DOOWON AUTOMOTIVE SYSTEMS INDIA PRIVATE LIMITED,KNACHEEPURAM vs. ACIT (OSD) CORPORATE RANGE 1, CHENNAI

आयकर अपीलीय अिधकरण, ’डी’ �ायपीठ, चे�ई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI �ी धु�ु� आर.एल रे�ी, �ाियक सद� एवं �ी जी. मंजुनाथा, लेखा सद� के सम� Before Shri Duvvuru RL Reddy, Judicial Member & Shri G. Manjunatha, Accountant Member आयकर अपील सं./I.T.A. No. 3061/Chny/2017 िनधा�रण वष�/Assessment Year: 2013-14 M/s. Doowon Automotive Systems The Assistant Commissioner of India Pvt. Ltd., Plot No. B-19 & 20, Vs. Income Tax (OSD), SIPCOT Industrial Park, Oragadam, Corporate Range – 1, Sriperumbudur Taluk, Chennai. Kancheepuram District 602 105. [PAN:AACCD4172F] (अपीलाथ�/Appellant) (��थ�/Respondent) अपीलाथ� की ओर से / Appellant by : Shri S.P. Chidambaram, Advocate ��थ� की ओर से/Respondent by Shri B. Jayaragahvan, CIT : सुनवाई की तारीख/ Date of hearing : 16.09.2021 घोषणा की तारीख /Date of Pronouncement 23.11.2021 : आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: This appeal filed by the assessee is directed against the assessment order passed under section 143(3) r.w.s. 144C(13) r.w.s. 92CA of the Income Tax Act, 1961 [“Act” in short], dated 13.10.2017 relevant to the assessment year 2013-14. Besides challenging Transfer Pricing issues of custom duty, working capital adjustment, foreign exchange loss, provision for doubtful debts, confirming Hanon Climate Systems India Pvt. Ltd. is a comparable company, the assessee has also challenged corporate tax issue of brought forward business losses from the previous years.

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matter in appeal before the Tribunal and vide order dated 18.08.2017 in I.T.A. No. 2560/Mds/2016 relevant to the assessment year 2012-13, wherein, decision of the Coordinate Benches of the Tribunal in assessee’s own case for the assessment year 2011-12 in I.T.A. No. 692/Mds/2016 dated 25.01.2017 has been followed while adjudicating the above ground. The relevant findings of the Tribunal order relevant to the assessment year 2011-12 are extracted as under: “5. We heard the rival submissions, perused the material on record and judicial decisions. The Ld. AR explained that the company was incorporated in the year 2006 and in the second year of operation. The raw material component include import cost which constitute a major cost and claim adjustment of custom duty (non-cenvatable) before TPO. We rely on coordinate bench decision of Motonic India Automotive Pvt. Ltd Vs. ACIT, ITA No. 741/Mds/2014 dated 17.08.2016 at page 5 Para 6 which read as under: “6. The ld. AR submitted that in respect of custom duty component suitable adjustment to be made while determining the ALP. In our opinion, the plea of the assessee is justified. The TPO has not considered the custom duty adjustment on the reason that it is equivalent to central excise in commercial market. This is not correct. The Tribunal consistently holding that while determining ALP, there should be suitable adjustment in respect of custom duty, which was considered in the following cases : i) Skoda Auto India (P) Ltd. v. ACIT, Aurangabad (30 SOT 319)[Pune] ii) Toyota Kirloskar Motors Pvt. Ltd. v. ACIT, Bangalore – ITA No. 828/Bang/2010 iii) Putzmeister Concrete Machines Pvt. Ltd. v. DCIT, Panaji – ITA No. 107/PNJ/2012 iv) Demag Cranes & Components (India) Pvt. Ltd. v. DCIT, Pune in ITA No.120/PN/2011 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 ITA No.120/PN/2011, 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

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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 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 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 EGain Communication (P) Ltd. (supra) “the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the pen 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 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 Co- ordinate 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.”

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also failed to provide the aging details of its payables and receivables in order to evidence the claim for its working capital adjustment. The TPO has further observed that the assessee has been consistently claiming the adjustment towards working capital, which cannot be accepted year on year. It was not shown specifically, how the working capital position of its company is any different from that of the comparables. Further, considering the sales during the year which is ₹.425 crores, it can be seen that trade receivable is a meagre ₹.55 crores (12% of sales). Hence, major portion of the sales have been realised and the assessee did not have any prohibition to pay off its due to AE’s. Accordingly, the TPO rejected the claim of the assessee, which was confirmed by the ld. DRP.

5.1 Before us, by filing copy of the order of the TPO dated 23.08.2017 by giving effect to the order of the ITAT, the ld. Counsel for the assessee has submitted that the TPO had examined and allowed working capital adjustment for the assessment years 2011-12 and 2012-13 and prayed for following the same. On the other hand, the ld. DR supported the assessment order.

5.2 We have heard the rival contentions. With regard to the allowability of working capital adjustment, the Tribunal has considered similar issue in the

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assessment year 2011-12 and vide its order in I.T.A. No. 692/Mds/2016, the Tribunal has observed and held as under: “7. The Ld. AR argued that the Assessing Officer/DRP has confirmed the action of the TPO in not providing working capital adjustment while determining net profit margin of the assessee. In the assessee's own case in the assessment year 2009-10, DRP in its order dated 20.12.2013 has directed the TPO to examine the issue and consider working capital adjustment. Whereas, the Ld. TPO observed that the assessee company is actually buying the parts from the AE and working capital adjustment to be allowed if the assessee demonstrates with AE of allowing the credit period to the assessee and DRP confirm the action of the TPO and the Ld. AR demonstrated the Arithmetic Mean of 4.58% of seven comparables selected at Page 41 of paper book and referred to the working capital adjustment PLR of 12.26% with the comparables current assets being sundry creditors, sundry debtors and inventories at Page 42 and supported working capital adjustment of comparables company based on the financial statements. The Ld. DR relied on the order of TPO and prayed for no adjustment is required. Considering the facts and material on record the financial statements and the paper book, there is necessity for working capital adjustment and accordingly we remit the issue to the file of AO to consider the material for fresh consideration.” 5.3 By giving effect to the order of the ITAT, vide order dated 28.10.2018, the TPO had examined and allowed the benefit of working capital adjustment. Thus, respectfully following the above decision of the Coordinate Benches of the Tribunal, for the assessment year under consideration also, we direct the Assessing Officer to give suitable adjustment against the working capital component while determining the ALP.

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market rate. Before the TPO, it was the submission of the assessee that the foreign exchange loss is not dependent upon the operations carried out by Doowon India and that it is a result of various economic factors determined by the markets, RBI, macro-economic condition, world market etc. After considering the submissions of the assessee, the TPO has observed that the holding period with respect to payments made to creditors (AE’s) arising out of the international transactions is within the control of the management. Since the assessee had made delayed payments to its AE taking advantage of the leisurely credit period given by the AE and moreover, by holding that the forex gain/loss are an integral part of sale/purchase, they are directly attributable to the operational cost which has to be essentially taken into consideration while arriving at the operating cost of the entities while computing the PLI as well as by following various decisions, the TPO held that the forex gain/loss has to be treated as operating in nature, which was confirmed by ld. DRP by following the decision of the Tribunal in assessee’s own case for the assessment year 2012-13.

6.1 Before us, the ld. DR has submitted that the issue of foreign exchange loss – non-operative expense is covered against the assessee by the decision of the Tribunal in assessee’s own case for the assessment year 2012-13 and the same may be followed. The ld. Counsel for the assessee fairly conceded the above submissions of the ld. DR.

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6.2 We have considered the rival contentions. Similar issue was subject matter in appeal before the Tribunal in assessee’s own case for the assessment year 2012-13 and vide its order in I.T.A. No. 2560/Mds/2016 dated 18.08.2017, the Tribunal has observed and held as under: “9. We have heard both the parties and perused the material on record. We are of the opinion that the similar issue came up for consideration before this Tribunal in the case of M/s.Motonic India Automotive Pvt. Ltd. in ITA No.741/Mds/2014 for assessment year 2009-10 vide order dated 17.08.2016 wherein it was held that:- “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.” 9.1. However, in the present case as rightly pointed out by the ld. D.R that earlier year the assessee claimed foreign exchange loss as operating expenditure. This year assessee has shifted its stand and claimed it as non-operating expenditure. There is no consistency in its approach and also no reason has been given for such a change. Being so, in our opinion, foreign exchange loss is to be treated as operating nature only. Hence, this ground is dismissed. Respectfully following the above decision in assessee’s own case for the assessment year 2012-13, the ground raised by the assessee stands dismissed for the assessment year 2013-14.

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“(j) Operating expenses means the cost incurred in the previous year by the assessee in relation to the international transactions during the course of its normal operations including depreciation and amortization, but not including the following, namely:  Interest expenses  Provision for unascertained liabilities  Pre-operating expenses  Extraordinary expenses  Loss on transfer of assets  Expense on account of income tax &  Other expenses not relating to normal operations of the assessee.” Hence, the assessee has considered the same as non-operating in nature and has been excluded for the purpose of margin computation.

7.1 After considering the arguments of the assessee, the TPO has observed that the “Provision for doubtful debts” as the name suggests is made for the debts deemed to be unrecoverable by the company with respect to the sales made by the company. It is an integral part of the normal operations of any company. Further, the assessee has been into business for 6 years. It should, by this time be able to judge the credibility of its customers & be able to provide for non-recovery. Just because the appropriation is done, the assessee cannot claim the same to be non- operative. The very basis of any business lies on recognition of its customers & their credibility. Hence, making provision for non-recoverability of debts from customers is part & parcel of normal operations of the company & the same should be considered while calculating its PLI. Hence,

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the TPO has rejected the contention of the assessee and the DRP has upheld the decision of the TOP by rejecting the objections of the assessee.

7.2 Before us, the ld. Counsel for the assessee has submitted that the provision is only an estimate and it is pre-recognition of future loss. Prudence requires that a provision be created to recognize potential loss arising from the possibility of incurring bad debts, the same is considered as a debt while computing the net operating margins. It was further submission that the Safe Harbour Rules issued by the CBDT under section 92CB of the Act read with Rule 10TA(j) of the Rules states that any provision for uncertain liabilities should be excluded from the definition of operating expense. Thus, it was the submission that the assessee has considered the provision of doubtful debts as non-operating in nature and on parity basis provisions, if any, included in the financials of comparables companies has been excluded for the purpose of net margin computation. It was further submission that if the provision is included for computation of margin, it would amount to double adjustment. By relying on the order of the TPO in assessee’s own case for the assessment year 2014-15, wherein, by considering the submissions of the assessee, the TPO has treated the provision for bad and doubtful debts as non-operating in nature, the ld. Counsel for the assessee prayed that the provision for doubtful debts should be treated as non-operating in nature. On the other hand, the ld. DR

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submitted that each assessment year is separate and supported the TPO order for the assessment year under consideration.

7.3 We have considered the rival submissions. In the assessment year 2013-14, the TPO has rejected the submissions of the assessee and treated the provision for doubtful debts as operating in nature, which was confirmed by the ld. DRP. Whereas, in the assessment year 2014-15 vide his TP order dated 31.10.2017, the TPO has accepted the contention of the assessee and treated the provision for bad and doubtful debts as non-operating in nature. The relevant portion of the TP order for the assessment year 2014- 15 is extracted as under: “6.5 Assessee’s submission regarding “Treatment of Provision for doubtful debts” as operating item: With regard to the provision for doubtful debts, recoverability of some receivable may be doubtful although not definitely irrecoverable. Prudence requires that a provision be created to recognize the potential loss arising from the possibility of incurring bad debts. A business organization regularly reviews its debtors at the end of every accounting period and makes a provision for debts considered not recoverable. Such Provisions are only estimation based and are created by a business organization on a conservative basis. In fact, even for computation of total income, the same has been excluded. Hence, if provision is included for computation of margin, it would amount to double adjustment. In fact, even if is a bad debt written off in the profit and loss account then also the same should not be considered for computing the operating margin under transfer pricing analysis because the same would be an extraordinary item and these bad debts relates to third party transaction and not related party transaction. Also, as per the Safe Harbour Rules by the Central Board of Direct taxes under section 92CB of the Act read with Rule 10TA of the Rules, loss arising out of foreign exchange transactions should be considered as a non-operating expenditure. The relevant extract of the Rule is as follows:

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(j) “operating expense” means the costs incurred in the previous year by the Assessee in relation to the international transaction during the course of its normal operations including depreciation and amortization expenses relating to the assets used by the Assessee, but not including the following namely:-  Interest expenses  Provision for unascertained liabilities  Pre-operating expenses  Extraordinary expenses  Loss on transfer of assets  Expense on account of income tax &  Other expenses not relating to normal operations of the assessee.” Hence, the assessee has considered the same as non-operating in nature and on parity basis, provisions if any included in the financials of comparable companies has been excluded for the purpose of margin computation. TPO comments: The assessee’s contentions are accepted and same is now considered as non- operating in nature.” 7.4 The above order of the TPO for the subsequent assessment year 2014-15 was not available before the ld. DRP for consideration while passing its directions on 18.09.2017 during the assessment year 2013-14. In consistent with the observations given by the TPO for the assessment year 2014-15, we direct the Assessing Officer to treat the provision for bad and doubtful debts as non-operating in nature for the assessment year 2013-14 as well. Thus, the ground raised by the assessee is allowed.

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after making proper FAR analysis of the tested party and based on this analysis significant economic functions are identified and thereafter the relevant filters are adopted based on significant economic functions performed by the tested party. Once proper filters are chosen and applied on the public data base the proper comparables can be identified. After considering the objections and submissions of the assessee, TPO has rejected the TP study of the assessee on the ground that the ALP determined by the assessee has been use of data by the assessee which is not reliable or correct, because, the assessee had adopted data for comparables on three year average basis. In the assessment year 2013-14, as per Rule 10B(4) the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. The TPO has further noted that the notification for allowing use of multiple year data was made by CBDT only on 19th of October 2015 which is after the completion of the assessment year 2013-14. Consequently, the TPO was of the view that the TP study of the assessee was not in confirmation with the provisions of section 92C and hence, the TPO initiated fresh study to find out the comparable for the assessee company.

8.1 Before the DRP, the assessee raised objections regarding fresh search made by the TPO even after accepting all the comparable companies

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selected by the assessee. The objections with respect to comparables selected by TPO Comparable Objection raised ATS Elgi Doowon India is engaged in manufacturing of cooling systems for automotive whereas ATS Elgi into manufacturing of different product portfolio of automotive service equipments. Hence, not comparable. Hanon Climate Systems India P. Ltd. RPT >25% RACL Geartech Ltd. RACL Gear tech Ltd.is into manufacturing of industrial gears for electric switch gears & circuit breakers, winchers and cranes & hence functionally dissimilar. Lumax Automotive Lumax is engaged in manufacture of rear view mirror, plastic moulded parts for passenger cars, light and heavy vehicle, tractors, earthmovers and two & three wheelers. Hence, functionally dissimilar. Indication Instruments Ltd. Functionally dissimilar TPO’s remarks: Reasons for rejecting/accepting the assessee’s contention are as follows: Comparable Reason ATS Elgi Contention of the assessee is accepted since they RACL Geartech Ltd. are found to be functionally dissimilar. Lumax Automotive Hanon Climate Systems India P. Ltd. The comparable was resultant from the search made which had the filter rejecting companies with RPT >25%. Hence, contention of assessee is rejected. Indication Instruments Ltd. The assessee had adopted the company its TP report. However, due to non-availability of financials at the time of preparation of TP report, the same was dropped. Hence, contention of the assessee stating functional dissimilarity as an objection is rejected.

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Considering the above, the ld. DRP found that the action of the TPO was justified and the claim and objection of the assessee in respect of Hanon Climate Systems India Pvt. Ltd. is not correct.

8.2 On being aggrieved, the assessee is in appeal before the Tribunal. It was the submissions before the TPO that the Hanon Climate Systems India Pvt. Ltd. reports significant related party transactions during the financial year 2013. However, given that the values mentioned in RPT schedule was not clear for the financial year 2013, the assessee computed RPT based on the financial year 2012 prowess data arriving the RPT at 96.85%. The ld. Counsel for the assessee has submitted that the RPT of the comparable was in excess of 25% filter applied by the TPO, the said comparable Hanon Climate Systems India Pvt. Ltd. should be excluded. On the other hand, the ld. DR has supported the orders TPO/DRP.

8.3 We have heard the rival contentions. The assessee has excluded the comparable since the RPT was in excess of 25% in respect of Hanon Climate Systems India Pvt. Ltd. However, the TPO/DRP rejected the contentions of the assessee. The view adopting more than 25% RPTs making a company incomparable has been taken by various benches of the Tribunal including Aglient Technologies International P. Ltd. v. ACIT (2013) 36 CCH 187 Del Trib; Stream International Services Pvt. Ltd. v. ADIT

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(IT)(2013) 152 TTJ(Mumbai) 553; and Actis Advisers Pvt. Ltd. v. DCIT (2012) 20 ITR (Trib) 138(Delhi). In view of the above judicial precedents, we are of the considered opinion that the TPO was not justified for including an incomparable company namely, Hanon Climate Systems India Pvt. Ltd., who’s RPTs exceed 25%. Accordingly, we direct the TPO/AO to exclude the comparable M/s. Hanon Climate Systems India Pvt. Ltd. Thus, the ground raised by the assessee is allowed.

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the assessee has not brought on record any details of possessing such brought forward losses. Thus, the ground raised by the assessee stands dismissed.

Sd/- Sd/- [जी. मंजुनाथा, लेखा सद�] [धु�ु� आर.एल रे�ी, �ाियक सद�] (G. MANJUNATHA) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, 23.11.2021 Vm/- आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant, 2.��थ�/ Respondent, 3. आयकर आयु� (अपील)/CIT(A), 4. आयकर आयु�/CIT, 5. िवभागीय �ितिनिध/DR & 6. गाड� फाईल/GF.