In a recent case it was held that the foreign exchange fluctuation loss shall be considered as a part of the Operating Cost. Facts of the case: The assessee is engaged in the business of rendering services and marketing of separators and decanters and spare parts related to separators and decanters. The assessee has two separate units for ‘Trading functions’ in Delhi and ‘Assembly functions’ located in Mumbai. Two transactions relating to ‘Trading business’ are not disputed as the TPO accepted such transactions at arm’s length price (ALP). Issue aroused in the international transaction of ‘Purchase of components of Plate Heat Exchanger and Braze Plate Heat Exchanger’ amounting to 4.96 crore under the ‘Assembly segment.    The assessee applied Transactional Net Margin Method (TNMM). He showed operating profit margin at 5.83% under this segment, as against the average profit margin at 6.55% of 14 independent comparables.  The assessee claimed that forex loss of 50.04 lakh under this segment was an item of non-operating expense. The same was, therefore, excluded from the operating costs. The TPO rejected the assessee’s contention. He was of the opinion that foreign exchange loss was required to be considered as part of operating cost. Thus, he reduced the operating margin profit with such loss and determined the new profit margin of 1.42% and transfer pricing adjustment of `53.55 lakh on the basis of difference between the operating profit margin of the assessee and that of the comparables. The assessee went for appeal to the CIT (A) contending that Euro had shot up like anything from the preceding year’s closing of `42.94 to `51.91 as on March 31, 2003. Since such fluctuation was not anticipated, the same was claimed to be in the nature of extra-ordinary item eligible for exclusion from operating costs. The CIT (A) re-examined and excluded the case of HMT Bearings Ltd. for the reasons given in the impugned order. CIT(A) finally computed the OP/sales of the remaining comparables at an average of 5.72%. He did not accept the assessee’s contention for treating forex loss as non-operating. He increased the TP adjustment to 84.15 lakh as against 53.55 lakh made by the AO. He applied 5.72% on total sales to work out the above addition. On this, assessee applied for rectification u/s 154 contending firstly, that TP adjustment was not to be made with 5.72%, but with the difference between the assessee’s profit margin and that of comparables and, secondly, even the calculation by the application of the rate of 5.72% was incorrect, as the resultant figure came at `64.54 lakh instead of ` 84.54 lakh. The. CIT(A) agreed with the assessee for the calculation mistake, but did not accept that the point of differential rate between 5.72% and 1.40% for the purpose of TP adjustment. The assessee was not satisfied on treatment of forex loss as operating expense. So, assessee appealed to the Tribunal. It was held that: Tribunal stated that the forex gain or loss is the difference between the price at which an import or export transaction was recorded in the books of account and the amount actually paid or received at the rate of foreign exchange prevailing at the time of payment. Any gain or loss arising out of change in foreign currency rate in respect of transaction for import or export of goods shall be the part of the price of import or the value of export. In a case, Supreme Court held that profit or loss on appreciation or depreciation  in the value of foreign currency held, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee as revenue or as a trading asset. From the above, it was clear that forex gain or loss from a trading transaction is of revenue nature and also forms a part of the price of import or value of export transaction. The business of ‘Assembly’ done by the assessee was not possible without purchasing forex and forex gain in relation to such purchase, was an item of operating cost. The issue of discussion in inclusion of foreign exchange loss in the operating cost was that the fluctuation in Euro was very high than expected. It was claimed that it was in the nature of extra-ordinary item and hence liable to be expelled from operating costs. It was to be noted that extra-ordinary item is normally distinct and unusual from the ordinary activity of the business that is carried on by the assessee. While the amount of forex loss cannot be considered as unusual from the ordinary activity of the purchase carried on by the assessee throughout the year. Hence, such transaction cannot be said as an extra- ordinary item. In the view of the above argument, assessee contended that if forex loss was to be considered as part of operating cost, then, the forex loss in relation to the international transaction undertaken during the year alone should be considered. There was four component of forex loss viz. on account of purchases made during the year; on account of earlier year’s purchases finally paid in this year; on account of translation difference of outstanding amounts at the end of the year; on account of purchase transactions with unrelated parties. He said that only the first component, being the forex loss in respect of international transactions undertaken during the year should be considered. This contention was rejected as the companies shall follow only mercantile system instead of TNMM process. It was argued that as per Rule 10 (T) (j) foreign currency fluctuations cannot be included in the operating expense. Against this it was cleared that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment year under consideration. In the view of above arguments, ITAT applauded the CIT (A)’s decision and thus held that forex loss is not out of the purview of operating cost. _____________________________________________________________________________________________________