2019 (6) TMI 478 - AT - Income Tax

Tribunal Ruling: Forex Gain/Loss as Operating Revenue, ALP Determination, International Transactions

INA Bearings India Pvt. Ltd. Versus DCIT, Circle-1 (2), Pune And ACIT, Circle-11, Pune Versus INA Bearings India Pvt. Ltd.

The Tribunal allowed the assessee's appeal partially, directing the inclusion of forex gain/loss as an item of operating revenue/cost. The Tribunal ... TPA - computation of ALP of the Manufacturing as well as Trading segment by excluding Foreign Exchange Gain/Loss (forex) - inclusion or otherwise of forex gain/loss in the computation of operating margin under the TNMM both for the assessee as well as the comparables - HELD THAT:- There is no doubt that in such rules, forex gain/loss has been treated as non-operating. However it is pertinent to note that such rules are not applicable to the assessment year under consideration. Even the reliance of the DR on certain decisions taking cognizance of safe harbour rules for the period anterior to their insertion in other contexts, does not improve the case of the Department. Following the judgment in Principal Commissioner of Income Tax Vs. Ameriprise India Private Limited [2016 (3) TMI 1272 - DELHI HIGH COURT] holding foreign exchange gains earned by the assessee, which is in relation to trading items and emanating from international transactions, cannot be treated as non-operating losses and gains, the Hon’ble Delhi High Court in Pr. CIT VS. B.C. Management Services Pvt. Ltd. [2017 (12) TMI 255 - DELHI HIGH COURT] reiterated held that foreign exchange fluctuation in relation to trading transactions, prior to safe harbor rules from 2013, is operating gain or loss. The amount of foreign exchange gain/loss arising out of trading transactions is required to be considered as an item of operating revenue/cost, both for the assessee as well as the comparables. The ground taken by the assessee is, therefore, allowed. Availability of +-5% benefit in determining the ALP - NIL ALP of the international transaction of Payment of management fees - HELD THAT:- Second proviso to section 92C(2) provides that if the variation between the ALP and the price at which the international transaction has actually been undertaken does not exceed the specified margin, which at the material time was 5%, then the price at which the international transaction has actually been undertaken shall be deemed to be the ALP. The effect of this proviso is that so long as the difference between the ALP as determined by applying one of the specified methods and the price at which the international transaction was undertaken is within the prescribed percentage, no transfer pricing adjustment can be made. This proviso was substituted by the Finance (No.2) Act, 2009 w.e.f. 01-10-2009. Explanation to sub-section (2) of section 92C has clarified : “that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before the Assessing Officer as on 1st October, 2009”. Thus, it is overt that even for the assessment year under consideration, namely, 2010-11, the benefit of the second proviso would be available by virtue of the Explanation given at the end of sub-section (2) of 92C. We, therefore, hold that the CIT(A) was justified in extending the benefit of +/-5% margin in determining the ALP of the international transactions. This ground of the Revenue fails. Exclusion of additional companies selected by the TPO from the list of comparables - HELD THAT:- AR, at the very outset, submitted that even if all the companies directed to be excluded by the ld. first appellate authority, against which the Revenue has come up in appeal before the Tribunal, are included, its profit margin would be within the permissible range of +/-5%, if forex gain is treated as an item of operating nature. DR did not dispute this position. In view of the rival but common submissions, though we technically accept the ground of the Revenue, but it would not lead to increase in the total income by reason of any transfer pricing addition. We set aside the impugned order and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction of Trading segment in conformity with the foregoing discussion. Issues:1. Computation of Arm's Length Price (ALP) excluding Foreign Exchange Gain/Loss2. Determination of NIL ALP for Payment of Management Fees3. Grant of +/-5% benefit in determining ALP4. Exclusion of additional companies as comparablesIssue 1: Computation of Arm's Length Price (ALP) excluding Foreign Exchange Gain/LossThe appeal involved a dispute regarding the computation of ALP for the Manufacturing and Trading segments by excluding Foreign Exchange Gain/Loss (forex). The Tribunal considered whether forex gain/loss should be included in the operating revenue/costs of the assessee and comparables. The Tribunal found merit in the assessee's contention that forex gain/loss related to trading items should be considered as operating revenue. Citing precedents, the Tribunal held that exchange rate fluctuation gain/loss arising from exports cannot be detached from the sale proceeds and should be treated as operating gain or loss. The Tribunal rejected the argument that forex gain/loss should be considered non-operating based on Safe Harbour rules, stating that such rules were not applicable for the relevant assessment year. Ultimately, the Tribunal allowed the assessee's ground, directing the inclusion of forex gain/loss as an item of operating revenue/cost.Issue 2: Determination of NIL ALP for Payment of Management FeesThe second issue involved the determination of NIL ALP for the international transaction of Payment of management fees. The Transfer Pricing Officer (TPO) recommended a transfer pricing adjustment for management fees paid to an Associated Enterprise (AE), considering the services as stewardship for which no payment was necessary. The TPO proposed a transfer pricing adjustment, but the Assessing Officer (AO) did not make the addition. The Commissioner of Income Tax (Appeals) erroneously adjudicated on the issue without any addition being made, leading to an impermissible enhancement. The Tribunal vacated the order on this issue, restoring the position as per the assessment order.Issue 3: Grant of +/-5% benefit in determining ALPThe Tribunal addressed the grant of a +/-5% benefit in determining the ALP for international transactions. The Tribunal upheld the Commissioner of Income Tax (Appeals)' decision to extend the benefit of the second proviso to section 92C(2), allowing a margin of 5% for determining the ALP. The Tribunal ruled that the benefit applied even for the relevant assessment year, 2010-11, as per the Explanation to section 92C(2). Consequently, the ground of the Revenue challenging this benefit failed.Issue 4: Exclusion of additional companies as comparablesThe final issue pertained to the exclusion of additional companies selected by the TPO from the list of comparables. The TPO introduced fresh comparables for determining the ALP of international transactions, leading to an addition challenged by the assessee before the Commissioner of Income Tax (Appeals). The Commissioner directed the exclusion of certain companies as comparables, disputed by the Revenue. The Tribunal noted that including the excluded companies would not impact the profit margin within the permissible range of +/-5% if forex gain was treated as an operating item. Thus, while technically accepting the Revenue's ground, the Tribunal ruled that it would not result in any transfer pricing addition.In conclusion, the Tribunal allowed the assessee's appeal partially and dismissed the Revenue's appeal partly on merits and partly due to becoming academic. The matter was remitted back to the Assessing Officer/Transfer Pricing Officer for a fresh determination of the ALP of the international transaction of the Trading segment.