9911796707
TMI Blog2015 (8) TMI 981X X X X Extracts X X X X X X X X Extracts X X X X ..... d business loss aggregating to Rs. 2,97,46,620/-. The company had computed the income u/s.115JB of the I.T. Act at Rs. 48,52,674/-. The assessee filed a revised return on 23-09-2008 declaring total income of NIL. 3. The AO made a reference to the TPO u/s.92CA(1) for determination of the ALP of international transaction. Accordingly, the TPO issued notices u/s.92CA(2) of the I.T. Act and asked the assessee to furnish the requisite details. From the various details furnished by the assessee the TPO noted that the assessee is a part of the preferred brands group of companies. He observed that the international transactions undertaken by the assessee during the relevant assessment year is as under : Sr.No. Description of transaction Amount (Rs.) Method 1 Sale of ready to serve foods 23,48,77,291/- TNMM 2 Payment of interest on ECB and 52,10,842/- CUP 3 Interest charges on AE towards overdue dues 13,26,462/- CUP 4 Reimbursement of expenses 72,69,146/- CPM Total 24,86,83,743/- 4. He observed that TBEL has sold goods worth Rs. 23.48 crores to its Associated Enterprises as against total sale of Rs. 27.55 crores for the year ended 31-03-2007. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the new management in 1999. That the company had huge carry forward losses and was in a turnaround phase during the Financial Years 2000-01 to Financial Year 2004-05. 6.7 That TBEL had discontinued the domestic sales of ready to eat processed food products during the year 2004-05. That in the financial year, the company has to settle claims for local distributors and other supply chain vendors including inventory write off, provision for sales tax payable under deferral scheme, and for provision for non-collectability of Govt. incentives. 6.8 That adjustment on account of capacity under utilization, debit of expenses pertaining to the non-AE business may be given and PLI of the assessee after adjustment works out to 16.28%. 7. The submissions made by the assessee together with the facts of the case and the oral contentions made during the course of hearing have been considered and for the reasons given herein under the contentions of the assessee have not been found to be acceptable." 6. However, the TPO was not satisfied with the above explanation given by the assessee. He referred to the provisions of Rule 10B(4) and observed that from a plain reading of the above rule it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has submitted detailed search process adopted by it and has selected only ADF Foods Ltd as a comparable company to benchmark its transaction with Associated Enterprises. The assessee in its report has mentioned that ADF Foods Ltd is engaged in the manufacturing of ethnic Indian foods, ready to eat food in frozen and retort packs, pickles, pastes, mango pulps/slices, chutneys, papadums, ready to cook vegetables, cooking sauces, masala and rice, flavoured water and tamarind products. Thus after carrying out the functional analysis the assessee has finally selected ADF Foods Ltd. as a comparable company. The TPO further noted that the assessee has not demonstrated as to how the company preparing pickles/pastes, canned produces, masala spices have greater margin especially when these products have a lesser shelf life as compared to ready to eat products and accordingly the comparable company bears more risk of wastages. He therefore, rejected the contention of the assessee on this ground. 9. The TPO also rejected the submission of the assessee that it had huge carry forward losses and was in a turnaround phase during F.Y. 2000-01 to F.Y. 2004-05 and that it discontinued the domestic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction or between the enterprises entered into such transactions which could materially affect the amount of net profit margin in the open market. The net profit thus established is then taken into account to arrive at an ALP in relation to international transactions. 12. Referring to the decision of the Pune Bench of the Tribunal in the case of Skoda Auto India Pvt. Ltd. Vs. ACIT the TPO was of the opinion that inclusion of PBDIT as well as adjustment on account of capacity underutilization is not only not allowable as per Rule 10B(10)(e)(i) but even if some adjustment is considered as allowed, then too, it can only be allowed in respect of the items of expenses which may be proportionately higher in the case of the assessee only. Following similar corollary the adjustments would be required in the case of comparables in respect of all the items of expenses wherever there is difference vis-à-vis the tested party and the result of such an exercise would be nothing but bringing the net margin of the tested party at par with that of arithmetic mean of the margins of the comparables. The TPO, therefore, held that the contention of the assessee to consider PLI as OP/OE and ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are as under : Revised PLI of ADF foods Ltd. (as per DRP order) Particulars Rs. In crores Net Sales 77.56 Less : Sales of Import License (adj. taken as per DRP order) 4.54 Adjusted sales 73.02 PBIT (before giving effect on unallocable expenditure) 9.11 Less : Proportionate unallocable expenditure 3.49 PBIT 5.62 Operating Expenses 67.4 PLI (OP/OE) 8.34% 15. The TPO accordingly made an adjustment of Rs. 1.14 cr in respect of the TP adjustment by computing the revised PLI which is as under : Revised calculation of PLI : 1. The revised PLI margin of ADF In view of DRP's claim Rs.8.34% 2. Operating cost of Rs.24.44 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 Resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d adjustments made by the learned Transfer Pricing Officer. 7.2 The Appellant pleads that the shortfall in advance tax has resulted in view of the adjustments which have been objected in the Grounds above and accordingly is consequential in nature. 7.3 The learned ACIT has erred on the facts and in law by levying interest under section 234C of the Act on 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 848/Mum/2009 order dated 30-04-2010 reported in 2010-TII-30-ITAT-MUM-TP he submitted that the Tribunal has held that appropriate adjustments are required in terms of capacity utilization of the comparable cases to eliminate such difference. 20. Referring to the following charts, the Ld. Counsel for the assessee submitted that the assessee will be entitled 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 Employee cost 4.20 Repairs and Maintenance - Plant & Machinery 0.19 Repairs and Maintenance - Building 0.06 Repairs a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20.93 F Adjusted Profit (A-E) 2.56 G PLI (OP/OC) of TBEL (F/E*100) 12.23% H PLI of comparable company - ADF Foods Limited 8.34% I Adjustment (G-H) NIL Capacity Utilisation adjustment on the TBEL : 1. Working for capacity utilization adjustment A. Capacity Utilization of ADF Foods Limited 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 Utilization of Taste 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) 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 Gross Profit 6.19 21.47 E Fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranes and Components (India) Pvt. Ltd. vide ITA No.120/PN/2011 order dated 04-01-2012 he submitted that the Tribunal in the said decision has held that the TP adjustments are to be computed not considering the entity level sale rather it should be done ideally considering the relatable sales. 24. The Ld. Counsel for the assessee drew the attention of the Bench to para 49 of the order of the Tribunal which reads as under : "49. All these cited decision in general and the decision in the case of M/s IL Jin Electronics I.P. Ltd, supra, in particular are uniform in asserting that the TP adjustments are to computed not considering the entity level sales. Rather it should be done ideally considering the relatable sales drawing the quantitative relationship to the imports from the AEs, i.e. controlled cost. The principle of proportionality is relevant here and it is a settled law in this regard. In the situation like the one in the instant case of the assessee, there is data relating to controlled and uncontrolled cost particulars. This undisputed data is suffice to arrive the proportionate sales relatable to the international transaction with the AEs i.e. controlled cost. Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o various charts filed by the assessee the Ld. Departmental Representative submitted that even the assessee also cannot accurately calculate the capacity under utilization. Further, margin does not depend on the capacity. In the assessee's own case as against capacity utilization of 13.49% in the preceding year the capacity utilization during 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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for inappropriate 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 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting 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 cogen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, in our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore 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 are to be compute ..... X X X X Extracts X X X X X X X X Extracts X X X X
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