Summit (India) Water Treatment Services Ltd., Ahmedabad V. The ACIT.,(OSD)Circle-8, Ahmedabad

CO 73/AHD/2012

• Counselvise Citation: [2016] 112 COUNSELVISE.COM (IT) 4215 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 5 month(s) 9 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 24-08-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 22-08-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 15-03-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Additional evidence
• Section: 92C; 143(3); 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD I BENCH (BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER & SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER) ITA. NO: 377/AHD/2012 & C.O. NO. 73/AHD/12 (ASSESSMENT YEAR: 2007-08) ACIT (OSD) CIRCLE-8, AHMEDABAD SUMMIT (INDIA) WATER TREATMENT & SERVICES LTD. 306, KALASH-II, NR.JAIN TEMPLE B/H POST OFFICE, NABRANGPURA, 380009 V/S V/S SUMMIT (INDIA) WATER TREATMENT & SERVICES LTD. 306, KALASH-II, NR.JAIN TEMPLE B/H POST OFFICE, NABRANGPURA, 380009 ACIT (OSD) CIRCLE-8, AHMEDABAD (APPELLANT) (RESPONDENT) PAN: AAECS6689L APPELLANT BY : SHRI RAKESH JHA, SR. D.R. RESPONDENT BY : SHRI ASHWIN SHAH, A.R. ( )/ ORDER DATE OF HEARING : 22 -08-201 6 DATE OF PRONOUNCEMENT : 24 -08-2016 PER N.K. BILLAIYA, ACCOUNTANT MEMBER ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 2 1. ITA NO. 377/AHD/2012 AND C.O. NO. 73/AHD/2012 ARE A PPEAL BY THE REVENUE AND CROSS OBJECTION OF THE ASSESSEE DIRECTE D AGAINST THE VERY SAME ORDER OF THE LD. CIT(A)-XIV, AHMEDABAD DATED 3 0.11.2011 PERTAINING TO A.Y. 2007-08. 2. THE GRIEVANCE OF THE REVENUE READS AS UNDER:- 1. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, A HMEDABAD HAS ERRED IN LAW AND ON FACTS IN RESTRICTING THE TRA NSFER PRICING ADJUSTMENT U/S.92CA(6) TO RS.21,44,692/-AS AGAINST RS.3,00,89 ,890/-MADE BY THE ASSESSING OFFICER / TRANSFER PRICING OFFICER. 2. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, A HMEDABAD HAS ERRED IN LAW AND ON FACTS IN ADMITTING ADDITIONAL EVIDENCES IN V IOLATION OF 'RULE 46A AND NOT ALLOWING THE ASSESSING OFFICER OR THE TRANSFER PRIC ING OFFICER (TPO) AN OPPORTUNITY TO VERIFY & COMMENT UPON THE ADDITIONAL EVIDENCES FURNISHED BY THE ASSESSEE, ON APPLICATION OF THE DATA FROM THE PROW ESS. 3. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, A HMEDABAD HAS ERRED IN LAW AND ON FACTS IN GRANTING AN ADJUSTMENT TO THE A SSESSEE FOR INCREASE IN THE PRICE OF RAW MATERIALS, BY CONSIDERING SUCH AN INCR EASE AS AN ITEM OF 'EXTRA ORDINARY' NATURE AFTER PLACING MISPLACED RELIANCE O N RULE 10B(E)(III). 4. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV , AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN CONSIDERING FOREIGN EXCHANGE FL UCTUATION GAIN AS ITEM OF 'OPERATING INCOME' ESPECIALLY IN LIGHT OF THE FACT THAT THE ASSESSEE HAS FIXED PRICE CONTRACT WITH ITS ASSOCIATE ENTERPRISE AND FOREX FL UCTUATION HAS NO EFFECT ON SUCH FIXED PRICE. 5. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XLV, AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN CONSIDERING THE INCREASE IN CLO SING STOCK AS PART OF OPERATING COSTS, IN LIGHT OF THE FACT THAT THE INCREASE IS MA INLY ON ACCOUNT OF INCREASE IN FINISHED GOODS RATHER THAN RAW MATERIALS. 6. THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, A HMEDABAD HAS ERRED IN LAW IN GRANTING STANDARD DEDUCTION OF 5% TO THE ASS ESSEE. ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 3 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. COMMISSIONER OF INCOME- TAX (APPEALS)-XIV, AHMEDABAD OUGHT TO HAV E UPHELD THE ORDER OF THE ASSESSING OFFICER. 8. IT IS THEREFORE, PRAYED THAT THE ORDER OF THE LD. C OMMISSIONER OF INCOME-TAX (APPEALS)-XIV, AHMEDABAD MAY BE SET-ASIDE AND THAT OF THE ORDER OF THE ASSESSING OFFICER BE RESTORED. 3. AND THE CROSS OBJECTION OF THE ASSESSEE READS AS UN DER:- 1. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE TRANSFER PRICING ADJUSTMENT TO THE EXTENT OF RS. 21,44,692/- UNDER SECTION 92CA ON THE GROUND THAT: (I) THE CALCULATION OF PROFIT LEVEL INDICATOR [PLI ] MADE BY THE ASSESSEE COMPANY IS NOT CORRECT; (II) IRON (EXCHANGE) INDIA LTD. HAS NOT BEEN ACCEPT ED AS A COMPARABLE COMPANY FOR THE PURPOSE OF BENCH MARKING THE MARGINS SINCE THE COMPANY IS IN THE BUSINESS OF WATER TREATMENT PLANT AND NOT IN THE WA TER TREATMENT CHEMICALS. IN AS MUCH AS: (I) THE UNIT OF THE ASSESSEE COMPANY IS SITUATED IN SEZ AND HENCE ENTITLED FOR BENEFITS UNDER SECTION 10A AND HENCE THE TRANSFER P RICING PROVISIONS ARE NOT APPLICABLE; (II) THE AO HAS IGNORED THE MARGINS MADE BY THE AE IN US WHILE MAKING AN ADJUSTMENT. (III) IRON (EXCHANGE) INDIA LTD. IS HAVING THE BUSINESS O F WATER TREATMENT CHEMICALS AND PLANTS AND THAT IT IS DIRECTLY COMPAR ABLE WITH THE BUSINESS OF THE ASSESSEE COMPANY. THIS COMPANY WAS ACCEPTED AS COMPARABLE DURING EARLIER YEARS. 2. THE LEARNED CIT(A) HAS ERRED IN NOT GRANTING TH E BENEFIT OF RANGE OF +/- 5% WHILE CALCULATING THE TRANSFER PRICING ADJUSTMENT. 4. ASSESSEE IS A CLOSELY HELD LIMITED COMPANY ESTABLIS HED IN 1997 AND ENGAGED IN THE MANUFACTURE OF WATER TREATMENT CHEMI CALS NAMELY, ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 4 ALUMINIUM CHLORIDE AND POLY ALUMINIUM CHLORIDE. THE MAIN RAW MATERIALS USED ARE ALUMINIUM INGOTS AND HYDROCHLORI C ACID. 5. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE E NTERED INTO INTERNATIONAL TRANSACTION WHICH ARE AS UNDER:- TRANSACTION NAME OF THE AE AMOUNT (I N RS.) PURCHASE OF POLYMER SOMERVILLE ACQUSITIONS CO. INC. USA 35,54,481 PURCHASE OF ALUMINUM INGOTS -DO- 46,7 7,898 PURCHASE OF TOTES -DO- 4,79,080 SALES OF FINISHED GOODS -DO- 7,36,1 8,184 TOTAL 8,23,29,643 6. THE TRANSFER PRICING ADJUSTMENT IN RELATION TO THE INTERNATIONAL TRANSACTION TO BE CONSIDERED BEFORE US RELATES TO T HE SALES OF FINISHED GOODS AMOUNTING TO RS. 7,36,18,184/-. THE ASSESSEE COMPANY HAS SELECTED TNMM AS THE MOST APPROPRIATE METHOD USING PROFIT BEFORE INTEREST AND TAX (PBIT) AS THE PROFIT LEVEL INDICAT OR (PLI). 7. THE ASSESSEE CHOSE THREE COMPANIES AS COMPARABLE CO MPANIES AS UNDER:- CHEMBOND ASHLAND WATER TECHNOLOGIES LTD . CHEMBOND ASHLAND WATER TECHNOLOGIES LTD. IS A JOINT VENTURE BETWEEN CHEMBOND CHEMICALS LTD., INDIA AND ASHLAND INC., US A. IT HAS BEEN OPERATING IN THE VALUE ADDED WATER TREATMENT SOLUTIONS FIELD SIN CE 1980 AND SERVE DIVERSE INDUSTRIES LIKE STEEL, POWER, FERTILIZERS, REFINERI ES, PETROCHEMICALS, MINING, SUGAR, PAPER AND PULP, TEXTILE AND MUNICIPAL CORPOR ATION. ION EXCHANGE (INDIA) LTD. ION EXCHANGE (INDIA) LTD. SPECIALIZES IN WATER AND WASTE WATER TREATMENT. IT IS ENGAGED IN PROVIDING TOTAL WATER SOLUTIONS FOR INDU STRY, HOMES AND COMMUNITIES. INTEGRATING PROCESS TECHNOLOGY, DESIGN ENGINEERING AND PROJECT MANAGEMENT CAPABILITY BY TAKING END-TO-END RESPONSIBILITY-PLAN NING, INTEGRATING AND MANAGING WATER ON SUPPLY, QUANTITY, QUALITY DISCHAR GE AND ENVIRONMENTAL FRONTS. ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 5 NLC NALCO LTD. THE PRINCIPAL ACTIVITIES OF NLC NALCO ARE TO DEVELO P, MANUFACTURE AND MARKET INDUSTRIAL CHEMICALS. THE COMPANY OPERATES IN TWO S EGMENTS: SPECIALTY CHEMICALS AND EQUIPMENTS. SPECIALTY CHEMICALS INCLU DE WATER TREATMENT AND OILFIELD CHEMICALS AND INDUSTRIAL ADDITIVES. EQUIPM ENTS INCLUDE THE SUPPLY AND ERECTION OF WATER TREATMENT EQUIPMENT. THE COMPANY S PLANTS ARE LOCATED AT WEST BENGAL, JAMSHEDPUR AND MAHARASHTRA. 8. THE MARGIN ANALYSIS OF THE COMPARABLE COMPANIES ARE SHOWN AS UNDER:- SL. NO. NAME OF THE COMPANY WEIGHTED AVERAGE MARGINS (%) 1 CHEMBOND ASHLAND WATER TECHNOLOGIES LTD. 11.74% 2 ION EXCHANGE (INDIA) LTD. 4.68% 3 NLC NALCO LTD. 15.87% ARITHMETIC MEAN 10.76% LOWER RANGE (-5%) 5.23% UPPER RANGE (+5%) 16.30% 9. IN COMPARISON TO THE MARGINS OF THE COMPARABLES AS SHOWN HEREINABOVE, THE ASSESSEE HAS SHOWN ITS OWN MARGIN AS UNDER:- PARTICULARS FIGURE IN RS. OPERATING REVENUE 76,682,935.00 OPERATING COST 71,685,511.00 OPERATING PROFIT 4,997,424.00 OPERATING MARGIN (OPERATING PROFIT/ ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 6 OPERATING COST) 6.97% 10. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEE DINGS, A REFERENCE U/S. 92CA(1) OF THE ACT WAS MADE TO THE T PO FOR THE COMPUTATION OF ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION RELATING TO SALES OF FINISHED GOODS. 11. DURING THE COURSE OF THE TRANSFER PRICING PROCEEDIN GS BEFORE THE TPO, THE TPO ACCEPTED TWO COMPARABLES NAMELY CHEMBO ND ASHLAND WATER TECHNOLOGIES LTD. AND NLC NALCO LTD. HOWEVER, THE COMPANY ION EXCHANGE (INDIA) LTD. WAS REJECTED AS A COMPARA BLE COMPANY BY THE TPO. 12. HOWEVER, WHILE ACCEPTING THE TWO COMPARABLE COMPANI ES MENTIONED HEREINABOVE, THE TPO DETERMINED THE AVERA GE PLI OF THE COMPARABLE COMPANIES AT 16.58% AND ISSUED A SHOW CA USE NOTICE TO THE ASSESSEE TO EXPLAIN WHY THE AVERAGE PLI OF THE COMPARABLES SHOULD NOT BE ADOPTED AT 16.58% AND WHY THE ALP OF SALES TO ITS AE SHOULD NOT BE RECOMPUTED ACCORDINGLY. 13. ASSESSEE FILED A DETAILED REPLY FIRSTLY, QUESTIONIN G THE EXCLUSION OF THE COMPARABLE COMPANY ION EXCHANGE (INDIA) LTD. AND SECONDLY, THE ASSESSEE ALSO QUESTIONED THE WORKING OF PLI AT 16.58%. TO SUBSTANTIATE ITS CLAIM, THE ASSESSEE FURNISHED THE CORRECT WORKING OF THE COMPARABLE COMPANIES BY TAKING THE FINANCIAL DA TA FROM THE PROWESS DATABASE. 14. THE CONTENTIONS OF THE ASSESSEE WERE DISMISSED BY T HE TPO AND THE TPO PROCEEDED BY ADOPTING THE PLI AS PBIT/OPERA TING COST ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 7 WHEREAS THE ASSESSEE HAS USED PLI BY PBIT/TOTAL COS T. THE CALCULATION AND THE WORKING OF TP ADJUSTMENT MADE BY THE TPO RE AD AS UNDER:- CALCULATION IN THE CASE OF COMPARABLES (AMOUNT IN C R.) CHEMBOND ASH AND WATER TECHNOLOGIES LTD. HLL HALCO LTD. SALE 32.43 165.62 OPERATING COST 28.55 138.52 OPERATING PROFIT 3.88 27% OP/COST 13.59% 19.56% AVERAGE 16.58% WORKING OF ADJUSTMENT SALE 8,95,64,803 OPERATING COST 10,26,37,410 OPERATING PROFIT (-1,30,72,607) OP/COST (%) (-12.74%) OPERATING PROFIT (AT ALP OF 16.58%) 1,70,17,283 SALES AT BOOK VALUE 8,95,64,803 SALES AT ALP 11,96,54,693 TRANSFER PRICING ADJUSTMENT 3,00,89,890 15. ACCORDINGLY, UPWARD ADJUSTMENT OF RS.3,00,89,890/- WAS MADE BY THE TPO AND THE SAME WAS ACCEPTED BY THE A.O. WH ILE COMPLETING THE ASSESSMENT MADE U/S. 143(3) OF THE ACT VIDE ORD ER DATED 20.12.2010. 16. ASSESSEE STRONGLY OBJECTED THE UPWARD ADJUSTMENT MA DE BY THE A.O. BEFORE THE LD. CIT(A). IT WAS STRONGLY CONTEND ED BEFORE THE LD. CIT(A) THAT THE EXCLUSION OF THE COMPARABLE COMPANY ION EXCHANGE (INDIA) LTD. IS UNWARRANTED AND THE SAME SHOULD BE INCLUDED AS A COMPARABLE COMPANY. IT WAS BROUGHT TO THE NOTICE OF THE LD. CIT(A) THAT ION EXCHANGE WAS ACCEPTED AS COMPARABLE COMPAN Y IN A.Y. 2005- 06 BY THE TPO AND, THEREFORE, THE SAME SHOULD ALSO BE ACCEPTED AS A ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 8 COMPARABLE COMPANY FOR THE YEAR UNDER CONSIDERATION . AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS AND THE R EASONS GIVEN BY THE TPO FOR EXCLUDING ION EXCHANGE AS A COMPARABLE, THE LD. CIT(A) WAS CONVINCED THAT THE TPO HAS GIVEN VALID REASONS FOR NOT TAKING ION EXCHANGE (INDIA) LTD. AS THE COMPARABLE COMPANY. TH E LD. CIT(A) AGREED THAT ION EXCHANGE LTD. IS ENGAGED IN WATER T REATMENT PLANT AND NOT IN WATER TREATMENT CHEMICALS ALONE. THE MAJ OR PART OF THE BUSINESS OF THIS COMPANY IS THAT OF WATER TREATMENT PLANT WHEREAS THE APPELLANT COMPANY IS ONLY DEALING IN WATER TREATMEN T CHEMICALS. THE LD. CIT(A) FURTHER FOUND THAT THE TURNOVER OF ION E XCHANGE LTD. IS RS. 446 CRORES WHEREAS THE TURNOVER OF THE ASSESSEE IS ABOUT RS. 7 CRORES. THE LD. CIT(A) WAS OF THE OPINION THAT THE COMPANIE S WITH HUGE DIFFERENCE IN TURNOVER CANNOT BE COMPARED WITH EACH OTHER AS THERE WOULD BE DIFFERENCE IN THE PROFIT MARGINS ON ACCOUN T OF ECONOMIES OF SCALE AND OTHER SIMILAR FACTORS. 17. INSOFAR AS THE TWO COMPARABLE COMPANIES OF THE ASSE SSEE WHICH WERE ACCEPTED BY THE TPO, THE ASSESSEE STRONGLY CON TENDED THAT THE WORKING OF PLI AT 16.58% BY THE TPO IS NOT CORRECT. IT WAS BROUGHT TO THE NOTICE OF THE LD. CIT(A) THAT THE ASSESSEE HAS INCURRED EXTRA ORDINARY COST FOR PURCHASE OF RAW MATERIAL I.E. AL UMINIUM AS COMPARED TO EARLIER YEARS FOR WHICH THE ADJUSTMENT TO TOTAL COST HAS NOT BEEN ALLOWED BY THE TPO/AO WHILE CALCULATING TH E PLI. IT WAS EXPLAINED THAT THE PROFIT MARGIN AVAILABLE TO THE A SSESSEE WILL BE DIRECTLY AFFECTED BY THE PRICE OF ALUMINIUM. IT WAS ALSO EXPLAINED THAT ASSESSEE ENTERED INTO A CONTRACT WITH ITS AE IN 199 9 BY WHICH THE AE CONTRACTED FOR PURCHASE OF 75% OF THE PRODUCTION OF THE ASSESSEE. THE CONTRACT WAS A FIXED PRICE CONTRACT. IT WAS ALSO BR OUGHT TO THE NOTICE OF THE LD. CIT(A) THAT THE FLUCTUATION IN THE MARGINS OF PROFIT IN EARLIER ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 9 YEARS HAS ARISEN BECAUSE OF FLUCTUATING PRICE OF TH E ALUMINIUM. THE FINANCIAL DATA OF THE TWO COMPARABLE COMPANIES AS R ETRIEVED FROM PROWESS DATABASE WAS SHOWN AS UNDER:- ' EXPRESSION CHEMBOND ASHLAND WATER TECHNOLOGIES LTD. N L C NALCO INDIA LTD. INCOME & EXPENDITURE TOTAL INCOME 32.5 164.9 SALES 32.43 163.95 INDUSTRIAL SALES 0 158.49 INCOME FROM NON-FINANCIAL SERVICES 32.43 5.46 INCOME FROM FINANCIAL SERVICES 0.02 0.01 INTEREST 0.02 0.01 DIVIDENDS 0 0 TREASURY OPERATIONS 0 0 OTHER INCOME 0.05 0.15 PRIOR PERIOD INCOME & EXTRAORDINARY INCOME 0 0.79 CHANGE IN STOCK 0 1.67 TOTAL EXPENSES 30.36 152.79 RAW MATERIAL EXPENSES 0 50.94 PACKAGING EXPENSES 0 4.09 PURCHASE OF FINISHED GOODS 16.45 5.05 POWER, FUEL & WATER CHARGES 0.01 1.57 COMPENSATION TO EMPLOYEES 3.5 10.3 INDIRECT TAXES 2.95 28.14 ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 10 ROYALTIES, TECHNICAL KNOW-HOW FEES, ETC. 1.53 0 LEASE RENT & OTHER RENT 0.08 1.18 REPAIRS & MAINTENANCE 0.02 0.96 INSURANCE PREMIUM PAID 0.01 0.42 OUTSOURCED MFG. JOBS (INCL. JOB WORKS, ETC.) 0.07 5.7 OUTSOURCED PROFESSIONAL JOBS 0.19 3.97 DIRECTORS FEES 0 0.02 SELLING & DISTRIBUTION EXPENSES 1.83 10.25 TRAVEL EXPENSES 1.08 5.08 COMMUNICATION EXPENSES 0.23 0.91 PRINTING & STATIONERY EXPENSES 0.08 1.24 MISCELLANEOUS EXPENSES 0.15 3.82 OTHER OPERATIONAL EXP. OF INDL. ENTERPRISES 0.07 0 OTHER OPER. EXP. OF NON-FIN. SERVICE ENTERPRISES 0 0 SHARES OF LOSS IN SUBSIDIARIES/JVS, ETC. 0 0 LEASE EQUALIZATION ADJUSTMENT 0 0 LOSS ON SECURITIZATION OF ASSETS/LOANS 0 0 FEE BASED FINANCIAL SERVICE EXPENSES 0.08 0.35 TREASURY OPERATIONS EXPENSES 0 0.11 TOTAL PROVISIONS 0 0 WRITE-OFFS 0.17 4.15 LESS: EXPENSES CAPITALIZED 0 0 LESS: DRE & EXPENSES CHARGED TO OTHERS 0 0 PRIOR PERIOD & EXTRAORDINARY EXPENSES 0.03 0 INTEREST PAID 0.23 1 FINANCIAL CHARGES ON INSTRUMENTS 0 0 EXPENSES INCURRED ON RAISING DEPOSITS/DEBTS 0 0 DEPRECIATION 0.3 4.88 AMORTIZATION 0 0 PROVISION FOR DIRECT TAXES 1.3 8.66 PAT 2.14 13.78 18. AFTER PERUSING THE AFOREMENTIONED FINANCIAL DETAILS , THE LD. CIT(A) FOUND THAT THE FIGURES OF THE TPO IN ITS ORD ER AND THE FIGURES ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 11 CLAIMED BY THE ASSESSEE DEFERS BECAUSE THE AO/TPO H AS NOT INCLUDED CERTAIN ITEMS IN THE EXPENDITURE AS WELL AS IN THE OPERATING REVENUE. THE LD. CIT(A) FINALLY CONCLUDED BY HOLDING AS UNDE R:- AN EXAMINATION OF BOTH THE FIGURES SHOWS THAT THE APPROACH ADOPTED BY THE TPO AS WELL AS THE APPELLANT IS NOT CORRECT. FOR TAKING THE OPERATING REVENUE AND THE OPERATING EXPENSES ONLY THOSE ITEMS OF INCOME OR EX PENSES SHOULD BE CONSIDERED WHICH AFFECT THE PROFIT MARGIN OF THE INDUSTRIAL EN TERPRISE. THE CORRECT METHOD WOULD BE TO TAKE THE OPERATING REVENUE WHICH INCLUD ES INDUSTRIAL SALES AND INCOME FOR NON FINANCIAL SERVICES. SIMILARLY, THE O PERATING EXPENSES SHOULD INCLUDE EXPENSES IN THE ABOVE TABLE FROM RAW MATERI AL TO OTHER OPERATIONAL EXPENSES. WRITE OFF AND THE DEPRECIATION. THE FIGUR ES OF CHANGE IN STOCK SHOULD ALSO BE ADJUSTED (REDUCED) FROM THE RAW MATERIAL EX PENSES AS THE CLOSING STOCK OF RAW MATERIAL WOULD CONSIST OF THE RAW MATERIAL WHIC H HAS NOT BEEN CONSUMED FOR PRODUCTION. THE PROVISION FOR DIRECT TAXES, EXPENSE S ON FEE BASED FINANCIAL SERVICES AND INTEREST PAID SHOULD BE EXCLUDED FROM THE OPERATING EXPENSES. ACCORDINGLY, BY TAKING THE OPERATING REVENUE AND TH E OPERATING EXPENSES IN THE ABOVE MANNER, THE FIGURES WOULD BE AS UNDER: CHEMBOND NLC NALCO OPERATING REVENUE (R) 32.43 163.95 OPERATING EXPENSES (E) 28.72 141.00 OPEARING PROFIT (O=R-E) 3.71 22.95 OP/COST (D=O/E) 12.92% 16.27% AVERAGE 14.59% ACCORDINGLY, THIS MARGIN HAS TO BE APPLIED ON THE O PERATING EXPENSES INCURRED BY THE APPELLANT TO WORK OUT THE ARMS LENGTH SALE PRIC E. HOWEVER, AN ADJUSTMENT OF 5% AS DISCUSSED ABOVE, AS PER THE PROVISO TO SECTIO N 92C(2) WILL HAVE TO BE MADE. ACCORDINGLY, THE MARGIN TO BE APPLIED WOULD BE 14.5 9- 5 = 9.59%. FOR FINAL WORKING OF ADJUSTMENT, IT IS ALSO NOTED T HAT THE FIGURES OF SALES AS WELL AS OPERATING COST TAKEN BY THE A.O. AND CLAIMED BY THE APPELLANT ARE DIFFERENT. FOR THIS PURPOSE, THE PROFIT AND LOSS ACCOUNT SUBMITTED BY THE APPELLANT WAS ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 12 EXAMINED. IT IS NOTED THAT THE A.O. HAS ADOPTED THE SALES AFTER TAKING THE SALES DURING THE YEAR AND THE VALUE OF CLOSING STOCK. THE VALUES TAKEN BY THE A.O. ARE NOT CORRECT AS THE CLOSING STOCK SHOULD BE REDUCED FROM THE PURCHASES MADE DURING THE YEAR SO AS TO ARRIVE AT THE CORRECT CONS UMPTION FOR PRODUCTION. THE APPELLANT HAS CLAIMED THAT THE SALES SHOULD BE TAKE N AFTER INCLUDING THE OTHER INCOME OF RS. 17.92 LACS THAT HAS ARISEN DUE TO FLU CTUATION IN FOREIGN EXCHANGE RATE.THE CLAIM OF THE APPELLANT IS ACCEPTABLE AS TH E TOTAL INCOME FROM THE BUSINESS WOULD INCLUDE THE INCOME TO THE PROFIT GENERATED ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION AS IT IS INCOME DIRECTLY DERIVED FROM T HE EXPORTS AND SHOULD THEREFORE BE INCLUDED IN THE SALE PRICE. THEREFORE, THE SALE PRICE FOR WORKING OF ADJUSTMENT WILL BE TAKEN AT RS.7,66,82,935/-. FOR WORKING OUT THE OPERATING COST, THE A. O. HAS T AKEN THE FIGUREOF TOTAL EXPENDITURE AFTER REDUCING THE FIGURES OF FINANCIAL CHARGES AND PRELIMINARY EXPENSES WRITTEN OFF. HE HAS THUS ARRIVED AT THE FI GURE OF RS.10,26,37,410/-. THE APPELLANT HAS SUBMITTED THAT THE FIGURE OF OPERATIN G COST SHOULD BE TAKEN AFTER REDUCING THE VALUE OF INCREASE IN STOCK FROM THE CO ST OF RAW MATERIAL AND AFTER EXCLUDING THE FINANCIAL CHARGES AND PRELIMINARY EXP ENSES. THE SUBMISSION OF THE APPELLANT IS LOGICALLY CORRECT. THE COST OF RAW MAT ERIAL CONSUMED CAN BE WORKED OUT AFTER REDUCING THE VALUE OF ITEMS THAT ARE INCL UDED IN THE STOCK FROM THE PURCHASES MADE DURING THE YEAR. THEREFORE, THE OPER ATING COST IS TAKEN BY ADJUSTING THE FIGURE TAKEN BY THE A. O. BY THE VALU E OF CLOSING STOCK. ACCORDINGLY, THE OPERATING COST FIGURE WOULD BE RS. 8,79,62,636/ - (RS.10,26,37,410/- - RS.1,46,74,774/-). THEREFORE AFTER CONSIDERING THE ABOVE FIGURES AND ALLOWING AD JUSTMENT FOR EXTRA- ORDINARY ITEMS. THE WORKING OF ADJUSTMENT WOULD BE AS UNDER: FIGURES IN RUPEES SALES 7,66,82,935/- LESS: OPERATING COST 8,79,62,636/- LESS: ADJUSTMENT FOR RAW MATERIAL 1,60,33,056/- 7,19,29,5 80/- ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 13 (EXTRA ORDINARY ITEM) OPERATING PROFIT 47,53,355/- OPERATING PROFIT/COST 6.60% OPERATING PROFIT AT ALP OF 9.59% 68,98,047/- OPERATING PROFIT EARNED BY THE APPELLANT 47,53,355/- NET ADJUSTMENT 21,44,692/- THEREFORE, UPWARD ADJUSTMENT OF RS. 21,44,692/- SHO ULD BE MADE AS PER THE PROVISIONS OF SECTION 92C OF THE ACT. THE GROUND OF APPEAL IS, THEREFORE, PARTLY ALLOWED. 19. AGGRIEVED BY THIS, THE REVENUE IS IN APPEAL BEFORE US AND THE ASSESSEE HAS PREFERRED CROSS OBJECTION. 20. THE LD. D.R. STRONGLY RELIED UPON THE FINDINGS OF T HE A.O. PER CONTRA, THE LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. 21. HAVING HEARD THE RIVAL CONTENTIONS, WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELO W. WE HAVE ALSO GONE THROUGH THE FINANCIALS OF THE COMPARABLE COMPA NIES QUA THE MARGINS SHOWN BY THE ASSESSEE. 22. IT IS AN ADMITTED FACT THAT ASSESSEE ENTERED INTO A N AGREEMENT FOR MARKETING TIE-UP WITH ITS AE SUMMIT RESEARCH LA B AN INCORPORATED COMPANY REGISTERED IN USA VIDE AGREEMENT DATED 08.0 2.1999 BY WHICH THE AE COMPANY AGREED TO PURCHASE 75% OF THE FINISHED PRODUCTS OF THE ASSESSEE COMPANY. THIS CONTRACT HAS BEEN ACCEPTED BY THE REVENUE AUTHORITIES. IT IS ALSO AN ADMITTED FAC T THAT OUT OF THREE ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 14 COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE, TWO CO MPARABLE COMPANIES HAVE BEEN ACCEPTED BY THE TPO/AO. THE ONL Y DISPUTE RELATES TO THE WORKING OF THE PLI BY THE ASSESSEE A ND BY THE TPO/AO. THE BONE OF CONTENTION IS THE FLUCTUATING PRICE OF ALUMINIUM. THE MAIN CONTENTION OF THE ASSESSEE IS THAT SINCE IT HAD A F IXED PRICE CONTRACT WITH ITS USA BASED AE AND WHICH CONTRACT HAS BEEN A CCEPTED BY THE REVENUE AUTHORITIES, IT IS NOT PROPER TO GIVE EFFEC T TO THE EXTRA ORDINARY ITEMS OF COST DUE TO HIGHER COST OF RAW MATERIAL I. E. ALUMINIUM. WE FIND THAT IF THE ADJUSTMENT FOR RAW MATERIAL I.E. H IGHER COST OF ALUMINUIM DURING THE YEAR UNDER CONSIDERATION IS TA KEN AS EXTRA ORDINARY ITEM FOR THE COMPUTATION OF PLI, THEN THE MARGINS OF THE ASSESSEE ARE WITHIN THE RANGE OF 5% WITH THE PLI OF THE COMPARABLE COMPANIES. IT IS ALSO AN ADMITTED FACT THAT THE PR OFIT MARGIN OF THE ASSESSEE IS DIRECTLY AFFECTED BY THE PRICE OF THE A LUMINIUM DURING THE YEAR UNDER CONSIDERATION. SINCE, THE ASSESSEE IS HA VING A FIXED PRICE CONTRACT WITH ITS AE, IT CANNOT BE INCREASE THE SAL E PRICE WHEREAS THE MARGINS OF THE COMPARABLE COMPANIES ARE NOT RESTRIC TED BY FIXED SALE PRICE. THEREFORE, THE MARGIN OF THE ASSESSEE COMPAN Y WILL DEFINITELY BE LESS DUE TO INCREASE IN THE PRICE OF ALUMINIUM QUA THE SALE PRICE. THEREFORE, THE ADJUSTMENT IN RESPECT OF THE SUBSTAN TIAL INCREASE IN THE COST OF RAW MATERIAL I.E. ALUMINIUM HAS TO BE MAD E FOR THE WORKING OF CORRECT PLI. WE, THEREFORE, DO NOT FIND ANY ERRO R OR INFIRMITY IN THE COMPUTATION OF THE UPWARD ADJUSTMENT OF RS. 21,44,6 92/- AS WORKED OUT BY THE FIRST APPELLATE AUTHORITY AFTER GIVING T HE BENEFIT OF ADJUSTMENT FOR RAW MATERIAL EXTRA ORDINARY ITEM. WE DECLINE TO INTERFERE. APPEAL FILED BY THE REVENUE IS ACCORDING LY DISMISSED. ITA NO 377 & C.O. NO. 73/AHD/2012 . A.Y. 2007-0 8 15 23. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT HE IS NOT PRESSING THE CROSS OBJECTION FILED BY THE ASSESSEE AND, THER EFORE, THE C.O. IS ALSO DISMISSED AS NOT PRESSED. ORDER PRONOUNCED IN OPEN COURT ON 24 - 08- 201 6. SD/- SD/- (R.P. TOLANI) (N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD