M/S. ZF RANE AUTOMOTIVE INDIA PRIVATE LIMITED,CHENNAI V. DCIT,NON CROP CRICLE-8(1), CHENNAI

ITTPA 53/CHNY/2024

AI Insights

The case involves M/s. ZF Rane Automotive India Private Limited, which appealed against the order of the Deputy Commissioner of Income Tax concerning the assessment year 2020-2021. The primary issues revolved around the treatment of export incentives, cash discounts, and the selection of comparable companies in transfer pricing assessments. The Tribunal examined whether these items should be classified as operating or non-operating incomes and whether certain companies should be included as comparables for benchmarking purposes. The Tribunal's decision emphasized the need for a consistent approach in treating similar items across the assessee and comparable companies.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 714745 (ITAT-CHENNAI)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 04-08-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2020-2021
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V.SREENIVASAN LD.
• Assessee Lawyers: S.P. CHIDAMBARAM LD; WAY OF GROUND OF APPEAL NO. . IS
• Keywords: Set aside; Opportunity of being heard; Additional evidence; Transfer pricing; International transaction; Business expenditure; Depreciation
• Section: 37; 28

Judgement Text

" आयकर अपीलीय अिधकरण, डी’ Ɋायपीठ, चेɄई IN THE INCOME TAX APPELLATE TRIBUNAL , ‘D’ BENCH, CHENNAI ŵी मनु क ुमार िगįर ,Ɋाियक सद˟ एवं ᮰ी अिमताभ शुƑा, लेखा सद᭭य के समᭃ BEFORE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER आयकर अपील सं./ IT(TP)A No.53/Chny/2024 (िनधाŊरणवषŊ / Assessment Year: 2020-21) M/s. ZF Rane Automotive India Private Limited, Maithri, 132, Cathedral Road, Gopalapuram, Chennai-600 086. बनाम / Vs. DCIT Non-Corporate Circle-8(1) Chennai. ˕ायीलेखासं./जीआइआरसं./PAN/TAN No. AAACR-3147-C (अपीलाथŎ/Appellant) : (ŮȑथŎ / Respondent) अपीलाथŎकीओरसे/ Appellant by : Shri S.P.Chidambaram (Advocate) – Ld.AR ŮȑथŎकीओरसे/Respondent by : Shri AR.V. Sreenivasan (CIT) -Ld. Sr.DR सुनवाईकीतारीख/Date of Hearing : 06-05-2025 घोषणाकीतारीख /Date of Pronouncement : 04-08-2025 आदेश / O R D E R Per Manu Kumar Giri, JM: This appeal by the Assessee is arising out of the order of the Deputy Commissioner of Income Tax, Non-Corporate Circle-8(1), Chennai passed u/s.143(3) r.w.s. 144C(13) r.w.s 144B of the Income Tax Act, 1961 (in short ‘’the Act’) vide order dated 19.07.2024 for assessment year 2020-2021. 2. The Assessee has raised the following Grounds of Appeal: 2.1 Incorrect treatment of Export incentives as non-operating income while computing margins of the Assessee 2.2 Incorrect treatment of cash discount as non-operating income 2.3 Incorrect treatment of certain expenses as non-operating expenses 2.4 Incorrect treatment of miscellaneous expenses as non-operating expense Printed from counselvise.com 2 IT (TP)A No.53/Chny/24 2.5 Rejection of comparable companies selected by the appellant in its transfer pricing documentation.  Jay Ushin Limited  Shivam Autotech Limited  Delux Bearings Private Limited  Omax Auto Limited  Nexteer Automotive India P Limited 2.6 Non-Inclusion of new comparable companies identified by the Assessee based on the updated information available in the public domain at the time of Transfer Pricing Assessment proceedings.  Minda Vast Access Systems Private Limited  SAR Auto Products Limited  JMT Auto Limited 2.7 Non-rejection of comparable companies failing RPT filter  Kwangsung Brake India Private Limited  Joyson Anand Abhishek Safety Systems Private Limited 2.8 Incorrect determination of margins in respect of comparable companies – correct margins as per annual reports to be considered 2.9 Erroneous consideration of Entity level margins vis-à-vis Comparable Segment marginsof M/s ZF Steering Gear Limited as against the segmental margins of auto- component segment which is available in the audited financials. 2.10 Adjustment for basic custom duty 2.11 Adjustment towards fixed costs incurred during shut down of plants 2.12 Joint venture arrangement in substance is a third party negotiated arrangement 2.13 Fresh search process undertaken is unwarranted and incorrect 2.14 Erroneous levy of Interest u/s 234A 2.15 Incorrect computation of Interest u/s 234C 3. Fact of the case are that the Assessee, a joint venture between Rane Holdings Limited, India and TRW Automotive JV LLC, USA, is engaged in the business of manufacture of hydraulic power steering gears, hydraulic pumps, power-rack pinion steering gears, air bags and safety seat belts systems catering to the automotive systems at large. Printed from counselvise.com 3 IT (TP)A No.53/Chny/24 3.1 During the assessment year 2020-21, the Assessee entered into certain international transactions with its Associated Enterprises (AEs). The Ld AR submitted that it had adopted TNMM as the most appropriate method for benchmarking the international transaction and the Assessee had reported a margin of 4.22% vis a vis 11 comparable companies margin of 1.92% to 4.66% with a median of 3.98%. The TPO has accepted the methodology adopted by the Assessee i.e. TNMM. However, the TPO has tweaked the margins of the Assessee/comparable companies by excluding certain incomes/ expenses and also by including/excluding certain comparable companies. Accordingly, the TPO has determined the margin of the Assessee to be at 1.52% against 9 comparable companies margin of 4.87% to 5.18% with a median of 5.16%.Since the Assessee margin did not fall within the range, the TP adjustment was proposed on the difference between the margin of the Asseesse (i.e. 1.52%) and the median of comparable companies (i.e. 5.16%).The TPO vide order dated 19.07.2023 determined the quantum of adjustment at Rs.6,15,00,000/. A draft assessment order dated 29.09.2023 came to be passed by the Assessing Officer incorporating the TP adjustment. The Assessee filed its objections before the DRP, which issued directions dated 20.06.2024 upholding the action/order of the TPO. Aggrieved by the final assessment order, the Assessee has preferred the above appeal before us. 3.2 The Ld. AR placed on record ground-wise chart and advanced arguments by referring to the findings of lower authorities. Our attention has been drawn to various documents as placed in paper book, case law compendium, summary chart and its annexures. The Ld. CIT-DR also advanced arguments and supported the findings of TPO / DRP. Having heard rival submissions and upon perusal of case records, our adjudication is as under. The core issues which fall for our primary consideration are: Printed from counselvise.com 4 IT (TP)A No.53/Chny/24 (i) Treatment of export incentives as operating income while computing the margin of Assessee (ii) Treatment of cash discount as operating income while computing the margin of Assessee (iii) Treatment of miscellaneous expenses as operating expense for comparable companies (iv) Considering segmental margin of ZF Steering Ltd (v) Inclusion of functionally similar comparable companies 3.3 The Ld AR indicated that the other grounds, being consequential in nature, do not require our indulgence, as they would become academic, if these issues are decided in favour of the Assessee. 4. Ground no.2.2: Treatment of export incentives as operating income while computing the margin of Assessee: 4.1 Brief facts of this issue as explained by the Ld AR is that the TPO while issuing the show cause notice to the Assessee had not proposed exclusion of this income from the margins of the Assessee. However, in the order of TPO, export incentives are excluded from the operating income of the Assessee without any reasoning. The Assessee had objected the same before DRP and the DRP had adjudicated this issue but upheld TPO's stand by relying on ITAT decisions in the case of M/s. Sami Labs Ltd IT(TP)A No. 186/Bang/2015 stating that similar situation of export incentives with other comparable companies is not available, therefore export incentives earned by the Assessee are also excluded for appropriate comparability. The DRP also placed reliance in the case of M/s. Goodyear India Ltd ITA No.1516/Del/2015 and adjudicated that including the export incentives in operating income and allowing the Assessee to achieve ALP would tantamount to shifting of Printed from counselvise.com 5 IT (TP)A No.53/Chny/24 profits outside to AE and hence, the same were correctly excluded while computing the operating margins of Assessee. 4.2 Now, before us, the ld. AR submitted that it is imperative on the tax authorities to determine a particular item of income as operating or non-operating by verifying the nature of such income derived and its nexus to the business operations of the Assessee. It is pertinent to note that the TPO / DRP is first required to determine whether an item of income would constitute operating income or not before excluding the same while computing the operating margins of the Assessee/ comparable companies. The Ld. AR pointed out that in the instant case, the DRP, without applying the primary test of whether the income would constitute operating / non-operating income, has excluded the same from the operating margins of the Assessee merely on the reason that the comparable companies does not have export incentives. The Ld. AR also highlighted that certain comparable companies had also earned export incentives during the years under consideration and as such the reasoning/logic behind exclusion is not correct. 4.3 The Ld. AR has submitted that the export incentives of the Assessee consist of two components, Duty drawback and MEIS Income amounting to Rs.26.31 Cr and Rs.9.79 Cr respectively. In relation to duty drawback, the Ld. AR submitted that the duty drawback scheme was introduced with objective to reduce duty or tax chargeable on any imported/ excisable materials and input services used in the manufacture of export goods. The Assessee incurs some duty at the time of importing some raw materials and such cost is considered to be integral part of the business operations. While utilizing such components in manufacture of goods exported, the Assessee would be eligible for refund of some part of the duty paid on such imported raw materials utilized in manufacturing of goods for exports. This refund of duties is only shown under other income under the head “Export Incentives”. While the duty paid on imports form part of integral cost of the Printed from counselvise.com 6 IT (TP)A No.53/Chny/24 business and it has been undisputedly accepted by the TPO as operating expense, however, the refund of the same is being considered as non-operating. The Ld AR contends that duty drawback is integral part of the business operations and cannot partake a different characterization. Therefore it is inextricably connected to the core business and as such it should be treated as operating income while computing the margins of Assessee as well as comparable companies (wherever applicable). 4.4 As regards the MEIS Income, the ld. AR submitted that the Primary objective of MEIS scheme is to offset infrastructural inefficiencies and associated costs involved in export of goods/products, which are produced/manufactured in India, especially those having high export intensity, employment potential and thereby enhancing India’s export competitiveness and to increase the flow of foreign exchange into India. The rewards granted under the MEIS scheme would be in the form of Duty credit scrips and the same shall be utilized for payment of customs duty. The Ld AR contends that only if the Assessee manufactures and export, it would be entitled to this incentive and the same is granted to reduce the cost of manufacturing. Therefore it is inextricably connected to the core business and as such it should be treated as operating income while computing the margins of Assessee as well as comparable companies (wherever applicable). 4.5 The Ld. AR also submitted that it is an implied principle that the quantum of incentives would eventually be reflected in the pricing of the transaction or cost of the transactions and thereby the overall profitability. Accordingly, such export incentives should be considered as operating in nature while determining the operating revenue of the Assessee. The Ld. AR also placed reliance on OECD guidelines, UN TP Manual and definition in Cost Accounting Standards highlighting the principle that entitlement of such incentives is intrinsically related to the export of goods and as such export incentive qualifies as a part of operating revenue for the purpose of computation of operating margin. Printed from counselvise.com 7 IT (TP)A No.53/Chny/24 4.6 Now, before us, the Ld. AR in support of his contention relied on the following decisions: (i) M/s. Greenland Exports Pvt Ltd v DCIT ITA No.514/Mds/2016 (ii) CIT v. Welspun Zucchi Textiles Ltd. order in ITA No. 1286/2014dt. 06.01.2017 passed by Bombay High Court (iii) AB INBEV GCC Services India Pvt. Ltd Vs DCIT, IT(TP)A No. 792/Bang/2022 (iv) Kennametal India Limited vs DCIT, IT(TP)A No.506/Bang/2022 (v) Cummins India Limited vs DCIT, ITA No.556/PUN/2015 (vi) Behr India Ltd. Vs DCIT, ITA No.566 & 645 (PUNE) of 2013 and 2637 (PUNE) of 2016 (vii) Tasty Bite Eatables Limited vs DCIT, ITA No.1823/PUN/2018 (viii) Alliance One Industries India Private Limited vs ACIT - I.T.A. No.68/Viz/2022 4.7 On the other hand, the Ld. DR submitted that export incentive is not connected to normal business operation and treating export incentives as operating in nature would result in shifting of profits from one tax jurisdiction to the other. The Ld. DR relied on the decision of M/s. Good Year India Ltd in ITA No. 1516/Del/2015, wherein export incentives are excluded from computing the operating margins. Relevant extract of the ruling is produced below: “11.5. As regards the issue of reduction of export incentives from cost of goods sold is concerned, we find that the reasoning adopted by the TPO has considerable cogency. The export benefits are given to the taxpayers to promote and stimulate the growth of exports of goods and services in India. They are also meant to earn valuable foreign exchange for the country. The export incentives was available to the Assessee only after trading exports made by the Assessee. Global transfer pricing policy of the group company mentions cost in inter company transfer before the goods and services are dispatched from the premises of a company to the other company. In the Global Transfer Pricing Policy the future value of benefits which may be available in a few countries cannot be included as this will disturb the very basis/purpose or providing uniform return to teach and every enterprise which is a member of global transfer pricing policy. The very purpose of global transfer pricing is to provide a minimum amount of return to the members of global transfer pricing policy. If India provide tax incentive or other incentive to compensate its taxpayers on the basis of the economic situation, then this benefit is available to Indian taxpayers and the same cannot be transferred or traded to other entity which is not located in India. This kind of shifting of economic and tax incentives offered to local company will disturb the fiscal structure of a country and will result in shifting of profits from Printed from counselvise.com 8 IT (TP)A No.53/Chny/24 one tax jurisdiction to other tax jurisdiction. The economic and tax incentives offered to Indian entities are not meant to subsidize the entity in foreign jurisdiction. The assessee who is involved in controlled transaction this approach actually results in transferring, benefit from Government granted incentives to AE.” 5. We have perused the orders and heard the rival contentions. The issue under discussion is against treatment of export incentives and whether the same were operating income or non-operating income. The case of Revenue was that the same are non-operating income as some of the comparable companies do not have such income and hence, the same are to be excluded from operating margins of Assessee by applying the parity principle. In our view, the approach of the Revenue is fundamentally flawed. We believe the correct approach to determine whether an income is operating or non-operating would be heavily dependent upon the character of such income and its proximity to the normal business operation. Viewed from this angle, we feel that both the export incentives are intertwined with the core operation of manufacturing and export as the entitlement of such incentive is wholly on manufacturing and export. In fact, Section 28 of the Act, specifically states that these export incentives will chargeable to tax as “profits and gains of business or profession”, accordingly taking a cue from the corporate tax provisions it could be safely inferred that export incentives are operating in nature. Further, the Act does not provide any specific definition of the specific term “operating income”. Therefore we refer to other related Enactments/Rules to decipher the meaning of the aforesaid term. In this regard, the Safe Harbour Rules 10TA (1)(i) defines “operating revenue” in an inclusive manner to mean “the revenue earned by the assessee in the previous year in relation to the international transaction during the course of its normal operations but not including the following, namely…….. (vii) other incomes not relating to normal operations of the assessee”. From this definition it is clear that an income to form part of operating income it should be derived from normal operations. Undoubtedly in the instant case, the export incentive is derived during the course of normal operations. Apart from this Printed from counselvise.com 9 IT (TP)A No.53/Chny/24 definition, the Cost Accounting Standards elucidates the term Revenue from operations as under: “4.9 Revenue from operations: is the income arising in the course of the ordinary activities of an entity from the sale of goods or rendering of services. Revenue from operations represents income arising from the sale of goods or rendering of services and includes other operating revenue, such as sale of scrap, government subsidies, or incentives received. Revenue from operations is generally recognised at the net value excluding indirect taxes. Sometime, revenue is presented at the gross value including excise duty and the excise duty is presented as deduction from such gross value of the revenue. Other Operating Revenue is the incidental income arising in the course of ordinary activities of an entity but not arising from the sale of main goods or services, and it does not include Other Income. Examples: (i) Sale of By-products; (ii) Sale of manufacturing scrap; (iii) Export incentives received from Government; and (iv) Product related subsidies or grants received from Government” Further, the purpose of these export incentives are implicit from the respective schemes as under: Duty Drawback is a trusted and time-tested scheme administered by CBIC to promote exports. It rebates the incidence of customs and Central Excise duties, chargeable on imported and excisable material respectively when used as inputs for goods to be exported. This WTO compliant scheme ensures that exports are zero-rated and do not carry the burden of the specified taxes. Duty Drawback provides essential support to exporters. The scheme comprises three categories, i.e. (i) All industry Rate (ii) Brand Rate and (iii) Drawback on re-export of imported goods. Duty Drawback on re-export of imported goods: Duty Drawback can also be claimed or the export of duty-paid imported goods. Under this facility, goods imported earlier may be exported and Duty Drawback of up to 98% of import duty paid can be claimed on such exports. Proof of duty paid on importation and identification of the export goods as those that were imported earlier are among the primary requirements under this scheme. MEIS Printed from counselvise.com 10 IT (TP)A No.53/Chny/24 What is Merchandise Exports from India Scheme (MEIS) Scheme A scheme designed to provide rewards to exporters to offset infrastructural inefficiencies and associated costs. The Duty Credit Scrips and goods imported/ domestically procured against them shall be freely transferable. The Duty Credit Scrips can be used for: (i) Payment of Basic Customs Duty and Additional Customs Duty specified under sections 3(1), 3(3) and 3(5) of the Customs Tariff Act, 1975 for import of inputs or goods, including capital goods, as per DoR Notification, except items listed in Appendix 3A. (ii) Payment of Central excise duties on domestic procurement of inputs or goods, (iii) Payment of Basic Customs Duty and Additional Customs Duty specified ender Sections 3(1), 3(3) and 3(5) of the Customs Tariff Act, 1975 and fee as per paragraph 3.18 of this Policy Objective of the Merchandise Exports from India Scheme (MEIS) is to promote the manufacture and export of notified goods/ products. 6. Therefore, one cannot have qualms about the nature of such export incentives and it forms part of the core business operation. Accordingly, the same will have to be treated as operating revenue in the hands of the Assessee while computing its margin for the purpose of Transfer Pricing benchmarking analysis with comparable companies. We also hold that merely because some of the comparables may not have such export incentive cannot debar the assessee from considering such income as operating revenue. Turning to the decisions relied on by the Ld DR. in the case of Sami Labs (Supra), we find that in the said decision it has been held in principle that export incentive is operating revenue, therefore this decision does not actually aid the contention of the Ld DR/DRP. The other decision which was considered by DRP and also emphasised by Ld DR in the case of Goodyear India Ltd (supra), the issue was whether export incentive and rebate should be reduced from cost of goods. What was held was that such incentives were available to an Assessee only after the exports were made and therefore, could not go to reduce Printed from counselvise.com 11 IT (TP)A No.53/Chny/24 the cost of goods. Apparently, the issue for consideration in the aforesaid case is different from the issue under consideration. Therefore, the decision of Goodyear is distinguishable on facts. Our view is also supported by the jurisdictional Tribunal decision in the case of M/s. Greenland Exports Pvt Ltd v DCIT ITA No.514/Mds/2016 wherein it was held that export incentives and duty drawback are considered to be operating in nature. Relevant extract of the ruling is provided below: “We have perused the orders and heard the rival contentions insofar as duty drawback and export incentives are concerned, the cases relied on by the ld. AR do support assessee’s case. As for the case of Goodyear India Ltd (supra) relied on by the Assessing Officer, the issue was whether export incentive and rebate could be reduced from cost of goods. What was held was that such incentives were available to an assessee only after the exports were made and therefore, could not go to reduce the cost of goods. In the cases relied by the Assessee, it has been uniformly held that such incentives were to be considered as a part of operational income under TNM method while working out the margin of an Assessee for comparability……hence we set aside the orders of the authorities below on this issue and direct the Assessing officer/TPO to rework the results of the Assessee after considering the above terms as operational in nature.” The Hon’ble Bombay High Court in the case of CIT v. Welspun Zucchi Textiles Ltd. In ITA No. 1286/2014 dt 06.01.2017held as under: “4. Regarding question (ii):- (a) The TPO while arriving at the ALP for the export of bathrobes and towels had excluded the DEPB benefit and depreciation while arriving at the operating profits and total cost respectively of the respondent for the purposes of application of the TNMM method to arrive at ALP. This exclusion of DEPB benefit from profit and depreciation from costs, was done only while arriving at the profits of the respondent assessee and not while arriving at the profit margin of the comparables. (b) Being aggrieved, the respondent assessee filed an appeal to the CIT(A). In appeal, the CIT(A) by an order dated 2nd November, 2012 held that both the DEPB as well as the depreciation are part of the operating income/expenses respectively. Thus, they have to be taken into account while arriving at the operating profit and total cost before determining the margin on adoption of TNMM method. (c) Being aggrieved, the Revenue carried the issue in appeal to the Tribunal. By the impugned order, the Tribunal held that so far DEPB benefit is concerned, the issue arose for consideration before it in the case of respondent assessee itself for Assessment year 2005-06 and 2007-08 and the Tribunal held that the same has to be included for the purposes of arriving at Printed from counselvise.com 12 IT (TP)A No.53/Chny/24 operating profit for the application of TNMM method. This on the basis that comparison should be made on like to like and similar to similar. So far as the depreciation is concerned, the impugned order of the Tribunal adopted the same reasoning which it had applied while holding that DEPB benefit is includable in arriving at the net profit in its order in the earlier assessment years 2005-06 and 2007-08 in the subject assessment year with regard to claim of depreciation. Therefore, the DEPB was includable in arriving at the operating profit and depreciation was includable while arriving at the total costs of the respondent assessee as the same is not excluded in arriving at the profits of the comparable companies. (d)We find that so far as exclusion of DEPB benefit in arriving at the operating profit of the respondent assessee is concerned, the order of the Tribunal for the assessment years 2005-06 and 2007-08 were appealed by the revenue to this Court. Mr. Suresh Kumar, learned Counsel appearing for the Revenue very fairly states that this very issue was raised by the Revenue in its appeal before this Court for the earlier assessment years being Income Tax Appeal No.1827 of 2013 relating to AY 2005-06 and Income Tax Appeal No.171 of 2014 relating to AY 2007-08. However, this Court by orders dated 22nd September, 2015 for AY 2005-06 and 1st July, 2016 for AY 2007-08, dismissed the Revenue’s appeal. In the above view, the issue with regard to the exclusion of the DEPB benefit stands concluded by virtue of order of this Court against the Revenue and in favour of the respondent assessee.” 7. In view of our elaborate discussions/observation as above, we arrive at an emphatic conclusion that export incentives like Duty drawback and MEIS which have the effect of reducing the operating cost, ought to be considered as part of “operating revenue” while computing the margin of the Assessee and we direct so the TPO to re-determine the margin of the Assessee after including the same. Thus, this ground of appeal is decided in favour of the Assessee. Ground No.2.2 is allowed. 8. The next issue raised by the Assessee by way of ground of appeal No. 2.3 is against treatment of cash discount as non-operating income. Brief facts of this issue as explained by the Ld AR is that the TPO while issuing the show cause notice to the Assessee had not proposed exclusion of this income from the margins of the Assessee. However, in the order of TPO, cash discounts are excluded from the operating income of the Assessee without any reasoning. The Assessee had Printed from counselvise.com 13 IT (TP)A No.53/Chny/24 objected the same before DRP and the DRP had adjudicated this issue but upheld the action of the TPO by relying on the Safe Harbour Rules 10TA and without much analysis simply put that cash discount is not connected to the normal business operations and therefore it should be excluded. 8.1. The Ld. AR contended that during the year consideration, the Assessee has earned cash discount amounting to Rs.1.82 crores on account of discounts offered by suppliers as a result of timely/early payment of bills raised towards purchase of materials/components. The ld. AR before us argued that the Assessee would have recognized the expenses in their books of accounts for the full amount due at the time of purchase of materials / components and upon earning the cash discount owing to payments made earlier than the due date, an amount of cash discount is recognized as an income component. Hence, if the expenses incurred are considered as operating, the cash discount earned in relation to such expenses shall also to be treated as operating in nature and cannot partake a different character. The Assessee had filed additional evidence presenting the accounting treatment. 8.2 In support of its arguments, the ld. AR placed reliance on the ruling of Jurisdictional tribunal in the case of M/s. Hyundai Motor India Limited vs ACIT - ITA No. 3912/Chny/2017 8.3 Per contra, the Ld. DR placed reliance on the observation of the DRP and also opposed admission of additional evidence at this stage as it is bereft of any reasons. In the rejoinder, the Ld AR contended that additional evidence is only to elucidate the accounting treatment but the issue at hand can also be decided without the same on a principal basis. 8.4 We have heard the contentions of the rival parties and perused the material available on record and we proceed to decide the issue without considering the Printed from counselvise.com 14 IT (TP)A No.53/Chny/24 additional evidence in this regard. The question is whether the cash discount reflected as income in the Profit and Loss can be treated as operating revenue. It is quite explicit from the undisputed facts of the case that the income in relation to cash discount is nothing, but an income earned due to early payment of invoices to suppliers. The Ld AR also contended that expense could be reduced by the component of cash discount and net amount could have been disclosed as expense or in the alternative gross amount of expense is disclosed as debit to P&L and the corresponding cash discount is separately shown as income in the P&L, in either case the overall impact and the nature of such cash discount remains the same. We agree in principal that cash discount ought to be treated as operating revenue and observation of the DRP by placing reliance on Rule 10TA of Safe Harbour Rules is not correct. In fact, even as per the definition of Safe harbour Rules, we are of the view that the said income is derived from the normal operation of business and therefore it ought to be treated as operating revenue. We also note that issue arising in the present appeal is squarely covered by the decision of this Tribunal in the case of M/s. Hyundai Motor India Limited vs ACIT - ITA No. 3912/Chny/2017 wherein it has been held that discount income are to be considered as operating income for the purpose of computing operating margins. Relevant extract of the said decision is provided below: “ 52. As regards commission / discount income, incentives and insurance claim income, we find that all these incomes are generated from main business activity of the Assessee of manufacturing and sales of cars. The Assessee has received commission / discount on procurement of raw materials and insurance claim is received towards damaged cars manufactured by the Assessee. When the Assessee is recognizing income from sale of cars as operating in nature, then insurance claim received towards damaged cars is also operating in nature and hence, we are of the considered view that the ld. TPO has erred in considering commission / discount income, incentives and insurance income as non-operating income. Hence, we direct the ld. TPO to consider commission / discount income, incentives and insurance claim as operating income for the purpose of computing operating margin.” Printed from counselvise.com 15 IT (TP)A No.53/Chny/24 8.5 Following this decision, we direct so the TPO to re-determine the margin of the Assessee after including the same. Thus this ground of appeal is decided in favour of the Assessee. The grounds of appeal No.2.3 raised by Assessee is thus, allowed. 9. Next, coming to the issue raised by the Assessee by way of ground no. 2.5 in relation to treatment of miscellaneous expenses as non-operating expense. 9.1 Brief facts of this issue as explained by the Ld AR is that the TPO while issuing the show cause notice to the Assessee has not provided any reasons for proposed exclusion of Miscellaneous Expenses from the margins of the Comparable Companies. However, in the order of TPO, the margins of the comparable companies are adopted after exclusion of Miscellaneous Expense. The Assessee had objected the same before DRP and the DRP had adjudicated this issue (along with other expenses) but overall upheld the action of the TPO by relying on the Safe Harbour Rules 10TA and without much analysis simply put that it is not connected to the normal business operations and therefore it should be excluded. TheLd. DR submitted that the Assessee, while computing the operating margins has considered all the above items as operating expense in nature both in the case of Assessee as well as comparable companies. However, the TPO and the DRP were of the view that such expenses are non-operating expenses and consistently treated them as non-operating expense as per Rule 10TA of Income Tax rules. The Ld. DR further stated that even otherwise, for the comparability analysis, such expenses were excluded from the tested party as well as comparable companies and as such there is no prejudice to the Assessee. 9.2 The ld. AR pointed out that Rule 10TA does not specifically exclude Miscellaneous Expenses from the definition of operating expenses. Rule 10TA excludes only such expenses which are not incurred in the normal course of business of the Assessee. The Ld. AR emphasised that any company in its ordinary Printed from counselvise.com 16 IT (TP)A No.53/Chny/24 course of business do incur Miscellaneous Expense. The ld. AR specifically pointed out that treatment of an item of expense as operating / non-operating isdependent on nature of said item of expense and mere exclusion of the same from operating expenses on account of non-availability of detailed break-down may not be a right approach. Often, on account of the multitude of expenses that were too small in value, many companies in general disclose all such items under the head miscellaneous expense which, prima facie, doesn’t mean that such expenses are not connected to the business. In support of his arguments, the ld. AR has placed reliance on the decision of Delhi ITAT in the case of ITO vs E Value serve.com(2016) 75 taxmann.com 195 (Delhi – Trib) wherein it is held that miscellaneous expenses ought to be treated as operating expenses for Assessee as well as comparable companies. The Ld. AR further submitted that the TPO has considered Miscellaneous expenses as operating in nature for comparable companies in the Assessee’s own case for AY 2022-23. 9.3. We have heard the rival submissions and perused the materials available on record. The case of Revenue was that the Miscellaneous Expense is non-operating expense and it is excluded for comparable companies and similar expenses are excluded for Assessee as well by applying the parity principle. In our view, the approach of the Revenue is fundamentally flawed. We believe the correct approach to determine whether an expense is operating or non-operating would be heavily dependent upon the character of such expense and its proximity to the normal business operation. Viewed from this angle, we feel that Miscellaneous Expense is part of any normal business operation. In fact as per Section 37 of the Act, the same is allowed as business expenditure, accordingly taking a cue from the corporate tax provisions it could be safely inferred that Miscellaneous expense is operating in nature. Therefore Miscellaneous expense incurred by every company in its usual course of business cannot be said that they have no nexus with normal operation of business. The view expressed is supported by the decision of the Delhi Tribunal in the case of ITO vs E Value serve.com (2016) 75 taxmann.com 195 Printed from counselvise.com 17 IT (TP)A No.53/Chny/24 (Delhi – Trib) wherein it is held that miscellaneous expenses ought to be treated as operating expenses for Assessee as well as comparable companies. Relevant para of the order is produced below: “47. Ground no. 6: The main contention of department is that ld. CIT(A) had concluded that misc. income and misc. expenses were operating profits without verifying their nature. We find that ld. CIT(A) has observed in regard to misc. income that the same pertained to income from other sources and the misc. income was included as part of operating profit in the case of comparable company. Therefore, there could not be any prejudice to revenue on this count. As regards misc. expenses, ld. CIT(A) has observed that the same included a multitude of expenses that were too small in value. But since they pertained to the operations of the company, they were treated as operating expenses for both the tested party as well as the comparable companies. The TP analysis, as we have earlier observed, is not an exact science and we have to arrive at reasonable conclusions which would not materially affect the profit margins. Therefore, we do not find any reason to interfere with the finding of ld. CIT(A) on this count. In the result ground no. 6 is dismissed”. 9.4. In view of our above discussions/observation and the judicial precedents as above, we hold that Miscellaneous expense ought to be considered as part of “operating expense” of comparable companies (wherever applicable) irrespective of whether the assessee has incurred such Miscellaneous expense or not and we direct so the TPO to redetermine the margin of the comparable companies after including the same. As a result, the ground of appeal no. 2.5 raised by the Assessee is allowed. 10.1 The issue raised in ground no. 2.10 is in relation to consideration of comparable segmental margins in the case of ZF Steering Gear Ltd as against entity level margins as considered by TPO. 10.2 The ld. AR submitted that ZF Steering Gear Ltd is engaged in the business of manufacturing Automotive Components as well as Renewable Energy and it is operating in two different reportable segments. The renewable energy segment is Printed from counselvise.com 18 IT (TP)A No.53/Chny/24 related to electricity generation through solar or windmill. So, it is functionally different and hence not comparable. Inviting our attention to the paper book page no.167 of Volume II, wherein the financials are placed particularly the Segmentation in financial statements and submitted that the audited financial statements has provided for segmental accounts bifurcating Auto Component (comparable segment) and Renewable energy (non-comparable segment). Therefore, the ld. AR pleaded that the results of Auto component segment alone be considered. In support of his claim, the ld. AR relied on the judgment of Jurisdictional Tribunal in the case of M/s. CMA CGM Shared Service Centre (India) (P.) Ltd vs DCIT IT(TP)A No.76/Chny/2016. The Ld. AR further submitted that the above issue is squarely covered in the own case of Assessee for AY 2021-22 wherein TPO has accepted the segmental results and has considered only the Auto Component segment as comparable in the TP order while determination of arm’s length results. Relevant findings of the TPO are at para 6.4.3 of the TPO order dated 12.10.2023 for AY 2021-22. 10.3 Per contra, the ld. DR, supporting the order of lower authorities, pointed out that 95.6% of the revenue earned by ZF Steering Gear Ltd is from Auto component segment and only 3.7% of revenue is from the renewable energy segment. Since, the company earns more than 95% of the income from core comparable activity, the ld. DR objected to compute the margins at segmental level. 10.4 We heard the rival submissions and gone through relevant material. We find merit in the Assessee's above submission that since the audited financial statement of ZF Steering Gear Ltd provides segmental reports, the non-comparable segment need not be considered as there could be some degree of influence of such non- comparable segment on the overall margins as in the present case. Our view is also supported by the jurisdictional Tribunal decision in the case of M/s. CMA CGM Shared Service Centre (India) (P.) Ltd vs DCITIT(TP)A No.76/Chny/2016 wherein Printed from counselvise.com 19 IT (TP)A No.53/Chny/24 the Tribunal has considered only comparable segment results of the comparable company instead of entity level results. Relevant extract of the order is reproduced below: “4.2. On the issue of Segmental margins to be considered for Microland Ltd., the ld.AR submitted that the nature of services of M/s Microland is that it engaged in ITeS and Infrastructure management. Infrastructure management services of Microland include cloud computing solutions, application management services, tool-based disaster recovery environment management services. So, it is functionally different and hence not comparable. Inviting our attention to the paper book page no 367, wherein the financials are placed particularly the Segmentation in financial statements and submitted that the financial statements has provided for segmental accounts bifurcating ITES (comparable service) and Infrastructure management services (non- comparable services). Therefore, it was pleaded that ITES segment should be considered as comparable to the Assessee's business. In support of his claim, the ld.AR relied on the following judicial judgments:- CGI Information Systems and Management Consultants (P.) Ltd. v. Asstt. CIT [2018] 94taxmann.com 97 (Bang. - Trib.); Infor Global Solutions India (P.) Ltd. v. Dy. CIT [2019] 102 taxmann.com 58 (Mum.); Infinera India (P.) Ltd. v. ITO [IT (TP) Appeal No. 1096 (Bang.) of 2011, dated 5-12-2018] 4.2.1Per contra, the ld DR supported the orders of the lower authorities. 4.2.2We heard the rival submissions and gone through relevant material. We find merit in the Assessee’s above submission. Therefore, we deem it appropriate to restore this to the AO/TPO for considering the ITEs segmentals alone afresh and rework the adjustments in accordance with law after due opportunity of being heard to the Assessee.” 10.5 Further, the TPO in the assessment order for AY 2021-22 has already verified this aspect and accepted the same and ultimately considered only the comparable segment. Since the issue is squarely covered in the own case of Assessee, we deem it appropriate to direct the AO/TPO to consider only the Auto component segment of ZF Steering Gear Ltd while benchmarking the international transaction. Accordingly, Ground No.2.10 is allowed. Printed from counselvise.com 20 IT (TP)A No.53/Chny/24 11. Next, in relation to ground of appeal no.2.6, at the time of hearing, the ld. AR has limited his argument for inclusion of the following 3 comparable only: (a) Jay Ushin Limited (b) Shivam Autotech Limited (c) Omax Autos Limited Jay Ushin Limited (“Jay Ushin”)Functionally dissimilar 11.1 The ld. AR submitted that Jay Ushin is engaged in the manufacture of auto ancillary products ranging from security systems, switches, body parts, Fuel Units and Heater control panels. The business of Jay Ushin viz., manufacture of security systems for automotive industry is similar to that of the Assessee, which is engaged in the manufacturing of occupant safety products for automotive industry. The ld. AR pointed out that fuel units and heater control panels manufactured by Jay Ushin are similar to the business of Talbros Automotive Components Ltd (“Talbros Automotive”) which is accepted as a comparable company by TPO. Talbros Automotive is engaged in the business of manufacture of gaskets, heat shields, forgings, chassis systems, suspension systems, etc. Therefore, ld. AR submitted that Jay Ushin ought not be excluded from the final list of comparables. 11.2 On the other hand, the ld. DR has relied on the orders of lower authorities in rejecting Jay Ushin on account of functional dissimilarity. 11.3 We have heard both the parties and considered relevant material available on record. We find that the Assessee has chosen Talbros Automotive as comparable company and the said company has been accepted by the TPO. Since the Assessee, Talbros Automotive and Jay Ushin are all in the same line of manufacturing auto components we hold that Jay Ushin should also be included as a comparable company. Therefore, we direct the TPO to include Jay Ushin in the final list of comparables companies. Printed from counselvise.com 21 IT (TP)A No.53/Chny/24 Shivam Autotech Limited - Functionally dissimilar 11.4 The ld. AR submitted that Shivam Autotech is engaged in the business of manufacturing various auto transmission components such as transmission gears, transmission shafts, spline shafts, plunger, power train components. The ld. AR pointed out that the business of Shivam Autotech and that of the Assessee is very similar. The Assessee is also engaged in the manufacture of steering gear systems which are broadly similar to transmission gears manufactured by Shivam Autotech. The ld. AR pointed also pointed out that the transmission shafts, spline shafts, plunger, power train components manufactured by Shivam Autotech are similar to the business of Auto International Private Limited (“Auto International”) which is accepted as a comparable company by TPO. Auto International is engaged in the business of manufacture of brakes, gear boxes, axles, road wheels, suspension shock absorbers, radiators, silencers, exhaust pipes etc. Therefore, ld. AR submitted that Shivam Autotech ought not be excluded from the final list of comparables. 11.5 On the other hand, the Ld. DR has relied on the orders of lower authorities in rejecting Shivam Autotech on account of functional dissimilarity. 11.6 We have heard both the parties and considered relevant material available on record. We find that the Assessee has chosen Auto International as comparable company, and the said company has bene accepted by the TPO. Auto International is engaged in manufacture of suspension shock absorbers, radiators, silencers, exhaust pipes and it is on the same line that of Shivam Autotech which manufactures transmission shafts, spline shafts, plunger, brakes, gear boxes etc., Since, Auto International has been accepted as comparable company, TPO ought to have also included Shivam Autotech also as a comparable company. Therefore, we direct the TPO to include the same in the final set of comparable companies. Printed from counselvise.com 22 IT (TP)A No.53/Chny/24 Omax Autos Limited (“Omax Auto”) Functionally dissimilar 11.7 The Ld.AR submitted that Omax Auto is engaged in the business of manufacturing auto components for the automotive industry such as steering shafts, axle shafts, piston, Gear Shifter Shaft Assembly, etc. The Ld. AR pointed out that the business of Omax Auto and that of the Assessee is broadly similar. The Assessee is also engaged in the manufacture of Pinion Steering Gear and steering gear systems which are broadly similar to steering shafts and Gear Shifter Shaft Assembly manufactured by Omax Auto. The Ld. AR pointed also pointed out that the steering shafts, axle shafts, piston, Gear Shifter Shaft Assembly manufactured by Omax Auto are similar to the business of Talbros Automotive Components Ltd (“Talbros Automotive”) which is accepted as a comparable company by TPO. Talbros Automotive is engaged in the business of manufacture of chassis systems, suspension systems gaskets, heat shields, forgings, anti-vibration components etc. Therefore, Ld. AR submitted that Omax Autoto be included in the final list of comparables. 11.8 On the other hand, the ld.DR has relied on the orders of lower authorities in rejecting Omax Auto on account of functional dissimilarity. 11.9 We have heard both the parties and considered relevant material available on record. We find that the Assessee has chosen Talbros Automotive as comparable company, and the said company has been accepted by the TPO. Talbros Automotive is engaged in manufacture of chassis systems, suspension systems gaskets, heat shields, forgings, anti-vibration components and it is on the same line that of Omax Autos which manufactures steering shafts, axle shafts, piston, Gear Shifter Shaft Assembly etc., Since, Talbros Automotive has been accepted as comparable company, TPO ought to have also included Omax Autos as a comparable company. Therefore, we direct the TPO to include the same in final Printed from counselvise.com 23 IT (TP)A No.53/Chny/24 comparable matrix. The Assessing Officer/TPO is directed to rework the Arm’s Length Price of the international transactions based on our direction in paras supra. 12. In the result, the appeal of the Assessee is treated as partly allowed for statistical purposes. Order pronounced on 4th August, 2025. Sd/- Sd/- (अिमताभ शुƑा) (मनु क ुमार िगįर) (Amitabh Shukla) (Manu Kumar Giri) लेखासद᭭य / Accountant Member Ɋाियकसद˟/ Judicial Member चेɄई Chennai; िदनांक Dated : 04-08-2025 Vm/- आदेशकीŮितिलिपअŤेिषत/Copy of the Order forwarded to : 1. अपीलाथŎ/Assessee 2. ŮȑथŎ/Revenue 3. आयकरआयुƅ/CIT Chennai/Madurai 4. िवभागीयŮितिनिध/DR 5. गाडŊफाईल/GF Printed from counselvise.com "