M/s SKF Technologies India Pvt Ltd , Bangalore V. The Commissioner of Income Tax (Appeal)-IV, Bangalore

ITTPA 341/BANG/2014

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 4298 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 15-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 22-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: KETAN K VED
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Set aside
• Section: 12; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ES B , BANGALORE BEFORE SHRI N.V.VASUDEVAN, VP & SHRI B.R.BASKARAN, AM IT (TP) A NO. 341 / BANG /201 4 : ASST.YEAR 2004 - 2005 M/S.SKF TECHNOLOGIES INDIA PRIVATE LIMITED (FORMERLY KNOWN AS SKF SEALING SOLUTIONS PRIVATE LIMITED SEALING SOLUTION BUSINESS UNIT, PLOT NO.36, PART - 37, 38, 39, KIADB NEW LAYOUT NANJANGUD ROAD, KADAKOLA VILLAGE, MYSORE - 571 311. PAN : AAACC4393D. VS. THE DY.COMMISSIONER OF INCOME - TAX, CIRCLE 12(3) BANGALORE. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI KETAN K.VED, CA RESPONDENT BY : SHRI R.N.SID DAPP AJI, ADDL.CIT DATE OF HEARING : 1 3 .02.2019 DATE OF PRONOUNCEMENT : 15 .02.2019 O R D E R PER B.R.BASKARAN, AM : THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 19.03.2014 PASSED BY LEARNED CIT(A) - IV, BANGALORE, AND IT RELATES TO THE ASSESSMENT YEAR 2004 - 2005 . THE ASSESSEE IS AGGRIEVED BY THE DECISION OF THE LEARNED CIT(A) IN CONFIRMING THE ADDITION OF RS.72. 73 LAKHS RELATING TO TRANSFER PRICING ADJUSTMENT MADE IN RESPECT OF FINISHED GOODS EXPORTED TO THE ASSOCIATED ENTERPRISES (AE) OF THE ASSESSEE. 2. THE ASSESSEE HEREIN IS A SUBSIDIARY OF SKF INC. US, WHICH IS A LEADING GLOBAL SUPPLIER FOR PRODUCTS, SALES AND IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 2 SERVICES FOR ROLLING BEARING AND SEALS BUSINESS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS AE IN THE FORM OF IMPORT O F RAW MATERIALS, FINISHED GOODS & CAPITAL GOODS; RECEIPT OF SERVICES; REIMB URSEMENT OF EXPENSES AND EXPORT OF FINISHED GOODS. THE DISPUTE HEREIN IS WITH REGARD TO THE ALP ADJUSTMENT MADE IN RESPECT OF EXPORT OF FINISHED GOODS (REFERRED AS MANUFACTURING SEGMENT ) . THE ASSESSEE HAD ADOPTED TNMM METHOD AS MOST APPROPRIATE METHOD AN D OPERATING PROFIT MARGIN TO SALES RATIO AS PLI. 3. THE OP/SALES IN THE MANUFACTURE SEGMENT BEFORE DEPRECIATION WAS COMPUTED AT ( - ) 12.70% . THE COMPANY HAD SELECTED FOUR COMPARABLES, WHOSE AVERAGE PLI WAS COMPUTED AT 9.23%. HOWEVER, IN THE TP STUDY, T HE ASSESSEE RE - COMPUTED THE AVERAGE MARGIN OF COMPARABLE BY EXCLUDING DEPRECIATION AND OVERHEADS . SIMILARLY IT ALSO RE - COMPUTED ITS OWN MARGIN IN THE SAME WAY . THE LD A.R EXPLAINED THE RATIONALE BEHIND THE ABOVE SAID CLAIM OF THE ASSESSEE. IT WAS S UBMI TTED THAT THE CAPACITY UTILIZATION OF THE ASSESSEE WAS LOWER DURING THE YEAR UNDER CONSIDERATION. IRRESPECTIVE OF THE CAPACITY UTILIZATION, IT HAD TO INCUR OVERHEADS AND PROVIDE FOR DEPRECIATION AN D BOTH THESE EXPENSES HAVE REDUCED ITS PROFIT MARGIN. IT WAS SUBMITTED THAT THE COMPARABLE COMPANIES HAD HIGHER CAPACITY UTILIZATION. ACCORDINGLY IT WAS SUBMITTED THAT THE DEPRECIATION AND OVERHEADS WERE EXCLUDED, SO THAT A MEANINGFUL COMPARISON COULD BE MADE. THE RE - COMPUTED PLI OF COMPARABLE S WORKED OUT TO 24% AND ITS OWN PLI WORKED OUT 25% . ACCORDINGLY, THE ASSESSEE CLAIMED THAT THE IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 3 INTERNATIONAL TRANSACTIONS IN MANUFACTURING SEGMENT ARE AT ARM S LENGTH. THE TPO , HOWEVER, DID NOT AGREE WITH THE CONTENTIONS OF THE ASSESSEE. HOWEVER, THE TPO AGREED TO EX CLUDE DEPRECIATION AND ACCORDINGLY COMPUTED PLI OF COMPARABLES AT 14.75%. BY APPLYING THE SAME, THE TPO MADE AN ADJUSTMENT OF RS.72.73 LAKHS. THE SAME WAS CONFIRMED BY THE LEARNED CIT(A). 