2014 (2) TMI 461 - AT - Income Tax

Appellate Tribunal Affirms Export Incentives Inclusion & Forex Loss Disallowance

DCIT Versus Welspun Zucchi Textiles Ltd.

The Appellate Tribunal upheld the decisions of the Ld. CIT(A) in both issues. The Tribunal dismissed the revenue's appeal, affirming the inclusion of ... Transfer pricing adjustment – Determination of arm’s length price u/s 92CA of the Act - Determination of profit margin - Export incentives included in export sales – Comparables under TNMM method – Held that:- The decision in Welspun Zucchi Textiles Ltd. Versus Assistant Commissioner of Income-tax-2(3), Mumbai [2013 (9) TMI 336 - ITAT MUMBAI] followed - The DEPB benefit was not taken into consideration by the AO/TPO for the purpose of working out the profit margin of the assessee whereas such benefit was taken into account in the comparable cases while working out their profit margin as found by the learned CIT(Appeals) - nothing has been brought on record to controvert or rebut this finding recorded by the learned CIT(Appeals) and this being so, there was no justifiable reason to interfere with the decision of the learned CIT(Appeals) that the DEPB benefit received during the year under consideration should be considered as part of the turnover of the assessee for working out the profit margin to make the comparison of like to like and similar to similar - Since the profit margin of the assessee after taking into consideration the DEPB benefit as part of its turnover comes to 12.30% as against the average net profit margin of 13.05% of the comparables which is within the safe limit of 5%, - no TP adjustment in respect of transactions made with the associated enterprises was required to be made in the case of the assessee – the decision of the learned C1T(Appeals) upheld in deleting the addition made by the AO by way of TP adjustment – Decided against Revenue. Deletion on the loss on account of foreign exchange fluctuation – Speculative transaction - Proper explanation not furnished - Held that:- The decision in CIT v. Badridas Gauridu (P.) Ltd. [2003 (1) TMI 61 - BOMBAY High Court] followed - the assessee, an exporter of the cotton, having booked foreign exchange in forward market to hedge against losses, loss suffered by the assessee on account of failure to honour certain contract was not speculation loss but was allowable as business less – the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction as a business loss – Decided against Revenue. Issues:1. Inclusion of export incentives in export sales for determining profit margin under TNMM method.2. Deletion of disallowance on loss due to foreign exchange fluctuations.Issue 1: Inclusion of export incentives in export sales for determining profit margin under TNMM method:The appeal by the revenue challenged the order passed by the Ld. CIT(A) for the assessment year 2007-08. The primary contention was regarding the inclusion of export incentives in export sales to determine the profit margin of the assessee for making comparables under the TNMM method for the purpose of adjustment in determining arm's length price u/s. 92CA of the I.T. Act. The Tribunal referred to an earlier decision where it was concluded that the CUP method was not the most appropriate method for benchmarking international transactions due to variations in product types and markets. The Tribunal upheld the decision of the CIT(A) in rejecting the CUP method and applying the TNMM method. Regarding the issue of DEPB benefit, the Tribunal found that the benefit was rightly considered by the CIT(A) for working out the profit margin of the assessee for comparability analysis. As the profit margin of the assessee, after considering the DEPB benefit, was within the safe limit compared to the average net profit margin of comparables, the Tribunal upheld the CIT(A)'s decision to delete the TP adjustment. Therefore, the Tribunal dismissed the revenue's appeal on this ground.Issue 2: Deletion of disallowance on loss due to foreign exchange fluctuations:The second ground of appeal related to the disallowance of a sum claimed by the assessee under the head 'loss on foreign exchange fluctuation.' The AO disallowed the amount due to lack of explanation from the assessee. However, the assessee submitted an explanation before the AO, which was also considered by the Ld. CIT(A). The Ld. CIT(A) found that the loss on foreign exchange fluctuation was related to the export activity of the assessee and was in line with Accounting Standard-11. The CIT(A) further noted that the loss was a revenue loss in respect of circulating capital and, therefore, allowable. Relying on various Supreme Court decisions, the CIT(A) granted relief to the assessee. The Tribunal, after hearing both parties, found that the factual position established by the CIT(A) was not disputed by the Ld. DR. Additionally, the issue was deemed covered in favor of the assessee by a decision of the Jurisdictional High Court. As no contrary decision was presented, the Tribunal dismissed this ground of the revenue's appeal.In conclusion, the Appellate Tribunal ITAT MUMBAI upheld the decisions of the Ld. CIT(A) in both issues, regarding the inclusion of export incentives in export sales for determining profit margin under the TNMM method and the deletion of disallowance on loss due to foreign exchange fluctuations. The Tribunal dismissed the revenue's appeal on both grounds, affirming the relief granted to the assessee in each case.