2018 (6) TMI 452

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....eframed questions of law, for our consideration: "(a) Whether on the facts and in the circumstance of the case and in law, the Tribunal was correct in holding that profit margin of the comparable should be applied only to the value of the International Transactions entered into Associated Enterprises to determine the Arms Length Price and not at entity level? (b) Whether on the facts and circumstances of the case and in law, the Tribunal is justified in directing the Assessing Officer to take into consideration the adjustment of capacity utilization factor even though it is not prescribed in Section 92CA of the Income Tax Act, 1961 read with Rules 10AB, 10B, 10C of the Income Tax Rules, 1962? (c) Whether on the fa....

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....39;s transactions with its Associated Enterprises, had invoked Rule 10B( 1) (e) (iii) of the Income Tax Rules, 1962 (the Rules). Thus, taking into account the capacity utilization as factor which could affect the extent of the profit margin of the comparable for the purposes of determining the ALP of the RespondentAssessee's transactions. (ii) The impugned order of the Tribunal reproduced Rule 10B (1) (e) (iii) of the Rules, which reads as under: "(e) transactional net margin method, by which, (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....

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....maller number of final products. Thus, reducing the profit margin. The impugned order of the Tribunal with the aid of illustration, points out that higher capacity utilization would lead to higher profitability as fixed costs would be spread over in a larger number of units manufactured. It was in the above context, that the impugned order of the Tribunal held that difference in capacity utilization would materially affect the profit margin. Thus, if there is a difference in the level of capacity utilization of the assessee and the level of capacity utilization of the comparable, then adjustment would be required to be made to the profit margin of the comparable on account of difference in capacity utilization in terms of Rule 10B (1) (e)(i....