VALEO INDIA PRIVATE LIMITED,CHENNAI vs. ACIT, CORPORATE CIRCLE 3(2), CHENNAI, CHENNAI

The assessee is a private limited company and engaged in the business of manufacturing of head and rear lighting for the automotive OEM customers. The assessee is also engaged in sale of tools and provision of design and development services to its automotive OEM customers and such services are provided through sub contracting to its AEs and third parties. The assessee filed a return of income for AY 2011-12 on 30.11.2011 declaring a loss of Rs. 17,56,86,546/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions, the A.O made a reference to the Transfer Pricing Officer (TPO) to determine Arm's Length Price (ALP) of the international transactions. The TPO proposed an adjustment of Rs.4,92,04,186/-. The A.O passed the draft assessment order incorporating the TP adjustments. The A.O also disallowed expenses claimed towards ROC fees and provision for doubtful debts. Since the assessee preferred to file appeal before the CIT(A), the assessee requested the A.O to pass the final assessment order vide letter dated 28.04.2025. In the final assessment order, the A.O assessed the total income at Rs. 7.22 Crores after making additions to the tune of Rs. 25.44 Crores in complete variation with draft assessment order. The assessee aggrieved by the final assessment order filed a writ petition before the Hon'ble Delhi High Court and the Hon'ble High Court vide its order dated 06.07.2015 set aside the assessment order and directed the A.O to pass afresh assessment order u/s. 144C of the Act. The file of the assessee was subsequently transferred to Chennai and the A.O passed the second final assessment order dated 30.09.2016 assessing the income at Rs.7,21,57,033/- after making various additions/disallowances and including the transfer pricing adjustments. Aggrieved, the assessee filed further appeal before the CIT(A). Before the CIT(A), the assessee contended only those issues pertaining to the TP adjustments and the CIT(A) partly allowed the same. The assessee is in appeal against the order of the CIT(A) before the Tribunal.

The Ld. Authorized Representative (AR) of the assessee during the course of hearing presented arguments pertaining to the grounds regarding economic adjustments towards capacity utilization and working capital adjustments only. The Ld. AR further submitted that the rest of the grounds are not pressed and hence they are dismissed as not pressed.

At the outset, the Ld. AR drew our attention to the below findings of the TPO with regard to the working capital adjustment: “12.2 The calculations submitted by the assessee for working capital adjustments were examined in the light of its audited financials submitted during the TP proceedings. Before discussing the merits of the work capital adjustments, it is important to know that as per the P&L account for the period 2009-10 the assessee had made no sales of lighting components. The only sales made were of Tools and it had other income as well. The closing balance of the receivables as on 31.3.10 was Rs. 1.22 Gr as per the balance sheet figures and the closing balance figure for the year ending 31.3.11 was 19.80 Cr. The working capital adjustment calculation submitted in this office vide reply dated 10.10.14 was examined, and it was observed that the value of receivables in the calculation chan did not match with the audited financials. The opening balance of receivables was negative and the closing balance also did not match. Since the values of receivables forming part working capital calculations are not in consonance with those of audited financials the working calculations submitted cannot be relied upon to arrive at a reasonably accurate adjustment figure. It may also be noted that since the assessee had no sales at all in the previous financial year for the lighting components, the mean of the opening and closing balances for the current financial year would render a very distorted picture of the working capital adjustment thereby proving that reliable data is not available to arrive at a reasonably accurate adjustment value.” 5. The Ld. AR accordingly submitted that the reason for not allowing the working capital adjustment is that the workings submitted by the assessee are not matching with the financial statements. The Ld. AR in this regard drew our attention to the below workings of working capital adjustment carried out by the assessee to submit that TPO's observations are not correct and that the TPO did not verify the details –

With regard to capacity utilization, the Ld. AR submitted that the ground for not allowing the adjustment is that the assessee has not provided any documentary basis for the assumption taken into account for arriving at the adjustment. The Ld. AR drew our attention to the financial statements of the assessee as extracted below to submit that during the year under consideration the assessee for the first time started the manufacturing activity and the capacity utilization was only 33%:

The Ld. AR further drew our attention the financial statement where the revenue from the sale of lighting components is disclosed for the first time. Accordingly the ld AR submitted that the TPO is not correct in denying the economic adjustments to the assessee.

The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the CIT(A).

We have heard the parties, and perused the material available on record. The assessee has adopted TNMM as the most appropriate method and the PLI was computed as OP/OR. In the Transfer Pricing Study Report (TPSR) the assessee computed the margin at (-) 1.08% and the margin of the comparables was computed at (-) 2.39%. Accordingly the assessee in the TPSR has stated that the transactions are at Arm's Length. The assessee for the purpose of bench marking has made certain economic adjustments towards Working Capital adjustment, Freight and capacity utilization. The TPO denied the same mainly for the reason that the data used by the assessee are not verifiable. We further notice that the TPO has denied the adjustment towards capacity utilisation also stating that the assessee has not substantiated the adjustment with documentary evidences and workings. With regard to denial of economic adjustments as above we notice that the coordinate bench, under similar facts in assessee's own case for AY 2021-22 [(2026) 182 taxmann.com 506 (Chennai-Trib)] has held that –

When we apply the ratio as laid down in the above case, there is merit in the contention that the TPO ought not to have denied the working capital adjustment stating that the data used is not verifiable when the TPO has other options to call for details and consider the claim of the assessee. There is also merit in the submission that when the financials of the assessee evidence the under utilisation of capacity, the TPO should not have denied the adjustments for want of evidence. Further non-granting of economic adjustments when the assessee is able to demonstrate that the same has effect on the margins is not in accordance with Rule 10B(e) of the Income Tax Rules 1962. Therefore we restore the impugned issues back to TPO with similar directions as in the above order of the Tribunal. The TPO is further directed to call for necessary details and decide in accordance with law after giving a reasonable opportunity of being heard to the assessee. It is ordered accordingly.

In result, the appeal of the assessee is partly allowed for statistical purposes.