L S AUTOMOTIVE INDIA PVT. LTD.,THIRUVALLUR vs. ITO, CORPORATE WARD-4(3), CHENNAI

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ITTPA 54/CHNY/2025Status: DisposedITAT Chennai01 June 2026AY 2020-217 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the CIT(TP) was not justified in setting aside the TPO's order under Section 263. The Tribunal noted that the TPO had applied his mind while re-computing the PLI and made a conscious decision to allow the treatment of forex loss as non-operating. The Tribunal found that the CIT(TP) had not brought any material on record to establish that the forex loss had a direct bearing on the pricing or PLI of the assessee, which would demonstrate an error prejudicial to the revenue. Furthermore, the Tribunal observed that while the CIT(TP) relied on the fact that a major portion of the assessee's purchases were from imports, no factual finding was recorded to establish an error in the TPO's acceptance of the forex loss treatment. The Tribunal also noted that the revenue had allowed the treatment of forex loss as non-operating in other assessment years for the assessee without dispute. Citing Supreme Court decisions in Malabar Industrial Co. Ltd. and CIT v. Max India Ltd., the Tribunal stated that if the Assessing Officer has adopted a permissible course of action or taken one of two possible views, it cannot be treated as erroneous unless unsustainable in law. The Tribunal concluded that the CIT(TP)'s order was without jurisdiction and liable to be quashed. The TPO's order was set aside for a fresh order to be passed, considering the loss on account of foreign exchange fluctuation as operating expense, which would be suggested to the Assessment Unit.

What were the facts?

The assessee, LS Automotive India Pvt. Ltd., engaged in manufacturing automotive switches and a subsidiary of a South Korean company, is in appeal against an order passed by the Commissioner of Income Tax (Transfer Pricing) (CIT(TP)) under Section 263 of the Income Tax Act, 1961. The assessment year in question is 2020-21. The CIT(TP) initiated proceedings under Section 263, considering the Transfer Pricing Officer's (TPO) order to be erroneous and prejudicial to the revenue. The TPO had proposed a downward adjustment of Rs. 22,04,48,623/- towards AE cost. The CIT(TP) believed that foreign exchange fluctuation, treated as non-operating by the assessee and accepted by the TPO, should have been considered operating expenditure due to the assessee's significant import purchases. The assessee argued that forex fluctuations were consistently treated as non-operating and that the TPO had made a conscious decision.

What were the issues?

1. Whether the order passed by the CIT(TP) under Section 263 of the Income Tax Act, 1961, revising the TPO's order, is valid, particularly concerning the treatment of foreign exchange fluctuation as operating expenditure for the assessment year 2020-21? Assessee's contentions: - The TPO had consciously decided to treat forex loss as non-operating after considering it in the show-cause notice and re-computing the Profit Level Indicator (PLI). - The treatment of forex fluctuation as operating or non-operating is a debatable issue, and therefore, Section 263 cannot be invoked for a mere change of opinion. - The assessee relied on its consistent treatment of forex fluctuations as non-operating across various assessment years and cited precedents where forex gains/losses were treated as operating or non-operating depending on facts. Revenue's contentions: - The CIT(TP) relied on its order, arguing that forex loss on account of fluctuation has a direct bearing on the pricing of the product and ought to have been considered as operating expenditure, making the TPO's order erroneous and prejudicial to the revenue.

Which sections of the Income-tax Act were involved?

Section 263,Section 92CA(3),Section 92CA

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI

Before: SHRI ABY T. VARKEY & MS. PADMAVATHY.S

Pronounced: 01.06.2026

आदेश / O R D E R

PER PADMAVATHY.S, A.M: This appeal by the assessee is against the order of the Commissioner of Income Tax (Transfer Pricing), Chennai, (in Short CIT(TP) passed under Section 263 of the Income Tax Act, (the Act), dated 09.10.2025 for the assessment year 2020-21. The assessee, through various grounds of appeal, is contending the validity of the order passed under Section 263 of the Act.

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2.

The assessee is a private limited company engaged in the manufacturing of power window switches, interior switches and multi-function switches, mainly catering to original equipment manufacturer Hyundai Motors in the automotive industry. The assessee is a 100% subsidiary of LS Automotive Technologies Company Limited, South Korea. During the assessment proceedings, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) to compute the Arm’s Length Price (ALP) of the international transactions. The TPO passed an order dated 12.07.2023 wherein a downward adjustment of Rs.22,04,48,623/- was proposed towards AE cost. Subsequently, the CIT(TP), from the records, noticed that the assessee, while computing the PLI, had considered the forex fluctuation as non-operating expenses though 68% of the purchases of the assessee were from imports. The CIT(TP) was of the view that the forex loss on account of fluctuation has a direct bearing on the pricing of the product and the same ought to have been considered as operating expenditure. Since the TPO had accepted the treatment of forex loss as non- operating, as claimed by the assessee, the CIT(TP) was of the view that the order of the TPO is erroneous and prejudicial to the interest of the Revenue. The CIT(TP) issued a show-cause notice initiating proceedings under Section 263 of the Act. The assessee made various submissions and relied on judgments wherein the treatment of forex loss as non-operating has been allowed. After considering the submissions of the assessee, the CIT(TP) held that:-

“6. The submissions of the assessee made during the course of proceeding under section 263 of the income tax act and during hearings conducted on various dates have been duly considered. 7. To begin with, the objection of the Assessee to reopening u/s 263 of the Income Tax Act, is not acceptable. The loss on account of forex fluctuation was considered as non-operating expense, in the PLI computation. However from the financial statement of AY-2020-21, it was found that major portion of the purchases are from imports. Hence, the Forex losses on account of fluctuation will have an impact on the pricing of the product and for that reason it should have been considered as operating expenditure.

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Consideration of Forex losses as Operating expense, would further reduce the PLI of the Assessee and would enhance the adjustment proposed. Hence, the order u/s 92CA(3) of the IT Act dated 12.07.2023 passed by the TPO in the case of the assessee for AY-2020-21 was found to be erroneous in so far as it is prejudicial to the interest of revenue. Further, for AY 2021-22, the Assessee was found to have Gain on account of Forex fluctuation. The Assessee had treated it as Non-operating in Nature, in the PLI computation, provided along with the Transfer pricing Study Report. However in the Order u/s 92CA(3) dated 31.08.2023, the Gain on account of Forex fluctuation, was treated as Operating in Nature, in consonance with the rulings of the Jurisdictional ITAT. Hence in order to have consistency, Forex Losses should be considered as Operating in Nature for AY 2020-21 also.

8.

The averments raised by the Assessee that, 'in order to call something as erroneous it should not be a mere change of opinion' is not tenable. The Assessee had relied on the filing of SLP by Revenue before the Honourable Supreme Court of India against the decision of the Honourable High Court of Delhi, in the ase of M/s ST Ericsson India Pvt Ltd. Vs. AddI CIT - ITA 1672/Del/2014, where in it was held that Forex gain to be treated as Operating in Nature, by the High Court. The Jurisdictional ITAT had gave a detailed discussion in the case of the Assessee, in the combined order in ITA No. 585/Chny/2017 dated 19.01.2024, stating that forex loss/gains is operating in nature. Further the Honourable High Court of Karnataka in the case of PCIT Vs. M/s Sami Labs, vide order in ITA No/ 291/2017 of 16.08.2018 and the Honourable High Court of Delhi in the case of PCIT Vs. M/s Samsung India Electronics Pvt. Ltd., vide Order in ITA 453/2024 dated 22.05.2024 have adjudicated that forex loss/gain to be operating in nature. Hence invoking the provisions of section 263 of the Act, cannot be stated to be on account of change of opinion, but as a proceeding to revise the Order u/s 92CA(3), in consonance with the rulings of the Jurisdictional ITAT, rulings of the various High Courts10 020.and the approach of the TPO, for subsequent years.

9.

The Assessee had relied on OECD Transfer pricing guidelines, which states that In effect, if a transactional net margin is applied to a transaction in which foreign exchange risk is borne by the tested party, foreign exchange gains or losses should be consistently accounted for either in the calculation of the net profit indicator or separately)'. In this case the Forex Risk is borne by the Assessee, who is the tested party. Even so, relying upon the OECD guidelines, it is to be stated that loss on account of Forex fluctuation is to be treated as Operating in nature.

10.

Further, the Assessee had questioned the assumption of jurisdiction u/s 263 of the Act, by CIT, on the grounds that it was invoked at the Draft Assessment Order stage. However it is pertinent to mention that, the amendment brought in by Finance Act 2022, had enabled the CIT- Transfer

IT(TP)A No.54/Chny/2025 LS Automotive India Pvt. Ltd. :- 4 -:

Pricing to Revise the Order passed u/s 92CA of the Act, by the TPO, if it is found to be erroneous in so far as it is prejudicial to the interest of revenue. Hence the precondition to pass final assessment order, before invoking the provisions of section 263 of the Act, by CIT - Transfer Pricing, does not arise, as this Order seeks to revise the Order u/s 92CA. Without prejudice to the above, it is to be stated that final assessment order, in the case of the assessee was passed on 02.11.2023, well in advance before the date of this Order u/s 263 of the Act.

11.

In view of the above facts, am satisfied that the order of the Transfer Pricing Officer is erroneous in law as far as it is prejudicial to the interest of the revenue. Hence, the order of the Transfer Pricing Officer is hereby set aside for fresh order to be passed, by considering the loss on account of foreign exchange fluctuation as Operating Expense, while computing the PLI. This margin shall be adopted for computing the adjustment to the AE Cost and shall be suggested to the Assessment Unit.”

3.

The ld. AR, at the outset, submitted that the assessee has been consistently treating the forex fluctuations as non-operating. The ld. AR, in this regard, drew our attention to the treatment of forex loss through various assessment years, as tabulated below:-

EXCHANGE FLUCTUATION FROM AY 2011-12 TO AY 2020-21

Forex Gain/(Loss) – Sno AY Nature Stage of Appeal Rs. 1 2011-12 2,08,36,397 Considered as Non operating No Adjustment 2 2012-13 -13,60,33,416 Considered as Non operating High Court 3 2013-14 -9,38,18,604 Considered as Non operating No TP Adjustment 4 2014-15 14,82,61,320 Considered as Non operating CIT Appeals 5 2015-16 -4,79,80,277 Considered as Non operating No TP Adjustment 6 2016-17 -12,52,96,772 Considered as Non operating No TP Adjustment 7 2017-18 9,06,45,301 Considered as Non operating CIT Appeals No TP 8 2018-19 38,46,590 Considered as Non operating Adjustment/CIT 9 2019-20 -11,59,50,905 Considered as Non operating No Adjustment 10 2020-21 -27,43,52,823 Considered as Non operating ITAT - 263 order

4.

The ld. AR also argued that the TPO had raised a query regarding the forex loss in the show-cause notice during the TP proceedings (pages 23 to 26 of the paper book) and had, while re-computing the PLI of the assessee, allowed the

IT(TP)A No.54/Chny/2025 LS Automotive India Pvt. Ltd. :- 5 -:

treatment of forex loss as non-operating. The ld. AR, therefore, argued that the TPO had made a conscious decision to allow the claim of the assessee and, therefore, the CIT(TP) was not correct in invoking the provisions of Section 263 of the Act. The ld. AR further argued that, even otherwise, the treatment of forex fluctuation, either as operative or non-operative, is a debatable issue and, therefore, the CIT(TP) cannot invoke the provisions of Section 263 in this regard.

5.

The ld. DR, on the other hand, relied on the order of the CIT(TP).

6.

We have heard the parties and perused the relevant records. The CIT(TP) has invoked the provisions of section 263 of the Act for the reason that the TPO has erroneously allowed the treatment of forex loss as non-operating by the assessee. In this regard we notice that during the TP proceedings the TPO in show cause notice while re-computing the PLI of the assessee has considered forex loss as non-operating expenses. We further notice that the TPO while re- computing the PLI has not accepted the working capital adjustment, adjustment towards depreciation, and treatment of bank charges as non-operating. Therefore we see merit in the argument of the ld AR that the decision to allow the treatment of forex loss as non-operating has been consciously taken by the TPO after application of mind. We also notice that the judicial precedence have taken diverse views with regard to treatment of forex loss either as operating or non- operating depending on the facts of the case and after examining the impact of the forex movement to the pricing / PLI of the international transaction. Therefore in our considered view the treatment of forex movement depends on the facts peculiar to the case and either of the treatment cannot be held to be erroneous without examining the facts. In the given case we notice that the CIT(TP) has mainly relied the stand of the revenue and decision of the Tribunal for AY 2012-13 in assessee's own case. However, from the perusal of the table

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extracted in the earlier part of this order we notice that the revenue has allowed the treatment of forex loss as non-operating by the assessee in other AYs in assessee's own case which have not been disputed by the revenue. We further notice that the CIT(TP) has merely stated that the major portion of assessee's purchases are from imports and hence the forex loss is to be treated as operating. However while doing so the CIT(TP) has not recorded any factual finding with regard to the breakup of forex loss to establish that there is an error in the order of the TPO in accepting the treatment of forex loss as non-operating.

7.

There is no dispute that u/s. 263 of the Act, the CIT(TP) does have the power to set aside the assessment order and send the matter for a fresh assessment if he is satisfied that further enquiry is necessary and the assessment order is prejudicial to the interests of the Revenue. However, in doing so, the CIT(TP) must have some material which would enable to form a prima facie opinion that the order passed by the TPO is erroneous, insofar as it is prejudicial to the interests of the Revenue. The condition precedent to the exercise of jurisdiction under section 263 is that the order sought to be revised must be erroneous insofar as it is prejudicial to the interests of the revenue. The Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd.vs CIT ((2000) 243 ITR 83) and CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188, has laid down the ratio that where the Assessing Officer has adopted one of the courses permissible in law or where two views are possible and the Assessing Officer has taken one of the views with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Assessing Officer is unsustainable in law. In the present case of the assessee it is clear from the order of the TPO that he has applied his mind while re- computing the PLI of the assessee where he has taken the conscious decision

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to allow certain adjustments and not to allow certain adjustments. Further, as already stated the CIT(TP) has not brought anything on record to show that the forex loss has a direct bearing on the pricing / PLI of the assessee to establish that an error in the TPO is prejudicial to the interest of the revenue. In view of the above discussion, we are of the considered view that the CIT(TP) is not justified in setting aside the TPO order and accordingly we hold that the order of the CIT u/s. 263 is without jurisdiction and liable to be quashed.

8.

In the result, the appeal of the assessee is allowed.

Order pronounced on 01st day of June, 2026 at Chennai.

Sd/- Sd/- (एबी टी. वक�) (पदमावती यस) (ABY. T. Varkey) (Padmavathy.S) लेखा लेखा सद�य लेखा लेखा सद�य सद�य /Accountant Member सद�य �याियक सद�य �याियक सद�य / Judicial Member �याियक �याियक सद�य सद�य चे�नई/Chennai, �दनांक/Dated: 01st June, 2026. EDN, Sr. P.S आदेश क� �ितिल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु!/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF

EJTADA Digitally signed by EJTADA DURGA NARESH DURGA Date: 2026.06.04 NARESH 16:58:57 +05'30'

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