JCIT Vs AON Servies India Pvt. Ltd. (ITAT Delhi)
Summary:
The Delhi ITAT dealt with cross-appeals involving transfer pricing comparables, disallowance u/s 14A & treatment of foreign exchange fluctuation while computing operating margins under TNMM. The Revenue challenged the CIT(A)’s directions regarding six comparables as well as deletion of ₹20.23 lakh disallowance u/s 14A. The assessee, apart from its original grounds relating to delayed employees’ contribution, raised an additional ground contending that forex fluctuation arising from normal business transactions was an operating item. The Tribunal dismissed the Revenue’s appeal in entirety & partly allowed the assessee’s appeal.
Transfer pricing battle – Revenue wanted the comparables back
The Revenue challenged the CIT(A)’s treatment of several companies while determining the assessee’s ALP. Its objections related to R Systems International Ltd., Accentia Technologies Ltd., Acropetal Technologies Ltd., E-Clerx Services Ltd., Infosys BPO Ltd. & TCS E-Serve Ltd. It also challenged deletion of the ₹20,23,500 disallowance u/s 14A r.w. Rule 8D.
The ITAT, however, found no merit in any of these grounds.
Different financial year alone cannot sink R Systems
The TPO had rejected R Systems International Ltd. because it followed a different financial year.
The CIT(A), however, had directed its inclusion subject to the assessee producing quarterly financial data available in the public domain, so that the figures could be aligned with the relevant financial year in accordance with Rule 10B(4).
The ITAT found this to be a perfectly reasonable conditional direction. Since the comparable could be aligned with the assessee’s financial year by using publicly available quarterly data, there was no reason to interfere with its inclusion.
Accentia fails the FAR test
The Tribunal upheld exclusion of Accentia Technologies Ltd.
The CIT(A) had found that Accentia was engaged in product development & sales, thereby failing the Functions, Assets & Risks (FAR) test vis-à-vis the assessee. Further, relevant segmental data was unavailable.
The ITAT therefore upheld its exclusion.
E-Clerx – BPO & KPO cannot be mixed merely because both use computers
Revenue also sought inclusion of E-Clerx Services Ltd.
The CIT(A) had distinguished E-Clerx on the ground that it was engaged in Knowledge Process Outsourcing (KPO), whereas the assessee was carrying on Business Process Outsourcing (BPO) activities.
The ITAT relied upon the jurisdictional Delhi HC ruling in Rampgreen Solutions Pvt. Ltd. v. CIT [2015] 377 ITR 533 (Delhi), which recognised the functional distinction between KPO & BPO activities. Accordingly, Revenue’s attempt to bring E-Clerx back into the comparable basket was rejected.
Infosys BPO – extraordinary acquisition makes comparison unreliable
The Tribunal also upheld exclusion of Infosys BPO Ltd.
During the relevant year, Infosys BPO had undergone an extraordinary business event, acquiring 100% voting interest in Portland Group Pty. Ltd. on 04.01.2012.
The Tribunal considered this sufficient reason not to disturb the CIT(A)’s exclusion of the company from the comparable set.
Similarly, the exclusion of Acropetal Technologies Ltd. was upheld, particularly since similar relief granted to the assessee for an earlier year had attained finality. TCS E-Serve Ltd. was also kept outside the comparable basket, the CIT(A) having relied upon a catena of decisions holding it unsuitable as an ITES comparable.
No exempt income – no s.14A disallowance
Revenue’s next challenge concerned deletion of ₹20,23,500 disallowed u/s 14A r.w. Rule 8D.
The decisive fact was simple—the assessee had not earned any exempt income during the relevant previous year.
Following the Delhi HC judgment in Cheminvest Ltd. v. CIT [2015] 378 ITR 33 (Delhi), the CIT(A) had deleted the disallowance.
The ITAT found no reason to interfere. Consequently, Revenue’s entire appeal was dismissed.
Employees’ PF/ESI contribution issue not pressed
In its cross-appeal, the assessee had originally challenged disallowance of employees’ contributions to EPF, ESI & Labour Welfare Fund, contending that the amounts had been deposited before the due date for filing the income-tax return.
However, before the Tribunal, the assessee’s counsel did not press these grounds, subject to the rider that the concession should not be treated as a precedent.
The grounds were therefore rejected as not pressed.
Forex fluctuation – operating or non-operating?
The more interesting issue arose through an additional ground filed by the assessee.
The TPO/AO/CIT(A) had classified the assessee’s foreign exchange fluctuation as non-operating while computing the Net Cost Plus margin.
The assessee argued that such fluctuation arose incidentally from its normal business transactions & therefore formed an integral part of operating income/cost.
The ITAT accepted this contention.
Forex gain/loss follows the character of the underlying transaction
The Tribunal relied extensively upon Westfalia Separator India Pvt. Ltd. v. ACIT [2014] 52 taxmann.com 381 (Delhi-Trib.).
The principle is straightforward. Forex gain or loss represents the difference between the exchange rate at which an import/export transaction was initially recorded & the rate prevailing when the payment or receipt ultimately takes place. Therefore, where the underlying transaction is a trading/revenue transaction, the resulting forex fluctuation takes the same revenue character.
It is not an extraordinary event divorced from business. It is a direct incident of the purchase or sale itself.
The precedent relied upon by the Tribunal further explained that where foreign currency is held on revenue account, as a trading asset or as circulating capital, exchange fluctuation ordinarily results in trading profit or loss. Consequently, forex gain/loss arising from business transactions forms part of operating revenue/operating cost.
Even abnormal fluctuation does not make it extraordinary
An interesting aspect of the reasoning was rejection of the proposition that unusually high currency fluctuation should be treated as an abnormal or non-recurring item.
Forex movement is an inherent incident of international business. It affects the assessee as well as comparables & merely because the fluctuation is unusually high does not change its underlying character.
The precedent specifically recognised that forex gain/loss may be high or low, but that does not make it abnormal or non-recurring when it arises from ordinary business transactions.
The Tribunal therefore held that the lower authorities had erred in law & on facts in treating the assessee’s foreign exchange fluctuation loss as a non-operating item. The TPO was directed to recompute the margins accordingly.
The result was that the Revenue’s appeal was dismissed in entirety, while the assessee’s cross-appeal was partly allowed.
Author’s Comment
The decision reiterates three useful TP principles. First, functional comparability matters more than broad industry labels—a KPO cannot automatically be compared with a BPO merely because both fall loosely within IT-enabled services. Secondly, a different accounting year need not automatically disqualify a comparable where reliable quarterly data permits alignment with the tested period. Thirdly, extraordinary corporate events such as acquisitions can materially affect comparability.
The forex ruling is equally significant. In TP analysis, the correct question is not merely whether the item is called “foreign exchange fluctuation”, but what transaction produced that fluctuation. If it arises from normal revenue operations, its character ordinarily travels with the underlying transaction & it becomes part of operating income/cost.
The s.14A issue, meanwhile, was refreshingly uncomplicated: no exempt income means no disallowance for the year concerned.
For comparables, substance beats labels; for forex, the fluctuation follows the transaction; & for s.14A, zero exempt income leaves little room for Rule 8D arithmetic.
Cases Discussed
- Rampgreen Solutions Pvt. Ltd. Vs. CIT [2015] 377 ITR 533 (Delhi)
- Cheminvest Ltd. Vs. CIT [2015] 378 ITR 33 (Delhi)
- Westfalia Separator India (Pvt.) Ltd. Vs. ACIT [2014] 52 taxmann.com 381 (Delhi-Trib.)
- Asstt. CIT v. Prakash L. Shah [2008] 115 ITD 167 (Mum.)
- Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC)
- Sumitomo Corpn. India (P.) Ltd. v. Dy. CIT [2005] 1 SOT 91 (Delhi)
- Honda Trading Corpn. India (P.) Ltd. v. Asstt. CIT [2013] 33 taxmann.com 21 (Delhi)
- DHL Express (India) (P.) Ltd. v. Asstt. CIT [2011] 46 SOT 379 / 11 taxmann.com 40 (Mumbai)
- Techbooks International (P.) Ltd. v. Asstt. CIT [2014] 45 taxmann.com 528 (Delhi-Trib.)
- SAP Labs India (P.) Ltd. v. Asstt. CIT [2010] 8 taxmann.com 207 / [2011] 44 SOT 156 (Bang.)
- Rushabh Diamonds v. Asstt. CIT [2016] 68 taxmann.com 141 (Mumbai)
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, DELHI BENCH
These Revenue’s and assessee’s cross appeals ITA Nos.7526 & 7669/Del/2017 for assessment year 2012-13, arise against the Commissioner of Income Tax (Appeals)-42 [in short, the “CIT(A)”], New Delhi’s order dated 27.10.2017 passed in case no. 37/2017-18/CIT(A)-42, involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).
Heard both the parties. Case file perused.
2. This Revenue’s appeal ITA No.7526/Del/2017 raises the following substantive grounds:
1) The Ld. CIT(A) has erred in law and on facts in directing the Transfer Pricing Officer (TPO) to include M/s. R Systems International Ltd. from the final list of comparables on account of TP adjustment in arm’s length price as the Ld. CIT(A) failed to appreciate the fact that Rule 108(4) very clearly states that the data of the comparables transactions should be the data pertaining to the financial year in which the taxpayer has entered into international transactions.
2) The Ld. CIT(A) has erred in law and on facts in directing the Transfer Pricing Officer (TPO) to exclude M/s. Accentia Technologies Ltd. from the final list of comparables on account of TP adjustment in arm’s length price as the Ld. CIT(A) failed to appreciate the fact that the company has defined Health Receivable Cycle Management (HRCM) services in its Annual Reports which are part and parcel of IT Enabled Services and the company in its annual report has defined only this segment (HRCM).
3) The Ld. CIT(A) has erred in law and on facts in directing the Transfer Pricing Officer (TPO) to exclude M/s. Acropetal Technologies Ltd. from the final list of comparables on account of TP adjustment in arm’s length price as the Ld. CIT(A) failed to appreciate the fact that the services offered by this company in “Engineering Design Services” segment are in the nature of IT enabled services only as these falls within the list of services published by the CBDT.
4) The Ld. CIT(A) has erred in law and on facts in directing the Transfer Pricing Officer (TPO) to exclude M/s. E-clerx Services Ltd. from the final list of comparables on account of TP adjustment in arm’s length price as the Ld. CIT(A) failed to appreciate the fact that on a perusal of annual report of the company, it is very much an ITES company and AR is available on the public data base and passes all filters also.
5) The Ld. CIT(A) has erred in law and on facts in directing the Transfer Pricing Officer (TPO) to exclude M/s. Infosys BPO Limited from the final list of comparables on account of TP adjustment in arm’s length price as the Ld. CIT(A) failed to appreciate the fact that the taxpayer has been unable to prove as to the effect of exceptional circumstances on the turnover or profitablility of the company.
6) The Ld. CIT(A) has erred in law and on facts in directing the Transfer Pricing Officer (TPO) to exclude M/s. TCS E-Serve Ltd. from the final list of comparables on account of TP adjustment in arm’s length price as the Ld. CIT(A) failed to appreciate the fact that the services offered by this company are in the nature of IT enabled services only as these falls within the list of services published by the CBDT.
7) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 20,23,500/- made by the AO on account of disallowance u/s 14A r.w.r. 8D of Income Tax Rules.
8) The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.”
3. Both the parties vehemently reiterate their respective stands against and in favour of the learned CIT(A)’s lower appellate discussion deleting all the foregoing six comparables for the purpose of determining the assessee’s arm’s length price “ALP” adjustment as well as rejecting the applicability of section 14A r.w. Rule 8D in its case.
4. It is in this factual backdrop that we advert to the Revenue’s first and foremost substantive ground seeking to include M/s. R. Systems International Ltd. in the array of comparables which has been directed to be included in the CIT(A)’s lower appellate discussion, as under:
“A.3 R Systems International Ltd.
A.3.1 I find that the TPO rejected the R Systems on the ground that it follows a different financial year and is in violation of the provision of Rule 108(4).
A.3.2 This company has been accepted as a comparable in number of judgments by ITAT Delhi on the ground that the data for the financial year adopted by the assessee can be easily compiled from the audited statements of such company to align it to the provisions of Rule 10B(4). Since the sole reason to exclude was the different financial year closing, therefore, the conditions of Rule 10B(4) can be met if the quarterly data is available in public domain. AO is directed to accept it as a good comparable if the assessee produces quarterly data available in public domain for the subject year.”
5. That being the case, the Revenue could hardly dispute that the learned CIT(A) has duly issued a conditional direction to include this entity M/s. R System International Limited subject to a rider that the assessee shall produce the relevant financials going by Rule 10B(4) of the Income Tax Rules. We thus find no reason to interfere with the same.
6. Next comes the second comparable namely, M/s. Accentia Technologies Ltd. which has been directed to be excluded from the assessee’s list of comparables. We note from a perusal of the CIT(A)’s detailed discussion at page 11 that this entity has been found to be engaged in product development and sales thereby failing the functions, assets and risk “FAR” test coupled with the fact that the relevant segmental data is also not available. The CIT(A)’s impugned findings are upheld accordingly.
7. The Revenue’s third comparables herein sought to be included is M/s. Acropetal Technologies Limited. We notice that the learned CIT(A) takes note of his order in AY 2009-10 granting very relief to the assessee which is stated to have attained finality. Rejected accordingly.
8. The Revenue’s 4th comparable herein sought to be included is M/s. Eclerx Services Ltd. Learned CIT(A)’s impugned lower appellate discussion at pages 6 to 17 has drawn a distinction that this entity is engaged in knowledge process outsourcing i.e. “KPO” as against the assessee carrying out business processing outsourcing “BPO” activity. He has further quoted hon’ble jurisdictional high court’s decision in M/s. Rampgreen Solutions (Pvt.) Ltd. Vs. CIT [(2015) 377 ITR 533 (Del.)] deciding the very issue in the assessee’s favour and against the department thereby drawing distinction between the aforesaid twin segments. Rejected accordingly.
9. The Revenue’s 5th comparable M/s. Infosys BPO Ltd., has been directed to be excluded in the learned CIT(A)’s detailed discussion for the precise reason that it witnessed an extraordinary business acquisition on 04.01.2012 thereby acquiring 100% of the voting interest in M/s. Portland Group Pty. Ltd. We thus find no merit in the Revenue’s instant 5th substantive ground as well.
10. Next comes the Revenue’s 6th comparable entity M/s. TCS E-Serve Ltd. directed to be excluded in the CIT(A)’s lower appellate discussion. We note from a perusal of CIT(A)’s order at page 20 that he quoted a catena of case-laws deciding the very issue that the same is a not valid comparable in “ITes” segment. Rejected accordingly.
11. The Revenue’s 7th substantive ground canvassed herein is that the CIT(A) has erred in law and on facts in reversing the Assessing Officer’s action invoking section 14A r.w. Rule 8D of the Income Tax Rules disallowing the assessee’s expenditure amounting to Rs.20,23,500/- as having incurred in relating to its exempt income. Learned CIT(A) appears to have noticed the clinching fact that the assessee has not derived any exempt income in the relevant previous year in light of Cheminvest Limited Vs. Commissioner of Income Tax (2015) 378 ITR 33 (Del). Rejected accordingly. This Revenue’s appeal ITA No.7526/Del/2017 fails therefore.
12. Next comes the assessee’s cross appeal ITA No.7669/Del/2017 raising the following grounds:
1. On the facts and circumstances of the case and in law the Hon’ble Commissioner of Income Tax 42 [‘Hon’ble CIT(A)’] has erred in confirming the disallowance of employee’s (Appeals) contribution to Recognized Provident Fund (‘EPF’), Employee State Insurance (‘ESI’) and Labour Welfare Fund (‘LWF’) by alleging that there has been a delay in deposit of the contribution before the due date mentioned under the Employees Provident Funds and Miscellaneous Provisions Act, 1952, Employee’s State Insurance Act, 1948 and various Labour Welfare Fund Act.
2. On the facts and circumstances of the case and in law the Hon’ble CIT(A) has failed to appreciate that the employee’s contribution to the above-mentioned funds were paid before the due date of filing of income-tax return for 2016 mentioned were the should have been allowed in accordance with the provisions of section 43B of the Income-tax Act, 1961, relying on judicial precedents Court.
The Appellant craves leave to supplement, to cancel, amend, add and/or otherwise alter or modify, any or all, grounds of the appeal stated hereinabove.
13. Learned counsel submits very fairly that the assessee does not wish to press for both of these aforesaid grounds subject to a rider that the same are not treated as a precedent. Rejected in very terms therefore.
14. Learned counsel lastly invites the tribunal’s attention to the assessee’s additional ground filed on 23.09.2025, reading as under:
“Treatment of fluctuation on account of foreign exchange as non-operating in nature
3. That on the facts and circumstances of the case and in law, Ld. Deputy Commissioner of Income Tax Transfer Pricing Officer 2(3)(2) (“Ld. TPO”)/Ld. Deputy Commissioner of Income Tax, Circle 2(2), New Delhi (“Ld. AO”)/Hon’ble Commissioner of Income Tax (Appeals) – 42 (“Hon’ble CIT(A)”) has erred in computing Net Cost Plus (“NCP”) margin of selected companies and that of Appellant by incorrectly classifying fluctuation on account of foreign exchange as non-operating in nature, without appreciating the fact that such fluctuation/difference is incidental to and arises from the normal course of business and should be considered as operating in nature.”
15. Both the parties vehemently reiterate their respective stands. We note in this factual backdrop that the instant issue of the assessee’s foreign exchange fluctuation loss as revenue in nature is no more res-integra in light of Westfalia Separator India (Pvt.) Ltd. Vs. ACIT, [2014] 52 taxmann.com 381 (Delhi – Trib.), deciding the same against the department, reading as under:
“4.1 We have heard the rival submissions and perused the relevant material on record. The forex gain or loss is the difference between the price at which an import or export transaction was recorded in the books of account on the basis of rate of foreign exchange then prevailing and the amount actually paid or received at the rate of foreign exchange prevailing at the time of actual payment or receipt. Since such forex loss or gain is a direct outcome of the purchase or sale transaction, it partakes of the same character as that of the transaction to which it relates. The Special Bench of the Tribunal in the case of Asstt. CIT v. Prakash L. Shah [2008] 115 ITD 167 (Mum) has held that foreign exchange fluctuation gain is a part of export turnover. Though such decision was rendered in the context of section 80HHC, but the same logic applies generally as well. The essence of the matter is that any gain or loss arising out of change in foreign currency rate in respect of transaction for import or export of goods is nothing, but inherent part of the price of import or the value of export. The Hon’ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 has held that : ‘where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business’. When we read the ratio of the case of Sutlej Cotton Mills Ltd. (supra) in juxtaposition to that of the Special Bench in case of Prakash L Shah (supra), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. Operating expense is ordinarily an expense that a business incurs as a result of performing its normal business operations. As the business of ‘Assembly’ done by the assessee under this segment is not possible without purchases and forex gain is in relation to such purchase transactions, we have no hesitation in holding that it is an item of operating cost.”
4.2 The ld. AR disputed the inclusion of foreign exchange loss in the operating cost by arguing that rate of Euro had increased beyond proportions. It was stated that Euro had shot up like anything. Since such fluctuation was not anticipated, the ld. AR claimed that it was in the nature of extra-ordinary item and hence liable to be expelled from operating costs. This contention is again bereft of any force. Extra-ordinary item is normally distinct and unusual from the ordinary activity of the business that is carried on by the assessee. We fail to comprehend as to how the amount of forex loss can be considered as unusual from the ordinary activity of the purchase carried on by the assessee throughout the year from its associated enterprise. As it is direct incident of or rather a part and parcel of purchase transaction itself, the same cannot be viewed as an extra-ordinary item of expense.
4.3 Without prejudice to the above arguments, the ld. AR contended in the alternative that if forex loss was to be considered as part of operating cost, then, the forex loss in relation to the international transaction undertaken during the year alone should be considered. He invited our attention towards four components of such forex loss tabulated on page 13 of the impugned order, being, on account of purchases made during the year; on account of earlier year’s purchases finally paid in this year; on account of translation difference of outstanding amounts at the end of the year; on account of purchase transactions with unrelated parties. His submission was that only the first component, being the forex loss in respect of international transactions undertaken during the year should be considered.
4.4 We again find this contention to be untenable. The obvious reason is that the calculation under TNMM proceeds on the basis of method of account consistently followed by the assessee. In the case of companies, it is only mercantile system of accounting which is applicable. Under mercantile system of accounting, any income arising out of transactions during the year is accounted for irrespective of its actual receipt. Similarly expenses are recorded at the time of incurring of liability irrespective of the actual payment. TNMM does not require the splitting of expenses and incomes into actually paid and received and then determining the profit margin. It is simple that profit margin is calculated with the figures from the Trading and profit and loss account which are recorded on accrual basis. TNMM does not mandate to first recast the Trading and profit and loss account with the figures of actual receipt or payments in respect of international transaction and then calculate the profit margin.
4.5 There is one more independent reason for which this contention deserves to be rejected because it results in absurdity. It is simple and plain that outstanding creditors out of imports made during the year would be paid in the subsequent year. It is in such subsequent year that the forex gain/loss would eventually arise. So forex gain/loss in respect of an international transaction entered in year one and settled by payment in the year two, would not find its place in the operating cost/revenue either in the year one of entering into international transaction or in the year two at the time of actual payment. The reason is obvious that during the year one in which international transaction of import took place, the amount would be unpaid and during the year two, when payment is made, there would be no matching international transaction. This contention is, therefore, jettisoned.
4.6 Still another argument was raised by the ld. AR that the forex loss to the extent it is abnormal, be ignored from inclusion in the operating cost. By inviting our attention towards pages 4k to 4T of the paper book, the ld. AR submitted that the average rate of Euro during the period 1.4.2001 to 31.3.2002 was Rs. 41.52 as against the higher and lower rates of Rs. 44.81 and Rs. 38.68 respectively. It was submitted that any payment of foreign currency at the rate above Rs. 44.81 was abnormal loss, liable to be ignored from operating cost.
4.7 We are again unable to accept this proposition put forth on behalf of the assessee for the reason that forex loss is a natural incident of import. Each item of import leads to forex gain/loss when there is a difference between the rate of foreign currency at the time of purchase and payment. When buying of goods is a core business of the assessee and there is a change in the rate of foreign exchange at the time of payment for goods purchased, such forex gain/loss is simply a recurring item and not any abnormal or non-recurring item of income or expense. Such forex loss/gain may be high or low, but cannot be construed as abnormal or non-recurring nature. The ld. AR accentuated on the forex loss as an abnormal expense and claimed that any payment of foreign currency at the rate above Rs. 44.81 was abnormal loss liable to be ignored from operating cost. In order to evaluate this contention, it is significant to note that the assessee applied TNMM as the most appropriate method. The calculation of ALP under this method is prescribed in rule 10B(1)(e). Clause (ii) of this sub-rule provides that the : ‘net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base’. Clause (iii), which is quite relevant for our purpose provides that : ‘the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ‘. The position which follows on conjoint reading of clauses (ii) and (iii) is that net profit margin realized from comparable uncontrolled transactions is adjusted for differences between the international transaction and uncontrolled transactions. It follows that the adjustment is made in respect of the net profit margin of comparable uncontrolled transactions to bring it at par with the international transaction and not vice versa. Secondly, the adjustment is contemplated if there is difference between the assessee’s international transaction and comparables which could materially affect the amount of net profit margin in the open market. Coming back to our context, we find that the assessee is claiming that difference in the foreign exchange rate of Euro beyond a particular point is abnormal and hence the same be not considered as recurring expense. This contention is devoid of any merits because of the obvious reason that fluctuation in the foreign currency is across the board and is applicable not only to the assessee but to the comparables as well. It was fairly admitted that in some of the comparable cases, there is a figure of forex gain/loss. This shows that such change in the foreign exchange rate is not assessee-specific so as to warrant any adjustment. As it is applicable to one and all, there can be no case for treating some part of the forex loss as normal and the other as abnormal so as to warrant exclusion of the second part from operating cost by treating it as an abnormal loss. It is further relevant to note that the assessee earned forex gain of around Rs. 18.40 lac under the ‘Trading segment’. As such, the contention of the assessee claiming exclusion of some part of the forex loss from the ambit of operating expenses on the basis of the abnormal loss theory, is not sustainable.
