M/S DOOWON AUTOMOTIVE SYSTEMS INDIA PRIVATE LIMITED, KANCHEEPURAM V. ACIT CORPORATE RANGE 1, CHENNAI

ITTPA 7/CHNY/2018

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 4314 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 17-05-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 28-02-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Set aside
• Section: 144C

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.07/Chny/2018 (िनधाCरण वषC / Assessment Year: 2009-10) 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 : 18-05-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2009-10 arises out of final assessment order dated 29.12.2017 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 27.12.2017 u/s 144C(5) of the Act. The IT(TP)A No.07/Chny/2018 - 2 - assessee has raised multiple grounds of appeal. However, during hearing, Ld. AR sought adjustment of custom duty (the credit of which is not available to the assessee) as granted by the Tribunal in subsequent years. The Ld. AR submitted that this is the first year of operations and therefore, the aforesaid adjustment ought to have been granted to the assessee. The Ld. AR, also filed additional ground of appeal to submit the Transfer Pricing (TP) adjustment should be restricted to the value of international transactions as carried out by the assessee with its Associated Enterprises (AE). Since the additional ground does not require appreciation of new facts, the same is admitted. Thus, the grounds to be adjudicated by us are as under: - 2.3 The AO/DRP erred in confirming the action of TPO by not allowing the differential adjustment for basic customs duty without appreciating fact that percentage of imported goods consumed by Doowon India is 85% as against 16.10% by comparable companies of the case. 2.4 The AO/DRP ought to have appreciated that that due to the initial year of business operations, the 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. 2.5 The AO/ DRP ought to have appreciated that the comparable companies would not have incurred customs duty liability on goods procured locally and as such the custom duty paid by the Appellant will have to be eliminated while undertaking comparability analysis. 2.6 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 customs duty adjustment. 2.7 The AO/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. 2.8 The AO/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. Additional Grounds of Appeal 1. The AO/DRP erred in 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 AEs. IT(TP)A No.07/Chny/2018 - 3 - 2. Having heard rival submissions and after due consideration of orders of lower authorities, our adjudication would be as given in succeeding paragraphs. This is second round of appeal since the matter, vide Tribunal order dated 19.05.2016 in ITA No. 852/Mds/2014, was restored back to Ld. DRP with the following directions: 6. We have carefully gone through the provisions of Sec. 144C of the Act. Sec. 144C(5) says that the DRP shall issue 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 Act 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 opportunity of being heard to the assessee. Therefore, the scheme of the international transaction under the Income-tax Act, enables the Assessing Officer to complete the assessment in conformity with the direction of the DRP. Since an opportunity was given before the DRP, Section 144C(13) specifically provides that no further opportunity shall be given to the assessee. In this case, the DRP directed the TPO to apply TNMM with adjustment on account of working capital. On the basis of this direction, the TPO has passed another order dated 22.1.2014 and subsequently, the Assessing Officer gave effect to the order of the TPO dated 22.1.2014. When the mandate of sec. 144C(13) is to pass an assessment order in conformity with the direction of the DRP, the TPO has no role to pass a subsequent order after the direction given by the DRP. In this case, the Assessing Officer has not passed the assessment order in conformity with the direction of 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 dated 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 was not empowered to pass any order subsequent to the direction of the DRP. The Assessing Officer is expected to pass an assessment order in conformity with the direction of the DRP without any 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 assessee, the DRP made adjustment with regard to capacity utilization and customs duty adjustment without issuing any notice. This Tribunal 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 and clear so that the Assessing Officer can implement the same without any intervention either by the TPO or any authority. If the DRP directs the TPO to consider any of the things, that would amounts to violation of the procedure laid down in sec. 144C of the Act. If the 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 Officer to make the adjustment as provided under the scheme of the Income-tax Act. Accordingly, we are unable to uphold the order of the authorities below. Hence, the same is set aside and the entire issue is remitted back IT(TP)A No.07/Chny/2018 - 4 - to the file of the Assessing Officer. The Assessing 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 assessee 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 between. 