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TMI Blog2014 (5) TMI 924X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length price. 4. The learned CIT-A has erred on facts and in law in upholding the order of the AO by disregarding the fact that value of import of raw materials by the Appellant had already been examined by the Customs authorities (i.e. another department of Ministry of Finance, Government of India) and found the price to be lower than arm's length (signified by 1 percent loading imposed by them). 5. The learned CIT-A has erred on facts and in law in upholding the action of the AO by rejecting the use of multiple year data as permitted under the provisions of Rule 10D(4) of the Rules as elaborated in the transfer pricing study report. 2. Ground no. 1 and 2 are general in nature and dependent upon the finding of the other specific grounds, therefore, no specific finding is required in respect of ground no. 1 and 2. 3. Ground no. 3 is regarding adjustment on account of under utilization of capacity as per Rule 10B(1)(e) of the Income Tax Rules. 3.1 The assessee is a wholly owned subsidiary of the Fuckhs Petrolube AG, Germany (Fuchs AG) and is engaged in manufacturing and distribution of lubricants. The assessee has various international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in capacity utilization is required to be made. He has further contended that it is practically impossible to find out the fixed overhead of the comparables for making adjustment, therefore, the adjustment should be permitted in the operating margin of the assessee. The Ld. AR has filed a detailed chart showing adjustment in the margins of the comparables on account of difference in capacity utilization and submitted that if the adjustment on account of difference in capacity utilization is allowed then the mean operating margin of the comparable comes below 5% and, therefore, no adjustment is required because the ALP after the adjustment is within the tolerance range of +/-5% of the assessee's margin. The Ld AR has given the calculation based on the difference between the ratio of assessee's depreciation to sales vis-a-vis comparables as well as the difference in the ratio of depreciation to total cost vis-a-vis comparables. 3.4 On the other hand, the Ld. DR has submitted that in the case of Petro Araldite Ltd., the Tribunal has considered this aspect and finally arrived at the conclusion that the adjustment on account of difference in capacity utilization has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, the learned counsel for the assessee submitted that the transfer pricing adjustments should be restricted to transactions with the AE only and also that operating cost of the software segment referable to AE transactions only should be taken into consideration. The learned DR however, supported the orders of the authorities below. 6.1 Having heard both the parties and having considered their rival contentions, we find that 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 therein relates to computation of income from international transactions having regard to ALP. Thus, 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. This issue is also covered by the decisions relied upon by the learned counsel for the assessee. Accordingly, the AO is directed to make the transfer pricing adjustments by restricting the adjustments to the transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit margin after adjustment 10% 10% 24. The adjustment thus can be made to the profit margin of the com parables by allocating fixed overheads at the same rate at which fixed overheads are al-located in the case of the tested party. For example, in the case of a comparable having 80%o 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 com parables 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 would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arm's length Operating Profit Margin of comparables before Capacity Utilization Adjustment G 5.79% Revised Arm's length Operating Profit Margin of comparables after Capacity Utilization Adjustment H 4.68% Arm's length Operating Profit J=A*H 3,109,766 Arm's length Total Cost J=A-J 63,338,234 Variation between Revised Arm's length AE Cost and Actaul AE Cost K=D-J 2,861,766 5% of Revised AE Cost L=D*5% 3,310,000 Adjustment (Since L is higher than K, considering 5% range, not adjustment is required) NIL 3.10 In view of the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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