TRIUMPH INTERNATIONAL (INDIA) PRIVATE LIMITED,KANCHEEPURAM V. DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-3(1), CHENNAI

CO 64/CHNY/2024

AI Insights

The case involves Triumph International (India) Pvt. Ltd., which appealed against the adjustments made by the Assistant Commissioner of Income Tax regarding the Arm's Length Price (ALP) of international transactions and capacity utilization for the assessment year 2012-13. The CIT(A) had allowed a segmental approach in computing ALP and granted adjustments for capacity utilization, which the Revenue challenged. The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision based on legal precedents and previous rulings in similar cases involving the same assessee.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 107108 (ITAT-CHENNAI)
• Duration Of Justice: 1 month(s) 15 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 18-10-2024
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 10-10-2024
• Assessment Year: 2012-2013
• Appeal Filed On: 03-09-2024
• Other Referred Cases: CIT vs. Firestone International (P.) Ltd., reported in [2016] 73 taxmann.com 39(SC)
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A. SASIKUMAR
• Assessee Lawyers: S.P.CHIDAMBARAM
• Keywords: Condonation of delay; Transfer pricing; International transaction; Corroborative evidences; Wholly owned subsidiary
• Section: 43; 73

Judgement Text

"आयकर अपीलीय अिधकरण, ‘डी’ ᭠यायपीठ,चे᳖ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI ᮰ी महावीर ᳲसह, उपा᭟यᭃ एवं ᮰ी मनोज कुमार अᮕवाल, लेखा सद᭭य के समᭃ BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENTAND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.: 1657/CHNY/2024 िनधाᭅरण वषᭅ/Assessment Year:2012-13 & C.O No.64/CHNY/2024 [in I.T.A. No.1657/CHNY/2024] The Deputy Commissioner of Income Tax, Corporate Ward 3(1), Chennai – 600 034. vs. Triumph International (India) Pvt. Ltd., 240-B, Sengundram Village, Singaperumal Koil, Kanchipuram – 603 204. PAN: AABCT 5775D (अपीलाथᱮ/Appellant) (ᮧ᭜यथᱮ/Respondent/Cross Objector) राज᭭व कᳱ ओर से /Revenue by : Shri A. Sasikumar, CIT िनधाᭅᳯरती कᳱ ओर से/Assessee by : Shri S.P. Chidambaram, Advocate सुनवाई कᳱ तारीख/Date of Hearing : 10.10.2024 घोषणा कᳱ तारीख/Date of Pronouncement : 18.10.2024 आदेश /O R D E R PER MAHAVIR SINGH, VICE PRESIDENT: This appeal by the Revenue and cross objection by the assessee are arising out of the order of the Commissioner of Income Tax, Appeal, Chennai-16 in Order No.ITBA/APL/S/250/2023- 24/1062027785(1) dated 05.03.2024. The assessment was framed by the Asst. Commissioner of Income Tax, Corporate Circle-3(1), - 2 - ITA No1657/CHNY/2024 & CO No.64/CHNY/2024 Chennai (i/c) for the assessment year 2012-12 u/s.143(3) r.w.s. 92CA of the Income Tax Act (hereinafter the ‘Act’) vide order dated 02.05.2016. 2. This Revenue’s appeal is barred by limitation by 27 days and Revenue has filed affidavit. The facts are that the order of CIT(A) was received by in the office of PCIT on 05.03.2024 and the due date of filing of appeal before ITAT was 04.05.2024 but actually the appeal was filed only on 31.05.2024. Thereby, there is a delay of 27 days. The reason stated by the AO in his affidavit reads as under:- “4. It is submitted before the Hon’ble Tribunal that the delay has happened because in this case, TP issue was involved and to prepare the scrutiny report, TPO’s comment was necessary. This office has received the necessary TPO’s comments on 06.05.2024 for the above mentioned case. Therefore, the scrutiny report to the PCIT-3, sent on 06.05.2024 from this office.” 2.1 Since there is a delay of 27 days and assessee has not objected to the same, we are inclined to condone the delay and admit the appeal. 3. The only issue in this appeal of Revenue is against the order of CIT(A) allowing segmental approach for manufacturing segment and granted capacity utilization adjustment while computing PLI (Profit - 3 - ITA No1657/CHNY/2024 & CO No.64/CHNY/2024 Level Indicator). For this, Revenue has raised the following three effective grounds:- 2. The Ld. CIT(A) erred in allowing segmental approach despite the fact that functionally there is even Non-AE segments is significantly influenced by AE. 3. The Ld. CIT(A) erred in allowing segmental approach on the face of the fact that the segmental bifurcation of P & LA/c is unaudited and expenditure booked under non-AE are extraordinarily high and unreliable, therefore entity level PLI is a more reliable indicator. 4. The Ld. CIT(A) erred in allowing the capacity utilization adjustment on the face of the fact that the assessee has neither established that its PLI was affected by capacity utilization nor was it in the startup phase. 4. Briefly stated facts are that the assessee company is engaged in manufacturing and trading of intimate apparel. The assessee filed its return of income for the relevant assessment year 2012-13 on 29.11.2012. Consequent to selection of assessee’s case for scrutiny assessment, the AO noticed that the assessee has entered into international transaction carried out during the year as per Form No.3CEB which is more than Rs.15 crores, for determination of ALP (Arm’s Length Price). The matter was referred to TPO u/s.92CA(1) of the Act on 05.09.2012. - 4 - ITA No1657/CHNY/2024 & CO No.64/CHNY/2024 4.1 The TPO noted the background of the assessee company and noted that the assessee company operates to two segments i.e., manufacturing and trading. This fact is noted by TPO in his order in para 3 as under:- “Triumph International (India) Pvt. Ltd., was incorporated in March 2002 as a wholly owned subsidiary of Triumph Universa AG, Switzerland which is ultimately held by Triumph International, Switzerland. Triumph India is in the business of women’s foundation garment, swimwear and lingerie brand in India. This is the first year in which a reference has been received under section 92CA(1) of the Income-tax Act from the assessing officer, as Triumph India established its manufacturing operations in Chennai only in FY 2008-09. The manufacturing set up in Chennai is a 100% EOU catering to the needs of the Group companies. Primarily the Company operates through two segments viz., manufacturing and distribution. The manufacturing segment caters to the needs of its AEs. In the distribution segment, it has distribution outlets across 43 cities in India. The products are available at the national chain stores and as well as retailers in these cities.” Further, the TPO combined the manufacturing segment and trading segment for computing ALP on segmental operating profit and capacity utilization. The AO accordingly made adjustment on both i.e., segment operating profit and capacity utilization by clubbing both the segments i.e., manufacturing and trading. The TPO has adopted the entire sales including manufacturing and trading sales for computing Arm’s Length Price as well as made adjustment of capacity utilization and proposed adjustment at Rs.20,17,24,157/- u/s.92CA(3) of the Act. The AO accordingly made adjustment of - 5 - ITA No1657/CHNY/2024 & CO No.64/CHNY/2024 Rs.20,17,24,157/-. Aggrieved, assessee preferred appeal before CIT(A). 5. The CIT(A) has considered the issue and held that the assessee has submitted details and hence, the manufacturing segment and trading segment should be separated for the purpose of computing ALP for making adjustment. For this, he relied on the decision of Hon’ble Supreme Court in the case of CIT vs. Firestone International (P.) Ltd., reported in [2016] 73 taxmann.com 39(SC). He also stated that the TPO in earlier year i.e., assessment year 2009-10 has also considered this issue and has only made adjustment segment-wise i.e., manufacturing segment and trading segment. He stated that instead of entire sale value, the TP adjustment should be made in relation to international transactions and not on the entire trading transactions. 5.1 As regards to second issue i.e., capacity adjustment, the CIT(A) relied on the Tribunal’s order in assessee‘s own case for assessment years 2010-11 & 2011-12 in ITA Nos.987/CHNY/2015 & 924/CHNY/2016. Accordingly, the CIT(A) allowed the segmental approach and directed the AO/TPO to recomputed the assessee’s ALP after excluding trading segment and only the value of - 6 - ITA No1657/CHNY/2024 & CO No.64/CHNY/2024 international transaction should be taken while computing ALP. The CIT(A) also, following Tribunal’s order in assessee’s own case, excluded certain fixed costs while computing capacity utilization and finally allowed both the appeals by observing in para 3.2.5 & 3.3.5 as under:- 3.2.5 Considering the entire gamut of facts and in the circumstance of the case, placing reliance on the Appellant’s own case in the earlier years and following the ratio in the above cited case by Hon’ble Supreme Court, this office is of the considered opinion that the upward adjustment ought to be restricted to the value of international transactions and not on the overall operating income at entity level. Thus Grounds of Appeal Nos.2,3,4,5 and 6 stands allowed. ………… ………… ………… 3.3.5 I have carefully gone through the above facts pertaining to this specific issue. Considering the entire gamut of facts and in the circumstance of the case by respectfully following the above cited jurisdictional Chennai Tribunal decisions including the Appellant’s own case, I am of the considered opinion that the adjustment with respect to capacity utilization for net margin computation of the Appellant are fairly substantiated with supporting evidence and detailed workings and hence the claim of capacity adjustment on fixed cost shall be allowed. Thus Grounds of Appeal No.7, 8, 9,10, 11 and 12 stand allowed.” Aggrieved, now Revenue is in appeal before us. 6. We have heard rival contentions and gone through facts and circumstances of the case. We noted that the issue of segmental approach i.e., only value of international transaction is to be - 7 - ITA No1657/CHNY/2024 & CO No.64/CHNY/2024 adopted is covered by the decision of Hon’ble Supreme Court in the case of Firestone International (P.) Ltd., supra, wherein the Hon’ble Supreme Court held as under:- “The arm’s length price has to be determined only with reference to the international transactions, whatever be the method followed or adopted for arriving at the ALP, the ALP can only be considered on the value of international transactions alone and not on the entire turnover of assessee. If this sort of adjustment is permitted this will result in increasing the profit of assessee on the entire non-AE sales also, which is not according to the provisions of Transfer Pricing mandated by the Act for the impugned assessment year.” Since the issue is covered by the decision of Hon’ble Supreme Court and the TPO & DRP has accepted the segmental profit in assessee’s own case for assessment years 2009-10, 2010-11 & 2011-12, we find no fault with the findings of CIT(A). The order of CIT(A) is affirmed on this issue. 7. As regards to capacity utilization, the issue is covered by the decision of the Co-ordinate Bench of this Tribunal in assessee’s own case for the AYs 2010-11 & 2011-12 in ITA No.987/CHNY/2015 & 935/CHNY/2016 vide order dated 18.11.2022, wherein it is held as under:- 6. We find that the assessee’s capacity utilization is much less than the capacity utilized by comparable entities and therefore, the assessee seeks exclusion of certain fixed costs while computing capacity utilization which would ultimately affect its own PLI. The Tribunal in its order for AY 2009- - 8 - ITA No1657/CHNY/2024 & CO No.64/CHNY/2024 10 (para 5.1) has observed that abnormal costs are required to be adjusted so as to have a meaningful comparability analysis and accordingly, the issue of adjustment was restored back to the file of Ld. TPO. Similar is the plea of Ld. AR in this year. We are of the considered opinion it is undisputed fact that the assessee is entitled for capacity utilization since its capacity is much lower than the comparable entities. The lower authorities have also granted the same which controvert the argument of Ld. CIT-DR that such an adjustment should not be granted. The only dispute is with respect to extent of adjustment. So far as the assessee’s own capacity utilization is concerned, we direct Ld. TPO not to treat the units purchased as its capacity utilization since it could not be said that the assessee has utilized the capacity to that extent. 7. So far as the argument of acceptance / rejection of comparable entities is concerned, we find that the assessee has been characterized as normal risk bearing entrepreneur and TP adjustment has been made proceeding on that basis. Therefore, in the absence of any cogent material warranting disturbance of comparable entities matrix, we decline to accept any of the plea of Ld. AR in this regard. The comparable entities as finally selected by Ld. TPO would require no interference on our part. Since the assessee is characterized as normal risk bearing entrepreneur the plea of grant of risk adjustment could also not be accepted. The only direction to Ld. TPO is to compute correct capacity utilization of comparable entities since prior period data may not reflect a correct picture and may not result into correct computation of capacity utilization. The assessee is directed to provide requisite to the extent it is possible. If the data is not available for this year, the average of past three years’ data could be considered. So far as the issue of fixed costs is concerned, we direct Ld. TPO to adjudicate the same afresh keeping in mind the directions of Tribunal in AY 2009-10 and consequential order passed against the same. With these directions, the matter is restored back to the file of Ld. AO / Ld. TPO. The Transfer pricing grounds stand partly allowed for statistical purposes. ………… ………... ASSESSMENT YEAR 2011-12 12. So far as the issue of capacity utilization is concerned, we find that this is third year of operations and the assessee’s capacity has not shown much significant improvement. Therefore, to say that the startup phase was over for the assessee would not be correct. In fact, Ld. TPO was convinced with the assessee’s claim and accordingly it granted the adjustment to the assessee. Therefore, we would hold that such an adjustment would be - 9 - ITA No1657/CHNY/2024 & CO No.64/CHNY/2024 allowable to the assessee. Accordingly, for correct computation of the same, the issue is restored back to the file of Ld. TPO / Ld. AO to grant appropriate adjustment in this year on the same lines as given in AYs 2009- 10 & 2010-11. Our adjudication as for AY 2010-11 in preceding paragraphs would mutatis-mutandis apply to this issue. No interference would be required in the final list of comparable entities. The working capital adjustment, as granted by Ld. DRP in AY 2010-11, would be allowed to the assessee if the assessee is able to demonstrate the same. The corresponding grounds stand partly allowed for statistical purposes.” Since the Tribunal has already allowed the issue of capacity utilization, we find no fault with the order of CIT(A) and hence, the same is affirmed. Therefore, the appeal of the Revenue is dismissed. 8. Coming to cross objection of the assessee in C.O. No.64/CHNY/2024, at the outset, it is noticed that this cross objection is barred by limitation by 47 days. The assessee has filed condonation petition for condoning the delay by stating the following reason:- “3.I state that the aforesaid delay in filing the cross objection is as mentioned as under:- 4. I state that, during the time of receipt of notice from ITAT, there was a lack of manpower in the Finance & Tax team at the office of the Petition Company and the notice from the ITAT was inadvertently overlooked and necessary action could not be taken. 5. I state that subsequently, the ITAT registry had issued a hearing notice on 02.08.2024 fixing the hearing of the appeal on 04.09.2024. Only upon receipt of this notice, the Finance & Tax tem realized that department - 10 - ITA No1657/CHNY/2024 & CO No.64/CHNY/2024 has filed an appeal. Immediately, the legal counsel was contacted for further course of action and based on discussions, the cross objection was decided to be filed. Accordingly, we are no filing cross objections against the Grounds of Appeal filed by the Department before this Hon’ble Tribunal.” 8.1 The ld.Senior DR has not objected for condonation of delay and by going through the reason stated, we are inclined to condone the delay and admit the cross objection. 9. Since the cross objection filed by the assessee is supportive and we have dismissed the Revenue’s appeal by confirming the order of CIT(A), the cross objection raised by the assessee has become academic and does not require any adjudication. Hence, the same is dismissed as academic. 10. In the result, both the appeal filed by the Revenue and the cross objection filed by the assessee are dismissed. Order pronounced in the open court on 18th October, 2024 at Chennai. Sd/- Sd/- (मनोज कुमार अᮕवाल) (MANOJ KUMAR AGGARWAL) लेखा सद᭭य/ACCOUNTANT MEMBER (महावीर ᳲसह ) (MAHAVIR SINGH) उपा᭟यᭃ /VICE PRESIDENT चे᳖ई/Chennai, ᳰदनांक/Dated, the 18th October, 2024 - 11 - ITA No1657/CHNY/2024 & CO No.64/CHNY/2024 RSR आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy to: 1. अपीलाथᱮ/Appellant 2. ᮧ᭜यथᱮ/Respondent 3. आयकर आयुᲦ /CIT, Chennai. 4. िवभागीय ᮧितिनिध/DR 5. गाडᭅ फाईल/GF. "