ILJIN AUTOMOTIVE PRIVATE LIMITED,KANCHEEPURAM vs. DCIT CORPORATE CIRCLE 2(2), CHENNAI

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ITTPA 60/CHNY/2018Status: DisposedITAT Chennai03 December 2024AY 2014-157 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal addressed the issues as follows: Regarding **Transfer Pricing Adjustment**, the Tribunal rejected the assessee's argument for using multiple years' data, stating that comparability must be based on contemporaneous data. The Tribunal accepted the inclusion of M/s Automotive Stamping Assemblies Ltd. as a comparable entity, directing the AO/TPO to accept it, following a similar decision for AY 2013-14. The issue of M/s Jamna Auto Industries Ltd. was restored to the AO/TPO for substantiation by the assessee, as no finding was rendered by lower authorities. The Tribunal rejected the exclusion of M/s ATS Elgi Ltd., M/s JBM Auto Systems Pvt. Ltd., and M/s MK Autocomponents Ltd. based solely on public domain product information, stating that TNMM requires broad comparability and that the business model appeared similar. The argument that forex losses were non-operating was rejected, as these losses had a direct linkage to the assessee's international transactions. The issue of entity-level adjustment was restored to the AO/TPO for fresh adjudication with a direction to the assessee to substantiate its case, as the assessee was unable to provide separate data before the lower authorities, despite agreeing that adjustments should be made only with respect to AE transactions. Regarding **Disallowance under Section 43A**, the Tribunal noted that this issue was restored to the AO for fresh consideration in AY 2013-14 due to the assessee's failure to provide requisite details. As the facts are similar, the Tribunal gave similar directions for the current year, restoring the issue to the AO for fresh adjudication with a direction to the assessee to substantiate its case. The corresponding grounds were allowed for statistical purposes. The operative directions were to restore certain aspects of the transfer pricing adjustment and the disallowance under Section 43A to the AO/TPO for fresh adjudication, with directions for the assessee to provide substantiation. The appeal was partly allowed.

What were the facts?

This appeal by M/s. Iljin Automotive Private Limited (the assessee) for Assessment Year 2014-15 is a recalled matter. The original appeal was disposed of but later recalled. The appeal arises from a final assessment order dated 20-08-2018 passed by the Assessing Officer (AO) under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961, pursuant to directions from the Dispute Resolution Panel (DRP). The assessee, a subsidiary of Iljin, Korea, operates an assembling plant in Chennai. International transactions with Associated Enterprises (AEs) led to a reference to the Transfer Pricing Officer (TPO). The TPO proposed transfer pricing adjustments, which were incorporated into a draft assessment order. The assessee filed objections with the DRP, whose directions were followed by the AO in the final assessment order.

What were the issues?

The Tribunal had to decide two main issues: 1. **Transfer Pricing Adjustment:** Whether the Transfer Pricing Officer (TPO) and Assessing Officer (AO), under the directions of the Dispute Resolution Panel (DRP), erred in rejecting the assessee's Transfer Pricing (TP) study, undertaking a fresh benchmarking search, rejecting the use of multiple-year data, selecting new comparable companies without cogent reasons, rejecting the assessee's comparable companies, disregarding consistency, selecting functionally dissimilar companies, treating foreign exchange losses as operating in nature, not allowing customs duty adjustment, and computing the adjustment at the entity level. * **Assessee's Contention:** The assessee argued that the TPO/AO violated Section 92C(3) by rejecting its TP study and conducting a fresh search. It contended against rejecting multiple-year data, the selection of comparables, and the treatment of forex losses. It also argued for entity-level adjustments only on AE transactions, relying on CIT vs. Firestone International Pvt. Ltd. (Bombay High Court) and the dismissal of the department's SLP by the Supreme Court. * **Revenue's Contention:** The Revenue, through the Ld. CIT-DR, supported the findings of the DRP. 2. **Disallowance under Section 43A:** Whether the AO erred in disallowing the total Foreign Exchange (forex) loss of INR 173,229,632 under Section 43A as capital in nature, failing to appreciate that a portion of this loss (INR 134,951,732) pertaining to buyer's credit was revenue in nature and allowable under Section 37(1), and in computing the total forex loss without reducing unrealized profit of INR 21,439,346. * **Assessee's Contention:** The assessee argued that a significant portion of the forex loss was revenue in nature and allowable under Section 37(1), and that unrealized profits should have been reduced from the total forex loss. * **Revenue's Contention:** The DRP confirmed the disallowance for want of requisite documents/information.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 144C(5),Section 92CA(3),Section 92C(3),Section 43A,Section 37(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “D” BENCH, CHENNAI

