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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against final assessment order passed u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 ['the Act' for short] dated 31.10.2019 for the assessment year 2015- 16. The assessee has raised following grounds:-
“The grounds mentioned herein below are independent and without prejudice to the other grounds preferred by the Appellant. 1. That on facts and circumstances of the case and in law, the order passed by the Learned Assistant Commissioner of Income-tax, Circle-y(i)(i), Bengaluru ('Learned AO'), pursuant to the directions of the Learned Dispute Resolution Panel - 2, Bangalore ('Learned Panel'), and the order of the Learned Deputy
IT(TP)A No.2585/Bang/2019 Toyota Industries Engine India Pvt. Ltd., Bangalore
Page 2 of 12 Commissioner of Income-tax, Transfer Pricing- Circle (2X2X2), Bengaluru ('Learned TPO') to the extent prejudicial to the Appellant, is bad in law and facts and liable to be quashed. Transfer pricing related General grounds 2. That, on the facts and circumstances of the case, the Learned AO in pursuance of the directions issued by the Learned Panel erred in rejecting the TP documentation maintained by the Appellant under Section g2D of the Income- tax Act, 1961 ('the Act').
That the Learned AO / TPO erred in law and facts by rejecting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act and the Income-tax Rules, 1962 ('the Rules'), thereby arbitrarily rejecting the economic analysis undertaken by the Appellant and in conducting fresh economic analysis.
That the Learned AO in pursuance of the directions issued by the Learned Panel erred in considering provision no longer required written back and export incentives as non-operating for computing the operating margin earned by the Appellant.
5. That the Learned AO in pursuance of the directions issued by the Learned Panel erred in considering income / loss pertaining to foreign exchange fluctuations as operating in nature while computing the operating margin earned by the Appellant.
6. That the Learned AO in pursuance of the directions issued by the Learned Panel erred in considering expenses incurred by the Appellant for setting up engine division which has not commenced operations during the relevant year as operating in nature while computing the operating margin earned by the Appellant.
That the Learned AO/ TPO has erred in not considering the actual bifurcation of gain on account of foreign exchange fluctuation ('forex gain') between the two segments while computing the segmental operating margin of the Assessee. In doing so, the Learned AO/ TPO has erred in bifurcating the forex gain on the basis of net sales, without providing an opportunity to the Assessee for providing the correct bifurcation.
8. That the Learned AO in pursuance of the directions issued by the Learned Panel erred in not providing the benefit of adjustment for working capital to the Appellant.
9. That the Learned AO in pursuance of the directions issued by the Learned Panel erred in not granting capacity utilization adjustment to the Appellant
IT(TP)A No.2585/Bang/2019 Toyota Industries Engine India Pvt. Ltd., Bangalore
Page 3 of 12 by not appreciating that proportionate overheads incurred for unutilized capacity cannot be treated as operating expense while computation of operating margin of the Assessee. 10. Without prejudice to the other grounds of appeal raised by the Appellant, the Learned AO / TPO has erred in law in not restricting the transfer pricing ('TP') adjustment to the cost relating to import of raw materials and components from the associated enterprises i.e., 28.47% and 16.06% of the total cost, with respect to the textile machinery manufacturing segment and auto components manufacturing segment respectively, in spite of the fact that the Learned Panel has allowed proportionate Adjustment. Textile machinery segment
11. That the Learned AO / TPO erred in rejecting Veejay Lakshmi Engg. Works Ltd. ('Veejay Ltd.') selected by the Appellant as a comparable company by incorrectly stating that Veejay Ltd. is a persistent loss making company, though Veejay Ltd. has negative operating margin in only i out of 3 years.
12. That the Learned AO in pursuance of the directions issued by the Learned Panel erred in selection of the following comparable companies which do not satisfy the test of comparability. 12.1. Lakshmi Machine Works Ltd. 12.2.Meera Industries Ltd. 12.3.Lohia Corp Ltd. 12.4.UMW Industries Ltd.
13. That the Learned AO / TPO while performing the comparability analysis erred in the computation of operating margin of all comparable companies in the textile machinery segment. Auto components segment
14. That the Learned AO/ TPO has erred in exclusion of Almighty Auto Ancillaries Limited from the list of comparable companies instead of CIM Tools Private Limited, while issuing order giving effect to the directions issued by the Learned Panel.
15. That the Learned AO in pursuance of the directions issued by the Learned Panel erred in rejecting the following companies selected by the Appellant which were otherwise comparable to the Appellant. 15.1. Aurangabad Electricals Ltd. 15.2. RSB Transmissions (I) Ltd.
16. That the Learned AO in pursuance of the directions issued by the Learned Panel erred in rejecting Automotive Stampings & Assemblies Limited on the basis of failure of net worth filter, despite the company having a positive net worth in all the three relevant years.
IT(TP)A No.2585/Bang/2019 Toyota Industries Engine India Pvt. Ltd., Bangalore Page 4 of 12 17. That the Learned AO in pursuance of the directions issued by the Learned Panel erred in selection of the following comparable companies which do not satisfy the test of comparability. 17.1. Almighty Auto ancillary Pvt. Ltd. 17.2. ASK Automotive Pvt. Ltd. 17.3. Tech Auto Pvt. Ltd.
That the Learned AO while performing the comparability analysis erred in the computation of operating margin of Tech Auto Pvt. Ltd.
19. That the Learned AO erred in disallowing depreciation adjustment with respect to the auto components segment and thereby failing to appreciate that there is a huge difference in the amount of depreciation charged by the Appellant vis-a-vis the comparable companies selected by the Learned TPO and requires a suitable comparability adjustment.
20. That the Learned TPO has rejected 376 companies in the TP order on the basis of functional, asset and risk profile whereas none of the companies were rejected in the show-cause notice on this basis. In this regard, the Learned AO/ TPO has erred in not providing the detailed search" workbook to the Assessee, which depicts the reasons for rejection / acceptance of the companies in the TP order. Corporate tax related 21. Pursuant to the TP adjustment, the Appellant would be liable to pay tax under the normal provisions of the Act as against the tax liability discharged by the Appellant under the provisions of section H5JB of the Act in the return of income. Therefore, the Appellant would be eligible for set off of brought forward Minimum Alternate Tax ('MAT') credit amounting to INR 1,424,922 pertaining to the assessment year ('AY') 2013-14/2014-15 as appearing in the return of income. However, the Learned AO has not given effect to the same at the time of passing the assessment order.
22. Consequent to the above adjustments, the Learned AO determined the assessable total income at INR 411,288,750 against a total income of INK 127,838,750 declared in the return of income and recomputed the tax liability (including surcharge, cess and interest) at INR 149,244,346.
The Appellant submits that the action of the Learned AO is not in accordance with law and facts.
The Appellant believes that the above adjustments made by the Learned AO are without merit and bad in law and therefore liable to be quashed.
Aggrieved by the said order of the Learned AO, the Appellant prefers this appeal before the Honourable Income Tax Appellate Tribunal ('ITAT').
IT(TP)A No.2585/Bang/2019 Toyota Industries Engine India Pvt. Ltd., Bangalore
Page 5 of 12 That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.”
The assessee has raised following additional grounds and the ld. A.R. submitted that inadvertently the assessee has not raised these grounds on earlier occasion and prayed that these grounds may be admitted for adjudication in the interest of justice:- “Based on the facts and circumstances of the present case and in law: 26. The order passed by the Learned AO/Learned TPO being not in conformity with the mandatory directions issued by the Hon'ble Dispute Resolution Panel under section 144C{5) of the Act, is bad in law and void.
On the facts and in the circumstances of the case:
The Learned Assessing Officer/Transfer Pricing Officer ('Learned AO/ Learned TPO'} erred in non-consideration of gross profit / sales as the PLI, with respect to the international transaction of purchase of raw materials for the auto components segment.
The Learned TPO erred in accepting UMW Industries Limited as a comparable company to the Appellant's Textile Machinery segment without appreciating that UMW Industries Limited is functionally not comparable to the Appellant.
The Appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. Further, this ground of appeal is independent of the grounds of appeal already filed by the Appellant.”
3. Regarding admission of additional grounds, in our opinion, all the facts are already on record and there is no necessity of investigation of any fresh facts for the purpose of adjudication of above grounds. Accordingly, by placing reliance on the judgement of Hon’ble Supreme Court in the case of NTPC Vs. CIT 229 ITR 383 (SC) we inclined to admit the additional grounds for the purpose of adjudication as there was no investigation of any fresh facts otherwise on record and the action of the assessee is bonafide.
IT(TP)A No.2585/Bang/2019 Toyota Industries Engine India Pvt. Ltd., Bangalore
Page 6 of 12 4. At the time of hearing, assessee has pressed only ground nos.10 & 12 in the main grounds and in the additional grounds only ground no.27 was pressed. Accordingly, the grounds which are not pressed in main grounds and additional grounds are dismissed as not pressed.
Ground No.10 (Main Grounds):
Ground No.10 in the main grounds is reproduced as under:
“10. Without prejudice to the other grounds of appeal raised by the Appellant, the Learned AO / TPO has erred in law in not restricting the transfer pricing ('TP') adjustment to the cost relating to import of raw materials and components from the associated enterprises i.e., 28.47% and 16.06% of the total cost, with respect to the textile machinery manufacturing segment and auto components manufacturing segment respectively, in spite of the fact that the Learned Panel has allowed proportionate Adjustment.”
5.1 The ld. DRP in his order observed on this issue as follows:
“6.4 The legal contention of the assessee that the transfer pricing adjustment with respect to the manufacturing of textile machinery/ auto component segment should be restricted to the amount of international transactions, pertaining to textile machinery/ auto component segment. The TPO is directed to re-compute and re-verify the computation of TP adjustment only with reference to the value of international transactions and not the entire revenue/costs of the assessee company. The TPO is therefore directed to act as stated above. These objections are disposed off accordingly.”
However, the TPO has not carried necessary adjustment on this issue. Against this, assessee is in appeal before us.
After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessee’s own case in IT(TP)A No.355, 2127/Bang/2016 for the assessment year 2011-12 & 2012-13, wherein the Tribunal vide order dated 21.03.2022 held as under:-
IT(TP)A No.2585/Bang/2019 Toyota Industries Engine India Pvt. Ltd., Bangalore Page 7 of 12 “37. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm’s length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm’s length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE.
In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee.”
6.1 In view of the above binding precedent in assessee’s own case, we direct the AO to restrict the TP adjustment only to the AE related transactions of the assessee. Ordered accordingly.
Ground No.12: 7. Ground No.12 in the main grounds of appeal is reproduced as under:
“12. That the Learned AO in pursuance of the directions issued by the Learned Panel erred in selection of the following comparable companies which do not satisfy the test of comparability. 12.1. Lakshmi Machine Works Ltd. 12.2.Meera Industries Ltd. 12.3.Lohia Corp Ltd. 12.4.UMW Industries Ltd.”
7.1 In this ground, the assessee has pressed only two comparable companies viz. Lohia Corp Ltd. and UMW Industries Ltd. Other comparables are not pressed. Accordingly, those are dismissed as not pressed.
IT(TP)A No.2585/Bang/2019 Toyota Industries Engine India Pvt. Ltd., Bangalore
Page 8 of 12 Lohia Corp. Ltd.:
7.2 The ld. A.R. submitted that this company is involved in R&D activities unlike the assessee and hence, he requested to exclude this company from the list of comparables.
7.3 The ld. D.R. submitted that the assessee has not disputed the functional comparability but has contended that it failed to R&D filter. The application of R&D filter has already been rejected in earlier para. Hence, this comparable is accepted. Against this assessee is in appeal before us.
We have heard the rival submissions and perused the materials available on record. This comparable has been considered in IT(TP)A No.271/Bang/2021 in assessment year 2016-17 vide order dated 14.2.2023 held as under:
26. We heard the rival submissions and perused the material on record We notice from the above judicial pronouncements relied on by the assessee that application of R&D filter with a threshold limit of 3% is a settled position now. We also notice that the Bangalore Bench of the Tribunal in the case of KBACE Technologies Pvt. Ltd vs Deputy Commissioner of Income-tax (ITA No.3189/Bang/2018 dated 29.1.2020) has also taken a similar view. In view of this we direct the TPO to exclude Lohia Corporation Ltd from the list of comparables.
8.1 In view of the above binding precedent in the case of assessee’s own case, we direct the AO to exclude this company from the list of comparables.
UMW Industries Ltd.:
The ld. A.R. submitted that this company produces wires for a single customer which is a Government enterprise who is engaged in defence weapon systems and therefore claimed to be dissimilar
IT(TP)A No.2585/Bang/2019 Toyota Industries Engine India Pvt. Ltd., Bangalore
Page 9 of 12 and hence, he requested to exclude this company from the list of comparables.
9.1 The ld. D.R. submitted that the argument of the assessee that it caters to only one customer does not hold water since the customer is undeniably un-related and that the prices cannot be influenced since the customer is a Government enterprise. Further from an FAR perspective what is required to be ascertained is whether the raw materials used and products manufactured are functionally similar or not on a broad basis. The manner in which such product is thereafter used by the customer is of no consequence. Since this company satisfies the FAR analysis, the same is accepted.
After hearing both the parties, we are of the opinion that this company has been considered as not a comparable in assessee’s own case in IT(TP)A No.271/Bang/2021 dated 14.2.2023 wherein the Tribunal held as under:
“UMW Industries Ltd.
The ld. AR submitted that the principal activities of the company as per the annual return is that the company is engaged in manufacture of guidance wire and miniature control cable. The ld. AR drew our attention to the Profit & loss account of the assessee wherein the revenue from operations is mainly from sale of guidance wire. The ld. AR therefore submitted that the company is functionally not comparable with the assessee which is engaged in the manufacture of textile machinery. The ld. AR submitted that UMW Ltd. is engaged in manufacture of guidance wire used in the defence activities unlike assessee which caters to the textile industry. The ld. AR also submitted that the TPO and the DRP have unanimously considered the profile of the company as manufacture of other machinery for textile apparels and leather products which is factually not correct.
The ld. DR relied on the order of the DRP.
We heard the rival submissions and perused the material on record. We notice that as per the annual return as extracted below, the principal business activity of the company is manufacturing of guidance wire.
IT(TP)A No.2585/Bang/2019 Toyota Industries Engine India Pvt. Ltd., Bangalore
Also we notice that the major part of the revenue derived by the company is from sale of guidance wire. We also notice from the annual report (pg. 1493 of paper book) that one of the major suppliers for the company is Bharat Dynamics which is a Govt. of India Enterprise, which is a manufacturing base for guided weapon systems. Therefore we see merit in the submission of the ld AR that the company supplies the guided wire for defence activities and therefore not comparable with the assessee who supplies machinery to textile industry. We also notice that the TPO and the DRP have considered the profile of the company as manufacturer of other machinery for textiles, apparel and other industries (page 11 to DRP order), whereas as per the annual return, the extract of which is reproduced above, the company is engaged in the manufacture of guidance wire and miniature control cable. In view of the discussion, we hold that the functional profile of UMW Industries Ltd. is different from that of the assessee and therefore not comparable. The AO/TPO is directed to exclude the company from list of comparables.”
10.1 In view of the above binding precedent, we exclude this also company from the list of comparables.
Ground No.27 (Additional ground): 11. Ground No.27 in the additional grounds raised by the assessee is reproduced as under:
27. The Learned Assessing Officer/Transfer Pricing Officer ('Learned AO/ Learned TPO'} erred in non-consideration of gross profit / sales as the PLI, with respect to the international transaction of purchase of raw materials for the auto components segment.”
11.1 After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessee’s own case in IT(TP)A No.485/Bang/2015 for the IT(TP)A No.2585/Bang/2019 Toyota Industries Engine India Pvt. Ltd., Bangalore
Page 11 of 12 assessment year 2010-11 dated 18.52016, wherein the Tribunal held as under: “5.5. In principle; we are in agreement with the contentions raised by assessee, as GP over sales can eliminate the difference in claim of depreciation due to age of machinery, rate at which it was claimed and method of claims like straight line on written down value. We accordingly direct the AO/TPO to adopt the comparison of profitability ratios adopting GP over sales, Since the details of capacity utilization of the comparable companies and rate of depreciation could not be analysed as commented by DRP, it would be better if GP analysis was undertaken taking sales less cost of raw material as basis (excluding other cost including Depreciation, interest etc) so that auto components; profitability could be analysed so as to consider whether the import of raw material from AE has effected the profitability of assessee under the TP provisions. Accordingly, we set aside the impugned orders of the Revenue authorities on this issue and restore the matter to the file of AO/TPO to carry out the exercise as stated above. Assessee should be given due opportunity. However, we make it clear that if any adjustment is required to be made, the same is to be restricted, as directed by DRP in para 3.1.3 (Ground No.2) above. The matters which have attained finality are not intended to be reopened. AO/TPO is directed accordingly. Ground No. 3 is allowed for statistical purposes.”
11.2 In view of the above order of this Tribunal in assessee’s own case, we allow this ground of assessee.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 3rd Mar, 2023.