is foreign exchange loss an operating expense

The Ld. ), iii. 19 crores as contribution towards brand equity. Rule 10TA of I.T. Ltd.  vs. ITO  [TS-730-ITAT-2012(HYD)-TP], 12)   M/s Capital IQ Information Systems (India) Pvt. Expenses are revenue, and not capital, in nature. For instance, while dealing with comparables of filters, if unequals like software giant Infosys or Wipro are compared to a newly established small size Company engaged in Software service, it would obviously be wrong and perverse. Swiss Re Global Business Solutions India (P.) Ltd. FS-307-ITAT- 2017(Bang), i. XL Health Corporation India (P.) Ltd. (supra), ii. 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. The Ld D.R further submitted that assessee company also reports all its revenues under single head “Revenue from Data processing and other ITES”. It appears therefore that this Court has consistently upheld decisions of the ITAT excluding both these very comparables. It is backed by M/s Infosys Ltd. Hence it cannot be said that the brand value would affect profitability of the companies. An example might be: interest income, dividend income, profits and losses from investments, gains or losses incurred due to foreign exchange. Ltd. vs. He submitted that the nature of transaction is more relevant than the stand taken by the assessee. TCS E-Serve Ltd., M/s. Reference was again made to the decision in BC Management Services Ltd. 23. 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. At the time of hearing, however, the learned Counsel for the assessee brought to our notice the decision of the ITAT Bangalore Bench in the case of Finastra Software Solutions (India) Pvt. Ltd. vs. Addl CIT  [TS-736-ITAT-2012(Mum)-TP], 9)       M/s Bearing Point Business Consulting Pvt. 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. Legislative intent: The legislative intent behind TP audit is clear that forex gain/loss is non-operating. 49. Is Tran credit/ITC recovery mechanism defective under GST? Kenexa Technologies Pvt. Hence taking forex as operating distorts the comparability. 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. Both entities had close connection of the Tata Group of Companies and TCS E-Serve International had given a huge amount to TCS towards brand equity. 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. He submitted that M/s Infosys Ltd has given brand value computation at page 70 of its annual report. . Accordingly he submitted that the assessee cannot change its stand and contend that the foreign exchange gain should be treated as operating income. Whether forex gain and loss is operating or not is … The assessee is a company belonging to M/s. 26. It was held that foreign exchange gain had to be treated as part of the operating profit while computing the profit margin of the assessee as well of the comparable companies. 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. When an overall foreign loss offsets U.S. taxable income, a foreign loss account is created or … 7. Revenue takes inspiration from Rule 10TA and considers forex fluctuation as non-operating. 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. Hence both the companies have huge brand presence. The learned counsel for the Assessee pointed out that it is impossible to carry out such an exercise. He also pointed out that under rule 10B(3) of the criteria for comparability is the effect of profit on account of differences. The consistent stand of TPOs has been to consider foreign exchange difference as non-operating in nature. 352/Bang/2017. There is no direct correlation between operating income/expenses and revenue income/expenses. 21. In the light of this, the merits of taking foreign exchange gain/loss as non-operating are as under: 1. However, the frequent litigation has resulted in a situation in which revenue is losing both ways. Luxottica India Eyewear Pvt. 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.”. you must also decide what type of exchange gain / loss you have they may well be part of general income or expenses. Safe harbour definitions of the government clearly portray the rules governing TP audit. The nominal gain or loss arising on 31st March each year is mandated by MTM method of accounting. Hence it is, by default, operating. Foreign exchange risk has been high on the agenda of CFOs of MNCs for many years. Your Company is an integral part of the Tata Consultancy Services’ (TCS) strategy to build on its ‘Full Services Offerings’ that offer global customers an integrated portfolio of services ranging from IT services to BPO services. Vs. Dy.CIT  [TS-715-ITAT-2011(HYD)], 6)       M/s CSR India Pvt. 17. 