TDK India Pvt. Ltd. Vs DCIT (ITAT Kolkata)
Conclusion: The issue of ₹5.11 crore forex fluctuation loss on the settlement of External Commercial Borrowings (ECB) was restored back to AO for re-examination as adjustment could not be made for the comparables due to non-availability of reliable data, the foreign currency gain should be excluded from operating income/expense of the assessee as well as that of the comparables while calculating the PLI for determining the Arm’s length price in order to ensure a consistent and reliable comparison.
Held: Assessee-company had incurred a forex fluctuation loss of ₹12,77,92,261 during the relevant assessment year 2017-18. This loss arose from the settlement of ECB and related contracts through conversion into equity shares. The tax audit report classified it as capital expenditure. Out of this, ₹7,66,75,357 was linked to imported assets and was disallowed in the total income computation, then added to the block of assets under Section 43A. The remaining ₹5,11,16,904 was a realized loss on ECB used for purchasing capital goods domestically and was reported for disallowance in the tax audit report under earlier tax provisions. After the retrospective introduction of Section 43AA through the Finance Act, 2018, assessee claimed ₹5,11,16,904 in the revised return. The ECB purpose was declared to the RBI for both imported and locally sourced capital goods. However, the claim was disallowed under Section 143(1) due to inconsistencies between the tax audit report and the return of income. Later, in the assessment under Section 143(3), the AO disallowed the claim in the draft order without giving the assessee an opportunity to explain. Dispute Resolution Panel (DRP) mistakenly treated the issue as a transfer pricing matter instead of a corporate tax issue. It directed AO to classify foreign currency gains as operating if linked to sales and exchange fluctuation risk was borne by the assessee. If reliable data for comparables were unavailable, the gains were to be excluded from operating income. It also considered provisions for doubtful debts and advances as non-operating. Assessee filed a rectification application on March 11, 2022, but no order was passed. On appeal. It was held that adjustment could not be made for the comparables due to non-availability of reliable data, the foreign currency gain should be excluded from operating income/expense of the assessee as well as that of the comparables while calculating the PLI for determining the Arm’s length price in order to ensure a consistent and reliable comparison. It was also noted that assessee followed the mercantile system of accounting. Hence, provision for doubtful debt and advances were to be considered as non-operating in nature. Therefore, the issue needed re-examination and sent it back to AO for a fresh decision based on the facts and the law. It also directed that assessee be given a fair opportunity before the final decision.
