Broader Auto-Component Manufacturer Is Valid TNMM Comparable

Broader Auto-Component Manufacturer Is Valid TNMM Comparable and Loss Set-Off Must Be Granted

Issue

Whether a company performing broader auto-component manufacturing functions can be accepted as a valid comparable under the Transactional Net Margin Method (TNMM), particularly when accepted by the Transfer Pricing Officer (TPO) in subsequent assessment years.
Whether the Assessing Officer (AO) is required to grant set-off of brought forward business losses in the final tax computation when such set-off was explicitly allowed in the draft and final assessment orders.

Facts

Primary Business: The assessee-company manufactures car air conditioner systems and components, importing raw materials and components from Associated Enterprises (AEs) and unrelated parties.
TP Benchmarking Selection: For benchmarking under TNMM, the assessee selected a company manufacturing core auto components, air/gas compressors, fans, pumps, hoods, and filters for the automotive industry.
TPO Rejection & Consistency: The TPO disputed the comparable for Assessment Year (AY) 2017-18, despite accepting the same company on functional similarity in subsequent assessment years.
Omission in Computation Sheet: While the AO allowed the set-off of brought forward business losses in the text of both the draft and final assessment orders, the AO omitted to grant the set-off in the final tax computation sheet determining tax liability.

Decision

Issue 1 (Transfer Pricing Comparability):
- Under TNMM, only broader functional comparability is required rather than strict product identity.
- Considering the broader functions performed, the selected company’s operations are primarily comparable to the assessee’s manufacturing functions.
- Since the TPO accepted the same company on functional similarity in subsequent years, it constitutes a valid comparable for AY 2017-18 as well. Decided in favor of the assessee.
Issue 2 (Set-Off of Brought Forward Losses):
- The failure to reflect loss set-off in the tax computation sheet was a procedural omission inconsistent with the body of the assessment order.
- The AO is directed to grant the set-off of brought forward business losses and recompute the final tax liability accordingly. Decided in favor of the assessee.

Key Takeaways

Broader Functionality Under TNMM: TNMM tests overall net profit margins; precise product identity is not mandatory as long as broad functional profiles align.
Rule of Consistency in Transfer Pricing: The Revenue cannot reject a comparable accepted in subsequent years without showing a material change in underlying facts or functions.
Computation Sheet Alignment: The final calculation sheet determining tax liability must strictly align with allowances granted within the text of the assessment order.

IN THE ITAT DELHI BENCH ‘I’

Sanden Vikas India (P.) Ltd.

ACIT, TP

Vimal Kumar, Judicial Member
and M. Balaganesh, Accountant Member

IT APPEAL No. 1754 (Delhi) of 2021
[Assessment year 2017-18]

JULY 22, 2026

Pradeep Dinodia, Ms. Pallavi Dinodia and Ms. Monika Bhardwaj, CAs for the Appellant. Mahesh Kumar, CIT(DR) for the Respondent.

ORDER

M. Balaganesh, Accountant Member.- The Assessee Sanden Vikas India Pvt. Ltd (hereinafter referred to as ‘assessee) by filing the present appeal sought to set aside the impugned assessment order dated 02.11.2021 passed by the Assessing Officer (AO) u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (for short ‘the Act’) inconsonance with the order passed by the Dispute Resolution Panel (DRP)-2, New Delhi dated 22.09.2021 u/s 144C(5).

2. At the outset, we find that the assessee had raised additional ground challenging the validity of assessment on the ground that the same is barred by limitation in the light of the decision of the Hon’ble Madras High Court in the case of Roca Bathroom Products Pvt Ltd. The same was later withdrawn by the assessee. Hence the said additional ground is not even admitted.

3. The assessee has raised the following grounds of appeal before us:-

“General Ground- That the Ld. (‘AO’) of National Faceless Assessment Centre (‘NaFAC’), the Ld. Transfer Pricing Officer (‘TPO’) and consequently the Dispute Resolution Panel (‘DRP’) have grossly erred in law and on facts and circumstances of the appellant’s case in making a Transfer Pricing adjustment to the returned income of the appellant amounting to INR 2,48,65,842/- in relation to the International Transaction of purchase of raw materials and components with its associated enterprises (AEs), wholly on illegal, erroneous and untenable grounds.

That the order of Assessment including order of the Ld. TPO and the DRP Directions are bad in law and erroneous on the facts of the appellant.

That the Ld. TPO and consequently the DRP have grossly erred in law and on facts and circumstances of the appellant’s case by rejecting the appellant’s search process and quantitative filters applied by it without giving any cogent reasons.

That the Ld. TPO and consequently the DRP have grossly erred in law and on facts and circumstances of the appellant’s case by carrying out a fresh search process by applying inappropriate quantitative filters for selection of comparable companies, and not giving the appellant details of such search process (including outcome of each filter applied, accept-reject matrix and operating margin computation) and including FAR analysis of final comparables selected, which is against the principles of natural justice and which tantanmounts to cherry picking of comparables, which is bad in law.

That the Ld. AO (NaFAC) / Ld. TPO and consequently the DRP have grossly erred in law and on facts and circumstances of the appellant’s case in rejecting appellant’s comparable Calsonic Kansei Motherson Auto Products Private Limited, which is engaged in manufacturing of non-core auto-components similar to the appellant which is against the tenet of comparability under Rule 10B(2) of the Income Tax Rules, 1962 (‘the Rules’).

That the Ld. AO (NaFAC) / Ld. TPO and consequently the DRP have grossly erred in law and on facts and circumstances of the appellant’s case in selecting new comparables which have dissimilar functional, product and industry profiles as compared to the appellant (being a noncore auto-components manufacturer) and do not meet the comparability criteria as prescribed under Rule 10B(2) of the Rules and their selection is therefore bad in law and on the appellant’s facts.

(a)

Turbo Energy Private Limited (a)

(b)

Standard Radiators Private Limited

(c)

Tech Auto Private Limited

(d)

Rexnord Electronics & Controls Limited

(e)

Elgi Equipments Limited

(f)

Triton Valves Limited

(g)

Kirloskar Pneumatic Company Limited

That the Ld. AO (NaFAC) has grossly erred in law and on facts and circumstances of the appellant’s case by erroneously raising a demand of INR 3,25,29,360/- without setting off the brought forward business losses from previous years in the demand computation and demand notice, though the assessed income is determined correctly at Nil in the final assessment order.

That the Ld. TPO and consequently the Ld. AO (NaFAC) have grossly erred in law and in the circumstances of the appellant by initiation of penalty proceedings u/s 270A of the Act for underreporting of income in consequence of misreporting.

That the Ld. AO (NaFAC) has grossly erred in law and on facts and circumstances of the appellant’s case in converting a Nil assessment in the draft assessment order dated 27/04/2021 to the assessed income of INR 22,25,87,532/- in the final assessment order dated 02/11/2021 u/s 143(3) r.w.s. 144C(13) and 144B of the Act, without the authority of law.

10.

That each ground is independent and without prejudice to other grounds raised herein.”

4. We have heard the rival submissions and perused the materials available on record. The assessee was engaged in manufacturing of Car Air Conditioner Systems and Components such as compressors, HVAC units, cooling units, evaporators, condensers, hose & pipes and Receiver Drier for sale primarily to unrelated parties in India. The 50% shareholding in assessee is held by Sanden International Ltd, Singapore and Sanden Holdings Corporation, Japan and the remaining 50% shareholding is held by the Indian shareholders (Vikas group). The list of international transactions carried out by the assessee are listed out in pages 2 and 3 of the order of the Learned TPO. Out of the same, the only transaction which is in dispute before us is with regard to purchase of raw material and components from AE. The assessee had imported raw materials from its AEs as well as from the unrelated parties and after converting the same into finished goods, had sold those goods primarily to unrelated parties. The assessee had benchmarked the said purchase transaction from its AEs by adopting Transactional Net Margin Method (TNMM) having Operating Profit / Operating Revenue (OP/OR) as the Profit Level Indicator (PLI) and arrived at the margin thereon of 4.08%.The assessee benchmarked the same with two comparable companies and worked out the Arm’s length arithmetical mean of 3 years weighted average of comparables at 4.34%.Since the said margin of comparables falls within the range of + /-3% tolerance range as per second proviso to section 92C(2) of the Act, the transaction carried out by the assessee was considered to be at Arm’s Length Price (ALP).

