IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCHES "A", PUNE
BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER
AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER
ITA No.2545/PN/2012
(Assessment Year : 2008-09)
Sandvik Asia Private Limited
Mumbai-Pune Road, Dapodi,
Pune - 411 012.
PAN : AACCS6638K .... Appellant
Vs.
Asstt. Commissioner of Income Tax
Circle - 10, Akurdi, Pune. .... Respondent
Appellant by : Mr. J. D. Mistry
Respondent by : Ms. M. S. Verma
Date of hearing : 02-09-2013
Date of pronouncement : 27-09-2013
ORDER
PER G. S. PANNU, AM
This appeal by the assessee is directed against the order of the Asstt.
Commissioner of Income Tax, Circle – 10, Pune (in short ‘the Assessing
Officer’) passed under Section 143(3) read with Section 144C(13) of the
Income Tax Act, 1961 (in short “the Act”) dated 30.10.2012, which is in
conformity with the directions given by the Dispute Resolution Panel, Pune (in
short ‘the DRP’) dated 05.09.2012 for the assessment year 2008-09.
2. In this appeal, Grounds of Appeal raised by the assessee read as
under: –
“1. The learned AO erred in passing the impugned order which
was not in accordance with law, the statutory provisions, and which is void
and of no legal effect.2. The learned AO erred in rejecting the transfer pricing analysis
undertaken by the assessee by aggregating its international transactions.3. The learned AO erred in rejecting the selection of the TNMM
adopted by the assessee as the most appropriate method in the
2 ITA No.2545/PN/2012
A.Y. 2008-09circumstances of the case and comparing net profit margins with external
comparables for computing the arms length price of international transactions.4. The learned AO erred in rejecting the selection of the
TNMM/net profit margins adopted by the assessee without properly giving the
assessee an opportunity of being heard in this regard and also without
assigning valid reasons for the same.5. The learned AO erred in adopting the cost plus method as the
most appropriate method in the circumstances of the case for computing the
arms length price of international transactions.6. The learned AO erred in adopting the cost plus method for
computing the arms length price without properly giving the assessee an
opportunity of being heard in this regard and also without assigning valid
reasons for the same.7. The learned AO erred in making an addition of
Rs.30,70,02,006/- by holding that international transactions of the
Manufacturing – Tools segment were not at arms length.8. In making addition of Rs.30,70,02,006/- by holding that
international transactions of the Manufacturing – Tools segment were not at
arms length, the learned AO erred in :-a. rejecting certain segments of Rajasthan Udyog & Tools
Ltd. and Hittco Tools Ltd. which had been used as a comparable by
the assessee,
b. considering a sum of Rs.2.8 crores being ‘loss on
impairment of assets’ as operating expenditure of the assessee.c. considering the entire segment level profitability of the
assessee despite the fact that the segment comprised transactions
with both associated and non-associated enterprises.9. The learned AO erred in making an addition of Rs.60,48,143/-
by holding that international transactions of the Manufacturing – Wires
segment were not at arms length.
10. In making addition of Rs.60,48,143/- by holding that
international transactions of the Manufacturing – Wires segment were not at
arms length, the learned AO erred in considering the entire segment level
profitability of the assessee despite the fact that the segment comprised
transactions regarding both wires and heating systems, thereby not comparing
like with like.
11. The learned AO erred in failing to apply the provisions of the
proviso to s. 92C(2) of the Act.
12. The learned AO erred in failing to apply multiple year data for
comparables as applied by the assessee and as mandated by Rule 10B(4) of
the Income-tax Rules, 1962.”
3. In brief, the background of the dispute is that assessee is a company
incorporated under the provisions of the Indian Companies Act, 1956 and its
principal activities comprised manufacturing, trading and regrinding of
tungsten carbide tools, rock processing equipments, thermostatic electrical
bimetal strips, wires, ribbons, heating elements, cold finished tubes/pipes and
3 ITA No.2545/PN/2012
A.Y. 2008-09
manufacturing of hot extruded seamless stainless steel tubes/pipes, etc.. The
business of the company was divided into three segments, which read as
under :-
(i) Tooling-specialises in tools for metal cutting.
