2020 (6) TMI 206 - AT - Income Tax

TP Adjustment - non-granting of Capacity under utilization adjustment while determining Arms length price of international transactions - assessee is engaged in the business of manufacture and sale of self adhesive tear tapes - HELD THAT - We notice that an identical issue has been examined by the coordinate bench in the case of IKA India Pvt. Ltd. 2018 (10) TMI 49 - ITAT BANGALORE thus we hold that the assessee is entitled for deduction from its PLI towards capacity under-utilisation adjustment. As noticed earlier that the assessee has computed the adjustment by presuming that the comparable companies have operated at 100% of capacity. A.R also accepted that the said adjustment should have been computed by considering the details of actual capacity utilization by comparable companies. Since the said details are not available in public domain, it is imperative to restore this issue to the file of AO/TPO with the direction to collect the relevant details from comparable companies for the year under consideration and accordingly compute the adjustment. We notice that the co-ordinate bench has given certain directions to be followed by the AO/TPO in the case of IKA India Ltd (supra). Accordingly, we set aside the order passed by AO on the impugned issue and restore the same to the file of AO/TPO with similar directions. - Appeal filed by the assessee is treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Non-granting of "Capacity underutilization adjustment" while determining the Arms Length Price (ALP) of international transactions.

Detailed Analysis:

1. Non-granting of "Capacity underutilization adjustment" while determining the Arms Length Price (ALP) of international transactions:

The assessee, engaged in the manufacture and sale of self-adhesive tear tapes, challenged the assessment order for the year 2013-14, particularly focusing on the non-granting of "Capacity underutilization adjustment" in determining the ALP of its international transactions. The assessee had operated at 28.95% of its installed capacity during the year, leading to significant unutilized capacity. Consequently, it deducted ?2.48 crores as an adjustment towards the cost of unutilized capacity, arguing that fixed expenses incurred irrespective of capacity utilization adversely impacted profitability.

The assessee presumed that comparable companies operated at 100% capacity due to the lack of public domain data regarding their actual capacity utilization. The Tribunal, referencing the case of IKA (India) Pvt. Ltd. vs. DCIT, acknowledged that capacity utilization adjustments could be made for the tested party if comparable companies' data were unavailable. The Tribunal emphasized the necessity of accurate adjustments to ensure comparability, citing Indian transfer pricing regulations, OECD Guidelines, and US transfer pricing regulations, which all support such adjustments in the presence of material differences.

The Tribunal directed the Transfer Pricing Officer (TPO) to use powers under section 133(6) of the Act to collect data on capacity utilization from comparable companies. This data should include installed capacity, actual production, cost breakdowns, and segmental information. The TPO must then share this information with the assessee and adjust the capacity underutilization accordingly. The Tribunal's decision follows precedents set by cases such as Mando India Steering Systems (P.) Ltd., Panasonic AVC Networks India Co. Ltd., Biesse Mfg. Co. Ltd., and GE Intelligent Platform (P.) Ltd., which support adjustments for capacity underutilization.

The Tribunal concluded that the assessee is entitled to a deduction for capacity underutilization adjustment from its PLI. The case was remanded to the AO/TPO to collect relevant data from comparable companies and compute the adjustment accordingly, following the directions provided in the IKA India Ltd. case.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the AO/TPO to collect and utilize data on capacity utilization from comparable companies to accurately compute the capacity underutilization adjustment. The decision underscores the importance of reliable adjustments to ensure fair and accurate transfer pricing assessments.