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

ITA 100/DEL/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7327 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 7 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 02-08-2016
• Assessment Year: 2003-2004
• Appeal Filed On: 07-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANOJ PANDWANI
• Assessee Lawyers: N C SWAIN
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH C, NEW DELHI BEFORE SHRI N. K. SAINI, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. NO.100/DEL/2011 (ASSESSMENT YEAR 2003-04) DCIT, CIRCLE 78(1), VS. SWAROVSKI INDIA PVT. LTD., NEW DELHI 1A-ID VANDHANA BUILDING 11, TOLSTOY MARG, NEW DELHI GIR / PAN :AABCS4767J (APPELLANT) (RESPONDENT) APPELLANT BY :SHRI MANOJ PANDWANI, CA, RESPONDENT BY :SHRI N C SWAIN, CIT DR DATE OF HEARING: 02.08.2016 DATE OF PRONOUNCEMENT: 26.08.2016 ORDER PER BEENA A. PILLAI, JM: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE REVENUE AGAINST THE ORDER DATED 29/10/2010 PASSED B Y LD. CIT (A) 20, NEW DELHI FOR ASSESSMENT YEAR 2003- 04 ON THE FOLLOWING GROUNDS OF APPEAL: 1) THE LD.C1T(A) ERRED IN LAW AS WELL AS ON THE FACTS AND CIRCUMSTANCES OF THE CASE, IN DELETING TH E ADDITION OF RS.44,52,550/- MADE BY AO ON ACCOUNT OF PROVISION FOR DOUBTFUL DEBTS AND ADVANCES'. 2) THE LD.CIT(A) ERRED IN LAW AS WELL AS ON THE FACTS AND CIRCUMSTANCES OF THE CASE IN DELETING THE ADDITION OR RS. I 5074722/- BEING DIFFERENCE IN THE ARM'S LENGTH PRICE IN THE VALUE OF THE INTERNATIONA L TRANSACTION. THE AO MADE THIS ADDITION ON THE BASIS 2 I.T.A.NO.100/DEL/2011 ON PO'S ORDER PASSED U/S 92C.1\(3) OF THE INCOME TA X ACT. 3.1 'THE LD.CIT(A) ERRED IN LAW AS WELL AS ON THE F ACT AND CIRCUMSTANCES OF THE CA E. B) REDUCING THE COST BASE OF THE ASSESSEE AS DETERMINED BY THE TPO.' 3.2 'THE LD. CIT(A) ERRED IN LAW AS WELL AS ON THE FACTS AND CIRCUMSTANCES OF THE CASE. IN DISTURBING THE COST BASE AS DIRECTED BY THE TPO WITHOUT ASSIGNING ANY REASON THEREOF. 3.3. 'THE LD.CIT(A) ERRED IN LAW AS WELL AS ON THE FACTS AND CIRCUMSTANCES OF THE CASE, IN AGREEING FO R PARTIAL INCLUSION OF CLEARING CHARGES AND FOREIGN EXCHANGE LOSS AND EXCLUDING EXPENSES SUCH AS REPAIR AND MAINTENANCE, ELECTRICITY. INSURANCE AND DEPRECIATION ON OTHER A SETS. 4.1 'THE LD.CIT(A) ERRED IN LAW AS WELL AS ON THE F ACTS AND CIRCUMSTANCES OF THE CASE BY EXCLUDING TWO COMPARABLE COMPANIES I.E. M/S. PUNIT COMMERCIAL LTD . AND M/S. GOLDIAM INTERNATIONAL LTD. WITHOUT ASSIGNING ANY REASON THEREOF.' 4.2. 'THE LD.CIT(A) ERRED IN LAW AS WELL AS ON THE FACTS AND CIRCUMSTANCES OF THE CASE WILL EXCLUDING HIGH MARGIN COMPARABLES WITHOUT CONSIDERING NEGATIVE MARGIN AND LOW MARGIN COMPARABLES ALSO AND FURTHER ERRED IN EXCLUDING COMPARABLES SELECTED BY THE ASSESSEE ITSELF. 