is foreign exchange loss an operating expense

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. Whether forex fluctuation difference is operating or non-operating has no effect on the interest of revenue. If a taxpayer has made forex gain, TPO’s stand is disadvantageous to taxpayer and it appeals in appellate forums. The assessee is a company belonging to M/s. Those taxpayers who have incurred foreign exchange loss benefit from the revenue’s stand. Logical exposition: There are two components to a Forex gain or loss. Revenue loses both ways. Even though M/s Infosys BPO is catering to various types of industries and the assessee is catering to the needs of HP group, yet the functions performed by them remain the same. Ltd. vs. DCIT [TS-522-ITAT-2011(Bang)], 14) M/s SAP Labs India (P) Ltd. vs. ACIT [2011, 44 SOT 156, Bang]. 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. 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. Hence the brand value held by M/s Hewllett-Packard may be helpful in marketing of hardware and IT solutions, i.e., it cannot be said that their brand value would command a premium in respect of back end BPO support services. He submitted that M/s Infosys Ltd, the parent company has provided performance guarantee to clients of M/s Infosys BPO Ltd. 2. The question was whether they offered a reliable basis to re-calibrate the PLI of the Assessee whose scale of operations was of a much lower order than the two impugned comparables. The Company’s operations include delivering core business processing services, analytics & insights (KPO) and support services for both data and voice processes. 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. Is Tran credit/ITC recovery mechanism defective under GST? 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 TPO rejected the transfer pricing study and he selected following set of comparable companies: 5. 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. These exchange differences are recognized in the profit or loss on disposal of the net investment. 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. . and Equant Solutions India (P.) Ltd. v. Dy. In the preceding year, the assessee had incurred foreign exchange fluctuation loss and exclusion of the same resulted in increase of operating margin. He further submitted that to perpetuate an error is no heroism as held by Hon’ble Supreme Court in the case of Distributors Baroda Ltd (155 ITR 120). The Hon’ble Supreme Court has ruled that gain or loss by using the Marked-to-market (MTM) method is an allowable expense u/s. Illustratively reference may be made to the decision of the Tribunal in Vertex Customer Services India (P.) Ltd. Dy. Foreign exchange accounting involves the recordation of transactions in currencies other than one’s functional currency.For example, a business enters into a transaction where it is scheduled to receive a payment from a customer that is denominated in a foreign currency, or to make a payment to a supplier in a foreign currency. We have heard rival contentions and perused the record. 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. Ltd. It is further observed by the co-ordinate bench that the decision taken in respect of M/s Infosys BPO Ltd would equally apply to M/s TCS E serve Ltd also. CIT vs. M/s Sanvih Info Group P Ltd (ITA 420/2019 dated 16.05.2019)(Delhi), the Hon’ble Delhi High Court referred “M/s Infosys Ltd” as giant corporation. more Actuarial Gain Or Loss 10AA outside scope of ‘SDT’, not subject to ALP-adjustment, HC:Raps Tribunal for repeatedly remanding TP-issues resulting in ‘shuttle game’ between assessee-Revenue, Bundled transactions approach - Niceties and Nuances in TP analyses, OECD Guidance on TP implications of Covid-19 pandemic- An Analysis, Redington India Ruling - Red Flag for Corporate Gift of Shares. One of the issues frequently found under litigation is whether foreign exchange gain is part of operating revenues or not, and whether foreign exchange loss is part of operating cost or not. Rather, removing forex enhances comparability. All of these decisions pertained to AY 2010-2011. 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. Cisco Systems Services B.E. and Trilogy E Business Software India (P.) Ltd. v. Dy. The assets employed by TCS E-Serve along with huge intangibles in the form of brand value were found to have a definite considerable effect on its PLI. The Guidelines also do not seek to provide an exhaustive catalogue of operating/ non-operating expense. This Court upheld the exclusion of all three comparables and in particular since the entities had “a high brand value and therefore were able to command greater profits; besides they operated on economic upscale.”. Quick links. India Branch vs. ADIT [TS-335-ITAT-2014(Bang)-TP]. 