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Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI & SHRI G. PAVAN KUMAR
आदेश /O R D E R
PER G. PAVAN KUMAR, JUDICIAL MEMBER:
The assessee has filed appeal against the order of Assessing Officer u/s. 143(3) r.w.s. 144C(3) dated 31.10.2012 passed under the directions of the Dispute Resolution Panel (DRP) dated 09.08.2012. At the time of hearing
:-2-: I.T.A. No.38/Mds/2013 the Ld. AR of the assessee submitted that he is not pressing ground no.s 2, 3, 3.1, 3.2 and 3.3 and made endorsement in Grounds of Appeal and treated as dismissed.
2. The Brief facts of the case, that the assessee is in business of manufacture and sale of dump trucks and filed Return of income on 30.09.2008 declaring loss of Rs. 23,46,31,798/-. The Return of income was processed u/s. 143(1) on 25.09.2009. Subsequently, the case was selected for scrutiny under the CASS and notice u/s. 143(2) was issued. In response to the notice, the Ld. AR appeared from time to time and explained the activities of the assessee company in manufacturing and sale of dump trucks and after sales service support. The Ld. AO found that there are international transactions and Arm Length Price (ALP) has to be calculated and Assessing Officer referred to Transfer Pricing Officer (TPO) under the provisions of 92CA(i) of the Act for computation of Arms Length Price. Subsequently, the Ld. TPO vide order dated 31.10.2010 made downward adjustment of Rs. 36,52,63,964/- in purchases from Associated Enterprises (AE) and with these adjustments Draft Assessment Order was passed u/s. 143(3) r.w.s 144C(1) of the Act on 21.12.2011 Against the Draft Assessment Order, the assessee company filed objections to the Dispute Resolution Panel (DRP) and whereas, DRP directed the TPO to rectify the mistake in considering the comparable company and the Ld. TPO made rectification to downward adjustment and the :-3-: I.T.A. No.38/Mds/2013 Ld. AO with the said adjustments assessed the total income of Rs. 3,85,85,393/- vide order u/s. 143 r.w.s. 144C(3) of the Act. Aggrieved by the order and the assessee company filed an appeal with the Tribunal.
The Ld. AR argued the grounds on the Custom Duty Adjustment, where the lower authorities erred in law and on facts not considering the Custom Duty Adjustment and ignoring the fundamental principles behind claiming non-cenvatable custom duty adjustment amounting to Rs. 142,005,128/- and the TPO/DRP/AO erred in law and on facts in rejecting the custom duty adjustment on assumption that benefit of custom duty would have been passed to Associated Enterprise (AE) and consequently shifted the tax base. The Ld. TPO has found that the assessee company is engaging in Heavy duty dump trucks for use in mines and earth moving and most of the materials are imported from Associate Enterprise (AE) and has 5 comparables and worked out the PLI at 9.69% and after considering the working capital adjustment the PLI adjusted and worked out to 4.25%. The assessee computed PLI percentage based on the custom duty, Forex loss and Idle Capacity. The assessee company also operates 'Market Support Division' which renders marketing and after sale support to AE's for which it earned commission and the mark up cost worked out to 82.17% with 7 comparables PLI being 24.04% and the weighted PLI of 3 years is 16.02%. The Ld. TPO found that the Custom Duty paid by the assessee company is Rs.
:-4-: I.T.A. No.38/Mds/2013 417,728,928/- and an amount of Rs. 142,005,128/- is non-cenvatable duty in assessee case is higher due to Higher import component. The Ld. TPO considered the submission of the assessee dated 20.10.2011 and found that the assessee reiterated its stand it has additional unclaimable expenditure, whereas, it is not in the case of comparables and further relied on the decision of Pune Tribunal in the case of Skoda Auto India Pvt. Ltd., Vs ACIT in ITA No. 202/PN/2007. The Ld. TPO relied on the decision of M/s. Sony India Pvt Ltd., in 819/DEL/2007 & 820/DEL/2007 at Para 5.2 referred at Page 4 of the order and the Ld. TPO is of the opinion that the additional Custom Duty is not warranted and rejected the adjustments of non- cenvetable custom duty and the Ld. DRP has confirmed the action of Ld. TPO in its order.
Before us, the Ld. AR submitted that the company is in first four months of its operations and has made heavy investment and required custom duty adjustment and TPO has not considered the adjustments in commercial markets and substantiated the arguments that assessee company imports are 91% and whereas the import component of comparables selected is 6.57% and relied on the co-ordinate bench decision in Motonic India Automotive Pvt. Ltd., Vs ACIT dated 17.08.2016, whereas, the Ld. DR submitted that the assessee is a assembler and not a manufacturer and Higher cost of inputs are passed on to the customers and :-5-: I.T.A. No.38/Mds/2013 relied on the orders of the lower authorities and judicial decisions and prayed for rejection of the ground.
We heard the rival submissions, perused the material on record and the judicial decisions. The Ld. AR submissions on custom duty adjustment are realistic and they have to be considered due to the background of the company which is in operation for 4 months and with Higher imported component in operations. We place reliance on the co-ordinate bench decision Motonic India Automotives Pvt. Ltd., (Supra) at Para 6 Page 5 which read as under:
"6. The ld. AR submitted that in respect of custom duty component suitable adjustment to be made while determining the ALP. In our opinion, the plea of the assessee is justified. The TPO has not considered the custom duty adjustment on the reason that it is equivalent to central excise in commercial market. This is not correct. The Tribunal consistently holding that while determining ALP, there should be suitable adjustment in respect of custom duty, which was considered in the following cases : i) Skoda Auto India (P) Ltd. v. ACIT, Aurangabad (30 SOT 319)[Pune] ii) Toyota Kirloskar Motors Pvt. Ltd. v. ACIT, Bangalore – iii) Putzmeister Concrete Machines Pvt. Ltd. v. DCIT, Panaji – ITA No. 107/PNJ/2012 iv) Demag Cranes & Components (India) Pvt. Ltd. v. DCIT, Pune in ITA No.120/PN/2011
:-6-: I.T.A. No.38/Mds/2013
6.1 At this stage, it is pertinent to mention the finding of the Pune Bench in the case of Demag Cranes & Components (India) Pvt. Ltd. v. DCIT(supra) dated 4.1.2012 in which is as follows : “37. We have heard the parties and perused the available material on records in the light of the second limb of the ground 4(b). It is relevant mentioned that we have already analysed the relevant provisions of Income Tax rules vis a vis the scope of the adjustments in the preceding paragraphs in the context of the adjustments on account of the ‘working capital’. In principles, our findings on the issue remain applicable to the adjustments on account of the import cost mentioned in ground 4(b) too. The difference between the AL Margin before and after the said adjustments on account of ‘import cost’ works out to 0.57% (7.18%-6.61%). Revenue has not disputed the said working of the assessee. In these factual circumstances and in the light of the scope of adjustments discussed above, in our opinion and in principle, the assessee should win on this ground too. One such decision relied upon by the assessee’s counsel supports our finding relates to the decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd 122 TTJ 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that,- “No doubt , a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd.’s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee’s control. As was observed by a Co-ordinate Bench of this Tribunal in the case of E- Gain Communication (P) Ltd. (supra) “the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect”. We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars,
:-7-: I.T.A. No.38/Mds/2013 assemble it and sell it in the market, that is certainly not the business models of the comparables that the TPO has adopted in this case. The adjustments then are required to be made for functionally differences. The other way of looking at the present situation is to accept that business model of the assessee company and the comparable companies are the same and it is on account of initial stages of business that the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and profits in fit cases. We also do not agree with the authorities below that the onus is on the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in public domain. In such a situation, i.e. when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of assessee’s operations and complete facilities ensuring a reasonable indigenous raw material content was not in place. The assessee’s claim is that it was in these circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Co-ordinate Bench and we are in respectful agreement with the views of our esteemed colleagues. This additional argument was not available before the authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations.”
:-8-: I.T.A. No.38/Mds/2013
The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP shall see to it that the difference in question is ‘likely to materially affect’ the price/profit in the open market as envisaged in sub rule (3) of Rule 10B of the Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto.” Accordingly, we direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP."
Considering the factual aspects and material on record and the orders of the lower authority and the judicial decisions, we are of the opinion custom duty adjustment to be made while calculating the Arm Length Price and we direct the TPO to make adjustments of the custom duty in determining the Arm Length Price and allow the ground.
The second ground argued by the Ld. AR that the Ld. TPO has rejected the adjustment of Foreign Exchange Fluctuations without appreciating the fact of unexpected increase in the cost of inputs due to unanticipated adverse foreign exchange fluctuations where import component is 91% compared to comparables which has only 5% imported component and has resulted in significant foreign exchange loss of 10.02% of sales. The :-9-: I.T.A. No.38/Mds/2013 Ld. TPO while determining ALP find that the assessee company operating profit of comparables has considered foreign exchange fluctuations as non- operating item. The Ld. TPO considered the exchange rate of dollars and foreign exchange fluctuations loss treated as non-operational cost. The business of the assessee may vary from the comparables and seek adjustment to suit its model. The Ld. TPO has not considered the fact that the assessee company has been set up in year 2005 compared to the comparable which existed for long time with different income components, the TPO is of the opinion that the mere statement of established players and passing of additional cost to customers will not help the assessee company.
Further, considering the market fluctuations and variations, the assessee company could not establish the increase in price of raw material in the adverse conditions and rejected the adjustments. The DRP found that the foreign exchange loss arises in the course of business and the exchange rate fluctuations have consequence effect on sale cost operating expenses and net income. If there are fluctuations from year to year as a result of foreign exchange rate fluctuations, the financial analysis should explain the variability and the variations were part of the input of the assessee and upheld the action of the TPO.
Before us the Ld. AR argued that there is loss on foreign exchange adjustments as the assessee having transactions with the Japan
:-10-: I.T.A. No.38/Mds/2013 Manufacturing Unit and effected adversely due to the high component of import products. Whereas, comparables company does not have risk on foreign exchange fluctuations and raw materials from domestic market. The Ld. AR drew attention to Page No. 282 in paper book where depreciation of Indian Rupee against the Japan Yen had impact on profitability and fluctuations in the financial year 2007-08 and also adverse impact resulting in forex loss to the company and prayed the foreign exchange adjustment should be granted and relied on the decision of Honda Trading Corp. India Pvt. Ltd. Vs ACIT in dated 08.03.2013 and Transwitch India Pvt. Ltd., Vs DCIT in ITA No. 6083/DEL/2010 dated 30.03.2012. Contra, the Ld. DR relied on the orders of the TPO.
We heard the rival submissions, perused the material on record and the judicial decisions cited. The Ld. AR's contention that to grant foreign exchange rate adjustments in determining the Arm Length Price as the assessee has entered into a contract and the price was fixed on prevailing exchange rate and due to fluctuations in value of the currency and there is a loss, and same has to be affected in determining Arm Length Price. We found the Ld. AR has demonstrated the fluctuations of Japan Yen due to various economic factors and such fluctuations are to be considered in the financial statements. We are of the opinion the Ld. TPO has to determine the Arm Length Price after dealing with the correctness of loss in foreign
:-11-: I.T.A. No.38/Mds/2013 exchange fluctuation. We rely on decision of the co-ordinate bench in the case of Montonic India Automotive Pvt. Ltd., Vs ACIT in where this issue has been discussed at Page 10, Para 9 :
" We find force in the argument of the Ld. AR. It is normal that exchange rate is subject to fluctuation due to economic conditions. While determining the ALP, one has to consider these factors, more so, our view is fortified by the decision of the Tribunal in the cases of Honda Trading Corp. India Pvt. Ltd., Vs ACIT in for the assessment year 2007-08 and DHL Express (India) Pvt. Ltd., Vs. ACIT in ITA No. 7360/Mum/2010 for the assessment year 2006-07. Accordingly, we direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e., customs duty adjustments, air freight adjustment and foreign exchange fluctuation adjustment."
With these observations we direct the TPO to make adjustment of foreign exchange fluctuations in determining the Arm Length Price.
The last ground argued by the Ld. AR that the assessee company is in its initial period of commercial production and there is idle capacity. The Ld. TPO has erred in calculating average capacity utilisation of comparables at 65.55%. Whereas, the idle capacity of the aassessee is at 67% and PLI worked out at 21.73%. The DRP subsequently found the capacity adjustment and the methodology cannot be accepted and relied on the Tribunal decision and held with the capacity utilisation adjustment can be granted only if accurate information is furnished by the assessee company and upheld the :-12-: I.T.A. No.38/Mds/2013 action of the TPO. The Ld. AR further, argued on the idle capacity adjustment as the assessee is in first year of commercial operations. The Assessee company was set up in 2005 and started its commercial business operations in December 2007 and have heavily invested in fixed assets. The company's production capacity is 200 trucks, whereas actual production made during the year 2007-08 is 67 trucks and resulted in non-utilisation capacity of 67% and incurred idle capacity cost which resulted in loss. The comparable company operations are from many years with the capacity utilisation at 84.73%.
Whereas, the assessee company average capacity utilisation is only 33%.
The Ld. AR submitted that the idle capacity to be considered in respect of capacity utilisation of comparables and also weighted average capacity utilisation and relied on the Pune Tribunal decision of Amdocs Business Services P. Ltd., Vs DCIT in dated 23.07.2012 and prayed for allowing the adjustment of idle capacity. Contra, the Ld. DR submitted that the TPO adopted TNM Method, where the transactions are aggregated for analysis and no reasoning for adjustments to be considered to certain operations of products and prayed for dismissing the ground.
We heard the rival submissions perused the material on record and judicial decisions cited. The Ld. AR contention that assessee company was formed in the year 2005 and the idle capacity of comparables is lower and in production prior to year 2005. We find there is strength in arguments of Ld.
:-13-: I.T.A. No.38/Mds/2013 AR as the company is in the first year of operation with 4 month active operations and made heavy investments in Fixed Asset and capacity is under utilised. We are of the view that there should be a reasonable adjustment of non-utilisation of production capacity by the Ld. TPO. We found the similar issue dealt in the case of co-ordinate bench decision M/s. Mando India Steering Systems P. Ltd., Vs ACIT in for the assessment year 2008-09 dated 07.04.2004 at Page 10, Para 10 as under:
" The second ground in appeal is with regard to downward adjustment of Rs. 7,59,39,334/-. The Revenue has not denied that the assessee is in initial year of its production. It is also a well known fact that in the initial years of production, the over head fixed costs are more due to under-utilisation of resources. The TPO has brushed aside the contention of the assessee with regard to the under-utilisation of capacity on the ground that the assessee had not claimed the idle capacity adjustment in initial TP analsysis. the TPO has also raised objection that the installed capacity has been given in matric tones whereas the production is given in number. Due to difference in units of expression, it is difficult to analyse the percentage of capacity utilisation. We are of the considered view that under utilisation of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production. In view of the above, we deem it appropriate to remit this issue back to the Assessing Officer with a direction to consider the claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP cost. The assessee is also directed to produce relevant documents in comparable units for the necessary analysis."
:-14-: I.T.A. No.38/Mds/2013 We relied on the decision and direct TPO to consider the idle capacity adjustments in the relevant financial year in determining the Arm Length Price.
In the result, the appeal of the assessee is allowed for statistical purpose.
Order pronounced on Tuesday, the 20th day of December, 2016 at Chennai.