TMI Blog2023 (4) TMI 517X X X X Extracts X X X X X X X X Extracts X X X X ..... ard. In a situation where the data about comparable companies is not available for the purpose of allowing adjustments towards capacity utilization and working capital levels, the only way to get the data in a current case would be by Ld. TPO collecting the same from the comparable companies so selected by him by exercising his powers u/s 133(6) of the Act. We direct the Ld. TPO to exercise powers u/s. 133(6) of the Act to call for information on capacity utilization and working capital levels of the selected comparable companies in those cases whose data is not available in public domain. After obtaining the information, the assessee be given an opportunity to put up its case by sharing details so obtained and accordingly grant the adjustment for capacity utilization and working capital levels. We thus, remit the matter back to the file of Ld. TPO/AO in terms of our above directions and thus the appeal of the assessee is partly allowed for statistical purposes. - ITA No.222/Kol/2021 - - - Dated:- 22-11-2022 - SHRI SANJAY GARG, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER For the Appellant : Sm. Pallavi Paul, AR For the Respondent : Smt. Ranu Bis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istribution of industrial products to various industrial plants. Assessee started its second unit in Chennai in 2008 wherefrom it carried on assembly operations, mainly catering to the automotive industry. In respect of this assembly unit, assessee is in the first year of operation in the impugned AY 2009-10 and claimed that it was working at low capacity utilization alongwith adverse working capital level. 6.1. Assessee filed its return of income on 23.09.2009 reporting total income as nil. Case of the assessee was selected for scrutiny for which statutory notices were issued and served on the assessee and were duly complied with. A reference u/s. 92CA(1) of the Act was made by Ld. AO to the Dy. Director of Income Tax (Transfer Pricing Officer-IV), Kolkata (Ld. TPO) for computation of arms length price in relation to international transactions undertaken by the assessee during the year. In respect of the international transactions, Ld. TPO noted that arms length income of the said transactions was not found to be acceptable for which a show cause notice was issued vide its letter dated 15.01.2013. Against this show cause notice, assessee submitted its detailed reply dated 18.01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of capacity utilization adjustment, as already stated above, this being the first year of operation, assessee had significant idle capacity. A reference was made to audited financial statement of the assessee wherein licensed capacity, installed capacity and production details have been disclosed in the additional information pursuant to provisions of para 3 and 4 part II of Schedule VI to the Companies Act, 1956 in clause 12(a) placed at page 781 of the paper book. Details of the same are tabulated as under: Licensed capacity, installed capacity and production:- Item Unit License/installed capacity Production 2008-09 2007-08 2008-09 2007-08 Metal Bellows Pcs 60,000 60,000 12,385 10,693 Cupling Bellows Pcs 8,00,000 NA 1,89,166 NA 7.1. Capacity utilization levels of the comparables selected both by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Turnover Ratio is low, it means that sale is low or investment in plant machinery is too high. The firm having high Fixed Asset Turnover Ratio are likely operating in over capacity and the same should be curtailed by reducing the capacity or increasing its asset base to support its sales. As computation of fixed asset ratio is similar for both comparable companies and the Appellant, it was stated that the Appellant is operating at optimum label and thus rejected the contention of the Appellant. viii) The Average Net fixed assets ratio of comparables was calculated at 35.56%, whereas that of the Appellant at 51.98% by the learned TPO. 7.3. On the application of FATR by the Ld. TPO, ld. Counsel submitted that this ratio is not a correct indicator to measure the capacity utilization of a company but it is a measure for its efficiency even though Ld. TPO has stated that FATR of the assessee is at optimum level and if the same is compared to the comparable companies. Ld. Counsel also pointed out that while computing the FATR, Ld. TPO has applied the formula in an incorrect manner, Ld. TPO has computed the FATR by keeping the turnover in the denominator and fixed assets i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment, it was submitted that a business organization needs funds to cover the time gap between the time it invests money i.e. payments to suppliers and the time to collect investments i.e. collection from customers. This time gap is calculated as the period required to sell the inventories to customers plus the time required for collection of money from customers less the period allowed by suppliers for payments. It was further submitted that in a competitive environment, money has time value and such differences arise due to difference in financial/commercial terms of purchase and sales as well as by difference in levels of inventory maintained. The operating profits get impacted by such differences due to the financing cost of the working capital structure. A comparable company with favourable working capital position would be better off in terms of low or negative interest costs resulting in better margins and vice versa. Ld. Counsel thus submitted that in order to align the difference in working capital levels between that of the assessee and the comparables, impugned adjustment towards working capital was undertaken. It was also pointed out that Ld. TPO did not perform t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactional net margin method, by which, (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in subclause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: 10.2. Useful reference is also made to the Guidance Note issued by ICAI on report u/s. 92E of the Act (revised 2020) which is as under: 10.3. Reference is also made to the relevant extracts from Transfer Pricing Guidelines for Multinational Enterprises and tax Administrations issued by OECD: 11. From the above regulations and guidelines, we note that as per section 92C of the Act, ALP is required to be computed using any of the given six methods and in the manner as is prescribed in Rule 10B of the Rules. Rule 10B in turn states that the MAM would be one which, inter alia provides the most reliable measure of ALP and one of the important factors to be taken into account is the ability to make reliable and accurate adjustment. Reliability and accuracy of adjustment would largely depend on availability of reliable and accurate data. For certain types of adjustments, relevant data for comparables may either not to be available in public domain or may not be readily determinable based on information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to be rejected. 14. In the present case, assessee has given detailed working in respect of financial adjustments undertaken to eliminate material differences towards capacity utilization and working capital levels. On both the issues of differences towards capacity utilization and working capital levels, we find that it is a settled position of law whereby such an adjustment has to be granted. There are plethora of judicial precedents which have dealt with the two issues, permitting the adjustment for effective comparability. Certain relevant judicial precedence dealing with the two issues in hand as pressed by the Ld. Counsel are referred below along with the relevant extracts for better understanding of the subject matter. 15. IKA India (P.) ltd. v. Assistant Commissioner of Income Tax, Circle-3(1)(1), Bangalore (2019)101 taxmann.com 276 28. The reliability and accuracy of adjustments would largely depend an availability of reliable and accurate data. For certain types of adjustments, relevant data for comparable may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts are required to be made. If the difference between the companies are so material that adjustment is not possible, then comparables are required to be rejected. 40. In light of the principles embodied in the above judgment, the assessee prayed that the benefit of a working capital adjustment should be accorded to the assessee in the instant case. 41. The CIT(A) rejected the claim of the assessee for the reason the assessee has to demonstrate the impact on profit margins by reason of a particular level of working capital requirement in the case of the assessee and that of comparable companies. In coming to the above conclusion, the CIT(A) has placed reliance on decisions of Chennai ITAT in the case of Mobis India, ITA No.2112/Mds/2011 (AY 2007-08) and SAMDeutz Fahr India Pvt. Ltd., ITA No.2666/Mds/2016 AY 2006-07, order dated 22.2.2017. In those cases, the Tribunal was dealing with case where data was not provided. In the present case the assessee has given such working which is given as Annex. 4 to the written submissions filed before us. Such working was also given in pages 59 to 64 of submissions filed before the CIT(A) . Therefore, the TPO/AO is directed to consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inance cost as non-operating in nature. In our view, 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. 15.3. Skoda Auto India Pvt Ltd Vs. Asstt. Commissioner of Income Tax [ITA No. 202/PN/07, AY 2003-04]- Pune ITAT 17. . It was then contended that there was a gross under utilization of capacity as a result of which profitability was affected. It was submitted that the appellant company had utilized only 37.19% of its capacity whereas average capacity utilization of comparable companies works out to 68.15% was thus contended before us that the computation of TNMM was vitiated mismatch as the comparison was without taking into account (a) multiple year data; (b) the results of Ford India Limited ond Generol Motors Limited; (c) adjustments on account of high level of import content of raw material, and (d) adjustments on account of lower capacity utilization .... 19. One of the things which is clearly discernable from the facts of this case is that so for as the year be are us is concerned, which was incidentally first full year of appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fixed cost is not limited to depreciation only but there are other elements of fixed costs also. Therefore, proper adjustment has to be allowed to appellant. We, therefore, restore this issue to the file of ld. AO/ TPO to compute the quantum of capacity adjustment. The appellant is directed to provide necessary details in this regard. In the result, this ground is allowed for statistical purposes. 14. We have considered the submissions of both the parties. It is now well settled that in order to arrive at correct comparability criteria, it is necessary that the working capital employed by comparables vis a vis working capital employed by tested party has to be examined and necessary working capital adjustment has to be made in order to arrive at level playing field. We, therefore, restore this matter to the file of Ld. TPO to consider the working capital adjustment as claimed by appellant as per pages 313 to 315 of appeal set and allow the capital working adjustment, if so required. In the result, this ground is allowed for statistical purposes. 15.5. Dover India (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle 1(2), Pune [2017] 81 taxmann.com 245 As per t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing assessments. In fact, in principle, the plea of the appellant is in line with the decisions of the Tribunal in the case of Global Vanttedge P. Ltd v. DCIT in ITA Nos 2763-2764/Del/09 (Del); Brintons Carpets Asia (P) Ltd v. DCIT 139 TTJ 177; and, Skada Auto India P. Ltd. v. ACIT 122 TTJ 699. In our view, the matter requiring factual appreciation, the same is remanded back to the file of the Assessing Officer, who shall consider the propositions put forth by the appellant and allow appropriate economic adjustments on a reasonable basis. 15.7. Global Vanttedge P. Ltd Vs. DCIT [ITA Nos 2763-2764/Del/09 - AY 03-04, 04-05]- Delhi ITAT 5.4.4 Proceeding to the next issue, regarding claim of appellant for giving suitable adjustment on account of idle capacity and that they were in start up phase, I have considered the submissions of the appellant and looking to the fact that the remaining comparables were established entities, accordingly adjustment needs to be made while doing the comparability analysis. Normally wherever an entity is established it always carried some surplus capacity visa- vis present/Projected business operations. Looking into the IT industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant in TNMM analysis were reasonable and accurate and as reflected in the said analysis, international transactions made by the appellant company with its associated concerns during the year under consideration were at arms length requiring no adjustment/addition on this issue. The impugned order of the Id. ClT(A) on this issue is therefore upheld dismissing ground No.2 of Revenue's appeal. 16. Considering the factual position detailed above and the position of law as referred in judicial precedents stated above as well as under the regulations and guidelines quoted hereinabove, we agree with the contention of the Ld. Counsel for the assessee to permit making adjustment in respect of capacity utilization and working capital levels vis- -vis the comparables based on the methodology adopted by it as reproduced hereinabove. However, in the course of hearing and also by way of written submission, Ld. Counsel has pressed upon only two grounds i.e. ground nos. 2 and 3(supra) which when taken up in juxtaposition with the finding given by Ld. CIT(A) in the last para of his order leads to the selection of comparables by Ld. TPO and computation of PLI thereof has undisturb ..... X X X X Extracts X X X X X X X X Extracts X X X X
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