AI Drafter 
TaxTMI 
TaxTMI 
2015 (8) TMI 981
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....f brought forward unabsorbed depreciation and business loss aggregating to Rs. 2,97,46,620/-. The company had computed the income u/s.115JB of the I.T. Act at Rs. 48,52,674/-. The assessee filed a revised return on 23-09-2008 declaring total income of NIL. 3. The AO made a reference to the TPO u/s.92CA(1) for determination of the ALP of international transaction. Accordingly, the TPO issued notices u/s.92CA(2) of the I.T. Act and asked the assessee to furnish the requisite details. From the various details furnished by the assessee the TPO noted that the assessee is a part of the preferred brands group of companies. He observed that the international transactions undertaken by the assessee during the relevant assessment year is as under : Sr.No. Description of transaction Amount (Rs.) Method 1 Sale of ready to serve foods 23,48,77,291/- TNMM 2 Payment of interest on ECB and 52,10,842/- CUP 3 Interest charges on AE towards overdue dues 13,26,462/- CUP 4 Reimbursement of expenses 72,69,146/- CPM Total 24,86,83,743/- 4. He observed that TBEL has sold goods worth Rs. 23.48 crores to its As....
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.... 6.6 That the TBEL was referred to BIFR in early 1990's and came out of BIFR only at the time of acquisition of the new management in 1999. That the company had huge carry forward losses and was in a turnaround phase during the Financial Years 2000-01 to Financial Year 2004-05. 6.7 That TBEL had discontinued the domestic sales of ready to eat processed food products during the year 2004-05. That in the financial year, the company has to settle claims for local distributors and other supply chain vendors including inventory write off, provision for sales tax payable under deferral scheme, and for provision for non-collectability of Govt. incentives. 6.8 That adjustment on account of capacity under utilization, debit of expenses pertaining to the non-AE business may be given and PLI of the assessee after adjustment works out to 16.28%. 7. The submissions made by the assessee together with the facts of the case and the oral contentions made during the course of hearing have been considered and for the reasons given herein under the contentions of the assessee have not been found to be acceptable." 6. However, the TPO was not satisfied with the above explanation given ....
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....elf has selected TNMM method to benchmark its transaction with the Associated Enterprises. The assessee in its TP study report has submitted detailed search process adopted by it and has selected only ADF Foods Ltd as a comparable company to benchmark its transaction with Associated Enterprises. The assessee in its report has mentioned that ADF Foods Ltd is engaged in the manufacturing of ethnic Indian foods, ready to eat food in frozen and retort packs, pickles, pastes, mango pulps/slices, chutneys, papadums, ready to cook vegetables, cooking sauces, masala and rice, flavoured water and tamarind products. Thus after carrying out the functional analysis the assessee has finally selected ADF Foods Ltd. as a comparable company. The TPO further noted that the assessee has not demonstrated as to how the company preparing pickles/pastes, canned produces, masala spices have greater margin especially when these products have a lesser shelf life as compared to ready to eat products and accordingly the comparable company bears more risk of wastages. He therefore, rejected the contention of the assessee on this ground. 9. The TPO also rejected the submission of the assessee that it had hu....
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....ons are adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entered into such transactions which could materially affect the amount of net profit margin in the open market. The net profit thus established is then taken into account to arrive at an ALP in relation to international transactions. 12. Referring to the decision of the Pune Bench of the Tribunal in the case of Skoda Auto India Pvt. Ltd. Vs. ACIT the TPO was of the opinion that inclusion of PBDIT as well as adjustment on account of capacity underutilization is not only not allowable as per Rule 10B(10)(e)(i) but even if some adjustment is considered as allowed, then too, it can only be allowed in respect of the items of expenses which may be proportionately higher in the case of the assessee only. Following similar corollary the adjustments would be required in the case of comparables in respect of all the items of expenses wherever there is difference vis-à-vis the tested party and the result of such an exercise would be nothing but bringing the net margin of the tested party at par with that of arith....
