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TMI Blog2016 (10) TMI 1283X X X X Extracts X X X X X X X X Extracts X X X X ..... fter taking into cognizance the various submissions made by the Appellant, made an adjustment of Rs. 58,553,403 in respect of the international transactions entered into by the Appellant u/s 92CA of the Income Tax Act. Aggrieved by such an adjustment to the Arm's Length Price (hereinafter referred to as "ALP") as originally determined by the Appellant, the appellant took recourse to the Dispute Resolution Panel ("DRP") as constituted under the Income-Tax Dispute (Resolution Panel) Rules, 2009. As provided under the said Rules, the appellant filed a comprehensive set of objections set out under various grounds against the order passed by the learned TPO. The Honourable DRP, subsequent to providing an opportunity for the appellant to represent the case before the Panel, passed an order dated 22nd September, 2010, upholding the contentions and consequently the adjustment to the ALP as made by the TPO. Subsequently, an order was passed by the learned Assessing Officer (hereinafter referred to as "AO") dated 22nd October, 2010 (received on 28th of October 2010 by the Appellant), under sub section (3) of section 147 in pursuance of the directions of the Honourable DRP. I. Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the learned AO ought to have appreciated the fact that the objective underlying the use of multiple-year data was to ensure that the outcomes of the international transactions for the year under consideration were based on all the earlier periods which were relevant for determination of transfer price. Moreover the data of the preceding two financial years gives a clear indication of the business and economic conditions prevailing at the beginning of the relevant financial year i.e. the time when the transfer prices are set up, and the purpose of using multiple year data is to minimize and even out the impact of any abnormal factor which might have unduly influenced the outcomes of the data used for the comparability analysis. *4. Safe harbour and application of +=5% Arm's Length range *The Hon'ble DRP and the ld. AO have erred in supporting the learned TPO's misinterpretation that the amended provision regarding the provision of the arm's length range as per the Finance Act, 2009 was applicable to the financial year (FY) 2005-06 as well. *The Hon'ble DRP and the ld. AO ought to have considered the fact that the amendment was introduced with effect from 1st October 209 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable companies, and considered the ratio of Profit before Depreciation, Interest and Taxes ('PBDIT') to Total Operating Cost excluding depreciation ('PBDIT / TC') as the Profit Level Indicator ('PU'). Hence, the learned TPO computed the Appellant's PLI to be (-) 31.46%. 2.4. The learned TPO arrived at a comparable PLI of 18.80% and provided an adjustment of INR 5,70,01,235/-. 2.5. In addition to the above, the learned TPO determined the arm's length price of the transaction of purchase price of raw materials, production supplies and spares. In this regard, the learned TPO computed the arm's length price for the aforementioned transaction as follows: Particulars Amount (INR) Purchase price of raw materials, production spares 37,29, 591 Sales in proportion to above purchases [(100%-31.46%) ofINR 37,29,591] 25,56, 261 Arm's Length Margin on Sales (PBDIT / TC) 14*82 Arm's Length Price of the aforementioned [(100purchases %-18.80 %) ofINR 25,56,261] 21,77,423 Accordingly, the learned TPO provided adjustment of INR 15,52,168/-. 2.6. Therefore the total adjustment provided by the learned TPO was INR 5,85,53,403/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s used to manufacture moulds, during year, thereby tantamounting to extraordinary activity. Accordingly, making EMT functionally not comparable to the Appellant and consequently, ought to be rejected from the set of comparable companies (Please refer to page no. of the 465, 489 & 490 of the Annual Report Compendium submitted before the Honorable Tribunal). 4.5. Furthermore, the Appellant submits before the Honorable Tribunal that Kulkarni Power Tools Limited ("KPT") is engaged in activities of manufacturing and trading of power tools and blowers. In addition to the aforementioned activities, KPT is also involved in distribution of electricity. Further, the segment financial information is not available during the year. Accordingly, making KPT functionally not comparable to the Appellant and consequently, ought to be rejected from the set of comparable companies (Please refer to page no. of the 520, 529 & 530 of the Annual Report Compendium submitted before the Honorable Tribunal). 4.6. Furthermore, the Appellant submits that the operating cost mark-up of the Appellant and the comparable companies computed by the learned TPO was erroneous, consequently, the Appellant submits t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 unavailability of data, but since the data of these two companies are now available in the annual report of these two companies, these two companies should be considered as good comparables. In view of these facts, we are of the considered opinion that the issue regarding inclusion of these two companies should go back to the file of the TPO/ AO for fresh decision. We order accordingly. Regarding the adjustment on account of lower capacity utilization and wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the assessee. In other words, the net operating profit margin realized by the assessee from its international transaction is to be computed as such, without adjusting it on account of differences with the comparable uncontrolled transactions. The adjustment, if any, is required to be made only in the profit margins of the comparables. 9.4. Reverting to the facts of the instant case, we find that the authorities below have adjusted the operating costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apacity 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 done by proportionately scaling up the fixed costs incurred by A so as to make it fully comparable with the assessee. This we can do by increasing the fixed costs of A to Rs. 200 (Rs. 100 into 50/25) as against the actually incurred fixed costs by it at Rs. 100. When we compute operating profit of A by substituting the fixed costs at Rs. 200 with the actually incurred at Rs. 100, it would mean that the fixed costs incurred by the assessee and A are at the same capacit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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