SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER

For the Petitioner : Sh. Pradeep Dinodia FCA & Shri R.K. Kapoor CA. & Shri Anubhav Jaggi CA
For the Respondent : Sh. Amrendra Kumar CIT (DR)

ORDER

S.V. MEHROTRA, A.M..:-This appeal has been preferred by the assessee against the assessment order passed by the DCIT, Circle-15(1), New Delhi pursuant to DRP directions u/s 143(3)/144C of the Income-tax Act, 1961.

2. Following grounds have been raised:
1. That the Ld. TPO and consequently DRP/AO has erred in law and on facts in the circumstances of the case in confirming and enhancing the addition on account of arms' length price under section 92CA(3) of the Income-tax Act amounting to Rs. 3,71,14,107/- on wholly illegal, erroneous and untenable grounds.

2. The order of assessment is bad in law.

3. The learned AO's order based on the findings of the learned Transfer Pricing Officer and the directions of the learned Dispute Resolution Panel u/s.144C(5) of the Incometax, is erroneous, untenable in law and on facts for the various reasons and not limited to the following: -

3.1. The TPO as well as the DRP and consequently the AO have grossly erred in law and on facts and in the circumstances of the case in erroneously:
3.1.1. Rejecting the scientifically the assessee without cogent reason.
3.1.2. Carrying out a new search process based on erroneous filters
3.1.3. Cherry Picking Ii comparables with high margins

3.2. The TPO as well as the DRP and consequently the AO have grossly erred in law and on facts and in the circumstances of the case for the choice of comparable companies by erroneously:

3.2.1. Adjusting the ALP of the international transactions of the assessee related to project management services (PMS) and marketing support services (MSS) that are support services in nature by treating and comparing them to high end technical services.

3.2.2. Ignoring the fact that the AE service segment of the assessee constitutes of more than 90% of support services and therefore comparable companies which provided similar support services and bear similar risks to the support service segment of the assessee should have been chosen.

3.2.3. In not appreciating the fact that the new comparables chosen bear different risk in rendering technical services, while the assessee is non-risk bearing entity in its support services segment.

3.2.4. In not allowing an adjustment on account of differences In the functions, assets and risks undertaken between the assessee and the comparable companies, as per the provisions of Rule 10B of Income Tax Rules which allow reasonable accurate adjustments to eliminate the material effects of differences.

3.3. The TPO as well as the DRP and consequently the AO have erred in law and on facts and in the circumstances in determination of the PLI of the assessee and the comparable companies by:

3.3.1. In applying the safe harbor rules (SAR) notified by CBDT to the assessee which have no retrospective application to A Y 2010-11

3.3.2. In treating the foreign exchange gain/loss as nonoperating nature.
3.3.3. In treating the provision of doubtful debts as nonoperating nature
4. That the proposed addition of Rs. 3,71,14,107/- is bad in the law and is prayed to be deleted.
5. That the Ld. AO has erred on the facts of the assessee's case in not allowing the complete credit of prepaid taxes.

6. That the penalty proceedings initiated u/s Sec 271(1)(c) are on wholly illegal and untenable grounds since there was no concealment of any income nor submission of inaccurate particulars of income, nor any default according to law by the assessee.

7. That the interest charged u/s See 234B and 234C of the Act is on wholly illegal and untenable grounds and is prayed not to be upheld.

3. Brief facts of the case are that assessee, a subsidiary of Rolls Royce Overseas Holding Limited, filed its return of income declaring taxable income of Rs. 20,15,61,520. The business profile of the assessee as discussed by ld. TPO in paras 2.1 to 2.4 of his order is as under:

“2.1 Rolls Royce group Plc is a company operating in the civil aerospace, defense, marine and .energy market providing Aero engines using gas turbine technology, Rolls Royce International Ltd. is engaged in the formulation of policy and strategy for the development of business opportunity and provides marketing, research and commercial information services to its AEs.

2.2 Further, the Group also operates. in India through its liaison office ("RRIL-LO"). RRIL-LO carries out the liaison activities for the Rolls-Royce group. It provides marketing support and other support services such as provision of commercial information and co-ordinates service support operations.

2.3 The Assessee Company (RRIPL) undertakes trading of Rolls Royce engines and has a presence primarily in the power generation and oil and gas markets, supporting a range of reciprocating engines covering gas engines, HFO engines and crude oil engines. It also functions as an integrated solution provider for the afore-mentioned two markets. In the oil and gas sector, Rolls-Royce engines are used for running very large pumps to drive crude oil through pipelines running several hundred miles and also providing electrical power for such pumping stations. Similarly, for power generation, the engines are used to run generators catering for the captive power needs and process steam/heat requirements of various industrial units.

2.4. RRIPL also undertakes servicing contracts, which involve selling parts purchased from Indian manufacturers and distributors, overseas Rolls-Royce entitles and overseas third parties as well as performing services such as repair and maintenance work and other field support.

4. During the year under consideration the assessee company had entered into various transactions with its AEs and, therefore, in order to determine the ALP of the said transactions u/s 92CA(3) of the Income-tax Act, reference was made to the TPO by the AO. The main dispute in the present appeal is in regard to addition made on account of the ALP determined by ld. TPO in regard to provision of technical project management and marketing support services, which had been bench marked using TNMM method and adopting OP/OC as the PLI. PLI in assessee’s case had been calculated at 10.21% by assessee and, accordingly, it was claimed that the international transactions were at ALP in view of the average PLI of 9.90% in the case of 13 comparables. In the services segment, the OP/OC computed in the TP study was as below:

5. As per the bench marking analysis done in the TP study, following comparables had been taken:

6. Ld. TPO noticed that in the TP report in regard to the functional analysis of providing technical, project management and market support services, it was mentioned as under:

"RRIPL has entered into various agreements with its associated enterprises for rendering various support services which facilitates the Rolls-Royce Group to conduct business ill India. Such services are in the nature of technical support, project management and market support services. In this regard, the functions performed by RRIPL have been enumerated below:

Provision of technical services

During the year under consideration, RRIPL rendered technical services to Rolls- Royce Power Engineering Pic, Bedford "RRPE, Bedford"), Rolls-Royce Power Engineering Pic, Derby ("RRPE, Derby'') and Roll-Royce Marine AS, Notway("RRMAS, Notway"}. In this regard, the functions performed by RRIPL include:

- Assistance and / or advice in repair and overhaul of Rolls- Boyce energy production and / or oil and gas distribution engines Making recommendations with respect to technical solutions and workflows to enhance repair and overhaul capability Provision of project management services

- In addition to the above, RRTPL also rendered project management services to RRMAS, Norway. The nature of services rendered includes the following:

- Review of the internal operations of the firm with the good practice framework
- Co-ordination for procurement of equipments and supplies and expediting the process with suppliers
- Co-ordination with Indian suppliers ill relation to supply of drawings and specifications
- Controlling and reviewing the expenditure all a project and identifying and claiming additional Costs from clients
- Planning and scheduling resource requirements for ongoing and future projects
- Raising invoices in accordance with project milestones, issuing invoices to customer one collecting cash
- Assistance in management of logistics for RRMAS Norway for delivery of goods with appropriate documentation for the same
- Maintenance of tile customer base for the Group provision of market support services.
Service rendered by RRIPL in relation to market support services to RRMAS Norway and Rolls-Royce International Ltd; UK ( includes the following.

- Maintenance of business and market relation and provision of necessary support
- Identification a/new business opportunities and prospective customers fat he Rolls Royce products
- Assistance in formulations of effective market and business strategies
- Co-ordination with respect to customer complaints and provision of necessary inputs."

7. In course of proceedings before ld. TPO, the assessee submitted segmental details in regard to the services provided to the AE as under:

- O&M Services
- Project management services
- Market support services
- Corporate Services.

8. The assessee’s contention was that O&M services were high end services which constituted 10% of the average service segment. The rest three being Project management services; Market support services; and corporate service, constituted 90% of the services rendered by assessee. It was further pointed out that the PLI of O&M services segment, where the assessee was rendering technical services, was 59.32%, whereas for other three services, which were low end services, the profit margin was 6.5%. The assessee’s contention was that only those comparables should be taken which were performing non-technical services as the assessee’s major chunk of services was non technical in nature. However, ld. TPO did not accept the assessee’s contention pointing out that the filter of ratio of service income to total income of at least 75% was a quantitative filter which had been used to arrive at a set of companies which were deriving service income. Ld. TPO pointed out that the comparables passing this quantitative filter were examined in detail with respect to the broad functional similarity as required by the TNMM for benchmarking international transactions. He pointed out that from the TP report it is evident that assessee was engaged in providing O&M, Project Management services; corporate services as well as market support services to its AEs. He further observed that it could be seen from TP report that the services provided by the assessee to the AE were in the nature of marketing support services, managerial services and some amount of technical support also. He observed that while using TNMM method, companies providing approximately similar services can be taken as comparable and, therefore, functional or service line was the type of functions being performed whether low or high end. He, thus, did not accept the assessee’s contention that the comparables performing high end as well as low end services should be considered segmental wise having regard to the composition of proportion of high and low end services rendered by those comparables. He was of the opinion that those comparables would be selected which were particularly performing functions similar to the assessee and were providing market support service, technical and related business services and such comparables could not be rejected simply on the ground of high end activity. Thus, in sum and substance, ld. TPO did not agree with assessee’s contention of not clubbing the high end and low end services. The AO, accordingly, determined the PLI at 20.98% as under:

9. The AO made an addition of Rs. 3,20,82,086/- as under:

10. Before ld. DRP, the assessee reiterated its submissions and pointed out that share of support service rendered to the AE vis a vis the total service rendered to the AE was 90% and technical services were only 10%. It was submitted that the comparables selected, disregarding the assessee’s contention, was not justified as the characteristic and functions rendered and assumed in relation to the services rendered by the comparables were in star contrast to the assessee and, thus, not comparable. The assessee had also pointed out that certain comparables were wrongly rejected by ld. TPO though they conformed to the functions performed by assessee.

11. Ld DRP after considering the assessee’s contention rejected the same and gave relief only in respect of two comparables viz. BVG India Ltd. and M.N. Dastur & Co. Ltd., inter alia, observing that M.N. Dastur & Co. Ltd. was more suitable to its O&M segment. The AO, accordingly, passed the assessment order and determined the average PLI at 22.70% as under:

12. The AO, accordingly, determined the ALP as under:

13. Ld. counsel for the assessee narrated the factual aspects in regard to the two main service segments viz. technical segment and the other business support service segment. He referred to page 85 of the PB wherein segmentwise profitability for AY 2010-11 has been given in regard to all the service segments.

14. Ld. counsel pointed out that assessee was maintaining separate books of account for all the four service segments. He demonstrated that 90% of the service segment was in regard to project management service, market support service and corporate support service. All the three together constituted the business support service segment and only 10% was in regard to operation and maintenance (technical) services constituting only 10% of the service segment.

15. Ld. counsel referred to page 127 of the PB, wherein the agreement between Rolls Roce Marine AS and Rolls Royce Energy Systems India Pvt. Ltd., for the provision of service is contained and referred to page 137 of the PB, wherein the scope of services to be provided by assessee are contained.

16. Ld. counsel referred to page 131 of the PB and pointed out that in para 5.2 it is clearly mentioned that the mark-up will be 6.52%, which represented a mark-up appropriated for “non risk bearing service provider”. He further referred to page 133 of PB and referred to para 8.1 of the agreement wherein it is mentioned as under:

“8.1. Whilst PRESIPL will take all reasonable steps to ensure that its performance of the services is to the standard required by PRMAS, then, except as otherwise provided in clause 8.4, all risk of shortfall in performance, and any liability to third parties arising from such shortfall in performance or from defective or non-performance of its obligations to provide the services, shall be and remain with PRMAS and PRMAS shall hold PRESIPL harmless from any such liability to third parties howsoever caused regardless of fault.

17. With reference to this clause, ld. counsel demonstrated that assessee is essentially a non-risk bearing service provider. Ld. counsel pointed out that ld. TPO wrongly rejected the assessee’s contention regarding segmental details for the four service segment observing that personal cost, bank charges and administrative cost were not allocated to project and market support services. He referred to page 13 of the PB, wherein Schedule 10 to the P&L A/c is contained to demonstrate that these costs had already been allocated to various service segments:
Schedule 10:

18. He, therefore, submitted that the remark of ld. TPO regarding nonallocation of cost to project management services and Market support service is not correct. He submitted that ld. DRP has not dealt with assessee’s objections regarding selection of comparables, having regard to the segmental details.

19. Ld. counsel submitted that keeping in view the nature of services rendered by assessee being non-risk bearing and non-technical, the comparables should have been selected accordingly, even if for bench marking the TNMM method was to be applied in respect of technical as well as business support services.

20. Ld. counsel further referred to the decision in 121 ITR 1 to submit that dominant objective test has to be applied in such circumstances.

21. In support of his contention ld. counsel relied on the decision of Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. 2015-TII-33-HC-Delhi-TP, wherein it has been, inter alia, held that knowledge processing, outsourcing (KPO) cannot be compared to business process outsourcing (BPO). In regard to the comparables, ld. counsel submitted that ld. TPO has wrongly excluded two comparables viz. ICRA Management and Denave India and has wrongly included three comparables viz. Rites Ltd., Apitco Ltd. and Kitco Ltd.

22. As regards the exclusion of ICRA Management and Denave India ld. counsel pointed out that the services rendered by the assessee are comparable either to a sales agent or corporate agency wherein gross remuneration range from 2 to 4% as was found out in the case of ICRA Management and Denave India Ltd. He submitted that as against this the assessee has got 6.52% assured return on its total cost. However, he did not seriously pressed for exclusion of these two comparables. Therefore, we do not go into this aspect.

23. Ld. counsel further submitted that turn-over filter applied by ld. TPO also should not be applied in view of the decision of Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India)(P) Ltd. Vs. DCIT (2015) 277 CTR (Del) 137.

24. Ld. CIT(DR) referred to the decision of Hon’ble Bombay High Court in the case of Tvonic India (P) Ltd. TS/301 ITAT/2014 (Mumbai) and submitted that a comparable can be rejected only on the ground of functional dissimilarly. He submitted that RITES Ltd. was assessee’s comparable and, therefore, cannot be excluded.

25. Ld. CIT(DR) filed before us a copy of MAP agreement in the case of Rolls Royce India Pvt. Ltd. for A.Y. 2008-09 and 2009-10, which is also a subsidiary of Rolls Royce International Ltd. He pointed out that for both the years the PLI has been taken at 12.5% and the same should be taken in assessee’s case also.

26. Ld. counsel for the assessee submitted that this agreement cannot be applied in assessee’s case because as far as assessee is concerned, it is a separate entity and has no relation with the assessee which was under consideration in MAP proceedings.

27. We have considered the submissions of both the parties and have perused the record of the case. As far as ld. CIT(DR)’s submission regarding MAP agreement in the case of M/s Rolls Royce India Pvt. Ltd. for AY 2008- 09 and 2009-10 is concerned, we are of the opinion that the same cannot be imported in the case of the assessee, which, as per the statement made by ld. counsel for the assessee, is for a different assessee altogether.

28. At this juncture we may point out that the name of the assessee, as given in the order of MAP agreement, is same as that of assessee, but it appears that the name of present assessee before us formerly was Rolls Royce Energy Systems India Pvt. Ltd., which has now been changed to Rolls Royce India Pvt. Ltd.

29. Thus, there is some confusion in regard to the names of the assessee but, be that as it may, since the MAP agreement, in any view of the matter, is not for AY 2010-11, under consideration, therefore, the same cannot be applied in the current assessment year.

30. We now proceed to consider the merits of the arguments of both the parties.
31. There is no quarrel with the proposition advanced by ld. CIT(DR) that it is the functional test which plays paramount role in selection of comparables. It is also settled law that functional test is to be applied having regard to the segmental details. If a particular segment is performing specific function, then for determining the ALP those comparables should be selected which have close similarity with the functional segment under consideration. We are in agreement with ld. counsel for the assessee that such comparables should be selected which are providing non-risk bearing business support service because as per the segmental details, the PLI of technical segment is more than 59% and for other segments, the assessee had been reimbursed at cost plus 6.52%.

32. Having regard to the major functions performed by assessee, the assessee has primarily objected to inclusion of three comparables, namely, RITES Ltd., Apitco Ltd. and Kitco Ltd. As far as RITES Ltd. is concerned, the said company is a government of India enterprise and is a multidisciplinary consultancy organization in the fields of transport, infrastructure and related technologies. It provides a comprehensive array of services under a single roof and believes in transfer of technology to client organizations. In overseas projects, RITES actively pursues and develops cooperative links with local consultants/ firms, as means of maximum utilization of local resources and as an effective instrument of sharing its expertise. This business profile of RITES Ltd., as given in the synopsis of assessee, has not been disputed. Therefore, it is evident that RITES Ltd. is a primarily imparting high end technical services, which cannot be compared with low end marketing business support services rendered by assessee, which primarily, are as under:

“Technical services Division – operations & maintenance management unit:

The unit provides railway related technical support to captive railway systems for private and public sectors in India for power Industry, Steel and Aluminium plants, Ports etc. The unit has secured works from a number of clients in the recent past like NTPC, SAIL, Port Companies, TATAS Steel & WBPOCL for operations of their railway systems, maintenance of rolling stock, track signaling etc.

Of late the unit has started a new business offering shunting locomotive on wet lease including operation and maintenance to various non-railway clients Locomotive on wet lease are working at Bandel Thermal Power Station, Bandel and NTPC, SAIL Power Co. Ltd., Bhilai. Recently, the unit has given two locomotives to Dharma Port Co. Ltd. and one locomotive to Lloyds Steel Industries, Wardha. The unit has also secured orders for supplying and commissioning DLW manufactured DG Sets Id domestic clients.

33. Further, this comparable has been excluded in the case of M/s Verizon India Pvt. Ltd. Vs. JCIT 2766/Del/2010, which has been filed by the assessee in its case law PB as Annexure V, wherein it has been, inter alia, observed in para 23 that RITES Ltd. is an engineering company and provides end to end solutions to its clients.

34. Ld. counsel has also pointed out that this comparable has also been excluded in following cases:
- Shell India Markets Pvt. Ltd. [TS-430-ITAT-2014(MUM)-TP];
- Chemtex Global Engineers Pvt. Ltd. [TS-161-ITAT-2013(Mum)- TP]; Yum Restaurants (India) Pvt. Ltd. [TS-166-ITAT-2014 (Del)- TP] and Nortel Networks India Pvt. Ltd. ‘TS-65-ITAT- 2014(DEL)-TP].
35. We, therefore, in view of above discussion, direct the AO to exclude RITES Ltd. from the list of comparables.

36. The second comparable, inclusion of which is disputed by the assessee, is Apitco Ltd. In the synopsis filed by the assessee it is mentioned that the services provided include but not limited to the domains of project report preparation, techno economic studies, feasibility studies, micro enterprise development, skill development, project management consulting, industrial cluster development, environmental management consulting, energy management consulting, market & social research and asset reconstruction management services. This company was promoted jointly by All India Financial Institutions (IDBI, IFCI, ICICI), State Industry Development Corporations (APIDC, APSFC) and commercial banks (Andhra Bank, Indian Bank, State Bank of India, Syndicate Bank),

37. From a bare perusal of the services rendered by Apitco Ltd. it is clear that it is imparting consultancy in entirely different field and is not comparable to the functions performed by different service segments of assessee. We, therefore, direction for exclusion of this comparable from the list of comparables.

