SANGSIN BRAKES INDIA PRIVATE LIMITED,THIRUVALLUR vs. DCIT CORPORATE CIRCLE 6(1), CHENNAI

We find that the Registry made endorsement that the appeal was filed with a delay of 34 days. The ld. AR Shri N.V. Balaji, Advocate submits that there is no delay as such, the assessee, by inadvertent mistake mentioned the date of receipt as date of order of the ld. CIT(A) in Form 36. He submits that the assessee received the impugned order on

Ground No. 1 is general in nature and requires no adjudication.

Ground No. 2 raised by the assessee in challenging the action of the ld. CIT(A) in confirming upward adjustment made by the TPO in respect of international transaction.

Brief facts relating to the case are that the assessee is a private limited company incorporated in India having its registered office in Chennai. Sangsin Brake Ltd., Korea holds 99.97% of equity shares in assessee company. The assessee assists its parent company in manufacturing and selling of brake lining and brake parts for automotive industry.

The assessee adopted TNMM having PLI of OP/OC. The assessee claimed its armed length price (ALP) within +/-5% with a margin of comparables at 5.22% as against assessee’s margin of 4.12%. The TPO found the said method adopted by the assessee is not acceptable for not

The ld. CIT(A) confirmed the same by holding that the TPO used the same filters as used for selecting companies of manufacturing segments by using the key words “Trading of automobile equipment – brake lining, brake parts” and upheld the adjustment made by the TPO.

Before us, the ld. AR submits that the ld. CIT(A) and the Assessing Officer erred in segmenting the activities which otherwise based on the business functions of the assessee cannot be fragmented. Further, the ld. CIT(A) erred in confirming in support of method of Assessing Officer in resorting to cherry picking the comparables which are functionally not comparable to that of the assessee. The ld. AR submits that the assessee is seeking exclusion of two comparables C M Smith & Sons Ltd. and Rane Brake Lining Ltd.

C M Smith & Sons Ltd.: The Assessing Officer selected this company as comparable only on trading segment. The ld. AR drew our attention to the order of the TPO and submits that the TPO observed the mean margin of C M Smith & Sons Ltd. is at 11.62%. He referred to paper book and submits that the said company’s revenue was recognized to the extent it is probable that the economic benefits will go to the company and the revenue can be reliably measured. Further, he stated that the revenue from maintenance contracts are recognized pro-rata over the period of the contract as and when services are rendered He drew our attention to page 106 of the paper book and argued that the said company derived revenue mostly from sale of products. The ld. AR argued taking into account the revenue recognition and revenue from operation, and the said company is not into trading as the sale of goods shown in the revenue from operation is not trading. Further he argued that there is no details of goods purchased in the accounts showing are the said purchase of goods required for manufacturing. Trading is goods purchased and goods sold. But, in the present case, only services are shown in the revenue recognition at page 88 of the paper book and argued that since there is no trading activity in the C M Smith & Sons Ltd. and cannot be selected as comparable to the assessee company.

The ld. DR Shri Suresh Guduri relied on the order of the ld. CIT(A)/TPO.

After hearing both the parties and having examined with the financials of C M Smith & Sons Ltd., we note that the main contention of the ld. AR is that the said company cannot be compared with the assessee in the absence of trading activity. We note that the financials of C M Smith & Sons Ltd. is placed on record from page 29 to 125 of the paper book. In the balance sheet for the period of 01.04.2011 to 31.03.2012 is placed at page 29 of the paper book, wherein, it is noted that the principal product or services are parts and accessories of motor vehicle under the description of product or services activity. Further, it is shown in the turnover of the product or services activity is at ₹.194,47,05,338/-. The revenue recognition shows sale of goods, income from services and the details of which are at page 106 of the paper book in Statement of Profit and Loss, where it shows revenue from sale of product are at ₹.194,37,05,338/- and revenue from sale of services at ₹.6,78,07,515/-. Further, under the head “other income”, it is shown at ₹.78,93,195/-, whereas, we find the cost of materials consumed is shown at ₹.75,56,64,215/-, which clearly suggest that the said company is engaged in manufacturing activity and no comparable revenue from sale

Rane Brake Lining Ltd.: We find the financials of this company are placed at page 1 to 28 of the paper book. As per Notes forming part of the accounts, we find the revenue from the sale of products under the head “finished goods” is at ₹.397.97 crores. Further, it has shown the details of sales with break-up of finished goods viz., brake lining, disc pads, clutch facings railway brake blocks and others to an extent of ₹.358.54 crores. Further, we note that the details of sales (traded goods) under the head “raw materials” shown at ₹.0.63 crores, which is negligible as compared to the sale of products. Further in page 27 of the paper book, the

Ground No. 3 raised by the assessee in challenging the action of the ld. CIT(A) in confirming the addition made on account of cost of assets in respect of foreign exchange loss.

The assessee has debited an amount of ₹.3,20,75,213/- as forex loss under the head extraordinary items. It was seen from the notes forming part of accounts that exchange fluctuation gain was also there during the year in respect of few items. Therefore, the assessee was requested to file the relevant details and the working for forex gain as well as forex loss. The Assessing Officer noted from the table and the details furnished by the assessee in this regard that the gross forex logs incurred during the year is ₹. 4,37,66,753/- and after setting off the gross forex gain of ₹.1,16,91,540/- the assessee has claimed net forex loss of ₹. 3,20,75,213/- in the profit and loss account. On going into the nature of these losses, the Assessing Officer noted the loss is incurred in respect of the following items: S.No. Particulars Amount in Rs. (i) Korea Exchange Bank buyer’s loan 91,93,890/- (ii) ECB loan from Exim Bank, Korea 1,62,75,000/- (iii) Purchase of raw materials 65,95,736/- (iv) Purchase of spares 10,587/- Total 3,20,75,213/- 15. From the details filed in respect of the above items, the Assessing Officer has noted that ECB loan taken from Exim Bank, Korea of

We find that the assessee claimed foreign exchange loss as deduction, which was denied by the Assessing Officer in the final assessment order by stating that it is not allowable in terms of the provisions of section 43A of the Act. On perusal of the final assessment order and upon hearing both parties, we are of the opinion that the forex loss is not allowable deduction as found by the Assessing Officer under section 43A of the Act since the assessee has imported capital items by availing ECB loan from Exim Bank, Korea. Therefore, ground No. 3 raised by the assessee is dismissed.

Ground No. 4 raised by the assessee is relating to denial of depreciation under section 32 of the Act on the cost of asset after including foreign exchange loss to the cost of the asset in terms of provisions of section 43A of the Act. In the aforementioned para vide ground No. 3, we held that the foreign exchange loss is not allowable in terms of section 43A of the Act, but, however, the foreign exchange loss when it is included in the cost of assets then depreciation is allowable.

In the result, the appeal of the assessee is partly allowed.