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2017 (7) TMI 1349 - ITAT DELHIGain arising due to foreign exchange fluctuation - receivables from A.E. on account of export/rendering of services - whether revenue earned by the assessee from the activity of rendering services to the A.E. and cannot be excluded from the revenue for the purpose of computing margins of the assessee while comparing the same with the comparables - HELD THAT:- We concur with the earlier views of the Tribunal wherein it has been held that if the loss or gain arising due to fluctuation of foreign exchange on account of revenue receivables on exports then the same will be treated as part of operating cost or operating revenue of the assessee as well as comparable companies. Though the Ld. D.R. has placed reliance on Rule 10TA however, we find that the definition as provided under Rule 10TA of the Income Tax Rules are only for specific purpose to consider the price under Advance Price Agreement. Therefore, to avoid any further ambiguity and uncertainty in the process of advance pricing agreements, the definition has been provided under Rule 10TA which may not be adopted for the purpose of taking the actual margins of the assessee as well as the comparable companies for the purpose of determining the ALP under TNMM method. Thus, in view of the above facts, where the gain earned by the assessee due to foreign exchange fluctuation on the receivables which are revenue in nature, the claim of the assessee is allowed and consequently, the A.O./TPO is directed to compute the margins of the assessee as well as the comparable by considering the loss or gain arising due to foreign exchange fluctuation on revenue receivables as part of the operating cost or operating revenue as the case may be. This ground of the assessee appeal is allowed. Adjustment claimed by the assessee on account of idle personnel and rent paid in respect of new office as an abnormal cost to be excluded from the operating cost for the purpose of computing the margins of the assessee - The assessee is a wholly owned subsidiary of VTC Varginia, USA. The assessee is engaged in designing transformer components etc., under the projects provided by its A.E. VTC USA. Since the entire work has been outsourced by its A.E. to the assessee and therefore, the assessee is working only as a captive service provider of designing of transformers and transformer components. The assessee is remunerated by its A.E. on the basis of 250% of the remuneration of service engineers who are assigned to work on A.Es project. When it was found that the assessee could not utilise its capacity to the optimum level in comparison to the comparable companies and therefore, the Tribunal has taken a consistent view that substantial difference in the capacity utilisation warrants a proper adjustment in the margins of the comparable so that the loss to the assessee on account of un- utilisation can be equalised. In this case, it is not the case of the assessee that their capacity is un-utilisation comparison to the comparables. Therefore, the decisions relied upon by the Ld. A.R. of the assessee will not help the case of the assessee on the issue of claim of abnormal cost to be excluded for the purpose of computing the margins of the assessee. We find that the rent paid by the assessee for the new office as well as the salary paid to the engineers hired by the assessee is not an abnormal cost as the assessee has not brought any material on record to show that these office building as well as engineers who were hired from 1st April, 2008 could not be used for the purpose of execution of the work but it may the assessee's own decision not to charge its A.E. to compensate the assessee in respect of the remuneration of these engineers which was otherwise agreed between the parties as per clause-10 of the agreement. Thus when the assessee was to be compensated by the A.E. at 250% of the remuneration of service engineers then the salary paid to the service engineer cannot be considered as an abnormal cost. Hence, in view of the above discussion, we do not find any subsistence or merit in the claim of the assessee. Selection of comparable - WAPCOS Ltd., is a Government of India undertaking and once the TPO has accepted that the Government of India undertaking cannot be considered as a good comparable of the assessee then to maintain the rule of consistency, this company cannot be considered as a good comparable solely on this ground. Accordingly, once this company is found to be a Government of India undertaking this cannot be accepted as a comparable to the assessee as per the TPO's own finding in respect of other Government of India undertaking. Hence, we direct the TPO/A.O. to exclude this company WAPCOS Ltd., from the set of comparable. L & T Ramboll Cons. - maximum tolerance range on related party transaction should not exceed 25%. Though the assessee has not disputed the filter of 25% applied by the TPO regarding related party transaction however, once the TPO has applied this filter for the purpose of selecting the comparable companies it is incumbent upon TPO to verify the relevant record of each and every company considered for the selection in the set of comparable to see whether the related party transactions of the comparable companies are within the tolerance raised as applied by the TPO. We do not find any force in the contention of the Ld. D.R. that assessee has failed to produce the authentic record and complete details of this company because of the reason that it is the duty of the TPO to verify the relevant record at the time of selection of comparable companies. Therefore, once the Ld. A.R. of the assessee has filed the details of related party transaction of this company which show more than 25% then this issue requires a proper verification and examination. Accordingly, in the facts and circumstances of the case, we set aside this issue of verification of the related party transaction of this company namely L & T Ramboll Cons. to the record of the TPO/A.O. and then consider the comparability of this company only on the issue of related party transactions. Appeal of the assessee partly allowed.
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