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Facts
The assessee, engaged in trading ball bearing components, filed an appeal against the Assessing Officer's order. The dispute primarily revolves around the transfer pricing adjustment made by the TPO concerning the sale of traded goods to its Associated Enterprise (AE). The TPO adjusted the assessee's operating margin from 6.24% to -35.46% and proposed an arm's length price adjustment.
Held
The Tribunal held that the TPO's action of considering total indirect expenses in proportion to export revenue to total revenue was flawed, as these expenses were also necessary for the abandoned project. The Tribunal directed the TPO to accept the assessee's operating margin at 6.24% and disallowed the transfer pricing adjustment.
Key Issues
Whether the TPO's method of calculating the assessee's operating margin by allocating indirect expenses based on export revenue to total revenue is appropriate, and if the proposed transfer pricing adjustment is justified.
Sections Cited
143(3), 143(13), 144B, 144C(5), 92CA(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “H”: NEW DELHI
O R D E R 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.
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.
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.
3. On the facts and circumstances of the case, the Ld. AO/TPO have erred, both on facts and in law, in making an adjustment of Rs. 1,11,76,537/- on account of arm's length difference on sale of the traded goods. 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. 6. On the facts and circumstances of the case, the Ld. AO/TPO have erred, both on facts and in law, in computing the OP/OC at the rate of 13.68% as against 2.35% calculated by the assessee.”
Ground Nos. 1, 2 and 7 are general in nature and does not require any specific adjudication.
Ground Nos. 3 to 6 raised by the assessee are only challenging the transfer pricing adjustment of Rs. 1,11,76,537/- made on account of arm‟s length price difference on sale of the traded goods.
We have heard the rival submissions and perused the material available on record. The assessee is a company engaged in the business of trading of ball bearing components. The assessee company was incorporated in May 2014 and is a subsidiary of SC URB Rulmenti [(associated enterprise) (AE)] and engaged in trading of all types of bearings. The AE is worldwide supplier of bearings and provides services in the rolling bearing business and is located in Romania. The assessee has reported the following international transactions of the company as per Form 3CEB:-
SI. No. Nature of transaction Method applied Amount (in Rs.) 1. Sale of Traded goods TNMM 1,95,82,372 External Commercial Borrowing 2. CUP 20,67,34,470 outstanding as on 31st March 2020 3. Trade Receivables Other method 83,14,680 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 93,68,914 (94.3% of total of these expenses- being the ratio of 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 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 1,11,76,537 (F=D-E) 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/- isderived at as the difference in ALP of the revenue determined and declared in respect of sale of traded goods for AY 2020-21.”
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.
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:- Page | 4 Particulars Debited in profit and loss Treatment given in account computation of total income Purchase of stock in 1,92,40,624/- Claimed as deduction trade allowed by AO Employee benefit 42,24,383 Voluntarily disallowed expenses 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 Towards Towards the Sales made Abandoned during the year Project Total Revenue From Domestic Abandoned Operations Export Sales 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
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 42,24,38 Total Employee Cost 42,24,383 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 Page | 6 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.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 30/07/2025.