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Facts
The assessee, Volkswagen Group Technology Solutions India Pvt. Ltd., is in appeal against the order of the Assessment Unit. The core dispute revolves around the classification of foreign exchange gain and loss as operating or non-operating income/expenditure for the purpose of calculating the arm's length price (ALP) of international transactions.
Held
The Tribunal held that the Transfer Pricing Officer (TPO) erred in invoking Safe Harbour Rules (Rule 10TA) when the assessee had not exercised this option. The Tribunal found that foreign exchange gain and loss arising from business transactions should be considered as operating income/cost, aligning with normal business understanding and commercial principles. The assessee's calculation of OP/OC at 12.89% was held to be correct.
Key Issues
Whether foreign exchange gain and loss should be treated as operating or non-operating income/expenditure for ALP determination, and whether Safe Harbour Rules were correctly applied by the TPO.
Sections Cited
143(3), 144C(3), 144B, 92C(3), 92C(1), 92C(2), 92CA(3), 10TA, 10TB, 10TE, 153
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Income Tax Appellate Tribunal, PUNE BENCHES “C” :: PUNE
Before: DR.DIPAK P. RIPOTE & SHRI VINAY BHAMORE
आदेश/ ORDER
PER DR. DIPAK P. RIPOTE, AM:
This is an appeal filed by the assessee directed against the order of Assessment Unit, Income Tax Department under section 143(3) r.w.s144C(3) read with section 144B of the Income Tax Act, 1961 for A.Y.2020-21 dated 25.07.2024. The Assessee has raised the following grounds of appeal :
“1. On the facts and in the circumstances of the case, and in law, the Ld. Assessing Officer ('AO') / Ld. Dispute Resolution Panel ('DRP') has erred in proposing to enhance the income of the Appellant by INR 15,77,44,750 by holding that the international transaction of provision of IT services is not at arm's length price as envisaged under the Act.
2. On the facts and in the circumstances of the case, and in law, the Ld. AO/ Ld. DRP erred in disregarding the fact that none of the conditions, as set out in Section 92C(3) of the Act are satisfied and hence does not warrant re-determination of arm's length price by the Ld. TPO. The Appellant has complied with the provisions of Section 92C(1) and 92C(2) of the Act and the Ld. TPO has erred in disregarding the transfer pricing analysis carried out by the Appellant with respect to the international transaction of provision of IT services.
On the facts and in the circumstances of the case, and in law, the Ld. AO / Ld. TPO has erred passing the final assessment order dated July 25, 2024 without appropriately incorporating the directions of the DRP allowing the ground with respect to the mistakes apparent from record resulting in foreign exchange expense being considered as operating for the purpose of margin calculation. In this regard, the Appellant has also separately filed a rectification application before the Ld. AO/TPO.
On the facts and in the circumstances of the case, and in law, the Ld. AO/Ld. DRP has erred in application of certain additional quantitative filters for rejecting companies selected by the Appellant in its TP Study.
5. On the facts and in the circumstances of the case, and in law, the Ld. AO / Ld. DRP has erred in selecting functionally dissimilar companies.
6. On the facts and in the circumstances of the case, and in law, the Ld. AO / Ld. DRP has erred in not granting economic adjustments for differences in the level of risks assumed and differences in the functional profile in terms of marketing functions between the comparables companies vis-à-vis the Appellant while determining the arm's length price of the impugned international transaction.
