ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(2)(1), BANGALORE vs. CONTINENTAL AUTOMOTIVE COMPONENTS (INDIA) PRIVATE LIMITED, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI BALAKRISHNAN S, ACCOUNTANT MEMBER AND SHRI KESHAV DUBEY, JUDICIAL MEMBER ITA No.1318/Bang/2025 Assessment Year : 2013-14 DCIT/ACIT, Vs. M/s. Continental Automotive Circle - 2(2)(1), Components (India) Pvt. Ltd., Bangalore. 18,19& 20, Veerasandra Industrial Area, Ground, 2nd - 14th Floor, Southgate Tech Park, Plot No. 1, Sy No. 17, Hosur Rd, Electronic City, Hebbagodi, Karnataka 560100. PAN : AAKCS 7578 C APPELLANT RESPONDENT CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Assessment Year : 2013-14 M/s. Continental Automotive Components Vs. ACIT, (India) Pvt. Ltd., Circle - 2(2)(1), Hebbagodi, Karnataka 560100. Bangalore. PAN : AAKCS 7578 C APPELLANT RESPONDENT Assessee by : Shri. T. Suryanarayana, Sr. Counsel Department by : Smt. Divya K. J, CIT(DR)(ITAT), Bengaluru. Date of hearing : 17.06.2026 Date of Pronouncement : 23.07.2026

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 2 of 41

O R D E R Per Balakrishnan S, Accountant Member :

This appeal is filed by the Revenue against the Order of CIT(A), Bangalore – 12, vide DIN and Order No.ITBA/APL/S/250/2024- 25/1072(1) dated 24.06.2025 passed under section 250 of the Act for the Assessment Year is 2013-14 arising out of the Order passed under section 143(3) r.w.s. 144C dated 29.12.2016. The assessee also filed Cross Objections (in short ‘CO’).

Manufacturing segment,

The assessee is engaged in the manufacture of auto-electrical components which include instrument clusters, engine systems, speed sensors, airbag controllers, anti-lock braking system etc., for the automobile industry.

Trading segment,

The assessee's operations in this segment primarily related to the trading of dashboard instruments, tachographs, sensors and other allied components for the automobile industry.

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 3 of 41

Services segment.

In the services segment, the assessee renders application / specific services to its Associated Enterprises ("AEs") with regard to development of software.

Sl International transaction Amount No. (in Rs.) 1 Purchase of raw material and components 75,82,37,634 2 Purchase of automotive components for 1,07,97,03,531 trading 3 Sale of automotive components 19,94,07,592 4 Purchase of capital assets 6,81,52,474 5 Payment towards technical know-how 32,05,47,018 6 Service revenue 1,17,39,64,404 7 Production support services 3,10,87,567 8 Shared support services 54,53,58,170 9 Payment towards research and development 26,65,84,442 expenses 10 Issue of equity shares 1,77,62,50,000 11 Advance from customers 1,80,52,691 12 Advance paid 75,81,89,283 13 Payables for capital goods 5,04,14,775 14 Recovery of expenses 20,76,777

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 4 of 41

15 Reimbursement of expenses 12,04,23,299 16 Trade payables 95,75,21,315 17 Trade receivables 8,66,50,443 4. The assessee in its TP documentation has selected 13 comparables in respect of IT support services and applied TNM method as Most Appropriate method (MAM) and by applying the filters arrived at the arithmetic mean for the 13 comparables as follows:

A.4. Filters applied by the assessee in its TP study: Step Description 1. Companies without the latest reported financial data in a fiscal year ending 2011 or later - rejected 2. Companies with Net sales > 1 crore - selected 3. Companies which have positive net worth - selected 4. Companies rendering services similar to the Assessee - selected 5. Companies reporting manufacturing + trading income < 50% - selected 6. Companies with related party transactions less that 10% of sales - selected 7. Companies with export/sales ratio less than 25% - rejected 8. Companies with forex earnings/Net sales > 25% - selected 9. Companies with employee cost less than 25% of the total sales – rejected A.5. Comparables selected by assessee and their arithmetic mean: Sl. Name of the company Weighted Average No. (in %) 1. Akshay Software Technologies Ltd. 5.66 2. R S Software (India) Ltd. 16.45 3. Cades Digitech Private Ltd. 3.60 4. Cigniti Technologies Ltd. 8.35 5. Persistent System and Solution Limited 16.55 6. Kals Information Systems Ltd. 9.95 7. Evoke Information Pvt. Ltd. 10.45

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 5 of 41

NOTE: Out of the 13 comparables selected by the assessee, the TPO accepted the 2 highlighted above, viz. Mindtree Ltd. and RS Software. and rejected the other 11.

A.6. Filters applied by the TPO: Step Description 1. Companies whose data is not available for FY 2012-13- excluded. 2. Companies having different financial year ending or data of the company which does not fall within 12-month period i.e., 01.04.2012 to 31.03.2013- excluded 3. Companies whose income was less than Rs. 1 Cr – excluded. 4. Companies whose software development service income is less than 75% of the total operating revenues - excluded. 5. Companies having related party transactions greater than 25% of sales – excluded 6. Companies which have export service income less than 75% of the

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 6 of 41

sales- excluded. 7. Companies with employee cost less than 25% of turnover- excluded. A.7. Comparables selected by TPO and their arithmetic mean: Sl. Mark-up on No. Total Costs Name of the Company (WC– unadjusted) (in %) 1. CG-VAK Software Exports Ltd. 20.54 2. ICRA Techno Analytics Ltd. 17.10 3. Larsen and Toubro Infotech Ltd. 26.06 4. Mindtree Ltd. (seg.) 18.19 5. Persistent Systems Ltd. 28.27 6. RS Software (India) Pvt. Ltd. 17.41 7. Tech Mahindra Ltd. (seg.) 18.72 AVERAGE MARK-UP 20.90

A.8. Computation of arm’s length price by the TPO and adjustment made for IT Services: Arm’s Length Mean Mark-up 20.90% Operating Cost Rs. 116,10,90,000/- Arm’s Length Price Rs.140,37,38,189 /- Price Received Rs. 123,82,30,000/- Variation in Price Rs. 16,55,08,189/- 3% of price received Rs. 3,71,46,900 Shortfall being adjustment u/s. 92CA Rs. 16,55,08,189

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 7 of 41

Sl. Particulars Amount No. 1 Operating Revenue 572,83,20,000 2 Operating Cost 660,96,90,000 3 OP -88,13,70,000 4 OP/OR -15.39% 5 OP/OC -13.33% 6 Arm's length OP/OR (Comparables margin) 3.77% 7 Arm's length OP 215,957,664 8 Arm's length cost 5,512,362,336 9 Adjustments 1,097,327,664 10 3% of Price paid (Operating cost) 198,290,700 11 Shortfall being adjustment 1,097,327,664

Sl. No. Particulars Amoun t 1 Operating Revenue 2,419,050,000 2 Operating Cost 2,416,685,756

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 8 of 41

3 OP (Co1.1-2) 2,364,244 4 OP/OR (Col.3/1) 0.10% 5 OP/OC (Col.3/2) 0.10% 6 Arm's length OP/OR (Comparables margin) 3.43% 7 Arm's length OP (Co1.1*6) 82,973,415 8 Arm's length cost (Col.1-7) 2,336,076,585 9 Adjustments (Col.2-8) 80,609,171 10 3% of Price paid (Operating cost) 72,500,573 11 80,609,171 Shortfall being adjustment

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 9 of 41

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 10 of 41

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 11 of 41

order in the case of SAME Deutz-Fahr India Pvt. Ltd. ITA No. 2666/Mds/2016 in which working capital was not granted owing to absence of requisite details pertaining to working capital? 15. Whether the CIT(A) was right in fact and in law to allow for adjustment towards forex fluctuation relying on the decision of the Chennai tribunal in Gates Unitta India Company (P) Ltd. v DCIT, 84 taxman.com 69., wherein the taxpayer company facts are different from the company involved in the case? 16. Whether on the facts and circumstances of the case the CIT(A) was justified in remitting the issue of adjustment towards forex fluctuation, wherein the taxpayer's case it is a normal routine event and is operating in nature and in the case of the company, it is an extraordinary event which is non-operating in nature? 17. Whether the CIT(A) is right in granting capacity utilization adjustment, without verifying the claim of capacity utilization of comparables when the same is not available in public domain 18. Whether CIT(A) is right in granting capacity utilization adjustment when there is absence of reliable data and methodology to determine the same 19. Whether CIT(A) is right in granting capacity utilization adjustment when the same introduces inaccuracies in benchmarking due to assumptions about fixed cost allocations. 20. Whether on the facts and in the circumstances of the case, the CIT(A) is correct in directing the TPO to allow capacity utilization without oppreciating the facts and materials on record by TPO. 21. Whether the CIT(A) was right in directing to confine the TP adjustment to the value of International Transactions in manufacturing segment of the assessee. 22. Whether the CIT(A) erred in not considering the fact that whatever is the reduction in the margin of the assessee viz a viz

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 12 of 41

comparables is on account of purchase from AЕ at a higher price and the same gets considered when ALP is calculated by applying TNMM. 23. Whether the CIT(A) is right in restricting the adjustment to international transaction when it brings the margin of the tested party at -13.19% which is much lower than the ALP of 3.77%, when the ALP margin is confirmed. and non-AE 24. Whether the CIT(A) erred in ignoring the interdependency between AE transactions and the impact of controlled transactions driving down the margin in manufacturing segment. 25. Whether the CIT(A) is right in considering amortization of goodwill as nonoperating cost of the tested party without verifying the facts of circumstances of the case. 26. Whether the CII(A) is right in ruling that amortization of goodwill should be considered as non-operating cost, without verifying whether the acquisition of goodwill has resulted in revenue generation. 27. Whether the CIT(A) is right in ignoring the impact of goodwill on revenue generation and accordingly ruling amortization of goodwill as non-operating in nature. 28. Whether the CIT(A) is right in granting custom duty adjustment ignoring the facts that difference in custom duty paid is immaterial as long as the purchase is made by non-associated enterprises. 29. Whether the CIT(A) is right in granting custom duty adjustment ignoring the facts that purchase price of the raw material by comparable already includes custom duty directly or indirectly. 30. Whether the CIT(A) is right in granting custom duty adjustment without verifying whether the purchase price of raw materials by tested party and comparables is materially different on account of import with custom duty vis-à-vis domestic purchase without custom duty.

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 13 of 41

“5.3 Next ground relates to treatment of royalty payment as capital in nature as against the claim of the appellant that it is revenue in nature. The appellant relied on the decision of the ITAT, Bengaluru it its own case for A.Y.2010-11 wherein it is held that: "28. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that the revenue in the own case of the assessee in the earlier assessment year 2012-13 and in the assessment year 2015-16 held the royalty expenses as revenue in nature. Therefore, we hold that such expenses cannot be treated as capital in nature in the year under consideration. The copy of the assessment order framed for the assessment year 2012-13 in pursuance to the

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 14 of 41

direction of the ITAT and the remand report of the AO for the assessment year 2015-16 are available on record. Even at the time of hearing, the learned DR has not brought anything on record contrary to the arguments advanced by the learned AR for the assessee. Accordingly, we set aside the order of the learned DRP/ the AO with the direction to allow the deduction to the assessee on account of royalty expenses treating the same as revenue in nature. Hence the ground of appeal of the assessee is hereby allowed." 5.3.1 Further, in the remand report for A.Y.2015-16, the AO accepted the contention of the appellant that the said royalty payment is revenue in nature. 5.3.2 In view of the above, the AO is directed to treat the royalty payment as revenue in nature. The appellant succeeds on this ground.” 17. In the absence of any change in the facts and circumstances during the impugned Assessment Year, we do not find any infirmity in the Order of the learned CIT(A) and hence no interference is required. Thus, ground No.1 raised by the Revenue is dismissed.

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 15 of 41

by the Hon’ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 180 Taxman 422/314 ITR 62.

Provision for warranty: 5.4 The next ground relates to disallowance of provision for warranty. The appellant relied on ITAT, Bengaluru decision in its own case for AYs 2010-11, 2012-13, 2014-15 & 2016-17. For the year 2014-15, ITAT, Bengaluru held that: "107. We have carefully considered the submissions and are of the view that provision for warranty created is based on past experience and historical trend of each product and at a percentage. The claim made by the Assessee that the method followed for creating provision for anticipated liability on

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 16 of 41

account of warranty stands vindicated by the fact that the actual liability on account of warranty expenses is always on the higher side. The reasons given by the DRP for not accepting the claim of the Assessee is that the provision is created as a percentage of sale, ignoring the fact that past experience is also the basis for creation o provision for warranty. We are therefore of the view that the provision for warranty has to be allowed as a deduction, as the provision created satisfies the requirements for claiming provision as a liability, as laid down in the judicial precedents referred to above. We hold and order accordingly and allow the relevant ground of appeal of the Assessee." 5.4.1 Respectfully following the decision of the ITAT, Bengaluru the provision for warranty is allowed as deduction. 21. The decision of the Hon’ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 180 Taxman 422/314 ITR 62 relied on by Ld DR could not be of any help to the Revenue.

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 17 of 41

“5.1 Comparables (Exclusion) - Services segment

5.1.1 Exclusion of comparable CG-VAK Software Exports Ltd., Larsen and Toubro Infotech Ltd. and Persistent Systems Ltd.

5.1.1.1 The appellant contended that these comparables are excluded from the list of comparables by the ITAT, Bengaluru in the case of M/s NXP India Private Ltd for A.Y.2013-14 wherein it is held that:

"Ill. CGVAK SOFTWARE & EXPORTS LIMITED

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 18 of 41

statement as on 31.03.2013 at Rs.3,03,83,536 and it is also engaged in outsource product development, as is evident from the attached notes forming part of the accounts. The learned AR also submitted that CG VAK Software & Exports Limited was not considered as a comparable in the case of M/s. EPAM Systems India Private Limited (ITA No.2122/Hyd/2017 for assessment year 2013- 2014). Vide order dated 20.11.2018, the Tribunal held as under:-

"16. Having regard to the rival contentions and the material on record, we find that the assessee has raised its objections before 10 the TPO but he held that it is functionally similar. We have gone through the annual reports of CGVAK Software & Exports Lid and find that the said company is having revenue from both software services and BPO services but there is no segmental data with regard to each of these transactions. Therefore, as held by the Coordinate Bench of the Tribunal in a number of cases (cited supra), we hold that this company cannot be taken as a comparable to the assessee-company. Accordingly, we direct the TPO to exclude this company from the final list of comparables."

24.1 Similarly. in the case of M/s.ION Trading India Private Limited v. ITO (ITA No.1035/De1/2015 for the assessment year 2010-2011). The Tribunal vide its order dated 07.12.2015, held as under:-

"21. We have considered the submission of the Id. counsel for the assessee and have considered the argument of the Id. DR that the assessee is not producing any product, however, we find that CGVak Software and Exports Limited is not only into computer software but it is a product manufacturer too. Since assessee is not into product manufacturing and the segmental details cannot be bifurcated from the financial details, we find that the assessee and the CG-Vak Software and Exports Limited are not comparables. Therefore, we are inclined to uphold the orders of the authorities below in rejecting this company as a comparable. We direct accordingly."

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 19 of 41

24.2 In our opinion, there is force in the argument of the learned AR. M/s.0 G VAX Software & Exports Limited is not only engaged in the business of computer software development, but also engaged in product manufacturing process, whereas the present assessee is not in product manufacture activity. M/s. C G VAX Software & Exports Ltd. owns huge intangible assets and also engaged in outsourced product development. In view of the foregoing reasons, we hold that the said company cannot be considered for inclusion in the list of comparables. We, therefore, direct the TPO to exclude the said company from the list of comparables."

I. LARSEN & TOUBRO 1NFOTECH LIMITED

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 20 of 41

22.1 It was also brought to our notice that in earlier year, Larsen & Toubro Infotech Limited has incurred expenditure on "cost of brought out items for resale at Rs.27,10,89,274 for which he drew our attention to the financial statement of Larsen & Toubro Infotech Limited placed at paper book page No.1081, which is absent in the case of present assessee. He also submitted that it has huge intangible assets and brand value in software at Rs. 143;61,95,196 and it has intangible asset in the form of business rights to the tune of Rs.153,42,45,196 as shown in the Fixed Assets as on 31.03.2013 placed at paper book page No.1078. Being so, in our opinion, it cannot be compared with the assessee's case. Accordingly, we direct the TPO to exclude the same from the list of comparables.

II. PERSISTENT SYSTEMS LIMITED

"13.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decision cited. We find that a co-ordinate bench of this Tribunal in the assessee's own case (supra) for Assessment Year 2008-09 has held that this company being engaged in product development and product design and analysis service is functionally different from a

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 21 of 41

pure software service provider and therefore excluded it from the list of comparables for software development services; holding as under at para 17.3 of its order:-

"17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly."

13.4.2 Following the decision of the co-ordinate bench of this Tribunal in the assessee's own case (supra) for Assessment Year 2008-09. we direct the TPO to exclude this company from the list of comparables as it is functionally different (viz. being engaged in product development and product design services) from the assessee in the case on hand which is rendering software development services. It is ordered accordingly."

23.1 Therefore, Persistent Systems Limited cannot be compared with the assessee's case. Accordingly, we direct the TPO to exclude the said company from the list of comparables, with the similar directions given in the above order of the Tribunal (supra).

5.1.1.3 Respectfully following the jurisdictional ITAT, Bengaluru decisions for the same A.Y.2013-14 in the above case, these comparables are excluded from the list of comparables.”

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 22 of 41

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 23 of 41

CIT(A) by relying on the decision by this Tribunal in the case of M/s NXP India Private Ltd for A.Y.2013-14 allowed the inclusion of 2 comparables cited above.

“5.2 Comparables (Inclusion) — Services segment 5.2.1 Inclusion of comparables Akshay Software Technologies Ltd. and Cigniti Technologies Ltd. 5.2.1.1 The appellant contended that these comparables are functionally similar and relied on the decision of ITAT, Bengaluru in the case of M/s NXP India Private Ltd for A.Y.2013-14 wherein it is held that: "IV. AKSHAY SOFTWARE TECHNOLOGIES LIMITED 32. It was rejected by the TPO for the reason that the function of this company appears to be more in the nature of support services and I. T. enabled services. However, this company is engaged in providing professional services, implementation, support and maintenance of ERP products and other services. These are nothing but software development services, as is evident from Notes forming part of the financial statement, which is placed at paper book page No.1825. Further, the revenue from software services accounts for 99.45% of the total revenue of the company as evident from the financial statement placed on record at paper book page No.1831. Being so, we direct the TPO to consider this company as comparable to the assessee's case while selecting the comparables. VI. CIGNITI TECHNOLOGIES LIMITED 34. This company was rejected by the TPO for the reason that this company was engaged in software testing service. This company is also into computer programming, consultancy and related activities. According to the TPO, it was functionally different from assessee-company. As seen from the revenue from operations, which is as follows:-

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 24 of 41

Particulars Year ending 31.03.2013 Revenue from operations Sale of Services Domestic 4,632,731 Export 231,042,089 Total Revenue from 235,674,820 Operations

34.1 In our opinion, software testing is a part of software development life cycle and being so, this company should be considered as a comparable. Accordingly, we direct the TPO to include Cigniti Technologies Limited as a comparable to the assessee-company, while selecting the comparables." 5.2.1.2 Respectfully following the jurisdictional ITAT, Bengaluru decisions for the same A.Y.2013-14 in the above case, these comparables are to be included to the list of comparables.” 32. Further, it is noticed that the functional profile of the assessee and of M/s NXP India P Ltd is identical where the said company is also involved in providing SWD services to its AE. The learned TPO has also chosen certain comparable companies which were also chosen by the assessee company for the purposes comparability.

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 25 of 41

5.6 The next ground relates to granting of working capital adjustment in trading and services segments. The appellant relied on ITAT, Bengaluru decision in its own case for AYs 2012-13 and 2014- 15. ITAT, Bengaluru for AY 2014-15 held that: 35. Both the parties agreed that identical issue was decided by this Tribunal in Assessee's own case for AY 2012-13 in Continental Automotive Components (India) (P.) Ltd.'s (supra) remanded to issue to the TPO with the following observations: 30. This issue came up for consideration before the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd. v. DCIT, 84 taxmann.com 69 wherein it was held as follows:— "5. Before us, Id. A.R submitted that 90% of the raw materials of the assessee are' imported as such customs duty adjustments to be made and it includes Rs. 4.31 crores pertained to the customs duty in the manufacturing

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 26 of 41

segment. In principle the customs duty adjustments is allowed in view of the Co-ordinate Bench decision in the case of Motonic India Automotive (P.) Ltd. v. Assn. CIT 12016] 73 taxmann.com 235 (Chennai Trib.) wherein held that: '6.1 At this stage, it is pertinent to mention the finding of the Pune Bench in the case of Demag Cranes & Components (India) Pvt. Ltd. v. DCIT (supra) dated 4-1- 2012 in ITA No. 120/PN/2011, which is as follows :' "37. We have heard the parties and perused the available material on records in the light of the second limb of the ground 4(b). it is relevant mentioned that we have already analysed the relevant provisions of Income-tax rules vis a vis the scope of the adjustments in the preceding paragraphs in the context of the adjustments on account of the 'working capital'. in principles, our findings on the issue remain applicable to the adjustments on account of the import cost mentioned in ground 4(b) too. The difference between the AL Margin before and after the said adjustments on account of 'import cost' works out to 0.57% (7.18%-6.61%). Revenue has not disputed the said working of the assessee. In these factual circumstances and in the light of the scope of adjustments discussed above, in our opinion and in principle, the assessee should win on this ground too. One such decision relied upon by the assessee's counsel supports our finding relates to the decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd 122 TT.I 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that,-" "No doubt, a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P.) Ltd.'s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. As was observed by a Co-ordinate Bench of this Tribunal in the case of E- Gain Communication (P.) Ltd. (supra) "the differences

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 27 of 41

which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the business models of the comparables that the TPO has adopted in this case. The adjustments then are required to be made for functionally differences. The other way of looking at the present situation is to accept that business model of the assessee company and the comparable companies are the same and it is on account of initial stages of business that the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and profits in fit cases. We also do not agree with the authorities below that the onus is on the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in public domain. In such a situation, i.e. when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of assessee's operations and complete facilities ensuring a reasonable indigenous raw material content was not in place. The assessee's claim is that it was in These circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car vas computed in the light of the costs as would apply when the

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 28 of 41

complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Co-ordinate Bench and we are in respectful agreement with the views of our esteemed colleagues. 17-25 additional argument was not available before authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations." 38. The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub rule (3) of rule 10 of the Income-tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto. Accordingly, we direct the A. O. to give suitable adjustment against the custom duty component while determining the ALP. Hence, to bring uniformity, the customs duty was to be eliminated from the comparable price also to arrive at correct PLI. Accordingly, we remit the issue to the file of AO for fresh consideration."

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 29 of 41

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 30 of 41

“5.8 Next ground relates to treating forex fluctuation as operating. The appellant relied on ITAT, Bengaluru decision in its own case for AY 2012-13 wherein it is held that: 35. The Id. AR submitted that during the FY 2011-12, there was an abnormal depreciation in the value of Euro and USD as against the average movement for the preceding periods. This has resulted in a higher outflow of INR for the same value of Euro and USD which was transacted in the previous year. Although there was no significant increase in the price of imports as compared to the previous year. the foreign exchange rate fluctuations has also contributed towards increased material costs. Therefore, an adjustment for the abnormal impact due to foreign currency fluctuation during the year has to be considered on the value of import purchases made during the year. He highlighted the following points that necessitate the adjustment to the Appellant's cost on account of foreign exchange fluctuations: Higher Import Content of the assessee vis-à-vis comparable companies: 36. As stated above, the assessee imports a considerable amount of raw materials for undertaking the manufacturing operations in India unlike the comparable companies selected in the transfer pricing documentation by the assessee and also the comparable companies selected by the TPO. 37. It is submitted that in comparison to the assessee, the comparable companies who are established players in the automobile market, have negligible import content due to indigenization of materials required for production. The

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 31 of 41

assessee contends that due to stricter quality norms and necessity for adherence to the global quality standards, the assessee had to import from its group affiliates/foreign unrelated suppliers and therefore localisation of such high- quality raw materials had not occurred during the assessment year in question due to several factors. In this connection, the assessee's import consumption vis-à-vis the imports of comparable companies selected by the TPO and the assessee are as below for the FY 2011-12.

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 32 of 41

year 2006-07. Accordingly, we direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment." Accordingly, this issue is remitted to the file of AO for fresh consideration." 40. Following the aforesaid decision of the Tribunal, we remit this issue to the AO/TPO with similar directions for fresh decision. 5.8.1 In the OGE to ITAT order for A.Y.2012-13, the TPO treated forex fluctuation as operating in nature by stating that: "5.5 Foreign exchange fluctuation adjustment: The Hon'ble ITAT has remitted the matter to the file of the Id. TPO relying on the decision of Gates Unitta India Company (P.) Ltd to determine the ALP considering foreign exchange fluctuation adjustment. The taxpayer in its submission had stated that imports a considerable amount of raw material for undertaking the manufacturing operations in India (ie, 60.10%) unlike the comparable companies which have negligible import content due to indigenization of materials required for production. On the other hand, the comparable companies had a ratio of import purchases to total purchases of 3.83%. Hence. the claim of the taxpayer is considered in light of the ruling of Hon'ble ITAT and accordingly the adjustment is allowed." 5.8.2 In view of the above, forex fluctuation is treated as operating in nature for the purposes of computation of TP adjustment.”

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 33 of 41

5.7 The next ground relates to granting capacity utilization adjustment in the manufacturing segment. The appellant sought capacity utilization adjustment and relied on ITAT, Bengaluru decision in its own case for AY 2012-13 wherein it is held that: "24. We have heard both the parties and perused the material on record. In this case, the exact details of capacity utilization of comparable companies was not made available to the TPO. It was alleged that the TPO should obtained it by exercising powers u/s. 133(6) of the Act so as to compare the capacity utilisation

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 34 of 41

comparables with the assessee company. In our opinion, it is appropriate to rem issue relating to adjustment on account of capacity utilisation of the assessee to the of the AO/TPO for deciding the same afresh keeping in view the OECD guideline the exact details of capacity utilisation of comparable companies are not available in public domain, the AO/TPO is directed to obtain the same directly from the comparable companies and decide the issue afresh, after affording opportunity of being heard to assessee. Accordingly, this issue is remitted to the AO/TPO."

5.7.1 The AO is directed to follow the same directions given the ITAT, Bengaluru for AY 2012-13, in the present case also.”

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 35 of 41

5.10.1 Respectfully following the ITAT, Bengaluru decision, TP adjustment should be restricted only to international transactions.”

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 36 of 41

submitted that the learned CIT(A) has followed the decision of the Co- ordinate Bench of Bangalore in the assessee’s own case for the Assessment Year 2010-11. He also further submitted that in the remand report for the Assessment Year 2015-16, the AO has accepted the contention of the assessee and hence prayed for upholding learned CIT(A)’s Order.

“5.5 Next ground relates to depreciation on goodwill amortisation as non-operating in nature which is relevant for all three segments i.e., Manufacturing, Trading, and Services segments. The appellant relied on ITAT, Bengaluru decision in its own case for AY 2012-13 wherein it is held that: "41. Ground No.7 is regarding treatment of amortisation of goodwill as operating expenditure. The facts of this issue are that the assessee had purchased the automotive components business of Siemens Limited pursuant to a business purchase agreement dated 23.11.2007. The sale consideration for the said purchase was Rs. 1,700 million. The assessee had accounted for the tangible and intangible assets based on the fair value of these assets as determined by an external valuer appointed by the company. Thereafter, an amount of Rs. 1226.70 million was accounted as goodwill and amortized over a period of 5 years. An amount of Rs. 245.60 million was amortized in FY 2011-12 and the assessee has considered the said expenses as non- operating in nature and the same was not included in the cost base for determination of operating margin of the manufacturing segment for transfer pricing purposes.

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 37 of 41

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 38 of 41

regular operation of the taxpayer, hence non-operating in nature. 16. Ld. AR for the assessee contended that Id. DRP in assessee's own case in AYs 2011-12 and 2012-13 and Id. TPO in AY 2013- 14 ITA No.168/Del./2015 has already amortized goodwill as extra ordinary in nature by excluding the same by computing operating margin of the taxpayer and order thereof is available at pages 2681 to 2695, 2696 to 2713 and 2718 and 2764 of the paper books. It is also not in dispute that there is no change in the facts of AYs 201011, 2011-12, 2012-13 and 2013-14. Perusal of the order passed by Id. DRP available at page 2681 relevant portion at page 2691, shows that amortization of goodwill is an extra-ordinary item and is not pertaining to the regular operation of the assessee, and hence non-operating in nature. So, in these circumstances, we direct the TPO to verify the facts and treat the amortization of the goodwill as non- operating expenditure in order to compute the operating margin of the assessee. So, ground no.7 is determined in favour of the assessee." 46. Following the above cited decision of the Delhi Tribunal, this issue is decided in favour of the assessee." 5.5.1 Respectfully following ITAT, Bengaluru above said decision, depreciation on goodwill which is amortised is to be treated as non- operating in nature.”

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 39 of 41

“5.9 Next ground relates to adjustment for non-cenvatable customs duty sought by the appellant and relied on ITAT. Bengaluru decision in its own case for AY 2012-13 wherein the issue was remanded to the TPO with the direction: "31. In view of the above finding of the Tribunal in Gates Unitta India Company (P.) Ltd. (supra), we are inclined to remit this issue to the AO/TPO with similar directions." 5.9.1 In the OGE to ITAT order for A.Y.2012-13. the TPO granted the said adjustment by stating that: "5.6 Customs duty adjustment: The Hon'ble ITAT has remitted the matter to the file of the Id. TPO relying on the decision of Gates Unitta India Company (P.) Ltd to determine the ALP considering

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 40 of 41

customs duty adjustment and also to arrive at the correct profit level indicator. Upon verification of the taxpayer's submission, it was observed that the taxpayer had imported considerable amount of raw material for undertaking the manufacturing operations in India (ie, at 60.10%) unlike the comparable companies which have negligible import content due to indigenization of materials required for production. Therefore, the taxpayer incurred significantly higher customs duty charges which are much greater than that of the comparable companies. Considering the above facts in light of the Hon'ble ITAT's ruling, the claim of the taxpayer is allowed while computing the arm's length price." 5.9.2 In view of the above, adjustment on account of non-cenvatable customs duty is allowed for the purposes of computation of TP adjustment.”

ITA No.1318/Bang/2025 CO No.21/Bang/2025 (in ITA No.1318/Bang/2025) Page 41 of 41

C.O. raised in ground Nos.2.4 to 2.7 would not arise for consideration and therefore not pressed. Since the grounds raised by the Revenue are adjudicated in favour of the assessee, by dismissing the Revenue’s Appeal, in the preceding paras aforesaid, the grounds raised by the assessee in the C.O. is dismissed as infructuous.

Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (KESHAV DUBEY) (BALAKRISHNAN S) Accountant Member Judicial Member Bangalore, Dated : 23.07.2026. /NS/* Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order

Assistant Registrar ITAT, Bangalore.