ITAT Bangalore: Foreign Exchange Gain Included in Operating Profit for Transfer Pricing

The Appellate Tribunal ITAT Bangalore allowed the miscellaneous application filed by the assessee under section 254(2) of the Income-tax Act, 1961. The Tribunal directed the Assessing Officer to treat the foreign exchange gain as part of the operating profit for determining the profit level indicator in the arms length price analysis under section 92 of the Act concerning international software development services transactions. The Tribunal rectified the order based on the assessee's argument and relevant case laws, ultimately favoring the assessee's position.

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Issues: Determination of arms length price under section 92 of the Income-tax Act, 1961.

In this case, the Appellate Tribunal ITAT Bangalore dealt with a miscellaneous application filed by the assessee under section 254(2) of the Income-tax Act, 1961, seeking rectification of an order dated 21/12/2018 to correct certain apparent errors. The main issue involved was the determination of the arms length price under section 92 of the Act concerning international transactions of providing software development services by the assessee to its holding company. The assessee contended that the Tribunal did not address ground 4.1(g) related to the treatment of foreign exchange gain as part of the operating profit for determining the profit level indicator. The assessee argued that the failure to adjudicate this ground constituted a mistake apparent on the face of the record, citing relevant case laws in support of their claim. The Tribunal acknowledged the submissions made by the assessee regarding the treatment of foreign exchange gain and referred to decisions of the Delhi High Court to support the assessee's position. Consequently, the Tribunal rectified the order by directing the Assessing Officer to treat the foreign exchange gain as part of the operating profit and compute the profit level indicator accordingly. The miscellaneous petition filed by the assessee was allowed by the Tribunal, and the order was pronounced on 22nd February 2019.

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