INA BEARINGS INDIA PVT. LTD,PUNE vs. DEPUTY COMMISSIONER OF INCOME TAX,

आदेश / ORDER

PER R.S.SYAL, VP : These two appeals – one by the assessee and other by the

Revenue - arise out of the order passed by the CIT(A)-13, Pune on

10-10-2016 in relation to the Assessment Year 2010-11.

the computation of Arm’s Length Price (ALP) of the

Manufacturing as well as Trading segment by excluding Foreign

Exchange Gain/Loss (forex).

of the companies of INA brand of Schaeffler group worldwide. It

is a wholly owned subsidiary of Schaeffler KG, Germany. The

assessee is engaged in the business of manufacturing,

development, marketing and distribution of roller bearing, linear

bearings system and engine components. The assessee filed its

return declaring total income at Rs. Nil. Certain international

transactions entered into by the assessee with its Associated

Enterprises (AEs) were reported in Form No. 3CEB. The

Assessing Officer (AO) referred the matter of determination of the

3 ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

arm’s length price (ALP) of the international transactions to the

Transfer Pricing Officer (TPO). The TPO observed that though the

assessee reported twelve international transactions, but it

categorized its business into two segments viz., Manufacturing

segment and Trading segment.

raised by the assessee is against the determination of ALP of the

manufacturing as well as trading segment by excluding foreign

exchange (forex) from the computation of profit margins under the

Transactional Net Margin Method (TNMM). In view of the above

submission advanced on behalf of the assessee, we are restricting

ourselves only to the inclusion or otherwise of forex gain/loss in

the computation of operating margin under the TNMM both for the

assessee as well as the comparables.

pertaining to the business operations alone was considered by the

assessee as an item of operating revenue, which was wrongly

considered by the TPO as non-operating in the computation of the

ALP and hence such a view should be rejected. This was opposed

4 ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

by the ld. DR, who contended that forex gain/loss was non-

operating in nature and hence was rightly excluded by the

authorities in the computation of OP/OC under the TNMM.

assessee about the inclusion of foreign exchange gain/loss in the

operating revenue/costs of the assessee as well as that of the

comparables. When we advert to the nature of such foreign

exchange gain earned by the assessee, it has not been controverted

by the ld. DR that the same is in relation to the trading items

emanating from the international transactions. If the foreign

exchange gain/loss directly results from the trading items, we fail

to appreciate as to how such foreign exchange fluctuation gain/loss

can be considered as non-operating.

The Special Bench of the Tribunal in ACIT Vs Prakash I. 7.

Shah (2008) 115 ITD 167 (Mum)(SB) has held that the gain due to

fluctuations in the foreign exchange rate emanating from export is

its integral part and cannot be differentiated from the export

proceeds simply on the ground that the foreign currency rate has

increased subsequent to sale but prior to realization. It went on to

add that when goods are exported and invoice is raised in currency

5 ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

of the country where such goods are sold and subsequently when

the amount is realized in that foreign currency and then converted

into Indian rupees, the entire amount is relatable to the exports. In

fact, it is only the translation of invoice value from the foreign

currency to the Indian rupees. The Special bench held that the

exchange rate gain or loss cannot have a different character from

the transaction to which it pertains. The Bench found fallacy in the

submission made on behalf of the Revenue that the exchange rate

difference should be detached from the exports and be considered

as an independent transaction. Eventually, the Special Bench held

that such exchange rate fluctuation gain/loss arising from exports

cannot be viewed differently from sale proceeds.

that foreign exchange gain or loss be taken as non-operating, is not

sustainable. There is no doubt that in such rules, forex gain/loss

has been treated as non-operating. However it is pertinent to note

that such rules are not applicable to the assessment year under

consideration. Even the reliance of the ld. DR on certain decisions

taking cognizance of safe harbour rules for the period anterior to

their insertion in other contexts, does not improve the case of the

6 ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

Department. Following the judgment in Principal Commissioner of

Income Tax Vs. Ameriprise India Private Limited (ITA 206/2016)

decided on 23.03.2016, holding foreign exchange gains earned by

the assessee, which is in relation to trading items and emanating

from international transactions, cannot be treated as non-operating

losses and gains, the Hon’ble Delhi High Court in Pr. CIT VS. B.C.

Management Services Pvt. Ltd. (2018) 403 ITR 45 (Del) reiterated

held that foreign exchange fluctuation in relation to trading

transactions, prior to safe harbor rules from 2013, is operating gain

or loss. In view of the foregoing discussion, we are of the

considered opinion that the amount of foreign exchange gain/loss

arising out of trading transactions is required to be considered as an

item of operating revenue/cost, both for the assessee as well as the

comparables. The ground taken by the assessee is, therefore,

allowed.

the determination of NIL ALP of the international transaction of

Payment of management fees amounting to Rs.5,25,95,383/-.

of the international transactions as “Procurement of other services

7 ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

and items” with transacted value at Rs.9,06,79,154/-. This

included a sum of Rs.5,25,95,383/- on account of Management fee

paid by the assessee to its Associated Enterprise (AE). As no

separate and independent comparability analysis of this transaction

was done and the assessee had included such cost with other

operating costs qua the Manufacturing and Trading segments, the

Transfer Pricing Officer (TPO) required the assessee to make cost

benefit analysis in respect of this payment vis-à-vis other

comparable and independent third parties. The assessee submitted

certain details. The TPO observed that though the assessee

provided details about receipt of services and the benefits derived

therefrom but it could not substantiate the receipt of services

through e-mails or contemporaneous documents. The TPO opined

that the services performed by the AE fell into the category of

stewardship for which no payment was necessary. In the absence

of the assessee making any comparison with similar services it

could have availed from third parties, the TPO held that the ALP of

this transaction was to be taken at Nil. He, therefore,

recommended transfer pricing adjustment amounting to Rs.5.25

crore vide para 8.11 on page 87 of his order. However at the end

8 ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

of his order on page 89, he proposed only a transfer pricing

adjustment of Rs.7,35,83,486/- in relation to the Trading segment.

In the penultimate para of his order, the TPO concluded that : `In

view of the discussion as above, the arm’s length price of the

international transactions of the assessee company is not being

disturbed except for transaction relating to Trading segment.’

computed total income at Rs.7,35,83,486/- by making the solitary

transfer pricing addition of the equal amount proposed by the TPO

under the Trading segment to the Nil income declared by the

assessee. Our attention has not been drawn towards any

rectification order having passed either by the AO or the TPO on

this score.

CIT(A) the so-called transfer pricing addition of Rs.5,25,95,383/-

towards Management fees paid to the AEs, which was, in fact,

never made, the ld. CIT(A) too fell into error by adjudicating the

issue without noticing that since no addition was made, the issue

did not arise out of the impugned order before him and more so

when no notice of enhancement for such an addition was issued by

9 ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

him. The ld. CIT(A) called for a remand report from the TPO on

this issue. The TPO proposed enhancement of the transfer pricing

addition by a further sum of Rs.2,41,68,991/- on the basis of some

information available on page 29 of the T.P. Study report. In reply,

the assessee submitted that the amount of Rs.2.41 crore and odd

did not pertain to the Management fees, but was paid to the

German AE as Product development fees. The ld. CIT(A) directed

the AO to examine the assessee’s books of account and then make

or delete the addition depending upon the ascertainment of its true

character.

CIT(A) has dealt with the issue of payment of Management fees

by the assessee to its AE, for which neither any transfer pricing

adjustment was finally recommended nor any addition was made

by the AO. The enhancement notice was given by the ld. CIT(A)

only qua the enhancement proposed by the TPO during remand

proceedings, which also remained inconclusive ending with a

direction from the ld. CIT(A) to the AO for making a further

enquiry and then deciding, which is impermissible under law as

such a power of restoration has been withdrawn from the CIT(A)

10 ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

by the Finance Act, 2001 w.e.f. 1.6.2001. The Revenue vide its

ground no. 3 has also challenged the order of the ld. CIT(A) : `in

directing the TPO to re-examine the issue of the management

services paid’. Under such circumstances, it is palpable that the

adjudication by the ld. CIT(A) on this issue has no legal legs to

stand on. We, therefore, vacate the impugned order to this extent

and restore the position on Management fee as was prevalent as per

the assessment order on this score.

benefit by the ld. CIT(A) to the assessee in determining the ALP.

material on record. Second proviso to section 92C(2) provides that

if the variation between the ALP and the price at which the

international transaction has actually been undertaken does not

exceed the specified margin, which at the material time was 5%,

then the price at which the international transaction has actually

been undertaken shall be deemed to be the ALP. The effect of this

proviso is that so long as the difference between the ALP as

determined by applying one of the specified methods and the price

at which the international transaction was undertaken is within the

11 ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

prescribed percentage, no transfer pricing adjustment can be made.

This proviso was substituted by the Finance (No.2) Act, 2009

w.e.f. 01-10-2009. Explanation to sub-section (2) of section 92C

has clarified : “that the provisions of the second proviso shall also

be applicable to all assessment or reassessment proceedings pending before the Assessing Officer as on 1st October, 2009”.

Thus, it is overt that even for the assessment year under

consideration, namely, 2010-11, the benefit of the second proviso

would be available by virtue of the Explanation given at the end of

sub-section (2) of 92C. We, therefore, hold that the ld. CIT(A)

was justified in extending the benefit of +/-5% margin in

determining the ALP of the international transactions. This ground

of the Revenue fails.

direction of the ld. CIT(A) for exclusion of additional companies

selected by the TPO from the list of comparables, which as per the

Revenue, are comparable.

determine the ALP of the international transactions recorded by the

assessee. He tinkered with the list of comparables drawn by the

12 ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

assessee and introduced certain fresh comparables. The AO made

the addition accordingly, which was challenged by the assessee

before the ld. CIT(A). The ld. first appellate authority directed to

exclude certain fresh companies from the list of comparables,

which as per the Revenue are functionally comparable.

companies directed to be excluded by the ld. first appellate

authority, against which the Revenue has come up in appeal

before the Tribunal, are included, its profit margin would be within

the permissible range of +/-5%, if forex gain is treated as an item

of operating nature. The ld. DR did not dispute this position. In

view of the rival but common submissions, though we technically

accept the ground of the Revenue, but it would not lead to increase

in the total income by reason of any transfer pricing addition.

above extent and that of the Revenue is partly dismissed on merits

and partly having become academic.

13 ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

matter to the file of AO/TPO for a fresh determination of the ALP

of the international transaction of Trading segment in conformity

with the foregoing discussion.

Order pronounced in the Open Court on 07th June, 2019.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 07th June, 2019 सतीश आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत

अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr.CIT-1, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “C” / DR ‘C’, ITAT, Pune; गाड� फाईल / Guard file. / True copy // 6.

आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार

// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA Nos.43 & 100/PUN/2017 INA Bearings India Pvt. Ltd.

Date 1. Draft dictated on 07-06-2019 Sr.PS 2. Draft placed before author 07-06-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *