Youngshin Automotive India Pvt. Ltd., Kancheepuram V. ACIT, CHENNAI

ITA 3266/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4684 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-05-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 19-04-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 01-12-2016
• Court: TRIBUNAL
• Department Lawyers: PATHALAVATH PEERYA
• Assessee Lawyers: SANDEEP BAGMAR R
• Keywords: Working capital adjustments
• Section: 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , . ! '# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.3266/MDS./2016 / ASSESSMENT YEAR : 2012-13 M/S.YOUNGSHIN AUTOMOTIVE INDIA PVT LTD ., SURVEY NO.307,310,317, VAYALUR ROAD, KILLAI VILLAGE, SRIPERUMBUDUR TK KANCHIPURAM DIST. 602 105 VS. THE ACIT, CORPORATE CIRCLE-3(2), CHENNAI. [PAN AAACY 4007 A] ( $% / APPELLANT) ( &'$% /RESPONDENT) / APPELLANT BY : MR.SANDEEP BAGMAR R. ADVOCATE /RESPONDENT BY : MR.PATHALAVATH PEERYA, CIT D.R / DATE OF HEARING : 19.04 .2017 !' / DATE OF PRONOUNCEMENT : 01 .05 .2017 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED A GAINST THE ASSESSMENT ORDER PASSED U/S.143(3) R.W.S.144C(5) OF THE ACT DATED 30.09.2016, WHICH WAS PASSED IN CONSEQUENT TO DIREC TION OF DRP ORDER DATED 29.07.2016 PASSED U/S.144C(5) OF THE ACT. ITA NO.3266/MDS./2016 :- 2 -: 2. THE FIRST GROUND RAISED BEFORE US IS THAT THE L D.TPO/DRP/AO ERRED IN MAKING ADDITION OF ` 1,90,78,862/- BY NOT ALLOWING ADJUSTMENTS FOR THE FOLLOWING:- I) WORKING CAPITAL AND II) CUST OMS DUTY. 3. AT THE TIME OF HEARING, LD.A.R HAS NOT PRESSED THE GROUNDS RELATING TO WORKING CAPITAL ADJUSTMENTS WHILE COMPU TING THE ALP AND MADE ENDORSEMENTS TO THIS EFFECT. HENCE, THIS GROUN D STANDS DISMISSED AS NOT PRESSED. 4. REGARDING CUSTOMS DUTY ADJUSTMENTS WHILE COMPUT ING THE ALP, LD.A.R SUBMITTED THAT THE ASSESSEE IS IN FIRST YEAR OF OPERATION AND LARGELY DEPENDENT ON THE IMPORTS FOR ITS RAW MATER IAL REQUIREMENTS BE MAINTAINED THE QUALITY, STANDARDS AND TO ESTABLISH ITSELF IN THE INDIAN AUTOMOTIVE INDUSTRY. THE IMPORT OF RAW MATERIALS FO RMS 87.12% OF THE TOTAL RAW MATERIALS AND DETAILS OF PURCHASE BY YAIP L I.E. THE ASSESSEE. ON ANALYSIS OF AVAILABLE DATA OF COMPARABLE COMPANI ES, IT IS INFERRED THAT ON AN AVERAGE THE RAW MATERIAL IMPORT COMPONEN T OF COMPARABLE COMPANIES IS ABOUT 2.89%. ACCORDINGLY, HE PRAYED T HAT SUITABLE ADJUSTMENTS MADE TOWARDS CUSTOMS DUTY AND HE RELIED ON THE FOLLOWING JUDGEMENTS OF CHENNAI TRIBUNAL :- ITA NO.3266/MDS./2016 :- 3 -: I) M/S.KOMATSU INDIA PVT LTD. VS. DCIT FOR ASSESSM ENT YEAR 2008- 09 VIDE ORDER DATED 20.12.2016 II) M/S.MOTONIC INDIA AUTOMOTIVE PVT. LTD. FOR ASS ESSMENT YEAR 2009-10 VIDE ORDER DATED 17.08.2016. 