Galax E Solutions India Pvt. Ltd. Vs ITO (ITAT Bangalore)
The revenue is assailing the decision of Ld DRP in holding that the gain/loss arising on account of fluctuation in foreign exchange is operating income/expenses. We notice that the Ld DRP has followed the decision rendered by the Tribunal in the case of Sap Labs India (P) Ltd (2011)(44 SOT 156) and Cisco Systems Services BV (IT(TP)A No.270/Bang/2014) and accordingly held that the foreign exchange fluctuation gain/loss arising to the assessee on realization of trade debtors, payment to creditors etc were nothing but operation income. Accordingly, the Ld DRP has directed the AO to consider the foreign exchange fluctuation gain/loss as operating in nature both in the hands of the assessee and in the hands of comparable companies. Since the ld DRP has followed the decision rendered by the Tribunal in this regard, we do not find any infirmity in its decision rendered on this issue.
FULL TEXT OF THE ITAT JUDGEMENT
These cross appeals are directed against the assessment order dated 18-01-2016 passed by the assessing officer for assessment year 2011-12 u/s 143(3) r.w.s 144C of the Income-tax Act,1961 [‘the Act’ for short] in pursuance of directions given by Ld Dispute Resolution Panel (DRP).
2. The grounds urged by the assessee relate to the addition made towards transfer pricing adjustment
3. The revenue is in appeal in respect of following issues:-
(a) Whether foreign exchange gains/loss are operating in nature or not?
(b) Whether the Ld DRP was justified in directing the AO to follow the decision of Karnataka High Court rendered in the case of Tata Elxsi Ltd, i.e., exclusion of expenses incurred in foreign currency from both export turnover and total turnover.
(c) Relief granted by Ld DRP in respect of addition made on account of transfer pricing adjustment.
4. The facts relating to the case are discussed in brief. The assessee company is wholly owned subsidiary of M/s Galax E Solutions Inc. It is providing software development services to its AE relating to internet client-server, more particularly it offers:-
1. Independent verification and validation.
2. Enterprise Application Integration
3. Enterprise shared services implementation
4. Enterprises IT solutions
5. Services level management
6. Enterprise reliability framework
7. Technical support.
The TPO has made transfer pricing adjustment in respect of Provision of software development services only.
5. Both the parties are in appeal in respect of addition relating to Transfer pricing adjustment. The facts relating to the same are discussed in brief. The assessee has provided software development services to its Associated Enterprises (AEs). The turnover of the assessee in the segment of Provision of software development services was Rs.32.16 crores. The assessee adopted Transactional Net Margin Method (TNMM) as most appropriate method. It adopted Operating Profit/Operating Cost (OP/OC) as the Profit level indicator (PLI). The assessee declared a margin of 11.48% in the software development segment.
5.1 The assessee had selected 5 comparable companies in its transfer pricing study. The TPO rejected the transfer pricing study of the assessee and he finally selected following 13 comparable companies, whose average margin worked out to 24.82%:-
