AI Drafter 
TaxTMI 
TaxTMI 
2015 (8) TMI 977
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....g the year under consideration, assessee had entered into international transactions with its Associated Enterprises (in short 'AEs') within the meaning of Section 92B(1) of the Act. Section 92(1) prescribes that income arising from an international transaction shall be computed having regard to the arm's length price (ALP) and accordingly the Assessing Officer referred the matter to the Transfer Pricing Officer ( in short 'TPO') in terms of Section 92CA(1) of the Act for the purposes of computing the ALP under Section 92C of the Act. The TPO vide his order dated 28.10.2009 passed under Section 92CA(3) of the Act, after allowing opportunity to the assessee of being heard determined the ALP in relation to the international transactions by enhancing the stated values by a sum of Rs. 2,67,06,520/-. The Assessing Officer passed a draft assessment order under Section 144C of the Act on 30.12.2009 considering the order of the TPO dated 28.10.2009. The assessee filed objections before the DRP, who vide order dated 14.09.2010 passed under Section 144C(5) of the Act issued directions to the Assessing Officer. The Assessing Officer, after considering the directions issued by the DRP computed....
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....ted at ALP, having regard to the economic and commercial factors and therefore according to it no adjustment was required in the value of international transactions as stated. 6. However, the TPO has differed with the assessee, and instead he has determined an adjustment of Rs. 2,67,06,520/- in order to bring the stated values of the international transactions to the ALP. The first point of difference between the assessee and the TPO was the use of data of multiple financial years. The TPO used the financial data of the comparable companies only for the financial year relevant to the year in which the international transactions were undertaken, whereas assessee had used average of three year's data of the comparable companies to carry out the benchmarking analysis. At the time of hearing, the learned counsel submitted that the aforesaid aspect is not disputed and therefore we do not dwell further on this. Secondly, the TPO accepted the TNM method as the most appropriate method, but while calculating the Profit Level Indicator (PLI) of the assessee, the TPO considered the Operating profits/Total cost as the PLI whereas the assessee in its Transfer pricing study had considered Ope....
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....essee. The first point made out is that for the purpose of comparability analysis the adjustments that can be made are only those which are in accordance with rule 10B(1)(e) of the Income Tax Rules, 1962 (in short "the Rules"), which is in respect of the TNM method. As per the Revenue in terms of rule 10B(1)(e) of the Rules, the adjustments are permissible only with respect to the net profit margin of the comparable uncontrolled transactions and not with regard to the net profit margin of the tested party i.e. the assessee. For the aforesaid reason, the adjustments sought by the assessee on account of low capacity utilization and abnormal start-up costs have been denied. At the time of hearing, the learned CIT(DR) appearing for the Revenue further submitted that the Delhi Bench of the Tribunal in the case of Haworth (India) P. Ltd. vs. DCIT 131 ITD 215 (Delhi) has also found it proper not to allow adjustment for capacity utilization while computing the net profit margin of the tested party. In this regard, in particular reference was made to discussion by the Tribunal in paras 83 to 92 of the order. 9. On the other hand, the learned counsel for the assessee submitted that the fa....
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....rgins have been compared with entities established over the years. Ostensibly, such a comparability analysis does not provide a level playing field. In our view, the aforesaid factor is required to be adjusted so as to facilitate a meaningful comparability analysis between the international transactions of the assessee and the comparable uncontrolled transactions. 11. However, as per the Revenue, such an adjustment to the profit margin of the assessee is not permissible having regard to the provisions of rule 10B(1)(e) of the Rules. The method adopted by the assessee for benchmarking its international transaction is the TNM method and rule 10B(1)(e) of the Rules prescribes the manner in which the same is to be applied. As per the Revenue, in sub-clause (iii) adjustments to the net profit margin are permissible but it is only in relation to the net profit margins of the comparable uncontrolled transactions and not with respect to the margin of the tested party and thus the claim of the assessee cannot be allowed. In our considered opinion, in sub-clause (i) the net profit margin realized by a tested party from an international transaction is required to be ascertained having rega....
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.... Egain Communication (P.) Ltd. (supra) in para 36 of the order opined that depending on the facts and circumstances of a case, it may be appropriate to adjust the operating profit of the tested party as well as of the comparable parties. To the similar effect is the decision of the Mumbai Bench of the Tribunal in the case of M/s Fiat India Pvt. Ltd. (supra). In fact, in the case of Amdocs Business Services (P.) Ltd. (supra) wherein one of us was a member of the Bench i.e. Accountant Member, an adjustment was allowed to the profit margin of the tested party with respect to the under capacity utilization, the unit being in the start-up phase. The decision of the Pune Bench of the Tribunal in the case of Skoda Auto India (supra) is also on similar lines. 12. The learned CIT(DR) has relied on the decision of the Tribunal in the case of Haworth (India) P. Ltd. (supra) for the proposition that adjustment to the profit margin of the tested party is not permissible. We have perused the said decision. In the case before the Delhi Bench of the Tribunal, assessee had computed its margin after claiming adjustment for capacity utilization. The assessee had adopted the TNM method for the purp....
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....the time of hearing, the learned CIT(DR) pointed out that TPO has also observed that appropriate details in respect of low utilization of capacity in the case of comparables etc. were not available. It was submitted that the plea of the assessee was rejected at the threshold, and therefore, the lower authorities had no occasion to examine the plea of the assessee on merits. No doubt, the aforesaid aspect spring up only after the plea of the assessee is accepted in principle and the same was not so done by the authorities below. The learned counsel for the assessee pointed out to page 97 of the Paper Book wherein is placed the financial statement of a comparable concern, M/s Khaitan Electricals Limited for the financial year 2005-06 to point out that the information regarding the Installed capacity and Actual production carried out during the year is available, which would facilitate the comparison and also making of an adjustment to the profits margin of the assessee. It was pointed out that at-least for the said comparable the adjustment ought to have been allowed by the lower authorities. 14. In our considered opinion, in order to arrive at an appropriate adjustment, the entir....
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....ion, etc., but there is no justification for inclusion of the future year's profit margins while determining the ALP of the current year's international transactions. Therefore, on this aspect, the action of the lower authorities is hereby affirmed and the assessee fails. 17. Another aspect raised by the assessee is that the lower authorities have erred in not providing adjustment on account of working capital differences vis-à-vis the comparable uncontrolled entities. The plea of the assessee is that the TPO erred by comparing entities having a different working capital structure with the assessee's operations, which have a different working capital requirements and no adjustment for the said difference was made. The aforesaid plea was not raised before the TPO but has been raised by the assessee only before the DRP. Before us, the learned counsel for the assessee submitted that such adjustments are quite reasonable and deserve to be allowed and for that matter he has referred to page 130 of the Paper Book wherein the relevant workings have been exhibited. The working capital requirements of the three comparable uncontrolled entities vis-à-vis that of the assessee....