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TMI Blog2013 (6) TMI 184X X X X Extracts X X X X X X X X Extracts X X X X ..... of Thai Bhat was substantially increased and the average exchange rate of Thai Bhatt was increased to 100 Thai Bhat = INR 119. Accordingly, we can not rule out and ignore this factual matrix emerged from the fluctuation of foreign exchange rates that while prices of purchases and import made by the appellant have increased, the sale price of exported goods remained on the lower side which is an important element to materially affect the price in the open market. In this situation, we are inclined to hold that the authorities below should have considered the said difference due to foreign exchange rate fluctuation in favour of Thai Bhat and against the INR and the said difference has to be removed and the margin thereon has to be adjusted for arriving at the credible comparable through the requisite adjustments. We observe that the authorities below have not considered the element of abnormal and huge fluctuation in the foreign exchange favouring Thai Bhat and against the Indian currency. Accordingly, in view of the observations made hereinabove, ground no. 2.7 and 2.8 are allowed with a direction to the Assessing Officer that necessary adjustments pertaining to the huge and abnorma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in law in completing the assessment under section 143(3) read with section 144C of the Income-tax Act (the Act) at an income of Rs. 17,642,880 as against the returned loss of Rs. 25,461,192. 2. That the assessing officer erred on facts and in law in making adjustment of Rs. 43,047,427 to the income of the appellant on account of international transactions of import of parts and capital goods by disregarding the transfer pricing methodology adopted by the appellant for benchmarking its international transactions. 2.1 That the assessing officer/DRP erred on facts and in law in aggregating the transaction of import of parts and capital goods with other transactions and benchmarking the international transactions at entity level applying TNMM. 2.2 That the assessing officer/DRP erred on facts and in law in rejecting resale price method applied by the appellant for benchmarking the international transaction of export of parts as the most appropriate method and applying TNMM at entity level. 2.3 That the assessing officer/DRP erred on facts and in law in rejecting associated enterprise of the appellant as the tested party even when the associated enterprises were the least complex par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee filed a return of income declaring a loss of Rs.25,461,192 on 24.10.2007 and the same was processed u/s 143(3) of the Act. Further, the case was selected for scrutiny and a notice u/s 143(2) along with the questionnaire u/s 142(1) of the Act was served on the assessee. During the year under consideration, the assessee had undertaken international transactions with its associated enterprises and the value of the same was more than Rs.15 crore, in accordance with the provisions of Section 92CA of the Act and with prior approval of Commissioner of Income Tax, Delhi-IV. The Assessing Officer referred the international transactions entered into by the assessee to the Transfer Pricing Officer (TPO) for determining Arms Length Price (ALP). 3. The TPO passed his order u/s 92CA(3) dated 07.09.2010 wherein he made an adjustment of Rs.6,48,78,406 in the ALP of the assessee. The assessee was asked to show cause as to why adjustment of above amount to the income of the assessee should not be made, being a difference in the ALP as determined by the TPO vide his order u/s 92CA(3) dated 07.07.2010. The assessee s contentions were considered by the Assessing Officer and rejected on the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t plus method, the appellant has considered comparables which were operating in Japan and engaged in similar kind of business as that of associated enterprises i.e. manufacturing and trading of automobile parts and spares. The assessee also submitted that the TPO rejected the comparable companies considered by the appellant by holding that there was no basis and search process for selection of such comparables proposed by the assessee. In this application of additional evidence, the assessee has vehemently contended that the appellant has reasonably obtained access to a foreign data base viz. on source and in order to justify the international transactions at ALP and to meet the objections of the TPO, the appellant has undertaken an extensive search of comparable companies on the said foreign data base providing data information of huge number of companies operating in Japan and Thailand in the similar business as that of associated enterprises of the appellant company. The assessee s learned counsel submitted that the additional evidence could not be submitted earlier because the database was very costly to obtain. 8. Replying to the above submissions, ld. DR submitted that at thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search and finds new comparables to leverage the ALP, then the process would be endless and we are of the opinion that the same cannot be admitted as additional evidence at this stage of Tribunal proceedings. For this assessee has to show that he was prevented to submit this additional evidence due to reasonable cause beyond his control but there is nothing to show that the assessee could not produce additional evidence due to circumstances beyond his control and reasonable cause. In this situation, we are inclined to hold that additional evidence submitted by the assessee cannot be admitted at this appellate stage and, therefore, the application of the assessee is rejected. Ground no.1 11. Ground no.1 contains factual matrix related to the other issues which need no adjudication and we dismiss the same. Ground no.2 (2.1 to 2.9) 12. Ground no.2 is related to the adjustment of Rs.4,30,47,427 to the income of the appellant assessee on account of international transaction of import of parts and capital goods by disregarding the transfer pricing methodology adopted by the appellant for benchmarking its international transactions. 13. The counsel for the assessee submitted that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate of INR against Thai Bhatt and adjustment for the same has to be given because of huge fluctuation in the exchange price. The prices of purchase and import made by the appellant company have increased and on the other hand, the sale prices have remained on the lower side. He also advanced the contention that the Assessing Officer/DRP were not justified in ignoring the fact that in the absence of such abnormal exchange rate fluctuation, the appellant would have earned 10.04 percent of profit over sales and, hence, no adjustment would have been warranted in the arms length price of the international transactions undertaken by the appellant company but due to huge and abnormal fluctuation in currency exchange rates, the associated enterprise had sold trading goods to the appellant company at a very low margin of 1-1.5 percent and if any adjustment is required to be made, it should be restricted to the profits retained by the associated enterprises. 16. Replying to the above submissions, the DR submitted that the DRP and Assessing Officer considered all the submissions and contentions of the assessee company. He further submitted that despite enough opportunities afforded by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant, while undertaking the benchmarking analysis applying TNMM, in order to make comparison of like to like, the following comparability adjustments are required to be made:- It is respectfully submitted in this regard, that for the purpose of sale of raw material components and parts in the domestic market, the appellant entered into contract with the various customers at a price determined/fixed for the future on the basis of average exchange rate of the currency involved in import of such products as prevailing in past six months. The price of sale so determined remains fixed and thereafter cannot be changed. The appellant after entering into contract for sale of the products enters into the contract for import of such products from overseas venders / suppliers. The invoices for such import are raised on the appellant by the overseas venders / suppliers in foreign currency, e.g., Thai Bhat or Japanese Yen. The invoices for import are, therefore, to be paid in the foreign currency purchased at the exchange rate available at the time of payment. Since the exchange rate of the currency involved, i.e., Thai Bhat and Japanese yen, incurs substantially during the relevant previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fluctuation, the import price would have been Rs. 512,381,455, and as against the sale value of Rs. 605,236,723, the appellant would have earned a gross profit of Rs. 92,855,268. Keeping the above computation in view, a line by line computation of entity level profit margin of the appellant is as under:- Particulars Amount in Rs. Sales (Trading segment) 808,624,823 Other operating income 37,422,103 Purchase price Less: Adjustment on account of exchange fluctuation (621,364,728-512,381,355) 814,114,911 108,983,273 705,131,638 Operating expense 59,665,854 Net Profit 81,249,434 OP/Sales 10.04 Accordingly, since the operating profit to sales ratio (PLI) of the appellant at 10.04 percent is higher than the operating profit margin of the comparable company selected by the TPO/DRP at 1.78 percent, the international transactions undertaken by the appellant of import of goods should be considered at being arms length price. 19. From the order of the DRP, we observe that the DRP considered the objection of the assessee related to rejection of Orbit Industries as a comparable and held that the assessee has not given any cogent reason for change in the new search process which was essential t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions and careful perusal of citations and all other relevant judgments we observe that Rule 10(B)(1)(e) of the Act on the one side and other sub-rules in the context of TNMM need to be analyzed for eliminating the difference, if any, in the comparable uncontrolled transaction which materially affect the profit margin of the assessee. Having noticed the difference, the revenue has to quantity the difference, if any, and then revenue authorities must decide if that difference constitutes materially affect the price in open market. As per these provisions, if the answer of the above question is in the affirmative, then the identified difference has to be removed and the margin has to be adjusted for arriving at the credible comparable. It is a well-accepted accounting principle that net margins can be influenced by some of same factors which can influence price or gross margins. It is the expectations and requirements of the rules/provisions that any difference which is likely to materially affect the net profit margin (NPM) in the open market has to be eliminated. The revenue authorities and TPO are duty bound to know that the TNMM visualizes the undertaking of a thorough comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary adjustments pertaining to the huge and abnormal fluctuation in the foreign exchange may be allowed to the assessee in determining the ALP of the international transaction undertaken by the appellant. 25. During the arguments, the counsel of the assessee submitted that if it is found appropriate and held in favour of the assessee that necessary adjustment pertaining to the huge and abnormal fluctuation in foreign currency is allowed then other grounds would reach to its justified conclusion. With this submission, the counsel did not submit detailed contentions on other ground nos. 2.1 to 2.6 and 2.9. In view of the directions to the Assessing Officer on ground nos. 2.7 and 2.8, inter alia the above submission of the assessee, we treat ground nos. 2.1 to 2.6 and 2.9 as not pressed and we dismiss the same because the adjustment allowed to the assessee hereinabove pertaining to the abnormal fluctuation in foreign currency would serve the ends of justice for entire grievances of the assessee. Hence, ground nos. 2.1 to 2.6 and 2.9 are dismissed. Ground no. 3 4 26. Apropos ground no. 3 and 4, the counsel for the assessee submitted that the Assessing Officer was not justified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses the expression deductable or collectable at source and it is this clause which is incorporated by the Uttaranchal High Court in the said judgment (supra) in the manner already pointed above. The scheme of the Act in respect of non- residents is clear. Section 195 of the Act puts an obligation on the payer, i.e. any person responsible for paying to a non -resident, to deduct income tax at source at the rates in force from such payments excluding those incomes which are chargeable under the head Salaries. Therefore, the entire tax is to be deducted at source which is payable on such payments made by the payee to the non -resident. Section 201 of the Act lays down the consequences of failure to deduct or pay. These consequences include not only the liability to pay the amount which such a person was required to deduct at source from the payments made to a non-resident but also penalties etc. Once it is found that the liability was that of the payer and the said payer has defaulted in deducting the tax at source, the Department is not remedy-less and therefore can take action against the payer under the provisions of Section 201 of the Income Tax Act and compute the amount accordin ..... 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