HSI AUTOMOTIVES PRIVATE LIMITED,KANCHEEPURAM vs. DCIT, CHENNAI

आदेश /O R D E R आदेश आदेश आदेश

PER ANIKESH BANERJEE, JM:

The instant appeals are filed against the order of the

learned Deputy Commissioner of Income Tax, Corporate Circle –

2(2), Chennai passed u/s.143(3) read with section 144 of the

Income Tax Act, 1961 (in brevity “the Act”) for the Assessment

::2 :: I.T.A. Nos.276 & 3011/Chny/2017 Years 2012-2013 and 2013-2014. For the Assessment Year

2013-2014, the order was passed u/s.143(3) read with section

144C(13) of the Act. Both the orders are pursuant from the

orders of the learned Dispute Resolution Panel-2, Bengaluru

passed u/s.144C(5) of the Act (in brevity “The DRP”). Both the

orders are the same and are having the same kind of issues and

hence we are clubbing all the issues together and disposing off

the issues accordingly.

“M/s. HSI Automotives Limited” was established in the year

1997. The company is having its manufacturing facility in

Sriperumbudur and is producing major products such as low

pressure hose, rubber profile car roof sealing layout parts,

power steering parts, fuel hose, brake hose, intercooler hose,

water hose, radiator hose, weather strips and aircon hose. The

company caters mostly to original equipment manufacturers like

the Hyundai Motor India Limited, For India and General Motors

India. The Assessee followed the Transactional Net Margin

Method [TNMM] and the Most Appropriate Method [MAM] for

calculating the Arm’s Length Price [ALP]. In both the years, the

issues that are agitated by the Assessee are common. In short,

::3 :: I.T.A. Nos.276 & 3011/Chny/2017 the facts are that the Assessee was availing foreign exchange

fluctuation loss as non-operative expenses. The claim behind

the non-operating Foreign Exchange Fluctuation Loss [FEFL] is

that, it is extraordinary in nature. The Assessee states that

there was a sharp volatility in the transacting currencies of

about 19.15% during the period for the Financial Year 2007-

2008 to the Financial Year 2011–2012 indicating that there was

a lower foreign exchange rate (Rs.40.24 = 1 USD), when

negotiated and accepted the price with the customer and a

much higher rate when it actually imported the goods for the

Financial Year 2011–2012. Further, adjustments towards usage

of diesel in place of electricity supplied by the Tamil Nadu

Electricity Board [TNEB]. The Assessee’s plea was that during

the financial year 2011-2012, Tamil Nadu was facing acute

power issue and due to that, informally, industries were asked

to run the Gensets during particular timings. To manage this,

the Government of Tamil Nadu has even allowed for set off

/reduced VAT to compensate the industries in the next year.

The Assessee seeks an adjustment of Rs.10,71,87,811/- as this

is the cost incurred in excess to cost that would have incurred in

the normal course which are abnormal in nature and needs to

be removed in arriving at the PLI. A further prayer was placed

::4 :: I.T.A. Nos.276 & 3011/Chny/2017 as per Section 92C(2) of the Act, the standard deduction of +/-

5% should be allowed.

as payment of Provident Fund and Employees State Insurance,

Guarantee Fee payment and applicability of TDS and other

expenses. The learned Transfer Pricing Officer [TPO] made a

downward adjustment of Rs.35,78.19,630/-. Subsequently, the

Assessee filed a rectification petition u/s.154 of the Act dated

27.01.2016 before the TPO for rectification and the TPO passed

a rectification order dated 10.03.2016 and suggested a

downward adjustment to the extent of Rs.19,22,85,727/-.

Being aggrieved, the Assessee filed an appeal before the

Tribunal for further adjudication.

vehemently argued and pointed out that the Assessee has

incurred significant losses on account of the difference in

conversion of the foreign exchange to INR while there was no

change in the purchasing price in foreign currencies between

the periods. The order was taken for the Financial Year 2007 –

2008 but execution was made for the Financial Year 2011-

2012. The total losses on account of foreign fluctuation arrived

::5 :: I.T.A. Nos.276 & 3011/Chny/2017 was to Rs.24,89,68,029/- by multiplying the total purchase

value during the year. During the year, USD with difference

between USD vs INR during the period (USD 3,23,33,510 X INR

7.70 = 2,48,968). Since, there is only one accrual entry passed

when the actual goods are imported, this loss are accounted in

the cost of goods sold and not as separate foreign exchange

amount like the transactional related losses. Mr. B. Ramana

kumar, Advocate referred to the judgement of ITAT, New Delhi

in the case of Honda Trading Corporation India Private Limited,

New Delhi Vs. The Assistant Commissioner of Income Tax, New

Delhi in I.T.A. No.5297/DEL/2011. He respectfully submitted

the observation of the Co-ordinate Bench of ITAT, Chennai in

the case of M/s Kwang Jin India Autosystems Pvt. Ltd.,

Kancheepuram Vs. The Deputy Commissioner of Income Tax,

Chennai [IT(TP)A No.38/Chny/2018] and in the case of Motonic

India Automotive Pvt. Ltd., Vs. The Assistant Commissioner of

Income-tax, Company Circle-IV(3), Chennai – 600 034, dated

17.08.2016 [ITA No. 741/Mds/2014]. The relevant paragraph is

extracted as under:

“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

::6 :: I.T.A. Nos.276 & 3011/Chny/2017 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 ITA No.5297/Del/2011 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.”

4.1 The learned Counsel of the Assessee further asked for

adjustment towards the payment of custom duty. The Assessee

imported raw-material such as rubber and polyurethane related

chemicals, final products weather strips and water into car. He

further relied on the judgement of the ITAT, Chennai Benches in

the case of M/s. Mobis India Limited Vs. The Deputy

Commissioner of Income Tax [I.T.A. No.2112/Mds/2011, 2014

(2) TMI 36], and requested for an adjustment during calculation

of the PLI. He further mentioned that both the issues were not

taken before the Revenue authorities at the time of assessment.

::7 :: I.T.A. Nos.276 & 3011/Chny/2017 He further requested that the matter could be remanded back

before the Revenue authorities for further consideration.

4.2 The learned Counsel of the Assessee, Mr. B. Ramana

kumar, Advocate also requested for adjustment towards usage of

diesel in place of electricity supplied by the Tamil Nadu Electricity

Board. The issue is already discussed in the brief facts of the

case. The learned Transfer Pricing Officer [TPO] during the

calculation invoked fresh facts to prove that the Assessee was

working beyond its installed capacity which led to the increase in

power cost, irrespective of the source of power generation. The

learned Counsel of the Assessee mentioned that the capacity

cannot be ascertained merely from the notes of accounts, as the

company is assisted by various sub-units job source and

contractor manufacturers. The actual capacity cannot be arrived

directly from the performance until the performance is split into

self and supported. Reliance is being placed on the order of

ITAT, Delhi in the case of M/s. HCL Technologies BPO Services

Limited Vs. The Assistant Commissioner of Income Tax in I.T.A.

No.3547/DEL/2010 and in the case of M/s. Mando India Steering

Systems Private Limited Vs. The Commissioner of Income Tax in

I.T.A. No,2092/Mds/2012. The Madras [Chennai], ITAT took into

::8 :: I.T.A. Nos.276 & 3011/Chny/2017 consideration the abnormal costs in the nature of overhead fixed

costs that arouse due to under-utilization of resources. As per

the learned Counsel of the Assessee, the Transfer Pricing Officer

[TPO] did not dispute the submission of documents and

calculated the electricity expenditure but the Hon’ble DRP has

recorded that the Assessee has not given any detailed workings

for adjustment. In this respect, the Assessee had filed a written

submission and a consolidated case-book which are kept in the

records.

a written submission which is placed on record. He relied on the

order of the learned Transfer Pricing Officer and the relevant

portions are extracted as under:

“Power Related Adjustment: Rs.10,71,63,792/-

::9 :: I.T.A. Nos.276 & 3011/Chny/2017

operating cost. The above adjustment is a one sided adjustment. You may in a position to reveal certain information which you claim to be material in the computation of operating margin. But what is the scenario in the cast of comparables on such one sided claims of yours is not known. It may be that the financials of the comparable do not reveal any such information. Even in your financials, the said item of expenditure is not treated as abnormal in nature so as to warrant a specific mention in your financials. In the absence of specific mention of such extraordinary cost either in your case, or in the case of comparables, the same has to be treated as not material in nature warranting a separate treatment.

Item of Installed Actual Percentage to manufacture Capacity Production installed capacity (Units) (Units) Rubber 4000000 36832157 920.8% Profiles PVC Profiles 4000000 9073340 226.85% Low Pressure 4000000 19786199 494.66% Hose

::10 :: I.T.A. Nos.276 & 3011/Chny/2017 The data presented in the above table amply proves that you are working way above your uninstalled capacity. The presumption that for the current previous year also you are working way above your installed capacity is justified when taking into account your turnover has gone up from Rs.378 crores to Rs.458 crores. Similar to under utilization of capacity resulting in under absorption of fixed costs, an adjustment is warranted on account of over utilization of capacity. The margins in the case of yourself and comparables required to be adjusted in the light of the above information. The above scenario adequately accounts for your need to depend on diesel generators. In the case of the comparables the utilization of the capacity is not on the scale as you have been operating. There will no end if one starts making comparisons this way. When TNMM method is chosen for benchmarking, the net margin is not unduly affected by such factors. Therefore, the power related adjustment requires no consideration.

::11 :: I.T.A. Nos.276 & 3011/Chny/2017

Description Amount in Rs. Amount in Rs. Revenue 4550900499 Less: Cost 4779139884 Profit before Tax -228239385 Less: Finance Cost 124197161 Less : Less on sale 2824512 127021673 of assets Loss 101217712 Revenue 4550900499 Margin on revenue (-)2.22 %

considered in the Cash Flow Statement

represents gain of Rs.4,84,72,577 and not

::12 :: I.T.A. Nos.276 & 3011/Chny/2017

loss as presented in the show cause notice

and the breakup in the Forex Loss reported in

P&L {schedule 28(ii)(p)} was given as under:

Type Loss Gain Net (Gain)/Loss Transaction 6,61,89,612 3,37,82,683 3,24,06,929 Translation 13,30,13,695 3,47,47,979 10,09,59,986 Total 19,92,03,307 6,85,30,662 13,33,66,915

Assessee also submitted that the Forex loss

reported in Cash Flow had no impact with

respect to this assessment under TP

provisions and therefore requested for

considering the entire the Forex Loss

reported in P&L as non operating in nature for

the purpose of margin computation.

Position of this office:

6.1. Assessee’s claim that the forex gain

(mistakenly mentioned in the cash flow

statement as loss) does not have any impact

in the assessment. The cash flow statement

adds back unrealized losses and deducts

unrealized gain while arriving at the figure of

::13 :: I.T.A. Nos.276 & 3011/Chny/2017 funds from operations. Therefore, the figures

represented therein have to be matched with

the Assessee’s claim of non operating gains

and losses while computing operating margin.

What was mentioned in the Cash flow

statement was gain of Rs.4,84,72,577, which

is a translational loss, whereas in the break

up provided in the earlier paragraph shows

the unrealized gain as Rs.3,47,47,979 leaving

a gap of Rs.1,37,24,598. Such

inconsistencies in stand make the Assessee’s

claim doubtful in the absence of fool proof

evidence in the form of the entire ledger

dump being produced for verification.

