ILJIN AUTOMOTIVE PRIVATE LIMITED,KANCHEEPURAM vs. DCIT, CHENNAI

आदेश /ORDER Per Sanjay Arora, AM: This is an Appeal by the Assessee agitating its assessment under section 143(3) r/w s.92CA of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (AY) 2012-13 vide order dated 21.12.2016, made pursuant to the directions by the Dispute Resolution Panel-2, Bangalore (‘DRP’ for short) dated 20.10.2016.

2 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT July, 1997. Iljin India operates its assembling plant in Chennai, and is a leading assembler of wheel bearings. The major products assembled by Iljin India are Ball Joints, Wheel bearings, Sub corner modules, sub axle assembly, Different case assembly, Engine mounting brackets, Fly wheel assembly, Steering linkages, Drum, Door hinges and Checkers transmission gears. Iljin India imports raw materials and other relevant components, including stores and spares required in the manufacturing process, from its AEs. Iljin India’s clientele includes car giants such as Hyundai Motor, Mobis India, Ford, Fiat, etc. Adjustments qua international transactions with its Associate Enterprises (AEs) constitute a significant part of its assessment and, thus, appeal. The assessee has adopted the transactional net margin method (TNMM) for bench marking its international transactions, with it being the tested party, and which has not been disturbed by the Revenue.

3 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT Both the TPO and the ld. DRP have per their respective orders not addressed the assessee’s objections, so that the matter may be restored back for considering the same and adjudication on merits. This is the assessee’s case before us. The ld. Departmental Representative (DR) would object, stating that it was not clear from the assessee’s objection qua Lumax DK Auto Inds. Ltd., one of the two comparables being objected to, if it is in respect of the front modules of two wheelers or extends to its entire production, to which the ld. Authorized Representative (AR) fairly conceded, stating the objection as being not happily worded, leading to a confusion, and of being therefore unable to furnish any satisfactory answer immediately, and that he shall respond upon seeking requisite instructions from his client. At this stage, it was observed by the Bench that the five companies selected by the assessee itself, i.e., which survive the TPO’s scrutiny, includes Majestic Auto Ltd., which is also in the two wheeler segment only. How could then the assessee’s objection qua Lumax DK Auto Industries Ltd. be regarded as valid? The ld. AR could not furnish any answer, much less satisfactory. Similarly, how could the assessee object to Spicer India Pvt. Ltd., when Jamna Auto Inds. Ltd., which also finds place in it’s list of comparables, manufacturers automotive components for all types of vehicles, including off-highway vehicles, industrial machinery and commercial vehicles, to which query by the Bench, again, no answer could be provided by the ld. AR. The assessee’s objections, which are raised per its Grounds 2.2 and 2.3 of its appeal (Gds.1 & 2.1 being general in nature, warranting no adjudication), thus, fail. The said grounds are accordingly dismissed.

4 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT ‘2.4 Erred in computing the Net Profit Margin of the Appellant by treating entire foreign exchange losses as operating in nature. 5. Disallowance under Section 43A of the Act 5.1 Erred in law in disallowing the total realized Foreign Exchange (‘Forex’) loss of INR 39,482,463 under section 43A of the Act as capital in nature. 5.1 Failed to appreciate that the aforesaid total realized Forex loss includes INR 37,693,320 pertaining to buyer’s credit which is revenue in nature. 5.3 Failed to appreciate that realized Forex loss INR 37,693,320 is allowable under section 37(1) of the Act.’ The assessee restated its fixed assets by �. 1788.39 lacs due to foreign exchange losses (pertaining to AY 2011-12) on account of increase in loan liability (ECB) as expressed Indian currency, assumed for financing the said assets, during the relevant year, i.e., by capitalizing the loan amount (pg. 4 / para 6 of the assessment order). As the same included also unrealized losses, while section 43A allowed adjustment of realized loses only, i.e., the decline suffered with reference to the date/s of actual payment/s, and not that from time (year) to time, the DRP, subject to verification by the Assessing Officer (AO), confirmed the restatement of assets with reference to realized loses, i.e., as provided u/s. 43A (refer para 5.2 of the ld. DRP’s order). Aggrieved, the assessee is in appeal.

5 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT TPO and the ld. DRP have not addressed it’s objections, raised per para 1.10.3 (PB pgs. 280-281) under the head ‘incorrect margin computation’ vide letter dated 19.04.2016 (PB pgs.264-313; their orders, the relevant part of which is reproduced as under, the other being in respect of comparables (the subject matter of Gds.2.2 and 2.3): TPO’s order: ‘8.4 Coming to the comparability analysis……… With regard to the assessee’s submission about incorrect margin computation, it is noted that assessee has not taken other operating expenses as a part of operating cost and hence the margin computed by this office is in order. Final set of comparables………. Ld. DRP’s order: 3.2 The copy of the above letter of TPO was provided to the AR of the assessee and the matter was discussed and considered during the hearing of the case on 22-09-2016. In view of above, the contentions of the assessee are found to be not maintainable and hence the objections are rejected.’

Clearly, there is no consideration and, consequently, delineation of the various issues in-as-much as the assessee has sought adjustment of loss, both on revenue and capital account and, further, both realized as well as non-realized. Only a speaking order would bring forth the consideration and the reasons for the decision. The matter, accordingly, shall travel back to the file of the AO/TPO for a consideration on merits. Both the sides, i.e., the assessee and the Revenue, have been, we observe, assuming contrary stands. While for AY 2010-11, the assessee sought inclusion and the Revenue, exclusion, claiming it as non operational, it is opposite for the current year. Clearly, the stand adopted by the parties is motivated by tax considerations; there being a foreign exchange gain for AY 2010-11. Nothing much, as such, turns on the treatment of the transactions for that year, which does not represent a principled or the legal position. The assessee has before us placed reliance on r. 10TBA of the Income

6 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT Tax Rules, 1962 (‘the Rules’ hereinafter), which it claims to have been held as retrospective by a decision by the co-ordinate bench. The TPO shall consider the assessee’s claim with regard thereto as well. However, even as observed during hearing, in the case of a positive consideration, the loss/gain posted by other comparables shall have to be similarly treated. Further still, we observe the assessee’s objection being limited to �. 1002.47 lacs (detailed at para 1.10.3 aforesaid). However, in-as-much as we have found no adjustment qua forex loss, which has to be, firstly, specific and, two, consistent, it is only considered proper that the matter is restored for consideration. A decision on merits, qua the assessee’s entire claim for �. 1788.39 lacs, shall be made. Needless to add, the TPO shall do so after allowing the assessee a reasonable opportunity to present and state its case before him, per a speaking order. We may, however, before parting with this matter, make some observations, deemed relevant, regard for which shall be made by the Revenue in deciding the issues arising: a) Section 43A is specific in nature. The capital asset acquired must be from outside India. Two, the foreign exchange fluctuation materialized up to the date of payment of the cost or of the borrowing made in foreign currency for meeting the liability on that count (or preoperative interest), shall be capitalized, i.e., included in or reduced from the cost of the relevant capital asset. The same being a non obstante clause shall prevail, i.e., irrespective of the method of accounting or the applicable Accounting Standard (AS). Needless to add, depreciation shall be exigible on the revised cost. b) As regards the capital asset to which s. 43A does not apply, viz., not acquired from a country outside India, it is the Accounting Standards, i.e., AS 10, 11 & 16, that shall apply. The same advocate that the costs (including interest) suffered up to the date the asset is in a ready-to-use stage that could be capitalized. The borrowing cost would include exchange rate differences to the extent the same could be regarded as an adjustment of interest cost. Further, fluctuation differences, whether it is the buyer’s credit that finances the purchase cost of the capital asset or borrowing, for the period subsequent cannot be regarded as influencing the cost of an asset, being extraneous to its acquisition, and arising only on account of

