IT/ILT: Foreign exchange gains are required to be treated as part of operating

profits
IT/ILT: For purpose of computing administrative expenses to be disallowed
under section 14A, read with rule 8D, only such investments are to be taken into
account which yield tax exempt income

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[2018] 100 taxmann.com 147 (Ahmedabad - Trib.)

IN THE ITAT AHMEDABAD BENCH 'D'
Gateway Technolabs (P.) Ltd.
v.
Deputy Commissioner of Income-tax, Circle-2(1)(1), Ahmedabad*
PRAMOD KUMAR, VICE-PRESIDENT
AND MADHUMITA ROY, JUDICIAL MEMBER
IT APPEAL NO. 677 (AHD.) OF 2017
[ASSESSMENT YEAR 2012-13]
OCTOBER 22, 2018

I. Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm’s
length price (Comparables and adjustments/Adjustment - Foreign exchange gain) -
Assessment year 2012-13 - Whether foreign exchange gains are required to be treated
as part of operating profits - Held, yes [Para 12] [In favour of assessee]
II. Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules,
1962 - Expenditure incurred in relation to exempt income not includible in total income
(General) - Whether for purpose of computing administrative expenses to be disallowed
under section 14A, read with rule 8D, only such investments are to be taken into
account which yield tax exempt income - Held, yes [Paras 14 and 16] [In favour of
assessee]
CASES REFERRED TO

ITO v. EDAG Engineers & Design India Ltd.[2014] 52 taxmann.com 398 (Delhi - Trib.) (para 6), CIT v.
Alps Chemicals (P.) Ltd. [2014] 367 ITR 594/[2015] 55 taxmann.com 388 (Guj.) (para 6) and Suzlon
Energy Ltd. v. Dy. CIT [IT Appeal Nos. 764 & 765 (Ahd.) of 2018, dated 27-6-2018] (para 9).
T.P. Hemani for the Appellant. Apoorva Bharadwaj for the Respondent.
ORDER

