Continental Automotive Components India Pvt. Ltd. Vs DCIT (ITAT Bangalore)
The appeal arose from the final assessment order dated 30.11.2018 passed under Sections 143(3) read with 144C(13) of the Income-tax Act, 1961 for Assessment Year 2014-15. The assessee, a wholly owned subsidiary of Continental Automotive GmbH, Germany, was engaged in manufacturing automotive electronic components, trading imported products, and rendering software development services to its Associated Enterprises (AEs). The appeal primarily concerned transfer pricing adjustments in the manufacturing and software development service segments, along with disallowance of warranty provision, annual licence fees, and non-set-off of brought forward losses.
The TPO initially proposed transfer pricing adjustments exceeding Rs.155.70 crore. After the DRP’s directions, the final adjustment was recomputed at Rs.143.30 crore. The manufacturing segment adjustment was ultimately recomputed at Rs.117.35 crore, while the software development services adjustment remained Rs.25.95 crore. Apart from transfer pricing issues, disputes also arose regarding disallowance of warranty provision of Rs.3.21 crore, annual licence fees of Rs.28 crore, and non-set-off of brought forward losses exceeding Rs.232.54 crore.
Manufacturing Segment Transfer Pricing
The assessee had adopted the Transactional Net Margin Method (TNMM) with Operating Profit to Operating Cost as the Profit Level Indicator. It claimed adjustments for:
- under-utilisation of capacity,
- customs duty,
- foreign exchange fluctuation,
- depreciation,
- selection of comparable companies, and
- restriction of adjustment only to international transactions with AEs.
The TPO rejected the adjustments and determined the arm’s length margin using a different cost base and expanded list of comparables. The assessee also contended that transfer pricing adjustment should be confined only to transactions with AEs rather than the entire manufacturing segment.
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