Kehin Automotive Systems India Pvt. Ltd., Gurgaon V. Addl. CIT, Special Range-5, New Delhi

ITA 5189/DEL/2018

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 7581 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Assessment Year: 2014-2015
• Appeal Filed On: 31-07-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Depreciation; Transfer pricing; International transaction; Set aside
• Section: 143(3); 13; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELHI (THROUGH VIDEO CONFERENCING] BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND MS. SUCHITRA KAMBLE, JUDICIAL M EMBER ITA NO. 5189/DEL/2018 [A.Y 2014-15] KEIHIN AUTOMOTIVE INDIA PVT LTD VS. THE ADDL. C.I.T [NOW AMALGAMATED AND KNOWN AS SPECIAL RANG E-5 KEIHIN INDIA MANUFACTURING PVT LTD NEW DE LHI PLOT NO. 663, PHASE 5, UDYOG VIHAR GURUGRAM, HARYANA PAN : AAACK 5968 J [APPELLANT] [RESPONDENT] DATE OF HEARING : 24.08.2021 DATE OF PRONOUNCEMENT : 24.08.2021 ASSESSEE BY : MS. PALLAVI DINODIA, CA SHRI R.K. KAPOOR, CA REVENUE BY : SHRI SURENDER PAL, CI T-DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST TH E ORDER DATED 21.06.2018 FRAMED U/S 143(3) R.W.S 144C(5) OF THE I NCOME TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT' FOR SHOR T]. 2 2. THE GRIEVANCES OF THE ASSESSEE READ AS UNDER: 1. THE LD. TRANSFER PRICING OFFICER (TPO)/LD. AS SESSING OFFICER (AO) AND CONSEQUENTLY THE HONBLE DISPUTE RESOLUTION PANEL (DRP) HAVE ERRED IN LAW AND ON FACTS AND CI RCUMSTANCES OF APPELLANTS CASE, IN MAKING A TRANSFER PRICING (TP ) ADJUSTMENT OF RS.4,06,60,617/-ON ACCOUNT OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT UNDER S ECTION 92CA OF THE INCOME TAX ACT, 1961 ('THE ACT'), WHOLLY ON ILL EGAL, ERRONEOUS AND UNTENABLE GROUNDS. 2. THE ORDER OF ASSESSMENT INCLUDING ORDER OF THE L D. TPO IS BAD IN LAW AND NOT IN ACCORDANCE WITH THE FACTS OF THE APPELLANT. 3. THE LD. TPO/LD. AO AND CONSEQUENTLY THE HONBLE DRP HAVE GROSSLY ERRED IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE APPELLANTS CASE BY NOT GRANTING THE IMPORT DUTY AD JUSTMENT CARRIED OUT BY THE APPELLANT ON ACCOUNT OF DIFFERENCE IN IM PORT DUTY COST OF APPELLANT AND THAT OF THE COMPARABLES, WHICH IS IN CONTRAVENTION WITH THE PROVISIONS OF RULE 10B(3) OF THE INCOME TA X RULES, 1962 (THE RULES); AND: 3.1 THE HONBLE DRP, DID NOT APPRECIATE THAT THE IM PORT DUTY ADJUSTMENT, WAS CALCULATED BASED ON LEVEL OF COMPAR ATIVE IMPORTED RAW MATERIALS AND IMPORT DUTY COST THEREON, BASED O N THE FINANCIAL DETAILS OF THE COMPARABLE COMPANIES TO THE EXTENT A VAILABLE IN PUBLIC DOMAIN AND REASONABLE ASSUMPTIONS. 3 4. THE LD. TPO/ LD. AO AND CONSEQUENTLY THE HONBLE DRP HAVE GROSSLY ERRED IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE APPELLANTS CASE IN REFUSING CAPACITY ADJUSTMENT AS KED FOR BY THE APPELLANT, ALTHOUGH THE FAR DIFFERENCES AND UNDER-U TILIZATION OF CAPACITY WERE APPRECIATED BY THE LD. TPO WHILE GRAN TING DEPRECIATION ADJUSTMENT. THE LD. TPO / HONBLE DRP ERRED IN LAW IN RESTRICTING THE CAPACITY ADJUSTMENT ONLY TO DEPRECI ATION. 5. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE LD. TPO/LD. AO AND CONSEQUENTLY THE HONBLE DRP HAVE ERRED IN L AW AND ON FACTS AND CIRCUMSTANCES OF THE CASE OF THE APPELLAN T IN COMPUTING THE TRANSFER PRICING ADJUSTMENT BY ALLOCATING THE E NTIRE DIFFERENCE BETWEEN THE ARM'S LENGTH OPERATING PROFI T AND ACTUAL OPERATING PROFIT TO THE CONTROLLED TRANSACTIONS OF THE APPELLANT AND NOT IN THE PROPORTION IN WHICH THE INTERNATIONAL TR ANSACTIONS FORMING PART OF THE COST BASE OF THE APPELLANT BEAR S TO THE TOTAL OPERATING COST OF THE APPELLANT I.E. 77.84%. 5.1 THE LD. TPO/LD. AO/HONBLE DRP ERRED IN LAW IN NOT RESTRICTING THE ADJUSTMENT TO THE PROPORTION OF INT ERNATIONAL TRANSACTIONS WITH AES ON THE COST SIDE WHICH WERE A DMITTEDLY 77.84% OF THE TOTAL OPERATING COST. 6. THE PENALTY PROCEEDINGS INITIATED U/S SEC 271(L J(CJ ARE ON WHOLLY ILLEGAL AND UNTENABLE GROUNDS SINCE THERE WA S NO CONCEALMENT OF ANY INCOME NOR SUBMISSION OF INACCURATE PARTICUL ARS OF INCOME, NOR ANY DEFAULT ACCORDING TO LAW BY THE APPELLANT. 4 THAT EACH GROUND IS INDEPENDENT OF AND WITHOUT PREJ UDICE TO THE OTHER GROUNDS RAISED HEREIN. 3. REPRESENTATIVES OF BOTH THE SIDES WERE HEARD AT LENGTH. CASE RECORDS CAREFULLY PERUSED AND JUDICIAL DECISIONS RE LIED UPON BY THE ASSESSEE DULY CONSIDERED.. 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE APPELLANT COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF COMPRESSED NATURAL GAS [CNG] ASSEMBLY PARTS FOR THE AUTOMOTIVE INDUSTRY. THE YEAR UNDER CONSIDERATION IS THE SECOND FULL YEAR OF COMMERCIAL OPERATIONS AND THE ASSESSEE FOLLOWED AGGREGATED TRA NSACTIONS APPROACH TO ARRIVE AT THE ARMS LENGTH PRICE (ALP ) OF ITS MAJORITY OF THE CONTROLLED TRANSACTIONS, CONSIDERING ITSELF AS THE TESTED PARTY. 5. THE ASSESSEE ARRIVED AT ITS PLI BY CLAIMING THE FOLLOWING ADJUSTMENTS IN THE TP STUDY:- I) CAPACITY UTILIZATION ADJUSTMENT IN RESPECT OF PE RSONNEL COSTS AND DEPRECIATION EXPENSES, AND II) IMPORT DUTY AND RELATED COST ADJUSTMENT ON CON SUMPTION OF IMPORTED RAW MATERIALS. 5 6. BENCHMARKING SUMMARY OF INTERNATIONAL TRANSACTIO NS AS PER THE TP STUDY IS AS UNDER: NATURE OF TRANSACTIONS VALUE MOST APPROP RIATE PROFIT LEVEL ARM'S RESULT (ADJUSTED BY THE (INR) METHOD INDICATOR LENGTH OF LD. TPO) (PLI) RESULT ASSESSEE 1. PURCHASE OF RAW 24,18,79,425 MATERIALS TRANSACTIONAL OPERATING PROFIT 3.52% 9.78% NET MARGIN OPERATING REVENUE METHOD OP/OR (TNMM) 2. PURCHASE OF TRADED GOODS 8,25,18,387 3. AVAILING OF TECHNICAL 6,81,50,800 SUPPORT SERVICES 4. PAYMENT OF ROYALTY 51,48,759 5. JOB WORK CHARGES 1,30,905 TOTAL 39,78,2 8,276 7. THE TRANSFER PRICING ASSESSMENT WAS COMPLETED BY THE TPO VIDE ORDER DATED 23.10.2017 WHEREIN THE TPO MADE TRANSFE R PRICING ADJUSTMENT OF RS. 4,06,60,617/-. WHILE COMPLETING THE TRANSFER PRICING ADJUSTMENT, THE TPO ACCEPTED THE ADJUSTMENT OF NON OPERATING EXPENSES AND CAPACITY UTILISATION EXPENSES IN RESPE CT OF DEPRECIATION BY FOLLOWING THE ORDER OF THE DRP FOR A.Y 2013-14 A ND OTHER ADJUSTMENTS CLAIMED BY THE ASSESSEE WERE DENIED. 6 8. OBJECTIONS WERE RAISED BEFORE THE DRP AND THE DR P AFFIRMED THE ORDER OF THE TPO VIDE ORDER DATED 11.05.2018 REJECT ING THE CONTENTIONS OF THE ASSESSEE FOR CAPACITY UTILISATIO N ADJUSTMENT FOR PERSONNEL EXPENSES, ADJUSTMENT IMPORTING DUTY AND R ELATED COSTS ON RAW MATERIAL AND PROPORTIONATE TRANSFER PRICING ADJ USTMENT. FINAL ASSESSMENT ORDER WAS, ACCORDINGLY, PASSED WHICH IS UNDER CONSIDERATION BEFORE US. 9. GROUND NOS. 1 AND 2 ARE OF GENERAL IN NATURE AND NEED NO SEPARATE ADJUSTMENT. 10. GROUND NO. 3 RELATES TO NON GRANTING OF ADJUSTM ENT ON IMPORT DUTY. 11. THIS ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN A SSESSEES OWN CASE IN A.Y 2013-14 IN ITA NO. 7801/DEL/2017 ORDER DATED 08.06.2021 AND HAS DECIDED THIS ISSUE AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. THE RELEVANT FINDINGS OF THE ORDER OF THE TRIBUNAL READ AS UNDER: WITH RESPECT TO GROUND NUMBER 3.4 WHERE THE CLAIM OF THE ASSESSEE IS THAT THE IMPORT DUTY ADJUSTMENT CARRIED OUT BY THE 7 ASSESSEE ON ACCOUNT OF HUGE DIFFERENCE IN IMPORT DU TY COST OF THE ASSESSEE AS WELL AS OF THE COMPARABLE SHOULD ALSO B E ELIMINATED FROM THE OPERATING EXPENSES OF THE ASSESSEE, WE HOL D THAT AS NECESSARY CONSUMPTION OF THE MATERIAL IS ONLY BOOKE D IN THE PROFIT AND LOSS ACCOUNT FOR WHICH THE MATERIALS ARE IMPORT ED FOR ONWARD SALE/ MANUFACTURING WHOSE REVENUE HAS BEEN BOOKED I N THE PROFIT AND LOSS ACCOUNT, THE ABOVE ADJUSTMENT CANNOT BE GR ANTED. THIS IS SO FOR THE REASON THAT THE DUTY STRUCTURE OF THE MA TERIAL IMPORTED BY THE ASSESSEE AND THE SALE PRICE OF THE ASSESSEE TAKES INTO CONSIDERATION ALL THESE COMMERCIAL ASPECTS OF THE T RADING OR OPERATION OF THE BUSINESS OF THE ASSESSEE. NATURALL Y, IF THE IMPORT DUTY FACTOR (RATE) IS HIGHER WHEN RAW MATERIALS IMP ORTED BY THE ASSESSEE NATURALLY THE SALE PRICE WILL REFLECT THE RECOVERY OF THOSE IMPORT DUTY ALSO FROM THE BUYERS. 12. RESPECTFULLY FOLLOWING THE AFORESAID FINDINGS O F THIS TRIBUNAL, WE HOLD ACCORDINGLY. GROUND NO. 3 STANDS DISMISSED. 13. GROUND NO. 4 RELATES TO THE REFUSAL OF CAPACITY ADJUSTMENT AS ASKED BY THE ASSESSEE. 14. WE FIND THAT WHILE DISMISSING THE OBJECTION OF THE ASSESSEE, THE DRP OBSERVED AS UNDER: 8 VI. ON THIS ISSUE, THE DRP IN ITS DIRECTIONS FOR A Y 2013-14 DATED 22.09.2017 DIRECTED AS UNDER: '3.5.2 WITH REGARD TO IDLE CAPACITY ADJUSTMENT, WE DO NOT APPROVE AD-HOC ADJUSTMENT OF 37% OF COST OF SALES ? (IMPORT DUTY ON TANGIBLES) AND PERSONNEL COST, AS HAS BEEN DONE BY THE ASSESSEE. ASSESSEE HAS TO SHOW THAT THE CAPACIT Y UTLILISATION OF THE ASSESSEE WAS 63% AND THAT OF THE COMPARABLES AVERAGED AT 100%. NO FACT CAN BE ASSUME D THE NAME COMPARABILITY ADJUSTMENT.' VII. THE FACTUAL MATRIX OF THE CASE REMAINS THE SAM E FOR THIS AY ALSO. SO THERE IS NO REASON TO DIFFER FROM THE ABOV E DIRECTION OF THE DRP. THE TPO HAS PROVIDED FOR THE UNDERUTILIZAT ION OF CAPACITY BY ADJUSTMENT IN DEPRECIATION. THE ORDER OF THE TPO IS UPHELD ON THIS ISSUE. 6. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO/TPO H AS ERRED IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE O F THE ASSESSEE IN COMPUTING THE PROPOSED TRANSFER PRICING ADJUSTME NT BY ALLOCATING THE ENTIRE DIFFERENCE BETWEEN THE ARM'S LENGTH OPERATING COST AND ACTUAL OPERATING COST OF THE ASS ESSEE AND NOT ADJUSTING IT IN THE PROPORTION THAT INTERNATIONAL T RANSACTIONS FORMING PART OF THE COST BASE OF THE ASSESSEE BEAR TO THE TOTAL OPERATING COST OF THE ASSESSEE I.E. 77.84%. 9 15. IT CAN BE SEEN FROM THE ABOVE DIRECTIONS OF THE DRP THAT IT HAS SIMPLY FOLLOWED THE DIRECTIONS GIVEN BY IT IN A.Y 2 013-14, WHICH QUARREL TRAVELLED UPTO THIS TRIBUNAL IN ITA NO. 7801/DEL/20 17 ORDER DATED 08.06.2021 AND THIS TRIBUNAL HAS DECIDED THIS QUARR EL IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THE RELEVANT FIN DINGS READ AS UNDER: WITH RESPECT TO GROUND NUMBER 3.3 WHERE THE CAPACI TY UTILIZATION ADJUSTMENT CARRIED OUT BY THE ASSESSEE IN RESPECT O F PERSONNEL COST BEING THE FIRST YEAR OF OPERATION HAS NOT BEEN GRANTED BY THE LOWER AUTHORITIES, WE HOLD THAT AS ASSESSEE HAS SUB MITTED COMPLETE DETAILS OF THE EMPLOYEES STATING THEIR NAME, DESIGN ATION, EXPERIENCE, EDUCATIONAL QUALIFICATION, ROLE AND RES PONSIBILITY AND THE AMOUNT OF SALARY PAID, MORE PARTICULARLY WHEN T HERE IS A DISPROPORTIONATE DIFFERENCE BETWEEN THE SALARY EXPE NDITURE INCURRED BY THE COMPARABLE COMPANIES WITH THE SALAR Y EXPENDITURE OF THE ASSESSEE AND THERE ARE SECONDED EMPLOYEES WH O ARE NECESSARILY DEPUTED TO THE ASSESSEE FOR THE PURPOSE OF DEVELOPMENT OF THE BUSINESS, THE CLAIM THE ASSESSEE NEEDS TO BE RE-EXAMINED WITH THE DETAILS FURNISHED. THIS IS MOR E SO WHEN LEARNED DISPUTE RESOLUTION PANEL ACCEPTED THAT THER E IS A HIGHER DEPRECIATION CLAIM IN THE CASE OF ASSESSEE COMPARED TO THE COMPARABLE COMPANIES. IN VIEW OF THIS WE SET ASIDE GROUND NUMBER 3.3 OF THE APPEAL BACK TO THE FILE OF THE LEARNED T RANSFER PRICING OFFICER WITH A DIRECTION TO EXAMINE THE CLAIM OF TH E ASSESSEE THAT THOSE EXPENDITURE ON SALARY OF THE EMPLOYEES WHO AR E WORKING FOR 10 THE DEVELOPMENT OF THE BUSINESS AND NOT FOR EARNING THE OPERATING PROFIT FOR THE YEAR REQUIRES PROPER ADJUSTMENT. 16. AS NO DISTINGUISHING FACT HAS BEEN BROUGHT TO O UR NOTICE, RESPECTFULLY FOLLOWING THE DECISION OF THIS TRIBUNA L [SUPRA], WE DIRECT ACCORDINGLY. GROUND NO. 4 IS ALLOWED FOR STATISTIC AL PURPOSES. 17. GROUND NO. 5 RELATES TO THE GRIEVANCE THAT IN C OMPUTATION OF TRANSFER PRICING ADJUSTMENT, THE ASSESSING OFFICER ERRED BY ALLOCATING THE ENTIRE DIFFERENCE BETWEEN THE ARMS LENGTH OPER ATING PROFIT AND ACTUAL OPERATING PROFIT TO THE CONTROLLED TRANSACTI ONS OF THE APPELLANT. 18. THE PROPORTIONATE TRANSFER PRICING ADJUSTMENT A S CLAIMED BY THE ASSESSEE IS AS UNDER: 11 19. WE FIND THAT THIS QUARREL TRAVELLED UPTO THE HO N'BLE HIGH COURT OF DELHI IN ITA NOS. 11 & 12/2015 AND DECIDED BY THE H ON'BLE HIGH COURT VIDE ORDER DATED 09.09.2015. THE RELEVANT FINDINGS OF THE HON'BLE HIGH COURT READ AS UNDER: 12. THE CONTENTION THAT THE ADJUSTMENT ON ACCOUNT OF EXPENSES AS DETERMINED BY THE TPO MUST BE ATTRIBUTED ENTIRELY T O THE INTERNATIONAL TRANSACTION IS BEREFT OF ANY MERITS. DURING THE FINANCIAL YEAR 2003-04 RELATING TO THE ASSESSMENT Y EAR 2004-05, THE ASSESSEE HAD REPORTED AN OPERATING INCOME OF RS.72,24,22,000/-. THE TOTAL EXPENSES FOR THE SAID PERIOD AMOUNTED TO RS.68,00,88,000/-. ADMITTEDLY, THE INTE RNATIONAL TRANSACTIONS IN QUESTION AMOUNTED TO RS.15,90,66,93 5/- WHICH WERE ONLY 23.38% IN VALUE OF THE TOTAL EXPENSES. THE TPO HAD DETERMINED THE PLI (OPERATING PROFIT OVER TOTAL COS T) OF COMPARABLE CASES AT 8.29% AGAINST 6.22% AS DECLARED BY THE ASSESSEE. APPLYING THE PLI OF COMPARABLE CASES, THE ADJUSTED TOTAL EXPENSES WERE COMPUTED AT RS.66,71,17,924/-, THUS, INDICATING AN ADJUSTMENT OF RS.1,29,70,076/-. AS IS APPARENT FROM THE ABOVE, THE SAID ADJUSTMENT RELATED TO ENTIRE EXPENSES AND NOT JUST THE INTERNATIONAL TRANSACTIONS ALONE. SINCE THE INTERNA TIONAL TRANSACTIONS ONLY CONSTITUTED 23.38%, A TP ADJUSTME NT PROPORTIONATE TO THAT EXTENT COULD BE MADE IN RESPE CT OF SUCH INTERNATIONAL TRANSACTIONS. THUS, ONLY AN ADJUSTMEN T OF RS.30,33,593/- COULD BE ATTRIBUTED TO THE INTERNATI ONAL TRANSACTIONS IN QUESTION. THE SAME WAS ACCEPTED BY THE CIT(A) AS 12 WELL AS THE TRIBUNAL. WE DO NOT FIND ANY INFIRMITY WITH THEIR DECISION. 20. RESPECTFULLY FOLLOWING THE FINDINGS OF THE HON' BLE JURISDICTIONAL HIGH COURT OF DELHI [SUPRA], WE DIRECT THE ASSESSIN G OFFICER TO ACCEPT THE COMPUTATION OF PROPORTIONATE TP ADJUSTMENT AS C OMPUTED BY THE ASSESSEE AND AS EXHIBITED ELSEWHERE IN THIS ORDER. GROUND NO. 5 IS ACCORDINGLY ALLOWED. 21. GROUND NO. 6 IS PREMATURE AND IS DISMISSED. 22. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 5189/DEL/2018 IS PARTLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 24.08. 2021 IN THE PRESENCE OF BOTH THE RIVAL REPRESENTATIVES. SD/- SD/- [ SUCHITRA KAMBLE ] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 24 TH AUGUST, 2021 13 VL/ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER