M/S KENNAMETAL INDIA LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX LTU CIRCLE-1 , BANGALORE

This appeal by the assessee is directed against the order dated 27.11.2018 passed u/s 143(3) r.w.s. 144C of the I.T.Act. The relevant assessment year is 2014-2015.

Ground Nos.1 to 7 are general in nature and no arguments were raised. Hence, these grounds are dismissed. Ground Nos.8 to 11 are relating to various facets of Transfer Pricing Adjustment of Rs.4,99,37,624.

Brief facts of the case are as follow: The assessee is a subsidiary of Kennametal Inc. USA. It is engaged in the business of manufacturing of hard metal products, special purpose machines and metal forming tools. For the assessment year 2014-2015, the return of income was filed on 27.11.2014 admitting total income of Rs.15,98,22,400. The assessment was taken up for scrutiny by issuance of notice u/s 143(2) of the I.T.Act. During the course of assessment

The assessee being aggrieved, has filed this appeal before the Tribunal. In ground No.8, the assessee is assailing the order of the TPO and DRP in adopting the threshold limit of 25% for “related party transactions” filter as against the limit of 10% adopted by the assessee. In ground No.9, the assessee is assailing the decision of the DRP in rejecting the claim of “capacity utilization adjustment” without proper discussion. Ground No.10 is general in nature. In ground No.11, the assessee is seeking exclusion of the following comparables:-

The learned AR submitted that identical issue of transfer pricing adjustment was considered by the Tribunal in assessee’s own case for assessment year 2013-2014 in IT(TP)A No.2880/Bang/2017 (order dated 27.04.2020). It was stated that in assessee’s own case for assessment year 2013-2014, the Tribunal had restored the entire transfer pricing adjustment to the files of the AO/TPO for de novo consideration. It was contended that similar view may be taken for the relevant assessment year since the transfer pricing adjustment undertaken by the AO/TPO for assessment year 2013-2014 is identical to the instant case.

The learned Departmental Representative did not have serious objection for remanding the issue to the AO/TPO since for the earlier assessment year, i.e., 2013-2014, the Tribunal had restored an identical issue to the AO/TPO for determining afresh the ALP of the international transaction.

We have heard rival submissions and perused the material on record. The Tribunal in assessee’s own case for assessment year 2013-2014 had restored the entire transfer pricing issue to the AO/TPO to arrive at fresh ALP of the international transaction undertaken by the assessee with its AE. The relevant finding of the Tribunal in assessee’s own case for assessment year 2013-2014, reads as follow:-

With regard to the plea of the assessee for inclusion of four comparable companies, the Ld DRP has observed as under:- “7.5 On perusal of the order of the TPO, it is found that above 4 comparables qualified all filters adopted by the TPO and are functionally comparable. Panel finds that objections and submissions of assessee made before TPO have been considered and countered by the TPO correctly. Therefore assessee’s objection against adoption of Ace Multi Axes Systems Ltd., Micromatic Manufacturing Systems P Ltd; Federal Mogul Anand Bearings India Ltd; Birla Precision Technologies Ltd are not accepted.”

With regard to the plea of the assessee for inclusion of two comparable companies, the Ld DRP has observed as under:- “7.6 At para 8 of his order the TPO has considered submissions of the assessee and has accepted the contention of the assessee in the case of Bharat Fritz Werner Ltd. However on the grounds of functional dissimilarities the TPO has rejected Porwal Auto Components Ltd and Rane Engine Valve Ltd. On careful examination of the TPO’s order and after careful consideration of the assessee’s submissions, panel finds that the TPO has rejected these cases correctly and hence assessee’s objection against rejection of Porwal Auto Components and Rane Engine Valve are rejected.”

With regard to the claim for Capacity Utilisation Adjustment, the Ld DRP, in paragraph 6.1 of its order, has expressed that the assessee has not raised this objection before the TPO and accordingly declined to adjudicate this ground. With regard to the substitution of PLI from OP/OR to OP/OC, the assessee had raised objection in ground 8.1 urged before Ld DRP. However, the Ld DRP has not adjudicated the same.

We notice that the assessee has furnished details of the companies, cited above, in its paper book. We notice that the Ld DRP has rejected the claim of the assessee by making general observations, i.e., without addressing specific grounds urged in respect of each of the companies. We have noticed that the assessee, in its Transfer Pricing study, has made adjustment towards under utilization of capacity. However, the said adjustment was not given by the TPO. Hence, we are of the view that the Ld DRP was not justified in declining to adjudicate this claim of the assessee. As noticed earlier, the Ld DRP has not adjudicated the issue relating to selection of PLI.

In totality, we are of the view that the Ld DRP has passed a nonspeaking order. In this view of the matter, we are of the opinion that all the issues relating to Transfer pricing adjustment need to be restored to the file of Ld DRP/AO for adjudicating all the objections of the assessee by a speaking order. Accordingly, we set aside the Transfer pricing adjustment made in the final assessment order and restore all the issues relating there to the file of AO/DRP with the direction to the Ld DRP to pass a speaking order. 7.1 In view of the above order of the Tribunal, the entire issue raised in this appeal are restored to the files of the AO/TPO to arrive at fresh ALP of the international transaction undertaken by the assessee with its AE. It is ordered accordingly.