2014 (5) TMI 924 - AT - Income Tax

Adjustment of underutilization of capacity under Rule 10A(1)(e) of the Act Computation of ALP Held that - The issue of TP adjustment has to be made only in respect of the turnover with the AE, is concerned, the decision in Genisys Integrating Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax 2011 (8) TMI 952 - ITAT BANGALORE followed - Sec. 92B of the IT Act gives the meaning of international transactions to mean a transaction between two or more Associated enterprises either or both of whom are non-resident Chapter-X of IT Act relates to special provisions relating to avoidance of tax and sec. 92 relates to computation of income from international transactions having regard to ALP - it can be seen that only international transactions between the associated enterprises either or both of whom are non- resident are to be computed having regard to ALP thus, the AO/TPO is directed to restrict the TP adjustment if any only to the transactions with the AE instead of total turnover of the assessee - Decided in favour of Assessee. Adjustment on account of difference in capacity utilization Held that - Following Dy. Commissioner of Income Tax Rg. 8(2) Versus M/s Petro Araldite P. Ltd. 2013 (8) TMI 403 - ITAT MUMBAI - The adjustment as per Rule 10B is permissible only in the margins of the comparables and not in the margins of the assessee - an appropriate adjustment on account of difference in capacity utilization is required to be made by considering the depreciation being the fixed overhead on operating cost instead of sales of the comparables - assessee has furnished the detailed chart of calculation of the adjustment and finally summarized the mean margin of the comparables after the adjustment on account of difference in capacity utilization arrived at 4.68% in comparison to the assessee s own operating profit margin at 0.37% - The authorities have out rightly denied the adjustment on account of difference in capacity utilization the AO/TPO is directed to verify the details and allow the adjustment on account of difference in capacity utilization as per our observation - If the adjusted mean margin of the comparables is within the tolerance range of /-5% to the assessee s operating profit margin then in view of the proviso to section 92C(2) of the Income Tax Act no TP adjustment is required - Decided in favour of Assessee. Rejection of use of multiple year data in a single year Rule 10D(4) of the Rules Held that - To determine the ALP in relation to international transactions it has be to be compared with uncontrolled and un-related transactions by using data relating to the financial year in which the international transaction has been entered into - for using the multiple year data there should be existence of abnormal or exceptional circumstances/facts for the current year which could have an influence on the result on the determination of transfer pricing - nothing has been brought on record to show that any abnormal or exceptional circumstances or facts exist for current year which could have any influence on the results as well as determination of transfer pricing Decided against Assessee.

Summary

Issues Involved:
1. Partial relief of transfer pricing adjustment.
2. Documentation disregarded by the AO.
3. Adjustment for underutilization of capacity.
4. Value of import of raw materials examined by Customs authorities.
5. Use of multiple-year data versus single-year data.

Issue-wise Detailed Analysis:

1. Partial Relief of Transfer Pricing Adjustment:
The appellant argued that the CIT-A erred by only allowing a partial relief of Rs. 4,63,110 out of the total transfer pricing adjustment of Rs. 35,99,339 made by the AO. The Tribunal noted that grounds 1 and 2 were general and dependent on the findings of the other specific grounds, thus requiring no specific finding.

2. Documentation Disregarded by the AO:
The appellant contended that the AO disregarded the documentation maintained as per Rule 10D of the Income Tax Rules. This issue was tied to the findings on other specific grounds and did not require a separate finding.

3. Adjustment for Underutilization of Capacity:
The appellant, a wholly-owned subsidiary of Fuchs Petrolube AG, Germany, engaged in manufacturing and distribution of lubricants, argued that the CIT-A failed to address the issue of adjustment for underutilization of capacity as per Rule 10B(1)(e). The TPO had determined the arm's length price (ALP) based on the operating margin using the TNMM method, rejecting the appellant's use of gross profit margin and multiple-year data. The Tribunal directed the AO/TPO to restrict the TP adjustment to transactions with the AE only, citing the Bangalore Bench's decision in Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT and the Mumbai Bench's decision in Dy. CIT v. Petro Araldite (P.) Ltd. The Tribunal also directed the AO/TPO to verify the details and allow the adjustment for capacity utilization differences, emphasizing that adjustments should be made in the comparables' margins, not the appellant's.

4. Value of Import of Raw Materials Examined by Customs Authorities:
The appellant argued that the value of imported raw materials, as accepted by the Customs authorities, should be regarded as the ALP. The Tribunal dismissed this ground, stating that the value accepted by Customs authorities cannot be accepted as the ALP under the Income Tax Act.

5. Use of Multiple-Year Data Versus Single-Year Data:
The appellant contended for the use of multiple-year data instead of single-year data. The Tribunal upheld the use of single-year data as stipulated under Rule 10B(4) r.w.r 10D(4), which mandates the use of contemporaneous information for comparing uncontrolled transactions with international transactions. The Tribunal found no abnormal or exceptional circumstances for the current year that would justify the use of multiple-year data and dismissed this ground.

Conclusion:
The appeal was partly allowed, with specific directions for the AO/TPO to verify and allow adjustments for capacity utilization differences and to restrict TP adjustments to transactions with the AE only. Other grounds, including the acceptance of Customs authorities' valuation and the use of multiple-year data, were dismissed.