Case Law Details
Kellog Brown and Root Engineering and Construction India Pvt. Ltd. Vs DCIT (ITAT Delhi)
ITAT Treats Foreign Exchange Gains as Operating Income Because They Arose From Export Service Realisations; Transfer Pricing Adjustment Set for Reconsideration Because Forex Gains Were Held Operating in Nature
The Income Tax Appellate Tribunal (ITAT), Delhi, partly allowed the assessee’s appeal for Assessment Year 2020-21 against the assessment order passed under Sections 143(3), 144C(13), and 144B of the Income Tax Act, 1961. The appeal challenged a transfer pricing adjustment of ₹4.11 crore, denial of deduction under Section 80G, denial of double taxation relief under Section 90, levy of interest, and initiation of penalty proceedings.
The assessee, engaged in providing design, technical consultancy, IT/ITES, marketing support services, and sale of proprietary equipment, had entered into international transactions with its associated enterprises (AEs). The principal transfer pricing dispute related to the treatment of foreign exchange fluctuation gains while computing the Profit Level Indicator (PLI) under the Transactional Net Margin Method (TNMM). The assessee treated foreign exchange gains arising from realization of export proceeds as operating income, whereas the Transfer Pricing Officer (TPO), Assessing Officer (AO), and Dispute Resolution Panel (DRP) treated them as non-operating by relying on the Safe Harbour Rules.
The Tribunal observed that the Safe Harbour Rules are optional and create a deeming fiction, and the assessee had not opted for them. Relying on judicial precedents, the Tribunal held that foreign exchange gains arising from realization of normal export proceeds from services rendered to associated enterprises in the ordinary course of business are operating in nature for computing PLI under TNMM. It directed the AO to verify that the gains arose from realization of normal export proceeds and to treat them accordingly. The Tribunal noted that if such gains are treated as operating income, the transfer pricing adjustment would become nil, rendering the remaining transfer pricing issues academic. It therefore did not adjudicate the remaining transfer pricing grounds while granting liberty to the assessee to seek rectification if required.
The Tribunal also examined the denial of deduction under Section 80G relating to a donation of ₹24.50 lakh made to the Odisha State Disaster Management Authority, of which deduction of ₹12.25 lakh had been claimed. The deduction had been denied on the ground that the donation formed part of the assessee’s Corporate Social Responsibility (CSR) obligation under Section 135 of the Companies Act, 2013. The Tribunal noted that the Assessing Officer had allowed deductions for donations made to PM Cares Fund and the National Defence Fund even though they also formed part of CSR expenditure.
It further observed that the Odisha State Disaster Management Authority possessed a valid certificate under Section 80G(5)(vi). Relying on judicial precedents, the Tribunal held that although CSR expenditure is not allowable as business expenditure under Section 37(1), there is no bar on claiming deduction under Section 80G except in the specific cases provided under Section 80G(2)(a)(iiihk) and (iiihl). Accordingly, it directed the AO to allow the deduction under Section 80G in accordance with law.
Regarding the denial of double taxation relief under Section 90 amounting to ₹1.11 crore, the Tribunal noted that both parties agreed that the matter required verification. It restored the issue to the Assessing Officer with a direction to verify the claim and grant the relief in accordance with law.
The Tribunal held that the grounds relating to interest under Sections 234A, 234B, and 234C were consequential and dismissed them. It also dismissed the challenge to initiation of penalty proceedings under Section 270A as premature. Consequently, the appeal was partly allowed.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal in ITA No.3310/Del/2024 for assessment year: 2020-21 has been filed by the assessee against the assessment order dated 17.05.2024 passed by the learned Assessing Officer, Assessment Unit, Income Tax Department u/s 143(3) r.w.s. 144C(13) read with Section 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) , wherein addition of Rs.4,11,54,574/- on account of ALP adjustment u/s 92C and also disallowance of deduction on account of donations of Rs. 12,25,000/- u/s 80G were made in the hands of the assessee, which assessment order has been passed by the AO in pursuance of the directions given by the Ld. DRP-1. New Delhi, dated 23.04.2024 u/s 144C(5) of the Act. The AO had earlier issued draft assessment order dated 06.09.2023 u/s. 144C(1) of the Act wherein the AO proposed an addition of Rs.9,61,64,469/- on account of ALP adjustment u/s 92C as proposed by ld. TPO in its Transfer pricing order dated 01.07.2023 passed u/s 92CA(3) , and a disallowance of deduction on account of donations to the tune of Rs.12,25,000/-u/s 80G were made by the AO, which were subjected to challenge by the assessee by filing objection before the ld. DRP which culminated into an order passed by ld. DRP dated 23.04.2024 u/s 144C(5) of the Act. TPO passed order giving effect to the directions of ld. DRP vide order dated 10.05.2024, wherein ALP adjustment to the international transactions was proposed at Rs. 4,11,54,574/-. The AO passed FINAL assessment order dated 17.05.2024 in pursuance to directions given by ld. DRP which assessment order is in challenge in appeal by the assessee before us.