3. Pursuant to these directions, Ld. DRP has issued directions in its order dated 27.12.2017 which has been given effect to by Ld. AO vide order dated 29.12.2017 wherein the income of the assessee has been determined at Rs.608.14 Lacs. However, the assessee preferred rectification before Ld. DRP, which were disposed-off vide order dated 26.03.2018. Pursuant to the rectified directions, an order has been passed by Ld. AO on 27.03.2018 wherein the income of the assessee has been re-determined at Rs.176.29 Lacs. In the meantime, the assessee has preferred further appeal to Tribunal against directions dated 27.12.2017 which is the present appeal before us. 4.1 To understand the dispute, it would be imperative to take note of the sequence of events as enumerated in Tribunal order dated 19.05.2016. 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 and import of capital items. The transactions were benchmarked using Transactional Net Margin Method (TNMM) taking Operating profit / Operating revenue (OP/OR) as Profit Level Indicator (PLI). However, the method as well as few of the IT(TP)A No.07/Chny/2018 - 5 - comparables as selected by the assessee was rejected by Ld. TPO. Ultimately, Ld. TPO revised the PLI and proposed Transfer Pricing Adjustment of 4.23% of assessee’s sales as additional profits which resulted into an addition of Rs.353.11 Lacs in the hands of the assessee. 4.2 Upon further appeal, Ld. DRP accepted TNMM method and allowed working capital adjustment. However, Ld. DRP confirmed the comparable selected by Ld. TPO. The Ld. DRP, without giving any notice of enhancement, enhanced the TP adjustment since Ld. DRP rejected capacity utilization and custom duty adjustment without issuing any enhancement notice. The directions of Ld. DRP enhanced the TP adjustment from Rs.353.11 Lacs to Rs.1089.83 Lacs. Upon further appeal, Tribunal restored the matter back to the file of Ld. DRP with certain direction as extracted in preceding para-2. 4.3 Pursuant to the same, directions have been issued by Ld. DRP vide order dated 27.12.2017. During set-aside proceedings, the assessee, inter-alia, submitted that this was the first year of commercial operation and it imported huge raw material to the extent of 85% as against 16.10% imported by comparable entities. To import the goods, the assessee had to incur additional cost in the form of basic customs duty which is non-cenvatable as compared to the comparable companies. Therefore, the adjustment of the same should be granted to the assessee. Reliance was placed on the decision of this Tribunal in assessee’s own case in ITA No.692/Mds/2016 for AY 2011-12 wherein such an adjustment was allowed by the Tribunal. However, the plea was rejected by Ld. DRP and finally, the adjustment was computed at Rs.1089.83 Lacs. Consequently, Ld. AO, vide order dated 29.12.2017, IT(TP)A No.07/Chny/2018 - 6 - added the differential of Rs.608.35 Lacs (Rs.1089.83 Lacs – Rs.481.47 Lacs) to the income of the assessee. 4.4 The assessee sought rectification of Ld. DRP dated 27.12.2017 which was disposed-off by Ld. DRP in directions dated 26.03.2018. In the directions, Ld. DRP revised the upward adjustment to Rs.657.97 Lacs which was given effect to by Ld. AO vide order dated 27.03.2018 wherein the income of the assessee was recomputed as Rs.176.29 Lacs. Aggrieved by final assessment order dated 27.12.2017, the assessee is in further appeal before us wherein Ld. AR has sought custom duty adjustment as granted by Tribunal in subsequent year. Another plea of Ld. AR is that the adjustment should be restricted to the value of international transactions carried out by the assessee with its AEs. Our findings and Adjudication 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 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 IT(TP)A No.07/Chny/2018 - 7 - 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. 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. 7. The appeal stands partly allowed in terms of our above order. Order pronounced on 18 th May, 2022. Sd/- (MAHAVIR SINGH) उपा23 / VICE PRESIDENT Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद; / ACCOUNTANT MEMBER चे-ई / Chennai; िदनांक / Dated : 18-05-2022 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