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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI KULDIP SINGH & SHRI PRASHANT MAHARISHI
per prior approval of Ministry of Commerce & Industry as well as Reserve Bank of India (RBI) for the compressors and kits respectively as the reimbursement has been stated to be inextricably linked to the manufacturing functions performed by the taxpayer. The taxpayer has not made separate benchmarking qua trading segment. The taxpayer selected 31 comparables with the PLI average of 1.08% to benchmark the international transactions as against PLI average of taxpayer at 1.77% and found its international transactions at arm’s length.
Ld. TPO by rejecting the entity level analysis computed the PLI of manufacturing sector at 1.3%, rejected 30 comparables out of 31 chosen by the taxpayer and retained only one comparable, namely, Subros Ltd.. TPO introduced 5 new comparables and computed their average PLI at 10.70% and thereby computed the arm’s length price of international transaction as under :- ./2017 ITA No.826/Del./2017 Particulars Amount in INR Total sales of manufacturing segment 438,00,00,000 Arm’s length Margin (%) 10.70% Arm’s length Margin 468,660,000 Arm’s Length Cost 3,911,340,000 Operating Cost 4,300,100,000 International transaction of purchase 1,480,700,000 5% of international transaction 74,035,000 Difference in the Arm’s Length Cost and 388,760,000 Operating Cost for which adjustment is required to be made Percentage of purchases made from AE to 34.43% total cost (Rs.1480700000/- / Rs.4300100000*100) Proportionate Difference for which 133865941 adjustment is required to be made
The taxpayer carried the matter before the ld. CIT (A) by way of filing the appeal who has rejected all the comparables chosen by TPO and computed the ALP of international transactions by retaining Subros Limited having average PLI of 14.12% and thereby restricted the ALP adjustment to Rs.3,46,21,430/- by partly allowing the appeal. Feeling aggrieved, both the taxpayer as well as Revenue have come up before the Tribunal by way of filing the present appeals.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. comparables at 10.70% for benchmarking the international transactions and final set of comparables is as under :-
S.No. Company OP/Sales(%) i. Banco Products (India) Ltd. 15.78 ii. Eco Auto Component Ltd. 10.66 iii. Spaco Technologies (India) Pvt. Ltd. 16.84 iv. Standard Radiators Pvt. LTd. 7.58 v. Tata Toyo Radiator Ltd. 8.91 vi. Subros Ltd. 4.47 AVERAGE 10.7
So far as appeal filed by the Revenue is concerned, they have challenged the impugned order on the ground that the ld. CIT(A) has erred in directing the TPO to exclude comparables without having any FAR analysis.
Ld. DR for the Revenue contended that ld. CIT (A) without giving an opportunity of being heard to the TPO rejected 5 comparables out of final set of 6 comparables without conducting any FAR analysis whereas method adopted by the TPO in its TP analysis to benchmark the international transaction is scientific and relied upon the order passed by the TPO.
However, on the other hand, appeal filed by the taxpayer revolves around the sole fact that so far as a manufacturer is concerned, there are two segments : (i) Non-core auto components and (ii) core auto components. manufacturing non-core auto component viz. air-conditioner compressors and components used for cooling interiors of the car, it cannot be compared with manufacturing company which is into the manufacturing of core components without which car cannot run. It is also one of the contentions of the ld. AR for the taxpayer that without non-core auto component car can run. So, the core auto components are one without which a vehicle cannot run whereas without air-conditioner compressors and components, certain automobiles, such as, buses, trucks, tractors, etc. can run whereas without radiators and carburetors, no automobile can run.
Ld. AR for the taxpayer supported the order passed by the ld. CIT (A) to the extent that ld. CIT (A) rejected 5 comparables on the basis of product dissimilarity and on account of failure of quantitative filters in some cases.
When we examine the impugned order passed by the ld. CIT(A) in the light of the contentions raised by the ld. AR and ld. DR for the parties to the appeal, it has come on record that the ld. CIT (A) has proceeded summarily to reject the comparables chosen by the TPO without conducting any FAR analysis and without examining the comparables being part of core or non-core auto component segment as contended by the ld. AR for the taxpayer.
CIT(A) is extracted as under :-
“18. During the course of proceedings, the appellant Company argued that M/s. Subros Ltd. was also engaged in manufacture of air-conditioning systems and it should be adopted. The TPO has accepted the contention of the appellant Company and following companies were selected:-
S.No. Company OP/Sales (%) 1 Banco Products India Ltd. 15.78 2 Eco Auto Component Ltd. 10.66 3 Spaco Technologies Pvt. Ltd. 16.84 4 Standard Radiators Pvt. Ltd. 7.58 5 Tala Toyo Radiator Lid. 8.91 6 Subros Ltd. 4.47 Average 10.7
The appellant Company has objected to the selection of these comparables on the ground that no search matrix was furnished and no basis of selection has been confronted to the appellant Company. It has stated that appellant has failed to reject the companies which had material consumption of less than 60% to the cost as pointed out by him. He has given the following chart:-
S. Company A.Y. 2011-12 No. OP (%) Adjusted 1 Bajaj Motors Ltd. 5.14% 4.68% 2 Calcast Ferrous Ltd. 2.00% 1.54% 3 Inzi Controls India Ltd. 3.43% 4.07% 4 K R Rubberite Ltd. 3.90% 3.45% 5 Liners India Ltd. 4.81% 2.19% 6 Mahle Filter Systems 5.74% 5.66% (India) Ltd. 7 Multitex Filters Pvt. Ltd. 1.84% -2.68%
8 Sibar Auto Parts Ltd 2.24% 1.10% 9 Standard Radiators Pvt. 7.58% 5.23% Ltd 10 Subros Ltd. 4.47% 4.12% 11 Tata Toyo Radiator Ltd. 8.91% 8.85% 12 Teksons Ltd. -2.71% -5.08% 13 Western Thomson (India) 4.73% 3.67% Ltd. Average 4.01% 2.83% ./2017 ITA No.826/Del./2017 20. After considering the submissions of the appellant, the Assessing Officer rejected the few companies but still accepted the 2 companies Banco Products India Ltd. & Eco Auto Component Ltd. which were showing raw material less than 60%. AR states that TPO has cherry picked the comparables found by him in respect of Space Technologies India Pvt. Ltd., it that this Company was engaged in making Carburetors for the scooter industry. He has produced the copy of annual report, whereby the Company profile as reproduced, as under:-
SPACO had technical tie ups with renowned companies from Europe as well as Japan for a long period. We have also developed our own technical capability to design and manufacture Carburettors with venture diameters ranging from 7 mm to 30 mm to suit 2stroke and 4strokeengines of 22cc to 500cc. We are committed to achieve Total Customer Satisfaction by making, available to our customers, products that conform to international Standards on Quality, Cost and Delivery.
21. I agree with the view of appellant that Spaco Technologies is dealing in a totally different segment and therefore, is not proper comparable.
22. The appellant Company in ground nos. 11 and 12 has requested that working capital adjustment should be given and benefit of plus/minus (5%) should be provided.
23. I have gone through the submissions. The specific submissions of the appellant have been considered above. The appellant Company is engaged in manufacturing & trading of automobile air-conditioning parts. He is manufacturing & installing air-conditioners as OEM equipments of branded cars like Maruti. Out of 31 original or 13 subsequent comparables selected during the course of TP proceedings, none of the companies are engaged in any activity even remotely similar to activity of appellant Company on a FAR analysis. Similarly, the comparables selected by the TPO are not engaged in any similar activity namely e.g. Banco Products India Ltd. & Eco Auto Component Ltd. failed to pass even the quantitative filters and remaining two Standard Radiators Pvt. Ltd. and Tata Toyo Radiator Ltd. are engaged in manufacture of radiators which are installed in the vehicle to cool the engine and not the vehicle.
This leaves us with only one Company namely M/s. Subros Ltd. which was suggested by the appellant Company itself. A search on "Google" reveals that search for "automobile air-conditioning companies" throws only 2 names namely M/s. Subros Ltd. and M/s. Sanden Vikas India Ltd. i.e. the appellant Company. This shows that only M/s. Subros Ltd. out of companies available in public domain is engaged in activities ./2017 ITA No.826/Del./2017 similar to that of the appellant Company. A perusal of the Balance Sheet of M/s. Subros Ltd. shows that Company is engaged in manufacturing automobile air-conditioning systems and fan motor assembly. The turnover of the Company is about 1203 crores against the total turnover of 485 crores of the appellant. Thus, both companies belonged to a similar class of medium turnover companies. The turnover of fan motor assembly in Subros is just around 17 crores of the total turnovers of 1203 crores which is just about one and a half percent of total turnovers and is not likely to have any impact on the overall profitability. As far as the segmental reporting is concerned, it is reported as under.-
"The Group's business activity-falls within a single primary business segment i.e., Automotive AIR-conditioning Systems (with or without Fan Motor Assembly) and parts thereof Export sales constitute an insignificant portion of the total business of the Group. Hence, there is no geographical segment as well. Therefore, the disclosure requirements of Accounting Standard - 17 on 'Segment Reporting' issued by the Institute of Chartered Accountants of India are not applicable."
25. The above profile of the Company shows that only Company in public domain which satisfied all the filters and conditions adopted by TPO and appellant is M/s. Subros India Ltd. On a FAR analysis also, it fits as the best rather the only comparable available with the assessee or the TPO.
The PLI of M/s. Subros India Ltd. after providing working capital adjustment as worked out by appellant is at 4.12%. The adjustment is worked out as under:-
Particulars Amount in INR Total sales of manufacturing segment 438,00,00,000 Arm’s length margin (%) 4.12% Arm’s length margin 18,04,56,000 Arm’s length cost 419,95,44,000 Operating cost 430,01,00,000 Difference in the arm’s length cost & 10,05,56,000 operating cost for which adjustment is required to be made Percentage of purchases made from AE 34.43% to total cost Proportionate difference for which 3,46,21,430 adjustment is required to be made
Since there is only one comparable price, no adjustment of 5% shall not be permissible to appellant Company as per the proviso to section 92C(2).” 17. Bare perusal of the aforesaid order goes to prove that the ld.
CIT(A) has firstly made up his mind to select M/s. Subros Limited as the comparable and then discussed its comparability without conducting the FAR analysis of other comparables and without looking into if the comparables in this case are to be chosen on the basis of core and non-core function of automobile companies. No doubt, the ld. CIT (A) has used word FAR analysis at many places in the impugned order but FAR analysis of comparables, if any conducted by the ld. CIT (A) is not visible in the order.
Ld. AR for the taxpayer by relying upon the decision rendered by the Hon’ble Delhi High Court in the case of Rampgreen Solutions Pvt. Ltd. (2015-TII-33-HC-DEL-TP) and order passed by the coordinate Bench of the Tribunal in LG Electronics India P. Ltd. vs. ACIT (TS-11-ITAT-2013-(Del.)-TP) contended that under TNMM product, comparability is the basis for comparability of the tested party vis-à-vis the comparables to benchmark the international transaction.
19. In Rampgreen Solutions Pvt. Ltd. (supra), Hon’ble High Court held that, “a higher product and functional similarity reliable ALP.” But we are of the considered view that all these facts have not been taken care of by the ld. CIT (A) while rejecting the comparables chosen by the TPO.
So, we are of the considered view that distinction of the core and non-core auto components is the key to benchmark the international transactions undertaken by the taxpayer in this case and this view is supported with the decision of the coordinate Bench of the Tribunal in Minda Acoustic Ltd. (now Minda Industries Ltd.) (TS-468-ITAT-2019 (DEL)-TP).
Coordinate Bench of the Tribunal in the case of Minda Acoustic Ltd (supra) had made the distinction between core and non-core auto components as per Clause (b) & (h) of Rule 10TA of the Income-tax Rules, 1962 applicable to the identical facts of this case by returning following findings :-
“14. Based on this distinction brought in the statute, the Ld. DRP has rejected most of the comparables selected by the TPO holding that these comparables were manufacturing core products which cannot be compared with the assessee which is purely into production of noncore auto components mainly various types of horns. From the perusal of the definition of ‘core auto components’ as given in the Rules, it can be inferred that core auto components are crucial part of automobile that requires sophisticated technology for manufacturing and such components are very lifeline like the heart and brain of automobile which are vital for power performance, actual running and stability of the automobile. Like engines and engine parts are inextricably link with the performance of the vehicle, without which vehicle cannot move; transmission system which assists in running of car; steering and steering systems, gears ./2017 ITA No.826/Del./2017 and clutches; axels and wheels; suspensions which balances the vehicle; breaks, etc. In other words, without the core part neither the automobile can run nor can it function. Whereas non-core auto components which are not covered under the core components could be like accessories, equipment, vehicle parts such as head lights, wipers, dash board equipment, horns, etc., which are used in the vehicle but they are not vital for the actual running of the vehicle.”
Following the order (supra) passed by the coordinate Bench of the Tribunal making distinction in core and non-core auto components, we are of the considered view that benchmarking in this case is required to be carried out with FAR analysis of the comparables keeping in view the distinction between core and non- core auto components because a company manufacturing core components cannot be compared with company manufacturing non-core auto components.
When we further examine the contention raised by the ld. AR for the taxpayer that apart from M/s. Subros Ltd., Jagan Lamps Ltd. and Swaraj Automotives Ltd. are the suitable comparables to benchmark the international transactions, it has come on record that Jagan Lamps Ltd. is manufacturer of auto bulbs, halogen bulbs, head lights, automotive electrical spares and other related products and Swaraj Automotives Ltd. is manufacturer of seats of a kind used for automobiles. We are constrained to record that when we go by the product comparability as held by Hon’ble High Court in Rampgreen Solutions Pvt. Ltd. (supra) relied upon by the ld. taxpayer and Swaraj Automotives Ltd.& Jagan Lamps Ltd..
24. Ld. AR for the taxpayer further contended that the matter may be remitted back to the TPO for the limited issue of use of comparability and computation of PLI of Swaraj Automotives Ltd.& Jagan Lamps Ltd.. We are of the considered view that in view of the slipshot TP analysis made by the ld. TPO as well as ld. CIT (A) conditional remand cannot be made. At the same time, we are of the considered view that to determine the arm’s length price of the international transaction undertaken by the taxpayer, fresh open ended TP analysis is required to be made by the TPO keeping in view the factum of product comparability as well as keeping in view the distinction between the core and non-core auto component manufactured for the purpose of comparability of the companies vis-à-vis the taxpayer.
The taxpayer has also challenged non-grant of benefit of arm’s length range of +/- 5% under the second proviso of section 92C (2) of the Act. Since the case is remitted back to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer, the TPO is directed to decide this issue in accordance with the provisions contained under Rule 10TA. the Revenue is allowed for statistical purposes and the appeal filed by the taxpayer is partly allowed for statistical purposes. Order pronounced in open court on this 31st day of December, 2019.