KITCOLTD.
38. The functional profile of this company, as given in the synopsis filed by the assessee, is as under:
“1. KITCO, the first technical consultancy organization (TCO) in India, was established in 1972 by Industrial Development Bank of India, other national and state level financial institutions, Govt. of Kerala and 7 Public Sector Banks for rendering services to Entrepreneurs, Govt. Departmental PSUs, Local Bodies, etc. Presently, Small Industries Development Bank of India (SIDBI) is the prime shareholder with 49% shares of the company.

2. The aim of setting up of TCO, which had the blessing of Govt. of India and the Reserve Bank of India, was to provide professional technical consultancy assistance to banks by appraisal of projects for priority sector lending and to entrepreneurs in the 5MB Sector by way of preparation of Project Reports & Market Studies and conducting training programmes for entrepreneurship development. Subsequently similar TCOs were set up in almost all the states with one of the National Financial Institutions (IDBI, IFCI or ICICI) as the prime shareholder.

3. KITCO has successfully implemented projects like Cochin International Airport Ltd., Titanium Sponge Project, International Marina, Cochin Special Economic Zone, etc and presently implementing a multimodal Mobility Hub at Cochin, all of which are first of its kind in the country in their own respect. KITCO has successfully completed the Phase-1 of CIAL Golf Course & Country Club and Ghallah Wentworth Golf Course at Muscat, Sultanate of Oman, thereby establishing itself in an area, which was considered to be the forte of European Consultants. The prestigious overseas assignments KITCO so far has completed include the technical evaluation of electrical power distribution network at King Abdul Aziz International Airport, Jeddah.

4. All its clients are either central government, state government, PSU etc. Snapshot enclosed.
5. It is working In divisions like infrastructure, tourism, aviation, IT services, HRD, financial services etc. which are dissimilar to the functional profile of the assessee company. Snapshot enclosed.
39. From the above submissions it is evident that this comparable is not functionally comparable with the assessee because it is the nature of services rendered and not per se rendering of services is relevant in accepting or rejecting a company as comparable. Therefore, we direct exclusion of this comparable from the list of comparables.

40. Now coming to ground no.3.3 in regard to the ld. TPO’s action of excluding the foreign exchange gains/ loss and provision for bad debts, by calculating the PLI, treating the same as non-operating item.

41. Before we consider these issues, we may point out that assessee has not challenged the treatment of bank charges as non-operative income in grounds of appeal and, therefore, we refrain from considering the same.

42. The learned TPO has given the explanation for the exclusion of items of foreign exchange gain/loss while calculating the OP/OC treating the same as non operating item.

43. Main contention of ld. TPO was that forex gain/loss occurs in following two situations:
“(i) Receipt/ expenditures are booked at the time of transaction while payment of foreign exchange is received at a later point of time and foreign exchange is converted to Indian currency at that time resulting into Forex gain/loss due to variation in the exchange rate from the date of transaction to that of conversion of Foreign exchange into Indian currency. An exporter/importer of goods/services enters into forward contract for sale/purchase of Forex to hedge itself from the fluctuation in exchange rates.”

44. He observed that the amount of forex loss/ gain and hedging cost/premium in each case would depend upon the risk management policy of each company and, therefore, the profit margin at the end of the year may vary substantially from the expected profit margin at the time of entering into project because of fluctuation in the exchange rate and its risk management policy i.e. the extent of which its Forex transactions were hedged.

45. Ld. counsel submitted that any gain or loss arising out of change in foreign currency rate in respect of transaction for import or export of goods or services is to treated as part of the price of import or the value of export of goods or services. He relied on the decision of Hon'ble Supreme Court in case of CIT v. M/s Woodward Governor India Private Ltd. For this proposition he also referred to the decision of Bangalore ITAT in case of M/s SAP Labs India Pvt. Ltd vs. ACIT [2010-TII-44-ITAT-BANG-TP] wherein it was held that:

"The foreign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business. The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company"

46. Ld. counsel pointed out that learned TPO has stated in its order Para- 22.10 that Safe Harbour Rules notified by CBDT on 18.09.2013 gives clear indication as to what constitute the operating items of income and expenses and, accordingly, disposed off the assessee’s objection that safe harbour rules do not apply to the year under consideration.

47. In this regard ld. counsel submitted that Delhi ITAT in a recent decision in case of Westfalia Separator India Pvt. Ltd. vs. ACIT has, inter alia, held that-

"Para 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 harbour rules notified on 18.09.2013 which are not applicable to the assessment year under consideration. "
"Para 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 Pvt. Vs ACIT (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. Vs. ACIT (2010) 6ITR (Trib) 81 (Bang) has also held that foreign exchange gain should be added to the operating revenue. The Mumbai bench of the tribunal in Rushabh Diamonds, Mumbai vs. ACIT in I.T.A. No. 7217 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. "

"Para 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' 50.04 lac as a part of operating cost. The same is, therefore, countenanced".

48. He also relied on following decisions:
- DCIT vs. M/s. Luxottica India Eyewear Pvt. Ltd. [ITA No.617/Del/2014],
- M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. DCIT [ITA No. 1961/Hyd/2011 ]
- M/s Bearing Point Business Consulting Pvt. Ltd. vs. DCIT [ITA No. 1124/Bang/2011 ]
49. Ld. CIT(DR) relied on the TPO’s order.

50. We have considered the rival submissions and have perused the record of the case. We find considerable force in the submission of ld. counsel for the assessee that ld. DRP wrongly invoked Safe Harbour Rule for coming to the conclusion that forex gain/ loss was not to be treated as operating income/ loss for current assessment year because the Safe Harbour Rules, in any case, were applicable from 18-9-2013 and prior to that the said Rules could not be applied. That apart, it is not disputed that in the case of assessee forex gain/ loss was related to sale price of export, which was in US dollar. Therefore, the entire receipts were on revenue account. This issue is squarely covered by the decision of the Hon’ble Supreme Court in the case of Woodward Governor’s (supra), wherein it has been held that forex gain/ loss in the revenue account is a trading receipt, or, as the case may be, business expenditure, allowable u/s 37(1) of the Act. We, accordingly, direct that the forex gain/ loss be treated as operating income/ loss both in the case of tested party as well as comparable and the PLI should be determined accordingly.

51. As regards provision for doubtful debts, ld. counsel submitted that provision for doubtful debts are a part of the operating activities of a business. The accounting standards issued by the ICAI require that accounting policies must be governed by the principles of "prudence". Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only the basic estimate in the light of available information. Para 6 of Accounting Standard-l defines accrual as the assumption that revenues and costs are accrued, i.e., recognized as they are earned or incurred and recorded in the financial statements of the period to which they relate.

52. Thus, going with the abovementioned facts and statutory provisions, when the making of provisions is very much in the interest of business to show the true and fair view and statutorily required, it cannot be said that such provisions are of non-operating nature. Such provisions are made to comply with the requirements of statute.

53. The learned TPO treated provision for doubtful debts as non-operating referring to the Safe Harbour Rules notified by CBDT, which are not applicable for the year under consideration as mentioned above.
54. Ld. CIT(DR) relied on the order of TPO.

55. As regards the treatment of provision of doubtful debts also, we find that the reasoning given by ld. TPO cannot be accepted because he has primarily relied on safe harbor rule for treating this as non-operating expenditure. We find considerable force in the submission of ld. counsel for the assessee, considered earlier, that provision for doubtful debts is a provision which is to be made as a part of the operating activities of business governed by the principles of prudence. We, accordingly, direct that this provision be treated as part of operating expenditure and treatment be made accordingly, because, in any view of the matter, the safe harbor rule is not applicable for the current year under consideration. In the result, this ground is allowed.

56. Ground no. 4 is general in nature.
57. Ground no. 5 has not been pressed, hence dismissed accordingly.
58. Ground no. 6, relating to initiation of penalty u/s 271(1)(c) is premature.

59. As regards ground no. 7, the contention of ld. counsel for the aseessee is that interest u/s 234B ha wrongly been computed for 65 months as against 58 months, starting from 1.4.2010 till the date of passing of the order i.e. January 2015. The AO is directed to verify the assessee’s contention and recalculate the interest accordingly.

60. In the result, assessee’s appeal stands partly allowed accordingly.