Doowon Automotive Systems India Private Limited, Kancheepuram V. ACIT, CHENNAI

ITA 852/CHNY/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9324 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 1 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-05-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 04-04-2014
• Court: TRIBUNAL
• Keywords: Transfer pricing; Principle of natural justice; International transaction

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , . !' , # $ % [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ] ./ I.T.A.NO.852/MDS/2014 / ASSESSMENT YEAR : 2009-10 M/S DOOWON AUTOMOTIVE SYSTEMS INDIA PVT. LTD NO.19 & 20, SIPCOT INDUSTRIAL PARK ORAGADAM, SRIPERUMBUDUR TALUK KANCHEEPURAM DISTRICT 602 105 VS. THE ASSTT. COMMISSIONER OF INCOME-TAX COMPANY CIRCLE I(4) CHENNAI [PAN AACCD 4172 F ] ( &' / APPELLANT) ( ()&' /RESPONDENT) / APPELLANT BY : SHRI S.P.CHIDAMBARAM, ADVOCATE /RESPONDENT BY : SHRI JASDEEP SINGH, CIT / DATE OF HEARING : 16 - 0 3 - 2016 ! / DATE OF PRONOUNCEMENT : 19 - 05 - 2016 / O R D E R PER N.R.S.GANESAN, JUDICIAL MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 24.1.2014 CONSEQUENT TO THE DIRECTION OF THE DISPUTE RESOLUTION PANEL DATED 20.12.2013 AND PERTA INS TO ASSESSMENT YEAR 2009-10. 2. SHRI S.P.CHIDAMBARAM, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FIRST ISSUE ARISES FOR CONSIDERA TION IS UPWARD ITA NO.852/14 :- 2 -: ADJUSTMENT OF ` 4,81,47,719/- TO THE VALUE OF INTERNATIONAL TRANSA CTION. ACCORDING TO THE LD. COUNSEL, THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AUTOMOBILE AIR CONDITIONE R AND COOLING SYSTEMS, AUTOMOTIVE ANCILLARIES, COMPONENTS AND OTH ER AUTOMOTIVE PARTS. THE ASSESSEE-COMPANY IS A SUBSIDIARY COMPAN Y OF M/S DOOWON CLIMATE CONTROL LTD., KOREA. M/S DOOWON CLIMATE CO NTROL LTD., KOREA, HOLDS THE ASSESSEE-COMPANY BY MAJORITY SHARES THROU GH ITS SUBSIDIARY COMPANIES. DURING THE YEAR UNDER CONSIDERATION, TH E ASSESSEE IMPORTED RAW MATERIAL, CAPITAL MACHINERIES AND SHAR E CAPITAL FROM THE PARENT COMPANY. THE ASSESSEE APPLIED TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD. THE TPO, HO WEVER, REJECTED THE METHOD TAKEN BY THE ASSESSEE AS THE MOST APPRO PRIATE METHOD AND ALSO REJECTED THE THREE COMPARABLES SELECTED BY THE ASSESSEE, NAMELY, M/S SIBAR AUTO PARTS LTD., TECHNICO INDUSTR IES LTD AND JOHNSON CONTROLS INDIA (P) LTD. THE TPO HAS ALSO A CCEPTED PART OF THE COMPARABLES SELECTED BY THE ASSESSEE. ULTIMATELY, THE TPO REVISED THE PLI BEING NET PROFIT MARGIN OF THE ASSESSEE AN D COMPARABLES ARE WORKED OUT AS DISCUSSED AT PARA 38 OF THE TPOS ORD ER. THE TPO COMPUTED 4.23% OF THE SALES AS ADDITIONAL PROFIT AN D ACCORDINGLY MADE UPWARD ADJUSTMENT TO THE EXTENT OF ` 3,53,11,980.23. HOWEVER, THE DRP ACCEPTED THE TNMM SELECTED BY THE ASSESSEE AS THE MOST APPROPRIATE METHOD AND DIRECTED THE ASSESSING OFFIC ER TO APPLY TNMM ITA NO.852/14 :- 3 -: WHILE MAKING ADJUSTMENT ON ACCOUNT OF WORKING CAPIT AL. FURTHER THE DRP CONFIRMED THE COMPARABLES SELECTED BY THE TPO. THE DRP WITHOUT GIVING ANY NOTICE OF ENHANCEMENT, ENHANCED THE TRANSFER PRICING ADJUSTMENT FROM ` 3,53,11,982/- TO ` 4,81,47,719/-. ACCORDING TO THE LD. COUNSEL, WHEN THE DRP FINDS THAT TNMM WA S THE MOST APPROPRIATE METHOD, MAKING FURTHER ADJUSTMENT BY CO MPARING THE GROSS MARGIN LEVEL BY APPLYING THE STATISTICAL METH OD IS NOT CORRECT. THE LD. COUNSEL FURTHER SUBMITTED THAT STATISTICAL METHOD CANNOT BE APPLIED AS PER THE PROVISIONS OF THE INCOME-TAX ACT . FOR MAKING ADJUSTMENT, THE TPO AND DRP ARE EXPECTED TO FOLLOW THE METHOD PRESCRIBED UNDER THE INCOME-TAX ACT. ACCORDING TO THE LD. COUNSEL, THE DRP PROCEEDED TO REJECT THE CAPACITY UTILIZATIO N AND CUSTOMS DUTY ADJUSTMENT WITHOUT ISSUING ANY ENHANCEMENT NOTICE. THEREFORE, THE ASSESSEE HAS NO OCCASION TO PUT FORWARD ITS OBJECTI ON BEFORE THE DRP. ACCORDING TO THE LD. COUNSEL, CAPACITY UTILIZATION AND CUSTOMS DUTY ADJUSTMENT WITHOUT ISSUING ANY NOTICE TO THE ASSES SEE CANNOT BE MADE BY THE DRP. THEREFORE, ACCORDING TO THE LD. C OUNSEL, THE MATTER MAY BE REMITTED BACK TO THE FILE OF THE DRP FOR REC ONSIDERATION. 3. ON THE CONTRARY, SHRI JASDEEP SINGH, THE LD. DEPART MENTAL REPRESENTATIVE SUBMITTED THAT THE DRP BY ORDER DATE D 20.12.2013 DIRECTED THE ASSESSING OFFICER TO APPLY TNMM WITH A DJUSTMENT ON ACCOUNT OF WORKING CAPITAL AND TO EXCLUDE LOSS OR G AIN ON ACCOUNT OF ITA NO.852/14 :- 4 -: FOREIGN EXCHANGE FLUCTUATION FROM OPENING PROFIT. SUBSEQUENTLY, THE TPO VIDE HIS ORDER DATED 22.1.2014 DETERMINED THE A DJUSTMENT AT ` 10,89,83,390/- INSTEAD OF ` 3,53,11,980/- ORIGINALLY PROPOSED. ACCORDINGLY, A SUM OF ` 10,89,83,390/- WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE IN VIEW OF THE SUBSEQUENT ORDER OF THE TPO. SIMILARLY, THE FEES PAID TO ROC AND THE DIFFERENCE OF ` 2,28,8,217/- BETWEEN THE TOTAL TURNOVER AS PER THE RETURN FILED UNDER THE VA LUE ADDED TAX AND THE TOTAL TURNOVER AS PER THE PROFIT & LOSS ACCOUNT WAS ALSO ADDED AS SUPPRESSION OF SALES BY THE ASSESSING OFFICER. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSESSING OFFICER INITIALLY PASSED THE DRAFT ASSESSMENT ORDER ON THE BASIS OF THE SUGGESTION MADE BY THE TPO. THE ASSESSEE FILED IT S OBJECTION AND THE MATTER WAS REFERRED TO THE DRP. THE DRP BY ITS ORD ER DATED 20.12.2013, DIRECTED THE ASSESSING OFFICER TO MAKE THE FOLLOWING ADJUSTMENT: 17. CONSIDERING ALL THE ABOVE ISSUES, WE DIRECT TH E AO/TPO TO RECOMPUTE THE ALP OF THE ASSESSEES INTERNATION AL TRANSACTION BY FOLLOWING NPM AS PROVIDED IN THE ACT TAKING PBIT AS THE PLI FOR COMPARISON. THE OPERATING PROF IT MAY BE WORKED OUT IN THE LINES INDICATED IN THE SAFE HARBO R RULES ANNOUNCED BY THE CBDT. THE ISSUE OF VARIOUS ADJUST MENTS CLAIMED BY THE ASSESSEE IS DISCUSSED BELOW: 18. WOR K ING CAPITAL ADJUSTMENT: WE ARE . IN AG R EEMENT WI T H THE ASSESSEE THAT THE D IFFE R ENCE IN THE WORKING CAPITAL STRUCTURE OF THE ASSESSEE AND THE ITA NO.852/14 :- 5 -: COMPARABLES NEE D S TO BE ADJUSTED. HOWEVER WE ALSO NOTICE THAT THE ' ASSESSEE IS ACTUALLY BUYING F R OM THE AE AND T HEREFORE WORKING CAP IT AL ADJUSTMENT BE ALLOWED IF IT IS DEM O NSTRATED THAT THE AE IS ALLOWING EXTRA ORDINARY CREDIT PERIOD TO THE ASSESSEE. WE D IRECT THE TPO TO COMPUTE THE ADJUSTMENT KEEPING THIS ASPECT I N MIND. 19. CUST O MS DUTY ADJUSTMENT: WE AGREE WITH THE TPO THAT THE ADJUSTMENT IS NOT R EQU I R ED IN THE FACTS OF THE CASE. APART FROM THE REASONING GIVEN BY THE TPO, IN TH I S R EGARD WE SHALL ALSO REFER TO THE DECIS I ON OF THE DELHI ITAT IN THE CASE OF S O N Y INDIA, CONSOLIDATED ORDER FOR ASST Y EARS 2001-02 TO 2 . 003-04 DATED 23 . 0 9 .2008 WHEREIN (PARA 136 ON PAGE 67 . ) T H E TRIBUNAL HELD AS : UNDER: 136. AS REGARDS THE TAXPAYERS CLAIM FOR ADJUSTME NT TO THE OPERATING MARGINS OF THE COMPARABLES ON ACCOUNT OF HIGHER AMOUNT OF CUSTOM DUTY PAID ON IMPORTED COMPONENTS VIZ. A VIZ. THE COMPARABLES, IT IS NOTIC ED THAT THE WORKING OF SUCH ADJUSTMENT SOUGHT BY THE TAXPAY ER IS GIVEN ON PAGE NO.365 AND 366 OF THE TAXPAYERS P APER BOOK. A PERUSAL OF THE SAID WORKING SHOWS THAT IT IS MAINLY BASED ON PROPORTION OF IMPORTED COMPONENTS A ND THE DUTY PAID ON SUCH IMPORTED COMPONENTS. IN OUR OPINION, THIS BASIS ADOPTED BY THE TAXPAYER FOR SEE KING THE ADJUSTMENT ON ACCOUNT OF EXCESS CUSTOM DUTY BOR NE BY IT IS NOT CORRECT INASMUCH AS CONSIDERATION OF D UTY PAYMENT ALONE WOULD NOT JUSTIFY SUCH ADJUSTMENT AND IT WOULD BE NECESSARY TO TAKE INTO ACCOUNT THE COST OF COMPONENTS IMPORTED ALONGWITH THE CUSTOM DUTY PAID THEREON FOR THE PURPOSE OF COMPARISON WITH THE CORRESPONDING INDIGENOUS COMPONENTS CONSUMED BY THE COMPARABLES. MOREOVER, THE LOCAL LEVIES SUCH AS SA LES TAX ETC. ARE ALSO REQUIRED TO BE TAKEN INTO ACCOUNT FOR SUCH COMPARISON. IT IS ALSO PERTINENT TO NOTE HERE THAT IF THE TAXPAYER COMPANY HAS PURCHASED THE IMPORTED COMPONENTS AFTER PAYMENT OF CUSTOM DUTY AT A HIGHER PRICE THAN THE INDIGENOUS COMPONENTS PURCHASED BY THE COMPARABLES, THIS DECISION MUST HAVE BEEN TAKEN BY IT CONSCIOUSLY TAKING INTO ACCOUNT ALL THE COMMERCI AL CONSIDERATIONS INCLUDING THE OBVIOUS BENEFITS OF BE TTER QUALITY WHICH IS BOUND TO REFLECT OR TRANSLATE INTO A HIGHER SELLING PRICE OF THE PRODUCT. THIS LEAVES H ARDLY ITA NO.852/14 :- 6 -: ANY SCOPE FOR ADJUSTMENT TO THE PROFIT MARGINS OF T HE COMPARABLES ON THIS COUNT. T H E A D JUS T MENT ON ACCOUNT OF CUSTOM DUTY PA Y MENT IS NOT ALLOWED. 20. T H E A S SESSEE WANTS THAT LOSS ON ACCOUNT O F F ORE X FLUCTUATIONS BE EXCLUDED FROM OP E RA TI NG INCOME. THE TPO HAS ACCEPTED T H AT FOREX FLUCTUATION LOSS IS DUE TO T R EASU R Y MANAGEMENT FUNCTIONS O F THE ASSESE E , BUT STILL . THE TPO APPEARS TO BE AG A INS T EXCLUSION OF THE SAME FROM OPERATING PROFIT FOR THE PURPOSE OF COMPA R ABIL I TY . WE AGREE WITH THE ASSESSEE I N T H I S REGARD AND DIRECT THE TPO TO EXC L UD E THE LOSS ON ACCOUNT OF FOREX FLUCTUATIONS. OUR REASON FOR THE S AM E IS THAT T HE FU N CTIONS OF TREASURY MANAGEMENT ARE NO T BEING COMPA R ED IN T HIS CASE. THE C OMPA R ABLES MIGHT HAVE MANAGED THEIR FORE X BETTER OR WORSE. THE RESULT OF F O RE X M ANAGEMENT IS NOT LINKED TO MAIN F UNCTIONS OF THE ASSESEES AND THE COMPARABLES I.E MANUFACTURING AND DISTRIBUTION. FURTHER WE DO NOT HAVE INFORMATION A BOUT THE FOREX MANAGEMENT OR TREASURY FUNCTION OF THE COMPARABLES. HENCE IT IS BETTER TO EXCLUDE FOREX LOSS/GAIN FROM COMPARABILITY ANALYSIS. THERE IS NO EVIDENCE THAT IN THE ASSESSEES CASE FOREX LOSS IS DUE TO OR C ONNECTED WITH THE AE TRANSACTIONS . WE DIRECT THE TPO TO EXCLUDE FO R EX LOSS FROM P LI COMPUTATION - OF THE ASSESSEE AS WELL AS THE COMPARABLES. . 2 1. C APACITY UTILISATION: THE ASSESSEE CLAIMS TO HAVE 46.16% CAPACITY UTILISATION AS A GAINST THE COMPARABLES AVERAGE CAPACITY UTILISATION OF 66%. THE ASSESSEE HAS A SKED FOR AN ADJUSTMENT IN THIS REGARD. WE ARE NOT CONVINCED BY THE . ASSESSEE'S A RGUMENTS IN THIS REGARD. THE COMPARABLES MARGIN DOES NOT SHOW A NY DIRECT C ORRELATION BETWEEN % ' OF CAPACITY UTILIZATION AND PROFIT EARNED. FURTHER THE D IFFERENCE IS NOT SO MUCH TO BE CONSIDERED SIGNIFICANT. 22. A S REGARDS COMPARABLE, WE FIND THAT T HE TPO HAD ACCEPTED THE SET OF 10 C OMPARABLES : SUGGESTED BY THE ASSESSEE DURING TP PROCEEDINGS. HENCE NO I N TERFERENCE IS REQUIRED IN THIS ' MATTER. 23. TO CONCLUDE WE DIRECT THE TPO TO APPLY TNMM WITH THE ADJUSTMENTS ON ACCOUNT O F WORKING CAPITA L . THE ~ COMPARABLE SET SHALL BE ' THE SAME AS ADOPTED IN THE ITA NO.852/14 :- 7 -: T P O'S ORDER. LOSS OR GAIN ON ACCOUNT OF FOREX FLUCTUATIONS SHALL BE EX C LUDED FROM O P ERATION PROFITS. 5. CONSEQUENT TO THE DIRECTION OF THE DRP, THE TPO HAS PASSED ANOTHER ORDER DATED 22.1.2014. THE ASSESSING OFFIC ER GIVING EFFECT TO THE ORDER OF THE TPO HAS PASSED THE IMPUGNED ASSESS MENT ORDER DATED 24.1.2014. 6. WE HAVE CAREFULLY GONE THROUGH THE PROVISIONS OF SE C. 144C OF THE ACT. SEC. 144C(5) SAYS THAT THE DRP SHALL I SSUE SUCH DIRECTIONS AS IT THINKS FIT FOR THE GUIDANCE OF THE ASSESSING OFFICER TO ENABLE HIM TO COMPLETE THE ASSESSMENT. SEC. 144C(13) OF THE A CT SAYS THAT ONCE A DIRECTION WAS GIVEN BY THE DRP UNDER SUB-SECTION( 5) OF SEC. 144C, THE ASSESSING OFFICER SHALL IN CONFORMITY WITH THE DIRECTION, COMPLETE THE ASSESSMENT WITHOUT PROVIDING ANY FURTHER OPPORT UNITY OF BEING HEARD TO THE ASSESSEE. THEREFORE, THE SCHEME OF T HE INTERNATIONAL TRANSACTION UNDER THE INCOME-TAX ACT, ENABLES THE A SSESSING OFFICER TO COMPLETE THE ASSESSMENT IN CONFORMITY WITH THE DIRE CTION OF THE DRP. SINCE AN OPPORTUNITY WAS GIVEN BEFORE THE DRP, SECT ION 144C(13) SPECIFICALLY PROVIDES THAT NO FURTHER OPPORTUNITY S HALL BE GIVEN TO THE ASSESSEE. IN THIS CASE, THE DRP DIRECTED THE TPO T O APPLY TNMM WITH ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL. ON THE B ASIS OF THIS DIRECTION, THE TPO HAS PASSED ANOTHER ORDER DATED 2 2.1.2014 AND SUBSEQUENTLY, THE ASSESSING OFFICER GAVE EFFECT TO THE ORDER OF THE TPO ITA NO.852/14 :- 8 -: DATED 22.1.2014. WHEN THE MANDATE OF SEC. 144C(13) IS TO PASS AN ASSESSMENT ORDER IN CONFORMITY WITH THE DIRECTION O F THE DRP, THE TPO HAS NO ROLE TO PASS A SUBSEQUENT ORDER AFTER THE DI RECTION GIVEN BY THE DRP. IN THIS CASE, THE ASSESSING OFFICER HAS NOT P ASSED THE ASSESSMENT ORDER IN CONFORMITY WITH THE DIRECTION O F THE DRP. IN FACT, THE DIRECTION OF THE DRP WAS TO THE TPO. THEREFORE , THE ASSESSEE HAS NO OCCASION TO FILE ITS OBJECTION TO THE SUBSEQUENT ORDER OF THE TPO DATED 22.1.2014. WHEN THE TPO PASSED THE ORDER DAT ED 22.1.2014, THE ASSESSING OFFICER IN ALL FAIRNESS OUGHT TO HAVE GIVEN AN OPPORTUNITY TO THE ASSESSEE TO FILE ITS OBJECTION . SUCH AN OPPORTUNITY WAS NOT GIVEN TO THE ASSESSEE. MOREOVER, THE TPO W AS NOT EMPOWERED TO PASS ANY ORDER SUBSEQUENT TO THE DIREC TION OF THE DRP. THE ASSESSING OFFICER IS EXPECTED TO PASS AN ASSESS MENT ORDER IN CONFORMITY WITH THE DIRECTION OF THE DRP WITHOUT AN Y INTERVENTION EITHER BY THE TPO OR BY ANY AUTHORITY. THEREFORE, THERE IS A CLEAR VIOLATION OF THE PROCEDURE PRESCRIBED U/S 144C OF THE ACT. MOREOVER, AS RIGHTLY SUBMITTED BY THE LD. COUNSEL FOR THE ASS ESSEE, THE DRP MADE ADJUSTMENT WITH REGARD TO CAPACITY UTILIZATION AND CUSTOMS DUTY ADJUSTMENT WITHOUT ISSUING ANY NOTICE. THIS TRIBUN AL IS OF THE CONSIDERED OPINION THAT THERE WAS A CLEAR VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE. THEREFORE, THE MATTER NEEDS TO BE RECONSIDERED BY THE DRP. THE DIRECTION OF THE DRP SHALL BE SPECIFIC AN D CLEAR SO THAT THE ITA NO.852/14 :- 9 -: ASSESSING OFFICER CAN IMPLEMENT THE SAME WITHOUT AN Y INTERVENTION EITHER BY THE TPO OR ANY AUTHORITY. IF THE DRP DIR ECTS THE TPO TO CONSIDER ANY OF THE THINGS, THAT WOULD AMOUNTS TO V IOLATION OF THE PROCEDURE LAID DOWN IN SEC. 144C OF THE ACT. IF TH E DRP FINDS THAT ANY FURTHER INVESTIGATION IS REQUIRED BY THE TPO, IT IS OPEN TO THE DRP TO KEEP THE MATTER PENDING AND CALL FOR REMAND REPORT FROM THE TPO AND UPON RECEIVING SUCH REMAND REPORT, IT IS FOR THE DRP TO PASS ORDER U/S 144C(5) OF THE ACT DIRECTING THE ASSESSING OFFI CER TO MAKE THE ADJUSTMENT AS PROVIDED UNDER THE SCHEME OF THE INCO ME-TAX ACT. ACCORDINGLY, WE ARE UNABLE TO UPHOLD THE ORDER OF T HE AUTHORITIES BELOW. HENCE, THE SAME IS SET ASIDE AND THE ENTIRE ISSUE IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASS ESSING OFFICER SHALL REFER THE MATTER ONCE AGAIN TO THE DRP AND THE DRP SHALL PASS A CLEAR AND SPECIFIC ORDER, IF NECESSARY, AFTER CALLING FOR A REMAND REPORT FROM THE TPO. AN OPPORTUNITY SHALL BE GIVEN TO THE ASS ESSEE IN RESPECT OF THE ISSUES RAISED AND CONSIDERED BY THE DRP BEFORE ISSUING ANY DIRECTION TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL PASS THE ASSESSMENT ORDER IN CONFORMITY WITH THE DIRECTION OF THE DRP WITHOUT INTERVENTION OF THE TPO OR ANY OTHER AUTHORITY IN B ETWEEN. 7. WITH THE ABOVE OBSERVATION, THE APPEAL OF THE ASSE SSEE IS ALLOWED FOR STATISTICAL PURPOSES. ITA NO.852/14 :- 10 -: ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH MAY, 2016, AT CHENNAI. SD/- SD/- ( . !' ) (A. MOHAN ALANKAMONY) # / ACCOUNTANT MEMBER ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER #$ / CHENNAI %& / DATED: 19 TH MAY, 2016 RD &' ()*) / COPY TO: 1 . / APPELLANT 4. + / CIT 2. / RESPONDENT 5. ),- . / DR 3. +/' / CIT(A) 6. -01 / GF