Federal Mogul Automotive Products ... vs Department Of Income Tax

I.T.A. No. 5769/DEL/2011 A.Y. : 2003-04 Dy. Commissioner of Income Tax, M/s Federal Mogul Circle-11(1), VS. Automotive Products (India) New Delhi Pvt. Ltd., Room No. 312, CR Building, R-6, Greater Kailash=I, New Delhi New Delhi - 110 048 (PAN: AAACF4128M) (APPELLANT) (RESPONDENT)

Department by : Sh. Judy James, Spl. Counsel/DR Assessee by : Sh. Himanshu Sinha, Adv. & Anil Gupta, CA & Archit Rastogi, CA

Date of Hearing : 23-3-2015 Date of Order : 25-3-2015

ORDER

PER H.S. SIDHU : JM

This appeal by the Revenue is directed against the order of

the Ld. Commissioner of Income Tax (Appeals)-XX, New Delhi dated

31.10.2011 pertaining to assessment year 2003-04, on the

following grounds:-

1. On the facts and circumstances of the case and in law,

the Ld. CIT(A) has erred in deleting the addition of Rs.

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1,87,53,644/- made on account of adjustment of arm's

length price.

2. The appellant craves leave to add, alter or amend any

ground of appeal raised above at the time of hearing.

2. The brief facts in this case are that the assessee is a 100%

subsidiary of Federal Mogul Pty. Ltd., Australia. Federal Mogul

Corporation US, is the parent company of the group. The assessee

is in the Automobile ancillary business. The assessee is engaged in

manufacturing the group's popular line of "champion spark plugs"

and undertakes marketing and distribution operation for a wide

range of group products including wiper blades, glow pugs, ignition

coils, oil seals etc. The manufacturing facility of the company is

located at Bhiwadi. During the year the assessee has imported raw

materials, semi finished goods and finished goods from its AEs.

The return of income was filed on 2.12.2003 declaring a NIL income

after setting off brought forwards business loss of Rs. 3,32,034/-.

Order u/s. 143(3) was passed on 17.3.2006 making various

adjustments on account of Transfer Pricing adjustments and also on

account of various corporate tax adjustments.

3. Against the assessment order dated 17.3.2006, assessee

appealed before the Ld. CIT(A), who vide his impugned order dated

31.10.2011 has partly allowed the appeal of the assessee.

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4. Aggrieved with the order of the Ld. CIT(A), Revenue is in

appeal before the Tribunal.

5. After hearing the rival contentions, we find that Ld. CIT(A) has held as under:-

"4.6 Assessee did not create any provision of stock obsolesce / non moving inventory during the previous years (i.e. AY 2001-02 and AY 2002-

03) and subsequent year (i.e. A.Y. 2004-05).

Further, an analysis of stock obsolescence to sales ratio for the

comparables companies (as provided by the appellant) is reproduced below:-

Name of the Obsolete Sales (B) Ratio company inventory (A/B)% (A) Escorts Pistons NA NA NA Ltd. (merged) Greaves Ltd. - 5,929,900,000 -

Kirloskar Oil 88,884 8,664,356 1.03% Engineers Ltd.

Pricision Pipes - 640,292,906 -

& Profiles Co.

Ltd.

Rane Brake - 1,419,267 - Linings Ltd. Sharda Motor - 1,119,081,864 - Inds Ltd. Sona Somic - 281,417,651 - Lemforder Components Ltd. Victor Gaskets - 309,523,000 - India Ltd. Appellant 25,306,608 281,827,439 8.98%

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As can be observed from the above, none of the comparable companies, except Kirloskar Oil Engines Ltd., has any provision for stock obsolesce / non moving inventory. Further, for Kirloskar Oil Engines Ltd., the provision for stock obsolesce / non moving inventory is only 1.03% of sales as against a similar provision of 8.98% for the Appellant.

If provision of stock obsolesce / non moving inventory is considered as non operating expense for the comparable companies and the Appellant, then the analysis is as follows:-

Name of the Operating Provision for Revised company Margin, as per stock Operating (As per TPO's TPO's order obsolescence Margin order) A B C = A+B Escorts Pistons -2.62% -2.62% Ltd. (merged) Greaves Ltd. 0.14% 0.14% Kirloskar Oil 10.52% 1.03% 11.55% Engineers Ltd.

Precision Pipes 16.48% 16.48% & Profiles Co. Ltd. Rane Brake 15.54% 15.54% Linings Ltd. Sharda Motor 15.57% 15.57% Inds Ltd. Sona Somic 2.88% 2.88% Lemforder Components Ltd. Victor Gaskets 5.78% 5.78% India Ltd. Appellant 8.04% 1.03% 8.17%

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Based on the above, arithmetic mean of the revised margin of the comparable companies after considering provision of stock obsolesce / non moving inventory as non operating is 8.17%. As per the TPO's order, the operating margin of the Appellant after undertaking similar analysis is 10.85%

Based on the paragraphs above, it is clearly evident that the 'Provision for stock obsolescene' amounting to Rs. 25,306,608/- was abnormal and extraordinary in nature, and the same is required to be excluded from the cost base of the Appellant for computing the operating margins of the Appellant before comparing the said margin with margin of the comparable uncontrolled companies. These items are occurring in only one comparable and therefore, the margin of that comparable also needs to be re-worked out. Hall mark of comparability analysis is do the same treatment to both sides of the equation; on the one hand it is the tested party i.e. assessee and on the other hand it is the comparables.

As can be seen from the calculation above, margin of the assessee is above that of the comparables. Therefore, the AO is directed to delete the additions made on account of transfer pricing adjustment.

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Since the assessee's ALP is above the margin of the comparables proviso to section 92C(2) is not applicable in this case."

5.1. From the above finding of the Ld. CIT(A), we find no infirmity in the same. The assessee in this case has created a provision for obsolete stocks. Admittedly, such the provision for obsolesce stock has not been made by any of the companies, which are taken as comparables as per the TPO's order, except for Kirsolkar Oil Engines Ltd. where the provision for stock obsolesce / non moving inventory is only 1.03% of sales as against the provision for stock obsolesce or non moving inventory made by the assessee at 8.98%. There is no dispute that such a provision for stock obsolesce and non moving inventory is an extraordinary time. Ld. CIT(A), has rightly made suitable adjustments by eliminating the said provision from the financial statements of the assessee and thereafter arriving at the operation margin for the purpose of comparability and benchmarking with the other comparables companies. Assessee has rightly relied upon the order of the ITAT 'I' Bench, New Delhi in ITA No. 903/Del/2010 (A.Y. 2004-05) in the case of DCIT vs. M/s Ariba India Pvt. Ltd. and C.O. No. 130Del/2010 (in ITA No. 903/Del/2010) A.Y. 2004-05 in the case of M/s Ariba India Pvt. Ltd. vs. DCIT vide common order dated 19.2.2015 for the proposition that, wherever extraordinary items form part of the comparables, then the suitable adjustments should be made for the purpose of comparability.

5.2 In the background of the aforesaid discussions and precedent, we do not find any infirmity in the well reasoned order passed by the Ld. CIT(A) on the issue in dispute, hence, we uphold the same by dismissing the appeal filed by the Revenue.

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6. In the result, the Appeal filed by the Revenue stands dismissed.

Order pronounced in the Open Court on 25/3/2015.

Sd/- Sd/-

[J.S. REDDY] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER

Date 25/3/2015 "SRBHATNAGAR" Copy forwarded to: - 1. Appellant -

2. Respondent - 3. CIT 4. CIT (A) 5. DR, ITAT

TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches

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