TaxTMI 
TaxTMI 
2023 (6) TMI 1493
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....he 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 admit the appeal for hearing. 3. Grounds raised by the revenue are reproduced as under: "1. That on the facts and circumstances of the Case, the Ld. CIT(A) has erred In deleting the Transfer Pricing adjustment of Rs. 1,69,80,694 made on account of International AE transaction (purchase and sale) of the assessee. 2. That on the facts and circumstances of the Case, the Ld. CIT(A) has erred in relying upon the approach adopted by the assessee for capacity utilization adjusted PLI without the appropriate verification of all the relevant factual data for the comparable companies vis-a-vis the assessee. 3. That on the facts and circumstances of the Case, the Ld. CIT(A) has erred in not appreciating that the findings of the TPO is based on the unavailability of relevant financial data for comparable companies for allowing the ....
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.....16%. Assessee took NCP margins as its Profit Level Indicator (PLI) and by applying an adjustment towards its capacity utilisation, arrived at NCP margin of 11.66%. The final list of comparables taken by the assessee and those chosen by the Ld. TPO which have been considered for the purpose of bench marking are not in dispute in this appeal. Details in this respect are tabulated below :- Sr. No. Particulars NCPM NPM 1 Anant Cutting Edge Private Limited 2.42% 2.36% 2 Birla Precision Technologies Limited 2.71% 2.64% 3 Guindy Machine Tools Limited 0.90% 0.89% 4 Hindustan Everest Tools Limited 3.30% 3.20% 5 Hi-Speed Drilling Solutions India Private Limited 5.16% 4.91% 6 Hittco Tools Limited 4.87% 4.64% 7 Jainex Aamcol Limited 6.91% 6.46% 8 Mitsubishi Heavy Industries India Precision Tools Limited 16.24% 13.97% 9 Solitaire Machine Tools Limited 10.98% 9.91% 10 Total Tools and Equipments Private Limited 6.54% 6.14% 11 Zenith Metaplast Private Limited 5.25% 4.99% Arithmetic Mean 5.59% 5.46% 35th Percentile 3.30% 3.20....
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....e three broad aspects are given as under :- (i) Commercial aspect of effect of under-utilisation of capacity upon the margins of the concern, (ii) whether adjustment based on the fact of capacity under-utilisation have any justification, roots or sanction in the various judicial precedents or not. (iii) whether there is an express embargo upon the making of capacity utilisation adjustment with Rule 10B(1)(e)(iii) or in any other Rules of the Income-tax Rules, 1962 while working out the profitability parameters of an enterprise. 5.1. The observations made by Ld. CIT(A) on the above three broad aspects of the issue under challenge before us, are extracted as under: 5.1.1. Commercial aspect of effect of underutilisation of capacity upon the margin of the concern, "By definition, capacity utilisation is the extent to which an enterprise actually uses its installed productive capacity. It is the relationship between actual output using the installed infrastructure, and the potential output which could arise, if capacity was fully used. Typically expressed as a percentage, this factor becomes an important comparability factor as it helps measure ....
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....ity under utilisation and any adjustments concomitant with such effects, any evaluation of the efficiency, margins or profitability, or indeed the very working environment peculiar to the particular company cannot be sensibly undertaken at any point of time. The Hon'ble High Court of Karnataka, in the case of The Commissioner of Income Tax-8 Vs. Petro Araldite Put. Ltd. (ITA No. 1540 of 2014), has explained this issue in the following terms. " ... The impugned order of the Tribunal records that the difference in capacity utilisation would affect the profit margin of a manufacturing concern. It points out that the fixed overheads of any manufacturing concern will be constant, irrespective of the capacity utilisation. Thus, the profit margin would be affected on account of the difference in capacity utilisation. Less utilisation of capacity, would result in allocation fixed costs over a smaller number of final products. Thus, reducing the profit margin." (emphasis added) Having thus accepted that the effects of capacity under- utilisation are an integral, indispensable and important part of the analysis of the economic/commercial working environment of ....
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....isputed that assessee has utilized only 22% of its installed capacity in the year under consideration. It is also evident that the comparables are at higher levels of capacity utilization. These facts are incorporated in the tables reproduced above. We note that capacity utilization has a co-relation with the profits earned by a company since it leads to under-absorption of fixed cost, more particularly when the MAM selected is TNMM. Further, we note that FATR is not an indicator of capacity utilization of a company. In respect of working capital adjustment, we note that it is undisputed that assessee has a lower level of working capital as compared to the comparables. Admittedly, levels of working capital have an impact on the prices charged and the profits earned by a company. In respect of the above two adjustments, we note that it would be against the TP regulations and guidelines enumerated above to compare the profits earned without making these economic adjustments. 13. 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 ....
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....levels so as to allow adjustment to the profit margin on comparables selected by him (TPO/ AO), after affording the assessee reasonable opportunity of being heard. 16.2 In a situation where the data about comparable companies is not available for the purpose of allowing adjustments towards capacity utilization and working capital levels, the only way to get the data in a current case would be by Ld. TPO collecting the same from the comparable companies so selected by him by exercising his powers U/S 133(6) of the Act. For this proposition, reliance is placed on the decision of Coordinate bench of ITAT, Mumbai in the case of ft. CIT v. Kiara Jewellery (P.) Ltd. (2014) 45 taxmann.com 548/[2015] 152 ITD 891 wherein the TPO/AO was directed to obtain the exact details on 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 utiliz....
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....er of Income Tax (LTU), Bangalore Bangalore Tribunal: I.T.A No. 2835/Bang/2017 108-179 9 Ariston Thermo India Limited v. Dy. Commissioner of Income Tax Circle - 8, Pune Pune Tribunal: ITA No.1455/PN/2010 180-193 B Judicial precedent pertaining to average industry capacity as reference point where data of comparables are not available 10 M/s. Dell International Services India Private Limited v. The Additional Commissioner of Income Tax (LTU), Bangalore Bangalore Tribunal: I.T.A No. 2835/Bang/2017 108-179 11 Deputy Commissioner of Income-tax, Circle 3(1)(2), Bengaluru. v. M/s. GE Intelligent Platform Pvt. Ltd Bengaluru Tribunal: IT(TP)A No.164/Bang/2015 194-206 12 The Deputy Commissioner of Income Tax, Circle 11 (4), Bangalore. v. ISG Novasoft Technologies Ltd. Bengaluru Tribunal: IT(TP)A No. 609/Bang/2013 207-213 C Judicial precedent pertaining to average industry capacity as reference point where data of comparables are not available 13 Skoda Auto India P. Ltd v. Assistant Commissioner of Income-tax, Circle I, Aurangabad Pune Tribunal: TS-18-ITAT-2009(PUN)-TP 214-231 14 UCB In....
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....ion of capacity. Let us now take a closer look at the relevant Rules themselves. Before looking at the issue of adjustment for difference in capacity utilisation, it is necessary first to see the procedure laid down for carrying out the exercise of comparability analysis and for making suitable adjustments. This procedure, as laid down in section 92-C of the Act, provides that the ALP in relation to an international transaction shall be determined by any of the methods specified therein, being the most appropriate method and the manner in which the said ALP has to be determined is given in section 92-C(2) of the Act read with Rule 10B of the Income Tax Rules, 1962 in respect of each method .separately. Clause (e) of Rule 10-B stipulates the manner in which the ALP in relation to an international transaction is to be determined by following the transactional net margin method. The same is reproduced as under: "(e) transactional net margin method by which- i)the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employ....
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....he said clause of the sub-rule. Once the matter that there is nothing materially wrong or unlawful with the appellant's approach of making adjustments for capacity under utilisation is settled as per the above discussions, the next question that arises is, in view the aforesaid provisions of the relevant Rule, how and to what extent the difference in capacity utilisation affects the profit margin and how the adjustment on account of difference in capacity utilisation can appropriately be made. This question, naturally, has to be answered within the framework of Rule 10B - that being the governing Rule for addressing such issues. I have examined the appellant's submissions in this regard and find that some possible approaches to implement capacity utilisation adjustments areas under: ● Approach 1: Adjusting fixed costs of the tested party, keeping sales and variable costs unchanged; ● Approach 2: Hypothesising sales and variable costs of the tested party to the optimum level of utilisation, keeping fixed costs constant; and ● Approach 3: Adjusting the profit margin of the com parables by absorbing depreciation of the comp....
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....sp; Consumption of Stores and Spare Parts 12,517,320 12,517,320 12,517,320 26,945,372 Power & Fuel 6,615,242 6,615,242 6,615,242 14,240,281 Rent 537,755 537,755 249,811 537,755 Repairs and Maintenance - Others 1,534,707 1,534,707 712,939 1,534,707 Insurance 192,206 192,206 89.288 192,206 Rates and Taxes 493,273 493,273 229, 147 493,273 Excise Duty on Stocks 1,062,062 1.062,062 1,062,062 2,286,245 Carriage, Freight and Forwarding Charges 3,337,032 3,337,032 3,337,032 7,183,452 Traveling and Conveyance 2,457,000 2,457,000 2,457,000 5,289,054 Communication Expenses 479,512 479,512 479,512 1,032,220 Conference & Ceremony Expenses 315,302 315,302 146,472 315,302 Staff Recruitment Expenses 301,039 301,039 139,846 301,039 Consultancy and Professional Fees 12,301,947 12,301,94/ 5,714,800 12,301,947 Payment t....
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....r referred to as the "Rules") clause (e) sub-clause (iii) which provides that the net profit margin is to be adjusted to take into account the difference, if any, which could materially affect the amount of net profit margin in the open market. He further pointed to the said rule to submit that an uncontrolled transaction shall be comparable, if reasonably accurate adjustment can be made to eliminate the material effects of differences, if any, between the transactions being compared. 7.1. According to the Ld. Counsel, guidance note on report u/s. 92E of the Act issued by Institute of Chartered Accountants of India (ICAI) also provides guidance and lists down specific entries which may affect the net margins and includes adjustment in respect of difference in the capacity utilisation level. He also referred to the transfer pricing guidelines for Multinational enterprise and Tax Administration by the OECD wherein at para 2.76, difference in capacity utilisation has been considered wherein it is stated that the transactional net margin method may be more sensitive than the cost plus or resale price methods to differences in capacity utilisation, because differences in the levels o....