TMI Blog2013 (9) TMI 231X X X X Extracts X X X X X X X X Extracts X X X X ..... f accounting and not cash system of accounting. The loss has been incurred for hedging of foreign currency fluctuation involved in sales invoices on the basis of forward contracts, which is a business decision to safeguard its interest. The loss has been incurred on the basis of scientific method in the ordinary course of business. The loss being based on a scientific method, on the basis of contractual liability with banks and on mercantile system has to be allowed to the assessee following Hon'ble Supreme Court judgment in the case of Woodward Governor India (P.) Ltd. [2009 (4) TMI 4 - SUPREME COURT] - Allowability of the loss on actual payment in A.Y. 2009-10 has been made subject to the allowability of the loss for AY. 2008-09. This stand of the DRP itself negates the observations of assessing officer that it is a notional loss and establishes that it is a business loss incurred by the assessee on mercantile system which method is consistently followed by the assessee - Allowed the foreign exchange fluctuation loss to assessee in this year – Decided in favor of Assessee. - IT Appeal No. 5895 (Delhi) of 2012 - - - Dated:- 8-3-2013 - R. P. Tolani And Shamim Yahya, JJ. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nouncements on the issue) and not allowing the risk adjustment to the appellant: 2.7 disregarding multiple year prior years' data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2007-08) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation: 2.8 disregarding judicial pronouncements in India in undertaking the TP Adjustment. 2.2 The corporate grounds are as under: 3. On the facts and circumstances of the case, and in law the Ld. AO and the DRP erred in disallowing the loss of ₹ 20,55,724/- incurred by the assessee from foreign exchange forward contracts entered into by it with banks and calculated with reference to the prevailing spot rate as on the balance sheet date ('Mark to Market losses'). 3.1 That on the facts and circumstances of the casco and in law the Ld. AO and the DRP erred in holding that Mark to Market losses are notional in nature. 3.2 That on the facts and circumstances of the case, and in law the Ld. AO and the DRP erred in disallowing the Mark to Market losses even though Ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Reimbursement of expenses (paid) 13.18 lakhs Comparable Uncontrolled Price ('CUP') Method 3 Reimbursement of expenses (received) 15.16 crore CUP Method 3.3 Economic analysis undertaken by assessee BIPL in its Transfer Pricing documentation: Benchmarking analysis Method Used TNMM Profit Level Indicator (PLI) Operating Profit/ Total Cost ('OP/TC') No. of Comparables 6 Average OP/TC of comparables 8.08% Data used Average of FY 2007-08, FY 2006-07 FY 2005-06 Company's OP/TC 16.42% 3.4 During the course of the assessment proceedings, the Learned Transfer Pricing Officer (Ld. TPO) issued a show-cause notice to the appellant dated July 13, 2011 asking various queries. The appellant made various submissions in reply to the show cause. The international transactions entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable company, viz., UB Engineering from the above search and rejected the other 6 companies on various grounds such as functional dissimilarities, significant related party transactions, non-availability of Annual reports etc. 3.9 The Ld TPO finally arrived at a set of 6 comparable companies in the TP Order as given below. S.No. TPO's Comparables Working capital adjusted OP/TC margin 1. Mahindra Consulting Engineers Ltd. 31.37% 2. Alphageo (India) Limited 41.27% 3. Stup Consultants Limited 33.33% 4. Semac Limited 51.71% 5. Kirloskar Consultants Ltd. 30.47% 6. UB Engineering Ltd. 5.00% Mean 32.19% 3.10 The working capital adjusted average mark-up on cost of 32.19% was higher than the mark up on cost of 16.75% of BIPL (margin used by the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible. Therewith, with these short comings a proper comparison cannot be made and it is very difficult to determine amounts items of costs such as employee costs, etc. 4.2 If Semac is removed from the comparables set, and all other comparables selected by DRP are accepted even, then comparable companies works out to 19.75% and the same is within the 5% range of the appellant's OP/TC margin of 16.42% as allowed under the safe Harbour proviso to Section 92C(2) of the Act and accordingly, the appellant's international transactions could be held to be satisfying the arm's length standard under the Indian Transfer Pricing Regulations. 4.3 With respect to Semac Ltd., if Semac is to be accepted as a final comparable, even where annual report is not legible for the FY 2007-08, and it is difficult to determine amounts of each line item of costs such as employee costs etc., then on same parity Consulting Engineers and Development Consultants comparables should be included in the final set of comparable companies. 4.4 The TPO rejected the comparables on the basis that it is deriving majority of its income from engineering Assignment and no segmental information is avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Indian Transfer Pricing Regulations. 5. Apropos corporate additions, brief facts are: 5.1 During the previous year 2007-08, the appellant entered into foreign exchange forward contracts with banks in order to hedge foreign currency fluctuation and incurred a (net) foreign exchange loss of ₹ 20,55,724/- as a result of marking to market the forward contracts that were outstanding on March 31, 2008. 5.2 Ld. Counsel for the assessee Shri Sandeep Chaufla contends that: (i) There is no dispute about the incurrence of this loss as in the subsequent year the AO after due verification has allowed these losses. (ii) Similarly, there is no dispute on the method of accounting followed by the assessee is mercantile as the AO has recorded this fact in the assessment order. (iii) It is not disputed that these losses have been recognised by the assessee in accordance with applicable accounting standards/policies in this regard. (iv) The AO has raised only dispute that this loss is not allowable as deduction in the year of incurrence computed under mercantile system by following the accounting standards in this respect or at the time of realization of export proceeds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to Security Contract Regulation Act, whereas sec. 2(ac)/2(h) thereof refers to derivate as stocks, bonds, debenture etc. 5.8 The loss of ₹ 20,55,724/- is allowable as deduction in AY 2008-09 as the same was computed as per mercantile system of accounting continuously followed by assessee as per section 145(1) of the Act. 5.9 Such loss was computed as per accepted accounting principles/standards that were not have not been disputed by AO. This is further evident from the DRP order for succeeding year recognizing the fact of actual payment of loss by assessee. Therefore, it has directed in A.Y. 2009-10 that if this loss has not been allowed in A.Y. 2008-09, then it should be allowed in A.Y. 2009-10. 5.10 There is no provision in the Act that calls for disallowance of such losses. Therefore, such loss arising out of binding contracts is not notional or contingent. 6. Ld. CIT (DR) is heard on T.P. adjustments and corporate addition i.e. disallowance of loss. Ld. CIT (DR) supports the order of AO /TPO/DRP. 7. We have heard rival contentions and perused the material available on record. Apropos T.P. addition, the DRP has directed the TPO to include the comparable c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feguard its interest. The loss has been incurred on the basis of scientific method in the ordinary course of business. The loss being based on a scientific method, on the basis of contractual liability with banks and on mercantile system has to be allowed to the assessee following Hon'ble Supreme Court judgment in the case of Woodward Governor India (P.) Ltd. (supra). Our view is further fortified by the fact that DRP in its own order in subsequent year has itself held that the issue about the loss on mercantile system is pending dispute in A.Y. 2008-09. Therefore, the allowability of the loss on actual payment in A.Y. 2009-10 has been made subject to the allowability of the loss for AY. 2008-09. This stand of the DRP itself negates the observations of assessing officer that it is a notional loss and establishes that it is a business loss incurred by the assessee on mercantile system which method is consistently followed by the assessee. Under these circumstances, we are inclined to allow the foreign exchange fluctuation loss to assessee in this year. This ground of the assessee is allowed. 9. In the result, assessee's appeal is partly allowed for statistical purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