7 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT availing a credit for payment of its cost, i.e., a period cost. Where, and to the extent inconsistent with s. 43(1), defining ‘actual cost’, it is the latter that shall hold. Reference in this context may also be made to the decision in CIT v. Tata Iron & Steel Co. Ltd. [1998] 231 ITR 285 (SC), wherein it was held that the cost of an asset and the cost of raising money for its purchase are two different and independent transactions. The manner and mode of repayment of a loan had nothing to do with the cost of an asset acquired by the assessee for the purpose of his business. The Apex court was speaking in context of a loan/borrowing. Again, in Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC), the Hon’ble Court held that where the foreign currency is held as capital asset or as fixed capital, the profit or loss would be capital in nature. Needless to add, it is the entire loss/gain suffered/accrued during the relevant year that would stand accounted for and claimed/offered. c) The exchange fluctuation loss, where in respect of circulating capital, employed in business, would be on revenue account, again, to be allowed on accrual basis. d) Coming to the aspect of whether the loss or gain on account of foreign exchange fluctuation is to be regarded as an operating cost (income) or not, so as to warrant, or not so, an adjustment to the operating profit (OP) in arriving at the profit level index (PLI) under TNMM, the same should be guided by whether the same is a normal incident of the business or otherwise. Foreign exchange fluctuations are on account of a variety of macro factors, viz. balance of payment position; trade deficit; relative performance of the respective economies, etc. Except for any abnormal fluctuation on account of economic developments or crisis that could not be reasonably anticipated or regarded as in the normal course, there is nothing to suggest that the same must not be regarded as a part of the operating cost or, as the case may be, income of the enterprise for the relevant period. We decide accordingly.

8 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT ‘8.1 Price increase or decrease is a result of market mechanism and it is not an extraordinary item. Also, it cannot be considered as an adjustment, unilaterally in the hands of the assessee only. There is no proof got on record by the assessee that the comparables did not experience such a situation. Therefore, any adjustment should be only with reference to the differential intensities between comparables and assessee. It cannot be one sided adjustment to improve the margin of assessee alone. If adjustment is given it will not provide parity between assessee and comparables in the comparability analysis. In this regard, it is also stated that the assessee is the regular supplier to the OEMs as per the detailed agreement and pricing negotiations. However, assessee has not been able to explain the reason for the price reduction with supporting evidences, in this year. Hence, this claim of the assessee is rejected.’ The same found agreement with the ld. DRP, which endorsed the TPO’s order. Its observations and conclusion is as under: ‘4.2 As regards the above objections it was submitted that similar to the previous years, HMIL and Mobis India introduced cost reduction program in relation to the products supplied by Iljin India. Since Iljin India is majorly dependent on the HMIL and Mobis, the assessee had no option but to accept the price quoted by HMIL and Mobis India. The impact of reduction in selling price amounted to Rs.51.23 Crores, which affected the profitability of the company significantly. Therefore, it was submitted that reduction in price was considered to be extra-ordinary in nature and therefore ought to be reduced from operating cost for the purpose of computing operating margins. Relating to the objection regarding custom duty adjustment it was submitted that in order to be competitive on the price front, the Assessee had to absorb the additional cost relating to non-cenvatable portion of import duties. As a consequence, the assessee's margin dropped in comparison with the comparables. Therefore, the assessee had made necessary economic adjustments (i.e. reducing the impact of import duty from the profit margin of the assessee and the comparables) for factoring the aforesaid operational differences which would improve the reliability of comparision. However, the TPO has refused to provide adjustment for custom duty. The assessee has also cited a few decisions in support of its claim for above two adjustments.’

