{"id":215542,"date":"2013-09-02T00:00:00","date_gmt":"2013-09-01T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/sandvik-asia-p-ltd-pune-vs-assessee-on-2-september-2013"},"modified":"2015-05-04T20:44:30","modified_gmt":"2015-05-04T15:14:30","slug":"sandvik-asia-p-ltd-pune-vs-assessee-on-2-september-2013","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/sandvik-asia-p-ltd-pune-vs-assessee-on-2-september-2013","title":{"rendered":"Sandvik Asia P. Ltd., Pune vs Assessee on 2 September, 2013"},"content":{"rendered":"
Income Tax Appellate Tribunal – Pune<\/div>\n
Sandvik Asia P. Ltd., Pune vs Assessee on 2 September, 2013<\/div>\n
              IN THE INCOME TAX APPELLATE TRIBUNAL\n                      PUNE BENCHES \"A\", PUNE\n\n           BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER\n             AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER\n\n\n                           ITA No.2545\/PN\/2012\n                        (Assessment Year : 2008-09)\n\nSandvik Asia Private Limited\nMumbai-Pune Road, Dapodi,\nPune - 411 012.\n\nPAN : AACCS6638K                                        ....       Appellant\n\nVs.\n\nAsstt. Commissioner of Income Tax\nCircle - 10, Akurdi, Pune.                              ....      Respondent\n\n\n             Appellant by                 :   Mr. J. D. Mistry\n             Respondent by                :   Ms. M. S. Verma\n\n             Date of hearing              :   02-09-2013\n             Date of pronouncement        :   27-09-2013\n\n\n                                    ORDER\n<\/pre>\n
PER G. S. PANNU, AM<\/p>\n
      This appeal by the assessee is directed against the order of the Asstt.<\/p>\n
Commissioner of Income Tax, Circle – 10, Pune (in short ‘the Assessing<\/p>\n
Officer’) passed under Section 143(3) read with Section 144C(13) of the<\/p>\n
Income Tax Act, 1961 (in short “the Act”) dated 30.10.2012, which is in<\/p>\n
conformity with the directions given by the Dispute Resolution Panel, Pune (in<\/p>\n
short ‘the DRP’) dated 05.09.2012 for the assessment year 2008-09.<\/p>\n
2.    In this appeal, Grounds of Appeal raised by the assessee read as<\/p>\n
under: –\n<\/p>\n<\/p>\n
             “1.     The learned AO erred in passing the impugned order which
\n      was not in accordance with law, the statutory provisions, and which is void
\n      and of no legal effect.<\/p>\n
             2.     The learned AO erred in rejecting the transfer pricing analysis
\n      undertaken by the assessee by aggregating its international transactions.\n<\/p><\/blockquote>\n
            3.   The learned AO erred in rejecting the selection of the TNMM
\n      adopted by the assessee as the most appropriate method in the
\n                                         2                    ITA No.2545\/PN\/2012<\/span>
\n                                                                        A.Y. 2008-09<\/p>\n
      circumstances of the case and comparing net profit margins with external
\n      comparables for computing the arms length price of international transactions.\n<\/p><\/blockquote>\n
             4.      The learned AO erred in rejecting the selection of the
\n      TNMM\/net profit margins adopted by the assessee without properly giving the
\n      assessee an opportunity of being heard in this regard and also without
\n      assigning valid reasons for the same.\n<\/p><\/blockquote>\n
             5.      The learned AO erred in adopting the cost plus method as the
\n      most appropriate method in the circumstances of the case for computing the
\n      arms length price of international transactions.\n<\/p><\/blockquote>\n
             6.      The learned AO erred in adopting the cost plus method for
\n      computing the arms length price without properly giving the assessee an
\n      opportunity of being heard in this regard and also without assigning valid
\n      reasons for the same.\n<\/p><\/blockquote>\n
             7.     The learned AO erred in making an addition of
\n      Rs.30,70,02,006\/- by holding that international transactions of the
\n      Manufacturing – Tools segment were not at arms length.\n<\/p><\/blockquote>\n
              8.      In making addition of Rs.30,70,02,006\/- by holding that
\n      international transactions of the Manufacturing – Tools segment were not at
\n      arms length, the learned AO erred in :-\n<\/p><\/blockquote>\n
                    a.      rejecting certain segments of Rajasthan Udyog & Tools
\n             Ltd. and Hittco Tools Ltd. which had been used as a comparable by
\n             the assessee,
\n                    b.     considering a sum of Rs.2.8 crores being ‘loss on
\n             impairment of assets’ as operating expenditure of the assessee.\n<\/p><\/blockquote>\n
                    c.     considering the entire segment level profitability of the
\n             assessee despite the fact that the segment comprised transactions
\n             with both associated and non-associated enterprises.\n<\/p><\/blockquote>\n
            9.     The learned AO erred in making an addition of Rs.60,48,143\/-\n<\/p><\/blockquote>\n<\/blockquote>\n
      by holding that international transactions of the Manufacturing – Wires
\n      segment were not at arms length.\n<\/p><\/blockquote>\n
              10.      In making addition of Rs.60,48,143\/- by holding that
\n      international transactions of the Manufacturing – Wires segment were not at
\n      arms length, the learned AO erred in considering the entire segment level
\n      profitability of the assessee despite the fact that the segment comprised
\n      transactions regarding both wires and heating systems, thereby not comparing
\n      like with like.\n<\/p><\/blockquote>\n
             11.      The learned AO erred in failing to apply the provisions of the
\n      proviso to s. 92C(2) of the Act.\n<\/p><\/blockquote>\n
             12.    The learned AO erred in failing to apply multiple year data for
\n      comparables as applied by the assessee and as mandated by Rule 10B(4) of
\n      the Income-tax Rules, 1962.”\n<\/p><\/blockquote>\n
3.    In brief, the background of the dispute is that assessee is a company<\/p>\n
incorporated under the provisions of the Indian Companies Act, 1956 and its<\/p>\n
principal activities comprised manufacturing, trading and regrinding of<\/p>\n
tungsten carbide tools, rock processing equipments, thermostatic electrical<\/p>\n
bimetal strips, wires, ribbons, heating elements, cold finished tubes\/pipes and
\n                                               3                   ITA No.2545\/PN\/2012<\/span>
\n                                                                              A.Y. 2008-09<\/p>\n
manufacturing of hot extruded seamless stainless steel tubes\/pipes, etc.. The<\/p>\n
business of the company was divided into three segments, which read as<\/p>\n
under :-\n<\/p>\n
               (i)        Tooling-specialises in tools for metal cutting.\n<\/p><\/blockquote>\n
               (ii)       Mining and Construction – focuses on tools and service
\n                          for mining and construction contracts with respect to
\n                          comprissiong of crushing plants used in mines.\n<\/p><\/blockquote>\n
               (iii)      Materials Technology-Specialises in high value added
\n                          products metallic materials.<\/p><\/blockquote>\n
      For the assessment year under consideration, assessee-company filed<\/p>\n
a return of income declaring total income of Rs.104,06,33,924\/- which was<\/p>\n
subject to scrutiny assessment under Section 143(3) read with Section<\/p>\n
144C(13) of the Act, wherein by way of order dated 30.10.2012 the total<\/p>\n
income has been determined at Rs.134,81,22,200\/-. The substantive<\/p>\n
difference between the returned and the assessed income is on account of<\/p>\n
transfer pricing adjustment while determining the Arm’s Length Price (in short<\/p>\n
‘ALP’) of the international transactions carried out by the assessee with its<\/p>\n
Associated Enterprises (in short ‘AEs’). The assessee-company had<\/p>\n
undertaken certain international transactions with its AEs for which the income<\/p>\n
is required to be computed having regard to the ALP, as provided in Section<\/p>\n
92(1) of the Act. A reference under Section 92CA(1) of the Act was made by<\/p>\n
the Assessing Officer to the Transfer Pricing Officer (i.e. TPO) for computation<\/p>\n
of ALP in relation to the international transactions carried out by the assessee.<\/p>\n
In terms of the order passed by the TPO under Section 92CA(3) of the Act<\/p>\n
dated 28.10.2011, the following adjustments were proposed to the ALP stated<\/p>\n
by the assessee :-\n<\/p>\n
       Sr No         Description of international transaction   Proposed adjustment
\n       1             Export of finished goods in respect of 30,70,02,0661
\n                     manufacturing of tools division
\n       2             Manufacturing of wire segment              60,48,143\/-\n<\/p><\/blockquote>\n
                     TOTAL Adjustments proposed                 31,30,50,209\n                                       4                   ITA No.2545\/PN\/2012<\/span>\n                                                                   A.Y. 2008-09\n\n\n\n<\/pre>\n
4.    The Assessing Officer proposed a draft assessment order under<\/p>\n
Section 143(3) read with Section 144C(1) of the Act proposing adjustments to<\/p>\n
the value of international transactions as determined by the TPO and against<\/p>\n
such draft assessment order assessee preferred objections before the DRP.\n<\/p><\/blockquote>\n
The DRP vide its order dated 05.09.2012 affirmed the adjustments to the ALP<\/p>\n
of the international transactions as proposed by the TPO. Accordingly, the<\/p>\n
Assessing Officer finalized assessment under Section 143(3) read with<\/p>\n
Section 144C(3) of the Act dated 30.10.2012 determining the ALP of the<\/p>\n
international transactions in conformity with the order of the TPO passed<\/p>\n
under Section 92CA(3) of the Act.\n<\/p>\n<\/p>\n
5.    The dispute before us primarily relates to the adjustments made to the<\/p>\n
total income of the assessee on account of re-determining the ALP of the<\/p>\n
international transactions over and above the value of such transactions stated<\/p>\n
in the account books. With regard to the wire manufacturing segment, the<\/p>\n
stated values have been enhanced by a sum of Rs.60,48,143\/- and in respect<\/p>\n
of the Tools manufacturing segment the adjustment to the stated values has<\/p>\n
been made to the extent of Rs.30,70,02,006\/-.\n<\/p>\n<\/p>\n
6.    At the outset, we may dispose of Grounds of Appeal No. 3, 5, 6, 9, & 10<\/p>\n
in so far as they relate to the adjustment proposed by the TPO of<\/p>\n
Rs.60,48,143\/- in respect of international transactions of the manufacturing<\/p>\n
wire segment.\n<\/p>\n<\/p>\n
7.    In this context, the learned counsel for the assessee explained that the<\/p>\n
TPO in his order dated 28.10.2011 had proposed an addition of<\/p>\n
Rs.60,48,143\/- in respect of international transactions of the assessee’s<\/p>\n
manufacturing wire segment which was also proposed by the Assessing<\/p>\n
Officer in the draft assessment order under Section 143(3) read with Section<\/p>\n
144C(1) dated 26.12.2011 and also upheld by the DRP. Further, in para 7.3 of
\n                                         5                   ITA No.2545\/PN\/2012<\/span>
\n                                                                      A.Y. 2008-09<\/p>\n
the final assessment order dated 30.10.2012 the Assessing Officer noted the<\/p>\n
said adjustment proposed by the TPO. So, however, it is contended that while<\/p>\n
