Mainetti India Pvt Ltd., CHENNAI V. DCIT, CHENNAI

ITA 624/CHNY/2014

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7524 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 04-01-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 13-03-2014
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Assessee Lawyers: T BANUSEKAR
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH: CHENNAI . . . , ! ' .. # $!% , ' () BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER ! ./ ITA NO.624/MDS/2014 * +* /ASSESSMENT YEAR: 2009-10 M/S.MAINETTI INDIA PVT. LTD., 3 RD FLOOR, FLORIDA TOWERS, 138/30, NELSON MANICKAM ROAD, CHENNAI-600 029. [PAN: AAACM 6894 M] VS. THE DY. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-IV(1), CHENNAI. ( ,- /APPELLANT) ( ./,- /RESPONDENT) ,- 0 1 / APPELLANT BY : MR.T.BANUSEKAR, CA ./,- 0 1 /RESPONDENT BY : MR.PATHLAVATH PEERYA, CIT # 0 2' /DATE OF HEARING : 04.01.2017 34+ 0 2' /DATE OF PRONOUNCEMENT : 15.03.2017 / O R D E R PER D.S.SUNDER SINGH , ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF THE AO DATED 09/01/2014 U/S 144C(13) R.W.S.92CA(3) OF THE INCOME TAX ACT CONSEQUENT TO THE DIRECTIONS ISSUED BY THE DRP, CH ENNAI ON 20.12.2013 IN FN NO.DRP/CHE/66/2013 FOR THE AY 2009-10. THE AS SESSEE RAISED THE FOLLOWING GROUNDS IN ITS APPEAL: ITA NO.624/MDS/2014 :- 2 -: 1. FOR THAT THE ORDER OF THE ASSESSING OFFICER IS CONTR ARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE TO THE EXTENT PREJUDICIAL TO THE INTEREST OF THE APPELLANT AND AT ANY RATE IS OPPOSED TO THE PRINCIPLES OF EQUITY, NATURAL JUSTIC E AND FAIR PLAY. 2. FOR THAT THE ASSESSING OFFICER ERRED IN DISALLOWING THE LOSS ON ACCOUNT OF EXCHANGE FLUCTUATION AMOUNTING TO 53,39,000/- BASED ON THE CONTENTION THAT IT IS A NO TIONAL LOSS AND CAPITAL IN NATURE. 3. FOR THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THAT LOSS WAS MADE IN ORDER TO COMPLY WITH THE MANDATORY ACCOUNTING STANDARDS. 4. FOR THAT THE ASSESSING OFFICER FAILED TO APPRECIATE THAT THE ASSETS FOR WHICH THE LOAN WAS TAKEN WERE ALREADY PUT TO USE AND HENCE THE EXPENDI TURE IS ALLOWABLE AS REVENUE. 5. FOR THAT WITHOUT PREJUDICE TO THE CONTENTION THAT E XCHANGE RATE FLUCTUATION ON RESTATEMENT OF ECB LOAN TO THE TUNE OF 53,39,000/- SHOULD BE ALLOWED AS A REVENUE DEDUCTION, THE ASSESSING OFFICER OUGHT TO HAVE ADDED IT TO THE COST OF THE FIXED ASSETS AND ALLOWED DEPRECIATION ON THE SAME. 6. FOR THAT THE ASSESSING OFFICER ERRED IN MAKING AN AD JUSTMENT OF 15,98,138/- TO THE ARMS LENGTH PRICE DETERMINED BY THE APPELLANT. 7. FOR THAT IN DETERMINING THE ARMS LENGTH PRICE, THE ASSESSING OFFICER FAILED TO APPRECIATE THE APPELLANTS CONTENTION THAT THE AGGR EGATE OF THE TRANSACTIONS ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRIS E SHOULD BE CONSIDERED WHILE DETERMINING ARMS LENGTH. 8. FOR THAT WHERE THE AGGREGATE OF ALL DIFFERENCES BET WEEN THE SALE PRICE TO ASSOCIATED ENTERPRISE AND SALE PRICE TO NON-ASSOCIATED ENTERPR ISE IS WITHIN THE TOLERANCE LIMIT SET OUT IN THE SECOND PROVISO TO SECTION 92C(2), NO ADJ USTMENT IS REQUIRED ON ACCOUNT OF ARMS LENGTH PRICE. 9. FOR THAT THE APPELLANT OBJECTS TO THE LEVY OF INTER EST U/S.234B OF THE INCOME TAX ACT. 2.0 GROUND NO.1 IS GENERAL IN NATURE WHICH DOES NOT RE QUIRE SPECIFIC ADJUDICATION. 3.0 GROUND NOS.2 TO 5 ARE RELATED TO THE DISALLOWANCE OF FOREIGN EXCHANGE LOSS AMOUNTING TO 53,39,000/-. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER [(HEREINAFTER RE FERRED TO AS AO) FOUND THAT THE ASSESSE HAS TAKEN THE EXTERNAL COMMERCIAL BORROWINGS (IN SHORT ECB) LOAN CONVERTED INTO FOREIGN CURRENCY)] AND I NCURRED A SUM OF 53,39,000/- TOWARDS THE FOREIGN EXCHANGE LOSS WHICH WAS DUE TO THE ITA NO.624/MDS/2014 :- 3 -: RESTATEMENT OF FOREIGN EXCHANGE FLUCTUATION. THE AO WAS OF THE VIEW THAT THE LOSS WAS DUE TO CONVERSION OF ECB LOAN IN TO I NDIAN CURRENCY ON ACCOUNT OF RESTATEMENT TO FOLLOW THE ACCOUNTING STA NDARDS WHICH WAS NOTIONAL IN NATURE AND IS NEITHER THE REVENUE NOR THE CAPITAL EXPENDITURE AND ACCORDINGLY AO DISALLOWED A SUM OF 53,39,000/-. THE ASSESSE WENT BEFORE THE DISPUTE RESOLUTION PANEL (IN SHORT DRP ) AND THE DRP AGREED WITH THE VIEW OF THE AO AND HELD THAT THE EXPENDIT URE WAS NOT ALLOWABLE U/S.37 AND ALSO NOT PERMITTED TO MAKE ADJUSTMENT U/ S.43A TO INCLUDE THE ACTUAL COST, SINCE IT IS APPLICABLE ONLY WHEN THE A SSET IS ACQUIRED IN INDIA. 4.0 THE AO PASSED THE ASSESSMENT ORDER ON RECEIPT OF D IRECTIONS FROM THE DRP U/S.143(3) R/W SEC.144C OF INCOME TAX ACT B Y ORDER DATED 09.01.2014 MAKING THE ADDITION OF 53,90,000/-. 5.0 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSE FILE D THE APPEAL BEFORE THIS TRIBUNAL. 5.1 DURING THE APPEAL HEARING, THE LD.AR ARGUED THAT T HE ASSESSE HAS PURCHASED THE ASSETS AND THE ASSETS WERE PUT TO USE BY TAKING THE ECB LOAN AND INCURRED LOSS ON ACCOUNT OF FOREIGN EXCHAN GE FLUCTUATION AS PER THE MANDATORY ACCOUNTING STANDARDS AND THE SAME IS REVENUE IN NATURE WHICH SHOULD BE ALLOWED AS DEDUCTION. THE ASSESSEE ALSO FURNISHED PAPER BOOK CONTAINING LOAN DOCUMENTS AND LOAN AGREEMENTS. THE ASSESSE HAS ITA NO.624/MDS/2014 :- 4 -: BORROWED A SUM OF 3.00 LAKHS EUROS FROM M/S.MAINETT E ON 21.06.2006 FOR FINANCING CAPITAL EXPENDITURE TOWARDS PURCHASE OF M ACHINES AND MOULDS. THE ASSESSE HAS PURCHASED THE CAPITAL ASSETS BY USI NG ECB LOAN. SIMILARLY, THE ASSESSE ALSO FURNISHED LOAN AGREEMEN T DATED 16.05.2007 FOR 4.00 LAKHS EUROS. BOTH THE LOANS WERE FOR THE PURP OSE OF PURCHASE OF CAPITAL ASSETS OF THE ASSESSEES BUSINESS. ACCORDIN G TO THE ASSESSE, SINCE THE ASSETS WERE PUT TO USE THE EXPENDITURE ACCRUED AFTER COMMENCEMENT OF BUSINESS SHOULD BE ALLOWED AS REVENUE EXPENDITUR E. ALTERNATIVELY, THE LEARNED AUTHORIZED REPRESENTATIVE (HEREINAFTER REFE RRED TO AS LD.AR) OF THE ASSESSEE CLAIMED THAT EXCHANGE RATE FLUCTUATION ON RE-STATEMENT OF ECB LOAN TO BE ADDED TO THE COST OF FIXED ASSETS AN D ALLOW THE DEPRECIATION ON THE ASSETS. THE ASSESSEE RELIED ON THE FOLLOWIN G DECISIONS: (I) CIT V WOODWARD GOVERNOR OF INDIA(P) LTD.312 ITR 254 (SC) (II) CIT V MARUTI UDYOG LTD 320 ITR 729 (SC) 5.2 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL RE PRESENTATIVE (HEREINAFTER REFERRED TO AS LD.DR) ARGUED THAT TH E ASSESSE HAS BORROWED THE FUNDS FOR THE PURPOSE OF CAPITAL ASSET S AND THE EXPENDITURE ACCRUED ON RE-STATEMENT OF FOREIGN EXCHANGE LOSS IS A CAPITAL LOSS WHICH IS NOT ALLOWABLE AS REVENUE EXPENDITURE. LD.DR ALSO ARGUED THAT SEC.43A IS APPLICABLE FOR INCLUSION OF INCREASE OR DECREASE IN FOREIGN EXCHANGE FLUCTUATION TO THE COST OF ASSET IN THE CASE OF ASS ESSE ACQUIRING THE ASSET FROM FOREIGN COUNTRY BUT NOT FOR THE EXTERNAL BORRO WINGS. ACCORDING TO THE LD.DR, THE EXPENDITURE IS NEITHER ALLOWABLE U/S.37( 1) NOR ALLOWED TO BE CAPITALIZED. ITA NO.624/MDS/2014 :- 5 -: 6.0 WE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATE RIAL PLACED ON RECORD. THE ASSESSE HAS BORROWED ECB LOAN FOR THE PURPOSE OF CAPITAL EXPENDITURE AND INCURRED FLUCTUATION LOSS OF 53,90,000/- AND CLAIMED IT AS A REVENUE EXPENDITURE. THE ECB LOAN WAS BORROWED FOR THE PURPOSE OF ACQUIRING THE CAPITAL ASSETS AND THE ASSETS WERE NO T ACQUIRED FROM OUTSIDE THE COUNTRY. THE LOSS WAS DUE TO RESTATEMENT OF THE EXTERNAL COMMERCIAL BORROWING OF LOAN, CONVERTED IN TO INDIAN