TaxTMI 
TaxTMI 
TaxTMI 
2016 (3) TMI 1169
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....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 Reimbursement of expenses 43,046 6. The TPO noted that the assessee in the TP study report has selected TNMM as the most appropr....
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....ents 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% 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% 9 Kirloskar Electric Co. Ltd., (Rotating Machines Group) NA Average 14.34% 10....
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....ressive 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. The TPO observed that In the case of Deepak industries, the company's annual accounts actually give no details of installed capacity but mention that "the majority of Plant Machinery being common for different products and installed capacity being dependent on Product Mix, it is not feasible for the company to indicate the exact installed capacity". He noted that the assessee has substituted licensed capacity for installed capacity. It is not clear how much libe....
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....harat 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 transaction falls outside the range) 185,352,642 Difference over Profit shown B-A 87,352,427 18. The assessee made elaborate submissions before the DRP. Based on the arguments advanced by the assessee the DRP held that adjustment can only be made to the comparable companies. Therefore, adjustment sought on account of under utilisation of capacity is neither possible on facts nor is in accordance with law. The DRP further held that TNMM is used at entity level to compute the margins. Hence adjustment may be made at entity level only. The law does not provide for making further adjustment to an adjustmen....
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....ant 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 transactions. 4. Incorrect margin computation The Appellant craves to plead before your Honour, to allow correction in the margins of comparable companies and the Appellant, which are wrongly taken by the Ld. DRP/TPO/AO while passing their respective orders. 5. Corroborative approach for determination of arm's length price : The Appellant craves to plead before your Honour, to consider the pricing policy adopted by the Group for Appellant vis a vis third party (discount rate compared to Group's global price list) for determination of arm's length price for the international transaction of purchases. The Appellant craves to plead before your Honour to consider using Nord Germany as the tested party give....
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....rounds. 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. Ground of appeal No.1 by the assessee being general in nature is dismissed. 24. In ground of appeal No.2 the assessee has requested for adjustment of capacity utilisation. 25. The Ld. Counsel for the assessee submitted that the assessee has provided an independent cost accountant certificate for classification of expenses into fixed and variable based on which capacity utilisation adjustment is computed. After taking the same into account the adjusted PLI of the assessee works out to 12.31%. 26. The Ld. Counsel for the assessee filed an application requesting the Tribunal for admission of the following additional evidence : "1. Cost Accountant Certificate (given by M/s. B.M. Sharma & Co.) for classification of Expenses as Fixed/Variable for F.Y.200809. 2. Independent Auditors Certificate for discount structure & credit policy by AE. 3. Independ....
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....I 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 direction for A.Y. 2011-12 has also agreed with the assessee's contention and accordingly pleased to consider the correct profit margin of all comparable companies after working capital adjustment. He further submitted that on the basis of the direction of the DRP granting cash PLI adjustment, if the revised working of capital adjustment of the comparables is computed after considering cash PLI the same works out to 6.02%, vis-à-vis margins of the assessee of 0.79%. On comparison of the adjusted net operating margin (post cash PLI and custom duty adjustment) of the assessee which is 6.97% with the adjusted net operating margin (post cash PLI and working capital adjustment) of comparables which is at 6.02% the international transaction relating to purchase of raw material is at Arm's Length. He accordingly submitted that if the direction of the DRP and the method adopted by the TPO in subsequent assessment years are considered, then the enti....
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....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 comparable companies with that of the assessee. No argument was advanced before the TPO or the DRP for setting off of brought forward losses and or depreciation. He accordingly submitted that the appeal filed by the assessee should be dismissed. 36. We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. After considering the rival arguments made by both the sides, the additional evidences filed by the assessee in the shape of certificates as per para 26 of this order to support the case of the assessee are admitted. 36.1 We find the assessee in the instant case is incorporated in India and is a 100% subsidiary of NORD Germany. NORD group is a worldwide leader in drive technology for mechanical and electronic solutions. Nord India, which was founded in Pune in the year 2007, is a 100% subsidiary of NORD Germany for the purpose of manufactur....
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....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) in allowing the adjustments made by the assessee to work out its operating margin for comparing the same with the profit margin of comparable cases. It is observed in this context that a detailed submission was made on behalf of the assessee before the Id. CIT(A) explaining each and every adjustment sought to be made by it. The gist of the said submission has already been extracted by us in the foregoing portion of this order and a perusal of the same shows that each and every adjustment made by the assessee company was duly explained by it by furnishing the relevant facts and figures as well as by producing the supporting evidence wherever required. As rightly held by the Ld. CIT(A), the said submission made by the assessee is sufficient to demonstrate that there was a material difference in the facts of the assessee'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 consi....
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....ue to low capacity utilization. In the absence of optimum utilization of its production capacity, it has suffered operating losses during the year. On the other hand, the net profit margin of the assessee has been benchmarked against comparables cases, who are established entities and have started businesses many years ago. In our considered opinion, the case made out by the assessee is based on economic and commercial reasons. The assessee is a unit which has been set-up during the year and its capacity utilization is only 21%, which has resulted in losses, while its profit margins 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 trans....
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....y drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per subclause (i) of rule 10B(1)(e) of the Rules itself. The absence of such a specific provision in rule 10B(1)(e)(iii) of the Rules does not operate as a bar, so long as the adjustment sought to be made in the profit margin of the tested party are based on cogent and sufficient reasons and seeks to make the comparability analysis with comparable uncontrolled transactions more meaningful. In-fact, Pune Bench of the Tribunal in the case of 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 uni....
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....) does not help the Revenue, and the reliance by the CIT(DR) is misplaced. Therefore, in our view, having regard to the precedents and the aforesaid discussion, in the present case assessee has to succeed in principle for adjustment on account of lower capacity utilization, and the loss suffered on account of unabsorbed fixed operating costs incurred in the initial year. The aforesaid factors, in our view, warrant an appropriate adjustment to the operating margins of the assessee to facilitate a meaningful comparison with the comparable uncontrolled transactions. 13. At 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 i....
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....ation, it is observed that the said claim of the assessee was disallowed by the AO as well as by ld. CIT(A) on account of irrelevant consideration. In the case of DCIT V/s Petro Araldite (P) Ltd, the Co-ordinate Bench of the Tribunal has decided the similar issue vide its order dated July 24, 2013 passed in IT Appeal No.3782 (Mum) of 2011 (AY 2005-06), after considering and discussing the necessity of allowing adjustment on account of capacity utilization while computing the TP adjustment. The Tribunal has explained how such adjustment is necessary depending on the facts and circumstances of the case and has also laid down the guidelines as to how to quantify such adjustment. The observations recorded by the Tribunal in this context in paras 19 to 25 of its order are reproduced below : "19. There being difference in the capacity utilization of the assessee vis-à- vis the comparables, adjustment on account of capacity utilization was claimed by the assessee. According to 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 ca....
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....lished is then taken into account to arrive at an arm's length price in relation to the international transaction;" 20. Keeping in view the aforesaid provisions of the relevant Rule, we can now endeavor to consider how and to what extent the difference in capacity utilization affects the profit margin and how the adjustment on account of difference in capacity utilization can appropriately be made within the framework of Rule 10B. The issue of difference in capacity utilisation generally comes in the case of manufacturing concern and like any other business undertaking, the manufacturing concern has mainly two types of overheads i.e. fixed overheads and variable overheads. The variable overheads vary in proportion to the sales and they therefore do not have any effect on the profit margin as a result of difference in capacity utilization. The fixed overheads, on the other hand, do not vary with the volume of sales and since they remain 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 ....
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....omparable. It was done by taking EBDIT as PLI instead of EBIT. Although this method adopted by the assessee was not approved by the TPO, it was accepted by the ld. CIT(A) on the ground that the effect of difference in capacity utilization on profitability could be nullified by taking EBDIT as PLI instead of EBIT. We are unable to concur with this view of the ld. CIT(A). In our opinion, when the PLI is taken as OP to sales or OP to cost, operating profit of the assessee as well as comparable cases becomes relevant and the depreciation being very much integral part of the operating expenses of the manufacturing concern, the same cannot be excluded for the purpose of computing operating profit. Moreover, clause (e)(i) of sub Rule (1) of Rule 10-B requires that the net profit margin of the assessee is to be worked out while clause (e)(ii) of the said sub Rule requires that net profit margin of the comparables is 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 prof....
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....e said comparables by allocating more fixed overheads at 15% of sales to bring the rate of allocation of fixed overheads at par with that of the tested party, the profit of the comparable would be reduced by Rs. 1.20 crores thereby giving a net profit of Rs. 0.80 crores which would bring the profitability to 10%, i.e. at par with the tested party. Similarly, if the adjustment is made in the profit margin of a comparable having 60% capacity utilization by allocating more fixed overheads at 6.67% of sales to bring the rate of allocation of fixed overheads at par with that of the tested party, the profit of the said comparable would be reduced by Rs. 0.40 crores thereby giving a net profit of Rs. 0.60 crores which would bring the profitability to 10% i.e. at part with the tested party. 25. Having held that the adjustment on account of difference in capacity utilization is required to be made 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 ope....
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.... the facts and the arguments of the Assessee and perused the judicial pronouncement on which Assessee has relied upon. The TPO is directed to examine the computation of the working capital adjustment worked out by the Assessee and re-compute the same, if necessary. In case of dispute, the TPO is directed to follow the methodology of the adjustment provided in the example given in the Annexure to Chapter III of the OECD Transfer Guidelines, 2010. For PLI, the TPO is directed to use the data of the PLR either of SBI or RBI for the relevant year. The TPO is directed to consider only "trade payables" and "trade receivable" for the computation of the working capital adjustment, as it is payable and receivables from customer impacting profit margin can be compared, as provided in the OECD Guidelines. In this connection, relevant portion of the Annexure to Chapter-III of the OECD Transfer Pricing Guidelines, 2010 is reproduced as under: 42. Similarly we find from the order of the DRP for A.Y. 201112 that the DRP has directed the TPO to accept the contention of the assessee that a higher discount is offered to the assessee as well as to the third parties. The relevant observation of the D....