Comparable having loss in three successive assessment years is persistent loss making company

Nordex India Pvt  Ltd Vs DCIP (ITAT Bangalore)

ITAT Bangalore held that if two out of the three preceding assessment year the comparable has earned profits it cannot be held a persistent loss making company. Hence, persistent loss filter can be applied only if there is loss in three successive assessment years.

Facts- Assessee is a company being wholly owned subsidiary of Acciona Windpower International S.L., Spain. The assessee aggregated the purchases of raw materials and purchase of fixed assets under manufacturing segment.

The only segment disputed by the TPO was in the manufacturing segment. It was noted by the TPO that assessee computed its margin under the manufacturing segment to be 5.83%. Assessee selected six comparable with a median of 5.47% thereby treating its transaction to be at arm’s length under the manufacturing segment. Disagreeing with the transfer pricing study, the TPO applied certain filters and shortlisted the comparables with a mean of 11.62%. Accordingly, TPO proposed an adjustment of Rs. 30,14,11,018/- to be the shortfall.

DRP upheld the observations of the TPO and rejected the objections raised by the assessee. Being aggrieved, the present appeal is filed.

Conclusion- Hon’ble Pune Tribunal, in case of Yazaki (India) Pvt. Ltd. vs. ACIT, has held that persistent loss filter can be applied only if there is loss in three successive assessment years and that if there is a profit in any one of the three past Financial Years, then that company cannot be excluded on the basis of this filter.

Accordingly, this Tribunal has observed that if two out of the three preceding assessment year the comparable has earned profits it cannot be held a persistent loss making company.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

Present appeal is filed by assessee against the final assessment order dated 16.02.2022 passed by NFAC, for Assessment Year 2017-18 on following grounds of appeal:

2. Brief facts of the case are as under:

2.1 Assessee is a company being wholly owned subsidiary of Acciona Windpower International S.L., Spain. Assessee is engaged in assembly of wind turbine generators, including parts such as nacelle, rotor, tower etc. It filed its return of income on 30.11.2017 declaring a loss of Rs.2,97,69,675/- and income under 1 15JB of Rs.6,55, 16,748/-. The case was selected for scrutiny and notice u/s. 143(2) was issued to assessee. In response to the statutory notices, the Ld.AO noted that, the assessee had entered into international transaction with its associated enterprises in Spain that exceeded Rs. 15 crores. A reference was therefore made to the transfer pricing officer to determine the arms length price of the international transaction. 2.2 On receipt of the reference, the Ld.TPO called upon assessee to file the economic details of international transaction in form 3CEB. The Ld.TPO noted that assessee had following international transactions with associated enterprises.

2.3 The Ld.TPO observed that, the assessee used TNMM as the most appropriate method for determining the arms length price of the purchases made from the AE and CUP was used as the most appropriate method for determining the arms length margin of the payment made towards the royalty, ECB and interest on ECB. It was noted that, the assessee aggregated the purchases of raw materials and purchase of fixed assets under manufacturing segment.

2.4 The only segment disputed by the Ld.TPO was in the manufacturing segment. It was noted by the Ld.TPO that assessee computed its margin under the manufacturing segment to be 5.83%. Assessee selected six comparables with a median of 5.47% thereby treating its transaction to be at arms length under the manufacturing segment.

a) Indowind Power Pvt. Ltd.

b) TD Power Systems Ltd.

c) Bharat Heavy Electricals Ltd.

d) Enrich Energy Pvt. Ltd.

e) Indowind Energy Ltd.

f) Karma Energy Ltd.

2.5 Disagreeing with the transfer pricing study, the Ld.TPO applied certain filters and shortlisted the following comparables with a mean of 11.62%, the details of which are as under:

2.6 The Ld.TPO thus proposed an adjustment of Rs .30,14,11,018 / – to be the shortfall. The Ld.TPO also denied the working capital adjustment.

3. On receipt of the transfer pricing order by the Ld.AO, the draft assessment order was passed on 31.03.2021 wherein the addition of Rs.30,14,11,018/- was proposed.

4. On receipt of the draft assessment order, assessee raised objections before the DRP. The DRP upheld the observations of the Ld.TPO and rejected the objections raised by the assessee.

4.1.  On receipt of the DRP directions, the Ld.AO passed the final assessment order making addition of Rs.30, 14,11,018/ – in the hands of the assessee.

Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Tribunal.

5. At the outset, the Ld.AR submitted that assessee has filed an application seeking admission of additional grounds on 08.01.2023 which are as under:

5.1 It has been submitted that no new facts needs to be considered in order to dispose of the additional grounds raised by the assessee. It is submitted that, the additional grounds raised do not require verification of any new facts. The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee.

