2017 (12) TMI 1793 - AT - Income Tax

Rectification of mistake - TP Adjustment - comparable selection - margin computational error in respect of two comparables - HELD THAT - Contentions are raised regarding margin computational error in respect of two comparables i.e. Accentia Technologies Ltd. and e4e Healthcare Business Services Pvt. Ltd. and for the remaining four comparables, the only contention raised was regarding turnover filter and there is no contention raised regarding the functionality aspect. Hence on this aspect, we find no apparent mistake in the impugned Tribunal order because it appears that no argument was made in respect of this aspect. ALP Computation - Foreign Exchange fluctuation gain / loss - HELD THAT - In respect of computation of ALP, profit margin percentage is worked out by dividing the operating profit of the tested party by the turnover of the tested party and therefore, if the foreign exchange gain/loss is not in respect of turnover of the present year, then such gain/loss cannot be considered for computing the profit percentage even after holding the same as operating profit/loss because if the corresponding turnover is not a part of the denominator, the profit in respect of such turnover cannot be included in the numerator because if this is done, it will give an absurd result. Hence we feel it proper to restore back this matter to the file of AO / TPO for fresh decision after examining this aspect and we hold that if the foreign exchange gain / loss is in respect of the present year turnover then the same should be considered as profit/loss of the current year for working out the profit percentage of the tested party but if such foreign exchange gain / loss is not in respect of current year turnover then the same should not be considered in the case of tested party. In the case of comparable companies also, if there is any foreign exchange gain / loss and this information is available in the annual report of the concerned company as to whether the fluctuation gain / loss is in respect of current year turnover or earlier year turnover then the same treatment should be given to foreign exchange gain / loss in case of comparable company also but if such information is not available in the annual report of such company then it should be taken as foreign exchange gain / loss in respect of earlier year s turnover because in most of the cases, such foreign exchange gain / loss is in respect of turnover of the earlier year because any gain / loss on account of foreign exchange difference for current year turnover is generally included in sale proceeds and is not shown separately in the final accounts. AO / TPO should decide this issue afresh as per above discussion after providing reasonable opportunity of being heard to assessee

Summary

Issues:
1. Rectification of apparent mistakes in the impugned Tribunal order regarding acceptance of additional comparable companies and treatment of foreign exchange gain/loss.

Analysis:
The assessee filed a Miscellaneous Petition (MP) contending that the Tribunal order contained mistakes. The contention was that the AO/TPO erred by accepting functionally dissimilar additional comparable companies during TP assessment proceedings. Another issue raised was the treatment of foreign exchange gain/loss as operating in nature for computing margins. The MP sought rectification of these issues as they were not decided by the Tribunal initially.

During the hearing, the assessee reiterated the contentions, while the Revenue's representative argued that there were no apparent mistakes in the Tribunal order. The Tribunal considered the submissions and found that the appeal was heard based on a chart filed by the assessee. The chart raised concerns about margin computational errors for two comparables and turnover filter issues for the remaining four comparables. No arguments were made regarding functionality aspects for the four comparables, leading the Tribunal to find no apparent mistake on this issue.

However, concerning the treatment of foreign exchange gain/loss, the Tribunal noted that although ground no. 9 was raised, there was no decision on this aspect in the order. The Tribunal decided to address this issue and highlighted the importance of determining whether the gain/loss was related to the current year's turnover or an earlier year. It emphasized that for computing the profit percentage, the gain/loss should be in respect of the current year's turnover. If the information is unavailable, it should be considered in relation to the earlier year's turnover. The matter was remanded to the AO/TPO for a fresh decision after examining this aspect, with directions to provide a reasonable opportunity for the assessee to be heard. Ground no. 9 of the assessee's appeal was allowed for statistical purposes.

In conclusion, the Miscellaneous Petition was partly allowed, and the Tribunal's order was pronounced in open court.