TaxTMI 
TaxTMI 
2017 (9) TMI 968
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....laring nil income. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short "the Act") was issued and complied with. The Assessing Officer noted the international transactions carried out by the assessee with Associated Enterprises (AEs) and he referred determination of arm's length price of the international transactions to the Transfer Pricing Officer (TPO). On perusal of transfer pricing study submitted under Rule 10D of Income-tax Rules, 1962 (in short 'the Rules'), the learned TPO noted following international transactions: Nature of transaction Method selected Total value transaction (Rs.) of Purchase of Components CUP 172,578,808 Sale of Components/Convertor CUP 855,430 Purchase of Capital Items CUP 2,341,600 Reimbursement of Expenses CUP 147,583 2.1 Regarding the functions carried out by the assessee, the learned TPO noted that till the year under consideration the assessee owned manufacturing facilities for only the last process (Canning) of the catalytic converters. The Coated substrate was impo....
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.... as most appropriate method, just to gloss over the facts and it does not capture the reality that the assessee was an independent entrepreneur and should be tested on the basis of own financial results and directed the assessee to carry out analysis of arm's length on the basis of Transactional Net Margin Method (TNMM). 2.5 In response, though the assessee objected rejection of 'CUP' method and adopting 'TNMM' as the most appropriate method for computation of the arm's length price, the assessee provided a list of 19 comparable companies with calculation of weight average operating profit margins for financial year 2005-06 and financial year 2006-07 at (-) 1.90%. 2.6 The learned TPO rejected the four comparables of the assessee on the ground of consistent loss-making companies and retained 15 comparables and there profit margin for financial year 2006-07 having arithmetic mean of 5.05% was considered for calculating the arm's length price. 2.7 The learned TPO rejected the 'CUP' method of the assessee on the ground that the assessee was operating as an independent entrepreneur and therefore its finances result should have been tested in their entirety. He also noted that t....
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....der: "7. Based on the discussing above, the following conclusions are made. (i) The most appropriate method shall be TNMM, OP/sales shall be the PLI. (ii) The comparables which shall be used are. S. No. Company F.Y.2006-07 1 Auto Gallon Inds. Pvt. Ltd. 4.86% 2 Bharat Technologies Auto Components Ltd. 3.51% 3 Design Auto Systems Ltd. 6.12% 4 Gajra Bevel Gears Ltd. 3.33% 5 Goa Auto Accessories Ltd. 3.33% 6 Haryana Roadways Engg. Corpn. Ltd. 2.60% 7 Hindustan Hardy Spicer Ltd. 5.35% 8 I A Industries Ltd. 3.45% 9 Jagan Lamps Ltd. -0.66% 10 K R Rubberite Ltd. 5.12% 11 P M P Components Pvt. Ltd. 10.78% 12 Rane N S K Steering Systems Ltd. 6.01% 13 Special Engineering Services Ltd. 9.24% 14 Standard Radiators Pvt. Ltd. 9.65% 15 X L O India Ltd. 3.09% Arithmetic Mean 5.05% The arms length price of international transaction is calculation as below. Total cost of the assessee : Rs.194,902,590 Operating profit margin of 5.05% : Rs.9,842,580 Less: operating loss shown : Rs.(-....
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....imposed by is AE as if the appellant is a captive entity. 5.2. The appellant had submitted that it had not hedged its currency transaction in Euro and therefore the entire loss was on account of currency fluctuation. There is no reason to ignore this material fact. Therefore, I hold that there was no reason to reject the CUP produced by the appellant. The appellant has brought to my notice that in the subsequent assessment year, where facts and circumstances are similar in the case of the appellant, the TPO has accepted the CUP and no addition has been made. Therefore, this also shows that there is merit in the CUP presented by the appellant. In view of this, it is important to appreciate the evidence of CUP presented by the appellant. The appellant has produced the evidence which was produced before the TPO in Annexure -I of his submission. 5.3. The appellant is manufacturer of catalytic convertor used in automobile industry. The same products were sold by the AE of the appellant to unrelated parties. The appellant had produced along with the bills and invoices the third party sales of the AE in the relevant period. There is a 'one to one' corre....
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....ign currency then the loss / gain on account of fluctuation in foreign currency can be held as operational in nature. Since assessee is not in such a business, respectively following the judgment of the Hon'ble ITAT in the case of DHL Express (India) Pvt. Ltd. (supra), the foreign exchange fluctuation loss should be excluded as non operational in nature. The appellant has suffered a loss of Rs. 1.24 crores on account of forex loss. By taking out this loss if the margin of the appellant is correctly calculated, then also the appellant falls within +/-5% of the ALP as per proviso to section 92C(2) of the IT Act. The calculation of the ALP margin as submitted by the appellant along with as calculated by the TPO is given below: As per TPO Revised 1. Operating Profit Margin 5.05% 5.05% 2. Total Cost of Ecocat 19.49 18.41 3. Operating Profit/Net Sales (1 X 2) 0.98 0.93 4. Operating Profit Shown (1.06) 0.059 5. Difference (3-4) 2.05 0.34 6. Purchases from AE 17.26 17.26 7. ALP (6-5) 15.21 16.91 8....
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....ndia during the same period had BS-II regulatory norms and thus, the list of raw materials sold by the AEs in Europe, cannot be compared with list of raw materials sold in India. According to him, this comparison of the price by the assessee and the 'CUP' method for benchmarking, seems to be an exercise in haste and without application of mind. He also supported his argument with 'OECD' guidelines in this regard. 3.2 On the contrary, the Ld. counsel relied on the order of the learned CIT-(A) and further submitted that the TPO in subsequent assessment year 2008-09 has accepted the 'CUP' method for benchmarking the international transactions of the assessee. Accordingly, he prayed that the order of the Ld. CIT-(A) on the issue in dispute might be upheld. 3.3 In the rejoinder, the learned Sr. DR submitted that accepting CUP method of benchmarking the transactions in subsequent years does not hold good as principle of res judicata in Income-tax proceedings is not applicable and each assessment year is a separate unit and what is decided in one year shall not ipso facto apply in subsequent years. 3.4 We have heard the rival submission of the parties on the issue in dispute. We ....
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....ute in facts and circumstances of the year under consideration. 3.5 In view of above discussion, we are of the opinion that assessee's international transactions cannot be benchmarked applying the 'CUP' method. 3.6 The TPO has adopted TNMM as most appropriate method for computing the arm's length price on the ground that the assessee operated as independent entrepreneur, as it caters to requirement of automobiles manufacturers in India like General Motors, Mahindra and Mahindra, and Ashok Leyland and compared the profit margins with the other comparables in similar market conditions. In our opinion, the approach of the learned TPO/AO is justified and we accordingly set aside the order of the learned CIT-(A) on the issue in dispute and uphold the order of the learned TPO/AO on the issue in dispute. 4. Now the second issue for adjudicating before us is whether the loss due to fluctuation in foreign exchange should be treated as nonoperative expenditure in the case of the assessee. 4.1 Before us the Ld. Sr. DR submitted that foreign exchange gain/loss arising out of the revenue transaction is required to be considered an item of operating revenue/cost both for the assessee....
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..... This was opposed by the Id. AR, who contended that forex gain/loss relates to the trading transactions of the assessee and hence the same was operating in the computation of OP/OC under the TNMM. 65. We find merit in the contention raised on behalf of the assessee about the inclusion of foreign exchange gain/loss in the operating revenue/costs of the assessee as well as that of the comparables. When we advert to the nature of such foreign exchange gain earned by the assessee, it has not been controverted by the Id. DR that the same is in ITA No.i54/Del/20i6 relation to the trading items emanating from the international transactions. If the foreign exchange gain/loss directly results from the trading items, we fail to appreciate as to how such foreign exchange fluctuation loss can be considered as non-operating. 66. The Special Bench of the Tribunal in ACIT Vs Prakash I. Shah (2008) 115 ITD 167 (Mum)(SB) has held that the gain due to fluctuations in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds simply on the ground that the foreign currency rate has increased subsequent to sale but prior....
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....judgment dated 4.5.2016 in ITA 279/2016, has held that: 'So far as the question of fluctuation of foreign exchange was concerned, the ITAT ruled that the relevant provision, i.e. 'Safe Harbour Rules' had not been notified for the concerned assessment year and were, therefore, inapplicable'. Thus the Hon'ble High Court did not disturb the operating nature of forex gain/loss as held by the tribunal. In view of the foregoing discussion, we are of the considered opinion that the amount of foreign exchange gain/loss arising out of revenue 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 Department is, therefore, dismissed." 4.6 As in the instant case assessment year involved is 2007-08, which is even prior to assessment year 2011-12, the definition of the operating expenses provided in safe harbour rules cannot be applied. 4.7 Thus, respectfully following the decision of the Tribunal in the case of McKinsey Knowledge Centre Private Limited (supra), we hold that foreign exchange fluctuation loss is part of a operating expenses. Accordingly, the finding of the....