4.3 'THE LD. CIT(A) ERRED IN LAW AS WELL AS ON THE FACTS AND CIRCUMSTANCES OF THE CASE, IN NOT CONSIDERING THE CONCEPT OF AVERAGE MEAN MARGIN WHEREIN ALL COMPARABLE ARE CONSIDERED.' 2. THE BRIEF FACTS OF THE CASE ARE AS UNDER: 2.1 THE ASSESSEE FILED ITS RETURN OF INCOME DECLARI NG A LOSS OF RS. (-) 8,55,86,879/- ON 27/11/2003, WHICH WAS PROCESSED UNDER SECTION 143 (1) OF THE ACT. THE CAS E WAS 3 I.T.A.NO.100/DEL/2011 SELECTED FOR SCRUTINY AND NOTICE UNDER SECTION 143 (2) WAS ISSUED. 2.2 THE LD. A. O. DURING THE ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESSEE HAD MADE PROVISION FOR DOUBTFUL DEBTS AND DOUBTFUL ADVANCES AMOUNTING TO RS.44,52,550/-. THESE ALLEGED DEBTS AND ADVANCES WE RE DOUBTFUL OF RECOVERY AND THEREFORE IT WAS WRITTEN O FF AS IRRECOVERABLE, IN THE ACCOUNTS OF THE ASSESSEE. LD. AO DISALLOWED THE SAID PROVISION BY HOLDING THAT SECTI ON 36 (1) (VII) MANDATES THAT THE AMOUNT OF ANY DEBT OR P ART THEREOF, WHICH IS WRITTEN OFF AS IRRECOVERABLE IN T HE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR COUL D ONLY BE DEDUCTED WHILE COMPUTING THE INCOME OF THE ASSES SEE COMPANY AND THE ASSESSEE HAS NO WHERE MENTIONED THA T IT HAS WRITTEN OF THE SAID AMOUNT IN THE BOOKS OF ACCO UNT DURING THE YEAR UNDER CONSIDERATION. 3. AGGRIEVED BY THE ORDER OF THE LD. A.O., THE ASSE SSEE PREFERRED AN APPEAL BEFORE THE LD. CIT (A). THE LD . CIT (A) DELETED THE DISALLOWANCE BY RELYING UPON THE DECISI ON OF HONBLE SUPREME COURT IN THE CASE OF VIJAY BANK VER SUS CIT AND ANR., REPORTED IN (2010) 323 ITR 166. 4. AGGRIEVED BY THE ORDER OF THE LD. CIT (A) THE RE VENUE IS IN APPEAL BEFORE US NOW. 5. LD. D.R. SUBMITTED THAT THE ASSESSEE HAS NOT SQUARED UP THE INDIVIDUAL CREDITORS ACCOUNT THOUGH THE AMOUNT HAS BEEN PROVIDED FOR IN THE BALANCE SHEET F OR THE 4 I.T.A.NO.100/DEL/2011 YEAR UNDER CONSIDERATION. THE LD. DR SUBMITTED THAT AS THE INDIVIDUAL ACCOUNT HAS NOT BEEN WRITTEN OFF AND THE ASSESSEE HAS NOT COMPLIED WITH THE REQUIREMENTS FOR THE DEDUCTION TO BE ALLOWED UNDER SECTION 36 (1) (VII) OF THE ACT. HE SUBMITTED THAT HONBLE SUPREME COURT IN THE CASE OF TRF LTD. REPORTED IN 323 ITR 397, HAS EXPRESSED THE REQUIREMENT OF THE INDIVIDUAL ACCOUNT TO BE WRITTEN OFF FOR THE PROVISION TO BE QUALIFIED FOR THE DEDUCTION UND ER SECTION 36 (1) (VII) OF THE ACT. HE SUBMITTED THAT THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF VI JAYA BANK VS. CIT AND ANR., (SUPRA) HAS BEEN PASSED BEFO RE THE DECISION IN THE CASE OF TRF LTD. HE THUS SUBMITTED THAT THE DECISION OF TRF LTD. BEING RECENT, MUST BE FOLL OWED AS THE FACTS THEREIN ARE SIMILAR TO THAT OF THE CASE O F ASSESSEE. 6. ON THE CONTRARY, THE LD. A.R. SUBMITTED THAT THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TR F LTD., HAS BEEN SET ASIDE TO THE LD. A.O. FOR VERIFICATION . HE PLACED HIS RELIANCE UPON THE DECISION OF HONBLE SU PREME COURT IN THE CASE OF VIJAYA BANK VERSUS CIT AND ANR ., (SUPRA) WHICH HAS BEEN FOLLOWED SUBSEQUENTLY BY HON 'BLE SUPREME COURT, VARIOUS HIGH COURTS AND COORDINATE BENCHES OF THIS TRIBUNAL. HE SUBMITTED THAT IT IS A SETTLED LAW AS FAR AS PRINCIPLES RELATING TO WRITING OFF OF DEBTS ARE CONCERNED. 7. THE LD. A.R. FURTHER SUBMITTED THAT THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR HAS MADE PROVISION FOR D OUBTFUL 5 I.T.A.NO.100/DEL/2011 DEBTS AND PROVISION FOR DOUBTFUL ADVANCES. HE SUBMI TTED THAT THESE DEBTS AND ADVANCES WERE DOUBTFUL OF RECO VERY, WHICH WERE IDENTIFIED BY THE ASSESSEE AND DULY PROV IDED FOR IN THE BOOKS OF ACCOUNTS BY DEBITING TO PROFIT AND LOSS ACCOUNT AND THE SAME HAS BEEN SHOWN REDUCED FROM TH E AMOUNT OF DEBTORS AND ADVANCES SHOWN UNDER THE HEAD CURRENT ASSETS APPEARING IN THE AUDITED BALANCE SHE ET FOR THE RESPECTIVE YEAR (RELEVANT PAGES 20, 24, 27 OF T HE PAPER BOOK). HE PLACED HIS RELIANCE UPON THE RELEVANT PAR A OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF VI JAYA BANK VS. CIT AND ANR., (SUPRA), WHICH IS AS UNDER: BAD DEBT - WRITING OFF - LAW AFTER APRIL 1, 1989 - MERE DEBIT TO PROFIT AND LOSS ACCOUNT NOT SUFFICIENT-SIMULTANEOUS OBLITERA- TION OF PROVISION FROM ACCOUNTS BY REDUCTION FROM 'LOANS AND ADVANCES' OR 'DEBTORS' ON ASSETS SIDE OF BALANCE-SHEET-AMOUNTS TO WRITING OFF FOR GRANT OF DEDUCTION - DISALLOWANCE FOR FAILURE TO CLOSE INDIVIDUAL ACCOUNT OF EACH DEBTOR IN ACCOUNT BOOKS- NOT JUSTIFIED-PROVISIONS APPLY TO BANKING AS WELL AS NON-BANKING ASSESSE.ES- INCOME-TAX ACT, 1961, SS. 36(1)(VII), 41(4). BUSINESS INCOME-DEEMED PROFITS-DEDUCTION ALLOWED - PART RECOVERY LATER OF DEDUCTION ALLOWED-INCOME-TAX ACT, 1961, S. 41(4). SECTION 36(1)(VII) OF THE INCOME-TAX ACT, 1961, DEA LING WITH ALLOWANCE OF BAD DEBTS WRITTEN OFF BY THE ASSESSEE, COVERS BANKING AS WELL AS NON-BANKING ASSESSEES. AFTER APRIL 1, 1989, A MERE PROVISION FOR BAD DEBT WILL NOT BE ENTITLED TO DEDUCTION UNDER SECTION 36(1)(VI I). IF 6 I.T.A.NO.100/DEL/2011 AN ASSESSEE DEBITS AN AMOUNT OF DOUBTFUL DEBT TO TH E PROFIT AND LOSS ACCOUNT AND CREDITS THE ASSETS ACCO UNT LIKE SUNDRY DEBTORS ACCOUNT THAT WOULD CONSTITUTE A WRITE OFF OF AN ACTUAL DEBT. HOWEVER, IF AN ASSESSE E DEBITS PROVISION FOR DOUBTFUL DEBTS TO THE PROFIT A ND LOSS ACCOUNT AND MAKES A CORRESPONDING CREDIT TO TH E 'CURRENT LIABILITIES AND PROVISIONS' ON THE LIABILI TIES SIDE OF THE BALANCE-SHEET, THEN IT WOULD CONSTITUTE A PROVISION FOR DOUBTFUL DEBT. IN THE LATTER CASE, TH E ASSESSEE WOULD NO) BE ENTITLED TO DEDUCTION