EDAG Engineering & Design (India) Pvt. Ltd.(Now Known as EDAG Production Solutions P.Ltd), New Delhi V. DCIT, Circle-11(1), New Delhi

ITA 5053/DEL/2019

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6964 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-10-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Assessment Year: 2005-2006
• Appeal Filed On: 31-05-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUBHAKANT SAHU
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction
• Section: 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1, NEW DELHI BEFORE SH. N. K. BILLAIYA, ACCOUNTANT MEMBER AND SH. KULDIP SINGH, JUDICIAL MEMBER ITA NO.5053/DEL/2019 ASSESSMENT YEAR: 2005-06 EDAG ENGINEERING & DESIGN (INDIA) PVT. LTD. (NOW KNOWN AS EDAG PRODUCTION SOLUTIONS P. LTD.) 125-B, SOMDATT CHAMBER-1, 5- BHIKAJI CAMA PLACE, NEW DELHI PAN NO.AAACE6666K VS DCIT CIRCLE 11 (1) NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY SH. G. C. SRIVASTAVA, ADVOCATE SH. SUVINAY K. DAGH, ADVOCATE SH. PARICHAY SOLANKI, CA SH. MAYANK PATAWARI, CA RESPONDENT BY SH. SUBHA KANT SAHU, SR. DR. DATE OF HEARING: 21/10/2019 DATE OF PRONOUNCEMENT: 22/10/2019 ORDER PER N. K. BILLAIYA, AM: THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST TH E ORDER OF THE CIT(A)-44, NEW DELHI DATED 16.04.2019 PERTAININ G TO A. Y.2005-06. 2 2. THE GRIEVANCE OF THE ASSESSEE READ AS UNDER :- 1. THE ORDER OF THE LD. COMMISSIONER OF INCOME-TAX (AP PEALS) IS CONTRARY TO LAW AND TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT(A) AS WELL AS TPO HAS NOT GONE THROUGH THE SUBMISSION OF APPELLANT COMPANY AND PASSED THE ORDER WITHOUT PROVIDING ANY FURTHER OPPORTUNITY WHICH IS AGAINST THE PRINCIPLE OF NATURAL JUSTICE. 3. THE CIT(A) ERRED IN LAW BY NOT ACCEPTING THE QUANTI TATIVE ADJUSTMENTS MADE BY THE APPELLANT COMPANY ON COMPARABLES AS PER THE OBSERVA TION OF HON'BLE ITAT ON ACCOUNT OF UNDER CAPACITY UTILIZATION OF FIXED COSTS I.E. RENT , SALARY AND DEPRECIATION IN THE SAME RATIO OF TESTED PARTY. 4. THE APPELLANT HAD CLAIMED AN ADJUSTMENT FOR DIFFERE NCES IN CAPACITY UTILIZATION VIS- A-VIS THE COMPARABLE COMPANIES ON THE BASIS OF DATA AVAILABLE IN PUBLIC DOMAIN. THE TPO/CIT(A) SHOULD HAVE VERIFIED DATA/INFORMATION UN DER SECTION 133(6) FROM RESPECTIVE COMPARABLES TO GIVE THE BENEFIT OF UNDER CAPACITY U TILIZATION AS CLAIMED BY THE APPELLANT. 5. THE CIT(A) ERRED WHILE STATING THAT NO DOCUMENTS HA VE BEEN PROVIDED RELATING TO FINANCIAL ASSISTANCE OF RS. 10,288,176 WHEREIN THE SAME HAD BEEN DULY FILED BEFORE TPO DURING ASSESSMENT PROCEEDINGS AND ACCEPTED BY TPO A FTER GOING THROUGH THE DETAILS OF FINANCIAL ASSISTANCE. THE SAME IS AVAILABLE AS PER THE RECORDS OF TAX AUTHORITIES. 6. THE CIT(A) ERRED IN FACTS AND ON THE BASIS OF HER OWN PRESUMPTION THAT APPELLANT COMPANY IS 100% CAPTIVE UNIT WITHOUT PROVIDING AN O PPORTUNITY TO THE APPELLANT COMPANY IN THIS REGARD. 7. THE CIT(A) ERRED IN HOLDING THAT THE APPELLANT IS 1 00% CAPTIVE UNIT WITHOUT APPRECIATING THAT THE APPELLANT IS DEVELOPING/HAVING SIGNIFICANT DEALING WITH THIRD PARTIES BOTH IN INDIA AND IN OVERSEAS MARKET. 8. THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJ UDICE TO EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, SUPPLEMEN T, AMEND, VARY, WITHDRAW OR OTHERWISE MODIFY THE GROUND MENTIONED HEREIN ABOVE AT OR BEFO RE THE TIME OF HEARING. 3. THIS BEING THE SECOND ROUND OF LITIGATION, THE C OUNSEL FOR THE ASSESSEE EXPLAINED THE FACTS CONSIDERED IN THE FIRS T ROUND BY THE 3 AO/TPO. THE COUNSEL FURTHER EXPLAINED HOW THE MATT ER TRAVELLED UP TO THE TRIBUNAL AND REFERRED THE DECISION OF THE TRIBUNAL. 4. IT IS THE SAY OF THE COUNSEL THAT THE CIT(A) DID NOT APPRECIATE THE DIRECTIONS OF THE TRIBUNAL IN TRUE SPIRIT AND C ONFIRMED THE ADJUSTMENTS MADE BY THE AO/ TPO. THE COUNSEL REFER RED TO THE SUBMISSIONS AND THE DETAILS FURNISHED BEFORE THE CI T(A) AND POINTED OUT THAT THE DETAILED SUBMISSION SUPPORTED BY EVIDENCES WERE NOT CONSIDERED BY THE CIT(A). 5. PER CONTRA THE DR STRONGLY SUPPORTED THE FINDING S OF THE CIT(A), THOUGH, FAIRLY CONCEDED THAT THE CIT(A) HAS NOT CONSIDERED THE SUBMISSIONS MADE BY THE ASSESSEE AT THE APPELLA TE STAGE. 6. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELOW. THE APPELLANT COMPANY IS EN GAGED IN PROVIDING SOFTWARE ADDED DESIGN AND ENGINEERING SER VICES. AS MENTIONED ELSEWHERE IN THE FIRST ROUND OF LITIGATIO N THE MATTER TRAVELLED UP TO THE TRIBUNAL WHEREIN THE QUARREL WA S IN RESPECT OF THE ADDITION OF RS.1,65,87,730/- ON ACCOUNT OF ARMS LENGTH PRICE ADJUSTMENT. THE BONE OF CONTENTION WAS THE EFFECT NOT GIVEN TO THE CAPACITY UNDER UTILIZATION BY THE TPO. THE CIT (A) GRANTED THE IMPUGNED RELIEF BY MAKING ADJUSTMENTS ON ACCOUNT OF CAPACITY UNDER UTILIZATION. REVENUE AGITATED THE MATTER BEF ORE THE TRIBUNAL AND THE TRIBUNAL IN ITA NO.549/DEL/2011 HE LD AS UNDER :- 4 5. WE FIND THAT LEARNED CIT(A) HAS GRANTED THE IMPU GNED RELIEF BY MAKING ADJUSTMENTS, ON ACCOUNT OF CAPACITY UNDERUTILIZATION, IN THE RES ULTS SHOWN BY THE TESTED PARTY AND THUS COMPUTING HYPOTHETICAL FINANCIAL RESULTS WHICH THE TESTED PARTY WOULD HAVE ACHIEVED IN PERFECT CONDITIONS. SUCH AN EXERCISE, IN OUR, HUMBLE UNDERS TANDING OF LAW, IS IMPERMISSIBLE. AS AS IS THE UNDISPUTED LEGAL POSITION, SUCH COMPARABILITY A DJUSTMENTS CAN ONLY BE MADE IN THE COMPARABLES AND NOT THE TESTED PARTY ITSELF. IT IS SPECIFICALLY PROVIDED IN RULE 10B (L)(E)(III) THAT ADJUSTMENTS FOR VARIATIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET IN COMPARABLE UNCONTROLLED TRANSACTIONS , ARE TO BE MADE IN RESPECT OF NET PROFITS REALIZED BY THE COMPARABLE TRANSACTIONS OR ENTERPRI SES. LEARNED C1T(A) WAS THUS CLEARLY IN ERROR IN PROCEEDING TO MAKE CAPACITY UNDERUTILIZATI ON ADJUSTMENTS IN THE PROFITS EARNED BY THE ASSESSEE. THAT APART, IN THE CASE OF A ONE HUNDRED PERCENT CAPTIVE SERVICE UNIT, AS IS THE ASSESSEE BEFORE US, THE VERY CONCEPT OF CAPACITY UN DERUTILIZATION MAY NOT REALLY MAKE ANY SENSE UNLESS THE ASSESSEE HAS NOT BEEN ABLE TO OFFE R, FOR REASONS BEYOND ITS CONTROL, THE UNDERUTILIZATION CAPACITY TO ITS AE. THERE IS NO FIN DING ON' THIS ASPECT OF THE MATTER. AS THE ASSESSEE DOES NOT HAVE THE LIBERTY TO WORK FOR ANY OTHER CUSTOMER, AND IS WHOLLY DEPENDENT ON ITS AE FOR PRODUCTIVE USE OF ITS CAPACITY TO WORK , THE AE SHOULD NORMALLY MAKE GOOD ANY LOSSES TO THE CAPTIVE UNIT CAUSED BY ITS NOT BEING ABLE TO MAKE USE OF THE AVAILABLE CAPACITY. IN THE CASE BEFORE THIS, THE AE HAS INDEED GIVEN SOME F INANCIAL SUPPORT TO THE ASSESSEE WHICH HAS BEEN REDUCED FROM THE ALP ADJUSTMENT FIGURE, AND THE BUSINESS RATIONALE OF AES EXTENDING FINANCIAL SUPPORT TO THE ASSESSEE IS THUS NOT IN DOUBT. HOWEVER, THERE IS NOTHING ON RECORD TO SHOW HOW THIS FINANCIAL SUPPORT HAS BEEN COMPUTED AND IS ON WHAT GROUND, AND ON WHAT BASIS, THIS FINANCIAL SUPPORT IS GIVEN. THE RE ASON FOR UNDERUTILIZED CAPACITY AND THE FACTS REGARDING FINANCIAL SUPPORT EXTENDED TO THE ASSESSE E ARE NOT CLEAR FROM THE MATERIAL ON RECORD. LEARNED CIT(A) HAS GRANTED THE IMPUGNED RELIEF MERE LY BY MAKING CAPACITY UNDERUTILIZATION ADJUSTMENTS TO THE PROFITS ACHIEVED BY THE TESTED P ARTY, BUT THEN SUCH AN APPROACH, AS WE HAVE NOTED EARLIER, IS WHOLLY UNSUSTAINABLE IN LAW. 6. IN VIEW OF THE ABOVE DISCUSSIONS, AS ALSO BEARING I N MIND ENTIRETY OF THE CASE, WE DEEM IT FIT AND PROPER TO VACATE THE IMPUGNED ORDER AND DIR ECT THE C1T(A) TO DECIDE THE MATTER AFRESH AFTER GIVING AN OPPORTUNITY OF HEARING TO THE ASSES SEE, IN ACCORDANCE WITH THE LAW AND BY WAY OF A SPEAKING ORDER. WE ORDER SO. 7. DURING THE FRESH APPELLATE PROCEEDINGS BEFORE TH E CIT(A) THE ASSESSEE VIDE REPLY DATED 14.06.2018 MADE THE FOLLO WING SUBMISSIONS : 5 SUBMISSION OF THE APPELLANT DATED 14.06.2018: 5. THE APPELLANT MADE THE FOLLOWING SUBMISSIONS DATED 14.06. 2018 DURING THE COURSE OF APPELLATE PROCEEDINGS:- THIS IS REFERENCE TO THE NOTICE ISSUED BY YOUR GOO DSELF VIDE F. NO. CIT(A)-44/NOTICE/2018- 19/128 DATED 15/05/2018 WHEREIN HEAR ING DATE IS FI XED ON 08/06/2018 AND RE-FIXED FOR TODAY. IN THIS REGARD, WE ON THE BEHALF OF OUR CLIE NT SUBMIT AS BELOW:- EDAG ENGINEERING & DESIGN INDIA PRIVATE LIMITED (HE REIN AFTER REFERRED AS APPELLANT') IS A COMPANY INCORPORATED UNDER INDIAN COMPANIES ACT, 19 56 ENGAGED IN PROVIDING SOFTWARE- AIDED SERVICES FOR ENGINEERING AND DESIGN OF AUTOMO BILE AND AUTOMOBILE COMPONENTS. THE APPELLANT PROVIDES THESE SERVICES ON PROJECT BASIS TO ITS AE IN GERMANY. DURING THE YEAR UNDER CONSIDERATION, THE TRANSFER PRICING OFFICER ( TPO) /ASSESSING OFFICER (AO) HAS MADE ADDITION ' 16,587,730/- WITHOUT GIVING ADJUSTMENT O F CAPACITY UTILIZATION TO THE APPELLANT COMPANY. COPY OF TRANSFER PRICING ORDER IS ENCLOSED HEREWITH (REFER ANNEXURE-I). THEREAFTER, AGGRIEVED APPELLANT COMPANY FILED AN APPEAL TO CIT( A)-XX AND THE LEARNED C1T(A)-XX HAS DELETED THE TRANSFER PRICING ADDITION MADE BY TPO/A Q AFTER ALLOWING ADJUSTMENT OF CAPACITY UTILIZATION. COPY OF ORDER PASSED BY CIT(A)-XX IS E NCLOSED HEREWITH (REFER ANNEXURE-II). IN RESPONSE OF AFORESAID CIT(A) ORDER, TAX DEPARTMENT FLED AN APPEAL TO HONBLE ITAT AND HONBLE ITAT AFTER ALLOWING THE APPEAL FOR STATISTI CAL PURPOSES DIRECTED THE CIT(A) TO DECIDE THE MATTER AFRESH AFTER GIVING AN OPPORTUNITY OF HE ARING TO APPELLANT IN ACCORDANCE WITH THE LAW AND BY WAY OF SPEAKING ORDER. COPY OF IT A T OR DER IS ENCLOSED HEREWITH (REFER ANNEXURE- IIL). YOUR GOODSELF WILL APPRECIATE THAT THE APPELLANT CO MPANY HAS UNDER-UTILIZATION CAPACITY DURING THE YEAR UNDER CONSIDERATION AND THE LEARNED CIT(A) HAS GIVEN THE RELIEF OF UNDER CAPACITY UTILIZATION TO THE PROFITS ACHIEVED BY TESTED PARTY. THE COMPARABLE COMPANIES NORMALLY WORKING UNDER OPTIMUM CAPACITY A ND PUBLICALLY DATA IS NOT AVAILABLE REGARDING CAPACITY UTILIZATION DURING THE YEAR. THE ISSUE OF ADJUSTMENT ON ACCOUNT OF IDLE CAPACITY HINGES ON THE CONCEPT OF T HE LEVERAGE THAT FIXED COST OFFERS TO THE PROFITABILITY RATIO OF BUSINESS. THE VARIABLE O VERHEADS 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 OVERH EADS, ON THE OTHER HAND, DO NOT VARY WITH THE VOLUME OF SALES AND SINCE THEY REMAIN BY A ND LARGE STATIC IRRESPECTIVE OF LEVEL OF CAPACITY UTILIZATION, THE PROFIT MARGIN GETS AFF ECTED AS A RESULT OF DIFFERENCE IN CAPACITY UTILIZATION ON THIS COUNT. THE UNDERUTILIZ ATION OF CAPACITY RESULTS IN OVER ALLOCATION OR OVER ABSORPTION OF FIXED OVERHEADS RE SULTING INTO UNDER-RECOVERY OF FIXED OVERHEADS WHICH ADVERSELY AFFECTS THE PROFIT MARGIN . AS THE LEVEL OF CAPACITY UTILIZATION GOES UP, THE RATE OF ALLOCATION OR ABSORPTION OF FI XED OVERHEADS TO SALES COMES DOWN RESULTING INTO HIGHER PROFIT MARGIN. THE DIFFERENCE IN CAPACITY UTILIZATION THUS MATERIALLY AFFECTS THE PROFIT MARGIN AND IF THERE IS A DIFFERE NCE IN THE LEVEL OF CAPACITY UTILIZATION OF THE ASSESSEE AND THE LEVEL OF CAPACITY UTILIZATION OF THE COMPARABLE COMPANIES, ADJUSTMENT IS REQUIRED TO BE MADE TO THE PROFIT MAR GIN OF THE COMPARABLES ON ACCOUNT OF DIFFERENCE IN CAPACITY UTILIZATION AS PER CLAUSE (E )(III) OF SUB-RULE (I) OF RULE 10-D OF THE INCOME TAX RULES, 1962. THEREFORE, IT WAS SUBMITTED THAT THE APPELLANT FINA NCIAL RESULTS WERE HIT BY THE SAID FACTORS, THE COMPARABLE CASES SELECTED WERE UNITS W HICH WERE ALREADY ESTABLISHED IN MARKET WHO DID NOT HAVE SUCH FACTORS. THEREFORE, IN ORDER TO FACILITATE APPROPRIATE COMPARABILITY ANALYSIS, ASSESSEE CONTENDED BEFORE Y OUR GOODSELF THAT ADJUSTMENTS BE MADE TO THE PROFIT MARGIN OF THE APPELLANT ON ACCOU NT OF ABNORMAL COSTS AND UNDER CAPACITY UTILIZATION DURING THE YEAR. 6 CAPACITY UTILIZATION ADJUSTMENT IN COMPARABLES COMP ANIES AS PER RULE 10B(L)(E)(III) OF THE RULES 'THE APPELLANT COMPANY HEREBY SUBMIT THE COMPARABLE COMPANY'S FINANCIALS WHEREIN SALARY COST, RENT AND DEPRECIATION HAS BEEN CONSIDE RED ACCORDING TO TESTED PARTY SALES RATIO (REFER ANNEXURE-IV). THE ADJUSTED OP/OC OF 6 COMPARABLE COMES TO -26:93% & THE DIFFERENCE COMES TO 5,590,062/- AS PER AFORESAID CALCULATION SHEET. FUR THER, ARM'S LENGTH ADDITION WILL BE NIL AFTER CONSIDERING THE R ECEIVED SUPPORT SERVICES ' 10,288,176/- AS MENTIONED IN TP ORDER. CONSIDERING THE AFORESAID, APPELLANT COMPANY REQUES T BEFORE YOUR GOODSELF TO GRANT THE APPROPRIATE RELIEF SINCE THE SAME IS AT ARMS L ENGTH PRICE. RULE 10B(2) AND 10B(3) OF THE IT RULES ALLOW ADJUST MENTS WITH REGARDS TO ELIMINATE THE MATERIAL DIFFERENCES AT THE TIME OF COMPARABILI TY OF TRANSACTIONS. RULE 10B(2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH RE FERENCE TO THE FOLLOWING, NAMELY: (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TR ANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTIO N; THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTI ONS; (B) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS A RE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITL Y HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; (C) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SI ZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESAL E OR RETAIL. RULE 10B(3) (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANS ACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIK ELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSA CTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELI MINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. FROM PERUSAL OF THE ABOVE RULES, IT IS CLEAR THAT T HE SUITABLE ADJUSTMENT SHOULD BE MADE TO ENSURE THAT THERE IS A CLOSER COMPARABILITY BETWEEN THE UN CONTROLLED AND CONTROLLED TRANSACTION. IF THESE ADJUSTMENTS ARE NOT MADE OR ARE NOT POSSIBLE THAN I N THAT CASE COMPARABLES CANNOT BE USED AS APPROPRIATE COMPARABLES. THE HON 'BLE IT A T IN THIS CASE OF MENTOR GRAPHIC S CASE ON THE ISSUE OF ADJUSTMENT HAS HELD THAT; QUOTE 'IF THERE ARE DIFFERENCES WHICH CAN BE ADJUSTED, TH EN ADJUSTMENTS ARE REQUIRED TO BE MADE. ' UNQUOTE THE HON 'BLE BENCH HAS FURTHER NOTED THAT QUOTE 7 THE TRANSACTIONAL NET MARGIN METHOD MAY AFFORD A P RACTICAL SOLUTION TO OTHERWISE INSOLUBLE TRANSFER PRICING PROBLEMS IF IT IS USED SENSIBLY AN D WITH APPROPRIATE ADJUSTMENT TO ACCOUNT FOR DIFFERENCE OF THE TYPE REFERRED TO ABOVE.' UNQUOTE AS PER THE RULING, THE ITAT HAS HELD THAT ADJUSTMEN T, IF REQUIRED, MAY BE MADE WHILE APPLICATION OF TNMM TO ENSURE RELIABLE RESULTS. ON THE ISSUE OF ADJUSTMENT SUPPORT IS ALSO DRAWN FR OM PARA 1.16 OF OECD GUIDELINES, WHICH STATES AS UNDER; OECD GUIDELINES, PARA 1.16 ' ADJUSTMENT MUST BE MADE TO ACCOUNT FOR DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED SITUATIONS THAT WOULD SIGNIFICANTL Y AFFECT THE PRICE CHARGED OR RETURNED REQUIRED BY INDEPENDENT ENTERPRISES. THEREFORE, IN NO EVENT CAN UNADJUSTED AVERAGE RETURNS THEMSELVES ESTABLISH ARM'S LENGTH CONDITIONS. ' FROM THE ABOVE DISCUSSION, IT IS VERY CLEAR THAT IF THE TPO FOUNDS THAT BOTH CONTROLLED AND UNCONTROLLED TRANSACTIONS OPERATE IN DIFFERENT ENVI RONMENT AND CIRCUMSTANCES ETC. THEN IN ORDER TO MAKE THE COMPARABILITY ANALYSIS MORE RELIABLE, FRUI TFUL AND AUTHENTIC, THE TPO MUST CARRY OUT THE APPROPRIATE ADJUSTMENTS. 8. THE ABOVE SUBMISSIONS DID NOT FIND ANY FAVOUR WI TH CIT(A) WHO DECIDED THE APPEAL HOLDING AS UNDER :- 8. I HAVE CONSIDERED THE FACTS IN THE CIRCUMSTANCES OF THE CASE. I HAVE ALSO PERUSED THE ORDER OF THE AO AS WELL AS THE SUBMISSION OF THE APPELLAN T AND THE JUDGMENTS OF THE TRIBUNALS AND THE COURTS RELIED UPON BY THE APPELLANT. THE HONBLE IT AT, DELHI HAD REMANDED THE ISSUE REGARDING ECONOMIC ADJUSTMENT ON ACCOUNT OF UNDERUTILIZATION OF CAPACITY IN THE PROFIT MARGINS OF THE APPELLANT/ COMPARABLES TO THE FILE OF THE CIT(A). THE TPO WAS ASKED TO FILE HIS COMMENTS WHICH WAS SUBSEQUENTLY SENT TO THE APPELLANT FOR ITS REPL Y. 9. THE HONBLE ITAT, DELHI IN ITS ORDER HAD REMANDE D THE ISSUE REGARDING ADJUSTMENT ON ACCOUNT OF UNDER-UTILIZATION OF CAPACITY IN THE PRO FIT MARGINS OF THE APPELLANT / COMPARABLES FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE. THE TPO IN HIS LETTER DATED 21.06.2018 HAS CLEARLY STATED THAT RULE 10B(L)(E)(III) SPECIFICALLY PROVID ES THAT ADJUSTMENTS FOR VARIATIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN I N THE OPEN MARKET IN COMPARABLE UNCONTROLLED TRANSACTIONS, ARE TO BE MADE IN RESPECT OF NET PROF ITS REALIZED BY COMPARABLE TRANSACTIONS / ENTERPRISES. THE TPO, HAS FURTHER POINTED OUT THAT THE APPELLANT IS A 100% CAPTIVE SERVICE UNIT AND 8 THE APPELLANT HAS NOT SUBMITTED ANY REASONS FOR THE UN-UTILIZED CAPACITY. IF HAS ALSO BEEN POINTED OUT THAT THE APPELLANT DOES NOT HAVE THE LIBERTY TO WORK WITH ANY OTHER CUSTOMER AND WAS WHOLLY DEPENDENT ON ITS AE FOR THE PRODUCTIVE USE OF ITS C APACITY. IN FACT, THE AE HAD GIVEN SOME FINANCIAL SUPPORT TO THE APPELLANT WHICH WAS REDUCED FROM TRA NSFER PRICING ADJUSTMENT MADE BY THE TPO IN HIS IMPUGNED ORDER. 10. THE HONBLE ITAT, DELHI AT PARA 5 OF ITS IMPUGN ED ORDER HAS CLEARLY STATED THAT RULE 10B(L)(E)(III) SPECIFICALLY PROVIDES THAT COMPARABI LITY ADJUSTMENTS CAN BE MADE ONLY IN THE PROFIT MARGINS OF THE COMPARABLES AND NOT IN THAT OF THE T ESTED PARTY. THE HONBLE TRIBUNAL HAD ALSO NOTED THAT THE APPELLANT WAS WHOLLY DEPENDENT ON IT S AE FOR CAPACITY UTILIZATION AND DID NOT HAVE THE LIBERTY TO WORK FOR ANY OTHER CUSTOMER AND HENC E, IT WAS UP TO THE AE TO MAKE GOOD ANY LOSS. IT HAD ALSO NOTED THAT THE AE HAVE GIVEN SOME FINANCIA L SUPPORT TO THE APPELLANT WHICH HAD BEEN REDUCED FROM THE FIGURE FOR TRANSFER PRICING ADJUST MENT. HOWEVER, IT ALSO NOTED THAT THE APPELLANT HAD NOT PROVIDED ANY DOCUMENT TO SHOW HOW THE FINAN CIAL SUPPORT HAVE BEEN COMPUTED AND ON WHAT GROUND / BASIS THE SAME HAD BEEN GIVEN TO THE APPELLANT, IT WAS ALSO NOTED THAT THE ORDER OF 29.11.2010 HAD GRANTED CAPACITY UNDERUTILIZATION AD JUSTMENT IN THE MARGINS OF PARTY WHICH WAS UNSUSTAINABLE IN LAW. 11. IN VIEW OF THE CATEGORICAL FINDINGS OF THE HON BLE ITAT, DELHI IN THE CASE OF THE APPELLANT ITSELF FOR THE YEAR UNDER REFERENCE, IT IS HELD THA T NO ADJUSTMENT ON ACCOUNT OF UNDER- UTILIZED CAPACITY CAN BE MADE IN THE PROFIT MARGINS OF THE A PPELLANT, WHO IS THE TESTED PARTY IN THE INSTANT CASE, IN VIEW OF THE PROVISIONS OF RULE 10B (L)(E)(III) OF THE INCOME TAX RULES, 1962. IT, IS ALSO NOTED THAT THE APPELLANT HAS NOT SUBMITTED ANY REASONS SUPPORTED BY EVIDENCE / DOCUMENTATION REGARDING THE REASON FOR HAVING UNUTI LIZED CAPACITY WHEN IT WAS A 100% CAPTIVE SERVICE PROVIDER TO ITS AE. IN FACT, IT IS NOTED TH AT THE AE HAS COMPENSATED THE APPELLANT ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT, DETAILS OF CALCULATION OF WHICH HAVE NOT BEEN SUBMITTED BY THE APPELLANT EITHER DURING THE COURSE OF ASSESS MENT PROCEEDINGS, APPELLATE PROCEEDINGS OR REMAND BACK PROCEEDINGS. IN VIEW OF THE SAME, THE C ONTENTION OF THE APPELLANT IS LIABLE TO BE DISMISSED. THE ISSUE REFERRED BY THE HONBLE ITAT, DELHI IN THE CASE OF THE APPELLANT FOR AY 2005- 06 VIDE ITS ORDER IN ITA NO. 549/DEL/2011 DATED 13.10.2 014FOR AY 2005-06 IS ACCORDINGLY DECIDED AGAINST THE APPELLANT. 9. WE ARE OF THE CONSIDERED VIEW THAT THE CIT(A) OU GHT TO HAVE CONSIDERED THE ADJUSTMENTS MADE TOWARDS UNDER UTILI ZATION OF CAPACITY IN THE CASE OF THE COMPARABLES FURNISHED B Y THE ASSESSEE IN SUPPORT OF ITS CLAIM. WE FIND THAT THE ASSESSEE HAS FURNISHED 9 DETAILED WORKING IN RESPECT OF THE COMPARABLES - SO FTWARE EXPORTS, ATHENA GLOBAL TECHNOLOGIES, ECHO RECYCLING LIMITED, NEW TIME INFRASTRUCTURE LTD., TELESYS SOFTWARE LTD. AND TERA SOFTWARE LTD. WHICH ARE EXHIBITED AT PAGES 29 TO 33 OF THE PAPER BOOK RESPECTIVELY. 10. WE ARE LEFT WITH NO CHOICE BUT TO RESTORE THIS ISSUE TO THE FILES OF THE TPO. THE TPO IS DIRECTED TO VERIFY TH E WORKING OF UNDER UTILIZATION OF CAPACITY OF THE SIX COMPARABLE S AS FURNISHED BY THE ASSESSEE. IF THE TPO IS OF THE VIEW THAT FI NANCIALS OF THESE SIX COMPARABLES ARE NOT AVAILABLE ON THE PUBLIC DOM AIN THEN HE SHOULD CALL THE RELATED INFORMATIONS FROM THE COMPA RABLE COMPANIES DIRECTLY EXERCISING POWERS VESTED UPON HI M U/S.133 (6) OF THE ACT. 11. WITH THESE DIRECTIONS WE RESTORE THE ISSUE TO T HE FILES OF THE TPO. THE TPO SHALL EXAMINE AND DECIDE THE ISSUE AF TER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. 12. IN SO FAR AS THE BENEFIT OF THE ADJUSTMENT IN R ESPECT OF WAVER OF AMOUNTS PAYABLE TO THE PARENT COMPANY OF THE ASS ESSEE AMOUNTING TO RS.1,02,88,176/- IS CONCERNED, THIS BE NEFIT HAS ALREADY BEEN ALLOWED BY THE TPO IN HIS ORDER DATED 27.10.2008 FRAMED U/S. 92CA(3) OF THE ACT AND THIS ADJUSTMENT HAS ATTAINED FINALITY, THEREFORE, NO SEPARATE ADJUDICATION IS RE QUIRED. 10 13. IN THE RESULT, THE APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 22.10.2019. SD/- SD/- [KULDIP SINGH] [N.K. BIL LAIYA] JUDICIAL MEMBER A CCOUNTANT MEMBER DATED: 22 OCTOBER , 2019 *NEHA* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CITI 4. CIT(A) 5. DR ASST. REGISTRAR ITAT, NEW DELHI DATE OF DICTATION 21.10.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 22.10.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER 22.10.2019 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS 22.10.2019 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 22.10.2019 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS 22.10.2019 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 22.10.2019 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 22.1 0.2019 DATE ON WHICH FILE GOES TO THE HEAD CLERK. THE DATE ON WHICH FILE GOES TO THE ASSISTANT REGIST RAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER