M/s Continental Automotive Components India Private Limited , Bangalore V. Deputy Commissioner of Income Tax Circle-2(1)(1), Bangalore

ITA 129/BANG/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 5907 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Appeal Filed On: 22-01-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: APPLYING NEW
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Additional evidence; Question of law; Revenue expenditure; Capital expenditure
• Section: 92C; 143(3); 92; 92B; 92F; 92A; 133(6); 37(1); 64; 43; 48; 73; 72; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER ITA No.129/Bang/2019 Assessment Year :2014-15 M/s. Continental Automotive Components India Pvt. Ltd., Plot No.53B, Bommasandra Industrial Area, Hosur Road, Attibele Hobli, Anekal Taluk, Bengaluru–560 099. PAN : AAKCS 9578 C Vs. DCIT, Circle – 2(1)(1), Bengaluru. APPELLANT RESPONDENT Assessee by :Shri.T. Suryanarayana, Senior Advocate Revenue by:Shri. Mudavathu Harish Chandra Naik, CIT(DR)(ITAT), Bengaluru. Date of hearing:21.03.2022 Date of Pronouncement:29.03.2022 O R D E R Per N. V. Vasudevan, Vice President : This is an appeal by the assessee against the final Order of Assessment dated 30.11.2018, under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called ‘the Act’), passed by ACIT, Circle – 3(1)(1), Bengaluru, in relation to Assessment Year 2014-15. 2. The assessee is a wholly owned subsidiary of Continental Automotive GmbH, Germany. The holding company is one of the world’s leading suppliers to the automotive industry specializing in tyres and break technology, vehicle dynamics control, as well as electronics and sensor systems. There are three segments where the assessee has transactions with it’s Associated Enterprises (AEs) viz., Manufacturing Segment, Trading Segment and Services Segment. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 2 of 97 3. In the Manufacturing Segment, the assessee manufactures intermediate products that fall under the product classification automotive components/auto anciliary products like It operates in the following segments: -Instrument clusters; -Engine systems; -Immobilisers and transponders -Speed sensors, -Airbag controllers - Anti-lock braking systems(ABS) -Fuel supply modules; and -Temperature gauges, pressure gauges, etc. 4. In the manufacturing segment, the assessee is in charge of conceptualization and designs. It procures equipment for manufacture both fixed and capital equipments. It owns any intellectual Property rights (IPR) for the products developed by them. It receives technology and manufacturing know-how from its Associate Enterprise (AE) for its manufacturing process. It purchases raw materials and components from both third parties and AEs. The nature of raw materials purchased from the AEs and third parties are different. The raw materials procured from the AE are globally sourced by Continental group wherein prices are negotiated globally to get price advantage for bulk purchases. Manufacturing and assembly of products is undertaken by the assessee. The assessee receives guidance from its AEs on the quality control procedures to be followed. The assessee sells finished products to third parties as well as to its AE. Majority of the sales are to OEMs. Continental Group has a Global Key Key Accounts Management (KAM) structure through which it maintains customers relationship with OEMs having global presence which helps the assessee to establish customer relationship with the Indian entities of global OEMs. The assessee sells goods both to independent third parties as well ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 3 of 97 as to its AEs. For sales to third parties the price is driven by market conditions and for sales to AEs, it is based on agreed pricing policy. 5. In the trading segment the assessee imports finished goods from its AE for its trading/distribution activities. The assessee is responsible for undertaking all the logistic management activities including transportation from ports, custom formalities, ensuring proper warehousing of its finished goods etc. The assessee is responsible for sales and marketing and decies on the marketing strategy, sales and pricing, order processing and outbound logistics and distribution network. 6. Services segment: In the services segment, the Assessee renders application / specific services to its Associated Enterprises (“AEs”) with regard to development of software. 7. During the previous year relevant to the assessment year 2014-15, several international transactions took place between the Assessee and its AEs, including purchase of raw materials for the manufacturing segment, purchase and trading in finished goods of its AE, and the aforesaid provision of SWD services. 8. The Finance Act. 2001 had introduced a legislation with respect to transfer pricing by substituting the erstwhile section 92 of the Act with a new and separate code or sections, namely sections 92 to 92F, with effect from 1 st April. 2002. i.e., the Assessment Year 2002- 2003. The salient features of the legislation with respect to transfer pricing, to the extent material for the purpose of deciding the question referred to the special bench, are as follows: - ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 4 of 97 • Section 92(l) of the Act provides that any income arising from an "international transaction" shall be computed having regard to the arms length price. The Explanation to the said section provides that allowance for any expense or interest arising from an international transaction hall also be determined having regard to the arm' s length price. • The term "international transaction' has been defined in section 92B(1) or the Act to mean a transaction between two or more "associated enterprises" either or both of whom are non-residents in the nature of inter alia purchase, sale or lease of intangible property or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises. • Section 92A of the Act defines the term "associated enterprise" in relation to another enterprise, in a manner where the enterprise directly or indirectly participates in the Management, control or capital of the other enterprise. • The term "arm's length price" (ALP) has been defined in clause (ii) of section 92F of the Act, to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. Section 92C(1) of the Act provides that the arm's length price in relation to an international. By virtue of the provisions of section 92CA(1), the Assessing Officer, with the previous approval of the Pr Commissioner / Commissioner is empowered to refer to the Transfer Pricing Officer (TPO) the computation of the arm’s length price of an international transaction or specified domestic transaction entered into by an assessee over whom the Assessing Officer exercises jurisdiction. The TPO, after due enquiry and opportunity of being heard, shall by order in writing determine the ALP in relation to the international transaction in accordance with provisions of section 92CA(3) and send a copy of his order to the Assessing Officer (AO) and to the assessee for finalization of assessment order. Section 92C(2) provides that the variation between the ALP and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been under taken shall be deemed to be the ALP. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 5 of 97 The AO passes a draft order of assessment against which, the Assessee has a right to file objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act. Under section 144C(5), the Dispute Resolution Panel (DRP) shall issue the directions, as it thinks fit, for the guidance of the AO to enable him to complete the assessment after considering report of TPO. The AO passes a final assessment order on the basis of directions of the DRP. 9. The legislative intent in introducing the new transfer pricing legislation, as available in the Memorandum explaining the provisions in the Finance Bill, 2001, which later on was enacted as the Finance Act, 2001, was as follows. "The increasing participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multinational group. The profits derived by such enterprises carrying on business in India can be controlled by the multinational group by manipulating the prices charged and paid in such intra-group transactions, thereby, leading to erosion of tax revenues. With a view to provide a statutory framework which can lead to computation or reasonable fair and equitable profits and tax in India, in the case of such multinational enterprises, new provisions are proposed to be introduced in the Income-tax Act, " ... " [248 ITR st 181]. 10. In this appeal we are concerned with two of the International Transactions carried out by the assessee during the previous year, in respect of which additions were made to the total income on account of determination of ALP, which has been challenged by the assessee before the Tribunal, viz., (i)Transfer pricing adjustment (“TP adjustment”) of Rs.117,35,51,190/- made by the Transfer Pricing Officer (“TPO”) in respect of the manufacturing segment of the Assessee pursuant to the DRP directions. (ii)TP adjustment of Rs.25,95,18,911/- made by the TPO in respect of the software development services (‘SWD services’ for short) rendered by the Assessee pursuant to the DRP directions. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 6 of 97 11. In the course of assessment the Assessing Officer (“AO”) made a reference to the TPO for examination of the arm’s length price of the aforesaid transactions.On such reference, the TPO passed an order dated 30.10.2017 under Section 92CA of the Income-tax Act, 1961 (“the Act”) determining the TP adjustment with respect to manufacturing segment and SWD services segment totaling to Rs.155,70,82,500/-.Initially, a draft assessment order dated 08.12.2017 came to be passed by the AO in which, inter alia, the aforesaid TP adjustment was incorporated, apart from the additions made to the income of the assessee on account of disallowance of provision for warranties and annual license fees. Aggrieved, the assessee filed its objections before the DRP which, vide its directions dated 10.01.2018, rejected most of the assessee’s objections insofar as the TP adjustments made by the TPO were concerned. Pursuant to the directions of the DRP, the AO passed the final assessment order dated 30.11.2018 in which the TP adjustment was reworked to Rs. 143,30,70,101/-. 12. Apart from the Transfer Pricing additions, there are some issues that arise out of determination of total income viz., (i) Disallowance of provision for warranty to the extent of Rs. 3,21,32,433/-. (ii) Disallowance of annual license fees amounting to Rs. 28,00,21,116/-. And (iii) Non-set off of brought forward losses amounting to Rs. 232,54,55,699/- available to the assessee. As regards provision for warranty, the DRP directed allowance of the actual expenditure and as regards expenditure incurred towards annual license fees, the disallowance made by the AO in the draft assessment order was upheld. 13. Aggrieved by the final assessment order dated 30.11.2018, the assessee has filed the present appeal before the Tribunal. In this appeal, the following issues arise for consideration in this appeal: (i)Transfer pricing adjustment (“TP adjustment”) of Rs.117,35,51,190/- made by the Transfer Pricing Officer (“TPO”) in respect of the ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 7 of 97 manufacturing segment of the Assessee pursuant to the DRP directions.\ (ii)TP adjustment of Rs.25,95,18,911/- made by the TPO in respect of the software development services (‘SWD services’ for short) rendered by the Assessee pursuant to the DRP directions. (iii)Disallowance of provision for warranty to the extent of Rs. 3,21,32,433/-. (iv)Disallowance of annual license fees amounting to Rs. 28,00,21,116/- . (v)Non-set off of brought forward losses amounting to Rs. 232,54,55,699/- available to the Assessee. We shall take up for consideration, the issues as listed above for consideration in seriatim. TRANFSER PRICING ADJUSTMENT IN THE MANUFACTURING SEGMENT: 14. As far as the issue of determination of ALP in the Manufacturing segment are concerned, the facts are that the Assessee filed a Transfer Pricing Study (TP Study) in terms of Sec.92D of the Act justifying the price it received from the AE. The Assessee chose Transactional Net Margin Method (TNMM) – as the Most Appropriate Method for comparing Assessee’s profit margin with that of comparable companies. Under this method the comparison is made between the Assessee’s the operating/ net margins with that of comparable companies to analyse if the related party transactions have been undertaken on an arm’s length basis. Rule 10B(1)(e) of the Income Tax Rules, 1962 (Rules), explains transactional net margin method as a method by which,— (i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 8 of 97 employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; Report this ad (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transactionand the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction. 15. In its TP Study, the Assessee in terms of Rule 10B(1)(e ) (i) of the Rules, net profit realized by the Assessee was chosen with reference to cost i.e., Operating profit on Operating Cost was chosen as the profit level Indicator (PLI) for comparing Assessee’s margin with the comparable companies. The TPO to whom a reference was made for determination of ALP in terms of Sec.92CA accepted the PLI chosen for the purpose of comparison. In terms of Rule 10B(1)( e) of the Rules, the Assessee in its TP Study adjusted the net profit margin it earned to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market. In this regard the Assessee reduced from its operating cost three items (i) a sum of Rs.60,80,69,000 towards difference in the capacity utilization by it vis-à-vis the comparable companies; (ii) a sum of Rs.14,85,40,000/- towards ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 9 of 97 customs duty adjustment and (iii) a sum of Rs. 23,43,61,607/- towards extraordinary expenses on account of Exchange fluctuation. Due to the above adjustment, the net profit margin as computed by the Assessee in its transfer pricing study and the net profit margin as computed by the TPO varied and consequently, the addition to the total income on account of determination of ALP stood enhanced. This is the major dispute between the Assessee and the Revenue as to how to compute the net profit margin. On making the above mentioned adjustments, the Assessee arrived at a margin of 2.38%. as against - 16.78% arrived at by the TPO. Besides the above, the Assessee also disputes, inclusion of certain companies as comparable with the Assessee by the TPO and exclusion of a company chosen by the Assessee as a comparable company in its TP study. Besides the above, the Assessee has also raised a contention that the provisions of Sec.92 of the Act have to be applied only to the proportionate value of international transaction i.e., transaction with the AE and transactions with non AEs should be not considered for the purpose of adjustment u/s.92 of the Act. 16. A comparison of the Assessee’s TP study and the manner of determination of ALP by the TPO is given below: 1. Net mark-up on cost earned by the Assessee As per the TP study: Operating Income Rs. 5,17,71,00,000/- Operating Cost Rs.5,05,41,30,000/- Operating Profit (Op. Income – Op. Cost) Rs. 12,29,70,000/- Net mark-up (OP/OR)2.38% ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 10 of 97 As reflected in the TP Order: Operating Income Rs. 5,17,71,00,000/- Operating Cost Rs.6,04,57,20,000/- Operating loss (Op. Income – Op. Cost) Rs.-86,86,20,000/- Net mark-up (OP/OR)-16.78% 2.Comparison of the TP studies done by the Assessee and TPO: AssesseeTPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/OR OP/OR Database used PROWESS & CAPITALINE PLUS PROWESS &Ace- TP Comparables selected 6 11 3.Filters applied by Assessee in its TP study: StepDescription 1.Companies for which data available was for a period prior to 31.03.2012 – rejected 2.Companies reporting net sales >Rs. 1 crore – selected 3.Companies reporting average manufacturing income/average net sales>50% - selected 4.Companies with related party transactions less that 10% of sales – selected 5.Companies with positive net worth – selected 6.Companies which were functionally comparable – selected ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 11 of 97 4.Comparables selected by Assessee and their arithmetic mean: Sl. No.Name of the companyAverage OP/Sales(in %) 1.Automotive Stamping Assembly Ltd 1.22 2.Bharat Gears Ltd 4.78 3.Hindustan Hardly Spicer Ltd 4.12 4.JMT Auto Ltd 7.84 5.Munjal Showa Ltd 5.25 6.Wheels India Ltd 5.74 Arithmetical Mean 4.82 The TPO accepted 4 companies selected by the Assessee in its TP study viz., Automotive Stamping Assembly Ltd, Bharat Gears Ltd, JMT Auto Ltd and Wheels India Ltd. 5.Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the CompanyOP/Sales(in %) 1 Rajsriya Automotive Inds. Pvt Ltd 13.07 2 TVS Upasana Ltd 12.13 3 Aspee Springs Ltd 11.15 4 Supreme Treon Pvt Ltd 7.37 5 JMT Auto Ltd 6.46 6 Aditya Auto Products &Engg. (India) Pvt Ltd 5.48 7 Varroc Engineering Pvt Ltd 5.16 8 Leewon Precision Pvt Ltd 4.34 9 Borgwarner Morse TEC Murugappa Pvt Ltd 12.45 10 Maco Pvt Ltd 2.59 ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 12 of 97 11 Vijayashree Autocom Ltd 2.20 AVERAGE MARK-UP7.49 6. Computation of arm’s length price by the TPO and the adjustment made: A. Arm’s Length Mean Mark-up 7.50% A.Operating cost Rs. 604,57,20,000 B.Operating Revenues Rs.517,71,00,000 C.Arm’s length Operating profit (7.50% of Rs.517.71 cr) Rs. 38,82,82,500 D.Arm’s length Cost (B-C) Rs. 478,88,17,500 Shortfall being adjustment u/s. 92CARs. 125,69,02,500 17. In arriving at the above adjustment, the TPO imposed the adjustment on an entity level, rather than restricting the adjustment to the proportion of international transactions to total cost in the segment. It can be seen from the above that the TPO arrived at Rs.38,82,82,500 that the operating profit that the Assessee should have made by applying 7.5% on cost of Rs.517,71,00,000 and after reducing the same from the operating revenue arriving at cost of Rs.478,88,17,500. Since the Assessee’s cost was Rs.has taken the entire cost of Rs.604,57,20,000 incurred in the manufacturing segment and reduced the Arm’s Length margin of 7.50% to arrive at the operating cost of Rs.478,88,17,500 that the Assessee ought to have incurred but since revenue that the Assessee’s cost was Rs.604,57,20,000, the difference of Rs.125,69,02,500 (Rs.604,57,20,000 – Rs.478,88,17,500) was added as adjustment consequent to determination of ALP. 18. It is one of the contention of the Assessee before the TPO that the provisions of Sec.92 can be applied only to transactions with AE. In this regard ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 13 of 97 the Assessee pointed out that in the manufacturing segment, the Assessee is in charge of conceptualization and designs. It procures equipment for manufacture both fixed and capital equipments. It owns any intellectual Property rights (IPR) for the products developed by them. It receives technology and manufacturing know-how from it’s Associate Enterprise (AE) for its manufacturing process. It purchases raw materials and components from both third parties and AEs. The nature of raw materials purchased from the AEs and third parties are different. The raw materials procured from the AE are globally sourced by Continental group wherein prices are negotiated globally to get price advantage for bulk purchases. Manufacturing and assembly of products is undertaken by the Assessee. The Assessee receives guidance from its AEs on the quality control procedures to be followed. The Assessee sells finished products to third parties as well as to its AE. Majority of the sales are to OEMs. Continental Group has a Global Key Key Accounts Management (KAM) structure through which it maintains customers relationship with OEMs having global presence which helps the Assessee to establish customer relationship with the Indian entities of global OEMs. The Assessee sells goods both to independent third parties as well as to its AEs. It can be seen from the aforesaid sentences in bold and underlined that the component of AE transaction in the Assessee in the manufacturing segment is only in respect of purchase of raw materials, getting technical know how for which the Assessee pays royalty, getting services specific and getting benefit of shared services and obtaining production support services. The ALP has to be determined only with reference to that proportion of the transaction in which the AE’s are involved and the entire manufacturing segment cost base cannot be the subject matter of determination of ALP. The figures given by the Assessee in this regard were as follows: ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 14 of 97 18A. The percentage of international transacitons to the total operating cost would be at 22.49%, as demonstrated below and therefore, the adjustment if any should be restricted to such percentage alone. ParticularsAs per TP order Transfer pricing Adjustment 125,69,02,500 (which was reduced by Rs.27,63,35,693 being the payment of royalty by the Assessee to its AE to avoid double taxation) and the final figure of addition was Rs.8,05,66,807) Total operating cost6,04,57,20,000 Purchase of raw materials76,47,58,690 Payment of technical know-how14,89,99,314 Payment of royalty27,63,35,693 Payment of services availed 17,07,549 Payment of shared services availed13,40,30,481 Payment for production support services availed 3,37,97,500 Total value of international transactions in the manufacturing segment 1,35,96,29,227 Percentage of international transactions to total operating cost 22.49% Revised transfer pricing adjustment restricted to percentage of international transactions 26,39,21,336 Relief from original adjustment90,96,29,854 The above plea was not accepted by the TPO. No specific discussion is there on this issue in the order of the TPO. 18B. Aggrieved by the aforesaid determination of ALP by the TPO in the draft order of Assessment by the AO, the Assessee filed objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act. The DRP issued directions, whereby it upheld the contentions of the TPO, subject to the following directions: ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 15 of 97 (i)Company Hindustan Hardy Spicer Limited to be included in the list of comparable companies. (ii)The TPO to examine the claim of the Assessee that Supreme Treon Private Limited and Borg Warner Morse TEC Murugappa Pvt Ltd fail the RPT filter. (iii)Re-computation of margins for Vijayashree Automotive Ltd (iv)The rectification petition filed by the Assessee to be considered on merits. 19. The AO passed the impugned final assessment order in line with the directions of the DRP in which the TP adjustment was reworked to Rs. 117,35,51,190/- in accordance with the order dated 22.11.2018 passed by the TPO. 20. The grounds that were pressed for adjudication regarding determination of ALP in the Manufacturing segment, are as follows: (i)That the DRP erred in not granting an adjustment for underutilisation of capacity (Ground No. 9). (ii)That the DRP erred in not granting adjustment towards custom duty expenses.(Ground No. 10). (iii)That the DRP erred in not granting adjustment towards exchange fluctuations.(Ground No. 11) (iv)The DRP erred in not granting depreciation adjustment (Ground No. 12) (v)That the DRP erred in upholding the inclusion of Rajsriya Automotive Inds. Pvt Ltd., TVS Upasana Ltd., Aspee Springs Ltd., Supreme Treon Pvt Ltd., Leewon Precision Pvt Ltd., Borgwarner Morse TEC ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 16 of 97 Murugappa Pvt Ltd., and Maco Pvt Ltd. as comparable to the Assessee(Ground No. 13). (vi)That the DRP erred in not including Munjal Showa Ltd as a comparable to the Assessee. (Ground No. 15) (vii)That in any event, the DRP ought to have appreciated that adjustment if any, should be restricted to the proportionate value of the international transactions of the Assessee. (Ground no. 16) 21. As far as Ground No.9 raised by the Assessee is concerned, the same is in relation to the action of the revenue authorities in not allowing adjustment to the operating costs of the Assessee by reducing the cost on account of underutilization of capacity. It was submitted that the Assessee was not able to operate at its optimum capacity and could not recoup its fixed costs due to industry slowdown, leading to lesser demand and high depreciation cost,since the economy had faced global recession and the industry meltdown had hit the automotive industry and affected the opportunity of the Assessee to acquire new customers. This resulted in underutilization of the production capacity in the factory, resulting in low utilization of the available capacity for the FY 2013-14 to manufacture the products. The Assessee operated at 44.76% of its installed capacity whereas the comparable companies chosen by the Assessee operated at an average of 71.94%.It is evident from the capacity utilization of 44.76% that the Assessee had under-utilized its capacity considering low demand for its products. Hence, the Assessee could not manufacture at optimal capacity and recoup the fixed expenses for the year and the adjustment for under-utilization of capacity is warranted. 22. The TPO did not grant an adjustment for capacity underutilisation on the ground that the adjustment would have to be made to the comparable companies and not the tested party and that the capacity utilisation of each of the ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 17 of 97 comparable companies has not been considered. According to the AO in terms of Rule 10B(1)( e) clause (iii) the net profit margin arising in comparable uncontrolled transactions has only to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market and the Assessee’s margin can never be adjusted. The TPO held that the data considered by the Assessee to compute the adjustment pertained only to 3 out of 7 companies and that the capacity utilisation for FY 2010 to 2014 alone were considered. It was also observed that under-utilization of capacity is not only for the Assessee but had affected the entire industry. Therefore, its comparable companies also have the same effect as the Assessee. Normally, utilization of capacity is significantly different between the Assessee and comparable companies in the initial stage of operation. However, the Assessee is not in the initial stage of operation. 23. The DRP while upholding the order of the TPO relied on decision of ITAT Delhi in the case of Haworth India Pvt. Ltd ITA No.5341/Del/2010 (“Haworth India”) and also on various other rulings to hold that the Assessee did not produce any evidence for assuming the capacity utilization of comparable companies and whatever data relied upon by the assessee for seeking the adjustment was either unreliable or incorrect. 24. Before the Tribunal, it was submitted by the learned counsel for the Assessee that from a harmonious reading of sub-clause (iii) of clause (e) of Rule 10B and sub-rule (3) of 10B, it is evident that for a comparability analysis of an international transaction with the uncontrolled transaction, reasonable and accurate adjustment is permitted to eliminate any difference which materially affects the price or costs or the profit arising from such transaction in the open market. Nowhere the rulesuggest that such adjustment should be made only to ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 18 of 97 the uncontrolled transaction, that is, comparable companies and not to the 'tested party' whose transaction is being compared. It was submitted that the adjustment can be made either in the case of the 'tested party' or the comparable companies so that the difference which could materially affect the amount of net profit margin is removed. More so, in practical situations there may be absence of reliable data in the case of the comparable companies for which such material difference is to be analysed or examined. In certain cases there may arise some difficulty when the reliable data for particular cost or profit may not be available, therefore, a reasonable accurate adjustment in the hands of the tested party may throw fruitful result. This view has been upheld by the ITAT in the case of Pangea3 & Legal Database Systems Pvt Ltd v. Income-tax Officer reported in[2017] 79 taxmann.com 303 (Mumbai - Trib.). This Hon’ble Tribunal has also allowed adjustments in the case of tested party in the following cases:  Skoda India Pvt. Ltd. v. ACIT reported in [2009] 30 SOT 319 (Pune)  Kirloskar Motors Pvt. Ltd. v. ACIT reported in [2012] 28 taxmann.com 293 (Bangalore) 25. It was submitted that in the case of Haworth India, this Hon’ble Tribunal had held that the adjustment, if any, can be made to eliminate the material differences between the Assessee and its comparable companies to the extent these adjustments are reasonably accurate. Such adjustment can be allowed only in a case where Assessee is able to furnish accurate and credible evidence in this regard. In the relevant case law, since Haworth India had not been able to furnish credible and accurate information with regard to capacity utilization, the adjustment was not allowed. However, in the Assessee’s case, the Assessee has provided all information practically possible. Sufficient evidence has been provided in the form of capacity data of comparable companies as well as industry average from the Federation of Indian Chambers of Commerce & ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 19 of 97 Industry (“FICCI”) survey report. Hence principally capacity utilization adjustment should have been granted. 26. The Assessee has also relied on the following judicial precedents in this regard: Global Vantedge P. Ltd. v. DCIT reported in [2010] 37 SOT 1 (DELHI) ITO v. CRM Services India (P) Ltd reported in [2011] 14 taxmann.com 96 (Delhi) CIT v. Petro Araldite Pvt. Ltd reported in [2018] 93 taxmann.com 438 (Bombay). Transwitch (India) Pvt. Ltd. v. DCITreported in [2012] 21 taxmann.com 257 (Delhi - Trib.) Capgemini India Private Limited v. ACIT reported in [2013] 33 taxmann.com 5 (Mumbai - Trib.) ACIT v. Fiat India (P.) Ltd. [IT Appeal No.1848 (Mum) of 2009, dated 30-04-2010] Amdocs Business Services (P.) Ltd. v. DCIT reported in [2012] 26 taxmann.com 120 (Pune) 27. Without prejudice to the above contentions on producing relevant data wherever practically possible by the Assessee, since the Respondent is of the opinion that the data provided by the Assessee is unreasonable and inaccurate, the Respondent can exercise his power under Section 133(6) to collate the information on capacity details of the comparable companies such as actual capacity in units, installed capacity, break up of fixed and variable cost, product wise segmental profitability (if any) and provide the Assessee an opportunity by sharing the details so obtained on the comparable companies, and accordingly grant the adjustment for capacity under-utilized. Similar ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 20 of 97 contentions have been upheld by this Hon’ble Tribunal in the case of IKA India Private Limited v. ACIT reported in [2019] 101 taxmann.com 276 (Bangalore). 28. It was therefore submitted the adjustment for capacity utilisation as made by the Assessee in its TP study be upheld. In the alternative, as submitted above, since the Respondent revenue is well within its power to call for details from the comparable companies, such course may be adopted and the adjustment be granted. 29. The learned DR relied on the order of the DRP. 30. Both the parties agreed that identical issue was decided by this Tribunal in Assessee’s own case for AY 2012-13 in IT (TP) A No.713/Bang/2017 and this Tribunal by its order dated 24.11.2021 remanded to issue to the TPO with the following observations: “24. We have heard both the parties and perused the material on record. In this case, the exact details of capacity utilisation of comparable companies was not made available to the TPO. It was alleged that the TPO should obtained it by exercising his powers u/s. 133(6) of the Act so as to compare the capacity utilisation of the comparables with the assessee company. In our opinion, it is appropriate to remit the issue relating to adjustment on account of capacity utilisation of the assessee to the file of the AO/TPO for deciding the same afresh keeping in view the OECD guidelines. If the exact details of capacity utilisation of comparable companies are not available in the public domain, the AOITPO is directed to obtain the same directly from the comparable companies and decide theissue afresh, after affording opportunity of being heard to the assessee. Accordingly, this issue is remitted to the AO/TPO.” 31. Following the aforesaid order, we remand the issue to the TPO/AO for consideration afresh on the lines indicated in the decision of the Tribunal for AY 2012-13, after affording the Assessee opportunity of being heard. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 21 of 97 32. As far as Grd.No.10 raised by the Assessee is concerned, the same is in relation to adjustment to the cost base of the Assessee on account of custom duty. The Assessee has incurred significant customs duty charges which are proportionately much greater than that of the comparable companies leading to a lower profitability for the Assessee. The comparable companies have not incurred any significant custom duty expense as they primarily manufacture using materials available indigenously within India. It was submitted that the Assessee is still in the process of localizing its manufacturing process. To meet the quality standards and to overcome technological challenges, the Assessee imports raw materials from its AEs. Therefore, it becomes necessary for the Assessee to import raw materials from its AEs which is not the case for the comparable companies, thus, putting the Assessee in a comparative disadvantage viz-a-viz the comparables. The TPO rejected the adjustment sought for the reason that the decision to import is a conscious decision taken by the Assessee and in the absence of any external factors , beyond the control of the Assessee necessitating imports, no adjustment can be made. The DRP upheld denial of such adjustment holding that price increase on account of imported raw material is also to correspondingly take place. It was suibmitted that the import of raw materials is not a commercial decision but on the other hand is necessitated for reasons beyond the Assessee’s i.e., by lack of capacity to localize the procurement which the Assessee is still in the process of doing. Reliance was placed on the following decisions in support of the Assessee’s contentions: Skoda India Pvt. Ltd. v. ACIT reported in [2009] 30 SOT 319 (Pune) Putzmeister Concrete Machines Private Limited v. DCITreported in [2014] 49 taxmann.com 436 (Panaji - Trib.) Toyota Kirloskar Motors Pvt. Ltd. v. ACIT reported in [2012] 28 taxmann.com 293 (Bangalore) ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 22 of 97 33. In this connection, the Assessee’s import consumption vis-à-vis the imports of comparable companies selected by the learned TPO and the Assessee are as below for the FY 2013-14: TPO’s comparables Import/Total purchases Import/Sales Rajsriya Automotive Inds. Pvt. Ltd.0.06%0.03% TVS Upasana Ltd.1.24%0.48% Aspee Springs Ltd.4.46%2.23% Supreme Treon Pvt. Ltd7.47%3.84% JMT Auto Ltd6.21%3.26% Aditya Auto Products &Engg. (India) Pvt Ltd.19.75%10.25% Varroc Engineering Pvt Ltd.7.56%4.80% Leewon Precision Pvt. Ltd.2.02%1.05% Borgwarner Morse TEC Murugappa Pvt. Ltd.0%0% Maco Pvt. Ltd64.88%40.02% VijayshreeAutocom Ltd. 0%0% Average Import Consumption 10.33%6.00% 34. The learned DR while relying on the order of the DRP submitted that arithmetic mean of the margins of comparables under TNMM takes care of such differences and reiterated the stand of the TPO for refusing such adjustment. 35. Both the parties agreed that identical issue was decided by this Tribunal in Assessee’s own case for AY 2012-13 in IT (TP) A No.713/Bang/2017 and this Tribunal by it’s order dated 24.11.2021 remanded to issue to the TPO with the following observations: “30. This issue came up for consideration before the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd. v. DCIT, 84 taxman.com 69 wherein it was held as follows:- ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 23 of 97 "5. Before us, Id. A.R submitted that 90% of the raw materials of the assessee are' imported as such customs duty adjustments to be made and it includes Rs. 4.31 crores pertained to the customs duty in the manufacturing segment. In principle the customs duty adjustments is allowed in view of the Co-ordinate Bench decision in the case of Motonic India Automotive (P.) Ltd. v. Assn. CIT [20161 73 taxmanri.corn 235 (Chennai Trib.) wherein held that: '6.1 At this stage, it is pertinent to mention the finding of the Pune Bench in the case of Demag Cranes & Components (India) Pvt. Ltd. v. DCIT (supra) dated 4.1.2012 in ITA No.120/PN/2011, which is as follows : "37. We have heard the parties and perused the available material on records in the light of the second limb of the ground 4(b). it is relevant mentioned that we have already analysed the relevant provisions of Income Tax rules vis a vis the scope of the adjustments in the preceding paragraphs in the context of the adjustments on account of the 'working capital'. in principles, our findings on the issue remain applicable to the adjustments on account of the import cost mentioned in ground 4(b) too. The difference between the AL Margin before and after the said adjustments on account of 'import cost' works out to 0.57% (7.18%-6.61%). Revenue has not disputed the said working of the assessee. In these factual circumstances and in the light of the scope of adjustments discussed above, in our opinion and in principle, the assessee should win on this ground too. One such decision relied upon by the assessee's counsel supports our finding relates to the decision of this bench of the Tribunal in the case of SkodaAuto India p Ltd 122 TT.I 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that,- "No doubt , a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd.'s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. As was observed by a Co-ordinate Bench of this Tribunal in the case of E-Gain Communication (P) Ltd. (supra) "the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". We do not agree with the AO that every time the assessee pays the higher import duty, ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 24 of 97 it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the business models of the comparables that the TPO has adopted in this case. The adjustments then are required to be made for functionally differences. The other way of looking at the present situation is to accept that business model of the assessee company and the comparable companies are the same and it is on account of initial stages of business that the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and profits in fit cases. We also do not agree with the authorities below that the onus is on the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in publicdomain. In such a situation, i.e. when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of assessee's operations and complete facilities ensuring a reasonable indigenous raw material content was not in place. The assessee's claim is that it was in These circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car vas computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is perrnissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Co-ordinate Bench and we are in respectful agreement with the views of our esteemed colleagues. 17-25 additional argument was not available before authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 25 of 97 to the file of the TPO for fresh adjudication in the light of our above observations." 38. The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminatethe difference if any. However, the TPO/A0/DRPsee to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged insub rule (3) of Rule 1013 of the Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto.' Accordingly, we direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP.' Hence, to bring uniformity, the customs duty was to be eliminated from the comparable price also to arrive at correct PLI. Accordingly, we remit the issue to the file of AO for fresh consideration." 31. In view of the above finding of the Tribunal in Gates Unitta India Company (P.) Ltd. (supra), we are inclined to remit this issue to the AO/TPO with similar direction.” 36. Following the aforesaid order, we remand the issue to the TPO/AO for consideration afresh on the lines indicated in the decision of the Tribunal for AY 2012-13, after affording the Assessee opportunity of being heard. 37. The next grievance projected by the Assessee in Grd.No.11 is with regard to adjustment to operating cost on account of foreign exchange fluctuation. In this regard it was submitted that the Assessee imports a considerable amount of raw material for undertaking the manufacturing operations in India. As a rule, import prices are significantly impacted by the foreign exchange rates, which is the case for the Assessee as well. Hence, foreign exchange fluctuation will be one of the significant factors impacting the import costs and in turn influencing the profitability. Accordingly, it made an adjustment to its operating costs by reducing an amount of Rs. 23.44 crores therefrom. The TPO disallowed such ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 26 of 97 adjustment and the DRP upheld the same. The observations of the TPO/DRP and the Assessee’s submission as regards the same was as under: TPO/DRP observations Assessees submissions  The Assessee has already included Foreign exchange gain/loss in its income statements and hence, it is not appropriate to adjust it for transfer pricing analysis.  The Assessee imports components and raw materials in Euro, US dollars and JPY but sells them in Indian Rupees and does bear the risk of foreign exchange transaction. The Assessee’s loss is mainly due to higher import cost of raw materials  While the Assessee’s submission talks about review and revision of rate contract with its unrelated customers, it does not talk about review/revision with AEs and the Assessee should have revised the same considering the foreign exchange market and depreciation of Indian rupee.  Such adjustments are to be conducted not to the Assessee’s profit but to comparable companies’ profit. The Assessee failed to demonstrate that there exists such losses in the case of comparable companies selected by the Assessee.  Forex fluctuation computed as per Accounting Standards (“AS”) 11 takes into account the realization loss/gain (fluctuation due to differences between invoice and payment exchange rates) and revaluation loss/gain (translation of closing balances at the year-end exchange rate). Hence such exchange fluctuation does not take into account any adverse exchange fluctuation due to depreciation of Indian currency on a year-on-year basis.  The Assessee bears the forex risk and hence it has incurred high forex fluctuation loss which is embedded in the raw material import cost. The fact that forex risk is borne by the Assessee cannot be a valid reason for rejecting the adjustment claimed by it.  As the Assessee bears the forex risk, any adverse fluctuation on foreign currency would be borne only by the Assessee. The AE has nothing to do whatsoever with this Indian leg of the transaction. Such fluctuation being due to external factors, there would be no reason for the AE to revise its rate contracts where components have been sold broadly at consistent prices (in some cases ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 27 of 97 even at lower prices). It is to be noted that there has been an extraordinary and significant depreciation in INR over Yen/USD during the year when compared to the previous years.  From a harmonious reading of the relevant provisions of Indian TP Regulations, it is evident that for a comparability analysis of an international transaction with the uncontrolled transaction, reasonable and accurate adjustment is permitted to eliminate any difference which materially affects the price or costs or the profit arising from such transaction in the open market. Nowhere the relevant rules suggest that such adjustment should be made only to the uncontrolled transaction, that is, comparable companies and not to the ‘tested party’ whose transaction is being compared. The adjustment can be made either in the case of the ‘tested party’ or the comparable companies so that the difference which could materially affect the amount of net profit margin is removed. More so, in practical situations there may be absence of reliable data in the case of the comparable companies for which such material difference is to be analyzed or examined. In certain cases there may arise some difficulty when the reliable data for particular cost or profit may not be available, therefore, a reasonable accurate adjustment in ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 28 of 97 the hands of the tested party may throw fruitful result. The Assessee’s profitability is significantly impacted as a result of forex fluctuation where it had import content of around 73% unlike comparable companies with significantly lower portion of import of materials (4%). Hence such losses would not exist in the case of comparable companies. 