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TMI Blog2021 (12) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... account of underutilized capacity. Not allowing working capital adjustment has been rejected by the DRP but the DRP has given the direction to the TPO / AO to take the margins of the comparables by considering finance cost as non-operating in nature - The directions of the DRP cannot be regarded as substitute for not granting working capital adjustment and therefore we direct the AO / TPO to allow working capital adjustment. Whether transaction of payment of royalty can be aggregated with the international transaction of manufacturing activity also requires afresh look in the light of the submissions made by the learned Counsel for the assessee that the royalty payment as to whether it is linked with the trading segment also has not been verified. Comparables adopted by the assessee in the TP study, it is seen that the DRP has not properly analysed the submissions of the assessee. The 7 comparable companies also are engaged in manufacturing of plastic goods. The DRP has made observation that the assessee is engaged in manufacturing of plastic closures, caps, etc., and therefore the 7 companies are not functionally comparables. There seems to be a contradiction in the order of the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade a reference u/s.92CA of the Act, however recomputed the PLI and arrived at OP/OC margin of -36.83%. The computation of margins by the TPO was as follows: Particulars Manufacturing Revenue 94,483,840 Expenses 185,534,395 Less: Finance Cost 11,789,987 Less: Loss on sale of fixed assets (net) 21,628 Less: Exchange Loss (Net) 24,137,170 Operating cost 149,585,610* Operating Profit (55,101,770) OP/OC -36.83% OP/Sales -58.32% The computation of margins by the Assessee was as follows: Manufacturing segment financials (unadjusted and adjusted) Particulars Amount (in INR) Manufacturing (unadjusted) Amount (in INR) Adjustments Amount (in INR) Manufacturing (adjusted) Income from Export of Services- Net of Duty (A) 9,33,01,020 - 9,33,01,020 Other Operating Income - Sale :::f Scrap (B) 11,82,820 - 11,82,820 Operating Income (C =A+B) 9,44,83,840 - 9,44,83,840 Cost of materials (D) 59,312,451 - 59,312,451 Changes in inventories of finished goods, work- in-progress and stock in trade (E) (9,159,394) - (9,159,394) Operating and other expenses (F) 6,3815,142 37,211,952 26,603,190 Depreciation (G) 28,660,199 18,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Comparable Functional Profile 1. Deccan Polypacks The Company is involved in the manufacturing of HDPE/PP Woven sacks/fabric, film covers, HMHDPE /LDPE bags, which is alternate packing medium in comparison with jute or 2 Gujarat Raffia Inds The company is mainly engaged in manufacturing of P.E.Tarpaulin, H.D.P.E/P.P Woven sacks & other fabrics. 3 Raj packaging Inds Ltd The Company is involved in the manufacturing and exporting of multilayer co-extruded plastic film and 1 flexible packaging material. 4 Duropack Ltd The company is involved in the manufacture of plastic packaging products. 5 Pearl Polymers Ltd The Company is involved in the manufacturing of PET bottles, jars and -containers. The Company manufactures technologically advanced packaging materials for special applications in food products, beverages, Pharmaceuticals and allied sectors. 6 Kanpur Plastipack The company is involved in the manufacture of plastic packaging goods. 7 Well Pack papers and contains Ltd The company is involved in the manufacture of laminated sheets, and paper. Having considered the submissions, it is noticed by us that the assessee is engaged in the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as non-operating in nature. The objection is disposed accordingly." 9. With regard to capacity utilization adjustment not having been the Assessee gave the following details of its capacity utilization: Financial Year Sales unit ('000) [A] Actual Capacity ('000) [B] Percentage of Capacity utilization [A/B] 2011-12 2,10,934 5,76,216 37% The assessee, in addition to the other decisions of the Tribunals, relied on the decision of the Hon'ble Delhi ITAT Bench, in the case of Haworth India Private Limited (ITA No. 5341/De1/2010). 10. The DRP did not agree with the submission of the Assessee and the DRP held that the assessee is merely contending that the capacity utilisation during the assessment year is 37%, without producing any details with regard to the fixed cost in respect of such adjustment needs to be given and also furnishing evidences to justify that such under-utilisation is not there in the case of the comparables. Accordingly, the above objection was rejected. 11. The assessee was using technology of the AE for its manufacturing operations for which it paid royalty to the AE. While computing ALP, the assessee aggregated the transaction of receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r than the purchase of fixed assets and royalty (evaluated separately). The Explanation to section 92(1) provides that the allowance for an expense arising from an international transaction shall also be determined having regard to arm's length price. Now the question arises as to whether the adjustment can be more than the expenses incurred, by way of international transactions. In our view, it cannot be done. At the most, the adjustment can be made to the extent of the cost debited in the P & L account with regard to international transactions. Accordingly, we direct the Assessing Officer to restrict the adjustment in the manufacturing segment to the extent of ₹ 1,19,18,712/- (other than royalty), if on giving effect to our directions, in the preceding paragraphs, such adjustment under TNMM for the manufacturing segment works out to more than the said amount." 13. Aggrieved by the direction of the DRP, the assessee is in appeal before the Tribunal raising various grounds of appeal. After hearing the rival submissions, what we notice is that the proceedings before the DRP there was only 1 hearing. The main grievance is the non-granting of the adjustment with regard to u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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