POSCO INDIA PROCESSING CENTER PVT. LIMITED,CHENNAI vs. ACIT CORPORATE CIRCLE 5(2), CHENNAI

आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the assessee company against the

assessment order passed u/s.143(3) r.w.s.92CA r.w.s.144C(4) of the

Income Tax Act, 1961 (hereinafter referred to as ‘the Act‘) pursuant to

the DRP directions dated 18.09.2018 for AY 2014-15.

transfer pricing adjustment made by the TPO, it was submitted before us

that first, Ground No.2 may be first considered, and if it is allowed, then

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the assessee’s grievance against the or the assessee’s grievance against the order of the TPO/AO would stand AO would stand

addressed and that, the transfer pricing adjustment would stand vacated. addressed and that, the transfer pricing adjustment would stand vacated. addressed and that, the transfer pricing adjustment would stand vacated.

Erroneous treatment of foreign exchange gains/losses arising from Erroneous treatment of foreign exchange gains/losses arising from Erroneous treatment of foreign exchange gains/losses arising from finance transactions The Hon'ble DRP has erred in law and facts in upholding the action of the Ld. e DRP has erred in law and facts in upholding the action of the Ld. e DRP has erred in law and facts in upholding the action of the Ld. AO/Ld. TPO in treating gains/losses arising out of foreign exchange fluctuations AO/Ld. TPO in treating gains/losses arising out of foreign exchange fluctuations AO/Ld. TPO in treating gains/losses arising out of foreign exchange fluctuations as operating in nature, without appreciating the fact that such gains/losses had as operating in nature, without appreciating the fact that such gains/losses had as operating in nature, without appreciating the fact that such gains/losses had resulted out of finance tr resulted out of finance transactions such as short-term buyers credit term buyers credit borrowings from the bank, ECB loan availed etc. borrowings from the bank, ECB loan availed etc. 4. Brief facts relating to this issue are that, the assessee is trading in Brief facts relating to this issue are that, the assessee is trading in Brief facts relating to this issue are that, the assessee is trading in

steel coils and it undertakes shearing and slitting activities as per the steel coils and it undertakes shearing and slitting activities as per the steel coils and it undertakes shearing and slitting activities as per the

length and width specifications of the customers. The assessee is noted to length and width specifications of the customers. The assessee is noted to length and width specifications of the customers. The assessee is noted to

importing steel coils from its AE a importing steel coils from its AE abroad amongst other international broad amongst other international

transactions. The assessee had benchmarked all the international transactions. The assessee had benchmarked all the international transactions. The assessee had benchmarked all the international

transactions on an aggregate basis, at entity level by applying the transactions on an aggregate basis, at entity level by applying the transactions on an aggregate basis, at entity level by applying the

Transactional Net Margin Method (‘TNMM’). According to the TPSR, Transactional Net Margin Method (‘TNMM’). According to the TPSR, Transactional Net Margin Method (‘TNMM’). According to the TPSR, since

the margin of 2.26% earned earned by assessee was higher than the average was higher than the average

margin of 1.78% of comparable companies, the f comparable companies, the international international transactions

were reported to be at arm’s length be at arm’s length. The TPO however is noted to have . The TPO however is noted to have

disagreed with the economic analysis of the assessee and undertoo disagreed with the economic analysis of the assessee and undertoo disagreed with the economic analysis of the assessee and undertook a

segmental analysis and drew up the ‘Import Segment segmental analysis and drew up the ‘Import Segment – AE’. For working AE’. For working

out its profitability, the AO is noted to have treated the foreign exchange out its profitability, the AO is noted to have treated the foreign exchange out its profitability, the AO is noted to have treated the foreign exchange-

fluctuation loss as an operating expense, albeit the TPO treated the fluctuation loss as an operating expense, albeit the TPO treated the fluctuation loss as an operating expense, albeit the TPO treated the

foreign exchange gain to be non foreign exchange gain to be non-operating in nature. The TPO accordingly ating in nature. The TPO accordingly

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computed the margin of the ‘Import Segment computed the margin of the ‘Import Segment – AE’ at (-) 8.79% and the ) 8.79% and the

margin of comparables was worked out to 1.97%. Since the margin of the was worked out to 1.97%. Since the margin of the

segment was lower than the segment was lower than the comparables, the TPO worked out transfer , the TPO worked out transfer

pricing adjustment of Rs.15.32 crores. Aggrieved by the draft order of the justment of Rs.15.32 crores. Aggrieved by the draft order of the justment of Rs.15.32 crores. Aggrieved by the draft order of the

AO/TPO, the assessee filed objections before the DRP who dismissed the AO/TPO, the assessee filed objections before the DRP who dismissed the AO/TPO, the assessee filed objections before the DRP who dismissed the

same. Pursuant to it, the AO passed the final assessment order. Pursuant to it, the AO passed the final assessment order. Pursuant to it, the AO passed the final assessment order.

Aggrieved, the assessee is now in appeal before us. Aggrieved, the assessee is now in appeal before us.

brought to our notice that both the foreign exchange fluctuation loss was brought to our notice that both the foreign exchange fluctuation loss was brought to our notice that both the foreign exchange fluctuation loss was

in the nature of finance costs finance costs viz., bank charges, interest etc bank charges, interest etc. incurred as

a consequence of financial transact financial transactions such as short-term term buyer’s credit

borrowings from banks, ECB loan etc. to manage the working capital of borrowings from banks, ECB loan etc. to manage the working capital of borrowings from banks, ECB loan etc. to manage the working capital of

the business and therefore it was non and therefore it was non-operating in nature. In support the operating in nature. In support the

assessee has relied upon a plethora of decisions wherein the foreign assessee has relied upon a plethora of decisions wherein the foreign assessee has relied upon a plethora of decisions wherein the foreign

exchange fluctuation loss has been consistently held as non ange fluctuation loss has been consistently held as non ange fluctuation loss has been consistently held as non-operating

item. He also pointed out that, when the TPO himself had treated the item. He also pointed out that, when the TPO himself had treated the item. He also pointed out that, when the TPO himself had treated the

foreign exchange gain to be non n to be non-operating in nature in subsequent years operating in nature in subsequent years

then according to him, it was unjustified on his then according to him, it was unjustified on his part to shift his stand and part to shift his stand and

treat only the net forex net forex loss as operating in nature in the relevant in the relevant

assessment year. He further brought to our attention the relevant safe . He further brought to our attention the relevant safe . He further brought to our attention the relevant safe

harbor rules contained in Rule 10TA of the I harbor rules contained in Rule 10TA of the Income Tax ax Rules, 1962

wherein also the foreign exchange fluctuation loss was stated to be non gn exchange fluctuation loss was stated to be non gn exchange fluctuation loss was stated to be non-

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operating item. Alternatively, he argued that, operating item. Alternatively, he argued that, to even out the differences to even out the differences

between the comparable companies and the Assessee, foreign exchange between the comparable companies and the Assessee, foreign exchange between the comparable companies and the Assessee, foreign exchange

fluctuation gain/loss should be excluded consistently from the fluctuation gain/loss should be excluded consistently from the fluctuation gain/loss should be excluded consistently from the PLI

computation and the computation of comparable companies while computation and the computation of comparable companies while computation and the computation of comparable companies while

undertaking the benchmarking analysis of its international transactions undertaking the benchmarking analysis of its international transactions undertaking the benchmarking analysis of its international transactions

with AEs. The Ld. AR for the assessee also furnished written submissions . The Ld. AR for the assessee also furnished written submissions . The Ld. AR for the assessee also furnished written submissions

in support of his arguments, which has been taken on record. in support of his arguments, which has been taken on record. in support of his arguments, which has been taken on record.

the order of the lower authorities. According to him, the buye the order of the lower authorities. According to him, the buye the order of the lower authorities. According to him, the buyer’s credit

availed by the assessee was inextricably linked with import of materials availed by the assessee was inextricably linked with import of materials availed by the assessee was inextricably linked with import of materials

from AEs and therefore it ought to be treated as an operating item. from AEs and therefore it ought to be treated as an operating item. from AEs and therefore it ought to be treated as an operating item.

before us. The issue in dispute in th before us. The issue in dispute in the present ground is that, whether the e present ground is that, whether the

foreign exchange fluctuation loss debited by the assessee in the books of foreign exchange fluctuation loss debited by the assessee in the books of foreign exchange fluctuation loss debited by the assessee in the books of

accounts is to be treated as an operating item or non accounts is to be treated as an operating item or non-operating item for operating item for

the purposes of computing operating margin for transfer pricing the purposes of computing operating margin for transfer pricing the purposes of computing operating margin for transfer pricing

benchmarking purposes. It is noted from the facts available on record rking purposes. It is noted from the facts available on record rking purposes. It is noted from the facts available on record

that, the assessee had availed buyer’s credit which is a finance that, the assessee had availed buyer’s credit which is a finance that, the assessee had availed buyer’s credit which is a finance

arrangement from banks. In terms of this credit line, a short arrangement from banks. In terms of this credit line, a short arrangement from banks. In terms of this credit line, a short-term credit

is available to importers in relation to the goods pro is available to importers in relation to the goods procured from abroad. cured from abroad.

Upon perusal of the terms of the arrangement and the modus operandi, it Upon perusal of the terms of the arrangement and the modus operandi, it Upon perusal of the terms of the arrangement and the modus operandi, it

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is noted that, the assessee first places import order and the amount is is noted that, the assessee first places import order and the amount is is noted that, the assessee first places import order and the amount is

invoiced by the supplier in USD. The suppliers usually invoiced by the supplier in USD. The suppliers usually allow allow a specified

credit period for discharging the invoice value. Upon expiry of this period, scharging the invoice value. Upon expiry of this period, scharging the invoice value. Upon expiry of this period,

the assessee approaches the bank who sanctions short term credit the assessee approaches the bank who sanctions short term credit the assessee approaches the bank who sanctions short term credit

(denominated in USD) and essentially makes payment to the supplier on (denominated in USD) and essentially makes payment to the supplier on (denominated in USD) and essentially makes payment to the supplier on

behalf of the assessee. At the time of payment of the buyer’s cr behalf of the assessee. At the time of payment of the buyer’s cr behalf of the assessee. At the time of payment of the buyer’s credit upon

expiry of the credit period allowed by the Bank and having regard to the expiry of the credit period allowed by the Bank and having regard to the expiry of the credit period allowed by the Bank and having regard to the

prevailing foreign exchange rates at that material time, the assessee prevailing foreign exchange rates at that material time, the assessee prevailing foreign exchange rates at that material time, the assessee

incurs interest cost and foreign exchange los incurs interest cost and foreign exchange loss/gain. In our considered gain. In our considered

view therefore, such foreign exc view therefore, such foreign exchange fluctuation loss relates to hange fluctuation loss relates to

borrowings/financing arrangement entered into by the assessee with the financing arrangement entered into by the assessee with the financing arrangement entered into by the assessee with the

Bank.

at Pages 458 to 528 of Paper book, it is noted that, the impugned foreign at Pages 458 to 528 of Paper book, it is noted that, the impugned foreign at Pages 458 to 528 of Paper book, it is noted that, the impugned foreign

exchange fluctuation loss only related to the loss incurred in relation to exchange fluctuation loss only related to the loss incurred in relation to exchange fluctuation loss only related to the loss incurred in relation to

this buyer’s credit facility availed from the Bank and therefore for the this buyer’s credit facility availed from the Bank and therefore for the this buyer’s credit facility availed from the Bank and therefore for the

above reasons, the said loss is found to be financial above reasons, the said loss is found to be financial/non non-operating in

nature. It is also observed that, th nature. It is also observed that, the TPO himself had treated the foreign e TPO himself had treated the foreign

exchange fluctuation gain to be a non exchange fluctuation gain to be a non-operating item but surprisingly held operating item but surprisingly held

the foreign exchange loss to be operating in nature. We are unable to the foreign exchange loss to be operating in nature. We are unable to the foreign exchange loss to be operating in nature. We are unable to

countenance this contrary and shifting stand of the Revenue. The Ld. AR countenance this contrary and shifting stand of the Revenue. The Ld. AR countenance this contrary and shifting stand of the Revenue. The Ld. AR

also brought to our notice the opinion of the Institute of Chartered lso brought to our notice the opinion of the Institute of Chartered lso brought to our notice the opinion of the Institute of Chartered

