TaxTMI 
TaxTMI 
2016 (6) TMI 633
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....ices to its parent company, Biesse Spa, Italy. The assessee filed its return of income for Assessment Year 2010-11 on 14.10.2010 declaring loss of Rs. 8,83,10,550. The case was processed under Section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer ('TPO') for determining the Arm's Length Price ('ALP') of the international transactions reported by the assessee, after obtaining the approval of the CIT-I, Bangalore. The TPO passed an order under Section 92CA of the Act dt.15.1.2014 proposing a T.P. Adjustment of Rs. 11,62,02,178 to the international transactions entered into by the assessee in the period under consideration. 2.2 After receipt of the TPO's order, the Assessing Officer passed the draft order of assessment under Section 143(3) rws 144C of the Act dt.28.2.2014, wherein the income of the assessee was determined at Rs. 2,78,91,628 and which included the T.P. Adjustment of Rs. 11,62,02,178. 2.3 Aggrieved, the assessee filed its objections thereto before the DRP. The DRP disposed off the assessee's....
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....tion of the Learned TPO in computing arm's length price under Section 92CA of the IT Act by taking incorrect average margin of 18.76% [which includes M/s. Premier Ltd., which does not satisfy the tests of comparability] as against the correct average margin of 6.40% of the comparable companies. 9. Without prejudice to the above, assuming without conceding that M/s. Premier Ltd. is a comparable Company, the Honourable DRP is not justified in upholding the action of the Learned TPO in computing arm's length price under Section 92CA of the IT Act by taking incorrect average margin of 18.76% as against the correct average margin of 8.98% of the comparable companies. 10.The Honourable DRP is not justified in upholding the action of the Learned TPO in denying adjustment in respect of under utilization of capacity while determining the ALP by perversely stating that there is no reliable information regarding the under utilization of capacity despite Appellant having furnished the Chartered Engineering Certificate and related information. 11.The Honourable DRP is not justified in perversely stating that the Appellant's data are not reliable without finding specifically any particu....
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....tion is as under :- Particulars Manufacturing (Rs.) Trading (Rs.) Operating Revenue 17,08,11,421 9,31,37,089 Operating Cost 28,31,58,271 4,74,68,913 Operating Profit / Cost (-) 11,23,46,850 4,56,68,176 OP/OC % 48.64% -- OP / Sales % -- 49.03% During the year under consideration, the assessee has reported the following international transactions :- Transaction Amount Rs. Purchase of components 10,45,52,930 Sale of goods 10,70,14,327 Import of finished goods 1,38,99,316 Purchase of capital goods 1,07,13,580 Receipt on account of provision of services. 2,27,95,313 Interest paid on loan (6 month Euribor + 50 basis points - total interest rate is 1.46%) 35,79,962 Reimbursement of expenses paid 2,31,51,238 Total : 28,60,06,666 4.2 In the T.P. Documentation submitted to the TPO, the assessee had mentioned that it is into both manufacturing and trading activities and that the segmental details were mentioned separately for each segment. The assessee adopted TNMM as the Most Appropriate Method ('MAM') to determine the ALP of the international transactions in the manufacturing se....
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....en by the assessee. The TPO observed that the assessee had adopted multiple years' data for computation of the average margins of the comparable companies. The TPO considered only those comparable companies whose financial data for the current year, i.e. F.Y.2009-10 was available in the TP document and he therefore accepted only 7 companies as comparable out of the 16 companies selected by the assessee. The list of 7 comparable companies selected by the TPO are as under :- Sl.No. company PLI (OP/OC %) 1. Cmi FPE Ltd. 11.82 2. English Tools & Castings Ltd. - 15.86 3. Kabra Extrusion Technik Ltd. 17.99 4. Mitsubishi Heavy Industries India Precision Tools Ltd. 1.65 5. Solitaire Machine Tools Ltd. 9.65 6. Lakshmi Machine Works Ltd. 9.86 7. Premier Ltd. 32.22 Average 13.57 4.6 Accordingly the TPO completed the ALP of the international transactions pertaining to the manufacturing segment as under :- Operating Cost Rs.32,42,20,711 Arm's Length Margin 13.57% of Operating Cost Arm's Length Price @ 113.57% of operating cost Rs.36,82,17,461. Price Received Rs.25,2....
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....mparable company. It was further submitted that this company, Premier Ltd. as can be seen from its Annual Report had two segments, namely engineering segment and automotive segment and if at all it is to be considered as a comparable, then only the engineering segment of the company has to be considered for the comparability analysis. 7.2 Per contra, the learned Departmental Representative supported the orders of the authorities below in including this company as a comparable to the assessee in the case on hand. 7.3.1 We have heard the rival contentions and perused and carefully considered the material on record. Admittedly, this company was selected as a comparable company by the assessee itself in its T.P. Study as it satisfies all the criteria for comparability adopted by the assessee. In fact, the TPO has accepted all the comparables adopted by the assessee which had the current financial year data. 7.3.2 Before us, the assessee has not brought on record any material or evidence to substantiate its claim that this company is not comparable to the assessee. The assessee has also not brought on record any factors that have changed the circumstances from the time when the....
