HSI Automotives Private Limited, Kancheepuram V. DCIT, CHENNAI

ITA 276/CHNY/2017

• Counselvise Citation: [2022] 107 COUNSELVISE.COM (IT) 0726 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-08-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2012-2013
• Appeal Filed On: 29-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; TDS
• Section: 144; 14A

Judgement Text

आयकरअपीलीयअिधकरण,‘डी’ यायपीठ,चे ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI ी जी मंजूनाथा, लेखा सद के सम , ी अिनके श बनज , ाियक सद एवं BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER AND SHRI ANIKESH BANERJEE, JUDICIAL MEMBER आयकर अपील सं./I.T.A No.:276/Chny/2017 िनधा रण वष /Assessment Year: 2012 - 2013 AND आयकर अपील सं./I.T.A No.:3011/Chny/2017 िनधा रण वष /Assessment Year: 2013 - 2014 M/s. HSI Automotive Private Limited, Survey No.73, ‘A’ Block, No.100, Thandalam Post, Mevalurkuppam, Sriperumbudur Taluk, Kancheepuram – 602 105. PAN : AAACH 2804E Vs. The Deputy Commissioner of Income Tax, Corporate Circle – 2(2), Room No.512, 5 th Floor, Wanapathy Block, No.121, Mahatma Gandhi Road, Nungambakkam, Chennai – 600 034. (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओरसे/Appellant by : Shri. B. Ramanakumar, Advocate यथ क ओरसे/Respondent by : Shri. Dr. S. Palani Kumar, CIT सुनवाई क तारीख/Date of Hearing : 15.06.2022 घोषणा क तारीख/Date of Pronouncement : 03.08.2022 आदेश आदेशआदेश आदेश /O R D E R PER ANIKESH BANERJEE, JM: The instant appeals are filed against the order of the learned Deputy Commissioner of Income Tax, Corporate Circle – 2(2), Chennai passed u/s.143(3) read with section 144 of the Income Tax Act, 1961 (in brevity “the Act”) for the Assessment ::2 :: I.T.A. Nos.276 & 3011/Chny/2017 Years 2012-2013 and 2013-2014. For the Assessment Year 2013-2014, the order was passed u/s.143(3) read with section 144C(13) of the Act. Both the orders are pursuant from the orders of the learned Dispute Resolution Panel-2, Bengaluru passed u/s.144C(5) of the Act (in brevity “The DRP”). Both the orders are the same and are having the same kind of issues and hence we are clubbing all the issues together and disposing off the issues accordingly. 2. The brief facts of the case is that the Assessee company “M/s. HSI Automotives Limited” was established in the year 1997. The company is having its manufacturing facility in Sriperumbudur and is producing major products such as low pressure hose, rubber profile car roof sealing layout parts, power steering parts, fuel hose, brake hose, intercooler hose, water hose, radiator hose, weather strips and aircon hose. The company caters mostly to original equipment manufacturers like the Hyundai Motor India Limited, For India and General Motors India. The Assessee followed the Transactional Net Margin Method [TNMM] and the Most Appropriate Method [MAM] for calculating the Arm’s Length Price [ALP]. In both the years, the issues that are agitated by the Assessee are common. In short, ::3 :: I.T.A. Nos.276 & 3011/Chny/2017 the facts are that the Assessee was availing foreign exchange fluctuation loss as non-operative expenses. The claim behind the non-operating Foreign Exchange Fluctuation Loss [FEFL] is that, it is extraordinary in nature. The Assessee states that there was a sharp volatility in the transacting currencies of about 19.15% during the period for the Financial Year 2007- 2008 to the Financial Year 2011–2012 indicating that there was a lower foreign exchange rate (Rs.40.24 = 1 USD), when negotiated and accepted the price with the customer and a much higher rate when it actually imported the goods for the Financial Year 2011–2012. Further, adjustments towards usage of diesel in place of electricity supplied by the Tamil Nadu Electricity Board [TNEB]. The Assessee’s plea was that during the financial year 2011-2012, Tamil Nadu was facing acute power issue and due to that, informally, industries were asked to run the Gensets during particular timings. To manage this, the Government of Tamil Nadu has even allowed for set off /reduced VAT to compensate the industries in the next year. The Assessee seeks an adjustment of Rs.10,71,87,811/- as this is the cost incurred in excess to cost that would have incurred in the normal course which are abnormal in nature and needs to be removed in arriving at the PLI. A further prayer was placed ::4 :: I.T.A. Nos.276 & 3011/Chny/2017 as per Section 92C(2) of the Act, the standard deduction of +/- 5% should be allowed. 3. In Corporate Tax, the following issues were added, such as payment of Provident Fund and Employees State Insurance, Guarantee Fee payment and applicability of TDS and other expenses. The learned Transfer Pricing Officer [TPO] made a downward adjustment of Rs.35,78.19,630/-. Subsequently, the Assessee filed a rectification petition u/s.154 of the Act dated 27.01.2016 before the TPO for rectification and the TPO passed a rectification order dated 10.03.2016 and suggested a downward adjustment to the extent of Rs.19,22,85,727/-. Being aggrieved, the Assessee filed an appeal before the Tribunal for further adjudication. 4. The learned Counsel, Mr. B. Ramana kumar, Advocate vehemently argued and pointed out that the Assessee has incurred significant losses on account of the difference in conversion of the foreign exchange to INR while there was no change in the purchasing price in foreign currencies between the periods. The order was taken for the Financial Year 2007 – 2008 but execution was made for the Financial Year 2011- 2012. The total losses on account of foreign fluctuation arrived ::5 :: I.T.A. Nos.276 & 3011/Chny/2017 was to Rs.24,89,68,029/- by multiplying the total purchase value during the year. During the year, USD with difference between USD vs INR during the period (USD 3,23,33,510 X INR 7.70 = 2,48,968). Since, there is only one accrual entry passed when the actual goods are imported, this loss are accounted in the cost of goods sold and not as separate foreign exchange amount like the transactional related losses. Mr. B. Ramana kumar, Advocate referred to the judgement of ITAT, New Delhi in the case of Honda Trading Corporation India Private Limited, New Delhi Vs. The Assistant Commissioner of Income Tax, New Delhi in I.T.A. No.5297/DEL/2011. He respectfully submitted the observation of the Co-ordinate Bench of ITAT, Chennai in the case of M/s Kwang Jin India Autosystems Pvt. Ltd., Kancheepuram Vs. The Deputy Commissioner of Income Tax, Chennai [IT(TP)A No.38/Chny/2018] and in the case of Motonic India Automotive Pvt. Ltd., Vs. The Assistant Commissioner of Income-tax, Company Circle-IV(3), Chennai – 600 034, dated 17.08.2016 [ITA No. 741/Mds/2014]. The relevant paragraph is extracted as under: “9. We find force in the argument of the ld. AR. It is normal that exchange rate is subject to fluctuation due to economic conditions. While ::6 :: I.T.A. Nos.276 & 3011/Chny/2017 determining the ALP, one has to consider these factors, more so, our view is fortified by the decision of the Tribunal in the cases of Honda Trading Corp. India Pvt. Ltd. V. ACIT in ITA No.5297/Del/2011 for the assessment year 2007-08 and DHL Express (India) Pvt. Ltd. V. ACIT in ITA No.7360/Mum/2010 for the assessment year 2006-07. Accordingly, we direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment.” 4.1 The learned Counsel of the Assessee further asked for adjustment towards the payment of custom duty. The Assessee imported raw-material such as rubber and polyurethane related chemicals, final products weather strips and water into car. He further relied on the judgement of the ITAT, Chennai Benches in the case of M/s. Mobis India Limited Vs. The Deputy Commissioner of Income Tax [I.T.A. No.2112/Mds/2011, 2014 (2) TMI 36], and requested for an adjustment during calculation of the PLI. He further mentioned that both the issues were not taken before the Revenue authorities at the time of assessment. ::7 :: I.T.A. Nos.276 & 3011/Chny/2017 He further requested that the matter could be remanded back before the Revenue authorities for further consideration. 4.2 The learned Counsel of the Assessee, Mr. B. Ramana kumar, Advocate also requested for adjustment towards usage of diesel in place of electricity supplied by the Tamil Nadu Electricity Board. The issue is already discussed in the brief facts of the case. The learned Transfer Pricing Officer [TPO] during the calculation invoked fresh facts to prove that the Assessee was working beyond its installed capacity which led to the increase in power cost, irrespective of the source of power generation. The learned Counsel of the Assessee mentioned that the capacity cannot be ascertained merely from the notes of accounts, as the company is assisted by various sub-units job source and contractor manufacturers. The actual capacity cannot be arrived directly from the performance until the performance is split into self and supported. Reliance is being placed on the order of ITAT, Delhi in the case of M/s. HCL Technologies BPO Services Limited Vs. The Assistant Commissioner of Income Tax in I.T.A. No.3547/DEL/2010 and in the case of M/s. Mando India Steering Systems Private Limited Vs. The Commissioner of Income Tax in I.T.A. No,2092/Mds/2012. The Madras [Chennai], ITAT took into ::8 :: I.T.A. Nos.276 & 3011/Chny/2017 consideration the abnormal costs in the nature of overhead fixed costs that arouse due to under-utilization of resources. As per the learned Counsel of the Assessee, the Transfer Pricing Officer [TPO] did not dispute the submission of documents and calculated the electricity expenditure but the Hon’ble DRP has recorded that the Assessee has not given any detailed workings for adjustment. In this respect, the Assessee had filed a written submission and a consolidated case-book which are kept in the records. 5. The learned CIT-DR vehemently argued and submitted a written submission which is placed on record. He relied on the order of the learned Transfer Pricing Officer and the relevant portions are extracted as under: “Power Related Adjustment: Rs.10,71,63,792/- 4. The said adjustment is based on your claim that your entity is situated in Sriperumbudur, Tamilnadu and due to the poor electric supply prevailing in Tamil Nadu, you had to depend on your own power generation. Your claim is apparently based on the assumption that had you relied upon the power supplied by TNEB, instead of using the diesel generators what would have been the saving in cost claimed as an item of reduction from the ::9 :: I.T.A. Nos.276 & 3011/Chny/2017 operating cost. The above adjustment is a one sided adjustment. You may in a position to reveal certain information which you claim to be material in the computation of operating margin. But what is the scenario in the cast of comparables on such one sided claims of yours is not known. It may be that the financials of the comparable do not reveal any such information. Even in your financials, the said item of expenditure is not treated as abnormal in nature so as to warrant a specific mention in your financials. In the absence of specific mention of such extraordinary cost either in your case, or in the case of comparables, the same has to be treated as not material in nature warranting a separate treatment. 5. Besides, you have failed to take note of the information which you have furnished as part of the financials. The capacity utilization details in your case in the earlier year 31.03.2011 deserve mention in the absence of data for the relevant previous year viz.31.03.2012. Item of manufacture Installed Capacity (Units) Actual Production (Units) Percentage to installed capacity Rubber Profiles 4000000 36832157 920.8% PVC Profiles 4000000 9073340 226.85% Low Pressure Hose 4000000 19786199 494.66% ::10 :: I.T.A. Nos.276 & 3011/Chny/2017 The data presented in the above table amply proves that you are working way above your uninstalled capacity. The presumption that for the current previous year also you are working way above your installed capacity is justified when taking into account your turnover has gone up from Rs.378 crores to Rs.458 crores. Similar to under utilization of capacity resulting in under absorption of fixed costs, an adjustment is warranted on account of over utilization of capacity. The margins in the case of yourself and comparables required to be adjusted in the light of the above information. The above scenario adequately accounts for your need to depend on diesel generators. In the case of the comparables the utilization of the capacity is not on the scale as you have been operating. There will no end if one starts making comparisons this way. When TNMM method is chosen for benchmarking, the net margin is not unduly affected by such factors. Therefore, the power related adjustment requires no consideration. 9. Computation of Operating Margin: The margin computation as per Annexure I require computation as the figures are not in agreement with the financials. ::11 :: I.T.A. Nos.276 & 3011/Chny/2017 Description Amount in Rs. Amount in Rs. Revenue 4550900499 Less: Cost 4779139884 Profit before Tax -228239385 Less: Finance Cost 124197161 Less : Less on sale of assets 2824512 127021673 Loss 101217712 Revenue 4550900499 Margin on revenue (-)2.22 % 8. You have benchmarked your operating margin with reference to the solitary comparable M/s. Sundaram Industries Limited. Fresh search was done using the Prowess data base which resulted in four additional comparables as mentioned in the Annexure of which PPAP was considered as a comparable in the earlier assessment year also. The revised stand alone operating margin of the comparables is 10.97% measured on revenue. Your revised operating margin on revenue is (-)2.22% 9. Arm’s Length Price is proposed to be determined by taking your operating loss at 2.22% and your comparable operating margin of 10.97% which calls a total adjustment of 13.19% on your revenues [unquote]. Reply to show-cause notice : 6. Assessee clarified that the value of Forex considered in the Cash Flow Statement represents gain of Rs.4,84,72,577 and not ::12 :: I.T.A. Nos.276 & 3011/Chny/2017 loss as presented in the show cause notice and the breakup in the Forex Loss reported in P&L {schedule 28(ii)(p)} was given as under: Type Loss Gain Net (Gain)/Loss Transaction 6,61,89,612 3,37,82,683 3,24,06,929 Translation 13,30,13,695 3,47,47,979 10,09,59,986 Total 19,92,03,307 6,85,30,662 13,33,66,915 Assessee also submitted that the Forex loss reported in Cash Flow had no impact with respect to this assessment under TP provisions and therefore requested for considering the entire the Forex Loss reported in P&L as non operating in nature for the purpose of margin computation. Position of this office : 6.1. Assessee’s claim that the forex gain (mistakenly mentioned in the cash flow statement as loss) does not have any impact in the assessment. The cash flow statement adds back unrealized losses and deducts unrealized gain while arriving at the figure of ::13 :: I.T.A. Nos.276 & 3011/Chny/2017 funds from operations. Therefore, the figures represented therein have to be matched with the Assessee’s claim of non operating gains and losses while computing operating margin. What was mentioned in the Cash flow statement was gain of Rs.4,84,72,577, which is a translational loss, whereas in the break up provided in the earlier paragraph shows the unrealized gain as Rs.3,47,47,979 leaving a gap of Rs.1,37,24,598. Such inconsistencies in stand make the Assessee’s claim doubtful in the absence of fool proof evidence in the form of the entire ledger dump being produced for verification. Therefore the claim is rejected. 6. The learned Counsel of the Assessee further mentioned that the learned Transfer Pricing Officer included 10% addition of the total quantum on import of machinery and tools without any supporting documents and had asked for standard deduction +/- 5%. The learned Counsel of the Assessee prayed that the matter ::14 :: I.T.A. Nos.276 & 3011/Chny/2017 may be remanded back to the learned Transfer Pricing Officer [TPO] with a direction to deal the arbitrary addition of 10%. 7. The learned CIT-DR fully relied on its submission which was filed before the Bench and claimed that the net loss on the foreign currency transactions and translational debited into the Profit & Loss [P&L] account was Rs.13,33,66,915/-. The company was given a breakup of the transactional loss and translational loss in its written submission dated 23.11.2015 in Annexure – IV. As per the breakup, the direct transactional loss was Rs.3,24,04,929 and translational loss was Rs.10,09,59,985. So, this loss was only the notional loss or paper loss and it was not a crystallized loss. 8. We considered the issues and relied on the documents available on record. All the issues together are remanded back to the learned Assessing Officer for de novo adjudication. The learned Assessing Officer should consider afresh on the basis of the above mentioned discussion. The learned Counsel of the Assessee pointed out that the foreign exchange loss is a genuine loss which is not at all a notional loss. The Assessee was also directed to submit all relevant documents before the learned Assessing Officer to substantiate its claim. Nonetheless, a reasonable opportunity should be allowed to the Assessee for redressal of its grievances. ::15 :: I.T.A. Nos.276 & 3011/Chny/2017 9. Corporate Taxes: The learned Counsel of the Assessee, Mr. B. Ramanakumar, Advocate also agitated three issues related to the disallowance payment of profit which is of the Employees State Insurance. The issues were highly discussed in different orders in the Co-ordinate Benches. He mentioned that the payment was made before the due date of filing the return u/s.139(1) of the Act. But at this moment, we are unable to verify the payment details. So, the issue is remanded back to the learned Assessing Officer for further adjudication. 9.1 The Disallowance on account of Section 14A of the Act read with Rule – 9D. The Counsel of the Assessee claimed that they made a strategic investment purely on strategic purpose. Accordingly, he made an addition of Rs.18,51,00,000/- for the Assessment Year 2012 – 2013 and Rs.90,55,457/- for the Assessment Year 2013 – 2014. The learned Counsel of the Assessee mentioned that no expenditure was incurred for the Assessment Year 2013 – 2014, the controversial situation on the fact between the Revenue and parties. The issue is further remanded back to the learned Assessing Officer for further verification in the light of the Assessee’s payment. The Assessee should be given a reasonable opportunity to substantiate his claim. ::16 :: I.T.A. Nos.276 & 3011/Chny/2017 10. Disallowance u/s.40(ia) :– Disallowance of Rs.84,33,60,360/- on account of non-deduction of TDS and Royalty and Guarantee Fees and Professional Charges: The learned Counsel of the Assessee mentioned about the CBDT Circular No.5/2015 dated 15.07.2005 and mentioned that the TDS deduction in the previous year but paid in the subsequent year after the time limit prescribed u/s.200(1) of the Income Tax Act, 1961 shall be allowed for deduction. The amount was remitted for the Assessment Year 2011 – 2012 and 2012 – 2013. The other issue related to the disallowance of expenses in relation to the scientific research and all the issues are remanded back to the learned Assessing Officer for further adjudication as because at this stage as there is no such sufficient documentation for adjudicating the issue under factual matrix. 11. Considering the above discussion related to the Assessment Year, in both the Assessment Years 2012 – 2013 and 2013 – 2014 in I.T.A. No.276/Chny/2017 and I.T.A. No.3011/Chny/2017 respectively, both are fully remanded back to the learned Assessing Officer for further adjudication de novo and the Assessee to be given reasonable opportunity for redressal of his grievances. ::17 :: I.T.A. Nos.276 & 3011/Chny/2017 12. In the result, the appeals of the Assessee in I.T.A. No.276/Chny/2017 and I.T.A. No.3011/Chny/2017 are allowed for statistical purposes. Order pronounced in the court on 3 rd August, 2022 at Chennai. Sd/- Sd/- (जीमंजूनाथा) (G. MANJUNATHA) लेखा सद /ACCOUNTANT MEMBER (अिनके श बनज ) (ANIKESH BANERJEE) ाियकसद एवं /JUDICIAL MEMBER चे ई/Chennai, िदनांक/Dated, the 3 rd August, 2022 IA, Sr. PS आदेशकी#ितिलिपअ&ेिषत/Copy to: 1. अपीलाथ /Appellant 2. #(थ /Respondent 3. आयकरआयु+ (अपील)/CIT(A) 4. आयकरआयु+/CIT 5. िवभागीय#ितिनिध/DR 6. गाड0फाईल/GF