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2015 (8) TMI 981 - ITAT PUNE

2015 (8) TMI 981 - ITAT PUNE - TMI - Transfer pricing adjustment - adjustment for capacity under utilisation - Held that:- Respectfully following the case of Ariston Thermo India Ltd. (2015 (8) TMI 977 - ITAT PUNE) we are of the considered opinion that the assessee should be given the benefit of low capacity utilisation. We therefore restore the ground of appeal No.2 to the file of the AO/TPO with a direction to consider the appropriate adjustment after necessary verification on the basis of mat .....

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not considering the entity level sales rather it should be done ideally considering the relatable sales drawing the quantitative relationship to the imports from the AEs, i.e. controlled cost. The Mumbai Bench of the Tribunal in the case of Emersons Process Management India (P.) Ltd. (2011 (8) TMI 427 - ITAT MUMBAI) has held that transfer pricing adjustment is to be made with respect to international transactions and not the entire sales. Similar view has been taken by various other coordinate .....

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in favour of assessee for statistical purposes. - ITA NO. 1682/PN/2011 - Dated:- 10-6-2015 - Ms. Sushma Chowla and Shri R.K. Panda, JJ. For The Assessee : Shri Arvind Sonde, Shri Ketan Ved, Shri Amit Singhal & Shri Vishal Solanki For The Revenue : Shri A.K. Modi ORDER PER R.K.PANDA, AM :- This appeal filed by the assessee is directed against the order dated 30-10-2011 passed u/s.143(3) r.w.s.144C(13) of the I.T. Act for the Assessment Year 2007-08. 2. Facts of the case, in brief, are that th .....

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ome under normal provisions of the Act after setting off brought forward unabsorbed depreciation and business loss aggregating to ₹ 2,97,46,620/-. The company had computed the income u/s.115JB of the I.T. Act at ₹ 48,52,674/-. The assessee filed a revised return on 23-09-2008 declaring total income of NIL. 3. The AO made a reference to the TPO u/s.92CA(1) for determination of the ALP of international transaction. Accordingly, the TPO issued notices u/s.92CA(2) of the I.T. Act and ask .....

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verdue dues 13,26,462/- CUP 4 Reimbursement of expenses 72,69,146/- CPM Total 24,86,83,743/- 4. He observed that TBEL has sold goods worth ₹ 23.48 crores to its Associated Enterprises as against total sale of ₹ 27.55 crores for the year ended 31-03-2007. The assessee has adopted TNMM method to benchmark its transaction with its Associated Enterprises. The TPO noted that the assessee has selected ADF Foods Ltd., as a comparable company to benchmark its transactions with the AEs. It wa .....

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ing the international transactions pertaining to provision of export of finished goods. It was explained by the assessee as under (page 5 of the order of the TPO) : "6.1 That ADF Foods Limited has shown increase in Profit After Tax of 146% though the sales increased only by 28% in FY 2006-07 as compared to previous financial year. 6.2 That ADF Foods Limited (ADF) was manufacturing and marketing various products like pickles, pastes, canned products, masala spices, instant mixes, frozen vege .....

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d) pouch and this is then sterilized. That the sterilization process enables the preservation of the food for a period of 36 months without any preservative/chemical (though for the purpose of marketing the products are displayed with shelf life of only 18 months). That on the other hand, chutneys, pastes, pickles are hot filled products wherein the product is heated and filled in the bottle/jar without any additional treatment. These hot filled products are with a shelf life of 3/6/9 months and .....

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any has to settle claims for local distributors and other supply chain vendors including inventory write off, provision for sales tax payable under deferral scheme, and for provision for non-collectability of Govt. incentives. 6.8 That adjustment on account of capacity under utilization, debit of expenses pertaining to the non-AE business may be given and PLI of the assessee after adjustment works out to 16.28%. 7. The submissions made by the assessee together with the facts of the case and the .....

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has taken place and only in such circumstances data for the previous 2 years could be used if such data reveals facts which could have an influence on determination of transfer price in relation to the transaction being compared. The TPO observed that the assessee could not explain as to how the use of data for 3 years decreases any variability/distortions and how the earlier 2 year's data has an effect on determining transfer price of the international transactions. He further observed tha .....

