The Delhi High Court, in relief to Samsung India held that foreign exchange ( forex ) loss arising from trading activities should be treated as an operational loss and not as a non-operational matter.
The Income Tax Appellate Tribunal ( ITAT ) had earlier ruled in favour of Samsung, stating that the forex fluctuation, which occurred due to trading items linked to international transactions, must be categorised as an operational cost. The Revenue authorities, however, contended that such losses should be considered non-operational and appealed the ITAT ruling.
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The High Court upheld the tribunal’s decision by stating that since the forex loss was directly associated with trading items from international transactions, it should rightfully be categorised as an operational expense.
It was observed that such fluctuations impacting the core business activities should be treated as part of operational costs, particularly when the company follows a cost-plus pricing methodology in its service agreements with associated enterprises.
The relevant portion of a tribunal ruling was reproduced as follows:
“The ITAT has in the impugned order noted the fact that the foreign exchange gain earned by the Assessee is in relation to the trading items emanating from the international transactions. Since the foreign exchange loss directly resulted from trading items, it could not be considered as a non-operating loss. Further, it is noted by the Dispute Resolution Panel that the service agreement between the Associated Enterprise ( AE ) and the Assessee stated that for the specified products and services provided by the Assessee, it “shall raise invoices on Ameriprise USA on the basis of a cost plus pricing methodology.” The ITAT was therefore right in holding that the AO was not justified in considering the foreign exchange loss as a non-operating cost.”
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Thus, the Division Bench of the Delhi High Court comprising Justice Yashwant Varma and Ravinder Dudeja dismissed the Revenue’s appeal and ruled that the forex gain/loss, resulting from trading items, should be included in operating revenue/cost, providing significant relief to Samsung India Electronics.
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