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2014 (4) TMI 622 - AT - Income TaxDeletion of arm's length price (ALP) adjustment – Margins used for adjustment - Whether the CIT(A) has erred in using the margins of the assessee after allowing for adjustment for capacity utilization – Held that:- CIT(A) rightly held that in case a reasonably accurate method of making adjustment for such low capacity utilization can indeed be made, such an adjustment will meet ends of justice particularly as the assessee had utilized only 31.75% of its installed capacity - there was no reason to interfere in very well-reasoned findings and directions of the learned CIT (A) - Rule 10 B (1)(e)(ii) of the Income Tax Rules 1962 does indeed provide that the net profit margin realized in a comparable uncontrolled transaction is adjusted, inter alia, for differences in enterprise entering into such transactions, which could materially affect the net profit margin in open market - Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits - CIT(A)'s approach is reasonable in this regard and the adjustments are on a conceptually sound basis – Decided against Revenue. Allowability of comparables – Held that:- CIT(A) rightly held that the decision in DCIT v. Quark Systems (P.) Ltd [2009 (10) TMI 591 - ITAT, CHANDIGARH] followed - there cannot be any estoppel against pointing out assessee's own errors in selection of comparables and that aspect of the matter is to be decided on merits, and on merits as also since the AO has not made any submissions against the same in remand report, these additional comparables can be accepted – thus, there is no need to interfere in the findings of the CIT(A). Exclusion of comparable - Major dissimilarities between the tested party and the comparables – Held that:- There cannot be a cherry picking for deciding parameters of rejection of a comparable, and the parameters have to be broad enough of being general application - In the scheme of things envisaged under the TNMM, it is inevitable that there will be some differences between the comparables and the tested party but the impact of these differences is substantially mitigated by the averaging - If a comparable is being sought to be rejected on the ground of its differences vis-à-vis the tested party, similar criteria must be adopted for deciding suitability of other comparables as well - It cannot be open to any judicial authority to reject a comparable on the ground that the comparable has significant differences vis-à-vis the tested party, unless the differences are broad enough of general application, are such as materially affecting the profitability, as not being capable of reasonably accurate adjustments to eliminate the impact of such differences, and as are also not found in other comparables - All the comparables must face the same test on which comparability of a particular comparable is being sought to be rejected – thus, the matter is remitted back to the CIT(A) for fresh adjudication – Decided in favour of Revenue.
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