TaxTMI 
TaxTMI 
2018 (11) TMI 481
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....1. That the Hon'ble Dispute Resolution Panel, New Delhi ("the DRP") has erred both in law and on facts by summarily rejecting the Appellant's objections to the draft order dated December 29, 2010 passed by the Ld. AO under section 143(3) read with section 144C(1) of the Act. The Hon'ble DRP while issuing directions under section 144C(5) of the Act did not consider the facts and merits of Appellant's objections to the proposed adjustments, and merely relied on the reasoning given by the Additional Commissioner of Income-tax, Transfer Pricing Officer - II (3) vide order under section 92CA(3) of the Act dated October 15, 2010 ("TP Order"). On the facts and in the circumstances of the case, the Ld. TPO and the Ld. AO have erred in proposing and the Hon'ble DRP has further erred in confirming the transfer pricing adjustment of Rs. 40,556,951 without due application of mind and without affording a reasonable opportunity of being heard in the matter to the Appellant on the following grounds: 1.1. By alleging that the losses incurred by the Appellant were due to the international transactions and disregarding the fact that the Appellant's capacity ....
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....penditure incurred by the Appellant for legitimate business purpose. The above 'Grounds of Appeal' are all independent and without prejudice to one and another. The Appellant craves leave to supplement, to cancel, amend, add and/or otherwise alter/modify any or all the grounds of the appeal stated hereinabove." 2. The brief facts of the case are that the assessee is engaged in the business of manufacturing of earth moving and construction equipments. During the year the assessee has undertaken following international transactions:- S.No. Nature of Transaction Method used by assessee Amount (in crores) 1 Purchase of raw material and components and spare parts TNMM 20.38 2 Purchase of spare parts TNMM 1.30 3 Sale of finished goods TNMM 0.28 4 Royalty payment TNMM 4.04 5 Global Sourcing TNMM 0.45 6 Design Centre TNMM 0.57 7 Reimbursement of expense TNMM 0.09 8 Sale of fixed assets TNMM 0.34 Total 27.49 The assessee benchmarked above transactions using TNMM taking operating profit upon sales (OP/Sales) as the Profit Le....
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....sing Officer thereafter passed the final assessment order accordingly, aggrieved by which, the assessee is in appeal before the Tribunal, inter alia, on the grounds reproduced herein above. 5. Ground no. 1.1 to 1.3 pertain to adjustment on account of international transactions. The assessee incurred a loss of 3.93% at net level and the reason for the same was stated to be low capacity utilization and high establishment cost of the assessee company vis-à-vis the comparable company. The assessee for capacity utilization made adjustment to the comparables and after making adjustment to capacity utilization by using assets turnover ratio worked out the arithmetic mean of a comparable (20.29%). The TPO however rejected the computation done by the assessee of the capacity utilization by using assets turnover ratio. The TPO also referred to the Rule 10B(3) and the balance sheet of the assessee company to demonstrate that it has utilized 98.2 % of its installed capacity during the year and hence not eligible for any further adjustment on account of capacity utilization. The TPO was of the view that though the Indian Transfer Pricing Rules allows capacity adjustment but there is n....
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....to rebut the contention of the TPO regarding actual production being 982 as against installed capacity of 1000 as per its annual accounts, whereby it was clarified that installed capacity and actual production for different products are denominated in different units. The assessee has also given the figures of the Elecon Engineering Ltd. to demonstrate that capacity utilization as a whole for the entity cannot be accurately calculated as under: Company Name Product / Raw Material name Capacity (All Units) Produciton (All Units) Capacity - Unit (Unitcap) Elecon Engineering Co. Ltd. Axels 1500 38 Numbers Conveying Equipments 15000 1004 Tonnes Crushers, Screens & Feeders 1000 352 Tonnes Reduction Gears 55 35.14 000 nos Specialized Convey. Equip., Blender Reclaimers Etc. 3000 1055 Tonnes Wagon Marshalling Equipments 300 93 Tonnes Wagon Tippler Equipment 16 16 Sets On this basis, the Ld. AR contended that the rejection of the assets turnover ratio for making adjustment has been wrongly rejected by the TPO. It was also submitted that similar adjustment was allowed by TPO using assets ....
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....e assessee to maintain documentation and satisfy the TPO. The Ld. DR submitted that assessee has not tried to provide capacity utilization of comparables rather it has come up with a new concept of applying ATR for capacity utilization. The TPO has examined the contention of the assessee and was of the view that in all the cases the adjustment of net profit margin of comparable will be downward and in fact in some cases it has gone in the negative from the positive. And therefore, he has rightly rejected this method. He further submitted that the contention of the assessee that it has incurred huge expenditure on setting up of new production facility is to be seen with reference to the claim of depreciation which is only 1.74 crore. He further submitted that the assessee having failed to produce the reliable data and documentation, the TPO was right in refusing to allow any adjustment. The onus is upon the assessee to produce sufficient documentation. Thus, the Ld. DR submitted that the order passed by the TPO be confirmed. 12. We have considered the rival submissions and gone through the facts. The issue here is that of adjustment on account of capacity utilization. Accor....
