Income Tax Appellate Tribunal - Chennai
Triumph International (India) Private ... vs Dcit, Chennai on 4 April, 2019
आयकर अपीलीय अिधकरण, 'डी' ायपीठ, चे ई
IN THE INCOME TAX APPELLATE TRIBUNAL , 'D' BENCH, CHENNAI
ी एन.आर.एस. गणेशन, ाियक सद एवं ी एस.जयरामन, लेखा सद के सम#
BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER
AND SHRI S.JAYARAMAN, ACCOUNTANT MEMBER
आयकरअपीलसं/I.T.A. No.1035/Chny/2014
िनधा'रणवष'/Assessment Year : 2009-10
M/s. Triumph International (I) P.Ltd., Vs The Deputy Commissioner of
240B, Sengundram Village, Income Tax,
SingaperumalKoil, Company Circle III(2),
KanchipuramDist Pin :603 204. Chennai.
PAN: AABC T5775D
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओरसे/ Appellant by : Mr. Girish Dave, Sr. Advocate
यथ क ओरसे/Respondent by : Mr. M.Srinivasa Rao, CIT
सुनवाईक तार ख/Da t e of he ar in g : 07.02.2019
घोषणाक तार ख /D at e of Pr on oun c e m ent : 04.04.2019
आदे श/O R D E R
Per S.JAYARAMAN, AM:
The assessee filed this appeal against the order of the Deputy Commissioner of Income Tax, Company Circle-III(2), Chennai, dated 14.02.2014, passed in pursuance of the order passed by DRP, Chennai in F.No. DRP/CHE/61/2013 dated 20.12.2013 for assessment year 2009-10.
2. M/s Triumph International (India) Private Limited, the assessee, was incorporated in March 2002 as a wholly owned subsidiary of 2 ITANo.1035/Chny/2014 Triumph Universal AG, Switzerland which is ultimately held by Triumph International Spiesshofer & Braun KG (TISUB), Switzerland.Triumph India is engaged in the business of manufacturing and distribution of women foundation garment, swimwear and lingerie brand in India and commenced its commercial production during April 2008. Thus, this year was the first year of manufacturing for the assesee company. 2.1. The assessee has entered into various international transactions with Associated Enterprises (AEs) during financial year ended 31 March 2009. Its activities are bifurcated into 3 Segments, namely; a) manufacture & sales to group companies (AE segment), b) manufacture & sales in domestic market (Domestic segment) and c) distribution in domestic market.-- buy/sell (Distribution segment) . Since the assesse was in the initial year of operations in relation to the manufacturing activity, it claimed to have incurred significant start-up costs which, inter alia, included excessive raw material consumption, high fixed cost, under-utilization of installed capacity, under recovery of administrative costs, economic factors and other overheads on account of lower sales volume.Therefore, it claimed to have incurred huge costs during the first start-up year due to the following factors:- 3 ITANo.1035/Chny/2014
"Non-utilisation of full capacity in the first year of manufacturing operations. The average utilization rate for the period of operations was only l5.04%. As a result, the assets purchased for the production were underutilized and the fixed costs were not fully absorbed.
The company had also invested heavily on training its employees and other set-up costs during the year.
In any product life cycle, at the stage of inception, a company has to face the effects of learning curve, with abnormal material wastage, incur additional costs on training the employees during the training period to assure sustainable growth at the right quantity."
2.2 Thus, the assessee claimed that it has faced similar business and economic conditions during the year. Therefore, the huge losses incurred by it was on account of the above reasons, attributed to the start-up years of manufacturing operations, and is not due to transfer pricing reasons. In its TP document, the assessee aggregated all the international transactions entered into with AEs and benchmarked them by applying the Transactional Net Margin Method (TNMM). Its operating margin for the year ended 31st March 2009 was 18.60% vis-à-vis -1.80% for the assessee's selected comparable companies post certain adjustments. Based on them, the assessee had concluded that all the international transactions entered into with AEs were at arm's length. However, the TPO considered certain items of costs such as employee cost, electricity, heating oil, shipping, postage, miscellaneous expenses, etc as variable while reworking the capacity utilization adjustment claimed by the assessee and also did not grant relief for start-up 4 ITANo.1035/Chny/2014 expenses. On the domestic transactions, the AO made disallowance of foreign exchange fluctuation loss arising on restatement of foreign currency receivables/payables as notional loss, disallowed employee's contribution to Employee's Provident Fund (EPF) and Employees State Insurance Fund (ESI) under Section 36(1)(va) and granted credit for the TDS at Rs.3,74,032/- as against Rs.3,96,149/- claimed by the assesse. Aggrieved, the assesse filed its objections before the DRP and the DRP dismissed them. On giving effect to the order, the assessee filed this appeal with following grounds:
"1. The Appellant objects to the final assessment order dated 14.02.2014 passed under section 143(3) r.w.s. 92CA of the Income-tax Act, 1961 ('the Act') by the Deputy Commissioner of Income-tax, Company Circle -- III (2), Chennai ('the Assessing Officer'/'AO') for the aforesaid assessment year on the following among other grounds:
TRANSFER PRICING GROUNDS
2. Adjustment of Rs.1,42,23,286 to the value of international transaction of sales made to Associated Enterprises (AE) 2.1 The TPO's recommendation/computation in pursuance of DRP directions and the consequential final assessment order passed by the AO is erroneous in seeking to make an upward adjustment of Rs.
1,42,23,286/- to income/sales declared by the Appellant. 2.2 The AO/DRP erred in stating that "once idle capacity adjustment has been allowed there was no need to go to individual expenses" without appreciating the fact that selection of certain items of fixed costs is an important factor in computing the adjustment.
2.3 The DRP erred in confirming the order of the TPO/AO in treating certain items of expenditure as variable expenses, instead of fixed costs, such as employee cost, electricity, power, heating oil (diesel), repairs & maintenance (others). professional charges, communication and miscellaneous expenses while arriving at the adjustment for capacity utilization.
5 ITANo.1035/Chny/20142.4 The TPO/AO/DRP erred in not providing appropriate adjustment for start-up cost.
2.5 The DRP erred in confirming the order of the TPO/AO in not providing appropriate adjustment for excess employee cost incurred by the Appellant vis-a-vis comparable companies considering the start-up phase of operations.
2.6 The TPO erred in not providing appropriate adjustments for excess depreciation charged by the Appellant vis-ã-vis comparable companies considering the start-upphase of operations.
2.7 The DRP erred in confirming the order of the TPO/AO in not treating the travelexpenditure incurred in relation to implementation of SAP as abnormal cost and exclude the same while reckoning the operating cost for the purpose ofdetermination of ALP of international transactions. 2.8 The learned AO/DRP erred in not providing the adjustment to the arm's length margin of comparable companies on account of differences in the functional and risk profile of the Appellant vis-à-vis comparable companies mainly in respect of marketing, advertisement and promotion expenses.
CORPORATE TAX GROUNDS
3. Disallowance of foreign exchange fluctuation loss arising on restatement of foreign currency receivables/payables as notional loss 3.1 The DRP erred in confirming the order of the AO in treating the foreign exchange fluctuation loss amounting to Rs.5,17,50,001/- on account of foreign currency receivables/payables as notional loss and thereby erred in disallowing the said loss while arriving at the total income of the Appellant.
3.2 The DRP erred in confirming the order of the AO without appreciating that the loss on foreign exchange fluctuation has arisen entirely on restatement of foreign currency receivables/payables which are revenue in nature.
3.3 Without prejudice to the above, the DRP erred in confirming the order of the AO in not considering the credit entries to the extent of Rs.4,40,40,855/- in forex fluctuation account while disallowing Rs.5,17,50,001/- and as such the total loss on account of Foreign exchange fluctuation on revenue items is only Rs.77,09,146/- (i.e. difference between Rs.5,17,50,001/- and Rs.4,40,40,855/-). 3.4 Without prejudice to the above, the DRP/AO ought to have appreciated that the disallowance of foreign exchange fluctuation loss cannot in any event be higherthan the amount debited to the Profit & Loss account.
5. Disallowance of employee's contribution to Employee's Provident Fund 6 ITANo.1035/Chny/2014 (EPF) and Employees State Insurance Fund (ESI) under Section 36(1)(va) of the Act.
5.1 The final assessment order in pursuance of DRP directions is erroneous in disallowing an amount of Rs.17,76,433/- being employee's contribution EPF and ESI under Section 36(1)(va) of the Act. 5.2 The AO/ DRP ought to have appreciated that the Appellant has remitted the EPF and ESI contributions received from employees before the due date for filing of income tax return as per Section 139(1) of the Act and as such its disallowance is unwarranted.
6. Miscellaneous
6. 1 The Assessing Officer erred in granting credit for Tax Deducted at Source (TDS) for an amount of Rs.3,74,032/- as against a total TDS of Rs.3,96,149/- claimed by the Appellant in its return of income.
7. The Appellant craves leave to add, alter, amend, substitute, rescind, modify and/or withdraw in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal." 2.3 Since the Ld AR has withdrawn ground no. 4 and made the due endorsement in the record and the Ld DR has not objected to it, such grounds were not extracted, supra, and they are treated as dismissed as withdrawn.
3. The assessee pleaded for admission of additional grounds and submitted that for assessment year 2009-10, the Transfer Pricing Officer (TPO) concluded that :
(i) the manufacturing segment of the appellant caters to the need of the AE segment only; and hence the capacity utilization of 10.61% for the AE segment is rejected and;7 ITANo.1035/Chny/2014
(ii) capacity utilization of the appellant is to be reckoned at 15.04% after considering the production of the appellant at the manufacturing segment / entity level.
3.1 While issuing the order giving effect to the directions of Honorable Dispute Resolution Panel dated 05.02.2014, the TPO has accepted that the assessee's revenue consisted the following income streams:
Particulars Amt. ₹
Manufacturing -- Export Sale 20,80,31,348 AE Transaction
Manufacturing -- Domestic Sale 6,24,87,127 Non-AE Transaction Distribution -- Domestic Sale 12,60,36,884 Non-AE Transaction Total 39,65,55,259 3.2 The TPO while computing the margin of the assessee at a AE segment level within the manufacturing segment, ought to have reckoned the capacity achieved by the assessee with respect to the AE segment at 10.61% (Annexure A to the submission made to the TPO dated25th October 2012) instead of reckoning the capacity utilization at the manufacturing segment I entity level at 15.04%.
3.3 Before this Hon'ble Tribunal, among other grounds of appeal, the assesseehas challenged the final assessment order passed in pursuance of the directions issued by DRP. However, it has inadvertently omitted to raise specific ground that while allowing adjustment for under utilization of capacity in the manufacturing AE segment, the TPO ought to have reckoned the capacity achieved in the AE segment vis-à-vis capacity achieved by the comparable companies instead of comparing the entity level capacity (i.e. manufacturing relating to AEs and manufacturing relating to domestic segment).
3.4 The above grounds do not require investigation of additional facts as these details are available in the TP order. It is therefore prayed that these additional legal grounds may be admitted and decided on merits. The assesseerelied on the following decisions for admission of additional grounds of appeal:
• CIT Vs Associated Stone Industries (224 ITR 560 (SC) • CIT VsM.K.Yashwant Singh (231 ITR 145 (Del) • National Thermal Power Co Ltd (229 ITR 383 (SC) ADDITIONAL GROUNDS OF APPEAL
1. Without prejudice to the grounds of appeal already filed as part of Form 36B, the DRP / TPO while computing the adjustment for underutilization of capacity in the manufacturing segment has erred in considering the capacity utilized by the appellant at the whole manufacturing segment / entity level of 15.04% instead of considering 8 ITANo.1035/Chny/2014 the capacity utilized by the appellant only in respect of the AE segment within the manufacturing segment, which is as low as 10.61%."
4. We heard the rival submissions on the additional grounds and gone through relevant material. We find that the assessee's additional ground that "while computing the adjustment for under utilization of capacity in the manufacturing segment has erred in considering the capacity utilized by the appellant at the whole manufacturing segment / entity level of 15.04% instead of considering the capacity utilized by the appellant only in respect of the AE segment within the manufacturing segment, which is as low as 10.61%", is purely legal in nature and since this issue is not at all considered by the lower authorities, we therefore admit the additional ground and restore the matter to the file of the TPO/AO to consider it, de novo.
5. The Ld.AR submitted that though capacity utilization adjustment was granted by the TPO but he excluded certain costs from such adjustment. The appellant's capacity utilization was at 10.61%, as is pleaded in the additional grounds, supra, and the comparables capacity utilization was at 56.41%. However, the TPO has adopted higher rates for both of them which require reconsideration/ re-adjudication. Further, the Ld AR submitted that the TPO/AO/DRP erred in not providing appropriate adjustment for start-up cost and trouble cost and they havenot appreciated the fact that selection of certain items of fixed costs 9 ITANo.1035/Chny/2014 is an important factor in computing the adjustment. Further, the Ld. AR submitted that the DRP erred in confirming the order of the TPO/AO in not treating the one travel expenditure incurred in relation to implementation of SAP as abnormal cost and exclude the same while reckoning the operating cost for the purpose of determination of ALP of international transactions. In this regard, he placed reliance on the following decisions:-
Nippon Paint India P.Ltd in ITA No.779/Mds/2016, ITAT., Chennai Benches, Ariston Thermo India Ltd., Pune ITAT Bench in ITA No.1455/PN/2010 & In the case of Calsonic Kansel Motherson Products Ltd. Delhi ITA No. 667/Del/2015. Per contra, the Ld DR supported the orders of lower authorities.
5.1 We heard the rival submissions and gone through relevant material. It is clear from the above that the assessee contended before the income-tax authorities that adjustments are be made to the profit margin of the assessee on account of abnormal start-up costs and under capacity utilization being the initial year of operations.The capacity utilization adjustment granted by the TPO is, on admission of additional grounds of appeal, supra, already restored to the file of the TPO/AO to consider it, de novo. The Ld AR submitted that the 10 ITANo.1035/Chny/2014 TPO/AO/DRP erred in not providing appropriate adjustment for start-up cost and trouble cost and they have not appreciated the fact that selection of certain items of fixed costs is an important factor in computing the adjustment. Further, the Ld. AR submitted that the DRP erred in confirming the order of the TPO/AO in not treating the one travel expenditure incurred in relation to implementation of SAP as abnormal cost vis-à-vis, comparable which were already established in market and they did not have such factors. In our view, these factors are required to be adjusted so as to have a meaningful comparability analysis between the international transactions of the assessee and the comparables. In our considered opinion, in order to arrive at an appropriate adjustment, the entire factual matrix is required to be re-
examined/ verified on the basis of the material to be furnished by the assessee, which deserves to be carried out by the TPO/ Assessing Officer. Therefore, we restore these issues back to the file of the TPO/ Assessing Officer who shall allow the assessee a reasonable opportunity to make submissions and produce relevant material in support of its stand and thereafter the TPO/ Assessing Officer shall allow an appropriate adjustment in the operating margins of the assessee. 11 ITANo.1035/Chny/2014
6. The next issue is in connection with the disallowance of foreign exchange fluctuation loss arising on restatement of foreign currency receivables/payables as notional loss .In this regard, the relevant portion of the order of the AO / DRP is extracted as under :
"5.2 Normally, a Foreign ExchangeLoss/gain can be realized or unrealized. Realized foreign exchangeLoss/gain is the difference in rate of foreign exchangebetween the date of invoice and date of receipt/ payment. Unrealized foreign exchange loss/gainrefers to the Loss/ gain due to restatement of assets and liabilities as on the balance sheet date at the prevailing exchange rate. As unrealized foreign exchange loss is allowable only on revenue account, the assessee was requested to produce ledger extract and the same was submitted vide letter dated 12.03.2013.
5.4 An examination of the above ledger exact showed that the assessee has the practice of restating its assets and liabilities at the prevailing rate of exchange at the end of every month and reversing the entry subsequently However, it is noticed that certain entries represents notional losses, the same cannot be allowed as expenditure. The lists of such entries as extracted from assessee's submissions are as under:-
Date Particulars Veh.Type Veh.No. Debit Credit 30.06.2008 To Triumph Journal AJV/08/360 4,24,14,484 International voucher Services AG 30.06.2008 To Journal JV/08/2164 1,85,05,000 Triumph Universal 31.07.2008 To Triumph Journal JV/08/2525 91,69,483 International Services AG 5.5 The excessof debit entries over that of credit i.e. to say a sum of Rs.5,17,50,001/- [4,24,14,484 + 1,85,05,000 - 9,69,483} being notional loss is disallowed and added back to total Income.
[Addition: Rs.5,17,50001/-
................................................................................................. .
................................................................................................. 12 ITANo.1035/Chny/2014 ................................................................................................. .
................................................................................................. ................................................................................................ ................................................................................................. The assessee on the other hand has claimed, that he follows mercantile system of accounting consistently every year and accordingly restates the trading liabilities incurred in foreign currency at the end of every month and reverses such restatement at the commencement of immediately succeeding month. As a matter of: consistency the assessee claimed that the loss should have been allowed.
We have considered the facts of the case. We do not find any infirmity in the AO's order. The objection is rejected."
6.1 In this regard, the Ld AR submitted that the ratio of the decision of the Hon'ble Apex Court in Commissioner of Income Tax, Delhi Vs M/s. Woodward Governor India P. Ltd., be applied. Alternatively, he pleaded that certain entries viz., the opening entries in April 2008 and omission of certain entries in page 57 of ledger extract in the copy of the paper book be taken into account.
6.2 We heard the rival submissions and gone through relevant material. It is clear from the above that this issue requires re- examination / verification by the TPO/ Assessing Officer of the relevant material which are to be furnished by the assessee. Therefore, we restore the matter back to the file of the TPO/ Assessing Officer, who 13 ITANo.1035/Chny/2014 shall after affording effective opportunity to the assesse decide this issue in accordance with law .
7. The next issue is in connection with the disallowance of employee's contribution to Employee's Provident Fund (EPF) and Employees State Insurance Fund (ESI) under Section 36(1)(va) of the Act.
7.1 In this regard , the Ld AR submitted that the AO/ DRP ought to have appreciated that the assessee has remitted the EPF and ESI contributions received from employees before the due date for filing of income tax return as per Section 139(1) and as such its disallowance is unwarranted.
7.2 We heard the rival contentions. Since the impugned payments were made within the due date for filing of return of income, relying on the Hon'ble Jurisdictional High Court decision in the case of M/s. Industrial Security & Intelligence India Pvt. Ltd. in T.C.A. Nos. 585 & 586 of 2015 & MP No.1 of 2015 dated 24.07.2015, the corresponding grounds are allowed.
8. The last ground is that the Assessing Officer has granted credit for Tax Deducted at Source (TDS) for ₹3,74,032/- as against a total TDS 14 ITANo.1035/Chny/2014 of ₹3,96,149/- claimed by the assessee in its return. In this regard, we direct the AO / TPO to examine this issue and grant due credit to the assessee while giving effect to this order.
9. In the result, the assessee's appeal is partly allowed for statistical purposes.
Order pronounced on 04th April, 2019
Sd/- Sd/-
(एन.आर.एस. गणेशन) (एस.जयरामन)
(N.R.S.Ganesan) (S.Jayaraman)
( या यक सद!य /Judicial Member) (लेखा सद!य /Accountant Member)
चे नई/Chennai,
$दनांक/Dated 4th April, 2019
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आदे श क त(ल)प अ*े)षत/Copy to:
1. Appellant 2. Respondent 3. आयकर आय+
ु त (अपील)/CIT(A)
4. आयकर आयु+त/CIT 5. )वभागीय त न/ध/DR 6. गाड2 फाईल/GF