TMI Blog2016 (12) TMI 1792X X X X Extracts X X X X X X X X Extracts X X X X ..... cloth guiders no. KF 2020 and KF 2060 numbering 600 35 involving adjusted per unit price of ₹ 26180/- and ₹ 57849/- as against those numbering 30 3 sold to third parties involving adjusted per unit price of ₹ 26071/- ₹ 56762/-; respectively. It had used CUP method in benchmarking the above transactions. TPO proceeded to make the impugned adjustment after noticing the above difference in the sale price involving assessee s associate enterprises and third party customers. The DRP upholds the same as indicated in the instant ground. The assessee s next argument is that it has to provide warranties to local purchasers as calculated at the rate of ₹ 608/- which is not the case with respect to its associate enterprises. Learned counsel accordingly submits that the lower authorities ought to have included the above two factors for the purpose of making adjustments before arriving at the ALP adjustment in question. The said gap is to the tune of 1/20th in case of former variety of cloth guider and almost 1/10th in latter category (supra). The Revenue further is unable to dispute the fact that assessee has been providing warranty cost to its local p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having PLI of 4.22% (as per the Transfer Pricing Officer s order dated 19.10.2008). It had chosen fifteen comparable companies i.e. M/s. Ahmedabad Victoria Iron Works Ltd., Nichrome India, Rollatainer, Schrader Duncan Ltd., Seasons Textiles Ltd., Lippy Systems Ltd., Austin Engineering, EPC Industries, Forbes Aquamall Ltd., JBM Industries Ltd., Jai Bharat Exhaust Systems Ltd., Krypton Industries Ltd., Mivin Engineering Technologies Pvt. Ltd. and M/s. Ultra Dytech Ltd.. The Transfer Pricing Officer excluded two of them i.e. M/s. Rollatainer and M/s. EPC Industries only on the ground that they had been making losses since 2002 and past three years; respectively after declining assessee s very strong objections against the said exclusion. 4. We proceed further to notice that the Transfer Pricing Officer thereafter adopted profit level indicator of PBIT (Profits before interest and tax)/sales after rejecting assessee s plea to rather take its profit level indicator as PBDIT (profits before depreciation, interest and tax)/sales since it had made additions in fixed assets of ₹ 1435.98 lacs in its new plant over and above the written down value of ₹ 341.51 lacs of the asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave heard both sides. Case file perused. The assessee s arguments are two folded. First one is that the authorities below have erred in excluding the above two loss making entities from the array of comparables. The Revenue strongly supports the impugned exclusion. We find that neither the Transfer Pricing Officer nor the Dispute Resolution Panel have looked into the FAR analysis of the above two entities M/s. Rollatainer and EPC Industries as the same have been summarily rejected in view of their consistent losses since 2002 and last three assessment years. We repeat that the impugned assessment year is 2007-08. We quote Rule 10B(4) herein to observe that the data relevant for a time period of not more than two years prior to the financial year involved may be considered only if it reveals any influence thereof in such financial year involved. The authorities below have nowhere under taken such an exercise. We also find that this tribunal s special bench decision in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ 001 (SB) has already rejected such an approach after concluding that consistent loss making entities cannot be per se excluded merely in view of the negative income figur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprise involving PLI @ 12.13%. He accordingly rejected assessee s explanation stating various key factors of volume of business transactions, market presence and geographical factors to make the impugned adjustment after taking PLI @ 12.13% resulting in the addition in question. The Dispute Resolution Panel upholds the same. 8. Heard both sides. The assessee is unable to dispute the fact that it had already adopted CUP method wherein the german non associate enterprise had paid it commission income of 12.13% as against 8.52% obtained from its italian associate enterprise. Learned counsel raises a technical plea that the DRP s findings at page 16 observe that assessee s german associate enterprise could not be taken as a comparable in CUP method. He however fails to dispute that the other german entity who is not assessee s associate enterprise is a valid comparable under CUP method having PLI @ 12.13%. We thus find no reason to interfere with the impugned transfer pricing adjustment pertaining to assessee s commission income. 9. The assessee s third substantive ground seeks benefit of 5% tolerance margin in the above transfer pricing adjustments. Ld. Departmental Represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable entities is nowhere provided either in the Act or Rules. This argument fails to impress us. We find that a coordinate bench decision in DCIT vs. EDAG Engineers Design India Pvt. Ltd. ITA No.549/Del/2011 decided on 13.10.2014 quotes Rule 10B (1)(e)(3) to be providing for adjustments for variation which could materially affect the net profit margins in case of comparable uncontrolled transactions. Ld. Departmental Representative seeks to draw a distinction that the said case law deals with CUP method as against TNMM employed in the instant case. We find that Rule 10B(e)(iii) hereinabove is regarding TNMM method only providing for various adjustments on account of the contemporaneous factors materially affecting the net profits. The above co-ordinate bench thereafter concludes that such capacity under utilization adjustments have to be made only in the hands of comparable entities instead of that in case of tested party itself. We thus accept assessee s instant argument in principle and direct the Transfer Pricing Officer to proceed afresh as indicated hereinabove after affording adequate opportunity of hearing to the assessee. 13. Learned counsel s next plea is that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices to associate enterprises who happen to be purchaser of huge quantity as per annexure 4 attached with Form 35A. 16. The assessee s next argument is that it has to provide warranties to local purchasers as calculated at the rate of ₹ 608/- which is not the case with respect to its associate enterprises. Learned counsel accordingly submits that the lower authorities ought to have included the above two factors for the purpose of making adjustments before arriving at the ALP adjustment in question. 17. Ld. Departmental Representative strongly supported the lower authorities action. He however fails to rebut the fact that the assessee s bulk sales to its associate enterprises are much voluminous as compared to third parties. The said gap is to the tune of 1/20th in case of former variety of cloth guider and almost 1/10th in latter category (supra). The Revenue further is unable to dispute the fact that assessee has been providing warranty cost to its local purchasers which has further shrunk its profit margins in question. We thus prima facie agree with assessee s above two arguments in principle and leave it open for the ld. Transfer Pricing Officer to make appropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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