TMI Blog2021 (12) TMI 141X X X X Extracts X X X X X X X X Extracts X X X X ..... the DRP but the DRP has given the direction to the TPO / AO to take the margins of the comparables by considering finance cost as non-operating in nature - The directions of the DRP cannot be regarded as substitute for not granting working capital adjustment and therefore we direct the AO / TPO to allow working capital adjustment. Whether transaction of payment of royalty can be aggregated with the international transaction of manufacturing activity also requires afresh look in the light of the submissions made by the learned Counsel for the assessee that the royalty payment as to whether it is linked with the trading segment also has not been verified. Comparables adopted by the assessee in the TP study, it is seen that the DRP has not properly analysed the submissions of the assessee. The 7 comparable companies also are engaged in manufacturing of plastic goods. The DRP has made observation that the assessee is engaged in manufacturing of plastic closures, caps, etc., and therefore the 7 companies are not functionally comparables. There seems to be a contradiction in the order of the DRP - we deem it fit and proper that the issue with regard to determination of ALP should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er (AO) made a reference u/s.92CA of the Act, however recomputed the PLI and arrived at OP/OC margin of -36.83%. The computation of margins by the TPO was as follows: Particulars Manufacturing Revenue 94,483,840 Expenses 185,534,395 Less: Finance Cost 11,789,987 Less: Loss on sale of fixed assets (net) 21,628 Less: Exchange Loss (Net) 24,137,170 Operating cost 149,585,610* Operating Profit (55,101,770) OP/OC -36.83% OP/Sales -58.32% The computation of margins by the Assessee was as follows: Manufacturing segment financials (unadjusted and adjusted) Particulars Amount (in INR) Manufacturing (unadjusted) Amount (in INR) Adjustments Amount (in INR) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tilisation of the comparable companies was not available and since the assessee was not able to establish that the comparable companies were operating at 100% capacity, the adjustment on account of capacity utilization cannot be allowed. The TPO thereafter proceeded to compute the ALP as follows: Arm s Length Mean Margin on cost 7.84% Operating Cost 149,585,610 Arm s Lengh Price (ALP) 161,313,122 107.84% of Operating Cost) Price Received 94,483,840 Shortfall being adjustment u/s 92CA: 6,68,29,282 5% of price received 4724192 6. Aggrieved by the draft Assessment Order dated 20.03.2016, wherein the addition of ₹ 6,68,29,282 was suggested by the TPO on account of determination of ALP, the Assessee preferred objections before the Dispute Resolution Pan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stablish before us that the above companies are functionally comparable and qualifies all filters applied by the TPO. Accordingly, rejection of the above companies is upheld. 7. Similarly, the conclusion of the DRP on the 37 comparable companies chosen by the TPO is contained in para 2.6 of the DRP s order which reads as follows: 2.6 Ground of objection Nos.6 to 39: In the above grounds, the assessee objected to selection of 34 out of the 37 companies selected by the TPO as comparables. The assessee accepted that the following three companies are comparable with the assessee: Sl.No. Names of the companies OP/OC% 1. Glory Films Ltd. (-) 0,90% 2. Manjushree Technopack Ltd. 12.29% 3. Hitech Plast Ltd. 9.37% Mean Margin (20.76 -. 3 6.92% Having considered the submissions, on examination of the functional profile of 34 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also furnishing evidences to justify that such under-utilisation is not there in the case of the comparables. Accordingly, the above objection was rejected. 11. The assessee was using technology of the AE for its manufacturing operations for which it paid royalty to the AE. While computing ALP, the assessee aggregated the transaction of receipt of consideration for manufacturing from the AE and the transaction of payment of royalty by the assessee to its AE and determined the ALP adopting a combined approach. In other words, the assessee clubbed the transaction of manufacturing with the transaction of payment of royalty and adopted a combined approach of determining the ALP. The DRP upheld the action of the TPO in segregating the royalty transaction from the transaction of manufacturing and adopted Comparative Uncontrolled Price (CUP) method for determining ALP of the transaction of payment of royalty. Thereafter the DRP held that as per the technology licence agreement dated 27.09.2011 article 5.2 licencee has to reimburse cost excluding salaries incurred by the technical expert and personnel assigned by the licensor to the licencee premises to provide relevant technical ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent works out to more than the said amount. 13. Aggrieved by the direction of the DRP, the assessee is in appeal before the Tribunal raising various grounds of appeal. After hearing the rival submissions, what we notice is that the proceedings before the DRP there was only 1 hearing. The main grievance is the non-granting of the adjustment with regard to underutilized capacity. On this issue, we find that the settled law is that adjustment on account of capacity utilization has to be granted. In this regard, the TPO is bound to exercise its powers under section 133(6) of the Act and to collate the information on capacity details of comparable companies such as actual capacity in units, installed capacity, breakup of fixed and variable cost, product wise segmental profitability (if any) and provide the assessee opportunity by sharing the details so obtained on the comparable companies. The Tribunal also held that if there is want of information / data, adjustment can be made to the tested party also. In this regard, reference may be made to the decision of the ITAT Bengaluru Bench in the case of Flint Group India Pvt. Ltd., IT(TP) No.3285/Bang/2018 dated 31.10.2019. We are of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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