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TMI Blog2017 (9) TMI 968X X X X Extracts X X X X X X X X Extracts X X X X ..... nd notice under section 143(2) of the Income-tax Act, 1961 (in short "the Act") was issued and complied with. The Assessing Officer noted the international transactions carried out by the assessee with Associated Enterprises (AEs) and he referred determination of arm's length price of the international transactions to the Transfer Pricing Officer (TPO). On perusal of transfer pricing study submitted under Rule 10D of Income-tax Rules, 1962 (in short 'the Rules'), the learned TPO noted following international transactions: Nature of transaction Method selected Total value transaction (Rs.) of Purchase of Components CUP 172,578,808 Sale of Components/Convertor CUP 855,430 Purchase of Capital Items CUP 2,341,600 Reimbursement of Expenses CUP 147,583 2.1 Regarding the functions carried out by the assessee, the learned TPO noted that till the year under consideration the assessee owned manufacturing facilities for only the last process (Canning) of the catalytic converters. The Coated substrate was imported from the AEs and after canning of same, the catalytic converter was manufactured and sold to the customers on the basis of tentative sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be tested on the basis of own financial results and directed the assessee to carry out analysis of arm's length on the basis of Transactional Net Margin Method (TNMM). 2.5 In response, though the assessee objected rejection of 'CUP' method and adopting 'TNMM' as the most appropriate method for computation of the arm's length price, the assessee provided a list of 19 comparable companies with calculation of weight average operating profit margins for financial year 2005-06 and financial year 2006-07 at (-) 1.90%. 2.6 The learned TPO rejected the four comparables of the assessee on the ground of consistent loss-making companies and retained 15 comparables and there profit margin for financial year 2006-07 having arithmetic mean of 5.05% was considered for calculating the arm's length price. 2.7 The learned TPO rejected the 'CUP' method of the assessee on the ground that the assessee was operating as an independent entrepreneur and therefore its finances result should have been tested in their entirety. He also noted that there are geographical differences, product differences, timing differences and differences in quantity due to bulk sale/retail sales in the transactions c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h shall be used are. S. No. Company F.Y.2006-07 1 Auto Gallon Inds. Pvt. Ltd. 4.86% 2 Bharat Technologies Auto Components Ltd. 3.51% 3 Design Auto Systems Ltd. 6.12% 4 Gajra Bevel Gears Ltd. 3.33% 5 Goa Auto Accessories Ltd. 3.33% 6 Haryana Roadways Engg. Corpn. Ltd. 2.60% 7 Hindustan Hardy Spicer Ltd. 5.35% 8 I A Industries Ltd. 3.45% 9 Jagan Lamps Ltd. -0.66% 10 K R Rubberite Ltd. 5.12% 11 P M P Components Pvt. Ltd. 10.78% 12 Rane N S K Steering Systems Ltd. 6.01% 13 Special Engineering Services Ltd. 9.24% 14 Standard Radiators Pvt. Ltd. 9.65% 15 X L O India Ltd. 3.09% Arithmetic Mean 5.05% The arms length price of international transaction is calculation as below. Total cost of the assessee : Rs.194,902,590 Operating profit margin of 5.05% : Rs.9,842,580 Less: operating loss shown : Rs.(-)10,615,894 ALP at a margin of 5.05% : Rs.152,120,334 Price paid : Rs.172,578,808 Difference being adjustment u/s 92 CA : Rs.20,458,474" 2.12 The Assessing Officer completed assessment under section144(c)/ 143(3) of the Act on 14/02/2011 after making addition of Rs. 2,04,58,474/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P produced by the appellant. The appellant has brought to my notice that in the subsequent assessment year, where facts and circumstances are similar in the case of the appellant, the TPO has accepted the CUP and no addition has been made. Therefore, this also shows that there is merit in the CUP presented by the appellant. In view of this, it is important to appreciate the evidence of CUP presented by the appellant. The appellant has produced the evidence which was produced before the TPO in Annexure -I of his submission. 5.3. The appellant is manufacturer of catalytic convertor used in automobile industry. The same products were sold by the AE of the appellant to unrelated parties. The appellant had produced along with the bills and invoices the third party sales of the AE in the relevant period. There is a 'one to one' correspondence between the product part numbers sold to the appellant and to unrelated parties. The prices are in FOB terms. As FOB prices are at origin of the goods which is at the local ports of the AE, the so called geographical difference has no meaning. This is because the AE is selling the goods at the port of its origin to the assessee as well as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has suffered a loss of Rs. 1.24 crores on account of forex loss. By taking out this loss if the margin of the appellant is correctly calculated, then also the appellant falls within +/-5% of the ALP as per proviso to section 92C(2) of the IT Act. The calculation of the ALP margin as submitted by the appellant along with as calculated by the TPO is given below: As per TPO Revised 1. Operating Profit Margin 5.05% 5.05% 2. Total Cost of Ecocat 19.49 18.41 3. Operating Profit/Net Sales (1 X 2) 0.98 0.93 4. Operating Profit Shown (1.06) 0.059 5. Difference (3-4) 2.05 0.34 6. Purchases from AE 17.26 17.26 7. ALP (6-5) 15.21 16.91 8. 5% Difference on ALP 0.85 9. Disallowance (5-8) 2.05 -0.50 2.16 On the issue of the correct 'Profit Level Indicator' (PLI), the learned CIT-(A) held that mentioning of OP/sales as the PLI while calculating the margin of the comparables was a clerical mistake and actually the TPO has multiplied the main margin of the comparables with the cost base of the assessee, which was rectified by the learned CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the order of the learned CIT-(A) and further submitted that the TPO in subsequent assessment year 2008-09 has accepted the 'CUP' method for benchmarking the international transactions of the assessee. Accordingly, he prayed that the order of the Ld. CIT-(A) on the issue in dispute might be upheld. 3.3 In the rejoinder, the learned Sr. DR submitted that accepting CUP method of benchmarking the transactions in subsequent years does not hold good as principle of res judicata in Income-tax proceedings is not applicable and each assessment year is a separate unit and what is decided in one year shall not ipso facto apply in subsequent years. 3.4 We have heard the rival submission of the parties on the issue in dispute. We find that Ld. CIT-(A) carried out the comparison of the transaction of the assessee with its AE, with the transaction of the AEs with other unrelated parties situated in Europe. The learned CIT-(A) observed that there was a one-to-one correlation between the product, part numbers sold to the assessee and to the unrelated parties. The learned CIT-(A) further observed that prices in both the situation are F.O.B. prices, which are at the origin of the goods and so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indra and Mahindra, and Ashok Leyland and compared the profit margins with the other comparables in similar market conditions. In our opinion, the approach of the learned TPO/AO is justified and we accordingly set aside the order of the learned CIT-(A) on the issue in dispute and uphold the order of the learned TPO/AO on the issue in dispute. 4. Now the second issue for adjudicating before us is whether the loss due to fluctuation in foreign exchange should be treated as nonoperative expenditure in the case of the assessee. 4.1 Before us the Ld. Sr. DR submitted that foreign exchange gain/loss arising out of the revenue transaction is required to be considered an item of operating revenue/cost both for the assessee as well as comparable. In support of his contention, the Ld. Sr. DR relied on the decision dated 15/12/2016 of the Tribunal in the case of McKinsey Knowledge Centre Private Limited Vs. DCIT, New Delhi in ITA No. 154 and 499/Del/2016. 4.2 On the contrary, the Ld. counsel of the assessee relied on the order of the learned CIT-(A) that as far as loss being an extraordinary item of the profit and loss account, it need to be excluded for the purpose of comparison of profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has not been controverted by the Id. DR that the same is in ITA No.i54/Del/20i6 relation to the trading items emanating from the international transactions. If the foreign exchange gain/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. 66. 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 bench held that the exchange rate gain or loss cannot have a different character from the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both for the assessee as well as the comparables. The ground taken by the Department is, therefore, dismissed." 4.6 As in the instant case assessment year involved is 2007-08, which is even prior to assessment year 2011-12, the definition of the operating expenses provided in safe harbour rules cannot be applied. 4.7 Thus, respectfully following the decision of the Tribunal in the case of McKinsey Knowledge Centre Private Limited (supra), we hold that foreign exchange fluctuation loss is part of a operating expenses. Accordingly, the finding of the Ld. CIT-(A) on the issue in dispute is set aside and that of the Assessing Officer is upheld. 4.8 We find that the Ld. TPO/AO has considered foreign exchange fluctuation loss as part of operating expenses in the case of the assessee, however, same has also to be considered in the case of the comparables. From the order of the lower authorities, it is not clear whether the AO/TPO has considered this aspect in the case of the comparables. Accordingly, we feel it appropriate to restore the issue of computing avera ..... X X X X Extracts X X X X X X X X Extracts X X X X
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