Transfer Pricing: For the purpose of benchmarking the international transactions, the effect of underutilization of capacity/excess fixed costs has to be eliminated while computing the operating margins of the assessee
Under-utilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production. The claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP cost. Economic adjustment on account of under capacity utilization when the assessee was in start up phase has to be considered
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