Tribunal decision on forex loss as operating cost and working capital adjustment

The tribunal held that foreign exchange fluctuation loss is an operating cost, not an extraordinary item, and should be included in operating costs. It allowed a working capital adjustment, emphasizing that rightful dues should not be denied due to technicalities. The deletion of addition on account of forex loss was upheld, as it was considered contingent. Additionally, the deletion of the addition under Section 68 of the Income Tax Act was affirmed, as the credits were advances adjusted against invoices. The tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal.

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Issues Involved:
1. Treatment of foreign exchange fluctuation loss as operating cost.
2. Denial of working capital adjustment.
3. Deletion of addition on account of forex loss.
4. Deletion of addition under Section 68 of the Income Tax Act.

Detailed Analysis:

1. Treatment of Foreign Exchange Fluctuation Loss as Operating Cost:
The primary issue is whether the foreign exchange fluctuation loss should be considered as an operating cost. The assessee, engaged in rendering services and marketing of separators and decanters, argued that the forex loss of Rs. 50.04 lac should be treated as a non-operating expense and excluded from operating costs. The Transfer Pricing Officer (TPO) disagreed, including it as part of operating costs, reducing the operating profit margin to 1.42%, leading to a transfer pricing adjustment of Rs. 53.55 lac. The CIT(A) upheld this view, increasing the adjustment to Rs. 84.15 lac.

The tribunal held that forex gain or loss is inherently part of the price of import or export transactions, referencing the Special Bench decision in ACIT vs. Prakash I. Shah and the Supreme Court decision in Sutlej Cotton Mills Ltd. vs. CIT. It concluded that forex loss is an operating cost as it is a direct outcome of purchase transactions. The argument that forex loss due to an extraordinary increase in Euro rates should be excluded was rejected, as forex loss is a recurring and inherent part of business operations, not an extraordinary item.

2. Denial of Working Capital Adjustment:
The assessee requested a working capital adjustment, which was not initially claimed before the TPO but raised before the CIT(A). The CIT(A) refused to admit this additional ground. The tribunal noted that the assessment year 2003-04 was the second year of transfer pricing provisions, and the rightful due should not be denied due to technicalities. Citing decisions in Agilent Technologies International Pvt. Ltd. vs. DCIT and Mercer Consulting (India) Pvt. Ltd. vs. DCIT, the tribunal remanded the matter to the AO/TPO for verification and allowance of the working capital adjustment if applicable.

3. Deletion of Addition on Account of Forex Loss:
The AO disallowed Rs. 18.96 lac of the claimed Rs. 31.64 lac forex loss, considering it contingent as it related to unliquidated foreign trade liability. The CIT(A) deleted this addition. The tribunal upheld the deletion, referencing the Supreme Court judgment in Sutlej Cotton Mills Ltd. and the Special Bench decision in Oil and Natural Gas Corpn. Ltd. vs. DCIT, which permit such claims.

4. Deletion of Addition under Section 68 of the Income Tax Act:
The AO added Rs. 15,75,430/- under Section 68 due to lack of confirmations for sundry creditors. The CIT(A) deleted the addition after considering additional evidence that the AO did not refute. The tribunal noted that the credits from Pioneer Agro Exports Ltd. and Spic Pharmaceutical Division were advances received in earlier financial years and adjusted against invoices, thus not attracting Section 68. The tribunal upheld the deletion of these additions.

Conclusion:
The tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal. The order was pronounced on 18.07.2014.

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