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2017 (1) TMI 1776 - BOMBAY HIGH COURTRejecting claim of the appellant of abnormal expenses - Tribunal found that the claim of the assessee is of adjustment on account of the low capacity utilization - Whether Income-tax Appellate Tribunal was right in upholding the order of the Respondent A.O. in rejecting claim of the appellant of abnormal expenses? - HELD THAT:- The business of the assessee was segregated into two parts, namely, manufacture and distribution. There were various international transactions with the aforesaid associate enterprises, but there was a transfer pricing report which adopted the transaction net margin method considering it to be the most appropriate method for the purpose of benchmarking its activities under the manufacturing and distribution segments separately. The details of all these activities are set out and then what has been argued is that the item No.3 of the table is of Professional Consultancy. That was a case where a team of experienced professionals visited the assessee's vendors and performed various activities in respect of standardization and improvement of the process at the vendor's site. Thus, they carried out the work to improve the quality. The assessee furnished the details of the work performed by professionals and the details, according to the assessee, was enough for the purposes of making the adjustments. This is a case where there was no absence of materials, but whether the materials supplied were sufficient and adequate for the purpose of making the adjustments or otherwise. To our mind, this case is completely distinct from the case at hand. Here, the assessee projects that the activities performed and carried out by it by themselves must be taken as a benchmark or as a standardized practice. There is no need to make any comparison or draw any comparables. The Tribunal found that unless the standardization in the jewellery manufacturing units is established and by bringing in the necessary materials, the assessee's consumption by itself and without anything more cannot be accepted. Therefore, we do not think that the Punjab & Haryana decision would be of any assistance. Similarly in the case of the Tribunal's order, what we have found is that the assessee was a joint venture and with a Switzerland based unit. It was engaged in the business of manufacturing of diamonds and precious stones studded jewellery. The return of income was filed and declaring a loss. The transfer pricing study report was submitted and the AO noticed that the assessee has entered into various international transactions with its associate enterprises, including export of studded jewellery. He, therefore, made the reference and the Transfer Pricing Officer determined the arm's length price. As far as the capacity utilization is concerned, there is an explanation offered by the assessee that it was operating at 50% of its actual capacity during the year under consideration and, therefore, its operating profit margin was lower as compared to all comparables selected. Thus, there were comparables and on record. It is in relation to the comparables performance that the Transfer Pricing Officer was, by taking that as a benchmark, applying the same to the assessee before the Tribunal. The assessee was a relatively new unit having put in only two years after its existence and, therefore, could not achieve the optimum capacity. That is why it urged that it was operating at 50% of its actual capacity. Thus, materials were already on record and there was no dispute about it. It is in these circumstances that the Tribunal found fault with the approach of the authorities in taking the comparables as the benchmark and applying them to a relatively new unit. Therefore, to our mind, even this Tribunal's order cannot assist the assessee in the facts and circumstances of our case.
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