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2015 (9) TMI 1172 - AT - Income TaxTransfer pricing adjustment - Revenue is aggrieved by the direction of the DRP who had directed the TPO to exclude the forex loss from the computation of operating cost of the assessee - Held that:- In transfer pricing matters, comparisons are drawn in regard to transactions made by the assessee with its Associated Enterprises (AE) and transactions between the business entities who are unrelated parties. In that context operating cost of the assessee company which has transactions with its AEs is compared with operating cost of business entities that are not related to each other. While determining the operating cost, various factors come into play, which may be both internal as well as external. The decisions of each entity in respect of various factors controlling the cost will affect the operating cost. Various risk factors are taken into consideration while making financial commitments, one among them is risk pertaining to foreign exchange fluctuations. Since the holding period with respect to sundry creditors who are raw materials suppliers or debtors arising out of sale transactions is with the management which exposes the entities to forex risks. Therefore, the profit or loss arising out of foreign exchange fluctuations will be directly attributable to the operational cost which has to be essentially taken into consideration while arriving at the operating cost of the entities while computing the profit level indicator (PLI) in transfer pricing matters. Unless there is an abnormal situation resulting in abnormal forex fluctuations, the profit or loss arising due to forex fluctuations cannot be ignored while arriving at the operating cost for deriving the PLI in Transfer pricing matters. It is pertinent to mention here that in arriving at the operating cost in transfer pricing matters the principles of Cost Accounting will not be strictly applicable where cost of finance may be treated differently. For the afore-stated reasons we do not find any merit in the arguments advanced by the Ld. A.R. We hereby hold that profits or loss arising out of foreign exchange fluctuations has to be taken into consideration while arriving at the operation cost in transfer pricing matters. Accordingly, we hereby set aside the order of the Ld.DRP and uphold the order of the Ld. Assessing Officer who has only adopted the order of the Ld. TPO. - Decided in favour of revenue.
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