TMI Blog2021 (2) TMI 938X X X X Extracts X X X X X X X X Extracts X X X X ..... h (₹ 1369.23 lakh x 1.1664 lakhs), calling for further action. TPO erred in computing the assessee's PLI and that of the comparables by treating foreign exchange fluctuation gain as non-operating revenue, which also got echoed at the level of the DRP - No discussion in the TPO's order on the exclusion of the foreign exchange fluctuation gain from the operating revenue in computation of the assessee's operating profit margin. The DRP has held at para 3.4 of its direction that foreign exchange fluctuation gain cannot be considered as operating income by mainly relying on Rule 10TA(k) of the Safe Harbour Rules. Determination of the ALP shall be done in accordance with the safe harbour rules in terms of section 92CB of the Act and ex consequenti, the application of other rules will be ousted. The sequitur is that where such an option is not availed, neither section 92CB gets triggered nor the relevant rules including 10TA(k). In that scenario, determination of the ALP is done de hors the safe harbour rules. Once these rules are kept out of compass, the otherwise settled position by virtue of the judgment of the Hon'ble Delhi High Court in B.C. Management S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et of transactions. For the reasons set out in the order, the TPO did not accept the internal TNMM. The TPO proceeded with the external TNMM having six companies as comparable giving average Profit Level Indicator (PLI) of Operating profit to Total cost (OP/TC) at 16.64%. The assessee's own Profit Level Indicator (PLI) was computed at 11.81%. This is how, the TPO computed the transfer pricing adjustment as under: Particulars Amt. in lakhs Sales (A) 6097.94 AE sales=B 1530.98 Non AE sale=C 4566.96 Cost=D 5453.68 Profit=P 644.26 PLI=OP/OC=P/D 11.81% PLI of comparable 16.64% ALP=E=D*PLI of comparable 6364.17 ALP of AE Transactions =F=E-C 1797.21 G1=B*95% 1454.43 G2=B*105% 1607.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only the international transaction which calls for transfer pricing adjustment and not the entity level transactions of the assessee. On one hand, the TPO took arm's length cost of the entity at ₹ 6364.17 lakh and on the other, he reduced the figure of non-AE sales of ₹ 4566.96 lakhs, which also contains the profit element apart from cost. What ought to have been done was to first compute the total cost in relation to the AE transactions and then increase it with the PLI of comparables for ascertaining the arm's length sale price. The resultant total cost in relation to the AE transactions, under this mechanism, comes to ₹ 1369.23 lakh, which is obtained by multiplying total cost of ₹ 5453.68 lakh with AE sales of ₹ 1530.98 lakh as divided by total sales of ₹ 6097.94 lakh. It is this cost of the transactions with AE which needs to be loaded with the margin of the comparables at 16.64% to find out ALP of the AE transactions at ₹ 1597.06 lakh (₹ 1369.23 lakh x 1.1664 lakhs), calling for further action. 7. The Ld. AR espoused the next issue by submitting that the TPO erred in computing the assessee's PLI and that of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price declared by the assessee in respect of eligible transaction shall be accepted by the income-tax authorities at ALP, if it is in accordance with the circumstances as specified in sub-rules (2) or (2A). A chart has been given in these sub-rules in which the safe harbour has been provided for the eligible international transactions. For example, the first entry in Rule 10TD(2) is the eligible international transaction of Provision of software development services' and the safe harbour, requiring acceptance of the declared transaction value, has been prescribed as the operating profit margin of not less than 20% of operating expenses. Explanation to section 92CB itself provides the meaning of safe harbour as circumstances in which the income-tax authorities shall accept the transfer price .... declared by the assessee. It is for the purpose of calculating value of various components under the safe harbour rules, such as, operating profit or operating expense etc. that one needs to knock on the door of rule 10TA for finding out their respective connotation. Clause (1) of Rule 10TA defines operating profit margin in relation to operating expenses to mean the ratio of operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price under section 92C or section 92CA shall be subject to safe harbour rules and hence the application of rule 10TA(k) across the board is essential whether or not the assessee opts for the safe harbour - in our considered opinion does not merit acceptance. Section 92CB unequivocally states that the arm's length price under section 92C or section 92CA shall be subject to safe harbour rules. It only means that if there is an eligible assessee, who has exercised option to be governed by the safe harbour rules in respect of an eligible international transaction after complying with the due procedure, then the determination of the ALP shall be done in accordance with the safe harbour rules in terms of section 92CB of the Act and ex consequenti, the application of other rules will be ousted. The sequitur is that where such an option is not availed, neither section 92CB gets triggered nor the relevant rules including 10TA(k). In that scenario, determination of the ALP is done de hors the safe harbour rules. Once these rules are kept out of compass, the otherwise settled position by virtue of the judgment of the Hon'ble Delhi High Court in B.C. Management Services Pvt. Ltd. (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X
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