Operating revenue must include linked foreign exchange gains, and safe harbour rules cannot be imposed without a taxpayer's option.

Foreign exchange gain directly linked to business receipts from associated enterprises is treated as part of operating revenue for profit level indicator purposes, and a selective approach that treats foreign exchange loss as operating while excluding corresponding gain is inconsistent. The safe harbour framework applies only where an eligible assessee voluntarily exercises the prescribed option; it cannot be invoked unilaterally by the revenue authorities. Applied to a captive IT service provider benchmarked under the transactional net margin method, these principles supported acceptance of the assessee's operating margin as computed and rejection of the reworked margin based on an inconsistent operating classification.

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Issues: Whether foreign exchange gain and loss arising from the assessee's international service transactions were to be treated as operating items while computing the profit level indicator, and whether the safe harbour definition of operating revenue could be invoked absent an option exercised by the assessee.

Analysis: The assessee was a captive IT service provider whose margins were benchmarked under the transactional net margin method. The transfer pricing officer excluded foreign exchange gain from operating income while treating foreign exchange loss on derivative transactions as operating, and supported the reworking by reference to the safe harbour rules. The Tribunal held that the safe harbour framework applies only where an eligible assessee voluntarily opts for it under the prescribed rules, and it cannot be applied unilaterally. It further held that foreign exchange gain directly linked to business receipts from associated enterprises is part of operating revenue, and that the treatment adopted by the transfer pricing officer was inconsistent in excluding gain while including loss. The assessee's operating margin was therefore accepted as computed.

Conclusion: The foreign exchange gain and loss were required to be treated in a consistent operating manner, and the assessee's operating margin was accepted; the issue was decided in favour of the assessee.

Final Conclusion: The transfer pricing adjustment based on the reworked profit level indicator was deleted, and the appeal succeeded only to that extent.

Ratio Decidendi: Safe harbour rules cannot be invoked suo motu by the revenue authorities, and foreign exchange gain or loss arising from business transactions is to be treated according to its direct nexus with operating revenue and not by an inconsistent selective approach.

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