Assessee is Volkswagen Group Technology Solutions India Pvt. Ltd
The Assesseeis engaged in providing IT services exclusively to its Associated Enterprises (AEs) and earns revenue in foreign exchange.
Invoking Rule 10TA, the Transfer Pricing Officer (TPO) excluded foreign exchange gains from operating income while treating forex losses as operating expenses, resulting in a TP adjustment of INR 15.77 crores.
Assessee’s Contentions | Revenue’s Contentions | Judgement |
|---|---|---|
The assessee had not opted for Safe Harbour Rules, making the TPO’s invocation of Rule 10TA invalid and without jurisdiction. The assessee contented that foreign exchange gains and losses are inherently linked to its operating revenue from IT services provided to AEs in foreign currency. | The Revenue relied on Rule 10TA (Safe Harbour Rules) to exclude foreign exchange gains from operating income, saying this is how operating margin should be calculated. | The ITAT ruled that Rule 10TA applies solely to assessees who have voluntarily opted for the Safe Harbour Rules; as the assessee had not done so, the TPO’s invocation of the rule was invalid. The Tribunal further noted that the foreign exchange gain was directly related to the assessee’s revenue from IT services and should be classified as operating income. |
The assessee highlighted the TPO’s inconsistent treatment of foreign exchange gains as non-operating income and losses as operating expenses, deeming it unjustified. When properly classified, the assessee’s margin was 12.89%, comfortably within the arm’s length range. | They argued that foreign exchange losses on derivative transactions are part of operating expenses and should be included accordingly. | The Tribunal reproached the TPO’s inconsistent classification of foreign exchange gains as non-operating and losses as operating, deeming this differential treatment arbitrary and unwarranted. |
To support its position, the assessee cited several Pune ITAT rulings, including Dana India, Delval Flow Controls, and Robertshaw Controls, which held that foreign exchange fluctuations from regular business operations are operating in nature. | However, the revenue did not address the assessee’s claim that both forex gains and losses are operating, nor the inconsistent treatment of gains versus losses. | The ITAT referred to several rulings of the Pune ITAT, as well as the decision of the Delhi High Court in Fiserv India Pvt. Ltd, which supported the assessee’s position regarding the treatment of foreign exchange fluctuations. |
The Pune ITAT held that no transfer pricing adjustment was warranted, and the appeal was allowed in favour of the assessee.
