ASSISTANT COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE 1(1), CHENNAI V. HWASHIN AUTOMOTIVE INDIA PRIVATE LIMITED, CHENNAI

ITTPA 3/CHNY/2024

AI Insights

The case revolves around a dispute concerning the selection of comparable companies for the purpose of determining the Arm's Length Price (ALP) of international transactions under transfer pricing regulations. Hwashin Automotive India Private Limited, the respondent, contested the adjustments made by the Transfer Pricing Officer (TPO) which were based on the selection of comparables that the respondent argued were not functionally similar. The Commissioner of Income Tax (Appeals) sided with the respondent, leading to the revenue's appeal to the Tribunal. The Tribunal's decision focused on the functional comparability of the companies rather than their financial performance, aligning with international guidelines and previous judicial decisions.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 29973 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s) 23 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 14-11-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 09-09-2024
• Assessment Year: 2018-2019
• Appeal Filed On: 21-02-2024
• Other Referred Cases: Quark Systems Pvt Ltd vs ITO, Misys Software Solutions (India) P. Ltd vs DCIT, Chandigarh Tribunal in the case of Quark Systems Pvt Ltd vs ITO [2009] in ITA No. 115/Chd/2009, Sony India Private Limited vs DCIT, ITA No. 1189/Del/2005
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R. RAGHUPATHY
• Assessee Lawyers: SRINATH; REJECTING TWO COMPARABLE COMPANIES; ACCEPTED TWO
• Keywords: Set aside; Transfer pricing; International transaction; Rule of consistency; Wholly owned subsidiary
• Section: 143(3); 10B

Judgement Text

" आयकर अपीलीय अिधकरण,‘डी’ ᭠यायपीठ,चे᳖ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI ᮰ी महावीर ᳲसह, उपा᭟यᭃ एवं ᮰ी एस. आर.रघुनाथा, लेखा सद᭭य के समᭃ BEFORE SHRI MAHAVIR SINGH, HON’BLE VICE PRESIDENT AND SHRI S. R. RAGHUNATHA, HON’BLE ACCOUNTANT MEMBER आयकरअपीलसं./IT(TP)A No.: 3/Chny/2024 िनधाᭅरणवषᭅ / Assessment Year: 2018-19 Assistant Commissioner of Income Tax, Corporate Circle -1(1), Chennai. v. Hwashin Automotive India Private Limited, F-65A, SIPCOT Industrial Park, Irungattukottai, Sriperumbudur, Tamil nadu – 602 117. [PAN:AAACH-9909-E] (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) अपीलाथᱮकᳱओरसे/Appellant by : Shri. R. Raghupathy, JCIT ᮧ᭜यथᱮकᳱओरसे/Respondent by : Shri. Srinath, CA सुनवाई कᳱ तारीख/Date of Hearing : 09.09.2024 घोषणा कᳱ तारीख/Date of Pronouncement : 14.11.2024 आदेश /O R D E R PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER: This appeal filed by the revenue is directed against the order passed by the learned Commissioner of Income Tax (Appeals), Chennai -16, dated 22.12.2023 and pertains to assessment year 2018-19. 2. The revenue has raised the following grounds of appeal: 1. The order of the learned CIT(A) is contrary to law, facts and circumstances of the case. :-2-: IT(TP)A. No: 3/Chny/2024 2. Whether on the facts and circumstances of the case, the learned CIT(A) was justified in directing the AO to accept Autoline Industries Limited and Automotive Stampings and Assemblies Limited as comparables for the computation of PLI, as the Margin of these companies, are found to be in loss? 3. Whether on the facts and circumstances of the case, the learned CIT(A) was justified in directing the AO to reject Gatiman Auto Private Limited as comparable for the computation of PLI on the grounds of having low turnover, as the company having low turnover is not a sole reason for exclusion of a comparable company? 4. Whether on the facts and circumstances of the case, the learned CIT(A) was justified in directing the AO to reject Bundy India Limited as comparable for the computation of PU on the grounds that the company is into diverse activities, as considerable portion of Turnover of the company is from manufacture of Auto Components? 5. Whether on the facts and circumstances of the case, the learned CIT(A) was justified in directing the Assessing Officer to reject Brakes India Private Limited as comparable for the computation of PLI on the grounds that the company is into R &D activities, as the TNMM requires transactions to be \"broadly similar\" to qualify as comparable? 6. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.” 3. The brief facts of the case are that, the assessee is a company incorporated in the year 2002 as a 100% subsidiary of Hwashin Korea with its manufacturing facility at Sriperumbudur, Tamilnadu. The assessee is engaged in the manufacture of sales of body and chassis components for automobiles. The assessee caters mostly OEM like Hyundai Motor India Ltd. The assessee filed its return of income for the assessment year :-3-: IT(TP)A. No: 3/Chny/2024 2018-19 on 28.11.2018, declaring a total income as loss of Rs.67,76,011/-. The case was selected under CASS with Transfer Pricing Risk Parameter. After issuing statutory notices to the assessee for assessment proceedings, the case was referred to the TPO as per the provisions of section 92CA(1) of the Act for computation of ALP in relation to International Transactions. Subsequently, an order u/s. 92CA(3) of the Act was passed by the TPO, Chennai on 31.07.2021, wherein an downward adjustment of Rs.9,14,37,310/- attributable to difference in Arms length Price of International Transactions entered by the assessee with its AE has been made. The Assessing Officer passed a draft order u/s.144C of the Act dated 21.09.2021, proposing to make a TP adjustment as determined by the TPO intimating the assessee to respond within 30 days. The assessee filed its reply dated 20.10.2021 and intimated that it is proposing to file an appeal before the ld.CIT(A) against the final assessment order. Accordingly, the Assessing Officer passed an order u/s. 143(3) r.w.s.144C(3) r.w.s. 144B of the Act dated 26.11.2021 by making a downward adjustment of Rs.9,14,37,310/- attributable to difference in ALP of International Transactions entered by the assessee with AE. During the TP assessment, the TPO called for the details of :-4-: IT(TP)A. No: 3/Chny/2024 International Transactions reported in Form 3CEB filed by the assessee. The details of International Transactions entered by the assessee during the financial year 2017-18 are furnished below: Sl. No. Description of Transaction Name of the Associate Enterprise Quantum of International Transaction (Rs.) Method adopted by the assessee 1 Purchase of Components and spares Hwashin Co. Limited 1,56,96,36,970 TNMM 2 Import of Capital Goods 11,50,96,729 CUP 3 IT Support Charges 1,60,96,028 TNMM 4 Loan Guarantee 0 Other method Total 1,70,08,29,727 4. The TPO rejected the TP document filed by the assessee by rejecting two comparable companies and accepted two comparable companies as detailed below: Sl. No. Name of the Company Weighted average OP/Sales Remarks 1 Autoline Industries Limited -7.19% Rejected, Persistent loss making company 2 Automotive stampings & Assemblies Ltd. -6.74% Rejected. Persistent loss making company 3 Satyam Auto Components Pvt Ltd. 3.48% Accepted, TPO considered as comparable 4 Maini Precision Products Limited 7.73% Not available in prowess database & public domain , hence the authenticity of the comparable can’t be determined. Arithmetic Mean -0.68% :-5-: IT(TP)A. No: 3/Chny/2024 4.1 Later, the TPO added three companies along with two comparable companies adopted by the assessee and accepted by TPO as detailed below: Sl. No. Name of the Company Weighted OP/OI 1 Satyam Auto Components Pvt. Ltd. 4.19 2 Gatiman Auto Pvt. Ltd. 4.40 3 Bundy India Ltd. 6.44 4 Brakes India Pvt. Ltd. 9.81 5 Maini Precision Products Ltd 7.73 Arithmetic Mean 6.51 And margin of the assessee was recalculated as detailed below: Particulars In INR Revenue from operation 15,354,443,144 Add: other operating revenue - Operating Income (OI) 15,354,443,144 Total expenses 15,502,341,756 Less: Non-operating expenses Less: finance cost 223,294,209 Less: Unrealized forex loss 46,442,946 Operating Cost (OC) 15,232,604,601 Operating Profit (OP) 121,838,543 OP/OI(%) 0.79% Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the ld.CIT(A). 5. Before the ld.CIT(A), the assessee stated that they had selected four comparable companies in the TP study and the Arithmetic Mean of NPM on comparable selected in the TP study is (-)0.04%. The TPO has erred in retaining only two :-6-: IT(TP)A. No: 3/Chny/2024 comparable chosen by the assessee and selected three new companies resulting in total five comparable companies in the TPO order. The assessee’s contention against the proposed comparable for rejected companies and new added companies by the TPO is detailed below: Name of the Comparable Contention of the Appellant Autoline Industries Limited Comparable companies can’t be rejected merely on the grounds that is a loss making company. Functional comparability should be given priority. Automotive Stampings & Assemblies Limited Comparable companies can’t be rejected merely on the grounds that it is a loss making company. Functional comparability should be given priority. Gatiman Auto Private Limited Functionally dissimilar and low turnover Bundy India Limited Functionally dissimilar Brakes India Private Limited Functionally dissimilar, engaged in R&D and principle of consistency. 5.1 After considering the submissions and detailed statistics and analysis of the companies selected by the assessee and selected by the TPO, the ld.CIT(A) allowed the appeal of the assessee directed the AO to accept as a right comparable company in respect of Autoline Industries Ltd and Automotive Stampings & Assemblies Ltd, by holding that merely because the comparable company has incurred losses, it should not necessarily eliminate as a invalid comparable company. Further, :-7-: IT(TP)A. No: 3/Chny/2024 the ld.CIT(A) rejected the new comparables selected by the TPO in place of rejected comparable companies i.e., Gatiman Auto Pvt Ltd, Bundy India Ltd, Brakes India Pvt Ltd., stating that these companies are functionally dissimilar and Gatiman auto private limited has lower turnover, by passing an order dated 22.12.2023. Aggrieved by the order of the ld.CIT(A), the revenue preferred an appeal before us. 6. The ld.DR stated that the ld.CIT(A) has erred in directing the Assessing Officer in accepting the comparable of following two companies i.e., Autoline Industries Ltd and Automotive Stampings & Assemblies Ltd. Further, the ld.DR submitted that the ld.CIT(A) also erred in directing the Assessing Officer in rejecting the comparables considered by the TPO of the following companies i.e, Gatiman Auto Pvt Ltd, Bundy India Ltd, Brakes India Pvt Ltd. The ld.DR argued that the ld.CIT(A) has directed the Assessing Officer to accept the Autoline Industries Ltd and Automotive Stampings & Assemblies Ltd as comparable for the computation of PLI even though the margin of these companies are found to be loss continuously. Further, the ld.DR submitted that the ld.CIT(A) has directed the Assessing Officer to reject Bundy India Ltd., as comparable for the :-8-: IT(TP)A. No: 3/Chny/2024 computation of PLI on the ground that the company is into diverse activities, though the considerable portion of the turnover of the company is from the manufacture of auto components. Similarly, the ld.CIT(A) has erred in directing the Assessing Officer to reject Gatiman Auto Pvt. Ltd., as a comparable for the computation of PLI on the ground of having low turnover without considering any other criteria for exclusion of a comparable company. In respect of Brakes India Pvt. Ltd. rejected by the ld.CIT(A) as comparable on the ground that the company is into R&D activities, as the TNMM requires transactions to be broadly similar to qualify as comparable. In light of the above submissions, the ld.DR prayed for dismissing the order of the ld.CIT(A) by considering the TPO order as correct in adopting the comparable companies for determining the ALP. 7. Per contra, the ld.AR of the assessee submitted that the ld.CIT(A) has considered all the parameters in accepting the assessee’s contentions and rightly accepted the comparable companies as per the TP study of the assessee by rejecting the three new comparable companies added by the TPO. :-9-: IT(TP)A. No: 3/Chny/2024 7.1 Firstly, the ld.AR submitted that both Autoline Industries Ltd and Automotive Stampings & Assemblies Ltd are selected as a comparable based on the services provided, assets employed, risks assumed, size of the markets, costs of labour and capital in the markets, turnover, etc. However, no where the persistent loss is the determinative factor to make a company incomparable. The profit is not a factor in itself, but consequent of the effect of various factors. The ld.AR submitted that merely because an otherwise company has incurred loss, it should not be necessarily eliminate that company as a valid comparable company. The ld.AR relied on the decision of Chandigarh Tribunal in the case of Quark Systems Pvt Ltd vs ITO [2009] in ITA No. 115/Chd/2009, wherein the Tribunal held as under: Para 25….”While we agree that merely because a comparable is making loss, it cannot be excluded from the list of comparables for the purposes of computation of arm’s length price, Imercius is a case in which not only functional area is different, Imercius has a negative networth but also because turnover of the Imercius has no comparison with the assessee companies.” 7.1.1 The ld.AR also submitted that OECD guidelines in this context states that the inclusion of a company should be based on facts and circumstances not only because it has incurred loss which is reproduced below: :-10-: IT(TP)A. No: 3/Chny/2024 “… In general, all relevant information should be used and there should not be any overriding rule on the inclusion or exclusion of loss- making comparables. Indeed, it is the facts and circumstances surrounding the company in question that should determine its status as a comparable, not its financial result.” Therefore, merely because a company has incurred loss, it should not be eliminated from the comparable set, since the company continues to engage itself in manufacturing of automobile components similar to that of the assessee. 7.1.2 In light of the above submissions and judicial precedents, the ld.AR prayed that Autoline Industries Ltd and Automotive Stampings & Assemblies Ltd are functionally comparable engaged in similar products as that of the assessee and hence, the ld.CIT(A) direction to Assessing Officer to accept the comparable is in order and prayed for dismissing the ground of appeal of the revenue. 7.2 The next issue argued by the ld.AR is that the comparable selected by the TPO. In this regard, the ld.AR stated that establishing functional comparability is the most fundamental aspect of benchmarking analysis. It is relevant to go through the Rule 10B of I.T. Rules, 1962 which is reproduced as under: :-11-: IT(TP)A. No: 3/Chny/2024 “As per Rule 10B(2) of Income Tax Rules, 1962, the comparability of an international transaction or a specified domestic transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a)the specific characteristics of the property transferred or services provided in either transaction; (b)the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; [Emphasis added] In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:— “………. d. The degree of comparability existing between the international transaction 56a[or the specified domestic transaction] and the uncontrolled transaction and between the enterprises entering into such transactions; …………………” 7.2.1 Further, in support of that the ld.AR relied on the following decisions of various Tribunals as against the selection of comparables chosen by the TPO as under: 1. M/s. Mentor Graphics (Noida) Pvt Ltd, ITA No 1969/D/2006 2. Sony India Private Limited vs DCIT, ITA No. 1189/Del/2005 3. M/s. Virtusa Consulting Services Pvt Ltd 4. M/s. Verizon Data Services India Pvt Ltd 5. M/s. VWR Lab Products Ltd 6. M/s MPS Limited 7. M/s. GAP International Sourcing (India) Pvt Ltd 8. M/s. E-Gain Communication Pvt Ltd vs ITO 9. M/s. Vedaris Technology (P) Limited and M/s. Agnity India Technologies Pvt Ltd :-12-: IT(TP)A. No: 3/Chny/2024 7.3 The ld.AR argued that the company Gatiman Auto Pvt. Ltd., selected as comparable by the TPO is into the business of manufacturing of sheet metal automobile components and tipper assembly and parts of earth moving equipments and hence, cannot be compared to the assessee which is engaged in the manufacturing of body and chassis components for automobiles. Since, the comparable is having varied turnovers cannot be compared to each other as the difference in their size and scale of their operation have a direct impact of their profitability. 7.3.1 Further, the turnover of the comparable company in the F.Y. 2017-18 was Rs.113.56 crores compared to the turnover of the assessee at Rs.1535.44 crores which is less than 1/10th of the assessee’s turnover and hence, the rejection as comparable as directed by the ld.CIT(A) is to be upheld. This analogy has been decided in the case of Misys Software Solutions (India) P. Ltd vs DCIT [2017] 1650 (Bang). 