Affinity Express India Pvt.Ltd., Pune V. CIT(A)-I, Pune, Pune

ITA 106/PUN/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2562 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 1 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 12-01-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 20-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAWE
• Assessee Lawyers: VISHAL SOLANKI
• Keywords: Business income; Transfer pricing; International transaction; Services rendered outside India; Retrospective amendment
• Section: 92C; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E , , !'#'' $ , % & BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 106/PN/2012 %' ( ')( / ASSESSMENT YEAR : 2004-05 AFFINITY EXPRESS INDIA PVT. LTD., OFFICE NO. 6B, 7 & 8, 4 TH FLOOR, C WIND, GODREJ ETERNIA, WAKADEWADI, SHIVAJINAGAR, PUNE 411005 PAN : AABCC1224C ....... / APPELLANT ' / V/S. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(1), PUNE / RESPONDENT ASSESSEE BY : SHRI KETAN VED AND SHRI VISHAL SOLANKI REVENUE BY : SHRI HITENDRA NINAWE / DATE OF HEARING : 12-01-2016 / DATE OF PRONOUNCEMENT : 09-03-2016 * / ORDER PER VIKAS AWASTHY, JM : THE APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE OR DER OF COMMISSIONER OF INCOME TAX (APPEALS)-I, PUNE DATED 30-06- 2011 FOR THE ASSESSMENT YEAR 2004-05. 2 ITA NO. 106/PN/2012, A.Y. 2004-05 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM THE RE CORDS ARE: THE ASSESSEE COMPANY IS A SUBSIDIARY OF CVJV INC. USA. T HE ASSESSEE IS ENGAGED IN PROVIDING INFORMATION TECHNOLOGY ENABLED SERVIC ES (ITES). THE TOTAL ISSUED AND SUBSCRIBED SHARES OF THE ASSESSEE ARE 11,33,329 OUT OF WHICH THE HOLDING COMPANY IS HAVING 11,33,309 SHARE S. THE REMAINING 20 SHARES ARE HELD BY ASSOCIATE PERSONS. THU S, THE CVJC INC. USA IS HAVING COMPLETE HOLD AND CONTROL OVER THE AFFAIR S OF ASSESSEE COMPANY. THE HOLDING COMPANY IS ENGAGED IN THE MARKET SELLING AND DISTRIBUTION OF THE WORK EXECUTED BY THE ASSES SEE COMPANY. THE ASSESSEE COMPANY IS PROVIDING TWO TYPES OF SERVICES TO ITS ASSOCIATED ENTERPRISE (AE) I.E. DIGITISING SERVICES AND DATA CONVERSION/CREATION SERVICES. BOTH THE SERVICES FALL UNDER THE AMBIT OF IT ENABLED SERVICES. DURING THE COURSE OF ASSESSMENT PR OCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS CARRIED OUT INTERNATIONAL TRANSACTIONS OF MORE THAN ` 5 CRORES. THEREFORE, HE REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER (TPO) U /S. 92CA OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS TH E ACT). THE ASSESSEE DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION HAD SHOWN TOTAL SALES OF ` 11,07,77,000/- OUT OF WHICH INTERNATIONAL TRANSACTIONS WITH ITS AE WERE TO THE TUNE O F ` 11,07,46,207/-. APART FROM THE ABOVE SAID INTERNATIONAL TRA NSACTIONS, THERE WERE TRANSACTIONS AMOUNTING TO ` 1,31,701/- RELATING TO IMPORT OF CONSUMABLES AND SPARE ITEMS. ALL THE TRANSACTIONS WERE R ELATING TO THE ACTIVITY OF PROVIDING IT ENABLED SERVICES. FOR BENCHMARKIN G THE TRANSACTIONS AND DETERMINING ARMS LENGTH PRICE (ALP) TH E ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE M OST APPROPRIATE METHOD. FOR APPLYING TNMM THE ASSESSEE US ED PROFIT LEVEL INDICATOR (PLI) OF OPERATING MARGIN/OPERATING REVENUE. I N THE TP REPORT THE ASSESSEE SHOWS LOSS OF 2.09% ON SALES AS COM PARED TO THE 3 ITA NO. 106/PN/2012, A.Y. 2004-05 ARITHMETICAL MEAN OF THE OPERATING MARGIN TO SALES OF THE COMPARABLE COMPANIES, CONSIDERING AVERAGE FOR THREE YEARS, AT 4.85%. 2.1 THE ASSESSEE WHILE DETERMINING OPERATING PROFIT MADE AD JUSTMENT FOR THE UNDER UTILIZATION OF THE WORKING CAPACITY AT 29% AN D UNDER UTILIZATION OF MANPOWER BY 40%. AFTER MAKING THE ADJUSTMEN T THE ASSESSEE REWORKED ITS OPERATING MARGIN ON SALES AT 14.71 %. HOWEVER, THE TPO REJECTED THE ADJUSTMENT MADE BY THE ASSESSE E IN ITS OPERATING PROFIT ON ACCOUNT OF UNDER UTILIZATION OF CAPACITY AND MANPO WER. FURTHER, FROM THE LIST OF COMPARABLE COMPANIES FURNISHED BY THE ASSESSEE, THE TPO EXCLUDED F I SOFEX LIMITED AND FORTUN E INFORMATICS LIMITED ON THE GROUND THAT BOTH THE COMPANIES ARE EXTR EME LOSS MAKING COMPANIES HAVING OPERATING MARGIN RATIO AT (-) 120. 13% AND (-) 47.58%, RESPECTIVELY. AFTER ELIMINATING THE ABOVE SAID TWO C OMPANIES THE TPO MADE REVISED AVERAGE OPERATING MARGIN OF THE CO MPARABLES AT 12.04%. THE ASSESSEE HAD COMPUTED AVERAGE OPERATING M ARGIN OF THE COMPARABLE COMPANIES FOR THE FINANCIAL YEAR 2003-04 AT (- ) 15.36%. THE ASSESSEES CONTENTION IS THAT IF AFORESAID AVERAGE O PERATING MARGIN OF THE COMPARABLES IS CONSIDERED, THEN THE OPERATING MAR GIN EARNED BY THE ASSESSEE (-) 2.09% IS GREATER THAN THE AVERAGE OPE RATING MARGIN OF THE COMPARABLE COMPANIES. THE TPO AFTER EXCLUSION OF TWO LOSS MAKING COMPANIES AND REJECTING THE UNDER UTILIZATION OF CAPACITY A DJUSTMENT CONCLUDED THAT THE ASSESSEES INTERNATIONAL TRANSACTIONS WITH ITS AE ARE NOT AT ALP AND THUS MADE ADJUSTMENT OF ` 1,57,97,452/-. BASED ON THE ORDER OF TPO THE ASSESSING OFFICER MADE ADDITION OF ` 1,57,97,452/- VIDE ASSESSMENT ORDER DATED 29-12-2006. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFER RED AN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). THE ASSESSEE IN FIRST APPEAL INTER ALIA OBJECTED TO THE REJECTION OF ADJU STMENT RELATING 4 ITA NO. 106/PN/2012, A.Y. 2004-05 TO UNDER UTILIZATION OF CAPACITY AND MANPOWER AND EXCLUSION OF TWO COMPANIES, F I SOFEX LIMITED AND FORTUNE INFORMATICS LIMITED FROM THE LIST OF COMPARABLES. THE COMMISSIONER OF INCOME TAX (APPEA LS) VIDE IMPUGNED ORDER REJECTED BOTH THE GROUNDS OF THE ASSES SEE. NOW, THE ASSESSEE IS IN SECOND APPEAL BEFORE THE TRIBUNAL ASSAILING THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS). 3. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN APPEAL: 1. GENERAL: 1.1. THE HONORABLE CIT (A) ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN CONFIRMING TO THE TRAN SFER PRICING ADJUSTMENT TO THE VALUE OF INTERNATIONAL TRANSACTIONS PERTAINI NG TO INFORMATION TECHNOLOGY (IT) ENABLED SERVICES MADE BY THE LEARNE D TPO OF RS. 1,57,97,452 ENTERED INTO BY THE APPELLANT BY REJECT ING THE ANALYSIS UNDERTAKEN BY THE APPELLANT IN THE TRANSFER PRICING REPORT TO DETERMINE THE ARM'S LENGTH PRICE FOR ITS INTERNATIONAL TRANSA CTIONS PERTAINING TO EXPORT OF SERVICES. 2. REJECTION OF FUNCTIONAL ADJUSTMENT MADE TO PLI O F THE APPELLANT 2.1 THE HONORABLE CIT (A) ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN REJECTING THE FUNCTION AL ADJUSTMENT MADE BY THE APPELLANT TO ITS PROFIT LEVEL INDICATOR. 3. REJECTION OF TWO COMPARABLE COMPANIES FROM THE T RANSFER PRICING ANALYSIS 3.1 THE HONORABLE CIT (A) ERRED ON THE FACTS AND I N CIRCUMSTANCES OF THE CASE IN CONFIRMING THE REJ ECTION OF THE INDEPE NDENT COMPARABLE COMPANIES 'F I SOFEX LTD.' AND FORTUNE INFORMATICS LTD. (NOW KNOWN AS 'INTENSE TECHNOLOGIES LTD'.) SELECTED BY THE APPELL ANT IN ITS TRANSFER PRICING. 4. TRANSFER PRICING ADJUSTMENT WITHOUT GIVING BENEFIT OF +/- 5 PER CENT AS AVAILABLE UNDER PROVISO TO SECTION 92C( 2) OF THE ACT 5 ITA NO. 106/PN/2012, A.Y. 2004-05 4.1 THE HONORABLE CIT (A) ERRED ON THE FACTS AND I N CIRCUMSTANCES OF THE CASE AND IN LAW IN MAKING THE TRANSFER PRICING ADJUSTMENT FROM THE ARM'S LENGTH PRICE WITHOUT, GIVING THE BEN EFIT OF THE OPTION AVAILABLE TO THE APPELLANT UNDER PROVISO TO SECTION 92C(2) OF THE ACT. 5. EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITHOUT PREJUDICE TO THE OTHER. 6 . THE APPELLANT RESERVES THE RIGHT TO AMEND, ALTER OR ADD TO THE GROUNDS OF APPEAL. 4. SHRI SHRI KETAN VED AND SHRI VISHAL SOLANKI APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE AUTHORITIES BELOW HAV E ERRED IN NOT GRANTING THE CAPACITY UNDER UTILIZATION ADJUSTMENT. THE LD . AR SUBMITTED THAT WHILE CALCULATING OPERATING MARGIN THE FIXE D COSTS HAVE BEEN ADJUSTED TO THE EXTENT OF CAPACITY UNDER UTILIZED. THE ASSESSEE COMPANY HAS BUILT UP SUBSTANTIAL CAPACITY UTILIZATION DURING THE YEAR 2003-04 FOR ITS DOCUMENTATION BUSINESS IN ANTICIPATION OF INCREASE IN BUSINESS AS WELL AS ADDITION OF NEW CUSTOMERS. HOWEVER, TH E BUSINESS DID NOT GROW UP IN THE LINE WITH THE INCREASE IN THE CAPAC ITY. MOREOVER, THE EXPECTATIONS OF INCREASE IN BUSINESS FROM NEW CUSTOME RS DID NOT MATERIALIZE. THE ASSESSEE COMPANY HAD INCURRED SUBSTANT IAL EXPENDITURE FOR UNDERSTANDING THE BUSINESS REQUIREMENTS OF THE POTENTIAL CUSTOMERS, PERSONNEL, SOFTWARE AND TRAINING COSTS TO FULFILL THEIR REQUIREMENTS AND SUCH OTHER INCIDENTAL COSTS. ALL THESE THINGS RESULTED IN LOSS FOR THE YEAR ON ACCOUNT OF UNDER ABSORP TION OF FIXED COSTS INCURRED FOR INCREASING CAPACITY AND BUILDING UP NEW CLIENTELE. SINCE, THE CAPACITY OF THE COMPANY HAS BEEN UNDER UTILIZED , FIXED COSTS TO THE EXTENT OF UNDER UTILIZATION OF CAPACITY HAVE NOT B EEN CONSIDERED FOR THE PURPOSE OF CALCULATION OF OPERATING MARGIN EARNED BY THE ASSESSEE COMPANY. THE LD. AR REFERRED TO PAGE 181 OF THE PAPER BOOK TO SHOW WORKING OF UNDER UTILIZATION OF CAPACITY FOR THE DOC UMENTATION 6 ITA NO. 106/PN/2012, A.Y. 2004-05 BUSINESS. THE LD. AR FURTHER REFERRED TO PAGES 335 TO 33 7 OF THE PAPER BOOK TO SUBSTANTIATE ITS CLAIM THAT THERE WAS UNDER UTILIZ ATION OF CAPACITY AND MANPOWER. THE LD. AR CONTENDED THAT THESE WORKINGS WERE NOT CONSIDERED BY THE COMMISSIONER OF INCOME TAX (A PPEALS) DURING THE FIRST APPELLATE PROCEEDINGS. THE LD. AR FURTHER S UBMITTED THAT THE ASSESSEE IS NOT WORKING ON COST PLUS BASE, TH E ASSESSEE IS WORKING ON UNIT COST. THE LD. AR REFERRED TO THE CONTRAC T BETWEEN THE CVJV INC. USA AND THE ASSESSEE FOR THE EXPORT OF EMBR OIDERY SOFTWARE DESIGN DEVELOPMENT EFFECTIVE FROM 01 ST APRIL, 2003 AT PAGES 226 TO 228 OF THE PAPER BOOK. THE LD. AR ALSO FURNISHED REVISED PLI C OMPUTATION AFTER ADJUSTING THE SALARY AND EMPLOYEE COST OF THE ASSE SSEE AND THE COMPARABLE COMPANIES. THE LD. AR PLACED RELIANCE ON THE FO LLOWING DECISIONS OF THE TRIBUNAL IN SUPPORT OF HIS CONTENTIONS THA T CAPACITY UTILIZATION ADJUSTMENT SHOULD BE GRANTED : I. AMDOCS BUSINESS SERVICES (P.) LTD. VS. DCIT, 54 SOT 46; II. GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. VS. DCIT IN I TA NO. 1231/BANG/2010 DECIDED ON 05-08-2011; III. TASTY BITE EATABLES LIMITED VS. ACIT IN ITA NO. 1682/PN/20 11 DECIDED ON 10-06-2015. IV. DCIT VS. CLAAS INDIA PVT. LTD. IN ITA NO. 1783/DEL/2011 D ECIDED ON 12-08-2015. 4.1 THE LD. AR FURTHER SUBMITTED THAT THE AUTHORITIES BELOW HAVE ERRED IN EXCLUDING F I SOFEX LIMITED AND FORTUNE INFORMATIC S LIMITED FROM THE LIST OF COMPARABLES ON THE GROUND THAT THEY ARE LOSS MAKING COMPANIES. WHEREAS A PERUSAL OF YEAR WISE DETAILS OF OPERA TING MARGIN RATIO OF BOTH THE ENTITIES AT PAGE 293 OF THE PAPER BOOK WOULD SHOW THAT OUT OF 7 YEARS ( FROM 1999-00 TO 2005-06) THE AFORESAID C OMPANIES HAVE EARNED PROFITS IN 4 YEARS. UP TO THE PERIOD RELEVANT TO THE ASSESSMENT 7 ITA NO. 106/PN/2012, A.Y. 2004-05 YEAR 2004-05 BOTH THE COMPARABLES HAVE LOSSES IN 2 YEA RS ONLY. TO BE CONSIDERED AS A CONSISTENT LOSS MAKING COMPANY, THE COMP ANY SHOULD HAVE INCURRED LOSSES IN 3 CONSECUTIVE FINANCIAL YEARS, WHICH IS NOT THE CASE IN THE AFORESAID COMPARABLES. THE LD. AR FURTHER REFE RRED TO THE TABLE AT PAGE 314 OF THE PAPER BOOK TO SHOW THAT THE SAID COMPANIES HAD POSITIVE NET WORTH IN THE YEARS UNDER CONSIDERATION AND WERE NOT SICK ENTERPRISES. BOTH THE COMPANIES HAD INCURRED NORMA L BUSINESS LOSSES AS A PART OF THEIR OPERATIONS. THE LD. AR SUBMITTED THAT IN THESE CIRCUMSTANCES THE ACTION OF THE TPO IN REJECTING THE COM PARABLE ENTITIES ON THE BASIS OF LOSS MAKING COMPANIES IS NOT APPRO PRIATE. A COMPARABLE SHOULD NOT BE REJECTED MERELY ON THE GROUN D THAT IT HAS LOSS IN A PARTICULAR YEAR. IN SUPPORT OF HIS SUBMISSIONS, TH E LD. AR PLACED RELIANCE ON THE FOLLOWING JUDGMENTS : I. JOY ALUKKAS INDIA PVT. LTD. VS. ACIT IN ITA NO. 230 OF 2013 DECIDED ON 20-01-2014 (KERALA HC); II. CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) (P.) LTD. VS. DCIT, 5 6 TAXMANN.COM 417 (DELHI); III. CUMMINS TURBO TECHNOLOGIES LIMITED VS. DDIT (INTERNATIONAL TAXATION) IN ITA NO. 118/PN/2011 DECIDED ON 31-05-2013; IV. M/S. BOBST INDIA PRIVATE LIMITED VS. DCIT IN ITA NO. 1380/PN/2010 DECIDED ON 09-10-2014. 5. ON THE OTHER HAND SHRI HITENDRA NINAWE REPRESENTING THE DEPARTMENT VEHEMENTLY SUPPORTED THE FINDINGS OF COMMISSIO NER OF INCOME TAX (APPEALS) IN UPHOLDING THE ASSESSMENT ORDER. THE LD. DR SUBMITTED THAT THE ASSESSEE IS A CAPTIVE UNIT OF ITS AE. T HE SUBSTANTIAL PRODUCTION OF THE ASSESSEE COMPANY IS UTILIZED BY ITS AE. SINCE, THE SALES OF THE ASSESSEE IS MAINLY DONE BY AE, THE ASSESSEE IS HAVING PRIOR INFORMATION REGARDING ITS FUTURE CAPACITY UNITIZATION. DURIN G THE FIRST 8 ITA NO. 106/PN/2012, A.Y. 2004-05 APPELLATE PROCEEDINGS THE ASSESSEE WAS GIVEN OPPORTUNITY TO EXPLAIN WHETHER SIMILAR CONDITIONS WERE FACED BY THE COMPARABLE CO MPANIES. THE ASSESSEE WAS FURTHER ASKED TO GIVE THE DETAILS FOR N ORMAL CAPACITY RATE OF THE INDUSTRIES IN WHICH THE ASSESSEE COMPANY IS O PERATING AND AS TO HOW UNDER UTILIZATION OF THE CAPACITY IS ARRIVED AT WITH RESPECT TO COMPARABLE COMPANIES. THE ASSESSEE VIDE LETTER DATED 01 -12-2009 ADMITTED THAT THE DETAILS ARE NOT AVAILABLE. THUS, IT IS EV IDENT THAT THE CLAIM OF THE ASSESSEE IS NOT BASED ON ANY ACCEPTABLE NOR MS AND IS MERELY A SUPERFICIAL CALCULATIONS. IN RESPECT OF REJECTION OF TWO COMPARABLE COMPANIES THE LD. DR CONTENDED THAT BOTH THE COMPANIES DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDE R CONSIDERATION HAD SUBSTANTIAL LOSS AND WERE HAVING NEGATIVE OPERATING M ARGIN. THEREFORE, THEY WERE RIGHTLY REJECTED BY THE TPO AND T HE COMMISSIONER OF INCOME TAX (APPEALS). THE LD. DR SUBMITTED THAT AS FAR A S GROUND NO. 4 RAISED IN THE APPEAL WITH REGARD TO BENEFIT OF SAFE HA RBOUR 5% IS CONCERNED THE PROVISIONS OF SECTION 92C(2) HAVE BEEN AME NDED BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FROM 01-04-200 2. THEREFORE, THE ASSESSEE CANNOT CLAIM THE BENEFIT OF 5%, IF THE DIFFERENCE BETWEEN THE ALP DETERMINED BY THE TPO AND AC TUAL PRICE CHARGED IS BEYOND THE 5% MARGIN. 6. THE LD. AR OF THE ASSESSEE CONTROVERTING THE SUBMISSIO NS MADE ON BEHALF OF THE DEPARTMENT SUBMITTED THAT UNDER UTILIZATI ON CAPACITY ADJUSTMENT IS TO BE MADE ON COMPARABLES AND NOT ON T HE TESTED PARTY. THE LD. AR FAIRLY ADMITTED THAT GROUND NO. 4 RAISED IN THE APPEAL RELATING TO 5% SAFE HARBOUR HAS TO BE DECIDED AGAINST THE ASSESSEE IN VIEW OF THE AMENDED PROVISIONS OF SECTION 92C OF THE ACT. 9 ITA NO. 106/PN/2012, A.Y. 2004-05 7. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESEN TATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIE S BELOW. WE HAVE ALSO CONSIDERED THE DECISIONS ON WHICH THE LD. AR OF T HE ASSESSEE HAS PLACED RELIANCE TO SUPPORT HIS SUBMISSIONS. THE ASSES SEE IN ITS APPEAL HAS RAISED 6 GROUNDS. GROUND NOS. 1, 5 AND 6 ARE GENERAL IN NATURE. HENCE, REQUIRE NO ADJUDICATION. THUS, THE EFFECTIV E GROUNDS RAISED IN THE APPEAL ARE 2, 3 AND 4 ONLY. 8. IN GROUND NO. 2 THE ASSESSEE HAS ASSAILED THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) IN UPHOLDING THE ORDER OF ASSESSING OFFICER IN REJECTING FUNCTIONAL (CAPACITY UTILIZATION) ADJUSTMENT. THE CONTENTION OF THE ASSESSEE IS THAT DUR ING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION TH E ASSESSEE HAS EXPANDED ITS OUTPUT CAPACITY BY INCREASING MANPOWER BY ANTICIPATING NEW MARKETS AND INCREASED VOLUME OF WORK FROM THE EXIST ING CUSTOMERS. HOWEVER, THE VOLUME OF THE WORK DID NOT INC REASE IN COMMENSURATE WITH THE EXPANDED PRODUCTION CAPACITY OF T HE ASSESSEE COMPANY. WHILE CALCULATING OPERATING MARGIN THE FIXED COST HAVE BEEN ADJUSTED TO THE EXTENT OF CAPACITY UNDER UNITIZED IN THE DOCUMENTATION BUSINESS OF THE ASSESSEE. THE ASSESSEE HAS GIVEN WORK ING OF UNDER UTILIZATION OF THE CAPACITY AND MANPOWER FOR DOCUMENTATION BUSINESS AT PAGE 181 OF THE PAPER BOOK. THE RELEVANT EXTRACT OF TH E SAME IS REPRODUCED HERE-IN-UNDER: SR. NO. PARTICULARS NUMBE I UNDER-ABSORPTION OF OVERHEADS INSTALLED CAPACITY - JOBS PER DAY 413 ACTUAL JOBS PER DAY 294 UNDER-UTILIZATION OF WORKING FACILITIES 119 - % UNDER-UTILISATION OF WORKING FACILITIES 29% 10 ITA NO. 106/PN/2012, A.Y. 2004-05 I UNDER-UTILIZATION OF MANPOWER AVERAGE NUMBER OF EMPLOYEES (EMPLOYED DURING THE YE AR) 197 AVERAGE NUMBER OF EMPLOYEES EXECUTING THE JOBS 118 (CONSIDERING 2.5 JOBS PER EMPLOYEE PER HOUR AS STANDARD) UNDER-UTILIZATION OF MAN-POWER 79 % UNDER-UTILIZATION OF MAN-POWER 40% THE LD. AR ALSO FURNISHED REVISED WORKING OF PLI OF THE COMPARABLES IN SUPPORT OF EMPLOYEES COST AND FIXED EXPENSES. 8.1 THE TPO AND COMMISSIONER OF INCOME TAX HAVE DENIED T HE CAPACITY UTILIZATION ADJUSTMENT ON THE GROUND THAT THE A SSESSEE COMPANY IS A CAPTIVE UNIT OF ITS AE. IT IS PRESUMED THAT THE ORDERS/BUSINESS ARE ASSURED BECAUSE THE ENTIRE CAPACIT Y CREATED IS FOR THE PURPOSE OF BUSINESS OF THE HOLDING AE. THE UNDER UT ILIZATION OF THE CAPACITY CAN ONLY BE POSSIBLE IF THE HOLDING AE IS NOT PERFORMING WELL. THE FACT THAT THE ASSESSEE HAS INCREASED THE WORKING C APACITY DURING THE YEAR HAS NOT BEEN EXAMINED BY THE AUTHORITIE S BELOW. THE TPO AND THE COMMISSIONER OF INCOME TAX (APPEALS) REJECTED THE CONTENTIONS OF THE ASSESSEE MERELY ON THE GROUND THAT THE ASSESSEE IS A CAPTIVE UNIT OF HOLDING AE, THEREFORE, THE ENTIRE PRODUCTION CAPACITY WILL BE MONITORED AND UTILIZED BY THE HOLDING COMPANY ALONE. TH E TPO AND THE COMMISSIONER OF INCOME TAX (APPEALS) HAVE ERRED IN NOT EXAMINING THE FACTUAL ASPECT OF INCREASE IN OUTPUT CAPACITY BEFORE R EJECTING FUNCTIONAL ADJUSTMENT MADE TO THE PLI. THE CONTENTION OF THE ASSESSEE IS THAT IT HAD INCREASED THE CAPACITY IN ANTICIPATION OF NEW VISTAS. WE DO NOT CONCUR WITH THE VIEW OF COMMISSIONER OF INCOME TAX (APPEALS) THAT FUTURE BUSINESS DEMANDS CAN BE PREDICTED WITH ACCU RACY BY USING 11 ITA NO. 106/PN/2012, A.Y. 2004-05 MODERN BUSINESS MANAGEMENT TOOLS. IF THAT WOULD BE THE CASE, NO BUSINESS VENTURE WOULD FAIL. THE FUTURE IS UNCERTAIN, MARKE T FORCES PLAY A VITAL ROLE IN PROVIDING BUOYANCY TO NEW BUSINESS VEN TURES. THE CLAIM OF THE ASSESSEE CAN BE REJECTED IF THE ASSERTIONS M ADE BY THE ASSESSEE ARE FOUND TO BE INCORRECT. THE TRIBUNAL IN VARIO US CASES HAS GRANTED UNDER/LOW CAPACITY UTILIZATION ADJUSTMENTS. 9. THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. VS. DCIT (SUPRA) HAS H ELD AS UNDER: 15. WITH REGARD TO LOW CAPACITY UTILIZATION, ADJUS TMENTS TO BE GIVEN IN THE DETERMINATION OF ALP IN ITES SECTOR, THE LEARNE D COUNSEL FOR THE ASSESSEE SUBMITTED THAT DURING THE YEAR UNDER CONSI DERATION THE ASSESSEE HAD UNDER UTILIZED ITS FACILITIES TO THE E XTENT OF 51.89% AND THEREFORE, THIS ADJUSTMENTS ALSO SHOULD BE GIVEN WH ILE DETERMINING THE ALP. AFTER GIVING ADJUSTMENTS, ACCORDING TO HIM THE NET OPERATING MARGIN ON COST WOULD BE 27.46%. HE SUBMITTED THAT THE LEAR NED TPO HAS REJECTED THE ADJUSTMENTS ON THE GROUND THAT COMPARA BLES HAVE SIMILAR PROBLEM AS THEY HAVE IDLE BENCH STRENGTH. HE SUBMIT TED THAT THE ADJUSTMENTS SOUGHT WAS FOR UNDER UTILIZATION OF INF RASTRUCTURE WHILE IN THE CASE OF COMPARABLES, IT IS THE CASE OF IDLE BEN CH STRENGTH. HE SUBMITTED THAT INFRASTRUCTURE CERTAIN FIXED COSTS A TTACHED TO IT WHICH WOULD AFFECT THE OPERATING MARGIN OF THE ASSESSEE C ONSIDERABLY. 15.1 IN SUPPORT OF HIS CONTENTION, THAT ADJUSTMENT HAS TO BE MADE FOR UNDER UTILIZATION OF THE INFRASTRUCTURES HE PLACED RELIANCE UPON THE DECISION OF THE TRIBUNAL AT DELHI IN THE CASE OF M/ S GLOBAL VANTEDGE PVT.LTD., (2010-TIOL-24 ITAT- DELHI) AND ALSO THE D ECISION OF ITAT IN THE CASE OF M/S FIAT INDIA PVT.LTD., VS ACIT 2010-TII-3 0 ITAT-MUM-TP. HE HAS ALSO DRAWN OUR ATTENTION TO THE ORDERS OF THE T PO IN THE CASE OF OTHER COMPANIES FOR THE ASSESSMENT YEAR 2007-08, THE EXTR ACTS OF WHICH ARE REPRODUCED AT PAGES 199-200 OF PAPER BOOK-2, WHEREI N THE TPO HAS OBSERVED THAT THE AVERAGE UNDER UTILIZATION OF MANP OWER IN ITES INDUSTRY IS 20% AS PER INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. THE ADJUSTMENT TO THE EXTENT OF DIFFERENCE IS BEING ALL OWED. HE SUBMITTED THAT WHEN THE UNDER UTILIZATION OF MANPOWER IS ALLOWED, SIMILAR ADJUSTMENT FOR UNDER UTILIZATION OF INFRASTRUCTURE ALSO HAS TO BE ALLOWED. 12 ITA NO. 106/PN/2012, A.Y. 2004-05 10. THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF TASTY BITE EATABLE S LIMITED VS. ACIT (SUPRA) WHILE DEALING WITH THE ISSUE OF CAPAC ITY UNDER UTILIZATION PLACED RELIANCE ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. M/S. FIAT INDIA PVT. LTD. IN ITA NO. 1848/MUM/2009 DECIDED ON 30-04-2010 AND IN THE CASE O F ARISTON THERMO INDIA IN ITA NO. 1455/PN/2010 DECIDED ON 25-06- 2013 AND GRANTED THE BENEFIT OF LOW CAPACITY UTILIZATION TO THE ASSESSEE. 11. THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. CLAAS INDIA PVT. LTD. (SUPRA) WHILE DEALING WITH THE ISSUE OF CAPACITY UTILIZATION IN AN ELABORATE MANNER BIFURCATED THE ISSUE IN TW O PARTS I.E. CAPACITY ADJUSTMENT, ALLOWABLE IN WHOSE HANDS AND HOW TO COMPUTE CAPACITY ADJUSTMENT UNDER TNMM. THE RELEVANT EXTRACT OF THE ORDER OF TRIBUNAL READS AS UNDER: 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. BEFORE EMBARKING UPON THE QUEST ION OF ALLOWABILITY AND EXTENT OF CAPACITY ADJUSTMENT UNDER THE TNMM, W E WANT TO MAKE IT CLEAR THAT THE ASSESSEE REDUCED ITS OPERATING COSTS BY CONSIDERING ITS CAPACITY UTILIZATION VIS--VIS THAT OF COMPARABLES AND RESULTANTLY CLAIMED THAT ITS INCREASED PROFIT AS A RESULT OF SUCH REDUC ED OPERATING COSTS BE COMPARED WITH THAT OF THE COMPARABLES. THE TPO HAS ALSO AGREED IN PRINCIPLE WITH THE OTHERWISE AVAILABILITY OF THE CA PACITY ADJUSTMENT. THE ISSUE OF ALLOWING CAPACITY ADJUSTMENT BEFORE US CAN BE DIVIDED INTO TWO SUB-ISSUES FOR CONSIDERATION, VIZ., FIRST, WHETHER THE ADJUSTMENT SHOULD BE ALLOWED IN THE HANDS OF THE ASSESSEE AS HAS BEEN DONE BY THE AUTHORITIES BELOW OR COMPARABLES AND SECOND, HOW TO COMPUTE CAPACITY UTILIZATION ADJUSTMENT UNDER THE TNMM. WE WILL DEAL WITH THESE ASPECTS ONE BY ONE. I. CAPACITY ADJUSTMENT SHOULD BE ALLOWED IN WHOSE H ANDS? 9.1. IT HAS BEEN NOTICED ABOVE THAT THE ASSESSEE CL AIMED IDLE CAPACITY ADJUSTMENT BY REDUCING ITS OWN OPERATING COSTS. IT IS FURTHER OBSERVED THAT THE AUTHORITIES BELOW HAVE REDUCED THE AMOUNT OF ADJUSTMENT BY EXCLUDING CERTAIN COSTS FROM THE AMBIT OF THE COSTS QUALIFYING FOR ADJUSTMENT. HOWEVER, THE ADJUSTMENT HAS BEEN ULTIMA TELY ALLOWED FROM THE OPERATING COSTS INCURRED BY THE ASSESSEE. IN SU CH CIRCUMSTANCES, THE 13 ITA NO. 106/PN/2012, A.Y. 2004-05 QUESTION ARISES AS TO WHETHER THE ACTION OF THE AUT HORITIES IN ALLOWING THE REDUCTION OF THE OPERATING COSTS INCURRED BY THE AS SESSEE, IS IN ACCORDANCE WITH LAW? IN ORDER TO FIND ANSWER TO THI S QUESTION, WE NEED TO REFER TO THE MANNER OF COMPUTATION OF THE ARMS LENGTH PRICE UNDER TNMM, WHICH HAS BEEN SET OUT IN RULE 10B(1)(E) AS U NDER:- (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGA RD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III) ; (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. 9.2. SUB-CLAUSE (I) IN THE PROCESS OF DETERMINATION OF THE ALP UNDER THE TNMM TALKS OF THE COMPUTATION OF NET OPERATING PROF IT MARGIN REALIZED BY THE ASSESSEE FROM AN INTERNATIONAL TRANSACTION. SUB -CLAUSE (II) IS THE COMPUTATION OF NET OPERATING PROFIT MARGIN REALIZED BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON. THIS REFERS TO DETERMINING THE OPERATING PROFIT MARGIN OF COMPARAB LES WITH THE SAME BASE AS THAT OF THE ASSESSEE. SUB-CLAUSE (III) PROV IDES THAT THE NET PROFIT MARGIN REALIZED BY A COMPARABLE COMPANY, DETERMINED AS PER SUB-CLAUSE (II) ABOVE, IS ADJUSTED TO TAKE INTO ACCOUNT THE D IFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, ..... WHICH COULD MATERIALLY AFFECT T HE AMOUNT OF NET PROFIT 14 ITA NO. 106/PN/2012, A.Y. 2004-05 MARGIN IN THE OPEN MARKET. IT IS THIS ADJUSTED NET PROFIT MARGIN OF THE UNRELATED TRANSACTIONS OR OF THE COMPARABLE COMPANI ES, AS DETERMINED UNDER SUB-CLAUSE (III), WHICH IS USED FOR THE PURPO SES OF MAKING COMPARISON WITH THE NET PROFIT MARGIN REALIZED BY T HE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION AS PER SUB-CLAUSE (I). 9.3. SUB-RULE (2) OF RULE 10B PROVIDES THAT THE COM PARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO CERTAIN FACTORS WHICH HAVE BEEN ENUMERATED THEREIN. RULE 10B(3) STATES THAT AN UNCONTROLLED TR ANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION, IF EITH ER THERE ARE NO DIFFERENCES BETWEEN THE TWO OR A REASONABLY ACCURA TE ADJUSTMENT CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFE RENCES. WHEN WE READ SUB-CLAUSES (II) & (III) OF RULE 10B(1)(E) IN JUXTA POSITION 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 A ND 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 M ARGIN OF THE COMPARABLE COMPANIES BECOMES A BENCHMARK. HOWEVER, IN CASE THERE ARE SOME DIFFERENCES BETWEEN THE COMPARABLES AND TH E ASSESSEE, THEN THE EFFECT OF SUCH DIFFERENCES SHOULD BE IRONED OUT BY MAKING SUITABLE ADJUSTMENT TO THE OPERATING PROFIT MARGIN OF COMPAR ABLES. THAT IS THE WAY FOR BRINGING BOTH THE TRANSACTIONS, NAMELY, THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, ON THE SAME PLATFORM FOR MAKING A MEANINGFUL AND EFFECTIVE COMP ARISON. THE ABOVE ANALYSIS OVERTLY TRANSPIRES THAT THE LAW PROVIDES F OR ADJUSTING THE PROFIT MARGIN OF COMPARABLES ON ACCOUNT OF THE MATERIAL DI FFERENCES BETWEEN THE INTERNATIONAL TRANSACTION OF THE ASSESSEE AND C OMPARABLE 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 INTERNATIO NAL TRANSACTION IS TO BE COMPUTED AS SUCH, WITHOUT ADJUSTING IT ON ACCOUN T OF DIFFERENCES WITH THE COMPARABLE UNCONTROLLED TRANSACTIONS. THE ADJUS TMENT, IF ANY, IS REQUIRED TO BE MADE ONLY IN THE PROFIT MARGINS OF T HE COMPARABLES. 9.4. REVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE AUTHORITIES BELOW HAVE ADJUSTED THE OPERATING COSTS OF THE ASSE SSEE IN ALLOWING THE CAPACITY ADJUSTMENT. AS AGAINST THAT, THE CORRECT C OURSE OF ACTION PROVIDED UNDER THE LAW IS TO ADJUST THE OPERATING C OSTS OF THE COMPARABLE AND THEIR RESULTANT OPERATING PROFIT. THERE IS HARD LY NEED TO ACCENTUATE THAT THERE CAN BE NO ESTOPPEL AGAINST THE LAW. ONCE THE LAW ENJOINS FOR DOING A PARTICULAR THING IN A PARTICULAR MANNER ALO NE, IT IS NOT OPEN TO 15 ITA NO. 106/PN/2012, A.Y. 2004-05 ANYONE TO ADOPT A CONTRARY OR DIFFERENT APPROACH. A S THE AUTHORITIES BELOW HAVE ADOPTED A COURSE OF ACTION IN ALLOWING A DJUSTMENT, WHICH IS NOT IN CONSONANCE WITH LAW, WE CANNOT APPROVE THE S AME. THE IMPUGNED ORDER IS SET ASIDE AND THE MATTER IS RESTORED TO TH E FILE OF THE TPO/AO FOR GIVING EFFECT TO THE AMOUNT OF IDLE CAPACITY ADJUST MENT IN THE OPERATING PROFIT OF THE COMPARABLES AND NOT THE ASSESSEE. II. HOW TO COMPUTE CAPACITY UTILIZATION ADJUSTMENT UNDER TNMM: - 10.1. UNDER THE TNMM, THE ALP OF AN INTERNATIONAL T RANSACTION IS DETERMINED BY COMPUTING AND COMPARING THE PERCENTAG E OF OPERATING PROFIT MARGIN REALIZED BY THE ASSESSEE WITH THAT OF THE COMPARABLES. WE HAVE NOTICED ABOVE THAT THE DIFFERENCE IN THE CAPAC ITY UTILIZATIONS IS AN IMPORTANT FACTOR, WHICH NEEDS TO BE ADJUSTED. NO ME CHANISM HAS BEEN GIVEN UNDER THE ACT OR THE RULES FOR COMPUTING THE AMOUNT OF CAPACITY UTILIZATION ADJUSTMENT. 10.2. ON AN OVERALL UNDERSTANDING, WE FEEL THAT UND ER THE TNMM, THE FIRST STEP IN GRANTING CAPACITY UTILIZATION ADJUSTM ENT IS TO ASCERTAIN THE PERCENTAGE OF CAPACITY UTILIZATION BY THE ASSESSEE AND COMPARABLES. THERE CAN BE NO DIFFICULTY IN WORKING OUT THESE PER CENTAGES. THE SECOND STEP IS TO GIVE EFFECT (POSITIVE OR NEGATIVE) TO TH E DIFFERENCE IN THE PERCENTAGE OF CAPACITY UTILIZATIONS OF THE ASSESSEE VIS--VIS COMPARABLES, ONE BY ONE, IN THE OPERATING PROFIT OF COMPARABLES BY ADJUSTING THEIR RESPECTIVE OPERATING COSTS. OPERATING COSTS CAN BE EITHER FIXED OR VARIABLE OR SEMI-VARIABLE. ONE NEEDS TO SPLIT SEMI-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. ACCORDIN GLY, 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 COMPA RABLE. IT CAN BE ILLUSTRATED WITH THE HELP OF A SIMPLE EXAMPLE. SUPP OSE THE FIXED COSTS INCURRED BY A COMPARABLE (SAY, A) ARE RS. 100 AND I T HAS CAPACITY UTILIZATION OF 50% AS AGAINST THE CAPACITY UTILIZAT ION OF 25% BY THE ASSESSEE. THE ABOVE PERCENTAGES SHOW THAT THE ASSES SEE 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 FIXE D COSTS AND A HAS INCURRED LOWER COSTS. IN ORDER TO MAKE AN EFFECTIVE COMPARISON, THERE ARISES A NEED TO OBLITERATE THE EFFECT OF THIS DIFF ERENCE IN CAPACITY UTILIZATIONS. IT CAN BE DONE BY PROPORTIONATELY SCA LING UP THE FIXED COSTS 16 ITA NO. 106/PN/2012, A.Y. 2004-05 INCURRED BY A SO AS TO MAKE IT FULLY COMPARABLE WIT H 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 TH E 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 CAPA CITY UTILIZATION. THERE CAN BE CONVERSE SITUATION AS WELL. SUPPOSE TH E FIXED COSTS INCURRED BY A COMPARABLE (SAY, B) ARE RS. 100 AND IT HAS CAP ACITY UTILIZATION OF 25% AS AGAINST THE CAPACITY UTILIZATION OF 50% BY T HE ASSESSEE. THE ABOVE PERCENTAGES SHOW THAT THE ASSESSEE HAS INCURR ED FULL FIXED COSTS AT 50% OF THE UTILIZATION OF ITS CAPACITY, AS AGAIN ST B INCURRING FULL FIXED COSTS AT 25% OF THE CAPACITY UTILIZATION. THIS DECI PHERS THAT THE ASSESSEE HAS INCURRED RELATIVELY LOWER FIXED COSTS AND B HAS INCURRED HIGHER COSTS. THIS DIFFERENCE IN CAPACITY UTILIZATIONS CAN BE ELI MINATED BY PROPORTIONATELY SCALING DOWN THE FIXED COSTS INCURR ED BY B SO AS TO MAKE IT FULLY COMPARABLE. THIS WE CAN DO BY REDUCING THE FIXED COSTS OF B TO RS. 50 (RS.100 INTO 25/50) AS AGAINST THE ACTUALLY INCU RRED FIXED COST BY IT AT RS.100. WHEN WE COMPUTE OPERATING PROFIT OF B BY SU BSTITUTING THE FIXED COSTS AT RS.50 WITH THE ACTUALLY INCURRED AT RS.100 , IT WOULD MEAN THAT THE FIXED COSTS INCURRED BY THE ASSESSEE AND B ARE AT THE SAME CAPACITY UTILIZATION LEVEL. 10.3. TURNING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT BOTH THE TPO AS WELL AS THE LD. CIT(A) HAVE PROCEEDED ON A WRONG PREMISE NOT ONLY BY ALLOWING CAPACITY UTILIZATION ADJUSTMENT IN THE ASS ESSEES PROFIT, WHICH IS CONTRARY TO THE LEGAL POSITION AS DISCUSSED ABOVE, BUT ALSO BY CONSIDERING ALL THE COMPARABLES AS ONE UNIT WITH THE AVERAGE PE RCENTAGE OF THEIR RESPECTIVE CAPACITY UTILIZATIONS. IT IS FURTHER OBS ERVED THAT IN THE CALCULATION OF SUCH CAPACITY UTILIZATION ADJUSTMENT , THE LD. CIT(A) HAS CONSIDERED FOUR COMPANIES AS COMPARABLE, WHICH VIEW HAS BEEN MODIFIED BY US SUPRA INASMUCH AS WE HAVE HELD THAT M/S EICHER MOTORS AND M/S. FORCE MOTORS ARE INCOMPARABLE. NATURALLY, THEY WOULD ALSO GO OUT OF RECKONING IN THE COMPUTATION OF IDLE CAPACIT Y UTILIZATION ADJUSTMENT. IN THE ABSENCE OF THE AVAILABILITY OF F INANCIALS OF ALL THE COMPARABLE COMPANIES, IT IS NOT POSSIBLE AT OUR END TO WORK OUT THE AMOUNT OF CAPACITY ADJUSTMENT IN THE MANNER DISCUSS ED ABOVE. ERGO, WE SET ASIDE THE IMPUGNED ORDER AND DIRECT THE TPO/AO TO WORK OUT THE AMOUNT OF CAPACITY UTILIZATION ADJUSTMENT AFRESH IN TERMS OF OUR ABOVE OBSERVATIONS. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDINGS. 17 ITA NO. 106/PN/2012, A.Y. 2004-05 12. THUS, IN VIEW OF THE DECISIONS OF THE TRIBUNAL DISCUSSED A BOVE, IT IS EVIDENT THAT THE CAPACITY UTILIZATION ADJUSTMENT HAS TO BE GRANTED WHERE THERE HAS BEEN UNDER UTILIZATION OR LOWER UTILIZATION OF THE CAPACITY. IN THE FACTS OF THE PRESENT CASE, WE DEEM IT A PPROPRIATE TO REMIT THE ISSUE BACK TO THE FILE OF ASSESSING OFFICER TO DECID E THIS ISSUE AFRESH AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, D OCUMENTS ON RECORD AND DECISIONS OF THE TRIBUNAL. ACCORDINGLY, GROUND NO. 2 RAISED IN THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSE. 13. IN GROUND NO. 3 THE ASSESSEE HAS IMPUGNED THE FINDING S OF COMMISSIONER OF INCOME TAX (APPEALS) IN REJECTING TWO COMPA RABLE COMPANIES ON THE GROUND THAT THEY ARE LOSS MAKING ENTI TIES. THE ASSESSEE HAD SELECTED 7 COMPARABLES WITH THE FOLLOWING OPE RATING MARGIN RATIO : ___________________________________________________ _____ COMPARABLE COMPANY OPERATING MARGIN RATIO __________________________________________________ ______ ACE SOFTWARE EXPORTS LIMITED 16.97% C S SOFTWARE ENTERPRISE LIMITED 10.4% F I SOFEX LIMITED (120.13)% FORTUNE INFORMATICS LIMITED (47.58)% FEDERAL TECHNOLOGIES LIMITED 8.47% K L G SYSTEL LIMITED 9.74% ZIGMA SOFTWARE LIMITED 14.64% AVERAGE OPERATING MARGIN RATIO (15.36)% 13.1 FROM THE LIST OF ABOVE 7 COMPARABLES THE TPO EXCLUDE D F I SOFEX LIMITED AND FORTUNE INFORMATICS LIMITED BEING LOSS MAKING CO MPANIES. THE ASSESSEE HAS GIVEN THE DETAILS OF OPERATING MARGIN RATIO EARNED BY THE AFORESAID COMPANIES IN THE LAST 7 YEARS WHICH IS AS UNDER: FINANCIAL YEAR OPERATING MARGIN RATIO (%) FORTUNE INFORMATICS LTD. F I SOFEX LTD. 2005-06 2.70 53.85 2004-05 (39.19) (25.69) 18 ITA NO. 106/PN/2012, A.Y. 2004-05 2003-04 (47.58) (120.13) 2002-03 47.63 (42.02) 2001-02 (20.83) 3.74 2000-01 6.45 4.35 1999-00 48.70 29.11 13.2 THE CONTENTION OF THE ASSESSEE IS THAT THE SAID CO MPANIES CANNOT BE REJECTED MERELY ON THE GROUND THAT IN A PARTICULAR YEAR, THE COMPANIES HAVE INCURRED LOSSES. WE FIND MERIT IN THE CONTE NTION OF THE LD. AR OF THE ASSESSEE. A COMPARABLE CAN BE REJECTED ON LY IF IT IS A CONSISTENT LOSS MAKING COMPANY AND THE CONSISTENT LOSS M AKING COMPANY IS ONE WHICH SUSTAINS LOSSES IN THE THREE CONSEC UTIVE FINANCIAL YEARS. THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF M/ S. BOBST INDIA PRIVATE LIMITED VS. DCIT (SUPRA) HAS HELD AS UNDER: 5.4 FURTHER, WE FIND IN THE CASE OF GOLDMAN SACHS (INDIA) SECURITIES PVT. LTD. VS. ACIT, WHICH HAS BEEN DECIDED BY ITAT, MUMBAI K BENCH, WHEREIN THE TPO REJECTED CAPITAL TRUST AS COMPARABL E BECAUSE OF TWO OUT OF LAST THREE YEARS TAKEN INTO CONSIDERATION. CAPI TAL TRUST WAS IN THE RED AND NOT BECAUSE THE NATURE OF BUSINESS HAD ANY VARI ANCE WITH THAT OF THE ASSESSEE. THE TRIBUNAL LOOKED INTO THE BUSINES S SEGMENT OF CAPITAL TRUST AND FOUND THAT IN THE FOREIGN CONSULTANCY SEG MENT WITH WHICH THE BENCH WAS CONCERNED IN THE YEAR 2004-05, IT HAD OPE RATIVE PROFIT / OPERATIVE COST AT 27.25%. SINCE THE NATURE OF SERV ICES RENDERED BY COMPARABLE WERE EXACTLY ON SIMILAR LINES AS THAT OF THE ASSESSEE, THOUGH, DURING THE YEAR, IT WAS IN THE LOSS COULD NOT BE DI SQUALIFIED AS NON- LEGITIMATE COMPARABLE. THE TRIBUNAL DREW STRENGTH FROM BRIGADE GLOBAL SERVICES (SUPRA) FOR REACHING THIS CONCLUSION AND H ELD THAT THE ASSESSEE HAD RIGHTLY TAKEN CAPITAL TRUST AS VALID COMPARABLE AND THE REVENUE AUTHORITIES HAVE ERRED IN EXCLUDING THE SAME. A SI MILAR VIEW HAS BEEN TAKEN BY ITAT, MUMBAI K BENCH IN THE CASE OF TEMA SEK HOLDINGS ADVISORS VS. DCIT. IN SUM AND SUBSTANCE, ALL THE A BOVE CASES IS THAT THE COMPANY MAKING PERSISTENT LOSS FOR PAST 3 YEARS IS NOT GOOD COMPARABLE. ACCORDING TO US, WHEN LOSS MAKING COMPANY HAS BEEN SELECTED FOR COMPARISON IN TP STUDY FOR NECESSARY, WHICH IS PROF IT MAKING ONE, THERE IS A NEED FOR MORE ATTENTION QUA THE CONDITIONS PRE SCRIBED IN CLAUSE (A) TO (D) OF RULE 10B(2) OF IT RULES, 1962 FOR AN ULTIMAT E JUDGMENT OF COMPARABILITY OF IMPUGNED TRANSACTION . SO, THE PERSISTENT LOSS MAKING 19 ITA NO. 106/PN/2012, A.Y. 2004-05 MEANS CONTINUOUS LOSS MAKING FOR MORE THAN 3 YEARS BUT IN THE CASE BEFORE US I.E. STOVEC HAS EARNED A MARGIN OF 2.39% IN COMPARABLE SEGMENT IN F.Y. 2003-04. HENCE, IT COULD NOT BE CO NSIDERED AS LOSS MAKING, SO THE SAME SHOULD BE EXCLUDED FOR COMPUTIN G OPERATIVE MARGIN OF COMPARABLE COMPANIES FOR ARRIVING AT ALP IN RELA TION TO INTERNATIONAL TRANSACTIONS PERTAINING TO EOU OPERATIONS. THE ASS ESSING OFFICER IS DIRECTED ACCORDINGLY. 14. THE CONTENTION OF THE REVENUE IS THAT RESULTS OF THE AFORESAID TWO COMPARABLE ENTITIES ARE ON THE EXTREME NEGATIVE SIDE. TH EREFORE, THEY SHOULD NOT BE CONSIDERED. THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) (P.) LTD. VS. DCIT ( SUPRA) AFTER CONSIDERING VARIOUS DECISIONS OF THE TRIBUNAL AND THE JUDGM ENT OF DIVISION BENCH OF THE HON'BLE DELHI HIGH COURT IN THE CASE O F CIT VS. MENTOR GRAPHICS (NOIDA) (P.) LTD. REPORTED AS 354 ITR 586 C ONCLUDED AS UNDER: 44. A. THE MERE FACT THAT AN ENTITY MAKES HIGH/EXTREMELY H IGH PROFITS/LOSSES DOESNOT, IPSO FACTO, LEAD TO ITS EXC LUSION FROM THE LIST OF COMPARABLES FOR THE PURPOSES OF DETERMINATION OF AL P. IN SUCH CIRCUMSTANCES, AN ENQUIRY UNDER RULE 108(3) OUGHT T O BE CARRIED OUT, TO DETERMINE AS TO WHETHER THE MATERIAL DIFFERENCES BETWEEN THE ASSESSEE AND THE SAID ENTITY CAN BE ELIMINATED. UN LESS SUCH DIFFERENCES CANNOT BE ELIMINATED, THE ENTITY SHOULD BE INCLUDED AS A COMPARABLE. 15. IN THE CASE OF CUMMINS TURBO TECHNOLOGIES LIMITED VS. DDIT (INTERNATIONAL TAXATION) (SUPRA) THE CO-ORDINATE BENCH OF TH E TRIBUNAL OBSERVED THAT WHERE THE ASSESSEE HAS TAKEN SUPER LOS S MAKING COMPANIES IN THE LIST OF COMPARABLES. THE BURDEN IS ON TH E TPO TO PROVE THAT SUCH COMPARABLE COMPANIES ARE CONSISTENT LOS S MAKING COMPANIES. THE RELEVANT EXTRACT OF THE FINDINGS OF TRIBUNAL ARE AS UNDER: 14. WE FIND THAT IN RESPECT OF THE SELECTION OF TH E COMPARABLES, THE TRIBUNAL HAS TAKEN THE CONSISTENT STAND THAT AS THE SUPER PROFIT 20 ITA NO. 106/PN/2012, A.Y. 2004-05 COMPANIES SHOULD NOT BE INCLUDED, THE SAME WAY, SUP ER LOSS MAKING COMPANIES SHOULD ALSO BE EXCLUDED. THOUGH WE AGREE WITH THE TPO THAT SOME OF THE COMPARABLES FOR THE PURPOSE OF PLI ADOP TED BY THE ASSESSEE ARE SHOWING THE LOSS, BUT THE BURDEN IS ON THE TPO TO PROVE WHERE THOSE COMPANIES ARE CONSISTENTLY LOSS MAKING COMPANIES. M OREOVER, EXCEPT UNSUPPORTED REASONING, NO DATA HAS BEEN BROUGHT ON RECORD BY THE TPO FOR EXCLUDING THE COMPARABLES SELECTED BY THE ASSES SEE IN THE TRANSFER PRICING STUDY REPORT. WE, THEREFORE, FIND NO JUSTIF ICATION TO THE ADJUSTMENT MADE U/S.92CA(3) OF THE ACT. WE ACCORDINGLY DELETE THE SAME. IN THE RESULT, RELEVANT GROUNDS ARE ALLOWED. 16. THUS, IN VIEW OF THE FACT THAT THE COMPARABLES F I SO FEX LIMITED AND FORTUNE INFORMATICS LIMITED ALTHOUGH WERE HAVING LOSS IN THE YEAR OF COMPARISON BUT WHETHER THEY WERE CONSISTENT LOSS MAKING COMP ANIES HAS NOT BEEN ASCERTAINED BY THE TPO BEFORE REJECTING T HE SAME. A COMPANY IS SAID TO BE BAD COMPARABLE IF IT IS A CONSISTENT LOSS MAKING ENTITY. ACCORDINGLY, WE ARE OF THE OPINION THAT THIS ISSUE NEEDS A REVISIT TO THE ASSESSING OFFICER. THE ASSESSING OFFICER AFTER CONSIDE RING THE SUBMISSIONS OF THE ASSESSEE AND DOCUMENTS ON RECORD SH ALL DECIDE THE ISSUE AFRESH IN THE LIGHT OF THE DECISIONS DISCUSSED ABOVE. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 17. THE FOURTH GROUND RAISED IN THE APPEAL IS WITH REGARD TO THE BENEFIT OF 5% IN TRANSFER PRICING ADJUSTMENT U/S. 92C(2) OF THE ACT. THE CLAIM OF THE ASSESSEE FOR THE BENEFIT OF SAFE HARBOUR OF 5% IS NOT SUSTAINABLE IN VIEW OF AMENDED PROVISIONS OF SECTION 92C. TH E FINANCE ACT, 2012 HAS INSERTED SUB-SECTION (2A) WITH RETROSPECTIV E EFFECT FROM 01-04-2002 WHICH READS AS UNDER: WHERE THE FIRST PROVISO TO SUB-SECTION (2) AS IT S TOOD BEFORE ITS AMENDMENT BY THE FINANCE (NO.2) ACT, 2009 (33 OF 2009), IS APPLI CABLE IN RESPECT OF AN INTERNATIONAL TRANSACTION FOR AN ASSE SSMENT YEAR AND THE VARIATION BETWEEN THE ARITHMETICAL MEAN REFERRED TO IN THE SAID PROVISO AND THE PRICE AT WHICH SUCH TRANSACTION HAS ACTUALL Y BEEN UNDERTAKEN 21 ITA NO. 106/PN/2012, A.Y. 2004-05 EXCEEDS FIVE PER CENT OF THE ARITHMETICAL MEAN THEN , THE ASSESSEE SHALL NOT BE ENTITLED TO EXERCISE THE OPTION AS REFERRED TO IN THE SAID PROVISO. IN VIEW OF THE NEWLY INSERTED SUB-SECTION (2A) TO SECTION 92C THE ASSESSEE IS NOT ELIGIBLE TO CLAIM THE BENEFIT OF 5% IN THE VARIATION BETWEEN THE ARITHMETICAL MEAN OF THE ASSESSEE AND THE C OMPARABLES AND ENTITIES. MOREOVER, THE LD. AR OF THE ASSESSEE HAS C ONCEDED THAT THIS ISSUE IS TO BE DECIDED AGAINST THE ASSESSEE IN THE LIG HT OF AMENDED PROVISIONS. ACCORDINGLY, GROUND NO. 4 RAISED IN THE APPEAL OF THE ASSESSEE IS DISMISSED. 18. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY A LLOWED FOR THE STATISTICAL PURPOSE IN THE AFORESAID TERMS. ORDER PRONOUNCED ON WEDNESDAY, THE 9 TH DAY OF MARCH, 2016. SD/- SD/- ( . . / R.K. PANDA) ( ! ' / VIKAS AWASTHY) #' / ACCOUNTANT MEMBER $ % #' / JUDICIAL MEMBER / PUNE; &# / DATED : 9 TH MARCH, 2016 RK *+,%-.#/#)- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ' () / THE CIT(A)-I, PUNE 4. ' / THE CIT-I, PUNE 5. !*+ %%,- , ,- , . ./0 , / DR, ITAT, B BENCH, PUNE. 6. + 1 23 / GUARD FILE. // ! % // TRUE COPY// #4 / BY ORDER, %5 ,0 / PRIVATE SECRETARY, ,- , / ITAT, PUNE