ITAT Chennai Treats Nokia Shutdown as Extraordinary Event: Key Rulings on TP Adjustment, Expense Disallowance & Slump Sale

1. Background of the Dispute

DCIT Vs BYD India Pvt. Ltd. came before the Income Tax Appellate Tribunal, Chennai Bench, in relation to Assessment Year 2015–16. The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-16, Chennai passed under Section 250 of the Income Tax Act 1961 dated 20.04.2023.

The assessee is an Indian company and a wholly owned subsidiary of Lead Wealth International Ltd., British Virgin Island. During the relevant financial year, its core activities were:

  • Manufacturing, assembly and sub-assembly of mobile phone components exclusively for Nokia India and its group entities; and
  • Trading in solar panels.

The assessee:

  • Filed its original return of income on 25.03.2015 for A.Y. 2015–16, declaring a loss of Rs. 34,18,12,411/-.
  • Subsequently revised the return, declaring an enhanced loss of Rs. 37,25,43,570/-.

The case was picked up for scrutiny. Given that the assessee had entered into international transactions with its associated enterprise (AE), the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for determination of arm’s length price (ALP).

Pursuant to the TPO’s order and the AO’s assessment:

  • A transfer pricing adjustment of Rs. 10,70,45,309/- was made in respect of sale of finished goods to the AE.
  • Expenses of Rs. 43,26,63,304/- were disallowed, treating them as capital/preliminary expenditure under Section 35D.
  • Proceeds from sale of fixed assets were treated as consideration for a slump sale and taxed as short-term capital gains.

The CIT(A) deleted all three major additions. The Revenue challenged this relief before the ITAT.

The core issues before the Tribunal were:

  1. Validity of the transfer pricing adjustment on sale of finished goods to the AE, allegedly in a ‘distress sale’ situation.
  2. Justification of disallowance of expenses as preliminary/capital in nature.
  3. Correct tax treatment of sale of plant and machinery—whether it constituted a slump sale or mere item-wise sale of assets.

2. Transfer Pricing Issue: Distress Sale of Finished Goods

2.1 Facts Surrounding the TP Transaction

During FY 2014–15, the assessee sold finished mobile phone components amounting to Rs. 23,95,68,252/- to its AE, BYD Precision Manufacturing Co. Ltd., China.

The assessee’s explanation:

  • Nokia India, its predominant and virtual sole customer for mobile components, shut down its Chennai operations during the year.
  • With Nokia India closing and no alternative buyers for these specific components, the assessee had no option but to liquidate its inventory by selling the goods to the AE at lower prices, characterising the transaction as a distress sale.
  • The AE, in turn, either:
    • Sold part of these components to Nokia Group at prices lower than its purchase cost; or
    • Consumed them in its own manufacturing; or
    • Scrapped items that were not usable.

2.2 Assessee’s Transfer Pricing Analysis

In its transfer pricing documentation, the assessee:

  • Selected TNMM as the most appropriate method.
  • Chose gross profit margin (sales minus cost of production) as the Profit Level Indicator (PLI), specifically due to the abnormal impact of Nokia India’s shutdown in the relevant year.
  • Identified four comparable companies and computed a three-year weighted average margin of 26.08%.
  • Computed its own GPM-based PLI at 37.69%.

Based on this analysis, the assessee concluded that the sale of finished goods to the AE was at arm’s length, even though the year was described as extraordinary due to the loss of its only major customer.

2.3 TPO’s Rejection and Re-Characterisation

The TPO rejected the assessee’s TP study on several counts:

  • Change of PLI:
    The TPO substituted the assessee’s GPM-based PLI with an OP/OC (Operating Profit / Operating Cost) PLI, recomputing the assessee’s margin at (-)26.75%.

  • Rejection of ‘distress sale’ plea:
    The TPO took the view that:

    • Nokia India had announced its impending closure as early as September 2013.
    • Despite this, the assessee continued manufacturing components for Nokia models, knowing that full off-take might not materialise.
    • The claim that the sales to the AE were made under distress and not in the normal course of business was, according to the TPO, unsupported by contemporaneous records.

  • Independent search for comparables:
    The TPO carried out her own benchmarking exercise, identifying comparables with margins in the narrow range of 5.89% to 6.38%, and on that basis proposed a transfer pricing adjustment of Rs. 10,70,45,309/-.

2.4 Findings of the CIT(A) on TP

The CIT(A) examined:

  • Year-wise sales data to the AE and to Nokia India;
  • The shutdown of the assessee’s SEZ manufacturing unit at Orgadam catering to Nokia India; and
  • The evidence that the AE resold or utilised the goods under unfavourable conditions.

Key observations of the CIT(A) included:

  • Sales to the AE had jumped from about Rs. 3.25 crores in the immediately preceding year to Rs. 23.95 crores in the relevant year—approximately a sevenfold increase.
  • This spike in AE sales, coupled with the collapse of Nokia India’s purchases, clearly indicated that the goods were not sold under normal commercial conditions but under compulsion as part of a distress liquidation of inventory.
  • The AE itself bore losses by selling to Nokia Group at prices lower than its acquisition cost and by scrapping or internally consuming the remaining components.

On this basis, the CIT(A) held that:

  • FY 2014–15 was an extraordinary year for the assessee due to the Nokia shutdown.
  • The impugned transactions were distress sales and not routine trading operations.
  • The assessee’s benchmarking for the distress sale transaction at Rs. 23,95,68,252/- was acceptable and the TP adjustment of Rs. 10,70,45,309/- was liable to be deleted.

2.5 Revenue’s Arguments Before ITAT

The Departmental Representative (DR) contended that:

  • The assessee had allegedly not produced adequate evidence of the AE’s subsequent sales to Nokia Group before the TPO.
  • The CIT(A) mentioned having considered additional details furnished in appeal but failed to:
    • Record those details in the appellate order, or
    • Call for a remand report from the AO/TPO on such fresh material.
  • A prudent contract manufacturer in the assessee’s position would normally have negotiated compensation or safeguards with Nokia India in anticipation of such a shutdown, and the absence of such arrangements undermined the distress claim.
  • Given that Nokia’s closure was known in September 2013, continuation of manufacturing for Nokia models showed this was part of normal business risk, not an extraordinary event justifying special TP treatment.

The DR therefore urged reinstatement of the TPO’s adjustment.

2.6 Assessee’s Defence Before ITAT

The assessee’s Authorised Representative (AR) emphasised: