KENNAMETAL INDIA LIMITED ,BANGALORE vs. DCIT,CIRCLE-4(3)(1), BANGALORE

Brief facts of the case are assessee is engaged in the business of manufacturing mining tools, metal castings, fixtures and jigs and special purposes machines and products made of hard metals, filed its return of income for the Assessment Year 2021-22 on 15.03.2022 admitting a total income of Rs.44,79,58,851/-. The case was selected for complete scrutiny through CASS. Accordingly, notice under section 143(2) of the Act dated 28.06.2022 was issued and served on the assessee. The learned Assessing Officer (in short ‘AO’)

The AO made a reference under section 92CA of the Act to the learned Transfer Pricing Officer (in short ‘TPO’) after obtaining approval from competent authorities. The learned TPO, after considering the submissions made by the assessee on various dates, computed the Arm’s Length Price (in short ‘ALP) as follows:

The learned TPO proposed a Transfer Pricing (in short ‘TP’) adjustment of Rs.27,78,67,225/-. The learned AO, thereafter, passed a Draft Assessment Order under section 144C(1) of the Act on 21.12.2023.

Being aggrieved by the Draft Assessment Order, assessee raised objections before the Dispute Resolution Panel (in short ‘DRP’). The learned DRP, after considering the submissions made by the assessee, gave directions to the TPO on 04.09.2024. The learned TPO, thereafter, passed Order Giving Effect based on the directions of the learned DRP by granting relief amounting to Rs.15,29,96,103/- and thereby the total adjustments on account of TP are reduced to Rs.12,48,71,122/-. The learned AO thereafter made an adjustment of Rs.12,48,71,122/- to the returned income of the assessee. During the assessment proceedings, the learned AO also issued various notices under section 142(1) of the Act wherein the assessee submitted its reply on various dates. The learned AO

On being aggrieved by the Final Assessment Order passed by the learned AO, the assessee filed an appeal before the Tribunal by raising the following grounds:

Ground No.1 is general in nature and needs no adjudication. In ground No.2, the assessee has raised covid adjustment which is exceptional, on the business operations of the assessee by way of sub-grounds in 2.4 and 2.5. On this issue, the learned AR submitted that learned TPO has included the extraordinary event as part of the operating expenses due to which the margin of the assessee stood drastically reduced. He further submitted that the assessee’s manufacturing operations which are materially and demonstrably impacted by the covid 19 pandemic wherein the assessee did not make any significant sales during the lock

He further submitted that manufacturing sales trend show a dip in the current year on account of covid as follows:

He further submitted that the assessee’s sales are significantly dropped during the Financial Year 2020-21 which was primarily due to the impact of covid. Thus, the reduced sales has contributed to the under absorption of fixed overhead which ultimately resulted in reduced profitability for the impugned Assessment Year. He also submitted that the gross profit to sales ratio remained fairly consistent whereas the profitability at the net level was reduced drastically due to under absorption of fixed overheads. He further submitted that the OECD guidelines recognized the grant of adjustment on account of covid in para 36 as follows:

The learned AR relied on the following decisions: - Costrategix Technologies Pvt. Ltd. v. DCIT (Order dated 18.12.2025 passed by this Hon’ble Tribunal in IT(TP)A No. 2354/Bang/2024 for the assessment year 2021-22) - DGS Technical Services P. Ltd. v. DCIT (reported in (2025) 180 taxmann.com 266 (Hyd. Trib.) Madura Coats P. Ltd. v. ACIT (reported in (2026) 182 taxmann.com 741 - (Chennai-Trib.)

He, therefore, prayed that the impact of covid adjustment which reduces the operational profit of the assessee shall be adjusted while computing the ALP.

Per contra, the learned Departmental Representative (in short ‘DR’) fully supported the Order of the AO and the DRP stating that effect of covid is not only on the assessee but also on the other enterprises which was used as comparables. Therefore, the learned DRP has rightly rejected the covid adjustment and prayed to uphold the same.

We have heard the rival contentions and perused the material on record. It is an apparent fact that the assessee was severely impacted in the manufacturing, on account of covid 19 pandemic reducing the sales for the impugned Financial Year wherein the fixed costs remained unabsorbed during the year. The assessee has demonstrated in its written submissions the comparative sales summary for the Financial Years 2019-20 to 2021-22 as follows:

Further, the assessee has also stated the decline in the profitability due to under absorbed fixed overheads as compared to Financial Years 2019-20 to 2021- 22.

The assessee has computed the operating margin @ 4.09% after adjusting unabsorbed fixed overheads incurred during the covid period. The learned TPO has computed the ALP @ 3.64% on operating cost before adjusting the extraordinary expenses. It was the contention of the learned DRP that the covid pandemic has affected not only the assessee but also the comparables selected by the assessee and hence no adjustment is required in the case of the assessee. However, we find that the business operations of the assessee were impacted due to covid pandemic period on account of lockdown. The assessee continued to incur substantial salary cost and other expenditures to retain the employees

The next ground raised by the assessee in 2.6 and 2.7 relates to economic adjustments towards capacity underutilization. On this issue, the learned AR submitted that the assessee’s primary customers are in the automotive industry and the major portion of its manufacturing revenue derived from its automotive sector. He further submitted that automobile sector witnessed a slow down in the past few years which was further compounded due to shortage of integrated circuit that had a wide scale impact. He also referred to the automobile production trends which is given below:

He therefore submitted that there was a fall in the production as well as sale of vehicles which impacted the assessee who caters the automobile industry. He also submitted that these facts were reported in the annual report of the assessee wherein the sales declined by 34% for 2 wheelers, 12% for passenger vehicles, 51% for commercial vehicles compared to year over year. He further submitted that in the assessee’s case for the Assessment Year 2013-14, the learned DRP accepted the claim for capacity underutilization adjustment, however, rejected the claim in the impugned Assessment Year for the reason that details in relation to other comparable companies are not available in the annual report. He relied on the decision of Co-ordinate Bench of Bangalore in the case of IKA India Pvt. Ltd., Vs. The Deputy Commissioner of Income Tax in IT(TP)A No.2192/Bang/2017. He also relied on the following judicial precedents:

Per Contra, the learned DR fully supported the Order of the learned DRP.

We have heard the rival submissions and perused the material available on record. The assessee has stated that it did not utilize installed capacity fully and therefore as per the OECD guidelines, the comparability adjustment to be made to the data of the comparables in line with the OECD guidelines which also requires certain economic adjustment made to the financial data of the comparable companies. The learned TPO has observed that assessee did not submit any evidence for assuming the capacity utilization of the comparable companies and the data relied upon by the assessee for seeking capacity utilization adjustment was either unreliable or incorrect. It is a fact that assessee has underutilized capacity during the Financial Year and therefore eligible for adjustment to the same. The learned DRP observed that it is difficult to make an adjustment for differences in capacity utilization between the assessee and comparable companies due to lack of sufficient data available in the public domain. The DRP has put the onus on the assessee for the maintenance of robust documentation in this regard in order to claim capacity adjustment which would tantamount to requiring the assessee to perform an impossible tax. On the other hand, the TPO, by exercising his powers under section 133(6) of the Act should have collated the same from comparable companies. In this regard, we find that Co-ordinate Bench of Mumbai in the case of M/s Kiara Jewellery P.Ltd. in ITA No.8109/Mum/2011 has directed the AO/TPO to obtain the details of capacity utilization of comparable companies if not available in the public domain. Accordingly, we direct the TPO to exercise powers under section 133(6) of the Act calling for capacity utilization of the comparable companies. Assessee shall also be provided an opportunity before

With respect to ground Nos.2.8 to 2.10, the assessee has raised these grounds challenging the TP adjustment to the entire transaction and not restricting it to the proportionate cost of international transactions. On this issue, the learned AR submitted that assessee has earned least rental income from support services by letting it out to its group entities for service operations. These costs were included in the cost based on the manufacturing segment; income therefrom was allocated between manufacturing and trading segment by the TPO which is inconsistent with the settled accounting principles. The learned AR prayed that since the cost form part of manufacturing segment, the corresponding revenue also ought to be included in the manufacturing segment alone. He also submitted that Chapter X of the Act permits determination of ALP only in respect of international transactions entered into with the Associated Enterprises (in short ‘AE’) and the cost relating to such international transactions cannot be extended to the non-AE transactions. On this issue, he relied on the following decisions:

Per Contra, the learned DR relied on the Orders of the learned DRP.

We have heard the rival contentions. The learned DRP observed that when Transaction Net Margin Method (in short ‘TNMM’) is chosen as the Most Appropriate Method (in short ‘MAM’) at the entity level, profit of the assessee must be compared with the set of comparable companies using appropriate PLI. The contention of the assessee is that this adjustment should be restricted to the international transactions only. The learned DRP has observed that the fundamental principle is that since the transactions with non-AEs are at arm’s length, no adjustment is necessary for those transactions and therefore the entire adjustments should be made with respect to the transactions with AE and therefore adjustment between AEs and non-AEs is not appropriate. The Hon’ble High Court of Karnataka in the case of PCIT Vs. TT Steel Service India (P.) Ltd., reported in (2024) 168 taxmann.com 515 (Karnataka) by relying on the findings of the Hon’ble High Court of Bombay held as follows:

Respectfully following the decision of the jurisdictional High Court, we direct the learned AO to restrict the adjustments only with respect to the international transactions and not to transactions entered into by the assessee with other parties. Thus, the grounds raised by the assessee are allowed.

The assessee has raised in ground No.3 and sub grounds challenging the additions amounting to Rs.76,28,409/- towards bad debts in the intimation issued under section 143(1) of the Act. The learned AR submitted that the claim of bad debts as a deduction was mechanically done by the CPC under section 143(1) of the Act without considering the adjustment already made in the computation of income by the assessee. The learned AR submitted that the same amount of Rs.76,28,409/- has already been offered to tax while filing the return of income and making an addition again leads to clear case of double addition. He further

Per contra, the learned DR relied on the Orders of the Revenue authorities.

We have heard the rival contentions. It is the contention of the learned AR that the assessee has already offered to tax the impugned addition of Rs.76,28,409/- in the return of income filed by the assessee. The learned DRP considered these objections raised by the assessee as not maintainable before the DRP thereby rejecting the objections raised by the assessee for double addition. In these circumstances, we deem it fit to remand the matter back to AO/TPO to examine the claim of deduction on account of bad debts by the assessee and decide the case on merits in accordance with the law. Thus, the grounds raised by the assessee are partly allowed for statistical purposes.

With respect to ground No.2.10, the adjustment towards working capital while computing the ALP, the learned AR submitted that as per Rule 10B of the Income Tax Rules, 1962, an adjustment not to be provided for any difference in economic facts between the tested party and the comparables, in the absence of workings, the learned TPO/learned DRP considered that assessee did not demonstrate with the data, the impact of the working capital differences, therefore rejected the claim of the assessee. The learned AR further submitted that under TNMM, the comparison of net profit margins expressly require adjustments to eliminate material difference that could affect the profit. The assessee also referred to the OECD discussion on the comparability and the standard approach in determination of differences in the working capital levels of the tested party vis- à-vis comparables. The learned AR placed reliance on the decision of Co-ordinate Bench of Delhi in the case of Mentor Graphics (Nioda) Pvt. Ltd., reported in

Per contra, the learned DR relied on the Orders of the Revenue authorities.

We have heard the rival contentions. The learned DRP has observed that assessee has not demonstrated with any data or information as to the impact of such difference or the price, cost or profits as to whether such difference materially affect the price, cost or profits. In the absence of reasonable data, it is noted that accurate adjustment arising out of the differences in working capital adjustment could not be ascertained. The learned DRP also noted that assessee has failed to demonstrate such material differences as to warrant an adjustment. Therefore, it upheld the Order of the TPO by rejecting the assessee’s claim on working capital adjustment. In these circumstances, we direct the assessee to demonstrate before the learned AO/TPO such material differences so as to warrant an adjustment in the working capital. We therefore remit this matter back to the file of learned AO/TPO. Accordingly, this ground is allowed for statistical purposes.

In the result, appeal filed by the assessee is partly allowed for statistical purposes.