DEPUTY COMMISSIONER OF INCOME TAX OFFICER CIRCLE-3(1)(1), BANGALORE vs. M/S FMC INDIA PRIVATE LIMITED , BANGALORE

ORDER

PER BEENA PILLAI, JUDICIAL MEMBER Present cross appeals are filed by the assessee and revenue against order dated 23/07/2018 passes by the Ld.CIT(A)-3, Bangalore for assessment year 2013-14 on following grounds of appeal:

1. The order of the learned AO/ CIT(A) is based on incorrect interpretation of law and therefore, is bad in law, and hence liable to be quashed.

2. Disallowance of vehicle registration and other expenses 2.1. The learned AO/ CIT(A) erred in law and facts, in treating the sum of INR 2,04,289 being expenditure incurred towards RTO charges and vehicle transfer charges as capital expenditure and thereby erred in not allowing the same under section 37(1) of the Act. 2.2. The learned AO/ CIT(A) failed to appreciate that expenditure incurred towards RTO charges and vehicle transfer is incurred wholly and exclusively for the purpose of business and therefore should be allowed as deduction under section 37(1) of the Act. 2.3. The learned AO/ CIT(A) erred in law and facts, in not allowing expenditure amounting to INR 25,000 incurred towards earnest money deposit.

3. The learned AO/ CIT(A) erred, in law and on facts, in not considering the claim of excess disallowance on account of interest on finance lease amounting to INR 4,95,359 (the Appellant had inadvertently added back interest on finance lease amounting to INR 25,89,398, instead of INR 20,94,039).

4. Disallowance of product development expenses 4.1. The learned CIT(A) erred in law and facts, by disallowing expenditure amounting to INR 3,28,45,694 debited to the Statement of Profit and Loss as product development expenditure on the grounds that it is a capital expenditure. 4.2. The learned CIT(A) failed to appreciate that the product development expenditure primarily pertains to testing fees and incidental charges and therefore should be allowed as a deduction under section 37(1) of the Act. 4.3 The learned CIT(A) failed to appreciate that the product development expenditure would never bring any asset into existence nor give an enduring benefit to the assessee and thus ignored the principles laid down by various judicial precedents.

Page 3 of 35 & 2732/Bang/2018 4.4 The learned CIT(A) failed to appreciate the submissions made by the assessee during the course of the appeal proceedings and erred in considering the expenditure as a capital expenditure.

10. The learned CIT(A) has erred, in law and in facts, by upholding the order issued by the AO/ TPO, not granting suitable adjustment as per Rule 10B on account of abnormal foreign exchange fluctuation loss suffered by the Appellant vis-a-vis comparables.

11. The learned CIT(A) has erred, in law and in facts, by upholding the order issued by the AO/ TPO, in relation to treatment of product development expenses as an operating item for the purpose of computation of operating margin of the Appellant.

12. Without prejudice to Ground number 7 above that Bharath Insecticides Limited, along with few other comparables, should not be considered as a comparable, the learned CIT(A) has erred, in law and in facts, by Page 4 of 35 & 2732/Bang/2018 disregarding the submissions made by the Appellant, in relation to erroneous computation of operating margins of Bharat Insecticides Limited by the leaned TPO.

14. The learned AO/ CIT(A) erred, in law and in facts, in not considering the revised computation of income filed by the Appellant. The learned AO/ CIT(A) thereby erred in not considering the loss of INR 14,44,51,972 instead of INR 14,39,56,613, which was based on error while filing the return of income.

at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.” “1. The order of the learned CIT(A) is opposed to law and facts of the case. 2.On the facts and in the circumstances of the case the learned CIT(A) erred in fact and law, in violating Rule 46A as the taxpayer brought out a fresh issue of foreign exchange revenue filter before the CIT(A) and the remand report is not called for on this issue

3. On the facts and in the circumstances of the case, the learned CIT(A) erred in fact and in law in rejecting the companies as comparable by applying the export turnover filter of 40% arbitrarily when the taxpayer anad the TPO had not applied that filter in the manufacturing segment.

4. On the facts and in the circumstances of the case, the learned CIT(A) erred in fact and in law in rejecting the companies as comparable by applying the export turnover filter of 40% arbitrarily which resulted in elimination of the companies (Bhagiradha Chemicals & Inds Ltd and Sabero Organics Gujarat Ltd) that were selected by the tax payer in his own TP Study.

4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.

Page 5 of 35 & 2732/Bang/2018 5. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.”

Page 7 of 35 & 2732/Bang/2018 Other expenses 416026239 27834755 5081562 448942556 Provision for doubtful 22110432 22110432 trad e receivab les Loss on sale of fixed assets 12296 12296 Interest expenses 16456906 16456906 Product development 32845694 32845694 expenses Depreciation 23088513 6359667 29448180 Total Expenses 2202838769 64418805 11495620 38579634 2317332828 Operating Profit - OP -81812170 12174247 1379474 -95641802 OP/Sales -3.86% OP/OC 18.90% 12.00% -4.13% 2.6 Assessee was called upon to explain the negative OP/Sales, to which the assessee responded by replying that assessee treated the forex loss as non operating and product development expenses was also considered as non operating in the Manufacturing segment. The Ld.TPO while computing the margin of assessee rejected the treatment of forex loss and product development loss as non operating. 2.7 The Ld.TPO noted that assessee used following three comparables :

1. 1. Bhagiradha Chemicals and Industries Ltd.

2. Kilpest India Ltd.

3. Sabero Organics Gujarat Ltd. 2.8 The Ld.TPO also shortlisted 14 comparables and after considering the comparables of the assessee finalized following 13comparable with average margin of 7.66 %. The Ld.TPO thus computed the proposed adjustment being the shortfall at Rs.24,42,82,807/-

Page 8 of 35 & 2732/Bang/2018 2.9 The Ld.AO while passing the final assessment order made further addition apart from the TP addition of Rs.24,42,82,807/- as under: Disallowance of Provision under sec.40(a)(i) – Rs.6,76,413/- Disallowance of vehicle registration charges as capital in nature : Rs.2,29,289/- Disallowance of FBT : Rs.9,39,525/- Aggrieved by the assessment order, the assessee preferred appeal before the Ld.CIT(A).

Page 9 of 35 & 2732/Bang/2018 3. The Ld.CIT(A) upheld the assition made by the Ld.AO in respect of vehicle registration charges and Disallowance of Provision. 4. In respect of Transfer pricing addition, the assessee sought for exclusion of 9 comparables, out of which the Ld.CIT(A) allowed exclusion of following 8 comparables:

1. 1. Anshul Speciality Molecules Pvt.Ltd. 2. Excel Corp Care Ltd. 3. Ghards Chemicals Ltd.

4. Meghmani Industries Ltd 5. P I Industries Ltd. Assessee also sought exclusion of 2 comparables which were rejected.

5. Assessee was rejected WCA, Forex loss and Product development cost was not allowed to be treated a non operating expenses. The Ld.CIT(A) while disallowing the claim of trating product development expenses to be non operating, observed as under:

Page 10 of 35 & 2732/Bang/2018 Page 11 of 35 ITA Nos. 2611 & 2732/Bang/2018 Page 12 of 35 ITA Nos. 2611 & 2732/Bang/2018 Aggrieved by the order of the Ld.CIT(A), the assessee as well as revenue has filed present appeals before this Tribunal. We shall first consider appeal filed by the assessee: 6. The Ld.AR submitted that the assessee has raised following additional Grounds: “Based on the facts and circumstances of the case and in law, FMC India Private Limited (hereinafter referred to as the `Appellant'), respectfully craves leave to file additional Page 13 of 35 ITA Nos. 2611 & 2732/Bang/2018 grounds of appeal in addition to the grounds of appeal filed previously by the Appellant on September 18. 2018, which are detailed herein below: On the facts and in the circumstances of the case and in law:

16. Without prejudice to other Grounds of appeal, the learned AO/TPO and the learned CIT(A) have erred in not restricting transfer pricing adjustments to transactions with Associated Enterprises, in the nature of purchase of materials, in proportion such transactions with Associated Enterprises bear to total operating cost of the Appellant.

17. The learned AO/TPO and the learned CIT(A) failed in not appropriately factoring in correct impact of foreign e 'change fluctuation in relation to different transactions while working out operating margin of the Appellant. The Appellant craves leave to add, alter, amend, vary. omit or substitute the aforesaid ground of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.” 6.1 It has been submitted that no new facts needs to be considered in order to dispose of the additional ground raised by the assessee vide application dated 05/04/2019. It is submitted that the additional grounds is a legal issue that goes to the root cause of the proceedings. The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee. 6.2 On the contrary, the Ld.CIT.DR though opposed admission of the additional grounds, could not bring anything on record which would challenge such a right available to assessee under the Act. We have perused the submissions advanced by both sides in light of records placed before us. The Ld.DR did not object for the additional grounds being admitted. 6.3 We note that one of the additional grounds is directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another Page 14 of 35 & 2732/Bang/2018 issues alleged by the assessee is a legal issue that does not require investigation of any facts. 6.4 Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly, the additional grounds raised by assessee stands admitted. In view of the above we admit the additional ground filed by the assessee vide application dated 05/04/2019.

7. The Ld.AR submitted that Ground No.1, 5-6 is general in nature and do not require adjudication.

8. It is also submitted that the assessee do not wish to press Ground No.13. Accordingly Ground No.13 stands dismissed and not pressed.

9. Ground no.2 is in respect of disallowance of Vehicle registration expenses. 9.1 The Ld.AO observed that assessee had incurred expenditure of Rs.2,29,289/- on registration of vehicles and had claimed as revenue expenditure. The Ld.AO disallowed the same by holding it to be capital in nature. 9.2 During the proceedings before the Ld.CIT(A), assessee submitted that this expenditure was incurred towards the cost of transfer of registration of vehicles from Andhra Pradesh to Karnataka and also towards the registration of new vehicles. The assessee also submitted that out of the total expenditure of Rs.2,29,289/-, sum of Rs.25,000/- was incurred by assessee Page 15 of 35 & 2732/Bang/2018 towards earnest money for applying in a Government tender. The Ld.CIT(A) after considering the submissions of assessee disallowed the expenditure of Rs.25,000/- which was in the nature of the refundable deposits by treating as not a revenue expenditure. As regards the balance expenditure of Rs.2,04,289/- on registration of new vehicles and /or for transfer of registration of vehicles from Andhra Pradesh to Karnataka was held to be capital in nature however depreciation was granted. Before us, the Ld.AR submitted that the revenue authorities has erred in disallowing the registration expenses as capital in nature even though all the vehicles were registered in assessee’s own name. It was submitted that these vehicles were used by the assessee for the purposes of its business. The Ld.DR on the contrary submitted that the vehicle registration expenses has been rightly capitalised as the expenditure are incurred in respect of the capital asset that forms part of the block of assets of the assessee. He relied on the orders passed by the Ld.CIT(A). We have perused the submissions advanced by both sides in the light of records placed before us. 9.3 The disallowance of Rs.2,29,289/- comprises of two components: i) Being Rs.25,000/- that was paid by the assessee as earnest money deposit with regards to Government tender applied during the period. ii) Balance of Rs.2,04,289/- is in respect of registration of new vehicles and or vehicles that was transferred from Andhra Pradesh to Karnataka.

Page 16 of 35 & 2732/Bang/2018 9.4 In respect of Rs.25,000/- being the earnest money deposit there is a categorical observation by the Ld.CIT(A) that these are refundable deposits and therefore has been rightly treated as not revenue in nature which is disallowed by the Ld.CIT(A) u/s. 37(1). It is not in dispute that the said amount has not been expended for the purposes of business. Under such circumstances, the disallowance of Rs.25,000/- is not warranted. We therefore direct the Ld.AO to allow Rs.25,000/- as an expenditure incurred by the assessee for the purposes of its business. Coming to the registration expenses incurred by assessee to the extent of Rs.2,04,289/-, we note that the Ld.CIT(A) has rightly considered the vehicles to be capital asset as these vehicles are admittedly put to use for the purposes of business. Under such circumstances, granting of depreciation is rightly been directed by Ld.CIT(A), which is in accordance with law. We do not find any infirmity in the view taken by Ld.CIT(A) and the same is upheld. Accordingly, Ground no. 2 raised by assessee stands partly allowed.

Page 17 of 35 & 2732/Bang/2018 11.1 We note that Ld.CIT(A) did not consider the plea of the assessee as the Ld.AO had not considered the revised return. Hon’ble Supreme Court in case of Goetze India Ltd. Vs. CIT reported in (2006) 157 taxman 1, has observed as under: “4. The decision in question is that the power of the Tribunal under section 254 of the Income Tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the assessing officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income Tax Appellate Tribunal under section 254 of the Income Tax Act, 1961. “ Respectfully following the above, in our opinion, this issue needs to be remanded to the Ld.AO to consider the loss as declared by the assessee in the revised return. Accordingly, Ground No.3 and 14 stands allowed for statistical purposes.

8. The next issue relates to the disallowance of Product development expenses of Rs. 4,36,88,418/-. The assessee submitted before the AO that it has incurred these expenses with the intention of expanding the existing line of business. The assessee submitted that incurring of this kind of expenses is an integral part of profit earning process and it aids the assessee to continuously improve its portfolio of products. The assessee also relied upon the decision rendered by Chandigarh bench of ITAT in the case of Glaxo Smithkline Consumer Healthcare Ltd. v. Asstt. CIT [2007] 112 TTJ 94 and also the decision rendered by Hon'ble Karnataka High Court in the case of CIT v. Bharat Earth Movers Ltd. [1985] 23 Taxman 400 and also by Chennai bench of ITAT in the case of Dy. CIT v. Magnetic Meter Systems IndiaLtd. [2012] Page 18 of 35 & 2732/Bang/2018 25 taxmann.com 438. It was submitted that these expenses did not result in any enduring benefit to the assessee. 8.1 The AO did not accept the explanations of the assessee. The AO took the view that these expenses would give enduring benefit to the assessee once the products developed by it are put to commercial use. The AO also examined the nature of expenses and noticed that these expenses have been incurred for registration studies of product Carbosulfan, various diseases of plants, Clomazone etc. He also noticed that the assessee has already started commercially producing the products viz., Carbosulfan, Clomazone etc. Since the expenses have been incurred for getting approval from Central Insecticides Board and also for commercial utilisation of pesticides, these expenses are not recurring in nature and further it would give enduring benefit to the assessee. Accordingly, he disallowed the above said claim of Rs. 4,36,88,418/-. 8.2 The Ld DRP noticed that these expenses have been incurred for registration of patent in the name of the AE or for assignment in favour of AE. Accordingly, the Ld DRP confirmed the disallowance. Since the intangible rights are to be owned by the AE, the Ld DRP held that the assessee would not be entitled for depreciation also. 8.3 We heard rival contentions on this issue. We notice that the expenses incurred by the assessee under this head consisted of Registration expenses, Field Trial expenses, Cost of samples issued and Testing fee & other charges. We notice that the AO has taken the view that these expenses are capital in nature. On the contrary, the Ld DRP has taken the view that the beneficiary of these expenses is the AE of the assessee. 8.4 Hence, it is necessary to find out as to whether the assessee has incurred all these expenses on its own account or on behalf of its AE. If the assessee has incurred expenses on behalf of the AE and the benefits of these expenses go the AE, then the Ld DRP was justified in disallowing this claim. If it is not so, then the assessee is required to prove that these expenses are not capital in nature. The facts available on record are not clear as to whether these expenses are routine expenses incurred for expansion of existing business or not. If it is so, then the relevant expenses are allowable as revenue expenditure. In the absence of relevant details, we feel it proper to restore this issue to the file of AO for examining it afresh in the light of discussions made supra and also in accordance with law. Accordingly we restore this issue to the file of AO. 12.2 The Ld.AR submitted that the facts un the present year under consideration is identical to assessment year 2014-15. The Ld.DR did not object for the issue to be remanded to the Ld.AO.

Page 19 of 35 & 2732/Bang/2018 Based on the above, we remand this issue to the Ld.AO for considering it afresh in light of the above observation by the coordinate bench. Accordingly these grounds raised by the assessee stands allowed for statistical purposes.

13. Ground No.7 & 12 are raised by the assessee challenging the inclusion of following comparables: Bharat Insecticides Ltd., Bharat Rasayan Ltd., and Rallis India Ltd. 13.1 Before we undertake the comparability analysis, it is sinequa non to understand the FAR of the assessee vis-a-vis the comparables. The functional analysis as obverted by the Ld.TPO is as under: “2.1 As per the TP document, FMC India is a company incorporated in India on 6 April 20th having its registered and corporate office in Bangalore. FMC India imports chemicals and formulations (raw materials), from FMC Corporation, USA and processes them (through toll manufacturers) in India. FMC India sells its finished products to third parties in India, and also resells the chemicals and formulations imported from FMC Corporation, USA. The taxpayer also imports raw materials (Lithium Metal) and finished goods for trading (Lithium HMDS) from FMC corporation, USA and FMC Chemicals Ltd, UL (`FMC UK'). FMC India processes them and sells them to third parties in India. FMC India also provides certain support services to the various divisions of FMC. The taxpayer provides development services to the API Hong Kong and application support services to the Health & Nutrition (Pharma) division of FMC Corporation, USA. Also it provides support services in the form of Business Development Services, SAP Application Support Services, Human Resource Services and Regulatory Affairs Management services to FMC Corporation and its affiliates. 2.2 The taxpayer company has stated in its website that the company is engaged in "all major classes of crop protection chemicals -insecticides, herbicides, fungicides and plant growth regulators."”

Page 20 of 35 & 2732/Bang/2018 13.2 Bharat Insecticides Ltd., 13.2.1 The Ld.AR relied on submission made by the assessee and argued that this comparable is functionally not similar and is involved in diversified products. 13.2.2 The Ld.DR submitted that coordinate bench of this Tribunal in assessee’s own case for assessment year 2014- 15(supra) upheld inclusion of Bharat Insecticides Ltd. He submitted that this comparable is engaged in Pesticides Formulation and therefore is comparable to the assessee. We have perused the submission advanced by both sides in light of records placed before us. 13.2.3 We note that this Tribunal in assessee’s own case for assessment year 2014-15(supra) has observed and held as under: “The assessee also seeks exclusion of M/s. Bharat Insecticides Ltd. the ld. A.R. submitted that this company is dealing in diversified products, viz., pesticides, plant growth regulators, etc. Further, this company also acts as toll manufacturer i.e. doing job work for other companies. He submitted that TPO has wrongly understood that the assessee herein is also engaged in toll manufacturing, whereas the fact remain the assessee gets his product processed/manufactured by other toll manufacturers. He submitted that this company also does not have segmental results. Accordingly, he submitted that this company cannot be considered as a comparable to the assessee. 4.11 We heard Ld. D.R. on this comparable and perused the record. The annual report of the company pertaining to assessment year 2014- 15 (F Y 2013-14) is placed at page Nos. 2370 to 2408. We notice that the principal product dealt by the company is stated as "pesticides formulation". The total revenue from operations is shown at Rs. 261.88 crores in the profit & loss account and the entire turnover pertains to pesticides formulation only as per information given at page Nos. 2370 & 2371. We also notice that this company has not reported any other operating revenues in the profit & loss account available at page No. 2371, meaning thereby, the assessee has not carried out any toll manufacturing works during the year under consideration, as submitted by Ld. A.R. Accordingly, we are unable to appreciate the contentions of Ld. A.R. Accordingly, we do not find any other reason to exclude this company from the list of comparable companies. Accordingly, we confirm the order of the AO in including this company as comparable company.”

