DCIT, New Delhi V. M/s. Daikin Air- Conditioning India Pvt. Ltd., Gurgaon

ITA 2547/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3031 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2018
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 29-05-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 25-04-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: KHYATI DADHWAL S
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Capital expenditure
• Section: 143(3); 37(1); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NOS.2536/DEL/2014 &1207/DEL/2015 ASSESSMENT YEARS : 2009-10 & 2010-11 DAIKIN AIRCONDITIONING INDIA PVT. LTD., 12 TH FLOOR, BUILDING NO.9, TOWER-A, DLF CYBER CITY, DLF PHASE III, GURGAON. PAN: AABCD0971F VS. DCIT, CIRCLE-7(1), NEW DELHI. ITA NO.2547/DEL/2014 ASSESSMENT YEAR : 2009-10 DCIT, CIRCLE-7(1), NEW DELHI. VS. DAIKIN AIRCONDITIONING INDIA PVT. LTD., 12 TH FLOOR, BUILDING NO.9, TOWER-A, DLF CYBER CITY, DLF PHASE III, GURGAON. PAN: AABCD0971F (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VISHAL KALRA & MS KHYATI DADHWAL, ADVOCATES DEPARTMENT BY : SHRI SANJAY I BARA, CIT, DR ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 2 DATE OF HEARING : 15.03.2018 DATE OF PRONOUNCEMENT : .03.2018 ORDER PER R.S. SYAL, VP: THIS BATCH OF THREE APPEALS COMPRISES OF TWO CROSS APPEALS FOR THE ASSESSMENT YEAR 2009-10 AND ONE APPEAL BY THE ASSES SEE FOR THE ASSESSMENT YEAR 2010-11. SINCE SOME OF THE ISSUES RAISED IN TH ESE APPEALS ARE COMMON, WE ARE, THEREFORE, PROCEEDING TO DISPOSE THEM OFF B Y THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ASSESSMENT YEAR 2009-10 2. THESE CROSS APPEALS ARISE OUT OF THE FINAL ASSES SMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 28.02.2014 U/S 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT). 3. THE ONLY ISSUE RAISED BY THE REVENUE IN ITS APPE AL IS AGAINST THE DIRECTION OF THE DISPUTE RESOLUTION PANEL (DRP) REQ UIRING THE ASSESSING OFFICER TO CONSIDER DOMESTIC BRAND OWNERS AS COMPAR ABLE FOR THE PURPOSE OF COMPUTING BRIGHT LINE LIMIT IN THE CONTEXT OF AD DITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN ADVERTISEMENT, MARKE TING AND PROMOTION ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 3 (AMP) EXPENSES. GROUND NO.2 OF THE ASSESSEES APPE AL IS AGAINST ADDITION OF RS.5,58,24,315/- MADE BY THE AO ON ACCOUNT OF TR ANSFER PRICING ADJUSTMENT IN THE INTERNATIONAL TRANSACTION OF AMP EXPENSES. 4. SUCCINCTLY, THE FACTUAL MATRIX OF THE CASE IS TH AT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF IMPORT AND SALE OF ALL T YPES OF REFRIGERATION EQUIPMENTS AND ACCESSORIES. DURING THE YEAR, THE A SSESSEE WAS ALSO IN THE PROCESS OF SETTING UP ITS MANUFACTURING PLANT FOR M ANUFACTURE AND SALE OF SUCH GOODS IN INDIA. THE ASSESSEE IS A SUBSIDIARY OF DAIKIN JAPAN, WHICH HOLDS 99.9999% OF ITS SHARE CAPITAL, LEAVING THE RE MAINING 0.0001% FOR DAIKIN INDUS MANAGEMENT SERVICE ASIA (PTE) LTD., SI NGAPORE. THE ASSESSEE REPORTED SIX INTERNATIONAL TRANSACTIONS IN FORM NO.3CEB. THE AO MADE REFERENCE TO THE TRANSFER PRICING OFFICER (TPO ) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANS ACTIONS. THE TPO, ON THE BASIS OF THE ELABORATE DISCUSSION MADE BY HIM IN HI S ORDER DATED 29.01.2013, PROPOSED TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF AMP EXPENSES AT RS.18,19,73,249/-. THE ASSESSEE APPROA CHED THE DISPUTE RESOLUTION PANEL (DRP). AFTER GIVING EFFECT TO THE DIRECTIONS GIVEN BY THE DRP, THE TPO AND THEREAFTER, THE ASSESSING OFFICER, MADE TRANSFER PRICING ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 4 ADDITION OF RS.5,58,24,315/- ON AMP EXPENSES. THE ASSESSEE IS AGGRIEVED AGAINST THE ADDITION. 5. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE REL EVANT MATERIAL ON RECORD. IT IS OBSERVED THAT SIMILAR ISSUE CAME UP F OR CONSIDERATION BEFORE THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE IMMEDIA TELY PRECEDING THREE ASSESSMENT YEARS, NAMELY, 2006-07 TO 2008-09. VIDE ORDER DATED 17.04.2017, THE TRIBUNAL, ON THE ASSESSEES REQUEST , REMITTED THE MATTER TO THE FILE OF ASSESSING OFFICER/TPO FOR TAKING A FRES H DECISION ON THE EXISTENCE OR OTHERWISE OF THE INTERNATIONAL TRANSAC TION OF AMP EXPENSES AND, THEN, DETERMINING THE ALP OF SUCH INTERNATIONA L TRANSACTION OF AMP EXPENSES, IF IT IS FOUND TO EXIST. THE TRIBUNAL FU RTHER DIRECTED THAT SELLING EXPENSES SHOULD NOT BE CONSIDERED WITHIN THE AMBIT OF AMP EXPENSES. THE LD. AR FAIRLY CONCEDED THAT THE ISSUE OF AMP EXPENS ES FOR THE INSTANT YEAR MAY ALSO BE RESTORED TO THE FILE OF ASSESSING OFFIC ER/TPO FOR TAKING A FRESH DECISION IN LINE WITH THE DIRECTIONS GIVEN BY THE T RIBUNAL FOR THE PRECEDING THREE YEARS. THE LD. DR DID NOT RAISE ANY OBJECTION TO IT. RESPECTFULLY FOLLOWING THE PRECEDENT, WE SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND REMIT THE MATTER TO THE FILE OF ASSESSING OFFICER/T PO FOR DECIDING THIS ISSUE ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 5 AFRESH AS PER LAW, AFTER ALLOWING A REASONABLE OPPO RTUNITY OF BEING HEARD TO THE ASSESSEE. THE TPO, IN DOING THIS EXERCISE AFRE SH, WILL TAKE INTO CONSIDERATION THE DIRECTIONS GIVEN BY THE TRIBUNAL IN ITS AFORENOTED ORDER. 6. THE NEXT ISSUE RAISED THROUGH GROUND NO.3 OF THE ASSESSEES APPEAL IS AGAINST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.8,44,864/- ON ACCOUNT OF `PAYMENT OF CONSULTANCY EXPENSES IN RELATION TO ITS DISTRIBUTION OPERATIONS. GROUND NO.5, WHICH IS CONNECTED WITH GROUND NO.3, IS AGAINST TREATING `CONSULTANCY EXPEN SES OF RS.4,96,20,173/- AS CAPITAL IN NATURE RELATING TO S ETTING UP OF ITS MANUFACTURING UNIT. 7. THE FACTS APROPOS THESE ISSUES ARE THAT THE ASSE SSEE REPORTED AN INTERNATIONAL TRANSACTION OF RECEIPT OF CONSULTANC Y SERVICES (SIC FEE) AND TRAINING SERVICES WITH TRANSACTED VALUE OF RS.7,94 ,14,638/-. THE ASSESSEE AGGREGATED THE INTERNATIONAL TRANSACTION OF `PAYMEN T OF CONSULTANCY CHARGES WITH ITS INTERNATIONAL TRANSACTIONS UNDER THE `MANUFACTURING SEGMENT AND BENCHMARKED THE SAME USING THE TRANSAC TIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD ON ENT ITY LEVEL. THE TPO ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 6 DID NOT ACCEPT THE AGGREGATION OF THE TRANSACTION O F `PAYMENT OF CONSULTANCY FEE WITH THE INTERNATIONAL TRANSACTION S OF THE `MANUFACTURING SEGMENT AND APPLYING THE TNMM ON ENTITY LEVEL. HE OPINED THAT PAYMENT OF `CONSULTANCY CHARGES AMOUNTING TO RS.7.94 CRORE SHOULD BE BENCHMARKED SEPARATELY UNDER THE COMPARABLE UNCONTR OLLED PRICE (CUP) METHOD. BY APPLYING THE CUP METHOD, HE DETERMINED THE ALP OF THIS INTERNATIONAL TRANSACTION AT NIL AND, ACCORDINGLY, PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.7.94 CRORE. THE ASSESSEE ASSAILED THIS ISSUE BEFORE THE DRP, WHICH CONSIDERED THE NATURE OF SERVICES PROVID ED BY THE CONSULTANTS, AS REPRODUCED ON PAGES 40 TO 44 OF ITS DIRECTIONS. IT WAS FOUND THAT MOST OF THE PAYMENTS MADE TO EXPATRIATE CONSULTANTS WERE IN CONNECTION WITH SETTING UP OF MANUFACTURING UNIT OF THE ASSESSEE, I N PROGRESS DURING THE YEAR UNDER CONSIDERATION. SUCH A FINDING WAS RENDERED O N PERUSAL OF THE ASSESSEES PROFIT & LOSS ACCOUNT WHICH DEPICTED NO REVENUE FROM SALE OF MANUFACTURED GOODS. IT WAS, THEREFORE, HELD THAT S UCH PAYMENTS WERE REQUIRED TO BE CAPITALIZED. THE MATTER WAS SENT BA CK TO THE TPO WITH A DIRECTION TO THE ASSESSEE TO FURNISH DETAILS OF EXP AT PERSONNEL VISITING INDIA FOR FACILITATION OF SETTING UP OF THE MANUFACTURING UNIT. THE TPO WAS ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 7 DIRECTED TO TREAT SUCH AMOUNT AS CAPITAL EXPENDITUR E. GIVING EFFECT TO THE DIRECTIONS OF THE DRP, THE TPO PROPOSED A FRESH TRA NSFER PRICING ADJUSTMENT ON ACCOUNT OF CONSULTANCY CHARGES AT RS.8,44,864/- TREATING NIL ALP IN RELATION TO THE DISTRIBUTION SEGMENT. THE ASSESSIN G OFFICER TREATED A SUM OF RS.4,96,20,173/- AS CAPITAL EXPENDITURE RELATING TO THE SETTING UP OF MANUFACTURING UNIT. THIS IS HOW, THE ASSESSEE IS AG GRIEVED ON TWO COUNTS ON THIS ISSUE. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS SEEN THAT THE ASSESSEE R EPORTED AN INTERNATIONAL TRANSACTION OF RECEIPT OF CONSULTANCY AND TRAINING SERVICES AMOUNTING TO RS.7.94 CRORE. THE LD. AR EXPLAINED THAT THE DRP D ELETED THE ADDITION OF RS.25 LAC TOWARDS PAYMENT MADE FOR `TRAINING SERVIC ES, LEAVING THE REMAINING AMOUNT AT RS.7.86 CRORE. HE FURTHER SUBM ITTED THAT A SUM OF RS.2.64 CRORE OUT OF SUCH TOTAL AMOUNT WAS SUO MOTU CAPITALIZED BY THE ASSESSEE AND THE ASSESSING OFFICER HAS MADE A FURTH ER CAPITALIZATION OF CONSULTANCY FEE AMOUNTING TO RS.4.96 CRORE BY TREAT ING THE REMAINING AMOUNT OF RS.8,44,864/- AS A REVENUE TRANSACTION RE LATABLE TO DISTRIBUTION SEGMENT BUT TREATED ITS ALP AT NIL. THE LD. AR ARGU ED THAT THE ASSESSING ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 8 OFFICER WAS NOT JUSTIFIED IN CAPITALIZING A FURTHER SUM OF RS.4.96 CRORE TOWARDS PAYMENT OF CONSULTANCY FEE IN ADDITION TO R S.2.64 CRORE ALREADY CAPITALIZED BY THE ASSESSEE. 9. IT IS UNDISPUTED THAT SETTING UP OF THE MANU FACTURING UNIT OF THE ASSESSEE WAS IN PROGRESS DURING THE YEAR UNDER CONS IDERATION. AS SUCH, ALL EXPENSES IN RELATION TO SUCH SETTING UP OF UNIT WER E REQUIRED TO BE CAPITALIZED AS HAS BEEN ADMITTED BY THE ASSESSEE AS WELL, WHICH IS EVIDENT FROM THE VOLUNTARY CAPITALIZATION OF CERTAIN AMOUNT OF CONSULTANCY EXPENSES, CLAIMED TO BE THE ONLY CONSULTANCY EXPENS ES IN RELATION TO SETTING UP OF THE MANUFACTURING UNIT. THUS, THERE CAN BE NO QUESTION OF CLAIMING DEDUCTION OF ANY CONSULTANCY EXPENSES IN CONNECTION WITH THE SETTING UP OF MANUFACTURING UNIT. WE HAVE GONE THROUGH THE ORDER OF THE DRP IN WHICH DETAILS OF CONSULTANCY SERVICES RENDERED BY FOREIGN EXPERTS HAVE BEEN GIVEN ON PAGES 40 TO 44 OF ITS DIRECTION. FIRST IS PAYME NT OF RS.41.15 LAC TO HIROYUKI NAKABAYASHI. UNDER THE COLUMN NATURE OF WORK UNDERTAKEN, IT HAS BEEN MENTIONED AS PREPARATION OF ALL LEGAL LIC ENSES, APPROVALS, REGISTRATIONS FOR FACTORY SET UP ETC. UNDER THE BE NEFIT COLUMN AGAINST THIS PAYMENT, IT HAS BEEN MENTIONED: ASSISTANCE IN SETT ING UP OF MANUFACTURING ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 9 FACILITY IN INDIA, SEEKING ALL NECESSARY APPROVAL S. THEN, THERE IS PAYMENT OF RS.43,74,421/- TO YUICHI TATEOKA. UNDER THE COL UMN NATURE OF WORK UNDERTAKEN, IT HAS BEEN MENTIONED AS EQUIPMENT LO CAL CONTENT RESULT CHECK.. NEXT IS PAYMENT OF RS.37,75,485/- TO KAZ UYA ORITA AND THE NATURE OF WORK HAS BEEN GIVEN AS : DISCUSS ABOUT SPECIFIC ATION OF EQUIPMENT. A SUM OF RS.59,30,109/- HAS BEEN SHOWN TO HAVE BEEN P AID TO TOSHIO MASUDA AND THE NATURE OF WORK HAS BEEN MENTIONED AS MEETI NG WITH ACCOUNTING SECTION; FACTORY CS AND BUDGET AND `PRODUCTION EQU IPMENT ORDER. IN THIS WAY, DETAILS HAVE BEEN GIVEN IN RESPECT OF 12 PAYME NTS WHICH APPARENTLY SHOW THAT MOST OF THE SERVICES PROVIDED BY THE EXPA TS ARE IN CONNECTION WITH THE SETTING UP OF THE FACTORY. AT THE SAME TIM E, IT IS ALSO VIVID THAT SOME SERVICES HAVE BEEN RENDERED BY THE EXPATS QUA THE RUNNING BUSINESS OF DISTRIBUTION, WHICH ARE OF THE REVENUE NATURE. IT G OES WITHOUT SAYING THAT AN EXPENDITURE INCURRED IN RELATION TO SETTING UP MANU FACTURING UNIT CANNOT BE CONSIDERED AS OF REVENUE NATURE AND THE SAME HAS TO BE CAPITALIZED. SINCE COMPLETE DETAILS OF SUCH AMOUNT ARE NOT AVAILABLE, WE ARE OF THE CONSIDERED OPINION THAT THE ENDS OF JUSTICE WOULD MEET ADEQUAT ELY IF THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 10 ASSESSING OFFICER/TPO. WE ORDER ACCORDINGLY AND DIR ECT HIM TO EXAMINE EACH AND EVERY ITEM OF PAYMENT OF CONSULTANCY FEE A ND, THEN, CAPITALIZE SUCH AMOUNTS AS RELATE TO THE SETTING UP OF MANUFAC TURING UNIT. SINCE THE DRP HAS SIMPLY DIRECTED THE TPO/A.O. TO CAPITALIZE THE EXPENDITURE RELATING TO MANUFACTURING UNIT AND THE ALP OF THE S AME HAS NEITHER BEEN DIRECTED TO BE NOR ACTUALLY DETERMINED BY THE TPO/A .O., WE CANNOT ENLARGE THE CONTROVERSY BY DIRECTING THE AUTHORITIES TO DET ERMINE THE ALP OF THE AMOUNT TO BE CAPITALIZED. 10. NOW, WE ESPOUSE THE REMAINING SUM OF RS.8, 44,864/-, WHOSE ALP HAS BEEN DETERMINED BY THE AUTHORITIES AT NIL. WE H AVE NOTICED ABOVE THAT THE ASSESSEE BENCHMARKED THE INTERNATIONAL TRANSACT ION OF `PAYMENT OF CONSULTANCY FEE BY AGGREGATING IT WITH THE `MANUFA CTURING SEGMENT AND, THEN, DETERMINED THE ALP ON AGGREGATE BASIS UNDER T HE TNMM. THE TPO HAS BENCHMARKED THIS PART OF THE TRANSACTION UNDER THE CUP METHOD. 11. IT IS, NO DOUBT, TRUE THAT TWO OR MORE INTER NATIONAL TRANSACTIONS CAN BE AGGREGATED. HOWEVER, IT IS SINE QUA NON THAT THE TWO OR MORE TRANSACTIONS, IN ORDER TO BE AGGREGATED, MUST BE INTERLINKED AND HAVE A CLOSE CONNECTION ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 11 WITH EACH OTHER. TWO SEPARATE AND INDEPENDENT TRANS ACTIONS CANNOT BE BUNDLED TOGETHER FOR THE PURPOSES OF BENCHMARKING, IN THE ABSENCE OF THEIR HAVING ANY CLOSE CONNECTION OR LIVE LINK WITH EACH OTHER. THE DELHI BENCH OF THE TRIBUNAL IN GRUNER INDIA PVT LTD [TS-202-ITAT-2016(DEL)-TP] HAS HELD THAT ROYALTY AND FEES FOR TECHNICAL SERVIC ES ARE NOT CLOSELYLINKED AND HENCE APPROVED THE TPOS SEGREGATION. 12. ADVERTING TO THE FACTS OF THE INSTANT CASE , WE FIND THAT THE ASSESSEE HAS BUNDLED THE INTERNATIONAL TRANSACTION OF `PAYME NT OF CONSULTANCY FEE WITH ITS `MANUFACTURING SEGMENT. PRIMARILY, IT IS SEEN THAT THE ASSESSEE DID NOT UNDERTAKE ANY MANUFACTURING ACTIVITY AS THE MAN UFACTURING UNIT WAS BEING SET UP DURING THE YEAR. IN SUCH A CASE, THERE COULD HAVE BEEN NO REASON TO AGGREGATE THE TRANSACTION OF `PAYMENT OF CONSULTANCY FEE WITH THE `MANUFACTURING SEGMENT. SECONDLY, BOTH THE TR ANSACTIONS DO NOT HAVE ANY CLOSE CONNECTION AND ARE INDEPENDENT OF EACH OT HER AND, HENCE, CANNOT BE AGGREGATED FOR THE PURPOSE OF BENCHMARKING. ONC E THE INTERNATIONAL TRANSACTION OF `PAYMENT OF CONSULTANCY FEE IS SEGR EGATED FROM THE INTERNATIONAL TRANSACTIONS OF `MANUFACTURING SEGMEN T, THE FORMER TRANSACTION UNDER CONSIDERATION NEEDS TO BE SEPARAT ELY BENCHMARKED. ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 12 CONSIDERING THE NATURE OF THE INTERNATIONAL TRANSAC TION OF RECEIPT OF CONSULTANCY SERVICES, THE SAME, IN OUR CONSIDERED O PINION, NEEDS TO BE MORE APPROPRIATELY BENCHMARKED ON A COMPARISON WITH ANOT HER SIMILAR TRANSACTION OF SERVICE UNDER THE CUP METHOD RATHER THAN ON PROFIT LEVEL UNDER THE TNMM. WE, THEREFORE, APPROVE THE APPLICA TION OF THE CUP AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE REMAINING AMOUNT OF CONSULTANCY EXPENSES PAID AFTER EXCLUDING THE AMOUNT TO BE CAPITALIZED AS RELATING TO THE SETTING UP OF MANUFA CTURING UNIT IN TERMS OF OUR FOREGOING DISCUSSION. 13. IN THIS REGARD, IT IS OBSERVED THAT THE TPO COMPUTED NIL ALP ON THE GROUND THAT THE ASSESSEE DID NOT SHOW ANY SERVICE H AVING BEEN ACTUALLY RECEIVED BY IT AND, FURTHER, NO INDEPENDENT PARTY W OULD HAVE MADE A SIMILAR PAYMENT IN UNCONTROLLED SIMILAR CIRCUMSTANCES. WHIL E APPLYING THE CUP METHOD, IT WAS OBLIGATORY UPON HIM TO BRING ON RECO RD SOME COMPARABLE UNCONTROLLED INSTANCE(S) AS PER THE MANDATE OF RULE 10B(1)(A)(I). NOT EVEN A SINGLE COMPARABLE INSTANCE HAS BEEN BROUGHT ON RE CORD TO FACILITATE A COMPARISON BETWEEN THE PRICE FOR THE SERVICE VIS--VIS THAT PAID BY OTHER COMPARABLES IN SIMILAR UNCONTROLLED CIRCUMSTANCES. IN THE SAME BREATH, THE ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 13 ASSESSEE HAS ALSO NOT PLACED ON RECORD ANY COMPARAB LE UNCONTROLLED TRANSACTION WHICH COULD ENABLE THE DETERMINATION OF ALP OF THE TRANSACTION. 14. BE THAT AS IT MAY, IT IS NOTICED THAT THE ACTIO N OF THE TPO IN DETERMINING NIL ALP OF THE INTERNATIONAL TRANSACTIO N ON THE GROUND THAT NO BENEFIT ACCRUED TO THE ASSESSEE AND THEN THE AO MAK ING ADDITION SIMPLY ON THE BASIS OF RECOMMENDATION OF THE TPO, IS NOT IN A CCORDANCE WITH THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN CIT V. CUSHMAN & WAKEFIELD (INDIA) (P.) LTD. (2014) 367 ITR 730 (DEL ), IN WHICH IT HAS BEEN HELD THAT THE AUTHORITY OF THE TPO IS LIMITED TO CONDUCTING TRANSFER PRICING ANALYSIS FOR DETERMINING THE ALP OF AN INTE RNATIONAL TRANSACTION AND NOT TO DECIDE IF SUCH SERVICE EXISTS OR BENEFITS DI D ACCRUE TO THE ASSESSEE. SUCH LATER ASPECTS HAVE BEEN HELD TO BE FALLING IN THE EXCLUSIVE DOMAIN OF THE AO. IN THAT CASE, IT WAS OBSERVED THAT THE E-MA ILS CONSIDERED BY TRIBUNAL FROM MR. BRAGANZA AND MR. CHOUDHARY DEALT WITH SPEC IFIC INTERACTION AND RELATED TO BENEFITS OBTAINED BY ASSESSEE, PROVIDING A SUFFICIENT BASIS TO HOLD THAT BENEFIT ACCRUED TO ASSESSEE. AS THE DETAILS O F SPECIFIC ACTIVITIES FOR WHICH COST WAS INCURRED BY BOTH AES (FOR ACTIVITIES OF MR. BRAGANZA AND MR. CHOUDHARY), AND ATTENDANT BENEFITS TO ASSESSEE WERE NOT CONSIDERED, THE ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 14 HON'BLE HIGH COURT REMANDED THE MATTER TO FILE OF C ONCERNED AO FOR AN ALP ASSESSMENT BY TPO, FOLLOWED BY AO'S ASSESSMENT ORDER IN ACCORDANCE WITH LAW CONSIDERING THE DEDUCTIBILITY OR OTHERWISE AS PER SECTION 37(1) OF THE ACT. 15. WHEN WE COME BACK TO THE FACTS OF THE EXTANT CA SE, IT TURNS OUT THAT THE TPO PROPOSED THE TRANSFER PRICING ADJUSTMENT, INTER ALIA , BY HOLDING THAT NO BENEFIT WAS RECEIVED BY THE ASSESSEE AND HE NCE NO PAYMENT ON THIS SCORE WAS WARRANTED. THE TPO FURTHER NOTED ON PAGE 44 OF HIS ORDER THAT : `THE ASSESSEE HAS NOT SUBMITTED THE DETAILS REGARDI NG THE SERVICES AVAILED AND THE CONSEQUENT BENEFITS RECEIVED DESPITE THE FA CT THAT IN THE SHOW CAUSE LETTER, IT WAS TOLD SPECIFICALLY TO IDENTITY EACH O F THE SERVICES ACTUALLY RECEIVED FROM THE AES FOR WHICH THE AMOUNT HAS BEEN PAID. INSTEAD IT HAS GIVEN GENERAL DESCRIPTION FOR THE SO-CALLED SERVICE S AND THEIR BENEFITS WITHOUT LINKING THESE TWO ASPECTS. IT HAS ALSO BE EN REITERATED ON THE SAME PAGE THAT THE ASSESSEE DID NOT FILE ANY SPECIFIC/CO NCRETE DETAILS REGARDING RECEIPT OF SERVICES IN LIEU OF PAYMENT OF CONSULTAN CY FEE TO ITS AE. IN THE CONCLUDING PARA 17 OF HIS ORDER, THE TPO HAS RECORD ED THAT : `THE ASSESSEE HAS NOT BEEN ABLE TO SHOW THAT ANY SERVICES HAVE AC TUALLY RECEIVED BY IT. ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 15 HE FURTHER HELD THAT : `NO INDEPENDENT PARTY WOULD HAVE MADE A SIMILAR PAYMENT IN UNCONTROLLED CIRCUMSTANCES. THE AO IN H IS DRAFT ORDER HAS TAKEN THE ALP OF THE INTERNATIONAL TRANSACTION AT N IL ON THE BASIS OF SUCH RECOMMENDATIONS OF THE TPO WITHOUT CARRYING OUT ANY INDEPENDENT INVESTIGATION FOR THE DEDUCTIBILITY OR OTHERWISE OF SUCH A PAYMENT IN TERMS OF SECTION 37(1) OF THE ACT. THIS ADDITION HAS BEEN MADE BY THE AO IN HIS FINAL ASSESSMENT ORDER GIVING EFFECT TO THE DIRECTI ON GIVEN BY THE DRP AND NOT BY INVOKING SECTION 37(1) OF THE ACT. AS PER TH E RATIO DECIDENDI OF CUSHMAN & WAKEFIELD INDIA (P.) LTD. (SUPRA) , THE TPO WAS REQUIRED TO SIMPLY DETERMINE THE ALP OF THE INTERNATIONAL TRANS ACTION, UNCONCERNED WITH THE FACT, IF ANY BENEFIT ACCRUED TO THE ASSESS EE AND THEREAFTER, IT WAS FOR THE AO TO DECIDE THE DEDUCTIBILITY OF THIS AMOUNT U /S 37(1) OF THE ACT. AS THE TPO IN THE INSTANT CASE DETERMINED NIL ALP BY H OLDING THAT NO BENEFIT ACCRUED TO THE ASSESSEE ETC. AND THE AO MADE THE AD DITION WITHOUT EXAMINING THE APPLICABILITY OF SECTION 37(1) OF THE ACT, WE FIND THE ACTIONS OF THE AO/TPO RUNNING IN CONTRADICTION WITH THE RATIO LAID DOWN IN CUSHMAN & WAKEFIELD (SUPRA) . IN THESE CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND SEND THE MATTER TO THE FILE OF AO/TPO FOR ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 16 DECIDING IT IN CONFORMITY WITH THE ABOVE DISCUSSION AND THE LAW LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN THE AFORENOTED C ASE. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNI TY OF HEARING IN SUCH PROCEEDINGS. THESE TWO GROUNDS ARE, THEREFORE, ALL OWED FOR STATISTICAL PURPOSES. 16. OTHER GROUNDS OF THE APPEAL ARE EITHER CONSEQUE NTIAL OR GENERAL, NOT REQUIRING ANY SPECIFIC ADJUDICATION. ASSESSMENT YEAR 2010-11 17. THIS APPEAL FILED BY THE ASSESSEE ARISES OUT OF THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER ON 29.12.2014 U/S 143(3) READ WITH SECTION 144C OF THE ACT. 18. THE FIRST ISSUE RAISED IN THIS APPEAL IS AGAINS T ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF RS.12,06,57,010/- O N ACCOUNT OF AMP EXPENSES. THE LD. AR DID NOT RAISE ANY OBJECTION T O THE RESTORATION OF THIS ISSUE TO THE TPO/A.O. FOR FRESH ADJUDICATION IN ACC ORDANCE WITH THE ORDERS PASSED BY THE TRIBUNAL FOR EARLIER YEARS. FOLLOWIN G THE VIEW TAKEN HEREINABOVE, WE SET ASIDE THE IMPUGNED ORDER ON ACC OUNT OF AMP EXPENSES ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 17 AND REMIT THE MATTER TO THE FILE OF A.O./TPO FOR DE CIDING IT AFRESH IN CONSONANCE WITH OUR DIRECTIONS GIVEN HEREINABOVE. 19. NEXT ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION OF RS.9,77,68,737/- ON ACCOUNT OF `PAYMENT OF CONSULTA NCY AND TRAINING EXPENSES TREATING THE SAME AS NOT AT ALP. THE ASS ESSEE REPORTED AN INTERNATIONAL TRANSACTION OF RECEIPT OF TRAINING AND CONSULTANCY SERVICES WITH TRANSACTED VALUE OF RS.9,77,68,737/-. THE TP O DETERMINED NIL ALP OF THIS INTERNATIONAL TRANSACTION, WHICH RESULTED I NTO THE RECOMMENDATION OF TRANSFER PRICING ADJUSTMENT OF RS.9.77 CRORE. THE DRP ECHOED THE ACTION OF THE TPO IN DETERMINING NIL ALP. THIS LED TO AN ADD ITION OF RS.9.77 CRORE ON THIS TRANSACTION, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 20. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RE LEVANT MATERIAL ON RECORD. THE TPO HAS NOTICED ON PAGE 65 OF HIS ORDE R: THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT HE HAS ACTUALLY RECEIVE D SERVICES OF SOME VALUE THAT CAN CALL FOR COST ALLOCATION. THEN, AGAIN, HE RECORDED ON PAGE 66 OF HIS ORDER THAT: THE TAXPAYER HAS NOT BEEN ABLE TO SHOW AS TO WHEN AND HOW THE ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 18 VARIOUS SERVICES WERE REQUISITIONED FROM THE AES, W HETHER THE SERVICES WERE ACTUALLY NEEDED BY IT, WHETHER THE SAME WERE A CTUALLY RECEIVED BY IT BY PRODUCING CONTEMPORANEOUS DOCUMENTARY EVIDENCE A T THE TIME OF ENTERING INTO AGREEMENT OR AT THE TIME OF AVAILING THE SERVICE (IF ACTUALLY AVAILED). HE SUMMED UP HIS ANALYSIS IN PARA 5.13 O F HIS ORDER AS UNDER:- 5.13 AS CAN BE SEEN FROM THE REPLY OF THE ASSESSE E AS STATED ABOVE HE WAS UNABLE TO GIVE A CLEAR REPLY ALONG WIT H DOCUMENTARY EVIDENCE ON ANY OF THE FOLLOWING ISSUES: 1. CONTEMPORANEOUS DOCUMENTARY EVIDENCE TO SHOW THAT T HESE SERVICES HAVE ACTUALLY BEEN RECEIVED. 2. NEED FOR THE RECEIPT OF SUCH SERVICES FOR WHICH PAY MENT HAS BEEN MADE 3. DOCUMENTARY EVIDENCE AS TO WHEN AND HOW THESE SERVI CES WERE REQUISITIONED FROM THE AES. 4. BASIS OF DETERMINATION OF RATE OF PAYMENT FOR IGS A T THE TIME OF ENTERING INTO THE AGREEMENT. 5. DETAILS OF COST BENEFIT ANALYSIS VIS A VIS THE EXPE CTED BENEFIT FROM THE IGS AND THE PAYMENT MADE FOR THE SAME. 6. DETAILS OF BENCHMARKING ANALYSIS DONE AT THE TIME O F ENTERING INTO THE AGREEMENT SO AS TO COMPARE THE PAYMENT OF IGS TO THE AE VIS A VIS AN INDEPENDENT PARTY UNDER SIMILAR CIR CUMSTANCES. 7. TANGIBLE AND DIRECT BENEFITS DERIVED BY THE ASSESSE E COMPANY FROM THE USE OF SUCH IGS. 8. DETAILS AND DOCUMENTARY EVIDENCE OF COST INCURRED B Y THE AE FOR RENDERING EACH TYPE OF SERVICES PURPORTEDLY REC EIVED BY THE ASSESSEE COMPANY. 21. THEREAFTER, IT WAS NOTICED THAT: THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE, BASED ON ANY CONTEMPORANEOUS DOCUMENTA RY EVIDENCE THAT IT RECEIVED ANY SERVICES PERFORMED BY THE EXPATRIATES. AS AGAINST THE ABOVE ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 19 FINDINGS RECORDED BY THE TPO, THE ASSESSEE CONTENDE D THAT THE SERVICES WERE, IN FACT, AVAILED FROM EXPATRIATES. 22. IT IS OBSERVED THAT UNLIKE THE PRECEDING YE AR, THE DRP DID NOT DIRECT THE TPO TO EXAMINE THE EXPENSES IN CONNECTION WITH SETTING UP OF THE MANUFACTURING UNIT AND, THEN, CAPITALIZE THE SAME. CERTAIN DETAILS INDICATE SOME EXPENDITURE OF THE CAPITAL NATURE BOOKED UNDER THIS HEAD. SINCE THE ASSESSEE CLAIMED THE ENTIRE AMOUNT AS A REVENUE EXP ENDITURE AND THE AUTHORITIES DID NOT HOLD ANY PART OF THE SAME AS RE LATING TO SETTING UP OF THE MANUFACTURING UNIT AND HENCE CAPITAL, WE CANNOT DIR ECT A PART OF SUCH EXPENDITURE TO BE CAPITALIZED. 23. IN THIS YEAR, AGAIN, THE ASSESSEE AGGREGATE D THE INTERNATIONAL TRANSACTION OF `PAYMENT OF CONSULTANCY FEE AND TRAI NING SERVICES WITH THE `MANUFACTURING SEGMENT AND INDICATED THE SAME AT A LP BY FOLLOWING THE TNMM ON ENTITY LEVEL. THE TPO, LIKE PRECEDING YEAR , FOLLOWED THE CUP METHOD WITHOUT INDICATING ANY COMPARABLE UNCONTROLL ED TRANSACTION AND COMPUTED NIL ALP AND THE ASSESSEE HAS ALSO NOT PLAC ED ON RECORD ANY COMPARABLE UNCONTROLLED TRANSACTION. IT IS THUS SEE N THAT THE MATERIAL FACTS ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 20 AND CIRCUMSTANCES OF THIS GROUND, IN SO FAR AS THEY CONCERN WITH TREATING NIL ALP OF THE NON-CAPITAL CONSULTANCY SERVICES EXPENDI TURE, ARE ESSENTIALLY SIMILAR TO THOSE OF THE PRECEDING YEAR. WE HAVE DEA LT WITH THIS ISSUE IN EARLIER PARAS. WE HAVE DISCUSSED ABOVE THE JUDGMEN T OF THE HON'BLE DELHI HIGH COURT IN CIT V. CUSHMAN & WAKEFIELD (INDIA) (P.) LTD. AND NOTICED HOW THE ORDERS OF THE A.O./TPO ARE NOT IN CON SONANCE WITH THE RATIO LAID DOWN IN THE SAID DECISION AND EVENTUALLY SENT THE MATTER BACK FOR A FRESH DETERMINATION. FOLLOWING THE VIEW TAKEN HEREINABOVE, WE HOLD THAT PAYMENT OF CONSULTANCY FEE IS A SEPARATE INTER NATIONAL TRANSACTION, WHICH IS REQUIRED TO BE BENCHMARKED SEPARATELY UNDE R THE CUP METHOD. THE AO/TPO IS DIRECTED TO FOLLOW THE MANDATE GIVEN BY US HEREINABOVE WHILE DISPOSING OF SIMILAR GROUND FOR THE IMMEDIATE LY PRECEDING YEAR AND DETERMINE AFRESH THE ALP OF THE INTERNATIONAL TRANSACTION OF `PAYMENT OF CONSULTANCY AND TRAINING CHARGES. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH PROCEEDINGS. ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 21 24. THE ONLY OTHER EFFECTIVE ISSUE WHICH SURVIVES IN THIS APPEAL IS AGAINST NOT ALLOWING `CAPACITY ADJUSTMENT IN THE `MA NUFACTURING SEGMENT. THE ASSESSEE CLAIMED `IDLE CAPACITY ADJUSTM ENT IN THE `MANUFACTURING SEGMENT BEFORE THE TPO VIDE ITS SUBMI SSION DATED 10.01.2014. THE OFFICER OBSERVED THAT IN SOME OF TH E COMPARABLES, PRODUCTION WAS DONE ON A SINGLE SHIFT BASIS WHILE IN OTHERS, THE FIGURES WERE GIVEN ON DOUBLE/TRIPLE SHIFT BASIS. IT WAS STILL FURTHER OBSERVED THAT THE ASSESSEE TOOK UP FIGURES OF `LICENSED CAPACITY INSTEAD OF `INSTALLED CAPACITY FOR COMPUTING THE PERCENTAGE OF CAPACITY UTI LIZATION BY THE SIX COMPARABLES UNDER THIS SEGMENT. IN THE ABSENCE OF THE AVAILABILITY OF ANY RELIABLE DATA AND LACK OF UNIFORMITY IN ITS APP LICATION ON ALL THE COMPARABLES, THE TPO REFUSED TO GRANT ANY CAPACITY UTILIZATION ADJUSTMENT. THE DRP DID NOT INTERFERE IN THE DRAFT ORDER ON THI S SCORE. THAT IS HOW, THE ASSESSEES CLAIM FOR GRANT OF CAPACITY UTILIZATION ADJUSTMENT WAS TURNED DOWN, AGAINST WHICH THE ASSESSEE HAS COME UP IN APP EAL BEFORE THE TRIBUNAL. ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 22 25. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE EMPLOYED THE TNMM FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF MANUFACTURING SEGM ENT. MODUS OPERANDI FOR CALCULATION OF THE ALP UNDER THE TNMM HAS BEEN PRESCRIBED IN RULE 10B(1)(C) 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 HAVING REGAR D 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 ; (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 TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFE CT 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 ARMS LENGTH PRICE IN RELATION TO T HE INTERNATIONAL TRANSACTION. ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 23 26. SUB-CLAUSE (I) IN THE PROCESS OF DETERMINATIO N OF THE ALP UNDER THE TNMM TALKS OF THE COMPUTATION OF NET OPERATING PROF IT MARGIN REALIZED BY THE ASSESSEE FROM AN INTERNATIONAL TRANSACTION. SU B-CLAUSE (II) IS THE COMPUTATION OF NET OPERATING PROFIT MARGIN REALIZED BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON. THIS REFERS TO DETERMINING THE OPERATING PROFIT MARGIN OF COMPARAB LES WITH THE SAME BASE AS THAT OF THE ASSESSEE. SUB-CLAUSE (III) PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY A COMPARABLE COMPANY , DETERMINED AS PER SUB-CLAUSE (II) ABOVE, IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, I F ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS, ..... WHICH COULD MATERIALLY AFFECT THE AMOUNT OF N ET PROFIT MARGIN IN THE OPEN MARKET. IT IS THIS ADJUSTED NET PROFIT MARGI N OF THE UNRELATED TRANSACTIONS OR OF THE COMPARABLE COMPANIES, AS DET ERMINED UNDER SUB- CLAUSE (III), WHICH IS USED FOR THE PURPOSES OF MAK ING COMPARISON WITH THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION AS PER SUB-CLAUSE (I). 27. SUB-RULE (2) OF RULE 10B PROVIDES THAT THE COM PARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 24 WITH REFERENCE TO CERTAIN FACTORS WHICH HAVE BEEN E NUMERATED THEREIN. RULE 10B(3) STATES THAT AN UNCONTROLLED TRANSACTION SHAL L BE COMPARABLE TO AN INTERNATIONAL TRANSACTION, IF EITHER THERE ARE NO D IFFERENCES BETWEEN THE TWO OR A REASONABLY ACCURATE ADJUSTMENT CAN BE MADE TO ELIMI NATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. WHEN WE READ SUB-CLAUSES (II) & (III) OF RULE 10B(1)(E) IN JUXTAPOSITION TO SUB-RULES (2) & (3) O F RULE 10B, THE POSITION WHICH EMERGES IS THAT THE NET OPERATING PROFIT MARG IN OF COMPARABLE COMPANIES CALLS FOR ADJUSTMENT IN SUCH A MANNER SO AS TO BRING BOTH THE INTERNATIONAL TRANSACTION AND COMPARABLE CASES AT T HE SAME PEDESTAL. IN OTHER WORDS, IF THERE ARE NO DIFFERENCES IN THESE T WO, THEN THE AVERAGE OF THE NET OPERATING PROFIT MARGIN OF THE COMPARABLE COMPA NIES BECOMES A BENCHMARK. HOWEVER, IN CASE THERE ARE SOME DIFFEREN CES BETWEEN THE COMPARABLES AND THE ASSESSEE, THEN THE EFFECT OF SU CH DIFFERENCES SHOULD BE IRONED OUT BY MAKING SUITABLE ADJUSTMENT TO THE OPE RATING PROFIT MARGIN OF COMPARABLES. THAT IS THE WAY OUT FOR BRINGING BOTH THE TRANSACTIONS, NAMELY, THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, ON THE SAME PLATFORM FOR MAKING A MEA NINGFUL AND EFFECTIVE COMPARISON. ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 25 28. UNDER THE TNMM, THE ALP OF AN INTERNATIONAL TRA NSACTION IS DETERMINED BY COMPUTING AND COMPARING THE PERCENTAG E OF OPERATING PROFIT MARGIN REALIZED BY THE ASSESSEE WITH THAT OF THE CO MPARABLES. WE HAVE NOTICED ABOVE THAT THE DIFFERENCE IN THE CAPACITY U TILIZATIONS IS AN IMPORTANT FACTOR, WHICH NEEDS TO BE ADJUSTED. NO MECHANISM HA S BEEN GIVEN UNDER THE ACT OR THE RULES FOR COMPUTING THE AMOUNT OF CAPACI TY UTILIZATION ADJUSTMENT. 29. ON AN OVERALL UNDERSTANDING, WE FEEL THAT UN DER THE TNMM, THE FIRST STEP IN GRANTING CAPACITY UTILIZATION ADJUSTMENT IS TO ASCERTAIN THE PERCENTAGE OF CAPACITY UTILIZATION VIS--VIS THE INSTALLED CAPACITY BY THE ASSESSEE AND COMPARABLES. THERE CAN BE NO DIFFICULT Y IN WORKING OUT THESE PERCENTAGES. THE SECOND STEP IS TO GIVE EFFECT (POS ITIVE OR NEGATIVE) TO THE DIFFERENCE IN THE PERCENTAGE OF CAPACITY UTILIZATIO NS OF THE ASSESSEE VIS--VIS COMPARABLES, ONE BY ONE, IN THE OPERATING PROFIT OF COMPARABLES BY ADJUSTING THEIR RESPECTIVE OPERATING COSTS. OPERATI NG COSTS CAN BE EITHER FIXED OR VARIABLE OR SEMI-VARIABLE. ONE NEEDS TO SP LIT SEMI-VARIABLE COSTS INTO THE FIXED PART AND VARIABLE PART. IN SO FAR AS THE VARIABLE COSTS AND THE VARIABLE PART OF THE SEMI-VARIABLE COSTS ARE CONCER NED, THESE REMAIN ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 26 UNAFFECTED DUE TO ANY UNDER OR OVER UTILIZATION OF CAPACITY. ACCORDINGLY, SUCH VARIABLE OPERATING COSTS REMAIN UNCHANGED. THE ADJUSTMENT IS CALLED FOR ONLY IN RESPECT OF THE FIXED OPERATING COSTS AN D FIXED PART OF SEMI- VARIABLE COSTS. SUCH COSTS ARE SCALED UP OR DOWN BY CONSIDERING THE PERCENTAGE OF CAPACITY UTILIZATION BY THE ASSESSEE AND SUCH COMPARABLE. IT CAN BE ILLUSTRATED WITH THE HELP OF A SIMPLE EXAMPL E. SUPPOSE THE FIXED COSTS INCURRED BY A COMPARABLE (SAY, A) ARE RS. 10 0 AND IT HAS CAPACITY UTILIZATION OF 50% AS AGAINST THE CAPACITY UTILIZAT ION OF 25% BY THE ASSESSEE. THE ABOVE PERCENTAGES SHOW THAT THE ASSES SEE HAS INCURRED FULL FIXED COSTS WITH 25% OF THE UTILIZATION OF ITS CAPA CITY, AS AGAINST A INCURRING FULL FIXED COSTS WITH 50% OF ITS CAPACITY UTILIZATI ON. THIS DIVULGES THAT THE ASSESSEE HAS INCURRED RELATIVELY MORE FIXED COSTS A ND A HAS INCURRED LOWER COSTS. IN ORDER TO MAKE AN EFFECTIVE COMPARISON, TH ERE ARISES A NEED TO OBLITERATE THE EFFECT OF THIS DIFFERENCE IN CAPACIT Y UTILIZATIONS. IT CAN BE DONE BY PROPORTIONATELY SCALING UP THE FIXED COSTS INCUR RED BY A SO AS TO MAKE IT FULLY COMPARABLE WITH THE ASSESSEE. THIS WE CAN DO BY INCREASING THE FIXED COSTS OF A TO RS. 200 (RS.100 INTO 50/25) AS AGAIN ST THE ACTUALLY INCURRED FIXED COSTS BY IT AT RS.100. WHEN WE COMPUTE OPERAT ING PROFIT OF A BY ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 27 SUBSTITUTING THE FIXED COSTS AT RS.200 WITH THE ACT UALLY INCURRED AT RS.100, IT WOULD MEAN THAT THE FIXED COSTS INCURRED BY THE ASS ESSEE AND A ARE AT THE SAME CAPACITY UTILIZATION. THERE CAN BE CONVERSE SI TUATION AS WELL. SUPPOSE THE FIXED COSTS INCURRED BY A COMPARABLE (SAY, B) ARE RS. 100 AND IT HAS CAPACITY UTILIZATION OF 25% AS AGAINST THE CAPACITY UTILIZATION OF 50% BY THE ASSESSEE. THE ABOVE PERCENTAGES SHOW THAT THE ASSES SEE HAS INCURRED FULL FIXED COSTS AT 50% OF THE UTILIZATION OF ITS CAPACI TY, AS AGAINST B INCURRING FULL FIXED COSTS AT 25% OF THE CAPACITY UTILIZATION . THIS DECIPHERS THAT THE ASSESSEE HAS INCURRED RELATIVELY LOWER FIXED COSTS AND B HAS INCURRED HIGHER COSTS. THIS DIFFERENCE IN CAPACITY UTILIZATIONS CAN BE ELIMINATED BY PROPORTIONATELY SCALING DOWN THE FIXED COSTS INCURR ED BY B SO AS TO MAKE IT FULLY COMPARABLE. THIS WE CAN DO BY REDUCING THE FI XED COSTS OF B TO RS. 50 (RS.100 INTO 25/50) AS AGAINST THE ACTUALLY INCURRE D FIXED COST BY IT AT RS.100. WHEN WE COMPUTE OPERATING PROFIT OF B BY SU BSTITUTING THE FIXED COSTS AT RS.50 WITH THE ACTUALLY INCURRED AT RS.100 , IT WOULD MEAN THAT THE FIXED COSTS INCURRED BY THE ASSESSEE AND B ARE AT T HE SAME CAPACITY UTILIZATION LEVEL. ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 28 30. THE LD. AR HAS BROUGHT TO OUR NOTICE THAT TH E LD. CIT(A) FOR THE ASSESSMENT YEAR 2012-13 HAS ALSO DIRECTED THE AUTHO RITIES BELOW TO GRANT CAPACITY UTILIZATION ADJUSTMENT. A COPY OF SUCH OR DER DATED 31.10.2017 HAS BEEN PLACED ON RECORD. THE ASSESSEE SUBMITTED THAT NO APPEAL HAS BEEN FILED AGAINST THIS ORDER AND THE SAME HAS ATTAINED FINALI TY. THIS CONTENTION WAS NOT CONTROVERTED BY THE LD. DR WITH ANY COGENT MATE RIAL. 31. TURNING TO THE FACTS OF THE INSTANT CASE, W E FIND THAT COMPLETE FINANCIALS OF ALL THE COMPARABLE COMPANIES ARE NOT AVAILABLE ON RECORD. THUS, IT IS NOT POSSIBLE AT OUR END TO WORK OUT THE AMOUNT OF CAPACITY ADJUSTMENT IN THE MANNER DISCUSSED ABOVE. ERGO, WE SET ASIDE THE IMPUGNED ORDER AND DIRECT THE TPO/AO TO WORK OUT TH E AMOUNT OF CAPACITY UTILIZATION ADJUSTMENT AFRESH IN TERMS OF OUR ABOVE OBSERVATIONS. IT IS MADE CLEAR THAT THE CAPACITY ADJUSTMENT WILL BE CONSIDER ED IN THE HANDS OF THE COMPARABLES BY TAKING INTO ACCOUNT `INSTALLED CAPAC ITY VIS--VIS THE ACTUAL PRODUCTION AND NOT THE `LICENSED CAPACITY VIS--VIS THE ACTUAL PRODUCTION. FURTHER, THE PRODUCTION ON DOUBLE SHIFT OR TRIPLE S HIFT BASIS IN CASE OF CERTAIN COMPARABLES ALSO NEEDS TO BE SUITABLY ADJUSTED. NEE DLESS TO SAY, THE ITA NOS.2536 & 2547/D/2014 & ITA NO.1207/DEL/2015 29 ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY O F HEARING IN SUCH FRESH PROCEEDINGS. 32. OTHER GROUNDS ARE EITHER CONSEQUENTIAL OR GENER AL NOT REQUIRING ANY SPECIFIC ADJUDICATION. 33. IN THE RESULT, BOTH THE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 19.03.201 8. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 19 TH MARCH, 2018. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.