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....ade by the assessee. 14. On the basis of the directions given by the DRP the AO recomputed the revised PLI of ADF Foods Ltd. at 8.34%, the details of which are as under : Revised PLI of ADF foods Ltd. (as per DRP order) Particulars Rs. In crores Net Sales 77.56 Less : Sales of Import License (adj. taken as per DRP order) 4.54 Adjusted sales 73.02 PBIT (before giving effect on unallocable expenditure) 9.11 Less : Proportionate unallocable expenditure 3.49 PBIT 5.62 Operating Expenses 67.4 PLI (OP/OE) 8.34% 15. The TPO accordingly made an adjustment of Rs. 1.14 cr in respect of the TP adjustment by computing the revised PLI which is as under : Revised calculation of PLI : 1. The revised PLI margin of ADF In view of DRP's claim Rs.8.34% 2. Operating cost of Rs.24.44 Cr 3. Annual Length price 28.44 cr X 8.34%100 Rs.2.37 Cr 4. 95% of annual length price Rs.2.24 Cr 5. ALP shown by assessee Rs.1.37 Cr 6. Difference Rs.1.14 Cr 7. Adjustment required to be made Rs.1.14 Cr 16. Against such order of the AO the assessee is in appeal before us with the fo....
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.... The learned ACIT erred on the facts and in circumstances of the case and in law in disallowing freight expenses. 7. Levy of interest obligation on account of transfer pricing adjustment 7.1 The learned ACIT has erred on the facts and in law by levying interest under section 234B of the Act, on account of the unanticipated adjustments made by the learned Transfer Pricing Officer. 7.2 The Appellant pleads that the shortfall in advance tax has resulted in view of the adjustments which have been objected in the Grounds above and accordingly is consequential in nature. 7.3 The learned ACIT has erred on the facts and in law by levying interest under section 234C of the Act on the assessed income and not restricting to returned income. 8. Initiation of penalty proceedings under section 271 (1) (c) read with section 274 of the Act on account of transfer pricing adjustment. The learned ACIT erred on the facts and in law in proposing to initiate penalty proceedings section 271(1) (c) read with section 274 of the Act, without considering the facts of the case. 9. Each one of the above grounds of appeal is without prejudice to t....
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....for A.Y. 2006-07, the Ld. Counsel for the assessee drew the attention of the Bench to para 10 and 14 of the order and submitted that the Tribunal has in principle allowed the claim of low capacity utilization and high fixed operating cost incurred in the initial year of operation. Referring to the decision of the Mumbai Bench of the Tribunal in the case of ACIT Vs. M/s.Fiat India Pvt. Ltd. vide ITA No.1848/Mum/2009 order dated 30-04-2010 reported in 2010-TII-30-ITAT-MUM-TP he submitted that the Tribunal has held that appropriate adjustments are required in terms of capacity utilization of the comparable cases to eliminate such difference. 20. Referring to the following charts, the Ld. Counsel for the assessee submitted that the assessee will be entitled to capacity under utilization of minimum 37.97% margin. 1. Working for capacity utilisation adjustment A. Capacity utilisation of ADF Foods Ltd. Sl.No. Particulars A.Y. 2007-08 (MT) 1 Installed capacity 25,900 2 Actual Production 13,822 3 Capacity Utilization % [2/1*100] 53.37% B. Capacity utilisation of Tasty Bite Eatables Limited Sl.No. Particulars A.....
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.... Repairs and Maintenance - Building 0.06 Repairs and Maintenance - Others 0.08 Rent Rates and Taxes 0.20 Insurance 0.06 Total 5.47 E. Idle cost (CXD) 2.08 F. Total Revenue of Tasty Bite as per annual report 30.75 G. Value of International transactions of Taste Bite 23.49 H. Idle cost attributable to value of International Transaction (C/FXG) 1.59 I. PLI of Taste Bite after capacity Utilisation adjustment Sl.No. Particulars A.Y. 2007-08 A Value of International transaction as above (Refer G above) 23.49 B Less : Profit by applying PLI as calculated by TPO 0.97 C Cost (A-B) 22.52 D Less : Unabsorbed Fixed Cost as calculated above 1.59 E Adjusted Cost (C-D) 20.93 F Adjusted Profit (A-E) 2.56 G PLI (OP/OC) of TBEL (F/E*100) 12.23% H PLI of comparable company - ADF Foods Limited 8.34% I Adjustment (G-H) NIL Capacity Utilisation adjustment on the TBEL : 1. Working for capacity utilization adjustment A. Capaci....
