Lubrizol Advanced Materials Private Limited, Mumbai V. The Asstt. Commissioner of Income Tax, Circle-1(2), Vadodara

ITA 1349/AHD/2016

• Counselvise Citation: [2018] 112 COUNSELVISE.COM (IT) 5572 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-11-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2009-2010
• Appeal Filed On: 19-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LALIT P JAIN
• Keywords: Depreciation; Transfer pricing; Set aside
• Section: 271(1)(c); 143(3); 10B

Judgement Text

, MH MHMH MH * ** * IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD L LL LK KK KOZJH OZJH OZJH OZJH OLHE VGEN OLHE VGEN OLHE VGEN OLHE VGEN] YS[KK LNL; ,OA ] YS[KK LNL; ,OA ] YS[KK LNL; ,OA ] YS[KK LNL; ,OA EK/KQFERK JKW; EK/KQFERK JKW; EK/KQFERK JKW; EK/KQFERK JKW;] ] ] ] U;KF;D LNL; DS LE{KA U;KF;D LNL; DS LE{KA U;KF;D LNL; DS LE{KA U;KF;D LNL; DS LE{KA BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SMT MADHUMITA ROY, JUDICIAL MEMBER ./ I.T.A. NO. 1349/AHD/2016 ( / ASSESSMENT YEAR : 2009-10) LUBRIZOL ADVANCED MATERIALS PRIVATE LIMITED, 6 TH & 7 TH FLOOR, JASWANTI LANDMARK, MEHRA INDUSTRIAL ESTATE, LBS MARG, VIKHROLI (W), MUMBAI-400 079. / VS. ACIT, CIRCLE 1(2), BARODA. ./ ./ PAN/GIR NO. : AAACI 4361 B ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI DHANESH BAFNA, A.R. / RESPONDENT BY : SHRI LALIT P. JAIN, SR. D.R. / DATE OF HEARING 11/10/2018 !'# / DATE OF PRONOUNCEMENT 15/11/2018 $% / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)1, VADODARA [CIT(A) IN SHORT] VIDE APPEAL NO.CAB-1/78/ 2014-15 DATED 18.02.2016 ARISING IN THE MATTER OF ASSESSMENT ORDE R PASSED UNDER SEC.143(3) R.W.S. 144C(1) OF THE INCOME TAX ACT, 19 61(HERE-IN-AFTER REFERRED TO AS 'THE ACT') DATED 02.05.2013 RELEVANT TO ASSESSMENT YEAR (AY) 2009-10. ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 2 - 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE A RE AS UNDER:- EACH OF THE GROUNDS AND/ OR SUB-GROUNDS OF THE APP EAL ARE INDEPENDENT AND WITHOUT PREJUDICE TO THE OTHERS. GROUND NO.1: 1.1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE HON'BLE COMMISSIONER OF INCOME-TAX (APPEALS)-1 ['TH E CIT(A)'] ERRED IN CONFIRMING THE VITIATED ASSESSMENT ORDER P ASSED BY THE ASST. COMMISSIONER OF INCOME-TAX, RANGE 1(2) ('ASSE SSING OFFICER' OR 'AO') AS THE LD. AO ERRED BOTH IN FACTSAND IN LAWN MAKING AN ADDITION TO THE APPELLANT'S TOTAL INCOME. THE APPELLANT PRAYS THAT THE ASSESSMENT ORDER PASSE D BY THE AO BE QUASHED. GROUND NO. 2 2.1. ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE ASSESSMENT ORDER DATED 2 MAY 2013 PASSED BY THE LD. ASSESSING OFFICER UNDER SECTION 143(3) READ WITH SECTION 1440 (1) OF THE ACT (RECEIVED BY THE APPELLANT ON 31 JULY 2013) IS TIME BARRED AND THEREFORE, BAD IN LAW. THE APPELLANT PRAYS THAT THE ASSESSMENT ORDER PASSE D BY THE AO BE QUASHED. GROUND NO. 3: 3.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE AO/TRANSFER PRICING OFFICER (TPO)/ CIT(A) ERRED IN MAKING/CONFIRMING THE UPWARD ADJUSTMENT OF INR 1,90 ,93,083 TO THE INCOME OF THE APPELLANT, IN RESPECT OF TRANSACT ION IN RELATION TO EXPORT OF FINISHED GOODS TO ASSOCIATED ENTERPRIS ES, BY: A. REJECTING THE TRANSFER PRICING DOCUMENTATION PRE PARED BY THE APPELLANT; B. REJECTING THE USE OF MULTIPLE YEAR DATA FOR BENCHMARKING THE TRANSACTION IN RELATION TO THE EXPORT OF FINISHED GOODS; ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 3 - C. REJECTING THE PROFIT LEVEL INDICATOR ('PLI') USED BY THE APPELLANT (I.E. RETURN ON CASH COST); 3.2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO/ TPO/ CIT(A) ERRED IN NOT CONSIDERING THE DIFFER ENTIAL LEVEL OF ECONOMIC ACTIVITY BETWEEN THE APPELLANT AND THE COMPARABLES (I.E. DIFFERENCE IN CAPACITY UTILISATION). 3.3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN L AW, THE AO/ TPO/ CIT(A) ERRED IN CONSIDERING INTEREST RATE OF 12.75% (I.E. PRIME LENDING RATE) INSTEAD OF THE APPELLANT' S CONTENTION OF APPLYING SHORT TERM DEPOSIT RATE WHILE COMPUTING WO RKING CAPITAL ADJUSTMENT. THE APPELLANT PRAYS THAT THE ADDITION OF INR 1,90.93,08 3 BE DELETED. GROUND NO. 4: 4.1. ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW. THE AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTI ON 271(1)(C) OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, OMIT OR ALTER GR OUNDS OF APPEAL BEFORE OR DURING THE HEARING OF AFORESAID MATTER. 3. THE GROUND NO.1 IS GENERAL AND DOES NOT REQUIRE ANY SEPARATE ADJUDICATION. THEREFORE, THE SAME IS DISMISSED. 4. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT HE HAD BEEN INSTRUCTED NOT TO PRESS THE GROUND NO.2 AND GR OUND NO. 3.3, THEREFORE WE DISMISS THE SAME AS NOT PRESSED. ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 4 - 5. THE ONLY EFFECTIVE ISSUE RAISED BY THE ASSESSEE IS THAT LD. CIT(A) ERRED IN CONFIRMING THE ORDER OF AO BY NOT ADJUSTIN G THE AMOUNT OF DEPRECIATION CLAIMED BY IT IN DETERMINING THE PLI . 6. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY AND ENGAGED IN THE BUSINESS OF MANUFACTURIN G OF GUAR GUM AND CASSIA GUM POWDER. THE ASSESSEE DURING THE YEAR HAS MADE SALES TO ITS ASSOCIATED ENTERPRISES NAMELY LUBRIZOL ADVANCED MAT ERIALS EUROPE BVBA AMOUNTING TO RS. 27,60,04,106/-. THE ASSESSEE CLAIMED TO HAVE DETERMINED THE ALP OF THE TRANSACTION WITH ITS AE R EGARDING THE SALE OF FINISHED GOODS USING TNMM METHOD. 6.1 THE ASSESSEE HAS TAKEN OPERATING PROFIT WITHOUT DEPRECIATION, I.E. PBDIT TO TOTAL COST FOR DECIDING THE PROFIT LEVEL I NDICATOR FOR THE PURPOSE TNMM ANALYSIS. ACCORDINGLY, THE ASSESSEE WORKED OUT PLI FOR ITS EXPORT OF GOODS TO ITS AE @ 20.58%. 6.2 THE ASSESSEE WORKED OUT AVERAGE PLI OF THE COMP ARABLE COMPANIES @ 8.81%. IN VIEW OF ABOVE, THE ASSESSEE C LAIMED THAT IT HAD SOLD GOODS TO ITS AE AT ARMS LENGTH PRICE AND NO A DJUSTMENT WAS REQUIRED. HOWEVER, THE TPO WAS NOT SATISFIED WITH THE METHOD OF DETERMINING THE PLI AS OPERATING PROFIT (PBDIT) TO TOTAL COST AS TH E PROFIT LEVEL INDICATORS. ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 5 - AS PER THE TPO, THE OPERATING PROFIT (PBIT) TO OPER ATING COST SHOULD HAVE BEEN TAKEN AS PLI. ACCORDINGLY, THE AO PROPOSED TO DETERMINE THE PLI OF THE ASSESSEE AT (-)1.05%. ON A QUESTION BY THE T PO, THE ASSESSEE SUBMITTED THAT IT HAD CLAIMED EXCESS DEPRECIATION, THEREFORE, THE SAME NEEDS TO BE ADJUSTED WHILE DETERMINING THE PLI. ACC ORDINGLY, THE ASSESSEE PROPOSED TO ADJUST THE DEPRECIATION AMOUNT ING TO RS.1,57,49,979/- ONLY. 6.3 BESIDES THE ABOVE, THE ASSESSEE ALSO SUBMITTED THAT IT HAD PURCHASED NEW PLANT & MACHINERY UNDER THE YEAR UNDE R CONSIDERATION WHICH HAS NOT BEEN UTILIZED AT THE OPTIMUM LEVEL. A S SUCH THESE PLANT AND MACHINERY HAVE BEEN UTILIZED ONLY TO THE EXTENT OF 6.81% OF ITS TOTAL CAPACITY. THEREFORE, ADJUSTMENT ON ACCOUNT OF DEPRE CIATION AS WELL AS A SALARY TO THE EMPLOYEES WORKING IN THE PLANT ON ACC OUNT OF LOW CAPACITY SHOULD BE ALLOWED. HOWEVER, THE TPO DISAGREED WITH THE SUBMISSION OF THE ASSESSEE AND WORKED OUT THE ARMS LENGTH PRICE AS UNDER: 7. THE CALCULATION OF THE ARMS LENGTH PRICE IS AS BELOW: OPERATING COST AS PER SHOW CAUSE RS.31,93,76,058/ - LESS: DEPRECIATION ADJUSTMENT RS.1,57,49,979/- OPERATING COST RS.30,36,26,079/- ARMS LENGTH ADJUSTED MEAN MARGIN 10.18% OF THE OPERATING COST ARMS LENGTH PRICE(ALP) @110.18% OF OPERATING COST RS.33,45,35,214/- PRICE RECEIVED RS.31,54,42,131/ - SHORTFALL BEING ADJUSTMENT U/S 92CA RS.1,90,93,083/ - 5% OF THE ALP DETERMINED BY ASSESSEE RS.138,00,206/ - ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 6 - SINCE THE DIFFERENCE BETWEEN THE ALP AND THE PRICE SHOWN IN THE BOOKS OF ACCOUNTS IS MORE THAN 5% OF THE PRICE SHOWN IN THE BOOKS OF ACCOUNTS, THE ABOVE ADJUSTMENT IS PROPOSED. IN VIEW OF THE ABOVE, THE TPO MADE ADJUSTMENTS OF R S. 1,90,93,083/- ON ACCOUNT OF SALES MADE TO THE AE. THE ABOVE ADJUSTME NT WAS DULY INCORPORATED BY THE AO IN HIS ASSESSMENT ORDER PASS ED U/S 143(3) R.W.S144C OF THE ACT VIDE ORDER DATED 2 ND MAY, 2013. 7. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL TO LD. C IT(A). THE ASSESSEE BEFORE THE LD. CIT(A) SUBMITTED THAT ITS P LANT AND MACHINERY HAD BEEN UTILIZED TO THE EXTENT OF RS. 6.81% ONLY, THER EFORE, THERE HAS TO BE AN ADJUSTMENT ON ACCOUNT OF DEPRECIATION CLAIMED BY IT IN DETERMINING THE PLI OF THE ASSESSEE WITH THE COMPARABLE COMPANIES. 7.1 THE ASSESSEE ALSO SUBMITTED TO THE LD. CIT(A) F OR PROVIDING ADJUSTMENT OF THE EMPLOYEE COST WORKING IN THE PLAN T AND MACHINERY. HOWEVER, THE LD. CIT(A) DISREGARDED THE CONTENTION OF THE ASSESSEE AND CONFIRMED THE ORDER OF AO BY OBSERVING AS UNDER: 6.4.1 A PERUSAL OF THE ORDER OF TPO SHOWS THAT HE HAD DISALLOWED THIS CLAIM BY STATING THAT EXACTLY SIMILAR ISSUE WAS INV OLVED IN THE CASE OF HAWORTH (INDIA) PVT. LTD. VS. DCIT(2011) TAXMANN.CO M 76 (DEATH). IN THIS JUDGMENT THE HONBLE TRIBUNAL DENIED THE ADJUS TMENT IN RESPECT OF CAPACITY UTILIZATION ASKED FOR BY THE ASSESSEE, IN THAT CASE THE COMPANY ASSUMED CAPACITY UTILIZATION OF 70% IN THE CASE OF COMPARABLES AND SOUGHT TO ADJUST ITS NET PROFIT MARGIN ON THE BASIS OF THE SAME. THE HON'BLE TRIBUNAL REJECTED THE CLAIM OF THE ASSESSEE ON THE BASIS THAT THE NET PROFIT OF THE ASSESSEE CAN'T BE CHANGED. THE AD JUSTMENT, IF REQUIRED TO BE CARRIED OUT, IS TO BE MADE IN THE FINANCIALS OF THE COMPARABLES. IN THE INSTANT CASE THE ASSESSEE HAS NOT PRODUCED ANY CALCULATION IN ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 7 - RESPECT OF SUCH ADJUSTMENT BY MAKING A COMPARISON W ITH THE CAPACITY UTILIZATION OF THE COMPARABLES AND BY MAKING ADJUST MENTS IN THE FINANCIALS OF THE COMPARABLES. 6.4.2 DURING THE COURSE OF THE APPELLATE PROCEEDING S ALSO, NO SUCH COMPUTATIONS REGARDING THE COMPARABLES WERE FILED. THE APPELLANT HAS ONLY FILED THAT THE CAPACITY UTILIZATION OF THE COM PARABLES ARE AVAILABLE IN THEIR AUDITED REPORTS. BUT IN THE ABSENCE OF WOR KINGS AS DISCUSSED BY THE TPO IN HIS ORDER, NO SUCH ADJUSTMENT CAP BE GRA NTED TO THE APPELLANT. HENCE THIS GROUND OF APPEAL IS ALSO DISM ISSED. BEING AGGRIEVED BY THE ORDER OF LD. CIT(A) ASSESSEE IS IN APPEAL BEFORE US. 8. THE LD. AR BEFORE US SUBMITTED AS UNDER: APPELLANT'S SUBMISSION - I) USE OF CASH PLI DURING FINANCIAL YEAR 2007-08 THE APPELLANT HAD SET UP A NEW MANUFACTURING PLANT CALLED MPP PLANT FOR MANUFACTUR E OF PRODUCTS SUCH AS RHEORANGER AND MOUNTAIN CAT. THE HUGE ADDIT IONS MADE IN FY 2007-08 & 2008-09 ON ITS NEW MPP PLANT LEAD TO A HI GH AMOUNT OF DEPRECIATION BEING CHARGED TO ITS PROFIT & LOSS ACC OUNT (FORMING 13.68% OF TOTAL OPERATING COST). FURTHER, THE MPP PLANT WAS SEVERLY UNDERUTILIZED (L ESS THAN 7%) DUE TO PRODUCTION RELATED ISSUES. CONSIDERING HUGE DIFFERENCES IN DEPRECIATION BETWEE N THE APPELLANT AND COMPARABLE COMPANIES AND THE LOW UTILISATION OF ASS ETS, THE DEPRECIATION COST CANNOT BE CONSIDERED FOR CALCULAT ING OPERATING PROFITS. IN VIEW THEREOF, THE APPELLANT SUBMITS THA T CASH PLI IS THE APPROPRIATE PLI FOR BENCHMARKING ITS MANUFACTURING SEGMENT. THE APPELLANT PLACES RELIANCE ON THE FOLLOWING DECISION IN SUPPORT OF ITS CONTENTION: ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 8 - - CIT VS. BA CONTINUUM INDIA PVT. LTD (ITA NO 449 O F 2014) (ANDHA PRADESH & TELANGANA HC) - BA CONTINUUM INDIA PVT. LTD. VS. ACIT (ITA NO. 1154/HYD/2O11) (HYD. TRIB.) - SCHEFENACKER MOTHERSON LTD. VS. ITO [2009] (123 TTJ 509) (DEL. TRIB.) - ERHARDT LIEMER INDIA PVT. LTD. VS. ACIT [2017] ( 78 TAXMAN.COM 258) (AHD. TRIB.) CONCLUSION II THE APPELLANT'S CONTENTION OF USING CASH PLI AS AN APPROPRIATE PLI IS ACCEPTED, THE APPELLANT'S TRANSACTIONS WOULD 1 AT A RM'S LENGTH SINCE THE APPELLANT HAS EARNED A HIGHER MARGIN THAN THAT OF C OMPARABLE COMPANIES AS SHOWN IN THE TABLE BELOW - COMPANY NAME CASH PLI MARGIN CASH PLI MARGIN (WCA) HINDUSTAN GUMS AND CHEMICALS LTD. 11.78% 17.79% JAI BHARAT GUMS & CHEMICALS 3.58% 9.15% MEAN/ALP 7.68% 13.47% APPELLANT'S MARGIN (REFER PG. 82 OF PAPERBOOK) 20.58% 20.58% 9. THE LD. DR BEFORE US SUBMITTED AS UNDER: THE REJECTION OF DOCUMENTATION PREPARED BY TAXPAYE R USING MULTIPLE YEAR DATA WITHOUT USING DATA RELATING TO THE YEAR U NDER CONSIDERATION IS NOT IN ACCORDANCE WITH PROVISIONS OF LAW AND AS A R ESULT OF THE SAME INFORMATION AND DOCUMENT USED IN JUSTIFICATION OF A RMS LENGTH PRICE BY TAXPAYER BECOMES INCORRECT AND/OR UNRELIABLE AND RE JECTED UNDER THE PROVISIONS OF SECTION 92C(3)(C). FURTHER, SINCE (LI E TAXPAYER IS INVOLVED IN SALE OF PRODUCTS TO ITS AE, WHICH ARE IN THE EXP ORT MARKET, THE SELECTION OF COMPARABLES WHICH DO NOT HAVE SIGNIFIC ANT EXPORT SALES AGAIN RENDERS THE INFORMATION USED FOR THE BENCHMAR KING AS INCORRECT. ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 9 - SINCE THE ASSESSEE AND AE OPERATE IN INDIA AND EURO PE, THE COMPARABLES ARE REQUIRED TO BE SELECTED WHICH ARE E NGAGED IN PROVIDING THE OPERATION IN SIMILAR JURISDICTION. PA RA 3.43 OF TRANSFER PRICING GUIDELINES ISSUED BY OECD IN 2010 ALSO LIST S OUT THIS CRITERIA AS ONE OF THE MOST COMMONLY USED QUALITATIVE CRITERIA FOR SELECTION OF COMPARABLES. SELECTION OF ENTITIES HAVING PREDOMINANTLY DOMESTIC OPERATIONS AND USE OF MULTIPLE YEAR DATA, WITHOUT USING DATA FOR THE Y EAR UNDER CONSIDERATION RENDERS ENTIRE EP DOCUMENTATION PREPA RED BY TAXPAYER BEEN CORRECTLY REJECTED UNDER SECTION 92C(3)(C). THE TAXPAYER SUBMITTED THAT DUE TO SEVERE UNDER-UTI LISATION IN CAPACITY OF PLANT IN THE YEAR UNDER CONSIDERATION, THERE WAS HUGE IMPACT ON DEPRECIATION RESULTING IN VERY HIGH RATIO OF DEPREC IATION TO TOTAL OPERATING COST AS COMPARED TO COMPARABLES. IN ORDER TO HAVE COMPATIBILITY, DEPRECIATION SHOULD BE TAKEN OUT FRO M COMPARABILITY ANALYSIS AND CONSEQUENTLY PBDIT/OP COST SHOULD BE CONSIDERED AS RELEVANT PLI. THE CONTENTION OF ASSESSEE TO EXCLUDE DEPRECIATION FROM CALCULATION OF OPERATING MARGIN IS NOT ACCEPTABLE. IF DEPRECIATION IS TAKEN OUT FROM CALCULATIONS THEN THERE IS NO COMPAT IBILITY OF INTENSITY OF ASSET UTILIZATION IN FAR. CONSEQUENTLY, NON CONSIDE RATION OF DEPRECIATION FOR PURPOSE OF COMPARISON OF NET MARGI NS IS ERRONEOUS. THUS THE ASSESSEE'S CONTENTION TO CONSIDER PBDT/TOT AL COST AS THE PROFIT LEVEL INDICATOR IS REJECTED. FOR PROPER APPRECIATION OF THE SUBMISSION OF THE AS SESSEE IT HAD TO BE SEEN THAT WHAT EVIDENCE HAD BEEN FILED BY THE ASSES SEE WITH REGARD TO ASSUMPTION MADE BY IT WITH REGARD TO CAPACITY UTILI ZATION OF 70 PERCENT OF THE COMPARABLES. IT WAS THE LEGAL OBLIGATION OF THE ASSESSEE TO KEEP AND MAINTAIN THE INFORMATION AND DOCUMENTS IN RESPE CT OF ANY ASSUMPTION MADE BY IT WHICH ACCORDING TO ASSESSEE H AD CRITICALLY AFFECTED THE DETERMINATION OF ARM'S LENGTH PRICE. N ONE OF THE DOCUMENTS RELIED UPON BY THE ASSESSEE DESCRIBED THE CAPACITY UTILIZATION BY COMPARABLES. THUS IT WAS WRONGLY CLAIMED BY THE ASS ESSEE THAT IT HAD FURNISHED SUFFICIENT EVIDENCE WITH REGARD TO CAPACI TY UTILIZATION. THUS IT WAS HELD THAT ASSESSEE HAD NOT BEEN ABLE TO FURNISH CREDIBLE AND ACCURATE INFORMATION WITH REGARD TO CAPACITY UTILIZ ATION AND SUCH ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 10 - ADJUSTMENT COULD BE ALLOWED ONLY IN A CASE WHERE AS SESSEE IS ABLE TO FURNISH ACCURATE AND CREDIBLE EVIDENCE IN THIS REGA RD. THEREFORE THE SAID GROUND OF THE ASSESSEE WAS TO BE REJECTED (PAR A 90). RELYING ON THE ABOVE JUDGMENT THE ADJUSTMENT RELATED TO CAPACITY U TILIZATION AS CALLED FOR BY THE, ASSESSEE IS REJECTED. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IT IS UNDISPUTED FACT THAT IN THE PREVIOUS ASSESSMENT YEAR THE ASSESSEE HAS DETERMINED PLI AFTER TAKING T HE PROFIT BEFORE INTEREST & TAX AND AFTER TAKING INTO CONSIDERATION THE DEPRECIATION. HOWEVER, THE FACT OF THE PRESENT CASE IS DIFFERENT FROM THE CASE OF THE EARLIER YEARS. IT IS BECAUSE THE ASSESSEE HAS CLAIM ED DEPRECIATION IN THE YEAR UNDER CONSIDERATION ON THE PLANT AND MACHINERY WHICH HAS NOT BEEN EFFECTIVELY UTILIZED. THEREFORE, IN OUR CONSIDERED VIEW, THE ADJUSTMENT ON ACCOUNT OF DEPRECIATION IS REQUIRED IN DECIDING THE PLI. 10.1 SIMILARLY, THE CASE LAW RELIED ON BY THE AO IS FACTUALLY DIFFERENT FROM THE FACTS ON HAND. IN THAT CASE, THE CAPACITY OF THE PLANT AND MACHINERY WAS ASSUMED @70% WHEREAS IN THE INSTANT C ASE THE CAPACITY UTILIZED BY THE ASSESSEE IS ONLY 6.81%. THEREFORE, IN OUR CONSIDERED VIEW WE CANNOT MAKE ANY REFERENCE TO THE CASE LAW RELIED BY THE AO. 10.2 BESIDES THE ABOVE, WE FIND THAT THE AHMEDABAD TRIBUNAL IN THE CASE OF ERHARDT + LEIMER (INDIA) LTD VS. ACIT REPOR TED IN 78 TAXMANN.COM 258 INVOLVING THE IDENTICAL FACTS & CIR CUMSTANCES HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. THE RE LEVANT EXTRACT OF THE ORDER IS REPRODUCED AS UNDER: ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 11 - 11. THE ASSESSEE'S ONLY SUBSTANTIVE ARGUMENT RAISED IN THE COURSE OF HEARING IS THAT THE AUTHORITIES BELOW HAVE NOT GRAN TED IT CAPACITY UNDERUTILIZATION BENEFIT IN RESPECT OF THE ABOVE IM PORT OF COMPONENT TRANSACTIONS. WE NOTICE AT THIS STAGE THAT THE RELE VANT FACTS PERTAINING TO THE INSTANT ISSUE ARE IN A NARROW COMPASS. THE ASSE SSEE PLEADED BEFORE THE TRANSFER PRICING OFFICER THAT IT HAD SET UP NEW INSTALLED CAPACITY OF MANUFACTURING OF 11520 MACHINES AS AGAINST THE CONS EQUENTIAL PRODUCTION OF 4133 SETS THEREOF ONLY. IT SOUGHT TO SEEK UNDERUTILIZATION ADJUSTMENT SINCE IT COULD MANUFACTURE ONLY 35% OF T HE INSTALLED CAPACITY LEAVING BEHIND 65% AS UNUTILIZED. THE TRAN SFER PRICING OFFICER AS WELL AS THE DISPUTE RESOLUTION PANEL DECLINED TH IS RELIEF ON THE GROUND THAT SUCH A COURSE OF ACTION OF MAKING ADJUS TMENT IN THE HANDS OF COMPARABLE ENTITIES IS NOWHERE PROVIDED IN THE A CT OR THE RULES FRAMED THEREUNDER. ALL THIS RESULTED IN THE IMPUGNE D TRANSFER PRICING ADJUSTMENT ADDITION BEING MADE IN ASSESSEE'S HANDS. 12. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO RIVA L CONTENTIONS. THERE IS ADMITTEDLY NO DISPUTE ABOUT THE FACT THAT ASSESSEE'S 65% MANUFACTURING CAPACITY HAS REMAINED IDLE IN THE IMP UGNED ASSESSMENT YEAR. IT ADOPTED THE TRANSACTION NET MARGIN METHOD (TNMM) TO BENCHMARK ITS ABOVE PURCHASED TRANSACTION. THERE IS FURTHER NO ISSUE BETWEEN THE PARTIES THAT THE ABOVE TERM CAPACITY UT ILIZATION IS A FACTOR AFFECTING NET PROFIT MARGINS SINCE IT RESULTS IN HI GHER PER UNIT COST QUA THE UTILIZED CAPACITY WHICH IN TURN LOWERS DOWN THE PROFITS IN QUESTION AT A TRANSACTIONAL OR UNIT LEVEL. LD. DEPARTMENTAL REP RESENTATIVE AT THIS STAGE VEHEMENTLY ARGUED THAT SUCH AN ADJUSTMENT IN THE HANDS OF COMPARABLE ENTITIES IS NOWHERE PROVIDED EITHER IN T HE ACT OR RULES. THIS ARGUMENT FAILS TO IMPRESS US. WE FIND THAT A CO- OR DINATE BENCH DECISION IN DY. CIT V. EDAG ENGINEERS & DESIGN INDIA (P.) LT D. [2014] 50 TAXMANN.COM 332 (DELHI-TRIB) 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 UNCONT ROLLED TRANSACTIONS. LD. DEPARTMENTAL REPRESENTATIVE SEEKS TO DRAW A DIS TINCTION THAT THE SAID CASE LAW DEALS WITH CUP METHOD AS AGAINST TNMM EMPLOYED IN THE INSTANT CASE. WE FIND THAT RULE 10B(E)(III) HER EINABOVE IS REGARDING TNMM METHOD ONLY PROVIDING FOR VARIOUS ADJUSTMENTS ON ACCOUNT OF THE CONTEMPORANEOUS FACTORS MATERIALLY AFFECTING TH E NET PROFITS. THE ABOVE CO-ORDINATE BENCH THEREAFTER CONCLUDES THAT S UCH CAPACITY UNDER UTILIZATION ADJUSTMENTS HAVE TO BE MADE ONLY IN THE HANDS OF COMPARABLE ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 12 - ENTITIES INSTEAD OF THAT IN CASE OF TESTED PARTY IT SELF. 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. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT THE A DJUSTMENT IN DECIDING THE PLI OF THE ASSESSEE ON ACCOUNT OF DEPRECIATION SHOULD BE GIVEN. THEREFORE, WE SET ASIDE THE ORDER OF LD. CIT(A) TO THE FILE OF TPO TO DECIDE THE ISSUE AFRESH AFTER GIVING THE EFFECT OF DEPRECIATION AS PER THE PROVISIONS OF LAW. HENCE, THE GROUND OF APPEAL OF T HE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . THIS ORDER PRONOUNCED IN OPEN COURT ON 15/11/2018 SD/- SD/- E/KQFERK JKW; E/KQFERK JKW; E/KQFERK JKW; E/KQFERK JKW; OLHE VGEN OLHE VGEN OLHE VGEN OLHE VGEN U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; YKS[KK LN YKS[KK LN YKS[KK LN YKS[KK LNL; L; L; L; (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 15/11/2018 PRITI YADAV, SR.PS ITA NO.1349/AHD/2016 LUBRIZOL ADVANCED MATERIALS INDIA PVT. LTD. VS ACIT A.Y. 2009-10 - 13 - !'# $#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. & '( ) / CONCERNED CIT 4. ) () / THE CIT(A)-1, VADODARA. 5. ,-. //'( , '(# , 12$&$ / DR, ITAT, AHMEDABAD. 6. .34 5 / GUARD FILE. % & / BY ORDER, , / //TRUE COPY// '/& () ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD