Once Working Capital Adjustments Is Factored In Pricing, No Separate Adjustment On Outstanding Receivables Is Required: Visakhapatnam ITAT
The Visakhapatnam ITAT directed the TPO to consider the impact of working capital adjustments of the assessee company and appropriate material differences with that of the comparable companies.The ITAT ruled on comparables selection, treatment of expenses as operating/non-operating, and notional interest on outstanding receivables in case of assessee company engaged in providing...
The Visakhapatnam ITAT directed the TPO to consider the impact of working capital adjustments of the assessee company and appropriate material differences with that of the comparable companies.
The ITAT ruled on comparables selection, treatment of expenses as operating/non-operating, and notional interest on outstanding receivables in case of assessee company engaged in providing processing services in relation to manufacture of garments.
The Bench comprising Duvvuru RL Reddy (Judicial Member) and S Balakrishnan (Accountant Member) observed that “if the working capital adjustments on the ALP has been already factored in its pricing / profitability vis-à-vis that of its comparables further adjustment to the margin of the assessee on the outstanding receivables cannot be justified and no separate upward adjustment on outstanding receivables is required, since TNM method is considered as the most appropriate method”. (Para 22)
With respect to selection of comparables, the Bench accepted assessee's plea for exclusion of three comparables being functionally different and engaged in manufacturing of garments.
Separately, the Bench noted that assessee had incurred air freight expenses for which liability created in the books of accounts in prior years was written off during impugned AY, and said expenses when incurred in prior years were included in operating cost by assessee, but TPO considered it as non-operating when the liability was written back in the impugned AY.
With respect to treatment of forex loss, the Bench referred to the Coordinate bench decisions in NVH India Auto Parts P Ltd and Phoenix Comtrade P Ltd and noted that the TPO has observed that the foreign exchange fluctuations on account of hedging operations cannot be considered as operating item.
However, in the instant case the Bench found that the assessee has not engaged in hedging activities and foreign exchange loss is a transactional loss and it should be considered as an operating cost for mark-up purposes.
Therefore, the ITAT directed the TPO to decide impact of working capital adjustment.
Counsel for Appellant/ Taxpayer: Darpan Kriplani
Counsel for Respondent/ Department: Satyasai Rath
Case Title: Brandix Apparel India Private Limited vs ACIT
Case Number: ITA No 627/Viz/2018