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2024 (5) TMI 482 - AT - Income TaxTP Adjustment - computation of PLI - exclusion of forex loss/forex gains as non-operating for the purpose of computation of operating margin - cherry picking of definition provided in Safe Harbor Rules - CIT(A) rejected the arguments of the assessee s on the ground that, forex loss/forex gains relating to revenue items is operating in nature because it has direct and inextricable link to business activities of the assessee s - TPO/CIT(A) also rejected the arguments of the assessee s for applying Safe Harbor Rules on the ground that said rules should be applied as a whole and not with specific reference to forex loss or gains - HELD THAT - Forex loss/gain is derived on account of trading account/revenue account, then such forex loss/gain should be treated as revenue in nature and also operating in nature - loss arisen on account of fluctuation in foreign currency for payment made to suppliers of materials or receipts from buyer of assessee product is also arisen out of main business activity of the assessee and thus, same cannot be considered as non- operating in nature. In so far as Safe Harbor Rules is concerned, Rule 10TA has notified Safe Harbor Rules for international transactions and as per said Rules, operating expenses and operating income has been defined, which excludes loss arising on account of foreign currency fluctuations and said Rules has been notified w.e.f. assessment year 2013-14. In the present case, the assessee could not furnish any evidences to prove that it has opted for Safe Harbor Rules for determining ALP of international transactions. Unless, the assessee opts for Safe Harbor Rules for international transactions, the cherry picking of definition provided in Safe Harbor Rules cannot be considered to determine forex loss/gain as operating in nature or not. Since, the appellant itself has treated forex loss/gain as operating in nature for earlier years and also the Tribunal has considered in assessee s own case and held that forex loss is operating in nature, in our considered view there is no merit in grounds taken by the assessee challenging exclusion of forex loss/gain from operating expenditure or operating income. Same issue has been decided in the case of M/s. Hyundai Motor India Ltd 2021 (9) TMI 1013 - ITAT CHENNAI where one of us is also signatory and held that forex loss/gains is revenue is nature and operating expenditure/income. Therefore, we are of the considered view, that there is no error in the reasons given by the TPO/CIT(A) to include forex loss/forex gains as operating in nature, for the purpose of computing PLI or operating margin of the assessee. Decided against assessee. Denial of working capital adjustment - assessee submitted that, TPO/CIT(A) both are erred in not providing working capital adjustment even though the assessee demonstrate with evidences that the working capital position of the assessee when compared to comparable companies is different and suitable adjustments needs to be provided on par with working capital level of comparable companies - HELD THAT - In the present case, the assessee claims that it has filed working explaining working capital position of comparable companies vis-a-vis the working capital position of assessee company and suitable adjustment is required to be provided. But, the TPO and CIT(A) rejected the claim of the assessee. The assessee has filed computation explaining working capital adjustment which needs to be considered by the lower authorities. Therefore, we are of the considered view that this issue needs to go back to the file of the AO/TPO to verify the claim of the assessee with reference to computation, if any, along with other supporting evidences to be filed by the assessee for providing working capital adjustments. Thus, we set aside the order of the ld. CIT(A) on this issue and direct the AO/TPO to re-examine the claim of the assessee with regard to working capital adjustments and decide the issue in accordance with law in all cases. Entity level adjustments - assessee argued assessee that, as per section 92 of the Act and Rule 10B(1)(e) of IT Rules, 1962, any income arising from international transactions shall be computed having regard to Arm s Length Price - HELD THAT - From a plain reading of section 92 of the Act and Rule 10B(1) of IT Rules, 1962, it is very clear that any income arising from an international transaction shall be computed having regard to arm s length price alone, which means, very purpose of said provision is to establish arm s length nature of the international transactions only. The transactions with Non- AE have to be presumed to be at arm s length price because, there is no relationship which is likely to influence pricing. See case of High Court of Madras in the case of M/s. Hyundai Motor India Ltd 2021 (9) TMI 1013 - ITAT CHENNAI - Thus TPO/CIT(A) erred in making downward adjustment on entity level including transactions with non-AE. We direct the AO/TPO to make adjustment to international transactions of the assessee alone in all cases. TDS u/s 195 - disallowance u/s. 40(a)(i) of the Act for non-deduction of tax on interest payable to foreign company on delayed payment of import payables - whether said interest is taxable on accrual basis or receipt basis? - HELD THAT - As per the provisions of section 195 of the Act, any person responsible for paying to a non-resident, shall at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier, deduct income-tax thereon at the rates in force. Since, the DTAA is silent on taxability of interest income i.e., whether on accrual basis or receipt basis, in our considered view, as per provisions of section 195 of the Act, the payee is responsible for deducting tax at the time of credit or payment, whichever is earlier - case law relied upon by assessee M/s. Pramerica ASPF II Cyprus Holding Limited 2019 (3) TMI 1668 - BOMBAY HIGH COURT as clearly held that, royalty and fees for technical services should be taxed on receipt basis, but not on accrual basis. Since, the case law relied upon by the assessee is applicability of DTAA between India and Cyprus and also on payment of royalty and fee for technical services, in our considered view, this issue once again needs to be examined by the Assessing Officer, in light of the decision of Hon ble Bombay High Court and also DTAA between India and Korea. Thus, we set aside the issue to the file of the AO and direct the AO to examine the issue in light of our discussions given herein above. Re-computation