TaxTMI 
TaxTMI 
2019 (10) TMI 211
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....ernational transaction entered into between the Assessee and its Associated Enterprise (AE) under the provisions of Sec.92 of the Income Tax Act, 1961 (Act). The second issue is with regard to disallowance of a sum of Rs. 33,14,764/- which was claimed as revenue expenditure in the profit and loss account. The sum was capital assets (tools) costing less than Rs. 50,000/- each which was written off in the profit and loss account and claimed as revenue expenditure. The Assessee had before the AO also made a claim in its letter dated 2.11.2005 that in the event of the expenditure being treated as capital expenditure then the Assessee should be allowed depreciation. This alternative claim was not allowed by the AO. In this appeal, the Assessee has prayed only for the alternative relief. The second issue can therefore be decided by directing the AO to allow depreciation, which is to be allowed to an Assessee as a consequence, despite a claim for such depreciation not having been made specifically, as laid down in the decision of Mahendra Mills Ltd., 99 ITR 135 (SC). Thus we allow the alternative prayer of the Assessee for allowing depreciation. 4. As far as the first issue of determin....
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.... Average 23.26 The principal activities of each comparable companies and financials as appearing in the database- Appendix 4 The margins of the final comparable companies based on the databases -Appendix 5 8.5 OECD Guidelines 8.5.1 Associated Enterprises, like any other independent, can sustain genuine losses, whether due to heavy start-up costs (emphasis supplied), unfavourable economic conditions, inefficiencies (emphasis supplied) or other legitimate business reasons. MITPL being a start up company and has realised loss due to inefficiencies in production utilisation. In this regard reliance is placed on the OECD guidelines (para 1.52) in this regard. 8.6 Margin of MITPL: The margins of MITPL as a percentage of net sales are as below: Particulars Rupees Manufacturing Revenue 49,773,188 Adjusted Cost of Production 41,959,834 MARGIN 7,813,354 MARGIN/ COST (%) 18.62 The margins of comparable companies are in the range of 13.75 to 30.22%. The arithmetic mean of the net margins of the comparable companies is at 23.26 % (excluding the loss making companies). 8. The TPO howev....
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....sessee's own case for AY 2006-07 & 2005-06 this Tribunal has considered and remanded similar issue to the TPO/AO for fresh consideration. In AY 2006-07, the Tribunal held as follows on this issue:- " Regarding the adjustment on account of lower capacity utilization and working capital adjustment, we find that it is noted by the DRP in para 3.2 on page 3 of its order that the TPO highlighted the major cost shown in the P&L account was the depreciation which in the case of tax payer was about 20% of the total cost against an average of 3.5% in the case of comparables. Thereafter, it is noted by the DRP that neutralize this difference the TPO has considered PBDIT as PLI by following the Tribunal order in the case of Sechefenacker Motherson Ltd., Vs ITO(2009- TIOL-376-ITAT-Delhi. It is further noted by the DRP in the same para with regard to the claim of assessee for other costs such as employee cost, repair and maintenance cost, office supplies, filing fee etc., It has been observed by the TPO that these cases are slightly higher than the comparables in the ratio of about 7 to 6 but just because the costs were higher, adjustment could not be considered. In the light of these ....
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....ng it on account of differences with the comparable uncontrolled transactions. The adjustment, if any, is required to be made only in the profit margins of the comparables. 9.4. Reverting to the facts of the instant case, we find that the authorities below have adjusted the operating costs of the assessee in allowing the capacity adjustment. As against that, the correct course of action provided under the law is to adjust the operating costs of the comparable and their resultant operating profit. There is hardly need to accentuate that there can be no estoppel against the law. Once the law enjoins for doing a particular thing in a particular manner alone, it is not open to anyone to adopt a contrary or different approach. As the authorities below have adopted a course of action in allowing adjustment, which is not in consonance with law, we cannot approve the same. The impugned order is set aside and the matter is restored to the file of the TPO/AO for giving effect to the amount of idle capacity adjustment in the operating profit of the comparables and not the assessee. ii. How to compute capacity utilization adjustment under TNMM : - 10.1. Under the TNM....
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....ed costs of A to Rs. 200 (Rs. 100 into 50/25) as against the actually incurred fixed costs by it at Rs. 100. When we compute operating profit of A by substituting the fixed costs at Rs. 200 with the actually incurred at Rs. 100, it would mean that the fixed costs incurred by the assessee and A are at the same capacity utilization. There can be converse situation as well. Suppose the fixed costs incurred by a comparable (say, B) are Rs. 100 and it has capacity utilization of 25% as against the capacity utilization of 50% by the assessee. The above percentages show that the assessee has incurred full fixed costs at 50% of the utilization of its capacity, as against B incurring full fixed costs at 25% of the capacity utilization. This deciphers that the assessee has incurred relatively lower fixed costs and B has incurred higher costs. This difference in capacity utilizations can be eliminated by proportionately scaling down the fixed costs incurred by B so as to make it fully comparable. This we can do by reducing the fixed costs of B to Rs. 50 (Rs. 100 into 25/50) as against the actually incurred fixed cost by it at Rs. 100. When we compute operating profit of B by substituting the ....