M/s Tupperware India Pvt. Ltd., New Delhi V. DCIT, New Delhi

CO 191/DEL/2011

• Counselvise Citation: [2014] 122 COUNSELVISE.COM (IT) 9834 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 18 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 29-08-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 24-07-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 10-06-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ASHWANI TANEJA SOMIL AGARWA L
• Assessee Lawyers: YOGESH KUMAR VERMA
• Keywords: Reopening of assessment; Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Tangible material; Difference of opinion; Capital receipt; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 143(3); 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I, NEW DELHI) BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. NO. 2140/DEL/2011 & I.T.A.NO. 1323/DEL/2012 ASSESSMENT YEAR : 2003-04 & 2004-05 RESPECTIVELY DCIT, CIRCLE 16(1), VS. M/S. TUPPERWARE INDIA PVT. LTD., NEW DELHI 204-206, TOLSTOY HOUSE, 15, TOLSTOY MARG, NEW DELHI GIR / PAN: AAACT3770D C.O. NO.191/DEL/2011 & 168/DEL/2012 ASSESSMENT YEARS 2003-04 & 2004-05 RESPECTIVELY M/S. TUPPERWARE INDIA PVT. LTD., VS. DCIT, CIRCLE 16(1), 204-206, TOLSTOY HOUSE, NEW DELHI 15, TOLSTOY MARG, NEW DELHI GIR / PAN: AAACT3770D (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI YOGESH KUMAR VERMA, CIT DR RESPONDENT BY : S/SHRI ASHWANI TANEJA, SOMIL AGARWA L & ROHAN KHARE, ADV. ORDER PER T.S. KAPOOR, AM: THESE APPEALS HAVE BEEN FILED BY THE REVENUE AGAIN ST SEPARATE ORDERS OF LD. CIT(A) DATED 28.01.2011 AND DATED 31.01.201 2 RESPECTIVELY. THE ASSESSEE HAS ALSO FILED CROSS OBJECTIONS TO THE APP EALS FILED BY THE REVENUE. ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 2 THESE APPEALS AND THE CROSS OBJECTIONS WERE HEARD T OGETHER AND FOR THE SAKE OF CONVENIENCE, A COMMON AND CONSOLIDATED ORDER IS BEING PASSED. 2. AT THE OUTSET, LD. A.R. TOOK UP THE CROSS OBJECT ION FILED BY THE ASSESSEE IN RESPECT OF ASSESSMENT YEAR 2003-04 AND INVITED OUR ATTENTION TO THE APPLICATION SEEKING PERMISSION TO ADD/AMEND GRO UNDS OF APPEAL RAISED IN THE CROSS OBJECTION. LD. A.R. SUBMITTED THAT THE A DDITIONAL GROUNDS RAISED ARE LEGAL GROUNDS WHICH ARE EMANATING FROM THE APPE LLATE ORDER AND ARE IN ACCORDANCE WITH THE ITAT RULES. LD. A.R. SUBMITTED THAT THOUGH IN THE ORIGINAL CROSS OBJECTIONS, THESE GROUNDS WERE TAKEN BUT THE WORDING WAS NOT APPROPRIATE, THEREFORE, TO BE MORE SPECIFIC, THE AS SESSEE INTENDS TO TAKE ADDITIONAL GROUNDS WHICH READ AS UNDER: 1. THAT HAVING REGARD TO THE FACTS AND CIRCUMSTANC ES OF THE CASE, LD. CIT(A) HAS ERRED IN LAW IN CONFIRMING THE ACTIO N OF THE ASSESSING OFFICER IN ASSUMING JURISDICTION U/S 147 OF THE ACT MORE SO WHEN THERE WAS NO ESCAPEMENT OF ANY INCOME. 2. THAT HAVING REGARD TO THE FACTS AND CIRCUMSTANCE S OF THE CASE, ASSUMING THE JURISDICTION U/S 147 OF THE ACT BY THE ASSESSING OFFICER IS BAD IN LAW AND AGAINST THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. LD. D.R. DID NOT OBJECT TO THE ADMISSION OF ADDI TIONAL GROUNDS, THEREFORE, THE SAME WERE ADMITTED. 4. LD. A.R. FURTHER SUBMITTED THAT THE REASSESSMENT IN THIS CASE WAS INITIATED BY RECORDING REASONS AS PLACED IN PAPER B OOK PAGE 93 AND WE WERE TAKEN TO PAPER BOOK PAGE 93. LD. A.R. SUBMITTED TH AT FROM THE REASONS RECORDED AS PLACED AT PAPER BOOK PAGE 93, IT IS APP ARENT THAT THE ASSESSING OFFICER RECORDED THE REASONS FROM THE REPORT OF STA TUTORY AUDITORS IN FORM 3CD WHEREIN HE OBSERVED THAT THE ASSESSEE HAD NOT D EDUCTED TAX ON PAYMENTS MADE TO TUPPERWARE INDIA P. LTD. TO THE EX TENT OF RS.1,36,89,075/. ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 3 LD. A.R. SUBMITTED THAT COPY OF AUDITORS REPORT WAS ALREADY WITH THE ASSESSING OFFICER AND WAS PART OF INCOME TAX RETURN FILED BY THE ASSESSEE AND THEREFORE, REASONS FOR REOPENING THE CASE HAD E MANATED FROM EXISTING MATERIAL ONLY. IT WAS SUBMITTED THAT THERE WAS NO FRESH MATERIAL IN THE POSSESSION OF THE ASSESSING OFFICER FROM WHERE HE H AD FORMED REASON TO BELIEVE THAT INCOME HAD ESCAPED FROM ASSESSMENT. L D. A.R. INVITED OUR ATTENTION TO A NUMBER OF DECISIONS AS PLACED IN PAP ER BOOK PAGES 347-395 WHEREIN IT HAS BEEN HELD THAT WHERE THERE IS NO FRE SH MATERIAL, THE ASSESSING OFFICER CANNOT INITIATE PROCEEDINGS U/S 147 OF THE ACT IRRESPECTIVE TO THE FACT THAT THE ASSESSMENT MIGHT HAVE BEEN COMPLETED U/S 1 43(1) OF THE ACT OR U/S 143(3) OF THE ACT. OUR PARTICULAR ATTENTION WAS I NVITED TO PAPER BOOK PAGES 363-373 WHEREIN A COPY OF HON'BLE DELHI HIGH COURT ORDER IN THE CASE OF CIT VS ORIENT CRAFTS 354 ITR 356 WAS PLACED. SIM ILARLY, OUR SPECIFIC ATTENTION WAS INVITED TO THE HON'BLE RAJASTHAN HIGH COURTS DECISION IN THE CASE OF CIT VS SMT. JYOTI DEVI 218 CTR 264 AND FURT HER, WE WERE TAKEN TO PAPER BOOK PAGES 390-395 WHERE A COPY OF CASE LAW D ECIDED BY HON'BLE MADRAS HIGH COURT IN THE CASE OF BAPA LAL AND CO. 289 ITR 37 WAS PLACED. IN VIEW OF THE ABOVE LEGAL POSITION, IT WAS ARGUED THAT ASSESSMENT ORDER PASSED IN CONSEQUENCE TO PROCEEDINGS U/S 147 WAS BA D IN LAW. WITHOUT PREJUDICE TO THE ABOVE ARGUMENTS, IT WAS FURTHER SU BMITTED THAT THE ADDITION MADE BY THE ASSESSING OFFICER ON THE BASIS OF REASO NS RECORDED WAS DELETED BY LD. CIT(A) AND REVENUE HAD NOT FILED ANY APPEAL AGAINST SUCH DELETION AND THEREFORE, ADDITION MADE BY THE ASSESSING OFFIC ER WAS INCORRECT AND THEREFORE, REASONS RECORDED WERE ALSO INCORRECT. I N VIEW OF THE ABOVE FACTS ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 4 AND CIRCUMSTANCES AND IN VIEW OF THE ABOVE JUDICIAL PRECEDENTS, THE LD. A.R. SUBMITTED THAT REASSESSMENT ITSELF WAS BAD IN LAW A ND NEED TO BE QUASHED. 5. LD. D.R. ON THE OTHER HAND ARGUED THAT ASSESSMEN T WAS COMPLETED U/S 143(1), AND IN PROCESSING OF THE RETURN U/S 143(1) ASSESSING OFFICER DOES NOT GET AN OPPORTUNITY TO EXAMINE THE DOCUMENTS ACCOMPA NYING THE RETURN, THEREFORE, AFTER THE PROCESSING U/S 143(1), IF ANYT HING COMES TO THE POSSESSION OF THE ASSESSING OFFICER WHEREBY HE FORM S A BELIEF THAT INCOME HAD ESCAPED ASSESSMENT, THEN HE CAN LEGALLY REOPEN THE CASE AS IT HAS TO BE CONSIDERED AS FRESH MATERIAL AS INTIMATION U/S 143( 1) IS NOT AN ASSESSMENT ORDER. ARGUING UPON REVENUES APPEAL ON MERITS IN RESPECT OF 1 ST GROUND IN ASSESSMENT YEAR 2003-04 AND 2004-05, LD. D.R. SUBMI TTED THAT THE MOULD EXPENSES ALLOWED BY LD. CIT(A) WERE NOT VERIFIABLE. IT WAS SUBMITTED THAT ASSESSEE WAS PROVIDED A NUMBER OF OPPORTUNITIES BUT IT DID NOT SUBMIT THE RELEVANT DOCUMENTS AS ASKED FOR BY THE ASSESSING OF FICER AND, THEREFORE, EXPENSES ITSELF COULD NOT BE SUBSTANTIATED AND WERE RIGHTLY DISALLOWED BY THE ASSESSING OFFICER. INVITING OUR ATTENTION TO LD. C IT(A)S FINDINGS IN ASSESSMENT YEAR 2003-04, LD. D.R. SUBMITTED THAT TH E ORDER PASSED BY HIM IS A NON-SPEAKING ORDER. LD. D.R. SUBMITTED THAT ASSE SSEE WAS NOT A MANUFACTURER AND THEREFORE, MOULD EXPENSES WERE NOT EXPENSES WHICH WERE INCURRED FOR THE PURPOSE OF BUSINESS AND FURTHER HE HEAVILY RELIED UPON THE FINDINGS OF THE ASSESSING OFFICER. IT WAS FURTHER SUBMITTED THAT TAX WAS NOT DEDUCTED AT SOURCE AND THEREFORE, ASSESSING OFFICER KEEPING IN VIEW ALL FACTS AND CIRCUMSTANCES HAD MADE THE ADDITION. 6. IN RESPECT OF GROUND NO.2, LD. D.R. SUBMITTED TH AT LD. CIT(A) HAS NOT APPLIED HIS MIND AS HE WRONGLY RELIED UPON THE CASE LAWS OF IL JIN ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 5 ELECTRONICS (P) LTD. AS THE FACTS ARE DISTINGUISHAB LE. HE FURTHER SUBMITTED THAT LD. CIT(A) IN HIS CONCLUSION HAS NOTED CERTAIN FIGURES TO ARRIVE AT THE CONCLUSION BUT FROM WHERE HE GOT THESE FIGURES, IS NOT MENTIONED. THEREFORE, LD. CIT(A) HAS PASSED THE ORDER WITHOUT APPLICATION OF MIND AND NEEDS TO BE SET ASIDE. IN REPLY TO THE ARGUMENTS O F LD. D.R. ON MERITS ON GROUND NO.1, THE LD. A.R. SUBMITTED THAT SINCE THE PAYMENT WERE MADE TO THE NON RESIDENTS OUTSIDE INDIA AND, THEREFORE, THE RE WAS NO REQUIREMENT OF TDS AND THAT IS WHY THE TDS WAS NOT DEDUCTED. 7. LD. A.R. FURTHER SUBMITTED THAT THE ASSESSEE HAD BEEN INCURRING EXPENSES ON MOULDS SINCE 1997 AND THE SAME WERE BEI NG ALLOWED REGULARLY VIDE ASSESSMENT PROCEEDINGS U/S143(3) OF THE ACT AN D IN THIS RESPECT, OUR ATTENTION WAS INVITED TO PAGE 6 OF LD. CIT(A)S ORD ER WHERE LD. CIT(A) HAS MADE A NOTE OF THESE FACTS. LD. A.R. SUBMITTED THA T THE ADDITIONS MADE BY THE ASSESSING OFFICER WERE BAD IN LAW AS IT WAS AGA INST THE PRINCIPLES OF CONSISTENCY AS HELD BY HON'BLE SUPREME COURT IN THE CASE OF EXCEL INDIA 350 ITR 290. CONTINUING HIS ARGUMENTS, LD. A.R. SUBMIT TED THAT THE PAYMENTS WERE MADE THROUGH BANKING CHANNELS AND AS PER THE T ERMS AND CONDITIONS OF AGREEMENTS ENTERED INTO BY THE ASSESSEE WITH THE TW O COMPANIES AS PLACED IN PAPER BOOK PAGES 156-183. HE FURTHER TOOK US TO PA PER BOOK PAGES 184-239 WHEREIN COPY OF INVOICES RAISED BY OVERSEAS COMPANI ES AND CERTIFICATE OF EVIDENCE OF RECEIPT OF MOULDS BY OVERSEAS GROUP COM PANIES WAS PLACED. IN VIEW OF THE ABOVE, LD. A.R. SUBMITTED THAT BESIDES CONSISTENCY, THE ASSESSEE HAD ALL THE EVIDENCES OF HAVING MADE THE PAYMENTS F OR MOULDS WHICH WERE NECESSARILY INCIDENTAL TO THE BUSINESS OF THE ASSES SEE AND HAD ARISEN ON ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 6 ACCOUNT OF BUSINESS AGREEMENTS EXECUTED BY THE ASSE SSEE. REPLYING TO LD. D.R. ON GROUND NO.2, LD. A.R. SUBMITTED THAT ALL FI GURES WERE PROVIDED TO LD. CIT(A) AND INVITED OUR ATTENTION TO PAPER BOOK CONTAINING 570 PAGES. LD. A.R. SPECIFICALLY INVITED OUR ATTENTION TO WRIT TEN SUBMISSIONS BEFORE CIT(A) AS PLACED IN PAPER BOOK PAGE 466-570. 7.1 COMING TO THE CROSS OBJECTIONS IN ASSESSMENT YE AR 2004-05, LD. A.R. SUBMITTED THAT GROUND NO.1 OF THE CROSS OBJECTION I S REGARDING DISALLOWANCE MADE BY LD. CIT(A) ON ACCOUNT OF DEPRE CIATION EXPENSES ON COMPUTERS. LD. A.R. SUBMITTED THAT THE PAYMENT FOR PURCHASE OF COMPUTERS WAS MADE THROUGH CHEQUES AND ASSESSING OFFICER DISA LLOWED DEPRECIATION ONLY BECAUSE THE ASSESSEE WAS NOT ABLE TO PROVIDE A SSET REGISTER AND ORIGINAL BILLS OF PURCHASE. LD. A.R. SUBMITTED THAT THE ASS ESSEE IS READY TO PROVIDE ALL THE INFORMATION TO THE ASSESSING OFFICER, THEREFORE , IT WAS PRAYED THAT THIS GROUND MAY BE ALLOWED FOR READJUDICATION. 