M/S. FIH INDIA PVT. LTD.,CHENNAI vs. DCIT, COMPANY CIRCLE-2(1), CHENNAI

आदेश /O R D E R

PER S. R. RAGHUNATHA, AM :

These cross appeals filed by the Assessee and the Revenue arise out of the order of the learned Commissioner of Income Tax (Appeals), Chennai – 16, (hereinafter referred to as “ld.CIT(A)”), dated 07.10.2024 partly allowing the appeal filed by the assessee against the Assessment Order dated 31.12.2010 passed u/s.143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), by the Deputy Commissioner of Income Tax, Circle 2(1), Chennai (in short “AO”) pertaining to Assessment Year (A.Y.) 2007-08. Since, these are cross appeals filed by the revenue and assessee they are being heard together and disposed of, by this consolidated order. 2. The brief facts of the case are that the assessee being engaged in the business of manufacturing parts and accessories for telecommunication makers. The company was incorporated in 2006 and started its commercial operations in September 2006 and operates only under one segment, of which the TPO made TP additions towards margins earned by the assessee. Further, the TPO has not allowed economic adjustments claimed by the assessee by way of – (i) Capacity Utilization adjustment (ii) Adjustment for Packing materials cost (iii) Working capital adjustment (iv) Adjustment for Pre-commencement expenses (v) Freight cost & training expenses (vi) Inclusion of comparable companies – Arcee Industries Ltd, Synthetic moulders Ltd and Naman Plastic Processor Ltd. (vii) Depreciation on UPS at higher rate

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IT(TP)A No.137/Chny/2024 – Assessee’s Appeal:

On the facts and in the circumstances of the case and in law, the Ld.TPO and Ld.AO, under the order issued by the Ld.CIT(A), erred in the following grounds:

Downward adjustment towards operating margin earned by assessee - Adjustment- INR 5,15,96,754/-

1.Erroneous Rejection of Economic Adjustments

Adjustment for Capacity underutilization: a. The Ld.CIT(A) erred in law and on facts by upholding the action of the Ld TPO in rejecting the capacity utilization adjustment claimed by the Appellant. b. The Ld.CIT(A) erred in confirming the order of the Ld TPO by not appreciated the fact that FY 2006-07 is the first year of operation and the company had not operated at its optimum capacity. 2. Elimination of Abnormal cost in relation to Packing material

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a. The Ld.CIT(A) erred in confirming the order of the TPO in not considering the cost incurred towards packing material amounting to INR 2,42,04,233/- as abnormal in nature and treating the same as non-operating expense.

a. The Ld.CIT(A) erred in confirming the order of the TPO in rejecting the start- up expenses amounting to INR 6,24,16,613/- to be treated as non-operating item, which is incurred by the Appellant in the initial months of the year and prior to commencement of operations.

b. The Ld.TPO has failed to understand the fact that, no business can earn profits right from its incorporation and losses shall be integral part of the startup phase of the operations. These losses cannot be attributed to the international transactions entered by the Appellant.

c. The Ld CIT(A)/ TPO has not taken cognizance of the standard cost data submitted by the Appellant during the course of assessment for arriving at the normal profit which the Appellant would have earned but for the initial start-up cost and higher raw material consumption in the initial years of operation.

The Ld.CIT(A)/ TPO erred in rejecting Naman Plastic Processor Ltd. as a comparable company to that of the Appellant without considering the arguments /evidence put forth by the appellant.

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The Ld.CIT(A) or the Ld.TPO has erred in not considering the cash profits earned by the appellant vis a vis the comparable companies considering the first year of operations by the appellant resulting in under absorbed costs.

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Further, the Assessee had achieved a capacity of only 47.80% of the installed capacity (pages 146-307 of paper book). Accordingly, the claim of the Assessee is that material disparities in the utilisation of capacity and the level of absorption of the fixed costs between the Assessee and the comparable companies should be eliminated. Accordingly, the Assessee had claimed that the capacity achieved by the comparable companies, computed based on the available data, was around 64.81% and therefore it has sought for considering under utilisation capacity adjustment. However, the TPO did not grant this adjustment on the reasoning that such data is not available in respect of all the comparable companies. The Ld.CIT(A) upheld the order of the TPO by observing that the capacity details of the comparables were not furnished. The Ld.AR reiterated that it is inappropriate to expect a company to earn profit in the first year of operations itself, having regard to the startup phase of operations, low-capacity utilization, impact of learning curve etc. The losses being an integral part of the startup phase of the operations, it is not appropriate to attribute the losses solely to the international transactions entered by the Assessee. The Assessee during the course of assessment proceedings has also provided the profitability statements of the subsequent years where it has been able to successfully overcome the start-up phase and has started earning profits. Further, the Ld.AR submitted that RBI’s Order Books, Inventories and Capacity Utilization Survey (OBICUS) data is available only from FY 2011–12 onwards. In the present case, the Assessee has furnished capacity utilization data for four comparable companies. Accordingly, in situations where specific capacity utilization data is not available for all the comparable companies, a reasonable computation should be undertaken based on the capacity details of the available comparable companies. In this regard, the Ld.AR has also referred to various judicial precedents including that of the jurisdictional Tribunal.

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adjustment in the present case is not justifiable, as the capacity details for all the comparable companies is not available. 9. We have considered the rival contentions, perused the materials available on record and gone through the orders of the authorities along with the paper books filed and judicial precedents relied upon. The undisputed fact is that the Assessee is in its first year of operation and it had operated only for part of the year i.e. 7 months. In such a scenario, expecting the Assessee to achieve optimum capacity is unreasonable. Further, the comparable companies selected by the Assessee as well as by the TPO are all in existence for more than 5 years, which clearly establishes the fact that when the margin of the Assessee is compared with mature comparable companies, then a reasonable adjustment ought to be granted for differential capacity utilisation. Interestingly, in the present case, the TPO has not denied any of these aspects but rejected the adjustment only on the premise that capacity utilisation data is not available for all the comparable companies. The lower authorities having in principle admitted that adjustment for underutilisation capacity is allowable cannot deny the same merely on the ground that capacity data is not available for all comparable companies. We are of the view that as long as capacity data of some comparable is available, the same should be considered as an indicator of the industry trend and the TPO ought to have granted the idle capacity adjustment. In the instant case, the capacity utilisation of the Assessee is 47.80% vis a vis the capacity of the 4 comparable selected by the Assessee was at 64.81%. Therefore, we are of the view that merely because data of capacity of some comparable is not available cannot be a basis to deny the benefit of the adjustment for underutilisation of capacity and the TPO ought to have granted the adjustment basis the data available. In this regard, we also gainfully refer and rely on the jurisdictional Tribunal decision in the case of Valeo India Private Limited vs DCIT [IT(P)A No.77/Chny/2024], wherein it is held as under:

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“7.4 We have heard the rival parties and perused the material on record. In principle we agree that under TNMM appropriate economic adjustments ought to be made while determining the margins. We gainfully rely on the jurisdictional Tribunal decision in the case of Motonic India Automotive Pvt Ltd v. ACIT [2016] 73 taxmann.com 235 (Chennai - Trib.) and DCIT v. Woosu Automotive India Pvt.Ltd [2023] 155 taxmann.com 287 wherein economic adjustments were allowed. Further, we find that the DRP after having found merit in underutilisation of capacity and other operational issues, rejected the economic adjustment on the premise that the data for some comparable is not available. Non-granting of economic adjustment is against the principles of transfer pricing regulations and the relevant Rule 10B(e) of the Income tax Rules, 1962. In case the data is not available, the TPO could have exercised his powers and called for information from the respective companies to quantify the economic adjustment or alternatively the TPO could have proceeded to determine/quantify the economic adjustments based on the available data and/or relied on the RBI report for the purpose of quantification. In light of our observations as above, we hereby direct the TPO that while undertaking fresh benchmarking analysis, the TPO shall quantify and grant economic adjustments by adopting either one of the methodology as pointed out hereinabove.” (emphasis supplied)

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packing and environmental issues were factored while pricing the product. The Assessee was also not able to substantiate that the cost of recycling couldn’t be passed on to its customer. On appeal, the Ld.CIT(A) has held that the packaging cost to be treated only as routine business expenditure and consequently as operating item while computing assessee’s margin. 13. We have considered all the submissions made in this regard and we are also conscious of the fact that in the first year of operation the Assessee may not be able to establish necessary facilities for recycling of packing material but that by itself would not qualify the Assessee for claiming an adjustment unless and until it is established that such additional cost incurred was not recoverable from the customer. The Assessee having failed to establish that it was not able to recover the additional packaging cost from its customer, cannot as a matter of right claim such an adjustment. Therefore, we agree with the finding of lower authorities that additional packaging cost should not be eliminated separately for the purpose of margin computation of Assessee. Accordingly, this ground No.2.5 of the assessee is dismissed. 14. The next ground has been raised by the Assessee for elimination of pre- commencement expenses from the operating cost base while arriving at the operating margins of the Assessee. The TPO, during the proceedings has disallowed the claim of the Assessee in excluding such costs as according to him, the Assessee couldn't substantiate the claim of such adjustment in comparison to the comparables and the Assessee also has failed to substantiate with supportive documentary evidence of prior period expense being incurred by comparable companies. The Ld.CIT(A) has also upheld the TPO’s position in this matter and has disallowed the Assessee’s claim for adjustment in relation to the pre-commencement expenses.

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production only during September, 2006. The Assessee, being in its first year of operations and that too only for 7 months during the subject AY, has incurred expenses prior to the commencement of its operations amounting to Rs.6,24,16,613/-. It was also submitted that the comparable companies selected by the Assessee are all well established companies unlike the Assessee and these comparables are not in their initial years of operation. Since the comparable companies are well established companies, they would not have incurred pre-commencement expenses during the subject AY under consideration. Hence, in order to bring the Assessee at par with the comparables, such expenses should be eliminated from the operating cost base while computing the operating margin of Assessee.

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with mature comparable companies. In one hand the TPO does not dispute that the comparable companies are all well established companies but on the other hand the TPO denies the benefit of this adjustment on the ground that Assessee has not established that comparable companies have not incurred similar expenditure. It is a definite fact that established companies would not incur pre-commencement expenditure, therefore it is only logical that when Assessee has incurred such expenditure in the first year of operation the same ought to excluded while comparing the Assessee’s margin with well established comparable companies. That apart, we also note that the purpose of the TP analysis is to find out whether the Assessee has shifted profits outside India by arranging its international transaction with AE’s but in the instant case we find that the pre-commencement expenditure has got nothing to do with international transaction undertaken by the Assessee, hence it is not appropriate to consider such expense as an operating cost while benchmarking the international transaction. In the light of these findings and going through the details/ evidence produced by the Assessee, we direct the TPO to exclude the pre-commencement expenses from the operating cost while computing the margin of the Assessee. Accordingly, the corresponding Ground of appeal No.2.6 raised by the assessee is allowed.

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The Ld.AR referred to the annual report of the comparable company - Naman Plastic Processor Ltd (pages 105-139 of the Paper book). The annual report for Naman Plastic Processor Ltd was furnished for AY 2008-09 which has the details pertaining to AY 2007-08 also. The same was also furnished during the course of assessment proceedings before the TPO.

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and held that various other factors were also required to be considered. The Ld.CIT(A) stated that the opening and closing balances do not show the movements in their accounts during the year. The ld.CIT(A) further stated that the disclosure of the figures of debtors and creditors which are important for computing the working capital adjustment does not provide the breakup of trade and non-trade nature of such balances. Since, the assessee has failed to provide such data pertaining to the assessee as well as the comparable companies, the claim for working capital adjustment was rejected.

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non-trade nature of such balances were not considered in the working without appreciating that the guidelines does not prescribe or mandate such inclusions while computing the working capital adjustment. It is just and necessary to consider the fact that these details are never available in the public domain and hence the Assessee cannot be called upon to do an impossible task. Moreover, these details are not relevant and it may not have significant impact on the overall computation of the adjustment as long as the opening and closing values are considered. Hence, the Lower authorities position that movements in the debtors and creditors accounts during the year and the breakup between trade and non-trade nature of such balances not being reckoned in Assessee’s working, cannot be valid ground to deny working capital adjustment, more so when the guideline does not insist on the same. In fact, these details will not be available in public domain and in effect it will make it impossible for anybody to apply working capital adjustment. Therefore, the unreasonable contention of the lower authorities cannot be sustained. The ld.CIT(A) has relied on Jurisdictional Tribunal decision in the case of NVH India Auto Parts P. Ltd wherein working capital adjustment was denied. However, the said order has been later modified by this Tribunal vide order in MA No.170/Chny/2023 dated 19.01.2024, wherein the Tribunal has remanded back the issue of working capital adjustment to the file of the TPO to verify and allow the adjustment based on the workings & details furnished by the Assessee. Hence, the ld.CIT(A)’s reliance on the main appeal order which is subsequently modified cannot be sustained. This Tribunal in plethora of decisions has held that working capital adjustment is allowable on the basis of working in accordance with ICAI guidelines. We rely on the jurisdictional Tribunal decision in the case of Hyundai Wia Ltd (supra) wherein it is held under:

“16. The next issue before us is the ground on working capital adjustment. The Ld. AR submitted that this ground was raised as an additional ground before the dispute resolution panel (DRP). The DRP having admitted the grounds has not allowed the adjustment on working capital. The Ld. AR

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placed reliance on Jurisdictional ruling in the case of Doowon Automotive India Private Limited ITA No. 692/Mds/2016 for AY 2011-12 and also ITA No. 3061/Chny/2017 for AY 2013-14, the Tribunal has held under: “……We have heard the rival contentions. With regard to the allowability of working capital adjustment, the Tribunal has considered similar issue in the assessment year 692/Mds/2016, the Tribunal has observed and held as under: “7. The Ld. AR argued that the Assessing Officer/DRP has confirmed the action of the TPO in not providing working capital adjustment while determining net profit margin of the assessee. In the assessee's own case in the assessment year 2009 directed the TPO to examine the issue and consider working capital adjustment. Whereas, the Ld. TPO observed that the assessee company is actually buying the parts from the AE and working capital adjustment to be allowed if the assessee demonstrates with AE of allowing the credit period to the assessee and DRP confirm the action of the TPO and the Ld. AR demonstrated the Arithmetic Mean of 4.58% of seven comparables selected at Page 41 of paper book and referred to the working adjustment PLR of 12.26% with the comparables current assets being sundry creditors, sundry debtors and inventories at Page 42 and supported working capital adjustment of comparables company based on the financial statements. The Ld. DR relied on the order of TPO and prayed for no adjustment is required. Considering the facts and material on record the financial statements and the paper book, there is necessity for working capital adjustment and accordingly we remit the issue to the file of AO to consider the material for fresh consideration. 5.3 By giving effect to the order of the ITAT, vide order dated 28.10.2018, the TPO had examined and allowed the benefit of working capital adjustment. Thus, respectfully following the above decision of the Coordinate Benches of the Tribunal, for the assessment year under consideration also, we direct the Assessing Officer to give suitable adjustment against the working capital component while determining the ALP.” 17. Per contra, the Ld. DR also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. V. Dy. CIT(2013) where the decision was based on the factual aspect that the assessee was not able to demonstrate the impact of working capital adjustment. The Ld. AR objected to the argument of the Ld. DR and pointed out that complete

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working capital adjustment working has been given by the assessee and a copy of the same is at pages 212 to 260 of the Assessee’s paper book. 18. We perused the material on record and find that the working is available and furnished before the lower authority. Therefore, we direct the TPO to consider the working capital adjustment as provided in paper book page nos. 212-260 and grant adjustment while arriving at the arm’s length price. This ground is allowed.”

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arithmetical mean of such prices: Provided further that if the variation between the arm’s length price so determined and price at which the international transaction has actually been undertaken does not exceed [five per cent of the latter], the price at which the international transaction has actually been undertaken shall be deemed to be the arm’s length price.]”

The above provisions were applicable up to 31st March 2012. Post this, 28. the provisions were amended through Finance Act 2012, restating this tolerance ALP cap to +/- 3%. Since, as per the provisions of the Act a tolerance band of 5% is applicable for AY 2007-08, the TPO is directed to apply this proviso after re-determining the margins of the assessee and the final set of comparable companies, pursuant to implementation of our findings/ directions herein above and if it falls within the tolerance band, the transfer pricing adjustment shall be deleted. Hence, this additional ground of appeal is allowed with the above observations.

IT(TP)A No.01/CHNY /2025 – Revenue’s Appeal:

The revenue has raised the following grounds of appeal:

i. The order of the Ld. CIT(A) is contrary to the facts and circumstances of the case. ii. Whether on the facts and circumstances of the case, the Ld. CIT(A) is correct in directing the TPO to include the company M/s. Synthetic Moulders Ltd, ignoring the fact that this company is having abnormal business trend during the years considered in the comparability analysis.

iii. Whether on the facts and circumstances of the case, the Ld. CIT(A) is correct in directing the Ld TPO to include the company M/s. Arcee Industries Ltd and ignoring the fact that the PBIT of this company is negative. This indicated that the company has incurred loss in 2 years out of 3 years and considered as a comparable.

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iv. The Ld. CIT(A) has erred in deleting the disallowance of depreciation on UPS by relying on the decision of the Hon’ble Madras High Court in the case of CIT vs Cactus Imaging India Pvt. Ltd, where the dispute relates to depreciation on printer.

v. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld CIT(A) may be set aside and that order of the Assessing Officer be restored.

Exclusion of comparable company - Arcee Industries Limited

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company. In the instant case, Arcee Industries Ltd. has made profits in 1 out of the 3 years and therefore it cannot be rejected on the ground of persistent loss making company. The ld.CIT(A) has rightly applied this principle already in his order, we therefore uphold the order of the ld.CIT(A). Hence, we decide this issue in favour of the assessee. The ground of appeal No. (ii) of the revenue is dismissed. Exclusion of comparable company - Synthetic Moulders Ltd 33. Ground No.(iii) relates to the exclusion of Synthetic Moulders Ltd as a comparable company. The TPO had rejected the company stating that based on the data available in prowess, the PBIT of the company is negative and the company has been incurring loss for FY 2004-05 and 2005-06 - which is 2 out of the 3 years under consideration. Hence, the TPO held that the company failed persistent loss filter and consequently rejected the company. Also, the TPO has provided that the said company has earned abnormal profits during the years under consideration. 34. The Ld.CIT(A) took a consistent stand as stated above and directed the TPO to include this company as a comparable to the assessee. 35. We have heard the rival contentions and as discussed above, the exclusion of this company is not justified, as losses were incurred only in two of the relevant years. Accordingly, the ground No.(iii) of the revenue is dismissed. Disallowance of depreciation on UPS: 36. Ground No. (iv) relates to disallowance of depreciation on UPS. This ground is regarding the claim of depreciation on UPS at a rate of 60% instead of 15%. The AO had declined higher rate of depreciation on UPS as claimed by the Assessee at 60%. However, the Ld.CIT(A), made a reference to the ruling pronounced by the Hon’ble High Court of Madras in the case of CIT vs. Cactus Imaging India Pvt Limited [2018] 93 taxmann.com 396 (Madras) and

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Hon’ble Delhi High Court in the case of Nestle India Ltd (2023) 153 taxmann 201 and held that UPS being a part of computer, is eligible for depreciation at higher rate of 60 per cent. 37. We have heard the rival submissions and perused the material available on record. The issue in the present ground pertains to the rate of depreciation applicable to UPS, wherein the AO restricted the claim of depreciation to 15% as against 60% claimed by the assessee. We find that the Ld.CIT(A), relying on the judgment of the Hon’ble Madras High Court in the case of CIT vs. Cactus Imaging India Pvt. Ltd. [2018] 93 taxmann.com 396 and the decision of the Hon’ble Delhi High Court in Nestle India Ltd. [2023] 153 taxmann.com 201, has rightly held that UPS, being an integral part of the computer system and supporting its functions, is eligible for depreciation at the rate applicable to computers, i.e., 60%. In view of the judicial precedents cited above and the functional similarity of UPS with computer systems, we find no infirmity in the order of the Ld.CIT(A) and hereby direct the AO to allow depreciation at 60%. Accordingly, the ground No. (iv) raised by the Revenue is dismissed.

Order pronounced in the court on 21st July, 2026 at Chennai.

Sd/- Sd/- (जॉजा जॉजा के) (एस. आर. रघुनार्था) (GEORGE GEORGE K) (S. R. RAGHUNATHA) उपाध्यक्ष /VICE PRESIDENT लेखा सदस्य/ACCOUNTANT MEMBER चेन्नई/Chennai, ददनांक/Dated, the 21st July, 2026. Devadas

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आदेश की प्रनतललपप अग्रेपर्त/Copy to: 1. अपीलार्थी/Appellant 2. प्रत्यर्थी/Respondent 3.आयकर आयुक्त/CIT– Chennai/Coimbatore/Madurai/Salem 4. पवभागीय प्रनतननधि/DR 5. गाडा फाईल/GF Digitally signed by DEVADAS DEVADAS GOPALANACHARY GOPALANACHARY Date: 2026.07.24 11:26:00 +05'30'