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TMI Blog2015 (8) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... imports from the AEs, i.e. controlled cost. The Mumbai Bench of the Tribunal in the case of Emersons Process Management India (P.) Ltd. (2011 (8) TMI 427 - ITAT MUMBAI) has held that transfer pricing adjustment is to be made with respect to international transactions and not the entire sales. Similar view has been taken by various other coordinate Benches of the Tribunal. In view of the above, we agree with the contention of the Ld. Counsel for the assessee that transfer pricing adjustment has to be made with respect to international transactions only and not on the entire sales. However, this adjustment also requires verification at the level of the Assessing Officer. We therefore restore this issue to the file of the AO/TPO with a direction to recompute the adjustment, if any, on the basis of material provided by the assessee.- Decided in favour of assessee for statistical purposes. - ITA NO. 1682/PN/2011 - - - Dated:- 10-6-2015 - Ms. Sushma Chowla and Shri R.K. Panda, JJ. For The Assessee : Shri Arvind Sonde, Shri Ketan Ved, Shri Amit Singhal Shri Vishal Solanki For The Revenue : Shri A.K. Modi ORDER PER R.K.PANDA, AM :- This appeal filed by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chmark its transaction with its Associated Enterprises. The TPO noted that the assessee has selected ADF Foods Ltd., as a comparable company to benchmark its transactions with the AEs. It was mentioned by the assessee that PBDT on cost during the year is 6.25% whereas that of the comparable company ADF Foods Ltd. works out to 9.02% considering the average of sales and cost for the F.Y. 2004-05, 2005-06 and 2006-07. 5. Having not been satisfied with the TP study report of the assessee and its submission the TPO asked the assessee to explain as to why PLI of the segmental data for processed and preserved foods of the comparable ADF Foods Ltd. be not taken for the purpose of benchmarking the international transactions pertaining to provision of export of finished goods. It was explained by the assessee as under (page 5 of the order of the TPO) : 6.1 That ADF Foods Limited has shown increase in Profit After Tax of 146% though the sales increased only by 28% in FY 2006-07 as compared to previous financial year. 6.2 That ADF Foods Limited (ADF) was manufacturing and marketing various products like pickles, pastes, canned products, masala spices, instant mixes, frozen vegetables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that the data to be used for the comparability shall be the data of the financial year in which the transaction has taken place and only in such circumstances data for the previous 2 years could be used if such data reveals facts which could have an influence on determination of transfer price in relation to the transaction being compared. The TPO observed that the assessee could not explain as to how the use of data for 3 years decreases any variability/distortions and how the earlier 2 year's data has an effect on determining transfer price of the international transactions. He further observed that the assessee has not given with facts and figures as to how are they supposed to be addressed by taking multiple year data. The TPO accordingly observed that it is nowhere demonstrated that data pertaining to 2 years prior to the F.Y. 2006-07 have any influence on the determination of transfer prices in relation to the transactions being compared. Relying on the decision of the Delhi Bench of the Tribunal in the case of Ranbaxy Laboratories Ltd. Vs. Addl.CIT ide ITA No.2146/Del/2007 for A.Y. 2004-05 and in the case of Mentor Graphics (Noida) Pvt. Ltd., Vs. DCIT reported in 109 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales of ready to eat, processed foods during F.Y. 2004-05. Similarly the TPO also rejected the contention for adjustment of capacity utilization. 10. Relying on the provisions of Rule 10B(1)(e) the TPO was of the opinion that the net profit margin arising in comparable, uncontrolled transactions may be adjusted to take into account the differences between the international transactions and the comparable uncontrolled transactions, which could materially affect the amount of net profit in the open market. For the above proposition, the TPO observed as under : (a) From the plain reading of the aforesaid Rule, it is crystal clear that profit level indicator (PLI) prescribed under TNMM is the net operating margins computed in relation to the prescribed base as mentioned in sub-section (i) above. The choice with the tax payer is regarding selection of base, i.e. cost incurred or sale effected or assets employed or any other relevant base, but not in the selection of margins. (b) Net profit margins have not been defined in the I.T. Act or Rules made therein. When the statutes have not provided the definition of a term used in it then general meaning of the term has to be taken i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment on account of under utilization and debit of expenses pertaining to non-AE business while determining the ALP of the international transaction is not acceptable. Although assessee has not specifically asked for the benefit of +/-5% the TPO observed that the provisions of section 92C(2) has been amended w.e.f. 01-10-2009. Following the decision of the Delhi Bench of the Tribunal in the case of Global Vantedge (P.) Ltd. vs. DCIT reported in 1 ITR 326 (Del.) the TPO rejected the claim of the assessee regarding benefit of adjustment of +/-5%. The TPO held that the benefit of safe harbor of +/-5% is not available to the assessee. In view of the above discussion the TPO worked out the adjustment by taking the PLI of ADF Foods Ltd. at 15.07% and made an adjustment of ₹ 3.05 crores to the total income of the assessee by observing as under : Operating expenses - ₹ 28.44 cr Operating Profit - ₹ 1.23 Cr Operating Profit as a percentage of Operating expenditure - 4.32% Arm's Length margin earned by the comparable - 15.07% Profit to be earned by assessee based on Arm's Length Margin - ₹ 4.28 crore Adjustment to be made - ₹ 3.05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Cr 3. Annual Length price 28.44 cr X 8.34%100 Rs.2.37 Cr 4. 95% of annual length price Rs.2.24 Cr 5. ALP shown by assessee Rs.1.37 Cr 6. Difference Rs.1.14 Cr 7. Adjustment required to be made Rs.1.14 Cr 16. Against such order of the AO the assessee is in appeal before us with the following grounds : 'The Appellant objects to the order dated October 30, 2011 passed by the learned Assistant Commissioner of Income Tax, Circle 7, Pune [ ACIT ] in pursuance of the directions dated May 20, 2011 of the learned Dispute Resolution Panel, Pune [ DRP ] for the Assessment Year 2007-08 on the following among other grounds: 1. General: The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting to INR 1,14,00,000 to the value of international transactions entered into by the Appellant pertaining to sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessed income and not restricting to returned income. 8. Initiation of penalty proceedings under section 271 (1) (c) read with section 274 of the Act on account of transfer pricing adjustment. The learned ACIT erred on the facts and in law in proposing to initiate penalty proceedings section 271(1) (c) read with section 274 of the Act, without considering the facts of the case. 9. Each one of the above grounds of appeal is without prejudice to the other. 10. The appellant reserves the right to amend, alter or add to the grounds of appeal.' 17. The Ld. Counsel for the assessee did not press grounds of appeal No.1 being general in nature. He also did not press grounds of appeal No. 4 to 10 for which the Ld. Departmental Representative has no objection. Accordingly, the above grounds are dismissed as 'not pressed'. 18. So far as ground of appeal No.2 is concerned the Ld. Counsel for the assessee submitted that although this issue was taken up before the TPO that benefit of capacity under utilization has to be given to the assessee, however, the TPO did not agree with the contention of the assessee. Referring to para 6.4 to 6.8 of the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to capacity under utilization of minimum 37.97% margin. 1. Working for capacity utilisation adjustment A. Capacity utilisation of ADF Foods Ltd. Sl.No. Particulars A.Y. 2007-08 (MT) 1 Installed capacity 25,900 2 Actual Production 13,822 3 Capacity Utilization % [2/1*100] 53.37% B. Capacity utilisation of Tasty Bite Eatables Limited Sl.No. Particulars A.Y. 2007-08 (MT) 1 Installed capacity 17,200 2 Actual Production 2,648 3 Capacity Utilization % [2/1*100] 15.40% C. Difference in capacity utilization (A-B) 37.97% D. Fixed costs of Tasty Bite as per annual report Sl.No. Particulars A.Y. 2007-08 in Rs. Crores Depreciation 0.67 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13,822 3 Capacity Utilization % [2/1*100] 53.37% B. Capacity Utilisation of Tasty Bite Eatables Limited Sl.No. Particulars A.Y. 2007-08 (MT) 1 Installed capacity 17,200 2 Actual Production 2,648 3 Capacity Utilization % [2/1*100] 15.40% C. Difference in capacity utilization (A-B) 37.97% D. Fixed costs of Tasty Bite as per annual report Sl.No. Particulars A.Y. 2007-08 in Rs. Crores Depreciation 0.67 Employee cost 4.20 Repairs and Maintenance - Plant Machinery 0.19 Repairs and Maintenance - Building 0.06 Repairs and Maintenance - Others 0.08 Rent Rates and Taxes 0.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Actual Production 2,648 3 Capacity Utilization % [2/1*100] 15.40% C. Difference in capacity utilization (A-B) 39.97% D. Workings after adjusting the difference in capacity In Rs. Crores Sl.No. Particulars At 15.40% capacity At 53.37% capacity 1 Sale 29.67 102.85 Less Variable Costs 2 Raw Materials consumed 16.67 57.79 3 Inventory change 1.93 6.69 4 Consumption of stores and packing materials 1.38 4.78 5 Power and fuel 1.03 3.57 6 Freight 2.47 8.55 Total Variable Cost 23.48 81.38 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.07 5 Excise duty 1.08 0.31 6 Decrease in stock 8.01 2.31 Total Variable Cost 65.26 18.83 Gross Profit 7.76 2.24 E Fixed Cost (Operating Cost-Variable Cost) 2.14 2.14 F Total Operating Cost 67.40 20.97 G PBIT 5.62 0.10 H PLI of ADF 8.34 0.47 21. He also relied on the following decisions : 1. Brintons Carpets Asia Pvt. Ltd. Vs. DCIT ITA No.1296/PN/2010 2. Skoda Auto India P. Ltd. Vs. ACIT reported in 30 SOT 319 (Pune) 3. Amdocs Business Services Pvt. Ltd. Vs. DCIT ITA No.1412/PN/2011 4. Ariston Thermo India Ltd. ITA No.1455/PN/2010 22. So far as ground of appeal No.3 is concerned, the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue 23.47 6.10 29.67 Page No.48 of the compilation b Profit @4.32% of cost (as per the Assessing Officer/TPO) (a*4.32/104.32) 0.97 0.26 1.23 Page No.243 of the compilation c Cost (a-b) 22.50 5.94 28.44 d Applying the PLI of the comparable - i.e. 8.34% (c*8.32%) 1.88 0.50 2.37 Page No.269 of the compilation e Adjustment - applying PI on the AE transaction only (d-b) 0.90 0.24 1.14 Sr.No. Particulars Amount A Sales 30.43 Less: Expenses B Material con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the year is 15.39%. Referring to page 49 of the paper book the Ld. Departmental Representative drew the attention of the Bench to the following table given in the Audited accounts : 12. Annual capacities and Production Sr.No. Item Installed Capacity Actual Production Current Year MT Previous Year MT Current year MT Previous Year MT 1. Ready to Serve Foods 5,000 5,000 2,343 2,024 2. Frozen Products 12,200 10,000 305 -- 28. Referring to page 9 of the paper book the Ld. Departmental Representative submitted that profit before tax for the year ending 31-03-2007 was 243.70 lakhs as against ₹ 167.32 lakhs for the period ending 31-03-2006. He accordingly submitted that with more capacity utilization there is less margin of profit. So far as employees cost are concerned he submitted that there may be two types of cases, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nappropriate calculation of TP. 33. So far as the adjustment on account of capacity under utilisation is concerned, it is the submission of the Ld. Counsel for the assessee that capacity utilisation of the assessee works out to 15% whereas capacity utilisation of the comparable company was 53%. Therefore, the difference between the two is significant and material to impact the profit margin of the assessee and the comparable company's ability to absorb the fixed overheads like depreciation, salary and wages, power, repair etc. is less where capacity utilisation is low and this would lead to increased cost and lower profit. 34. We find some force in the above submission of the Ld. Counsel for the assessee. We find the Mumbai Bench of the Tribunal in the case of Fiat India Ltd. (supra) for A.Y. 2004-05 at para 8 of the order has observed as under : 8. In ground No. 2, the Revenue has challenged the action of the Id. CIT(A) in allowing the adjustments made by the assessee to work out its operating margin for comparing the same with the profit margin of comparable cases. It is observed in this context that a detailed submission was made on behalf of the assessee before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion on this issue. The impugned order of the Ld. CIT(A) on this issue is therefore upheld dismissing ground No. 2 of Revenue's appeal. (underline given by us) 35. We find following the above decision the Pune Bench of the Tribunal in the case of Ariston Thermo India Ltd. (supra) has also agreed in principle the adjustment on account of low capacity utilisation and high fixed operating cost by observing as under : 10. We have carefully considered the rival submissions. The point sought to be made out by the assessee is that this being the first year of operations, it has not achieved an optimum level of capacity utilization and the sales are also on a lower side. Moreover, it has incurred certain start-up costs and the fixed operating costs have also not being absorbed due to low capacity utilization. In the absence of optimum utilization of its production capacity, it has suffered operating losses during the year. On the other hand, the net profit margin of the assessee has been benchmarked against comparables cases, who are established entities and have started businesses many years ago. In our considered opinion, the case made out by the assessee is based on economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th accounting principles. In our considered opinion, the whole objective of adopting the most appropriate method for the purpose of comparability analysis is to determine arm's length price of the international transactions. In other words, the purpose of the comparability analysis is to examine as to whether or not the values stated for the international transactions are at an arm's length price i.e. whether the price charged is comparable to an uncontrolled transaction of similar nature. Therefore, the adoption of the net profit margin of the tested party has to be made keeping in mind its objective, i.e. to facilitate its comparison with other uncontrolled comparable entities/transactions. Therefore, keeping in mind the aforesaid objective, the net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per sub-clause (i) of rule 10B(1)(e) of the Rules itself. The absence of such a specific provision in rule 10B(1)(e)(iii) of the Rules does not operate as a bar, so long as the adjustment sought to be made in the profit margin of the tested party are based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in this regard. In conclusion, the Tribunal specifically noted that because of the aforesaid failure of the assessee, the precedents cited by the assessee by way of the decisions of the Tribunal in M/s Fiat India Pvt. Ltd. (supra), Skoda Auto India (P.) Ltd. (supra), Egain Communication (P.) Ltd. (supra) and Global Vatedge Pvt. Ltd. v. DCIT (ITA Nos, 2763 2764/Del/2009) could not be applied in the case of the assessee. The aforesaid discussion in the order of the Tribunal clearly shows that the assessee therein failed in seeking adjustment to its profit margins for lack of evidence, and the Tribunal was fully conscious that the relief was otherwise allowable to the assessee in principle, based on the precedents cited above. Thus, the decision in the case of Haworth (India) P. Ltd. (supra) does not help the Revenue, and the reliance by the CIT(DR) is misplaced. Therefore, in our view, having regard to the precedents and the aforesaid discussion, in the present case assessee has to succeed in principle for adjustment on account of lower capacity utilization, and the loss suffered on account of unabsorbed fixed operating costs incurred in the initial year. The aforesaid factors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. We therefore restore the ground of appeal No.2 to the file of the AO/TPO with a direction to consider the appropriate adjustment after necessary verification on the basis of material supplied by the assessee. The Assessing Officer shall recompute such adjustment after giving due opportunity of being heard to the assessee. Ground of appeal No.2 by the assessee is accordingly allowed for statistical purposes. 37. So far as ground of appeal No.3 is concerned, it is the submission of the Ld. Counsel for the assessee that right segmental for applying TNM method is only AE segment. According to him the TPO has taken the entire RTS segment which contains transactions with AEs (Export) as well as transactions with non AEs (Domestic). However, since the assessee was making losses in the non AE segment the PLI of the assessee was artificially brought down. It is the submission of the Ld. Counsel for the assessee that for determining ALP only international transactions need to be considered. We find an identical issue had come up before the Coordinate Bench of the Tribunal in the case of Demag Cranes Components (India) (P.) Ltd. (supra) where it has been held that TP adjustments a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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