CURRENCY. THERE WAS NO ACTUAL PAYMENT BUT AS A MANDATORY TO FOLLOW THE ACCOUNTING STANDARD THE LOSS WAS RESTATED. THE ASSESSEE RELIED ON HONBLE APEX C OURT JUDGMENT IN THE CASE OF CIT V WOODWARD GOVERNOR OF INDIA(P) LTD.312 ITR 254 (SC). THE ASSESSEE HAS SPECIFICALLY BROUGHT TO OUR ATTENTION TO PARA NO.18 WHEREIN HONBLE APEX COURT HELD AS UNDER: 18. AS-11 DEALS WITH GIVING OF ACCOUNTING TREATMENT FOR THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES. AS-11 DEALS WITH EFFECTS OF EXCHANG E DIFFERENCES. UNDER PARA 2, REPORTING CURRENCY IS DEFINED TO MEAN THE CURRENCY USED IN PR ESENTING THE FINANCIAL STATEMENTS. SIMILARLY, THE WORDS 'MONETARY ITEMS' ARE DEFINED T O MEAN MONEY HELD AND ASSETS AND LIABILITIES TO BE RECEIVED OR PAID IN FIXED AMOUNTS , E.G., CASH, RECEIVABLES AND PAYABLES. THE WORD 'PAID' IS DEFINED UNDER SECTION 43(2). THIS HA S BEEN DISCUSSED EARLIER. SIMILARLY, IT IS IMPORTANT TO NOTE THAT FOREIGN CURRENCY NOTES, BALA NCE IN BANK ACCOUNTS DENOMINATED IN A FOREIGN CURRENCY, AND RECEIVABLES/PAYABLES AND LOAN S DENOMINATED IN A FOREIGN CURRENCY AS WELL AS SUNDRY CREDITORS ARE ALL MONETARY ITEMS WHI CH HAVE TO BE VALUED AT THE CLOSING RATE UNDER AS-11. UNDER PARA 5, A TRANSACTION IN A FOREI GN CURRENCY HAS TO BE RECORDED IN THE REPORTING CURRENCY BY APPLYING TO THE FOREIGN CURRE NCY AMOUNT THE EXCHANGE RATE BETWEEN THE REPORTING CURRENCY AND THE FOREIGN CURRENCY AT THE DATE OF THE TRANSACTION. THIS IS KNOWN AS RECORDING OF TRANSACTION ON INITIAL RECOGN ITION. PARA 7 OF AS-11 DEALS WITH REPORTING OF THE EFFECTS OF CHANGES IN EXCHANGE RAT ES SUBSEQUENT TO INITIAL RECOGNITION. PARA 7(A) INTER ALIA STATES THAT ON EACH BALANCE SHEET D ATE MONETARY ITEMS, ENUMERATED ABOVE, DENOMINATED IN A FOREIGN CURRENCY SHOULD BE REPORTE D USING THE CLOSING RATE. IN CASE OF REVENUE ITEMS FALLING UNDER SECTION 37(1), PARA 9 O F AS-11 WHICH DEALS WITH RECOGNITION OF EXCHANGE DIFFERENCES, NEEDS TO BE CONSIDERED. UNDER THAT PARA, EXCHANGE DIFFERENCES ARISING ON FOREIGN CURRENCY TRANSACTIONS HAVE TO BE RECOGNIZED AS INCOME OR AS EXPENSE IN THE PERIOD IN WHICH THEY ARISE, EXCEPT AS STATED IN PARA 10 AND PARA 11 WHICH DEALS WITH EXCHANGE DIFFERENCES ARISING ON REPAYMENT OF LIABIL ITIES INCURRED FOR THE PURPOSE OF ACQUIRING FIXED ASSETS, WHICH TOPIC FALLS UNDER SEC TION 43A OF THE 1961 ACT. AT THIS STAGE, WE ARE CONCERNED ONLY WITH PARA 9 WHICH DEALS WITH REV ENUE ITEMS. PARA 9 OF AS-11 RECOGNISES EXCHANGE DIFFERENCES AS INCOME OR EXPENSE. IN CASES WHERE, E.G., THE RATE OF DOLLAR RISES VIS-A-VIS THE INDIAN RUPEE, THERE IS AN EXPEN SE DURING THAT PERIOD. THE IMPORTANT ITA NO.624/MDS/2014 :- 6 -: POINT TO BE NOTED IS THAT AS-11 STIPULATES EFFECT O F CHANGES IN EXCHANGE RATE VIS-A- VIS MONETARY ITEMS DENOMINATED IN A FOREIGN CURRENC Y TO BE TAKEN INTO ACCOUNT FOR GIVING ACCOUNTING TREATMENT ON THE BALANCE SHEET DATE. THE REFORE, AN ENTERPRISE HAS TO REPORT THE OUTSTANDING LIABILITY RELATING TO IMPORT OF RAW MAT ERIALS USING CLOSING RATE OF EXCHANGE. ANY DIFFERENCE, LOSS OR GAIN, ARISING ON CONVERSION OF THE SAID LIABILITY AT THE CLOSING RATE, SHOULD BE RECOGNIZED IN THE P&L ACCOUNT FOR THE REPORTING PERIOD. 