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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI GEORGE GEORGE K & MS. PADMAVATHY S
O R D E R Per Padmavathy S, Accountant Member
This appeal of the assessee is directed against the order DCIT, LTU, Circle-1, Bengaluru passed u/s 143(3) r.w.s 144C of the Income- tax Act 1961 (the Act) dated 27/01/2016 for the asst. year 2011-12.
IT(TP)A No.649/Bang/2016 Page 2 of 27 The brief facts of the case
The assessee is a private limited company and is in the business of manufacture of aluminum radiators and air-conditioners for cars and multi utility vehicles for Toyoto Kirloskar Motor Ltd., Maruti Udyog, Honda Motors and other automobiles manufactures in India. For the asst. year 2011-12, the assessee filed return of income on 30/11/2011 admitting a loss of Rs.42,27,71,490/-. The case was selected for scrutiny under CASS and accordingly notice u/s 143(3) was issued. During the previous year relevant to the asst. year 2011- 12 several international transactions took place between the assessee and its AEs. On a reference being made by the AO to the TPO, the TPO passed an order dated 30.01.2015 determined TP adjustment of Rs.41,61,93,370/- in respect of the manufacturing segment and Rs. 1,86,11,578 towards interest. The TPO rectified the order u/s.154 by re-computing the TP adjustment of manufacturing segment to Rs.21,76,78,098/-. The TPO while arriving at the TP adjustment did not consider adjustments made by the assessee with respect to (i) Extraordinary expenses incurred in setting up new production line, (ii) Foreign exchange fluctuation, (iii) Customs Duty expenses and (iv) Under utilization of capacity. The TPO also made an adjustment towards interest.
The AO passed the draft order giving effect to the TP adjustment. Aggrieved, the assessee filed its objections before the IT(TP)A No.649/Bang/2016 Page 3 of 27 DRP. DRP gave partial relief to the assessee. In respect of adjustment made towards interest paid and sustained the adjustment made towards manufacturing segment. The AO passed the final assessment order giving effect to the TP adjustment as per the directions of the DRP.
Aggrieved by the final order of the AO, the assessee is in appeal before the Tribunal.
5. The assessee raised seven grounds and one additional ground before us. Ground No.1 and 2 are general in nature and does not warrant separate adjudication and hence dismissed. The Ld.AR during the course of hearing did not press for ground 7 and hence the same is dismissed. Ground No. 3 to 6 and the additional ground read as under:- “3. The learned AO/ learned TPO /Hon'ble DRP have erred in facts by not acknowledging that the Appellant had incurred substantial start-up costs while setting up the Common Heat Exchangers ("CHE") production line which was set up newly and thereby erred:
• In not appreciating that the Appellant had incurred losses due to the initial period of operation of the CHE line as the start-up costs were not recovered completely and thereby significantly affecting the profitability of the Appellant; • In not providing suitable adjustment with respect to the specific circumstances contributing for losses in the CHE production line;
IT(TP)A No.649/Bang/2016 Page 4 of 27
• In attributing the losses of CHE production line to international transaction of purchase of raw material which are subjected to transfer pricing adjustment ignoring the fact that major portion of purchase of raw materials are related to Non-Cl-IF production lines; and • In rejecting the robust evidences/workings filed providing detailed information on specific circumstances contributing for losses in the CHE production line without providing any cognizant reasons and merely stating that extra-ordinary items should have disclosed in audited financial statements.
4. The learned AO/ learned TPO /Hon'ble DRP have erred in not granting adjustments towards adverse effect of forex fluctuation due to depreciation of Indian Rupee resulting in incremental import costs which is not attributable to the transfer pricing of its purchase of raw materials from its AEs.
The learned AO/ learned TPO /Hon'ble DRP have erred in not excluding the additional custom duty costs as a result of increased import costs of raw materials due to adverse effect of forex fluctuation.
