M/s Ocap Chassis Parts Pvt Ltd., New Delhi V. ACIT, New Delhi

ITA 1928/DEL/2017

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 1517 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 8 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-12-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 31-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; International transaction; Initiation of penalty proceedings
• Section: 143(3); 195; 201; 144C; 13; 92

Judgement Text

IN TH E INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : I - 2 : NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO. 1928 /DEL/201 7 ASSESSMENT YEAR : 201 2 - 13 OCAP CHASSIS PARTS PVT. LTD., 62, SRESHTHA VIHAR, VIKAS MA RG EXTENSION, NEW DELHI. PAN: AA ACO4028M VS ACIT, CIRCLE - 19(1), NEW DELHI. (APP ELL A NT S ) (RESPONDENT S ) ASSESSEE BY : SHRI VISHAL KALRA, ADVOCATE DEPTT. BY : MS NIDHI SHARMA, SR. DR DATE OF HEARING : 2 4 . 09 . 201 9 D ATE OF PRONOUNCEMENT : 11 . 1 2 . 201 9 ORDER PER R. K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 2 0 TH JANUARY, 201 7 PASSED BY THE ASSESSING OFFICER U/S 143(3) R.W. SECTION 144C OF THE IT ACT, 1961 RELATING TO TH E ASSESSMENT YEAR 201 2 - 13. 2 . FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING OF AUTOMOBILE, STEERING AND SUSPENSION PARTS FOR THE AUTO MANUFACTURERS. IT FILED ITS RETURN OF INCOME ON 30.11.201 2 DECLARING THE TOTAL INCOME OF RS. 71,98,240/ - . SINCE THE ASSESSEE HAD ENTERED INTO CERTAIN INTERNATIONAL ITA NO. 1928 /DEL/201 7 2 TRANSACTIONS , THE ASSESSING OFFICER REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER U/S 92CA OF THE ACT FOR DETERMINATION OF THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. THE TPO PASSED AN ORDER PROPOSING AN ADJUSTMENT OF RS.2,69,92,075/ - . THE ASSESSING OFFICER, IN THE DRAFT ASSESSMENT ORDER ACCORDINGLY MADE THE ADDITION AND DETERMINED THE TOTAL INCOME AT RS.3,41,90,315/ - . THE ASSESSEE APPROACHED THE DRP WHO UPHELD THE ACTION OF THE A.O./TPO. ACCORDINGLY, THE ASSESSING OFFICER PASSED THE FINAL ORDER MAKING THE ADDITION OF RS.2,53,72,551/ - . 3 . AGGRIEVED WITH SUCH ORDER OF THE A.O./TPO/DRP, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL RAISING THE FOLLOWING GROUNDS: - 1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE REFERENCE MADE BY THE LD. ASSESSING OFFICER SUFFERS FROM JURISDICTIONAL ERROR AS THE LD. AO DID NOT RECORD ANY REASONS IN THE ASSESSMENT ORDER BASED ON WHICH H E REACHED THE CONCLUSION THAT IT WAS 'EXPEDIENT AND NECESSARY' TO REFER THE MATTER TO THE LD. TRANSFER PRICING OFFICER ('TPO') FOR COMPUTATION OF THE ARM'S LENGTH PRICE, AS IS REQUIRED UNDER SECTION 92 CA (1) OF THE ACT. 2. T HAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN ASSESSING THE TOTAL INCOME OF THE APPELLANT AT INR 32,570,791 AS AGAINST INCOME OF INR 7,198,240 RETURNED BY THE APPELLANT, AFTER MAKING TRANSFER PRICING ADJUSTMENT OF INR 25,372,551. 