Pramod Kumar, Vice-President - By way of this appeal, the assessee appellant has challenged
correctness of the order dated 28th December 2016, passed by the learned CIT (A), in the matter of
assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2012-13.
2. The assessee has filed concise grounds of appeal, in conformity with rule 8 of the Appellate Tribunal
(Income Tax) Rules 1963, and prayed that the same be substituted for the original grounds of appeal -
prayer granted.
3. In the first ground of appeal, the assessee has raised the following grievance:—
"(1) The Ld. CIT(A) has erred, both in law and on the facts of the case, in confirming the upward
adjustment of Rs.47,11,618/- under section 92C of the Act."
4. So far as this grievance of the assessee is concerned, the relevant material facts are like this. The
assessee is engaged in the business of providing software development services. The Assessing Officer
had made an arm's length price adjustment in respect of services provided to associated enterprises,
amounting to Rs.2,11,46,680/- but it was subsequently rectified and then quantified at Rs.47,11,618/-.
The method of ascertaining arm's length price was adopted at Transactional Net Margin Method
(TNMM). There was no dispute on this aspect but the dispute was confined to comparables and to
foreign exchange being excluded from operating revenue. The grievance of the assessee was also
rejected by the learned CIT(A) and the impugned ALP adjustment was thus confirmed in appeal as well.
The assessee is not satisfied and is in further appeal before us.
5. We have heard the rival contentions, perused the material on record and duly considered facts of the
case in the light of applicable legal position.
6. We have noted that so far as assessee's grievance against exclusion of CGA-AVK Software & Export
Limited is concerned, it has been rejected as consistently loss making concern which is clearly incorrect,
because once foreign exchange gains are to be included as operating income - which is what ought to be
done, the figures at page 33 of CIT(A)'s order itself show profitability in the financial year 2008-09,
2010-11 and 2012-13. In our considered view, therefore, CGA-AVK Software & Export Limited was
wrongly excluded. We direct the Assessing Officer to include the same in the list of comparables. As
regards the question as to whether foreign exchange gains are to be included in operating profits or net,
the issue is settled in favour of the assessee by a co-ordinate bench decision in the case of ITO v. EDAG
Engineers & Design India Ltd. [2014] 52 taxmann.com 398 (Delhi - Trib.) and Hon'ble jurisdictional
High Court's judgment in the case of CIT v. Alps Chemicals (P.) Ltd. [2014] 367 ITR 594/[2015] 55
taxmann.com 388 (Guj.). Quite clearly, therefore, the assessee deserves to succeed on both the issues.
The foreign exchange gains are, in our opinion, required to be treated as part of operating profits and
CGA-AVK Software & Export Limited is required to be included in the comparables. We accept the
plea, and remit the matter to the file of the Assessing Officer to verify whether, upon the above
directions being implemented, margin will be less than 5%. If so, the entire ALP addition will stand
deleted. In any other case, the ALP adjustment will stand modified suitably. With these directions, matter
stands restored to the assessment stage.
7. Ground no.1 is thus allowed for statistical purposes in the above terms.
8. In ground no.2, the assessee has raised the following grievance:
"(2) The Ld. CIT(A) has erred, both in law and on the facts of the case, in confirming the addition
of Rs.1,98,429/- made u/s.36(1)(va) r.w.s. 2(24(x) of the Act towards late payment of employees'
contribution to PF & ESIC."
9. Learned Representative fairly agree that this issue is covered, in favour of the assessee, by a co-
ordinate bench decision in the case of Suzlon Energy Ltd. v. Dy. CIT [IT Appeal Nos. 764 & 765 (Ahd.)
of 2018, dated 27-6-2018] wherein the co-ordinate bench have observed as follows :—
'3. Learned representatives fairly agree that the aforesaid issue is squarely covered against the
assessee by Hon'ble jurisdictional High Court's judgment in the case of CIT v. Gujarat State Road
Transport Corporation, 366 ITR 170 (Guj.), wherein it is categorically held that in the case of
delayed deposit of employees' contribution to PF, the same will not be deductable in computing
income under section 28 of the Act. The law so laid down by the Hon'ble jurisdictional High Court
 is binding on us. The mere fact that an appeal against the said decision is pending before the
Hon'ble Supreme Court does not dilute binding nature of this judicial precedent. As regard
dismissal of SLP in the case of Rajasthan State Beverages Corporation Ltd (2017) 84 taxmann.com
185 (SC), it is only elementary that when a SLP is dismissed by a non-speaking order, it does not
constitute a law declared by Hon'ble Supreme Court, and as such, it is not binding under Article 141
of the Constitution of India. The authority, for this proposition, is contained in a series of judgments
of Hon'ble Supreme Court, including, inter alia, in the cases of State of Manipur v. Thingujam
Brojen Meetai, (1996) 9 SCC 29; Om Prakash Gargi v. State of Punjab, (1996) 11 SCC 399 and
Sun Export Corpn v. Collector of Customs, AIR 1997 SC 2658. We, therefore, see no legally
sustainable merit in the case of the assessee and, respectfully following the judgment of Hon'ble
jurisdictional High Court in the case of Gujarat State Road Transport Corporation (supra), dismiss
the grievance of the assessee in principle. We may, however, add that a co-ordinate bench of this
Tribunal, in the case of Rajjratna Metal Industries Ltd v. ACIT (ITA No.940/Ahd/2015; order dated
22.09.2017), has observed as follows:—
"3. Assessee's latter substantive ground challenges correctness of both the lower authorities' action
disallowing/adding a sum of Rs.3,85,810/- u/s. 36(1)(va) r.w.s. 2(24) of the Act on account late
payment of employees' contribution to PF & ESI in question. There is no dispute that hon'ble
jurisdictional high court's decision in CIT v. Gujarat State Road Transport Corporation (2014) 366
ITR 170 (Guj) upholds such a disallowance in principle. The assessee's case however is that
relevant due date has to be seen not from the relevant month of salary but the one pertaining to its
payment. He then files a computation chart indicating it to have paid above employees' PF/ESI
contributions on 22.05.2009 and 28.05.2009 as against the due dates thereof following on
20.06.2009. The Revenue fails to dispute this factual position. We therefore quote this tribunal's co-
ordinate bench decision in Kanoi paper & Industries Ltd. v. ACIT 75 TTJ 448 that the relevant date
in such case is that of month of the actual payment of wages/salaries. We therefore rely on the
above co-ordinate bench decision and direct the Assessing Officer to delete the impugned
disallowance as well."
4. In effect thus while any delayed deposit of PF/ESI is to be disallowed, in terms of Hon'ble
Gujarat High Court's judgment in the case of Gujarat State Road Transport Corporation (supra), the
question as to whether there is a delay or not may be decided by the Assessing Officer in the light of
above observations by the coordinate bench. The assessee will get relief, if found admissible, on
that basis'
10. Following the co-ordinate bench decision, we remit this issue also to the file of the Assessing Officer
for readjudication in the light of above observations which will apply mutatis mutandis here as well.
Ordered, accordingly.
11. Ground no.2 is also allowed for statistical purposes in the above terms.
12. In ground no.3, the assessee has raised the following grievance:—
"(3) The Ld. CIT(A) has erred, both in law and on the facts of the case, in confirming disallowance
under section 14A of the Act to the extent of Rs.1,04,115/-."
13. So far as the above grievance of the assessee is concerned, it is sufficient to take note of the fact that
the Assessing Officer has also included the investments not yielding tax exempt income, i.e. Mutual
Funds - Debt Funds, in computation of 0.5% amount being treated as administrative expenses. This
action of the Assessing Officer has been confirmed by learned CIT(A) as well. The assessee is not
satisfied and is in further appeal before us.
14. We have heard the rival contentions, perused the material on record and duly considered facts of the
case in the light of applicable legal position.
15. It is, in our considered view, only elementary that for the purpose of computing administrative
expenses to be disallowed under rule 14A r.w.r. 8D, only such investments are to be taken into account
as yield tax exempt income. The 0.5% of investments is to be treated as inadmissible administrative
expenses under rule 8D must therefore be computed with respect to equity funds Mutual Funds only.
The plea of the assessee is thus indeed well taken and meets our approval. We remit this issue also to the
file of the Assessing Officer for recomputation of disallowance under section 14A r.w.r. 8D in the light
of above observations. Ordered, accordingly.
16. Ground no.3 is also thus allowed for statistical purposes.
17. In the result, the appeal is allowed for statistical purposes.
pooja

*In favour of assessee.