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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 ..... 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. Loss due to fluctuation in foreign exchange - whether loss should be treated as nonoperative expenditure in the case of the assessee - Held that:- As following the decision of the Tribunal in the case of McKinsey Knowledge Centre Private Limited (2017 (5) TMI 830 - ITAT DELHI), 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. 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 av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to gloss over the facts and it does not capture the reality that the assessee was an independent entrepreneur and 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 difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following conclusions are made. ( i) The most appropriate method shall be TNMM, OP/sales shall be the PLI. ( ii) The comparables which 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no factual analysis, appreciation and evaluation of the CUP data given by the appellant. While selecting the most appropriate method, it is always held that product to product comparison or transaction to transaction comparison in terms of similarity of product, size of the transaction, time etc. are the best way of comparison since this comparison is not affected by other than the material being compared. However, without giving any cogent reason Transfer Pricing Officer rejected the CUP. It is unfair to come to a conclusion that the loss incurred by the appellant is only due to its transaction with the AE without going into the details of the market situation wherein appellant is located and other parameters. In any case, the most appropriate method selected by the appellant cannot be rejected just because the appellant is suffering losses. The TPO is contradicting himself by stating that your status as an independent entrepreneur cannot be ignored : on the one hand, the appellant is treated as a full risk bearing independent manufacturer, on the other hand, the loss incurred by the appellant is treated as a loss imposed by is AE as if the appellant is a captiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, even under the TNMM method also no adjustment was required to the arm s length. The finding of the learned CIT-(A) on the issue is reproduced as under: Issue 2: Whether forex loss should be treated as non operative in nature in the facts and circumstances of this case?: 5.4. It is strongly contended by the appellant that the foreign exchange loss is a single most reason for incurring loss and it happened in an extraordinary situation of fluctuation of foreign exchange rate between Euro and Indian rupee. The business decision taken by the appellant not to hedge the Euro currency cannot be questioned and termed as poor management . In the case of DHL Express (India) Pvt. Ltd. v. ACIT 10(1), Mumbai [2001] 11 taxmann.com 40 (Mumbai) it has been held by the Hon ble ITAT that foreign exchange fluctuation do not form part of the operational income because these items have nothing to do with the main operation of the assessee. It is important to note here that the appellant is a manufacturer of catalytic convertor and not a dealer in foreign currency. It will be proper if the business of person is dealing in foreign currency then the loss / gain on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adjudicating issue No.2. 2.17 Other issues relating to the comparables were not adjudicated being academic in nature. 2.18 According to the Ld. CIT-(A) the ALP of the assessee even using the TNMM with 15 comparables used by the TPO, falls within the arm s length range and, therefore, there was no justification for making any addition on account of arm s length price and accordingly directed the AO/TPO to delete the addition. 2.19 Aggrieved with the above finding of the Ld. CIT-(A), the Revenue is in appeal before the Tribunal raising the grounds as reproduced above. 3. The sole ground of the Revenue is in respect of deletion of the addition of adjustment of ₹ 2,04,58,470/- to the international transactions. 3.1 Before us, on the issue of selection of appropriate method for computation of arm s length price, the Ld. Senior DR submitted that the learned CIT-(A) was not justified in upholding the CUP method adopted by the assessee as most appropriate method for computing arm s length price of the international transactions. He submitted that while applying the CUP method adjustments for economy and market conditions in different geographical locations need ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods and so there was no effect of geographical differences. The learned CIT-(A) has noted that price paid by the assessee is lesser than what is paid by the third parties. In our opinion the finding of the learned CIT-(A) on the basis of above observations is not correct. We find that when the pollution norms of the Europe and the India during relevant period are different, the quality of the product cannot be same and in such situation adopting the transaction of the AE with third-parties in Europe as CUP for comparison of the transaction with the assessee, is not correct. Moreover, the currencies of both jurisdiction are different and, therefore, also prices charged to party at the Europe and to AE in the India cannot be compared. We find that in the case of UCB India (P) Ltd (supra), the Tribunal took note of the effect of minor change in the properties of the product on the pricing and held that there should be scientific basis to say that APIs are identical with same purity, potency and characteristics and also all such data should be first obtained by the Revenue or the assessee, who wish to compare products and then arrive at ALP or wish to make adjustment to price, cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparison of profit margin of the assessee with the comparables. The learned counsel further submitted that the Central board of Direct Taxes (CBDT) in notification dated 18/09/2013 has made safe harbour rules and according to the definitions part of the safe harbour rules, in rule 10TA, loss arising on account of foreign currency fluctuation has been excluded from the operating expenses. 4.3 In Rejoinder, the learned Sr. DR submitted that safe harbour rules are not applicable to the assessment year under consideration. Further, he submitted that the Tribunal in the case of Mckinsey Knowledge Centre Private Limited (supra) has considered this arguments and rejected the contention following the Hon ble Delhi High Court in Principle CIT Vs. Cashedge India Private Limited vide its judgment dated 04/05/2016 in ITA 279/2016. 4.4 We have heard the rival submission and perused the relevant material on record. The Tribunal in the case of DHL Express (India) P. Ltd. (supra), which is relied upon by the learned CIT-(A), held that foreign exchange fluctuation do not form part of the operational income because that item was nothing to do with the main operation of the assessee. But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a different character from the transaction to which it pertains. The Bench found fallacy in the ITA No.i54/Del/20t6 submission made on behalf of the Revenue that the exchange rate difference should be detached from the exports and be considered as an independent transaction. Eventually, the Special Bench held that such exchange rate fluctuation gain/loss arising from exports cannot be viewed differently from sale proceeds. 67. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addtl. CIT (2013) 32 taxman.com 196 has also laid down to this extent. 4.5 Further, the Tribunal has also considered the argument of the assessee on safe harbour rules to contend that foreign exchange gain or loss as non-operating item and held that safe harbour rules were not applicable in assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appropriate to restore the issue of computing average margin of the comparables with limited direction to consider the foreign exchange fluctuation loss as part of the operating expenses in case of comparables also. It is needless to mention that assessee shall be afforded reasonable opportunity of being heard. 4.9 As regard the third issue of Profit Level Indicator (PLI), the learned CIT-(A) has already rectified the clerical mistake as under: 5.5 It is important to note at this point to say that while calculating the margin of the comparables, the TPO has taken OP/sales as the PLI. While calculating the ALP margin of the assessee, the TPO has multiplied the mean margin of the ALP of the comparable with that of cost base of the assessee instead of sales, which seems to be a clerical mistake. In the above calculation, this mistake is rectified. Since the appellant falls within the range, the other issues relating to the comparable becomes academic in nature and therefore they are not separately adjudicated. 4.10 Since the assessee is neither in the appeal nor in cross objection before us and, therefore, the arguments of the learned counsel regarding adopting ..... 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