VALEO INDIA PRIVATE LIMITED,KANCHIPURAM vs. DCIT CORPORATE CIRCLE 3(1), CHENNAI

आदेश /O R D E R

PER S. R. RAGHUNATHA, AM :

These appeals filed by the assessee are directed against the final assessment orders dated 11.09.2024 passed by the DCIT, Corporate Circle 3(1), Chennai, u/s. 143(3) r.w.s. 144C (13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter the ‘Act’) for the assessment year 2021-22 in pursuant to the directions of the Dispute Resolution Panel-2, Bengaluru vide orders dated 19.08. 2024.

:-2-: IT(TP)A. No:77/Chny/2024 2. The brief facts of the case are that the assessee Valeo India Private Limited (‘the Assessee’) is a Private Company incorporated on 19.06.2008. The Company is engaged in the business of manufacturing head lamps/ rear lamps/ fog lamps for passenger cars, manufacturing, assembling, sub-assembling, designing, developing, fabricating, and distributing alternators and starter motors, air conditioning units, engine cooling modules and trading compressors. The manufacturing division had five segments viz., Starter Segment, Lighting Segment, Engine Cooling Segment, HVAC Segment, Wiper Segment. The Company also renders design and development services, shared support services and information technology services to its group companies.

S.no. Description Amount in Rs. 1 Upward adjustment towards margin earned 17,19,62,519 from manufacturing segment 2 Upward adjustment towards interest on 28,03,971 overdue receivables

Ground No.2.1: Combining all five manufacturing segments into a single manufacturing segment; and

:-3-: IT(TP)A. No:77/Chny/2024 Ground No.2.2: Rejection of Other Method as Most Appropriate Method for manufacturing segment.

5.1 The ld.AR submitted that the above two grounds of appeal is not pressed.

5.2 Since the above ground nos.2.1 & 2.2 are not pressed by the assessee and hence the same are dismissed.

Ground No.2.3: Comparable Companies Selected by TPO

6.1 For the impugned AY, the assessee had undertaken manufacturing activities, in relation to which the assessee had entered into certain international transactions with its Associated Enterprises (‘AEs’), which were benchmarked under “other method” by following the group pricing policy. However, the TPO rejected “other method” and adopted TNMM as the most appropriate method by combining all 5 manufacturing segments as a single manufacturing segment. Accordingly the TPO proceeded to compute the PLI of Assessee by excluding income from scrap sales, export incentives, foreign exchange gain, government grants, liability is no longer required written back, profit on sale of fixed assets, interest on bank deposits, other non-operating income, reversal of impairment allowance of financial assets reported in the financials by treating them as non-operating income. Post exclusion of these incomes the margin of the Assessee was determined by the TPO at -13.41%. The TPO had also undertaken search in the database and identified 14 comparable companies and arrived at a median margin of 11.1% with the 35th percentile being at 7.6 % and the 65th percentile being at 14.91%. Since the margin of the Assessee was not at arm's length range of the comparable companies identified by the TPO, the TPO had proposed an adjustment to the manufacturing segment.

6.2 The assessee had filed various objections before the DRP as under:

:-4-: IT(TP)A. No:77/Chny/2024 a. Combining all 5 manufacturing segments into a single manufacturing segment b. rejection of other method as most appropriate method for manufacturing segment c. Comparable companies selected by BPO d. Adoption of TNMM method without performing economic adjustment

6.3 However, the DRP upheld the order of the TPO did not grant any relief. Aggrieved against the same, the Assessee is in appeal before us. However, since the Assessee has not pressed ground no. 2.1 relating to combining all manufacturing segments and ground no.2.2. Rejection of other method, our adjudication is limited to selection of comparable companies and granting of economic adjustments.

6.4 In view of the above, the ld.AR submitted that the comparable selected by the TPO pertains to different industry and the products considered are HVAC and cooling segment which constitutes only 13.4% of the revenue of the manufacturing segment (Refer to Page 301 and 302 of Paper book) whereas the majority of the manufacturing segment are into different products such starters, alternator and lighting. This clearly depicts the narrow approach adopted by the TPO while performing the search to identify comparable companies. Further the Ld. AR contended that the comparable companies selected by the TPO are rejected by the assessee on the grounds of significant exports, significant related party transactions and functional differences. Few comparables are not functionally or in terms of size can be compared with the Company. The Ld AR also took us through the annual report extracts of these comparables are provided in the paper-book at pages 369 to 439 of the paper book.

6.5 The Ld AR relied on the following decisions:

:-5-: IT(TP)A. No:77/Chny/2024 • Myunghwa Automotive India Private Limited (2018) 95 taxmann.com 670 • Yutaka Autoparts India (P) Ltd vs DCIT [2024] 168 taxmann.com 80 • Spicer India Ltd (2017) 85 taxmann.com 379

6.6 Per contra the Ld.DR supported the orders of the TPO and DRP and submitted that under TNMM it is only the function undertaken by the Assessee is tested vis a vis the comparable companies and as such even if there are certain comparable engaged in different industry, it will not significantly affect the entire search and therefore, the Ld DR pleaded that order of the lower authorities should be upheld.

6.7 We have heard the rival submissions and considered the material available and record. Apparently the TPO has selected comparables which are diversified into various industries instead of restricting it to automotive industry. Further, many comparable selected by the TPO are into cooling systems vis a vis the Assessee’s majority of the manufacturing segment is engaged in a completely different product which is starters, alternators and lighting. The selection of comparable by the TPO in relation to a specific product may not yield result for appropriate benchmarking, given the fact that Assessee is engaged in multiple segments manufacturing multiple automobile products. Further, we also note that the TPO has combined all the 5 segments as one manufacturing segment and in such a scenario we are of the view that it would be better if the automobile sector companies are considered as comparables instead of considering comparable companies from diversified industry. We also find that the decisions relied upon by the Ld.AR supports this proposition. We gainfully extract the relevant portion of those decisions for our consideration as here under:

:-6-: IT(TP)A. No:77/Chny/2024

Myunghwa Automotive India Private Limited (2018) 95 taxmann.com 670

“In the assessee's own case, for the AY 2010-11 in Myunghwa Automotive India (P.) Ltd. v. Dy. CIT [2016] 69 taxmann.com 168/[IT Appeal No.658 (Mds.) of 2015, dated 7-4- 2016] of this Tribunal, the Tribunal directed the AO/TPO to select only automobile segment of M/s.Dynamatic Technologies Ltd. as comparable or any other suitable company whose activities and characteristics are identical and similar to that of the assessee company. For ready reference, we extract the relevant paragraphs of the ITAT Orders:

………….. 7. We have heard both the parties and carefully perused the materials available on record. Considering the arguments of the learned Authorized Representative, we find merit in the same because comparable companies should have identical or similar activities and characteristic of similar qualities, size and nature. The assessee company is only engaged in the manufacturing activity of automobile products such as water pump assembly and oil pump assembly meant for passenger cars. In these circumstances, only those companies which are operating in the automobile sector manufacturing similar kind of products are to be taken as comparables…………For the above reasons, we remit back the matter to the file of the learned Assessing Officer in order to refer the matter to the learned TPO and further direct the learned TPO to either select the automobile segment of M/s. Dynamatic Technologies as comparables or select some other suitable comparable company whose activities and characteristics are identical and similar to that of the assessee company and thereafter determine the ALP with regard to the International transaction. It is ordered accordingly…….” (emphasis supplied)

Yutaka Autoparts India (P) Ltd vs DCIT [2024] 168 taxmann.com 80:

“14. The above Company is engaged in three divisions brake division, Foundry division and Polymer division. Foundry division manufactures permanent could castings, grey iron ad SG from castings which can be corroborated with Textual information 7 produced at Page No. 236 of the Paper Book. Further the sales of Brakes India is Rs. 2,64,262.62 lakhs whereas the sales of Assessee is Rs. 7,108.495 lakhs which is 37 times that of Assessee. It is the contention of the Assessee that the Brakes India sales are not only more than 37 times i.e. more than 10 times and also the Brakes India is operating in diversified segments. Considering the above facts and circumstances, as Brakes India Pvt. Ltd. is having diversified operations and diversified market, the Brakes India Ltd. cannot be proper comparable. Accordingly, we order to exclude Brakes India Pvt. Ltd. from the list of comparables. Accordingly, the Ground No. 2 of the Assessee is allowed.” (emphasis supplied)

6.8 Based on the ratio decidendi of the above decisions, it can be observed that companies operating in diversified segments (other than automotive segment) cannot be taken as comparable companies. From the Annual Report

:-7-: IT(TP)A. No:77/Chny/2024 submitted as part of the paper book, it can be observed that all companies selected are engaged in diversified segments and not exclusively catering to automotive sector i.e. passenger vehicles as catered by the Appellant. Hence, we hold that the search undertaken by the TPO is skewed and cannot be upheld. Accordingly, we direct the Ld. TPO to undertake fresh transfer pricing analysis by choosing comparable companies that are engaged only in automotive sector. Needless to mention that the TPO shall afford opportunity to the Assessee before passing the order.

Thus, the ground no.2.3 raised by the assessee is partly allowed for statistical purposes.

7.1 The Ld AR contended that during the subject year of assessment, the company was severely impacted by the following factors which resulted in low profitability (Refer to Page 313 to 314 of Paperbook)

o Lockdown cost due to Covid-19 o Under the absorption of fixed costs o Underutilisation of capacity (Refer to page 343 of the paper book for capacity utilisation workings) o Significant depreciation cost o One time R&D cost o Nascent stage of operations of W28 segment (i.e., during the subject year W28 was only operating on a trial run basis and commercial production had not commenced)

:-8-: IT(TP)A. No:77/Chny/2024 7.2 The Ld. DRP and TPO failed to adjust the margin of the comparable companies on account of economic adjustment while benchmarking the international transactions.

7.3 The Ld.DR relied on the orders of lower authorities.

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.

7.5 Accordingly, Ground no.2.4 is partly allowed for statistical purposes.

:-9-: IT(TP)A. No:77/Chny/2024 8.1 The TPO proposed an upward adjustment towards notional interest on outstanding receivables to the extent of Rs.28,03,971. Against the draft assessment order, the assessee filed its objections before the DRP had issued directions confirming the adjustment proposed by TPO. Subsequently, the AO passed the final assessment order against which the assessee has filed this appeal before us.

8.2 The ld.AR submitted that the TPO proposed the upward adjustment towards notional interest on outstanding receivables on the basis that trade receivables due from the foreign AE have been delayed beyond the credit period allowed, for which appropriate compensation has not been received, thus concluding that the receivables have resulted in an interest free loan being provided by the assessee to the foreign AEs. The TPO accordingly, imputed an interest adjustment based on the ageing details provided charging an interest at the rate of 6 months LIBOR plus 350 bps (4.186%) after allowing 30 days credit period.

8.3 The ld.AR submitted that no adjustment in respect of the interest on overdue receivables shall be warranted in case of a debt free company, on the basis that the assessee does not incur any significant interest cost. The Ld.AR stated that, the above principle has been upheld by the Jurisdictional Tribunal in the case of Temenos India Private Limited (IT(TP)A32/CHNY/2024).

8.4 Based on the above, notwithstanding the other contentions, the ld.AR submitted that, since the assessee is a debt free company and does not pay any interest cost, the impugned adjustment proposed by the TPO is not warranted and should be deleted.

8.5 The Ld. DR in this regard, contended that the assessee’s argument against imputing interest towards a debt free company is not tenable on the basis that even though there is no finance cost incurred, there is an imputed

:-10-: IT(TP)A. No:77/Chny/2024

interest cost that is foregone due to outstanding receivables pending collection and that the said argument can only be made in the case of domestic transactions and not in the case of international transactions.

8.6 We have heard the rival contentions and gone through the orders of the authorities along with the paper and book and decided case laws relied on by the parties. The issue of TP adjustment on account of interest on overdue receivables from AE is covered by the decision of this Tribunal in the case of Temenos India Private Limited (ITTPA No.32/CHNY/2024) wherein it was held as follows:

“15. From the above order of the Delhi Bench of the Tribunal in the case of Bechtel India Pvt. Ltd., concerning AY 2013-14, we find that ITAT has taken note of the judgments of the Hon’ble Delhi High Court, Hon’ble Supreme Court concerning AY 2010-11 and also co-ordinate bench order of the Tribunal for assessment year 2012-13. After taking note of above judicial pronouncements, the ITAT had deviated from its earlier order for AY 2012-13 and followed the judgment of Hon’ble Delhi High Court and Hon’ble Supreme Court concerning AY 2010-11. The Delhi Bench of the Tribunal in Bechtel India Pvt. Ltd., for the assessment year 2013-14 had categorically held that there need not be any transfer pricing adjustment for imputing interest cost for the outstanding trade receivables from AEs when the assessee in the said case is a debt free company. Therefore, the DRP’s reliance on the order of Delhi Bench of the Tribunal in Bechtel India Pvt. Ltd., concerning assessment year 2012-13 (which according to us has not laid down a correct proposition of law) is legally not tenable. In light of the above, we delete the transfer pricing adjustment imputing interest income on the outstanding trade receivables. In the result, the Ground No.2 (f) is allowed.”

8.7 Since the assessee is a debt free company and the assessee does not incur any significant interest cost, the TP adjustment of notional interest on overdue receivable is not warranted.

8.8 In light of the factual matrix of the present case, and in consonance with the judicial precedents of this Tribunal, we are of the considered view that the transfer pricing adjustment on account of notional interest pertaining to overdue receivables is unwarranted. Accordingly, we direct the Transfer Pricing Officer (TPO) to delete the said adjustment and to recompute the Arm’s Length Price (ALP) in accordance with the above observations. In view thereof, the grounds of appeal raised by the assessee are allowed.

:-11-: IT(TP)A. No:77/Chny/2024

Order pronounced in the open court on 11th December, 2025 at Chennai.

Sd/- Sd/- (मनु कुमार �ग�र) (एस. आर. रघुनाथा) (MANU KUMAR GIRI) (S. R. RAGHUNATHA) �या�यक सद�य/Judicial Member लेखासद�य/Accountant Member

चे�नई/Chennai, .दनांक/Dated, the 11th December, 2025 SP आदेश क* (�त0ल1प अ2े1षत/Copy to: 1. अपीलाथ'/Appellant 2. ()यथ'/Respondent 3.आयकर आयु3त/CIT– Chennai/Coimbatore/Madurai/Salem 4. 1वभागीय (�त�न�ध/DR 5. गाड% फाईल/GF