2024 (4) TMI 141 - HC - Income Tax

TP Adjustment - relevance of capacity under utilisation factor alongwith other factors for determining TP adjustment - comparable selection - ITAT directing to make appropriate capacity utilization adjustment while computing net margin of the tested party (i.e. assessee) - HELD THAT - In the assessment order the TPO provided all set of 12 comparables to assessee. The set of 3 comparables selected by assessee were sent for bench marking. Assessee raised various objections to the proposed comparison and the main ground of objection was that assessee had started production only in the month of May 2007 and the sales have started only from the month of July 2007. Whereas, the comparables were in the business for many years. This objection was rejected by the TPO. The CIT(A) upheld the findings of the TPO. The ITAT has rightly came to a conclusion that comparison has to be made between two equals. We agree with the finding of the ITAT that assessee who started the business in a particular year cannot be compared with assessee who are doing business for many years. On facts, the ITAT has given a finding that though there has been no major sales throughout the whole year, the expenses incurred by assessee are almost the same as compared to the expenses of the next year. It is also a fact that assessee had achieved sales of Rs. 62 crores in the next assessment year and assessee could achieve that turnover because the business by that time had got stabilised. No infirmity in the order passed by the ITAT. Therefore, no substantial question of law arise.

Summary

Issues involved:
The issues involved in the judgment are related to the assessment order challenged by the assessee, involving international transactions exceeding Rs. 15 crores, adjustments suggested by the Transfer Pricing Officer (TPO), appeal before the Commissioner of Income Tax (Appeal) [CIT(A)], subsequent appeal before the Income Tax Appellate Tribunal (ITAT), directions given by ITAT for fresh adjudication by TPO, and the legality of capacity utilization adjustment while computing net margin.

Issue 1: Assessment and adjustments related to international transactions:
The respondent-assessee, engaged in research and technical services, filed a return of income for A.Y.-2008-09 declaring total income at Rs. Nil. The case was selected for assessment under Section 143(3) of the Income Tax Act, 1961, due to international transactions exceeding Rs. 15 crores. The TPO determined the ALP and suggested an adjustment of Rs. 3,59,81,523/- to be made with the international transaction. The Assessing Officer passed the final order making the addition on account of international transaction. The CIT (A) partly allowed the appeal, upholding the addition related to international transaction. The ITAT partly allowed the appeal by referring the matter back to the TPO for fresh adjudication and reconsideration of factors for determining TP adjustment.

Issue 2: Legality of capacity utilization adjustment:
The ITAT directed to make an appropriate capacity utilization adjustment while computing the net margin of the tested party, the assessee. This direction was challenged in the appeal under Section 260A of the Act. The questions of law raised were related to the violation of express provisions of rule 10B(1) (e) (iii) of IT Rules 1962 and judicial pronouncements. The counsel agreed to consider only the first question of law. The respondent's absence and failed attempts to serve were noted, with the counsel stating that even the Chartered Accountant mentioned in the appeal papers had not represented the assessee.

Final Decision:
The High Court upheld the ITAT's decision, finding no infirmity in the order passed. It was concluded that no substantial question of law arose, and thus, the appeal was dismissed.