Foreign Exchange Fluctuations have direct Nexus over Export Sales, would be Eligible for Deduction u/s 10A of Income Tax Act: ITAT [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that foreign exchange fluctuations have direct nexus over export sales and would be eligible for deduction under Section 10A of the Income Tax Act, 1961.

The AO had held that foreign exchange and forward contract gain of Rs. 14.48 crores and Rs. 7.44 crores were derived by the assessee due to hedging activity and the same is not derived by the specified business activity of the undertaking in the Software Technology Park (STP) or Special Economic Zone (SEZ). With these observations, the AO denied deduction under Section 10A & 10AA of the Income Tax Act to the assessee on the said foreign exchange and forward contract gain. 

 The CIT(A) granted relief to the assessee by placing reliance on various decisions and giving a categorical finding that foreign exchange gain is directly relatable to the export of services and sale proceeds thereof and consequently would be eligible for deduction under Section 10A and 10AA of the Income Tax Act. It was also observed by the CIT (A) that a similar issue was decided in assessee’s favour by the orders of his predecessors for A.Ys. 2000-01, 2002-03, 2005-06 to 2009-10.

 Mr. Waseem Arshad representing the revenue argued that the forward contracts outstanding at the end of the year exceeded the entire export receivables itself and hence gain derived thereon cannot be construed as business income of the assessee and the same would have to be considered as speculative income of the assessee and consequently not eligible for deduction under Section 10A & 10AA of the Income Tax Act.

The bench found that the assessee had furnished complete details of income from foreign exchange/forward contract gains before the AO vide letter dated 27.02.2015, which is enclosed in pages 154 to 160 of the paper book. The assessee had explained that it had entered into forward contracts with certain banks during the year for hedging its foreign exchange risks on the receivables of export sales.

Forward foreign exchange contracts are taken to protect profit margins when receiving or making a foreign currency payment at some point in the future, usually as a result of foreign sales or purchases. A forward contract that lock-in the foreign exchange rate for a future date eliminates the effect that a change in the foreign exchange rate would have on profits.

Further, the two member bench of the tribunal comprising Yogesh Kumar US (Judicial member) and M. Balaganesh (Accountant member) found that the Madras High Court in the case of Commissioner of Income Tax v. Pentasoft Technologies Ltd. had categorically held that gains arising out of foreign exchange fluctuations are having direct nexus over the export sales of the assessee and would be eligible for deduction under Section 10A of the Income Tax Act.

To Read the full text of the Order CLICK HERE

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