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....tment is to be made and as a result of which the net profit margin of comparable get converted from positive to negative the same has to be considered. Merely because consequent to such adjustment downward adjustment is required and such adjustment cannot be rejected. The adjustment can be rejected only on its merit after consideration of facts and not on the ground that it will lead to downward adjustment. In fact, it is the case of the assessee that downward adjustment is required in the facts of the case. As regards the documentation required for considering such adjustment, we are not in agreement with the contention of the Ld. DR that assessee is required to produce even that data which is not in public domain. The assessee cannot be asked to do what is not possible for him. On the contrary, the TPO being an adjudicating officer has to carry out the exercise and wherever required to use its power collect information which will help in correct determination of arm's length price. In such situation, the TPO can always call for the information to collect the information from the comparables. Our this view gets support from the judgment of the Bangalore 13 Bench of ITAT in the ....
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....35. Accordingly, we direct the TPO to exercise powers under section 133(6) of the Act to call for information on capacity utilization of the comparable companies such as - * Installed Capacity, * Actual Production in Units, * Break-up of Fixed Cost and Variable Cost; * Segmental/ product wise information, if any. 36. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obtained, and accordingly, grant the adjustment for capacity under-utilized. Ground No.7 is decided accordingly." 13. In view of the above, we set aside this issue to the TPO and direct the TPO to examine the data placed by the assessee before it. The TPO shall also call for the information from the comparables by issue of notice under Section 133(6). While carrying out this exercise the TPO shall also examine the 'unit' in which such capacity utilization is to be measured. The TPO shall also examine the capacity utilization of the assessee company and will ensure that the capacity utilization of the assessee company i.e. the tested party and that of the comparables is on the same parameters which will include ....
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....nstallation of such machineries as normal depreciation on the same has been allowed by the AO. The only dispute is whether such machinery and equipment will fall within the meaning of plant and machineries on the reasoning given by the AO and the DRP. The Ld. AR placed reliance on the judgment of the Calcutta High Court in the case of CIT vs. Technico Enterprises Pvt. Ltd. 206 ITR 36 and Gujarat High Court in the case of CIT vs. Elecon Engineering Co. Ltd. 96 ITR 672 in support of its contention. 18. The Ld. DR, on the other hand, submitted that assessee is not eligible for claim of additional depreciation. It was submitted that the AO has not disallowed the additional depreciation only on the ground of small plant but also that these assets are not used for manufacturing of article or thing. The Ld. DR invited attention to the finding of the TPO at Para 2 Page 2 whereby it has been stated that assessee is engaged in the business of assembly, marketing and servicing of products and components manufactured in India. In support of its contention that the assessee is in the business of assembly of products and services of components produced in India. The assessee cannot be said....
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....machinery which has been acquired and installed by an assessee engaged in the business of manufacture or production of any article or thing. Thus, to be eligible for additional depreciation, the assessee has to demonstrate that it is engaged in the business of manufacture or production of any article or thing. Further, it has to demonstrate that it has acquired and installed new machinery and plant during the year. The first issue which has been raised by the Ld. DR is that assessee is not engaged in the business of manufacture or production of any article or thing. For this, he has relied upon the observation of the TPO in its order that the assessee is engaged in the business of assembly, marketing and servicing of products and components manufactured in India. However, ongoing through the annual report of the assessee, we note that assessee is engaged in manufacturing of construction equipments. In fact, the arguments advanced on the issue of adjustment on account of arm's length price are all with reference to actual production where the TPO himself has referred to actual production number being 982 as against installed capacity of 1000 nos. As per the annual report, the assess....
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.... and held that the word plant is a word of wide import and in the context of Section 32 must be broadly construed and it included any article or object fixed or movable, live or dead, used by a businessman for carrying on his business. Similarly Calcutta High Court in the case of CIT vs. Technico Enterprises Ltd. 206 ITR 36 has explained the meaning of the plant. In the light of the interpretation of the meaning of the plant in above judgment and the case of the assessee from the items stated hereinabove, it cannot be said that these items will not fall within the meaning of plant. Once the items fall within the meaning of the plant, there cannot be a further category to exclude certain items on the ground that these are routine addition or these are small items. The language of the Section 32(1)(iia) does not make any distinction about routine additions of plant or small additions so as to exclude these items for the purpose of additional depreciation. It may be relevant to point out that the legislature by putting a proviso to this section itself has excluded following items from the benefit of additional depreciation: "Provided further that no deduction shall be allowed....