2015 (8) TMI 981 - AT - Income Tax

Transfer pricing adjustment - adjustment for capacity under utilisation - Held that - Respectfully following the case of Ariston Thermo India Ltd. (2015 (8) TMI 977 - ITAT PUNE) we are of the considered opinion that the assessee should be given the benefit of low capacity utilisation. We therefore restore the ground of appeal No.2 to the file of the AO/TPO with a direction to consider the appropriate adjustment after necessary verification on the basis of material supplied by the assessee. The Assessing Officer shall recompute such adjustment after giving due opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes. Adjustment for inappropriate calculation of TPO - Held that - Identical issue had come up before the Coordinate Bench of the Tribunal in the case of Demag Cranes & Components (India) (P.) Ltd. (2012 (1) TMI 60 - ITAT Pune) where it has been held that TP adjustments are to be computed not considering the entity level sales rather it should be done ideally considering the relatable sales drawing the quantitative relationship to the imports from the AEs, i.e. controlled cost. The Mumbai Bench of the Tribunal in the case of Emersons Process Management India (P.) Ltd. (2011 (8) TMI 427 - ITAT MUMBAI) has held that transfer pricing adjustment is to be made with respect to international transactions and not the entire sales. Similar view has been taken by various other coordinate Benches of the Tribunal. In view of the above, we agree with the contention of the Ld. Counsel for the assessee that transfer pricing adjustment has to be made with respect to international transactions only and not on the entire sales. However, this adjustment also requires verification at the level of the Assessing Officer. We therefore restore this issue to the file of the AO/TPO with a direction to recompute the adjustment, if any, on the basis of material provided by the assessee.- Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Adjustment for capacity under-utilization.
2. Inappropriate calculation of Transfer Pricing (TP) adjustment.
3. Disallowance of freight expenses.
4. Levy of interest obligation on account of TP adjustment.
5. Initiation of penalty proceedings under section 271(1)(c) read with section 274 of the Act on account of TP adjustment.

Detailed Analysis:

1. Adjustment for Capacity Under-utilization:
The assessee argued that their capacity utilization was only 15% compared to 53% for the comparable company, ADF Foods Ltd. This significant difference impacted the profit margin due to the inability to absorb fixed overheads. The Tribunal found merit in this argument, referencing similar cases where adjustments for low capacity utilization were allowed. The Tribunal directed the AO/TPO to consider appropriate adjustments after necessary verification based on the material supplied by the assessee.

2. Inappropriate Calculation of TP Adjustment:
The assessee contended that the AO/TPO incorrectly applied the TNMM method to the entire RTS segment, which included both AE (Associated Enterprises) and non-AE transactions. The Tribunal agreed that TP adjustments should be made only concerning international transactions and not the entire sales. The issue was remanded to the AO/TPO for recomputation of the adjustment based on the material provided by the assessee.

3. Disallowance of Freight Expenses:
The specific details regarding the disallowance of freight expenses were not pressed by the assessee's counsel during the hearing, and thus, this ground was dismissed as 'not pressed.'

4. Levy of Interest Obligation on Account of TP Adjustment:
The assessee challenged the levy of interest under section 234B and 234C due to unanticipated TP adjustments. However, this ground was also not pressed by the assessee's counsel and was dismissed as 'not pressed.'

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee objected to the initiation of penalty proceedings without considering the facts of the case. This ground, like the others, was not pressed during the hearing and was dismissed as 'not pressed.'

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, directing the AO/TPO to reconsider the adjustments for capacity under-utilization and to recompute the TP adjustments based on international transactions only. The other grounds were dismissed as 'not pressed.'

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