Molex India Tooling Private Limited, Bangalore V. DCIT, Bangalore

ITA 1494/BANG/2010

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9324 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-10-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 14-06-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 23-12-2010
• Court: TRIBUNAL
• Assessee Lawyers: P K PRASAD
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 10B; 147

Judgement Text

IT(TP)A NO.1494(B)/2010 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B, BANGALORE BEFORE SHRI S.K.YADAV, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER IT (TP) A NO.1494(BANG) 2010 (ASSESSMENT YEAR : 2006-07) M/S MOLEX INDIA TOOLING PVT. LTD., PLOT NO.6A, SADARMANAGALA INDUSTRIAL AREA, BANGALORE -560 067 PAN NO.AACCM6091N/MA-336 APPELLANT VS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(1), BANGALORE RESPONDENT ASSESSEE BY : SHRI P.K PRASAD, CA REVENUE BY : MS. NEERA MALHOTRA, CIT DATE OF HEARING : 03-08-2016 DATE OF PRONOUNCEMENT: : 18-10-2016 O R D E R PER SHRI A.K.GARODIA, AM THIS IS AN ASSESSEES APPEAL DIRECTED AGAINST THE A SSESSMENT ORDER PASSED BY THE AO ON 22-09-2010 U/S 143(3)R.W.S.144C(5)R.W.144C(8) OF THE IT ACT, 1961 AS PER THE DIRECTIONS OF DRP. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER ; IT(TP)A NO.1494(B)/2010 WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY MOLEX INDIA TOOLING PRI V ATE LIMITED (HEREINAFTER REFERRED TO AS THE ' APPELLANT ' ), A REFERENCE WAS MADE UNDER THE PROVISIONS OF SECTION 92CA B Y THE ASSISTANT COMMISSIONER OF INCOME-TAX , CIRCLE - 12(1 ) POST OBTAINING THE APPROVAL OF THE COMMISSIONER OF INCOME-TAX , BAN G ALORE - III . T RAN S FER PRICIN G PROCEEDINGS WERE TAKEN UP SUBSEQUENT TO THE AFOREMENTIONED REF E R E NCE A ND THE LEARNED TRANSFER PRICING OFFICER ( ' TPO ' ) AFTER TAKING INTO COGNIZANCE THE VARIOUS SUBMI S SIONS MADE BY THE APPELLANT , MADE AN ADJUSTMENT OF RS . 58 , 553 , 403 IN RESPECT OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT U / S 92CA OF THE INCOME TAX ACT . AG G RI EV ED B Y SUCH AN ADJUSTMENT TO THE ARM ' S LENGTH PRICE (HEREINAFTER REFERRED TO AS ' ALP ' ) AS O RIGINALLY DETERMINED BY THE APPELLANT , THE APPELLANT TOOK RECOURSE TO THE DISPUTE RESOLUTION PANEL ( ' DRP') AS CONSTITUTED UNDER THE INCOME-TAX DISPUTE (RE S OLUTION PANEL) RULES , 2009 . AS PROVIDED UNDER THE SAID RULES , THE APPELLANT FILED A C O MPREH E N S IVE SET OF OBJECTIONS S ET OUT UNDER VARIOUS GROUNDS AGAINST THE ORDER PA SSE D B Y THE LEARNED TPO . THE HONOURABLE DRP , SUBSEQUENT TO PROVIDING AN O PP O RTUNIT Y FOR THE APPELLANT TO REPRESENT THE CASE BEFORE THE PANEL , PASSED AN ORDER DAT E D 22 N D SEPTEMBER , 2010 , UPHOLDING THE CONTENTIONS AND CONSEQUENTLY THE A DJU S TMENT TO THE ALP AS MADE BY THE TPO . IT(TP)A NO.1494(B)/2010 SUB SE QUENTL Y, AN ORDER WAS PASSED BY THE LEARNED ASSESSING OFFICER (HEREINAFTER REF E RRED TO AS ' AO ' ) DATED 22ND OCTOBER, 2010 (RECEIVED ON 28 TH OF OCTOBER 2010 BY THE APPELLANT) , UNDER SUB SECTION (3) OF SECTION 147 IN PURSUANCE OF THE DIRECTIONS O F THE HONOURABLE DRP . I. TRANSFER PRICING THE APPELLANT WI S HES TO STATE THAT THE HONOURABLE DRP AND THE LEARNED AO GROSSL Y E RR E D IN UPH O LDIN G THE INCOME ADJUSTMENT PROPOSED BY THE LEARNED TPO IN ARRIVING AT THE A LP O F THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT . THE APPELLANT IS IN APPEAL BEFORE THE HONOURABLE BENCH OF THE INCOME TAX APPELLATE TRIBUNAL (HEREINAFTER REFERRED TO AS 'ITA T') UNDER SECTION 253 (1) (D) AGAINST THE ORDER PASSED B Y TH E LEARNED AO IN PURSUANCE OF THE DIRECTIONS OF THE HONOURABLE DRP. 1 . ADJUSTMENTS FOR MATERIAL DIFFERENCES T H E H O N O UR A BL E DRP AND TH E L E ARNED AO HAVE ERRED I N ACCEPTING THE CONT E NTION O F THE T PO THAT TH E TRANSACTION S A RE NOT AT ARM 'S LENGTH PRICE . T H E H O NOURABL E DRP AND THE LEARNED AO HAVE ERRED IN ACCEPTIN G THE C O NTENTION O F TH E TPO , W H E R E IN THE TPO HA S REJECTED THE QUANTITATIVE ADJUSTMENTS PR O VID E D B Y THE A P PE LLANT FO R TH E DIFFERENCE S IN PRODUCTION C APACIT Y UTILI S ED B Y THE APPELLANT AND TH E CO MP A R A BL E CO MP A NIES . IT(TP)A NO.1494(B)/2010 T H E H O N O UR A BL E DRP AND TH E LEARNED A O HAVE E RRED IN ACCEPTIN G THE CO NT E NTION O F TH E T PO , W H E R E IN TH E TPO H AS PROVIDED ADJUSTMENTS ONL Y IN RE S PECT O F D E PR EC IATI O N COS T S A ND N O A DJU S TM E NT S F O R THE EXP E N S E S W HICH A R E FI X ED IN NATUR E FOR DIFFER E NC E IN T H E PR O DU C TI O N CA PACIT Y UTILI SE D B Y TH E APPELLANT AND THE COMPARABL E C O MPAN Y. 2. GROSS MARGIN ANALYSIS T H E H O N O UR A BL E DRP AND TH E LEARNED AO HAVE E RRED IN REJECTING THE G R OSS MAR G IN A N A L YSIS PR OV ID E D B Y TH E APP E LL A NT . 3 . U S E OF CONTEMPORANEOUS DATA T H E H O N O URABL E DRP AND T H E L E ARN E D A O E RR E D IN CO NCLUDIN G THAT THE APPELLANT O U G HT TO H AVE E MPL OYE D CO NTEMP O R A N EO U S D A TA IN TH E PR E PARATION O F TH E TRAN S F E R PRICIN G R EPO RT . T HI S A R G UM E NT OF THE H O N O URABL E DRP I S N O T VALID ON THE PRINCIPLE OF FAIRNE SS AN D N A TURAL J U S TI CE, A S THE APP E LLANT C ANN O T B E E X P EC TED TO USE DATA THAT I S UNAVAILABL E I N T H E D A T A B ASES A T TH E TIME OF PREPARIN G THE D O CUM E NTATION. T H E H O N O UR A BL E DRP AND TH E LE A RNED A O ERRED IN INTERPRETING TH E W ORD ' SHALL ' IN RUL E 1OB ( 4 ) T O MEAN THAT D A T A FOR THE SA M E FINAN C IAL Y EAR IN WHICH THE INT E RN A TION A L TR A N SAC TI O N WAS AC TUALL Y E NT E RED INT O I S A MAND A TOR Y REQUIREMENT . A L SO TH E APP E LL A NT W I S H ES T O S UBMIT TH A T TH E H O N O UR A BL E DRP A ND TH E LEARNED AO O U G HT TO HA VE AP PR EC I ATE D TH AT TH E TRAN S F E R PRICIN G R EG UL A TION S PR O VID E CO NT E MP O RAN EO U S D OC UM E NT AT I O N T O B E MAND A T O R Y, A ND NOT US E O F DATA FOR THE S AME F INANCIAL IT(TP)A NO.1494(B)/2010 YE AR . T H E H O N O URABL E DRP AND TH E LEARN E D AO O U G HT T O HA V E APPRECIATED TH E FA C T THAT TH E OBJEC T IVE UND ER L Y IN G THE U S E OF MULTIPL E - YE AR DAT A W A S TO ENSUR E THAT TH E O UT CO M ES OF T H E INT E RN A TI O N A L TR A N S A C TI O N S F O R TH E YE AR UND E R C O NSIDERATI O N WER E B ASE D O N ALL TH E EA RLI E R P E RI O D S W HI C H W ER E R E L E VANT FO R D E T E RMINATION O F TRANSF E R PRICE . M O RE O V E R TH E D A T A OF TH E PR ECE DIN G T WO F INANCI A L Y EAR S GIVE S A CLEAR INDICATION OF TH E BU S IN ESS AND ECO N O MI C CO NDITI O N S PREVAILIN G AT TH E BE G INNIN G OF THE RELEVANT FINAN C IAL YE A R I . E . TH E TIM E W H E N TH E TR A N S FER PRIC ES A R E SE T UP , AND TH E PURPOSE OF U S IN G MULTIPL E YE AR D A TA IS TO MIN I MI ZE A ND EVE N O UT TH E IMP AC T O F AN Y A BN O RMAL FACTOR WHICH MI G HT HAV E UNDUL Y IN F LU E N CE D T H E O UT CO ME S OF TH E DAT A U SE D F OR T H E CO MPARABILIT Y ANAL YS I S . 4 . SAFE HARBOUR AND APPLICATION OF +=5% ARMS LENGTH RANGE THE HONBLE DRP AND THE LD. AO HAVE ERRED IN SUPPORTING THE LEARNED TPOS MISINTERPRETATION THAT THE AMENDED PROVISION REGARDING THE PROVISION OF THE ARMS LENGTH RANGE AS PER THE FINANCE ACT, 2009 WAS APPLICABLE TO THE FINANCIAL YEAR (FY) 2005-06 AS WELL. THE HONBLE DRP AND THE LD. AO OUGHT TO HAVE CONSIDERED THE FACT THAT THE AMENDMENT WAS INTRODUCED WITH EFFECT FROM 1 ST OCTOBER 209 AND THE SAID AMENDMENT WAS NOT RETROSPECTIVE IN NATURE. FURTHER, THE AMENDMENT IS SUBSTANTIVE IN NATURE AND NOT MERELY PROCEDURAL. IT IS AN ACCEPTED LEGAL IT(TP)A NO.1494(B)/2010 POSITION THAT CHANGES OF A SUBSTANTIVE NATURE CANNOT BE CONSTRUED TO BE RETROSPECT5IVE, UNLESS EXPRESSLY PROVIDED BY THE STATUTE. THEREFORE, THE AMENDMENT TO SEC.92C SHOULD NOT BE INTERPRETED TO COVER THE ASSESSMENT YEAR 2006-07. THIS IS FURTHER SUPPORTED BY THE CBDT CIRCULAR NO.05/2010 DATED 3 RD JUNE 2010, WHICH CLARIFIES THAT THE AMENDED SAFE HARBOR PROVISIONS ARE APPLICABLE TO ASSESSMENTS FOR THE YEAR ENDED 31 MARCH 2009. WITHOUT PREJUDICE TO ANY OF THE APPELLANTS OTHER GROUNDS OF APPEAL, IF AT ALL ANY ADJUSTMENT IS MADE, THE SAME SHOULD BE MADE ONLY TO THE LOWER LIMIT OF THE 5% RANGE SET OUT U/S 92C(2). THE APPELLANT CRAVES LEAVE TO ADD, ALTER AND MODIFY THE ABOVE GROUNDS DURING THE COURSE OF THE APPEAL. FOR THE ABOVE AND ANY OTHER GROUNDS WHICH MAY BE RAISED AT THE TIME HEARING, IT IS PRAYED THAT TH E ORDER OF THE LEARNED AO BE SET ASIDE. THE LD. AR OF THE ASSESSEE SUBMITTED A COPY OF THE SYNOPSIS CONTAINING ALL THE ARGUMENTS OF THE ASSESSEE BEFORE THE TRIBUNAL AND THE SAME IS REPRODUCED HEREIN BELOW: SYNOPSIS 1 . BACKGROUND: 1 . 1 . MOLEX INDIA TOOLING PRI V ATE LIMITED ( ' MITPL ' OR ' APPELLANT ' ) WAS ENGAGED IN MANUFACTURE OF MACHINE TOOLS, TOOLIN G SPARES, HOUSING, DIES AND MOULDS AND COMMENCED THE COMMERCI AL PRODUCTION ON MARCH 1, 2 00 2 . IT(TP)A NO.1494(B)/2010 1 . 2. D UE TO UNDERUTILIZATION OF THE PRODUCTION CAPACIT Y , THE APPELLANT SUFFERED LOSSES DURING THE FINANCIAL YEAR ('FY ' ) 2 00 5- 06. 2. PROCEEDINGS BEFORE THE LEARNED TRANSFER PRICING OFFICER ( ,T PO , ) : 2.1 . THE APPE LL ANT , D UR ING THE TRANSFER PRICE ('TP') ASSESSMENT, SUBMITTED THAT IT WAS IN A START-UP PHASE AND CONSE QUENTL Y , THE PRODUCTION CAPACITY WAS UNDERUTILIZED. ACCORDINGLY, THE APPELLANT SUBMITTED GROS S MARGIN ANAL Y SIS ESTABLISHING THE ARM ' S LENGTH NATURE OF THE INTERNA T IONAL TRANSACTIONS UNDER T AKEN B Y THE APPELLANT. 2 . 2. FU R THER, THE APPELLANT PROVIDED THE COMPUTATION OF OPERATING COST MARK-UP OF THE COMPARABLES POST ADJU STING FOR THE DIFFERENCES IN THE PRODUC TI ON CAPACIT Y UTILIZED BY THE APPELLANT AND THE COMPARABLE COMPANIES ( ' CAPACIT Y UTILIZATION ADJUSTMENT ' ). 2 . 3 . THE LEARNED TPO ACKNOWLEDGED THE DIFFERENCE OF UNDERUTILIZATI O N OF PRODUCT I ON C A PACIT Y BET W EEN THE A PPELLANT AND THE COMPARABLE COMPANIES , AND C ON S IDERED THE RAT I O OF PROFIT BEFORE DEPRE C IATION , I NTEREST AND TA X ES ( ' PBDIT ' ) TO TOTAL OPERATING COST E X CLUDING DEPRECIATION ( ' PBDIT / TC ' ) AS THE PROFIT LE V EL I NDICATOR ( ' PU ' ). HENCE , THE LEA R NED TP O COMPU T ED THE APPELLANT'S P LI TO BE ( -) 31.46% . 2 - 4. THE LEARNED TPO ARRI V ED AT A COMPARABLE PLI OF 18.80 % AND PROVIDED AN ADJUSTMENT OF INR 5 ,7 0 , 01 , 235 / -. 2 . 5 . IN ADDITION TO THE ABO V E, THE LEARNED TP O DETERMINED THE ARM ' S LENGTH P R ICE OF THE TRANSACTION OF PURCHASE PRICE OF RA W MATERIALS , PRODUCTION SUPPLIES AND SPARES . IN THIS REGARD , THE LEARNED TPO COMPUTED THE ARM ' S LENGTH PRICE FOR THE AFOREMENTIONED TRAN S ACTION AS FOLLO W S: PARTICULARS AMOUNT (INR) PU R CHASE PRICE OF RAW MATERIALS, PRODUCTION 37,29, 591 SPARES SALES IN PROPOR T ION TO ABOVE PURCHASES 25,56, 261 [(1 0 0% - 31 . 46%) OFINR 37,29,591] ARM'S LENGTH MARGIN ON SALES (PBDIT / TC) 1482 ARM'S LENGTH PRICE OF THE AFOREMENTIONED PURCHASES 21,77 , 423 [(100% - 18 . 80%) OFINR 25,56,261] IT(TP)A NO.1494(B)/2010 ACCORDINGLY, THE LEARNED TPO PROVIDED ADJUSTMENT OF INR 1 5 ,5 2 ,1 68 /-. 2.6. THEREFORE THE TOTAL ADJUSTMENT PRO V IDED BY THE LEARNED TPO WAS I N R 5, 8 5, 5 3, 403 / - . 3. PROCEEDINGS B E FORE THE LEARNED DISPUT E RESOLUTIO N P ANEL { ' PANE L'] 3.1 . THE LEARNED PANEL UPHELD THE ACTION OF THE LEARNED TPO AND DISMISSED THE OBJECTIONS OF THE APPELLANT . 4 . PRO C EED I NGS B E FORE TH E H ONORABLE INCOME-TAX A PPELLAT E T RIBUNAL ( ,T RIBUNAL ') 4.1 . THE APPELLANT WOULD LIKE TO HUMBLY SUBMIT BEFORE TH E HONORABLE TRIBUNAL THAT THE LEARNED TPO ERRED IN NO T PROVIDING THE CAPACITY UTILIZATION ADJUSTMENT AND CHANGING TH E PLI F ROM OPERATING CO S T MARK-UP TO RATI O OF PBD IT / T C WHEN DEPRECIATION IS AN ESSENTIAL COMPONENT OF THE OPERA TIONS , IT BEING RELATED TO THE MACHINERY USED FOR THE MANUFAC TURING ACTIVITY . ALSO, THE LEARNED TPO ERRED IN ONL Y CONSIDERING THE DEPRECIATION COST AS FIXED WITHOUT CONSIDERING THE OTHER FIXED COSTS OF THE APPELLANT. 4.2. THE APPELLANT ALSO WOULD HUMBL Y SUBMIT BEFORE THE HONORABLE TRIBUNAL THAT WHILE COMPUTING THE PLI OF THE APPELLANT , THE TRANSACTION OF PURCHASE OF RAW MATERIALS , PRODUCTION SUPPLIES AND SPARES WAS CONSIDERED. THE ADJUSTMENT TO THE PLI OF THE APPELLANT WAS ALREAD Y PRO V IDED. THEREFORE, ADJUSTING THE AFOREMENTIONED TRANSACTION TANTAMOUNTS TO DOUBLE ADJUSTMENT. 4.3. FURTHER , THE APPELLANT WISHES TO HUMBL Y SUBMIT BEFORE THE HONORABLE TRIBUNAL THAT THE ANNUAL REPORTS OF G UIND Y MA CHIN E TO OL S L IMITED AND U N I T E D DRILLING TO OL S LIMITED WERE NOT A V AILABLE DURING THE PREPARATION OF TP STUD Y AND ACCORDINGL Y, WAS NOT CONSIDERED WHILE COMPUTING THE ARM ' S LENGTH PRIC E . THE ANNUAL REPORTS OF THE A FOREMENTIONED COM PARABLES ARE NOW A V AILABLE AND HENCE , SHOULD BE INCLUDED IN THE LIST OF COMPARABLES WHILE DETERMINING THE ARM ' S LENGTH PRIC E. (PLEASE REFER TO PAGE NO 4 & 10 OF APPENDIX 3 OF THE TP STUDY AND PAGE NO. OF THE 636 TO 7 00 OF THE ANNUAL REPORT COMPENDIUM SUBMITTED BEFORE THE HONORABLE TRIBUNAL). IT(TP)A NO.1494(B)/2010 IN ADDITION TO THE ABOVE, THE APPE L LANT HUMBL Y SUBMITS THAT AFOREMENTIONED COMPARABLES WERE ALSO CONSIDERED WHI LE THE PREPARATION OF TP STUD Y FOR TH E FY 2004-05 AND THE SAME WERE ACCEPTED BY THE LEA R NED TPO AND LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) AS COM PARABLES TO THE APPELLANT. 4 - 4. THE APPELLANT FURTHER SUBMITS THAT EL E CTRONICA M A C HIN E TO O LS L IMIT E D ('EM T ' ) IS ENGAGED IN TRADING ACTI V IT Y IN ADDITION TO TH E MANUFACTUR E O F MACHINES AND TUNG S TEN CARBIDE PRODUCT S . FURTHERMOR E, EMT H AS A M ALG AM AT ED W ITH ELECTRONICA PLASTIC MACHINE S P V T. LTD. , W H IC H I S I N VOLVE D I N M ANUFACTURING MACHINE S USED TO MANUFACTURE MOULD S, DURING YE AR , THE REBY T ANT A MOUNTING TO EXTRAORDINARY ACTI V IT Y. ACCORDINGL Y, MAKING EMT FUNCTIONALL Y NO T C OMPARABLE TO THE APPELLANT AND CONSEQUENTL Y , OUGHT TO BE REJECTED FROM THE SET OF COMPARABLE COMPANIES (PLEASE REFER TO PAGE N O . OF THE 465 , 489 & 490 OF THE ANNUAL REPORT COMPENDIUM SUBMITTED BEFORE THE HONORABLE TRIBUNAL). 4.5. FURTHERMORE, THE APPELLANT SUBMITS BEFORE THE HONORABLE TRIBUNAL THAT K ULK A RN I POWE R TOO L S LIMITED (' KPT ' ) IS ENG A GED IN ACTI V ITIES OF MANU FAC TUR I NG AND TRAD I NG OF P OW ER TOOL S AND BLO W ER S . IN ADDIT I O N T O T HE A FO REM E NTIO N ED A CTI V ITI ES, K PT IS A L S O I N V OL V ED IN DISTRIBUT I ON O F E L ECTRI C IT Y. FURTHER , THE SEGMENT FIN A NCIAL INFORMATION IS NOT AVAILABLE DURING THE Y EAR . ACCORDINGL Y , MAKING K P T FUN C TION A LL Y N O T CO MPARABL E TO THE APPELLANT AND CONSEQUENTL Y, OU G HT TO BE REJECTED FROM THE SET OF COMP A RABLE COMPANIES (PLEASE REFER TO PAGE NO. OF THE 520 , 529 & 530 OF THE ANNUAL REPORT COMPENDIUM SUBMITTED BEFORE THE HONORABLE TRIBUNAL) . 4.6. FURTHERM O RE, TH E APPELLANT SUBMITS THAT THE OPERATING COST M A RK-UP OF THE APPELLANT AND THE COMPARABL E COMPANIES COMPUTED B Y THE LEARNED TPO WAS ERRONEOUS, CONSEQUENTL Y , THE A PPELLANT S UBMITS THE CORRECT COMPUTATION BEFORE THE H O NORABLE TRIBUNAL . 4.7. FURTHERMORE , TH E LEARNED TPO / LEARNED DRP DID NOT PRO V IDE THE A DJUSTMENT W ITH R ES PECT TO THE DIFFERENCE S IN THE WORKING CAPITAL BETWEEN THE COMPARABLE COMPANIES AN D THE A PP E LLANT. A CC O RDIN G L Y , THE A PPELLANT HUMBL Y SUBMITS B E FOR E THE H O NORABLE TRIBUNAL THAT AN ADJUSTMENT TO THE OPERATING PROFIT TO OPERATING COST O F COM PARABLES OUGHT TO BE PRO V IDED TOWARDS THE DIFFERENCE IN WORKING CAPITAL LE V ELS OF THE COMPARABLE COMPANIES AND THE APPELLANT . IT(TP)A NO.1494(B)/2010 4.8. THE APPELLANT RELIES ON THE RULING OF 24 /7 C US TOMER CON PT . LT D . [IT A .22 7 /BANG / 20 1 01 W HEREIN THE HONORABLE TRIBUNAL HAS A CCEPTED THE ADDITIONAL GROUND FILED BY THE APPELLANT SEEKING ECONOMIC ADJUSTMENT AND W HERE SUCH CLAIM W AS NOT PLACED EARLIER DURING TRANSFER PRICING ASSES SMENT OR APPELLATE PROCEEDINGS. 4 . 9 . THE APPELLANT HUMBL Y SUBMITS THAT THE CAPACITY UTILIZATION A DJUSTMENT I S TO BE PROVIDED ON THE FIXED COSTS OF THE COMPARABLE COMPANIES . SIMILAR DIRECTIONS HA V E BEEN PRO V IDED B Y VARIOUS TRIBUNAL IN THE CASE OF C LAUS I NDIA PV T. L TD . [ITA NO. 17 8 3/ D EL / 20 1 11 AND PETRO ARALDITE PV T . LT D . [ I TA NO . 3 7 82 / MUM / 2 011] . 4.10 . FURTHER, THE APPELLANT HUMBL Y SUBMITS THAT THE CAPACIT Y UTILIZED B Y THE APPELLANT AND THE COMPARABLE COMPANIES COMPUTED E ARLIER WERE ERRONEOU S. ACCORDINGL Y, THE APPELLANT HAS COMPUTED THE CORRECT CAPACIT Y UTILIZED AS PER THE RULING OF PANA S ONIC AVC NE TWORKS INDIA PVT . LTD . [I TA NO. 4620 / D EL / 2011 1. 4.11. FOLLOWING THE ABOVE MENTIONED RULINGS AND CON T E NTIONS, THE APPELLANT HAS COMPUTED THE AVERAGE OPERATING COST M ARK - UP OF THE COMPARABLE COMPANIE S CONSIDERING THE CAPACIT Y UTILIZATION ADJUSTMENT AT (-) 88.24%. 4 . 12. THE OPERATING COST MARK-UP OF THE APPELLANT HAS BEEN CORRECTL Y COMPUTED A T (-) 46.03% WHICH IS HIGHER THAN THE ADJUSTED AV ERAGE OPERATING COST M A RK-UP OF THE COMPARABLE COMPANIES AND THEREFORE, IS AT ARM ' S LENGTH. 4.13. FURTHER, THE APPELLANT WISHES TO HUMBL Y HIGHLIGHT BEFOR E TH E HONORABL E TRIBUNAL THAT DURING THE COURSE OF TP ASSESSMENT FOR THE AY 200 7 -08 OF THE APPELLANT , THE LEARNED TPO HAS CONSIDERED THE UNDERUTILIZATION OF CAPACIT Y A ND HELD THAT TH E TRANSFER PRICE O F THE INTERNATIONAL TRANSACTIONS UNDERTAK E N B Y THE APPELLANT T O B E AT ARM'S LENG T H. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND T HAT APART FROM THE REQUEST OF THE ASSESSEE FOR INCLUSION OF TWO CO MPARABLES AND EXCLUSION OF TWO COMPARABLES, THE MAIN GRIEVANCE OF THE ASSESSEE IS REGARDING NON-GRANTING OF ADJUSTMENT ON ACCOUNT OF LOWER CAPACITY UTILIZATION AND WORKING CAPITAL ADJUSTMENT. IN THI S REGARD RELIANCE HAS BEEN PLACED BY THE LD. AR OF THE ASSESSEE ON VARIOU S JUDICIAL PRONOUNCEMENTS NOTED IN THE SYNOPSIS REPRODUCED ABO VE. FOR EXCLUSION OF ELECTRONICA MACHINE TOOLS LTD., AND KULKARNI POW ER TOOLS LTD., ASSESSEE POINTED OUT THE ANNUAL REPORTS OF THESE TW O COMPANIES ON THE ISSUE REGARDING THESE TWO COMPANIES RAISED BY WAY O F FILING ADDITIONAL GROUNDS. REGARDING INCLUSION OF TWO COMPANIES I.E M/S GUINDY MACHINE TOOLS LTD., AND M/S UNITED DRILLING TOOLS LTD., IT HAS BEEN SUBMITTED BEFORE US THAT THESE COMPANIES WERE REJECTED BECAUS E UNAVAILABILITY OF DATA, BUT SINCE THE DATA OF THESE TWO COMPANIES ARE NOW AVAILABLE IN THE ANNUAL REPORT OF THESE TWO COMPANIES, THESE TWO COM PANIES SHOULD BE CONSIDERED AS GOOD COMPARABLES. IN VIEW OF THESE F ACTS, WE ARE OF THE CONSIDERED OPINION THAT THE ISSUE REGARDING INCLUSI ON OF THESE TWO COMPANIES SHOULD GO BACK TO THE FILE OF THE TPO/ AO FOR FRESH DECISION. WE ORDER ACCORDINGLY. REGARDING THE ADJUSTMENT ON ACCOUNT OF LOWER CAPAC ITY UTILIZATION AND WORKING CAPITAL ADJUSTMENT, WE FIND THAT IT IS NOTED BY THE DRP IN PARA-3.2 ON PAGE-3 OF ITS ORDER THAT THE TPO HIGHLI GHTED THE MAJOR COST IT(TP)A NO.1494(B)2010 12 SHOWN IN THE P&L ACCOUNT WAS THE DEPRECIATION WHICH IN THE CASE OF TAX PAYER WAS ABOUT 20% OF THE TOTAL COST AGAINST AN AV ERAGE OF 3.5% IN THE CASE OF COMPARABLES. THEREAFTER, IT IS NOTED BY TH E DRP THAT NEUTRALIZE THIS DIFFERENCE THE TPO HAS CONSIDERED PBDIT AS PLI BY FOLLOWING THE TRIBUNAL ORDER IN THE CASE OF SECHEFENACKER MOTHERS ON LTD., VS ITO(2009-TIOL-376-ITAT-DELHI. IT IS FURTHER NOTED BY THE DRP IN THE SAME PARA WITH REGARD TO THE CLAIM OF ASSESSEE FOR OTHER COSTS SUCH AS EMPLOYEE COST, REPAIR AND MAINTENANCE COST, OFFICE SUPPLIES, FILING FEE ETC., IT HAS BEEN OBSERVED BY THE TPO THAT THESE C ASES ARE SLIGHTLY HIGHER THAN THE COMPARABLES IN THE RATIO OF ABOUT 7 TO 6 BUT JUST BECAUSE THE COSTS WERE HIGHER, ADJUSTMENT COULD NOT BE CONSIDERED. IN THE LIGHT OF THESE FACTS, NOW WE CONSIDER THE APPLI CABILITY OF VARIOUS JUDGMENTS CITED BY THE LD. AR OF THE ASSESSEE ON TH IS ISSUE. FIRST JUDGMENT CITED IS THE TRIBUNAL ORDER RENDERE D IN THE CASE OF CIT VS CLASS INDIA PVT.LTD., IN ITA NO.1783/DEL/201 1 DATED 12-08- 2015. COPY AVAILABLE ON PAGES 701 -726 OF THE PAPE R BOOK, PARA NO.9.3 TO 10.2 OF THIS TRIBUNAL ORDER AVAILABLE ON PAGES 7 14 TO 720 OF THE PAPER BOOK ARE RELEVANT FOR THE PRESENT ISSUE IN DISPUTE HENCE, THESE PARAS ARE REPRODUCED HEREIN BELOW FOR THE SAKE OF READY REFER ENCE; 9.3. SUB-RULE (2) OF RULE 10B PROVIDES THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFER ENCE TO CERTAIN FACTORS WHICH HAVE BEEN ENUMERATED THERE IN. RULE 10B(3) STATES THAT AN UNCONTROLLED TRANSACTION IT(TP)A NO.1494(B)2010 13 SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION , IF EITHER THERE ARE NO DIFFERENCES BETWEEN THE TWO OR A REASONABLY ACCURATE ADJUSTMENT CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES . WHEN WE READ SUB-CLAUSES(II) & (III) OF RULE 10B(1)(E) IN JUXTAPOSITION TO SUB-RULES (2) & (3) OF RULE 10B, T HE POSITION WHICH EMERGES IS THAT THE NET OPERATING PR OFIT MARGIN OF COMPARABLE COMPANIES CALLS FOR ADJUSTMEN T IN SUCH A MANNER SO AS TO BRING BOTH THE INTERNATIO NAL TRANSACTION AND COMPARABLE CASES AT THE SAME PEDESTAL. IN OTHER WORDS, IF THERE ARE NO DIFFERENC ES IN THESE TWO, THEN THE AVERAGE OF THE NET OPERATING PR OFIT MARGIN OF THE