TaxTMI 
TaxTMI 
2017 (7) TMI 425
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....rder of the Learned TPO. 2. The Hon'ble DRP and the LAO erred in confirming the order of the Learned TPO which had rejected the transfer pricing documentation of the Appellant by not demonstrating the basis for rejection under section 92C(3) of the Income-tax Act, 1961 ("the Act"). 3. The Hon'ble DRP and the LAO erred in confirming the order of the Learned TPO which had not considered that the loss on account of cancellation of select forward purchase contracts is extraordinary in nature and hence should be excluded in computing the operating profit margin of the AE-export segment. 4. The Hon'ble DRP and the LAO erred in confirming the order of the Learned TPO which had held that the most appropriate method to determine the arm's length price of the international transaction of export of cotton bales (AE-export segment) is the internal Transactional Net Margin Method ('internal TNMM') without recognizing that the AE-export segment is not comparable with the domestic segment for the year under review. 5. The Hon'ble DRP erred in holding that the companies identified by the Appellant in its TP study as comparable to it u....
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....ice. The TPO noted that the assessee has non-AE and AE segments engaged in the sale of cotton bales. In the AE segment the assessee made an adjustment of Rs. 88,59,92,134 under the head 'Loss' due to default of forward purchase contract. The TPO was of the view that the assessee is dealing in the purchase and sale of cotton bales to AE as well as non-AE segments. The purchase for both the segments are made from various vendors in India at prevailing market price. The TPO took the average sale price of cotton bale as furnished by the assessee for AE segment as well as non-AE segment @ Rs. 13,141 per cotton bale and Rs. 14,723 per cotton bale respectively as against the average purchase price of cotton bale of Rs. 14,765 per cotton bale in AE segment and Rs. 13,943 per cotton bale in non-AE segment. Thus the TPO found that the profit margin in non-AE segment was 4.32 % on cost and in AE segment was (-) 11.91 %. The TPO noted that the loss in the AE segment is due to high purchase price and low sale price when compared to non-AE segment. It was also noted that the assessee has losses only in AE segment and there are profits in non-AE segment although the purchases are made locally inv....
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....the sales and purchase price per cotton bale for the AE segment and non-AE segment without appreciating the fact that the lower sale price in the AE segment was on account of the sale price agreed as per forward contract. Thus the assessee supplied the cotton bales to the AE on account of forward contract and has suffered losses which is extraordinary in nature. Thus the learned Authorised Representative has reiterated the assessee's stand as taken before the authorities below and submitted that the loss suffered by the assessee due to default of purchase forward contract of the vendor shall be treated as extra-ordinary in nature for the purpose of determining the ALP. 6. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that in the case of the assessee the economic and financial scenario of AE and non-AE are similar and comparable. Therefore when an internal comparable is available which is direct and close relationship to the transaction then as per the OECD Guidelines the internal comparable should be preferred than the external comparable. He has further submitted that once the internal comparable....
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....as well as purchase of cotton bales from local market. It is contended that the local market vendor has defaulted the forward contract obligation and therefore the assessee had to purchase cotton bales from the market at the prevailing price and supply the same to the AE at a lesser rate as per the forward contract. It is pertinent to note that the concept of forward contract is to hedge the fluctuation of the price in future and is adopted when the parties are dealing independently without any mutual interest. Therefore to avoid the risk due to the fluctuation of the price in future the parties enter into forward contract for purchase or sale of the goods at a pre-agreed price. In the case on hand, the assessee has entered into a forward contract with the AE. Since both the parties of the contract are related parties therefore, the agreement between the related party does not serve the very purpose of entering the forward contract because a loss to either of the party will not be the gain to the other party. The forward contract serves its purpose only between independent parties and therefore in the case of fluctuation in the price in future if protects the interest of the partie....
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....y with the margin of the segment where the appellant sold goods to domestic customers under forward contracts. We pray to the Hon. Bench to admit the above additional grounds of appeal." 10. We have considered the rival submissions as well as the relevant material on record. The additional ground No.1 is regarding working capital adjustment. We find that the assessee did not claim working capital adjustment either before the TPO or before the DRP nor the assessee has given any working in the TP study regarding working capital adjustment. The learned Authorised Representative of the assessee has submitted that the assessee raised advance from the AE and therefore an appropriate working capital adjustment has to be granted. We find that this claim of the assessee is not supported by the agreement as there is no clause for giving any advance against the purchase price payable by the assessee. Therefore if the assessee received loan or other advance which is not an advance against the export then the claim of the assessee cannot be accepted. Accordingly in the facts and circumstances of the case when the assessee has not claimed working capital adjustment before the authori....