TaxTMI 
TaxTMI 
2016 (3) TMI 1169
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....ssee to substantiate the ALP computed by it in the Form 3CEB. 4. From the various details furnished by the assessee the TPO noted that the assessee has undertaken the following international transactions as per the TP study report prepared by M/s. PWC and submitted by the assessee : Sl.No. Description of the transactions Amount (in Rupees) 1 Purchase of components and parts 38,798.709 2 Purchase of geared motors 4,966,700 3 Purchase of capital goods 206,433 4 Commission on sales 13,436,816 5 Interest on External Commercial Borrowing 9,149,245 6 Reimbursement of expenses 43,046 5. However, he noted that the above details furnished by the assessee in the TP study report are incorrect and the actual AE transactions as reported in Form 3CEB are as under : Sl.No. Description of the transactions Amount (in Rupees) 1 Purchase of components and parts 10,96,50,348 2 Purchase of geared motors 99,33,399 3 Purchase of capital goods 206,433 4 Commission on sales 13,436,816 5 Receipt of ECB loan 3,59,12,257 6 Interest on External Commercial Borrowing 9,149,245 7 ....
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....ignificant amount of underutilised capacity. As against the average capacity utilisation of 57.50% for comparables, the capacity utilisation of the assessee is 13.01%. Relying on various decisions it was argued that it is permissible to make adjustments to costs and profits in fit cases for the purpose of comparable analysis. The assessee accordingly submitted a fresh TP study report by making suitable adjustment to the fixed cost incurred by the company on account of underutilised capacity for determining the net margin from the international transactions. The TPO has incorporated such working at para 9.5 (page 14 to 17) of his order. 9. The TPO analysed the various submissions made by the assessee from time to time and noted that there is no dispute regarding the selection of the tested party and the most appropriate method, i.e. TNMM. He noted that the updated margins of the comparable companies for F.Y. 2008-09 are as under : S.No. Name of the Company PLI 1 Crompton Greaves Ltd. 14.86% 2 Deepak Industries Ltd. 2.82% 3 J.M.T. Auto Ltd. 12.73% 4 Mahindra Gears and Transmission Pvt. Ltd. 15.08% 5 Shanthi Gears Ltd. 29.54% ....
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....ually had any apparent effect on the profitability of the companies. 12. The TPO further noted that the assessee has taken comparables which are producing many items. He observed that Kirloskar manufactures transformers apart from motors/generators/alternators. The assessee has considered capacity utilization in the case of motors/generators etc. However capacity utilization of this company in the case of transformers is almost 200% and in spite of such impressive capacity utilization its margins are quite low. Further in certain items, Kirloskar has absolutely nil capacity utilization such as Welding equipments (installed capacity 1800) but production is nil). The same is the case with metal cutting machines, printed circuit boards etc. He noted that going by assessee's logic one must say that Kirloskar's margin required upward adjustment because of unutilized capacity in these items. 13. Similarly in the case of Crompton the TPO noted that the company also manufactures energy metres where the installed capacity is 10,00,000 and production is 2,80,693. Similarly, in case of switchgear control equipment - installed capacity is 413400 whereas actual production is 263868. 14....
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....7,896 Expenses 273,145,264 Less : interest -7,752,041 Less : Loss on Sale of assets -117,266 Less : Prior Period adj -1,397,204 OC 263,878,753 OP -57,800,857 PLI OP/Sales -28.05 16. He noted that the PLI of comparables on a single year data is as under : S.No. Name of the Company PLI 1 Crompton Greaves Ltd. 14.86% 2 Deepak Industries Ltd. 2.82% 3 J.M.T. Auto Ltd. 12.73% 4 Mahindra Gears and Transmission Pvt. Ltd. 15.08% 5 Shanthi Gears Ltd. 29.54% 6 Bharat Gears Ltd. 5.42% 7 Gujarat Automotive Gears Ltd. (Automotive Parts Segment) 12.80% 8 International Combustion (India) Ltd. (Gear box & Geared Motor Drive System Segment) 21.46% Average 14.34% 17. The TPO accordingly made an upward adjustment of Rs. 8,73,52,427/-, the details of which are as under : Description Rs. Turnover B 206,077,896 OC 263,878,753 ALP of comparables P 14.34 Arms Length Price (ALP) of the International transaction (A) (ALP=OC*(1-D/100) A 176,526,326 5% range on higher side (the assessee's transact....
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....y, working capital adjustment, cash profit level indicator 'PLI') etc.) 2.1 The Appellant craves to plead before your Honour, to grant capacity underutilization adjustment on account of difference in utilization of capacity by the appellant and the utilization of capacity by the comparable companies. 2.1.1 The Appellant craves to plead before Honour, to appreciate assessee's classification of expenses into fixed and variable. 2.2 Cash PLI The Appellant craves to plead before Honour, to grant an adjustment on account of depreciation expense incurred by the Appellant vis-à-vis the comparables. 2.3 Working Capital Adjustment The Appellant craves to plead before your Honour, to grant an adjustment for differences in working capital position of the comparable companies and the Appellant; 3. Selection and rejection of comparables 3.1 The Appellant craves to plead before your Honour, to accept certain functionally comparable companies and reject certain functionally non-comparable companies. 3.2 The Appellant craves to plead before your Honour, to reject companies with significant related party tra....
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....e interest of justice, the additional ground may please be admitted. Additional Ground No.2 The Ld. AO/TPO/DRP erred in working out the operating cost by including loss on account of foreign exchange difference. Additional Ground No.3 "The Ld. AO/TPO/DRP erred in not considering the "Kirloskor Electric Co. Ltd" as one of the comparable. " Additional Ground No.4 "The adjustment should be allowed for High Import duty content on account of very high import as compared to the import of comparable." 21. The Ld. Counsel for the assessee referring to the decision of Hon'ble Supreme Court in the case of NTPC Ltd. reported in 222 ITR 383 and the decision of the Special bench of the Tribunal in the case of Mahindra and Mahindra Ltd. reported in 122 TTJ 0577 (SB) requested for admission of the additional grounds. He submitted that no new facts are required to be verified and all material facts are on record of the Department. He accordingly submitted that the additional grounds raised by the assessee should be allowed. 22. After hearing both the sides, the additional grounds raised by the assessee are admitted for adjudication. 23....
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.... 5. Brintons Carpets Asia - 139 TTJ 0177 Pune ITAT 6. E.I. Dupont India Pvt. Ltd. - 49 SOT 123 Delhi ITAT 7. E-Gain Comm. - 118 TTJ 354 Pune 8. Global Turbine Services Inc. - ITA No.3484/Del/2011 29. Referring to the certificate of the Cost Accountant who have analysed and classified the expenses into fixed and variable he submitted that after taking the same into account the adjusted PLI of the assessee works out to 12.31%. He accordingly submitted that ground of appeal No.2.2 and 2.1.1 should be allowed. 30. The Ld. Counsel for the assessee further submitted that an adjustment on account of depreciation expenses incurred by the assessee vis-à-vis the comparables should also be allowed to the assessee. 31. So far as the other grounds are concerned, the Ld. Counsel for the assessee submitted that the DRP in its order for A.Y. 2011-12 has upheld the assessee's contention and allowed the use of cash PLI for computing the Arm's Length Margin for A.Y. 2011-12. Similarly, the TPO in his order for A.Y. 2012-13 has granted the working capital adjustment to the assessee which resulted in deleting the Transfer Pricing adjustment. The DRP vide d....
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....fore, the assessee should be granted the benefit of +/-5% as per proviso to section 92C(2). He accordingly submitted that considering the direction of the DRP for A.Y. 2011-12 and the order of the TPO for A.Y. 2012-13 the addition made by the TPO and upheld by the DRP should be deleted. 35. The Ld. Departmental Representative on the other hand heavily relied on the order of the TPO/DRP. So far as the capacity utilisation adjustment is concerned he submitted that adjustment can only be made to the comparable companies. The adjustment sought on account of under utilisation of capacity is neither possible on facts nor is in accordance with law. So far as the argument of the assessee regarding working capital adjustment, custom duty adjustment, expenses of certain functional comparable companies and rejection of certain functional non comparable companies and to reject companies with significant RPT are concerned, the Ld. Departmental Representative submitted that the assessee has not made any submissions before the DRP and assessee is now making fresh arguments on this issue. Similarly, no submission was made before the DRP or the TPO to allow correction in the margins of compar....
