[2016] 67 taxmann.com 68 (Bangalore) e4e Business Solutions India (P) Ltd vs. DCIT A.Y.: 2009-10, Date of order: 10 November, 2015

Facts
The Taxpayer was engaged in the business of end-to-end BPO Services. It had entered into service agreement with its Associated Enterprise (“AE”) based in USA, which was its holding company. For computing its operating profit margin for transfer pricing purpose, the taxpayer had included foreign exchange gains.

However, TPO recomputed the operating profit margin by excluding foreign exchange gain for benchmarking the international transaction. The DRP did not accept the objections of the Taxpayer and confirmed the proposed adjustment.

Held
It was undisputed that the foreign exchange gain pertained to income from service provided to the AE. Therefore, it had direct nexus with international transactions and service provided by the Taxpayer to its AE.

The tax authority had contended that the economic and other factors affected foreign exchange gains and such gain was not dependent on operations of the Taxpayer. However, such factors also affected the business transactions and price determination between the parties. Since foreign exchange gain had arisen only because of international transactions, it had direct nexus with international transactions. Therefore, such gain was part of operating revenue, and consequently part of operating profit of the Taxpayer for the purpose of determining the ALP in respect of the international transaction.

However, while comparing the margins of the comparable, foreign exchange gain should also be included for computing operating profit margin.