DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-3(1), CHENNAI vs. TRIUMPH INTERNATIONAL (INDIA) PRIVATE LIMITED, KANCHEEPURAM

Briefly stated facts are that the assessee company is engaged in manufacturing and trading of intimate apparel. The assessee filed its return of income for the relevant assessment year 2012-13 on 29.11.2012. Consequent to selection of assessee’s case for scrutiny assessment, the AO noticed that the assessee has entered into international transaction carried out during the year as per Form No.3CEB which is more than Rs.15 crores, for determination of ALP (Arm’s Length Price). The matter was referred to TPO u/s.92CA(1) of the Act on 05.09.2012.

The CIT(A) has considered the issue and held that the assessee has submitted details and hence, the manufacturing segment and trading segment should be separated for the purpose of computing ALP for making adjustment. For this, he relied on the decision of Hon’ble Supreme Court in the case of CIT vs. Firestone International (P.) Ltd., reported in [2016] 73 taxmann.com 39(SC). He also stated that the TPO in earlier year i.e., assessment year 2009-10 has also considered this issue and has only made adjustment segment-wise i.e., manufacturing segment and trading segment. He stated that instead of entire sale value, the TP adjustment should be made in relation to international transactions and not on the entire trading transactions.

We have heard rival contentions and gone through facts and circumstances of the case. We noted that the issue of segmental approach i.e., only value of international transaction is to be CO No.64/CHNY/2024 adopted is covered by the decision of Hon’ble Supreme Court in the case of Firestone International (P.) Ltd., supra, wherein the Hon’ble Supreme Court held as under:- “The arm’s length price has to be determined only with reference to the international transactions, whatever be the method followed or adopted for arriving at the ALP, the ALP can only be considered on the value of international transactions alone and not on the entire turnover of assessee. If this sort of adjustment is permitted this will result in increasing the profit of assessee on the entire non-AE sales also, which is not according to the provisions of Transfer Pricing mandated by the Act for the impugned assessment year.”

As regards to capacity utilization, the issue is covered by the decision of the Co-ordinate Bench of this Tribunal in assessee’s own case for the AYs 2010-11 & 2011-12 in & 935/CHNY/2016 vide order dated 18.11.2022, wherein it is held as under:- 6. We find that the assessee’s capacity utilization is much less than the capacity utilized by comparable entities and therefore, the assessee seeks exclusion of certain fixed costs while computing capacity utilization which would ultimately affect its own PLI. The Tribunal in its order for AY 2009- CO No.64/CHNY/2024 10 (para 5.1) has observed that abnormal costs are required to be adjusted so as to have a meaningful comparability analysis and accordingly, the issue of adjustment was restored back to the file of Ld. TPO. Similar is the plea of Ld. AR in this year. We are of the considered opinion it is undisputed fact that the assessee is entitled for capacity utilization since its capacity is much lower than the comparable entities. The lower authorities have also granted the same which controvert the argument of Ld. CIT-DR that such an adjustment should not be granted. The only dispute is with respect to extent of adjustment. So far as the assessee’s own capacity utilization is concerned, we direct Ld. TPO not to treat the units purchased as its capacity utilization since it could not be said that the assessee has utilized the capacity to that extent.

So far as the argument of acceptance / rejection of comparable entities is concerned, we find that the assessee has been characterized as normal risk bearing entrepreneur and TP adjustment has been made proceeding on that basis. Therefore, in the absence of any cogent material warranting disturbance of comparable entities matrix, we decline to accept any of the plea of Ld. AR in this regard. The comparable entities as finally selected by Ld. TPO would require no interference on our part. Since the assessee is characterized as normal risk bearing entrepreneur the plea of grant of risk adjustment could also not be accepted. The only direction to Ld. TPO is to compute correct capacity utilization of comparable entities since prior period data may not reflect a correct picture and may not result into correct computation of capacity utilization. The assessee is directed to provide requisite to the extent it is possible. If the data is not available for this year, the average of past three years’ data could be considered. So far as the issue of fixed costs is concerned, we direct Ld. TPO to adjudicate the same afresh keeping in mind the directions of Tribunal in AY 2009-10 and consequential order passed against the same. With these directions, the matter is restored back to the file of Ld. AO / Ld. TPO. The Transfer pricing grounds stand partly allowed for statistical purposes. ………… ………... ASSESSMENT YEAR 2011-12 12. So far as the issue of capacity utilization is concerned, we find that this is third year of operations and the assessee’s capacity has not shown much significant improvement. Therefore, to say that the startup phase was over for the assessee would not be correct. In fact, Ld. TPO was convinced with the assessee’s claim and accordingly it granted the adjustment to the assessee. Therefore, we would hold that such an adjustment would be CO No.64/CHNY/2024 allowable to the assessee. Accordingly, for correct computation of the same, the issue is restored back to the file of Ld. TPO / Ld. AO to grant appropriate adjustment in this year on the same lines as given in AYs 2009- 10 & 2010-11. Our adjudication as for AY 2010-11 in preceding paragraphs would mutatis-mutandis apply to this issue. No interference would be required in the final list of comparable entities. The working capital adjustment, as granted by Ld. DRP in AY 2010-11, would be allowed to the assessee if the assessee is able to demonstrate the same. The corresponding grounds stand partly allowed for statistical purposes.”

Coming to cross objection of the assessee in C.O. No.64/CHNY/2024, at the outset, it is noticed that this cross objection is barred by limitation by 47 days. The assessee has filed condonation petition for condoning the delay by stating the following reason:- “3.I state that the aforesaid delay in filing the cross objection is as mentioned as under:- 4. I state that, during the time of receipt of notice from ITAT, there was a lack of manpower in the Finance & Tax team at the office of the Petition Company and the notice from the ITAT was inadvertently overlooked and necessary action could not be taken.

Since the cross objection filed by the assessee is supportive and we have dismissed the Revenue’s appeal by confirming the order of CIT(A), the cross objection raised by the assessee has become academic and does not require any adjudication. Hence, the same is dismissed as academic.

In the result, both the appeal filed by the Revenue and the cross objection filed by the assessee are dismissed.