Tasty Bite Eatables Ltd., Pune V. Asst. Comm.of Income-tax, Pune

ITA 1682/PUN/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 93820 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 11-03-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 28-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K MODI
• Assessee Lawyers: VISHAL SOLANKI
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Initiation of penalty proceedings; Revised return; Unabsorbed depreciation
• Section: 92C; 234B

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 1682/PN/2011 (ASSESSMENT YEAR : 2007-08) TASTY BITE EATABLES LIMITED, 204, MAYFAIR TOWERS, WAKDEWADI, SHIVAJINAGAR, PUNE 411005 .. APPELLANT PAN NO.AAACI2317A VS. ACIT, CIRCLE-7, PUNE .. RESPONDENT ASSESSEE BY : SHRI ARVIND SONDE, SHRI KETAN VED, SHRI AMIT SINGHAL & SHRI VISHAL SOLANKI REVENUE BY : SHRI A.K. MODI DATE OF HEARING : 11-03-2015 DATE OF PRONOUNCEMENT : 10-06-2015 ORDER PER R.K.PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 30-10-2011 PASSED U/S.143(3) R.W.S.144C(13) O F THE I.T. ACT FOR THE ASSESSMENT YEAR 2007-08. 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE TASTY BITE EATABLES LIMITED ( IN SHORT TBEL) IS A COMPANY RE GISTERED UNDER THE COMPANIES ACT, 1956 AND IS IN THE BUSINESS OF M ANUFACTURE, MARKETING AND DISTRIBUTION OF READY TO SERVE AND RE ADY TO COOK FOOD PRODUCTS AND FOOD INTERMEDIATES. IT HAS ONLY ONE M ANUFACTURING FACILITY AT VILLAGE BHANDGAON, TALUKA DAUND, DISTRI CT PUNE AND THE 2 CORPORATE OFFICE IS LOCATED AT 204, MAYFAIR TOWERS, WAKDEWADI, SHIVAJINAGAR, PUNE. IT FILED ITS RETURN OF INCOME ON 31-10-2007 DECLARING NIL INCOME UNDER NORMAL PROVISIONS OF THE ACT AFTER SETTING OFF BROUGHT FORWARD UNABSORBED DEPRECIATION AND BUSINESS LOSS AGGREGATING TO RS.2,97,46,620/-. THE COMPANY HAD COMPUTED THE INCOME U/S.115JB OF THE I.T. ACT AT RS.48,52,67 4/-. THE ASSESSEE FILED A REVISED RETURN ON 23-09-2008 DECLARING TOTA L INCOME OF NIL. 3. THE AO MADE A REFERENCE TO THE TPO U/S.92CA(1) F OR DETERMINATION OF THE ALP OF INTERNATIONAL TRANSACTI ON. ACCORDINGLY, THE TPO ISSUED NOTICES U/S.92CA(2) OF THE I.T. ACT AND ASKED THE ASSESSEE TO FURNISH THE REQUISITE DETAILS. FROM TH E VARIOUS DETAILS FURNISHED BY THE ASSESSEE THE TPO NOTED THAT THE AS SESSEE IS A PART OF THE PREFERRED BRANDS GROUP OF COMPANIES. HE OBSERV ED THAT THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESS EE DURING THE RELEVANT ASSESSMENT YEAR IS AS UNDER : SR.NO. DESCRIPTION OF TRANSACTION AMOUNT (RS.) METHOD 1 SALE OF READY TO SERVE FOODS 23,48,77,291/- TNMM 2 PAYMENT OF INTEREST ON ECB AND 52,10,842/- CUP 3 INTEREST CHARGES ON AE TOWARDS OVERDUE DUES 13,26,462/- CUP 4 REIMBURSEMENT OF EXPENSES 72,69,146/- CPM TOTAL 24,86,83,743/- 4. HE OBSERVED THAT TBEL HAS SOLD GOODS WORTH RS.23 .48 CRORES TO ITS ASSOCIATED ENTERPRISES AS AGAINST TOTAL SALE OF RS.27.55 CRORES FOR THE YEAR ENDED 31-03-2007. THE ASSESSEE HAS AD OPTED TNMM METHOD TO BENCHMARK ITS TRANSACTION WITH ITS ASSOCI ATED ENTERPRISES. THE TPO NOTED THAT THE ASSESSEE HAS SELECTED ADF FO ODS LTD., AS A COMPARABLE COMPANY TO BENCHMARK ITS TRANSACTIONS WI TH THE AES. IT 3 WAS MENTIONED BY THE ASSESSEE THAT PBDT ON COST DUR ING THE YEAR IS 6.25% WHEREAS THAT OF THE COMPARABLE COMPANY ADF FO ODS LTD. WORKS OUT TO 9.02% CONSIDERING THE AVERAGE OF SALES AND COST FOR THE F.Y. 2004-05, 2005-06 AND 2006-07. 5. HAVING NOT BEEN SATISFIED WITH THE TP STUDY REPO RT OF THE ASSESSEE AND ITS SUBMISSION THE TPO ASKED THE ASSES SEE TO EXPLAIN AS TO WHY PLI OF THE SEGMENTAL DATA FOR PROCESSED AND PRESERVED FOODS OF THE COMPARABLE ADF FOODS LTD. BE NOT TAKEN FOR T HE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTIONS PERTAIN ING TO PROVISION OF EXPORT OF FINISHED GOODS. IT WAS EXPLAINED BY T HE ASSESSEE AS UNDER (PAGE 5 OF THE ORDER OF THE TPO) : 6.1 THAT ADF FOODS LIMITED HAS SHOWN INCREASE IN PROFIT AFTER TAX OF 146% THOUGH THE SALES INCREASED ONLY BY 28% IN FY 2006-07 AS COMPARED TO PREVIOUS FINANCIAL YEAR. 6.2 THAT ADF FOODS LIMITED (ADF) WAS MANUFACTURING AN D MARKETING VARIOUS PRODUCTS LIKE PICKLES, PASTES, CANNED PRODUCTS, MASALA SPICES, INSTANT MIXES, FROZEN VEGETABLES AND READY TO EAT PRODUCTS (CURRIES AND SNACKS) WHEREAS TASTY BITE WAS PRIMA RILY MANUFACTURING AND SELLING READY TO EAT FOOD PRODUCTS (CURRIES AND MEAL PRODUCTS) TO ASSOCIATED ENTERPRISES. 6.3 THAT THE SALES OF ADF IS RS.72 CR WHEREAS THE SALES O F TBEL IS ONLY RS.27 CRORES. 6.4 THAT ADFS CAPACITY UTILIZATION IS 53% AS COMPARE D TO TBELS CAPACITY UTILIZATION OF ONLY 15%. 6.5 THAT THE PRODUCT OF THE ASSESSEE IS MANUFACTURED AND THEN FILED IN A SPECIAL FOUR LAYERED (RETORTED) POUCH AND THIS IS THEN STERILIZED. THAT THE STERILIZATION PROCESS ENABLES TH E PRESERVATION OF THE FOOD FOR A PERIOD OF 36 MONTHS WITHOUT ANY PRESERVATIVE/CHEMICAL (THOUGH FOR THE PURPOSE OF MARK ETING THE PRODUCTS ARE DISPLAYED WITH SHELF LIFE OF ONLY 18 MONT HS). THAT ON THE OTHER HAND, CHUTNEYS, PASTES, PICKLES ARE HOT FILL ED PRODUCTS WHEREIN THE PRODUCT IS HEATED AND FILLED IN THE BOTT LE/JAR WITHOUT ANY ADDITIONAL TREATMENT. THESE HOT FILLED PRODUCTS ARE WITH A SHELF LIFE OF 3/6/9 MONTHS AND THE PACKAGE INVOLVED IS A SIMPLE BOTTLE/JAR/CONTAINER WITH A LID. 4 6.6 THAT THE TBEL WAS REFERRED TO BIFR IN EARLY 1990 S AND CAME OUT OF BIFR ONLY AT THE TIME OF ACQUISITION OF THE N EW MANAGEMENT IN 1999. THAT THE COMPANY HAD HUGE CARRY FORWARD LOSSES AND WAS IN A TURNAROUND PHASE DURING THE FINANCIAL YEARS 2000-01 T O FINANCIAL YEAR 2004-05. 6.7 THAT TBEL HAD DISCONTINUED THE DOMESTIC SALES OF RE ADY TO EAT PROCESSED FOOD PRODUCTS DURING THE YEAR 2004-05. THAT IN THE FINANCIAL YEAR, THE COMPANY HAS TO SETTLE CLAIMS FOR L OCAL DISTRIBUTORS AND OTHER SUPPLY CHAIN VENDORS INCLUDING INVENTORY WR ITE OFF, PROVISION FOR SALES TAX PAYABLE UNDER DEFERRAL SCHEME, AND FOR PROVISION FOR NON-COLLECTABILITY OF GOVT. INCENTIVES. 6.8 THAT ADJUSTMENT ON ACCOUNT OF CAPACITY UNDER UTI LIZATION, DEBIT OF EXPENSES PERTAINING TO THE NON-AE BUSINESS MAY BE GIVEN AND PLI OF THE ASSESSEE AFTER ADJUSTMENT WORKS OUT TO 16. 28%. 7. THE SUBMISSIONS MADE BY THE ASSESSEE TOGETHER WITH THE F ACTS OF THE CASE AND THE ORAL CONTENTIONS MADE DURING THE COURSE OF HEARING HAVE BEEN CONSIDERED AND FOR THE REASONS GIVEN HEREIN UNDER THE CONTENTIONS OF THE ASSESSEE HAVE NOT BEEN FOUN D TO BE ACCEPTABLE. 