TaxTMI 
TaxTMI 
2022 (12) TMI 1074
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....argin, the assessee made certain adjustments to its operating cost base. 3. On a reference from the AO, the TPO passed an order dated 14.1.2016 determining a TP adjustment of Rs.56,87,83,323 in the manufacturing segment without granting the adjustments made by the assessee to its operating cost base. According to the assessee, the TPO made the adjustment at the entity level by taking into consideration the unrelated party transactions, instead of restricting the adjustment to the value of international transactions. The draft assessment order was passed by the AO incorporating the above TP adjustment. The DRP rejected the objections of the assessee and upheld the TP adjustment. Consequently, the final assessment order was passed sustaining the TP adjustment of Rs.56,87,323. Aggrieved, the assessee is in appeal before the Tribunal. 4. Though various grounds of appeal are raised by the assessee, the ld. AR submitted that the issues that arise for consideration in this appeal pertains to the adjustments not allowed to the operating cost in the manufacturing segment vide ground Nos.5, 6 & 9 are as follows:- i.Adjustment towards fluctuation of foreign currency (Ground 5) ....
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.... No.5 reads as follows:- "5. The learned AO/ learned TPO / Hon'ble DRP has erred in not granting economic adjustments towards adverse effect of forex due to depreciation of Indian Rupees resulting in incremental import costs which is not attributable to the transfer pricing of its purchase of raw materials from its AEs." 11. The brief facts of the issue are that the assessee imports a considerable amount of raw material for undertaking the manufacturing operations in India in order to meet the stringent quality requirements. In view of the business model it bears significant risk on account of foreign exchange fluctuation. The assessee enters into contracts with its customers in India which is reviewed and revised year on year. While negotiating the price, one of the aspects taken into consideration is the cost of materials to be imported from Japan for manufacture in India. During the FY 2011-12, Yen rates were fluctuating. Subsequent to its commitment of the sale price with the customers, rupee depreciated significantly and therefore the assessee had to incur additional cost of manufacture, which could not be recouped as the assessee had committed to the sale price un....
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....l number of cases. Further, the Assessee has negotiated a better price in the subsequent years with its customers and there is a gradual increase in the selling price in the subsequent years.Such fluctuation being due to external factors, there would be no reason for the AE to revise its rate contracts where components have been sold broadly at consistent prices. It is to be noted that there has been an extraordinary and significant depreciation in INR over Yen/USD during the year when compared to the previous years. The Assessee's profitability is significantly impacted as a result of forex fluctuation. As adjustment made was towards exchange fluctuation component included in the raw material cost, even though the purchase rate of raw material has remained constant, the Assessee has paid more in absolute terms merely because of the difference in exchange rate from the earlier year. 14. In light of the above, the ld. AR submitted that an adjustment for the abnormal impact due to foreign currency fluctuation during the year, ought to be made on the value of import purchases made during the year. 15. The Ld. AR contended that the assessee had to honou....
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....r change in the new search process which was essential to have current year data and the filters applied earlier need to be applied now to maintain consistency in approach. The DRP further held that abnormal losses indicate that it was not a normal loss because financial analysis was triggered for FAR and this comparable fails at the very first step. In view of cogent reasons recorded by the TPO and DRP, we are unable to see any infirmity and perversity in these findings in rejection of Orbit Industry as a comparable. On the issue of adjustment of exchange fluctuation, loss incurred by the assessee, we observe that it is a well accepted principle of Transfer Pricing regulations to compare like with like and eliminate the differences if any, by suitable adjustment. The said principle clearly provides for adjustments in margins of the enterprise entering into international transactions for any differences between such international transactions and the transaction of comparables or between the enterprise entering into internationals transactions and comparable companies. The foreign exchange element also needs consideration. Rule 10B(3) of Income Tax Rules, 1962 provides that an appr....
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....has to be eliminated. The revenue authorities and TPO are duty bound to know that the TNMM visualizes the undertaking of a thorough comparability analysis and elimination of the differences through the requisite adjustments. 22. In the case in hand, admittedly the average exchange rate of Thai Bhat during October, 2005 to March 2006 was 100 Thai Bhat equivalent to INR 110 and after consideration of said average exchange rate, price of sale of goods had to be agreed upon with the customers. The DR has not disputed the point that during April 2006 to September 2006 at the time of purchase, the exchange rate of Thai Bhat was substantially increased and the average exchange rate of Thai Bhatt was increased to 100 Thai Bhat = INR 119. Accordingly, we can not rule out and ignore this factual matrix emerged from the fluctuation of foreign exchange rates that while prices of purchases and import made by the Assessee have increased, the sale price of exported goods remained on the lower side which is an important element to materially affect the price in the open market. In this situation, we are inclined to hold that the authorities below should have considered the said difference....
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....of the ld. AR. It is normal that exchange rate is subject to fluctuation due to economic conditions. While determining the ALP, one has to consider these factors, more so, our view is fortified by the decision of the Tribunal in the cases of Honda Trading Corp. India Pvt. Ltd. v. ACIT in ITA No. 5297/Del/2011 for the assessment year 2007-08 and DHL Express (India) Pvt. Ltd. v. ACIT in ITA No. 7360/Mum/2010 for the assessment year 2006-07. Accordingly, we direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment.' Accordingly, this issue is remitted to the file of AO for fresh consideration." 40. Following the aforesaid decision of the Tribunal, we remit this issue to the AO/TPO with similar directions for fresh decision." 22. Considering the judicial precedence and the materials submitted, we remit this issue to AO/TP with a direction to consider the foreign exchange fluctuation adjustment for comput....
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.... similar issue. The Hon'ble Tribunal has held that '30. This issue came up for consideration before the Chennai Tribunal in the case of Gates Unitta India Co. (P.) Ltd. v. Dy. CIT [2017] 84 taxmann.com 69 wherein it was held as follows:- "5. Before us, ld. A.R submitted that 90% of the raw materials of the assessee are imported as such customs duty adjustments to be made and it includes Rs. 4.31 crores pertained to the customs duty in the manufacturing segment. In principle the customs duty adjustments is allowed in view of the Co-ordinate Bench decision in the case of Motonic IndiaAutomotive (P.) Ltd. v. Asstt. CIT [2016] 73 taxmann.com 235 (Chennai - Trib.) wherein held that: '6.1 At this stage, it is pertinent to mention the finding of the Pune Bench in the case of Demag Cranes & Components (India) Pvt. Ltd. v. DCIT (supra) dated 4-1-2012 in ITA No. 120/PN/2011, which is as follows : "37. We have heard the parties and perused the available material on records in the light of the second limb of the ground 4(b). It is relevant mentioned that we have already analysed the relevant provisions of Income-tax rules vis a vis the scope of the adjus....
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....f business that the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and profits in fit cases. We also do not agree with the authorities below that the onus is on the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in public domain. In such a situation, i.e. when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of assessee's operations and complete facilities ensuring a reasonable indigenous raw material content was not in place. The assessee's claim is that it was in these circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. None....
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....issue to the AO/TPO for fresh consideration with similar directions. This ground is allowed in favour of the assessee for statistical purposes. 25. Ground No.9 by the assessee is as follows:- "9. The learned AO/ learned TPO / Hon'ble DRP has erred in not appreciating that the transfer pricing adjustment, if any should be restricted to the international transactions of the Assessee." 26. The ld. AR submitted that the action of the TPO in determining an adjustment by taking into account the transactions with unrelated parties is wholly erroneous and is contrary to the provisions of the Act and the rules made thereunder. It is submitted that in terms of Section 92CA of the Act, the Assessing Officer can refer the matter to the TPO for computation of ALP only in relation to international transaction and the TPO is empowered to compute the ALP only of the said international transaction. It is submitted that no adjustment can be made in respect of transaction entered into with non-AEs as the same are presumed to be at arm's length and are not subject to transfer pricing provisions. Therefore the action of the TPO is wholly without jurisdiction. Moreover, it is submitte....
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....as accepted that purchase of raw material and components by the assessee from its AE is at arm's length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. 56. In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee." 29. Respectfully following the above decision of the coordinate bench of the Tribunal, we hold that the transfer pricing adjustment should be restricted only to the international transactions with the AE. This ground is allowed in favour of the assessee. 30. The next issue for consideration is recomputation of operating profit margin pursuant to the MAP resolution which is raised by the assessee in the form of additional ground. 31. During the year under consideration, the assessee entered into international transactions with its AEs situated in Japan, and i....