M/s. Doowon Automotive Systems India Pvt. Ltd., Kancheepuram V. JCIT (OSD), CHENNAI

ITA 2560/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6297 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-08-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 25-05-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 01-09-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR MILIND MADHUKAR BHUSARI
• Keywords: Transfer pricing; International transaction; Speculation loss

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , ! ' ! # . $ , % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER . / ITA NO. 2560/MDS/2016 / ASSESSMENT YEAR : 2012-13 M/S. DOOWON AUTOMOTIVE SYSTEMS INDIA PVT. LTD., NO.19 & 20, SIPCOT INDUSTRIAL PARK, ORAGADAM, SRIPERUMBUDUR TALUK, KANCHEEPURAM DIST. 602 105. PAN AACCD4172F ( /APPELLANT) V. THE JOINT COMMISSIONER OF INCOME-TAX,(OSD), CORPORATE RANGE-1(1), CHENNAI-34. RESPONDENT) / APPELLANT BY : SHRI S.P.CHIDAMBARAM, ADVOCATE / RESPONDENT BY : DR. MILIND MADHUKAR BHUSARI, CIT ! / DATE OF HEARING : 25.05.2017 '# ! / DATE OF PRONOUNCEMENT: 18.08.2017 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS FILED AGAIN ST THE FINAL ASSESSMENT ORDER DATED 29.06.2016 PASSED U/S.143(3) R.W.S.144C R.W.S.92CA OF THE ACT CONSEQUENT TO THE DIRECTIONS OF - - ITA 2560/MDS/1 6 2 THE DISPUTE RESOLUTION PANEL DATED 13.6.2016 UNDER SEC.144C(5) OF THE INCOME-TAX ACT, 1961. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS F OR OUR CONSIDERATION. 1. THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP), THE CONSEQUENTIAL TRANSFER PRICING ORDER AND THE FI NAL ASSESSMENT ORDER IS ERRONEOUS IN SO FAR AS DETERMIN ING AND QUANTIFYING A DOWNWARD ADJUSTMENT TO THE VALUE OF INTERNATIONAL TRANSACTION (IMPORTS) OF THE APPELLAN T. 2. THE AO/DRP ERRED IN CONFIRMING THE ACTION OF TH E TPO IN NOT ACCEPTING THE ECONOMIC ADJUSTMENTS UNDERTAKE N BY THE APPELLANT. 3. THE AO/DRP ERRED IN CONFIRMING THE ACTION OF TP O BY NOT ALLOWING THE DIFFERENTIAL ADJUSTMENT FOR BASIC CUSTOMS DUTY WITHOUT APPRECIATING FACTS OF THE CASE. 4. THE AO/DRP ERRED IN CONFIRMING THE ORDER OF THE TPO IN NOT PROVIDING WORKING CAPITAL ADJUSTMENT WHILE DETERMINING THE NET PROFIT MARGINS OF THE APPELLANT . 5. THE AO/DRP ERRED IN CONFIRMING THE ORDER OF THE TPO IN TREATING FOREIGN EXCHANGE LOSS SUFFERED BY THE ASSESSEE AS OPERATING EXPENSE. 6. THE AO/DRP ERRED IN NOT APPRECIATING THE FACT T HAT THE TPO PROCEEDED TO CONSIDER FOREIGN EXCHANGE LOSS AS NON-OPERATING WITHOUT ISSUING A SHOW-CAUSE NOTICE I N RESPECT OF THIS ISSUE AND AS SUCH TO THIS EXTENT TH E TRANSFER PRICING ORDER IS VOID AB INITIO. - - ITA 2560/MDS/1 6 3 3. GROUND NOS.1 AND 2 ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. 4. THE THIRD GROUND IS WITH REGARD TO CUSTOMS D UTY ADJUSTMENT WHILE COMPUTING ARMS LENGTH PRICE (ALP) 5. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE IS IN THIRD YEAR FULL OPERATIONS FOR M/S.DOOWON AUTOMOTIVE SYST EMS INDIA PVT. LTD.,(HEREINAFTER REFERRED TO AS THE ASSESSEE OR DOOWON INDIA). THE ASSESSEE HAD IMPORTED THE RAW MATERIA LS FOR A.E AS THEY HAD TO MEET THEIR STRINGENT QUALITY STANDARDS IN THE MANUFACTURE OF FINAL PRODUCT. SINCE THE RAW MATERI ALS WERE IMPORTED, THE ASSESSEE HAD TO PAY CUSTOMS DUTY WHIC H IS MUCH HIGHER THAN CORRESPONDING LOCAL TAXES, IF SIMILAR R AW MATERIALS WERE PROCURED IN THE DOMESTIC MARKET. THE ASSESSEE HAD SOUGHT FOR CUSTOMS DUTY ASSESSMENT, WHICH WAS NOT G IVEN BY THE TPO. THE VIEW OF THE TPO WAS CONFIRMED BY THE DRP. AGGRIEVED BY THE ORDER OF LD. ASSESSING OFFICER CON SEQUENT TO THE DIRECTIONS OF THE DRP, THE ASSESSEE IS IN APPEAL BE FORE US. - - ITA 2560/MDS/1 6 4 6. AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, THE SIMILAR ISSUE CAME FOR CONSIDERATION BEFORE THIS TRIBUNAL IN ASSESSEE'S OWN CASE IN ITA NO.692/MDS./ 2016 FOR ASSESSMENT YEAR 2011-12 VIDE ORDER DATED 25.01.2017 WHEREIN IT WAS HELD AS FOLLOWS:- 5. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MAT ERIAL ON RECORD AND JUDICIAL DECISIONS. THE LD. AR EXPLA INED THAT THE COMPANY WAS INCORPORATED IN THE YEAR 2006 AND I N THE SECOND YEAR OF OPERATION. THE RAW MATERIAL COMPONE NT INCLUDE IMPORT COST WHICH CONSTITUTE A MAJOR COST A ND CLAIM ADJUSTMENT OF CUSTOM DUTY (NON-CENVATABLE) BEFORE T PO. WE RELY ON CO-ORDINATE BENCH DECISION OF MOTONIC IN DIA AUTOMOTIVE PVT. LTD VS. ACIT, ITA NO. 741/MDS/2014 DATED 17.08.2016 AT PAGE 5 PARA 6 WHICH READ AS UNDER :- '6. THE LD. AR SUBMITTED THAT IN RESPECT OF CUSTOM DUTY COMPONENT SUITABLE ADJUSTMENT TO BE MADE WHILE DETERMINING THE ALP. IN OUR OPINION, THE PLEA OF TH E ASSESSEE IS JUSTIFIED. THE TPO HAS NOT CONSIDERED T HE CUSTOM DUTY ADJUSTMENT ON THE REASON THAT IT IS EQUIVALENT TO CENTRAL EXCISE IN COMMERCIAL MARKET. THIS IS NOT CORRECT. THE TRIBUNAL CONSISTENTLY HOLDING THAT WHILE DETERMINING ALP, THERE SHOULD BE SUITABLE ADJUSTMEN T IN RESPECT OF CUSTOM DUTY, WHICH WAS CONSIDERED IN THE FOLLOWING CASES : I) SKODA AUTO INDIA (P) LTD. V. ACIT, AURANGABAD (3 0 SOT 319)[PUNE] - - ITA 2560/MDS/1 6 5 II) TOYOTA KIRLOSKAR MOTORS PVT. LTD. V. ACIT, BANG ALORE ITA NO. 828/BANG/2010 III) PUTZMEISTER CONCRETE MACHINES PVT. LTD. V. DCI T, PANAJI ITA NO. 107/PNJ/2012 IV) DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. V. DCIT, PUNE IN ITA NO.120/PN/2011 6.1 AT THIS STAGE, IT IS PERTINENT TO MENTION THE FINDING OF THE PUNE BENCH IN THE CASE OF DEMAG CRAN ES & COMPONENTS (INDIA) PVT. LTD. V. DCIT(SUPRA) DATED 4.1.2012 IN ITA NO.120/PN/2011, WHICH IS AS FOLLOWS : 37. WE HAVE HEARD THE PARTIES AND PERUSED THE AVAILABLE MATERIAL ON RECORDS IN THE LIGHT OF THE S ECOND LIMB OF THE GROUND 4(B). IT IS RELEVANT MENTIONED T HAT WE HAVE ALREADY ANALYSED THE RELEVANT PROVISIONS OF IN COME TAX RULES VIS A VIS THE SCOPE OF THE ADJUSTMENTS IN THE PRECEDING PARAGRAPHS IN THE CONTEXT OF THE ADJUSTME NTS ON ACCOUNT OF THE WORKING CAPITAL. IN PRINCIPLES, OUR FINDINGS ON THE ISSUE REMAIN APPLICABLE TO THE ADJUSTMENTS ON ACCOUNT OF THE IMPORT COST MENTIONED IN GROUND 4(B) TOO. THE DIFFERENCE BETWEEN THE AL MARG IN BEFORE AND AFTER THE SAID ADJUSTMENTS ON ACCOUNT 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 COUNSEL SUPPORTS OUR FINDING RELATES TO THE DECISION OF THIS BENCH OF THE TRIBUNAL IN THE CASE OF - - ITA 2560/MDS/1 6 6 SKODA AUTO INDIA P LTD 122 TTJ 699 (PUNE) DATED MAR CH 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 WHAT IS TO BE REALLY SEEN IS WHETHER T HIS HIGH IMPORT CONTENT WAS NECESSITATED BY THE EXTRAORDINAR Y CIRCUMSTANCES BEYOND ASSESSEES 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 T HE PRICE, COST CHARGED OR PAID IN, OR THE PROFIT IN THE PEN M ARKET ARE TO BE TAKEN INTO CONSIDERATION WITH THE IDEA TO MAK E REASONABLE AND ACCURATE ADJUSTMENT TO ELIMINATE THE DIFFERENCES HAVING MATERIAL EFFECT. WE DO NOT AGRE E 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 WHIC H 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 CERT AINLY 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. T HE OTHER WAY OF LOOKING AT THE PRESENT SITUATION IS TO ACCEPT THAT BUSINESS MODEL OF THE ASSESSEE COMPANY AND THE COMPARABLE COMPANIES ARE THE SAME AND IT IS ON ACCO UNT OF INITIAL STAGES OF BUSINESS THAT THE UNUSUALLY HI GH COSTS ARE INCURRED. THE ADJUSTMENTS ARE THUS REQUIRED EIT HER - - ITA 2560/MDS/1 6 7 WAY. IT IS, THEREFORE, PERMISSIBLE IN PRINCIPLE TO MAKE ADJUSTMENTS IN THE COSTS AND PROFITS IN FIT CASES. WE ALSO DO NOT AGREE WITH THE AUTHORITIES BELOW THAT THE ON US IS ON THE ASSESSEE TO GET ALL SUCH DETAILS OF THE COMP ARABLE CONCERNS SO AS TO MAKE THIS COMPARISON POSSIBLE. TH E ASSESSEE CANNOT BE EXPECTED TO GET THE DETAILS AND PARTICULARS WHICH ARE NOT IN PUBLIC DOMAIN. IN SUCH A SITUATION, I.E. WHEN INFORMATION AVAILABLE IN PUBLI C 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 OPERATIONS AND COMPLETE FACILITIES ENSURING A REASO NABLE INDIGENOUS RAW MATERIAL CONTENT WAS NOT IN PLACE. T HE ASSESSEES CLAIM IS THAT IT WAS IN THESE CIRCUMSTAN CES THAT THE ASSESSEE HAD TO SELL THE CARS WITH SUCH HI GH IMPORT CONTENTS, AND ESSENTIALLY HIGH COSTS, WHILE THE NORMAL SELLING PRICE OF THE CAR WAS COMPUTED IN THE LIGHT OF THE COSTS AS WOULD APPLY WHEN THE COMPLETE FACIL ITIES OF REGULAR PRODUCTION ARE IN PLACE. NONE OF THESE ARGUMENTS WERE BEFORE ANY OF THE AUTHORITIES BELOW. WHAT WAS ARGUED BEFORE THE AO WAS MERE FACT OF HIGH ER COSTS ON ACCOUNT OF HIGHER IMPORT DUTY BUT THEN THI S ARGUMENT PROCEEDED ON THE FALLACY THAT AN OPERATING PROFIT MARGIN FOR HIGHER IMPORT DUTY IS PERMISSIBLE MERELY BECAUSE THE HIGHER COSTS ARE INCURRED FOR THE INPUT S. THAT ARGUMENT HAS BEEN REJECTED BY A CO-ORDINATE BENCH A ND WE ARE IN RESPECTFUL AGREEMENT WITH THE VIEWS OF OU R ESTEEMED COLLEAGUES. THIS ADDITIONAL ARGUMENT WAS N OT AVAILABLE BEFORE THE AUTHORITIES BELOW AND IT WILL INDEED BE UNFAIR FOR US TO ADJUDICATE ON THIS FACTUAL ASPE CT - - ITA 2560/MDS/1 6 8 WITHOUT ALLOWING THE TPO TO EXAMINE ALL THE RELATED RELEVANT FACTS. WE, THEREFORE, 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 THE ABOVE CITED GUIDELINES BY WAY OF DECISION OF THIS BENCH OF THE TRIBUNAL IN THE CASE OF SKODA AUTO IND IA P LTD (SUPRA) WERE NOT AVAILABLE TO THE REVENUE AUTHO RITIES. 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 F ACTOR 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 10 B 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. 6.1 ACCORDINGLY, THIS ISSUE IS REMITTED TO THE FIL E OF AO FOR CUSTOM DUTY ADJUSTMENT ON SIMILAR DIRECTIONS GI VEN IN THE ABOVE ORDER OF TRIBUNAL. - - ITA 2560/MDS/1 6 9 7. THE FOURTH GROUND IS WITH REGARD TO NON-GRANTING OF WORKING CAPITAL ADJUSTMENT WHILE COMPUTING THE ALP. 7.1 AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, THE SIMILAR ISSUE CAME FOR CONSIDERATION BEFORE THIS TRIBUNAL IN ASSESSEE'S OWN CASE IN ITA NO.692/MDS./ 2016 FOR ASSESSMENT YEAR 2011-12 VIDE ORDER DATED 25.01.2017 WHEREIN IT WAS HELD AS FOLLOWS:- 7. THE LD. AR ARGUED THAT THE ASSESSING OFFICER/DR P HAS CONFIRMED THE ACTION OF THE TPO IN NOT PROVIDING WORKING CAPI TAL ADJUSTMENT WHILE DETERMINING NET PROFIT MARGIN OF THE ASSESSEE . IN THE ASSESSEE'S OWN CASE IN THE ASSESSMENT YEAR 2009-10, DRP IN ITS ORDER DATED 20.12.2013 HAS DIRECTED THE TPO TO EXAMINE TH E ISSUE AND CONSIDER WORKING CAPITAL ADJUSTMENT. WHEREAS, THE LD. TPO OBSERVED THAT THE ASSESSEE COMPANY IS ACTUALLY BUYING THE PA RTS FROM THE AE AND WORKING CAPITAL ADJUSTMENT TO BE ALLOWED IF THE ASSESSEE DEMONSTRATES WITH AE OF ALLOWING THE CREDIT PERIOD TO THE ASSESSEE AND DRP CONFIRM THE ACTION OF THE TPO AND THE LD. A R DEMONSTRATED THE ARITHMETIC MEAN OF 4.58% OF SEVEN COMPARABLES S ELECTED AT PAGE 41 OF PAPER BOOK AND REFERRED TO THE WORKING CAPITA L ADJUSTMENT PLR OF 12.26% WITH THE COMPARABLES CURRENT ASSESTS BEIN G SUNDRY - - ITA 2560/MDS/1 6 10 CREDITORS, SUNDRY DEBTORS AND INVENTORIES AT PAGE 4 2 AND SUPPORTED WORKING CAPITAL ADJUSTMENT OF COMPARABLES COMPANY B ASED ON THE FINANCIAL STATEMENTS. THE LD. DR RELIED ON THE ORD ER OF TPO AND PRAYED FOR NO ADJUSTMENT IS REQUIRED. CONSIDERING THE FACTS AND MATERIAL ON RECORD THE FINANCIAL STATEMENTS AND THE PAPER BOOK, THERE IS NECESSITY FOR WORKING CAPITAL ADJUSTMENT AND ACC ORDINGLY WE REMIT THE ISSUE TO THE FILE OF AO TO CONSIDER THE MATERIA L FOR FRESH CONSIDERATION. 7.2 ACCORDINGLY, THIS ISSUE IS REMITTED TO THE FILE OF AO FOR CUSTOM DUTY ADJUSTMENT ON SIMILAR DIRECTIONS GIVEN IN THE ABOVE ORDER OF TRIBUNAL. 8. THE LAST GROUND IS WITH REGARD TO TREATING FOREI GN EXCHANGE LOSS SUFFERED BY THE ASSESSEE AS OPERATING EXPENSE. 8.1 THE TPO ERRED IN TREATING THE ENTIRE FOREIG N EXCHANGE LOSS SUFFERED BY THE ASSESSEE AS OPERATING EXPENSE. THE TPO GROSSLY ERRED IN TREATING FOREIGN EXCHANGE LOSS AS OPERATING EXPENSE WITHOUT ISSUING SHOW-CAUSE NOTICE AS PER PR OVISO TO SEC.92C(3) AND AS SUCH TO THIS EXTENT THE TRANSFER PRICING (TP) - - ITA 2560/MDS/1 6 11 ORDER IS VIDE AB INITIO. THE TPO ORDER TREATING FO REIGN EXCHANGE LOSS AS OPERATING EXPENSE WITHOUT PROVIDING AN OPPO RTUNITY TO THE ASSESSEE IS OPPOSED TO THE PRINCIPLE OF NATURAL JUS TICE AND FAIR PLAY. THE TPO ERRED IN NOT APPRECIATING THE FACT T HAT THE ASSESSEE HAS IMPORTED THE RAW MATERIALS AT THE SAME PRICE EVERY YEAR AND THE FOREIGN EXCHANGE LOSS SUFFERED BY THE ASSESSEE IS ON ACCOUNT EXCHANGE FLUCTUATIONS IN CURRENCY DURING THE RELEVANT FINANCIAL YEAR. THE ASSESSEE HAS RAISED THE OBJECT ION DURING THE AY 2011-12 THAT THE TPO ERRED IN NOT CONSIDERING FO REIGN EXCHANGE GAIN AS OPERATING INCOME WHILE DETERMINING THE NET PROFIT MARGIN OF THE ASSESSEE. 8.2. THE DRP OBSERVED DURING THE PRESENT YEAR I.E. 2012-13 THAT THE ASSESSEE IS CLAIMING THE REVERSE OF WHAT W AS CLAIMED LAST YEAR. THE INCONSISTENCY IN THE CLAIMS MADE BY THE ASSESSEE IN THE TWO YEARS HAS NOT BEEN EXPLAINED. LAST YEAR , THE DRP HAS GIVEN THE FOLLOWING REASONS:- THE AO IS HEREBY DIRECTED TO VERIFY THE EXISTENCE OR ABSENCE OF FORWARD CONTRACT. IN CASE OF FORWARD CO NTRACT BEING PRESENT, THE AO IS HEREBY DIRECTED TO ALLOW T HE LOSS - - ITA 2560/MDS/1 6 12 ONLY ON THE BASIS OF ACTUAL REALIZATION AS TERMINAT ION OF THE CONTRACTS BEFORE THE END OF THE FINANCIAL YEAR. IN THIS ASPECT, THE DEPARTMENTS STAND ON THIS ISSU E IS VERY CLEAR THAT EXCHANGE LOSSES ARE TO BE RECOGNIZED ONL Y IN THE YEAR OF ACTUAL PAYMENT/TERMINATION. THE CLAIM OF MARKED TO MARKET LOSSES BE IT FOR HEDGING FOR SPE CULATION, IS NOTIONAL AND DISALLOWABLE AS PER CBDT INSTRUCTIO N NO.03 OF 2010 DATED 23.03.2010. AS SEEN FROM THE CBDT INSTRUCTION NO.03 OF 2010, MARKED TO MARKET LOSSES ARE NOTIONAL AND CONTIN GENT DESPITE THAT MARKED TO MARKET SETTLEMENT IS A TRA NSPARENT ACCOUNTING PRACTICE. IN TERMS OF THIS INSTRUCTION EVEN ACTUAL LOSSES I.E. HEDGE LOSS ARE ALLOWABLE AS NON- SPECULATIVE ONLY IF THE TRANSACTION QUALITY UNDER C LAUSE (D) OF THE PROVISO TO SECTION 43(5). MARKED TO MARKET LOSSES CLAIMED AS NOTIONAL LOSSES PRIOR TO SETTLEMENT HAS TO BE TREATED AS SPECULATIVE LOSS IN TERMS OF SECTION 43( 5). IN CASE FORWARD CONTRACT IS NOT PRESENT, THE DECISI ON OF BANGALORE BENCH OF ITAT IN THE CASE OF SAPLAB INDIA PVT. LTD. VS. ACIT ( 2011) 44 SOT 156 (BANG.) IS APPLICABLE. - - ITA 2560/MDS/1 6 13 FOLLOWING THE SAME, OBJECTION OF THE ASSESSEE IS TO BE ACCEPTED AND ASSESSING OFFICER / TPO IS DIRECTED TO CONSIDER THE FOREIGN EXCHANGE FLUCTUATION IN RESPEC T OF THE ASSESSEE AS WELL AS THE COMPARABLES AS OPERATING IN NATURE WHILE DETERMINING THE ALP IN THE CASE OF THE ASSESSEE. 8.3 THE TPO HAS OBSERVED THAT IN FACT, IN THE CASH FLOW STATEMENT, IT IS ADMITTED BY THE ASSESSEE UNDER HEA D CASH FLOW FROM FINANCING ACTIVITY, THE ENTIRE FOREX LOSS OF 13.84 CRORES. THE LONG TERM LOSS AS ON 31/03/11 WAS ONLY 1,10,73, 388 AND AS ON 31/03/12 IT IS 2,22,02,204. THEREFORE, IT WAS C LEAR THAT IT WAS NOT ON ACCOUNT OF FINANCING ACTIVITIES. THEREFORE, THE PRESENTATION OF THE ASSESSEE IN THE FINANCIAL AND I N THE CASH FLOW STATEMENT ARE CONTRADICTORY. UNDER THE CIRCUMSTANC ES, IN THE ABSENCE OF CLEAR CUT EVIDENCE SUBMITTED BY THE ASSE SSEE AS TO WHAT WAS THE LOSS INCURRED BY THE ASSESSEE AS PART OF ITS NORMAL TRANSACTIONS AND WHAT WAS THE NOTIONAL LOSS RECOGNI ZED BY THE ASSESSEE ON ACCOUNT OF MONETARY ITEMS IN THE BALANC E SHEET AS ON 31.03.2012, THE ASSESSEES CLAIM THAT ENTIRE LOS S OF 13.84 - - ITA 2560/MDS/1 6 14 CRORES HAS TO BE TREATED AS NON-OPERATING IN NATURE CANNOT BE ACCEPTED. 8.4 THE ARGUMENTS OF THE ASSESSEE BEFORE THE DR P WERE THAT THE TPO HAD CONSIDERED FOREIGN EXCHANGE LOSS AS NON -OPERATING WHILE ISSUING THE SHOW-CAUSE NOTICE DATED 18 TH DECEMBER 2015. HOWEVER, WHILE PASSING THE FINAL ORDER, THE TPO CON SIDERED THE SAME AS OPERATING AN ENHANCED THE ADJUSTMENT. FURT HER, THE ASSESSEE CONTENDED THAT THE TPO DID NOT PROVIDE AN OPPORTUNITY FOR PERSONAL HEARING OR TO THE ASSESSEE TO SUBMIT T HE DETAILS OF THE FOREIGN EXCHANGE LOSS SUFFERED BY THE COMPANY. THERE IS NOTHING CONTRADICTORY IN THE FINANCIAL STATEMENTS. IN CASH FLOW STATEMENT, WHILE COMPUTING THE MARGINS FROM OPERATI ONS THE AUDITOR HAS RIGHTLY EXCLUDED THE ENTIRE FOREX LOSS AS THE SAME IS NOT DUE TO OPERATIONS BUT BECAUSE OF EXTERNAL FACTO RS NOT UNDER THE CONTROL OF MANAGEMENT. THE SAFE HARBOR GUIDELI NES ISSUED BY THE CBDT VIDE ALSO STATES THAT LOSS / GAIN ARISI NG OUT OF FOREIGN EXCHANGE FLUCTUATION SHOULD NOT BE CONSIDER ED IN CALCULATING THE OPERATING MARGINS OF THE ASSESSEE. ACCORDING TO THE ASSESSEE, IT IS PERTINENT TO NOTE THAT THE PRIC E OF THE RAW MATERIAL IMPORTED BY THE ASSESSEE HAS REMAINED THE SAME EVERY - - ITA 2560/MDS/1 6 15 YEAR IN $ TERMS AND THE FOREIGN EXCHANGE LOSS SUFFE RED BY THE COMPANY IS ON ACCOUNT OF THE FLUCTUATION IN THE EXC HANGE RATES. 8.5 ACCORDING TO THE DRP, THE CLAIM OF THE ASSESS EE IS CONTRADICTORY IN TWO ASSESSMENT YEARS ON THE SAME F ACTS. THE CLAIM OF THE ASSESSEE IS THAT IF IT IS GAIN THEN IT IS OPERATING GAIN (AY 11-12), BUT IF IT IS LOSS IT IS NON-OPERATING ( AY 12-13). THIS OBJECTION / ARGUMENT OF THE ASSESSEE IS INCONSISTEN T ON THE SAME FACTS. FURTHER, THE SAFE HARBOR GUIDELINES ISSUED BY THE CBDT ARE NOT APPLICABLE FOR THE CURRENT YEAR. 8.6 IN RELATION TO OBJECTION REGARDING TREATING FOREIGN EXCHANGE GAIN / LOSS AS NON-OPERATING IN NATURE BY THE TPO, THE DECISION OF THE ITAT, CHENNAI (2015) 61 TAXMANN.COM 49 / 70 SOT 410 IN THE CASE OF DEPUTY COMMISSIONER OF INCOME-TAX, CO. CIRCLE-II(3), CHENNAI V. INFAC INDIA (P.) LTD. IS APPLICABLE. TH E SAME IS EXTRACTED AS UNDER:- 2. THE REVENUE HAS RAISED THREE ELABORATE GROUNDS IN ITS APPEAL; HOWEVER THE CRUX OF THE ISSUE IS THAT THE REVENUE IS AGGRIE VED BY THE DIRECTION OF THE DRP WHO HAD DIRECTED THE TPO TO EXCLUDE THE FOREX L OSS FROM THE COMPUTATION OF OPERATING COST OF THE ASSESSEE.----- -- 7. WE HAVE HEARD THE RIVAL SUBMISSIONS, CAREFULLY P ERUSED THE DECISIONS CITED BY BOTH THE PARTIES AND ARGUMENTS ADVANCED BY THEM. IN TRANSFER PRICING MATTERS, COMPARISONS ARE DRAWN IN REGARD TO TRANSAC TIONS MADE BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AE) AND T RANSACTIONS BETWEEN THE - - ITA 2560/MDS/1 6 16 BUSINESS ENTITIES WHO ARE UNRELATED PARTIES. IN THA T CONTEXT OPERATING COST OF THE ASSESSEE COMPANY WHICH HAS TRANSACTIONS WITH IT S AES IS COMPARED WITH OPERATING COST OF BUSINESS ENTITIES THAT ARE NOT RE LATED TO EACH OTHER. WHILE DETERMINING THE OPERATING COST, VARIOUS FACTORS COM E INTO PLAY, WHICH MAY BE BOTH INTERNAL AS WELL AS EXTERNAL. THE DECISIONS OF EACH ENTITY IN RESPECT OF VARIOUS FACTORS CONTROLLING THE COST WILL AFFECT TH E OPERATING COST. VARIOUS RISK FACTORS ARE TAKEN INTO CONSIDERATION WHILE MAKING F INANCIAL COMMITMENTS, ONE AMONG THEM IS RISK PERTAINING TO FOREIGN EXCHANGE F LUCTUATIONS. SINCE THE HOLDING PERIOD WITH RESPECT TO SUNDRY CREDITORS WHO ARE RAW MATERIALS SUPPLIERS OR DEBTORS ARISING OUT OF SALE TRANSACTIO NS IS WITH THE MANAGEMENT WHICH EXPOSES THE ENTITIES TO FOREX RISKS. THEREFOR E, THE PROFIT OR LOSS ARISING OUT OF FOREIGN EXCHANGE FLUCTUATIONS WILL BE DIRECT LY ATTRIBUTABLE TO THE OPERATIONAL COST WHICH HAS TO BE ESSENTIALLY TAKEN INTO CONSIDERATION WHILE ARRIVING AT THE OPERATING COST OF THE ENTITIES WHIL E COMPUTING THE PROFIT LEVEL INDICATOR (PLI) IN TRANSFER PRICING MATTERS. UNLESS THERE IS AN ABNORMAL SITUATION RESULTING IN ABNORMAL FOREX FLUCTUATIONS, THE PROFIT OR LOSS ARISING DUE TO FOREX FLUCTUATIONS CANNOT BE IGNORED WHILE A RRIVING AT THE OPERATING COST FOR DERIVING THE PLI IN TRANSFER PRICING MATTE RS. IT IS PERTINENT TO MENTION HERE THAT IN ARRIVING AT THE OPERATING COST IN TRANSFER PRICING MATTERS THE PRINCIPLES OF COST ACCOUNTING WILL NOT BE STRIC TLY APPLICABLE WHERE COST OF FINANCE MAY BE TREATED DIFFERENTLY. FOR THE AFORE-S TATED REASONS WE DO NOT FIND ANY MERIT IN THE ARGUMENTS ADVANCED BY THE LD. A.R. FURTHER IN THE FOLLOWING DECISIONS IT IS MADE CLEAR THAT PROFITS O R LOSS ARISING OUT OF FOREIGN EXCHANGE FLUCTUATIONS OUGHT TO BE TAKEN INTO CONSID ERATION WHILE ARRIVING AT THE OPERATION COST IN TRANSFER PRICING MATTERS. -- ------ 6. M/S SAP LABS INDIA (P) LTD. VS. ACIT [2011, 44 S OT 156, BANG] 42. WE CONSIDERED THE ISSUE CAREFULLY. THE FOREIGN EXCHANGE FLUCTUATION GAINS IS NOTHING BUT AN INTEGRAL PART OF THE SALES PROCEEDS OF AN ASSESSEE CARRYING ON EXPORT BUSINESS. THIS PROPOSITION HAS B EEN TIME AND AGAIN CONSIDERED IN CASES ARISING IN THE CONTEXT OF SECTI ON 80HHC. THE COURTS AND TRIBUNALS HAVE HELD THAT FOREIGN EXCHANGE FLUCTUATI ON GAINS FORM PART OF THE SALE PROCEEDS OF EXPORTER-ASSESSEE. USEFUL REFERENC E MAY BE MADE TO THE DECISIONS OF BOMBAY HIGH COURT IN THE CASE OF SHAH BROS. V. CIT, [2003] 259 ITR 741; THAT OF GUJARAT HIGH COURT IN THE CASE OF CIT V. AMBA IMPEX [2006] 282 ITR 144 AND THAT OF MUMBAI ITAT SPL. BENCH IN T HE CASE OF ASSTT. CIT V. PRAKASH L. SHAH [2008] 306 ITR (AT) 1. IN ALL THE A BOVE CASES, THE DOMINANT QUESTION CONSIDERED WAS THE YEAR OF DEDUCTION ON TH E ACCEPTED PROPOSITION THAT THE FOREIGN EXCHANGE FLUCTUATION GAINS COMPUTE D BY AN ASSESSEE IN A RELEVANT PREVIOUS YEAR SHOULD BE TREATED AS PART OF THE OPERATING INCOME AND THEREBY IT WOULD CONTRIBUTE TO THE OPERATING MARGIN OF THE ASSESSEE- COMPANY. THE FOREIGN EXCHANGE FLUCTUATIONS INCOME CANNOT BE EXCLUDED FROM THE COMPUTATION OF THE OPERATING MARG IN OF THE ASSESSEE-COMPANY. THIS CONTENTION OF THE ASSESSEE I S ACCEPTED . THEREFORE FOLLOWING THE DECISION OF THE TRIBUNAL AN D THE SPECIAL BENCH OF THE TRIBUNAL AND FOR THE REASONS DISCUSSED HEREINABOVE, WE HEREBY HOLD THAT PROFITS OR LOSS ARISING OUT OF FOREIGN EXCHANGE FLU CTUATIONS HAS TO BE TAKEN INTO CONSIDERATION WHILE ARRIVING AT THE OPERATION COST IN TRANSFER PRICING MATTERS. ACCORDINGLY, WE HEREBY SET ASIDE THE ORDER OF THE LD.DRP AND - - ITA 2560/MDS/1 6 17 UPHOLD THE ORDER OF THE LD. ASSESSING OFFICER WHO H AS ONLY ADOPTED THE ORDER OF THE LD.TPO. 8. IN THE RESULT, THE APPEAL OF REVENUE IS ALLOWED. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE ARE OF THE OPINION THAT THE SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF M/S.MOTONIC INDIA AUTOMOTIVE PVT. LTD. IN ITA NO.741/MDS/2014 F OR ASSESSMENT YEAR 2009-10 VIDE ORDER DATED 17.08.2016 WHEREIN IT WAS HELD THAT:- 8. THE NEXT GROUND IS WITH REGARD TO VARIATION IN EXCHANGE RATE ADJUSTMENT WHILE DETERMINING THE ALP. ACCORDI NG TO THE LD. AR, THE ASSESSEE ENTERED INTO CONTRACT IN ADVER SE PRICES FIXED ON THE PREVAILING EXCHANGE RATE AND DUE TO FL UCTUATION IN EXCHANGE RATE, THERE IS LOSS AND THAT EXCHANGE F LUCTUATION TO BE CONSIDERED WHILE DETERMINING THE ALP. 9.1. HOWEVER, IN THE PRESENT CASE AS RIGHTLY POINT ED OUT BY THE LD.D.R THAT EARLIER YEAR THE ASSESSEE CLAIMED FORE IGN EXCHANGE LOSS AS OPERATING EXPENDITURE. THIS YEAR ASSESSEE H AS SHIFTED ITS STAND AND CLAIMED IT AS NON OPERATING EXPENDITURE. THERE IS NO - - ITA 2560/MDS/1 6 18 CONSISTENCY IN ITS APPROACH AND ALSO NO REASON HAS BEEN GIVEN FOR SUCH A CHANGE. BEING SO, IN OUR OPINION, FOREI GN EXCHANGE LOSS IS TO BE TREATED AS OPERATING NATURE ONLY. HE NCE, THIS GROUND IS DISMISSED. 10. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 18 TH AUGUST, 2017 AT CHENNAI. SD/- SD/- ( $ % . & '( ) ( ) * + , ) DUVVURU RL REDDY - ./012304556037- 8 9: /JUDICIAL MEMBER ! 9:;<<5=1>01>?@AB@3 )8 /CHENNAI, C9 /DATED, THE 18 TH AUGUST, 2017. K S SUNDARAM 9D EFGF /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. H- /CIT(A) 4. H /CIT 5. FIJ K /DR 6. J(L /GF.