4.8 The ld. AR relied on Rule 10T(j) to contend that loss arising on account of foreign currency fluctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment year under consideration.
4.9 Now we will deal with the decisions relied by the ld. AR in support of his case. The decision of the Delhi Bench in Sumitomo Corpn. India (P.) Ltd. v. Dy. CIT [2005] 1 SOT 91 is in the context of interest which the tribunal held to be non-operating income. There is no reference to any foreign exchange fluctuation gain or loss in that case. The Delhi tribunal decision in Honda Trading Corpn. India (P.) Ltd. v. Asstt. CIT [2013] 33 taxmann.com 21/[2014] 146 ITD 591 does not stand in view of our above discussion about the non-acceptability of abnormal loss theory in the context of forex loss. The decision of the Mumbai tribunal in DHL Express (India) (P.) Ltd. v. Asstt. CIT [2011] 46 SOT 379/11 taxmann.com 40 does not throw any light on the preliminary question as to whether such forex loss/gain resulted from a trading or a capital transaction.
4.10 In contrast to the above, we find that there is a plethora of decisions rendered by various benches of the tribunal across the country holding that forex gain/loss is part of operating revenue/cost. To cite a few, the Delhi bench of the tribunal in Techbooks International (P.) Ltd. v. Asstt. CIT [2014] 45 taxmann.com 528 (to which one of us, namely, the AM is party) has held vide its order dated 28.4.2014 that foreign exchange gain or loss is a part and parcel of operating revenue/operating cost. The Bangalore bench of the tribunal in SAP Labs India (P.) Ltd. v. Asstt. CIT [2010] 8 taxmann.com 207/[2011] 44 SOT 156 has also held that foreign exchange gain should be added to the operating revenue. The Mumbai bench of the tribunal in Rushabh Diamonds v. Asstt. CIT in [I.T. Appeal No. 7217 (Mum.) of 2012 vide its order, dated 26-4-2013] (to which the AM is party) has also held foreign exchange gain as a part of operating profit.
4.11 In view of the foregoing discussion, we hold that the ld. CIT(A) has taken an unimpeachable view by considering the forex loss of Rs. 50.04 lac as a part of operating cost. The same is, therefore, countenanced.”
16. We accordingly conclude that the learned lower authorities have erred in law and on facts whilst holding that the assessee’s foreign exchange fluctuation loss is not an “operating” item. The TPO is directed to finalize his consequential computation afresh in very terms therefore. This assessee’s cross appeal ITA No. 7669/Del/2017 is partly accepted.
No other ground or argument has been pressed.
17. The Revenue’s appeal ITA No. 7526/Del/2017 is dismissed and the assessee’s appeal ITA No. 7669/Del/2017 is partly allowed. A copy of this common order be placed in the respective case files.
Order pronounced in the open court on 2nd September, 2026
