TMI Blog2010 (8) TMI 762X X X X Extracts X X X X X X X X Extracts X X X X ..... m s length price (ALP), allowability of benefit of 5 per cent variation to the arm s length price, adjustment on account of risk factors, addition on account of foreign exchange fluctuation and in addition a legal issue has also been raised in the appeal of the assessee as to whether the Assessing Officer is bound by the order passed by the Transfer Pricing Officer (TPO). 2. Before we proceed to deal with the various grounds raised it will be appropriate to give a brief factual background of the cases. The assessee was engaged in the business of research and development (R D) in pharmaceutical industry through Indian companies. During the relevant year it had transactions with two associate enterprises (AE) i.e. M/s. IVAX Internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating margin on operating cost (%) 2003 Alpghageo (India) Ltd. 37.82% Choksi Laboratories Ltd. 35.30% Kitco Ltd. -9.73% NIS Sparata Ltd. 11.83% Vimta Labs Ltd. 26.08% Water and Power Consultancy Services (India) Ltd. 1.05% Ujjwal Ltd. 3.21% Arithmetic mean 15.08% 2.1 The Assessing Officer however noted that, incase of Kitco Ltd., one of the comparables, the company had been consistently incurring losses. The operating margins in this case were -9.73 per cent. -2.24 per cent and -0.02 per cent respectively for the years 2003, 2002 and 2001. Assessing Officer therefore asked the assessee to explain as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cent the Assessing Officer did not allow adjustments of 5 per cent variation from the arm s length price in terms of the provisions to section 92C(2). On the basis of arithmetic mean of the comparable cases, the Assessing Officer made the adjustment of Rs. 37,45,626. The Assessing Officer also made additions of Rs. 9,09,970 on account of foreign exchange fluctuation in relation to the foreign currency loan. The actions of the Assessing Officer was disputed by the assessee in appeal. 2.2 In appeal assessee submitted that Kitco Ltd. could not be excluded only on the ground that it was making losses. It was pointed out that it was not a persistent loss making company and the margin in financial year 1999-00 was 2.10 per cent. Its busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factors. It had also not demonstrated the method of price setting mechanism and risk factors involved therein CIT(A) therefore held that the assessee was not entitled to claim any adjustment on this account at the appellate stage. It was also observed by him that the risk adjustment could not be claimed as an afterthought when 5 per cent threshold had already been reached. It was also observed by him that TNMM method was a broad method which accommodated all general non-quantifiable assumptions. Accordingly he rejected the claim of risk adjustments. CIT(A) also did not allow the benefit of 5 per cent cover as the difference between arithmetic mean of ALP and the price declared was more than 5 per cent. CIT(A) however deleted the addition m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) has held that ECB loan was on capital account and therefore the foreign currency gain was capital in nature and has accordingly deleted the addition. The Learned AR for the assessee reiterated the stand taken earlier that the loan was on capital account. He referred to the loan agreement placed at page 217 of the paper book in which it is clearly mentioned that the assessee had taken the loan to establish a formulation pilot plant, analytical laboratory and office. Loan was therefore obviously for acquisition of capital assets. Any gain/loss arising on account of fluctuation of foreign currency loan taken for acquisition of capital assets has to be treated as capital,in nature in view of the judgment of Hon ble Supreme Court in case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to the amendment of sub-section (4) of section 92CA with effect from 1-6-2007 the order of TPO was not final and binding on the Assessing Officer and the Assessing Officer could take a transfer price other than one determined by the TPO after hearing the assessee and after recording the reasons. In view of the special bench decision the Assessing Officer has to pass a fresh order after hearing the assessee on the TPO report. As regards the issue of exclusion of a comparable based on losses and 5 per cent adjustments on account of variation in ALP, it was pointed out by the Learned AR that these issues had been considered by the Tribunal in case of Sony India (P.) Ltd. ( supra ). It has been held by the Tribunal that a comparable cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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