NatWest Digital Services India Pvt. Ltd., engaged in providing software development services to its AE, benchmarked its international transactions under TNMM. The TPO proposed a TP adjustment by treating foreign exchange fluctuation as non-operating income. Aggrieved by the CIT(A)'s order granting working capital adjustment and treating foreign exchange fluctuation as operating income, both the assessee and the Revenue appealed before the Delhi ITAT
Assessee’ s Contentions | Revenue’s Contentions | Tribunal’s Judgment |
Foreign exchange fluctuation arising from software development services should be treated as operating income while computing operating margins. | Foreign exchange fluctuation should not be treated as operating income for computing the assessee's operating margin. | Foreign exchange fluctuation is inextricably linked with software development services and constitutes operating income. |
The assessee was entitled to working capital adjustment while determining the arm's length margin of the comparables. | The working capital adjustment granted by the CIT(A) required verification before granting relief. | The issue of working capital adjustment was restored to the TPO for limited verification of the adjustment workings. |
After granting working capital adjustment, the assessee's margin fell within the ±5% tolerance range and no TP adjustment was warranted. | The APA margin was not applicable for AY 2009-10 since the year was outside the APA and rollback period. | If, after verification, the adjusted margins fall within the ±5% tolerance range, no TP adjustment shall be made, irrespective of the adoption of the APA margin. |
Ruling Summary -
Delhi ITAT held that foreign exchange fluctuation arising from software development services forms part of operating income and that no TP adjustment is warranted where, after verification of the working capital adjustment, the margins fall within the ±5% tolerance range.