of book profit with reference to downward TP adjustment - HELD THAT - ITAT Mumbai in the case of GTS e- Services Private Ltd 2019 (7) TMI 296 - ITAT MUMBAI following the decision of Apollo Tyres 2002 (5) TMI 5 - SUPREME COURT held that, no adjustment can be made to book profit with reference to TP adjustment because there is no such provision under law that permits the AO to make adjustment on account of transfer pricing adjustment to the amount of profit shown by the assessee in its profit and loss account for the purpose of computation of book profit u/s. 115JB - Thus we direct the AO to delete additions made towards book profit on account of downward adjustment made under TP Provisions. Exclusion of creditors write off for the purpose of computation of operating margin - AO has excluded creditors write off from other income for the purpose of computing operating margin on the ground that writing back of creditors depends upon the wisdom of the businessman with regard to timing of its identification and showing it as income - HELD THAT - Write off of creditors should relates to operating activity of the assessee or any creditor if any, on account of capital account cannot be considered as operating in nature. Further writing back of creditors depends upon wisdom of business enterprises with regard to timing of its identification etc. The very nature of credits written back is such that it is not peculiar to all the business transactions and so it cannot be considered as normal and direct income. Therefore, in our considered view while working out operating margin, only items of receipts and expenditure, which have direct relation for determining the operating profit have to be taken into account. Since, the assessee could not provide any details with regard to nature of credits write off, in our considered view merely because the assessee has treated it as other income, said write off of creditors cannot be treated as operating in nature, for the purpose of computing operating margin. Therefore, we are of the considered view that there is no error in the reasons given by the Ld. TPO/DRP to exclude creditors write off for the purpose of computation of operating margin - Decided against assessee. Disallowing set off of brought forward losses - as argued assessee has filed necessary evidences to prove that it has satisfied conditions prescribed for set off of brought forward losses - HELD THAT - We set aside the issue to the file of the AO and direct the AO to verify the claim of the assessee with reference to necessary evidence, if any that may be filed by the assessee and decide the issue in accordance with law.
Issues Involved:
1. Exclusion of forex loss/forex gains as non-operating for the purpose of computation of operating margin. 2. Non-provision of working capital adjustment. 3. Entity level adjustments. 4. Disallowance u/s. 40(a)(i) of the Act for non-deduction of tax at source u/s. 195 of the Act. 5. Re-computation of book profit with reference to downward TP adjustment. 6. Exclusion of creditors write-off for the purpose of computation of operating margin. 7. Not allowing set off of brought forward losses. Summary: 1. Exclusion of Forex Loss/Forex Gains: The primary issue was whether forex loss/forex gains should be treated as non-operating for computing the operating margin. The assessee argued that forex loss/gains should be excluded from operating costs as per Safe Harbor Rules and the Supreme Court's decision in Shah Originals vs CIT. However, the Tribunal upheld the TPO/CIT(A)'s decision, stating that forex loss/gains are inextricably linked to business activities and should be considered operating in nature. The Tribunal also noted that the Safe Harbor Rules must be applied in totality and not selectively. 2. Non-Provision of Working Capital Adjustment: The assessee contended that the TPO/CIT(A) erred in not providing working capital adjustment despite evidence showing different working capital positions compared to comparable companies. The Tribunal agreed that working capital adjustments impact pricing patterns and operating margins. The issue was remanded to the AO/TPO to verify the assessee's claim and provide necessary adjustments in accordance with the law. 3. Entity Level Adjustments: The TPO/CIT(A) made adjustments at the entity level, including transactions with non-AE. The Tribunal clarified that adjustments should only be made to international transactions as per section 92 of the Act and Rule 10B(1)(e) of IT Rules, 1962. The Tribunal directed the AO/TPO to make adjustments solely to international transactions. 4. Disallowance u/s. 40(a)(i) for Non-Deduction of TDS: The AO disallowed interest expenses for non-deduction of TDS under section 195. The Tribunal noted that the DTAA between India and Korea did not specify whether interest is taxable on an accrual or receipt basis. The issue was remanded to the AO to examine it in light of the Bombay High Court's decision in CIT vs M/s. Pramerica ASPF II Cyprus Holding Limited and the DTAA provisions. 5. Re-computation of Book Profit with Reference to TP Adjustment: The assessee argued that book profit should not be recomputed with reference to TP adjustments. The Tribunal agreed, citing the ITAT Mumbai's decision in GTS e-Services Private Ltd vs ITO and the Supreme Court's decision in Apollo Tyres vs CIT. The Tribunal directed the AO to delete additions made to book profit on account of TP adjustments. 6. Exclusion of Creditors Write-Off: The AO excluded creditors write-off from other income for computing the operating margin. The Tribunal held that write-offs related to operating activities should be treated as operating income. However, as the assessee did not provide details about the nature of credits written off, the Tribunal upheld the TPO/DRP's decision to exclude them for computing the operating margin. 7. Not Allowing Set Off of Brought Forward Losses: The assessee argued that the AO and CIT(A) erred in not allowing the set-off of brought forward losses. The Tribunal directed the AO to verify the assessee's claim with necessary evidence and allow the set-off of brought forward losses if conditions prescribed for set-off are satisfied. Conclusion: The appeals filed by the assessee and the revenue were partly allowed, with several issues remanded to the AO/TPO for re-examination and decisions in accordance with the law. The Tribunal provided detailed directions on each issue to ensure proper verification and compliance with legal provisions.
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