Nissin Brake India Pvt. Ltd., Gurgaon V. DCIT, Gurgaon

ITA 1292/DEL/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2788 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 06-07-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 03-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Bad and doubtful debts
• Section: 92C; 143(3); 154

Judgement Text

PAGE | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 : NEW DELHI BEFORE SHRI H.S.SIDHU , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 1292/DEL/2017 (ASSESSMENT YEAR: 2012 - 13 ) NISSIN BRAKE INDIA PVT LTD, B - 37/38, HIP JAPANESE BUSINESS CENTRE IDC, MAHRAULI ROAD, SECTOR - 14, GURGAON PAN: AACCN3633K VS. DCIT, CIRCLE - 2, 4 TH FLOOR, VANIYA NIKUNJ, HSIIDC BUILDING, UDYOG VIHAR, PH - V, NR. SHANKAR CHOWK, BH - 8, GURGAON (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU SINHA, ADV REVENUE BY: SANJAY KUMAR YADAV, SR. DR DATE OF HEARING 21/12 /2017 DATE OF PRONOUNCEMENT 1 9 / 0 3 / 2018 O R D E R PER PRASHANT MAHARISHI , A. M. 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD ASSESSING OFFICER/ DY CIT, CIRCLE - 3, GURGAON PASSED U/S 143(3) READ WITH SECTION 144C OF THE INCOME TAX ACT, 1961 ON 30.1.2017 IN PURSUANCE OF DIRECTION OF THE DISPUTE RESOLUTION PANEL DATED 14.12.2016 . 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - APPEAL AGAINST THE ORDER UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME TAX ACT, 1961 ('THE ACT') DATED JANUARY 30, 2017 JANUARY 30, 2017 (RECEIVED ON FEBRUARY 02, 2017) FOR THE ASSESSMENT YEAR ('AY') 2012 - 13, PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 3, GURGAON 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN ASSESSING THE TOTAL INCOME OF THE APPELLANT FOR THE RELEVANT AY AT RS. 52,418,071 AS AGAINST THE RETURNED INCOME OF NIL (CONSIDERING BROUGHT FORWARD LOSSES). 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP') / AO / TRANSFER PRICING OFFICER ('TPO') ERRED IN MAKING A TRANSFER PRICING ADJUSTMENT OF RS. 5 2,418,071 IN RESPECT OF THE INTERNATIONAL TRANSACTION RELATING TO PROVISION OF BRAKING PARTS SERVICE ALLEGING THE SAME TO BE NOT AT ITA NO. 1292/DEL/2017 (ASSESSMENT YEAR: 2012 - 13) NISSIN BRAKE INDIA PVT LTD, VS. DCIT, PAGE | 2 ARM'S LENGTH IN TERMS OF THE PROVISIONS OF SECTION 92C OF THE ACT READ WITH RULE 10D OF THE INCOME - TAX RULES,1962 ('THE RULE S'). 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP / AO / TPO WHILE REJECTING APPELLANT'S DETERMINATION OF ARM'S LENGTH PRICE FOR ITS INTERNATIONAL TRANSACTIONS HAVE RESORTED TO CHERRY PICKING AND ERRED IN INCLUDING INAPPROPRIATE C OMPARABLES WHICH ARE FUNCTIONALLY NOT COMPARABLE TO THE APPELLANT. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP / AO / TPO HAVE IN ARBITRARILY REJECTING CERTAIN FUNCTIONALLY COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT. 5. THA T ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP / AO / TPO HAVE ERRED IN REJECTING WITHOUT PROVIDING ANY REASON, THE CAPACITY UTILIZATION ADJUSTMENT CONDUCTED BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION WITHOUT TAKING COGNIZANCE OF THE FACT THAT THE APPELLANT WAS OPERATING AT DIFFERENT LEVEL OF CAPACITY, I.E. UNABSORBED FIXED COST TO SALES AS COMPARED TO COMPARABLES AND HENCE, ERRED IN DENYING THE ECONOMIC ADJUSTMENT FOR THE DIFFERENCE IN CAPACITY LEVELS OF THE APPELLANT VIS - A - VI S COMPARABLES AND DISREGARDING THEIR OWN APPROACH FOR AY 2009 - 10 AND AY 2010 - 11 WHERE CAPACITY UTILIZATION ADJUSTMENT HAS BEEN GRANTED TO THE APPELLANT. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP / AO / TPO HAVE ERRED IN TREATING FOREIGN EXCHANGE FLUCTUATION GAINS/ LOSSES AND PROVISION FOR DOUBTFUL DEBTS AS NON - OPERATING IN NATURE WHILE COMPUTING THE PROFIT MARGIN OF THE APPELLANT. 7. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. AO ERRED IN INITIATING PENALTY PROCEEDINGS U/S 271(L)(C) OF THE ACT. 8. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN PROPOSING TO CHARGE INTEREST UNDER SECTION 234B, 234C AND 234D OF THE ACT. 3. THE ASSESSEE IS ENGAGED IN MANUFACTURING AND TRADING OF V ARIOUS TYPES AUTOMOTIVE AND ALUMINUM, NON - AUTOMOTIVE BRAKE, ALUMINUM COMPONENTS, SPARE PARTS AND OTHER RELATED ACCESSORIES. IT STARTED ITS BUSINESS IN ASSESSMENT YEAR 2008 - 09. THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.11.2012 SHOWING NIL INCOME. AS THE ASSESSEE HAS ENTERED INTO THE INTERNATIONAL TRANSACTION OF PURCHASE AND SALES THE REFERENCE WAS MADE TO THE LD TRANSFER PRICING OFFICER TO DETERMINE THE ARMS LENGTH PRICE. T HE LD TRANSFER PRICING OFFICER PASSED ORDER U/S 92CA(3) OF THE ACT ON 29.01.2016 WHEREIN, THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF RS. 779080174/ - WAS COMPUTED AT RS. 831498245/ - ITA NO. 1292/DEL/2017 (ASSESSMENT YEAR: 2012 - 13) NISSIN BRAKE INDIA PVT LTD, VS. DCIT, PAGE | 3 PROPOSING AN ADJUSTMENT OF RS. 52418071/ - . IN ITS TP STUDY REPORT THE ASSESSEE SELECTED 7 COMPARABLES OUT OF WHICH ONLY TWO COMPARABLES WERE ACCEPTED AND 5 WERE REJECTED. THE LD TRANSFER PRICING OFFICER ALSO INCLUDED 4 COMPARABLES. CONSEQUENT TO THAT THE FINAL COMPARABILITY LIST OF 6 COMPARABLES SHOWED PROFIT LEVE L INDICATOR OF OP/OI OF 6.03% AND CONSEQUENT ADJUSTMENT WAS PROPOSED. THE LD PROPOSED THE DRAFT OF THE VARIATION ON 21.03.2016. AGAINST WHICH THE ASSESSEE FILED ITS OBJECTION BEFORE THE LD DRP WHO GAVE DIRECTION ON 14.12.2016 AND CONSEQUENTLY ASSESSMENT OR DER U/S 143(3) READ WITH SECTION 144C WAS PASSED ON 30.01.2017 AT RS. 52418071/ - AS LD DISPUTE RESOLUTION PANEL DID NOT GRANT ANY RELIEF TO THE ASSESSEE. 