R Stahl Private Limited, Kancheepuram V. DCIT, Corporate Circle-5(2), Chennai

ITA 55/CHNY/2018

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 3116 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-08-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Assessment Year: 2013-2014
• Appeal Filed On: 02-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Unabsorbed depreciation
• Section: 143(3); 115JB; 13; 92CA

Judgement Text

आयकरअपीलीयअिधकरण,‘ डी’ ायपीठ,चे ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI ी जी मंजूनाथा ,लेखासद य,एवं ी रा ल चौधरी, याियक सद य के सम BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER AND SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER आयकरअपीलसं./I.T.A No.:55/CHNY/2018 िनधा रणवष /Assessment Year: 2013 - 2014 R Stahl Private Limited, Plot No. 5, Malrosapuram Main Road, Sengundram Industrial Area, Singaperumal Koil, Malrosapuram, Post, Kancheepuram Dist. - 603204 PAN: AAACB2538F ............... अपीलाथ /Appellant Vs. Deputy Commissioner of Income Tax, Corporate Circle – 5(2), Main Building, 4 th Floor, M.G. Road, Nungambakkam, Chennai - 600034 ............... थ /Respondent Appearances: For the Appellant/Assessee : Ashik Shah, C.A. For the Respondent/Department : S. Palani Kumar, CIT Date of conclusion of hearing : 30.05.2022 Date of pronouncement of order : 26.08.2022 आदेश /O R D E R Per Rahul Chaudhary, Judicial Member : 1. By way of the present appeal the Appellant/Assessee has challenged the Final Assessment Order, dated 31.10.2017, passed under Section 143(3) read with Section 92CA(4) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] in terms of the directions issued by the Learned Dispute Resolution Panel–2 Bengaluru under Section I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 2 - 144C(5) of the Act vide order dated 18.09.2017 for the Assessment Year 2013-14. 2. The R Stahl Group is engaged in the business of manufacturing explosion proof and explosion protected components, and systems for automation; control and distribution; operations and monitoring; and lighting. The Appellant, a wholly owned subsidiary of R Stahl AG, is part of R Stahl Group and is engaged in the business of manufacturing products such as light fittings, switch gears and explosion control equipment (including those made from aluminum alloys used in oil & gas and pharmaceuticals sectors). 3. The Appellant filed return of income on 30.11.2013 declaring ‘Nil’ income under normal provisions of the Act (after setting off brought forward losses and unabsorbed depreciation), and ‘Nil’ Book Profits under Section 115JB of the Act. The case of the Appellant was selected for scrutiny and a reference was made under Section 92CA of the Act was to the Transfer Pricing Officer, Chennai (TPO) for determination of Arm’s Length Price (ALP) in respect of International Transactions undertaken by the Appellant with its Associated Enterprises (AEs) during the relevant previous year. 4. The TPO noted that during the Assessment Year 2013-14 the Appellant operated in two business segments namely Manufacturing Segment and Contract R&D Segment with disclosed profit margins of 3.03% and 22.93%, respectively. I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 3 - 5. The TPO only disputed the ALP determined in respect of the international transactions pertaining to the Manufacturing Segment and related activities. The TPO accepted the Transaction Net Margin Method (TNMM) as the most appropriate method selected by the Appellant with Operating Profit on Cost as the Profit Level Indicator (PLI) for benchmarking the international transactions pertaining to Manufacturing Segment. However, the TPO decided to carry out fresh search for benchmarking the transactions, and arrived at final set of comparables consisting of the following 4 companies: Sr. No. Name of the Comparables 1. Nitin Fire Protection Industries Ltd. (NFPIL) 2. Amtech Power Limited 3. Thakral Services (India) Ltd. 4. Chemtrols Industries Ltd. 6. By using current year data, the TPO arrived at upwards transfer pricing adjustment of INR 2,63,22,674/- vide order dated 31.10.2016, passed under Section 92CA(3) of the Act. The Assessing Officer incorporated the proposed adjustment in the Draft Assessment Order, dated 23.12.2016, passed under Section 143(3) read with Section 92CA(4) and 144C(1) of the Act prosing transfer pricing addition of INR 2,63,22,674/-. In addition, the Assessing Officer, rejected the claim of carry forward of unabsorbed depreciation of INR 2,09,40,303/- holding that the same stands set off fully against the income of the relevant previous year as the Assessing Officer was of the view that the Appellant should have set off the unabsorbed depreciation of INR I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 4 - 2,09,40,303/- with the income of the relevant previous year before setting off brought forward business losses of INR 22,16,22,341/- pertaining to earlier assessment years. 