‘4.4 The assessee supplies its products mainly to Hyundai motors, Mobis India, Ford India and Fiat automobile companies. While 65% of the components are procured by the assessee from the third parties in India, balance is imported from its AE. It is seen that claim of sales price

9 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT reduction by Hyundai and Mobis India is not new for this year. The assessee has been taking this plea regularly starting at least with FY 2009-10. As such, the aspect has become a regular and normal business factor for the assessee over the years. The prices are normally decided by agreement and intense negotiations. The assessee has not brought on record any supporting evidence to show how the two main customers are unilaterally dictating a lump sum price reduction subjecting assessee to suffer business loss year after year. Merely submitting the comparison with average sales price of the immediate previous year as supporting evidence is considered too simplistic and inadequate to prove the claim. Besides, since the price reduction has become a regular annual feature, the assessee would have normally factored in this aspect while deciding the purchase price for the components. It is also to be kept in mind that the assessee, its customers as well as suppliers are subject to the market dynamics. Price increase or decrease is a result of market mechanism. The assessee has not been able to bring in comparable data to show that the comparables did not encounter such a situation as that of assessee. When the comparable companies are also subject to similar market dynamics during the year and it is not possible to carry out similar adjustments to their prices, adjustment in case of assessee company is not possible unilaterally.’

10 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT normally in sympathy with the market trend, is a normal feature/incident of the trade/business. Why, how could it be presumed that the prices of the competitors, operating in the same market, would not be similarly influenced? Further, the same would surely have an economic justification, for it could not be otherwise, nor has it been shown that the price reduction has led to a spurt in the margin of the buyers. A downturn in prices, or indeed an upturn as well, cannot be regarded, without evidence, as abnormal or extraordinary for it to be segregated while analyzing profits. Again, it is only where it impacts the assessee, to the exclusion of others, that an adjustment in its respect would be warranted. The assessee’s case is sans any evidence. We accordingly have no hesitation in upholding the denial of the sale price reduction adjustment in the TP analysis. We decide accordingly.

Ground 2.6 is in respect of an adjustment of �. 1699 lacs (refer PB pg. 8. 239) by the assessee qua custom duty on imported raw materials, etc., which accounts for 35% of the total component cost, the balance being procured from third parties in India. The import duty being non-cenvatable, no input credit in its respect is available, leading to a direct increase in cost, which is not borne by the comparables.

11 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT d) Constraint of sharing know-how with local vendors. The TPO’s observations in the matter, finding the assessee’s claim as not acceptable, are as under: ‘8.2 With regard to the Customs Duty adjustment claim by the assessee,........ BCD is a component which the assessee cannot set off against excise duty payment. Therefore it is the contention of the assessee that it cannot be passed on to customers. The claim required to be substantiated with reference to the pricing model of the assessee. The assessee has not furnished the basis of working out its price and comparability of cost forming part of the cost base. Prima facie margins at gross levels for the assessee is profit which shows that the assessee is able to absorb as part of its selling price, the material cost which includes the BCD element. Only down the line expenses are not able to be absorbed by gross profit leaving an arm's length return to assessee which is comparable to profit margin of peers in the industry. Therefore, assessee's claim that BCD has affected its profit margin is not correct. Secondly, assessee has to prove with reference to its business model that it is able to go for indigenization in a significant manner in the subsequent years. In the absence of the same, it has to be concluded that the business model of assessee itself is such that it has to necessarily import its various materials from AE and non-AE customers. Assessee has submitted detailed workings along with its own justification for claiming the adjustment in relation to customs duty. Assessee's claim of custom duty adjustment is rejected following the decision of the Jurisdictional ITAT in the case of M/s. Mobis India Ltd. Vs DCIT in ITA No. 2112/Mds/20011 dated 14.8.2013. No doubt in the case of Skoda Auto India P Ltd it was held by Hon'ble Pune Bench that higher import content of raw material itself did not warrant an adjustment in operating margins. For getting the benefit of any such adjustment, Assessee should be able to demonstrate that higher import content was necessitated by any extraordinary circumstance beyond its control.’

