NORD Drivesystems Pvt. Ltd., Pune V. Assistant Commissioner of Income-tax,

ITA 158/PUN/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2483 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 03-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 24-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Additional evidence; Wholly owned subsidiary; Corroborative evidences
• Section: 10B

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE . . , , ' # BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.158/PN/2014 '% % / ASSESSMENT YEAR : 2009-10 NORD DRIVE SYSTEMS PVT. LTD., 282/2, 283/2, PLOT NO.15, VILLAGE MANN, TALUKA MULSHI, ADJ. HINJEWADI, MIDC, PHASE II, PUNE 411057 PAN NO.AACCN0708R . / APPELLANT V/S ACIT, CIRCLE-2, PUNE . / RESPONDENT / ASSESSEE BY : SHRI SHARAD SHAH / REVENUE BY : SHRI S.K. RASTOGI / ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED U/S.143(3) R.W.S. 144C(13) OF THE I.T. ACT FOR T HE ASSESSMENT YEAR 2009-10. 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING OF COMPONENTS FOR AUTOMATION OF INDUSTRIAL PROCESS. IT MAINL Y MANUFACTURES GEARED MOTORS AND GEAR BOXES. THE ASSES SEE FILED / DATE OF HEARING :03.03.2016 / DATE OF PRONOUNCEMENT: 30 .03.2016 2 ITA NO.158/PN/2014 ITS RETURN OF INCOME ON 28-09-2009 FOR THE IMPUGNED ASSESSMENT YEAR DECLARING TOTAL LOSS OF RS.4,18,95,728/-. SI NCE THE TOTAL QUANTUM OF INTERNATIONAL TRANSACTIONS WITH AES W AS MORE THAN 15 CRORES THE AO REFERRED THE MATTER TO TH E TPO FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION AS PROVIDED IN SECTION 92CA(1) OF THE I.T. ACT. 3. THE TPO VIDE NOTICE U/S.92CA(2) OF THE I.T. ACT ASKED T HE ASSESSEE TO SUBSTANTIATE THE ALP COMPUTED BY IT IN THE FORM 3CEB. 4. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE TH E TPO NOTED THAT THE ASSESSEE HAS UNDERTAKEN THE FOLLOWIN G INTERNATIONAL TRANSACTIONS AS PER THE TP STUDY REPORT P REPARED BY M/S. PWC AND SUBMITTED BY THE ASSESSEE : SL.NO. DESCRIPTION OF THE TRANSACTIONS AMOUNT (IN RUPEES) 1 PURCHASE OF COMPONENTS AND PARTS 38,798.70 9 2 PURCHASE OF GEARED MOTORS 4,966,700 3 PURCHASE OF CAPITAL GOODS 206,433 4 COMMISSION ON SALES 13,436,816 5 INTEREST ON EXTERNAL COMMERCIAL BORROWING 9,149,245 6 REIMBURSEMENT OF EXPENSES 43,046 5. HOWEVER, HE NOTED THAT THE ABOVE DETAILS FURNISHED BY THE ASSESSEE IN THE TP STUDY REPORT ARE INCORRECT AND THE ACTUAL AE TRANSACTIONS AS REPORTED IN FORM 3CEB ARE AS UNDER : SL.NO. DESCRIPTION OF THE TRANSACTIONS AMOUNT (IN RUPEES) 1 PURCHASE OF COMPONENTS AND PARTS 10,96,50,348 2 PURCHASE OF GEARED MOTORS 99,33,399 3 PURCHASE OF CAPITAL GOODS 206,433 4 COMMISSION ON SALES 13,436,816 5 RECEIPT OF EC B LOAN 3,59,12,257 6 INTEREST ON EXTERNAL COMMERCIAL 9,149,245 3 ITA NO.158/PN/2014 BORROWING 7 REIMBURSEMENT OF EXPENSES 43,046 6. THE TPO NOTED THAT THE ASSESSEE IN THE TP STUDY R EPORT HAS SELECTED TNMM AS THE MOST APPROPRIATE METHOD WHICH WAS ACCEPTED BY HIM. HE NOTED THAT BASED ON THE FUNCTIONAL ANALYSIS THE ASSESSEE HAS SELECTED THE FOLLOWING TESTED PARTIES FOR THE ECONOMIC ANALYSIS : S.NO. NAME OF THE COMPANY DAT A SOURCE AVERAGE PLI 1 CROMPTON GREAVES LTD. P 11.36% 2 DEEPAK INDUSTRIES LTD. P 5.68% 3 J.M.T. AUTO LTD. P 8.07% 4 MAHINDRA SAR TRANSMISSION PVT. LTD. P 3.28% 5 SHANTHI GEARS LTD. P 26.96% 6 BHARAT GEARS LTD. C 6.53% 7 GUJARAT AUTOMOTIVE GEARS LTD. (AUTOMOTIVE PARTS SEGMENT) P - SEG 7.11% 8 INTERNATIONAL COMBUSTION (INDIA) LTD. (GEAR BOX & GEARED MOTOR DRIVE SYSTEM SEGMENT) P - SEG. 9.09% 9 KIRLOSKAR ELECTRIC CO. LTD., (ROTATING MACHINES GROUP) P - SEG. - 1.96% MEAN 8.46% MEDIAN 7.11% UPPER QUARTILE 9.09% LOWER QUARTILE 5.68% 7. IT WAS SUBMITTED THAT SINCE THE ARITHMETIC MEAN OF OPERATING MARGIN OF COMPARABLE COMPANIES IS 8.46%, HENCE T HE PRICES OF INTERNATIONAL TRANSACTIONS OF NORD DRIVE SYSTEMS PVT. LTD. THAT ACHIEVE AN OPERATING MARGIN OF 8.46% OR MORE WO ULD MEET THE ARMS LENGTH STANDARD REQUIRED UNDER THE IND IAN REGULATIONS. 8. IT WAS SUBMITTED THAT THE MANAGEMENT OF NORD DRIVE SYSTEMS PVT. LTD. HAS REPORTED THAT IT HAS AN INSTALLED C APACITY OF 24000 NOS. HOWEVER, DURING THE YEAR ENDED 31-03-200 9 NORD DRIVE HAS MANUFACTURED ONLY 3123 NOS. WHICH WORKS OUT 4 ITA NO.158/PN/2014 TO A CAPACITY UTILISATION OF 13.01% APPROXIMATELY. THIS BEIN G THE SECOND YEAR OF THE COMPANY AND DUE TO THE VERY LOW CAPACITY UTILISATION THE ASSESSEE MADE VERY LOW MARGINS DU RING THE YEAR WHICH IS NOT REPRESENTATIVE OF THE MARGINS WHICH CAN BE ACHIEVED BY IT UNDER NORMAL CIRCUMSTANCES. IT WAS FUR THER ARGUED THAT THE ENGINEERING INDUSTRY DURING THE PERIOD H AS BEEN HIT BY ECONOMIC SLOWDOWN, NEGATIVELY IMPACTING THE DEMAND FROM THE INDUSTRY. THE DECLINE IN PROFIT FOR THE F.Y . 2008-09 IS MAINLY DUE TO THE LOW SALES ON ACCOUNT OF TH E GLOBAL ECONOMIC SLOWDOWN. ON ACCOUNT OF THE ECONOMIC SLOWDOWN THERE IS A SIGNIFICANT DROP IN SALES DURING THE CURRENT YEA R WHICH HAS IMPACTED ADVERSELY ON THE SALES OF THE COMPAN Y. IT WAS ACCORDINGLY ARGUED THAT THE ASSESSEE HAD SIGNIFICANT AMOUNT OF UNDERUTILISED CAPACITY. AS AGAINST THE AVERAGE CAPACITY UTILISATION OF 57.50% FOR COMPARABLES, THE CAPACITY UTILISATION OF THE ASSESSEE IS 13.01%. RELYING ON VARIOUS DECISIONS IT WAS ARGUED THAT IT IS PERMISSIBLE TO MAKE ADJUSTMENTS TO COSTS AND PROFITS IN FIT CASES FOR THE PUR POSE OF COMPARABLE ANALYSIS. THE ASSESSEE ACCORDINGLY SUBMITTED A FRESH TP STUDY REPORT BY MAKING SUITABLE ADJUSTMENT TO THE FIXED COST INCURRED BY THE COMPANY ON ACCOUNT OF UNDER UTILISED CAPACITY FOR DETERMINING THE NET MARGIN FROM THE INTERNAT IONAL TRANSACTIONS. THE TPO HAS INCORPORATED SUCH WORKING AT PARA 9.5 (PAGE 14 TO 17) OF HIS ORDER. 9. THE TPO ANALYSED THE VARIOUS SUBMISSIONS MADE BY THE ASSESSEE FROM TIME TO TIME AND NOTED THAT THERE IS NO D ISPUTE REGARDING THE SELECTION OF THE TESTED PARTY AND THE MOS T APPROPRIATE METHOD, I.E. TNMM. HE NOTED THAT THE UPDATED 5 ITA NO.158/PN/2014 MARGINS OF THE COMPARABLE COMPANIES FOR F.Y. 2008-09 ARE AS UNDER : S.NO. NAME OF THE COMPANY PLI 1 CROMPTON GREAVES LTD. 14.86% 2 DEEPAK INDUSTRIES LTD. 2.82% 3 J.M.T. AUTO LTD. 12.73% 4 MAHINDRA GEARS AND TRANSMISSION PVT. LTD. 15.08% 5 SHANTHI GEARS LTD. 29.54% 6 BHARAT GEARS LTD. 5.42% 7 GUJARAT AUTOMOTIVE GEARS LTD. (AUTOMOTIVE PARTS SEGMENT) 12.80% 8 INTERNATIONAL COMBUSTION (INDIA) LTD. (GEAR BOX & GEARED MOTOR DRIVE SYSTEM SEGMENT) 21.46% 9 KIRLOSKAR ELECTRIC CO. LTD., (ROTATING MACHINES GROUP) NA AVERAGE 14.34% 10. SO THE ONLY MAJOR ISSUE ACCORDING TO THE TPO IS RE GARDING THE ADJUSTMENT ON ACCOUNT OF CAPACITY UTILISATION. THE A SSESSEE FURNISHED THE FOLLOWING DETAILS : AS PER PRESENT DATA BASE PROWESS SR.NO. NAME OF COMPANY CAPACITY UTILIZATION 1 BHARAT GEARS LTD. 43.79% 2 CROMPTON GREAVES LTD. 62,34% 3 INTERNATIONAL COMBUSTION (INDIA) LTD. 47.66% 4 KIRLOSKAR ELECTRIC CO. LTD., 104.92% 5 MAHINDRA GEARS AND TRANSMISSION PVT. LTD. 71.0 0 AVERAGE 65.94 OPERATING PROFIT/SALES 15.10 AS PER PROWESS AS ON REPORT DATE SR.NO. NAME OF COMPANY CAPACITY UTILIZATION 1 CROMPTON GREAVES LTD. 60.59 2 DEEPAK INDUSTRIES LTD. 72.67 3 BHARAT GEARS LTD. 73.89 4 KIRLOSKAR ELECTRIC CO. LTD. 22.84 AVERAGE 57.50 OPERATING PROFIT/SALES 14.12 AS PER FINANCIALS SR.NO. NAME OF COMPANY CAPACITY UTILIZATION 1 BHARAT GEARS LTD. 72.57 1 CROMPTON GREAVES LTD. 63.83 3 DEEPAK INDUSTRIES LTD. 56.67 4 MAHINDRA GEARS & TRANSMISSION PVT. LTD. 71.00 6 ITA NO.158/PN/2014 5 KIRLOSKAR ELECTRIC CO. LTD. 70.67 AVERAGE 66.95 OPERATING PROFIT/SALES 15.20 11. THE TPO NOTED THAT ASSESSEES CLAIM THAT CAPACITY UTILIZATION MAKES A DIFFERENCE IN THE MARGINS OF A COMPANY IS NOT DEMONSTRATED BY THE MARGINS OF THE COMPARABLE COMP ANIES. HE NOTED FROM THE ABOVE CHART FURNISHED BY THE ASSESSE E THAT CAPACITY UTILIZATION IN THE CASE OF KIRLOSKAR ELECTRIC CO. LTD . IS 100% AS PER THE DATA BASE AND 70.67% AS PER THE REVI SED WORKING BY THE ASSESSEE. THE PROFIT MARGIN OF THE COMPAN Y ARE ONLY 3.84% WHEREAS THE PROFIT MARGIN IN THE CASE OF CRO MPTON GREAVES IS 16.5% (AS PER REVISED WORKING BY THE ASSESSE E) BUT CAPACITY UTILIZATION @63% IS MUCH LESS THAN KIRLOSKAR. SIMILARLY BHARAT GEARS WITH 72.5% CAPACITY UTILIZATION IS EARNING ONLY 8% MARGINS. THUS THE DATA DOES NOT SHOW THAT CAPACITY UTILIZATION IN THE CASE OF COMPARABLES HAS ACTUALL Y HAD ANY APPARENT EFFECT ON THE PROFITABILITY OF THE COMPANIES. 12. THE TPO FURTHER NOTED THAT THE ASSESSEE HAS TAKE N COMPARABLES WHICH ARE PRODUCING MANY ITEMS. HE OBSERVED THAT KIRLOSKAR MANUFACTURES TRANSFORMERS APART FROM MOTORS/GENERATORS/ALTERNATORS. THE ASSESSEE HAS CONS IDERED CAPACITY UTILIZATION IN THE CASE OF MOTORS/GENERATORS ETC. HOWEVER CAPACITY UTILIZATION OF THIS COMPANY IN THE CASE OF TRANSFORMERS IS ALMOST 200% AND IN SPITE OF SUCH IMPRESSIVE CAPACITY UTILIZATION ITS MARGINS ARE QUITE LOW. FURTHER IN CER TAIN ITEMS, KIRLOSKAR HAS ABSOLUTELY NIL CAPACITY UTILIZATION SUCH A S WELDING EQUIPMENTS (INSTALLED CAPACITY 1800) BUT PRODUCTION IS NIL). THE SAME IS THE CASE WITH METAL CUTTING MACHINES, PRINT ED 7 ITA NO.158/PN/2014 CIRCUIT BOARDS ETC. HE NOTED THAT GOING BY ASSESSEES LO GIC ONE MUST SAY THAT KIRLOSKARS MARGIN REQUIRED UPWARD ADJUS TMENT BECAUSE OF UNUTILIZED CAPACITY IN THESE ITEMS. 13. SIMILARLY IN THE CASE OF CROMPTON THE TPO NOTED THAT THE COMPANY ALSO MANUFACTURES ENERGY METRES WHERE THE INST ALLED CAPACITY IS 10,00,000 AND PRODUCTION IS 2,80,693. SIMILARLY, IN CASE OF SWITCHGEAR CONTROL EQUIPMENT - INSTALLED CAPACITY IS 413400 WHEREAS ACTUAL PRODUCTION IS 263868. 14. THE TPO OBSERVED THAT IN THE CASE OF DEEPAK INDUS TRIES, THE COMPANYS ANNUAL ACCOUNTS ACTUALLY GIVE NO DETAILS O F INSTALLED CAPACITY BUT MENTION THAT THE MAJORITY OF PLANT MACHINERY BEING COMMON FOR DIFFERENT PRODUCTS AND INSTALLED CAPACITY BEING DEPENDENT ON PRODUCT MIX, IT IS NOT FEASIB LE FOR THE COMPANY TO INDICATE THE EXACT INSTALLED CAPACITY. H E NOTED THAT THE ASSESSEE HAS SUBSTITUTED LICENSED CAPACITY FOR INSTALLED CAPACITY. IT IS NOT CLEAR HOW MUCH LIBERTY THE ASSESSEE CAN TAKE WITH FIGURES TO JUSTIFY ITS ALP. REJECTING THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE THE TPO HELD THAT T HE CLAIM OF ADJUSTMENT FOR LOWER CAPACITY UTILISATION IS NOT TENABLE B Y OBSERVING AS UNDER: 13.11 EVEN IF WE CONSIDER THE FACT THAT THERE IS EXC ESS CAPACITY INSTALLED IN THE ASSESSEES CASE, THE MAXIMUM EFFECT OF T HE SAME WOULD BE SEEN IN THE MATTER OF DEPRECIATION. I DO N OT SEE MUCH FORCE IN THE ASSESSEES ARGUMENT THAT OTHER COSTS SUCH AS PE RSONNEL ETC. ALSO NEED ADJUSTMENT. THE TOTAL PERSONAL COST 29, 019,186 HAS BEEN TREATED AS FIXED COST AND THE ASSESSEE HAS SOUGHT AN ADJUSTMENT OF RS.2,24,55,046/- FROM THIS COST. IT IS TH E ASSESSEES CONTENTION THAT THIS COST REMAINS FIXED IRRESPECTIVE OF CAPACITY UTILIZATION. I FIND THIS CONTENTION QUITE UNTENABLE . THERE IS NO EVIDENCE TO HOLD THAT THIS MUCH PERSONNEL COST IS REQU IRED TO HAVE THE INSTALLED CAPACITY SIMILAR TO THE ASSESSEE. I DO NOT THINK THAT TOMORROW IF THE ASSESSEE RAMPS INSTALLED CAPACITY, THIS CO ST WILL GO UP, IRRESPECTIVE OF THE ACTUAL PRODUCTION. I WOULD RATHER SAY THAT 8 ITA NO.158/PN/2014 PERSONNEL COST IS DIRECTLY DEPENDENT ON THE ACTUAL OP ERATIONS OF THE COMPANY AND NOT ON THE INSTALLED CAPACITY. THER E ARE A NUMBER OF INOPERATIVE TEXTILE MILLS WHICH HAVE THE I NSTALLED CAPACITY BUT HARDLY INCUR ANY PERSONNEL COST BECAUSE T HERE IS NO PRODUCTION. IF A MANUFACTURING COMPANY REDUCES ITS P RODUCTION THE FIRST CASUALTY ALWAYS IS LABOUR AND NEXT COMES ADMIN ISTRATIVE, CLERICAL AND MANAGERIAL STAFF. IT IS INDEED A STRANGE ARGUMENT THAT EVEN BEFORE STARTING PRODUCTION TO ITS FULL CAPACITY, THE ASSESSEE EMPLOYED ENOUGH STAFF TO ACHIEVE 100% CAPACITY UTILI ZATION. THE ARGUMENT OF THE ASSESSEE IS NOT BORNE OUT BY THE FACTS AS WELL. 15. THE TPO ANALYSED THE PLI OF THE ASSESSEE WHICH IS AS UNDER: TURNOVER 191,338,112 ADD : SERVICE AND OTHER INCOME 1,302,968 ADD : COMMISSION I NCOME 13,436,616 OR 206,077,896 EXPENSES 273,145,264 LESS : INTEREST - 7,752,041 LESS : LOSS ON SALE OF ASSETS - 117,266 LESS : PRIOR PERIOD ADJ - 1,397,204 OC 263,878,753 OP - 57,800,857 PLI OP/SALES - 28.05 16. HE NOTED THAT THE PLI OF COMPARABLES ON A SINGLE YE AR DATA IS AS UNDER : S.NO. NAME OF THE COMPANY PLI 1 CROMPTON GREAVES LTD. 14.86% 2 DEEPAK INDUSTRIES LTD. 2.82% 3 J.M.T. AUTO LTD. 12.73% 4 MAHINDRA GEARS AND TRANSMISSION PVT. LTD. 15.08% 5 SHANTHI GEARS LTD. 29.54% 6 BHARAT GEARS LTD. 5.42% 7 GUJARAT AUTOMOTIVE GEARS LTD. (AUTOMOTIVE PARTS SEGMENT) 12.80% 8 INTERNATIONAL COMBUSTION (INDIA) LTD. (GEAR BOX & GEARED MOTOR DRIVE SYSTEM SEGMENT) 21.46% AVERAGE 14.34% 17. THE TPO ACCORDINGLY MADE AN UPWARD ADJUSTMENT OF RS.8,73,52,427/-, THE DETAILS OF WHICH ARE AS UNDER : 9 ITA NO.158/PN/2014 DESCRIPTION RS. TURNOVER B 206,077,896 OC 263,878,753 ALP OF COMPARABLES P 14.34 ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION (A) (ALP=OC*(1-D/100) A 176,526,326 5% RANGE ON HIGHER SIDE (THE ASSESSEES TRANSACTION FALLS OUTSIDE THE RANGE) 185,352,642 DIFFERENCE OVER PROFIT SHOWN B - A 87,352,427 18. THE ASSESSEE MADE ELABORATE SUBMISSIONS BEFORE THE DRP. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSE E THE DRP HELD THAT ADJUSTMENT CAN ONLY BE MADE TO THE COM PARABLE COMPANIES. THEREFORE, ADJUSTMENT SOUGHT ON ACCOUNT OF U NDER UTILISATION OF CAPACITY IS NEITHER POSSIBLE ON FACTS NOR IS IN ACCORDANCE WITH LAW. THE DRP FURTHER HELD THAT TNMM IS U SED AT ENTITY LEVEL TO COMPUTE THE MARGINS. HENCE ADJUSTMEN T MAY BE MADE AT ENTITY LEVEL ONLY. THE LAW DOES NOT PROVIDE FOR MAKING FURTHER ADJUSTMENT TO AN ADJUSTMENT. THE DRP FU RTHER HELD THAT PROPORTIONATE ADJUSTMENT MAY NOT LEAD TO A R ELIABLE ADJUSTMENT WHICH IS AGAINST THE PRINCIPLES OF RULE 10B(3) OF THE I.T. RULES,. THUS, THE DRP HELD THAT THE DECISION OF THE AO TO DENY THE ADJUSTMENT ON ACCOUNT OF CAPACITY UNDER UTILIS ATION IS CORRECT AS PER LAW AND THERE IS NO PROVISION IN LAW TO MA KE FURTHER ADJUSTMENT TO AN ADJUSTMENT FOR MAKING PROPORT IONATE ADJUSTMENT. THE AO THEREAFTER PASSED THE ORDER U/S.14 3(3) R.W.S. 144C AND MADE AN ADJUSTMENT OF RS.8,73,52,427/- TO THE INTERNATIONAL TRANSACTION CARRIED ON BY THE ASSESSEE. 19. AGGRIEVED WITH SUCH ORDER OF THE AO THE ASSESSEE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : 10 ITA NO.158/PN/2014 THE FOLLOWING GROUNDS OF APPEAL (ALONG WITH THE GRO UNDS OF APPEAL FILED TILL DATE) AND SUB GROUNDS OF APPEAL ARE INDEPENDENT OF AND WITHOUT PREJUDICE TO ONE ANOTHER. 1. ERRONEOUS TP ADJUSTMENT OF RS. 8,73,52,427/- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND I N LAW, THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX (CIRCLE-2) (LD. AO) AND THE DEPUTY COMMISSIONER OF INCOME-TAX (TPO) -IV P UNE [HEREINAFTER REFERRED TO AS LD. TRANSFER PRICING OFFI CER (LD. TPO)] HAVE ERRED IN PROPOSING AND THE HON'BLE DISPUTE RESOL UTION PANEL (THE DRP') HAS FURTHER ERRED IN CONFIRMING THE TRAN SFER PRICING ADJUSTMENT AMOUNTING TO RS. 8,73,52,427/- . 2. ECONOMIC ADJUSTMENTS THE APPELLANT CRAVES TO PLEAD BEFORE YOUR HONOUR, T O ALLOW ECONOMIC ADJUSTMENTS BETWEEN THE APPELLANT AND THE CO MPARABLE COMPANIES AS PER THE PROVISIONS OF RULE 10B OF THE INCO ME-TAX RULES, 1962 (THE RULES') WHICH MANDATE SUCH ADJUSTMENT S TO EQUALIZE THE DIFFERENCE BETWEEN THE APPELLANT VIS A VIS COMPARABLE COMPANIES (INCLUDING ADJUSTMENT FOR UNDERUTILIZATION OF CAPACITY, WORKING CAPITAL ADJUSTMENT, CASH PROFIT LEVEL INDICAT OR PLI') ETC.) 2.1 THE APPELLANT CRAVES TO PLEAD BEFORE YOUR HONOU R, TO GRANT CAPACITY UNDERUTILIZATION ADJUSTMENT ON ACCOUNT OF D IFFERENCE IN UTILIZATION OF CAPACITY BY THE APPELLANT AND THE UT ILIZATION OF CAPACITY BY THE COMPARABLE COMPANIES. 2.1.1 THE APPELLANT CRAVES TO PLEAD BEFORE HONOUR, TO APPRECIATE ASSESSEES CLASSIFICATION OF EXPENSES INTO FIXED AND VARIABL E. 2.2 CASH PLI THE APPELLANT CRAVES TO PLEAD BEFORE HONOUR, TO GR ANT AN ADJUSTMENT ON ACCOUNT OF DEPRECIATION EXPENSE INCURRE D BY THE APPELLANT VIS--VIS THE COMPARABLES. 2.3 WORKING CAPITAL ADJUSTMENT THE APPELLANT CRAVES TO PLEAD BEFORE YOUR HONOUR, TO GRANT AN ADJUSTMENT FOR DIFFERENCES IN WORKING CAPITAL POSITION OF THE COMPARABLE COMPANIES AND THE APPELLANT; 3. SELECTION AND REJECTION OF COMPARABLES 3.1 THE APPELLANT CRAVES TO PLEAD BEFORE YOUR HONO UR, TO ACCEPT CERTAIN FUNCTIONALLY COMPARABLE COMPANIES AND REJECT CERTAIN FUNCTIONALLY NON-COMPARABLE COMPANIES. 3.2 THE APPELLANT CRAVES TO PLEAD BEFORE YOUR HONOUR , TO REJECT COMPANIES WITH SIGNIFICANT RELATED PARTY TRANSACTIONS. 11 ITA NO.158/PN/2014 4. INCORRECT MARGIN COMPUTATION THE APPELLANT CRAVES TO PLEAD BEFORE YOUR HONOUR, T O ALLOW CORRECTION IN THE MARGINS OF COMPARABLE COMPANIES AND THE APPELLANT, WHICH ARE WRONGLY TAKEN BY THE LD. DRP/ TPO/ AO WHILE PASSING THEIR RESPECTIVE ORDERS. 5. CORROBORATIVE APPROACH FOR DETERMINATION OF ARM S LENGTH PRICE : THE APPELLANT CRAVES TO PLEAD BEFORE YOUR HONOUR, TO CONSIDER THE PRICING POLICY ADOPTED BY THE GROUP FOR APPELLANT V IS A VIS THIRD PARTY (DISCOUNT RATE COMPARED TO GROUP'S GLOBAL PRICE LIST) FOR DETERMINATION OF ARM'S LENGTH PRICE FOR THE INTERNAT IONAL TRANSACTION OF PURCHASES. THE APPELLANT CRAVES TO PLEAD BEFORE YOUR HONOUR TO CONSIDER USING NORD GERMANY AS THE TESTED PARTY GIVEN THE FACTS / CIRCUMSTANCES OF THE APPELLANT FOR AY 2009-10. 6. TRANSFER PRICING ADJUSTMENT TO BE RESTRICTED TO INTERNATIONAL TRANSACTIONS ONLY. THE LD. AO, BASED ON THE ORDER OF THE LD. TPO, ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE IN COMPUTING THE ADJUSTMENT AT THE ENTERPRISE LEVEL (WHICH INCLUDES TRA NSACTIONS WITH ASSOCIATED ENTERPRISES (AES') AS WELL AS NON- AES) AND DID NOT RESTRICT THE ADJUSTMENT ONLY TO TRANSACTION WITH A ES. 7. THE APPELLANT CRAVES LEAVE TO PLEAD BEFORE YOUR H ONOUR, TO GRANT BENEFIT OF +/- 5 PERCENT AS PER PROVISO TO SECTI ON 92C(2) OF THE INCOME TAX ACT, 1961. 8. THE APPELLANT CRAVES LEAVE TO PLEAD BEFORE YOUR H ONOUR, TO ALLOW SETUP OFF BROUGHT FORWARD LOSSES AND/OR DEPRECIAT ION/. THE APPELLANT CRAVES ITS RIGHT TO ADD TO OR ALTER THE GROUNDS OF APPEAL AT ANY TIME BEFORE OR DURING THE COURSE OF HE ARING OF THE CASE. 20. THE ASSESSEE HAS ALSO RAISED THE FOLLOWING ADDITIONAL GROUNDS : ADDITIONAL GROUND NO.1 'WITHOUT PREJUDICE TO OTHER GROUNDS, THE COMPARABLE SHOULD NOT INCLUDE M/S. SHANTHI GEARS LIMITED, BEING A COMPANY SH OWING EXTRA ORDINARY HIGH PROFIT AND IN THE BUSINESS FOR MO RE THAN 30 YEARS. ALTHOUGH WE OURSELVES HAD INCLUDED SHANTHI GEARS LIMIT ED AS ONE OF THE COMPARABLE ON THE ADVICE OF OUR CONSULTANTS, W E REALIZE THAT THE COMPANY IS HAVING EXTRA ORDINARY HIGH PROFITS AND ON THAT COUNT SHOULD NOT HAVE BEEN INCLUDED IN THE LIST OF CO MPARABLE. ALL 12 ITA NO.158/PN/2014 THE DETAILS OF THIS COMPANY ARE ALREADY ON THE RECORD S AND DOES NOT REQUIRE ANY ADDITIONAL FACTS. THE ISSUE IS PURELY A LEGAL ISSUE AND IN THE INTEREST OF JUSTICE, THE ADDITIONAL GROUND MAY PLEASE BE ADMITTED. ADDITIONAL GROUND NO.2 THE LD. AO/TPO/DRP ERRED IN WORKING OUT THE OPERATI NG COST BY INCLUDING LOSS ON ACCOUNT OF FOREIGN EXCHANGE DIFFERE NCE. ADDITIONAL GROUND NO.3 'THE LD. AO/TPO/DRP ERRED IN NOT CONSIDERING THE 'KI RLOSKOR ELECTRIC CO. LTD' AS ONE OF THE COMPARABLE. ' ADDITIONAL GROUND NO.4 THE ADJUSTMENT SHOULD BE ALLOWED FOR HIGH IMPORT DUT Y CONTENT ON ACCOUNT OF VERY HIGH IMPORT AS COMPARED TO THE IM PORT OF COMPARABLE. 21. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO THE DE CISION OF HONBLE SUPREME COURT IN THE CASE OF NTPC LTD. REPOR TED IN 222 ITR 383 AND THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF MAHINDRA AND MAHINDRA LTD. REPORT ED IN 122 TTJ 0577 (SB) REQUESTED FOR ADMISSION OF THE ADDITION AL GROUNDS. HE SUBMITTED THAT NO NEW FACTS ARE REQUIRED TO BE VERIFIED AND ALL MATERIAL FACTS ARE ON RECORD OF THE DEPART MENT. HE ACCORDINGLY SUBMITTED THAT THE ADDITIONAL GROUNDS RA ISED BY THE ASSESSEE SHOULD BE ALLOWED. 22. AFTER HEARING BOTH THE SIDES, THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE ARE ADMITTED FOR ADJUDICATION. 23. GROUND OF APPEAL NO.1 BY THE ASSESSEE BEING GENERAL IN NATURE IS DISMISSED. 24. IN GROUND OF APPEAL NO.2 THE ASSESSEE HAS REQUEST ED FOR ADJUSTMENT OF CAPACITY UTILISATION. 13 ITA NO.158/PN/2014 25. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS PROVIDED AN INDEPENDENT COST ACCOUNTANT CERTIFICATE FOR CLASSIFICATION OF EXPENSES INTO FIXED AND VARIAB LE BASED ON WHICH CAPACITY UTILISATION ADJUSTMENT IS COMPUTED . AFTER TAKING THE SAME INTO ACCOUNT THE ADJUSTED PLI O F THE ASSESSEE WORKS OUT TO 12.31%. 26. THE LD. COUNSEL FOR THE ASSESSEE FILED AN APPLICATION REQUESTING THE TRIBUNAL FOR ADMISSION OF THE FOLLOWING ADDITIONAL EVIDENCE : 1. COST ACCOUNTANT CERTIFICATE (GIVEN BY M/S. B.M. S HARMA & CO.) FOR CLASSIFICATION OF EXPENSES AS FIXED/VARIABLE FO R F.Y.2008- 09. 2. INDEPENDENT AUDITORS CERTIFICATE FOR DISCOUNT STRUC TURE & CREDIT POLICY BY AE. 3. INDEPENDENT AUDITORS CERTIFICATE REGARDING SEGMEN TAL PROFITABILITY BY AE FOR DEALINGS WITH ASSESSEE AND COMPA RED WITH DEALINGS WITH OTHERS. 27. THE LD. COUNSEL FOR THE ASSESSSEE REFERRING TO THE S AID APPLICATION STATED THAT THE ASSESSEE HAD PREPARED THE TP STUDY REPORT ON THE BASIS OF CAPACITY UTILISATION ADJUSTMENT AND FOR THAT THE ASSESSEE HAD MADE BIFURCATION OF EXPENSES INCUR RED DURING THE YEAR INTO FIXED EXPENSES AND VARIABLE EXPENSE S. SINCE THE TPO WAS NOT SATISFIED WITH THE ALLOWANCE OF CAPAC ITY UTILISATION AND HAD COMMENTED ON THE BIFURCATION OF EXPENSE S BY THE ASSESSEE, THE ASSESSEE HAD OBTAINED A CERTIFICATE FROM THE COST ACCOUNTANT M/S. B.M. SHARMA & CO. ON 30-07-2015 TO SUPPORT THE BIFURCATION. HE SUBMITTED THAT THE CERTIFICATE WAS NOT AVAILABLE IN THE PAST AND THE TPO HAD NEVER ASKED T HE ASSESSEE TO SUPPORT THE BIFURCATION FOR WHICH THE CERTIFICA TE WAS NEVER OBTAINED. HE SUBMITTED THAT THE CERTIFICATE WOULD B E VERY 14 ITA NO.158/PN/2014 IMPORTANT DOCUMENT IF THE TRIBUNAL AGREES FOR THE CAPACITY UTILISATION ADJUSTMENT. HE ACCORDINGLY REQUESTED THE BEN CH TO ADMIT THE ADDITIONAL EVIDENCE. 28. REFERRING TO THE FOLLOWING DECISIONS HE SUBMITTED THAT IT HAS BEEN HELD IN THE ABOVE DECISIONS THAT CAPACITY UTILISAT ION ADJUSTMENT CAN BE MADE TO THE TESTED PARTY : 1. TASTY BITE EATABLES LTD. TS-289 ITAT PUNE 2015 2. ARISTON THERMO INDIA LTD. 157 TTJ (PUNE) 481 3. KIARA JEWELLERY PVT. LTD. ITA NO.8109/MUM/2011 4. SKODA INDIA PVT. LTD. 122 TTJ 699 PUNE ITAT 5. BRINTONS CARPETS ASIA 139 TTJ 0177 PUNE ITAT 6. E.I. DUPONT INDIA PVT. LTD. 49 SOT 123 DELH I ITAT 7. E-GAIN COMM. 118 TTJ 354 PUNE 8. GLOBAL TURBINE SERVICES INC. ITA NO.3484/DEL /2011 29. REFERRING TO THE CERTIFICATE OF THE COST ACCOUNTANT W HO HAVE ANALYSED AND CLASSIFIED THE EXPENSES INTO FIXED AND VARIABLE HE SUBMITTED THAT AFTER TAKING THE SAME INTO ACC OUNT THE ADJUSTED PLI OF THE ASSESSEE WORKS OUT TO 12.31% . HE ACCORDINGLY SUBMITTED THAT GROUND OF APPEAL NO.2.2 AND 2. 1.1 SHOULD BE ALLOWED. 30. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED T HAT AN ADJUSTMENT ON ACCOUNT OF DEPRECIATION EXPENSES INCUR RED BY THE ASSESSEE VIS--VIS THE COMPARABLES SHOULD ALSO BE ALLO WED TO THE ASSESSEE. 31. SO FAR AS THE OTHER GROUNDS ARE CONCERNED, THE LD . COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DRP IN ITS O RDER FOR A.Y. 2011-12 HAS UPHELD THE ASSESSEES CONTENTION AND A LLOWED THE USE OF CASH PLI FOR COMPUTING THE ARMS LENGTH MAR GIN FOR A.Y. 2011-12. SIMILARLY, THE TPO IN HIS ORDER FOR A.Y. 2012-13 15 ITA NO.158/PN/2014 HAS GRANTED THE WORKING CAPITAL ADJUSTMENT TO THE ASSE SSEE WHICH RESULTED IN DELETING THE TRANSFER PRICING ADJUSTMENT. THE DRP VIDE DIRECTION FOR A.Y. 2011-12 HAS ALSO AGREED WITH TH E ASSESSEES CONTENTION AND ACCORDINGLY PLEASED TO CONSID ER THE CORRECT PROFIT MARGIN OF ALL COMPARABLE COMPANIES AFTER WORK ING CAPITAL ADJUSTMENT. HE FURTHER SUBMITTED THAT ON THE BA SIS OF THE DIRECTION OF THE DRP GRANTING CASH PLI ADJUSTMENT, IF THE REVISED WORKING OF CAPITAL ADJUSTMENT OF THE COMPARABLES IS COMPUTED AFTER CONSIDERING CASH PLI THE SAME WORKS OUT TO 6.02%, VIS--VIS MARGINS OF THE ASSESSEE OF 0.79%. ON COMPARISON OF THE ADJUSTED NET OPERATING MARGIN (POST CA SH PLI AND CUSTOM DUTY ADJUSTMENT) OF THE ASSESSEE WHICH IS 6. 97% WITH THE ADJUSTED NET OPERATING MARGIN (POST CASH PLI A ND WORKING CAPITAL ADJUSTMENT) OF COMPARABLES WHICH IS AT 6.02 % THE INTERNATIONAL TRANSACTION RELATING TO PURCHASE OF RAW MATERIAL IS AT ARMS LENGTH. HE ACCORDINGLY SUBMITTED TH AT IF THE DIRECTION OF THE DRP AND THE METHOD ADOPTED BY THE TPO IN SUBSEQUENT ASSESSMENT YEARS ARE CONSIDERED, THEN THE ENTIRE TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.8,73,52,427/- WOULD GET DELETED. 32. THE LD. COUNSEL FOR THE ASSESSEE REQUESTED TO CONS IDER THE PRICING POLICY ADOPTED BY THE GROUP FOR THE ASSESSEE VIS-- VIS THIRD PARTIES FOR DETERMINATION OF ALP FOR THE INTERNATIO NAL TRANSACTION PURCHASES. HE SUBMITTED THAT WHILE SELLING PARTS/FINISHED GOODS NORD GERMANY FOLLOWS THE NORD GROUP S PRICING POLICY ON OFFERING DISCOUNT ON THE GLOBAL PRICELIST. H E SUBMITTED THAT THE DISCOUNT PERCENTAGE AND THE CREDIT TERMS 16 ITA NO.158/PN/2014 OFFERED BY NORD GERMANY FOR A.Y. 2009-10 CAN BE SUMMARISE D WHICH IS AS UNDER : PARTICULARS ASSESSEE UNRELATED THIRD PARTIES OTHER NORD GROUP ENTITIES BEARING MAN GROUP, SOUTH AFRICA VARIADORES S.A., COLOMBIA NORD POHANECI, PRAGUE NORD GEAR PTE, SINGAPORE DISCOUNT PERCENTAGE OFFERED BY NORD GERMANY ON SALE OF PARTS/FINISHED GOODS (PERCENTAGE %) 65% 56% 56% 56% 60% CREDIT PERIOD OFFERED (NUMBER OF DAYS) 180 DAYS 60 DAYS 120 DAYS 30 - 180 DAYS 33. HE SUBMITTED THAT THE DRP IN ITS DIRECTIONS FOR A.Y. 2 011- 12 HAS ACCEPTED THE CONTENTION OF THE ASSESSEE THAT A HIGHER DISCOUNT IS OFFERED TO THE ASSESSEE AS WELL AS THIRD PARTIES. 34. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO IN HIS ORDER FOR A.Y. 2012-13 HAS ALSO GRANTED THE BENEFIT OF +/- 5%. SINCE THE ASSESSMENT YEAR INVOLVED IN THE INSTANT CA SE IS A.Y. 2009-10, THEREFORE, THE ASSESSEE SHOULD BE GRANTED T HE BENEFIT OF +/-5% AS PER PROVISO TO SECTION 92C(2). HE ACCORDINGLY SUBMITTED THAT CONSIDERING THE DIRECTION OF TH E DRP FOR A.Y. 2011-12 AND THE ORDER OF THE TPO FOR A.Y. 2012-13 THE ADDITION MADE BY THE TPO AND UPHELD BY THE DRP SHOULD B E DELETED. 35. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE TPO/DRP. SO FAR AS TH E CAPACITY UTILISATION ADJUSTMENT IS CONCERNED HE SUBMITTED THAT ADJUSTMENT CAN ONLY BE MADE TO THE COMPARABLE COMPAN IES. 17 ITA NO.158/PN/2014 THE ADJUSTMENT SOUGHT ON ACCOUNT OF UNDER UTILISATION OF CAPACITY IS NEITHER POSSIBLE ON FACTS NOR IS IN ACCORDANCE WITH LAW. SO FAR AS THE ARGUMENT OF THE ASSESSEE REGARDING W ORKING CAPITAL ADJUSTMENT, CUSTOM DUTY ADJUSTMENT, EXPENSES OF CERTAIN FUNCTIONAL COMPARABLE COMPANIES AND REJECTION OF CERTAIN FUNCTIONAL NON COMPARABLE COMPANIES AND TO REJECT COMPANIES WITH SIGNIFICANT RPT ARE CONCERNED, THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSE E HAS NOT MADE ANY SUBMISSIONS BEFORE THE DRP AND ASSESSEE IS NOW MAKING FRESH ARGUMENTS ON THIS ISSUE. SIMILARLY, NO SUBMISSION WAS MADE BEFORE THE DRP OR THE TPO TO ALLOW CORRECTION IN THE MARGINS OF COMPARABLE COMPANIES WITH THA T OF THE ASSESSEE. NO ARGUMENT WAS ADVANCED BEFORE THE TP O OR THE DRP FOR SETTING OFF OF BROUGHT FORWARD LOSSES AND OR DEPRECIATION. HE ACCORDINGLY SUBMITTED THAT THE APPEAL FILE D BY THE ASSESSEE SHOULD BE DISMISSED. 36. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES, PERUSED THE ORDERS OF THE AO/TPO/DRP AND TH E PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. AFTER CONSIDERING THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, T HE ADDITIONAL EVIDENCES FILED BY THE ASSESSEE IN THE SHAPE OF CERTIFICATES AS PER PARA 26 OF THIS ORDER TO SUPPORT THE CASE OF THE ASSESSEE ARE ADMITTED. 36.1 WE FIND THE ASSESSEE IN THE INSTANT CASE IS INCORPORA TED IN INDIA AND IS A 100% SUBSIDIARY OF NORD GERMANY. NORD GROUP IS A WORLDWIDE LEADER IN DRIVE TECHNOLOGY FOR MECHANIC AL 18 ITA NO.158/PN/2014 AND ELECTRONIC SOLUTIONS. NORD INDIA, WHICH WAS FOUNDED IN PUNE IN THE YEAR 2007, IS A 100% SUBSIDIARY OF NORD GERM ANY FOR THE PURPOSE OF MANUFACTURING GEAR BOXES AND GEARED MOTORS MAINLY TO CATER TO VARIOUS INDUSTRIAL NEEDS IN INDIA. THE VARIOUS INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASS ESSEE HAVE ALREADY BEEN GIVEN AT PARA 4 AND 5 OF THIS ORDER. THE TPO AFTER REJECTING THE VARIOUS SUBMISSIONS MADE BY THE ASSE SSEE DETERMINED THE PLI OF THE ASSESSEE AT -28.05% WHEREAS THE PLI OF THE COMPARABLE COMPANIES WAS DETERMINED BY HIM AT 14.34% BY USING SINGLE YEAR DATA. THIS RESULTED INTO AN UPWARD ADJUSTMENT OF RS.8,73,52,427/-. 37. WE FIND THE DRP REJECTED THE VARIOUS CONTENTIONS OF THE ASSESSEE AND UPHELD THE ACTION OF THE TPO/AO. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT CAPAC ITY UTILIZATION ADJUSTMENT SHOULD BE GRANTED TO THE ASSESSEE SINCE AS AGAINST AVERAGE CAPACITY UTILIZATION OF 57.50% FOR COMPARABLES, THE ASSESSEE HAS USED CAPACITY OF 13.01%. W E FIND SOME FORCE IN THE ABOVE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE. WE FIND DIFFERENT BENCHES OF THE TRIBUNAL AR E ALLOWING CAPACITY UTILIZATION ADJUSTMENT. WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF TASTY BITE EATABLES L TD. VIDE ITA NO.1682/PN/2011 ORDER DATED 10-06-2015 FOR A.Y . 2007-08 HAS OBSERVED AS UNDER : 32. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER/DRP AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE AL SO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. ALTHOU GH THE ASSESSEE HAS TAKEN NUMBER OF GROUNDS NOW THEY CRYSTALLISE O NLY ON TWO ISSUES, I.E. ADJUSTMENT FOR CAPACITY UNDER UTILI SATION AND ADJUSTMENT FOR INAPPROPRIATE CALCULATION OF TP. 19 ITA NO.158/PN/2014 33. SO FAR AS THE ADJUSTMENT ON ACCOUNT OF CAPACITY U NDER UTILISATION IS CONCERNED, IT IS THE SUBMISSION OF THE LD . COUNSEL FOR THE ASSESSEE THAT CAPACITY UTILISATION OF THE ASSESSEE WORKS OUT TO 15% WHEREAS CAPACITY UTILISATION OF THE COMPARABLE CO MPANY WAS 53%. THEREFORE, THE DIFFERENCE BETWEEN THE TWO IS SI GNIFICANT AND MATERIAL TO IMPACT THE PROFIT MARGIN OF THE ASSESSEE AN D THE COMPARABLE COMPANYS ABILITY TO ABSORB THE FIXED OVER HEADS LIKE DEPRECIATION, SALARY AND WAGES, POWER, REPAIR ETC. IS LESS WHERE CAPACITY UTILISATION IS LOW AND THIS WOULD LEAD TO INC REASED COST AND LOWER PROFIT. 34. WE FIND SOME FORCE IN THE ABOVE SUBMISSION OF THE L D. COUNSEL FOR THE ASSESSEE. WE FIND THE MUMBAI BENCH OF T HE TRIBUNAL IN THE CASE OF M/S. FIAT INDIA LTD. VS. ACIT VIDE ITA NO.1848/MUM/2009 ORDER DATED 30-04-2010 FOR A.Y. 20 04-05 AT PARA 8 OF THE ORDER HAS OBSERVED AS UNDER : 8. IN GROUND NO. 2, THE REVENUE HAS CHALLENGED THE ACTION OF THE ID. CIT(A) IN ALLOWING THE ADJUSTMENTS MADE BY THE ASSESSEE TO WORK OUT ITS OPERATING MARGIN FOR COMPARING THE SAME WIT H THE PROFIT MARGIN OF COMPARABLE CASES. IT IS OBSERVED IN THIS CONTEXT THAT A DETAILED SUBMISSION WAS MADE ON BEHALF OF THE ASSESSEE BEFOR E THE ID. CIT(A) EXPLAINING EACH AND EVERY ADJUSTMENT SOUGHT TO BE M ADE BY IT. THE GIST OF THE SAID SUBMISSION HAS ALREADY BEEN EXTRAC TED BY US IN THE FOREGOING PORTION OF THIS ORDER AND A PERUSAL OF TH E SAME SHOWS THAT EACH AND EVERY ADJUSTMENT MADE BY THE ASSESSEE COMP ANY WAS DULY EXPLAINED BY IT BY FURNISHING THE RELEVANT FACTS AN D FIGURES AS WELL AS BY PRODUCING THE SUPPORTING EVIDENCE WHEREVER REQUI RED. AS RIGHTLY HELD BY THE LD. CIT(A), THE SAID SUBMISSION MADE BY THE ASSESSEE IS SUFFICIENT TO DEMONSTRATE THAT THERE WAS A MATERIAL DIFFERENCE IN THE FACTS OF THE ASSESSEE'S CASE AND THAT OF THE COMPAR ABLE CASES IN TERMS OF CAPACITY UTILIZATION AS WELL AS IN OTHER T ERMS. APPROPRIATE ADJUSTMENTS THUS WERE REQUIRED TO BE MADE TO ELIMIN ATE SUCH DIFFERENCES AND AFTER HAVING CONSIDERED THE RELEVANT TRANSFER PRICING GUIDELINES AS WELL AS TRANSFER PRICING REGULATIONS, IT WAS HELD BY THE LD. CIT(A) THAT VARIOUS ADJUSTMENTS MADE BY THE ASS ESSEE WERE REASONABLE AND ACCURATE. HE ALSO HELD THAT THE SAID MATERIAL DIFFERENCE WERE ARBITRARILY IGNORED BY THE TPO WHIL E DISALLOWING THE ASSESSEE'S CLAIM SUCH FOR ADJUSTMENTS AND THERE BEI NG NO PROPER REASONS ASSIGNED BY HIM FOR IGNORING THE SAID DIFFE RENCE, THE TRANSFER PRICING EXERCISE DONE BY HIM IN THE REPORT WAS ENTI RELY FUTILE. AT THE TIME OF HEARING BEFORE US, THE ID. D.R. HAS NOT BEE N ABLE TO RAISE ANY MATERIAL CONTENTION TO REBUT/CONTROVERT THE OBSERVA TIONS/FINDING RECORDED BY THE LD. CIT(A) IN HIS IMPUGNED ORDER TO ARRIVE AT THE SAID CONCLUSION. HE HAS SIMPLY RELIED ON THE REPORT OF T HE TRANSFER PRICING OFFICER IN SUPPORT OF THE REVENUE'S CASE. HOWEVER, AS POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE FROM THE COPIES OF RELEVANT REPORTS, THE TPO HIMSELF HAS ALLOWED SIMILAR ADJUSTMENTS MAD E BY THE ASSESSEE IN THE IMMEDIATELY PROCEEDING YEARS I.E. A .Y. 2002-03, 2003-04 AS WELL AS IN THE IMMEDIATELY SUCCEEDING YE ARS I.E. 2005-06 AND 2006-07 WHEREIN THE FACTS INVOLVED WERE SIMILAR TO THAT OF THE YEAR UNDER CONSIDERATION I.E. A.Y. 2004-05. WE, THEREFOR E, FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(A) HOLDING THA T THE ADJUSTMENTS MADE BY THE ASSESSEE IN TNMM ANALYSIS WERE REASONAB LE AND ACCURATE AND AS REFLECTED IN THE SAID ANALYSIS, INT ERNATIONAL TRANSACTIONS MADE BY THE ASSESSEE COMPANY WITH ITS ASSOCIATED CONCERNS DURING THE YEAR UNDER CONSIDERATION WERE A T ARMS LENGTH REQUIRING NO ADJUSTMENT/ADDITION ON THIS ISSUE. THE IMPUGNED ORDER OF 20 ITA NO.158/PN/2014 THE LD. CIT(A) ON THIS ISSUE IS THEREFORE UPHELD DI SMISSING GROUND NO. 2 OF REVENUE'S APPEAL. (UNDERLINE GIVEN BY US) 35. WE FIND FOLLOWING THE ABOVE DECISION THE PUNE BE NCH OF THE TRIBUNAL IN THE CASE OF ARISTON THERMO INDIA LTD. (SU PRA) HAS ALSO AGREED IN PRINCIPLE THE ADJUSTMENT ON ACCOUNT OF LOW CAPACITY UTILISATION AND HIGH FIXED OPERATING COST BY OBSERVING AS UNDER : 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. 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 UTILIZATION AND THE SALES ARE ALSO ON A LOWER SIDE. MOREOVER, IT HAS INCURRED CERTAIN START-UP COSTS AND THE FIXED OPERA TING 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 THE OTHER HAND, THE NET PROFIT MARGIN OF THE ASSESSEE HAS BEEN BENCHMARKED AGAINST COMPARABLES C ASES, WHO ARE ESTABLISHED ENTITIES AND HAVE STARTED BUSINESSE S MANY YEARS AGO. IN OUR CONSIDERED OPINION, THE CASE MADE OUT BY THE ASSESSEE IS BASED ON ECONOMIC AND COMMERCIAL REASONS. THE ASSES SEE IS A UNIT WHICH HAS BEEN SET-UP DURING THE YEAR AND ITS CAPAC ITY UTILIZATION IS ONLY 21%, WHICH HAS RESULTED IN LOSSES, WHILE ITS P ROFIT MARGINS HAVE BEEN COMPARED WITH ENTITIES ESTABLISHED OVER THE YE ARS. OSTENSIBLY, SUCH A COMPARABILITY ANALYSIS DOES NOT PROVIDE A LE VEL PLAYING FIELD. IN OUR VIEW, THE AFORESAID FACTOR IS REQUIRED TO BE AD JUSTED SO AS TO FACILITATE A MEANINGFUL COMPARABILITY ANALYSIS BETW EEN 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 RE GARD TO THE PROVISIONS OF RULE 10B(1)(E) OF THE RULES. THE METH OD ADOPTED BY THE ASSESSEE FOR BENCHMARKING ITS INTERNATIONAL TRANSAC TION IS THE TNM METHOD AND RULE 10B(1)(E) OF THE RULES PRESCRIBES T HE MANNER IN WHICH THE SAME IS TO BE APPLIED. AS PER THE REVENUE , IN SUB-CLAUSE (III) ADJUSTMENTS TO THE NET PROFIT MARGIN ARE PERM ISSIBLE BUT IT IS ONLY IN RELATION TO THE NET PROFIT MARGINS OF THE COMPARABL E UNCONTROLLED TRANSACTIONS AND NOT WITH RESPECT TO THE MARGIN OF THE TESTED PARTY AND THUS THE CLAIM OF THE ASSESSEE CANNOT BE ALLOWED. I N OUR CONSIDERED OPINION, IN SUB-CLAUSE (I) THE NET PROFIT MARGIN RE ALIZED 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 C OMPARABLE UNCONTROLLED TRANSACTION IS TO BE ASCERTAINED HAVIN G REGARD TO THE SAME BASE. SUB-CLAUSE (III) PERMITS ADJUSTMENT WITH REGARD TO THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (II) I.E. O F THE COMPARABLE UNCONTROLLED TRANSACTIONS SO AS TO TAKE INTO ACCOUN T THE DIFFERENCE, IF ANY BETWEEN THE INTERNATIONAL TRANSACTION OF THE TE STED PARTY AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. THE PLEA OF T HE REVENUE, IN OUR VIEW, IS MISDIRECTED FOR THE REASON THAT THE NE T PROFIT 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 PE R THE REVENUE THE NET PROFIT MARGIN OF THE TESTED PARTY AS STATED IN SUB-CLAUSE (I) IS TO BE THE SAME AS REFLECTED IN THE FINANCIAL ACCOUNTS. IN PARA 8.1 OF THE ORDER OF THE TPO IT IS CANVASSED THAT THE NET PROFI T MARGIN HAS TO BE UNDERSTOOD AS MEANING PROFIT BEFORE TAX COMPUTED IN ACCORDANCE WITH ACCOUNTING PRINCIPLES. IN OUR CONSIDERED OPINION, T HE WHOLE OBJECTIVE OF ADOPTING THE MOST APPROPRIATE METHOD FOR THE PUR POSE OF COMPARABILITY ANALYSIS IS TO DETERMINE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. IN OTHER WORDS, THE PUR POSE OF THE COMPARABILITY ANALYSIS IS TO EXAMINE AS TO WHETHER OR NOT THE VALUES 21 ITA NO.158/PN/2014 STATED FOR THE INTERNATIONAL TRANSACTIONS ARE AT AN ARMS LENGTH PRICE I.E. WHETHER THE PRICE CHARGED IS COMPARABLE TO AN UNCONTROLLED TRANSACTION OF SIMILAR NATURE. THEREFORE, THE ADOPT ION OF THE NET PROFIT MARGIN OF THE TESTED PARTY HAS TO BE MADE KEEPING I N MIND ITS OBJECTIVE, I.E. TO FACILITATE ITS COMPARISON WITH O THER UNCONTROLLED COMPARABLE ENTITIES/TRANSACTIONS. THEREFORE, KEEPIN G IN MIND THE AFORESAID OBJECTIVE, THE NET PROFIT MARGIN OF THE T ESTED PARTY DRAWN FROM ITS FINANCIAL ACCOUNTS CAN BE SUITABLY ADJUSTE D TO FACILITATE ITS COMPARISON WITH OTHER UNCONTROLLED ENTITIES/TRANSAC TIONS AS PER SUB- CLAUSE (I) OF RULE 10B(1)(E) OF THE RULES ITSELF. T HE ABSENCE OF SUCH A SPECIFIC PROVISION IN RULE 10B(1)(E)(III) OF THE RU LES DOES NOT OPERATE AS A BAR, SO LONG AS THE ADJUSTMENT SOUGHT TO BE MA DE IN THE PROFIT MARGIN OF THE TESTED PARTY ARE BASED ON COGENT AND SUFFICIENT REASONS AND SEEKS TO MAKE THE COMPARABILITY ANALYSIS WITH C OMPARABLE UNCONTROLLED TRANSACTIONS MORE MEANINGFUL. IN-FACT, PUNE BENCH OF THE TRIBUNAL IN THE CASE OF EGAIN COMMUNICATION (P.) LT D. (SUPRA) IN PARA 36 OF THE ORDER OPINED THAT DEPENDING ON THE FACTS AND CIRCUMSTANCES OF A CASE, IT MAY BE APPROPRIATE TO ADJUST THE OPER ATING PROFIT OF 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. (SUPRA) WHEREIN ONE OF US WAS A MEMBER OF THE BENCH I.E. ACCOUNTANT MEMBER, AN ADJUSTMENT WAS ALL OWED TO THE PROFIT MARGIN OF THE TESTED PARTY WITH RESPECT TO T HE 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 AUT O INDIA (SUPRA) IS ALSO ON SIMILAR LINES. 12. THE LEARNED CIT(DR) HAS RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF HAWORTH (INDIA) P. LTD. (SUPRA) FOR THE PROPOSITION THAT ADJUSTMENT TO THE PROFIT MARGIN OF THE TESTED PARTY IS NOT PERMISSIBLE. WE HAVE PERUSED THE SAID DECISION. IN THE CASE BEFO RE THE DELHI BENCH OF THE TRIBUNAL, ASSESSEE HAD COMPUTED ITS MA RGIN AFTER CLAIMING ADJUSTMENT FOR CAPACITY UTILIZATION. THE A SSESSEE HAD ADOPTED THE TNM METHOD FOR THE PURPOSE OF COMPUTING ITS ALP. THE ASSESSEE HAD CLAIMED THAT CAPACITY UTILIZATION OF C OMPARABLES WAS TO THE EXTENT OF 70%, WHICH WAS AN ASSUMPTION MADE DUE TO NON- AVAILABILITY OF THE REQUIRED DETAILS OF THE COMPARA BLE CASES. THE TPO REJECTED THE ADJUSTMENT ON THE GROUND THAT ASSESSEE HAD NOT SUBMITTED ANY EVIDENCE FOR ASSUMING THE CAPACITY UT ILIZATION OF THE COMPARABLES AND THE DATA BEING RELIED UPON BY THE A SSESSEE WAS FOUND TO BE EITHER UNRELIABLE OR INCORRECT. THE TRI BUNAL 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 ON RECORD, THE TRIBUNAL CAME TO CONCLUDE THAT THE ASSE SSEE DID NOT FURNISH SUFFICIENT EVIDENCE WITH REGARD TO THE CAPA CITY UTILIZATION OF THE COMPARABLE CASES. THE TRIBUNAL HELD THAT ASSESSEE W AS NOT ENTITLED TO SEEK ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATI ON BECAUSE OF ITS FAILURE TO FURNISH CREDIBLE AND ACCURATE INFORMATIO N IN THIS REGARD. IN CONCLUSION, THE TRIBUNAL SPECIFICALLY NOTED THAT BE CAUSE 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 INDIA PVT. LTD. (SUPRA), SKODA AUTO INDIA (P.) LTD. (SUPRA), E GAIN COMMUNICATION (P.) LTD. (SUPRA) AND GLOBAL VATEDGE PVT. LTD. VS. DCIT (ITA NOS, 2763 & 2764/DEL/2009) COULD NOT BE APPLIED IN THE C ASE OF THE ASSESSEE. THE AFORESAID DISCUSSION IN THE ORDER OF THE TRIBUNAL CLEARLY SHOWS THAT THE ASSESSEE THEREIN FAILED IN SEEKING A DJUSTMENT TO ITS PROFIT MARGINS FOR LACK OF EVIDENCE, AND THE TRIBUN AL WAS FULLY CONSCIOUS THAT THE RELIEF WAS OTHERWISE ALLOWABLE T O THE ASSESSEE IN PRINCIPLE, BASED ON THE PRECEDENTS CITED ABOVE. THU S, THE DECISION IN THE CASE OF HAWORTH (INDIA) P. LTD. (SUPRA) DOES NO T HELP THE 22 ITA NO.158/PN/2014 REVENUE, AND THE RELIANCE BY THE CIT(DR) IS MISPLAC ED. THEREFORE, IN OUR VIEW, HAVING REGARD TO THE PRECEDENTS AND THE A FORESAID DISCUSSION, IN THE PRESENT CASE ASSESSEE HAS TO SUC CEED IN PRINCIPLE FOR ADJUSTMENT ON ACCOUNT OF LOWER CAPACITY UTILIZA TION, AND THE LOSS SUFFERED ON ACCOUNT OF UNABSORBED FIXED OPERATING C OSTS INCURRED IN THE INITIAL YEAR. THE AFORESAID FACTORS, IN OUR VIE W, WARRANT AN APPROPRIATE ADJUSTMENT TO THE OPERATING MARGINS OF THE ASSESSEE TO FACILITATE A MEANINGFUL COMPARISON WITH THE COMPARA BLE UNCONTROLLED TRANSACTIONS. 13. AT THE TIME OF HEARING, THE LEARNED CIT(DR) POI NTED OUT THAT TPO HAS ALSO OBSERVED THAT APPROPRIATE DETAIL S IN RESPECT OF LOW UTILIZATION OF CAPACITY IN THE CASE OF COMPARABLES ETC. WERE NOT AVAILABLE. IT WAS SUBMITTED THAT THE PLEA OF THE AS SESSEE WAS REJECTED AT THE THRESHOLD, AND THEREFORE, THE LOWER AUTHORIT IES HAD NO OCCASION TO EXAMINE THE PLEA OF THE ASSESSEE ON MERITS. NO D OUBT, THE AFORESAID ASPECT SPRING UP ONLY AFTER THE PLEA OF T HE ASSESSEE IS ACCEPTED IN PRINCIPLE AND THE SAME WAS NOT SO DONE BY THE AUTHORITIES BELOW. THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT TO PAGE 97 OF THE PAPER BOOK WHEREIN IS PLACED THE FINANCIAL S TATEMENT OF A COMPARABLE CONCERN, M/S KHAITAN ELECTRICALS LIMITED FOR THE FINANCIAL YEAR 2005-06 TO POINT OUT THAT THE INFORMATION REGA RDING THE INSTALLED CAPACITY AND ACTUAL PRODUCTION CARRIED OUT DURING T HE YEAR IS AVAILABLE, WHICH WOULD FACILITATE THE COMPARISON AND ALSO MAKI NG OF AN ADJUSTMENT TO THE PROFITS MARGIN OF THE ASSESSEE. I T WAS POINTED OUT THAT AT-LEAST FOR THE SAID COMPARABLE THE ADJUSTMEN T OUGHT TO HAVE BEEN ALLOWED 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 BE EN ACCEPTED BY US. THEREFORE, IN ORDER TO ALLOW AN APPROPRIATE ADJUSTM ENT, NECESSARY VERIFICATION ON THE BASIS OF THE MATERIAL TO BE FUR NISHED BY THE ASSESSEE, DESERVES TO BE CARRIED OUT BY THE ASSESSI NG OFFICER. THEREFORE, WHILE UPHOLDING THE PLEA OF THE ASSESSEE , WE RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WH O SHALL ALLOW THE ASSESSEE A REASONABLE OPPORTUNITY TO MAKE SUBMISSIO NS AND PRODUCE RELEVANT MATERIAL IN SUPPORT OF ITS STAND AND THERE AFTER THE ASSESSING OFFICER SHALL ALLOW AN APPROPRIATE ADJUSTMENT IN TH E OPERATING MARGINS OF THE ASSESSEE FOR LOW CAPACITY UTILIZATION AND HI GH FIXED OPERATING COSTS INCURRED IN THE INITIAL YEAR OF OPERATION. 36. RESPECTFULLY FOLLOWING THE ABOVE DECISIONS CITED ( SUPRA) WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE SHOULD B E GIVEN THE BENEFIT OF LOW CAPACITY UTILISATION. WE THEREFORE R ESTORE THE GROUND OF APPEAL NO.2 TO THE FILE OF THE AO/TPO WIT H A DIRECTION TO CONSIDER THE APPROPRIATE ADJUSTMENT AFTER NECESSARY VER IFICATION ON THE BASIS OF MATERIAL SUPPLIED BY THE ASSESSEE. THE ASSE SSING OFFICER SHALL RECOMPUTE SUCH ADJUSTMENT AFTER GIVING D UE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. GROUND OF APPEAL NO.2 BY THE ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PUR POSES. 38. WE FIND THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF JCIT VS. M/S. KIARA JEWELLERY PVT. LTD. AND VICE VERSA VIDE I TA NO.8109/MUM/11 AND CO NO.228.MUM/12 ORDER DATED 23 ITA NO.158/PN/2014 07-05-2014 FOR A.Y. 2007-08 HAS OBSERVED AS UNDER : 10. AS REGARDS THE ISSUE INVOLVED IN THE CROSS-OBJECT ION FILED BY THE ASSESSEE RELATING TO THE CLAIM OF THE ASSESSEE FOR ADJU STMENT ON ACCOUNT OF CAPACITY UTILIZATION, IT IS OBSERVED T HAT THE SAID CLAIM OF THE ASSESSEE WAS DISALLOWED BY THE AO AS WELL AS BY LD. CIT(A) ON ACCOUNT OF IRRELEVANT CONSIDERATION. IN THE CASE O F DCIT V/S PETRO ARALDITE (P) LTD, THE CO-ORDINATE BENCH OF TH E TRIBUNAL HAS DECIDED THE SIMILAR ISSUE VIDE ITS ORDER DATED JULY 24, 2013 PASSED IN IT APPEAL NO.3782 (MUM) OF 2011 (AY 2005-06), AF TER CONSIDERING AND DISCUSSING THE NECESSITY OF ALLOWING ADJ USTMENT ON ACCOUNT OF CAPACITY UTILIZATION WHILE COMPUTING THE TP ADJUSTMENT. THE TRIBUNAL HAS EXPLAINED HOW SUCH ADJUSTM ENT IS NECESSARY DEPENDING ON THE FACTS AND CIRCUMSTANCES OF TH E CASE AND HAS ALSO LAID DOWN THE GUIDELINES AS TO HOW TO QUAN TIFY SUCH ADJUSTMENT. THE OBSERVATIONS RECORDED BY THE TRIBUNAL IN THIS CONTEXT IN PARAS 19 TO 25 OF ITS ORDER ARE REPRODUCED BELOW : 19. THERE BEING DIFFERENCE IN THE CAPACITY UTILIZA TION OF THE ASSESSEE VIS-- VIS THE COMPARABLES, ADJUSTMENT ON ACCOUNT O F CAPACITY UTILIZATION WAS CLAIMED BY THE ASSESSEE. ACCORDING TO THE ASSESSEE, IF THE PROFIT MARGIN IS TAKEN BEFORE DEPRECIATION BY A DOPTING EARNING BEFORE DEPRECIATION, INTEREST AND TAX (EBDIT) AS PL I, THE EFFECT OF DIFFERENCE IN CAPACITY UTILIZATION ON PROFIT MARGIN CAN BE NULLIFIED. THE TPO DID NOT APPROVE THIS METHOD ADOPTED BY THE ASSE SSEE FOR MAKING ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATIO N WHEREAS THE LD. CIT(A) FOUND THE SAME TO BE ACCEPTABLE HOLDING THAT THE UNDER UTILIZATION OF CAPACITY RESULTS IN UNDER RECOVERY O F FIXED EXPENSES LIKE DEPRECIATION AND IF THE DEPRECIATION IS EXCLUDED, T HE EFFECT OF DIFFERENCE IN CAPACITY UTILIZATION ON PROFIT MARGIN CAN BE NULLIFIED. BEFORE WE PROCEED TO DEAL WITH THE ISSUE OF ADJUSTM ENT FOR DIFFERENCE IN CAPACITY UTILIZATION, IT IS NECESSARY FIRST TO S EE THE PROCEDURE LAID DOWN FOR CARRYING OUT THE EXERCISE OF COMPARABILITY ANALYSIS AND MAKING SUITABLE ADJUSTMENTS. THIS PROCEDURE AS LAID DOWN IN SECTION 92-C OF THE ACT PROVIDES THAT THE ALP IN RELATION T O AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHO DS SPECIFIED THEREIN, BEING THE MOST APPROPRIATE METHOD AND THE MANNER IN WHICH THE SAID ALP HAS TO BE DETERMINED IS GIVEN IN SECTI ON 92-C(2) OF THE ACT READ WITH RULE 10B OF THE INCOME TAX RULES, 196 2 IN RESPECT OF EACH METHOD SEPARATELY. CLAUSE (E) OF RULE 10-B STI PULATES THE MANNER IN WHICH THE ALP IN RELATION TO AN INTERNATI ONAL TRANSACTION IS TO BE DETERMINED BY FOLLOWING THE TRANSACTIONAL NET MARGIN METHOD AS UNDER: '(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 TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; 24 ITA NO.158/PN/2014 (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 TRANSACTION 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 ARM'S LENGTH PRICE IN RELATION TO T HE INTERNATIONAL TRANSACTION;' 20. KEEPING IN VIEW THE AFORESAID PROVISIONS OF THE RELEVANT RULE, WE CAN NOW ENDEAVOR TO CONSIDER HOW AND TO WHAT EXTENT THE DIFFERENCE IN CAPACITY UTILIZATION AFFECTS THE PROFIT MARGIN A ND HOW THE ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN CAPACITY UTILIZATION CA N APPROPRIATELY BE MADE WITHIN THE FRAMEWORK OF RULE 10B. THE ISSUE OF DIFFERENCE IN CAPACITY UTILISATION GENERALLY COMES IN THE CASE OF MANUFACTURING CONCERN AND LIKE ANY OTHER BUSINESS UNDERTAKING, TH E MANUFACTURING CONCERN HAS MAINLY TWO TYPES OF OVERHEADS I.E. FIXE D OVERHEADS AND VARIABLE OVERHEADS. THE VARIABLE OVERHEADS VARY IN PROPORTION TO THE SALES AND THEY THEREFORE DO NOT HAVE ANY EFFECT ON THE PROFIT MARGIN AS A RESULT OF DIFFERENCE IN CAPACITY UTILIZATION. THE FIXED OVERHEADS, ON THE OTHER HAND, DO NOT VARY WITH THE VOLUME OF S ALES AND SINCE THEY REMAIN BY AND LARGE STATIC IRRESPECTIVE OF LEV EL OF CAPACITY UTILIZATION, THE PROFIT MARGIN GETS AFFECTED AS A R ESULT OF DIFFERENCE IN CAPACITY UTILIZATION ON THIS COUNT. THE UNDER UTILI ZATION OF CAPACITY RESULTS IN OVER ALLOCATION OR OVER ABSORPTION OF FI XED OVERHEADS RESULTING INTO UNDER-RECOVERY OF FIXED OVERHEADS WH ICH ADVERSELY AFFECTS THE PROFIT MARGIN. AS THE LEVEL OF CAPACITY UTILIZATION GOES UP, THE RATE OF ALLOCATION OR ABSORPTION OF FIXED OVERH EADS TO SALES COMES DOWN RESULTING INTO HIGHER PROFIT MARGIN. THE FOLLO WING SIMPLE EXAMPLE WOULD FURTHER EXPLAIN THIS POSITION: INSTALLED CAPACITY IN MONETARY TERMS RS.10 CRORES RS. 10 CRORES RS. 10 CRORES CAPACITY UTILISATION 50% 60% 80% SALES RS. 5 CRORES RS. 6 CRORES RS.8 CRORES VARIABLE OVERHEADS AT 50% RS.2.5 CRORES RS.3 CR ORES RS. 4 CRORES FIXED OVERHEADS RS.2 CRORES RS. 2 CRORES RS. 2 CRORES NET PROFIT RS.0.5 CRORES RS. 1 CRORE RS. 2 CR ORES PROFIT MARGIN (OP/SALES) 10% 16.67% 25% 21. THE ABOVE EXAMPLE SHOWS THAT THE PROFITABILITY CHANGES WITH THE CHANGE IN THE LEVEL OF CAPACITY UTILIZATION WITH HI GHER PROFITABILITY AT HIGHER UTILIZATION AND LOWER PROFITABILITY AT LOWER REALIZATION. THIS HAPPENS MAINLY BECAUSE OF HIGHER ALLOCATION OR ABSO RPTION OF FIXED OVERHEADS AT LOWER CAPACITY UTILIZATION WHICH COMES DOWN AS THE LEVEL OF CAPACITY UTILIZATION GOES UP. FOR INSTANCE , AS GIVEN IN THE ABOVE EXAMPLE, THE RATE OF ALLOCATION OR ABSORPTION OF FIXED OVERHEADS TO SALES IS 40% AT 50% CAPACITY UTILIZATI ON WHILE IT BECOMES 33.33% AT 60% CAPACITY UTILIZATION AND 25% AT 80% CAPACITY UTILIZATION GIVING MORE PROFIT MARGIN OF 1 6.67% AT 60% CAPACITY UTILIZATION AND 25% AT 80% CAPACITY UTILIZ ATION AS AGAINST PROFIT MARGIN OF 10% AT 50% CAPACITY UTILIZATION. T HE DIFFERENCE IN CAPACITY UTILIZATION THUS MATERIALLY AFFECTS THE PR OFIT MARGIN AND IF THERE IS A DIFFERENCE IN THE LEVEL OF CAPACITY UTIL IZATION OF THE ASSESSEE AND THE LEVEL OF CAPACITY UTILIZATION OF THE COMPAR ABLE COMPANIES, ADJUSTMENT IS REQUIRED TO BE MADE TO THE PROFIT MAR GIN OF THE 25 ITA NO.158/PN/2014 COMPARABLES ON ACCOUNT OF DIFFERENCE IN CAPACITY UT ILIZATION AS PER CLAUSE (E)(III) OF SUB-RULE (1) OF RULE 10-B OF THE INCOME TAX RULES, 1962. 22. HAVING HELD THAT THE ADJUSTMENT IS REQUIRED TO BE MADE TO THE NET MARGIN OF THE COMPARABLES ON ACCOUNT OF DIFFERENCE IN CAPACITY UTILISATION, THE NEXT ISSUE THAT ARISES IS REGARDIN G THE ADOPTION OF PROPER METHOD BY WHICH THE SAME CAN APPROPRIATELY B E MADE. IN THE PRESENT CASE, THE ASSESSEE MADE THIS ADJUSTMENT BY NOT CONSIDERING DEPRECIATION FOR COMPUTING ITS OWN OPERATING PROFIT AS WELL AS THE OPERATING PROFIT OF COMPARABLE. IT WAS DONE BY TAKI NG EBDIT AS PLI INSTEAD OF EBIT. ALTHOUGH THIS METHOD ADOPTED BY TH E ASSESSEE WAS NOT APPROVED BY THE TPO, IT WAS ACCEPTED BY THE LD. CIT(A) ON THE GROUND THAT THE EFFECT OF DIFFERENCE IN CAPACITY UT ILIZATION ON PROFITABILITY COULD BE NULLIFIED BY TAKING EBDIT AS PLI INSTEAD OF EBIT. WE ARE UNABLE TO CONCUR WITH THIS VIEW OF THE LD. C IT(A). IN OUR OPINION, WHEN THE PLI IS TAKEN AS OP TO SALES OR OP TO COST, OPERATING PROFIT OF THE ASSESSEE AS WELL AS COMPARA BLE CASES BECOMES RELEVANT AND THE DEPRECIATION BEING VERY MU CH INTEGRAL PART OF THE OPERATING EXPENSES OF THE MANUFACTURING CONC ERN, THE SAME CANNOT BE EXCLUDED FOR THE PURPOSE OF COMPUTING OPE RATING PROFIT. MOREOVER, CLAUSE (E)(I) OF SUB RULE (1) OF RULE 10- B REQUIRES THAT THE NET PROFIT MARGIN OF THE ASSESSEE IS TO BE WORKED O UT WHILE CLAUSE (E)(II) OF THE SAID SUB RULE REQUIRES THAT NET PROF IT MARGIN OF THE COMPARABLES IS WORKED OUT. CLAUSE (E)(III), WHICH P ERMITS THE ADJUSTMENTS, CLEARLY STIPULATES THAT ANY ADJUSTMENT ON ACCOUNT OF DIFFERENCES AFFECTING MATERIALLY THE PROFITABILITY IS TO BE MADE TO THE NET PROFIT MARGIN OF THE COMPARABLES AS REFERRED TO IN CLAUSE (E)(II). BY TAKING THE NET PROFIT MARGIN OF THE ASSESSEE WITHOU T CONSIDERING THE DEPRECIATION IN ORDER TO MAKE ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN CAPACITY UTILIZATION, WHAT THE ASSESSEE HAS SOUGHT TO DO IS TO MAKE ADJUSTMENT TO THE NET PROFIT MARGIN OF THE ASSESSEE AS REFERRED TO IN CLAUSE (E)(I) OF SUB RULE (1) OF RULE 10B, WHICH IN OUR OPINION, IS NOT PERMISSIBLE IN ACCORDANCE WITH CLAUSE (E)(III) OF S UB RULE (1) OF RULE 10B. 23. THE QUESTION THAT NOW ARISES IS WHAT IS THE PRO PER METHOD OF MAKING ADJUSTMENT FOR DIFFERENCE IN CAPACITY UTILIZ ATION WITHIN THE FRAME WORK GIVEN IN RULE 10B. AS ALREADY DISCUSSED BY US, THE DIFFERENCE IN CAPACITY UTILIZATION AFFECTS THE PROF ITABILITY MAINLY BECAUSE OF THE DIFFERENCE IN RATES AT WHICH THE FIX ED OVERHEADS ARE ABSORBED OR ALLOCATED DEPENDING ON THE LEVEL OF CAP ACITY UTILIZATION. THE EXAMPLE GIVEN BY US CLEARLY DEPICTS THIS POSITI ON. THE SAID EXAMPLE SHOWS THAT THE ALLOCATION OF FIXED OVERHEAD S AT THE CAPACITY UTILIZATION OF 50%, 60% & 80% IS 40%, 33.33% & 25% RESPECTIVELY RESULTING IN THE PROFIT MARGIN OF 10%, 16.67% AND 2 5%. IN OUR OPINION, IF THE FIXED OVERHEADS ALLOCATION OR ABSORPTION OF COMPARABLE IS BROUGHT AT THE LEVEL OF THE ASSESSEE , IT WOULD NUL LIFY THE EFFECT OF DIFFERENCE IN CAPACITY UTILIZATION ON THE PROFIT MA RGIN. FOR EXAMPLE, IF WE TAKE THE PROFITABILITY WORKING AT 50% CAPACITY U TILIZATION AS THAT OF THE TESTED PARTY AND AT CAPACITY UTILIZATION OF 60% AND 80% AS THAT OF THE COMPARABLES AND ADJUST THE RATE OF ALLOCATION O F FIXED OVERHEADS OF THE COMPARABLES IN ORDER TO BRING THE SAME AT PA R (I.E. 40% OF SALES) WITH THE TESTED PARTY, THE RESULTANT POSITIO N WILL BE AS UNDER:- NET PROFIT RS.1 CRORE RS. 2.00 CRORES LESS ADDITIONAL ALLOCATION OF DEPRECIATION BY TAKING THE RATE OF FIXED OVERHEADS AT 40% OF SALES: RS. 0.40 CRORES RS.1.20 CROR ES NET PROFIT AFTER ADJUSTMENT RS. 0.60 CRORES RS. 0.80 CRORES PROFIT MARGIN AFTER ADJUSTMENT 10% 10% 26 ITA NO.158/PN/2014 24. THE ADJUSTMENT THUS CAN BE MADE TO THE PROFIT M ARGIN OF THE COMPARABLES BY ALLOCATING FIXED OVERHEADS AT THE SA ME RATE AT WHICH FIXED OVERHEADS ARE ALLOCATED IN THE CASE OF THE TE STED PARTY. FOR EXAMPLE, IN THE CASE OF A COMPARABLE HAVING 80% CAP ACITY UTILIZATION, THE RATE OF ALLOCATION OF DEPRECIATION IS 25% OF TH E SALES AS AGAINST THE RATE OF ALLOCATION OF FIXED OVERHEADS OF 40% IN THE CASE OF THE TESTED PARTY. IF THE ADJUSTMENT IS MADE IN THE PROF IT MARGIN OF THE SAID COMPARABLES BY ALLOCATING MORE FIXED OVERHEADS AT 1 5% OF SALES TO BRING THE RATE OF ALLOCATION OF FIXED OVERHEADS AT PAR WITH THAT OF THE TESTED PARTY, THE PROFIT OF THE COMPARABLE WOULD BE REDUCED BY RS. 1.20 CRORES THEREBY GIVING A NET PROFIT OF RS. 0.80 CRORES WHICH WOULD BRING THE PROFITABILITY TO 10%, I.E. AT PAR WITH TH E TESTED PARTY. SIMILARLY, IF THE ADJUSTMENT IS MADE IN THE PROFIT MARGIN OF A COMPARABLE HAVING 60% CAPACITY UTILIZATION BY ALLOC ATING MORE FIXED OVERHEADS AT 6.67% OF SALES TO BRING THE RATE OF AL LOCATION OF FIXED OVERHEADS AT PAR WITH THAT OF THE TESTED PARTY, THE PROFIT OF THE SAID COMPARABLE WOULD BE REDUCED BY RS. 0.40 CRORES THER EBY GIVING A NET PROFIT OF RS. 0.60 CRORES WHICH WOULD BRING THE PRO FITABILITY TO 10% I.E. AT PART WITH THE TESTED PARTY. 25. HAVING HELD THAT THE ADJUSTMENT ON ACCOUNT OF D IFFERENCE IN CAPACITY UTILIZATION IS REQUIRED TO BE MADE AND HAV ING EXPLAINED WITH ILLUSTRATION THAT THE SAME CAN APPROPRIATELY BE MAD E BY ABSORBING OR ALLOCATING FIXED OVERHEADS SUCH AS DEPRECIATION ON SALES OF THE COMPARABLE AT THE SAME RATE AS THAT OF THE TESTED P ARTY, WE ARE OF THE VIEW THAT SUCH ABSORPTION OR ALLOCATIONS OF FIXED O VERHEADS ON OPERATING COST INSTEAD OF SALES WOULD BE MORE APPRO PRIATE AS THE SAME WILL ELIMINATE THE EFFECT OF DIFFERENCE IN PRO FIT MARGIN OR DIFFERENCE IN LEVEL OF STOCK OF FINISHED GOODS, IF ANY, OF THE TESTED PARTY AND COMPARABLES. 11. KEEPING IN VIEW THE DECISION OF THE TRIBUNAL IN THE CASE OF PETRO ARALDITE (P) LTD (SUPRA) LAYING DOWN THE GUIDELINES O N THE ISSUE OF CAPACITY UTILIZATION, WE CONSIDER IT APPROPRIATE TO RESTORE THIS ISSUE RELATING TO ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZ ATION IN THE CASE OF ASSESSEE COMPANY TO THE FILE OF AO/TPO FOR DECIDING THE SAME AFRESH KEEPING IN VIEW THE SAID GUIDELINES. IF THE EXACT DE TAILS OF CAPACITY UTILIZATION OF THE COMPARABLE COMPANIES ARE NOT AVAI LABLE IN THE PUBLIC DOMAIN, THE AO/TPO IS DIRECTED TO OBTAIN THE SAME DIR ECTLY FROM THE CONCERNED PARTIES AND TO DECIDE THIS ISSUE AFRESH AFTER GIVING ASSESSEE AN OPPORTUNITY OF BEING HEARD. 39. SIMILAR VIEW HAS BEEN TAKEN BY VARIOUS OTHER DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE. UNDER THE SE CIRCUMSTANCES WE DEEM IT PROPER TO RESTORE THE ISSUE R ELATING TO CAPACITY UTILIZATION ADJUSTMENT TO THE FILE OF THE TPO FOR ADJUDICATION OF THE ISSUE IN THE LIGHT OF THE DECISIONS CITED ABOVE AND IN ACCORDANCE WITH LAW. 27 ITA NO.158/PN/2014 40. WE FURTHER FIND THE DRP IN ASSESSEES OWN CASE FOR A .Y. 2011-12 HAS UPHELD THE ASSESSEES CONTENTION AND ALLOWE D THE USE OF CASH PLI FOR COMPUTING ARMS LENGTH MARGIN BY OBSERVING AS UNDER : 9.8 THE ASSESSEE PRAYED FOR AN ADJUSTMENT TO ACCOUNT FO R DIFFERENCE IN INVESTMENTS & HAS COMPUTED CASH PLI TO BE NCHMARK ITS INTERNATIONAL TRANSACTIONS. THE TPO IN ITS REMAND REPORT HAS INTIMATED THAT THE DIFFERENT ON ACCOUNT OF DEPRECIA TION BETWEEN THE CONTROLLED & THE COMPARABLE UNCONTROLLED TRANSAC TION HAS A LIKELY EFFECT OF AFFECTING THE PRICE, COST CHARGES OR PROFIT ARISING THERE FROM. WE AGREE WITH THIS VIEW & ACCORDINGLY, DIRECT TO ALLOW CASH PLI IN THIS CASE. 41. SIMILARLY THE TPO IN HIS ORDER FOR A.Y. 2012-13 HAS GRANTED WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE RES ULTING IN DELETION OF TP ADJUSTMENT. WE FURTHER FIND FROM THE PAP ER BOOK THAT THE DRP IN ITS DIRECTION FOR A.Y. 2011-12 HAS ALSO AGR EED WITH THE ASSESSEES CONTENTION AND DIRECTED THE TPO TO CONSIDER THE CORRECT OPERATING PROFIT MARGIN OF ALL COMPARABLE COMP ANIES AFTER WORKING CAPITAL ADJUSTMENT. THE RELEVANT OBSERVATIO N OF THE DRP FOR A.Y. 2011-12 READS AS UNDER : 9.7 WE HAVE CONSIDERED THE FACTS AND THE ARGUMENTS OF THE ASSESSEE AND PERUSED THE JUDICIAL PRONOUNCEMENT ON WHICH ASSESSEE HAS RELIED UPON. THE TPO IS DIRECTED TO EXAMINE THE COMPUTATION OF THE WORKING CAPITAL ADJUSTMENT WORKED OUT BY THE ASSESSEE AND RE-COMPUTE THE SAME, IF NECESSARY. IN CASE OF DISPUTE, THE TPO IS DIRECTED TO FOLLOW THE METHODOLOG Y OF THE ADJUSTMENT PROVIDED IN THE EXAMPLE GIVEN IN THE ANNE XURE TO CHAPTER III OF THE OECD TRANSFER GUIDELINES, 2010. F OR PLI, THE TPO IS DIRECTED TO USE THE DATA OF THE PLR EITHER OF SBI OR RBI FOR THE RELEVANT YEAR. THE TPO IS DIRECTED TO CONSIDER O NLY TRADE PAYABLES AND TRADE RECEIVABLE FOR THE COMPUTATION OF THE WORKING CAPITAL ADJUSTMENT, AS IT IS PAYABLE AND RECE IVABLES FROM CUSTOMER IMPACTING PROFIT MARGIN CAN BE COMPARED, AS PROVIDED IN THE OECD GUIDELINES. IN THIS CONNECTION, RELEVAN T PORTION OF THE ANNEXURE TO CHAPTER-III OF THE OECD TRANSFER PRICING GUIDELINES, 2010 IS REPRODUCED AS UNDER: 28 ITA NO.158/PN/2014 42. SIMILARLY WE FIND FROM THE ORDER OF THE DRP FOR A.Y. 2011- 12 THAT THE DRP HAS DIRECTED THE TPO TO ACCEPT THE C ONTENTION OF THE ASSESSEE THAT A HIGHER DISCOUNT IS OFFERED TO THE ASSESSEE AS WELL AS TO THE THIRD PARTIES. THE RELEVANT OBSERVATIO N OF THE DRP AT PARA 15.8 OF THE ORDER READS AS UNDER : 15.8 WE HAVE CONSIDERED THIS. AS DISCUSSED IN EARLIER PARAGRAPH, THE TPO HAS ALREADY ACCEPTED THAT HIGHER DISCOUNT HAS BEEN OFFERED TO THE ASSESSEE AS WELL AS THE THIRD PARTY. THE ASSESSEES OBJECTION IS ACCEPTED. 43. THE TPO HAS ALSO GRANTED BENEFIT OF +/-5% TO THE ASSESSEE IN HIS ORDER FOR A.Y. 2012-13. WE THEREFORE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE BENEFIT OF +/-5% SHOULD BE GRANTED TO THE ASSESSEE FOR A .Y. 2009-10, IF APPLICABLE. 44. IN VIEW OF THE DIRECTION OF THE DRP FOR A.Y. 2011-12 ON VARIOUS ISSUES AND THE ORDER OF THE TPO FOR A.Y. 2009-10 WE ARE OF THE CONSIDERED OPINION THAT THE MATTER REQUIRES A RE- VISIT TO THE FILE OF THE TPO FOR ADJUDICATION OF THE ENTIRE ISSUE AFRES H. WE ACCORDINGLY SET ASIDE THE MATTER TO THE FILE OF THE T PO FOR DETERMINATION OF THE ALP KEEPING IN MIND THE DIRECTIONS FOR CAPACITY UTILISATION ADJUSTMENT AND THE VARIOUS OTHER ADJUSTMENTS WHICH WERE ALLOWED TO THE ASSESSEE IN SUBS EQUENT ASSESSMENT YEARS BUT WERE NOT CONSIDERED BY THE DRP/ TPO/AO FOR THE IMPUGNED ASSESSMENT YEAR. THE AO SHALL DECIDE TH E ISSUE AS PER LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 29 ITA NO.158/PN/2014 45. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30-03-2016. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE ; DATED : 30 TH MARCH, 2016. ( )'+ , / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CONCERNED CIT , PUNE 4. 5. $ ''(, (, / DR, ITAT, A PUNE; . / GUARD FILE. / BY ORDER , // TRUE COPY // // TRUE COPY // // $ ' //TRUC // 01 ' ( / SR. PRIVATE SECRETARY (, / ITAT, PUNE