COMPARABLE COMPANIES BECOMES A BENCHMARK. HOWEVER, IN CASE THERE ARE SOME DIFFEREN CES BETWEEN THE COMPARABLES AND THE ASSESSEE, THEN THE EFFECT OF SUCH DIFFERENCES SHOULD BE IRONED OUT BY MAKING SUITABLE ADJUSTMENT TO THE OPERATING PROFIT MARGIN OF COMPARABLES. THAT IS THE WAY FOR BRINGING BOTH THE TRANSACTIONS, NAMELY, THE INTERNATIONAL TRANSAC TION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, ON TH E SAME PLATFORM FOR MAKING A MEANINGFUL AND EFFECTIVE COMPARISON. THE ABOVE ANALYSIS OVERTLY TRANSPIRES T HAT THE LAW PROVIDES FOR ADJUSTING THE PROFIT MARGIN OF COMPARABLES ON ACCOUNT OF THE MATERIAL DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION OF THE ASSESS EE AND COMPARABLE UNCONTROLLED TRANSACTIONS. IT IS N OT 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 ADJU STING IT ON ACCOUNT OF DIFFERENCES WITH THE COMPARABLE IT(TP)A NO.1494(B)2010 14 UNCONTROLLED TRANSACTIONS. THE ADJUSTMENT, 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 OPERAT ING COSTS OF THE ASSESSEE IN ALLOWING THE CAPACITY ADJUSTMENT. AS AGAINST THAT, THE CORRECT COURSE OF ACTION PROVIDED UNDER THE LAW IS TO ADJUST THE OPERATING C OSTS OF THE COMPARABLE AND THEIR RESULTANT OPERATING PRO FIT. THERE IS HARDLY NEED TO ACCENTUATE THAT THERE CAN B E NO ESTOPPEL AGAINST THE LAW. ONCE THE LAW ENJOINS FOR DOING A PARTICULAR THING IN A PARTICULAR MANNER ALONE, IT IS NOT OPEN TO ANYONE TO ADOPT A CONTRARY OR DIFFERENT APPROACH. AS THE AUTHORITIES BELOW HAVE ADOPT ED A COURSE OF ACTION IN ALLOWING ADJUSTMENT, WH ICH IS NOT IN CONSONANCE WITH LAW, WE CANNOT APPROVE THE SAME. THE IMPUGNED ORDER IS SET ASIDE AND THE MATTE R IS RESTORED TO THE FILE OF THE TPO/AO FOR GIVING EF FECT TO THE AMOUNT OF IDLE CAPACITY ADJUSTMENT IN THE OP ERATING PROFIT OF THE COMPARABLES AND NOT THE ASSESSE E. II. HOW TO COMPUTE CAPACITY UTILIZATION ADJUSTMENT UNDER TNMM : - 10.1. UNDER THE TNMM, THE ALP OF AN INTERNATIONAL TRANSACTION IS DETERMINED BY COMPUTING AND COMPARIN G THE PERCENTAGE OF OPERATING PROFIT MARGIN REALIZED BY THE ASSESSEE WITH THAT OF THE COMPARABLES. WE HAVE NOT ICED IT(TP)A NO.1494(B)2010 15 ABOVE THAT THE DIFFERENCE IN THE CAPACITY UTILIZATI ONS IS AN IMPORTANT FACTOR, WHICH NEEDS TO BE ADJUSTED. NO MECHANISM HAS BEEN GIVEN UNDER THE ACT OR THE RULES FOR COMPUTING THE AMOUNT OF CAPACITY UTILIZATION ADJUST MENT. 10.2. ON AN OVERALL UNDERSTANDING, WE FEEL THAT UND ER THE TNMM, THE FIRST STEP IN GRANTING CAPACITY UTILI ZATION ADJUSTMENT IS TO ASCERTAIN THE PERCENTAGE OF CAPA CITY UTILIZATION BY THE ASSESSEE AND COMPARABLES. T HERE CAN BE NO DIFFICULTY IN WORKING OUT THESE PERCENTAG ES. THE SECOND STEP IS TO GIVE EFFECT (POSITIVE OR NEGA TIVE) TO THE DIFFERENCE IN THE PERCENTAGE OF CAPACITY UTILIZ ATIONS 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 NE EDS 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 CONCER NED, THESE REMAIN UNAFFECTED DUE TO ANY UNDER OR OVER UTILIZATION OF CAPACITY. ACCORDINGLY, SUCH VARIAB LE OPERATING COSTS REMAIN UNCHANGED. THE ADJUSTME NT IS CALLED FOR ONLY IN RESPECT OF THE FIXED OPERATIN G COSTS AND FIXED PART OF SEMI-VARIABLE COSTS. SUCH COSTS A RE SCALED UP OR DOWN BY CONSIDERING THE PERCENTAGE OF CAPACITY UTILIZATION BY THE ASSESSEE AND SUCH COMPARABLE. IT CAN BE ILLUSTRATED WITH THE HELP OF A SIMPLE EXAMPLE. SUPPOSE THE FIXED COSTS INCURRED BY A COMPARABLE (SAY, A) ARE RS. 100 AND IT HAS CAPACIT Y UTILIZATION OF 50% AS AGAINST THE CAPACITY UTILIZA TION OF 25% BY THE ASSESSEE. THE ABOVE PERCENTAGES SHOW IT(TP)A NO.1494(B)2010 16 THAT THE ASSESSEE HAS INCURRED FULL FIXED COSTS WIT H 25% OF THE UTILIZATION OF ITS CAPACITY, AS AGAINST A IN CURRING FULL FIXED COSTS WITH 50% OF ITS CAPACITY UTILIZATI ON. THIS DIVULGES THAT THE ASSESSEE HAS INCURRED RELATIVELY MORE FIXED COSTS AND A HAS INCURRED LOWER COSTS. IN ORD ER TO MAKE AN EFFECTIVE COMPARISON, THERE ARISES A NEED T O OBLITERATE THE EFFECT OF THIS DIFFERENCE IN CAPACIT Y UTILIZATIONS. IT CAN BE DONE BY PROPORTIONATELY SCA LING UP THE FIXED COSTS INCURRED BY A SO AS TO MAKE IT FULL Y COMPARABLE WITH 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 PROFI T OF A BY SUBSTITUTING THE FIXED COSTS AT RS.200 WIT H THE ACTUALLY INCURRED AT RS.100, IT WOULD MEAN THAT THE FIXED COSTS INCURRED BY THE ASSESSEE AND A ARE AT THE SAM E CAPACITY UTILIZATION. THERE CAN BE CONVERSE SITUATI ON AS WELL. SUPPOSE THE FIXED COSTS INCURRED BY A COMPARA BLE (SAY, B) ARE RS. 100 AND IT HAS CAPACITY UTILIZATI ON OF 25% AS AGAINST THE CAPACITY UTILIZATION OF 50% BY THE ASSESSEE. THE ABOVE PERCENTAGES SHOW THAT THE ASSESSEE HAS INCURRED FULL FIXED COSTS AT 50% OF THE UTILIZATION OF ITS CAPACITY, AS AGAINST B INCURRING FULL FIXED COSTS AT 25% OF THE CAPACITY UTILIZATION. THIS DECIPHERS THAT THE ASSESSEE HAS INCURRED RELATIVELY LOWER FIXED COSTS AND B HAS INC URRED HIGHER COSTS. THIS DIFFERENCE IN CAPACITY UTILIZATIONS CAN BE ELIMINATED BY PROPORTIO NATELY SCALING DOWN THE FIXED COSTS INCURRED BY B SO AS TO MAKE IT FULLY COMPARABLE. THIS WE CAN DO BY REDUCING TH E FIXED COSTS OF B TO RS. 50 (RS.100 INTO 25/50) AS IT(TP)A NO.1494(B)2010 17 AGAINST THE ACTUALLY INCURRED FIXED COST BY IT AT R S.100. WHEN WE COMPUTE OPERATING PROFIT OF B BY SUBSTITUTI NG 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 UTILIZA TION LEVEL. FROM THE ABOVE PARAS OF THE TRIBUNAL ORDER, IT IS S EEN THAT THE TRIBUNAL HAS GIVEN A DETAILED GUIDELINES AS TO HOW TO MAKE OR GRANT CAPACITY UTILIZATION ADJUSTMENT. HENCE, WE FEEL IT PROPER THAT THIS MATTER ALSO SHOULD GO BACK TO THE FILE OF THE AO/TPO FOR G RANTING CAPACITY UTILIZATION ADJUSTMENT AS PER THE GUIDELINES GIVEN BY THE TRIBUNAL IN THE CASE OF DCIT VS CLASS INDIA PVT.LTD., (SUPRA). IT IS ORDERED ACCORDINGLY. IN THE RESULT, THE APPEAL STANDS ALLOWED FOR STATIS TICAL PURPOSES IN THE TERMS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MEN TIONED ON THE CAPTION PAGE. (SUNIL KUMAR YADAV) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER PLACE: BANGALORE: D A T E D : 18.10.2016 AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER, AR, ITAT, BANGALORE IT(TP)A NO.1494(B)2010 18 1. DATE OF DICTATION 2. , , DATE ON WHICH TYPED DRAFT IS PLACED BEFORE THE DICT ATING MEMBER .. 3. !' # . $ %# / $ %# # & DATE ON WHICH THE APPROVED DRAFT COMES TO THE PS/SR .PS. 4. ''() & * + DATE ON WHICH THE ORDER IS PLACED BEFORE THE DICTAT ING MEMBER FOR PRONOUNCEMENT 5. * . %# / # . . %# # + DATE ON WHICH THE ORDER COMES BACK TO THE PS/SR.PS .. 6 * !', + DATE OF UPLOADING THE ORDER ON WEBSITE .. 7. ! !', ' , - ) IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO . 8. .% / 0 + DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. * 1'2 / 34 & 5 + DATE ON WHICH ORDER GOES FOR XEROX &ENDORSEMENT 10. 0 6 / + DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 11. * 7 & 0 8 + THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 12. !) * 9() & 0 9() /#5 . + THE DATE ON WHICH THE FILE GOES TO DESPATCH SECTION FOR DESPATCH OF THE TRIBUNAL ORDER 13. * 9() + DATE OF DESPATCH OF ORDER .