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004-05 and in the case of Mentor Graphics (Noida) Pvt. Ltd., Vs. DCIT reported in 109 ITR 101, which speaks of use of data relating to financial year in which the international transaction has been entered into, the TPO rejected the contention of the assessee about use of multiple year data. 7. So far as the claim of the assessee that ADF Foods Ltd. has earned huge profit, the TPO noted that the profit margin of ADF Foods Ltd for the F.Yrs. 2004-05, 2005-06 and 2006-07 is 8.56%, 10.38% and 15.07 .....

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meal products) to Associated Enterprises and that the manufacturing process of ADF Foods Ltd and TBEL are different, the TPO noted that the assessee itself has selected TNMM method to benchmark its transaction with the Associated Enterprises. The assessee in its TP study report has submitted detailed search process adopted by it and has selected only ADF Foods Ltd as a comparable company to benchmark its transaction with Associated Enterprises. The assessee in its report has mentioned that ADF F .....

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ned produces, masala spices have greater margin especially when these products have a lesser shelf life as compared to ready to eat products and accordingly the comparable company bears more risk of wastages. He therefore, rejected the contention of the assessee on this ground. 9. The TPO also rejected the submission of the assessee that it had huge carry forward losses and was in a turnaround phase during F.Y. 2000-01 to F.Y. 2004-05 and that it discontinued the domestic sales of ready to eat, .....

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e proposition, the TPO observed as under : (a) From the plain reading of the aforesaid Rule, it is crystal clear that profit level indicator (PLI) prescribed under TNMM is the net operating margins computed in relation to the prescribed base as mentioned in sub-section (i) above. The choice with the tax payer is regarding selection of base, i.e. cost incurred or sale effected or assets employed or any other relevant base, but not in the selection of margins. (b) Net profit margins have not been .....

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ion." 11. The TPO accordingly was of the opinion that the net profit normally means profit before tax, computed in accordance with the accounting principles. However, any item of income or expenditure which has no bearing on the amount of the transactions under examination have to be excluded or included as the case may be, such as dividend income and interest income which are not directly related to the transaction. Therefore, according to him under TNMM in the first step, net operating ma .....

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ofit margin in the open market. The net profit thus established is then taken into account to arrive at an ALP in relation to international transactions. 12. Referring to the decision of the Pune Bench of the Tribunal in the case of Skoda Auto India Pvt. Ltd. Vs. ACIT the TPO was of the opinion that inclusion of PBDIT as well as adjustment on account of capacity underutilization is not only not allowable as per Rule 10B(10)(e)(i) but even if some adjustment is considered as allowed, then too, it .....

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herefore, held that the contention of the assessee to consider PLI as OP/OE and adjustment on account of under utilization and debit of expenses pertaining to non-AE business while determining the ALP of the international transaction is not acceptable. Although assessee has not specifically asked for the benefit of +/-5% the TPO observed that the provisions of section 92C(2) has been amended w.e.f. 01-10-2009. Following the decision of the Delhi Bench of the Tribunal in the case of Global Vanted .....

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#8377; 1.23 Cr Operating Profit as a percentage of Operating expenditure - 4.32% Arm's Length margin earned by the comparable - 15.07% Profit to be earned by assessee based on Arm's Length Margin - ₹ 4.28 crore Adjustment to be made - ₹ 3.05 crore 13. The AO after receiving the order of the TPO passed the draft assessment order u/s.143(3) r.w.s. 144C considering the adjustment of ₹ 3.05 crores u/s.92CA(3). The assessee filed a petition against the draft assessment order .....

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id sale of import license at ₹ 4.54 crores and proportionate share of unallocated expenses at ₹ 3.49 crores the revised PLI of ADF Foods Ltd was computed at 8.32%. The DRP directed the AO to exclude that part of the export licenses sold at 4.54 crores which do not form part of the current year's operation and rejected various other submissions made by the assessee. 14. On the basis of the directions given by the DRP the AO recomputed the revised PLI of ADF Foods Ltd. at 8.34%, th .....

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ch is as under : Revised calculation of PLI : 1. The revised PLI margin of ADF In view of DRP's claim Rs.8.34% 2. Operating cost of Rs.24.44 Cr 3. Annual Length price 28.44 cr X 8.34%100 Rs.2.37 Cr 4. 95% of annual length price Rs.2.24 Cr 5. ALP shown by assessee Rs.1.37 Cr 6. Difference Rs.1.14 Cr 7. Adjustment required to be made Rs.1.14 Cr 16. Against such order of the AO the assessee is in appeal before us with the following grounds : 'The Appellant objects to the order dated October .....

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national transactions entered into by the Appellant pertaining to sale of packaged and ready to eat/serve foods ("RTS") by rejecting the analysis undertaken by the Appellant in the Transfer Pricing ["TP"] Study Report to determine the arm's length price for its international transactions pertaining to export of RTS. 2. Capacity utilization adjustment The learned ACIT pursuant to the directions of the learned DRP erred on the facts and in circumstances of the case and in l .....

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ent without giving benefit of+/- 5 per cent as available under proviso to section 92C(2) of the Act The learned ACIT erred on the facts and in circumstances of the case and in law in making the transfer pricing adjustment from the arm's length price without giving the benefit of the option available to the Appellant under proviso to section 92C (2) of the Act of adopting as arm's length price, a price which varies by not more than 5 per cent from the arm's length price. 5. The learne .....

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cts and in law by levying interest under section 234B of the Act, on account of the unanticipated adjustments made by the learned Transfer Pricing Officer. 7.2 The Appellant pleads that the shortfall in advance tax has resulted in view of the adjustments which have been objected in the Grounds above and accordingly is consequential in nature. 7.3 The learned ACIT has erred on the facts and in law by levying interest under section 234C of the Act on the assessed income and not restricting to retu .....

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al.' 17. The Ld. Counsel for the assessee did not press grounds of appeal No.1 being general in nature. He also did not press grounds of appeal No. 4 to 10 for which the Ld. Departmental Representative has no objection. Accordingly, the above grounds are dismissed as 'not pressed'. 18. So far as ground of appeal No.2 is concerned the Ld. Counsel for the assessee submitted that although this issue was taken up before the TPO that benefit of capacity under utilization has to be given t .....

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respect of the items of expenses which may be proportionately higher in the case of the assessee only. Following similar corollary the adjustment should be required in the case of comparables in respect of all the items of expenses whenever there is difference, vis-à-vis tested party and result of such exercise would be nothing but bringing the net margin of the tested party at par with that of the arithmetic mean of the margins of the comparables. Referring to page 5 of the order of the .....

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; wages, power, repairs etc. is less where capacity utilization is low and this would lead to increased cost and lower profits. 19. Referring to the decision of the Pune Bench of the Tribunal in the case of Ariston Thermo India vide ITA No.1455/PN/2010 order dated 25-06-2013 for A.Y. 2006-07, the Ld. Counsel for the assessee drew the attention of the Bench to para 10 and 14 of the order and submitted that the Tribunal has in principle allowed the claim of low capacity utilization and high fixed .....

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tted that the assessee will be entitled to capacity under utilization of minimum 37.97% margin. 1. Working for capacity utilisation adjustment A. Capacity utilisation of ADF Foods Ltd. Sl.No. Particulars A.Y. 2007-08 (MT) 1 Installed capacity 25,900 2 Actual Production 13,822 3 Capacity Utilization % [2/1*100] 53.37% B. Capacity utilisation of Tasty Bite Eatables Limited Sl.No. Particulars A.Y. 2007-08 (MT) 1 Installed capacity 17,200 2 Actual Production 2,648 3 Capacity Utilization % [2/1*100] .....

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Idle cost attributable to value of International Transaction (C/FXG) 2.00 I. PLI of Taste Bite after capacity Utilisation adjustment Sl.No. Particulars A.Y. 2007-08 in Rs. Crores A Total revenue from the RTS segment (Refer G above) 29.68 B Less : Profit by applying PLI as calculated by TPO 1.23 C Cost (A-B) 28.45 D Less : Unabsorbed Fixed Cost as calculated above 2.00 E Adjusted Cost (C-D) 26.44 F Adjusted Profit (A-E) 3.23 G PLI (OP/OC) of TBEL (F/E*100) 12.23% H PLI of comparable company - ADF .....

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*100] 15.40% C. Difference in capacity utilization (A-B) 37.97% D. Fixed costs of Tasty Bite as per annual report Sl.No. Particulars A.Y. 2007-08 in Rs. Crores Depreciation 0.67 Employee cost 4.20 Repairs and Maintenance - Plant & Machinery 0.19 Repairs and Maintenance - Building 0.06 Repairs and Maintenance - Others 0.08 Rent Rates and Taxes 0.20 Insurance 0.06 Total 5.47 E. Idle cost (CXD) 2.08 F. Total Revenue of Tasty Bite as per annual report 30.75 G. Value of International transactions .....

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rable company - ADF Foods Limited 8.34% I Adjustment (G-H) NIL Capacity Utilisation adjustment on the TBEL : 1. Working for capacity utilization adjustment A. Capacity Utilization of ADF Foods Limited Sl.No. Particulars A.Y. 2007-08 (MT) 1 Installed capacity 25,900 2 Actual Production 13,822 3 Capacity Utilization % [2/1*100] 53.37% B. Capacity Utilization of Taste Bite Eatables Limited Sl.No. Particulars A.Y. 2007-08 (MT) 1 Installed capacity 17,200 2 Actual Production 2,648 3 Capacity Utilizat .....

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le Cost) 4.97 4.97 F Total Operating Cost 28.44 86.34 G PBIT 1.23 16.51 H PLI of TBEL (OP/OE) (On whole RTS) 4.32 19.12 I PLI of ADF 0.47 8.34 Refer working of ADF at 15.40% Page No.269 of the compilation Capacity Utilisation adjustment on the ADF : 1. Working for capacity utilization adjustment A. Capacity Utilization of ADF Foods Limited Sl.No. Particulars A.Y. 2007-08 (MT) 1 Installed capacity 25,900 2 Actual Production 13,822 3 Capacity Utilization % [2/1*100] 53.37% B. Capacity Utilization .....

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5 Excise duty 1.08 0.31 6 Decrease in stock 8.01 2.31 Total Variable Cost 65.26 18.83 Gross Profit 7.76 2.24 E Fixed Cost (Operating Cost-Variable Cost) 2.14 2.14 F Total Operating Cost 67.40 20.97 G PBIT 5.62 0.10 H PLI of ADF 8.34 0.47 21. He also relied on the following decisions : 1. Brintons Carpets Asia Pvt. Ltd. Vs. DCIT - ITA No.1296/PN/2010 2. Skoda Auto India P. Ltd. Vs. ACIT reported in 30 SOT 319 (Pune) 3. Amdocs Business Services Pvt. Ltd. Vs. DCIT - ITA No.1412/PN/2011 4. Ariston .....

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LP only international transactions need to be considered. 23. Referring to the decision of the Pune Bench of the Tribunal in the case of Demag Cranes and Components (India) Pvt. Ltd. vide ITA No.120/PN/2011 order dated 04-01-2012 he submitted that the Tribunal in the said decision has held that the TP adjustments are to be computed not considering the entity level sale rather it should be done ideally considering the relatable sales. 24. The Ld. Counsel for the assessee drew the attention of the .....

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evant here and it is a settled law in this regard. In the situation like the one in the instant case of the assessee, there is data relating to controlled and uncontrolled cost particulars. This undisputed data is suffice to arrive the proportionate sales relatable to the international transaction with the AEs i.e. controlled cost. Accordingly, the grounds 10 relating to Incorrect computation of transfer pricing adjustment to the manufacturing activity is allowed pro tanto." 25. Referring t .....

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a-b) 22.50 5.94 28.44 d Applying the PLI of the comparable - i.e. 8.34% (c*8.32%) 1.88 0.50 2.37 Page No.269 of the compilation e Adjustment - applying PI on the AE transaction only (d-b) 0.90 0.24 1.14 Sr.No. Particulars Amount A Sales 30.43 Less: Expenses B Material consumption 16.67 C Manufacturing & Other Expenses 11.46 D Interest & Finance Charges 0.32 E Inventory Change 0.19 F Total Expenses (B+C+D+E) 28.64 G Operating Profits (A-F) 1.79 H Operating Profit/Total Cost (G/F) 6.25% (I .....

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t India Pvt. Ltd., -ITA No.8188/Mum/2010 2. IL Jin Electronics I.P. Ltd. Vs. ACIT - ITA No.438/Del/2008 3. DCIT Vs. Starlite - ITA No. 2279 & 925/Mum/2006 4. Abishek Auto Industries Ltd. Vs. DCIT - ITA No.1433/Del/2009 5. M/s. 3i Infotech Ltd. Vs. ITO - ITA No.21/Mds/2013 27. The Ld. Departmental Representative on the other hand heavily relied on the order of the AO. Referring to various charts filed by the assessee the Ld. Departmental Representative submitted that even the assessee also ca .....

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n Current Year MT Previous Year MT Current year MT Previous Year MT 1. Ready to Serve Foods 5,000 5,000 2,343 2,024 2. Frozen Products 12,200 10,000 305 - 28. Referring to page 9 of the paper book the Ld. Departmental Representative submitted that profit before tax for the year ending 31-03-2007 was 243.70 lakhs as against ₹ 167.32 lakhs for the period ending 31-03-2006. He accordingly submitted that with more capacity utilization there is less margin of profit. So far as employees cost ar .....

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ound for capacity utilization. Therefore, no adjustment for capacity utilization should be allowed. 29. So far as ground of appeal No.3 is concerned the Ld. Departmental Representative submitted that adjustment has to be made on segment to segment and if the assessee wants any adjustment on the basis of transaction to transaction they have to give full details which they have not given. Therefore, the ground of appeal No.3 has to be dismissed. 30. The Ld. Counsel for the assessee in his rejoinde .....

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ales of ready to eat processed food products during the year 2004-05. That in the financial year, the company has to settle claims from local distributors and other supply chain vendors including inventory write off, provision for sales tax payable under deferral scheme, and provision for non-collectability of Govt. Incentives." He submitted that because of the write off there was less profit during the year. Therefore, the submission of the Ld. Departmental Representative that there is les .....

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as the adjustment on account of capacity under utilisation is concerned, it is the submission of the Ld. Counsel for the assessee that capacity utilisation of the assessee works out to 15% whereas capacity utilisation of the comparable company was 53%. Therefore, the difference between the two is significant and material to impact the profit margin of the assessee and the comparable company's ability to absorb the fixed overheads like depreciation, salary and wages, power, repair etc. is les .....

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e same with the profit margin of comparable cases. It is observed in this context that a detailed submission was made on behalf of the assessee before the Id. CIT(A) explaining each and every adjustment sought to be made by it. The gist of the said submission has already been extracted by us in the foregoing portion of this order and a perusal of the same shows that each and every adjustment made by the assessee company was duly explained by it by furnishing the relevant facts and figures as wel .....

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transfer pricing regulations, it was held by the Ld. CIT(A) that various adjustments made by the assessee were reasonable and accurate. He also held that the said material difference were arbitrarily ignored by the TPO while disallowing the assessee's claim such for adjustments and there being no proper reasons assigned by him for ignoring the said difference, the transfer pricing exercise done by him in the report was entirely futile. At the time of hearing before us, the Id. D.R. has not b .....

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-04 as well as in the immediately succeeding years i.e. 2005-06 and 2006-07 wherein the facts involved were similar to that of the year under consideration i.e. A.Y. 2004-05. We, therefore, find no infirmity in the impugned order of the Ld. CIT(A) holding that the adjustments made by the assessee in TNMM analysis were reasonable and accurate and as reflected in the said analysis, international transactions made by the assessee company with its associated concerns during the year under considerat .....

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refully considered the rival submissions. The point sought to be made out by the assessee is that this being the first year of operations, it has not achieved an optimum level of capacity utilization and the sales are also on a lower side. Moreover, it has incurred certain start-up costs and the fixed operating costs have also not being absorbed due to low capacity utilization. In the absence of optimum utilization of its production capacity, it has suffered operating losses during the year. On .....

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Ostensibly, such a comparability analysis does not provide a level playing field. In our view, the aforesaid factor is required to be adjusted so as to facilitate a meaningful comparability analysis between the international transactions of the assessee and the comparable uncontrolled transactions. 11. However, as per the Revenue, such an adjustment to the profit margin of the assessee is not permissible having regard to the provisions of rule 10B(1)(e) of the Rules. The method adopted by the as .....

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e (i) the net profit margin realized by a tested party from an international transaction is required to be ascertained having regard to the relevant base. In sub-clause (ii) the net profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction is to be ascertained having regard to the same base. Sub-clause (iii) permits adjustment with regard to the net profit margin referred to in sub-clause (ii) i.e. of the comparable uncontrolled transactions so as to take into .....

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In para 8.1 of the order of the TPO it is canvassed that the net profit margin has to be understood as meaning profit before tax computed in accordance with accounting principles. In our considered opinion, the whole objective of adopting the most appropriate method for the purpose of comparability analysis is to determine arm's length price of the international transactions. In other words, the purpose of the comparability analysis is to examine as to whether or not the values stated for th .....

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uitably adjusted to facilitate its comparison with other uncontrolled entities/transactions as per sub-clause (i) of rule 10B(1)(e) of the Rules itself. The absence of such a specific provision in rule 10B(1)(e)(iii) of the Rules does not operate as a bar, so long as the adjustment sought to be made in the profit margin of the tested party are based on cogent and sufficient reasons and seeks to make the comparability analysis with comparable uncontrolled transactions more meaningful. In-fact, Pu .....

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the Bench i.e. Accountant Member, an adjustment was allowed to the profit margin of the tested party with respect to the under capacity utilization, the unit being in the start- up phase. The decision of the Pune Bench of the Tribunal in the case of Skoda Auto India (supra) is also on similar lines. 12. The learned CIT(DR) has relied on the decision of the Tribunal in the case of Haworth (India) P. Ltd. (supra) for the proposition that adjustment to the profit margin of the tested party is not .....

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nd that assessee had not submitted any evidence for assuming the capacity utilization of the comparables and the data being relied upon by the assessee was found to be either unreliable or incorrect. The Tribunal in para 90 of its order examined the evidence relied by the assessee with regard to its assumption made towards the capacity utilization of 70% of the comparable cases. On the basis of the documents and material on record, the Tribunal came to conclude that the assessee did not furnish .....

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ndia (P.) Ltd. (supra), Egain Communication (P.) Ltd. (supra) and Global Vatedge Pvt. Ltd. v. DCIT (ITA Nos, 2763 & 2764/Del/2009) could not be applied in the case of the assessee. The aforesaid discussion in the order of the Tribunal clearly shows that the assessee therein failed in seeking adjustment to its profit margins for lack of evidence, and the Tribunal was fully conscious that the relief was otherwise allowable to the assessee in principle, based on the precedents cited above. Thus .....

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ent to the operating margins of the assessee to facilitate a meaningful comparison with the comparable uncontrolled transactions. 13. At the time of hearing, the learned CIT(DR) pointed out that TPO has also observed that appropriate details in respect of low utilization of capacity in the case of comparables etc. were not available. It was submitted that the plea of the assessee was rejected at the threshold, and therefore, the lower authorities had no occasion to examine the plea of the assess .....

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vailable, which would facilitate the comparison and also making of an adjustment to the profits margin of the assessee. It was pointed out that at-least for the said comparable the adjustment ought to have been allowed by the lower authorities. 14. In our considered opinion, in order to arrive at an appropriate adjustment, the entire factual matrix is required to be examined at the appropriate level. The TPO as well as the DRP did not accept the plea of the assessee in principle, while the same .....

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shall allow an appropriate adjustment in the operating margins of the assessee for low capacity utilization and high fixed operating costs incurred in the initial year of operation." 36. Respectfully following the above decisions cited (Supra) we are of the considered opinion that the assessee should be given the benefit of low capacity utilisation. We therefore restore the ground of appeal No.2 to the file of the AO/TPO with a direction to consider the appropriate adjustment after necessa .....

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