2024 (11) TMI 1439 - AT - Income Tax

Working capital adjustment allowed but foreign exchange losses deemed operating for PLI computation purposes

M/s. Doowon Electronics India Private Limited Versus The Deputy Commissioner of Income Tax, Company Circle-1 (1), Chennai And (Vice-Versa)

ITAT Chennai allowed assessee's appeal regarding working capital adjustment, finding CIT(A) erred in rejecting such adjustment. However, foreign exchange ... TP Adjustment - allowability of working capital adjustment - HELD THAT:- We are of the considered view that the CIT(A) has erred in confirming the rejection of adjustment on account of working capital and hence we allow this ground of the assessee. Disallowance of Foreign exchange gain / losses arise due to uncertainties such as fluctuations in the currency market rate - HELD THAT:- Tribunal has considered the similar issue of treating the foreign exchange loss as operating in nature for the purpose of computing PLI, in the case of sister concern of the assessee in Doowon Automotive Systems India Private Limited [2021 (11) TMI 1147 - ITAT CHENNAI] 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. Allowance of custom duty adjustment while computing the margin of the Appellant - HELD THAT:- As perused the material available on record and gone through the orders of the lower authorities. We note that the Tribunal has considered the similar issue of customs duty adjustment and allowed in favour of the assessee, in the case of sister concern of the assessee in Doowon Automotive Systems India Private Limited [2021 (11) TMI 1147 - ITAT CHENNAI] we are of the considered view that the customs duty adjustment need to be given to assessee and hence, we direct the AO to give suitable adjustment against the customs duty component while determining the ALP and dismiss the ground of the revenue. 1. ISSUES PRESENTED and CONSIDEREDThe Tribunal considered several issues related to transfer pricing adjustments and the treatment of certain financial elements in determining the arm's length price (ALP) for international transactions. The core issues included:Whether the CIT(A) erred in confirming the TPO's decision to make a downward adjustment to the value of international transactions without further examination of the facts and submissions.Whether the CIT(A) erred in not providing a working capital adjustment while determining net profit margins for benchmarking international transactions.Whether the CIT(A) erred in treating foreign exchange loss as an operating expense.Whether the CIT(A) was correct in allowing customs duty adjustment based on precedents without adjudicating the specific facts of the current year.2. ISSUE-WISE DETAILED ANALYSISWorking Capital AdjustmentRelevant legal framework and precedents: The Tribunal referred to the OECD guidelines for working capital adjustments and previous ITAT decisions, particularly in the case of Doowon Automotive Systems India Private Limited, a sister concern of the assessee.Court's interpretation and reasoning: The Tribunal recognized the necessity of working capital adjustments to improve the reliability of comparables and to reflect differences in working capital levels between the assessee and comparable companies.Key evidence and findings: The assessee provided detailed workings showing the impact of working capital differences on profitability, which was not adequately considered by the CIT(A).Application of law to facts: The Tribunal found that the CIT(A) erred in rejecting the working capital adjustment and directed the AO to provide suitable adjustments.Treatment of competing arguments: The Tribunal noted the lack of contrary evidence from the revenue side and followed the precedent set by similar cases.Conclusions: The Tribunal allowed the assessee's ground for working capital adjustment.Foreign Exchange Loss AdjustmentRelevant legal framework and precedents: The Tribunal examined previous decisions, including those involving the assessee's sister concern, which treated foreign exchange losses as operating in nature.Court's interpretation and reasoning: The Tribunal noted that the assessee had previously treated foreign exchange losses as operating expenses and found no justification for changing this treatment.Key evidence and findings: The assessee argued that foreign exchange fluctuations were due to external market forces and should be treated as non-operating; however, the Tribunal found no new evidence to support this reclassification.Application of law to facts: The Tribunal upheld the treatment of foreign exchange losses as operating expenses, consistent with past rulings.Treatment of competing arguments: The Tribunal dismissed the assessee's argument for treating foreign exchange losses as non-operating due to lack of consistency and supporting evidence.Conclusions: The Tribunal dismissed the assessee's ground on foreign exchange loss adjustment.Customs Duty AdjustmentRelevant legal framework and precedents: The Tribunal referred to previous decisions that allowed for customs duty adjustments to account for differences in import content and non-cenvatable duties.Court's interpretation and reasoning: The Tribunal recognized that the assessee's higher import content and related customs duties warranted an adjustment to ensure comparability with companies sourcing locally.Key evidence and findings: The Tribunal considered the percentage of imports and the customs duty paid by the assessee compared to comparable companies.Application of law to facts: The Tribunal directed the AO to provide a suitable customs duty adjustment, following the precedent set in similar cases.Treatment of competing arguments: The Tribunal found the revenue's arguments unpersuasive and upheld the CIT(A)'s decision to allow the adjustment.Conclusions: The Tribunal dismissed the revenue's appeal and upheld the customs duty adjustment.3. SIGNIFICANT HOLDINGSThe Tribunal emphasized the necessity of working capital adjustments to ensure the reliability of comparables and directed the AO to provide such adjustments.The Tribunal upheld the treatment of foreign exchange losses as operating expenses, citing consistency with past treatment and lack of new evidence.The Tribunal confirmed the appropriateness of customs duty adjustments to account for differences in import content and non-cenvatable duties, aligning with established precedents.Final determinations: The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed.