M/s Sumi Motherson Innovative Engineering Ltd., New Delhi V. DCIT, New Delhi

CO 155/DEL/2011

• Counselvise Citation: [2014] 122 COUNSELVISE.COM (IT) 9394 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 8 month(s) 23 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 11-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 04-02-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 18-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: K M GUPTA SHRI KUNCHAN KAUSHAL
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Rule of consistency; Unabsorbed depreciation; Revenue expenditure
• Section: 92C; 80HHC; 115JB; 37(1); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SHRI I. C. SUDHIR, JUDICIAL MEMBER ITA NO. 1816/DEL/2011 (ASSESSMENT YEAR-2003-04) DCIT, CIRCLE 9(1) ROOM NO. 163, C. R. BUILDING, NEW DELHI VS M/S SUMI MOTHERSON INNOVATIVE ENGINEERING LTD., F-7, BLOCK B-1, MOHAN COOPERATIVE INDUSTRIAL ESTATE, MATHURA ROAD, NEW DELHI-44 (APPELLANT) (RESPONDENT) CO NO. 155/DEL/2011 (ASSESSMENT YEAR-2003-04) M/S SUMI MOTHERSON INNOVATIVE ENGINEERING LTD., F-7, BLOCK B-1, MOHAN COOPERATIVE INDUSTRIAL ESTATE, MATHURA ROAD, NEW DELHI-44 VS DCIT, CIRCLE 9(1) ROOM NO. 163, C. R. BUILDING, NEW DELHI (APPELLANT) (RESPONDENT) PAN NO: AABCS0913N ASSESSEE BY: SHRI K. M. GUPTA, SHRI KUNCHAN KAUSHAL & SHRI TARUN KUMAR REVENUE BY: SHRI PEEYUSH JAIN DATE OF HEARING 4.2.2014 DATE OF PRONOUNCEMENT 11.2.2014 ORDER PER R. S. SYAL, AM: THIS APPEAL BY THE REVENUE AND CROSS OBJECTION BY THE ASSESSEE ARISE OUT OF THE ORDER PASSED BY CIT(A ) ON 25.1.2011 IN RELATION TO THE ASSESSMENT YEAR 2003-0 4. ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 2 2. FIRST GROUND OF THE REVENUES APPEAL IS AGAINST THE ALLOWING OF THE BENEFIT OF BROUGHT FORWARD LOSS OF RS. 3,91,04,236/- FOR THE PURPOSE OF COMPUTATION OF BOO K PROFITS U/S 115JB OF THE INCOME-TAX ACT, 1961 (HERE INAFTER ALSO CALLED `THE ACT). BRIEFLY, STATED THE FACTS O F THE GROUND ARE THAT THE ASSESSEE CLAIMED DEDUCTION OF RS. 3.91 CRORE FROM THE NET PROFITS IN THE COMPUTATION OF BOOK PRO FITS. SUCH CLAIM WAS BASED ON THE FOUNDATION OF EXPLANATI ON (III) WHICH PROVIDES DEDUCTION FOR : THE AMOUNT OF LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION, WHICHEV ER IS LESS AS PER THE BOOKS OF ACCOUNTS. THE ASSESSING O FFICER OBSERVED THAT THERE WERE NO ACCUMULATED LOSSES AS P ER THE BOOKS OF ACCOUNTS. ON BEING SHOW CAUSED, THE ASSES SEE SUBMITTED THAT THERE WERE ACCUMULATED BOOK LOSSES T O THE TUNE OF RS. 3.46 CRORE AS ON 31.3.2001. REDUCTION I N THE CAPITAL OF THE COMPANY WAS EFFECTED ON 30 TH AUGUST, 2001, BY WHICH THE PAID UP CAPITAL STOOD REDUCED FROM RS. 3250 LAC TO RS. 5 LAC, RESULTING INTO CANCELLATION OF PAID-UP CAPITAL AMOUNTING OF RS. 3245 LACS. THE ASSESSING O FFICER REJECTED THE ASSESSEES CLAIM ON THE GROUND THAT TH ERE WERE NO ACCUMULATED LOSSES AT THE BEGINNING AND AT THE E ND OF THE YEAR. THE LD. CIT(A) REVERSED THE ASSESSMENT OR DER ON THIS POINT AND CONCURRED WITH THE ASSESSEES CONTEN TION. ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 3 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. AT THE VERY OUTSET, I T IS RELEVANT TO NOTE THAT SIMILAR ISSUE CAME FOR CONSID ERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2002-03. VIDE ITS ORDER DATED 11.7.2008 IN ITA NO. 2323/DEL/2006, TH E TRIBUNAL HAS HELD THAT THE ASSESSEE TO BE ENTITLED TO DEDUCTION OF SUCH LOSS. THE LD. DEPARTMENTAL REPRESENTATIVE CONTENDED THAT THE EARLIER YEAR ORDE R SHOULD NOT BE FOLLOWED BECAUSE UNLIKE THE PRECEDING YEAR, THERE WERE NO ACCUMULATED LOSSES AT THE END OF THE YEAR R ELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. WE DO N OT FIND THIS CONTENTION AS CORRECT FOR THE REASON THAT IN T HE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2002-03 ALSO, THERE WERE NO ACCUMULATED LOSSES AT THE END OF THE YEAR B ECAUSE THE REDUCTION IN PAID UP CAPITAL TOOK PLACE DURING THE SAID YEAR. SINCE, THE FACTS AND CIRCUMSTANCES FOR THE CU RRENT YEAR ARE MUTATIS MUTANDIS SIMILAR TO THOSE FOR THE PRECEDING YEAR, IN WHICH THE TRIBUNAL HAS ALLOWED THE ASSESSE ES CLAIM, RESPECTFULLY FOLLOWING THE PRECEDENT, WE HO LD THAT THE BENEFIT OF BROUGHT FORWARD LOSS CANNOT BE DENIE D FOR THE PURPOSES OF COMPUTATION OF BOOKS PROFIT U/S 115JB. HOWEVER, THE ASSESSING OFFICER IS DIRECTED TO VERIF Y THE ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 4 CORRECTNESS OF THE FIGURE SO CLAIMED. THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND ACCORDINGLY THE MATT ER IS REMITTED TO THE AO FOR DECIDING IT AFRESH IN CONFOR MITY WITH THE MANDATE OF THE ORDER OF THE TRIBUNAL FOR THE EA RLIER YEAR IN THE LIGHT OF THE FACTS PREVAILING FOR THE YEA R UNDER REVIEW. 4.1. (I) GROUND NO. 2 OF THE REVENUES APPEAL IS AG AINST THE DELETION OF DISALLOWANCE MADE ON ACCOUNT OF DED UCTION U/S 80HHC FOR THE PURPOSE OF COMPUTING THE BOOK PR OFITS U/S 115JB. (II) NEXT GROUND OF THE DEPARTMENTAL APPEAL IS AGAINST THE DELETION OF DISALLOWANCE OF DEPRECIATIO N OF VEHICLES WHICH WERE PENDING FOR REGISTRATION IN THE NAME OF THE ASSESSEE. (III) NEXT GROUND IS AGAINST DELETION OF DISALLOWAN CE OF CLAIM FOR LOOSE TOOLS AMOUNTING TO RS. 2,22,097/ -. (IV) NEXT GROUND OF THE REVENUES APPEAL IS AGAINS T THE DELETION OF DISALLOWANCE OF RS. 2,59,934/- TOWA RDS TRAINING EXPENSES. (V) NEXT GROUND OF THE REVENUES APPEAL IS AGAINST THE DELETION OF DISALLOWANCE OF ROYALTY EXP ENSES AMOUNTING TO RS. 67,14,126/-. ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 5 (VI) GROUND NO. 7 OF THE REVENUES APPEAL IS AGAINST THE DELETION OF DISALLOWANCE ON ACCOUNT OF REDUCTION OF RATE OF DEPRECIATION FROM 40% TO 25% O N MOULDS USED IN PLASTIC BUSINESS. 4.2. BOTH THE SIDES ARE CONSENSUS AD IDEM THAT THE FACTS AND CIRCUMSTANCES OF ALL THE ABOVE GROUNDS FOR THE INSTANT YEAR ARE MUTATIS MUTANDIS SIMILAR TO THOSE FOR THE PRECEDING YEAR. NO DISTINGUISHING FEATURE COULD BE BROUGHT TO OUR NOTICE BY THE LD. DR. AS THE TRIBUNAL HAS DELETED S UCH DISALLOWANCES IN THE PRECEDING YEAR VIDE THE AFORES AID ORDER, FOLLOWING THE SAME VIEW, WE UPHOLD THE IMPU GNED ORDER ON THESE GROUNDS. THESE GROUNDS, THEREFORE, FAIL. 5.1. LAST EFFECTIVE GROUND OF THE REVENUES APPEAL IS THE MAJOR GROUND, WHICH IS DIRECTED AGAINST THE DELETIO N OF TRANSFER PRICING ADDITION MADE BY THE AO. BRIEFLY STATED THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE WAS ENGAGED IN THE MANUFACTURE OF MOLDS, DIES AND MOLDE D COMPONENTS AND PROVISIONS OF BUSINESS/MANAGEMENT CONSULTANCY SERVICES TO GROUP COMPANIES. THE ENTIRE BUSINESS WAS SEGMENTED INTO THE FOLLOWING THREE OPERATIONAL DIVISIONS :- ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 6 I. COMPONENTS DIVISION - FOR MANUFACTURE OF MOLDED COMPONENTS AND PRESSED STAMPED PRODUCT, PRIMARILY F OR AUTOMOBILE SECTOR; II. TOOLING DIVISION - FOR MANUFACTURE OF MOLDS/DIE S, PRIMARILY USED IN THE AUTOMOBILE SECTOR; AND III. CORPORATE DIVISION - FOR PROVIDING BUSINESS/ MANAGEMENT CONSULTANCY TO ITS GROUP COMPANIES. 5.2. THE ASSESSEE ENTERED INTO CERTAIN INTERNATION AL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) WHICH WERE REPORTED THROUGH FORM NO. 3CEB. THE ASSESSEE APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) IN RESPECT OF COMPONENTS DIVISION, BY CHOOSING PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT TO TOTAL COST ( OP/ TC). SINCE THIS MARGIN OF 17% EARNED BY THE ASSESSEE WAS MORE THAN 5.1% OF COMPARABLES, THE TPO ACCEPTED THAT THE TRANSACTIONS UNDER THIS DIVISION WERE AT ARMS LENG TH PRICE (ALP). SIMILARLY, THERE IS NO DISPUTE ON THE CORPORATE DIVISION. THE INTERNATIONAL TRANSACTIONS UNDER SUCH DIVISION WERE ACCEPTED AT ARMS LENGTH PRICE WHICH WERE BENCHMARKED BY THE ASSESSEE BY APPLYING TNMM WITH PLI OF OP/TC. ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 7 5.3. THE ENTRE DISPUTE REVOLVES AROUND THE DETER MINATION OF THE ALP OF THE INTERNATIONAL TRANSACTIONS UNDER THE TOOLING DIVISION. TO DEMONSTRATE THAT THE INTERNATI ONAL TRANSACTIONS UNDER THIS DIVISION WERE AT ALP, THE A SSESSEE HERE ALSO APPLIED TNMM. HOWEVER, THE PLI FROM THE O THER TWO DIVISIONS WAS DEPARTED FROM AND CHOSEN AS `CASH PROFITS TO SALES (CP/S) FOR THIS DIVISION. THE AM OUNT OF `CASH PROFITS WAS COMPUTED BY EXCLUDING TWO NON-CA SH ITEMS VIZ., DEPRECIATION AND TOOLS WRITTEN OFF FRO M THE OPERATING PROFIT. IN NOTES TO ACCOUNTS, THE ASSESSE E MENTIONED THAT TOOLS WERE WRITTEN OFF OVER A PERIOD OF TWO YEARS FROM THE DATE OF PURCHASE. ON THAT BASIS, IT WAS CLAIMED THAT THE MEAN OF SIMILAR PLI OF THE COMPARA BLES CHOSEN BY THE ASSESSEE AT 13% WAS WELL BELOW ITS 20 % UNDER THIS DIVISION. THE TPO ACCEPTED THE DENOMINAT OR OF `SALES AS CORRECT, BUT OBJECTED TO THE ADOPTION OF THE NUMERATOR AS CASH PROFITS. ON BEING SHOW CAUSED, THE ASSESSEE SUBMITTED THAT THE PROFITS OF THE TOOLING DIVISION WERE SIGNIFICANTLY IMPACTED DUE TO CHANGE IN DEPREC IATION POLICY EFFECTED IN THIS YEAR. IT WAS PUT FORTH THA T ADJUSTMENT TO PROFIT ON ACCOUNT OF SUCH DIFFERENCE IN DEPRECIATION POLICY WAS REQUIRED. SINCE QUANTIFICAT ION OF SUCH DIFFERENCE DUE TO VARIANT DEPRECIATION POLICY FOLLOWED ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 8 BY THE ASSESSEE AND OTHER COMPARABLES WAS NOT POSSI BLE, IT WAS CONSIDERED PRUDENT TO APPLY `CASH PROFIT/SALES AS CORRECT PLI. SUCH EXPLANATION TENDERED BY THE ASSES SEE WAS REJECTED BY THE TPO, WHO HELD THAT RULE 10B(I)(E) T ALKS OF `OPERATING PROFIT AND THE SAME CANNOT BE SUBSTITU TED WITH `CASH PROFIT. ON THE ANALYSIS OF THE ASSEESSEES FIGURES, IT WAS NOTED BY THE TPO THAT THE ASSESSEE HAD, IN FACT , REPORTED OPERATING LOSS AT RS. 66,71,390/- UNDER TH IS SEGMENT AS AGAINST THE OPERATING REVENUE OF RS. 16. 12 CRORES. IN HIS OPINION, THE CORRECT FIGURE OF `OPER ATING PROFITS WAS LIABLE TO BE CONSIDERED AND NOT THE `C ASH PROFITS AS ADOPTED BY THE ASSESSEE. HE, THEREFORE, PROCEEDED TO COMPUTE THE AMOUNT OF `OPERATING PROFI T BY CONSIDERING THE AMOUNT OF DEPRECIATION AT RS. 3.86 CRORE AND TOOLS WRITTEN OFF AT RS. 35.14 LAC. THIS GAVE RATIO OF OPERATING LOSS/SALES AT (-) 9.03%. THE ASSESSEE HAD ALREADY CARRIED OUT DETAILED SEARCH PROCESS UNDER THIS DIVI SION. THE COMPARABLES SO CHOSEN BY THE ASSESSEE WERE NOT DIST URBED BY THE TPO. AS THE ASSESSEE DID NOT CALCULATE OR COMMUNICATE THE RATIO OF `OPERATING PROFIT TO SALES OF SUCH COMPARABLES DESPITE SPECIFIC NOTICE, THE TPO TOOK UP THIS TASK UPON HIMSELF AND WORKED OUT MEAN OF OP/SALES O F SUCH COMPARABLES AT 6.17%. THIS LED TO THE TP ADJUS TMENT ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 9 OF RS. 1,95,48,015/- (EARLIER WRONGLY CALCULATED AT RS. 2,30,62,953/- DUE TO SOME CALCULATION MISTAKE). TH E LD. CIT(A) GOT CONVINCED WITH THE ASSESSEES SUBMISSION S ON THIS ISSUE AND HELD THAT THE APPROACH OF THE ASSESS EE IN CONSIDERING `CASH PROFIT TO SALES AS THE PLI WAS APPROPRIATE. IN REACHING THIS CONCLUSION, HE RELIED ON AN ORDER PASSED BY THE DELHI BENCH OF THE TRIBUNAL IN SCHEFENACKER MOTHERSON LTD. (2009-TIOL-376-ITAT-DEL ). THE REVENUE IS AGGRIEVED AGAINST THE DELETION OF SU CH ADDITION. 5.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THE FACTUAL MATRIX OF THE CASE THAT THE ASSESSEE ADOPTED TNMM AS THE MOST APPROPRIATE METHOD AND USE D PLI OF CASH PROFIT TO SALES UNDER THE TOOLING DIVIS ION. IN COMPUTING SUCH CASH PROFITS, IT REDUCED THE AMOUNT OF DEPRECIATION AND TOOLS WRITTEN OFF. THE LD. DR STRO NGLY OPPOSED THE UPHOLDING BY THE LD. CIT(A) OF THE SUBS TITUTION OF CASH PROFIT WITH NET OPERATING PROFIT, THEREBY REDUCING THE AMOUNT OF DEPRECIATION AND TOOLS WRITTEN OFF ( WHICH IS ALSO A DIFFERENT NOMENCLATURE FOR DEPRECIATION). TH E LD. AR VEHEMENTLY ARGUED THAT PRIMARILY, THE ADOPTION OF C ASH PROFIT WAS APPROPRIATE AND SECONDLY, IF THE BENCH W AS NOT ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 10 WITH HIM, THEN SUITABLE REDUCTION BE ALLOWED TOWARD S HIGHER DEPRECIATION CHARGED BY THE ASSESSEE. I. IS IT CASH PROFIT OR NET OPERATING PROFIT UNDER TNMM ? I. THE KEY QUESTION WHICH FALLS FOR OUR ADJUDICAT ION IS AS TO WHETHER THE ADOPTION OF CASH PROFITS AS THE NUME RATOR UNDER THE TNMM IS IN ACCORDANCE WITH LAW ? II. SECTION 92C OF THE ACT PROVIDES THAT THE ALP S HALL BE COMPUTED BY ANY OF THE PRESCRIBED METHODS WHICH IS THE MOST APPROPRIATE METHOD. FIVE METHODS HAVE BEEN ENSHRINED IN SPECIFIC AND THE LAST ONE IS GENERAL. TNMM IS THE FOURTH METHOD AS PROVIDED U/S 92C. THE MANDATE FOR DETERMINING THE ALP UNDER TNMM IS GIVEN AS PER RULE 10B(1). CLAUSE (E) OF THIS RULE GIVES MODUS OPERANDI FOR DETERMINATION OF ALP UNDER TNMM AS UNDER:- (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO CO STS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPR ISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 11 TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLA USE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF A NY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MA RGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPR ISE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CL AUSE (III) ; (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. III. IT IS MANIFEST FROM THE PRESCRIPTION OF THE AB OVE RULE THAT THE STARTING POINT FOR COMPUTING ALP UNDER TNM M IS THE DETERMINATION OF `NET PROFIT MARGIN REALIZED B Y THE ENTERPRISE FROM INTERNATIONAL TRANSACTION WITH ITS AES. SUCH NET PROFIT MARGIN IS COMPUTED IN RELATION TO C OST INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED ETC. THUS, IT BRINGS TO LIGHT THAT THE NUMERATOR IS NET PROFIT MA RGIN AND THE DENOMINATOR IS EITHER COST INCURRED OR SALES EF FECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY ENTERPRISE OR ANY OTHER RELEVANT BASE. THE DENOMINATOR VARIES FROM C ASE TO CASE DEPENDING UPON NATURE OF TRANSACTION AND HOST OF OTHER RELEVANT FACTORS. IN SOME CASES, IT MAY BE COST EM PLOYED, ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 12 WHILE IN OTHERS, IT MAY BE SALES EFFECTED OR ASSETS EMPLOYED ETC. HOWEVER THE NUMERATOR, BEING THE `NET PROFIT M ARGIN IS STATIC OR FIXED. UNLIKE DENOMINATOR, NO ALTERNAT IVES HAVE BEEN PROVIDED FOR NUMERATOR. IT REMAINS CONSTANT WI TH THE VARYING DENOMINATORS. IT IS THIS PERCENTAGE OF NET PROFIT MARGIN DERIVED BY THE ASSESSEE FROM ITS INTERNATION AL TRANSACTION, WHICH IS COMPARED WITH SIMILAR ADJUST ED NET PROFIT MARGIN WITH THE SAME BASE OF OTHER COMPARAB LES FOR ASCERTAINING WHETHER THE `NET PROFIT MARGIN (OR TO BE MORE APPROPRIATE `NET OPERATING PROFIT MARGIN) FROM INTERNATIONAL TRANSACTIONS IS AT ARMS LENGTH. IN COMMON PARLANCE, THE TERM `NET PROFIT REFERS TO THE PRO FIT OF THE ASSESSEE AFTER DEPRECIATION, INTEREST AND TAXES. BU T IN THE CONTEXT OF TNMM, THIS TERM RESTRICTS ITSELF TO `NET OPERATING PROFIT, WHICH MEANS THE PROFIT FROM BUS INESS ACTIVITY AFTER CONSIDERING ALL DIRECT AND INDIRECT COSTS AND EXCLUDING NON-OPERATING INCOMES AND EXPENSES. TO PU T IT SIMPLY, IT REFERS TO THE DETERMINATION OF PROFIT BY IGNORING NON-OPERATING COSTS AND REVENUES AND ALSO EXTRAORDI NARY AND EXCEPTIONAL ITEMS WHICH ARE NON-RECURRING IN NA TURE. THE LOGIC IN CONSIDERING NET OPERATING PROFIT MARGI N IS SIMPLE THAT THE ITEMS OF INCOME/EXPENSE WHICH ARE NOT CONCERNED WITH THE BUSINESS OPERATION OF THE ASSESS EE ARE ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 13 TAKEN OUT WITH A VIEW TO DERIVE A FAIR PICTURE ABOU T THE PROFITABILITY FROM OPERATIONS. IN THIS PROCESS, AL L THE OPERATING EXPENSES AND ALL THE OPERATING REVENUES A RE TAKEN INTO CONSIDERATION. HOWEVER, THE ITEMS OF EXPENSES OR INCOME WHICH ARE NOT CONNECTED WITH THE BUSINESS OPERATIONS OF THE ASSESSEE ARE EXCLUDED. THIS IMPLI ES THAT ALL THE OPERATING EXPENSES ARE REQUIRED TO BE NECES SARILY INCLUDED WHILE CALCULATING THE OPERATING PROFIT MAR GIN. THE HONBLE SUPREME COURT IN DIT (INTERNATIONAL TAXATION) VS MORGAN STANLEY AND CO. INC. (2007) 29 2 ITR 416 (SC) HAS HELD THAT : `TNMM APPORTIONS THE TOTAL OPERATING PROFIT ARISING FROM THE TRANSACTION ON THE BASIS OF SALES, COSTS, ASSETS, ETC .. IV. IT IS NOTEWORTHY THAT AS THE ASSESSEE HAS TO CH OOSE ONE OF THE PRESCRIBED METHODS AS MOST APPROPRIATE METH ODS FOR DETERMINING THE ALP, SIMILARLY IT HAS TO STRICTLY U NDERGO THE PROCEDURE PRESCRIBED UNDER RULE 10B IN RESPECT OF SUCH CHOSEN METHOD. ALL THE STEPS GIVEN UNDER THE RULE, TO THE EXTENT THEY ARE APPLICABLE, ARE TO BE ADHERED TO WI THOUT ANY MODIFICATION WHATSOEVER. IT IS COMPLETELY IMPERMISS IBLE TO SUBSTITUTE, FULLY OR PARTLY, THE MECHANISM GIVEN UN DER RULE 10B BY CLAIMING IT TO BE MORE BEFITTING OR SUITABLE TO THE FACTS OF THE CASE. THE SPECIAL BENCH OF THE TRIBUNA L IN LG ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 14 ELECTRONICS INDIA PVT. LTD. VS ACIT (2013) 140 ITD 41 (SB) HAS HELD THAT : IT IS EQUALLY NOT PERMISSIBLE TO INVENT A NEW PROCEDURE AND TRY TO FIT SUCH PROCEDURE WITHI N ANY OF THE EXISTING PROCEDURES PRESCRIBED AS PER THESE MET HODS. NO ONE IS AUTHORIZED TO ADD ONE OR MORE NEW STEPS I N THE PRESCRIBED PROCEDURE OR TO SUBSTITUTE ANY OTHER MEC HANISM WITH THE ONE PRESCRIBED UNDER THE RULE. IT IS NEITHER POSSIBLE TO INVENT A NEW METHOD NOR TO SUBSTITUTE A NEW METHODOLOGY IN PLACE OF THE ONE PRESCRIBED IN THE R ULE. IN VIEW OF MORGAN STANLEY AND CO. INC. (SUPRA) AND LG ELECTRONICS (SUPRA) , IT BECOMES VIVID THAT THE PROCEDURE PRESCRIBED UNDER RULE 10B(I)(E) IS REQUIRED TO BE S TRICTLY FOLLOWED. ON HAVING A GLANCE AT THE LANGUAGE OF TH E DELEGATED LEGISLATURE GIVEN UNDER RULE 10B(1)(E) IN THE LIGHT OF THE ABOVE REFERRED PRECEDENTS, IT IS MANI FESTED THAT IN CONTRADISTINCTION TO THE VARYING DENOMINATOR, TH E NUMERATOR INVARIABLY REMAINS CONSTANT AT NET OPERAT ING PROFIT MARGIN. IT, THEREFORE, FOLLOWS THAT THERE I S NO WARRANT FOR SUBSTITUTING `NET OPERATING PROFIT WITH `CASH PROFITS IN DETERMINING THE ALP UNDER TNMM AND THEREBY EXCLUDIN G DEPRECIATION FROM TOTAL OPERATING COSTS. THIS POSIT ION BECOMES MORE PERTINENT WHEN FIXED ASSETS PREDOMINAN TLY PLAY A PIVOTAL ROLE IN THE BUSINESS ACTIVITY, SUCH AS ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 15 MANUFACTURING INDUSTRY. IN SUCH CASES, DEPRECIATION MAKES UP A VITAL INTEGRAL PART OF THE TOTAL OPERATING COS TS. IF SUCH AN IMPORTANT CONSTITUENT OF DEPRECIATION IS EXCLUDE D FROM THE TOTAL OPERATING COSTS, THE RESULTS ARE BOUND TO VITIATE. V. COMING BACK TO THE FACTS OF OUR CASE, WE ARE UNABLE TO COMPREHEND AS TO HOW DEPRECIATION CAN BE EXCLUDED F ROM OPERATING EXPENSES UNDER TNMM, WHEN THE ASSESSEE I S A MANUFACTURING UNIT. AS SUCH, THIS CONTENTION ADVAN CED ON BEHALF OF THE ASSESSEE IS REPELLED. WE HOLD THAT `N ET OPERATING PROFIT IS REQUIRED TO BE CONSIDERED AND `CASH PROFIT IS NOT AN APPROPRIATE NUMERATOR IN THIS CA SE. VI. EVEN OTHERWISE THE ASSESSEES CALCULATION OF TH E SO CALLED CASH PROFIT BY SIMPLY REDUCING THE AMOUNT OF DEPRECIATION FROM THE AMOUNT OF NET PROFIT DOES NOT STAND ANYWHERE. THE ASSESSEE IS A LIMITED COMPANY. AS SUC H, IT IS REQUIRED TO MAINTAIN ITS ACCOUNT ON MERCANTILE B ASIS. UNDER SUCH METHOD OF ACCOUNTING, THE EXPENSES `INCU RRED ARE CONSIDERED FOR DEDUCTION IRRESPECTIVE OF THE AC TUAL PAYMENT. SIMILAR IS THE POSITION ABOUT THE REVENUE. INCOME IS RECOGNIZED WHEN RIGHT TO RECEIVE INCOME IS ACQUI RED NOTWITHSTANDING THE ACTUAL RECEIPT OF THE AMOUNT. W HEN THE ASSESSEE HAS MAINTAINED ITS ACCOUNT UNDER THE MERCA NTILE ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 16 SYSTEM OF ACCOUNTING, IT AUTOMATICALLY IMPLIES THAT THE EXPENSES HAVING BEEN INCURRED OR INCOME HAVING BEE N ACCRUED BUT NOT ACTUALLY PAID OR RECEIVED HAVE ALSO IMPACTED THE AMOUNT OF NET PROFIT AS PER ITS PROFIT AND LOSS ACCOUNT. SUCH ITEMS OF INCURRING OF EXPENSES OR AC CRUAL OF INCOME HAVE NOT BEEN TAKEN OUT OF THE AMOUNT OF NET PROFIT TO CHARACTERIZE THE NUMERATOR AS `CASH PROFIT. IN SUCH A CASE, THE PROFIT SO DEDUCED BY THE ASSESSEE AND CL AIMED AS `CASH PROFIT IS STRICTLY SPEAKING NEITHER CASH PR OFIT NOR PROFIT UNDER MERCANTILE SYSTEM, BUT HYBRID OF BOTH. VII. SEEN FROM ANY ANGLE, WE FIND NO MERIT IN THE ASSESSEES CONTENTION THAT, THE AMOUNT DETERMINED B Y IT IS, IN FACT, `CASH PROFIT OR IT IS PERMISSIBLE TO USE `CASH PROFIT AS NUMERATOR UNDER TNMM IN THE PRESENT CASE. THIS CONTENTION IS JETTISONED. II. WHETHER ANY ADJUSTMENT TOWARDS HIGHER DEPRECIATION IS CALLED FOR IN PRESENT CASE ? I. THE NEXT LEG OF THE LD. ARS CONTENTION IN THIS REGARD WAS THAT IF THE DEPRECIATION WAS TO BE TAKEN INTO A CCOUNT BY CONSIDERING THE NET OPERATING PROFIT, THEN SUITABLE REDUCTION BE ALLOWED TOWARDS HIGHER DEPRECIATION CH ARGED ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 17 BY IT DUE TO CHANGE IN THE DEPRECIATION POLICY EFFE CTED FOR THE FIRST TIME IN THIS YEAR. TO BOLSTER HIS SUBMISS ION, THE LD. AR INVITED OUR ATTENTION TOWARDS PAGE 16 OF THE PAP ER BOOK, BEING A COPY OF SCHEDULE XIV TO THE ANNUAL ACCOUNTS, TO DEMONSTRATE THAT THE RATES OF DEPRECIA TION HAVE BEEN REVISED FOR THE CURRENT YEAR. ELABORATING THI S SUBMISSION, HE TOOK US THROUGH PAGE 24 OF THE IMPUG NED ORDER TO HIGHLIGHT THAT THE ASSESSEES PERCENTAGE O F DEPRECIATION TO SALES WAS 24% AS AGAINST MEAN OF SU CH COMPARABLES RATIO OF 5.48%. IT WAS ON THE STRENGT H OF THESE ARGUMENTS, THAT HE STRONGLY PRESSED FOR THE ADEQUATE RELIEF IN THE OPERATING PROFIT RATE. II. WE ARE NOT IMPRESSED WITH THE SUBMISSION T ENDERED ON BEHALF OF THE ASSESSEE. FIRSTLY, THE SO-CALLED C HANGE IN THE DEPRECIATION POLICY IS SIMPLY CONFINED TO UPWAR DS REVISION OF RATE OF DEPRECIATION IN RESPECT OF SOME OF THE ITEMS OF THE ASSETS. THE METHOD OF CHARGING DEPRECI ATION CONTINUES TO REMAIN THE SAME. NOW, LET US VIEW THE CHANGE IN THE RATE OF DEPRECIATION OF CERTAIN ASSETS. SCHE DULE XIV INDICATES THAT THE RATE OF DEPRECIATION UNDER THE B LOCK OF PLANT AND MACHINERY HAS BEEN INCREASED FROM 4.75% T O 10.34%/12.50% FOR AIR CONDITIONER, CONTROL PANEL, ELECTRIC INSTALLATION AND FIRE FIGHTING EQUIPMENT, OFFICE ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 18 EQUIPMENTS AND GENERATORS. HOWEVER, THERE IS NO CHA NGE IN THE RATE OF DEPRECIATION ON PLANT AND MACHINERY (NEW MACHINES AND OLD MACHINES). SIMILARLY, THERE IS NO CHANGE IN THE RATE OF DEPRECIATION ON FACTORY EQUIPMENTS, FACTORY EQUIPMENT (FOR EXPORT INS. MACHINES), DIES AND MOUL DS (BOTH FOR LOCAL PRODUCTION AND EXPORT PRODUCTION) A ND COMPUTERS. ALTHOUGH THERE IS CHANGE IN THE RATES O F DEPRECIATION OF GENERATORS AND VEHICLES, YET THE RA TE OF DEPRECIATION ON COMPUTER REMAINS THE SAME. SIMILARL Y, ALBEIT THE RATE OF DEPRECIATION ON VEHICLES HAS CHA NGED, THERE IS NO CHANGE IN OTHER BLOCKS OF ASSETS, SUCH AS, BUILDING AND FURNITURE AND FIXTURE. AN OVERVIEW OF SUCH CHANGE IN THE RATES OF DEPRECIATION BRINGS TO LIGHT THAT THE CHANGE IN THE RATE OF DEPRECIATION ONLY ON SUCH ASS ETS HAS BEEN EFFECTED WHICH ARE NOT SUBSTANTIAL. HOWEVER, T HE RATE OF DEPRECIATION ON PLANT AND MACHINERY (NEW AND OLD MACHINES) HAS NOT BEEN CHANGED. SIMILARLY, THERE IS NO CHANGE IN THE RATE OF DEPRECIATION ON THE BLOCKS OF BUILDING AND FURNITURE & FIXTURE. THE LD. AR WAS DIRECTED TO PLACE ON RECORD A CHART SHOWING THE QUANTUM OF CHANGE IN THE OVERALL AMOUNT OF DEPRECIATION AS A RESULT OF CHANG E IN RATE OF DEPRECIATION OF CERTAIN INDIVIDUAL ITEMS OF PLA NT AND MACHINERY. NO SUCH INFORMATION HAS BEEN FILED. AS SUCH, ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 19 WE INFER THAT THERE IS NO SUBSTANTIAL CHANGE IN THE OVERALL AMOUNT OF DEPRECIATION DUE TO CHANGE IN THE RATES O F DEPRECIATION OF CERTAIN ITEMS OF ASSETS, WARRANTING CONSIDERATION OF THIS ARGUMENT ON MERITS. III. THE SECOND PROPOSITION PUT FORWARD BY THE L D. AR THAT THE ASSESSEES RATIO OF DEPRECIATION TO SALES AT 24 % IS MUCH HIGHER THAN THAT OF THE MEAN OF COMPARABLES AT 5.48 % AND HENCE SUITABLE ADJUSTMENT BE ALLOWED, IS AGAIN DEVO ID OF ANY FORCE. FIRSTLY, WE ARE UNABLE TO APPRECIATE A S TO HOW THE RATIO OF DEPRECIATION TO SALES IS RELEVANT. DEP RECIATION IS ALWAYS CONSIDERED WITH REFERENCE TO THE COST OF ASS ET AND NOT THE SALES EFFECTED. BY THIS ARITHMETICAL EXERCI SE, THE ASSESSEE SUCCEEDED IN IMPRESSING THE LD. FIRST APPE LLATE AUTHORITY THAT ITS DEPRECIATION WAS HIGHER IN COMPA RISON WITH OTHER COMPARABLES AND HENCE TRANSFER PRICING ADJUSTMENT WAS NOT CALLED FOR. HOW THIS RATIO CAN A DVANCE THE ASSESSEES CASE IS ANYBODYS GUESS. THE CLAIM F OR REDUCTION IN THE PROFIT DUE TO VARIATION IN THE RAT E OF DEPRECIATION AS CHARGED BY THE ASSESSEE COULD HAVE BEEN MADE BY DEMONSTRATING THAT THE RATES OF DEPRECIATIO N CHARGED BY THE ASSESSEE ON CERTAIN ASSETS WERE MORE THAN THOSE CHARGED BY THE COMPARABLE COMPANIES. THE TOTA L OF DEPRECIATION AMOUNT IS ABSOLUTELY IRRELEVANT. THE F ACT THAT ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 20 THE ASSESSEE HAS CHARGED DEPRECIATION AT HIGHER RAT E CAN BE VIEWED ONLY WHEN IT IS ESTABLISHED THAT THE COMPARA BLE COMPANIES CHARGED DEPRECIATION ON SUCH ASSETS AT LO WER RATES VIS--VIS THAT OF THE ASSESSEE. ON A SPECIFIC QUERY FROM THE BENCH, AGAIN NO SUCH INFORMATION WAS GIVE N BY THE ASSESSEE. IV. BE THAT AS IT MAY, WE FIND THAT IT IS NOT ALLOWED TO COMPARE EACH AND EVERY ITEM OF THE OPERATING COST I NCURRED BY THE ASSESSEE WITH SIMILAR COST IN THE CASE OF CO MPARABLES TO ASK FOR ADJUSTMENT. IT IS THE OVERALL EFFECT OF ALL SUCH INDIVIDUAL ITEMS CULMINATING INTO OPERATING PROFIT, WHICH IS CONSIDERED FOR BENCHMARKING THE ASSESSEES INTERNAT IONAL TRANSACTION. IT IS QUITE NATURAL THAT IF A NEW ASSE T IS PURCHASED, THE AMOUNT OF DEPRECIATION ON A WRITTEN DOWN VALUE METHOD WILL BE HIGHER BUT THE REPAIR COST WIL L BE LOW. IN CONTRAST TO THAT, WHEN THE ASSET GROWS OLD, TH OUGH THE AMOUNT OF DEPRECIATION WILL MARCH SOUTHWARDS, BUT T HE EXPENSES ON REPAIRS WILL ASSUME SOJOURN TO THE NORT H COUPLED WITH THE HIGHER WASTAGE AND LOWER OUTPUT DU E TO FREQUENT BREAKDOWNS. IF THE AMOUNT OF DEPRECIATION IS DISTINCTLY COMPARED WITH COMPARABLES LEAVING ASIDE OTHER RELATED AND CONSEQUENTIAL ITEMS, SUCH AS REPAIR COS TS ETC., THE RESULTS ARE LIKELY TO BE DISTORTED. IT SHOWS TH AT INCREASE ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 21 IN ONE EXPENSE CANNOT BE VIEWED IN ISOLATION. IT IS REQUIRED TO BE EXAMINED WITH ITS CORRESPONDING EFFECT ON REL ATED ITEMS. SUCH INCREASE OR DECREASE IN INDIVIDUAL ITEM S OF EXPENSES MAY BE DUE TO A PARTICULAR BUSINESS MODEL ADOPTED BY THE ASSESSEE. TO CITE AN EXAMPLE, AN INC REASED AMOUNT OF SALARIES MAY BE DUE TO THE POLICY OF THE ASSESSEE IN COMPARATIVELY MORE OUTSOURCING OF ITEMS. IN SU CH A SITUATION, THOUGH THE EXPENSE UNDER THE HEAD `SALAR Y WILL BE LESS, BUT THERE WILL BE MORE `JOB WORK CHARGES ETC. A COMPANY WHICH OUTSOURCES LESS AND STICKS TO MORE OW N PRODUCTION REGIME, MAY NEED TO HAVE MORE ASSETS, WH ICH MAY RESULT IN HIGHER AMOUNT OF DEPRECIATION. IN SUC H A CASE, CLAIMING ADJUSTMENT ON ACCOUNT OF HIGHER DEPRECIATI ON WILL BE ABSURD. SIMILARLY, AN ENTITY MAY BOOK ENTIRE SAL ARY EXPENSE UNDER ONE HEAD, WHILE ANOTHER MAY BIFURCATE IT INTO DIFFERENT PARTS AND INCLUDE SOME PART IN MARKE TING EXPENSES OR FACTORY OVERHEADS ETC. IN SUCH A CASE A LSO, THE COMPARISON OF `SALARY EXPENSE IN SEPARATION WILL B E MEANINGLESS. IN THE LIKE MANNER, ONE COMPANY MAY U SE MORE RENTED PREMISES OR VEHICLES IN COMPARISON WITH THE OTHER, WHICH HAS ITS OWN PREMISES AND VEHICLES. WH EREAS IN THE CASE OF THE FORMER, THE AMOUNT OF RENT OR VEHICLE MAINTENANCE CHARGES WILL BE HIGHER, BUT THE AMOUNT OF ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 22 DEPRECIATION IN THE CASE OF THE LATER WILL BE MORE BECAUSE OF USE OF MORE ASSETS OF ITS OWN RATHER THAN TAKING T HE FACILITY OF HIRED ONES. THE CRUX OF THE MATTER IS THAT A HI GHER AMOUNT OF A PARTICULAR EXPENDITURE PER SE CAN BE NO REASON TO CLAIM ADJUSTMENT IN PROFIT RATIO. THAT IS THE REASON FOR WHICH THE LEGISLATURE HAS PROVIDED FOR COMPARING COMPOSITE FIGURE OF OPERATING PROFIT WHICH ENVELOPE S THE OVERALL EFFECT OF ALL THE ITEMS OF OPERATING EXPEN SES AND REVENUES. WE ARE NOT LAYING DOWN THE PROPOSITION TH AT ONCE THE OPERATING PROFIT IS AVAILABLE, THEN NO ADJUSTME NT IS POSSIBLE. SUB-CLAUSE (III) TO RULE 10B(1)(E) CLEARL Y PROVIDES THAT THE NORMAL GROSS PROFIT MARK-UP OF COMPARABLES IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OT HER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS ETC. TO ASK FOR ADJUSTMENT, IT IS SINE QUA NON THAT THERE SHOULD BE SOME INDEPENDENT AND SUBSTANTIAL REASON FOR CLAIMING ADJUSTMENT IN PROFIT RATE OF COMPARABLES. THE SI NGULAR EFFECT OF HIGHER QUANTUM OF AN ITEM OF EXPENDITURE DE HORS THE OTHER RELEVANT FACTORS, IS NOT PERMISSIBLE. IN THE CONTEXT OF DEPRECIATION, ONE CAN RIGHTLY APPRECIATE THE NEE D TO MAKE ADJUSTMENT, IF RATE OF DEPRECIATION CHARGED BY THE ASSESSEE VIS--VIS ITS COMPARABLES IS DIFFERENT. BUT THE ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 23 SIMPLICITOR DIFFERENCE IN THE AMOUNT OF DEPRECIATIO N IS INCONSEQUENTIAL. AS THERE IS NOTHING TO SHOW IN TH E EXTANT CASE THAT THE ASSESSEE DID CHARGE DEPRECIATION AT HIGHER RATES IN COMPARISON WITH ITS COMPARABLES, WE ARE NO T INCLINED TO ACCEPT EVEN THE ALTERNATIVE PRAYER OF T HE LD. AR. III. RULE OF CONSISTENCY I. THE LD. AR ALSO PRESSED INTO SERVICE A CONTENTIO N THAT THE PLI OF `CASH PROFIT TO TOTAL SALES ADOPTED FOR THE CURRENT YEAR SHOULD NOT BE DISTURBED AS THE REVENUE HAS ACCEPTED THE SAME FOR THE ASSESSMENT YEAR 2007-08 ONWARDS. TO FORTIFY HIS POINT OF VIEW OF CONSISTENC Y, HE RELIED ON AN ORDER PASSED BY THE MUMBAI BENCH OF TH E TRIBUNAL IN DCIT VS REUTERS INDIA PVT. LTD. (ITA NO . 9177/M/2010). II. THE LD. DR OPPOSED THIS CONTENTION BY SUB MITTING THAT THE REVENUE HAS REJECTED THE PLI OF `CASH PRO FIT TO SALES NOT ONLY FOR THE ASSESSMENT YEAR 2003-04 UND ER CONSIDERATION BUT ALSO FOR THE ASSESSMENT YEARS 200 4-05 AND 2005-06, WHICH ARE ALSO LISTED FOR ADJUDICATION BEFORE THE BENCH ALONG WITH THE PRESENT APPEALS. TO REBUT THE CONSISTENCY RULE, HE RELIED ON AN ORDER PASSED BY T HE DELHI BENCHES OF THE TRIBUNAL IN ACIT VS MOSAIC INDIA PVT . LTD. ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 24 (ITA NO. 4831/DEL/2010 DATED 18.12.2013) IN WHICH I T HAS BEEN HELD THAT THE RES JUDICATA DOES NOT APPLY TO INCOME- TAX PROCEEDINGS. APART FROM THAT, THE LD. DEPARTMEN TAL REPRESENTATIVE CONTENDED THAT THE ACCEPTANCE OF `CA SH PROFIT TO SALES FOR THE ASSESSMENT YEAR 2007-08 WA S TAX NEUTRAL AS COULD BE SEEN FROM THE LETTER DATED 8.1 0.2010 WRITTEN BY THE TPO TO THE DIRECTOR OF INCOME TAX, A COPY OF WHICH WAS PLACED ON RECORD. IT WAS SHOWN FROM TH IS LETTER THAT THE TPO, IN FACT, WORKED OUT THE OP/TC MARGIN OF THE ASSESSEE FOR THAT YEAR UNDER THE TOOLING DIV ISION AT 8.34% AS COMPARED TO OP/TC MARGIN OF 10 COMPARABLES COMPANIES AT 5.95%. SINCE, THE OP/TC MARGIN OF THE ASSESSEE WAS HIGHER THAN THE COMPARABLE COMPANIES, THE TPO DID NOT THINK IT APPROPRIATE TO CATEGORICALLY D ISCUSS THE CORRECTNESS OF THE PLI OF `CASH PROFIT OF SALE S IN SO MANY WORDS AS IT DID NOT CALL FOR ANY TRANSFER PRIC ING ADJUSTMENT. IT WAS SUBMITTED THAT SIMILAR POSITION PREVAILED FOR THE ASSESSMENT YEAR 2008-09 ALSO WHEN OP/TC OF THE ASSESSEE UNDER THE TOOLING DIVISION WAS WORKED OUT BY THE TPO AT HIGHER LEVEL THAN THAT OF THE AVERAGE OF COMPARABLES. THAT WAS STATED TO BE THE REASON FOR THE TPO NOT TO SPECIFICALLY REJECT `CASH PROFIT TO SALES A S THE RESULT UNDER BOTH THE SITUATIONS WOULD HAVE BEEN SIMILAR. THE LD. ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 25 DR OFFERED FOR VIEW THE COMMUNICATION BETWEEN THE T PO AND DIRECTOR OF INCOME-TAX IN THIS REGARD, WHICH T HE LD. AR DID NOT OBJECT AND ALSO DID NOT DOUBT THE CORREC TNESS OF THE CONTENTION ADVANCED ON BEHALF OF THE REVENUE. T HE LD. DR ACCENTUATED ON DIFFERENCE IN THE POSITION FOR T HE YEAR UNDER CONSIDERATION AND THE OTHER TWO SUCCEEDING YE ARS UNDER APPEAL BY STRESSING THAT THE ASSESSEE SHOWED OPERATING LOSS AND TO COVER UP SUCH A SITUATION, R ESORTED TO PLI OF `CASH PROFIT TO SALES. III. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. IT IS CLEAR THAT THE A SSESSEE APPLIED `CASH PROFIT TO TOTAL SALES AS PLI UNDER T NMM FOR THE CURRENT YEAR AND TWO SUBSEQUENT YEARS ALSO UNDE R APPEAL. THE APPLICATION OF SUCH PLI CAME TO BE REJ ECTED BY THE TPO FOR ALL THESE THREE ASSESSMENT YEARS. IN A LL THESE YEARS, THE TPO IS CONSISTENT WITH HIS STAND THAT TH E PLI OF `CASH PROFIT TO SALE IS NOT CORRECT AS IT DOES NOT PROPERLY INDICATE THE ALP OF THE INTERNATIONAL TRANSACTIONS AND THE SAME SHOULD BE SUBSTITUTED WITH THE CORRECT PLI OF `OP TO SALES. THE LD. AR HAS RELIED ON THE ORDER PASSED BY THE TPO FOR THE ASSESSMENT YEARS 2007-08 AND SUBSEQUENT YEA RS TO BUTTRESS HIS CONTENTION THAT THE PRINCIPLE OF CONSI STENCY SHOULD BE FOLLOWED IN AS MUCH AS THE TPO HAS ACCEPT ED THE ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 26 PLI OF `CASH PROFIT TO SALES FOR THESE YEARS. WE A RE UNABLE TO ACCEPT THIS CONTENTION FOR THE REASON THAT THE L D. DR HAS PLACED SUFFICIENT MATERIAL ON RECORD WHICH INDICATE S THAT THE TPO DID COMPUTE OP/TC FOR THESE YEARS WHICH WAS MORE THAN THAT OF THE COMPARABLES. IN SUCH A SITUAT ION, NOT MAKING A SPECIFIC MENTION ABOUT THE INCORRECTNESS O F THE PLI OF `CASH PROFIT TO SALES IN HIS ORDER WAS ADD ITION NEUTRAL. WE FIND THAT RULE OF CONSISTENCY AS PRESSE D INTO SERVICE BY THE LD. AR RATHER SUPPORTS THE CASE OF T HE REVENUE. AT THE COST OF REPETITION, WE WOULD LIKE T O MAKE A CATEGORICAL MENTION OF THE FACT THAT THE REVENUE DI D NOT ACCEPT THIS PLI OF THE ASSESSEE NOT ONLY FOR THE YE AR UNDER CONSIDERATION BUT ALSO FOR THE SUBSEQUENT TWO YEARS , WHICH WE ARE DISPOSING OF BY A SEPARATE ORDER. WE, THERE FORE, FIND NO FORCE IN THIS ARGUMENT TENDERED BY THE LD. AR. IV. RELIANCE OF THE LD. AR ON THE ORDER OF REUTE RS INDIA PVT. LTD. (SUPRA) IS MISPLACED IN AS MUCH AS THE A SSESSEE IN THAT CASE WAS ENGAGED IN I.T. ENABLED SERVICES. IN SUCH AN INDUSTRY, THE MAJOR INGREDIENT OF THE OPERATING CO ST IS REMUNERATION TO EMPLOYEE AND THE ASSETS PLAY MINIMA L ROLE IN THE PROCESS OF RENDERING OF SUCH SERVICES. THE DEPRECIATION COMPONENT IN SUCH CASES BECOMES QUITE INSIGNIFICANT. AS SUCH, THIS DECISION IS OF NO HELP TO THE ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 27 ASSESSEE, WHO IS ENGAGED IN MANUFACTURING INDUSTRY. MOREOVER, THE APPLICATION OF SUCH PLI WAS ACCEPTED BECAUSE IN THAT CASE THERE WAS AN ISOLATED YEAR IN WHICH SUCH CHANGE IN THE NUMERATOR WAS OBJECTED TO. FOR T HE SUBSEQUENT YEARS, THE SAME WAS ACCEPTED. THIS POSIT ION STANDS IN CONTRAST TO OUR CASE IN WHICH THE TPO HAS REJECTED SUCH PLI CONSISTENTLY FOR THREE YEARS IN A ROW. FUR THER, NO MATERIAL IN THAT CASE WAS PLACED ON RECORD TO SHOW THAT THE ACCEPTANCE OF CASH PROFIT TO SALES AS THE CORRECT P LI WORKED TO THE PREJUDICE OF THE REVENUE IN TERMS OF THE SAC RIFICE OF TRANSFER PRICING ADJUSTMENT, UNLIKE IT IS THE CASE OF THE REVENUE BEFORE US. THIS ARGUMENT IS ALSO REPELLED. IV. GENERAL I. AT THIS JUNCTURE, IT IS OF PARAMOUNT IMPORT ANCE TO NOTE THAT THE `COMPONENTS DIVISION OF THE ASSESSEE IS INVOLVED IN MANUFACTURING OF MOLDS COMPONENTS AND PRESS STAM PED PRODUCTS PRIMARILY FOR AUTOMOBILE SECTOR AND THE TO OLING DIVISION IS INVOLVED IN MANUFACTURING OF MOLDS/DIES , PRIMARILY USED IN THE AUTOMOBILE SECTOR. FOR BOTH T HE DIVISIONS, THE ASSESSEE APPLIED TNMM AS THE MOST APPROPRIATE METHOD. HOWEVER, THE PLI IN THE CASE OF `COMPONENTS DIVISION WAS TAKEN AS OP/TC, WHEREAS THE PLI FOR THE `TOOLING DIVISION WAS TAKEN AS `CASH P ROFIT ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 28 /SALES. THE REASON FOR ADOPTING SUCH PLI UNDER THE TOOLING DIVISION WAS STATED THROUGH ITS LETTER DATED 13.01. 21005 AS REPRODUCED ON PAGE 4 OF THE TPOS ORDER, TO BE : ` A CHANGE IN THE DEPRECIATION POLICY OF THE SEGMENT DURING THE YEAR. ON VETTING THE INFORMATION ON RECORD IT TRANSPIRED TO US THAT THE REVISION IN THE RATES OF DEPRECIATION IN RESPEC T OF SOME OF THE ASSETS WAS ACROSS THE BOARD AND NOT CONFINED TO TOOLING DIVISION ALONE. ON A SPECIFIC QUERY RAISED FROM THE BENCH, IT WAS UNEQUIVOCALLY ADMITTED BY THE LD. AR THAT THE CHANGE IN DEPRECIATION RATES WAS CARRIED OUT ON ENTITY LEVEL EXTENDING TO ALL THE THREE SEGMENTS, AND IT W AS NOT RESTRICTED TO `TOOLING DIVISION ALONE. THIS DIVUL GES THE FALLACY OF THE STATEMENT MADE BEFORE THE TPO IN THI S REGARD. THUS, IT IS PALPABLE THAT THE OPERATING PRO FIT WAS WORKED OUT BY THE ASSESSEE WITH THE CHANGED DEPRECI ATION RATES UNDER THE COMPONENTS DIVISION AND THERE WAS N O SIGNIFICANT IMPACT OF SUCH CHANGE IN DEPRECIATION P OLICY OF THE ASESSEE. IT IS SO FOR THE REASON THAT THE ASSES SEE ADOPTED OP/TC UNDER THIS SEGMENT FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION, BY OBVIOUSLY CONSIDERING DEPRECIATION AT THE REVISED RATES. HOWEVER, THE SAM E WAS FOUND TO BE NOT WORKABLE UNDER TOOLING DIVISION FOR THE COVERT AND UNDERSTANDABLE REASON THAT THE ASSESSEE HAD ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 29 REPORTED OPERATING LOSS OF RS. 66.71 LAC FROM INTER NATIONAL TRANSACTIONS WITH ITS AES UNDER THIS DIVISION. THIS ITSELF DEFIES THE LOGIC OF THE CONTENTION OF THE ASSESSEE THAT THE CHANGE IN THE DEPRECIATION POLICY SEVERELY IMPACTED THE OPERATING EFFICIENCY UNDER THE TOOLING DIVISION. W HEN THE CHANGED RATES OF DEPRECIATION DID NOT INFLUENCE THE RESULTS OF THE OTHER TWO DIVISIONS, HOW THEY COULD AFFECT T HE RESULTS OF THE TOOLING DIVISION IS NOT EXPLICABLE. II. AT THIS STAGE, IT IS ALSO RELEVANT TO NOT E THAT SECTION 92C(1) PROVIDES THAT THE ALP IN RELATION TO AN INTE RNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHO DS BEING THE MOST APPROPRIATE METHOD. SUB-SECTION (2) OF SECTION 92C STATES THAT THE MOST APPROPRIATE METHOD SHALL BE APPLIED FOR DETERMINATION OF ALP. SIMILARLY, RUL E 10B(1) ALSO PROVIDES THAT THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHO D. RULE 10C WHICH IS OF SIGNIFICANCE, PROVIDES THROUGH SUB- RULE (1) THAT; THE MOST APPROPRIATE METHOD SHALL B E THE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUM STANCES OF EACH PARTICULAR INTERNATIONAL TRANSACTION, AND W HICH PROVIDES THE MOST RELIABLE MEASURE OF ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. AN OVER VIEW OF ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 30 THE ABOVE DISCUSSED PROVISIONS MAKES IT SEVERELY SI MPLE THAT THE ALP IS REQUIRED TO BE DETERMINED BY APPLYI NG ANY ONE OF THE PRESCRIBED METHODS, WHICH IS MOST APPROP RIATE AND THE MOST APPROPRIATE METHOD IS ONE WHICH IS BE ST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH INTER NATIONAL TRANSACTION. IF THE ASSESSEE FINDS THAT A PARTICULA R METHOD, WHICH IT IS SEEKING TO APPLY, IS NOT PROPERLY WORKA BLE BECAUSE OF THE LACK OF CERTAIN INFORMATION NECESSAR Y FOR DETERMINING ALP UNDER SUCH METHOD, THEN IT IS OPEN TO THE ASSESSEE TO DISREGARD SUCH METHOD AND CHOOSE THE NE XT BEST METHOD WHICH IS PROPERLY WORKABLE. ADVERTING TO THE FACTS OF THE INSTANT CASE, IT IS FOUND THAT THE ASSESSEE CONSISTENTLY TOOK THE VIEW THAT TNMM IS THE MOST APPROPRIATE MET HOD APPLICABLE TO THE INTERNATIONAL TRANSACTIONS UNDER THIS DIVISION, WHICH POSITION HAS EQUALLY NOT BEEN DIST URBED BY THE TPO. ONCE THE ASSESSEE AS WELL AS THE TPO CONSI DER THAT THE TNMM TO BE THE MOST APPROPRIATE METHOD, TH EN THE ASSESSEE CANNOT PLEAD FOR THE DISTORTION IN THE PROCEDURE PRESCRIBED FOR CALCULATION OF ALP UNDER SUCH METHOD AS PER RULE 10B(1). IF THE ASSESSEE HAD SOME APPREHENS ION ABOUT THE CORRECT WORKABILITY OF TNMM ON THE FACTS AND CIRCUMSTANCES PREVAILING IN ITS CASE UNDER SUCH MET HOD, IT OUGHT TO HAVE CHOSEN ANOTHER MORE APPROPRIATE METHO D. ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 31 SINCE IT HAS ADOPTED TNMM AS THE MOST APPROPRIATE METHOD AND THE COMPUTATION OF ALP UNDER SUCH METHOD IS DEFINITELY WORKABLE BY COMPUTING THE OPERATING PROF IT, WE ARE OF THE CONSIDERED OPINION THAT THERE CAN BE NO WARRANT FOR CONVERTING NET OPERATING PROFIT TO `CASH PROFIT . III. WHEREAS THE LD. CIT(A) RELIED ON THE DECIS ION IN SCHEFENACKER MOTHERSON LTD. (2009-TIOL-376-ITAT-DEL ) , WHICH SAYS THAT THE OPERATING PROFIT CAN BE SUBSTI TUTED WITH THE CASH PROFIT IN CERTAIN CASES, THERE ARE OTHER D ECISIONS INCLUDING DCIT VS. PETRO ARALDITE P. LTD. (2013) 36 CCH 330 MUMTRIB WHICH HOLD THAT OPERATING PROFIT CANNOT BE CALCULATED WITHOUT DEPRECIATION. MOREOVER, THE BENC H IN THE CASE OF SCHEFENACKER MOTHERSON LTD. (SUPRA) HAS ITSELF NOTICED THAT : DEPRECIATION CAN BE TAKEN INTO ACCO UNT OR DISREGARDED IN COMPUTING PROFIT DEPENDING UPON THE CONTEXT AND PURPOSE FOR WHICH PROFIT IS TO BE COMPU TED. THERE IS NO FORMULA WHICH WOULD BE APPLICABLE UNIVE RSALLY AND IN ALL CIRCUMSTANCES. THUS, THE RATIO DECIDENDI OF THIS DECISION SHOULD BE CONFINED TO THE PECULIAR FACTS A S WERE OBTAINING IN THAT CASE AND CANNOT BE ATTEMPTED TO B E UNIVERSALLY APPLIED. ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 32 IV. COMING BACK, WE ARE CONCERNED WITH A CASE I N WHICH THE ASSESSEE IS MANUFACTURING MOLDS/DIES UNDER THE TOOLING DIVISION. THE ASSETS PLAY SIGNIFICANT ROLE IN MANUFACTURING. IN SUCH A SITUATION, THE DEPRECIATI ON COST PLAYS A MAJOR ROLE IN THE OVERALL OPERATING COST AN D AS SUCH CANNOT BE EXCLUDED. IF THE AMOUNT OF DEPRECIATION, WHICH IS OTHERWISE AN IMPORTANT ITEM OF THE OPERATING NATURE , IS EXPELLED FROM COMPUTATION, THEN NO MEANINGFUL ANAL YSIS IS POSSIBLE UNDER TNMM. WE, THEREFORE, REJECT THIS CONTENTION ADVANCED ON BEHALF OF THE ASSESSEE. V. NOW, TURNING TO THE WORKING DONE BY THE TPO UNDER THIS METHOD, IT IS NOTICED THAT HE DID NOT DISTURB THE COMPARABLE CASES AS CHOSEN BY THE ASSESSEE. HE SIMP LY WORKED OUT THE MEAN OF RATIO OF OP/SALES OF SUCH COMPANIES AT 6.17%. THIS EXERCISE WAS DONE BY THE T PO, WHEN THE ASSESSEE FAILED TO AVAIL THE OPPORTUNITY GRANTED BY THE TPO VIDE ORDER SHEET ENTRY DATED 12.12.2005 TO WORK OUT THE OPERATING PROFIT OF SUCH COMPARABLES. THOUGH THE ASSESSEE SUBMITTED ITS REPLY DATED 13.1.2006, BUT DID NOT GIVE WORKING OF OP/SALES OF SUCH COMPARABLES. I T CAN ALSO BE SEEN FROM THE ASSESSEES SUBMISSIONS AS REC ORDED BY THE LD. CIT(A) THAT THE CORRECTNESS OF SUCH OP/S ALES OF COMPARABLES WAS NOT DISPUTED. THE RIGHTNESS OF THIS ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 33 CALCULATION BY THE TPO HAS ALSO NOT BEEN CONTROVERT ED BEFORE US. AS SUCH, WE HOLD THAT THE DETERMINATION OF ALP BY THE TPO BY CONSIDERING OP/SALES AT 6.17% OF THE COMPARABLES WITH THE OPERATING LOSS SHOWN BY THE AS SESSEE, THEREBY DETERMINING TP ADJUSTMENT AMOUNTING TO RS. 1.95 CRORES (AS RECTIFIED), DOES NOT REQUIRE ANY INTERFE RENCE. THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE A DDITION MADE BY THE AO IS RESTORED. THIS GROUND OF THE REVE NUE IS ALLOWED. 6.1. THE ONLY ISSUE RAISED BY THE ASSESSEE IN IT S CROSS OBJECTION IS AGAINST THE CONFIRMATION OF DISALLOWANCE OF CONSULTANCY CHARGES AMOUNTING TO RS . 48.92 LACS. BRIEFLY STATED THE FACTS OF THIS GROUND ARTE THAT THE ASSESSEE CLAIMED DEDUCTION TO THE TUNE OF RS. 4 8.92 LACS ON ACCOUNT OF CHARGES FOR FEASIBILITY STUDY AT MAU RITIUS AS A PART OF CONSULTANCY/MANAGEMENT CHARGES. ON BEI NG CALLED UPON TO JUSTIFY THE ABOVE DEDUCTION, THE ASS ESSEE STATED THAT TWO OF ITS SUBSIDIARY COMPANIES GOT MER GED IN THE ASSESSEE DURING THE YEAR WHICH WERE EARLIER DOI NG MANUFACTURING OF PLASTIC COMPONENTS, TOOLS, MOLDS A ND DIES ETC. AS A PART OF ITS BUSINESS STRATEGY, IT WAS PRO POSED TO MANUFACTURE AND EXPORT TOOLS MOLDS OUTSIDE INDIA. I N THIS REGARD, IT TOOK CONSULTANCY SERVICES FOR CONDUCTING ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 34 FEASIBILITY STUDY FOR DOING MANUFACTURING AND EXPOR T OF TOOLS AND MOLDS IN MAURITIUS. AS PROJECT AT MAURIT IUS DID NOT MATERIALIZE, THE ASSESSEE CLAIMED DEDUCTION FO R THE ENTIRE EXPENDITURE IN THIS REGARD. THE ASSESSING OF FICER OPINED THAT THE PROVISIONS OF SECTION 35D WERE ATTR ACTED AND HENCE ONLY 1/10 TH OF THE EXPENDITURE WAS ALLOWABLE. AS THE CONCERNED PROJECT DID NOT COMMENCE DURING THE Y EAR, THE AO HELD THAT NO EXPENSE AT ALL WAS DEDUCTIBLE. THE LD. CIT(A) UPHELD THE DISALLOWANCE BY RELYING ON CERTAI N JUDGMENTS WHICH HAVE BEEN REFERRED TO IN PARA 68 ON PAGE 14 OF THE IMPUGNED ORDER. THE ASSESSEE IS AGAINST T HE SUSTENANCE OF THIS ADDITION. 6.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED ON RELEVANT MATERIAL ON RECORD. THE FIRST UNDISPUTED POSITION IS THAT THE ASSESSEE WAS EARLIE R ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF TOOLS AN D MOLDS. THE EXPENDITURE IN QUESTION WAS INCURRED FOR CONDUC TING FEASIBILITY STUDY FOR UNDERTAKING THE SAME ACTIVITY OF MANUFACTURING IN MAURITIUS. THE PLANS DID NOT FRUCT IFY AND THE PROJECT WAS ABANDONED. NOW THE QUESTION ARISES AS TO WHETHER THE EXPENSES INCURRED FOR CONDUCTING FEASIB ILITY STUDY FOR THE EXISTING PRODUCTS CAN BE ALLOWED AS D EDUCTION IN ENTIRETY U/S 37(1) OR ARE TO BE TREATED AS PRELI MINARY ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 35 EXPENSES DEDUCTIBLE @ 10% OR NOT AT ALL DEDUCTIBLE BECAUSE SUCH EXPENSES WERE INCURRED OUTSIDE INDIA. THE LD. CIT(A) HAS ADOPTED THE THIRD REASON IN REJECTING TH E ASSESSEES CLAIM. ON A SPECIFIC QUERY, THE LD. DR COULD NOT DRAW OUR ATTENTION TOWARDS ANY PART OF SECTIONS 35D OR 37(1), WHICH PROHIBITS THE ALLOWABILITY OF EXPENSES SIMPLY FOR THE REASON THAT IT WAS INCURRED OUTSIDE INDIA. THIS BEING THE POSITION, WE ARE UNABLE TO UPHOLD THE REASONING ADOPTED BY THE LD. CIT(A) FOR SUSTAINING THIS ADDITION. 6.3. NOW COMES THE NEXT QUESTION AS TO WHETHER THE EXPENDITURE SHOULD BE ALLOWED U/S 37(1) IN ENTIRETY OR SHOULD BE ALLOWED AS PRELIMINARY EXPENDITURE U/S 3 5D. THE HONBLE DELHI HIGH COURT IN CIT VS PRIYA VILLAGE ROADSHOWS LTD. (2011) 332 ITR 594 (DEL) HAS HELD THAT : `WHERE EXPENDITURE WAS INCURRED ON FEASIBILITY STUD Y ON NEW PROJECT DEVELOPMENT CONNECTED WITH THE EXISTING BUSINESS WITH A COMMON ADMINISTRATION AND COMMON FU ND, AND THE NEW PROJECT WAS SHELVED WITH NO NEW ASSET B EING CREATED, THE IMPUGNED EXPENDITURE WAS ALLOWABLE AS REVENUE EXPENDITURE . SIMILAR VIEW HAS BEEN REITERATED BY THE HONBLE DELHI HIGH COURT IN INDO SYNTHETIC (I) LTD. VS CIT (2011) 333 ITR 18 (DEL) . THE DECISIONS OF THE HONBLE NON-JURISDICTIONAL HIGH COURTS RELIED BY THE LD. CI T(A) TO ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 36 UPHOLD THE DISALLOWANCE ARE DISTINGUISHABLE IN AS M UCH AS IN THESE CASES THE EXPENSES WERE INCURRED IN RESPEC T OF NEW PROJECT OR NEW PRODUCT. AS ADMITTEDLY THE ASSESSEE INCURRED SUCH EXPENDITURE FOR THE EXTENSION OF THE EXISTING BUSINESS ON CONDUCTING MARKET FEASIBILITY STUDY FOR THE SAME PRODUCTS IN MAURITIUS, SUCH DECISIONS ARE OF NO HE LP TO THE REVENUE. IN VIEW OF THE CLEAR ENUNCIATION OF LAW BY HONBLE JURISDICTIONAL HIGH COURT ON THIS POINT, WE HOLD THAT THE DECISION TAKEN BY THE LD. CIT(A) CANNOT BE UPHELD. THE SAME IS, THEREFORE, OVERTURNED AND THE ADDITION IS DIRECTED TO BE DELETED. 7. IN THE RESULT, THE CROSS OBJECTION OF THE A SSESSEE IS ALLOWED AND THE APPEAL OF THE REVENUE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11/02/2014. SD/- SD/- (I. C. SUDHIR) (R. S. S YAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 11/02/2014 *SUBODH* ITA NO. 1816/DEL/2011 CO NO. 155/DEL/2011 37 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR DATE INITIAL 1. DRAFT DICTATED ON 04.02.2014 PS 2. DRAFT PLACED BEFORE AUTHOR 07.02.2014 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. *