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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND SHRI MANOJ KUMAR AGGARWAL
आदेश /O R D E R
PER MAHAVIR SINGH, VICE PRESIDENT:
This appeal by the assessee is arising out of the directions of the Dispute Resolution Panel-2, Bengaluru dated 18.12.2015. The assessment was framed by the DCIT, Corporate Circle-4(1), Chennai for the assessment year 2012-13 u/s. 144C(13) of the Income Tax Act, 1961 (hereinafter the ‘Act’), vide order dated 08.02.2017.
2 2. In this appeal of assessee, the assessee has filed revised and concise grounds of appeal on 04.04.2023 on three issues only i.e., (i) Wrongly included Dynamatic Technologies Ltd., as comparable by TPO (ii) Not granting working capital adjustment and (iii) Wrongly computing and enhancing downward adjustment by computing on the entire transaction instead of Associated Enterprise transaction on entity level.
For these assessee has now filed the concise grounds which we will deal issue-wise.
The first issue in this appeal of assessee raised by concise grounds is as regards to the order of DRP confirming the TPO order and directing the AO to include Dynamatic Technologies as comparable company. For this assessee has raised following grounds:- 1. TPO Erred in including “Dynamatic Technologies" as a comparable company which has diversified presence and without considering the proper facts about the comparable company.
1.1 Without prejudice to the above, the TPO and DRP erred in not considering the 'automotive segment' alone given in the financials of 'Dynamatic Technologies'.
1.2 DRP erred in not considering the entire ground raised in this regard and submissions made.
3 1.3 The Ld DRP ignored the honorable tribunal decision in Assessee's own vide ITA 658/Mds/2015 that 'ONLY automotive segment alone need to be considered with regard to Dynamatic Technology".
Brief facts are that the assessee company is having its manufacturing facility of automobile products such as water pump assembly and oil pump assembly for automobile (passenger cars). Water pump assembly provides circulation of the engine coolant around the engine. It is driven by the engine through the V-belt, serpentine belt and gears. Oil pump assembly provides oil to all parts of the engine for lubrication. The assessee company mainly caters to Original Equipment Manufacturers (“OEMs”) Hyundai Motors India and its ancillary units. The TPO issued show cause notice asking the assessee to show-cause as to why Dynamatic Technologies Ltd., be not taken for the purpose for benchmarking international transaction and accordingly why the Arms Length Price (ALP) of this international transaction be not determined, following Transactional Net Margin Method (TNMM) by taking the average PLI of comparables at 7.06% by including other companies also, which are not challenged before us. The assessee replied that the company Dynamatic Technologies Ltd., has presence in diversified fields ranging between Automotive to Aerospace and Wind Farm and therefore out of the various segment, comparable company has reported assessee’s arm’s length calculation only i.e., the 4 automotive segment which is relevant one and need to be considered. The assessee before TPO urged that the operating margin of the said segment is 7.54% which alone need to be considered instead of 8.26% as considered by the TPO in its show- cause notice. But the TPO considered the Hydraulic and Precision Engineering (HPE) and Automotive Components (AUC) segments and for this, he observed as under:- As submitted by the assessee company, M/s. Dynamatic Technologies Ltd., the segmental financials are considered. However, it was seen that Hydralic and Precision Engineering segment is also a comparable segment. The assessee company is into manufacture of water/oil pump assembly and hence by analyzing the product profile regarding the HPE segment it is similar to that of assessee company. Hence both HPE and AUC segment were taken for comparison purpose.
4.1 The assessee raised objection before the DRP. The DRP simpliciter confirmed the comparables selected by the TPO including the present company Dynamatic Technologies Ltd., by observing in para 1.1 & 1.2 as under:- 1.1 The TPO has analyzed the TP documentation of assessee. The TPO has also discussed regarding functional analysis, different adjustments, and the filters applied for doing the comparability study. The TPO has searched appropriate comparables considering the appropriate sector and functions, current year financial data, companies with sales turnover < Rs. 1 Crore excluded, RPT > 26% are excluded, persistent loss making companies were excluded. A final set of 6 comparables is taken by TPO which include 2 comparables selected by assessee. Computation of operating margin of these comparables has been done and intimated to the assessee. The assessee has been issued a show cause notice informing all the above details
5 and the submission of the assessee dated 07.01.2015 has been considered in the TP order.
Therefore, the objection that no opportunity and details were not provided to the assessee is not correct.
1.2 As regards objection of the assessee for the comparables Dynamatic Technologies, Sundaram Fastners Ltd, Lumax Automotive Systems Ltd, Imperial Auto Industries Ltd, same are considered and discussed in the order by the TPO. For the reasons mentioned by the TPO, the DRP upholds the decision and finds that the objections of the assessee have no merit.
Aggrieved, now assessee is in appeal before the Tribunal.
We have heard rival contentions and gone through fats and circumstances of the case. Before us, the ld.counsel for the assessee filed complete chart of working of the comparable company, the Dynamatic Technologies Ltd., which has basically five segments as under:- (i) HPE (Hydraulic and Precision Engineering) (ii) (AC) (Aluminium Casting) (iii) (AUC) Automotive Components (iv) ASP (Aerospace division) and (v) WF (Wind Farm)
The ld.counsel took us to page 3 of the submissions and drew our attention to all the 5 segments of Dynamatic Technologies Ltd., for the financial year 2011-12 relevant to assessment year 2012-13
6 and stated that only comparability can be done on automotive components (AUC) which has operating margin 7.54%. The ld.counsel for the assessee drew our attention to Tribunal’s order in assessee’s own case in for the assessment year 2010-11, wherein the Tribunal has categorically directed the TPO / AO to include only the automobile product segment i.e., AUC of Dynamatic Technologies and the Tribunal observed in para 7 as under:- “7. We have heard both the parties and carefully perused the materials available on record. Considering the arguments of the learned Authorized Representative, we find merit in the same because comparable companies should have identical or similar activities and characteristic of similar qualities, size and nature. The assessee company is only engaged in the manufacturing activity of automobile products such as water pump assembly and oil pump assembly meant for passenger cars. In these circumstances, only those companies which are operating in the automobile sector manufacturing similar kind of products are to be taken as comparables. In the relevant case before us, the Revenue has selected M/s. Dynamatic Technologies which is engaged in diversified activities such as, automobile sector, aerospace sector, wind form sector and hydraulic / security applications sector. In such situation, the consolidated operating profit of M/s. Dynamatic Technologies cannot be taken as comparables because the assessee company is only operating in the automobile sector manufacturing spare parts such as water pump assembly and oil pump assembly while as M/s. Dynamatic Technologies has various other segments. Therefore, we are of the considered view that only that segment which relates to automobile sector of M/s. Dynamatic Technologies should be taken as comparables at the most or some other suitable comparable companies may be taken as comparables. For the above reasons, we remit back the matter to the file of the learned Assessing Officer in order to refer the matter to the learned TPO and further direct the learned TPO to either select the automobile segment of M/s. Dynamatic Technologies as comparables or select some other suitable comparable company whose activities and characteristics are identical and 7 similar to that of the assessee company and thereafter determine the ALP with regard to the International transaction. It is ordered accordingly.”
The ld.counsel for the assessee stated that even in assessment year 2011-12, there is no adjustment made by the AO in regard to ALP of the assessee and accepted automotive segment of the Dynamatic Technologies Ltd., because of its diversified presence ranging between Automotive to Aerospace and Wind Farm, etc. The assessee before us filed submissions and filed details of hydraulic division and others before us and requested that on the same reasoning matter can be restored back to the file of the TPO/AO to consider only the automotive segment results for the comparability purposes.
When this was pointed out to ld.CIT-DR, he could not controvert the findings given by the Tribunal in assessment year 2010-11 however he supported the order of TPO that the operating margin for the purpose of comparability of PLI, the entire business is to be considered as one and not segment-wise. He supported the order of TPO and that of the DRP.
After hearing both the sides and going through the facts of the case, we are of the view that the Revenue itself has accepted the 8 comparables automotive components segment results while computing PLI of the assessee comparing with the Dynamatic Technologies Ltd., and even there is no challenge to the findings of Tribunal in assessee’s own case for assessment year 2010-11. Hence, we direct the AO to take Dynamatic Technologies Ltd., as comparable only for Automotive Components segment results wherein operating margin of the said segment is 7.5% for the computation of PLI. We direct the AO accordingly. This issue of assessee’s appeal is partly-allowed as indicated above.
The next issue in this appeal of assessee is as regards to the order of TPO / DRP in not allowing the working capital adjustment. For this, assessee has raised following grounds:- 2. The Ld TPO/DRP erred in not considering the impact of 'working capital adjustment'. 2.1 The Ld DRP erred in concluding that no working with regard to working capital adjustment" submitted, ignoring the fact that working capital adjustment related working submitted both before TPO as well as DRP.
Brief facts are that the assessee company during the course of proceedings before TPO requested adjustment of working capital in regard to their margin computation towards longer credit term on supplies received. The assessee before TPO filed working of capital
9 adjustment but TPO on verifying the computation found that the assessee company had took only creditors in to account and not the debtors and inventories. He noted that the working capital is the company’s efficiency in paying back its current liability or creditors in the short term and the ratio indicates whether the company has enough short term assets to cover its short term debts. According to TPO, since the computation does not take into account short term debts, the working capital adjustment was denied. The TPO also noted that in addition to wrong calculation made by not considering the short term debts, the assessee has not been able to justify the adjustment that were required to be made on account of negative working capital. The TPO relied on the Jurisdictional ITAT decision in the case of Mobis India Ltd., in ITA No.2112/MDS/2011. The assessee raised the issue before the DRP.
The DRP directed the TPO to allow working capital adjustment after verifying the necessary details by observing in para 5.1 & 5.2 as under:- 5.1 The TPO has rejected the claim of adjustment for WCA as assessee did not consider debtors and inventories in its computation. Placing reliance on the decision of Hon'ble Chennai ITAT in case of Mobis India Ltd, the TPO has rejected the claim of the assessee. The assessee has Submitted computation of WCA for the assessee as well as the comparables before this Panel. It has also cited decisions in case of Sunlife India Service Centre
10 Pvt Ltd. ITAT, Delhi and Emersons Process Management India Pvt Ltd of ITAT, Mumbai in support of its claim.
5.2 This Panel has considered the submission of the assessee. It is also noted that for the AY 2010-11 the DRP has allowed WCA in this case upholding the computation of WCA by the TPO. After considering all the aspects, the TPO is directed to allow WCA to the assessee at the prevailing rate after verification of necessary details.
Aggrieved, now assessee is in appeal before the Tribunal.
Before us, the ld.counsel for the assessee drew our attention to Annexure ‘C’ i.e., working capital adjustment details filed by assessee viz-a-viz comparable companies which is enclosed at assessee’s paper-book page 319. But the ld.counsel stated that none of the authorities below have gone into these details and he referred to the decision of Mumbai Tribunal in the case of Syngenta Biosciences Pvt. LTd., vs. DCIT in wherein the Mumbai Tribunal has considered the issue of working capital adjustment and how it is to be made in para 10 as under:- “10 In view of the above discussion, we are of the view that the authorities below were not justified in including Alphageo (India) Ltd. as comparable for benchmarking for determining ALP u/s. 92C(1) and 92C(2) of the Act. The TPO is directed to exclude Alphageo (India) Ltd. as comparable for benchmarking for determining ALP. For rest of the comparables for benchmarking as selected by revenue has not been disputed by assessee except claim made that working capital adjustment should be given. The assessee's contention regarding adjustment for the differences in working capital level of the assessee and comparable companies selected by revenue, we find that the required data in relation to these companies are not available in the orders of the lower authorities or the details filed by the 11 assessee before us. However, we are of the view that the need to carry out the working capital adjustments is for the reason that the differences on account of working capital cycle not only impact the finance cost but it also affects items of P&L Account like expenses, sale price of product, provision for bad debts etc. and in turn it affects the profit before interest and tax. Accordingly, we are of the view that to take into account the difference in the net working capital requirements between the assessee and comparables selected by revenue, appropriate adjustments should be made on account of debtors and creditors. And adjustment to working capital cycle of assessee should be made vis-à-vis the sale and total cost of each of the comparable companies……….. ……………. …………… In view of the above directions, we restore the issue to the file of the AO/TPO to give adjustment accordingly. This issue of assessee's appeal is allowed for statistical purposes.”
11.1 The ld.counsel also stated that even Chennai Tribunal in the case of Hyundai Motor India Ltd., vs. ACIT I has considered a similar issue and directed the AO/TPO to carry out the exercise of working capital adjustment and allow accordingly. The ld.counsel stated that there is plethora of judgment by this Tribunal where working capital adjustment has been allowed but after considering the facts. According to him, since none of the authorities below have gone into the details filed by the assessee in regard to working capital adjustment, the issue needs to go to the AO. We noted that the DRP in assessee’s own case now has already sent back the matter to the TPO directing that the working capital adjustment be allowed to the assessee after
12 verification of necessary details. Needless to say that the decision of Chennai Tribunal in the case of Mobis India Ltd., supra, is entirely different on facts. Hence, that cannot be considered.
On the other hand, the ld. CIT-DR relied on the order of the DRP and that of the TPO / AO and argued that the TPO has already remanded the matter back to the file of the TPO/AO and he has no objection for similar directions.
After hearing rival contentions and going through the facts of the case, we are of the view that let the TPO consider afresh the detailed working capital adjustment filed by assessee before him and the TPO will consider the allowability of working capital adjustment in term of the decision of the Mumbai Tribunal in the case of Syngenta Biosciences Pvt. Ltd., supra. Hence, this issue of assessee’s appeal is allowed for statistical purposes.
Coming to next issue in this appeal of assessee is as regards to the TPO / AO is not allowing entity level adjustment in regard to the portion of Associated Enterprises only instead he has directed to compute downward adjustment on the entire amount on entity level. For this, assessee has raised the following grounds:-
13 3. Without Prejudice to our other submissions, DRP has also violated principle of natural justice in so far it attempt to enhance the downward adjustment by computing on the entire transaction instead of Associated Enterprise transaction without either a reference from the TPO nor any proper notice and adequate opportunity in this regard and hence, the DRP order is also liable to be quashed.
3.1 The DRP has grossly misunderstood and with wrong surmises directed TPO to compute downward adjustment on the entire amount at entity level instead of computing on the Associated Enterprise portion thereby made significant enhancement to the addition made by the TPO, by completely disregarding the various judicial precedence in this regard.
The TPO while proceeding for transfer pricing adjustment has allowed the entity level adjustment on the entire amount instead of computing the same on the portion of Associated Enterprises only. The DRP also rejected the claim of the assessee by observing in para 10.5 as under:-
10.5 Thus adjustment u/s 92CA in above example works out to Rs 10/-, which is the same as presumed above in the example. Now if the method adopted by the TPO is accepted, then adjustment of only 37.50% of Rs 10 i.e. Rs3.75/- can be made which is evidently not correct. So, the method adopted by the TPO is not correct and thus cannot be accepted. Any impact on the basis of calculation of ALP by MAM (here TNMM) has to be considered as adjustment u/s 92CA and the same cannot be proportionately reduced by considering that a part of the purchases was from non-AE also Whatever is the reduction in the margin of the assessee vis a vis comparables is on account of inflated purchases from AE and the same gets considered when AIP is calculated by applying TNMM. The AOTPO is; therefore, directed to effect adjustment without restricting the same to the proportion of international transaction.
14 16. The ld.counsel for the assessee before us only requested that the DRP is wrong in directing the AO / TPO to effect adjustment without restricting the same to proportion of international transactions and make adjustment on the entire transactions. The ld.counsel drew our attention to the decision of Chennai Tribunal in the case of Yongsan Automotive India Pvt. Ltd., vs. ACIT in wherein the Tribunal has directed the TPO to consider only the tested party i.e., Associated Enterprise for allowing entity level adjustment by observing in para 7 as under:-
“7. This Tribunal is of the considered opinion that under the scheme of the Income-tax Act, the transfer pricing adjustment has to be made only in respect of the transaction of the assessee being a tested party, with Associated Enterprise outside the country after comparing the transaction made by similarly placed company in uncontrolled transaction with non- Associated Enterprise. Therefore, we are unable to uphold the order of the Dispute Resolution Panel Accordingly the order of the DRP is set aside and the entire issue is remitted back to the file of the Assessing Officer.”
When this was confronted to ld.CIT-DR, he could not rebut above but he requested that matter can be referred back to the AO / TPO for the same.
After hearing both the sides and going through the facts of the case, we direct the TPO/AO to reconsider the entity level adjustment
15 in term of the transactions of Associated Enterprises only. This issue is also allowed for statistical purposes.
In the result, the appeal filed by the assessee is partly-allowed for statistical purposes.
Order pronounced in the open court on 19th July, 2023 at Chennai.