6. HOWEVER, THE TPO WAS NOT SATISFIED WITH THE ABOV E EXPLANATION GIVEN BY THE ASSESSEE. HE REFERRED TO THE PROVISIONS OF RULE 10B(4) AND OBSERVED THAT FROM A PLAIN READING OF THE ABOVE RULE IT IS CLEAR THAT THE DATA TO BE USED FOR THE COMPAR ABILITY SHALL BE THE DATA OF THE FINANCIAL YEAR IN WHICH THE TRANSACTION HAS TAKEN PLACE AND ONLY IN SUCH CIRCUMSTANCES DATA FOR THE PREVIOUS 2 YEARS COULD BE USED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON DETERMINATION OF TRANSFER PRICE IN RELATION TO THE TRANSACTION BEING COMPARED. THE TPO OBSERVED THAT THE ASSESSEE COULD NOT EXPLAIN AS TO HOW THE USE OF DATA FOR 3 YEARS DECREASES ANY VARIABILITY/DISTORTIONS AND HOW THE EARLIER 2 YEAR S DATA HAS AN EFFECT ON DETERMINING TRANSFER PRICE OF THE INTERNATIONAL TRANSACTIONS. HE FURTHER OBSERVED THAT THE ASSESSEE HAS NOT GIVEN WI TH FACTS AND FIGURES AS TO HOW ARE THEY SUPPOSED TO BE ADDRESSED BY TAKING MULTIPLE YEAR DATA. THE TPO ACCORDINGLY OBSERVED T HAT IT IS NOWHERE 5 DEMONSTRATED THAT DATA PERTAINING TO 2 YEARS PRIOR TO THE F.Y. 2006-07 HAVE ANY INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. RELYING ON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF RANBAXY LABORATORIES LTD. VS. ADDL.CIT VIDE ITA NO.2146/DEL/2007 FOR A.Y. 200 4-05 AND IN THE CASE OF MENTOR GRAPHICS (NOIDA) PVT. LTD., VS. DCIT REPORTED IN 109 ITR 101, WHICH SPEAKS OF USE OF DATA RELATING T O FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERE D INTO, THE TPO REJECTED THE CONTENTION OF THE ASSESSEE ABOUT USE O F MULTIPLE YEAR DATA. 7. SO FAR AS THE CLAIM OF THE ASSESSEE THAT ADF FOO DS LTD. HAS EARNED HUGE PROFIT, THE TPO NOTED THAT THE PROFIT M ARGIN OF ADF FOODS LTD FOR THE F.YRS. 2004-05, 2005-06 AND 2006- 07 IS 8.56%, 10.38% AND 15.07% RESPECTIVELY. HE, THEREFORE, CON CLUDED THAT ADF FOODS LTD HAS NOT EARNED SUPER PROFIT AND THE PROFI T MARGIN OF ADF FOODS LTD IS CONSISTENTLY IMPROVING. 8. AS REGARDS THE CONTENTION OF THE ASSESSEE THAT A DF FOODS LTD WAS MANUFACTURING AND MARKETING VARIOUS PRODUCTS LI KE PICKLES, PASTES, CANNED PRODUCTS, MASALA SPICES, INSTANT MIX ES, FROZEN VEGETABLES AND READY TO EAT PRODUCTS (CURRIES AND S NACKS) WHEREAS TASTY BITE WAS PRIMARILY MANUFACTURING AND SELLING READY TO EAT FOOD PRODUCTS (CURRIES AND MEAL PRODUCTS) TO ASSOCI ATED ENTERPRISES AND THAT THE MANUFACTURING PROCESS OF ADF FOODS LTD AND TBEL ARE DIFFERENT, THE TPO NOTED THAT THE ASSESSEE ITSELF H AS SELECTED TNMM METHOD TO BENCHMARK ITS TRANSACTION WITH THE ASSOCI ATED ENTERPRISES. 6 THE ASSESSEE IN ITS TP STUDY REPORT HAS SUBMITTED D ETAILED SEARCH PROCESS ADOPTED BY IT AND HAS SELECTED ONLY ADF FOO DS LTD AS A COMPARABLE COMPANY TO BENCHMARK ITS TRANSACTION WIT H ASSOCIATED ENTERPRISES. THE ASSESSEE IN ITS REPORT HAS MENTIO NED THAT ADF FOODS LTD IS ENGAGED IN THE MANUFACTURING OF ETHNIC INDIAN FOODS, READY TO EAT FOOD IN FROZEN AND RETORT PACKS, PICKL ES, PASTES, MANGO PULPS/SLICES, CHUTNEYS, PAPADUMS, READY TO COOK VEG ETABLES, COOKING SAUCES, MASALA AND RICE, FLAVOURED WATER AND TAMARI ND PRODUCTS. THUS AFTER CARRYING OUT THE FUNCTIONAL ANALYSIS THE ASSESSEE HAS FINALLY SELECTED ADF FOODS LTD. AS A COMPARABLE COM PANY. THE TPO FURTHER NOTED THAT THE ASSESSEE HAS NOT DEMONST RATED AS TO HOW THE COMPANY PREPARING PICKLES/PASTES, CANNED PRODUC ES, MASALA SPICES HAVE GREATER MARGIN ESPECIALLY WHEN THESE PR ODUCTS HAVE A LESSER SHELF LIFE AS COMPARED TO READY TO EAT PRODU CTS AND ACCORDINGLY THE COMPARABLE COMPANY BEARS MORE RISK OF WASTAGES. HE THEREFORE, REJECTED THE CONTENTION OF THE ASSESSEE ON THIS GRO UND. 9. THE TPO ALSO REJECTED THE SUBMISSION OF THE ASSE SSEE THAT IT HAD HUGE CARRY FORWARD LOSSES AND WAS IN A TURNAROU ND PHASE DURING F.Y. 2000-01 TO F.Y. 2004-05 AND THAT IT DISCONTINU ED THE DOMESTIC SALES OF READY TO EAT, PROCESSED FOODS DURING F.Y. 2004-05. SIMILARLY THE TPO ALSO REJECTED THE CONTENTION FOR ADJUSTMENT OF CAPACITY UTILIZATION. 10. RELYING ON THE PROVISIONS OF RULE 10B(1)(E) THE TPO WAS OF THE OPINION THAT THE NET PROFIT MARGIN ARISING IN C OMPARABLE, UNCONTROLLED TRANSACTIONS MAY BE ADJUSTED TO TAKE I NTO ACCOUNT THE 7 DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIONS AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, WHICH COULD M ATERIALLY AFFECT THE AMOUNT OF NET PROFIT IN THE OPEN MARKET. FOR T HE ABOVE PROPOSITION, THE TPO OBSERVED AS UNDER : (A) FROM THE PLAIN READING OF THE AFORESAID RULE, IT IS CRYSTAL CLEAR THAT PROFIT LEVEL INDICATOR (PLI) PRESCRIBED UNDER T NMM IS THE NET OPERATING MARGINS COMPUTED IN RELATION TO THE PRESCRI BED BASE AS MENTIONED IN SUB-SECTION (I) ABOVE. THE CHOICE WITH THE TAX PAYER IS REGARDING SELECTION OF BASE, I.E. COST INCURRED OR SALE EFFECTED OR ASSETS EMPLOYED OR ANY OTHER RELEVANT BASE, BUT NOT IN THE SELECTION OF MARGINS. (B) NET PROFIT MARGINS HAVE NOT BEEN DEFINED IN THE I.T. ACT OR RULES MADE THEREIN. WHEN THE STATUTES HAVE NOT PROVID ED THE DEFINITION OF A TERM USED IN IT THEN GENERAL MEANING OF THE TERM HAS TO BE TAKEN INTO CONSIDERATION. IT HAS BEEN HELD BY THE KERALA HIGH COURT IN THE CASE REPORTED IN 190 ITR 32 (KER) WHIL E INTERPRETING THE MEANING OF A WORD, THE COURT IN THE ABSENCE OF A STATUTORY DEFINITION WILL HAVE TO CONSIDER ITS MEANING IN THE M ANNER IN WHICH IT IS UNDERSTOOD GENERALLY BY THOSE WHO DEAL WITH THE SUBJ ECTION IN QUESTION. 11. THE TPO ACCORDINGLY WAS OF THE OPINION THAT THE NET PROFIT NORMALLY MEANS PROFIT BEFORE TAX, COMPUTED IN ACCOR DANCE WITH THE ACCOUNTING PRINCIPLES. HOWEVER, ANY ITEM OF INCOME OR EXPENDITURE WHICH HAS NO BEARING ON THE AMOUNT OF THE TRANSACTI ONS UNDER EXAMINATION HAVE TO BE EXCLUDED OR INCLUDED AS THE CASE MAY BE, SUCH AS DIVIDEND INCOME AND INTEREST INCOME WHICH A RE NOT DIRECTLY RELATED TO THE TRANSACTION. THEREFORE, ACCORDING T O HIM UNDER TNMM IN THE FIRST STEP, NET OPERATING MARGIN FROM INTERN ATIONAL TRANSACTION IS COMPUTED IN RELATION TO THE APPROPRIATE BASE. I N THE SECOND STEP, NET OPERATING MARGIN OF THE UNCONTROLLED TRANSACTIO NS ARE IDENTIFIED. IN THE THIRD STEP THE NET OPERATING MARGIN OF THE U NCONTROLLED TRANSACTIONS ARE ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE 8 UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERED INTO SUCH TRANSACTIONS WHICH COULD MATERIALLY AFFECT THE AMOU NT OF NET PROFIT MARGIN IN THE OPEN MARKET. THE NET PROFIT THUS EST ABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ALP IN RELATION TO INTERNATIONAL TRANSACTIONS. 