TaxTMI 
TaxTMI 
TaxTMI 
2023 (4) TMI 517
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.... to file this appeal expired on 20.06.2021. However, the appeal has been filed on 19.07.2021. Petition for condonation of delay is placed on record. It is stated that the period relating to delay falls during the time of Pandemic Covid-19. It is noted that the period of delay falls during the time of Pandemic of Covid-19 which has been excluded by the Hon'ble Supreme Court in the case of Suo moto Writ Petition (C) No. 3 of 2020 dated 10.01.2022 by which the period from 15.03.2020 to 28.02.2022 has been directed to be excluded for the purpose of limitation. Vide this order a further period of 90 days has been granted for providing the limitation from 01.03.2022. Accordingly, we condone the delay and proceed to adjudicate upon the matter. 5. Further, Ld. Counsel for the assessee stated that without prejudice to other grounds, the assessee is pressing ground nos. 2 and 3 relating to financial adjustments undertaken to eliminate material differences in respect of capacity utilization adjustment and working capital adjustment, respectively. The same is also stated in the written submission dated 11.10.2022 filed after the hearing held on 21.09.2022 based on direction given by the Bench....
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....ssembly 2. Purchase of fixed assets/tools 3. Sale of assembled goods 6,37,22,701 6.2. Ld. CIT(A) while dismissing the appeal of the assessee held that assessee had started with the wrong assumption that only three of the nine comparables would qualify as comparables. This has not been accepted in appeal. In the rest of the working, no defect was found by Ld. CIT(A) in the working employed by the TPO and the same was confirmed while series of assumptions employed by the assessee in its working were not accepted in the appeal. Accordingly, working of TPO remained undisturbed, as held by the Ld. CIT(A). Aggrieved by the upward TP adjustments confirmed by the Ld. CIT(A), assessee is in appeal before the Tribunal. 6.3. Before the Tribunal, assessee has placed on record, paper books in two volumes containing 1005 pages in total along with written submission, summary of the two grounds of appeal i.e. ground nos. 2 and 3 and relevant extracts of Rule 10B of the Income Tax Rules, 1963 (hereinafter referred to as the "Rules") guidance note on transfer pricing regulations issued by Institute of Chartered Accountants of India (ICAI) as well as OECD Transfer Pricing Guidelines for Multinatio....
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....n risk not taken into account in the T P Report ii) Independent companies do not charge at premium rate to account for underutilization of capacity. iii) Non reflection of differences in utilization of infrastructure on pricing of independent comparables. iv) No evidence or reliable report to show that comparable companies' prices change with their capacity utilization rates or margin changes because of under utilization. v) The taxpayer submitted capacity workings as per which idle capacity was computed at 77.86% and as a result abnormal loss of Rs 4,77,88,098 was calculated in the TP Report by the Appellant. However, on perusal of fixed assets schedule, it was concluded that the assets were put to use during the year and full depreciation was claimed. vi) Fixed Asset Turnover Ratio considered to compare the capacity utilization of the Appellant and the comparables; vii) It is important for a manufacturing firm that uses significant plant and equipment in its operation to calculate Fixed Asset Turnover Ratio. It was cited that if Fixed Turnover Ratio is low, it means that sale is low or investment in plant & machinery is too high. The firm having high Fixed A....
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....ry of the assessee has been put to use for manufacturing process resulting in full claim of depreciation, Ld. Counsel contended that depreciation figures used in the tax audit report are governed by tax laws and is not indicative of the production made by using the said machineries. 7.4. In relation to ground no. 3 in respect of working capital adjustment made by the assessee to eliminate material differences for comparability, it was submitted that assessee being in the start-up phase, was operating with much lower levels of accounts receivables and inventory and higher levels of accounts payables. This implied that assessee did not have enough short term assets to cover its short term debts. It was submitted that levels of working capital have an impact on the prices charged and consequently the profits earned by a company. It would be against TP regulations and guidelines to compare the profits earned without making an economic adjustment in relation to the differences in working capital levels. To explain the rationale of making working capital adjustment, it was submitted that a business organization needs funds to cover the time gap between the time it invests money i.e. pay....
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....djustment together and such an application is not erroneous. It was also contended that the brand value of the AE of the assessee does not warrant any capacity utilization adjustment on the contention of the assessee that in the first year of operations in automotive sector, manufacture customer would not entrust significant volumes to a new vendor unless it is satisfied with a price and quality of the products supplied by the vendor. 10. We have heard the rival contentions and perused the material available on record and gone through the submissions made. Before embarking upon deciding the two issues before us, it is more appropriate to understand the relevant regulations and guidelines which need to be borne in mind. Rule 10B of the Rules deals with determination of arm's length price u/s. 92C of the Act. MAM in the present case is TNMM which is not in dispute. We also note that assessee has been selected as the tested party which is also not in dispute. 10.1. The relevant extract from Rule 10B is as under: "(e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transac....
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....ansaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction [or a specified domestic transaction] shall be the data relating to the financial year [(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction [or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to [the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: 10.2. Useful reference is also made to t....
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.... From rule 10B(3)(ii) of the Rules, we note that an uncontrolled transaction is considered to be comparable if none of the differences are likely to materially affect the price or cost charged or the profit arising therefrom in the open market or if reasonable accurate adjustment can be made to eliminate the material effect of such differences, if they so exist. Thus, it is reasonable to infer from the said rule that the purpose or intent of the comparability analysis is to examine as to whether or not values stated for the international transactions are at arm's length i.e. whether the price charged is comparable to the price charged under an uncontrolled transaction of similar nature. The position that emerges under the regulation is that if there are differences which can be adjusted, then adjustments are required to be made and also that if the differences between the companies are so material that adjustment is not possible then comparables are required to be rejected. 14. In the present case, assessee has given detailed working in respect of financial adjustments undertaken to eliminate material differences towards capacity utilization and working capital levels. On both the....
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.... is accordingly factually and legally eligible to an adjustment for the same. Therefore, such a benefit cannot be denied to the assessee only for the reason that the data about comparable companies is not available. Requiring the assessee to produce such a data which is not available in public domain would tantamount to requiring the Appellant to perform an impossible task. The only way to get the data in the current case, would be where the TPO collates the same from the comparable companies by exercising his powers under section 133(6) of the Act. 34. 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.' ... The position in India as per Indian regulations on the subject has been noted earlier. If there are differences which can be adjusted, then adjustments are required to be made. If the difference between the companies are so material that adjustment is not possible, then comparables are required to be rejected." 40. In light of the principles embodied in the above judgment, the assessee prayed ....
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....mental profitability (if any) and provide the assessee opportunity by sharing the details so obtained on the comparable companies. The Tribunal also held that if there is want of information / data, adjustment can be made to the tested party also. In this regard, reference may be made to the decision of the ITAT Bengaluru Bench in the case of Flint Group India Pvt. Ltd., IT(TP) No.3285/Bang/2018 dated 31.10.2019. We are of the view that in the given facts and circumstances of the case, it would be just and appropriate to set aside the impugned order on this issue and remand the issue to the AO / TPO to carry out the exercise of allowing adjustment on account of underutilized capacity. We also find that the assesssee's objection with regard to not allowing working capital adjustment has been rejected by the DRP but the DRP has given the direction to the TPO / AO to take the margins of the comparables by considering finance cost as non-operating in nature. In our view, the directions of the DRP cannot be regarded as substitute for not granting working capital adjustment and therefore we direct the AO / TPO to allow working capital adjustment." 15.3. Skoda Auto India Pvt Ltd Vs.....
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.... not complete, as also dealing with the contention that the business model in this year of operation was fundamentally different from the business model of the comparable concerns." 15.4. Calsonic Kansel Matherson Products Ltd. v. Deputy Commissioner of Income-tax, Circle 5(2), New Delhi [2016] 72 taxmann.com 109 (Delhi - Trib.) "11. We have considered the submissions of both the parties and have perused the record of the case. Ld. DRP in principle has accepted that adjustment on account of capacity utilization is to be allowed to appellant. However, in the absence of non- availability of item wise expenses, in the case of comparable companies, restricted the adjustment only to depreciation. In 'our opinion, this is not the correct approach because unutilized capacity has direct bearing on the operational profits of the company, because in initial years there is overabsorption affixed costs leading to losses. The fixed cost is not limited to depreciation only but there are other elements of fixed costs also. Therefore, proper adjustment has to be allowed to appellant. We, therefore, restore this issue to the file of ld. AO/ TPO to compute the quantum of capacity adjustment.....
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....underutilization at RS.1.44 crores." 15.6. Amdocs Business Services Pvt. ltd. Vs. Dy. Commissioner of Income-tax, Cir.1(1), Pune [ITA No. 1412/PN/ll]- Pune ITAT. "9. The next major point made out by the appellant is that this being the first full year of operation, the appellant had incurred certain expenditure which are start-up costs and cannot be fully recovered in the instant year itself, and such an expenditure has abnormally affected the profit margin. It is also canvassed that due to the start-up year the capacity utilization was not satisfactory, whereas its profitability has been benchmarked against 13 comparables which are established entities and have been set up over the years. The plea set-up by the appellant for economic adjustments on account of under capacity utilization and being in start up phase, is not same thing which is unreasonable an neither it is otiose to the mechanism of transfer pricing assessments. In fact, in principle, the plea of the appellant is in line with the decisions of the Tribunal in the case of Global Vanttedge P. Ltd v. DCIT in ITA Nos 2763-2764/Del/09 (Del); Brintons Carpets Asia (P) Ltd v. DCIT 139 TTJ 177; and, Skada Auto India P. Lt....
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....ricing exercise done by him in the report was entirely futile. At the time of hearing before us, the Ld. DR has not been able to raise any material contention to rebut/controvert the observations/finding recorded by the Ld. ClT(A) in his impugned order to arrive at the said conclusion. He has simply relied on the report of the transfer pricing officer in support of the Revenue's case. However, as pointed out by the Ld. Counsel for the appellant from the copies of relevant reports, the TPO himself has allowed similar adjustments made by the appellant in the immediately proceeding years i.e. A. Y. 2002-03, 2003-04 as well as in the immediately succeeding years i.e. 2005-06 and 2006-07 wherein the facts involved were similar to that of the year under consideration i.e. A. Y. 2004-05. We, therefore, find no infirmity in the impugned order of the Ld. ClT(A) holding that the adjustments made by the appellant in TNMM analysis were reasonable and accurate and as reflected in the said analysis, international transactions made by the appellant company with its associated concerns during the year under consideration were at arms length requiring no adjustment/addition on this issue. The i....