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2021 (7) TMI 711 - ITAT PUNEAdjustment towards foreign exchange fluctuation - non-consideration of impact of abnormal movement in the foreign exchange rates while computing the operating profit margin - HELD THAT:- The assessee is claiming reduction in the profit margin of the comparables on the ground that the foreign exchange fluctuation rate varied at 13.54% in this year in comparison with the preceding year. We fail to appreciate as to what is the rationale of comparing the foreign exchange rate for this year with the preceding year when the transactions of the assessee and those of the comparables relate only to the year in question. The foreign exchange rate fluctuation has impacted the assessee in the same way as the comparables. That can't be a reason for allowing any adjustment in the profit margin of the comparables. Adverting to the facts of the instant case, it is seen that the assessee treated foreign exchange fluctuation loss as non-operating and thus computed its operating margin accordingly. Such treatment has been accepted by the TPO also. Once the forex loss has itself been treated and accepted as non-operating for self and the comparables, the same become neutral qua the computation of operating margin, leaving no room for any further adjustment. We, therefore, reject the claim of the assessee. The ground fails. Adjustment towards excess Custom duty paid on imports by it vis-à-vis the comparables - HELD THAT:- There is no merit in the contention of the assessee. Ordinarily, costly purchases are coupled with the increased sale price of final products, thereby leaving the ultimate profit margin at almost the same level as that with cheap purchases. There can be no adjustment just for the assessee making more imports and consequently paying higher custom duty vis-à-vis the comparables making indigenous purchases and paying no custom duty. It has not been shown that the import price of the assessee when added with custom duty was higher than the indigenous purchase price of the comparables or that the goods manufactured by it with such costly purchases were sold at same prices as the comparables. As admittedly, there is no difference in custom duty rate paid by the assessee and its comparables, there can be no question of allowing any reduction in the profit margins of comparables on this score simply because the assessee's percentage of import to total materials purchased is higher than that of the comparables. This ground is therefore, dismissed. Comparable selection - HELD THAT:- Bharat Earth Movers Limited as functionally different and further it was a government company with fixed customer base thus be excluded as eligible comparable. JCB India Limited - We uphold the inclusion of JCB India Limited in the list of comparables. At the same time, the TPO is directed to carry out reasonably accurate adjustment to the margin of JCB India Ltd. so as to eliminate the effect of the amalgam of the a microscopic Trading sales and service income, after affording hearing opportunity to the assessee. AR argument stating that if, at all, JCB Ltd. was to be considered as comparable, then the assessee's Manufacturing and Trading activities should also be merged and only one ALP be determined on a consolidated basis - We are not convinced with this argument. The reason is that the assessee itself benchmarked both the segments separately by considering distinct comparables with varying margins. The TPO accepted the ALP under the Trading segment, thereby assigning finality to that. Now, the assessee cannot turn around at this juncture and claim clubbing of the two, which would entail the doing of the entire transfer pricing exercise all over again by the assessee (including preparing a new Transfer pricing study report with altogether new process of selecting comparables) and also the TPO doing everything ab initio. It is because of the difference in the precise nature of Manufacturing and Trading activities having different functions, assets and risks that we have directed hereinabove that suitable adjustment should be made to the profit margin of JCB Ltd. on account of the infusion of its proportionately infinitesimal Trading and Services activities in the Manufacturing activity. Inappropriate computation of working capital adjustment - HELD THAT:- We set-aside the impugned order on this aspect and remit the matter to the file of AO/TPO for re-computing the working capital adjustment by adopting the correct figures. Transfer pricing adjustment on entity level rather than restricting it to the AE transactions - TPO computed the transfer pricing addition by considering revenues from 'Manufacturing segment' in totality at the entity level - HELD THAT:- This issue is fairly settled by judgment of Hon'ble jurisdictional High court in CIT Vs. Phoenix Mecano (India) Pvt. Ltd[2017 (6) TMI 1240 - BOMBAY HIGH COURT] holding that the transfer pricing adjustment made at entity level should be restricted to the international transactions only - We, therefore, direct the AO/TPO to restrict the transfer pricing addition to the extent of international transactions under the segment of 'Manufacturing activity'. Recomputation of losses to be carried forward in case resultant transfer pricing adjustment is less than voluntary adjustment offered in turn of income - Additional ground raised - HELD THAT:- The additional ground raised by the assessee is for allowing adjustment towards voluntary transfer pricing addition offered by the assessee in the computation of total income. In this regard, we direct the TPO to allow necessary relief qua the suo motu transfer pricing adjustment offered by the assessee, if the resultant transfer pricing addition turns out to be more than that. The transfer pricing addition made in the impugned order under the Manufacturing activity segment is set aside and the matter is restored to the file of the AO/TPO for recomputing the same in accordance with the directions and observations given hereinabove.
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