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DCIT, Circle-11 (1) , New Delhi Versus Ecocat India Pvt. Ltd.

2017 (9) TMI 968 - ITAT DELHI

TPA - addition on account of arm’s length price - rejection of ‘CUP’ method and adopting ‘TNMM’ as the most appropriate method for computation of the arm’s length price - selection of appropriate method for computation of arm’s length price - Held that:- We find that when the pollution norms of the Europe and the India during relevant period are different, the quality of the product cannot be same and in such situation adopting the transaction of the AE with third-parties in Europe as ‘CUP’ for .....

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rement of automobiles manufacturers in India like General Motors, Mahindra and Mahindra, and Ashok Leyland and compared the profit margins with the other comparables in similar market conditions. In our opinion, the approach of the learned TPO/AO is justified and we accordingly set aside the order of the learned CIT-(A) on the issue in dispute and uphold the order of the learned TPO/AO on the issue in dispute. - Loss due to fluctuation in foreign exchange - whether loss should be treated as .....

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the case of the assessee, however, same has also to be considered in the case of the comparables. From the order of the lower authorities, it is not clear whether the AO/TPO has considered this aspect in the case of the comparables. Accordingly, we feel it appropriate to restore the issue of computing average margin of the comparables with limited direction to consider the foreign exchange fluctuation loss as part of the operating expenses in case of comparables also. - What is the correct c .....

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e. In the above calculation, this mistake is rectified. - Since the appellant falls within the range, the other issues relating to the comparable becomes academic in nature and therefore they are not separately adjudicated.” - Since the assessee is neither in the appeal nor in cross objection before us and, therefore, the arguments of the learned counsel regarding adopting of incorrect PLI by the TPO are not considered. - ITA No. 847/Del/2012 - Dated:- 15-9-2017 - SH. VIJAY PAL RAO, JUDI .....

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,04,58,470/- made on account of arm s length price. 2. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing. 2. The facts in brief of the case are that during the relevant year the assessee company was engaged in manufacturing of Catalytic Converters for automobiles and components of car A/C systems. The assessee filed return of income on 29/10/2007 declaring nil income. The case was selected for scrutiny and notice under section 143(2) of th .....

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transaction Method selected Total value transaction (Rs.) of Purchase of Components CUP 172,578,808 Sale of Components/Convertor CUP 855,430 Purchase of Capital Items CUP 2,341,600 Reimbursement of Expenses CUP 147,583 2.1 Regarding the functions carried out by the assessee, the learned TPO noted that till the year under consideration the assessee owned manufacturing facilities for only the last process (Canning) of the catalytic converters. The Coated substrate was imported from the AEs and aft .....

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located in other countries. Based on the analysis, the assessee concluded that its international transactions were at arm s length. 2.3 For benchmarking the international transactions, the assessee used weighted average of the financial data for financial year 2004-05, 2005-06 and 2006-07 i.e multiple year data. The Learned TPO, referred to Rule 10B(4) of Rules & OECD guidelines and rejected the approach of the assessee of using multiple year data, relying on the decision of the ITAT Bangal .....

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ut of total purchases of ₹ 178,011,008/- ) being from its AEs. The learned TPO also noted that during the year under consideration the assessee carried out research and development for a new catalytic converter for M/s. Mahindra and Mahindra Ltd. which shows an independent entrepreneur status of the assessee. The learned TPO noted that the assessee has shown sales of ₹ 184,286,696/- and incurred loss of ₹ 10,615,894/- and thus the loss was primarily due to the transaction with .....

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ndependent entrepreneur and should be tested on the basis of own financial results and directed the assessee to carry out analysis of arm s length on the basis of Transactional Net Margin Method (TNMM). 2.5 In response, though the assessee objected rejection of CUP method and adopting TNMM as the most appropriate method for computation of the arm s length price, the assessee provided a list of 19 comparable companies with calculation of weight average operating profit margins for financial year .....

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t should have been tested in their entirety. He also noted that there are geographical differences, product differences, timing differences and differences in quantity due to bulk sale/retail sales in the transactions compared for CUP method by the assessee. He noted that all sales by the AE are to unrelated parties in the Europe and thus, according to him the CUP data relied upon by the assessee was not reliable and did not represent the true comparability. The learned TPO relied on the decisio .....

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vet India private limited 2010-TII-12-ITAT-MUM-TP wherein it is held that while applying CUP method adjustment related to economy and market conditions in different geographical locations need to be made. 2.8 Further, the learned TPO, rejected the claim of the assessee seeking comparability adjustment on the ground of exchange rate fluctuation. The assessee submitted that losses incurred by it are due to exchange rate fluctuation, whereas comparables are not exposed to this and, therefore, suita .....

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e assessee for seeking adjustment on account of increasing price of metal as well as capacity adjustment was also denied. 2.10 The learned TPO declined to exclude interest and financial charges and exchange loss from operating expenses and took operating losses at the figure of ₹ 106.15 Lacs. 2.11 Finally, the learned TPO retained 15 comparables and computed the adjustment to the international transaction as under: 7. Based on the discussing above, the following conclusions are made. (i) T .....

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nents Pvt. Ltd. 10.78% 12 Rane N S K Steering Systems Ltd. 6.01% 13 Special Engineering Services Ltd. 9.24% 14 Standard Radiators Pvt. Ltd. 9.65% 15 X L O India Ltd. 3.09% Arithmetic Mean 5.05% The arms length price of international transaction is calculation as below. Total cost of the assessee : Rs.194,902,590 Operating profit margin of 5.05% : Rs.9,842,580 Less: operating loss shown : Rs.(-)10,615,894 ALP at a margin of 5.05% : Rs.152,120,334 Price paid : Rs.172,578,808 Difference being adjus .....

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Whether forex loss should be treated as non operative in nature in the facts and circumstances of this case? Issue 3: What is the correct calculation of the PLI of the comparables as well as the assessee? 2.14 The learned CIT-(A) concluded the CUP method adopted by the assessee as most appropriate method and upheld that there was no need for any addition to the international transaction. The finding of the leather CIT-(A) is reproduced as under: 5.1 The TPO has not commented on the validity of .....

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l being compared. However, without giving any cogent reason Transfer Pricing Officer rejected the CUP. It is unfair to come to a conclusion that the loss incurred by the appellant is only due to its transaction with the AE without going into the details of the market situation wherein appellant is located and other parameters. In any case, the most appropriate method selected by the appellant cannot be rejected just because the appellant is suffering losses. The TPO is contradicting himself by s .....

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fact. Therefore, I hold that there was no reason to reject the CUP produced by the appellant. The appellant has brought to my notice that in the subsequent assessment year, where facts and circumstances are similar in the case of the appellant, the TPO has accepted the CUP and no addition has been made. Therefore, this also shows that there is merit in the CUP presented by the appellant. In view of this, it is important to appreciate the evidence of CUP presented by the appellant. The appellant .....

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ices are in FOB terms. As FOB prices are at origin of the goods which is at the local ports of the AE, the so called geographical difference has no meaning. This is because the AE is selling the goods at the port of its origin to the assessee as well as to the third party it is immaterial where the goods ultimately travel to. It is seen that in all cases the price paid by the appellant is lesser than what is paid by the third parties. The appellant has given CUP data for entire transaction amoun .....

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the cost of the assessee and concluded that the assessee falls within +/- 5% of the ALP as per the provisions to section 92(c) of the Act and, therefore, even under the TNMM method also no adjustment was required to the arm s length. The finding of the learned CIT-(A) on the issue is reproduced as under: Issue 2: Whether forex loss should be treated as non operative in nature in the facts and circumstances of this case?: 5.4. It is strongly contended by the appellant that the foreign exchange l .....

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income because these items have nothing to do with the main operation of the assessee. It is important to note here that the appellant is a manufacturer of catalytic convertor and not a dealer in foreign currency. It will be proper if the business of person is dealing in foreign currency then the loss / gain on account of fluctuation in foreign currency can be held as operational in nature. Since assessee is not in such a business, respectively following the judgment of the Hon ble ITAT in the .....

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s given below: As per TPO Revised 1. Operating Profit Margin 5.05% 5.05% 2. Total Cost of Ecocat 19.49 18.41 3. Operating Profit/Net Sales (1 X 2) 0.98 0.93 4. Operating Profit Shown (1.06) 0.059 5. Difference (3-4) 2.05 0.34 6. Purchases from AE 17.26 17.26 7. ALP (6-5) 15.21 16.91 8. 5% Difference on ALP 0.85 9. Disallowance (5-8) 2.05 -0.50 2.16 On the issue of the correct Profit Level Indicator (PLI), the learned CIT-(A) held that mentioning of OP/sales as the PLI while calculating the margi .....

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ustification for making any addition on account of arm s length price and accordingly directed the AO/TPO to delete the addition. 2.19 Aggrieved with the above finding of the Ld. CIT-(A), the Revenue is in appeal before the Tribunal raising the grounds as reproduced above. 3. The sole ground of the Revenue is in respect of deletion of the addition of adjustment of ₹ 2,04,58,470/- to the international transactions. 3.1 Before us, on the issue of selection of appropriate method for computati .....

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bmitted that in the case of the assessee, it has sold goods to the parties in Europe and such transactions can never be a good CUP for price charged in India. Also the pricelist of the raw materials sold to the assessee and to third-party in Europe or other countries, seemed to be case of cherry picking. He also submitted that the list of the materials sold to the assessee identified by their part numbers, seems untrue in view of the different market conditions and regulatory norms. He emphasize .....

