9911796707
TMI Blog2013 (8) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... During the year under consideration, the assessee had entered into the following international transactions with its Associated Enterprises (AEs):- (1) Export of finished goods to AEs in various countries :Rs.28,60,843/- (2) Import of raw materials from AEs in various Countries :Rs.16,15,91,463/- (3) Management charges paid to AEs in various Countries :Rs.2,91,20,790/- In the TP study report, TNMM was adopted by the assessee as the most appropriate method to benchmark the above transactions with its AEs and operating profit to sales was taken as PLI. All the transactions with the AEs were aggregated for benchmarking as per the said method and the following two entities were identified as comparables:- 1. Resins & Plastics Ltd. 2. Sanmar Speciality Chemicals Ltd. 4. The average PLI i.e. OP to sales of the above two comparables was worked out at 8.54% and the same being less than 12.55% of the assessee, it was claimed that all the internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . OP/TC as per arm's length margin i.e. 13.50% 19.46 Cr. g. Difference 5.79 Cr. The addition of Rs. 5.79 crores accordingly was made by the A.O. to the total income of the assessee on account of transfer pricing adjustment in the assessment completed u/s 143(3) of the Act vide an order dated 12-12-2008. 6. Against the order passed by the A.O. u/s 143(3) of the Act, appeal was preferred by the assessee before the ld. CIT(A) disputing the addition made by the A.O. on account of transfer pricing adjustment. Before the ld. CIT(A), it was submitted on behalf of the assessee that the TPO completely failed to appreciate the difference in the capacity utilization between the assessee company and the comparable companies. It was submitted that the TPO grossly failed in not considering the adjustment on account of capacity utilization and ignored the effect of under utilization of plant by the assessee which resulted in idle capacity. It was pointed out that the capacity utilization of the assessee was only 65% as against more than 80% capacity utilization in the cases of comparables. 7. The assessee also objected to the new comparable selected by the TPO and made the following submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; NA Transaction value 28.60 9. After considering the submissions made on behalf of the assessee, the ld. CIT(A) identified three issues arising from the appeal of the assessee for his consideration as under:- 1. Claim of capacity utilization adjustment 2. Selection of comparables 3. Whether PLI has to be applied on a whole entity basis or AE segments only. As regards the first issue relating to capacity utilization adjustment, the ld. CIT(A) observed that the cost incurred by any entity are of two types ; variable cost which varies directly with the production level and fixed cost which remains the same irrespective of the production level. He held that since the variable cost varies directly with the production level, its recovery remains uniform irrespective of capacity utilization whereas the fixed cost which remains the same is under recovered as a result of under utilization of capacity resulting in lower profitability. He held that there thus arises need to perform the capacity utilization adjustment and the same can be done by excluding the depreciation which represents fixed co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue's case. He also fairly agreed that the issue as to whether the PLI of comparables is to be applied on the total transactions or only on the international transactions of the assessee with AEs is covered in favour of the assessee by the various decisions relied upon by the ld. CIT(A) in his impugned order and there is no contrary decision taking a view in favour of the Revenue on this issue. He, however, contended that if only one comparable company is finally available for the comparability analysis, the assessee cannot claim the benefit of +/- 5% adjustment as per proviso to section 92-C(2) of the Act. In support of this contention, he relied on the decision of the Tribunal in the case of General Atlanta Pvt. Ltd. v. ACIT rendered vide order dtd. 17-5-13 in ITA No. 7638/Mum/2011 and submitted that the decision of the ld. CIT(A) in giving the benefit of +/- 5% adjustment when only one comparable was finally selected by him is contrary to the said decision of the Tribunal. 13. As regards the capacity utilization adjustment, the ld. D.R. contended that such adjustment can be allowed only after ascertaining the reason for low capacity utilization and effect thereof on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as under:- 1. Selection of comparables 2. Benefit of +/- 5% adjustment permissible as per the proviso to section 92 C(2) of the Act, 3. Application of PLI of comparables on the total transactions or on the international transactions of the assessee with AEs, 4. Adjustment for the difference in capacity utilization. In the light of the submissions made before us as well as material available on record including the orders of authorities below, we no proceed to discuss and decide these issues. SELECTION OF COMPARABLES 16. In the TP study report, the assessee company had identified two comparable companies namely Rasin Plastics Ltd. and Sanmar Speciality Chemicals Ltd. Since the relevant financial data of Sanmar Speciality Chemicals Ltd. for the year under consideration was not available in public domain as admitted by the assessee company also, the said company was rejected by the TPO as comparable and there is nothing in the impugned order of the ld. CIT(A) to show that this rejection was disputed by the assessee. As per the fresh search carried out by him, the TPO identified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not applicable. According to him, the benefit of 5% adjustment allowable to the assessee as per the said proviso thus cannot be allowed. In support of this contention, he has relied on various decisions of the Tribunal. In one of such decisions rendered in the case of Haworth (India) P. Ltd. 131 ITD 215, it was held by the Tribunal that the proviso to section 92C(2) of the Act is applicable in the case where more than one price is determined by the most appropriate method and in the case where only one price is determined by the most appropriate method, benefit of 5% is not available to the assessee. The said decision of the Delhi Bench of the Tribunal in the case of Haworth (India) P. Ltd. (supra) has been followed by the Mumbai Bench of the Tribunal in the case of IIML Asset Advisors Ltd. in ITA No. ITA No. 5173/Mum/2012 wherein it was held that where only one comparable was finally selected by following the appropriate method which was acceptable to both parties and it was possible to recompute the ALP on the basis of even one comparable, the assessee would not be entitled to the benefit of 5% range as per the proviso to section 92C(2) of the Act. In the case of General Atla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with its AEs and not to the entire transactions at enterprise level. In another case of IL Jin Electronics (I) (P) Ltd. v. ACIT (ITA No. 438 of 2008), the co-ordinate Bench of this Tribunal held that the A.O. was not justified in calculating the net profit on entire sales and directed the A.O. to make adjustment only for the difference in operating profit calculated on the international transactions of the assessee with its AEs. To the similar effect are the decisions of the co-ordinate Bench of this Tribunal in the case of UCB India Private Ltd. v. ACIT (ITA No. 428 & 429 of 2007) and in the case of ACIT v. T Two International Pvt. Ltd. (ITA No. 5644 of 2008). Respectfully following the ratio of these decisions of the co-ordinate Bench of this Tribunal, we uphold the impugned order of the ld. CIT(A) holding that the profit margin of comparables should be applied only to the value of international transactions of the assessee with its AEs to determine the ALP of the said transactions and the TP adjustment has to be worked out on the basis of ALP so determined. Adjustment for the capacity utilization. 19. There being difference in the capacity utilization ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... controlled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) The net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) The net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction;" 20. Keeping in view the aforesaid provisions of the relevant Rule, we can now endeavor to consider how and to what extent the difference in capacity utilization affects the profit margin and how the adjustment on account of difference in capacity utilization can appropriately be made within the framework of Rule 10B. The issue of difference in capacity utilisation generally comes in the case of manufacturing concern and like any other business undertaking, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gin of the comparables on account of difference in capacity utilization as per clause (e)(iii) of sub-rule (1) of Rule 10-B of the Income Tax Rules, 1962. 22. Having held that the adjustment is required to be made to the net margin of the comparables on account of difference in capacity utilisation, the next issue that arises is regarding the adoption of proper method by which the same can appropriately be made. In the present case, the assessee made this adjustment by not considering depreciation for computing its own operating profit as well as the operating profit of comparable. It was done by taking EBDIT as PLI instead of EBIT. Although this method adopted by the assessee was not approved by the TPO, it was accepted by the ld. CIT(A) on the ground that the effect of difference in capacity utilization on profitability could be nullified by taking EBDIT as PLI instead of EBIT. We are unable to concur with this view of the ld. CIT(A). In our opinion, when the PLI is taken as OP to sales or OP to cost, operating profit of the assessee as well as comparable cases becomes relevant and the depreciation being very much integral part of the operating expenses of the manufacturing conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter adjustment Rs. 0.60 crores Rs. 0.80 crores Profit margin after adjustment 10% 10% 24. The adjustment thus can be made to the profit margin of the comparables by allocating fixed overheads at the same rate at which fixed overheads are allocated in the case of the tested party. For example, in the case of a comparable having 80% capacity utilization, the rate of allocation of depreciation is 25% of the sales as against the rate of allocation of fixed overheads of 40% in the case of the tested party. If the adjustment is made in the profit margin of the said comparables by allocating more fixed overheads at 15% of sales to bring the rate of allocation of fixed overheads at par with that of the tested party, the profit of the comparable would be reduced by Rs. 1.20 crores thereby giving a net profit of Rs. 0.80 crores which would bring the profitability to 10%, i.e. at par with the tested party. Similarly, if the adjustment is made in the profit margin of a comparable having 60% capacity utilization by allocating more fixed overheads at 6.67% of sales to bring the rate of allocation of fixed overheads at par with that of the tested party, the profit of the said comparable wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of closing stock as well as opening stock. In the case of Mahavir Alluminium Ltd. 297 ITR 727, the Hon'ble Delhi High Court has also taken a similar view. Respectfully following the ratio of these judicial pronouncements, we direct the A.O. to make the adjustment on account of Excise duty to the value of opening stock as well as closing stock in accordance with section 145A of the Act and make the addition, if any, to the total income of the assessee on this issue. Ground No. 4 of Revenue's appeal is accordingly treated as partly allowed for statistical purpose. 29. The next issue raised by the Revenue in this appeal is whether for the purpose of clause (iii) of Explanation 1 to section 115 JB of the Act, one consolidated figure of brought forward losses or unabsorbed depreciation for the earlier years is to be taken or the same is to be considered on year to year basis. This issue is raised by the Revenue in ground No. 5, 6 & 7 which read as under:- "5. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that for the purpose of Clause (iii) of Explanation 1 to section 11 5JB, eligibility fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation for all the earlier years is to be clubbed into one amount; and the amount of brought forward loss (before depreciation) is also to be taken by summing up all the. figures of loss of earlier years, and then the lower of these two amounts is to be reduced from the net profit as shown in the profit & loss account so as to comply with the prescription of clause (iii) of Explanation (1). Similar position is coming up from the pressing into service of the word "loss" in this clause in contradistinction to the word 'losses', as has been done in the marginal notes to sections 72,73,74,74A and 75 etc. From here we gather that by using the words 'amount' and 'loss' in this clause, the point has been made clear that it is a composite figure each of the unabsorbed and brought forward loss, that merits consideration. Moving still further we find from the language of this clause that there is no reference to considering the brought forward loss or unabsorbed depreciation on year to year basis. There is nothing in the language of section, which could suggest, even remotely, that the Legislature intended to consider year-wise figures. If it had desired like that, then it would have been so ..... X X X X Extracts X X X X X X X X Extracts X X X X
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