H.S.I.AUTOMOTIVES PRIVATE LIMITED,KANCHEEPURAM vs. DCIT CORPORATE CIRCLE 2(2), CHENNAI

आयकर अपीलीय अिधकरण ‘डी’ �ायपीठ चे�ई म�। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI माननीय ,ी मनोज कुमार अ0वाल ,लेखा सद5 एवं माननीय ,ी मनु कुमार िग9र, �ाियक सद5 के सम:। BEFORE HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM AND HON’BLE SHRI MANU KUMAR GIRI, JM आयकरअपील सं./ IT(TP)A No.66/Chny/2018 (िनधा;रणवष; / Assessment Year: 2014-15) M/s HSI Automotives Private Limited DCIT Corporate Circle-2(2) बनाम/ Survey No.73, A Block, No.100, Chennai. Thandalam Post, Mevalurkuppam, Vs. Sriperumbudhur Taluk, Kancheepuram-602 105 �थायीलेखासं./जीआइआरसं./PAN/GIR No. AAACH-2804-E (अपीलाथ�/Appellant) : (� थ� / Respondent) अपीलाथ� कीओरसे/ Appellant by : Shri H. Chandrasekaran (CA) - Ld. AR � थ�कीओरसे/Respondent by : Smt. Jyothi Lakshmi Nayak (CIT)-Ld. DR सुनवाई की तारीख/Date of Hearing : 06-06-2024 घोषणा की तारीख /Date of Pronouncement : 12-06-2024 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)

Pricing Officer (TPO) DCIT(TPO)-2(1), Chennai 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 02.11.2017 which was subjected to assessee’s objections before Ld. DRP. Pursuant to the directions of Ld. DRP, final assessment order was passed against which the assessee is in further appeal before us. The assessee has filed revised grounds on 08-10-2022 which read as under: - 1. For that order of the Ld.AO u/s.143(3) r.w.s. 144C(13) of the I.T. Act is opposed to law / facts and circumstances of the case. Exclusion of Specified Domestic Transaction from Transfer Pricing Adjustments: The appellant during the year under consideration has entered into specified domestic transaction to the tune of Rs.105,14,10,663. 2. The Ld. TPO based on the directions of Ld.DRP failed to understand the fact that related parties referred to u/s.40A(2)(b) who received payments from the assessee has filed its return of income admitting the same payments as its income. 2.1 The Ld.TPO failed to understand all the related parties with whom the assessee has entered into specified domestic transactions are corporate entities and filing its own return of income. Hence there is not tax avoidance/evasion. 2.2 The Ld.TPO failed to understand that if specified domestic transactions are not removed from AE cost for arriving ALP, it would amount to double taxation of the same transaction. 3. The Ld.TPO not considered the clause (1) of section 92BA was removed from scope of Finance Act, 1917 is in curative in nature. Transfer pricing Adjustments –Entity level Adjustments to arrive at ALP: 4. The Ld.TPO based on the directions of Ld.DRP failed to understand that entry level adjustments is only a protective adjustment to keep the matter alive as the SLP filed by the Department against the Bombay High Cout in case of CIT Vs.Firestone International Pvt. Ltd was admitted by the Hon'ble Supreme Court . 4.1 Now the matter is settled as Hon'ble Supreme Court dismissed the SLP filed by the Department. Other Transfer Pricing Adjustments 5. Bills Discounting Charges - The Learned Transfer Pricing Officer based on the directions of the Dispute Resolution Panel failed to understand that the bills discounting charges is purely a finance cost. It is a method of borrowing funds, whereby bills receivables from debtors are discounted with the banks and it is exactly in the nature of working capital Loan. 6. Removal of Incremental Depreciation from Operating Cost- The Learned Transfer Pricing Officer and the Dispute resolution Panel failed to appreciate the fact that the incremental depreciation has been adjusted in

Appellant's own case in the ITA No 2086/Mds/2015, 2087/Mds/2015 and 2086/Mds/2015. 7. Adjustment of Foreign Currency Fluctuation Loss - The Learned Transfer pricing Officer and Dispute Resolution Panel has failed to realize that the forex fluctuation is unduly high in the year under consideration. The imports are in USO and the USD fluctuated from Rs 52 to 62 in the year under consideration, 20% fluctuation in the year. The Learned Transfer Pricing Officer has failed to understand that the 7.1 devaluation of Indian Rupee is no way connected with the assessee business and it should be treated as non-operating in nature. 8. Customs duty adjustment - Rs.11,20,90,491 - The Learned Transfer pricing Officer and Dispute Resolution Panel has failed to appreciate that Basic Customs Duty and Education Cess paid on imports has been allowed on the Assessee's Own case in the Assessment year 2005-06, 2006-07, 2007-08. 8.1 The ITAT in appellant's own case AY 2005-06, AY 2006-07 and AY 2007-08 not allowed these issues raised by the Department (ITA No.2086/Mds /2015, 2087/Mds/2015 and 2088/Mds/2015) Product Development Expenses - The Learned Transfer Pricing 9. Officer and Dispute Resolution Panel has failed to understand the fact that the product development expenses are not incurred this year The expense is in the nature of research and development. The benefits of research and development may or may not occur and does not have any direct link with the revenue of this year. 9.1 The Transfer Pricing Officer and Dispute Resolution Panel has failed to appreciate the fact that the adjustment has been allowed in appellant's own case by the TPO for the AY 2012-13.

As is evident, the assessee is aggrieved by confirmation of Transfer Pricing Adjustments from Specified domestic transactions as well as from International transactions. 2. The Ld. AR advanced arguments and placed on record issue-wise chart. References have been made to various judicial decisions, the copies of which have been placed on record. The Ld. CIT-DR also advanced arguments and supported the assessments framed by lower authorities. Having heard rival submissions and upon perusal of case recorded, our adjudication would be as under. Proceedings before lower authorities 3.1 The assessee was established in 1997 and it carries out manufacturing activity in India. The assessee manufactures auto

accessories in India and it caters mostly to original equipment manufacturers (OEM). The assessee is wholly owned subsidiary entity of Hawseung R&A Co. Ltd., Korea. The assessee carried out certain international transactions with its AEs which include import of raw material, consumable, trading goods, machinery, tools, payment of royalty, guarantee fees and export of trading goods. The same has been tabulated in para-4 of the order of Ld. TPO. The assessee benchmarked the same using Transactional Net Margin Method (TNMM). 3.2 Similarly, the assessee carried out specified domestic transactions (SDT) of purchase of raw material and trading goods which have been tabulated in para-5. The same were similarly benchmarked using TNMM method. The assessee was characterized as normal manufacturers exposed to normal risk associated with carrying out such business. 3.3 The assessee arrived at its own Profit Level Indicator (PLI) (OP/OR) at 5.06% after adjustment of depreciation loss, forex fluctuation loss, customs duty adjustment and adjustment of product development expense. However, Ld. TPO denied the adjustments and re-computed PLI at -2.61%.The two comparable entities selected by the assessee were also rejected. Based on fresh analysis, Ld. TPO selected six comparable entities having mean margin of 4.38%. 3.4 The assessee claimed forex loss to be extraordinary and non- operating in nature. However, the same was rejected considering the decision of Hon’ble High Court of Madras in the case of Pentasoft Technologies Ltd. (347 ITR 578) holding that forex losses being directly related to export of sales, could not be treated separately. The Ld. TPO also noted that the assessee was bearing such forex losses.

The assessee claimed depreciation adjustment on the ground that machineries were constantly upgraded to accommodate new model introduced by OEM. However, Ld. TPO held that investment in fixed assets and expansion of business would be normal activity in the course of business. The assessee was not in start-up phase. Therefore, this adjustment was rejected. The assessee claimed customs duty adjustment to eliminate the impact of import duty. However, the same was also denied to the assessee considering the decision of Tribunal in M/s Mobis India Ltd. (ITA No.2112/Mds.2011 dated 14-08-2013). For getting the benefit of such adjustment, the assessee should be able to demonstrate that higher import content was necessitated by extraordinary circumstances beyond its control. The assessee sough risk adjustment. However, Ld. TPO held that the assessee was not entirely a risk-free entity. Further, in case of comparable entities, it was not possible to ascertain the different levels of risk. In the absence of adequate data, it was not possible to make reliable adjustments. Similarly the adjustment of product development expenses was rejected. 3.5 Finally, Ld. TPO proposed TP adjustments. If the adjustment was applied to AE transactions, the same would be Rs.17.67 Crores. However, if the same was applied at entity level, it would be Rs.33.95 Crores. Considering the fact that the issue did not attain finality, Ld. TPO proposed higher entity level adjustment of Rs.33.95 Crores. The same was incorporated in the draft assessment order which was subjected to assessee’s objections before Ld. DRP.

3.6 The Ld. DRP upheld application of TP adjustment on Specified domestic transactions on the ground that amendment made by Finance Act 2017 by way of exclusion of clause (i) to Sec.92BA would be prospective in nature. The Ld. DRP also confirmed denial of various economic adjustments to the assessee. The Ld. DRP directed Ld. TPO to treat forex gains / losses as operating in nature for assessee as well as for comparable entities. 3.7 Pursuant to these directions, Ld. TPO made revised working vide order dated 26.09.2018 and re-computed margins of comparable entities as 4.41%. The TP adjustment thus worked out to be Rs.34.18 Crores which was incorporated in the final assessment order. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 4. So far as the application of Transfer Pricing Provisions to Specified Domestic Transactions is concerned, we find that this issue is covered in assessee’s favor by the decision of Hon’ble Karnataka High Court in the case of Texport Overseas P. Ltd. (114 Taxmann.com 568). In this decision, it was held that the resultant effect of omission of clause (i) of Sec. 92BA by Finance Act, 2017 with effect from 01.04.2017 would be that these provisions had never been passed and to be considered as a law never been existed and therefore, the reference made to TPO for AYs 2013-14 and 2014-15 would be bad in law. In the absence of any contrary decision shown to us, we direct Ld. TPO to exclude specified domestic transactions while computing Arm’s Length Price (ALP) of the transactions. The corresponding grounds raised by the assessee stand allowed.

regard is not clearly demonstrated. Therefore, this adjustment could not be granted to the assessee. 8. The assessee contends that adjustment of forex loss is to be treated as non-operating in nature. The same is on the ground that purchases were primarily in US dollars and there was fluctuation in currency rates. The Ld. AR has submitted that forex loss of comparable entities is very low and huge variation was to be factored in. However, we are of the opinion that forex gains / losses are part of normal business operations only. Further, the assessee is engaged in export of goods also and is having earnings in foreign currency. Therefore, the resultant gains or losses could not be treated as extraordinary in nature. No such adjustment could be granted to the assessee. 9. The assessee seeks customs duty adjustment. The same has been treated as operating in nature. The Ld. AR has contended that custom duty paid on imports forms part of cost. The net expenditure in foreign currency by comparable entities is very less and therefore, to have fair base, custom duty adjustments should be granted to the assessee. However, the assertion of Ld. AR is very generalized in nature. In the absence of any acceptable clear-cut data shown to us, in this regard, no such adjustment could be granted to the assessee. 10. The assessee also seeks adjustment of product development expenses. The Ld. TPO has treated the same as operating in nature. The Ld. AR has stated that product development expenses are not incurred for this year. The expenses is incurred for extending support services rendered during the development of new model car by HMIL, the benefit of which may or may not occur and would not have any direct link with the revenue of this year. It has been submitted that this

adjustment has been granted by Ld. TPO in AY 2012-13. Accepting the plea of Ld. AR, we direct Ld. TPO to consider the same. The assessee is directed to provide the data to substantiate the same. No other grounds or plea has been urged before us. 11. The appeal stand partly allowed in terms of our above order. Order pronounced on 12th June, 2024

Sd/- Sd/- (MANU KUMAR GIRI) (MANOJ KUMAR AGGARWAL) �ाियक सद5 / JUDICIAL MEMBER लेखा सद5 / ACCOUNTANT MEMBER चे3ई Chennai; िदनांक Dated : 12-06-2024 DS आदेशकीOितिलिपअ0ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. � थ�/Respondent 3. आयकरआयु</CIT Chennai. 4. िवभागीय�ितिनिध/DR 5. गाडAफाईल/GF