DCIT, CHENNAI V. Gates unitta India Company Pvt Ltd., Kancheepuram

ITA 1036/CHNY/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4749 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2017
• Appeal Filed By: Department
• Bench Allotted: D
• Next Hearing Date: 06-03-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 23-04-2014
• Court: TRIBUNAL
• Department Lawyers: PATHALAVATH PEERYACIT
• Assessee Lawyers: B RAMAKRISHNANC A
• Keywords: Business income; Transfer pricing; Rule of consistency; Additional evidence
• Section: 10B; 2

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , ! ' ! # . $ % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NOS.1041/MDS./2014 / ASSESSMENT YEAR :2009-10 M/S.GATES UNITTA INDIA COMPANY P LTD., F-19, SIPCOT INDUSTRIAL PARK PONDUR, A.SRIPERUMBDUR, KANCHIPURAM DISTRICT 602 105. VS. THE DCIT, COMPANY CIRCLE II(2), CHENNAI. [PAN AABCG 7107 J ] ( () / APPELLANT) ( *+() /RESPONDENT) ./ I.T.A.NOS.1036/MDS./2014 / ASSESSMENT YEAR :2009-10 THE DCIT, COMPANY CIRCLE II(2), CHENNAI. VS. M/S.GATES UNITTA INDIA COMPANY P LTD., F-19, SIPCOT INDUSTRIAL PARK KANCHIPURAM DISTRICT 602 105 [PAN AABCG 7107 J ] ( () / APPELLANT) ( *+() /RESPONDENT) ASSESSEE BY : MR.B.RAMAKRISHNAN,C.A REVENUE BY : MR.PATHALAVATH PEERYA,CIT DR / DATE OF HEARING : 06 - 03 - 201 7 / DATE OF PRONOUNCEMENT : 26 - 04 - 2017 , / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE ARE DIRECTED AGAINST THE ASSESSMENT ORDER DATED 27. 02.2014 ITA NOS.1041& 1036/14, :- 2 -: PASSED U/S.143(3) R.W.S.144C(13) OF THE ACT CONSEQ UENT TO THE DIRECTIONS OF THE DRP PASSED U/S. 144C(5) OF THE ACT ON 20.12.2013. SINCE ISSUES INVOLVED IN THIS CROSS APPEALS ARE COMMON IN NATURE, THESE APPEALS ARE CLUBBED TOGETHE R, HEARD TOGETHER, DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. FIRST, WE TAKE UP APPEAL OF ASSESSEE (ITA NO.1041/1 4) 2.1 THE FIRST GROUND RAISED IN THIS APPEAL IS TOO GENERAL AND DOES NOT REQUIRE ADJUDICATION. HENCE, THIS GROUND IS DI SMISSED. 2.2 AT THE TIME OF HEARING, THE LD. A.R OF THE A SSESSEE DID NOT PRESS GROUND NOS.2 & 3. ACCORDINGLY, GROUND N OS. 2 & 3 ARE DISMISSED AS NOT PRESSED. 3. GROUND NO.4 IS WITH REGARD TO DISALLOWANCE OF CU STOMS DUTY PAYMENT. THE CONTENTION OF THE LD.A.R IS THAT THE TRANSFER PRICING OFFICER (TPO) ERRED IN INCLUDING 30% OF THE CUSTOMS DUTY AS PART OF THE OPERATING COST OF THE ASSESSEE TO DE TERMINE THE RATIO OF OPERATING PROFIT TO SALES. 4. THE FACTS OF THE ISSUE ARE THAT FROM THE FACTS OF THIS CASE IT IS MADE CLEAR THAT THE ASSESSEE IN ITS INITIAL Y EARS OF MANUFACTURING OPERATIONS, THE IMPORT CONTENT OF RAW MATERIALS WAS AS HIGH AT 99%. SECONDLY, GUI IS PROCURING A PRODUC T WHICH, AS ITA NOS.1041& 1036/14, :- 3 -: ALREADY UNDERGONE A VERY KEY PROCESS OF CALENDARING . THE RAW MATERIAL IS NOT JUST POLYMER OR RUBBER. LOCAL VENDO RS IN INDIA DO NOT HAVE THE CAPABILITY OF UNDERGOING THIS PROCESS OF CALENDARING AND THIS PROCESS REQUIRES HUGE INVESTMENTS PLANT AN D MACHINERIES. THIS PROCESSED AND CALENDARED MATERI AL IS RECEIVED BY GUI IN REFRIGERATED CONTAINERS AND HAS A LIMITED SHELF LIFE AND IS PACKED ACCORDINGLY WITH LINERS ETC, WHICH HAS A COS T TO IT. GUI HAS TO USE THE BEST TECHNOLOGY SINCE THESE PRODUCTS ARE CONSUMED BY AUTO MANUFACTURERS. THESE BUSINESS FACTORS, CONSTRA INED GUI AND GUI HAD TO IMPORT ALL OF ITS RAW MATERIALS, DURING THE YEAR ENDED MARCH 31, 2009. THIS IS MATERIALLY DIFFERENT FROM T HE IMPORT CONTENT OF THE RAW MATERIAL IN THE CASE OF THE CORN PARABLES SELECTED BY YOUR GOOD SELF. THE AVERAGE IMPORT CONT ENT OF RAW MATERIAL OF ALL THE COMPARABLE COMPANIES WAS 29%. T HIS VARIATION IS PARTICULARLY IMPORTANT SINCE THE BUSINESS MODEL OF AN AUTOMOTIVE BELT MANUFACTURER, HAVING 99% IMPORT CON TENT IN RAW MATERIAL, NORMALLY CANNOT BE THE SAME AS OF THE COM PARABLE COMPANIES HAVING IMPORT CONTENT OF 29%. 4.1 THE ASSESSEE COMPANY HAD ALSO RELIED ON HONBLE TRIBUNAL DECISION IN THE CASE OF M/S. SKODA AUTO INDIA PRIVA TE LIMITED.,IN [2009] 30 SOT 319(PUNE) WHEREIN IT WAS RULED THAT S UITABLE ITA NOS.1041& 1036/14, :- 4 -: CUSTOMS DUTY ADJUSTMENTS HAS TO BE PROVIDED AND THE CASE INVOLVES INITIAL YEAR OF OPERATIONS. THE ASSESEE CO MPANY HAD REQUESTED TO EXCLUDE RS.4.31 CRORES PERTAINS TO CUS TOMS DUTY IN THE MANUFACTURING SEGMENT (5.61% OF RELEVANT CUSTOM S DUTY CHARGED TO SALES). 4.2 THE CONTENTION OF THE ASSESSEE COMPANY IS THAT IT IS IN INITIAL YEAR OF OPERATIONS HAS BEEN CONSIDERED AND THE CUST OMS DUTY ADJUSTMENT WAS PROVIDED TO THE ASSESSEE COMPANY. HO WEVER, IT HAS TO BE NOTED THAT THE ASSESSEE HAS NOT EXCLUDED THE CUSTOMS DUTY IN THE COMPARABLES. TO BRING IN UNIFORMITY, TH E CUSTOMS DUTY WAS ELIMINATED IN THE COMPARABLE ALSO. THE IMPORT P ERCENTAGE IN THE COMPARABLES COMES TO 30% AND THIS 30% WAS EXCLU DED FROM THE ASSESSEES CUSTOMS DUTY TO WEED OUT THE DIFFERE NCE BETWEEN THE ASSESSEE COMPANY AND THE COMPARABLES. 4.3 THE TPO OBSERVED THAT WHILE REQUESTING FOR CUSTOMS DUTY ADJUSTMENT, THE ASSESSEE HAD STATED THAT THEY NEED TO IMPORT BECAUSE THEIR CUSTOMERS ARE INTO HIGHLY ENGINEERED PRODUCTS AND FIND APPLICATIONS IN AUTOMOBILES AND THEY REQUIRE A N EXACT MADE TO SPECIFICATION PRODUCT AND HENCE GOOD CALENDARING PROCESS IS ITA NOS.1041& 1036/14, :- 5 -: REQUIRED AND THE ASSESSEE COMPANY IS IN INITIAL YEA R OF OPERATIONS. THE PRICE REDUCTION CLAIMED FOR SUCH HIGH ENGINEERE D PRODUCTS CANNOT BE BELIEVABLE BECAUSE FROM THE SUBMISSIONS I T CAN BE GATHERED THAT THE ASSESSEE COMPANY IS OPERATING IN A SPECIAL NICHE ZONE. THE ASSESSEE COMPANY HAS NOT SUBMITTED ANY COMPETITIVE FACTORS THAT COMPELLED THEM TO SELL THE IR PRODUCTS AT LESSER PRICE, THAN THEIR PRODUCTION COST. 4.4 ACCORDING TO TPO, ANOTHER IMPORTANT POINT IS T HAT THE ACTUAL PRODUCTION OF THE ASSESSEE COMPANY VIS-A- VIS THE C OMPARABLES. AS SEEN FROM THE ANNUAL