2016 (10) TMI 1283 - AT - Income Tax

TP Adjustment - comparable selection - non-granting of adjustment on account of lower capacity utilization and working capital adjustment - capacity utilization adjustment - HELD THAT - For exclusion of Electronica Machine tools Ltd. and Kulkarni Power Tools Ltd. assessee pointed out the annual reports of these two companies on the issue regarding these two companies raised by way of filing additional grounds. Regarding inclusion of two companies i.e M/s Guindy Machine Tools Ltd. and M/s United Drilling Tools Ltd. It has been submitted before us that these companies were rejected because unavailability of data but since the data of these two companies are now available in the annual report of these two companies these two companies should be considered as good comparables. We are of the considered opinion that the issue regarding inclusion of these two companies should go back to the file of the TPO/ AO for fresh decision. Adjustment on account of lower capacity utilization and working capital adjustment - HELD THAT - It is seen that the 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 as per the guidelines given by the Tribunal in the case of DCIT Vs Class India Pvt.Ltd. 2015 (8) TMI 1490 - ITAT DELHI . It is ordered accordingly.

Issues Involved:
1. Adjustments for material differences
2. Gross Margin Analysis
3. Use of contemporaneous data
4. Safe harbour and application of ±5% Arm’s Length range

Detailed Analysis:

1. Adjustments for Material Differences:
The appellant contended that the Honourable DRP and the learned AO erred in accepting the TPO's contention that the transactions were not at arm's length price. Specifically, the appellant argued that the TPO rejected the quantitative adjustments provided for differences in production capacity utilized by the appellant and comparable companies. The TPO only provided adjustments for depreciation costs and not for other fixed expenses related to production capacity differences. This issue was pivotal in determining whether the appellant's transactions were conducted at arm's length, considering the underutilization of production capacity.

2. Gross Margin Analysis:
The appellant claimed that the Honourable DRP and the learned AO erred in rejecting the gross margin analysis provided by the appellant. This analysis was intended to establish the arm's length nature of the international transactions. The appellant highlighted that the gross margin analysis was crucial in demonstrating that the transactions were conducted at arm's length, especially given the appellant's underutilization of production capacity during the financial year in question.

3. Use of Contemporaneous Data:
The appellant argued that the Honourable DRP and the learned AO erred in concluding that the appellant should have used contemporaneous data in preparing the Transfer Pricing report. The appellant contended that this requirement was not valid on the principle of fairness and natural justice, as the data was unavailable in the databases at the time of documentation preparation. The appellant emphasized that the transfer pricing regulations mandate contemporaneous documentation, not necessarily the use of data from the same financial year. The appellant further argued that the use of multiple-year data was to ensure that the outcomes of the international transactions were based on relevant periods and to minimize the impact of any abnormal factors.

4. Safe Harbour and Application of ±5% Arm’s Length Range:
The appellant contended that the Honourable DRP and the learned AO erred in supporting the TPO's misinterpretation that the amended provision regarding the arm's length range as per the Finance Act, 2009, was applicable to the financial year 2005-06. The appellant argued that the amendment was introduced with effect from 1st October 2009 and was not retrospective. The appellant emphasized that substantive changes cannot be construed as retrospective unless expressly provided by the statute. The appellant also cited the CBDT Circular No.05/2010, which clarifies that the amended safe harbour provisions apply to assessments for the year ended 31 March 2009. The appellant further argued that any adjustment, if made, should only be to the lower limit of the 5% range set out under section 92C(2).

Judgment:
The Tribunal considered the rival submissions and found that the main grievance of the appellant was regarding non-granting of adjustment on account of lower capacity utilization and working capital adjustment. The Tribunal noted that the DRP had highlighted the major cost shown in the P&L account was depreciation, which was significantly higher for the appellant compared to comparables. The Tribunal referred to various judicial pronouncements, including the case of CIT Vs Class India Pvt.Ltd., which provided detailed guidelines on granting capacity utilization adjustment. The Tribunal ordered that the issue regarding the inclusion of two comparables and exclusion of two comparables should go back to the file of the TPO/AO for fresh decision. Additionally, the Tribunal directed the AO/TPO to grant capacity utilization adjustment as per the guidelines given in the case of DCIT Vs Class India Pvt.Ltd.

Conclusion:
The appeal was allowed for statistical purposes, and the matter was remanded to the AO/TPO for fresh consideration and granting of capacity utilization adjustment as per the established guidelines. The Tribunal emphasized the need for accurate adjustments to ensure that the transactions were conducted at arm's length, considering the specific circumstances of the appellant.

← Previous Next →