URB INDIA BEARING FACTORY AND TRADE PVT. LTD.,NEW DELHI vs. ITO WARD 27(1), NEW DELHI

PER M. BALAGANESH, A. M.: 1. Assessee URB India Bearing Factory and Trade Pvt. Ltd, (hereinafter referred to as „assessee) by filing the present appeal sought to set aside the impugned order dated 26.12.2023 passed by the Assessing Officer (AO) under section 143(3) read with section 143(13) and 144B of the Income Tax Act, 1961 (for short „the Act‟) inconsonance with the order passed by the Dispute Resolution Panel (DRP) dated 30.11.2023 u/s 144C(5) and order passed by Transfer Pricing Officer (TPO) under section 92CA(3) dated 19.12.2023 for AY 2020-21. 2. The assessee has raised the following grounds of appeal:- “1. On the facts and circumstances of the case, the order passed by the Ld. Assessing Officer (AO) is bad both in the eye of law and on facts. URB India Bearing Factory and Trade Pvt. Ltd 2. On the facts and circumstances of the case, the Ld. AO has erred, both on facts and in law, in making assessment at an income of Rs.1,12,41,198/-as against NIL income declared by the assessee.

4(i) On the facts and circumstances of the case, the Ld. AO/TPO have erred, both on facts and in law, in considering the operating margin at (-) 35.46% as against 6.24% calculated by the assessee.

(ii)
That the Ld. AO/TPO have erred, both on facts and in law, in considering the employee benefit expenses and other expenses at the ratio of export revenue to the total revenue.

(iii)
That the above said has been done ignoring the fact that the significant part of these expenses do not pertain to the trading operations and mainly relate to the project which was being set up for manufacturing bearings.

5(i)
On the facts and circumstances of the case, the Ld. AO/TPO have erred, both on facts and in law, in rejecting all the six comparables selected by the assessee for the purpose of transfer pricing study.

(ii)
That the Ld. AO/TPO have erred, both on facts and in law, in rejecting the comparables selected by the assessee without giving any specific reason for doing the same.

(iii)
That the Ld. AO/TPO have erred, both on facts and in law, in selecting 15
new comparables without giving any reason for the same.

Total
23,46,31,522
6. The assessee adopted Operating Profit (OP)/ Operating Cost (OC) as its Profit Level Indicator (PLI). The assessee selected 5 comparables in its Transfer
Pricing Study Report (TPSR). The PLI of the assessee as per TP study was 6.24%
while PLI of comparables was 2.32%. The assessee had exported its stock amounting to Rs. 1,95,82,372/- to its AE. Since, the assessee‟s PLI was higher, the same was considered to be @ arm‟s length by adopting Transactional Net
Margin Method (TNMM) as the Most Appropriate Method (MAM). The ld TPO observed that there were shortcomings in the TPSR submitted by the assessee company and accordingly a fresh search of comparables was selected. The PLI of the assessee was recalculated by the ld TPO as under:-
Particulars
Amount in Rs.
Sales- export
1,95,82,372
Sales- scrip exim
6,51,582
Duty draw- back
4,15,682
Total Export Revenue
2,06,99,390
Less:

Cost of material consumed
1,86,71,134
Employee benefit expenses and other expenses
(94.3% of total of these expenses- being the ratio of 93,68,914
export revenue to total revenue)

Total Operating Loss
(-)73,40,658
Operating loss %
-35.46%
7. By this process, the ld TPO tinkered with the assessee‟s reported margin of 6.24% and substitute the same with (-) 35.46%. The ld TPO rejected all the comparables chosen by the assessee in its TPSR and took 15 fresh comparables and arrived at the median of 13.68%. Accordingly, ld TPO proposed an arm‟s
URB India Bearing Factory and Trade Pvt. Ltd length price adjustment on sale of traded goods to AE of Rs. 1,11,76,537/- worked out as under:-
Particulars
Amount in Rs.
Operating Cost (A)
2,80,40,048
Arm’ Length Margin OP/OC (%)(B)
13.68%
Arm’s Length (C=A*B)
38,35,879
Arm’s Length Revenue (D=A+C)
3,18,75,927
Operating Export Revenue (E) (as declared by assessee)
2,06,99,390
Difference between ALP and Operating Export Revenue
(F=D-E)
1,11,76,537
Adjustment u/s 92CA (3)
1,11,76,537
where,
Operating cost = Cost of material consumed (Rs. 1,86,71,134) + Employee benefit expenses and other expenses (94.3% of total of these expenses- being the ratio of export revenue to total revenue) (Rs. 93,68,914)
Thus, amount of Rs. 1,11,76,537/- i erived at as the difference in ALP of the revenue determined and declared in respect of sale of traded goods for AY
2020-21.”
8. The assessee filed its objections before the ld Dispute Resolution Panel
(DRP) whereby the issue of rejection of comparables of assessee and selection of new comparables were challenged apart from tinkering of assessee‟s margin by the ld TPO. The ld DRP upheld the action of the ld TPO with regard to ALP adjustment on sale of traded goods which culminated in framing of an addition of the same figure in the final assessment order.
9. Let us first get into the aspect of tinkering of the assessee‟s operating margin by the ld TPO. We find that the ld TPO had arrived at the assessee‟s operating margin at loss of (-) 35.46%. While doing so, he had considered the employee‟s benefit expenses and other expenses at Rs. 93,68,914/-. On the contrary, the assessee had taken the employee‟s benefit and other expenses on actual basis of Rs. 7,65,496/-. This is the only point of dispute between the assessee computation of operating margin and TPO‟s computation of operating margin. We find that the assessee had practically disallowed majority of the expenses debited in the profit and loss account voluntarily in the computation of total income as under:-
URB India Bearing Factory and Trade Pvt. Ltd
Particulars
Debited in profit and loss account
Treatment given in computation of total income
Purchase of stock in trade
1,92,40,624/-
Claimed as deduction allowed by AO
Employee benefit expenses
42,24,383
Voluntarily disallowed
Other expenses
57,10,839
Voluntarily disallowed
Exception items
17,44,59,099
Voluntarily disallowed
10. Employee benefit and other expenses of Rs. 99,35,222/- (4224383+
57,10,839) debited in the profit and loss account and exceptional item of Rs
17,44,59,099/- had been suo moto disallowed by the assessee in the computation of income while filing the return. There was an abandoned project with regard to ball bearing manufacturing plant for which the assessee had incurred lot of expenditure and the same was debited in the profit and loss account and disallowed voluntarily in the return of income by the assessee. The ld TPO had taken the figure of operating cost of 94.30% in proportion of export turnover to total turnover. The contentions of the assessee was that significant part of the expenses debited in the profit and loss account allocated to trading activities of the assessee were infact related to the abandoned projects due to cancellation of lease which consequentially led to write off of the expenses thereon. The assessee had apportioned the actual expenses incurred towards trading activities and had allocated the remaining employee benefit and other expenses towards the project which stood abandoned. The workings of the same are reproduced as under:-
Expenses Distribution
Revenue From Operations

Towards the Sales made during the year
Towards
Abandoned
Project
Total
Export
Domestic
Sales
Abandoned
Project
Domestic
5,98,330

5,98,330

5,98,330
Sales Exim
6,51,522
6,51,522

6,51,522
Sales Export
1,95,82,372
1,95,82,372

1,95,82,372

2,08,32,224
2,02,33,894
5,98,330

2,08,32,224
Other Income

Interest
8,772

8,772
8,772
Duty Drawback received
4,15,682
4,15,682

4,15,682

4,24,454
4,15,682

8,772
4,24,454
URB India Bearing Factory and Trade Pvt. Ltd
Total
2,12,56,678
2,06,49,576
5,98,330
8,772
2,12,56,678

Cost of Material consumed
.

.
Purchase of stock in trade
1,92,40,624
1,86,71,134
5,69,490

1,92,40,624
Change in inventory

Employee Benefit expenses

Salary Expenses
41,84,830

41,84,830
41,84,830
employee insurance benefit
39,553

39,553
39,553
Leave encashment

Total Employee Cost
42,24,383

42,24,38
3
42,24,383
Finance Cost

Depreciation and Amortization

.
Other Expenses:

Office expenses
3,01,099
10,000

2,91,099
3,01,099
Rent Expenses
5,65,150

5,65,150
5,65,150
Professional charges
14,05,200
2,52,000

11,53,200
14,05,200
Travelling Expenses -
Domestic
13,44,476

13,44,476
13,44,476
audit Fee
30,000
10,000

20,000
30,000
Electricity and Water
Expenses
34,934

34,934
34,934
Telephone
12,162

12,162
12,162
Postage and Courier
Expenses
56,261
14,000

42,261
56,261
Bank Charges
53,227
14,000

39,227
53,227
Insurance
14,400
14,400

14,400
Shipping and Forwarding larges
4,51,096
4,51,096

4,51,096
Watch and ward expenses 6,19,904

6,19,904
6,19,904
party balances w/o
8,22,930

8,22,930
8,22,930
Total Other Expenses
57,10,839
7,65,496
-
49,45,343
57,10,839
11. We find that the ld DRP at page 6 para 8.4.1(iii) of its directions had specifically taken note of the aforesaid contentions of the assessee and had directed the ld AO to examine this issue further and make suitable modification in the final order. The ld TPO passed a giving effect order on 19.12.2023 to the direction of the ld DRP and erroneously stated in para 4.1 that the ld DRP had upheld the findings of the ld TPO. This, in our considered opinion, is factually incorrect and contrary to the directions given by the ld DRP vide page 6 in para
8.4.1 (iii) of the DRP‟s order. In any case, we find that the dispute raised by the ld DRP was only with regard to capital expenses vs. revenue expenses. The genuinity of incurrence of such expenses towards the trading activity and URB India Bearing Factory and Trade Pvt. Ltd abandoned project was not doubted. As stated earlier, the ld TPO had taken the indirect expenses in proportion to the export revenue to total revenue and had allocated the said expenses more to the trading activity thereby resulting in tinkering of assessee‟s operation margin, whereas the assessee had taken the actual expenses incurred in its trading activity and allocated the same for working out its operation margin. Either way, the assessee had already disallowed the entire indirect expenses in the computation of income. We hold that action of the lower authorities in considering the total indirect expenses in proportion to the export revenue to total revenue is totally flawed as the very same indirect expenses were also needed to be allocated largely to the abandoned project.
Because of tinkering with the assessee‟s margin by the ld TPO, the entire dispute arose in the instant case. Hence, we have no hesitation in directing the ld TPO to accept the assessee‟s operating margin @6.24%. No transfer pricing adjustment need to be made in respect of trading activity. Accordingly, ground Nos. 3 to 6
raised by the assessee are allowed.
12. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 30/07/2025. - - (C. N. PRASAD)
ACCOUNTANT MEMBER

Dated: 30/07/2025
A K Keot