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Accountants of India, Expert Advisory Committeewho have also Accountants of India, Expert Advisory Committeewho have also Accountants of India, Expert Advisory Committeewho have also opined

that the balances arising on account of buyer’s credit is in the nature of balances arising on account of buyer’s credit is in the nature of balances arising on account of buyer’s credit is in the nature of

financing arrangement and therefore in terms and therefore in terms of Accounting Standard of Accounting Standard-11,

the assessee had rightly reported the foreign exchange fluctuation loss the assessee had rightly reported the foreign exchange fluctuation loss the assessee had rightly reported the foreign exchange fluctuation loss

relating to this financing arrangement under the head ‘Finance Costs’ in relating to this financing arrangement under the head ‘Finance Costs’ in relating to this financing arrangement under the head ‘Finance Costs’ in

the Profit & Loss Account. Having regard our foregoing observations, we the Profit & Loss Account. Having regard our foregoing observations, we the Profit & Loss Account. Having regard our foregoing observations, we

thus find merit in the contention of the assessee that, the impugned rit in the contention of the assessee that, the impugned rit in the contention of the assessee that, the impugned

foreign exchange fluctuation loss related to financing arrangement made foreign exchange fluctuation loss related to financing arrangement made foreign exchange fluctuation loss related to financing arrangement made

with the Bank and not the import of steel coils, as wrongly inferred by the with the Bank and not the import of steel coils, as wrongly inferred by the with the Bank and not the import of steel coils, as wrongly inferred by the

lower authorities, and hence, the impugned loss is lower authorities, and hence, the impugned loss is held to be an a non held to be an a non-

operating item, which according to us, is to be excluded from the operating item, which according to us, is to be excluded from the operating item, which according to us, is to be excluded from the

computation of operating margin of the assessee. Our view finds support computation of operating margin of the assessee. Our view finds support computation of operating margin of the assessee. Our view finds support

from the decision of this Tribunal in the case of from the decision of this Tribunal in the case of Nethawk Networks Nethawk Networks

India Private Limited vs ITO [I India Private Limited vs ITO [I.T.A. No.7633/M/2012] .T.A. No.7633/M/2012]wherein it

was held as under: -

"40...it is evident that "40...it is evident that the TPO considered the interest on the loan the TPO considered the interest on the loan as the non-operating one and however, he considered the operating one and however, he considered the operating one and however, he considered the related Foreign Exchange Loss as the operating expense related Foreign Exchange Loss as the operating expense related Foreign Exchange Loss as the operating expense. Consequently, the iss Consequently, the issue is raised here for adjudication. After hearing the ue is raised here for adjudication. After hearing the Revenue on this issue, we are of the opinion that there is merit in the Revenue on this issue, we are of the opinion that there is merit in the Revenue on this issue, we are of the opinion that there is merit in the above submissions of the assessee and the TPO is directed to give above submissions of the assessee and the TPO is directed to give above submissions of the assessee and the TPO is directed to give favourable consideration to the submissions of the assessee, in favourable consideration to the submissions of the assessee, in favourable consideration to the submissions of the assessee, in this regard. Accordingly, we direct the AO to exclude the foreign Accordingly, we direct the AO to exclude the foreign Accordingly, we direct the AO to exclude the foreign exchange loss pertaining to the interest from the operating cost exchange loss pertaining to the interest from the operating cost exchange loss pertaining to the interest from the operating cost for working out the operating margins for the purposes of ALP. for working out the operating margins for the purposes of ALP. for working out the operating margins for the purposes of ALP. Accordingly ground no.10 is allowed." Accordingly ground no.10 is allowed."

(emphasis supplied) (emphasis supplied)

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contained in Rule 10TA of the Income tax Rules, 1962, the ‘operating contained in Rule 10TA of the Income tax Rules, 1962, the ‘operating contained in Rule 10TA of the Income tax Rules, 1962, the ‘operating

expenses’ is defined to exclude foreign exchange fluctuation loss. We are expenses’ is defined to exclude foreign exchange fluctuation loss. We are expenses’ is defined to exclude foreign exchange fluctuation loss. We are

aware that the assessee has not opted for the Safe Har aware that the assessee has not opted for the Safe Harbour Rules, but in bour Rules, but in

our considered view, the said Rules carry persuasive value as it speaks our considered view, the said Rules carry persuasive value as it speaks our considered view, the said Rules carry persuasive value as it speaks

the mind of the Rule making Authority Rule making Authority. For this, we gainfully refer to the . For this, we gainfully refer to the

decision rendered by this Tribunal in the case of decision rendered by this Tribunal in the case of DCIT vs Hanil Tube DCIT vs Hanil Tube

India [ITA No.1037/Md India [ITA No.1037/Mds/2014]in which referring to the Safe Habour in which referring to the Safe Habour

Rules, the AO was directed to exclude the foreign exchange fluctuation Rules, the AO was directed to exclude the foreign exchange fluctuation Rules, the AO was directed to exclude the foreign exchange fluctuation

loss from ‘operating expenses expenses. The relevant findings taken note of by us, . The relevant findings taken note of by us,

is as follows :-

"10.2 ...Therefore, while computing the PLI, oper "10.2 ...Therefore, while computing the PLI, operating income for the ating income for the purpose of PLI, both foreign exchange loss or gain should be excluded purpose of PLI, both foreign exchange loss or gain should be excluded purpose of PLI, both foreign exchange loss or gain should be excluded from the operating income. The DRP has allowed loss on Forex to from the operating income. The DRP has allowed loss on Forex to from the operating income. The DRP has allowed loss on Forex to exclude from the operating income, relying on the safe Harbour Rules exclude from the operating income, relying on the safe Harbour Rules exclude from the operating income, relying on the safe Harbour Rules which provide for exclusion of F which provide for exclusion of Forex loss from operating expenses. orex loss from operating expenses. Therefore, we do not find any infirmity in the directions given by the Therefore, we do not find any infirmity in the directions given by the Therefore, we do not find any infirmity in the directions given by the DRP to exclude both foreign exchange loss or gain of the tested party as DRP to exclude both foreign exchange loss or gain of the tested party as DRP to exclude both foreign exchange loss or gain of the tested party as well as comparables from the operating income. This ground of well as comparables from the operating income. This ground of well as comparables from the operating income. This ground of Revenue is dismissed." smissed."

to consider the foreign exchange fluctuation loss to be non to consider the foreign exchange fluctuation loss to be non to consider the foreign exchange fluctuation loss to be non-operating

expense and accordingly exclude the same, while computing the expense and accordingly exclude the same, while computing the expense and accordingly exclude the same, while computing the

operating margin of the assessee. The AO/ operating margin of the assessee. The AO/TPO shall accordingly re TPO shall accordingly re-

compute the operating margin of the assessee and pass a speaking order compute the operating margin of the assessee and pass a speaking order compute the operating margin of the assessee and pass a speaking order

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for giving effect to this appellate order. for giving effect to this appellate order. Accordingly, this ground is

allowed.

is allowed, the operating margin of the assessee company shall be higher d, the operating margin of the assessee company shall be higher d, the operating margin of the assessee company shall be higher

the margins of the comparables, as computed by the TPO in the the margins of the comparables, as computed by the TPO in the the margins of the comparables, as computed by the TPO in the

impugned order and accordingly the TP adjustment would stand vacated. impugned order and accordingly the TP adjustment would stand vacated. impugned order and accordingly the TP adjustment would stand vacated.

Having regard to this submission of the Ld. AR, other ground Having regard to this submission of the Ld. AR, other ground Having regard to this submission of the Ld. AR, other grounds raised in

this appeal has become academic in nature and is therefore being this appeal has become academic in nature and is therefore being this appeal has become academic in nature and is therefore being

dismissed as infructuous. dismissed as infructuous.

Order pronounced on the 04th day of April, 2025, in Chennai. Order pronounced on the , in Chennai.

Sd/- Sd/ Sd/- (अिमताभ शु�ा) . वक�) (एबी टी. ) (AMITABH SHUKLA AMITABH SHUKLA) (ABY T. VARKEY ABY T. VARKEY) लेखासद�य/ACCOUNTANT MEMBER �याियकसद�य/JUDICIAL MEMBER /ACCOUNTANT MEMBER /JUDICIAL MEMBER चे�ई/Chennai, �दनांक/Dated: 04th April, 20 , 2025. TLN आदेशक��ितिलिपअ�ेिषत/Copy to Copy to: