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Income Tax Appellate Tribunal, ‘D’ BENCH : CHENNAI
Before: SHRI ABRAHAM P. GEORGE & SHRI DUVVURU RL REDDY]
आदेश / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
This is an appeal filed by the assessee directed against an assessment done on 04.10.2017 by ld. Deputy Commissioner of Income Tax, Corporate Circle 2(2), Chennai pursuant to directions of ld. Dispute Resolution Panel (herein after referred to as ‘’the DRP’’)
ITA No3195 /2017 :- 2 -: u/s.144C(13) of the Income Tax Act, 1961 ( herein after referred to as ‘’the Act’’).
Assessee has taken altogether twelve grounds of which ground No.12 is general needing no specific adjudication.
Ld. Counsel for the assessee at the outset submitted that he 3. was not pressing grounds 1, 2, 5, 7 & 9. Accordingly these grounds 1, 2,5,7 & 9 are dismissed as not pressed.
Grounds 3 & 4 of the assessee are reproduced hereunder:-
‘’Without prejudice to our objection to inclusion of 'Suprajit Engineering', if TPO decides to include as comparable then appropriate risk related adjustment to be considered. 3.1 The TPO/DRP erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in risk profile between the Assessee and the 'Suprajit Engineering'. 3.2 The TPO/DRP erred in law and on facts in arbitrarily not considering research reports/data from company websites provided to demonstrate difference in risk between asseessee and the 'Suprajit Engineering' viz (i) presence of 'Suprajit Engineering' in to 'replacement market' (ii) 'Suprajit Engineering' catering to 'diversified industry' (iii) the research reports demonstrating additional margin earned in the 'replacement/diversified market' by the 'Suprajit Engineering' (iv) research reports regarding additional margin earned by companies catering to 'automobile replacement market'. 3.3 The Ld DRP omitted to consider the order passed by the hon'ble tribunal in assessee's own case during AY 2012-13-IT A No.3182/Mds/2016, wherein the tribunal remitted back the matter to the TPO for determination of risk related adjustment to be granted. 4.Non-allowance of appropriate adjustments to the comparable companies, by the TPO/DRP with regard to the risk related adjustment.
ITA No3195 /2017 :- 3 -:
4.1 The TPO/DRP erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in risk profile between the Assessee and the comparable companies’’.
Ld. Counsel for the assessee submitted that lower authorities failed to allow risk adjustment viz-a-viz M/s. Suprajit Engineering Ltd selected as a comparable in the Arms Length Pricing analysis done by the ld. TPO. As per the ld. Authorised Representative, assessee was manufacturing control cables and selling it to M/s. Hyundai Motor India and its ancillaries. Submission of the ld. Authorised Representative, was that assessee’s international transactions comprised of import and export of raw material, import of machinery and tools, payment of royalty and payment of technical fee to its Associated Enterprises abroad. As per the ld. Authorised Representative, both assessee as well as ld. TPO had followed Transactional Net Margin Method (hereinafter referred to as ‘’TNMM’’) for the Arms Length Pricing study. Further, as per the ld. Authorised Representative, comparables selected by the ld. TPO and their average profit level indicator read as under:-
Sl.No Name of the company OP/OI
1 Remsons Industries Ltd 2.83 2 Tata Ficosa Automotive Systems Ltd 4.41 3 Suprajit Engineering Ltd 16.27
Average 7.83%
ITA No3195 /2017 :- 4 -:
Contention of the ld. Authorised Representative was that M/s. Suprajit Engineering Ltd catered to replacement market which had high margins and therefore had a different risk profile when compared to the assessee. Relying on a decision of this Tribunal in assessee’s own case for assessment year 2012-2013, (ITA No.3182/Mds/2016, dated 17.02.2017), ld. Authorised Representative submitted that risk adjustment and replacement adjustment claimed by the assessee viz- a-viz M/s. Suprajit Engineering Ltd was granted in a similar situation.
As per the ld. Authorised Representative, assessee in its TP study had made a risk related adjustment of 5% considering the differences in the nature of operation of the assessee and M/s. Suprajit Engineering Ltd and associated risk profiles. Submission was that assessee was supplying more than 99% of its products for OEM car manufacturers whereas M/s. Suprajit Engineering Ltd was supplying spares to two wheelers and three wheelers market and also catering replacement markets. As per the ld. Authorised Representative, assessee had therefore rightly made a risk adjustment of 5% which was unjustly denied by the lower authorities. Further, as per the ld. Authorised Representative Co-ordinate Benches through various decisions had allowed risk adjustment between 5.25% to 29.15%. Despite pointing out this, as per the ld. Authorised Representative, lower authorities
ITA No3195 /2017 :- 5 -: rejected the claim for risk adjustment viz-a-viz M/s. Suprajit
Per contra, ld. Departmental Representative strongly supported the orders of the authorities below.
We have considered the rival contentions and perused the orders of the authorities below. Contention of the assessee is that risk profile of the assessee and that M/s. Suprajit Engineering Ltd, considered as a comparable for TP study of the assessee, were different. As per the assessee, it was supplying 99% of its products to Hyundai Motor India and had never catered to replacement market.
What was stated by the assessee viz-a-viz its claim for risk adjustment in its letter dated 26.09.2016 addressed to the ld. TPO is reproduced hereunder:-
‘’4.11 The tested party, Infac, is predominantly an OEM (Hyundai) supplier. Therefore, the margins of lnfac are driven by Hyundai's dominance. Hence, the margins of Suprajit need to be further adjusted both for different functions and different risk profile, as detailed above.
Due to the difference economic circumstances (maintenance & replacement markets) and the business strategies, an adjustment in the margin to the extent of 5% is considered especially for Suprajt. It is an established position that in Auto component industry, the after market supply provide strong profits. As Auto market in India has developed, the profits in the downstream activities such as service, spare parts, finance and insurance are more profitable and the suppliers supplying to these markets do
ITA No3195 /2017 :- 6 -: make higher margins. There are research reports indicating that in mature automotive markets ( in particular the three wheeler, two wheeler segments and non-automotive segments), more than 70% of profits are derived from downstream activities, with spare parts being the key driver. Further, the margin level on supply of spare parts for three wheelers and two wheelers, which are matured and vast automotive market in India are more, as compared to such supply to cars. It may be noted that the assessee company supplies 99% of the revenue to Car Market whereas some of the SUPRAJIT have diversified supply to two wheeler/three wheeler and other diversified OEMs, Tier l/Tier 2 and Replacement market as well as to other diversified industries. Therefore, suitable adjustments are to be made for all the comparable companies. Hence, we made a risk related adjustment to the extent of 5% of the comparable companies margins (ie) EBITDA restricted to 50% of the EBITDA of the comparable companies, whichever is less. Further additional 5% adjustment of margin is considered in case of Suprajit for the above reasons mentioned above. As detailed above, there is difference in the risk level between the tested party and the comparable companies exist. The adjustment towards risk and de-risked environment needs to be adjusted suitably. To adjust the same, we have assumed the differential interest rate between a NORMAL RISK BEARING RATE versus RISK FREE RATE. The judicial decisions in this regard peg such adjustment in the range between 5.25% to 29.15% . But on conservative basis, we have ,claimed only of 5% of the comparable companies margins but further restricted the same to a lower level of 50% of the EBITDA of the comparable companies' and additional 5% in case of Suprajit due to its very diversified functional profile, as discussed above’’.
A reading of the above reply clearly show that 5% risk calculated by the assessee was a pure estimate and was not based on any empirical data. OECD guidelines, though it allows a risk adjustment where found necessary, does not say that any such adjustment had to be given merely based on estimates, founded on surmises. What was held by ITA No3195 /2017 :- 7 -: this Tribunal in assessee’s own case for assessment year 2012-2013 with regard to risk adjustment for M/s. Suprajit Engineering Ltd is reproduced hereunder:-
‘’10. We have heard both the parties and perused the material on record. It is not correct to observe by the DRP that the assessee has not claimed this adjustment in its TP study. Admittedly, the assessee claimed this adjustment in its TP study @ 10% as reflected in paper book-II (risk adjustment at 5% and replacement adjustment at 5%), since M/s.Suprajit Engineering Ltd., which is in non-automotive segment which commands higher margin of profit. It is also brought to our notice that M/s.Suprajit Engineering Ltd., has set up manufacturing facility at eight different location across the country to be close to its main customers in the North, West and Southern belts. Haridwar plant ext to Hero Honda,Pantnagar plant next to Bajaj, the planned Sanand Plant next to Tata Nano etc. which gives Suprajit a logistic advantage. In two wheelers space the company’s major customers are TVS, Bajaj Auto and Hero Moto. In the Four wheeler segment, the company’s customers are Tata Motors, Mahindra and Mahindra, Hyundai, Ford and General Motors. The major exports customers are General Motors, Suzuki and Piaggio. Being so, the AO required to re-examine the claim of risk adjustment and replacement adjustment claimed by the assessee and suitable adjustments to be given after apprising the TP documents submitted by the assessee. With this observation, we remit the issue to the file of AO for the purpose of determination of risk adjustment to be granted to the assessee’’.
The Tribunal had remitted the issue back to the ld. Assessing Officer for reexamining the claim of risk and replacement adjustment claimed by the assessee and to give suitable adjustments after apprising the TP documents submitted by the assessee. However for the impugned assessment year both in TP study and in the ITA No3195 /2017 :- 8 -: submissions filed by the assessee before ld. TPO, it had claimed an estimated 5% of risk adjustment based on an argument that M/s.
Suprajit Engineering Ltd was catering to secondary market, and the assessee was catering only to primary market. Hence a fresh appraisal of these documentation will not help the assessee’s case in any manner.
No doubt Bangalore Bench of the Tribunal in the case of 8.
Philips Software Centre (P) Ltd vs. ACIT, (2008) 26 SOT 226 had approved adjustment being made to eliminate difference on account of difference in risk profile, working capital and accounting policies.
Bench had allowed a flat risk judgment of 5.25% in the said case considering the difference in prime lending rate and prevailing bank rates. This order has been stayed by Hon’ble Karnataka High Court vide its order reported as (2009) TIOL-123-HC-ICR. Delhi Bench of the Tribunal in the case of Sony India (P) Ltd vs. DCIT, (2008) 114 ITD 448 had also allowed a flat 20% as a fair and reasonable adjustment for differences in intangible ownership and risk assumed in the controlled transactions and that of the comparables. However, in our opinion, essential requirement for allowing a risk adjustment is that the assessee should have quantified and claimed the risk adjustment in its TP documentation based on a clear and logical workings, considering
ITA No3195 /2017 :- 9 -: the risk profile of tested party and comparables companies and not based on surmises. Just because assessee was serving a single customer would not mean that it was bearing market risk different from any other competitor. As already mentioned by us, assessee had simply estimated risk adjustment at 5% without properly quantifying the difference in the risk profile between assessee and M/s. Suprajit Engineering Ltd. We are of the opinion that lower authorities were thus justified in not allowing the risk adjustment claimed by the assessee. Grounds 3 and 4 of the assessee stand dismissed.
Ground No.6 raised by the assessee is reproduced hereunder:-
‘’6. Without prejudice to our submission made in ground no. 5 above, TPO/DRP erred in not removing the 'Loss on Forex fluctuation' amounting to Rs.27,540,930/- from the Operating Expenditure, which has arisen due to reinstatement of foreign currency done accordance with the accounting standards.
6.1 TPO/DRP has failed to look into the ONLY statutory definition of 'Operating Expenses' Rule 10TA (j)(iv) in the context of determining arm's length price, which specifically excludes Forex fluctuation loss or gain from operating expenses or operating income.
6.2 Without prejudice to our above submission, the TPO erred in not removing the 'unrealised portion of the forex fluctuation' from the operating expenditure/operating income.
ITA No3195 /2017 :- 10 -:
Ld. Counsel for the assessee submitted that forex fluctuation loss could not be considered as non-operating in nature by virtue of Rule 10TA(j)(iv) of the Income Tax Rules, 1962 (in short ‘’the Rules’’). As per the ld. Authorised Representative, ld. DRP had relied on a judgment of Hon’ble Jurisdictional High Court in the case of CIT vs. Pentasoft Technologies Ltd , 347 ITR 578 in upholding the order of the ld. Assessing Officer. According to him, the judgment of Jurisdictional High Court in Pentasoft Technologies Ltd (supra) was on claim of deduction u/s.10A of the Act and had nothing to do with a TP adjustment.
Per Contra, ld. Departmental Representative submitted that the issue stood covered in favour of the Revenue by the order dated 17.02.2017 of this Tribunal in assessee’s own case for assessment year 2012-2013 (ITA No.3182/Mds/2016).
We have considered the rival contentions and perused the 12. orders of the authorities below. Claim of the assessee is that the expenditure under the head ‘’loss on forex exchange’’ had arise due to fluctuations of foreign currency. We find that the very same issue had come up before this Tribunal in assessee’s own case for ITA No3195 /2017 :- 11 -: assessment year 2012-2013 mentioned (supra) and what was held by this Tribunal at para 14 is reproduced hereunder:-
‘’14. We have heard both the parties and perused the material on record. In our opinion, this issue is squarely covered by the judgement of Madras High Court in the case of CIT Vs. Pentasoft Technogies Ltd. in (2012) 347 ITR 578 wherein held that:
“In order to allow a claim under section 10A of the Act, what all is to be seen is whether such benefit earned by the assessee was derived by virtue of export made by the assessee. The exchange value based on upward or downward of the rupee value is not in the hands of the assessee. In other words, the assessee does not determine the exchange value of the Indian rupee. It has to be remembered but for the fact that the assessee is an export house, there was no question of earning any foreign exchange. Therefore, when the fluctuation in foreign exchange rate was solely relatable to the export business of the assessee and the higher rupee value was earned by virtue of such exports carried out by the assessee, there is no reason why the benefit of section 10A should not be allowed to the assessee.”
