INCOME TAX APPELLATE TRIBUNAL DELHI BENCH 'C: NEW DELHI BEFORE SHRI R P TOLANI, JUDICIAL MEMBER AND SHRI J. S. REDDY, ACCOUNTANT MEMBER (ITA No. 3484/Del/2011) Assessment Year: 2005-06 Global Turbine Services Inc., ADIT, (Now known as Granite Services International Inc.), Circle-1(2), B-6/8 Local Commercial Vs International Taxation, Complex, Safdarjung Enclave, New Delhi New Delhi-110019 PAN AABCG9134D (Appellant) (Respondent) Appellant by : Shri Rohit Tiwari, CA Respondents by: Smt. Satpal Singh, Sr. DR ORDER
PER SHRI R. P. TOLANI, J. M.
This is an assessee's appeal challenging Assessing Officer action of making an adjustment of Rs. 8,008,161 in the international transactions on various issues. At the time of hearing ld. counsel for the assessee contends that except issue raised in ground No. 2. No other issues are pressed which are dismissed accordingly. This leaves us with ground No.2 which is as under:
"2. The Ld. CIT(A)/Assessing Officer grossly failed to appreciate that during the relevant assessment year, the Appellant's business was adversely impacted by unutilized 2 capacity which resulted in unabsorbed overheads and operating losses."
2. Brief facts of the case are that the assessee is a Global Turbine Services Inc. (India Branch Office) ('GTSI India' for short) was incorporated on 22.09.2003 as Indian Branch of the parent company. This is the first and last of the assessment of the branch office entity as there after the parent company started a subsidiary in the name and style of Global Turbine Service India Ltd on the same line of business activity as that of assessee.
3. During this financial year the assessee was engaged in manpower sourcing and support services to its associated enterprises ('AEs') The AEs were responsible for identifying their personnel requirements including skills, experience, and other qualifications. The assessee was required to provide such personal staff for specific project and duration. The services provided by assessee to AEs, addition made by TPO are as under:
S. Nature of Transaction Value Adjustment by AO No. (INR in crore)) 1. Provision of sourcing and 4.35 TP adjustment of Rs. support services 86.65 lacs 2. Cost allocation arrangement 0.06 No Adjustment 3. Payment of vehicle lease rentals 0.03 No Adjustment 4. Reimbursement of expenses 0.40 No Adjustment
4. The TPO made the above adjustment on various grounds and by further holding that the assessee was working as manpower sourcing and support services provider and assumed all the operational/ business risks like market risks, foreign exchange risks, capacity risks.3
5. Aggrieved assessee preferred first appeal ld CIT(A) dismissed the assessee appeal by upholding the TPO/Assessing Officer and also holding/ rejecting assessee's plea about capacity under utilization and held that since the appellant was engaged in recruiting highly technical and skilled employees, and thus in the business of services, a business loss is least expected and hence the loss was obviously due to the transfer price of the international transactions pertaining to services.
6. Aggrieved assessee is before us, Ld. Counsel Shri Rohit Tiwari contends that:-
i) The appellant had commenced its operations in September 2003 and FY 2004-05 was the first full year of its operations. In AY 2005-06, the appellant had shown income of Rs.43, 539,119 against the expenditure of Rs. 44,271,913 resulting in a loss of Rs. 732, 795 in this gestation period on account of inadequate volumes of work generated during the year.
ii) Creation of capacity was a business Investment for the appellant and such an Investment was necessary during the gestation period and would be borne by any independent company in its initial years. Even from the accounting point of view, with the increase in turnover, the fixed cost gets apportioned. When the turnover is less, on net scale there will be loss but with the increase in turnover there will be profit although the gross margin may be same.
iii) Further the appellant would like to bring to your 4 honours' attention that both the companies selected by the Ld AO were incorporated much prior to the FY 2000, and were not in their first full year of operations. They were not operating in the gestation phase and hence would not be incurring similar levels of excess capacity. Accordingly, in order to ensure closer comparability, the appellant craves that capacity adjustment be allowed.
iv) In this regard, the appellant places reliance on the recent judgement pronounced by the Tribunal in case of Amdocs Business Services Private Limited wherein ITAT has held that the economic adjustment on account of under capacity utilization being the first year of operation is appropriate in the mechanism of transfer pricing assessments the relevant observations are as under:-
"The plea set-up by the assessee for economic adjustments on account of under capacity utilization and being in start up phase, is not something which is unreasonable and neither it is otiose to the mechanism of transfer pricing assessments. In our view, the matter requiring factual appreciation, the same is remanded back to the file of the Assessing Officer, who shall consider the proposition put forth by the assessee and allow economic adjustments on a reasonable basis.
7. Further, the principle of capacity adjustment for consideration of T.P. adjustments has also been upheld by the ITAT in the below mentioned rulings • Mentor Graphics Noida Private Limited (2007) 109 ITD
101) • M/s. Fiat India Private Limited ITA No. 1848/Mum/2009 5 • CRM Services India Private Limited.
• Genisys Integrating Systems (India) Pvt Ltd (2011-TII- 96-ITAT-BANG-TP, ITA No. 1231 (Bang.)/2010, ITAT Bangalore, Assessment Year: 2006-07) • Brintons Carpets Asia Private Limited (ITA No. 1296/PN/10.
8. Ld. Counsel for the assessee further requests to admit the additional evidence which is proposed to be filed. The same elaborates the date to utilize non utilization capacity of the assessee and the effect of capacity non utilization of the assessee profitability and it is further affects the foreign exchange prices. It is contends that the pleas of the assessee in this behalf having been not considered by the lower authorities in objective terms the matter requires to be set aside back to the file of Assessing Officer to decide the same afresh. Since we are setting aside the issue to Assessing Officer who will consider the evidence filed by the assessee in this behalf.
9. Ld. DR relies on the order of the lower authority.
10. We have heard the rival contentions and perused the material available on record. The suitable adjustment for non- utilisation of capacity is to be taken in to account after considering the ALP while working out TP adjustment, this proposition has been held by co-oridnate Bench in the case of the Amdocs Business Services Private Limited (Supra) and various other cases as cited here in above.
11. In the given facts and circumstances it was required on the part of the lower authorities to have given due effect to under capacity utilization of the assessee which has not been 6 done TPO for adjustment for ALP determination. In view of the facts and circumstances we are inclined to set aside the matter and restore the issue of under capacity utilization back to the file of the Assessing Officer /TPO to decide the same afresh after giving assessee adequate opportunity of being heard and to file the necessary evidence on this behalf. Needless to say that a proper and speaking order will be passed deciding the issue in accordance with law.
12. In the result the assessee's appeal is partly allowed for statistical purpose.
Order pronounced in the open court on 06.09.2013.
Sd/- Sd/- (J. S. REDDY) (R P TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated 06/09/2013 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR