M/s Kennametal India Ltd, Bengaluru V. Deputy Commissioner of Income Tax, LTU Circle-1, Bengaluru

ITA 2880/BANG/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 2105 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 28-01-2020
• Assessment Year: 2013-2014
• Appeal Filed On: 27-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADEEP KUMAR CIT BENGALURU
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Transfer pricing; International transaction; TDS; Set aside
• Section: 143(3); 40(a)(ia); 201(1); 144C; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B R BASKARAN , ACCOUNTANT MEMBER IT (TP) A NO. 2880 /BANG/2017 ASSESSMENT YEAR: 2013 - 14 KENNAMETAL INDIA LTD., 8/9 TH MILE, TUMKUR ROAD, BANGALORE 560 073. PAN: AACCK 4472B VS. THE DEPUTY COMMISSIONER OF INCOME TAX, LTU, CIRCLE 1, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI K.R. VASUDEVAN, ADVOCATE RESPONDENT BY : SHRI PRADEEP KUMAR, C IT(DR)(ITAT ), BENGALURU. DATE OF HEARING : 2 8 .0 1 .2020 DATE OF PRONOUNCEMENT : 27 .0 4 .2020 O R D E R PER B R BASKARAN, ACCOUNTANT MEMBER THE ASSESSEE HAS FILED THIS APPEAL CHALLENGING THE ORDER DATED 31.10.2017 PASSED BY THE ASSESSING OFFICER FOR ASSE SSMENT YEAR 2013-14 U/S 143(3) R.W.S. 144C OF THE ACT IN PURSUANCE OF D IRECTIONS GIVEN BY LD DISPUTE RESOLUTION PANEL (DRP). 2. THE GROUNDS NUMBERED AS 1 TO 7 ARE GENERAL IN NA TURE. THE GROUNDS NUMBERED AS 8 TO 13 ARE RELATED TO TRANSFER PRICING ADJUSTMENT. GROUND NO.14 RELATES TO THE DISALLOWANCE MADE U/S 4 0(A)(IA) OF THE ACT. IT(TP)A NO.2880/BANG/2017 PAGE 2 OF 8 3. THE ASSESSEE HEREIN IS A SUBSIDIARY OF M/S KENNA METAL INC., USA. AS MENTIONED IN THE ORDER OF TPO, IT IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF SINTERED PRODUCTS, DIES & WEAR PARTS , ROUND TOOLS, CARRIER BODIES, END MILLS, CONFORMA CLAD AND MACHINE TOOLS. THE PRODUCTS MANUFACTURED BY THE ASSESSEE ARE SUPPLIED TO VARIOU S INDUSTRIES SUCH AS CONSTRUCTION, MINING, GENERAL ENGINEERING AND MACHI NE TOOLS. THE ASSESSEE IS HAVING TWO SEGMENTS, VIZ., MANUFACTURIN G SEGMENT AND TRADING SEGMENT. THE TPO HAS MADE TRANSFER PRICING ADJUSTMENT ONLY IN RESPECT OF MANUFACTURING SEGMENT. 4. THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY TH E ASSESSEE ARE AS GIVEN BELOW:- INTERNATIONAL TRANSACTIONS AS PER FORM 3CEB PARTICULARS AMOUNT (IN RS.) PURCHASE OF RAW - MATERI ALS AND COMPONENTS 673567058 PURCHASES OF FINISHED GOODS 943131007 SALE OF FINISHED GOODS 383533489 PUR CHASES OF FIXED AS SETS 16939618 P AYMENT FOR ROYALTY 32069325 IT ALLOCATIONS CHARGES 135373283 REIMBURSEMEN T PAID 30317867 RECOVERY EXPENSES 8936552 TRADE RECEIVABLE 29385302 ADVANCE 11540 5 TRADE PAYABLE 276743907 5. THE ASSESSEE ADOPTED TNMM METHOD AS MOST APPROPR IATE METHOD. THE PROFIT LEVEL INDICATOR (PLI) WAS TAKEN AS OPERATING PROFIT TO OPERATING REVENUE (OP/OR). THE PLI OF THE ASSESSE E IN MANUFACTURING SEGMENT WORKED OUT TO 3.16%. HOWEVER, AFTER MAKING ADJUSTMENT TOWARDS UNDER UTILIZATION OF CAPACITY, THE ASSESSEE WORKE D OUT ITS PLI TO 9.60%. THE ASSESSEE SELECTED 12 COMPARABLE COMPANIES, WHOS E ARITHMETIC MEAN IT(TP)A NO.2880/BANG/2017 PAGE 3 OF 8 OF PLI WORKED OUT TO 6.18%. ACCORDINGLY, IT WAS SU BMITTED THAT THE INTERNATIONAL TRANSACTIONS CARRIED OUT BY IT ARE AT ARMS LENGTH. 6. THE TPO REJECTED THE TRANSFER PRICING STUDY OF T HE ASSESSEE AND SELECTED FOLLOWING NINE COMPARABLE COMPANIES. THOU GH THE TPO WORKED OUT PLI UNDER OP/OC AND OP/OR, YET HE ADOPTED OP/OC AS PLI WHILE WORKING OUT THE TRANSFER PRICING ADJUSTMENT. SL. NO. COMPANY NAME OP/OC OP/OR 1 ACE MULTI AXES SYSTEMS LTD. 21. 26% 17.54% 2 HOTTCO TOO LS LTD. 5.19% 4.93% 3 I T L INDUSTRIES L TD. 10.65% 9.63% 4 JAINEX AAMCOL LTD. 9.80% 8.92% 5 KULKARNI POWER TOOLS LTD. 6.06% 5.71% 6 MICROMATIC MANUFACTURING SYSTEMS PVT. LTD. 6.57% 6.16% 7 MITSUBISHI HEAVY INDS. INDIA PRECISION TOOLS LTD. 21.65% 17.80% 8 SOLITAIRE MACHINE TOO LS LTD. 14.62% 12.75% 9 RANE BRAKE L I NING LTD. 3.70% 3.57% 10 FEDERAL-MOGUL ANAND BEARINGS INDIA LTD. 6.03% 5.68% 11 BIRLA PR ECISION TECHNOLOGIES LTD 7.1 7% 6.69 % 12 BHARAT FRITZ WER NER LTD. 2.80% 2.72% AVERAGE 9.62% 8.51% ACCORDINGLY, THE TPO MADE TRANSFER PRICING ADJUSTME NT OF RS.4.98 CRORES. 7. THE LD DRP CONFIRMED THE TRANSFER PRICING ADJUST MENT MADE BY THE TPO AND ACCORDINGLY THE AO PASSED THE FINAL ASS ESSMENT ORDER. 8. (A) IN GROUND NO.8, THE ASSESSEE IS ASSAILING T HE DECISION OF TPO & DRP IN ADOPTING THE THRESHOLD LIMIT OF 25% FOR R ELATED PARTY TRANSACTION FILTER AS AGAINST THE LIMIT OF 10% ADO PTED BY THE ASSESSEE. IT(TP)A NO.2880/BANG/2017 PAGE 4 OF 8 8 (B) IN GROUND NO.9, THE ASSESSEE SEEKS EXCLUSIO N OF FOLLOWING FOUR COMPANIES, VIZ., (I) ACE MULTI AXES SYSTEMS LTD. (II) BIRLA PRECISION TECHNOLOGIES LTD (III) MICROMATIC MANUFACTURING SYSTEMS P LTD (IV) FEDERAL MOGUL ANAND BEARINGS INDIA LTD. 8 (C) IN GROUND NO.10, THE ASSESSEE SEEKS INCLUSIO N OF FOLLOWING TWO COMPANIES, VIZ., (I) PORWAL AUTO COMPONENTS LTD (II) RANE ENGINE VALVE LTD. 8 (D) GROUND NO.11 IS GENERAL IN NATURE. IN GROUND NO.12, THE ASSESSEE IS ASSAILING THE DECISION OF LD DRP IN REJECTING THE C LAIM OF CAPACITY UTILISATION ADJUSTMENT WITHOUT PROPER DISCUSSION. 8 (E) IN GROUND NO.13, THE ASSESSEE IS ASSAILING T HE DECISION OF TPO IN ADOPTING OP/OC AS PLI, AS AGAINST OP/OR ADOPTED BY THE ASSESSEE. 9. WE HEARD THE PARTIES AND PERUSED THE RECORD. WI TH REGARD TO THE THRESHOLD LIMIT FOR RPT FILTER, WE NOTICE THAT THE LD DRP HAS OBSERVED AS UNDER:- 5.1 PANEL:- ASSESSEES SUBMISSION AND TPO ORDER HAS BEEN EXAMINED. PANEL FINDS THE ANALYSIS OF APPLICATION OF THIS FILTER BY THE TPO AT PARA 8.2 OF HIS ORDER AS APPROPRIATE. T HEREFORE, ADOPTION OF THIS FILTER BY THE TPO HAS BEEN FOUND A CCEPTABLE AND HENCE OBJECTIONS OF THE ASSESSEE ARE REJECTED. IT(TP)A NO.2880/BANG/2017 PAGE 5 OF 8 WHILE THE OBJECTION OF THE ASSESSEE WAS WITH REGARD TO THE THRESHOLD LIMIT, WE NOTICE THAT THE LD DRP HAS GIVEN ITS DECISION OF ADOPTION OF RPT FILTER, WHICH IS NOT THE OBJECTION OF THE ASSESSEE. 10. WITH REGARD TO THE PLEA OF THE ASSESSEE FOR INC LUSION OF FOUR COMPARABLE COMPANIES, THE LD DRP HAS OBSERVED AS UN DER:- 7.5 ON PERUSAL OF THE ORDER OF THE TPO, IT IS FOU ND THAT ABOVE 4 COMPARABLES QUALIFIED ALL FILTERS ADOPTED BY THE TP O AND ARE FUNCTIONALLY COMPARABLE. PANEL FINDS THAT OBJECTIO NS AND SUBMISSIONS OF ASSESSEE MADE BEFORE TPO HAVE BEEN C ONSIDERED AND COUNTERED BY THE TPO CORRECTLY. THEREFORE ASSE SSEES OBJECTION AGAINST ADOPTION OF ACE MULTI AXES SYSTEM S LTD., MICROMATIC MANUFACTURING SYSTEMS P LTD; FEDERAL MOG UL ANAND BEARINGS INDIA LTD; BIRLA PRECISION TECHNOLOGIES LT D ARE NOT ACCEPTED. 11. WITH REGARD TO THE PLEA OF THE ASSESSEE FOR INC LUSION OF TWO COMPARABLE COMPANIES, THE LD DRP HAS OBSERVED AS UN DER:- 7.6 AT PARA 8 OF HIS ORDER THE TPO HAS CONSIDERE D SUBMISSIONS OF THE ASSESSEE AND HAS ACCEPTED THE CONTENTION OF THE ASSESSEE IN THE CASE OF BHARAT FRITZ WERNER LTD. HOWEVER ON TH E GROUNDS OF FUNCTIONAL DISSIMILARITIES THE TPO HAS REJECTED POR WAL AUTO COMPONENTS LTD AND RANE ENGINE VALVE LTD. ON CAREF UL EXAMINATION OF THE TPOS ORDER AND AFTER CAREFUL CO NSIDERATION OF THE ASSESSEES SUBMISSIONS, PANEL FINDS THAT THE TP O HAS REJECTED THESE CASES CORRECTLY AND HENCE ASSESSEES OBJECTIO N AGAINST REJECTION OF PORWAL AUTO COMPONENTS AND RANE ENGINE VALVE ARE REJECTED. 12. WITH REGARD TO THE CLAIM FOR CAPACITY UTILISATI ON ADJUSTMENT, THE LD DRP, IN PARAGRAPH 6.1 OF ITS ORDER, HAS EXPRESSED T HAT THE ASSESSEE HAS NOT RAISED THIS OBJECTION BEFORE THE TPO AND ACCORD INGLY DECLINED TO ADJUDICATE THIS GROUND. WITH REGARD TO THE SUBSTIT UTION OF PLI FROM OP/OR IT(TP)A NO.2880/BANG/2017 PAGE 6 OF 8 TO OP/OC, THE ASSESSEE HAD RAISED OBJECTION IN GROU ND 8.1 URGED BEFORE LD DRP. HOWEVER, THE LD DRP HAS NOT ADJUDICATED TH E SAME. 13. WE NOTICE THAT THE ASSESSEE HAS FURNISHED DETAI LS OF THE COMPANIES, CITED ABOVE, IN ITS PAPER BOOK. WE NOTI CE THAT THE LD DRP HAS REJECTED THE CLAIM OF THE ASSESSEE BY MAKING GENERA L OBSERVATIONS, I.E., WITHOUT ADDRESSING SPECIFIC GROUNDS URGED IN RESPEC T OF EACH OF THE COMPANIES. WE HAVE NOTICED THAT THE ASSESSEE, IN I TS TRANSFER PRICING STUDY, HAS MADE ADJUSTMENT TOWARDS UNDER UTILIZATIO N OF CAPACITY. HOWEVER, THE SAID ADJUSTMENT WAS NOT GIVEN BY THE T PO. HENCE, WE ARE OF THE VIEW THAT THE LD DRP WAS NOT JUSTIFIED IN DECLI NING TO ADJUDICATE THIS CLAIM OF THE ASSESSEE. AS NOTICED EARLIER, THE LD D RP HAS NOT ADJUDICATED THE ISSUE RELATING TO SELECTION OF PLI. 14. IN TOTALITY, WE ARE OF THE VIEW THAT THE LD DRP HAS PASSED A NON- SPEAKING ORDER. IN THIS VIEW OF THE MATTER, WE ARE OF THE OPINION THAT ALL THE ISSUES RELATING TO TRANSFER PRICING ADJUSTMENT NEED TO BE RESTORED TO THE FILE OF LD DRP/AO FOR ADJUDICATING ALL THE OBJECTIONS OF THE ASSESSEE BY A SPEAKING ORDER. ACCORDINGLY, WE SET ASIDE THE TRAN SFER PRICING ADJUSTMENT MADE IN THE FINAL ASSESSMENT ORDER AND RESTORE ALL THE ISSUES RELATING THERE TO THE FILE OF AO/DRP WITH THE DIRECTION TO THE LD DRP TO PASS A SPEAKING ORDER. 15. THE SURVIVING GROUND RELATES TO THE DISALLOWANC E MADE U/S 40(A)(IA) OF THE ACT IN RESPECT OF YEAR END PROVISIONS MADE. THE AO NOTICED THAT THE TAX AUDITOR HAS REPORTED THE FAILURE OF THE ASSESSE E TO DEDUCT TAX AT SOURCE FROM THE YEAR END PROVISIONS. ACCORDINGLY, IT APPE ARS THAT THE ITO(TDS) HAS INITIATED PROCEEDINGS RAISING DEMAND, APPARENTL Y U/S 201(1) OF THE ACT. IN THE APPELLATE PROCEEDINGS, THE LD CIT(A) HAS GIV EN RELIEF IN RESPECT OF TDS PAYMENTS MADE SUBSEQUENTLY AND ACCORDINGLY CONF IRMED THE DEMAND TO THE TUNE OF RS.5,682/-. THE CORRESPONDING AMOUN T OF PAYMENT RELATING TO IT(TP)A NO.2880/BANG/2017 PAGE 7 OF 8 THE ABOVE SAID TDS DEMAND WORKED OUT TO RS.2,84,100 /-. HENCE THE AO ADDED THE ABOVE SAID AMOUNT OF RS.2,84,100/- U/S 40 (A)(IA) OF THE ACT TO THE TOTAL INCOME OF THE ASSESSEE IN THE DRAFT ASSES SMENT ORDER. THE LD DRP ALSO CONFIRMED THE SAME AND HENCE THE AO DISALL OWED THE ABOVE SAID AMOUNT U/S 40(A)(IA) OF THE ACT IN THE FINAL ASSESS MENT ORDER. 16. BEFORE US, THE LD A.R ARGUED THAT THE YEAREND P ROVISIONS ARE REQUIRED TO BE MADE AS PER ACCOUNTING PRINCIPLES ON ESTIMATED BASIS. FURTHER THE ASSESSEE COULD NOT DEDUCT TAX THEREFROM , SINCE THE PAYEES ARE NOT KNOWN. HOWEVER, WE NOTICE THAT THE ASSESSEE HA S STATED BEFORE LD DRP THAT THE PROVISIONS HAVE BEEN MADE FOR PAYMENT TO CONTRACTORS, SUB- CONTRACTORS, PROFESSIONAL FEES, ROYALTY, RENT AND C OMMISSION. HENCE THE PAYEES SHOULD BE KNOWN TO THE ASSESSEE. ACCORDINGL Y, WE ARE OF THE VIEW THAT THE ASSESSEE SHOULD HAVE DEDUCTED TAX AT SOURC E, WHEN THE PAYEES ARE KNOWN. ACCORDINGLY WE CONFIRM THE ADDITION MAD E BY THE AO U/S 40(A)(IA) OF THE ACT. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TR EATED AS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 27 TH DAY OF APRIL, 2020. SD/- SD/- ( N V VASUDEVAN ) ( B R BASKARAN ) VICE PRESIDENT ACCOUNTANT M EMBER BANGALORE, DATED, THE 27 TH APRIL, 2020. / DESAI S MURTHY / IT(TP)A NO.2880/BANG/2017 PAGE 8 OF 8 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FIL E BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.