6. The learned AO/ learned TPO /Hon'ble DRP have erred in not granting the adjustment towards underutilization of capacity while computing the operating margin of the Appellant.“
Additional Ground “Without prejudice, The appellant’s operating profit margin ought to be re-computed considering the revised transfer pricing of international transactions as concluded pursuant to the resolution
IT(TP)A No.649/Bang/2016 Page 5 of 27 agreed between the Competent Authorities of India and Japan under the Mutual Agreement Procedure (MAP) and thereby the resultant downward revision in transfer pricing of international transactions amounting to INR 13,74,78,853 has to be reduced from the cost base while re-computing the operating profit margin of the Appellant. Alternatively the said amount could be added to the operating income of the Appellant as the same has been offered to tax in India pursuant to MAP resolution”
6. In the course of hearing the Ld AR submitted a paper book with additional evidence supporting its claim for adjustment towards underutilization of capacity, Foreign Exchange Fluctuation and Customs Duty (Ground 3, 4 and 5) . The ld.AR prayed for admission of additional evidences before the Tribunal as these evidences when considered would substantiate the claim of the assessee that the international transactions of the assessee are at arm’s length. With regard to various TP adjustments, the additional evidences now produced go the root of the issue and the core reason for not granting adjustment towards all the three adjustment by the lower authorities. For a proper adjudication of the issue and for substantial cause, the additional evidence is admitted and taken on record.
IT(TP)A No.649/Bang/2016 Page 6 of 27 Adjustment towards under utilization of capacity (Ground 6)
The assessee in the transfer pricing study has applied Transaction Net Margin Method (TNMM) as the most appropriate method and basis that the assessee concluded that the international transactions at arm’s length price (ALP) in arriving at the operating profit margins of the assessee. While computing the ALP the assessee made certain adjustments to its operating cost base. One of the adjustments thus made is towards capacity utilization. The assesse is dependent on the demands from Toyoto Kirloskar Motor Ltd (TKML) for its production. The assessee has set up a production line to cater to TKML’s needs. However, due to reducing demand from TKML, the assessee was not able to operate at its optimum capacity and could not recoup its fixed costs. The assessee is operating at 46.88% of its installed capacity whereas the comparable companies chosen by the assessee operated at an average of Rs.68.43%. The assessee therefore made an adjustment for under utilization of the capacity. The TPO did not grant the adjustment for capacity underutilization on the ground that the assessee functioned at a capacity higher than that of comparables. The TPO while arriving at the utilized capacity of the assessee did not take into consideration the “car air conditioners (CAC)” product line considering the volume and the number of the CAC parts manufactured it is not practicable to disclose quantity details of such parts. The TPO took a simple average of actual production to the installed capacity to arrive at the utilized capacity the IT(TP)A No.649/Bang/2016 Page 7 of 27 assessee @ 80.76% and concluded that the assessee’s capacity utilization is in line with that of the comparables warranting no adjustments. The DRP upheld the order of the TPO on the ground that –
i. The assessee has furnished capacity utilization details only for 27 out of 68 comparables. ii. The main margin of the companies would take care of the difference arising on account of capacity underutilization. iii. The DRP in the assessee’s case for earlier asst. year had rejected the request for grant of adjustment.
The AO passed the final assessment order considered directions of the DRP
Before us, the Ld.AR submitted that from harmonies reading of sub clause (iii) to clause (e) of Rule 10B and sub Rule (3) of 10B, it is evident that for comparable analysis of an international transaction with the uncontrolled transaction, reasonable and accurate adjustment is permitted to eliminate any difference which materially affects the price or costs or profit arising from such transaction in the open market. The Ld.AR also submitted that as a result of underutilization of capacity the assessee was unable to recoup the fixed cost incurred as compared to the comparable companies thereby affecting the profit margin of the assessee and, therefore, an adjustment to eliminate effect
IT(TP)A No.649/Bang/2016 Page 8 of 27 of the underutilized capacity is warranted. The Ld.AR further submitted that the assessee had furnished all the details available in the form of capacity utilization data of 27 comparables companies before the lower authorities and that if further details are required for determination of adjustment the AO ought to have exercised power u/s.133(6) to collate the details.
The ld.DR relied on the written submissions.
