TMI Blog2016 (6) TMI 1342X X X X Extracts X X X X X X X X Extracts X X X X ..... on Ltd. as one of the comparables. Accordingly, ground nos. 2 and 4 raised in the concise grounds of appeal are allowed. Capacity utilization - Held that:- The capacity utilization adjustment has to be granted where there has been under utilization or lower utilization of the capacity. In the facts of the present case, we deem it appropriate to remit the issue back to the file of Assessing Officer to decide this issue afresh after considering the submissions of the assessee, documents on record and decisions of the Tribunal. Accordingly, ground no. 2 raised in the appeal is allowed for statistical purpose. - ITA No. 1467/PN/2010 - - - Dated:- 10-6-2016 - SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For the Appellant : Shri Ketan Ved For the Respondent : Ms. M.S. Verma ORDER PER VIKAS AWASTHY, JM : The appeal has been filed by the assessee against the assessment order dated 19-10-2010 passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) for the assessment year 2006-07. 2. The brief facts of the case as emanating from the records are: The assessee company is a 100% export oriented un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Systel Ltd. 13.33% 6 Zigma Software Limited 10.56% Average Operating Margin Ratio of Comparable Companies 10.86% The TPO excluded Genesys International Corporation Ltd. from the list of comparables on the ground that it is functionally different. Further, the TPO did not accept the adjustment made by the assessee in PLI on account of under utilization of its employee cost and under absorption of overheads. Aggrieved by the order of TPO dated 07-10-2009 and the subsequent draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP rejected the contentions of the assessee and upheld the findings of TPO. On the basis of directions of DRP the Assessing Officer made upward adjustment to ALP of ₹ 3,87,48,200/- in respect of international transactions. Now, the assessee is in appeal before the Tribunal assailing the assessment order. 3. The assessee has raised following concise grounds in the appeal against the assessment order : 1. General: The learned DCIT erred in law and on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under capacity utilization of manpower and under absorption of overheads. 4.1 The ld. AR submitted that the assessee is engaged in the activity of rendering ITES. For benchmarking its ALP the assessee selected seven companies as comparables and all the selected companies were engaged in ITES. However, the TPO excluded Genesys International Corporation Ltd. on the ground that it is not functionally comparable with the assessee. The ld. AR referred to the decision of Mumbai Bench of the Tribunal in the case of M/s. Willis Processing Services (I) P Ltd. Vs. The Dy. Commissioner of Income Tax in ITA No. 4547/Mum/2012 for the assessment year 2007-08 decided on 01-03-2013 and the decision of Mumbai Bench of the Tribunal in the case of Vodafone India Services P. Ltd. Vs. DCIT in ITA No. 7140/Mum/2012 for the assessment year 2007-08 decided on 26-04-2013. The ld. AR submitted that the Genesys International Corporation Ltd. is engaged in the business of Geospatial Information System (GIS) activity. The CBDT vide notification dated 26-09-2000 has clarified that the GIS is one of the ITES. In both the above said cases the Tribunal has held that Genesys International Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the DRP. As regards furnishing of information with respect to capacity utilization the ld. AR submitted that the assessee had furnished all the necessary documents along with the TP study report before the TPO. However, the TPO brushed aside the same and did not grant the benefit of capacity utilization adjustment to the assessee. 7. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. The first issue raised by the assessee in appeal which contained in ground nos. 2 and 4 of the grounds of appeal relates to rejection of Genesys International Corporation Ltd. as comparable. The TPO and DRP have excluded Genesys International Corporation Ltd. from the list of comparables on the ground that it is functionally different from the activities carried on by the assessee. On the other hand the assessee has placed reliance on the decision of Mumbai Bench of the Tribunal in the case of M/s. Willis Processing Services (I) P Ltd. Vs. The Dy. Commissioner of Income Tax (supra) to substantiate that Genesys International Corporation Ltd. can be considered as comparable where the company is engaged in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Content Development/Animation; (iv) Data Processing; (v) Engineering and Design; (vi) Geographic Information System Services r- (vii) Human Resource Services; (viii) Insurance Claim Processing; (ix) Legal Databases; (x) Medical Transcription; (xi) Payroll; (xii) Remote Maintenance; (xiii) Revenue Accounting; (xiv) Support Centres; and (xv) Web-site Services' 38.1 When GIS is notified ITES/product, then undisputedly, this comparable and the assessee both are engaged in the ITES services; therefore, we do not find any substance or merit in the contention of the Id AR that this company is functional different and cannot be considered as a comparable. We further note that even before the TPO, the assessee did not raise any such objection of functional difference. Hence, we find that this company is a good comparable of the assessee. 8. The Mumbai Bench of the Tribunal in the case of Vodafone India Services P. Ltd. Vs. DCIT (supra) where similar issue had come up and the assessee had objected to the selection of Genesys International Corporation Ltd. as comparable. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees and under absorption of its overheads, primarily on the ground that the assessee company is a captive unit of its AE. The entire capacity increased by the assessee is for the purpose of business of its holding AE. Thus, there cannot be any possibility of under utilization of capacity. The DRP made a detailed discussion in its order in respect of under utilization of manpower and under absorption of overheads. However, after the elaborate discussion we find that DRP has not given any findings on this issue. The ld. AR of the assessee has placed on record a copy of the order of Tribunal in asessee s own case for the assessment year 2004-05, wherein the identical issue was considered. The relevant extract of the findings of the Tribunal are reproduced here-in-below: 7. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered the decisions on which the ld. AR of the assessee has placed reliance to support his submissions. The assessee in its appeal has raised 6 grounds. Ground Nos. 1, 5 and 6 are general in nature. Hence, require no adjudication. Thus, the effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company is a captive unit of its AE. It is presumed that the orders/business are assured because the entire capacity created is for the purpose of business of the holding AE. The under utilization of the capacity can only be possible if the holding AE is not performing well. The fact that the assessee has increased the working capacity during the year has not been examined by the authorities below. The TPO and the Commissioner of Income Tax (Appeals) rejected the contentions of the assessee merely on the ground that the assessee is a captive unit of holding AE, therefore, the entire production capacity will be monitored and utilized by the holding company alone. The TPO and the Commissioner of Income Tax (Appeals) have erred in not examining the factual aspect of increase in output capacity before rejecting functional adjustment made to the PLI. The contention of the assessee is that it had increased the capacity in anticipation of new vistas. We do not concur with the view of Commissioner of Income Tax (Appeals) that future business demands can be predicted with accuracy by using modern business management tools. If that would be the case, no business ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra) while dealing with the issue of capacity under utilization placed reliance on the decision of Mumbai Bench of the Tribunal in the case of ACIT Vs. M/s. Fiat India Pvt. Ltd. in ITA No. 1848/Mum/2009 decided on 30-04-2010 and in the case of Ariston Thermo India in ITA No. 1455/PN/2010 decided on 25-06-2013 and granted the benefit of low capacity utilization to the assessee. 11. The Delhi Bench of the Tribunal in the case of DCIT Vs. Claas India Pvt. Ltd. (supra) while dealing with the issue of capacity utilization in an elaborate manner bifurcated the issue in two parts i.e. capacity adjustment, allowable in whose hands and how to compute capacity adjustment under TNMM. The relevant extract of the order of Tribunal reads as under: 8. We have heard the rival submissions and perused the relevant material on record. Before embarking upon the question of allowability and extent of capacity adjustment under the TNMM, we want to make it clear that the assessee reduced its operating costs by considering its capacity utilization vis- -vis that of comparables and resultantly claimed that its increased profit as a result of such reduced operating costs be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. 9.2. Sub-clause (i) in the process of determination of the ALP under the TNMM talks of the computation of net operating profit margin realized by the assessee from an international transaction. Sub-clause (ii) is the computation of net operating profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction. This refers to determining the operating profit margin of comparables with the same base as that of the assessee. Sub-clause (iii) provides that the net profit margin realized by a comparable company, determined as per subclause (ii) above, is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, ..... which could materially affect the amount of net profit margin in the open market. It is this adjusted net profit margin of the unrelated transactions or of the comparable compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee in allowing the capacity adjustment. As against that, the correct course of action provided under the law is to adjust the operating costs of the comparable and their resultant operating profit. There is hardly need to accentuate that there can be no estoppel against the law. Once the law enjoins for doing a particular thing in a particular manner alone, it is not open to anyone to adopt a contrary or different approach. As the authorities below have adopted a course of action in allowing adjustment, which is not in consonance with law, we cannot approve the same. The impugned order is set aside and the matter is restored to the file of the TPO/AO for giving effect to the amount of idle capacity adjustment in the operating profit of the comparables and not the assessee. ii. How to compute capacity utilization adjustment under TNMM: - 10.1. Under the TNMM, the ALP of an international transaction is determined by computing and comparing the percentage of operating profit margin realized by the assessee with that of the comparables. We have noticed above that the difference in the capacity utilizations is an important factor, which needs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the fixed costs incurred by the assessee and A are at the same capacity utilization. There can be converse situation as well. Suppose the fixed costs incurred by a comparable (say, B) are ₹ 100 and it has capacity utilization of 25% as against the capacity utilization of 50% by the assessee. The above percentages show that the assessee has incurred full fixed costs at 50% of the utilization of its capacity, as against B incurring full fixed costs at 25% of the capacity utilization. This deciphers that the assessee has incurred relatively lower fixed costs and B has incurred higher costs. This difference in capacity utilizations can be eliminated by proportionately scaling down the fixed costs incurred by B so as to make it fully comparable. This we can do by reducing the fixed costs of B to ₹ 50 (Rs.100 into 25/50) as against the actually incurred fixed cost by it at ₹ 100. When we compute operating profit of B by substituting the fixed costs at ₹ 50 with the actually incurred at ₹ 100, it would mean that the fixed costs incurred by the assessee and B are at the same capacity utilization level. 10.3. Turning to the facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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