TMI Blog2023 (4) TMI 558X X X X Extracts X X X X X X X X Extracts X X X X ..... mputed by the assessee after making foreign exchange fluctuation adjustment. The decisions cited before us by learned counsel also express similar view. We direct the AO to allow adjustment for foreign exchange fluctuation rate while computing margin of the assessee and the comparables. Adjustment on account of difference in rates of depreciation as per Income-tax Act followed by the assessee and Companies Act in case of comparables - HELD THAT:- As identical issue in assessee s case in assessment year 2012-13 [ 2022 (2) TMI 1361 - ITAT DELHI] we direct the Assessing Officer to allow depreciation adjustment while determining the ALP. Adjustment relating to manufacturing segment - On careful perusal of the orders of the Transfer Pricing Officer (TPO) and learned Commissioner (Appeals), we find, though, detailed submissions were made by the assessee in support of its claim, however, they have not at all been considered on merits and have been rejected on flimsy grounds. Even, the ratio laid down in various judicial precedents have not been taken note of. Considering that this is the first year of commencement of manufacturing activity in case of assessee, the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from its parent company in Japan and sells it primarily to Maruti Suzuki India Ltd. (MSIL). As far as the international transaction relating to purchase of traded goods, the assessee benchmarked it for transfer pricing analysis applying Cost Plus Method (CPM) by treating the overseas Associated Enterprise (AE) as the tested party and the price paid to the AE was claimed to be at arm s length. However, after verifying the TP study report of the assessee, the Transfer Pricing Officer (TPO) was not convinced. Therefore, he insisted upon the assessee to carry out a fresh benchmarking by considering itself as the tested party and applying Transactional Net Margin Method (TNMM). In compliance to the direction of TPO, the assessee carried out a fresh benchmark under TNMM showing operating margin of 8.94% as against the average margin of comparables worked out at 9.71%. Thus, the transaction was claimed to be at arm s length. While examining the benchmarking of the assessee, the TPO disallowed certain adjustments made by the assessee while computing the margin, such as, foreign exchange fluctuation adjustment and depreciation adjustment. As a result, the operating margin of the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whereas, 90% of assessee s transactions are in foreign currency, the assessee sought adjustment on account of foreign exchange fluctuation. He submitted, in assessee s own case in assessment year 2009-10, the DRP has allowed adjustment on account of foreign exchange fluctuation to ensure parity between comparables and the assessee. In this context, he also referred to Rule 10B(iv) and paragraph 2.97 of OECD Transfer Pricing Guidelines. Further, he submitted, the source of foreign exchange gain/loss lies in the fluctuation of exchange rate between two countries, hence, not a related party transaction. In support of his contention, learned counsel relied upon the following decisions: i. Honda Trading Corp. India Pvt. Ltd. Vs. ACIT (ITA No.5297/Del/2011) (Tribunal Delhi) ii. Motonic India Automotive (P.) Ltd. Vs. ACIT [2016] 73 taxmann.com 235 (Chennai-Trib.) iii. Komatsu India (P.) Ltd. Vs. DCIT [2017] 78 taxmann.com 60 (Chennai Trib.) 8. Without prejudice, he submitted, while the assessee has charged higher rate of depreciation under the Income Tax Act, the comparables have charged depreciation under the Companies Act. He submitted, higher rate of depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. We have considered rival submissions and perused the materials on record. As regards, the transfer pricing adjustment made to trading segment, on perusal of facts and materials on record, we find that the assessee imports ignition coil from its AE in Japan and sales it to MSIL. It is further observed that the price fixed for purchase and sale of ignition coils were fixed in terms with agreements between the assessee and its AE on one hand and the assessee and MSIL on the other. Facts on record further reveal that between January, 2008, wherein, the assessee entered into an agreement with MSIL for sale of ignition coils and the financial year relevant to assessment year under dispute, there has been substantial appreciation in the price of Yen. Thus, the assessee was put to foreign exchange fluctuation risk as the value of Rupee depreciated compared to Yen. Therefore, the assessee had to pay more to the AE due to variation in foreign exchange rate. Whereas, it was unable to fully recover the increased amount paid form MSIL. Therefore, the assessee had to absorb loss on account of foreign exchange fluctuation. In its benchmarking under TNMM the assessee has claimed adjustment t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of their depreciation 9. Similarly in the case of DCIT vs. Sumi Motherson Innovative Engineering Ltd. 2014 (30) ITR (Trib) 367(Delhi) the Tribunal observed as under: The crux of the matter is that a higher amount of a particular expenditure per se can be no reason to claim adjustment in profit ratio. That is the reason for which the legislature has provided for comparing composite figure of operating profit which envelopes the overall effect of all the items of operating expenses and revenues. We are not laying down the proposition that once the operating profit is available, then no adjustment is possible. Sub-clause (iii) to rule 10B(1)(e) clearly provides that the normal gross profit mark-up of comparables is adjusted to take into account the functional and other differences, if any, between the is international transaction and the comparable uncontrolled transactions etc. To ask for adjustment, it is sine qua non that there should be some independent and substantial reason for claiming adjustment in profit rate of comparables. The singular effect of higher quantum of an item of expenditure de hors the other relevant factors, is not permissible. In the context of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under SLM with the lower rates of depreciation charged by four comparable companies, other than Mapro Industries Ltd. and Karvy Consultants Ltd. In view of above discussion, we hold that the operating profit margin of these four comparable companies, should be recomputed by the TPO/AO in line with the rates of depreciation charged by the assessee under SLM .. 11. The ratio of the above decisions clearly applies to the facts of the assessee's case. Following the said decisions, we hold that the Ld. TPO has rightly allowed the adjustment for depreciation on assets. Thus, we reverse the findings of the DRP on this issue and direct the TPOIAO to restore the depreciation adjustments on assets which was earlier allowed while passing the order u/s 92CA dated 29.01.2016. Ground nos. 4.6, 4.7 and 5 are allowed. 14. Respectfully following the decision of the Coordinate Bench, as aforesaid, we direct the Assessing Officer to allow depreciation adjustment while determining the ALP. 15. Insofar as adjustment relating to manufacturing segment, we find, the assessee has claimed certain adjustments for computing the profit margin qua the comparables and also applying the cash ..... X X X X Extracts X X X X X X X X Extracts X X X X
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