7. Being aggrieved, the Appellant filed objections before Dispute Resolution Panel-2, Bengaluru (hereinafter referred to as ‘the DRP’). Vide order dated 18.09.2017, the DRP rejected the objections raised by the Appellant. Accordingly, the Assessing Officer passed the Final Assessment Order under Section 143(3) read with Section 92CA(4) of the Act on 31.10.2017 making transfer pricing addition of INR 2,63,22,674/- to arrive at total assessed income of INR 3,78,43,383/- that was first set off against unabsorbed depreciation of INR 2,09,40,303/- and thereafter, against brought forward business losses of INR 1,69,03,080/- to arrive at ‘Nil’ assessed taxable income after the aforesaid set off of depreciation/business losses. 8. Being aggrieved, the Appellant is in appeal before us challenging the Final Assessment Order. 9. The Learned Authorised Representative for the Appellant submitted that the Appellant had selected following comparables: Sr. No. Name of the Comparables 1. Thakaral Services (India) Limited 2. Amtech Power Limited 3. Chemtrols Industries Ltd. 4. NFPIL 5. Integra India Group Co. Ltd. 6. Impact Fire & Safety Appliances Private Limited I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 5 - Further, during the course of assessment proceedings the Appellant sought inclusion of the following two comparables: Sr. No. Name of the Comparables 1. Stelmec Ltd. 2. SGN Telecom Ltd. The Appellant also sought exclusion of NFPIL on the ground that same lacked functional comparability. 9.1. However, the TPO rejected 4 of the above comparables selected by the Appellant for the reasons specified herein under: Sr. No. Name of the Comparables Reasons for Rejection 1. Integra India Group Co. Ltd. Fails Sales Filter 2. Impact Fire & Safety Appliances Private Limited Unavailability of Data 3. Stelmec Ltd. Fails RPT Filter as per SCN dated 13.1.02016 4. SGN Telecom Ltd. Consistently Loss Making 9.2. After giving the above factual background, the Learned Authorised Representative for the Appellant submitted that the findings returned by the TPO are factually incorrect. Referring to the financial statements of M/s SGN Telecom Ltd., placed at page 659 of the paper-book, he submitted that for the Financial Year ended 31.03.2012 the company was not loss making and had Profit before Exceptional & Extraordinary Items and Tax of INR 3,01,053/- while for the Financial Year ended 31.03.2011 there as a loss of INR 5,33,470/-. Thus, the company was not consistently loss-making. As regards, Stelmec Ltd. he submitted that as per the annual report placed in the paper-book, Stelmec Ltd. had I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 6 - related party transaction of INR 0.29 Crores and therefore, the company did not fail Related Party Transaction (RPT) Filter as RPT /Sales for the company only 0.137% as against threshold of 25% determined by the TPO. The Learned Authorised Representative for the Appellant further submitted that even for the comparables which were selected, the TPO refused to exclude non-operational expenses (such as one-time shifting expenses) and non-operational income (such as rental income and income from other sources) while determining operational profits. He further submitted that during the relevant previous year the Appellant had expanded it business operations and shifted his manufacturing unit from leased premises to owned premises and for the same the Appellant had incurred one-time expenses of INR 32.50 Lakhs which were sought to be excluded by the Appellant. However, the TPO refused to exclude the same by treating the same as operational expenses despite the Appellant placing relevant documents on record. Due to the shifting the manufacturing unit of the Appellant stayed idle and therefore, the Appellant had claimed Idle Capacity Adjustment form the TPO. However, even the Idle Capacity Adjustment was rejected by the TPO. He further submitted that while the TPO/DRP have denied Working Capital Adjustment and Foreign Exchange Fluctuation Adjustment claimed by the Appellant the same have been allowed by the Tribunal has, in the case of the Assessee for the Assessment Year 2012-13 in ITA No. 2745/MDS./2016 (decided on 19.04.2017), granted the benefit of Working Capital Adjustment and Foreign Exchange Fluctuation Adjustment to the Appellant. I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 7 - 9.3. He further submitted that the Tribunal had also excluded NFPIL from the list of comparables holding that the aforesaid company was mainly earning project related revenues. 9.4. As regards, denial of carry forward of unabsorbed depreciation the Ld. Authorised Representative for the Appellant submitted that the issue stands decided in the favour of the Assessee by the judgement of the Hon’ble Madras Jurisdictional High Court in the case of SPEL Semi Conductor Limited [Tax Case Appeal No.2490 of 2006 / (2012) 27 Taxmann.com 242 (Madras)] 10. In response, the Learned Departmental Representative relied upon the order passed by the TPO and DRP. In addition, he submitted that the appellant had on its own selected NFPIL as a comparable and therefore, the Appellant cannot contend that the same is not functionally comparable. He further submitted that since no data was provided by the Appellant, the TPO was justified in rejecting the Working Capital Adjustment. As regards, adjustments for capacity underutilization, foreign exchange fluctuation and exclusion of extra-ordinary items, he submitted that the same was not claimed either in the Transfer Pricing Study and therefore, TPO was justified in not allowing the adjustments claimed by the Appellant. 11. We have heard the rival submission and perused the material on record. The Appellant has raised 10 grounds of appeal some of which are connected and also, in some cases, overlapping. Therefore, to the I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 8 - extent possible, the connected/overlapping grounds have been taken up together. Ground No. 1 to 5 12. Ground No. 1 to 4 are directed against rejection of claim of working capital adjustment, idle capacity adjustment and foreign exchange fluctuation adjustment. Further, the Appellant is also challenged the computation made by the TPO. Ground No. 5 is directed against non- exclusion of one-time/extraordinary expense incurred by the Appellant while computing operating margins. Working Capital Adjustment 13. The DRP has rejected the claim for Working Capital Adjustment on the ground that no data were submitted by the Appellant in relation to the same following the decision of the Chennai Bench of the Tribunal in the case of Mobis India Ltd. vs. Deputy Commissioner of Income Tax: ITA No. 2112 (MDS.) of 2011 [Assessment Year 2007-08, decided on 14.08.2013], and the decision of Bangalore Bench of the Tribunal in the case of Zyme Solutions (P) Ltd. vs. Assistant Commissioner of Income, Circle 7(1)(2), Bengaluru: IT (TP) A No. 1661 (Bang.) of 2016 [Assessment Year 2012-13, decided on 16.11.2018]. However, we note that in appeal filed by the Appellant for the Assessment Year 2012-13 (ITA No. 2745/Mds./2016, dated 19.04.2017), the Tribunal has, in the identical facts and circumstances, remitted the issue to the file of Assessing Officer for granting suitable Working Capital Adjustment by holding as under: I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 9 - “4. Ground No. 3 is with regard to non-granting the adjustment for differences in working capital levels. Before the DRP, the assessee sought for working capital adjustment, which was rejected by the DRP on the reason that calculation of working capital adjustment between the assessee and the comparable companies is not provided to TPO. Against this, the assessee is in appeal before us. 5. We have heard both the parties and perused the material on record. In our opinion, there is a positive working capital as seen from the balance sheet submitted by the assessee. Accordingly, we remit the issue to the file of AO to grant suitable working capital adjustments after making proper TP study. Hence, this ground is allowed for statistical purposes.” In view of the above, respectfully following the above decision of the Tribunal, the issue is remanded back to the file of this Assessing Officer/TPO with the directions to grant suitable Working Capital Adjustment. Claim for Ideal Capacity Adjustment & Exclusion of Extra-Ordinary Expenses 14. The DRP had rejected claim for Idle Capacity Adjustment, and Exclusion of Extraordinary Expenses made by the Appellant on the ground that no such adjustments were made in the Transfer Pricing Study, however, the same were claimed by the Appellant only during the course of assessment proceedings. We note that the Appellant had shifted the manufacturing facility during the relevant previous year and to substantiate this the Appellant has placed on record Letter of Intent, dated 21.08.2012, issued by the Appellant to Echo Care Engineering Pvt. Ltd. and the invoices raised by Echo Care Engineering Pvt. Ltd. on the Appellant for providing consultancy services in relation to the shifting I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 10 - of the manufacturing facility (placed at page 306 to 310 of the paper book), and the invoices raised by Vruksha Marine Company Limited dated, 31.01.2013 and 07.02.2013 upon the Appellant (placed on page 311 and 312 of the paper book). On perusal of the aforesaid, documentary evidence, it is clear that the Appellant had shifted the manufacturing facility which resulted in incurring one-time extra ordinary expenditure and capacity under-utilization during the relevant previous year on account of shifting of manufacturing facility. Accordingly, we direct the Assessing Officer/TPO to recomputed operational margins of the Appellant after excluding the one-time extra ordinary expenditure after verification of the same. Further, the Assessing Officer / TPO is also directed to grant suitable capacity under-utilization adjustment to the Appellant after necessary verification and after providing the Appellant an opportunity of being heard. Foreign Exchange Fluctuation Adjustment 15. The claim for Foreign Exchange Fluctuation Adjustment was also rejected on the ground that the claim was made during the course of assessment proceedings. However, DRP rejected the claim of the Appellant following the order of DRP for the immediately preceding Assessment Year 2012-13. We note that in appeal filed by the Appellant for the Assessment Year 2012-13 (ITA No. 2745/Mds./2016, dated 19.04.2017), the Tribunal has granted relief to the Appellant holding as under: “8. Ground No.7 is with regard to not allowing an adjustment in respect of the extraordinary foreign exchange loss suffered by the appellant as against the comparable companies. I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 11 - 9. The similar issue came before Co-ordinate Bench of Chennai Tribunal in the case of M/s.Motonic India Automotive (P.) Ltd. Vs. ACIT in ITA No.749/Bang/2014 vide order dated 17.08.2016 wherein held that:- “8. The next ground is with regard to variation in exchange rate adjustment while determining the ALP. According to the ld. AR, the assessee entered into contract in adverse prices fixed on the prevailing exchange rate and due to fluctuation in exchange rate, there is loss and that exchange fluctuation to be considered while determining the ALP. 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 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.” In view of the above order of the Tribunal, this issue is remitted to the file of AO for considering the same afresh in the light of above Order of Tribunal.” 16. Respectfully following the above decision of the Tribunal, we direct the Assessing Officer/TPO to provide suitable foreign exchange fluctuation adjustment after verification and after providing the Appellant opportunity of being heard. 17. In view of paragraphs 13 to 16 above, Ground No. 1 to 5 are partly allowed. Ground No. 6 to 8 18. In Ground No. 6 the Appellant has challenged the computation of operating margins made by the TPO. Ground No. 7 is directed against I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 12 - the selection of incorrect comparables which were not functionally similar. Ground No. 8 is directed against rejection of comparable selected by the Appellant. Exclusion of Nitin Fiber Protection Industries Limited (NFPIL) from list of Comparables 19. DRP had confirmed to order of Assessing Officer rejecting the claim of the Appellant that NFPIL should be excluded from the list of comparable on the ground that the Appellant had itself considered NFPIL as a comparable in the transfer pricing documentation for the Assessment Year 2013-2014. The DRP concluded that the NFPIL was functionally comparable with the Appellant and thus, rejected the objections raised by the Appellant. We note that the Tribunal has, while deciding the appeal filed by the Appellant for immediately preceding Assessment Year 2012-2013 (ITA No. 2745/Mds./2016, dated 19.04.2017), directed the Assessing Officer to exclude NFPIL after coming to a conclusion that major income of NFPIL was from project related activities and therefore, could not be compared to the Appellant. In view of the aforesaid, we direct the Assessing Officer to exclude NFPIL from the list of comparables. Selection of Comparables and Computation of Margins 20. As regards selection of comparables and computation of margins, we have perused the material placed on record. In our view, the authorities below have failed to appreciate the correct facts and take into account the financial data as reflected in the annual accounts of the comparables placed on record by the Ld. Authorised Representative for the Appellant. I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 13 - We find merit in the contentions advanced on behalf of the Appellant in this regards (recorded in paragraph 9.2 above). However, as submitted by the Ld. Departmental Representative the Revenue must be granted opportunity to examine the correctness of the claims made by the Appellant in view of the document/information pertaining to the comparables placed on record as part of the paper-book. Accordingly, subject to the directions given by us hereinabove, since there are a number of factual discrepancies leading to incorrect selection/rejection of comparables and computation of margins, we deem it appropriate to remit all issues related to inclusion/exclusion of comparables and computation of the margins thereof back to the file of Assessing Officer/TPO for fresh adjudication after giving appellant opportunity of being heard. 21. In view of the paragraph 18-20 above, Ground No. 6 to 8 are partly allowed. Ground No. 9 22. Ground No. 9 is directed against rejection of claim of carry forward of unabsorbed depreciation by setting off of the unabsorbed depreciation before allowing set off of the brought forward losses while computing taxable income of the relevant previous year. 23. According to the Assessing Officer, the unabsorbed depreciation of INR 2,09,40,303/- should have been set off with the income of the relevant previous year before setting off brought forward business losses of INR 22,16,22,341/-. Since the income of the relevant previous year was sufficient to set off entire unabsorbed depreciation, the question of carry I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 14 - forward of unabsorbed depreciation to the subsequent year did not arise and therefore, the Assessing Officer disallowed the claim of the Appellant to carry forward unabsorbed depreciation of INR 2,09,40,303/. The DRP rejected the objections of the Appellant and therefore in the final assessment order the claim of the Appellant regarding carry forward of unabsorbed depreciation was rejected. 24. We note that the issue stands decided in the favour of the assessee by the judgment of the Hon’ble Madras High Court in the case of SPEL Semi Conductors Ltd (supra) wherein it has been held as under: “5. A combined reading of the above said sections shows that while carried forward of loss could be adjusted as against the profits and gains of business or profession of the year, the set off of unabsorbed depreciation allowance as per Section 32(2) could be given effect to only after giving relief on the carried forward loss. Given the fact that the carried forward of business loss could be adjusted only as against the business income, if there is no other income available, then as per Section 72(2) of the Act, unabsorbed depreciation has to wait for further years subject to the limitation of eight years for absorbing the same in the business income of the assessee. However, in a case of assessee as one before us, when the assessee has income both from business as well as from other sources, that after having set off of the business loss as against the current year income from business, there existed no further business income, the carried forward business loss remaining still unabsorbed could only be carried forward for the next year. However, given the fact that the assessee has income under the other heads, Section 32(2) provides the relief. 6. Thus, as far as the income from other sources are concerned, given the fact that under Section 32(2) of the Act, there is a provision of set off of unabsorbed depreciation allowance as against the income from other sources, it is not necessary that one should wait I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 15 - for the assessee to earn income from business so as to exhaust the carried forward loss to be set off as against the business income and then apply the unabsorbed depreciation. A reading of Section 32(2) thus makes it clear that if the unabsorbed depreciation allowance could not be wholly set off under clause (i) and clause (ii), the amount of depreciation not so set off can be set off from income from other head, if any, available for that assessment year. The language of Section 32(2) is very clear and there is hardly anything contained in Section 72(2) to prevent such set off of carried forward depreciation being given to the assessee under the head of income from business or income from other sources. The Revenue does not deny the fact that as far as the income from other sources are concerned, there could be no set off of business loss or carried forward loss. However, what is contended by the Revenue is that Section 72(2) controls the operation of Section 32(2) to have the set off of unabsorbed depreciation against the income from other sources. We do not agree with this line of reasoning. What is spoken to under Section 72(2) is as regards set off of business loss as against the income from profits and gains of business or profession and if there is loss as well as unabsorbed depreciation, the set off shall be first on the business loss as against the business income and then on unabsorbed depreciation. What is spoken to under Section 32(2) is as regards set off of unabsorbed depreciation as per clause (ii) of sub-section (1) and when the unabsorbed depreciation could not be set off as against the income from business or profession by reason of there being no income available under the said heads and where there is income from other sources, effect must be given to Section 32(2) of the Act for that assessment year.” (Emphasis Supplied) In view of the above, we direct the Assessing Officer to allow the set off of the brought forward business loss with current year business income as claimed by the Appellant and allow carry forward of the unabsorbed depreciation of INR 2,09,40,303/-. Accordingly, Ground No. 9 is allowed. I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 16 - Ground No. 10 25. Ground No. 10 is general in nature and does not require adjudication. 26. In result present appeal is partly allowed. Order pronounced in the court on 26.08.2022 at Chennai. Sd/- Sd/- ( जी मंजूनाथा) (G. MANJUNATHA) लेखासद$/ACCOUNTANT MEMBER (रा%ल चौधरी) (RAHUL CHAUDHARY) ाियकसद$एवं /JUDICIAL MEMBER चे ई/Chennai, िदनांक/Dated, the 26 th August, 2022 Alindra, 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. गाड फाईल/GF I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 - 17 - Sr. No. Details Date Initials Designation 1 Draft dictated on/Draft dictation sheets are attached/Dictated directly on PC Sr.PS/PS 2 Draft Placed before author Sr.PS/PS 3 Draft proposed & placed before the Second Member JM/AM 4 Draft discussed/approved by Second Member JM/AM 5 Approved Draft comes to the Sr.PS/PS Sr.PS/PS 6 Order pronouncement on Sr.PS/PS 7 File sent to the Bench Clerk Sr.PS/PS 8 Date on which the file goes to the Head clerk 9 Date on which file goes to the AR 10 Date of Dispatch of order