Therefore the claim is rejected.

the learned Transfer Pricing Officer included 10% addition of the

total quantum on import of machinery and tools without any

supporting documents and had asked for standard deduction +/-

5%. The learned Counsel of the Assessee prayed that the matter

::14 :: I.T.A. Nos.276 & 3011/Chny/2017 may be remanded back to the learned Transfer Pricing Officer

[TPO] with a direction to deal the arbitrary addition of 10%.

filed before the Bench and claimed that the net loss on the foreign

currency transactions and translational debited into the Profit &

Loss [P&L] account was Rs.13,33,66,915/-. The company was

given a breakup of the transactional loss and translational loss in

its written submission dated 23.11.2015 in Annexure – IV. As per

the breakup, the direct transactional loss was Rs.3,24,04,929 and

translational loss was Rs.10,09,59,985. So, this loss was only the

notional loss or paper loss and it was not a crystallized loss.

available on record. All the issues together are remanded back to

the learned Assessing Officer for de novo adjudication. The learned

Assessing Officer should consider afresh on the basis of the above

mentioned discussion. The learned Counsel of the Assessee

pointed out that the foreign exchange loss is a genuine loss which

is not at all a notional loss. The Assessee was also directed to

submit all relevant documents before the learned Assessing Officer

to substantiate its claim. Nonetheless, a reasonable opportunity

should be allowed to the Assessee for redressal of its grievances.

::15 :: I.T.A. Nos.276 & 3011/Chny/2017 9. Corporate Taxes: The learned Counsel of the Assessee, Mr.

B. Ramanakumar, Advocate also agitated three issues related to

the disallowance payment of profit which is of the Employees State

Insurance. The issues were highly discussed in different orders in

the Co-ordinate Benches. He mentioned that the payment was

made before the due date of filing the return u/s.139(1) of the Act.

But at this moment, we are unable to verify the payment details.

So, the issue is remanded back to the learned Assessing Officer for

further adjudication.

9.1 The Disallowance on account of Section 14A of the Act read

with Rule – 9D. The Counsel of the Assessee claimed that they

made a strategic investment purely on strategic purpose.

Accordingly, he made an addition of Rs.18,51,00,000/- for the

Assessment Year 2012 – 2013 and Rs.90,55,457/- for the

Assessment Year 2013 – 2014. The learned Counsel of the

Assessee mentioned that no expenditure was incurred for the

Assessment Year 2013 – 2014, the controversial situation on the

fact between the Revenue and parties. The issue is further

remanded back to the learned Assessing Officer for further

verification in the light of the Assessee’s payment. The Assessee

should be given a reasonable opportunity to substantiate his claim.

::16 :: I.T.A. Nos.276 & 3011/Chny/2017 10. Disallowance u/s.40(ia) :– Disallowance of Rs.84,33,60,360/-

on account of non-deduction of TDS and Royalty and Guarantee

Fees and Professional Charges: The learned Counsel of the

Assessee mentioned about the CBDT Circular No.5/2015 dated

15.07.2005 and mentioned that the TDS deduction in the previous

year but paid in the subsequent year after the time limit prescribed

u/s.200(1) of the Income Tax Act, 1961 shall be allowed for

deduction. The amount was remitted for the Assessment Year

2011 – 2012 and 2012 – 2013. The other issue related to the

disallowance of expenses in relation to the scientific research and

all the issues are remanded back to the learned Assessing Officer

for further adjudication as because at this stage as there is no such

sufficient documentation for adjudicating the issue under factual

matrix.

Year, in both the Assessment Years 2012 – 2013 and 2013 – 2014

in I.T.A. No.276/Chny/2017 and I.T.A. No.3011/Chny/2017

respectively, both are fully remanded back to the learned Assessing

Officer for further adjudication de novo and the Assessee to be

given reasonable opportunity for redressal of his grievances.

::17 :: I.T.A. Nos.276 & 3011/Chny/2017