Vodafone Global Services Private Limited, appellant-assessee,was engaged in providing telecommunication networking services, including network design, project management, and network maintenance. It was a wholly owned subsidiary of Vodafone entities based in Mauritius.

For Assessment Year 2018-19, it filed its return declaring an income of ₹18.83 crore. The case was selected for scrutiny, and notices were issued. Since the assessee had entered into international transactions with its Associated Enterprise (AE), the matter was referred to the Transfer Pricing Officer (TPO).

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The TPO passed an order under Section 92CA(3), making two adjustments. First, the TPO recalculated the Operating Profit Margin (OPM) at 8.80%, excluding certain income like foreign exchange gains and gains on defined benefit obligations.

Second, the TPO re-examined the ITeS transactions worth around ₹119.89 crore, rejected some comparables used by the assessee, and applied a median Profit Level Indicator (PLI) of 24.02%. This resulted in an adjustment of ₹17.02 crore.

The Assessing Officer ( AO) issued a draft assessment order based on the TPO’s findings. The assessee approached the Dispute Resolution Panel (DRP), which directed the TPO to re-verify the margins. In the revised order dated 20.06.2022, the median PLI was adjusted to 23.40%, leading to a reduced Transfer Pricing adjustment of ₹16.32 crore.

The assessee then filed an appeal before the Tribunal against the final assessment order.

The two member bench comprising Vinay Bhamore (Judicial Member) and Manish Borad (Accountant Member) examined the submissions from both sides and reviewed the records and case laws relied on. The main issue was whether the net gain of ₹17.02 crore from foreign currency transactions and translations should be treated as operating income.

The assessee had included this amount in its operating income, but the DRP had rejected the claim. The assessee argued that since it had not opted for the Safe Harbour Rules, foreign exchange gains related to trade receivables and payables should be considered as part of operating income, in line with OECD guidelines.

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The appellate tribunal referred to the Delhi High Court’s decision in B.C. Management Services Pvt. Ltd., which held that such foreign exchange gains linked to trading transactions form part of operating profits. It also considered consistent views from earlier tribunal rulings in Transperfect Solutions India Pvt. Ltd., Validor Capital India Pvt. Ltd., and Delval Flow Controls Pvt. Ltd.

Since the gain was from trade receivables with the Associated Enterprise, the ITAT held that the assessee had correctly treated it as operating income. The Assessing Officer was directed to make necessary adjustments in line with this finding.

In short, the appeal was allowed.

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