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Facts
The assessee, Hyundai Steel Manufacturing India Private Limited, engaged in processing steel, appealed against the final assessment order for AY 2020-21. The appeal challenges the rejection of its segmental profitability analysis and the VAE filter used for determining the arm's length price (ALP) of steel coil purchases from an associated enterprise (AE).
Held
The Tribunal held that the internal TNMM method, based on audited segmentation provided by an external CA, should be accepted, especially given the consistency of acceptance in prior years. It was noted that the TPO had previously accepted similar internal comparable analysis. The other grounds became academic due to this decision.
Key Issues
Whether the rejection of the assessee's certified segmental profitability analysis and VAE filter by the TPO and DRP for determining the ALP of international transactions was justified, considering past acceptance and principles of consistency?
Sections Cited
143(3), 144C, 144C(13), 144C(5), 92CA(3)
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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI S.R. RAGHUNATHA
अपीलाथ� की ओर से/Appellant by : Shri. B. Srinath, C.A. ��थ� की ओर से/Respondent by : Shri. A. Sasikumar, C.I.T. सुनवाई की तारीख/Date of Hearing : 20.03.2025 घोषणा की तारीख/Date of Pronouncement : 04.06.2025 आदेश /O R D E R PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against final assessment order passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 for AY 2020-21 dated 26.07.2024, pursuant to directions of the DRP issued u/s. 144C(5) of the Act dated 21.06.2024.
2. The assessee has raised the following grounds of appeal:-
1. The Order passed by the Income Tax Officer, National Faceless Assessment Center ('Ld. AO') in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel ("DRP") under section 143(3)
:-2-: ITA. No:2485/Chny/2024 r.w.s. 144C of the Income-tax Act, 1961 ("the Act"), is bad in law and on facts.
Erroneous rejection of Segmentation provided by the Appellant
2.1 The Ld. TPO and the Ld. DRP erred in law and on facts in disregarding the certified segmental profitability between AE and Non-AE segment which has been adopted as a part of transfer pricing documentation maintained by the assessee while determining the ALP in relating to payment for the purchase of steel coils.
2.2 Further, the ld.TPO and the ld.DRP failed to consider the submissions and evidence provided by the assessee establishing the segregation of sales made to customers and basis of allocation of expenses with respect to the materials purchased from AE and Non-AE.
2.3 The Ld.TPO and the Ld.DRP erred in law and in facts in disregarding the principle of consistency and rejecting segmentation data without considering the fact that the same has been accepted in the previous and future years.
2.4 The Ld.TPO and the Ld.DRP has erred in law and in facts in disregarding the internal TNMM method for benchmarking the international transaction in arriving at the arm’s length price, which has been accepted in the previous and future years.
3. Rejection of VAE Filter and erroneous selection of additional comparable companies
3.1 The ld.TPO and the Ld.DRP disregarded the VAE filter adopted by the assessee in selection of comparable companies and did
:-3-: ITA. No:2485/Chny/2024 not acknowledge the fact that the assessee functions as a limited value addition company where the value added cost as a percentage of total sale is only 8.94%.
3.2 Further, the Ld.TPO and the Ld.DRP failed to consider the submissions made by the assessee and erred in concluding that the assessee is unable to provide reasons for adoption of VAE filter as a quantitative filter of rejecting companies having value added expenses greater than 15% of the total sales.
3.3 The ld.TPO and the Ld.DRP erred in law in disregarding the VAE filter in determining the ALP for purchase of steel coils from the AEs without considering the fact that the same has been accepted by the TPO in the previous and future years.
3.4 The Ld.TPO and the Ld.DRP erred in understanding the business of the Appellant and ended in selecting comparable companies like Thana Steels Ltd., Scan Steels Ltd., Tarun International Ltd., and Aarti SteelsLtd. without considering the fact that these companies have value added expenses greater than 15% of the total sales thus performing high-end manufacturing activities which cannot be considered as a comparable company to the assessee.
Erroneous Computation of TP Adjustment
4.1 Further, the Ld.TPO and the ld.AO has erred by considering the original TPO order instead of the rectified TPO order passed on 5th September 2024 , when giving effect to the DRP Directions.
The brief facts of the case are that the assessee company is established in the year 1997 and is primarily owned by Hyundai Corporation, Korea with a 94% stake, while POSCO Korea holds the remaining 6%. The assessee is primarily engaged in the processing of hot
:-4-: ITA. No:2485/Chny/2024 and cold rolled steel into skelp coils and sheets based on the requirements of customers. The Assessee purchases steel coils from both AE’s and Non-AE’s and slits and shears the same and sells the finished products to Tier 1 and Teir 2 suppliers of auto parts. The assessee to benchmark the international transaction of purchase of steel coils from AE has adopted TNMM as the Most Appropriate Method by considering the AE segment margin of 5.01% and compared it with External comparable, including POS India’s Non-AE segment. The margin of the comparable is in the range of 2.59% to 3.08% with a median of 2.68%. The case was selected for scrutiny and during the course of assessment proceedings, a reference was made to Transfer Pricing Officer. The TPO vide order u/s.92CA(3) of the Act, dated 19.07.2023 proposed an upward adjustment of Rs.5,62,73,439/-. Later the TPO has passed a rectification order and reduced the quantum of adjustment from Rs.5,62,73,439/- to Rs.1,97,98,470/-. Subsequently, the Assessing Officer passed draft assessment order u/s.144C of the Act on 27.09.2023 making the TP adjustment. The assessee filed objections against draft assessment order before the DRP-2, Bangalore. The DRP-2, vide their directions dated 21.06.2024 issued u/s.144C(5) of the Act, in principle upheld TP adjustment except for directing the TPO to adopt the correct margins of the comparable. Thereafter, the AO passed final assessment order u/s.143(3) r.w.s. 144C(13) of the Act for AY 2020-21 and determined total income of Rs.9,93,58,590/-. Aggrieved by the aforementioned order, the assessee filed this appeal which is taken up for adjudication. Broadly the assessee has raised the following grounds of appeal: a. Erroneous rejection of Segmentation provided by the assessee. b. Rejection of VAE Filter and erroneous selection of additional comparable companies c. Erroneous computation of TP adjustment
4. The first issue that came up for our consideration from ground nos.2.1 to 2.4 of assessee’s appeal is regarding rejection of certified segmental comparison of AE
:-5-: ITA. No:2485/Chny/2024 and Non-AE. The Ld.AR for the assessee, submitted that Segmentation was certified by external CA (Part-A – PB Pg No.288-291); Detailed segmentation and cost allocation, including transaction flow of steel coil purchases from AE’s and sales to third parties (Part A- PB Pg No.365 – 369); Pricing data for purchases from AE and Non-AE (Part A- PB Pg.371); Reasons for losses in the non-AE segment (Part A- PB Pg.365 – 370); Cost allocation with proper allocation mechanism for direct overheads, indirect overheads, job work and storage segments (Part A- PB Pg.365 – 369). However, the TPO rejected this segmentation by making the following observations in the TP order viz., - No details on sales segregation for materials purchased from AE and Non-AEs submitted; - No evidence that AE materials fetched higher prices than Non-AEs; - No Explanation for higher profit from AE materials despite lower costs; - No details provided on the quality, grade and quality of steel from AE and Non-AEs; - Cost segregation not provided and skewed cost allocation to increase AE segments’s net profit margin; - Not provided any reason for selection of VAE filter, hence rejected.
The DRP had called for a remand report from the TPO and the TPO has also submitted the same vide report dated 09.05.2024 wherein the TPO has rejected the contention of the assessee by stating that only sample invoices were produced and entire set of bills and vouchers were not produced and therefore the TPO gave a negative report to the DRP. Accordingly, the DRP confirmed adjustment.
:-6-: ITA. No:2485/Chny/2024 6. The Ld. AR submitted that in AE and Non-AE segment same process is followed and they have adopted Internal TNMM as most appropriate method. Further, the AR submitted due to voluminous nature of data sought by the TPO, the assessee has furnished only sample data and submitted that it is practically not possible to provide such large volume of data. It was also submitted that similar approach of considering AE segments profitability for all the prior years and subsequent years and the same has been accepted by the TPO for AY 2015-16 & 2021-22. The assessee submits that there are no change in the facts of the case as compared to prior years.
Per Contra, the Ld. DR vehemently stressed on the various points mentioned by the TPO and also submitted that despite remand proceedings the assessee was not able to furnish the necessary documentation to support its segmentation and therefore, prayed for segmentation and internal TNMM should be rejected.
We have heard the rival contentions perused the material available on record gone through the orders of the lower authorities along with the paper books filed and case laws relied upon. We find that on an identical set of facts for AY 2015-16, the TPO while conducting the TP assessment has in principle accepted the basis of segmentation and has not made any adjustment. In our considered view, when the TPO has accepted internal TNMM workings on the same parameters in the past years, cannot now take a different stand and try to reject the same. Our view is supported by the decision of the Apex Court in the case of Radhasaomi Satsang Vs CIT 192 ITR 321 has held that:
:-7-: ITA. No:2485/Chny/2024 “…where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”
Apart from the above, we also find that the jurisdictional Tribunal in the case of Prodapt Solutions Pvt Ltd Vs. DCIT [2019] 109 taxmann.com 282 (Chennai - Trib.)
“5. We heard the rival submissions and gone through relevant material. We find merit in the submissions of the Ld.AR. On the issue of rejection of segmentation, following the decisions of Birla Soft (supra), we set aside the order of the AO /TPO and remit this issue back to the file of the AO / TPO for determining the arm's length price in respect of the international transactions undertaken with the associated enterprise be determined by making internal comparison of profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segments.”
In view of the above view of the judicial precedents we are also of the view that Internal TNMM is more superior than external TNMM more so when audited segmental are available. Accordingly, in principle we hold that in Internal TNMM is the most appropriate method.
Further, we also note that jurisdictional Tribunal in the case of 3i Infotech Ltd [2013] 35 taxmann.com 582 (Chennai - Trib.) and Honeywell Electrical Devices & Systems India Ltd [2014] 42 taxmann.com 223 (Chennai - Trib.) have categorically held that even unaudited segmental ought to be accepted as long as there are no errors pointed out. However, in the instant case the assessee has taken care to have the segmental audited and certified by an external CA but the TPO has pointed out certain discrepancies despite the fact that he has not pointed specifically why the :-8-: ITA. No:2485/Chny/2024 same was accepted in the past years but not in the present year. Further, even in the remand report the TPO has rejected segmentation on the ground that entire bills & vouchers were not produced. We find that the TPO having not pointed out any defect in the sample invoices ought not to have insisted on furnishing entire invoices, which will definitely be impractical. Further, the segmentation has been verified and certified by an external CA, which actually gives the comfort and assurance that the segmentation is prepared in a proper manner. In this regard, the Ld.AR also relied on the Bangalore Tribunal decision in the case of Brillo Technologies Pvt Ltd Vs AO, NFAC reported in Taxsutra [TS-740-ITAT-2022(Bang)-TP] held as under:
“14. Now coming to the issue of application of internal TNMM and other external comparables followed by the assessee, we notice that the coordinate Bench of the Tribunal in assessee’s own case for the AYs 2011-12 & 2012-13 in & 354/Bang/2016 by order dated 19.1.2018 has upheld the internal TNMM used by the assessee for determination of the ALP for international transactions. The relevant extract of this decision is as follows:-
“7. Having carefully examined the orders of lower authorities and the documents placed before us, we find that the assessee has placed the relevant evidence with respect to scope of work, nature of services rendered for AE and nonAE in the same countries. But these aspects were not examined by the TPO. Therefore, we set aside the order of the AO passed consequent to the order of the DRP and restore the issue to the AO/TPO to re- examine the issue of determination of ALP for international transactions in the light of the transactions made with non-AEs in the same countries. It is settled position of law that if internal benchmarking is possible, the TPO should go with the internal benchmarking instead of going for external benchmarking by collecting various comparables from the database. In the instant case, since the assessee has placed the evidence to establish that the assessee has :-9-: ITA. No:2485/Chny/2024 rendered similar type of services to AE and non-AE in the same countries, the internal benchmarking is possible. We therefore restore the matter to the AO/TPO to re-examine the issue of determination of ALP in the light of assessee's contentions. If the assessee is able to establish that he has undertaken the similar international transactions with AEs and non-AEs in the same countries, the internal benchmarking will be done, otherwise the AO/TPO will act in accordance with the law.”
We also notice that the TPO in the order passed u/s. 92CA(3) of the Act for the AY 2016-17 has accepted the international transaction of provision of SWD services to be at arm’s length on the basis of internal comparables. The Tribunal has also taken a similar view for the order passed for the AYs 2009- 10 & 2010-11 in assessee’s own case in IT(TP)A No. 1319 & 1320/Bang/2016 dated 14.8.2020 and pursuant to the order of the Tribunal, the TPO has accepted the application of internal comparables for those assessment years.
Since the TPO in the present year under consideration has proceeded to make the TP adjustment on the mistaken fact that assessee has followed CUP method, we deem it fit and appropriate to remit this issue back to the TPO for fresh analysis considering the actual method followed by the assessee i.e., TNMM as the MAM. The TPO is also directed to consider the principles laid down by the coordinate Bench of the Tribunal in the earlier years in assessee’s own case in terms of considering the internal comparables for TNMM and also the stand taken by the TPO for the AY 2016-17 where the internal comparables has been accepted.”
Respectfully following the above decision, we are also of the view that Internal TNMM basis the audited segmentation furnished by the external CA should be accepted. This ground of appeal is allowed.
Since the main issue is addressed in favour of the assessee, the other grounds of appeal, i.e. ground Nos.3.1 to 3.4 and 4.1 becomes academic and hence
:-10-: ITA. No:2485/Chny/2024 we are not adjudicating the same.
In the result the appeal of the Assessee is allowed.
Order pronounced in the open court on 04th June, 2025 at Chennai.