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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 ..... Delhi ("the DRP") has erred both in law and on facts by summarily rejecting the Appellant's objections to the draft order dated December 29, 2010 passed by the Ld. AO under section 143(3) read with section 144C(1) of the Act. The Hon'ble DRP while issuing directions under section 144C(5) of the Act did not consider the facts and merits of Appellant's objections to the proposed adjustments, and merely relied on the reasoning given by the Additional Commissioner of Income-tax, Transfer Pricing Officer - II (3) vide order under section 92CA(3) of the Act dated October 15, 2010 ("TP Order"). On the facts and in the circumstances of the case, the Ld. TPO and the Ld. AO have erred in proposing and the Hon'ble DRP has further erred in confirming the transfer pricing adjustment of Rs. 40,556,951 without due application of mind and without affording a reasonable opportunity of being heard in the matter to the Appellant on the 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and without prejudice to one and another. The Appellant craves leave to supplement, to cancel, amend, add and/or otherwise alter/modify any or all the grounds of the appeal stated hereinabove." 2. The brief facts of the case are that the assessee is engaged in the business of manufacturing of earth moving and construction equipments. During the year the assessee has undertaken following international transactions:- S.No. Nature of Transaction Method used by assessee Amount (in crores) 1 Purchase of raw material and components and spare parts TNMM 20.38 2 Purchase of spare parts TNMM 1.30 3 Sale of finished goods TNMM 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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-à-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 accur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 Sets On this basis, the Ld. AR contended that the rejection of the assets turnover ratio for making adjustment has been wrongly rejected by the TPO. It was also submitted that similar adjustment was allowed by TPO using assets turnover ratio in the preceding year. For this, the Ld. AR invited attention to the order passed by the TPO for the preceding year placed at paper book page 249-252. 9. The Ld. AR also placed reliance on the judgment of ITAT Delhi in the case of Lumax Industries Ltd. 2013(8) TMI 669 in support of adjustment by using assets tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 documentation. Thus, the Ld. DR submitted that the order passed by the TPO be confirmed. 12. We have considered the rival submissions and gone through the facts. The issue here is that of adjustment on account of capacity utilization. According to the assessee, there is a difference in the working of the assessee i.e. tested party and the comparables. During the course of the proceedings before the TPO the assessee has submitted the necessary details as is evident from the Paper Book pages 91 to 126. The assessee has picked up each one of the comparables and demonstrated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts 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 determination of arm's length price. In such situation, the TPO can always call for the information to collect the information from the comparables. Our this view gets support from the judgment of the Bangalore 13 Bench of ITAT in the case of IKA India Pvt. Ltd. (Supra) where the ITAT has held as under: 33. The assessee has under-utilized capacity during the subject AY and is accordingly factually and legally eligible to an adjustment for the same. Therefore, such a benefit cannot be denied to the assessee only for the reason that the data about comparable companies is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. Accordingly, grounds Nos. 1.1 to 1.3 are allowed for statistical purposes. 14. Ground no. 1.4 is not pressed and is dismissed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 components manufactured in India. In support of its contention that the assessee is in the business of assembly of products and services of components produced in India. The assessee cannot be said to be in the business of manufacturing and hence not eligible for additional depreciation. 19. We have perused the orders passed by the lower authorities and also the Paper Book filed by the assessee and we note that the issue here is regarding interpretation of Section 32(1)(iia) of the Act which reads as under: "32(1)(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 to actual production where the TPO himself has referred to actual production number being 982 as against installed capacity of 1000 nos. As per the annual report, the assessee has got plant and machinery at gross value of Rs. 10,34,89,552/-. It has incurred manufacturing expenses of Rs. 2,14,26,332/- which include direct labor expenses and power and fuel expenses as well. It is liable to pay 19 excise duty as per the annual accounts. The comparables used for determination of arm's length price stated on page 12 and 13 of the TPO's order are all companies which are engaged in manufacturing and production. Thus, the contention of the Ld. DR on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this section itself has excluded following items from the benefit of additional depreciation: "Provided further that no deduction shall be allowed in respect of- (A) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (B) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or (C) any office appliances or road transport vehicles; or (D) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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