The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that, even where an assessee has not opted for the Safe Harbour Rules, the definitions in Rule 10TA distinguishing “core auto components” from “non-core auto components” may validly be used as a guiding aid in FAR analysis and comparability determination under transfer pricing provisions.
Where the tested party is engaged in manufacturing a core auto component, comparables engaged in non-core auto components or in functionally dissimilar businesses are liable to be excluded if the product and business differences materially affect comparability. Further, a comparable may also be excluded independently if it fails the accepted related party transaction filter.
The Tribunal thus recognised that the distinction between core and non-core auto components is relevant for determining ALP under TNMM as well, and is not confined only to cases where Safe Harbour has been formally opted for. Accordingly, the Tribunal directed the AO/TPO to exclude Vega Auto Accessories Private Limited, Studds Accessories Ltd., Nifco South India Manufacturing Private Limited, Eicher Motors Limited, and Special Engineering Services Limited from the final set of comparables for the manufacturing segment.
The Division Bench comprising Madhumita Roy (Judicial Member) and Manish Agarwal (Accountant Member) first considered whether the assessee could rely on the definitions of “core auto components” and “non-core auto components” in Rule 10TA despite not having opted for Safe Harbour Rules. The Tribunal held that, though the assessee had not opted for Safe Harbour Rules, reference could still be taken from those definitions as a guiding factor in determining comparability for ALP purposes.
In doing so, the Tribunal expressly relied on the Delhi Bench ruling in DCIT v. Minda Acoustic Ltd. [ITA No. 1759/DEL/2015] and accepted the proposition that the distinction between core and non-core auto components assumes significance in FAR analysis, because such distinction affects price negotiations, margins, technology, R&D, and skilled manpower, and therefore comparables should be selected from the same field where the assessee manufactures core auto components.
On the individual comparables, the Tribunal observed that Vega was engaged in manufacturing safety helmets and accessories and derived its main revenue from helmets; accordingly, being engaged in non-core auto components, it was not a valid comparable. Similarly, Studds was found to be engaged in manufacturing helmets and two-wheeler accessories, which did not fall within the core auto component segments referred to by the Tribunal, and was therefore directed to be excluded.
As regards Nifco, the Tribunal did not accept the assessee’s primary argument that plastic automobile parts were non-core auto components, observing that merely because such parts are plastic and not primary components without which the vehicle cannot move, they could not be treated as non-core on that basis and were included within the “other segment”; however, the Tribunal accepted the alternate contention that Nifco failed the RPT filter, since it had more than 25% related party transactions in the relevant and preceding years, and therefore directed its exclusion on that ground.
The Tribunal further observed that Eicher Motors Limited was engaged in manufacturing motorcycles, commercial vehicles, spare parts, vehicle financing and after-sales services, whereas the assessee manufactured shock absorbers, which were only a minor part of the vehicle; even on a broad view, Eicher was held to be functionally dissimilar, and since its major revenue came from sale of motorcycles and commercial vehicles, it was directed to be excluded. Special Engineering Services Limited was found to be engaged in manufacturing railway locomotive products such as locomotive footsteps, cable trays, steel louvres, filter assembly, electrical panels and cablings, which were specialised railway items and not core auto components used in the two-wheeler automobile industry; it too was held not to be a valid comparable and was directed to be excluded.
Briefly, the appellant/assessee is engaged in the manufacturing of shock absorbers used in two-wheelers for domestic and export markets, and also in assembly/trading of electric power steering used in four-wheeler automobiles for the domestic market. Its return of income was filed declaring a loss of Rs. 9.9 crores. Since the assessee had international transactions with its AEs, the matter was referred to the TPO for determination of ALP. The TPO initially made adjustments in the manufacturing segment, provision of business support services, and royalty payment; thereafter, pursuant to DRP directions, the adjustment was modified, and the final transfer pricing adjustment surviving in the assessment order was Rs. 2.34 crores, of which Rs. 2.02 crores pertained to the manufacturing segment.
The assessee’s case before the Tribunal was that it manufactures shock absorbers, which fall within “suspension and braking parts”, i.e., “core auto components”, and therefore companies manufacturing non-core auto components or otherwise functionally different products ought not to be taken as comparables. In support, the assessee relied on the bifurcation of auto-components referred to from the IBEF report and on the definitions in Rule 10TA(b) and Rule 10TA(h) of the Income Tax Rules. The Revenue argued that Rule 10TA pertains to Safe Harbour Rules and, since the assessee had not opted for Safe Harbour, reliance on that definition was misplaced; it was further contended that under TNMM broad comparability is sufficient and minor functional differences should not lead to exclusion, particularly where a large set of comparables is used.
