DOOWON AUTOMOTIVE SYSTEMS INDIA PRIVATE LIMITED,KANCHEEPURAM vs. DCIT, CHENNAI

This appeal of the assessee is directed against the order of the Assessing Officer, consequent to the directions of Dispute Resolution Panel dated 10.12.2014 and pertains to assessment year 2010-11.

Sh. SP. Chidambaram, the Ld.counsel for the assessee, submitted that the assessee-company is a wholly owned subsidiary of Doowon Corporation Korea. According to the Ld. counsel, the assessee-company is engaged in the business of manufacturing automotive air conditioning systems and its parts. The manufacturing plant is situated near Chennai. According to the Ld. counsel, in the course of its manufacturing activity, the assessee has purchased raw material from its Associate Enterprise outside India. The assessee has also paid fee for technical services. The Ld.counsel further submitted that capital assets were also purchased from Associate Enterprise. In respect of the transaction entered with Associate Enterprise for purchasing raw material and its components, capital assets and payment of fee for technical services, the assessee maintained transfer pricing documentation by adopting Transaction Net Margin Method. The Ld.counsel further submitted that the assessee has also made adjustment towards Customs duty payment and working capital. The Transfer Pricing Officer and the Dispute Resolution Panel have made adjustments resorting to statistical method to benchmark the international transaction. According to the Ld. counsel, Transaction Net Margin Method is the most appropriate method, therefore, the Customs duty paid by the assessee for importing the raw material and capital employed has to be taken into consideration while making transfer pricing adjustment.

The Ld.counsel for the assessee further submitted that this is the third year of business operation, therefore, the assessee had to import huge volume of components and raw material by paying Customs duty. According to the Ld. counsel, the comparable companies selected by the TPO and the DRP have purchased the raw material and components in the domestic market, therefore, they have not paid any Customs duty. Since the assessee has imported 85% of raw material from outside the country, the assessee had to incur an additional liability towards Customs duty, therefore, according to the Ld. counsel, the payment of Customs duty has to be necessarily eliminated while making comparison by adopting Transaction Net Margin Method. However, the Dispute Resolution Panel, after considering its own directions in the assessee's own case for assessment year 2009-10, confirmed the order of the Transfer Pricing Officer by holding that the Customs duty payment need not be allowed.

Referring to the order of the DRP, the Ld.counsel for the assessee submitted that the Transfer Pricing Officer adopted Net Profit Margin at 14.6% as benchmark as against 1.86% actually shown by the assessee. Considering the difference of 12.74% on the assessee’s operating turnover, the Transfer Pricing Officer determined the downward adjustment at `30,29,38,756/-.

Referring to Rule 10B of Income-tax Rules, 1962, the Ld.counsel for the assessee submitted that the net profit margin between the international transaction of the assessee and the comparable uncontrolled transaction has to be adjusted after taking into consideration the difference, which could materially affect the net profit margin in the open market. Placing reliance on the decision of Pune Bench of this Tribunal in Skoda Auto India (P.) Ltd. v. ACIT (2009) 30 SOT 319, the Ld.counsel submitted that the business model of the assessee has to be taken into consideration while comparing the comparable companies. The Pune Bench did not agree with the Transfer Pricing Officer that every time the assessee pays higher import duty, it must be passed on the customers or it must be adjusted for in negotiating the purchase price. The Ld.counsel has also placed reliance on the decision of Panaji Bench of this Tribunal in Putzmeister Concrete Machines Pvt. Ltd. v. DCIT in and submitted that the cost of raw material varied due to import, it will have impact for deciding the arm's length price. In fact, the Panaji Bench placed its reliance on the Pune Bench in Skoda Auto India (P.) Ltd. (supra). In view of the above, according to the Ld. counsel, the statistical method adopted by the Transfer Pricing Officer and the Dispute Resolution Panel is not one of the methods prescribed under the scheme of Income-tax Act for making adjustment of arm's length price. Therefore, the statistical method adopted by the DRP is not justified. According to the Ld. counsel, Transaction Net Margin Method is the most appropriate method.

Referring to one of the comparable companies, namely, WABCO India Ltd., the Ld.counsel for the assessee submitted that this company is functionally different from the assessee-company, therefore, it should be removed from the list of comparable companies.

On the contrary, Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that the assessee-company is a manufacturer of automotive air conditioner and cooling systems, automotive ancillaries, components and other automative parts.

Referring to Customs duty adjustment, the Ld. D.R. submitted that an identical order of the Transfer Pricing Officer was confirmed by the Dispute Resolution Panel for the assessment year 2009-10 in the assessee's own case. By following that order, the DRP confirmed the TPO’s order by holding that Customs duty payment need not be adjusted while making prima facie adjustment.

We have considered the rival submissions on either side and perused the relevant material available on record. The assessee claims that Transaction Net Margin Method is the most appropriate method. For the purpose of transfer pricing adjustment, Section 92C of the Income-tax Act, 1961 (in short 'the Act') provides for the method to be adopted. Therefore, the Transfer Pricing Officer and Dispute Resolution Panel have to determine the transfer pricing adjustment by following any one of the methods prescribed under Section 92C of the Act, which would be appropriate to the international transaction made by the assessee. In the case before us, the Dispute Resolution Panel and the Transfer Pricing Officer have not adopted any of the methods prescribed under Section 92C of the Act. As rightly contended by the Ld.counsel for the assessee, the DRP resorted to statistical method to benchmark the international transaction. This Tribunal is of the considered opinion that the DRP is expected to find out most appropriate method among the methods prescribed under Section 92C of the Act. The Dispute Resolution Panel is not expected to travel beyond the method prescribed under Section 92C of the Act.

In respect of the Customs duty adjustment and working capital employed, the Dispute Resolution Panel has simply placed its reliance on its own order in the assessee's own case for assessment year 2009-10. This Tribunal examined the directions of the Dispute Resolution Panel in the assessee's own case for assessment year 2009-10 in I.T.A.No. 852/Mds/2014 dated 19.05.2016. For the assessment year 2009-10, the Dispute Resolution Panel directed the Transfer Pricing Officer to determine the transfer pricing adjustment afresh. This Tribunal found that such a direction cannot be given by the Dispute Resolution Panel.

In the result, the appeal filed by the assessee is allowed for statistical purposes.