Westfalia Separator (I) Pvt. Ltd, V. ACIT Circle 18 (1),

ITA 4446/DEL/2007

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77795 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 8 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 17-07-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 08-11-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: ANKIT ARORA; HIMANSHU SHEKHAR SINGH; MRS SOMYA SETH CAS
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Additional evidence
• Section: 68; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM ITA NO.4446/DEL/2007 ASSESSMENT YEAR : 2003-04 WESTFALIA SEPARATOR INDIA PVT. LTD., 201, COMPETENT HOUSE, 7, NANGAL RAYA BUSINESS CENTRE, NEW DELHI 110 046. PAN : AAACW0197M VS. ACIT, CIRCLE 18(1), DELHI. ITA NO.4447/DEL/2007 ASSESSMENT YEAR : 2003-04 ACIT, CIRCLE 18(1), DELHI. WESTFALIA SEPARATOR INDIA PVT. LTD., 201, COMPETENT HOUSE, 7, NANGAL RAYA BUSINESS CENTRE, NEW DELHI 110 046. PAN : AAACW0197M ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI HIMANSHU SHEKHAR SINGH, ADVOCATE AND SHRI ANKIT ARORA & MRS. SOMYA SETH, CAS DEPARTMENT BY : S HRI PEEYUSH JAIN, CIT, DR ITA NOS.4446 & 4447/DEL/2007 2 ORDER PER R.S. SYAL, AM: THESE CROSS APPEALS - ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE ARISE OUT OF THE ORDER PASSED BY THE CI T(A) ON 30 TH AUGUST, 2007 IN RELATION TO THE ASSESSMENT YEAR 200 3-04. 2. THE ASSESSEE HAS FILED REVISED GROUNDS. THE FIR ST ISSUE PRESSED BEFORE US IS AGAINST THE TREATMENT OF FOREI GN EXCHANGE FLUCTUATION LOSS AS OPERATING COST. BRIEFLY STATED , THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINE SS OF RENDERING SERVICES AND MARKETING OF SEPARATORS AND DECANTERS AND SPARE PARTS RELATED TO SEPARATORS AND DECANTERS . THE ASSESSEE HAS TWO SEPARATE UNITS FOR TRADING FUNCTI ONS AND ASSEMBLY FUNCTIONS LOCATED AT DELHI AND MUMBAI, R ESPECTIVELY. THE ASSESSEE DECLARED THREE INTERNATIONAL TRANSACTI ONS IN ITS AUDIT REPORT. TWO TRANSACTIONS RELATING TO TRADING BUSIN ESS ARE NOT DISPUTED AS THE TPO ACCEPTED SUCH TRANSACTIONS AT A RMS LENGTH PRICE (ALP). THE ENTIRE CONTROVERSY ROTATES AROUND THE INTERNATIONAL TRANSACTION OF PURCHASE OF COMPONENT S OF PLATE HEAT EXCHANGER AND BRAZE PLATE HEAT EXCHANGER AMOUNTING TO ` 4.96 CRORE UNDER THE ASSEMBLY SEGMENT. THE ASSESSEE A PPLIED ITA NOS.4446 & 4447/DEL/2007 3 TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD. IN ITS TRANSFER PRICING STUDY, THE ASSESS EE SHOWED OPERATING PROFIT MARGIN AT 5.83% UNDER THIS SEGMENT , AS AGAINST THE AVERAGE PROFIT MARGIN AT 6.55% OF 14 INDEPENDEN T COMPARABLES. THAT IS HOW, THE ASSESSEE CLAIMED THA T ITS INTERNATIONAL TRANSACTION UNDER ASSEMBLY SEGMENT WAS AT ALP. IN COMPUTING THE OPERATING PROFIT MARGIN UNDER THIS SEGMENT, THE ASSESSEE MADE CERTAIN ADJUSTMENTS TO THE OPERATING PROFITS. IN THIS APPEAL, WE ARE CONCERNED ONLY WITH THE ADJUSTM ENT FOR LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION (HEREINAFTER AL SO CALLED FOREX LOSS). THE ASSESSEE CLAIMED THAT FOREX LOSS OF ` 50.04 LAC UNDER THIS SEGMENT WAS AN ITEM OF NON-OPERATING EXPENSE. THE SAME WAS, THEREFORE, EXPUNGED FROM THE OPERATING COSTS. THE TPO DID NOT ACCEPT THE ASSESSEES CONTENTION ON THIS ISSUE. HE HELD THAT FOREIGN EXCHANGE LOSS WAS REQUIRED TO BE CONSIDERED AS PART OF OPERATING COST. IN THIS MANNER, HE REDUCED THE OPE RATING PROFIT MARGIN WITH SUCH FOREIGN EXCHANGE LOSS AND DETERMIN ED THE ASSESSEES FRESH PROFIT MARGIN AT 1.42%. SINCE THE ARITHMETICAL MEAN OF THE MARGIN OF COMPARABLES DECLARED BY THE A SSESSEE STOOD AT 6.55%, WHICH WAS NOT TINKERED BY THE TPO, HE PROPOSED ITA NOS.4446 & 4447/DEL/2007 4 TRANSFER PRICING ADJUSTMENT OF `53.55 LACS ON THE B ASIS OF DIFFERENCE BETWEEN THE OPERATING PROFIT MARGIN OF T HE ASSESSEE AND THAT OF THE COMPARABLES. THE AO GIVING EFFECT TO THE TPOS ORDER, MADE SUCH ADDITION ON ACCOUNT OF TRANSFER PR ICING ADJUSTMENT. THE ASSESSEE CHALLENGED IT BEFORE THE LD. CIT(A) CONTENDING THAT EURO HAD SHOT UP LIKE ANYTHING FROM THE PRECEDING YEARS CLOSING OF `42.94 TO `51.91 AS ON MARCH 31,2003. SINCE SUCH FLUCTUATION WAS NOT ANTICIPATED, THE SAM E WAS CLAIMED TO BE IN THE NATURE OF EXTRA-ORDINARY ITEM ELIGIBLE FOR EXCLUSION FROM OPERATING COSTS. THE LD. CIT(A) RE-EXAMINED TH E ENTIRE TP ADJUSTMENT MADE BY THE AO. OUT OF 14 COMPARABLE CA SES CONSIDERED BY THE TPO, HE EXCLUDED THE CASE OF HMT BEARINGS LTD. FOR THE REASONS GIVEN IN THE IMPUGNED ORDER. THE A SSESSEE IS NOT AGGRIEVED AGAINST THE EXCLUSION OF THIS CASE FROM T HE LIST OF COMPARABLES. BY CONSIDERING THE REMAINING 13 COMPA RABLES AND RESTRICTING THE CALCULATION OF OP/SALES TO CURRENT YEARS DATA ALONE, INSTEAD OF MULTIPLE YEAR DATA DONE BY THE AS SESSEE, THE LD. CIT(A) FINALLY COMPUTED THE OP/SALES OF THE REMAINI NG COMPARABLES AT AN AVERAGE OF 5.72%. HE DID NOT ACC EPT THE ASSESSEES CONTENTION FOR TREATING FOREX LOSS AS NO N-OPERATING ITA NOS.4446 & 4447/DEL/2007 5 EXPENSE. IN THIS WAY, THE ASSESSEES PROFIT MARGIN AT 1.40% WAS CONSIDERED TO BE OUTSIDE THE PERMISSIBLE RANGE OF T HE COMPARABLES AT 5.72%. HE INCREASED THE AMOUNT OF T P ADJUSTMENT TO ` 84.15 LAC AS AGAINST ` 53.55 LAC MADE BY THE AO. IN THIS EXERCISE DONE ON PAGE 45 OF THE IMPUGNED OR DER, HE APPLIED 5.72% ON TOTAL SALES TO WORK OUT THE ABOVE ADDITION. AT THIS STAGE, IT IS RELEVANT TO MENTION THAT THE ASSE SSEE AGITATED SUCH COMPUTATION BY THE CIT(A) THROUGH RECTIFICATIO N APPLICATION FILED U/S 154 CONTENDING, FIRSTLY, THAT TP ADJUSTM ENT WAS NOT TO BE MADE WITH 5.72%, BUT WITH THE DIFFERENCE BETWEEN THE ASSESSEES PROFIT MARGIN AND THAT OF COMPARABLES AN D, SECONDLY, EVEN THE CALCULATION BY THE APPLICATION OF THE RATE OF 5.72% WAS INCORRECT, AS THE RESULTANT FIGURE CAME AT ` 64.54 LAC INSTEAD OF ` 84.54 LAC. THE LD. CIT(A) AGREED WITH THE ASSESSEE S POINT OF VIEW IN RESPECT OF CALCULATION MISTAKE, BUT DID NOT ACCE PT THAT THE POINT OF DIFFERENTIAL RATE BETWEEN 5.72% AND 1.40% FOR TH E PURPOSE OF TP ADJUSTMENT. 3. THE ASSESSEE IS AGGRIEVED AGAINST THE TP ADDITIO N SUSTAINED BY THE LD. CIT(A) PRIMARILY ON ACCOUNT OF TREATMENT OF FOREX LOSS AS OPERATING EXPENSE. ITA NOS.4446 & 4447/DEL/2007 6 4.1. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. THE FOREX GAIN OR LOSS IS THE DIFFERENCE BETWEEN THE PRICE AT WHICH AN IMPORT OR EXPORT TRANSACTION WAS RECORDED IN THE BOOKS OF ACCOUNT ON THE BASIS OF RATE OF FOREIGN EXCHANGE THEN PREVAILING AND THE AM OUNT ACTUALLY PAID OR RECEIVED AT THE RATE OF FOREIGN EXCHANGE PR EVAILING AT THE TIME OF ACTUAL PAYMENT OR RECEIPT. SINCE SUCH FOREX LOSS OR GAIN IS A DIRECT OUTCOME OF THE PURCHASE OR SALE TRANSACTIO N, IT PARTAKES OF THE SAME CHARACTER AS THAT OF THE TRANSACTION TO WHICH IT RELATES. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. PRAKASH I. SHAH (2008) 115 ITD 167 (MUM) (SB) HAS HELD THAT FOREIGN EXCHANGE FLUCTUATION GAIN IS A PART OF EXPO RT TURNOVER. THOUGH SUCH DECISION WAS RENDERED IN THE CONTEXT OF SECTION 80HHC, BUT THE SAME LOGIC APPLIES GENERALLY AS WELL . THE ESSENCE OF THE MATTER IS THAT ANY GAIN OR LOSS ARISING OUT OF CHANGE IN FOREIGN CURRENCY RATE IN RESPECT OF TRANSACTION FOR IMPORT OR EXPORT OF GOODS IS NOTHING, BUT INHERENT PART OF THE PRICE OF IMPORT OR THE VALUE OF EXPORT. THE HONBLE SUPREME COURT IN SUTLEJ COTTON MILLS LTD. VS. CIT 116 ITR 1 (SC) HAS HELD THAT : WHERE PROFIT OR LOSS ARISES TO AN ASSSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION ITA NOS.4446 & 4447/DEL/2007 7 IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CO NVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINAR ILY BE TRADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY T HE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINESS. WHEN WE READ T HE RATIO OF THE CASE OF SUTLEJ COTTON (SC)(SUPRA) IN JUXTAPOSITION TO THAT OF THE SPECIAL BENCH IN CASE OF PRAKASH I SHAH (SUPRA) , THERE REMAINS NO DOUBT THAT FOREX GAIN OR LOSS FROM A TRADING TRANSA CTION IS NOT ONLY AN ITEM OF REVENUE NATURE, BUT IS, IN FACT, A PART OF THE PRICE OF IMPORT OR VALUE OF EXPORT TRANSACTION, AS THE CASE MAY BE. OPERATING EXPENSE IS ORDINARILY AN EXPENSE THAT A B USINESS INCURS AS A RESULT OF PERFORMING ITS NORMAL BUSINESS OPERA TIONS. AS THE BUSINESS OF ASSEMBLY DONE BY THE ASSESSEE UNDER T HIS SEGMENT IS NOT POSSIBLE WITHOUT PURCHASES AND FOREX GAIN IS IN RELATION TO SUCH PURCHASE TRANSACTIONS, WE HAVE NO HESITATION I N HOLDING THAT IT IS AN ITEM OF OPERATING COST. 4.2. THE LD. AR DISPUTED THE INCLUSION OF FOREIG N EXCHANGE LOSS IN THE OPERATING COST BY ARGUING THAT RATE OF EURO HAD INCREASED BEYOND PROPORTIONS. IT WAS STATED THAT EURO HAD SHO T UP LIKE ANYTHING. SINCE SUCH FLUCTUATION WAS NOT ANTICIPATE D, THE LD. AR ITA NOS.4446 & 4447/DEL/2007 8 CLAIMED THAT IT WAS IN THE NATURE OF EXTRA-ORDINARY ITEM AND HENCE LIABLE TO BE EXPELLED FROM OPERATING COSTS. THIS CO NTENTION IS AGAIN BEREFT OF ANY FORCE. EXTRA-ORDINARY ITEM IS N ORMALLY DISTINCT AND UNUSUAL FROM THE ORDINARY ACTIVITY OF THE BUSIN ESS THAT IS CARRIED ON BY THE ASSESSEE. WE FAIL TO COMPREHEND AS TO HOW THE AMOUNT OF FOREX LOSS CAN BE CONSIDERED AS UNUSUAL F ROM THE ORDINARY ACTIVITY OF THE PURCHASE CARRIED ON BY THE ASSESSEE THROUGHOUT THE YEAR FROM ITS ASSOCIATED ENTERPRISE. AS IT IS DIRECT INCIDENT OF OR RATHER A PART AND PARCEL OF PURCHASE TRANSACTION ITSELF, THE SAME CANNOT BE VIEWED AS AN EXTRA-ORDIN ARY ITEM OF EXPENSE. 4.3. WITHOUT PREJUDICE TO THE ABOVE ARGUMENTS, TH E LD. AR CONTENDED IN THE ALTERNATIVE THAT IF FOREX LOSS WAS TO BE CONSIDERED AS PART OF OPERATING COST, THEN, THE FOR EX LOSS IN RELATION TO THE INTERNATIONAL TRANSACTION UNDERTAKE N DURING THE YEAR ALONE SHOULD BE CONSIDERED. HE INVITED OUR AT TENTION TOWARDS FOUR COMPONENTS OF SUCH FOREX LOSS TABULATE D ON PAGE 13 OF THE IMPUGNED ORDER, BEING, ON ACCOUNT OF PURCHA SES MADE DURING THE YEAR; ON ACCOUNT OF EARLIER YEARS PURCH ASES FINALLY PAID IN THIS YEAR; ON ACCOUNT OF TRANSLATION DIFFERENCE OF OUTSTANDING ITA NOS.4446 & 4447/DEL/2007 9 AMOUNTS AT THE END OF THE YEAR; ON ACCOUNT OF PURCH ASE TRANSACTIONS WITH UNRELATED PARTIES. HIS SUBMISSION WAS THAT ONLY THE FIRST COMPONENT, BEING THE FOREX LOSS IN RESPEC T OF INTERNATIONAL TRANSACTIONS UNDERTAKEN DURING THE YE AR SHOULD BE CONSIDERED. 4.4. WE AGAIN FIND THIS CONTENTION TO BE UNTENAB LE. THE OBVIOUS REASON IS THAT THE CALCULATION UNDER TNMM PROCEEDS ON THE BASIS OF METHOD OF ACCOUNT CONSISTENTLY FOLLOWED BY THE A SSESSEE. IN THE CASE OF COMPANIES, IT IS ONLY MERCANTILE SYSTEM OF ACCOUNTING WHICH IS APPLICABLE. UNDER MERCANTILE SYSTEM OF AC COUNTING, ANY INCOME ARISING OUT OF TRANSACTIONS DURING THE YEAR IS ACCOUNTED FOR IRRESPECTIVE OF ITS ACTUAL RECEIPT. SIMILARLY EXPENSES ARE RECORDED AT THE TIME OF INCURRING OF LIABILITY IRRE SPECTIVE OF THE ACTUAL PAYMENT. TNMM DOES NOT REQUIRE THE SPLITTIN G OF EXPENSES AND INCOMES INTO ACTUALLY PAID AND RECEIVED AND THE N DETERMINING THE PROFIT MARGIN. IT IS SIMPLE THAT PROFIT MARGIN IS CALCULATED WITH THE FIGURES FROM THE TRADING AND PROFIT AND LOSS AC COUNT WHICH ARE RECORDED ON ACCRUAL BASIS. TNMM DOES NOT MANDATE TO FIRST RECAST THE TRADING AND PROFIT AND LOSS ACCOUNT WITH THE FI GURES OF ACTUAL RECEIPT OR PAYMENTS IN RESPECT OF INTERNATIONAL TRA NSACTION AND ITA NOS.4446 & 4447/DEL/2007 10 THEN CALCULATE THE PROFIT MARGIN. IF WE ACCEPT THE CONTENTION OF THE LD. AR, THEN IT WOULD NOT ONLY DISTURB THE CALC ULATION OF OPERATING PROFITS, BUT ALSO THE METHOD OF ACCOUNTIN G ON WHICH TNMM IS BASED. 4.5. THERE IS ONE MORE INDEPENDENT REASON FOR WH ICH THIS CONTENTION DESERVES TO BE REJECTED BECAUSE IT RESUL TS IN ABSURDITY. IT IS SIMPLE AND PLAIN THAT OUTSTANDING CREDITORS O UT OF IMPORTS MADE DURING THE YEAR WOULD BE PAID IN THE SUBSEQUEN T YEAR. IT IS IN SUCH SUBSEQUENT YEAR THAT THE FOREX GAIN/LOSS WO ULD EVENTUALLY ARISE. SO FOREX GAIN/LOSS IN RESPECT OF AN INTERNA TIONAL TRANSACTION ENTERED IN YEAR ONE AND SETTLED BY PAYMENT IN THE Y EAR TWO, WOULD NOT FIND ITS PLACE IN THE OPERATING COST/REVE NUE EITHER IN THE YEAR ONE OF ENTERING INTO INTERNATIONAL TRANSACTION OR IN THE YEAR TWO AT THE TIME OF ACTUAL PAYMENT. THE REASON IS OB VIOUS THAT DURING THE YEAR ONE IN WHICH INTERNATIONAL TRANSACT ION OF IMPORT TOOK PLACE, THE AMOUNT WOULD BE UNPAID AND DURING T HE YEAR TWO, WHEN PAYMENT IS MADE, THERE WOULD BE NO MATCHING IN TERNATIONAL TRANSACTION. THIS CONTENTION IS, THEREFORE, JETTIS ONED. ITA NOS.4446 & 4447/DEL/2007 11 4.6. STILL ANOTHER ARGUMENT WAS RAISED BY THE LD. AR THAT THE FOREX LOSS TO THE EXTENT IT IS ABNORMAL, BE IGNORED FROM INCLUSION IN THE OPERATING COST. BY INVITING OUR ATTENTION TO WARDS PAGES 4K TO 4T OF THE PAPER BOOK, THE LD. AR SUBMITTED THAT THE AVERAGE RATE OF EURO DURING THE PERIOD 1.4.2001 TO 31.3.200 2 WAS ` 41.52 AS AGAINST THE HIGHER AND LOWER RATES OF ` 44.81 AND ` 38.68 RESPECTIVELY. IT WAS SUBMITTED THAT ANY PAYMENT OF FOREIGN CURRENCY AT THE RATE ABOVE ` 44.81 WAS ABNORMAL LOSS, LIABLE TO BE IGNORED FROM OPERATING COST. 4.7. WE ARE AGAIN UNABLE TO ACCEPT THIS PROPOSIT ION PUT FORTH ON BEHALF OF THE ASSESSEE FOR THE REASON THAT FOREX LO SS IS A NATURAL INCIDENT OF IMPORT. EACH ITEM OF IMPORT LEADS TO F OREX GAIN/LOSS WHEN THERE IS A DIFFERENCE BETWEEN THE RATE OF FORE IGN CURRENCY AT THE TIME OF PURCHASE AND PAYMENT. WHEN BUYING OF G OODS IS A CORE BUSINESS OF THE ASSESSEE AND THERE IS A CHANGE IN THE RATE OF FOREIGN EXCHANGE AT THE TIME OF PAYMENT FOR GOODS P URCHASED, SUCH FOREX GAIN/LOSS IS SIMPLY A RECURRING ITEM AND NOT ANY ABNORMAL OR NON-RECURRING ITEM OF INCOME OR EXPENSE . SUCH FOREX LOSS/GAIN MAY BE HIGH OR LOW, BUT CANNOT BE CONSTRU ED AS ABNORMAL OR NON-RECURRING NATURE. THE LD. AR ACCEN TUATED ON THE ITA NOS.4446 & 4447/DEL/2007 12 FOREX LOSS AS AN ABNORMAL EXPENSE AND CLAIMED THAT ANY PAYMENT OF FOREIGN CURRENCY AT THE RATE ABOVE ` 44.81 WAS ABNORMAL LOSS LIABLE TO BE IGNORED FROM OPERATING COST. IN ORDER TO EVALUATE THIS CONTENTION, IT IS SIGNIFICANT TO NOTE THAT THE ASSE SSEE APPLIED TNMM AS THE MOST APPROPRIATE METHOD. THE CALCULATIO N OF ALP UNDER THIS METHOD IS PRESCRIBED IN RULE 10B(1)(E). CLAUSE (II) OF THIS SUB-RULE PROVIDES THAT THE : NET PROFIT MARGI N REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COM PARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSA CTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE. CLAUSE (I II), WHICH IS QUITE RELEVANT FOR OUR PURPOSE PROVIDES THAT : THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (II) ARISING IN CO MPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET . T HE POSITION WHICH FOLLOWS ON CONJOINT READING OF CLAUSES (II) A ND (III) IS THAT NET PROFIT MARGIN REALIZED FROM COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED FOR DIFFERENCES BETWEEN THE INTERNATION AL TRANSACTION ITA NOS.4446 & 4447/DEL/2007 13 AND UNCONTROLLED TRANSACTIONS. IT FOLLOWS THAT THE ADJUSTMENT IS MADE IN RESPECT OF THE NET PROFIT MARGIN OF COMPARA BLE UNCONTROLLED TRANSACTIONS TO BRING IT AT PAR WITH T HE INTERNATIONAL TRANSACTION AND NOT VICE VERSA . SECONDLY, THE ADJUSTMENT IS CONTEMPLATED IF THERE IS DIFFERENCE BETWEEN THE ASS ESSEES INTERNATIONAL TRANSACTION AND COMPARABLES WHICH COU LD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. COMING BACK TO OUR CONTEXT, WE FIND THAT THE ASSESS EE IS CLAIMING THAT DIFFERENCE IN THE FOREIGN EXCHANGE RATE OF EUR O BEYOND A PARTICULAR POINT IS ABNORMAL AND HENCE THE SAME BE NOT CONSIDERED AS RECURRING EXPENSE. THIS CONTENTION IS DEVOID OF ANY MERITS BECAUSE OF THE OBVIOUS REASON THAT FLUCTUATI ON IN THE FOREIGN CURRENCY IS ACROSS THE BOARD AND IS APPLICA BLE NOT ONLY TO THE ASSESSEE BUT TO THE COMPARABLES AS WELL. IT WAS FAIRLY ADMITTED THAT IN SOME OF THE COMPARABLE CASES, THER E IS A FIGURE OF FOREX GAIN/LOSS. THIS SHOWS THAT SUCH CHANGE IN THE FOREIGN EXCHANGE RATE IS NOT ASSESSEE-SPECIFIC SO AS TO WAR RANT ANY ADJUSTMENT. AS IT IS APPLICABLE TO ONE AND ALL, THE RE CAN BE NO CASE FOR TREATING SOME PART OF THE FOREX LOSS AS NO RMAL AND THE OTHER AS ABNORMAL SO AS TO WARRANT EXCLUSION OF THE SECOND PART ITA NOS.4446 & 4447/DEL/2007 14 FROM OPERATING COST BY TREATING IT AS AN ABNORMAL L OSS. IT IS FURTHER RELEVANT TO NOTE THAT THE ASSESSEE EARNED F OREX GAIN OF AROUND `18.40 LAC UNDER THE TRADING SEGMENT. AS S UCH, THE CONTENTION OF THE ASSESSEE CLAIMING EXCLUSION OF SO ME PART OF THE FOREX LOSS FROM THE AMBIT OF OPERATING EXPENSES ON THE BASIS OF THE ABNORMAL LOSS THEORY, IS NOT SUSTAINABLE. 4.8. THE LD. AR RELIED ON RULE 10T(J) TO CONTEND THAT LOSS ARISING ON ACCOUNT OF FOREIGN CURRENCY FLUCTUATIONS CANNOT BE INCLUDED IN THE OPERATING EXPENSE. WE ARE NOT PERSUADED TO GIVE ANY MILEAGE TO THE LD. AR ON THIS COUNT FOR THE SIMPLE REASON T HAT RULE 10T IS A PART OF SAFE HARBOR RULES NOTIFIED ON 18.09.2013 WH ICH ARE NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATI ON. 4.9. NOW WE WILL DEAL WITH THE DECISIONS RELIED BY THE LD. AR IN SUPPORT OF HIS CASE. THE DECISION OF THE DELHI BENC H IN SUMITOMO CORPORATION INDIA PVT. LTD. VS. DCIT IS IN THE CONTEXT OF INTEREST WHICH THE TRIBUNAL HELD TO BE NON-OPERATING INCOME. THERE IS NO REFERENCE TO ANY FOREIGN EXCHANGE FLUCTUATION GAIN OR LOSS IN THAT CASE. THE DELHI TRIBUNAL DECISION IN HONDA TRADING CORP INDIA PVT. LTD. VS. ACIT DOES NOT STAND IN VIEW OF OUR ABOVE DISCUSSION ABOU T ITA NOS.4446 & 4447/DEL/2007 15 THE NON-ACCEPTABILITY OF ABNORMAL LOSS THEORY IN TH E CONTEXT OF FOREX LOSS. THE DECISION OF THE MUMBAI TRIBUNAL IN DHL EXPRESS (INDIA) PRIVATE LTD. VS. ACIT DOES NOT THROW ANY LIGHT ON THE PRELIMINARY QUESTION AS TO WHETHER SUCH FOREX LOSS/ GAIN RESULTED FROM A TRADING OR A CAPITAL TRANSACTION. 4.10. IN CONTRAST TO THE ABOVE, WE FIND THAT THE RE IS A PLETHORA OF DECISIONS RENDERED BY VARIOUS BENCHES OF THE TRIBUN AL ACROSS THE COUNTRY HOLDING THAT FOREX GAIN/LOSS IS PART OF OPE RATING REVENUE/COST. TO CITE A FEW, THE DELHI BENCH OF THE TRIBUNAL IN TECHBOOKS INTERNATIONAL PVT. VS ACIT (TO WHICH ONE OF US, NAMELY, THE AM IS PARTY) HAS HELD VIDE ITS ORDER D ATED 28.4.2014 THAT FOREIGN EXCHANGE GAIN OR LOSS IS A PART AND PA RCEL OF OPERATING REVENUE/OPERATING COST. THE BANGALORE BEN CH OF THE TRIBUNAL IN SAP LABS INDIA (P) LTD. VS. ACIT (2010) 6 ITR (TRIB ) 81 (BANG) HAS ALSO HELD THAT FOREIGN EXCHANGE GAIN SHOULD BE ADDED TO THE OPERATING REVENUE. THE MUMBAI BENCH OF THE T RIBUNAL IN RUSHABH DIAMONDS , MUMBAI VS. ACIT IN I.T.A. NO. 7217 VIDE ITS ORDER DATED 26.4.2013 (TO WHICH THE AM IS PARTY) H AS ALSO HELD FOREIGN EXCHANGE GAIN AS A PART OF OPERATING PROFIT . ITA NOS.4446 & 4447/DEL/2007 16 4.11. IN VIEW OF THE FOREGOING DISCUSSION, WE HOL D THAT THE LD. CIT(A) HAS TAKEN AN UNIMPEACHABLE VIEW BY CONSIDERI NG THE FOREX LOSS OF ` 50.04 LAC AS A PART OF OPERATING COST. THE SAME IS , THEREFORE, COUNTENANCED. 5.1. THE NEXT ISSUE RAISED BY THE LD. AR IS AGAINS T THE DENIAL OF WORKING CAPITAL ADJUSTMENT. ADMITTEDLY, THIS ISSUE WAS NOT BEFORE THE TPO. THE ASSESSEE TOOK IT BEFORE THE LD.CIT(A) IN THE FORM OF AN ADDITIONAL GROUND AND REQUESTED FOR THE GRANT OF WORKING CAPITAL ADJUSTMENT. THE LD. CIT(A) REFUSED TO ADMI T THIS ADDITIONAL GROUND. 5.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ASSESSMENT YEA R UNDER CONSIDERATION IS 2003-04, BEING THE SECOND YEAR OF INTRODUCTION OF TRANSFER PRICING PROVISIONS. NORMALLY, IT TAKES SOM E TIME IN UNDERSTANDING THE CONCEPTS AND MODALITIES OF A NEW PROVISION. THIS DIFFICULTY HAS ALSO BEEN APPRECIATED BY THE SP ECIAL BENCH OF THE TRIBUNAL IN DCIT VS. QUARK SYSTEMS (P) LTD. (2010) 132 TTJ (CHD)(SB) 1. THE FACT OF THE MATTER IS THAT IF AN ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION AS PER LAW, THE SAME CANNOT BE ITA NOS.4446 & 4447/DEL/2007 17 REFUSED BECAUSE OF TECHNICALITIES OR IGNORANCE. AS THE TRANSFER PRICING PROVISIONS WERE IN RUDIMENTARY STAGE AT THE MATERIAL TIME, THE RIGHTFUL DUE TO THE ASSESSEE SHOULD NOT HAVE BE EN DENIED SIMPLY BECAUSE IT WAS NOT CLAIMED BEFORE THE TPO BU T BEFORE THE CIT(A) FOR THE FIRST TIME. 5.3. NOW COMING TO THE MERITS OF THE CLAIM, WE FI ND THAT THE DELHI BENCH OF THE TRIBUNAL IN AGILENT TECHNOLOGIES INTERNATIONAL PVT. LTD. VS. DCIT (ITA NO.1837/DEL/2014) VIDE ITS ORDER DATED 15 TH JULY, 2014 HAS HELD THAT THE ASSESSEE CANNOT BE DEP RIVED OF THE WORKING CAPITAL ADJUSTMENT, IF IT IS RIGHTLY DUE. S IMILAR VIEW HAS BEEN TAKEN BY IN MERCER CONSULTING (INDIA) PVT. LTD. VS. DCIT IN ITA NO.966/DEL/2014. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT THE CLAIM OF THE ASSESS EE FOR WORKING CAPITAL ADJUSTMENT CANNOT BE REJECTED AT THE OUTSET . THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE M ATTER IS SENT BACK TO THE AO/TPO FOR VERIFYING THE CALCULATION SO MADE BY THE ASSESSEE IN SUPPORT OF ITS WORKING CAPITAL ADJUSTME NT, AND THEN ALLOW IT AS PER LAW, IF AVAILABLE, AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ITA NOS.4446 & 4447/DEL/2007 18 6. IN SUCH FRESH DETERMINATION OF THE ALP, THE T PO/AO WOULD REVISE DOWNWARDS THE AMOUNT OF TP ADJUSTMENT AS REC TIFIED BY THE LD. CIT(A) VIDE HIS ORDER U/S 154. FURTHER, SUCH T RANSFER PRICING ADJUSTMENT BE MADE BY CONSIDERING THE DIFFERENCE BE TWEEN THE PROFIT MARGIN OF COMPARABLES AND THAT OF THE ASSESS EE AND NOT BY APPLYING THE PROFIT MARGIN OF THE COMPARABLES ALONE . 7. NO OTHER GROUND WAS ARGUED BY THE LD. AR. TH E SAME, ARE THEREFORE, DISMISSED AS EITHER GENERAL OR NOT PRESS ED OR CONSEQUENTIAL. 8.1. THE FIRST GROUND OF THE REVENUES APPEAL IS AG AINST THE DELETION OF ADDITION OF ` 18,96,077/- ON ACCOUNT OF FOREX LOSS. THE AO NOTICED THAT THE ASSESSEE CLAIMED NET FOREX LOSS OF ` 31.64 LAC. HE OBSERVED THAT A SUM OF ` 18.96 LAC OUT OF THIS SUM OF ` 31.64 LAC RELATED TO UNLIQUIDATED OUTSTANDING FOREIGN TRA DE LIABILITY AS ON THE LAST DAY OF THE PREVIOUS YEAR. THE SAME WAS CO NSIDERED AS CONTINGENT IN NATURE FOR WHICH DISALLOWANCE WAS MAD E. THE LD. CIT(A) ORDERED FOR THE DELETION OF THIS ADDITION. 8.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, WE FIND NO INFIRMITY I N THE IMPUGNED ITA NOS.4446 & 4447/DEL/2007 19 ORDER ON THIS SCORE BECAUSE SUCH A CLAIM IS PERMISS IBLE AS PER THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F SUTLEJ COTTON MILLS LTD. (SUPRA) AND THE SPECIAL BENCH ORDER IN THE CASE OF OIL AND NATURAL GAS CORPN. LTD. VS. DCIT 83 ITD 51 (DEL) (SB) . NO CONTRARY JUDGMENT HAS BEEN BROUGHT TO OUR NOTICE BY THE LD. DR. THIS GROUND IS, THEREFORE, NOT ALLOWED. 9.1. THE ONLY OTHER GROUND IN THE REVENUES APPEAL IS AGAINST THE DELETION OF ADDITION OF ` 15,75,430/- WHICH WAS MADE BY THE AO U/S 68 OF THE ACT. THE AO NOTICED THAT THE ASSESSE E HAD SHOWN SEVERAL SUNDRY CREDITORS. AS THE ASSESSEE COULD NO T PRODUCE CONFIRMATIONS IN RESPECT OF M/S PIONEER AGRO EXPORT S LTD. AND M/S SPIC PHARMACEUTICAL DIVISION, IN WHICH CASES THE CR EDITS STOOD AT ` 9,25,430/- AND ` 6,50,000/- RESPECTIVELY, THE AO MADE SUCH ADDITION U/S 68 OF THE ACT. THE LD. CIT(A) DELETED BOTH THE ADDITIONS. 9.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT TH E ASSESSEE FURNISHED ADDITIONAL EVIDENCE BEFORE THE LD. CIT(A) IN SUPPORT OF THE DELETION OF THE ADDITION. SUCH ADDITIONAL EVID ENCE WAS SENT TO ITA NOS.4446 & 4447/DEL/2007 20 THE AO FOR COMMENTS. THE AO SIMPLY OBJECTED TO THE ADMISSION OF ADDITIONAL EVIDENCE WITHOUT CONTROVERTING THE PO SITION STATED IN SUCH EVIDENCE. IT IS NOTICED THAT A SUM OF ` 9,25,430/- WAS RECEIVED AS ADVANCE FROM PIONEER AGRO EXPORTS LTD. DURING FINANCIAL YEARS 2000-01 AND 2001-02. SINCE THE CRE DIT IN RESPECT OF THIS AMOUNT DID NOT GENERATE DURING THE YEAR, TH ERE CAN BE NO QUESTION OF THE APPLICABILITY OF SECTION 68 OF THE ACT TO SUCH A CREDIT. AS REGARDS THE SECOND AMOUNT OF ` 6,50,000/- FROM M/S SPIC PHARMACEUTICAL DIVISION, IT IS SEEN THAT THE A SSESSEE RECEIVED IT AS AN ADVANCE WHICH WAS ADJUSTED AGAINST THE INV OICE RAISED IN AUGUST, 2003. IN VIEW OF THESE CIRCUMSTANCES, WE A RE OF THE CONSIDERED OPINION THAT THE LD. CIT (A) WAS FULLY J USTIFIED IN DELETING THIS ADDITION. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES AND THAT OF THE REVENUE IS DIS MISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 18.07.201 4. SD/- SD/- [ A.T. VARKEY ] [ R.S. SYAL ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 18 TH JULY, 2014. ITA NOS.4446 & 4447/DEL/2007 21 DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.