5. The Learned TPO rejected one of the two comparables (i.e. Calsonic Kansei Motherson Auto Products Private Limited) chosen by the assessee and conducted a fresh search process and introduced 9 new comparables. The Learned TPO computed arm’s length median of weighted average operating margins of 10 comparable companies at 7.47% as against the recomputed operating profit margin of 3.77% of the assessee, thereby proposing an upward TP adjustment to the total income of the assessee by Rs 4,73,00,778. The assessee filed objections before the Learned Dispute Resolution Panel (DRP). The Learned DRP retained all the 10 comparables chosen by the Learned TPO but directed him to grant working capital adjustment to the assessee and also to examine the operating margin of the assessee. Accordingly, the transfer pricing adjustment was reduced to Rs 2,48,68,842 by the Learned TPO in the order giving effect dated 26-102021. Aggrieved, the assessee is in appeal before us.

6. Before us, the Learned AR submitted that if only one comparable company chosen by the assessee i.e. Calsonic Kansei Motherson Auto Products Pvt Ltd is included, then assessee would be through with its margins and the same would become at arm’s length. The Learned AR made a preliminary submission that the very same comparable was included in the list of comparables by the Learned TPO in the transfer pricing order passed under section 92CA(3) of the Act for the Assessment Years 2020-21 and 2023-24 on 28-6-2023 and 17-12-2025 respectively and in support of which, placed the respective orders on record. Accordingly, it was argued that the said comparable was included only on functional similarity in those years and hence there is no reason to reject the same in the year under consideration before us stating functional dissimilarity. The Learned DR submitted that the functions performed by the comparable is dissimilar to that of the assessee company and hence has been rightly rejected by the Learned TPO.

7. We find from the functions performed by the said comparable company in the year under consideration and in subsequent assessment years, there has been no change thereon. The said comparable company is engaged in manufacture of core auto components, manufacture of air / other gas compressors & fans, air / vacuum pumps, ventilating / recycling hoods and filters for automative industry. In our considered opinion, under TNMM only broader functional comparability is relevant. Looking at the broader functions performed by the said comparable company, we hold that the said company’s functions are primarily comparable with the functions performed by the assessee company and hence would have to be construed as a good comparable. Further as stated supra, the said comparable has been included in the list of comparables by the Learned TPO himself in Assessment Years 2020-21 and 2023-24 vide orders referred supra on functional similarities. Hence there is no reason to take a divergent stand when the functions performed by the said comparable company remains the same in this year as well as in subsequent years. Hence we direct the Learned TPO to include this comparable company in the final list of comparables and re-compute the arithmetical mean margin of all the comparables and compare the same with the assessee’s margin and decide the determination of ALP accordingly in accordance with law. Accordingly, the Ground No.5 raised by the assessee is allowed.

8. In view of aforesaid decision in Ground No. 5, the adjudication of grounds 3,4 and 6 would be academic in nature and they are left open.

9. The Ground Nos. 1 ,2, 8 & 10 are general in nature and does not require any specific adjudication.

10. The Ground No. 7 raised by the assessee is challenging the action of the Learned AO who determined the income in the final assessment order without setting off the brought forward business losses from previous years.

11. We have heard the rival submissions and perused the materials available on record. At the outset, we find that the Learned AO had given the benefit of set off of brought forward losses both in the draft assessment order as well as in the final assessment order. But in the final computation sheet of the final assessment order determining the tax liability of the assessee, the benefit of set off of brought forward losses were denied by the Learned AO. We direct the Learned AO to grant the said benefit to the assessee and recompute the tax liability accordingly. The Ground No. 7 raised by the assessee is allowed.

12. The Ground No.9 raised by the assessee is challenging the initiation of penalty proceedings under section 270A of the Act would be premature for adjudication at this stage and hence dismissed.

13. In the result, the appeal of the assessee is partly allowed.