Contact us   Feedback   Annual Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2015 (9) TMI 1172 - ITAT CHENNAI

2015 (9) TMI 1172 - ITAT CHENNAI - TMI - Transfer 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 comp .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

luctuations. 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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. - I.T.A.No.983/Mds. /2014 - Dated:- 17-7-2015 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the issue is that the 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. 3. The brief facts of the case are that the assessee is a company, engaged in the business of manufacturing control cable, Antenna and Feeder cable and ignition cable etc., filed its return of income for the assessment year 2009-10 on 28.09.2009 admitting its income as ₹ 4,98,20,2990/-. The Ld. Assessing Officer re .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

lculation. The Ld. TPO relied in the decision of 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/gains should be considered as a part of operating income for the purpose of PLI computation because it is an integral part of sale proceeds. Therefore, the Ld. TPO included the forex loss while computing the revised margin of the assessee company. The Ld. Assessing Officer adopted the s .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rm 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 activi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

. The Ld. A.R. submitted before us that the difference in foreign exchange rate is not in operating expenses due to the following reasons:- i) Profit or loss due to fluctuation of currency rate at the time of actual payment or receipt on the outstanding amount, due to purchase or sale transactions, will amount to financial transactions and not an operating transaction. ii) As per Accounting Standard(AS)-11 the assessee company had booked cost of imported raw materials at the exchange rate preval .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s as difference in exchange rate amounting to ₹ 3,51,11,952/-which is a revenue expenditure and not an operating expenditure. v) Operating expenditure is expenditure incurred by the assessee in the course of the normal business operations and capable of being controlled by the assessee. Loss due to foreign exchange fluctuation is resulting from global factors affecting the respective currencies which are beyond the control of the assessee. vi) The Institute of Cost Accountancy of India in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

duction against business income but the same does not assume the character of operating expenses as it is not concerned with the hub activity of the business. Further in the case of Honda Trading Car India Pvt Ltd. [TS-135-ITAT-2013(Del.)-TP], 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 Com .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

at 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rd. The forex gain or loss is the difference between the price at which an import or export transaction was recorded in the books of account on the basis of rate of foreign exchange then prevailing and the amount actually paid or received at the rate of foreign exchange prevailing at the time of actual payment or receipt. Since such forex loss or gain is a direct outcome of the purchase or sale transaction, it partakes of the same character as that of the transaction to which it relates. The Spe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e 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 . Wh .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

. Assembly done by the assessee under this segment is not possible without purchases and forex gain is in relation to such purchase transactions, we have no hesitation in holding that it is an item of operating cost. 2. M/s. Cisco Systems Services B. E. India Branch vs. ADIT [ITA(TP) No.270/Bang/2014], 17. We have perused the orders and heard the rival contentions. The TPO had considered foreign exchange fluctuation gains to be non-operational in nature. This view was confirmed by the DRP statin .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n exchange fluctuation gain arising to the assessee on realization of trade debtor s, payment to creditors etc., were nothing but operational income….. 3. M/s CSR India Pvt. Ltd. vs. The ITO [IT(TP)A No.119/Bang/2011] 3.6 The Tribunal in the case of Trilogy E-Business had directed that the foreign exchange gain or loss should be considered as operating revenue or cost while computing the operating margin of the asssessee as well as the comparable. The relevant finding of the Tribunal read .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

…………………. As far as foreign exchange gain/loss being considered as not forming part of the operating cost, the reasoning of the revenue is that such loss or gain cannot be said to be one realized from international transaction though they may form part of the gain/loss of the enterprise and therefore they should be excluded while determining operating cost. On the above issue we find that the Bangalore Bench of ITAT in the case of Sap Labs India (P .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

or 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 fl .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

11] 79…… A…… 1. Treating foreign exchange gain or loss and provision for bad debts as nonoperating in nature and fringe benefit tax as part of operating cost: As far a foreign exchange gain/loss being considered as not forming part of the operating cost, the reasoning of the revenue is that such loss or gain cannot be said to be one realized from international transaction though they may form part of the gain/loss of the enterprise and therefore they should be exclude .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version