Facts of the Case

The assessee, Hitachi Astemo Haryana (P.) Ltd., was engaged in manufacturing shock absorbers used in two-wheelers for both domestic and export markets. During Assessment Year 2021-22, it entered into various international transactions with its Associated Enterprises (AEs).

For benchmarking its manufacturing segment transactions, the assessee applied the Transactional Net Margin Method (TNMM) and claimed that the transactions were conducted at Arm's Length Price (ALP).

During transfer pricing proceedings, the Transfer Pricing Officer (TPO) rejected certain comparables selected by the assessee and introduced additional companies into the comparable set. Based on the revised comparables, a transfer pricing adjustment was proposed.

The objections filed before the Dispute Resolution Panel (DRP) did not provide substantial relief. Consequently, the final assessment order was passed under Sections 143(3), 144C(13), and 144B of the Income-tax Act.

The assessee challenged the transfer pricing adjustment before the Delhi Bench of the ITAT, particularly disputing the inclusion of companies engaged in manufacturing helmets, accessories, vehicles, and railway products while benchmarking a manufacturer of shock absorbers, which are recognized as core auto components.

Issues Involved

  1. Whether manufacturers of core auto components can be compared with manufacturers of non-core auto components while determining ALP under TNMM?
  2. Whether Rule 10TA definitions relating to “core auto components” and “non-core auto components” can be relied upon for transfer pricing comparability analysis even when the assessee has not opted for Safe Harbour Rules?
  3. Whether companies manufacturing helmets, accessories, vehicles, and railway engineering products are functionally comparable to a manufacturer of shock absorbers.

Petitioner’s Arguments (Assessee)

The assessee contended that:

  • Shock absorbers are recognized as core auto components forming part of the vehicle suspension system.
  • Comparability should be undertaken only with manufacturers engaged in similar core automotive components.
  • Core auto component manufacturers differ materially from non-core component manufacturers in terms of technology, assets employed, functions performed, and risks assumed.
  • Rule 10TA, although contained in Safe Harbour provisions, provides useful legislative guidance for FAR analysis.
  • Reliance was placed on:
    • DCIT v. Minda Acoustic Ltd.
    • Daido India (P.) Ltd. v. DCIT
  • Vega Auto Accessories Pvt. Ltd. and Studds Accessories Ltd. manufacture helmets and riding accessories, which are non-core automotive products.
  • Eicher Motors Ltd. is a vehicle manufacturer and cannot be compared with a component manufacturer.
  • Special Engineering Services Ltd. manufactures railway-related products and is functionally different.
  • Nifco South India Manufacturing Pvt. Ltd. failed the Related Party Transaction (RPT) filter.

Respondent’s Arguments (Revenue)

The Revenue submitted that:

  • Rule 10TA applies only to Safe Harbour provisions and cannot govern ordinary transfer pricing analysis.
  • Under TNMM, broad functional similarity is sufficient.
  • Exact product similarity is not mandatory for comparability.
  • Manufacturers operating within the automotive sector can generally be compared.
  • Restricting comparables only to core auto component manufacturers would unduly narrow the comparable set.
  • Product differences alone should not justify exclusion unless profitability is materially affected.

Court Findings 

The Tribunal ruled substantially in favour of the assessee and held:

1. Rule 10TA Can Be Used as a Guiding Tool

Although the assessee had not opted for Safe Harbour Rules, the legislative distinction between core auto components and non-core auto components remains relevant for FAR analysis and comparability determination.

2. Core Auto Component Manufacturers Require Similar Comparables

The Tribunal observed that manufacturers of core auto components typically:

  • Employ advanced technology
  • Use specialized machinery
  • Undertake sophisticated engineering functions
  • Operate under distinct risk profiles
  • Have different pricing structures

Therefore, they should ordinarily be compared with companies operating in the same field.

3. Tribunal's Ruling on Individual Comparables

Vega Auto Accessories (P.) Ltd.

  • Manufactures helmets and riding accessories.
  • Held functionally dissimilar.
  • Excluded from comparables.

Studds Accessories Ltd.

  • Engaged in helmet and accessory manufacturing.
  • Considered non-core automotive product manufacturer.
  • Excluded.

Nifco South India Manufacturing (P.) Ltd.

  • Not excluded on functional grounds.
  • Excluded because Related Party Transactions exceeded permissible limits.

Eicher Motors Ltd.

  • Engaged in motorcycle and commercial vehicle manufacturing.
  • Performs functions substantially different from a component manufacturer.
  • Excluded.

Special Engineering Services Ltd.

  • Manufactures railway locomotive products and infrastructure components.
  • Functionally unrelated to automotive component manufacturing.
  • Excluded.

4. Transfer Pricing Adjustment Directed to be Recomputed

The Tribunal directed recomputation of ALP after excluding the functionally incomparable entities.

Important Clarification

The ITAT clarified that:

  • Safe Harbour Rules need not be formally adopted for Rule 10TA definitions to serve as a useful analytical guide.
  • Core auto component manufacturers cannot automatically be benchmarked against manufacturers of helmets, riding accessories, vehicle assemblies, railway products, or other functionally distinct products.
  • FAR analysis remains the foundation of transfer pricing comparability.
  • Industry-wide classification alone cannot justify inclusion of comparables.

Sections Involved

  • Section 92C of the Income-tax Act, 1961
  • Section 92CA of the Income-tax Act, 1961
  • Section 143(3) of the Income-tax Act, 1961
  • Section 144B of the Income-tax Act, 1961
  • Section 144C(13) of the Income-tax Act, 1961
  • Rule 10B of the Income-tax Rules, 1962
  • Rule 10TA of the Income-tax Rules, 1962
  • Transfer Pricing Provisions relating to Arm's Length Price (ALP)
  • Transactional Net Margin Method (TNMM)