TaxTMI 
TaxTMI 
2016 (10) TMI 1283
X X X X Extracts X X X X
X X X X Extracts X X X X
....e and the learned Transfer Pricing Officer ("TPO") after taking into cognizance the various submissions made by the Appellant, made an adjustment of Rs. 58,553,403 in respect of the international transactions entered into by the Appellant u/s 92CA of the Income Tax Act. Aggrieved by such an adjustment to the Arm's Length Price (hereinafter referred to as "ALP") as originally determined by the Appellant, the appellant took recourse to the Dispute Resolution Panel ("DRP") as constituted under the Income-Tax Dispute (Resolution Panel) Rules, 2009. As provided under the said Rules, the appellant filed a comprehensive set of objections set out under various grounds against the order passed by the learned TPO. The Honourable DRP, subsequent to providing an opportunity for the appellant to represent the case before the Panel, passed an order dated 22nd September, 2010, upholding the contentions and consequently the adjustment to the ALP as made by the TPO. Subsequently, an order was passed by the learned Assessing Officer (hereinafter referred to as "AO") dated 22nd October, 2010 (received on 28th of October 2010 by the Appellant), under sub section (3) of section 14....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... provide contemporaneous documentation to be mandatory, and not use of data for the same financial year. *The Honourable DRP and the learned AO ought to have appreciated the fact that the objective underlying the use of multiple-year data was to ensure that the outcomes of the international transactions for the year under consideration were based on all the earlier periods which were relevant for determination of transfer price. Moreover the data of the preceding two financial years gives a clear indication of the business and economic conditions prevailing at the beginning of the relevant financial year i.e. the time when the transfer prices are set up, and the purpose of using multiple year data is to minimize and even out the impact of any abnormal factor which might have unduly influenced the outcomes of the data used for the comparability analysis. *4. Safe harbour and application of +=5% Arm's Length range *The Hon'ble DRP and the ld. AO have erred in supporting the learned TPO's misinterpretation that the amended provision regarding the provision of the arm's length range as per the Finance Act, 2009 was applicable to the financial year (FY) 2005-0....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Appellant and the comparable companies ('capacity utilization adjustment'). 2.3. The learned TPO acknowledged the difference of underutilization of production capacity between the Appellant and the comparable companies, and considered the ratio of Profit before Depreciation, Interest and Taxes ('PBDIT') to Total Operating Cost excluding depreciation ('PBDIT / TC') as the Profit Level Indicator ('PU'). Hence, the learned TPO computed the Appellant's PLI to be (-) 31.46%. 2.4. The learned TPO arrived at a comparable PLI of 18.80% and provided an adjustment of INR 5,70,01,235/-. 2.5. In addition to the above, the learned TPO determined the arm's length price of the transaction of purchase price of raw materials, production supplies and spares. In this regard, the learned TPO computed the arm's length price for the aforementioned transaction as follows: Particulars Amount (INR) Purchase price of raw materials, production spares 37,29, 591 Sales in proportion to above purchases [(100%-31.46%) ofINR 37,29,591] 25,56, 261 Arm's Length Margin on Sales (PBDIT / TC) 14*82 Arm's Length P....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 4.4. The Appellant further submits that Electronica Machine Tools Limited ("EMT") is engaged in trading activity in addition to the manufacture of machines and tungsten carbide products. Furthermore, EMT has amalgamated with Electronica Plastic Machines Pvt. Ltd., which is involved in manufacturing machines used to manufacture moulds, during year, thereby tantamounting to extraordinary activity. Accordingly, making EMT functionally not comparable to the Appellant and consequently, ought to be rejected from the set of comparable companies (Please refer to page no. of the 465, 489 & 490 of the Annual Report Compendium submitted before the Honorable Tribunal). 4.5. Furthermore, the Appellant submits before the Honorable Tribunal that Kulkarni Power Tools Limited ("KPT") is engaged in activities of manufacturing and trading of power tools and blowers. In addition to the aforementioned activities, KPT is also involved in distribution of electricity. Further, the segment financial information is not available during the year. Accordingly, making KPT functionally not comparable to the Appellant and consequently, ought to be rejected from the set of comparable companies (Please r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....AY 2007-08 of the Appellant, the learned TPO has considered the underutilization of capacity and held that the transfer price of the international transactions undertaken by the Appellant to be at arm's length". We have considered the rival submissions. We find that apart from the request of the assessee for inclusion of two comparables and exclusion of two comparables, the main grievance of the assessee is regarding non-granting of adjustment on account of lower capacity utilization and working capital adjustment. In this regard reliance has been placed by the ld. AR of the assessee on various judicial pronouncements noted in the synopsis reproduced above. For exclusion of Electronica Machine tools Ltd., and Kulkarni Power Tools Ltd., assessee pointed out the annual reports of these two companies on the issue regarding these two companies raised by way of filing additional grounds. Regarding inclusion of two companies i.e M/s Guindy Machine Tools Ltd., and M/s United Drilling Tools Ltd., It has been submitted before us that these companies were rejected because unavailability of data, but since the data of these two companies are now available in the annual report of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the position which emerges is that the net operating profit margin of comparable companies calls for adjustment in such a manner so as to bring both the international transaction and comparable cases at the same pedestal. In other words, if there are no differences in these two, then the average of the net operating profit margin of the comparable companies becomes a benchmark. However, in case there are some differences between the comparables and the assessee, then the effect of such differences should be ironed out by making suitable adjustment to the operating profit margin of comparables. That is the way for bringing both the transactions, namely, the international transaction and the comparable uncontrolled transactions, on the same platform for making a meaningful and effective comparison. The above analysis overtly transpires that the law provides for adjusting the profit margin of comparables on account of the material differences between the international transaction of the assessee and comparable uncontrolled transactions. It is not the other way around to adjust the profit margin of the assessee. In other words, the net operating profit margin realized by the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... variable costs and the variable part of the semi-variable costs are concerned, these remain unaffected due to any under or over utilization of capacity. Accordingly, such variable operating costs remain unchanged. The adjustment is called for only in respect of the fixed operating costs and fixed part of semi-variable costs. Such costs are scaled up or down by considering the percentage of capacity utilization by the assessee and such comparable. It can be illustrated with the help of a simple example. Suppose the fixed costs incurred by a comparable (say, A) are Rs. 100 and it has capacity utilization of 50% as against the capacity utilization of 25% by the assessee. The above percentages show that the assessee has incurred full fixed costs with 25% of the utilization of its capacity, as against A incurring full fixed costs with 50% of its capacity utilization. This divulges that the assessee has incurred relatively more fixed costs and A has incurred lower costs. In order to make an effective comparison, there arises a need to obliterate the effect of this difference in capacity utilizations. It can be done by proportionately scaling up the fixed costs incurred by A so as to mak....