Ariston Thermo India Ltd., Pune V. Dy.CIT,Cir.8, Pune, Pune

ITA 1455/PUN/2010

• Counselvise Citation: 145524514 RSA 2010
• Duration Of Justice: 2 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 05-11-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 15-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 92C; 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHES B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.1455/PN/2010 (ASSESSMENT YEAR : 2006-07) ARISTON THERMO INDIA LIMITED GAT NO. 265/374 375 KHARABWADI CHAKAN TALEGAON ROAD, PUNE 410 501 PAN : AAECM0766G . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX CIRCLE 8, PUNE . RESPONDENT APPELLANT BY : MR. HIMANSHU SINHA RESPONDENT BY : MR. AJIT KORDE ORDER PER G. S. PANNU, AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) READ WITH SE CTION 144C OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 20.10.2010 , WHICH IS IN CONFORMITY WITH THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANE L, PUNE (IN SHORT THE DRP) DATED 14.09.2010 FOR THE ASSESSMENT YEAR 2006-07. 2. IN BRIEF THE BACKGROUND OF THE DISPUTE IS THAT A SSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE INDIAN COM PANIES ACT, 1956 AND IT IS 100% EXPORT ORIENTED UNIT (EOU) ENGAGED IN THE MANU FACTURE OF WATER HEATERS. FOR THE ASSESSMENT YEAR UNDER CONSIDERATIO N IT FILED A RETURN OF INCOME DECLARING TOTAL LOSS OF RS.1,42,10,215/-, WH ICH WAS SUBJECT TO A SCRUTINY ASSESSMENT. THE ASSESSING OFFICER NOTED TH AT DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAD ENTERED INTO INTERNATIO NAL TRANSACTIONS WITH ITS ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 ASSOCIATED ENTERPRISES (IN SHORT AES) WITHIN THE MEANING OF SECTION 92B(1) OF THE ACT. SECTION 92(1) PRESCRIBES THAT INCOME ARISI NG FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE (ALP) AND ACCORDINGLY THE ASSESSING OFFICER REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER ( IN SHORT TPO) IN TERMS OF SECTI ON 92CA(1) OF THE ACT FOR THE PURPOSES OF COMPUTING THE ALP UNDER SECTION 92C OF THE ACT. THE TPO VIDE HIS ORDER DATED 28.10.2009 PASSED UNDER SECTION 92C A(3) OF THE ACT, AFTER ALLOWING OPPORTUNITY TO THE ASSESSEE OF BEING HEARD DETERMINED THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTIONS BY ENHAN CING THE STATED VALUES BY A SUM OF RS.2,67,06,520/-. THE ASSESSING OFFICER PASS ED A DRAFT ASSESSMENT ORDER UNDER SECTION 144C OF THE ACT ON 30.12.2009 C ONSIDERING THE ORDER OF THE TPO DATED 28.10.2009. THE ASSESSEE FILED OBJECT IONS BEFORE THE DRP, WHO VIDE ORDER DATED 14.09.2010 PASSED UNDER SECTIO N 144C(5) OF THE ACT ISSUED DIRECTIONS TO THE ASSESSING OFFICER. THE ASS ESSING OFFICER, AFTER CONSIDERING THE DIRECTIONS ISSUED BY THE DRP COMPUT ED THE INCOME OF THE ASSESSEE IN RELATION TO THE INTERNATIONAL TRANSACTI ONS IN CONFORMITY WITH THE ALP DETERMINED BY THE TPO. ACCORDINGLY, THE ASSESSI NG OFFICER PASSED AN ORDER UNDER SECTION 143(3) READ WITH SECTION 144C(1 3) OF THE ACT AFTER MAKING ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF RS.2,67,06,520/-, THEREBY THE TOTAL INCOME WAS COMPUTED AT RS.77,32,530/-. IN THE CAPTIONED APPEAL, ASSESSEE HAS AGITATED THE AFORESAID ADJUSTMENT MADE BY THE ASSESSING OFFICER TO THE VALUE OF THE INTERNATIONAL TRANSACTI ONS ENTERED INTO BY THE ASSESSEE WITH THE AES. 3. IN THE AFORESAID BACKGROUND, THE RIVAL COUNSELS HAVE ADVANCED THEIR ARGUMENTS. ON BEHALF OF THE ASSESSEE, A PAPER BOOK HAS ALSO BEEN FILED WHICH INTER-ALIA, CONTAINS COPY OF THE TRANSFER PRICING STUDY CONDUC TED BY THE ASSESSEE; FINANCIAL DATA OF COMPARABLE CASES OF KHA ITAN ELECTRICALS LIMITED AND PENGUIN ELECTRONICS LIMITED, COMPUTATION OF WOR KING CAPITAL ADJUSTMENT ETC. THE LEARNED CIT(DR) HAS ALSO REFERRED TO THE M ATERIAL ON RECORD IN THE ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 COURSE OF HEARING. THE RIVAL SUBMISSIONS HAVE BEEN HEARD IN THE ABOVE LIGHT AND THE RELEVANT MATERIAL PERUSED. 4. NOTABLY, ASSESSEE IS A COMPANY INCORPORATED UNDE R THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS A SUBSIDIARY OF M/S MERLONI TERMOSANITARI SPA-ITALY (MTS). THE ASSESSEE COMPANY WAS INCORPORA TED ON 11.11.2004 AND IT STARTED THE COMMERCIAL PRODUCTION OF WATER HEATE RS, ETC. ON 26.04.2005. THE ASSESSEE ENTERED INTO THE FOLLOWING INTERNATIONAL T RANSACTIONS WITH THE AES DURING THE YEAR UNDER CONSIDERATION :- SL. NO. DESCRIPTION OF TRANSACTION AMOUNT 1. PURCHASE OF COMPONENTS AND RAW MATERIALS RS.49,000/- 2. SALE OF WATER HEATERS & SPARE PARTS RS. 20,02,83 ,000/- 3. PAYMENT OF MANAGEMENT FEES RS. 2,90,000/- TOTAL RS. 20,06,22,000/- 5. DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HA D DECLARED A LOSS OF RS.1,50,39,180/- AS PER ITS PROFIT AND LOSS ACCOUNT AND AFTER MAKING RELEVANT ADJUSTMENTS, THE RETURNED LOSS WAS COMPUTED AT RS.1 ,42,10,215/-. IN THE TRANSFER PRICING STUDY UNDERTAKEN BY THE ASSESSEE, THE INTERNATIONAL TRANSACTIONS WERE BENCHMARKED ON THE BASIS OF THE T RANSACTIONAL NET MARGIN METHOD (IN SHORT TNM METHOD) PRESCRIBED IN SECTIO N 92C(1) OF THE ACT, CONSIDERING THE SAME TO BE THE MOST APPROPRIATE MET HOD. THE ASSESSEE CONCLUDED THAT ITS INTERNATIONAL TRANSACTIONS WERE STATED AT ALP, HAVING REGARD TO THE ECONOMIC AND COMMERCIAL FACTORS AND THEREFOR E ACCORDING TO IT NO ADJUSTMENT WAS REQUIRED IN THE VALUE OF INTERNATION AL TRANSACTIONS AS STATED. 6. HOWEVER, THE TPO HAS DIFFERED WITH THE ASSESSEE, AND INSTEAD HE HAS DETERMINED AN ADJUSTMENT OF RS.2,67,06,520/- IN ORD ER TO BRING THE STATED VALUES OF THE INTERNATIONAL TRANSACTIONS TO THE ALP . THE FIRST POINT OF DIFFERENCE BETWEEN THE ASSESSEE AND THE TPO WAS THE USE OF DAT A OF MULTIPLE FINANCIAL YEARS. THE TPO USED THE FINANCIAL DATA OF THE COMPA RABLE COMPANIES ONLY FOR THE FINANCIAL YEAR RELEVANT TO THE YEAR IN WHICH TH E INTERNATIONAL TRANSACTIONS ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 WERE UNDERTAKEN, WHEREAS ASSESSEE HAD USED AVERAGE OF THREE YEARS DATA OF THE COMPARABLE COMPANIES TO CARRY OUT THE BENCHMARK ING ANALYSIS. AT THE TIME OF HEARING, THE LEARNED COUNSEL SUBMITTED THAT THE AFORESAID ASPECT IS NOT DISPUTED AND THEREFORE WE DO NOT DWELL FURTHER ON T HIS. SECONDLY, THE TPO ACCEPTED THE TNM METHOD AS THE MOST APPROPRIATE MET HOD, BUT WHILE CALCULATING THE PROFIT LEVEL INDICATOR (PLI) OF THE ASSESSEE, THE TPO CONSIDERED THE OPERATING PROFITS/TOTAL COST AS THE PLI WHEREAS THE ASSESSEE IN ITS TRANSFER PRICING STUDY HAD CONSIDERED OPERAT ING PROFITS/OPERATING SALES AS THE PLI. THIS ASPECT HAS ALSO NOT BEEN ASSAILED BY THE ASSESSEE BEFORE US AND WE DO NOT DWELL FURTHER ON THIS. 7. THE FIRST POTENT POINT OF DIFFERENCE BETWEEN THE ASSESSEE AND THE REVENUE IS ON ACCOUNT OF COMPUTING OPERATING MARGIN OF THE ASSESSEE FOR THE FINANCIAL YEAR UNDER CONSIDERATION. FOR THE PURPOSE S OF COMPARABILITY ANALYSIS, ASSESSEE COMPUTED ITS OPERATING MARGIN FOR THE YEAR UNDER CONSIDERATION AFTER EXCLUDING FIXED COST ATTRIBUTABLE TO START-UP PHASE AND UNDERUTILIZED PRODUCTION CAPACITY. ON THIS ASPECT, THE PLEA OF THE ASSESSEE IS THAT IT STARTED COMMERCIAL OPERATIONS FROM 26.04.2005 AND THE CURRENT YEAR IS THE INITIAL YEAR OF COMMERCIAL OPERATION. AS PER THE ASSESSEE, IT WAS R EQUIRED TO INCUR CERTAIN FIXED COSTS AND IT CREATED HUGE CAPACITY TO CATER T O THE GROWING DEMAND OF WATER HEATERS IN THE EXPORT MARKET. BEING THE INITI AL YEAR, ASSESSEE WAS NOT ABLE TO GENERATE THE REQUIRED SALES SO AS TO RECOVE R THE FIXED COSTS INCURRED BY IT. THE ASSESSEE WAS NOT ABLE TO UTILIZE THE PRODUC TION CAPACITY TO ITS OPTIMUM LEVEL DURING THE YEAR, AS IT WAS CONDUCTING NEGOTIA TIONS TO GET PURCHASE ORDERS, STUDYING THE MARKET PRICE TO UNDERSTAND THE REQUIRE MENTS OF THE MARKET AND PLANNING ITS PRODUCTION ACCORDINGLY. THE LEARNED CO UNSEL POINTED OUT THAT ON ACCOUNT OF THE INITIAL YEAR AND LACK OF SALE ORDERS , THE ASSESSEE COULD UTILIZE ONLY 21% OF ITS PRODUCTION CAPACITY AND THEREFORE, THE ASSESSEE INCURRED A LOSS DURING THE YEAR UNDER CONSIDERATION. IT WAS PO INTED OUT THAT IN THE FUTURE YEARS, ASSESSEE EARNED PROFITS AND THE SAME WOULD G O TO SHOW THAT THE INCURRENCE OF START-UP COSTS AND UNDER UTILIZATION OF CAPACITY IN THE INITIAL YEAR, ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 HAS RESULTED IN LOSS AND THE REASON FOR SUCH LOSS C ANNOT BE ATTRIBUTED TO PRICING OF ITS PRODUCTS SOLD TO THE AES. THEREFORE, IT WAS SUBMITTED THAT WHEREAS THE ASSESSEES FINANCIAL RESULTS WERE HIT B Y THE SAID FACTORS, THE COMPARABLE CASES SELECTED WERE UNITS WHICH WERE ALR EADY ESTABLISHED IN MARKET WHO DID NOT HAVE SUCH FACTORS. THEREFORE, IN ORDER TO FACILITATE APPROPRIATE COMPARABILITY ANALYSIS, ASSESSEE CONTEN DED BEFORE THE INCOME-TAX AUTHORITIES THAT ADJUSTMENTS BE MADE TO THE PROFIT MARGIN OF THE ASSESSEE ON ACCOUNT OF ABNORMAL START-UP COSTS AND UNDER CAPACI TY UTILIZATION BEING THE INITIAL YEAR OF OPERATIONS. 8. THE TPO AS WELL AS THE DRP HAVE NOT ACCEPTED THE AFORESAID STAND OF THE ASSESSEE. THE FIRST POINT MADE OUT IS THAT FOR THE PURPOSE OF COMPARABILITY ANALYSIS THE ADJUSTMENTS THAT CAN BE MADE ARE ONLY THOSE WHICH ARE IN ACCORDANCE WITH RULE 10B(1)(E) OF THE INCOME TAX RU LES, 1962 (IN SHORT THE RULES), WHICH IS IN RESPECT OF THE TNM METHOD. AS PER THE REVENUE IN TERMS OF RULE 10B(1)(E) OF THE RULES, THE ADJUSTMENTS ARE PERMISSIBLE ONLY WITH RESPECT TO THE NET PROFIT MARGIN OF THE COMPARABLE UNCONTROLLED TRANSACTIONS AND NOT WITH REGARD TO THE NET PROFIT MARGIN OF THE TESTED PARTY I.E. THE ASSESSEE. FOR THE AFORESAID REASON, THE ADJUSTMENTS SOUGHT BY THE ASSESSEE ON ACCOUNT OF LOW CAPACITY UTILIZATION AND ABNORMAL START-UP COSTS HAVE BEEN DENIED. AT THE TIME OF HEARING, THE LEARNED CIT(DR) APPEARING FOR THE REVENUE FURTHER SUBMITTED THAT THE DELHI BENCH OF THE TRIBU NAL IN THE CASE OF HAWORTH (INDIA) P. LTD. VS. DCIT 131 ITD 215 (DELHI) HAS AL SO FOUND IT PROPER NOT TO ALLOW ADJUSTMENT FOR CAPACITY UTILIZATION WHILE COM PUTING THE NET PROFIT MARGIN OF THE TESTED PARTY. IN THIS REGARD, IN PARTICULAR REFERENCE WAS MADE TO DISCUSSION BY THE TRIBUNAL IN PARAS 83 TO 92 OF THE ORDER. 9. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE A SSESSEE SUBMITTED THAT THE FACT THAT ASSESSEE HAD USED ONLY 21% OF ITS TOT AL PRODUCTION CAPACITY IS EVIDENT FROM THE ANNUAL ACCOUNTS, WHOSE RELEVANT EX TRACT IS PLACED AT PAGE 51 OF THE PAPER BOOK AND THAT THE SAME WAS NOT DISPUTE D BY THE LOWER ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 AUTHORITIES. APART THEREFROM IT IS SOUGHT TO BE POI NTED OUT ON THE BASIS OF PAGE 52 OF THE PAPER BOOK WHEREIN IS PLACED A FINANCIAL ANALYSIS OF THE FIXED COSTS INCURRED DURING THE YEAR, THAT CERTAIN FIXED OPERAT ING COSTS, LIKE FACTORY RENT, TESTING RESEARCH & DEVELOPMENT COST, DEPRECIATION, ETC. HAVE BEEN INCURRED IRRESPECTIVE OF THE LEVEL OF PRODUCTION ACHIEVED AN D BECAUSE OF LOW SALES AND PRODUCTION CAPACITY UTILIZATION OF 21% ONLY, THERE IS AN OPERATING LOSS, WHICH WAS REQUIRED TO BE ADJUSTED. THE LEARNED COUNSEL SU BMITTED THAT THE REASONS ADVANCED BY THE LOWER AUTHORITIES TO DENY THE RELIE F ARE UNTENABLE AND THAT IN THE FOLLOWING DECISIONS RENDERED BY VARIOUS BENCHES OF THE TRIBUNAL, APPROPRIATE ADJUSTMENT HAS BEEN ALLOWED WHILE COMPU TING THE NET MARGINS IN THE CASE OF TESTED PARTY ALSO TO FACILITATE COMPARA BILITY ANALYSIS : - (I) ACIT VS. M/S FIAT INDIA PVT. LTD., ITA NO. 1848 /MUM./2009 DATED 30.04.2010; (II) SKODA AUTO INDIA (P.) LTD. VS. ACIT, 122 TTJ 699 (PUNE); (III) EGAIN COMMUNICATION (P.) LTD. VS. ITO 118 TT J 354 (PUNE); (IV) AMDOCS BUSINESS SERVICES (P.) LTD. VS. DCIT 26 TAXMANN.COM 120 (PUNE); AND, (V) SCHEFENACKER MOTHERSON LTD. VS. ITO 123 TTJ 50 9 (DELHI ) 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE POINT SOUGHT TO BE MADE OUT BY THE ASSESSEE IS THAT THIS BEING THE FIRST YEAR OF OPERATIONS, IT HAS NOT ACHIEVED AN OPTIMUM LEVEL OF CAPACITY UTILI ZATION AND THE SALES ARE ALSO ON A LOWER SIDE. MOREOVER, IT HAS INCURRED CER TAIN START-UP COSTS AND THE FIXED OPERATING COSTS HAVE ALSO NOT BEING ABSORBED DUE TO LOW CAPACITY UTILIZATION. IN THE ABSENCE OF OPTIMUM UTILIZATION OF ITS PRODUCTION CAPACITY, IT HAS SUFFERED OPERATING LOSSES DURING THE YEAR. ON T HE OTHER HAND, THE NET PROFIT MARGIN OF THE ASSESSEE HAS BEEN BENCHMARKED AGAINST COMPARABLES CASES, WHO ARE ESTABLISHED ENTITIES AND HAVE STARTED BUSIN ESSES MANY YEARS AGO. IN OUR CONSIDERED OPINION, THE CASE MADE OUT BY THE AS SESSEE IS BASED ON ECONOMIC AND COMMERCIAL REASONS. THE ASSESSEE IS A UNIT WHICH HAS BEEN ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 SET-UP DURING THE YEAR AND ITS CAPACITY UTILIZATION IS ONLY 21%, WHICH HAS RESULTED IN LOSSES, WHILE ITS PROFIT MARGINS HAVE B EEN COMPARED WITH ENTITIES ESTABLISHED OVER THE YEARS. OSTENSIBLY, SUCH A COMP ARABILITY ANALYSIS DOES NOT PROVIDE A LEVEL PLAYING FIELD. IN OUR VIEW, THE AFO RESAID FACTOR IS REQUIRED TO BE ADJUSTED SO AS TO FACILITATE A MEANINGFUL COMPARABI LITY ANALYSIS BETWEEN THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. 11. HOWEVER, AS PER THE REVENUE, SUCH AN ADJUSTMENT TO THE PROFIT MARGIN OF THE ASSESSEE IS NOT PERMISSIBLE HAVING REGARD TO THE PROVISIONS OF RULE 10B(1)(E) OF THE RULES. THE METHOD ADOPTED BY THE A SSESSEE FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION IS THE T NM METHOD AND RULE 10B(1)(E) OF THE RULES PRESCRIBES THE MANNER IN WHI CH THE SAME IS TO BE APPLIED. AS PER THE REVENUE, IN SUB-CLAUSE (III) AD JUSTMENTS TO THE NET PROFIT MARGIN ARE PERMISSIBLE BUT IT IS ONLY IN RELATION T O THE NET PROFIT MARGINS OF THE COMPARABLE UNCONTROLLED TRANSACTIONS AND NOT WITH R ESPECT TO THE MARGIN OF THE TESTED PARTY AND THUS THE CLAIM OF THE ASSESSEE CAN NOT BE ALLOWED. IN OUR CONSIDERED OPINION, IN SUB-CLAUSE (I) THE NET PROFI T MARGIN REALIZED BY A TESTED PARTY FROM AN INTERNATIONAL TRANSACTION IS REQUIRED TO BE ASCERTAINED HAVING REGARD TO THE RELEVANT BASE. IN SUB-CLAUSE (II) THE NET PROFIT MARGIN REALIZED BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROL LED TRANSACTION IS TO BE ASCERTAINED HAVING REGARD TO THE SAME BASE. SUB-CLA USE (III) PERMITS ADJUSTMENT WITH REGARD TO THE NET PROFIT MARGIN REF ERRED TO IN SUB-CLAUSE (II) I.E. OF THE COMPARABLE UNCONTROLLED TRANSACTIONS SO AS T O TAKE INTO ACCOUNT THE DIFFERENCE, IF ANY BETWEEN THE INTERNATIONAL TRANSA CTION OF THE TESTED PARTY AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. THE PLEA OF THE REVENUE, IN OUR VIEW, IS MISDIRECTED FOR THE REASON THAT THE NET PR OFIT MARGIN OF THE TESTED PARTY REFERRED TO IN SUB-CLAUSE (I) HAS NOT BEEN DEFINED IN A MANNER AS IS BEING UNDERSTOOD BY THE REVENUE. AS PER THE REVENUE THE N ET PROFIT MARGIN OF THE TESTED PARTY AS STATED IN SUB-CLAUSE (I) IS TO BE T HE SAME AS REFLECTED IN THE FINANCIAL ACCOUNTS. IN PARA 8.1 OF THE ORDER OF THE TPO IT IS CANVASSED THAT THE ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 NET PROFIT MARGIN HAS TO BE UNDERSTOOD AS MEANING P ROFIT BEFORE TAX COMPUTED IN ACCORDANCE WITH ACCOUNTING PRINCIPLES. IN OUR CO NSIDERED OPINION, THE WHOLE OBJECTIVE OF ADOPTING THE MOST APPROPRIATE METHOD F OR THE PURPOSE OF COMPARABILITY ANALYSIS IS TO DETERMINE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. IN OTHER WORDS, THE PURPOSE OF THE CO MPARABILITY ANALYSIS IS TO EXAMINE AS TO WHETHER OR NOT THE VALUES STATED FOR THE INTERNATIONAL TRANSACTIONS ARE AT AN ARMS LENGTH PRICE I.E. WHET HER THE PRICE CHARGED IS COMPARABLE TO AN UNCONTROLLED TRANSACTION OF SIMILA R NATURE. THEREFORE, THE ADOPTION OF THE NET PROFIT MARGIN OF THE TESTED PAR TY HAS TO BE MADE KEEPING IN MIND ITS OBJECTIVE, I.E. TO FACILITATE ITS COMPARIS ON WITH OTHER UNCONTROLLED COMPARABLE ENTITIES/TRANSACTIONS. THEREFORE, KEEPIN G IN MIND THE AFORESAID OBJECTIVE, THE NET PROFIT MARGIN OF THE TESTED PART Y DRAWN FROM ITS FINANCIAL ACCOUNTS CAN BE SUITABLY ADJUSTED TO FACILITATE ITS COMPARISON WITH OTHER UNCONTROLLED ENTITIES/TRANSACTIONS AS PER SUB-CLAUS E (I) OF RULE 10B(1)(E) OF THE RULES ITSELF. THE ABSENCE OF SUCH A SPECIFIC PROVIS ION IN RULE 10B(1)(E)(III) OF THE RULES DOES NOT OPERATE AS A BAR, SO LONG AS THE ADJUSTMENT SOUGHT TO BE MADE IN THE PROFIT MARGIN OF THE TESTED PARTY ARE B ASED ON COGENT AND SUFFICIENT REASONS AND SEEKS TO MAKE THE COMPARABIL ITY ANALYSIS WITH COMPARABLE UNCONTROLLED TRANSACTIONS MORE MEANINGFU L. IN-FACT, PUNE BENCH OF THE TRIBUNAL IN THE CASE OF EGAIN COMMUNICATION (P. ) LTD. (SUPRA) IN PARA 36 OF THE ORDER OPINED THAT DEPENDING ON THE FACTS AND CI RCUMSTANCES OF A CASE, IT MAY BE APPROPRIATE TO ADJUST THE OPERATING PROFIT O F THE TESTED PARTY AS WELL AS OF THE COMPARABLE PARTIES. TO THE SIMILAR EFFECT IS THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S FIAT INDIA PVT. LTD. (SUPRA). IN FACT, IN THE CASE OF AMDOCS BUSINESS SERVICES (P.) LTD. (SUP RA) WHEREIN ONE OF US WAS A MEMBER OF THE BENCH I.E. ACCOUNTANT MEMBER, AN AD JUSTMENT WAS ALLOWED TO THE PROFIT MARGIN OF THE TESTED PARTY WITH RESPE CT TO THE UNDER CAPACITY UTILIZATION, THE UNIT BEING IN THE START-UP PHASE. THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SKODA AUTO IND IA (SUPRA) IS ALSO ON SIMILAR LINES. ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 12. THE LEARNED CIT(DR) HAS RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF HAWORTH (INDIA) P. LTD. (SUPRA) FOR THE PRO POSITION THAT ADJUSTMENT TO THE PROFIT MARGIN OF THE TESTED PARTY IS NOT PERMIS SIBLE. WE HAVE PERUSED THE SAID DECISION. IN THE CASE BEFORE THE DELHI BENCH O F THE TRIBUNAL, ASSESSEE HAD COMPUTED ITS MARGIN AFTER CLAIMING ADJUSTMENT F OR CAPACITY UTILIZATION. THE ASSESSEE HAD ADOPTED THE TNM METHOD FOR THE PURPOSE OF COMPUTING ITS ALP. THE ASSESSEE HAD CLAIMED THAT CAPACITY UTILIZATION OF COMPARABLES WAS TO THE EXTENT OF 70%, WHICH WAS AN ASSUMPTION MADE DUE TO NON-AVAILABILITY OF THE REQUIRED DETAILS OF THE COMPARABLE CASES. THE TPO R EJECTED THE ADJUSTMENT ON THE GROUND THAT ASSESSEE HAD NOT SUBMITTED ANY EVID ENCE FOR ASSUMING THE CAPACITY UTILIZATION OF THE COMPARABLES AND THE DAT A BEING RELIED UPON BY THE ASSESSEE WAS FOUND TO BE EITHER UNRELIABLE OR INCOR RECT. THE TRIBUNAL IN PARA 90 OF ITS ORDER EXAMINED THE EVIDENCE RELIED BY THE ASSESSEE WITH REGARD TO ITS ASSUMPTION MADE TOWARDS THE CAPACITY UTILIZATION OF 70% OF THE COMPARABLE CASES. ON THE BASIS OF THE DOCUMENTS AND MATERIAL O N RECORD, THE TRIBUNAL CAME TO CONCLUDE THAT THE ASSESSEE DID NOT FURNISH SUFFICIENT EVIDENCE WITH REGARD TO THE CAPACITY UTILIZATION OF THE COMPARABL E CASES. THE TRIBUNAL HELD THAT ASSESSEE WAS NOT ENTITLED TO SEEK ADJUSTMENT O N ACCOUNT OF CAPACITY UTILIZATION BECAUSE OF ITS FAILURE TO FURNISH CREDI BLE AND ACCURATE INFORMATION IN THIS REGARD. IN CONCLUSION, THE TRIBUNAL SPECIFICAL LY NOTED THAT BECAUSE OF THE AFORESAID FAILURE OF THE ASSESSEE, THE PRECEDENTS C ITED BY THE ASSESSEE BY WAY OF THE DECISIONS OF THE TRIBUNAL IN M/S FIAT IN DIA PVT. LTD. (SUPRA), SKODA AUTO INDIA (P.) LTD. (SUPRA), EGAIN COMMUNICATION ( P.) LTD. (SUPRA) AND GLOBAL VATEDGE PVT. LTD. VS. DCIT (ITA NOS, 2763 & 2764/DE L/2009) COULD NOT BE APPLIED IN THE CASE OF THE ASSESSEE. THE AFORESAID DISCUSSION IN THE ORDER OF THE TRIBUNAL CLEARLY SHOWS THAT THE ASSESSEE THEREI N FAILED IN SEEKING ADJUSTMENT TO ITS PROFIT MARGINS FOR LACK OF EVIDEN CE, AND THE TRIBUNAL WAS FULLY CONSCIOUS THAT THE RELIEF WAS OTHERWISE ALLOWABLE T O THE ASSESSEE IN PRINCIPLE, BASED ON THE PRECEDENTS CITED ABOVE. THUS, THE DECI SION IN THE CASE OF HAWORTH (INDIA) P. LTD. (SUPRA) DOES NOT HELP THE R EVENUE, AND THE RELIANCE BY THE CIT(DR) IS MISPLACED. THEREFORE, IN OUR VIEW, H AVING REGARD TO THE ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 PRECEDENTS AND THE AFORESAID DISCUSSION, IN THE PRE SENT CASE ASSESSEE HAS TO SUCCEED IN PRINCIPLE FOR ADJUSTMENT ON ACCOUNT OF L OWER CAPACITY UTILIZATION, AND THE LOSS SUFFERED ON ACCOUNT OF UNABSORBED FIXE D OPERATING COSTS INCURRED IN THE INITIAL YEAR. THE AFORESAID FACTORS, IN OUR VIEW, WARRANT AN APPROPRIATE ADJUSTMENT TO THE OPERATING MARGINS OF THE ASSESSEE TO FACILITATE A MEANINGFUL COMPARISON WITH THE COMPARABLE UNCONTROLLED TRANSAC TIONS. 13. AT THE TIME OF HEARING, THE LEARNED CIT(DR) POI NTED OUT THAT TPO HAS ALSO OBSERVED THAT APPROPRIATE DETAILS IN RESPE CT OF LOW UTILIZATION OF CAPACITY IN THE CASE OF COMPARABLES ETC. WERE NOT A VAILABLE. IT WAS SUBMITTED THAT THE PLEA OF THE ASSESSEE WAS REJECTED AT THE T HRESHOLD, AND THEREFORE, THE LOWER AUTHORITIES HAD NO OCCASION TO EXAMINE THE PL EA OF THE ASSESSEE ON MERITS. NO DOUBT, THE AFORESAID ASPECT SPRING UP ON LY AFTER THE PLEA OF THE ASSESSEE IS ACCEPTED IN PRINCIPLE AND THE SAME WAS NOT SO DONE BY THE AUTHORITIES BELOW. THE LEARNED COUNSEL FOR THE ASSE SSEE POINTED OUT TO PAGE 97 OF THE PAPER BOOK WHEREIN IS PLACED THE FINANCIA L STATEMENT OF A COMPARABLE CONCERN, M/S KHAITAN ELECTRICALS LIMITED FOR THE FINANCIAL YEAR 2005-06 TO POINT OUT THAT THE INFORMATION REGARDING THE INSTALLED CAPACITY AND ACTUAL PRODUCTION CARRIED OUT DURING THE YEAR IS AV AILABLE, WHICH WOULD FACILITATE THE COMPARISON AND ALSO MAKING OF AN ADJ USTMENT TO THE PROFITS MARGIN OF THE ASSESSEE. IT WAS POINTED OUT THAT AT- LEAST FOR THE SAID COMPARABLE THE ADJUSTMENT OUGHT TO HAVE BEEN ALLOWE D BY THE LOWER AUTHORITIES. 14. IN OUR CONSIDERED OPINION, IN ORDER TO ARRIVE A T AN APPROPRIATE ADJUSTMENT, THE ENTIRE FACTUAL MATRIX IS REQUIRED T O BE EXAMINED AT THE APPROPRIATE LEVEL. THE TPO AS WELL AS THE DRP DID N OT ACCEPT THE PLEA OF THE ASSESSEE IN PRINCIPLE, WHILE THE SAME HAS BEEN ACCE PTED BY US. THEREFORE, IN ORDER TO ALLOW AN APPROPRIATE ADJUSTMENT, NECESSARY VERIFICATION ON THE BASIS OF THE MATERIAL TO BE FURNISHED BY THE ASSESSEE, DE SERVES TO BE CARRIED OUT BY THE ASSESSING OFFICER. THEREFORE, WHILE UPHOLDING T HE PLEA OF THE ASSESSEE, WE ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSIN G OFFICER WHO SHALL ALLOW THE ASSESSEE A REASONABLE OPPORTUNITY TO MAKE SUBMISSIO NS AND PRODUCE RELEVANT MATERIAL IN SUPPORT OF ITS STAND AND THEREAFTER THE ASSESSING OFFICER SHALL ALLOW AN APPROPRIATE ADJUSTMENT IN THE OPERATING MARGINS OF THE ASSESSEE FOR LOW CAPACITY UTILIZATION AND HIGH FIXED OPERATING COSTS INCURRED IN THE INITIAL YEAR OF OPERATION. 15. ACCORDINGLY, ON THIS ASPECT, ASSESSEE SUCCEEDS FOR STATISTICAL PURPOSES. 16. ANOTHER ISSUE WHICH HAS BEEN RAISED BEFORE US R ELATES TO THE COMPUTATION OF ASSESSEES MARGIN FOR THE PURPOSES O F COMPARABILITY ANALYSIS. AS PER THE ASSESSEE, FUTURE YEARS ACTUAL MARGINS B E ALSO CONSIDERED TO DETERMINE ITS PROFIT MARGINS IN ORDER TO DETERMINE THE ALP. THE AFORESAID PLEA IS SOUGHT TO BE JUSTIFIED ON THE BASIS THAT DUE TO EXCEPTIONAL CIRCUMSTANCES OF BEING THE INITIAL YEAR OF SET-UP, THE ASSESSEE HAS INCURRED LOSS DURING THE YEAR, WHILE IT HAS EARNED PROFITS IN THE SUBSEQUENT TWO Y EARS. THEREFORE, ASSESSEE SUBMITTED THAT FUTURE YEARS ACTUAL MARGINS BE ALSO CONSIDERED FOR ANALYZING THE COMPARABILITY OF CURRENT YEARS MARGIN WITH THE COMPARABLE UNCONTROLLED TRANSACTIONS. THE TPO AS WELL AS THE DRP HAVE NOT A CCEPTED THE PLEA OF THE ASSESSEE AND IN THIS CONTEXT A REFERENCE HAS ALSO B EEN MADE TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF HO NEY-WELL AUTOMATION INDIA LTD. VS. DCIT (ITA NO.4/PN/2008) WHEREIN IT IS HELD THAT HAVING REGARD TO RULE 10B(1)(E) OF THE RULES, THERE IS NO SCOPE TO CONSID ER DATA OF THE SUBSEQUENT ASSESSMENT YEARS. IN OUR CONSIDERED OPINION, THE AS SESSEE HAS TO FAIL ON THIS ASPECT FOR THE REASONS ASSIGNED BY THE LOWER AUTHOR ITIES. WE MAY ALSO OBSERVE HERE THAT THE EARNING OF PROFITS IN THE FUT URE TWO YEARS BY THE ASSESSEE MAY BE A GOOD GROUND TO JUSTIFY THE LOSS BEING INCU RRED IN THIS YEAR BECAUSE OF THE EXCEPTIONAL CIRCUMSTANCES OF BEING THE INITIAL YEAR OF SET-UP, UNDER CAPACITY UTILIZATION, ETC., BUT THERE IS NO JUSTIFI CATION FOR INCLUSION OF THE FUTURE YEARS PROFIT MARGINS WHILE DETERMINING THE ALP OF THE CURRENT YEARS ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 INTERNATIONAL TRANSACTIONS. THEREFORE, ON THIS ASPE CT, THE ACTION OF THE LOWER AUTHORITIES IS HEREBY AFFIRMED AND THE ASSESSEE FAI LS. 17. ANOTHER ASPECT RAISED BY THE ASSESSEE IS THAT T HE LOWER AUTHORITIES HAVE ERRED IN NOT PROVIDING ADJUSTMENT ON ACCOUNT O F WORKING CAPITAL DIFFERENCES VIS--VIS THE COMPARABLE UNCONTROLLED E NTITIES. THE PLEA OF THE ASSESSEE IS THAT THE TPO ERRED BY COMPARING ENTITIE S HAVING A DIFFERENT WORKING CAPITAL STRUCTURE WITH THE ASSESSEES OPERA TIONS, WHICH HAVE A DIFFERENT WORKING CAPITAL REQUIREMENTS AND NO ADJUS TMENT FOR THE SAID DIFFERENCE WAS MADE. THE AFORESAID PLEA WAS NOT RAI SED BEFORE THE TPO BUT HAS BEEN RAISED BY THE ASSESSEE ONLY BEFORE THE DRP . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT SUCH ADJUST MENTS ARE QUITE REASONABLE AND DESERVE TO BE ALLOWED AND FOR THAT M ATTER HE HAS REFERRED TO PAGE 130 OF THE PAPER BOOK WHEREIN THE RELEVANT WOR KINGS HAVE BEEN EXHIBITED. THE WORKING CAPITAL REQUIREMENTS OF THE THREE COMPARABLE UNCONTROLLED ENTITIES VIS--VIS THAT OF THE ASSESSE E HAVE BEEN TABULATED AND IT IS SUBMITTED THAT SUCH WORKING WAS ALSO AVAILABLE B EFORE THE DRP. 18. ON THE OTHER HAND, THE LEARNED CIT(DR) RELIED U PON THE ORDER OF THE DRP AND IN PARTICULAR PARA 11.2 OF THE ORDER TO OPP OSE THE PLEA OF THE ASSESSEE. AS PER THE DRP, THE ADJUSTMENT SOUGHT BY THE ASSESSEE HAD NO SCIENTIFIC BASIS AND THEREFORE, THE PLEA OF THE ASS ESSEE WAS TURNED DOWN. 19. IN OUR CONSIDERED OPINION, THE ISSUE WHETHER OR NOT WORKING CAPITAL REQUIREMENTS CAN CONSTITUTE AN ITEM OF DIFFERENCE S O AS TO REQUIRE AN ADJUSTMENT IN THE PROFIT MARGIN ARISING IN COMPARAB LE UNCONTROLLED TRANSACTIONS WHILE BENCHMARKING THE INTERNATIONAL TRANSACTION OF THE TESTED PARTY, IS NO LONGER RES-INTEGRA AND HAS BEEN SUBJECT MATTER OF ADJUDICATION BY THE TRIBUNAL IN QUITE A FEW PRECEDENTS. OF COURSE, THE ADJUSTMEN TS PERMISSIBLE HAVE TO BE WITHIN THE PARA-METERS PROVIDED IN RULE 10B(1)(E)(I II) OF THE RULES. WE MAY OBSERVE THAT ADJUSTMENT ON THE ASPECT OF WORKING CA PITAL DIFFERENCE BETWEEN THE TESTED PARTY AND THE COMPARABLE UNCONTROLLED EN TITIES/TRANSACTIONS IS ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 PERMISSIBLE ONLY WHERE THE REQUIREMENTS OF RULE 10B (1)(E)(III) R.W. RULE 10B(3) OF THE RULES ARE SATISFIED. IN THIS BACKGROUND, THE LEARNED COUNSEL FOR THE ASSESSEE STATED THAT SINCE ASSESSEES PLEA HAS NOT BEEN FACTUALLY VERIFIED, IT MAY BE SENT BACK TO THE ASSESSING OFFICER FOR VERIF ICATION. 20. THE PLEA OF THE ASSESSEE HAS NOT BEEN SERIOUSLY OPPOSED BY THE LEARNED CIT(DR). 21. THEREFORE, WE ARE INCLINED TO REMIT THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WHO SHALL EXAMINE AS TO WHETHER O R NOT IN THE PRESENT CASE THE WORKING CAPITAL REQUIREMENT CONSTITUTE AN ITEM OF DIFFERENCE SO AS TO REQUIRE ADJUSTMENT AS PER THE PARA-METERS LAID DOWN BY RULE 10B(1)(E)(III) R.W.RULE 10B(3) OF THE RULES FOR THE PURPOSES OF AN ALYZING THE COMPARABILITY OF THE COMPARABLE UNCONTROLLED TRANSACTIONS WITH THE I NTERNATIONAL TRANSACTIONS OF THE ASSESSEE. NEEDLESS TO SAY, THE ASSESSING OFFICE R SHALL ALLOW THE ASSESSEE A REASONABLE OPPORTUNITY TO PUT-FORTH MATERIAL AND SUBMISSIONS IN SUPPORT OF ITS STAND AND ONLY THEREAFTER HE SHALL PASS AN ORDER AF RESH ON THIS ASPECT AS PER LAW. THUS, ON THIS ASPECT, ASSESSEE SUCCEEDS. 22. IN THE LAST GROUND RAISED BY THE ASSESSEE BEFOR E US IS TO THE EFFECT THAT THE LOWER AUTHORITIES HAVE ERRED IN COMPUTING THE A LP OF THE INTERNATIONAL TRANSACTIONS PERTAINING TO THE MANUFACTURING ACTIVI TY AND EXPORT OF COMPONENTS AND SPARES WITHOUT TAKING INTO ACCOUNT + - 5% VARIA TION FROM THE MEAN WHICH IS PERMISSIBLE AND WAS ALSO OPTED FOR BY THE ASSESS EE IN TERMS OF SECTION 92C(2) OF THE ACT. 23. ON THIS GROUND OF APPEAL, THE ASSESSEE HAS NOT ARTICULATED ITS GRIEVANCE AT THE TIME OF HEARING, PRIMARILY ON ACCO UNT OF THE AMENDMENTS MADE BY THE FINANCE ACT, 2012 IN SECTION 92C OF THE ACT. IN THIS VIEW OF THE MATTER, WE THEREFORE, DEEM IT FIT AND PROPER TO DIR ECT THE ASSESSING OFFICER TO REVISIT SUCH CONTROVERSY IN THE LIGHT OF LEGAL POSI TION EMERGING AS A RESULT OF ITA NO.1455/PN/2010 ARISTON THERMO INDIA LIMITED A.Y. 2006-07 AMENDMENTS MADE TO SECTION 92C OF THE ACT BY THE FI NANCE ACT, 2012. THUS, THIS GROUND IS ACCORDINGLY DISPOSED OFF. 24. IN CONCLUSION, WE DIRECT THE ASSESSING OFFICER TO RE-DETERMINE THE ALP AND INTERNATIONAL TRANSACTIONS ON THE BASIS OF AFOR ESAID DISCUSSION. THUS, ASSESSEE PARTLY SUCCEEDS. 25. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH JUNE, 2013. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 25 TH JUNE, 2013 SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE DRP, PUNE; 4) THE DR, B BENCH, I.T.A.T., PUNE; 5) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T., PUNE