M/s. Kirloskar Toyoda Textile Machinery Pvt. Ltd., Bangalore V. ACIT, Bangalore

ITA 1401/BANG/2010

• Counselvise Citation: 140121114 RSA 2010
• Duration Of Justice: 3 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 07-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: FARHAT HUSSAIN QURESHI
• Assessee Lawyers: AJIT THOLANI
• Keywords: Business income; Transfer pricing; International transaction
• Section: 92C; 143(3); 154

Judgement Text

ITA NO.1401 OF 2010 KIRLOSKAR TOYODA TEXTILE MACHIN ERY P LTD BANGALORE PAGE 1 OF 11 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE C BENCH, BANGALORE BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER IT(TP)A NO.1401/BANG/2010 (ASSESSMENT YEAR: 2006-07) M/S. KIRLOSKAR TOYODA TEXTILE MACHINERY PRIVATE LIMITED, PLOT NO.10-13 JIGANI INDUSTRIAL AREA, 2 ND PHASE, JIGANI, ANEKAL TALUK BANGALORE PAN : AAACK 7425 Q VS. ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-11(5) BANGALORE (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI AJIT THOLANI, CA DEPARTMENT BY: SHRI FARHAT HUSSAI N QURESHI, (DR) DATE OF HEARING: 10/11/2014 DATE OF PRONOUNCEMENT: 14/11/2014 O R D E R PER RAJPAL YADAV, JM THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE AS SESSMENT ORDER DATED 30.09.2010 PASSED U/S 143(3) R.W.S. 144 C(13) OF THE INCOME TAX ACT, 1961, PASSED FOR A.Y 2006-07. THE A SSESSEE HAS TAKEN FIVE GROUNDS OF APPEAL, HOWEVER, THE LD COUNS EL FOR THE ASSESSEE AT THE TIME OF HEARING RESTRICTED THE GRIE VANCE OF THE ASSESSEE TO THE EXTENT THAT THE LD AO HAS ERRED IN CONFIRMING THE ADDITION OF RS.2,10,95,333/- BY MAKING ADJUSTMENT I N THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION ENTERED WITH THE ASSOCIATED ENTREPRENEURS (AES). HE ALSO PLEADED THAT THE LD AO HAS ERRED IN NOT GRANTING THE BENEFIT OF SEC 92C (2). ACCORDING ITA NO.1401 OF 2010 KIRLOSKAR TOYODA TEXTILE MACHIN ERY P LTD BANGALORE PAGE 2 OF 11 TO THE LEARNED COUNSEL THE ADJUSTMENT RECOMMENDED B Y THE TPO FALLS WITHIN THE AMBIT OF (+-)5% RANGE PROVIDED IN THE SECOND PROVISO APPENDED TO SECTION 92C(2) AND THEREFORE, N O ADDITION OUGHT TO HAVE BEEN MADE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF TEXTILE MACHINERY, RELATED PARTS, AUTOMOTIVE PARTS AND TRAD ING MATERIAL, HANDLING EQUIPMENTS AND RELATED PARTS. IT HAS FILED ITS RETURN OF INCOME ON 23.11.2006 DECLARING NIL INCOME. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND A NOTICE U/S 143(2) WAS ISSUED TO THE ASSESSEE ON 24.09.2007 WHI CH WAS DULY SERVED UPON THE ASSESSEE. LEARNED ASSESSING OFFICER NOTICED THE INTERNATIONAL TRANSACTIONS WITH THE AE, THEREFORE, A REFERENCE WAS MADE U/S 92CA OF THE INCOME TAX ACT TO THE TPO FOR DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TR ANSACTIONS REPORTED BY THE ASSESSEE. THE TPO FOUND THAT THERE ARE TWO INTERNATIONAL TRANSACTIONS AS MENTIONED IN THE TP S TUDY REPORT. THESE TRANSACTIONS ARE (A) AUTO COMPONENT SEGMENTS AND (B) TEXTILE MACHINERY SEGMENT. IN THE AUTO COMPONENT SE GMENTS THE ASSESSEE HAS SHOWN THE PLI WHICH IS OPERATING PROFI TS/SALES AT 8.08%. THE TPO FOUND ARITHMETIC MEAN MARGIN OF THE COMPARABLES AT 9.70% ON SALES. THIS PLI OF THE COMP ARABLES FALLS WITHIN THE MARGIN OF (+-) 5% FROM THE PRICE CHARGED BY THE TAX PAYERS. THEREFORE, HE DID NOT RECOMMEND ANY ADJUSTM ENT. 3. WITH REGARD TO THE TEXTILE SEGMENT, THE ASSESSEE HAS SHOWN PLI AT 6.15%. THE TPO DID NOT ACCEPT THE RESULTS SH OWN BY THE ASSESSEE. HE DETERMINED THE PLI OF THE COMPARABLES AT 13.32% AND COMPUTED THE ALP AS UNDER: ITA NO.1401 OF 2010 KIRLOSKAR TOYODA TEXTILE MACHIN ERY P LTD BANGALORE PAGE 3 OF 11 7. COMPUTATION OF ARMS LENGTH PRICE 7.1 METHODOLOGY TNMM AS APPLIED BY THE TAXPAYER. 7.2 PROFIT LEVEL INDICATOR NET PROFIT MARGIN ON SALES 7.3 COMPARABLES AS DISCUSSED ABOVE 7.4 DETERMINATION OF ALP THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. BASED ON THIS, THE ARMS LENGTH PRICE OF THE RESEARCH AND DEVELOPMENT SERVICES RENDERED BY THE TAXPAYER IS COMPUTED AS UNDER: ARITHMETIC MEAN MARGIN 13.32% ON SALES OPERATING REVENUES RS.99,97,74,000 ARMS LENGTH MEAN MARGIN 13.32% OF THE SALES ARMS LENGTH COST (ALP) @ 86.68% OF OPERATING REVENUES RS.86,66,04,103 7.4.1 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRI CE THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH COST @ 86.68% OPERATING REVENUES (A) RS.86,66,04,103 OPERATING COST (INCLUDING THE PURCHASES MADE FROM AES) (B) RS.93,82,88,000 PURCHASES MADE FROM AE (C) RS. 9,75,04,096 COST WITH UNRELATED PARTIES (D) = (B) (C) RS.84,07,83,904 ARMS LENGTH COST OF THE PURCHASES MADE (E) = (A) (D) RS. 2,58,20,199 EXCESS PAYMENT BEING ADJUSTMENT U/S 92CA (F) = (C) (D) RS. 7,16,83,897 THE ABOVE SHORTFALL OF RS.7,16,83,897/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. ITA NO.1401 OF 2010 KIRLOSKAR TOYODA TEXTILE MACHIN ERY P LTD BANGALORE PAGE 4 OF 11 BASED ON THE ABOVE DETAILED DISCUSSION, THE ARMS L ENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS PERTAINING TO PURCHASES MADE FROM THE AES IN THE TEXTILE MACHINER Y SEGMENT IS DETERMINED AS ABOVE RESULTING IN AN ADJUSTMENT TO THE EXTENT OF RS.7,16,83,897/-. THE O THER INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE TAXP AYER WITH ITS ASSOCIATED ENTERPRISES ARE TREATED AT ARM S LENGTH IN THE ABSENCE OF ANY ADVERSE INFERENCE BASED ON TH E FACTS SUBMITTED BY THE TAXPAYER BEFORE THE TPO. 4. THE ASSESSEE FILED AN APPLICATION U/S 154 OF THE I.T. ACT AND POINTED OUT THAT THE TPO HAS ERRED IN COMPUTING THE NET MARGIN OF COMPARABLES AT 13.32%. THE ACTUAL MEAN MA RGIN IN TERMS OF PERCENTAGE IS 8.26%. TPO HAS ADMITTED THE ARITHMETIC ERROR COMMITTED BY HIM IN CALCULATING THE DETERMINA TION OF ALP. HE PASSED AN ORDER U/S 154 OF THE I.T. ACT R.W.S. 9 2CA(5) ON 27.01.2010. THE TPO HAS RECTIFIED THE ERRORS AND UL TIMATELY DETERMINED THE FOLLOWING ADJUSTMENTS: ARITHMETIC MEAN MARGIN : 8.26% ON SALES OPERATING REVENUES RS.99,97,74,000 ARMS LENGTH MEAN MARGIN 8.26% OF THE SALES ARMS LENGTH COST (ALP) @ 91.74% OF OPERATING REVENUES RS.91,71,92,667 2.1.1 PRICE RECEIVED VIS--VIS THE ARMS LENGTH PR ICE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH COST @ 91.74% OPERATING REVENUES (A) RS.91,71,92,667 OPERATING COST (INCLUDING THE PURCHASES MADE FROM AES) (B) RS.93,82,88,000 PURCHASES MADE FROM AE (C) RS. 9,75,04,096 COST WITH UNRELATED PARTIES (D) = (B) (C) RS.84,07,83,904 ARMS LENGTH COST OF THE PURCHASES MADE (E) = (A) (D) RS.7,64,08,763 EXCESS PAYMENT BEING ADJUSTMENT U/S 92CA (F) = (C) (D) RS. 2,10,95,333 ITA NO.1401 OF 2010 KIRLOSKAR TOYODA TEXTILE MACHIN ERY P LTD BANGALORE PAGE 5 OF 11 THE ABOVE SHORTFALL OF RS.2,10,95,333/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. HENCE, THE ORIGINAL ADJUSTMENT OF RS.7,16,83,897/- STANDS REVISED TO RS.2,10,95,333/-. ACCORDINGLY THE AO MAY AMEND THE ORDER OF THE ASSESSMENT IN CONFORMITY WITH THIS ORDER. 5. THE LEARNED COUNSEL FOR THE ASSESSEE WHILE IMPUG NING THE ASSESSMENT ORDER CONTENDED THAT THE LEARNED TPO FAI LED TO GIVE BENEFIT OF SEC 92C(2). THE ARITHMETIC MEAN OF COMPA RABLES AT 8.26% FALLS WITHIN THE (+-) 5% RANGE PROVIDED IN TH E PROVISO AND THEREFORE, NO ADJUSTMENT OUGHT TO BE MADE IN THE VA LUE OF INTERNATIONAL TRANSACTIONS. IN HIS SECOND FOLD OF S UBMISSIONS, HE CONTENDED THAT THE ADJUSTMENT OUGHT TO HAVE BEEN CO NFINED TO THE VALUE OF TRANSACTIONS THE ASSESSEE HAS ENTERED WITH ITS AES. THE TPO IN HIS ORDER DATED 29.10.2009 HAS ADMITTED THAT THE ASSESSEE HAD MADE PURCHASES FROM THE AE OF ONLY RS.9,75,04,096/- WHEREAS THE PURCHASES FROM UNRELAT ED PARTIES WERE MADE OF RS.84,07,83,904/-, ON THE PURCHASES MA DE FROM UNRELATED PARTIES, THERE COULD NOT BE ANY ADJUSTMEN T BECAUSE THERE COULD NOT BE ANY UNDUE BENEFIT EXTENDED BY TH E ASSESSEE TO ITS AE. THE VERY FORMULA ADOPTED BY THE TPO IS ERRO NEOUS. THE ADJUSTMENT SHOULD BE RESTRICTED QUA THE PURCHASES M ADE FROM THE AE, HE FILED THE DETAILS IN TABULAR FORM AND CO NTENDED THAT THE ADJUSTMENT AT THE MOST COULD BE OF RS.21,92,164 /-, INSTEAD OF RS.2,10,95,333/-. THIS ADJUSTMENT WOULD FALL WIT HIN THE AMBIT OF (+-) BENEFIT EXTENDED TO AN ASSESSEE AND THEREFO RE, THERE COULD NOT BE ANY ADDITION WHICH COULD BE MADE. FOR BUTTRE SSING HIS CONTENTIONS, HE RELIED ON THE ORDER OF THE ITAT IN THE CASE OF POLARTECH INDIA (P) LTD V. ASSTT. CIT (2013) 156 TT J 0659. HE TOOK US THROUGH PARAGRAPH NOS. 28 TO 33 OF THIS ORD ER. ITA NO.1401 OF 2010 KIRLOSKAR TOYODA TEXTILE MACHIN ERY P LTD BANGALORE PAGE 6 OF 11 6. ON THE OTHER HAND, THE LEARNED DR CONTENDED THAT BEFORE THE TPO, THE ASSESSEE DID NOT TAKE SPECIFIC PLEA. I T COULD HAVE FILED AN APPLICATION FOR RECTIFICATION. THEREFORE, THE TPO SHOULD BE GIVEN AN OPPORTUNITY TO EXAMINE THE DETAILS OF THE ASSESSEE WITH THIS ANGLE. IN THE REBUTTAL THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE TP STUDY REPORT, THE ASSESSEE HAS SPECIFICALLY GIVEN THE SEGMENTAL DETAILS OF THE PUR CHASES MADE FROM THE AE. THESE FIGURES HAVE BEEN NOTICED BY THE TPO IN HIS ORDER WHILE COMPUTING THE ALP. HE ALSO POINTED OUT THAT THE ASSESSEE TOOK A SPECIFIC PLEA BEFORE THE DRP AND TH E DRP HAS REJECTED THIS PLEA BY OBSERVING AS UNDER: THE PANEL IS OF THE VIEW THAT AS THE MANUFACTURE AND SALE OF TEXTILE MACHINERY IS AN INTEGRATED PROC ESS IN THE COURSE OF WHICH PURCHASES FROM THE AES AS WELL AS THIRD PARTIES ARE CONSUMED, IT IS NOT POSSI BLE TO ACCURATELY DETERMINE THE PROFIT FROM SALES ATTRIBUTABLE TO THE PURCHASES MADE FROM THE AES. TH E PANEL IS THEREFORE, OF THE VIEW THAT THE TNMM METHO D HAS TO BE APPLIED AT THE MANUFACTURING SEGMENT LEVE L AND THAT THE METHOD FOLLOWED BY THE TPO IS MORE APPROPRIATE THAN THAT SUGGESTED BY THE ASSESSEE BASED ON AN ESTIMATED BIFURCATION OF THE SALES. 7. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AN D CAREFULLY GONE THROUGH THE RECORD. SECTION 92C OF THE INCOME TAX ACT PROVIDES COMPUTATION OF INCOME FROM INTERNATIONAL T RANSACTION HAVING REGARD TO ARMS LENGTH PRICE. IT CONTEMPLATE S THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SH ALL BE COMPUTED HAVING REGARD TO THE ALP. BEFORE US THE AS SESSEE HAS NOT DISPUTED ABOUT THE NATURE OF THE INTERNATIONAL TRANSACTION WITH ITS AE IN TEXTILE MACHINERY SEGMENT. IT HAS AL SO NOT DISPUTED SELECTION OF TNMM METHOD FOR DETERMINING ALP OF THE INTERNATIONAL TRANSACTION. SIMILARLY THE LEARNED CO UNSEL FOR THE ITA NO.1401 OF 2010 KIRLOSKAR TOYODA TEXTILE MACHIN ERY P LTD BANGALORE PAGE 7 OF 11 ASSESSEE DID NOT DISPUTE ABOUT THE SELECTION OF COM PARABLE CASES FOR DETERMINING THE PLI OF THE COMPARABLES. THE DIS PUTE BEFORE IS, WHETHER THE ARITHMETIC MEAN OF THE PROFIT LEVEL IND ICATOR ARRIVED AT FROM THE COMPARABLES COULD BE APPLIED TO THE TOT AL COST INCLUDING THE PURCHASES MADE FROM UNRELATED PARTIES OR IT IS TO BE RESTRICTED TO THE PURCHASE MADE FROM THE AE. THE SECOND FOLD OF SUBMISSION IS THAT THE BENEFIT OF THE PROVISO OF SECTION 92C(2) OUGHT TO HAVE BEEN GIVEN TO THE ASSESSEE, BECAUSE I N THE AUTOMOTIVE COMPONENT SEGMENT, THE TPO HAS HIMSELF G IVEN THE BENEFIT OF THIS PROVISO. THE CONTENTION OF THE LEAR NED DR WAS THAT THIS ARGUMENT WAS NOT TAKEN UP BY THE ASSESSEE BEFO RE THE LEARNED TPO. THEREFORE, IT BE REMITTED TO THE TPO F OR VERIFICATION AND RE-ADJUDICATION. HOWEVER, WE FIND THAT IN THE T P STUDY REPORT, THE ASSESSEE HAS DISCLOSED THE DETAILS OF P URCHASES IN TEXTILE MACHINERY SEGMENT FROM THE AE. THESE ARE AV AILABLE ON PAGE 47 OF THE TP STUDY REPORT AND THEY READ AS UND ER: THE DETAILS OF THE INTERNATIONAL TRANSACTIONS ENTER ED BY KTTM WITH ITS ASSOCIATED ENTERPRISES DURING THE FIN ANCIAL YEAR 2005-06 ARE AS FOLLOWS: NAME & ADDRESS OF THE ASSOCIATED ENTERPRISE DESCRIPTION OF THE TRANSACTIONS PAYMENT AMOUNT (RS.) RECEIPT AMOUNT (RS.) TOYOTA INDUSTRIES CORPORATION, JAPAN 2-1 TOYODA- CHO, KARIYASHI, AICHI 448 JAPAN PURCHASE OF RAW MATERIALS AND COMPONENTS 97,504,096 PURCHASE OF CAPITAL GOODS 889,684 PAYMENT T OWARDS TRADE MARK FEES 120,000 RECEIPT FOR ENTRUSTMENT FEES 484,51 RECEIPTS TOWARDS SALES COMMISSION AND SERVICES 1,134,279 REIMBURSEMENT OF EXPENSES 150,139 SALE OF COMPONENTS 66,092,263 AUTOMOTIVE COMPONENTS SEGMENT. ITA NO.1401 OF 2010 KIRLOSKAR TOYODA TEXTILE MACHIN ERY P LTD BANGALORE PAGE 8 OF 11 WE FIND THAT THE ASSESSING OFFICER HAS WORKED OUT T HE ARMS LENGTH COST OF OPERATING REVENUE BY REDUCING THE TO TAL REVENUE WITH ARMS LENGTH MEAN MARGIN WHICH WAS WORKED OUT A T 8.26%. IN OTHER WORDS, THE TOTAL SALES HAVE BEEN REDUCED B Y THIS PERCENTAGE IN ORDER TO ACHIEVE THE COST. THIS COST WAS FURTHER REDUCED BY THE PURCHASES WITH UNRELATED PARTIES AND THEREAFTER THE LEARNED TPO COMPUTED THE ALP OF THE PURCHASES M ADE BY THE ASSESSEE FROM THE AE. IN OUR OPINION THIS TOTAL EXE RCISE IS ERRONEOUS, BECAUSE THERE IS NO ELEMENT OF UNDUE BEN EFIT WHICH WOULD BE PRESUMED TO HAVE BEEN EXTENDED BY THE ASSE SSEE ON THE PURCHASES FROM THE THIRD PARTIES. THE BASIC ANO MALY IN THIS FORMULA WOULD BE THAT IT COULD MAKE MULTI-FOLD ADJU STMENTS, FOR EXAMPLE IF THE ASSESSEE HAD MADE PURCHASE OF ONLY R S.2.00 CRORES FROM THE AE AND RS.91.00 CRORES FROM UNRELAT ED PARTIES, THE ADJUSTMENT WORKED OUT BY THE TPO IN THE FIGURE WOULD BE MORE THAN THE TOTAL PURCHASES MADE FROM THE AE. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TOWARDS THE ORDER OF THE ITAT IN THE CASE OF POLARTECH INDIA (P) LTD V. ASSTT. CIT (SUPRA). IN THIS CASE THE TRIBUNAL HAS FOLLOWED THE ORDER OF THE ITAT DELHI BENCH AND MADE THE FOLLOWING OBSERVATION S UNDER A SIMILAR SITUATION: 31. FOR APPLYING THE TNMM IN CASE OF INTERNATIONAL TRANSACTIONS CONSTITUTING A SMALL PORTION OF EXPENS ES, THE ONLY PRACTICAL WAY OF APPLYING THE TNMM IS TO A DOPT THE PROFITABILITY OF THE ENTIRE ENTERPRISE AS THE PROFITABILITY FROM INTERNATIONAL TRANSACTION. IT HA S THEN TO BE COMPARED WITH THE PLI OF THE COMPARABLE COMPANIE S AND ADJUSTMENT MADE ONLY TO THE INTERNATIONAL TRANSACTIONS. THIS WILL BE ACHIEVED BY TAKING THE T OTAL ADJUSTMENT APPLICABLE TO THE ENTERPRISE AS A WHOLE AND APPLYING PRO RATA, ON THE BASIS OF RATIO OF THE VAL UE OF INTERNATIONAL TRANSACTIONS FORMING PART OF OPERATIO NAL COST TO THE TOTAL OPERATIONAL EXPENSES OF THE ENTER PRISE ITA NO.1401 OF 2010 KIRLOSKAR TOYODA TEXTILE MACHIN ERY P LTD BANGALORE PAGE 9 OF 11 AS A WHOLE. WE FIND THAT THE ADJUSTMENT MADE BY THE TPO FOR THIS PURPOSE IS NOT CORRECT. , 32. WE FIND SUPPORT OF THIS VIEW IN THE DELHI TRIBU NAL FL JIN ELECTRONICS (L)(P) LTD. US. ASSTT. CIT (201 0) 36 SOT 227 (DEL) AS UNDER: 'THE ASSESSEE HAS ALSO TAKEN ONE ALTERNATIVE GROUND OUT OF THE TOTAL RAW MATERIALS CONSUMED BY THE ASSESSEE FOR MANUFACTURING PRINTED CIRCUIT BOARDS, ONLY 45.51 PER CENT OF THE TOTAL RAW MATERIALS WERE IMPORTED THROUGH ASSESSEE'S ASSOCIATE CONCERNS, AND, THEREFORE, ANY ADJUSTMENT, IF ANY CALLED FOR, CAN ONLY BE MADE TO THE 45.51 PER CENT OF THE TOTAL TURNOVER, AND NOT T O THE TOTAL TURNOVER OF THE ASSESSEE. AFTER CONSIDERING THE FACTS OF THE CASE, WE DO NOT FIND ANY DIFFICULTY IN ACCEPTING THIS CONTENTION OF THE ASSESSEE THAT AT BEST ONLY 45.51 PER CENT OF THE OPERATING PROFIT CAN BE ATTRIBUTED TO IMPORTED RAW MATERIAL ACQUIRED FROM ASSESSEE'S ASSOCIATE CONCERNS. IN THE PRESENT CASE, THE AO HAS CALCULATED THE OPERATING PROFIT ON THE ENTIRE SALES OF THE ASSESSEE, WHICH IN OUR CONSIDERED OPINION, IS NOT JUSTIFIED, WHEN IT IS ADMITTED POSITION THAT ONLY 45.51 PER CENT OF RAW MATERIAL HAS BEEN ACQUIRED BY THE ASSESSEE FROM ITS ASSOCIATE CONCERNS FOR THE PURPOSE OF MANUFACTURING ITEMS. THE ASSESSEE HAS STATED THAT THE OPERATING PROFIT IF APPLIED TO 45.51 PER CENT OF THE TURNOVER WOULD COME TO RS. 35,52,573 AS AGAINST OPERATING PROFIT OF RS. 24,35,175 BOOKED BY THE ASSESSEE, AND THE DIFFERENCE THEREOF WOULD ONLY BE CALLED FOR TO BE MADE AS ADDITION TO THE PROFIT SHOWN BY THE ASSESSEE. WE, THEREFORE, DIRECT THE AO TO MODIFY- THE ASSESSMENT AND MAKE THE ADJUSTMENT ONLY TO THE EXTENT OF DIFFERENCE IN THE ARM'S LENGTH OPERATING PROFIT WITH ADJUSTED PROFIT WITH REFERENCE TO THE 45.51 PER CENT OF THE TURNOVER, AND NOT TO THE TOTAL TURNOVER OF THE ASSESSEE. THEREFORE, TO THIS EXTENT, THE ADDITION MADE BY THE AO AND FURTHER CONFIRMED BY THE CIT(A) IS REDUCED. WE ORDER ACCORDINGLY.' 33. THEREFORE, THE TRANSFER PRICING ADJUSTMENT IS T O BE WORKED OUT WITH THE ALP DETERMINED FOR THE ENTERPRI SE, AS A WHOLE. THEREAFTER THE TRANSFER PRICING ADJUSTM ENT FOR THE ENTERPRISE AS A WHOLE SHOULD BE ALLOCATED T O THE ITA NO.1401 OF 2010 KIRLOSKAR TOYODA TEXTILE MACHIN ERY P LTD BANGALORE PAGE 10 OF 11 INTERNATIONAL TRANSACTION ON A PRO RATA BASIS IN TH E RATIO OF OPERATING EXPENSES INCURRED THROUGH INTERNATIONA L TRANSACTIONS TO THE TOTAL OPERATIONAL EXPENSES OF T HE COMPANY. ONLY THIS PROPORTION OF THE OVERALL ADJUST MENT CAN BE ADDED AS TRANSFER PRICING ADJUSTMENT. WE DIR ECT THE TPO TO COMPUTE THE TRANSFER PRICING ADJUSTMENT ALONG THESE DIRECTIONS. 8. TAKING INTO THE CONSIDERATION OF THESE FACTORS, WE ACCEPT THE FIRST FOLD OF SUBMISSION MADE BY THE LEARNED CO UNSEL FOR THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO CONFIN E THE ADJUSTMENT, QUA THE PURCHASES MADE BY THE ASSESSEE FROM THE AE. TO BE MORE SPECIFIC, THE ADJUSTMENT IS TO BE MA DE ONLY TO THE PURCHASES MADE FROM THE AE. HOWEVER, THIS EXERCISE BE CARRIED OUT AFTER VERIFYING THE DETAILS OF PURCHASES AVAILA BLE ON PAGE NO.47 OF THE TP STUDY REPORT (EXTRACTED SUPRA). THE ASSESSING OFFICER FIRST DETERMINE THE PURCHASE OF RAW MATERIA L AND COMPONENTS FROM THE AE AND THEN DETERMINE THE ALP H AVING REGARD TO THE MEAN PROFIT MARGIN OF COMPARABLE CASE S AT 8.26%. 9. AS FAR AS THE SECOND FOLD OF SUBMISSION IS CONCE RNED, WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFIC ER FOR RE- ADJUDICATION. THE LEARNED ASSESSING OFFICER, AFTER DETERMINATION OF ANY ADJUSTMENT, IF REQUIRED TO THE VALUE OF THE INTERNATIONAL TRANSACTIONS SHALL DETERMINE, WHETHER THE ASSESSEE IS ENTITLED FOR THE BENEFIT OF PROVISO APPENDED TO SECTION 92C(2). SINCE THE LEARNED TPO GRANTED THIS BENEFIT TO THE ASSESSEE WI TH REGARD TO THE AUTOMOTIVE COMPONENT SEGMENT, IT CANNOT BE DENI ED QUA, THIS CLAIM ALSO, IF THE ADJUSTMENT FALLS WITHIN THE RANGE PROVIDED IN THE PROVISO. THE ASSESSING OFFICER SHALL LOOK IN TO THESE ASPECTS AND IF SO REQUIRE CAN TAKE THE HELP OF THE TPO. ITA NO.1401 OF 2010 KIRLOSKAR TOYODA TEXTILE MACHIN ERY P LTD BANGALORE PAGE 11 OF 11 10. WITH THE ABOVE OBSERVATIONS, APPEAL OF THE ASSE SSEE IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 14 TH NOVEMBER, 2014. SD/- SD/- (JASON P. BOAZ) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE DATED 14 TH NOVEMBER 2014 VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCHES, BANGALORE