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....er and fuel 21.05 6.07 5 Excise duty 1.08 0.31 6 Decrease in stock 8.01 2.31 Total Variable Cost 65.26 18.83 Gross Profit 7.76 2.24 E Fixed Cost (Operating Cost-Variable Cost) 2.14 2.14 F Total Operating Cost 67.40 20.97 G PBIT 5.62 0.10 H PLI of ADF 8.34 0.47 21. He also relied on the following decisions : 1. Brintons Carpets Asia Pvt. Ltd. Vs. DCIT - ITA No.1296/PN/2010 2. Skoda Auto India P. Ltd. Vs. ACIT reported in 30 SOT 319 (Pune) 3. Amdocs Business Services Pvt. Ltd. Vs. DCIT - ITA No.1412/PN/2011 4. Ariston Thermo India Ltd. - ITA No.1455/PN/2010 22. So far as ground of appeal No.3 is concerned, the Ld. Counsel for the assessee submitted that the AO has taken the operating cost for the entire RTS segment which contains transaction with AEs (exports) as well as transactions with non-AEs (domestic). He submitted that since the assessee was incurring losses in the non-AE segment, the PLI of the assessee was artificially brought down. Referring to various dec....
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.... e Adjustment - applying PI on the AE transaction only (d-b) 0.90 0.24 1.14 Sr.No. Particulars Amount A Sales 30.43 Less: Expenses B Material consumption 16.67 C Manufacturing & Other Expenses 11.46 D Interest & Finance Charges 0.32 E Inventory Change 0.19 F Total Expenses (B+C+D+E) 28.64 G Operating Profits (A-F) 1.79 H Operating Profit/Total Cost (G/F) 6.25% (INR in crores) Sr.No. Particulars Amount Total Amount A Total Sales 67.80 Less: Trading Sales 3.58 B Sales net of Trading Activity 64.22 C Total Operating Expenses 61.60 Less: Expenses attributable to Trading (trading sales - Trading Margin) 2.95 D Total Operating Expenses net of trading expenses 58.65 E Total Operating Profit net of trading activity (B_D) 5.57 F Adjusted Operating Profit/Adjusted Total Cost (....
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....ncerned the Ld. Departmental Representative submitted that adjustment has to be made on segment to segment and if the assessee wants any adjustment on the basis of transaction to transaction they have to give full details which they have not given. Therefore, the ground of appeal No.3 has to be dismissed. 30. The Ld. Counsel for the assessee in his rejoinder submitted that depreciation is taken as a fixed cost and power and fuel has been taken as variable cost. If Departmental Representative wants to take these as fixed costs then the assessee stands to gain. 31. So far as the capacity under utilization is concerned the Ld. Counsel for the assessee drew the attention of the Bench to the submissions made before the TPO which appears at page 235 of the paper book para 6.7 and which reads as under : "6.7 That TBEL had discontinued the domestic sales of ready to eat processed food products during the year 2004-05. That in the financial year, the company has to settle claims from local distributors and other supply chain vendors including inventory write off, provision for sales tax payable under deferral scheme, and provision for non-collectability of Govt. Incentives." He ....
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....#39;s case and that of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences and after having considered the relevant transfer pricing guidelines as well as transfer pricing regulations, it was held by the Ld. CIT(A) that various adjustments made by the assessee were reasonable and accurate. He also held that the said material difference were arbitrarily ignored by the TPO while disallowing the assessee's claim such for adjustments and there being no proper reasons assigned by him for ignoring the said difference, the transfer pricing exercise done by him in the report was entirely futile. At the time of hearing before us, the Id. D.R. has not been able to raise any material contention to rebut/controvert the observations/finding recorded by the Ld. CIT(A) in his impugned order to arrive at the said conclusion. He has simply relied on the report of the transfer pricing officer in support of the Revenue's case. However, as pointed out by the Ld. Counsel for the assessee from the copies of relevant reports, the TPO himself has allowed similar adjustments made by the ....
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....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 regard to the relevant base. In sub-clause (ii) the net profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction is to be ascertained having regard to the same base. Sub-clause (iii) permits adjustment with regard to the net profit margin referred to in sub-clause (ii) i.e. of the comparable uncontrolled transactions so as to take into account the difference, if any be....
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....siness 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 purpose of computing its ALP. The assessee had claimed that capacity utilization of comparables was to the extent of 70%, which was an assumption made due to non-availability of the required details of the comparable cases. The TPO rejected the adjustment on the ground that assessee had not submitted any evidence for assuming the capacity utilization of the comparables and the data being relied....
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....resaid 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 entire factual matrix is required to be examined at the appropriate level. The TPO as well as the DRP did not accept the plea of the assessee in principle, while the same has been accepted by us. Therefore, in order to allow an appropriate adjustment, necessary verification on the basis of the material to be furnished by the assessee, deserves to be carried out by the Assessing Officer. Therefore....