Vodafone Global Services Private Limited Vs ACIT (ITAT Pune)
Foreign Exchange Gains linked to trading transactions formed part of operating income in Transfer Pricing Adjustment
Conclusion: Since the gain was from trade receivables with the Associated Enterprise and foreign exchange gains linked to trading transactions form part of operating profits therefore, assessee was allowed to include foreign exchange gains as operating income in its transfer pricing adjustment.
Held: Assessee,was engaged in providing telecommunication networking services, including network design, project management, and network maintenance. It was a wholly owned subsidiary of Vodafone entities based in Mauritius. For Assessment Year 2018-19, it filed its return declaring an income of ₹18.83 crore. Since assessee had entered into international transactions with its Associated Enterprise (AE), the matter was referred to the Transfer Pricing Officer (TPO). TPO passed an order under Section 92CA(3), making two adjustments. First, the TPO recalculated the Operating Profit Margin (OPM) at 8.80%, excluding certain income like foreign exchange gains and gains on defined benefit obligations. Second, TPO re-examined the ITeS transactions worth around ₹119.89 crore, rejected some comparable used by assessee, and applied a median Profit Level Indicator (PLI) of 24.02%. This resulted in an adjustment of ₹17.02 crore. AO issued a draft assessment order based on the TPO’s findings. Assessee approached the Dispute Resolution Panel (DRP), which directed TPO to re-verify the margins. In the revised order dated 20.06.2022, the median PLI was adjusted to 23.40%, leading to a reduced Transfer Pricing adjustment of ₹16.32 crore. Assessee then filed an appeal before Tribunal. It was held that assessee had included net gain of ₹17.02 crore from foreign currency transactions and translations in its operating income, but DRP had rejected the claim. Assessee argued that since it had not opted for the Safe Harbour Rules, foreign exchange gains related to trade receivables and payables should be considered as part of operating income, in line with OECD guidelines. Appellate tribunal referred to the Delhi High Court’s decision in B.C. Management Services Pvt. Ltd., which held that such foreign exchange gains linked to trading transactions form part of operating profits. It also considered consistent views from earlier tribunal rulings in Transperfect Solutions India Pvt. Ltd., Validor Capital India Pvt. Ltd., and Delval Flow Controls Pvt. Ltd. Since the gain was from trade receivables with the Associated Enterprise, Tribunal held that assessee had correctly treated it as operating income.
