Income Tax Appellate Tribunal - Chennai
Assistant Commissioner Of Income Tax, ... vs Armstrong International Private ... on 6 April, 2026
आयकर अपील य अ धकरण, 'डी ' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH, CHENNAI
ी मनु कुमार ग र, या यक सद य एवं ी एस. आर. रघुनाथा, लेखा सद य के सम$
BEFORE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND
SHRI S. R. RAGHUNATHA, ACCOUNTANT MEMBER
आयकर अपील सं./ITA No.: 1612/Chny/2024
नधा%रण वष%/Assessment Year: 2012-13
ACIT, Armstrong International Private
Corporate Circle -1(1), vs. Limited,
Chennai. P 46 Eighth Avenue Domestic Tariff
Area,
Natham Sub Anjur Village Mahindra
World City,
Chengelpet - 603 002.
[PAN: AAGCA-6963-P]
(अपीलाथ'/Appellant) (()यथ'/Respondent)
आयकर अपील सं./ITA No.: 1704/Chny/2024
C.O.No.55/Chny/2024 (in ITA No.: 1704/Chny/2024)
नधा%रण वष%/Assessment Year: 2013-14
ACIT, Armstrong International Private
Corporate Circle -1(1), vs. Limited,
Chennai. P 46 Eighth Avenue Domestic Tariff
Area,
Natham Sub Anjur Village Mahindra
World City,
Chengelpet - 603 002.
[PAN: AAGCA-6963-P]
(अपीलाथ'/Appellant) (()यथ'/Respondent/ Cross Objector )
Assessee by : Mr. Vikram Vijayaraghavan, Advocate
Department by : Mr. Karthik Dasari, JCIT
:-2-:
ITA No.: 1612, 1704/Chny/2024,
C. O.No .5 5 / C hn y/2 0 2 4
सुनवाई क7 तार ख/Date of Hearing : 09.02.2026
घोषणा क7 तार ख/Date of Pronouncement : 06.04.2026
आदे श /O R D E R
PER S. R. RAGHUNATHA, AM:
These are appeals filed by the Revenue against separate orders of Learned Commissioner of Income Tax (Appeals), Chennai-16 (hereinafter referred to as "ld.CIT(A)"), both dated 05.02.2024 for the assessment years 2012-13 & 2013-14 (hereinafter in short "AY") against the assessment order dated 29.04.2016 and 19.01.2017 respectively passed u/s.143(3) r.w.s. 92CA of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The CO No.55/Chny/2024 filed by the Assessee against ld.CIT(A) order for AY 2013-
14.
2. At the outset, both the parties agreed that the issues raised by the revenue for both the assessment years are identical. Therefore, we take up appeal for 2012-13, as lead case and the result of which will be followed mutatis mutandis for AY 2013-14.
3. The assessee is a private limited company incorporated in India and wholly owned subsidiary of Armstrong Global Holdings Inc., USA (hereinafter called as 'Amstrong US'). The assessee has pioneered into various energy saving developments in generation and distribution of steam compressed air and hot water in term of its products, service and engineering offerings. The assessee filed its return of income (RoI) for AY 2012-13 on 26.11.2012 admitting Nil income and current year loss of Rs.8,30,81,494/-. Later, the return was selected for scrutiny, and since assessee company had international transactions with its Associated Enterprise (AE), the Assessing Officer [AO] made reference to Transfer Pricing Officer [TPO] u/s.92CA(1) of the Act for :-3-:
ITA No.: 1612, 1704/Chny/2024, C. O.No .5 5 / C hn y/2 0 2 4 determining arm's length price with reference to all the transactions reported in Form 3CEB filed by the assessee for AY 2012-13.
4. Pursuant to the reference by the AO, the TPO vide his order dated 28.01.2016 u/s.92CA(3) of the Act made certain adjustments to arm's length price of international transactions undertaken by the assessee company [adjustment in the income of the assessee towards manufacturing segment to the tune of Rs.2,96,10,541/-]. Thereafter, draft assessment order was issued by the AO on 24.03.2016 u/s.144(3) r.w.s 92CA of the Act, wherein the AO has disallowed forex loss to the tune of Rs.1,65,45,780/-. Aggrieved over the said draft assessment order, the assessee filed an appeal before ld.CIT(A) and the ld.CIT(A) vide its order dated 05.02.2024 partly allowed the appeal. The Revenue has preferred an appeal before this ITAT., Chennai in ITA No.1612/Chny/2024. The Ld.AR submitted that the appeal filed by the Assessee in IT(TP)A No.9/Chny/2024 for the A.Y.2012-13 is withdrawn as it is settled under VsV Scheme.