In view of the above, we are inclined to decide the issue against the assessee holding that foreign exchange loss is a part of operating expenditure. Further, in view of above judgement of Madras High Court cited supra, we are not in a position to follow the Order of Tribunal, Bangalore Bench in the case of M/s.Airbus India Operations Pvt. Ltd. for assessment year 2009-10 vide order dated 10.10.2014(supra)’’.
Nothing has been brought before us by the ld. Authorised Representative so as to persuade as to take a different view. We do
ITA No3195 /2017 :- 12 -: not find any reason to interfere with the orders of the lower authorities. Ground No.6 of the assessee stands dismissed.
Ground No.8 of the assessee is reproduced hereunder:-
‘’The TPO/DRP erred in not considered the 'Working Capital Adjustment' for Determination of arm's length price by the TPO’’.
Ld. Counsel for the assessee submitted that working capital adjustment sought by the assessee was denied by the ld. TPO taking a view that there was no basis for allowing any such adjustments since assessee could not establish the difference between various ingredients comprised in its working capital vis-à-vis its comparables.
As per the ld. Authorised Representative, assessee had claimed working capital adjustment of 3.18% which was properly computed in its TP report. According to the ld. Authorised Representative, a detailed working of the working capital adjustment covering three comparables selected for the TP study was furnished before the ld. TPO. As per the ld. Authorised Representative, assessee had produced sufficient evidence to substantiate its claim. Contention of the ld. Authorised Representative was that ld. DRP also rejected the claim taking a general view that working capital adjustment could not be granted. Relying on the work out of the operating profit of the ITA No3195 /2017 :- 13 -: assessee placed at paper book page 185, ld. Authorised Representative submitted that a working capital adjustment of 3.18% was claimed by the assessee. Submission of the ld. Authorised Representative was that 3.18% working capital adjustment was based on higher inventory holding and lower debtors holding and higher creditors holding vis-à- vis the comparables. As per the ld. Authorised Representative, even under OECD guidelines, such adjustment had to be allowed.
Per contra, ld. Departmental Representative strongly 15.
supported the orders of the lower authorities.
We have considered the rival contentions and perused the orders of the authorities below. It might be true that assessee had considered the inventory holding level, debtors holding level and creditors holding level of the three comparable companies while working out the working capital adjustment. The basis of the calculation was the number of days of holding of the inventory, receivables and creditors of the comparables viz-a-viz the assessee.
However, while working out the rate of interest for calculating working capital adjustment, assessee had considered the prime lending rate @18.5% and this is clear from page book 450 which gives the work-
ITA No3195 /2017 :- 14 -: out of the working capital adjustment. There is nothing on record to show that the interest paid by the assessee or the comparables, on their respective loans were at the rate of 18.5% or the rates were significantly different. This in our opinion reduced the claim of working capital adjustment at 3.18%, to a mere estimate. Actual interest paid was never considered by the assessee. Hence, we are of the opinion that lower authorities were justified in taking a view that assessee had not produced sufficient data for proving its claim of working capital adjustment. We do not find any reason to interfere with the orders of the lower authorities. Ground No.8 of the assessee stands dismissed.
Vide its ground No.10, grievance of the assessee is on a disallowance of employees contribution to Provident Fund/ remitted after the due date mentioned in the relevant statute, but before the due date of filing the return of income.
The issue raised by the assessee is covered by the judgment of Hon’ble Jurisdictional High Court in the case of CIT vs. Industrial Security & Intelligence India Pvt. Ltd (TCS No.585 & 586 of 2015, dated 24.07.2015). Assessee having remitted the amount before due date of filing of return, by virtue of the above judgment of Hon’ble Jurisdictional High Court a disallowance could not have been made.
ITA No3195 /2017 :- 15 -:
Such disallowance stands deleted. Ground No.10 of the assessee is allowed. 19. Ground No.11 of the assessee is on interest u/s.234B and 234C of the Act. This being consequential in nature need no specific adjudication .
In the result, the appeal of the assessee is treated as partly 20. allowed.
Order pronounced on Thursday, the 3rd day of May, 2018, at Chennai.