TMI Blog2017 (2) TMI 1449X X X X Extracts X X X X X X X X Extracts X X X X ..... ency and the Indian currency. Therefore, while computing the PLI, operating income for the purpose of PLI, both foreign exchange loss or gain should be excluded from the operating income. The DRP has allowed loss on Forex to exclude from the operating income, relying on the safe Harbour Rules which provide for exclusion of Forex loss from operating expenses. Therefore, we do not find any infirmity in the directions given by the DRP to exclude both foreign exchange loss or gain of the tested party as well as comparables from the operating income. This ground of Revenue is dismissed. Working capital adjustment - Assessee has not furnished the pricing model and reasons for extending extraordinary credit to its clients. Similarly the assessee did not furnish the pricing models of the comparable companies as well as the AE. The terms and conditions of sale and interest clause if any require verification - HELD THAT:- The issue of working capital adjustment requires verification of facts from the assessment records of the assessee and the data of comparables companies in the light of discussion made above. Therefore, we remit the matter back to the file of the AO to examine the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s AE u/s.92A. Similarly, Sec.40A(2)(b) treats 20% as the threshold limit for having substantial interest in the company. Therefore, the DRP held the application of 25% is reasonable. No argument has been made by the assessee on this ground and we consider that as per the reasoning given by the DRP for application of 25, application of RPT appears to be reasonable and this ground is dismissed. Not considering the fresh set of comparables submitted by the assessee for bench marking the margins - HELD THAT:- DRP has rejected the objection of the assessee stating that the additional set of companies were nothing but cherry picked by the Ld.AR without proper objectives and analysis. During the appeal hearing, the Ld.AR did not place any additional information except reiterating the submissions made before the DRP. The Ld.AR has not placed TP analysis and the FAR analysis and the financials of the additional comparables before the tribunal. Therefore, we uphold the directions of the DRP and this ground of the appeal is dismissed. - ITA No.1037/Mds/2014, Cross Objection No.58/Mds/2014 - - - Dated:- 22-2-2017 - SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Hon ble ITAT in the case of M/s. Zenta Knowledge Service Private Limited and M/s.Mercedes Benz R D India Private Limited, wherein the ITAT has laid down the principle that the forex gain / loss should be considered as an operating item. 4. For these and other grounds that may be adduced at the time of hearing, it is prayed that the direction of the Hon ble DRP may be set aside and the order of the Transfer Pricing Officer be restored. 2.0 M/s.Hanil Tube India Ltd., (HTIL) is engaged in manufacturing of Tubes, pipes, automotive components and Tubular Products primarily for the auto industry. M/s.HTIL caters to the requirement only one Original Equipment Manufacturer (OEM) Hyndai Motors India Limited (HMIL) and hence it dependent on all its sales. During the assessment proceedings the Assessing officer (AO) found that the assessee has reported the International transaction in Form - 3CEB as follows: S. No. Name of the Associated Enterprise Description of Transaction Amount (in ₹) Method adopted 1 Hanil Tube ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable on payment but not freely. The assessee also used multiple year data for arriving the margin against the Rules of contemporaneous data. The assessee further stated before the TPO that the Transfer pricing study conducted by the assessee was as per the Indian TP regulations in sections 92, 92A and 92F of Income Tax Act. The TPO after considering the explanation of the assessee excluded the four companies given from the list of 11 companies. As per the detailed reasoning given in the TP order for arriving at the margin, the following list of companies were excluded by the TPO: a) M/s.I.P.Rings Ltd b) M/s.Autolite India Ltd. c) M/s.G.S.Auto International Ltd. d) M/s.Ceekay Daikin Ltd.(presently known as M/sdy Ceekay Ltd.) 4.0 The TPO conducted independent search process and opined that for external TNMM, selection of comparables should be at similar functions and products and selected the following comparables. S.No. Name of the Company Operating Profit ----------------------- Operating Income TPOs comparables: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 Actual AE cost 18.10 Cr. 9 Difference proposed to be adjusted 1.08 Cr. 6.0 The assessee filed reply to the show cause notice objecting for exclusion of the following comparables selected by the assessee: i) M/s.G.S.Auto International Ltd. ii) M/s.Ceekay Daikin Ltd.(presently known as M/sdy Ceekay Ltd) 6.1 The assessee had objected for inclusion of the following comparables selected by the TPO: 1. M/s.Amtek Ring Gears Limited. 2. M/s.Highway Industries Limited. 3. M/s.Rambal Limited. 6.2 The assessee also submitted for inclusion of the following additional comparables: 1) M/s.Federal-Mogul Bearings India Ltd. 2) M/s.India Japan Lighting Pvt. Ltd. 3) M/s.Jay Bharat Exhaust Systems Ltd. 4) M/s.Mubea Suspension India Ltd. 5) M/s.R S M Autokast Ltd. 6) M/s.Remsons Industries Ltd. 7) M/s.Somic Z F Components Ltd. 8) M/s.Talbros Automotive Components Ltd. 9) M/s.Vaid Elastomer Processors Ltd. 10) M/s.Victor Gaskets India Ltd. The TPO considered the reply of the assessee and rejected the objections raised by the assessee for exclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the directions of the DRP and the assessee filed Cross-Objections. Revenues appeal: 8.0 Ground Nos.1 4 are general in nature which do not require specific adjudication. 9.0 Ground Nos.2 to 2.3 are related to the inclusion of M/s.CeeKay Daikin Ltd., as comparable. The assessee argued before the DRP not to exclude M/s.Ceekay Daikin Ltd., from the comparables since the functions of the company are the same. The DRP after considering the objections raised by the assessee directed the AO to include M/s.Ceekay Daikin Ltd., as comparables for determining the margin. 