The Income Tax Appellate Tribunal (ITAT), Bangalore Bench held that foreign exchange fluctuation should be treated as operating profit/loss while computing the profit margin.
The assessee, M/s. Global E-Business Operations Pvt. Ltd. is a company belonging to M/s. Hewlett Packard (HP) group. The assessee is engaged in ITES services. The assessee undertakes HP’s worldwide accounting and transaction processing work, provision of back office operation and customer support services to various associated enterprises.
The assessee is being compensated at cost plus 8%. The assessee adopted TNMM method to benchmark his transactions and the profit level indicator was taken as operating profit by operating cost (OP/OC). The assessee declared net margin of 19.08%.
The TPO recomputed the margin of the assessee by excluding interest income and non-operating income and also reducing the expenditure. Accordingly, he computed the net margin of the assessee at 15.75%.
The exchange fluctuation loss incurred by the assessee, M/s. Global E-Business Operations Pvt. Ltd. in the immediately preceding year as non-operating in nature and the assessee did not object to the same.
Accordingly, the department submitted that the assessee cannot change its stand and contend that the foreign exchange gain should be treated as operating income.
The assessee submitted that in its transfer pricing study, has always been treating foreign exchange loss/gain as operating in nature.
In the preceding year, the assessee had incurred foreign exchange fluctuation loss and exclusion of the same resulted in increase of operating margin. Since it was advantageous to the assessee, the action of TPO was not objected to.
The coram consists of George George K and B.R. Baskaran viewed that the foreign exchange fluctuation gain/loss is operating in nature.
In other words, foreign exchange fluctuation gain/loss should be treated as operating profit/loss in nature while computing the profit margin of the assessee as well as of the comparable companies.
The ITAT observed that the ALP of the transactions required to be determined afresh in the light of decisions rendered.
Accordingly, the ITAT restored the matter to the file of the AO/TPO.
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