4. THEREFORE, THE LD AR SUBMITTED THAT THE LD TRANSFER PRICING OFFICER VIDE ORDER DATED 23.08.2017 U/S 154 OF THE ACT PROVIDED RELIEF TO THE APPELLANT COMPANY WHERE THE TRANSFER PRICING OFFICER ACCEPTED ONLY 3 COMPARABLE COMPANIES OUT OF THE FIVE REJECTED EARLIER AND ACCORDINGLY, THE ADJUSTMENT AS NOW WORKED OUT AT RS. 40032978/ - INSTEAD OF RS. 52418071/ - . HE SUBMITTED THAT HOWEVER, THE LD TRANSFER PRICING OFFICER REJECTED THE CAPACITY UTILIZATION ADJUSTMENT CLAIMED BY THE ASSESSEE WHILE RE - COMPUTING THE ALP OF INTERNATIONAL TRANSACTION PERTAINING TO MANUFACTURING SEGMENT. HE SUBMITTED THAT THE CAPACITY UTIL IZATION OF THE ASSESSEE IS MERELY 37% WHERE THE SAME OF THE COMPARABLES IS ON VERY HIGH SIDE. HE FURTHER STATED THAT IN CASE OF ASSESSEE FOR AY 2010 - 11 THE COORDINATE BENCH HA S ALREADY GRANTED THE CAPACITY ADJUSTMENT IN PRINCIPLE AND HAS REFERRED THE MATTE R BACK TO THE TPO FOR FRESH ADJUDICATION. HE FURTHER THAT ALL THE COMPARABLES ARE SET UP LONG BACK WHEREAS THE ASSESSEE IS JUST 3.5 YEARS OLD AND THEREFORE, IT HAS A HUGE DEPRECIATION EXPENDITURE AS WELL AS THE FIXED COST AND SEMI VARIABLE COST. HE FURTHER SUBMITTED A CHART WHICH SHOWS THAT APPELLANT HAS INCURRED LOSSES DUE TO HUGE UNUTILIZED CAPACITY AND IT WAS IN FIFTH YEAR IT HAS STARTED EARNING SOME OPERATING EARNINGS . HE FURTHER STATED THAT THE FIXED COST OF DEPRECIATION AND RENT IS 11.91% OF THE SALES OF THE ASSESSEE WHEREAS, IN CASE OF COMPARABLE COMPANIES SALE IS IN THE RANGE OF 2 TO 3%. HE ITA NO. 1292/DEL/2017 (ASSESSMENT YEAR: 2012 - 13) NISSIN BRAKE INDIA PVT LTD, VS. DCIT, PAGE | 4 THEREFORE, SUBMITTED THAT THE ASSESSEE DESERVES THE CAPACITY UTILIZATION ADJUSTMENT. THE LD DR RELIED ON THE ORDER OF THE TRANSFER PRICING OFFICER AND SUBMITTED T HAT ASSESSEE HAS FAILED GIVE DETAILS OF THE CAPACITY UTILIZATION ADJUSTMENT. THEREFORE, SAME CANNOT BE GRANTED. 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE IDENTICAL HAS BEEN CONSIDERED BY THE COORDINATE BENCH IN CASE OF THE ASSESSEE FOR AY 20 10 - 11, VIDE ITA NO. 3425/DEL/2016 DATED 22.09.2017 THE IDENTI CAL ISSUE HAS BEEN SET ASIDE TO THE FILE OF TPO VIDE PARA NO. 11 OF THE ORDER OF THE COORDINATE BENCH AS UNDER: - 7. AT THE OUTSET, THE LEARNED AR HAS DRAWN OUR ATTENTION TO PAGE 595 OF THE PAPER BOOK WHERE OUR SPECIFIC ATTENTION WAS DRAWN TO THE INSTALLED CAPACITY OF THE TESTED PARTY AND ALSO OF THE COMPARABLES AND FURTHER OUR ATTENTION WAS DRAWN TO CAPACITY UTILIZATION RATIO. WE WOULD LIKE TO REPRODUCE THE COMPARATIVE TABLE FROM THE PART OF THE PAPER BOOK WHICH IS AS UNDER: - NISSIN INDIA - TESTED PARTY CLASS OF GOODS INSTALLE D CAPACIT Y (UNIT NOS.) ACTUAL PRODUCTIO N (UNIT NOS.) VALUE PER UNIT INSTALLED CAPACITY (VALUE) ACTUAL PRODUCTIO N (VALUE) REFERENCE TANDEM MASTER CYLINDER ASSEMBLY 136,136 54,206 1,912 260.227,35 6 103.616.1 20 ANNEXURE 3 OF SUBMISSION DATED JAN 03, 2014. POINT 141 & 14.6 OF NOTES TO ACCOUNTS CALIPER ASSEMBLY 134,775 105,880 1,392 187,642,90 2 147.413,3 22 PREFILLED CLUTCH ASSEMBLY 68.068 47.117 2.237 152.247.99 9 105.386.8 04 ENGINE MOUNT BRACKET 204, 204 48. 