2022 (2) TMI 384 - AT - Income Tax

Extraordinary expenses Allowability - AR submits that some raw material belonged to earlier concern which was returned back due to quality concerns and it was a loss to the assessee - HELD THAT - AO/TPO asked the assessee to explain why the loss is treated as of extraordinary nature - as submitted that the year under consideration is the first year of operation and the assessee did not treat the material returned in subsequent years A.Ys. 2016-17 and 2017-18. Considering the same the TPO held the amount of goods returned will not be expenses of extraordinary nature - claim of extraordinary expense due to the defective goods written off is not mentioned as separate item in the audited financials. TPO held there was no such extraordinary item in the audited financials and suitable adjustment to that effect with proper comparability and analysis is not possible. AO/TPO rejected the claim of adjustment of extraordinary expense - AR did not bring on record supporting evidence showing that the cost of goods returned cost of demurrages, etc. is to be considered as extraordinary expenses. Therefore, we find no infirmity in the direction of DRP which was followed by the AO in its final assessment order. Thus, the first issue raised by the assessee is dismissed. Treating the foreign exchange gain as operating revenue - foreign exchange fluctuation gain/loss is included in the operating revenue/expense for the computation of PLI, the actual receipts/payments are substituted in the place of sale price or purchase price charged on the date of transfer and the PLI so computed would reflect the net margin prevalent at the time of realization/payment rather than the net margin at the time of sale or purchase - HELD THAT - We hold the foreign exchange gain/loss as operating revenue/loss in the ALP determination and the other comparable needs to be considered as operating revenue/cost. Therefore, the issue raised above relation to foreign exchange gain/loss is allowed. TP Adjustment - Selection of MAM - TNMM or RPM - HELD THAT - We note that when the goods in the trading segment are sold to its AEs the RPM is the most appropriate method as there was no value addition to the goods at the time of selling the same to AEs if the goods are sold to non-AEs i.e. unrelated parties then the TNMM is the most appropriate method. On perusal of the record, we note that when there is no value addition to the goods traded, in our opinion, RPM is the most appropriate method but however, value of manufacturing is to be excluded. Thus, the issue raised regarding the most appropriate method in respect of RPM in the trading segment is to be accepted and accordingly, we direct the AO/TPO to consider the same but however, the value of manufacturing is to be excluded. Thus, issue raised by the assessee is allowed for statistical purpose.

Summary

Issues:
1. Extraordinary expenses of ?1.70 crores.
2. Treatment of foreign exchange gain as operating revenue.
3. Comparable company in the case of Kirloskar Pneumatic Co. Ltd.
4. Selection of the Resale Price Method (RPM) as the most appropriate method for benchmarking traded goods.

1. Extraordinary Expenses:
The assessee claimed extraordinary expenses of ?1.70 crores due to goods returned and scrapped. The Tribunal noted that the TPO rejected the claim as no separate item for extraordinary expenses was mentioned in the audited financials. The TPO found no evidence to support the claim, leading to the dismissal of the issue by the Tribunal.

2. Treatment of Foreign Exchange Gain:
The AO treated foreign exchange gain as operating revenue, affecting the comparability analysis. The Tribunal referred to a previous order where foreign exchange gain/loss was considered operating revenue. Following this precedent, the Tribunal allowed the issue, considering foreign exchange gain/loss as operating revenue in the ALP determination.

3. Comparable Company Issue:
An additional ground regarding a comparable company was raised but later withdrawn by the assessee. The Tribunal treated the additional ground as withdrawn, resolving this issue.

4. Selection of Benchmarking Method:
The TPO favored the Transactional Net Margin Method (TNMM) over the Resale Price Method (RPM) for benchmarking traded goods. The assessee argued that RPM was appropriate for the trading segment due to gross margin considerations. The Tribunal agreed that RPM is suitable when there is no value addition to traded goods but directed the exclusion of manufacturing value. Consequently, the Tribunal allowed the issue for statistical purposes, partially allowing the assessee's appeal.

In conclusion, the Tribunal dismissed the claim of extraordinary expenses, allowed the treatment of foreign exchange gain as operating revenue, resolved the comparable company issue, and partially allowed the appeal concerning the selection of the benchmarking method for traded goods. The order was pronounced on 27th January 2022.