REPORT THEY HAVE ACHIEVED 1 70% OF THEIR INSTALLED CAPACITY WHEREAS THE COMPARABLES HAD ACHI EVED ONLY 66% (ON AVERAGE) OF THEIR CAPACITY UTILIZED. WHEN A N EXPLANATION IS CALLED FOR, THE ASSESSEE HAD SUBMITTED THAT SOME OF THE PRODUCTION PROCESS ARE CARRIED OUT BY AE ITSELF AND THEIR CAPACITY UTILIZATION IS ONLY 53%. THE HIGHER PRODUCTION OF T HE ASSESSEE COMPANY THAN THAT OF THE COMPARABLES WOULD ALSO BE ONE OF THE REASONS FOR SUCH PRICE REDUCTION SINCE NORMALLY ANY COMPANY WOULD NOT LIKE TO STORE THE GOODS FOR LONGER TIME, WHICH WILL AFFECT THEIR WORKING CAPITAL. THE FACT THAT THE ASSESSEE C OMPANY HAD ITA NOS.1041& 1036/14, :- 6 -: IMPORTED THE CALENDARED PRODUCT FROM THEIR AE HAS T O BE TAKEN INTO ACCOUNT IN THIS REGARD. 4.5. EVEN THOUGH THE ASSESSE COMPANY ARGUES THAT T HEIR PROFITABILITY HAD REDUCED DUE TO THE SALES FACTORS, ACTUALLY IT IS NOT SO. THE ASSESSEE HAS NOT SUBMITTED ANY VALID DOCUME NTARY EVIDENCES TO SUBSTANTIATE THEIR CLAIM. HENCE, THE T PO REJECTED THE CLAIM OF ASSESSEE. 4.6. THE DRP OBSERVED THAT THE ASSESSEE SUBMITTED THE COMPUTATION OF THE RATIO OF OPERATING PROFIT TO SAL ES TO ARRIVE AT THE PROFIT LEVEL INDICATOR OF THE ASSESSEE. IN THE SAME, THE ASSESSEE EXCLUDED THE CUSTOMS DUTY OF ` 4.31 CRORES AS THIS WAS A VARIATION WITH MATERIALLY DIFFERENT FACTS LISTED BELOW AND HENCE EXCLUDED. A) THE ASSESSEE IMPORT CONTENT WAS AS HIGH AS 99% I N THE INITIAL YEARS. B) THE COMPARABLE COMPANIES D NOT POSSESS THE TECHN OLOGY FOR THE RAW MATERIAL, WHICH IS A TECHNOLOGICALLY SU PERIOR PRODUCT. C) THE IMPORT CONTENT OF THE COMPARABLES ARE LESS THATN 30% AND HENCE EXCLUDED IN ORDER TO WEED OUT THE DIFFERE NCES BETWEEN THE ASSESSEE COMPANY AND THE COMPARABLES. ITA NOS.1041& 1036/14, :- 7 -: THE DRP RELYING ON THE DECISION OF DELHI BENCH OF T RIBUNAL IN THE CASE OF SONY INDIA, CONSOLIDATED ORDER FOR ASSESSME NT YEARS 2001-02 TO 2003-04 DATED 23.09.2008 IN [2009] 315 I TR (A.T.) 150 (ITAT[DEL]), REJECTED THE ADJUSTMENT ON ACCOUNT OF CUSTOM DUTY PAYMENT. AGAINST THIS, THE ASSESSEE IS IN APP EAL BEFORE US. 5. BEFORE US, LD.A.R SUBMITTED THAT 90% OF THE RAW MATERIALS OF THE ASSESSEE ARE IMPORTED AS SUCH CUSTOMS DUTY A DJUSTMENTS TO BE MADE AND IT INCLUDES ` 4.31 CRORES PERTAINED TO THE CUSTOMS DUTY IN THE MANUFACTURING SEGMENT. IN PRINCIPLE THE CUSTOMS DUTY ADJUSTMENTS IS ALLOWED IN VIEW OF THE CO-ORDINATE B ENCH DECISION IN THE CASE OF MOTONIC INDIA AUTOMOTIVE (P.) LTD., VS. ACIT IN [2016) 73 TAXMANN.COM 235(CHENNAI-TRIB) WHEREIN HEL D THAT: 6.1 AT THIS STAGE, IT IS PERTINENT TO MENTION THE FINDING OF THE PUNE BENCH IN THE CASE OF DEMAG CRANES & COMPONENTS (IND IA) PVT. LTD. V. DCIT(SUPRA) DATED 4.1.2012 IN ITA NO.120/PN/2011, W HICH IS AS FOLLOWS : 37. WE HAVE HEARD THE PARTIES AND PERUSED THE AVAI LABLE MATERIAL ON RECORDS IN THE LIGHT OF THE SECOND LIMB OF THE G ROUND 4(B). IT IS RELEVANT MENTIONED THAT WE HAVE ALREADY ANALYSED