DCIT, New Delhi V. M/s. Ecocat India Pvt. Ltd., New Delhi

ITA 847/DEL/2012

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4248 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-09-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 14-06-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 21-02-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I - 2 , NEW DELHI BEFORE SH. VIJAY PAL RAO , JUDICIAL M EMBER AND SH. O.P. KANT , ACCOUNTANT MEMBER ITA NO. 847 /DE L/ 2012 ASSESSMENT YEAR : 2007 - 08 DCIT, CIRCLE - 11(1), ROOM NO. 312, C.R. BUILDING, NEW DELHI VS. ECOCAT INDIA PVT. LTD., 12 - A , SHIVAJI MARG, NEW DELHI PAN : AAACV2674G (APPELLANT) (RESPONDENT) APPELLANT BY SH. SANJAY KUMAR YADAV, SR.DR RESPONDENT BY SH. K. SAMPATH, ADV. DATE OF HEARING 02.08.2017 DATE OF PRONOUNCEMENT 15.09.2017 ORDER PER O.P. KANT , A. M. : THIS APPEAL BY THE R EVENUE IS DIRECTED AGAINST ORDER DATED 27/12/2011 OF THE COMMISSIONER OF INCOME - TAX (APPEALS) - XX, NEW DELHI [IN SHORT THE CIT - (A) ] FOR ASSESSMENT YEAR 2007 - 08 , RAISING FOLLOWING GROUNDS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS E R RED IN DELETING THE ADDITION OF RS.2,04,58,470/ - MADE ON ACCOUNT OF ARM S LENGTH PRICE. 2 ITA NO. 847/DEL/2012 2. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARING. 2. THE FACTS IN BRIEF OF THE CASE ARE THAT DURING THE RELEVANT YEAR THE ASSESSEE COMPANY WAS ENGAGED IN MANUFACTURING OF CATALYTIC C ONVERTERS FOR AUTOMOBILES AND COMPONENTS OF CAR A/C SYSTEMS. THE ASSESSEE FILED RETURN OF INCOME ON 29/10/2007 DECLARING NIL INCOME. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT ) WAS ISSUED AND COMPL IED WITH. THE ASSESSING OFFICER NOTED THE INTERNATIONAL TRANSACTIONS CA RRIED OUT BY THE ASSESSEE WITH A SSOCIATED ENTERPRISES (AES) AND HE REFERRED DETERMINATION OF ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION S TO THE T RANSFER PRICING O FFICER (TPO). ON PERUSAL OF TRANSFER PRICING STUDY SUBMITTED UNDER RULE 10 D OF INCOME - TAX RULES, 1962 (IN SHORT THE RULES ), THE LEARNED TPO NOTED FOLLOWING INTERNATIONAL TRANSACTIONS: NATURE OF TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION (RS .) PURCHASE OF COMPONENTS CUP 172,578,808 SALE OF COMPONENTS/CONVERTOR CUP 855,430 PURCHASE OF CAPITAL ITEMS CUP 2,341,600 REIMBURSEMENT OF EXPENSES CUP 147,583 2.1 REGARDING THE FUNCTIONS CARRIED OUT BY THE ASSESSEE, THE LEARNED TPO NOTED THAT TILL THE YEAR UNDER CONSIDERATION THE ASSESSEE OWNED MANUFACTURING FACILIT IES FOR ONLY THE LAST PROCESS ( CANNING) OF THE CATALYTIC CONVERTERS. THE C OATED SUBSTRATE WAS IMPORTED FROM THE AES AND AFTER C ANNING OF SAME , THE CATALYTIC CONVERTER WAS MANUFACTURE D AND SOLD TO THE CUSTOMER S ON THE BASIS OF TENTATIVE SCHEDULES RECEIVED FROM THE CUSTOMERS. THE COATED SUBSTRATE IMPORTED FROM AES , CONSTITUTED 85% TO 90% OF ITS RAW MATERIAL. 3 ITA NO. 847/DEL/2012 2.2 THE LD. TPO FURTHER NOTED THAT THE ASSESSEE HAD USED COMP ARABLE UNCONTROLLED PRICE (CUP) METHOD FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS. THE ASSESSEE COMPARED THE PRICES CHARGED FROM IT BY THE AE WITH THE PRICES CHARGED BY THE AE FROM UNRELATED PARTIES LOCATED IN OTHER COUNTRIES. BASED ON THE ANALYSIS, THE ASSESSEE CONCLUDED THAT ITS INTERNATIONAL TRANSACTIONS WERE AT ARM S LENGTH. 2.3 FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS, THE ASSESSEE USED WEIGHTED AVERAGE OF THE FINANCIAL DATA FOR FINANCIAL YEAR 2004 - 05, 2005 - 06 AND 2006 - 07 I.E MULTIPLE YEA R DATA. THE LEARNED TPO, REFERRED TO R ULE 10 B(4) OF R ULES & OECD GUIDELINES AND REJECTED THE APPROACH OF THE ASSESSEE OF USING MULTIPLE YEAR DATA , RELYING ON THE DECISION OF THE ITAT BANGALORE BENCH ES IN THE CASE OF AZTEC SOFTWARE AND TECHNOLOGY (2007) 294 ITR(AT) 32 AND DELHI BENCHES DECISION IN THE CASE OF MENTOR GRAPHICS PRIVATE LIMITED (2007) 109 ITD 21 AND OTHER DECISIONS. 2.4 THE LEARNED TPO FURTHER ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE RE FERRING TO VARIOUS PARAGRAPHS OF THE TRANSFER PRICING STUDY OF THE ASSESSEE. IN THE SHOW CAUSE NOTICE , THE LEARNED TPO NOTED THAT THE ASSESSEE WAS DEPENDED FOR PURCHASES ON AES AS SUBSTANTIAL PART OF PURCHASES ( RS.172,578,808 / - OUT OF TOTAL PURCHASES OF RS. 178,011,008 / - ) BEING FROM ITS AES. THE LEARNED TPO ALSO NOTED THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE CARRIED OUT RESEARCH AND DEVELOPMENT FOR A NEW CATALYTIC CONVERTER FOR M/S. MAHINDRA AND MAHINDRA LTD . WHICH SHOWS AN INDEPENDENT ENTRE PRENEUR STATUS OF THE ASSESSEE. THE LEARNED TPO NOTED THAT THE ASSESSEE HAS SHOWN SALES OF RS.184,286, 696/ - AND INCURRED LOSS OF RS.10,615, 894/ - AND THUS THE LOSS WAS PRIMARILY DUE TO THE TRANSACTION WITH THE AES. THE LEARNED TPO COMPUTED UNIT SALE PRICE A ND UNIT PURCHASE PRICE FOR THE YEAR UNDER CONSIDERATION AND COMPARED WITH IMMEDIATELY PRECEDING YEARS AND CONCLUDED THAT THE ASSESSEE HAS NOT NEGOTIATED ITS UNIT PURCHASE PRICE IN THE YEAR UNDER CONSIDERATION 4 ITA NO. 847/DEL/2012 WITH AES . IN VIEW OF THE OBSERVATIONS, THE LEAR NED TPO WAS OF THE OPINION THAT THE CUP METHOD WAS CHOSEN BY THE ASSESSEE AS MOST APPROPRIATE METHOD , JUST TO GLOSS OVER THE FACT S AND IT DOES NOT CAPTURE THE REALITY THAT THE ASSESSEE WAS AN INDEPENDENT ENTREPRENEUR AND SHOULD BE TESTED ON THE BASIS OF OWN FINANCIAL RESULTS AND DIRECTED THE ASSESSEE TO CARRY OUT ANALYSIS OF ARM S LENGTH ON THE BASIS OF TRANSACTIONAL NET MARGIN METHOD (TNMM). 2.5 IN RESPONSE, THOUGH THE ASSESSEE OBJECTED REJECTION OF CUP METHOD AND ADOPTING TNM M A S THE MOST APPROPRI ATE METHOD FOR COMPUTATION OF THE ARM S LENGTH PRICE, THE ASSESSEE PROVIDED A LIST OF 19 COMPARABLE COMPANIES WITH CALCULATION OF WEIGHT AVERAGE OPERATING PROFIT MARGINS FOR FINANCI AL YEAR 2005 - 06 AND FINANCIAL YEAR 2006 - 07 AT ( - ) 1.90%. 2. 6 THE LEARNED T PO REJECTED THE FOUR COMPARABLE S OF THE ASSESSEE ON THE GROUND OF CONSISTENT LOSS - MAKING COMPANIES AND RETAINED 15 COMPARABLES AND THERE PROFIT MARGIN FOR FINANCIAL YEAR 2006 - 07 HAVING ARITHMETIC MEAN OF 5.05% WAS CONSIDERED FOR CALCULATING THE ARM S LENGTH PRICE. 2.7 THE LEARNED TPO R EJECTED THE CUP METHOD OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE WAS OPERATING AS AN INDEPENDENT ENTREPRENEUR AND THEREFORE ITS FINANCES RESULT SHOULD HAVE BEEN TESTED IN THEIR ENTIRETY. HE ALSO NOTED THAT THERE ARE GEOGRAPHICAL DIFFERENCES, PRODUC T DIFFERENCES, TIMING DIFFERENCES AND DIFFERENCES IN QUANTITY DUE TO BULK SALE/RETAIL SALES IN THE TRANSACTIONS COMPARED FOR CUP METHOD BY THE ASSESSEE. HE NOTED THAT ALL SALES BY THE AE ARE TO UNRELATED PARTIES IN THE EUROPE AND THUS , ACCORDING TO HIM THE CUP DATA RELIED UPON BY THE ASSESSEE WAS NOT RELIABLE AND DID NOT REPRESENT THE TRUE COMPARABILITY. THE LEARNED TPO RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF UCB INDIA (P) LTD. VERSUS ACIT (2009) 30 SOT 95 ( MUM ) 5 ITA NO. 847/DEL/2012 WHEREIN IT IS HELD THAT T HE CUP METHOD REQUIRES A HIGH DEGREE OF COM PARABILITY ALONG THE DIMENSION OF QUALITY OF THE PRODUCT OR SERVICE, CONTRACTUAL TERMS, LEVEL OF MARKET, GEOGRAPHICAL MARKET IN WHICH THE TRANSACTION TAKES PLACE, DATE OF TRANSACTION, INTANGIBLE PROPERTY ASSOCIATED WITH THE SALE, FOREIGN CURRENCY RECEIVED ETC. THE LEARNED TPO ALSO RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S INTERVET INDIA PRIVATE LIMITED 2010 - TII - 12 - ITAT - MUM - TP WHEREIN IT IS HELD THAT WHILE APPLYING CUP METHOD ADJUSTMENT RELATED TO ECONOMY AND MARKET CONDITIONS IN DIFFERENT GEOGRAPHICAL LOCATIONS NEED TO BE MADE. 2.8 FURTHER , THE LEARNED TPO, REJECTED THE CLAIM OF THE ASSESSEE SEEKING COMPARABILITY ADJUSTMENT ON THE GR OUND OF EXCHANGE RATE FLUCTUATION. THE ASSESSEE SUBMITTED THAT LOSSES INCURRED BY IT ARE DUE TO EXCHANGE RATE FLUCTUATION , WHEREAS COMPARABLE S ARE NOT EXPOSED TO THIS AND , THEREFORE , SUITABLE ADJUSTMENT SHO ULD BE ALLOWED TO THE ASSESSEE. THE LEARNED TPO CI TED FOLLOWING REASONS FOR REJECTION OF THE CLAIM OF THE ASSESSEE: A ) THE COMPARABLES WERE CHOSEN BY THE ASSESSEE ITSELF AND IF THEY ARE CORRECT COMPARABLE, THERE WAS NO NEED FOR ANY FURTHER ADJUSTMENT. B ) E XCHANGE RATE FLUCTUATION IS NORMAL EXPENSE INCIDENTAL TO BUSINESS AND IT MAY RESULT IN LOSS IN ONE YEAR BUT GAIN IN ANOTHER YEAR. C ) F OREIGN EXCHANGE RISK WAS PARTIALLY SHARED BY CERTAIN CUSTOMERS. 2. 9 FURTHER , THE CLAIM OF THE ASSESSEE FOR SEEKING ADJUSTMENT ON ACCOUNT OF INCREASING PRICE OF METAL AS WELL AS CAPACITY ADJUSTMENT WAS ALSO DENIED. 