computing the income at the end of the assessment order, the Assessing<\/p>\n
Officer has not actually added the said sum in the returned income and no tax<\/p>\n
thereon has been demanded. The learned counsel explained that in order to<\/p>\n
be cautious and not to be denied an adjudication on technicality, the assessee<\/p>\n
still preferred the aforesaid Grounds while filing the appeal before the Tribunal.<\/p>\n
8.     The above factual matrix brought out by the learned counsel is not<\/p>\n
disputed by the learned CIT(DR) and it is pointed out that the adjustment was<\/p>\n
discussed in the body of the assessment order but it remained to be<\/p>\n
considered in the computation of income, which was merely a mistake<\/p>\n
rectifiable under Section 154 of the Act by the Assessing Officer.<\/p>\n
9.     Be that as it may, it is quite clear that no such addition has been<\/p>\n
ultimately made in the computation of income by the Assessing Officer and tax<\/p>\n
liability in relation to such adjustment has not been determined against the<\/p>\n
assessee. In this background, the only premise that can be drawn is that the<\/p>\n
grievances raised in the Grounds of Appeal Nos. 3, 5, 6, 9, & 10 relating to the<\/p>\n
addition of Rs.60,48,143\/- in respect of international transactions of the<\/p>\n
manufacturing wire segment, as proposed by the TPO in his order dated<\/p>\n
28.10.2012, do not arise out of the impugned order of the Assessing Officer<\/p>\n
passed under Section 143(3) read with Section 144C(13) of the Act dated<\/p>\n
30.10.2012. Therefore, the aforesaid Grounds do not require any adjudication<\/p>\n
for the present. So, however, we may make it clear that if in future the<\/p>\n
Assessing Officer takes steps to give effect to the said addition and determine<\/p>\n
tax liability thereof, assessee shall be at liberty to appeal against such<\/p>\n
addition, if so advised in law. Therefore, with the aforesaid remarks, we<\/p>\n
dismiss the Grounds of Appeal Nos. 3, 5, 6, 9 & 10 in respect of international
\n                                            6                   ITA No.2545\/PN\/2012<\/span>
\n                                                                          A.Y. 2008-09<\/p>\n
transactions of manufacturing wire segment as they do not arise out of<\/p>\n
impugned order of the Assessing Officer dated 30.10.2012 (supra).<\/p>\n
10.   Now, we may take-up the remaining Grounds of Appeal which primarily<\/p>\n
deal with the grievance of the assessee with regard to the adjustments made<\/p>\n
to the stated value of the international transactions in the Tools manufacturing<\/p>\n
segment. In this regard, it is to be noted that the Tools manufacturing segment<\/p>\n
of the assessee is engaged in the manufacture of cemented carbide and high<\/p>\n
speed steel tools for metalworking applications and tools for mining and<\/p>\n
construction.    The    international    transactions   pertaining   to   the   Tools<\/p>\n
Manufacturing segment comprised of :-\n<\/p>\n
      (i)       Import of Raw Material, Spares, Consumables, etc.;\n<\/p><\/blockquote>\n
      (ii)      Import of promotional material;\n      (iii)     Import of fixed assets\n      (iv)      Export of Finished Goods'\n      (v)       Provision for technical services;\n      (vi)      Payment of IT support services fees;\n      (vii)     Payment of Management fees; and,\n      (ix)      Payment of technical and training fees.\n\n\n\n<\/pre>\n
11.   In respect of above transactions pertaining to the Tools manufacturing<\/p>\n
segment, assessee contended that the principal activity was of manufacturing<\/p>\n
of tools. Since the aforestated international transactions formed an integral<\/p>\n
and integrated part of its manufacturing tools business, the aforesaid<\/p>\n
transactions were considered to be closely linked with the activity of<\/p>\n
manufacturing of tools and thus assessee adopted a combined transactions<\/p>\n
approach in order to carry out the benchmarking analysis. Accordingly,<\/p>\n
assessee applied the Transactional Net Margin Method (TNM method) as the<\/p>\n
most appropriate method in order to benchmark the international transactions<\/p>\n
of the Tools manufacturing segment. The TPO has accepted the TNM method<\/p>\n
of benchmarking, as adopted by the assessee subject to certain variations<\/p>\n
which are disputed before us.\n<\/p>\n
                                              7                      ITA No.2545\/PN\/2012<\/span><\/p>\n
                                                                               A.Y. 2008-09<\/p>\n
12.    In so far as the Ground of Appeal No. 1 is concerned the same is<\/p>\n
general in nature and requires no adjudication and hence it dismissed.<\/p>\n
13.    In Ground of Appeal No. 2, the grievance of the assessee is that while<\/p>\n
determining the ALP of the international transactions with its AEs, the<\/p>\n
Assessing Officer’s jurisdiction is limited to making adjustment in respect of<\/p>\n
transactions with AEs alone and not in respect of non-AE transactions<\/p>\n
undertaken by the assessee. It is contended that in the present case, the<\/p>\n
adjustment determined in respect of Tools manufacturing segment is with<\/p>\n
respect to the total sales undertaken by the assessee, including the<\/p>\n
transactions with the non-AEs. In this context, the learned counsel submitted<\/p>\n
that the aforesaid plea is notwithstanding the primary grievance of the<\/p>\n
assessee that the determination of ALP by the Assessing Officer is also<\/p>\n
otherwise unjustified. The learned counsel referred to the following<\/p>\n
computation of adjustment made by the TPO in para 7.1 of his order :-<\/p>\n
           Sr No     Particulars                                             Figures\n             1       Total cost of manufacturing of tools segment            547,02,63,000\n             2       Operating margin of the assessee (PLI)                  2.01%\n             3       Operational margin adopted by TPO                       7.63%\n             4       Difference between the PLI                              5.62%\n             5       Arm's length profit @ 7.63% on cost                     41,73,81,066\n             6       Arm's length profit shown by the assessee               11,03,79,000\n             7       95% of the ALP determined (profit)                      36,31,60,213\n             8       ALP adjustment (41,73,81,066 (-) 11,03,79,000           30,70,02,066\n\n\n\n<\/pre>\n
14.    The learned counsel submitted even after assuming that transfer pricing<\/p>\n
adjustment was warranted, the TPO has erroneously made adjustment in<\/p>\n
respect of all transactions of the assessee’s Tools manufacturing segment and<\/p>\n
not limited the adjustment to the transactions with its AEs. In support of his<\/p>\n
proposition the learned counsel relied upon the following decisions of the<\/p>\n
Tribunal : – (i) IL Jin Electronics India (P) Ltd. vs. ACIT (2010) 36 SOT 227<\/p>\n
(Delhi);    (ii)   Kyungshin    Industrial   Motherson     Limited     vs.    DCIT,    ITA
\n                                          8                     ITA No.2545\/PN\/2012<\/span>
\n                                                                         A.Y. 2008-09<\/p>\n
No.1396(Del)\/2009 dated 21.10.2010; and, (iii) Demag Cranes & Components<\/p>\n
(India) Pvt. Limited vs. DCIT, ITA No. 120\/PN\/2011 dated 04.01.2012.<\/p>\n
15.    On this aspect, the learned CIT(DR) reiterated that the adjustment was<\/p>\n
appropriately determined by the lower authorities and pointed out that the<\/p>\n
assessee had itself adopted the methodology of comparing the segmental net<\/p>\n
margins with those of the comparable cases and therefore adjustment has to<\/p>\n
be made to the profit\/margins at the entity\/segmental level.<\/p>\n
16.    We have carefully considered the rival submissions. In our considered<\/p>\n
opinion, the TPO has clearly misdirected himself in computing the transfer<\/p>\n
pricing adjustment in respect of all transactions of the assessee’s Tools<\/p>\n
manufacturing segment and not limiting it to the transactions with the AEs.<\/p>\n
Pertinently, the entire exercise of conducting a transfer pricing analysis is to<\/p>\n
compute ALP of an international transaction alone. Section 92(1) of the Act<\/p>\n
prescribes that any income arising from an international transaction shall be<\/p>\n
computed having regard to the ALP. Therefore, the objective of the computing<\/p>\n
ALP is to determining the income arising from an international transaction.<\/p>\n
Therefore, the adjustment that is required to be made is to be limited to the<\/p>\n
international transactions with the AEs and not to the entity\/segmental level<\/p>\n
transactions. Similar view has been expressed by our Coordinate Benches in<\/p>\n
the cases of (i) IL Jin Electronics India (P) Ltd. (supra); (ii) Kyungshin Industrial<\/p>\n
Motherson Limited (supra); and, (iii) Demag Cranes & Components (India) Pvt.<\/p>\n
Limited (supra). Following the aforesaid precedents, we therefore find enough<\/p>\n
merit in the plea of the assessee and conclude by directing the Assessing<\/p>\n
Officer to re-compute the adjustment, if so warranted, only with regard to the<\/p>\n
transactions in the Tools manufacturing segment carried out with the AEs and<\/p>\n
not to the entire transactions in the segment which include the transactions<\/p>\n
with the non-AEs also. In other words, the addition is to be confined, if<\/p>\n
otherwise warranted, to the component of transactions with the AEs alone and
\n                                        9                   ITA No.2545\/PN\/2012<\/span>
\n                                                                    A.Y. 2008-09<\/p>\n
not to the entire segmental results. Thus, on Ground of Appeal No. 2,<\/p>\n
assessee succeeds as above.\n<\/p>\n<\/p>\n
17.   In Ground of Appeal No. 4, the point made out is that in its Transfer<\/p>\n
Pricing Study (in short ‘TP Study’) assessee had considered the Profit Level<\/p>\n
Indicator (i.e. PLI) as Operating Profit\/Operating Revenue. Accordingly, the<\/p>\n
PLI of assessee’s Tools manufacturing segment was calculated at 1.98% as<\/p>\n
detailed at page 172 of the Paper Book. The learned counsel pointed out that<\/p>\n
the PLI adopted by the assessee in its TP Study, being Operating<\/p>\n
Profit\/Operating Revenue has been altered by the TPO without giving any<\/p>\n
opportunity of being heard in this matter. In this context, the learned counsel<\/p>\n
referred to the computation of adjustments made to the ALP contained in the<\/p>\n
order of the TPO whereby the PLI adopted by the TPO is Operating<\/p>\n
Profit\/Operating Cost. Learned counsel pointed out that at no stage the TPO<\/p>\n
had called upon the assessee to justify the PLI adopted by it in the TP Study<\/p>\n
during the course of transfer pricing proceeding.\n<\/p>\n<\/p>\n
18.   In the above background, the learned counsel submitted that assessee<\/p>\n
would be satisfied if the matter is remanded back to the file of the Assessing<\/p>\n
Officer\/TPO to allow the assessee a reasonable opportunity of being heard on<\/p>\n
this aspect and thereafter it may be decided by the said authorities as per law.<\/p>\n
Pointing out that such an infirmity was raised before the DRP, a reference was<\/p>\n
made to para 5.3 of the DRP order and it is contended that the issue of denial<\/p>\n
of natural justice to the assessee has not been appropriately addressed.<\/p>\n
19.   On the other hand, the learned CIT(DR) appearing for the Revenue has<\/p>\n
pointed out that the assessee had raised objections before the DRP and the<\/p>\n
PLI adopted in the TP Study has not been accepted by the DRP.
\n                                        10                   ITA No.2545\/PN\/2012<\/span>\n<\/p>\n
                                                                      A.Y. 2008-09<\/p>\n
20.    We have carefully considered the rival submissions. At the level of<\/p>\n
AO\/TPO it is quite evident that with regard to the altering of PLI from the<\/p>\n
“return of sales”, as adopted by the assessee to the “return on cost” done by<\/p>\n
the TPO, no opportunity was allowed to the assessee. In-fact, it is also<\/p>\n
pertinent to note from the orders of the TPO\/AO that no reasons have<\/p>\n
assigned for changing the PLI as used by the assessee in the TP Study. In our<\/p>\n
considered opinion, such an approach impinges on the principles of natural<\/p>\n
justice and the assessee is rightfully aggrieved. In so far as the opportunity of<\/p>\n
raising objections before the DRP is concerned, in our view, the same cannot<\/p>\n
take the place of an opportunity that was required to be allowed before the<\/p>\n
TPO\/AO. The assessee had an opportunity before the DRP is of no<\/p>\n
consequence for it is the fairness and reasonableness of furnishing of an<\/p>\n
explanation before the TPO\/AO which is the issue. In-fact, in a somewhat<\/p>\n
similar situation the Hon’ble Supreme Court in the case of Tin Box Company<\/p>\n
vs. CIT (2001) 249 ITR 216 (SC) held that once it is established that the<\/p>\n
Assessing Officer had not given to the assessee an appropriate opportunity of<\/p>\n
being heard, that the assessee had an opportunity before the higher appellate<\/p>\n
authorities was really of no consequence, for it was the assessment order that<\/p>\n
counted inasmuch as the assessment order was required to be made only<\/p>\n
after the assessee had been allowed a reasonable opportunity of being heard.<\/p>\n
Considered in the aforesaid light, in the present case it is axiomatic that so far<\/p>\n
as the issue of the PLI adopted by the assessee in respect of Tools<\/p>\n
manufacturing segment of Operating Profit\/Operating Revenue is concerned,<\/p>\n
the same has been altered by the TPO without giving the assessee any<\/p>\n
opportunity of being heard and therefore in our view the matter ought to be<\/p>\n
remanded back to the AO\/TPO for consideration afresh. We hold so. Thus, on<\/p>\n
this aspect also assessee succeeds.\n<\/p>\n<\/p>\n
21.    By way of Ground of Appeal Nos. 7 and 8, assessee has assailed the<\/p>\n
addition of Rs.30,70,02,006\/- made by the Assessing Officer by holding that
\n                                        11                   ITA No.2545\/PN\/2012<\/span>
\n                                                                     A.Y. 2008-09<\/p>\n
international transactions of the Tools manufacturing segment were not at<\/p>\n
arm’s length. The appellant-company has assailed the said addition on three<\/p>\n
aspects. The first aspect is that the Assessing Officer erred in rejecting the<\/p>\n
segmental results of Rajasthan Udyog & Tools Limited and Hittco Tools<\/p>\n
Limited, which have been adopted by the assessee as comparable cases. On<\/p>\n
the said aspect, plea of the assessee is that out of the five comparables cases<\/p>\n
considered by it in its TP Study, Assessing Officer accepted three of them and<\/p>\n
excluded two, namely, Rajasthan Udyog & Tools Limited and Hittco Tools<\/p>\n
Limited. A common point raised against the exclusion of the two companies<\/p>\n
from the list of comparables is that the said companies were adopted by the<\/p>\n
assessee as comparables in the TP Study for the earlier two assessment<\/p>\n
years of 2006-07 and 2007-08 in respect of Tools manufacturing segment and<\/p>\n
the same was accepted by the Revenue in the said years. It was, therefore,<\/p>\n
contended that the Assessing Officer erred in rejecting the said concerns from<\/p>\n
the list of comparables in this year. Apart from the aforesaid with regard to the<\/p>\n
M\/s Rajasthan Udyog & Tools Limited, the learned counsel pointed out that<\/p>\n
the reasons advanced by the Assessing Officer to reject the same on the<\/p>\n
ground of continuous losses and lack of functional comparability was factually<\/p>\n
incorrect. With regard to the exclusion of Hittco Tools Limited, the learned<\/p>\n
counsel pointed out that the reasons advanced by the Assessing Officer for<\/p>\n
the same were also unjustified. The segmental results of the said concern<\/p>\n
have been referred in the Paper Book to point out that the concern was<\/p>\n
declaring profits and was not a consistently loss-making concern as observed<\/p>\n
by the TPO. In sum and substance, the plea of the assessee is that the two<\/p>\n
concerns have been unjustly excluded from the list of comparables.<\/p>\n
22.   The assessee had computed its PLI at 1.98% with respect to its Tools<\/p>\n
manufacturing segment. The assessee benchmarked the same against the<\/p>\n
arithmetic mean of the average operating margins of the following five<\/p>\n
comparables as per which the operating margin of the assessee was higher
\n                                       12                   ITA No.2545\/PN\/2012<\/span>
\n                                                                    A.Y. 2008-09<\/p>\n
and therefore the international transactions between the assessee and its AEs<\/p>\n
in respect of the activity of Tools manufacturing segment was considered to be<\/p>\n
at an arm’s length from Indian Transfer Pricing perspective. The details of the<\/p>\n
five comparable cases selected by assessee is as under :-<\/p>\n
                  Name of the company                Average operating margin\n                                                     on operating revenue (%)\n         Electronica Machine Tools Ltd.                       1.30%\n         Hittco Tools Ltd.                                    -7.48%\n         Rajasthan Udyog & Tools Limited                     -18.18%\n         Rapicut Carbides Ltd.                                8.89%\n         Zenith Birla (India) Ltd.                           15.03%\n\n         Arithmetic mean                                      -0.09%\n\n\n<\/pre>\n
23.    However, the Assessing Officer has excluded M\/s Rajasthan Udyog &<\/p>\n
Tools Limited and Hittco Tools Limited from the list of comparables. As per the<\/p>\n
discussion in para 7.1 of the order of the TPO, M\/s Rajasthan Udyog & Tools<\/p>\n
Limited has been excluded on account of it being in continuous losses and<\/p>\n
functionally incomparable. In this context, we find that the Tools manufacturing<\/p>\n
segment of the assessee is engaged in the manufacture of cemented carbide<\/p>\n
and high speed steel tools for metalworking applications and tools for mining<\/p>\n
and construction. M\/s Rajasthan Udyog & Tools Limited is engaged in the<\/p>\n
manufacturing of diamonds tools, castings and cutting machines stone edge<\/p>\n
and spare parts. It has primarily three segments – Diamond Tools and Gang<\/p>\n
Saw Blades, Stone Cutting Machines and Diaga Mono Blade Cranes. The<\/p>\n
assessee considered the Diamond Tools and Gang Saw Blades segment as<\/p>\n
comparable for the purpose of benchmarking of its international transactions in<\/p>\n
Tools manufacturing segment. A similar position has been taken by the<\/p>\n
assessee in its TP Study for assessment year 2006-07 as well as for<\/p>\n
assessment year 2007-08, whereby the Diamond Tools and Gang Saw Blades<\/p>\n
segment of the said concern was considered as comparable for purpose of<\/p>\n
benchmarking the international transactions carried out in its Tools<\/p>\n
manufacturing segment. In the Paper Book filed before us, assessee has<\/p>\n
furnished copies of orders passed by the TPO for assessment year 2006-07
\n                                        13                   ITA No.2545\/PN\/2012<\/span>
\n                                                                     A.Y. 2008-09<\/p>\n
and 2007-08 under Section 92CA(3) of the Act dated 30.10.2009 and<\/p>\n
29.10.2010 respectively whereby no adjustments with respect to the<\/p>\n
international transactions in the Tools manufacturing segment have been<\/p>\n
made. In other words, the adoption of segmental result of M\/s Rajasthan<\/p>\n
Udyog & Tools Limited as a comparable case has been accepted. In the<\/p>\n
current year too we find that functional analysis of the said concern made in<\/p>\n
the TP Study, copy of which has been placed in the Paper Book, is similar to<\/p>\n
what was considered by the assessee in the other two assessment years<\/p>\n
2006-07 and 2007-08.\n<\/p>\n<\/p>\n
24.   The learned CIT(DR) has argued that merely because the said concern<\/p>\n
was used as a comparable in the immediately two preceding years cannot be<\/p>\n
a reason to adopt the said concern in the instant year also because each year<\/p>\n
is independent and comparability of the case is to be tested for each and<\/p>\n
every year separately.\n<\/p>\n<\/p>\n
25.   In our considered opinion, the proposition advanced by the learned<\/p>\n
CIT(DR) cannot be faulted because for the purpose of determination of ALP,<\/p>\n
an international transaction has to be compared with uncontrolled and<\/p>\n
unrelated transactions by using the data relating to the financial year in which<\/p>\n
the international transaction has been entered into. In other words, the<\/p>\n
contemporaneous information and documents are liable to be considered as<\/p>\n
far as possible for the purposes of comparing uncontrolled transactions with<\/p>\n
the international transactions sought to be tested. So, however, it is also to be<\/p>\n
noted in the present case, that the Revenue has not made out any case as to<\/p>\n
in what manner, the Diamond Tools and Gang Saw Blades segment of M\/s<\/p>\n
Rajasthan Udyog & Tools Limited is carrying out different activities then those<\/p>\n
carried out in assessment years 2006-07 and 2007-08. The aforesaid aspect<\/p>\n
becomes important because factually speaking in the assessment years<\/p>\n
2006-07 and 2007-08, the said concern’s Diamond Tools and Gang Saw
\n                                        14                    ITA No.2545\/PN\/2012<\/span>
\n                                                                      A.Y. 2008-09<\/p>\n
Blades segment has been accepted as functionally comparable to assessee’s<\/p>\n
Tools manufacturing segment. From the impugned orders of the lower<\/p>\n
authorities, we do not find any such distinction being brought out. On the basis<\/p>\n
of the material on record, it is evident that the assertion of the TPO that the<\/p>\n
said concern is functionally incomparable is a mere bald assertion devoid of<\/p>\n
factual support. Therefore, the action of the TPO in excluding the said<\/p>\n
concern, in our view, is not well founded and is liable to be set-aside.<\/p>\n
26.    Another reason advanced by the TPO to reject the said comparable is<\/p>\n
that the said concern is in continuous losses. On this aspect, we find that as<\/p>\n
per the data contained in the TP Study for assessment year 2006-07, copy of<\/p>\n
which has been placed in the Paper Book, the Diamond Tools and Gand Saw<\/p>\n
Blades segment of the said concern was declaring profits in 2004, 2005 and<\/p>\n
2006 also. However, it is only for the year under consideration that the<\/p>\n
relevant segment of the said concern has been declared a loss. Therefore, it<\/p>\n
cannot be factually tenable to hold that the relevant segment of the said<\/p>\n
concern has been continuously making losses, as sought to be made out by<\/p>\n
the TPO. For both the above reasons advanced by the TPO we have not<\/p>\n
found any factual support and therefore we direct the Assessing Officer to<\/p>\n
include the results of the Diamond Tools and Gang Saw Blades segment of<\/p>\n
M\/s Rajasthan Udyog & Tools Limited as comparable for the purposes of<\/p>\n
carrying out the benchmarking analysis of the international transactions<\/p>\n
pertaining to Tools manufacturing segment of the assessee.<\/p>\n
27.    The other dispute is with regard to the exclusion of M\/s Hittco Tools<\/p>\n
Limited from the list of comparables. The said concern is said to be engaged<\/p>\n
in the manufacturing of drill bits and for the said reason assessee treated it as<\/p>\n
a comparable for the purposes of transfer pricing analysis of its Tools<\/p>\n
manufacturing segment. The learned counsel pointed out that initially<\/p>\n
assessee had made an error while stating the operating margins of the said
\n                                        15                   ITA No.2545\/PN\/2012<\/span>
\n                                                                     A.Y. 2008-09<\/p>\n
concern but it rectified its mistake in the course of proceedings before the<\/p>\n
TPO. The learned counsel submitted that the said concern was making profits<\/p>\n
in assessment year 2006-07 and it is not a case where it was making losses<\/p>\n
continuously. The learned counsel pointed out that even for the assessment<\/p>\n
year under consideration, assessee corrected the error by making an<\/p>\n
appropriate adjustment to the figure of profit of M\/s Hittco Tools Limited so as<\/p>\n
to exclude the extraordinary profits on account of write-back of loans waived<\/p>\n
by banks. It was therefore, contended that the said concern has been rejected<\/p>\n
on mere surmises without appreciating the correct factual position. It was<\/p>\n
further contended that even in the assessment year 2006-07 and 2007-08 the<\/p>\n
said concern has been taken as a comparable case and the same has not<\/p>\n
been disputed by the Assessing Officer\/TPO.\n<\/p>\n<\/p>\n
28.   On this aspect, the learned CIT(DR) has referred to the discussion<\/p>\n
made by the TPO in the impugned order and has pointed out that assessee<\/p>\n
had himself submitted the profit margin of the said concern differently on<\/p>\n
different occasions. Apart therefrom it is sought to be made out that the said<\/p>\n
concern is also stated by the TPO to be functionally incomparable.<\/p>\n
29.   We considered the rival stands and find that no cogent reasons have<\/p>\n
been advanced by the TPO to exclude the said concern from the list of<\/p>\n
comparables. Ostensibly, the said concern was accepted as functionally<\/p>\n
comparable in assessment years 2006-07 and 2007-08 and there is no<\/p>\n
material to depart from the said proposition especially when no case has been<\/p>\n
made out that in the instant assessment year that the activities of the said<\/p>\n
concern have undergone any change. The other point made by the TPO to the<\/p>\n
effect that the said concern is consistently loss making is also not borne out of<\/p>\n
the record. It is only in 2004 and 2005 that the said concern had losses but it<\/p>\n
had profits in 2006 and also for the subsequent years ending on 31.03.2010<\/p>\n
and 31.03.2011 the said concern is making profits, as per the material placed
\n                                       16                   ITA No.2545\/PN\/2012<\/span>
\n                                                                     A.Y. 2008-09<\/p>\n
in the Paper Book. Therefore, it cannot be said that the said concern is<\/p>\n
consistently loss-making and accordingly, we do not find enough reasons to<\/p>\n
sustain the action of the TPO in excluding the said concern from the list of<\/p>\n
comparable.\n<\/p>\n<\/p>\n
30.   Another aspect made out by the assessee is that the TPO did not allow<\/p>\n
the plea of the assessee to remove an extraordinary debit made in its Profit<\/p>\n
and Loss account of Rs.2.8 crores while computing the operating margin for<\/p>\n
determining the PLI. The assessee claimed that this amount has been written-<\/p>\n
off from the value of assets of its Titex Division, which had the effect of<\/p>\n
debiting additional depreciation to the Profit and Loss account resulting in<\/p>\n
reduction of profits. As per the appellant, it is an extraordinary and non-<\/p>\n
recurring charge and represents a one time debit in Profit and Loss account to<\/p>\n
reflect the abnormal reduction in the value of the assets of Titex Division.<\/p>\n
Thus, the said “Impairment Loss” was required to be removed so as to<\/p>\n
compute the normal profits.\n<\/p>\n<\/p>\n
31.   At the outset, it is submitted that if such extraordinary “impairment loss”<\/p>\n
is reduced from the cost and the profit margin is enhanced, the PLI of Tools<\/p>\n
manufacturing segment would be enhanced and in comparison to the average<\/p>\n
mean of the PLI’s of the comparable cases as determined by the TPO it would<\/p>\n
be higher and therefore no adjustment would be required to be made for<\/p>\n
determination of ALP of the international transactions in the Tools<\/p>\n
management segment.\n<\/p>\n<\/p>\n
32.   At the time of hearing before us, the learned counsel pointed out that<\/p>\n
even if one of the comparables from the companies rejected by the TPO i.e.<\/p>\n
M\/s Rajasthan Udyod & Tools Limited or M\/s Hittco Tools Limited is accepted<\/p>\n
as comparable and every other aspect of the TPO and the DRP order is<\/p>\n
accepted i.e. change in the manner of determination of PLI is accepted and
\n                                             17                       ITA No.2545\/PN\/2012<\/span>
\n                                                                                 A.Y. 2008-09<\/p>\n
the “impairment loss” is considered as part of operating expenditure and no<\/p>\n
other adjustment favourable to the assessee is made even then no transfer<\/p>\n
pricing adjustment can be made in respect of Tools manufacturing segment,<\/p>\n
since the operating margins of the assessee would fall within the + margins<\/p>\n
permitted by Section 92C of the Act and a working in support of the aforesaid<\/p>\n
plea has also been furnished during the course of hearing. In terms of the said<\/p>\n
working, which is reproduced below, the PLI of assessee’s Tools management<\/p>\n
segment of 1.98% is higher than the arithmetic mean of comparable margins,<\/p>\n
thus the international transactions between the assessee and the AEs in<\/p>\n
respect of Tools management segment can be considered to be at arm’s<\/p>\n
length price from the Indian Transfer pricing perspective :-<\/p>\n
                            SANDVIK ASIA PRIVATE LIMITED
\n                                       A.Y. 2008-09
\n                     Operating Profit\/Sales – PLI   Operating Profit\/Total Cost – PLI
\n                                  Hittco    Rajasthan                  Hittco      Rajasthan
\n                                 Tools is    Udyog                    Tools is      Udyog
\n Comparables       % OP\/Sales     added      added      % OP\/Cost      added        added
\nElectronica               0.04       0.04        0.04         0.05       0.05           0.05
\nMachine Tools
\nLtd.\n<\/p><\/blockquote>\n
Hittco    Tools         -18.95    -18.95                    -15.93      -15.93\nLtd.\nRajasthan               -63.25                 -63.25       -38.75                     -38.75\nUdyog         &\nTools Limited\nRapicut                 10.60      10.60         1060        11.85      11.85          11.85\ncarbides Ltd.\nZenith     Birla          9.92       9.92        9.92        11.01      11.01          11.01\n(India) Ltd.\n       Average          -12.33       0.04      -10.67        -6.35       1.75           -3.96\n\n\n\n<\/pre>\n
33.     The aforesaid plea of the assessee has not been factually faulted by<\/p>\n
the Revenue before us. Since we have already upheld assessee’s plea to<\/p>\n
include the two companies i.e. M\/s. Rajasthan Udyog & Tools Limited and M\/s<\/p>\n
Hittco Tools Limited as comparables in order to benchmark its international<\/p>\n
transaction transactions of the Tools manufacturing segment, the other aspect<\/p>\n
of excluding the debit of Rs.2.8 crores representing ‘Impairment Loss’ in order<\/p>\n
to calculate the PLI of the assessee is not being adjudicated as the same is<\/p>\n
rendered academic. Thus, Grounds of Appeal No. 7 & 8 are allowed to above<\/p>\n
extent.\n<\/p><\/blockquote>\n
                                          18                   ITA No.2545\/PN\/2012<\/span><\/p>\n
                                                                         A.Y. 2008-09<\/p>\n<\/blockquote>\n
34.      In so far as the Grounds of Appeal Nos. 11 and 12 are concerned<\/p>\n
relating to the application of the proviso of Section 92C of the Act and non-use<\/p>\n
of multiple years data of the comparables as canvassed by the assessee are<\/p>\n
concerned, the learned counsel pointed out that in case of the decision on the<\/p>\n
plea of the assessee contained in Grounds of Appeal Nos. 2, 4, 7 & 8 is taken<\/p>\n
in favour of the assessee or the matter is set-aside in view of the violation of<\/p>\n
principle of natural justice, the aforesaid two Grounds will become infructuous<\/p>\n
and would not require any adjudication. For the aforesaid reasons, the<\/p>\n
aforesaid Grounds are treated as infructuous and are accordingly disposee-<\/p>\n
off.\n<\/p>\n<\/p>\n
35.      Thus, in conclusion, we direct the Assessing Officer to re-compute the<\/p>\n
ALP of the international transactions in respect of the Tools manufacturing<\/p>\n
segment as per our above discussion.\n<\/p>\n<\/p>\n
36.      In the result, appeal of the assessee is partly allowed.<\/p>\n
       Order pronounced in the open Court on 27 th September, 2013.<\/p>\n
                Sd\/-                                            Sd\/-\n        (R.S. PADVEKAR)                                (G.S. PANNU)\n       JUDICIAL MEMBER                             ACCOUNTANT MEMBER\n\nPune, Dated: 27 th September, 2013\nSujeet\n\nCopy of the order is forwarded to: -\n         1)     The Assessee;\n         2)     The Department;\n         3)     The DRP, Pune;\n         4)     The DR, \"A\" Bench, I.T.A.T., Pune;\n         5)     Guard File.\n\n                                                                    By Order\n\/\/True Copy\/\/\n\n\n                                                          Sr. Private Secretary\n                                                              I.T.A.T., Pune\n <\/pre>\n","protected":false},"excerpt":{"rendered":"
Income Tax Appellate Tribunal – Pune Sandvik Asia P. Ltd., Pune vs Assessee on 2 September, 2013 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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-215542","post","type-post","status-publish","format-standard","hentry","category-judgements"],"yoast_head":"\nSandvik Asia P. 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