2016 (3) TMI 1169 - AT - Income Tax

Transfer pricing adjustment - TPO determined the PLI of the assessee at -28.05% whereas the PLI of the comparable companies was determined by him at 14.34% by using single year data. This resulted into an upward adjustment of Rs. 8, 73, 52, 427/-. - Held that - We find the DRP rejected the various contentions of the assessee and upheld the action of the TPO/AO. It is the submission of the Ld. Counsel for the assessee that capacity utilization adjustment should be granted to the assessee since as against average capacity utilization of 57.50% for comparables the assessee has used capacity of 13.01%. We find some force in the above argument of the Ld. Counsel for the assessee. We find different Benches of the Tribunal are allowing capacity utilization adjustment. Under these circumstances we deem it proper to restore the issue relating to capacity utilization adjustment to the file of the TPO for adjudication of the issue in the light of the decisions cited above and in accordance with law. Similarly the TPO in his order for A.Y. 2012-13 has granted working capital adjustment to the assessee resulting in deletion of TP adjustment. We further find from the paper book that the DRP in its direction for A.Y. 2011-12 has also agreed with the assessee s contention and directed the TPO to consider the correct operating profit margin of all comparable companies after working capital adjustment. Also we find from the order of the DRP for A.Y. 2011-12 that the DRP has directed the TPO to accept the contention of the assessee that a higher discount is offered to the assessee as well as to the third parties. The TPO has also granted benefit of /-5% to the assessee in his order for A.Y. 2012-13. We therefore find merit in the submission of the Ld. Counsel for the assessee that the benefit of /-5% should be granted to the assessee for A.Y. 2009-10 if applicable. In view of the direction of the DRP for A.Y. 2011-12 on various issues and the order of the TPO for A.Y. 2009-10 we are of the considered opinion that the matter requires a re-visit to the file of the TPO for adjudication of the entire issue afresh. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Capacity Utilization Adjustment.
2. Economic Adjustments.
3. Selection and Rejection of Comparables.
4. Incorrect Margin Computation.
5. Corroborative Approach for Determination of Arm’s Length Price.
6. Transfer Pricing Adjustment to be Restricted to International Transactions Only.
7. Benefit of +/- 5% as per Proviso to Section 92C(2).
8. Set-off of Brought Forward Losses and/or Depreciation.

Detailed Analysis:

1. Capacity Utilization Adjustment:
The assessee argued for a capacity utilization adjustment due to significantly lower capacity utilization (13.01%) compared to the average capacity utilization of comparables (57.50%). The Tribunal found merit in this argument, referencing multiple decisions that support capacity utilization adjustments. The Tribunal restored the issue to the TPO for reassessment, emphasizing that the adjustment should be based on the material supplied by the assessee.

2. Economic Adjustments:
The assessee requested various economic adjustments, including working capital adjustments and adjustments for depreciation expenses. The Tribunal noted that the DRP had allowed cash PLI adjustments in subsequent years and directed the TPO to consider these adjustments for the impugned year as well. The Tribunal also admitted additional evidence from the assessee, including a cost accountant certificate for classification of expenses into fixed and variable.

3. Selection and Rejection of Comparables:
The assessee contested the inclusion and exclusion of certain comparables. The Tribunal noted that the DRP and TPO had not properly considered these arguments. The matter was remanded to the TPO for reconsideration in light of the assessee's submissions and subsequent DRP directions.

4. Incorrect Margin Computation:
The assessee argued that the margins of comparable companies and the assessee were incorrectly computed. The Tribunal directed the TPO to re-examine the margin computations and make necessary corrections.

5. Corroborative Approach for Determination of Arm’s Length Price:
The assessee requested consideration of the pricing policy adopted by the group for transactions with third parties. The Tribunal noted that the DRP had accepted similar arguments in subsequent years and directed the TPO to consider this approach for the impugned year.

6. Transfer Pricing Adjustment to be Restricted to International Transactions Only:
The Tribunal agreed with the assessee that the adjustment should be restricted to international transactions with AEs and not at the enterprise level. The TPO was directed to recompute the adjustment accordingly.

7. Benefit of +/- 5% as per Proviso to Section 92C(2):
The Tribunal noted that the TPO had granted the benefit of +/- 5% in subsequent years and directed that the assessee should be granted this benefit for the impugned year as well.

8. Set-off of Brought Forward Losses and/or Depreciation:
The Tribunal directed the TPO to consider the set-off of brought forward losses and/or depreciation as per the assessee's submissions.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remanding the matter to the TPO for a fresh adjudication considering the directions for capacity utilization adjustment and other adjustments allowed in subsequent years. The TPO was instructed to decide the issue as per law after giving due opportunity to the assessee.