Tribunal upholds working capital adjustment using availed credit period per OECD guidelines, remands foreign exchange loss matter

ITAT Chennai-AT addressed transfer pricing adjustments in a working capital and economic adjustment dispute. The tribunal upheld CIT(A)'s order on working capital adjustment, ruling that availed credit period rather than agreed credit period should be considered per OECD guidelines, dismissing Revenue's appeal. However, regarding foreign exchange fluctuation loss and non-cenvatable custom duty adjustments, the tribunal found insufficient adjudication by lower authorities and remanded the matter to AO/TPO for detailed examination and verification of comparative custom duty payments and foreign exchange losses.

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Issues Involved:
1. Working Capital Adjustment
2. Economic Adjustment on Foreign Exchange Fluctuation Loss, Non-Cenvatable Custom Duty Adjustment, Power Related Adjustment, Risk Adjustment, and Abnormal Freight Charges Adjustment

Summary:

1. Working Capital Adjustment:
The Revenue's appeal contested the CIT(A)'s decision to grant working capital adjustment without the assessee establishing the need for it by showing that the credit period with its AE exceeded that of comparables. The TPO had rejected the working capital adjustment claimed by the assessee, stating it was not justified in the TP audit cycle. The CIT(A) directed the AO/TPO to provide the working capital adjustment as done in AY 2013-14, noting that the AO had accepted it for that year. The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal, and emphasized the OECD guidelines which support considering the availed credit period rather than the agreed credit period.

2. Economic Adjustment on Foreign Exchange Fluctuation Loss, Non-Cenvatable Custom Duty Adjustment, Power Related Adjustment, Risk Adjustment, and Abnormal Freight Charges Adjustment:
The assessee's appeal involved multiple adjustments:
- Custom Duty Adjustment: The TPO and CIT(A) rejected this adjustment, noting it was not part of the original TP study and was not justified. The Tribunal remitted the issue back to the AO/TPO for verification, stating the assessee is entitled to this adjustment based on facts.
- Foreign Exchange Fluctuation Loss: The Tribunal agreed with the assessee that this should be considered non-operating while computing margins, following the precedent set by the Tribunal in similar cases. The issue was remitted back to the AO/TPO for recomputation.
- Power Related Adjustment, Risk Adjustment, and Abnormal Freight Charges Adjustment: These issues were not adjudicated by the CIT(A). The Tribunal remitted them back to the AO/TPO for detailed examination and decision.

Cross Objection by the Assessee:
The cross objection raised issues identical to those in the assessee's appeal and was dismissed as academic.

Conclusion:
The Revenue's appeal and the assessee's cross objection were dismissed. The assessee's appeal was partly allowed for statistical purposes, with several issues remitted back to the AO/TPO for further verification and decision.

Order Pronounced:
The judgment was delivered in the open court on 23rd August 2023 at Chennai.

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