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TMI Blog2021 (2) TMI 938X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparables at 16.64% to find out ALP of the AE transactions at ₹ 1597.06 lakh (₹ 1369.23 lakh x 1.1664 lakhs), calling for further action. TPO erred in computing the assessee's PLI and that of the comparables by treating foreign exchange fluctuation gain as non-operating revenue, which also got echoed at the level of the DRP - No discussion in the TPO's order on the exclusion of the foreign exchange fluctuation gain from the operating revenue in computation of the assessee's operating profit margin. The DRP has held at para 3.4 of its direction that foreign exchange fluctuation gain cannot be considered as operating income by mainly relying on Rule 10TA(k) of the Safe Harbour Rules. Determination of the ALP shall be done in accordance with the safe harbour rules in terms of section 92CB of the Act and ex consequenti, the application of other rules will be ousted. The sequitur is that where such an option is not availed, neither section 92CB gets triggered nor the relevant rules including 10TA(k). In that scenario, determination of the ALP is done de hors the safe harbour rules. Once these rules are kept out of compass, the otherwise settled position by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of transactions. For the reasons set out in the order, the TPO did not accept the internal TNMM. The TPO proceeded with the external TNMM having six companies as comparable giving average Profit Level Indicator (PLI) of Operating profit to Total cost (OP/TC) at 16.64%. The assessee's own Profit Level Indicator (PLI) was computed at 11.81%. This is how, the TPO computed the transfer pricing adjustment as under: Particulars Amt. in lakhs Sales (A) 6097.94 AE sales=B 1530.98 Non AE sale=C 4566.96 Cost=D 5453.68 Profit=P 644.26 PLI=OP/OC=P/D 11.81% PLI of comparable 16.64% ALP=E=D*PLI of comparable 6364.17 ALP of AE Transactions =F=E-C 1797.21 G1=B*95% 1454.43 G2=B*105% 1607.52 Since F is more than G2. Therefore, Adjustment =F-B 266.23 4. The assessee assailed the above determination before the Dispute Resolution Panel (DRP), but with partial success. This led to the transfer pricing addition of ₹ 1,03,98,000 in the final assessment order, which is under challenge before the Tribunal. 5. We have heard the rival submissions through Virtual Court and scanned through the relevant material on record. Before proceeding further, we want to clarify that the assessee applied the TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to the AE transactions, under this mechanism, comes to ₹ 1369.23 lakh, which is obtained by multiplying total cost of ₹ 5453.68 lakh with AE sales of ₹ 1530.98 lakh as divided by total sales of ₹ 6097.94 lakh. It is this cost of the transactions with AE which needs to be loaded with the margin of the comparables at 16.64% to find out ALP of the AE transactions at ₹ 1597.06 lakh (₹ 1369.23 lakh x 1.1664 lakhs), calling for further action. 7. The Ld. AR espoused the next issue by submitting that the TPO erred in computing the assessee's PLI and that of the comparables by treating foreign exchange fluctuation gain as non-operating revenue, which also got echoed at the level of the DRP. 8. We find no discussion in the TPO's order on the exclusion of the foreign exchange fluctuation gain from the operating revenue in computation of the assessee's operating profit margin. The DRP has held at para 3.4 of its direction that foreign exchange fluctuation gain cannot be considered as operating income by mainly relying on Rule 10TA(k) of the Safe Harbour Rules. 9. The Honble Delhi High Court in PCIT vs. B.C. Management Services Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin of not less than 20% of operating expenses. Explanation to section 92CB itself provides the meaning of safe harbour as circumstances in which the income-tax authorities shall accept the transfer price .... declared by the assessee. It is for the purpose of calculating value of various components under the safe harbour rules, such as, operating profit or operating expense etc. that one needs to knock on the door of rule 10TA for finding out their respective connotation. Clause (1) of Rule 10TA defines operating profit margin in relation to operating expenses to mean the ratio of operating profit, being operating revenue in excess of operating expenses, to operating expense. So, for determining the operating profit margin under the safe harbour rules, one requires figures of operating expenses [defined in Rule 10TA(j)] and operating revenue [defined in Rule 10TA(k)]. It is this definition of operating revenue which has been evoked by the DRP for construing foreign exchange fluctuation gain as non-operating revenue. 12. At this juncture, it is apposite to take note of rule 10TD(1), which underscores that the exercise of option for safe harbour rules by an eligible assessee [as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, then the determination of the ALP shall be done in accordance with the safe harbour rules in terms of section 92CB of the Act and ex consequenti, the application of other rules will be ousted. The sequitur is that where such an option is not availed, neither section 92CB gets triggered nor the relevant rules including 10TA(k). In that scenario, determination of the ALP is done de hors the safe harbour rules. Once these rules are kept out of compass, the otherwise settled position by virtue of the judgment of the Hon'ble Delhi High Court in B.C. Management Services Pvt. Ltd. (supra) and various Benches of the Tribunal across the country holding foreign exchange gain/loss as operating revenue/loss in the ALP determination, comes to the fore. We, therefore, hold that the foreign exchange gain/loss earned/incurred by the assessee and the other comparables needs to be considered as a part of operating revenue/cost not only for the reason that the assessment year under consideration is prior to the applicability of the safe harbour rules but also that there can be no question of applying Rule 10TA(k) in the absence of the assessee having or exercising option to be subjected to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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