Doowon Automotive Systems India Private Limited, Kancheepuram V. ACIT (OSD) Corporate Range 1, CHENNAI

ITTPA 102/CHNY/2018

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 4032 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 5 month(s) 10 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 07-06-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Assessment Year: 2014-2015
• Appeal Filed On: 27-12-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction

Judgement Text

आयकर अपीलीय अिधकरण ‘डी’ ायपीठ चे ई म । IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI माननीय ,ी महावीर िसंह, उपा23 एवं माननीय ,ी मनोज कु मार अ8वाल ,लेखा सद; के सम3। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सं./ IT(TP)A No.102/Chny/2018 (िनधाCरण वषC / Assessment Year: 2014-15) M/s. Doowon Automotive Systems India Pvt. Ltd. B-19 & 20, SIPCOT Industrial Park, Oragadam, Sriperumbudur Taluk, Kancheepuram District – 602 105. बनाम/ V s. ACIT (OSD), Corporate Range-1, Chennai. थायी लेखा सं./जीआइ आर सं./P AN /GI R No . AAC C D -4 1 7 2 - F (अपीलाथ /Appellant) : ( थ / Respondent) अपीलाथ की ओरसे/ Appellant by : Shri S.P. Chidambaram (Advocate) – Ld. AR थ की ओरसे/Respondent by : Dr. S. Palani Kumar (CIT) – Ld. DR सुनवाई की तारीख/ Date o f Hea rin g : 24-03-2022 घोषणा की तारीख / Date of Pronouncement : 08-06-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2014-15 arises out of final assessment order dated 31.10.2018 passed by learned Assistant Commissioner of Income Tax (OSD), Corporate Range-1, Chennai (AO) pursuant to the directions of learned Dispute Resolution Panel-2, Bengaluru dated 19.09.2018 u/s 144C(5) of the Act. This IT(TP)A No.102/Chny/2018 - 2 - appeal was heard along with assessee’s appeal for AY 2009-10, IT(P) No.07/Chny/2018 which has separately been disposed-off by us on 18.05.2022. The effective grounds raised by the assessee read as under: - General Ground: 2.1 The directions of the Dispute Resolution Panel (DRP), the consequential transfer pricing order and the final assessment order is erroneous in so far as determining and quantifying a downward adjustment of Rs.25,42,23,046/-to the value of international transaction (imports) of the Appellant. 2.2 The AO/DRP erred in confirming the action of the TPO in not accepting the economic adjustments undertaken by the Appellant. Customs duty adjustment: 2.3 The AO/DRP erred in confirming the action of the TPO by not considering the detailed submissions and relevant workings made by the appellant in justifying the need for economic adjustments. 2.4 The AO/DRP erred in confirming the action of TPO by not allowing the differential adjustment for basic customs duty without appreciating the fact that percentage of imported goods consumed by Doowon India is 77.05% as against 22.83% by comparable companies of the case. 2.5 The TPO/AO/DRP ought to have appreciated that tile Appellant had imported huge volume of components by incurring additional liability towards customs duty and hence the non-cenvatable portion of customs duty paid should be eliminated for comparison under TNMM method. 2.6 The DRP ought to have appreciated the fact that the sale price is market driven and hence the customs duty could not be recouped from its customers. 2.7 The DRP ought to have appreciated the fact that the appellant would be eligible for customs duty adjustment as an extra-ordinary cost even in the event had it imported the raw-materials from third party suppliers. Working capital adjustment: 2.8 The AO/DRP erred in confirming the order of the TPO in not providing working capital adjustment while determining the net profit margins of the Appellant. 2.9 The AO/DRP erred in confirming the order of the TPO in rejecting the working capital adjustment without appreciating the fact that the TPO failed to consider the additional credit period extended by the AE's and thereby erred in rejecting the working capital adjustment. Depreciation: 2.10 The AO/DRP erred in confirming the order of the TPO in treating the amount of deprecation as non-operating expense. 2.11 The AO/DRP erred in confirming the order of the TPO by failing to take cognizance of the fact that the differential depreciation on account of change in method was accounted in accordance with Accounting Standard 6 as prescribed by the Institute of Chartered Accountants of India (ICAI). 2.12 Without prejudice to the above, the AO/DRP erred in confirming the order of the TPO by failing to note that reversal of depreciation (due to change of method) made in the audited financial statement of FY 13-14 would amount to double transfer pricing adjustment given the fact that in the prior years while computing the IT(TP)A No.102/Chny/2018 - 3 - Transfer Pricing adjustments, the TPO had considered the higher depreciation (under WDV method) as mentioned in the relevant year audited financial statement and arrived at the higher TP adjustments. Entity Level Adjustment: 2.13 The AO/DRP erred in confirming the order of the TPO by making the transfer pricing adjustment, at entity level (which also includes transactions with third parties), instead of restricting the same to the value of international transactions entered with AE’s. 2.1 The Ld. AR advanced arguments assailing the adjustments made by lower authorities. The Ld. AR sought adjustment of custom duty as granted by Tribunal in earlier years. The Ld. AR also sought adjustment of working capital as granted by Ld. DRP in earlier years. Regarding adjustment of depreciation, Ld. AR submitted that there was change in method of depreciation from Written down value (WDV) to Straight line method (SLM) and the effect of the same was given in the financial statements during the year. Therefore, the same should be factored in while computing the assessee’s margins. 2.2 The Ld. CIT-DR, on the other hand, vehemently opposed custom duty adjustment on the ground that this was sixth year of operation and the effect of the custom duty should have been in-built by the assessee in its margins. The assessee was claiming this adjustment from year after year which was unwarranted and unjustified. The Ld. CIT-DR opposed working capital adjustment on the ground that it could not be measured with reasonable accuracy. 2.3 Having heard rival submissions and after due consideration of orders of lower authorities, our adjudication would be as given in succeeding paragraphs. IT(TP)A No.102/Chny/2018 - 4 - Proceedings before Ld. TPO 3.1 The assessee being resident corporate assessee is stated to be engaged as manufacturer of automobile air conditioner, cooling systems, automotive ancillaries, components and other automotive parts. Since the assessee carried out certain international transactions with its associated enterprises (AE), the same were referred to Ld. TPO for determination of Arm’s Length Price (ALP). These transactions were in the nature of import of raw-material, purchase and sale of finished goods etc. The transactions were benchmarked using Transactional Net Margin Method (TNMM) as well as Comparable uncontrolled Price (CPU) method. 3.2 The assessee sought working capital adjustment on the ground that difference in working capital levels between tested party and comparable entities impacted its margins. However, Ld. TPO held that these differences could not be measured with reasonable accuracy. The financial statements would only show opening and closing balances of Debtors and Creditors and not their movement during the year. Further, in respect of companies which are engaged in multiple business segments, such figures would not be available for segment under consideration. Further, the cost of capital would be different for different entities. The assessee is not able to demonstrate that how its working capital position was different from that of comparable entities. 3.2 The assessee also claimed a custom duty adjustment which was denied on the ground that the assessee should have considered the indirect taxes while adopting the pricing strategy. The call taken by the assessee not to absorb the customs duty portion of the imports seems to be conscious business development risk assumed. Therefore, the IT(TP)A No.102/Chny/2018 - 5 - expenditure could not be held to be extra-ordinary. The assessee could not factually demonstrate as to how the customs duty could not be absorbed in the pricing. 3.3 Another plea raised by the assessee was that the depreciation method was changed from Written Down Value Method (WDV) to Straight Line Method (SLM) and therefore, the difference arising therefrom up-to 31/03/2013 was to be considered as non-operative in nature whereas actual depreciation charged during the year was to be considered as operative in nature. However, Ld. TPO rejected the plea. 3.4 Finally, the assessee’s margins (Operating Profit / Operating Revenue) were taken as -2.08% as against margin of 6.01% shown by the comparable entities which was not within the statutory range of + 3% and therefore, the adjustment would be required at entity level. The Arm’s Length Price (ALP) of purchase transactions was computed as Rs.309.51 Crores as against Rs.336.15 Crores shown by the assessee and accordingly, an adjustment of Rs.26.64 Crores was proposed by Ld. TPO. Proceedings Before Ld. DRP 4. Regarding Customs duty adjustment, Ld. DRP held that the decision of Ld. TPO was supported by the decision of M/s Sony India Ltd. V/s DCIT (Delhi Tribunal) wherein such adjustment was held to be not correct in as much as the consideration of duty payment alone would not justify such adjustment and it would be necessary to take into account the cost of components imported along with the customs duty paid thereon for the purpose of comparison with corresponding indigenous components consumed by the comparable. It was observed that local levies such as Sales Tax Should also be considered. In the IT(TP)A No.102/Chny/2018 - 6 - present case, no computations were provided by the assessee for the effect of sales taxes and other local levies. Also, nothing was forthcoming as to whether the price is loaded with the non cenvatable portion of the customs duty. Accordingly, this adjustment was held to be not acceptable. Similar was the view of Ld. DRP in AYs 2012-13 & 2013- 14. The adjustment of working capital was denied by following DRP’s order for AYs 2012-13 & 2013-14. Regarding depreciation, Ld. DRP held that operating expenses means the cost incurred in the previous year by the assessee in relation to international transactions during the course of its normal operations. This would include depreciation also. Therefore, the adjustment could not be granted under TNMM. The plea to restrict the adjustment to the value of international transaction was also rejected. Pursuant to these directions, final assessment order has been passed by Ld. AO on 31.10.2018 wherein total loss of Rs.18.88 Crores has been assessed at income of Rs.6.53 Crores. Aggrieved as aforesaid, the assessee is in further appeal before us. Our findings and Adjudication 5. So far as the customs duty adjustment is concerned, as noted in our order for AY 2009-10, this adjustment has been granted by the Tribunal in AY 2011-12 & 2012-13. The Ld. DRP has granted this adjustment for AY 2010-11. Accordingly, this adjustment has been granted for AY 2009-10 as follows: - 5. We find that this is first year of operation by the assessee. The assessee is dependent on its AE for raw material and bulk of raw material is imported by the assessee from its AE. The import constitutes more than 85% of raw material cost which is approx. 16% for comparable entities. In such a case, the margins of the assessee would be hit by non-cenvatable portion of basic custom duty which would not make such significant impact for comparable entities. In such a case, the difference has to be nullified to make the comparable at par with the assessee. Accordingly, this adjustment should have been granted to the assessee to make the IT(TP)A No.102/Chny/2018 - 7 - margins comparable. In fact, Tribunal, in assessee’s own case for AY 2011-12, ITA No.692/Mds/2016 order dated 25.01.2017, has allowed this adjustment. Following the same, this adjustment has also been allowed by Tribunal in AY 2012-13, ITA No.2560/Mds/2016 order dated 18.08.2017. Pursuant to the same, suitable adjustments have been granted by Ld. TPO for both the years. Similar adjustment has also been granted by Ld. DRP in AY 2010-11. Therefore, respectfully following the earlier orders of Tribunal, we direct Ld. TPO to grant this adjustment. The ground thus raised stand allowed. Thus, following the rule of consistency, we would hold that such adjustment would be available to the assessee provided requisite details and data could be furnished by the assessee to demonstrate that this was extra cost for the assessee in comparison to comparable entities. Therefore, this adjustment is restored back to the file of Ld. TPO with a direction to the assessee to show quantification of the same and substantiate the adjustment. The corresponding grounds raised by the assessee stand allowed for statistical purposes. 6. The Working capital adjustment has been denied to the assessee by following DRP’s order for AYs 2012-13 & 2013-14. The Tribunal has adjudicated the appeal for AY 2012-13 ITA No. 3061/Chny/2017 order dated 23.11.2021 wherein the bench has followed the earlier decision of AY 2011-12 ITA No.692/Mds/2016 and directed Ld. AO to give suitable adjustment against the working capital component while determining the ALP. Thus, following the same, we direct Ld. TPO to grant this adjustment with a direction to the assessee to show quantification of the same and substantiate the adjustment. The corresponding grounds raised by the assessee stand allowed for statistical purposes. 7. Regarding the plea of Ld. AR that depreciation effect up-to 31.03.2013 should be treated as non-operative in nature, the same do not convince us since the assessee has changed its method of IT(TP)A No.102/Chny/2018 - 8 - depreciation. The depreciation is nothing but an allowance and it is due to assessee’s own volition that this adjustment has arisen. Further, the claim of depreciation is integrally connected with the fixed base of the assessee and any such expenditure would be operative in nature only. We concur with the findings of lower authorities, in this regard and therefore, dismiss the grounds raised by the assessee. 8. The last plea of the assessee is that the adjustments, if any, should be restricted to the value of international transactions and not to be computed at the entity level which is inclusive of AE and non-AE transactions. We find that this issue has been decided by us in assessee’s favor for AY 2009-10 as under: - 6. Another plea of the assessee is that the adjustments, if any, should be restricted to the value of international transactions and not at the entity level which is inclusive of AE and non-AE transactions. For the same, Ld. AR relies on various decisions including the recent decision of Chennai Tribunal in M/s Hyundai Motor India Ltd. V/s ACIT (ITA No.3192/Chny/2017 order dated 01.09.2021). The Ld. AR has filed a working to submit that the upward adjustment, computed in this manner, should have been Rs.481.47 Lacs. Concurring with the submissions of Ld. AR, we direct Ld. TPO to verify the same and restrict the adjustment to the value of international transactions in the manner as worked out by Ld. AR. This ground stand allowed for statistical purposes. Taking the same, view we issue similar directions in this year. The assessee is directed to provide quantification of the same. The corresponding grounds stand allowed for statistical purposes. No other ground has been urged before us. IT(TP)A No.102/Chny/2018 - 9 - 9. In the result, the appeal stands partly allowed for statistical purposes. Order pronounced on 08 th June, 2022. Sd/- (MAHAVIR SINGH) उपा23 / VICE PRESIDENT Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद; / ACCOUNTANT MEMBER चे,ई / Chennai; िदनांक / Dated : 08-06-2022 EDN/- आदेश की Wितिलिप अ 8ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकर आयु (अपील)/CIT(A) 4. आयकर आयु /CIT 5. िवभागीय ितिनिध/DR 6. गाड फाईल/GF