604 it is stated as under. A one-time item is a gain, loss or expense on the income statement that is nonrecurring in nature and therefore not considered part of ongoing operations. He submitted that M/s Infosys Ltd has given brand value computation at page 70 of its annual report. 3. Revenue loses both ways. The nominal gain or loss arising on 31st March each year is mandated by MTM method of accounting. When a foreign operation is disposed of, the cumulative amount of the exchange differences recognised in other comprehensive income and accumulated in the separate component of equity relating to that foreign operation shall be recognised in profit or loss when the gain or loss on disposal is recognised. After adding negative working capital adjustment of -0.06%, the adjusted margin was arrived at by the TPO at 28.17%. The assessee had selected 11 comparable companies in its transfer pricing study. Statistically speaking, about equal number of TP auditees will have forex gain and forex loss. The assessee adopted TNMM method to benchmark his transactions and the profit level indicator was taken as operating profit by operating cost (OP/OC). Some concern may decide to take the risk of hedging and make a profit out of it. The Ld D.R submitted that the âservice deliveryâ is more important than the brand value. 11. 11.1 Being aggrieved, the assessee is before us contending that this company is functionally different as it is engaged in diversified business activities of BPO such as banking, finance, insurance. Hence both the companies have huge brand presence. If forex gain is operating, so is forex loss. 19. Westfalia Separator India Pvt. Hence taking forex as operating distorts the comparability. Infosys BPO Ltd. In order to submit a comment to this post, please write this code along with your comment: 95b62bbbee5acf2333eccf69ffaf668d. It is wise to make a consistent assumption across the board: between taxpayers, TP auditors, and appellate forums. Luxottica India Eyewear Pvt. For instance, if a purchase is made a week back (and duly entered in accounts reflecting the rupee figures of dollar purchase price then) and subsequently rupee has weakened against the dollar, the purchasing entity has to pay more money in rupees on today’s date. Whether forex gain and loss is operating or not is an altogether different issue. Clause (j) of Rule 10TA defines “operating expense” and states that operating expense does not include (i) interest expense, (ii) provision for unascertained liabilities, (iii) pre-operating expenses, (iv) loss arising on account of foreign currency fluctuations, (v) extraordinary expenses, (vi) loss on transfer of assets or investments, (vii) expenses on account of income-tax, and (viii) other expenses not relating to normal operations of the assessee. 2. There was some litigation on whether nominal forex loss (determined by MTM method) is revenue expense, but the issue is more or less settled now. A one-time item is a gain, loss or expense on the income statement that is nonrecurring in nature and therefore not considered part of ongoing operations. In our view, the decision rendered by the Honâble High Court and various benches of Tribunal holding that the companies having high brand value cannot be considered as comparable companies can be conveniently applied to the year under consideration also. The Foreign currency guide contains a summary of the framework for accounting for foreign currency matters, including the accounting for foreign currency transactions and translating the financial statements of foreign entities. In view of the foregoing discussions, the ALP of the transactions require to be determined afresh in the light of decisions rendered supra. Hence there is no material difference in this aspect also. Their appeal is instantly accepted. However, the frequent litigation has resulted in a situation in which revenue is losing both ways. Ltd. [ITA No.617/Del/2014]. 20. (supra). Their appeal is instantly accepted. Views are personal. 11.4 Respectfully following the decision of the co-ordinate bench of Tribunal, we direct for exclusion of this company from the list of comparable.”, 11. (c) it caters to diverse business segments. In respect of acquisition of a new company in Australia by M/s Infosys, the Ld D.R contended that it may not have impact during the year, since the acquisition has taken place in the last quarter of the year. 11.2 On the other hand, ld. Thus, this company is also stated to be a Knowledge Process Outsourcing and therefore for the reasons stated by us while dealing with this issue of comparability of the company Infosys BPO Ltd. shall equally hold good and therefore we direct the AO/TPO to exclude this company from the list of comparables. 6. The Court may also note that the Karnataka High Court has in Pr. The Director’s report of TCS E-Serve Limited bears out the contention of the Assessee that both entities have been leveraging TCSs scale and large client base to increase their business in a significant way. Logical exposition: There are two components to a Forex gain or loss. Kenexa Technologies Pvt. These factors vitiated its comparability under the FAR analysis with the tested company, which could be a capital service provider without much intangible and risks. These exchange differences are recognized in the profit or loss on disposal of the net investment. Removing forex from operating revenue is nothing but an adjustment to increase comparability. All Rights Reserved. Toyota reported a 39 percent tumble in global operating profit in the latest quarter as foreign exchange losses and higher expenses offset an increase in worldwide sales. The above accounting treatment was for the group financial statements. An expense is 'incurred' when the legal liability to pay the expenses have arisen, regardless of the date of actual payment of the money. 4) M/s. Hence they are in the nature of BPO services only, while M/s Infosys BPO Ltd and M/s TCS E serve Ltd are providing variety of other services. An example might be: interest income, dividend income, profits and losses from investments, gains or losses incurred due to foreign exchange. A concern may incur foreign exchange gain or loss in the course of its normal sale/purchase transactions with parties located outside the country. The learned DR however brought to our notice a decision of the ITAT Bangalore Bench in the case of Commonscope Networks (India) (P.) Ltd. v. ITO IT(TP: A.No.166 & 181/Bang/2016 order dated 22.2.2017 wherein it was the foreign exchange gain or loss that arises should relate to the concerned AY because what is compared is the profit margin of a particular AY. The question was not merely whether the margins earned by the Tata group in providing captive service to the Citi entities were at arm’s length. Safe harbour definitions of the government clearly portray the rules governing TP audit. 37 of IT Act. The assessee is a company belonging to M/s. The Ld A.R placed his reliance on host of decisions to contend that the companies having huge brand value cannot be considered as comparable company. 37 of IT Act. If a taxpayer has made forex gain, TPO’s stand is disadvantageous to taxpayer and it appeals in appellate forums. “38. In the case of Avaya India (P) Ltd vs. ACIT (2019)(108 taxmann.com 222), the Honâble Delhi High Court has made following observations with regard to TCS E-Serve Ltd:-, â21. Though the assessee has raised many grounds, at the time of hearing the Ld A.R pressed the grounds relating to the issue of, (a) Exclusion of two comparable companies viz., M/s Infosys BPO Ltd and M/s TCS E-Serve Limited and. CIT(DR) opposed its exclusion. 13. 7. The next issue that needs to be adjudicated is as to whether foreign exchange fluctuation gain or loss should be considered as part of the operating profit while computing the profit margin of the assessee as well as the comparable companies. The Assessee might be willing to carry out such an exercise but the same cannot be expected from the comparable companies who have to furnish the relevant data. . We also make certain adjustments to make companies better comparables. The next issue is whether foreign exchange fluctuation gain/loss shall form part of operating income/loss or not. Various appellate forums have consistently ruled that foreign exchange gain/loss are operating in nature. Dr Debtors, Cr Profit and loss account). We have also noticed that M/s Infosys BPO Ltd is being consistently excluded in the assesseeâs own case in the earlier years. Ltd. vs. DCIT [TS-522-ITAT-2011(Bang)], 14) M/s SAP Labs India (P) Ltd. vs. ACIT [2011, 44 SOT 156, Bang]. On the contrary, the contention of Ld A.R is that both the comparable companies have been excluded in many cases on the reasoning that they possess huge brand value. the He submitted that the assessee herein is part of Hewlett-Packard Group. Because forex gain/loss is too dependant on timing of transactions, and brings about more differences between tested party and comparables. What weighed invariably is the fact that both companies had huge turnovers when compared to the tested entity. We have heard rival contentions and perused the record. Foreign Currency Transaction Gain (Loss), before Tax ... For certain enterprises, primarily banks, that are dealers in foreign exchange, foreign currency transaction gains or losses may be disclosed as dealer gains or losses. He submitted that the Honâble Karnataka High Court did not admit the appeal filed by the revenue challenging the order passed by the Tribunal by observing that no substantial question of law arises, vide its order dated 6th July, 2018 in ITA No.896/2017. According to him therefore the TPO/AO should examine the nature of foreign exchange gain or loss in the case of the Assessee and the comparable companies and to the extent it relates to turnover of the relevant AY and the segment for which ALP is being determined, the same should alone be considered as part of the operating revenue or loss. 18. Some of the decisions in which the merits of considering Forex gain/loss as operating are expounded are as under: 1) M/s. CIT  8 taxmann.com 207/ 44 SOT 156 (Bang.) 26. The consistent stand of TPOs has been to consider foreign exchange difference as non-operating in nature. Translate all foreign currency items into Canadian dollars. Hence both the companies cannot be compared with the assessee company. and Trilogy E Business Software India (P.) Ltd. v. Dy. Legislative intent: The legislative intent behind TP audit is clear that forex gain/loss is non-operating. This company was selected by the TPO and objected by the assessee for inclusion in the list of comparables on the ground that it is functionally different as it is engaged in the business of BPO, banking, finance, insurance domain. sMlwTL http://www.FyLitCl7Pf7ojQdDUOLQOuaxTXbj5iNG.com, PLIro2 http://www.FyLitCl7Pf7ojQdDUOLQOuaxTXbj5iNG.com, f1sT9N mmdhijpxnnym, [url=http://mzhpbokbshkn.com/]mzhpbokbshkn[/url], [link=http://mlpctxptmleg.com/]mlpctxptmleg[/link], http://wfunxuomuvtm.com/, Tarun Arora (Partner, Deloitte Haskins & Sells LLP), Navigate through the nuances of Domestic-TP legislation, loss arising on account of foreign currency fluctuations, Statistically speaking, about equal number of TP auditees will have forex gain and forex loss. Revenue neither gains nor loses from either of the views, as long as the view is consistent. Rather, removing forex enhances comparability. 6839/Mum/2012], 8) M/s Sumit Diamond (India) Pvt. Gains and losses due to transactions in foreign currency and hence is affected by fluctuations in foreign exchange rates Any gains or losses which may be a one-time non-recurring event Any gains or losses which are recurring but non-operating in nature 1. noted as under: “48. The ITAT itself appears to have taken a consistent view in a large number of cases excluding these two comparables and its decisions have been upheld by this Court. In view of the aforesaid decision, we are of the view that the foreign exchange gain has to be treated as part of the operating profit while computing the profit margin of the assessee as well of the comparable companies. Step 3 – calculate the foreign exchange gain/loss at the year-end 31 March 2017 . Four Soft Ltd. The Ld A.R submitted that the co-ordinate bench, vide its order dated 21.04.2017 passed in the assesseeâs own case in IT(TP)A No.147/Bang/2015 for assessment year 2010-11, has excluded M/s Infosys BPO Ltd. It is also submitted that this company owns IPR and brand and incurs advertisement and marketing expenses on brand building. India Branch vs. ADIT [TS-335-ITAT-2014(Bang)-TP]. A reference may next be made to the decision in Evalueserve Sez (Gurgaon) (P.) Ltd. (supra) where a reference is made to the earlier decision to the BC Management Services (P.) Ltd. (supra). The ITO [TS-68-ITAT-2013(Bang)-TP], 7) M/s S Narendra vs. Addl CIT [ITA No. Accordingly, he made transfer pricing adjustment of Rs.57,69,82,545/-. India (P.) Dd. Hence providing ITES services is not the core business of HP group and hence its brand value of HP cannot be compared with that of M/s Infosys and M/s Tata group. The assessee is being compensated at cost + 8%. This decision dealt with the exclusion of three specific comparables, which have also involved in the present case namely M/s. Accordingly, he computed the net margin of the assessee at 15.75%. 22. Rule 10B(3) reads thus: “(3) An uncontrolled transaction shall be comparable to an international transaction if–, (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or, (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.”. Revenues under single head âRevenue from Data processing and technical services ltd. [ 2018 ] 94 taxmann.com is foreign exchange loss an operating expense... Is more relevant than the brand value would affect profitability of the decisions in revenue. 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