Cummins India Ltd., Pune V. Deputy Commissioner ofIncome-tax,

CO 53/PUN/2014

• Counselvise Citation: [2016] 123 COUNSELVISE.COM (IT) 1964 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 10 month(s) 18 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 29-01-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 12-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Assessee Lawyers: AMIT SINGHAL
• Keywords: Business income; Transfer pricing; International transaction; Earning of tax free income; Retrospective amendment; Fair market value; Condonation of delay
• Section: 92C; 10B; 92

Judgement Text

] IQ.KS ] IQ.KS ] IQ.KS ] IQ.KS IQ.KS IQ.KSIQ.KS IQ.KS IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE . . , , ! ' BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.594/PN/2013 !$ $ / ASSESSMENT YEAR : 2005-06 DCIT, CIRCLE-1(1), PUNE . / APPELLANT V/S CUMMINS INDIA LTD., KOTHRUD, PUNE 411038 PAN NO.AAACC7258B . / RESPONDENT CO NO.53/PN/2014 !$ $ / ASSESSMENT YEAR : 2005-06 CUMMINS INDIA LTD., KOTHRUD, PUNE 411038 PAN NO.AAACC7258B CROSS OBJECTOR V/S DCIT, CIRCLE-1(1), PUNE APPELLAN T IN THE APPEAL / ASSESSEE BY : SHRI AMIT SINGHAL / DEPARTMENT BY : SHRI S.K. RASTOGI, CIT / ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE OR DER DATED 08-10-2012 OF THE CIT(A)-IT/TP, PUNE RELATING TO A SSESSMENT / DATE OF HEARING : . 02.11.2015 / DATE OF PRONOUNCEMENT :29.01.2016 2 YEAR 2005-06. THE ASSESSEE HAS FILED THE CROSS OBJECT ION AGAINST THE APPEAL FILED BY THE REVENUE. FOR THE SAKE OF CONVENIE NCE, THE APPEAL AS WELL AS THE CO WERE HEARD TOGETHER AND ARE B EING DISPOSED OF BY THIS COMMON ORDER. 2. THERE IS DELAY OF 87 DAYS IN FILING OF THE APPEAL BY THE RE VENUE FOR WHICH A CONDONATION PETITION HAS BEEN FILED. THE LD. DEPARTMENTAL REPRESENTATIVE REFERRING TO THE CONDONATION PETITION EXPLAINED THE REASONS FOR DELAY IN FILING OF THIS APPEAL BY TH E REVENUE. AFTER HEARING BOTH THE SIDES, THE DELAY IN FILING OF THE APPEAL BY THE REVENUE IS CONDONED. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A LIMITED COMPANY DEALING IN THE BUSINESS OF MANUFACTURING OF ENGIN ES. IT FILED ITS RETURN OF INCOME ON 31-10-2005 DECLARING TOTAL INC OME OF RS.1,42,18,02,320/-. THE AO MADE A REFERENCE U/S.92CA(1) OF T HE I.T. ACT TO THE TPO FOR COMPUTATION OF ALP IN RELATION TO THE INTERNATIONAL TRANSACTIONS DETAILED IN THE AUDIT REPORT IN F ORM 3CEB. THE TPO ACCORDINGLY ISSUED NOTICE TO THE ASSESSE E ASKING FOR DETAILS/EXPLANATIONS TO SUPPORT THE ALP COMPUTED BY IT IN THE AUDIT REPORT. 4. FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE THE TPO NOTED THAT CUMMINS INDIA LTD. IS A 51% OWNED SUBSIDIARY OF CUMMINS INC., USA. THE BALANCE EQUITY IS HELD BY THE KIRLO SKAR GROUP, THE INDIAN PUBLIC AND VARIOUS FINANCIAL INSTITUTIONS. CUMMINS INDIA WAS FORMERLY KNOWN AS KIRLOSKAR CUMMINS LTD .. THE COMPANY IS ENGAGED INTER ALIA IN THE MANUFACTURE AND SALE OF IC ENGINES FOR POWER GENERATION AND INDUSTRIAL APPLICATIONS IN THE DOMESTIC MARKET. IT ALSO MANUFACTURES AND SELLS IC ENGINE S AND COMPONENTS FOR EXPORTS. IT ALSO PURCHASES SPARES BY W AY OF 3 IMPORTS FOR RESELLING IN DOMESTIC MARKET. THE DETAILS OF INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE ARE AS UN DER: SR. NO. INTERNATIONAL ACTIVITY AMOUNT (RS.) METHOD ADOPTED MANUFACTURING ACTIVITY 1 IMPORT OF ENGINE PARTS AND COMPONENTS 205,47,91,880/ - TNMM 2 EXPORT OF MANUFACTURED IC ENGINES 344,88,29,555/ - TNMM 3 PAYMENT OF ROYALTY 15,64,19,584/ - TNMM 4 PROVISION OF MISCELLANEOUS SERVICES (PROCUREMENT SUPPORT SERVICES) 1,67,74,530/ - TNMM 5 PAYMENT OF FEES FOR IT SUPPORT SERVICES 4,06,99,976/ - TNMM 6 DESIGN SERVICES 2,15,64,258/ - TNMM 7 PAYMENT OF GLOBAL SOURCING CONSIDERATION 21,43,26,665/ - TNMM ACTIVITY CARRIED ON BY THE LOW HORSE POWER DIVISION 8 IMPORT OF PARTS AND COMPONENTS OF IC ENGINES 1,97,85,546/ - TNMM 9 EXPORT OF MANUFACTURED IC ENGINES 17,69,10,279/ - TNMM SOURCING ACTIVITY 10 EXPORT OF MANUFACTURED AND BOUGHT OUT COMPONENTS 20,31, 29,233 / - TNMM 11 IMPORT OF GAS GENSETS 2,86,56,580/ - TNMM FINANCING ACTIVITY 12 RECEIPT OF INTEREST FOR EXTENDED CREDIT - PERIOD FACILITY 2,45,92,952/ - COMPARABLE UNCONTROLLED PRICE METHOD TOTAL 640,64,81,038/ - 5. AFTER CONSIDERING THE VARIOUS SUBMISSIONS MADE BY THE ASSESSEE FROM TIME TO TIME, THE TPO VIDE ORDER U/S.92CA(3 ) DATED 25-07-2008 MADE FOLLOWING ADJUSTMENTS TO THE INTERNATIONA L TRANSACTIONS UNDERTAKEN BY THE ASSESSEE : AMOUNT (RS.) EXPORT OF MANUFACTURED IC ENGINES 8,23,19,580 PROCUREMENT SUPPORT SERVICES 12,84,929 EXPORT OF IC ENGINES OF LHP DIVISION 78,72,507 TOTAL 9,14,77,052/ - 6. SUBSEQUENTLY, THE AO PASSED THE ASSESSMENT ORDER U/S.143(3) ON 22-12-2008 INCORPORATING THE ABOVE MENTIONE D TP ADJUSTMENTS. APART FROM THE ABOVE, THE AO ALSO MADE TH E FOLLOWING MAJOR DISALLOWANCES : 4 AMOUNT (RS.) DISALLOWANCE OF PROVISION FOR NEW ENGINE PERFORMANCE INSPECTION FEE 92,26,850 DISALLOWANCE OF EXPENSES FOR EARNING EXEMPT INCOME U/S.14A 40,36,560 DISALLOWANCE OF WARRANTY PROVISION 2,55,41,000 THE AO ACCORDINGLY DETERMINED THE INCOME OF THE ASSESS EE AT RS.155,20,83,790/- AFTER DEDUCTION UNDER CHAPTER VIA AT RS.3,45,30,113/-. 7. IN APPEAL THE LD.CIT(A) GAVE PART RELIEF TO THE ASSESSEE BY DELETING THE ADDITION OF RS.8,23,19,580/- MADE ON ACCOUNT OF EXPORT OF MANUFACTURED IC ENGINES, DELETED THE DISALLOWANCE OF RS.92,26,850/- MADE ON ACCOUNT OF NEW ENGINE PERFORMANCE INSPECTION FEE, DELETED THE DISALLOWANCE OF RS.40,36,560/- MADE U/S.14A AND RS.2,55,41,000/- MADE ON ACCOUNT OF PROVISION O F WARRANTY FEE. HE HOWEVER SUSTAINED THE ADDITION OF RS.12,8 4,929/- MADE ON ACCOUNT OF PROCUREMENT SERVICES AND RS.78,72,507 /- MADE ON ACCOUNT OF EXPORT OF IC ENGINES OF LHP DIVISION. 8. AGGRIEVED WITH SUCH PART RELIEF GIVEN BY THE CIT(A) THE REVENUE AS WELL AS THE ASSESSEE ARE IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : GROUNDS OF APPEAL BY THE REVENUE : 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME- TAX (APPEALS) IS CONTRARY TO LAW AND TO THE FACTS AND CIRCUMSTANCES O F THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN ALLOWING THE ASSESSEE'S APPEAL INSTEAD OF CONFI RMING THE ASSESSING OFFICER'S ORDER. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN DELETING THE TRANSFER PRICING ADJUSTMENT ON EXPORT OF MANUFACTURED IC ENGINES OF RS.8,23,19,580/- BY REJECT ING THE COMPARISON OF THE GROSS MARGINS OF THE CONTROLLED AE T RANSACTION WITH THE UNCONTROLLED AE TRANSACTIONS AND THE UNCONTROLLED NON AE TRANSACTION WHEN TNMM WITH INTERNAL SEGMENTATION HAD BEEN APPLIED AS THE MOST APPROPRIATE METHOD. 5 4. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN FAILING TO APPLY THE RATIO OF THE DECISION OF THE JURISDICTIONAL TRIBUNAL IN THE CASE OF AMDOCS BUSINESS SERVICES PVT LTD. VS. DCIT IN ITA NO. 1412/PN/11 WHICH CLEARLY APPLIES TO THE PRESE NT CASE. 5. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) GR OSSLY ERRED IN DELETING THE DISALLOWANCES OF RS. 4O,36,560/ - MADE BY THE ASSESSING OFFICER U/S.14A BY MERELY HOLDING THAT RULE 8D WOULD NOT APPLY TO ANY ASST. YEAR PRIOR TO ASST. YEAR 2008-09 AS H ELD BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOY CE MFG. CO. LTD. VS. DCIT (2010), 328 ITR 81 (BOM). 6. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) G ROSSLY ERRED IN NOT APPLYING THE 'REASONABLE BASIS' TEST AND A CCORDINGLY IN NOT CONFIRMING THE DISALLOWANCE EVEN WHILE ACKNOWLEDGING THAT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT (2010), 328 ITR 81 (BOM), THE HON'BLE BOMBAY HIGH COURT CATEGORICALLY HELD THAT P RIOR TO THE A.Y. 2008-09, DISALLOWANCE U/S.14A COULD BE MADE ON 'REASON ABLE BASIS'. 7. FOR THESE AND SUCH OTHER GROUNDS AS MAY BE URGED A T THE TIME OF HEARING, THE ORDER OF THE LEARNED CIT (APPEALS) MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 9. THE ASSESSEE HAS ALSO FILED CROSS OBJECTION BY RAISING T HE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, ANY PRAYER BY THE LEARNED AO FOR CONDONATION OF THE DEL AY IN FILING THE APPEAL OUGHT NOT TO BE ADMITTED. THE RESPONDENT OBJE CTS TO THE LATE FILING OF APPEAL BY THE LEARNED AU AND CONTENDS THAT THE SAID APPEAL IS NOT FILED WITHIN THE PRESCRIBED TIME LIMIT AND HENCE IS VOID AB INITIO . 2. INTERNATIONAL TRANSACTION RELATING TO EXPORT O F IC ENGINES BY HHP DIVISION 2.1 THE LEARNED AO HAS ERRED IN LAW AND ON THE FA CTS AND IN CIRCUMSTANCES OF THE CASE IN OBJECTING TO THE DELETION OF TRANSFER PRICING ADJUSTMENT BY THE LEANED COMMISSIONER OF INCOM E TAX (APPEALS)-IT/TP, PUNE ['CIT(A )'] AMOUNTING TO RS. 8, 23,19,580/-, WITH REGARD TO THE INTERNATIONAL TRANSACTIONS PERTAINING TO EXPORT OF IC ENGINES BY HHP DIVISION. 2.2 THE LEARNED C1T(A) ERRED IN LAW AND ON FACTS AND IN CIRCUMSTANCES OF THE EASE IN NOT ACCEPTING THE RESPONDE NT'S PLEA OF GRANTING BENEFIT OF +/-5 PERCENT RANGE FROM THE PRICE COMPUTED BASED ON ARITHMETIC MEAN AS PROVIDED ILL PROVISO TO SECTION 92C(2) OF THE ACT. 2.3 THE LEARNED CIT(A) ERRED IN LAW AND ON THE F ACTS AND IN CIRCUMSTANCES OF THE CASE IN NOT ACCEPTING THE BENCHMA RKING ANALYSIS FOLLOWED BY THE RESPONDENT FOR BENCHMARKING OF INTE RNATIONAL TRANSACTIONS IN RESPECT OF MANUFACTURING ACTIVITY OF T HE HHP DIVISION. 2.4 THE LEARNED CIT(A) ERRED IN LAW AND ON THE FA CTS AND IN CIRCUMSTANCES OF THE CASE IN NOT CONSIDERING THE USE OF EXTERNAL COMPARABLE COMPANIES SELECTED BY THE RESPONDENT FOR B ENCHMARKING THE MANUFACTURING ACTIVITY OF HHP DIVISION. 6 2.5 THE LEARNED CIT(A) ERRED IN LAW AND ON THE FA CTS AND IN CIRCUMSTANCES OF THE CASE IN ACCEPTING THE AO'S STAND OF COMPARING SEGMENTAL PROFITABILITY OF THE RESPONDENT'S 'EXPORTS TO AES' SEGMENT AND 'DOMESTIC SALES' SEGMENT. 2.6 THE LEARNED CIT(A) ERRED IN LAW AND ON THE FAC TS AND IN CIRCUMSTANCES OF THE CASE IN CONCLUDING WITHOUT DEMONST RATING THAT FUNCTIONS PERFORMED AND RISKS ASSUMED ARE GREATER IN EXP ORT MARKET THAN IN DOMESTIC MARKET. 3. INTERNATIONAL TRANSACTION RELATING TO PROCUREME NT SUPPORT SERVICES 3.1 THE LEARNED CIT(A) ERRED IN LAW AND ON THE FACT S AND ILL CIRCUMSTANCES OF THE CASE IN CONFIRMING AN ADJUSTMENT A MOUNTING TO RS. 12,84,929 TO THE VALUE OF INTERNATIONAL TRANSACTI ONS IN RESPECT OF PROVISION OF PROCUREMENT SUPPORT SERVICES. 3.2 THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS AND IN CIRCUMSTANCES OF THE CASE IN NOT ACCEPTING THE RESPONDE NT'S PLEA OF GRANTING BENEFIT OF +/-5 PERCENT RANGE FROM THE PRI CE COMPUTED BASED ON ARITHMETIC MEAN AS PROVIDED IN PROVISO TO SECTION 92 C(2) OF THE ACT. 3 .3 THE LEARNED CIT(A) ERRED ON FACTS AND CIRCUMST ANCES ON THE CASE OF THE CASE IN CONFIRMING REJECTION OF THREE COM PARABLE COMPANIES CONSIDERED FOR BENCHMARKING THE INTERNATIONAL TRANSAC TION RELATING TO PROVISION OF PROCUREMENT SUPPORT SERVICES. 4. INTERNATIONAL TRANSACTION RELATING TO EXPORT OF I C ENGINES BY LHP DIVISION 4.1 THE LEARNED CIT(A) ERRED IN LAW AND ON THE FAC TS AND IN CIRCUMSTANCES OF THE CASE IN CONFIRMING AN ADJUSTMENT A MOUNTING TO RS. 78,72,507 TO THE VALUE OF INTERNATIONAL TRANSACTI ONS IN RESPECT OF EXPORT OF IC ENGINES BY LHP DIVISION. 4.2 THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS A ND IN CIRCUMSTANCES OF THE CASE IN NOT ACCEPTING THE RESPONDE NT'S PLEA OF GRANTING BENEFIT OF +/-5 PERCENT RANGE FROM THE PRI CE COMPUTED BASED ON ARITHMETIC MEAN AS PROVIDED IN PROVISO TO SECTION 92C(2) OF THE ACT. 4.3 THE LEARNED CIT(A) ERRED IN LAW AND ON THE FA CTS AND IN CIRCUMSTANCES OF THE CASE IN CONFIRMING THE REJECTION OF THE BENCHMARKING ANALYSIS FOLLOWED RESPECT OF MANUFACTURIN G ACTIVITY OF THE LHP DIVISION. 4.4 THE LEARNED CIT(A) ERRED IN LAW AND ON FACTS A ND IN CIRCUMSTANCES OF THE CASE IN CONFIRMING THE REJECTION OF THE EXTERNAL COMPARABLE COMPANIES SELECTED BY THE RESPONDENT FOR BENCHMARKING THE MANUFACTURING ACTIVITY OF LHP DIVISION. 4.5 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS AND IN CIRCUMSTANCES OF THE CASE IN ADJUDICATING UPON THE RESP ONDENT'S PLEA THAT VARIOUS DIFFERENCES HAVE BEEN IGNORED WHILE COM PARING CONTROLLED INTERNATIONAL TRANSACTIONS WITH UNCONTROLL ED TRANSACTIONS IN RESPECT OF LHP DIVISION. 5. EXPENSES ALLOWED U/S.14A OF THE ACT 5.1 THE LEARNED AO ERRED IN LAW AND ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE IN OBJECTING TO THE DELETION OF DISALLOWANCE U/S.14A BY THE LEARNED CIT(A) AMOUNTING TO RS.40,36, 560/-. 7 6. EACH ONE OF THE ABOVE GROUNDS OF CROSS OBJECTION IS WITHOUT PREJUDICE TO THE OTHER. 7. THE RESPONDENT CRAVES LEAVE TO ADD, TO AMEND, TO A LTER, TO SUBSTITUTE, AND TO WITHDRAW THE ABOVE GROUNDS OF APPEA L. 10. IN GROUNDS OF APPEAL NO.1 TO 4 THE REVENUE HAS CHALLE NGED THE ORDER OF THE CIT(A) IN DELETING THE TP ADJUSTMENT OF RS.8,23,19,850/- MADE BY THE AO. 11. FACTS OF THE CASE IN BRIEF ARE THAT THE TPO DURING TH E PROCEEDINGS BEFORE HIM NOTED THAT THE ASSESSEE, DURING T HE YEAR UNDER CONSIDERATION, HAS GROUPED/AGGREGATED INTERNATIONA L TRANSACTION AT SL.NO.1 TO 7 OF THE TABLE AT PARA 4 OF TH IS ORDER AS MANUFACTURING ACTIVITY AND HAS BENCHMARKED USING TNMM TA KING EXTERNAL COMPARABLES AND BY ADOPTING PLI AS OPERATING M ARGIN TO SALES EARNED BY THIRD PARTY COMPARABLES. THE TPO OBSER VED THAT THE ASSESSEE COMPANY MANUFACTURES VARIETY OF ENGINES FRO M 60 TO 2000 HORSE POWERS OPERATING EITHER ON DIESEL OR NATURA L GAS OR DUAL FUEL. THE COMPANY DOES NOT HAVE STANDARD PRODUCT AVAILABLE OFF THE SHELF. THE COMPANY MANUFACTURES ENGINES OF SPECIFIC HORSE P OWER ACCORDING TO CUSTOMERS NEEDS AND EXTENT OF USAGE. HE NOTED THAT THE GROSS MARGIN TO SALES IN RESPECT OF THIRD PARTY SALES OF ENGINES STAND AT 18.83% AS COMPARED TO GROSS MARGIN OVER SALES OF 16.46% RECORDED BY THE COMPANY FROM EXPORT TO AES. ACCORDING LY, THE TPO PROPOSED ADJUSTMENT OF EQUIVALENT TO 2.3%, (I.E. 18.83% - 16.4 6%) ON SALES OF RS.347.34 CRORES WHICH RESULTED INTO AN ADJUST MENT OF RS.8,23,19,580/-. 12. THE ASSESSEE OBJECTED TO THIS ADJUSTMENT. IT WAS SUBMITTED THAT THE ADJUSTMENT SO PROPOSED IS AGAINST THE PRINCIPLE S OF TRANSFER PRICING PROVISIONS. IT WAS ARGUED THAT THE ENGIN ES SOLD BY THE ASSESSEE IN THE DOMESTIC MARKET AND THE ONES SOLD IN THE EXPO RT 8 MARKET ARE SIGNIFICANTLY DIFFERENT FROM EACH OTHER AS A PR ODUCT. MOREOVER THE ASSESSEE PERFORMS MORE FUNCTIONS FOR DOMES TIC SALES, I.E. SELLING AND DISTRIBUTION, ASSUMES MORE RISK, I.E. PRODUCT LIABILITY WHILE SELLING IN DOMESTIC MARKET AS AGAINST SELLING IN EXP ORT MARKET. FURTHER, THE VOLUME OF SALES MADE TO CUSTOMERS IN DOMESTIC MARKET IS DIFFERENT AS AGAINST MADE IN THE EXPORT MARKET. 13. HOWEVER, THE TPO WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. FROM AN ANALYSIS OF THE NATURE OF THE CLIENTS DEALT BY THE ASSESSEE COMPANY, THE TPO NOTED THAT THE ASSESSEE COMPANY DEALS WITH WELL ESTABLISHED CLIENTS IN THE DOMESTIC M ARKET AND WITH AES IN THE EXPORT MARKET. THEREFORE, EXPORT TO THE AES BY THE ASSESSEE IS NOTHING BUT AN EXTENSION OF INDIAN MARKE T BUT FOR THE GEOGRAPHICAL BOUNDARIES. FURTHER, THE ASSESSEE COULD NOT DEMONSTRATE WITH FACTS AND FIGURES AS TO HOW SUCH DIFFERE NCE, IF ANY, IMPACTS ITS GROSS MARGIN PROFITABILITY. HE OBSERVED THA T AS AGAINST EXPORT OF ENGINES OF RS.347.34 CRORES THE DOMESTIC SALES IS RS.484.76 CRORES. THEREFORE, THE VOLUME OF SALES IN BOTH TH E MARKETS IS COMPARABLE AND THEREFORE THE ARGUMENT OF THE ASSESSEE THAT BOTH THE MARKETS ARE NOT COMPARABLE BECAUSE OF S UBSTANTIAL VARIATION IN VOLUME OF SALES IN BOTH THE MARKET IS WITHOUT A NY BASIS. 14. AS REGARDS THE ARGUMENT OF PRODUCT DIFFERENCE IS CON CERNED THE TPO NOTED THAT THE ASSESSEE ESSENTIALLY HAS SOLD IC ENGINES IN DOMESTIC AS WELL AS IN THE EXPORT MARKETS. THE DIFFERENCE OF CERTAIN FEATURES OR SPECIFICATIONS OF ENGINES SUCH AS COOLING SYSTEM , MOUNTING SYSTEM, INSTRUMENTATION PANEL, ELECTRICAL AND CHARG ING SYSTEM WILL NOT MAKE PRODUCTS ENTIRELY DIFFERENT FROM EACH OTHER. ACCORDING TO HIM, THERE CANNOT BE PRODUCT DIFFERENTIATION B UT FOR ITS CAPACITIES ONCE END-USE OF THE ENGINES REMAINS THE SAME. FURTHER, 9 THE COMPANY MANUFACTURES PRODUCTS ACCORDING TO THE RE QUIREMENT OF THE CUSTOMERS AND NATURE OF APPLICATION OF THE PRODUC T FOR WHICH THE ASSESSEE LEVIES ADDITIONAL MARK UP BASED ON THE BASIS OF ADDITIONAL FEATURES AVAILABLE IN THE PRODUCT. HE ACCORDINGLY REJECTED THE ABOVE ARGUMENT OF THE ASSESSEE. 15. AS REGARDS THE CONTENTION OF THE ASSESSEE THAT IT A SSUMES MORE RISK IN THE DOMESTIC SALES SUCH AS PRODUCT RISK, MAR KET RISK AND CREDIT RISK WHEREAS SUCH RISKS ARE NOT THERE IN EX PORT SALES, WHICH IS EVIDENT FROM THE HIGHER WARRANTY CLAIM, THE TPO NO TED THAT WARRANTY CLAIMS WILL IMPACT NET MARGIN OF THE ASSESSE E COMPANY AND NOT THE GROSS MARGIN. SECONDLY, THE ASSES SEE HAS NOT DEMONSTRATED WITH FACTS AND FIGURES THAT RISK DIFFERENCE IMPACTS TH E ASSESSEES GROSS MARGINS ON SALES MADE TO THIRD PARTIES , VIS--VIS AES. REJECTING THE VARIOUS EXPLANATIONS GIVEN BY THE ASS ESSEE AND RELYING ON VARIOUS DECISIONS THE TPO MADE AN ADJUSTMENT OF RS.8,23,19,580/-. SUBSEQUENTLY, THE AO MADE THE ABOVE AD DITION IN THE ORDER PASSED U/S.143(3). 16. BEFORE CIT(A) THE ASSESSEE VEHEMENTLY ARGUED AGAINST ADOPTION OF GROSS MARGIN AS PROFIT LEVEL INDICATOR AS AGAINST ADOPTION OF NET MARGIN AS PLI. THE ASSESSEE REFERRED TO PARA 3.17 OF THE OECD TRANSFER PRICING GUIDELINES AND SUBMITTED THAT TNMM RELATES TO NET PROFIT MARGIN AND NOT GROSS PROFIT MARGIN. THE ADJUSTMENT MADE BY THE AO BY ADOPTING GROSS MARGIN AS THE BASIS IS NEITHER SUPPORTED BY THE INDIAN LAW NOR BY THE OECD GUIDELINES. THEREFORE, THE ENTIRE ADJUSTMENT IS ILLEGAL AND D ESERVES TO BE DELETED. IT WAS ARGUED THAT THE OPERATING MARGIN ON COST EARNED BY THE ASSESSEE FOR THIS ACTIVITY IS 4.8% WHEREAS THE MARGIN EARNED BY EXTERNAL COMPARABLE CASE WAS 6.34%. ACCORDIN GLY, IT WAS ARGUED THAT NO ADJUSTMENT IS CALLED FOR. 10 17. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DELETED THE ADDICTION OF RS.8,23,19,580/- BY OBSERVIN G AS UNDER : 3.1.8. I HAVE CONSIDERED ARGUMENTS OF THE ASSESSC. THE ASSESSE BEFORE ME HAS REPEATED THE SAME ARGUMENTS WHICH WERE ADVANCED BEFORE THE TPO. BEFORE ME, IT HAS RELIED ON ITS LETTER ADDRESSED T O CIT(A) DATED 18- 09-2009, WHICH CONTAINS THE SAME ARGUMENTS, WHICH WERE ADVANCED BEFORE THE AO. 3.1.9 THE FIRST ARGUMENT WHICH IS RAISED BY THE ASSESSEE I S OF THE PRODUCT DIFFERENCE. I FIND THAT THE ASSESSEE HAS NOT FUR NISHED RELEVANT COSTING AND PRICING STATEMENTS FOR EACH PRODUCT TO SUBST ANTIATE ITS ARGUMENT THAT THE MARGIN IS IMPACTED BECAUSE OF THE D IFFERENCES IN PRODUCT. THE ASSESSEE HAS NOT DEMONSTRATED THAT INCORPOR ATING OF A PARTICULAR ADDITIONAL FEATURE HAS MADE THIS SPECIFIC D IFFERENCE TO THE MARGIN OF THE PRODUCT. IT MAY BE NOTED THAT, DIFFE RENT FEATURES OR SPECIFICATIONS WOULD NOT DRASTICALLY IMPACT MARGINS OF DIFFERENT PRODUCTS AS THE ASSESSEE COMPANY USED SAME RESOURCES AND UNDERTAKES SIMILAR MAJOR FUNCTIONS FOR DIFFERENT PRODU CTS. DIFFERENT FEATURE WOULD CHANGE THE COST OF THE PRODUCT BUT NOT THE PROFIT MARGIN, UNLESS CONSCIOUS PRICING POLICY DECISION IS TAKEN TO PRIC E A PARTICULAR PROJECT IN A PARTICULAR MANNER, MARGINS ARE UNLIKELY TO VARY DRASTICALLY. AS MENTIONED ABOVE, THIS HAS NOT BEEN DEMONSTRATED BY T HE ASSESSEE. IN ANY CASE, ALL MANUFACTURED PRODUCTS OF THE ASSESSEE FA LL INTO THE BASKET OF IC ENGINES. THEREFORE, IT IS UNLIKELY THAT THERE WILL BE MATERIAL VARIATION IN MARGIN OF EACH PRODUCT TYPE. HENCE, I DO NOT FIND ANY SUBSTANCE IN THE ASSESSES ARGUMENT ON PRODUCT DIFFER ENCES. 3.1.10. THE ASSESSEE HAS STATED THAT IT UNDERTAKES MORE FU NCTIONS AND ASSUMES MORE RISKS IN THE DOMESTIC MARKET. I DO NOT AGRE E WITH THE ARGUMENT. IN MY VIEW, FUNCTIONS PERFORMED AND RISKS A SSUMED ARE ALWAYS GREATER IN EXPORT MARKET THAN IN THE DOMESTIC MARKET. AS A THUMB RULE, IN AN INDIAN SITUATION, PROFIT MARGINS AR E ALWAYS HIGHER IN THE EXPORT SALES THAN IN THE DOMESTIC SALES. THIS IS BEC AUSE, THE ENTERPRISE ASSUMES PRODUCT LIABILITY RISK (PRODUCTS ARE R EJECTED IF THEY DO NOT MEET REQUIRED SPECIFICATIONS). MORE IMPORTAN TLY, IN AN INDIAN SITUATION, PARTS OF LOCATIONAL SAVINGS ARE ALSO IS AVAILA BLE TO THE INDIAN MANUFACTURING COMPANY. THEREFORE, UNLESS THE ENTERPR ISE DEMONSTRATES WITH RELEVANT FACTS AS TO WHY IT EARNED LO WER PROFIT WHILE EXPORTING TO AES AS AGAINST THE DOMESTIC MARKET A SSESSEES ARGUMENT ON THIS ISSUE CANNOT BE CONSIDERED. THE ASSESSEE HAS NOT ADVANCED ANY ARGUMENTS ON THIS ASPECT. THEREFORE, I DO NOT ACCEPT THE CONTENTION OF THE ASSESSEE ON THIS GROUND. 3.1.11 HOWEVER, ON THE ISSUE OF PLI, I AGREE WITH THE ASSESSEE THAT THE TRANSACTIONAL NET MARGIN METHOD, REFERS TO NET MARGI N AND NOT GROSS MARGIN. THIS ASPECT IS CLEAR IN RULE 10B, WHICH IS AS UNDER : (E) TRANSACTION NET MARGIN METHOD BY WHICH : (I) THE NET PROFIT REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIA TED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BA SE. 11 3.1.12 THE ABOVE RULES PROVIDES FOR USING PLI OF COST I NCURRED OR SALES AFFECTED OR ASSETS EMPLOYED OR ANY OTHER RELEVANT BASE, BUT IT EMPHASIZES THAT IT IS NET PROFIT MARGIN OF CONTROLLED TRANSACTION, WHICH IS TO BE COMPARED WITH NET PROFIT MARGIN OF UNCONT ROLLED TRANSACTION. GROSS MARGIN IS REFERRED IN CUP METHOD OR RESALE PRIC E METHOD. HOWEVER, GROSS MARGIN IS NOT TO BE CONSIDERED IN TNMM. THE TPO HAS COMPARED GROSS MARGINS IN TRADING BY APPLYING INTERNAL TNMM. THE METHOD USED BY THE TPO NEITHER CAN NEITHER CALL UNDE R RULE 10B(B) ON RE-SALE PRICE METHOD NOR UNDER 10B(C) ON COST PLUS MET HOD. AS DISCUSSED ABOVE, IT DOES NOT FALL UNDER TNMM ALSO. 3.1.13 THE TPO HAS RELIED ON PARA 3.26 OF THE OECD GUIDELINES IN SUPPORT OF GROSS MARGIN ADOPTED BY HIM UNDER TNMM. HO WEVER, IN MY OPINION, THE TPO HAS STRETCHED THE SIMILARITY BETWE EN TNMM AND CUP AND RE-SALE PRICE METHOD TO THE EXTENT OF MAKING THE METHOD SIMILAR ON THE ASPECT OF GROSS MARGIN AS WELL. IN THIS C ONNECTION, PARA 2.69 OF OECD GUIDELINES 2010 MAY BE PERUSED. THE REL EVANT PORTION OF THE PARA IS AS UNDER : PRICES ARE LIKELY TO BE AFFECTED BY DIFFERENCES IN PR ODUCTS, AND GROSS MARGINS ARE LIKELY TO BE AFFECTED BY DIFFERENCES IN FUNCTIONS, BUT NET PROFIT INDICATORS ARE LESS ADVERSELY AFFECTED BY SUCH DIFFERENCES. AS WITH THE RESALE PRICE AND COST PLUS METHODS THAT THE TRANSACTIONAL NET MARGIN METHOD RESEM BLES, THIS, HOWEVER, DOES NOT MEAN THAT A MERE SIMILARITY OF FUNCTIONS BETWEEN TWO ENTERPRISES WILL NECESSARILY LEAD TO RELIAB LE COMPARISONS. ASSUMING SIMILAR FUNCTIONS CAN BE ISOLATED F ROM AMONG THE WIDE RANGE OF FUNCTIONS THAT ENTERPRISES MA Y EXERCISE, IN ORDER TO APPLY THE METHOD, THE NET PROF IT INDICATORS RELATED TO SUCH FUNCTIONS MAY STILL NOT BE AUTOMATICAL LY COMPARABLE WHERE, FOR INSTANCE, THE ENTERPRISES CONCER NED CARRY ON THOSE FUNCTIONS IN DIFFERENT ECONOMIC SECTORS OR MARKETS WITH DIFFERENT LEVELS OF PROFITABILITY. 3.1.14 IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SE RVICES LTD. VS. ACIT (2007) 107 ITD 141 (BANG) (SB) THE HONOURABLE BANGALORE TRIBUNAL HAS HELD AS UNDER : UNDER THIS METHOD, THE NET PROFIT MARGIN REALIZED B Y AN ASSOCIATED ENTERPRISE FROM AN INTERNATIONAL TRANSACTION IS COMPUTED IN RELATION TO A PARTICULAR FACTOR SUCH AS C OSTS INCURRED, SALES, ASSETS UTILIZED ETC. THE NET PROFIT M ARGIN REALIZED BY AN ASSOCIATED ENTERPRISE IS COMPARED WITH NET PROFIT MARGIN OF THE UNCONTROLLED TRANSACTIONS TO ARRIVE AT THE ALP. THE TNMM IS SIMILAR TO RPM AND CPM TO THE EXTENT THAT IT INVOLVES COMPARISON OF MARGIN EARNED IN A CONTROLLED SITUATION WITH MARGINS EARNED FROM COMPARABLE UNCONTROLLED SITU ATION. THE ONLY DIFFERENCE IS THAT, IN THE RPM AND CPM METH ODS, COMPARISON IS OF MARGINS OF GROSS PROFITS AND WHEREAS IN T NMM THE COMPARISON IS ON MARGINS OF NET PROFIT. 3.1.15 RULE 10B(E) AND THE OECD GUIDELINES MAKE IT C LEAR THAT THIS METHOD SEEKS TO COMPARE NET PROFIT MARGINS OF THE CONT ROLLED AND UNCONTROLLED TRANSACTIONS. COMPARING OF GROSS MARGINS I S NOT ENVISAGED UNDER THE INCOME TAX RULES. CONCEPTUALLY A LSO COMPARING OF GROSS MARGINS MAY PROVIDE UNRELIABLE REASONS BECAUSE O F THE FACTORS MENTIONED ABOVE. IN VIEW OF THE ABOVE, I HOLD THAT THE ADJUSTMENT MADE BY THE TPO IS NOT SUPPORTED BY THE LEGAL PROVISIO NS AND HENCE, IT IS DELETED. THE APPELLANT GETS RELIEF OF RS.8,23,19,5 80/-. 12 3.1.16 SINCE THE DECISION IS TAKEN IN THE ASSESSEES FAVO UR, IT IS NOT NECESSARY TO GIVE FINDINGS ON THE OTHER CONNECTED GROU NDS ON THIS ISSUE. 18. AGGRIEVED WITH SUCH ORDER OF CIT(A) THE REVENUE IS IN A PPEAL BEFORE US. 19. THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY OPPOSE D THE ORDER OF THE CIT(A). HE SUBMITTED THAT THE POWERS OF THE CIT(A) ARE COTERMINOUS WITH THAT OF THE AO. HE CAN DO ENQUIRIES AND DO THINGS WHICH THE AO HAS NOT DONE WHILE PASSING THE ASSES SMENT ORDER. THEREFORE, THE MATTER MAY BE RESTORED TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY WHETHER EXTERNAL COMPARABLES T AKEN BY THE ASSESSEE ARE CORRECT. 20. AS REGARDS THE GROUNDS RAISED BY THE REVENUE THAT THE DECISION OF THE JURISDICTIONAL TRIBUNAL IN THE CASE OF AMDOCS BUSINESS SERVICES PVT. LTD., (SUPRA) CLEARLY APPLIES TO THE P RESENT CASE. THE LD. DEPARTMENTAL REPRESENTATIVE FAIRLY SUBMITTE D THAT THE SAID DECISION IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 21. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND REFERRED TO PAGE 2 OF THE TPOS ORDER AND DREW THE ATTENTION O F THE BENCH TO THE INTERNATIONAL TRANSACTIONS CARRIED ON BY THE ASSESSE E DURING THE YEAR WHEREIN THE ASSESSEE HAS AGGREGATED THE MANUFACT URING PRODUCTS WHICH ARE CLOSELY INTERLINKED AND WHERE THE TNM M METHOD HAS BEEN ADOPTED. REFERRING TO PAGE 4 PARA (I) OF THE ORDER THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE FOLLOWING OBSERVATION OF THE TPO. FROM THE TP STUDY REPORT IT IS SEEN THAT THE COMPANY SPECIALIZES IN MANUFACTURING OF INTERNAL COMBUSTION ENGINES WHICH AR E USED IN VARIETY OF BUSINESS SEGMENTS. THE IC ENGINES SO MANUFACTU RED ARE SOLD FOR POWER GENERATION AND INDUSTRIAL APPLICATIONS. IT IS ALSO SEEN THAT THE COMPANY MANUFACTURES VARIETY OF ENGINES FROM 60 T O 2700 HORSE 13 POWER OPERATING ON DIESEL, NATURAL GAS AND DUAL FUEL. IT IS ACCORDINGLY CLEAR THAT YOUR COMPANY DOES NOT HAVE A STANDARD PROD UCT OF STANDARD SPECIFICATIONS BUT BASED ON THE CUSTOMERS NEEDS, ENGINES O F SPECIFIC HORSE POWER AS MAY BE SUITABLE FOR SUCH USAGE, IS MANUFAC TURED AND SOLD TO THE ORIGINAL EQUIPMENT MANUFACTURERS WHO IN T URN SELL THEIR FINAL EQUIPMENT TO THE END USER IN THE MARKET. (EMPH ASIS SUPPLIED BY THE LD. AR) 22. REFERRING TO PAGE 12 OF THE TPOS ORDER THE LD. COUN SEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE S UBMISSION OF THE ASSESSEE BEFORE THE TPO WHICH HAS BEEN SUMMARIZED BY THE TPO IN HIS ORDER AND WHICH READS AS UNDER : DIFFERENCE IN PRODUCTS : UNDER THIS HEAD IT HAS BEEN SUBMITTED THAT THERE IS DIFFERENCE IN THE BASIC ENGINES ON ACCOUNT OF PARTS AND COMPONENTS WHICH ARE SELECTED DEPENDING UPON THE APPL ICATION OF ENGINES, THAT THE ENGINE CONFIGURATIONS TO SATISFY REQU IREMENTS IN THE INDIAN MARKET ARE DIFFERENT FROM THE EXPORT MARKETS, THAT THE EXPORTED ENGINES REPRESENT BASIC CONFIGURATIONS WHILE DOMESTIC EN GINES INCLUDE A GREAT VARIETY OF ADDITIONAL FEATURES SUCH AS COOLING SYSTEMS, EXHAUST SYSTEMS, AIR FILTRATION SYSTEMS, FUEL SYSTEM, MOUNTING SYSTE M, INSTRUMENTATION PANEL, ELECTRICAL AND CHARGING SYSTEM AND AUXILIARY ACCESSORIES AND THUS ADDITIONAL CAPABILITIES AND THEREFO RE APPROPRIATE MARK UP FORMS PART OF THE SALES. HE ACCORDINGLY SUBMITTED THAT WHEN IT EXPORTS ITS PRODU CTS TO THE AE IT IS THE AE WHO DOES ALL THOSE THINGS. THEREFORE, THER E IS DIFFERENCE IN THE PRODUCT. HE FURTHER SUBMITTED THAT THE ASSESSEE IS NOT REQUIRED TO DO MARKETING FUNCTIONS FOR THE AES SINCE IT IS THEIR JOB TO DO MARKETING. 23. REFERRING TO PAGE 14 OF THE ORDER OF THE TPO HE DREW THE ATTENTION OF THE BENCH TO PARA 3.27 OF THE OECD GUIDELINES WHICH READ AS UNDER : 3.27 ONE STRENGTH OF THE TRANSACTIONAL NET MARGIN ME THOD IS THAT NET MARGINS (I.E. RETURN ON ASSETS, OPERATING INCOME TO SALE S AND POSSIBLY OTHER MEASURES OF NET PROFIT) ARE LESS AFFECTED BY TRAN SACTIONAL DIFFERENCES THAN IS THE CASE WITH PRICE AS USED IN THE C UP METHOD. THE NET MARGINS ALSO MAY BE MORE TOLERANT TO SOME FUNCTION AL DIFFERENCE BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS THAN GROSS PROFIT MARGINS. DIFFERENCE IN THE FUNCTIONS PERFORMED BETWE EN ENTERPRISES ARE OFTEN REFLECTED IN VARIATIONS IN OPERATING EXPEN SES. CONSEQUENTLY, ENTERPRISES MAY HAVE WIDE RANGE OF GROSS PROFIT MARGIN S BUT STILL EARN BROADLY SIMILAR LEVELS OF NET PROFITS. 