2023 (11) TMI 25 - AT - Income Tax

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

The DCIT, Corporate Circle 3 (2), Chennai Versus Woosu Automotive India Pvt. Ltd. And Woosu Automotive India Pvt. Ltd. Versus The ACIT, Corporate Range -3, Chennai

ITAT Chennai-AT addressed transfer pricing adjustments in a working capital and economic adjustment dispute. The tribunal upheld CIT(A)'s order on working ... TP Adjustment - working capital adjustment - contention of the Revenue is to restrict the adjustment to the difference in agreed credit period between the AO and the assessee and that of comparables - As submitted assessee had not established the need for working capital adjustment by showing that the credit period agreed between the assessee and its AE are more than the agreed period availed by the comparables - Revenue argued CIT(A) failed to understand the issue that only difference in the days of credit between that of comparable and the agreed credit period as per invoice / agreement with the AE should be taken into account and not the availed credit period - HELD THAT:- Assessee drew our attention to OECD guidelines which provides for considering the availed credit period rather than agreed credit period. OECD guidelines of July, 2010, wherein it is mentioned that making working capital adjustments involves the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. We uphold the order of CIT(A) and this issue of Revenue’s appeal is dismissed. Reduction of economic adjustment on foreign exchange fluctuation loss, non-cenvatable custom duty adjustment - HELD THAT:- The assessee has tried to show the details of higher custom duty incurred but no comparable was cited but ld.counsel for the assessee stated that his mater can go back to the file of AO for verification whether the assessee is paying higher custom duty i.e., non-cenvatable custom duty and the comparables are either procuring indigenous raw material or buying lesser custom duty which could be set-off against cenvat. We noted that the authorities below have not adjudicated this issue by comparing the custom duty paid by the assessee and its comparable. Hence, this issue needs verification at the level of TPO/AO. Needless to say, the assessee will file all the details before the AO/TPO and the matter is restored back to the file of the AO/TPO, who will examine the facts in detail and then decide this issue Also noted that in principle, the foreign exchange fluctuation loss adjustment has to be given being a non-operating expenses and the AO/TPO will recomputed the PLI after considering the details and facts of foreign exchange fluctuation loss claimed by assessee. In term of the above, this issue is also set aside to the file of the AO/TPO and allowed for statistical purposes. Issues Involved:1. Working Capital Adjustment2. Economic Adjustment on Foreign Exchange Fluctuation Loss, Non-Cenvatable Custom Duty Adjustment, Power Related Adjustment, Risk Adjustment, and Abnormal Freight Charges AdjustmentSummary: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.