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TMI Blog2018 (11) TMI 481X X X X Extracts X X X X X X X X Extracts X X X X ..... arables by issue of notice under Section 133(6). While carrying out this exercise the TPO shall also examine the ‘unit’ in which such capacity utilization is to be measured. The TPO shall also examine the capacity utilization of the assessee company and will ensure that the capacity utilization of the assessee company i.e. the tested party and that of the comparables is on the same parameters which will include assets turnover ratio. After carrying out such exercise the TPO shall compute appropriate adjustment, if any, on account of capacity utilization. The TPO shall share the details so obtained with the assessee and decide the issue afresh after giving adequate opportunity to the assessee. Allowing the benefit of (+/-) 5% in terms of proviso to Section 92C(2)- Held that:- This ground is consequential to ground above. Since we have restored the issue of adjustment on account of arm’s length price to the TPO, this issue of allowing benefit of +/- 5% will be considered appropriately by the TPO as per the proviso to Section 92C(2) of the Act while computing the adjustment if any required to be made on account of arm’s length price. Additional depreciation under Section 32(1)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following grounds: 1.1. By alleging that the losses incurred by the Appellant were due to the international transactions and disregarding the fact that the Appellant's capacity utilization was very low vis-a-vis the capacity utilization of the comparable companies. 1.2. By summarily disregarding the economic adjustment claimed by the Appellant for analysis under the Transactional Net Margin Method and giving erroneous reasons for rejecting the adjustment claimed by the Appellant. The Ld. DRP/ Ld. TPO have failed to appreciate the use of 'Asset Turnover Ratio' as a substitute or proxy for capacity utilization adjustment. Further, the Ld. DRP/Ld. TPO have also erred on facts and on circumstances of the case by misconstruing the approach followed by the Appellant and by placing reliance on erroneous presumptions/ hypothesis. 1.3. By erroneously concluding that the requisite information for carrying out adjustment on account of high establishment cost and low utilisation of capacity is not available in public domain with respect to the comparables and further erred in concluding that such information is also not available in respect of the Appellant. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.28 4 Royalty payment TNMM 4.04 5 Global Sourcing TNMM 0.45 6 Design Centre TNMM 0.57 7 Reimbursement of expense TNMM 0.09 8 Sale of fixed assets TNMM 0.34 Total 27.49 The assessee benchmarked above transactions using TNMM taking operating profit upon sales (OP/Sales) as the Profit Level Indicator (PLI). The assessee on account of the underutilization adjusted the TNMM by using assets turnover ratio (ATR) on the reasoning that a higher fixed-asset turnover ratio shows that the company has been moved effective in using the investment in fixed assets to generate revenues. After adjustment on account of ATR, adjusted Net Profit Margin of comparable was worked out -20.29% as against that of assessee -3.93%. He, therefore, proposed no adjustment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of international transactions. The assessee incurred a loss of 3.93% at net level and the reason for the same was stated to be low capacity utilization and high establishment cost of the assessee company vis- -vis the comparable company. The assessee for capacity utilization made adjustment to the comparables and after making adjustment to capacity utilization by using assets turnover ratio worked out the arithmetic mean of a comparable (20.29%). The TPO however rejected the computation done by the assessee of the capacity utilization by using assets turnover ratio. The TPO also referred to the Rule 10B(3) and the balance sheet of the assessee company to demonstrate that it has utilized 98.2 % of its installed capacity during the year and hence not eligible for any further adjustment on account of capacity utilization. The TPO was of the view that though the Indian Transfer Pricing Rules allows capacity adjustment but there is no guidance on comparability adjustment in the Rules. What constitute a reasonably accurate adjustment as well as how to perform these adjustment are not provided in the Rules. The TPO was of the view that the assessee has not furnished reasonably accurate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different units. The assessee has also given the figures of the Elecon Engineering Ltd. to demonstrate that capacity utilization as a whole for the entity cannot be accurately calculated as under: Company Name Product / Raw Material name Capacity (All Units) Produciton (All Units) Capacity Unit (Unitcap) Elecon Engineering Co. Ltd. Axels 1500 38 Numbers Conveying Equipments 15000 1004 Tonnes Crushers, Screens Feeders 1000 352 Tonnes Reduction Gears 55 35.14 000 nos Specialized Convey. Equip., Blender Reclaimers Etc. 3000 1055 Tonnes Wagon Marshalling Equipments 300 93 Tonnes Wagon Tippler Equipment 16 16 Set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over ratio is the accepted method of making adjustment on account of capacity utilization. As regards the reliance placed by the assessee on the judgment of IKA India Pvt. Ltd. (Supra) the Ld. DR submitted that it is primarily the duty of the assessee to maintain documentation and satisfy the TPO. The Ld. DR submitted that assessee has not tried to provide capacity utilization of comparables rather it has come up with a new concept of applying ATR for capacity utilization. The TPO has examined the contention of the assessee and was of the view that in all the cases the adjustment of net profit margin of comparable will be downward and in fact in some cases it has gone in the negative from the positive. And therefore, he has rightly rejected this method. He further submitted that the contention of the assessee that it has incurred huge expenditure on setting up of new production facility is to be seen with reference to the claim of depreciation which is only 1.74 crore. He further submitted that the assessee having failed to produce the reliable