8. AS REGARDS 2 ND GROUND, REGARDING WARRANTY EXPENSES, LD. A.R. SUBMITTED THAT IN ASSESSEES OWN CASE, IN ASSESSMEN T YEAR 1999-2000, THE TRIBUNAL VIDE ITS ORDER DATED 25.08.2006 HAS DECIDE D THE ISSUE AGAINST ASSESSEE. IN THIS RESPECT, HE INVITED OUR ATTENTIO N TO PAGE 297 OF PAPER BOOK WHERE RELEVANT FINDINGS OF THE TRIBUNAL WERE PLACED . LD. A.R. SUBMITTED THAT THE TRIBUNAL HAD HELD THAT CLAIM FOR EXPENSES BE AL LOWED ON ACTUAL BASIS AND THEREFORE, IT WAS ARGUED THAT ASSESSING OFFICER BE DIRECTED TO ALLOW THE CLAIM ON ACTUAL BASIS. 9. LD. D.R. ON THE OTHER HAND SUBMITTED THAT THE TR IBUNAL HAS ALREADY DISMISSED THE SIMILAR GROUND IN ASSESSMENT YEAR 199 9-2000 AND IT HAS HELD THAT CLAIM OF THE ASSESSEE CAN BE ALLOWED ONLY ON T HE BASIS OF ACTUAL CLAIMS ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 7 WHEREAS THE AMOUNT DEBITED IN THE P & L ACCOUNT IS ON ACCOUNT OF PROVISION ONLY. 10. WE HAVE HEARD RIVAL PARTIES AND HAVE GONE THROU GH THE MATERIAL PLACED ON RECORD. WE FIRST TAKE UP ADDITIONAL GROUND TAKE N BY LD. A.R. IN ASSESSMENT YEAR 2003-04. THE LD. A.R. HAD ARGUED A T LENGTH TO HIGHLIGHT THAT REASSESSMENT WAS INITIATED ON THE BASIS OF MAT ERIAL ALREADY ON RECORD AND THERE WAS NO FRESH MATERIAL TO INITIATE SUCH PROCEE DINGS. WE HAVE CAREFULLY GONE THROUGH THE CASE LAW RELIED UPON BY THE LD. A. R. IN THIS RESPECT AND WE FIND THAT IN ALL THESE CASES, IT HAS BEEN HELD THAT WHERE THERE IS NO FRESH MATERIAL IN THE POSSESSION OF THE ASSESSING OFFICER , REASSESSMENT PROCEEDINGS ARE NOT VALID. IN THIS RESPECT, HON'BL E HIGH COURT IN THE CASE OF CIT VS ORIENT CRAFTS 354 ITR 536 HAS HELD AS UNDER: 3. THE ASSESSEE OBJECTED TO THE REOPENING OF THE A SSESSMENT CONTENDING THAT THERE WAS NO FRESH OF TANGIBLE MATE RIAL DISCERNED BY THE REVENUE FOR NOTICE FOR REASSESSMENT. THIS OBJEC TION V AS OVERRULED AND, THE AO ADDED BACK THE SAID AMOUNT AS BUSINESS INCOME OBSERVING THAT THE NATURE OF THE CONSIDERATION RECE IPT HAVING REGARD TO THE TERMS OF THE AGREEMENT WAS SUCH THAT IT WAS INCOME AND NOT CAPITAL RECEIPT. . THE ASSESSEE PREFERRED AN APPEAL BUT WITHOUT SUCCESS TO THE COMMISSIONER (APPEALS). THE COMMISSIONER (AP PEALS) HAD DURING THE PENDENCY OF THE APPEAL CALLED FOR REMAND REPORT AND AFTER DISCUSSING ITS CONTENTS REJECTED THE APPEAL. 4. THE INCOME TAX APPELLATE TRIBUNAL AFTER CONSID ERING THE DECISION OF THE SUPREME COURT IN CIT VS. KELVINATOR (INDIA) LTD. (2010) 320ITR 56} AS WELL AS THE LATER RULINGS OF T HE SUPREME C0U11 AND THIS COURT HELD THAT THERE WAS NO TANGIBLE MATE RIAL AND THAT THE MERE CIRCUMSTANCE THAT ADVANCE TAX TO THE TUNE OF R S.27.6 LAKHS WAS PAID DID NOT AMOUNT TO ADMISSION BY HIM. THE LEARNE D COUNSEL FOR THE REVENUE CONTENDS THAT HAVING REGARD TO THE EXPLANAT ION I OF SECTION 147 READ WITH SECTION 143( I). THE REOPENING OF THE ASSESSMENT IN THIS CASE WAS JUSTIFIED. SHE ALSO ARGUED THAT THE AGREEM ENT ENTERED INTO BY ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 8 THE ASSESSEE UNDER WHICH THE AMOUNT WAS PAID HAD NO T BEEN FILED DURING THE ASSESSMENT STAGE. THIS ACCORDING TO THE REVENUE JUSTIFIED THE REASSESSMENT PROCEEDINGS. 5. AS TO WHAT CONSTITUTES VALID 'REASONS TO BELIE VE' IS NO LONGER A MATTER OF DEBATE. SO LONG AS THE LAW DECLA RED IN KELVINATOR (SUPRA) STANDS, A VALID REOPENING OF ASSESSMENT HAS TO BE BASED ONLY ON TANGIBLE MATERIAL TO JUSTIFY THE CONCLUSION THAT THERE IS ESCAPEMENT OF INCOME. IN THE PRESENT CASE THE NOTE FORMING PAR T OF THE RETURN CLEARLY MENTIONED AND DESCRIBED THE NATURE OF THE R ECEIPT UNDER A NON-COMPETE AGREEMENT. THE REASONS FOR THE NOTICE U NDER SECTION T47 NOWHERE MENTIONED THAT THE REVENUE CAME UP WITH ANY OTHER FRESH MATERIAL WARRANTING REOPENING OF ASSESSMENT. IN THE SE CIRCUMSTANCES, THE COURT IS OF THE OPINION THAT MERE CONCLUSION OF THE PROCEEDINGS UNDER SECTION 143( I) IPSO FACTO DOES NOT BRING INV OCATION OF POWERS FOR REOPENING THE ASSESSMENT. WE ARE SATISFIED TH AT THE TRIBUNALS REASONS ARE JUSTIFIED AND DO NOT CALL FOR ANY INTER FERENCE. 11. SIMILARLY, IN THE CASE LAW OF CIT VS SMT. JYOTI DEVI 218 CTR 264 THE HON'BLE HIGH COURT OF RAJASTHAN HAS HELD AS UNDER: 12. THE PRECISE QUESTION, THEREFORE IS, AS TO WHE THER IN THE PRESENT CASE, ANY SUBSEQUENT INFORMATION, OR MATERIAL HAVE COME TO THE NOTICE OF THE AO, TO ENABLE HIM TO FORM A REQUISITE BELIEF , THAT ANY PARTICULAR INCOME HAS ESCAPED ASSESSMENT, WHICH WAS LIABLE TO BE ASSESSED, AND APART FROM THE FACT, THAT AS FOUND BY THE LEARNED C IT(A), AND THE LEARNED TRIBUNAL, THAT THERE WAS NO SUBSEQUENT INFO RMATION, OR FRESH MATERIAL, WE AGAIN POINTEDLY ASKED THE LEARNED COUN SEL FOR THE REVENUE TO POINT OUT, AS TO HOW THESE FINDINGS ARE WRONG, AND TO SHOW EVEN TO US, IF THERE IS ANY MATERIAL, WHICH MIGHT H AVE COME TO THE NOTICE OF THE AO SUBSEQUENTLY, BUT THE LEARNED COUN SEL FOR THE REVENUE COULD NOT POINT OUT ANYONE. 13. THAT BEING THE POSITION, IN OUR VIEW, IT WAS RI GHTLY FOUND BY THE LEARNED CIT(A), AND THE LEARNED TRIBUNAL, THAT IT W AS MERELY A CHANGE OF OPINION ON THE PART OF THE LEARNED AO, ABOUT ADM ISSIBILITY OF CLAIM OF DEPRECIATION ON TRACTORS, AND IN VIEW OF THE JUD GMENT OF HON'BLE THE ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 9 SUPREME COURT, IN CIT VS. BHANJI LAVJI'S CASE (SUPR A), THE AO COULD NOT INITIATE REASSESSMENT PROCEEDINGS. 14. IN VIEW OF THE ABOVE, QUESTION NO. 1 IS ANSWERE D AGAINST THE REVENUE, AND IT IS HELD, THAT IN THE CIRCUMSTANCES OF THE CASE, THE RESORT TO PROCEEDINGS UNDER S. 147, WAS OUTCOME OF MERE CHANGE OF OPINION. SO FAR AS QUESTION NO.2 IS CONCERNED, IN O UR VIEW IT DOES NOT ARISE IN THE PRESENT CASE, BECAUSE IT IS NOT A CASE HERE, THAT THE AO HAS FAILED TO MAKE REGULAR ASSESSMENT WITHIN THE TIME P ERMITTED, AFTER ASSESSMENT UNDER S. 143(1)(A). 12. THE OTHER CASE LAWS RELIED UPON BY THE LD. A.R. ALSO SUPPORTS THE CASE OF THE ASSESSEE AND LD. D.R. HAS NOT FURNISHED ANY JUDGEMENT AGAINST THE ABOVE SAID PROPOSITION. IN THE PRESENT CASE, WE OB SERVE THAT THE ASSESSING OFFICER HAD FORMED AN OPINION REGARDING ESCAPEMENT OF INCOME ON THE BASIS OF AUDIT REPORT WHICH WAS A PART OF THE RETURN AND WHICH WAS ALREADY AVAILABLE WITH THE ASSESSING OFFICER. THOUGH THE A SSESSMENT IN THE PRESENT CASE WAS COMPLETED U/S 143(1) YET IT DOES NOT MAKE ANY DIFFERENCE AS THE CASE LAW RELIED UPON BY THE LD. A.R. WERE ALSO PROC ESSED U/S 143(1) OF THE ACT AND THEREFORE, THESE JUDGEMENTS ARE SQUARELY AP PLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. THEREFORE, RESP ECTFULLY FOLLOWING THE ABOVE JUDICIAL PRONOUNCEMENTS, WE HOLD THAT THE REA SSESSMENT PROCEEDINGS WERE NOT LEGALLY INITIATED AND, THEREFORE, ASSESSME NT ORDER PASSED IN CONSEQUENCE THEREOF IS LIABLE TO BE QUASHED AND WE HOLD ACCORDINGLY. 13. IN VIEW OF THE ABOVE FACTS, WE QUASH THE ASSESS MENT ORDER AND ALLOW THE CROSS OBJECTION FILED BY THE ASSESSEE. SINCE, WE HAVE ALREADY QUASHED THE ASSESSMENT ORDER, REVENUES APPEAL HAS BECOME INFRU CTUOUS AND IS THEREFORE DISMISSED. IN NUTSHELL, C.O. OF THE ASSESSEE IS AL LOWED WHEREAS APPEAL OF THE REVENUE IS DISMISSED FOR ASSESSMENT YEAR 2003-04. ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 10 14. NOW, COMING TO ASSESSMENT YEAR 2004-05, IT IS O BSERVED THAT THE 1 ST ISSUE RAISED BY THE REVENUE IS REGARDING DISALLOWAN CE OF MOULDS EXPENSES. WE FIND THAT THIS ISSUE TAKEN AS FIRSTS GROUND IS S QUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL DATED 14. 03.2014 IN I.T.A.NOS. 137 & 2012/DEL/2011 AND 2608/DEL/2012 FOR THE ASSESSMEN T YEARS 2007-08 AND 2008-09. THE TRIBUNAL HAS DEALT WITH THE SIMILAR I SSUE IN PARA 10-16. FOR THE SAKE OF CONVENIENCE, THE SAME IS REPRODUCED BEL OW: 10. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LD. DEPARTMENTAL REPRESENTATIVE PLACED RELIANCE UPON TH E ORDER OF THE AO. HE REITERATED THAT ASSESSEE HAS ADOPTED A COLO RABLE DEVICE. HE SUBMITTED THAT THE NATURE OF TRANSACTION BETWEEN TH E ASSESSEE AND THE CONTRACT MANUFACTURER WAS THAT ALL PURCHASERS AND S ELLER. HENCE, THERE WAS NO QUESTION OF PAYMENT OF MOULDS RENTALS BY THE ASSESSEE WHO IS A PURCHASER. HE FURTHER SUBMITTED THAT IN EXCISE PROCEEDINGS THE MATTER HAS GONE TO THE SETTLEMENT COMMISSION AN D EXCISE LIABILITY IN THIS REGARD FASTENED ON THE CONTRACT MANUFACTURE RS. HENCE, HE SUBMITTED THAT THE LD. CITS INFERENCE IN THIS REGA RD IS NOT SUSTAINABLE. LD. COUNSEL OF THE ASSESSEE ON THE OT HER HAND SUPPORTED THE ORDER OF THE LD. CIT(A). HE REITERATED THAT U SE OF MOULDS AND THE PAYMENTS OF RENTAL BY THE ASSESSEE WAS A PART OF AG REEMENT WITH THE CONTRACT MANUFACTURER. HE FURTHER PLACED RELIANCE OF THE DECISION OF THE HONBLE APEX COURT IN EXCEL INDUSTRIES EXCEL I NDUSTRIES EXCEL INDUSTRIES EXCEL INDUSTRIES 358 ITR 593. 358 ITR 593. 358 ITR 593. 358 ITR 593. 11. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS A ND PERUSED THE RECORDS. AT THE OUTSET, WE NOTE THAT THE MOULD EXPE NSE IN THIS REGARD WAS BEING INCURRED BY THE ASSESSEE FOR THE ASSTT. Y EAR 1997-98. THE SAME HAS BEEN ALLOWED BY THE AO AS BUSINESS EXPENDI TURE. NO DISALLOWANCE IN THIS REGARD WAS MADE IN THE PRECEDI NG ASSTT. YEAR I.E. 2005-06 ALSO IN 143(3) ASSESSMENT. IN THESE CIRCUM STANCES, WE FIND THAT THERE IS NO CHANGE IN THE FACTS AND LEGAL PO SITION. IN THIS REGARD, WE FIND THAT HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. CIT VS. CIT VS. CIT VS. DALMIA PROMOTERS DEV ELOPERS (P) LTD. ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 11 281 ITR 346 DALMIA PROMOTERS DEVELOPERS (P) LTD. 28 1 ITR 346 DALMIA PROMOTERS DEVELOPERS (P) LTD. 281 ITR 346 DA LMIA PROMOTERS DEVELOPERS (P) LTD. 281 ITR 346, HAS HELD THAT FOR REJECTING THE VIEW TAKEN IN EARLIER ASSESSMENT Y EARS, THERE MUST BE MATERIAL CHANGE IN THE FACT, SITUATION OR IN LAW. WE FIND THAT IN THIS CASE THERE IS NO CHANGE IN THE FACTS, SITUATION OR IN LAW. HENCE, THE REVENUE CANNOT BE ALLOWED TO ADOPT A DIFFERENT STAN D. THIS IS ALSO REITERATED BY THE HONBLE APEX COURT DECISION IN E XCEL INDUSTRIES EXCEL INDUSTRIES EXCEL INDUSTRIES EXCEL INDUSTRIE S (SUPRA). (SUPRA). (SUPRA). (SUPRA). IN THIS REGARD, IT WAS HELD THAT WHEN IN EARLIER ASSTT. YEARS THE REVENUE ACCEPTED THE ORDER OF THE TRIBUNA L IN FAVOUR OF THE ASSESSEE, THEN REVENUE CANNOT BE ALLOWED TO FLIP F LOP ON THE ISSUE AND IT OUGHT LET THE MATTER REST RATHER THAN SPEND THE TAX PAYERS MONEY IN PURSUING LITIGATION FOR THE SAKE OF IT. 12. EVEN ON MERITS, WE FIND THAT THE EXPENDITURE ON MOULD IS ALLOWABLE IN THE HANDS OF THE ASSESSEE. THE PAYMENT OF MOULD RENTAL WAS DONE BY THE ASSESSE E UNDER A CONTRACTUAL OBLIGATION WITH THE CONTRACT MANUFACTUR ER. IN THIS REGARD, FOLLOWING TERMS OF CONTRACT IN THE CONTRACT MANUFAC TURING AGREEMENT WITH DART INDIA LTD. CAN BE GAINFULLY REFERRED HER E:- ...THE CONTRACT MANUFACTURER RECOGNISES THAT CERTA IN MOULDS WILL BE IMPORTED BY TUPPERWARE FOR THE SPECIFIC PUR POSE OF MANUFACTURE OF PRODUCTS AND ACCORDINGLY, THE MANUFA CTURER SHALL RETURN THE MOULDS TO TUPPERWARE IMMEDIATELY U PON THE MANUFACTURER OF ORDERED QUANTITIES AS STATED IN THE RELEVANT ORDER WITHIN THE TIME SPECIFIED THEREIN. 13. THUS, IT IS CLEAR THAT MOULD RENTALS WAS PAYABL E BY THE ASSESSEE UNDER A CONTRACTUAL OBLIGATION WITH CONTRACT MANUFA CTURER. THE CONTRACT MANUFACTURER HAVE ALSO GIVEN A CERTIFICATE TO THE EXTENT THAT MOULD RENTALS WAS TO BE BORNE BY THE ASSESSEE PURSU ANT TO THE AGREEMENT. HENCE, THE EXPENDITURE IN QUESTION CAN NOT BE SAID TO BE NOT ALLOWABLE. 14. THE PRODUCT BEING DEALT BY THE ASSESSEE HAD TO MEET INTERNATIONAL QUALITY AND SPECIFICATION OF TUPPERWARE WORLD WID E WHICH REQUIRES USE OF HIGH QUALITY AND SPECIFIC TYPE OF MOULDS, AS THE DESIGN OF PRODUCTS ARE PATENT DESIGN. THE MOULDS USED BY MAN UFACTURER OF ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 12 PRODUCTS ARE NOT AVAILABLE IN THE OPEN MARKET. THE REFORE, THE COMPANY HAD TO IMPORT THESE MOLDS FROM OVERSEAS GR OUP COMPANY ON HIRE BASIS AND PROVIDE THE SAME TO CONTRACT MANUFA CTURERS TO ENABLE THEM TO MANUFACTURE THE PRODUCTS. ONCE THE CONTRACT MANUFACTURER COMPLETES THE ORDER PLACED BY THE ASSESSEE, THE MOL DS ARE RETURNED BACK TO THE COMPANY AND THEREFROM TO THE MOLDS OWNE RS IN CASE THE PARTICULAR MOLDS, IS NOT REQUIRED FOR USE OF MANUFA CTURER. WE FIND THAT THE ABOVE CONTRACT AND MOLDS BORROWED BY THE A SSESSEE CAN BY NO STRETCH OF IMAGINATION BE CONSIDERED AS A COLORABLE DEVICE. IN OUR CONSIDERED OPINION, THE SAME HAS BEEN RIGHTLY ALLOW ED BY THE LD. CIT(A) AS REVENUE EXPENSES. 15. WE ALSO AGREE WITH THE LD. CIT(A) THAT EVEN IF FOR THE SAKE OF ARGUMENT, IF IT WAS TO BE PRESUMED THAT THE PAYMENT OF MOULD RENTALS IS THE LIABILITY OF THE CONTRACT MANUFACTURERS AND SO INCURRED BY THEM IN THAT CASE THE COST OF SUCH MOULD RENTALS WOULD B E PART OF 'PURCHASES' AS IT WOULD INCREASE THE PRODUCTION COS T OF THE CONTRACT MANUFACTURER AND ACCORDINGLY, THE PURCHASE PRICE BA RGAINED BY THE APPELLANT WOULD BE INCREASED BY THE SAME AMOUNT OF MOULD RENTAL. THUS, IN THE ABOVE SITUATION THE ASSESSEE WOULD NOT INCUR RENTAL EXPENSES, BUT WILL HAVE TO PAY RESULTANT HIGHER PUR CHASE PRICE TO THE CONTRACT MANUFACTURER. THUS THE POSITION IN THE HA NDS OF THE ASSESSEE WILL BE THAT THE NET EFFECT ON REVENUE WOULD BE THE SAME. HENCE, THE SITUATION WOULD BE REVENUE NEUTRAL. 16. ACCORDINGLY, IN THE BACKGROUND OF THE AFORESAID DISCUSSIONS AND PRECEDENTS, WE DO NOT FIND ANY INFIRMITY IN THE ORD ER OF THE LD. CIT(A). ACCORDINGLY, WE UPHOLD THE SAME. 15. IN VIEW OF ABOVE, GROUND NO.1 OF THE REVENUES APPEAL IS DISMISSED. 16. THE 2 ND GROUND OF REVENUES APPEAL IS WITH RESPECT TO TRAN SFER PRICING ISSUE. LD. CIT(A) HAS HELD THAT THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WERE AT ARMS LENGTH BY HOLDING AS UNDE R: 7.4. THE APPELLANT HAD MADE A DETAILED SUBMISSION ON 08.11.2011. IT IS ALSO STATED THAT THERE WAS NO ADD ITION MADE IN THE AY ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 13 2002-03 BY THE TPO/ AO EVEN WHEN THE TRANSACTIONS W ERE EXACTLY SIMILAR DURING THAT YEAR. THE POINTS FOR DETERMINAT ION IN THIS CASE ARE AS FOLLOWS: 1. MOST APPROPRIATE METHOD AND PLI TO BE USED IN T HIS CASE. 2. TREATMENT TO BE GIVEN TO NON OPERATING EXPENSES WHILE CALCULATING PLI OF THE APPELLANT. 3. PROPORTIONATE ADJUSTMENT TO BE MADE AGAINST THE INTERNATIONAL TRANSACTION AS OPPOSED TO THE ENTITY LEVEL ADJUSTME NT MADE BY THE TPO. THESE ISSUES ARE DECIDED AS FOLLOWS: 7.5. ISSUE 1. MOST APPROPRIATE METHOD AND PLI TO BE USED IN THIS CASE: THE APPELLANT HAD SUBMITTED THAT IT OPERATES AS A D ISTRIBUTOR OF PLASTIC FOOD STORAGE AND SERVING CONTAINERS. IT HAS SUBCONT RACTED THE MANUFACTURING ACTIVITY TO CONTRACT MANUFACTURERS. T HE MOULDS REQUIRED TO MANUFACTURE THE PRODUCTS ARE LEASED IN BY THE APPELLANT FROM THE AES AND THEREAFTER SUPPLIED TO CONTRACT MA NUFACTURERS. MOULDS ARE USED TO PRESS PLASTIC INTO FORM AND ARE AN ESSENTIAL EMBODIMENT OF THE PRODUCT DESIGN. IT WAS POINTED T HAT THESE MOULDS ARE PROPRIETARY IN NATURE AND ARE DEVELOPED AND OWN ED BY THE OVERSEAS GROUP ENTITIES. IT WAS SUBMITTED THAT THE APPELLANT DOES NOT ADD V ALUE TO THE PRODUCTS AND CARRIES OUT THE FUNCTIONS OF A PURE RE SELLER. IT MERELY PROCURES THE MOULDS FROM THE AES AND SUPPLIES THEM TO CONTRACT MANUFACTURERS FOR USE IN PRODUCTION. THEREAFTER, IT PROCURES FINISHED GOODS FROM THE CONTRACT MANUFACTURERS AND SELLS THE M IN THE INDIAN MARKET WITHOUT ADDING ANY VALUE THEREON. ACCORDING TO THE APPELLANT, THERE IS A VERY STRONG CO-RELATION AND INTERDEPENDE NCE BETWEEN THE TRANSACTION OF PAYMENT OF MOULD LEASE RENTALS AND T HE CORE ACTIVITY OF THE APPELLANT, WHICH IS THAT OF DISTRIBUTION, I.E., PURCHASE AND RESALE (WITHOUT ADDING VALUE), OF PLASTIC FOOD STORAGE AND SERVING CONTAINERS. WITHOUT ACCESS TO THESE PROPRIETARY MOULDS, THE APP ELLANT WOULD NOT HAVE BEEN ABLE TO CONDUCT/ CARRY OUT ITS DISTRIBUTI ON ACTIVITY. IT IS SUBMITTED THAT RPM IS MOST APPROPRIATE FOR A DISTRI BUTOR WHO DOES NOT ADD VALUE TO THE GOODS BY PHYSICALLY ALTERING T HEM AND BECAUSE THIS IS PRECISELY THE SITUATION IN CASE OF CLASS I TRANSACTIONS OF THE APPELLANT (SEE TABLE-L], RPM WAS CONSIDERED AS THE MOST APPROPRIATE METHOD FOR DECIDING THE ARM'S LENGTH PRICE. ACCORDI NGLY, THE APPELLANT CONCLUDED THAT, GIVEN THE FACTS AND CIRCUMSTANCES O F THE INSTANT CASE, SELECTION OF RPM AS THE MAM TO BENCHMARK THE APPELL ANT'S CLASS I ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 14 TRANSACTIONS IS IN LINE WITH THE GUIDANCE PROVIDED BY THE RULE LOC OF THE INCOME-TAX RULES, 1961. REASONS FOR DECISION: I HAVE CAREFULLY EXAMINED THE SUBMISSION MADE BY TH E APPELLANT. IT IS CLEAR THAT THERE WAS HARDLY ANY VALUE ADDITION MADE BY THE APPELLANT RELATING TO THE INTERNATIONAL TRANSACTION, WHATEVER WAS THE VALUE ADDITION IT WAS ONLY THROUGH RESALE OF THE GOODS PU RCHASED. THE FUNCTION OF THE APPELLANT IS THAT OF A RESELLER. TH EREFORE, THE RPM IS THE MOST APPROPRIATE METHOD IN THIS CASE. THERE WAS NO VALID REASON FOR CHANGE OF MOST APPROPRIATE METHOD IN THIS CASE BY THE TPO. THE TPO ORDER MAKES SOME GENERIC OBSERVATION ABOUT THE MOST APPROPRIATE METHOD AND WITHOUT ANY ANALYSIS REFERRI NG TO THE CASE IN HAND, JUMPS TO THE CONCLUSION THAT TNMM IS THE MOST APPROPRIATE METHOD IN THIS THEREFORE, THE METHOD EMPLOYED BY TH E TPO IS NOT CORRECT SINCE IT IS NOT BASED ON ANY FACTS RELEVANT TO THE CASE. 7.6. ISSUE 2. TREATMENT TO BE GIVEN TO NON OPERATI NG EXPENSES WHILE CALCULATING PLI OF THE APPELLANT: IT IS SUBMITTED THAT WHILE COMPUTING THE ADJUSTMENT ON ACCOUNT OF THE ARM'S LENGTH PRICE IN THE APPELLANT'S CASE, THE TPO HAS INCORRECTLY INCLUDED CERTAIN NON-OPERATING/ EXTRAORDINARY EXPEN SES IN THE APPELLANT'S COST BASE FOR CALCULATING ITS OPERATING LOSS PERCENTAGE. IT IS SUBMITTED THAT THE OPERATING EXPENSES ARE THO SE EXPENSES WHICH ARE INCURRED DURING THE NORMAL RUNNING OF BUSINESS AND ARE NECESSARY TO MAINTAIN THE REAL PROPERTY AND CONTINUED PRODUCT ION/ OPERATIONS FOR EFFECTIVE GROSS INCOME. IN THIS REGARD ATTENTIO N IS DRAWN TO THE JUDGMENT OF SONY INDIA (P) LIMITED [114 ITD 448] WH EREIN ON THE ISSUE OF EXCLUSION OF LOCAL AREA DEVELOPMENT TAX (' LADTJ FROM THE COMPUTATION OF OPERATING PROFIT, THE ITAT HAD HELD THAT A COST WHICH IS NOT RELATED TO THE ONGOING OPERATIONS OF THE TAX PAYER SHOULD BE EXCLUDED FROM THE COMPUTATION OF ITS OPERATING PROF IT. FURTHER, EVEN IN THE CASE OF HONEYWELL AUTOMATION INDIA LTD. (2009-T IOL-104- ITAT- PUNE), THE PUNE BENCH OF ITAT HAS HELD THAT AN ITEM OF RECEIPT OR ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 15 EXPENDITURE, WHICH HAS NO DIRECT CONNECTION/ NEXUS WITH OPERATING PROFIT SHOULD BE IGNORED. THE APPELLANT HAS GIVEN THE FOLLOWING CALCULATION B Y STATING THAT NON- OPERATING/ EXTRAORDINARY ITEMS SHOULD BE EXCLUDED F ROM THE COMPUTATION OF THE APPELLANT'S OPERATING LOSS PERCE NTAGE. TABLE 2: PARTICULARS F.Y.2003-04 SALES 564,764,554 COST OF SALES 318,840,248 SERVICE FEE 4,794,553 EMPLOYEE REMUNERATION & BENEFITS 54,176,687 ADMINISTRATION EXPENSES 73,323,119 SELLING & DISTRIBUTION EXPENSES 104,993,775 DEPRECIATION 14,640,476 TOTAL COST (T.C.) 569,626,964 OPERATING PROFIT (O.P.) 4,862,410 OP/SALES -0.86% PARTICULARS FY 2003-04 RECONCILIATION ADD:NON-OPERATING/ EXTRAORDINARY INCOME OTHER INCOME 5,387,133 LESS:NON-OPERATING/ EXTRAORDINARY EXPENSES: OBSOLETE STOCK WRITTEN OFF 14,083,604 FINANCIAL & OTHER CHARGES 1,469,325 FIXED ASSETS WRITTEN OFF 81,630 PRIOR PERIOD EXPENSES 1,141,894 PROFIT AFTER TAX (16,251,730) ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 16 REASONS FOR DECISION: AS CAN BE SEEN FROM THE ABOVE TABLE-2, OTHER INCOME TO THE EXTENT OF RS. 53,87,133/ - IS EXCLUDED. THE FINANCIAL CHARGES , OBSOLETE STOCK AND FIXED ASSET WRITTEN OFF, PRIOR PERIOD EXPENSES ARE EXCLUDED WHILE COMPUTING THE PLI. DURING THE COURSE OF THE TP PROC EEDINGS, THE APPELLANT HAD FILED THE TP STUDY BEFORE THE TPO WHI CH SPECIFICALLY EXCLUDED THESE ITEMS AS NON OPERATING ITEMS. TPO HA S NOT GIVEN ANY REASON FOR TAKING THE SAME AS OPERATING IN NATURE. THE EXPENSES WHICH ARE MENTIONED ABOVE LIKE FIXED ASSETS AND OBSOLETE STOCK WRITTEN OFF AND PRIOR PERIOD EXPENSES ARE NOT DIRECTLY LINKED T O THE OPERATION OF THE APPELLANT FOR THE CURRENT YEAR. FINANCIAL CHARG ES FALLS IN THE SAME CATEGORY AS OTHER INCOME AND BOTH OF THEM HAVE TO B E EXCLUDED WHILE COMPUTING THE PLI. APPARENTLY, THE TPO HAS NOT TAKE N THE SAME AS OPERATING IN THE HANDS OF THE COMPARABLES CHOSEN. T HEREFORE, THERE IS MERIT IN THE ARGUMENT OF THE APPELLANT THAT THE ABO VE ITEMS SHOULD BE EXCLUDED WHILE CALCULATING THE PLI. THE DECISIONS O F THE HON'BLE ITAT IN CASE OF SONY INDIA AND HONEYWELL AUTOMATION INDI A LTD. QUOTED ABOVE ALSO SUPPORTS THE SAME VIEW. 7.7. ISSUE 3. PROPORTIONATE ADJUSTMENT TO BE MADE AGAINST THE INT ERNATIONAL TRANSACTION AS OPPOSED TO THE ENTITY LEVEL ADJUSTME NT MADE BY THE TPO: THE APPELLANT PLACED RELIANCE ON THE RULINGS PRONOU NCED BY THE HON'BLE DELHI BENCH OF THE ITAT IN THE CASE OF IL J IN ELECTRONICS (I) PVT. LTD. [2010 36 SOT 227 & BY THE HON'BLE BANGALO RE BENCH IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LT D. (IT 1231/ BANG- 2010). IN THE SAID RULING THE HON'BLE DELHI BENCH O F THE ITAT HAS HELD THAT THE ADJUSTMENT MADE TO THE TRANSFER PRICES OF THE TAXPAYER SHOULD BE PROPORTIONAL TO THE QUANTUM OF INTERNATIONAL TRA NSACTIONS ENTERED INTO BY IT. AS THE DECISION RELIED BY THE APPELLANT IS THE DECISION OF THE HON'BLE ITAT DELHI WHICH IS BINDING ON THE CIT(APPE ALS) IN DELHI, PROPORTIONATE ADJUSTMENT IS JUSTIFIED IN THIS CASE. 7.8. BASED ON THE ABOVE DISCUSSION, THE FOLLOWING S CENARIOS EMERGE. ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 17 1. USING THE RPM AS THE MOST APPROPRIATE METHOD, T HE MARGIN OF THE APPELLANT IS AT 42.73% AS PER THE TP REPORT. TH E MARGIN OF THE COMPARABLES (ACCEPTED BY THE TPO AS COMPARABLE COMP ANIES) WITH THE SINGLE YEAR DATA IS AT (GP/ SALES) 20.66% (SEE THE TABLE-3 BELOW). TABLE-3: S.NO. COMPANY NAME GP/SALES (MAR 04) 1 ACI INFOCOM LTD. 6.41% 2 ADAM COMSOF LTD. 19.05% 3 BLOW PLAST LTD. (MERGED) 34.61% 4 POSITIVE ELECTRONICS LTD. 11.67% 5 REDINGTON (INDIA) LTD. DATA NOT AVAILABLE 6 UNIPORT COMPUTERS LTD. 25.00% 7 USHA INTERNATIONAL LTD. 27.21% AVERAGE 20.66% THEREFORE, THE INTERNATIONAL TRANSACTION OF THE APP ELLANT IS AT ARM'S LENGTH. 2. EXCLUDING THE NON OPERATING INCOME AND N ON OPERATING EXPENDITURE THE PLI OF THE APPELLANT CALCULATED IS AT -0.86% IN TABLE- 2. BASED ON THE RATIO OF IL JIN ELECTRONICS (I) PVT . LTD. (SUPRA) CALCULATION OF THE PROPORTIONATE ADJUSTMENT AND + / -5% IS AS FOLLOWS: TABLE 4: CORRECT O.P./SALES COMPUTATION OF THE APPELLANT OPERATING INCOME OF THE APPELLANT (SALES) A 564,764 ,554 OPERATING COST OF THE APPELLANT B 569,626,964 OPERATING LOSS OF THE APPELLANT C=A-B 4,862,410 OPERATING LOSS PERCENTAGE OF THE APPELLANT D 0.86% AARMS LENGTH OPERATING PROFIT % AS DETERMINED BY TPO E 1.28% ARMS LENGTH OPERATING PROFIT AS DETERMINED BY TPO F=E*A 7,228,968 ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 18 SHORTFALL IN OPERATING PROFIT OF THE APPELLANT G=F- C 12,091,396 COMPUTATION OF ADJUSTMENT BY APPLYING PRINCIPLES ENUNCIATED IN THE IL JIN RULING PURCHASE OF FINISHED GOODS BY THE APPELLANT H 8,582 ,423 PAYMENT OF MOULD LEASE RENTALS BY THE APPELLANT I 4 4,365,829 PAYMENT OF MANAGEMENT SERVICES FEE BY THE APPELLANT J 4,794,553 TOTAL INTERNATIONAL TRANSACTIONS WITH AES (PAYABLES) K=H+I+J 57,742,805 TOTAL COST OF THE APPELLANT B 564,764,554 AE COSTS AS A PERCENTAGE OF TOTAL COSTS L+K/B 10% TP ADJUSTMENT ATTRIBUTABLE TO AE COSTS M=G*L 1,236, 252 TP ADJUSTMENT ATTRIBUTABLE TO INTERNATIONAL TRANSACTIONS PURCHASE OF FINISHED GOODS BY THE APPELLANT N=H/K*M 183,746 PAYMENT OF MOULD LEASE RENTALS BY THE APPELLANT O=I /K*M 949,856 PAYMENT OF MANAGEMENT SERVICES FEE BY THE APPELLANT P=J/K*M 102,650 CALCULATION OF +/-5% TABLE 5: INTERNATIONAL TRANSACTIONS BOOK VALUE (RS.) ADDITION TO ALP ALP 105% OF ALP TP ADDITION TO BE MADE PURCHASE OF FINISHED 8,582,423 183,746 8,398,677 8,818,610 NIL SINCE BOOK ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 19 GOODS VALUE IS LOWER THAN 105% OF ALP AND THEREFORE WITHIN ALLOWABLE (+/-)5% RANGE PAYMENT OF MOULD LEASE RENTALS 44,365,829 949,856 43,415,973 45,586,772 PAYMENT OF MANAGEMENT SERVICES FEE 4,794,553 102,650 4,691,903 4,926,499 17. WE FIND THAT LD. CIT(A) HAS ELABORATELY DEALT W ITH THE ISSUE AND HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY FOLL OWING THE JUDGMENT OF IL JIN ELECTRONICS INDIA PVT. LTD. THOUGH THERE ARE SMALL CALCULATION MISTAKES AS IN TABLE 4 UNDER THE ITEM B AGAINST TOTAL COST, THE FIGURE OF TOTAL REVENUE HAS BEEN TAKEN. SIMILARLY, IN THE SAME TABLE AGAIN ST COLUMN M THERE IS SMALL MISTAKES BUT THESE MISTAKES ARE NOT MATERIAL TO ALT ER THE DECISION OF LD. CIT(A). THE ARGUMENT OF LD. D.R. THAT LD. CIT(A) HAS NOT MENTIONED AS TO FROM WHERE FIGURES WERE TAKEN, DOES NOT HOLD ANY FO RCE IN VIEW OF THE FACT THAT BEFORE LD. CIT(A), THE LD. A.R. HAD FILED DETA ILED SUBMISSIONS INCLUDING FIGURES WHICH IS PLACED AT PAPER BOOK PAG E 466-570. THE ORDER PASSED BY LD. CIT(A) IS ELABORATE AND REASONED ONE AND WE DO NOT SEE ANY INFIRMITY IN THE SAME. 18. IN VIEW OF THE ABOVE, GROUND NO.2 IS ALSO DISMI SSED. ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 20 19. NOW, COMING TO THE C.O. FILED BY THE ASSESSEE. THE 1 ST GROUND IS WITH RESPECT TO DEPRECIATION ON COMPUTERS. LD. CIT(A) H AD CONFIRMED THE DISALLOWANCE OF DEPRECIATION ON COMPUTER BY HOLDING AS UNDER: THE FACT OF THE MATTER IS THAT THE APPELLANT COULD NOT PRODUCE THE ORIGINAL INVOICES FOR PURCHASE OF COMPUTERS. THE FI XED ASSET REGISTER WAS ALSO NOT UPDATED AT THE END OF THE FINANCIAL YE AR RELEVANT TO THE ASSESSMENT YEAR 2004- 05. THE RESPONSIBILITY OF THE AO TO SATISFY HIMSELF OF THE CLAIM MADE BY THE APPELLANT IN THE R ETURN OF INCOME IS NOT ENCUMBERED BY ANY RESTRICTION. IT IS THE DUTY O F THE AO TO SATISFY HIMSELF ABOUT THE CORRECTNESS OF THE ENTRIES MADE I N THE BOOKS OF ACCOUNTS. IN ORDER TO DO THAT THE AO HAS ASKED FOR THE ORIGINAL INVOICES. EVEN DURING THE APPELLATE PROCEEDINGS, TH E APPELLANT HAS NOT PRODUCED THE ORIGINAL INVOICES. THE OTHER ALTERNATI VE OF VERIFYING FROM THE FIXED ASSET REGISTER DID NOT MATERIALIZED BEFOR E THE AO. THEREFORE, I AM OF THE OPINION THAT THE APPELLANT FAILED TO DI SCHARGE ITS OBLIGATIONS. FOR THE ALLOWABILITY OF DEPRECIATION, THE TWO NECESSARY CONDITIONS ARE THE OWNERSHIP OF THE ASSET AND THE D ATE ON WHICH THE ASSET WAS 'PUT TO USE'. THE EXISTENCE OF THE ASSET CAN BE CONFIRMED FROM THE TAX AUDIT REPORTS FILED IN FORM NO. 3CD. H OWEVER, SINCE THE AUDITORS THEMSELVES HAVE QUALIFIED IN THE AUDIT REP ORT ABOUT THE FIXED ASSET REGISTER, THE AO WAS NOT SATISFIED WITH THE T AX AUDIT REPORT. IN VIEW OF THE ABOVE CIRCUMSTANCES, I HOLD THAT THE DI SALLOWANCE OF THE EXPENSES IS CORRECT SINCE ASSESSEE HAS FAILED TO DI SCHARGE ITS ONUS. THIS GROUND OF THE APPEAL IS DISMISSED 20. BEFORE US, LD. A.R. HAS SUBMITTED THAT THE ASSE SSEE WAS PREPARED TO COOPERATE WITH THE ASSESSING OFFICER IN DETERMINING THE AUTHENTICITY OF PURCHASE OF COMPUTERS AND SIMILARLY, ASSESSEE WAS R EADY TO SUBMIT SUFFICIENT EVIDENCE REGARDING THE USE OF SUCH COMPUTERS IN THE BUSINESS OF THE ASSESSEE. THEREFORE, KEEPING IN VIEW THE SUBSTANTIAL JUSTICE, WE REMIT THIS GROUND OF C.O. TO THE FILE OF THE ASSESSING OFFICER WHO AFTER BEING SATISFIED REGARDING PURCHASE OF COMPUTERS AND ITS USE FOR THE BUSINESS OF THE ASSESSEE SHOULD ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 21 ARRIVE AT THE CONCLUSION OF ALLOWING DEPRECIATION O R NOT AS PER LAW. NEEDLESS TO SAY THAT ASSESSEE SHOULD BE AFFORDED A REASONABL E OPPORTUNITY OF BEING HEARD. THE ASSESSEE IS ALSO DIRECTED TO UTILIZE TH IS OPPORTUNITY TO SUBSTANTIATE ITS CLAIM AS IN THE ABSENCE OF SUFFICIENT EVIDENCE, ASSESSING OFFICER HAS ALL POWERS TO REJECT A CLAIM. 21. IN GROUND NO.2, THE ASSESSEE HAS TAKEN THE GROU ND THAT ITAT IN ASSESSMENT YEAR 1999-2000 HAD HELD THAT THE CLAIM O F WARRANTY EXPENSES CAN ONLY BE ON THE BASIS OF ACTUAL EXPENSES AND NOT ON THE BASIS OF PROVISIONS. LD. A.R. HAD SUBMITTED THAT THE ASSESSING OFFICER B E DIRECTED TO CONSIDER THE CLAIM OF WARRANTY EXPENSES ON ACTUAL BASIS. WE FIN D THAT THE TRIBUNAL IN THE CASE OF THE ASSESSEE ITSELF IN ASSESSMENT YEAR 1999 -2000 AT PAGE 19 HAS DECIDED THE ISSUE AGAINST THE ASSESSEE BY HOLDING A S UNDER: ON THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE , WE ARE OF THE VIEW THAT SUCH A CLAIM FOR DEDUCTION SHOULD BE ALLO WED ONLY ON ACTUAL BASIS I.E. THE LIABILITY AS ASCERTAINED FROM ACTUAL CLAIMS MADE IN THIS REGARD. THIS WOULD ELIMINATE THE CHANCES OF EITHER MAKING A HIGHER OR LOWER CLAIM FOR ACTUAL LIABILITY INCURRED BY THE ASSESSEE UNDER THIS HEAD. WE, THEREFORE, CONFIRM THE ORDER OF THE REVE NUE AUTHORITIES AND DISMISS THE GROUND OF APPEAL OF THE ASSESSEE. 22. FROM THE FINDINGS OF THE TRIBUNAL, WE DO NOT F IND ANY SUCH DIRECTION, FOR ALLOWING THE CLAIM ON ACTUAL BASIS. RATHER THE TRIBUNAL HAS DISMISSED THIS GROUND OF APPEAL OF THE ASSESSEE AND HAS NOT ALLOWE D IT FOR STATISTICAL PURPOSES. MOREOVER, WE FIND THAT THE ASSESSEE HAS NOT DEBITED ANY ACTUAL WARRANTY EXPENSES IN THE P & L ACCOUNT AS PLACED IN PAPER BOOK PAGE 24-45. THE P & L ACCOUNT PLACED AT PAPER BOOK PAGE 29 DOES NOT CONTAIN ANY EXPENSES ON ACCOUNT OF WARRANTY CLAIM WHICH WERE WR ITTEN OFF ON ACTUAL BASIS. IN SCHEDULE 13 AS PLACED IN PAPER BOOK PAG E 34, THE ASSESSEE HAS ITA NO.2140/DEL/2011 I.T.A.NO. 1323/DEL/2012 C.O.NO.191/DEL/2011 & 168/DEL/2012 22 DEBITED AN AMOUNT OF RS.55,64,448/- ON ACCOUNT OF W ARRANTY, WHICH AMOUNTS TO 0.985% OF THE TURNOVER WHICH IS EQUAL TO ALMOST 1% OF TURNOVER AND WHICH NECESSARILY REPRESENTS THE PROVISION AMOUNT A S PER THE POLICY OF COMPANY. THEREFORE, FROM THE ABOVE FIGURES, IT IS APPARENT THAT THE ASSESSEE HAS NOT CLAIMED ANY AMOUNT OF WARRANTY EXPENSES ON ACTUAL BASIS AND, ASSESSING OFFICER HAS NOT DISALLOWED ANY AMOUNT CLA IMED ON ACTUAL BASIS. THEREFORE, FOLLOWING THE TRIBUNAL ORDER IN ASSESSME NT YEAR 1999-2000 IN THE CASE OF ASSESSEE ITSELF, GROUND NO.2 OF THE C.O. IS DISMISSED. 23. IN VIEW OF ABOVE, THE REVENUES APPEAL FOR ASSE SSMENT YEAR 2004-05 IS DISMISSED WHEREAS C.O. OF THE ASSESSEE IS PARTLY AL LOWED FOR STATISTICAL PURPOSES. 24. IN NUTSHELL, THE C.O. OF THE ASSESSEE IN ASSESS MENT YEAR 2003-04 IS ALLOWED, WHEREAS REVENUES APPEAL IN ASSESSMENT YEA R 2003-04 IS DISMISSED AS INFRUCTUOUS. REVENUES APPEAL IN ASSESSMENT YEA R 2004-05 IS ALSO DISMISSED WHEREAS C.O. OF THE ASSESSEE IS PARTLY AL LOWED FOR STATISTICAL PURPOSES. 25. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH AUG., 2014. SD./- SD./- ( DIVA SINGH ) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 29 TH AUG., 2014 SP COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY.