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TMI Blog2017 (1) TMI 1687X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 incurred by the Appellant at net margin level was due the underutilization of production capacity. 5. The learned Lower Authorities erred in providing adjustment on account of underutilization of production capacity only to depreciation cost and not to all the fixed costs of the Appellant. 6. The learned Lower Authorities erred in not restricting the adjustment provided to the Appellant to the international transactions undertaken by the Appellant with its Associated Enterprises ('AEs'). 7. The learned Lower Authorities erred in considering the interest expense as operating while computing the operating cost mark-up of the Appellant. 8. The learned Lower Authorities erred in not considering the multiple year data and using contemporaneous data while performing the economic analysis. 9. The learned Lower Authorities erred in not providing the benefit of + / - 5% as per the section 92(C)(2) of the Income-tax Act, 1961. The Appellant craves leave to add, to alter or amend the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e light of rival submissions, we are of the view that since the Tribunal has taken a view in assessee's own case in the succeeding year, we do not find any justification to take a contrary view in this appeal. We, however, for the sake of reference extract the relevant observations of the Tribunal as under:- "We have considered the rival submissions. We find that apart from the request of the assessee for inclusion of two comparables and exclusion of two comparables, the main grievance of the assessee is regarding non-granting of adjustment on account of lower capacity utilization and working capital adjustment. In this regard reliance has been placed by the ld. AR of the assessee on various judicial pronouncements noted in the synopsis reproduced above. For exclusion of Electronica Machine tools Ltd., and Kulkarni Power Tools Ltd., assessee pointed out the annual reports of these two companies on the issue regarding these two companies raised by way of filing additional grounds. Regarding inclusion of two companies i.e M/s Guindy Machine Tools Ltd., and M/s United Drilling Tools Ltd., It has been submitted before us that these companies were rejected because unavailabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -clauses(ii) & (iii) of Rule 10B(1)(e) in juxtaposition to sub-rules (2) & (3) of rule 10B, the position which emerges is that the net operating profit margin of comparable companies calls for adjustment in such a manner so as to bring both the international transaction and comparable cases at the same pedestal. In other words, if there are no differences in these two, then the average of the net operating profit margin of the comparable companies becomes a benchmark. However, in case there are some differences between the comparables and the assessee, then the effect of such differences should be ironed out by making suitable adjustment to the operating profit margin of comparables. That is the way for bringing both the transactions, namely, the international transaction and the comparable uncontrolled transactions, on the same platform for making a meaningful and effective comparison. The above analysis overtly transpires that the law provides for adjusting the profit margin of comparables on account of the material differences between the international transaction of the assessee and comparable uncontrolled transactions. It is not the other way around to adjust the profit margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i-variable costs into the fixed part and variable part. In so far as the variable costs and the variable part of the semi-variable costs are concerned, these remain unaffected due to any under or over utilization of capacity. Accordingly, such variable operating costs remain unchanged. The adjustment is called for only in respect of the fixed operating costs and fixed part of semi-variable costs. Such costs are scaled up or down by considering the percentage of capacity utilization by the assessee and such comparable. It can be illustrated with the help of a simple example. Suppose the fixed costs incurred by a comparable (say, A) are Rs. 100 and it has capacity utilization of 50% as against the capacity utilization of 25% by the assessee. The above percentages show that the assessee has incurred full fixed costs with 25% of the utilization of its capacity, as against A incurring full fixed costs with 50% of its capacity utilization. This divulges that the assessee has incurred relatively more fixed costs and A has incurred lower costs. In order to make an effective comparison, there arises a need to obliterate the effect of this difference in capacity utilizations. It can be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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