6.1 FROM PLAIN READING OF THE HONBLE APEX COURT DECIS ION THE EXPENDITURE IS RELATABLE DAY TO DAY RUNNING OF THE BUSINESS WHICH IS INDICATED FROM THE OUTSTANDING LIABILITY RELATING TO IMPORT OF RAW MATERIALS. THEREFORE, THE RELIANCE PLACED BY THE ASSESSEE IS OF NOT HELPFUL TO THE ASSESSEE. THE HONBLE APEX COURT IN THE DECI SION CITED SUPRA DEALT WITH THE CAPITAL ACCOUNTS IN PARA NO.22 TO34 AND AM ENDED PROVISIONS DEALT WITH IN PARA NO.34 AS UNDER: 34. LASTLY, WE ARE OF THE VIEW THAT AMENDMENT OF SE CTION 43A BY THE FINANCE ACT, 2002 WITH EFFECT FROM 1-4-2003 IS AMENDATORY AND NOT CLA RIFICATORY. THE AMENDMENT IS IN COMPLETE SUBSTITUTION OF THE SECTION AS IT EXISTED PRIOR THERETO. UNDER THE UNAMENDED SECTION 43A ADJUSTMENT TO THE ACTUAL COST TOOK PLAC E ON THE HAPPENING OF CHANGE IN THE RATE OF EXCHANGE WHEREAS UNDER THE AMENDED SECTION 43A THE ADJUSTMENT IN THE ACTUAL COST IS MADE ON CASH BASIS. THIS IS INDICATED BY TH E WORDS 'AT THE TIME OF MAKING PAYMENT'. IN OTHER WORDS, UNDER THE UNAMENDED SECTION 43A, 'A CTUAL PAYMENT' WAS NOT A CONDITION PRECEDENT FOR MAKING NECESSARY ADJUSTMENT IN THE CA RRYING COST OF THE FIXED ASSET ACQUIRED IN FOREIGN CURRENCY, HOWEVER, UNDER AMENDED SECTION 43A WITH EFFECT FROM 1-4-2003 SUCH ACTUAL PAYMENT OF THE DECREASED/ENHANCED LIABILITY IS MADE A CONDITION PRECEDENT FOR MAKING ADJUSTMENT IN THE CARRYING AMOUNT OF THE FIX ED ASSET. THIS INDICATES A COMPLETE STRUCTURAL CHANGE BROUGHT ABOUT IN SECTION 43A VIDE FINANCE ACT, 2002. THEREFORE, THE AMENDED SECTION IS AMENDATORY AND NOT CLARIFICATORY IN NATURE. 6.2 IN THE INSTANT CASE, THE ASSESSEE HAS BORROWED THE ECB LOAN SUBSEQUENT TO THE AMENDMENT OF SECTION 43A AND THE CONDITION PLACED IN THE AMENDMENT WAS ON ACTUAL PAYMENT. IN THE ASSESSE ES CASE NO PAYMENT WAS MADE AND THE LOSS WAS NOTIONAL AND NO A DJUSTMENT CAN BE MADE IN THE COST OF ACTUAL COST OF THE ASSET. THE A SSESSEE ALSO RELIED ON HONBLE APEX COURT DECISION IN THE CASE OF MARUTI U DYOG LTD CITED SUPRA WHICH WAS DELIVERED BY THE HONBLE APEX COURT FOLLO WING THE DECISION OF WOODWARD GOVERNOR OF INDIA CITED (SUPRA) WHICH RELA TES TO PRIOR TO THE ITA NO.624/MDS/2014 :- 7 -: AMENDMENT OF SEC.43A. THEREFORE, THE CASE LAWS REL IED UP ON BY THE ASSESSE ARE NOT APPLICABLE IN THE ASSESSEESS CASE TO ALLOW THE SAME AS REVENUE EXPENDITURE AS WELL AS TO INCLUDE THE SAME AS ACTUAL COST. 6.3 ON THE SIMILAR FACTS, THE CO-ORDINATE BENCH OF ITA T, HYDERABAD, IN ITA NO.2095/HYD/2011 HELD THAT IN THE CASE OF M/S.M +W ZANDER (S) PVT. LTD., VS. ASSESSEE ON 06.06.2012 WAS HELD AS UNDER: 11. BRIEF FACTS OF THE ISSUE ARE THAT IT IS THE CL AIM OF THE ASSESSEE THAT IT HAS OBTAINED LOAN FROM ITS HEAD OFFICE FOR AN SGD 15,00,000 AND SGD 10,00,000 RESPECTIVELY. IT ALSO FILED LETTER DATED 25.4.2005 AND RBI'S LETTER DATED 26.4.2005 STATING THAT WITH RESPECT TO THE EXECUTION OF PARTICULAR PROJECTS, IT HAD BORROW ED CERTAIN MONIES ON REPATRIATION BASIS FROM ITS HEAD OFFICE. THE ASSESSEE ALSO REFERRED TO BOMBAY HIGH COURT DECISION IN THE CASE OF CIT V. DEMPO AND CO. PVT. LTD. (206 ITR 291) WHE REIN IT HAS SUMMED UP THE POSITION THAT FOR DETERMINING WHETHER THE DEVALUATION LOSS I S REVENUE OR CAPITAL WHAT IS RELEVANT IS UTILISATION OF THE AMOUNT AT THE TIME OF DEVALUATIO N AND NOT THE OBJECT FOR WHICH THE LOAN WAS TAKEN. ALSO IT WAS HELD THAT LOSS IN RESPECT OF CIRCULATING CAPITAL IS REVENUE LOSS WHEREAS LOSS IN RESPECT OF FIXED CAPITAL IS NOT. TH E ASSESSEE REFERRED TO THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD. (312 ITR 254) (SC ). 12. THE CONTENTION OF THE ASSESSEE IS THAT U/S. 43 A WHENEVER THERE IS AN INCREASE IN THE LIABILITY OF THE ASSESSEE AS EXPRESSED IN INDIA N CURRENCY, THE LIABILITY IS TO BE ALLOWED AT THE TIME OF MAKING PAYMENT. HOWEVER, SECTION 43A DE ALS WITH A CASE WHEREIN THE ASSESSEE HAS ACQUIRED A CAPITAL ASSET AND IN THE CASE OF THE ASSESSEE IT HAS BORROWED FOR THE PURPOSE OF WORKING CAPITAL AND HENCE LIABILITY HAS ARISEN O N ACCOUNT OF REVENUE ACCOUNT AND THE SAME IS ADMISSIBLE. 