data and documentation, the TPO was right in refusing to allow any adjustment. The onus is upon the assessee to produce sufficient document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted the adjustment to the net profit margin of a comparable on the ground that adjustment was downward, we are of the view that it doesn t matter whether the adjustment is upward or downward. In case, facts are so that downward adjustment is to be made and as a result of which the net profit margin of comparable get converted from positive to negative the same has to be considered. Merely because consequent to such adjustment downward adjustment is required and such adjustment cannot be rejected. The adjustment can be rejected only on its merit after consideration of facts and not on the ground that it will lead to downward adjustment. In fact, it is the case of the assessee that downward adjustment is required in the facts of the case. As regards the documentation required for considering such adjustment, we are not in agreement with the contention of the Ld. DR that assessee is required to produce even that data which is not in public domain. The assessee cannot be asked to do what is not possible for him. On the contrary, the TPO being an adjudicating officer has to carry out the exercise and wherever required to use its power collect information which will help in correct d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble in the public domain, the AO/TPO is directed to obtain the same directly from the concerned parties and to decide this issue afresh after giving assessee an opportunity of being heard. (Emphasis Supplied) 35. Accordingly, we direct the TPO to exercise powers under section 133(6) of the Act to call for information on capacity utilization of the comparable companies such as - Installed Capacity, Actual Production in Units, Break-up of Fixed Cost and Variable Cost; Segmental/ product wise information, if any. 36. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obtained, and accordingly, grant the adjustment for capacity under-utilized. Ground No.7 is decided accordingly. 13. In view of the above, we set aside this issue to the TPO and direct the TPO to examine the data placed by the assessee before it. The TPO shall also call for the information from the comparables by issue of notice under Section 133(6). While carrying out this exercise the TPO shall also examine the unit in which such capacity utilization is to be measured. The TPO shall also examine the capacity utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged in manufacturing of earth moving and construction equipments. It has submitted the complete details of the machineries purchased during the year. So there is no dispute about acquisition and installation of such machineries as normal depreciation on the same has been allowed by the AO. The only dispute is whether such machinery and equipment will fall within the meaning of plant and machineries on the reasoning given by the AO and the DRP. The Ld. AR placed reliance on the judgment of the Calcutta High Court in the case of CIT vs. Technico Enterprises Pvt. Ltd. 206 ITR 36 and Gujarat High Court in the case of CIT vs. Elecon Engineering Co. Ltd. 96 ITR 672 in support of its contention. 18. The Ld. DR, on the other hand, submitted that assessee is not eligible for claim of additional depreciation. It was submitted that the AO has not disallowed the additional depreciation only on the ground of small plant but also that these assets are not used for manufacturing of article or thing. The Ld. DR invited attention to the finding of the TPO at Para 2 Page 2 whereby it has been stated that assessee is engaged in the business of assembly, marketing and servicing of products and comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits and gains of business or profession of any one previous year; 20. As per the above Section, an assessee is entitled to additional depreciation on new plant and machinery which has been acquired and installed by an assessee engaged in the business of manufacture or production of any article or thing. Thus, to be eligible for additional depreciation, the assessee has to demonstrate that it is engaged in the business of manufacture or production of any article or thing. Further, it has to demonstrate that it has acquired and installed new machinery and plant during the year. The first issue which has been raised by the Ld. DR is that assessee is not engaged in the business of manufacture or production of any article or thing. For this, he has relied upon the observation of the TPO in its order that the assessee is engaged in the business of assembly, marketing and servicing of products and components manufactured in India. However, ongoing through the annual report of the assessee, we note that assessee is engaged in manufacturing of construction equipments. In fact, the arguments advanced on the issue of adjustment on account of arm s length price are all with reference t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. Way back in the year 1974 the Gujarat High Court in the case of CIT vs. Elecon Engineering Co. Ltd. 96 ITR 672 had occasion to consider meaning of plant and held that the word plant is a word of wide import and in the context of Section 32 must be broadly construed and it included any article or object fixed or movable, live or dead, used by a businessman for carrying on his business. Similarly Calcutta High Court in the case of CIT vs. Technico Enterprises Ltd. 206 ITR 36 has explained the meaning of the plant. In the light of the interpretation of the meaning of the plant in above judgment and the case of the assessee from the items stated hereinabove, it cannot be said that these items will not fall within the meaning of plant. Once the items fall within the meaning of the plant, there cannot be a further category to exclude certain items on the ground that these are routine addition or these are small items. The language of the Section 32(1)(iia) does not make any distinction about routine additions of plant or small additions so as to exclude these items for the purpose of additional depreciation. It may be relevant to point out that the legislature by putting a proviso to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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