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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 ..... 'the Act'). 2. The learned CIT-A has erred on facts and in law by upholding the order of the AO which completely disregarded the documentation maintained by the Appellant as per Rule 10D of the Income Tax Rules, 1962 ('the Rules '). 3. The learned CIT-A erred on facts and in law in not allowing adjustments on account of under utilization of capacity by the Appellant as warranted under Rule 10B(1)(e) of the Rules for computing the arm's 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic issue raised by the assessee. He has further contended that even otherwise the TPO has made the adjustment in respect of total turnover of the assessee instead of the turnover with the AE in the segment of manufacturing, therefore, the adjustment made by the TPO is not sustainable in view of the various decisions of this Tribunal on this point. In support of his contention he has relied upon the decision of Bangalore Bench of this Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 20 taxmann.com 715. The Ld. AR has then relied upon the decision of Mumbai Bench of Tribunal in the case of Dy. CIT v. Petro Araldite (P.) Ltd. [2013] 145 ITD 182 and submitted that the Tribunal has held that adjustment in respect of difference 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion that only international transactions with AE are to be considered, the learned counsel for the assessee placed reliance upon the following decisions 1. Dy. CIT v. Starlite [2010] 40 SOT 421 (Mum.) 2. IL Jin Electronics (I) (P.) Ltd. v. Asstt. CIT [2010] 36 SOT 227 (Delhi) 3. Asstt. CIT v. T Two International (P.) Ltd. [IT Appeal Nos. 5645 & 5646 (Mum.) of 2009] 4. Global Vantedge (P.) Ltd. v. Dy. CIT [2010] 37 SOT 1 (Delhi) 5. DCIT v. Startex Networks (Ind) (P.) Ltd. 2010-TII-13-ITAT-DEL-TP. 6. Asstt. CIT V. Wockhardt Ltd. [2011] 45 SOT 138 (URO)/[2011] 10 taxmann.com 207 (Mum.) (URO) 7. Addl. CIT v. Tej Diam [2010] 37 SOT 341 (Mum.) 8. Abhishek Auto Industries Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y us, the difference in capacity utilization affects the profitability mainly because of the difference in rates at which the fixed overheads are absorbed or allocated depending on the level of capacity Utilization. The example given by us clearly depicts this position. The said ex-ample shows that the allocation of fixed overheads at the capacity utilization of 50%, 60% & 80% is 40%, 33.33% & 25% respectively resulting in the profit margin of 10%, 16.67% and 25%. In our opinion, if the fixed overheads allocation or absorption of comparable is brought at the level of the assessee, it would nullify the effect of difference in capacity utilization on the profit margin. For example, if we take the profitability working at 50% capacity utilization as that of the tested party and at capacity utilization of 60% and 80% as that of the com parables and adjust the rate of allocation of fixed overheads of the comparables in order to bring the same at par (i.e. 40%) of sales) with the tested party, the resultant position will be as under:- Net profit Rs.1 crore Rs. 2.00 crore Less additional allocation of depreciation by taking the rate of fixed overheads at of sales: Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the comparables. The 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 .37%. The detailes summarized by the assessee are as under:- "Fuchs Lubricants (India) Private Limited Assessment Year 2005-06 Appeal No. 663911 Mum/2011 Calculation of 5 percent range - Corrected Margin Particulars Amount (in INR) Sales A 66,448,000 AE - Cost B 12,861,553 Non AE Cost C 53,338,447 Total Cost D=B+C 66,200,000 Operating Profit E=A-D 248,000 Operating Profit Margin F=DIA 0.37% 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 & ..... 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