Inclusion of Forex Gains/Losses in Operating Costs Upheld for Transfer Pricing

The tribunal concluded that forex gains/losses should be included in the operating cost for transfer pricing purposes. It set aside the Dispute Resolution Panel's order and upheld the Transfer Pricing Officer's decision to include forex loss in the operating expenses. The appeal of the Revenue was allowed.

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Issues Involved:
1. Inclusion of forex loss in the computation of operating cost for transfer pricing purposes.
2. Applicability of OECD guidelines and various tribunal decisions on forex loss treatment.
3. Determination of whether forex loss is an operating or financial expenditure.

Issue-wise Detailed Analysis:

1. Inclusion of Forex Loss in Operating Cost:
The primary issue in this case is whether forex loss should be included in the computation of operating cost for transfer pricing purposes. The Transfer Pricing Officer (TPO) included the forex loss in the operating expenses, citing OECD guidelines and previous tribunal decisions which held that forex loss/gains should be considered as a part of operating income. The assessee argued that forex losses should be excluded from operating expenses as they are financial transactions, not operating transactions.

2. Applicability of OECD Guidelines and Tribunal Decisions:
The TPO relied on OECD guidelines, which suggest that forex loss/gain related to revenue transactions should be included in margin calculations. The TPO supported this with decisions from SAP Labs, Four Soft, and Trilogy Ebusiness, which considered forex loss/gains as part of operating income. The assessee countered with the decision in DHL Express (India) Pvt Ltd, where it was held that exchange fluctuations do not form part of operational income. The DRP accepted the assessee's contention and directed the TPO to exclude forex loss from the operating profit margin computation.

3. Determination of Forex Loss as Operating or Financial Expenditure:
The assessee argued that forex loss should be treated as a financial cost, not an operating cost, citing various reasons including Accounting Standard (AS)-11 and guidance from the Institute of Cost Accountancy of India. They emphasized that forex loss results from global factors beyond the assessee's control and should not be considered part of normal business operations. The assessee also referenced tribunal decisions in Sumitomo Corporation of India P Ltd and Honda Trading Car India Pvt Ltd, which supported the exclusion of forex loss from operating expenses.

Tribunal's Analysis and Decision:
The tribunal analyzed rival submissions and relevant decisions. It emphasized that in transfer pricing matters, the operating cost of transactions with Associated Enterprises (AEs) should be compared with that of unrelated entities. The tribunal noted that forex fluctuations are inherent to business transactions and should be considered in operating cost calculations unless they result from abnormal situations. The tribunal cited several decisions, including those in Westfalia Separator India Pvt. Ltd., Cisco Systems Services B. E. India Branch, CSR India Pvt. Ltd., S Narendra, Trilogy E-Business Software India Pvt. Ltd., and SAP Labs India (P) Ltd., which supported including forex gains/losses in operating costs.

Conclusion:
The tribunal concluded that forex gains/losses should be included in the operating cost for transfer pricing purposes. It set aside the DRP's order and upheld the TPO's decision to include forex loss in the operating expenses. The appeal of the Revenue was allowed.

Order Pronouncement:
The order was pronounced on 17th July 2015 at Chennai, allowing the Revenue's appeal.

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