KOSO INDIA PVT.LTD,,NASHIK vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1,, NASHIK

PER R.S.SYAL, VP :

This appeal by the assessee is directed against the final assessment order dated 26-10-2017 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter called ‘the Act’) in relation to the assessment year 2013-14.

2 ITA No.3044/PUN/2017 Koso India Private Limited

part of the Koso group, which has Control valve manufacturing

locations in Japan, UK, USA, Korea, China and India. The assessee

was incorporated in the year 2004 and during the year under

consideration it was engaged in the manufacture and supply of

control valves and actuators. Return was filed declaring total

income of Rs.19.36 crore and odd. Certain international

transactions were reported in Form No.3CEB. The AO made a

reference to the Transfer Pricing Officer (TPO) for determining the

Arm’s Length price (ALP) of the international transactions.

Instantly, we are concerned with a combined international

transaction of sale of finished goods to various Associated

Enterprises (AEs) amounting to Rs.34.29 crore and purchase of raw

materials from various AEs amounting to Rs.10.09 crore. The

assessee applied the Transactional Net Margin Method (TNMM) for

demonstrating that these two transactions in an aggregate manner

were at ALP. The assessee worked out it Profit level indicator

(PLI) of OP/OC at 9.80% for this transaction as against the average

PLI of 6 comparables at 8.96%. The TPO dropped three companies

from the assessee’s list and proceeded with the final set of

remaining three companies, namely, Cenlub Industries Ltd.

3 ITA No.3044/PUN/2017 Koso India Private Limited

(14.13%), Continental Valve Ltd. (5.87%) and Oswal Industries

Ltd. (18%). The TPO computed unadjusted average PLI of the

above three companies at 12.66%. During the course of the transfer

pricing proceedings, the assessee submitted the working capital

adjusted margins of comparables at 16.18%, 8.34% and 18.10%

respectively. The TPO accepted such adjusted working capital

margins of the three comparables at an average of 14.20% as against

the assessee’s margin of 9.80%. This is how, the TPO

recommended transfer pricing adjustment of Rs.6,05,55,749/-,

which was incorporated by the AO in the draft order. The assessee

challenged certain aspects of the draft order before the Dispute

Resolution Panel (DRP), which for the time being are not relevant

for our purpose. The DRP directed the AO/TPO to treat net

gain/loss on foreign currency fluctuations as non-operating

income/expenses and recompute the PLI of the assessee and the

comparables and thereafter consequential transfer pricing

adjustment accordingly. While giving effect to the direction given

by the DRP, the TPO recomputed the profit margin of the assessee

at 11.76% by taking net gain/loss on foreign currency fluctuation as

non-operating. Revised adjusted average PLI of the above referred

three companies was also computed accordingly at 15.12% after

4 ITA No.3044/PUN/2017 Koso India Private Limited

giving effect to the working capital adjustment. This led to the

transfer pricing addition of Rs.4,66,04,340/-, against which the

assessee has come up in appeal before the Tribunal.

relevant material on record. There is no dispute on the aggregation

of the above referred two transactions of purchase of raw materials

and sale of finished goods and also the application of the TNMM as

the most appropriate method along with the PLI of OP/OC. The ld.

AR focused primarily on the calculation of the working capital

adjustment. At this juncture it would be relevant to note that the

assessee submitted, during the course of original proceedings before

the TPO, the adjusted profit margins of the comparables (after

giving effect to the working capital adjustment) at the percentages

indicated above. This was done by applying State Bank of India

Base rate of 9.86%, whose detailed working has been given at page

234 of the paper book. Such calculation of the margins was

accepted by the TPO, who computed the transfer pricing adjustment

by considering such working capital adjusted margins of the three

comparables. The assessee did not assail such working capital

adjustment before the DRP, which was, in fact, accepted by the

5 ITA No.3044/PUN/2017 Koso India Private Limited

TPO himself. Ex consequenti, the DRP too did not interfere with

any aspect of the calculation of working capital adjustment except

for holding that the net foreign exchange gain/loss should be taken

as an item of non-operating, which aspect has not been challenged

by the assessee before the Tribunal. However, when the TPO gave

effect to the directions given by the DRP, he adopted rate of interest

at 14.61% for the purpose of calculating the working capital

adjustment qua the three comparables. Now, whereas the case of

the assessee before the Tribunal is that the AO/TPO, while giving

effect to the directions of the DRP, could not have altered the earlier

accepted rate of interest at 9.86%, the ld. DR contended that the rate

of interest applied by the assessee during the course of transfer

pricing proceedings was wrongly taken, which was rightly corrected

in the order giving effect to the direction of the DRP. The moot

question, which ergo arises is whether the TPO, having accepted the

rate of interest for the purposes of calculating working capital

adjustment at 9.86% at the time of passing order u/s 92CA(3) of the

Act, was right in changing such rate to 14.61% for whatever reason,

while giving effect to the DRP’s direction when there was no such

direction in this regard?

6 ITA No.3044/PUN/2017 Koso India Private Limited

Dispute Resolution Panel”. Sub-section (1) of section 144C

provides that: “The Assessing Officer shall, notwithstanding

anything to the contrary contained in this Act, in the first instance,

forward a draft of the proposed order of assessment (hereafter in this

section referred to as the draft order) to the eligible assessee if he

proposes to make, on or after the 1st day of October, 2009, any

variation in the income or loss returned which is prejudicial to the

interest of such assessee.’ Sub-section (2) of section 144C states

that the assessee shall either file his acceptance to the AO on the

variations proposed in the draft order or file his objections, if any,

with the DRP. Sub-section (3) states that : `The Assessing Officer

shall complete the assessment on the basis of the draft order, if—

(a) the assessee intimates to the Assessing Officer the acceptance of

the variation; or (b) no objections are received within the period

specified in sub-section (2). A conjoint reading of first three sub-

sections of section 144C deciphers that the draft order attains

finality, inter alia, on the assessee accepting the variation and the

assessment has to be necessarily completed on the basis of the draft

order. It means that unless the assessee raises objection before the

DRP, the AO in the assessment order has to obey and follow the

7 ITA No.3044/PUN/2017 Koso India Private Limited

income computation in his draft order. He cannot alter any aspect

of the draft order in passing the assessment order u/s 144C(3). Now,

we come to the second scenario of the assessee aggrieved by the

draft order. If the assessee is not satisfied with the draft order, sub-

section (5) comes into play, which stipulates that the DRP shall, in a

case where any objection is received under sub-section (2), issue

such necessary directions for the guidance of the AO to enable him

to complete the assessment. Sub-section (13) provides that : `Upon

receipt of the directions issued under sub-section (5), the Assessing

Officer shall, in conformity with the directions, complete ..….. the

assessment without providing any further opportunity of being

heard to the assessee …’. It means what is required to be done by

the AO at the stage of completing the assessment under sub-section

(13) is to first pick up the income determination under the draft

order; then ascertain the directions given by the DRP, which under

sub-section (8) can be for confirming, reducing or enhancing the

variations; and thereafter give effect to the directions given by the

DRP by modifying the income computation as per the draft strictly

in accordance with the direction of the DRP. This manifests that

once the matter travels to the DRP, the AO/TPO become functus

officio except to the extent of giving effect to the directions of the

8 ITA No.3044/PUN/2017 Koso India Private Limited

DRP vis-à-vis the income computation under the draft order. It is

up to the stage of the passing of the draft order that the AO/TPO can

examine any issue from any angle. But after the passing of the draft

order, there cannot be any suo motu addition to or subtraction

from the draft order, whether the order is passed under sub-section

(3) or sub-section (13) except in the latter sub-section, to the

limited extent of giving effect to the direction given by the DRP. If

the contrary is permitted, the assessee would lose the forum of the

DRP for redressal of his grievance, which is statutorily

impermissible.

observed that the TPO vide his order giving effect to the directions

of the DRP changed the rate of interest for the purpose of

calculating working capital adjustment from the originally accepted

9.86% to 14.61%. It is seen that the AO passed the draft order on

28.11.2016 by considering the adjusted margins of the comparables

with the working capital adjustment on the basis of rate of interest at

9.86%. The assessee assailed the draft order before the DRP on

certain issues other than the rate of interest for computing the

working capital adjustment. The DRP gave certain directions but

9 ITA No.3044/PUN/2017 Koso India Private Limited

did not direct to alter such interest rate either suo motu or at the

instance of the assessee. Once the position was so, the rate of

interest at 9.86% attained finality as the draft order was passed with

such a rate of interest. The AO/TPO, while giving effect to the

directions of the DRP, were bereft of any power to change any

aspect of the draft order save and except the direction of the DRP

including the rate of interest to 14.61%. Having themselves

accepted such a rate of interest up to the stage of passing the draft

order, the AO/TPO ceased to exercise any jurisdiction to re-examine

the earlier view and enhance it at the time of giving effect to the

direction of the DRP, when the same was not a part of the direction.

Under such circumstances, we direct to consider the rate of interest

at 9.86% for calculating the working capital adjustment for

benchmarking the international transaction in question, as was

originally accepted.

under :

“The appellant requests for an adjustment to account for differences in the depreciation cost of the Appellant vis-à-vis comparable companies selected by the Appellant.”

10 ITA No.3044/PUN/2017 Koso India Private Limited

require any fresh examination of facts, we admit the same in the hue

of the judgment of Hon’ble Supreme Court in National Thermal

Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC).

material on record, it is observed from the additional ground that the

assessee wants adjustment in the profit margin of the comparables

on the basis of difference in the rates of depreciation as charged by

the assessee vis-à-vis the comparables on the same asset(s). In other

words, the dispute is not about granting any adjustment on account

of difference in the quantum of depreciation as such or percentage

of such depreciation to a common base but only towards difference

in the rates of depreciation on similar asset(s). We agree with this

proposition as has been approved in several decisions including a recent decision of the Pune Benches of the Tribunal dated 13th

January, 2020 in M/s. Vishay Components India Private Limited

vs. ACIT (ITA No.585/PUN/2015). It is, therefore, held that no

adjustment can be allowed if there is difference just on account of

the quantum of depreciation or percentage of depreciation to a

certain base. An adjustment should be allowed in the computation

11 ITA No.3044/PUN/2017 Koso India Private Limited

of profit of the comparables only if there is a difference in the rate

of depreciation as charged by the assessee vis-a-vis the comparables

on the same asset(s).

if the assessee gets relief on account of working capital adjustment

and rates of depreciation, the profit rate will be within the

permissible range and no transfer pricing adjustment would survive.

We, therefore, set-aside the impugned order and remit the matter to

the file of AO/TPO for a fresh determination of the ALP of the

international transaction in accordance with our above directions.

Needless to say, the assessee will be allowed reasonable opportunity

of hearing.

purposes.

Order pronounced in the Open Court on 21st January, 2020.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT

पुणे Pune; �दनांक Dated : 21st January, 2020 सतीश

12 ITA No.3044/PUN/2017 Koso India Private Limited

आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr.CIT-V, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “C” / DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

Date 1. Draft dictated on 20-01-2020 Sr.PS 2. Draft placed before author 21-01-2020 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.

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