DE DAIMOND ELECTRIC INDIA PVT. LTD.,,REWARI vs. JT.CIT, NEW DELHI

1. This appeal is filed by the assessee against the order of the Dispute Resolution Panel passed u/s 144C(5) of the I.T. Act. The assessee raised ground nos. 4.6, 4.7 and 5 in respect of depreciation adjustment which was rejected by the DRP though allowed by the TPO.

Ld. Counsel for the assessee submits that Diamond Electric Manufacturing, Japan (‘Diamond Japan’) was incorporated in 1937 having its headquarters in Osaka, Japan. Diamond Japan is engaged in the manufacture and sale of automobile and electronic equipments. It is submitted that the assessee a DE Diamond Group Company is engaged in the operations in India and was set up in 2007 with a factory unit in Bawal, Haryana and commenced its operations in FY 2008-09. It is submitted that the assessee filed its return on 30.11.2012 declaring a loss of Rs. 5,85,01,761/- under the normal provisions of the Act. In the course of assessment proceedings, the Assessing Officer made a reference u/s 92CA(1) to the Transfer Pricing Officer and the assessee complied with the notice issued by the TPO by filing necessary information. The Ld. Counsel submits that during the financial year under consideration the assessee undertook following international transactions with its AEs, which were duly reported in Accountant’s Report (Form No. 3CEB) filed along with return of income: - Diamond Elect ric India Pvt. Ltd. Vs. Jt. CIT] A.Y. 2012-13 - 3 -

Ld. Counsel submits that in order to bench mark its international transaction in the course of assessment proceedings the assessee conducted fresh search and arrived at a set off comparables. The Ld. Counsel submits that TPO insisted that depreciation adjustment should be carried out on profit margins of comparables and not the assessee company. Therefore, the depreciation and working capital adjusted margins were furnished for the following fresh search comparables:-

The Ld. Counsel submits that assessee earned net operating margin of Rs. (-1.07)% without depreciation adjustment. However, the mean operating profit margin of comparables undertaking similar manufacturing activity was (-0.92)% after making depreciation and working capital adjustment. Therefore, it is submitted that relying on the (+/-)5% range benefit under proviso to section 92C(2) the assessee demonstrated that its international transaction are at arm’s length by applying TNMM. The Ld. Counsel for the assessee submits that the Ld. TPO allowed depreciation adjustment on the comparables. However, he disallowed working capital adjustment on the ground that computation/data on same had not been submitted. The Ld. Counsel for the assessee submitted that assessee has undertaken adjustment for hiring rates of depreciation charged by it compared to rates Diamond Elect ric India Pvt. Ltd. Vs. Jt. CIT] A.Y. 2012-13 - 5 - charged by comparable companies as per Companies Act. It is submitted that depreciation adjustment is necessary to establish priority between assessee and the comparables. Ld. Counsel submitted that the management of the assessee company provided for depreciation on fixed assets on straight line method based on estimated useful lives. The rates so derived which higher than rates prescribed in Rule 4 of the Companies Act, 1956. On the other hand, the comparables have charged depreciation at the rates according to the Companies Act.

The Ld. Counsel for the assessee further submitted that similar adjustment for depreciation on assets was allowed by the DRP for the AY 2013-14 in its directions given on 22.09.2017. The Ld. Counsel further submitted that Delhi Bench of the Tribunal allowed depreciation adjustment in its several rulings. Ld. Counsel referred to the following decisions:

Bekaert Industries (P) Ltd. vs. DCIT, ITA No. 146/Pun/2014 & 171/Pun/2014 9. Market Tools Research (P) Ltd. vs. ACIT, ITA No. 2066/Hyd./2011 10. Srini Pharmaceuticals Ltd. vs. ACIT, ITA No. 1851/Hyd./2012 6. The Ld. DR referring to para 14 of page 34 of the DRP submitted that it is the finding of the DRP that in the preceding previous year the claim of the assessee for depreciation adjustment was rejected by the DRP. Therefore, the Ld. DR submits that the Ld. TPO has rightly rejected the claim of the assessee for depreciation adjustment.

We have heard the rival submissions perused the orders of the authorities below and the decisions relied upon. From the record placed before us, we observe that the claim for depreciation adjustment was allowed to the assessee by the DRP for the AY 2013-14 in its directions dated 22.09.2017. However, it is the finding of the DRP for the assessment year under consideration in its directions dated 18.11.2016 is that in the preceding previous year relevant to AY 2011-12 the claim of the assessee for depreciation adjustment was denied by the Ld. TPO and this was upheld by the DRP. We have also gone through the judgments relied upon by the Ld. Counsel on this issue.

Similarly in the case of DCIT vs. Sumi Motherson Innovative Engineering Ltd. 2014 (30) ITR (Trib) 367(Delhi) the Tribunal observed as under:

In the case of Excel Service the Tribunal held as under: - Diamond Elect ric India Pvt. Ltd. Vs. Jt. CIT] A.Y. 2012-13 - 9 -

The ratio of the above decisions clearly applies to the facts of the assessee’s case. Following the said decisions, we hold that the Ld. TPO has rightly allowed the adjustment for depreciation on assets. Thus, we reverse the findings of the DRP on this issue and direct the TPO/AO to restore the depreciation adjustments on assets Diamond Elect ric India Pvt. Ltd. Vs. Jt. CIT] A.Y. 2012-13 - 10 - which was earlier allowed while passing the order u/s 92CA dated 29.01.2016. Ground nos. 4.6, 4.7 and 5 are allowed.

Coming to ground nos. 4.5 and 4.9 the Ld. Counsel for the assessee submits that the TPO included Uniklinger Ltd. and Talbros Automotive Components Ltd. as comparables. The Ld. Counsel submits that these two comparables have to be excluded for the reason that in the case of Uniklinger Ltd. the product profile of this comparable is different than the assessee. The Ld. Counsel submits that Uniklinger Ltd. does not manufacture/deal in auto parts at all.

Coming to Talbros Automotive Components Ltd. it is submitted that this company has diversified activities. This company is also engaged in rendering of IT Services and no segmental details are available. Ld. Counsel submits that the annual Diamond Elect ric India Pvt. Ltd. Vs. Jt. CIT] A.Y. 2012-13 - 11 - report of this company is placed at pages 1046 of the Paper Book Part III. The Ld. Counsel further submits that this company is affected by a peculiar abnormal circumstance as this company entered into Joint Venture Agreement (JVA) during the year under consideration with Fiat Group Company. Ld. Counsel submits that profitability of this company has been impacted by Joint Venture.

On the other hand, the Ld. DR strongly placed reliance on the orders of the DRP.

Heard rival submissions, perused the orders of the DRP and the material placed before us. Coming to Uniklinger Ltd. we have perused the annual report of the company which is placed at pages 971 to 1008 of the compilation. In the notes to financial statements for the year ended 31.03.2012 under the head “Revenue from operations” it is seen that this company is deriving income from sale of fluid control products, sale of jointing sheets, sale of fluid Diamond Elect ric India Pvt. Ltd. Vs. Jt. CIT] A.Y. 2012-13 - 12 - seiling products. Further, in the segment reporting the company stated that it is in the business of manufacturing and sale of fluid control products and fluid seiling products. Therefore, it is abundantly clear from the annual report of this company that this company namely Uniklinger is not engaged in the automotive industry and has a completely different product profile. Therefore, we are of the view that this company is functionally not comparable to the assessee and, therefore, we direct the TPO to exclude this company from comparables.

Coming to the Talbros Automobile Ltd., we observe from the notes to financial statements for the year ended 31.03.2012 placed at Paper Book 1046 that this company’s operations comprises of two segments which are auto components and parts and IT Services.

In the case of Adoptic India Pvt. Ltd. Vs. ITO (supra) in Hyderabad Bench of the Tribunal held as under: -

In the case of M/s Capital IQ Information Systems (India) Pvt. Ltd. VS. DCIT the Hyderabad Bench of the Tribunal held as under: - Diamond Elect ric India Pvt. Ltd. Vs. Jt. CIT] A.Y. 2012-13 - 14 -

In the case of M/s Ameriprise India Pvt. Ltd. vs. DCIT the Delhi Tribunal held as under: -

In view of this comparable company entering into joint venture agreement and also transferring its assets to the JV Company it can be viewed that there is an extraordinary event has taken place. Further there are no segmental accounts available to establish separately the profitability from manufacturing of auto components and rendering of IT Services. In the circumstances this company cannot be considered as comparable company and Diamond Elect ric India Pvt. Ltd. Vs. Jt. CIT] A.Y. 2012-13 - 15 - accordingly, we direct the TPO to exclude this company from the comparables.