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....at since separate books of accounts are maintained in respect of the two segments, the TPO ought to have considered the details related to the manufacturing segment only, for bench marking the transactions related to the manufacturing segment. 8.2.1 We have heard both parties and perused and carefully considered the material on record. It is not in dispute that the assessee had furnished the segmental details related to the manufacturing and trading segments. The TPO had pointed out certain anomalies / defects in the segmental details furnished by the assessee in the T.P. Study vis-à-vis details furnished during T.P. proceedings. The assessee was asked to explain the anomalies and it has furnished its explanation in this regard. In the show cause notice, the TPO had proposed to re-cast the segmental financials of the assessee and had proposed the margin of (-) 43.5% for the manufacturing segment and 48.5% for the trading segment. 8.2.2 After seeking the explanation of the assessee for the anomalies in the details furnished and proposing to recast the segmental details, the TPO ought to have either accepted the explanations furnished by the assessee or adopted the recas....
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....ow down. The TPO, however, rejected the assessee's claim of capacity under-utilisation on the ground that adequate evidence and satisfactory explanation was not provided by the assessee and that merely submitting the details of capacity is not enough to claim adjustment for under-utilisation of capacity. 10.2 Before the DRP, the assessee submitted a certificate from a Chartered Engineer giving details of the capacity to produce various types of machines and their utilization thereof. However, the DRP upheld the decision of the TPO and rejected the assessee's claim of under-utilisation of capacity. 10.3 Aggrieved by the decision of the authorities below in turning down its claim for adjustment on account under-utilisation of capacity, the assessee submitted detailed written submissions and also submitted copies of the decisions relied upon by the assessee. It was contended that the assessee is entitled for under-utilisation of capacity and the TPO has wrongly disallowed the claim for adjustment by stating/observing that there was no reliable information regarding the under-utilisation of capacity. In this regard, a Chartered Engineer certificate was submitted before th....
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....o the assessee, if the profit margin is taken before depreciation by adopting Earning Before Depreciation, Interest and Tax (EBDIT) as PLI, the effect of difference in capacity utilization on profit margin can be nullified. The TPO did not approve this method adopted by the assessee for making adjustment on account of capacity utilization whereas the ld. CIT(A) found the same to be acceptable holding that the under utilization of capacity results in under recovery of fixed expenses like depreciation and if the depreciation is excluded, the effect of difference in capacity utilization on profit margin can be nullified. Before we proceed to deal with the issue of adjustment for difference in capacity utilization, it is necessary first to see the procedure laid down for carrying out the exercise of comparability analysis and making suitable adjustments. This procedure as laid down in section 92-C of the Act provides that the ALP in relation to an international transaction shall be determined by any of the methods specified therein, being the most appropriate method and the manner in which the said ALP has to be determined is given in section 92-C(2) of the Act read with Rule 10B of th....
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....main by and large static irrespective of level of capacity utilization, the profit margin gets affected as a result of difference in capacity utilization on this count. The under utilization of capacity results in over allocation or over absorption of fixed overheads resulting into under-recovery of fixed overheads which adversely affects the profit margin. As the level of capacity utilization goes up, the rate of allocation or absorption of fixed overheads to sales comes down resulting into higher profit margin. The following simple example would further explain this position: Installed capacity in monetary terms Rs. 10 crores Rs. 10 crores Rs. 10 crores Capacity utilisation 50% 60% 80% Sales Rs. 5 crores Rs. 6 crores Rs. 8 crores Variable overheads at 50% Rs. 2.5 crores Rs. 3 Crores Rs. 4 crores Fixed overheads Rs. 2 crores Rs. 2 crores Rs. 2 crores Net profit Rs. 0.5 crores Rs. 1 crore Rs. 2 crores Profit margin (OP/Sales) 10% 16.67% 25% 21. The above example shows that the profitability changes with the change in the level of capacity utilization with higher profitability at higher utilizatio....
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.... worked out. Clause (e)(iii), which permits the adjustments, clearly stipulates that any adjustment on account of differences affecting materially the profitability is to be made to the net profit margin of the comparables as referred to in clause (e)(ii). By taking the net profit margin of the assessee without considering the depreciation in order to make adjustment on account of difference in capacity utilization, what the assessee has sought to do is to make adjustment to the net profit margin of the assessee as referred to in clause (e)(i) of sub Rule (1) of Rule 10B, which in our opinion, is not permissible in accordance with clause (e)(iii) of sub Rule (1) of Rule 10B. 23. The question that now arises is what is the proper method of making adjustment for difference in capacity utilization within the frame work given in Rule 10B. As already discussed by us, the difference in capacity utilization affects the profitability mainly because of the difference in rates at which the fixed overheads are absorbed or allocated depending on the level of capacity utilization. The example given by us clearly depicts this position. The said example shows that the allocation of fixed overh....
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....and having explained with illustration that the same can appropriately be made by absorbing or allocating fixed overheads such as depreciation on sales of the comparable at the same rate as that of the tested party, we are of the view that such absorption or allocations of fixed overheads on operating cost instead of sales would be more appropriate as the same will eliminate the effect of difference in profit margin or difference in level of stock of finished goods, if any, of the tested party and comparables. 26. In so far the present case is concerned, it is observed that depreciation claimed by the assessee is Rs. 6.15 crores which is 4.26% of its operating cost of Rs. 144.13 crores. If the depreciation in case of a comparable is allowed at the same rate i.e. 4.26% of its operating cost instead of the actual depreciation claimed, if it is lower, this adjustment, in our opinion, will take care of difference in capacity utilization. We accordingly set aside the impugned order of the ld. CIT(A) excluding the depreciation entirely for the purpose of computing operating profit and direct the A.O. to make the adjustment as given above for difference in capacity utilization after ve....
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.... for the assumption of 277 working days in a year and 80% efficiency of the machines and manpower have not been spelt out. v) Down time for repairs and maintenance has not been projected. From the above, it emerges that the capacity worked out by the assessee, is the total installed capacity. However, the optimum capacity that can be utilized is the right figure that needs to be adopted for comparability. It is well known that manufacturing industries cannot always operate to full installed capacity. It will be a wrong assumption to make that the comparable companies are all operating to their full installed capacity. The capacity to which the manufacturing units can be reasonably expected to operate is the optimum capacity and this can / will vary from industry to industry. It is essential to understand the capacity at which the comparable companies operated during that relevant period. The capacity at which the comparable companies operate has to be compared with the capacity utilization of the assessee to evaluate the under-utilisation of capacity, in the case on hand. 10.4.8 From the cost sheet submitted, it is seen that the assessee has compared all the non-operating ....
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....tes that if the arithmetical mean price falls beyond + / - 5% from the price charged in the international transactions, then the assessee does not have any option referred to in section 92C(2). Thus, as per the above amendment, it is clear that the + / - 5% variation is allowed only to justify the price charged in the international transactions and not for adjustment purposes. The aforesaid amendment has settled the issue and accordingly the 5% benefit is not allowable in the assessee's case. The various judicial decisions cited pertain to the period prior to the retrospective amendment in section 92C(2A) of the Act and are not applicable to the facts of the assessee's case. In view of the amendment brought about therein by Finance Act, 2012, this ground raised by the assessee is not maintainable and is accordingly dismissed. 12. Ground No.14 : Set off of carry forward losses. 12.1 In this Ground, the assessee contends that it has been wrongly denied the benefit of set off of carried forward losses to the extent of Rs. 1,16,71,624 by the authorities below. Since we find, from a perusal of the orders of assessment, that this issue has not been addressed by the Assessin....
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....nal, inter alia, in the case of NXP Semi Conductors India Pvt. Ltd. in IT(TP)A No.1662/Bang/2014 dt.12.8.2015 which has followed the decisions of earlier co-ordinate bench of this Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) and Sap Labs India (P) Ltd. (2011) 44 SOT 156 (Bang). 16.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We observe that it has not been disputed that the foreign exchange gain/loss has arisen as a consequence of the realization of the consideration in the course of business operation for rendering software development of the assessee and therefore there is no reason for its exclusion from the operating revenues for the purpose of calculating the operating margin of the assessee. The DRP in its order at para 3.2 thereof, following the order of the co-ordinate bench of this Tribunal in the case of SAP Labs India Pvt. Ltd. (supra) has held and directed the A.O. to consider foreign exchange fluctuation as operating in nature in respect of the assessee as well as the comparable companies while determining the margins....
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.... regarding as part of the operating revenue. Following the decision of the ITAT, Bangalore Bench in the case of SAP Labs (supra), we hold that the operating revenue for the assessee be computed by including the foreign exchange gain." Following the decision of the co-ordinate benches of this Tribunal in the case of Sap Labs India (Pvt.) Ltd. (supra), Triology E Business Software India Pvt. Ltd. (supra) and Mindteck (India) Ltd. (supra), we hold that operating revenue should be computed by including the foreign exchange gain. Consequently, the grounds at S.Nos.2 to 4 raised by revenue are dismissed." Following the decision of the co-ordinate benches of this Tribunal in the case of Sap Labs India (Pvt.) Ltd. (supra), Triology E Business Software India Pvt. Ltd. (supra), Mindteck (India) Ltd. (supra) and Amba Research India Pvt. Ltd. (supra), we hold that operating revenue should be computed by including the foreign exchange gain/loss. Consequently, the grounds at S.Nos.2 to 4 raised by revenue are dismissed." 16.4 Following the decision of the co-ordinate benches of this Tribunal in the cases of Sap Labs India (Pvt.) Ltd. (supra), Triology E Business Software India Pvt. Ltd.....