M/s. Mando India Steering Systems Private Limited, Kancheepuram V. ACIT, CHENNAI

ITA 2092/CHNY/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77199 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 4 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-04-2014
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 03-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 21-11-2012
• Court: TRIBUNAL
• Department Lawyers: ANIRUDH RAI
• Assessee Lawyers: PRASUN KUMAR MAITI; BHARATH CHOPRA
• Keywords: Depreciation; Transfer pricing; International transaction; Working capital adjustments; Wholly owned subsidiary; Revised return

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHE NNAI . . . , ! , ' # $ BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT & SHRI VIKAS AWASTHY, JUDICIAL MEMBER . / I.T.A. NO. 2092/MDS/2012 / ASSESSMENT YEAR : 2008-09 M/S.MANDO INDIA STEERING SYSTEMS PRIVATE LIMITED, S-1 A & S-5, SIPCOT INDUSTRIAL PARK, VENGADU VILLAGE, SRIPERUMBUDUR TALUK, KANCHEEPURAM-602 105 [PAN: AAECM 8625 J] ( !% /APPELLANT) VS ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-IV(I), CHENNAI ( &'!% /RESPONDENT) / APPELLANT BY : SHRI PRASUN KUMAR MAITI , CA & SHRI BHARATH CHOPRA, CA / RESPONDENT BY : SHRI ANIRUDH RAI, CIT-DR / DATE OF HEARING : 03-02-2014 ! / DATE OF PRONOUNCEMENT : 07-04-2014 #( / O R D E R PER VIKAS AWASTHY, J.M: THE APPEAL HAS BEEN FILED BY THE ASSESSEE IMPUGNIN G THE ASSESSMENT ORDER DATED 26-09-2012 PASSED U/S.143(3) R.W.S.144C(13) AND 92CA(3) OF THE INCOME TAX ACT, 1 961 (HEREIN AFTER REFERRED TO AS THE ACT) RELEVANT TO THE ASS ESSMENT YEAR (AY) 2008-09. I.T.A. NO. 2092/MDS/2012 2 2. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF MAN DO CORPORATION, KOREA AND IS ENGAGED IN THE ASSEMBLY O F STEERING COLUMNS TO ORIGINAL EQUIPMENT MANUFACTURERS (OEM) L IKE HYUNDAI MOTOR INDIA LTD. THE ASSESSEE IN THE COURSE OF ITS BUSINESS HAS INTERNATIONAL TRANSACTIONS ON ACCOUNT OF IMPORT OF MACHINERY, RAW- MATERIALS, CONSUMABLE COMPONENTS AND FINISHED GOODS BESIDES PAYMENT OF ROYALTY, MANAGEMENT FEE, REIMBURSEMENT O F EXPENSES ETC. THE ASSESSEE FILED ITS RETURN OF INCOME FOR T HE AY UNDER CONSIDERATION ON 30-09-2008 DECLARING A LOSS OF ` 16,03,67,744/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE U/S.143(2) OF THE ACT WAS ISSUED TO THE ASSESSEE O N 12-08-2009. SINCE THE ASSESSEE HAD CERTAIN INTERNATIONAL TRANSA CTIONS WITH ASSOCIATED ENTERPRISE [AE], REFERENCE WAS MADE TO T RANSFER PRICING OFFICER [TPO] TO DETERMINE THE ARMS LENGTH PRICE [ALP]. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSEE VIDE LETTER DATED 15-12-2011 CLAIMED THE DEDUCTION OF ` 3,14,10,819/- ON ACCOUNT OF FOREIGN EXCHANGE GAIN O N FIXED ASSETS. AS PER THE CONTENTION OF THE ASSESSEE, THI S AMOUNT HAS ALREADY BEEN REDUCED FROM THE COST OF FIXED ASSETS WHILE COMPUTING THE DEPRECIATION UNDER THE PROVISIONS OF THE INCOME TAX ACT, HOWEVER, THE SAME WAS NOT CLAIMED AS DEDUCTION WHILE MAKING COMPUTATION. AS A RESULT, THE LOSS IN THE FI NANCIAL YEAR I.T.A. NO. 2092/MDS/2012 3 (FY) RELEVANT TO THE AY UNDER CONSIDERATION HAS RED UCED. THE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSE E FOR THE REASON THAT THE CLAIM HAS NOT BEEN MADE BY FILING REVISED RETURN OF INCOME AND AS PER THE ACT, ANY CLAIM MADE DURING THE COURS E OF ASSESSMENT BY FILING AN APPLICATION IS NOT PERMISSI BLE. 3. AS FAR AS THE INTERNATIONAL TRANSACTIONS ARE CON CERNED, THE ASSESSEE SUBMITTED DETAILED REPORT IN FORM-3CEB. T HE ASSESSEE HAD ADOPTED CUP METHOD FOR THE PURCHASE OF MACHINER Y AND REIMBURSEMENT OF EXPENSES AND TNM METHOD FOR PURCHA SE OF FINISHED GOODS, RAW-MATERIAL COMPONENTS AND CONSUMA BLES, PAYMENT OF ROYALTY, MANAGEMENT FEE DEVELOPMENT FEE ETC. IN TRANSFER PRICING STUDY, THE ASSESSEE IDENTIFIED 10 COMPARABLES BY ADOPTING TNM METHOD AND ARRIVED AT A MEAN OF 8.4%. THE ASSESSEE ADJUSTED THIS MARGIN AFTER MAKING WORKING CAPITAL ADJUSTMENTS. THE ASSESSEE THEREAFTER REVISED THE M EAN MARGIN TO 6.78% WHICH WAS ACCEPTED BY THE TPO. THE TPO AFTER DETAILED ANALYSIS OF THE INTERNATIONAL TRANSACTIONS, MADE DO WNWARD ADJUSTMENT OF ` 7,59,39,334/- VIDE ORDER DATED 28-10-2011. AGGRIEVED AGAINST THE ORDER OF THE TPO, THE ASSESSE E FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL [DRP ]. THE DRP SOUGHT DETAILED REPORT FROM THE TPO ON THE OBJECTIO NS FILED BY THE I.T.A. NO. 2092/MDS/2012 4 ASSESSEE. THE TPO SUBMITTED HIS REPORT DATED 01-06 -2012 TO DRP. HOWEVER, IN THE REPORT, THE TPO ENHANCED THE ADJUSTMENT FROM ` 7,59,39,334/- TO ` 11,39,39,334/-. THE REASON FOR MODIFYING THE ADJUSTMENT AS STATED BY TPO WAS THAT THE ACTUAL COST WAS WRONGLY TAKEN AS ` 1,11,50,23,385/- INSTEAD OF ` 1,15,30,23,385/-. THE DRP REJECTED ALL THE OBJECTIONS RAISED BY THE A SSESSEE AND CONFIRMED THE FINDINGS OF TPO. ON THE BASIS OF THE DIRECTIONS OF THE DRP, THE ASSESSING OFFICER COMPLETED THE ASSESS MENT VIDE IMPUGNED ORDER DATED 26-09-2012 AND MADE ADDITION O F ` 7,59,39,334/- ON ACCOUNT OF DIFFERENCE IN ALP. THE ASSESSEE AGGRIEVED AGAINST THE ASSESSMENT ORDER HAS FILED PRESENT APPEAL BEFORE THE TRIBUNAL AND HAS RA ISED THE FOLLOWING GROUNDS IN APPEAL: 1. THAT THE ORDER OF THE LEARNED (LD) ASST. COMMISS IONER OF INCOME TAX, CHENNAI (ASSESSING OFFICER OR AO) TO TH E EXTENT PREJUDICIAL TO THE APPELLANT, IS BAD IN LAW AND LIABLE TO BE QUASHED. NON TRANSFER PRICING RELATED : 2. THE LEARNED (LD) ASST. COMMISSIONER OF INCOME TA X, CHENNAI (ASSESSING OFFICER OR AO) AND THE LD. DISPU TE RESOLUTION PANEL (DRP) ERRED BOTH IN LAW AND IN FAC TS IN NOT REDUCING FROM THE TAXABLE INCOME OF THE ASSESSE E THE FOREIGN EXCHANGE GAIN OF ` 3,14,10,819/- WHICH WAS ALREADY REDUCED FROM THE COST OF FIXED ASSETS. I.T.A. NO. 2092/MDS/2012 5 TRANSFER PRICING RELATED : 3. THAT THE LD.AO AND THE LD.DRP ERRED BOTH IN FACT S AND LAW IN CONFIRMING THE ACTION OF THE LEARNED TPO OF MAKI NG AN ADJUSTMENT TO THE TRANSFER PRICE OF THE APPELLANT B Y ` 7,59,39,334 HOLDING THAT THE INTERNATIONAL TRANSACT IONS DO NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UN DER THE ACT AND IN DOING SO GROSSLY ERRED IN REJECTING THE TP DOCUMENTATION MAINTAINED BY THE ASSESSEE. 4. THE LD.AO/LD.DRP ERRED IN LAW IN NOT CONSIDERING ASSESSEES CLAIM THAT IF THE INTERNATIONAL TRANSACT IONS ARE TESTED ON INDIVIDUAL BASIS CONSIDERING MANDO KOREA AS THE TESTED PARTY, THE SAME WOULD MEET THE ARMS LENTH P RICE (ALP). 5. THE LD.AO/LD.DRP ERRED IN LAW AND IN FACTS IN RE JECTING ASSESSEES CLAIM OF CAPACITY UTILIZATION ADJUSTMENT . 6. THE LD.AO/LD.DRP ERRED IN LAW AND IN FACTS BY CO MPUTING THE ADJUSTMENT ON AN OVERALL BASIS INCLUDING UNCONT ROLLED TRANSACTIONS. 4. SHRI PRASUN KUMAR MAITI, APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE PERIOD RELEVANT TO THE AY UNDER CONSIDERATION WAS THE FIRST YEAR OF PRODUCTION. TH E ASSESSEE HAD UTILIZED ONLY 15% OF ITS PRODUCTION CAPACITY. SINC E THE PRODUCTION CAPACITY OF THE ASSESSEE WAS UNDER-UTILIZED, THE OV ERHEAD FIXED COST WAS HIGH THUS, THE ASSESSEE SUFFERED LOSS IN T HE FIRST YEAR OF ITS OPERATION. THE LD.AR SUBMITTED THAT DESPITE TH E FACT THAT THE ASSESSEE HAD STARTED ITS COMMERCIAL PRODUCTION ONLY SIX MONTHS I.T.A. NO. 2092/MDS/2012 6 BACK, THE COMPANY WAS ABLE TO RESTRICT ITS LOSS AT 3.44% ON SALES. IN THE SUBSEQUENT AYS, THE COMPANY STARTED EARNING PROFITS AND IN THE FY.2010-11, THE ASSESSEE HAS OPERATING PROFIT O F 6.62%. THE LD.AR CONTENDED THAT THE TPO AND THE DRP HAS NOT TA KEN INTO CONSIDERATION THIS FACT WHILE MAKING TP ADJUSTMENT. THE LD.AR FURTHER CONTENDED THAT THE TPO HAS ERRED IN CONSIDE RING THE ASSESSEE AS TESTED PARTY WHEREAS THE TPO SHOULD HAV E TAKEN KOREAN COMPANY AS TESTED PARTY. THE ASSESSEE HAD S UBMITTED COMPREHENSIVE DOCUMENTS BEFORE THE TPO TO SHOW THAT ALL COMPLIANCES WITH REGARD TO TP REGULATIONS WERE MADE AND HAD JUSTIFIED THE ALP BUT THE SAME WERE BRUSHED ASIDE B Y THE TPO AS WELL AS DRP. IN ORDER TO SUPPORT HIS CONTENTIONS, THE LD.AR ALSO TOOK THE SUPPORT OF OECD GUIDELINES. THE LD.AR FUR THER STATED THAT THE TPO MADE ADJUSTMENTS WITHOUT ISSUING SHOW CAUSE NOTICE TO THE ASSESSEE. IF SHOW CAUSE NOTICE HAVE BEEN ISSUE D, THE ASSESSEE COULD HAVE EXPLAINED THE REASONS FOR LOSS SUCH AS ABNORMAL WASTAGE DURING THE INITIAL PERIOD. ON THE ISSUE OF DEDUCTION ON ACCOUNT OF EXCHANGE GA IN, THE LD.AR CONTENDED THAT THE AMOUNT OF ` 3,14,10,819/- HAS ALREADY BEEN REDUCED FROM THE COST OF FIXED ASSETS WHILE CO MPUTING ALLOWABLE DEPRECIATION UNDER THE ACT. AS PER THE B OOKS OF ACCOUNT, THE ASSESSEE HAS SHOWN TOTAL PROFIT ON FOR EIGN EXCHANGE I.T.A. NO. 2092/MDS/2012 7 FLUCTUATION AS ` 5,38,99,923/- WHICH IS INCLUSIVE OF GAIN RELATING T O FIXED ASSETS AMOUNTING TO ` 3,14,10,819/-. HOWEVER, THE SAID AMOUNT WAS NOT CLAIMED AS DEDUCTION WHILE MAKING TH E COMPUTATION AS A RESULT, THE LOSS OF THE YEAR WAS L ESSER TO THAT EXTENT. THE MISTAKE WAS POINTED OUT TO THE ASSESSI NG OFFICER AT THE TIME OF MAKING DRAFT ASSESSMENT ORDER. THE ASS ESSEE COULD NOT RECTIFY THE MISTAKE BY FILING REVISED RETURN, A S THE TIME PERIOD FOR FILING REVISED RETURN HAD ALREADY ELAPSED BY TH EN. 5. ON THE OTHER HAND, SHRI ANIRUDH RAI, APPEARING O N BEHALF OF THE REVENUE VEHEMENTLY SUPPORTED THE ORDER OF THE A SSESSING OFFICER AND THE FINDINGS OF THE TPO/DRP. THE LD.DR SUBMITTED THAT THE ASSESSEE FOR THE FIRST TIME RAISED THE GRO UND OF UNDER- UTILIZATION OF ITS PRODUCTION CAPACITY BEFORE THE D RP. THE ASSESSEE WAS GIVEN AMPLE OPPORTUNITY TO REPRESENT I TS CASE DURING THE PENDENCY OF PROCEEDINGS BEFORE DRP. REPORT WAS SOUGHT FROM TPO ON THE OBJECTIONS RAISED BY THE ASSESSEE. THE TPO GAVE DETAILED REPORT DATED 01-06-2012. THEREAFTER, ON THE DIRECTIONS OF THE DRP, THE ASSESSING OFFICER PASSED ORDER. THE LD.DR CONTENDED THAT THE ASSESSEE HAS GIVEN TWO DIF FERENT UNITS OF MEASURE. THE INSTALLED CAPACITY IS GIVEN IN MATRIC TONES WHEREAS THE PRODUCTION OF THE ARTICLES IS GIVEN IN NUMBERS. THE INSTALLED I.T.A. NO. 2092/MDS/2012 8 CAPACITY AND PRODUCTION ARE IN DIFFERENT UNITS. TH EREFORE, CAPACITY UTILIZATION CANNOT BE DETERMINED. THE LD.DR PRAYED FOR THE DISMISSAL OF THE APPEAL OF THE ASSESSEE. 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF BOTH THE SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW. PRIMARILY, THE ASSESSEE IS AGGRIEVED BY ADDITIONS MADE IN THE RETURN OF INCOME ON THE FOLLO WING TWO COUNTS: I. DIS-ALLOWANCE OF FOREIGN EXCHANGE GAIN ` 3,14,10,819/-; II. ADJUSTMENT OF TP ` 7,59,39,334/-. 7. AS FAR AS THE FIRST ISSUE IS CONCERNED, IT IS A FACT THAT THE ASSESSEE NEITHER CLAIMED THE AMOUNT IN ITS ORIGINAL RETURN OF INCOME NOR FILED REVISED RETURN OF INCOME TO RECTIF Y THE MISTAKE. THE ASSESSEE REALIZED ITS MISTAKE DURING ASSESSMENT PROCEEDINGS AND CLAIMED THE DEDUCTION OF ` 3,14,10,819/- ON ACCOUNT OF FOREIGN EXCHANGE GAIN WHILE ARRIVING AT THE TAXABLE INCOME. THE ASSESSEE DID NOT FILE REVISED RETURN, AS BY THE TIME ASSESSE E REALIZED MISTAKE THE TIME PERIOD FOR FILING THE REVISED RETU RN HAD ALREADY ELAPSED. THE ASSESSEE FILED LETTER DATED 15-12-201 1 DURING ASSESSMENT PROCEEDINGS TO CLAIM THE AFORESAID DEDUC TION. THE I.T.A. NO. 2092/MDS/2012 9 CLAIM OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER BY PLACING RELIANCE ON THE JUDGMENT OF THE HONBLE SUP REME COURT OF INDIA IN THE CASE OF GOETZE INDIA LTD., VS.CIT REPORTED AS 284 ITR 323. 8. IN THE AFORESAID DECISION, THE HONBLE APEX COUR T HAS HELD THAT IF THE DEDUCTION IS NOT CLAIMED IN ORIGINAL, T HE ASSESSING OFFICER CANNOT ENTERTAIN CLAIM FOR DEDUCTION OTHERW ISE THAN IN A REVISED RETURN. FURTHER, THE HONBLE COURT OBSERVE D THAT THE ISSUE IS LIMITED TO THE POWER OF THE ASSESSING OFFICER AN D DOES NOT IMPINGE ON THE POWER OF THE INCOME TAX APPELLATE TR IBUNAL U/S.254 OF THE INCOME TAX ACT, 1961. 9. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF M/S.PRUTHVI PACKERS & SHAREHOLDERS PVT. LTD., REPORTED AS 349 ITR 336 AFTER CONSIDERING THE JUDGMENTS OF THE HONBLE APEX COURT IN THE CASE OF GOETZE INDIA LTD., (SUPRA) AND NATIONAL THERMAL POWER CO. LTD., VS. CIT REPORTED AS 229 ITR 383 HAS HELD THAT THE APPELLANT AUTHORITIES CAN EXERCISE THEIR JURISDICTION TO CONS IDER THE CLAIM OF THE ASSESSEE NOT RAISED IN RETURN. WE ARE OF THE C ONSIDERED OPINION THAT, SINCE THE DEDUCTION CLAIMED BY THE AS SESSEE WHICH HAS BEEN LEFT OUT AT THE TIME OF FILING RETURN HAS NOT BEEN I.T.A. NO. 2092/MDS/2012 10 CONSIDERED AT ALL, IN THE INTEREST OF JUSTICE, IT W OULD BE JUST AND PROPER IF THE ISSUE IS REMITTED BACK TO THE ASSESSI NG OFFICER TO CONSIDER THE CLAIM OF ASSESSEE AND ALLOW THE SAME, IF THE ASSESSEE IS ENTITLED TO IT. 10. THE SECOND GROUND IN APPEAL IS WITH REGARD TO D OWNWARD ADJUSTMENT OF ` 7,59,39,334/-. THE REVENUE HAS NOT DENIED THAT THE ASSESSEE IS IN INITIAL YEAR OF ITS PRODUCTION. IT IS ALSO A WELL KNOWN FACT THAT IN THE INITIAL YEARS OF PRODUCTION, THE OVER HEAD FIXED COSTS ARE MORE DUE TO UNDER-UTILIZATION OF RE SOURCES. THE TPO HAS BRUSHED ASIDE THE CONTENTION OF THE ASSESSE E WITH REGARD TO THE UNDER-UTILIZATION OF CAPACITY ON THE GROUND THAT THE ASSESSEE HAD NOT CLAIMED THE IDLE CAPACITY ADJUSTMENT IN INI TIAL TP ANALYSIS. THE TPO HAS ALSO RAISED OBJECTION THAT THE INSTALLE D CAPACITY HAS BEEN GIVEN IN MATRIC TONES WHEREAS THE PRODUCTION I S GIVEN IN NUMBERS. DUE TO DIFFERENCE IN UNITS OF EXPRESSION, IT IS DIFFICULT TO ANALYSE THE PERCENTAGE OF CAPACITY UTILIZATION. WE ARE OF THE CONSIDERED VIEW THAT UNDER-UTILIZATIO N OF PRODUCTION CAPACITY IN THE INITIAL YEARS IS A VITAL FACTOR WHICH HAS BEEN IGNORED BY THE AUTHORITIES BELOW WHILE DETERMI NING THE ALP COST. THE TPO SHOULD HAVE MADE ALLOWANCE FOR THE H IGHER OVERHEAD EXPENDITURE DURING THE INITIAL PERIOD OF P RODUCTION. IN I.T.A. NO. 2092/MDS/2012 11 VIEW OF THE ABOVE, WE DEEM IT APPROPRIATE TO REMIT THIS ISSUE BACK TO THE ASSESSING OFFICER WITH A DIRECTION TO CONSID ER THE CLAIM OF THE ASSESSEE WITH RESPECT TO IDLE CAPACITY ADJUSTME NT DURING THE RELEVANT PERIOD WHILE DETERMINING THE ALP COST. TH E ASSESSEE IS ALSO DIRECTED TO PRODUCE RELEVANT DOCUMENTS IN COMP ARABLE UNITS FOR THE NECESSARY ANALYSIS. THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTIC AL PURPOSES IN THE AFORESAID TERMS. ORDER PRONOUNCED ON MONDAY, THE 07 TH APRIL, 2014 AT CHENNAI. SD/- SD/- (DR. O.K. NARAYANAN) (VI KAS AWASTHY) VICE PRESIDENT JUDICIAL MEMBER DATED: 07 TH APRIL, 2014 TNMM COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR