Faurecia Automotive Seating India Pvt.Ltd, Pune V. Assistant Commissioner of Income-tax, Circle - 9, Pune

ITA 1932/PUN/2018

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Faurecia Automotive Seating India Pvt. Ltd. appealed against the final assessment order passed under sections 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, which included significant TP adjustments proposed by the TPO. The appellant contested the adjustments related to customs duty, the valuation of international transactions, and the denial of benefits from professional services and R&D cost sharing from its Associated Enterprises (AEs). The Tribunal found merit in the appellant's arguments regarding customs duty adjustments and the restriction of TP adjustments to international transactions. However, the issues concerning the receipt of professional services and R&D cost sharing were remitted for further examination.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 137569 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 09-02-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 20-12-2018
• Other Referred Cases: DCIT vs. India Kawasaki Motors Pvt. Ltd., CIT vs. Transwitch India Pvt. Ltd., ACIT vs. Nord Drive Systems Pvt. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Working capital adjustments; Revised return
• Section: 143(3); 92B; 133(6); 72; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “C”, PUNE BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER आयकर अपील सं. / ITA No.1932/PUN/2018 िनधाᭅरण वषᭅ / Assessment Year : 2014-15 Faurecia Automotive Seating India Pvt. Ltd., Plot No.T-187, B.G. Block, Pimpri Industrial Area, Bhosari, Pune- 411026. PAN : AADCS8694Q Vs. ACIT, Circle-9, Pune. Appellant Respondent आदेश / ORDER PER INTURI RAMA RAO, AM: This is an appeal filed by the assessee directed against the final assessment order dated 17.10.2018 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (‘the Act’) for the assessment year 2014-15. 2. The appellant raised the following grounds of appeal :- “Based on the facts and circumstances of the case, Faurecia Automotive Seating India Private Limited (hereinafter referred to as the ‘Appellant’) respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income Tax, Circle - 3(1)(1) (‘AO’) dated 11 October 2017 (received by the Appellant on 25 Assessee by : Shri Percy Pardiwalla & Shri Jeet Kamdar Revenue by : Shri Ganesh Bare Date of hearing : 10.02.2023 Date of pronouncement : 24.02.2023 ITA No.1932/PUN/2018 2 October 2017) in pursuance of the directions issued by Dispute Resolution Panel (‘DRP'), Bangalore, dated 19 September 2017 under section 253 of the Income-tax Act, 1961 (‘Act’) on the following grounds, which are independent of and without prejudice to each other: On the facts and in the circumstances of the case and in law, the Hon’ble DRP and consequentially the learned AO/Transfer Pricing Officer (‘TPO’) has: A. General 1. erred in assessing the total income at Rs 17,71,51,770 as against income of Rs 10,79,81,090 (as per the revised return of income filed by the Appellant); B. Transfer Pricing adjustment under provisions of Chapter X of the Act in respect of international transactions 2. erred in not considering custom duty adjustment while computing the profitability of the Assessee. 3. erred in law by ignoring the principle of consistency in not considering custom duty adjustment in calculating the Assessee’s entity level margin. 4. erred in not restricting the adjustment proportionate to the value of the international transactions of the Assessee. 5. erred in conforming the arm’s length price for international transaction in respect of availing professional services in the nature of Group service fees and Research and Development (‘R&D’) cost sharing by the Appellant from its Associated Enterprises (‘AEs’) at INR NIL as against the sum of INR 6,91,70,675/- as determined by the Appellant and thereby proposing an adjustment of INR 6,91,70,675/- 6. erred in alleging that no tangible or direct benefit was derived by the Appellant from the receipt of professional services in the nature of Group service fees and R&D cost sharing and further erred in disregarding the Service Agreement (‘SA’), Cost Sharing Agreement (‘CSA’), detailed documentary evidences filed by the Appellant from time to time to substantiate the receipt of services, benefits derived there from and cost incurred by the AE for rendering these services, without identifying any specific flaws in the said documents. 7. erred in not appreciating that payment for these services is based on allocation mechanism followed by the Group. 8. erred in disregarding the cost allocation working by stating that no correlation has been made to the expenses incurred and the exact services received by the Assessee. 9. erred on facts in alleging that professional services were in the nature of shareholder activities. ITA No.1932/PUN/2018 3 10. erred on facts in alleging that the AE is double charging the Assessee i.e. charging the Assessee twice for the same service and charging the Assessee for the services which were either not rendered or were only incidentally beneficial to the Assessee, without appreciating the fact that parent company has actually rendered these services. 11. erred in disregarding the benchmarking analysis conducted by the Appellant using the Transactional Net Margin Method (‘TNMM’) to demonstrate the arm’s length nature of the pricing of the said international transaction. 12. exceeded their jurisdiction by computing the transfer pricing addition by applying Comparable Uncontrolled Price (‘CUP’) method and without comparing the same with any uncontrolled comparable transactions and thus their orders on this issue are bad in law. 13. exceeded their jurisdiction by making an ad-hoc disallowance of the payment of professional services in the nature of Group service fees and R&D cost by challenging the commercial expediency of the appellant. 14. erred in ignoring the fact that the AE has paid tax on professional fees in the nature of Group service fees and R&D cost and has filed the return of income in India for the year under consideration. C. Others 1. On the facts and in the circumstances of the case, the Ld. AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act on the premise that the Appellant has concealed/furnished inaccurate particulars of income, without appreciating the fact that adjustment made is not in accordance with the law. The Appellant prays that the additions made by the learned AO / TPO under the directions of the learned DRP be deleted and consequential relief be granted. The Appellant craves leave to add, alter, amend and/or withdraw any of the above grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal as per law.” 3. Briefly, the facts of the case are as under :- The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of ITA No.1932/PUN/2018 4 manufacturing of recliner including handle bar and connecting rods. The handle bar is used in slider and connecting rod is used in recliner. The combination of slider, recliner, handle bar and connecting rod define one complete assembly set for the vehicle seats. The Return of Income for the assessment year 2014-15 was filed on 30.11.2014 declaring total income of Rs.6,00,79,766/-. The same was revised on 31.03.2016 at a total income of Rs.10,79,81,000/-. The appellant also reported the following international transactions with its Associated Enterprises (‘AEs’) within the meaning of section 92B of the Income Tax Act, 1961 (‘the Act’) :- Particulars Amount Raw material and components 7,31,03,332 Sale of sample material 1,40,183 Royalty payments 2,78,42,507 Design service income 28,70,220 Professional expenses 32,52,326 Professional expenses (Validation charges) 56,97,550 Professional expenses (group fees) 6,91,70,675 Training cost 14,02,895 Reimbursement of expenses 66,93,717 Total 89,01,73,405 4. The appellant company submitted a Transfer Pricing (TP) study report, wherein, the appellant sought to benchmark the above international transactions by using TNM Method at entity level and OP/OR as Profit Level Indicator (PLI). The appellant company also ITA No.1932/PUN/2018 5 identified 8 comparables on the basis of FAR analysis. In the TP study report, the appellant company stated that PLI of the comparable was 4.54% as against the PLI of the appellant was 4.59%. Thus, it was sought the international transactions with AEs at arm’s length price. 5. Noticing the above international transactions, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) u/s 92CA(1) for the purpose of benchmarking the above international transactions reported by the appellant company in Form No.3CEB. 6. The TPO vide order dated 30.10.2017 passed u/s 92CA(3) suggested the TP adjustments of Rs.13,87,88,731/- which includes TP adjustments in respect of manufacturing segment of Rs.6,96,18,056/- and in respect of group services fee and R&D cost sharing fee of Rs.6,91,70,675/-. While doing so, the TPO accepted the comparables selected by the appellant company, however, rejected the adoption of 3 years average data and had not allowed the working capital adjustments and accordingly, computed the TP adjustments in respect of manufacturing segment is as under :- Determination of Arm’s Length Price: Arm’s Length Margin 4.54% Arm’s Length Cost 95.46% Operating Revenue Rs.1,76,43,33,092 Arm’s Length Cost Rs.1,68,42,32,369 Operating Cost Rs.1,75,38,50,425 ITA No.1932/PUN/2018 6 Excess being Transfer Pricing Adjustment u/s 92CA Rs.6,96,18,056 7. As regards to the group services fees of Rs.2,60,04,987/-, the TPO was of the opinion that in the absence of any evidence with regard to the rendering of services by the AEs, the arm’s length price is determined at Rs.Nil under the CUP method. As regards to the R&D cost sharing fee of Rs.4,31,65,688/-, the TPO was of the opinion that it is nothing but a duplication of expenses incurred for royalty and accordingly, determined the arm’s length price of Rs.Nil. Accordingly, TP adjustment of Rs.6,91,70,675/- was proposed by the TPO towards ALP services of group services fee and R&D cost sharing fee. Accordingly, the TPO proposed the total upward TP adjustment of Rs.13,87,88,731/-. 8. On receipt of the TPO’s order, a draft assessment order was passed by the Assessing Officer on 30.11.2017 u/s 143(3) r.w.s. 144C(1) of the Act. 9. On receipt of the draft assessment order, the appellant filed objections before the Hon’ble DRP. The Hon’ble DRP vide order dated 27.08.2018 had denied the customs duty adjustments for computation of margin of the appellant company. While denying, the same, he had confirmed the action of the Assessing Officer not ITA No.1932/PUN/2018 7 restricting the TP adjustment in the international transactions with AEs. However, the Hon’ble DRP had also confirmed the TP adjustments in respect of group services fees and R&D cost sharing fees. According to the Hon’ble DRP, the appellant had failed to prove the receipt of the services as well as the difference between the royalty and R&D cost, however, directed the Assessing Officer/TPO to compute the margin of the manufacturing segment by removing the value of international transactions pertaining to the professional services/R&D from the cost base. 10. On receipt of the Hon’ble DRP directions, the Assessing Officer referred the matter to the TPO. The TPO vide order dated 10.10.2018 passed u/s 92CA in terms of the direction of the Hon’ble DRP, wherein, the TP adjustments of Rs.6,91,70,675/- in management fees and R&D was suggested. Accordingly, the Assessing Officer passed final assessment order dated 17.10.2018 passed u/s 143(3) r.w.s. 144C(13) after making the TP adjustments of Rs.6,91,70,675/- in respect of intra group service fees and R&D cost sharing fees. 11. Being aggrieved by the above final assessment order, the appellant is in appeal before us in the present appeal. ITA No.1932/PUN/2018 8 12. Ground of appeal no.1 is general in nature and does not require any adjudication. 13. Ground of appeal nos.2 and 3 challenges the action of the lower authorities ignoring the custom duty adjustments while computing the profit margins of the appellant company. It is submitted before us that the appellant is engaged in the business of manufacturing of automotive seating and recliner including handle bar and connecting rods which requires adherence to strict quality standards. The majority of the raw material was imported and appellant company procured very minimal quantity of raw material locally. During the year under consideration, imports of raw material constituted 69.02% of the total purchases used for manufacturing activities. Whereas in the case of comparable, the percentage of imported goods is only 13.69% on account of composition of imported raw material, it resulted in higher incidence of customs duty thereby increasing the cost of raw material, components, stores directly affecting the net profit margin of the appellant company vis-a-vis comparables selected by it. Accordingly, the assessee claimed adjustment on account of higher duty paid in order to eliminate the difference that are likely to materially affect the price or profit between the assessee company ITA No.1932/PUN/2018 9 and comparables. Reliance also placed on OECD Guidelines as well as Rule 10B(1)(b)(iv) of the Income Tax Rules, 1962 (‘the Rules), which provides for adjustment that can be made to eliminate difference that are likely to materially affect the price or cost or profit between the controlled and uncontrolled transactions. The appellant also provided the working of the adjustment, set out at page no.19 of the Hon’ble DRP order. In support of this, the assessee placed reliance on the decision of the Co-ordinate Bench of this Tribunal in the case of DCIT vs. India Kawasaki Motors Pvt. Ltd. vide ITA No.88/PUN/2021 for A.Y. 2013-14 dated 19.05.2022. It is further submitted that the adjustments should be made out in the hands of the appellant company alone, to iron out the differences of profit between the profit of the tested company and the comparables, as the necessary data in respect of the comparables was not available. The ld. Sr. Counsel also placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Transwitch India Pvt. Ltd. in ITA 678/2012 dated 17.07.2013, wherein, the Hon’ble Delhi High Court has upheld that the suitable adjustments should be made only in the hands of the tested party/company, not the comparables. ITA No.1932/PUN/2018 10 14. On the other hand, ld. CIT-DR objected for adjustment on account of customs duty, as the appellant company had chosen this business model. Further, the ld. CIT-DR submitted that in the event it is held that the appellant company is entitled for adjustments on account of customs duty, the suitable adjustments should be made only in the hands of the comparables, as the Assessing Officer/TPO can always seek data from the comparables by exercising the power vested with them u/s 133(6) of the Act. 15. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal no.2 and 3 relates to the allowability of the adjustments on account of customs duty while computing the profit margin of the appellant company. The submission of the appellant company that it had imported 69.02% of the total raw material, whereas in the case of comparables, the percentage of imported goods is only 13.69% on account of composition of imported raw material chosen by the appellant company is not in dispute. Undoubtedly, higher percentage of the imported raw material resulted in higher incidence of the customs duty, which increased the cost of manufacturing segment thereby directly affect the gross profit margin as compared to the comparables. The provisions of Rule 10B(1)(b)(iv) of the Rules ITA No.1932/PUN/2018 11 provide that the adjustments can be made to eliminate the difference that are likely to materially affected the price, cost or profit between the controlled and uncontrolled transactions. Therefore, in the light of above discussions, we find merit in the contention of the appellant company that the suitable adjustments should be made to iron out the differences of profit between the profit of tested company and comparables. The Co-ordinate Bench of this Tribunal took similar view in the case of India Kawasaki Motors Pvt. Ltd. (supra). The next question that may come up is in whose hands such adjustment can be made? The Co-ordinate Bench of this Tribunal in the case of ACIT vs. Nord Drive Systems Pvt. Ltd. in ITA No.825/PUN/2016 for A.Y. 2011-12 dated 28.11.2019 held that the adjustments is required to be made only in the profit margin of the comparables by holding as under :- “10. In sofaras the legal position on this issue is concerned, subclause (i) of rule 10B(1)(e) eloquently provides for computing the net profit margin as realized by the enterprise from the international transaction. Sub-clause (ii) deals with the computation of net operating profit margin from a comparable uncontrolled transaction, may be internal or external. Sub-clause (iii) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above, ‘is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, ..... which could materially affect the amount of net profit margin in the open market.’ It is this adjusted net profit margin of the unrelated transactions or of the comparable companies, as determined under sub-clause (iii), which is used for the purposes of making comparison with the net profit margin realized by the assessee from its international transaction as per sub-clause (i). Thus the law explicitly ITA No.1932/PUN/2018 12 provides for adjusting the profit margin of comparables on account of the material differences between the international transaction of the assessee and comparable uncontrolled transactions. It is not the other way around to adjust the profit margin of the assessee. In other words, the net operating profit margin realized by the assessee from its international transaction is to be computed as such, without adjusting it on account of differences with the comparable uncontrolled transactions. The adjustment, if any, is required to be made only in the profit margins of the comparables.” 16. This decision was followed by the Co-ordinate Bench of this Tribunal in the case of India Kawasaki Motors Pvt. Ltd. (supra). The submission of the ld. Sr. Counsel that the decision of the Hon’ble Delhi High Court in the case of Transwitch India Pvt. Ltd. (supra) should be followed in preference to the decision of the Co- ordinate Bench of this Tribunal stated supra, we are of the considered opinion that the decision was not rendered by the Hon’ble Delhi High Court in the of Transwitch India Pvt. Ltd. (supra) by making the reference to provisions of Rule 10B(1)(b)(iv) of the Rules. In the event, the data of the comparable companies are not available, the Assessing Officer/TPO can obtain the same by exercising the power vested with them u/s 133(6) of the Act. Accordingly, we remit this issue to the file of the Assessing Officer/TPO with a direction to allow the adjustments on account of customs duty on the lines indicated above. Accordingly, the ground of appeal nos.2 and 3 stands partly allowed for statistical purposes. ITA No.1932/PUN/2018 13 17. Ground of appeal no.4 challenges the decision of the lower authorities not restricting the TP adjustments proportionate to the value of the international transactions of the assessee. 18. It is now settled law that the TP adjustments should be restricted to the international transactions alone as held by the Jurisdictional High Court in the case of in the (i) CIT vs. Hindustan Unilever Ltd., 72 taxmann.com 325 (Bombay) and (ii) CIT vs. Ratilal Becharlal & Sons, 65 taxmann.com 155 (Bombay). Therefore, in the light of the law laid down by the Jurisdictional High Court, we direct the Assessing Officer/TPO to restrict the TP adjustments, if any, to the international transactions alone. Accordingly, this ground of appeal no.4 stands allowed. 19. Ground of appeal nos.5 to 14 challenges the decision of the lower authorities in confirming the TP adjustments in respect of intra group professional services and R&D cost sharing fees. During the previous year relevant to the assessment year under consideration, the appellant company made payment towards professional services amounting to Rs.6,91,70,675/- to Faurecia Sieges D’Automobile (‘Faurecia France’). The appellant company made payments towards the services rendered as per the service agreement entered between the parties on 18.05.2010. This also ITA No.1932/PUN/2018 14 includes R&D cost pertaining to designing new concepts, developing technical and feasible concepts, engineering studies etc. are also incurred and allocated to the assessee as per cost sharing agreement entered between the parties on 22.05.2010. It is submitted that the findings of the TPO as confirmed the Hon’ble DRP that no benefit was derived by the appellant company from the receipt of the professional services and no services were received are incorrect having regard to the evidence of the receipt of services from AEs in the form of e-mails, report which demonstrated actual receipt of the services by the assessee from AE and in this regard reference also made to the submission made before the Hon’ble DRP at page no.36 to 54. It is further submitted that the functions of professional services and the sharing of R&D cost are two separate and distinct functions does not result in duplication of the services. In terms of the cost sharing agreement entered between the parties on 22.05.2010, R&D cost pertaining to designing new concepts, developing technical and feasible concepts, engineering studies etc. are also incurred and allocated to the assessee, whereas, under service agreement, the assessee had received assistance, advice and support on matters relating to general management, communication, sales and marketing, program management, ITA No.1932/PUN/2018 15 accounting, controlling and tax, insurance and real estate, legal, treasury, general management of information system organisation, production purchasing, non-production purchasing and manufacturing. It is stated that the TPO as well as the Hon’ble DRP determined the arm’s length price of the above at Nil for two reasons : (i) there was no proof in support of the receipt of the services from the AEs in respect of professional services and (ii) in respect of cost sharing of R&D, the lower authorities was of the opinion that it is duplication of the services for royalty and R&D cost. 20. At the first instance, we shall deal with the contentions of the lower authorities whether there was a proof of receipt of services or not. It is settled position of law that the onus of proving the receipt of services lies on the assessee claiming deduction on account of payment made towards professional charges. It is a condition precedent to prove that the receipt of services for availing the deduction towards the payment. The appellant had filed description of the services received in several forms and also filed before us the copies of the descriptive and evidence in respect of receipt of services running from page no.232 to 921 of the Paper Book. We find from the ITAT order 2013-14, this issue was restored to the file ITA No.1932/PUN/2018 16 of the Assessing Officer/TPO to examine the evidence filed in support of the receipt of the services. On the parity of same reasoning, we remit the matter to the file of the Assessing Officer/TPO to examine and reach a conclusion whether or not the appellant company had received the services from its AEs and then, if it is found that the appellant had received the professional services, then the Assessing Officer/TPO further proceed to examine the evidence produced by the appellant to find out where these services were rendered in relation to business of the manufacturing segment. If it is found that these transactions are closely linked transactions with the business of segment, then the Assessing Officer/TPO shall benchmark these transactions by including cost of the services as part of the cost base, as the TPO had adopted and accepted the TNM Method at entity level as the most appropriate method. Otherwise, the Assessing Officer/TPO shall undertake the exercise of benchmarking of these transactions under CUP Method by bringing the comparables on record. 21. As regards to the benchmarking of the payment of R&D fees, we are in agreement with the submissions made by the appellant company that the R&D sharing cost are not covered under royalty agreement and, therefore, it does not result in duplication. ITA No.1932/PUN/2018 17 However, this issue is required to examine on the similar lines as indicated in respect of management service fees. Therefore, this issue is remitted to the file of the Assessing Officer/TPO to be dealt on similar line as indicated in respect of the management service fees. Thus, ground of appeal no.5 to 14 stands partly allowed for statistical purposes. 22. In the result, the appeal filed by the assessee stands partly allowed for statistical purposes. Order pronounced on this 24 th day of February, 2023. Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / Pune; ᳰदनांक / Dated : 24 th February, 2023. Sujeet आदेश कᳱ ᮧितिलिप अᮕेिषत / Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant. 2. ᮧ᭜यथᱮ / The Respondent. 3. The DRP-3, Mumbai-1/2/3 4. The Pr. CIT concerned. 5. िवभागीय ᮧितिनिध, आयकर अपीलीय अिधकरण, “C” बᱶच, पुणे / DR, ITAT, “C” Bench, Pune. 6. गाडᭅ फ़ाइल / Guard File. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.