We heard the rival submission and perused the materials on record. The assessee submitted the capacity utilization data of 35 companies (pages 26 and 27 of the additional evidence compilation) and from the details as submitted by the Ld AR, it is noted that the assessee is functioning at a capacity lower than the industrial average. It is also noticed that out of the 68 comparables taken by the assessee in the TP study and which is accepted by the TPO, the assessee has submitted the capacity utilization of more than 50% of the details. With regard to the full details not being made available to the TPO, we notice the co-ordinate bench of the Tribunal in the case of Continental Automotive Components India Pvt. Ltd., in (IT(TP)A No.713/Bang/2017) has held that the TPO could exercise the power u/s 133(6) of the Act to obtain more details. The Hon’ble Tribunal held that –
IT(TP)A No.649/Bang/2016 Page 9 of 27
“24. We have heard both the parties and perused the material on record. In this case, the exact details of capacity utilisation of comparable companies was not made available to the TPO. It was alleged.jat the TPO should obtained it by exercising his powers u/s. 133(6) of the Act so as to compare the capacity utilization of the comparables with the assessee company. In our opinion, it is appropriate to remit the issue relating to adjustment on account of capacity utilization of the assessee to the file of the AOITPO for deciding the same afresh keeping in view the OECD guidelines. If the exact details of capacity utilization of comparable companies are not available in the public domain, the AO/TPO is directed o obtain the same directly from the comparable companies and decide the issue afresh, after affording opportunity of being heard to the assessee. Accordingly, this issue is remitted to the AO/TPO.”
The TPO while computing the capacity utilization of the assessee has applied simple average of the number of units produced in each category. When the assessee is involved producing and selling varied products with different sale value assigning the equal weightage to all the products in our view is not appropriate. We also notice that the TPO while arriving at the capacity utilization has not taken into consideration the car air conditioners, product line that contributed for 64% of the revenue generated by the assessee. The coordinate Bench of the Tribunal in the case of Moog Control (India) Pvt. Ltd., Vs. ACIT (2019) 111 taxmann.com 247 (Bang Trib) has considered a similar issue and has held that the capacity utilization should be computed as weighted average of units produced with weights being the corresponding revenue achieved from each category of the IT(TP)A No.649/Bang/2016 Page 10 of 27 products produced. The relevant extract of the decision is reproduced below-
“7.3.1 We have considered the rival contentions and perused the material on record. It is a settled principle, upheld in the decisions of several Hon'ble Courts/Tribunals, that adjustment for under utilization of capacity can be granted; provided the under utilization of capacity viz-a-viz the comparable companies is established with evidence. In the case on hand, admittedly, the assessee has given the details of capacity utilization of the assessee and that of its comparable companies at Appendix-9 and 10 of its TP Study. The TPO has examined the same, in the course of proceedings referred to him under section 92CA of the Act and has apparently accepted the veracity of the members mentioned therein, as he has quoted from the above Charts/Appendix (supra). Since the TPO has himself accepted the figures/numbers stated in the Appendix-9 and 10, the figures stated therein cannot be doubted at this stage.
7.3.2 In our view, the only difference between the contentions of the assessee and the TPO was on whether the mean average of capacity utilization should be adopted or whether the capacity utilization of only Motors should be adopted. In the factual matrix of the case, as discussed above we find merit in the contentions put forth by the learned AR of the assessee that the capacity utilization of only the main product, i.e., the Motors, should be considered. The other r components, namely, coils and parts, in our considered opinion, are only incidental components and cannot by any stretch of imagination be equated and treated on par with the main product i.e Motors. The installed capacity of Motors, Coils and Parts are 38,000, 80,000 and 3,82,000 respectively, whereas the price of these are Rs. 18,426 per motor, Rs. 312 per coil and Rs. 172 per part. In these factual circumstances, as IT(TP)A No.649/Bang/2016 Page 11 of 27 narrated above, assigning of equal weightage to motors, coils and parts and taking the mean average for computing the capacity utilization will clearly result in distortion of the real picture on this issue. In this view of the matter, we hold and direct the TPO that the weighted mean of the capacity utilization should be adopted for computing the adjustment for under utilization of capacity, as was taken by the assessee. Consequently, ground No.
Additional ground No. 6A raised by the assessee are allowed.”
The additional evidence placed by the assessee (page 25 of the additional evidence compilation) supports the contention of Ld AR that the if the ratio of the decision of Hon’ble Tribunal in Moog Control (India) Pvt. Ltd (supra) is applied, the capacity utilization of the assessee stands @ 46.88% which is much lower than that of the comparable companies warranting an adjustment.
Considering the decisions Hon’ble Tribunal in the case of Continental Automotive Components India Pvt. Ltd (supra) and Moog Control (India) Pvt. Ltd (supra), we are of the considered view that the adjustment for capacity under utilization needs to looked at afresh and hence, we remit the issue back to TPO/AO. Needless to say that opportunity of being heard should be given to the assessee. The appeal on this ground is allowed for statistical purposes.
Ground No.3 regarding adjustment of extraordinary expenses gets subsumed with Ground No. 6 on the basis of the adjudication of Ground No.6 and does not warrant a separate adjudication. Since we
IT(TP)A No.649/Bang/2016 Page 12 of 27 have remitted the issue of adjustment towards capacity underutilization back to the TPO/AO, accordingly we remit the issue of adjustment towards extraordinary expenses also to the files of TPO/AO for fresh consideration based on merits. The TPO/AO is directed accordingly after giving a proper opportunity of being heard to the assessee.
Adjustment for foreign exchange fluctuations (Ground 4)
The next ground argued by the assessee is the adjustment for foreign exchange fluctuation not granted by the TPO. The assessee imports a considerable amount of raw material for undertaking the manufacturing operations in India in order to meet the stringent quality requirements. During the financial year 2010-1, 83.12% of the raw materials were imported by the assessee. The assessee enters into contract with its customers in India which is reviewed and revised year on year while negotiating the price. One of the aspects that is taken into consideration is the cost of materials to be imported from Japan for manufacture in India during the financial year 2009-10. When the assessee negotiated the price with its customers and YEN remained stable and therefore the assessee could not negotiate for higher price however subsequent to commitment of the sale price with the customers rupee depreciated significantly and therefore the assessee had to add in additional cost on purchase of material which could not be recouped as the assessee had committed to the sale price. This additional cost incurred by the assessee is not a loss which can be IT(TP)A No.649/Bang/2016 Page 13 of 27 debited to the Profit & Loss account and therefore the assessee made an adjustment to the operating cost based by reducing an amount of Rs.9,19,57,241.
The TPO denied the Adjustment on the ground that (i) the laws in the manufacturing segment has a arisen on account of import cost and the assessee did not suitably negotiate the Purchase cost from its AEs. (ii) the computation made by the assessee is not in line with AS11 and (iii) the assessee has failed to show the difference between comparables and the assessee in respect of the exchange fluctuation loss. The view taken by the TPO is upheld by the DRP the effect of which is given by the AO in the final assessment order.
Aggrieved by the order of the AO the assessee is in appeal before the Tribunal.
19. The Ld. AR contended that the assessee had to honour the terms of contract and supply the products at the committed rate for the entire year even though there was significant increase in the cost of the products by virtue of higher cost of the components being imported vis-a-vis be comparable companies selected by the assessee who had less significant imports. The Ld AR also submitted that the assessee had in the in the subsequent years negotiated for a better price with the customers and has realised better margins (pages 129 and 130 of the additional evidence compilation) The Ld AR brought to our attention
IT(TP)A No.649/Bang/2016 Page 14 of 27 that there is no increase in the price of raw materials supplied by the AE to the appellant as compared to the previous year which is evident from the analysis of per unit price in foreign currency for financial year 2009-10 and 2010-11 produced at pages 121 to 127 of the additional evidence compilation. The Ld AR submitted that this would demonstrate that the loss has arisen solely on account of exchange fluctuation which warrants adjustment in TP for comparables.
The Ld DR relied on the written submissions. We heard the rival submissions and perused the materials on record. We notice that the Delhi Bench of the Hon’ble Tribunal in the case of Honda Trading Corp. India Pvt. Ltd., vs ACIT (2013) 33 Taxmann.com 21 (Delhi Trib) has decided on the similar issue as under-
From the order of the DRP, we observe that the DRP considered the objection of the assessee related to rejection of Orbit Industries as a comparable and held that the assessee has not given any cogent reason for change in the new search process which was essential to have current year data and the filters applied earlier need to be applied now to maintain consistency in approach. The DRP further held that abnormal losses indicate that it was not a normal loss because financial analysis was triggered for FAR and this comparable fails at the very first step. In view of cogent reasons recorded by the TPO and DRP, we are unable to see any infirmity and perversity in these findings in rejection of Orbit Industry as a comparable. On the issue of adjustment of exchange fluctuation, loss incurred by the assessee, we observe that it is a well accepted principle of Transfer Pricing regulations to compare like with like
IT(TP)A No.649/Bang/2016 Page 15 of 27 and eliminate the differences if any, by suitable adjustment. The said principle clearly provides for adjustments in margins of the enterprise entering into international transactions for any differences between such international transactions and the transaction of comparables or between the enterprise entering into internationals transactions and comparable companies. The foreign exchange element also needs consideration. Rule 10B(3) of Income Tax Rules, 1962 provides that an appropriate adjustment is required to be made on account of the differences between the controlled and the uncontrolled transactions. This rule clearly stipulates that an uncontrolled transaction shall be comparable to an international transaction, if none of the differences between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market. This rule clearly stipulates that reasonably accurate adjustments can be made to eliminate the material effects of such differences.
20. The counsel of the assessee has placed reliance on the judgment of ITAT Delhi Bench in the case of Transwitch India Pvt. Ltd. vs DCIT (ITA NO.6083/Del/2010) wherein it has been held that the claim of comparability adjustment on account of abnormal expenses incurred by the assessee on account of relocation expenses should be allowed in the profitability of the assessee. The assessee has also relied on the judgment of ITAT Pune Bench in the case of Demag Cranes & Components vs DCIT in wherein the Tribunal elaborately dealt with the issue of comparability adjustment.
21. From the above submissions and careful perusal of citations and all other relevant judgments we observe that Rule 10(B)(1)(e) of the Act on the one side and other sub-rules in the context of TNMM
IT(TP)A No.649/Bang/2016 Page 16 of 27 need to be analyzed for eliminating the difference, if any, in the comparable uncontrolled transaction which materially affect the profit margin of the assessee. Having noticed the difference, the revenue has to quantity the difference, if any, and then revenue authorities must decide if that difference constitutes 'materially affect' the price in open market. As per these provisions, if the answer of the above question is in the affirmative, then the identified difference has to be removed and the margin has to be adjusted for arriving at the credible comparable. It is a well-accepted accounting principle that net margins can be influenced by some of same factors which can influence price or gross margins. It is the expectations and requirements of the rules/provisions that any difference which is likely to materially affect the net profit margin (NPM) in the open market has to be eliminated. The revenue authorities and TPO are duty bound to know that the TNMM visualizes the undertaking of a thorough comparability analysis and elimination of the differences through the requisite adjustments.
22. In the case in hand, admittedly, the average exchange rate of Thai Bhat during October, 2005 to March 2006 was 100 Thai Bhat equivalent to INR 110 and after consideration of said average exchange rate, price of sale of goods had to be agreed upon with the customers. The DR has not disputed the point that during April 2006 to September 2006 at the time of purchase, the exchange rate of Thai Bhat was substantially increased and the average exchange rate of Thai Bhatt was increased to 100 Thai Bhat = INR 119. Accordingly, we can not rule out and ignore this factual matrix emerged from the fluctuation of foreign exchange rates that while prices of purchases and import made by the appellant have increased, the sale price of exported goods remained on the lower side which is an important element to materially affect the price in the open market. In this situation, we
IT(TP)A No.649/Bang/2016 Page 17 of 27 are inclined to hold that the authorities below should have considered the said difference due to foreign exchange rate fluctuation in favour of Thai Bhat and against the INR and the said difference has to be removed and the margin thereon has to be adjusted for arriving at the credible comparable through the requisite adjustments.
23. During the course of arguments, the DR submitted that the issue of fluctuation in foreign exchange price was considered by the authorities below but from perusal of the impugned order, inter alia, order of the DRP, we observe that the authorities below have not considered the element of abnormal and huge fluctuation in the foreign exchange fluctuation in favour of Thai Bhat and against the INR and the said difference has to be removed and the margin thereon has to be adjusted for arriving at the credible comparable through the requisite adjustments.
During the course of arguments, the DR submitted that the issue of fluctuation in foreign exchange price was considered by the authorities below but from the perusal of the impugned order, inter alia, order of the DRP, we observe that the authorities below have not considered the element of abnormal and huge fluctuation in the foreign exchange favouring Thai Bhat and against the Indian currency. Accordingly, in view of the observations made hereinabove, ground no. 2.7 and 2.8 are allowed with a direction to the Assessing Officer that necessary adjustments pertaining to the huge and abnormal fluctuation in the foreign exchange may be allowed to the assessee in determining the ALP of the international transaction undertaken by the appellant.
We also notice that the coordinate bench of the Tribunal in the case Continental Automotive Components India Pvt Ltd (Supra) has held that IT(TP)A No.649/Bang/2016 Page 18 of 27
This issue was also considered by the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd. (supra) and it was held as under:- “7. We have heard both the parties and perused the material on record. In our opinion, forex fluctuations loss in the operating cost of the assessee and also forex gains in the operating income of assessee, both to be excluded from the operating expenses as well as operating income respectively in view of the Order of Tribunal in the case of Motonic India Automotive (P.) Ltd. (supra) in for assessment year 2009-10 vide order dated 17.08.2016 wherein held that:— "9. We find force in the argument of the ld. AR. It is normal that exchange rate is subject to fluctuation due to economic conditions. While determining the ALP, one has to consider these factors, more so, our view is fortified by the decision of the Tribunal in the cases of Honda Trading Corp. India Pvt. Ltd. v. ACIT in for the assessment year 2007-08 and DHL Express (India) Pvt. Ltd. v. ACIT in ITA No.7360/Mum/2010 for the assessment year 2006-07. Accordingly, we direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment." Accordingly, this issue is remitted to the file of AO for fresh consideration.”
Following the aforesaid decision of the Tribunal, we remit this issue to the AO/TPO with similar directions for fresh decision.
Considering the judicial precedence and the materials submitted, we remit this issue to AO/TP with a direction to consider the foreign exchange fluctuation adjustment for computing the ALP of the IT(TP)A No.649/Bang/2016 Page 19 of 27 assessee. This ground is allowed in favour of the assessee for statistical purposes.
Adjustment for customs duty (Ground No.5)
The assessee imported 83.12% of its raw materials whereas the comparable companies imported only an average of 15.14% of their raw materials whereby the assessee incurred significant customs duty charges warranting an adjustment for TP comparison. The TPO rejected the adjustment for the same reason for rejecting the adjustment towards exchange fluctuation loss which the DRP upheld.
24. Aggrieved by the final order passed giving effect to the DRP directions, the assessee is in appeal before the Tribunal.
The Ld AR submitted that on account of the exchange fluctuation, the assessee has paid significant non-cenvatable customs duty on its imports which cannot be passed on to the customers. This cost is not incurred by the comparable companies who do not undertake significant imports. The Ld AR drew our attention to the additional evidences submitted in terms details of non-cenvatable duty paid (pages 131 to 286) and the details of imports made by the comparable companies (page 93). Therefore the Ld AR prayed that an adjustment to eliminate the difference on account of the customs duty paid ought to be granted.
IT(TP)A No.649/Bang/2016 Page 20 of 27
The Ld DR relied on the written submissions.
We heard the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in the case of M/s. Continental Automotive Components (India) Pvt. Ltd (supra) has considered the similar issue. The Hon’ble Tribunal has held that
This issue came up for consideration before the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd. v. DCIT, 84 taxman.com 69 wherein it was held as follows:- “5. Before us, ld. A.R submitted that 90% of the raw materials of the assessee are imported as such customs duty adjustments to be made and it includes Rs. 4.31 crores pertained to the customs duty in the manufacturing segment. In principle the customs duty adjustments is allowed in view of the Co-ordinate Bench decision in the case of Motonic India Automotive (P.) Ltd. v. Asstt. CIT [2016] 73 taxmann.com 235 (Chennai - Trib.) wherein held that: '6.1 At this stage, it is pertinent to mention the finding of the Pune Bench in the case of Demag Cranes & Components (India) Pvt. Ltd. v. DCIT (supra) dated 4.1.2012 in which is as follows : "37. We have heard the parties and perused the available material on records in the light of the second limb of the ground 4(b). It is relevant mentioned that we have already analysed the relevant provisions of Income Tax rules vis a vis the scope of the adjustments in the preceding paragraphs in the context of the adjustments on account of the 'working capital'. In principles, our findings on the issue remain applicable to the adjustments on account of the import cost mentioned in ground 4(b) too. The difference between the AL Margin before and after the said adjustments on account of 'import cost' works out to 0.57% (7.18%-6.61%). Revenue has not disputed the said working of the assessee. In these
IT(TP)A No.649/Bang/2016 Page 21 of 27 factual circumstances and in the light of the scope of adjustments discussed above, in our opinion and in principle, the assessee should win on this ground too. One such decision relied upon by the assessee's counsel supports our finding relates to the decision of this bench of the Tribunal in the case of Skoda IT(TP)A No. 713/Bang/2017 Page 21 of 79 Auto India p Ltd 122 TTJ 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that,- "No doubt , a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd.'s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. As was observed by a Co-ordinate Bench of this Tribunal in the case of E-Gain Communication (P) Ltd. (supra) "the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the business models of the comparables that the TPO has adopted in this case. The adjustments then are required to be made for functionally differences. The other way of looking at the present situation is to accept that business model of the assessee company and the comparable companies are the same and it is on account of initial stages of business that the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and IT(TP)A No.649/Bang/2016 Page 22 of 27 profits in fit cases. We also do not agree with the authorities below that the onus is on the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in public domain. In such a situation, i.e. when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of assessee's operations and complete facilities ensuring a reasonable indigenous raw material content was not in place. The assessee's claim is that it was in these circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Coordinate Bench and we are in respectful agreement with the views of our esteemed colleagues. This additional argument was not available before the authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations."
The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the IT(TP)A No.649/Bang/2016 Page 23 of 27 TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP shall see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub rule (3) of Rule 10B of the Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto.' Accordingly, we direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP.' Hence, to bring uniformity, the customs duty was to be eliminated from the comparable price also to arrive at correct PLI. Accordingly, we remit the issue to the file of AO for fresh consideration.”
31. In view of the above finding of the Tribunal in Gates Unitta India Company (P.) Ltd. (supra), we are inclined to remit this issue to the AO/TPO with similar directions
Respectfully following the decision of the coordinate bench of the Tribunal, we are remitting this issue to the AO/TPO for fresh consideration. This is ground is allowed in favour of the assessee for statistical purposes.
The assessee has raised an additional ground for re-computation of operating margins pursuant to the Mutual Agreement Procedure (MAP) resolution covering the transaction between the assessee and its AE Denso Corporation Japan (DNJP). In support of the admission of this additional ground, the Ld AR submitted that it involved only adjudication of substantial question of law and no fresh facts were required to be examined. The Ld DR did not have any counter submissions. Keeping into consideration the entire conspectus of the IT(TP)A No.649/Bang/2016 Page 24 of 27 facts and circumstances of the case and the additional ground raised, before us we are convinced that its adjudication does not require any fresh investigation of facts and involves substantial question of law. Respectfully following the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Company Ltd. Vs. CIT [(1998) 229 ITR 383 (SC)] we admit this additional ground for disposal on merits.
Additional Ground
30. During the year under consideration, the assessee entered into international transactions with its AEs situated in Japan and in countries other than Japan. The TPO determined an aggregate adjustment of Rs.21,76,78,098 in respect of the entire international transaction of the assessee. In the meantime, the assessee applied for MAP with Japan to eliminate the impact of double taxation and a resolution was arrived at by the Competent Authorities of India and Japan. Under the resolution out of the total adjustment the amount of Rs.14,54,87,775 which was the adjustment in respect of the transaction with the AEs in Japan, stood reduced to Rs.13,74,78,853 granting a relief of Rs.80,08,922. Now through additional ground the assessing is praying that the segmental margin of the assessee needs to be re- computed taking into the account the adjustment determined under MAP.
IT(TP)A No.649/Bang/2016 Page 25 of 27
The Ld AR submitted that as a result of MAP resolution, the assessee’s loss stands reduced to the extent of Rs.13,74,78,853 and this has to be reduced from the cost base while computing the operating margin of the assessee. The Ld AR also submitted that alternatively the said amount could be added to the operating income of the assessee.
The Ld DR did not raise any objections to the claim of the assessee
We have heard the rival submissions and perused the materials on record. We notice that the MAP resolution which resulted in the reduction of the cost (thereby reduction in the returned loss) and as contended by the Ld AR will have an impact on the other TP adjustment done with AEs other than Japan. The argument of the Ld AR that the impact of reduced loss which resulted in additional income being offered to tax should be given effect in re-computing the segmental margin requires looking at the matter afresh. Hence we remit the issue back to the AO for re-computation of the operating margins. The AO is directed accordingly. This ground is allowed in favour of the assessee for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.
IT(TP)A No.649/Bang/2016 Page 26 of 27 Order pronounced in court on 30th March, 2022