TaxTMI 
TaxTMI 
TaxTMI 
2015 (3) TMI 140
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....y. The assessee declared three international transactions in its Audit Report. Two transactions relating to 'Trading business' are not disputed as the TPO accepted such transactions at arm's length price (ALP). The entire controversy rotates around the international transaction of 'Purchase of components of Plate Heat Exchanger and Braze Plate Heat Exchanger' amounting to Rs. 4.96 crore under the 'Assembly segment.' The assessee applied Transactional Net Margin Method (TNMM) as the most appropriate method. In its transfer pricing study, the assessee showed operating profit margin at 5.83% under this segment, as against the average profit margin at 6.55% of 14 independent comparables. That is how, the assessee claimed that its international transaction under 'Assembly segment' was at ALP. In computing the operating profit margin under this segment, the assessee made certain adjustments to the operating profits. In this appeal, we are concerned only with the adjustment for loss due to foreign exchange fluctuation (hereinafter also called 'forex loss'). The assessee claimed that forex loss of Rs. 50.04 lac under this segment was an item of non-operating expense. The same was, therefor....
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....the calculation by the application of the rate of 5.72% was incorrect, as the resultant figure came at `64.54 lac instead of Rs. 84.54 lac. The ld. CIT(A) agreed with the assessee's point of view in respect of calculation mistake, but did not accept that the point of differential rate between 5.72% and 1.40% for the purpose of TP adjustment. 3. The assessee is aggrieved against the TP addition sustained by the ld. CIT(A) primarily on account of treatment of forex loss as operating expense. 4.1. We have heard the rival submissions and perused the relevant material on record. The forex gain or loss is the difference between the price at which an import or export transaction was recorded in the books of account on the basis of rate of foreign exchange then prevailing and the amount actually paid or received at the rate of foreign exchange prevailing at the time of actual payment or receipt. Since such forex loss or gain is a direct outcome of the purchase or sale transaction, it partakes of the same character as that of the transaction to which it relates. The Special Bench of the Tribunal in the case of ACIT vs. Prakash I. Shah (2008) 115 ITD 167 (Mum) (SB) has held that foreign ex....
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.... of purchase transaction itself, the same cannot be viewed as an extra-ordinary item of expense. 4.3. Without prejudice to the above arguments, the ld. AR contended in the alternative that if forex loss was to be considered as part of operating cost, then, the forex loss in relation to the international transaction undertaken during the year alone should be considered. He invited our attention towards four components of such forex loss tabulated on page 13 of the impugned order, being, on account of purchases made during the year; on account of earlier year's purchases finally paid in this year; on account of translation difference of outstanding amounts at the end of the year; on account of purchase transactions with unrelated parties. His submission was that only the first component, being the forex loss in respect of international transactions undertaken during the year should be considered. 4.4. We again find this contention to be untenable. The obvious reason is that the calculation under TNMM proceeds on the basis of method of account consistently followed by the assessee. In the case of companies, it is only mercantile system of accounting which is applicable. Under mercan....
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....of the assessee for the reason that forex loss is a natural incident of import. Each item of import leads to forex gain/loss when there is a difference between the rate of foreign currency at the time of purchase and payment. When buying of goods is a core business of the assessee and there is a change in the rate of foreign exchange at the time of payment for goods purchased, such forex gain/loss is simply a recurring item and not any abnormal or non-recurring item of income or expense. Such forex loss/gain may be high or low, but cannot be construed as abnormal or non-recurring nature. The ld. AR accentuated on the forex loss as an abnormal expense and claimed that any payment of foreign currency at the rate above `44.81 was abnormal loss liable to be ignored from operating cost. In order to evaluate this contention, it is significant to note that the assessee applied TNMM as the most appropriate method. The calculation of ALP under this method is prescribed in rule 10B(1)(e). Clause (ii) of this sub-rule provides that the : 'net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is co....
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....nt of foreign currency fluctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment year under consideration. 4.9. Now we will deal with the decisions relied by the ld. AR in support of his case. The decision of the Delhi Bench in Sumitomo Corporation India Pvt. Ltd. VS. DCIT is in the context of interest which the tribunal held to be non-operating income. There is no reference to any foreign exchange fluctuation gain or loss in that case. The Delhi tribunal decision in Honda Trading Corp India Pvt. Ltd. VS. ACIT does not stand in view of our above discussion about the non-acceptability of abnormal loss theory in the context of forex loss. The decision of the Mumbai tribunal in DHL Express (India) Private Ltd. VS. ACIT does not throw any light on the preliminary question as to whether such forex loss/gain resulted from a trading or a capital transaction. 4.10. In contrast to the above, we find that there is a plethora of decisions rendered by various benches of the tribunal across the....
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.... of the working capital adjustment, if it is rightly due. Similar view has been taken by in Mercer Consulting (India) Pvt. Ltd. vs. DCIT in ITA No.966/Del/2014. In view of the foregoing discussion, we are of the considered opinion that the claim of the assessee for working capital adjustment cannot be rejected at the outset. The impugned order on this issue is set aside and the matter is sent back to the AO/TPO for verifying the calculation so made by the assessee in support of its working capital adjustment, and then allow it as per law, if available, after allowing a reasonable opportunity of being heard to the assessee. 6. In such fresh determination of the ALP, the TPO/AO would revise downwards the amount of TP adjustment as rectified by the ld. CIT(A) vide his order u/s 154. Further, such transfer pricing adjustment be made by considering the difference between the profit margin of comparables and that of the assessee and not by applying the profit margin of the comparables alone. 7. No other ground was argued by the ld. AR. The same, are therefore, dismissed as either general or not pressed or consequential. 8.1. The first ground of the Revenue's appeal is against the dele....