R STAHL PRIVATE LIMITED,KANCHEEPURAM vs. DCIT, CORPORATE CIRCLE-5(2), CHENNAI

आदेश /O R D E R Per Rahul Chaudhary, Judicial Member:

I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014

144C(5) of the Act vide order dated 18.09.2017 for the Assessment

Year 2013-14.

explosion proof and explosion protected components, and systems for

automation; control and distribution; operations and monitoring; and

lighting. The Appellant, a wholly owned subsidiary of R Stahl AG, is part

of R Stahl Group and is engaged in the business of manufacturing

products such as light fittings, switch gears and explosion control

equipment (including those made from aluminum alloys used in oil & gas

and pharmaceuticals sectors).

income under normal provisions of the Act (after setting off brought

forward losses and unabsorbed depreciation), and ‘Nil’ Book Profits

under Section 115JB of the Act. The case of the Appellant was selected

for scrutiny and a reference was made under Section 92CA of the Act

was to the Transfer Pricing Officer, Chennai (TPO) for determination of

Arm’s Length Price (ALP) in respect of International Transactions

undertaken by the Appellant with its Associated Enterprises (AEs)

during the relevant previous year.

operated in two business segments namely Manufacturing Segment and

Contract R&D Segment with disclosed profit margins of 3.03% and

22.93%, respectively.

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international transactions pertaining to the Manufacturing Segment and

related activities. The TPO accepted the Transaction Net Margin Method

(TNMM) as the most appropriate method selected by the Appellant with

Operating Profit on Cost as the Profit Level Indicator (PLI) for

benchmarking the international transactions pertaining to Manufacturing

Segment. However, the TPO decided to carry out fresh search for

benchmarking the transactions, and arrived at final set of comparables

consisting of the following 4 companies:

Sr. No. Name of the Comparables

adjustment of INR 2,63,22,674/- vide order dated 31.10.2016, passed

under Section 92CA(3) of the Act. The Assessing Officer incorporated

the proposed adjustment in the Draft Assessment Order, dated

23.12.2016, passed under Section 143(3) read with Section 92CA(4)

and 144C(1) of the Act prosing transfer pricing addition of INR

2,63,22,674/-. In addition, the Assessing Officer, rejected the claim of

carry forward of unabsorbed depreciation of INR 2,09,40,303/- holding

that the same stands set off fully against the income of the relevant

previous year as the Assessing Officer was of the view that the

Appellant should have set off the unabsorbed depreciation of INR

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2,09,40,303/- with the income of the relevant previous year before

setting off brought forward business losses of INR 22,16,22,341/-

pertaining to earlier assessment years.

Resolution Panel-2, Bengaluru (hereinafter referred to as ‘the DRP’).

Vide order dated 18.09.2017, the DRP rejected the objections raised by

the Appellant. Accordingly, the Assessing Officer passed the Final

Assessment Order under Section 143(3) read with Section 92CA(4) of

the Act on 31.10.2017 making transfer pricing addition of INR

2,63,22,674/- to arrive at total assessed income of INR 3,78,43,383/-

that was first set off against unabsorbed depreciation of

INR 2,09,40,303/- and thereafter, against brought forward business

losses of INR 1,69,03,080/- to arrive at ‘Nil’ assessed taxable income

after the aforesaid set off of depreciation/business losses.

Final Assessment Order.

the Appellant had selected following comparables:

Sr. No. Name of the Comparables

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Further, during the course of assessment proceedings the Appellant

sought inclusion of the following two comparables:

Sr. No. Name of the Comparables

The Appellant also sought exclusion of NFPIL on the ground that same

lacked functional comparability.

9.1. However, the TPO rejected 4 of the above comparables selected by the

Appellant for the reasons specified herein under:

Sr. No. Name of the Comparables Reasons for Rejection 1. Integra India Group Co. Ltd. Fails Sales Filter 2. Impact Fire & Safety Unavailability of Data Appliances Private Limited

9.2. After giving the above factual background, the Learned Authorised

Representative for the Appellant submitted that the findings returned by

the TPO are factually incorrect. Referring to the financial statements of

M/s SGN Telecom Ltd., placed at page 659 of the paper-book, he

submitted that for the Financial Year ended 31.03.2012 the company

was not loss making and had Profit before Exceptional & Extraordinary

Items and Tax of INR 3,01,053/- while for the Financial Year ended

31.03.2011 there as a loss of INR 5,33,470/-. Thus, the company was

not consistently loss-making. As regards, Stelmec Ltd. he submitted that

as per the annual report placed in the paper-book, Stelmec Ltd. had

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related party transaction of INR 0.29 Crores and therefore, the company

did not fail Related Party Transaction (RPT) Filter as RPT /Sales for the

company only 0.137% as against threshold of 25% determined by the

TPO. The Learned Authorised Representative for the Appellant further

submitted that even for the comparables which were selected, the TPO

refused to exclude non-operational expenses (such as one-time shifting

expenses) and non-operational income (such as rental income and

income from other sources) while determining operational profits. He

further submitted that during the relevant previous year the Appellant

had expanded it business operations and shifted his manufacturing unit

from leased premises to owned premises and for the same the

Appellant had incurred one-time expenses of INR 32.50 Lakhs which

were sought to be excluded by the Appellant. However, the TPO refused

to exclude the same by treating the same as operational expenses

despite the Appellant placing relevant documents on record. Due to the

shifting the manufacturing unit of the Appellant stayed idle and

therefore, the Appellant had claimed Idle Capacity Adjustment form the

TPO. However, even the Idle Capacity Adjustment was rejected by the

TPO. He further submitted that while the TPO/DRP have denied

Working Capital Adjustment and Foreign Exchange Fluctuation

Adjustment claimed by the Appellant the same have been allowed by

the Tribunal has, in the case of the Assessee for the Assessment Year

2012-13 in ITA No. 2745/MDS./2016 (decided on 19.04.2017), granted

the benefit of Working Capital Adjustment and Foreign Exchange

Fluctuation Adjustment to the Appellant.

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9.3. He further submitted that the Tribunal had also excluded NFPIL from the

list of comparables holding that the aforesaid company was mainly

earning project related revenues.

9.4. As regards, denial of carry forward of unabsorbed depreciation the Ld.

Authorised Representative for the Appellant submitted that the issue

stands decided in the favour of the Assessee by the judgement of the

Hon’ble Madras Jurisdictional High Court in the case of SPEL Semi

Conductor Limited [Tax Case Appeal No.2490 of 2006 / (2012) 27

Taxmann.com 242 (Madras)]

order passed by the TPO and DRP. In addition, he submitted that the

appellant had on its own selected NFPIL as a comparable and therefore,

the Appellant cannot contend that the same is not functionally

comparable. He further submitted that since no data was provided by

the Appellant, the TPO was justified in rejecting the Working Capital

Adjustment. As regards, adjustments for capacity underutilization,

foreign exchange fluctuation and exclusion of extra-ordinary items, he

submitted that the same was not claimed either in the Transfer Pricing

Study and therefore, TPO was justified in not allowing the adjustments

claimed by the Appellant.

The Appellant has raised 10 grounds of appeal some of which are

connected and also, in some cases, overlapping. Therefore, to the

I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014

extent possible, the connected/overlapping grounds have been taken up

together.

Ground No. 1 to 5

capital adjustment, idle capacity adjustment and foreign exchange

fluctuation adjustment. Further, the Appellant is also challenged the

computation made by the TPO. Ground No. 5 is directed against non-

exclusion of one-time/extraordinary expense incurred by the Appellant

while computing operating margins.

Working Capital Adjustment

ground that no data were submitted by the Appellant in relation to the

same following the decision of the Chennai Bench of the Tribunal in the

case of Mobis India Ltd. vs. Deputy Commissioner of Income Tax: ITA

No. 2112 (MDS.) of 2011 [Assessment Year 2007-08, decided on

14.08.2013], and the decision of Bangalore Bench of the Tribunal in the

case of Zyme Solutions (P) Ltd. vs. Assistant Commissioner of Income,

Circle 7(1)(2), Bengaluru: IT (TP) A No. 1661 (Bang.) of 2016

[Assessment Year 2012-13, decided on 16.11.2018]. However, we note

that in appeal filed by the Appellant for the Assessment Year 2012-13

(ITA No. 2745/Mds./2016, dated 19.04.2017), the Tribunal has, in the

identical facts and circumstances, remitted the issue to the file of

Assessing Officer for granting suitable Working Capital Adjustment by

holding as under:

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“4. Ground No. 3 is with regard to non-granting the adjustment for differences in working capital levels. Before the DRP, the assessee sought for working capital adjustment, which was rejected by the DRP on the reason that calculation of working capital adjustment between the assessee and the comparable companies is not provided to TPO. Against this, the assessee is in appeal before us.

In view of the above, respectfully following the above decision of the

Tribunal, the issue is remanded back to the file of this Assessing

Officer/TPO with the directions to grant suitable Working Capital

Adjustment.

Claim for Ideal Capacity Adjustment & Exclusion of Extra-Ordinary Expenses

of Extraordinary Expenses made by the Appellant on the ground that no

such adjustments were made in the Transfer Pricing Study, however,

the same were claimed by the Appellant only during the course of

assessment proceedings. We note that the Appellant had shifted the

manufacturing facility during the relevant previous year and to

substantiate this the Appellant has placed on record Letter of Intent,

dated 21.08.2012, issued by the Appellant to Echo Care Engineering

Pvt. Ltd. and the invoices raised by Echo Care Engineering Pvt. Ltd. on

the Appellant for providing consultancy services in relation to the shifting

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of the manufacturing facility (placed at page 306 to 310 of the paper

book), and the invoices raised by Vruksha Marine Company Limited

dated, 31.01.2013 and 07.02.2013 upon the Appellant (placed on page

311 and 312 of the paper book). On perusal of the aforesaid,

documentary evidence, it is clear that the Appellant had shifted the

manufacturing facility which resulted in incurring one-time extra ordinary

expenditure and capacity under-utilization during the relevant previous

year on account of shifting of manufacturing facility. Accordingly, we

direct the Assessing Officer/TPO to recomputed operational margins of

the Appellant after excluding the one-time extra ordinary expenditure

after verification of the same. Further, the Assessing Officer / TPO is

also directed to grant suitable capacity under-utilization adjustment to

the Appellant after necessary verification and after providing the

Appellant an opportunity of being heard.

Foreign Exchange Fluctuation Adjustment

rejected on the ground that the claim was made during the course of

assessment proceedings. However, DRP rejected the claim of the

Appellant following the order of DRP for the immediately preceding

Assessment Year 2012-13. We note that in appeal filed by the Appellant

for the Assessment Year 2012-13 (ITA No. 2745/Mds./2016, dated

19.04.2017), the Tribunal has granted relief to the Appellant holding as

under:

“8. Ground No.7 is with regard to not allowing an adjustment in respect of the extraordinary foreign exchange loss suffered by the appellant as against the comparable companies.

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“8. The next ground is with regard to variation in exchange rate adjustment while determining the ALP. According to the ld. AR, the assessee entered into contract in adverse prices fixed on the prevailing exchange rate and due to fluctuation in exchange rate, there is loss and that exchange fluctuation to be considered while determining the ALP.

In view of the above order of the Tribunal, this issue is remitted to the file of AO for considering the same afresh in the light of above Order of Tribunal.” 16. Respectfully following the above decision of the Tribunal, we direct the

Assessing Officer/TPO to provide suitable foreign exchange fluctuation

adjustment after verification and after providing the Appellant

opportunity of being heard.

allowed.

Ground No. 6 to 8

operating margins made by the TPO. Ground No. 7 is directed against

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the selection of incorrect comparables which were not functionally

similar. Ground No. 8 is directed against rejection of comparable

selected by the Appellant.

Exclusion of Nitin Fiber Protection Industries Limited (NFPIL) from list of Comparables

the Appellant that NFPIL should be excluded from the list of comparable

on the ground that the Appellant had itself considered NFPIL as a

comparable in the transfer pricing documentation for the Assessment

Year 2013-2014. The DRP concluded that the NFPIL was functionally

comparable with the Appellant and thus, rejected the objections raised

by the Appellant. We note that the Tribunal has, while deciding the

appeal filed by the Appellant for immediately preceding Assessment

Year 2012-2013 (ITA No. 2745/Mds./2016, dated 19.04.2017), directed

the Assessing Officer to exclude NFPIL after coming to a conclusion that

major income of NFPIL was from project related activities and therefore,

could not be compared to the Appellant. In view of the aforesaid, we

direct the Assessing Officer to exclude NFPIL from the list of

comparables.

Selection of Comparables and Computation of Margins

have perused the material placed on record. In our view, the authorities

below have failed to appreciate the correct facts and take into account

the financial data as reflected in the annual accounts of the comparables

placed on record by the Ld. Authorised Representative for the Appellant.

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We find merit in the contentions advanced on behalf of the Appellant in

this regards (recorded in paragraph 9.2 above). However, as submitted

by the Ld. Departmental Representative the Revenue must be granted

opportunity to examine the correctness of the claims made by the

Appellant in view of the document/information pertaining to the

comparables placed on record as part of the paper-book. Accordingly,

subject to the directions given by us hereinabove, since there are a

number of factual discrepancies leading to incorrect selection/rejection

of comparables and computation of margins, we deem it appropriate to

remit all issues related to inclusion/exclusion of comparables and

computation of the margins thereof back to the file of Assessing

Officer/TPO for fresh adjudication after giving appellant opportunity of

being heard.

Ground No. 9

unabsorbed depreciation by setting off of the unabsorbed depreciation

before allowing set off of the brought forward losses while computing

taxable income of the relevant previous year.

2,09,40,303/- should have been set off with the income of the relevant

previous year before setting off brought forward business losses of INR

22,16,22,341/-. Since the income of the relevant previous year was

sufficient to set off entire unabsorbed depreciation, the question of carry

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forward of unabsorbed depreciation to the subsequent year did not arise

and therefore, the Assessing Officer disallowed the claim of the

Appellant to carry forward unabsorbed depreciation of INR 2,09,40,303/.

The DRP rejected the objections of the Appellant and therefore in the

final assessment order the claim of the Appellant regarding carry

forward of unabsorbed depreciation was rejected.

the judgment of the Hon’ble Madras High Court in the case of SPEL

Semi Conductors Ltd (supra) wherein it has been held as under:

“5. A combined reading of the above said sections shows that while carried forward of loss could be adjusted as against the profits and gains of business or profession of the year, the set off of unabsorbed depreciation allowance as per Section 32(2) could be given effect to only after giving relief on the carried forward loss. Given the fact that the carried forward of business loss could be adjusted only as against the business income, if there is no other income available, then as per Section 72(2) of the Act, unabsorbed depreciation has to wait for further years subject to the limitation of eight years for absorbing the same in the business income of the assessee. However, in a case of assessee as one before us, when the assessee has income both from business as well as from other sources, that after having set off of the business loss as against the current year income from business, there existed no further business income, the carried forward business loss remaining still unabsorbed could only be carried forward for the next year. However, given the fact that the assessee has income under the other heads, Section 32(2) provides the relief.

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for the assessee to earn income from business so as to exhaust the carried forward loss to be set off as against the business income and then apply the unabsorbed depreciation. A reading of Section 32(2) thus makes it clear that if the unabsorbed depreciation allowance could not be wholly set off under clause (i) and clause (ii), the amount of depreciation not so set off can be set off from income from other head, if any, available for that assessment year. The language of Section 32(2) is very clear and there is hardly anything contained in Section 72(2) to prevent such set off of carried forward depreciation being given to the assessee under the head of income from business or income from other sources. The Revenue does not deny the fact that as far as the income from other sources are concerned, there could be no set off of business loss or carried forward loss. However, what is contended by the Revenue is that Section 72(2) controls the operation of Section 32(2) to have the set off of unabsorbed depreciation against the income from other sources. We do not agree with this line of reasoning. What is spoken to under Section 72(2) is as regards set off of business loss as against the income from profits and gains of business or profession and if there is loss as well as unabsorbed depreciation, the set off shall be first on the business loss as against the business income and then on unabsorbed depreciation. What is spoken to under Section 32(2) is as regards set off of unabsorbed depreciation as per clause (ii) of sub-section (1) and when the unabsorbed depreciation could not be set off as against the income from business or profession by reason of there being no income available under the said heads and where there is income from other sources, effect must be given to Section 32(2) of the Act for that assessment year.” (Emphasis Supplied)

In view of the above, we direct the Assessing Officer to allow the set off

of the brought forward business loss with current year business income

as claimed by the Appellant and allow carry forward of the unabsorbed

depreciation of INR 2,09,40,303/-. Accordingly, Ground No. 9 is allowed.

I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014 Ground No. 10 25. Ground No. 10 is general in nature and does not require adjudication.

Order pronounced in the court on 26.08.2022 at Chennai. Sd/- Sd/- (जी मंजूनाथा) (रा%ल चौधरी) (G. MANJUNATHA) (RAHUL CHAUDHARY) लेखासद$/ACCOUNTANT MEMBER �ाियकसद$एवं /JUDICIAL MEMBER चे�ई/Chennai, िदनांक/Dated, the 26th August, 2022 Alindra, PS आदेशकी�ितिलिपअ)ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु+ (अपील)/CIT(A) 4. आयकरआयु+/CIT 5. िवभागीय�ितिनिध/DR 6. गाड�फाईल/GF

I.T.A. No. 55/Chny/2018 Assessment Year : 2013 - 2014

Sr. No. Details Date Initials Designation 1 Draft dictated on/Draft Sr.PS/PS dictation sheets are attached/Dictated directly on PC 2 Draft Placed before author Sr.PS/PS 3 Draft proposed & placed JM/AM before the Second Member 4 Draft discussed/approved by JM/AM Second Member 5 Approved Draft comes to the Sr.PS/PS Sr.PS/PS 6 Order pronouncement on Sr.PS/PS 7 File sent to the Bench Clerk Sr.PS/PS 8 Date on which the file goes to the Head clerk 9 Date on which file goes to the AR 10 Date of Dispatch of order