6 ITA NO. 847/DEL/2012 2.10 THE LEARNED TPO DECLINED TO EXCLUDE INTEREST AND FINANCIAL CHARGES AND EXCHANGE LOSS FROM OPERATING EXPENSES AN D TOOK OPERATING LOSSES AT THE FIGURE OF RS. 106.15 LACS. 2.11 FINALLY, THE LEARNED TPO RETAINED 15 COMPARABLES AND COMPUTED THE ADJUSTMENT TO THE INTERNATIONAL TRANSACTION AS UNDER: 7. BASED ON THE DISCUSSING ABOVE, THE FOLLOWING CONCLUSIONS ARE MADE. (I) THE MOST APPROPRIATE METHOD SHALL BE TNMM , OP/SALES SHALL BE THE PLI. (II) THE COMPARABLES WHICH SHALL BE USED ARE. S. NO. COMPANY F.Y.2006 - 07 1 AUTO GALLON INDS. PVT. LTD. 4.86% 2 BHARAT TECHNOLOGIES AUTO COMPONENTS LTD. 3.51% 3 DESIGN AUTO SYSTEMS LTD. 6.12% 4 GAJRA BEVEL GEARS LTD. 3.33% 5 GOA AUTO ACCESSORIES LTD. 3.33% 6 HARYANA ROADWAYS ENGG. CORPN. LTD. 2.60% 7 HINDUSTAN HARDY SPICER LTD. 5.35% 8 I A INDUSTRIES LTD. 3.45% 9 JAGAN LAMPS LTD. - 0.66% 10 K R RUBBERITE LTD. 5.12% 11 P M P COMPONENTS PVT. LTD. 10.78% 12 RANE N S K STEERING SYSTEMS LTD. 6.01% 13 14 15 SPECIAL ENGINEERING SERVICES LTD. STANDARD RADIATORS PVT. LTD. X L O INDIA LTD. 9.24% 9.65% 3.09% ARITHMETIC MEAN 5.05% THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION IS CALCULATION AS BELOW. TOTAL COST OF THE ASSESSEE : RS.194,902,590 OPERATING PROFIT MARGIN OF 5.05% : RS.9,842,580 LESS: OPERATING LOSS SHOWN : RS.( - )10,615,894 ALP AT A MARGIN OF 5.05% : RS.152,120,334 PRICE PAID : RS.172,578,808 DIFFERENCE BEING ADJUSTMENT U/S 92 CA : RS.20,458,474 7 ITA NO. 847/DEL/2012 2.12 THE ASSESSING OFFICER COMPLETED ASSESSMENT UNDER SECTION144 (C) / 143(3) OF THE ACT ON 14/02/20 11 AFTER MAKING ADDITION OF RS.2,04, 58,474/ - AS PROPOSED BY THE TPO. 2.13 AGGRIEVED, THE ASSESSE E FILED APPEAL BEFORE THE LD. CIT - (A) . THE LEARNED CIT - (A) AFTER TAKING INTO CONSIDERATION THE OBJECTION S OF THE ASSESSEE , FRAMED THREE ISSUES FOR ADJUDICATION AS UNDER: ISSUE 1: WHETHER TPO WAS RIGHT IN REJECTING THE CUP BECAUSE APPELLANT IS SUFFERING A LOSS? ISSUE 2: WHETHER FOREX LOSS SHOULD BE TREATED AS NON OPERATIVE IN NATURE IN THE FACTS AND CIRCUMSTANCES OF THIS CASE? ISSUE 3: WHAT IS THE CORRECT CALCULATION OF THE PLI OF THE COMPARABLES AS WELL AS THE ASSESSEE? 2.14 THE LEARNED CIT - (A) CONCLUDED THE CUP METHOD ADOPTED BY THE ASSESSEE AS MOST APPROPRIATE METHOD AND UPHELD THAT THERE WAS NO NEED FOR ANY ADDITION TO THE INTERNATIONAL TRANSACTION. THE FINDING OF THE LEATHER CIT - (A) IS RE PRODUCED AS UNDER: 5.1 THE TPO HAS NOT COMMENTED ON THE VALIDITY OF THE CUP IN TERMS OF ITS EVIDENTIARY VALUE AND ITS COMPARABILITY. APART FROM THEORIZING IN ABSTRACT THERE IS NO FACTUAL ANALYSIS, APPRECIATION AND EVALUATION OF THE CUP DATA GIVEN BY THE APPELLANT. WHILE SELECTING THE MOST APPROPRIATE METHOD, IT IS ALWAYS HELD THAT PRODUCT TO PRODUCT COMPARISON OR TRANSACTION TO TRANSACTION COMPARISON IN TERMS OF SIMILARITY OF PRODUCT, SIZE OF THE TRANSACTION, TIME ETC. ARE THE BEST WAY OF COMPARISON SINCE THIS COMPARISON IS NOT AFFECTED BY OTHER THAN THE MATERIAL BEING COMPARED. HOWEVER, WITHOUT GIVING ANY COGENT REASON TRANSFER PRICING OFFICER REJECTED THE CUP. IT IS UNFAIR TO COME TO A CONCLUSION THAT THE LOSS INCURRED BY THE APPELLANT 8 ITA NO. 847/DEL/2012 IS ONLY DUE TO ITS TRANSACTION WITH THE AE WITHOUT GOING INTO THE DETAILS OF THE MARKET SITUATION WHEREIN APPELLANT IS LOCATED AND OTHER PARAMETERS. IN ANY CASE, THE MOST APPROPRIATE METHOD SELECTED BY THE APPELLANT CANNOT BE REJECTED JUST BECAUSE THE APPELLANT IS SUFFERING LOSSES. THE TPO IS CONTRADICTING HIMSELF BY STATING THAT YOUR STATUS AS AN INDEPENDENT ENTREPRENEUR CANNOT BE IGNORED : ON THE ONE HAND, THE APPELLANT IS TREATED AS A FULL RISK BEARING INDEPENDENT MANUFACTURER, ON THE OTHER HAND, THE LOSS INCURRED BY THE APPELLANT IS TREATED AS A LOSS IMPOSED BY IS AE AS IF THE APPELLANT IS A CAPTIVE ENTITY. 5.2. THE APPELLANT HAD SUBMITTED THAT IT HAD NOT HEDGED ITS CURRENCY TRANSACTION IN EURO AND THEREFORE THE ENTIRE LOSS WAS ON ACCOUNT OF CURRENCY FLUCTUATION. THERE IS NO REASON TO IGNORE THIS MATERIAL FACT. THEREFORE, I HOLD THAT THERE WAS NO REASON TO REJECT THE CUP PRODUCED BY THE APPELLANT. THE APPELLANT HAS BROUGHT TO MY NOTICE THAT IN THE SUBSEQUENT ASSESSMENT YEAR, WHERE FACTS AND CIRCUMSTANCES ARE SIMILAR IN THE CASE OF THE APPELLANT, THE TPO HAS ACCEPTED THE CUP AND NO ADDITION HAS BEEN MADE. THEREFORE, THIS ALSO SHOWS THAT THERE IS MERIT IN THE CUP PRESENTED BY THE APPELLANT. IN VIEW OF THIS, IT IS IMPORTANT TO APPRECIATE THE EVIDENCE OF CUP PRESENTED BY TH E APPELLANT. THE APPELLANT HAS PRODUCED THE EVIDENCE WHICH WAS PRODUCED BEFORE THE TPO IN ANNEXURE - I OF HIS SUBMISSION. 5.3. THE APPELLANT IS MANUFACTURER OF CATALYTIC CONVERTOR USED IN AUTOMOBILE INDUSTRY. THE SAME PRODUCTS WERE SOLD BY THE AE OF THE AP PELLANT TO UNRELATED PARTIES. THE APPELLANT HAD PRODUCED ALONG WITH THE BILLS AND INVOICES THE THIRD PARTY SALES OF THE AE IN THE RELEVANT PERIOD. THERE IS A ONE TO ONE CORRESPONDENCE BETWEEN THE PRODUCT PART NUMBERS SOLD TO THE APPELLANT AND TO UNRELATE D PARTIES. THE PRICES ARE IN FOB TERMS. AS FOB PRICES ARE AT ORIGIN OF THE GOODS WHICH IS AT THE LOCAL PORTS OF THE AE, THE SO CALLED GEOGRAPHICAL DIFFERENCE HAS NO MEANING. THIS IS BECAUSE THE AE IS SELLING THE GOODS AT THE PORT OF ITS ORIGIN TO THE ASSES SEE AS WELL AS TO THE THIRD PARTY IT IS IMMATERIAL WHERE THE GOODS ULTIMATELY TRAVEL TO. IT IS SEEN THAT IN ALL CASES THE PRICE PAID BY THE APPELLANT IS LESSER THAN WHAT IS PAID BY THE THIRD PARTIES. THE APPELLANT HAS GIVEN CUP DATA FOR ENTIRE TRANSACTION AMOUNTING TO RS.17,25,78,808/ - . IN VIEW OF THIS, I HOLD THAT THE CUP IS A VALID JUSTIFICATION OF THE ARM S LENGTH 9 ITA NO. 847/DEL/2012 TRANSACTION OF THE APPELLANT. THERE IS NO NEED FOR ANY ADDITION TO THE INTERNATIONAL TRANSACTION. 2.15 FURTHER , THE LD. CIT - (A) , HELD THAT FOREIGN EXCHANGE FLUCTUATION DO NOT FORM PART OF OPERATION INCOME AS THE ASSESSEE WAS NOT A DEALER IN FOREIGN CURRENCY. THE LD. CIT - (A) COMPUTED THE REVISED ADJUSTMENT TO ARM S LENGTH PRICE AFTER REMOVING THE FOREIGN EXCHANGE FLUCTUATION LOSS F ROM THE COST OF THE ASSESSEE AND CONCLUDED TH AT THE ASSESSEE FALLS WITHIN +/ - 5% OF THE ALP AS PER THE PROVISIONS TO SECTION 92 (C) OF THE ACT AND , THEREFORE, EVEN UNDER THE TNMM METHOD ALSO NO ADJUSTMENT WAS REQUIRED TO THE ARM S LENGTH. THE FINDING OF THE LEARNED CIT - (A) ON THE ISSUE IS REPRODUCED AS UNDER: ISSUE 2: WHETHER FOREX LOSS SHOULD BE TREATED AS NON OPERATIVE IN NATURE IN THE FACTS AND CIRCUMSTANCES OF THIS CASE?: 5.4. IT IS STRONGLY CONTENDED BY THE APPELLANT THAT THE FOREIGN EXCHANGE LOSS IS A SINGLE MOST REASON FOR INCURRING LOSS AND IT HAPPENED IN AN EXTRAORDINARY SITUATION OF FLUCTUATION OF FOREIGN EXCHANGE RATE BETWEEN EURO AND INDIAN RUPEE. THE BUSINESS DECISION TAK EN BY THE APPELLANT NOT TO HEDGE THE EURO CURRENCY CANNOT BE QUESTIONED AND TERMED AS POOR MANAGEMENT . IN THE CASE OF DHL EXPRESS (INDIA) PVT. LT D. V. ACIT 10(1), MUMBAI [2001] 11 TAXMANN.COM 40 (MUMBAI) IT HAS BEEN HELD BY THE HON BLE ITAT THAT FOREIGN EXCHANGE FLUCTUATION DO NOT FORM PART OF THE OPERATIONAL INCOME BECAUSE THESE ITEMS HAVE NOTHING TO DO WITH THE MAIN OPERATION OF THE ASSESSEE. IT IS IMPORTANT TO NOTE HERE THAT THE APPELLANT IS A MANUFACTURER OF CATALYTIC CONVERTOR AND NOT A DEALER IN FOR EIGN CURRENCY. IT WILL BE PROPER IF THE BUSINESS OF PERSON IS DEALING IN FOREIGN CURRENCY THEN THE LOSS / GAIN ON ACCOUNT OF FLUCTUATION IN FOREIGN CURRENCY CAN BE HELD AS OPERATIONAL IN NATURE. SINCE ASSESSEE IS NOT IN SUCH A BUSINESS, RESPECTIVELY FOLLOW ING THE JUDGMENT OF THE HON BLE ITAT IN THE CASE OF DHL EXPRESS (INDIA) PVT. LTD. (SUPRA), THE FOREIGN EXCHANGE FLUCTUATION LOSS SHOULD BE EXCLUDED AS NON OPERATIONAL IN NATURE. 10 ITA NO. 847/DEL/2012 THE APPELLANT HAS SUFFERED A LOSS OF RS. 1.24 CRORES ON ACCOUNT OF FOREX LOSS. BY TAKING OUT THIS LOSS IF THE MARGIN OF THE APPELLANT IS CORRECTLY CALCULATED, THEN ALSO THE APPELLANT FALLS WITHIN +/ - 5% OF THE ALP AS PER PROVISO TO SECTION 92C(2) OF THE IT ACT. THE CALCULATION OF THE ALP MARGIN AS SUBMITTED BY THE APPELLANT ALO NG WITH AS CALCULATED BY THE TPO IS GIVEN BELOW: AS PER TPO REVISED 1. OPERATING PROFIT MARGIN 5.05% 5.05% 2. TOTAL COST OF ECOCAT 19.49 18.41 3. OPERATING PROFIT/NET SALES (1 X 2) 0.98 0.93 4. OPERATING PROFIT SHOWN (1.06) 0.059 5. DIFFERENCE (3 - 4) 2.05 0.34 6 . PURCHASES FROM AE 17.26 17.26 7. ALP (6 - 5) 15.21 16.91 8. 