2017 (1) TMI 1687 - AT - Income Tax

TP Adjustment - capacity utilization and working capital adjustment - HELD THAT - Having carefully examined the orders of lower authorities in the light of rival submissions we are of the view that since the Tribunal has taken a view in assessee s own case in the succeeding year we do not find any justification to take a contrary view in this appeal. Tribunal has given a detailed guidelines as to how to make or grant capacity utilization adjustment. Hence we feel it proper that this matter also should go back to the file of the AO/TPO for granting capacity utilization adjustment Accordingly following the order of the Tribunal we restore the matter to the file of the AO to readjudicate the issue of lower capacity utilization and working capital adjustment in the light of the finding of the Tribunal in assessee s own case for the AY 2006-07. Accordingly the order of the CIT(Appeals) is set aside and the matter is restored to the AO/TPO in the terms indicated above.

Summary

Issues Involved:

1. Rejection of Kabra Winders Ltd. and United Drilling Tools Ltd. as comparable companies.
2. Losses incurred due to economic conditions versus international transactions.
3. Gross Margin alignment with comparable companies.
4. Loss due to underutilization of production capacity.
5. Adjustment on account of underutilization of production capacity.
6. Restriction of adjustment to international transactions with Associated Enterprises (AEs).
7. Consideration of interest expense as operating while computing operating cost mark-up.
8. Use of multiple year data versus contemporaneous data.
9. Benefit of +/- 5% as per section 92(C)(2) of the Income-tax Act, 1961.
10. Adjustment for differences in working capital position.
11. Consideration of non-comparable companies like Kulkarni Power Tools Limited.
12. Computation of operating cost mark-up.

Detailed Analysis:

1. Rejection of Comparable Companies:
The appellant contested the exclusion of Kabra Winders Ltd. and United Drilling Tools Ltd. as comparable companies. The Tribunal noted that the inclusion of these companies was previously rejected due to unavailability of data. However, since data is now available, the Tribunal ordered that the matter be remanded to the TPO/AO for fresh consideration.

2. Losses Due to Economic Conditions:
The appellant argued that losses were due to economic conditions and not international transactions. The Tribunal did not provide a specific ruling on this issue but considered it in the context of overall adjustments and comparability.

3. Gross Margin Alignment:
The appellant claimed that their Gross Margin was in line with comparable companies. The Tribunal did not specifically address this issue but noted the need for adjustments to ensure comparability.

4. Underutilization of Production Capacity:
The appellant argued that losses were due to underutilization of production capacity. The Tribunal acknowledged this issue and referred to previous rulings that provided guidelines for capacity utilization adjustments.

5. Adjustment for Underutilization of Production Capacity:
The Tribunal referred to the case of DCIT v. Class India Pvt. Ltd., which provided detailed guidelines for making capacity utilization adjustments. The matter was remanded to the AO/TPO to grant capacity utilization adjustment as per these guidelines.

6. Restriction of Adjustment to International Transactions:
The appellant contended that adjustments should be restricted to international transactions with AEs. The Tribunal did not provide a specific ruling on this issue but included it in the overall context of adjustments.

7. Interest Expense Consideration:
The appellant argued that interest expense should not be considered as operating while computing the operating cost mark-up. The Tribunal did not address this issue directly but included it in the remand for fresh consideration.

8. Use of Multiple Year Data:
The appellant contended that multiple year data should be used instead of contemporaneous data. The Tribunal did not specifically address this issue but included it in the remand for fresh consideration.

9. Benefit of +/- 5% Adjustment:
The appellant sought the benefit of +/- 5% as per section 92(C)(2) of the Income-tax Act, 1961. The Tribunal did not specifically address this issue but included it in the overall context of adjustments.

10. Working Capital Adjustment:
The appellant argued for an adjustment for differences in working capital position. The Tribunal acknowledged this issue and referred it back to the AO/TPO for fresh consideration in light of previous rulings.

11. Non-Comparable Companies:
The appellant contested the inclusion of non-comparable companies like Kulkarni Power Tools Limited. The Tribunal ordered that this issue be reconsidered by the TPO/AO.

12. Computation of Operating Cost Mark-up:
The appellant argued that there were errors in the computation of the operating cost mark-up. The Tribunal included this issue in the remand for fresh consideration.

Conclusion:
The Tribunal restored the matter to the file of the AO/TPO to re-adjudicate the issues of lower capacity utilization and working capital adjustment in light of the Tribunal's findings in the appellant's own case for AY 2006-07 and the guidelines provided in the case of DCIT v. Class India Pvt. Ltd. The appeal was allowed for statistical purposes.