TMI Blog2016 (10) TMI 1283X X X X Extracts X X X X X X X X Extracts X X X X ..... HAT:- It is seen that the Tribunal has given a detailed guidelines as to how to make or grant capacity utilization adjustment. Hence, we feel it proper that this matter also should go back to the file of the AO/TPO for granting capacity utilization adjustment as per the guidelines given by the Tribunal in the case of DCIT Vs Class India Pvt.Ltd. [ 2015 (8) TMI 1490 - ITAT DELHI] . It is ordered accordingly. - IT (TP) A No.1494(Bang) 2010 (Assessment year : 2006-07) - - - Dated:- 18-10-2016 - Shri S.K.Yadav, Judicial Member And Shri A. K. Garodia, Accountant Member Assessee by : Shri P.K Prasad, CA Revenue by : Ms. Neera Malhotra, CIT ORDER Shri A.K.Garodia, This is an assessee s appeal directed against the assessment order passed by the AO on 22-09-2010 u/s 143(3)r.w.s.144C(5)r.w.144C(8) of the IT Act, 1961 as per the directions of DRP. 2. The grounds raised by the assessee are as under; With respect to the international transactions entered into by Molex India Tooling Private Limited (hereinafter referred to as the Appellant ), a reference was made under the provisions of Section 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the appellant for the differences in production capacity utilised by the appellant and the comparable companies. The Honourable DRP and the learned AO have erred in accepting the contention of the TPO, wherein the TPO has provided adjustments only in respect of depreciation costs and no adjustments for the expenses which are fixed in nature for difference in the production capacity utilised by the appellant and the comparable company. 2. Gross Margin Analysis The Honourable DRP and the learned AO have erred in rejecting the gross margin analysis provided by the appellant. 3. Use of contemporaneous data The Honourable DRP and the learned AO erred in concluding that the appellant ought to have employed contemporaneous data in the preparation of the Transfer Pricing report. This argument of the Honourable DRP is not valid on the principle of fairness and natural justice, as the appellant cannot be expected to use data that is unavailable in the databases at the time of preparing the documentation. The Honourable DRP and the learned AO erred in interpreting the word Shall in Rule 1OB (4) to mean that data for the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant craves leave to add, alter and modify the above grounds during the course of the appeal. For the above and any other grounds which may be raised at the time hearing, it is prayed that the order of the learned AO be set aside. The ld. AR of the assessee submitted a copy of the synopsis containing all the arguments of the assessee before the Tribunal and the same is reproduced herein below: SYNOPSIS 1. Background: 1.1. Molex India Tooling Private Limited ('MITPL' or 'Appellant') was engaged in manufacture of machine tools, tooling spares, housing, dies and moulds and commenced the commercial production on March 1, 2002. 1.2. Due to underutilization of the production capacity, the Appellant suffered losses during the financial year ('FY') 200506. 2. Proceedings before the learned Transfer Pricing Officer (,TPO,): 2.1. The Appellant, during the Transfer Price ('TP') assessment, submitted that it was in a start-up phase and consequently, the production capacity was underutilized. Accordingly, the Appellant submitted Gross Margin analysis establishing the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capacity utilization adjustment and changing the PLI from Operating Cost Mark-up to ratio of PBDIT / TC when depreciation is an essential component of the operations, it being related to the machinery used for the manufacturing activity. Also, the learned TPO erred in only considering the depreciation cost as fixed without considering the other fixed costs of the Appellant. 4.2. The Appellant also would humbly submit before the Honorable Tribunal that while computing the PLI of the Appellant, the transaction of purchase of raw materials, production supplies and spares was considered. The adjustment to the PLI of the Appellant was already provided. Therefore, adjusting the aforementioned transaction tantamounts to double adjustment. 4.3. Further, the Appellant wishes to humbly submit before the Honorable Tribunal that the annual reports of Guindy Machine Tools Limited and United Drilling Tools Limited were not available during the preparation of TP Study and accordingly, was not considered while computing the arm's length price. The Annual Reports of the aforementioned com parables are now available and hence, should be included in the list of comparables w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit to operating cost of com parables ought to be provided towards the difference in working capital levels of the comparable companies and the Appellant. 4.8. The Appellant relies on the ruling of 24/7 Customer Con Pt. Ltd. [ITA.227/Bang/20101 wherein the Honorable Tribunal has accepted the additional ground filed by the Appellant seeking economic adjustment and where such claim was not placed earlier during transfer pricing assessment or appellate proceedings. 4.9. The Appellant humbly submits that the capacity utilization adjustment is to be provided on the fixed costs of the comparable companies. Similar directions have been provided by various Tribunal in the case of Claus India Pvt. Ltd. [ITA No. 1783/ DEL / 20111 and Petro Araldite Pvt. Ltd. [ITA No. 3782/ MUM /2011]. 4.10. Further, the Appellant humbly submits that the capacity utilized by the Appellant and the comparable companies computed earlier were erroneous. Accordingly, the Appellant has computed the correct capacity utilized as per the ruling of Panasonic AVC Networks India Pvt. Ltd. [ITA No. 4620/ DEL / 20111. 4.11. Following the above mentioned rulings and contentions, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereafter, it is noted by the DRP that neutralize this difference the TPO has considered PBDIT as PLI by following the Tribunal order in the case of Sechefenacker Motherson Ltd., Vs ITO(2009-TIOL-376-ITAT-Delhi. It is further noted by the DRP in the same para with regard to the claim of assessee for other costs such as employee cost, repair and maintenance cost, office supplies, filing fee etc., It has been observed by the TPO that these cases are slightly higher than the comparables in the ratio of about 7 to 6 but just because the costs were higher, adjustment could not be considered. In the light of these facts, now we consider the applicability of various judgments cited by the ld. AR of the assessee on this issue. First judgment cited is the Tribunal order rendered in the case of CIT Vs Class India Pvt.Ltd., in ITA No.1783/Del/2011 dated 12-082015. Copy available on pages 701 -726 of the paper book, para no.9.3 to 10.2 of this Tribunal order available on pages 714 to 720 of the paper book are relevant for the present issue in dispute hence, these paras are reproduced herein below for the sake of ready reference; 9.3. Sub-rule (2) of Rule 10B provides that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he law. Once the law enjoins for doing a particular thing in a particular manner alone, it is not open to anyone to adopt a contrary or different approach. As the authorities below have adopted a course of action in allowing adjustment, which is not in consonance with law, we cannot approve the same. The impugned order is set aside and the matter is restored to the file of the TPO/AO for giving effect to the amount of idle capacity adjustment in the operating profit of the comparables and not the assessee. ii. How to compute capacity utilization adjustment under TNMM : - 10.1. Under the TNMM, the ALP of an international transaction is determined by computing and comparing the percentage of operating profit margin realized by the assessee with that of the comparables. We have noticed above that the difference in the capacity utilizations is an important factor, which needs to be adjusted. No mechanism has been given under the Act or the rules for computing the amount of capacity utilization adjustment. 10.2. On an overall understanding, we feel that under the TNMM, the first step in granting capacity utilization adjustment is to ascertain the percentage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges show that the assessee has incurred full fixed costs at 50% of the utilization of its capacity, as against B incurring full fixed costs at 25% of the capacity utilization. This deciphers that the assessee has incurred relatively lower fixed costs and B has incurred higher costs. This difference in capacity utilizations can be eliminated by proportionately scaling down the fixed costs incurred by B so as to make it fully comparable. This we can do by reducing the fixed costs of B to ₹ 50 (₹ 100 into 25/50) as against the actually incurred fixed cost by it at ₹ 100. When we compute operating profit of B by substituting the fixed costs at ₹ 50 with the actually incurred at ₹ 100, it would mean that the fixed costs incurred by the assessee and B are at the same capacity utilization level. From the above paras of the Tribunal order, it is seen that the Tribunal has given a detailed guidelines as to how to make or grant capacity utilization adjustment. Hence, we feel it proper that this matter also should go back to the file of the AO/TPO for granting capacity utilization adjustment as per the guidelines given by the Tribunal in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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