352/Bang/2017 operating revenue or loss. A part of forex gain/loss is definitely operating – the part that arises from sale/purchase transactions. He submitted that this company is engaged in KPO services and there is no difference between KPO and ITES. The Ld A.R submitted that the co-ordinate bench, vide its order dated 21.04.2017 passed in the assessee’s own case in IT(TP)A No.147/Bang/2015 for assessment year 2010-11, has excluded M/s Infosys BPO Ltd. Because appellate forums have consistently ruled that forex difference is operating, they get instant relief. As far as TCS E Service Ltd., is concerned, the comparability of this company was considered by this Tribunal in the case of Zyme Solutions Ltd., in its order dated 16.11.2018 as follows:-. Real gain/loss may arise out of hedging or time lag between transaction and payment, and nominal forex gain/loss arises on 31st March of the year by using Marked to Market(MTM) method of accounting. 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. It is, in a way, speculative. CIT [2017] 87 taxmann.com 43 (Delhi – Tri. He further submitted that the extra ordinary event, viz., acquisition of Portland group Pty Ltd, Australia has taken place in the last quarter of the financial year and hence the said acquisition would not affect FAR analysis. If a taxpayer has made forex gain, TPO’s stand is disadvantageous to taxpayer and it appeals in appellate forums. CIT [2016] 66 taxmann.com 192/157 ITD 292 (Delhi  – Trib.). The TPO is directed to compute the ALP in the light of the directions given above, after affording opportunity of being heard to the assessee. Baxter India (P.) v. ACIT12017185 taxmann.com 285 (Delhi – Trib. Legislative intent: The legislative intent behind TP audit is clear that forex gain/loss is non-operating. 5) M/s. The above accounting treatment was for the group financial statements. 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. They should not be wildly dissimilar or unlike or poles apart. So, you will record all the foreign-currency expenses incurred by your business as well as invoices created in U.S. dollars using the exchange rate that is current on the date when you log the transaction. Accordingly it was submitted that this company’s functions are different from that of the assessee company. In the result, the appeal of the assessee is treated as allowed. 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. 22. 37 crores and Rs. To this extent the decision rendered by the Bangalore Bench of ITAT in the case of Commonscope Networks (India) Pvt.Ltd. The assessee had selected 11 comparable companies in its transfer pricing study. A notional forex gain/loss also arises on 31st day of March (year-end date) when Marked-to-Market method is used to make accounting entries. Accordingly he submitted that the Ld DRP was justified in including both the above said comparable companies. The very word “comparable” means that the Group of Entities should be in a homogeneous Group. 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. At the onset it has to be clarified that ‘operating income’ is not the same as ‘revenue income’. It differs widely from business to business and depends on pending foreign creditors and debtors. Accordingly, the assessing officer passed the final assessment order. With the expansion of the global economy and diverse influences on exchange rates – such as the current climate of economic uncertainty and fear of terrorism in many countries – foreign exchange risk is likely to be a key consideration for most companies trading across borders in years to come. 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. Therefore respectfully following the decision of the ITAT Bangalore in the case of SAP Labs India (P.) Ltd. (supra), we hold that the DRP was justified in directing the AO to IT(TP)A No. Record the gains and losses of the translation between currencies. Infosys BPO Ltd. 4. UK Tribunal: Blackrock’s inter-co loan on arm’s length terms, prefers OECD’s “separate entity” approach, Transfer pricing officers to carry domestic TP-audit, clarifies CBDT. M/s TCS E Serve Ltd was considered by the co-ordinate bench in the case of M/s Arctern Consulting Pvt Ltd (IT(TP)A No.352/Bang/2017 dated 15.10.2019 relating to AY 2012-13) and it was held as under:-, “10. (supra). There are strong arguments on both sides of the table on whether forex gain/loss are operating or not. Others may not. 8. CIT [2010] 8 taxmann.com 207/[2011] 44 SOT 156 (Bang.) ), Stryker Global Technology Centre (P.) Ltd. v. Dy. A detailed Business Continuity Plan has also been put in place to ensure the services are provided to the customers without any disruptions.”. I would call this account Gain (Loss) on Foreign Exchange. Real foreign exchange loss is revenue expense u/s. Further all these decisions pertained to AY 2010-11. Hence taking forex as operating distorts the comparability. Four Soft Ltd. Held: Assessee was a company belonging to M/s. Forex gain/loss is part of the international transaction. Accordingly, it is submitted that this company is providing KPO services and hence functionally different. When an overall foreign loss offsets U.S. taxable income, a foreign loss account is created or … Another argument is that forex gain/loss arising out of ‘international transaction’ with an Associated Enterprise (AE) is itself an international transaction! The Annual report adduces other reasons for their growth. 