7. On the facts and in the circumstances of the case, and in law, the Ld. AO/Ld. DRP has erred in the computation of Profit Level Indicator in case of the Appellant by modifying the Operating/Non-operating nature of certain items.” Additional Ground : 1] In this case, the assessee has raised the following additional grounds of appeal-
2] The assessee further submits that recently Hon'ble Madras High Court in the case of CIT vs. Roca Bathroom Products (P.) Ltd. [140 taxmann.com 304] has held that the outer time limit of 33 months in case of reference made to the TPO u/s. 153 would not refer to draft order, but only to final order and hence, the entire proceedings would have to be concluded within time limits prescribed. In the present case, the final assessment order has been passed beyond the time limit prescribed u/s. 153 accordingly, the said asst. order is null and void. In view of the said decision, the assessee is filing the above additional ground.” Submission of ld.AR :
2. Ld.AR for the Assessee submitted that Assessee is providing I.T.Services to its AEs’. The Assessee has considered TNMM as the most appropriate method to benchmark the international transaction. In the Transfer Pricing Study Report, Assessee has considered Foreign Exchange Gain as well as Foreign Exchange Loss operating income/expenditure. However, the Transfer Pricing Officer applied Safe Harbour Rules and held that Foreign Exchange Gain as operating income, whereas loss was considered as non-operating.
2.1 Ld.AR written submission as under : “1. The Assessee, M/s Volkswagen Group Technology Solutions India Private Limited (earlier know as Volkswagen IT Services India Private Limited), incorporated on 09 June 2015, is a captive service provider engaged in the business of providing IT services to its Group companies. For AY 2020-21, the turnover of the Assessee was approximately INR 169 crores, all of which was from the Group companies.
As per the TP study report maintained by the Assessee, the Transactional Net Margin Method (TNMM) was considered to be the most appropriate method to benchmark the various international transactions entered into by the Assessee for the said AY. The Assessee in the TP study report had identified 9 comparable companies, with working capital adjusted arm's length range of 9.49% to 14.05%. The margin of the Assessee was 12.89%. The Assessee has considered foreign exchange gain and loss as operating in nature while calculating the operating margin.
7.1. The Assessee in its TP study report, while calculating the profit margin, had considered foreign exchange gain and loss as operating in nature. All such gains are on account of normal business operations of the Assessee and have been offered to tax during the year. The TPO, recalculated the operating margin by considering foreign exchange gain as nonoperating, however, he considered foreign exchange loss (loss on account of derivative instruments) as operating in nature.
7.2. In the appeal before the DRP, the DRP in para 12.3 of its order has placed reliance on the Safe Harbour Rules (SH Rules) while deciding that foreign exchange gain/loss should be considered as non operating in nature. The DRP has also placed reliance on rulings in the case of DIHL Express (India) Pvt. Ltd. v. ACIT (2011) (ITA no. 7360MUM /2010) and NetHawk Networks India (Pvt) Ltd v. ITO (2013)-ITAT Mumbai 7.3. The Assessee submits that it has not applied for the SH Rules and therefore, placing reliance on the same would not be correct. Additionally, the Assessee places reliance on the following rulings of Pune ITAT wherein it has been held that foreign exchange gain and loss should be considered as operating in nature while calculating the operating margin.
Dana India Private Limited [2021] 129 taxmann.com 433 (Pune - Trib.)
Delval Flow Controls (P.) Ltd. [2021] 128 taxmann.com 260 (Pune - Trib.)
Robertshaw Controls India (P.) Ltd. vs. Assistant Commissioner of Income-tax [2022] 134 taxmann.com 332 (Pune-Trib.) [27-01-2022] DCIT Circle 3 Pune Vs. M/s. Oshung Electronics India Pvt. Ltd. (ITA No.854/PUN/2018); Transperfect Solutions India Pvt. Ltd. Vs. ACIT, Circle-7,Pune [ITA No.331/PUN/2021]; Synechron Technologies Private Limited Vs. The Assistant Commissioner of Income Tax, Circle-6, Pune [ITA No. 1692/PUN/2018]; Aptara Technologies Private Limited Vs. DCIT Circle 1(1) Pune [ITA No.291/PUN/2016); 7.4. The Assessee has recalculated the operating margin of the Assessee and that of comparables, after considering foreign exchange gain / loss as operating in nature The same is enclosed in page 188 of the paperbook. The Assessee has also enclosed the revised operating margin of the TPO considered comparable companies after considering foreign exchange gain as operating in nature and after allowing working capital adjustment. The revised margin is margin of comparable companies is enclosed at page 189 of the paperbook.”
Submission of ld.DR : 3. Ld.DR for the Revenue relied on the order the Dispute Resolution Panel and Transfer Pricing Officer(TPO).
Findings & Analysis : 4. We have heard both the parties and perused the material placed before us. In this case, Transfer Pricing Officer has passed an order under section 92CA(3) of the Act, for A.Y.2020-21 on 29.07.2023. In the said order, Assessing Officer in Para 4.1 recomputed the OP/OC of the Assessee as per Income Tax Rules, 10TA. The TPO has not considered Net Foreign Exchange of Rs.132.98 millions as operating income, based on Income Tax Rule, 10TA. However, at the same time, the TPO has considered Rs.642.14 millions as loss which was on account of Derivatives not designated as Hedging. Therefore, the TPO calculated OP/OC at 5.72% and OP/OR at 5.41%.
4.1 Aggrieved by the order of the TPO, Assessee filed objections before Dispute Resolution Panel(DRP). The DRP upheld the reworking of TPO.
4.2 Aggrieved by the Assessment Order, Assessee filed appeal before this Tribunal.
It is observed that while reworking “Profit Level Indicator”, the TPO has invoked Income Tax Rule, 10TA. The Rule-10TA is called Safe Harbour Rules. The Rule-10TA is applicable only to “Eligible Assessee’s” who voluntarily exercise option of Safe Harbour Rules, in accordance with Rule-10TB and Rule-10TE. In this case, Assessee has not exercised any such option. Therefore, TPO suo-moto is precluded from invoking Rule-10TA. It is also observed that TPO has not discussed why the Foreign Exchange Gain is not Operating Income! Assessee has provided I.T.Services to its AEs. Assessee receives revenue from operations entered with AEs in Foreign Exchange. Therefore, Gain due to Foreign Exchange Fluctuation is directly linked to the Revenue Receipt. Therefore, there is no reason to exclude Foreign Exchange Gain as non-operating. It is also noted that the TPO has considered Foreign Exchange Loss incurred by Assessee on derivative transactions as operating and accordingly reduced it. Therefore, TPO is not consistent in his approach. DRP has also upheld it, without discussing the reasons.
ITAT Pune in the case of Dana India Private Limited [2021] 129 taxmann.com 433 has held as under : “13. The next item is foreign exchange fluctuation gain. The assessee treated this amount as operating revenue. The TPO, again relying on the definition of operating revenue under rule 10TA, did not accept the assessee's contention. We have held above that rule 10TA is not applicable and as such the determination of the character of foreign exchange gain will have to be guided by the normal business understanding and commercial principles. It is fairly settled that foreign exchange gain/loss arising from business transactions is operating revenue/cost. Several benches of the Tribunal including a recent decision of the Pure Benches in Delval Flow Controls (P) Lad. v. Dy.CIT (20211 128 taxmann.com 260 have laid to this extent. We, therefore, direct to take foreign exchange gain as part of operating revenue.”
The Hon'ble Delhi High Court in the case of Pr.CIT Vs. Fiserve India Pvt. Ltd., in ITA 17/2016, dated 06.01.2016, held that Safe Harbour Rules are not applicable and also upheld ITAT order.
No contrary decision has been brought to our notice. Rather ld.DR for the Revenue accepted that treatment should be same for Foreign Exchange Gain and Loss. In these facts and circumstances of the case, we hold that the OP/OC calculated by Assessee at 12.89% as Correct. Accordingly, Ground No.3 raised by the Assessee is allowed.
8.1 Ld.AR for the Assessee submitted that once Assessee’s OP/OC is accepted, then there will not be any adjustments and hence, he did not press for other grounds on merit except the Legal Ground.
Additional Legal Ground : 9. Since we have decided the Ground No.3 in favour of assessee and Assessee has accepted that there will not be any adjustments, we do not intend to adjudicate the Additional Legal Ground raised by the assessee. We leave the Additional Legal Ground unadjudcited. Accordingly, Additional Legal Ground raised by the assessee is dismissed as unadjudicated.
In the result, appeal of the assessee is partly allowed. Order pronounced in the open Court on 28 May, 2025.