M/S. OROTEX CHEMICALS INDIA PRIVATE LIMITED ,BENGALURU V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-5(1)(1), BANGALORE

ITTPA 1690/BANG/2024

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Orotex Chemicals India Pvt. Ltd. appealed against the assessment order for the assessment year 2020-21, which determined their total income significantly higher than the returned income. The primary issues revolved around the transfer pricing adjustments made by the Transfer Pricing Officer (TPO) and the subsequent assessment by the Deputy Commissioner of Income Tax. The Tribunal examined various grounds including the non-consideration of the DRP's directions, the selection of comparable companies, and the computation of income under the Minimum Alternate Tax (MAT) provisions. The Tribunal found merit in some of the assessee's contentions, leading to a partial allowance of the appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 716672 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 15 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 18-08-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2020-2021
• Appeal Filed On: 02-09-2024
• Other Referred Cases: Commissioner of Income-tax, Central-III vs. Firestone International (P.) Ltd., Commissioner of Income-tax, Mumbai vs. Firestone International (P.) Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SHRISHAILENDRA KUMAR MISHRA
• Keywords: Set aside; Business income; Transfer pricing; International transaction; Question of law; Wholly owned subsidiary
• Section: 143(3); 115JB; 92C

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI KESHAV DUBEY, JUDICIAL MEMBER IT(TP)A No.1690/Bang/2024 Assessment year : 2020-21 M/s. Orotex Chemicals India Pvt. Ltd., B-28, ITI Industrial Estate, Dyavasandra, Mahadevapura, Bengaluru – 560 048. PAN: AABCO 2452Q Vs. The Deputy Commissioner of Income Tax, Circle 5(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri Shailendra Kumar Mishra, AR Respondent by : Dr. Divya K J, CIT(DR)(ITAT), Bengaluru. Date of hearing : 14.07.2025 Date of Pronouncement : 18.08.2025 O R D E R Per Prashant Maharishi, Vice President 1. This appeal is filed by Orotex Chemicals India Pvt. Ltd. (the assessee/appellant) for assessment year 2020-21 against the assessment order passed by the Assessment Unit [the ld. AO] u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 [the Act] dated 5.7.2024 determining total income of the assessee at Rs.3,24,60,651 against the returned income of Rs. Nil as per ROI filed on 15.2.2021. Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 2 of 13 The assessee has challenged the assessment order raising the following grounds:- “ 1. The Impugned Order dated 05.07.2024 passed by Assessment Unit, National Faceless Assessment Centre (hereinafter referred to as \"Ld. AO\") under section 143(3) r.w.s 144C(13) read with section 144B of the Income-tax Act is bad both in the eyes of Law and on Fact. 2. The Hon'ble DRP/Ld. AO has failed to consider and appreciate the fact that Ld. TPO had rejected the Filters applied by the Appellant Company to ascertain the Comparable Companies merely on the basis of Vague and Arbitrary Reasons without any Cogent reason and Justification. 3. The Hon’ble DRP/Ld. AO has failed to consider that Comparables selected Ld. TPO do not meet the criteria of Quantitative/Qualitative analysis and, therefore, such Comparable Companies cannot be used for the purpose of Benchmarking of International Transactions of assessee company. 4. The Hon'ble DRP/Ld. AO has failed to consider that Ld. TPO while determining the Arms' Length Price has benchmarked the total purchases instead of considering the international transaction with AE only thus the TP Adjustment is liable to be reduced to that extent only. 5. Ld. AO has failed in complying with the binding direction of the Hon'ble DRP dated 07.06.2024 wherein the Ld. AO was specifically directed to consider the amount of Rs. 1,73,69,171/- as non-operating in nature. Thus, the impugned order is invalid and bad in law. 6. The Ld. AO has wrongly computed the Total Income of Rs. 3,24,70,651/-by invoking provisions of MAT which was erroneous as while determining the Income as per Section 115JB of the Act, the Ld. AO, has ignored Book Loss of Rs. 2,38,99,840 claimed by the Appellant for AY 2020-21. 7. The Impugned Final Order dated 05.07.2024 passed by the Ld. AO and the Income enhanced therein for Rs. 3,24,70,651/- being Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 3 of 13 against the Directions of the Hon'ble DRP and the very provisions of Income Tax Act is bad in Law and, therefore, the Impugned Order deserves to be set aside and the Demand raised therein for Rs. 85,19, 650 deserves to be deleted. 8. The Appellant Company prays for leave to add, amend, modify, alter or withdraw any Ground of Appeal.” 2. Ground Nos.1 & 2 are in general and same were not pressed and therefore dismissed 3. Facts narrated for other grounds as culled from the orders of the ld. Lower authorities, show that assessee is a private limited company being wholly owned subsidiary of IIDA Industry Co. Ltd., Japan, engaged in the business of manufacturing and selling of rubber components for automobile industry. The assessee has entered into international transaction of purchase of raw material, purchase of trading goods and purchase of fixed assets. All these transactions are benchmarked adopting Transactional net Margin Method [TNMM] as the most appropriate method. The assessee has also paid technical fees to IIDA Industrial Co., Japan of Rs.75,427 which was benchmarked using other method. Interest was also paid to the holding company of Rs.30,06,407 which was benchmarked using CUP method and further reimbursement of expenses was considered as at arm’s length applying the other method. 4. In Transfer pricing Study Report [ TPSR] , With respect to purchase of goods, raw materials as well as trading goods, the assessee adopted TNMM considering the PLI of Operating Profit/Sales [ OP/sales] where the margin of the assessee was computed at 3.02%, selected 7 Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 4 of 13 comparables whose median margin was computed at 2.85% , considering the financial results of comparables for 2 years and it was stated that the transaction of purchase of traded goods, raw material, sale of traded goods and purchase of fixed assets is at arm’s length. 5. The international transactions were referred to the TPO, who asked for the financials of the impugned assessment year which were not provided to him, therefore on the basis of information available, he computed the margin of the assessee at (-) 22.66%. Subsequently the annual reports etc. were furnished to the TPO. The ld. TPO issued a show cause notice questioning the filters, search process adopted by the taxpayer, he applied fresh filters and conducted fresh search process arrived at new accept/reject matrix. The assessee was also provided with computation of margin of the comparables. The TPO rejected the TP study report due to non-application of appropriate filters. The TPO rejected all 7 comparables as all 7 comparables as all these comparables did not appear in the search matrix of the TPO. The TPO in the search process adopted the keyword of labour and other automobile ancillaries on Prowess database and ultimately came out with 7 comparable companies whose median margin based on 3 years financial results was considered at 4.77% and assessee’s margin was considered at (-) 22.50%, determined the shortfall of Rs.3,24,70,651 and passed an order u/s. 92CA of the Act. 6. Based on this the draft assessment order was passed on 15.9.2023, which was objected to before the DRP-2, Bangalore [ld. DRP]. The ld. Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 5 of 13 DRP passed direction on 7.6.2024. Based on this directions, the final assessment order was passed where the income was computed at Rs.3,24,70,651. The assessee is aggrieved and is in appeal. 7. Arguing ground No.5 of the appeal, the ld. AR submitted that binding direction of the DRP has not been considered by the AO. He referred to para 5.2 of the DRP direction where the ld. DRP directed that foreign exchange losses of Rs.1,73,69,171 should be treated as non- operating in nature because the same is arising out of reinstatement of outstanding principal amount of External Commercial Borrowing loans and interest payable. It was submitted that this will increase the margin of the assessee which the AO has not done. 8. Considering ground No.4, it was submitted by the ld. AR that adjustment of ALP are requested to be adjusted only on international transaction with AEs. He submitted that these arguments were advanced before the DRP at para 5.3. On this issue remand report was also called for and in para 5.5, the above objection was not considered. It was submitted that only 31% of the total purchases were made from the AE and balance 69% were from non-AEs. Further only 8% of the total sales is to the related parties and balance 92% is with the non- related parties. Therefore, the adjustment should have been made only with respect to AE transaction. 9. Contesting ground No.3, it was submitted that the ld. TPO has chosen comparable ALP Aeroflix India Pvt. Ltd. which is functionally not comparable as it is engaged in manufacturing of hard top roof and other Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 6 of 13 accessories for OEM auto segment in FY 2019-20 itself. Prior to that, it was engaged in manufacturing of EPDM insulation sheets, tubes and accessories for the refrigeration and air-conditioning, therefore functional profile of the same is not comparable with the assessee company. He submitted that the ld. DRP was also shown the above facts and vide para 4.1, remand report was called for, same was rejected. The ld. AR reiterated the above facts by referring to page 430 & 431 of the PB to show that the above company is functionally not comparable, which should have been excluded. 10. The ld. DR relied on the order of the TPO and the DRP. It was submitted that as the DRP has directed to exclude the foreign gain/loss treating it as non-operating and therefore it should have been excluded by the TPO for computation of the margin. The TPO may be directed to follow the direction of the DRP and compute the margin correctly. 11. With respect to the exclusion of ALP Aeroflix India Pvt. Ltd., it was submitted that the DRP has given a categorical finding that the company is engaged in manufacture of other rubber products which are similar to the assessee and same segment also for prior years, therefore the comparable is functionally comparable with the assessee. 12. With respect to the consideration of restructuring, the addition, if any, to the extent of the transaction with AE, she referred to para 5.4 of the DRP order and stated that when TNMM is adopted, the addition cannot be restricted to the AE transaction only. Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 7 of 13 13. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. Coming to ground No.5 of the appeal, it is apparent that in para 5.2 the DRP has given categorical direction to the TPO that foreign exchange losses are non-operating in nature as they are related to reinstatement of outstanding principal amount of ECB loan and interest payable, the TPO was directed to consider Rs.1,73,69,171 as non-operating in nature. The TPO has not followed the same. Directions of the DRP are binding on the AO as well as the TPO. We direct the ld. AO to refer the matter back to the TPO to consider the amount of Rs.1,73,69,171 as non-operating in nature and thereafter compute the margin of the assessee. The ld. TPO is directed to compute the Operating Profit by the above sum. The above will result into negative Operating Profit of Rs. 94,22,712 which will give PLI of Operating Profit/Total Revenue of (-) 7.91%. Thus, ground No.5 of the appeal is allowed. 14. Coming to ground No.3 of the appeal wherein assessee has objected to inclusion of one comparable company ALP Aeroflix India Pvt. Ltd., whose margin was considered to be at 9.93%. The assessee has objected that it is functionally not comparable. When the assessee challenged the same before the ld. DRP, remand report was called for. In the remand report, the TPO stated that taxpayer was provided search matrix and working of the margins of the comparables on 24.4.2024. The assessee in rejoinder has submitted that it was stated the above comparable has started manufacturing hard top roofs and other accessories for the OEM segment of automobile in FY 2019-20 itself Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 8 of 13 and prior to that it was primarily engaged in manufacture of EPDM insulation sheets, tubes and accessories for refrigeration and air- conditioning. The assessee has submitted that it is functionally not comparable. However, the ld. DRP held that as the assessee is engaged in the business of manufacture and other labour products itself similar to the assessee. 15. On a careful consideration, we find that the ld. DRP has reached the conclusion that it is engaged in manufacture of other rubber products only on the basis of financial results for FY 2019-20. This is also the submission of the assessee. But the assessee is disputing that for the earlier 2 years, that company is not engaged in the similar line of business and therefore its margin should be taken only for 1 year. On comparison of the margin, we find that margin for this year of this comparable company is 17.15% whereas margin of same company in earlier 2 years is of 7.79% and 2.35%. The jump in the margin itself show that there is a change in the business and assessee is not functionally comparable with the above company. Accordingly we direct the ld. AO to exclude this comparable from the comparability analysis. Accordingly we allow ground No.3 of the appeal. 16. Ground No.4 of the appeal is with respect to restriction of the addition to the extent of international transaction with AE only. The assessee has submitted that its transaction with AE is only 31% of the total purchases and only 8% of the total sales. On objection raised before the DRP, remand report was called for. Based on this, the ld. DRP at Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 9 of 13 para 5.4 the adjustment made by the TPO to the total transactions was upheld. 17. The direction of the DRP at para 5.3 to 5.4 is as under:- “5.3 Having considered the submission of the assessee on the issue related to AF and Non-AE transactions, the taxpayer stated that \"10 From the perusal of above, your goodself may note that only 31% of the total purchase are from AE and remaining 6.9% of the purchase are from Non-AE. Similarly, only 8% of total sales are with related party and remaining 92% of the sales are with unrelated parties. However, while benchmarking the international transactions, the id TPO has taken total operating cost (including purchases made from independent parties as well) which is against the fact and law on the point.” Further a remand report was called from the TPO on the above stated issue and the TPO in its remand report provided the comments, which is reproduced below: \"The argument of the assessee could have some force if the data in relation to profits earned by assessee in relation to costs related to international transactions were available. However, this is not so. The assessee is selling a product, for the manufacturer of which, part purchases are from AEs and remaining from non-AEs. When the product is sold, only overall profit margin is recorded without any data as to what would be the profit in relation to purchases from RE. So this can not be presumed that the profit percentage earned in relation to costs related to international transactions as well as non-international transaction was same. Since costs are common to the products ultimately sold by the assessee, and the same includes international transactions, so it is always possible that the margin of prof percentage vis a vis costs related to international transaction is not the same as profit margin on costs related to non-international transactions but ultimately overall certain profit are being shown. In fact the profit margin of the assessee in relation to imports should be higher than the profit margins on costs related to domestic sector as the imported items would be scare while domestic items would he abundantly available in local markets. Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 10 of 13 Hence, the Hon’ble DRP may direct accordingly.\" 5.4 On perusal of the international transactions undertaken by the assessee, it is seen that the taxpayer purchases are from both AEs and Non-AEs. Further when the product is sold , only overall profit margin is recorded without any data as to what would be the profit in relation to purchases from AEs. Further, for a while, if the claim of the proportionate adjustment to restrict to international transactions with AEs were to. be considered, the arm's length price will never be attained in view of the detailed reasoning given above and in the absence of breakup of bifurcation of sales and costs between AE and non-AEs. Further, the transactions with non AEs were presumed to be at arm's length and therefore no ALP is required to be determined in that transaction. Applying the TNMM, the adjustment u/s 92CA has already been arrived by the TPO following TNMM method by selecting comparables which are placed similarly in terms of functions, assets and risks. It is vivid that in TNMM, the net profit margin realized by the tested party, an assessee, out of the international transaction is computed in relation to sale effected (as in assessee' case), which is the relevant base. The expression 'in relation to' means 'in connection with' and it implies connection between impugned international transactions on account of Import and to the related sees. Panel is of view that profit margin of the assessee in relation to imports should be higher than the profit margins on costs related to domestic sector as the imported items would be scarce while domestic items would be abundantly available in the local markets. Considering the above, we uphold the adjustment made by the TPO and hence the objection of the assessee is rejected.” 18. On careful consideration, we understand that if the assessee does not have segmental costs and segmental sales both the above adjustment on proportionate basis becomes ad hoc adjustment only. However , we find that this issue has been decided by the Hon’ble Bombay high court in Commissioner of Income-tax, Central-III vs. Firestone International (P.) Ltd. [2015] 60 taxmann.com 235 (Bombay)/[2015] 234 Taxman 141 (Bombay)/[2015] 378 ITR 558 (Bombay)[15-06-2015] and SLP Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 11 of 13 against the same is pending before honourable Supreme Court Commissioner of Income-tax, Mumbai vs. Firestone International (P.) Ltd. [2016] 73 taxmann.com 39 (SC)/[2016] 242 Taxman 7 (SC)[16- 08-2016] . However Honourable High court held that. 4. (i) So far as Question (b) is concerned, the Respondent-Assessee is engaged in dealing with the Associated Enterprises (AE) in Import and Export of polished diamonds (Manufacturing). The Assessing Officer in line with the directions of the Transfer Pricing Officer (TPO) made an addition of Rs.1.20 Crores in respect of the Appellant's transaction with its AEs while arriving at Arm’s Length Price (ALP). This on the basis of the entire turnover of the Assessee and not only on the basis of the transaction with its AE. (ii) On appeal, the Commissioner of Income Tax [CIT(A)] held that the addition cannot be on the entire turnover of the Assessee but has to be restricted only to transactions with AEs. Consequently, the additional was restricted to 1.80% of the sales to AEs i.e. on Rs.4.51 Crores (Sales) at Rs.8.39 lakhs. (iii) Being aggrieved, the Revenue as well as the Respondent- Assessee carried the issue in appeal to the Tribunal. The impugned order of the Tribunal held that the addition made on account of ALP of Rs.8.39 lakhs at 1.86% is within the +/- 5% range as provided in Section 92C of the Act. Thus, if this was extended, no addition was called for. Besides, the Tribunal by the impugned order on examination of the facts held that even the ALP as Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 12 of 13 determined by the TPO is taken into account at Rs.61.99 Crores is taken, even then it is within the 5% +/- safe harbour Rules not warranting any addition. The impugned order held that amount of Rs.8.39 lakhs added by the CIT(A) is to be deleted as it falls within +/- 5% variation provided under Section 92C of the Act. (iv) We find that the decision of the Tribunal is a factual determination of the ALP and the same is found within +/- 5% safe harbour range. This is not show to be perverse and/or arbitrary. Accordingly, no occasion to entertain question (b) can arise as it does not give rise to any substantial question of law. Thus, respectfully following the decision of the Honourable High court holding that adjustment should be restricted to the extent of international transaction and not to other transactions, Accordingly, we direct the ld. AO to restrict the disallowance/addition if any to the extent of international transaction only. Accordingly we allow ground No.4 of the appeal. 19. Ground No.6 is with respect to the adjustment of ALP addition of Rs.3,24,70,651 in the trading profit of the assessee while computing tax u/s. 115JB of the Act. 20. The ld. AR submitted that the AO has ignored the book loss of Rs.2,38,99,840 and further the ALP adjustment could not have been added to the book profit. We find that there is no provision u/s. 115JB Printed from counselvise.com IT(TP)A No.1690/Bang/2024 Page 13 of 13 of the Act to include or enhance the book profit by adjustment of ALP of international transaction. Therefore, the AO is directed to delete the same from computation of book profit. Further, the assessee has incurred book loss of Rs.2,38,99,840 which should be allowed to the assessee in the computation of book profit. Ground No.6 is allowed. 21. Ground No.7 is general in nature and therefore dismissed. 22. In the result, the appeal of the assessee is partly allowed. Pronounced in the open court on this 18th day of August, 2025. Sd/- Sd/- ( KESHAV DUBEY ) ( PRASHANT MAHARISHI ) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 18th August 2025. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore. Printed from counselvise.com "