DEPUTY COMMISSIONER OF INCOME-TAX , COIMBATORE vs. L G BALAKRISHNAN & BROS LTD, COIMBATORE

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ITTPA 74/CHNY/2024Status: DisposedITAT Chennai03 September 2025AY 2013-1412 pages
AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the ITAT's order for de-novo consideration meant the matter should be examined from the beginning. The assessee had raised arguments regarding product mix and market mix during original assessment proceedings, and the quantitative details submitted as additional evidence before the CIT(A) could not be rejected. The Tribunal noted that the eligible Pantnagar unit catered significantly to the 'Replacement markets' yielding higher margins (about 60% of sales), unlike other units with only about 10% sales in replacement markets. Furthermore, the Pantnagar plant produced more high-margin Cam chains and kits, contributing to its higher profitability. The Tribunal also found that the comparable companies identified by the TPO were not truly comparable due to differences in their products compared to the assessee's. The Tribunal agreed with the CIT(A) that the assessee had consistently followed the 'Cost plus method' at cost plus 10% as the Most Appropriate Method (MAM), while the TPO considered TNMM. Therefore, the CIT(A) rightly considered the assessee's submissions and allowed the appeal. The Tribunal found no need for interference.

What were the facts?

The Revenue has appealed the order of the CIT(A) for Assessment Year 2013-14. The assessee, engaged in manufacturing automotive chains and sprockets, claimed deduction under Section 80IC. The TPO recommended a downward adjustment to the profits of the eligible unit. This led to a draft assessment order, which was upheld by the DRP. The assessee appealed to the ITAT, which remitted the matter back to the TPO for de-novo consideration. Subsequently, the TPO recommended a revised downward adjustment. The Assessing Officer completed the assessment incorporating this adjustment, reducing the Section 80IC deduction. The assessee appealed to the CIT(A), claiming further deduction and filing additional evidence regarding product mix and market mix affecting margins. The CIT(A) allowed the appeal, leading to the present appeal by the Revenue.

What were the issues?

1. Whether the Ld. CIT(A) erred in admitting additional grounds and evidence (difference in product mix and market mix) when the ITAT had set aside the initial order under Section 92CA(3) only to examine economic adjustments on power, fuel, repairs, maintenance, and employee costs? - Revenue argued that the ITAT's order for de-novo consideration was limited to specific issues and the CIT(A) exceeded its power by admitting new grounds and evidence. - Assessee contended that the ITAT's order for de-novo consideration meant the matter should be examined anew, and the CIT(A) had the power to consider any issue raised. 2. Whether the Ld. CIT(A) was right in admitting additional evidence under Rule 46A(1)(c) when sufficient opportunity was already provided? - Revenue argued that the assessee had already been given sufficient opportunities, and the case did not fall under the exceptions for admitting additional evidence. 3. Whether the Ld. CIT(A) was right in rejecting the TPO's contentions in the remand report, given that the remand report examined additional evidence furnished by the assessee? - Revenue argued that the remand report was an examination of additional evidence, not a set-aside proceeding, and the CIT(A) should not have rejected its findings without proper consideration. 4. Whether the Ld. CIT(A) was right in admitting further additional evidence and adjudicating in favour of the assessee without calling for a rejoinder or another report under Rule 46A(3)? - Revenue argued that the CIT(A) admitted more evidence and decided the case without allowing the Revenue to respond adequately. 5. Whether the Ld. CIT(A) was right in allowing the appeal by stating that excess profits were due to market and product mix, without quantifying these adjustments as per Rule 10B(3)? - Revenue argued that the CIT(A) accepted the market and product mix as reasons for higher profits but failed to quantify the adjustments as required by the rules. 6. Whether the Ld. CIT(A) was right in rejecting comparable companies (Rockman Industries Ltd., JK Fenner India Ltd., Pix Transmission Limited, Sundaram Fasteners Limited) as not comparable, when they were functionally similar? - Revenue argued that the rejected companies were comparable as they were in the business of transmission system components and auto components.

Which sections of the Income-tax Act were involved?

Section 92CA,Section 80IC,Section 143(3),Section 144C,Section 254,Section 115JB

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI

Before: SHRI MANU KUMAR GIRI & SHRI S.R.RAGHUNATHA

Hearing: 26.06.2025Pronounced: 03.09.2025

आदेश /O R D E R PER S.R.RAGHUNATHA, AM :

This appeal preferred by the Revenue against the order of the Ld. Commissioner of Income-tax (Appeals) – 16, Chennai (hereinafter referred to as ‘Ld.CIT(A)’), dated 03.09.2024 for the assessment year 2013-14. 2. The Revenue has raised the following grounds of appeal:

1.

The order of ld. CIT(A) is against the facts and circumstances of the case. 2. Whether on the facts and circumstances of the case the Ld. CIT(A) was right in admitting additional grounds and additional evidence in the form of difference in the form of difference in product mix and market mix as the reason for difference in margins of eligible units and non-eligible units, when the Hon’ble ITAT had set-aside the initial order u/s.92CA(3) to examine the allowability of

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economic adjustment on account of difference in Power and Fuel Cost, Repairs and Maintenance cost and Employee cost. 3. Whether on the facts and circumstances of the case the Ld. CIT(A) was right in admitting the claim of the assessee to file additional evidence, as its case fell within the clause (c) of sub-rule (1) of Rule 46A, when sufficient opportunity was already provided to the Assessee even during the set-aside proceedings. 4. Whether on the facts and circumstances of the case Ld.CIT(A) was right in rejecting the contentions raised by the TPO in the report under Rule 46A(3), on the grounds that no opportunity was given to the assessee during the remand proceedings, when the Remand report is an examination of additional evidences furnished by the Assessee before the Ld. CIT(A) and not a set aside proceedings in itself. 5. Whether on the facts and circumstances of the case the ld. CIT(A) was right in rejecting the contentions raised in the remand report, wherein the reasons for not accepting the additional evidences as reason for the difference in profit margins of eligible and non-eligible units was discussed in detail. 6. Whether on the facts and circumstances of the case the ld. CIT(A) was right in admitting further additional evidences for the contentions raised in the remand report and thereby going on adjudicate the issue in favour of the Assessee without calling for a rejoinder or another report under Rule 46A(3). 7. Whether on the facts and circumstances of the case the ld. CIT(A) was right in allowing the appeal of Assessee stating that the excess profits of the eligible and non-eligible unit was on account of difference in Market mix and Product mix, when the economic adjustment required to be done on these was not quantified neither by the Assessee nor the Ld. CIT(A) as in when Rule 108 (3) of the Income Tax Rules, 1962 which allows for making reasonably accurate adjustments to the uncontrolled comparable transaction to eliminate the material effects of such difference on the price, cost and profits. 8. Whether on the facts and circumstances of the case the ld. CIT(A) was right in allowing the appeal of the assessee and to reject comparable companies M/s. Rockman Industries Limited, M/s. JK Fenner India Limited, M/s. Pix Transmission Limited and M/s. Sundaram Fasteners Limited as not comparable with the assessee company, when these companies are into transmission system components manufacture and manufacture of auto components, and thereby functionally similar to the functions performed by the assessee. 9. For these and any other grounds that may be adduced at the time of hearing, the order of the CIT(A) may be quashed and that of the AO restored. 3. The brief facts of the case are that the assessee is a listed public limited company engaged in the business of manufacturing of Automotive chains, sprockets and other metal parts. The assessee had filed its return of income for the AY 2013-14 on 28.11.2013 admitting a total income of Rs.21,49,68,580/- after claiming deduction u/s. 80IC of the Income Tax Act, 1961 (in short “the Act”) of Rs.15,80,06,744/- under the normal provisions and Rs.42,14,74,047/-

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under MAT provisions. The case was selected for scrutiny assessment and was referred to Transfer Pricing Officer(“TPO”), Chennai u/s.92CA(1) of the Act. The TPO, vide order dated 28.10.2016 passed u/s.92CA(3) of the Act had recommended a downward adjustment of Rs.28,06,15,138/- to the profits derived by the eligible unit. In pursuant to the same, draft assessment order was passed u/s.144C(1) r.w.s. 143(3) of the Act on 05.12.2016, upholding the downward adjustment recommended by the TPO. The assessee had filed its objections against the said draft assessment order passed before the Learned Dispute Resolution Panel-2 (“DRP”), Bengaluru. The DRP vide its order dated 26.04.2017 in F.No. 262/DRP-2-BNG/2016-17 had upheld the order of the TPO. Aggrieved by the order the assessee filed appeal against the same before the Income Tax Appellate Tribunal(“Tribunal”) and the Tribunal vide order dated 17.12.2018 in ITA No.1924/CHNY/2017 had remitted the matter back to the TPO for de-novo consideration. 4. As per the Tribunal’s direction, the TPO had taken up the assessment and after perusal of the submissions made by the assessee from time to time during the assessment proceedings, vide order dated 01.11.2019 passed u/s.92CA(3) of the Act, recommended a downward adjustment of Rs.15,51,19,158/- to the profits derived by the eligible unit at Pantnagar. Pursuant to the same, the Assessing Officer (“AO”), vide order dated 14.12.2020 passed u/s.143(3) r.w.s. 144C r.w.s. 254 of the Act had completed the assessment by making the downward adjustment of Rs.15,51,19,158/- to the profits derived by the eligible unit, thereby reducing the deduction u/s.80IC claimed @ 30% to Rs.11,14,70,997/-. The Taxable Income under the normal provisions was thus arrived at Rs.26,15,04,327/- and the Book profits u/s.115JB of the Act was assessed at Rs.42,14,74,047/-. A sum of Rs.1,65,23,310/- had been determined as refundable then. 5. The assessee had then filed an appeal before the Commissioner of Income Tax (Appeals) (“CIT(A)”)-16, Chennai, praying for the balance deduction of Rs.4,65,35,747/- (ie) Rs.15,80,06,744/- – Rs.11,14,70,997/-, claimed u/s.80IC of the Act. During the appellate proceedings, the assessee

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had filed Additional Evidence petition under Rule 46A of the Income Tax Rules, 1962 to establish the fact that market-mix relating to Original Equipment Manufacturers (“OEM”) & Replacement markets also contributed to the higher profit margins earned by the Pantnagar Unit. The Ld.CIT(A) had called for a Remand Report from the TPO and had provided the assessee with an opportunity to submit a rejoinder to the same. On perusal of the Remand Report and the submissions made, the ld.CIT(A) had allowed the assessee’s appeal in their favour. Aggrieved by the ld.CIT(A)’s Order, the Department had filed an appeal before us.

6.

The ld.DR for the revenue submitted that the assessee counsel has submitted that the ITAT vide its order dated 17.12.2018 has ordered denovo consideration and thus he argued that the ld.CIT(A) had all the powers to consider any issue raised by the assessee. However, the ld.DR pointing out that the order of the ITAT was “we hereby remit the matter back to the file of TPO for denovo consideration”.

7.

Hence, it was submitted by the ld.DR that only 4 issues mentioned in para 4 of the ITAT order constitute the matter and thus the ld.CIT(A) erred in admitting additional grounds considering additional evidence. The AR relied upon page 41 of the documents filed by him before Tribunal to support his case that sales made to replacement market yields profit of 40% whereas sales made to manufacturer yield only 13% profit. The ld.DR drew our attention to page 41 of the paper book and countered by stating that it relates only to Pantnagar Plant (Eligible Unit) and data in respect of non-eligible units have not been furnished before Tribunal. Further he stated that the TPO has examined the details and recorded in para 9.6 of the remand report that when non eligible units make sales to replacement market the profit percentage is lesser than the shown by eligible unit. This has been done by assessee by accounting the price of inter unit transfer suitably to jack up the profits of the unit eligible for deduction u/s.80IC of the Act.

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8.

