TMI Blog2015 (9) TMI 1172X X X X Extracts X X X X X X X X Extracts X X X X ..... ppliers 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tune of ₹ 3,51,11,952/- pertaining to the purchase of raw materials and it has to be excluded while determining the operating profit. Reliance was placed in the decision of the case DHL Express (India) Pvt Ltd ITA No.7360/Mum/2010 for the assessment year 2006-07 wherein the Tribunal held that exchange fluctuation do not form part of the operational income because these items have nothing to do with the main operation of the assessee. The Ld.DRP accepted the contention of the assessee and directed the ld. TPO to exclude foreign exchange loss/gain while computing the operating profit margin of the assessee. Aggrieved by the direction of the Ld.DRP, the assessee is now in appeal before us. 5. Before us Ld. D.R submitted that the profit/loss arising out of foreign exchange fluctuation towards purchase and sale activities of the assessee is revenue nature and therefore it has to be taken into the account while computing the operating cost which is in accordance with OECD guidelines. The Ld. D.R also placed reliance in the case of SAP Labs (TS-61-ITAT 2010), M/s. Four Soft (TS-518-ITAT-2011-HYD) Trilogy Ebusiness (TS-455-1-ITAT-2011-Bang) wherein it was held that forex loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P], the Delhi Tribunal held that Foreign exchange loss for computing operating margin should be excluded because they are abnormal loss on account of huge fluctuation in exchange rate. viii) United Nations Practical Manual on Transfer Pricing on Developing Company has also suggested that the term operating profit indicates more clearly on the operating activities which are relevant for transfer pricing purposes. 7. We have heard the rival submissions, carefully perused the decisions cited by both the parties and arguments advanced by them. 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 take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny gain or loss arising out of change in foreign currency rate in respect of transaction for import or export of goods is nothing, but inherent part of the price of import or the value of export. The Hon ble Supreme Court in Sutlej Cotton Mills Ltd. VS. CIT 116 ITR 1 (SC) has held that : Rs. where profit or loss arises to an asssessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business . When we read the ratio of the case of Sutlej Cotton (SC)(supra) in juxtaposition to that of the Special Bench in case of Prakash I Shah (supra), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. Operating expense is ordinarily an expense that a business incurs as a result of performing its normal business operations. As the business of Rs. Assembly done by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or loss as part of the operating cost or revenue, as the case may be, for both the assessee as well for the comparable companies. 4. M/s S Narendra vs. Addl CIT [ITA No. 6839/Mum/2012] 11. We have carefully considered the rival submissions in the light of material placed before us. The proposition that gain on foreign exchange if it relates to the business of the assessee is part and parcel of operating income is well established by the afore-mentioned decisions of the coordinate benches . In the present case, nothing has been brought on record to suggest that the gain made by the assessee on fluctuation of foreign exchange was not on account of business transactions of the assessee. In absence of any such material, following the aforementioned decisions of the Tribunal, it has to be held that the foreign exchange gain of the assessee is to be considered as part and parcel of the profit of the assessee and therefore should be included for the purpose of computing the profit margin of the assessee . 5. M/s Trilogy E-Business Software India Pvt. Ltd. vs. DCIT [ITA No. 1054/Bang/2011] 79 A 1 . Treating foreign exchange gain or loss and provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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