Transfer pricing under TNMM: forex fluctuation treated as operating item, and erroneous comparable challenged despite prior inclusion

An additional ground on operating profit margin computation could be admitted where the relevant figures were already on record and the issue was arithmetical, leading to recomputation on correct operating profit and operating cost figures. Foreign exchange gain or loss arising directly from business transactions was treated as an operating item under TNMM, and it could not be excluded merely as non-operating; the Safe Harbour Rules were noted as not applicable retrospectively to the year in question. A comparable was also directed for exclusion subject to verification where the employee cost filter was not satisfied, and prior inclusion in the transfer pricing study did not bar challenge because there is no estoppel against law.

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Issues: (i) Whether an additional ground challenging the computation of the assessee's operating profit margin could be admitted and the margin recomputed on the basis of figures already on record; (ii) whether foreign exchange gain or loss arising from the business transactions was to be treated as an operating item while applying TNMM; (iii) whether the comparable company selected by the transfer pricing authorities was liable to be excluded for failing the employee cost filter, and whether the assessee was barred from challenging its inclusion because it had earlier used it in its transfer pricing study.

Issue (i): Whether an additional ground challenging the computation of the assessee's operating profit margin could be admitted and the margin recomputed on the basis of figures already on record.

Analysis: The relevant figures for operating profit and operating cost were already on record and the grievance was only arithmetical in nature. A legal ground based on admitted material can be entertained where it is necessary for correct determination of tax liability. The Tribunal therefore admitted the additional ground and directed recomputation of the margin on the basis of the correct operating profit and operating cost figures.

Conclusion: The additional ground was allowed, and the matter was remitted for arithmetical verification and recomputation.

Issue (ii): Whether foreign exchange gain or loss arising from the business transactions was to be treated as an operating item while applying TNMM.

Analysis: Foreign exchange fluctuation arising directly from export or business transactions forms part of the trading receipt or trading cost and partakes of the same character as the underlying transaction. The Tribunal also noted that the Safe Harbour Rules could not be applied retrospectively to the assessment year under consideration. On that basis, forex gain or loss could not be excluded from operating income or operating cost merely as a non-operating item.

Conclusion: Foreign exchange gain or loss was held to be an operating item.

Issue (iii): Whether the comparable company selected by the transfer pricing authorities was liable to be excluded for failing the employee cost filter, and whether the assessee was barred from challenging its inclusion because it had earlier used it in its transfer pricing study.

Analysis: The Tribunal accepted that the employee cost filter was relevant for functional comparability and directed verification of the assessee's computation showing that the comparable's employee cost was below the threshold applied by the TPO. The Tribunal also held that there is no estoppel against law, so the assessee was not precluded from challenging inclusion of a comparable merely because it had been included in the transfer pricing study earlier.

Conclusion: The comparable was directed to be excluded subject to verification, and the objection based on the assessee's prior selection was rejected.

Final Conclusion: The transfer pricing adjustment did not survive once the additional ground, the treatment of forex gain or loss, and the comparable selection issue were addressed, subject to arithmetical verification by the Assessing Officer/Transfer Pricing Officer.

Ratio Decidendi: In transfer pricing proceedings, a ground already supported by material on record may be admitted for correct determination of tax liability, foreign exchange fluctuation arising from business transactions is ordinarily an operating item under TNMM, and an assessee is not estopped from challenging an erroneous comparable even if it had earlier included it in its own study.

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