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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
Date of Hearing – 08.02.2018 Date of Order – 21.02.2018 2 M/s. Exedy India Ltd. O R D E R PER SAKTIJIT DEY, J.M.
Aforesaid cross–appeals arise out of order dated 2nd August 2016, passed by the learned Commissioner (Appeals)–56, Mumbai, pertaining to assessment year 2011–12.
Grounds no.2 and 3 are not pressed, hence, dismissed.
In ground no.1 with sub–grounds no.1.1 to 1.18, the assessee has raised a number of issues concerning transfer pricing adjustment. However, at the time of hearing, the learned Authorised Representative appearing for the assessee wanted to press ground no.1.1 only and restricted his arguments only in respect of this ground
Brief facts are, the assessee an Indian company in the relevant previous year entered into the following international transactions with its Associated Enterprise (A.E).
S.no. Particulars F.Y. 2010–11 Method Used 1. Purchase of automotive parts 40.24 TNMM 2. Purchase of finished goods 0.17 TNMM 3. Payment of royalty for technical 2.67 TNMM know–how 4. Interest on ECB loan 0.14 TNMM/CUP 5. ECB received 18.75 Total:– 61.97
3 M/s. Exedy India Ltd.
From the transfer pricing study of the assessee, the Transfer Pricing Officer found that the assessee had adopted Transactional Net Margin Method (TNMM) as the most appropriate method to bench mark its international transaction. It has selected itself as tested party and applying Profit Level Indicator (PLI) of PBDIT / sales has worked out its margin at entity level of 0.98%. Since, the arithmetic mean of the six selected comparables was within the tolerance range of margin shown by the assessee the value of the international transaction was found to be at arm's length. The Transfer Pricing Officer after examining the transfer pricing study and other materials, though, accepted the arm's length price of the international transaction relating to purchase of finished goods, payment of royalty for technical knowhow, interest on ECB loan, etc., however, he raised doubts with regard to the arm's length price of purchase of automotive parts and ultimately proceeded to determine the arm's length price of this particular transaction. The Transfer Pricing Officer selected five comparables with average margin of 4.45%. By applying the said margin to the international transaction relating to purchase of automotive parts he determined the arm's length profitability of the assessee at 8.73% as against the actual profitability of 1.93%. Since the purchase from the A.E. is ` 40.24 crore out of total purchases of ` 142.04 crore, the Assessing Officer worked out the proportionate
4 M/s. Exedy India Ltd. downward adjustment of ` 1,92,64,430, to the value of international transaction shown by the assessee with A.E. In terms of the transfer pricing adjustment proposed by the Transfer Pricing Officer, the Assessing Officer passed the assessment order making addition of the transfer pricing adjustment.
The assessee challenged the transfer pricing adjustment before the first appellate authority, inter–alia, on the ground that the price paid by the assessee towards purchase of automotive parts being within the range of ±5% of the arm's length price determined by the Transfer Pricing Officer, no adjustment should have been made. However, the aforesaid ground raised by the assessee did not find favour with the first appellate authority who held that assessee’s claim cannot be accepted.
Learned Authorised Representative submitted before us that the assessee has shown the value of disputed international transaction with A.E. at ` 40.24 crore. Whereas, the Transfer Pricing Officer has determined the arm's length price of the transaction with A.E. at ` 38.32 crore. Therefore, the variation between the price paid by the assessee to the A.E. and arm's length price determined by the Transfer Pricing Officer falls within ±5% range. The learned Authorised
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Representative furnished the following computation to demonstrate the aforesaid fact.
Particulars Reference Amount Value of international transaction (purchases) A INR 40.24 crore Adjustment made by the TPO B INR 1.92 crore Arm's length price so determined C=A–B INR 38.32 crore 5% of 40.24 crore 5% of the value of international transaction A*5.00% = INR 2.02 crore 105% of 40.24 105% of the value of international transaction A*105.00% crore = INR 42.25 crore 95% of 40.24 crore 95% of the value of international transaction A*95.00% = INR 38.22 crore
The learned Authorised Representative submitted, as per the proviso to section 92C(2) of the Act, the range of ±5% has to be worked out on the basis of the arm's length price of the international transaction and not the arm's length profitability as held by the learned Commissioner (Appeals). He, therefore submitted, no adjustment is required to be made in case of the assessee in view of the specific provisions contained under the second proviso to section 92C(2) of the Act.
Learned Departmental Representative, though, agreed in principle that in terms with second proviso to section 92C(2), no adjustment is required to be made if the difference in the price shown by the assessee and arm's length price determined is within ±5% as 6 M/s. Exedy India Ltd.
applicable for the relevant period, however, the Assessing Officer / Transfer Pricing Officer may be directed to verify the computation furnished by the assessee and decide the issue in terms with the said provision.
We have heard rival submissions and perused material available on record. As per the facts emanating from record there is no dispute that the price of the international transaction with the A.E. i.e., purchase of automotive parts shown by the assessee is ` 40.24 crore. It is also a fact on record that the Transfer Pricing Officer has made a downward adjustment of ` 1,92,64,430 to the price paid to the A.E. while determining the arm's length price of the transaction. Thus, prima–facie, it appears that he has determined the arm's length price of the international transaction with its A.E. at ` 38.32 crore. If the aforesaid figures are accepted, then, the contention of the learned Authorised Representative that the arm's length price determined by the Transfer Pricing Officer is within ±5% range as provided in the second proviso to section 92C(2) prima–facie appears to be correct. In our view, a reading of the said proviso makes it clear that the ±5% range is applicable to the arm's length price and not arm's length profitability. Therefore, the learned Commissioner (Appeals) has completely misconceived the statutory provisions while rejecting the claim of the assessee. In view of the aforesaid, we direct the Assessing
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Officer to verify the working of ±5% referred to above and if assessee’s claim is found to be correct no addition on account of transfer pricing adjustment should be made. With the aforesaid observations, the ground is allowed for statistical purposes.
In the result, assessee’s appeal is allowed for statistical purposes. ./2016 Revenue’s Appeal
The only ground raised by the Revenue is as under:–
“On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in directing the A.O. to increase the value of opening stock by ` 1,90,66,965 on account of addition made to closing stock for A.Y. 2010–2011 being unutilized modvat credit which is contrary to the direction given by CIT(A) to A.O, to determine the value of opening stock purchase sales and closing stock as per provision of section 145A of the Act, while deciding ground number 2.”
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that there is closing balance of unutilized MODVAT credit of ` 1,73,52,615, called upon the assessee to explain why it should not be added to the total income of the assessee. In response, it was submitted by the assessee that similar addition of unutilized MODVAT credit was made in the earlier year, therefore, if any disallowance is made in this year the unutilized MODVAT credit of `
8 M/s. Exedy India Ltd.
1,90,66,965 added in the assessment year 2010–11 should be reduced from the unutilized MODVAT credit in the impugned assessment year. The Assessing Officer, however, did not agree with the assessee stating that this is a recurring issue and appeal effect in some of the assessment years is yet to be given. Being aggrieved with the aforesaid addition made by the Assessing Officer, assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee in the context of the facts and material on record held as under:–
“14.6 Findings/Conclusions: I have carefully perused the facts of the case, contentions of the AO & submissions of the appellant. It can be observed that, that the closing of preceding year shall become opening stock of the current year. In this regards it is pertinent to note that the said issue was also involved in assessment year's 2005-06 and 2007-08. In view of the same, following my predecessor's order for the issue under consideration, the AO is directed to increase the value of opening stock by Rs. 1,90,66,965 for the addition made to closing stock of assessment year 2010-11 while making adjustment of modvat credit of Rs. 1,73,52,615 to the value of closing stock. Thus, this ground of appeal is treated as allowed.”
We have heard rival submissions and perused materials available on record. Undisputedly, in assessment year 2010–11, the Assessing Officer has disallowed unutilized MODVAT credit of ` 1,90,66,965 and 9 M/s. Exedy India Ltd.
added to the closing stock of the impugned assessment year. It is held by the Hon'ble Jurisdictional High Court in CIT v/s Mahalaxmi Glass Works Ltd., of 2009 dated 1st April 2009, as per section 145A of the Act, if there is any change in the closing stock at the end of the year then there must necessarily be a corresponding adjustment made in opening stock of that year. The Tribunal, Mumbai Bench, in ACIT v/s Koch Chemical Technology Group (I) Ltd., [2015] 64 taxmann.com 464 (Mum.) following the aforesaid decision of the Hon'ble Jurisdictional High Court has also expressed similar view. Therefore, the finding rendered by the first appellate authority on the issue being in consonance with section 145A as well as the judicial precedents referred to above, we find no reason to interfere with the same. Ground raised is dismissed.
In the result, Revenue’s appeal is dismissed.
To sum up, assessee’s appeal is partly allowed and Revenue’s appeal is dismissed. Order pronounced in the open Court on 21.02.2018