14 24. REFERRING TO PAGE 520 OF THE PAPER BOOK THE LD. COUN SEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO PARA 3.6 IN THE GROUNDS OF APPEAL BEFORE CIT(A) WHERE THE ABOVE OECD GU IDELINES WAS BROUGHT TO HIS NOTICE ACCORDING TO WHICH TNMM REQUIR ED NET PROFIT MARGIN EARNED FROM CONTROLLED TRANSACTIONS WITH THAT OF NET PROFIT MARGIN EARNED FROM UNCONTROLLED TRANSACTIONS. REFERR ING TO THE SUBMISSIONS MADE BEFORE THE TPO ON 01-02-2008, COPY OF WHICH IS PLACED AT PAGES 330 TO 334 OF THE PAPER BOOK, THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENC H TO PAGE 333 UNDER THE HEAD PRINCIPLE OF AGGREGATION ACCORDING TO WHICH THIS PRINCIPLE SEEKS TO COMBINE ALL FUNCTIONALLY SIMILAR TRANSACTIONS WHEREIN ALP CAN BE CONDUCTED FOR A NUMBER OF TRANSACTIO NS TAKEN TOGETHER. HE DREW THE ATTENTION OF THE BENCH TO PARA 1.42 OF THE OECD GUIDELINES WHICH ADVOCATE AGGREGATION OF TRANSACTIONS AND WHICH READS AS UNDER : 1.42 IDEALLY, IN ORDER TO ARRIVE AT THE MOST PRECISE APPROXIMATION OF FAIR MARKET VALUE, THE ARMS LENGTH PRINCIPLE SHOULD BE APPLIED ON A TRANSACTION-BY-TRANSACTION BASIS. HOWEVER; THERE ARE OFTEN SITUATIONS WHERE SEPARATE TRANSACTIONS ARE SO CLOSELY LINKED OR CON TINUOUS THAT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATE BA SIS. EXAMPLES MAY INCLUDE 1. SOME LONG-TERM CONTRACTS FOR THE SUPPL Y OF COMMODITIES OR SERVICES, 2. RIGHTS TO USE INTANGIBLE PROPERTY, AND 3. PRICING A RANGE OF CLOSELY-LINKED PRODUCTS (E.G. IN A PRODUCT LINE) W HEN IT IS IMPRACTICAL TO DETERMINE PRICING FOR EACH INDIVIDUAL PRODUCT OR TRANSACTION. ANOTHER EXAMPLE WOULD BE THE LICENSING OF MANUFACTUR ING KNOW-HOW AND THE SUPPLY OF VITAL COMPONENTS TO AN ASSOCIATED MA NUFACTURER, IT MAY BE MORE REASONABLE TO ASSESS THE ARMS LENGTH TERMS FO R THE TWO ITEMS TOGETHER RATHER THAN INDIVIDUALLY. SUCH TRANSACTIONS SHOULD BE EVALUATED, TOGETHER USING THE MOST APPROPRIATE ARMS L ENGTH METHOD OR METHODS. A FURTHER EXAMPLE WOULD BE THE ROUTING OF A TRANSACTION THROUGH ANOTHER ASSOCIATED ENTERPRISE, IT MAY BE MORE APPROPRIATE TO CONSIDER THE TRANSACTION OF WHICH THE ROUTING IS A PAR T IN ITS ENTIRETY, RATHER THAN CONSIDER THE INDIVIDUAL TRANSACTIONS ON A SEPARATE BASIS. (EMPHASIS SUPPLIED BY THE ASSESSEE BEFORE TPO). HE SUBMITTED THAT OECD DOES NOT SAY TO ADOPT GROSS M ARGIN IN TNMM. 15 25. REFERRING TO RULE 10B(1) HE SUBMITTED THAT FOR THE PURP OSE OF SUB-SECTION (2) OF SECTION 92C THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS BEING THE MOST APPROPRIATE METHOD IN THE FOLLOWING MANNER NAMELY: 1. CUP 2. RESELL PRICE 3. COST PLUS METHOD 4. PROFIT SPLIT METHOD 5. TNMM OR 6. ANY OTHER METHOD AS PROVIDED IN RULE 10AB 26. SO FAR AS TNMM IS CONCERNED HE SUBMITTED THAT EVERY WHERE THE STARTING POINT IN TNMM IS NET PROFIT. REFERRING TO PAR A 3.1.9 OF THE ORDER OF CIT(A) HE SUBMITTED THAT THE LD.CIT(A) WHILE DE LETING THE ADDITION HAS HOWEVER MADE CERTAIN OBSERVATIONS WHICH IS NOT AT ALL CORRECT. HE HAS STATED THAT ALL MANUFACTURED PRODUC TS OF THE ASSESSEE FALL INTO THE BASKET OF IC ENGINES, THEREFORE, IT IS UNLIKELY THAT THERE WILL BE MATERIAL VARIATION IN MARGIN OF EACH PRODU CT TYPE. HE HAS ACCORDINGLY REJECTED THE ARGUMENT OF THE ASSES SEE ON ACCOUNT OF PRODUCT DIFFERENCE WHICH ACCORDING TO LD. AUTHO RISED REPRESENTATIVE IS NOT CORRECT. 27. REFERRING TO THE SUBMISSIONS MADE BEFORE TPO ON 21-05 - 2008, A COPY OF WHICH IS PLACED AT PAGE 451 TO 464 OF THE PAPER BOOK THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTIO N OF THE BENCH TO THE PAGE 3 OF THE SAID SUBMISSION (PAGE 453 OF T HE PAPER BOOK) AND SUBMITTED THAT IT WAS CLEARLY EXPLAINED BEFORE T HE TPO THAT EVEN THE BASIC EXPORTED ENGINES AND THE BASIC DO MESTIC ENGINES ARE DIFFERENT ON ACCOUNT OF PARTS AND COMPONENTS USED IN EACH BASIC ENGINE WHICH ARE SELECTED DEPENDING UPON THE APPLICATION OF THE ENGINE, THE ELECTRICAL SYSTEM WITH WHICH IT IS TO BE INTEGRATED ETC. IT WAS ALSO SUBMITTED THAT THE ENGINE C ONFIGURATIONS 16 TO SATISFY REQUIREMENTS IN THE INDIAN MARKET ARE DIFFERENT FROM THE EXPORT MARKET. THEREFORE, THE OBSERVATION OF THE CIT(A) IN THE LAST 4 LINES OF PARA 3.1.9 ARE BASELESS AND UNSUSTAINABLE. 28. REFERRING TO VARIOUS CASE DECISIONS HE SUBMITTED THAT THE CIT(A) HAS CORRECTLY HELD THAT THE ADJUSTMENT MADE BY THE TPO AMOUNTING TO RS.8,23,19,580/- IS NOT SUPPORTED BY THE LEGA L PROVISIONS. HE ACCORDINGLY SUBMITTED THAT THE GROUNDS R AISED BY THE REVENUE SHOULD BE DISMISSED. 29. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND LD.CIT(A) AND TH E PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDE RED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND IN THE INSTANT CASE THE ASSESSEE HAS AGGREGATED THE INTERNATIONAL TRANSACTIONS FROM SL.NO.1 TO 7 OF THE TABLE AT PARA 4 OF THIS ORDER AS MANUFA CTURING ACTIVITY AND HAS BENCHMARKED USING TNMM TAKING EXTERNAL COMPARABLES AND ADOPTED THE PLI AS OPERATING MARGIN TO SALES EARNED BY THIRD PARTY COMPARABLES. WE FIND THE TPO REJ ECTED VARIOUS ARGUMENTS ADVANCED BY THE ASSESSEE AND MADE AN ADJUSTMENT OF RS.8,23,19,580/- IN RESPECT OF INTERNATIONAL TRANSACTION RELATING TO EXPORT OF MANUFACTURED IC ENGINE S BY CONSIDERING THE DIFFERENCE IN THE GROSS MARGIN EARNED BY T HE ASSESSEE FROM SALE OF IC ENGINES IN THE DOMESTIC MARKET A ND GROSS MARGIN EARNED BY THE ASSESSEE FROM EXPORT OF IC ENGINES TO AES. WE FIND IN APPEAL THE LD.CIT(A) FOLLOWING PROVISIONS OF RULE 10B(E) AS WELL AS PARA 3.26 OF THE OECD GUIDELINES AND VARIOUS OT HER DECISIONS HELD THAT NET PROFIT MARGIN OF CONTROLLED TRANSACT IONS HAS TO BE COMPARED WITH THE NET PROFIT MARGIN OF UNCONTROLLED TRANSACTIONS. HE HAS FURTHER HELD THAT COMPARING OF GROS S MARGIN 17 IS NOT ENVISAGED UNDER THE I.T. RULES. IN VIEW OF THE DET AILED REASONING GIVEN BY HIM AT PARA 3.1.8 TO 3.1.16 OF HIS ORDER, WHICH HAS ALREADY BEEN REPRODUCED IN THE PRECEDING PARAGRAPH S, HE DELETED THE ADDITION MADE BY THE AO ON ACCOUNT OF ADOPT ION OF DIFFERENCE IN GROSS PROFIT MARGIN BY THE AO AS AGAINST DIFFERE NCE IN NET PROFIT MARGIN BETWEEN SALES TO AE AND SALES IN DOMEST IC MARKET. WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A) WHO H AS DECIDED THE ISSUE AS PER THE PROVISIONS OF RULE 10B(E) AS W ELL AS PARA 3.26 OF THE OECD GUIDELINES AS WELL AS VARIOUS OTHER DECISIONS ACCORDING TO WHICH NET PROFIT MARGIN OF CONTROLLED TRANSACTIONS HAS TO BE COMPARED WITH NET PROFIT MARGIN O F UNCONTROLLED TRANSACTIONS. THE LD. DEPARTMENTAL REPRESEN TATIVE COULD NOT CONTROVERT THE LEGAL AND FACTUAL FINDINGS GIVEN BY THE CIT(A). IN ABSENCE OF ANY DISTINGUISHABLE FEATURES BROUGHT BEFORE US BY THE LD. DEPARTMENTAL REPRESENTATIVE WE DO NOT FIN D ANY INFIRMITY IN THE ORDER OF LD.CIT(A) DELETING THE ADDITION. ACCORDINGLY, THE SAME IS UPHELD. SINCE WE ARE DISMISSING T HE GROUND RAISED BY THE REVENUE BY UPHOLDING THE ORDER OF CIT(A) ON THE ISSUE OF NET MARGIN, THE OTHER ARGUMENTS OF THE ASSE SSEE ARE NOT CONSIDERED BEING ACADEMIC IN NATURE. GROUNDS RAISED BY THE REVENUE ARE ACCORDINGLY DISMISSED. 30. IN GROUNDS OF APPEAL NO.5 THE REVENUE HAS CHALLENGED THE ORDER OF THE CIT(A) IN DELETING THE DISALLOWANCE OF RS.40,36, 560/- MADE BY THE AO U/S.14A OF THE I.T. ACT. 31. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT ASSESSEE HAS REC EIVED INTEREST AND DIVIDEND OF RS.31,41,04,213/-. HE THEREFORE ASK ED THE ASSESSEE TO EXPLAIN AS TO WHY DISALLOWANCE SHOULD NOT BE MADE 18 U/S.14A OF THE I.T. ACT SINCE THE ASSESSEE HAS CLAIMED T HE INTEREST AND DIVIDEND AS EXEMPT U/S.10(15), 10(34)/10(35) OF THE I.T. AC T. ACCORDING TO THE AO CERTAIN EXPENSES MUST HAVE BEEN IN CURRED BY THE ASSESSEE FOR EARNING SUCH EXEMPT INCOME. THE ASSESSEE REPLIE D THAT IT IS A CASH RICH COMPANY. ITS SHARE CAPITAL AND FRE E RESERVES AS ON 31-03-2005 STOOD AT RS.698.19 CRORES AS AGAINST UNSECURED LOANS OF RS.19 LAKHS ONLY. IT HAD NO SECURED LOANS. THER EFORE, NO DISALLOWANCE IS CALLED FOR U/S.14A AS THE INVESTMENTS WERE MADE FROM THE OWN FUNDS OF THE COMPANY. 32. HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. ACCORDING TO HIM, IT IS NOT POSSIBLE TO CONCEIVE THAT NO EXPENSES CAN BE ATTRIBUTED TO EARNING OF EXEMP TED INCOME AS INVESTMENT DECISIONS ARE COMPLEX DECISIONS AND ASSESSE E IS BOUND TO HAVE INCURRED CERTAIN EXPENSES FOR EARNING DIVID END INCOME. APPLYING RULE 8D (2)(III) THE AO DISALLOWED AN AMOUNT OF RS.40,36,560/-. 33. IN APPEAL THE LD.CIT(A) HELD THAT PROVISIONS OF RULE 8D CANNOT BE APPLIED WITH RETROSPECTIVE EFFECT IN VIEW OF THE D ECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOY CE MFG. COMPANY PVT. LTD. VS. DCIT REPORTED IN 328 ITR 81. IT I S APPLICABLE ONLY PROSPECTIVELY. HE ACCORDINGLY DELETED THE DISALLOWANCE MADE BY THE AO. 34. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 35. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE P APER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E 19 VARIOUS DECISIONS CITED BEFORE US. WE FIND THE ASSESSEE D URING THE IMPUGNED ASSESSMENT YEAR HAS EARNED INTEREST AND DIVID END INCOME OF RS.31,41,04,213/- WHICH IT CLAIMED AS EXEMPT. WE FIND THE AO APPLYING THE PROVISIONS OF RULE 8D DISALLOWED AN AMO UNT OF RS.40,36,560/-. IN APPEAL THE LD.CIT(A) FOLLOWING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOY CE MFG. COMPANY PVT. LTD. (SUPRA) DELETED THE ADDITION HOLDING THAT PROVISIONS OF RULE 8D ARE PROSPECTIVE IN NATURE AND THERE FORE ARE APPLICABLE TO A.Y. 2008-09 AND ON ONWARDS. SINCE THE AS SESSMENT YEAR INVOLVED IN THE IMPUGNED APPEAL IS A.Y. 2005-06, THERE FORE, NO DISALLOWANCE IS CALLED FOR UNDER PROVISIONS OF RULE 8D AS THE SAME IS NOT APPLICABLE FOR THE IMPUGNED ASSESSMENT YEAR. HOWEVE R, IT CANNOT BE SAID THAT NO ADMINISTRATIVE EXPENSES HAVE BEE N INCURRED BY THE ASSESSEE FOR EARNING THE HUGE TAX FREE DIVIDEND IN COME. CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE, DISALLOWANC E OF AN AMOUNT OF RS.2 LAKHS, IN OUR OPINION, WILL MEET THE ENDS OF JUS TICE. WE HOLD AND DIRECT ACCORDINGLY. ACCORDINGLY, THE GROUND S RAISED BY THE REVENUE ON THIS ISSUE ARE PARTLY ALLOWED. 36. GROUNDS OF APPEAL NO.7 AND 8 BEING GENERAL IN NATURE A RE DISMISSED. CO NO.53/PN/2014 : 37. GROUND OF APPEAL NO.1 IN THE CO REFERS TO NON ADMISSION OF THE APPEAL FILED BY THE REVENUE DUE TO DELAY IN FILING OF THE SAME. WE HAVE ALREADY CONDONED THE DELAY WHILE DECIDING THE AP PEAL FILED BY THE REVENUE. THEREFORE, THIS GROUND BY THE ASSESSEE IS DISMISSED. 20 38. GROUNDS OF APPEAL NO. 2, 3 AND 5 OF THE CO WERE NOT PRESSED BY LD. AUTHORISED REPRESENTATIVE. GROUNDS OF APPEAL NO.6 & 7 BEING GENERAL ARE DISMISSED. THUS, WE ARE LEFT WITH ONLY GROUND OF APPEAL NO.4 WHICH RELATES THE ORDER OF THE CIT(A) IN CONFIRMIN G THE ADJUSTMENT OF RS.78,72,507/- TO THE VALUE OF INTERNATIONAL TRANSACTIONS IN RESPECT OF EXPORT OF IC ENGINES BY THE LHP DIVISION. 39. FACTS OF THE CASE, IN BRIEF, ARE THAT THE TPO DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE COMPANY MANUFACTURES IC ENGINES OF CAPACITY LOWER THAN 125 KVA, I.E . 164 HORSE POWER IN ITS LHP DIVISION. HE NOTED THAT TOTAL EXPO RT SALES TO AES FROM LHP DIVISION IS RS.17.69 CRORES ON WHICH THE COMPA NY EARNED OPERATING MARGIN TO SALES AT 3.22%. HOWEVER, THE COMPANY HAS EARNED OPERATING MARGIN TO SALES AT 7.76% ON THE TO TAL SALES OF 135.36 CRORES MADE TO THIRD PARTIES. REJECTING THE VAR IOUS EXPLANATIONS GIVEN BY THE ASSESSEE THE TPO MADE ADJUST MENT EQUIVALENT TO THE DIFFERENCE OF 4.45%, (I.E. 7.76 3.22) ON TO TAL SALES MADE TO AES OF 17,69,10,279/-. ACCORDINGLY, THE ADJU STMENT WAS WORKED OUT AT RS.78,72,507/-. 40. BEFORE CIT(A) IT WAS SUBMITTED THAT ACCORDING TO RULE 1 0B, COMPARABILITY OF THE TRANSACTION DEPENDS ON VARIOUS FACTOR S SUCH AS SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED, FUNCTIONS PERFORMED WITH RISKS ASSUMED AND ASSETS EMPLOYED IN THE TRANSACTIONS AND CONTRACTUAL TERMS AND CONDITIONS PREVA ILING IN THE MARKET. IT WAS SUBMITTED THAT AT BEST, COMPARISON CAN BE MADE BETWEEN EXPORTS TO AES AND EXPORTS TO NON AES IN THE SAME OVERSEAS MARKET PROVIDED FUNCTIONS INVOLVED, CONTRACTUAL T ERMS AND CONDITIONS PREVAILING IN THE OVERSEAS MARKET ARE SAME . IT WAS SUBMITTED THAT THE TPO WRONGLY MADE ADJUSTMENT OF RS.78,72,507/-. 21 41. HOWEVER, THE CIT(A) ALSO WAS NOT CONVINCED WITH THE ARGUMENTS ADVANCED BY THE ASSESSEE. HE NOTED THAT THE TPO IN HIS ORDER HAS HELD THAT THE ASSESSEE HAS OFFERED ONLY GENE RAL ARGUMENTS AND HAS NOT PROVIDED SPECIFIC FACTS OR FIGURES A S TO HOW THESE CONDITIONS HAVE REDUCED ITS PROFIT MARGIN ON EXPORTS MADE T O THE AES. ACCORDING TO HIM UNLESS PROVED OTHERWISE THE P ROFIT MARGIN IN EXPORT SALES SHOULD ALWAYS BE HIGHER THAN ANY SALES MADE IN THE DOMESTIC MARKET IN INDIAN SITUATION. ACCORDING TO HIM IT IS FOR THE ASSESSEE TO EXPLAIN AS TO HOW THE EXPORT S ALES MADE TO AES IS AT ARMS LENGTH AS RELEVANT INFORMATION IS IN ITS POS SESSION. SINCE THE ASSESSEE HAS NOT DONE THE SAME HE HELD THAT THE TPO WAS JUSTIFIED IN MAKING THE ADJUSTMENT. 42. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE HAS TAKEN THIS GROUND OF APPEAL NO.4 IN THE CO. 43. THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO PAGE 46 3 OF THE PAPER BOOK AND DREW THE ATTENTION OF THE BENCH TO THE FOLLOWING SUBMISSION MADE BEFORE THE TPO : C. YOUR HONOUR HAS REQUESTED THE COMPANY TO SHOW CAU SE AS TO WHY ADJUSTMENT OF AN AMOUNT CORRESPONDING TO THE DIFF ERENCE IN THE MARGINS GENERATED BY THE COMPANY FROM EXPORT OF IC E NGINES OF LHP DIVISION TO AES AND AS GENERATED BY THE COMPANY FROM SA LE OF IC ENGINES OF LHP DIVISION TO NON AES BE NOT MADE TOWARD S THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE COMPANY RELATING TO EXPORT TO IC ENGINES OF LHP DIVISION. C.1 THE COMPANY HAS SUBMITTED THE FOLLOWING INFORMATI ON IN THE LETTER DATED 3 RD APRIL 2008 : PARTICULARS EXPORT SALE TO AE EXPORT SALE TO NON AE DOMESTIC SALE TO NON AE TOTAL SALES TO NON AE A B C (B+C) SALES 17.69 6.23 129.13 135.36 TOTAL INCOME 17.69 6.23 129.13 135.36 LESS : MATERIAL CONSUMED 15.76 5.35 109.21 114.56 22 MANUFACTURING EXPENSES 0.52 0.32 2.98 3.3 ADMINISTRATIVE EXPENSES 0.24 0.09 2.38 2.47 SELLING & DISTRIBUTION EXPENSES 0.58 0.22 4.09 4.31 INTEREST & FINANCE 0.03 0.01 0.21 0.22 TOTAL COSTS 17.12 5.99 118.88 124.86 NET OPERATING MARGIN 0.57 0.24 10.26 10.5 % OF NET OPERATING MARGIN TO SALES 3.22% 3.85% 7.94% 7.76% YOUR HONOUR IS COMPARING NET MARGIN OF 3.22% EARNED FROM THE EXPORTS OF IC ENGINES OF RS.17.69 CRORES TO THE AES WIT H NET MARGIN OF 7.76% EARNED FROM THE SALE OF IC ENGINES TO NON AES OF RS.135.36 CRORES. HOWEVER, IT WOULD BE PERTINENT TO NOTE THAT THE AMOUNT OF RS.135.36 CRORES INCLUDES DOMESTIC SALE OF RS.129.13 CROR ES WHICH EARNS NET MARGIN OF 7.94% OF SALES. THE COMPANY WOULD LIKE TO SUBMIT THAT RULE 10B OF TH E INCOME TAX RULES, 1962 PRESCRIBE THAT THE COMPARABILITY OF THE T RANSACTIONS DEPEND ON VARIOUS FACTORS SUCH AS SPECIFIC CHARACTERISTIC S OF THE PROPERTIES TRANSFERRED, FUNCTIONS PERFORMED WITH RISKS A SSUMED AND ASSETS EMPLOYED IN THE TRANSACTIONS, CONTRACTUAL TERMS AN D CONDITIONS PREVAILING IN THE MARKETS. CONSIDERING THE DIFFERENC E IN THE MARKETS FOR SALE OF IC ENGINES IN TERMS OF SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPIT AL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON, THE TRANSACTIONS OF SALE OF IC ENGINES OF RS.135.36 CRORES TO NON AES ARE NOT COMPARABLE WITH THE TRANSACTION OF RS.17.69 CRORE S IN RESPECT OF SALE OF IC ENGINES TO AES. CONSIDERING THE SAME, THE CO MPANY IS OF THE VIEW THAT ADJUSTMENT ON ACCOUNT DIFFERENCE IN MARGIN S TO THE EXTENT OF 4.45% IS NOT REQUIRED. 44. HE SUBMITTED THAT COMPARISON OF EXPORT TO EXPORT C AN BE MADE BUT COMPARISON OF EXPORT TO DOMESTIC SALES CANNOT BE MADE FOR ARRIVING AT THE PROFIT MARGIN. HE SUBMITTED THAT WHEN THE ASSESSEE HAS GIVEN ALL THE DETAILS, THEREFORE, THE ORDER OF THE CIT(A) STATING THAT THE ASSESSEE HAS NOT EXPLAINED AS TO HOW THE EXPORT SALES TO AES IS AT ARMS LENGTH IS INCORRECT. HE ACCORDIN GLY SUBMITTED THAT THE ORDER OF THE CIT(A) BE SET ASIDE AND THE ADDITION SUSTAINED SHOULD BE DELETED. 45. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 23 46. AFTER HEARING BOTH THE SIDES, WE FIND ALTHOUGH THE AS SESSEE HAS MADE ELABORATE SUBMISSIONS BEFORE THE TPO RELATING TO THE PROPOSED ADJUSTMENT ON ACCOUNT OF EXPORT OF IC ENGINES OF LHP DIVISION TO AES, THE LOWER AUTHORITIES HAVE NOT PROPERLY C ONSIDERED THE SUBMISSIONS MADE BEFORE THEM. IN OUR OPINION, THE MAT TER REQUIRES REVISIT TO THE FILE OF THE TPO WITH A DIRECTION TO G IVE ANOTHER OPPORTUNITY TO THE ASSESSEE TO DEMONSTRATE A S TO HOW THE EXPORT SALES MADE TO AES IS AT ARMS LENGTH. THE GROUN D RAISED BY THE ASSESSEE IN THE CO IS ACCORDINGLY ALLOWED FOR STATISTIC AL PURPOSES. 47. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMIS SED AND THE CO FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 29-01-2016. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER IQ.KS PUNE ; DATED : 29 TH JANUARY, 2016 LRH'K ' (!* + / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. $ ( ) , / THE CIT(A), KOLHAPUR 4. $ , / THE CIT, KOLHAPUR 5. ' **+ , + , IQ.KS / DR, ITAT, A PUNE 6. / / GUARD FILE. / BY ORDER , ' //TRUE COPY // 12 * + / SR. PRIVATE SECRETARY +, IQ.KS / ITAT, PUNE