ORDER
Padmavathy. S, Accountant Member.- This appeal by the assessee is against the final order of the assessment passed by National Faceless Assessment Unit (in short “AO”) passed u/s. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (in short “the Act”) dated 25.10.2024 for Assessment Year (AY) 2021-22.
2. The assessee is a company and is 100% export oriented unit and has a motor assembly and a machining unit. The assessee is mainly set up for manufacture and export of hydraulic motors and motor components to proclaim hydraulics group and other third parties. The assessee filed a return of income for AY 2021-22 declaring total income of Rs. 12,24,36,450/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions, the A.O made a reference to the Transfer Pricing Officer (TPO) to compute the Arm’s Length Price (ALP) of the international transactions. The TPO proposed an upward adjustment towards margins amounting to Rs. 12,93,81,764/- and towards interest on receivable to the tune of Rs. 81,764/-. The TP adjustment was subsequently revised to Rs.8,95,63,528/-. The A.O passed the draft assessment order incorporating the TP adjustment. The A.O also made disallowances/additions to the tune of Rs. 12,12,70,025/-. Aggrieved, the assessee filed its objections before the DRP. The DRP confirmed the TP adjustment and gave marginal relief to the assessee towards other corporate adjustments. The assessee is in appeal before the Tribunal against the final order of assessment passed by the A.O pursuant to the direction of the DRP.
3. The Ld. Authorized Representative (AR) of the assessee at the outset submitted that though the assessee has raised several grounds contending the TP adjustments if the ground (ground No.2.1) pertaining to the forex loss being considering as operative expense by the TPO and exclusion of one of the comparables (Ground No.2.22) being ZF Steering Gear (India) Limited are considered and allowed in favour of the assessee the rest of the grounds pertaining to TP adjustments would become academic. With regard to a TP adjustment towards interest on receivable the Ld. AR submitted that due to smallness of amount the same is not pressed for the year under consideration.
4. The assessee in the TP study has chosen TNMM as the MAM and OP/OC is taken as the PLI. The assessee has computed the PLI at 4.08% and since the average margin of the 3 comparables chosen by the assessee was at 4.35% the assessee in the TP report concluded that the transactions are at arm’s length. The TPO recomputed the PLI of the assessee at 1.14% and based on fresh set of 6 comparables whose average margin is arrived at 6.18%, the TPO worked out a TP adjustment of Rs. 12.93 Crores. The TPO subsequently passed a rectification order recomputing the PLI at 4.675% which reduced the TP adjustment to Rs. 8.94 Crores. The TPO while recomputing the PLI of the assessee has considered the Forex loss as operating expenses.
Forex loss being considering as operative expense
5. The Ld. Authorised Representative (Ld AR) of the assessee in this regard submitted that the assessee has been consistently treating the Forex gain/loss as non operating and that the TPO is not correct in re-computing the margin considering the same as operating. The Ld. AR drew our attention to the treatment of forex gain in the subsequent AYs where it has been treated as non operating income for the purpose of PLI. The Ld. AR also submitted the treatment of Forex loss as non-operating has been accepted by the TPO in earlier AYs and therefore for the year under consideration the treatment of the same as operating is an inconsistent stand taken by the TPO. The ld AR alternatively argued that the foreign loss for the year under consideration includes forex loss from capital transactions which do not have any impact on the price charged or margins and in this regard submitted the following breakup of the forex loss for the year under consideration –
| Particulars |
Amount in INR |
Nature |
| Loss pertaining to AP/ AR – FC Loan |
34,511,304 |
Revenue |
| Loss pertaining to Capital expenditure |
7,410,264 |
Capital |
| Loss pertaining to ECB Loan |
3,851,441 |
Capital |
| Loss pertaining to foreign currency account reinstated |
15,311,370 |
Revenue |
| Total Forex loss during the year |
61,084,379 |
|
Therefore the Ld AR argued that in assessee’s case the forex loss pertaining to capital expenditure and ECB at the least should be treated as non-operating.
6. The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities.
7. We have heard the parties, and perused the material available on record. The assessee in the TPSR has computed the margin at 4.08% and since the arithmetic mean margin of the the 3 comparables is 4.35% the assessee has stated that the transactions with AE are at arm’s length. The TPO however recomputed the margin of the assessee at 1.14% by considering the forex loss which was excluded by assessee as operating expenses. The margin of the 6 comparables chosen by the TPO worked out to 4.675% and accordingly the TPO made an adjustment of Rs. 8,95,63,528/-. Now the assessee is contending the treatment of forex loss as operating expenses by the TPO on the ground of consistent treatment which has been allowed by the revenue in earlier / subsequent AYs and also on the ground that forex movement risk has no impact on the pricing since the AE bills and received payments in foreign currency. The alternate plea of the assessee is that the forex loss pertaining to capital expenditure and ECB has no impact on the margins / price charged and therefore the loss to that extent at least should be treated as non-operating.
8. Though the OECD Transfer Pricing Guideline lays down certain general principles regarding the treatment of foreign exchange gains or losses, where the emphasis is on functional comparability and the economic substance of the underlying transaction. It is stated that the forex gain or loss ordinarily assumes the same character the underlying transaction and that differences should generally be treated consistently with the item from which they arise. It is further stated that Forex gains or losses arising from financing activities may represent returns attributable to treasury or financing functions rather than operating activities. Accordingly it is safe to assume that when the fluctuation emanates from transactions forming part of the ordinary business operations viz., export sales, trade receivables, import purchases etc, that are having a direct nexus with the operating activities of the enterprise then the same is liable to be considered as operating in nature. In the same manner where the fluctuation arises from External Commercial Borrowings, term loans, share capital, investments or other financing and capital account transactions, the resultant gain or loss is attributable to treasury and funding functions and cannot be regarded as reflective of operational profitability. It is important mention here that these guiding principles need to be applied considering the facts and circumstances of the particular case / assessee. In the present case from the perusal of the table containing the breakup of the forex loss we notice that the loss is arising from ECB and from capital transactions. The ld AR submitted in this regard that these losses are not arising from the regular business activity of the assessee and therefore to this extent the same needs to treated as non-operating. When we consider the over all facts and circumstances along with OECD guidelines, we see merit in the said contention of ld AR. Further it is relevant to note that the revenue has allowed the treatment of forex loss as non-operating in assessee’s own case in other assessment years and the argument of the ld AR therefore would succeed on the principle of consistency also. In view of these discussions we hold that the forex loss pertaining to ECB of Rs. 38,51,441/- and capital expenditure of Rs. 74,10,264/- need to be excluded as non-operating while computing the PLI. The AO /TPO is directed accordingly.
Exclusion of ZF Steering Gear (India) Limited (ZF Steering)
9. The ld AR in this regard submitted that the assessee is engaged in the business of manufacturing hydraulic motors and motor components catering to a diverse range of industries, including agriculture, environmental solutions, building and construction, material handling, industrial applications, and highway-related sectors. The ld AR further submitted that ZF Steering whereas is engaged in manufacture of auto components viz. steering gear systems for the automobile industry and renewable energy. The ld AR accordingly argued that ZF Steering is functionally different from assessee and accordingly prayed that the same may be excluded from the list of comparables. The ld AR placed reliance on various decisions to argue that the companies having diversified business operations which are functionally different cannot be compared.
10. We heard the parties and perused the material on record. From the perusal of records we notice that ZF Steering operates in two verticals viz., Automotive components and Renewable energy and the TPO for the purpose of comparison has considered the overall revenue. We further notice that ZF Steering is serving a different industry which is different from that of the assessee. Though under TNMM the focus is not on exact product similarity, the comparability of functions performed, assets employed and risks assumed by the tested party and the comparable enterprises is vital. Further the reliability of the comparison depends upon whether the net profit indicators of the entities are influenced by similar economic factors. Consequently, while selecting comparables and computing the PLI, due regard must be had to differences in risk profile, financing arrangements, ownership of assets, accounting treatment and other factors capable of materially influencing operating profitability. In the given case even if the argument that under TNMM the focus is not on exact product similarity is to be accepted, the comparison with regard to functions performed, assets employed and risks assumed would vary considering the business segments, industry served etc., and the PLI is would get influenced by these economic factors. Therefore in our considered view, ZF Steering which is into manufacture of auto components for the automobile industry and into renewable energy is functionally dissimilar to that of the assessee. Accordingly we direct the AO/TPO to exclude ZF Steering from the list of comparables.
11. The ld AR during the course of hearing submitted the following table to substantiate the claim that if the contention with regard to exclusion of forex loss pertaining to ECB and Capital Expenditure as non-operating and the contention regarding exclusion of ZF Steering is allowed then the PLI of the assessee would be within arm’s length –
|
Scenario 3 |
| Comparable companies |
Forex relating to ECB and Capex considered as Non operating |
| Sulzer Pumps India Private Limited |
2.35% |
| Advance Hydrau-Tech Pvt.Ltd. |
2.94% |
| Intervalve Poonawalla Ltd. |
3.17% |
| Precision autowares |
6.18% |
| Sam Turbo Pvt Ltd |
6.48% |
| Mean * (A) |
4.22% |
| Count of Comparables |
5 |
| Poclain India (Amount in INR Crores) |
|
| Operating income (B) |
288.91 |
| Operating cost (C) |
285.66 |
| Forex loss (D) |
(1.13) |
| Adjusted Operating Cost (E) = (C) – (D) |
284.53 |
| Operating profit (F) = (B) – (E) |
4.38 |
| Margins of the assessee (OP/OC) (G) = (F)/ (E) |
1.54% |
| Transfer Price(H) |
256.30 |
| Arm’s Length price (I) = (H)*((100%-A)/(100%-G)) |
249.312 |
| Tolerance Band Lower end -3% |
248.61 |
| Tolerance Band Higher end +3% |
263.99 |
| Remarks |
ALP is within +/- 3% tolerance band |
12. We direct the AO/TPO to re-compute the PLI as per directions given in this order keeping in mind the above computation submitted by the assessee. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.
Disallowance of expenses:
13. We have heard the parties, and perused the material available on record. With regard to disallowances made by the A.O, the Ld. AR submitted that the assessee submitted additional evidences during the DRP proceedings and the DRP called for a remand report from the AO. The Ld. AR further submitted that the DRP however passed the order stating that the A.O has not submitted the remand report and since the timeline for completing the order is approaching the DRP without remand report confirmed the disallowances. The Ld. AR therefore prayed that the issue may be remitted back for reconsideration based on additional evidences. Accordingly, we remit the issue back to the AO to consider the evidences submitted and also call for any additional details as may be required to decide the issue in accordance with law. The assessee is directed to submit the required details and cooperate with the assessment proceedings. It is ordered accordingly.
14. In result the appeal of the assessee is partly allowed for statistical purposes.
