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Income Tax Appellate Tribunal, DELHI BENCH “I-1” NEW DELHI
Asstt. Yr: 2010-11 Calsonic Kansel Motherson Vs. DCIT Circle 5(2), Products Ltd., F-7, B-1, New Delhi. Mohan Coopertive Industrial Estate, Mathura Road, New Delhi. PAN: AADCC 1932 F ( Appellant ) (Respondent) Appellant by : Shri Kanchan Kaushal CA & Sh. Ravi Sharma Adv. Respondent by : Shri Munesh Kumar CIT (DR) Date of hearing : 01/07/2016. Date of order : 06/07/2016. O R D E R PER S.V. MEHROTRA, A.M:
This is assessee’s appeal against the assessment order passed by the Assessing Officer u/s 143(3) read with section 144C pursuant to DRP’s directions u/s 144C of the Income-tax Act, 1961, relating to AY 2010-11. 2. Grounds of appeal raised by the assessee are as under:
1. That the Assessment Order passed in pursuance to the directions issued -by the Ld. Dispute Resolution Panel ('Ld. DRP') is a vitiated order as the Ld. DRP has erred both on facts and in law, in not considering the submissions made by the Appellant and in confirming the addition made by the Ld. Assessing Officer ('Ld. AO')/ Ld. Transfer Pricing Officer ('Ld. TPO') to the Appellant's income.
2. That on the facts and circumstances of the case and in law, the Ld. AO [following the directions of Ld. DRP] erred in assessing the returned income of the Appellant of Rs. 22,87,383/- at the income of Rs.2,71,84,416/-.
3. The Ld. DRP / Ld. TPO erred on facts and circumstances of the case and in law by confirming an Transfer Pricing adjustment amounting to Rs. 7,74,42,676/- holding that the international transactions entered into by the Appellant with its Associated Enterprises ('AEs') during the Financial Year ('FY') 2009-10 pertaining to purchase of raw material, sale of finished goods and purchase of fixed assets do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in: 3.1 by disregarding the economic analysis conducted by the Appellant to determine the Arm's Length price (,ALP') of the international transactions in compliance with section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') in the Transfer Pricing ('TP') documentation; 3.2 rejecting the arm's length margin computed by the Appellant using multiple year / average data and instead of using current year data for comparable companies, i.e. data for FY 2009-10, despite the fact that the same was not available with the Appellant at the time of preparing its TP documentation; 3.3 by including certain companies in the final set of comparables which are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed;
3.4 rejecting Operating Profit/Value Added Expenses ('OP/VAE') as a valid Profit Level Indicator ('PLI') selected by Appellant in its TP documentation and erred in selecting OP /Sales as a Profit Level Indicator ('PLI') to determine arm's length nature of transactions; 3.5. Not appreciating the mechanism adopted by the Appellant to provide for suitable capacity utilization adjustment considering the fixed costs incurred by the Appellant to vitiate the fact that there are significant differences in the levels of capacity utilized by the comparables vis-a- vis that of the Assessee. In doing so the Ld. DRP / Ld. TPO has erred: 3.5.1 by not excluding the operating costs pertaining to one of the units (Chennai) of the Appellant which had not commenced commercial production and was engaged in only trial runs during AY 2010-11, while computing the operating margins of the Appellant; 3.5.2 allowing capacity adjustment only in respect of depreciation cost and not taking into consideration other fixed costs incurred by the Appellant on account of lower capacity utilization of Appellant vis-a-vis the identified comparable companies; 3.5.3 allowing capacity utilisation adjustment to the operating margins of the comparable companies instead of tested party; 3.6. by disregarding the additional evidence furnished by the Appellant during the course of the proceedings, pertaining to the profitability and the price charged by the AEs in respect of the components sold to the Appellant, which demonstrate that the international transaction pertaining to purchase of raw material was at arm's length;
3.7. by not placing reliance on international commentaries and judicial pronouncements while disallowing comparability adjustments; 3.8. by not providing relief on account of working capital adjustment to reflect the differing levels of trade receivables, trade payables and inventories between the Appellant and the potential comparables; 3.9. rejecting the miniscule mark up of 4% charged by its AE against the overheads and other costs incurred, on the fixed assets imported by the Appellant and thereby enhancing the income of the Appellant by Rs. 11,56,332/-; 3.10 denying the benefit of (+ / -) 5% range mentioned in the proviso to Section 92C(2) of the Act in determination of the arm's length price; 4. That the Ld. AO has grossly erred in law in levying interest under section 234D of the Act and also withdrawing interest under section 244A of the Act; 5. On the facts and in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(c), 271AA and 271BA of the Act.
Brief facts of the case are that the assessee had filed its return of income declaring nil income after adjusting brought forward losses of Rs. 91,01,938/-. Subsequently, the assessee revised its return of income declaring a loss of Rs. Nil, after adjusting brought forward loss of Rs. 22,87,383/-. The AO noticed that during the year the assessee had entered into following international transactions as per form 3CEB:
Name of the AE Nature of transactions Amount (Rs.) Calsonic Kansel Corp., Japan Purchase of raw material 83830475 Calsonic Kansel Thailand Co. Purchase of raw material 336715771 Ltd. Calsonic Kansel Corp., Japan Sale of finished goods 754032 Calsonic Kansel Corp. Purchase of fixed assets 30064627 Calsonic Kansel Corp. Technical Assistance fees 1609452 Calsonic Kansel Corp. Interest paid on external commercial 1790092 borrowing Calsonic Kansel Corp. Reimbursement of expenses 1076276
Accordingly, reference was made to TPO to determine the ALP u/s 92CA(3) in respect of aforementioned transactions. Ld. TPO has noticed the business profile of assessee as under:
“2. Calsonic Kansei Motherson Auto Products Limited was incorporated in September 2007 to manufacture/ assemble Heating Ventilation and Air-Conditioning (“HVAC”) and Compressors. The company was set up as a joint venture between CKC Japan and MSSL. The Company was set up to cater the compressors and HVAC requirements of Maruti and Nissan in India with technological back up from CKC Japan. The manufacturing facilities of CKM India are located at Manesar and Chennai. Since it was the first year of its manufacturing operations, the Chennai plant did not have any major activities during the year and had contributed to only 0.29% of the total sales of the company. Further, the Manesar Plant was also not fully operational and was working only 20% of its actual capacity, due to which the company has suffered losses in the initial year of its operations. 2.1 Ownership structure of the company is as under:
CKC, Japan (51%) & MSSL, India 49% = Calsonic Kansel Motherson Auto Products Ltd.
Ld. TPO determined the adjustment as under:
S.N Nature of international ALP ALP determined by Adjustment u/s Transaction determined this office (Rs) 92CA(Rs) By taxpayer (Rs.) 1. Sale finished foods/ -24836550 90236044 115,072,594 purchase of raw material 2. Purchase of capital goods 30064627 28908295 1156332 Total 116228926
AO passed a draft order in pursuance to the adjustments directed by ld. TPO. The assessee filed objections before ld. DRP and after ld. DRP’s directions the AO determined the adjustments on account of ALP at Rs. 7,74,42,676/-.
Apropos ground no. 3.5.3, regarding capacity utilization adjustment to be allowed to assessee, Ld. counsel submitted that that most of the comparables uncontrolled companies were incorporated prior to the FY 1995 and were not in their first full year of operations. They were not operating in the gestation phase and hence would not be incurring similar levels of expenses. Therefore, in order to ensure closer comparability, capacity adjustment is required, ld. counsel submitted that as far as Chennai plant is concerned, the same did not start during the year, but started on 19.4.2010.
In this regard he referred to page 298 of appeal set, wherein the certificate issued by the company in this regard is contained. He further referred to the TP report, contained at page 326 of paper book, wherein this fact is mentioned.
As regards Manesar plant, ld. counsel pointed out that this plant started on 1.4.2009, which is evident from the certificate of company, contained at page 296 of appeal set. He submitted that it worked only 18.93% of its actual capacity during the year.
Ld. counsel pointed out that all these facts are not disputed. He referred to page 17 of ld. DRP’s order, wherein ld. DRP has noted these aspects, but did not dispute the same. He also pointed out that ld. DRP has restricted the adjustments only to depreciation, which is not correct because assessee had incurred fixed cost on various items for which adjustment has to be provided.
Ld. CIT(DR) submitted that assessee had not provided details of expenses and did not demonstrate the impact of installed capacity clearly of each and every expenses itemwise as noted by ld. DRP.
We have considered the submissions of both the parties and have perused the record of the case. Ld. DRP in principle has accepted that adjustment on account of capacity utilization is to be allowed to assessee.
However, in the absence of non-availability of item wise expenses, in the case of comparable companies, restricted the adjustment only to depreciation. In our opinion, this is not the correct approach because unutilized capacity has direct bearing on the operational profits of the company, because in initial years there is over-absorption of fixed costs leading to losses. The fixed cost is not limited to depreciation only but there are other elements of fixed costs also. Therefore, proper adjustment has to be allowed to assessee. We, therefore, restore this issue to the file of ld. AO/ TPO to compute the quantum of capacity adjustment. The assessee is directed to provide necessary details in this regard. In the result, this ground is allowed for statistical purposes.
Apropos ground no. 3.8 regarding working capital adjustment, ld. counsel referred to page 308 of appeal set, wherein the submissions made before ld. DRP are contained and referred to page 311 wherein ld. DRP in its notice had required the assessee to furnish the calculation of working capital adjustment carried out taking into account all the comparables of the TPO and the comparables of the tax payer according to the prescribed format. Ld. counsel referred to pages 313 to 315 of the appeal set, wherein assessee had furnished calculation in regard to working capital adjustment margin following OECD guidelines.