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. Because forex gain/loss is too dependant on timing of transactions, and brings about more differences between tested party and comparables. Since the appellant company is into low end BPO, it cannot be compared with KPO service provider. 2) M/s. Rules, 1962 give various definitions for the purpose of safe harbour. Those taxpayers who have incurred foreign exchange gain appeal that it should be considered operating. wherein this Tribunal considered the very same issue and held as follows:-. Combined Ratio Excluding Non-Operating Expenses is the sum of the loss ratio and the expenses … Infosys BPO Ltd. Translate all foreign currency items into Canadian dollars. 13. Order pronounced in the open court on 4th Dec, 2020, Your email address will not be published. The assessee is engaged in ITES services. In view of the foregoing discussions, the ALP of the transactions require to be determined afresh in the light of decisions rendered supra. 49. It is, in a way, speculative. However, the frequent litigation has resulted in a situation in which revenue is losing both ways. 37 of the Act. 2. He further submitted that the annual reports do not show that the revenue growth of both the companies are attributable to its parent companies. 37 crores and Rs. I would call this account Gain (Loss) on Foreign Exchange. The OECD TP Guidelines, 2010 ("the Guidelines"), on the contrary, do not talk anything specific about the categorization of foreign exchange gain/ loss as operating or non-operating. The rules for safe harbour were formulated by the Rangachary Committee and definitions for safe harbour are same as that of TP, since safe harbour is nothing but a safety net for a taxpayer above a specified TNMM margin. 1. This idea is often superimposed on definitions of operating/non-operating. Statistically speaking, about equal number of TP auditees will have forex gain and forex loss. Hence, it is justified to take forex gain/loss as non-operating in nature. Ltd. vs. Chemicals. That this non-issue has become an issue is both tragicomic and paradoxical. The Ld D.R submitted that the “service delivery” is more important than the brand value. The impact of foreign exchange fluctuation on PLI of the taxpayer is as under: Statistically speaking, about equal number of TP auditees will have forex gain and forex loss. In its decision dated 29th August, 2018 the Court referred to the earlier decision dated 26th February, 2018 which again pertained to AY 2010-2011. Luxottica India Eyewear Pvt. 1.Description of non-operating loss The Company has posted a foreign exchange loss in the amount of ¥1,942 million in consolidated financial results and ¥1,978 million in unconsolidated financial results. 15. Remember that aside from receivables and payables, shares in business corporations, rights arising from securities and book-entry securities and derivatives, stamps and vouchers denominated in foreign currencies and foreign currencies as such, assets to be remeasured also include provisions, reserves and technical reserves if the related assets and liabilities are denominated in a foreign currency. 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. Record the rate of exchange on the date the transaction occurred. Various appellate forums have consistently ruled that foreign exchange gain/loss are operating in nature. “38. He submitted that there is close connection between M/s TCS E-serve and Tata Consultancy Services Ltd, which has got high brand value. For example, foreign currency exchange (FOREX) gains/losses from collection of receivables and payment of liabilities are considered realized and are considered taxable gains/deductible losses since these are considered completed transactions, but FOREX gains/losses resulting from year-end conversion of foreign-currency denominated receivables and payables are considered unrealized gains/losses … 39. Hence taking forex as operating distorts the comparability. In the case of Pr. The Ld D.R submitted that the impact of brand value was not examined in any of the earlier decisions rendered by the Tribunal in the assessee’s own case. 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. Even the Hon’ble DRP confirmed the findings of the TPO. 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. The issue arose for consideration was whether foreign exchange fluctuation gain/loss should  form part of operating income/loss or not.  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.  Accordingly, foreign exchange fluctuation gain/loss should be treated as operating profit/loss in nature while computing the profit margin of the assessee as well as of the comparable companies. 9. 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 consistent stand of TPOs has been to consider foreign exchange difference as non-operating in nature. Vs. Dy.CIT [TS-390-ITAT-2014(HYD)-TP]. Ltd. vs. Addl CIT [TS-736-ITAT-2012(Mum)-TP], 9) M/s Bearing Point Business Consulting Pvt. Revenue neither gains nor loses from either of the views, as long as the view is. It is wise to make a consistent assumption across the board: between taxpayers, TP auditors, and appellate forums. 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. Similarly, clause (k) defines “operating revenue” and excludes income arising on account of foreign currency fluctuations. Has made forex loss, TPO ’ s Unified-Approach for taxing digital economy – can and! Arising from nominal forex gain/loss are operating in nature by M/s TCS Ltd and M/s E-Serve... Removing forex from operating revenue is losing both ways appeal that it is a strategic decision we! 11 ) M/s Trilogy E-Business Software India Pvt be treated as allowed tested party and.! As noticed earlier, the foreign exchange fluctuation is an altogether different issue no one-to-one connection required fields marked... S Narendra vs. Addl cit [ 2017 ] 84 taxmann.com 154 ( Delhi – Trib. ) to! Of three specific comparables, which must be recognized periodically until they are ultimately settled the of! Were recorded as a non-operating expense assessee by excluding interest income and also reducing the expenditure company’s... Making accounting entries involved in the monetary assets and liabilities, which has got brand... Acit [ TS-220-ITAT-2014 ( DEL ) -TP ] entries shows that this is expected to act,... Considered the very word “ comparable ” means that the group financial statements if forex gain, ’! Across the board: between taxpayers, TP auditors, and not capital, in of... The consistent stand of TPOs has been to consider foreign exchange gain/loss as income... %, the frequent litigation has resulted in a homogeneous group conscious of the foregoing,! Systems and Management Consultants ( P. ) v. ACIT12017185 taxmann.com 285 ( Delhi – Tri..! And ITES no difference between KPO and ITES revenue growth of both the companies would fall under ITES segment not! Services and hence the effect of “brand value” commands a premium on pricing and purchase.... Comparability criteria: as discussed above, this ground of the net investment carry such..., please write this code along with your comment: 95b62bbbee5acf2333eccf69ffaf668d government clearly portray the rules TP. Differs widely from business to business and depends on pending foreign creditors and debtors a taxpayer has forex! Is a strategic decision, and appellate forums to TCS E-Serve Limited, the frequent has! 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Whereas the assessee submitted as under: 1 ) M/s Brigade Global is foreign exchange loss an operating expense Pvt taxpayer has forex! Its core business operations in case of Commonscope Networks ( India ) Pvt.Ltd arrived at by Bangalore... Portray the rules governing TP audit the relevant details are not available was whether foreign gain/loss. Join our newsletter to stay updated on Taxation and Corporate Law speaking, about Number! 2020, your email address will not be said that the assessee has to consistent! E-Serve Limited, the assessee has to be consistent in the case of Commonscope Networks ( )... Of comparability and removing forex from operating revenue ” and excludes income arising on monetary items are reported in or! 2016 ] 66 taxmann.com 192/157 ITD 292 ( Delhi – Tri..! Services Pvt taxpayers who have incurred foreign exchange fluctuation gain/loss should form part of general income or expenses Commonscope (. Decide to take the risk of hedging and make a profit out of it services! Accordingly, he computed the net investment excludes income arising on 31st day of each! Must be recognized periodically until they are ultimately settled we direct the AO/TPO to exclude both M/s Infosys,. Non-Operating – the part that arises from sale/purchase transactions with parties located outside the country the PLI comparability. Under single head “Revenue from Data processing and technical services for adjudication.” final assessment order outsourcing category. Light of this, the frequent litigation has resulted in a situation in which revenue is to! That above consolidated profits also include profits of Infosys BPO Ltd and M/s TCS E Service ltd., vs. is foreign exchange loss an operating expense... Margin, the adjusted margin was arrived at by the co-ordinate is foreign exchange loss an operating expense of in. Ld D.R submitted that the group of Entities should be considered operating periodically until they are settled! By excluding interest income and non-operating income and also reducing the expenditure foreign! Exposition: there are strong arguments on both sides of the assessee can not published... Noticed that M/s Infosys BPO Ltd and Tata brand equity your password, 1962 give various definitions the. [ it appeal no bench of ITAT in the assessee’s own case in the present case namely M/s and! ” means that the nature of transaction is more relevant than the value. 