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. FROM A READING OF THE ENTIRE AS-11 AND ALSO THE EXTRACTS I T FOLLOWS THAT LOAN IS A NON-INTEGRAL FOREIGN OPERATION WITH REFERENCE TO THE HEAD OFFICE , SO LONG AS BRANCH IS INDEPENDENTLY CONDUCTING ITS BUSINESS ACTIVITIES. IN THE CASE ON HAND THE BRANCH IS INDEPENDENTLY CARRYING OUT CONTRACTS IN THIS COUNTRY AND HENCE, THE FLUCTU ATION IN THE RATE OF EXCHANGE CANNOT HAVE EFFECT ON ITS INTEGRAL OPERATIONS. THE ENTIRE TRANS ACTION IS NON-INTEGRAL IN NATURE AND HENCE, THE SAME IS TO BE TREATED AS PER PARA 24 OF AS- 11. THE FLUCTUATIONS IN THE RATE OF FOREIGN EXCHANGE ON THE QUANTUM OF LOAN WOULD NOT AFFECT TH E DAY TO DAY WORKING OR THE PROFIT OF A GIVEN YEAR. IT WOULD AFFECT ONLY ON REPAYMENT AT TH E TIME OF SETTLEMENT. HENCE, THE GAIN OR LOSS IS TO BE ACCUMULATED IN THE RESERVE ACCOUNT UN TIL THE DATE OF SETTLEMENT WHEREUPON IT CAN BE CREDITED OR DEBITED IN THE PROFIT AND LOSS A /C. HENCE, THE LOSS CLAIMED IS TO BE CARRIED FORWARD IN THE FOREIGN CURRENCY TRANSLATION RESERVE ACCOUNT AND SQUARED UP AT THE TIME OF SETTLEMENT. IT CANNOT BE ALLOWED TILL THE T IME OF SETTLEMENT. ACCORDINGLY, WE CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. THIS GROUND OF THE ASSESSEE IS DISMISSED. 7.0 FOLLOWING THE DECISION OF CO-ORDINATE BENCH OF ITAT , HYDERABAD, WE HOLD THAT THE LOSS CLAIMED IS TO BE CARRIED FORWARD IN THE FOREIGN CURRENCY TRANSLATION RESERVE ACCOUNT AND SQUARED UP AT THE T IME OF SETTLEMENT. THE ITA NO.624/MDS/2014 :- 8 -: CLAIM MADE BY THE ASSESSE CANNOT BE ALLOWED TILL TH E TIME OF SETTLEMENT AND ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LOWER AUTHORITIES AND THE ORDER OF THE AO IS CONFIRMED. 8.0 GROUND NOS.6 TO 8 ARE RELATED TO THE TRANSFER PRIC ING ADJUSTMENT OF 15,98,138/-. DURING THE ASSESSMENT PROCEEDINGS, TH E AO FOUND THE INTERNATIONAL TRANSACTION OF 60,87,92,802/- RELATING TO PURCHASE OF RAW MATERIALS CONSUMABLES SOME FINISHED GOODS AND CAPEX , ETC. THE AO REFERRED THE ISSUE TO THE TPO FOR DETERMINING ALP O F INTERNATIONAL TRANSACTION. THE ASSESSE IS TESTED PARTY AND THE M ETHOD ADOPTED BY THE ASSESSE IS COMPARABLE UNCONTROLLED PRICE (IN SHORT CUP) METHOD. THE TPO ACCEPTED THE METHOD ADOPTED BY THE ASSESSE AND ANALYZED BY TRANSACTION AND ARRIVED AT DIFFERENCE OF 15,98,138/- IN SALE OF FINISHED GOODS FOR UPWARD ADJUSTMENT. THE AO HAS ISSUED DRA FT ASSESSMENT ORDER AND THE ASSESSE FILED OBJECTIONS BEFORE THE DRP IN RESPONSE TO THE DRAFT ASSESSMENT ORDER AS PER THE SEC.144C OF INCOME TAX ACT. BEFORE THE DRP, THE ASSESSE ARGUED THAT THERE WAS NO DIFFERENC E IN ALP CONSIDERING THE TOTALITY OF TRANSACTIONS INSTEAD OF INDIVIDUAL TRANSACTIONS. THE ASSESSEE ARGUED THAT THE TRANSACTIONS OF THE ASSESSEE WITH T HE AE WAS NOT AN ISOLATED TRANSACTION AND THERE WERE SERIES OF TRANS ACTIONS AND HENCE TO BE CONSIDERED IN TOTALITY. FURTHER THE AR SUBMITTED IF PERMISSIBLE TOLERANCE LIMIT (+/- 5%) IS ALLOWED THE TRANSACTIONS OF SALE S ARE AT ALP. SIMILARLY IN THE CASE OF PURCHASES FROM ASSESSEE NET RESULT OF C OMPARISON OF THE PRICE ITA NO.624/MDS/2014 :- 9 -: CHARGED BY THE AE TO ASSESSEE VIS-A VIS THE PRICE C HARGED BY THE AE TO THE OTHER PARTIES IS POSITIVE TO THE EXTENT OF RS.1.9 C RORE.THE DRP REJECTED THE CONTENTIONS OF THE ASSESSE AND UPHELD THE PROPOSAL MADE BY THE AO HOLDING THAT THERE IS NO DISPUTE IN ADOPTING CUP ME THOD AND ALSO THAT THERE IS NO MULTIPLE COMPARABLE PRICES FOR EACH TRA NSACTION. ACCORDINGLY, THE AO HAS PASSED ASSESSMENT ORDER U/S.143(3) R/W S EC.144C ON 09.01.2014 MAKING UPWARD ADJUSTMENT OF 15,98,138/- ON ACCOUNT OF SALE OF FINISHED GOODS. 9.0 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSE IS O N APPEAL BEFORE US. THE LD.COUNSEL ARGUED THAT AGGREGATING OF TRAN SACTIONS ENTERED INTO BY THE ASSESSEE WITH THE ASSOCIATED ENTERPRISE SHOU LD BE CONSIDERED WHILE DETERMINING THE ALP. THE AGGREGATION OF ALL DIFFER ENCE BETWEEN THE SALE PRICE TO ASSOCIATED ENTERPRISE AND SALE PRICE TO NO N-ASSOCIATED ENTERPRISE IS WITHIN THE TOLERANCE LIMIT NO ADJUSTMENT IS REQU IRED ON ACCOUNT OF ALP. 10.0 THOUGH, IN CERTAIN INSTANCES, THE SALE PRICE TO AS SOCIATED ENTERPRISE IS LOWER THAN THE SALE PRICE TO NON-ASSOCIATED ENTE RPRISE, THERE WERE OTHER TRANSACTIONS WHERE THE REVERSE WAS ALSO TRUE, THE INSTANCES WHERE THE SALE PRICE TO ASSOCIATED ENTERPRISE WAS HIGHER THAN THE SALE PRICE TO NON-ASSOCIATED ENTERPRISE ALSO SHOULD BE TAKEN INTO ACCOUNT WHILE DETERMINING THE ALP. IF THE SAME IS CONSIDERED, TH E NET DIFFERENCE IS POSITIVE. FURTHER, ANALYSIS OF PURCHASE FROM ASSOC IATED ENTERPRISE, NET RESULT OF COMPARISON OF PRICE CHARGED BY THE ASSOCI ATED ENTERPRISE TO THE ITA NO.624/MDS/2014 :- 10 -: ASSESSEE VIS-A-VIS, THE PRICE CHARGED BY THE ASSOCI ATED ENTERPRISE TO THIRD PARTIES IS POSITIVE TO THE EXTENT OF 1.90 CR. FURTHER, EVEN ASSUMING THAT THERE IS A NEGATIVE DIFFERENCE OF 15,98,138/- THE PURPORTED DIFFERENCE IS WITHIN THE TOLERANCE LIMIT OF 5% PRESCRIBED IN PROV ISO TO SEC.92C OF IT ACT. 11.0 ON THE OTHER HAND, THE LD.DR RELIED ON THE DECISIO N OF LOWER AUTHORITIES ORDERS AND STATED THAT FOR THE AY 200 7-08 IN THE CASE CITED (SUPRA), THE HONBLE ITAT HELD THAT ALP TO HAS BE D ETERMINED BY CONSIDERING BOTH PURCHASE AND SALES FROM ASSOCIATE D ENTERPRISE SINCE THESE ARE PART OF THE SAME CLASS OF TRANSACTIONS. THE LD.DR FURTHER SUBMITTED THAT THE ASSESSE IS CARRYING ON TWO KINDS OF ACTIVITIES, FIRST ACTIVITY IS MANUFACTURING AND SELLING OF HANGERS AN D SECOND ACTIVITY IS IN TRADING HANGERS. THE ASSESSE PURCHASED MANUFACTURE D HANGERS FROM GLUE WORKS AND SOLD TO THIRD PARTIES IN INDIA. THE HON BLE ITAT FOR THE AY 2007-08 DIRECTED THE AO TO CONSIDER THE AGGREGATION OF PURCHASE AND SALES UNDER THE IMPRESSION THAT THE ASSESSEE IS CAR RYING ONLY TRADING ACTIVITY. SINCE THE ASSESSE HAD INTERNATIONAL TRAN SACTION WITH ASSOCIATED ENTERPRISE AND IT SELECTED CUP METHOD AS MOST APPRO PRIATE METHOD TO BENCH MARK THE PURCHASE AND SALE TRANSACTIONS THE A GGREGATION OF TRANSACTIONS IS NOT PERMITTED IN VIEW OF SECTION92B (1)(A) R.W.R 10B(1)(A). ACCORDING TO THE LD.DR, NO INTERFERENCE IS CALLED F OR. 12.0 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. ITA NO.624/MDS/2014 :- 11 -: THE LD.AR OF THE ASSESSEE SUBMITTED PAPER BOOK AND FURNISHED THE DETAILS OF SALES MADE TO ASSOCIATED ENTERPRISE WHER E IT HAS CHARGED LOWER PRICE THAN THAT OF THIRD PARTIES AND ALSO HIGHER PR ICE THAN THAT OF TO THIRD PARTIES. IF THE TOTAL TRANSACTIONS ARE AGGREGATED, THERE IS A POSITIVE AMOUNT OF 18,84,775/-. THE ASSESSEE HAS SOLD THE PRODUCTS TO THIRD PARTIES AS WELL AS ASSOCIATED ENTERPRISE, IN SOME I NSTANCES THE ASSESSE SOLD PRODUCTS TO THIRD PARTIES HIGHER THAN THE PRIC E CHARGED TO ASSOCIATED ENTERPRISE AND VIS--VIS AE. FROM THE ABOVE DETAIL S FURNISHED BY THE ASSESSE, IT IS SEEN THAT THE PRICE CHARGED TO THIRD PARTIES SOME TIMES HIGHER THAN THE ASSOCIATED ENTERPRISE AND SOMETIMES LOWER THAN THE ASSOCIATED ENTERPRISE. ON THE SIMILAR FACTS IN THE ASSESSEES OWN CASE, FOR THE AY 2010-11 IN ITA NO.616/MDS/2015 DATED 24.08.2 016 THE CO- ORDINATE BENCH HAS REMITTED THE MATTER BACK TO THE FILE OF THE AO TO RE- COMPUTE THE ALP BY TAKING IN TO CONSIDERATION BOTH THE NET DIFFERENCE ON THE SALE FROM THE AE AND PURCHASE FROM AE FOLLOWIN G THE DECISION IN ASSESSEES OWN CASE IN ITA NO.1789/MDS./11 DECIDED ON 16.03.12 AS UNDER: 12. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE PAR TIES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE ORDE R OF THE TRIBUNAL RELIED UPON BY THE LD. A.R. WE FIND THAT THE ISSUE IN HAND HAS A LREADY BEEN DEALT WITH BY THE TRIBUNAL IN THE CASE OF THE ASSESSEE IN ITA NO.1789 /MDS./11 DECIDED ON 16.03.12. THE FINDINGS OF TRIBUNAL ARE REPRODUCED HEREIN UNDE R:- 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. PER USAL OF THE PROVISIONS OF SEC.92C SHOWS THAT THE WORDS USED IS IN RELATION T O AN INTERNATIONAL TRANSACTION - - - - - - HAVING REGARD TO THE NATURE OF TRANSACTI ON OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUC H PERSONS. THE TERM CLASS OF TRANSACTION AND NATURE OF TRANSACTIONS COME TO T HE FOREFRONT IN THE PRESENT CASE. IN THE ASSESSEES CASE, THE TRANSACTION WITH THE AE IS NOT ONE OF SIMPLE PURCHASE OR SIMPLE SALE. THE ASSESSEE PURCHASES FROM ONE AND S ELLS TO ANOTHER. THE ASSESSEE HAS PURCHASED FROM ITS AE IN HONGKONG, SRILANKA, MA LAYASIA, PAKISTAN AND RANDY ASIA AND HAS SOLD TO ITS AE IN SRILANKA, KOREA, HO NGKONG, GULF, EGYPT, BANGLADESH,MALAYASIA, TAIWAN, UK AND PAKISTAN. IN REGARD TO THE SALES MADE BY THE ASSESSEE, THE TRANSACTION WITH BANGALADESH IS I N POSITIVE, THE TRANSACTION WITH ITA NO.624/MDS/2014 :- 12 -: EGYPT IS IN NEGATIVE, THE TRANSACTION WITH GULF IS IN THE POSITIVE, THE TRANSACTION WITH HONGKONG IS IN NEGATIVE, THE TRANSACTION WITH KOREA IS IN POSITIVE, THE TRANSACTION WITH SRILANKA IS IN THE NEGATIVE, THE TRANSACTION W ITH MALAYASIA IS IN THE NEGATIVE, THE TRANSACTION WITH PAKISTAN IS IN THE NEGATIVE, T HE TRANSACTION WITH TAIWAN IS IN THE NEGATIVE AND THE TRANSACTION WITH UK IS IN THE NEGATIVE. THUS, WHAT IS NOTICED IS THAT ON THE PURCHASE THE ASSESSEE HAS A POSITIVE DIFFERENTIAL I.E. THE ASSESSEE PURCHASES AT A LOWER PRICE FROM ITS AE THAN THE NON -AE AND WHEN ITS SALES TO THE AE, ITS SELLING PRICE IS LOWER THAN THE SELLING PRI CE AS COMPARED WITH THE NON-AE. THERE IS NO QUESTION THAT THE ASSESSEE IS GENERATIN G PROFITS FROM THE TRANSACTION. THERE IS NO DISPUTE THAT THE ASSESSEE IS ALSO PAYIN G TAXES ON THE PROFITS THAT IT HAS GENERATED FROM ITS TRANSACTION OF PURCHASE AND SALE WITH ITS AE. THE ASSESSEE, THUS IT IS NOTICED, IS DOING THE BUSINESS OF TRADING WHE N IT PURCHASED FROM ITS AE FROM ONE COUNTRY AND SELLS TO ANOTHER AE IN ANOTHER COUN TRY. THIS MARGIN COULD BE ON ACCOUNT OF BOTH FOREIGN EXCHANGE FLUCTUATIONS AS AL SO THE MARK UP DONE BY THE ASSESSEE. THESE TRANSACTIONS CLEARLY SHOW THAT WHAT IS DONE BY THE ASSESSEE IS ONE OF PURCHASE AND SALE. WITH THIS IN MIND READING OF THE PROVISIONS OF SEC.92C SHOWS THAT THE WORD USED IS NATURE OF TRANSACTION. NAT URE OF TRANSACTION WOULD BE A PARTICULAR SET OF TRANSACTION, WHICH ARE TO BE SEEN TOGETHER. WHEN THE ASSESSEE IS BUYING FROM ONE PLACE AND SELLING AT ANOTHER THAT W OULD BE A CLASS OF TRANSACTION. WHEN THE ASSESSEE IS DOING THE BUSINESS OF TRADING, IT WOULD NOT BE A RIGHT TO HOLD THAT THE PURCHASE IS ONE CLASS OF TRANSACTION AND THE SALES ARE ANOTHER CLASS OF TRANSACTION. THE ASSESSEE DEALING WITH THE AES IS A BETTER POSITION TO NEGOTIATE BETTER PRICES AND CONSEQUENTLY WOULD BE ABLE TO GET A BETTER BARGAIN. HERE, WHAT IS TO BE SEEN IS WHETHER THE TRANSACTION OF PURCHASE A ND SALE BEING THE NATURE OF TRANSACTIONS, WHEN SEEN IN CONSOLIDATED FROM, GENER ATES PROFITS WHICH NORMALLY WOULD BE GENERATED. FOR THIS BOTH THE PURCHASE AND SALE TRANSACTIONS WOULD HAVE TO BE CONSIDERED. TO EXPLAIN BY AN EXAMPLE, THE ASSESSEE PURCHASES A PRODUCT AT 10 FROM ITS AE. THE SAME PRODUCT IS SOLD BY A NON-AE AT 12/-. THE ASSESSEE SELLS THE FINISHED PRODUCT TO ITS AE AT 15/-. THE SAME FINISHED PRODUCT IS SOLD BY A NON-AE AT 17/-. THE PROFITS FROM BOTH TRANSACTIONS, ASSESSEE TO AE, AS ALSO NON-AE TO NON-AE WOULD GIVE 5/- BUT FOR THE PURPOSE OF DETERMINING THE ALP AS THE ASSESSEE PURCHASES FROM ITS AE AT A PRICE LOWER THAN NON-AE, THE PURCH ASE PRICE WOULD BE ACCEPTED AS THE DEVIATION IS NEGATIVE I.E. 10/- IS LOWER THAN 12/-, BUT AS THE ASSESSEE SELLS TO ITS AE AT A PRICE LOWER THAN A NON-AE, THE SALE PR ICE WILL BE ADJUSTED TO THE SELLING PRICE OF THE NON-AE AS THE DEVIATION IS POSITIVE I. E. 15/- IS LOWER THAN 17/-. THEREFORE, 17/- WILL BE CONSIDERED AS ALP. THIS WOULD RESULT I N I) THE ASSESSEE BUYS FROM THE AE AT 10/- II) THE ASSESSEES SALE PRICE IS ADJUSTED TO ALP AT 17/-. THUS THE PROFIT OF THE ASSESSEE WILL BE DETERMINED AT 7/-. NOW IF WE COMPARE THE PROFITABILITY, ASSESSEES PURCHASE AND SALE TO AE IS 5/-. PERCENTAGE OF PROFIT 5 X 100 = 33.33% 15 NON-AE PURCHASE & SALE IS 5/- PERCENTAGE OF PROFIT 5 X 100 = 29.41% 17 AFTER ADJUSTMENT PROFIT IS 7/- PERCENTAGE OF PROFIT 7 X 100 = 41.17% 17 THUS THE PROFITABILITY IF CONSIDERED WITHOUT CONSID ERING THE POSITIVE DEVIATIONS WOULD LEAD TO IMPOSSIBLE PROFITABILITY POSITIONS, WHICH I S NOT WHAT IS CONTEMPLATED UNDER THE PROVISIONS OF 92C. IN THE CIRCUMSTANCES, THE A SSESSING OFFICER IS DIRECTED TO RE- COMPUTE THE ALP BY TAKING INTO CONSIDERATION BOTH T HE NET DIFFERENCE ON THE SALE ITA NO.624/MDS/2014 :- 13 -: FROM THE AE AND PURCHASE FROM THE AE. THE ASSESSI NG OFFICER MAY LOOK INTO THE FACT AS TO THE MARGINS OF THE PROFITS IN REGARD TO THE TRANSACTIONS DONE BY THE ASSESSEE WITH ITS AE, AS ALSO THE NON-AE TRANSACTI ONS AND THEN COMPUTE THE ADJUSTMENT OF ALP, IF ANY. IN THE CIRCUMSTANCES, THE GROUNDS NOS.5, 6, 8 & 9 OF THE ASSESSEE STAND PARTLY ALLOWED FOR STATISTICAL P URPOSES. RESPECTFULLY FOLLOWING THE ORDER OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL, THIS GROUND OF APPEAL OF ASSESSEE IS ALLOWED FOR STATIST ICAL PURPOSES WITH SIMILAR DIRECTIONS TO THE ASSESSING OFFICER. 13.0 THOUGH, THE ASSESSEE IS HAVING MANUFACTURING AND T RADING ACTIVITY, THE ASSESSEE HAS PURCHASED THE GOODS FROM ASSOCIATE D ENTERPRISES AND MANUFACTURING THE HANGERS SIMILARLY PURCHASED THE F INISHED GOODS AND SELLING THE HANGERS. BOTH ACTIVITIES ARE INTEGRAL PART BUT NOT INDEPENDENT TO EACH OTHER. THOUGH THE PURCHASE OF RAW MATERIAL IS FROM THE AE, SALE IS THE COMMON ACTIVITY OF THE ASSESSE AND SALES ARE MA DE BOTH TO THE ASSOCIATED ENTERPRISES AND NON-ASSOCIATED ENTERPRIS ES EITHER FROM THE PURCHASES MADE OUT OF FINISHED PRODUCTS OR MANUFACT URED PRODUCTS. THEREFORE THE PROFITABILITY HAS TO BE CONSIDERED WI TH THE AGGREGATE OF PURCHASES AND SALES BUT NOT ISOLATING PURCHASES AND SALES SEPARATELY. THEREFORE, WE ARE OF THE OPINION THAT EVEN THE ASSE SSEE IS HAVING TWO ACTIVITIES THE ORDER OF THIS CO-ORDINATE BENCH IN THE ASSESSEES OWN CASE IS SQUARELY APPLICABLE. RESPECTFULLY FOLLOWING THE ORDER OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL (SUPRA), THIS GROUND OF APPE AL OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES WITH SIMILAR DIREC TIONS TO THE ASSESSING OFFICER. ACCORDINGLY, THIS GROUND OF THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ITA NO.624/MDS/2014 :- 14 -: 14.0 IN THE RESULT, THE APPEAL OF THE ASSESSEE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH MARCH, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( ' . . # $!% ) (D.S.SUNDER SINGH) ' /ACCOUNTANT MEMBER /CHENNAI, 5! /DATED: 15 TH MARCH, 2017. TLN 0 .2$6 76+2 /COPY TO: 1. ,- /APPELLANT 4. # 82 /CIT 2. ./,- /RESPONDENT 5. 6 9 .2 /DR 3. # 82 ( ) /CIT(A) 6. * < /GF