Tribunal directs adjustments for customs duty & working capital, upholds foreign exchange loss treatment.

The Tribunal directed the Assessing Officer to make suitable adjustments for customs duty while determining the Arm's Length Price (ALP) and remitted the issue for fresh consideration. Working capital adjustments were also directed to be considered based on the assessee's demonstration of the need. However, the Tribunal upheld the treatment of foreign exchange loss as an operating expense, citing inconsistency in the assessee's claims and lack of clarity in explanations. The appeal was partly allowed for statistical purposes, with specific directions for fresh consideration on customs duty and working capital adjustments.

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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.

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