TaxTMI 
TaxTMI 
TaxTMI 
2023 (6) TMI 1493
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....f 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 appropriate capacity utilization adjustment. 4. That on the facts ....
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....ustment 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% Median 5.16% 4.91% 65th Percentile 6.54% 6.14% 4.2 In respect of capacity utilisation of the assessee in the year under consideration, it is stated that it is at 34% as compared to 73% of the i....
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....i) 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 productive efficiency and cost efficiency. The costs incurred by any entity are of two types : variable costs which vary directly with the production level; and fixed costs which remain roughly at the same level irrespective of the production level. Since the variable cost varies directly with the production level, its recovery remains un....
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....-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 an Assessee company, we find that in the instant case such an environment of capacity under- utilisation did indeed undisputedly exist during the impugned period on account of its initial stages of operation and the discussions, in relation to the installed and utilised capacity, above." 5.1.2. Whether adjustment based on the fact of capacity under utilisation have....
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....y 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 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 ....
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....me 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 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 on being heard." 17. Accordingly, we also direct the....
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.... 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 India (P.) Ltd. v. Assistant Commissioner of Income- tax, Circle 7(3), Mumbai Mumbai Tribunal: ITA Nos. 428&429/Mumbai/2007 232-265 D Relevant section of Indian Income Tax Rules: Rule 10B 266-269 E Relevant section of ICAI Guidance Note on Report u/s Section 92E 270-274 F Relevant section of OECD Guidelines 275-279 G Industry Reports: RBI & FICCI 280-285 5.1.3. 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 a....
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....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 employed or to be employed by the enterprise. or having regard to any other relevant base; - ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit....
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....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 comparables at same rate at which depreciation is absorbed by the tested party (based on guidance provided by the Mumbai bench of the Income Tax Appellate Tribunal in the Fuchs Lubricants ruling). Since the data pertaining to capacity utilisation of comparables is not available in the public domain, the only plausible option for making adjustments would be to follow Approach 1, were the tested party data is adjusted for capacity under-utilisation. Since variable costs is usually in proportion to the actual utilisation or production, no adjustments would be required to be made to the same. It is only the fixed cost that continues be incurred in full. It is this cost that remains a constant right up to the time that full ....
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....,039 301,039 139,846 301,039 Consultancy and Professional Fees 12,301,947 12,301,94/ 5,714,800 12,301,947 Payment to Auditors 900,000 900,000 418,090 900,000 Security Services 653,989 653,989 303,807 653,989 Contractor's Labour Charges 5,059,937 5,059,937 5,059,937 10,892,259 Royalty 2,823,273 2,823,273 2,823,273 6,077,510 Miscellaneous Expenses 1,702,509 1,702,509 790,891 1,702,509 Operating Cost (OC) (Y) 343,884,344 112,663,896 231,220,447 283,557,823 610,399,911 Operating Profit/(Loss) (OP) Z=X-Y 33,051,637 71,148,510 OP/OC (ZIY) 11.66% 11.66% 5.3. By analysing the above three aspects exhaustively, Ld. CIT(A) arrived at a conclusion to allow for the capacity utilisation adjustment for the purpose of benchmarking and deleted the addition made in this respect. Aggrieved, revenue is in appeal before the Tribunal. 6. Before us, Ld. CIT, DR contended that Ld. CIT(A) has not considered the unavailability of relevant financial data of comparable companies for allowing....
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....e levels of absorption of indirect fixed costs (e.g fixed manufacturing cost or fixed distribution costs) would affect the net profit indicator but may not affect the gross margin or gross mark-up on costs if not reflected in price differences. He also referred to an important fact of start-up phase which has led to the adjustment for capacity utilisation in contrast to the year of incorporation of comparables which has been tabulated to demonstrate that their operations had commenced much before the assessee was even incorporated. The table is reproduced as under: Sl. No. Name Year of Incorporation 1 Jainex Aamcol Limited 1947 2 Guindy Machine Tools Limited 1959 3 Hindustan Everest Tools Ltd. 1962 4 Mitsubishi Heavy Industries India Precision Tools Ltd. 1963 5 Solitaire Machine Tools Ltd. 1967 6 Birla Precision Technologies Ltd. 1986 7 Total Tools and Equipments Pvt. Ltd. 1989 8 Zenith Metaplast Private Limited 1994 9 Hittco Tools Ltd. 1995 10 Hi-Speed Drilling Solutions India Private Limited 2008 11 Anant Cutting Edge Private Limited 2011 7.2. He thus, emphasized that assessee has artificially made an adjustment towards its capacity utilisatio....