Poclain Hydraulics Pvt. Ltd. Vs DCIT (ITAT Chennai)
The Income Tax Appellate Tribunal (ITAT), Chennai, partly allowed the assessee’s appeal for statistical purposes in a transfer pricing dispute relating to Assessment Year 2021-22. The assessee, a 100% export-oriented company engaged in manufacturing hydraulic motors and motor components, had declared income of ₹12.24 crore. During scrutiny, the Assessing Officer (AO) referred the international transactions to the Transfer Pricing Officer (TPO), who initially proposed an upward transfer pricing adjustment of ₹12.93 crore, later revised to ₹8.95 crore. The AO also made corporate disallowances, and the Dispute Resolution Panel (DRP) substantially upheld the transfer pricing adjustment while granting marginal relief on other issues. The assessee appealed before the Tribunal.
Before the Tribunal, the assessee submitted that if two issues were decided in its favour—treatment of foreign exchange (forex) loss and exclusion of ZF Steering Gear (India) Limited as a comparable—the remaining transfer pricing grounds would become academic. The assessee did not press the adjustment relating to interest on receivables due to the small amount involved.
The Tribunal first considered the treatment of forex loss. The assessee had consistently treated forex gains and losses as non-operating in earlier and subsequent assessment years, and this treatment had been accepted by the Revenue. The assessee also argued that part of the forex loss related to capital expenditure and External Commercial Borrowings (ECB), which did not affect the pricing of international transactions or operating margins. The Tribunal examined the break-up of the forex loss and noted that certain losses arose from ECBs and capital transactions. Referring to the OECD Transfer Pricing Guidelines, the Tribunal observed that foreign exchange gains or losses ordinarily assume the character of the underlying transaction. Where fluctuations arise from ordinary business operations such as export sales, trade receivables or import purchases, they may be regarded as operating in nature. However, fluctuations arising from financing activities, external commercial borrowings, capital expenditure, term loans, investments or similar capital account transactions relate to treasury or funding functions and do not reflect operational profitability. Considering the facts of the case and the principle of consistency, the Tribunal held that the forex loss relating to ECB and capital expenditure should be treated as non-operating and excluded while computing the Profit Level Indicator (PLI). The AO/TPO was directed to recompute the PLI accordingly.
