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TMI Blog2019 (10) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee and its Associated Enterprise (AE) under the provisions of Sec.92 of the Income Tax Act, 1961 (Act). The second issue is with regard to disallowance of a sum of Rs. 33,14,764/- which was claimed as revenue expenditure in the profit and loss account. The sum was capital assets (tools) costing less than Rs. 50,000/- each which was written off in the profit and loss account and claimed as revenue expenditure. The Assessee had before the AO also made a claim in its letter dated 2.11.2005 that in the event of the expenditure being treated as capital expenditure then the Assessee should be allowed depreciation. This alternative claim was not allowed by the AO. In this appeal, the Assessee has prayed only for the alternative relief. The second issue can therefore be decided by directing the AO to allow depreciation, which is to be allowed to an Assessee as a consequence, despite a claim for such depreciation not having been made specifically, as laid down in the decision of Mahendra Mills Ltd., 99 ITR 135 (SC). Thus we allow the alternative prayer of the Assessee for allowing depreciation. 4. As far as the first issue of determination of ALP is concerned, the facts are that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appendix 5 8.5 OECD Guidelines 8.5.1 Associated Enterprises, like any other independent, can sustain genuine losses, whether due to heavy start-up costs (emphasis supplied), unfavourable economic conditions, inefficiencies (emphasis supplied) or other legitimate business reasons. MITPL being a start up company and has realised loss due to inefficiencies in production utilisation. In this regard reliance is placed on the OECD guidelines (para 1.52) in this regard. 8.6 Margin of MITPL: The margins of MITPL as a percentage of net sales are as below: Particulars Rupees Manufacturing Revenue 49,773,188 Adjusted Cost of Production 41,959,834 MARGIN 7,813,354 MARGIN/ COST (%) 18.62 The margins of comparable companies are in the range of 13.75 to 30.22%. The arithmetic mean of the net margins of the comparable companies is at 23.26 % (excluding the loss making companies). 8. The TPO however computed ALP by taking the gross margin of the Assessee and comparing it with the gross margin of the comparable companies chosen by the Assessee in its TP study, as follows:- "3.0 I have carefully considered the above submissions. I find that the gross margins computed in the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown in the P&L account was the depreciation which in the case of tax payer was about 20% of the total cost against an average of 3.5% in the case of comparables. Thereafter, it is noted by the DRP that neutralize this difference the TPO has considered PBDIT as PLI by following the Tribunal order in the case of Sechefenacker Motherson Ltd., Vs ITO(2009- TIOL-376-ITAT-Delhi. It is further noted by the DRP in the same para with regard to the claim of assessee for other costs such as employee cost, repair and maintenance cost, office supplies, filing fee etc., It has been observed by the TPO that these cases are slightly higher than the comparables in the ratio of about 7 to 6 but just because the costs were higher, adjustment could not be considered. In the light of these facts, now we consider the applicability of various judgments cited by the ld. AR of the assessee on this issue. First judgment cited is the Tribunal order rendered in the case of CIT Vs Class India Pvt.Ltd., in ITA No.1783/Del/2011 dated 12-08¬2015. Copy available on pages 701 -726 of the paper book, para no.9.3 to 10.2 of this Tribunal order available on pages 714 to 720 of the paper book are relevant for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating costs of the comparable and their resultant operating profit. There is hardly need to accentuate that there can be no estoppel against the law. Once the law enjoins for doing a particular thing in a particular manner alone, it is not open to anyone to adopt a contrary or different approach. As the authorities below have adopted a course of action in allowing adjustment, which is not in consonance with law, we cannot approve the same. The impugned order is set aside and the matter is restored to the file of the TPO/AO for giving effect to the amount of idle capacity adjustment in the operating profit of the comparables and not the assessee. ii. How to compute capacity utilization adjustment under TNMM : - 10.1. Under the TNMM, the ALP of an international transaction is determined by computing and comparing the percentage of operating profit margin realized by the assessee with that of the comparables. We have noticed above that the difference in the capacity utilizations is an important factor, which needs to be adjusted. No mechanism has been given under the Act or the rules for computing the amount of capacity utilization adjustment. 10.2. On an overall understandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity utilization of 25% as against the capacity utilization of 50% by the assessee. The above percentages show that the assessee has incurred full fixed costs at 50% of the utilization of its capacity, as against B incurring full fixed costs at 25% of the capacity utilization. This deciphers that the assessee has incurred relatively lower fixed costs and B has incurred higher costs. This difference in capacity utilizations can be eliminated by proportionately scaling down the fixed costs incurred by B so as to make it fully comparable. This we can do by reducing the fixed costs of B to Rs. 50 (Rs. 100 into 25/50) as against the actually incurred fixed cost by it at Rs. 100. When we compute operating profit of B by substituting the fixed costs at Rs. 50 with the actually incurred at Rs. 100, it would mean that the fixed costs incurred by the assessee and B are at the same capacity utilization level. From the above paras of the Tribunal order, it is seen that the Tribunal has given a detailed guidelines as to how to make or grant capacity utilization adjustment. Hence, we feel it proper that this matter also should go back to the file of the AO/TPO for granting capacity utilization ..... X X X X Extracts X X X X X X X X Extracts X X X X
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