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TMI Blog2015 (8) TMI 977X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purposes of comparability analysis - As per the assessee, future year’s actual margins be also considered to determine its profit margins in order to determine the ALP. The aforesaid plea is sought to be justified on the basis that due to exceptional circumstances of being the initial year of set-up, the assessee has incurred loss during the year, while it has earned profits in the subsequent two years. Therefore, assessee submitted that future year’s actual margins be also considered for analyzing the comparability of current year’s margin with the comparable uncontrolled transactions. The TPO as well as the DRP have not accepted the plea of the assessee and held that having regard to rule 10B(1)(e) of the Rules, there is no scope to consider data of the subsequent assessment years. In our considered opinion, the assessee has to fail on this aspect for the reasons assigned by the lower authorities. Also the earning of profits in the future two years by the assessee may be a good ground to justify the loss being incurred in this year because of the exceptional circumstances of being the initial year of set-up, under capacity utilization, etc., but there is no justification f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CA(1) of the Act for the purposes of computing the ALP under Section 92C of the Act. The TPO vide his order dated 28.10.2009 passed under Section 92CA(3) of the Act, after allowing opportunity to the assessee of being heard determined the ALP in relation to the international transactions by enhancing the stated values by a sum of ₹ 2,67,06,520/-. The Assessing Officer passed a draft assessment order under Section 144C of the Act on 30.12.2009 considering the order of the TPO dated 28.10.2009. The assessee filed objections before the DRP, who vide order dated 14.09.2010 passed under Section 144C(5) of the Act issued directions to the Assessing Officer. The Assessing Officer, after considering the directions issued by the DRP computed the income of the assessee in relation to the international transactions in conformity with the ALP determined by the TPO. Accordingly, the Assessing Officer passed an order under Section 143(3) read with Section 144C(13) of the Act after making addition on account of transfer pricing adjustment of ₹ 2,67,06,520/-, thereby the total income was computed at ₹ 77,32,530/-. In the captioned appeal, assessee has agitated the aforesaid adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... differed with the assessee, and instead he has determined an adjustment of ₹ 2,67,06,520/- in order to bring the stated values of the international transactions to the ALP. The first point of difference between the assessee and the TPO was the use of data of multiple financial years. The TPO used the financial data of the comparable companies only for the financial year relevant to the year in which the international transactions were undertaken, whereas assessee had used average of three year s data of the comparable companies to carry out the benchmarking analysis. At the time of hearing, the learned counsel submitted that the aforesaid aspect is not disputed and therefore we do not dwell further on this. Secondly, the TPO accepted the TNM method as the most appropriate method, but while calculating the Profit Level Indicator (PLI) of the assessee, the TPO considered the Operating profits/Total cost as the PLI whereas the assessee in its Transfer pricing study had considered Operating profits/Operating sales as the PLI. This aspect has also not been assailed by the assessee before us and we do not dwell further on this. 7. The first potent point of difference between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1962 (in short the Rules ), which is in respect of the TNM method. As per the Revenue in terms of rule 10B(1)(e) of the Rules, the adjustments are permissible only with respect to the net profit margin of the comparable uncontrolled transactions and not with regard to the net profit margin of the tested party i.e. the assessee. For the aforesaid reason, the adjustments sought by the assessee on account of low capacity utilization and abnormal start-up costs have been denied. At the time of hearing, the learned CIT(DR) appearing for the Revenue further submitted that the Delhi Bench of the Tribunal in the case of Haworth (India) P. Ltd. vs. DCIT 131 ITD 215 (Delhi) has also found it proper not to allow adjustment for capacity utilization while computing the net profit margin of the tested party. In this regard, in particular reference was made to discussion by the Tribunal in paras 83 to 92 of the order. 9. On the other hand, the learned counsel for the assessee submitted that the fact that assessee had used only 21% of its total production capacity is evident from the Annual Accounts, whose relevant extract is placed at page 51 of the Paper Book and that the same was not disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a meaningful comparability analysis between the international transactions of the assessee and the comparable uncontrolled transactions. 11. However, as per the Revenue, such an adjustment to the profit margin of the assessee is not permissible having regard to the provisions of rule 10B(1)(e) of the Rules. The method adopted by the assessee for benchmarking its international transaction is the TNM method and rule 10B(1)(e) of the Rules prescribes the manner in which the same is to be applied. As per the Revenue, in sub-clause (iii) adjustments to the net profit margin are permissible but it is only in relation to the net profit margins of the comparable uncontrolled transactions and not with respect to the margin of the tested party and thus the claim of the assessee cannot be allowed. In our considered opinion, in sub-clause (i) the net profit margin realized by a tested party from an international transaction is required to be ascertained having regard to the relevant base. In sub-clause (ii) the net profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction is to be ascertained having regard to the same base. Sub-clause (iii) permits adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties. To the similar effect is the decision of the Mumbai Bench of the Tribunal in the case of M/s Fiat India Pvt. Ltd. (supra). In fact, in the case of Amdocs Business Services (P.) Ltd. (supra) wherein one of us was a member of the Bench i.e. Accountant Member, an adjustment was allowed to the profit margin of the tested party with respect to the under capacity utilization, the unit being in the start-up phase. The decision of the Pune Bench of the Tribunal in the case of Skoda Auto India (supra) is also on similar lines. 12. The learned CIT(DR) has relied on the decision of the Tribunal in the case of Haworth (India) P. Ltd. (supra) for the proposition that adjustment to the profit margin of the tested party is not permissible. We have perused the said decision. In the case before the Delhi Bench of the Tribunal, assessee had computed its margin after claiming adjustment for capacity utilization. The assessee had adopted the TNM method for the purpose of computing its ALP. The assessee had claimed that capacity utilization of comparables was to the extent of 70%, which was an assumption made due to non-availability of the required details of the comparable cases. The TPO r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee was rejected at the threshold, and therefore, the lower authorities had no occasion to examine the plea of the assessee on merits. No doubt, the aforesaid aspect spring up only after the plea of the assessee is accepted in principle and the same was not so done by the authorities below. The learned counsel for the assessee pointed out to page 97 of the Paper Book wherein is placed the financial statement of a comparable concern, M/s Khaitan Electricals Limited for the financial year 2005-06 to point out that the information regarding the Installed capacity and Actual production carried out during the year is available, which would facilitate the comparison and also making of an adjustment to the profits margin of the assessee. It was pointed out that at-least for the said comparable the adjustment ought to have been allowed by the lower authorities. 14. In our considered opinion, in order to arrive at an appropriate adjustment, the entire factual matrix is required to be examined at the appropriate level. The TPO as well as the DRP did not accept the plea of the assessee in principle, while the same has been accepted by us. Therefore, in order to allow an approp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is hereby affirmed and the assessee fails. 17. Another aspect raised by the assessee is that the lower authorities have erred in not providing adjustment on account of working capital differences vis- -vis the comparable uncontrolled entities. The plea of the assessee is that the TPO erred by comparing entities having a different working capital structure with the assessee s operations, which have a different working capital requirements and no adjustment for the said difference was made. The aforesaid plea was not raised before the TPO but has been raised by the assessee only before the DRP. Before us, the learned counsel for the assessee submitted that such adjustments are quite reasonable and deserve to be allowed and for that matter he has referred to page 130 of the Paper Book wherein the relevant workings have been exhibited. The working capital requirements of the three comparable uncontrolled entities vis- -vis that of the assessee have been tabulated and it is submitted that such working was also available before the DRP. 18. On the other hand, the learned CIT(DR) relied upon the order of the DRP and in particular para 11.2 of the order to oppose the plea of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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