5% DIFFERENCE ON ALP 0.85 9. DISALLOWANCE (5 - 8) 2.05 - 0.50 2.16 ON THE ISSUE OF THE CORRECT PROFIT LEVEL INDICATOR ( PLI ) , THE LEARNED CIT - (A) HELD THAT MENTIONING OF OP/SALES AS THE PLI WHILE CALCULATING THE MARGIN OF THE COMPARABLES WAS A CLERICAL MISTAKE AND ACTUALLY THE TPO HAS MULTIPLIED THE MAIN MARGIN OF THE COMPARABLES WITH THE COST BASE OF THE ASSESSEE, WHICH WAS RECTIFIED BY THE LEARNE D CIT - (A) , WHILE ADJUDICATING ISSUE NO. 2. 2.1 7 OTHER ISSUES RELATING TO THE COMPARABLES WERE NOT ADJUDICATED BEING ACADEMIC IN NATURE. 2.1 8 ACCORDING TO THE LD. CIT - (A) THE ALP OF THE ASSESSEE EVEN USING THE TNMM WITH 15 COMPARABLES USED BY THE TPO , FALLS WITHIN THE ARM S LENGTH RANGE AND , THEREFORE , THERE WAS NO JUSTIFICATION FOR MAKING AN Y ADDITION ON ACCOUNT OF ARM S LENGTH PRICE AND ACCORDINGLY DIRECTED THE AO/TPO TO DELETE THE ADDITION. 2.19 AGGRIEVED WITH THE ABOVE FINDING OF THE LD. CIT - (A) , THE R EVENUE IS IN APPEAL BEFORE THE TRIBUNAL RAISING THE GROUNDS AS REPRODUCED ABOVE. 11 ITA NO. 847/DEL/2012 3. THE SOLE GROUND OF THE R EVENUE IS IN RESPECT OF DELETION OF TH E ADDITION OF ADJUSTMENT OF RS.2,04,58, 470/ - TO THE INTERNATIONAL TRANSACTION S . 3.1 BEFORE US, ON THE IS SUE OF SELECTION OF APPROPRIATE METHOD FOR CO MPUTATION OF ARM S LENGTH PRICE, THE LD. S ENIOR DR SUBMITTED THAT THE LEARNED CIT - (A) WAS NOT JUSTIFIED IN UPHOLDING THE CUP METH OD ADOPTED BY THE ASSESSEE AS MOST APPROPRIATE METHOD FOR COMPUTING ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. HE SUBMITTED THAT WHILE APPLYING THE CUP METHOD ADJUSTMENTS FOR ECONOMY AND MARKET CONDITIONS IN DIFFERENT GEOGRAPHICAL LOCATIONS NEED TO BE MADE. HE RELIED UPON THE DECISION OF THE TRIBUNAL , IN THE CASE OF M/S INTER VET INDIA PRIVATE L IMITED (SUPRA). HE SUBMITTED THAT IN THE CASE OF THE ASSESSEE, IT HAS SOLD GOODS TO THE PARTIES IN EUROPE AND SUCH TRANSACTION S CAN NEVER BE A GOOD CUP FOR PRICE CHARGED IN INDIA. ALSO THE PRICELIST OF THE RAW MATERIALS SOLD TO TH E ASSESSEE AND TO THIRD - PARTY IN EUROPE OR OTHER COUNTRIES , SEEMED TO BE CASE OF CHERRY PICKING. HE ALSO SUBMITTED THAT THE LIST OF THE MATERIALS SOLD TO THE ASSESSEE IDENTIFIED BY THEIR PART NUMBERS, SEEMS UNTRUE IN VIEW OF THE DIFFERENT MARKET CONDITIONS AND REGULATORY NORMS. HE EMPHASIZED THAT IN EUROPE , THE REGULATING NORMS ARE FAR AHEAD OF THOSE PREVAILING IN INDIA AS EUROP E HAD EURO IV NORMS, WHEREAS INDIA DURING THE SAME PERIOD HAD BS - II REGULATORY NORMS AND THUS , THE LIST OF RAW MATERIAL S SOLD BY TH E AES IN EUROPE , CANNOT BE COMPARED WITH LIST OF RAW MATERIAL S SOLD IN INDIA. ACCORDING TO HIM , THIS COMPARISON OF THE PRICE BY THE ASSESSEE AND THE CUP METHOD FOR BENCHMARKING , SEEMS TO BE AN EXERCISE IN HASTE AND WITHOUT APPLICATION OF MIND. HE ALSO SU PPORTED HIS ARGUMENT WITH OECD GUIDELINES IN THIS REGARD. 3.2 ON THE CONTRARY, THE LD. COUNSEL RELIED ON THE ORDER OF THE LEARNED CIT - (A) AND FURTHER SUBMITTED THAT THE TPO IN SUBSEQUENT ASSESSMENT 12 ITA NO. 847/DEL/2012 YEAR 2008 - 09 HAS ACCEPTED THE CUP METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. ACCORDINGLY , HE PRAYED THAT THE ORDER OF THE LD. CIT - (A) ON THE ISSUE IN DISPUTE MIGHT BE UPHELD. 3.3 IN THE REJOINDER, THE LEARNED S R . DR SUBMITTED THAT ACCEPTING CUP METHOD OF BENC HMARKING THE TRANSACTIONS IN SUBSEQUENT YEARS DOES NOT HOLD GOOD AS PRINCIPLE OF RES JUDICATA IN INCOME - TAX PROCEEDINGS IS NOT APPLICABLE AND EACH ASSESSMENT YEAR IS A SEPARATE UNIT AND WHAT IS DECIDED IN ONE YEAR SHALL NOT IPSO FACTO APPLY IN SUBSEQUENT Y EARS. 3.4 WE HAVE HEARD THE RIVAL SUBMISSION OF THE PARTIES ON THE ISSUE IN DISPUTE. WE FIND THAT LD. CIT - (A) CARRIED OUT THE COMPARISON OF THE TRANSACTI ON OF THE ASSESSEE WITH ITS AE , WITH THE TRANSACTION OF THE AES WITH OTHER UN RELATED PARTIES SITUATED IN EUROPE. THE LEARNED CIT - (A) OBSERVED THAT THERE WAS A ONE - TO - ONE CORRELATION BETWEEN THE PRODUCT , PART NUMBERS SOLD TO THE ASSESSEE AND TO THE UNRELATED PARTIES. THE LEARNED CIT - (A) FURTHER OBSERVED THAT PRICES IN BOTH THE SITUATION ARE F.O.B. PRICES, WHICH ARE AT THE ORIGIN OF THE GOODS AND SO THERE WAS NO EFFECT OF GEOGRAPHICAL DIFFERENCES. THE LEARNED CIT - (A) HAS NOTED THAT PRICE PAID BY THE ASSESSEE IS LESSER THAN WHAT IS PAID BY THE THIRD PARTIES. IN OUR OPINION THE FINDING OF THE LEARNED CIT - (A) ON THE BASIS OF ABOVE OBSERVATION S IS NOT CORRECT. WE FIND THAT WHEN THE POLLUTION NORMS OF THE EUROPE AND THE INDIA DURING RELEVANT PERIOD ARE DIFFERENT, THE QUALITY OF THE PRODUCT CANNOT BE SAME AND IN SUCH SITUATION ADOPTING THE TRANSACTION OF T HE AE WITH THIRD - PART IES IN EUROPE AS CUP FOR COMPARISON OF THE TRANSACTION WITH THE ASSESSEE, IS NOT CORRECT. MOREOVER, THE CURRENCIES OF BOTH JURISDICTION ARE DIFFERENT AND , THEREFORE , ALSO PRICES CHARGED TO PARTY AT THE EUROPE AND TO AE IN THE INDIA CANNOT BE COMPARED. WE FIND THAT IN THE CASE OF UCB INDIA (P) LTD (SUPRA), THE TRIBUNAL TOOK NOTE OF THE EFFECT OF MINOR CHANGE IN THE PROPERTIES OF THE PRODUCT ON THE PRICING AND HELD THAT THERE SHOULD BE SCIENTIFIC BASIS TO 13 ITA NO. 847/DEL/2012 SAY THAT APIS ARE IDENTI CAL WITH SAME PURITY, POTENCY AND CHARACTERISTICS AND ALSO ALL SUCH DATA S HOULD BE FIRST OBTAINED BY THE R EVENUE OR THE ASSESSEE, WHO WISH TO COMPARE PRODUCTS AND THEN ARRIVE AT ALP OR WISH TO MAKE ADJUSTMENT TO PRICE, COST OR MARGIN. THE TRIBUNAL IN THE S AID CASE ALSO TAKEN NOTE OF THE OECD TRANSFER PRICING GUIDELINES. THE LEARNED TPO IN HIS ORDER HAS RELIED ON THE SAID ORDER OF THE TRIBUNAL AND EXTRACTED THE RELEVANT PARAS ON PAGE 12 AND 13 OF THE ORDER. IN THE CASE OF M/S INTERVET INDIA PRIVATE L IMITED ( SUPRA) ALSO THE TRIBUNAL HELD THAT MERE GEOGRAPHICAL CONTIGUITY OF TWO COUNTRIES NEED NOT MEAN SIMILARITY IN E CONOMIC OR MARKET CONDITIONS ( LIKE VIETNAM AND THAILAND). WHEREAS IN THE PRESENT CASE MARKET CONDITIONS OF THE EUROPE AND INDIA ARE EVIDENTLY NO T SIMILAR BEING DIFFERENT REGULATORY NORMS FOR POLLUTION. FURTHER, WHAT THE AO/TPO HAS TAKEN STAND ON THE ISSUE IN SUBSEQUENT Y EAR, MAY NOT BE RELEVANT , FOR US. W E ARE REQUIRED TO DECIDE THE ISSUE IN DISPUTE IN FACTS AND CIRCUMSTANCES OF THE YEAR UNDER CON SIDERATION. 3.5 IN VIEW OF ABOVE DISCUSSION, WE ARE OF THE OPINION THAT ASSESSEE S INTERNATIONAL TRANSACTIONS CANNOT BE BENCHMARKED APPLYING THE CUP METHOD. 3.6 THE TPO HAS ADOPTED TNMM AS MOST APPROPRIATE METHOD FOR COMPUTING THE ARM S LENGTH PRICE ON THE GROUND THAT THE ASSESSEE OPERATED AS INDEPENDENT ENTREPRENEUR , AS IT CATERS TO REQUIREMENT OF AUTOMOBILES MANUFACTURERS IN INDIA LIKE GENERAL MOTORS, MAHINDRA AND MAHINDRA, AND ASHOK LEYLAND AND COMPARED THE PROFIT MARGINS WITH THE OTHER COMPARABLES IN SIMILAR MARKET CONDITIONS. IN OUR OPINION, THE APPROACH OF THE LEARNED TPO/AO IS JUSTIFIED AND WE ACCORDINGLY SET ASIDE THE ORDER OF THE LEARNED CIT - (A) ON THE IS SUE IN DISPUTE AND UPHOLD THE ORDER OF THE LEARNED TPO/AO ON THE ISSUE IN DISPUTE. 14 ITA NO. 847/DEL/2012 4. NOW THE SECOND ISSUE FOR ADJUDICATING BEFORE US IS WHETHER THE LOSS DUE TO FLUCTUATION IN FOREIGN EXCHANGE SHOULD BE TREATED AS NON - OPERATIVE EXPENDITURE IN THE CASE OF THE ASSESSEE. 4.1 BEFORE US THE LD. SR. DR SUBMITTED THAT FOREIGN EXCHANGE GAIN/LOSS ARISING OUT OF THE REVENUE TRANSACTION IS REQUIRED TO BE CONSIDERED AN ITEM OF OPERATING REVENUE/COST BOTH FOR THE ASSESSEE AS WELL AS COMPARABLE. IN SUPPORT OF HIS CONTE NTION, THE LD. SR. DR RELIED ON THE DECISION DATED 15/12/2016 OF THE TR IBUNAL IN THE CASE OF MCKINSEY KNOWLEDGE CENTRE PRIVATE L IMITED VS. DCIT , NEW DELHI IN ITA NO. 154 AND 499/DEL/2016. 4. 2 ON THE CONTRARY, THE LD. COUNSEL OF THE ASSESSEE RELIED ON THE ORDER OF THE LEARNED CIT - (A) THAT AS FAR AS LOSS BEING AN EXTRAORDINARY ITEM OF THE PROFIT AND LOSS ACCOUNT, IT NEED TO BE EXCLUDED FOR THE PURPOSE OF COMPARISON OF PROFIT MARGIN OF THE ASSESSEE WITH THE COMPARABLES. THE LEAR NED COUNSEL FURTHER SUBMITTED THAT THE CENTRAL BOARD OF DIRECT T AXES (CBDT) IN NOTIFICATION DATED 18/09/2013 HAS MADE SAFE HARBOUR RULES AND ACCORDING TO THE DEFINITIONS PART OF THE SAFE HARBOUR RULES, IN RULE 10TA, LOSS ARISING ON ACCOUNT OF FOREIGN CURRE NCY FLUCTUATION HAS BEEN EXCLUDED FROM THE OPERATING EXPENSES. 4.3 IN REJOINDER, THE LEARNED SR. DR SUBMITTED THAT SAFE HARBOUR RULES ARE NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATION. FURTHER , HE SUBMITTED THAT THE TRIBUNAL IN THE CASE OF M CKINSEY KNOWLEDGE CENTRE PRIVATE L IMITED (SUPRA) HAS CONSIDERED THIS ARGUMENTS AND REJECTED THE CONTENTION FOLLOWING THE HON BLE DELHI HIGH COURT IN P RINCIPLE CIT VS. CASHEDGE INDIA PRIVATE L IMITED VIDE ITS JUDGMENT DATED 04/05/2016 IN ITA 279/2016 . 4.4 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE TRIBUNAL IN THE CASE OF DHL EXPRESS (INDIA) P . LTD . (SUPRA) , WHICH IS RELIED UPON BY THE LEARNED CIT - (A) , HELD THAT FOREIGN 15 ITA NO. 847/DEL/2012 EXCHANGE FLUCTUATION DO NOT FORM P ART OF TH E OPERATIONAL INCOME BECAUSE THAT ITEM WAS NOTHING TO DO WITH THE MAIN OPERATION OF THE ASSESSEE. BUT IN THE INSTANT CASE , THE FOREIGN EXCHANGE FLUCTUATION LOSS HAS ARIS EN MAINLY ON ACCOUNT OF THE REVENUE TRANSACTIONS OF THE ASSESSEE. HENCE, THE DECISION C ITED BY THE LEARNED COUNSEL OF THE ASSESSEE IS DISTINGUISHABLE . IN THE CAS E OF MCKINSEY KNOWLEDGE CENTRE PRIVATE LIMITED (SUPRA) , DELHI BENCH OF THE TRIBUNAL HAS DECIDED THE ISSUE IN DISPUTE AS UNDER: 64. THE ONLY ISSUE RAISED BY THE REVENUE IN ITS APPEA L IS AGAINST THE TREATMENT OF FOREIGN EXCHANGE (FOREX) GAIN/LOSS AS AN ITEM OF OPERATING NATURE IN THE COMPUTATION OF THE ALP OF BOTH THE TRANSACTIONS. THE ID. DR. SUBMITTED THAT SUCH FOREX GAIN/LOSS WAS RIGHTLY CONSIDERED BY THE TPO AS NON - OPERATING IN TH E COMPUTATION OF THE ALP AND HENCE SUCH A VIEW SHOULD NOT HAVE DISTURBED. THIS WAS OPPOSED BY THE ID. AR, WHO CONTENDED THAT FOREX GAIN/LOSS RELATES TO THE TRADING TRANSACTIONS OF THE ASSESSEE AND HENCE THE SAME WAS OPERATING IN THE COMPUTATION OF OP/OC UN DER THE TNMM. 65. WE FIND MERIT IN THE CONTENTION RAISED ON BEHALF OF THE ASSESSEE ABOUT THE INCLUSION OF FOREIGN EXCHANGE GAIN/LOSS IN THE OPERATING REVENUE/COSTS OF THE ASSESSEE AS WELL AS THAT OF THE COMPARABLES. WHEN WE ADVERT TO THE NATURE OF SUCH FOREIGN EXCHANGE GAIN EARNED BY THE ASSESSEE, IT HAS NOT BEEN CONTROVERTED BY THE ID. DR THAT THE SAME IS IN ITA NO.I54/DEL/20I6 RELATION TO THE TRADING ITEMS EMANATING FROM THE INTERNATIONAL TRANSACTIONS. IF THE FOREIGN EXCHANGE GAIN/LOSS DIRECTLY RESULTS FROM THE TRADING ITEMS, WE FAIL TO APPRECIATE AS TO HOW SUCH FOREIGN EXCHANGE FLUCTUATION LOSS CAN BE CONSIDERED AS NON - OPERATING. 66. THE SPECIAL BENCH OF THE TRIBUNAL IN ACIT VS PRAKASH I. SHAH (2008) 115 ITD 167 (MUM)(SB) HAS HELD THAT THE GAIN DUE TO FLUCTUATIONS IN THE FOREIGN EXCHANGE RATE EMANATING FROM EXPORT IS ITS INTEGRAL PART AND CANNOT BE DIFFERENTIATED FROM THE EXPORT PROCEEDS SIMPLY ON THE GROUND THAT THE FOREIGN CURRENCY RATE HAS INCREASED SUBSEQUENT TO SALE BUT PRIOR TO REALIZATION. IT WENT ON TO ADD THAT WHEN GOODS ARE EXPORTED AND INVOICE IS RAISED IN CURRENCY OF THE COUNTRY WHERE SUCH GOODS ARE SOLD AND SUBSEQUENTLY WHEN THE 16 ITA NO. 847/DEL/2012 AMOUNT IS REALIZED IN THAT FOREIGN CURRENCY AND THEN CONVERTED INTO INDIAN RUPEES, THE ENTIRE AMOUNT IS RELATABLE TO THE EXPORTS. IN FACT, IT IS ONLY THE TRANSLATION OF INVOICE VALUE FROM THE FOREIGN CURRENCY TO THE INDIAN RUPEES. THE SPECIAL BENCH HELD THAT THE EXCHANGE RATE GAIN OR LOSS CANNOT HAVE A DIFFERENT CHARACTER FROM THE TRANSACTION TO WHICH IT PERTAINS. THE BENCH FOUND FAL LACY IN THE ITA NO.I54/DEL/20T6 SUBMISSION MADE ON BEHALF OF THE REVENUE THAT THE EXCHANGE RATE DIFFERENCE SHOULD BE DETACHED FROM THE EXPORTS AND BE CONSIDERED AS AN INDEPENDENT TRANSACTION. EVENTUALLY, THE SPECIAL BENCH HELD THAT SUCH EXCHANGE RATE FLUCT UATION GAIN/LOSS ARISING FROM EXPORTS CANNOT BE VIEWED DIFFERENTLY FROM SALE PROCEEDS. 67. IN THE CONTEXT OF TRANSFER PRICING, THE BANGALORE BENCH OF THE TRIBUNAL IN SAP LABS INDIA PVT. LTD. VS ACIT (2011) 44 SOT 156 (BANGALORE) HAS HELD THAT FOREIGN EXCH ANGE FLUCTUATION GAIN IS PART OF OPERATING PROFIT OF THE COMPANY AND SHOULD BE INCLUDED IN THE OPERATING REVENUE. SIMILAR VIEW HAS BEEN TAKEN IN TRILOGY E BUSINESS SOFTWARE INDIA (P) LTD. VS DCIT (2011) 47 SOT 45 (URO) (BANGALORE). THE MUMBAI BENCH OF THE TRIBUNAL IN S. NARENDRA VS ADDTL. CIT (2013) 32 TAXMAN.COM 196 HAS ALSO LAID DOWN TO THIS EXTENT. 4.5 FURTHER , THE TRIBUNAL HAS ALSO CONSIDERED THE ARGUMENT OF THE ASSESSEE ON SAFE HARBOUR RULES TO CONTEND THAT FOREIGN EXCHANGE GAIN OR LOSS AS NON - OPE RATING ITEM AND HELD THAT SAFE HARBOUR RULES WERE NOT APPLICABLE IN ASSESSMENT YEAR 2011 - 12. THE RELEVANT FINDING OF THE TRIBUNAL IS REPRODUCED AS UNDER: 68. THE RELIANCE OF THE ID. DR ON SAFE HARBOUR RULES TO CONTEND THAT FOREIGN EXCHANGE GAIN OR LOSS B E TAKEN AS NON - OPERATING, IS NOT SUSTAINABLE. THERE IS NO DOUBT THAT IN SUCH RULES, FOREX GAIN/LOSS HAS BEEN TREATED AS NON - OPERATING. HOWEVER IT IS RELEVANT TO NOTE THAT SUCH RULES ITA NO.I54/DEL/20I6 ARE NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSID ERATION. EVEN THE RELIANCE OF THE ID. DR ON CERTAIN DECISIONS TAKING COGNIZANCE OF SAFE HARBOUR RULES FOR THE PERIOD ANTERIOR TO THEIR INSERTION IN OTHER CONTEXTS DOES NOT IMPROVE THE CASE OF THE DEPARTMENT BECAUSE THE HON'BLE DELHI HIGH COURT IN PR. CIT V S. CASHEDGE INDIA PVT. LTD., VIDE ITS JUDGMENT DATED 4.5.2016 IN ITA 279/2016, HAS HELD THAT: 'SO FAR AS THE QUESTION OF FLUCTUATION 17 ITA NO. 847/DEL/2012 OF FOREIGN EXCHANGE WAS CONCERNED, THE ITAT RULED THAT THE RELEVANT PROVISION, I.E. 'SAFE HARBOUR RULES' HAD NOT BEEN NOTIF IED FOR THE CONCERNED ASSESSMENT YEAR AND WERE, THEREFORE, INAPPLICABLE'. THUS THE HON'BLE HIGH COURT DID NOT DISTURB THE OPERATING NATURE OF FOREX GAIN/LOSS AS HELD BY THE TRIBUNAL. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THA T THE AMOUNT OF FOREIGN EXCHANGE GAIN/LOSS ARISING OUT OF REVENUE TRANSACTIONS IS REQUIRED TO BE CONSIDERED AS AN ITEM OF OPERATING REVENUE/COST, BOTH FOR THE ASSESSEE AS WELL AS THE COMPARABLES. THE GROUND TAKEN BY THE DEPARTMENT IS, THEREFORE, DISMISSED. 4.6 AS IN THE INSTANT CASE ASSESSMENT YEAR INVOLVED IS 2007 - 08 , WHICH IS E VEN PRIOR TO ASSESSMENT YEAR 201 1 - 12 , THE DEFINITION OF THE OPERATING EXPENSES PROVIDED IN SAFE HARBOUR RULES CANNOT BE APPLIED. 4.7 THUS, RESPECTFULLY FOLLOWING THE DECISION OF THE TR IBUNAL IN THE CASE OF MCKINSEY KNOWLEDGE CENTRE P RIVAT E L IMITED (SUPRA) , WE HOLD THAT FOREIGN EX CHANGE FLUCTUATION LOSS IS PART OF A OPERATING EXPENSES. ACCORDINGLY, THE FINDING OF THE LD. CIT - (A) ON THE ISSUE IN DISPUTE IS SET ASIDE AND THAT OF T HE ASSESSING OFFICER IS UPHELD. 4.8 W E FIND THAT THE LD. TPO/AO HAS CONSIDERED FOREIGN EXCHANGE FLUCTUATION LOSS AS PART OF OPERATING EXPENSES IN TH E CASE OF THE ASSESSEE, HOWEVER, SAME HAS ALSO TO BE CONSIDERED IN THE CASE OF THE COMPARABLES. FROM THE O RDER OF THE LOWER AUTHORITIES, I T IS NOT CLEAR WHETHER THE AO/TPO HAS CONSIDERED THIS ASPECT IN THE CASE OF THE COMPARABLES. ACCORDINGLY, WE FEEL IT APPROPRIATE TO RESTORE THE ISSUE OF COMPUTING AVERAGE MARGIN OF THE COMPARABLES WITH LIMITED DIRECTION TO C ONSIDER THE FOREIGN EXCHANGE FLUCTUATION LOSS AS PART OF THE OPERATING EXPENSES IN CASE OF COMPARABLES ALSO. IT IS NEEDLESS TO MENTION THAT ASSESSEE SHALL BE AFFORDED REASONABLE OPPORTUNITY OF BEING HEARD. 4.9 AS REGARD THE THIRD ISSUE OF PROFIT LEVEL I NDICATOR (PLI), THE LEARNED CIT - (A) HAS ALREADY RECTIFIED THE CLERICAL MISTAKE AS UNDER: 18 ITA NO. 847/DEL/2012 5.5 IT IS IMPORTANT TO NOTE AT THIS POINT TO SAY THAT WHILE CALCULATING THE MARGIN OF THE COMPARABLES, THE TPO HAS TAKEN OP/SALES AS THE PLI. WHILE CALCULATING THE A LP MARGIN OF THE ASSESSEE, THE TPO HAS MULTIPLIED THE MEAN MARGIN OF THE ALP OF THE COMPARABLE WITH THAT OF COST BASE OF THE ASSESSEE INSTEAD OF SALES, WHICH SEEMS TO BE A CLERICAL MISTAKE. IN THE ABOVE CALCULATION, THIS MISTAKE IS RECTIFIED. SINCE THE A PPELLANT FALLS WITHIN THE RANGE, THE OTHER ISSUES RELATING TO THE COMPARABLE BECOMES ACADEMIC IN NATURE AND THEREFORE THEY ARE NOT SEPARATELY ADJUDICATED. 4.10 S INCE THE ASSESSEE IS NEITHER IN THE APPEAL NOR IN CROSS OBJECTION BEFORE US AND , THEREFORE , THE ARGUMENTS OF THE LEARNED COUNSEL REGARDING ADOPTING OF INCORRECT PLI BY THE TPO ARE NOT CONSIDERED. 4.11 THE GROUND OF THE R EVENUE IS ALLOWED FOR STATISTICAL PURPOSE S . 5. IN VI EW OF ABOVE, THE APPEAL OF THE R EVENUE IS ALLOWED FOR STATISTICAL PURPOSES. THE DECISION IS PRONOUN CED IN THE OPEN COURT ON 15.09.2017 SD/ - SD/ - ( VIJAY PAL RAO ) ( O.P. KANT ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 15.09.2017 RK / - (D.T.D) COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR ASST. REGISTRAR, ITAT, NEW DELHI