4. THE LEARNED COUNSEL APPEARING FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS SOUGHT FOR EXCLUSION OF DEPRECIATION AND FIXED COST SINCE THE CAPACITY UTILIZATION OF THE COMPANY WAS ONLY 42%. HE SUBMITTED THAT THE ASSESSEE HAD TO INCUR OVERHEAD EXPENSES AND PROVIDE FOR DEPRECIATION IRRESPECTIVE OF THE LEVEL OF CAPACITY ACTUALLY UTILIZ ED . HE SUBMITTED THAT THE HIGHER THE CAPACITY UTILIZATION, PER UNIT COST ALLOCABLE OUT OF OVERHEADS AND DEPRECIATION WOULD BE LOWER AND VICE VERSA. HE SUBMITTED THAT T HE COMPA RABLE COMPANIES HAVE ACHIEVED CAPACITY UTILIZATION OF 70%. HE SUBMITTED THAT T HE PROFIT MARGIN OF THE COMPANY WOULD BE BADLY AFFECTED IF THE CAPACITY OF THE ASSESSEE IS UNDER UTILISED . ACCORDING LY, THE LD A.R SUBMITTED THAT THE DEPRECIATION AND OVERHEAD S SHOULD BE EXCLUDED IN THE CASE OF COMPARABLE COMPANIE S , SO THAT THE EFFECT OF DIFFERENCE IN CAPACITY UTILISATION IS IRONED OUT , WHICH WILL LEAD TO A MEANINGFUL COMPARISON. 5. THE LD A.R SUBMITTED THAT ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN LEVEL OF CAPACITY UTILIZATION IS ONE OF THE RECOGNIZED ADJUSTMENTS. IN SUPPORT OF THE SAME, T HE LEARNED IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 4 AR PLACED HIS RELIANCE ON THE DECISION RENDERED BY THE HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. PETRO ARALDITE (P . ) LTD. [(2018) 93 TAXMANN.COM 438 (BOM.)] , WHEREIN IT WAS HELD THAT WHEN THERE IS A DIFFERENCE IN THE LEVEL OF CAPACITY UTILIZATION OF THE ASSESSEE AND THE LEVEL OF CAPACITY UTILIZATION OF COMPARABLE, THEN ADJUSTMENT WOULD BE REQUIRED TO BE MADE TO PROFIT MARGIN OF COMPARABLE ON ACCOUNT OF DIFFERENCE IN CAPACITY UTILIZATION IN TERMS OF RULE 10B(1)(E)(III). THE LEARNED AR ALSO PLACED RELIANCE ON THE DECISION RENDERED BY THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V. CLAAS INDIA (P.) LTD. [(2015) 62 TAXMANN.COM 173 (DELHI - TRIB.)] , WHE REIN ALSO IT WAS HELD THAT ADJUSTMENT FOR THE DIFFERENCE IN CAPACITY UTILIZATIO N IS REQUIRED TO BE MADE TO IRON OUT THE DIFFERENCE. THE LEARNED AR SUBMITTED THAT THE DELHI BENCH OF THE TRIBUNAL , IN THE ABOVE SAID CASE , HAS ALSO HELD THAT THE CAPACITY ADJUS TMENT SHOULD BE MADE IN THE HANDS OF COMPARABLE COMPANIE S AND HAS ALSO EXPLAINED AS TO HOW THE CAPACITY UTILIZATION ADJUSTMENT IS REQUIRED TO BE MADE. ACCORDINGLY, THE LEARNED AR PRAYED THAT THE ADJUSTMENT TOWARDS DIFFERENCE IN CAPACITY UTILIZATION BE ALLO WED. 6 . THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE CONTRARY, SUPPORTED THE ORDER PASSED BY THE LEARNED CIT(A). 7 . WE HEARD THE PARTIES AND PERUSED THE RECORD. WE NOTICED THAT THE HON BLE BOMBAY HIGH COURT IN THE CASE OF PETRO ARALDITE (P.) LTD. (S UPRA) A ND THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF CLAAS INDIA (P.) LTD. (SUPRA) HAVE HELD THAT THE ADJUSTMENT TOWARDS DIFFERENCE IN CAPACITY UTILIZATION IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 5 IS REQUIRED TO BE MADE IN TERMS OF RULE 10B(1)(E)(III) OF THE INCOME - TAX RULES. IN THE INSTANT C ASE, IT IS THE SUBMISSION OF THE ASSESSEE THAT THE AVERAGE CAPACITY UTILIZATION ACHIEVED BY IT DURING THE YEAR UNDER CONSIDERATION WAS 42%, W HILE THE CAPACITY UTILIZATION ACHIEVED BY COMPARABLES DURING THE SAME PERIOD WAS 70%. THE LEARNED AR WAS SPECIFICAL LY ASKED TO PROVIDE THE DATA AS TO HOW THE CAPACITY UTILIZATION ACHIEVED BY THE COMPARABLES WAS COMPUTED AT 70%. THE LEARNED AR SUBMITTED THAT HE DOES NOT POSSESS THE DETAILS AS OF NOW AND FURTHER SUBMITTED THAT THE ASSESSEE WOULD BE IN A POSITION TO FURNI SH THE SAID DETAILS TO THE AO / TPO, IF THE MATTER IS REMANDED TO THEIR FILES. 8 . WE NOTICED THAT THE DELHI BENCH OF THE TRIBUNAL HAS MADE A DETAILED DISCUSSION ON THE ADJUSTMENT TO BE MADE ON ACCOUNT OF DIFFERENCE IN THE LEVEL OF CAPACITY UTILIZATION IN THE CASE OF CLAAS INDIA (P.) LTD. (SUPRA) . FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE RELEVANT DISCUSSIONS MADE BY THE DELHI BENCH OF THE TRIBUNAL: - 6 . T H E S E CON D SE G M E N T O F G R OUN D N O . 1 O F T H E R E V E NUE S A P P E A L I S A G A I N S T T H E A LL OW I N G O F C A PAC ITY A D J U ST M EN T IN R E S PE C T O F C E RT A IN IT E M S O F E X P E N S E S , WH I C H WA S D E N I E D B Y T H E T P O . 7 . T H E F A C T S AP R OPO S T H IS I S S U E A R E T H A T T H E A S S E S S E E C L A I M E D TO H A V E W O R K E D A T A C AP A C ITY O F 29 % DU RI N G T H E Y EA R IN QU E S TI O N . IT WA S F U RT H E R C L A I M E D T H A T T H E T H R E E C O M P A R AB L E S C H O S E N B Y IT WO R KE D A T T H E A V E R A G E C APA C ITY U TILI Z A TI O N O F 4 4 % . T H A T IS HOW , T H E A S S E SS E E C L A I M E D C AP A C ITY U TILI Z A TI O N AD J U S T M E N T B Y R E D U C I N G ITS O P E R A TI N G CO S T S A C C O R D I N G L Y . IN S UPP O R T O F DEDUC TI O N , T H E IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 6 A SS E S S E E F IL E D A R EPO RT O F M R . C H A N D RA W A D H V A , A C O S T A C COUN T AN T. A S P E R T H IS R E PO RT, T H E C A P AC ITY U TILI Z A TI O N O F T H E A S S E SSE E A S W E LL A S T H E C O M P A R A B L E S WA S I N ITI A L L Y R A I S E D TO 1 0 0 % . T H E TPO P A R TLY A CC E P T E D T H E C L A I M O F T H E A SS E S S E E . H E CON S I D E R E D V S T TR A C T O R S A N D TILL E R S AN D P U N J A B TR AC T O RS LT D . ( S E G . ) F O R T H E PU R PO SE S O F A LL O W I N G C A PA C ITY AD J U ST M EN T W ITH A N A VE R AG E C A PA C I T Y U T ILI ZA TI O N T A KE N A T 5 4 % . T H E R E A FT E R , H E R ES TR I C T E D T H E R E D U C TI O N IN OP E R A TI N G C O S TS O F T H E A S S E S S E E DU E TO C AP A C ITY U TILI Z A TI ON , TO S O M E A D M I N I S TR A TI V E C O S T S AN D OTHER EXPENSES. AS AGAINST THE ASSESSEE S ACTUAL DEDUCTION OF RS. 6 , 65 , 7 9 , 91 6 F O R S UC H SE L EC TI V E IT E M S O F A D M I N I S T R A TI V E AN D O T H E R E X P E N S E S , T H E T P O AD J U S T E D S U C H C O S T S TO RS. 6 , 3 0 , 30 , 7 3 9 B Y A P P L Y I N G T H E F A C T O R O F 2 9 / 5 4 ( 2 9 % , BE I NG , T H E A S S E S S E E S C AP A C I TY U TILI ZA TI O N AN D 54% , B E I NG , T H E AVE R AG E C A PA C I T Y U TILI Z A TI O N O F C O M P A R AB L E S C H O S E N B Y H I M ) . S I M IL A R L Y , H E R EDUC E D T H E A M O UN T O F D EP R E C I A TI O N C L A I M E D B Y T H E A S S E S S E E A T R S. 1 , 1 9 , 60 , 92 1 TO R S. 64 , 23 , 4 5 8 B Y A P P L Y I N G T H E S A M E F A C T O R O F 2 9 / 54 . A F T E R A LL OW I N G T H IS C AP A C ITY U TILI Z A TI O N AD J U S T M EN T, H E DE T E R M I NE D O P /T C O F T H E A S S E SSE E A T A L O S S O F ( - ) 7 . 7 8 % . T O T A L C O S T O F T H E A SS E S SE E W A S T A K E N A T RS. 3 6 . 8 8 C R O R E . B Y APP L Y I N G T H E A RIT H M E T IC M E A N O F T H E P R O F I T R A TE O F C O M PA R AB LE C O M P A N I E S C H O S E N B Y H I M A T 11 . 92 % , H E P R O PO SE D A TR A N S F E R P RI C I N G A D J U S T M E N T O F RS. 7 , 2 6 , 60 , 1 03 / - , F O R W H I C H A DD ITI O N W A S M A D E B Y T H E A O . T H E L D . C I T( A ) A CC EP T E D T H E A S S E S S EE S C O N T E N TI O N A BOU T N O T M A K I N G A N Y TP A D J U S T M EN T IN R E L A TI O N TO NO N - A E T R A N SA C TI O N S . T H E R E VENU E IS NO T AGG RI E V E D TO T H A T E X T E N T. A S R E GA R D S A D J U S T M E N T F O R C APA C I T Y U TIL I ZA TI O N , T H E L D . C IT( A ) , B Y C O N S I D E RI N G T H E CO M P AN I E S FI N A LLY H E LD B Y H I M A S C O M PA R A B L E , A PP LI E D THE FACTOR OF 29/46 FOR REDUCING THE OPERATING COSTS ACTUALLY INCURRED BY T H E A S S E SS EE . A P A RT FR O M T H E A D J U S T M E N TS A LL O W E D B Y T H E TPO O N A D M I N I S T R A TI O N EXPEN S E S AN D D EP R E C I A TI O N , T H E L D . C I T( A ) A L S O R EDU C E D A D V E RTI S E M EN T & M A R KE TI N G E X P E N S ES , E M P L OY E E C O S T ( B Y T AK I N G EN TIRE E M P L O Y E E C O S T, O T HE R T H A N BO N U S , A T RS. 3 5 5157 0 9 A S F I X E D ). T H E R EV E N U E IS AGG RI E V E D IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 7 A GA I N S T T H E A LL OW I N G O F C APA C ITY U TILI Z A T I O N A D J U S T M E N T TO T H IS E X T E N T B Y T H E L D . C IT( A ) . 8 . W E HAV E H E A RD T H E RI VA L S U B M ISS I ON S A N D PE R U S E D T H E R E L E VAN T M A T E RI A L O N R E C O R D . B E F O RE E M B A R K I N G UPO N T H E Q U ES TI O N O F A LL O W AB ILITY A N D E X T EN T O F C AP A C ITY A D J U S T M E N T U ND E R T H E T N M M, W E WA N T TO M A K E IT C L E A R T H A T T H E A S S E S S E E R E D U CE D ITS O P E R A TI N G C O S TS B Y CON S I D E RI N G I T S C APA C ITY U TILI ZA TI O N V I S - - V I S T HA T O F C O M P A R AB L E S AN D R E S U LT AN TLY C L A I M E D T HA T ITS I N C R E A S E D P R O F IT A S A R E S U LT O F S UC H R EDUC E D OPE R A TI N G C O S TS B E C O M P A R E D W ITH T H A T O F T H E C O M PA R AB L E S . T H E T P O H A S A L S O A G R E E D IN P RI NC I P LE W ITH T H E O T HE R W I S E A V A IL AB I L ITY O F T H E C AP A C I TY A D J U S T M E N T. T H E I S S U E O F A LL OW I N G C A PA C ITY A D J U ST M E N T B E F O RE U S C A N B E D I V I DE D I N T O T W O S UB - I S S U E S F O R CO N S I DE R A TI ON , V I Z. , FI R S T , W H E T HE R T H E AD J U ST M E N T S H OU LD B E A LL O W E D IN T H E H A N D S O F T H E A S S E SS E E A S HA S BE E N D O N E B Y T H E A U T HO RITI E S BE L O W O R C O M PA R AB L E S AN D S E C O N D , HO W TO C O M PU TE C A PA C ITY U TILI Z A TI O N A D J U ST M E N T U N D E R T H E T N M M. W E W ILL D EA L W ITH T H E S E AS P E C TS O N E B Y ONE . I. CA P AC ITY A D J U S T ME NT S H O ULD BE A LL OWE D IN W H O S E H A NDS ? 9 . 1 . IT H A S B E E N NO TI C E D A B O V E T HA T T H E ASS E S S E E C L A I M E D I D LE C AP A C ITY A D J U ST M E N T B Y R E DU C I N G ITS O W N OPE R A TI N G C O S T S . IT I S F U R T HE R OB S E R VE D T HA T T H E AU T HO RITI E S B E L O W H A V E R E D U C E D T H E A M O U N T O F A D J U S T M EN T B Y E X C L U D I N G C E RT A IN CO S TS FR O M T H E A M B IT O F T H E C O S TS QUA LIF Y I N G F O R A D J U ST M E N T. HO W E V E R, T H E A D J U S T M E N T HA S BE E N U LT I M A T E LY A LL OW E D FR O M T H E OP E R A TI N G C O S T S I N C U RR E D B Y T H E A SS E S SE E . IN S UC H C I R C U M S T AN C E S , T H E QUE S TI O N A RI S E S A S T O WH E T H E R T H E A C TI O N O F T H E AU T H O R ITI E S IN A LL OW I N G T H E R E D U C TI O N O F T H E OPE R A TI N G C O S T S I NCU RR E D B Y T H E A S S E S S EE , I S IN A C C O R D A NC E W ITH L A W ? IN O R D E R TO F I N D A N SW E R TO T H IS Q U ES TI ON , W E N E E D TO R E F E R TO T H E M A NN E R O F C O M P U T A T I O N O F T H E A R M S L E N G TH P RI C E U N D E R T N M M, WH I C H HA S BE E N S E T OU T IN R U LE 10 B ( 1 ) ( E ) A S U N D E R: - IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 8 ( E ) T R A N SA C TI ON A L N E T M A R G IN M E T HO D , B Y W H I CH , (I) T H E N E T P R O F IT M A R G IN R EA LI S E D B Y T H E E N T E R P R I S E F R O M A N I N T E R N A TI ONA L TR A N S A C TI O N E N T E R E D I N TO W ITH A N AS S O C I A T E D E N T E R P R I S E I S C O M P U T E D IN R E L A TI O N T O C O S T S I NCU R R E D O R SA L E S E F F E C T E D O R A S S E T S E M P L O Y E D O R T O B E E M P L OY E D B Y T H E E N T E R P R I S E O R H A V I N G R E GA R D TO AN Y O T H E R R E L EV A N T B A S E ; (II) T H E NE T P R O FIT M A R G IN R E A L IS E D B Y T H E EN T E R P RI S E O R B Y A N UN R E L A T E D EN T E R P R I S E FR O M A C O M PA R A B LE U N C O N T R O LL E D TR A N S A C TI O N O R A N U M B E R O F S UC H T R A N S AC TI ON S I S C O M P U T E D HAV I N G R EG A RD T O T H E S A M E B A S E ; (III) T H E N E T P R O F IT M A R G IN R E F E R R E D T O I N S UB - C L A U S E (I I ) A R I S I N G IN C O M P A R A B LE U N C O N T R O LL E D T R A N S A C TI ON S I S AD J U S T E D TO T A K E I N TO A CC O U N T T H E D I FF E R EN C E S , I F A N Y , B E T W E E N T H E I N T E R N A TI O N A L T R A N SA C TI O N A N D T H E C O M P A R A B LE U N C ON T R O LL E D TR A N S A C TI ON S , O R B E T W E E N T H E EN T E R P RI S E S E N T E RI N G I N TO S U C H TR A N S A C TI ON S , W H I C H C O U LD M A T E RI A L L Y A FF E C T T H E A M OUN T O F N E T P R O F IT M A R G IN IN T H E O P E N M A R KE T ; (I V ) T H E NE T P R O F IT M A R G IN R E A LI S E D B Y T H E E N T E R P R I S E AN D R E F E R R E D TO IN S UB - C L A U S E (I) I S E S T A B L I S HE D TO B E T H E S A M E A S T H E NE T P R O F IT M A R G IN R E F E RR E D TO IN S U B - C L A U S E (III) ; ( V ) T H E N E T P R O F IT M A R G IN T HU S E S T A B L I S HE D IS T H E N T AKE N I N TO AC COUN T TO A RRI V E A T A N A R M S L E N G TH P RI C E IN R E L A TI O N TO T H E I N T E R N A TI O N A L TR A N S A C TI O N . 9 . 2 . S U B - C L A U S E (I) IN T H E P R O C E S S O F D E T E R M I N A TI O N O F T H E A L P U N D E R T H E T N M M T A L K S O F T H E C O M P U T A T I O N O F NE T OPE R A TI N G P R O F IT M A R G IN R E A LI Z E D B Y T H E A S S E SSE E FR O M A N I N T E R N A TI O N A L TR A N S AC T I ON . S UB - C L AU S E (II) I S T H E C O M PU T A TI O N O F NE T OPE R A TI N G P R O F IT M A R G I N R E A LI Z E D B Y A N UN R E L A T E D EN T E R P R IS E F R O M A C O M PA R A B LE UNCON TR O LL E D T R AN SAC T I ON . T H IS R E F E R S TO DE T E R M I N I N G T H E OPE R A TI N G P R O F IT M A R G IN O F C O M PA R AB L E S W ITH T H E S A M E BA S E A S IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 9 T HA T O F T H E A S S E SS EE . S UB - C L A U S E (III) P R O V I D E S T HA T T H E NE T P R O F I T M A R G IN R E A LI Z E D B Y A C OMPA R AB LE C OMPA N Y , DE T E R M I NE D A S PE R S UB - C L A U S E (II) ABO V E , I S AD J U S T E D TO T A K E I N TO AC C O U N T T H E D IFF ERE NCE S , IF ANY , BE T W E E N T H E I N T E R NA TI ON A L T R A N S A C TI O N AN D T H E C O M PA R A B LE UNCON T R O LL E D T R A N S A C TI O N S , . . . . . W H I C H C O U LD M A T ER I A LLY A FF E C T T H E A M O UN T O F NE T P R O FIT M A R G IN IN T H E OP E N M A R K E T . I T I S T H IS AD J U S T E D N E T P R O F IT M A R G IN O F T H E UN R E L A T E D TR A N S A C TI O N S O R O F T H E C O M P A R A B LE C O M PAN I E S , A S DE T E R M I NE D U ND E R S U B - C L A U S E (III), W H I C H IS U S E D F O R T H E P U R PO SE S O F M A K I N G C O M P A R I S O N W ITH T H E NE T P R O F I T M A R G IN R E A LI ZE D B Y T H E A S S E S S E E FR O M I T S I N T E R N A TI ON A L TR A N S A C TI O N A S P E R S UB - C L A U S E ( I ). 9 . 3 . S UB - R U LE ( 2 ) O F R U LE 10 B P R OV I D E S T HA T T H E C O M P A R AB ILITY O F A N I N T E R N A TI O N A L TR A N S A C TI O N W ITH A N UN C ON TR O LL E D TR A N S A C T I O N S HA LL B E J UDGE D W ITH R E F E R E NC E TO C E RT A IN F A C T O R S W H I C H HAV E BE E N E NU M E R A T E D T H E R E I N . R U LE 1 0 B ( 3 ) S T A T E S T H A T A N UNCON TR O LL E D TR A N S A C TI O N S H A L L B E C O M P A R A B LE TO A N I N T E R N A TI ONA L TR A N S AC TI ON , I F E IT H E R T HE RE A RE N O D I FF E R E NCE S BE T W E E N T H E T W O O R A RE A S ON A B LY AC C U R A TE A D J U S T M EN T C A N B E M A D E TO E LI M I N A TE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. WHEN WE READ SUB - CLAUSES (II) & (III) O F R U LE 10 B ( 1 ) ( E ) IN J UX T APO S ITI O N TO S UB - R U L E S ( 2 ) & ( 3 ) O F R U LE 10 B , T H E P O S ITI O N W H I C H E M E R GE S IS T H A T T H E NE T OPE R A T I N G P R O F IT M A R G IN O F C O M PA R AB LE C O M P A N I E S C A L L S F O R A D J U S T M E N T IN S UC H A M A N N E R S O A S TO B RI N G BO TH T H E I N T E R NA TI ON A L TR A N SA C TI O N AN D C O M P A R AB LE C A S E S A T T H E S A M E P E D E S T A L. I N O T H E R W O R D S , I F T HE RE A RE N O D I FF E R E N C E S IN T HE S E T WO , T HE N T H E A VE R A G E O F T H E NE T O P E R A T I N G P R O F IT M A R G IN O F T H E C O M PA R A B LE C O M PAN I E S BE C O M E S A B E NC H M A R K . H O WE V E R, IN C A S E T H E RE A RE S O M E D IFF E R EN C E S BE T W E E N T H E C O M P A R AB L E S A N D T H E A S S E S SE E , T H E N T H E E FF E C T O F S U C H D I F F E R ENCE S S HO U LD B E IR ONE D O U T B Y M A K I N G S U IT AB LE A D J U S T M EN T TO T H E OPE R A TI N G P R O F IT M A R G IN O F C O M P A R A B L E S . T HA T I S T H E W A Y F O R B RI N G I N G BO TH T H E TR A N S A C T I O N S , N A M E L Y , T H E I N T E R N A T I ON A L TR A N S A C TI O N A N D T H E C O M P A R AB LE U N C ON T R O LL E D TR A N S A C TI O N S , O N T H E S A M E P L A T F O R M F O R IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 10 M A K I N G A M EAN I NG F U L AN D E FF E C TI V E C O M PA R I S ON . T H E A B OV E ANA L Y S I S O V E RT L Y TR A N S P I R E S T HA T T H E L A W P R O V I D E S F O R A D J U S TI N G T H E P R O F IT M A R G IN O F C O M P A R AB L E S O N A C COUN T O F T H E M A T E RI A L D I FF E R ENCE S B E T W E E N T H E I N T E R N A TI O N A L TR AN S A C TI O N O F T H E A S S E SSE E A N D C O M P A R AB LE UNCON TR O LL E D TRANSACTIONS. IT IS NOT THE OTHER WAY AROUND TO ADJUST THE PROFIT MARGIN OF T H E A S S E SSE E . IN O T HE R W O R D S , T H E N E T O P E R A TI N G P R O F IT M A R G IN R EA L I ZE D B Y T H E A S S E SSE E F R O M I TS I N T E R NA TI ONA L T R A N SA C TI O N IS TO B E C O M P U T E D A S S UCH , W IT H OU T AD J U S TI N G IT O N A C C O U N T O F D I FF E R E N C E S W ITH T H E C O M PA R A B LE UNCON TR O LL E D TR A N S A C TI O N S . T H E A D J U ST M E N T, I F A N Y , I S R E QU IR E D TO B E M A D E ON LY IN T H E P R O F IT M A R G I N S O F T H E C O M P A R AB L E S . 9 . 4 . RE VE R TI N G TO T H E F A C TS O F T H E I N S T A N T C A SE , W E F I N D T H A T T H E A U T HO RITI E S B E L O W H A V E AD J U S T E D T H E OPE R A TI N G C O S TS O F T H E A S S E S S E E IN A LL O W I N G T H E C AP A C ITY A D J U S T M E N T. A S AG A I N S T T HA T, T H E CO RR E C T COU R S E O F A C TI O N P R OV I DE D UNDE R T H E L A W I S T O A D J U S T T H E OPE R A TI N G C O S T S O F T H E C O M P A R AB LE AN D T H E IR R E S U LT A N T O P E R A T I N G P R O F IT. T H E RE I S H A R D L Y N E E D TO A C C EN T UA TE T H A T T H E RE C A N B E N O E S T O P P E L A G A I N S T T H E L AW . O NC E T H E L A W E N J O I N S F O R DO I N G A PA R TI CU L A R T H I N G IN A P A RTI CU L A R M AN N E R A L ONE , IT I S NO T OPE N TO AN Y O N E T O ADOP T A C O N TR A R Y O R D I F F E R E N T A PP R OA C H . A S T H E A U T HO RITI E S B E L O W H A V E A D OP T E D A COU R S E O F A C TI O N IN A LL OW I N G A D J U ST M E N T, W H I C H IS NO T IN CON S ONA N C E W ITH L A W , W E CAN N O T A P P R O V E T H E S A M E . T H E I M P U GN E D O R D E R IS SE T A S I D E A N D T H E M A TT E R IS R E S T O R E D TO T H E FILE OF THE TPO/AO FOR GIVING EFFECT TO THE AMOUNT OF IDLE CAPACITY A D J U ST M E N T IN T H E O P E R A TI N G P R O F IT O F T H E C O M PA R AB L E S AN D NO T T H E A S S E S S EE . II. HO W TO C O M P U T E CA P AC ITY UT I LI ZA TI O N A DJ U S T M E N T U ND E R T N MM : - 10 . 1 . UNDE R T H E T N M M , T H E A L P O F A N I N T E R N A TI O N A L T R A N SAC T I O N I S DE T E R M I NE D B Y C O M P U TI N G AN D C O M P A RI N G T H E PE R C E N T A G E O F O P E R A TI N G P R O F IT M A R G IN R EA L I Z E D B Y T H E A SS E S S E E W ITH T H A T O F T H E C O M PA R AB L E S . WE HAV E NO T I CE D IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 11 AB OV E T H A T T H E D I F F E R E N C E IN T H E C A PA C ITY U TILI Z A TI O N S IS A N I M PO RT A N T F A C T O R , WH I C H N EE D S TO B E AD J U S T E D . N O M E C H A N I S M HA S B E E N G I VE N UNDE R T H E A C T O R T H E R U L E S F O R C O M PU TI N G T H E A MOUN T O F C AP A C I T Y U TILI Z A TI O N A D J U S T M EN T. 10 . 2 . O N A N OV E R A LL UN D E R S T A ND I N G , W E F EE L T H A T UN D E R T H E T N MM, T H E F IR S T S T E P IN G R A N TI N G C A PA C ITY U TILI ZA TI O N AD J U S T M EN T I S TO A S C E RT A IN T H E PE R C E N T A G E O F CAP A C ITY U TIL I Z A TI O N B Y T H E A S S E SS E E A N D C O M PA R AB L E S . T HE R E C A N B E N O D I FFI C U LTY IN W O R K I N G OU T T H ES E PE R CE N T A GE S . T H E SEC O N D S T E P IS TO G I V E E FF E C T ( PO S ITI V E O R NEG A TI VE ) TO T H E D IFF E R EN C E IN T H E PE R C E N T A G E O F C APAC ITY U TILI ZA TI O N S O F T H E A S S E S S E E V I S - - V IS C O M PA R AB L E S , ONE BY ONE, IN THE OPERATING PROFIT OF COMPARABLES BY ADJUSTING THEIR R ES P E C TI V E O P E R A T I N G C O S T S . OPE R A T I N G C O S TS CA N B E E IT H E R F I X E D O R VA R I A B LE O R S E M I - V A RI AB L E . ON E N E E D S TO S P LIT S E M I - VA RI A B LE C O S TS I N TO T H E F I XE D PA R T A N D V A RI AB LE P A RT. IN S O F A R A S T H E V A RI A B LE CO S T S AN D T H E VA R I A B LE P A RT O F T H E S E M I - V A RI AB LE CO S T S A RE CONC E R N E D , T HE S E R E M A IN UNA FF EC T E D D U E TO A N Y U NDE R O R OV E R U T ILI ZA T I O N O F C A PA C I T Y . A C C O R D I N G L Y , S U C H V A RI A B LE O P E R A TI N G C O S T S R E M A IN UNCH A N G E D . T H E A D J U S T M E N T I S C A LL E D F O R ON LY IN R E S P E C T O F T H E F I XE D OPE R A TI N G C O S TS A N D F I XE D P A RT O F S E M I - V A RI A B LE C O S T S . S UC H C O S T S A RE S C A L E D U P O R D O W N B Y C O N S I D E RI N G T H E PE R C E N T A G E O F C A P A C ITY U TILI ZA TI O N B Y T H E A S S E SSE E A N D S U C H C O M P A R A B L E . IT C A N B E ILL U S T R A T E D W ITH T H E HE LP O F A S I M P LE EX A M P L E . S UPPO S E T H E F I XE D C O S T S I NCU R R E D B Y A C O M P A R A B LE ( S A Y , A ) A RE R S . 1 0 0 A N D IT H A S C AP A C ITY U TILI Z A TI O N O F 5 0 % A S AG A I N S T T H E C A PA C ITY U TILI Z A TI O N O F 25 % B Y T H E A S S E S S EE . T H E A B O V E P E R C EN T A G E S S H O W T HA T T H E A SS E S SE E H A S I N C U RR E D F U LL F I XE D C O S T S W ITH 2 5 % O F T H E U TILI ZA TI O N O F ITS C A P A C IT Y , A S AG A I N S T A I NCU RRI N G F U LL FI XE D C O S T S W ITH 5 0 % O F I T S C A PA C I T Y U TILI Z A TI ON . T H IS D I V U L G E S T HA T T H E A SS E S SE E H A S I N C U R R E D R E L A TI V E L Y M O RE FI XE D C O S T S A N D A HAS INCURRED LOWER COSTS. IN ORDER TO MAKE AN EFFECTIVE COMPARISON, THERE A R I S E S A N EE D TO OB LIT E R A TE T H E E F F E C T O F T H IS D I F F E R E N C E IN C AP A C ITY U TILI Z A TI O N S . I T C A N B E D ON E B Y P R OP O R TI O N A T E LY S C A LI N G U P T H E F I X E D C O S T S I NCU RR E D B Y A IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 12 S O A S TO M A K E IT F U LLY C O M PA R AB LE W ITH T H E A S S E S S EE . T H I S W E CA N D O B Y I N C R E A S I N G T H E F I X E D CO S T S O F A TO R S . 20 0 ( R S . 1 0 0 I N TO 50 / 2 5 ) A S A G A I N S T T H E AC T U A LLY I N C U RR E D F I X E D CO S T S B Y IT A T R S. 100 . W HE N W E C O M PU TE O P E R A TI N G P R O F IT O F A B Y S UB S TIT U TI N G T H E F I X E D CO S T S A T R S . 2 0 0 W ITH T H E A C T U A LLY I N C U RR E D A T R S . 1 00 , IT WOU LD M EA N T HA T T H E FI X E D C O S T S I NCU R R E D B Y T H E A SS E S SE E AN D A A RE A T T H E S A M E CAPA C ITY U TILI ZA TI O N . T HE R E C A N B E C O N V E R S E S IT UA TI O N A S W E LL. S U PPO S E T H E F I XE D C O S TS I NCU R R E D B Y A C O M P A R A B LE ( S A Y , B ) A RE R S . 10 0 A N D IT H A S CA P AC ITY U TILI Z A T I O N O F 25 % A S AG A I N S T T H E CA P AC ITY U TIL I Z A T I O N O F 5 0 % B Y T H E A S S E S S E E . T H E A B OV E P E R C EN T A G E S S H O W T HA T T H E A S S E SSE E HA S I NCU R R E D F U LL F I XE D C O S T S A T 50 % O F T H E U TILI ZA TI O N O F I T S C A P AC I T Y , A S AG A I N S T B I N CU R R I N G F U LL F I XE D C O S T S A T 2 5 % O F T H E C A PA C ITY U TILI Z A T I O N . T H IS D EC I P H E RS T H A T T H E ASS E S S E E HA S I N C U RR E D R E L A T I VE LY L OW E R FI XE D C O S T S A N D B HA S I NC U R R E D H I G H E R C O S T S . T H IS D I F F E R E NC E IN C AP A C ITY U TIL I Z A TI ON S C A N B E E L I M I N A T E D B Y PROPORTIONATELY SCALING DOWN THE FIXED COSTS INCURRED BY B SO AS TO MAKE IT F U LLY C O M P A R A B L E . T H I S W E CA N D O B Y R E DUC I N G T H E F I X E D CO S TS O F B TO R S . 5 0 ( R S . 10 0 I N T O 2 5 / 5 0 ) A S A G A I N S T T H E AC T U A LLY I N C U RR E D F I X E D CO S T B Y IT A T R S. 100 . W HE N W E C O M PU TE O P E R A TI N G P R O F IT O F B B Y S UB S TIT U TI N G T H E F I XE D C O S TS A T RS. 5 0 W ITH T H E AC T U A LLY I N C U RR E D A T RS. 1 0 0 , IT W O U LD M E A N T HA T T H E F I X E D C O S TS I NCU R R E D B Y T H E A SS E S S E E A N D B A RE A T T H E S A M E C APA C ITY U TILI ZA TI O N L E V E L. 8. IN VIEW OF THE DECISION RENDERED BY THE HON BLE BOMBAY HIGH COURT AND THE DELHI BENCH OF TRIBUNAL, WE FIND MERIT IN THE PRAYER OF THE ASSESSEE FOR THE ADJUSTMENT TOWARDS THE DIFFERENCE IN THE LEVEL OF CAPACITY UTILIZATION . SINCE THIS ISSUE HAS NOT BEEN EXA MINED BY THE TAX AUTHORITIES AND SINCE THE ASSESSEE HAS TO FURNISH NECESSARY DETAILS IN ORDER TO SUPPORT ITS CLAIM, WHICH IN TURN REQUIRES EXAMINATION AT THE END OF AO , WE DEEM IT PROPER TO RESTORE IT TO THE FILE OF THE AO / TPO IT (TP) A NO. 341 / BANG /201 4 . M/S. SKF TECHNOLOGIES INDIA PVT. LTD . 13 FOR EXAMINING THE CLAIM OF THE ASSESSEE. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY THE LEARNED CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO / TPO FOR EXAMINING THE CLAIM OF THE ASSESSEE, IN ACCORDANCE WITH LAW, BY DULY CONSIDERING THE DECISIONS RENDERED BY THE HIGH COURT / TRIBUNAL ON CAPACITY UTILIZATION ADJUSTMENT. AFTER AFFORDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE, THE A.O. MAY TAKE APPROPRIATE DECISION IN ACCORDANCE WITH LAW. 9 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED ON THIS 15 TH DAY OF FEBRUARY, 2019 . SD/ - SD/ - (N.V.VASUDEVAN) ( B.R.BASKARAN ) VICE - PRESIDENT ACCOUNTANT MEMBER BANGALORE ; DATED : 15 TH FEBRUARY, 2019 . DEVDAS* COPY OF THE ORDER FORWARDED TO : TRUE COPY BY ORDER, (ASSTT. REGISTRAR) ITAT, BANGALORE 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT (A) - IV, BANGALORE 4. THE CIT - III BANGALORE . 5. THE DR, ITAT, BANGALORE 6. GUARD FILE.