Income Tax Appellate Tribunal - Chennai
M/S.Brakes India Pvt. Ltd.,Chennai vs Dcit, Ncc-8(1), Chennai on 3 June, 2025
आयकर अपीलीय अिधकरण,'डी' यायपीठ,चे ई
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH, CHENNAI
ी मनु कुमार िग र , ाियक सद एवं ी एस .आर.रघुनाथा, लेखा सद के सम
BEFORE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER
AND SHRI S.R.RAGHUNATHA, ACCOUNTANT MEMBER
आयकर अपीलसं./IT(TP)A No.: 47/CHNY/2024
िनधारण वष / Assessment Year: 2020-21
Brakes India Pvt. Ltd., The Deputy Commissioner
50, MTH Road, V. of Income Tax,
Padi, Non-Corporate Circle 8(1),
Chennai - 600 050. Chennai.
[PAN:AAACB 2533Q]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ की ओर से/Appellant by : Shri Vikram Vijayaraghavan, Advocate
थ की ओर से/Respondent by : Shri A. Sasikumar, CIT
सुनवाई क तार ख/Date of Hearing : 10.03.2025
घोषणा क तार ख/Date of Pronouncement : 03.06.2025
आदे श /O R D E R
PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the final assessment order passed by the Assessment Unit, Income Tax Department u/s. 143(3) r.w.s. 144C(13) r.w.s.144B of the Income Tax Act, 1961 (hereinafter the 'Act') for the assessment year 2020- 21 dated 06.07.2024 in pursuant to the directions of the Dispute Resolution Panel-2, Bengaluru dated 06.06.2024.
:-2-: IT(TP)A. No:47/CHNY/2024
2. The assessee has raised the following grounds of appeal:
The grounds of appeal listed below are without prejudice to each other.
1. The order of the AO /TPO/ DRP is contrary to law, facts and circumstances of the case.
2. Transfer Pricing Adjustment 2.1 The TPO/AO and DRP erred in making/ confirming an adjustment of Rs.22,94,179 /- under Transfer Pricing provisions of the Indian Income Tax Act, 1961 r.w. Rules, 1962.
2.2 Comparability Analysis incorrectly carried out by TPO/DRP:
2.2.1 Comparables wrongly included by TPO/DRP: The TPO and DRP erred in including Bundy India Ltd and Minda TG Rubber Pvt Ltd as comparable companies though they are functionally dissimilar to the Appellant 2.2.1 Comparables wrongly rejected by TPO/DRP: The TPO and DRP erred in excluding Canara Workshop without appreciating that it fell in the same overall segment as that of the Appellant and hence is functionally similar.
2.3 Economic adjustment not provided by TPO/DRP: 2.3.1 3-year comparison for both comparables and Appellant: The TPO/AO and DRP failed to appreciate that considering the severe economic slowdown during FY 2019-20, the weighted average PLI of Brake Division for 3 years ending with the relevant Assessment Year SHOULD have been compared with the weighted average PLIs of the Comparable companies for the three years ending with the relevant Assessment Year, in order to provide a like-to-like comparison as posited by Rule 10B.
2.3.1 Alternatively, the PLI of the Appellant for AY 2020-21 should have been compared with the PLI for the comparable companies for the single impugned AY 2020-21. The learned TPO instead erred in comparing the PLI of the Appellant for AY 2020-21 with the weighted average PLI of comparable companies for the three years FY 2017-18, 2018-19 and 2019-20 ignoring the severe economic downturn in AY 2020-21 (FY 2019-2020) thereby conducting a skewed and incorrect comparability analysis which is not as per provisions of IT Act r.w.Rules.
3. Initiation of Penalty Proceedings u/s 270 A incorrect: The AO erred in initiating penalty proceedings u./s 270A of the Act on all the disallowances made in the order u/s 143(3) rws 144C(3).
4. The Appellant craves leave to file additional grounds at the time of hearing.
:-3-: IT(TP)A. No:47/CHNY/2024
3. The brief facts of the case are that the Assessee is a Company engaged in the business of manufacturing of brakes and braking Systems. The Assessee has two divisions - "brakes division" and "Foundry Division". The assessee filed its return of income for the A.Y.2020-21 on 30.12.2020 declaring a total income of Rs.142,07,88,130/-. The case was selected for scrutiny through CASS and accordingly statutory notices were issued to the assessee.
