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2016 (8) TMI 644 - ITAT DELHI

2016 (8) TMI 644 - ITAT DELHI - TMI - Transfer pricing adjustment - capacity utilization adjustment - Held that:- DRP in principle has accepted that adjustment on account of capacity utilization is to be allowed to assessee. However, in the absence of non-availability of item wise expenses, in the case of comparable companies, restricted the adjustment only to depreciation. In our opinion, this is not the correct approach because unutilized capacity has direct bearing on the operational profits .....

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s. - Working capital adjustment - Held that:- It is now well settled that in order to arrive at correct comparability criteria, it is necessary that the working capital employed by comparables vis a vis working capital employed by tested party has to be examined and necessary working capital adjustment has to be made in order to arrive at level playing field. We, therefore, restore this matter to the file of ld. TPO to consider the working capital adjustment as claimed by assessee as per pag .....

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, then ld. TPO has to consider the same and if he finds that same cannot be relied upon for determining the ALP, then he can resort to his own search process in order to find out the ALP of the transactions. We, therefore, restore this matter to the file of ld. TPO to find out local comparables which had undertaken similar service as the assessee. In the result, this ground is allowed for statistical purposes. - ITA no. 667/Del/2015 - Dated:- 6-7-2016 - SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND .....

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pursuance to the directions issued -by the Ld. Dispute Resolution Panel ('Ld. DRP') is a vitiated order as the Ld. DRP has erred both on facts and in law, in not considering the submissions made by the Appellant and in confirming the addition made by the Ld. Assessing Officer ('Ld. AO')/ Ld. Transfer Pricing Officer ('Ld. TPO') to the Appellant's income. 2. That on the facts and circumstances of the case and in law, the Ld. AO [following the directions of Ld. DRP] err .....

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shed goods and purchase of fixed assets do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in: 3.1 by disregarding the economic analysis conducted by the Appellant to determine the Arm's Length price (,ALP') of the international transactions in compliance with section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('Rules') in the Transfer Pricing ('TP') documentation; 3.2 rejecting the arm's lengt .....

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nses ('OP/VAE') as a valid Profit Level Indicator ('PLI') selected by Appellant in its TP documentation and erred in selecting OP /Sales as a Profit Level Indicator ('PLI') to determine arm's length nature of transactions; 3.5. Not appreciating the mechanism adopted by the Appellant to provide for suitable capacity utilization adjustment considering the fixed costs incurred by the Appellant to vitiate the fact that there are significant differences in the levels of ca .....

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ed by the Appellant on account of lower capacity utilization of Appellant vis-a-vis the identified comparable companies; 3.5.3 allowing capacity utilisation adjustment to the operating margins of the comparable companies instead of tested party; 3.6. by disregarding the additional evidence furnished by the Appellant during the course of the proceedings, pertaining to the profitability and the price charged by the AEs in respect of the components sold to the Appellant, which demonstrate that the .....

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he overheads and other costs incurred, on the fixed assets imported by the Appellant and thereby enhancing the income of the Appellant by ₹ 11,56,332/-; 3.10 denying the benefit of (+ / -) 5% range mentioned in the proviso to Section 92C(2) of the Act in determination of the arm's length price; 4. That the Ld. AO has grossly erred in law in levying interest under section 234D of the Act and also withdrawing interest under section 244A of the Act; 5. On the facts and in the circumstance .....

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into following international transactions as per form 3CEB: Name of the AE Nature of transactions Amount (Rs.) Calsonic Kansel Corp., Japan Purchase of raw material 83830475 Calsonic Kansel Thailand Co. Ltd. Purchase of raw material 336715771 Calsonic Kansel Corp., Japan Sale of finished goods 754032 Calsonic Kansel Corp. Purchase of fixed assets 30064627 Calsonic Kansel Corp. Technical Assistance fees 1609452 Calsonic Kansel Corp. Interest paid on external commercial borrowing 1790092 Calsonic .....

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to cater the compressors and HVAC requirements of Maruti and Nissan in India with technological back up from CKC Japan. The manufacturing facilities of CKM India are located at Manesar and Chennai. Since it was the first year of its manufacturing operations, the Chennai plant did not have any major activities during the year and had contributed to only 0.29% of the total sales of the company. Further, the Manesar Plant was also not fully operational and was working only 20% of its actual capacit .....

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f capital goods 30064627 28908295 1156332 Total 116228926 6. AO passed a draft order in pursuance to the adjustments directed by ld. TPO. The assessee filed objections before ld. DRP and after ld. DRP s directions the AO determined the adjustments on account of ALP at ₹ 7,74,42,676/-. 7. Apropos ground no. 3.5.3, regarding capacity utilization adjustment to be allowed to assessee, Ld. counsel submitted that that most of the comparables uncontrolled companies were incorporated prior to the .....

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is contained. He further referred to the TP report, contained at page 326 of paper book, wherein this fact is mentioned. 8. As regards Manesar plant, ld. counsel pointed out that this plant started on 1.4.2009, which is evident from the certificate of company, contained at page 296 of appeal set. He submitted that it worked only 18.93% of its actual capacity during the year. 9. Ld. counsel pointed out that all these facts are not disputed. He referred to page 17 of ld. DRP s order, wherein ld. D .....

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s of both the parties and have perused the record of the case. Ld. DRP in principle has accepted that adjustment on account of capacity utilization is to be allowed to assessee. However, in the absence of non-availability of item wise expenses, in the case of comparable companies, restricted the adjustment only to depreciation. In our opinion, this is not the correct approach because unutilized capacity has direct bearing on the operational profits of the company, because in initial years there .....

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capital adjustment, ld. counsel referred to page 308 of appeal set, wherein the submissions made before ld. DRP are contained and referred to page 311 wherein ld. DRP in its notice had required the assessee to furnish the calculation of working capital adjustment carried out taking into account all the comparables of the TPO and the comparables of the tax payer according to the prescribed format. Ld. counsel referred to pages 313 to 315 of the appeal set, wherein assessee had furnished calculat .....

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e at level playing field. We, therefore, restore this matter to the file of ld. TPO to consider the working capital adjustment as claimed by assessee as per pages 313 to 315 of appeal set and allow the capital working adjustment, if so required. In the result, this ground is allowed for statistical purposes. 15. Brief facts, apropos ground no. 3.9, are that assessee had undertaken international transactions of purchase of fixed assets amounting to ₹ 3,00,64,627/- from CKC, Japan. These goo .....

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urement of capital goods. This mark up of 4% was charged by CKC Japan against the overheads and time cost of engineers incurred for the procurement and supply of capital goods. 16. Ld. TPO pointed out that assessee had used foreign comparables to justify the mark up on capital goods. He pointed out that the use of foreign comparable was not accepted. In this regard reliance was placed on the decision of ITAT Delhi Bench in the case of Ranbaxy Laboratories Ltd. Vs. DCIT (2008) 299 ITR (AT) 175 (D .....

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the service fee paid by the assessee to its AEs for procurement service was lower or equal to the cost plus mark up rate charged by the unrelated entity in the similar circumstances. The assessee had provided the list of comparable companies undertaking similar functions as carried on by CKC Japan and the same has been given at page 50 of ld. TPO s order. 19. The assessee demonstrated that arithmetic mean of total cost plus markup of comparable companies engaged in similar functions i.e. procure .....

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or the services rendered by it. 21. Having heard both the parties, we are of the opinion that entire service charges paid to AE by assessee could not be disallowed. It is true that assessee is required to maintain the information and documents as per Rule 10D requirements but once assessee has furnished the information and documents as maintained by it, then ld. TPO has to consider the same and if he finds that same cannot be relied upon for determining the ALP, then he can resort to his own sea .....

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