TH E RELEVANT PROVISIONS OF INCOME TAX RULES VIS A VIS THE SCOPE OF THE ADJUSTMENTS IN THE PRECEDING PARAGRAPHS IN THE CONTEXT OF THE A DJUSTMENTS ON ACCOUNT OF THE WORKING CAPITAL. IN PRINCIPLES, OU R FINDINGS ON THE ISSUE REMAIN APPLICABLE TO THE ADJUSTMENTS ON ACCOU NT OF THE IMPORT COST MENTIONED IN GROUND 4(B) TOO. THE DIFFERENCE B ETWEEN THE AL MARGIN BEFORE AND AFTER THE SAID ADJUSTMENTS ON ACC OUNT OF IMPORT COST WORKS OUT TO 0.57% (7.18%-6.61%). REVENUE HAS NOT DISPUTED THE SAID WORKING OF THE ASSESSEE. IN THESE FACTUAL CIRCUMSTANCES AND IN THE LIGHT OF THE SCOPE OF ADJUSTMENTS DISCUSSED ABOVE, IN OUR OPINION AND IN PRINCIPLE, THE ASSESSEE SHOULD WIN O N THIS GROUND TOO. ONE SUCH DECISION RELIED UPON BY THE ASSESSEES COU NSEL SUPPORTS ITA NOS.1041& 1036/14, :- 8 -: OUR FINDING RELATES TO THE DECISION OF THIS BENCH O F THE TRIBUNAL IN THE CASE OF SKODA AUTO INDIA P LTD 122 TTJ 699 (PUNE) D ATED MARCH 2009 WHEREIN, IT IS HELD (IN PARA 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 WHA T IS TO BE REALLY SEEN IS WHETHER THIS HIGH IMPORT CONTENT WAS NECESS ITATED BY THE EXTRAORDINARY CIRCUMSTANCES BEYOND ASSESSEES CONTR OL. AS WAS OBSERVED BY A CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF E-GAIN COMMUNICATION (P) LTD. (SUPRA) THE DIFFEREN CES WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE, COST CHA RGED OR PAID IN, OR THE PROFIT IN THE OPEN MARKET ARE TO BE TAKEN INTO CONSIDERATION WITH THE IDEA TO MAKE REASONABLE AND ACCURATE ADJUS TMENT 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. A LL THESE THINGS COULD BE RELEVANT ONLY WHEN HIGHER IMPORT CONTENT I S A PART OF THE BUSINESS MODEL WHICH THE ASSESSEE HAS CONSCIOUS LY CHOSEN BUT THEN IF IT IS A BUSINESS MODEL TO IMPORT THE SK D KITS OF THE CARS, ASSEMBLE IT AND SELL IT IN THE MARKET, THAT I S CERTAINLY NOT THE BUSINESS MODELS OF THE COMPARABLES THAT THE TPO HAS ADOPTED IN THIS CASE. THE ADJUSTMENTS THEN ARE REQUIRED TO BE MADE FOR FUNCTIONALLY DIFFERENCES. THE OTHER WAY OF LOOKING AT THE PRESENT SITUATION IS TO ACCEPT THAT BUSINESS MODEL OF THE A SSESSEE COMPANY AND THE COMPARABLE COMPANIES ARE THE SAME A ND IT IS ON ACCOUNT OF INITIAL STAGES OF BUSINESS THAT THE U NUSUALLY HIGH COSTS ARE INCURRED. THE ADJUSTMENTS ARE THUS REQUIR ED EITHER WAY. IT IS, THEREFORE, PERMISSIBLE IN PRINCIPLE TO MAKE ADJUSTMENTS IN THE COSTS AND PROFITS IN FIT CASES. WE ALSO DO N OT AGREE WITH THE AUTHORITIES BELOW THAT THE ONUS IS ON THE ASSE SSEE TO GET ALL SUCH DETAILS OF THE COMPARABLE CONCERNS SO AS TO MA KE THIS COMPARISON POSSIBLE. THE ASSESSEE CANNOT BE EXPECTE D TO GET THE DETAILS AND PARTICULARS WHICH ARE NOT IN PUBLIC DOMAIN. IN SUCH A SITUATION, I.E. WHEN INFORMATION AVAILABLE I N PUBLIC DOMAIN IS NOT SUFFICIENT TO MAKE THESE COMPARISONS POSSIBL E, IT IS INEVITABLE THAT SOME APPROXIMATIONS ARE TO BE MADE AND REASONABLE ASSUMPTIONS ARE TO BE MADE. THE ARGUMENT