TaxTMI 
TaxTMI 
2020 (5) TMI 157
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....It filed its return of income on 29.11.2011 declaring a loss of Rs. 6,45,23,822/-. Since the assessee had entered into certain international transactions with its AEs, the Assessing Officer referred the matter to the Transfer Pricing Officer u/s 92CA of the Act for determination of the arm's length price of such international transactions. The TPO, during the course of TP assessment proceedings, observed that the assessee company has undertaken the following international transactions with its AEs:- No. Nature of transaction Method Amount (in Rs.) 1 Purchase of raw Materials/assets/spares TNMM 5,85,47,963 2 Payment of royalty TNMM 76,32,183 3 Reimbursement of expenses to AE - 9,14,253 3. From the various details furnished by the assessee, the TPO noted that the assessee has considered six comparables with adjusted margin of (-) 6.53% after considering capacity utilization of 51.29%, the details of which are as under:- Sl. No. Company Name Margin (%) Capacity Utilisation Adjusted Margin taking capacity utilization at 51.29% 1 KAR Mobiles Ltd. 4.72% 94.94% -17.99% 2. Perfect Circle India Ltd.....
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....installed capacity. This is evident from the Audited Financial Statements of the assessee Company. In this year "moulds" were capitalized as part of Fixed Assets. While auditing the financial statements of the company for the F Y. 2010-11 the treatment of capitalizing 'moulds' in F.Y. 2009-10 was re-examined since 'moulds' being imported & used for the manufacturing of pistons &, rings generally had a life or less than year, since these were getting exhausted/broken & had to be discarded within in the process of manufacturing of pistons & rings. Based upon estimated useful life of such 'moulds these were correctly considered and treated as Spares." 6. However, the Assessing Officer was not satisfied with the explanation given by the assessee. According to him, the assessee could not substantiate its claim that the life of moulds was less than one year. Since the assessee had changed its policy with regard to capitalization of moulds, he allowed only depreciation on the same which comes to Rs. 9,42,081/-. Accordingly, the Assessing Officer made addition of Rs. 87,94,251/- to the total income of the assessee. 7. The assessee filed appeal before the CIT(A). However, the CIT(A) c....
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....ned assessment year in the audited financial statement of the assessee, the moulds were claimed as spares. I have perused certificate of certified engineer dated 24/03/2015 where he has certified that life of the moulds to achieve qualitative product as less than one year. Firstly certificate has been issued almost after four years from the end of F.Y. It does not certify whether items and quality manufactured during the impugned assessment year and as on date of issuance of certificate has remained same. Further certified engineers has mentioned in para 2 of the certificate that the conditions of moulds is not upto mark to manufacturer the qualitative products. Therefore the moulds are used for the manufacturing process even after useful life for quality product. Therefore certificate of engineer issued almost after four years from the end of F.Y. does not help much as it is difficult to assume that the quality of the products and moulds has remained same. I cannot give benefit on the basis of such certificate. Considering the facts that the appellant in its financial in earlier A Y. treated the moulds as capital expenditure, I confirm the additions. It ....
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....te the same with his own methodology without providing any cogent reasons/evidence or back up documentation in support of his contention stated in the order. 4.3 That the Ld. AO/TPO/Ld. CIT(A) has erred on facts and in law in not observing that the Appellant has demonstrated with reliable data available in public domain for adjustment of fixed costs in its operating margin due to under capacity utilization and in the comparables selected by it during the course of Transfer Pricing proceedings. 4.4 The Ld. TPO/Ld. CIT(A) ignored the observation of the erstwhile TPO in the financial year 2009- 10 wherein it was noted that the adjustment for under capacity utilization was permissible to the Appellant. 5. That the Ld.AO/Ld. CIT(A) has grossly erred on facts and in law in making addition of Rs. 87,94,251/- treating the 'moulds' to be a capital expenditure/asset vis-a-vis revenue expenditure considered by the Appellant and in specific has made a factual error by observing as under:- 5.1 The Ld CIT(A) erred in holding that the since the Chartered Engineer Certificate is issued after a gap of 4 years, it cannot be a reliable source of evidence; ....
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....led along with the synopsis, he submitted that the assessee has calculated the capacity utilization of all those companies and he has no objection if the matter is restored to the file of the A.O./TPO with a direction to grant appropriate capacity adjustment. He also relied on the following decisions to the proposition that capacity utilization adjustment is a must:- 1. Dover India Pvt. Ltd. Vs. DCIT reported in (2017) 81 Taxmann.com 245 (Pune Trib) 2. M/s Nippon Paint India Pvt. Ltd. Vs. ACIT reported in TS-102-ITAT-2017(Chny) 3. E.I. Dupont India Pvt. Ltd. DCIT reported in 16 Taxmann.com 352 4. DCIT Vs. Vertex Customer Services India Pvt. Ltd. reported in (2009) 34 SOT 532 (Del). 5. Global Vantedge Pvt. Ltd. Vs. DCIT reported in (2010) 1 ITR (Tri) 326 (Del) 6. ACIT Vs. MSS India Pvt. Ltd. reported in (2009) 32 SOT 132 (Pune) 7. DCIT Vs. Petro Araldite Pvt.Ltd. reported in (2013) 145 ITD (Mum) 182 8. DCIT vs. Terex India (P) Ltd. (2019) 71 ITR 259 (Delhi ITAT) 9. DCIT vs. Panasonic AVC Networks India Co. Ltd., 63 Sot 121 (Del) 11. The ld. DR, on the other hand, while supporting the order of the CIT....
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....ssessee during the impugned assessment year had incurred an expenditure of Rs. 97,36,932/- which has been debited under the head 'raw material and spares consumed' in its annual accounts. However, in the notes to the accounts it had been reported that during the year the expenditure incurred on moulds have been debited under the head 'raw material and spares' as against fixed assets in the preceding year. Accordingly, moulds amounting to Rs. 97,36,932/- represents expenditure and depreciation debited of Rs. 1,23,409/- was reversed. He submitted that the Assessing Officer, in the assessment order, held that the assessee could not substantiate with evidence that the life of moulds was less than one year for which he disallowed the claim made by the assessee which was upheld by the CIT(A). He submitted that the Chartered Engineer's certificate furnished by the assessee to substantiate that the life of mould of cylinder liner does not exceed more than one year was rejected by the CIT(A) on the ground that the certificate was issued after four years from the end of the financial year and it is not certified whether the item or quality manufactured during the year remained the same. S....
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....lowed depreciation on the same as against revenue expenditure treated by the assessee. We find although the assessee filed a certificate from the Chartered Engineer to the effect that the life of moulds of cylinder liners does not exceed more than one year, the ld.CIT(A) rejected the same and upheld the action of the AO the reasons for which have already been reproduced in the preceding paragraphs. It is the submission of the ld. Counsel that the assessee being the manufacturer of moulded automobile products, therefore, mould is a basic material. Such mould has been purchased and utilised in the process of production which has a very short life and needs to be replaced from time to time and, therefore, should be treated as revenue in nature. It is also his submission that the expenditure on mould is of recurring nature and, therefore, merely because it has some enduring benefit to the assessee, the same cannot be considered as capital in nature especially when the life of mould is less than one year and has to be replaced frequently. 16. We find merit in the above argument of the ld. Counsel. We find the Hon'ble Supreme Court in the case of Empire Jute Company Ltd. Vs. CIT repor....
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....as under:- "6. We do not think that any substantial question of law on this aspect/issue arises from the decision of the Tribunal. It has been factually found and that too concurrently by the CIT (Appeals) and the Tribunal that the purchase of dies and moulds did not bring into existence any permanent or enduring advantage to the assessee. It has been found that due to continuous use they wear out fast and further any minor defect in the mould on account of continuous use such as chipping or cracking would render them useless. In any case the longevity of the moulds and dies is not substantial as held by the Tribunal and they have to be replaced frequently to ensure quality of the product. Moreover, the moulds have to be produced to suit the requirements of the particular customer and after the order is met, they become useless and ultimately have to be destroyed to prevent misuse or manufacture of fakes. It has also been found by the appellate authorities that the expenditure on replacement of dies and moulds was earlier allowed by the income tax authorities as revenue expenditure. These are factual findings recorded by the Tribunal which are not disputed before us by the....