A reference u/s.92CA(1) of the Act was made for determination of ALP in respect of specified domestic transactions reported in form No.3CEB. In the Transfer Pricing report, the Assessee has conducted a search process for its Brakes Division using PROWESSIQ and identified 6 comparable Companies whose three years weighted average PLI (OP/OC) ranging from -0.36% to 14.36% and the median was 3.85%. The Assessee has computed its PLI as 5.30% and claimed the transaction is at Arm's length. 3.1 The TPO rejected the comparable companies of the assessee and arrived at four comparable companies, introducing Bundy India Ltd and retaining three comparable of the assessees viz.,
- Minda TG Rubber Pvt Ltd.,
- Auto Pins India and
- Jamna Auto India Ltd :-4-: IT(TP)A. No:47/CHNY/2024 arriving at arithmetic mean of comparable at 7.13% against the PLI arrived by the assessee at 5.30% to arrive at an ALP of Rs.22,94,179/- (para 6.3.1 of the TPO order) by passing an order u/s.92CA(3) of the Act dated 14.07.2023. The AO issued a draft order u/s.144C(1) of the Act dated 29.09.2023 proposing to make variations as additions by providing 30 days time to accept or to file an objection to DRP. Later the assessee filed an objection before the DRP. On perusal of the objections and after providing the opportunity to the assessee the directions are issued by confirming draft order of the AO by passing an order u/s.144C(5) of the Act dated 06.06.2024. According to the Directions of the DRP the AO passed an order u/s.143(3) r.w.s.144C(3) r.w.s.144B of the Act dated 06.07.2024.
4. Aggrieved by the order of the AO / DRP the assessee is before us.
5. The ld.AR for the assessee submitted the following arguments:
Ground No. 1. and 2.1 are general and Ground No.2.2 is not pressed by the ld.AR and hence dismissed as not pressed.
:-5-: IT(TP)A. No:47/CHNY/2024
6. Gr No. 2.3: Economic adjustment not provided by TPO/DRP:
(i) Financial Year 2019-20 was an extraordinary year of operations:
1) Financial Year 2019-20 relevant to Assessment Year 2020-21 faced severe slowdown in the Indian Automotive industry due to reasons such as : (PB dated 28th January, 2025) a. Switch over to BS IV to BS VI emission norms (skipping BS V) (GOI Circulars there in Page Nos.1 to 6 of Paper Book dated 28th Jan 2025); this resulted in reduction in demand for passenger and commercial during FY 2019-20.
b. NBFC liquidity crisis and corresponding increase in interest rates, triggered by IL&FS default on its debt obligations (Relevant extracts from ADB's report on NBFC crisis and an NBFC's Director's report for that financial year there in Pages 14 to 16 in Paper Book dated 28th Jan 2025). This resulted in a reduction in sale of both passenger and commercial vehicles. The downturn in these segments also affected the business of the Assessee.
c. Changes in axle norms allowing higher payload in commercial vehicle (CV), in turn increased the payload of both single and multi axle vehicles (Gross Vehicle Weight was increased) and with higher capacity available for each vehicle, fresh demand :-6-: IT(TP)A. No:47/CHNY/2024 for vehicles went down affecting our sale of commercial vehicle brakes in FY 2019-20 (relevant GOI Notification in Pages 7 to 13 in paper book dated 28th Jan 2025).
d. Increase in third party insurance premiums for motor vehicles (relevant IRDA Notification there in Pages 17 to 26 of paper book dated 28th Jan 2025). The increase in third party premiums has also resulted in a reduction in demand of passenger vehicles.
(2) Due to reasons mentioned in point (1) above, the automotive segment - OE vehicle sales and auto component industry got drastically impacted in FY 2019-20 (as compared to FY 2018-19) as follows:
a. 18% degrowth in passenger vehicles and 29% in commercial vehicles.
b. 47% degrowth in heavy commercial vehicles and 27% in light commercial vehicles (where Brakes India's presence is significant).
Above points are further clearly established through the official SIAM and ACMA reports of FY 2019-20 provided in PB dated 6th Jan 2025. (page 8, 16, 18 - SIAM, Page 28 - ACMA) :-7-: IT(TP)A. No:47/CHNY/2024 (3) Consequent to the above, sale of Brake Division of Brakes India Private Limited (BIPL) in FY 2019-20 witnessed 18% decrease over previous year and resultant reduction in profitability with fixed cost remaining more or less the same.
2.3.(ii). Given the above facts related to extraordinarily recessionary year - FY 2019-20 (AY 2020-21), the assessee in its reply to show cause notice dated 04.05.2023 for the Brakes division(**) had submitted the TPO comparing 3 years weighted average PLI of comparable companies (where two good years are there) with that of recessionary year (FY 2019-20) PLI of Brake Division, will not be an equitable comparison. So, the assessee requested:
a. Comparing FY 2019-20 PLI of Brake Division, BIPL with that of FY 2019-20 PLI of comparable companies (one-year vs one-year comparison) ; (or) b. Comparing the weighted average of 3 years PLI of Brake Division, BIPL with that of 3 years PLI of comparable companies (three years vs. three years comparison). The above fair comparison results in the following:
:-8-: IT(TP)A. No:47/CHNY/2024
Year PLI of Brake PLI of
Division, comparable
BIPL companies
FY 2019-20 alone 5.59 4.85
(or)
Average of 3 years viz., FY 2017-18, 9.41 7.39
2018-19 and 2019-20
** (Page 40 at 1st para to reply dated 16th May 2023 to SCN dated 04.05.2023) (Table in Page 120 of the Paper Book No. 1 dated 26.11.2024, also annexed to this letter) 2.3.(iii). However, the TPO did not even discuss the same during the proceeding nor in his TP Order dated 14.07.2023, though it was raised specifically in Reply to Show Cause Notice. 2.3.(iv) Subsequently, the assessee filed objections before the "DRP" including this ground of extraordinary year (FY 2019-20), but the DRP in its directions dated 06.06.2024 in para 2.3.6 at page 6 dismissed the assessee's objections as follows:-
"2.3.6 With regards to the Assessee's plea to compare the weighted average of the comparables with the weighted average of the Assessee, we note that as per the amended rules for the ALP determination vide S.O No.2860(E) dated 19.10.2015 which is effect from 01.04.2014, the range concept using the multiple year data is introduced. As per the amendment the weighted average of 3 years data of the comparables will be taken to compare the PLI of the tested party. The intent of the legislature was to even out the variations if any. Further, the range of 35th to 65th percentile is allowable to the tested party.
Therefore, we are of the opinion that the impact of the Covid 19 have been averaged out while calculating the PLI of the comparables which is effectively favourable to the Assessee.
In view of the same, we do not find merit in the contention of the Assessee Ground rejected"
:-9-: IT(TP)A. No:47/CHNY/2024 2.3.(v). In response, the assessee submitted that it is clearly documented that FY 2019-20 was an extraordinarily poor year due to downtrend in auto industries due to many factors as proved / substantiated above in point 1 via various markets reports as well as other data points including Government Orders and Circulars.
Thus, to ignore the market conditions and compared a weighted average of 3 years to the Assessee's impugned year would go against the very principle of comparability of analysis under the TP provisions of Chapter - X read with Rule 10B of IT Rules. More specifically the I.T Rules under Rule 10B(2) and 10B(3) require reasonable adjustments to be made to eliminate, material affects due to conditions prevailing in the market and read as follows:
"Rule 10B(2) (1) .........
(2) For the purposes of sub-rule (1), the comparability of an international transaction 94[or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:--
(a) the specific characteristics of the property transferred or services provided in either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;
(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
:-10-: IT(TP)A. No:47/CHNY/2024
Rule 10B(3)
(3) An uncontrolled transaction shall be comparable to an international
transaction 96[or a specified domestic transaction] if--
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or " (emphasis supplied) Also, the OECD guidelines (page 48 of PB dtd. 06.01.2025) specifically states reasonable adjustments to be made to eliminate material effects wherever differences arise due to conditions prevailing in markets, capacity utilization etc. 2.3.(vi) From the above Rules, it is clear that when market conditions are not the same for FY 2019-20 as compared to FY 2018-19 and FY 2017-18, an equitable comparison should have been either take the assessee's FY 2019-20 and comparable FY 2019-20 alone or compare 3 years viz FY 2017-18, 2018-19 and 2019-20 for both assessee and comparable.
2.3.(vii). The DRP circumvented the assessee's objections summarily dismissing them by referring to Notification dated 19.10.2015 (S.O.2860 (E) and held that the concept of multiple year data and range would take care of the issue at hand. This is an incorrect reading of the Notification which in fact clearly holds in :-11-: IT(TP)A. No:47/CHNY/2024 clause (2) referring to "Data set to be constructed under Rule 10C(A)" wherein it clearly states the manner of choosing previous two years has to be on the basis of there being similar comparable, uncontrolled transactions. In fact, if there does not exist similar comparable uncontrolled transactions in the previous two years, the data set can skip those respective years is what the notification clearly stating. Thus, the plain reading of the Notification itself would entitle that there has to be comparability viz a viz Rule 10B(2) and 10B(3) applications for the previous financial years to even be considered.
2.3.(viii). In other words, the Notification does not do away with comparability analysis or reasonable adjustments etc as prescribed in Rule 10B(2) and 10B(3). It merely reinforces the notion of comparability analysis has to be applied and then a data set of three years if available subject to being comparable has to be created. Thus, applying the very same notification and the concept of multiple year data and ALP which the Department is bound by, it is clear that FY 2019-20 alone is to be compared, as the earlier two years not directly comparable to the impugned year. In the alternative, in the interest of proper comparability three years' data set can be compared for both comparables and assessee.
:-12-: IT(TP)A. No:47/CHNY/2024 Therefore, ld.AR submitted that the DRP's reliance on the Notification is incorrect and the said Notification only supports the assessee's contentions (for better understanding of the application of the Notification, a flow chart and Table are attached). We would also like to point out that the range concept applies only when there are six or more comparable companies and so in the impugned assessment year ld. TPO has used only four comparable and has arrived at comparable PLI using simple arithmetic mean. Hence DRP's contention that range concept would even out the impact of one exceptional year does not apply to this instance.
Thus, the ld.AR prayed that only FY 2019-20 be compared, or an average of 3 years be compared to arrive at proper comparability as per TP provisions of the Act read with Rules. 2.3.(ix). Without prejudice to the above points, an alternative way of providing suitable economic adjustment is provided below in terms of fixed cost adjustment for lower capacity utilization as follows:
Year FY 2019-20 FY 2018-19
Fixed cost / turnover 19.83% 15.89%
Turnover of Brake Division Rs.320,430 lakhs Rs.404,189 lakhs
Fixed cost incurred Rs. 63,540 lakhs Rs. 64,235 lakhs
Quantum of adjustment Rs. 12,616 lakhs
Revised PLI of Brake Division, BIPL 9.75%
of FY 2019-20
Average PLI of comparable 7.39%
companies for three-year period
:-13-: IT(TP)A. No:47/CHNY/2024
6.1 The ld.AR placed a reliance on the following case laws for the above view:
(i) High Court of Bombay in CIT vs Petro Araldite (P) Ltd. IT APPEAL NO. 1540 OF 2014, {2018} 93 taxmann.com 438(Bombay)
(ii) ITAT Mumbai bench in Schott Glass India (P) Ltd vs ITO{2024} 159 taxmann.com 396 The ld.AR relied on the grounds of appeal filed by the assessee in respect of ground no.3, wherein the AO has erred in initiating penalty proceedings all disallowance made in the order u/s.143(3) r.w.s 144(c) of the Act.
6.2 Additional Ground: Further, the ld.AR stated that the R & D expenditure restriction made by DSIR to Rs.8,276 lakhs as compared to Rs.8,312 lakhs claimed. While disallowing the weighted deduction of Rs.54 lakhs (150% of the difference), the AO has not considered the expenditure incurred of Rs.36 lakhs, which is eligible to be claimed u/s.35(1)(iv) or u/s.37 of the Act. 6.3 Hence, the ld.AR prayed that the issue may please be remit back to the AO and he may verify the same and allow the claim of assessee u/s.35(1)(iv) or 37 as held by the Madras High Court in :-14-: IT(TP)A. No:47/CHNY/2024 Tube Investments of India Ltd Vs CIT reported in 260 ITR 94 (Mad) and Chennai ITAT in the case of Sundaram Clayton in ITA Nos.1376, 1254, 1355 & 1356/Chny/2018 dated 14.06.2021.
7. Per contra the ld.DR strongly supported the orders of the TPO and DRP and submitted that the orders are in accordance with law and hence prayed for confirming the same.
8. We have heard the rival contentions perused the material available on record gone through the orders of the lower authorities along with the paper books filed and case laws relied upon. The grievance of the assessee is that the TPO has not given economic adjustment to arrive at the PLI for the Financial Year 2019-20 relevant to Assessment Year 2020-21, since the automobile industry faced severe slowdown. We find that the assessee in their TP report has conducted a search process for its Brakes Division and identified 6 comparable whose 3 years weighted average PLI (OP/OC) ranging from -0.36% to 14.36% and median was 3.85%. The assessee computed its PLI as 5.30% and claimed the transaction is at arm's length. However, the TPO rejected the TP report of the assessee and applied the TNMM method as the Most Appropriate Method. The TPO considered the 3-year weighted average margin of the new :-15-: IT(TP)A. No:47/CHNY/2024 comparable companies chosen to arrive at range for determination of arm's length. The arithmetic mean arrived at 9.23% of comparable companies against the PLI of the assessee at 5.30%. The main contention of the ld.AR is the assessee for the Brakes Division the TPO comparing 3 years weighted average PLI of comparable companies (where two normal years are there) with that of recessionary year (FY 2019-20) PLI of Brake Division, will not be an equitable comparison. Hence, the assessee prayed for:
a. Comparing FY 2019-20 PLI of Brake Division, BIPL with that of FY 2019-20 PLI of comparable companies (one-year vs one- year comparison) ; (or) b. Comparing the weighted average of 3 years PLI of Brake Division, BIPL with that of 3 years PLI of comparable companies (three years vs. three years comparison). The above fair comparison results in the following:
Year PLI of Brake PLI of
Division, comparable
BIPL companies
FY 2019-20 alone 5.59 4.85
(or)
Average of 3 years viz., FY 2017- 9.41 7.39
18, 2018-19 and 2019-20
We find that the reasons for the severe economic slowdown during the impugned A.Y. 2020-21 were a. Switch over to BS IV to BS VI emission norms (skipping BS V) (GOI Circulars there in Page Nos.1 to 6 of Paper Book dated :-16-: IT(TP)A. No:47/CHNY/2024 28th Jan 2025); this resulted in reduction in demand for passenger and commercial during FY 2019-20. b. NBFC liquidity crisis and corresponding increase in interest rates, triggered by IL&FS default on its debt obligations (Relevant extracts from ADB's report on NBFC crisis and an NBFC's Director's report for that financial year there in Pages 14 to 16 in Paper Book dated 28th Jan 2025). This resulted in a reduction in sale of both passenger and commercial vehicles.
The downturn in these segments also affected the business of the Assessee.
c. Changes in axle norms allowing higher payload in commercial vehicle (CV), in turn increased the payload of both single and multi axle vehicles (Gross Vehicle Weight was increased) and with higher capacity available for each vehicle, fresh demand for vehicles went down affecting our sale of commercial vehicle brakes in FY 2019-20 (relevant GOI Notification in Pages 7 to 13 in paper book dated 28th Jan 2025).
d. Increase in third party insurance premiums for motor vehicles (relevant IRDA Notification there in Pages 17 to 26 of paper :-17-: IT(TP)A. No:47/CHNY/2024 book dated 28th Jan 2025). The increase in third party premiums has also resulted in a reduction in demand for passenger vehicles.
8.1 We appreciate the reasons mentioned above, that the automotive segment - OE vehicle sales and auto component industry got drastically impacted in FY 2019-20 (as compared to FY 2018-19) and as per the statistics shown by SIAM AND ACMA, there was 18% degrowth in passenger vehicles and 29% in commercial vehicles. Apart from that 47% degrowth in heavy commercial vehicles and 27% in light commercial vehicles (where Brakes India's presence is significant).
8.2 On perusal of submission made by the assessee, we find that sale of Brake Division of Brakes India Private Limited (BIPL) in FY 2019-20 witnessed 18% decrease over previous year and resultant reduction in profitability with fixed cost remaining more or less the same.
8.3 Considering the above facts of extraordinarily recessionary year - FY 2019-20 (AY 2020-21), the TPO comparing 3 years weighted average PLI of comparable companies (where two normal :-18-: IT(TP)A. No:47/CHNY/2024 years are there) with that of PLI of Brake Division of only impugned assessment years data, will not be an equitable comparison. Therefore, the TPO has to consider either weighted average of 3 years of both the comparable companies with weighted average of 3 years PLI of Brake Division or Comparing FY 2019-20 PLI of Brake Division, BIPL with that of FY 2019-20 PLI of comparable companies.
8.4 We note that the I.T Rules under Rule 10B(2) and 10B(3) require reasonable adjustments to be made to eliminate, material affects due to conditions prevailing in the market and read as follows:
"Rule 10B(2) (1) .........
(2) For the purposes of sub-rule (1), the comparability of an international transaction 94[or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:--
(a) the specific characteristics of the property transferred or services provided in either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;
(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
Rule 10B(3) :-19-: IT(TP)A. No:47/CHNY/2024 (3) An uncontrolled transaction shall be comparable to an international transaction 96[or a specified domestic transaction] if--
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or " (emphasis supplied) 8.5 Further, we also find that the OECD guidelines (page 48 of PB dt. 06.01.2025) specifically states reasonable adjustments to be made to eliminate material effects wherever differences arise due to conditions prevailing in markets, capacity utilization etc. Therefore, from the reading of the above rules, we are of the view that when the market conditions were not conducive for FY 2019-20 as compared to earlier years i.e. FY 2018-19 and FY 2017-18, an equitable comparison should be either take the assessee's FY 2019- 20 and comparable FY 2019-20 alone or compare 3 years viz FY 2017-18, 2018-19 and 2019-20 for both assessee and comparable companies.
8.6 In respect of the DRP's observation on the Notification dated 19.10.2015 (S.O.2860 (E)) that the concept of multiple year data and range would take care of the issue at hand. We are of the view that the Notification which in fact clearly holds in clause (2) referring to "Data set to be constructed under Rule 10C(A)" wherein :-20-: IT(TP)A. No:47/CHNY/2024 it clearly states the manner of choosing previous two years has to be on the basis of there being similar comparable, uncontrolled transactions.
8.7 In the case on hand there is not similar comparable uncontrolled transactions in the previous two years and hence the data of average 3 years cannot be considered for only the comparable companies. Thus, the plain reading of the Notification itself would entitle that there has to be comparability viz a viz Rule 10B(2) and 10B(3) applications for the previous financial years to even be considered.
8.8 Therefore, the Notification supports the assessee's contentions along with the I.T Rules under Rule 10B(2) and 10B(3) and the OECD guidelines require reasonable adjustments to be made to eliminate, material affects due to conditions prevailing in the market and capacity utilization.
In the above factual matrix, we are of the considered view that the TPO / DRP have erred in arriving at the PLI by considering the weighted average PLI of the comparable companies alone with the assessee's one-year results of the impugned A.Y. Therefore, we direct the TPO/AO to consider the data / results of the comparable :-21-: IT(TP)A. No:47/CHNY/2024 companies of the impugned assessment year alone with the assessee's data / results of impugned assessment year to arrive the PLI to find out the arm's length of the transactions.
9. The next issue before us is the R & D expenditure restriction made by DSIR to Rs.8,276 lakhs as compared to Rs.8,312 lakhs claimed. We find that the weighted deduction of Rs.54 lakhs (150% of the difference), has been disallowed by the AO. According to the ld.AR the AO should have considered the expenditure incurred of Rs.36 lakhs, which is eligible to be claimed u/s.35(1)(iv) or u/s.37 of the Act, against the disallowance of the deduction.
10. We find that the above issue is squarely covered by the Hon'ble Madras High Court in Tube Investments of India Ltd Vs CIT reported in 260 ITR 94 (Mad) and Chennai ITAT in the case of Sundaram Clayton in ITA Nos.1376, 1254, 1355 & 1356/Chny/2018 dated 14.06.2021. Therefore, we hereby remit the matter back to the AO with a direction to verify the same and allow the claim of assessee u/s.35(1)(iv) in accordance with law.
11. With regard to the initiation of penalty proceedings under Section 270A of the Act by the AO, is not required to be adjudicated :-22-: IT(TP)A. No:47/CHNY/2024 in this quantum proceedings. Hence, we refrain from adjudicating the same.
12. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 3rd June, 2025 at Chennai.
Sd/- Sd/-
(मनु कुमार िग र) (एस. आर.रघु नाथा)
(MANU KUMAR GIRI) (S. R. RAGHUNATHA)
ाियक सद /Judicial Member लेखा सद /ACCOUNTANT MEMBER
चे ई/Chennai,
दनांक/Dated, the 3rd June, 2025
RSR
आदे श की ितिलिप अ ेिषत/Copy to:
1. अपीलाथ /Appellant
2. थ /Respondent
3.आयकर आयु /CIT - Chennai
4. िवभागीय ितिनिध/DR
5. गाड फाईल/GF