The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has held that the foreign exchange loss can be treated as operating in nature when the loss was in connection with debtors and creditors which bear the operating margin and tax deduction not allowable.
The assessee company M/s.Eversendai Construction Private Limited (“M/s.ECPL”) is a subsidiary of Eversendai Constructions (s) Pte Ltd, Singapore. The company is engaged in the business of engineering, design, detailing, steel fabrication, and development of residential buildings and commercial complexes.
The TPO noticed that the assessee has adopted TNMM as the most appropriate method for both segments i.e. EPC & EDS. The TPO has accepted international transactions with AE to the EDS segment at ALP. However, in respect of the EPC segment, the TPO has conducted a fresh TP study and has rejected three comparables selected by the assessee and worked out an average PLI of 13.82% and then, compared with the PLI of the assessee at 8.96% and suggested TP adjustment of Rs.85,15,716/- to the international transaction of the assessee with its use.
The AO had also made additions towards the disallowance of employee contribution to PF & ESI for belated remittances under respective Acts and also disallowed excess depreciation claimed on the printer, UPS and port switch, etc.
The DRP vide their order passed u/s.144C(5) of the Act, dated 05.05.2017 rejected the objection filed by the assessee and upheld the TP adjustment proposed by the TPO as well as other Corporate Tax additions made by the AO.
In pursuant to the DRP directions, the AO has passed the final assessment order u/s.143(3) r.w.s.144C(13) of the Act, on 30.06.2017 and determined the total income of Rs.1,80,55,800/- by making additions towards TP adjustment, excess depreciation on printer, UPS & port switch, and disallowance of reimbursement of expenses.
The assessee while computing PLI has excluded foreign exchange loss on the ground that it is non-operating in nature and does not have any effect on the operating margin of the assessee.
The TPO had included foreign exchange loss as operating in nature on the ground that the assessee has mainly incurred foreign exchange loss in connection with debtors and creditors which is having a bearing on the operating margin of the assessee.
A Coram consisting of Shri V. Durga Rao, Judicial Member and Shri G Manjunatha, Accountant Member viewed that the assessee has incurred foreign exchange loss on account of creditors for purchase and debtors for sales and services.
The said loss is having bearing on the operating margin of the assessee and upheld the reason of the TPO/DRP to include foreign exchange loss as operating in nature for computing PLI. The assessee’s appeal on this ground was dismissed.
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