IGARASHI MOTORS INDIA LTD.,CHENNAI vs. DCIT, CHENNAI

This appeal of the assessee is directed against the order of the Assessing Officer, consequent to the direction of the Dispute Resolution Panel, Chennai, for the assessment year 2009-10.

The first issue arises for consideration is with regard to disallowance made by the Assessing Officer to the extent of `88,36,545/- under Section 14A of the Income-tax Act, 1961 (in short 'the Act').

Sh. T. Banusekar, the Ld. representative for the assessee, submitted that the assessee invested in equity shares of Bosh Electrical Drives India Private Ltd. and IJT Plastics and Tools Private Ltd. According to the Ld. representative, the income derived from both Bosh Electrical Drives India Private Ltd. and IJT Plastics and Tools Private Ltd. are exempted from taxation. According to the Ld. representative, no income was derived from these investments during the year under consideration. Placing his reliance on the judgment of Delhi High Court in Cheminvest Limited v. CIT (2015) 94 CCH 2, the Ld. representative submitted that when the assessee had not earned any taxable income during the year under consideration, then the corresponding expenditure cannot be worked out for disallowance. Therefore, according to the Ld. representative, there is no question of disallowance under Section 14A of the Act, especially when there was no income earned by the assessee from the investments made. According to the Ld. representative, the Delhi High Court reversed the decision of Special Bench of this Tribunal in I.T.A. No.87/DEL/2008.

The Ld. representative further submitted that the investments were made not for the purpose of earning any exempt income but for the purpose of business expediency. According to the Ld. D.R., both Bosh Electrical Drives India Private Ltd. and IJT Plastics and Tools Private Ltd. are sister concerns of the assessee, therefore, the investments were made due to commercial expediency.

On the contrary, Shri Arun C. Bharath, the Ld. Departmental Representative, submitted that during the year under consideration, Rule 8D of Income-tax Rules, 1962 is very much applicable. The issue whether no income was derived from the investment was considered by Special Bench of this Tribunal in Cheminvest Limited (supra) and the Special Bench of this Tribunal found that where the dividend is exempted under Section 10(34) of the Act, the interest paid on the borrowed capital, which is utilized for purchase of shares, is hit by Section 14A of the Act irrespective of the fact whether the stock was held as stock-in-trade. The Tribunal further found that the business income from dividend would not make any difference under Section 14A of the Act. The Ld. D.R. further submitted that even though no income was earned, the assessee has to necessarily incur expenditure for taking decision in making investments. According to the Ld. D.R., earning of income is not a sine qua for not allowing any expenditure. Even in a year no income was earned or received by the assessee, disallowance can be made under Section 14A of the Act. In view of the above, the Dispute Resolution Panel has rightly confirmed the decision of the Transfer Pricing Officer, therefore, no interference is called for.

We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that Bosh Electrical Drives India Private Ltd. and IJT Plastics and Tools Private Ltd. are joint venture companies. In other words, these are sister concerns of the assessee. The investments made in the sister concerns of the assessee are for commercial expediency. It is not the case of the Revenue that the sister concerns, which received the investments, diverted the funds for non-business purposes. Therefore, in view of the judgment of Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1, this Tribunal is of the considered opinion that the investments made by the assessee in the equity shares of the sister concerns, which were established by joint venture, have to be necessarily treated as for business purpose. Therefore, as rightly found by this Tribunal by majority decision in EIH Associated Hotels Ltd. (supra), the dividend income earned by the assessee, if any, from subsidiary companies, is incidental one, therefore, the investments made by the assessee in its subsidiary companies cannot be reckoned for disallowance under Section 14A of the Act. A similar view was taken by Delhi High Court in CIT v. Oriental Structural Engineers Pvt. Ltd. in ITA 605/2012 dated 15.01.2013, a copy of which is available at page 80 of the paper-book. The Mumbai Bench of this Tribunal in JM Financial Ltd. v. Addl. CIT in has also taken a similar view. The assessee has produced a copy of the order at page 93 of the paper-book. The assessee has also placed reliance on the decision of Delhi Bench of this Tribunal in Interglobe Enterprises Ltd. v. DCIT (2014) 40 CCH 22. Since the investments were made in the sister concerns as found by this Tribunal in EIH Associated Hotels Ltd. (supra), this Tribunal is of the considered opinion that there cannot be any disallowance under Section 14A of the Act. Accordingly, the orders of the lower authorities are set aside and the disallowance made by the Assessing Officer is deleted.

The next issue arises for consideration is with regard to adjustment of Arm's Length Price to the extent of `9,30,00,000/-.

Sh. T. Banusekar, the Ld. representative for the assessee, submitted that the assessee-company is engaged itself in the business of manufacturing DC micro motors and sub-assemblies for DC motors. The assessee-company is a joint venture between Crompton Greaves Limited and Igarashi Electric Works Ltd., Japan.

Referring to the profit ratio of the assessee, the Ld. representative for the assessee submitted that the assessee is also persistently making loss. When the Transfer Pricing Officer came to a conclusion that the comparables selected by the assessee are making persistent loss and the assessee is also equally suffering persistent loss, therefore, the comparables selected by the assessee cannot be rejected totally by the Transfer Pricing Officer and the Dispute Resolution Panel. Referring to the internal comparables, the Ld. representative submitted that when the assessee sold the manufactured products to its associate enterprise as well as non-associate enterprise, the preferred comparable should be the internal comparables as against the external comparables particularly, when there are no external comparable in the same line of business. Referring to the Lucas TVS, the Ld. representative submitted that this TVS group of company was established more than 50 years ago and they have made their market in the automobile industry. However, the assessee- company is relatively a new entrant to the industry. The exports of Lucas TVS Ltd. are limited when compared to the assessee- company. The product application of Lucas TVS Ltd. is for commercial vehicles, cars, two wheelers, tractors etc., whereas the product application of the assessee-company is only in cars.

Referring to the order of the Dispute Resolution Panel, the Ld. representative for the assessee submitted that the Transfer Pricing Officer applied the filter with a threshold level having related for transactions upto 25%. The number of comparable companies operating in similar segments are small in number. When the Lucas TVS has transactions with related parties upto 25% of their sales, the same cannot be taken as comparable at all.

According to the Ld. representative for the assessee, the assessee-company chose auto electrical filter as the first criteria which is the most nearest indicator of the assessee’s business model and function. The Ld. representative further clarified that selecting functionally similar companies is the first step for making comparison to determine the Arm's Length Price. Referring to the three comparables rejected by the TPO on the ground that they are loss making companies persistently year after year, the Ld. representative submitted that the assessee is also equally a loss making company persistently, therefore, the reasoning of the Transfer Pricing Officer and the Dispute Resolution Panel for rejecting the comparables selected by the assessee is not justified.

On the contrary, Shri Arun C. Bharath, the Ld. Departmental Representative, submitted that the assessee claims that the three comparables selected by it are making similar functions as that of the assessee. According to the Ld. D.R., the functions of the three comparables selected by the assessee are totally different, therefore, it cannot be compared. Referring to the contention of the assessee that the assessee is also making persistent loss as that of the comparables selected by the assessee, the Ld. D.R. pointed out that the assessee is not persistently loss making company except in the year under consideration. The assessee has made a positive profit in the earlier four years. Therefore, according to the Ld. D.R., incurring loss year after year is not the trend of the business segment but it happens due to various unique reasons. Therefore, the Transfer Pricing Officer has rightly rejected the comparables selected by the assessee.

Referring to the related party transaction upto 25% by Lucas TVS, the Ld. D.R. submitted that the related party transaction upto 25% is permissible at threshold level for TP study. According to the Ld. D.R., comparables being very limited, related party transaction would also be permissible upto the level of 25%. Referring to the internal comparables, the Ld. D.R. submitted that the available internal comparable cannot be considered for determining the Arm's Length Price. According to the Ld. D.R., only external comparable has to be considered for making adjustment while determining the Arm's Length Price of the transaction of the assessee. Therefore, according to the Ld. D.R., the DRP has rightly confirmed the order of the Transfer Pricing Officer.

We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessee is manufacturing DC micro motors and sub-assemblies for DC motors. The assessee selected three comparables, namely, Sibar Auto Parts Ltd., K.S. Diesels Ltd. and Suyaan Transmissions Ltd. From the product details, it appears Sibar Auto Parts Ltd. is manufacturing aluminium hard chrome plated cylinder kits, cylinder blocks, blind-end cylinder blocks, air cooler cylinder heads and water cooled cylinders. This company may be manufacturing sub- assemblies for DC motors. Similarly, K.S. Diesels Ltd. is manufacturing spares for fuel pumps, parts for fuel injection equipment for diesel engines, Nozzles, elements, delivery valves, injector complete and single cylinder pump, and Suyaan Transmissions Ltd. is manufacturing crank shafts. These comparable companies selected by the assessee may be sub- assembling for DC motors. Admittedly, the comparable companies selected by the assessee-company are suffering persistent loss in their business activities. The assessee-company is also making losses. However, it is not a persistent loss making company as that of comparables. Except for the year under consideration, the assessee-company is also making positive profit. Therefore, this Tribunal is of the considered opinion that the assessee-company is not a persistent loss making company. The loss suffered by the assessee during one year might not be compared with that of the comparable companies. Since the comparables selected by the assessee-company are admittedly persistent loss making companies, the DRP has rightly rejected the comparables selected by the assessee.

Now coming to the internal comparables, the DRP rejected the claim of the assessee on the ground that the only external comparable has to be considered. If only external comparable has to be considered, then Lucas TVS has related party transaction to the extent of 25%. Therefore, the Lucas TVS selected by the Transfer Pricing Officer also cannot be a comparable case while determining the Arm's Length Price in the case of the assessee.

In view of the above discussion, the orders of the lower authorities are set aside and the Assessing Officer is directed to compare the transaction of the assessee with associate enterprise by taking the transaction of the assessee with non-associate enterprise.

In the result, the appeal of the assessee is allowed.