2017 (8) TMI 1700 - AT - Income Tax

TP Adjustment - customs duty adjustment while computing Arm s Length Price (ALP) - HELD THAT - As similar issue came for consideration before this Tribunal in assessee s own case 2017 (1) TMI 1690 - ITAT CHENNAI direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP. Non-granting of working capital adjustment while computing the ALP - HELD THAT - As the similar issue came for consideration before this Tribunal in assessee s own case 2017 (1) TMI 1690 - ITAT CHENNAI there is necessity for working capital adjustment and accordingly we remit the issue to the file of AO to consider the material for fresh consideration. Treating foreign exchange loss suffered by the assessee as operating expense - Whether TPO erred in treating the entire foreign exchange loss suffered by the assessee as operating expense? - HELD THAT - As in the present case as rightly pointed out by the ld.D.R that earlier year the assessee claimed foreign exchange loss as operating expenditure. This year assessee has shifted its stand and claimed it as non operating expenditure. There is no consistency in its approach and also no reason has been given for such a change. Being so in our opinion foreign exchange loss is to be treated as operating nature only. Hence this ground is dismissed.

Summary

Issues Involved:
1. Customs duty adjustment while computing Arm’s Length Price (ALP)
2. Non-granting of working capital adjustment while computing the ALP
3. Treating foreign exchange loss as operating expense

Issue-wise Detailed Analysis:

1. Customs Duty Adjustment while Computing Arm’s Length Price (ALP):
The assessee argued that customs duty paid on imported raw materials should be adjusted while determining the ALP. The Tribunal referred to its previous decision in the assessee's own case for the assessment year 2011-12, where it was held that suitable adjustments should be made for customs duty while determining the ALP. The Tribunal relied on several precedents, including Skoda Auto India (P) Ltd. v. ACIT and Toyota Kirloskar Motors Pvt. Ltd. v. ACIT, to support the view that adjustments for customs duty are permissible. The Tribunal directed the Assessing Officer (AO) to provide suitable adjustments against the customs duty component while determining the ALP. Consequently, the issue was remitted to the AO for fresh consideration based on the Tribunal's directions.

2. Non-granting of Working Capital Adjustment while Computing the ALP:
The assessee contended that the AO/DRP erred in not providing working capital adjustments while determining the net profit margin. The Tribunal referred to its decision in the assessee's own case for the assessment year 2011-12, where it was directed that working capital adjustments should be considered. The Tribunal noted that the assessee had demonstrated the need for working capital adjustments based on the financial statements and other material on record. Therefore, the Tribunal remitted the issue to the AO for fresh consideration, directing the AO to consider the material provided by the assessee for making the necessary adjustments.

3. Treating Foreign Exchange Loss as Operating Expense:
The assessee argued that the TPO erred in treating foreign exchange loss as an operating expense without issuing a show-cause notice, which violated the principles of natural justice. The Tribunal noted that the TPO had treated the entire foreign exchange loss as an operating expense without providing an opportunity for the assessee to submit details. The Tribunal also observed that the assessee had been inconsistent in its claims regarding foreign exchange losses and gains in different assessment years. The Tribunal referred to the decision of the ITAT, Chennai in the case of Deputy Commissioner of Income-tax v. Infac India (P.) Ltd., which held that profits or losses arising from foreign exchange fluctuations should be considered while determining the operating cost in transfer pricing matters. The Tribunal upheld the TPO's treatment of foreign exchange loss as an operating expense, noting the inconsistency in the assessee's approach and the lack of a clear explanation for the change in its stance. Consequently, this ground was dismissed.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for fresh consideration on the issues of customs duty adjustment and working capital adjustment, while the treatment of foreign exchange loss as an operating expense was upheld.