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TMI Blog2019 (4) TMI 2110X X X X Extracts X X X X X X X X Extracts X X X X ..... g capacities of your appellant and the resulting idle costs - HELD THAT:- As relying on assessee own case for ay 2009-10 directed the A.O./TPO/A.O. to consider the claim of the assessee for the purpose of giving adjustment on account of low capacity utilization. We make it clear that the adjustment is only on account of cost attributable to idle capacity for the year under consideration. Accordingly, the assessee has to provide all the details of capacity utilization of assessee as well as comparable for computation of adjustment if any - we restore back this matter to the file of AO/TPO with similar directions. Ground no. 5 is also allowed for statistical purposes. Application of functional similarity filter while rejecting companies selected by appellant as comparables - HELD THAT:- As as per clause (c) of Para 3.7, this is admitted position that this was the dispute raised before DRP that the TPO has committed errors in selection of comparable companies. TPO has wrongly selected 10 companies as comparables whose businesses and operations have nothing in common with that of the assessee. From the decision of DRP we find that this issue was decided by DRP that TNMM is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The TPO has erred in rejecting the Cost Plus Method adopted by your appellant as the most appropriate method for the determination of the Arm's Length Price and wrongly adopting Transaction Net Margin Method. The DRP has erred in upholding this rejection of Cost Plus Method. 3. While following the revised directions of the DRP dated 16-03-2015 to restrict the ALP adjustment to transactions with AE only, the TPO has erred in wrongly computing the adjustments relating to AE transactions. 4. The TPO and the DRP has erred in not considering export incentives of Rs.1,80,85,480/- as part of operating revenues of your appellant and comparables or reducing from cost to determine operating profits. 5. The TPO has erred in not considering the under utilization of manufacturing capacities of your appellant and the resulting idle costs which have been wrongly ignored while computing your appellant's margins. The DRP has erred in upholding the action of the TPO. 6. The TPO has erred in the application of functional similarity filter while rejecting companies selected by your appellant as comparables and selecting wrong comparable companies, whose business and operations have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in this Para, it is noted by the DRP that in DRP s order for Assessment Year 2009-10 the TPO was directed to exclude such incentives in the case of comparables also and to recompute the TP adjustment. It is also noted in the same Para that the TPO at page no. 13 of this present TP order has stated that the tax payer company has also submitted that the export incentives and excise duty were not excluded from the operating revenue in 6 comparables and the same is accepted. Thereafter in para 4.1 of the same order, it is stated by DRP that the export incentives are either to be excluded or to be included in operating revenue of both the comparable cases as well as that of the assessee, while computing the operating profit ratio and thereafter, it is held by DRP in the present order that in line with the DRP order in the earlier year, it is held that in the year under consideration also, the export incentive should be excluded from both comparable cases and that of the assessee and to recompute the TP adjustment thereafter. Thereafter he drawn our attention to pages 490 to 493 of its rectification order of TPO dated 14.12.2018 and in particular, our attention was drawn to para 2 of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing profit percentage of the assessee i.e. the tested party and the comparables both and if it is found that the effect cannot be given in the case of the comparable for want of required data then it should not be included in the profit of the tested party i.e. assessee also. Necessary order as per law should be passed by AO/TPO in the light of above discussion after providing reasonable opportunity of being heard to assessee. Ground no. 4 is allowed for statistical purposes. 6. Regarding ground no. 5, it was submitted by ld. AR of assessee that on this issue, there is Tribunal order available in assessee s own case for Assessment Year 2009-10 in IT(TP)A No. 61/Bang/2014 dated 23.11.2016, copy available on pages 340 to 357 of paper book and in particular, our attention was drawn to Para no. 16 on page no. 352 of paper book. It was pointed out that as per this para of the Tribunal order, the matter was restored back to AO with similar directions. The ld. DR of revenue supported the order of CIT(A). 7. We have considered the rival submissions. First of all, we reproduce para no. 16 of the Tribunal order in assessee s own case for Assessment Year 2009-10 from pages 352 and 353 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relatively small values. a) Adjustments were not restricted to AE transactions only ALP adjustments have been done to non AE transactions also though operating margin statements for AE and non AE transactions were filed in the TP documentation which has not been considered by the TPO. By doing so the TPO has travelled much beyond his authority. The law does not permit a TPO to recompute arm's length price in respect of domestic transactions with any party as well as in international transactions with non AEs. On this ground alone, the entire order of the TPO requires to be set aside as it suffers from serious illegality. For AY 2009-10, the Hon'ble DRP had directed the TPO to restrict the adjustments to transactions with AE only. Case laws relied upon It was held in the case of Genisys Integrating Systems (India) Pvt. Ltd. Vs DCIT AY 2006-07 (ITA No.1231 (Bang)/2010) that ALP adjustments made by the TPO should he restricted to transactions with Associated Enterprises only. b) Export incentives The TPO has also erred in not considering export incentives of Rs.1,80,85,480/- as part of operating revenues for the purpose of computing Operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilities and consequent idle time. Fixed costs attributable to Idle Capacity is Rs.12.41 crores. The TPO has not made any adjustment for idle capacity of your petitioner though the details of the same were filed by your petitioner. He seems to be under the false impression that all manufacturing entities will make the same level of profits irrespective of their level of capacity utilization / business. It is a basic principle in marginal costing that under utilization of capacities will erode margins higher than in proportion to the contraction in capacity utilization. This fundamental principle has been given a go bye by the TPO in making an ALP adjustment for its entire business. f) Risk Adjustment No adjustments were made by the TPO for the differences in the functions and risks which are not undertaken by your petitioner but undertaken by the comparable companies considering the fact that your petitioner does not undertake marketing activities in respect of transactions with AEs. The Hon'ble ITAT had held in the case of Rolls Royce PLC Vs. DDIT dated January 30th, 2009 that 35% of the profits should be attributed to the marketing function. The TPO ought to hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable method for benchmarking in the assessee's case. For the same reasons, we hold that, for the assessment year 2010-11 in question also, the TPO's action in rejecting the CPM adopted by the assessee and in adopting the TNM as the appropriate method to measure the assessee's business operations, is justified and confirm his action in determining the transfer pricing adjustment in this regard. 3.9 As regards charging of interest on guarantee commission, it was held by the DRP for the assessment year 2009-10 that the guidelines apply to guarantees offered by directors in their individual capacity and not qua directors since the bar imposed in the guidelines is to prevent the directors and others in the managerial rank from making it a source of income for themselves. The DRP, therefore, upheld the TPO's action in charging notional interest on the guarantee commission for the purpose of determining the transfer pricing adjustment. We are in agreement with the views of the DRP for the assessment year 2009-10 in the case of the assessee and uphold similar action on the part of the TPO in the assessee's case for the assessment year 2010-11 in considering interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported the order of AO/TPO and DRP. She also submitted that the assessee has not submitted the computation of the risk adjustment being claimed by the assessee and therefore, this issue should not be restored back. In the rejoinder, it was submitted by ld. AR of assessee that on pages 11 and 12 of Form 35A filed before the DRP, it has been specifically claimed by the assessee that it is held by the Tribunal in the cases of Rolls Royce PLC Vs. DDIT in its order dated 30.01.2009 that 35% of the profits should be attributed to the marketing function. He submitted that clarification was filed earlier also and the same will be filed again if the matter is restored back to the file of AO/TPO. 15. We have considered the rival submissions. First of all, we reproduce paras 17 and 18 from the Tribunal order which is available on page no. 353 of paper book. The same reads as under. 17. Ground No.6 is regarding risk adjustment. 18. We have heard the learned A.R. as well as learned D.R. and considered the relevant material on record. The assessee is claiming the risk adjustment because of the majority of the sale to the AE in comparison to the comparables making sales to the third par ..... X X X X Extracts X X X X X X X X Extracts X X X X
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