TASTY BITE EATABLES LTD.,PUNE vs. DEPUTY COMMSSIONER OF INCOME-TAX,

आदेश / ORDER

PER VIKAS AWASTHY, JM

This appeal by the assessee is directed against the assessment order dated 17.01.2014 passed u/s.143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

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assessee-company is engaged in the business of manufacturing and sale of

Ready -to-serve (in short ‘RTS’) food products. The assessee–company is a

part of Preferred Brands International Inc., USA. During the period relevant

to assessment year under appeal, the assessee entered into various

international transactions with its Associated Enterprises (AEs) i.e.

Preferred Brands International Inc. USA and Preferred Brands Australia

Pty. Ltd. The details of international transactions undertaken by the

assessee with its AEs during the relevant period in respect of RTS food

segment are as under:

Sr. Description of Amounts (Rs.) Name of the No. transaction AE 1. Sale of ready to serve 30,07,10,326 Preferred foods Brands International Inc. USA 5,37,35,302 Preferred Brands Australia Pty Ltd., Australia Total 35,44,45,628

The assessee applied Transactional Net Margin Method (TNMM) to

benchmark its international transactions with respect to RTS food segment

and the same was duly accepted by the Transfer Pricing Officer (TPO). The

assessee selected ten comparables having arithmetic mean of 5.87% in its

TP study report to determine the arm’s length price (ALP) of the RTS food

segment transactions. Profit Level Indicator (PLI) of the assessee was

computed at 15.73%. The TPO applied export filter of 75% and rejected all

the companies selected by the assessee as comparables except ADF Foods

Ltd. The TPO finally made upward adjustment of Rs.3,41,94,575/- in the

international transactions with its AEs during financial year 2008-09.

Based on the order of TPO dated 17.09.2012, the Assessing Officer passed

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draft assessment order on 13.03.2013. Aggrieved with the adjustment

made by the TPO, the assessee filed objections before the Dispute

Resolution Panel (DRP). The DRP vide directions dated 18.12.2013 rejected

the objections of the assessee and confirmed the addition. The Assessing

Officer in line with the directions of DRP passed final assessment order

making addition of Rs. 3.41 Crores.

Tribunal by raising following grounds of appeal:

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TP study, assessee excluded non-operating expenses on account of foreign

exchange loss from total cost to arrive at the Operating Cost. However,

TPO took a view that foreign exchange loss is operating expenses and

included the said amount while arriving at operating margin. The DRP

upheld the findings of TPO by observing that assessee has not made any

submissions with respect to treatment to be given to foreign exchange loss.

It is an admitted fact that in preceding assessment years, the assessee had

treated foreign exchange loss as operating in nature. However, in the

assessment year under appeal, the assessee treated foreign exchange loss

as ‘non-operating expenditure’ in line with various decisions of the

Tribunal. To support his contention, the ld. AR placed reliance on the

following decisions:

i) BNY Mellon International Operating (India) Pvt. Ltd Vs. ACIT, in ITA No.2380/PN/2012, for assessment year 2008-09, decided on 10.10.2014. ii) M/s. DHL Express (India) Private Limited Vs. ACIT, in ITA No.7360/Mum/2010, for assessment year 2006-07, decided on 27.04.2011.

4.1 The ld. AR pointed out that the Tribunal in the above mentioned

decisions has held foreign exchange gain/loss as ‘non-operating

expenditure’. The ld. AR further submitted that in the subsequent

assessment years i.e. assessment year 2012-13 and 2013-14, the DRP

accepted foreign currency fluctuations are to be treated as non-operating

item.

adjustments were made by the Revenue in assessment year 2008-09. The

assessee carried the matter in appeal in ITA No.335/PN/2013 before the

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Tribunal. The Tribunal vide order dated 16.03.2016 accepted the

contentions of assessee and held that transfer pricing adjustment has to be

made with respect to international transaction only and not on entire sales

of RTS segment. The Tribunal finally remitted the issue back to the file of

Assessing Officer/ TPO with a direction to re-compute the adjustment. The

ld. AR for the assessee submitted that similar directions may be given to

Assessing Officer/TPO in the assessment year under appeal, as well.

selected ten comparables. The TPO rejected all the comparables selected by

the assessee except ADF Foods Ltd. by applying export turnover filter of

75%. The TPO had applied this filter for the first time in assessment year

2009-10. In earlier years and in the subsequent assessment years, no such

filter was applied. The ld. AR pointed that in assessee’s own case for

assessment years 2011-12, 2012-13, 2013-14 & 2014-15, the DRP

accepted two companies i.e. M/s. Haldiram Bhujiawala Ltd. and M/s.

Capital Foods Ltd. as functionally comparables. However, in the

assessment year under appeal, both the companies have been rejected by

applying export turnover filter. The only company, on the basis of which

TPO has determined ALP, is ADF Foods Ltd. The ld. AR prayed that TPO

may be directed to consider at least Haldiram Bhujiawala Ltd. and Capital

Foods Ltd in the list of comparables for determining ALP. The ld. AR placed

reliance on the following decisions to contend that the Tribunal accepted

comparable companies that were selected by the DRP/TPO in the

subsequent years:

i) Bobst India Private Limited Vs. DCIT, in ITA No. 1380/PN/2010, for assessment year 2006-07 decided on 29.01.2018. ii) Jacobs Engineering India Private Limited Vs. DCIT, in ITA No.7194/Mum/2012 for assessment year 2008-09, decided on 17.05.2017.

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iii) Tamasek Holdings Advisors India P. Ltd. Vs. DCIT, in ITA No.776/Mum/2015, for assessment year 2010-11, decided on 25.02.2016.

computing operating margin of ADF Foods Ltd. The correct operating

margin of ADF Foods Ltd. for assessment year 2009-10 is 10.31%; whereas

TPO has computed the same as 13.83%. While computing margin, TPO has

erred in not excluding sale of import license of Rs.258.05 lacs from the

segment results though he has excluded the same from segment revenue.

The assessee filed rectification application in this regard; however, the TPO

has disregarded the same. The DRP in its directions dated 18.12.2013, has

directed the TPO to recheck the material on record and remove the

arithmetical error. However, TPO vide order dated 17.01.2014 erroneously

considering the PLI as 13.83% instead of 10.31%.

variation in accordance with the proviso to section 92C(2) of the Act should

be granted to the assessee. The TPO has failed to grant the benefit of ±5%

variation despite the directions of DRP.

vehemently defended the assessment order and the directions of DRP in

confirming additions proposed by the TPO. Controverting the submissions

of assessee, the ld. DR submitted that assessee in the past has considered

foreign exchange fluctuations as ‘operating in nature’. It is for the first

time in assessment year under appeal; the assessee changed its method of

accounting and has treated foreign exchange fluctuations as ‘non-operating

in nature’. The assessee could not be allowed to change the method unless

assessee is able to show bona-fide reasons/intention. In support of his

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submissions, the ld. DR placed reliance on the decisions of Hon'ble

Bombay High Court in the case of Bajaj Auto Ltd. Vs. CIT in Income Tax

Reference No.192 of 1999 decided on 08.09.2016. The ld. DR further

referred to Schedule-13 of assessee’s P & L account for the Financial Year

ended on 31st March, 2007 to contend that assessee treated gain/loss on

exchange rate fluctuations as part of operating income.

9.1 In respect of ground Nos. 2 & 3, the ld. DR fairly admitted that

identical issue has been adjudicated by the Tribunal in assessee’s own case

in assessment year 2008-09.

9.2 In respect of ground No. 4, the ld. DR vehemently supporting the

order of DRP submitted that the TPO applied export turnover filter of 75%

and none of the companies selected by assessee could qualify the filter

except ADF Foods Ltd. Accordingly, the TPO selected ADF Foods Ltd. as

functionally comparable and determined ALP of the international

transaction of the assessee with its AEs.

sides and have perused the orders of Authorities below. We have also

considered the decisions on which both the sides have placed reliance in

support of their contentions.

DRP in not accepting gain/loss arising from foreign exchange fluctuations

as non-operating in nature. It is an undisputed fact that in the past

assessee has been treating foreign exchange fluctuation as operating

expenditure. However, in the assessment year under appeal, the assessee

shifted his stand and treated foreign exchange loss as non operating

expenses. The contention of assessee is that the change has been made in

8 ITA No.337 /PUN/2014 A.Y.2009-10

treating foreign exchange fluctuations as non operating expenditure in line

with various orders of the Tribunal. We find that the Co-ordinate Bench of

Tribunal in the case of BNY Mellon International Operations (India) Pvt.

Ltd. Vs. ACIT (supra.) held foreign exchange gain as non operating income.

Similar view has been expressed by Mumbai Bench of the Tribunal in the

case of M/s. DHL Express (India) Private Limited Vs. ACIT (supra.). It was

further pointed to the Bench that DRP in assessment years 2012-13 and

2013-14 has accepted the stand of assessee in treating foreign currency

fluctuation as non operating item. This fact has not been controverted by

the ld. DR. In so far as reason for accepting change in the method of

accounting is concerned, we are satisfied that the change has been made

by assessee for the bona-fide reasons. The assessee has changed the

method of accounting of foreign exchange fluctuations as non-operating

item in line with the judicial pronouncements. The assessee after the

change of method in assessment year 2009-10, has been regularly treating

foreign exchange fluctuations as non operating item. Therefore, objection

raised by the ld. DR against change of treatment given by assessee to

foreign exchange fluctuations in the past as operating and now shifting its

stand to treat the same as non operating item without any bona-fide

reason, is not sustainable. We are of consider view that the assessee has

changed method of treating foreign exchange fluctuation as non-operating

item for bona-fide reasons. Hence, ground No. 1 raised in appeal by

assessee is allowed.

entire RTS segment for calculation of PLI. The assessee has prayed for

restricting the adjustment on the basis of value of international

transactions only. It has been brought to our notice that identical grounds

were raised in the appeal for assessment year 2008-09. The Co-ordinate

9 ITA No.337 /PUN/2014 A.Y.2009-10

Bench of Tribunal in assessee’s own appeal in ITA No.335/PN/2013

(supra.) remitted the issue back to the file of Assessing Officer for re-

computation. The Tribunal in principle accepted that transfer pricing

adjustment has to be made with respect to international transaction only

and not on the entire sale of RTS segment. The relevant extract of the order

of Tribunal reads as under:

“21. The issue arising vide grounds of appeal No.2 and 3 is identical to the issue before the Tribunal in assessment year 2007-08 vide ground of appeal No. 3 and following the same parity of reasoning, we hold that transfer pricing adjustment has to be made with respect to international transaction only and not on the entire sales of RTS segment. However, since a verification exercise is required to be carried out, we remit this issue back to the file of Assessing Officer/TPO with a direction to re-compute the adjustment, if any, in line with directions given by the Tribunal in assessment year 2007-08. The Assessing Officer /TPO shall afford a reasonable opportunity of hearing to the assessee. The grounds of appeal No. 2 and 3 raised by the assessee are thus, allowed for statistical purposes.”

Thus, in view of the above decision of the Co-ordinate Bench, we

remit the issue back to the file of Assessing Officer/TPO to decide the issue

de-novo on similar lines. Accordingly, ground Nos. 2 & 3 raised in appeal

by the assessee are allowed for statistical purpose.

comparables by TPO by applying export turnover filter. The ld. AR

contended before us that export turnover filter of 75% has been applied by

the TPO for the first time in the assessment year under appeal. Neither the

filter was applied in earlier assessment years nor it is applied in the

subsequent assessment year. We observe that after applying export

turnover filter of 75%, out of total ten comparables selected by assessee in

TP study, nine comparables have been rejected by the TPO. The TPO has

not selected any other company as comparables while determining ALP.

The TPO determined ALP by considering ADF Foods Ltd. as only

comparable. The Assessing Officer in the first instance should not have

10 ITA No.337 /PUN/2014 A.Y.2009-10

applied a filter to select/reject comparables that was neither used in the

past nor in the subsequent years. ‘Rule of consistency’ demands that

uniform filters should be applied to bench mark the international

transactions, if there is no material difference in the facts of different

assessment years. Our this view is supported by the decision of

Chandigarh Bench of the Tribunal in the case of DSM Anti Injectives India

Ltd. Vs. DCIT reported as 145 ITD 454 (Chd.). The decision of the Tribunal

has been affirmed by the Hon'ble Punjab & Haryana High Court in appeal

filed by the Department reported as 233 Taxman 257 (P&H). The ld. AR

pointed that in the subsequent assessment years i.e. assessment years

2011-12, 2012-13 and 2013-14, the DRP has directed to include M/s.

Haldiram Bhujiawala Ltd. and M/s. Capital Foods Ltd. being functionally

comparable. Reliance has been placed on various cases by the assessee to

contend that the Tribunal accepted comparable companies that were

selected by the DRP/TPO in subsequent years. The Co-ordinate Bench of

the Tribunal in the case of Bobst India Private Limited Vs. DCIT (supra.)

directed the TPO to include a company in the list of comparables as the

said company was found to be comparable entity in the later assessment

year. The relevant extract of the findings of Tribunal reads as under:

“4.3 We are aware that every year is independent, but the decision taking in similar set of circumstances has strong persuasive value of other years. In A.Y.2009-10, the DRP has directed to take industrial machine segment of Stovec Industries Limited for comparability. There is nothing on record to suggest that there is functional difference in the case of Stovec Industrial Limited for the year under consideration i.e. A.Y. 2006-07 with that of A.Y. 2009-10, so the TPO is directed to take industrial machinery segment of Stovec Industries Limited for comparability. He has directed accordingly.”

Taking into consideration the un-rebutted facts and the decisions of

the Tribunal discussed above, we remit this issue back to the file of

Assessing Officer/TPO to consider M/s.Haldiram Bhujiawala Ltd. and

11 ITA No.337 /PUN/2014 A.Y.2009-10

M/s.Capital Foods Ltd. as comparables along with ADF Foods Ltd and

thereafter, determine ALP of the international transactions entered into by

assessee with its AEs. Accordingly, ground No. 4 raised in appeal by

assessee is allowed for statistical purpose.

computation of operating margin of ADF Foods Ltd. It has been pointed

that the correct operating margin of ADF Foods Ltd is 10.31%, whereas the

TPO computed the same as 13.83%. This issue requires verification of the

calculations. Accordingly, we remit this issue back to the file of Assessing

Officer/TPO to correctly compute the operating margin of the said company

before applying the same for determining ALP. Accordingly, ground No. 5

raised in appeal by assessee is allowed for statistical purpose.

benefit of ±5% variation. The Assessing Officer/TPO is directed to allow

benefit of ±5% tolerance to the assessee in accordance with law. Thus,

ground No. 6 raised in appeal by assessee is allowed.

interest u/s. 234B of the Act. The charging of interest u/s. 234B is

mandatory and consequential; hence, ground No.7 raised in appeal is

dismissed.

penalty proceedings u/s. 271(1)(c) of the Act. The challenge to penalty

proceedings at this stage is premature. Hence, ground No. 8 raised in

appeal is dismissed.

12 ITA No.337 /PUN/2014 A.Y.2009-10

Order pronounced on Monday, the 11th day of June, 2018

Sd/- Sd/- (अ�नल चतुव�द� /ANIL CHATURVEDI) (�वकास अव�थी /Vikas Awasthy) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER

पुणे / Pune; �दनांक / Dated : 11th June, 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 CIT- IT/TP, Pune. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” ब�च, 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.