HITACHI ASTEMO HARYANA PRIVATE LIMITED,FARIDABAD, HARYANA V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 10(1), ASSESSMENT UNIT, INCOME TAX DEPARTMENT, NEW DELHI

ITA 4473/DEL/2024

AI Insights

Hitachi Astemo Haryana Private Limited appealed against the final assessment order for the Assessment Year 2020-21, which included significant adjustments proposed by the Transfer Pricing Officer (TPO) related to the manufacturing segment, royalty payments, and business support services. The Dispute Resolution Panel (DRP) granted partial relief, but some additions were sustained. A key issue was the rejection of the assessee's claim for depreciation adjustment due to underutilization of capacity compared to external comparable companies. The Tribunal noted that in previous years, similar adjustments were accepted, and thus directed the TPO to reconsider the depreciation adjustment claim.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 126933 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S.K. JADHAV
• Assessee Lawyers: ANANYA KAPOOR; TARUN CHANANA
• Keywords: Transfer pricing; Depreciation; Commissioner; Statistical purposes; Transfer; Restored; Services
• Section: 143(3)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: H : NEW DELHI BEFORE SHRI ANUBHAV SHARMA, JUDICIAL MEMBER AND SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA No.4473/Del/2024 Assessment Year: 2020-21 Hitachi Astemo Haryana Private Limited, Plot No.23-32, Sector 58, Behind JCB India Ltd., Faridabad, Haryana – 121 002. PAN: AABCE5725G Vs DCIT, Circle-10(1), New Delhi. (Appellant) (Respondent) Assessee by : Ms Ananya Kapoor, Advocate & Shri Tarun Chanana, Advocate Revenue by : Shri S.K. Jadhav, CIT-DR Date of Hearing : 08.04.2025 Date of Pronouncement : 23.04.2025 ORDER PER ANUBHAV SHARMA, JM: This appeal is preferred by the assessee against the final assessment order dated 31.07.2024 of the Dy. Commissioner of Income-tax, Circle 10(1), Delhi (hereinafter referred as ‘the Ld. AO’) for Assessment Year 2020-21 passed u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’). ITA No.4473/Del/2024 2 2. The assessee is engaged in manufacturing of EPS used for four-wheeler automobiles operating in business segments of (i) manufacturing of shock absorber used in two wheelers for domestic and export market; and (ii) Assembly of electric power steering used in four-wheeler automobiles for domestic market. During the course of assessment, the Transfer Pricing Officer (“TPO”) made the following adjustments:- Particulars Proposed Adjustment (in INR) Manufacturing segment 8,43,98,720 Payment of royalty 4,61,33,562 Provision of business support services 34,46,379 Total 13,39,78,661 3. Aggrieved by the same, the Appellant filed objections before the Dispute Resolution Panel (“DRP”) against the draft assessment order issued incorporating the above additions. The DRP granted partial relief to the Appellant and the following additions were sustained by the TPO: Particulars Final Adjustment (in INR) Manufacturing segment 4,43,49,934 Payment of royalty NIL Provision of business support services 18,39,242 Total 4,61,89,176 4. During the course of assessment, the Appellant had claimed depreciation adjustment on account of underutilization of capacity vis-a-vis ITA No.4473/Del/2024 3 external comparable companies. The TPO rejected the assessee’s claim for depreciation adjustment on the premise that the assessee has not been able to substantiate the fact that there exists a material difference in level of capacity utilisation between assessee vis-a-vis comparables, where reasonably accurate adjustments can be made. The relevant extracts of the TP Order are provided hereunder for ready reference: “11.7. Claim for Abnormal Depreciation Adjustment 11.7.1. The assessee has argued that during the year under consideration, it was not able to utilise 100% production capacity and due to this, the fixed cost such as depreciation could not be utilised to the fullest, whereas, the comparable companies may have utilized the capacity in effective manner. Therefore, the assessee adjusted the tested party margin for difference in depreciation expense. 11.7.2. It is seen that taxpayer has not demonstrated what policies have been followed by other companies for depreciating their assets. As mentioned in the SCN, the assessee has not placed anything on record which proves efficient capacity utilization by the comparables. Further, there has to be a limit to the extent adjustments can be made for differences between the taxpayer and comparable companies as every company is different and follows different approaches for valuation of assets, inventories, depreciation, forex valuation etc. If, the adjustments are asked for each and every difference, it will not be possible to compare the companies at all. Hence, the depreciation depends on the overall business structure of the company and if the company is functionally same, various components of operating costs should then be not compared individually. ITA No.4473/Del/2024 4 Rule 10B(3) provides for making adjustments only if the differences are material and reasonably accurate adjustments can be made to eliminate the material effects of such differences. In this case, neither the differences are material nor reasonably accurate adjustments can be made as the differences have to be seen at the level of operating cost and not at the level of various components of operating cost. 11.7.3. Taxpayer has quoted several decisions for reliance on claim of depreciation adjustment. However, it is seen that in all cases, courts have enquired whether the differences are material and whether reasonably accurate adjustment can be made. Therefore, in view of this discussion, the claim of the taxpayer is not accepted.” 5. Ld. AR has submitted that the TPO has arbitrarily rejected the assessee’s claim pertaining to depreciation adjustment on the premise that the assessee has not been able to substantiate that there is a material difference in utilisation of capacity by the assessee vis-a-vis the comparable companies, where reasonably accurate adjustment can be made. We appreciate submissions of assessee that it has been highlighted in the TP Report that the assessee was engaged in the manufacture of electric power steering (EPS) for four wheeler automobiles since 2007. However, during FY 2011-12, it has started manufacturing shock absorbers for two wheelers and stopped producing EPS. It imports various components from its AEs for manufacture of new product. The present assessment year is the ninth full year of production of shock absorber by the assessed. Considering the same, the fixed cost such as depreciation incurred ITA No.4473/Del/2024 5 by assessee could not be utilised to the fullest whereas, the comparable companies may have utilised the capacity in effective manner leading to effective utilisation of its fixed costs. Hence, in order to adjust the same, assessee has adjusted its depreciation cost to provide the true and fair picture of its financial statements. Depreciation refers to a reduction in the value of an asset over time due to wear and tear in particular. For a manufacturing concern operating at optimum capacity, the expenditure on depreciation of machinery should normally be recovered by way of enhanced production and sales. In such a scenario the optimum utilization of the production capacity of any concern can be established by the depreciation to sales ratio. The lower the ratio, the better utilized production capacity of the entity. 6. In fact in assessee’s own case for AY 2014-15, AY 2015-16 and AY 2016-17. AY 2017-18 and AY 2018-19, the DRP has directed that the difference in depreciation vis-a-vis comparable companies needs to be adjusted on account of capacity utilisation. 7. It is submitted by ld. AR that considering the benefit of depreciation adjustment, the appellant’s profitability works out to 6.63%. A computation was provided and same is reproduced below:- ITA No.4473/Del/2024 6 Particulars Reference Amount / % Operating revenue considered by TPO in order giving effect dated 27 July 2024 (Refer Page 206 of Appeal Set) A 1,71,40,43,778 Operating cost considered by the TPO in order giving effect dated 27 July 2024 (Refer Page 206 of Appeal Set) B 1,65,47,47,653 Less: Excess depreciation (refer Page 848 of paperbook) C 4,73,11,219 Revised operating cost (“OC”) D=B-C 1,60,74,36,434 Revised operating profit (“OP”) E=A-D 10,66,07,344 Revised OP/OC E/D 6.63 % 8. In the light of the aforesaid, we are of the considered view that the arm’s length rate computed by the TPO as between 5.63% to 8.86% takes care of the revised OP/OC, considering the benefit of depreciation adjustment. That being so, the merits to contest the comparable companies selected by the TPO would become academic. 9. Accordingly, we are inclined to sustain the ground No.2. The appeal of the assessee is allowed for statistical purposes. The issue with regard to claim of depreciation of the assessee is restored to the files of AO/TPO with direction to allow the claim of depreciation adjustment. Order pronounced in the open court on 23.04.2025. Sd/- Sd/- (MANISH AGARWAL) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 23rd April, 2025. ITA No.4473/Del/2024 7 dk Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asstt. Registrar, ITAT, New Delhi "