2013 (11) TMI 65 - AT - Income Tax

Adjustment for non-utilisation of capacity in an International transaction - Lower authorities to have given due effect to under capacity utilization of the assessee which has not been done TPO for adjustment for ALP determination Held that - Suitable adjustment for non-utilisation of capacity is to be taken in to account after considering the ALP while working out TP adjustment, this proposition has been held by co-oridnate Bench in the case of the Amdocs Business Services (P.) Ltd. 2012 (12) TMI 482 - ITAT PUNE - Restored the issue of under capacity utilization back to the file of the Assessing Officer /TPO to decide the same afresh after giving assessee adequate opportunity of being heard.

Summary

Issues:
Challenge to Assessing Officer's adjustment in international transactions.

Analysis:
1. The appellant challenged the Assessing Officer's adjustment of Rs. 8,008,161 in international transactions. The counsel for the assessee contended that only one issue, regarding unabsorbed overheads and operating losses due to unutilized capacity, was pressed in the appeal.

2. The assessee, a branch office of a global company, provided manpower sourcing and support services to its associated enterprises during the relevant financial year. The Transfer Pricing Officer (TPO) made adjustments to the transactions, citing various grounds, including assuming operational and business risks by the assessee.

3. The Commissioner of Income Tax (Appeals) upheld the TPO's adjustments, rejecting the assessee's plea regarding capacity underutilization. The CIT(A) held that the loss incurred by the appellant was due to transfer pricing of international transactions related to services, considering the technical nature of the services provided.

4. The appellant argued that the loss incurred during the initial years was due to inadequate work volumes, necessitating capacity investment. Comparing with other companies not in their gestation phase, the appellant sought capacity adjustment, citing a recent Tribunal judgment allowing economic adjustments for under capacity utilization in the initial years of operation.

5. The Tribunal acknowledged the principle of capacity adjustment for transfer pricing assessments, citing precedents like Mentor Graphics Noida (P.) Ltd. and Fiat India (P.) Ltd. The matter was remanded to the Assessing Officer to consider the appellant's contentions and evidence on capacity utilization for a fair decision.

6. The Tribunal directed the Assessing Officer to consider the evidence filed by the assessee regarding non-utilization capacity's impact on profitability and foreign exchange prices. The issue of under capacity utilization was to be decided afresh, ensuring a proper and lawful order is passed, providing the assessee with a fair opportunity to present their case.

In conclusion, the Tribunal partly allowed the assessee's appeal for statistical purposes, emphasizing the importance of considering under capacity utilization in transfer pricing assessments and directing a fresh decision by the Assessing Officer on the matter.