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TMI Blog2015 (9) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... eration as an item of non-operating cost. We, therefore, accept the assessee’s contention for treating this sum of ₹ 3,84,196/- as non-operating. Loss on foreign exchange - Held that:- The amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both of the assessee as well as comparables. We, therefore, hold that the AO was justified in considering forex loss as operating cost as against the assessee’s claim of non-operating cost. Computation of transfer pricing adjustment in respect of transaction with Associated Enterprises (AEs) and non-AEs - AR contended that no transfer pricing adjustment is possible in respect of transactions with non-AEs - Held that:- As the entire exercise under Chapter-X is confined to computing total income of the assessee from international transactions having regard to the arm’s length price, there is no scope for computing income from non-international transactions having regard to the ALP. As the TPO has computed the transfer pricing adjustment qua all the transactions carried out by the assessee with reference to the base of ‘total costs’, also inclusive o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo grounds are general which do not require any specific adjudication. The ld. AR did not press these grounds as well. These grounds, therefore, stand dismissed. 3. Ground no. 3 has three parts. The first part is against some of the aspects relating to the computation of the Profit Level Indicator (PLI), being, the Operating Profit/Total Cost (OP/TC) of the assessee. 4. Briefly stated, the facts of the case are that the assessee was established as an Indian company in 1990 as a wholly owned subsidiary of a Claas KGaA mbH, Germany. Until 31.8.2002, the assessee was known as Escorts Claas Ltd., with 60:40 joint venture between Escorts India Ltd., and Claas, Germany. Thereafter, the entire shareholding was acquired by Claas, Germany. The assessee s main activity is manufacture and sale of harvester combines in India and export of harvester combines and engine harvester combines and engine related products, licensed by Claas Group. The assessee manufactures two types of harvester combines, namely, wheel based and track based. Certain international transactions were reported by the assessee including purchase of raw materials and components; sale of harvesters and spare parts; Imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as that of the comparables. When we advert to the nature of such foreign exchange gain earned by the assessee, it has been admitted by the ld. AR that the same is in relation to the trading items emanating from the international transactions. When the foreign exchange loss directly results from the trading items, we fail to appreciate as to how such foreign exchange fluctuation loss can be considered as non-operating. 9. The Special Bench of the Tribunal in ACIT Vs Prakash I. Shah (2008) 115 ITD 167 (Mum)(SB) has held that the gain due to fluctuations in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds simply on the ground that the foreign currency rate has increased subsequent to sale but prior to realization. It went on to add that when goods are exported and invoice is raised in currency of the country where such goods are sold and subsequently when the amount is realized in that foreign currency and then converted into Indian rupees, the entire amount is relatable to the exports. In fact, it is only the translation of invoice value from the foreign currency to the Indian rupees. The Special ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Under the TNMM, the process is simple in initially finding out the operating profit margin of the assessee and then the average adjusted operating profit margin of comparable cases. Such adjusted profit margin of the comparables constitutes benchmark margin, which is then compared with the operating profit margin from the assessee s international transactions with its AE. It is not permissible to make transfer pricing adjustment, by applying the average operating profit margin of the comparables, on the assessee s universal transactions entered into with both the AEs and non-AEs. As the entire exercise under Chapter-X is confined to computing total income of the assessee from international transactions having regard to the arm s length price, there is no scope for computing income from non-international transactions having regard to the ALP. As the TPO has computed the transfer pricing adjustment qua all the transactions carried out by the assessee with reference to the base of total costs , also inclusive of costs relevant for transactions with non-AEs, we vacate the impugned order on this issue and restore the matter to the file of the TPO/AO for recalculating the amount of ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a comparable uncontrolled transaction and, thereafter, it points out towards the net profit margin realized by an unrelated enterprise (external) from comparable uncontrolled transaction. Thus where a potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-a-vis the comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind the computation of the ALP of an international transaction is to find out the profit which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself realized from a third party, it is advisable to have recourse to an internally comparable uncontrolled transaction. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain, by and large, same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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