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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 ..... , CIT(DR-I), ITAT, Bangalore ORDER This is an appeal by the Assessee against the order dated 30.7.2008 passed by the CIT(Appeals)-IV, Bangalore, in relation to assessment year 2003-04. 2. Originally this appeal was dismissed by the Tribunal for the reason that there was a delay in filing appeal before the Tribunal and there was no reasonable or sufficient cause for such delay. This order of the Tribunal was set aside by the Hon ble Karnataka High Court in its order dated 2.7.2018 in ITA 197/2017 and the Tribunal was directed by the said order to decide the appeal on merits. 3. There are basically two issues that need to be adjudicated in this appeal. This first issue is with regard to Arm s Length Price (ALP) in respect of an international transaction entered into between 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 ₹ 33,14,764/- which was claimed as revenue expenditure in the profit and loss account. The sum was capital assets (tools) costing less than ₹ 50,000/- each which was written off in the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Depreciation 2,27,07,331 10,11,63,211 Loss 5,13,63,842 Other income 1,36,925 Total loss 5,12,26,917 6. The TPO issued a show cause notice dt. 07/03/2006 to the tax payer company calling for the tax payer _company's explanation as to why the arms length price of the international transactions should not be recomputed by adopting the average mean of the margins of the comparables. 7. The Assessee in its TP Study has justified the price received in the international transaction by comparing the gross margins of 5 comparable companies with Assessee s margin on net sales and claimed that the price received was at Arms Length as follows:- 8.4.4 Margins The gross margins of comparable companies are: Sl. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osen 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 above submissions do not contain all the direct costs and therefore, the same is re-computed taking into account all direct costs as appearing in P L a/c and schedules thereto. Sales 4,97,73,189 Less : Manufacturing expenses Material cost 2,89,98,985 Salaries waves other allowances 5,3,01,704 Power, fuel, etc 64,27,244 Stores packing material 21,93,504 Rates taxes 6,428 Repairs Maintenance of Machinery 1,31,06,810 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 the present issue in dispute hence, these paras are reproduced herein below for the sake of ready reference; 9.3. Sub-rule (2) of Rule 10B provides that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opt 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 understanding, we feel that under the TNMM, the first step in granting capacity utilization adjustment is to ascertain the percentage of capacity utilization by the assessee and comparables. There can be no difficulty in working out these percentages. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 ₹ 50 (₹ 100 into 25/50) as against the actually incurred fixed cost by it at ₹ 100. When we compute operating profit of B by substituting the fixed costs at ₹ 50 with the actually incurred at ₹ 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 adjustment as per the guidelines given by the Tribunal in the case of DCIT Vs Class India Pvt.Ltd., (Supra). It is ordered accordingly. 12. The said directions were again approved in As ..... 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