AFTER A PRIL 1, 1989. SOUTHERN TECHNOLOGIES LTD. V. JOINT (IT [2010] 320 ITR 577 (SC) FOLLOWED. THOUGH A MERE DEBIT TO THE PROFIT AND LOSS ACCOUNT WOULD CONSTITUTE A PROVISION FOR A BAD AND DOUBTFUL DEBT, YET THAT WOULD NOT CONSTITUTE ACTUAL WRITE OF F BUT WHERE, BESIDES DEBITING THE PROFIT AND LOSS CREATIN G A PROVISION FOR BAD AND DOUBTFUL DEBT, THE ASSESSEE H AS CORRESPONDINGLY/SIMULTANEOUSLY OBLITERATED THE SAID PROVISION FROM ITS ACCOUNTS BY REDUCING THE CORRESPONDING AMOUNT FROM LOANS AND ADVANCES/DEBTORS ON THE ASSETS SIDE OF THE BALANCE- SHEET, AND, CONSEQUENTLY AT THE END OF THE YEAR, TH E FIGURE IN THE LOANS AND ADVANCES OR THE DEBTORS ON THE ASSETS SIDE OF THE BALANCE-SHEET IS SHOWN AS NET OF THE PROVISION FOR 'IMPUGNED BAD DEBT', THE ASSESSEE WILL BE ENTITLED TO THE BENEFIT OF DEDUCTION UNDER SECTION 36(1)(VII), AS THERE IS AN ACTUAL WRITE OFF BY THE ASSESSEE IN HIS BOOKS. DISALLOWANCE CANNOT BE MADE ON AN APPREHENSION THAT IN THE ASSESSEE FAILED TO CLOSE EACH AND EVEN INDIVIDUAL ACCOUNT OF ITS DEBTO R, IT MAY RESULT IN THE ASSESSEE CLAIMING DEDUCTION TWICE OVER. HELD, ON THE FACTS, THAT THE ASSESSEE WAS ENTITLED TO THE DEDUCTION CLAIMED BECAUSE: (I) THE HEAD OFFICE ACCOUNTS OF THE ASSESSEE CLEARLY INDICATED THAT ON RE- PAYMENT IN SUBSEQUENT YEARS THE AMOUNTS WERE DULY OFFERED FOR TAX; (II) THAT WIDER ACCOUNTANCY PRACTI CE THE ACCOUNTS OF THE RURAL BRANCHES HAD TO TALLY WITH TH E 7 I.T.A.NO.100/DEL/2011 ACCOUNTS OF THE HEAD OFFICE, AND IF THE AMOUNT REPA ID IN SUBSEQUENT YEARS IS NOT CREDITED TO THE PROFIT A ND LOSS ACCOUNT OF THE HEAD OFFICE AND IF THE REPAID AMOUNT IN SUBSEQUENT YEARS IS NOT CREDITED TO THE PROFIT AND LOSS ACCOUNT OF THE HEAD OFFICE, WHICH W AS WHAT MATTERED ULTIMATELY, THEN THERE WOULD BE A MISMATCH BETWEEN THE RURAL BRANCH ACCOUNTS AND THE HEAD OFFICE ACCOUNTS; (III) IN ANY EVENT UNDER SECT ION 41(4), WHERE DEDUCTION HAD BEEN ALLOWED IN RESPECT OF A BAD DEBT OR A PART THEREOF UNDER SECTION 36(1)(VI I) THEN IF THE AMOUNT SUBSEQUENTLY RECOVERED ON ANY SUCH DEBT IS GREATER THAN THE DIFFERENCE BETWEEN TH E DEBT AND THE AMOUNT SO ALLOWED, THE EXCESS IS DEEMED TO BE PROFITS AND GAINS OF BUSINESS, AND ACCORDINGLY CHARGEABLE TO TAX AS THE INCOME OF THE PREVIOUS YEAR IN WHICH IT IS RECOVERED; AND THE INCOME-TAX OFFICER IS SUFFICIENTLY EMPOWERED TO TAX SUCH-SUBSEQUENT REPAYMENTS UNDER SECTION 41(4). 8. WE HAVE PERUSED THE RELEVANT RECORDS, THE ORDERS PASSED BY THE AUTHORITIES BELOW AND THE JUDGEMENTS RELIED UPON BY BOTH THE SIDES. WE AGREE WITH SUBMISSIONS M ADE BY THE LD. A.R. THAT THE ISSUE WHETHER THE PROVISIO N AS PROVIDED FOR BY THE ASSESSEE IS DEBITED TO THE PROF IT AND LOSS ACCOUNT SHOULD BE ALLOWED AS DEDUCTION UNDER SECTION 36 (1) (VII) IN SPITE OF THE FACT THAT THE INDIVIDUAL DEBTORS ACCOUNT HAS NOT BEEN WRITTEN OFF AS SETTLED BY THE HONBLE SUPREME COURT IN THE CASE OF VIJAYA BANK VE RSUS CIT AND ANR. (SUPRA). WE THEREFORE, DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT (A) IN DELETI NG THE DISALLOWANCE MADE BY THE LD. AO. 8.1 ACCORDINGLY GROUND NO. 1 RAISED BY THE REVENUE STANDS DISMISSED. 8 I.T.A.NO.100/DEL/2011 9. AS REGARDING THE TRANSFER PRICING ADJUSTMENTS TH E FACTS ARE AS UNDER: 9.1 ASSESSEE IS A GLOBALLY FAMOUS BRAND FOR CRYSTAL AND CRYSTAL RELATED PRODUCTS. IT IS A WHOLLY OWNED SUBS IDIARY OF SWAROVSKI INTERNATIONAL HOLDINGS AG (F I H) DURI NG THE YEAR UNDER CONSIDERATION ASSESSEE WAS 100% EOU IN PUNE AND WAS ENGAGED IN JOB WORK COATING RAW BEADS AND POLISHING THE SALE TO ITS AES AMOUNTING TO RS.57,598,485/-. THE ASSESSEE HAD COUNTRY SALES OFF ICE WITH CRYSTAL COMPONENT DIVISION AND CONSUMER GOODS DIVISION IN NEW DELHI. THE SALES ACTIVITY COMMENCED FROM NOVEMBER 2000. THE DOMESTIC UNITS AT NEW DELHI WAS CARRYING OUT THE ACTIVITY OF IMPORT AND SALE OF CRY STAL AND CRYSTAL RELATED PRODUCTS. THE MAJOR CUSTOMERS OF CONSUMER GOODS DIVISION AND CRYSTAL COMPONENT DIVIS IONS ARE DESIGNERS, GARMENT MANUFACTURERS ETC. DURING TH E YEAR UNDER CONSIDERATION ASSESSEE DISTRIBUTED FINIS HED CRYSTALS AND CRYSTAL RELATED PRODUCT SUPPLIED BY IT S AE TO THE CUSTOMERS. ASSESSEE WAS THE SOLE DISTRIBUTOR OF ITS AE IN INDIA. 9.2 THE INTERNATIONAL TRANSACTION ENTERED INTO BY T HE ASSESSEE FOR THE YEAR UNDER CONSIDERATION ARE AS UN DER: S.N. INTERNATIONAL TRANSACTION METHOD VALUE (RS.) 1 IMPORT OF CRYSTAL AND CRYSTAL COMPONENTS CUP 58,417,145 2 PURCHASE OF PLANT AND MACHINERY COST PLUS 29,24,725 9 I.T.A.NO.100/DEL/2011 3 COATING OF RAW BEADS COST PLUS 57,598,485 4 COMMISSION RECEIVED CUP 28,64,459 5 ECB LOAN CUP 59,60,300 6 PROVISION OF EDP PROCUREMENT & SUPPORT SERVICES CUP 30,72,651 7 PURCHASE OF CHEMICALS AND OTHER CONSUMABLES COST PLUS 7,84,646 8 IMPORT OF COMMUNICATION MATERIALS COST PLUS 58,28,599 9 REIMBURSEMENT OF TRAINING EXPENSES COST PLUS 3,59,118 9.3 THERE IS NO DISPUTE WITH RESPECT TO THE DETERMI NATION OF ARMS LENGTH PRICE IN RESPECT OF THE INTERNATION AL TRANSACTIONS WITH ITS AE ON COATING OF RAW BEEDS. ASSESSEE CHOSE COST PLUS METHOD AS THE MOST APPROPR IATE METHOD FOR THE PURPOSES OF DETERMINATION OF ARMS L ENGTH PRICE OF THE INTERNATIONAL TRANSACTION PERTAINING T O THE ACTIVITY OF PURCHASE OF CONSUMABLES AND JOB WORK CH ARGES RECEIVED AND THE ASSESSEE CALCULATED A GROSS MARKUP OF 120.94% ON THE DIRECT AND INDIRECT PROCESSING COST. THE LD. TPO RECOMPUTED THE COST BASE BY TAKING CERTAIN OVERHEAD EXPENSES SUCH AS REPAIRS AND MAINTENANCE, ELECTRICITY, INSURANCE AND DEPRECIATION AS A PART O F THE INDIRECT COST OF PRODUCTION FOR THE PURPOSES OF CPM ANALYSIS WHICH IS AS UNDER: COSTS INCURRED IN PROVING JOB WORK SERVICES RS.4,39,99,036/- 10 I.T.A.NO.100/DEL/2011 ARMS LENGTH PRICE (COSTS PLUS 65.17%) RS.7,26,73,207/- AMOUNT RECEIVED RS.5,75,98,485/- DIFFERENCE WITH ALP IN RS. AND IN % RS.1,50,74,722/- (26%) 9.4 IN THE TRANSFER PRICING DOCUMENTATION FILED BY THE ASSESSEE THE ASSESSEE HAD LISTED 19 COMPARABLE COMPANIES ENGAGED IN SIMILAR BUSINESS AS THAT OF TH E ASSESSEE. THE LD.TPO EXCLUDED 2 COMPARABLE COMPANIE S BEING M/S. PUNIT COMMERCIAL LTD. AND M/S. GOLDIAM INTERNATIONAL LTD. FOR THE REASON THAT THESE WERE H AVING HIGH MARGIN AS COMPARED TO THAT OF THE ASSESSEE, WH ICH COULD NOT BE VERIFIED BY THE LD. TPO DUE TO IN AVAI LABILITY OF THE DATA. 9.5 AGGRIEVED BY THE ORDER OF THE LD. TPO THE ASSES SEE PREFERRED AN APPEAL BEFORE THE LD. CIT (A). THE LD. CIT (A) AGREED WITH THE CONTENTIONS OF THE ASSESSEE AND DEL ETED THE ADJUSTMENTS MADE IN RESPECT OF THE COST BASE AN D EXCLUDED THE EXPENSES LIKE REPAIR AND MAINTENANCE, ELECTRICITY, INSURANCE AND DEPRECIATION, WHICH WAS NOT DIRECTLY CONNECTED WITH THE INTERNATIONAL TRANSACTI ON ENTERED INTO BY THE ASSESSEE WITH ITS AE. 9.6 IN RESPECT OF THE ABNORMAL GROSS MARKUP IN CASE OF THE 2 COMPARABLE COMPANIES, THE LD. CIT(A) RECOMPU TED THE SAME DUE TO THE AVAILABILITY OF THE ANNUAL REPO RT ON THE PUBLIC DOMAIN BY THEN, WHICH WAS NOT AVAILABLE AT THE TIME OF PREPARING THE TP REPORT. THE LD. CIT (A) CA LCULATED 11 I.T.A.NO.100/DEL/2011 THE AVERAGE GROSS MARKUP OVER COST AT 15.17% AND COMPUTED THE ARMS LENGTH PRICE AS UNDER: COSTS BASE AS TAKEN BY TPO RS.4,39,99,036/- ARMS LENGTH PRICE (COST PLUS 15.17%) RS.5,06,73,69 0/- AMOUNT RECEIVED RS.5,75,98,485/- 9.7 AGGRIEVED BY THE ORDER OF THE LD. CIT (A) THE R EVENUE IS IN APPEAL BEFORE US NOW. 9.8 THE LD. DR SUBMITTED THAT ASSESSEE MAINTAINED SEPARATE ACCOUNTS FOR ITS PUNE AND DELHI UNITS. HE SUBMITTED THAT PUNE UNIT IS A CONTRACT MANUFACTURIN G UNIT AND DELHI UNIT TAKES CARE OF DISTRIBUTION OF C RYSTAL GOODS. THE LD. D R SUBMITTED THAT AS PER THE SEGMEN TAL ACCOUNTS ANNEXED WITH THE RETURN OF INCOME THE TOTA L COST INCURRED BY THE PUNE JOB WORK UNIT IS RS.64,444,408 7/- AND IN THE TRANSFER PRICING ANALYSES, THE TOTAL COS T HAVE BEEN DECLARED AT RS.49,233,609/- ONLY. HE THUS SUBM ITTED THAT THE ASSESSEE HAS DISTRIBUTED THE COST OF PUNE UNIT OVER VARIOUS ACTIVITIES THAT IS COATING OF RAW BEED S, TRADING, TRANSFER ETC. LD. DR SUBMITTED THAT THERE IS NO RATIONAL GIVEN THE AFORESAID ALLOCATION OF EXPENSES OF PUNE UNIT AND THEREFORE, THE COST BASE CALCULATED BY THE LD. TPO HAS TO BE UPHELD IN RESPECT OF DETERMINATION O F ARMS LENGTH PRICE OF THE LD.TPO REJECTED TO COMPANIES WI TH ABNORMAL HIGH GROSS PROFIT MARGIN WHICH WAS INCLUDE D BY THE ASSESSEE IN ITS TP STUDY. HE SUBMITTED THAT THE LD. CIT(A) HAS NOT GIVEN PROPER REASONING FOR INCLUDING THE 2 12 I.T.A.NO.100/DEL/2011 COMPARABLES FOR THE PURPOSES OF DETERMINING THE ARM S LENGTH PRICE. LD. DR PLACED HIS RELIANCE UPON THE D ECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHRYS CA PITAL INVESTMENT ADVISERS (INDIA) (P) LTD VS. DCIT, REPOR TED IN (2015) 56 TAXMANN.COM 417, WHEREIN IT HAS BEEN HELD THAT; MERE FACT THAT AN ENTITY MAKES HIGH/EXTREMELY HIGH PROFITS/LOSSES DOES NOT, IPSO FACTO, LEAD TO I TS EXCLUSION FROM LIST OF COMPARABLES FOR THE PURPOSES OF DETERMINATION OF A LP AS IN SUCH CIRCUMSTANCES AND ENQUIRY UNDER RULE 10 B (3) OUGHT TO BE CARRIED OUT TO DATA MINE AS TO WHETHER MATERIAL DIFFERENCES BETWEE N THE ASSESSEE AND THE SAID ENTITY CAN BE ELIMINATED AND UNLESS SUCH DIFFERENCES CANNOT BE ELIMINATED, ENTITY HAS TO BE INCLUDED AS A COMPARABLE. 9.9 ON THE CONTRARY THE LD. AR REFERRED TO AND RELI ED UPON THE FINDINGS GIVEN BY THE LD. CIT (A). HE SUBM ITTED THAT AS PER RULE 10 B, THE COST BASE SHOULD INCLUDE THE DIRECT AND INDIRECT COST OF PRODUCTION OF GOODS AND SERVICES WHICH THE ASSESSEE HAS DULY CONSIDERED WHI LE WORKING OUT THE COST BASE. THE LD.AR FURTHER SUBMIT TED THAT IN RESPECT OF THE OVERHEADS AT PUNE, ASSESSEE HAS ALLOCATED PART OF THE OVERHEAD EXPENSES TO THE QUOT ING ACTIVITY, AND COST BASE HAS BEEN CALCULATED. LD. AR SUBMITTED THAT THE LD. TPO ON THE OTHER HAND ADDED 100% OF THE AMOUNT OF SOME OF THE OVERHEADS IN THE COST BASE WHICH IS NOT IN ACCORDANCE WITH THE SAID RULES . 9.10 REGARDING ABNORMAL GROSS PROFIT MARKUPS THE LD .AR SUBMITTED THAT THE LD. TPO HAS NOT FOLLOWED RULE 10 B. HE 13 I.T.A.NO.100/DEL/2011 SUBMITTED THAT GROSS PROFIT MARKUP OVER COST OF 19 COMPARABLE SHOWING AVERAGE GROSS MARKUP 15.71% WAS SUBMITTED BEFORE THE LD. TPO AND THE LD. TPO HAS TA KEN GROSS PROFIT MARKUP OF 17 COMPANIES FOR FY 2002-03 WHICH INCLUDES ABNORMAL, GROSS BUT PROFIT MARKUP OF 374% AND 630% IN CASE OF 2 COMPANIES WHICH ARE HIGH LY ABNORMAL AND SHOULD HAVE BEEN EXCLUDED WHILE CALCULATING THE AVERAGE GROSS MARGIN OVER COST IN C ASE OF THE COMPARABLE COMPANIES. THE LD. DR FURTHER SUBMIT TED THAT THE TPO EXCLUDED 2 COMPARABLE COMPANIES FROM T HE CALCULATION AS THEIR FINANCIALS WERE NOT AVAILABLE FOR FY 2002-03. 9.11 LD. AR SUBMITTED THAT THE LD. TPO HAS WRONGLY CONSIDERED THE GROSS PROFIT MARKUP OF GOLDIAM INTERNATIONAL LTD. AND PUNIT COMMERCIALS LTD. HE RE FERRED TO THE ANNUAL ACCOUNTS PLACED ON RECORD BEFORE AS, WHEREIN THE GROSS PROFIT MARKUP OVER COST HAS BEEN WORKED OUT TO BE 16.83% AND 11.79% RESPECTIVELY. HE SUBMITTED THAT IN THE EVENT THESE COMPARABLES ARE INCLUDED, CORRECT MARGIN AS DERIVED FROM THE ANNUAL REPORTS MAY BE TAKEN. 10. WE HAVE PERUSED THE ORDERS OF THE AUTHORITIES B ELOW AND THE PAPER BOOK FILED BY THE ASSESSEE. IT IS OBS ERVED THAT THE ASSESSEE HAS NOT OBJECTED TO THE INCLUSION OF THE CLEARING CHARGES FOREIGN EXCHANGE FLUCTUATION LOSS AND CERTAIN INDIRECT AND DIRECT COST OF PRODUCTION IN T HE COST BASE. THE ASSESSEE HAS OBJECTED TO THE INCLUSION OF 14 I.T.A.NO.100/DEL/2011 EXPENSES LIKE OTHER REPAIR AND MAINTENANCE, ELECTRI CITY, INSURANCE AND DEPRECIATION ON THE OTHER ASSETS BEIN G OVERHEAD EXPENSES IN THE COST BASE FOR CALCULATING GRASS MARKUP OVER COST. WE AGREE WITH THE SUBMISSIONS MAD E BY THE LD. AR THAT WHILE CALCULATING THE COST BASE OVER COST AS PER RULE 10 B, EXPENSES DIRECTLY RELATED TO THE PRODUCTION AND DISTRIBUTION OF BEADS ACTIVITY MUST ONLY BE CONSIDERED. IT IS OBSERVED THAT THE OTHER EXPENSES INCLUDED BY THE LD. TPO BEING ELECTRICITY, INSURANC E AND DEPRECIATION ETC CANNOT BE CONSIDERED TO BE DIRECTL Y RELATED TO THE PRODUCTION AND DISTRIBUTION OF THE B EADS ACTIVITY. WE THEREFORE, DO NOT FIND ANY INFIRMITY W ITH THE FINDINGS OF THE LD. CIT (A) IN DETERMINING THE COST BASE BY CONSIDERING THOSE EXPENSES WHICH COULD BE DIRECTLY LINKED WITH THE PRODUCTION AND DISTRIBUTION ACTIVITY OF TH E ASSESSEE FOR ITS AE. 10.1 REGARDING THE SUBMISSIONS ADVANCED BY BOTH THE PARTIES RELATING TO THE INCLUSION/EXCLUSION OF THE 2 COMPARABLES BEING GOLDIAM INTERNATIONAL LTD. AND PU NIT COMMERCIALS LTD, IS IT IS OBSERVED THAT THE ANNUAL REPORT SUBMITTED BY THE ASSESSEE, WAS NOT AVAILABLE ON THE DATABASE AT THE TIME OF TP PROCEEDINGS. THE PLEA AD VANCED BY THE LD. AR IS THAT, IN THE EVENT THESE COMPANIES ARE INCLUDED THEN THE CORRECT MARGIN AS PER THE ANNUAL ACCOUNTS MUST BE CONSIDERED. WE ACCORDINGLY SET ASI DE THESE TO THE LD. TPO FOR VERIFICATION OF THE DATA P ROVIDED IN 15 I.T.A.NO.100/DEL/2011 THE ANNUAL ACCOUNTS OF THESE 2 COMPANIES AND TO CALCULATE THE GROSS MARGIN BY USING THE CORRECT FIG URES. 10.2 ACCORDINGLY GROUND NO. 2 TO 3.3 STANDS DISMISS ED AND GROUND NO. 4.1 TO 4.3 STANDS ALLOWED FOR STATIS TICAL PURPOSES IN THE APPEAL FILED BY THE REVENUE. 11. IN THE RESULT THE APPEAL FILED BY THE REVENUE S TANDS DISPOSED OFF ACCORDINGLY. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH AUG., 2016. SD./- SD./- (N. K. SAINI) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 26.08. 2016 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 DELHI. TRUE COPY. BY ORDER (ITAT, NEW DELHI) 16 I.T.A.NO.100/DEL/2011 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS 26/8/16 SR. PS/PS 6 KEPT FOR PRONOUNCEMENT 26/8 SR. PS/PS 7 FILE SENT TO BENCH CLERK 26/8 SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER