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TMI Blog2022 (10) TMI 474X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) was issued. During the previous year relevant to the asst. year 2011- 12 several international transactions took place between the assessee and its AEs. On a reference being made by the AO to the TPO, the TPO passed an order dated 30.01.2015 determined TP adjustment of Rs.41,61,93,370/- in respect of the manufacturing segment and Rs. 1,86,11,578 towards interest. The TPO rectified the order u/s.154 by re-computing the TP adjustment of manufacturing segment to Rs.21,76,78,098/-. The TPO while arriving at the TP adjustment did not consider adjustments made by the assessee with respect to (i) Extraordinary expenses incurred in setting up new production line, (ii) Foreign exchange fluctuation, (iii) Customs Duty expenses and (iv) Under utilization of capacity. The TPO also made an adjustment towards interest. 3. The AO passed the draft order giving effect to the TP adjustment. Aggrieved, the assessee filed its objections before the DRP. DRP gave partial relief to the assessee. In respect of adjustment made towards interest paid and sustained the adjustment made towards manufacturing segment. The AO passed the final assessment order giving effect to the TP adjustment as per the dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, The appellant's operating profit margin ought to be re-computed considering the revised transfer pricing of international transactions as concluded pursuant to the resolution agreed between the Competent Authorities of India and Japan under the Mutual Agreement Procedure (MAP) and thereby the resultant downward revision in transfer pricing of international transactions amounting to INR 13,74,78,853 has to be reduced from the cost base while re-computing the operating profit margin of the Appellant. Alternatively the said amount could be added to the operating income of the Appellant as the same has been offered to tax in India pursuant to MAP resolution" 6. In the course of hearing the Ld AR submitted a paper book with additional evidence supporting its claim for adjustment towards underutilization of capacity, Foreign Exchange Fluctuation and Customs Duty (Ground 3, 4 and 5) . The ld.AR prayed for admission of additional evidences before the Tribunal as these evidences when considered would substantiate the claim of the assessee that the international transactions of the assessee are at arm's length. With regard to various TP adjustments, the additional evidences now produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the final assessment order considered directions of the DRP 9. Before us, the Ld.AR submitted that from harmonies reading of sub clause (iii) to clause (e) of Rule 10B and sub Rule (3) of 10B, it is evident that for comparable analysis of an international transaction with the uncontrolled transaction, reasonable and accurate adjustment is permitted to eliminate any difference which materially affects the price or costs or profit arising from such transaction in the open market. The Ld.AR also submitted that as a result of underutilization of capacity the assessee was unable to recoup the fixed cost incurred as compared to the comparable companies thereby affecting the profit margin of the assessee and, therefore, an adjustment to eliminate effect of the underutilized capacity is warranted. The Ld.AR further submitted that the assessee had furnished all the details available in the form of capacity utilization data of 27 comparables companies before the lower authorities and that if further details are required for determination of adjustment the AO ought to have exercised power u/s.133(6) to collate the details. 10. The ld.DR relied on the written submissions. 11. We heard the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td., Vs. ACIT (2019) 111 taxmann.com 247 (Bang Trib) has considered a similar issue and has held that the capacity utilization should be computed as weighted average of units produced with weights being the corresponding revenue achieved from each category of the products produced. The relevant extract of the decision is reproduced below- "7.3.1 We have considered the rival contentions and perused the material on record. It is a settled principle, upheld in the decisions of several Hon'ble Courts/Tribunals, that adjustment for under utilization of capacity can be granted; provided the under utilization of capacity viz-a-viz the comparable companies is established with evidence. In the case on hand, admittedly, the assessee has given the details of capacity utilization of the assessee and that of its comparable companies at Appendix-9 and 10 of its TP Study. The TPO has examined the same, in the course of proceedings referred to him under section 92CA of the Act and has apparently accepted the veracity of the members mentioned therein, as he has quoted from the above Charts/Appendix (supra). Since the TPO has himself accepted the figures/numbers stated in the Appendix-9 and 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Ground No. 6 on the basis of the adjudication of Ground No.6 and does not warrant a separate adjudication. Since we have remitted the issue of adjustment towards capacity underutilization back to the TPO/AO, accordingly we remit the issue of adjustment towards extraordinary expenses also to the files of TPO/AO for fresh consideration based on merits. The TPO/AO is directed accordingly after giving a proper opportunity of being heard to the assessee. Adjustment for foreign exchange fluctuations (Ground 4) 16. The next ground argued by the assessee is the adjustment for foreign exchange fluctuation not granted by the TPO. The assessee imports a considerable amount of raw material for undertaking the manufacturing operations in India in order to meet the stringent quality requirements. During the financial year 2010-1, 83.12% of the raw materials were imported by the assessee. The assessee enters into contract with its customers in India which is reviewed and revised year on year while negotiating the price. One of the aspects that is taken into consideration is the cost of materials to be imported from Japan for manufacture in India during the financial year 2009-10. When the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l submissions and perused the materials on record. We notice that the Delhi Bench of the Hon'ble Tribunal in the case of Honda Trading Corp. India Pvt. Ltd., vs ACIT (2013) 33 Taxmann.com 21 (Delhi Trib) has decided on the similar issue as under- 19. From the order of the DRP, we observe that the DRP considered the objection of the assessee related to rejection of Orbit Industries as a comparable and held that the assessee has not given any cogent reason for change in the new search process which was essential to have current year data and the filters applied earlier need to be applied now to maintain consistency in approach. The DRP further held that abnormal losses indicate that it was not a normal loss because financial analysis was triggered for FAR and this comparable fails at the very first step. In view of cogent reasons recorded by the TPO and DRP, we are unable to see any infirmity and perversity in these findings in rejection of Orbit Industry as a comparable. On the issue of adjustment of exchange fluctuation, loss incurred by the assessee, we observe that it is a well accepted principle of Transfer Pricing regulations to compare like with like and eliminate the differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference has to be removed and the margin has to be adjusted for arriving at the credible comparable. It is a well-accepted accounting principle that net margins can be influenced by some of same factors which can influence price or gross margins. It is the expectations and requirements of the rules/provisions that any difference which is likely to materially affect the net profit margin (NPM) in the open market has to be eliminated. The revenue authorities and TPO are duty bound to know that the TNMM visualizes the undertaking of a thorough comparability analysis and elimination of the differences through the requisite adjustments. 22. In the case in hand, admittedly, the average exchange rate of Thai Bhat during October, 2005 to March 2006 was 100 Thai Bhat equivalent to ITA No.5297/Del/2011 INR 110 and after consideration of said average exchange rate, price of sale of goods had to be agreed upon with the customers. The DR has not disputed the point that during April 2006 to September 2006 at the time of purchase, the exchange rate of Thai Bhat was substantially increased and the average exchange rate of Thai Bhatt was increased to 100 Thai Bhat = INR 119. Accordingly, we can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x fluctuations loss in the operating cost of the assessee and also forex gains in the operating income of assessee, both to be excluded from the operating expenses as well as operating income respectively in view of the Order of Tribunal in the case of Motonic India Automotive (P.) Ltd. (supra) in for assessment year 2009-10 vide order dated 17.08.2016 wherein held that:- "9. We find force in the argument of the ld. AR. It is normal that exchange rate is subject to fluctuation due to economic conditions. While determining the ALP, one has to consider these factors, more so, our view is fortified by the decision of the Tribunal in the cases of Honda Trading Corp. India Pvt. Ltd. v. ACIT in ITA No.5297/Del/2011 for the assessment year 2007-08 and DHL Express (India) Pvt. Ltd. v. ACIT in ITA No.7360/Mum/2010 for the assessment year 2006-07. Accordingly, we direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment." Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment. In principle the customs duty adjustments is allowed in view of the Co-ordinate Bench decision in the case of Motonic India Automotive (P.) Ltd. v. Asstt. CIT [2016] 73 taxmann.com 235 (Chennai - Trib.) wherein held that: '6.1 At this stage, it is pertinent to mention the finding of the Pune Bench in the case of Demag Cranes & Components (India) Pvt. Ltd. v. DCIT (supra) dated 4.1.2012 in ITA No.120/PN/2011, which is as follows : "37. We have heard the parties and perused the available material on records in the light of the second limb of the ground 4(b). It is relevant mentioned that we have already analysed the relevant provisions of Income Tax rules vis a vis the scope of the adjustments in the preceding paragraphs in the context of the adjustments on account of the 'working capital'. In principles, our findings on the issue remain applicable to the adjustments on account of the import cost mentioned in ground 4(b) too. The difference between the AL Margin before and after the said adjustments on account of 'import cost' works out to 0.57% (7.18%-6.61%). Revenue has not disputed the said working of the assessee. In these factual circumstances and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ublic domain. In such a situation, i.e. when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of assessee's operations and complete facilities ensuring a reasonable indigenous raw material content was not in place. The assessee's claim is that it was in these circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Coordinate Bench and we are in respectful agreement with the views of our esteemed coll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised, before us we are convinced that its adjudication does not require any fresh investigation of facts and involves substantial question of law. Respectfully following the judgment of the Hon'ble Supreme Court in the case of National Thermal Power Company Ltd. Vs. CIT [(1998) 229 ITR 383 (SC)] we admit this additional ground for disposal on merits. Additional Ground 30. During the year under consideration, the assessee entered into international transactions with its AEs situated in Japan and in countries other than Japan. The TPO determined an aggregate adjustment of Rs.21,76,78,098 in respect of the entire international transaction of the assessee. In the meantime, the assessee applied for MAP with Japan to eliminate the impact of double taxation and a resolution was arrived at by the Competent Authorities of India and Japan. Under the resolution out of the total adjustment the amount of Rs.14,54,87,775 which was the adjustment in respect of the transaction with the AEs in Japan, stood reduced to Rs.13,74,78,853 granting a relief of Rs.80,08,922. Now through additional ground the assessing is praying that the segmental margin of the assessee needs to be recomputed taking in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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