FRESENIUS KABI INDIA PRIVATE LIMITED,PUNE vs. ASSISTANT COMMISSIONER OF INCOME TAX,

आदेश / ORDER

PER R.S. SYAL, VP :

These two cross appeals, viz., one by the assessee and the other by the

Revenue are directed against the order passed by Ld. CIT (Appeals)-13, Pune

on 12.08.2016 in relation to the assessment year 2011-12.

Net Margin Method (TNMM) in respect of its international transaction of

trading activity as against its selection of Resale Price Method (RPM) as the

most appropriate method.

of Fresenius Kabi AG Germany. It is engaged in the field of Infusion Therapy

and Clinical Nutrition. It is also active in the field of Transfusion Technology, supplying Blood processing systems as well as Blood bags and filters. The

assessee filed its Audit report in Form no. 3CEB declaring eight international

transactions. The Assessing Officer (AO) referred the matter to Transfer

Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international transactions. The assessee applied the TNMM in respect of three

international transactions; Comparable uncontrolled Price (CUP) method in

respect of one international transaction; and the RPM in respect of one

international transaction, as the most appropriate methods for demonstrating

them to be at ALP. There is no dispute on the determination of the ALP of any of the international transactions except the transaction reported at Sr. No. 2,

that is, `Import of Finished goods’ with transacted value of Rs.58,12,31,464/-

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. The assessee applied the RPM to demonstrate that this international

transaction was at ALP. The TPO observed that the assessee under this

transaction was engaged in the `Distribution activity’. The assessee imported

finished goods under this transaction from its Associated enterprises (AEs)

and resold the same to non-AEs without any value addition. The TPO rejected

the assessee’s contention for the application of the RPM as most appropriate

method and resorted to the TNMM for benchmarking the international

transaction. As against the assessee’s list of certain comparables, the TPO

finally selected nine companies as comparable by making certain inclusions

/exclusions in/from the assessee’s list. He worked out average Profit Level

Indicator (PLI) of such finally selected comparable companies at 6.97% and

proposed the amount of transfer pricing adjustment at Rs.12,28,68,248/-.

The Assessing Officer passed the final assessment order giving effect to the

recommendation of the TPO. The assessee approached the ld. CIT(Appeals),

inter alia, on the selection of the TNMM as most appropriate method. The ld.

first appellate authority approved the view of the authorities below by relying

on the order passed by his predecessor in the case of the assessee itself for

the immediately preceding assessment year. The assessee is aggrieved by the

application of the TNMM as most appropriate method.

record. It is seen that ld. CIT(Appeals) relied on the order passed by his

predecessor for a preceding assessment year for applying the TNMM as most

appropriate method in relation to international transaction of distribution

activities depicted by the assessee as `Import of finished goods’. Such order of

the ld. CIT(Appeals) came up for consideration before the Pune bench of the

Tribunal. We have gone through the said order of the Tribunal dated

22.09.2007 in relation to the assessment years 2009-10, 2010-11, a copy of

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which is placed in the paper book. The Tribunal has approved the application

of the RPM as most appropriate method. In doing so, it also relied on the

order passed by it for the assessment year 2008-09. The Ld. DR failed to

point out any distinguishing feature in the international transaction under

dispute for the year under consideration vis-à-vis the preceding years.

Respectfully following the precedents, we hold the RPM to be the most

appropriate method in respect of distribution activities undertaken by the

assessee under the international transaction of `Import of finished goods’.

Accordingly, the impugned order is overturned to this extent.

functional adjustment relating to foreign exchange (forex) loss. The assessee

treated forex loss of the comparables as non-operational and computed their

PLI accordingly. The TPO while determining the ALP of the international

transaction did not concur with the assessee that the foreign exchange loss

should be taken as an item of non-operating nature. The ld. CIT(A) approved

the TPO’s stand that such foreign exchange loss should be taken as operating

in nature, against which the assessee has come up before the Tribunal.

material on record. The Special Bench of the Tribunal in ACIT Vs Prakash I.

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 a currency of the country where such goods are sold and

subsequently when the amount is realized in that foreign currency and then

5 ITA Nos. 2572 & 2573/PUN/2016 A.Y.2011-12

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 the sale proceeds.

SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that

foreign exchange fluctuation gain is part of operating profit of the company

and should be included in the operating revenue. Similar view has been taken

in Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO)

(Bangalore). The Mumbai Bench of the Tribunal in S. Narendra Vs Addtl. CIT

(2013) 32 taxman.com 196 has also laid down to this extent.

provides for taking foreign exchange gain or loss as non-operating. However

it is relevant to note that such rules are not applicable to the assessment year

under consideration. The Hon’ble Delhi High Court in Pr. CIT VS. Cashedge

India Pvt. Ltd., vide its judgment dated 4.5.2016 in ITA 279/2016, has held

that : `So far as the question of fluctuation of foreign exchange was

concerned, the ITAT ruled that the relevant provision, i.e. `Safe Harbour

Rules’ had not been notified for the concerned assessment year and were,

therefore, inapplicable’. Thus the Hon’ble High Court did not disturb the

operating nature of forex gain/loss as held by the tribunal. In view of the

foregoing discussion, we are of the considered opinion that the amount of

6 ITA Nos. 2572 & 2573/PUN/2016 A.Y.2011-12

foreign exchange gain/loss arising out of revenue 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,

dismissed.

adjustment. The assessee did not raise such an issue before the TPO. It was

only before the ld. CIT(Appeals) that the assessee requested for granting

adjustment on account of import duty paid because it incurred higher import

duty in comparison with the comparable companies. The ld. CIT(A) rejected

the assessee’s contention by relying on the order passed by Delhi High Court

in the case of Sony India (P) Ltd. Vs. DCIT (2008) 118 TTJ (Del) 865. Now the

assessee is aggrieved by the rejection of such a claim.

record, we find that the contention of the assessee for allowing separate

adjustment in respect of higher payment of import duty is not tenable.

as envisaged under Rule 10B(1)(b) embraces cumulative effect of all the items

of income and expenses leading to the determination of the amount of gross

profit. Ordinarily, there can be no question of considering each item of such

expenses or revenue in isolation de hors the other corresponding expenses or

items of revenue to claim adjustment on the ground of any particular item of

expenditure or income of the assessee on the higher side seen individually or

as a percentage of other operating expense/incomes in comparison with its

comparables. The reason is obvious that when we consider the gross profit

margin, the effect of all the individual higher or lower items of expenses or

incomes gets subsumed in the overall gross profit margin, ruling out the need

7 ITA Nos. 2572 & 2573/PUN/2016 A.Y.2011-12

for any separate adjustment on comparison of one by one items resulting into

the determination of the gross profit margin under the RPM or the operating

profit under the TNMM. A company may have taken a building on rent for

carrying on its business, in which case, it will pay rent which will find its

place in the operating costs. For the purposes of making comparison, one

cannot contend that the payment of rent by one enterprise in comparison

with a non-payment of rent by another should be neutralized by giving proper

adjustment from the operating profit of the comparable. The manifest reason

is that the other enterprise may have its own office premises and in that case,

the amount of depreciation on such premises will also form part of its

operating costs. When we consider the operating profit of the first enterprise

which is paying rent and then compare it with the second enterprise which is

not paying any rent but is claiming depreciation on its own premises, the

overall effect of rent in one case gets counterbalanced with depreciation on

premises of the other. Similar is the position of a company having purchased

new assets charging higher amount of depreciation allowance in its books of

accounts vis-a-vis another comparable company using old assets with lower

amount of depreciation. No adjustment on account of difference in the

amount of depreciation of two companies is called for when the operating

profits are determined because in the case of a company having purchased

new asset, there will be lower repair cost and vice versa. The effect of all the

individual items of direct or operating expenses and incomes culminates into

the overall gross or operating profit margin. That is why, the legislature has

provided for comparing the ratio of ‘operating profit margin’ to a similar base

of the assessee with that of its comparables under the TNMM, thereby

dispensing with the need for making any adjustment on account of higher or

lower amount of individual items of expenses and incomes. Similar view has

been taken by the Delhi Bench of the Tribunal in Honda Motorcycle &

8 ITA Nos. 2572 & 2573/PUN/2016 A.Y.2011-12

Scooters India Pvt. Ltd. VS. ACIT in ITA No. 1379/Del/2011 vide its order

passed in the year 2015.

made out a case that it paid import duty in respect of 100% of its goods

purchased, whereas, the comparables incurred import duty only @ 2% of

their purchases. In our considered opinion the fact whether the import duty

has been paid or not or paid to lower extent by the comparables cannot have

any effect over computation of gross profit margin of the comparables. If the

assessee has made costly purchases, it will naturally earn more revenue from

the sales as well. One can compare apple with apple and not with orange. If

purchase of goods is of higher quality and costly, it is but natural that the

sale will also be correspondingly at a higher price. It is impermissible to

claim that the amount of higher import duty paid by the assessee should be

adjusted in isolation without having effect on the higher sales price realized

from the sale of such imported goods. Once we take figure of gross profit, it

takes into account not only the higher debit side of cost of purchases but also

the higher credit side of the revenue earned from sales. No adjustment on

account of separate items resulting into the computation of gross profit can

be permitted. In our considered opinion, the stand taken by the assessee for

allowing separate adjustment in respect of higher custom duty paid by it has

been rightly rejected in the first appeal.

Roselabs Limited from its list of comparables and inclusion by the TPO of

Mankind Pharma Limited as a comparable company. The ld. AR submitted

that TPO was not justified in making such an inclusion/exclusion. It was

submitted that similar issue was raised in the preceding year and the

9 ITA Nos. 2572 & 2573/PUN/2016 A.Y.2011-12

Tribunal was pleased to remit the question of comparability of Mankind

Pharma Limited to the AO/TPO for fresh determination. It was, therefore,

prayed that similar treatment may be given for the instant year as well. The

ld. DR did not oppose the suggestion put forth on behalf of the assessee.

Tribunal in its order for the preceding year in the case of the assessee itself,

we set aside inclusion/exclusion of the two companies mentioned above and

remit the matter to the file of Assessing Officer/TPO for examining their

comparability or otherwise afresh after allowing a reasonable opportunity of

hearing to the assessee.

India Limited as comparable. The TPO included the same in the list of

comparable, which was excluded by the ld. CIT(Appeals).

consideration by the Tribunal in the preceding year as well and the Tribunal

remitted such issue back to the file of Assessing Officer/ TPO for fresh

determination. Following the same view, we set aside the impugned order on

this issue and direct the Assessing Officer/ TPO to consider the comparability

or otherwise of this company afresh after giving opportunity of hearing to the

assessee.

against granting benefit ±5% margin to the assessee in determining the ALP.

standard deduction in view of the amendment to Section 92C(2A) by the

10 ITA Nos. 2572 & 2573/PUN/2016 A.Y.2011-12

Finance Act, 2012 with retrospective effect. In view of legislative amendment carried out retrospectively, the assessee cannot claim any standard deduction. We, therefore, hold that ld. CIT(A) was justified in giving benefit of ±5% on individual basis without any standard deduction.

Order pronounced on 2nd day of November, 2018.

Sd/- Sd/- (VIKAS AWASTHY) (R.S.SYAL) �याियक सद�य �याियक सद�य /JUDICIAL MEMBER उपा�य� उपा�य�/ VICE PRESIDENT �याियक �याियक सद�य सद�य उपा�य� उपा�य� पुणे / Pune; �दनांक / Dated : 2nd November, 2018 SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT (Appeals)-13, Pune. 4. The Pr. CIT-1, Pune. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” ब�च, 5. पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 6.

// True Copy // आदेशानुसार / BY ORDER,

�नजी स�चव / Private Secretary आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune.*