38. The significant imports made by the Assessee are in Euro, USD and Yen. While accounting, the same is converted to INR based on the foreign exchange rates communicated by the Continental Group. During the relevant years, the INR depreciated considerably vis-à-vis most of the other major currencies and imports became costlier for the Assessee. The fluctuation in the value of Euro and USD vis-à-vis INR for a 10 year period from FY 2008-09 to FY 2017-18 was as under. Financial year Euro to INR rate % depreciation/ appreciation Average depreciation/ appreciation 2008-09 65.45 2.03% 2009-10 67.372.94% 2010-11 60.06(10.85%) 2011-12 66.2910.37% 2012-13 70.035.64% 2013-14 80.6615.18%15.18% 2014-15 78.15(3.11%) (1.68%)2015-16 71.78(8.15%) 2016-17 73.772.77% ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 29 of 97 2017-18 75.081.77% Financial year USD to INR rate % depreciation/ appreciation Average depreciation/ appreciation 2008-09 46.48 4.11% 2009-10 47.672.57% 2010-11 45.51(4.54%) 2011-12 47.865.16% 2012-13 54.1913.23% 2013-14 60.3311.34%11.34% 2014-15 61.031.15% 1.75% 2015-16 65.367.10% 2016-17 67.122.68% 2017-18 64.48(3.94%) 39. It was submitted that during the FY 2013-14, there was an abnormal depreciation in the value of Euro and USD as against the average movement for the preceding periods. This has resulted in a higher outflow of INR for the same value of Euro and USD which was transacted in the previous year. Although there was no significant increase in the price of imports as compared to the previous year, the foreign exchange rate fluctuations has also contributed towards increased material costs. Therefore, an adjustment for the abnormal impact due to foreign currency fluctuation during the year, has to be considered on the value of import purchases made during the year. 40. The learned counsel for Assessee highlighted the following points that necessitate the adjustment to the Assessee’s cost on account of foreign exchange fluctuations: 1.Higher Import Content of the Assessee vis-à-vis comparable companies: ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 30 of 97 As stated above, the Assessee imports a considerable amount of raw materials for undertaking the manufacturing operations in India unlike the comparable companies selected in the transfer pricing documentation by the Assessee and also the comparable companies selected by the learned TPO.It was submitted that in comparison to the Assessee, the comparable companies who are established players in the automobile market, have negligible import content due to indigenization of materials required for production. The Assessee contends that due to stricter quality norms and necessity for adherence to the global quality standards, the Assessee had to import from its group affiliates/foreign unrelated suppliers and therefore localisation of such high quality raw materials had not occurred during the assessment year in question due to several factors.In this connection, the Assessee’s import consumption vis-à-vis the imports of comparable companies selected by the learned TPO and the Assessee are as below for the FY 2013-14: TPO’s comparables Import/Total purchases Import/Sales Rajsriya Automotive Inds. Pvt. Ltd.0.06%0.03% TVS Upasana Ltd.1.24%0.48% Aspee Springs Ltd.4.46%2.23% Supreme Treon Pvt. Ltd7.47%3.84% JMT Auto Ltd6.21%3.26% Aditya Auto Products &Engg. (India) Pvt Ltd.19.75%10.25% Varroc Engineering Pvt Ltd.7.56%4.80% Leewon Precision Pvt. Ltd.2.02%1.05% Borgwarner Morse TEC Murugappa Pvt. Ltd.0%0% Maco Pvt. Ltd64.88%40.02% VijayshreeAutocom Ltd. 0%0% Average Import Consumption 10.33%6.00% ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 31 of 97 Assessee’s comparables Import/Total purchases Import/Sales Automotive Stampings & Assemblies Limited0.93%0.73% Bharat Gears Limited0.85%0.46% Hindustan Hardy Spicer Limited0.52%0.29% J M T Auto Limited6.21%3.26% Munjal Showa Limited8.03%6.37% Wheels India Limited5.34%4.15% Average Import Consumption 3.65%2.54% 41. It was pointed out that the TPO’s and Assessee’s comparable companies had an average import purchases to total purchases ratio of 10.33% and 3.65% respectively against the Assessee’s ratio of 72.60%. As a result, the Assessee is more prone to the impact of foreign exchange fluctuation. 2.Pre-agreed contracts with customers prevents passing the additional costs as a result of forex impact 42. It was submitted that the Assessee enters into rate contracts with its customers and the same is fixed for a period of time. It is to be observed that INR vs various currency was depreciating in the relevant year. Subsequent to the commitment of sale price to the customers, there was significant negative movement of rupees to Euro, USD and other currencies as the rupee depreciated substantially. The Assessee could not negotiate for an increase in the selling price to customers, and thus it had to bear any increase in the cost of manufacture.The Assessee had to oblige with the terms of contract and supply the products at the committed rate for the entire year even though there was significant increase in the cost of the products by virtue of higher cost of the components being imported vis-à-vis comparable companies selected by the Assessee who had either no imports or less significant imports. Further, it is also to be noted that the Assessee may not be able to pass on the entire impact of ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 32 of 97 foreign exchange to customers as it operates in the competitive environment of the automobile industry.On an analysis carried out to determine the change in selling price per unit of the products to the customer across years, it was also observed that there was no significant increase in the selling price of the Assessee to its customers in majority of products. From the same it is evident that the Assessee is unable to negotiate for an increase in sale prices to account for the impact of forex fluctuations etc. 3.Impact of forex fluctuations on the Assessee 43. In this regard it was submitted that the imports are made in foreign currency by the Assessee. While accounting, the same is converted to INR based on the foreign exchange rates communicated by the Continental Group. It was submitted that there is no price increase by group affiliates/unrelated foreign suppliers in majority of the components supplied as compared to the previous year. To demonstrate the fact that the increase in material costs are as a result of depreciation in currency and not because of price increase, the Assessee applied the following methodology: Step 1: Identify the total component wise invoice value in foreign currency for the parts imported by the Assessee in FY 2013-14; Step 2: Determine the corresponding quantity against such invoices imported; Step 3: Determine the per unit price in foreign currency (Step 1 divided by Step 2); Step 4: Carry out the same methodology for FY 2012-13 (previous year) and determine the per unit price in foreign currency; and Step 5: Compare the price (for the same components imported) so arrived at the Step 3 vis-à-vis Step 4 and identify the change in such price. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 33 of 97 44. The above exercise was carried out for FY 2013-14 and it was observed that majority of the components imported by the Assessee did not result in higher per unit price when compared with the previous year. In fact, in majority of cases, the per unit price has only declined/stayed constant. This demonstrates that the foreign exchange rate fluctuation is the lone factor that has significantly contributed towards higher import cost of the Assessee in turn affecting its profitability.Out of the total imports, INR 2,009.62 million pertained to import of components that were common for both FY 2013-14 and FY 2012-13. Out of the same it was observed that: Particulars Value (INR millions) Percentage Cases where purchase price has reduced/remained constant 1,688.7484% Cases where purchase price has increased 320.8816% Total 2,009.62100% 45. It was submitted that from the above, it is evident that in 84% of the cases, the per unit prices of the common components have reduced/remained constant from the FY 2012-13 to FY 2013-14. Hence any increase in import costs could only be attributed to adverse forex fluctuation. The detailed workings are provided aspart of the additional evidence submitted before this Hon’ble Tribunal vide application of the Assessee dated 22.3.3019. The documents sought to be submitted in this regard are as follows: 1.Tabulation of appreciation/depreciation in exchange rate 2.Exchange rates prevailing as per Reserve Bank of India from the years 2008 to 2018 3.Comparison of Rates of import purchases for FY 2013-14 and FY 2012-13 4.Analysis of import prices across FY 2013-14 and FY 2012-13 5.Invoice listing for FY 2013-14 ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 34 of 97 6.Invoice listing for FY 2012-13 7.Invoices submitted for FY2013-14 and FY2012-13 46. It was submitted that the Assessee bears the forex risk, any adverse fluctuation on foreign currency would be borne only by the Assessee. The AE has nothing to do whatsoever with the Indian leg of the transaction. Such fluctuation being due to external factors, there would be no reason for the AE to revise its rate contracts where components have been sold at consistent prices.Further the proportion of imports from AEs as against total imports is only approximately 24% and the majority of imports (76%) pertains to unrelated suppliers.It is evident from the above that the Assessee has incurred substantial cost due to fluctuation in foreign exchange rates and the Assessee has huge amount of imports when compared to the comparable companies. Therefore, the Assessee’s claim for an adjustment of INR 23.44 crores on account of adverse fluctuation in foreign exchange during the year in order to arrive at the appropriate comparability ought to be allowed. 47. Thelearned counsel for Assessee placed reliance on the judgment of this Hon’ble Tribunal (Delhi Bench) in Honda Trading Corpn. India Private Limited v. ACIT reported in[2013] 33 taxmann.com 21 (Delhi - Trib.), Gates Unitta India Company (P) Ltd reported in[2017] 84 taxmann.com 69 (Chennai - Trib.), Pangea3 & Legal Database Systems Pvt Ltd v. Income-tax Officer reported in[2017] 79 taxmann.com 303 (Mumbai - Trib.) in support of its contentions. 48. The learned DR relied on the order of the DRP on this issue. 49. Both the parties agreed that identical issue was decided by this Tribunal in Assessee’s own case for AY 2012-13 in IT (TP) A No.713/Bang/2017 and ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 35 of 97 this Tribunal by it’s order dated 24.11.2021 remanded to issue to the TPO with the following observations: “39. This issue was also considered by the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd. (supra) and it was held as under:- "7. We have heard both the parties and perused the material on record. In our opinion, forex fluctuations loss in the operating cost of the assessee and also forex gains in the operating income of assessee, both to be excluded from the operating expenses as well as operating income respectively in view of the Order of Tribunal in the case of Moronic India Automotive (P.) Ltd. (supra) in for assessment year 2009-10 vide order dated 17.08.2016 wherein held that:— "g. We find force in the argument of the Id. AR. It is normal that exchange rate is subject to fluctuation due to economic conditions. While determining the ALP, one has to consider these factors, more so, our view is fortified by the decision of the Tribunal in the cases of Honda Trading Corp. India Pvt. Ltd. v. ALIT in ITA No.5297/De 1 / 2 o11 for the assessment year 2007-08 and DHL Express (India) Put. Ltd. v. ALIT in ITA No.7360/Mum/2010 for the assessment year 2006-07. Accordingly, we direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment." Accordingly, this issue is remitted to the file of AO for fresh consideration." 40. Following the aforesaid decision of the Tribunal, we remit this issue to the AO/TPO with similar directions for fresh decision.” 50. Following the aforesaid order, we remand the issue to the TPO/AO for consideration afresh on the lines indicated in the decision of the Tribunal for AY 2012-13, after affording the Assessee opportunity of being heard. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 36 of 97 51. As far as Grd.No.12 raised by the Assessee is concerned, the same is in relation to the plea of the Assessee for grant of depreciation adjustment in computing operating cost of the Assessee. In this regard it was submitted that the Assessee has invested huge capital in purchasing fixed assets which are an integral part of the manufacturing operations. The Assessee incurred high depreciation cost to sales of 11.55%. As it did not manufacture the products as estimated, the Assessee could not recover its fixed costs and incurred losses.TheAssessee, without prejudice to the above arguments, has claimed adjustment to neutralize the difference between its depreciation cost and the significantly lower depreciation costs of the comparable companies. The DRP in its directions held that depreciation adjustment is related to the capacity adjustment and can be granted only in the initial years and that such high investments are observed not only for the Assessee but in the entire industry. It was further held that since the average of comparable margins are taken and a margin of 3% is also allowed, the same would take care of adjustments that cannot be carried out. 52. It was submitted that the DRP directed grant of depreciation adjustment vis-à-vis differences in depreciation cost in the Assessee’s own case in AY 2012-13, consequent to which the transfer pricing adjustment in the manufacturing segment for the AY 12-13 was reduced by INR 24.23 crores. Since there has been no change in facts from AY 12-13, the Assessee prays that the same be granted in the AY 14-15 as well. 53. Without prejudice to the arguments below on the comparability of companies chosen by the TPO, if depreciation adjustment is granted, the arithmetic mean of the margin of comparable companies adopted by the learned TPO would be -0.14%. The learned counsel for Assessee relied on the following judicial precedents: ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 37 of 97 - CIT v. Petro Araldite Pvt. Ltd reported in [2018] 93 taxmann.com 438 (Bombay) - SchefenackerMotherson Ltd vs. ITO reported in[2009] 123 TTJ 509 (Delhi) - CIT vs. Rakhra Technologies Private Limited reported in [2011] 15 taxmann.com 266 (Punjab & Haryana) - Amdocs Business Services (P.) Ltd. v. DCIT reported in [2012] 26 taxmann.com 120 (Pune) - ACIT v. Fiat India (P.) Ltd. [IT Appeal No.1848 (Mum) of 2009, dated 30-04-2010] - Brintons Carpets Asia (P) Ltd v. DCIT reported in [2011] 12 taxmann.com 148 (Pune) 54. We are of the view that the adjustment on account of underutilization of capacity will sufficiently take care of the depreciation adjustment and no separate adjustment is required to be granted on account of difference in quantum of depreciation vis-a-vis difference in capacity utilization and cost of fixed assets. We hold and direct accordingly. The decisions cited are all in the context of capacity utilization and cannot be extended to grant of depreciation adjustment. 55. Grounds No.13 and 15 raised by the Assessee are with regard to choice of comparable companies chosen by the TPO and confirmed by the DRP.In ground no. 13, the Assessee is seeking the exclusion of Rajsriya Automotive Industries. Pvt Ltd., TVS Upasana Ltd., Aspee Springs Ltd., Supreme Treon Pvt Ltd., Leewon Precision Pvt Ltd., Borgwarner Morse TEC Murugappa Pvt Ltd., and Maco Pvt Ltd.In ground no. 15, the Assessee is seeking inclusion of Munjal Showa Ltd. as a comparable. We shall deal with comparability of each of these companies. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 38 of 97 a)Rajsriya Automotive Industries. Pvt Ltd: (“Rajsriya”) 56. It is the claim of the Assessee that this company is functionally dissimilar to the Assessee. It is the contention of the Assessee that though Rajsriya is primarily involved in the manufacture of part and accessories for two-wheelers, the components manufactured by Rajsriya can be categorised as mechanical in nature whereas the Assessee is engaged in the manufacture of electrical components like instruments clusters, engine systems, speed sensors, airbag controllers, anti-lock braking system etc. It was also the contention of the Assessee that this company possesses/owns intangibles and therefore cannot be compared with the Assessee who does not own such intangibles. It was contended that the DRP has erred in holding presence of intangibles is not a determinative factor in selecting comparables. It is submitted that the presence of intangibles evidences that Rajsriya preforms product design and development function which makes the company incomparable to that of the Assessee as in the Assessee’s case, the AE is responsible for the product design and development. The Assessee does not own any intangibles. Hence, the same company ought to be excluded from the final list of comparables. The learned DR relied on the order of the DRP which held that broad comparability as part of automotible components was good enough and the conclusion that presence of intangibles by itself is not sufficient to disregard comparability when otherwise there is functional similarity. 57. Rule 10B(2) of the Rules provides the criteria for considering an international transaction undertaken by an Assessee as comparable with an uncontrolled transaction and it lays down as follows: “Rule 10B(2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:— ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 39 of 97 (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; (c)the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d)conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if— (i)none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii)reasonably accurate adjustments can be made to eliminate the material effects of such differences.” 58. In terms of Rule 10B(2)( a) of the rules specific characteristics of property transferred or services provided in either transaction is a relevant criteria. It may be true that broadly the Assessee and the comparable Rajsriya can be said to be in automotive component manufacturing. However, the specific characteristics of the property manufactured by the Assessee is electrical/electronics parts whereas the comparable company Rajsriya is manufacture of automotive components. Therefore there is a difference in the specific characterics of the property manufactured. So also in terms of Rule 10B(2)( b) of the Rules, presence of intangible as an Asset employed would be a relevant criteria to choose comparable. That being the case, we are of the view that if on a narrower search, if sufficient number of comparable companies are available in the automobile electrical/electronics component, then it would be ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 40 of 97 just and proper to disregard companies who manufacture automotive components. We hold and direct accordingly. b)TVS Upasana Ltd: (“TVS”) 59. The plea of the Assessee for exclusion of TVS is almost identical to the plea for rejection of Rajsriya as a comparable. It is the plea of the Assessee that TVS is functionally not comparable to the Assessee as it is engaged in the business of manufacturing spokes and nipples for all the major OEM’s in India. These automotive components are less complex and are mechanical in nature as compared to the electric components manufactured by the Assessee. The Assessee is into the manufacture of electrical components like instrument clusters, engine systems, speed sensors, airbag controllers, anti-lock braking system etc for the automobile industry. It is the further plea of the Assessee that TVS is also engaged in manufacture of various products and operates in different segments. Moreover, raw material consumption ratio on sales of TVS and the Assessee are widely variant. The proportion of raw materials consumed by the Assessee (76%) exceeds 2 times that of TVS. Particulars TV Upasana Ltd Amt (in Rs) Assessee Amt (in Rs) Raw material cost 33,50,12,898394,68,84,336 Sales 91,47,45,212517,71,01,220 Raw material cost/Sales 37%76% It was also pleaded that TVS fails the RPT filter of 15% consistently applied by the Tribunal. Therefore, the said company cannot be considered as a comparable and ought to be excluded from the final list of comparables. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 41 of 97 60. The learned DR relied on the order of the DRP and the submissions were identical to the choice of comparable Rajsriya. 61. After giving a careful consideration to the rival contentions, we find that the reason that the Assessee was in electrical/electronic components manufacture and TVS is in manufacture of automotive/mechanical components in the automobile industry is a difference in the characteristics of the property which is a relevant criteria for choosing comparable companies. On this aspect whatever conclusions we drawn in respect of the comparable Rajsriya would be equally applicable to this comparable company also. In respect of the Related Party Transaction (RPT), the range of related party transaction would vary between 15% and 25% depending on the availability of comparable companies. If more companies are available for comparability then the percentage of RPT can be restricted to 15% and in cases where such comparable companies are not available then the range can go upto 25% to rope in more comparable companies. The fact that raw material consumption is more in the case of the Assessee does not seem to fit into any of the criteria for deciding comparability in terms of Rule 10B(2) of the Rules. c)Aspee Springs Ltd: (Aspee) 62. The plea of the Assessee for exclusion of this company is on the ground that this company is functionally dissimilar to the Assessee. Aspee is engaged in the business of manufacturing Washers, Circlips, Bushes, Retaining Rings, Clips and other similar automotive parts. These auto components are less complex and are mechanical in nature as compared to that of the Assessee which manufactures electrical components. Also, Aspee performs research and development activities and therefore, this company is not functionally comparable to the Assessee. It was submitted that the DRP has erred in holding ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 42 of 97 that R&D activities are not relevant in selection of comparables as the same will exist is many companies. The DRP has failed to consider that Aspee has spent an amount of Rs. 40,00,000 towards development of a product which will have a material impact on the financials of the company. Aspee can be characterized as a full-fledged manufacturer while the Assessee is only a licensed manufacturer assuming normal risks and not engaged in R&D activities. The company is also in possession of intangible assets generated during the course of its operations. The proportion of raw materials consumed by the Assessee (76%) exceeds 1.5 times that of the comparable company. The relevant details as extracted from the annual reports are provided below. Particulars Amt (Rs.) Raw material cost 14,55,03,466 Sales 30,61,07,713 Raw material cost/Sales 48% From the above, it is evident that Aspee operates on a different business model from that of the Assessee and hence is functionally non-comparable. Therefore, the said company ought to be excluded from the final list of comparables. 63. The learned DR relied on the order of the DRP. 64. In so far as the contention regarding the dissimilarity in the characteristics of the property and presence of R & D activities the conclusions while dealing with Rajsriya will apply to this company also. As far as the difference in own consumption of raw material and different business model, we are of the view that the conclusions while dealing with the comparable TVS will equally apply to this comparable also. We hold and direct accordingly. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 43 of 97 d)Supreme Treon Pvt. Ltd. (‘Supreme’) (formerly Supreme– Treves Private Limited) 65. As far as the objection of the Assessee for exclusion of this company is concerned, it has been reiterated that Supreme is a supplier of Automotive Interior Trims and NVH components (door panels, acoustic and thermal floor insulation, carpets and textile floor coverings). Its product range includes: Interior components-trim and acoustics Exterior components-acoustic and thermal insulation These auto components can be categorised as mechanical or acoustic in nature. The Assessee on the other hand is engaged in the manufacture of electrical components like instrument clusters, engine systems, speed sensors, airbag controllers, anti-lock braking system etc for the automobile industry. Hence the products of Supreme cannot be compared with that of the Assessee. Since the products manufactured by Supreme are completely different from that of the Assessee, the company is functionally non-comparable and ought to be rejected.It was further submitted that the company fails the RPT filter of 25% applied by the TPO. The RPT workings as extracted from the annual report are provided below: Particulars Amt (Rs.) Related party transactions 119,35,66,404 Sales 424,62,83,702 RPT/Sales 28.11% It was submitted that while the DRP directed the RPT filter to be reapplied by the TPO, the same was inappropriately applied by the latter and the company ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 44 of 97 was included in the final list of comparable companies. The learned DR relied on the order of the DRP. 66. In so far as the contention regarding the dissimilarity in the characterics of the property is concerned, the conclusions while dealing with Rajsriya will apply to this company also. As far as the quantum of RPT is concerned, it would be appropriate to direct the TPO/AO to consider the plea of the Assessee that the RPT percentage is more than 25% for this comparable company. e)Borgwarner Morse TEC Murugappa Pvt Ltd. (‘Borgwarner’) 67. As far as exclusion of this company is concerned, the submission of the Assessee was that Borgwarner is primarily engaged in the manufacture of bearings, gears etc. These auto components can be categorised as mechanical in nature. The Assessee on the other hand is engaged in the manufacture of more complex electrical components like instrument clusters, engine systems, speed sensors, airbag controllers, anti-lock braking system etc for the automobile industry. Hence the products of Borgwarner cannot be compared with that of the Assessee.It was also submitted that the company fails the RPT filter of 25% applied by the TPO. The RPT workings as extracted from the annual report are provided below: Particulars Amt (Rs.) Related party transactions 33,14,12,001 Sales129,10,14,168 RPT/Sales25.67% It was submitted that while the DRP directed the RPT filter to be reapplied by the TPO, the same was inappropriately applied by the latter and the company was included in the final list of comparable companies. The Assesseealso submits that the raw material consumption ratio on sales of Borgwarner and the ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 45 of 97 Assessee are widely variant. The relevant details as extracted from the annual reports are provided below. Particulars Amt (Rs.) Raw material cost47,46,47,085 Sales99,66,28,898 Raw material cost/Sales48% The proportion of raw materials consumed by the Assessee (76%) exceeds 1.5 times that of the comparable company. From the above, it is evident that Borgwarner operates on a different business model from that of the Assessee and hence is functionally non-comparable. The learned DR relied on the order of the DRP. 68. In so far as the contention regarding the dissimilarity in the characteristics of the property the conclusions while dealing with Rajsriya will apply to this company also. As far as the difference in own consumption of raw material and different business model, we are of the view that the conclusions while dealing with the comparable TVS will equally apply to this comparable also. We hold and direct accordingly. As far as the quantum of RPT is concerned, it would be appropriate to direct the TPO/AO to consider the plea of the Assessee that the RPT percentage is more than 25% for this comparable company. We hold direct accordingly. f)Munjal Showa Ltd: (Munjal) 69. As far as comparability of this company is concerned, it was submitted that the said company is functionally similar to the Assessee and is engaged in the in the same industry and manufactures similar auto components as that of the Assessee. Therefore, the said company ought to be included in the final list of comparables. The learned DR relied on the order of the DRP. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 46 of 97 70. After considering the rival submissions, we find that the DRP has not gone into the comparability of this company but has proceeded under the mistaken belief that this company was not part of the search matrix before the TPO. This was a comparable chosen by the Assessee and rejected by the TPO and it was the plea of the Assessee that this company is comparable functionally. We are therefore of the view that interest of justice would be met, if the TPO/AO is directed to consider comparability of this company afresh. 71. In ground No.16, the Assessee has contended that the adjustment, if any should be restricted to the proportionate value of the international transactions of the Assessee. In this regard it was pointed out by the Assessee that the adjustment (if any) should be restricted only to the international transaction of the Assessee pertaining to purchase of raw materials from its AEs and other related transactions. The DRP did not accept this contention of the Assessee despite various decisions of this Hon’ble Tribunal in support of the Assessee. The Assessee submits that the mandate in Chapter X of the Act is only to re- determine the consideration received or given to arrive at income arising from an International Transaction with Associated Enterprises. In respect of transactions with non AEs, Chapter X of the Act has no role to play and therefore to make an adjustment including the non-AE transactions is erroneous and contrary to the provisions of the Act.Reliance was placed on the following decisions in support of the above contention of the Assessee: IL Jin Electronics (I) (P.) Ltd v. ACIT reported in[2010] 36 SOT 227 (DELHI) M/s Tupperware India Private Limited (ITA No. 2140/Del/2011 and 1323/Del/2012) ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 47 of 97 IKA India Private Limited v. ACIT reported in [2019] 101 taxmann.com 276 (Bangalore). CIT v. Alstom Projects India Limited reported in [2017] 88 taxmann.com 465 (Bombay)  Alstom Projects India Limited v. CIT reported in [2013] 36 taxmann.com 130 (Mumbai - Trib.) CIT v. Thyssen Krupp Industries (P) Limited reported in [2016] 70 taxmann.com 329 (Bombay) Claas India Pvt. Ltd., - ITA No.3883/Del/2010 CIT v. Petro Araldite Pvt. Ltd reported in [2018] 93 taxmann.com 438 (Bombay) Kyungshin Industrial Motherson Limited v. DCIT reported in [2015] 57 taxmann.com 166 (Delhi - Trib.) Emersons Process Management India (P) Ltd v. ACIT reported in [2011] 13 taxmann.com 149 (Mumbai) DCIT Vs Starlite reported in 133 TTJ 425(Mum) Gillete India Ltd v. ACIT reported in [2014] 44 taxmann.com 133 (Jaipur - Trib.) Phoenix Mecano (India) Private Limited v. ITO reported in [2014] 42 taxmann.com 469 (Mumbai - Trib.) Penfort (Israel) Limited v. Deputy Director of Income-tax reported in [2013] 36 taxmann.com 499 (Mumbai - Trib.) ACIT v. Super Diamonds reported in [2012] 26 taxmann.com 101 (Mum.) 72. It was submitted that the percentage of international transactions to the total operating cost would be at 22.49%, as demonstrated below and therefore, the adjustment if any should be restricted to such percentage alone. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 48 of 97 We have already given these figures in the earlier part of this order but for the sake of ready reference, we give below the details of percentage of international transaction in the manufacturing segment, which is as follows: Particulars As per TP order Transfer pricing Adjustment 11,73,55,1190 Total operating cost 6,04,57,20,000 Purchase of raw materials 76,47,58,690 Payment of technical know-how 14,89,99,314 Payment of royalty 27,63,35,693 Payment of services availed 17,07,549 Payment of shared services availed 13,40,30,481 Payment for production support services availed 3,37,97,500 Total value of international transactions in the manufacturing segment 1,35,96,29,227 Percentage of international transactions to total operating cost 22.49% Revised transfer pricing adjustment restricted to percentage of international transactions 26,39,21,336 Relief from original adjustment 90,96,29,854 It was submitted that the transfer pricing adjustment (if any) should be restricted to the international transaction of the Assessee. The learned DR relied on the order of the DRP. 73. In this regard, we find that identical issue has been decided by the Tribunal in the case of Ika India Pvt. Ltd., (surpa) and the Tribunal held as follows: ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 49 of 97 “44. Section 92(1) of the Act provides as under:- "Any income arising from an international transaction shall be computed having regard to the arm's length price". 45. Section 92B defines the term "international transaction" to mean "a transaction between two or more associated enterprises .....” . 46. A conjoint reading of section 92 with section 92B clearly brings out that computation of income at ALP is permissible only in respect of international transaction, which, in turn, means a transaction between two or more associated enterprises. Similar position has been reiterated in the machinery provision contained in section 92C dealing with the manner of computation of ALP. Sub-section (1) of section 92C stipulates that:- "The arm's length price in relation to an international transaction shall be determined by any of the following methods.....". 47. It is the plea of the assessee that addition by way of transfer pricing adjustment is mandated only in respect of transactions between two or more AEs. The profit from comparable transactions of the assessee with non-AEs is one of the subtle and most reliable modes for determining ALP of the international transactions. The Act does not contemplate an addition by way of TP adjustment in respect of transaction with non-AEs. 48. The TPO determined addition to total income, consequent to determination of ALP only in relation to international transaction i.e., transactions with AE in the export of finished goods segment by considering the value of international transaction at Rs.3,31,50,982 which is the value of export of finished goods by the assessee to its AE and not on the total sales in the finished goods segment of Rs.39,19,74,355 (vide para 8.3 of the TPO’s order). 49. The Hon'ble Bombay High Court in the case of Phoenix Mecano (India) Private Limited [ITA No. 1182 of 2014], had to deal with the following question of law suggested by the revenue:- 6.1 Whether on the facts and in the circumstances of the case, the Hon'ble Tribunal was correct in directing the AO to restrict the ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 50 of 97 determination of the ALP to transactions with the AE rather than on the entire turnover of the Company. 6.2 Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct while issuing the above directions without appreciating the observations of the DRP that there was no segmental audit of the transactions of AE and non AE and therefore there was no method whereby the AO could come to a fair determination of ALP by only restricting to transactions with AE." 50. The Hon’ble Bombay High Court on the above questions of law held as follows:- “5. With the assistance of the learned counsel for respective parties, we have considered the submissions and the judgment of the Tribunal. The Tribunal in para 7 of its order has observed as under:- "7. We have heard both the parties and their contention have carefully been considered. So far it relates to grievance of the assessee that the TP adjustment can only be applied to international transactions of the assessee with the AE and it cannot be applied at entity level, the issue is found to be covered by the aforementioned decision of the Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. (supra). Therefore, we hold that determination of arms length price should be restricted only to international transaction of the assessee with its AE. It was pointed out that the figures are available with the AO, details of which has also been filed before us at page 170 of the paperbook. Therefore, we direct the AO to take only the international transactions of the assessee with its AE for the purpose of determining arms length price. We direct accordingly." 6. The Tribunal has held that the figures are available with the Assessing Officer, the details of which has also been filed with the Tribunal at page 170 of the paperbook. It would be clear that the details of the international transaction are specifically made available and therefore the apprehension of the department as such is misplaced. ........ 7. Considering the provisions of Section 92 of the Income Tax Act, so also the reasoning adopted by the Tribunal suggesting that separate figures of international transaction are available, so also ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 51 of 97 the order referred above. No substantial question of law arises for consideration. As such the appeal is dismissed with no costs." (Emphasis supplied) 51. The Hon'ble Mumbai Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. [ITA No. 7032/Mum/2011] held that the ALP can only be determined on the value of international transaction alone and not on the entire turnover of the assessee at entity level. This decision was further upheld by the Hon'ble Bombay High Court in the case of Thyssen Krupp Industries India Pvt. Ltd. [ITA No. 2201 of 2013], which held as below:- "2. .............. (a) Whether on facts and the circumstances of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs.)? 3. ........... ........... (e) We find that in terms of Chapter X of the Act, redetermination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered to with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act. 5. In the above view, as the provisions of the Act in respect of transfer pricing are self evidence, Question No.(a) as proposed does not give rise to any substantial question of law. Thus not entertained.” 52. The ITAT Bangalore in the case of Kirloskar Toyota Textile Machinery Pvt. Ltd. v. ACIT [IT(TP)A No.1401/Bang/2010 held as under:- “Taking into consideration of these factors, we accept the first fold of submission made by the learned counsel for the assessee and direct the Assessing Officer to confine the adjustment, qua the ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 52 of 97 purchases made by the assessee from the AE. To be more specific, the adjustment is to be made only to the purchases made from the AE ..... (emphasis supplied) 53. The CIT(A) in exercise of his powers of enhancement of income took the view that the ALP has to be determined on the basis of the entire sales in the finished goods segment including transactions with Non-AE also. The reasoning adopted by the CIT(A) for doing so was as follows:- “10.0 While examining the working of ALP in the case of appellant, it was observed that the TPO has reduced the adjustment proportionately by holding that only 8.46% of revenue of the appellant is from AE. She accordingly adopted 8.46% of the operating revenue and 8.46% of the Operating cost for purpose of the determination of ALP. However, this method is not the correct approach as the ALP determination should have been based on the entire operating revenue and entire operating cost. Since this change in method would have amounted to enhancement of the income of the appellant, so opportunity of being heard was given to the appellant vide order sheet entry dated 11.08.2017, as to why the proportionate reduction done by the TPO should not be disregarded. The appellant sought time to file written submissions and the same was allowed. The appellant filed written submissions vide letter dt 29.08.2017. The same have duly been considered and the issue is being decided as follows: 10.1 In the case under consideration, the appellant is selling its product to AE as well as to non AEs, for the manufacture of which, part purchases are from AEs and remaining from the non AEs. The TPO has considered OP/OR for purpose of computation of the ALP as the quantum of sales to AE are lesser than the purchase from AE and thus lesser controlled. When a product is sold, only overall profit margin is recorded without any data as to what would be the profit in relation to purchases from AE. So this cannot be presumed that the profit percentage earned in relation to costs related to AE transactions as well as non-AE transactions was same. Since costs are common to the products ultimately sold by the appellant, and the same includes AE transactions, so it is always possible that the margin of profit percentage vis-a-vis costs related to AE transaction is not the same as profit margin on costs related to non-AE transactions but ultimately overall certain profits are being shown. Further, the transactions with non-AEs can be presumed to be at ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 53 of 97 arm's length as there is no reason to earn lesser profit. But in case of transactions with AEs, there is always a likelihood of earning lesser profits as transactions are controlled and decisions are influenced by AE. Thus the overall profits on account of transactions with AE as well as non-AE gets suppressed.” 54. We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions made before the CIT(A) that transaction with non- AE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of transactions with AE. He also referred to certain decisions of the Tribunal for the proposition that section 92 of the Act is not applicable to non-AE transactions. These decisions have already been extracted in the earlier paragraphs. The ld. DR relied on the order of the CIT(Appeals). 55. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm’s length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm’s length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. 56. In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee.” 74. The facts and circumstances of the case in this appeal on this issue is identical to the case decided by the Tribunal in the case of IKA (supra). The reasoning of the CIT(A) in this case and the case of IKA (supra) are also identical. Therefore the decision rendered in the case of IKA (supra) squarely applies to the present case. Therefore, the adjustment on account of ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 54 of 97 determination of ALP has to be restricted only to that part of the transaction with AE and not the entire value of the manufacturing segment as was done by the revenue authorities. 75. As far as Grd.No.17 is concerned, the Assessee in this ground has challenged the order of the TPO whereby he treated the payment of Research and Development and licence fee (Royalty) to the AE as at nil. In this regard it was submitted that the TPO erred in making an adjustment treating the ALP as ‘Nil’ with respect to royalty fee payment on the ground that the Assessee had failed to prove that the services were actually rendered by the AE. It was submitted that though the DRP has upheld the order of the TPO, the DRP has held that as the adjustment in the manufacturing segment being made under TNMM incorporating the payment of license fee/royalty as a part of the operating cost, the adjustment comes to more than the amount of royalty and therefore, no separate adjustment is called for royalty. Further, the DRP held that in the event, the margin of the manufacturing segment is at arm’s length or the adjustment under TNMM works out to be less than the payment for license fee/royalty, then the adjustment made towards royalty would be revived. It was submitted that as no adjustment with respect to royalty has been made in view of the adjustment in the manufacturing segment being more than the amount of royalty, the said ground may not be adjudicated at this stage. However, the Assessee reserves liberty to urge this ground at a later stage in the event the adjustment made towards royalty is revived. 76. We are of the view that the prayer so made is acceptable and the liberty prayed for is granted. We hold and direct accordingly. 77. The AO is directed to compute the ALP of the international transaction in the manufacturing segment as per the directions given in this order, after affording opportunity of being heard. ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 55 of 97 78. SWD SERVICES SEGMENT OF THE ASSESSE It is not in dispute that the transaction of rendering of SWD services by the Assessee to it’s AE is an international transaction. ANALYSIS OF THE ASSESSEE’S TP STUDY AND THE TP ORDER Net mark-up on cost earned by the Assessee (as reflected in the TP Order): Operating Income Rs. 1,38,06,40,000/- Operating CostRs.1,29,89,30,000/- Operating Profit (Op. Income –Op. Cost)Rs.8,17,10,000/- Operating/Net mark-up (OP/OC)6.29% Comparison of the TP studies done by the Assessee and TPO: AssesseeTPO Methodology adoptedTNMMTNMM Profit Level Indicator (PLI) OP/TC OP/OC Database used PROWESS & CAPITALINE PLUS PROWESS &Ace- TP Comparables selected 98 Filters applied by Assessee in its TP study: StepDescription 1.Companies reporting net sales >Rs. 1 crore –selected 2.Companies with positive net worth -selected 3.Companies reporting average manufacturing & trading income/average net sales>50% -selected 4.Companies having related party transactions> 10% of operating revenue-rejected. 5.Companies which were functionally comparable –selected Comparables selected by Assessee and their arithmetic mean: Sl. No.Name of the companyWeighted Average margin (in %) 1.Akshay Software Technologies Ltd. 4.39 2.Cigniti Technologies Ltd8.58 ITA No.129/Bang/2019 Continental Automotive Components India Pvt.Ltd. Page 56 of 97 Sl. No.Name of the companyWeighted Average margin (in %) 3.KALS Information Systems Ltd12 4.R S software (India) Limited16.48 5. Sasken Communication Technologies Ltd 6.24 6.Tata Elxsi Ltd14.49 7.Expert Global Solutions Pvt Ltd13.36 8.Hepatica Technologies Pvt Ltd-1.43 9.Hinode Technologies Pvt Ltd-3.60 Arithmetical Mean 5.71% The TPO selected 3 comparables from the TP study of the Assessee and rejected 6 comparables selected by the Assessee in its TP study. Filters applied by the TPO: StepDescription 1.Companies whose data is not available for FY 2013-14-excluded. 2.Companies which are functionally comparable -selected 3.Companies having different financial year ending (i.e. not March 31, 2014) or data of the company does not fall within 12 month period i.e., 01-04-2013 to 31-03-2014-rejected. 4.Companies whose service income