2022 (10) TMI 474 - AT - Income Tax

TP Adjustment - Adjustment towards under utilization of capacity - HELD THAT - Considering the decisions of Continental Automotive Components India Pvt. Ltd 2021 (11) TMI 1059 - ITAT BANGALORE and Moog Control (India) Pvt. Ltd 2019 (8) TMI 1839 - ITAT BANGALORE we are of the considered view that the adjustment for capacity under utilization needs to looked at afresh and hence, we remit the issue back to TPO/AO. Needless to say that opportunity of being heard should be given to the assessee. The appeal on this ground is allowed for statistical purposes. Adjustment for foreign exchange fluctuations - TPO denied the Adjustment on the ground that the laws in the manufacturing segment has a arisen on account of import cost and the assessee did not suitably negotiate the Purchase cost from its AEs, the computation made by the assessee is not in line with AS11 and the assessee has failed to show the difference between comparables and the assessee in respect of the exchange fluctuation loss - HELD THAT - We remit this issue to AO/TP with a direction to consider the foreign exchange fluctuation adjustment for computing the ALP of the assessee. This ground is allowed in favour of the assessee for statistical purposes. Adjustment for customs duty - assessee imported 83.12% of its raw materials whereas the comparable companies imported only an average of 15.14% of their raw materials whereby the assessee incurred significant customs duty charges warranting an adjustment for TP comparison - HELD THAT - We notice that the coordinate bench of the Tribunal in the case of M/s. Continental Automotive Components (India) Pvt. Ltd 2021 (11) TMI 1059 - ITAT BANGALORE has considered the similar issue. Thus we are remitting this issue to the AO/TPO for fresh consideration. This is ground is allowed in favour of the assessee for statistical purposes. Re-computation of operating margins pursuant to the Mutual Agreement Procedure (MAP) resolution covering the transaction between the assessee and its AE Denso Corporation Japan (DNJP) - HELD THAT - Keeping into consideration the entire conspectus of the facts and circumstances of the case and the additional ground raised, before us we are convinced that its adjudication does not require any fresh investigation of facts and involves substantial question of law. Respectfully following the judgment of the Hon ble Supreme Court in the case of National Thermal Power Company Ltd. 1996 (12) TMI 7 - SUPREME COURT we admit this additional ground for disposal on merits. Computation of operating margin - HELD THAT - MAP resolution which resulted in the reduction of the cost (thereby reduction in the returned loss) and as contended by the Ld AR will have an impact on the other TP adjustment done with AEs other than Japan. The argument of the Ld AR that the impact of reduced loss which resulted in additional income being offered to tax should be given effect in re-computing the segmental margin requires looking at the matter afresh. Hence we remit the issue back to the AO for re-computation of the operating margins. The AO is directed accordingly. This ground is allowed in favour of the assessee for statistical purposes.

Summary

Issues Involved:
1. Adjustment for extraordinary expenses.
2. Adjustment for foreign exchange fluctuations.
3. Adjustment for customs duty.
4. Adjustment for underutilization of capacity.
5. Re-computation of operating margins pursuant to MAP resolution.

Detailed Analysis:

1. Adjustment for Extraordinary Expenses:
The assessee contended that significant start-up costs were incurred in setting up the Common Heat Exchangers (CHE) production line, which affected profitability. The TPO did not consider these adjustments, and the DRP upheld this decision. The Tribunal noted that this issue is intertwined with the underutilization of capacity and remitted it back to the TPO/AO for fresh consideration based on merits.

2. Adjustment for Foreign Exchange Fluctuations:
The assessee argued that due to the depreciation of the Indian Rupee, the cost of imported raw materials increased, which was not attributable to transfer pricing of raw materials from its AEs. The TPO denied the adjustment, citing that the loss arose from import costs and was not suitably negotiated. The Tribunal, referencing the case of Honda Trading Corp. India Pvt. Ltd., held that adjustments for foreign exchange fluctuations should be considered to eliminate differences materially affecting profits. The issue was remitted to the AO/TPO for fresh consideration.

3. Adjustment for Customs Duty:
The assessee incurred significant customs duty charges due to high import content of raw materials, unlike the comparable companies. The TPO and DRP rejected the adjustment. The Tribunal, following precedents like Gates Unitta India Company (P.) Ltd., held that adjustments for customs duty should be allowed to eliminate differences in operating margins. The issue was remitted to the AO/TPO for fresh consideration.

4. Adjustment for Underutilization of Capacity:
The assessee argued that due to reduced demand from Toyoto Kirloskar Motor Ltd., it operated at a lower capacity, affecting profitability. The TPO and DRP denied the adjustment, stating the assessee operated at a higher capacity than comparables. The Tribunal noted that the TPO did not consider all product lines and used a simple average method, which was inappropriate. Citing cases like Moog Control (India) Pvt. Ltd., the Tribunal held that capacity utilization should be computed as a weighted average. The issue was remitted back to the TPO/AO for fresh consideration.

5. Re-computation of Operating Margins Pursuant to MAP Resolution:
The assessee sought re-computation of operating margins considering the revised transfer pricing of international transactions as concluded under the Mutual Agreement Procedure (MAP) with Japan. The Tribunal admitted the additional ground, noting that the MAP resolution reduced the cost base and affected other TP adjustments. The issue was remitted to the AO for re-computation of operating margins.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, with all major issues remitted back to the TPO/AO for fresh consideration and re-computation, ensuring that appropriate adjustments are made to reflect accurate operating margins.