Kolkata ITAT upholds capacity under-utilization adjustment to comparable in first full year of commercial operations
Kyocera CTC Precision Tools Pvt Ltd (“Kyocera CTC”) is a joint venture between Kyocera Asia Pacific
Pte. Ltd., Singapore (“KAPPL”) and CTC India Pvt. Ltd. (“CTC”).
Kyocera CTC is engaged in the business of manufacturing cutting tool to cater to the automotive
industry. AY 2014-15 was the first year of its commercial operation containing broken period of the
year and AY 2015-16 is the first year when operations took place for the full year.
Kyocera CTC procured raw materials from both AE and non-AEs and processed them into finished products, part of which was supplied to its AEs. For these international transactions with its AEs, Kyocera CTC bench-marked the same by selecting TNMM as the MAM and the results are tabulated.
Kyocera CTC’s NCP margin stood at 11.66% after applying adjustment towards capacity utilization.
Capacity utilization of Kyocera CTC was 34% as compared to 73% of the manufacturing and
automotive industry average. TPO disregarded the capacity utilization adjustment made. ITAT Ruled
in favour of Kyocera CTC on the following grounds,
Pune ITAT held no mark-up required for actual costs allocated
to eligible unit – absent service element
Finolex Cables Ltd was engaged in the business of manufacturing and sales of electrical cables and
other such items. Finolex cables had 80-IC eligible unit in Roorkee and any inter unit transfer would
attract transfer pricing provisions. (Specified Domestic transactions).
Finolex allocated the administrative expenses to the business unit which was eligible to claim
deduction under Section 80-IC on the basis of turnover.
The TPO Issued a show cause notice having TP Adjustment and charged 7.48% mark-up on the cost
allocated to the eligible unit.
On appeal, CIT(A) deleted the TP Adjustment on the following grounds,
The ITAT upheld the order of CIT(A) and ruled in the favour of Finolex that allocation of expenses is
not a transfer of service and does not require mark-up. Therefore no transfer pricing adjustment was
required.
Ahmedabad ITAT upheld guarantee fee at NIL sans commercial
justification; deletes NIL ALP for intra-group services
Bosch Rexroth (India) Ltd is engaged in the business of Information Technology enabled services, had
following international transactions for which ITAT ruled as follows,
Pune ITAT Imputes 0.5% fee on corporate & performance
guarantees, prefers external TNMM for purchases/sales.
Bilcare Limited (“Assessee”) is engaged in the business of manufacturing of Pharmaceutical Packages
and providing research driven packaging solutions and clinical supplies services.
a. Corporate Guarantee:
Bilcare India provided corporate guarantee to its AEs for which the assessee had not received any
commission as the transaction is in the nature of shareholder activity. TPO made adjustment by
benchmarking the transaction at 1.75% by using CUP method.
Pune ITAT held that the transactions of corporate guarantee should be benchmarked by
adopting 0.5% of value guarantee as increased by the expenditure actually incurred by the
assessee company by furnishing such guarantee.
b. Long Term Capital Loss on Sale of One Subsidiary to Another Subsidiary
The Assessee has sought to claim the long-term capital loss arising on sale of shares of a wholly owned
subsidiary company. The AO made an addition stating that the claim was not made in the original
return of income and held that the revised return of income is invalid.
Pune ITAT held that the assessee has satisfied the conditions prescribed under Section 139(5)
for filing the revised return of income. Therefore, the AO has erred in not accepting the
revised return of income as filed by the assessee company and allowed the claim made by
c. Purchase and Sale of pharma packaging material
Pune ITAT held that these transactions shall be benchmarked using the external TNMM Method due
to volume and geographical differences.
Kolkata High Court dismisses revenue’s appeal against ITAT
order holding AMP expenditure not international transaction.
Organon (India) Pvt Ltd (“Assessee”) outsources its entire production requirements to toll
manufacturers/contract manufacturers on a license basis. The assessee procures the raw materials
and gets them converted from the third-party toll manufacturers.
The Revenue held that Oraganon India promoted the brand of the AE by incurring Advertisement,
Marketing and Promotions (AMP) expenditure in India. The said transaction has not been considered
as International Transaction by Organon India and characterized the entity as a distributor. The TPO
and the DRP treated the AMP expenditure as international transaction, ITAT held AMP Expenditure as
not an international transaction.
Kolkata High Court Ruling:
Key Takeaways
- Capacity utilization adjustment shall be permissible in the first full of year of operation
provided convincing evidence and adequate documentation to support. - Actual cost allocated to 80-IC eligible unit where there is no transfer of goods and services
shall not require mark-up - Guarantee fee paid to AE with no commercial justification, ALP may be determined at Nil.
- Usage of Internal TNMM might get affected by volume and geographical differences.
- Mere usage of AE’s name in the name of Assessee cannot make the transaction fall within the
ambit of international transaction.