ITAT Delhi: Persistent Loss Filter Applies Only to Continuous Losses; Forex Fluctuations Are Operating in Nature

March 18, 2026 : The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has partly allowed the appeal filed by Keysight Technologies International India Pvt. Ltd., holding that companies cannot be excluded as comparables merely for incurring losses in two out of three years and that foreign exchange fluctuation gains arising from business transactions must be treated as operating in nature.

The Tribunal, comprising Judicial Member Yogesh Kumar U.S. and Accountant Member Manish Agarwal, directed the Assessing Officer/Transfer Pricing Officer (AO/TPO) to recompute the transfer pricing adjustment after revisiting the set of comparables and treating forex fluctuations as operating items.

Background

The assessee, a wholly owned subsidiary of Keysight Technologies Inc., is engaged in providing IT-enabled services and software development services to its associated enterprises. For the assessment year 2020–21, it filed its return declaring total income of ₹35.83 crore.

Given the international transactions, the matter was referred to the TPO, who proposed a transfer pricing adjustment of ₹4.13 crore. Following directions of the Dispute Resolution Panel (DRP), the adjustment was reduced to ₹2.67 crore, and the final assessment order assessed total income at ₹49.75 crore.

Persistent Loss Filter: Tribunal’s Clarification

A central issue before the Tribunal was whether certain companies could be excluded as comparables on the ground of being persistent loss-makers.

The Tribunal examined companies such as DCIS Dot Com Solutions India Pvt. Ltd. and Rheal Software Pvt. Ltd., noting that although they incurred losses in two of the three relevant financial years, they had reported profits in one year. It held that the “persistent loss filter” applies only where losses are incurred in all three consecutive years.

Accordingly, the Tribunal directed inclusion of these companies in the final set of comparables, rejecting the TPO’s approach of excluding them based on losses in two years.

Functional Comparability: Exclusion of High-End Companies

The Tribunal also addressed the inclusion of companies such as Mindtree Ltd. and Nihilent Ltd. It found these entities to be functionally dissimilar, engaged in diversified operations including consulting and digital transformation services, and lacking segmental data for software development services.

Additionally, factors such as significantly higher turnover and extraordinary events during the relevant year rendered them unsuitable comparables. The Tribunal therefore directed their exclusion from the final set.

Forex Fluctuations Held as Operating

On the treatment of foreign exchange fluctuation gains, the Tribunal disagreed with the TPO’s classification as non-operating. It held that such gains arise from realization of receivables linked to export of services and therefore have a direct nexus with business operations.

Relying on jurisdictional High Court precedent, the Tribunal ruled that foreign exchange fluctuations must be treated as operating in nature for computing the Profit Level Indicator (PLI).

Other Directions

The Tribunal restored the issue of risk adjustment to the AO/TPO for fresh consideration in accordance with law. It also directed grant of credit for self-assessment tax and tax collected at source after verification. Issues relating to interest were treated as consequential, while the challenge to penalty initiation was dismissed as premature.

Outcome

The appeal was partly allowed, with directions for recomputation of the transfer pricing adjustment in line with the Tribunal’s findings.

Case Title: Keysight Technologies International India Pvt. Ltd. v. DCIT
Case No.: ITA No. 3813/Del/2024 (AY 2020–21)