AI Insights
CNH Industrial (Ind) Pvt. Ltd. appealed against the assessment order for the assessment year 2018-19, which included significant adjustments under Transfer Pricing and disallowances under sections 14A and 35(2AB) of the Income Tax Act. The primary issues revolved around the selection and rejection of comparable companies in Transfer Pricing, the application of turnover filters, and the treatment of foreign exchange gains and R&D deductions. The Tribunal's decision addressed these issues by partly allowing the appeal, correcting some of the adjustments made by the lower authorities.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 299735 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
9 month(s) 16 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
14-05-2023
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
K
Next Hearing Date
16-02-2023
Assessment Year
2018-2019
Appeal Filed On
28-07-2022
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND MS. KAVITHA RAJAGOPAL, JM ITA No. 1890/MUM/2022 (Assessment Year: 2018-19) CNH Industrial (Ind) Pvt. Ltd Level04, Rectangle-1, D4 District Center, Commercial Complex Saket, South Delhi, Delhi 110017 Vs. ACIT, Central Circle 6(3) Mumbai (Appellant) (Respondent) PAN No. AACI3922Q Assessee by : Shri. Ajit Jain, AR Revenue by : Ms. Samruddhi Hande, DR Date of hearing: 17.02.2023 Date of pronouncement : 15.05.2023 O R D E R PER PRASHANT MAHARISHI, AM: 1. This appeal is filed by the CNH Industrial Pvt. Ltd. (The assessee/appellant) for assessment year 2018- 19 against the assessment order passed by the Assistant Commissioner Of Income-Tax Central Circle 6(3), Mumbai (The AO) dated 27.06.2022 wherein the total income of the assessee is determined at 253,11,19,599/- as per the normal computation of normal income whereas the return of income filed by the assessee on 30.11.2018 was of Rs 191,96,80,300/- Page | 2 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. 2. The Assessee is aggrieved and has raised the following 9 Grounds of appeal as under: 1. On the facts and in law, the Ld. AO has erred in: Assessing the total income of the Appellant at Rs. 2,53,11,19,599 as against the returned income of Rs. 1,91,96,80,300 under the normal provisions of the Act Levying income tax including interest under Section 234B of the Act and raising a net demand payable of Rs. 18,09,08,820 upon the Appellant. II. Transfer Pricing Grounds- Adjustment in relation to export of tractors and parts to its AES, amounting to Rs. 34,33,55,268; 2. On the facts and in the circumstances of the case and in law, the Ld. TPO/AO erred, and Hon'ble DRP further erred in confirming the action of the Ld. TPO/ AO in making the addition Rs. 34,33,55,268 under Section 92CA(3) of the Act to the international transaction of 'Export of tractors and parts'. 3. Erroneous rejection and selection of comparable companies 3.1 On facts and in the circumstances of the case and in law, the Ld. TPO/AO, and the Hon'ble DRP further erred in rejecting ‘Action Construction Equipment Limited’ selected by the Appellant in the TP documentation, and in doing so, further erred in: -violating the provisions of Rule 10B(2) of the Rules by rejecting Action Construction Equipment Limited without considering its functional comparability Page | 3 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. -not appreciating the fact that Action Construction Equipment Limited' was accepted by the Ld. TPO in Appellant's own case in AY 2017-18 as functionally comparable to the Appellant 3.2 On facts and in the circumstances of the case and in law, the Ld. TPO AO erred, and the Hon'ble DRP further erred in upholding the action of the TPO/AO of arbitrarily introducing new companies, namely, 'Indo Farm Equipment Limited" and "TAFE Motors and Tractors Limited' by relying upon previous year Le. AY 2017-18, and in doing so, further erred in: -not conducting a methodical search as required in accordance with Rules 10B and Rule 10C of the Rules, thereby resorting to cherry-picking of comparable companies. -violating the provisions of Rule 10B(2) by introducing new companies as comparable to the Appellant without establishing their functional comparability. 4. Erroneous application of turnover filter and consequent rejection of functionally comparable companies selected by Appellant in its TP study 4.1 On facts, and in the circumstances of the case, and in law, the Ld. TPO/AO erred, and the Hon'ble DRP further erred in upholding/confirming the action of the Ld. TPO/ AO in applying the additional turnover filter of 10 times upper and lower on Appellant's turnover, and in doing so, has grossly erred in: -rejecting companies namely, ‘Standard Corporation India Limited' and 'Swaraj Limited', that are functionally comparable to the Appellant -not the fact that the industry in which the Appellant operates has few comparable companies and application of additional filter would further reduce the set. thus, giving distorted outcome. Page | 4 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. 4.2 Without prejudice to any other ground herein, the Ld. TPO/AO erred, and the Hon'ble DRP further erred in upholding/ confirming the action of the Ld. TPO AO in applying turnover filter by considering Appellant's entity level turnover and not segmental turnover and in doing so, further erred in rejecting comparable company. ‘Swaraj Automotive Limited', selected by the Appellant in its TP documentation. 5. Erred in treating foreign exchange gain as non- operating in nature 5.1 On the facts, and in the circumstances of the case, and in law, the Ld. TPO/AO erred, and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO AO considering foreign exchange gain as non-operating and whereas there is no change in facts of the Appellant as compared to AY 2009-10, wherein the Hon. ITAT in Appellant's own case had accepted foreign exchange gain as operating in nature. 5.2 On the facts, and in the circumstances of the case, the Ld. TPO erred in not providing an opportunity of being heard (no show-cause notice was issued) in respect of treating foreign exchange gain as non-operating in nature, thereby, violating the principles of natural justice III. Corporate Tax Grounds 6. Disallowance of Rs. 2,28,85,300 under section 14A of the Act 6.1 On the facts and in the circumstances of the case and in law, the Ld. AO has erred in disallowing Rs. 2,28,85.300 under section 14A of the Act r.w Rule SD of the Income Tax Rules, 1962 ("the Rules') even though the Appellant has not earned/accrued any exempt income during the year under appeal. Page | 5 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. 6.2 The Ld. AO has failed to appreciate the fact that the Appellant has not earned any tax-exempt income and not incurred any expenditure in relation to earning tax exempt income and hence, no disallowance is warranted under section 14A of the Act. 6.3 On the facts and in the circumstances of the case and in law, the Ld. AO has erred in holding that provision of section 14A(2) of the Act automatically comes into play if the assessee contends that no expenditure has been incurred by it to earn exempt income and hence, disallowance has to be worked out mandatorily as per Rule 8D(ii) of the Rules. 7. Denial of Rs. 24.51,98,731 as deduction under section 35(2AB) of the Act 7.1 On the facts and in the circumstances of the case and in law, the Ld. AO has erred in denying weighted deduction of Rs. 24.51,98,731 under section 35(2AB) of the Act in the absence of Form 3CL, approval from the Department of Scientific and Industrial Research ('DSIR"). 7.2 The Ld, AO has failed to appreciate the fact that once R & D facility has been approved by DSIR and there being no dispute to the fact that Appellant has incurred the expenditure towards R&D activities, the Appellant is eligible to claim deduction under 35(2AB) of the Act 7.3 The Ld. AO has further erred by not appreciating the fact that DSIR is not the appropriate authority to quantify the eligible expenditure and therefore, non-issuance of Form 3CL by DSIR should not have a bearing on the Appellant's claim of weighted deduction which otherwise is allowable under the Act IV. Consequential Grounds Page | 6 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. 8. Levy of consequential interest of Rs. 6,11,01,621 under section 234B of the Act 8.1 On the facts and in the circumstances of the case, the AO has erred in levying interest under section 234B of the Act which is consequential in nature. 8.2 The Appellant submits that it is not liable to pay any interest under Section 234B of the Act and such levy is unjustified, incorrect and illegal. 9. Initiating Penalty under section 270A of the Act 9.1 On the facts and in the circumstance of the case and in law, the Ld. AO has grossly erred in initiating penalty proceedings for under and misreporting of income under section 270A of the Act, mechanically and without recording any satisfaction for its initiation. 9.2 The Ld. AO has failed to appreciate the fact that the addition/ disallowance made in the assessment order does not represent any "under reporting' or 'misreporting' but is a mere difference in view. Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant prays that directions be given to grant all such relief arising from the above and also all relief consequential thereto. The appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. 3. Brief facts of the case are that the assessee is engaged in the business of manufacturing and trading of Agricultural Equipments and Components. Page | 7 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. The assessee is a subsidiary of Fiat Group Italy and operating in India mainly for the business of Manufacturing of tractors, its spare parts and allied agriculture farm equipment. The Tractors are sold to associate enterprise as well as to third party also in India. 