2013 (9) TMI 231 - AT - Income Tax

Tribunal allows appeal, directs reassessment of Transfer Pricing adjustments, accepts foreign exchange loss as deductible.

Bechtel India (P.) Ltd Versus Additional Commissioner of Income-tax, Range-2, New Delhi

The Tribunal partially allowed the appellant's appeal, directing the Transfer Pricing Officer to reassess the Transfer Pricing adjustments and accepting ... Transfer price - ALP - corporate additions - selection of Comparables for Transfer pricing transactions – Held that:- The company selected by TPO namely Semac – The details of the Semac ought to have been provided by the TPO for consideration of assessee, in order to include it as a valid comparable – Again, Comparable Kitco submitted by Assessee should not have been excluded as other comparables are included by TPO on same parameters - Natural justice i.e. justice, equity and fair play have not been complied with in selection of comparables, hence the issue of TP adjustments restored back to the file of TPO to address these issues and pass a speaking order in accordance – Decided in favor of Assessee. Whether the loss/gain arising on fluctuation of exchange is allowable as deduction/additions in the year of fluctuation of exchange rate or whether the same could be allowed only in the year of repayment – Consistency to be maintained in the form of book keeping - Held that:- assessee in respect of foreign exchange realization follows mercantile system of accounting and not cash system of accounting. The loss has been incurred for hedging of foreign currency fluctuation involved in sales invoices on the basis of forward contracts, which is a business decision to safeguard its interest. The loss has been incurred on the basis of scientific method in the ordinary course of business. The loss being based on a scientific method, on the basis of contractual liability with banks and on mercantile system has to be allowed to the assessee following Hon'ble Supreme Court judgment in the case of Woodward Governor India (P.) Ltd. [2009 (4) TMI 4 - SUPREME COURT] - Allowability of the loss on actual payment in A.Y. 2009-10 has been made subject to the allowability of the loss for AY. 2008-09. This stand of the DRP itself negates the observations of assessing officer that it is a notional loss and establishes that it is a business loss incurred by the assessee on mercantile system which method is consistently followed by the assessee - Allowed the foreign exchange fluctuation loss to assessee in this year – Decided in favor of Assessee. Issues Involved:1. Transfer Pricing (TP) Adjustments.2. Corporate Additions - Disallowance of Loss from Foreign Exchange Forward Contracts.Issue-wise Detailed Analysis:1. Transfer Pricing (TP) Adjustments:Background:The appellant, a company engaged in providing engineering design services to its Associated Enterprises (AEs), contested the adjustments made by the Transfer Pricing Officer (TPO) and upheld by the Dispute Resolution Panel (DRP). The core issue revolved around whether the international transactions met the arm's length principle under the Income-tax Act, 1961.Key Points of Contention:- The appellant challenged the inclusion and exclusion of certain comparable companies by the TPO and DRP.- The appellant argued that the TPO did not appreciate that none of the conditions set out in section 92C(3) of the Act were satisfied.- The appellant contended that the TPO disregarded the Arm's Length Price (ALP) as determined by the appellant in its Transfer Pricing documentation.- Specific companies included by the TPO (e.g., Semac Ltd., Mahindra Consulting) were argued to be not comparable due to functional dissimilarities and other reasons.- The appellant also argued for the inclusion of certain companies it had considered comparable (e.g., Kitco Ltd., Consulting Engineering Services) which were excluded by the TPO on arbitrary grounds.Tribunal's Findings:- The Tribunal found merit in the appellant's argument regarding the inclusion of Semac Ltd. based on an illegible annual report and directed the TPO to provide proper and legible details for consideration.- The Tribunal also agreed that Kitco Ltd. should not have been excluded if other diversified companies were included by the TPO.- The Tribunal concluded that the appellant's right to natural justice was not complied with and set aside the issue of TP adjustments back to the TPO for a fresh consideration and a speaking order.2. Corporate Additions - Disallowance of Loss from Foreign Exchange Forward Contracts:Background:The appellant incurred a net foreign exchange loss of Rs. 20,55,724/- due to marking to market the forward contracts outstanding on the balance sheet date. The Assessing Officer (AO) and DRP disallowed this loss, considering it notional in nature.Key Points of Contention:- The appellant argued that the loss was incurred in the ordinary course of business and was recognized as per applicable accounting standards.- The appellant contended that similar losses were allowed in subsequent years by the AO.- The appellant relied on the Supreme Court judgment in CIT v. Woodward Governor India (P.) Ltd., which held that losses recognized as per mercantile system of accounting and applicable accounting standards should be allowed as deductions.Tribunal's Findings:- The Tribunal noted that the appellant followed the mercantile system of accounting and incurred the loss to hedge foreign currency fluctuations.- The Tribunal held that the loss was based on a scientific method and contractual liability with banks, thus allowable as per the Supreme Court judgment in Woodward Governor India (P.) Ltd.- The Tribunal also noted that the DRP's order for the subsequent year recognized the loss, further supporting the appellant's case.- Consequently, the Tribunal allowed the foreign exchange fluctuation loss to the appellant for the relevant assessment year.Conclusion:The Tribunal allowed the appellant's appeal partly for statistical purposes, directing the TPO to re-evaluate the TP adjustments and allowing the foreign exchange fluctuation loss as a deductible expense.