ACIT, CHENNAI vs. MYUNGHWA AUTOMOTIVE INDIA PRIVATE LIMITED, KANCHEEPURAM

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the Revenue against the Order dated

18.12.2015 of Dispute Resolution Panel-2, Bangalore, in F.No.240/DRP-

2/BNG/2015-16 for the AY 2011-12 and raised the following grounds:

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Grounds of Appeal: 1. The Order of the DRP is contrary to the law and facts and circumstances of the case. 2. The DRP erred in directing the TPO/AO to allow Working Capital Adjustment to the assessee at the prevailing rates after verification of necessary details. 2.1 The DRP failed in accepting the assessee’s contention that the comparable margin should be adjusted for working capital intensities vis-a-vis assessee’s margin for the reason that the above would be relevant only in the event of assessee’s working capital being negative. 2.2 Having regard to the Hon’ble ITAT ‘C’ Bench’s decision in the case of Mobis India Ltd. vs. DCIT in ITA No.2112/Mds/2011 wherein it is held that “the assessee has not been able to justify the adjustments that were required to be made on account of negative working capital”, the DRP ought have upheld the action of the TPO/AO in rejecting the claim of adjustment for Working Capital Adjustment. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Hon’ble DRP may be set aside and that of the Assessing Officer restored.

The assessee also filed cross-objections against the appeal of the

Revenue which is numbered as 179/Mds/2016.

2.0 Condonation of delay:

There was delay of 51 days in filing the appeal by the Revenue and

the assessing officer filed an Affidavit explaining the reasons for

delay and requested for condonation of delay. We heard both the

parties and Ld.AR did not make any objections for condonation of

delay. We are convinced with the explanation offered by the

Revenue and in the interest of justice, the delay is condoned.

3.0 Background of the Company:

M/s.Myunghwa Automotive Private Limited is a wholly owned

subsidiary of M/s.Myunghwa Industrial Company Limited, South

Korea Myunghwa Automotive Pvt Ltd incorporated as Private Limited

Company under the Companies Act, during September 2007. The

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Company is having its manufacturing facility in Sriperumbadur. The

Company is mainly engaged in the manufacture of automobile

products such as Water Pump Assembly and Oil Pump Assembly.

The Company mainly caters to Original Equipment Manufacturers

(“OEMs”) of Hyundai Motors India and its ancillary units.

3.1 Details of International Transactions: The assessee has entered

in to the international transactions with the AE as under:

Description of Quantum of Method S.No Transaction Transaction Adopted 1 Import of Raw Material 14,69,86,643 TRANSACTIONAL 2 Capital goods Import 17,55,91,239 NET MARGIN 3 Royalty 38,55,441 METHOD Total Rs.32,64,33,323/-

3.2 Functional Analysis: The assessee company is engaged in

manufacturing and selling and marketing function in India. The assets

employed by the assessee as on 31/03/2011 are as follows:

Types of assets Amount(In Rs.) Leasehold Land 13,99,93,900 Buildings 13,44,41,208 Plant & Machinery 11,37,35,738 Electrical Fittings 2,86,06,070 Vehicles 39,04,601 Computers 7,97,846 Furniture & Fixtures 2 1,57,364 Office Equipments 10,22,340 Total 42,46,59,067 Add: Capital CWIP 19,39,8 1,389 Grand Total 61,86,40,456

3.3. Most Appropriate Method (MAM):

The assessee company had adopted TNMM as MAM for the purpose

of ALP determination. The PLI adopted by the assessee is OP/OI.

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The net margins earned by the assessee company is tested against

the net margins of the selected comparables.

3.4 Computation of PLI (OP/OI) of the assessee company:

The assessee company had computed the PLI with the following adjustments:

Description Amount in INR Sales 332699046 Exchange gain 1738615 Operating Income (A) 334437661 Raw material cost 219324147 Increase/Decrease in stock 4647163 Manufacturing expenses 52933112 Payment of benefits to employees 19387874 Administrative expenses 12375156 Depreciation 21141655 Operating cost (B) 329809108 Profit before interest and Tax (PBIT) C= (A-B) 4628553 Add: Depreciation (D) 21141655 EBITA (Profit after adjusting depreciation) (E) 25770208 Add: Power related adjustment (G) 1760487 Adjusted operating profit (F = C+D+E+F+G) 27530695 Profit on Sales % G= (F/A*100) 8.23% Add: Adjustment towards longer credit term on 2.02% supplies received as compared to comparable companies Total Adjusted operating margin 10.25%

The TPO has reworked the PLI after excluding the adjustments made by

the assessee in it’s TP study in respect of Depreciation, Power related

adjustments, working capital adjustments, Risk adjustments and Forex

gain related adjustments and the PLI worked out to 0.97% as against the

assessee’s working of 10.25%. Hence the TPO made independent search

process and selected the final set of comparables as under:

Final set of comparables:

S.No. Name of the companies PLI (OP/OI) 1 Kalyani Forge Ltd. 5.55% 2 Imperial Auto Industries Ltd. 6.76% 3 Pricol Ltd. 2.87% 4 Dynamatic Technologies Ltd. 10.7% 5 Lumax Automotive Systems Ltd. 6.95% 6 Sundaram Fastners Ltd. 8.92% Mean 7.0%