Before: HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM & HON’BLE SHRI MANU KUMAR GIRI, JM

आयकर अपीलीय अिधकरण “डी” �ायपीठ चे�ई म�। IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, CHENNAI माननीय �ी मनोज कुमार अ�वाल ,लेखा सद# एवं माननीय �ी मनु कुमार िग'र, �ाियक सद# के सम(। BEFORE HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM AND HON’BLE SHRI MANU KUMAR GIRI, JM आयकरअपील सं./ IT(TP)A No.60/Chny/2018 (िनधा)रणवष) / Assessment Year: 2014-15) M/s. Iljin Automotive Private Limited DCIT बनाम/ Plot No.B1 & B2, SIPCOT Industrial Park Corporate Circle-2(2), Irungattukottai, Sriperumbudur Chennai. Vs. Kanchipuram-602 105. �थायीलेखासं./जीआइआरसं./PAN/GIR No.AAACI-2641-E (अपीलाथ�/Appellant) : (� थ� / Respondent) अपीलाथ�कीओरसे/ Appellant by : Shri Sandeep Bagmar (Advocate) - Ld. AR � थ�कीओरसे/Respondent by : Shri A. Sasikumar (CIT) - Ld. DR सुनवाईकीतारीख/Date of Hearing : 19-11-2024 घोषणाकीतारीख /Date of Pronouncement : 03-12-2024 आदेश / O R D E R

Manoj Kumar Aggarwal (Accountant Member)

1.1 Aforesaid appeal by assessee for Assessment Year (AY) 2014-15 is a recalled matter since the appeal was disposed-off by Tribunal vide common order dated 03-08-2022. However, the order has subsequently been recalled in MA Nos.8/Chny/2023 & ors. order dated 03-11-2023. Accordingly, the appeal has come up for fresh hearing before the bench. This appeal arises out of final assessment order dated 20-08-2018 passed by Ld. Assessing Officer (AO) u/s 143(3) r.w.s.144C(13) of the Act pursuant to the directions of Ld. Dispute Resolution Panel-2,

Bengaluru (DRP) u/s 144C(5) dated 10-08-2018. Since the assessee carried out certain international transactions with its Associated Enterprises (AE), the same were referred to Ld. DCIT (TPO)-2(1), Chennai (TPO) for determination of Arm’s Length Price (ALP). The Ld. TPO passed an order u/s 92CA (3) on 23-10-2017 proposing certain Transfer Pricing (TP) adjustment. Incorporating the same, a draft assessment order was passed on 16-11-2017 which was subjected to assessee’s objections before Ld. DRP. Pursuant to the directions of Ld. DR, Ld.AO passed final assessment order dated 20-08-2018 which is in further appeal before us. 1.2 The grounds raised by the assessee read as under:- 1. General On the facts and the circumstances of the case, the impugned order passed by the learned Deputy Commissioner of Income Tax / Assessing Officer ('AO') is erroneous and contrary to the principles of natural justice and bad in law. 2. Grounds in relation to transfer pricing adjustment 2.1 The learned Transfer Pricing Officer ('TPO') and the learned AO, under the directions issued by the Hon'ble Dispute Resolution Panel ('DRP"): 2.1 Erred in law and on facts in rejecting the Transfer Pricing ('TP') Study maintained by the Appellant and undertaking fresh benchmarking search, thereby violating Section 92C(3) of the Income-tax Act, 1961 ('the Act'). 2.2 Erred in law and on facts in rejecting the usage of multiple year data for comparability analysis. 2.3 Erred in law and on facts in arriving at a fresh set of comparable companies, without establishing any cogent reason or basis for selecting the same. 2.4 Erred in law and on facts by rejecting comparable companies selected by the Appellant in Erred in law and on facts by disregarding the rule of consistency and rejecting comparable companies which were consistently selected and accepted by the Ld. TPO year on year. 2.5 Erred in law by selecting companies which are functionally not comparable to that of the Appellant. 2.6 Erred in computing the Net Profit Margin of the Appellant by treating foreign exchange losses as operating in nature. 2.7 Erred in law and on facts in not allowing appropriate economic adjustment in the nature of customs duty adjustment to account for functional differences between the Appellant and the comparable companies. 2.8 Erred in law and on facts in computing the transfer pricing adjustment in the transfer pricing order at the entity level. Other than Transfer Pricing The learned AO, under the directions issued by the Hon'ble DRP: 3. Disallowance under Section 43A of the Act

3.

I Erred in law in disallowing the total Foreign Exchange (forex') loss of INR 173,229,632 under section 43A of the Act as capital in nature. 3.2 Failed to appreciate that, the aforesaid total forex loss includes INR 134,951,732 pertaining to buyer's credit which is revenue in nature and allowable under section 37(1) of the Act. 3.3 Without prejudice to 3.1 and 3.2, the Ld. AO erred in computing the total forex loss amounting to INR 173,229,632 disregarding the fact that the Appellant had earned an unrealized profit of INR 21,439,346 which ought to have been reduced from the total forex loss.

1.3 The Ld. AR placed on record ground-wise chart and advanced arguments by referring to the findings of lower authorities. Our attention has been drawn to various documents as placed in concise paper book as filed on 19-11-2024. Reference has also been made to the decision of Tribunal in assessee’s own case in earlier years. The Ld. CIT-DR also advanced arguments and supported the findings of Ld. DRP. Having heard rival submission and upon perusal of case records, our adjudication would be as under. The assessee being resident corporate assessee is stated to be operating assembling plant in Chennai and is a leading assembler of wheel bearings. The assessee is subsidiary of Iljin, Korea. Two issues that fall for our consideration are (i) Transfer Pricing Adjustment; (ii) Disallowance u/s 43A. This appeal was heard along with assessee’s similar appeal for AY 2013-14 which has separately been disposed-off. 2. Transfer Pricing Adjustment 2.1 The assessee carried out various international transactions with its AEs which include import of raw material, tools, stores and Machineries etc. The assessee was characterized as routine assembler exposed to less than normal risk associated with carrying out such business. The assessee compared its margins with weighted average of comparable companies. The assessee’s PLI (OP/OI) was computed as 0.46%. The

Ld. TPO rejected the weighted approach and in independent search from prowess database, identified 5 entities having mean margin of 4.61%. The assessee assailed comparability matrix and also sought various economic adjustment viz. customs duty adjustment and forex adjustment. However, Ld. TPO rejected all the arguments and proposed entity level adjustment of Rs.2577.10 Lacs. The 5 entities as selected by Ld. TPO were as under:- No. Name PLI 1. ATS Elgi Ltd. 5.76 % 2. Omax Autos Ltd. 0.80 % 3. Subros Ltd. 2.60 % 4. JBM Auto Systems P. Ltd. 7.63 % 5. MK Autocomponents India Ltd. 6.30 & Average 4.61 %

2.2 Before Ld. DRP, the assessee, inter-alia, assailed inclusion of comparable entities listed at serial nos. 1, 4 and 5. However, Ld. DR rejected the same on the ground of functional similarity. Under TNMM, strict product comparability was not necessity but broad functional comparability was the requirement. The assessee objected to rejection of comparable entities viz. M/s Automotive Stamping and Assemblies Ltd. which was also rejected on the ground that this entity incurred losses in 2 years out of 5 previous years. The customs duty adjustment and forex loss adjustment as claimed by the assessee was also rejected. The assessee also argued that no adjustments could be made at entity level on non-AE transactions and referred to various judicial decisions holding the field. However, in the absence of assessee’s segmental data, this plea was denied. Aggrieved, the assessee is in further appeal before us.

2.3 We have gone through the ground-wise chart as placed by Ld. AR on record. The Ld. AR has assailed rejection of usage of multiple years’ data. The same stand rejected at the outset since comparability has to be done on contemporaneous data as per extant rules. The Ld. AR seeks inclusion of M/s Automotive Stamping Assemblies Ltd. and M/s Jamna Auto Industries Ltd. We have accepted the argument for inclusion of M/s Automotive Stamping Assemblies Ltd. for AY 2013-14 on the ground that this entity could not be held to be persistent loss making entity. Taking the same view, we direct Ld. AO / Ld. TPO to accept this entity as a comparable entity. No finding has been rendered by lower authorities on M/s Jamna Auto Industries Ltd. Therefore, the issue of selection of this entity stand restored back to the file of Ld. AO / Ld. TPO with a direction to the assessee to substantiate the same. 2.4 The Ld. AR seeks exclusion of M/s ATS Elgi Ltd. on the ground that this entity is engaged in trading of garage equipment. Similarly, the assessee seeks exclusion of M/s JBM Auto Systems Pvt. Ltd. on the ground that this entity is engaged in manufacturing and sale of sheet metal components which is different segment. The assessee also seeks exclusion of M/s MK Autocomponents Ltd. on the ground that its components do not form part of suspension and braking parts as manufactured by the assessee. To support the same, Ld. AR has placed on record the product information as available in public domain. However, the same is not supported by any segmental data or financials of these entities. Therefore, merely on the basis of product information as available in public domain, such argument cannot be accepted. We are also of the opinion that TNMM require broad comparability only and therefore, if business model is same, these entities could be accepted.

Therefore, all these entities have rightly been included in the comparability matrix. 2.5 The Ld. AR has stated that forex exchange loss would be non- operating in nature. However, this argument could not be accepted since the assessee has carried out import transactions and forex loss has direct linkage with the international transactions as carried out by the assessee. Therefore, forex losses / gains have to be considered as operating in nature. 2.6 The Ld. AR has assailed adjustment at entity level by relying on the decision of Hon’ble Bombay High Court in the case of CIT vs. Firestone International Pvt. Ltd. (ITA No.1354 of 2013). The department’s Special Leave Petition (SLP) against the same is stated to have been dismissed by Hon’ble Supreme Court in CA No.2165 of 2012. We concur that the adjustments have to be made with respect to AE transactions only. However, the assessee was unable to provide separate data before lower authorities. Therefore, we restore this issue back to the file of Ld. AO / Ld. TPO for fresh adjudication with a direction to the assessee to substantiate the same. 2.7 No other ground has been urged in the appeal. All the corresponding grounds stands disposed-off accordingly, 3. Disallowance as per the provisions of Sec.43A 3.1 The assessee claimed forex loss of Rs.2325.39 Lacs. The Ld. AO, similar to stand taken in AY 2013-14, made addition of Rs.1732.29 Lacs and allowed depreciation of Rs.244.87 Lacs. The Ld. DRP confirmed the same for want of requisite documents / information etc. 3.2 In AY 2013-14, this issue has been restored back by us to the file of Ld. AO for fresh consideration in the light of the fact that the assessee

had failed to provide the requisite details of forex loss before lower authorities. Facts being pari-materia the same, similar directions are given in this year. In other words, this issue is restored back to the file of Ld. AO for fresh adjudication with a direction to the assessee to substantiate its case. The corresponding grounds stand allowed for statistical purpose. 4. Ground No.1 is general in nature. Ground Nos. 2 stand partly allowed. Ground No.3 stand allowed for statistical purposes. 5. The appeal stand partly allowed in terms of our above order. Order pronounced on 3rd December, 2024

Sd/- Sd/- (MANU KUMAR GIRI) (MANOJ KUMAR AGGARWAL) �ाियक सद# / JUDICIAL MEMBER लेखा सद# / ACCOUNTANT MEMBER चे4ई Chennai; िदनांक Dated :03-12-2024 DS आदेशकीIितिलिपअ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. � थ�/Respondent 3. आयकरआयु=/CIT, Chennai. 4. िवभागीय�ितिनिध/DR 5. गाडBफाईल/GF

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