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Income Tax Appellate Tribunal, ‘A’ BENCH, BENGALURU
Before: SHRI GEORGE GEORGE K & SHRI INTURI RAMA RAO
O R D E R Per INTURI RAMA RAO, AM : These are cross appeals by the revenue as well as the assessee directed against the assessment order passed u/s IT(TP)A Nos.148 & 164/Bang/2015 Page 2 of 11 143(3) r.w.s. 144C Income-tax Act, 1961 ['the Act' for short] dated 15/12/2014 for the assessment year 2010-11.
Briefly facts of the case are that the assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture of programmable logic controllers, automation software and related automation products. It is a subsidiary of M/s.GE Intelligent Platforms Inc.
Return of income for assessment year 2010-11 was filed on 08/10/2010 declaring total income of Rs.5,30,33,789/-. The assessee-company also reported in form 3CEB the following international transaction with its AEs:
The assessee sought to justify consideration received for international transactions entered into with its AE to be at arm’s length price. The assessee-company submitted that Transfer Pricing (TP) study adopting operating profit to sales (OP/to sales) as profit level indicator for TP Study. The assessee-company applied TNMM which was considered to be most appropriate method for the purpose of bench marking its international
IT(TP)A Nos.148 & 164/Bang/2015 Page 3 of 11 transactions. The assessee-company’s profit margin was computed at 4.9% in respect of manufacturing segment. For the purpose of comparison, the assessee-company had chosen 3 comparable entities and arithmetical average of the said company was computed at 4.77%. According to the assessee-company, its PLI was within range of +/- of the arithmetical mean of the comparable entities. Hence, it was claimed that international transaction of the assessee with its AEs are at arm’s length price. The assessee-company had chosen the following 3 entities whose average margin of sales was computed at 4.77%, as comparables: i. Amtech Electronics (India) Ltd., ii. Chemtrols Industries Ltd. iii. PMA Controls India Ltd.
The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for the purpose of bench marking its international transaction. TPO, by order dated 30/01/2014 passed u/s 92CA(3) computed TP adjustment at Rs.5,58,02,486/- The TPO accepted TNMM adopted by the assessee-company but rejected TP study report. While doing so, TPO applied the following filters: i) Using current data alone ii) The TPO rejected the assessee’s claim for adjustment to its own operating margin towards extraordinary and non- recurring expenses which resulted in loss to the company.
IT(TP)A Nos.148 & 164/Bang/2015 Page 4 of 11 The TPO also held that profit adjustment can be made only to net profit margin of the comparable companies and not to margins of tested party. The TPO did not provide any adjustment to working capital between assessee and comparable entity. The TPO rejected Megatech Control Ltd. on the ground that the company incurred abnormal losses during the financial year. By adopting the above, the TPO selected the following companies as comparables:
Name of the company Average margin Amtech Electronics (India) Ltd., 4.66% Chemtrols Industries Ltd. 4.00% PMA Controls India Ltd. 5.66% The TPO computed average margin of the comparables finally selected at 4.77% . On the said basis, the TPO computed TP adjustment:
The Assessing Officer (AO) passed draft assessment order dated 28/02/2014 and the same was served on the assessee. After receipt of draft assessment order, assessee-company filed objections before the Disputes Resolution Panel (DRP) contending inter alia that the TPO was not justified in rejecting TP documentation maintained by the assessee-company and not treating income from administrative services as operating revenue and not providing for adjustment for non-recurring
IT(TP)A Nos.148 & 164/Bang/2015 Page 5 of 11 expenditure and challenging exclusion of Megatech Control Ltd., from the list of comparables. The DRP directed the AO/TPO to treat income from Administrative Services as part of operating revenue as the expenses incurred in deriving income from administrative services is not excluded from operating cost. However, the DRP upheld the action of the TPO not adjusting the operating cost towards non-recurring expenditure. The DRP also confirmed the action of the TPO in excluding Megatech Control Ltd.
The AO, after receipt of directions of the DRP, passed final assessment order dated 15/12/2014 u/s 143(3) r.w.s. 144C of the Act making TP adjustment of Rs.5,28,59,604/- after making disallowance towards provision for warranty of Rs.17,28,452/- and towards provisions for obsolescence of Rs.43,54,177/-.
Being aggrieved by the order of assessment, the assessee is in appeal in raising the following grounds of appeal:
IT(TP)A Nos.148 & 164/Bang/2015 Page 6 of 11
IT(TP)A Nos.148 & 164/Bang/2015 Page 7 of 11
Ground Nos.1, 2 and 3 are general in nature. Ground No.4 was not pressed during the course of hearing.
Ground No.5 challenges the action of the TPO as confirmed by the DRP for not adjusting for extraordinary expenses/of non- recurring expenses made by the assessee-company to operating cost like high manufacturing cost, high personnel cost, execution of low margin deals and high import content cost while computing the operating margin of the company.
It is the contention of the assessee-company that during the previous year relevant to assessment year under consideration, level of sales i.e. operating capacity was not sufficient to absorb extraordinary expenses/loss incurred on account of business strategy, high base cost due to low sales, high import content during the year with the intention of expanding business. It was submitted that these expenses were incurred keeping in view anticipated expenses of operation of the IT(TP)A Nos.148 & 164/Bang/2015 Page 8 of 11 company in future and directly relatable to manufacturing activity of the company. According to the assessee-company the following expenses are required to be excluded while computing the operating margins of the company:
After hearing rival submissions and perusing material on record, now the law is quite settled to the extent that once there is unutilized capacity or men power, such underutilization impacts margin and therefore, the adjustment should be made while computing the ALP. But the onus lies on the assessee to establish there is under-utilization of the capacity and under-utilization is more than average underutilization in the industry. If the underutilization is more than average underutilization of the industry then necessary adjustment is required to be made to the margin of computing ALP. But in the present case, the assessee- company failed to demonstrate under-utilisation of the capacity in assessee’s own case and also not falling below average rate of underutilization in the industry. In the circumstances, we remand the matter back to the file of the AO/TPO to adjudicate this issue
IT(TP)A Nos.148 & 164/Bang/2015 Page 9 of 11 in accordance with law after due opportunity to the assessee- company.
The assessee also raised the following additional grounds of appeal:
It is prayed that the additional grounds may be admitted as the additional grounds are only consequential and may be admitted in the light of the following decisions: i. National Thermal Power Co. Ltd. vs. CIT (229 ITR 383)(SC) ii. Jute Corporation of India Ltd. (187 ITR 68)(SC) and iii. Ahmedabad Electricity Co. Ltd. (199 ITR 351)(Bom)(FB)
The additional grounds of appeal are admitted in view of the fact that no fresh investigation of material is required. However, since the TPO had no occasion to adjudicate on this matter, since these grounds were not raised before him, we
IT(TP)A Nos.148 & 164/Bang/2015 Page 10 of 11 remand the matter back to the file of the TPO for fresh adjudication in accordance with law.
In regard to other grounds relating to corporate issues, DRP has already rendered a finding directing the AO/TPO to verify tax credit and brought forward losses. Therefore, the assessee- company is not aggrieved by the directions of the DRP. Hence, the appeal is dismissed.
The revenue is in appeal challenging the direction of the DRP directing income from administrative services as part of operating revenue. The revenue raised the following grounds of appeal:
The finding of the DPO is as follows:
IT(TP)A Nos.148 & 164/Bang/2015 Page 11 of 11 The finding of the DRP is based on settled position of law and do not require any interference.
In the result, the appeal filed by the revenue is dismissed.