4. Assessee filed its return of income declaring total income of ₹ 1,919,680,300/–. The case of the assessee was selected for scrutiny. As assessee has entered into international transactions of export of tractors to its various associated enterprises, import of raw materials, import of capital goods, payment of royalty and provision of IT support services, reference was made to the assistant Commissioner of income tax, transfer pricing – 1 (3) (1), Mumbai the learned TPO for examination of the arm's-length price of these transactions. 5. Only transaction in dispute is export of tractors drive lines and other parts and components of ₹ 1077.90 crores made by the assessee to its associated enterprises. Assessee benchmarked this international transaction by adopting Transactional Net margin method [ TNMM], adopting profit level indicator of operating profit/operating cost, taking assessee itself as tested party, selecting 8 comparable companies whose weighted average margin for 3 years was computed in the range of 3.63% – 14.51%. Margin of assessee is computed at 10.97%. Therefore, as Page | 8 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. per Transfer Pricing study report this transaction at arm’s length. 6. During the course of transfer pricing assessment assessee submitted average margin for financial year 2017 – 18 of these eight comparable companies having arithmetic mean of 10.57%. Thus, the international transaction was on margin for current year was also stated to be at arm's-length. 7. The Ld. AO found that assesses has not applied a turn over filter of 10 times more or less of assessee’s turn over and therefore issue so cause notice. The Ld. TPO also issued show cause notice to apply that turnover filter. It was also asked that why 4 Comparable Companies used in their earlier years as comparables should not be used also for this year. 8. Assessee objected stating that there is no relationship between turn over and margin of entities and therefore turn over filter should not be considered to find out the comparable companies. Assessee submitted that it has already applied turn over filter of minimum of INR 1 Crore already. Further, if the additional turn over filter of 10 times of turnover were applied two comparable out of eight, two comparable companies would be rejected. Even then the margins of the assessee are at arm's- length. With respect to the four new comparable selected in earlier years, assessee submitted that even if the above comparable are selected, along with the assessee’s own comparables the margin of Page | 9 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. the assessee is selected still within the arm's-length price. 9. The Ld. TPO rejected the contention of the assessee. He found that the turnover of the assessee 2809 crores, therefore, standard Corporation India limited which is a turnover of 92.33 crores and Swaraj automotive limited which the turnover of hundred and 16.41 crores are rejected applying 10 times more or less turnover filter. He also included (i) Preet Tractors Limited, (2) Indo farm Equipment Limited, (iii) Tafe Motors & Tractors Limited as those were also included in the last years TP study report. Thereafter, from the set of six comparables companies having an author metric mean margin of 11.21% was found. The margin of the assessee was also tinkered by removing foreign exchange gain and re-computed at 8.03%. Accordingly he proposed adjustment of Rs. 34,33,55,268/- by order u/s 92 CA (3) of the Act dated 23.07.2021 on account of export of tractors. 10. During the year, assessee has made investment in shares, therefore, show cause notice was issued for disallowance of u/s 14A of the Act, and subsequently, the disallowance of Rs 2, 28, 85, 300/- u/s 14A of the Act was made. 11. Assessee has claimed deduction u/s 35(2B) of the Act of Rs 68,30,71,732/-. The assessee was asked for submitting form no 3CM and 3CL. assessee did not submit form of 3CL, and therefore, the AO Page | 10 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. disallowed Rs 24,51,98,731/- out of total deduction claimed. 12. Accordingly, draft order u/s 144C of the Act was passed on 29.09.2021, determining total taxable income of Rs 253,11,90,599 /- . 13. Assessee preferred an objection before the Ld. Dispute Resolution Panel (DRP) i. Assessee objected two comparables as well as application of turnover filter of 10 times. The Ld. DRP held that the purpose of applying a filter is to select desirable companies for comparability analysis; accordingly, it rejected the objection of the assessee on turnover filter. ii. With respect two comparables, such as Swaraj Automotive Ltd and Standard Corporation India Ltd. Ld DRP up held their rejection. The action of the Ld. TPO in rejecting Tirth Agro Technology Pvt. Ltd. and Action Construction Equipment Ltd. has functionally different was also upheld. Therefore, Transfer Pricing Adjustment is found to be proper. iii. With respect to disallowance u/s 14A of the Ld. DRP noted that the assessee does not have any exempt income, however, the objection of the assessee was rejected. iv. The objection with respect to the disallowance u/s 352AB was also rejected. Page | 11 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. 14. Based on this direction of the Ld DRP dated 27 06.2022 the final assessment order was passed determining total income of the assessee is Rs. 253,11,19,599/-. Assessee is aggrieved with this and has preferred this appeal. 15. Ground number one raised by the assessee is general in nature and therefore it is dismissed. 16. Ground number eight is against the levy of interest under section 234B of the act, which is consequential in nature, and therefore it is dismissed. 17. Ground number nine of the appeal is against initiation of penalty proceedings under section 270A of the act which is premature therefore same is dismissed 18. Ground no 5 whether the foreign exchange gain is consider as operating or non operating income, the co-ordinate bench in assessee’s own case for assessment year 2009-10 as held that forex gain is operating in nature. In view of this ground no 5 of the appeal, respectfully following the decision of co- ordinate bench, in assesse’s own case, is allowed. 19. Ground no. 6 is with respect to disallowance u/s 14A of the Act made of Rs 2,22,85,300/-. The facts clearly show that assessee has not earned any exempt income during the year. Therefore, no disallowance under section 14 A of the act read with rule 8D can be made. Further amendment made by The Finance Act, 2022 to section 14A with effect Page | 12 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. from 01.04.2022 does not have retrospective effect as held by Hon’ble Delhi High Court in PCIT vs Era Infrastructure Ltd 141 taxmann.com 288. Therefore, no disallowance under section 14 A of the act can be made in the case of the assessee for the impugned assessment year. Accordingly, ground number 6 of the appeal of the assessee is allowed and the learned assessing officer is directed to delete the disallowance under section 14 A of the act. Ground no 6 is allowed. 20. Coming to the ground no 2, 3 and 4 with respect to transfer pricing adjustment. The assessee has selected following companies (101 page no of paper book) 6.1.7 Final Set of comparable Companies. The search steps incorporated above resulted in the identification of a final set of 8 independent comparable companies, their NCP are presented below. Sr. No Company Name NCP % 2016 NCP % 2017 NCP % 2018 Weighted Average 1. Action Construction Equipment Ltd. -1.17% 0.16% 1.33% 0.10% 2. Swaraj Automotive Ltd. 2.16% 2.43% 3.83% 2.84% 3. Standard Corporation India Ltd. 4.28% 3.79% 2.98% 3.63% 4. Escorts Ltd. 6.57% 8.94% NA 6.78% 5. Tirth Agro Technology Pvt. Ltd. 9.03% 8.96% 11.29% 9.90% 6. Tractors & Farm Equipment Ltd. 13.23% 15.59% 10.75% 14.41% 7. V S T Tillers Tractors Ltd. 19.25% 14.98% 17.12% 17.04% 8. International Tractors Ltd. 31.08% 28.73% NA 29.82% Median 35 th Percentile 65 th Percentile 8.34% 3.63% 14.41% For selecting these comparables the assessee applied turn over filter of INR 1 crore. The TPO held that assessee should have applied turnover filter 10 times Page | 13 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. higher and lower turnover. If the turn over filter of TPO is considered then against the turnover of 2809 crores, two comparables company selected by the assessee namely Standard Corporation India Ltd. having turnover of Rs. 92.33 Crore and Swaraj Automotives Ltd. of Rs 116.41 Crore are excluded. The Ld. TPO further found that Tirth Agro Techno of having turnover of Rs. 836.36 Crore and Action Construction Equipment Ltd. having turnover of Rs. 1040 crore are functionally different, therefore, rejected, further V S T Tillers Tractors Ltd., selected by the assessee also passes the turnover filter, did not find mention in the final comparable selected by the TPO without assigning any reasons. The learned TPO included only three comparables selected by the assessee that is (1) Escorts Ltd, (2) Tractors & farm Equipment Ltd. and (3) International Tractors Ltd. As in the preceding years three comparable companies were selected in the comparability analysis which did not find mention in this year namely (I) Preet Tractors Pvt. Ltd., (II) Indo Farm Equipment Ltd. and (III) T A F E Motors & Tractors Ltd. were also included. Therefore, the TPO selected six comparable companies as under Sr. No Company Name Wt. Average OP/OC 1. Preet Tractors Pvt. Ltd. 3.52% 2. Escorts Ltd. 7.28% 3. Indo Farm Equipment Ltd. 9.28% 4. Tractors & Farm Equipment 13.14% 5. T A F E Motors & Tractors Ltd. 15.93% 6. International Tractors 23.67% Page | 14 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. 21. The argument of the Ld. AR is that the turnover filter is applied only for the purposes of having the good population of comparability study. This argument also find support by the circular of CBDT that for the comparability analysis minimum six comparable companies should be available as per CBDT notification no. 83/2015 dated 19.10.2015 also prescribed that minimum of six comparables would be required in data set for applicability of the range. It is the fact that if the companies with smaller turnover or vary large turnover are not comparable. Application of turnover filter of 1/10 has been up held by the Hon’ble Mumbai High court in case of Pentair Water India Ltd. as well as Hon’ble Delhi High Court in Agnity India Technologies Pvt. Ltd. purpose of applying the turnover filter is to have comparables having similar size. It definitely results into making more appropriate comparability analysis. Further, the only reason of the contention of the assessee to not to apply the turnover filter of one by ten turnover is for exclusion of Standard corporation India Pvt. Ltd. and Swaraj Automotive Ltd. comparable selected by the assessee which got excluded on application of above filter, we find that the turnover filter of 10 times more or less of assessee's turnover has been correctly applied by the learned TPO and also upheld by the learned dispute resolution panel. Therefore We do not find any reason to hold that turnover filter applied by Ld. TPO is erroneous, especially when Page | 15 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. Hon’ble High Court of Mumbai and Hon’ble High court of Delhi has also upheld the same. Accordingly, the Ground no 4 of the appeal is dismissed. 22. The Ld. Authorized Representative has not pressed the ground against introduction of two comparables by the Ld. TPO namely Indo Farm Equipment and T A F E Motors. Therefore, ground no. 3.2 is not pressed hence dismissed. 23. Ground no. 3.1 is against the exclusion of Action Construction Equipment Ltd. selected by the assessee and rejected by the TPO, DRP. It is apparently that above comparable companies passes turn over filter applied by the assessee as well as by the Ld TPO. The turnover of this company is Rs. 1040 Crore. The Ld. TPO has not given any reason for exclusion of the above comparable. In order u/s 92CA (3) of the Act for assessment year 2016-17 this comparable company was selected by assessee and accepted by the TPO. No evidences were led before us that this company is functionally different or the facts prevailing in that year is not comparable with this year. For this reason only ground no 3.1 of the appeal is allowed and Ld. AO, TPO directed to include Action Construction Ltd in comparable analysis. 24. Accordingly ground number 3 of the appeal is partly allowed. Page | 16 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. 25. Ground number 7 of the appeal is against denial of deduction of ₹ 245,198,731 as deduction under section 35 (2AB) of the act. The only reason is that assessee could not submit form number 3CL by the DSIR. There is no fault on part of the assessee in submitting the relevant details to the learned assessing officer or DSIR. Assessee has also submitted sent to DSIR for issue of form 3CL. Honourable Delhi High Court in case of SRF Ltd versus Union of India 143 taxmann.com 332 for assessment year 2017 – 18, 18 – 19 and 2020 – 21 has held that Where assessee had made an application for certification of R&D expenditure incurred by it in respect of all its R&D units and application was accompanied by auditor's report, DSIR was statutorily bound to issue Form 3CL within 120 days in accordance with rule 6(7A)(ba), certifying expenditure incurred by assessee on its in- house R&D units. Further the issue is also squarely covered in favour of the assessee by the decision of the honourable Gujarat High Court in case of CIT versus Sun pharmaceuticals Ltd 85 taxmann.com 80 has held that merely because the authorities have failed to submit the respective form to the learned assessing officer, the deduction under section 35 (2AB) of the act cannot be denied to the assessee when all other conditions of that particular section are fulfilled. In view of this, ground number 7 of the appeal is squarely covered in favour of the assessee Page | 17 ITA No.1890/M/2022 CNH Industrial (India) Pvt. Ltd. and hence allowed. Consequently the learned assessing officer is directed to delete the disallowance of ₹24,51,98,731/– under that section. 26. In the result appeal of the assessee is partly allowed. Order pronounced in the open court on 15.05.2023. Sd/- Sd/- (KAVITHA RAJAGOPAL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 15.05.2023 Sudip Sarkar, Sr.PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. BY ORDER, True Copy// Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai
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