2. The grounds of appeal raised by the assessee in its appeals filed with the Income-Tax Appellate Tribunal, Delhi Benches, New Delhi, reads as under:-
Grounds of appeal before the Delhi Bench of the Hon’ble ITAT for AY 2020-21
1. Transfer Pricing adjustment of INR 4,11,54,574/-
a. The learned Assessing Officer (‘AO’) / Transfer Pricing Officer (‘TPO’) and the Hon’ble Dispute Resolution Panel (‘DRP’) have erred in facts and in law in proposing an upward adjustment to appellant’s Income and making an addition of INR 4,11,54,574 in relation to the international transaction of ‘Provision of IT/ITES services’ to Associated Enterprises (‘AEs’).
b. The Id. AO/ TPO/ DRP have erred in facts and in law in conveniently disregarding the contentions of the appellant in relation to above actions and not considering the detailed statutory documentation maintained and furnished by the appellant and the submission filed during the assessment/ DRP proceedings.
2. Unjust exclusion of foreign exchange fluctuations while computing the operating margins of the appellant
a. The Id. AO/ TPO/ DRP have erred in considering foreign exchange fluctuations during the year as non-operating in nature while computing the segmental profitability of the appellant. In doing so, the Id. TPO and thereby the Id. AO has erroneously placed reliance on safe harbour provisions under Rule 10TA of the Rules, which are deeming provisions and have not been exercised by the appellant.
b. The Id. AO/TPO/ DRP have erred in rejecting the contentions of the appellant detailed In Its submissions made before the Id., TPO/ DRP and based on above approach, have recomputed the operating margins of the appellant at 11.42% In IT/ITES segment.
3. Unjust modification of RPT filter used by the appellant
The Id. AO/TPO/ DRP have erred in modifying the RPT filter used by the appellant.
4. Difference in opinion on the comparables selected by the appellant
a. The Id. AO/ TPO/ DRP have erred in selecting certain functionally incomparable companies to benchmark appellant’s services of provision of IT/ITES without providing any specific and clear rationale.
b. The Id. AO/ TPO/ DRP have erred in rejecting comparable companies selected by the appellant at the time of preparing its study on erroneous reasons.
5. DRP Directions not appropriately followed; Difference in calculation of comparable margins
The Id. AO/ TPO have grossly erred in margin computation of the comparable companies adopted by the Ld. TPO, despite the specific directions issued by the Hon’ble DRP.
6. Denial of deduction u/s 80G of the Act
a. That on the facts and circumstances of the case and in law, the Ld. AO/DRP erred in denying the claim of deduction of INR 12,25,000 u/s 80G of the Act, being 50% of the eligible amount of donations made to certain eligible organizations during the relevant previous year, merely because the subject payments formed part of CSR expenditure
b. The Ld. AO/ DRP has grossly erred in denying the deduction under section 80G of the Act without appreciating the fact that Explanation 2 to section 37 which denies deduction of CSR as business expenditure; and that no specific bar has been put under section 80G of the Act.
c. The Ld. AO/ DRP failed to appreciate the Appellant’s claim that in the absence of any express prohibition under the provisions of section 80G of the Act, such claim could not have been denied.
d. The Ld. AO/DRP should have been consistent in their positions where they allowed donations to PM Cares Fund and National Defense Fund as a CSR activity but denied benefit for the donation paid to Odisha State Disaster Management Authority, a 80G registered institution.
e. That the additions of INR 12,25,000 is against the law and liable to deleted as it would lead to double disallowance which is not the intention of the Legislature.
7. Incorrect denial of double taxation relief available u/s 90 of the Act while computing the demand arising out of the order appealed against and by CPC in Intimation u/s 143(1) of the Act.
a. That the Ld. AO has grossly erred in facts and in law by not allowing the double taxation relief of INR 1,11,34,019 u/s 90 of the Act while computing the demand arising out of the impugned order, even though the Ld. AO accepted the Appellant’s submission dated 20th December 2021 and did not make any variation as can be evidenced through para 6 of the impugned order.
b. That on the facts and circumstances of the case, the denial of the Double Taxation Relief of INR 1,11,34,019 while processing the tax return is not justified and liable to be deleted.
8. That in facts and in law, the Ld. AO/CPC was not justified in imposing interest u/s 234A, 234B and 234C of the Act.
9. Penalty proceedings under Section 270A of the Act ought not to be initiated.
The Ld. AO/ DRP has erred in initiating penalty proceedings under Section 270A of the Act without appreciating the submissions made during the assessment proceedings.
The Appellant craves leave, to add, amend, modify, rescind, supplement, or alter any or all of the Grounds stated herein above, either before or at the time of hearing of this appeal.
2. The brief facts of the case are that the assessee is engaged in the business of providing designing and technical consultancy services in respect of offshore and underwater construction activities for offshore oil and gas business. The assessee also provide marketing support and related services to its AE’s , and is involved in sale of proprietary equipments in India. The assessee filed return of income for the impugned assessment year, declaring income of Rs. 79,28,49,180/-. The return of income was selected by Revenue for framing complete scrutiny under CASS. Statutory notices u/s 143(2) and 142(1) were issued by the AO, and the assessee participated in assessment proceedings. The assessee submitted replies before the AO during the course of assessment proceedings. The AO observed that the assessee has entered into international transactions with its AE’s u/s 92 of the 1961 Act. Reference to the TPO was made by the AO to determine the Arms Length Price u/s 92CA , after seeking approval from ld. PCIT. Learned TPO finally proposed adjustments vide order giving effect to the directions of ld. DRP, to the tune of Rs. 4,11,54,574/- with respect to ITES segment of the assessee. The AO accordingly made the TP additions to the tune of Rs. 4,11,54,574/- towards adjustment to ALP of the international transactions towards ITES segment of the assessee. There is no dispute between rival parties with respect to ALP determination of other segments of assessee’s international transactions with AE, and hence the same is not considered by us in this order as the same is not required to be adjudicated by us. There are other grievance of the assessee wrt denial of deduction u/s 80G as well denial of credit under double taxation avoidance treaty with respect to foreign taxes paid. We will now deal with the issues/grounds raised by the assessee in this appeal.
I. Ground No. 1 to 5-Computation of ALP of International Transaction in ITES segment
i) The assessee has applied TNMM Method while computing ALP of the international transactions entered into by it with its AE’s in ITES Segment.
While computing PLI by applying OP/TC , the assessee has treated gains/loss arising from fluctuation in foreign exchange while realizing sale proceeds from export of services as operating income, while the authorities below have held the same to be ‘non operating income’. The assessee has claimed that the gain on foreign exchange realization has arisen on revenue account i.e. sales realizations towards export of services rendered by it to its AE in the normal course of business. The Revenue is mainly relying on safe harbor rules as enshrined in Rule 10TA of the Income-tax Rules, 1962 to hold that gains/loss realization on foreign exchange fluctuations are non-operating in nature. The assessee has admittedly not availed safe harbor rules u/r 10TA of 1962 Rules as the same is optional. The safe harbor rule creates a deeming fiction for computing PLI. The assessee has relied upon following judicial precedents wherein it is held that gains/loss on foreign exchange fluctuation on realization of business transactions in revenue field with AE’s are operating in nature :-
a) Dana India Private Limited (2021) 129 com433(Pune-Trib.)
b) Validor Capital India Private Limited (2019) 101 com15(Delhi-Trib.)
c) Delval Flow Controls Private Limited (ITA No. 640/Pun/2017)
d) PCIT v.Samsung India Electronics Private Limited (2024) 166 com130(Delhi HC)
e) PCIT v. Steria India Private Limited (ITA 739/2025, dated 12.12.2025-Delhi High Court)
Respectfully following the aforesaid decisions listed above as well other judicial precedents listed in paper book filed by the assessee , we hold that gains arisen on realization on account of foreign exchange fluctuation on account of normal sale proceeds for exports of services rendered by the assessee to its AE’s in normal course of business are operating in nature while computing PLI by applying OP/TC under TNMM Method. We allow this ground raised by the assessee , and direct the AO to verify whether the foreign exchange gains on account of fluctuation in currency have arisen from realization of normal sale proceeds from export of services rendered by the assessee to its AE in normal course of business, and accordingly allow the ground raised by the assessee. We order accordingly.
ii) The assessee has submitted that if the foreign exchange gains due to fluctuation in foreign currency arisen on account of realization of export proceeds of services rendered by it to its AE in normal course of business are treated as operating in nature, then the PLI of the assesssee shall be at arms length and adjustment to ALP shall be Nil. Thus, in that scenario, the other grounds with respect to computation of ALP becomes academic in nature , as we have already held foreign exchange gains/losses to be operating in nature in the preceding para’s of this order. Thus, the other grievances of the assessee have become academic in nature , the same are not adjudicated by us in the present appeal. However, liberty is granted to the assessee to make application with ITAT for rectification of this order, if so required, as the act of court should not prejudice any body. Accordingly Ground No. 1 to 5 are disposed off. We order accordingly.
II. Ground No. 6 –Denial of deduction u/s 80G
i) The authorities below has denied deductions to the tune of Rs. 12,25,000/- u/s 80G of the 1961 Act to the assessee with respect to donation of Rs. 24,50,000/-paid by the assessee to Odisha State Disaster Management Authority(50%) . The same was denied by the authorities below as the same was part of CSR incurred by the assessee to meet its obligation as per Section 135 of the Companies Act, 2013. The AO has allowed deductions to the tune of Rs.48,08,411/- paid by the assessee towards PM Cares Fund and National Defense Fund , as these donations were albeit part of CSR but as per AO eligible for deduction u/s 80G. However, deduction u/s 80G claimed by the assessee with respect to donation to Odisha State Disaster Management Authority was denied by the AO as the same was part of CSR obligation of the assesssee u/s 135 of 2013 Act, and hence as per the AO deduction u/s 80G is not admissible. The expenditure towards CSR obligation are prohibited u/s 37(1) of the 1961 Act. The assessee has produced receipt issued by Odisha State Disaster Management Authority bearing number 027667 ( PB/Page 542) and certificate issued by Odisha State Disaster Management Authority (A Government of Odisha Agency) that it qualifies u/s 80G(5)(vi) of the 1961 Act and certificate is valid for assessment year 2020-21(Placed in PB/Page 543) . The Tribunal has held in following judicial pronouncements that if the donations are paid towards CSR contribution as part of obligation under the Companies Act,2013, the same cannot be allowed as deduction u/s 37(1), but there is no bar in claiming deduction u/s 80G except as provided in Section 80G(2)(a)(iiihk) and (iiihl) wrt The Swachh Bharat Kosh and The Clean Ganga Fund . The judicial precedents relied upon by the assessee are as under:
a) Schenker India Private Limited in ITA no. 2391/Del/2022 (Delhi Tribunal)
b) Strides Pharma Science Limited in ITA no. 5721/Mum/2023 (Mumbai Tribunal)
c) Livlong Insurance Brokers Limited(2025) 176 com566(Mum. Trib.)
d) GIA India Laboratory Private Limited in ITA no. 4395/Mum/2024
Respectfully following the aforesaid decisions and other decisions relied upon by the assessee as listed in the paper book filed by the assessee, we direct AO to allow deduction u/s 80G in accordance with law wrt to donation paid by the assessee to Odisha State Disaster Management Authority . We order accordingly.
III. Ground No. 7 Denial of double taxation relief available u/s 90 of the 1961 Act– The assessee has claimed that the ld. DRP as well AO in its final assessment order has observed that the claim of the assessee wrt double taxation relief u/s 90 to the tune of Rs. 1,11,34,019/- is found to be correct and no adverse inference was drawn , but the credit of the same was not given by the AO to the assessee while computing the tax payable in consequent to assessment framed. Both the parties before us are ad-idem that the matter can be restored back to the file of the AO for verification and accordingly grant of double taxation relief u/s 90 after due verification. Thus, this issue is restored to the file of the AO accordingly to grant double tax relief available to the assessee u/s 90 of the 1961 Act after due verification in accordance with law. We order accordingly.
IV- Ground No. 8 Interest u/s 234A, 234B and 234C , are consequential in nature, and hence dismissed.
V Ground No. 9 Penalty u/s 270A is premature at this stage and is dismissed accordingly.
3. In the result, the appeal of the assessee in ITA No. 3310/Del/2024 for assessment year 2020-21 is partly allowed in the manner as indicated above.
Order pronounced in the open court on 05.06.2026.
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