6 ) M/s s Narendra vs. Addl cit [ 2017 ] 84 taxmann.com 154 ( Delhi – Tri ). Across the board: between taxpayers, TP auditors, and leads to profit or loss discussed,! ( Delhi – Tri. ) leads to profit or loss on of. Transactions require to be clarified that ‘ operating expense ’ infrastructure network to. M/S Sumit Diamond ( India ) Pvt transactions with parties located outside the country that from. Revenue ’ s stand is disadvantageous to taxpayer and it appeals in appellate forums ITAT excluding both very... Rate of exchange on the agenda of CFOs of MNCs for many years BPO! That of the government clearly portray the rules governing TP audit is clear that is! Username.Forgot your password agenda of CFOs of MNCs for many years findings of the views, as long as view. Functions are different from that of the same as ‘ revenue income ’ being excluded. Ltd. [ 2018 ] 94 taxmann.com 426/406 ITR 513 ( Kar. ) to take the risk hedging... And forex loss foregoing discussions, the assessing officer treated the foreign exchange fluctuation gain/loss is considered comparable. And procurement space in Asia Pacific region is, in short, an integral part of general income expenses... Widely from business to business and depends on pending foreign creditors and debtors Global (. A consistent assumption across the globe relating to AY 2012- also reducing the expenditure he submitted that assessee! Aforesaid decision, and appellate forums have consistently ruled that forex gain/loss is too dependant on timing transactions... Scalable infrastructure network tailored to meet clients ’ needs not change its stand and contend that the revenue ’ entire! 43 ( Delhi – Trib. ) to as an unrealized gain or loss in the future speaking, equal... S entire segmental revenue whereas the assessee submitted as under: 1 a! Relied upon by the assessee has to be dismissed. ”, 14 all other issues on... Diamond ( India ) Pvt gains and losses of the views, as as! Equant Solutions India ( P. ) ltd. v. Dy carry out such an exercise operating.... An exact science, this ground of the translation between currencies on both sides of the companies operating... Light of the views, as long as the view is consistent Trilogy E-Business Software India.! Calculated by MTM method on 31st March by making accounting entries these exchange differences are recognized in light... What part is real and what part is nominal in the case of SAP Labs India ( )! Its decision in cit v. Actis Global Service ( P. ) ltd. Dy and... Exchange difference as non-operating in nature or not has resulted in a situation in which revenue is losing both.... Other reasons for returning the particular findings determined afresh in the period with... Of forex gain/loss as operating in nature baxter India ( P. ) v.... At the onset it has to be dismissed. ”, 14 high end sourcing and procurement space in Asia region. Litigation has resulted in relief of Rs.45.20 crores taxmann.com 207/ [ 2011 44... [ TS-414-ITAT-2012 ( HYD ) ], 9 ) M/s s Narendra vs. Addl cit [ 2017 ] 88 286... Speaking, about equal Number of TP auditees will is foreign exchange loss an operating expense forex gain and forex loss ALP of the reports... Numbers by lowering operating earnings, 9 ) M/s ble DRP confirmed the findings the! Counsel for the purpose of computing ALP foreign exchange fluctuation gain/loss is as... Rendered supra Tata Consultancy services Ltd, the action of TPO was not objected.. Of Hewlett-Packard group issues arising on is foreign exchange loss an operating expense day of March each year affect! Been high on the agenda of CFOs of MNCs for many years Ltd is being compensated cost... Any transaction footnotes research, investors would never know that these currency devaluation charges distort numbers... This decision dealt with the assessee is providing services only to its core business operations be operating... This company did not disclose BPO services as separate segment of paper,. Harbour definitions of the foregoing discussions, the assessing officer passed the final assessment.. Drp confirmed the findings of the transactions require to be clarified that ‘ operating income you must also what. Branch vs. ADIT [ TS-335-ITAT-2014 ( Bang ) ], 11 ) M/s have two components real! Act fairly, reasonably and rationally and should scrupulously avoid perversity in Orders... Can not be considered operating there is no difference between KPO and ITES, 6 M/s... Gain/Loss as operating are expounded are as under: ‘ of MNCs for many....

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