Coming to ground nos. 4.11 and 4.12 the Ld. Counsel for the assessee submitted that the TPO excluded KMA Auto Components P. Ltd. and ANU Industries Ltd. from the list of comparable companies for the reason that annual reports/P&L Accounts are not available. The Ld. Counsel for the assessee submits that the DRP accepted the contention of the assessee that the annual reports are available in public domain but rejected the comparables on functional comparability. The Ld. Counsel for the assessee submits that the TPO never objected on functional comparability but excluded on the ground that annual reports are not available. The Ld. Counsel for the assessee further submits that functional comparability of these comparables was established by the assessee before the TPO as well as the DRP. The Ld. Counsel for the assessee submits that both these comparable companies KMA Auto Components Pvt. Ltd. and ANU Industries Ltd. are engaged only in the business of manufacturing of Auto Components. Ld. Counsel submits that ANU Industries Ltd. is manufacturing ignition coils, actuators, relay assembly starters, relays etc. for cars and two wheelers. As per their web site which is placed at pages 1070 and 1071 the Ld. Counsel submits that the TPO may verify the financials of these two comparables which are in public domain and may be considered these two companies as comparables. On the other hand, Diamond Elect ric India Pvt. Ltd. Vs. Jt. CIT] A.Y. 2012-13 - 16 - DR has no serious objection in examining the data of these two companies for the purpose of considering these two companies as forming part of final set of comparables.

We have heard rival contention perused the orders of the authorities below. We see that the TPO rejected these two comparables on the ground that annual reports are not available. The DRP accepted that the annual reports of both these comparables are in public domain but rejected these comparables as functionally not comparable. It is the contention of the Ld. Counsel for the assessee that function comparability was established before the TPO as well as before the DRP.

Considering the rival submissions, we are of the view that the TPO should re-examine these two comparables viz-a-viz the annual reports and give a fresh look into these comparables and decide afresh as to whether these two comparables selected by the assessee can be considered as comparable companies. Thus, we restore these grounds to the file of the TPO who shall examine afresh and decide in accordance with law after providing adequate opportunity of being heard to the assessee. Grounds are allowed for statistical purpose.

In ground nos. 4.13 and 4.14 the assessee challenged the order of the TPO/AO for not allowing working capital adjustment. The Ld. Counsel for the assessee submits that DRP allowed the claim of Diamond Elect ric India Pvt. Ltd. Vs. Jt. CIT] A.Y. 2012-13 - 17 - working capital adjustment but TPO/AO has not properly implemented DRP directions to undertake working capital adjustment. It is submitted that in the order giving effect to DRP directions the TPO has only shared working capital adjusted results without sharing the computation. The Ld. Counsel submits that TPO has undertaken incorrect/arbitrary working capital adjustment and not shared the computation of the working capital adjustment which is in violation of principles of natural justice. Therefore, Ld. Counsel requested that a direction to be given to the TPO to share computation of working capital adjustment with the assessee and compute the correct working capital adjustment. DR has no serious objection in giving direction to the TPO to compute the working capital adjustments after provide the information to the assessee.

Heard rival submissions. The Ld. Counsel for the assessee submitted that the following in the synopsis furnished before us pointing out the deficiencies in granting working capital adjustment.

Considering the rival submissions, we direct the TPO to examine the contentions of the assessee and to provide the details of working capital computations and after giving adequate opportunity to the assessee to carry out the directions of the DRP for granting working capital adjustment. We order accordingly. Grounds are allowed for statistical purpose.

Ground no. 6.1 of grounds of appeal which relates to Corporate Tax Issues i.e. allowability of R&D Cess as an admissible expense the Ld. Counsel for the assessee submits that the AO rejected the claim of the assessee for allowing R&D cess as admissible expense. The DRP on examining the issue of R&D cess held that the cess on royalty is not penal in nature and is, therefore, an admissible expense. The Ld. Counsel for the assessee submits that the directions be given to the AO to carry out the DRP directions and allow R&D cess as an admissible expense while Diamond Elect ric India Pvt. Ltd. Vs. Jt. CIT] A.Y. 2012-13 - 20 - computing the income of the assessee. DR has no objection in directing the AO to carry out the directions of the DRP.

In the result, appeal of the assessee is partly allowed as indicated above.