TMI Blog2022 (12) TMI 1074X X X X Extracts X X X X X X X X Extracts X X X X ..... A India (P.) Ltd [ 2018 (10) TMI 49 - ITAT BANGALORE] considered a similar issues and held that section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. Recomputation of operating profit margin pursuant to the MAP resolution - This issue was considered in assessee s own case for AY 2011-12 [ 2022 (10) TMI 474 - ITAT BANGALORE] thus we remit this issue to the AO with a direction to re-compute the operating margins pursuant to the MAP resolution. - IT(TP)A No. 73/Bang/2017 - - - Dated:- 20-7-2022 - SHRI N.V. VASUDEVAN, VICE PRESEIDENT AND SHRI PADMAVATHY S, ACCOUNTANT MEMBER Assessee by : Shri T. Suryanarayana, Advocate Respondent by : Shri V.S. Chakrapani, CIT(DR)(ITAT), Bengaluru. O R D E R Per Padmavathy S., Accountant Member This appeal is against the final assessment order dated 10.11.2016 passed by the Assessing Officer for the AY 2012-13. 2. The assessee is a company engaged in the business of manufacture of aluminum radiators and air-conditioners for cars and multi utility vehicles for automobile manufacturers in India. During the relevant year, there were several international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,62,043 has to be reduced from the cost base while re-computing the operating profit margin of the Assessee. Alternatively, the said amount could be added to the operating income of the Assessee as the same has been offered to tax in India pursuant to MAP resolution. 7. The ld. AR prayed for admission of the additional ground. 8. We have heard the rival submissions on the admission of the additional ground. The additional ground now raised does not require examination of new facts otherwise than on record and following the Hon ble Supreme Court judgment in the case of M/s National Thermal Power Co. Ltd. Vs. CIT, 229 ITR 383 (SC), the additional ground is admitted for adjudication. 9. In the course of hearing the Ld AR submitted a paper book with additional evidence supporting its claim for adjustment towards Foreign Exchange Fluctuation and Customs Duty (Ground 3, 4 and 5) . The ld.AR prayed for admission of additional evidences before the Tribunal as these evidences when considered would substantiate the claim of the assessee that the international transactions of the assessee are at arm s length. With regard to various TP adjustments, the additional evidences now prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns Forex gain or loss has to be computed as per AS 21 as done in audited P L. The taxpayer has debited Rs.1,04,60,347 as forex loss to the P L account treated it as operating expenses Forex fluctuation computed as per AS 21 takes into account the realization loss/gain (fluctuation due to differences between invoice and payment exchange rates) and revaluation loss/gain translation of closing balances at the year-end exchange rate). Hence such exchange fluctuation does not take into account any adverse exchange fluctuation due to depreciation of Indian currency on a year-on-year basis. The Assessee's loss is mainly due to higher import cost of raw materials. The Assessee did not suitably negotiate its purchase cost with its AE. The Assessee failed to demonstrate that there exists such losses in the case of comparable companies selected by the Assessee. The Assessee bears the forex risk and hence it has incurred high forex fluctuation loss which is embedded in the raw material import cost. The fact that forex risk is borne by the Assessee cannot be a valid reason for rejecting the adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditional evidence compilation . The Ld AR submitted that considering the movement in the INR as compared to YEN and that there is no increase in price would demonstrate that the loss has arisen solely on account of exchange fluctuation which warrants adjustment in TP for comparables. The details of the economic adjustment claimed on account of adverse fluctuation in foreign currency is furnished at pages 37-213 of the additional evidence compilation. 16. The ld. AR further submitted that this issue is covered in the assessee s favour by the decision of this Tribunal in the Assessee's own case for the AY 2011-12 (Order dated 30.03.2022 passed in IT(TP)A No, 649/Bang/2016), wherein the Tribunal directed the TPO to consider foreign exchange fluctuation adjustment for computing ALP of the Assessee. 17. The ld. DR supported the orders of the lower authorities. 18. This issue came up for consideration before this Tribunal in assessee s own case for AY 2011-12 and vide order dated 30.3.2022, it was held as under:- 20. The Ld DR relied on the written submissions. We heard the rival submissions and perused the materials on record. We notice that the Delhi Bench of the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein it has been held that the claim of comparability adjustment on account of abnormal expenses incurred by the assessee on account of relocation expenses should be allowed in the profitability of the assessee. The assessee has also relied on the judgment of ITAT Pune Bench in the case of Demag Cranes Components (India) (P.) Ltd. v. Dy. CIT [2012] 49 SOT 610/17 taxmann.com 190 wherein the Tribunal elaborately dealt with the issue of comparability adjustment. 21. From the above submissions and careful perusal of citations and all other relevant judgments we observe that Rule 10(B)(1)(e) of the Act on the one side and other sub-rules in the context of TNMM need to be analyzed for eliminating the difference, if any, in the comparable uncontrolled transaction which materially affect the profit margin of the assessee. Having noticed the difference, the revenue has to quantify the difference, if any, and then revenue authorities must decide if that difference constitutes 'materially affect' the price in open market. As per these provisions, if the answer of the above question is in the affirmative, then the identified difference has to be removed and the margin has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of arguments, the DR submitted that the issue of fluctuation in foreign exchange price was considered by the authorities below but from the perusal of the impugned order, inter alia, order of the DRP, we observe that the authorities below have not considered the element of abnormal and huge fluctuation in the foreign exchange favouring Thai Bhat and against the Indian currency. Accordingly, in view of the observations made hereinabove, ground nos. 2.7 and 2.8 are allowed with a direction to the Assessing Officer that necessary adjustments pertaining to the huge and abnormal fluctuation in the foreign exchange may be allowed to the assessee in determining the ALP of the international transaction undertaken by the Assessee: 21. We also notice that the coordinate bench of the Tribunal in the case Continental Automotive Components India Pvt Ltd (Supra) has held that 39. This issue was also considered by the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd. (supra) and it was held as under:- 7. We have heard both the parties and perused the material on record. In our opinion, forex fluctuations loss in the operating cost of the assessee and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has made adjustments towards the customs duty paid as an extraordinary item while arriving at the operating cost. The TPO rejected the adjustment for the same reasons for rejecting the adjustment towards exchange fluctuation loss which was upheld by the DRP. 22. The ld AR submitted that on account of the exchange fluctuation, the assessee has paid significant non-cenvatable customs duty on its imports, which cannot be passed on to the customer. The effect of the same of Rs. 3,54,68,588/- has been treated as an extraordinary expense while computing the operating margin of the Assessee. This cost is not incurred by the comparable companies who do not undertake significant imports. Therefore, the ld AR prayed that an adjustment to eliminate the difference arising on account of the customs duty paid ought to be granted. In this regard the ld AR drew our attention to the computation of adjustment for non-cenvatable duty set out at page 279 of the additional evidence compilation and the details of the imports made by the comparable companies are set out at page 278 of the additional evidence compilation. 23. We have heard the ld DR and perused the material on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19 of the order) that,- No doubt , a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd.'s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. As was observed by a Co-ordinate Bench of this Tribunal in the case of E-Gain Communication (P) Ltd. (supra) the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect . We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India P. Ltd. (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP shall see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub-rule (3) of rule 10B of the Income-tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto.' Accordingly, we direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP.' Hence, to bring uniformity, the customs duty was to be eliminated from the comparable price also to arrive at correct PLI. Accordingly, we remit the issue to the file of AO for fresh consideration. 31. In view of the above finding of the Tribunal in Gates Unitta India Company (P.) Ltd. (supra), we are inclined to remit this issue to the AO/TPO with similar directions. 28. Respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com 312, Bang. Trib) considered a similar issues and held that section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. The relevant observations are as follows:- 54. We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions made before the CIT(A) that transaction with non-AE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of transactions with AE. He also referred to certain decisions of the Tribunal for the proposition that section 92 of the Act is not applicable to non-AE transactions. These decisions have already been extracted in the earlier paragraphs. The ld. DR relied on the order of the CIT(Appeals). 55. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm's length. This p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lution, the returned loss of the Assessee stood reduced and thereafter in the assessment years 2015-16 and 2016-17, the assessee set off the said brought forward losses against the income of those years. The ld AR also submitted that the segmental margin of the assessee ought to be recomputed, taking into account the adjustment determined under MAP, either by reducing the operating cost base to that extent, or increasing the operating income. Reliance was placed on the decision of this Tribunal in the assessee s own case for the assessment year 2011-12 (supra). 33. The ld. DR supported the order of the lower authorities. 34. We have considered the rival submissions and perused the material on record. This issue was considered in assessee s own case for AY 2011-12 (supra) wherein it was held as under:- 33. We have heard the rival submissions and perused the materials on record. We notice that the MAP resolution which resulted in the reduction of the cost (thereby reduction in the returned loss) and as contended by the Ld AR will have an impact on the other TP adjustment done with AEs other than Japan. The argument of the Ld AR that the impact of reduced loss which resulte ..... 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