Ld. counsel pointed out that ld. DRP has not considered this issue.
We have considered the submissions of both the parties. It is now well settled that in order to arrive at correct comparability criteria, it is necessary that the working capital employed by comparables vis a vis working capital employed by tested party has to be examined and necessary working capital adjustment has to be made in order to arrive at level playing field. We, therefore, restore this matter to the file of ld. TPO to consider the working capital adjustment as claimed by assessee as per pages 313 to 315 of appeal set and allow the capital working adjustment, if so required. In the result, this ground is allowed for statistical purposes.
Brief facts, apropos ground no. 3.9, are that assessee had undertaken international transactions of purchase of fixed assets amounting to Rs. 3,00,64,627/- from CKC, Japan. These goods had been procured by CKC Japan from third parties as per the specification provided by assessee/ CKM India. The assessee in its submissions made before ld. TPO pointed out that the complete process of procuring the specified capital goods involved a detailed examination of specifications, supplier identification, quality management and thereupon the dispatch procedure etc. In connection with all the functions undertaken, CKC Japan had charged a nominal mark up of 4% approximately for the procurement of capital goods. This mark up of 4% was charged by CKC Japan against the overheads and time cost of engineers incurred for the procurement and supply of capital goods.
Ld. TPO pointed out that assessee had used foreign comparables to justify the mark up on capital goods. He pointed out that the use of foreign comparable was not accepted. In this regard reliance was placed on the decision of ITAT Delhi Bench in the case of Ranbaxy Laboratories Ltd. Vs. DCIT (2008) 299 ITR (AT) 175 (Del.).
Ld. TPO after referring to various submissions of assessee, finally concluded that since tax payer failed to provide any of the documents mentioned under Rule 10D, therefore, the mark up of 4% charged by the AE on sale of capital goods, is to be disallowed.
Ld. counsel pointed out that for the purpose of transfer pricing of purchase of capital goods from AE, which had been sourced from third parties, the price paid for such transaction will conform to the arm’s length standard, if the service fee paid by the assessee to its AEs for procurement service was lower or equal to the cost plus mark up rate charged by the unrelated entity in the similar circumstances. The assessee had provided the list of comparable companies undertaking similar functions as carried on by CKC Japan and the same has been given at page 50 of ld. TPO’s order.
The assessee demonstrated that arithmetic mean of total cost plus markup of comparable companies engaged in similar functions i.e. procurement, facilitation, logistics and related services was 8.06%.
Therefore, mark up charged by CKC Japan for these services was lower than average cost plus mark up earned by comparable companies.
Ld. counsel submitted that ld. TPO was bound to compute ALP of the transactions and could not disallow the entire mark up of 4% paid to AE for purchasing assets on asessee’s behalf. He submitted that ld. TPO should have searched for local comparables in order to find out the charges to be paid to AE for the services rendered by it.
Having heard both the parties, we are of the opinion that entire service charges paid to AE by assessee could not be disallowed. It is true that assessee is required to maintain the information and documents as per Rule 10D requirements but once assessee has furnished the information and documents as maintained by it, then ld. TPO has to consider the same and if he finds that same cannot be relied upon for determining the ALP, then he can resort to his own search process in order to find out the ALP of the transactions. We, therefore, restore this matter to the file of ld. TPO to find out local comparables which had undertaken similar service as the assessee.
In the result, this ground is allowed for statistical purposes.
Additional ground: Ld. counsel has raised additional ground vide its petition dated 20.5.2015, which is reproduced hereunder:
“3. The Ld. DRP / Ld. TPO erred on facts and circumstances of the case and in law by confirming an Transfer Pricing adjustment amounting to Rs, 7,74,42,676/- holding that the international transactions pertaining to purchase of raw material, sale of finished goods and purchase of fixed assets do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in: 3.11 by making the addition to the entire value of transactions entered into by the Appellant and not only to the value of international transactions entered into by the Appellant (i.e. proportionate adjustment) and ignoring established jurisprudence in this regard.”
Ld. counsel submitted that the additional ground sought to be admitted being purely a legal ground, may be admitted and the matter may be restored back to the file of ld. TPO.
Ld. CIT(DR) submitted that the assessee has not given any reasons as to why this ground could not be raised earlier.
We have considered the submissions of both the parties and have perused the record of the case. We find that the issue raised in the additional ground is purely legal in nature viz. whether the adjustment in regard to purchase of raw material and sale of goods is to be restricted to international transaction or to be made at entity level. This issue has not at all been considered by lower revenue authorities. We, therefore, admit the additional ground raised by assessee and restore the matter to the file of ld. TPO to consider the issue de novo.
No arguments were advanced in respect of other grounds raised.
In the result, assessee’s appeal is allowed for statistical purposes only. Order pronouncement in open court on 06/07/2016.