3. THAT ON T HE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO / LD. TPO ERRED IN MAKING AN ADDITION, ON TRANSFER PRICING MATTER, AMOUNTING TO INR 25,372,551/ - , TO THE APPELLANT'S INCOME BY: 3.1 MODIFYING THE COMPARABILITY ANALYSIS CONDUCTED IN THE TRANS FER PRICING DOCUMENTATION OF THE APPELLANT ON INAPPROPRIATE AND INADEQUATE GROUNDS; 3.2 SELECTING COMPANIES WHICH WERE NOT COMPARABLE TO THE APPELLANT ON VARIOUS GROUNDS; 3.3 DISALLOWING, WITHOUT APPRECIATING THE FACTS, ECONOMIC ADJUSTMENT ON ACCOUNT OF A SALES DOWNTURN MADE BY THE APPELLANT TO FACTOR FOR THE DIFFERENT ITA NO. 1928 /DEL/201 7 3 GEOGRAPHIC MARKETS OF OPERATION VIS - A - VIS COMPANIES SELECTED FOR ARM'S LENGTH PRICE DETERMINATION; 3.4 SELECTING CURRENT YEAR (I.E. FINANCIAL YEAR 2011 - 12) DATA FOR COMPARABILITY; 4 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. AO/ LD. TPO ERRED IN N OT EXAMINING THE VALIDITY OF INITIATION OF PENALTY PROCEEDINGS U/S 271 (1) (C) OF THE ACT . 5 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW , THE LD. AO ERRE D IN CHARGING AND COMPUTING INTEREST UNDER SECTION 234B, 234C AND 234D OF THE ACT . THAT THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR WITHDRAW ANY GROUND OF APPEAL EITHER BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL AS THEY MAY BE ADVISED. THAT, T HE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO EACH OTHER. 4 . THE ASSESSEE HAS ALSO RAISED TWO ADDITIONAL GROUNDS. HOWEVER, AT THE TIME OF HEARING, THE LD COUNSEL DID NOT PRESS THE ADDITIONAL GROUND NO.1 FOR WHICH THE LD. DR HAS NO OBJECTION. THEREFORE, WE ARE NOT CONCERNED WITH THE SAME. SO FAR AS THE ADDITIONAL GROUND NO.2 IS CONCERNED, THE SAME READS AS UNDER: - 2 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE DRP/ TPO HAVE ERRED IN MAKING NEGATIVE WORKING CAPITAL ADJ USTMENT FOR THE DIFFERENCES IN WORKING CAPITAL BETWE EN COMPARABLE COMPANIES VIS - A - VIS THE APPELLANT. 5 . RELYING ON VARIOUS DECISIONS, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ADDITIONAL GROUND BEING PURELY LEGAL IN NATURE DO NOT REQUIRE ANY F RESH INVESTIGATION INTO THE FACTS AND, THEREFORE, THE SAME SHOULD BE ADMITTED. 6. AFTER HEARING BOTH THE SIDES, THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS ADMITTED FOR ADJUDICATION. ITA NO. 1928 /DEL/201 7 4 7. THE LD. COUNSEL FOR THE ASSESSEE, AT THE TIME OF HEARING, DID N OT PRESS GROUND OF APPEAL NO.1, 2, 3.1 AND 3.4 FOR WHICH THE LD. DR HAS NO OBJECTION. ACCORDINGLY, THESE GROUNDS ARE DISMISSED AS NOT PRESSED. GROUND NO.4 BEING PREMATURE AT THIS JUNCTURE IS DISMISSED. GROUND OF APPEAL NO.5 RELATING TO LEVY OF INTEREST U/S 234B, 234C AND 234D BEING MANDATORY AND CONSEQUENTIAL IN NATURE, THEREFORE, THE SAME IS DISMISSED. 8. SO FAR AS TRANSFER PRICING ADJUSTMENT OF RS.2,53,72,551/ - IS CONCERNED, THE FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE, DURING THE YEAR HAS ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS: - NO. NATURE OF TRANSACTION METHOD VALUE OF TRANSACTION 1 PURCHASE OF RAW MATERIAL TNMM 1,715,551 2 PURCHASE OF CONSUMABLES 9,278 3 SALE OF GOODS 428,344,863 4 PURCHASE OF MACHINERY 487,004 5 PAYMENT OF ROYALTY 479,898 6 AVAILING OF TECHNICAL SERVICES 180,804 7 REIMBURSEMENT OF EXPENSES TO AE'S 7,311,328 9. IT WAS SEEN THAT THE ASSESSEE BENCHMARKED THE INTERNATIONAL TRANSACTIONS USING TRANSACTIONAL NET MARGIN METHOD (TNMM) AND PROFIT L EVEL INDICATOR (PLI) OF OPERATING PROFIT/OPERATING COST. THE ASSESSEE EARNED OPERATING PROFIT MARGIN OF 6.08% (AFTER CLAIMING IDLE CAPACITY ADJUSTMENT) VIS - - VIS ARITHMETIC MEAN OF COMPARABLE COMPANIES BEING 5.91%. ITA NO. 1928 /DEL/201 7 5 10. THE ASSESSEE HAD IDENTIFIED THE FOLLOWING FIVE COMPARABLE COMPANIES: - S.NO. NAME OF THE COMPANY RETURN ON COST (BASIS 3 YEARS WEIGHTED AVERAGE AS PER TP DOCUMENTATION) RETURN ON COST (SINGLE YEAR UPDATED MARGINS) REFER PAGES 195 - 196 OF PAPER BOOK 1. BHARAT GEARS LTD. 7.62% 6.98% 2. HINDUSTAN HARDY SPICER LTD. 1.01% 5.10% 3. RAUNAQ AUTOMOTIVE COMPONENTS LTD. 8.66% 7.35% 4. TALBROS ENGINEERING LTD. 5.72% 8.67% 5. RANE (MADRAS) LTD. 6.54% 6.84% ARITHMETIC MEAN 5.91% 6.99% 11. THE TPO ACCEPTED THE CLA IM OF THE ASSESSEE FOR CAPACITY UTILIZATION ADJUSTMENT AND WORKED OUT THE AVERAGE MARGIN OF THE COMPARABLE COMPANIES AT 0.8%. HE, HOWEVER, SELECTED THE FOLLOWING TWO ADDITIONAL COMPANIES, NAMELY, RANE TRW STEERING SYSTEMS LTD. AND ZF STEERING GEAR (INDIA) LTD., AS COMPARABLE COMPANIES. AFTER GRANTING WORKING CAPITAL ADJUSTMENT ON THE MARGIN OF THE COMPARABLE COMPANIES, THE TPO FINALLY PROPOSED THE UPWARD ADJUSTMENT OF RS.2,69,92,075/ - THE DETAILS OF WHICH ARE AS UNDER: - COMPANY NAME OP/OC % WCA OP/OC % BHARAT GEARS LTD. 2.5 7% 5.28% HINDUSTAN HARDY SPICER LTD. - 0.04% 2,39% RAUNAQ AUTOMOTIVE COMPONENTS LTD. - 0.78% 1.32% TALBROS ENGINEERING LTD. - 1.31% 1 27% RANE (MADRAS) LTD. - 2.24% 0,36% RANE TRW STEERING SYSTEMS LTD. 1.84% 4.30% Z F STEERING GEAR (INDIA)XTD, 5.58% 8.08% AVERAGE 0.80% 3.28% ITA NO. 1928 /DEL/201 7 6 PARTICULARS AMOUNT OPERATING COST 466,852,450 ARM'S LENGTH MARGIN (%) 3.28% ARM'S LENGTH MARGIN (RS.) 15,312,760 ARM'S LENGTH PRICE 482,165,210 PRICE CHARGED BY THE ASSESSEE 455,173,135 DIFFERENCE BETWE EN ALP AND PRICE 26,992,075 12. SINCE THERE W ERE CERTAIN ERRORS WHILE COMPUTING THE ALP, THE DRP DIRECTED THE TPO TO CONSIDER THE SAME BASED ON WHICH THE ASSESSING OFFICER FINALLY MADE ADDITION OF RS.2,53,72,551/ - AS AGAINST THE UPWAR D ADJUSTMENT OF RS.2,69,92,075/ - PROPOSED BY THE TPO. 13. THE LD. COUNSEL FOR THE ASSESSEE, AT THE OUTSET, CHALLENGED THE INCLUSION OF RANE TRW STEERING SYSTEMS LTD. AND ZF STEERING GEAR (INDIA) LTD. , AS COMPARABLES. SO FAR AS R ANE TRW STEERING SYSTEMS L TD. , IS CONCERNED, HE SUBMITTED THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLES SINCE IT IS ENGAGED IN TWO DIVISIONS, NAMELY, STEERING GEAR DIVISION AND HYDRAULIC PUMPS & SEAT BELT DIVISION WHEREAS THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF AUTOMOBILE STEERING AND SUSPENSION PARTS. HE SUBMITTED THAT THE ASSESSEE IS NOT ENGAGED IN THE BUSINESS HYDRAULIC PUMPS AND SEAT BELT DIVISION AS THAT OF RANE TRW STEERING SYSTEMS LTD. 14. REFERRING TO RULE 10TA OF THE IT RULES, 1962, THE LD. COUNSEL FOR THE ASS ESSEE DREW THE ATTENTION OF THE BENCH TO CLAUSE (B) OF THE SAID RULE AND DREW THE ATTENTION OF THE BENCH TO THE DEFINITION OF CORE AUTO COMPONENTS WHICH MEANS ITA NO. 1928 /DEL/201 7 7 (I) ENGINE AND ENGINE PARTS, INCLUDING PISTON AND PISTON RINGS, ENGINE VALVES AND PARTS COOLIN G SYSTEMS AND PARTS AND POWER TRAIN COMPONENTS (II) TRANSMISSION AND STEERING PARTS, INCLUDING GEARS, WHEELS, STEERING SYSTEMS, AXLES AND CLUTCHES; (III) SUSPENSION AND BRAKING PARTS, INCLUDING BRAKE AND BRAKE ASSEMBLIES, BRAKE LININGS, SHOCK ABSORBERS AND LEAF SPR INGS. 15. HE ACCORDINGLY SUBMITTED THAT THE BUSINESS OF THE ASSESSEE COMES WITHIN THE AMBIT OF MANUFACTURING CORE AUTO COMPONENTS WHICH HAS BEEN GIVEN A SEPARATE TREATMENT BY THE LEGISLATURE AS COMPARED TO MANUFACTURE OF NON - CORE COMPONENTS AS IN THE AUTO INDUSTRY THE BUSINESS OF MANUFACTURE AND SALE OF THESE TWO SEGMENTS IS VERY DIFFERENT. 16. FURTHER, THE SEGMENTAL DATA ARE NOT AVAILABLE. HE SUBMITTED THAT THE ASSESSEE COMPANY PRIMARILY CATERS TO THE AES BASED IN EUROPE AND HAS RECORDED EXPORT SALES OF 98.90% OF THE TOTAL SALES WHERE AS RANE TRW STEERING SYSTEMS LTD. CATERS TO THE DOMESTIC MARKET. IT REPORTED EXPORT SALES OF 78.09 CRORES WHICH IS 11.47% OF THE TOTAL SALES DURING THE F.Y. 2011 - 12. FURTHER, RANE TRW STEERING SYSTEMS LTD. , IS ENGAGED IN THE RESEARCH AND DEVELOPMENT ACTIVITIES IN THEIR PRODUCT/PROCESS DEVELOPMENT AND THEREBY INCURRED R&D EXPENSES DURING THE YEAR WHEREAS THE ASSESSEE DID NOT INCUR ANY SUCH EXPENDITURE DURING THE YEAR. HE SUBMITTED THAT RANE TRW STEERING SYSTEMS LTD. , WAS R EJECTED BY THE ASSESSEE IN PREVIOUS TWO ITA NO. 1928 /DEL/201 7 8 YEARS WHILE BENCHMARKING THE ANALYSIS WHICH WAS ACCEPTED OR NOT CHALLENGED BY THE TPO. REFERRING TO THE COPY OF THE TP STUDY REPORT AND THE ORDER U/S 92CA(3) FOR ASSESSMENT YEAR 2010 - 11 AND 2011 - 12, HE SUBMITTED THA T THE TPO HAS ACCEPTED THE REJECTION OF RANE TRW STEERING SYSTEMS LTD. , AND HAS NOT CONSIDERED THE SAID COMPANY AS A COMPARABLE COMPANY. RELYING ON THE FOLLOWING DECISIONS, HE SUBMITTED THAT COMPARABLES HAVE BEEN EXCLUDED ON ACCOUNT OF OWNING INTANGIBLE ASSETS: - (I) AVAYA INDIA (P.) LTD. VS ACIT [ITA NO. 532 OF 2019] DELHI HC (II) FLOUR DANIEL INDIA PVT. LTD. VS ACIT [ITA NO. 973/DEL/2016], FURTHER UPHELD BY DELHI HC IN THE CASE OF PR. CIT VS FLOUR DANIEL INDIA PVT. LTD. [ITA NO. 665/2019] (III) ALCATEL - LUCENT INDIA LTD. VS ACIT [ITA NO. 1112/DEL/2017] (IV) TRANSCEND MT SERVICES (P.) LTD. VS ACIT [ITA NOS. 4048 & 4501 / DEL/ 2013] (V) QUALCOMM INDIA PVT. LTD. VS DCIT [ITA NO. 1810/DEL/2014] (VI) TORUS BUSINESS SOLUTIONS PVT VS DCIT [ITA NO. 1974/DEL/2015], FURTHER UPHELD BY HON BLE DELHI COURT IN THE CASE OF PR. CIT VS TORUS BUSINESS SOLUTIONS PVT. LTD. [ITA NO. 207/2019] (DELHI HIGH COURT) (VII) CGI INFORMATION SYSTEMS & MANAGEMENT CONSULTATION (P.) LTD. VS DCIT [ITA NO. 502/BANG/2016] ITA NO. 1928 /DEL/201 7 9 17. REFERRING TO THE FOLLOWING DECISIONS, HE SUBMITTED THAT THE COMPARABLES HAVE BEEN EXCLUDED ON ACCOUNT OF CARRYING OUT RESEARCH & DEVELOPMENT ACTIVITIES: - (I) TEREX INDIA PRIVATE LTD VS DCIT [ITA NO. 4791/DEL/2015] ; (II) CALIBRATED HEALTHCARE SYSTEMS INDIA PVT. LTD. VSACIT [ITA NO. 5271/DEL/2012] ; (III) CIT VS AGNITY INDIA TECHNOLOGIES PVT. LTD. [ITA NO. 1204/DEL/2011] 18. RELYING ON THE FOLLOWING DECISIONS, HE SUBMITTED THAT LOW EXPORT SALES HAVE BEEN CONSIDERED APPROPRIATE CRITERIA FOR EXCLUSION OF A COMPARABLE: - (I) OMNIGLOBE INFORMATION TECHNOLOGIES (INDIA) PVT. LTD VS ADDL. CIT [ITA NO. 6980/DEL/2017] ; (II) CYPRESS SEMICONDUCTOR TECHNOLOGY INDIA (P.) LTD. VS DCIT [IT(TP) A NO. 1002/BANG/2011 ; AND (III) 24/7 CUSTOMER.COM (P.) LTD. VS DCIT [ITA NO. 227/BANG/2010] 19. HE ACCORDINGLY SUBMITTED THAT RANE TRW STEERING SYS TEMS LTD. , SHOULD BE EXCLUD ED FROM THE LIST OF COMPARABLES SINCE IT OWNS SUBSTANTIAL INTANGIBLES, HAS CARRIED OUT R&D ACTIVITIES AND HAS LOW EXPORT SALES AS COMPARED TO TOTAL SALES. 20. THE LD. DR, ON THE OTHER HAND, HEAVILY RELIED ON THE ORDER OF THE A.O ./TPO/DRP. ITA NO. 1928 /DEL/201 7 10 21. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES AND PERUSED THE RECORD. WE FIND THE T PO, IN THE ORDER PASSED U/S 92CA(3) ADDED RANE TRW STEERING SYSTEMS LTD. , AS A COMPARABLE. FROM THE ORDERS PASSED U/S 92CA(3) FOR THE ASSES SMENT YEAR 2010 - 11 AND 2011 - 12, WE FIND THE TPO HAS ACCEPTED THE TP ANALYSIS FILED BY THE ASSESSEE AND HAS NOT CONSIDERED RANE TRW STEERING SYSTEMS LTD. , AS A COMPARABLE. FURTHER, WE FIND FROM THE VARIOUS DETAILS FURNISHED BY THE LD. COUNSEL THAT THIS COM PANY IS NOT FUNCTIONALLY COMPARABLE SINCE RANE TRW STEERING SYSTEMS LTD., IS ENGAGED IN TWO DIVISIONS, NAMELY, STEERING GEAR DIVISION AND HYDRAULIC PUMPS & SEAT BELT DIVISION WHEREAS THE ASSESSEE IS ENGAGED IN THE AUTOMOBILE STEERING AND SUSPENSION PARTS. THE ASSESSEE IS NOT ENGAGED IN THE BUSINESS OF HYDRAULIC PUMPS AND SEAT BELT DIVISION AS THAT OF RANE TRW STEERING SYSTEMS LTD. WE FURTHER FIND THE SEGMENTAL DATA IN THE CASE OF RANE TRW STEERING SYSTEMS LTD., ARE NOT AVAILABLE. IT HAS BEEN HELD IN VARI OUS DECISIONS THAT WHEN SEGMENTAL DATA IS NOT AVAILABLE, A COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. APART FROM THE ABOVE, WE ALSO FIND THE EXPORT SALE OF THE ASSESSEE IS 98.90% OF THE TOTAL SALES WHEREAS THE EXPORT SALE OF RANE TRW STEERING SYSTEMS LTD., WHICH PRIMARILY CATERS TO THE DOMESTIC MARKET IS 11.47% OF THE TOTAL SALES. APART FROM THE ABOVE, RANE TRW STEERING SYSTEMS LTD., IS ENGAGED IN THE RESEARCH AND DEVELOPMENT ACTIVITIES IN THEIR PRODUCT/PROCESS DEVELOPMENT AND THEREBY HAS INCURRED HUG E RESEARCH & DEVELOPMENT EXPENSES DURING THE YEAR WHICH IS VERIFIABLE FROM THE ANNUAL AUDIT REPORT PLACED AT PAGE 514 AND 515 OF THE PAPER BOOK. IT ALSO HOLDS INTANGIBLE ASSETS WHICH ARE VERIFIABLE FROM THE NOTES ON ITA NO. 1928 /DEL/201 7 11 FIXED ASSETS, COPY OF WHICH IS PLACED A T PAGES 553 AND 554 OF THE PAPER BOOK. IN VIEW OF ALL THESE I.E., DIVERSIFIED BUSINESS, LOW EXPORT SALE, NON - AVAILABILITY OF SEGMENTAL DATA, INCURRING OF EXPENDITURE ON R&D ACTIVITIES AND PRESENCE OF INTANGIBLES, WE ARE OF THE CONSIDERED OPINION THAT RANE TRW STEERING SYSTEMS LTD., CANNOT BE CONSIDERED AS A COMPARABLE COMPANY. WE, THEREFORE, DIRECT THE A.O./TPO TO EXCLUDE RANE TRW STEERING SYSTEMS LTD., FROM THE LIST OF COMPARABLES. 22. SO FAR AS ZF STEERING GEAR (INDIA) LTD. , IS CONCERNED, THE LD. COUN SEL SUBMITTED THAT THIS COMPANY ALSO IS NOT FUNCTIONALLY COMPARABLE SINCE IT IS ENGAGED IN DIVERSIFIED BUSINESS. REFERRING TO THE COPY OF THE ANNUAL REPORT OF Z F STEERING GEAR (INDIA) LTD. , HE SUBMITTED THAT IT CLEARLY DEMONSTRATE S THAT IT IS IN THE BUSIN ESS O F GENERATING RENEWABLE ENERGY THROUGH SOLAR AND WINDMILL. THE ENERGY FROM ITS WINDMILLS HAS BEEN UTILIZED IN - HOUSE AND ACCOUNTS FOR 96% OF THE ENERGY UTILIZED BY IT FOR ITS MANUFACTURING BUSINESS, THUS, RESULTING IN A DIFFERENT BUSINESS MOD ULE . REFE RRING TO PAGE 662, 663 AND 665 OF THE PAPER BOOK, HE SUBMITTED THAT ZF STEERING GEAR (INDIA) LTD. , HAS ALSO RECORDED INCOME FROM SALE OF LONG - TERM INVESTMENTS, COST OF WHICH IS UNKNOWN AND CANNOT BE DETERMINED. FURTHER, THE EXPORT SALE OF ZF STEERING GEAR (INDIA) LTD. , IS 0.5% OF THE TOTAL SALES AS AGAINST EXPORT SALE OF 98.90% TO THE TOTAL SALES IN THE CASE OF THE ASSESSEE. HE SUBMITTED THAT ZF STEERING GEAR (INDIA) LTD., IS ENGAGED IN RESEARCH AND DEVELOPMENT ACTIVITIES IN THEIR PRODUCT/PROCESS DEVELOPM ENT DURING THE YEAR WHEREAS THE ITA NO. 1928 /DEL/201 7 12 ASSESSEE HAS NOT INCURRED ANY SUCH EXPENDITURE DURING THE YEAR. RELYING ON THE DECISION S CITED WHILE ARGUING EXCLUSION OF RANE TRW STEERING SYSTEMS LTD., HE SUBMITTED THAT ALL THESE DECISIONS ARE ALSO APPLICABLE TO THE PRES ENT COMPARABLE. HE ACCORDINGLY SUBMITTED THAT ZF STEERING GEAR (INDIA) LTD., SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. 23. THE LD. DR, ON THE OTHER HAND, HEAVILY RELIED ON THE ORDER OF THE A.O./TPO/DRP. 24. WE HAVE HEARD THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE A.O./TPO/DRP AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND THE TPO ADDED ZF STEERING GEAR (INDIA) LTD., AS A COMPARABLE WHILE DETERM INING THE ALP OF THE INTERNATIONAL TRANSACTION ALTHOUGH THE ASSESSEE HAS NOT CONSIDERED THE SAME. FROM THE DETAILS FURNISHED BY THE ASSESSEE IN THE PAPER BOOK, WE FIND FROM THE ANNUAL REPORT OF ZF STEERING GEAR (INDIA) LTD., THAT IT IS ALSO IN THE BUSINES S OF GENERATING RENEWABLE ENERGY THROUGH SOLAR AND WINDMILL. THE ENERGY FROM ITS WINDMILLS HAS BEEN UTILIZED IN - HOUSE AND ACCOUNTS FOR 96% OF THE ENERGY UTILIZED BY IT FOR ITS MANUFACTURING BUSINESS. THEREFORE, WE FIND FORCE IN THE ARGUMENT OF THE LD. COU NSEL THAT IT RESULTS IN A DIFFERENT BUSINESS MOD ULE . THE SUBMISSION OF THE LD. COUNSEL THAT ZF STEERING GEAR (INDIA) LTD., HAS RECORDED INCOME FROM SALE OF LONG - TERM INVESTMENTS, COST OF WHICH IS UNKNOWN AND CANNOT BE DETERMINED , COULD NOT BE CONTROVERTED BY THE LD. DR. APART FROM THE ABOVE, FROM THE DETAILS ITA NO. 1928 /DEL/201 7 13 FURNISHED BY THE ASSESSEE, WE FIND THE EXPORT SALES OF THE ASSESSEE IS 98.90% OF THE TOTAL SALES WHEREAS THE EXPORT SALE OF ZF STEERING GEAR (INDIA) LTD. IS ONLY 0.5% OF THE TOTAL SALES. THEREFORE, WE FIND MERIT IN THE ARGUMENT OF THE LD. COUNSEL THAT ZF STEERING GEAR (INDIA) LTD., CANNOT BE COMPARED TO THE ASSESSEE WHICH IS CATERING PRIMARILY TO THE EUROPEAN MARKET. WE FURTHER FIND FROM PAGE 665 OF THE PAPER BOOK THAT ZF STEERING GEAR (INDIA) LTD., HAS CARRIED OUT RESEARCH AND DEVELOPMENT ACTIVITIES IN THEIR PRODUC T /PROCESS DEVELOPMENT DURING THE YEAR AND HAS INCURRED HUGE R & D EXPENSES. HOWEVER, THE ASSESSEE COMPANY HAS NOT INCURRED ANY SUCH R & D EXPENSES. IN VIEW OF THE ABOVE AND RELYING ON VA RIOUS DECISIONS TO THE PROPOSITION THAT THE COMPARABLES HAVE TO BE EXCLUDED ON ACCOUNT OF CARRYING OUT RESEARCH AND DEVELOPMENT ACTIVITIES AND CONSIDERING THE FACT THAT THE COMPARABLE COMPANY HAS VERY LOW EXPORT SALES AS COMPARED TO THAT OF THE ASSESSEE, W E HOLD THAT ZF STEERING GEAR (INDIA) LTD., CANNOT BE CONSIDERED AS A COMPARABLE. WE, THEREFORE, DIRECT THE A.O./TPO TO EXCLUDE ZF STEERING GEAR (INDIA) LTD., FROM THE LIST OF COMPARABLES. 25. SO FAR AS THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS CONC ERNED, THE SAME RELATES TO MAKING NEGATIVE WORKING CAPITAL ADJUSTMENT FOR THE DIFFERENCES BETWEEN THE WORKING CAPITAL OF COMPARABLE COMPANIES VIS - - VIS THE ASSESSEE. 26. AFTER HEARING BOTH THE SIDES, WE FIND THE TPO, DURING THE TP PROCEEDINGS, GRANTED WOR KING CAPITAL ADJUSTMENT ON THE MARGIN OF THE COMPARABLE COMPANIES EVEN THOUGH THE SAME WAS NOT ASKED FOR AND CALCULATED THE AVERAGE MARGIN OF THE ITA NO. 1928 /DEL/201 7 14 COMPARABLE COMPANIES A T 3.28% (AFTER WORKING CAPITAL ADJUSTMENT OF COST OF THE ASSESSEE). HE ACCORDINGLY COMP UTED THE TP ADJUSTMENT. THE LD. DRP DISMISSED THE GROUND RAISED BY THE ASSESSEE OBJECTING THE WORKING CAPITAL ADJUSTMENT IN THE LIGHT OF THE ASSERTION OF THE ASSESSING OFFICER THAT THE SAID CLAIM WAS ALREADY ALLOWED TO THE ASSESSEE AT THE TIME OF TP PROCE EDINGS. 27. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO, IN HIS ORDER, HAS WRONGLY STATED THAT THE ASSESSEE ASKED FOR SUCH WORKING CAPITAL ADJUSTMENT. HE SUBMITTED THAT WORKING CAPITAL ADJUSTMENT WAS NEVER SOUGHT BY THE ASSESSEE AND WAS ALS O NOT REQUIRED IN THE CASE OF THE ASSESSEE. HE SUBMITTED THAT THE RELEVANT MARKET FACTORS SUCH AS DIFFERENCE IN INVENTORIES, DEBTORS AND CREDITORS PLAY A MAJOR ROLE WHILE SETTING UP PRICE MECHANISM FOR TRANSACTION S IN INDEPENDENT SCENARIO . THE SAID FACTO RS HAVE AL READY BEEN CONSIDERED BY THE ASSESSEE DURING THE PRICE SETTING PROCESS FOR TRANSACTIONS BETWEEN THE ASSESSEE AND ITS AES. HE SUBMITTED THAT THE TPO, AFTER ARRIVING AT THE ARITHMETIC MEAN OF ALL COMPARABLES AT 0.80 %, WORKED OUT THE NEGATIVE WORK ING CAPITAL ADJUSTMENT THEREBY MAKING ALP AT 3.28%. HE SUBMITTED THAT THE WORKING CAPITAL ADJUSTMENT IS MADE FOR THE TIME VALUE OF MONEY LOST WHEN CREDIT TIME IS PROVIDED TO THE CUSTOMERS. HOWEVER, IN THE INSTANT CASE, MAJORITY OF SALES ARE MADE TO THE R ELATED PARTIES. THEREFORE, THE ASSESSEE IS RUNNING ITS BUSINESS WITH NO WORKING CAPITAL RISK WHILE THE COMPARABLE COMPANIES PRIMARILY CATERS TO THE DOMESTIC MARKETS HAVING WORKING CAPITAL RISK. ITA NO. 1928 /DEL/201 7 15 RELYING ON THE FOLLOWING DECISIONS, HE SUBMITTED THAT THE NE GATIVE WORKING CAPITAL ADJUSTMENT IS NOT WARRANTED: - (I) INDUCTIS INDIA PVT. LTD. VS ACIT: ITA NO. 1203/DEL/2017 (DEL - TRIB.) (II) TNS INDIA PVT LTD VS ACIT: ITA NO. 1927/HYD/2011 (HYDERABAD - TRIB.) (III) LAM RESEARCH INDIA (PRIVATE) LIMITED VS DCIT: IT(TP) A NO.1437 /BANG/2014 . (IV) DCIT VS SOFTWARE AG BANGALORE TECHNOLOGIES PVT. LTD. [IT(TP)A NO 1628/BANG/2014] (V) ADAPTEC (INDIA) PRIVATE LIMITED VS ACIT [ITA NO. 206 /HYD./ 2014] (VI) CAPCO IT SERVICES INDIA (PVT) LIMITED VS ITO [ITA NO. 1340/BANG/2011] 28. HE ACCORDINGLY SUBMIT TED THAT WHEN THE ASSESSEE HAS NOT CLAIMED ANY WORKING CAPITAL ADJUSTMENT, THE TPO CANNOT MAKE A NEGATIVE ADJUSTMENT IN THE WORKING CAPITAL. HE ACCORDINGLY SUBMITTED THAT SUCH NEGATIVE WORKING CAPITAL ADJUSTMENT SHOULD BE CANCELLED. 29. THE LD. DR, ON TH E OTHER HAND, HEAVILY RELIED ON THE ORDER OF THE A.O/TPO/DRP. 30. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE A.O./TPO/DRP AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOU S DECISIONS CITED ( SUPRA ) . WE FIND THE TPO, ITA NO. 1928 /DEL/201 7 16 AFTER ARRIVING AT THE ARITHMETIC MEAN OF ALL COMPARABLES AT 0.80%, WORKED OUT THE NEGATIVE WORKING CAPITAL ADJUSTMENT THEREBY MAKING ARM S LENGTH PRICE AT 3.28%. IT IS THE SUBMISSION OF THE LD. COUNSEL THAT NEI THER THE ASSESSEE HAS SOUGHT ANY WORKING CAPITAL ADJUSTMENT NOR THE SAME IS REQUIRED IN THE CASE OF THE ASSESSEE. IT IS ALSO HIS SUBMISSION THAT WORKING CAPITAL ADJUSTMENT IS MADE FOR THE TIME VALUE OF MANY LOST WHEN CREDIT TIME IS PROVIDED TO THE CUSTOME RS. HOWEVER, IN THE INSTANT CASE, THE SALES ARE MADE TO THE RELATED PARTIES AND, THEREFORE, THERE IS NO WORKING CAPITAL RISK WHEREAS THE COMPARABLE COMPANIES PRIMARILY CATERS TO THE DOMESTIC MARKET HAVING WORKING CAPITAL RISK. THEREFORE, ACCORDING TO THE LD. COUNSEL, NEGATIVE ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL IS NOT REQUIRED. 31. WE FIND MERIT IN THE ABOVE ARGUMENTS OF THE LD. COUNSEL. IT IS AN ADMITTED FACT THAT MORE THAN 94% OF THE SALES MADE BY THE ASSESSEE ARE TO THE RELATED PARTIES AND, THER EFORE, THE ASSESSEE IS RUNNING ITS BUSINESS WITH NO WORKING CAPITAL RISK WHEREAS THE COMPARABLES COMPANIES WHO PRIMARILY CATER TO THE DOMESTIC MARKET ARE HAVING WORKING CAPITAL RISK. UNDER SUCH CIRCUMSTANCES, IF AT ALL ANY WORKING CAPITAL ADJUSTMENT HAS T O BE MADE, THEN, IT HAS TO BE A POSITIVE ADJUSTMENT AND THERE CANNOT BE ANY NEGATIVE WORKING CAPITAL ADJUSTMENT. WE FIND THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF INDUCTIS INDIA PVT. LTD. (SUPRA) HAS HELD THAT IN CASE THE ASSESSEE RENDER ITES SERVIC ES TO THE AE, THERE WAS NO NEED FOR MAKING ANY NEGATIVE WORKING CAPITAL ADJUSTMENT WHEN THE ASSESSEE DID NOT CARRY ANY WORKING CAPITAL RISK. THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF LAM RESEARCH ITA NO. 1928 /DEL/201 7 17 INDIA (PRIVATE) LIMITED (SUPRA) HAS HELD THAT NEG ATIVE WORKING CAPITAL ADJUSTMENT CANNOT BE CARRIED OUT WHERE THE ASSESSEE WAS A CAPTIVE SERVICE PROVIDER. THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF ADAPTEC (INDIA) PRIVATE LIMITED (SUPRA) HAS HELD THAT THERE IS NO NEED FOR MAKING ANY NEGATIVE WOR KING CAPITAL ADJUSTMENT WHEN THE ASSESSEE DOES NOT B EAR ANY WORKING CAPITAL RISK. THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF CAPCO IT SERVICES INDIA (PVT) LIMITED (SUPRA) HAS HELD THAT WHERE THE ASSESSEE DID NOT CARRY ANY WORKING CAPITAL RISK, TH ERE WAS NO NEED FOR MAKING ANY NEGATIVE WORKING CAPIT AL ADJUSTMENT. SINCE, IN THE INSTANT CASE, MAJORITY OF SALES I.E., 94% OF THE TOTAL SALES MADE BY THE ASSESSEE IS TO ITS RELATED PARTIES, THEREFORE, THE ASSESSEE, IN OUR OPINION, IS RUNNING ITS BUSINESS WITH NO WORKING CAPITAL RISK. THEREFORE, IN VIEW OF THE DECISIONS CITED (SUPRA), WE ARE OF THE CONSIDERED OPINION THAT THE TPO/DRP WERE NOT JUSTIFIED IN MAKING NEGATIVE WORKING CAPITAL ADJUSTMENT. THEREFORE, THE ADDITIONAL GROUND RAISED BY THE ASSESSEE I S ALLOWED. 32 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED . THE DECISION WAS PRONOUNCED IN THE OPEN COURT ON 11 . 1 2 .201 9 . SD/ - SD/ - ( SUCHITRA KAMBLE ) ( R. K. PANDA ) JUDICIAL MEMB ER ACCOUNTANT MEMBER DATED: 11 TH DECEMBER, 201 9 DK ITA NO. 1928 /DEL/201 7 18 COPY FORWARDED TO : 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASSTT. REGISTRAR, ITAT, NEW DELHI