TMI Blog2017 (1) TMI 1687X X X X Extracts X X X X X X X X Extracts X X X X ..... - - Dated:- 25-1-2017 - Shri Sunil Kumar Yadav, Judicial Member And Shri S. Jayaraman, Accountant Member Appellant by : S/Shri P.K. Prasad, Umashankar Gautam, Advocates Nishit Bhuwalka, CA Respondent by : Smt. Swapna Das, Jt. CIT (ITAT-2)(DR) ORDER Sunil Kumar Yadav, This appeal is preferred by the assessee against the order of the CIT(Appeals) inter alia on the following concise grounds:- 1. The learned Commissioner of Income-tax (Appeals) / Assessing Officer / Transfer Pricing Officer ('Lower Authorities') erred in not considering and rejecting Kabra Winders Ltd. and United Drilling Tools Ltd. as comparable companies. 2. The learned Lower Authorities erred in not appreciating the fact that the Appellant incurred losses due to the economic conditions and not on account of international transactions undertaken by the Appellant. 3. The learned Lower Authorities erred in not appreciating that the Gross Margin of the Appellant is in line with the Gross Margin of the comparable companies. 4. The learned Lower Authorities erred in not appreciating the fact that the loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He invited our attention that the issues were also raised in assessee s own case during the AY 2006-07 and the Tribunal has re-examined the issue in the light of the order of the Tribunal in the case of DCIT v. Class India Pvt. Ltd. in ITA No.1783/Del/2011 wherein the Tribunal has restored the matter to the AO/TPO for granting capacity utilization adjustment as per the guidelines given by the Tribunal in the case of DCIT v. Class India Pvt. Ltd. (supra). The Tribunal has also allowed working capital adjustment. The ld. counsel further contended that in the light of the view taken by the Tribunal in the succeeding year, the matter should also be restored back to the AO/TPO for readjudication of the issue. Copy of the Tribunal in assessee s own case for AY 2006-07 is placed on record at pages 813 to 829 and the order of the Tribunal in the case of DCIT v. Class India Pvt. Ltd. (supra) is placed on record at pages 831 to 855 of the compilation of the assessee. 3. The ld. DR did not dispute these facts. 4. Having carefully examined the orders of lower authorities in the light of rival submissions, we are of the view that since the Tribunal has taken a view in asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the costs were higher, adjustment could not be considered. In the light of these facts, now we consider the applicability of various judgments cited by the ld. AR of the assessee on this issue. First judgment cited is the Tribunal order rendered in the case of CIT Vs Class India Pvt.Ltd., in ITA No.1783/Del/2011 dated 12-08-2015. Copy available on pages 701 -726 of the paper book, para no.9.3 to 10.2 of this Tribunal order available on pages 714 to 720 of the paper book are relevant for the present issue in dispute hence, these paras are reproduced herein below for the sake of ready reference; 9.3. Sub-rule (2) of Rule 10B provides that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to certain factors which have been enumerated therein. Rule 10B(3) states that an uncontrolled transaction shall be comparable to an international transaction, if either there are no differences between the two or a reasonably accurate adjustment can be made to eliminate the material effects of such differences . When we read sub-clauses(ii) (iii) of Rule 10B(1)(e) in juxtaposition to sub-rules (2) (3) of ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w 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 utilizatins is an important factor, which needs to be adjusted. No mechanism has been given under the Act or the rules for computing the amount of capacity utilization adjustment. 10.2. On an overall understanding, we feel that under the TNMM, the first step in granting capacity utilization adjustment is to ascertain the percentage of capacity utilization by the assessee and comparables. There can be no difficulty in working out these percentages. The second step is to give effect (positive or negative) to the difference in the percentage of capacity utilizations of the assessee vis- -vis comparables, one by one, in the operating profit of comparables by adjusting their respective operating costs. Operating costs can be either fixed or variable or semi-variable. One needs to split semi-variable costs into the fixed part and variable part. In so far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. From the above paras of the Tribunal order, it is seen that the Tribunal has given a detailed guidelines as to how to make or grant capacity utilization adjustment. Hence, we feel it proper that this matter also should go back to the file of the AO/TPO for granting capacity utilization adjustment as per the guidelines given by the Tribunal in the case of DCIT Vs Class India Pvt.Ltd., (Supra). It is ordered accordingly. In the result, the appeal stands allowed for statistical purposes in the terms indicated above. 5. Accordingly, following the order of the Tribunal, we restore the matter to the file of the AO to readjudicate the issue of lower capacity utilization and working capital adjustment in the light of the finding of the Tribunal in assessee s own case for the AY 2006-07. Accordingly, the order of the CIT(Appeals) is set aside and the matter is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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