The same also found agreement with the ld. DRP, which endorsed the TPO’s order, holding as under, and for which reference be also made to para 4.2 (supra) of its order: ‘4.5 As regards the claim for adjustment in basic custom duty, the observations and findings of the TPO remain uncontended as no

12 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT evidence to the contrary has been brought on record. The TPO has analysed the issue in a clear and cogent manner in his order and has come out with the finding that the margin for assessee at gross level is profit, which shows the assessee has been able to absorb the material cost that includes the BCD element as part of its selling price. As a normal business practice, all costs and overheads are factored in while determining the price, which also appears to be the case for the assessee as mentioned above. Assessee has not produced anything either before the TPO or before this Panel to show that import duty component has not been taken into account in deciding the price. High import component of the assessee's business is not driven by any extraneous factor but out of own choice based on business strategy. It is also not the case of the assessee that it has come down in subsequent years. Besides, it is also not the case of the assessee that there is any explanation for the lack of support on the part of the holding company to partly absorb this cost. The Hon'ble IT A T, Chennai in case of Mobis India Limited for AY 2007-08 vide their order dated 14.08.2013 have held that "No doubt, in the case of Skoda Auto India (P) Ltd. it was held by Pune Bench that higher import content of raw material was a factor to be considered while doing the A LP analysis. Nevertheless, it is also mentioned therein that higher import content of raw material itself did not warrant an adjustment in operating margin. For getting the benefit of any such adjustment, assessee should be able to demonstrate that higher import content was necessitated by any extraordinary circumstance beyond its control. "

In view of the above decision by the Jurisdictional ITAT, the TPO's action to deny custom duty adjustment cannot be faulted with. Hence, the objection of the assessee is rejected.’ The assessee has not disclosed the business model, i.e., of progressive indigenization, or even its pricing model, for the Revenue to understand as to how the additional cost (of import duty) impacts its profits. Once the assessee has, guided by considerations such as quality concerns/constraints; higher cost of localization; non-availability of indigenous inputs; and even reluctance to share know-how, taken a business decision not to indigenize but import, how could it then plead a higher cost of import (of which the import duty is a part), and seek adjustment on that basis? Surely, as the Revenue infers, import (from AE or non AE) becomes a part of the assessee’s business model. We are conscious that no part of the import duty, adjustment for which is being sought,

13 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT flows to its AEs, but, then, it is again the assessee who has chosen TNMM – which takes the profit (margin) as an indicator, for benchmarking its transactions. An adjustment could be allowed only on the premise of any abnormal factor impacting its profits, while import and, consequently, the import duty forms a regular part of the assessee’s cost structure. The assessee has completely failed to make out a case on that score and, besides, it’s case is sans any evidence. The Revenue has, accordingly, in our view, rightly denied the assessee’s claim for the adjustment on that ground. We decide accordingly.

14 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT respect in computing his total income. As regards the AO’s claim of the plant and machinery being vehicle and office equipment, so that it gets excluded for the benefit u/s. 32(1)(iia), the same has been refuted by the assessee. The AO shall verify the same. The assessee’s claim is accordingly allowed subject to the AO’s satisfaction with regard to the conditions set out in the provision (s. 32(1)(iia)) per a speaking order. We decide accordingly.

15 ITA No.467/Mds/2017 (AY 2012-13) Iljin Automotive Pvt. Ltd. v. Dy. CIT ITR 733 (SC) and CIT v. Chennai Properties & Investments Ltd. [1999] 239 ITR 435 (Mad). Aggrieved, the assessee is in appeal.

Sd/- Sd/- (धु�वु� आर.एल रे�डी) (संजय अरोड़ा) (Duvvuru RL Reddy) (Sanjay Arora) �या�यक सद�य/Judicial Member लेखा सद�य/Accountant Member चे�नई/Chennai, �दनांक/Dated, September 18, 2017 EDN

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF