AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (6) TMI 206
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.... holding company of the group is M/s Filtrona Pic., UK 4. During the year under consideration, the assessee had entered into following transactions. Particulars Amount (in Rs.) Purchase of Raw Materials Packing Materials 165026279/- Sale of Self-adhesive tear tapes 80723204/- Payment for Management Support Services 6616106/- Recovery of Expenses 27592033/- Issue of Share 43050000/- The assessee selected TNMM method as most appropriate method for benchmarking the transactions. The same was accepted in respect of all items except Payment for management support services. The operating profit to total cost was taken as "profit level indicator" (PLI). 5. The ld AR submitted that the only dispute between the assessee and the AO/TPO pertains to "under-capacity utilization adjustment" claimed by the assessee in its Profit. He submitted that assessee has operated during the year under consideration at a level of 28.95% installed capacity only and hence un-utilized capacity was 71.05%. Accordingly, while determining its PLI, the assessee deducted a sum of Rs. 2.48 crores as "adjustment towards cost of unutilized capacity". The assessee substantiated ....
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.... notice that an identical issue has been examined by the coordinate bench in the case of IKA India Pvt. Ltd., (Supra). For the sake of convenience we extract below relevant observations made in the above cse by coordinate bench. Ground No.7: The learned CIT(A) has erred, in law and in facts, by upholding the action of the AO/TPO in rejecting capacity adjustment to account for differences in capacity utilization of the Appellant vis-à-vis the comparable companies. 21. The assessee in its TP documentation as well as before the TPO and the CIT(A), highlighted the fact that there are significant differences in the capacity utilization between the assessee vis-à-vis the comparables. It was also brought to the notice of the TPO and the CIT(A) that the assessee was incorporated in FY 2008-09 and FY 2011-12 (i.e., FY relevant to the impugned AY) was just the third year of commercial operation of the assessee during which the installed capacity was under-utlized to a significant extent. The assessee pleaded before the TPO and CIT(A) to provide an adjustment for idle capacity. However, the TPO/CIT(A) did not allow any adjustment to account for the dif....
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....eing compared that could materially affect the comparison, comparability adjustments must be made, where possible, to improve the reliability of the comparison. Therefore, in no event can unadjusted industry average returns themselves establish arm's length conditions" Para 1.36 of the OECD Guidelines states as follows: "..........material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm's length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm's length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties." Further. Para 2.74 of the OECD Guidelines while laying down the comparability criteria to be adopted while applying the transactio....
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.... (I) In the case of Mando India Steering Systems (P.) Ltd. v. Asstt. CIT [20141 45 taxmann.com 160/149 lTD 284 (Chennai Trib) the Tribunal upheld the contention of the taxpayer for making a suitable adjustment on account of idle capacity for the purpose of margin computation. The relevant extract is reproduced as below: "10. .......... We are of the considered view that underutilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production." (ii) In the ruling of Dy. CIT v. Panasonic AVC Networks India Co. Ltd. f01414 taxmann.com 420/63 SOT 121 (URO) (Delhi - Trib.) it was held that:- "5......Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mec....
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....e assessee is disposed of." 30. The reliability and accuracy of adjustments would largely depend on availability of reliable and accurate data. For certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party (whose data would generally be easily accessible). 31. In such a scenario, one has to resort to the provisions of Rule IOB(3)(ii) which provides for making "reasonably accurate adjustments" for eliminating any material differences between the two transactions being compared. The purpose or intent of the comparability analysis is to examine as to whether or not, the values stated for the international transactions are at ALP i.e., whether the price charges is comparable to the price charges under an uncontrolled transaction of similar nature. The regulations don't restrict or provide that the adjustments cannot he made on the results of the tested party. Therefore, keeping in mind the aforesaid objective, the net pr....
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.... CIT v. Kiara Jewelleiy P. Ltd. 120141 45 taxmann.com 548/120151 152 lTD 891 (Mum. Trib.) has directed the to obtain the exact details of capacity utilization of comparable companies, if not available in public domain. The relevant extract of the aforesaid decision is as under:- "11. Keeping in view the decision of the Tribunal in the case of Petro Araldite (P) Ltd (supra) laying down the guidelines on the issue of capacity utilization, we consider it appropriate to restore this issue relating to adjustment on account of capacity utilization in the case of assessee company to the file of AO/TPO for deciding the same afresh keeping in view the said guidelines. If the exact details of capacity utilization of the comparable companies are not available in the public domain, the AO/TPO is directed to obtain the same directly from the concerned parties and to decide this issue afresh after giving assessee an opportunity of being heard." (Emphasis Supplied) 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, ....