12. REFERRING TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SKODA AUTO INDIA PVT. LTD. VS. ACIT THE TPO WAS OF THE OPINION THAT INCLUSION OF PBDIT AS WELL AS ADJUSTME NT ON ACCOUNT OF CAPACITY UNDERUTILIZATION IS NOT ONLY NOT ALLOWABLE AS PER RULE 10B(10)(E)(I) BUT EVEN IF SOME ADJUSTMENT IS CONSID ERED AS ALLOWED, THEN TOO, IT CAN ONLY BE ALLOWED IN RESPECT OF THE ITEMS OF EXPENSES WHICH MAY BE PROPORTIONATELY HIGHER IN THE CASE OF THE ASSESSEE ONLY. FOLLOWING SIMILAR COROLLARY THE ADJUSTMENTS WOULD B E REQUIRED IN THE CASE OF COMPARABLES IN RESPECT OF ALL THE ITEMS OF EXPENSES WHEREVER THERE IS DIFFERENCE VIS--VIS THE TESTED PARTY AND THE RESULT OF SUCH AN EXERCISE WOULD BE NOTHING BUT BRINGING THE NET MARG IN OF THE TESTED PARTY AT PAR WITH THAT OF ARITHMETIC MEAN OF THE MA RGINS OF THE COMPARABLES. THE TPO, THEREFORE, HELD THAT THE CON TENTION OF THE ASSESSEE TO CONSIDER PLI AS OP/OE AND ADJUSTMENT ON ACCOUNT OF UNDER UTILIZATION AND DEBIT OF EXPENSES PERTAINING TO NON-AE BUSINESS WHILE DETERMINING THE ALP OF THE INTERNATI ONAL TRANSACTION IS NOT ACCEPTABLE. ALTHOUGH ASSESSEE HAS NOT SPECI FICALLY ASKED FOR THE BENEFIT OF +/-5% THE TPO OBSERVED THAT THE PROV ISIONS OF SECTION 92C(2) HAS BEEN AMENDED W.E.F. 01-10-2009. FOLLOWI NG THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF GLOBAL 9 VANTEDGE PVT. LTD. VS. DCIT REPORTED IN 1 ITR 326 ( DEL.) THE TPO REJECTED THE CLAIM OF THE ASSESSEE REGARDING BENEFI T OF ADJUSTMENT OF +/-5%. THE TPO HELD THAT THE BENEFIT OF SAFE HARBO R OF +/-5% IS NOT AVAILABLE TO THE ASSESSEE. IN VIEW OF THE ABOVE DI SCUSSION THE TPO WORKED OUT THE ADJUSTMENT BY TAKING THE PLI OF ADF FOODS LTD. AT 15.07% AND MADE AN ADJUSTMENT OF RS.3.05 CRORES TO THE TOTAL INCOME OF THE ASSESSEE BY OBSERVING AS UNDER : OPERATING EXPENSES RS.28.44 CR OPERATING PROFIT RS.1.23 CR OPERATING PROFIT AS A PERCENTAGE OF OPERATING EXPEN DITURE 4.32% ARMS LENGTH MARGIN EARNED BY THE COMPARABLE 15.0 7% PROFIT TO BE EARNED BY ASSESSEE BASED ON ARMS LENGTH MAR GIN RS.4.28 CRORE ADJUSTMENT TO BE MADE RS.3.05 CRORE 13. THE AO AFTER RECEIVING THE ORDER OF THE TPO PAS SED THE DRAFT ASSESSMENT ORDER U/S.143(3) R.W.S. 144C CONSIDERING THE ADJUSTMENT OF RS.3.05 CRORES U/S.92CA(3). THE ASSESSEE FILED A PETITION AGAINST THE DRAFT ASSESSMENT ORDER BEFORE THE DRP. APART F ROM CHALLENGING VARIOUS OTHER GROUNDS IT WAS SUBMITTED THAT SALE OF IMPORT LICENSE AT RS.4.54 CRORES BY ADF FOODS LTD. WAS INCLUDED IN TH E NET SALES AT RS.77.56 CRORES BY TAKING IN THE SEGMENTAL ACCOUNT. IT WAS SUBMITTED THAT SALE OF IMPORT LICENSES CONSTITUTED NORMAL PRO FIT IN THE CASE OF COMPARABLE ADF FOODS LTD. WHEREAS THE ASSESSEE DID NOT EARN A SINGLE RUPEE ON THIS ACCOUNT AND WAS NOT ELIGIBLE F OR IMPORT LICENSES DURING F.Y. 2006-07. AFTER EXCLUDING THE SAID SALE OF IMPORT LICENSE AT RS.4.54 CROES AND PROPORTIONATE SHARE OF UNALLOC ATED EXPENSES AT RS.3.49 CRORES THE REVISED PLI OF ADF FOODS LTD WAS COMPUTED AT 8.32%. THE DRP DIRECTED THE AO TO EXCLUDE THAT PART OF THE EXPORT 10 LICENSES SOLD AT 4.54 CRORES WHICH DO NOT FORM PART OF THE CURRENT YEARS OPERATION AND REJECTED VARIOUS OTHER SUBMISS IONS MADE BY THE ASSESSEE. 14. ON THE BASIS OF THE DIRECTIONS GIVEN BY THE DRP THE AO RECOMPUTED THE REVISED PLI OF ADF FOODS LTD. AT 8.3 4%, THE DETAILS OF WHICH ARE AS UNDER : REVISED PLI OF ADF FOODS LTD. (AS PER DRP ORDER) PARTICULARS RS. IN CRORES NET SALES 77.56 LESS : SALES OF IMPORT LICENSE (ADJ. TAKEN AS PER DRP ORDER) 4.54 ADJUSTED SALES 73.02 PBIT (BEFORE GIVING EFFECT ON UNALLOCABLE EXPENDITURE) 9.11 LESS : PROPORTIONATE UNALLOCABLE EXPENDITURE 3.49 PBIT 5.62 OPERATING EXPENSES 67.4 PLI (OP/OE) 8.34% 15. THE TPO ACCORDINGLY MADE AN ADJUSTMENT OF RS.1. 14 CR IN RESPECT OF THE TP ADJUSTMENT BY COMPUTING THE REVIS ED PLI WHICH IS AS UNDER : REVISED CALCULATION OF PLI : 1. THE REVISED PLI MARGIN OF ADF IN VIEW OF DRPS CLAIM RS.8.34% 2. OPERATING COST OF RS.24.44 CR 3. ANNUAL LENGTH PRICE 28.44 CR X 8.34%100 RS.2.37 CR 4. 95% OF ANNUAL LENGTH PRICE RS.2.24 CR 5. ALP SHOWN BY ASSESSEE RS.1.37 CR 6. DIFFERENCE RS.1.14 CR 7. ADJUSTMENT REQUIRED TO BE MADE RS.1.14 CR 11 16. AGAINST SUCH ORDER OF THE AO THE ASSESSEE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : THE APPELLANT OBJECTS TO THE ORDER DATED OCTOBER 30 , 2011 PASSED BY THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX, CI RCLE 7, PUNE ['ACIT'] IN PURSUANCE OF THE DIRECTIONS DATED MAY 20, 2011 OF THE LEARNED DISPUTE RESOLUTION PANEL, PUNE ['DRP'] FOR TH E ASSESSMENT YEAR 2007-08 ON THE FOLLOWING AMONG OTHER GROUNDS: 1. GENERAL: THE LEARNED ACIT PURSUANT TO THE DIRECTIONS OF THE LEARNED DRP ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE C ASE IN MAKING AN ADJUSTMENT AMOUNTING TO INR 1,14,00,000 TO THE VALU E OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELL ANT PERTAINING TO SALE OF PACKAGED AND READY TO EAT/SERVE FOODS ('RT S') BY REJECTING THE ANALYSIS UNDERTAKEN BY THE APPELLANT I N THE TRANSFER PRICING ['TP'] STUDY REPORT TO DETERMINE THE ARM'S L ENGTH PRICE FOR ITS INTERNATIONAL TRANSACTIONS PERTAINING TO EXPORT O F RTS. 2. CAPACITY UTILIZATION ADJUSTMENT THE LEARNED ACIT PURSUANT TO THE DIRECTIONS OF THE LEARNED DRP ERRED ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW IN NOT ALLOWING ADJUSTMENT FOR UNDER-UTILIZATION OF THE CA PACITY. 3. INAPPROPRIATE CALCULATION OF TP ADJUSTMENT THE LEARNED ACIT PURSUANT TO THE DIRECTIONS OF THE LEARNED DRP ERRED ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW I N MAKING THE TRANSFER PRICING ADJUSTMENT FOR THE ARM'S LENGTH PRICE BY MA KING THE ADJUSTMENT TO THE ENTIRE SALES OF RTS SEGMENT INSTEAD OF MAKING THE UPWARD TP ADJUSTMENT TO ONLY THE VALUE' OF INTERNAT IONAL' TRANSACTION. 4. TRANSFER PRICING ADJUSTMENT WITHOUT GIVING BENEFIT OF+/- 5 PER CENT AS AVAILABLE UNDER PROVISO TO SECTION 92C( 2) OF THE ACT THE LEARNED ACIT ERRED ON THE FACTS AND IN CIRCUMST ANCES OF THE CASE AND IN LAW IN MAKING THE TRANSFER PRICING ADJUSTMEN T FROM THE ARM'S LENGTH PRICE WITHOUT GIVING THE BENEFIT OF THE OPTI ON AVAILABLE TO THE APPELLANT UNDER PROVISO TO SECTION 92C (2) OF THE A CT OF ADOPTING AS ARM'S LENGTH PRICE, A PRICE WHICH VARIES BY NOT MOR E THAN 5 PER CENT FROM THE ARM'S LENGTH PRICE. 5. THE LEARNED ACIT ERRED ON THE FACTS AND IN CIRCU MSTANCES OF THE CASE IN NOT CONSIDERING THE FACT THAT THE ASSESSEE HA D NO INTENTION OF SHIFTING OF PROFITS OUTSIDE INDIA AS THE A ES HAS INCURRED LOSS AS COMPARED TO THE PROFIT EARNED BY THE ASSESSEE. 6. DISALLOWANCE OF FREIGHT EXPENSES THE LEARNED ACIT ERRED ON THE FACTS AND IN CIRCUMSTAN CES OF THE CASE AND IN LAW IN DISALLOWING FREIGHT EXPENSES. 12 7. LEVY OF INTEREST OBLIGATION ON ACCOUNT OF T RANSFER PRICING ADJUSTMENT 7.1 THE LEARNED ACIT HAS ERRED ON THE FACTS AND I N LAW BY LEVYING INTEREST UNDER SECTION 234B OF THE ACT, ON ACCOUNT OF THE UNANTICIPATED ADJUSTMENTS MADE BY THE LEARNED TRANSFER PRICING OFFICER. 7.2 THE APPELLANT PLEADS THAT THE SHORTFALL IN ADV ANCE TAX HAS RESULTED IN VIEW OF THE ADJUSTMENTS WHICH HAVE BEEN OB JECTED IN THE GROUNDS ABOVE AND ACCORDINGLY IS CONSEQUENTIAL IN NATU RE. 7.3 THE LEARNED ACIT HAS ERRED ON THE FACTS AND IN LAW BY LEVYING INTEREST UNDER SECTION 234C OF THE ACT ON THE ASSESSED IN COME AND NOT RESTRICTING TO RETURNED INCOME. 8. INITIATION OF PENALTY PROCEEDINGS UNDER SECT ION 271 (1) (C) READ WITH SECTION 274 OF THE ACT ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. THE LEARNED ACIT ERRED ON THE FACTS AND IN LAW IN PR OPOSING TO INITIATE PENALTY PROCEEDINGS SECTION 271(1) (C) READ WITH SECTION 274 OF THE ACT, WITHOUT CONSIDERING THE FACTS OF THE CASE. 9. EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITHOU T PREJUDICE TO THE OTHER. 10. THE APPELLANT RESERVES THE RIGHT TO AMEND, ALTER OR ADD TO THE GROUNDS OF APPEAL. 17. THE LD. COUNSEL FOR THE ASSESSEE DID NOT PRESS GROUNDS OF APPEAL NO.1 BEING GENERAL IN NATURE. HE ALSO DID N OT PRESS GROUNDS OF APPEAL NO. 4 TO 10 FOR WHICH THE LD. DEPARTMENTA L REPRESENTATIVE HAS NO OBJECTION. ACCORDINGLY, THE ABOVE GROUNDS A RE DISMISSED AS NOT PRESSED. 18. SO FAR AS GROUND OF APPEAL NO.2 IS CONCERNED TH E LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ALTHOUGH THIS ISSUE WAS TAKEN UP BEFORE THE TPO THAT BENEFIT OF CAPACITY UNDER UTILI ZATION HAS TO BE GIVEN TO THE ASSESSEE, HOWEVER, THE TPO DID NOT AGR EE WITH THE CONTENTION OF THE ASSESSEE. REFERRING TO PARA 6.4 TO 6.8 OF THE ORDER OF THE TPO HE SUBMITTED THAT THE ASSESSEE HAS SPECI FICALLY REQUESTED 13 FOR ADJUSTMENT ON ACCOUNT OF CAPACITY UNDER UTILIZA TION. HOWEVER, THE TPO RELYING ON THE PROVISIONS OF RULE 10B(1)(E) (I) HELD THAT ADJUSTMENT ON ACCOUNT OF CAPACITY UNDER UTILIZATION IS NOT ALLOWABLE. HE FURTHER HELD THAT EVEN IF SOME ADJUSTMENT IS CON SIDERED AS ALLOWED THEN IT CANNOT ONLY BE ALLOWED IN RESPECT O F THE ITEMS OF EXPENSES WHICH MAY BE PROPORTIONATELY HIGHER IN THE CASE OF THE ASSESSEE ONLY. FOLLOWING SIMILAR COROLLARY THE ADJ USTMENT SHOULD BE REQUIRED IN THE CASE OF COMPARABLES IN RESPECT OF A LL THE ITEMS OF EXPENSES WHENEVER THERE IS DIFFERENCE, VIS--VIS TE STED PARTY AND RESULT OF SUCH EXERCISE WOULD BE NOTHING BUT BRINGI NG THE NET MARGIN OF THE TESTED PARTY AT PAR WITH THAT OF THE ARITHME TIC MEAN OF THE MARGINS OF THE COMPARABLES. REFERRING TO PAGE 5 OF THE ORDER OF THE DRP HE SUBMITTED THAT THE DRP SIMPLY BRUSHED ASIDE THE ARGUMENTS MADE BEFORE IT AND HELD THAT THE ASSESSEE IS NOT EN TITLED TO CAPACITY UNDER UTILIZATION. HE SUBMITTED THAT AS AGAINST 53% CAPACITY UTILIZATION IN THE CASE OF ADF FOODS LTD, THE CAPAC ITY UTILIZATION OF THE ASSESSEE IS ONLY 15%. THEREFORE, THE DIFFERENC E BETWEEN THE TWO IS SIGNIFICANT AND MATERIAL TO IMPACT THE PROFIT MA RGIN OF THE ASSESSEE AND THE COMPARABLE COMPANY AS ABILITY TO ABSORB FIX ED OVERHEADS LIKE DEPRECIATION, SALARY & WAGES, POWER, REPAIRS E TC. IS LESS WHERE CAPACITY UTILIZATION IS LOW AND THIS WOULD LEAD TO INCREASED COST AND LOWER PROFITS. 19. REFERRING TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ARISTON THERMO INDIA VIDE ITA NO.1455/P N/2010 ORDER DATED 25-06-2013 FOR A.Y. 2006-07, THE LD. COUNSEL FOR THE ASSESSEE 14 DREW THE ATTENTION OF THE BENCH TO PARA 10 AND 14 O F THE ORDER AND SUBMITTED THAT THE TRIBUNAL HAS IN PRINCIPLE ALLOWE D THE CLAIM OF LOW CAPACITY UTILIZATION AND HIGH FIXED OPERATING COST INCURRED IN THE INITIAL YEAR OF OPERATION. REFERRING TO THE DECISI ON OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. M/S.F IAT INDIA PVT. LTD. VIDE ITA NO.1848/MUM/2009 ORDER DATED 30-04-20 10 REPORTED IN 2010-TII-30-ITAT-MUM-TP HE SUBMITTED THAT THE TR IBUNAL HAS HELD THAT APPROPRIATE ADJUSTMENTS ARE REQUIRED IN T ERMS OF CAPACITY UTILIZATION OF THE COMPARABLE CASES TO ELIMINATE SU CH DIFFERENCE. 20. REFERRING TO THE FOLLOWING CHARTS, THE LD. COUN SEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE WILL BE ENTITL ED TO CAPACITY UNDER UTILIZATION OF MINIMUM 37.97% MARGIN. 1. WORKING FOR CAPACITY UTILISATION ADJUSTMENT A. CAPACITY UTILISATION OF ADF FOODS LTD. SL.NO. PARTICULARS A.Y. 2007-08 (MT) 1 INSTALLED CAPACITY 25,900 2 ACTUAL PRODUCTION 13,822 3 CAPACITY UTILIZATION % [2/1*100] 53.37% B. CAPACITY UTILISATION OF TASTY BITE EATABLES LIMITED SL.NO. PARTICULARS A.Y. 2007-08 (MT) 1 INSTALLED CAPACITY 17,200 2 ACTUAL PRODUCTION 2,648 3 CAPACITY UTILIZATION % [2/1*100] 15.40% C. DIFFERENCE IN CAPACITY UTILIZATION (A-B) 37.97% D. FIXED COSTS OF TASTY BITE AS PER ANNUAL REPORT SL.NO. PARTICULARS A.Y. 2007-08 IN RS. CRORES DEPRECIATION 0.67 EMPLOYEE COST 4.20 REPAIRS AND MAINTENANCE PLANT & MACHINERY 0.19 15 REPAIRS AND MAINTENANCE BUILDING 0.06 REPAIRS AND MAINTENANCE OTHERS 0.08 RENT RATES AND TAXES 0.20 INSURANCE 0.06 TOTAL 5.47 E. IDLE COST (CXD) 2.08 F. TOTAL REVENUE OF TASTY BITE AS PER ANNUAL REPORT 30.75 G. VALUE OF REVENUE OF RTS SEGMENT 29.68 H. IDLE COST ATTRIBUTABLE TO VALUE OF INTERNATIONAL TRANSACTION (C/FXG) 2.00 I. PLI OF TASTE BITE AFTER CAPACITY UTILISATION ADJUSTMENT SL.NO. PARTICULARS A.Y. 2007-08 IN RS. CRORES A TOTAL REVENUE FROM THE RTS SEGMENT (REFER G ABOVE) 29.68 B LESS : PROFIT BY APPLYING PLI AS CALCULATED BY TPO 1.23 C COST (A-B) 28.45 D LESS : UNABSORBED FIXED COST AS CALCULATED ABOVE 2.00 E ADJUSTED COST (C-D) 26.44 F ADJUSTED PROFIT (A-E) 3.23 G PLI (OP/OC) OF TBEL (F/E*100) 12.23% H PLI OF COMPARABLE COMPANY ADF FOODS LIMITED 8.34% I ADJUSTMENT (G-H) NIL CAPACITY UTILISATION OF ADJUSTMENT OF THE AE SEGMENT : 1. WORKING FOR CAPACITY UTILISATION ADJUSTMENT A. CAPACITY UTILISATION OF ADF FOODS LIMITED SL.NO. PARTICULARS A.Y. 2007-08 (MT) 1 INSTALLED CAPACITY 25,900 2 ACTUAL PRODUCTION 13,822 3 CAPACITY UTILIZATION % [2/1*100] 53.37% B. CAPACITY UTILISATION OF TASTY BITE EATABLES LIMITED SL.NO. PARTICULARS A.Y. 2007-08 (MT) 1 INSTALLED CAPACITY 17,200 2 ACTUAL PRODUCTION 2,648 3 CAPACITY UTILIZATION % [2/1*100] 15.40% 16 C. DIFFERENCE IN CAPACITY UTILIZATION (A-B) 37.97% D. FIXED COSTS OF TASTY BITE AS PER ANNUAL REPORT SL.NO. PARTICULARS A.Y. 2007-08 IN RS. CRORES DEPRECIATION 0.67 EMPLOYEE COST 4.20 REPAIRS AND MAINTENANCE PLANT & MACHINERY 0.19 REPAIRS AND MAINTENANCE BUILDING 0.06 REPAIRS AND MAINTENANCE OTHERS 0.08 RENT RATES AND TAXES 0.20 INSURANCE 0.06 TOTAL 5.47 E. IDLE COST (CXD) 2.08 F. TOTAL REVENUE OF TASTY BITE AS PER ANNUAL REPORT 30.75 G. VALUE OF INTERNATIONAL TRANSACTIONS OF TASTE BITE 23.49 H. IDLE COST ATTRIBUTABLE TO VALUE OF INTERNATIONAL TRANSACTION (C/FXG) 1.59 I. PLI OF TASTE BITE AFTER CAPACITY UTILISATION ADJUSTMENT SL.NO. PARTICULARS A.Y. 2007-08 A VALUE OF INTERNATIONAL TRANSACTION AS ABOVE (REFER G ABOVE) 23.49 B LESS : PROFIT BY APPLYING PLI AS CALCULATED BY TPO 0.97 C COST (A-B) 22.52 D LESS : UNABSORBED FIXED COST AS CALCULATED ABOVE 1.59 E ADJUSTED COST (C-D) 20.93 F ADJUSTED PROFIT (A-E) 2.56 G PLI (OP/OC) OF TBEL (F/E*100) 12.23% H PLI OF COMPARABLE COMPANY ADF FOODS LIMITED 8.34% I ADJUSTMENT (G-H) NIL CAPACITY UTILISATION ADJUSTMENT ON THE TBEL : 1. WORKING FOR CAPACITY UTILIZATION ADJUSTMENT A. CAPACITY UTILIZATION OF ADF FOODS LIMITED SL.NO. PARTICULARS A.Y. 2007-08 (MT) 1 INSTALLED CAPACITY 25,900 2 ACTUAL PRODUCTION 13,822 3 CAPACITY UTILIZATION % [2/1*100] 53.37% 17 B. CAPACITY UTILIZATION OF TASTE BITE EATABLES LIMITE D SL.NO. PARTICULARS A.Y. 2007-08 (MT) 1 INSTALLED CAPACITY 17,200 2 ACTUAL PRODUCTION 2,648 3 CAPACITY UTILIZATION % [2/1*100] 15.40% C. DIFFERENCE IN CAPACITY UTILIZATION (A-B) 39.97% D. WORKINGS AFTER ADJUSTING THE DIFFERENCE IN CAPACIT Y IN RS. CRORES SL.NO. PARTICULARS AT 15.40% CAPACITY AT 53.37% CAPACITY 1 SALE 29.67 102.85 LESS VARIABLE COSTS 2 RAW MATERIALS CONSUMED 16.67 57.79 3 INVENTORY CHANGE 1.93 6.69 4 CONSUMPTION OF STORES AND PACKING MATERIALS 1.38 4.78 5 POWER AND FUEL 1.03 3.57 6 FREIGHT 2.47 8.55 TOTAL VARIABLE COST 23.48 81.38 GROSS PROFIT 6.19 21.47 E FIXED COST (OPERATING COST-VARIABLE COST) 4.97 4.97 F TOTAL OPERATING COST 28.44 86.34 G PBIT 1.23 16.51 H PLI OF TBEL (OP/OE) (ON WHOLE RTS) 4.32 19.12 I PLI OF ADF 0.47 8.34 REFER WORKING OF ADF AT 15.40% PAGE NO.269 OF THE COMPILATION CAPACITY UTILISATION ADJUSTMENT ON THE ADF : 1. WORKING FOR CAPACITY UTILIZATION ADJUSTMENT A. CAPACITY UTILIZATION OF ADF FOODS LIMITED SL.NO. PARTICULARS A.Y. 2007-08 (MT) 1 INSTALLED CAPACITY 25,900 2 ACTUAL PRODUCTION 13,822 3 CAPACITY UTILIZATION % [2/1*100] 53.37% 18 B. CAPACITY UTILIZATION OF TASTE BITE EATABLES LIMITE D SL.NO. PARTICULARS A.Y. 2007-08 (MT) 1 INSTALLED CAPACITY 17,200 2 ACTUAL PRODUCTION 2,648 3 CAPACITY UTILIZATION % [2/1*100] 15.40% C. DIFFERENCE IN CAPACITY UTILIZATION (A-B) 39.97% D. WORKINGS AFTER ADJUSTING THE DIFFERENCE IN CAPACIT Y IN RS. CRORES SL.NO. PARTICULARS AT 53.57% CAPACITY AT 15.40% CAPACITY 1 SALE 73.02 21.06 LESS VARIABLE COSTS 2 RAW MATERIALS CONSUMED 24.02 6.93 3 CONSUMPTION OF STORES AND PACKING MATERIALS 11.10 3.20 4 POWER AND FUEL 21.05 6.07 5 EXCISE DUTY 1.08 0.31 6 DECREASE IN STOCK 8.01 2.31 TOTAL VARIABLE COST 65.26 18.83 GROSS PROFIT 7.76 2.24 E FIXED COST (OPERATING COST-VARIABLE COST) 2.14 2.14 F TOTAL OPERATING COST 67.40 20.97 G PBIT 5.62 0.10 H PLI OF ADF 8.34 0.47 21. HE ALSO RELIED ON THE FOLLOWING DECISIONS : 1. BRINTONS CARPETS ASIA PVT. LTD. VS. DCIT ITA NO.1296/PN/2010 2. SKODA AUTO INDIA P. LTD. VS. ACIT REPORTED IN 30 SOT 319 (PUNE) 3. AMDOCS BUSINESS SERVICES PVT. LTD. VS. DCIT ITA NO.1412/PN/2011 4. ARISTON THERMO INDIA LTD. ITA NO.1455/PN/2010 22. SO FAR AS GROUND OF APPEAL NO.3 IS CONCERNED, T HE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO HAS TAKEN TH E OPERATING COST FOR THE ENTIRE RTS SEGMENT WHICH CONTAINS TRANSACTI ON WITH AES (EXPORTS) AS WELL AS TRANSACTIONS WITH NON-AES (DOM ESTIC). HE 19 SUBMITTED THAT SINCE THE ASSESSEE WAS INCURRING LOS SES IN THE NON-AE SEGMENT, THE PLI OF THE ASSESSEE WAS ARTIFICIALLY B ROUGHT DOWN. REFERRING TO VARIOUS DECISIONS HE SUBMITTED THAT WH ILE DETERMINING ALP ONLY INTERNATIONAL TRANSACTIONS NEED TO BE CONS IDERED. 23. REFERRING TO THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DEMAG CRANES AND COMPONENTS (INDIA) PVT . LTD. VIDE ITA NO.120/PN/2011 ORDER DATED 04-01-2012 HE SUBMIT TED THAT THE TRIBUNAL IN THE SAID DECISION HAS HELD THAT THE TP ADJUSTMENTS ARE TO BE COMPUTED NOT CONSIDERING THE ENTITY LEVEL SALE R ATHER IT SHOULD BE DONE IDEALLY CONSIDERING THE RELATABLE SALES. 24. THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTEN TION OF THE BENCH TO PARA 49 OF THE ORDER OF THE TRIBUNAL WHICH READS AS UNDER : 49. ALL THESE CITED DECISION IN GENERAL AND THE DECI SION IN THE CASE OF M/S IL JIN ELECTRONICS I.P.LTD, SUPRA, IN PARTICULAR ARE UNIFORM IN ASSERTING THAT THE TP ADJUSTMENTS ARE TO COMPUTED NOT C ONSIDERING THE ENTITY LEVEL SALES. RATHER IT SHOULD BE DONE IDEAL LY CONSIDERING THE RELATABLE SALES DRAWING THE QUANTITATIVE RELATIONSHIP TO THE IMPORTS FROM THE AES, IE CONTROLLED COST. THE PRINCIPLE OF PR OPORTIONALITY IS RELEVANT HERE AND IT IS A SETTLED LAW IN THIS REGARD. IN THE SITUATION LIKE THE ONE IN THE INSTANT CASE OF THE ASSESSEE, THERE I S DATA RELATING TO CONTROLLED AND UNCONTROLLED COST PARTICULARS. THIS UNDISPUTED DATA IS SUFFICE TO ARRIVE THE PROPORTIONATE SALES RELATABLE TO THE INTERNATIONAL TRANSACTION WITH THE AES IE CONTROLLED COST. ACCORDINGLY, THE GROUNDS 10 RELATING TO INCORRECT CO MPUTATION OF TRANSFER PRICING ADJUSTMENT TO THE MANUFACTURING ACTI VITY IS ALLOWED PRO TANTO. 25. REFERRING TO THE FOLLOWING CHARTS, THE LD. COUN SEL FOR THE ASSESSEE SUBMITTED THAT IF THIS GROUND IS ALLOWED, THEN THE ADDITION WILL BE 0.90 CRORES (1.88 CRORES 0.97 CRORES) : 20 SPLIT UP OF THE RTS SEGMENT INTO AE AND NON-AE TRANSA CTIONS AE NON-AE TOTAL (ADJUSTMENT MADE BY THE ASSESSING OFFICER/TPO) REFERENCE RS. IN CRORES A REVENUE 23.47 6.10 29.67 PAGE NO.48 OF THE COMPILATION B PROFIT @4.32% OF COST (AS PER THE ASSESSING OFFICER/TPO) (A*4.32/104.32) 0.97 0.26 1.23 PAGE NO.243 OF THE COMPILATION C COST (A-B) 22.50 5.94 28.44 D APPLYING THE PLI OF THE COMPARABLE I.E. 8.34% (C*8.32%) 1.88 0.50 2.37 PAGE NO.269 OF THE COMPILATION E ADJUSTMENT APPLYING PI ON THE AE TRANSACTION ONLY (D-B) 0.90 0.24 1.14 SR.NO. PARTICULARS AMOUNT A SALES 30.43 LESS: EXPENSES B MATERIAL CONSUMPTION 16.67 C MANUFACTURING & OTHER EPENSES 11.46 D INTEREST & FINANCE CHARGES 0.32 E INVENTORY CHANGE 0.19 F TOTAL EXPENSES (B+C+D+E) 28.64 G OPERATING PROFITS (A-F) 1.79 H OPERATING PROFIT/TOTAL COST (G/F) 6.25% (INR IN CRORES) SR.NO. PARTICULARS AMOUNT TOTAL AMOUNT A TOTAL SALES 67.80 LESS: TRADING SALES 3.58 B SALES NET OF TRADING ACTIVITY 64.22 C TOTAL OPERATING EXPENSES 61.60 LESS: EXPENSES ATTRIBUTABLE TO TRADING (TRADING SALES TRADING MARGIN) 2.95 D TOTAL OPERATING EXPENSES NET OF TRADING EXPENSES 58.65 E TOTAL OPERATING PROFIT NET OF TRADING ACTIVITY (B_D) 5.57 F ADJUSTED OPERATING PROFIT/ADJUSTED TOTAL COST (E/D) 9.50% 21 26. HE ALSO RELIED ON THE FOLLOWING DECISIONS : 1. EMERSONS PROCESS MANAGEMENT INDIA PVT. LTD., -ITA NO.8188/MUM/2010 2. IL JIN ELECTRONICS I.P. LTD. VS. ACIT ITA NO.438 /DEL/2008 3. DCIT VS. STARLITE ITA NO. 2279 & 925/MUM/2006 4. ABISHEK AUTO INDUSTRIES LTD. VS. DCIT ITA NO.1433/DEL/2009 5. M/S. 3I INFOTECH LTD. VS. ITO ITA NO.21/MDS/2013 27. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE AO. REFERRING T O VARIOUS CHARTS FILED BY THE ASSESSEE THE LD. DEPARTMENTAL REPRESEN TATIVE SUBMITTED THAT EVEN THE ASSESSEE ALSO CANNOT ACCURATELY CALCU LATE THE CAPACITY UNDER UTILIZATION. FURTHER, MARGIN DOES NOT DEPEND ON THE CAPACITY. IN THE ASSESSEES OWN CASE AS AGAINST CAPACITY UTIL IZATION OF 13.49% IN THE PRECEDING YEAR THE CAPACITY UTILIZATION DURI NG THE YEAR IS 15.39%. REFERRING TO PAGE 49 OF THE PAPER BOOK THE LD. DEPARTMENTAL REPRESENTATIVE DREW THE ATTENTION OF T HE BENCH TO THE FOLLOWING TABLE GIVEN IN THE AUDITED ACCOUNTS : 12. ANNUAL CAPACITIES AND PRODUCTION SR.NO. ITEM INSTALLED CAPACITY ACTUAL PRODUCTION CURRENT YEAR MT PREVIOUS YEAR MT CURRENT YEAR MT PREVIOUS YEAR MT 1. READY TO SERVE FOODS 5,000 5,000 2,343 2,024 2. FROZEN PRODUCTS 12,200 10,000 305 -- 28. REFERRING TO PAGE 9 OF THE PAPER BOOK THE LD. D EPARTMENTAL REPRESENTATIVE SUBMITTED THAT PROFIT BEFORE TAX FOR THE YEAR ENDING 31-03-2007 WAS 243.70 LAKHS AS AGAINST RS.167.32 LA KHS FOR THE PERIOD ENDING 31-03-2006. HE ACCORDINGLY SUBMITTED THAT WITH MORE CAPACITY UTILIZATION THERE IS LESS MARGIN OF PROFIT . SO FAR AS 22 EMPLOYEES COST ARE CONCERNED HE SUBMITTED THAT THER E MAY BE TWO TYPES OF CASES, I.E. FIXED COST FOR CERTAIN EMPLOYE ES AND VARIABLE COST FOR SOME OTHER EMPLOYEES. HOWEVER, HERE THEY HAVE GIVEN THE LUMPSUM FIGURES. REFERRING TO PROVISIONS OF RULE 1 0B(1)(I)(E) HE SUBMITTED THAT ADJUSTMENTS ARE TO BE MADE FOR COMPA RABLES ONLY THAT TOO IN VERY LIMITED CASE. HE SUBMITTED THAT VARIOU S BENCHES OF THE TRIBUNAL ARE AGAINST THIS PROPOSITION OF ADJUSTMENT S. FURTHER, DURING A.Y. 2009-10 THE ASSESSEE ITSELF HAS DROPPED THE GR OUND FOR CAPACITY UTILIZATION. THEREFORE, NO ADJUSTMENT FOR CAPACITY UTILIZATION SHOULD BE ALLOWED. 29. SO FAR AS GROUND OF APPEAL NO.3 IS CONCERNED T HE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT ADJUSTME NT HAS TO BE MADE ON SEGMENT TO SEGMENT AND IF THE ASSESSEE WANT S ANY ADJUSTMENT ON THE BASIS OF TRANSACTION TO TRANSACTI ON THEY HAVE TO GIVE FULL DETAILS WHICH THEY HAVE NOT GIVEN. THERE FORE, THE GROUND OF APPEAL NO.3 HAS TO BE DISMISSED. 30. THE LD. COUNSEL FOR THE ASSESSEE IN HIS REJOIND ER SUBMITTED THAT DEPRECIATION IS TAKEN AS A FIXED COST AND POWE R AND FUEL HAS BEEN TAKEN AS VARIABLE COST. IF DEPARTMENTAL REPRESENTA TIVE WANTS TO TAKE THESE AS FIXED COSTS THEN THE ASSESSEE STANDS TO GA IN. 31. SO FAR AS THE CAPACITY UNDER UTILIZATION IS CON CERNED THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE SUBMISSIONS MADE BEFORE THE TPO WHICH APPEARS AT PA GE 235 OF THE PAPER BOOK PARA 6.7 AND WHICH READS AS UNDER : 23 6.7 THAT TBEL HAD DISCONTINUED THE DOMESTIC SALES OF R EADY TO EAT PROCESSED FOOD PRODUCTS DURING THE YEAR 2004-05. T HAT IN THE FINANCIAL YEAR, THE COMPANY HAS TO SETTLE CLAIMS FROM LOCAL DISTRIBUTORS AND OTHER SUPPLY CHAIN VENDORS INCLUDING I NVENTORY WRITE OFF, PROVISION FOR SALES TAX PAYABLE UNDER DEFER RAL SCHEME, AND PROVISION FOR NON-COLLECTABILITY OF GOVT. INCENTIVES. HE SUBMITTED THAT BECAUSE OF THE WRITE OFF THERE WA S LESS PROFIT DURING THE YEAR. THEREFORE, THE SUBMISSION OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT THERE IS LESS PROFIT ALTHOUGH T HERE IS HIGHER CAPACITY UTILIZATION IS INCORRECT. 32. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER/ DRP AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. ALTHOUGH THE ASS ESSEE HAS TAKEN NUMBER OF GROUNDS NOW THEY CRYSTALLISE ONLY ON TWO ISSUES, I.E. ADJUSTMENT FOR CAPACITY UNDER UTILISATION AND ADJUS TMENT FOR INAPPROPRIATE CALCULATION OF TP. 33. SO FAR AS THE ADJUSTMENT ON ACCOUNT OF CAPACITY UNDER UTILISATION IS CONCERNED, IT IS THE SUBMISSION OF T HE LD. COUNSEL FOR THE ASSESSEE THAT CAPACITY UTILISATION OF THE ASSES SEE WORKS OUT TO 15% WHEREAS CAPACITY UTILISATION OF THE COMPARABLE COMPANY WAS 53%. THEREFORE, THE DIFFERENCE BETWEEN THE TWO IS SIGNIFICANT AND MATERIAL TO IMPACT THE PROFIT MARGIN OF THE ASSESSE E AND THE COMPARABLE COMPANYS ABILITY TO ABSORB THE FIXED OV ERHEADS LIKE DEPRECIATION, SALARY AND WAGES, POWER, REPAIR ETC. IS LESS WHERE CAPACITY UTILISATION IS LOW AND THIS WOULD LEAD TO INCREASED COST AND LOWER PROFIT. 24 34. WE FIND SOME FORCE IN THE ABOVE SUBMISSION OF T HE LD. COUNSEL FOR THE ASSESSEE. WE FIND THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. FIAT INDIA LTD. VS. AC IT 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 ASSE SSEE TO WORK OUT ITS OPERATING MARGIN FOR COMPARING THE SAME WITH THE PROFIT MARGIN OF COMPARABLE CASES. IT IS OBSERVED IN THIS CONT EXT THAT A DETAILED SUBMISSION WAS MADE ON BEHALF OF THE ASSESSEE BEFO RE THE ID. CIT(A) EXPLAINING EACH AND EVERY ADJUSTMENT SOUGH T TO BE MADE BY IT. THE GIST OF THE SAID SUBMISSION HAS ALREADY BEEN E XTRACTED BY US IN THE FOREGOING PORTION OF THIS ORDER AND A PERUSA L OF THE SAME SHOWS THAT EACH AND EVERY ADJUSTMENT MADE BY THE ASSESS EE COMPANY WAS DULY EXPLAINED BY IT BY FURNISHING THE RE LEVANT FACTS AND FIGURES AS WELL AS BY PRODUCING THE SUPPORTING EVID ENCE WHEREVER REQUIRED. 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 A SSESSEE'S CASE AND THAT OF THE COMPARABLE CASES IN TERMS OF CAPACITY UTIL IZATION AS WELL AS IN OTHER TERMS. APPROPRIATE ADJUSTMENTS THUS WERE REQ UIRED TO BE MADE TO ELIMINATE SUCH DIFFERENCES AND AFTER HAVING C ONSIDERED THE RELEVANT TRANSFER PRICING GUIDELINES AS WELL AS TRANSFER PRICING REGULATIONS, IT WAS HELD BY THE LD. CIT(A) THAT VARIO US ADJUSTMENTS MADE BY THE ASSESSEE WERE REASONABLE AND ACCURATE. HE AL SO HELD THAT THE SAID MATERIAL DIFFERENCE WERE ARBITRARILY I GNORED BY THE TPO WHILE DISALLOWING THE ASSESSEE'S CLAIM SUCH FOR ADJUSTMENTS AND THERE BEING NO PROPER REASONS ASSIGNED BY HIM FOR IGNOR ING THE SAID DIFFERENCE, THE TRANSFER PRICING EXERCISE DONE BY HIM IN THE REPORT WAS ENTIRELY FUTILE. AT THE TIME OF HEARING BEFORE U S, THE ID. D.R. HAS NOT BEEN ABLE TO RAISE ANY MATERIAL CONTENTION TO RE BUT/CONTROVERT THE OBSERVATIONS/FINDING RECORDED BY THE LD. CIT(A) I N HIS IMPUGNED ORDER TO ARRIVE AT THE SAID CONCLUSION. HE HAS SIMPLY R ELIED ON THE REPORT OF THE TRANSFER PRICING OFFICER IN SUPPORT OF THE REVENUE'S CASE. HOWEVER, AS POINTED OUT BY THE LD. COUNSEL FOR THE ASSE SSEE FROM THE COPIES OF RELEVANT REPORTS, THE TPO HIMSELF HAS ALLOWED SIMILAR ADJUSTMENTS MADE BY THE ASSESSEE IN THE IMMEDIATELY PROCE EDING YEARS I.E. A.Y. 2002-03, 2003-04 AS WELL AS IN THE IMM EDIATELY SUCCEEDING YEARS I.E. 2005-06 AND 2006-07 WHEREIN THE FACTS INVOLVED WERE SIMILAR TO THAT OF THE YEAR UNDER CONSI DERATION I.E. A.Y. 2004-05. WE, THEREFORE, FIND NO INFIRMITY IN THE IM PUGNED ORDER OF THE LD. CIT(A) HOLDING THAT THE ADJUSTMENTS MADE BY THE ASSESSEE IN TNMM ANALYSIS WERE REASONABLE AND ACCURATE AND AS REFLE CTED IN THE SAID ANALYSIS, INTERNATIONAL TRANSACTIONS MADE BY THE A SSESSEE COMPANY WITH ITS ASSOCIATED CONCERNS DURING THE YEAR U NDER CONSIDERATION WERE AT ARMS LENGTH REQUIRING NO ADJUSTM ENT/ADDITION ON THIS ISSUE. THE IMPUGNED ORDER OF THE LD. CIT(A) O N THIS ISSUE IS THEREFORE UPHELD DISMISSING GROUND NO. 2 OF REVENUE'S APPEAL. (UNDERLINE GIVEN BY US) 25 35. WE FIND FOLLOWING THE ABOVE DECISION THE PUNE B ENCH OF THE TRIBUNAL IN THE CASE OF ARISTON THERMO INDIA LTD. ( SUPRA) HAS ALSO AGREED IN PRINCIPLE THE ADJUSTMENT ON ACCOUNT OF LO W CAPACITY UTILISATION AND HIGH FIXED OPERATING COST BY OBSERV ING AS UNDER : 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S. THE POINT SOUGHT TO BE MADE OUT BY THE ASSESSEE IS THAT THIS BEING T HE FIRST YEAR OF OPERATIONS, IT HAS NOT ACHIEVED AN OPTIMUM LEVEL OF CAPACITY UTILIZATION AND THE SALES ARE ALSO ON A LOWER SIDE. MOR EOVER, IT HAS INCURRED CERTAIN START-UP COSTS AND THE FIXED OPERATIN G COSTS HAVE ALSO NOT BEING ABSORBED DUE TO LOW CAPACITY UTILIZATI ON. IN THE ABSENCE OF OPTIMUM UTILIZATION OF ITS PRODUCTION CAP ACITY, IT HAS SUFFERED OPERATING LOSSES DURING THE YEAR. ON THE OTHE R HAND, THE NET PROFIT MARGIN OF THE ASSESSEE HAS BEEN BENCHMARKED AGAIN ST COMPARABLES CASES, WHO ARE ESTABLISHED ENTITIES AND HAVE STARTED BUSINESSES MANY YEARS AGO. IN OUR CONSIDERED OPINION, THE CASE MADE OUT BY THE ASSESSEE IS BASED ON ECONOMIC AND COMMERCIAL R EASONS. THE ASSESSEE IS A UNIT WHICH HAS BEEN SET-UP DURING THE YE AR AND ITS CAPACITY UTILIZATION IS ONLY 21%, WHICH HAS RESULTED I N LOSSES, WHILE ITS PROFIT MARGINS HAVE BEEN COMPARED WITH ENTITIES EST ABLISHED OVER THE YEARS. OSTENSIBLY, SUCH A COMPARABILITY ANALYSIS DOE S NOT PROVIDE A LEVEL PLAYING FIELD. IN OUR VIEW, THE AFORESAID FA CTOR IS REQUIRED TO BE ADJUSTED SO AS TO FACILITATE A MEANINGFUL COMPARABILIT Y ANALYSIS BETWEEN THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE A ND 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 ASSESSEE FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION I S THE TNM METHOD AND RULE 10B(1)(E) OF THE RULES PRESCRIBES THE MANNER IN WHICH THE SAME IS TO BE APPLIED. AS PER THE REVENUE, I N SUB-CLAUSE (III) ADJUSTMENTS TO THE NET PROFIT MARGIN ARE PERMISSI BLE BUT IT IS ONLY IN RELATION TO THE NET PROFIT MARGINS OF THE CO MPARABLE UNCONTROLLED TRANSACTIONS AND NOT WITH RESPECT TO THE MARGIN OF THE TESTED PARTY AND THUS THE CLAIM OF THE ASSESSEE CANNOT B E ALLOWED. IN OUR CONSIDERED OPINION, IN SUB-CLAUSE (I) THE NET PROF IT MARGIN REALIZED BY A TESTED PARTY FROM AN INTERNATIONAL TRA NSACTION IS REQUIRED TO BE ASCERTAINED HAVING REGARD TO THE RELE VANT BASE. IN SUB- CLAUSE (II) THE NET PROFIT MARGIN REALIZED BY AN UNR ELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION IS TO BE A SCERTAINED HAVING REGARD TO THE SAME BASE. SUB-CLAUSE (III) PERMI TS ADJUSTMENT WITH REGARD TO THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (II) I.E. OF THE COMPARABLE UNCONTROLLED TRANSACTIONS SO AS TO TA KE INTO ACCOUNT THE DIFFERENCE, IF ANY BETWEEN THE INTERNAT IONAL TRANSACTION 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 PROFIT MARGIN OF THE TESTED PARTY REFER RED TO IN SUB- CLAUSE (I) HAS NOT BEEN DEFINED IN A MANNER AS IS BEIN G UNDERSTOOD BY THE REVENUE. AS PER THE REVENUE THE NET PROFIT MARGI N OF THE TESTED PARTY AS STATED IN SUB-CLAUSE (I) IS TO BE THE SAME AS REF LECTED IN THE FINANCIAL ACCOUNTS. IN PARA 8.1 OF THE ORDER OF THE TPO IT IS CANVASSED 26 THAT THE NET PROFIT MARGIN HAS TO BE UNDERSTOOD AS MEA NING PROFIT BEFORE TAX COMPUTED IN ACCORDANCE WITH ACCOUNTING P RINCIPLES. IN OUR CONSIDERED OPINION, THE WHOLE OBJECTIVE OF ADOPT ING THE MOST APPROPRIATE METHOD FOR THE PURPOSE OF COMPARABILITY ANALYSIS IS TO DETERMINE ARMS LENGTH PRICE OF THE INTERNATIONAL TR ANSACTIONS. IN OTHER WORDS, THE PURPOSE OF THE COMPARABILITY ANALYSIS IS TO EXAMINE AS TO WHETHER OR NOT THE VALUES STATED FOR THE INTERNA TIONAL TRANSACTIONS ARE AT AN ARMS LENGTH PRICE I.E. WHETHER THE PRICE CHARGED IS COMPARABLE TO AN UNCONTROLLED TRANSACTION OF SIMILAR NATURE. THEREFORE, THE ADOPTION OF THE NET PROFIT M ARGIN OF THE TESTED PARTY HAS TO BE MADE KEEPING IN MIND ITS OBJECTIVE, I.E. TO FACILITATE ITS COMPARISON WITH OTHER UNCONTROLLED COMPARABLE ENTITIES/TRANSACTIONS. THEREFORE, KEEPING IN MIND THE AFORESAID OBJECTIVE, THE NET PROFIT MARGIN OF THE TESTED PARTY DRAWN FROM ITS FINANCIAL ACCOUNTS CAN BE SUITABLY ADJUSTED TO FACILIT ATE ITS COMPARISON WITH OTHER UNCONTROLLED ENTITIES/TRANSACTIO NS AS PER SUB-CLAUSE (I) OF RULE 10B(1)(E) OF THE RULES ITSELF. THE ABSENCE OF SUCH A SPECIFIC PROVISION IN RULE 10B(1)(E)(III) OF TH E 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 BASED ON COGENT AND SUFFICIENT REASONS AND SEEKS TO MAKE THE COMPARABILITY ANALYSIS WIT H COMPARABLE UNCONTROLLED TRANSACTIONS MORE MEANINGFUL. IN-FACT, PUNE BENCH OF THE TRIBUNAL IN THE CASE OF EGAIN COMM UNICATION (P.) LTD. (SUPRA) IN PARA 36 OF THE ORDER OPINED THAT DEP ENDING ON THE FACTS AND CIRCUMSTANCES OF A CASE, IT MAY BE APPROPRIAT E TO ADJUST THE OPERATING PROFIT OF THE TESTED PARTY AS WELL AS OF THE COMPARABLE PARTIES. TO THE SIMILAR EFFECT IS THE DECISION OF THE M UMBAI 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) WHE REIN ONE OF US WAS A MEMBER OF THE BENCH I.E. ACCOUNTANT MEMBE R, AN ADJUSTMENT WAS ALLOWED TO THE PROFIT MARGIN OF THE TE STED PARTY WITH RESPECT TO THE UNDER CAPACITY UTILIZATION, THE UNIT BEING IN THE START- UP PHASE. THE DECISION OF THE PUNE BENCH OF THE TRIBU NAL IN THE CASE OF SKODA AUTO 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. (SUPR A) FOR THE PROPOSITION THAT ADJUSTMENT TO THE PROFIT MARGIN OF T HE TESTED PARTY IS NOT PERMISSIBLE. WE HAVE PERUSED THE SAID DECISION. IN THE CASE BEFORE THE DELHI BENCH OF THE TRIBUNAL, ASSESSEE HAD CO MPUTED ITS MARGIN AFTER CLAIMING ADJUSTMENT FOR CAPACITY UTILIZ ATION. THE ASSESSEE HAD ADOPTED THE TNM METHOD FOR THE PURPOSE OF C OMPUTING ITS ALP. THE ASSESSEE HAD CLAIMED THAT CAPACITY UTILIZAT ION OF COMPARABLES WAS TO THE EXTENT OF 70%, WHICH WAS AN ASSUM PTION MADE DUE TO NON-AVAILABILITY OF THE REQUIRED DETAIL S OF THE COMPARABLE CASES. THE TPO REJECTED THE ADJUSTMENT ON T HE GROUND THAT ASSESSEE HAD NOT SUBMITTED ANY EVIDENCE FOR ASSUMING THE CAPACITY UTILIZATION OF THE COMPARABLES AND THE DATA BEING RELIED UPON BY THE ASSESSEE WAS FOUND TO BE EITHER UNRELIABLE O R INCORRECT. THE TRIBUNAL IN PARA 90 OF ITS ORDER EXAMINED THE EV IDENCE RELIED BY THE ASSESSEE WITH REGARD TO ITS ASSUMPTION MADE