India: Foreign exchange fluctuation gain or loss | KPMG | GLOBAL
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India: Foreign exchange fluctuation gain or loss, arm’s length pricing

India: Foreign exchange fluctuation gain or loss

The Ahmedabad Bench of the Income-tax Appellate Tribunal issued a decision finding, in part, that foreign exchange fluctuation gain or loss was an operating item, and was not to be excluded under the arm’s length price standard.


Related content

The tribunal also addressed a separate issue—income accruing to the taxpayer on account of a business division (windmills) that had nothing to do with its international transactions (steel manufacturing), and whether this income was operating income that was excluded for purposes of computing arm’s length price. The tribunal concluded that the windmill-related income was to be excluded from the taxpayer’s steel manufacturing-related operating income in computing the arm’s length price.


The case is: ACIT v. Rajratna Metal Industries Ltd.

Foreign exchange fluctuation gain or loss

The taxpayer asserted that foreign exchange fluctuation gain or loss must be treated as operating in nature for the purpose of computing the arm’s length price. The tax department disagreed and proposed a transfer pricing adjustment.

The tribunal agreed with the tax authorities’ treatment of the foreign exchange fluctuation gain or loss as an operating item (and thus included for purposes of computing the arm’s length price).

KPMG observation

The foreign exchange fluctuation gain or loss is often considered in transfer pricing as non-operating for the purpose of computing arm’s length price. Even India’s current safe harbour rules provide that income or expense arising from foreign exchange fluctuations is to be excluded from operating revenue or expense. The tribunal’s decision is in addition to many cases providing relief for taxpayers in situations when the foreign exchange fluctuation gains or losses are arising directly in connection with the main operations of the taxpayer.


Read a July 2017 report [PDF 316 KB] prepared by the KPMG member firm in India

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