DCIT, CORPORATE CIRCLE - 3 (2), CHENNAI V. M/S. YAZAKI WIRING TECHNOLOGIES INDIA PVT. LTD., KANCHIPURAM

ITTPA 52/CHNY/2019

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 0308 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 3 month(s) 14 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 18-10-2022
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 26-09-2022
• Assessment Year: 2013-2014
• Appeal Filed On: 04-07-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 10B

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 आयकरअपीलसं./IT(TP) No.51/Chny/2019 (िनधाCरणवषC / Assessment Year: 2012-13) & आयकरअपीलसं./IT(TP) No.52/Chny/2019 (िनधाCरणवषC / Assessment Year: 2013-14) DCIT Corporate Circle 3(2) Chennai – 600 034. बनाम/ V s . M/s. Yazaki Wiring Technologies India Pvt Ltd (Formerly known as M/s. Yazaki India Pvt Ltd) No. D-7, Industrial Estate, Maraimalai Nagar, Kanchipuram District, Tamilnadu – 603 209. था यी ले खा सं. /जी आ इ आ र सं. /P AN / G I R N o . AAD C S - 3 1 5 2 - M (अ पीलाथ /Appellant) : ( थ / Respondent) अपीलाथ कीओरसे/ Appellant by : Mr. D. Hema Bhupal (JCIT) – Ld. DR थ कीओरसे/Respondent by : Shri. S.P. Chidambaram (Advocate) –Ld. AR सुनवाईकीतारीख/D a t e of He a r i n g : 27-09-2022 घोषणाकीतारीख /Date of Pronouncement : 19-10-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeals by revenue for Assessment Years (AYs) 2012- 13 & 2013-14 arises out of the separate orders passed by learned first appellate authority. The revenue’s appeal for AY 2011-12, ITA - 2 - No.50/Chny/2019 was also heard along with these appeals and the same has separately been disposed-off by us. 2. The appeal for AY 2012-13 arises out of an order passed by learned Commissioner of Income Tax (Appeals)-7, Chennai [CIT(A)] on 22.03.2019 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s 143(3) r.w.s. 144C(5) on 29.03.2016. The grounds raised by the revenue read as under: - 1. The order of the Ld. CIT(A) is contrary to the facts of the case and in law. 2. The Ld. CIT(A) erred in deleting the Transfer Pricing adjustment/addition of Rs.4,23,28,423/- proposed by the Transfer Pricing Officer by comparing the appellant's margin (after rejecting the claims of abnormal material consumption cost adjustment and premium freight adjustment and treating unrealised forex loss as non-operating) with that of two comparables selected by the appellant under TNMM. 3. The Ld.CIT(A) erred in upholding adjustments claimed by the assessee on account of premium freight adjustment, abnormal power costs, abnormal third party costs and realised forex loss, to the profit margin of assessee contrary to Rule 10B(3) read with Rule 10B (l)(e)(iii), which require that comparability adjustments, if any has to be made in the margin of comparables and not in the margin of tested party. 4. The Ld CIT(A) erred in allowing the adjustments to the margins of the tested party without the assessee establishing the need for these adjustments by showing that the comparables were different from the assessee on this account and such differences had an impact on price of imported goods from AE. 5. The Ld.CIT(A) erred in upholding the adjustments claimed by the assessee on account of freight premium, abnormal power costs, abnormal third party costs and realised forex loss, overlooking the fact that Transfer Pricing Officer has already restricted the total Arm's Length Price adjustment proportionately towards AE transactions only (@13.32% from Rs.31 crores to Rs.4 crores and thereby granted double benefit to the assessee for the same costs. 6. The Ld. CIT(A) erred in allowing the adjustment on account of premium freight and abnormal power costs on the basis of documentary evidences produced by the assessee for incurring these expenses, failing to note that an expenditure claimed in P & L A/C and allowed in tax computation cannot be ignored for PLI calculation under TNMM, as the consideration for allowance of an expenditure in normal income computation and its exclusion in the profit calculation for TNMM are different. 7. The Ld CIT(A) erred in allowing the adjustment to profit of assessee on account of abnormal third party consumption, by holding that no TP adjustment can be made, where loss of assessee was more than the value of International Transaction. The Ld. CIT(A) could have at best held that - 3 - TNMM is not the MAM in this case, but not deleted the TP adjustment for this reason. 8. The Ld.CIT(A) erred in treating realised forex loss as non-operating. contrary to the following decisions : Decision of the Hon’ble High Court of Delhi in the case of Principal Commissioner of Income-tax Vs B.C Management Services (P) Ltd., (2018) 89 taxman.com 68 (Delhi) Decision of the Hon’ble High Court of Delhi in the case of Pr.CIT vs Cash edge India (P) Ltd (IT Appeal No.279 of 2016, dated 4.5.2016) Decision of the Hon'ble High Court of Delhi in the case of Pr.CIT Vs Ameriprise India (P) Ltd (IT Appeal No.206 of 2016, dated 23.3.2016). 9. The Ld. CIT(A) erred in holding that no adjustment was warranted on import of goods from AE, as the goods were cleared by the Customs Authority after paying appropriate duty, contrary to ITAT decision in Mobis India Ltd Vs DCIT(2013) 38 Taxman.com 231 (Chennai-Trib). As is evident, the revenue is aggrieved by deletion of certain Transfer Pricing Adjustment as made by Ld. AO in the assessment order. 2. The Registry has noted delay of 31 days in the appeals, the condonation of which has been sought by the revenue on the strength of affidavit of Ld. Assessing Officer. Considering the period of delay, the delay is condoned and the appeals for both the years are admitted for adjudication on merits. 3. The Ld. Sr. DR justified Transfer Pricing Adjustment and assailed the relief granted by Ld. CIT(A) in the impugned order. The ld. AR controverted the arguments and supported the impugned order. Having heard rival submissions and after due consideration of material facts, our adjudication would be as under. Assessment Proceedings 4.1 The assessee being resident corporate assessee is stated to be engaged in design, development and manufacturing of Automotive harness. The assessee entered into international transactions with its Associated Enterprises (AE) which were subjected to determination of Arm’s Length Price (ALP) by Ld. Transfer Pricing Offcicer-3(2) vide - 4 - order dated 29.01.2016. The assessee entered into transaction of purchase and sale of raw material, purchase of plant and machinery, technical support services etc. and benchmarked the same using entity level Transactional Net Margin Method (TNMM) adopting Operating Profit to Operating income as Profit Level Indicator (PLI). It identified 2 comparable entities having PLI of 7.54% as pitied against assessee’s PLI of 15.08% and therefore, no Transfer Pricing adjustment was proposed by the assessee. The dispute is with respect to computation of assessee’s PLI. 4.2 The assessee sought various adjustments in its PLI which include Abnormal consumption cost adjustment, battery cable and relays, Premium freight adjustment etc. Abnormal Cost Adjustment The assessee claimed this adjustment since the assessee had to incur higher consumption cost when compared to its peers. The raw material consumption ratio for import from third party suppliers of the company and that of comparable companies was stated to be 74.64% and 60.37% respectively. Therefore, it was submitted that raw material consumption was higher in case of assessee. The Ld. TPO denied the same on the ground that it was normal occurrence for any business. Premium Freight The assessee claimed this adjustment by submitting that due to heavy demand from Ford India for Figo Model cars, the assessee had to incur extra freight in order to service the demand. This was due to the small size of the stock yard. Therefore, the assessee had to incur premium freight charges to import necessary raw material from the AE and third - 5 - parties. However, the same was denied by Ld. TPO on the ground that such costs may have bene incurred by the comparable entities also. 4.3 The assessee also sought to exclude foreign exchange fluctuation loss from operating costs. Relying upon certain decisions of this Tribunal, Ld. TPO held that if the loss is realized one then the same would from part of operational cost else the same would not form part of operational cost. 4.4 Finally, the assessee’s PLI was revised to -13.29% as against mean PLI of 7.07% of comparable entities. The same resulted into an adjustment of Rs.423.28 Lacs in the hands of the assessee. This adjustment was incorporate in the assessment order dated 29.03.2016. 5. Appellate Proceedings 5.1 Regarding freight adjustment, the assessee inter-alia, submitted that there was substantial increase in sales orders during previous two years from its customers owing to heavy market demand for Ford Figo brand cars. Since the raw material stock-yard was not sufficient to store the materials, the company was compelled to air-lift most of the raw materials in addition to routine shipments received through sea. Hence, the assessee had claimed the differential premium freight over and above shipment charges (freight charge of components air lifted) as extraordinary and excluded the same from its margin computation. 5.2 Regarding raw material consumption, the assessee submitted that it had to incur higher consumption cost when compared to its comparable companies. As the third-party raw material consumption ratio (excluding AE imports) of assessee was more than that of the comparable entities, it had claimed the adjustment of differential consumption cost in PLI. - 6 - 5.3 Regarding foreign exchange loss, the assessee submitted that the same has been treated as non-operating and on parity basis, the same has been excluded from the margins of the comparable entities also. 5.4 To support economic adjustments, the assessee relied on the decision of this Tribunal in Igarashi Motors India Vs. ACIT [ITA No.2257/Mds/2012] wherein the bench held that while computing the margins under TNMM, proper weightage has to be given to extraordinary items and the same has to be excluded while finalizing the Arm's Length Price (ALP) computation. To support the argument of forex losses, reliance was placed on the decision of this Tribunal in the case of Hanil Tube India Pvt. Ltd. (ITA No.1037/Mds/2014). 5.5 The assessee also submitted factual data in relation to premium freight cost incurred, invoice wise listing along with the name of the supplier in respect of the raw materials air lifted, sample invoices with respect to the raw materials air lifted, working of consumption ratios etc. 5.6 Concurring with assessee’s submissions, Ld. CIT-DR allowed the issue in assessee’s favor by observing as under: - 3. I have gone through the entire Transfer Pricing orders and the arguments and submissions made by the AR of the assessee company. Post going through the entire facts and submissions, my views are as follows: • As regards to premium freight adjustment, the Appellant company had provided detailed submissions including the computation of excess freight charges due to air lifting of materials due to limited capacity of its stock yard. • Similarly, with respect to abnormal power cost also, detailed calculation relating to DG set cost vis a vis normal power consumption cost was provided. • As regards to the above two adjustments, given the data submitted and also relying on the Chennai Jurisdictional Tribunal case of Igarashi Motors India Ltd (ITA No. 2257/Mds/2012), I am of the opinion that the said extraordinary adjustments should be allowed to arrive at the proper arm's length price computation. Hence, the grounds of the assessee are allowed. - 7 - 4. As regards to Abnormal third party consumption adjustments claimed by the Appellant company, I am unable to appreciate the difference in consumption as an abnormal item. In fact, the learned AR had admitted that the same is not an abnormal item but is mere differential of the third party consumption excluding related party imports. The learned AR explained that the objective of this adjustment is to only prove that the loss incurred by the Appellant company is not due to international transactions entered with related parties but due to higher third party consumption cost of appellant company vis a vis comparables. Having said that, there is force in the learned ARs argument that from the given facts, even if the Appellant company had not undertaken any international transactions during the year then also it would have incurred losses only. Hence, in such a scenario, comparing the margin of the appellant company with that of comparable companies and undertaking transfer pricing adjustment is not warranted. Based on the above facts and also relying on Jurisdictional Chennai Tribunal judgement of Igarashi Motors India Vs. ACIT [ITA No.2257/Mds/2012, the ground of the appellant company is allowed. 5. Also, it is pertinent to note that the imports of goods from AEs were cleared by customs authorities after paying appropriate customs duty. 6. Now taking up the last issue on forex adjustment, given that forex fluctuations are on account of market forces and cannot be controlled by Appellant company/ AEs, I am of the view that such forex loss should be considered as a non-operating item for margin computation. In this regard, reliance is placed on safe harbour provisions mentioned supra and jurisdictional Chennai Tribunal judgement in case of Hanil Tube India Private Ltd (ITA No. 1037/Mds/2014).' Hence, ground of the appellant company is allowed. Therefore, considering the entire gamut of facts and in the circumstance of the case and following the ratio of the above cited decisions, I am of the considered view that the economic adjustments claimed by the assessee should be allowed. Accordingly, the AO is directed to delete the addition. The grounds of the appeal of the assessee is allowed. Aggrieved, the revenue is in further appeal before us. Our finding and Adjudication 6. We find the issue to be in a narrow compass and is related with computation of assessee’s PLI. So far as the premium freight adjustment is concerned, we find that the assessee has fairly substantiated the fact that it was required to air-lift the material due to heavy demand in the market and had to incur abnormal costs. The assessee has supplied the requisite details and excess freight paid on each of the invoices. Similar is the situation with respect to abnormal power costs. The assessee was successful in establishing that it had to - 8 - incur additional power cost in the manufacturing process. To make the assessee’s PLI comparable with its peers, these two adjustments, in our opinion has rightly been granted by Ld. CIT(A). The decision of this Tribunal in Igarashi Motors India Vs. ACIT (ITA No.2257/Mds/2012) supports the grant of adjustment. Therefore, no interference, to that extent is required in the impugned order. 7. The abnormal third-party consumption adjustment has been granted by Ld. CIT(A) on the ground that had the assessee not undertaken any international transactions, it would have still incurred losses and therefore, comparing the margin of the assessee with that of comparable companies and undertaking TP adjustment is not warranted. The same, in our opinion, is not a correct reasoning. The Ld. CIT(A), in para-4, has noted that as per assessee’s submissions also, this is not an abnormal item. The objective of Transfer Pricing mechanism is to arrive at ALP of the international transactions and this reasoning applied by Ld. CIT(A) to grant this adjustment could not be upheld. Therefore, this adjustment has rightly been denied to the assessee by Ld. TPO. We order so. 8. Similar is the situation with foreign exchange losses. In a global environment, the assessee would be exposed to such risks and the same could not be termed as abnormal or non-operating item in nature. The foreign exchange fluctuations arise due to exchange differences during the year since the assessee would be dealing in multiple currencies. Such risks are normal in any business. Further, this adjustment could not be granted unless it was shown that similar data was available for comparable entities and the same was excluded to compute their respective PLI. Nevertheless, this item, in our opinion, - 9 - is still an operating item. The definition as provided under safe harbour provisions apply in a specific situation only which is not the case here. Therefore, this adjustment is not to be granted. No other ground has been urged before us. The appeal stands partly allowed in terms of our above order. The Ld. AO / TPO is directed to re-compute the TP adjustment in terms of our above order. 9. It is admitted position that facts as well as issues are pari-materia the same in AY 2013-14. The grounds raised by the revenue are identical. The adjudication in the impugned order is substantially the same. Therefore, our decision as for AY 2012-13 shall mutatis mutandis apply to this year also. In the result, the revenue’s appeal stands partly allowed in similar manner. 10. Both the appeals stand partly allowed. Order pronounced on 19 th October, 2022. Sd/- (MAHAVIR SINGH) उपा23 /VICE PRESIDENT Sd/- (MANOJ KUMAR AGGARWAL) लेखासद; /ACCOUNTANT MEMBER चे+ई/ Chennai; िदनांक/ Dated : 19-10-2022 JPV JPVJPV JPV आदेशकीWितिलिपअ8ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकरआयु (अपील)/CIT(A) 4. आयकरआयु /CIT 5. िवभागीय ितिनिध/DR 6. गाड फाईल/GF