Facts of the Case

The assessee, Ameriprise India Pvt. Ltd., is a wholly owned subsidiary of Ameriprise USA, engaged in providing Information Technology Enabled Services (ITES) and back-office support services to its Associated Enterprises (AEs).

For the relevant assessment year, the assessee entered into international transactions with its AE relating to provision of IT-enabled back-office services. The assessee benchmarked these transactions using the Transactional Net Margin Method (TNMM) and determined that the transactions were at Arm’s Length Price (ALP).

The Transfer Pricing Officer (TPO) rejected parts of the assessee’s transfer pricing study, selected different comparable companies, and computed a higher average operating margin, resulting in a transfer pricing adjustment to the assessee’s income.

The Assessing Officer passed the final assessment order under Section 143(3) read with Section 144C, incorporating the TP adjustment proposed by the TPO. Aggrieved by the additions and treatment of certain items, the assessee filed an appeal before the Income Tax Appellate Tribunal (ITAT), Delhi. 

Issues Involved

  1. Whether the selection and exclusion of certain comparable companies by the TPO for determining Arm’s Length Price under TNMM was justified.
  2. Whether foreign exchange gain or loss arising from revenue transactions should be treated as operating or non-operating in nature for transfer pricing purposes.
  3. Whether the transfer pricing adjustment made by the TPO in determining ALP of international transactions was sustainable.

Petitioner’s Arguments (Assessee)

The assessee contended that:

  • The TPO incorrectly rejected certain comparable companies selected by the assessee and arbitrarily introduced new comparables without proper functional analysis.
  • The comparability analysis carried out by the TPO was flawed and inconsistent with the functional profile of the assessee, which primarily provided ITES/back-office services.
  • The foreign exchange loss/gain arising from operational transactions should be treated as operating in nature, since it directly arises from revenue transactions with AEs.
  • Consequently, the transfer pricing adjustment determined by the TPO was excessive and unjustified. 

Respondent’s Arguments (Revenue)

The Revenue argued that:

  • The TPO had correctly analyzed the functional profile of the assessee and the comparables while determining the ALP.
  • Certain companies selected by the assessee were rightly rejected as they did not satisfy the comparability criteria.
  • The adjustment made by the TPO was justified based on the operating margins of comparable companies. 

Court Order / Findings

The Tribunal held that:

  • Foreign exchange gain or loss arising from revenue transactions is closely connected with business operations and therefore should be treated as an operating item while computing margins for transfer pricing purposes.
  • Exchange rate fluctuation related to export or revenue transactions cannot be separated from the underlying business transactions.
  • The issue of comparables required reconsideration, and the matter was remitted back to the Assessing Officer/TPO for fresh determination of ALP in accordance with the Tribunal’s observations.

Thus, the Tribunal partly allowed the appeal and directed the tax authorities to recompute the Arm’s Length Price after proper analysis of comparables and operating items.

Important Clarification

The Tribunal clarified that:

  • Foreign exchange gain or loss arising from operational transactions must be treated as operating income or cost in transfer pricing analysis.
  • Such gain or loss is intrinsically linked to business operations and cannot be treated as a separate non-operating item.

Link to download the order – https://itat.gov.in/public/files/upload/1703229691-1806.Amkeriprise...pdf

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