ASSISSTANT COMMISSIONER OF INCOME-TAX CORPORATE CIRCLE 1-1, CHENNAI vs. JOYSON ANAND ABISHEK SAFETY SYSTEM PRIVATE LIMITED, KANCHIPURAM

The assessee (earlier known as Takata India Pvt. Ltd.) is a company and is engaged in the business of manufacturing and supplying of safety products like seat belts, air bags and steering wheel systems for automotive original equipment manufactures in India. It is a joint venture between Takata Corporation, Japan and Anand Group India. The assessee filed the return of income for AY 2014-15 on 30.11.2013 by admitting a loss of Rs.21,85,97,159/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. During the year under consideration, the assessee had international transactions with Associated Enterprises (AEs) to the tune of Rs.1,79,20,86,674/-. The A.O therefore made a reference to the Transfer Pricing Officer (TPO) who proposed an adjustment of Rs.51,86,27,609/- which was subsequently revised u/s. 154 of the Act to Rs.51,16,27,454/-. Aggrieved, the assessee filed further appeal before the CIT(A), who dismissed the assessee's appeal. The assessee filed further appeal before the Tribunal and the Tribunal vide order dated 17.10.2019 remitted the matter back to the file of the CIT(A) to decide the issues afresh in accordance with law by affording sufficient opportunities of being heard to the assessee. During the remanded proceedings before the CIT(A), the assessee raised contentions with regard to rejection of certain adjustments made by the assessee while computing the PLI towards the following: i. Liabilities written back – Treated as operating income ii. Foreign Exchange loss – Treated as non-operating expenses iii. Customs duty adjustment – Treated as economic adjustment iv. Capacity utilization adjustment – Treated as economic adjustment v. Price penetration adjustment– Treated as economic adjustment.

The assessee while determining the Arms Length Price (ALP) has made the following economic adjustments: Descriptions Amount (in Rs.) a. Revenue loss adjustment 12,96,42,510 (Price penetration adjustment) b. Customs duty adjustment 11,24,97,943 c. Capacity adjustment 11,93,47,729 (depreciation adjustment)

The assessee also treated the following as operating income: Descriptions Amount (in Rs.) Liabilities no longer required written 97,63,115 back Trade payables with related party 8,09,99,673 waived and thus written back Contingencies no longer required 59,57,264 written back Insurance claimed 9,68,076 Others 36,75,776 Total 9,83,63,904 6. The assessee also treated the foreign exchange loss as non-operating. The TPO while determining the ALP did not allow the above adjustments made by the assessee and determined margin at -10.34%. The TPO also :- 7 -: rejected one of the comparables chosen by the assessee to arrive at a margin of 5.79%. Accordingly, the TPO arrived at the adjustment of Rs.51,36,27,609/- for the difference in the margin. The main contention of the Ld. AR before us is that the CIT(A) while adjudicating the grounds raised by the assessee with regard to the various adjustments did not record any specific finding with regard to treatment of foreign exchange loss, and the economic adjustments towards customs duty and price penetration.

With regard to treatment of foreign exchange loss as non-operating, the Ld. AR submitted that the assessee has been treating forex movement as non- operating from AY 2012-13 to AY 2016-17 and that the revenue has accepted the said decision for AY 2012-13 & 2013-14. The Ld. AR further submitted that for AY 2015-16, the assessee has earned forex gain and has treated the same as non operating income which has been accepted by the A.O. Accordingly, the Ld. AR argued that the assessee has been consistently treating the forex movement as non-operating and the same has not been disputed by the Revenue in the prior as well as the subsequent AY. The Ld. AR further argued that for the current year alone the TPO has rejected the claim of the assessee and has made the adjustments. The ld. AR also submitted that the forex risk is not born by the assessee and in the TP study it is incorrectly mentioned that forex risk is born by the assessee. The Ld. AR submitted that the said error has been brought to the notice of the TPO which has not been considered. The Ld. AR drew our attention to the finding of the CIT(A) to submit that the CIT(A) has not adjudicated the ground raised by the assessee but simply rejected the same stating that it is not allowable (para 3.10.2 from page 11 of CIT(A) order). The Ld. AR further submitted that since the TPO has not considered the consistent stand taken by the assessee :- 8 -: with regard to forex moment, the issue of adjustment towards forex loss may be remitted back to the TPO for fresh consideration.

With regard to the adjustment towards customs duty, the Ld. AR submitted the following table:

The Ld. AR submitted that the duty element in the purchases is a significant amount and therefore, the assessee has made the adjustment for the purpose of PLI. The Ld. AR in this regard drew our attention to the submission made before the TPO with regard to localising the purchases and that the localization could not be possible due to customer expectation with regard to the quality of the product. The Ld. AR submitted that the A.O while rejecting the adjustment did not consider the submissions made by the assessee and that the CIT(A) also has not given any detailed findings in this regard. Accordingly, the Ld. AR prayed that the issue may be remitted back to the TPO for fresh consideration. 10. The Ld. Departmental Representative (DR), on the other hand, relied on the orders of the lower authorities.

We have heard the parties, and perused the material available on record. The assessee while computing the margin for bench marking purposes :- 9 -: treated the forex loss as non-operating expenses and the same is not accepted by the lower authorities. From the perusal of the table submitted by the assessee (as extracted in the earlier part of this order), we notice that the assessee has been consistently treating the forex movement as non-operating expenses and in AY 2015-16 the assessee has treated the forex gain as non- operating income. We further notice that the revenue has accepted the said stand of the assessee in earlier years and in AY 2015-16. Therefore, we see merit in the submission of the Ld. AR that the consistent treatment of the assessee with regard forex movement has not been considered by the TPO for the year under consideration alone. We also notice that the CIT(A) while deciding the grounds of the assessee has not given any specific findings with regard to forex adjustment sought by the assessee and has merely stated that the ground raised is rejected. Considering these facts as enumerated above, we are of the view that the issue of forex adjustment has to be examined afresh by the TPO and therefore we remit the issue back to the TPO. The TPO is directed to examine the impugned issue afresh keeping in mind the consistent approach followed by the assessee in earlier years and decide the claim of the assessee in accordance with law. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.

With regard to adjustment towards customs duty, we notice that the CIT(A) while rejecting the adjustment, did not give any elaborate findings but has merely stated that the ground is rejected. The contention of the assessee is that the customs duty forms a major portion of the cost of imports affecting the profit margin of the assessee and therefore is an extraordinary item to be adjusted for PLI purposes. We notice that the TPO did not accept the adjustment for the reason that the customs duty element should have been :- 10 -: embedded in the pricing and that the assessee has not demonstrated as how the cost incurred is not recovered affecting the margins. The ld AR during the course hearing submitted that the assessee could not recover the cost due to competition and that the assessee's attempt to purchase from local markets also failed. Considering that the TPO has rejected the adjustment on the ground that the assessee has not discharged the burden of proving that the customs duty element skews the margins of the assessee and that the CIT(A) has not properly examined the issue, we are inclined to give one more opportunity to the assessee to justify the adjustment with proper evidences and details. Accordingly we remit the impugned issue back to the TPO for a fresh consideration by calling for relevant details and decide in accordance with law. The assessee is directed to submit the details as may be called for and cooperate with TP proceedings. It is ordered accordingly.

The ld AR during course of hearing brought to our attention that the CIT(A) did not give any reasons for rejection the price penetration adjustment made by the assessee. From the perusal of the order of the TPO we notice that the said claim is rejected for the reason that the quantitative details were not made available and since the major part of purchases is from AEs the loss reported cannot be distanced from AEs. Since the CIT(A)/TPO has not given any detailed finding and the adjustment is rejected for want of details, we deem it fit to remit the issue back to the TPO for consideration afresh of the impugned issue. The TPO is directed to re-examine the issue by calling for relevant information and decide in accordance with law after giving reasonable opportunity of being heard to the assessee.

The Ld. AR on the other hand, submitted that the major part of the write back pertain to the trade payable waived off by the related party and that the corresponding cost when incurred was part of the operating expenses of the assessee. The Ld. AR further submitted that when the cost of treated as operating expenses the liability against the same when reversed need to be treated as operating income. The Ld. AR also submitted that if the reversal is not treated as operating income then it would result in dual adjustment of income. The ld. AR drew our attention to the fact that the agreement with regard waiver of liability was submitted before the TPO which has not been considered.

We have heard the parties, and perused the material available on record. The assessee during the year under consideration wrote back certain liabilities the break up of which is as under –

The contention of the assessee is that the cost incurred against these liabilities were treated as operating expenses in the earlier years and therefore the write back of the said liabilities should be treated as operating income. In this regard we notice that out of the above breakup, the major amount is towards trade payables and with regard to the same we see merit in the submission of the assessee that the write back to this extent should be treated as operating income since the purchases would have been part of the operating expenses. It is also relevant to note that the assessee had submitted the agreement entered into AE with regard to the waiver of these liabilities based on which the assessee has written back the trade payable. Therefore to this extent we see no reason to interfere with the decision of CIT(A) in allowing the adjustment towards write back of trade payables as the operating income of the assessee. Having held so, from the perusal of the rest of the line items in the above breakup, we are unable to accept without verification the claim of the assessee the cost against these write backs were earlier treated as operating expenses. Therefore, we restore the issue with regard to rest of the claim back to the TPO with a direction to examine the nature of write back to verify whether the same pertains to earlier year operating expenses. The TPO is further directed to call for any supporting evidences as may be required in this regard and allow the treatment of the assessee if it pertains earlier year :- 13 -: operating expenses. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.

The next issue contended by the ld. DR pertain to the capacity utilization adjustment allowed by the CIT(A). The Ld. DR submitted that the assessee has been in existence since 2007 and has been operating in full capacity. Therefore, seeking adjustment towards capacity utilization for the year under consideration is not justified. The Ld. DR further submitted that the assessee is seeking the adjustment towards capacity utilization based on the ratio of depreciation to turnover and the assessee has not submitted any supporting for arriving at such adjustment. The Ld. DR also submitted that in the absence of relevant details of the bifurcation of cost into variable and fixed cost and without substantiating that the under absorption of depreciation as a result of under utilization installed capacity, the adjustment towards capacity utilization as claimed by the assessee cannot be entertained. The ld DR argued that the CIT(A) has allowed the adjustment merely based on assessee's submission without proper verification.

The Ld. AR, on the other hand, submitted that the CIT(A) has allowed the depreciation adjustment after consideration the workings submitted by the assessee wherein the depreciation as a percentage of sales in assessee's case is 6.7% whereas the same percentage of the comparables stood at 3.08%. The Ld. AR submitted that Rule 10B(e)(iii) allows for adjustment that would materially effect the margins of the assessee and the depreciation having a significant impact on the margin of the assessee is therefore adjusted for the purpose of computing the PLI. Accordingly, the Ld. AR supported the order of the CIT(A). The Ld. AR also drew our attention to the fact that for A.Y :- 14 -: 2013-14 where the assessee has sought similar adjustment the TPO has allowed cash PLI i.e., excluding depreciation. The ld. AR further drew our attention to the fact that the assessee stopped claiming adjustment towards capacity ululation from AY 2021-222 from the business of the assessee has stabilized.

We have heard the parties, and perused the material available on record. The assessee has made adjustment towards depreciation by computing the difference in the depreciation as a percentage of sales between the assessee and the comparables. The contention of the assessee in this regard is that the business of the main customers of the assessee (Nisson and Honda) was very low during the year under consideration due to which the depreciation was under absorbed and that the assessee could not operate at full capacity. In this regard we notice that the assessee company has been making consistent loss from earlier years and that the ld AR drew our attention to the depreciation schedule to submit that the depreciation cost is a major component contributing to the loss due under absorption. It is also relevant mention here that Rule 10B as relied on by the CIT(A) does provide for adjustments which could materially affect the net profit margin and therefore to this extent we find no infirmity in findings of the CIT(A). However we are unable to agree with the computation of adjustment made by the assessee i.e. the difference in the depreciation as a percentage of sales between the assessee and the comparables. Rule 10B(3) provides that reasonably accurate adjustments can be made to eliminate the material effects of differences on net profit margin between the assessee and the comparables. In our considered view, depreciation as percentage of sales cannot be reasonably accurate adjustment, since the relationship between depreciation :- 15 -: and sales in the case of comparable companies may not be similar to that of the assessee. During the course of hearing the ld AR submitted that the TPO has allowed the cash PLI for the assessee for bench marking. Considering the overall facts and circumstances of the case, we hold that for the year under consideration also the assessee should be allowed to compute cash PLI for the purpose of bench marking. We accordingly direct the TPO to re-compute the ALP of the assessee considering the cash PLI of the assessee and the comparables. The assessee is directed to submit the relevant details before the TPO in this regard. It is ordered accordingly.

In result, the appeal of the assessee and the revenue are allowed for statistical purposes and the CO of the assessee is dismissed.