7.4 The next comparable chosen by the TPO is Bundy India Ltd, engaged in the business of operating in the passenger vehicle segment of the automobile industry, which designs and :-13-: IT(TP)A. No: 3/Chny/2024 manufactures fluid carrying systems, including fuel lines, brake lines, tank top lines, heated selective catalytic reduction (SCR) lines, vacuum booster lines etc., as the company also has a tank manufacturing business and imports pumps and modules in the tanks. The company specifically manufactures weld tubes, brake and fuel lines clusters and other basic accessories for manufacturing motor vehicles. Since, the company’s operations are functionally dissimilar with that of the assessee and also the comparable company earns revenue from diversified business and is not available any information on the segmental bifurcation of the same in the standalone financials as per the annual report of the report. In this background the ld.AR stated that there is no error in the decision of the ld.CIT(A) in directing the Assessing Officer to reject this company as comparable. 7.5 The next comparable selected by the TPO was Brakes India Pvt Ltd, which is a market leader in automotive brakes, parts thereof and castings. The company has manufacturing facilities across the country and sells directly the OEM and other customers and to retail customers through its dealers and distributors network. Therefore, the ld.AR stated that the :-14-: IT(TP)A. No: 3/Chny/2024 comparable company chosen by TPO is functionally dissimilar as the assessee is having manufacturing set up only in Tamilnadu and the assessee is a major supplier for Hyundai Motor Company Ltd. Further, the Brakes India Pvt. Ltd. is a largest component manufacturing company within TVS group and also having major R&D activities, capable of designing, developing, testing and validating products. Therefore, the TPO has erred in selecting this company as comparable and hence the ld.AR prayed for dismissing the revenue’s appeal by sustaining the order of the ld.CIT(A) in rejecting the comparable chosen by the TPO. 8. We have heard the rival contentions, perused materials available on record and gone through orders of the authorities below. It is an admitted fact that the company is into manufacturing of body and chassis components for automobiles having setup at Sriperumbudur, Tamilnadu, caters mostly OEM like Hyundai Motor India Ltd. The turnover of the assessee for the impugned assessment year was Rs.1,535.44 Crores. The assessee has submitted the TP study report before the TPO with an analysis of comparable companies of the tested parties with an Arithmetic Mean of (-)0.68%, weighted average of OP/sales. :-15-: IT(TP)A. No: 3/Chny/2024 The TPO rejected the comparable of Autoline Industries Ltd and Automotive Stampings & Assemblies Ltd, for the reason that these two companies are having persistent loss. Further, the TPO added Gatiman Auto Pvt Ltd., Bundy India Ltd. And Brakes India Pvt. Ltd. as new comparables to arrive at the PLI and made a downward adjustment of Rs.9,14,37,370/-. On appeal by the assessee, the ld.CIT(A) has allowed the assessee’s appeal by accepting the TP study report of the assessee by deleting the adjustment made by the TPO. We note that the Autoline Industries Ltd and Automotive Stampings & Assemblies Ltd., selected by the assessee as comparable companies in its TP study report are functionally similar and passed all the filters adopted by the TPO. However, the TPO has rejected these two companies for the only reason that the companies are incurred losses persistently. Merely because the comparable company has incurred losses, it should not be necessarily eliminated the company as a valid comparable company. This view has been upheld in the case of Quark Systems Pvt Ltd vs ITO (Supra) and hence, we do not find any infirmity in the decision of the ld.CIT(A) in directing the Assessing Officer to accept these two companies as comparable to the assessee. Therefore, by respectfully following the above decision, we are of the :-16-: IT(TP)A. No: 3/Chny/2024 considered view that these two companies are to be accepted as comparable companies to the assessee and hence, we dismiss the ground no.2 of the revenue appeal. 8.1 Coming back to the other companies considered as comparable by the TPO, we note that Gatiman Auto Pvt. Ltd. is in the business of manufacture of sheet metal automobile components and tipper assembly and parts of earth moving equipments. It is observed that the companies turnover for the financial year 2017-18 was Rs.113.56 crores, which is less than 1/10th of the assessee’s turnover i.e., Rs.1535.44 crores. Therefore, the assessee’s reliance on the decision of the Tribual in the case of Misys Software Solutions (India) P. Ltd vs DCIT (Supra), wherein it has held that “if the turnover of a comparable company is either less than 1/10th or is more than 10 times of the turnover of the tested party them such comparable has to be excluded from the final list of comparables” is relevant in the present case. Considering the facts and circumstances of the case, we are of the considered view that selecting the Gatiman Auto Pvt. Ltd., as a comparable to the assessee as a tested party is not correct and hence, we direct the TPO to delete said company from the comparable. :-17-: IT(TP)A. No: 3/Chny/2024 8.2 In respect of Bundy India Ltd, we observed that the company’s functionality is not similar to that of the assessee’s activities. The comparable chosen by the TPO in the case of Bundy India Ltd, which is engaged in the business of designing and manufacturing of fluid carrying systems, including fuel lines, brake lines, tank top lines, heated selective catalytic reduction (SCR) lines, vacuum booster lines etc. The company also provide back-office IT support service i.e., Information Technology enables Services to some entities within the TI Automotive Group. Further, the segmental information of the revenue is not forthcoming in the annual reports as a standalone financials. We note that according to the OECD guidelines and Rule 10B of I.T. Rules, 1962, the functional profile, assets employed, assumed risks of controlled and uncontrolled transactions are pertinent to screening of comparable companies. 8.2.1 Since, the relevant information with respect to the segmental information undertaken by the company are not available in the public domain and the functionality is not similar to that of the assessee, we are of the considered view that the TPO/DRP has erred in selecting Bundy India Ltd., as a :-18-: IT(TP)A. No: 3/Chny/2024 correct comparable and hence, we direct the Assessing Officer to reject this company from the comparable and dismiss the ground no.4 of the revenue’s appeal. 8.3 In respect of M/s.Brakes India Pvt. Ltd., it is a largest component manufacturing company within TVS group. The product portfolio of the company includes calipers, actuation, drum brakes, valves, hose ABS and brake fluid for passenger vehicles, S-cam, Hydraulic drum brakes, Disk brakes, Electro Magnetic Retraders for commercial vehicles and Dry and Wet multiple plate disk brakes for agricultural tractors. Further, we note that the company is into manufacturing facilities across the country and sells directly to the OEMs and other customers and to retail customers through its dealers and distributors network. Further, we note that the company is actively involved in R&D activities with well-equipped R&D center capable of designing, developing, testing and validating products. As stated by the ld.AR, the TPO has not included Brakes India Pvt. Ltd., as comparable in the assessment year 2017-18. Therefore, we are of the considered view that the Brakes India Pvt. Ltd., is not functionally similar to the assessee’s activities and also as a principle of consistency, Brakes India Pvt. Ltd., which was not :-19-: IT(TP)A. No: 3/Chny/2024 included in the assessment year 2017-18 by the TPO as comparable and hence, the TPO/DRP has erred in considering this company as comparable with the assessee’s operations. In light of the above, we direct the Assessing Officer to reject the company as a comparable by dismissing the ground no.5 of the revenue’s appeal. 9. In the result, appeal filed by the revenue is dismissed. Order pronounced in the court on 14th November, 2024 at Chennai. Sd/- (एस. आर.रघुनाथा) (MAHAVIR SINGH) उपा᭟यᭃ/Vice President Sd/- (एस. आर.रघुनाथा) (S. R. RAGHUNATHA) लेखासद᭭य/Accountant Member चे᳖ई/Chennai, ᳰदनांक/Dated, the 14th November, 2024 JPV आदेशकीŮितिलिपअŤेिषत/Copy to: 1. अपीलाथŎ/Appellant 2. ŮȑथŎ/Respondent 3.आयकर आयुƅ/CIT – Chennai 4. िवभागीय Ůितिनिध/DR 5. गाडŊ फाईल/GF "