Per contra, the ld.AR for the assessee submitted that the Tribunal, vide Para 5 of the above mentioned Order dated 17.12.2018 in ITA No.1924/CHNY/2017, had stated that “Since the assessee has claimed that it has furnished the entire documentation before the Ld.Revenue Authorities and has also undertaken to produce any further materials required for facilitating the assessment proceedings, in the interest of justice, we hereby remit the matter back to the file of Ld.TPO for de-nova consideration.” (emphasis supplied). In other words, the Tribunal, though the discussion in the order is about the power cost, repairs and maintenance cost and employee cost, while giving directions, it had not specifically directed de novo consideration of only those factors as claimed by the TPO, but, had, in the interest of justice, remitted the matter back to the file of the TPO for ‘de novo’ consideration in general. The term ‘de novo’ has been defined as “from the beginning; anew” as per Collin’s English Dictionary. In common parlance, ‘de novo consideration’ would denote deciding an issue afresh.

9.

The additional evidence, pertaining to the quantitative details on Market- wise sales, cost and profit of transmission segment of Pantnagar & other units for the applicable F.Y.2012-13, submitted before the Ld.CIT(A) was very much in line with the assessee’s contentions before the Tribunal and hence cannot be construed as unlawful.

10.

The ld.AR further submitted that it is pertinent to note that the FY relevant to the subject A.Y.2013-14 being F.Y.2012-13, the submissions were being made in F.Y.2019-20 (i.e.) almost seven years down the line, with the assessment having to be completed within the stipulated due dates, the assessee was hard pressed for time to submit the relevant details that was spanning across various units and also requiring time to identify, compile and present the relevant underlying data in an appropriate form, during the Transfer Pricing assessment proceedings. However, post assessment, the assessee had undertaken a detailed exercise of analysing the various factors contributing to the higher profit margins of the Pantnagar plant and on identifying the same,

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had collected the relevant data and had filed the same in the form of a table as ‘Additional evidence’ before the ld.CIT(A).

11.

He further stated that the market mix and the product mix were the other factors that had contributed to the higher profit margins of the Pantnagar Plant as compared to the other units, that had led to the profits earned of Rs.4,65,35,747/- by the Pantnagar unit for the subject A.Y.2013-14, which is in dispute, as explained below : Market mix :  While in the Original Equipment Manufacturer (“OEM”) market, the assessee caters to the manufacturers of two-wheelers, in the Replacement market, it deals with more of off-the-shelf purchases.  The actual price of the product with respect to OEM is based on the contract price agreed between the parties based on the cost sheet with agreed margin whereas the actual price in the Replacement market is decided by the assessee company which is linked to MRP based on the various factors (i.e.) competition prevailing in the market, market demand for the products, seasonal factors and overall two wheeler industry growth.  Though the products could be the same, owing to the different grade of materials used in its production to comply with the specifications of the respective manufacturers, the cost of production is higher in OEM. Similarly, some of their specifications require additional processing involving further cost. Freight & forwarding cost could be lesser in OEM since the factories are located closer to that of the assessee company. The overhead cost too varies between the two markets. OEM works on ‘made-to-order’ basis, involving lesser lock-in-period of funds thereby reducing the interest cost involved which is not the case with Replacement markets which considering the credit period granted to customers, involves more interest cost.  It is submitted that the eligible unit at Pantnagar, having majorly catered to the ‘Replacement markets’ of about 60% of its entire sales, yielding

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higher margins had earned higher profit margins as against the other units of the assessee in the Transmission segment that had about only 10% of its sales in the Replacement markets.  Due to reduced cost factors, while the Replacement market yielded 35.01% on cost for Pantnagar, the OE/SPD markets yielded 13.39% on cost, resulting in an overall 26.07% profit on cost. The units other than Pantnagar, on the other hand, had yielded about 3.13% on cost in the Replacement market and that about 0.58% in the OE/SPD market. The data explained above represented in the form of a table, filed as ‘Additional evidence’ before the ld.CIT(A), forms part of the Paperbook filed before us. (Page 14 of Paperbook filed on 04.03.2025).

Product mix : o The Pantnagar plant manufactures both Cam chain and Drive chain, besides kits that yield high margins product-wise. o Margins in Cam chain is higher than in Drive chain. Since in the other plants the majority of the production is Drive chain, the higher margins due to more Cam chain production contributed to the higher profit margin in the Pantnagar Unit. It is submitted that the Cam chains are difficult to make as the tolerance level is very less and quality defect in the product shall incur severe damages due to vehicle recalls and repairs. The Respondent company was the first to make the Cam chain with cold formed bushes for Two-wheelers and hence it commands a premium price in the market. o It is submitted that about 72% of the kits sales of the Respondent company was through its Pantnagar unit. About 68% of its total sales was sale of kits. Thus, kits being the major product sold by the eligible unit too contributed to its higher margins. The above data represented in the form of a table forms part of the Paperbook filed before Your Authority (kindly refer Pages 8 & 9 of Paperbook filed on 04.03.2025). o It is submitted that the relevant data was presented before the Learned TPO as well during the assessment proceedings. Though she had made

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a reference to the same under Para 2.8. ‘Miscellaneous Factors’ in Page no.7 of her order, the due effect had not been given in the computation of profits derived by the Pantnagar Unit. 12. The ld.AR stated that it is pertinent to note that the aforesaid factors had been placed before the TPO during the assessment proceedings for the subsequent A.Ys.2015-16 & 2016-17 and the same had been considered while drawing ‘no adverse inference’ on the said Specified Domestic Transactions entered into by the assessee during such A.Ys. The copy of the relevant Orders had been placed before us as part of Paperbook dated 28.04.2025 (pages nos. 6 to 24). 13. The Learned TPO had identified independent comparable like Rockman Industries Ltd., J K Fenner(India) Ltd., Pix Transmissions Ltd. and Sundaram Fasteners Ltd. and based on their Operating Profit/Operating Cost margins, had arrived at a comparable margin of 9.76% that had been adopted to compute the profits derived by the eligible unit at Pantnagar. The ld.AR submitted that the TPO had erred in identifying the above mentioned comparable for the following reasons:  Rockman Industries Ltd. : The company is a subsidiary of Hero Motors and the majority of their supply is to Hero Motor, an Original Equipment Manufacturer (OEM) whereas the assessee is engaged in supplying to both OEM and Replacement markets. The superior quality of the assessee’s ‘ROLON’ brand fetches higher margin due to the fact that sale prices are 11% to 24% higher than that charged by M/s.Rockman.  J.K.Fenner (India) Ltd. : The company manufactures automotive belts and oilseals, variable speed drive, clutches and gear box under mechanical power transmission engineering which is entirely different from the products segment of the assessee (ie) automotive chains and sprockets.

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 Pix Transmissions Ltd. : The company manufactures extensive range of automotive belts which is entirely different from the assessee’s products.  Sundaram Fasteners Ltd. : The company manufactures high tensile fasteners, powder metal parts, radiator caps, hot forged parts, etc. which is entirely different from the assessee’s products. 14. Therefore, the ld.AR submitted that the assessee had been consistently following the ‘Cost plus method’ at cost plus 10% as the ‘Most Appropriate Method’(“MAM”) for transfers between the various units based on Cost Audit Report / Certificate issued by a qualified Cost Accountant as per the Cost Accounting Standard -4 whereas the TPO had considered ‘TNMM’ to be the MAM. The sale price as between units / consumers had been determined uniformly as per the pricing/discount policy of the assessee and the profits earned thereon had been appropriately disclosed in the segmental accounts forming part of the Audited Financial Statements of the assessee. 15. The contentions of the assessee on the various Grounds of appeal raised, had been duly placed before the ld.CIT(A) along with the relevant details / documents to substantiate the same. The Department had been duly provided with an opportunity to rebut the same during the remand proceedings and then only on due consideration of the contentions of both the assessee and the Department, the ld.CIT(A) had allowed the assessee’s appeal. 16. We have considered the rival submissions perused the material available on record and gone through the orders of the lower authorities along with the paper books pages referred. Admittedly it is a second round of litigation before us. The assessee was aggrieved by the order of the AO passed in accordance with the direction of the DRP before this Tribunal. The Tribunal had passed its order in ITA No.1924/CHNY/2017 dated 17.12.2018 by remitting the matter back to the TPO for de-novo consideration. 17. The Tribunal, vide Para 5 of the Order dated 17.12.2018 passed in ITA No. 1924/CHNY/2017 for the A.Y.2013-14, had stated that “Since the assessee

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has claimed that it has furnished the entire documentation before the Revenue Authorities and has also undertaken to produce any further materials required for facilitating the assessment proceedings, in the interest of justice, we hereby remit the matter back to the file of TPO for de-novo consideration”. The term 'de novo' has been defined as "from the beginning; anew' as per Collin's English Dictionary. Having so directed by the ITAT, the assessee had rightly made submissions before the TРО. 18. The assessee had taken arguments on the impact of product mix and market mix on the profitability of the Pantnagar and other units during the original assessment proceedings too. Only the quantitative details pertaining to such factors had been submitted as 'Additional Evidence' before the Ld. CIT(A) that cannot be rejected. The Department also had been given an opportunity of being heard against such 'Additional Evidencе’ submitted by the assessee during the appellate proceedings. 19. We note that the eligible Pantnagar unit of the assessee had majorly catered to the 'Replacement markets' yielding higher margins (i.e.) about 60% of its entire sales and had earned higher profit margins as against the other units in the Transmission segment that had about only 10% of its sales in the Replacement markets. On perusal of the records, we find that due to the reduced cost factors, the Pantnagar unit was able to yield more profits. 20. The Pantnagar plant manufactures both Cam chain and Drive chain, besides kits that yield high margins product-wise. The margin in Cam chain is higher than in Drive chain. The Pantnagar Unit produced more Cam chains while other units had produced more Drive chains. As per the details filed by the ld.AR about 72% of the kits sales yielding higher margins was through the Pantnagar unit, with 68% of its total sales towards sale of kits. In fact, the TPO had made a reference to the above under Para 2.8 ‘Miscellaneous Factors’ in Page No.7 of the order, but, the due effect had not been given in the computation of profits derived by the Pantnagar Unit.

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21.

The aforesaid factors had been placed before the TPO during the assessment proceedings for the subsequent A.Ys.2015-16 & 2016-17 and the same had been considered while drawing ‘no adverse inference’ on the said Specified Domestic Transactions entered into by the Assessee company during such A.Ys. 22. The Ld. TPO had identified independent comparable like Rockman Industries Ltd., JK Fenner(India) Ltd., Pix Transmissions Ltd. and Sundaram Fasteners Ltd. and based on their Operating Profit/Operating Cost margins, had arrived at a comparable margin of 9.76% that had been adopted to compute the profits derived by the eligible unit at Pantnagar. But their products being distinguished against that of the assessee company, they cannot be held as comparable companies for TP purposes. 23. We find that the assessee had been consistently following the 'Cost plus method' at cost plus 10% as the ‘Most Appropriate Method’ (MAM) for transfers between the various units based on Cost Audit Report / Certificate issued by a qualified Cost Accountant as per the Cost Accounting Standard – 4, whereas the TPO had considered TNMM to be the MAM. The sale price as between units / consumers had been determined uniformly as per the pricing/discount policy of the assessee company. Therefore, in the present facts and circumstances of the case we are of the considered view that the ld.CIT(A) had rightly considered the submissions made by the assessee and had allowed the appeal in their favour and hence in our opinion there is no need to of any interference. 24. In the result the appeal of the revenue is dismissed.

Order pronounced in the open court on 03rd September, 2025 at Chennai.

Sd/- Sd/- (मनु कुमार गिरर) (एस. आर. रघुनाथा) (MANU KUMAR GIRI) (S.R.RAGHUNATHA) न्यागिक सदस्य/Judicial Member लेखासदस्य/Accountant Member

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चेन्नई/Chennai, धदनांक/Dated, the 03rd September, 2025 RL आदेश की प्रधतधलधप अग्रेधर्त/Copy to: 1. अपीलाथी/Appellant 2. प्रत्यथी/Respondent 3.आयकर आयुक्त/CIT– Chennai/Coimbatore/Madurai/Salem 4. धवभागीय प्रधतधनधि/DR 5. गार्ा फाईल/GF

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