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TMI Blog2017 (8) TMI 1700X X X X Extracts X X X X X X X X Extracts X X X X ..... g the economic adjustments undertaken by the Appellant. 3. The AO/DRP erred in confirming the action of TPO by not allowing the differential adjustment for basic customs duty without appreciating facts of the case. 4. The AO/DRP erred in confirming the order of the TPO in not providing working capital adjustment while determining the net profit margins of the appellant. 5. The AO/DRP erred in confirming the order of the TPO in treating foreign exchange loss suffered by the assessee as operating expense. 6. The AO/DRP erred in not appreciating the fact that the TPO proceeded to consider foreign exchange loss as non-operating without issuing a Show-Cause notice in respect of this issue and as such to this extent the Transfer Pricing Order is void ab initio." 3. Ground Nos.1 and 2 are general in nature and do not require any adjudication. 4. The third ground is with regard to customs duty adjustment while computing Arm's Length Price (ALP) 5. The facts of the issue are that the assessee is in third year full operations for M/s.Doowon Automotive Systems India Pvt. Ltd.,(hereinafter referred to as the 'assessee' or 'Doowon India'). The assessee had imported the raw materials ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties and perused the available material on records in the light of the second limb of the ground 4(b). It is relevant mentioned that we have already analysed the relevant provisions of Income Tax rules vis a vis the scope of the adjustments in the preceding paragraphs in the context of the adjustments on account of the 'working capital'. In principles, our findings on the issue remain applicable to the adjustments on account of the import cost mentioned in ground 4(b) too. The difference between the AL Margin before and after the said adjustments on account of 'import cost' works out to 0.57% (7.18%-6.61%). Revenue has not disputed the said working of the assessee. In these factual circumstances and in the light of the scope of adjustments discussed above, in our opinion and in principle, the assessee should win on this ground too. One such decision relied upon by the assessee's counsel supports our finding relates to the decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd 122 TTJ 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that, "No doubt , a higher import content of raw material by itself does not warrant an adjustment in o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Co-ordinate Bench and we are in respectful agreement with the views of our esteemed colleagues. This additional argument was not available before the authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations." 38. The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y we remit the issue to the file of AO to consider the material for fresh consideration." 7.2 Accordingly, this issue is remitted to the file of AO for custom duty adjustment on similar directions given in the above Order of Tribunal. 8. The last ground is with regard to treating foreign exchange loss suffered by the assessee as operating expense. 8.1 The TPO erred in treating the entire foreign exchange loss suffered by the assessee as operating expense. The TPO grossly erred in treating foreign exchange loss as operating expense without issuing show-cause notice as per Proviso to sec.92C(3) and as such to this extent the Transfer Pricing ("TP") order is vide ab initio. The TPO order treating foreign exchange loss as operating expense without providing an opportunity to the assessee is opposed to the principle of natural justice and fair play. The TPO erred in not appreciating the fact that the assessee has imported the raw materials at the same price every year and the foreign exchange loss suffered by the assessee is on account exchange fluctuations in currency during the relevant financial year. The assessee has raised the objection during the AY 2011-12 that the TPO erred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent are contradictory. Under the circumstances, in the absence of clear cut evidence submitted by the assessee as to what was the loss incurred by the assessee as part of its normal transactions and what was the notional loss recognized by the assessee on account of monetary items in the balance sheet as on 31.03.2012, the assessee's claim that entire loss of 13.84 crores has to be treated as non-operating in nature cannot be accepted. 8.4 The arguments of the assessee before the DRP were that the TPO had considered foreign exchange loss as non-operating while issuing the show-cause notice dated 18th December 2015. However, while passing the final order, the TPO considered the same as operating an enhanced the adjustment. Further, the assessee contended that the TPO did not provide an opportunity for personal hearing or to the assessee to submit the details of the foreign exchange loss suffered by the company. There is nothing contradictory in the financial statements. In cash flow statement, while computing the margins from operations the auditor has rightly excluded the entire forex loss as the same is not due to operations but because of external factors not under the control o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange fluctuations. Since the holding period with respect to sundry creditors who are raw materials suppliers or debtors arising out of sale transactions is with the management which exposes the entities to forex risks. Therefore, the profit or loss arising out of foreign exchange fluctuations will be directly attributable to the operational cost which has to be essentially taken into consideration while arriving at the operating cost of the entities while computing the profit level indicator (PLI) in transfer pricing matters. Unless there is an abnormal situation resulting in abnormal forex fluctuations, the profit or loss arising due to forex fluctuations cannot be ignored while arriving at the operating cost for deriving the PLI in Transfer pricing matters. It is pertinent to mention here that in arriving at the operating cost in transfer pricing matters the principles of Cost Accounting will not be strictly applicable where cost of finance may be treated differently. For the afore-stated reasons we do not find any merit in the arguments advanced by the Ld. A.R. Further in the following decisions it is made clear that profits or loss arising out of foreign exchange fluctuations ..... X X X X Extracts X X X X X X X X Extracts X X X X
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