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4.0 One of the comparables selected by the TPO is M/s.Dynamatic

Technologies Ltd. The average mean of the comparables worked out to

7.0%. The TPO has issued show cause notice to the assessee as to why

the PLI of comparables @ 7.0% should not be adopted against the

operating margins of 0.97% of the assessee. The assessee filed it’s

objections and after considering the objections of the assessee, the TPO

has re-worked the average mean and PLI of comparables at 6.67% and

suggested for downward adjustment of Rs.85,84,772/- in purchases. The

AO issued draft Assessment Order as per TPO’s suggestion of ALP and

against the draft Assessment Order, the assessee has filed the objections

before the DRP. One of the objections raised before the DRP was the

selection of M/s.Dynamatic Technologies Ltd., as comparable which was

rejected by the DRP. The DRP has issued the directions to the AO to allow

working capital adjustment against which the Revenue has filed appeal

before this Tribunal. The assessee filed cross-objections agitating various

issues and one of the ground is objection for including M/s.Dynamatic

Technologies Ltd., as comparables.

5.0 We heard both the parties and perused the material placed on

record.

In Para No.5.1 of the DRP Order, the DRP has directed the AO to

allow working capital adjustment at the prevailing rate after verification of

the necessary details. For the sake of convenience, we extract the

relevant paragraphs of the DRP order:

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5.1 The TPO has rejected the claim of adjustment for WCA as assessee did not consider debtors and inventories in its computation. Placing reliance on the decision of Hon’ble Chennai ITAT in case of M/s.Mobis India Ltd, the TPO has rejected the claim of the assessee. The assessee has submitted computation of WCA for the assessee as well as the comparables before this Panel. It has also cited decisions in case of M/s.Sunlife India Service Centre Pvt Ltd, ITAT, Delhi and M/s.Emersons Process Management India Pvt Ltd of ITAT, Mumbai in support of its claim.

As per Sec.144C of Income tax act the DRP has no power to remit

the matter back to the file of the AO and it has to determine the

adjustment on its own. For ready reference, we extract Sec.144(c) as

under:

Reference to dispute resolution panel. 13 144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. (2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,—

(a) file his acceptance of the variations to the Assessing Officer; or (b) file his objections, if any, to such variation with,— (i) the Dispute Resolution Panel; and (ii) the Assessing Officer. (3) The Assessing Officer shall complete the assessment on the basis of the draft order, if—

(a) the assessee intimates to the Assessing Officer the acceptance of the variation; or (b) no objections are received within the period specified in sub-section (2). (4) The Assessing Officer shall, notwithstanding anything contained in section 15314[or section 153B], pass the assessment order under sub-section (3) within one month from the end of the month in which,—

(a) the acceptance is received; or (b) the period of filing of objections under sub-section (2) expires. (5) The Dispute Resolution Panel shall, in a case where any objection is received under sub- section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely:—

(a) draft order; (b) objections filed by the assessee; (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it.

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(7) The Dispute Resolution Panel may, before issuing any directions referred to in sub- section (5),— (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it. (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order. 15[Explanation.—For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee.]

6.0 Since the DRP has no power to remit the matter back to the file of

the AO/TPO, We are of the considered opinion that the issue should go

back to the file of DRP to work out the correct amount of working capital

adjustment and issue necessary directions to the AO/TPO. Accordingly,

we set-aside the issue and remit the matter back to the file of DRP and

the appeal of the Revenue is allowed for statistical purposes.

7.0 The cross-objections fled by the assessee on various issues including

the selection of comparable company M/s.Dynamatic Technologies Ltd.

7.1 In the assessee’s own case, for the AY 2010-11 in ITA

No.658/Mds/2015 of this Tribunal, the Tribunal directed the AO/TPO to

select only automobile segment of M/s.Dynamatic Technologies Ltd. as

comparable or any other suitable company whose activities and

characteristics are identical and similar to that of the assessee company.

For ready reference, we extract the relevant paragraphs of the ITAT

Orders:

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7.2 Respectfully following the decision of this tribunal supra we direct

the AO/TPO to take automobile segment of M/s.Dynamatic Technologies

Ltd., as comparable or any other company whose profile is comparable

with that of the assessee company and re-work the ALP. The AO/TPO is

free to select any comparable. Accordingly, the entire appeal in Cross-

Objections of the assessee is remitted back to the AO/TPO to re-work the

ALP.

8.0 The Cross-Objections of the assessee are allowed for statistical

purposes.

ITA No.1186/Mds/2016 & CO No.179/Mds/2016 :- 9 -: 9.0 In the result, the appeal of the Revenue and the cross objections of the assessee are allowed for statistical purposes.

Order pronounced in the Open Court on 12th April, 2017, at Chennai. Sd/- Sd/- (एन.आर.एस. गणेशन) ("ड.एस. सु�दर $संह) (N.R.S. GANESAN) (D.S.SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�नई/Chennai, 5दनांक/Dated: 12th April, 2017. TLN

आदेश क0 .�त$ल6प अ7े6षत/Copy to: 4. आयकर आयु8त/CIT 1. अपीलाथ-/Appellant 5. 6वभागीय .�त�न�ध/DR 2. ./यथ-/Respondent 6. गाड* फाईल/GF 3. आयकर आयु8त (अपील)/CIT(A)