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TMI Blog2016 (5) TMI 252X X X X Extracts X X X X X X X X Extracts X X X X ..... I CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER For The Appellant : Shri N. Venkatraman, Sr.Counsel, For Ms. V. Ubhaya Bharathi, Advocate, Shri K.R. Sekar and Shri S.P.Chidambaram, Advocates For The Respondent : Dr. B. Nischal, JCIT ORDER PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER This appeal is filed by the assessee against the order of the Dispute Resolution Panel, Chennai, dated 27.11.2014, for the assessment year 2010-11. 2. The assessee has also filed additional grounds of appeal contending that the foreign exchange gain pertaining to marketing commission segment should be considered as its operating income. The assessee in its additional grounds contends that foreign exchange gain was derived from marketing commission transaction and as such, it is directly and inextricably linked with marketing commission segment. The assessee contends that the TPO while computing the margin of the assessee considered the foreign exchange gain pertaining to marketing commission segment as non-operating income. It is the submission of the assessee that it has inadvertently omitted to raise specific alternative ground in relation to foreign exchange gain to be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut an integral part of the sales proceeds of an assessee carrying on export business. The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company . Following the aforesaid decision of the Bangalore Bench of the Tribunal, the Hyderabad Bench of the Tribunal held in the case of Four Soft Ltd. (supra) in the following manner- 16. With regard to the exclusion of gain on account of foreign exchange fluctuation while computing the net margin, as claimed by the assessee, we find that the exchange fluctuation gains arise out of several factors, for instance, realisation of export proceeds at higher rate, import dues payable at lower rate. Since the gain or loss on account of exchange rate fluctuation arises in the normal course of business transaction, the same should be considered while computing the net margin for the international transactions with the associated enterprises of the assessee. Our view in this behalf is fortified by the decisions of the Bangalore Bench of the Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transactions, the assessee has also entered into international transactions of marketing services with its Associated Enterprise i.e parent company/Head Office. It is submitted that Head Office had also appointed M/s Spinco Biotech Pvt. Ltd, a third party as another marketing service company in India. It is the submission of the ld. Sr. Counsel for the assessee that in the transfer pricing documentation for marketing services related to international transaction, the assessee adopted CUP method as the most appropriate method by relying on the weighted average rate of commission received by M/s Spinco. The rate of commission received by M/s Spinco was 15.7% whereas the assessee has earned commission @ 14.8%. Therefore, it is contended that the marketing services related international transaction was at ALP. The ld. Sr. Counsel for the assessee submits that in the transfer pricing assessment, the TPO held that M/s Spinco is not functionally comparable for the reason that (a) greater role of assistance and greater functions assumed by the assessee-company than M/s Spinco, (b) warranty risk/post sales services, and (c) restrictions imposed on M/s Spinco. It is submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d go back for fresh adjudication. The ld. Sr. Counsel strongly placed reliance on the decision of Ahmedabad Bench of the Tribunal in the case of Fortune Infotech Ltd vs ACIT in I.T.A.No. 274/Ahd/13 dated 3.2.2016. He submits that it is a finding of fact by the authorities below that functions performed by the assessee and the functions performed by M/s Spinco are not same. He further submits that as per the provisions of sec. 10B(2), when functions are different, the comparable ceases to be a comparable. The ld. Sr. Counsel further submits that DRP accepts that segmental financials have to be considered and there is no dispute on this. He submits that the only issue for consideration is whether one comparable or seven comparables to be considered. Placing reliance on para 11 of the decision of Ahmedabad Tribunal in the case of Fortune Infotech Ltd (supra), the ld. Sr. counsel submits that M/s Spinco could not be considered as comparable for the reason that the TPO has given a categorical finding that the functions performed by the assessee are much more than the functions performed by M/s Spinco. Further, the TPO has also held that the risk assumed by the assessee and M/s Spinco ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also held that when only one comparable is available for application of a particular method, this serious limitation on the availability of data, certainly relegates its appropriateness vis-z-vis other alternate methods available such as external TNMM in respect of which sufficient and essentially reliable data is available. It was held that for this reason alone, internal TNMM is certainly not the most appropriate method on the facts of the case. While holding so, the Tribunal observed as under: 10. We have noted that during the course of the hearing before us, learned counsel vehemently contended that, on the facts of this case, the internal transactional net margin method was wrongly rejected by the authorities below. His contention was that undoubtedly Fidelity US was an associated enterprise in an earlier accounting period but that aspect of the matter was wholly irrelevant since the prices for work done for Fidelity US were negotiated afresh after this concern ceased to an AE. Learned counsel took pains to take us through the documents in support of the facts embedded in his arguments, but, for the reasons we will set out in a short while and in our considered view, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the material factors, including availability, coverage and reliability of data necessary for application of such a method. The method selected for benchmarking must not only be a permissible method but it also be the most appropriate method on the facts and circumstances of that case and vis- -vis the other methods which can be applied on the facts of that case. The selection of most appropriate method is not simply deciding a question as to what is permissible and what is not permissible, because, as is elementary, everything permissible in law, as indeed in all walks of life, is not necessarily the most appropriate thing as well. It is important to bear in mind the fact that under section 92C(1), the arm s length price in relation to an international transaction shall be determined by one of the ...(prescribed)... methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe. Rule 10C, which prescribes the relevant factors for determining the most appropriate method, as it stood at the relevant point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g whether that particular method of determining the ALP is most appropriate method of determining ALP on the facts of that case, or not. When only one comparable is available for application of a particular method, this serious limitation on the availability of data, in our considered view, certainly relegates its appropriateness vis-a-vis other alternate methods available, such as external TNMM, in respect of which sufficient, and essentially reliable, data is available. For this short reason alone, the internal TNMM is certainly not the most appropriate method on the facts of this case. That is one aspect of the matter. The other aspect of the matter is its reliability. The fact that the independent enterprise was an associated enterprise in not so distant a past, the fact that despite its becoming, in legal terms and as an offshoot of group restructuring, an independent enterprise, the assessee continues to work for this enterprise even after making huge losses, as high as 21.75% on cost, and the fact that it is a single comparable, does raise serious apprehensions about its reliability. This fact situation, coupled with the admitted position that sufficient number of external ..... X X X X Extracts X X X X X X X X Extracts X X X X
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