2017 (2) TMI 1286 - AT - Income Tax

Tribunal partially allows appeal, directs inclusion of comparable company & margin adjustments

The Tribunal partly allowed the appellant's appeal, upholding the rejection of idle capacity adjustment and the adoption of single-year data. However, it ... TPA - idle capacity adjustment - Held that:- The assessee company has requested for idle capacity adjustment as per Rule 10B(1)(e)(iii),10B(2) and 10B(3) but company is not a new company or startup company. The company along with Greaves manufacturing the tractors prior to 2002.The ld A.R has not furnished the details of installed capacity and utilized capacity from the beginning of its operations. Since the company is reasonably old from the profile, justifiable reasons have to be explained for non-utilization of the capacity and the fixed costs incurred from the year of inception, the installed capacity, utilized capacity and capacity of breakeven point. Under-utilization of production capacity is a vital factor, as per the information available, this is more than five years old company and did not explain the reasons leading to underutilization of installed capacity. Whether it was on account of non-availability of material, electricity, infrastructures, lack of working capital, etc. In the absence of the details, the case laws relied upon by the assessee are of no help to make adjustment of idle capacity. Therefore we are unable accept the assessee’s request for idle capacity adjustment and the same is rejected. Accordingly grounds raised on this issue are dismissed. Selection of comparable - Held that:- Assessee is engaged into manufacture of tractors, thus companies functionally dissimilar with that of assessee need to be deselected from final-list. Working capital adjustment - Held that:- While arguing the case before us, the assessee has not furnished the pricing policy and the interest clauses to make necessary working capital adjustment. This is one of the important factors to make the necessary working capital adjustment. Further, though the TPO has determined the margin adopting M/s.VST Tillers as comparable, we have directed the TPO to include M/s.HMT Ltd., as additional comparable. The TPO should take both the comparables and re-work the margins and make necessary adjustments for working capital in the light of above discussion. This ground of appeal is allowed for statistical purposes. Rationale for the use of multiple year data - Held that:- As per the discussion made by the TPO and as per the Rule 10B(4) of IT Rules, it is binding of the assessee company to adopt the relevant FY data only in the year in which the international transaction has been entered into. Therefore, the AO has rightly rejected the multiple year data and we do not find any inconformity in the order of the Ld.CIT(A) and TPO. This ground of the appeal is dismissed. Issues Involved:1. Transfer Pricing Grounds2. Idle Capacity Adjustment3. Rejection of Comparable Company (M/s. HMT Ltd.)4. Working Capital Adjustment5. Adoption of Single Year Data vs. Multiple Year DataDetailed Analysis:1. Transfer Pricing Grounds:The appellant contested the CIT(A)'s decision to uphold the AO's Transfer Pricing downward adjustment of Rs. 1,65,03,225/- concerning the value of international transactions. The appellant argued that the CIT(A) incorrectly rejected the adjustment for idle capacity utilization, failed to appreciate the impact of idle capacity in non-production departments, and erred in rejecting M/s. HMT Ltd. as a comparable company based on turnover. The appellant also contended that the CIT(A) should have considered companies with turnovers closer to the appellant's and allowed working capital adjustment. Additionally, the appellant argued against the adoption of single-year data instead of multiple-year data.2. Idle Capacity Adjustment:The appellant, engaged in manufacturing tractors, argued that due to being in the initial stages of business, it incurred high fixed costs and could not achieve optimal capacity utilization, operating at only 34% compared to the comparable company's 61.36%. The appellant provided idle capacity details from audited financial statements and relied on several case laws to support the adjustment. However, the CIT(A) and AO rejected the request, stating that the appellant did not provide sufficient reasons for non-utilization of capacity and was not a new company. The Tribunal upheld this decision, emphasizing the need for detailed reasons and evidence for non-utilization of capacity, including factors like raw material availability, manpower, machinery, and capital resources.3. Rejection of Comparable Company (M/s. HMT Ltd.):The appellant argued that M/s. HMT Ltd., engaged in manufacturing tractors and power tillers, was functionally similar and should be included as a comparable despite its higher turnover. The Tribunal agreed with the appellant, noting that the turnover of M/s. HMT Ltd. was only twice that of the appellant and that the turnover filter of 3-5 times is acceptable for selecting comparables. The Tribunal directed the TPO to include M/s. HMT Ltd. as a comparable and rework the comparable margin.4. Working Capital Adjustment:The appellant requested a working capital adjustment, arguing that there were substantial differences between the comparable companies and the appellant regarding working capital. The AO rejected this request, stating that the appellant did not furnish detailed workings. The Tribunal noted that working capital adjustment is necessary to account for the time gap between investments and collections. However, the appellant did not provide the necessary details, such as pricing policy and interest clauses. The Tribunal directed the TPO to consider both comparables and rework the margins, making necessary adjustments for working capital.5. Adoption of Single Year Data vs. Multiple Year Data:The appellant adopted multiple-year data, while the TPO adopted single-year data. The TPO rejected the appellant's claim, citing Rule 10B(4) of the Income Tax Rules, which mandates using data from the financial year in which the international transaction occurred unless prior year data influences the determination of transfer prices. The Tribunal upheld the TPO's decision, agreeing that the appellant failed to demonstrate the influence of prior year data on the current year's data.Conclusion:The Tribunal partly allowed the appellant's appeal. It upheld the rejection of idle capacity adjustment and the adoption of single-year data but directed the TPO to include M/s. HMT Ltd. as a comparable and rework the margins, including necessary working capital adjustments.