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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI ABY T VARKEY, HON’BLE & SHRI JAGADISH, HON’BLE
PER JAGADISH, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order passed by the ld. Commissioner of Income Tax (Appeals)- 3, Chennai, confirming the assessment order passed by the DCIT, Circle -5(2), Chennai-34.
:-2-: ITA. No: 1241/Chny/2017 2. The assessee is wholly owned subsidiary of Poclain Hydraulics S.A, France. The assessee was incorporated on 1st December 2006 and was initially engaged in the business of trading of hydrolics motor parts. Assessee commenced its manufacturing activity in relation to Hydrolics Motors in July 2008. During the relevant Financial year, the assessee has made sales of Rs.18,59,55,638/- to its AE , which is the first full year after the commencement of manufacturing activity. The Assessee in its TP documentation adopted TNMM for substantiating the international transaction at arms’s length.
The TPO while accepting TNMM as MAM has not accepted the PLI (OP/OC) of 8.7% arrived by assessee after capacity utilization adjustment and recomputed the PLI at 9.26% without considering the capacity utilization adjustment and excluding certain comparable companies considered by assessee and including certain new comparable companies, making TP Adjustment of Rs.3,90,15,046/- on the above transactions. The ld. CIT(A) has confirmed the addition. The assessee is mainly aggrieved by not considering the capacity utilization adjustment and has filed an appeal before the Tribunal, inter alia, other grounds regarding comparables/working capital adjustment. However, the :-3-: ITA. No: 1241/Chny/2017 assessee has argued only on non-consideration of capacity utilization adjustment, which will be examined (infra).
The ld. AR has submitted that the assessee in its transfer pricing documents has arrived at the PLI (OP/OC) at 8.7%, after adjusting the capacity utilization. However, the TPO has rejected the capacity utilization adjustment and taken PLI at (-)
6.55%. The TPO has made adjustment by taking comparable companies PLI @ 9.26%. The ld. AR, has submitted that the TPO while computing the capacity utilization had included the quantitative details of the Hydraulic Motor parts which is not part of manufacturing activity. The quantitative information in respect of annual capacity as submitted by the appellant was as under:
Production, Sales and finished goods stocks:
Class of Goods manufactured Hydraulics Motors and Hydraulics Motor Parts
Installed Capacity p.a. on single-shift basis (units) Hydraulics Motor 30,000 Nos. P.a Hydraulics Motor Parts 3,50,000 Nos. p.a Actual Production (Units) Hydraulics Motor 1,170 No’s Hydraulics Motor Parts 2,81,727 No’s
The assessee has claimed capacity adjustment for the actual capacity utilized i.e., 1170 units as against the installed
:-4-: ITA. No: 1241/Chny/2017 capacity of 30,000 Hydraulic Motors, that is the utilization rate of capacity is only 4% during the year. The TPO has computed the capacity utilization of 75% including the Hydraulic Motors parts as under:
Installed capacity Actual production H.M = 30000 nos H.M = 1170 nos H.M P= 350000 nos H.M P = 281727 nos 380000 nos 282897 nos Capacity Utilization = 282897 = 75% 38000
The ld. AR, has submitted that he has provided additional evidences in the form of letters filed with MEPZ/Central Excess office proving that the assessee has not undertaken any manufacturing activity or motor parts before the ld. CIT(A).
The ld. AR, has also submitted follow up letter filed by the appellant to MEPZ, wherein it has been confirmed that Hydraulic Motor parts does not form part of manufacturing function.
However, the ld. CIT(A) has not considered the above documents and not adjudicated on the claim of capacity adjustment. The ld. AR, has relied upon the decision of Hon’ble ITAT, Chennai in the case of Triumph International (India) Pvt Ltd vs ACIT in for assessment year
:-5-: ITA. No: 1241/Chny/2017 2010-11, order dated 18.11.2022, wherein the capacity adjustment has been granted owing to its startup phase.
The ld. DR, has relied upon the order of authorities below.
We have considered rival submission. The assessee has entered into international transaction with its AE in the form of sales to its AE at Rs.18,59,55,638/-. The assessee in the transfer pricing document has followed TNMM for benchmarking its transactions with AE. The tested party is the assessee company and the PLI adopted is operating profit to cost. There is no dispute on the MAM. The assessee has computed PLI at 8.7%, after making certain adjustments including that of capacity utilization. The assessee has taken the capacity utilization at 4% which is no of Hydrolic Motor manufactured / Installed Capacity. However, the learned TPO has computed the capacity utilization at 75% including Hydraulic motors (pertaining to manufacturing activity) and hydraulic motor parts (pertaining to trading activity). The learned TPO has included hydraulic motor parts as part of capacity utilization, without considering the evidence submitted by assessee that assessee has not manufactured hydraulic motor parts. The learned
:-6-: ITA. No: 1241/Chny/2017 CIT(A) has not considered the evidences submitted before him regarding hydrolic motor parts are not manufactured by the assessee. We are therefore of the considered view that learned TPO and CIT(A) have not considered the evidences submitted by assessee regarding capacity utilization adjustment.
Therefore, impugned order of Ld. CIT(A) is set aside and the matter is restored to the file of AO. Assessee is directed to file all the evidences filled before learned CIT(A) within 30 days of receipt of this order for the purpose of making reference to the TPO. As we have set aside the assessment with the above observation, all issues are kept open before assessing officer/TPO and after hearing the assessee to frame assessment in accordance with law.
In the result, appeal filed by the assessee is allowed for statistical purposes.