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

The assessee has filed this appeal challenging the order dated 31.10.2017 passed by the assessing officer for assessment year 2013-14 u/s 143(3) r.w.s. 144C of the Act in pursuance of directions given by Ld Dispute Resolution Panel (DRP).

The grounds numbered as 1 to 7 are general in nature. The grounds numbered as 8 to 13 are related to Transfer Pricing Adjustment. Ground No.14 relates to the disallowance made u/s 40(a)(ia) of the Act.

The assessee herein is a subsidiary of M/s Kennametal Inc., USA. As mentioned in the order of TPO, it is engaged in the business of manufacture of sintered products, dies & wear parts, round tools, carrier bodies, end mills, conforma clad and machine tools. The products manufactured by the assessee are supplied to various industries such as construction, mining, general engineering and machine tools. The assessee is having two segments, viz., Manufacturing Segment and Trading Segment. The TPO has made transfer pricing adjustment only in respect of Manufacturing Segment.

The International transactions carried out by the assessee are as given below:-

The assessee adopted TNMM method as Most Appropriate Method. The Profit Level Indicator (PLI) was taken as Operating Profit to Operating Revenue (OP/OR). The PLI of the assessee in Manufacturing Segment worked out to 3.16%. However, after making adjustment towards “Under utilization of Capacity”, the assessee worked out its PLI to 9.60%. The assessee selected 12 comparable companies, whose arithmetic mean

The TPO rejected the Transfer Pricing Study of the assessee and selected following nine comparable companies. Though the TPO worked out PLI under OP/OC and OP/OR, yet he adopted OP/OC as PLI while working out the Transfer pricing adjustment.

The Ld DRP confirmed the Transfer pricing adjustment made by the TPO and accordingly the AO passed the final assessment order.

(a) In Ground No.8, the assessee is assailing the decision of TPO & DRP in adopting the threshold limit of 25% for “Related Party Transaction” filter as against the limit of 10% adopted by the assessee.

We heard the parties and perused the record. With regard to the threshold limit for RPT filter, we notice that the Ld DRP has observed as under:-

With regard to the plea of the assessee for inclusion of four comparable companies, the Ld DRP has observed as under:-

With regard to the plea of the assessee for inclusion of two comparable companies, the Ld DRP has observed as under:-

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

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 non- speaking 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.

The surviving ground relates to the disallowance made u/s 40(a)(ia) of the Act in respect of year end provisions made. The AO noticed that the tax auditor has reported the failure of the assessee to deduct tax at source from the year end provisions. Accordingly, it appears that the ITO(TDS) has initiated proceedings raising demand, apparently u/s 201(1) of the Act. In the appellate proceedings, the Ld CIT(A) has given relief in respect of TDS payments made subsequently and accordingly confirmed the demand to the tune of Rs.5,682/-. The corresponding amount of payment relating to IT(TP)A No.2880/Bang/2017 Page 7 of 8 the above said TDS demand worked out to Rs.2,84,100/-. Hence the AO added the above said amount of Rs.2,84,100/- u/s 40(a)(ia) of the Act to the total income of the assessee in the draft assessment order. The Ld DRP also confirmed the same and hence the AO disallowed the above said amount u/s 40(a)(ia) of the Act in the final assessment order.

Before us, the ld A.R argued that the yearend provisions are required to be made as per accounting principles on estimated basis. Further the assessee could not deduct tax therefrom, since the payees are not known. However, we notice that the assessee has stated before Ld DRP that the provisions have been made for payment to contractors, sub- contractors, professional fees, royalty, rent and commission. Hence the payees should be known to the assessee. Accordingly, we are of the view that the assessee should have deducted tax at source, when the payees are known. Accordingly we confirm the addition made by the AO u/s 40(a)(ia) of the Act.

In the result, the appeal of the assessee is treated as partly allowed.