Manufacturing Entity Fails to Qualify 75% Trading Turnover Filter: ITAT Orders Deletion of Comparable [Read Order]

The Income Tax Appellate Tribunal (ITAT) Pune Bench has ordered the deletion of a comparable company on the reason that it fell in the ambit of an entity carrying out manufacturing business and had also failed to qualify the 75% of trading turnover filter.

The case arose from the classification of a comparable company, Maxim SMT Technologies Private Limited, as one that is concerned with manufacturing exclusively in the assessment year 2021-22.

B & R Industrial Automation, the assessee, is in the business of trading of programmable logic controller and imports 100% of its goods from its holding company. The Transfer Pricing Officer (TPO) suggested adjustments as the Profit Level Indicator (PLI) of the assessee was 1.46% whereas Average PLI of comparable companies selected was 9.60%.

Order dated 06.09.2024 delivered by the Dispute Resolution Panel (DRP) and TPO under Section 144C of the Income Tax Act, 1961 (“the Act”) had been relied upon by the Department. The TPO determined Arm’s Length Price as per S.92C.

For this, TPO applied Transactional Net Margin Method (TNMM) and selected Profit Level Indicator and five comparable companies including Maxim SMT Technologies Pvt. Ltd. DRP had asked TPO to reduce the filter to 50% but such has not been provided for in the Act.

Appeal was filed under Section 143(3) read with (r.w.s.) Section 144B of the against order passed on 26.09.2024. The issue centred broadly around the use of improper comparables when deciding on assessee’s trading turnover.

The main contentions by the assessee were relating to transfer pricing matter wherein cherry picking of companies were practiced by the department. Further, non-operating items were argued to not be properly labelled. Other common grounds of appeal were also submitted such as non-compliance with the Income Tax Rules, 1962 (‘the Rules’) before delivering previous orders as mentioned. Lastly, it was additionally argued that there had been no Transfer Pricing Adjustments for the Assessment Year which was selected for scrutiny. Moreover, once the DRP accepts that the comparable does not fit the criteria of the filter, the comparable is to be mandatorily removed.

The Departmental Representative (DR) for the Revenue accepted the incorrect calculation of the margin of Debak Enterprises Private Limited and stated that it should be 2.92%.

The DR relied on the order of the DRP and TPO which found the contention of the assessee unacceptable as it can be seen from the annual report that the comparable company is also engaged in trading. However, when the Annual Return was referred to it was found that Maxim SMT Technologies Pvt Ltd has admitted before the Registrar of Companies that it is into manufacturing only. The bench consisting of Dr. Dipak P. Ripote (Accountant Member) and Vinay Bhamore (Judicial Member) previously mentioned found merit in one of the grounds which stated that the DRP has erred in reducing the filter only for a particular comparable, this is not permissible.

The comparable used was Maxim SMT Technologies Private Limited which is into manufacturing only whereas the assessee is into trading.