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....cisions cited before us. Although the assessee has taken number of grounds now they crystallise only on two issues, i.e. adjustment for capacity under utilisation and adjustment for inappropriate calculation of TP. 33. So far as the adjustment on account of capacity under utilisation is concerned, it is the submission of the Ld. Counsel for the assessee that capacity utilisation of the assessee works out to 15% whereas capacity utilisation of the comparable company was 53%. Therefore, the difference between the two is significant and material to impact the profit margin of the assessee and the comparable company's ability to absorb the fixed overheads like depreciation, salary and wages, power, repair etc. is less where capacity utilisation is low and this would lead to increased cost and lower profit. 34. We find some force in the above submission of the Ld. Counsel for the assessee. We find the Mumbai Bench of the Tribunal in the case of M/s. Fiat India Ltd. Vs. ACIT vide ITA No.1848/Mum/2009 order dated 30-04-2010 for A.Y. 2004-05 at para 8 of the order has observed as under : "8. In ground No. 2, the Revenue has challenged the action of the Id. CIT(A)....
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....TNMM analysis were reasonable and accurate and as reflected in the said analysis, international transactions made by the assessee company with its associated concerns during the year under consideration were at arms length requiring no adjustment/addition on this issue. The impugned order of the Ld. CIT(A) on this issue is therefore upheld dismissing ground No. 2 of Revenue's appeal. (underline given by us) 35. We find following the above decision the Pune Bench of the Tribunal in the case of Ariston Thermo India Ltd. (Supra) has also agreed in principle the adjustment on account of low capacity utilisation and high fixed operating cost by observing as under : "10. We have carefully considered the rival submissions. The point sought to be made out by the assessee is that this being the first year of operations, it has not achieved an optimum level of capacity utilization and the sales are also on a lower side. Moreover, it has incurred certain start-up costs and the fixed operating costs have also not being absorbed due to low capacity utilization. In the absence of optimum utilization of its production capacity, it has suffered operating losses during the yea....
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.... margin of the tested party as stated in sub-clause (i) is to be the same as reflected in the financial accounts. In para 8.1 of the order of the TPO it is canvassed that the net profit margin has to be understood as meaning profit before tax computed in accordance with accounting principles. In our considered opinion, the whole objective of adopting the most appropriate method for the purpose of comparability analysis is to determine arm's length price of the international transactions. In other words, the purpose of the comparability analysis is to examine as to whether or not the values stated for the international transactions are at an arm's length price i.e. whether the price charged is comparable to an uncontrolled transaction of similar nature. Therefore, the adoption of the net profit margin of the tested party has to be made keeping in mind its objective, i.e. to facilitate its comparison with other uncontrolled comparable entities/transactions. Therefore, keeping in mind the aforesaid objective, the net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as....
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....not furnish sufficient evidence with regard to the capacity utilization of the comparable cases. The Tribunal held that assessee was not entitled to seek adjustment on account of capacity utilization because of its failure to furnish credible and accurate information in this regard. In conclusion, the Tribunal specifically noted that because of the aforesaid failure of the assessee, the precedents cited by the assessee by way of the decisions of the Tribunal in M/s Fiat India Pvt. Ltd. (supra), Skoda Auto India (P.) Ltd. (supra), Egain Communication (P.) Ltd. (supra) and Global Vatedge Pvt. Ltd. vs. DCIT (ITA Nos, 2763 & 2764/Del/2009) could not be applied in the case of the assessee. The aforesaid discussion in the order of the Tribunal clearly shows that the assessee therein failed in seeking adjustment to its profit margins for lack of evidence, and the Tribunal was fully conscious that the relief was otherwise allowable to the assessee in principle, based on the precedents cited above. Thus, the decision in the case of Haworth (India) P. Ltd. (supra) does not help the Revenue, and the reliance by the CIT(DR) is misplaced. Therefore, in our view, having regard to the precedents ....
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....sessee for low capacity utilization and high fixed operating costs incurred in the initial year of operation." 36. Respectfully following the above decisions cited (Supra) we are of the considered opinion that the assessee should be given the benefit of low capacity utilisation. We therefore restore the ground of appeal No.2 to the file of the AO/TPO with a direction to consider the appropriate adjustment after necessary verification on the basis of material supplied by the assessee. The Assessing Officer shall recompute such adjustment after giving due opportunity of being heard to the assessee. Ground of appeal No.2 by the assessee is accordingly allowed for statistical purposes." 38. We find the Mumbai bench of the Tribunal in the case of JCIT Vs. M/s. Kiara Jewellery Pvt. Ltd. and vice versa vide ITA No.8109/Mum/11 and CO No.228.Mum/12 order dated 07-05-2014 for A.Y. 2007-08 has observed as under : "10. As regards the issue involved in the cross-objection filed by the assessee relating to the claim of the assessee for adjustment on account of capacity utilization, it is observed that the said claim of the assessee was disallowed by the AO as well as by ld. ....
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....ich,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) The net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) The net profit margin thus established is then taken into account to arrive at an ar....
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....on or absorption of fixed overheads to sales is 40% at 50% capacity utilization while it becomes 33.33% at 60% capacity utilization and 25% at 80% capacity utilization giving more profit margin of 16.67% at 60% capacity utilization and 25% at 80% capacity utilization as against profit margin of 10% at 50% capacity utilization. The difference in capacity utilization thus materially affects the profit margin and if there is a difference in the level of capacity utilization of the assessee and the level of capacity utilization of the comparable companies, adjustment is required to be made to the profit margin of the comparables on account of difference in capacity utilization as per clause (e)(iii) of sub-rule (1) of Rule 10-B of the Income Tax Rules, 1962. 22. Having held that the adjustment is required to be made to the net margin of the comparables on account of difference in capacity utilisation, the next issue that arises is regarding the adoption of proper method by which the same can appropriately be made. In the present case, the assessee made this adjustment by not considering depreciation for computing its own operating profit as well as the operating profit of comp....
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.... the effect of difference in capacity utilization on the profit margin. For example, if we take the profitability working at 50% capacity utilization as that of the tested party and at capacity utilization of 60% and 80% as that of the comparables and adjust the rate of allocation of fixed overheads of the comparables in order to bring the same at par (i.e. 40% of sales) with the tested party, the resultant position will be as under:- Net profit Less additional allocation of depreciation by taking the rate of fixed overheads Rs.1 crore Rs. 2.00 crores at 40% of sales: Rs. 0.40 crores Rs.1.20 crores Net profit after adjustment Rs. 0.60 crores Rs. 0.80 crores Profit margin after adjustment 10% 10% 24. The adjustment thus can be made to the profit margin of the comparables by allocating fixed overheads at the same rate at which fixed overheads are allocated in the case of the tested party. For example, in the case of a comparable having 80% capacity utilization, the rate of allocation of depreciation is 25% of the sales as against the rate of allocation of fixed overheads of 40% in the case of the tested party. If the adjustment is made in ....
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.... light of the decisions cited above and in accordance with law. 40. We further find the DRP in assessee's own case for A.Y. 2011-12 has upheld the assessee's contention and allowed the use of cash PLI for computing Arm's Length Margin by observing as under : "9.8 The assessee prayed for an adjustment to account for difference in investments & has computed cash PLI to benchmark its international transactions. The TPO in its remand report has intimated that the different on account of depreciation between the controlled & the comparable uncontrolled transaction has a likely effect of affecting the price, cost charges or profit arising there from. We agree with this view & accordingly, direct to allow cash PLI in this case." 41. Similarly the TPO in his order for A.Y. 2012-13 has granted working capital adjustment to the assessee resulting in deletion of TP adjustment. We further find from the paper book that the DRP in its direction for A.Y. 2011-12 has also agreed with the assessee's contention and directed the TPO to consider the correct operating profit margin of all comparable companies after working capital adjustment. The relevant observation of the DRP for A.Y. ....