13. In most accounting systems the chart of accounts will include an account or nominal code for exchange differences.When you create a customer or supplier, you can select the currency in which they operate (you can change it if it differs from your base currency). (c) it caters to diverse business segments. Whether forex fluctuation difference is operating or non-operating has no effect on the interest of revenue. TPO recomputed the margin of the assessee by excluding interest income and non-operating income and also reducing the expenditure. We have heard the rival submissions and perused the material on record. What weighed invariably is the fact that both companies had huge turnovers when compared to the tested entity. CIT [2011] 12 taxmann.com 464/47 SOT 45 (Bang)(URO), which decisions have subsequently been consistervs followed by this Tribunal, lays down the proposition that foreign exchange gain or loss has to be regarded as IT(TP)A No. The Revenue’s appeal against the same Assessee for AY 2011-2012 against another order of the ITAT excluding TCS E-Serve International Limited, Infosys BPO Limited from comparables met the same fate. The ITO [TS-68-ITAT-2013(Bang)-TP], 7) M/s S Narendra vs. Addl CIT [ITA No. Ltd. vs. DCIT [TS-395-ITAT-2012(Bang)], 11) M/s Brigade Global Services Pvt. One main distinction brought out by Ld A.R was that the Hewlett-Packard is having brand value for providing hardware and IT solutions to its customers, i.e., it is not known for rendering back-end BPO support services. A concern may incur foreign exchange gain or loss in the course of its normal sale/purchase transactions with parties located outside the country. Further, Citi has signed an agreement with TCS to provide process outsourcing services to Citi and its affiliates for an aggregate amount of USD 2.5 billion over a period of 9 years during the FY 2008-09. 26. Revenue neither gains nor loses from either of the views, as long as the view is consistent. The Ld A.R, in reply, submitted that, in various decisions rendered by High Courts, it has been held that the brand value plays a significant role. Often in transfer pricing, the foreign exchange fluctuation gain/loss is considered as non-operating for the purpose of computing ALP. Dr Debtors, Cr Profit and loss account). CIT [2017] 88 taxmann.com 286 (Delhi – Tri. Rule 10TA of I.T. Accordingly, he computed the net margin of the assessee at 15.75%. The main reason why the DRP considered foreign exchange gain should not be treated as a part of the operating profit was due to the fact that the assessee in the preceding Assessment year did not consider foreign exchange loss as operating in nature. the He submitted that the assessee herein is part of Hewlett-Packard Group. Statistically speaking, about equal number of TP auditees will have forex gain and forex loss. CIT(DR) opposed its exclusion. An example might be: interest income, dividend income, profits and losses from investments, gains or losses incurred due to foreign exchange. 352/Bang/2017 consider the foreign exchange gain or loss as operating in nature. With regard to functionality of M/s TCS E-Serve Limited, the assessee submitted as under:-. Rules, 1962 give various definitions for the purpose of safe harbour. We have considered the rival submissions and are of the view that in the light of Rule 10B(3) of the Rules and the business cycle in the relevant business, the comparability will not be materially affected if the foreign exchange gain is considered as reflected in the accounts of the comparable companies as available in public domain. wherein this Tribunal considered the very same issue and held as follows:-. Real foreign exchange loss is revenue expense u/s. We have heard rival contentions and perused the record. When you process the receipt or payment, this entry must be in the same currency as the original transaction in order for two important functions to occur: 1. This idea is often superimposed on definitions of operating/non-operating. The Ld A.R submitted that this company has also been excluded in many decisions. It can create differences in value in the monetary assets and liabilities, which must be recognized periodically until they are ultimately settled . 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 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. Exchange differences arising on monetary items are reported in profit or loss in the period, with one exception. 37 of IT Act. 37 of IT Act. As far the issue treating foreign exchange gain as operating revenue is concerned, it has been held a several decisions of various Benches of ITAT that foreign exchange gain, to the extent it relates to or connected with the business for which ALP is determined, is to be regarded as operating revenue or loss as the case may be. In a recent case it was held that the foreign exchange fluctuation loss shall be considered as a part of the Operating Cost. 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. Nonoperating Income (Expense). Rather, removing forex enhances comparability. There is merit in the contention of the Assessee that the scale of operations of the comparables with the tested entity is a factor that requires to be kept in view. In other words, expenses must be incurred. The DRP was of the view that the assessee has to be consistent in the approach in this regard. This method works for direct exchanges, such as when you purchase supplies from a foreign company or a foreign company buys your goods or services. It is stated that its total profit before interest and tax was Rs.11683 crores, consisted of brand profits of 9969 crores and non-brand income of Rs.1714 crores. We notice that the Tribunal, in the above said case, has taken the view that the foreign exchange fluctuation gain/loss is operating in nature. 27. The Ld D.R submitted that the TPO had treated the foreign exchange fluctuation loss incurred by the assessee in the immediately preceding year as non-operating in nature and the assessee did not object to the same. : it ( TP ) a no author is an altogether different issue as separate segment gain and have... Is further submitted that the assessee by excluding interest income and also reducing the expenditure a mere 24 crores never! Application of mind when they assign reasons for returning the particular findings comparables, has! Appeals in appellate forums no direct correlation between operating income/expenses or not Tata Consultancy services,... ’ ble DRP confirmed the findings of the translation between currencies transactions may lead to foreign exchange as! 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It does not depend on an event that may or may not in. Tpo was not objected to a robust and scalable infrastructure network tailored to meet clients ’ needs that. Non-Operating income and also reducing the expenditure group companies and hence the effect of value”! Bpo, it is submitted that the assessee seeks exclusion of the view is consistent profit... Considering forex gain/loss are operating in nature respectfully following the aforesaid decision, we direct the AO/TPO to both! A PLI is to get the best comparability possible liable to be dismissed. ” 14... Forex gain/loss as operating in nature comparable companies all the above said companies can not be published by. Two components to a forex gain or loss independent of the business excluding interest and. Email address will not be published recognized periodically until they are ultimately settled /. And comparables excluding interest income and also reducing the expenditure. ) to make accounting entries shows that non-issue. 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All other issues arising on account of foreign currency fluctuations the stand taken by the assessee seeks exclusion of specific! Unified-Approach for taxing digital economy – can ALP and formulary apportionment co-exist TP audit is clear that is... Was justified in including both the companies business Consulting Pvt [ 2018 ] taxmann.com! Case namely M/s above, this is not part of business operations in case of SAP Labs India P.! Being consistently excluded in many decisions 513 ( Kar. ) the present namely. The particular findings be made to the assessee submitted as under: - that Infosys! Differences arising on 31st March each year baxter India ( P. ) ltd. [ 2018 ] taxmann.com! The case of XLHealth Corpn transactions require to be consistent in the case of SAP India. March each year is mandated by MTM method of accounting reasons for returning the particular findings long as view! Since the appellant company is engaged in KPO services and hence functionally different and excludes income arising on 31st of! Was no segmental revenue whereas the assessee is treated as allowed on brand building taken... Meet clients ’ needs transactions require to be consistent in the profit or arising... Takes inspiration from Rule 10TA and considers forex fluctuation as non-operating are as under: 1 to... Revenue ” and excludes income arising on 31st March each year is mandated by MTM method of.... Supported by their parent companies, having huge brand value as non-operating nature! Along with your comment: 95b62bbbee5acf2333eccf69ffaf668d Equant Solutions India ( P. ) ltd. [ 2018 ] 94 taxmann.com ITR!

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