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TMI Blog2023 (7) TMI 170X X X X Extracts X X X X X X X X Extracts X X X X ..... respect to toll manufacturing charges on the ground that these charges were paid as extra-ordinary costs. Regarding excess power and electricity expenses, the TPO observed that the assessee in its calculation has not provided a bifurcation of power expenses into fixed and variable costs for the earlier year as well as year under consideration - DRP has not erred in facts and in law in not granting adjustment towards repairs and maintenance and excess power, electricity and store expenses. TPO not following the DRP direction for allowing tolling expenses while computing adjusted NCP mark up earned by the assessee - Hon ble DRP has agreed with the contention of the assessee that toll manufacturing charges were paid as extra-ordinary cost and had given a categorical direction to the TPO to exclude this expenditure from operating cost for the purpose of benchmarking - despite the same, no relief has been granted to the assessee in the final assessment order. We direct that toll manufacturing charges be excluded from operating costs for the purpose of benchmarking, as per directions of Hon ble DRP. TP adjustment to international transaction - whether the transfer pricing adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIAL MEMBER:- This is an appeal filed by the assessee against the order of the ld. Dy. Commissioner of Income Tax, Circle-1(1)(1) Vadodara, in proceeding u/s. 143(3) r.w.s. 144C(13) vide order dated 23/02/2015 passed for the assessment year 2009-10. 2. The assessee has taken the following grounds of appeal:- Ground No. 1: Addition on account of Transfer Pricing 1.1 The learned AO/Transfer Pricing Officer ('TPO')/DRP erred in upholding the transfer pricing adjustment to the extent of Rs. 38,41,90,287 in determination of Arm's Length Price ('ALP') by failing to consider the facts of the case, including the submissions made by the Appellant and the evidences produced with reference to the transactions reported in Form No. 3CEB filed by the Appellant. GROUND NO. 2: Capacity utilization and extraordinary expenses adjustment 2.1 The learned AO/DRP erred in not appreciating the adjustment carried out by the Appellant for unutilized capacity of Appellant vis-avis comparable companies. 2.2 The learned AO/DRP erred in holding that the capacity utilization adjustment has to be carried out on the margin of the comparable companies instea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g activity only and trading sales do not have any impact on the capacity utilization, while computing the NCP mark-up earned by Metropolitan Eximchem Limited. GROUND NO. 5: Restricting transfer pricing adjustment to international transaction 5.1 The learned AO/TPO and/or the DRP erred in not restricting the transfer pricing adjustment to the value of international transactions with associated enterprises. GROUND NO. 6: Multiple year data vs. current year data 6.1 The AO/TPO/DRP failed to appreciate the contention of the Appellant with respect to the use of relevant year data as against use of multiple year data for benchmarking the international transaction of the Appellant. GROUND NO. 7: Disallowance of contribution to gratuity fund 7.1 The learned AO erred by disallowing contribution of Rs. 11,04,588/- made by the appellant to Baroda Textile Effects Private Limited Employees Gratuity Assurance Scheme . GROUND NO. 8: General 8.1 The learned AO erred in initiating Penalty Proceeding u/s 271(l)(c) read with Explanation 7 of the Act. 8.2 The Appellant craves leave to add, alter, amend and/or substitute all or any of the foregoing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re consumption and excess electricity consumption, the DRP held that in view the fact that since it had already allowed capacity utilization adjustment, no further adjustment on account of extra-ordinary costs may be further allowed. While passing the order the Hon ble DRP observed as under:- 8. We have considered the fuels of the case. We fine! that the TPO ignored some of very relevant lads regarding the assessee such as this was the first year of operations by the assessee company after change in the management, one of its plant remained non operational throughout the year and (he assessee's capacity utilization was as low as 58% only. We find it strange that the TPO has rejected many comparables for having a change in the management or in the production process during the year or for having a failed product. But similar facts in the assessee's own case were not considered significant. Considering the various case laws cited by the assessee and as per the TP provisions capacity utilization is required in the assessee's case, The TPO's view that if an accurate .adjustment is not possible, the claim should be rejected in totality is not a reasonable interpreta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra-ordinary expenses incurred by the assessee, for which a separate adjustment needs to be granted. The counsel for the assessee drew our attention to page 302 and pages 673-675 and 738 of the paper book and requested that adjustment on account of the above expenses may kindly be granted to the assessee. 11. In response, the ld. Departmental Representative relied on the observations made by the DRP in its order. 12. We have heard the rival contentions and perused the material on record. The primary argument of the counsel for the assessee is that when the plant was shut down due to change in management, even though the assessee did not have to bear variable expenses, it was under obligation to incur fixed cost to maintain these plants. These costs included repair and maintenance expenses since pursuant to acquisition of BTE by Huntsman Group, the assessee had to undertake huge repairs and maintenance expenses for rendering the plants functional. Further, the assessee had to bear power and electricity expenses to maintain the plants so that they would be in working conditions once the same would be operative. We observe that the Hon ble DRP has been reasonable in its approach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lief has been granted to the assessee in the final assessment order. It would be pertinent to reproduce relevant extracts of the directions given by the Hon ble DRP for reference. 10 As regard the toll manufacturing charges we agree with the assessee that the charges were being paid as extra ordinary cost. None of the comparable had such an overriding agreement to its disadvantage. We direct the TPO to exclude this expenditure from operating cost for the purpose of benchmarking. 18. In view of the categorical directions made by the Hon ble DRP, we direct that toll manufacturing charges be excluded from operating costs for the purpose of benchmarking, as per directions of Hon ble DRP 19. In the result, ground no. 3.1 of assessee s appeal is allowed. 20. Ground Nos. 3.2 and 4 of assessee s appeal 21. Before us, the counsel for the assessee submitted that ground no. 3.2 of the assessee s appeal (the ld. A.O./TPO erred in not following direction of DRP while classifying various expenses as fixed or comparable in allowing the capacity utilization adjustment calculation of the comparable companies) and ground no. 4.1, 4.2 and 4.4 are similar and the ld. A.O./TPO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bay) , the Bombay High Court held that adjustment to be done to arrive at arm's length price is only in respect of transaction with its associated enterprises. In the case of KHS Machinery (P.) Ltd. [2023] 151 taxmann.com 122 (Ahmedabad - Trib.), the Ahmedabad ITAT held that adjustment of PLI of comparables ought to be made at transaction level and not entity level. In the case of Kemrock Industries Exports Ltd [2022] 141 taxmann.com 130 (Ahmedabad - Trib.), the Ahmedabad ITAT held that transfer pricing adjustment should be restricted only in respect of turnover of assessee-company relating to international transactions, sale of resins to its associated enterprises, and same should not be done in relation to all transactions. In the case of Bekaert Industries (P.) Ltd. [2022] 136 taxmann.com 355 (Pune - Trib.), the Pune ITAT held that Transfer pricing addition should be restricted only qua international transaction and not entity level transactions. 26. In view of the judicial precedents highlighted above, ground no. 5 of assessee s appeal is allowed. 27. The counsel for the assessee submitted that we shall not be pressing ground no. 6 of assessee s appeal and ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From a bare reading of Section 36(1)(v) of the Act, it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees. In the instant case, it is evident from the findings recorded by the Commissioner and affirmed by the Tribunal that the assessee had absolutely no control over the fund created by the LIC for the benefit of the employees of the assessee and further all the contribution made by the assessee in the said fund ultimately came back to the Textool Employees Gratuity Fund, approved by the Commissioner with effect from the following previous year. Thus, the conditions stipulated in Section 36(1)(v) of the Act were satisfied. Having regard to the facts found by the Commissioner and affirmed by the Tribunal, no fault can be found with the opinion expressed by the High Court, warranting our interference. In the case of Gujarat State Co-op. Marketing Federation Ltd. [2021] 129 taxmann.com 53 (Ahmedabad - Trib.), the Ahmedabad ITAT held that where AO disallowed deduction under section 36(1)(v) to assessee company on account of payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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