M/S HSI AUTOMOTIVES PRIVATE LIMITED,KANCHIPURAM V. DCIT-TP-2, CHENNAI

ITTPA 7/CHNY/2024

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The case revolves around the appeal by M/s. HSI Automotives Pvt Ltd. against the order of the Deputy Commissioner of Income Tax, Transfer Pricing, Chennai, which pertained to the assessment year 2020-21. The primary contention was regarding the arm's length pricing of technical assistance fees paid to an AE, which amounted to Rs.1,71,67,882. The TPO had treated this amount as nil under the 'Other Method' of transfer pricing, rejecting the Transaction Net Margin Method (TNMM) adopted by the assessee for all international transactions. The assessee argued that the TPO failed to provide a detailed reasoning for the adoption of the 'Other Method' and did not establish the cost of the technical assistance as nil with a comparable transaction. The DRP upheld the TPO's decision, leading to the appeal before the Tribunal.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 472145 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 18 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 14-11-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 09-09-2024
• Assessment Year: 2020-2021
• Appeal Filed On: 27-03-2024
• Other Referred Cases: Teejay India (P) Ltd. Vs. ACIT, Capgemini Technology Services India Ltd. Vs. ACIT, Tata Blue Scope Steel Ltd. Vs. DCIT, Societe General Global Solutions Private Limited vs. DCIT, Pr.CIT vs. AVERY DENNISON (INDIA) PVT LTD, Cummins India Ltd vs. Addl. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A. SASIKUMAR
• Assessee Lawyers: H. CHANDRASEKARAN
• Keywords: Transfer pricing; International transaction; Onus to prove
• Section: 143(3)

Judgement Text

" आयकर अपीलीय अिधकरण,‘डी’ ᭠यायपीठ,चे᳖ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI ᮰ी महावीर ᳲसह, उपा᭟यᭃ एवं ᮰ी एस. आर.रघुनाथा, लेखा सद᭭य के समᭃ BEFORE SHRI MAHAVIR SINGH, HON’BLE VICE PRESIDENT AND SHRI S. R. RAGHUNATHA, HON’BLE ACCOUNTANT MEMBER आयकरअपीलसं./IT(TP)A No.: 7/Chny/2024 िनधाᭅरणवषᭅ / Assessment Year: 2020-21 M/s. HSI Automotives Pvt Ltd., Survey No. 73, No. 100, A Block, Thandalam Post, Mevalurkuppam, Sriperumbudhur Taluk, Kanchipuram – 600 102. [PAN: AAACH-2804-E] v. DCIT – TP 2(1), Chennai. (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent) अपीलाथᱮकᳱओरसे/Appellant by : Shri. H. Chandrasekaran, CA ᮧ᭜यथᱮकᳱओरसे/Respondent by : Shri. A. Sasikumar, CIT सुनवाई कᳱ तारीख/Date of Hearing : 09.09.2024 घोषणा कᳱ तारीख/Date of Pronouncement : 14.11.2024 आदेश /O R D E R PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER: This appeal filed by the assessee is directed against the order passed by the learned Deputy Commissioner of Income Tax, Transfer Pricing , Chennai, dated 27.03.2023 and pertains to assessment year 2020-21. 2. The assessee has raised the following grounds of appeal: “General:- :-2-: IT(TP)A. No: 7/Chny/2024 For that the assessment order u/s 143(3) r.w.s144C(13) r.w.s 144B of the Income Tax Act, 1961 is opposed to law/facts and circumstances of the case. ALP of Payment of Technical Assistance fee of Rs.1, 71,67,882 being treated as Nil under Other Method: 1. The Learned TPO failed to give a speaking order explaining the reason for adoption of other method for arriving ALP of technical assistance fees, whereas the appellant adopted TNMM method for all International transactions. 2. The Learned TPO failed to establish the cost of technical assistance fee as NIL with a comparable transaction selected by the TPO and also has not established that the technical study was not conducted to come to the conclusion as the cost of technical assistance as NIL. 3. The DRP failed to consider the fact that 41 foreign technical teams came to India, stayed in India and spent 915 man days and improved the system as a whole and bring them to common international standards in all the areas including fixing stock level, manufacturing activity, storing activity, logistics movements, credit rating of customers, fixing credit periods, reducing the lead time of import and overall improvement in the MIS system. 4. The TPO and DRP failed to consider that the same level of operation maintained in the COVID year FY 2020-21 because of the improvement and suggestions by the technical team. 5. The DRP and TPO failed to consider that because of the continuous study and implementation of suggestions by the technical team, the turnover increased to Rs.548 crores. 6. The DRP and TPO failed to consider that even after debiting the technical fee of Rs.1, 71,67,882, our transactions with AE are at ALP and our profit indicators are at par with comparables. General For these grounds and such other grounds that may be adduced before or during the hearing of the appeal, it is prayed that the Hon'ble Tribunal may be pleased to delete the disallowances or pass such other orders as the Hon'ble Tribunal may deem fit.” 3. The brief facts of the case are that, the assessee company is having its manufacturing facility at Sriperumbudur, producing major products such as Rubber Profile, Low Pressure Hose, PVC Compound and others and weather strips. The company caters mostly to :-3-: IT(TP)A. No: 7/Chny/2024 Original Equipment Manufacturers (OEM) like Hyundai Motors India Ltd, Ford India and General Motors India. The assessee filed its return of income for the A.Y. 2020-21 on 18.11.2020 admitting total income of Rs.5,95,83,260/- and shown a book profit of Rs.8,90,95,250/- under MAT. The case was selected for scrutiny under CASS and statutory notices were served to assessee. The reference u/s.92CA of the Act was made to TPO after obtaining approval of the ld.PCIT for determination of Arm’s Length price with reference to all the transactions reported by the assessee. The TPO passed order u/s.92CA(3) of the Act dated 27.03.2023 proposed downward adjustment of Rs.1,71,67,882/-. Subsequently the AO passed a draft assessment order u/s.144C(1) of the Act on 28.04.2023. In turn the assessee filed objections before the DRP-2, Bengaluru and after considering the submissions of the assessee the DRP-2, confirmed the action of the TPO by dismissing the objections of the assessee by passing an order dated 24.01.2024. The AO passed an order u/s.143(3) r.w.s.144C(130 r.w.s. 144B of the Act dated 01.02.204 by adopting the downward adjustment as per the directions of the TPO/DRP. 4. Before the DRP, the assessee stated that the ld.TPO has erred in making the adjustment of Rs.1,71,67,882/- to the income of the :-4-: IT(TP)A. No: 7/Chny/2024 assessee by disallowing the technical assistance fees paid to the AE, without considering the detailed note with respect to the services rendered by the AE in determining the ALP of the said transaction as NIL by holding as under: “2.3 Having considered the submission and taking cognizance of the Article 1 of the Service agreement between the assessee and the AE, the assessee was ought to produce the evidence regarding the request for the requirement and kind of services to be rendered by the AE. However the assessee could not produce any credible evidence about the services actually rendered by the personnel deputed by the AE on time to time. The relevant extract of the agreement is as under:- ARTICLE 1. SERVICES 1. Service Recipient shall request the Service Provider the requirements under this agreement and the Service Provider shall consult the Service Recipient before hand about the services to be rendered. As it is clear from the above that the a prior communication had to be made by the assessee to its AE regarding the requirement and kind of services required, since the assessee fails to do so, we deem it fit not to interfere with the order of the AO/TPO. 2.4Mere submission of the travelling bills/tickets etc do not prove the benefit test derived from the visits of those personnel. The assessee could not justify its claim that the Services were technical and not incidental, as there is no proof before the AO or before the Panel about the kind of services actually rendered by the AE. 2.5 We also do not agree with the contention of the assessee that the AO could not establish the fact that the services were not technical, in this regard we are of the opinion that onus to prove that the services availed by the assessee were actually technical and the assessee had derived benefit from those services, is on the assessee, which the assessee could not discharge in the form of supporting documents. 2.6 Further the assessee has claimed that there was increase in turnover of the assessee and hence it is technical services In this regard we note that the assessee could not demonstrate before us how the visit of the personnel impacted the turnover. Therefore, we do not merit in this contention of the assessee. 2.7 Further with regard to the contention that the AO has not chosen any comparable to determine the ALP of the transaction, we are of the opinion that the other method is a residual method and it is applicable in the case of the assessee. All other methods require :-5-: IT(TP)A. No: 7/Chny/2024 details about the nature of transaction, risk involves, type of product/services availed. However in the case of the assessee, the nature of the services availed by the assessee and the benefit derived from those services are not made available by the assessee to the Panel, which caters the requirement of exact comparability in an uncontrolled scenario. Therefore, we are inclined with the method adopted by the TPO to determine the ALP of the transaction. Further we have also perused the case laws relied upon by the assessee, and upon perusal of the case laws we note that the cases are distinguishable on facts and are not relevant with the present case. 2.8 In view of the above-mentioned points, the Panel is of the considered opinion that the TP study of the assessee is flawed and the TPO as per the provisions of section 92C(3)(c) read with section 92CA has rightly rejected the TP study. Accordingly, all the objections raised by the assessee stand disposed off.” Aggrieved by the order of the AO u/s.143(3) r.w.s.144C(130 r.w.s. 144B of the Act, the assessee is before us. 5. The Ld.AR of the assessee submitted that the assessee adopted Transaction Net Margin method for all the international transactions. The TPO adopted other method for benchmarking Technical assistance fee. The reason for adoption of other method has not been detailed in TPO order. The said issue was raised as an objection before the Ld. DRP and the DRP upheld TPO's contention for the reason that the assessee did not make available the nature of services and benefits from those services before the DRP. 5.1 The Ld.AR further stated that the copy of technical assistance agreement, invoice and a detailed note on technical assistance :-6-: IT(TP)A. No: 7/Chny/2024 service was made available to the TPO during TP assessment proceedings. Also the details of technical teams who visited India, proof of their visit and the nature of services rendered by them were made available and explained before the Ld. DRP. 5.2 The Ld.AR stated that the TPO failed to establish the cost of technical assistance fee as Nil with a comparable transaction and also has not established that the technical study was not conducted to come to the conclusion as the cost of technical assistance as NIL. The Ld.AR stated that detailed note on technical assistance service was furnished during the TP proceedings, the TPO has failed to appreciate the same. 5.3 The Ld.AR also stated that, before the Ld.DRP, proof of technical team who visited India was furnished and the details of activity carried on by the team was explained during the DRP proceedings. The need and benefits of such service requirements was also explained during the DRP proceedings. The Ld. DRP failed to consider the fact that 41 foreign technical team came to India, stayed in India and spent 915 man days and improved the system as a whole and bring them to common international standards in all the areas including fixing stock level, manufacturing activity, storing :-7-: IT(TP)A. No: 7/Chny/2024 activity, logistics movements, credit rating of customers, fixing credit periods, reducing the lead time of import and overall improvement in the ERP and MIS systems. The entire detailed chart of Team visited, their stay, Number of days, staying allowance and other charges paid (PB page Nos. 49 to 79) are submitted by the ld.AR in support of the technical assistance given by the AE. 5.4 The detailed explanation which was made during DRP proceedings are produced below:- 1. M/s. HSI Automotives Private Limited is a manufacturer of Rubber products to Original Equipment Manufacturers(OEM) , particularly to Hyundai Motors Limited. 2. HSI is an Indian subsidiary of M/s. Hwaseung R & A Co Ltd, South Korea. The parent company has got subsidiary companies for supply of rubber products to Hyundai Motors Limited throughout the world. 3. Hwaseung R & A Co Ltd has manufacturing units in the following countries: South Korea, China, USA, India, Turkey, Brazil, Mexico, Vietnam, Germany. 4. ERP was installed in the year 2018-19. :-8-: IT(TP)A. No: 7/Chny/2024 5. To confirm the uniformity and constant upgradation of system, the Head Office, Hwaseung R & A Co Ltd has established group for spot analysis, enhancement of efficiency and uniformity in all levels. 6. There are several groups to do the audit and spot inspection for overall enhancement of efficiency and uniformity in the field of Production, Upgradation of machineries, Upgradation of procedure for production, Labour efficacy, HR related matters, Taxation group, Finance, Accounting study group and MIS group. 7. These groups will take up the assignments in different times, visit the units periodically to achieve the target. 8. This assignment was introduced from the financial year 2019-20, after implementation of ERP in all levels. 9. During the year 2019-20, several team has come from Parent company and conducted the Audit. One bill was raised for the Calendar year 2019 for the audit conducted up to December 2019 and the other provision entry was made for the quarter ended 31.03.2020 based on the bill raised by the Head Office. 10. The Ld.AR also stated that in the result of Technical support of the AE, the turnover of the assessee has increased from Rs.506 Crores to Rs.548 Crores. :-9-: IT(TP)A. No: 7/Chny/2024 5.5 Further, the ld.AR also argued that the TPO has not established that the technical assistance team not visited the factory to arrive the cost as NIL. The Ld.AR also relied on the following decisions of the co-ordinate benches, wherein the identical issue has been considered and held in favour of the assessee: - Teejay India (P) ltd. Vs.ACIT – ITA No.152/Viz/2021 – (A.Y.2016-17) dated 23.01.2023 - Capgemini Technology Services India ltd. Vs.ACIT – IT(TP)A No.181/Bang/2019 – (A.Y.2012-13) dated 17.06.2022. - Tata Blue Scope Steel ltd. Vs.DCIT – ITA No.567/Pun/2016 (A.Y.2011-12) and ITA No.510/Pun/2017 – (A.Y.2012-13) dated 30.01.2020 In light of the above submissions, arguments and the decisions of the Tribunal the ld.AR prayed for setting aside the order of the AO and allow the appeal of the assessee. 6. Per contra, the Ld.DR relied on the orders of the TPO / DRP and prayed for dismissing the appeal of the assessee, as the expenditure is not related to the manufacturing activity of the assessee. 7. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. Admittedly, the assessee has obtained the technical support from :-10-: IT(TP)A. No: 7/Chny/2024 the AE and made payments accordingly. We note that the assessee has furnished the entire chart of the team visited, their duration of stay in India, staying and other allowance paid to them before the TPO/DRP, which have not been appreciated while framing the assessment. We do not agree with the TPO, who has failed to establish the cost of technical assistance fee as NIL with comparable transactions selected. We also note that the TPO has not given any reason for having accepted the entire international transactions which have been evaluated under TNMM method, except the technical assistance fees. We have observed that the assessee’s turnover also has increased from Rs.506 Crores to Rs.548 Crores. The identical facts have been dealt by the Vishakhapatnam Tribunal in the case of Teejay India (P) ltd.(supra), and decided in favour of the assessee holding as under : “11. With respect to Ground No.5, the assessee has agitated against the disallowance of technical support service fee paid. The Ld. AR argued that the assessee has submitted the technical support services agreement before the Ld. TPO. The Ld. AR vehemently argued that the technical support services fee was incurred wholly and exclusively for the purpose of business operations. The Ld. AR also further submitted that technical services fee from its AE ie., Teejay Lanka PLC helped the assessee in achieving higher quality and efficiency standards in its manufacturing process and accordingly, the technical support service fee Rs. 88,44,539/- was paid to its AE. The Ld. TPO has erred in rejected the aggregation approach of the assessee and has held that the assessee has failed to justify the receipt of technical support services which are closely linked to the manufacturing activity. The Ld. AR therefore submitted that the Ld. TPO has therefore rejected the aggregation approach followed by the assessee. The Ld. AR relied on the decision of the Coordinate Bench of ITAT in Societe General Global Solutions Private Limited vs. DCIT in IT(TP)A No. 2580/Bang/2017. The Ld. AR also relied on the decision of the Hon’ble Delhi High Court :-11-: IT(TP)A. No: 7/Chny/2024 in the case of Pr.CIT vs. AVERY DENNISON (INDIA) PVT LTD. Per contra, the Ld. DR submitted that no documentary evidence for the services rendered was provided by the assessee and no explanation was furnished as to how commercially it enhanced the productivity. Contending the arguments of the Ld. DR, the Ld. AR submitted that the technical support services fee paid by the assessee during the impugned assessment year increased the sales by 33% when compared to the previous year. The Ld. AR submitted that the turnover of the assessee which stood at Rs. 218,83,46,604/- during the FY 2014-15 increased to Rs. 291,55,18,749/- during the FY 2015-16 solely on account of improvement in the productivity arising out of the technical support services fee payments made to AE. Further, the Ld. AR submitted that the technical support services fee was paid only in the impugned assessment year and not in the subsequent assessment years. 12. We have heard both the parties and perused the material available on record and the orders of the Ld. Revenue Authorities. Admittedly we find that there is an increase in the turnover of 33% as submitted by the Ld. AR. It is also found that the Ld. AR submitted that Technical Services Agreement before the Ld. TPO and therefore the contention of the Ld. DR that no documentary evidence was provided could not be accepted. The issue with respect to the aggregation approach followed by the assessee for the purpose of calculation of technical support service fee as submitted by the Ld. AR, it is found that the sale and purchase operations are closely linked transactions for the purpose of payment of technical support service fee. The Hon’ble Delhi High Court in the case of Pr.CIT vs. AVERY DENNISON (INDIA) PVT LTD held as follows: “3. The Commissioner of Income Tax (Appeals) [CIT(A)] on appeal restricted the transfer pricing adjustment to Rs. 1,66,18,290/-. The contention of the assessee was that agreement between the assessee and its AE was a composite one and could not be split up for the purposes of holding that some services are at arm’s length and some are not. The ITAT appears to have agreed with the above contention of the assessee on viewing the agreement as a whole. It was not within the purview of the TPO to determine if some of the services resulted in any actual benefit to the assessee or not.” 13. Further, the Coordinate Bench of the ITAT in in Societe General Global Solutions Private Limited vs. DCIT (supra) has held relying on the decision of the Pune Bench of the Tribunal in the case of Cummins India Ltd vs. Addl. CIT, 53 taxmann.com 53 (Pune Trib.) that for closely linked transactions it is not necessary that the transactions need to be identical or even similar. 14. In the instant case, the Ld. AR submitted that it is a composite agreement and it need to be aggregated for the purpose of payment of technical support services fees which has resulted in increase in the productivity during the impugned assessment year. We find merit in :-12-: IT(TP)A. No: 7/Chny/2024 the argument of the Ld. AR and judicially following the above precedents, we are inclined to allow this ground raised by the assessee.” 8. In the present facts and circumstances of the case and respectfully following the decision of the Tribunal(supra), we are of the considered view that the TPO / DRP have erred in treating the cost of technical assistance fee as Nil for determining the ALP and hence we delete the disallowance of the Technical assistance fees of Rs.1,71,67,882/- by allowing the grounds of appeal of the assessee. 9. In the result the appeal of the assessee is allowed. Order pronounced in the court on 14th November, 2024 at Chennai. Sd/- (महावीर िसंह ) (MAHAVIR SINGH) उपा᭟यᭃ/Vice President Sd/- (एस. आर.रघुनाथा) (S. R. RAGHUNATHA) लेखासद᭭य/Accountant Member चे᳖ई/Chennai, ᳰदनांक/Dated, the 14th November, 2024 JPV आदेशकीŮितिलिपअŤेिषत/Copy to: 1. अपीलाथŎ/Appellant 2. ŮȑथŎ/Respondent 3.आयकर आयुƅ/CIT – Chennai 4. िवभागीय Ůितिनिध/DR 5. गाडŊ फाईल/GF "