Foreign exchange losses must be included in operating costs for transfer pricing calculations

The ITAT Chennai held that foreign exchange losses must be included in the computation of operating costs for transfer pricing purposes. Following the precedent in M/s. Infac India Pvt. Ltd, the Tribunal ruled that profits or losses from foreign exchange fluctuations should be considered when determining operating costs in transfer pricing matters. The Revenue's appeal was allowed, rejecting the assessee's attempt to exclude forex losses from operating cost calculations.

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Issues:
- Appeal filed by Revenue against direction of DRP to exclude forex loss from operating cost of assessee.

Analysis:
1. The appeal was filed by the Revenue against the direction of the Dispute Resolution Panel (DRP) to exclude the forex loss from the computation of the operating cost of the assessee. The Revenue contended that the DRP's direction was against the principles of consistency as the assessee had included foreign gain in the operating income in the previous assessment year but excluded forex loss in the current year. The Transfer Pricing Officer (TPO) included forex loss in the operating cost for the current year, leading to the dispute. The Revenue argued in support of the TPO's decision, while the DRP followed the principle of consistency and directed the exclusion of forex loss from operating cost.

2. The Tribunal referred to various decisions, including the case of M/s. Infac India Pvt. Ltd., where it was held that profits or losses from foreign exchange fluctuations must be considered while determining the operating cost in transfer pricing matters. The Tribunal emphasized that unless there is an abnormal situation resulting in abnormal forex fluctuations, the profit or loss from forex fluctuations cannot be ignored in arriving at the operating cost. The Tribunal also cited other cases such as M/s. Westfalia Separator India Pvt. Ltd., M/s. Cisco Systems Services B.E. India Branch, M/s. CSR India Pvt. Ltd., M/s. S. Narendra, and M/s. Trilogy E-Business Software India Pvt. Ltd., which supported the inclusion of forex gains or losses in operating costs.

3. The Tribunal concluded that profits or losses arising from foreign exchange fluctuations should be taken into consideration while arriving at the operational cost in transfer pricing matters. Therefore, the Tribunal set aside the DRP's order and upheld the TPO's decision to include forex gains or losses in the operating cost. The Revenue's appeal was allowed based on this determination.

In summary, the judgment addressed the issue of whether forex losses should be excluded from the operating cost of the assessee in transfer pricing matters. The Tribunal ruled in favor of including profits or losses from foreign exchange fluctuations in the operating cost, citing various precedents and principles of consistency.

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