Gain Or Loss Arising Out Of Change In Foreign Exchange Rate Can Be Treated As An Income Or Loss After Computation: ITAT

The two-member bench of George George K. (Judicial Member) and Padmavathi S. (Accountant Member) observed that the amount claimed is a net loss after considering the foreign exchange gains arising in certain transactions and that the assessee has also submitted the invoice-wise details of foreign exchange loss and gain. The foreign exchange loss claimed by the assessee is an allowable expenditure.

The assessee is in the business of providing contract software development and support services and information technology (IT) enabled services including data analysis, compilation, and transmission of customised software to overseas group affiliates (AEs). The assessee also provides IT-enabled back-office services to support the business lines of its group.

The assessee had incurred a foreign currency exchange loss and had claimed it as an expense. The assessee submitted before the AO that the exchange loss (realised/unrealized) on the revenue account had been treated as allowable expenditure and claimed as a deduction. The AO was not satisfied with the submissions of the assessee and hence disallowed the foreign exchange loss, stating that the assessee had not provided a proper explanation as to why the foreign exchange loss was claimed as an expenditure.

The DRP confirmed the disallowance, stating that the foreign exchange loss has arisen out of the year-end restatement of advances received from the AEs and that it is of capital nature and not allowed to be debited to the Profit and Loss account. The DRP, while giving directions, had taken the foreign exchange loss as a TP adjustment, stating that the DRP does not find infirmity in the action of the TPO. The AO passed the final order without considering the submissions of the assessee in this regard and had arrived at the disallowance of foreign exchange loss.

The assessee submitted that the assessee has satisfied all conditions prescribed under section 43AA, which deals with the taxation of foreign exchange fluctuation. It has computed foreign exchange loss or gain on differences arising on the date of settlement or last date of FY 2016-17, as the case may be, as provided under Income Computation and Disclosure Standards (ICDS) VI notified under section 145(2).

The assessee contended that the lower authorities failed to appreciate the fact that the whole foreign exchange loss is revenue in nature (both monetary and non-monetary), which is covered in section 43AA(2), which is a sufficient explanation for claiming the loss as a deduction.

The ITAT held that the major portion of the loss has arisen out of the year-end restatement of receivables and the balance in the EEFC a/c of the assessee, which as per the ICDS VI clauses is a monetary item and to be converted into reporting currency based on the closing rate, and the difference shall be recognised as income/expense. Therefore, the assessee has correctly recognised the foreign exchange as per the ICDS, which is to be recognised as a loss as per the provisions of section 43AA.

Case Title: M/s. Altisource Business Solutions Private Limited Versus The Deputy Commissioner of Income Tax, NFAC, Delhi

Citation: IT(TP)A No.183/Bang/2022

Dated: 25.07.2022

Counsel For Appellant: CA Nitin G. Inamdar

Counsel For Respondent: CIT(DR) Srinivas T. Bidari

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