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Frigoglass India Pvt Ltd Versus Assistant Commissioner of Income Tax, Circle 9 (2) , New Delhi

Transfer pricing adjustment - ALP in respect of royalty and management fees - Held that:- The issue is covered, in favour of the assessee in assessee’s own case for the assessment year 2010-11. There is no occasion to take a different view of the matter for this year. In any event, one can discard the TNMM and proceed to adopt CUP only when a comparable product or service is available. When no such comparable is available, as in this case, there cannot be any occasion to resort to CUP, and, as s .....

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y of this appeal, the assessee appellant has challenged correctness of the order dated 30th January 2016 passed by the Assistant Commissioner of Income Tax Circle 9(2) New Delhi, under section 143(3) r.w.s 144C of the Income Tax Act, 1961, for the assessment year 2011-12/ 2. Grievances raised by the appellant, so far as transfer pricing issues are concerned, are as follows: 1. General 1.1 The learned Assistant Commissioner of Income Tax, Circle-9(2), New Delhi ("the Assessing Officer" .....

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ed in making/upholding an adjustment of ₹ 5,41,00.671 in respect of disallowance of capacity adjustment and payment of royalty and markup in respect of management charges to AE. 2. Rejection of the economic analysis of the Appellant 2 1 That on the facts and circumstances of the case and in law, Ld. TPO/ Hon'ble DRP have erred in not accepting the economic analysis of the Appellant, for determination of the arm's length price ('ALP') in connection with the impugned internat .....

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ternational transaction using Comparable Uncontrolled Price ('CUP') method without following the manner of applying the CUP method prescribed under Rule 10B(1)(a) of the Rules. 3.3. The Ld. TPO/ Hon'ble DRP have erred in upholding the adoption of CUP method as the most appropriate method for determining the arm's length price in respect of the impugned international transaction without identifying any comparable uncontrolled transaction(s) for the computation of the ALP as prescr .....

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o payment of royalty should be Nil. 4.2 The Ld, TPO/ Hon'ble DRP erred in rejecting the adjustment for difference in the capacity utilization of the Assessee vis-a-vis the comparable companies. 4.3. The learned AO/Hon'ble DRP erred, on facts and circumstances of the case and in law, in arbitrarily rejecting one of the comparable companies on the basis of insufficient related party transactions information. 4.4 The Ld. TPO/ Hon'ble DRP erred in misinterpreting/ misconstrued the facts .....

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hearing progressed and as we narrowed down to the precise issues requiring our adjudication, learned representatives fairly agreed that the short issues that we are required to decide, however, is (a) whether or not the Assessing Officer was justified in declining capacity utilization adjustment, in respect of computation of arm s length price on sale of finished goods, components and spares; and (b) whether or not the Assessing Officer was justified in making an arm s length price adjustment o .....

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rts to neighbouring Asian countries. During the course of proceedings before the Transfer Pricing Officer, one of the issues which came up for scrutiny was capacity underutilization adjustment. The TPO noted that the assessee was informed by his key customer, i.e. Coca Cola, of likely performance failure in some of the visicoolers sold and installed by it. Subsequently, because of the fault of the products already sold, the assessee s sale dwindled. As against a production of 1,11,000 visicooler .....

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) 67 SOT 81 (Del)] and referred to its observations to the effect that …. the very concept of capacity underutilization may not really make any sense unless the assessee has not been able to offer, for reasons beyond its control, the underutilized capacity to its AE. There is no finding on this aspect of the matter. As the assessee does not have the liberty to work for any other customer, and is wholly dependent on its AE for productive use of its capacity to work, the AE should normally .....

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ected to subsidize determination of ALP . The TPO the observed that in any case what could be relevant in making capacity underutilization adjustment is when ALP is being determined for the raw material rather than sales. It is only when purchases are being made from the AEs and the revenues are being generated from the unrelated parties that such an adjustment, even theoretically, can come into play. In view of these discussions, and noting that AE should have provided some price support to the .....

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ustments, accordingly, were made in respect of sale of finished goods for ₹ 1,51,68,845 and in respect of sale of components and spares for ₹ 87,90,105 Aggrieved by the stand so taken by the DRP, the assessee is in appeal before us. 5. Having heard the rival contentions and having perused the material on record, we are of the considered view that the assessee s grievance does deserve to be upheld in principle, even though the computations of the assessee, with respect to this adjustm .....

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sense unless the assessee has not been able to offer, for reasons beyond its control, the underutilized capacity to its AE , he misses out the opening words of this sentence to the effect That apart, in the case of a one hundred percent captive service unit, as is the assessee before us . The correct and complete sentence was That apart, in the case of a one hundred percent captive service unit, as is the assessee before us, the very concept of capacity underutilization may not really make any .....

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hese circumstances, there was clearly a substantial underutilization of capacity. The stand of the TPO that any fall in utilization of capacity should have been subsidized by the AE is devoid of any basis in the present circumstances. The lapses leading to issues with the quality related issues, as set out in TPO order itself at page 9, are purely production and operational reasons and for these reasons the assessee, as a commercial unit, is responsible. Of course, as the DRP rightly observes, t .....

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ove observations. 6. As for the second issue, that was a matter taken up at the DRP only inasmuch as an enhancement was made by the DRP in this regard. During the course of the proceedings before DRP, it was noticed that in the immediately preceding assessment year, i.e. 2010-11, the TPO had made an ALP adjustment of ₹ 29,65,700 in respect of management fees and of ₹ 8,47,65,448 in respect of royalty and licence fees, and these ALPs were confirmed by the DRP. The DRP required the ass .....

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₹ 5,41,00,671 as against ALP adjustment of ₹ 2,39,58,750 as originally proposed by the TPO. The assessee is aggrieved and is in appeal before us. 7. Having heard the rival submissions and having perused the material on record, we find that the issue is covered, in favour of the assessee,the order dated 8th April 2016 passed by a coordinate bench, in assessee s own case for the assessment year 2010-11. There is no occasion to take a different view of the matter for this year. In any e .....

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