Page 21 of 35 & 2732/Bang/2018 13.2.4 We do not find any reason to differ from the above view and respectfully following the same we up hold the inclusion of this comparable in the final list. 13.3 Bharat Rasayan Ltd: 13.3.1 Assessee is seeking exclusion of this comparable by submitting that it is functionally different as it is engaged in diversified products. In support of this argument, assessee has relied on the website of the company wherein it is revealed that this company is engaged in all major classes of crop protection chemicals, insecticides, herbicides, fungicides and plant growth regulators. The Ld.AR submitted that this comparable has revenue from export which is more than 25% and assessee is predominantly operating in domestic market. He thus submitted that this comparable is not functionally similar with that of assessee. 13.3.2 The Ld.DR submitted that this company is into sale of pesticides and insecticides which is also the functions performed by the assessee as observed by the Ld.TPO in paras 2.1 and 2.2. 13.3.3 For sake of convenience, the same is reproduced as under: “2.1 As per the TP document, FMC India is a company incorporated in India on 6 April 20th having its registered and corporate office in Bangalore. FMC India imports chemicals and formulations (raw materials), from FMC Corporation, USA and processes them (through toll manufacturers) in India. FMC India sells its finished products to third parties in India, and also resells the chemicals and formulations imported from FMC Corporation, USA. The taxpayer also imports raw materials (Lithium Metal) and finished goods for trading (Lithium HMDS) from FMC corporation, USA and FMC Chemicals Ltd, UL (`FMC UK'). FMC India processes them and sells them to third parties in India. FMC India also provides certain support services to the various divisions of FMC. The taxpayer provides development services to the API Page 22 of 35 & 2732/Bang/2018 Hong Kong and application support services to the Health & Nutrition (Pharma) division of FMC Corporation, USA. Also it provides support services in the form of Business Development Services, SAP Application Support Services, Human Resource Services and Regulatory Affairs Management services to FMC Corporation and its affiliates. 2.2 The taxpayer company has stated in its website that the company is engaged in "all major classes of crop protection chemicals -insecticides, herbicides, fungicides and plant growth regulators."” 13.3.4 The Ld.DR further submitted that the assessee is also selling the manufactured products locally as well as to its AE in USA. He submitted that assessee in its website also shows as it is engaged in all major classes of crop protection chemicals, insecticides, herbicides, fungicides and plant growth regulators which are manufactured products by this comparable. He thus submitted that this is the comparable that should be retained. We have perused the submissions advanced by both sides in the light of records placed before us. 13.3.5 We note that this comparable has only segmental head from which, the revenue is generated being gross sales and assessee also has not bifurcated its revenue from the sales in local market and export sales. As far as the products manufactured and sold are concerned, this comparable is also manufacturing similar products(pesticides) like that of assessee. We therefore do not find any reason to exclude this comparable from the final list. The Ld.AR pointed out that in Ground no. 12, assessee seeks to rectify the errors while computing the margins of this comparable. We therefore direct the Ld.AO to compute the margins of this comparable correctly and in accordance with law.

Page 23 of 35 & 2732/Bang/2018 13.4 Rallis India Ltd: 13.4.1 This comparable is sought to be excluded by assessee for the reason that it is engaged in diversified business comprising of agri inputs, plant growth nutrients, seed and agri services. The Ld.AR submitted that this company is basically into a non- pesticide profile and therefore cannot be held to be functionally comparable with that of assessee which is into manufacturing of pesticides. The Ld.TPO considered this comparable under the broad category of a domestic crop protection and insecticides which is not the functions performed by assessee. The Ld.DR on the contrary relied on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 13.4.2 The audited financial reports of this comparable placed at page 977 of paper book reveals that this company is into manufacturing non-pesticide kinds of products which are farmer friendly and in accordance with the changing agricultural needs. The basic raw materials for manufacturing such products are organic compost delivered out of the waste from sugarcane factories and has revealed itself to be a go green branded company. We note that from the functions performed by the assessee, before us, the assessee is into manufacturing of pesticides based on chemicals and formulations imported as raw materials from its AE. The basic ingredients forming part of raw materials are lithium metals etc which are chemical in nature and therefore cannot be compared with that of the present comparable sought for exclusion. We therefore direct the Ld.AO to exclude this comparable from the final list.

Page 24 of 35 & 2732/Bang/2018 Accordingly Ground no. 7 stands partly allowed & 12 stands allowed.

by the assessee stands allowed for statistical purposes.

15. Ground No.9 is raised by the assessee for adopting the foreign exchange revenue filter for excluding comparables having earnings in foreign currency exceeding 40 % as against 25%. 15.1 The assessee has argued that Ld.TPO has not applied foreign exchange revenue filter for excluding companies having earning in foreign currency exceeding 25% of the turnover. The assessee has argued that it predominantly operates in domestic market and so this filter is appropriate in its case. The assessee also submitted that this filter has been accepted by the TPO in its own case for AY 2015-16. 15.2 The Ld.CIT(A) rejected this plea on the ground that such filter was not applied by the assessee in its TP study itself.

16. Both sides submitted that Ground No.3-4 in revenue’s appeal are also on the issue of arbitrary adoption of foreign exchange currency filter at 40%. It is submitted that this is the only issue raised by the revenue in its appeal. We have perused the submission advanced by both sides in light of records placed before us.

17. It is noted that, such filter has not been applied by the Ld.TPO. And there is no basis for adopting 40% filter, applied by Page 26 of 35 & 2732/Bang/2018 the Ld.CIT(A). In the interest of justice, we remand this issue to the Ld.AO/TPO to consider a consistent approach in respect of selecting the range of this filter. In the interest of justice we remand this issue back to the Ld.AO/TPO to consider this claim in accordance with law. Needless to say that proper opportunity of being heard must be granted to the assessee. Accordingly Ground 9 in assessee’s appeal and Grounds 3-4 in revenue’s appeal stands allowed for statistical purposes.

Page 27 of 35 & 2732/Bang/2018 “12. The learned TPO/ AO have erred, in law and in facts, in not granting suitable adjustment as per Rule 10B on account of abnormal foreign exchange fluctuation loss suffered by the Appellant vis-a-vis comparables. The Assessee during FY 2012-13, has incurred the foreign exchange fluctuation loss amounting to INR 9,09,50,569. Of the above, INR 1,37,45,729 is relating to borrowings of the Assessee, i.e., financing activity pertaining to exchange loss in relation to External Commercial Borrowing ('ECB') loan, not pertaining to operating activities of FMC India. Therefore, the same shall not form part of operating results of the Assessee and should not be taken into account for computation of operating margins of the Assessee. Accordingly, post considering the exchange loss pertaining to ECB loan as non-operating expense, the foreign exchange fluctuation loss as a percentage of turnover works out to 3.64% which is substantially higher than the average foreign exchange fluctuation component of the comparable companies selected by the learned TPO, which is approximately 0.58%. As per clause 3(ii) of Rule 10B, an uncontrolled transaction shall be comparable to an international transaction if reasonably accurate adjustments can be made to eliminate the material effects of differences between the uncontrolled transactions being compared and international transaction. In this regard, we wish to place reliance on the ruling of the Hon'ble Delhi Tribunal in the case of Honda Trading Corp India Pvt Ltd Vs. ACIT (ITA No. 5297/Del 2011) wherein, having regard to the aforesaid clause 3(ii) of Rule 10B of the Rules, it was held that necessary adjustments pertaining to huge and abnormal fluctuations in the foreign exchange may be allowed to the taxpayer in determining the arm's length price of the international transaction undertaken by the taxpayer. Given the above, the Appellant wishes to submit that in case foreign exchange fluctuation is treated as operating in nature for the purpose of computing operating margins, suitable adjustments have to be made to get the uncontrolled transaction at par with the international transaction in view of the abnormal foreign exchange loss incurred by the Assessee during the year under consideration. Accordingly, we request your goodself to provide us with the below adjustment — Page 28 of 35 & 2732/Bang/2018 Foreign exchange fluctuation loss incurred by the assessee as a 3.64% percentage of turnover (A) Average foreign exchange fluctuation gain incurred by the comparables companies as a percentage of 0.08% turnover (comparables selected by the learned TPO) (B) Adjustment to get the international transaction at par with comparable 3.72% transactions (C=A+B) Without prejudice to the above, we wish to submit that, in a scenario where foreign exchange fluctuation loss of 1NR 1,37,45,729 relating to ECB loan is also considered as operating expense, total foreign exchange fluctuation loss would constitute 4.29% of turnover of the Assessee and applying above analogy we would request your goodself provide an adjustment to the extent of 4.38%.” 18.4 On the contrary, the Ld.DR relied on the observation of the DRP which is scanned and reproduced as under: 10.0 Vide ground of appeal

12 the appellant has argued that Foreign exchange loss should he considered as non- operating in nature. The appellant has made detailed submissions on this issue. 10.1 The submissions of the appellant have duly been considered. The issue has been discussed in detail by the TPO on page 4 of her order. In relation to treatment of "foreign exchange fluctuation gain/loss", the jurisdiction bench of ITAT in the case of SAP LABS India (P) Ltd v Asstt CIT [2011]

44. SOT 156 (Bang), held that the foreign exchange fluctuation income cannot be excluded from the computation of the operating margin of the assessee- company. In the case of Petrofac Engineering Services India (P) Ltd v ITO [20141 46 taxmann.com 126 (Chennai - Trib), ITAT held that in case of international transactions entered into by assessee with its AE, foreign exchange gain/loss is a relevant factor in computation of assessee's ALP. The Madras High Court in the case of CIT v. Pentasoft Technologies Ltd.[2012] 347 ITR 578420137 33 taxmann.com 570 (Mad.) held that gains due to fluctuation in foreign exchange is directly related to export sales of the assessee and therefore, it cannot be treated as other than part of profit from export. In the case of Dy. CIT v. Welspun Zucchi Textiles Ltd. [2013] 38 taxmann.com 243 (Mumbai - Trib.) it was held that loss on account of foreign exchange fluctuation loss was to be treated as business loss. In the Page 29 of 35 & 2732/Bang/2018 case of Cordys R & D (India) (P) Ltd. v. Dy. CIT [2014] 43 taxmann.com 64 (Hyderabad - Trib.), also it was held that in computing net margin, forex fluctuation gain-loss is to be treated as part of operating income of comparable companies. On the issue of nature of forex loss/gain being part of sale/purchase transaction or otherwise, various decisions of ITAT and courts require it to be treated as part of sales/purchase transaction. On this issue, the Delhi Bench of the Tribunal in the case of Wesffalia Separator India (P.) Ltd. v. Asstt. CIT [2014] 52 taxmann.com 381 held as under. "4.10 In contract to the above, we find that there is a plethora of decisions rendered by various benches of the tribunal across the country holding that forex gain/loss is part of operating revenue/cost. To cite a few, the Delhi Bench of the Tribunal in Techbooks International (P.) v. ACTT (to which one of us, namely, the AM is party) has held vide its order dated 28-04-2014 that foreign exchange gain or loss is a part and parcel of operating revenue/operating cost. The Bangalore bench of the Tribunal in SAP Labs India (P.) Ltd. v. ACIT (2010) 6 ITR (Trib) 81 (Bang) has also held that foreign exchange gain should be added to the operating revenue. The Mumbai Bench of the Tribunal in Rushabh Diamonds, Mumbai v. ACIT in ITA No.7217 vide its order dated 26-04-2013 (to which the AM is party) has also held foreign exchange gain as a part of operating profit". 10.2 Thus foreign exchange loss/gain has rightly been considered as operating in nature by the TPO. Considering above, the ground of appeal 12 of the appellant is dismissed.” We have perused the submissions advanced by both sides in the light of records placed before us. 18.5 It is the submission of the Ld.AR that the adjustment in respect of foreign exchange loss is to be considered as non- operating in the hands of assessee, rather than the uncontrolled comparables. In support he placed reliance on following decisions:  decision of Hon’ble Delhi Tribunal in case of Honda Trading Corporation India Pvt.Ltd., in ITA No.5297/Del/2017 by order dated 08/03/2013 Page 30 of 35 & 2732/Bang/2018  decision of Hon’ble Mumbai Tribunal in case of Pengea3 and Legal Database Systems Pvt.Ltd. in ITA numbers to 128/M/2014, 1958/M/2014 by order dated 06/03/2017  decision of Hon’ble Bombay High Court in case of CIT versus in the sun Unilever Ltd reported in (2016) 72 taxman.com 325  decision of Cochin Bench of the Tribunal in case of US Technology International Pvt. Ltd. vs. ACIT in IT(TP)A No. 592/Coch/2018 for AY 2014-15 dt. 11.12.2019 18.6 He submitted that the comparable companies have not incurred similar kind of expenditure. The Ld.AR thus submitted that, appropriate adjustment therefore is called for on account of differences between the uncontrolled and controlled transactions. We have perused the decisions relied by the LD.AR. 18.7 Rule 10B(1)(e) of the Rules states that adjustments should be made to account for the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market. 18.8 Rule 10B(2) of the Rules provides comparability of an international transaction with an uncontrolled transaction needs to be judged with reference to certain specified factors. Rule 10B(3) of the Rules provide that: "An uncontrolled transaction shall be comparable to an international transaction if — (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost Page 31 of 35 & 2732/Bang/2018 charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18.9 The OECD Guidelines on this aspect is as follows:- Para 1.35. Where there are differences between the situations being compared that could materially affect the comparison, comparability adjustments must be made, where possible, to improve the reliability of the comparison. Therefore, in no event can unadjusted industry average returns themselves establish arm's length conditions" Para 1.36 . ………… material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm's length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm's length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties." Para 2.74 states as follows: "….. Thus where the differences in the characteristics of the enterprises being compared have a material effect on the net margins being used, it would not be appropriate to apply the transactional net margin method without making adjustments for such differences. The extent and reliability of those adjustments will affect the relative reliability of the analysis under the transactional net margin method' (Emphasis supplied) US transfer pricing Regulations on this aspect is as follows:- Regulation 1.482-1(d)(2) of the US regulation states as follows: "In order to be considered comparable to a controlled transaction, an uncontrolled transaction need not be identical to the controlled transaction, but must be sufficiently similar that it provides a reliable measure of an arm's length result. If there are material differences between the controlled and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained with sufficient accuracy to improve the reliability of the results. For purposes of this section, a material difference is one that would materially affect the measure of an arm's length result under the method being applied." The Indian transfer pricing regulations, OECD Guidelines and the US transfer pricing regulations call for an adjustment to be made in case of material differences in the transactions or the enterprises being compared so as to arrive at a more reliable arm's length price/ margin.

Page 32 of 35 & 2732/Bang/2018 While the Indian transfer pricing regulations refer to the adjustments on uncontrolled transactions, however the same has to be read with Rule10B(3) of the Rules which clearly emphasizes the necessity and compulsion of undertaking adjustments. Hence in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then in order to read the provisions of transfer pricing regulations in harmony, the adjustments should be made on the tested party. 18.10 The reliability and accuracy of adjustments would largely depend on availability of reliable and accurate data. For certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party (whose data would generally be easily accessible). In such a scenario, one has to resort to the provisions of Rule 10B(3)(ii) which provides for making “reasonably accurate adjustments” for eliminating any material differences between the two transactions being compared. Therefore, keeping in mind the aforesaid objective, the net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per subclause (i) of Rule 10B(1)(e) of the Rules itself. The absence of specific provision in Rule 10B(1)(e)(iii) of the Rules does not impede the adjustment of the profit margin of tested party. This view is laid down in the following decisions:- • Capegemini India Pvt. Ltd. (ITA No.7861/Mum/2011) • Demang Cranes & Components (India) Pvt Ltd. [49 SOT 610 (Pune)] 18.11 Forex loss/gain may arise in the normal course of the business, and can be reckoned as operating in nature, however the loss/gain arising on account of abnormal fluctuation or on Page 33 of 35 & 2732/Bang/2018 account of abnormal movement in forward exchange contracts has to be treated as non-operating in nature. We place reliance on following decisions: Decision of Hon’ble Delhi Tribunal in case of Schneider Electric India (P.) Ltd. v. Dy. CIT reported in (2016) 75 taxmann.com 115 Decision of Hon’ble Delhi Tribunal in case of Honda Trading Corpn. India (P.) Ltd. reported in (2013) 33 taxmann.com 21; Decision of co-ordinate bench of this Tribunal in case of SAP Labs India (P.) Ltd. reported in (2010) 8 taxmann.com 207 Decision of co-ordinate bench of this Tribunal in case of CISCO Systems (India) (P.) Ltd. reported in (2014) 50 taxmann.com 280 18.12 The reliability and accuracy of adjustments would largely depend on availability of reliable and accurate data. For certain types of adjustment relevant data for comparables may either not be available in public domain or may not be readily determinable based on information available in public domain. Whereas it may be possible to make equally reliable and accurate adjustment of the tested party whose data is easily accessible. The purpose and intent of comparability analysis, is to examine as to whether, or not, the values stated for the international transactions are at arms length. It means, it is an exercise to ascertain, whether the price charged in case of a controlled transaction is comparable to the price charged under the uncontrolled transaction of similar nature. In our view the regulations do not cast any restriction to provide adjustment to be made on the tested party. Therefore if the data in respect of uncontrolled transactions are not sufficiently available in order to iron out the differences, the adjustment is to be made in the hands of the tested party. Accordingly we remand these issues back to the Ld.AO, with the direction to consider the claim of assessee based on the above discussions in respect of the forex loss earned by assessee on Page 34 of 35 & 2732/Bang/2018 ECB loans for year under consideration, as non operative in the hands of assessee. Accordingly Ground no. 10 and Additional Ground No. 17 stands allowed for statistical purposes.

Page 35 of 35 & 2732/Bang/2018 20. Ground No.15 is consequential in nature and do not require any adjudication. In the result, appeal filed by assessee stands partly allowed and appeal filed by revenue stands allowed for statistical purposes. Order pronounced in open court on 29th September, 2022.