Saturday 22 February 2014

Transfer Pricing: Adjustment to profit margin for “capacity underutilization” can be made. In choosing comparables, there cannot be a cherry picking for deciding parameters of rejection. All comparables must face the same test

DCIT vs. Panasonic AVC Networks India Co Ltd (ITAT Delhi)

Under Rule 10B (1)(e)(ii), an adjustment to the net profit margin has to be made for “capacity underutilization”. Capacity underutilization by enterprises is an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerned, is reasonable accuracy embedded in the mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment. On facts, the CIT(A)’s approach is reasonable and the adjustments are on a conceptually sound basis

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