5. The Assessee in its TP study had aggregated the international transactions and benchmarked them at entity level by applying Transactional Net Margin Method (in short 'TNMM'). The assessee is noted to have computed its margin at 11.15% after claiming idle capacity adjustment. The TPO vide his order dated 28.01.2016 accepted the selection of TNMM method as the most appropriate method and also acceded to the PLI adopted by the assessee. The TPO however was not agreeable to the manner of computation of 'operating profits'. According to the TPO, the idle capacity adjustment was not allowable. Accordingly, the TPO reworked the margin of the assessee at -26.18%. The TPO also rejected the search conducted as per TP study report and performed a fresh search and included some additional comparable companies while retaining some comparable companies of Assessee, totalling to nine (9) comparable companies and arrived at average margin of 10.68%. The TPO :-4-:
ITA No.: 1612, 1704/Chny/2024, C. O.No .5 5 / C hn y/2 0 2 4 accordingly proposed an upward adjustment of Rs.3,13,90,450/-. Later the TPO has passed a rectification order dated 07.03.2016 wherein he has reduced the TP adjustment to Rs.2,96,10,541/-.
6. On appeal, the ld.CIT(A) has granted idle capacity adjustment and also directed the TPO to exclude two comparable companies selected by the TPO. Further, the ld.CIT(A) has also deleted the corporate tax disallowance of restatement of forex loss on ECB. Aggrieved by the ld.CIT(A) order, the Revenue has filed these appeals, and the Assessee has filed cross objection in respect of the issues deduced against the Assessee by the ld.CIT(A) for the A.Y.2013-14 only.
7. We first take up the issue relating to primary transfer pricing adjustment of Rs.2,96,10,541/-. At the outset, the Ld.DR and Ld.AR of the assessee submitted that, if Ground Nos.2 to 4 are decided in assessee's favour, then the transfer pricing margin adjustment of Rs. 2,96,10,541/- shall stand vacated as the margin(s) would be within the arm's length range. Hence, with the consent of both the parties, we take up these grounds first.
8. The Revenue has raised Ground No.2 & 3 in relation to idle capacity adjustment. The Ld.DR submitted that the TPO has indicated multiple reasons for not granting the idle capacity adjustment. The Ld.DR reiterated and relied on the findings in the TP order in relation to this issue and pointed out that the Assessee failed to provide basis and break up of various expenses. Further, the Ld.DR stressed on the fact that the ld.CIT(A) has not controverted any of the factual findings of the TPO, instead, the ld.CIT(A) on the basis of the judicial precedents concluded that idle capacity adjustment is allowable, which is not acceptable. Further, the Ld.DR emphasized that vide ground no.3, the revenue would like to specifically submit that the expenses considered for the purpose :-5-:
ITA No.: 1612, 1704/Chny/2024, C. O.No .5 5 / C hn y/2 0 2 4 of idle capacity adjustment are not relating to manufacturing and questioned the basis of quantification of the idle capacity adjustment.
9. The Ld.AR submitted that the Assessee is in its second year of manufacturing operations and as such it is not able to observe the entire fixed cost. The Ld.AR also pointed out that as per data published by RBI average capacity utilization in the manufacturing sector during the subject A.Y. is around 75%, whereas the Assessee has achieved only 32.69% and hence the idle capacity should be adjusted. In this regard, the Ld.AR invited our attention to Page 7 Para 4.1.4 of the ld.CIT(A) order.
10. We have heard the rival submissions and perused the material on record. It is an admitted fact that the Assessee is in its initial years of operation, and it is a natural phenomenon in the manufacturing sector, which is capital intensive, to have huge fixed cost in the initial years. In fact, the revenue ratio is inversely proportionate in the initial years. The Ld.AR also submitted that certain new technology (concept owned by AE) were employed during the subject A.Y. and for the same the Assessee had to undertake extra marketing efforts to create awareness. Therefore, we in principle concur with the view taken by the Ld.CIT(A) in holding that capacity utilization adjustment should be granted. In this regard, we also rely on the jurisdictional Tribunal decision in the case of Eversendai Construction Pvt Ltd Vs DCIT in IT(TP)A.No.14/Chny/2025 dated 09.01.2026 wherein it is held as under:
"It is now well-settled that under TNMM, comparability must account for differences in functions, assets, and risks. Idle capacity, particularly in early years of ramp-up can distort net margins if not adjusted. We note that several Tribunals as referred supra have upheld idle capacity adjustments where a tested party incurs disproportionate fixed costs in start-up years or experiences underutilization affecting profitability. The assessee's evidence shows a clear capacity/operational ramp-up phase in FY 2010-11 and a dramatic improvement in cost absorption in FY 2011-12 and also a transparent and documented methodology. The Revenue has not demonstrated that the methodology is unreasonable, nor does it identify specific comparables demonstrating superior capacity utilization justifying denial of adjustment. Hence, we allow the idle capacity adjustment. The AO/TPO shall grant :-6-:
ITA No.: 1612, 1704/Chny/2024, C. O.No .5 5 / C hn y/2 0 2 4 this adjustment in the EPC segment in accordance with the methodology furnished and validated by the assessee."
11. Relying on the aforesaid decision, we hold that the idle capacity adjustment has to be granted. Though in principle we are in agreement with the ld.CIT(A) that idle capacity adjustment has to be granted, we also note that the ld.CIT(A) has not adjudicated on the various factual findings in the TP order in relation to quantification of idle capacity adjustment (refer Para 9.2 & 9.3 of TP order) and the Ld.DR has also emphasized on the same. Accordingly, we direct the Assessee to furnish the details/information as mentioned in Para 9.2 & 9.3 of the TP order and then the TPO may quantify the idle capacity adjustment and allow the same. Accordingly, the corresponding ground of appeal is partly allowed for statistical purposes.
12. Ground No.4 The Revenue has challenged the exclusion of two comparable companies viz., DHP India Ltd and Uni Klinger Ltd
13. The Ld.DR contended that once TNMM is adopted as the most appropriate method it will take care minor functional dissimilarities and as along as the broad functions are comparable, in this case manufacturing, then these comparables cannot be excluded. On the other hand, the Ld.AR contended that DHP India Ltd operates in different industry and Uni Klinger Ltd segmental result relating to valve division is not.
14. We have heard the rival contentions and perused the material on record. Though the contention of the Ld.DR that under TNMM broad functionality is sufficient is acceptable, we cannot discard the fact that even TNMM the comparable companies should be from the same industry. In this instant case, DHP India Ltd is operating in consumer durable industry whereas the Assessee operates in industrial sector. Accordingly, we hold that DHP India Ltd cannot be considered as a comparable. In so far as Uni Klinger Ltd is concerned it is an :-7-:
ITA No.: 1612, 1704/Chny/2024, C. O.No .5 5 / C hn y/2 0 2 4 undisputed fact that segmental results are not available and as such it cannot be considered as comparable. Accordingly, Ground no.4 is dismissed.
15. Ground No.5 is in relation to disallowance of Forex loss on restatement of ECB. The AO has disallowed the Forex loss on the grounds that it is mere restatement and that to it is in the capital field and therefore it is not allowable. The ld.CIT(A) by relying on the decision of the ld.CIT(A) in Assessee's own case in A.Y.2014-15 deleted the addition.
16. The Ld.DR contended that Foreign exchange fluctuation in respect of capital items and that too restatement being notional loss is not allowable. Further, the Ld.DR emphasized that post introduction of Section 43A of the Act, only realized forex loss can be considered for the purpose of capitalization subject to certain other conditions and all other forex loss relating to capital is not allowable.
17. The Ld.AR contended that it is consistently following this method of treatment and he relied on the jurisdictional Tribunal decision in the case of Green Star Fertilizers Ltd Vs DCIT in ITA.No.34 & 35/Chny/2020 dated 31.12.2020.
18. We have heard the rival contentions and perused the material on record. We note that the ld.CIT(A) has decided this issue in A.Y. 2014-15 in favor of the Assessee and the Ld.AR stated at bar that the department has not filed further appeal and the issue has reached finality in the Assessee's case. To maintain the principle of consistency we also hold that the foreign exchange loss on ECB restatement is allowable. In this regard, we also gainfully rely on the jurisdictional Tribunal decision in the case of Green Star Fertilizer (supra). We reproduce final conclusion in the said decision as under:
:-8-:
ITA No.: 1612, 1704/Chny/2024, C. O.No .5 5 / C hn y/2 0 2 4 "In this view of the matter and by respectfully following the decision of co-ordinate Bench in the case of M/s.Hyundai Motor Company Ltd. Vs. DCIT (supra), which in turn followed the decision of M/s. Cooper Corporation Vs. CIT and also by following the decision of Hon'ble Supreme Court in the case of CIT vs. Tata Iron & Steel Co.Ltd. (supra), we are of the considered view that there is no error in the findings recorded by the learned CIT(A) that in absence of applicability of section 43A of the Act, loss claimed by the assessee on account of exchange fluctuation loss on ECB loan availed for acquisition of indigenous assets revenue in nature deductible u/s.37(1) of the Act cannot be considered as capital in nature and added back to the cost of assets. Hence, we are inclined to uphold the findings of the learned CIT(A) and reject the grounds taken by the Revenue for both the assessment years."
19. Respectfully following the same, we hold that the ld.CIT(A) has rightly allowed the forex loss on ECB. Hence, this Ground no.5 of the appeal is dismissed.
20. In the result the revenue appeal in ITA.No.1612/Chny/2024 is partly allowed.
ITA No.1704/Chny/202421. Ground Nos.2 is identical to Ground 2 & 3 in ITA No.1612/Chny/2024; Ground no.3 is identical to Ground no.4 in ITA.No.1612/Chny/2024 and Ground no. 6 is identical to Ground no.5 in ITA.No.1612/Chny/2024. Accordingly, the decision rendered in these issues in ITA.No.1612/Chny/2024 (supra) is applicable mutatis mutandis. Ground nos. 4 & 5 are independent in relation to exclusion of comparable Acropetal Technologies Ltd.
22. The Ld.DR contended Acropetal Technologies Ltd is a comparable selected by the Assessee and as such it cannot seek for exclusion later. Further, the Ld.DR contended that the Assessee has not furnished sufficient evidence to substantiate that this comparable was involved in financial irregularities.
:-9-:
ITA No.: 1612, 1704/Chny/2024, C. O.No .5 5 / C hn y/2 0 2 4
23. The Ld.AR contended that initially when the TP documentation was prepared the Assessee was not aware about the financial irregularities committed by Acropetal Technologies Ltd. It came to light later during the course of TP assessment and therefore the Assessee sought exclusion.
24. We have considered the rival contentions and perused the material on record. We note that Acropetal Technologies Ltd was involved in window dressing of its financials and the said information was publicly available little later. In fact, this Tribunal in many cases has held that Acropetal Technologies Ltd was involved in certain financial irregularities and excluded the same. The jurisdictional Tribunal in the case of Caterpillar India Private Ltd Vs DCIT ITA.No.2749/Chny/2017 has held as under:
"Acropetal Technologies Ltd.
This entity has reflected margin of 61.11%. The Ld. AR seek exclusion of the same on the ground that financial results of this entity are window- dressed and this entity is primarily engaged in outsourcing its activities to third-parties. This is abnormal year of operation and this is high risk bearing entity with significant R&D activities. The Ld. AR has relied on the decision of Chennai Tribunal in the case of M/s Doosan Power Systems India Pvt. Ltd. (ITA No.1885/Chny/2017 & ors. dated 23-06-2023) which is for same AY 2013-14. We find that in this decision, the bench has excluded this entity on the ground that financials of this entity are based on fraud committed as per clear-cut finding of SEBI adjudicator. Considering the same, we direct Ld.TPO to exclude this entity from comparable matrix."
25. Respectfully following the jurisdictional Tribunal decision as above, we hold that Acropetal Technologies Ltd cannot be considered as a comparable and therefore the ld.CIT(A) has rightly excluded the same. The Ground Nos.4 & 5 are dismissed.
26. In the result, the revenue appeal in ITA No.1704/Chny/2024 is partly allowed.
CO No.55/Chny/2024 for the A.Y. 2013-14:
27. The Assessee had filed cross objection in respect of issues which were decided against the assessee by the ld.CIT(A). During the course of hearing, :-10-:
ITA No.: 1612, 1704/Chny/2024, C. O.No .5 5 / C hn y/2 0 2 4 the Ld. AR indicated that he is pressing only the ground in relation to rejection of working capital adjustment and he is not pressing all other grounds raised in the CO. Accordingly, grounds nos.1,2 and 4 to 8 are dismissed as not pressed.
28. Ground no.3 is in relation to rejecting of working capital adjustment. The Ld.AR contended that the TPO erred in not accepting the assessee's claim of working capital by erroneously holding that the adjustment would only be applicable if the Assessee's working capital was negative.
29. On appeal, the ld.CIT(A) held that the cost ascribable to the working capital would be different for different enterprises depending on the cost of fund to the enterprise, the cost of money in the economy it operates etc. In view of these, a reasonable accurate adjustment is not possible, as the differences in working capital requirements itself is based on various assumptions. Besides, that ld.CIT(A) also held that the Assessee had failed to demonstrate such material differences so as to warrant an adjustment.
30. The Ld.AR contended that working capital represents the operating liquidity available to an enterprise for funding its day-to-day operations and there are significant differences in the levels of working capital employed by the comparables vis-à-vis the Assessee (Refer page 63 to 65 of factual paper book) and submitted its working capital details vis-à-vis comparable companies (refer Page 142-144 of factual paper book). The Ld.AR placed reliance on jurisdictional Tribunal decisions in support of his contention. The Ld.DR on the other hand relied on the order of lower authorities.
31. We have heard the rival contentions and perused the material on record. We are in agreement with Assessee's stance that working capital impact would be there in the margins and appropriate adjustment ought to be granted. Our view is also supported by the jurisdictional Tribunal decision in the case of :-11-:
ITA No.: 1612, 1704/Chny/2024, C. O.No .5 5 / C hn y/2 0 2 4 Doosan Power Systems India vs ACIT (IT(TP)A No.83/Chny/2018, dated 31.03.2021 wherein it is held as under:
"10. As regards working capital adjustment, it was the claim of the Ld.AR for the assessee that the ITAT, Chennai Bench in assessee's own case for the AY 2011- 12 has considered an identical issue and held that working capital adjustment is necessary while computing profit level indicator after analyzing the margins of comparables. Therefore, we are of the considered view that the Ld. TPO needs to compute working capital adjustment having regard to the margins of the comparables after considering the working capital levels. But, fact remains that the details with regard to working capital adjustment of comparables is not placed before us. Therefore, we are of the considered view that the matter needs to go back to the file of Ld. TPO to re-consider the working capital adjustment in light of the findings of the Tribunal in assessee's own case for AY 2011-12. Hence, this issue is set aside to the file of the Ld. TPO."
32. Respectfully following the above decision, we also hold that the working capital adjustment should be granted subject to verification by TPO. The TPO shall provide an opportunity to the Assessee to file the relevant computation of working capital adjustment with the final set of comparable companies and then decide the issue in accordance with law. Accordingly, this Ground no.3 is allowed for statistical purposes.
33. In the result, the CO by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 06th April, 2026 at Chennai.
Sd/- Sd/-
(मनु कुमार िग र) (एस. आर. रघुनाथा)
(MANU KUMAR GIRI) (S. R. RAGHUNATHA)
ाियक सद /Judicial Member लेखासद /Accountant Member
चे ई/Chennai,
दनांक/Dated, the 06th April, 2026
JPV
आदे श की ितिलिप अ ेिषत/Copy to:
1. अ पीलाथ!/Appellant
2. +थ!/Respondent
3.आयकर आयु1/CIT- Chennai/Coimbatore/Madurai/Salem
4. िवभागीय ितिनिध/DR
5. गाडE फाईल/GF PRASANNA Digitally signed by PRASANNA VANI JETTY VANI JETTY Date: 2026.04.08 09:47:23 +05'30'