TMI Blog2015 (12) TMI 1464X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable to the international transactions of the assessee. In such a situation we are of the view that DRP was correct in giving the direction to the AO to carry out the necessary working capital adjustment in working out the average PLI of the comparables. We do not find any reason to interfere with the order of the DRP. - Decided against revenue Exchange loss / gain - treated as operating in nature for working out the PLI of the assessee - whether there was any nexus between foreign exchange loss / gain with the business activity of the assessee? - Held that:- Financial results of the assessee showed that its earnings from export on granite slabs to AE were ₹ 15,55,02,752/-. In our opinion, given this fact situation, foreign exchange gain / loss could have been considered as non-operational only if the AO could show that such gains / loss came out of hedging and transactions which were independent of the business revenue earning transaction of the assessee. The preponderance of probability will always weigh in favour of the assessee when its revenues are only from exports. In such a situation we cannot take a presumption that foreign exchange gain / loss were not havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds of which grounds 1, 7 and 8 are general needing no specific adjudication. There is no ground 3 in the appeal form. 03. Vide its grounds 2 to 4, Revenue is aggrieved on the directions given by the DRP on the working capital adjustment to be made while working out the Profit Level Indicator (PLI). 04. Facts apropos are that the assessee, a subsidiary of one Brachot Hermant N. V. A, Belgium, was in the business of manufacturing and exporting cut and polished granite slabs. Its international transactions with AE were on account of export of granite slabs and the revenue earned therefrom was ₹ 15,55,02,752/-. For justifying the prices charged for exports to its AE, assessee had carried out a TP study using capitaline data base. From such database itself assessee had selected 14 comparable companies. While working out the PLI of the comparable companies, assessee had made a working capital adjustment. As per the assessee, it was carrying no debtors and the exports made to the AEs were all on advance payments received from them. Thus to bring compatibility of the comparables on par with that of the assessee, assessee sought and made a working capital adjustment. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Assessee had given a detailed working capital study of the twelve comparables selected by it and worked-out the average working capital and the ratio of the average working capital to sales of such comparables. There is no case for the Revenue that the comparables considered were not carrying debtors, inventories and creditors. When assessee was not having any debtors and was entirely funded by advance received from AE abroad against supplies, then in order to bring parity between the results of the selected comparables and that of the assessee it is essential that adjustment for the working capital is made on the results of such comparables. Only then can the uncontrolled transaction become comparable to the international transactions of the assessee. In such a situation we are of the view that DRP was correct in giving the direction to the AO to carry out the necessary working capital adjustment in working out the average PLI of the comparables. We do not find any reason to interfere with the order of the DRP. Grounds 2 to 4 of the Revenue stand dismissed. 09. Vide its grounds 5 and 6, grievance raised by the Revenue is that DRP held the exchange loss / gain as operating in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax (FBT) is concerned, the same was not considered by the TPO as part of operating cost in the case of comparables and therefore the same should also not be considered as part of operating cost of the Assessee. We hold accordingly and direct the AO to compute the operating cost of the Assessee. Accordingly we are of the opinion that DRP was justified in directing the AO / TPO to consider foreign exchange gain / loss as operational in nature. Grounds 5 and 6 of the Revenue stand dismissed. 11. Now we take up appeal of the assessee. Assessee in its appeal has taken four grounds of which ground 4 is general needing no adjudication. 12. Vide its ground 1 and 2 assessee is aggrieved that adjustment sought by it for under utilisation of rated capacity was not allowed while comparing its results with that of the comparables selected for the TP study. 13. Facts apropos are that assessee had in its TP documentation worked out its PLI as under : (Rs.in crores) Sales 15.71 Less : Operating Cost 18.41 Operating Profit -2.70 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er studying the 14 comparable companies selected by the assessee came to a conclusion that these comparable companies which were facing the same business contingencies, had increased their sales volumes from that of the preceding previous year. Thus as per the TPO assessee could not bring out a case for making any adjustment for the depreciation while working out its PLI. AO / TPO thereafter computed the adjustment required u/s.92CA of the Act, by working out the PLI of the assessee without making any adjustment for depreciation. 16. Assessee s application before the DRP on this issue also did not meet with any success. DRP noted that though there was a 57% decrease in the sales of the assessee when compared with its sales for the preceding year, a similar trend existed in the case of Neelkanth Rock Minerals Ltd and Ceeta Industries Ltd which were in the list of selected comparables. Or in other words as per the DRP the reasons for under utilisation shown by assessee was adverse business environment, and this remained same for all similarly placed companies in this line of business. 17. Now before us, the Ld. AR strongly assailing the orders of authorities below submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, was not correct. No doubt, as mentioned by the Ld. AR, Rule 10B(1)(e) requires adjustment of differences between international transactions and the comparable uncontrolled transactions which would materially affect the net material margin. However, assessee here was unable to establish that the comparables had claimed depreciation after considering their capacity utilisation. Further assessee also could not establish the existence of a linear relationship between its depreciation cost and machine utilisation. We are therefore of the opinion that ground 1 and 2 of the assessee does not merit acceptance. Such grounds are dismissed. 20. Vide its ground 3 assessee is aggrieved that the AO while passing the order while giving effect to the DRP directions made an addition for the working capital adjustment whereas it was required to be reduced while working out the adjusted average PLI. 21. Assessee has produced before us a chart according to which the average working capital adjustment that was required to be done for working out the average PLI of the comparables was (-) 2.85%. TPO had however added 2.85% to the unadjusted average PLI of the comparables. We are of the opinion ..... 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