(ii) Mining and Construction – focuses on tools and service
for mining and construction contracts with respect to
comprissiong of crushing plants used in mines.
(iii) Materials Technology-Specialises in high value added
products metallic materials.
For the assessment year under consideration, assessee-company filed
a return of income declaring total income of Rs.104,06,33,924/- which was
subject to scrutiny assessment under Section 143(3) read with Section
144C(13) of the Act, wherein by way of order dated 30.10.2012 the total
income has been determined at Rs.134,81,22,200/-. The substantive
difference between the returned and the assessed income is on account of
transfer pricing adjustment while determining the Arm’s Length Price (in short
‘ALP’) of the international transactions carried out by the assessee with its
Associated Enterprises (in short ‘AEs’). The assessee-company had
undertaken certain international transactions with its AEs for which the income
is required to be computed having regard to the ALP, as provided in Section
92(1) of the Act. A reference under Section 92CA(1) of the Act was made by
the Assessing Officer to the Transfer Pricing Officer (i.e. TPO) for computation
of ALP in relation to the international transactions carried out by the assessee.
In terms of the order passed by the TPO under Section 92CA(3) of the Act
dated 28.10.2011, the following adjustments were proposed to the ALP stated
by the assessee :-
Sr No Description of international transaction Proposed adjustment
1 Export of finished goods in respect of 30,70,02,0661
manufacturing of tools division
2 Manufacturing of wire segment 60,48,143/-
TOTAL Adjustments proposed 31,30,50,209
4 ITA No.2545/PN/2012
A.Y. 2008-09
4. The Assessing Officer proposed a draft assessment order under
Section 143(3) read with Section 144C(1) of the Act proposing adjustments to
the value of international transactions as determined by the TPO and against
such draft assessment order assessee preferred objections before the DRP.
The DRP vide its order dated 05.09.2012 affirmed the adjustments to the ALP
of the international transactions as proposed by the TPO. Accordingly, the
Assessing Officer finalized assessment under Section 143(3) read with
Section 144C(3) of the Act dated 30.10.2012 determining the ALP of the
international transactions in conformity with the order of the TPO passed
under Section 92CA(3) of the Act.
5. The dispute before us primarily relates to the adjustments made to the
total income of the assessee on account of re-determining the ALP of the
international transactions over and above the value of such transactions stated
in the account books. With regard to the wire manufacturing segment, the
stated values have been enhanced by a sum of Rs.60,48,143/- and in respect
of the Tools manufacturing segment the adjustment to the stated values has
been made to the extent of Rs.30,70,02,006/-.
6. At the outset, we may dispose of Grounds of Appeal No. 3, 5, 6, 9, & 10
in so far as they relate to the adjustment proposed by the TPO of
Rs.60,48,143/- in respect of international transactions of the manufacturing
wire segment.
7. In this context, the learned counsel for the assessee explained that the
TPO in his order dated 28.10.2011 had proposed an addition of
Rs.60,48,143/- in respect of international transactions of the assessee’s
manufacturing wire segment which was also proposed by the Assessing
Officer in the draft assessment order under Section 143(3) read with Section
144C(1) dated 26.12.2011 and also upheld by the DRP. Further, in para 7.3 of
5 ITA No.2545/PN/2012
A.Y. 2008-09
the final assessment order dated 30.10.2012 the Assessing Officer noted the
said adjustment proposed by the TPO. So, however, it is contended that while
computing the income at the end of the assessment order, the Assessing
Officer has not actually added the said sum in the returned income and no tax
thereon has been demanded. The learned counsel explained that in order to
be cautious and not to be denied an adjudication on technicality, the assessee
still preferred the aforesaid Grounds while filing the appeal before the Tribunal.
8. The above factual matrix brought out by the learned counsel is not
disputed by the learned CIT(DR) and it is pointed out that the adjustment was
discussed in the body of the assessment order but it remained to be
considered in the computation of income, which was merely a mistake
rectifiable under Section 154 of the Act by the Assessing Officer.
9. Be that as it may, it is quite clear that no such addition has been
ultimately made in the computation of income by the Assessing Officer and tax
liability in relation to such adjustment has not been determined against the
assessee. In this background, the only premise that can be drawn is that the
grievances raised in the Grounds of Appeal Nos. 3, 5, 6, 9, & 10 relating to the
addition of Rs.60,48,143/- in respect of international transactions of the
manufacturing wire segment, as proposed by the TPO in his order dated
28.10.2012, do not arise out of the impugned order of the Assessing Officer
passed under Section 143(3) read with Section 144C(13) of the Act dated
30.10.2012. Therefore, the aforesaid Grounds do not require any adjudication
for the present. So, however, we may make it clear that if in future the
Assessing Officer takes steps to give effect to the said addition and determine
tax liability thereof, assessee shall be at liberty to appeal against such
addition, if so advised in law. Therefore, with the aforesaid remarks, we
dismiss the Grounds of Appeal Nos. 3, 5, 6, 9 & 10 in respect of international
6 ITA No.2545/PN/2012
A.Y. 2008-09
transactions of manufacturing wire segment as they do not arise out of
impugned order of the Assessing Officer dated 30.10.2012 (supra).
10. Now, we may take-up the remaining Grounds of Appeal which primarily
deal with the grievance of the assessee with regard to the adjustments made
to the stated value of the international transactions in the Tools manufacturing
segment. In this regard, it is to be noted that the Tools manufacturing segment
of the assessee is engaged in the manufacture of cemented carbide and high
speed steel tools for metalworking applications and tools for mining and
construction. The international transactions pertaining to the Tools
Manufacturing segment comprised of :-
(i) Import of Raw Material, Spares, Consumables, etc.;
(ii) Import of promotional material;
(iii) Import of fixed assets
(iv) Export of Finished Goods'
(v) Provision for technical services;
(vi) Payment of IT support services fees;
(vii) Payment of Management fees; and,
(ix) Payment of technical and training fees.
11. In respect of above transactions pertaining to the Tools manufacturing
segment, assessee contended that the principal activity was of manufacturing
of tools. Since the aforestated international transactions formed an integral
and integrated part of its manufacturing tools business, the aforesaid
transactions were considered to be closely linked with the activity of
manufacturing of tools and thus assessee adopted a combined transactions
approach in order to carry out the benchmarking analysis. Accordingly,
assessee applied the Transactional Net Margin Method (TNM method) as the
most appropriate method in order to benchmark the international transactions
of the Tools manufacturing segment. The TPO has accepted the TNM method
of benchmarking, as adopted by the assessee subject to certain variations
which are disputed before us.
7 ITA No.2545/PN/2012
A.Y. 2008-09
12. In so far as the Ground of Appeal No. 1 is concerned the same is
general in nature and requires no adjudication and hence it dismissed.
13. In Ground of Appeal No. 2, the grievance of the assessee is that while
determining the ALP of the international transactions with its AEs, the
Assessing Officer’s jurisdiction is limited to making adjustment in respect of
transactions with AEs alone and not in respect of non-AE transactions
undertaken by the assessee. It is contended that in the present case, the
adjustment determined in respect of Tools manufacturing segment is with
respect to the total sales undertaken by the assessee, including the
transactions with the non-AEs. In this context, the learned counsel submitted
that the aforesaid plea is notwithstanding the primary grievance of the
assessee that the determination of ALP by the Assessing Officer is also
otherwise unjustified. The learned counsel referred to the following
computation of adjustment made by the TPO in para 7.1 of his order :-
Sr No Particulars Figures
1 Total cost of manufacturing of tools segment 547,02,63,000
2 Operating margin of the assessee (PLI) 2.01%
3 Operational margin adopted by TPO 7.63%
4 Difference between the PLI 5.62%
5 Arm's length profit @ 7.63% on cost 41,73,81,066
6 Arm's length profit shown by the assessee 11,03,79,000
7 95% of the ALP determined (profit) 36,31,60,213
8 ALP adjustment (41,73,81,066 (-) 11,03,79,000 30,70,02,066
14. The learned counsel submitted even after assuming that transfer pricing
adjustment was warranted, the TPO has erroneously made adjustment in
respect of all transactions of the assessee’s Tools manufacturing segment and
not limited the adjustment to the transactions with its AEs. In support of his
proposition the learned counsel relied upon the following decisions of the
Tribunal : – (i) IL Jin Electronics India (P) Ltd. vs. ACIT (2010) 36 SOT 227
(Delhi); (ii) Kyungshin Industrial Motherson Limited vs. DCIT, ITA
8 ITA No.2545/PN/2012
A.Y. 2008-09
No.1396(Del)/2009 dated 21.10.2010; and, (iii) Demag Cranes & Components
(India) Pvt. Limited vs. DCIT, ITA No. 120/PN/2011 dated 04.01.2012.
15. On this aspect, the learned CIT(DR) reiterated that the adjustment was
appropriately determined by the lower authorities and pointed out that the
assessee had itself adopted the methodology of comparing the segmental net
margins with those of the comparable cases and therefore adjustment has to
be made to the profit/margins at the entity/segmental level.
16. We have carefully considered the rival submissions. In our considered
opinion, the TPO has clearly misdirected himself in computing the transfer
pricing adjustment in respect of all transactions of the assessee’s Tools
manufacturing segment and not limiting it to the transactions with the AEs.
Pertinently, the entire exercise of conducting a transfer pricing analysis is to
compute ALP of an international transaction alone. Section 92(1) of the Act
prescribes that any income arising from an international transaction shall be
computed having regard to the ALP. Therefore, the objective of the computing
ALP is to determining the income arising from an international transaction.
Therefore, the adjustment that is required to be made is to be limited to the
international transactions with the AEs and not to the entity/segmental level
transactions. Similar view has been expressed by our Coordinate Benches in
the cases of (i) IL Jin Electronics India (P) Ltd. (supra); (ii) Kyungshin Industrial
Motherson Limited (supra); and, (iii) Demag Cranes & Components (India) Pvt.
Limited (supra). Following the aforesaid precedents, we therefore find enough
merit in the plea of the assessee and conclude by directing the Assessing
Officer to re-compute the adjustment, if so warranted, only with regard to the
transactions in the Tools manufacturing segment carried out with the AEs and
not to the entire transactions in the segment which include the transactions
with the non-AEs also. In other words, the addition is to be confined, if
otherwise warranted, to the component of transactions with the AEs alone and
9 ITA No.2545/PN/2012
A.Y. 2008-09
not to the entire segmental results. Thus, on Ground of Appeal No. 2,
assessee succeeds as above.
17. In Ground of Appeal No. 4, the point made out is that in its Transfer
Pricing Study (in short ‘TP Study’) assessee had considered the Profit Level
Indicator (i.e. PLI) as Operating Profit/Operating Revenue. Accordingly, the
PLI of assessee’s Tools manufacturing segment was calculated at 1.98% as
detailed at page 172 of the Paper Book. The learned counsel pointed out that
the PLI adopted by the assessee in its TP Study, being Operating
Profit/Operating Revenue has been altered by the TPO without giving any
opportunity of being heard in this matter. In this context, the learned counsel
referred to the computation of adjustments made to the ALP contained in the
order of the TPO whereby the PLI adopted by the TPO is Operating
Profit/Operating Cost. Learned counsel pointed out that at no stage the TPO
had called upon the assessee to justify the PLI adopted by it in the TP Study
during the course of transfer pricing proceeding.
18. In the above background, the learned counsel submitted that assessee
would be satisfied if the matter is remanded back to the file of the Assessing
Officer/TPO to allow the assessee a reasonable opportunity of being heard on
this aspect and thereafter it may be decided by the said authorities as per law.
Pointing out that such an infirmity was raised before the DRP, a reference was
made to para 5.3 of the DRP order and it is contended that the issue of denial
of natural justice to the assessee has not been appropriately addressed.
19. On the other hand, the learned CIT(DR) appearing for the Revenue has
pointed out that the assessee had raised objections before the DRP and the
PLI adopted in the TP Study has not been accepted by the DRP.
10 ITA No.2545/PN/2012
A.Y. 2008-09
20. We have carefully considered the rival submissions. At the level of
AO/TPO it is quite evident that with regard to the altering of PLI from the
“return of sales”, as adopted by the assessee to the “return on cost” done by
the TPO, no opportunity was allowed to the assessee. In-fact, it is also
pertinent to note from the orders of the TPO/AO that no reasons have
assigned for changing the PLI as used by the assessee in the TP Study. In our
considered opinion, such an approach impinges on the principles of natural
justice and the assessee is rightfully aggrieved. In so far as the opportunity of
raising objections before the DRP is concerned, in our view, the same cannot
take the place of an opportunity that was required to be allowed before the
TPO/AO. The assessee had an opportunity before the DRP is of no
consequence for it is the fairness and reasonableness of furnishing of an
explanation before the TPO/AO which is the issue. In-fact, in a somewhat
similar situation the Hon’ble Supreme Court in the case of Tin Box Company
vs. CIT (2001) 249 ITR 216 (SC) held that once it is established that the
Assessing Officer had not given to the assessee an appropriate opportunity of
being heard, that the assessee had an opportunity before the higher appellate
authorities was really of no consequence, for it was the assessment order that
counted inasmuch as the assessment order was required to be made only
after the assessee had been allowed a reasonable opportunity of being heard.
Considered in the aforesaid light, in the present case it is axiomatic that so far
as the issue of the PLI adopted by the assessee in respect of Tools
manufacturing segment of Operating Profit/Operating Revenue is concerned,
the same has been altered by the TPO without giving the assessee any
opportunity of being heard and therefore in our view the matter ought to be
remanded back to the AO/TPO for consideration afresh. We hold so. Thus, on
this aspect also assessee succeeds.
21. By way of Ground of Appeal Nos. 7 and 8, assessee has assailed the
addition of Rs.30,70,02,006/- made by the Assessing Officer by holding that
11 ITA No.2545/PN/2012
A.Y. 2008-09
international transactions of the Tools manufacturing segment were not at
arm’s length. The appellant-company has assailed the said addition on three
aspects. The first aspect is that the Assessing Officer erred in rejecting the
segmental results of Rajasthan Udyog & Tools Limited and Hittco Tools
Limited, which have been adopted by the assessee as comparable cases. On
the said aspect, plea of the assessee is that out of the five comparables cases
considered by it in its TP Study, Assessing Officer accepted three of them and
excluded two, namely, Rajasthan Udyog & Tools Limited and Hittco Tools
Limited. A common point raised against the exclusion of the two companies
from the list of comparables is that the said companies were adopted by the
assessee as comparables in the TP Study for the earlier two assessment
years of 2006-07 and 2007-08 in respect of Tools manufacturing segment and
the same was accepted by the Revenue in the said years. It was, therefore,
contended that the Assessing Officer erred in rejecting the said concerns from
the list of comparables in this year. Apart from the aforesaid with regard to the
M/s Rajasthan Udyog & Tools Limited, the learned counsel pointed out that
the reasons advanced by the Assessing Officer to reject the same on the
ground of continuous losses and lack of functional comparability was factually
incorrect. With regard to the exclusion of Hittco Tools Limited, the learned
counsel pointed out that the reasons advanced by the Assessing Officer for
the same were also unjustified. The segmental results of the said concern
have been referred in the Paper Book to point out that the concern was
declaring profits and was not a consistently loss-making concern as observed
by the TPO. In sum and substance, the plea of the assessee is that the two
concerns have been unjustly excluded from the list of comparables.
22. The assessee had computed its PLI at 1.98% with respect to its Tools
manufacturing segment. The assessee benchmarked the same against the
arithmetic mean of the average operating margins of the following five
comparables as per which the operating margin of the assessee was higher
12 ITA No.2545/PN/2012
A.Y. 2008-09
and therefore the international transactions between the assessee and its AEs
in respect of the activity of Tools manufacturing segment was considered to be
at an arm’s length from Indian Transfer Pricing perspective. The details of the
five comparable cases selected by assessee is as under :-
Name of the company Average operating margin
on operating revenue (%)
Electronica Machine Tools Ltd. 1.30%
Hittco Tools Ltd. -7.48%
Rajasthan Udyog & Tools Limited -18.18%
Rapicut Carbides Ltd. 8.89%
Zenith Birla (India) Ltd. 15.03%
Arithmetic mean -0.09%
23. However, the Assessing Officer has excluded M/s Rajasthan Udyog &
Tools Limited and Hittco Tools Limited from the list of comparables. As per the
discussion in para 7.1 of the order of the TPO, M/s Rajasthan Udyog & Tools
Limited has been excluded on account of it being in continuous losses and
functionally incomparable. In this context, we find that the Tools manufacturing
segment of the assessee is engaged in the manufacture of cemented carbide
and high speed steel tools for metalworking applications and tools for mining
and construction. M/s Rajasthan Udyog & Tools Limited is engaged in the
manufacturing of diamonds tools, castings and cutting machines stone edge
and spare parts. It has primarily three segments – Diamond Tools and Gang
Saw Blades, Stone Cutting Machines and Diaga Mono Blade Cranes. The
assessee considered the Diamond Tools and Gang Saw Blades segment as
comparable for the purpose of benchmarking of its international transactions in
Tools manufacturing segment. A similar position has been taken by the
assessee in its TP Study for assessment year 2006-07 as well as for
assessment year 2007-08, whereby the Diamond Tools and Gang Saw Blades
segment of the said concern was considered as comparable for purpose of
benchmarking the international transactions carried out in its Tools
manufacturing segment. In the Paper Book filed before us, assessee has
furnished copies of orders passed by the TPO for assessment year 2006-07
13 ITA No.2545/PN/2012
A.Y. 2008-09
and 2007-08 under Section 92CA(3) of the Act dated 30.10.2009 and
29.10.2010 respectively whereby no adjustments with respect to the
international transactions in the Tools manufacturing segment have been
made. In other words, the adoption of segmental result of M/s Rajasthan
Udyog & Tools Limited as a comparable case has been accepted. In the
current year too we find that functional analysis of the said concern made in
the TP Study, copy of which has been placed in the Paper Book, is similar to
what was considered by the assessee in the other two assessment years
2006-07 and 2007-08.
24. The learned CIT(DR) has argued that merely because the said concern
was used as a comparable in the immediately two preceding years cannot be
a reason to adopt the said concern in the instant year also because each year
is independent and comparability of the case is to be tested for each and
every year separately.
25. In our considered opinion, the proposition advanced by the learned
CIT(DR) cannot be faulted because for the purpose of determination of ALP,
an international transaction has to be compared with uncontrolled and
unrelated transactions by using the data relating to the financial year in which
the international transaction has been entered into. In other words, the
contemporaneous information and documents are liable to be considered as
far as possible for the purposes of comparing uncontrolled transactions with
the international transactions sought to be tested. So, however, it is also to be
noted in the present case, that the Revenue has not made out any case as to
in what manner, the Diamond Tools and Gang Saw Blades segment of M/s
Rajasthan Udyog & Tools Limited is carrying out different activities then those
carried out in assessment years 2006-07 and 2007-08. The aforesaid aspect
becomes important because factually speaking in the assessment years
2006-07 and 2007-08, the said concern’s Diamond Tools and Gang Saw
14 ITA No.2545/PN/2012
A.Y. 2008-09
Blades segment has been accepted as functionally comparable to assessee’s
Tools manufacturing segment. From the impugned orders of the lower
authorities, we do not find any such distinction being brought out. On the basis
of the material on record, it is evident that the assertion of the TPO that the
said concern is functionally incomparable is a mere bald assertion devoid of
factual support. Therefore, the action of the TPO in excluding the said
concern, in our view, is not well founded and is liable to be set-aside.
26. Another reason advanced by the TPO to reject the said comparable is
that the said concern is in continuous losses. On this aspect, we find that as
per the data contained in the TP Study for assessment year 2006-07, copy of
which has been placed in the Paper Book, the Diamond Tools and Gand Saw
Blades segment of the said concern was declaring profits in 2004, 2005 and
2006 also. However, it is only for the year under consideration that the
relevant segment of the said concern has been declared a loss. Therefore, it
cannot be factually tenable to hold that the relevant segment of the said
concern has been continuously making losses, as sought to be made out by
the TPO. For both the above reasons advanced by the TPO we have not
found any factual support and therefore we direct the Assessing Officer to
include the results of the Diamond Tools and Gang Saw Blades segment of
M/s Rajasthan Udyog & Tools Limited as comparable for the purposes of
carrying out the benchmarking analysis of the international transactions
pertaining to Tools manufacturing segment of the assessee.
27. The other dispute is with regard to the exclusion of M/s Hittco Tools
Limited from the list of comparables. The said concern is said to be engaged
in the manufacturing of drill bits and for the said reason assessee treated it as
a comparable for the purposes of transfer pricing analysis of its Tools
manufacturing segment. The learned counsel pointed out that initially
assessee had made an error while stating the operating margins of the said
15 ITA No.2545/PN/2012
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concern but it rectified its mistake in the course of proceedings before the
TPO. The learned counsel submitted that the said concern was making profits
in assessment year 2006-07 and it is not a case where it was making losses
continuously. The learned counsel pointed out that even for the assessment
year under consideration, assessee corrected the error by making an
appropriate adjustment to the figure of profit of M/s Hittco Tools Limited so as
to exclude the extraordinary profits on account of write-back of loans waived
by banks. It was therefore, contended that the said concern has been rejected
on mere surmises without appreciating the correct factual position. It was
further contended that even in the assessment year 2006-07 and 2007-08 the
said concern has been taken as a comparable case and the same has not
been disputed by the Assessing Officer/TPO.
28. On this aspect, the learned CIT(DR) has referred to the discussion
made by the TPO in the impugned order and has pointed out that assessee
had himself submitted the profit margin of the said concern differently on
different occasions. Apart therefrom it is sought to be made out that the said
concern is also stated by the TPO to be functionally incomparable.
29. We considered the rival stands and find that no cogent reasons have
been advanced by the TPO to exclude the said concern from the list of
comparables. Ostensibly, the said concern was accepted as functionally
comparable in assessment years 2006-07 and 2007-08 and there is no
material to depart from the said proposition especially when no case has been
made out that in the instant assessment year that the activities of the said
concern have undergone any change. The other point made by the TPO to the
effect that the said concern is consistently loss making is also not borne out of
the record. It is only in 2004 and 2005 that the said concern had losses but it
had profits in 2006 and also for the subsequent years ending on 31.03.2010
and 31.03.2011 the said concern is making profits, as per the material placed
16 ITA No.2545/PN/2012
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in the Paper Book. Therefore, it cannot be said that the said concern is
consistently loss-making and accordingly, we do not find enough reasons to
sustain the action of the TPO in excluding the said concern from the list of
comparable.
30. Another aspect made out by the assessee is that the TPO did not allow
the plea of the assessee to remove an extraordinary debit made in its Profit
and Loss account of Rs.2.8 crores while computing the operating margin for
determining the PLI. The assessee claimed that this amount has been written-
off from the value of assets of its Titex Division, which had the effect of
debiting additional depreciation to the Profit and Loss account resulting in
reduction of profits. As per the appellant, it is an extraordinary and non-
recurring charge and represents a one time debit in Profit and Loss account to
reflect the abnormal reduction in the value of the assets of Titex Division.
Thus, the said “Impairment Loss” was required to be removed so as to
compute the normal profits.
31. At the outset, it is submitted that if such extraordinary “impairment loss”
is reduced from the cost and the profit margin is enhanced, the PLI of Tools
manufacturing segment would be enhanced and in comparison to the average
mean of the PLI’s of the comparable cases as determined by the TPO it would
be higher and therefore no adjustment would be required to be made for
determination of ALP of the international transactions in the Tools
management segment.
32. At the time of hearing before us, the learned counsel pointed out that
even if one of the comparables from the companies rejected by the TPO i.e.
M/s Rajasthan Udyod & Tools Limited or M/s Hittco Tools Limited is accepted
as comparable and every other aspect of the TPO and the DRP order is
accepted i.e. change in the manner of determination of PLI is accepted and
17 ITA No.2545/PN/2012
A.Y. 2008-09
the “impairment loss” is considered as part of operating expenditure and no
other adjustment favourable to the assessee is made even then no transfer
pricing adjustment can be made in respect of Tools manufacturing segment,
since the operating margins of the assessee would fall within the + margins
permitted by Section 92C of the Act and a working in support of the aforesaid
plea has also been furnished during the course of hearing. In terms of the said
working, which is reproduced below, the PLI of assessee’s Tools management
segment of 1.98% is higher than the arithmetic mean of comparable margins,
thus the international transactions between the assessee and the AEs in
respect of Tools management segment can be considered to be at arm’s
length price from the Indian Transfer pricing perspective :-
SANDVIK ASIA PRIVATE LIMITED
A.Y. 2008-09
Operating Profit/Sales – PLI Operating Profit/Total Cost – PLI
Hittco Rajasthan Hittco Rajasthan
Tools is Udyog Tools is Udyog
Comparables % OP/Sales added added % OP/Cost added added
Electronica 0.04 0.04 0.04 0.05 0.05 0.05
Machine Tools
Ltd.
Hittco Tools -18.95 -18.95 -15.93 -15.93
Ltd.
Rajasthan -63.25 -63.25 -38.75 -38.75
Udyog &
Tools Limited
Rapicut 10.60 10.60 1060 11.85 11.85 11.85
carbides Ltd.
Zenith Birla 9.92 9.92 9.92 11.01 11.01 11.01
(India) Ltd.
Average -12.33 0.04 -10.67 -6.35 1.75 -3.96
33. The aforesaid plea of the assessee has not been factually faulted by
the Revenue before us. Since we have already upheld assessee’s plea to
include the two companies i.e. M/s. Rajasthan Udyog & Tools Limited and M/s
Hittco Tools Limited as comparables in order to benchmark its international
transaction transactions of the Tools manufacturing segment, the other aspect
of excluding the debit of Rs.2.8 crores representing ‘Impairment Loss’ in order
to calculate the PLI of the assessee is not being adjudicated as the same is
rendered academic. Thus, Grounds of Appeal No. 7 & 8 are allowed to above
extent.
18 ITA No.2545/PN/2012
A.Y. 2008-09
34. In so far as the Grounds of Appeal Nos. 11 and 12 are concerned
relating to the application of the proviso of Section 92C of the Act and non-use
of multiple years data of the comparables as canvassed by the assessee are
concerned, the learned counsel pointed out that in case of the decision on the
plea of the assessee contained in Grounds of Appeal Nos. 2, 4, 7 & 8 is taken
in favour of the assessee or the matter is set-aside in view of the violation of
principle of natural justice, the aforesaid two Grounds will become infructuous
and would not require any adjudication. For the aforesaid reasons, the
aforesaid Grounds are treated as infructuous and are accordingly disposee-
off.
35. Thus, in conclusion, we direct the Assessing Officer to re-compute the
ALP of the international transactions in respect of the Tools manufacturing
segment as per our above discussion.
36. In the result, appeal of the assessee is partly allowed.
Order pronounced in the open Court on 27 th September, 2013.
Sd/- Sd/-
(R.S. PADVEKAR) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, Dated: 27 th September, 2013
Sujeet
Copy of the order is forwarded to: -
1) The Assessee;
2) The Department;
3) The DRP, Pune;
4) The DR, "A" Bench, I.T.A.T., Pune;
5) Guard File.
By Order
//True Copy//
Sr. Private Secretary
I.T.A.T., Pune