TOWARDS TH E CAPACITY UTILIZATION OF 70% OF THE COMPARABLE CASES. ON THE BASIS OF THE DOCUMENTS AND MATERIAL ON RECORD, THE TRIBUNAL C AME TO CONCLUDE THAT THE ASSESSEE DID NOT FURNISH SUFFICIENT EVI DENCE WITH REGARD TO THE CAPACITY UTILIZATION OF THE COMPARABL E CASES. THE TRIBUNAL HELD THAT ASSESSEE WAS NOT ENTITLED TO SEEK ADJU STMENT ON ACCOUNT OF CAPACITY UTILIZATION BECAUSE OF ITS FAILUR E TO FURNISH CREDIBLE AND ACCURATE INFORMATION IN THIS REGARD. IN CONCLUSION, THE 27 TRIBUNAL SPECIFICALLY NOTED THAT BECAUSE OF THE AFORE SAID FAILURE OF THE ASSESSEE, THE PRECEDENTS CITED 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), EGAIN COMMUNICATION (P .) LTD. (SUPRA) AND GLOBAL VATEDGE PVT. LTD. VS. DCIT (ITA NOS, 2763 & 2764/DEL/2009) COULD NOT BE APPLIED IN THE CASE OF T HE ASSESSEE. THE AFORESAID DISCUSSION IN THE ORDER OF THE TRIBUNAL CLEAR LY SHOWS THAT THE ASSESSEE THEREIN FAILED IN SEEKING ADJUSTMENT TO ITS P ROFIT MARGINS FOR LACK OF EVIDENCE, AND THE TRIBUNAL WAS FU LLY CONSCIOUS THAT THE RELIEF WAS OTHERWISE ALLOWABLE TO THE ASSESSEE I N PRINCIPLE, BASED ON THE PRECEDENTS CITED ABOVE. THUS, THE DECISION IN THE CASE OF HAWORTH (INDIA) P. LTD. (SUPRA) DOES NOT HELP THE REV ENUE, AND THE RELIANCE BY THE CIT(DR) IS MISPLACED. THEREFORE, IN O UR VIEW, HAVING REGARD TO THE PRECEDENTS AND THE AFORESAID DISCUSSION, I N THE PRESENT CASE ASSESSEE HAS TO SUCCEED IN PRINCIPLE FOR ADJUSTMENT ON ACCOUNT OF LOWER CAPACITY UTILIZATION, AND THE LOSS SUFFERED O N ACCOUNT OF UNABSORBED FIXED OPERATING COSTS INCURRED IN THE INITI AL YEAR. THE AFORESAID FACTORS, IN OUR VIEW, WARRANT AN APPROPRIAT E ADJUSTMENT TO THE OPERATING MARGINS OF THE ASSESSEE TO FACILITATE A ME ANINGFUL COMPARISON WITH THE COMPARABLE UNCONTROLLED TRANSACTI ONS. 13. AT THE TIME OF HEARING, THE LEARNED CIT(DR) POI NTED OUT THAT TPO HAS ALSO OBSERVED THAT APPROPRIATE DETAILS I N RESPECT OF LOW UTILIZATION OF CAPACITY IN THE CASE OF COMPARABLES ET C. WERE NOT AVAILABLE. IT WAS SUBMITTED THAT THE PLEA OF THE ASSESSEE WAS REJECTED AT THE THRESHOLD, AND THEREFORE, THE LOWER AUTHORITI ES HAD NO OCCASION TO EXAMINE THE PLEA OF THE ASSESSEE ON MERITS. N O DOUBT, THE AFORESAID ASPECT SPRING UP ONLY 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 ASSESSEE P OINTED OUT TO PAGE 97 OF THE PAPER BOOK WHEREIN IS PLACED THE F INANCIAL STATEMENT OF A COMPARABLE CONCERN, M/S KHAITAN ELECT RICALS LIMITED FOR THE FINANCIAL YEAR 2005-06 TO POINT OUT THAT TH E INFORMATION REGARDING THE INSTALLED CAPACITY AND ACTUAL PRODUCTI ON CARRIED OUT DURING THE YEAR IS AVAILABLE, WHICH WOULD FACILITATE THE COMPARISON AND ALSO MAKING OF AN ADJUSTMENT TO THE PROFITS MARGIN OF THE ASSESSEE. IT WAS POINTED OUT THAT AT-LEAST FOR THE SAID CO MPARABLE THE ADJUSTMENT OUGHT TO HAVE BEEN ALLOWED BY THE LOWER A UTHORITIES. 14. IN OUR CONSIDERED OPINION, IN ORDER TO ARRIVE AT AN APPROPRIATE ADJUSTMENT, THE ENTIRE FACTUAL MATRIX IS REQUIRED TO BE EXAMINED AT THE APPROPRIATE LEVEL. THE TPO AS WELL AS THE DRP DID NOT ACCEPT THE PLEA OF THE ASSESSEE IN PRINCIPLE, WHILE THE SAME HAS BE EN ACCEPTED BY US. THEREFORE, IN ORDER TO ALLOW AN APPROPRIATE A DJUSTMENT, NECESSARY VERIFICATION ON THE BASIS OF THE MATERIAL TO BE FURNISHED BY THE ASSESSEE, DESERVES TO BE CARRIED OUT BY THE ASSESSING O FFICER. THEREFORE, WHILE UPHOLDING THE PLEA OF THE ASSESSEE, W E RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WHO SHA LL ALLOW THE ASSESSEE A REASONABLE OPPORTUNITY TO MAKE SUBMISSIONS AND PR ODUCE RELEVANT MATERIAL IN SUPPORT OF ITS STAND AND THEREAF TER 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 OPERA TION. 28 36. RESPECTFULLY FOLLOWING THE ABOVE DECISIONS CITE D (SUPRA) WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE SHO ULD BE GIVEN THE BENEFIT OF LOW CAPACITY UTILISATION. WE THEREFORE RESTORE THE GROUND OF APPEAL NO.2 TO THE FILE OF THE AO/TPO WITH A DIR ECTION TO CONSIDER THE APPROPRIATE ADJUSTMENT AFTER NECESSARY VERIFICA TION ON THE BASIS OF MATERIAL SUPPLIED BY THE ASSESSEE. THE ASSESSING O FFICER SHALL RECOMPUTE SUCH ADJUSTMENT AFTER GIVING DUE OPPORTUN ITY OF BEING HEARD TO THE ASSESSEE. GROUND OF APPEAL NO.2 BY TH E ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 37. SO FAR AS GROUND OF APPEAL NO.3 IS CONCERNED, I T IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT RIGHT SEGMENTAL FOR APPLYING TNM METHOD IS ONLY AE SEGMENT. ACCORD ING TO HIM THE TPO HAS TAKEN THE ENTIRE RTS SEGMENT WHICH CONT AINS TRANSACTIONS WITH AES (EXPORT) AS WELL AS TRANSACTI ONS WITH NON AES (DOMESTIC). HOWEVER, SINCE THE ASSESSEE WAS MAKING LOSSES IN THE NON AE SEGMENT THE PLI OF THE ASSESSEE WAS ARTIFICI ALLY BROUGHT DOWN. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT FOR DETERMINING ALP ONLY INTERNATIONAL TRANSACTIONS NEED TO BE CONSIDERED. WE FIND AN IDENTICAL ISSUE HAD COME UP BEFORE THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DEM AG CRANES & COMPONENTS (INDIA) PVT. LTD. (SUPRA) WHERE IT HAS B EEN HELD THAT TP ADJUSTMENTS ARE TO BE COMPUTED NOT CONSIDERING THE ENTITY LEVEL SALES RATHER IT SHOULD BE DONE IDEALLY CONSIDERING THE RE LATABLE SALES DRAWING THE QUANTITATIVE RELATIONSHIP TO THE IMPORT S FROM THE AES, I.E. CONTROLLED COST. THE MUMBAI BENCH OF THE TRIB UNAL IN THE CASE 29 OF EMERSONS PROCESS MANAGEMENT INDIA PVT. LTD., (SU PRA) HAS HELD THAT TRANSFER PRICING ADJUSTMENT IS TO BE MADE WITH RESPECT TO INTERNATIONAL TRANSACTIONS AND NOT THE ENTIRE SALES . SIMILAR VIEW HAS BEEN TAKEN BY VARIOUS OTHER COORDINATE BENCHES OF T HE TRIBUNAL. IN VIEW OF THE ABOVE, WE AGREE WITH THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT TRANSFER PRICING ADJUSTMENT H AS TO BE MADE WITH RESPECT TO INTERNATIONAL TRANSACTIONS ONLY AND NOT ON THE ENTIRE SALES. HOWEVER, THIS ADJUSTMENT ALSO REQUIRES VERIFICATION AT THE LEVEL OF THE ASSESSING OFFICER. WE THEREFORE RESTORE THIS ISSUE TO THE FILE OF THE AO/TPO WITH A DIRECTION TO RECOMPUTE THE ADJUSTMEN T, IF ANY, ON THE BASIS OF MATERIAL PROVIDED BY THE ASSESSEE. THE AS SESSING OFFICER SHALL DECIDE THE ISSUE AFRESH AFTER AFFORDING REASO NABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE HOLD AND DIRECT AC CORDINGLY. GROUNDS OF APPEAL NO. 3 BY THE ASSESSEE IS ACCORDIN GLY ALLOWED FOR STATISTICAL PURPOSES. 38. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 10-06-2015. SD/- SD/- (SUSHMA CHOWLA) (R.K. PAN DA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED: 10 TH JUNE, 2015 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. DRP, PUNE 4. THE D.R, B PUNE BENCH 5. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY ITAT, PUNE BENCHES, PUNE