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2017 (9) TMI 968 - AT - Income TaxTPA - addition on account of arm s length price - rejection of CUP method and adopting TNMM as the most appropriate method for computation of the arm s length price - selection of appropriate method for computation of arm s length price - Held that - We find that when the pollution norms of the Europe and the India during relevant period are different, the quality of the product cannot be same and in such situation adopting the transaction of the AE with third-parties in Europe as CUP for comparison of the transaction with the assessee, is not correct. Moreover, the currencies of both jurisdiction are different and, therefore, also prices charged to party at the Europe and to AE in the India cannot be compared. Assessee s international transactions cannot be benchmarked applying the CUP method. The TPO has adopted TNMM as most appropriate method for computing the arm s length price on the ground that the assessee operated as independent entrepreneur, as it caters to requirement of automobiles manufacturers in India like General Motors, Mahindra and Mahindra, and Ashok Leyland and compared the profit margins with the other comparables in similar market conditions. In our opinion, the approach of the learned TPO/AO is justified and we accordingly set aside the order of the learned CIT-(A) on the issue in dispute and uphold the order of the learned TPO/AO on the issue in dispute. Loss due to fluctuation in foreign exchange - whether loss should be treated as nonoperative expenditure in the case of the assessee - Held that - As following the decision of the Tribunal in the case of McKinsey Knowledge Centre Private Limited (2017 (5) TMI 830 - ITAT DELHI), we hold that foreign exchange fluctuation loss is part of a operating expenses. Accordingly, the finding of the Ld. CIT-(A) on the issue in dispute is set aside and that of the Assessing Officer is upheld. TPO/AO has considered foreign exchange fluctuation loss as part of operating expenses in the case of the assessee, however, same has also to be considered in the case of the comparables. From the order of the lower authorities, it is not clear whether the AO/TPO has considered this aspect in the case of the comparables. Accordingly, we feel it appropriate to restore the issue of computing average margin of the comparables with limited direction to consider the foreign exchange fluctuation loss as part of the operating expenses in case of comparables also. What is the correct calculation of the PLI of the comparables as well as the assessee? - Held that - CIT-(A) has already rectified the clerical mistake as under 5.5 It is important to note at this point to say that while calculating the margin of the comparables, the TPO has taken OP/sales as the PLI. While calculating the ALP margin of the assessee, the TPO has multiplied the mean margin of the ALP of the comparable with that of cost base of the assessee instead of sales, which seems to be a clerical mistake. In the above calculation, this mistake is rectified. Since the appellant falls within the range, the other issues relating to the comparable becomes academic in nature and therefore they are not separately adjudicated. Since the assessee is neither in the appeal nor in cross objection before us and, therefore, the arguments of the learned counsel regarding adopting of incorrect PLI by the TPO are not considered.
Issues Involved:
1. Rejection of the Comparable Uncontrolled Price (CUP) method by the Transfer Pricing Officer (TPO). 2. Treatment of foreign exchange fluctuation loss as non-operating expense. 3. Correct calculation of the Profit Level Indicator (PLI) of the comparables and the assessee. Issue-wise Detailed Analysis: Issue 1: Rejection of the CUP Method by the TPO The TPO rejected the CUP method adopted by the assessee for benchmarking its international transactions, arguing that the assessee operated as an independent entrepreneur and should be tested on the basis of its own financial results using the Transactional Net Margin Method (TNMM). The TPO noted geographical, product, timing, and quantity differences in the transactions compared by the assessee and concluded that the CUP method was not reliable. The TPO directed the assessee to carry out an analysis of arm’s length on the basis of TNMM, retaining 15 comparables and calculating the arm’s length price with an arithmetic mean of 5.05% profit margin. The CIT-(A) upheld the CUP method, stating that the TPO did not provide factual analysis and evaluation of the CUP data. The CIT-(A) noted that the prices paid by the assessee were lesser than those paid by third parties and concluded that the CUP method was valid for arm's length transactions. The CIT-(A) also mentioned that in the subsequent assessment year, the TPO accepted the CUP method for similar transactions. The Tribunal, however, found that the quality of products and regulatory norms in Europe and India were different, making the CUP method inappropriate for comparison. The Tribunal upheld the TPO's approach of using TNMM, considering the assessee's status as an independent entrepreneur and the comparability of profit margins with other companies in similar market conditions. Issue 2: Treatment of Foreign Exchange Fluctuation Loss The CIT-(A) held that foreign exchange fluctuation loss should be treated as non-operating in nature, citing the case of DHL Express (India) Pvt. Ltd., where it was held that such losses do not form part of operational income for a manufacturer not dealing in foreign currency. The CIT-(A) recalculated the arm's length price after excluding the foreign exchange fluctuation loss, concluding that the assessee fell within the +/- 5% range of the ALP as per the provisions of section 92(c) of the Act. The Tribunal disagreed, referencing the case of McKinsey Knowledge Centre Private Limited, where it was held that foreign exchange gain/loss arising from revenue transactions should be considered as an item of operating revenue/cost for both the assessee and comparables. The Tribunal noted that safe harbour rules excluding such losses were not applicable for the assessment year under consideration. Consequently, the Tribunal set aside the CIT-(A)'s finding and upheld the TPO's inclusion of foreign exchange fluctuation loss as part of operating expenses. Issue 3: Correct Calculation of the Profit Level Indicator (PLI) The CIT-(A) identified a clerical mistake by the TPO in using OP/sales as the PLI for comparables but multiplying the mean margin with the cost base of the assessee instead of sales. The CIT-(A) rectified this mistake, but since the assessee did not appeal or file a cross-objection, the Tribunal did not consider arguments regarding the incorrect PLI adopted by the TPO. Conclusion: The Tribunal allowed the Revenue's appeal for statistical purposes, directing the AO/TPO to consider foreign exchange fluctuation loss as part of operating expenses for comparables as well. The decision was pronounced in the open court on 15.09.2017.
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