9.1 Aggrieved by the Order of DRP, the department has filed appeal before this Tribunal. Appearing for the Revenue, the Ld.DR argued that it is an exceptional year of operation for M/s.Ceekay Daikin Ltd. During the year the company has ventured in to manufacturing of new variety of clutch i.e. one way clutch and the startup cost incurred in the new product line has affected the company s margin. The Ld.DR submitted that if specific reasons exists for abnormal profits or loss or other general reasons which will have material effect on profit margins of such company should be excluded as comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough, the TPO noticed that the profits have been reduced due to start up costs of new product one way clutch no evidence has been placed before us and the Ld.DR did not controvert the facts. Therefore, we do not find any infirmity in the directions of the DRP and uphold the Order of the DRP. 10.0 Ground Nos.3 to 3.3 are related to the foreign exchange (in short Forex ) loss. The TPO has not considered the Forex loss as non-operative in nature while calculating the operative margin of the company. The DRP has directed the TPO to exclude the Forex loss from the operating income as well as from the comparables similarly Forex gain also should be excluded. 10.1 Aggrieved by the Order of the DRP, the Revenue is on appeal before us. The Ld.DR argued that Forex loss is an operative income which arises only due sales or purchase activities which are Revenue in nature and it should be part of operating loss. According to the OECD guidelines, the Forex loss or gain arising due to Revenue receipt shall form part of operating income. The Revenue relied on the decision of the Hon ble ITAT in the case of M/s.Zenta Knowledge Service Private Limited and M/s.Mercedes Benz R D India Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed party as per FAR analysis in TP Report and if there is under absorption of fixed overheads due to under-utilization of capacity then the tested party would have the right to undertake the capacity utilization adjustment. Hence, the conclusion made stating that, since forex risk is borne by the assessee as per FAR analysis, forex gain/loss would form part of operating expenses and hence the assessee cannot claim the forex adjustment is totally erroneous and defies the basic principles of risk adjustment concept. Given that under transfer pricing provisions, the objective is to determine the Arm s Length Price of transaction and to see if any profits are shifted to AEs, the forex loss/gain arising out of external market forces are to be excluded as the same are not under the control of the assessee or the AEs. Given the above, for determining the ALP of transaction with AEs, the forex fluctuations should be excluded. This is also the position taken by CDBT in computation of margins under safe harbor provisions. It is pertinent to note that this reinstatement was made only for the purpose of complying with the Accounting Standards. Therefore, forex loss on account of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following grounds: 1. The Transfer Pricing Officer (TPO) erred in making an upward adjustment to the value of international transaction 1.1 The DRP/TPO erred in not providing any adjustment to the arm s length margin of the comparables on account of differences in working capital. 1.2 The DRP/TPO ought to have considered adjustments for difference in capacity utilization while calculating the operating margin of the Respondent since the company is in the initial years of operations and its entire capacity could not be utilized fully. 1.3 The DRP erred in confirming the action of the TPO in selecting Amtek Ring Limited as a comparable company without appreciating that the said different financial year ending from that of the Respondent. 1.4 The Dispute Resolution Panel (DRP) erred in confirming the order of the TPO in holding that RPT filter should be applied at the rate of 25 per cent instead of 33 per cent. 1.5 The DRP erred in confirming the action of the TPO in not considering the fresh set of comparable companies submitted by the Respondent for benchmarking analysis. 1.6 The DRP erred in confirming the order of the TPO in excluding interest expenditure wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y utilization. The assessee also furnished the details of capacity utilization of adjustment and relied on the decision in the case of Mando India Steering Systems Pvt. Ltd., (in ITA No.2092/Mds/2012). On the other hand, the Ld.DR relied on the order of the Ld.DRP. 14.1 We heard the rival submissions and perused the material placed before us. The assessee has not furnished the details of installed capacity and capacity utilized and the reasons for non-utilization of the installed capacity and resources available and utilized by the assessee. Similarly, the assessee has also not furnished the details of the comparable companies installed capacity and utilized capacity and the levels of break even. In the absence of reasons for non-utilization of installed capacity the claim for capacity adjustment is unfounded. The assessee claimed to be in the second year of operation but furnished the details in respect of sales to fixed costs which is insufficient information to decide whether installed capacity was due to start ups or not. The assessee did not explain the reasons for non-utilization of optimum capacity and therefore, this objection of the assessee cannot be accepted and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained u/s.133(6). 27. Rule 10D(3) specifies the information and documents that are to be maintained by a person who is entering into international transactions. These are official publications, published accounts or those which are in public domain except for agreements and contracts to which assessee is privy. Once the annual report of a company is for a year different from the financial year ending 31st March, then without doubt, it will cease to be a good comparable, unless the information received in pursuance to a notice u/s.133(6) of the Act from such company, is reconciled with the figures available in such annual report . In the instant case, the assessee is following accounting year from April to March and the comparable company M/s.Amtek Ring Gears Ltd., is following June, 2008 to June, 2009. Once, the company is following a different accounting year, there will be a wide range effects in the operating results and the company seized to be a good comparable. The AO has not reconciled the financials of the comparable company to the corresponding period of the tested party by collecting necessary information and re-casted the financials. Therefore, following the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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