5.2 On the contrary, the Ld.CIT.DR though opposed admission of the additional ground, could not bring anything on record which would challenge such a right available to assessee under the Act. We have perused the submissions advanced by both sides in light of records placed before us.

5.3 We note that the additional grounds are directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts.

5.4 Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional grounds raised by the assessee. Accordingly, we admit the additional grounds raised by the assessee.

6. Before we undertake the comparability analysis, it is sine qua non to understand the FAR performed under manufacturing segment by the assessee before us.

Functions

The company is engaged in assembly of wind turbine generators, including parts such as nacelle, rotor, tower, etc. The Company also proposes to engage in operation, maintenance and development of wind farms in India.

Acciona Windpower India predominantly imports products from the Group companies in Spain. All import procurements are carried out at prices negotiated with the Group companies. Acciona Windpower India issues a purchase order (‘PO’) to Group companies and based on the specifications of the products, Acciona Windpower India imports the required components from its Group Companies.

In case of procurement of capital goods, Acciona Windpower Group provides knowledge and shares technical specifications before providing approval for the local / third-party procurement. Acciona Windpower India has an assembly facility in Chennai, where parts of nacelles and hubs for wind turbines are assembled.

Assets

Any business requires assets (tangible or intangible) without which it cannot carry out its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important. An understanding of the assets employed and owned by Acciona Windpower India and its AEs provides an insight into the resources deployed by them and their contribution to the business processes/ economic activities.

Risks assumed:

It has been submitted that assessee does not assume any significant risks as entire contract is entered into by AE with end customers. Except for foreign exchange fluctuation risk assessee does not bare any other risk with respect to the ultimate success or failure of the activities.

7. The Ld.AR submitted that Ground nos. 1 to 4 are general in nature, and therefore do not require adjudication.

8. The Ld.AR submitted that Ground nos. 5-6 r.w. additional ground nos. 5.1 and 6.1 are in respect of the comparables sought for inclusion / exclusion of comparables. He submitted that in Additional grounds 5.1 and 6.1, many comparables have been raised. The assessee wish to argue only TD Power Systems Ltd. in additional ground no. 5.1 for inclusion and Inox Wind Ltd. and Suzlon Energy Ltd. in additional ground no. 6.1 for exclusion.

8.1 Additional Ground no. 5.1 read with Ground no. 5  TD Power Systems Ltd.:-

The Ld.AR submitted that this comparable was excluded by the Ld.TPO by applying persistent loss filter. Before us the Ld.AR submitted that this comparable has earned loss only for Assessment Year 2017-18 and during Assessment Years 2016-17 and 2015-16, it had earned profit. The Ld.AR has filed before us the details of the revenue earned by this company under the manufacturing segment as well as at the entity level in order to substantiate its argument. It is submitted that apart from the observation of the Ld.AO that it is a persistent loss making company, there is no objection of the Ld.AO of this company being functionally not similar. The Ld.AR thus prayed for this company to be included. The Ld.DR submitted that all these details were not filed before the DRP and therefore has not been verified.

We have perused the submissions advanced by both sides in the light of records placed before us.

It is submitted by the Ld.AR that the comparable is functionally similar with that of assessee, however was excluded by applying persistent loss making filter.

It is also submitted that this comparable is not a persistent loss making company by referring to the annexures A1 and A2. The Ld.AR has relied on the following decisions in support of the proposition that a comparable cannot be rejected unless it is a persistent loss making company.

a) Decision of Hon’ble Bombay High Court in case of PCIT vs. Sandvik Asia Pvt. Ltd. in ITA No. 1088/2015 by order dated 26/04/2018

b) Decision of Hon’ble Bombay High Court in case of CIT vs. Goldsachs (India) Securities Pvt. Ltd. reported in (2016) 69 com 19

c)  Decision of Hon’ble Bombay High Court in case of CIT vs. Welspun Zucchi Textiles Ltd. reported in (2017) 77 com 137.

He also relied on the decision of Hon’ble Pune Tribunal in case of Yazaki (India) Pvt. Ltd. vs. ACIT in ITA No. 621/PUN/2014 by order dated 11/07/2019 wherein it was held that persistent loss filter can be applied only if there is loss in three successive assessment years and that if there is a profit in any one of the three past Financial Years, then that company cannot be excluded on the basis of this filter.

This Tribunal has observed that if two out of the three preceding assessment year the comparable has earned profits it cannot be held a persistent loss making company. The assessee has filed before this Tribunal the segmental working of TD Power Systems Ltd. as well as the extract from the annual report for the preceding three financial years which is annexed herewith as annexures A1 and A2.

We direct the Ld.AO/TPO to verify the details in annexure A1 and A2 in the light of the ration / observations by this Tribunal in case of Yazaki (India) Pvt. Ltd. vs. ACIT (supra).

Accordingly this comparable raised by assessee is remanded to the Ld.AO for necessary verification and consideration in accordance with law.

Needless to say that proper opportunity of being heard must be granted to assessee.

8.2 Additional Ground no. 6.1 r.w. Ground no. 6

a) Inox Wind Ltd.:-

The Ld.AR submitted that this comparable is not functionally similar with that of assessee and that there is no segmental reporting in the annual reports that is annexed at page 527 of the paper book. It is submitted that, this company is also into sale of power and has incurred a huge job work charges which establishes that it outsources its work. It is the submission of the Ld.AR that this company has a different business model and therefore cannot be considered to be a good comparable with that of assessee. The Ld.AR also relied on the decision of Hon’ble Delhi High Court in case of Rampgreen Solutions Pvt. Ltd. vs. CIT reported in (2015) 60 taxmann.com 355 in support of its above contention. The Ld. DR on the contrary relied on the
observations of the DRP.

We have perused the submissions advanced by both sides in the light of records placed before us.

We note that the Ld.TPO has held this comparable to be functionally similar as it is into manufacturing of wind turbine generator and also provides erection, procurement and commissioning and operations and maintenance. We note that admittedly the assessee before us is engaged in manufacturing of wind turbine only. From the annual report of this company at page 436, we note that this company is an integrated wing energy solutions provider and it manufactures key components of wind turbine generators in-house. At page 531 of the annual report, in the company information, it is reported that this company provides erection, procurement and commissioning (EPC), operations and maintenance and common infrastructure facilities services for wind turbine generators.

From the revenue recognition note at page 532 of the annual report, we note that the sale of goods also includes the sale of power and the sale of wind turbine generators. The segmental reporting of the revenue is under three segments as per page 558 of the paper book which is sale of products, sale of services and other operating revenues. This in our view, what is the proportion of the revenue from sale of power earned by the assessee that forms part of the sale of products is not ascertainable.

Under such circumstances, we cannot consider this company to be similar in business module as assessee is. We therefore direct the Ld.AO/TPO to exclude this comparable from the final list.

b) Suzlon Energy Ltd.:-

The Ld.AR is seeking exclusion of this comparable as it is functionally not similar with that of assessee. The Ld.AR submitted that this company is a public limited company and is engaged in the business of manufacturing of wind turbine generators and related components of various capacities.

It is submitted by the Ld.AR that, during the year under consideration, this company has entered into special purpose vehicles for sale of solars and has entered into this segment of amalgamation involving merger of three wholly owned subsidiaries viz., Suzlon Structures Ltd., Suzlon Wind International Ltd., SE Blades Ltd., SE Electricals Ltd. The said merger / demerger was sanctioned as on 3 1.05.2017 relevant to that an appointed date of 01.01.2016 for mergers and 0 1.04.2016 for demerger. At page 1150, the Ld.AR submitted that revenue from operations have been given wherein sale of wine turbines, solar systems and other systems have been clubbed together. He thus submitted that there is no segmental details available in respect of the revenue earned by this comparable from the sale of wind turbine generators and therefore deserves to be excluded.

On the contrary, the Ld.DR placed reliance on orders passed by authorities below.

We have perused the submissions advanced by both sides in the light of records placed before us.

The primary reason in our view why this comparable should not be considered is that it is a public limited company. It is thus a company wherein public has got huge stakes. The Ld.TPO did not consider the objections of the assessee by observing that the amalgamation / amalgamation merger was by way of an order passed in the month of May, 2017. But he failed to observe the effective date which is 01.01.2016 and 01.04.2016 which is relevant for the Assessment Year under consideration. Another reason why this comparable should not be excluded in our mind is that there is no segmental details available with respect to the income generated by this company with respect to sale of wind turbines. We therefore direct the Ld.AO/TPO to exclude this comparable from the final list.

Accordingly, ground nos. 5-6 and 5.1-6.1 raised by assessee stands partly allowed.

9. Additional ground no. 7.1 need not be adjudicated as we have already excluded the comparable while considering the additional ground no. 6.1.

10. Additional ground no. 8.1 raised by assessee is not pressed and therefore is dismissed as not pressed.

Except for the above grounds, no other grounds have been argued by assessee.

In the result, the appeal filed by the assessee stands partly allowed as indicated hereinabove.

Order pronounced in the open court on 31st May, 2023.