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OECD guidelines in this regard. 3.2 On the contrary, the Ld. counsel relied on the order of the learned CIT-(A) and further submitted that the TPO in subsequent assessment year 2008-09 has accepted the CUP method for benchmarking the international transactions of the assessee. Accordingly, he prayed that the order of the Ld. CIT-(A) on the issue in dispute might be upheld. 3.3 In the rejoinder, the learned Sr. DR submitted that accepting CUP method of benchmarking the transactions in subsequent .....

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A) observed that there was a one-to-one correlation between the product, part numbers sold to the assessee and to the unrelated parties. The learned CIT-(A) further observed that prices in both the situation are F.O.B. prices, which are at the origin of the goods and so there was no effect of geographical differences. The learned CIT-(A) has noted that price paid by the assessee is lesser than what is paid by the third parties. In our opinion the finding of the learned CIT-(A) on the basis of ab .....

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d. We find that in the case of UCB India (P) Ltd (supra), the Tribunal took note of the effect of minor change in the properties of the product on the pricing and held that there should be scientific basis to say that APIs are identical with same purity, potency and characteristics and also all such data should be first obtained by the Revenue or the assessee, who wish to compare products and then arrive at ALP or wish to make adjustment to price, cost or margin. The Tribunal in the said case al .....

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similar being different regulatory norms for pollution. Further, what the AO/TPO has taken stand on the issue in subsequent year, may not be relevant, for us. We are required to decide the issue in dispute in facts and circumstances of the year under consideration. 3.5 In view of above discussion, we are of the opinion that assessee s international transactions cannot be benchmarked applying the CUP method. 3.6 The TPO has adopted TNMM as most appropriate method for computing the arm s length p .....

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dispute. 4. Now the second issue for adjudicating before us is whether the loss due to fluctuation in foreign exchange should be treated as nonoperative expenditure in the case of the assessee. 4.1 Before us the Ld. Sr. DR submitted that foreign exchange gain/loss arising out of the revenue transaction is required to be considered an item of operating revenue/cost both for the assessee as well as comparable. In support of his contention, the Ld. Sr. DR relied on the decision dated 15/12/2016 of .....

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ication dated 18/09/2013 has made safe harbour rules and according to the definitions part of the safe harbour rules, in rule 10TA, loss arising on account of foreign currency fluctuation has been excluded from the operating expenses. 4.3 In Rejoinder, the learned Sr. DR submitted that safe harbour rules are not applicable to the assessment year under consideration. Further, he submitted that the Tribunal in the case of Mckinsey Knowledge Centre Private Limited (supra) has considered this argume .....

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operation of the assessee. But in the instant case, the foreign exchange fluctuation loss has arisen mainly on account of the revenue transactions of the assessee. Hence, the decision cited by the learned counsel of the assessee is distinguishable. In the case of McKinsey Knowledge Centre Private Limited (supra), Delhi bench of the Tribunal has decided the issue in dispute as under: 64. The only issue raised by the Revenue in its appeal is against the treatment of foreign exchange (forex) gain/ .....

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n raised on behalf of the assessee about the inclusion of foreign exchange gain/loss in the operating revenue/costs of the assessee as well as that of the comparables. When we advert to the nature of such foreign exchange gain earned by the assessee, it has not been controverted by the Id. DR that the same is in ITA No.i54/Del/20i6 relation to the trading items emanating from the international transactions. If the foreign exchange gain/loss directly results from the trading items, we fail to app .....

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are exported and invoice is raised in currency of the country where such goods are sold and subsequently when the amount is realized in that foreign currency and then converted into Indian rupees, the entire amount is relatable to the exports. In fact, it is only the translation of invoice value from the foreign currency to the Indian rupees. The Special bench held that the exchange rate gain or loss cannot have a different character from the transaction to which it pertains. The Bench found fa .....

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foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addtl. CIT (2013) 32 taxman.com 196 has also laid down to this extent. 4.5 Further, the Tribunal has also considered the argument of the assessee on safe harbour rules to contend that foreign exchange gain .....

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assessment year under consideration. Even the reliance of the Id. DR on certain decisions taking cognizance of safe harbour rules for the period anterior to their insertion in other contexts does not improve the case of the Department because the Hon'ble Delhi High Court in Pr. CIT VS. Cashedge India Pvt. Ltd., vide its judgment dated 4.5.2016 in ITA 279/2016, has held that: 'So far as the question of fluctuation of foreign exchange was concerned, the ITAT ruled that the relevant provis .....

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the comparables. The ground taken by the Department is, therefore, dismissed. 4.6 As in the instant case assessment year involved is 2007-08, which is even prior to assessment year 2011-12, the definition of the operating expenses provided in safe harbour rules cannot be applied. 4.7 Thus, respectfully following the decision of the Tribunal in the case of McKinsey Knowledge Centre Private Limited (supra), we hold that foreign exchange fluctuation loss is part of a operating expenses. Accordingly .....

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