193 308 62.830,046 14.828.15 4 DISK BRAKE SYSTEM ASSEMBLY 17,017 2,894 3,304 56,229,088 9,562.613 TOTAL 560,200 258,290 719,177,39 1 380,807,0 12 CAPACITY UTILIZATION RATIO 46.11 52.95% COMPARABLE COMPANIES 1.) ALLIED NIPPON LIMITED CLASS OF GOODS INSTALLED CAPACITY (UNIT BASED) ACTUAL PRODUCTION (UNIT NOS.) VALUE PER UNIT INSTALLED CAPACITY (VALUE BASED) ACTUAL PRODUCTION (VALUE BASED) REFERENCE FRICTION MATERIAL 4.000,000 28.249.523 35 138,322,376 976.885.284 POINT 8(I) & (III) OF NOTES DISC PAD. BRAKE SHOE & LINING 12.800.000 17.240.112 46 594.301.013 800.454,377 TOTAL 16,800,000 45,489,635 732,623,389 1,777,339,661 CAPACITY UTILIZATION RATIO 270.77% 242.60% ITA NO. 1292/DEL/2017 (ASSESSMENT YEAR: 2012 - 13) NISSIN BRAKE INDIA PVT LTD, VS. DCIT, PAGE | 5 2. BRAKES INDIA LIMITED CLASS OF GOODS INSTALLE D CAPACIT Y (UNIT NOS.) ACTUAL PRODUCTIO N (UNIT NOS.) VALUE PER UNIT INSTALLED CAPACITY (VALUE) ACTUAL PRODUCTION (VALUE) REFERENCE COMPLETE BRAKE SYSTEMS 9,500.0 00 6,340.47 0 1357 12.887.700, 744 8.601.482 .099 PAGE NO. 18 & 19 POINT NO. 14 & 15 OF NOTES TO ACCOUNTS. TOTAL 9,500,0 00 6,340,47 0 12,887,700, 744 8,601,482 ,099 CAPACITY UTILIZATION RATIO 66.74% 66.74% 3. HINDUSTAN COMPOSITES LIMITED CLASS OF GOODS INSTALLE D CAPACIT Y (UNIT BASED) ACTUAL PRODUCTION (UNIT BASED) VALUE PER UNIT INSTALLED CAPACITY (VALUE BASED) ACTUAL PRODUCTION (VALUE BASED) REFERENCE BRAKE LININGS 5,100 - 5.034 91.21 1 465.177.322 459.157.380 PAGE NO. 32 & 33. POINT NO 15 &. 16 OF NOTES TO ACCOUNTS CLUTCH FACINGS 3.000 2,751 45.838 137.513.666 126.100.032 INDUSTRIAL TEXTILES 576 314 219710 126553203 68989073 JOINTINGS/ LIMPSET SHEETS 1490 963 79012 117727241 76088143 COMPESTOS 50 39 1.905 95.269 74.310 OTHERS 180 161 89.168 16,050.262 14.356.068 TOTAL 10,396 9,262 863,116,964 744.765,005 CAPACITY UTILIZATION RATIO 89.09% 52.95% 4. RANGE BRAKE LINING LIMITED CLASS OF GOODS INSTALLE D CAPACIT Y (UNIT NOS.) ACTUAL PRODUCTIO N (UNIT NOS.) VALUE PER UNIT INSTALLED CAPACITY (VALUE) ACTUAL PRODUCTIO N (VALUE) REFERENCE AUTOMOTIVE PARTS 18.988 31,288 75 1,428.757 2,354327 4 PAGE NO. 29 & 39 SCHEDULE N OF P & L A/C AND POINT NO. 18 OF NOTES TO ACCOUNTS TOTAL 18,988 31,288 1,428,757 2,354,274 CAPACITY UTILIZATION RATIO 164.78 % 164.78% SUMMARY COMPANY CAPACITY UTILIZATION RATIO ALLIED NIPPON 242.60% BRAKES INDIA 66.74% HINDUSTAN COMPOSITES 86.29% RANE BRAKE LININGS 164.78% AVERAGE 140.10 ITA NO. 1292/DEL/2017 (ASSESSMENT YEAR: 2012 - 13) NISSIN BRAKE INDIA PVT LTD, VS. DCIT, PAGE | 6 8. ON THE BASIS OF THE ABOVE, IT WAS SUBMITTED THAT THE LEARNED ASSESSING OFFICER, HAD ERRED IN CONCLUDING THAT THE ASSESSEE FAILED TO SUBMIT THE PRODUCTION AND INSTALLED CAPACITY IN SAME UNITS. IT WAS SUBMITTED BEFORE US THAT FROM THE PERUSAL OF THE ABOVE NOTED CHART THE CAPACITY UTILIZATION OF VARIOUS COMPARABLES, IS DISCERNIBLE AS THE CAPACITY OF ALLIED NIPPON. BRAKE S INDIA, HINDUSTAN COMPOSITES AND RANE BRAKE LINING WHICH ARE REPRODUCED HEREUNDER: PARTICULARS CAPACITY UTILIZATION % (REFER PG. 594 OF PB TESTED PARTY 52.95% COMPARABLE COMPANIES ALLIED NIPPON 242.60% BRAKES INDIA 66.74% HINDUSTAN COMPOSITES 86.29% RANE BRAKE LININGS 164.78% AVERAGE 140.10% 9. FURTHER IT WAS SUBMITTED THAT THE COMPANY WHICH ARE IN EXISTENCE, FOR THE LAST 30 TO 40 YEARS AND ARE UTILIZING THE CAPACITIES, THE NECESSARY ADJUSTMENT AS CONTEMPLATED UNDER RULE 10 - B ARE REQUIRED TO BE GRANTED ITA NO.3425 /DEL/2017 TO THE ASSESSEE. OUR ATTENTION IN THE WRITTEN SUBMISSIONS WAS DRAWN TO THE JUDGMENT OF MUMBAI TRIBUNAL IN M/S KIARA JEWELLARY P. LTD. AND ALSO A MESSAGE TO MANDO INDIA STEERING IN ITA NO. 2092/MDS/2012. ON THE BASIS OF T HE ABOVE TWO JUDGMENT IT WAS SUBMITTED THAT IF THE INFORMATION PERTAINING TO CAPITAL CAPACITY UTILIZATION OF THE COMPARABLES ARE DISCERNIBLE FROM THE ANNUAL REPORTS OR OTHER DOCUMENT, THEN THE ISSUE IS REQUIRED TO BE ADJUDICATED BY THE TPO. 10. ON THE OTHE R HAND, THE LEARNED DR HAD RELIED UPON THE ORDER PASSED BY THE LOWER AUTHORITY. 11. WE HAVE HEARD THE CONTENTION OF THE PARTIES AND PERUSED THE RECORD. THERE IS NO QUARREL FOR THE APPLICABILITY OF RULE 10 - B OF THE INCOME TAX RULES WHICH CLEARLY PROVIDES TH AT THE REASONABLE ACCURATE ADJUSTMENT CAN BE MADE TO ELIMINATE THE MATERIAL FACTS OF SUCH DIFFERENCES INTO INTERNATIONAL TRANSACTIONS WHICH ARE MAKING THE COMPARABLE AS FUNCTIONALLY SIMILAR TO THE TESTED PARTY. THE CAPACITY UTILIZATION BY THE COMPARABLE AS WELL AS OF THE ASSESSEE IS AN IMPORTANT DIFFERENCE ARISING ON ACCOUNT OF TECHNOLOGY, USAGE AND AGE OF SET UP ETC. THEREFORE THE TPO IS UNDER AN OBLIGATION TO IRON OUT THE DIFFERENCES ARISING ON ACCOUNT OF DIFFERENCE IN CAPACITY UTILIZATION OF TESTED PARTY AND COMPARABLES WHILE DETERMINING THE ALP. ITA NO. 1292/DEL/2017 (ASSESSMENT YEAR: 2012 - 13) NISSIN BRAKE INDIA PVT LTD, VS. DCIT, PAGE | 7 12. HAVING SAID SO, THE TPO IS UNDER AN OBLIGATION TO WORK OUT THE CAPACITY UTILIZATION AND ITS EFFECT ON THE PROFIT EARNED BY THE COMPARABLE AS WELL AS BY THE ASSESSEE. FURTHER IT WAS THE DUTY OF THE ASSESSEE AN D TPO TO FIND OUT THE SUITABLE COMPARABLES AND CONDUCT HIS OWN STUDY AFTER REJECTING THE THREE COMPARABL ES OF THE ASSESSEE IN TP STUDY. 6. THEREFORE RESPECTFULLY FOLLOWING THE ORDER OF THE COORDINATE BENCH WE SET ASIDE THE GROUND NO. 5 OF THE APPEAL BACK TO THE FILE OF THE LD TPO WITH A DIRECTION TO THE ASSESSEE TO SUBMIT THE COMPLETE DETAILS OF ITS CLAIM OF CAPACITY UTILIZATION BEFORE THE LD TRANSFER PRICING OFFICER WHO WILL VERIFY THE SAME AND IF FOUND IN ACCORDANCE WITH THE LAW MAY GRANT THE ADJUSTMENT THE ALP ADJUSTMENT. IN THE RESULT GROUND NO. 5 OF THE APPEAL OF THE ASSESSEE IS ALLOWED WITH ABOVE DIRECTION. 7. ALL OTHER GROUNDS OF APPEAL ARE EITHER GENERAL OR CONSEQUENTIAL OR PREMATURE IN NATURE AS PER THE STATEMENT OF THE LD AR AND THEREFORE THEY ARE NOT PRESSED AND HENCE, DISMISSED. 8. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 1 9 / 0 3 / 2018 . - S D / - - S D / - ( H.S.SIDHU ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 9 / 0 3 / 2018 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI