2018 (6) TMI 452 - HC - Income Tax

TPA - Whether profit margin of the comparable should be applied only to the value of the International Transactions - Held that - this issue stands concluded against the Revenue by the following decisions of this Court in case of CIT v/s. M/s. Ratilal Becharlal & Sons 2015 (11) TMI 1524 - BOMBAY HIGH COURT . Whether adjustment of capacity utilization factor can be considered even though it is not prescribed u/s 92CA - Held that - Taking into account the capacity utilization of the comparable, in the present facts, as it materially affects the profit margin, the invocation of Rule 10B (1) (e)(iii) of the Rules, cannot be found fault with This is self evident position from the reading of the aforesaid provision that all aspects/ difference between the international transactions and the comparable uncontrolled transactions which materially affects the net profit margin had to be taken into account so as to have the fair comparison while determining the ALP of the tested party s transaction. No substantial question of law as Rule 10B (1)(e)(iii) of the Rule is self evident Appeal admitted on the substantial question of law at (c) - Whether on the facts and circumstances of the case and in law, the Tribunal was justified in not appreciating that the Assessing Officer had correctly computed the deduction yearwise as per clause (iii) of Explanation 1 to section 115JB of the Act?

Summary

Issues:
1. Application of profit margin of comparable at entity level for determining Arms Length Price.
2. Consideration of adjustment of capacity utilization factor in determining Arms Length Price.
3. Computation of deduction yearwise as per clause (iii) of Explanation 1 to section 115JB of the Income Tax Act.

Analysis:
1. The first issue revolves around the application of profit margin of comparable entities for determining the Arms Length Price. The Revenue contended that the profit margin should be applied only to the value of International Transactions with Associated Enterprises, not at the entity level. However, the Court referenced previous decisions where similar issues were resolved in favor of the Assessee. The Court highlighted that the issue had been conclusively settled in previous cases, leading to the dismissal of the proposed question as it did not raise any substantial legal question.

2. Moving on to the consideration of the adjustment of the capacity utilization factor in determining the Arms Length Price, the Tribunal invoked Rule 10B(1)(e)(iii) of the Income Tax Rules, 1962. This rule allows for adjustments to be made to the profit margin of comparable uncontrolled transactions based on factors like capacity utilization. The Tribunal emphasized that capacity utilization can significantly impact the profit margin of a manufacturing concern, as fixed costs remain constant regardless of utilization levels. The Court acknowledged that capacity utilization of comparable manufacturing units would indeed impact the net profit margin, leading to the acceptance of the Tribunal's decision to consider this factor in determining the Arms Length Price.

3. Lastly, the issue of computing deductions yearwise as per clause (iii) of Explanation 1 to section 115JB of the Income Tax Act was admitted for consideration as a substantial legal question. The Court directed the Registry to provide a copy of the order to the Tribunal for further proceedings. The Respondent's Counsel waived service, indicating their cooperation in the legal process.