Appellate Tribunal Affirms Export Incentives Inclusion & Forex Loss Disallowance

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 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.

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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.

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