5. ON THE OTHER HAND, LD.D.R SUBMITTED THAT THE TP O HAS DENIED THIS ADJUSTMENTS HOLDING THAT THE BUSINESS M ODEL OF THE ASSESSEE HAS BEEN DESIGNED AFTER FACTORING THE IMPO RT CONTENT OF RAW MATERIALS. THE DETAILS OF IMPORT COMPONENT OF THE C OMPARABLES ARE NOT AVAILABLE NOR PRODUCED. THE ASSESSEE SELLS ITS MA NUFACTURED COMPONENT COLUMN TYPE POWER STEERING SYSTEM (CEPS) TO A SINGLE CUSTOMER M/S.MANDO STEERING. FURTHER, LD.D.R SUBMIT TED THAT NO AGREEMENT IS EXECUTED FOR DECIDING THE PRICE OF COM PONENT SOLD TO M/S.MANDO STEERING. HENCE, IT IS NOT CLEAR HOW THE SALES PRICE IS DETERMINED. AS A NORMAL BUSINESS PRACTICE, ALL COST S AND OVERHEADS ARE FACTORED IN WHILE DETERMINING THE PRICE. ASSESSEE H AS NOT PRODUCED ANYTHING EITHER BEFORE THE AO OR BEFORE THE DRP TO SHOW THAT IMPORT DUTY COMPONENT HAS NOT BEEN TAKEN INTO ACCOUNT IN D ECIDING THE PRICE. HIGH IMPORT COMPONENT OF THE ASSESSEES BUSINESS I S NOT DRIVEN BY ANY EXTRANEOUS FACTOR BUT OUT OF OWN CHOICE BASED O N BUSINESS STRATEGY. THE ARGUMENT THAT IT HAS COME DOWN IN SUB SEQUENT YEARS DOES NOT EXPLAIN THE LACK OF SUPPORT ON THE PART OF THE HOLDING COMPANY IN INITIAL YEARS TO PARTLY ABSORB THIS COST . THE LD.D.R PLACED ITA NO.3266/MDS./2016 :- 4 -: RELIANCE IN THE DECISION OF CHENNAI TRIBUNAL IN TH E CASE OF MOBIS INDIA LTD., FOR ASSESSMENT YEAR 2007-08 VIDE ORDER DATED 14.08.2013 HAVE HELD THAT NO DOUBT, IN THE CASE OF SKODA AUTO INDI A (P) LTD., IT WAS HELD BY PUNE BENCH THAT HIGHER IMPORT CONTENT OF RA W MATERIAL WAS A FACTOR TO BE CONSIDERED WHILE DOING THE ALP ANALYSI S. NEVERTHELESS, IT IS ALSO MENTIONED THEREIN THAT HIGHER IMPORT CONTENT OF RAW MATERIALS ITSELF DID NOT WARRANT AN ADJUSTMENT IN OPENING MAR GIN. FOR GETTING THE BENEFIT OF ANY SUCH ADJUSTMENT, ASSESSEE SHOULD BE ABLE TO DEMONSTRATE THAT HIGHER IMPORT CONTENT WAS NECESSIT ATED BY ANY EXTRAORDINARY CIRCUMSTANCES BEYOND ITS CONTROL. IN VIEW OF THE ABOVE DECISION BY THE TRIBUNAL, THE TPOS ACTION TO DENY CUSTOM DUTY ADJUSTMENT MAY BE SUSTAINED. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, THIS ISSUE IS ALSO CONSIDER ED BY THIS TRIBUNAL IN THE CASE OF CIT VS. DEMAG CRANES & COMPONENTS (INDI A) PVT. LTD., VS. DCIT DATED 4.1.2012 IN ITA NO.120/PN/2011 WHEREIN H ELD THAT:- 6.1 AT THIS STAGE, IT IS PERTINENT TO MENTION THE FINDING OF THE PUNE BENCH IN THE CASE OF DEMAG CRANES & COMPONENTS (IND IA) PVT. LTD. V. DCIT(SUPRA) DATED 4.1.2012 IN ITA NO.120/PN/2011, W HICH IS AS FOLLOWS : 37. WE HAVE HEARD THE PARTIES AND PERUSED THE AVAI LABLE MATERIAL ON RECORDS IN THE LIGHT OF THE SECOND LIMB OF THE G ROUND 4(B). IT IS RELEVANT MENTIONED THAT WE HAVE ALREADY ANALYSED TH E RELEVANT PROVISIONS OF INCOME TAX RULES VIS A VIS THE SCOPE OF THE ADJUSTMENTS IN THE PRECEDING PARAGRAPHS IN THE CONTEXT OF THE A DJUSTMENTS ON ACCOUNT OF THE WORKING CAPITAL. IN PRINCIPLES, OU R FINDINGS ON THE ISSUE REMAIN APPLICABLE TO THE ADJUSTMENTS ON ACCOU NT OF THE IMPORT ITA NO.3266/MDS./2016 :- 5 -: COST MENTIONED IN GROUND 4(B) TOO. THE DIFFERENCE B ETWEEN THE AL MARGIN BEFORE AND AFTER THE SAID ADJUSTMENTS ON ACC OUNT OF IMPORT COST WORKS OUT TO 0.57% (7.18%-6.61%). REVENUE HAS NOT DISPUTED THE SAID WORKING OF THE ASSESSEE. IN THESE FACTUAL CIRCUMSTANCES AND IN THE LIGHT OF THE SCOPE OF ADJUSTMENTS DISCUSSED ABOVE, IN OUR OPINION AND IN PRINCIPLE, THE ASSESSEE SHOULD WIN O N THIS GROUND TOO. ONE SUCH DECISION RELIED UPON BY THE ASSESSEES COU NSEL SUPPORTS OUR FINDING RELATES TO THE DECISION OF THIS BENCH O F THE TRIBUNAL IN THE CASE OF SKODA AUTO INDIA P LTD 122 TTJ 699 (PUNE) D ATED MARCH 2009 WHEREIN, IT IS HELD (IN PARA 19 OF THE ORDER) THAT,- NO DOUBT , A HIGHER IMPORT CONTENT OF RAW MATERIAL BY ITSELF DOES NOT WARRANT AN ADJUSTMENT IN OPERATING MARGINS , AS WAS HELD IN SONY INDIA (P) LTD.S CASE (SUPRA), BUT WHA T IS TO BE REALLY SEEN IS WHETHER THIS HIGH IMPORT CONTENT WAS NECESS ITATED BY THE EXTRAORDINARY CIRCUMSTANCES BEYOND ASSESSEES CONTR OL. AS WAS OBSERVED BY A CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF E-GAIN COMMUNICATION (P) LTD. (SUPRA) THE DIFFEREN CES WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE, COST CHA RGED OR PAID IN, OR THE PROFIT IN THE OPEN MARKET ARE TO BE TAKEN INTO CONSIDERATION WITH THE IDEA TO MAKE REASONABLE AND ACCURATE ADJUS TMENT TO ELIMINATE THE DIFFERENCES HAVING MATERIAL EFFECT. WE DO NOT AGREE WITH THE AO THAT EVERY TIME THE ASSESSEE PAYS THE HIGHER IMPORT DUTY, IT MUST BE PASSED ON TO THE CUSTOMERS OR IT MUST BE ADJUSTED FOR IN NEGOTIATING THE PURCHASING PRICE. A LL THESE THINGS COULD BE RELEVANT ONLY WHEN HIGHER IMPORT CONTENT I S A PART OF THE BUSINESS MODEL WHICH THE ASSESSEE HAS CONSCIOUS LY CHOSEN BUT THEN IF IT IS A BUSINESS MODEL TO IMPORT THE SK D KITS OF THE CARS, ASSEMBLE IT AND SELL IT IN THE MARKET, THAT I S CERTAINLY NOT THE BUSINESS MODELS OF THE COMPARABLES THAT THE TPO HAS ADOPTED IN THIS CASE. THE ADJUSTMENTS THEN ARE REQUIRED TO BE MADE FOR FUNCTIONALLY DIFFERENCES. THE OTHER WAY OF LOOKING AT THE PRESENT SITUATION IS TO ACCEPT THAT BUSINESS MODEL OF THE A SSESSEE COMPANY AND THE COMPARABLE COMPANIES ARE THE SAME A ND IT IS ON ACCOUNT OF INITIAL STAGES OF BUSINESS THAT THE U NUSUALLY HIGH COSTS ARE INCURRED. THE ADJUSTMENTS ARE THUS REQUIR ED EITHER WAY. IT IS, THEREFORE, PERMISSIBLE IN PRINCIPLE TO MAKE ADJUSTMENTS IN THE COSTS AND PROFITS IN FIT CASES. WE ALSO DO N OT AGREE WITH THE AUTHORITIES BELOW THAT THE ONUS IS ON THE ASSE SSEE TO GET ALL SUCH DETAILS OF THE COMPARABLE CONCERNS SO AS TO MA KE THIS COMPARISON POSSIBLE. THE ASSESSEE CANNOT BE EXPECTE D TO GET THE DETAILS AND PARTICULARS WHICH ARE NOT IN PUBLIC DOMAIN. IN SUCH A SITUATION, I.E. WHEN INFORMATION AVAILABLE I N PUBLIC DOMAIN IS NOT SUFFICIENT TO MAKE THESE COMPARISONS POSSIBL E, IT IS INEVITABLE THAT SOME APPROXIMATIONS ARE TO BE MADE AND REASONABLE ASSUMPTIONS ARE TO BE MADE. THE ARGUMENT BEFORE US WAS THAT IT WAS FIRST YEAR OF ASSESSEES OPERATI ONS AND COMPLETE FACILITIES ENSURING A REASONABLE INDIGENOU S RAW MATERIAL CONTENT WAS NOT IN PLACE. THE ASSESSEES C LAIM IS THAT IT WAS IN THESE CIRCUMSTANCES THAT THE ASSESSEE HAD TO SELL THE CARS WITH SUCH HIGH IMPORT CONTENTS, AND ESSENTIALL Y HIGH COSTS, WHILE THE NORMAL SELLING PRICE OF THE CAR WAS COMPU TED IN THE LIGHT OF THE COSTS AS WOULD APPLY WHEN THE COMPLETE FACILITIES OF ITA NO.3266/MDS./2016 :- 6 -: REGULAR PRODUCTION ARE IN PLACE. NONE OF THESE ARGU MENTS WERE BEFORE ANY OF THE AUTHORITIES BELOW. WHAT WAS ARGUE D BEFORE THE AO WAS MERE FACT OF HIGHER COSTS ON ACCOUNT OF HIGH ER IMPORT DUTY BUT THEN THIS ARGUMENT PROCEEDED ON THE FALLAC Y THAT AN OPERATING PROFIT MARGIN FOR HIGHER IMPORT DUTY IS P ERMISSIBLE MERELY BECAUSE THE HIGHER COSTS ARE INCURRED FOR TH E INPUTS. THAT ARGUMENT HAS BEEN REJECTED BY A CO-ORDINATE BENCH A ND WE ARE IN RESPECTFUL AGREEMENT WITH THE VIEWS OF OUR ESTEE MED COLLEAGUES. THIS ADDITIONAL ARGUMENT WAS NOT AVAILA BLE BEFORE THE AUTHORITIES BELOW AND IT WILL INDEED BE UNFAIR FOR US TO ADJUDICATE ON THIS FACTUAL ASPECT WITHOUT ALLOWING THE TPO TO EXAMINE ALL THE RELATED RELEVANT FACTS. WE, THEREFO RE, DEEM IT FIT AND PROPER TO REMIT THIS MATTER TO THE FILE OF THE TPO FOR FRESH ADJUDICATION IN THE LIGHT OF OUR ABOVE OBSERVATIONS. 38. THE PERUSAL OF THE IMPUGNED ORDERS SHOWS THAT T HE ABOVE CITED GUIDELINES BY WAY OF DECISION OF THIS BENCH OF THE TRIBUNAL IN THE CASE OF SKODA AUTO INDIA P LTD (SUPRA) WERE NOT AVAILABL E TO THE REVENUE AUTHORITIES. THEREFORE, WE ARE OF THE OPINION, THE ISSUE SHOULD BE SET ASIDE TO THE FILES OF THE TPO WITH DIRECTION TO EXA MINE THE CLAIM OF THE ASSESSEE RELATING TO THE IMPORT COST FACTOR AND ELI MINATE THE DIFFERENCE IF ANY. HOWEVER, THE TPO/AO/DRP SHALL SE E TO IT THAT THE DIFFERENCE IN QUESTION IS LIKELY TO MATERIALLY AFF ECT THE PRICE/PROFIT IN THE OPEN MARKET AS ENVISAGED IN SUB RULE (3) OF RUL E 10B OF THE INCOME TAX RULES, 1962. ACCORDINGLY, GROUND 4(B) IS ALLOWED PRO TANTO. ACCORDINGLY, WE DIRECT THE A.O. TO GIVE SUITABLE AD JUSTMENT AGAINST THE CUSTOM DUTY COMPONENT WHILE DETERMINING THE ALP . 7. IN VIEW OF THE ABOVE ORDER OF TRIBUNAL , WE ARE INCLINED TO DIRECT THE AO TO OFFER SUITABLE ADJUSTMENT AGAINST THE CUS TOMS DUTY COMPONENTS WHILE DETERMINING THE ALP. ACCORDINGLY, WE REMIT THE ISSUE TO THE FILE OF AO FOR FRESH CONSIDERATION. ITA NO.3266/MDS./2016 :- 7 -: 8. THE ASSESSEE ALSO RAISED THE GROUND IS WITH REG ARD TO INITIATION OF PENALTY U/S.271(1)(C) OF THE ACT, WHICH IS PREPO STEROUS AT THIS STAGE. ACCORDINGLY, THIS GROUND STANDS DISMISSED AS INFRUC TUOUS. 9. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 1 ST MAY, 2017, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) ! / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 1 ST MAY, 2017. K S SUNDARAM &'(()*( +* / COPY TO: ( 1 . / APPELLANT 3. ( ,(- . / CIT(A) 5. */0 (1 / DR 2. / RESPONDENT 4. ( , / CIT 6. 02(3 / GF