BEFORE US WAS THAT IT WAS FIRST YEAR OF ASSESSEES OPERATI ONS AND COMPLETE FACILITIES ENSURING A REASONABLE INDIGENOU S RAW MATERIAL CONTENT WAS NOT IN PLACE. THE ASSESSEES C LAIM IS THAT IT WAS IN THESE CIRCUMSTANCES THAT THE ASSESSEE HAD TO SELL THE CARS WITH SUCH HIGH IMPORT CONTENTS, AND ESSENTIALL Y HIGH COSTS, WHILE THE NORMAL SELLING PRICE OF THE CAR WAS COMPU TED IN THE LIGHT OF THE COSTS AS WOULD APPLY WHEN THE COMPLETE FACILITIES OF REGULAR PRODUCTION ARE IN PLACE. NONE OF THESE ARGU MENTS WERE BEFORE ANY OF THE AUTHORITIES BELOW. WHAT WAS ARGUE D BEFORE THE AO WAS MERE FACT OF HIGHER COSTS ON ACCOUNT OF HIGH ER IMPORT DUTY BUT THEN THIS ARGUMENT PROCEEDED ON THE FALLAC Y THAT AN OPERATING PROFIT MARGIN FOR HIGHER IMPORT DUTY IS P ERMISSIBLE MERELY BECAUSE THE HIGHER COSTS ARE INCURRED FOR TH E INPUTS. THAT ARGUMENT HAS BEEN REJECTED BY A CO-ORDINATE BENCH A ND WE ARE IN RESPECTFUL AGREEMENT WITH THE VIEWS OF OUR ESTEE MED ITA NOS.1041& 1036/14, :- 9 -: COLLEAGUES. THIS ADDITIONAL ARGUMENT WAS NOT AVAILA BLE BEFORE THE AUTHORITIES BELOW AND IT WILL INDEED BE UNFAIR FOR US TO ADJUDICATE ON THIS FACTUAL ASPECT WITHOUT ALLOWING THE TPO TO EXAMINE ALL THE RELATED RELEVANT FACTS. WE, THEREFO RE, DEEM IT FIT AND PROPER TO REMIT THIS MATTER TO THE FILE OF THE TPO FOR FRESH ADJUDICATION IN THE LIGHT OF OUR ABOVE OBSERVATIONS. 38. THE PERUSAL OF THE IMPUGNED ORDERS SHOWS THAT T HE 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 AVAILABL E 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 EXA MINE THE CLAIM OF THE ASSESSEE RELATING TO THE IMPORT COST FACTOR AND ELI MINATE THE DIFFERENCE IF ANY. HOWEVER, THE TPO/AO/DRP SHALL SE E TO IT THAT THE DIFFERENCE IN QUESTION IS LIKELY TO MATERIALLY AFF ECT THE PRICE/PROFIT IN THE OPEN MARKET AS ENVISAGED IN SUB RULE (3) OF RUL E 10B OF THE INCOME TAX RULES, 1962. ACCORDINGLY, GROUND 4(B) IS ALLOWED PRO TANTO. ACCORDINGLY, WE DIRECT THE A.O. TO GIVE SUITABLE AD JUSTMENT 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 ISUSE TO THE FILE OF AO F OR FRESH CONSIDERATION. 6. THE SECOND GROUND IS WITH REGARD TO EXCLUDING F OREX GAIN FROM THE PROFIT LEVEL INDICATOR (PLI) BY THE ASSESS EE. 6.1 THE FACTS OF THE CASE ARE THAT THE MAIN CONTEN TION OF THE ASSESSEE IS THAT FOREX LOSS DO NOT FORM PART OF OPE RATING ITEM AND HENCE IT HAS TO BE EXCLUDED FROM THE MARGIN COMPUTA TION. THE ASSESSEE COMPANY HAD SUBMITTED THAT FOR THE FY 2008 -09, IT HAD ITA NOS.1041& 1036/14, :- 10 - : IMPORTED 99.11% OF THE RAW MATERIALS. ON THE OTHER HAND, IT EXPORTED GOODS ONLY WORTH RS.2.48 CRORES OUT OF ITS TOTAL SALES OF RS.101.62 CRORES (MANUFACTURING SALES BEING RS. 76. 90 CRORES) AS IS EVIDENT FROM NOTE 7 OF THE SAID FINANCIALS. THE RAW MATERIAL IMPORT PERCENTAGE IS VERY LOW IN THE CASE OF THE CO MPARABLE COMPANIES WHEREAS THEIR EXPORT TO SALES RATIO IS HI GH COMPARED TO THE ASSESSEE COMPANY. AT AN AVERAGE IMPORT CONTENT AND COMPARABLE EXPORT CONTENT, COMPARABLE COMPANIES HAV E A NATURAL HEDGE AND ARE NOT IMPACTED BY CURRENCY MOVEMENTS. T HE ASSESSEE HAD SUBSTANTIAL IMPORTS AND MINIMAL EXPORT S WHEREAS THE COMPARABLE COMPANIES HAD SUBSTANTIAL EXPORTS AN D MINIMAL IMPORTS. ALSO FY 2008-09 WAS A YEAR WHEN RUPEE WAS DEPRECIATING AND HAD SUBSTANTIAL FLUCTUATIONS. 6.2 ACCORDING TO TPO, AS PER ASSESSEE, FOREX LOSS ARISES ONLY DUE TO SALES OR PURCHASE ACTIVITIES WHICH ARE REVEN UE IN NATURE ARE NOT CLASSIFIED AS A PART OF THE OPERATING EXPEN SES. NOW THE ASSESSEE IS COMING WITH THE FRESH SUBMISSIONS THAT THEIR IMPORT PERCENTAGE IS HIGHER AND THEIR EXPORT PERCENTAGE IS LOWER THAN THAT OF THE COMPARABLES.THE ASSESSEE PRIMARILY ACCE PTS THE FOREX LOSS/GAIN PERTAINING TO REVENUE TRANSACTIONS HAS TO BE CONSIDERED ITA NOS.1041& 1036/14, :- 11 - : IN THE OPERATING ITEMS. THERE WAS NO DISPUTE ON THA T GROUND. HIS ONLY GRIEVANCE WAS THAT, GIVEN AN EXTRAORDINARY YEA R OF DEPRECIATING RUPEE, SUITABLE ADJUSTMENTS HAS TO BE GIVEN TO THE ASSESSEE COMPANY WITH RESPECT TO THE COMPARABLE. IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE COMPANY IMPORTS 98% OF RAW MATERIAL AND THE COMPARABLE IMPORT ONLY 30% OF RAW MATERIAL AND ON THAT BASIS SUITABLE FOREX LOSS ADJU STMENT WAS PROVIDED TO THE ASSESSEE COMPANY. 6.3 THE DRP OBSERVED THAT THEY ARE IN AGREEMENT WI TH THE ASSESSEE THAT FOREIGN EXCHANGE SHOULD HAVE BEEN EXC LUDED FROM THE OPERATING INCOME, EVEN THE SAFE HARBOUR RULES H AVE SUCH PROVISIONS. THE DRP DIRECTED THE TPO TO EXCLUDE TH E FOREX ADMISSION RESTATEMENT LOSS FROM THE PLI CVALCULATIO NS OF THE ASSESSEES CASE. 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 ALSO FOREX GAINS IN THE OP ERATING INCOME OF ASSESSEE, BOTH TO BE EXCLUDED FROM THE OPERATING EXPENSES AS WELL AS OPERATING INCOME RESPECTIVELY IN VIEW OF TH E ORDER OF ITA NOS.1041& 1036/14, :- 12 - : TRIBUNAL IN THE CASE OF MOTONIC INDIA AUTOMOTIVE PVT. LTD., IN ITA NO.741/MDS./2014 FOR ASSESSMENT YEAR 2009-10 V IDE ORDER DATED 17.08.2016 WHEREIN HELD THAT:- 9. WE FIND FORCE IN THE ARGUMENT OF THE LD. AR. I T IS NORMAL THAT EXCHANGE RATE IS SUBJECT TO FLUCTUATION DUE TO ECONOMIC CONDITIONS. WHILE DETERMINING THE ALP, ONE HAS TO CONSIDER THESE FACTORS, MORE SO, OUR VIE W IS FORTIFIED BY THE DECISION OF THE TRIBUNAL IN THE CA SES OF HONDA TRADING CORP. INDIA PVT. LTD. V. ACIT IN ITA NO.5297/DEL/2011 FOR THE ASSESSMENT YEAR 2007-08 AND DHL EXPRESS (INDIA) PVT. LTD. V. ACIT IN ITA NO.7360/MUM/2010 FOR THE ASSESSMENT YEAR 2006-07. ACCORDINGLY, WE DIRECT THE TPO TO PROVIDE CONSIDERA BLE EXCHANGE FLUCTUATION ADJUSTMENT WHILE DETERMINING T HE ALP. ACCORDINGLY, THIS ISSUE IS REMITTED TO THE FI LE OF THE TPO FOR DETERMINING THE ALP AFTER CONSIDERING THE ABOVE THREE COMPONENTS I.E. CUSTOMS DUTY ADJUSTMENT , AIR FREIGHT ADJUSTMENT AND FOREIGN EXCHANGE FLUCTUA TION ADJUSTMENT. ACCORDINGLY, THIS ISSUE IS REMITTED TO THE FILE OF AO FOR FRESH CONSIDERATION. 8. THE THIRD GROUND IS WITH REGARD TO REJECTION OF CERTAIN COMPARABLES. 9. BEFORE US, LD.A.R SUBMITTED THAT GUJARAT RECLAI MS AND RUBBER PRODUCTS LTD., AND VICTOR GASKET WERE REJECT ED AS COMPARABLE. FURTHER, LD.A.R SUBMITTED THAT GUJARAT RECLAIMS AND ITA NOS.1041& 1036/14, :- 13 - : RUBBER PRODUCTS LTD USES THE MATERIAL CONSISTING OF SCRAP/RECLAIMED RUBBER WHICH RECYCLED FROM WORN OUT TYRES AND TREAD PEELINGS TO THE TUNE OF 94%. ACCORDING TO LD. A.R, THE QUALITY OF RAW MATERIALS IS VERY POOR WHICH RESULTE D IN LOW QUALITY OF FINAL PROD8UCT AS WELL AS PRICE ALSO VARIOUS. B EING SO, IT CANNOT BE COMPARED TO THE ASSESSEES CASE. FOR THIS PURPO SE, LD.A.R RELIED ON THE JUDGEMENT OF MUMBAI TRIBUNAL IN THE C ASE OF MERCK LTD. VS. DCIT IN [2014] 148 ITD 513 (MUMBAI-TRIB) W HEREIN HELD THAT:- 22.8 THE ASSESSEE HAS ALSO ARGUED THAT THERE WAS M AJOR DIFFERENCE BETWEEN QUALITY OF THE PRODUCT PRODUCED BY THE AE WHICH WAS A BRANDED ITEM COMPARED TO THE LOW QUALIT Y GOODS MANUFACTURED BY UNICHEM LABORATORIES LTD. IT HAS BE EN ARGUED THAT THE MATERIAL PRODUCED FROM UNICHEM LABORATORIE S LTD. DID NOT PASS THE PARTICLE SIZE TEST AND BULK DENSITY TE ST WHICH DETERMINE THE QUALITY OF THE PRODUCT. A CERTIFICATE DATED 1.3.2005 FROM THE FACTORY MANAGER OF THE ASSESSEE HAD BEEN P RODUCED WHICH HAD BEEN REJECTED BY THE AUTHORITIES BELOW AS BEING NOT CONTEMPORARY. IN OUR VIEW THE QUALITY OF THE PRODUC T IS IMPORTANT AS IT AFFECTS THE COMPARABILITY OF THE TRANSACTIONS . QUALITY OF PRODUCT HAS INFLUENCE ON THE PRICING OF THE PRODUCT . THERE WAS HOWEVER NO INDEPENDENT EVIDENCE PRODUCED BEFORE THE LOWER AUTHORITIES TO SHOW SUPERIOR QUALITY OF ASSESSEES PRODUCT. THE ASSESSEE VIDE LETTER DATED 8.2.2010 HAS FILED AN AD DITIONAL EVIDENCE BEFORE THE TRIBUNAL IN THE FORM OF A QUALI TY CERTIFICATE FROM BEE PHARMA LABS (PVT.) LTD. AN INDEPENDENT ACC REDITED THIRD PARTY AND ALSO COMPARATIVE SELLING RATE OF TH E SAME PRODUCT ITA NOS.1041& 1036/14, :- 14 - : PRODUCED BY TORRENT PHARMA AND UNICHEM LABORATORIES LTD HAS BEEN FILED AND IT HAS BEEN REQUESTED THAT THE ADDIT IONAL EVIDENCE MAY BE SUBMITTED. IT WAS ARGUED THAT THE ASSESSEE W AS MADE AWARE OF THESE ADDITIONAL EVIDENCE ONLY AFTER PASSI NG OF ORDER BY CIT(A) AND ACCORDINGLY IT HAS BEEN REQUESTED FOR AD MISSION OF THE SAME. IN OUR VIEW AN INDEPENDENT EVIDENCE REGAR DING QUALITY OF PRODUCTS AND COMPARATIVE PRICES WILL BE USEFUL I N DECIDING THE ISSUE. LEARNED CIT (DR) HAD ALSO NO OBJECTION FOR A DMISSION OF ADDITIONAL EVIDENCES IF THE ISSUE WAS SENT BACK TO CIT(A) FOR FRESH EXAMINATION AFTER CONSIDERING THE DECISION OF TRIBUNAL IN CASE OF SERDIA PHARMACEUTICAL (INDIA) (R) LTD. (SUP RA). WE, THEREFORE, ADMIT THE ADDITIONAL .EVIDENCES FILED BY THE ASSESSEE AND THE ISSUE IS RESTORED TO THE FILE OF CIT(A) FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF O BSERVATIONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARIN G TO THE ASSESSEE. 10. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OPINION THAT IF THE PRODUCT OF THE COMPARABLES SELECTED BY THE TPO IS NOT COMPARABLE WITH THE ASSESSEES PRODUCT, IT CANNOT B E CONSIDERED. IN THE CASE OF GUJARAT RECLAIMS AND RUBBER PRODUCTS LTD., THE RAW MATERIAL USED BY THE ASSESSEE IS A RE-CYCLED FR OM WORN OUT TYRES AND TREAD PEELINGS. BEING SO, THE PRODUCT OF THAT COMPARABLE IS INFERIOR TO THE ASSESSEES PRODUCT, HENCE IT CANNOT BE COMPARED TO THE ASSESSEES CASE. ITA NOS.1041& 1036/14, :- 15 - : 10.1 REGARDING VICTOR GASKETS INDIA LTD., THE ASSE SSEE WANTS TO INCLUDE IT. ITS ANNUAL REPORT SHOWS THAT THE COMPAN Y EXITED OUT OF ASBESTOS BASED PRODUCTS IN TOTALITY AT ITS MANUFACT URING LOCATION, THUS COMPLETING A STRATEGIC PLAN TO GO ASBESTOS FRE E. BEING SO, IT CANNOT BE CONSIDERED AS COMPARABLE TO ASSESSEES CA SE. REJECTION IS JUSTIFIED. 10.2. IN THE RESULT, THE APPEAL OF ASSESSEE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES. REVENUES APPEAL 11. THE MODIFIED GROUNDS RAISED BY REVENUE ARE AS FOLLOWS:- 1. THE DIRECTIONS OF THE HONBLE DISPUTE RESOLUTION PANEL ARE CONTRARY TO THE LAW AND FACTS OF THE CASE. 2. THE HONBLE DRP ERRED IN DIRECTING THE TPO TO EX CLUDE THE FOREX LOSS ON ACCOUNT OF RESTATEMENT OF LOANS ETC., FROM THE O PERATING COST OF THE ASSESSEE. 2.1 THE HONBLE DRP OUGHT TO HAVE NOTED THAT THE TO SS ARISES ONLY DUE TO SALES OR PURCHASE ACTIVITIES WHICH ARE REVENUE I N NATURE AND ACCORDINGLY THE LOSS HAS TO BE PART OF OPERATING CO ST. 2.2 THE HONBLE DRP FAILED TO NOTE THAT AS PER PARA 2.82 OF OECD, TRANSFER PRICING GUIDETINES,2010, THE FOREX TOSSES OR GAINS ARISING DUE TO REVENUE TRANSACTIONS SHALL FORM PART OF THE OPERATING ITEM. 2.3 THE HONBLE DRP ERRED IN NOT CONSIDERING THE DE CISION OF THE HONBTE TAT, MUMBAI IN THE CASE OF S.NARENDRA VS. A DDI. CIT-16(3) IN NO. 6839(MUMBAI) OF 2012 WHEREIN THE ITAT HAS LA ID DOWN THE PRINCIPLE THAT THE FOREX GAIN/LOSS SHOULD BE CONSID ERED AS AN OPERATING ITEM. ITA NOS.1041& 1036/14, :- 16 - : 2.4 THE HONBTE DRP OUGHT TO HAVE NOTED THE FACT TH AT IN AYS 2007-08 & 2008-09, THE ASSESSEE HAS CONSIDERED THE FOREX LOSS AS PART OF THE OPERATING ITEM AND DURING THE Y 2009-10, I.E. THE CURRENT YEAR, THE ASSESSEE FAILED TO FOLLOW THE RULE OF CONSISTENCY I N THE TREATMENT OF FOREX LOSS. 12. IN VIEW OF OUR FINDINGS IN ASSESSEES APPEAL IN GROUND NO.4 AT PARA NOS.4 & 5 OF THIS ORDER, THE APPEAL OF REVENUE HAS BECOME INFRUCTUOUS. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL O F REVENUE STANDS DISMISSED. ORDER PRONOUNCED ON 26 TH APRIL, 2017, AT CHENNAI. SD/ - SD/ - ( . ! ) ( DUVVURU RL REDDY ) ) % / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 26 TH APRIL, 2017. K S SUNDARAM &' ) *+ ,+ / COPY TO: 1 . -. / APPELLANT 3. / () / CIT(A) 5. +01 ) 2 / DR 2. )3-. / RESPONDENT 4. / / CIT 6. 1! 4 / GF