DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE 1(1), CHENNAI vs. HWASHIN AUTOMOTIVE INDIA PRIVATE LIMITED, SRIPERUMBUDUR

PER MAHAVIR SINGH, VICE PRESIDENT:

These cross appeals by the assessee and Revenue are arising

out of the order passed by the Commissioner of Income Tax

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(Appeals), CIT(A), Chennai-16, in Order No.ITBA/APL/S/250/2023-

24/1056149376(1) dated 15.09.2023. The assessment was framed

by the Addl./Joint/Deputy/Asst.Commissioner of Income Tax/Income

Tax Officer, Corporate Circle-2(2), Chennai the assessment year

2013-14 u/s.143(3) r.w.s 144C(3) of the Income Tax Act, 1961

(hereinafter the ‘Act’) vide order dated 18.12.2017. However, as

facts and issues involved in these appeals are common, both these

appeals are heard together and being disposed off by this common

order for the sake of convenience.

order of the Ld.CIT(A) confirming action of the TPO/AO determining

arm’s length price (ALP) of the international transactions entered

into by the assessee. For this, the assessee has raised various

grounds which are argumentative, factual and exhaustive in nature

and hence, need not be reproduced.

Private Limited was incorporated on 03.01.2002 as 100%

subsidiary of Hwashin Korea with its manufacturing facility and is

engaged in the manufacture and sales of body and chassis

components for automobiles. The assessee caters mostly to Original

Equipment Manufacturers (OEM's). During the FY 2013-14, the

assessee imported raw materials and other relevant components,

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including tools and spares and capital assets required in the

manufacturing process from its AEs. The summary of international

transactions carried out by the assessee is as under:-

Sl. Nature of International Amount (in INR) Most Transaction No. Rs. Appropriate Method 1 Purchase of Components 2,93,23,93,050 TNMM and spares

2 Import of Capital Goods 1,65,48,31,693 CUP

3 Payment of Royalty 14,70,29,468 CUP

4 Payment of consultancy 1,13,76,883 TNMM charges Other Method' 5 Loan Guarantee - under Rule 10AB

As per Form 3CEB, the assessee entered into international

transactions with its Associated Enterprises (in short AEs) for an

amount exceeding Rs.15 crores and hence, assessee’s case was

referred to TPO for determination of ALP. The TPO noted

benchmarking approach adopted by the assessee in regard to import

of components and spares amounting to Rs.293,23,93,050/-,

import of fixed assets amounting to Rs. 165,48,31,693/- and

payment of royalty amounting to Rs.14,70,29,468/- being at 3% of

net of sales to OEMs and also payment of consultancy charges paid

to its AEs amounting to Rs.1,13,76,883/-. The TPO noted that

there is disproportionate increase in material cost and material was

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imported by the assessee from its AEs and hence, the assessee has

shown huge losses in its operation, but, the AEs financials show that

they are able to generate margin of more than 4% on sales. Hence,

the TPO attempted to validate the process of benchmarking done by

the assessee with reference to external comparables selected and

hence fresh search was done. According to the TPO, assessee was

asked to explain with details vide letter dated 12-10-2017. The

assessee responded and filed details, but, the TPO observed that

plea of the assessee that due to domestic transactions, huge losses

had happened is not accepted, because it is not supported by

documentary evidences for its substantiation. Hence, he selected

comparables namely –

Name of company OP/OI

Therefore, he computed average OP/OI @ 3.73% and computed

the ALP and directed adjustment to be made at Rs.186,48,53,644/-

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on the AEs cost of the assessee company. Aggrieved, the assessee

preferred appeal before the Ld.CIT(A).

by observing para 5.4 & 5.5 of his order as under:-

“5.5 On account of the above reduction in TP adjustment at entity level, the disallowance of excess depreciation effected on TP adjustment of Rs.1,06,89,112/- would also get revised. The Assessing Officer is directed to look into this aspect too and after due verification allow the same as per law. 6. Via Ground of Appeal No.3, comprising of Grounds of Appeal No.3.1, 3.2 and 3.3, the Authorised Representatives claimed for economic adjustments, namely working capital adjustment, customs duty and forex loss fluctuation. The TPO did not make any comments about working capital adjustment but discussed in detail while rejecting the customs duty and forex loss fluctuation. Very detailed submissions were made by the appellants Authorised Representatives on the above three economic adjustments. The same are available record. The reasons for rejection of the economic adjustments by TPO are also detaileda which are also available on record. A perusal of the economic facts in the case of the appellant demonstrates that the high import component of the assessee's business driven by any extraneous factor but is based on its own choice based on business strategy. The essential business of the appellant remains to be mostly import of goods from the appellant's

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A.E's and Non-A.E's and the business of the appellant did not change. It is a year not on year process and these costs are natural to the business of the appellant. The detailed reasons given by the TPO for rejection of economic adjustments and the figures furnished by the appellant regarding the economic adjustments and the basis for such claims are perused. To put it crisply, the loss of the appellant company is also due to these economic factors. Therefore, no further economic adjustments can be allowed. Thus, Ground of Appeal No.3 comprising of Ground of Appeal No.3.1, 3.2 and 3.3 are dismissed.”

Aggrieved, the assessee came in appeal before us.

first issue stated that the TPO did not share the search conducted for

identifying comparable companies for using TNMM in determining

ALP of assessee’s international transactions. He argued that the

CIT(A) has also erred in confirming action of the Assessing

Officer/TPO for computing ALP in rejecting benchmarking approach

adopted and comparables selected by the assessee in its TP study,

and proceeded to perform fresh benchmarking analysis without

providing any reasons. The Learned counsel for the assessee also

stated that assessee has selected five companies in the TP study and

arms length of range of comparables selected in TP study is at

9.52% to 2.36% with an arithmetic mean of 5.21%. The TPO,

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without considering the assessee’s comparable companies, has

proceeded to select new comparable companies, based on functional

similarities. The ld. counsel for the assessee stated that the TPO has

not given any basis and the Ld.CIT(A) has not at all adjudicated the

issue by a speaking order and without giving any reasoning

affirmed action of the Assessing Officer/TPO. The learned counsel for

the assessee further stated that from the order of the TPO or that of

the CIT(A), it cannot be made out how comparable companies

selected by the assessee are not functionally similar or turnover

fitment does not able or as to how these are not comparables.

Even, comparables selected by the Revenue, i.e all the six

companies are not at all comparable with the assessee, but the TPO

has not given any basis and nothing can be made out from the

order of the TPO. Hence, the ld.counsel for the assessee requested

that matter can be referred back to the file of the Assessing Officer

for determining the fresh ALP based on comparables selected by the

assessee, if these not properly rejected. When this was put to

Ld.CIT DR, he could not controvert the above factual situation.

and circumstances of the case. We noted that the TPO has

disregarded the assessee’s TP documentation and four comparables

selected and undertook a fresh search by selecting 5 additional

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companies as comparables. The TPO, while computing ALP

adjustment, at the entity level, instead of restricting it to value of

international transactions and has disregarded the assessee’s

economic adjustment. Even, no speaking order was given in relation

to working capital adjustment. The TPO has also not given any

comment in the order in relation to assessee’s treatment of royalty

using CUP method, whereas the TPO has erred in simply

aggregating the royalty under TNMM approach. The CIT(A) has also

erred in confirming TPO’s approach on comparable issues. However,

the CIT(A) has deleted entity level adjustment made by the TPO,

but did not make any comment on working capital adjustment and

upheld the TPO’s approach on economic adjustment. We noted that

the TPO as well as CIT(A) without rejecting the assessee’s

documentation on TP study cannot proceed on the issue. Hence, we

set aside orders of CIT(A) and that of the Assessing Officer on this

issue and remand the matter back to the file of the Assessing Officer

and direct the Assessing Officer to refer the matter back to the TPO

for determining correct ALP in term of law. Therefore, this issue

raised by the assessee is allowed for statistical purposes.

regards to TP economic adjustments to be provided by the TPO,

while computing ALP on the following issues:

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i) Working capital adjustment ii) Customs duty adjustment iii) Foreign exchange adjustment

For these adjustments, the assessee has raised grounds of appeal

nos.3.1 to 3.3 which are argumentative in nature and hence, need

not be reproduced.

and circumstances of the case. We noted that the Ld.CIT(A) has

erred in confirming action of the Assessing Officer in rejecting

working capital adjustment claimed by the assessee for differences

in working capital employed by the assessee and comparables.

Further, the CIT(A) has also erred in confirming action of the

Assessing Officer in not allowing the claim of working capital

adjustment, even after difference in working capital was clearly

demonstrated by the assessee. It was contended that customs duty

adjustment was not provided to the assessee for the reason that

the assessee has not provided any adjustment for customs duty in

its own TP study which is without any basis, as the learned counsel

for the assessee before us explained that the same is available in

assessee’s paper book at page 72. Similarly, the TPO has erred in

not considering exchange fluctuation loss arising on foreign

currency transactions as operating in nature while computing

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operating margin of tested party viz-a-viz comparable companies in

determining ALP on the basis of forex fluctuations risk. We noted

that these are economic adjustments and hence, the Assessing

Officer/TPO should recompute these adjustments, after considering

the data provided by the assessee in its TP study. We, after

considering the facts and circumstances of the case, set aside the

impugned order of CIT(A) and that of the AO and remand the

matter back to the file of the Assessing Officer for de novo

consideration to decide the issues of working capital adjustment,

Customs duty adjustment and Foreign exchange adjustment.

Therefore, the grounds raised by the assessee on the above issues

are allowed for statistical purposes.

regards to disallowance of depreciation claim on leasehold land. We

have heard rival contentions and gone through the facts and

circumstances of the case. We noted that the assessee claimed

depreciation amounting to Rs.3,03,647/- on leasehold land, but the

Assessing Officer and CIT(A) disallowed the claim by giving

reasoning that purchase cost of leasehold land would be capital in

nature and hence, depreciation or amortization of such purchase

cost of leasehold land cannot be allowed. We noted that neither the

AO nor the CIT(A) has given any reasoning for making disallowance

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on this issue. Therefore, as requested by the learned counsel for the

assessee, let this issue also be examined by the Assessing Officer

afresh and for this, the Ld.CIT DR has no objection. Hence, we set

aside the order of the CIT(A) and that of the AO and remand the

matter back to the file of the AO on this issue for fresh adjudication

in term of law. Therefore, this issue raised by the assessee is

allowed for statistical purposes.

we noted that the only issue urged by the Revenue is against

deletion of margin adjustment made by the CIT(A) on import of

capital goods for which the assessee could not substantiate the

purchase was made at the cost. The learned counsel for the

assessee, during the course of hearing, stated that this issue can

also go back to the AO, as the main issue of transfer pricing is

already remitted back to the file of the Assessing Officer in

assessee’s appeal in preceding paragraphs, for which the Revenue

has also agreed. Therefore, after hearing both the sides and going

through the records, we set aside the order of the CIT(A) and that of

the AO on this issue of Revenue appeal and remit this issue back to

the file of the AO for fresh adjudication. Thus, the ground raised by

the Revenue is allowed for statistical purposes.

- 12 - IT(TP)A No.75 & 77/Chny/2023 11. In the result, appeals of the assessee and Revenue are allowed

for statistical purposes.

Order pronounced in the open court on 12th August, 2024 at Chennai.

Sd/- Sd/- (महावीर �सह महावीर �सह महावीर �सह ) महावीर �सह (एस एस एस.आर एस आर आर. . . . रघुनाथा आर रघुनाथा रघुनाथा) रघुनाथा (MAHAVIR SINGH) (S.R. RAGHUNATHA) उपा�य� /VICE PRESIDENT लेखा सद�य/ACCOUNTANT MEMBER चे�ई/Chennai, �दनांक/Dated, the 12th August, 2024 DS आदेशक��ितिलिपअ$ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकरआयु% /CIT, Chennai. 4. िवभागीय�ितिनिध/DR 5. गाड*फाईल/GF.