Appeal details
Counselvise Citation
[2019] 116 COUNSELVISE.COM (IT) 7305 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 2 month(s) 27 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
18-07-2019
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I
Next Hearing Date
12-09-2017
Assessment Year
2005-2006
Appeal Filed On
21-04-2016
Judgement Text
- , - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI PRADIPKUMAR KEDIA, ACCOUNTANT MEMBER ./ ITA NO.1309/AHD/2012 [ASSTT.YEAR 2005-06] TYCO VALVES & CONTROLS INDIA PVT. LTD. 302, IVORY TERRACE R.C. DUTT ROAD ALKAPURI, BARODA 390 007. PAN : AAACK 8809 L VS. DCIT, CIR.4 BARODA. ./ ITA NO.1312/AHD/2012 [ASSTT.YEAR 2005-06] DCIT, CIR.4 BARODA. VS. TYCO VALVES & CONTROLS INDIA PVT. LTD. 302, IVORY TERRACE R.C. DUTT ROAD ALKAPURI, BARODA 390 007. ./ ITA NO.1003/AHD/2016 [ASSTT.YEAR 2005-06] PENTAIR VALVES & CONTROLS INDIA P.LTD. (FORMERLY KNOWN AS TYCO VALVES & CONTROLS INDIA PVT. LTD. 302, IVORY TERRACE R.C. DUTT ROAD ALKAPURI, BARODA 390 007. VS. ACIT, CIR.4 BARODA. ( APPLICANT ) (RESPONDENT) ASSESSEE BY : SHRI S.N. SOPARKAR, AND SHRI BANDISH SOPARKAR, AR REVENUE BY : SHRI MAHSH SHAH, CIT-DR ! '#$ % &' / DATE OF HEARING : 24/04/2019 ()* % &' / DATE OF PRONOUNCEMENT: 18/07/2019 ITA NO.1309/AHD/2012 AND 2 OTHERS 2 +, / O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: ITA NO.1309/AHD/2012 AND 1312/AHD/2012 ARE CROSS APPEALS AGAINST ORDER OF THE LD.CIT(A) DATED 29.3.2 012 AND 30.3.2012 [SEEMS TO BE AN INCORRECT DATE ON ANY ONE ORDER ANNEXED WITH RESPECTIVE APPEAL, BECAUSE OTHERWISE I T IS ONE ORDER ONLY] PASSED FOR THE ASSTT.YEAR 2005-06. THESE APPEALS HAVE ARISEN FROM AN ASSESSMENT ORDER PASSED UNDER SECTIO N 143(3) ON 30.12.2008. ITA NO.1003/AHD/2016 IS DIRECTED AT TH E INSTANCE OF THE ASSESSEE AGAINST ORDER OF THE LD.CIT(A) DATED 2 8.1.2016 PASSED FOR THE ASSTT.YEAR 2005-06. THIS APPEAL IS ARISEN FROM THE PROCEEDINGS INITIATED UNDER SECTION 271(1)(C) OF TH E INCOME TAX ACT. 2. FIRST WE TAKE QUANTUM APPEAL I.E. ITA NO.1312/AH D/2012. THIS APPEAL IS DIRECTED AT THE INSTANCE OF THE REVE NUE. THOUGH IT HAS TAKEN THREE GROUNDS, BUT ITS GRIEVANCE REVOLVES AROUND A SINGLE ISSUE, VIZ. THE LD.CIT(A) HAS ERRED IN ALLOW ING THE DEDUCTION OF RS.1,18,82,273/- OUT OF RS.1,83,82,531/- CLAIMED BY THE ASSESSEE UNDER SECTION 10B OF THE INCOME TAX ACT. 3. AT THE VERY OUTSET, THE LD.COUNSEL FOR THE ASSES SEE SUBMITTED THAT THE AMOUNT MENTIONED IN THE GROUND BY THE REVE NUE IS INCORRECT. BASICALLY, THE ASSESSEE HAS CLAIMED DEDU CTION OF RS.1,83,82,531/-. THIS DEDUCTION HAS BEEN ALLOWED BY THE LD.CIT(A). THE REVENUE HAS WRONGLY PLEADED THAT SU CH CLAIM HAS BEEN RESTRICTED TO RS.1,18,82,273/-. ITA NO.1309/AHD/2012 AND 2 OTHERS 3 4. WITH THE ASSISTANCE OF THE LD.REPRESENTATIVES, W E HAVE GONE THROUGH THE RECORD. IT EMERGES OUT FROM THE RECORD THAT THE ASSESSEE HAS FILED ITS RETURN OF INCOME ON 22.6.200 6 DECLARING TOTAL INCOME AT RS.14,39,11,680/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND NOTICE UNDER S ECTION 143(2) WAS ISSUED AND SERVED UPON THE ASSESSEE. THE ASSES SEE AT THE RELEVANT TIME WAS ENGAGED IN THE BUSINESS OF MANUFA CTURING AND SELLING OF VALVES, VALES PARTS, ACTUATORS, COMPONEN TS AND ACCESSORIES ETC. IT HAS TWO MANUFACTURING FACILITIE S VIZ. BARODA UNIT AND CHENNAI UNIT. CHENNAI UNIT IS 100% EXPORT ORIEN TED UNIT AND EXPORT COMPONENTS TO ITS ASSOCIATED ENTERPRISE. ON SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE AO THAT THE ASSESSEE H AS CLAIMED A DEDUCTION OF RS.1,83,82,531/- UNDER SECTION 10B OF T HE ACT. THE LD.AO ISSUED A SHOW CAUSE NOTICE, INVITING EXPLANAT ION OF THE ASSESSEE AS TO WHY THIS DEDUCTION BE NOT DISALLOWED . THE ASSESSEE FILED A REPLY AND CONTENDED THEREIN THAT T HAT DEDUCTION UNDER SECTION 10B WAS ALLOWED TO IT IN EARLIER YEARS , AND ON THE BASIS OF DECISION OF ITAT AS WELL AS HONBLE HIGH C OURT, THE SAME IS ADMISSIBLE. SOMEHOW, THE LD.AO WAS NOT SATISFI ED WITH THE EXPLANATION OF THE ASSESSEE AND REJECTED THE SAME, ACCORDINGLY HE MADE THE DISALLOWANCE. ON APPEAL, THE LD.CIT(A) HA S ALLOWED DEDUCTION TO THE ASSESSEE ON THE GROUND THAT SIMILA R DEDUCTION HAS BEEN ALLOWED TO THE ASSESSEE IN EARLIER YEARS. THE LD.CIT(A) HAS FOLLOWED THE DECISION OF HIS PREDECESSOR IN THE IMMEDIATELY PRECEDING YEAR. THE LD.COUNSEL FOR THE ASSESSEE CO NTENDED THAT IN THE ASSTT.YEAR 2003-04, THE TRIBUNAL HAS DECIDED TH IS ISSUE IN FAVOUR OF THE ASSESSEE IN ITA NO.2981/AHD/2008 AND CO NO.246/AHD/2008 AND THIS TRIBUNALS ORDER DATED 4.2 .2011 WAS CHALLENGED BEFORE THE HONBLE HIGH COURT IN TAX APP EAL NO.1048 ITA NO.1309/AHD/2012 AND 2 OTHERS 4 OF 2011. HONBLE HIGH COURT HAS UPHELD THIS ORDER VIDE ITS ORDER DATED 30.8.2012. COPY OF THE HONBLE HIGH COURTS D ECISION AS WELL AS ITATS ORDER ARE PLACED ON PAGE NO.996 TO 1009 O F THE PAPER BOOK. HE ALSO PLACED ON RECORD COPY OF THE ITATS ORDER DATED 2.11.2012 IN ITA NO.322/AHD/2009 AND CO NO.44/AHD/2 009 FOR THE ASSTT.YEAR 2004-05. THE LD.CIT-DR DID NOT DISPU TE WITH REGARD TO THE ABOVE FACTS. THEREFORE, AS FAR AS DEDUCTION ADMISSIBLE TO THE ASSESSEE UNDER SECTION 10B IS CONCERNED, THE ISS UE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F HONBLE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE IN ASSTT.YEAR 2003-04 AS WELL AS BY ITATS ORDER IN THE ASSTT.YEA R 2004-05 ALSO. IT IS ALSO PERTINENT TO MENTION THAT THE DEPARTMENT HAS MENTIONED INCORRECT AMOUNT IN ITS GROUND OF APPEAL. THE DEDU CTION HAS BEEN GRANTED BY THE LD.CIT(A) AT RS.1,83,82,531/- AND NO T AT RS.1,18,82,273/-. THE ASSESSEE HAS CLAIMED DEDUCTI ON OF RS.1,83,82,531/-. APART FROM THIS AMOUNT, IT HAS F IRST TIME CLAIMED DEDUCTION OF RS.65,00,258/- WHICH IS INTERE ST INCOME. THIS DEDUCTION WAS CLAIMED VIDE LETTER DATED 29.12. 2008 SUBMITTED DURING THE ASSESSMENT PROCEEDINGS, THIS D EDUCTION WAS NOT GRANTED TO THE ASSESSEE, AND THE CIT(A) HAS ALS O REJECTED THE CLAIM OF THE ASSESSEE. THE REVENUE HAS WRONGLY CON STRUED THAT THIS AMOUNT BE EXCLUDED FROM THE ELIGIBLE CLAIM OF RS.1,83,82,531/- IN ITS GROUNDS OF APPEAL. IT IS A SEPARATE AMOUNT. THEREFORE, WE DO NOT FIND ANY MERIT IN THI S APPEAL OF THE REVENUE. IT IS DISMISSED. 5. NOW WE TAKE THE APPEAL OF THE ASSESSEE I.E ITA NO.1309/AHD/2002. THE GROUNDS OF APPEAL TAKEN BY T HE ASSESSEE ARE NOT IN CONSONANCE WITH RULE 8 OF THE INCOME-TAX (APPELLATE TRIBUNAL) RULES, 1963 THEY ARE DESCRIPTIVE AND AR GUMENTATIVE IN ITA NO.1309/AHD/2012 AND 2 OTHERS 5 NATURE. THE ASSESSEE HAS PLEADED THAT THE LD. CIT( A) HAS ERRED IN CONFIRMING THE ADDITION OF RS.2,05,96,920/- OUT OF TOTAL ADDITION OF RS.2,91,71,038/- MADE BY THE AO ON THE RECOMMENDATI ON OF TPO TO THE ARMS LENGTH PRICE (ALP) IN RELATION TO INTE RNATIONAL TRANSACTION. IN OTHER SUB-GROUNDS, THE ASSESSEE HA S TAKEN PERIPHERAL ARGUMENTS. APART FROM THIS FOLD OF GRIE VANCE, THE ASSESSEE HAS RAISED ADDITIONAL GROUND OF APPEAL WHI CH READS AS UNDER: APPELLANT CRAVES LEAVE TO RAISE THIS ADDITIONAL GR OUND OF APPEAL BEFORE THE HON'BLE ITAT. THIS IS A LEGAL GRO UND AND THEREFORE AS PER THE DECISION OF HON'BLE SUPREME CO URT IN THE CASE OF NATIONAL THERMAL POWER (229ITR 383) IT CAN BE RAISED BEFORE THE HON'BLE ITAT. I. WITHOUT PREJUDICE TO THE OTHER GROUNDS IN AP PEAL, IT IS RESPECTFULLY SUBMITTED TO EXCLUDE THE AMOUNT OF MANAGEMENT FEE WHILE COMPUTING MARGINS OF CHENNAI UNIT, AS INCLUSION OF MANAGEMENT FEE IN PROFIT LEVE L INDICATOR OF CHENNAI UNIT IS RESULTING INTO DOUBLE TAXATION OF MANAGEMENT FEE. THE APPELLANT FURTHER CRAVES LEAVE TO ADD, AMEND, A LTER, CHANGE, DELETE AND EDIT THE ABOVE GROUND OF APPEAL BEFORE OR AT THE TIME OF THE HEARING OF THE APPEAL. 6. ON SCRUTINY OF THE RETURN AND TP STUDY REPORT, T HE LD.AO FOUND THAT THE ASSESSEE HAD INTERNATIONAL TRANSACTI ON WITH ITS AE, AND THEREFORE, REFERENCE UNDER SECTION 92CA(1) OF T HE ACT IS REQUIRED TO BE MADE TO THE LD.TPO. ACCORDINGLY, HE MADE REFERENCE TO THE TPO. IN ORDER TO GIVE LOGICAL END TO THE PROCEEDINGS, THE LD.TPO HAS ISSUED NOTICE UNDER SEC TION 92CA(2) OF THE ACT AND QUESTIONNAIRE TO THE ASSESSEE. HE N OTICED THE FOLLOWING INTERNATIONAL TRANSACTIONS: SR. NO. DESCRIPTION OF THE TRANSACTIONS AMT. PAID (IN INR) AMT. RECD (IN INR) ITA NO.1309/AHD/2012 AND 2 OTHERS 6 1 IMPORT OF RAW MATERIALS, PARTS ETC 1,40,703,162 - 2 IMPORT OF FINISHED GOODS FOR RESALE 57,198,135 - 3 EXPORT OF VALVES COMPONENTS - 18,11,38,364 4 EXPORT OF FINISHED GOODS FOR RESALE 3,80,11,428 5 AGENCY COMMISSION _ 1,16,58,594 6 PROVISION OF DESIGN RELATED SERVICES _ 2,10,70,872 7 PAYMENT OF MANAGEMENT FEE AND PROFESSIONAL CHARGES 81,21,072 - 8 REIMBURSEMENT OF OTHER EXPENSES 79,37,020 - ' 9 RECOVERY OF CAPITAL PURCHASES AND ADVANCE TO EMPLOYEES - 27,96,663 REIMBURSEMENT OF MANAGEMENT FEES EXPENSES OF RS.81, 21,072/- THE ASSESSEE WAS ASKED TO SUBMIT DETAILS OF MANAGEM ENT REIMBURSEMENT EXPENSES OF RS.81,21,072/-. IN RESPONSE TO THE SAME, THE ASS ESSEE HAS SUBMITTED FOLLOWING DETAILS: SI. NO. DESCRIPTION AMOUNT INVOICE NO. DATE 1. BRUSSELS MANAGEMENT FEES (BEING APRIL, 2003 TO SEPT. 2003) S$ 19583 (INR640712) DHQ5/007108 27/10/04 2. ASIA MANAGEMENT FEES (BEING APRIL, 2004 TO SEPT. 2004) US$ 50390.84 (INR 2217197) DHQ011514 17/9/04 3. ASIA MANAGEMENT FEES (BEING OCT., 2004 TO FEB.2005) US$ 53650.44 (INR 2799697) 1800000225 30/3/05 4. ASIA MANAGEMENT FEES (BEING MARCH, 2005 TO JUNE 2005) US$44123.38 (INR 2482733) 1800000367 27/9/05 7. AS FAR AS ADJUSTMENT MADE IN THE MANAGEMENT FEE EXPENSES ARE CONCERNED, WE WILL TAKE UP THIS ISSUE IN THE LA TER PART OF THIS ORDER. 8. A PERUSAL OF THE TPOS ORDER WOULD REVEAL THAT L D.TPO HAS IDENTIFIED NINE INTERNATIONAL TRANSACTIONS FROM THE TP STUDY REPORT. ITA NO.1309/AHD/2012 AND 2 OTHERS 7 OUT OF THESE NINE, FOUR TRANSACTIONS PERTAINED TO I NCURRENCE OF EXPENDITURE OR PAYMENTS MADE BY THE ASSESSEE TO ITS AE. THE LD.TPO EVALUATED TRANSACTION AT SERIAL NO.3, 6, 7 A ND 9. HE FIRST OBSERVED THAT THE ASSESSEE HAS DETERMINED ALP OF TH ESE TRANSACTIONS AFTER APPLYING TNMM METHOD. HE FIRST EXAMINED THE TRANSACTION PERTAINED TO ENGINEERING DESIGN SERVICE S OF RS.2,10,70,872/- AND CAPITAL RECOVERY OF CAPITAL PU RCHASE AND ADVANCES TO EMPLOYEES AMOUNTING TO RS.27,96,663/-. IN THESE TRANSACTIONS, HE HAS RECOMMENDED UPWARD ADJUSTMENT IN DESIGN SERVICES OF RS.1,33,704/-. THIS AMOUNT HAS NOT BEE N DISPUTED BY THE PARTIES BEFORE US. THEREFORE, WE NEED NOT TO EXAMINE THIS ASPECT OF THE TPOS ORDER. 9. THE NEXT ITEM WHICH HAS BEEN CONSIDERED BY THE L D.TPO IS WITH REGARD TO VALUE OF EXPORT OF VALVE COMPONENTS OF CHENNAI UNIT. WE DEEM IT APPROPRIATE TO TAKE NOTE OF RELEV ANT DISCUSSION MADE BY HIM ON THIS ISSUE. IT READS AS UNDER: 7.2 THE ABOVE ISSUES ARE BEING DISCUSSED AS UNDER: I) THE ASSESSEE HAS CONTENDED THAT CHENNAI UNIT MANUFACTURES AND SALES BARE SHAFT VALVES WHEREAS BAR ODA UNIT SALES HIGH VALUE ADDED VALVES. IN VIEW OF THE A BOVE, MARGINS ARE MORE IN BARODA UNIT. BUT, ASSESSEE HAS NOT SHOWN HOW AND WHY HIGHER MARGINS WILL BE EARNED BY ADDING AN ADDITIONAL COMPONENT AT BARODA UNIT. THE ASSESSEE HAS NOT SUBMITTED ANY COMPUTATION SHOWING HIGHER MARGIN S DUE TO ABOVE. AS BOTH THE UNITS ARE CARRYING OUT MANUFA CTURING ACTIVITIES, THEY SHOULD EARN MANUFACTURING MARGINS WHICH SHOULD BE COMPARABLE, WHICH ASSESSEE HAS ITSELF DON E WHILE COMPARING ITSELF, PERFORMANCE WITH EXTERNAL COMPARA BLES UNDER TNMM. II) THE ASSESSEE ARGUES THAT CHENNAI UNIT ASSUMES N O CREDIT AND MARKET RISK IN RESPECT OF ITS EXPORT TO ITS AES WHEREAS THE BARODA UNIT ASSUMES CREDIT AND MARKET RISK IN RE SPECT OF ITA NO.1309/AHD/2012 AND 2 OTHERS 8 ITS SALES TO THIRD PARTIES. I FULLY AGREE WITH THE ASSESSEE'S CONTENTION AND A DOWNWARD ADJUSTMENT IS TO BE MADE FOR THIS RISK TO THE BARODA UNIT'S RESULTS. III) THE ASSESSEE ARGUES ABOUT DIFFERENT GEOGRAPHIC AL LOCATION TO WHICH THESE UNITS CATER, AS BARODA UNIT CATERS TO THE LOCAL MARKET AND CHENNAI UNIT CATERS TO THE EXPORT MARKET. I HAVE SEEN FROM THE RECORD THAT CHENNAI UNIT IS EXPORTING ITS PRODUCT TO THE DEVELOPED COUNTRIES MAINLY AND MORE SPECIFICALLY TO USA. AND AS SUCH COMMAND PREMIUM IN PRICE AS COMPARED TO LOCAL MARKET. IT IS A WELL-KNOWN FAC T THAT PRICES OF MANUFACTURED PRODUCTS COMMAND HIGHER PRIC E IN DEVELOPED COUNTRIES MORE SPECIFICALLY IN USA AND EUR OPE AS COMPARED TO INDIAN MARKET BY AT LEAST 10%. IN VIEW OF THE ABOVE, RESULTS OF CHENNAI UNIT SHOULD BE ADJUSTED DOWNWARD BY 10% MARGIN DUE TO GEOGRAPHICAL LOCATION OR OF BARODA UNIT UPWARD MARGIN OF 10%. IT MAY BE WORTHWHILE TO MENTION HERE THAT HON'BLE ITAT, BANGAL ORE AND DELHI HAVE STATED THAT TRANSFER PRICING IS NOT AN E XACT SCIENCE AND ADJUSTMENT ARE TO BE MADE ON APPROXIMAT E BASIS AND ASSESSEE'S CONTENTION IN THIS REGARD OF A CCURATE ADJUSTMENT IS NOT CORRECT AND ADJUSTMENT SHOULD HAV E BEEN DONE ON THE BASIS OF MARKET REALITIES. IV) THE ASSESSEE HAS OBJECTED FOR USING RESULTS OF BARODA AND CHENNAI UNITS AS THEY ARE IMPACTED BY RELATED PARTI ES. IN SUPPORT, IT HAS RELIED ON THE DECISION IN THE CASE OF M/S. PHILIPS SOFTWARE PVT LTD-ITA NO. 218/BNG/08 AY 2003- 04 WHERE IT WAS OBSERVED BY THE TRIBUNAL THAT FOR THE PURPOSE OF COMPARABILITY, COMPANIES WITH EVEN A SINGLE RUPE E OF TRANSACTIONS WITH AE, CANNOT BE SAID TO BE A COMPAR ABLES. THE DELHI ITAT IN THE CASE OF SONY INDIA HELD THAT RELATED PARTY TRANSACTION SHOULD NOT EXCEED AT THE MOST 10- 15% OF TOTAL REVENUE SO THAT THEY CAN BE USED FOR COMPARIS ON PURPOSE. NONE OF THESE DECISIONS HAVE GIVEN REASON FOR TAKING ZERO PERCENT OR 10% TO 15% TO RELATED PARTY TRANSACTIONS AS CRITERIA FOR COMPARISON PURPOSE. IN FACT, EVEN IF RELATED PARTY TRANSACTIONS ARE 25% IT WILL NOT A FFECT NET MARGIN PROFITS MUCH, AS IF ONE CONSIDERS THAT AN AS SESSEE MAY HAVE MARKED UP OR MARKED DOWN ITS TRANSACTION P RICE BY 20%, THE IMPACT OF NET PROFIT VIS-A-VIS GROSS SA LES WILL BE ONLY 5% (25% OF 20%) AND THAT IS SAFE HARBOR LIMIT PROVIDED BY THE ACT WHERE ADJUSTMENT' ARE NOT TO BE MADE. IN THE PRESENT CASE, IF DISTRIBUTION ACTIVITY OF THE BARODA UNIT ARE ITA NO.1309/AHD/2012 AND 2 OTHERS 9 TAKEN OUT THEN TOTAL RELATED PARTY TRANSACTION ON P URCHASE SIDE WILL BE LESS THAN 25% AND AS THE RESULT OF CHE NNAI UNIT ARE TO BE COMPARED WHICH IS HAVING SUBSTANTIAL RELA TED PARTY TRANSACTION WILL NOT BE AN ISSUE IN THIS REGARD. AF TER TAKING OUT TRADING TRANSACTION RESULTS, OPERATING PROFIT R ATIO OF THE BARODA UNIT COMES TO 16.8% WHICH IS SIMILAR EXTERNAL COMPARABLE AS SUBMITTED BY THE ASSESSEE WITH MEAN OPERATING PROFIT TO THE SALES RATIO OF 16.62%. 7.3 THIS MEAN EXTERNAL COMPARABLE RESULTS ALONG WIT H BARODA UNIT RESULTS ARE NOW BEING COMPARED WITH CHENNAI UN IT AFTER MAKING ADJUSTMENT WHICH ASSESSEE HAS CLAIMED AND DISCUSSED ABOVE. IT CAN BE SEEN FROM THE ABOVE THAT COMPARABLES ARE TO BE ADJUSTED DOWNWARD FOR CREDIT AND FINANCE RISK AND TO BE ADJUSTED UPWARD FOR GEOGRAPH ICAL DIFFERENCE. THUS, UPWARD AND DOWNWARD ADJUSTMENT IS CONSIDERED AS NEUTRALIZING TO EACH OTHER. 7.4 AS SALES OF THE ASSESSEE IS TO RELATED PARTY, T HESE RATIOS ARE CONVERTED FROM OP/TS TO OP/TC, OP/TC FOR COMPAR ABLE COMPANIES WHICH WILL BE 19.93% AND OP/TC FOR CHENNA I UNIT WILL BE 9.71%. THE COMPUTATION OF OPERATIONAL PROFI T WILL BE AS UNDER: OP/TC = 19.93% OP =TCX 19.93% = 18,33,91,692 X 19.93% = 3,65,49,964 WHEREAS PROFIT SHOWN BY CHENNAI UNIT IS RS.1,81,89,9 36/-, SO SALES PRICES ARE ADJUSTED UPWARD BY RS. 1,83,60,028/- TO COMPAR E WITH OPERATING PROFIT OF RS.3,65,49,964/-. (UPWARD ADJUSTMENT OF SALE PRICE BY RS.1,83,60,028/ -) 7.5 TOTAL ADJUSTMENT RS.2,21,04,742/- (RS.1,83,60,028/-+RS.1,33,704/- + RS. 36,11,010/-) 10. BEFORE ADVERTING TO THE SUBMISSIONS MADE BY THE LD.COUNSEL FOR THE ASSESSEE, WE DEEM IT APPROPRIATE TO TAKE NO TE OF THE FINDING OF THE LD.CIT(A) ON THIS ASPECT, WHICH READ S AS UNDER: ITA NO.1309/AHD/2012 AND 2 OTHERS 10 6.3.2 VIDE THIRD PART OF GROUND NO.3, THE APPELLAN T HAS STATED THAT THE TPO HAD REJECTED CERTAIN COMPARABLES SELECTED BY THE APPELL ANT ON THE GROUND THAT THE FINISHED GOODS PROFILE OF THE APPELLANT DOES NOT MA TCH WITH THAT OF THE COMPARABLE AND MANY COMPARABLES SELECTED BY THE APPELLANT MAIN LY DEAL IN PUMPS AND OTHER PRODUCTS AS AGAINST ONLY VALVES. BUT, NEITHER THE T PO HAS MENTIONED AS WHAT ARE THE COMPARABLE COMPANIES TAKEN BY HIM FOR THE PURPO SE OF DETERMINING THIS RATIO, NEITHER THE APPELLANT HAS GIVEN DETAILS AS TO WHICH COMPARABLES ARE BEING TAKEN BY THE TPO AND WHICH ARE BEING REJECTED. THE APPELLANT HAS ONLY PROVIDED THE EXTRACTS OF ANNUAL REPORT OF COMPARABLES SELECTED B Y THE TPO. BUT NO SUCH INFORMATION HAS BEEN PROVIDED FOR THE COMPARABLES S ELECTED BY THE APPELLANT BUT REJECTED BY THE TPO. WHEN THE COMPANIES WHICH MAKE PRODUCTS COMPARABLES WITH THE MAIN PRODUCT OF THE APPELLANT, ARE AVAILABLE, T HEN THE APPELLANT'S CONTENTIONS THAT OTHER COMPANIES WHO ARE WORKING IN OTHER FLOW CONTROL TECHNOLOGY FIELD SHOULD ALSO BE SELECTED FOR COMPARISON IS NOT CORRECT. MOR EOVER, IN THE SUBMISSION MADE BY THE APPELLANT, IT HAS NOT FURNISHED DETAILS OF T HE COMPANIES WHICH HAVE BEEN IGNORED BY THE TPO AND HAS NOT EXPLAINED AS TO HOW THE PRODUCTS OF THESE COMPANIES ARE BROADLY SIMILAR WITH THOSE OF THE APP ELLANT SO THAT THE RESULTS OF THESE COMPANIES SHOULD ALSO BE COMPARED WITH THE RE SULTS OF CHENNAI UNIT, IN THE ABSENCE OF ANY SUCH EXPLANATION AND DETAILS, IT IS TO BE HELD THAT THE TPO'S ACTION OF COMPARING THE RESULTS OF THE APPELLANT WITH THE COMPARABLES SELECTED BY HIM IS WELL FOUNDED AND HENCE, THIS GROUND OF APPEAL IS AL SO DISMISSED. 11. AT THE TIME OF HEARING, THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED DETAILS COMPILED IN TABULAR FORM AND ON T HE BASIS OF SUCH DETAILS HE APPRAISED US THE ISSUE IN DISPUTE I N THIS GROUND OF APPEAL. WE DEEM IT APPROPRIATE TO TAKE NOTE OF THE SE DETAILS WHICH READS AS UNDER: 1. ASSESSEES MARGIN KEY PARTICULARS AMOUNT IN INR ASSESSEES MARGIN, AFTER APPLICATION OF +/-% RANGE A OPERATING INCOME 201,581,629 211,660,710 E TOTAL COST 183,391,692 183,391,692 C-A-B OPERATING PROFIT (OP) 18,189,936 28,269,018 D=C/B OP/TC* 9-92% 15.41% *TAKEN AS 9.71 BY TPO (PAGE 11) 2. TP STUDY SR.NO. NAME OF COMPARABLE MULTIPLE YEAR MARGIN (OP/SALES) SINGLE YEAR MARGIN* (OP/SALES) ITA NO.1309/AHD/2012 AND 2 OTHERS 11 1 CENLUB INDUSTRIES LTD. 8.37% - 2 DHPINDIALTD. 17.27% 17.56% 3 FISHER SANMAR LTD. 23.62% 20.01% 4 JOHNSON PUMP (INDIA) LTD. 11.10% - 5 ORSON HOLDINGS CO. LTD. 6.62% 3.26% 6 XOMOX SANMAR LTD. 12.04% 14.58% 7 ASCO (INDIA) LTD. 25.70% 29.99% 8 TRITON VALVES LTD. 18.63% 14.32% 9 SHAKTI PUMPS (INDIA) LTD 7.79% - 10 SHROFFS ENGINEERING LTD 10.07% - AVERAGE 14-12% 16.62% *TO THE EXTENT AVAILABLE 3 TP ORDER 1. NAME OF COMPARABLE OP/SALES REMARKS 1 DHP INDIA LTD. 17.56% 2 FISHER SANMAR LTD. 20.01% 3 ORSON HOLDINGS CO. LTD. 3.26% 4 XOMOX SANMAR LTD. 14.58% 5 ASCO (INDIA) LTD. 29-99% . 6 TRITON VALVES LTD. 14-32% AVERAGE (OP/SALES) 16.62% AVERAGE (OP/TC) I.E. (16.627(100-16.62)) 19-93% TPO CONSIDERED OP/TC ITA NO.1309/AHD/2012 AND 2 OTHERS 12 4. CIT(A) ORDER SR.NO. NAME OF COMPARABLE OP/SALES REMARKS FOR REQUEST BEFORE ITAT I D H P INDIA LTD. 17.56% 2 FISHER SANMAR LTD. 20.01% RPT IS 39.56%. REJECT AS HIGH RPT 3 ORSON HOLDINGS CO. LTD. 3.26% 4 XOMOX SANMAR LTD. 14.58% 5 ASCO (INDIA) LTD. 29.99% SPARE SALES IS 28.5%. REJECT ON GROUND OF HIGH PROPORTION OF SPARE SALES 6 TRITON VALVES LTD. 14.32% AVERAGE 16.62% AVERAGE (OP/TC) 19-93% 5 REQUEST BEFORE ITAT SR. NO. NAME OP/SALES OP/TC I DHPINDIALTD. 17.56% 21.30% 2 ORSON HOLDINGS CO. LTD. 3.26% 3-37% 3 XOMOX SANMAR LTD. 14.58% 17.07% 4 TRITON VALVES LTD. 14.32% 16.71% ITA NO.1309/AHD/2012 AND 2 OTHERS 13 AVERAGE 12.43% 14.61% 12. THE LD.COUNSEL FOR THE ASSESSEE WHILE EXPLAININ G THE ABOVE DETAILS SUBMITTED THAT THE ASSESSEE HAS WORKED OUT OPERATING PROFIT AT RS.1,81,89,936/- BY DIVIDING OPERATING IN COME WITH TOTAL COST. IN TERMS OF PERCENTAGE IT IS 9.92% AND IF TH E RANGE OF +/- 5% IS BEING APPLIED, THEN NO ADJUSTMENT COULD BE MA DE UNLESS MEAN PROFIT OF THE COMPARABLE ACCORDING TO SOME MET HOD OF COMPUTATION EXCEEDS 15.41%. HE FURTHER CONTENDED T HAT IN TABLE NO.2, THE ASSESSEE HAS HIGHLIGHTED COMPARABLE SELEC TED BY IT IN THE TP STUDY REPORT AND IF MULTI-YEAR MARGIN ARE BE ING TAKEN BY DIVIDING OPERATING INCOME/SALES THEN THE AVERAGE WA S 14.12%. THE ASSESSEE HAS SUBMITTED THAT ITS PROFIT IS WITHI N THE MARGIN AND NO ADJUSTMENT IS REQUIRED. THE LD.TPO DID NOT ACCE PT THE COMPARABLE SELECTED BY THE ASSESSEE. HE SCALED DOW N THE COMPARABLE TO 6 BY ADOPTING VARIOUS FILTERS. THE AS SESSEE HAS OBJECTED ON THE SELECTION OF THESE COMPARABLES ON T HE BASIS OF FILTERS APPLIED BY THE TPO ITSELF. ONE OF THE FILT ERS WHICH HAS BEEN APPLIED IS THAT COMPARABLE WHO HAVE RELATED PARTY T RANSACTION DESERVES TO BE EXCLUDED. THE LD.CIT(A) OBSERVED TH AT THE COMPARABLE WHO HAVE RELATED PARTY TRANSACTION OF LE SS THAN 20% COULD BE ACCEPTED AS COMPARABLE, BOTH THE PARTIES H AVE LOST SIGHT THAT FISHER SANMAR LTD. HAS RELATED PARTY TRANSACTI ON OF 39.56%; SIMILARLY, ASCO (INDIA) LTD. HAS A SPARE SALES AROU ND 28.5%. IF BOTH THESE COMPARABLES ARE EXCLUDED THEN AGAIN PROF IT MARGIN OF THE ASSESSEE WOULD BE BELOW THE RANGE CARVED OUT FO R ANY ADJUSTMENT. HE HAS PREPARED THE COMPARABLES AFTER EXCLUSION ON THE ABOVE PRINCIPLE WHICH HAS BEEN ADOPTED BY THE L D.CIT(A). ITA NO.1309/AHD/2012 AND 2 OTHERS 14 13. THE LD.COUNSEL FOR THE ASSESSEE APART FROM THIS PRELIMINARY OBJECTION HAS CONTENDED THAT THE ASSESSEE HAS RAISE D VARIOUS OTHER ISSUES AS TO HOW PROFITS OF VADODARA UNIT CAN NOT BE COMPARED WITH CHENNAI UNIT; AND HOW BOTH THESE UNIT S ARE ENGAGED IN DIFFERENT LINE OF PRODUCTS. ON THE OTH ER HAND, THE LD.CIT-DR RELIED UPON THE ORDERS OF THE REVENUE AUT HORITIES AND CONTENDED THAT THE LD.CIT(A) HAS TAKEN INTO CONSIDE RATION THESE ASPECTS. 14. WE HAVE DULY CONSIDERED RIVAL CONTENTIONS AND G ONE THROUGH THE RECORD CAREFULLY. FOR DETERMINING ALP OF INTE RNATIONAL TRANSACTION, THE LD.TPO IS REQUIRED TO FIRST SELECT TESTED PARTY, THEN THE METHOD ON WHOSE APPLICATION ALP IS TO BE DETERM INED. HE HAS OBSERVED THAT FOR EXPORT OF CHENNAI UNIT, PROFITS A RE TO BE DETERMINED AFTER APPLYING TNMM METHOD. THIS HAS NO T BEEN DISPUTED BY THE PARTIES BEFORE US. THE NEXT STEP WHICH WAS REQUIRED BY THE TPO TO IDENTIFY COMPARABLES FROM TH E TP STUDY REPORT OR FROM HIS INDEPENDENT INVESTIGATION. HE H AS TO FINALISE THE FILTERS REQUIRED TO BE APPLIED ON THE RESULTS O F THE COMPARABLES SELECTED BY HIM IN ORDER TO ZERO DOWN THE MOST COMP ARABLE ASSESSEES. WE HAVE EXTRACTED COMPLETE FINDING OF T HE TPO. HE HAS NOWHERE MENTIONED THE DETAILS OF COMPARABLE IN HIS ORDER. HE HAS NOWHERE MENTIONED HOW THESE ARE COMPARABLE TO T HE ASSESSEE. HE HAS NO WHERE TAKEN OBJECTION OF THE A SSESSEE AS TO HOW A PARTICULAR COMPARABLE SELECTED BY THE TPO IS COMPARABLE OR NOT COMPARABLE. IN OTHER WORDS, A PERUSAL OF HIS O RDER WOULD SUGGEST THAT THERE IS NO COHERENCE BETWEEN HIS INQU IRY AND CONCLUSION. IT APPEARS THAT CERTAIN PAGES ARE MISS ING FROM THE IMPUGNED ORDER. WE HAVE SPECIFICALLY EXTRACTED THE FINDING OF THE LD.CIT(A) ALSO WHERE THE ASSESSEE HAS RAISED THESE OBJECTIONS. AT ITA NO.1309/AHD/2012 AND 2 OTHERS 15 THE COST OF REPETITION, WE WOULD LIKE TO TAKE NOTE OF THESE FOLLOWING LINE OF OBSERVATION OF THE LD.CIT(A) THAT MOREOVER, IN THE SUBMISSION MADE BY THE APPELLANT, IT HAS NOT FURNIS HED DETAILS OF THE COMPANIES WHICH HAVE BEEN IGNORED BY THE TPO AN D HAS NOT EXPLAINED AS TO HOW THE PRODUCTS OF THESE COMPANIES ARE BROADLY SIMILAR WITH THOSE OF THE APPELLANT SO THAT RESULT OF THESE COMPANIES SHOULD ALSO BE COMPARED WITH THE RESULT O F CHENNAI UNIT. IN THE ABSENCE OF ANY SUCH EXPLANATION/DETAIL S, IT IS TO BE HELD THAT TPOS ACTION OF COMPARING THE RESULT OF A PPELLANT THAT THE COMPARABLES SELECTED BY HIM IS WELL FOUNDED. IT IS PERTINENT TO NOTE THAT THE ASSESSEE HAS SUBMITTED DETAILS OF COM PARABLE; ALSO RAISED OBJECTION AS TO HOW TWO COMPARABLES ARE REQU IRED TO BE EXCLUDED WHEREAS THE TPO HAS APPLIED RELATED PARTY TRANSACTION FILTER. HE CANNOT RETAIN CERTAIN COMPARABLES, WHO HAS HIGHER MARGIN AND SIMULTANEOUSLY EXCLUDE CERTAIN COMPARABL ES WHO HAVE LOWER MARGIN UNDER THE SAME FILTER. THE RELATED PA RTY TRANSACTION IF ADOPTED AS A FILTER, THEN IT IS TO BE APPLIED UN IFORMLY ON THE COMPARABLES GIVING HIGHER MARGIN AS WELL AS LOWER M ARGIN. THERE IS NO SUCH ANALYSIS IN THE ORDER OF THE TPO EXTRACT ED (SUPRA). THEREFORE, CONSIDERING THE ABOVE ASPECT, WE DEEM IT APPROPRIATE TO SET ASIDE THE FINDINGS OF BOTH THE AUTHORITIES O N THIS ISSUE AND REMIT DETERMINATION OF ALP WITH REGARD TO EXPORTS M ADE BY THE ASSESSEE FROM CHENNAI UNITS TO ITS AE AFRESH. THE LD.AO SHALL CALL FOR FRESH TP REPORT IN THE SET ASIDE ASSESSMENT PRO CEEDINGS AND THE TPO SHALL PROVIDE DUE OPPORTUNITY OF HEARING TO THE ASSESSEE ON THE SELECTION OF COMPARABLE AS WELL AS HE WILL I NVITE OBJECTION, IF ANY, ON THOSE COMPARABLES. 15. NOW WE TAKE UP THE ADJUSTMENTS MADE IN THE MANA GEMENT FEES. ITA NO.1309/AHD/2012 AND 2 OTHERS 16 16. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HA S ENTERED INTO AN AGREEMENT WITH TYCO FLOW P.LTD., SINGAPORE FOR R ECEIPT OF SERVICES WITH RESPECT TO MANAGEMENT AND FINANCIAL M ATTERS. THE ASSESSEE HAS CLAIMED MANAGEMENT FEES EXPENSES OF RS.81,21,072/-. WE HAVE EXTRACTED DETAILS OF MANAG EMENT FEE PAID BY THE ASSESSEE. AT THE COST OF REPETITION, W E TAKE NOTE OF SUCH DETAILS AGAIN: SI. NO. DESCRIPTION AMOUNT INVOICE NO. DATE 1. BRUSSELS MANAGEMENT FEES (BEING APRIL, 2003 TO SEPT. 2003) S$ 19583 (INR640712) DHQ5/007108 27/10/04 2. ASIA MANAGEMENT FEES (BEING APRIL, 2004 TO SEPT. 2004) US$ 50390.84 (INR 2217197) DHQ011514 17/9/04 3. ASIA MANAGEMENT FEES (BEING OCT., 2004 TO FEB.2005) US$ 53650.44 (INR 2799697) 1800000225 30/3/05 4. ASIA MANAGEMENT FEES (BEING MARCH, 2005 TO JUNE 2005) US$44123.38 (INR 2482733) 1800000367 27/9/05 17. THE LD.TPO HAS MADE AN ANALYSIS OF THE ABOVE PA YMENTS MADE BY THE ASSESSEE. HE OBSERVED THAT AS FAR AS FIRST INVOICE FOR A SUM OF RS.6,40,712/- IS CONCERNED, IT PERTAIN ED TO PRECEDING YEAR, HENCE NOT ALLOWABLE AS AN EXPENDITURE FOR THE YEAR UNDER CONSIDERATION. ACCORDINGLY, HE TOOK ALP OF THIS PA YMENT AT NIL. SIMILARLY, WITH REGARD TO LAST INVOICE I.E. ASIA MA NAGEMENT FEE AMOUNTING TO RS.24,82,733/-, THE LD.TPO HAS OBSERVE D THAT INVOICE PAYMENT EXPENSES RELATING TO THIS YEAR ARE ONLY FOR THE PERIOD OF MARCH, 2005 AND REST PERTAINED TO SUBSEQU ENT ASSESSMENT YEARS. ON AN ANALYSIS OF THE DETAILS, H E OBSERVED THAT A SUM OF RS.5,23,342/- IS THE EXPENSES MEANT FOR MA RCH, 2005 ON WHICH TDS OF RS.93,342/- WAS DEDUCTED. ACCORDINGLY , HE ALLOWED RS.6,20,640/- AND TREATED RS.18,62,049/- PERTAINING TO SUBSEQUENT YEARS. THE LD.AO THEREAFTER OBSERVED TH AT TYPE OF ITA NO.1309/AHD/2012 AND 2 OTHERS 17 SUPPORT SERVICES AVAILED BY THE ASSESSEE ARE NOT ES SENTIAL FOR INDIAN OPERATIONS. HE OBSERVED THAT SOME OF THE SE RVICES WERE PROVIDED BY THE AE RELATED TO IMPLEMENTATION OF CER TAIN US LAWS AND THESE WERE NOT REQUIRED AS SUCH FOR AN INDIAN E NTITY. THEREFORE, HE DISALLOWED. HE WORKED OUT 20% OF THE MANAGEMENT FEES FOR DISALLOWANCE. HE DISALLOWED IN THIS WAY, A SUM OF RS.11,27,56/- WHICH IS 20% OF RS.56,37,578/-. 18. DISSATISFIED WITH THIS ACTION OF THE TPO, THE A SSESSEE WENT IN APPEAL BEFORE THE LD.CIT(A). THE LD.CIT(A) HAS CON FIRMED THE DISALLOWANCE OF MANAGEMENT FEES OF RS.6,40,712/- BE ING NOT PERTAINING TO THIS YEAR. WITH REGARD TO INVOICE BE ARING NO.1800000367, THE LD.CIT(A) HAS OBSERVED THAT A SU M OF RS.24,84,733/- WAS ALLEGED TO HAVE BEEN PAID BY THE ASSESSEE, BUT IN FACT THE ASSESSEE HAS BOOKED A SUM OF RS.6,2 0,684/- ONLY IN F.Y.2004-05. REMAINING AMOUNT I.E. RS.18,62,049 /- WAS NOT BOOKED BY THE ASSESSEE, THEREFORE, IT COULD NOT BE DISALLOWED. THE LD.CIT(A) HAS DELETED THIS DISALLOWANCE MADE BY THE TPO. AS FAR AS 20% OF THE BALANCE MANAGEMENT FEE DISALLOWED BY THE TPO IS CONCERNED, THE LD.CIT(A) HAS CONFIRMED THE ACTION O F THE TPO. BEFORE US, THE LD.COUNSEL FOR THE ASSESSEE CONTENDED THAT AS FAR AS EXPENDITURE OF RS.6,40,712/- IS CONCERNED, IT PERTA INS TO SUPPORT SERVICES RECEIVED FOR F.Y.2003-04. THEREFORE, THE EXPENDITURE HAS BEEN CRYSTALLIZED AS LIABILITY WHICH HAS BEEN CLAIM ED IN THIS ASSESSMENT YEAR. WITH REGARD TO DISALLOWANCE OF 20 % OF THE BALANCE MANAGEMENT FEE IS CONCERNED THE LD.COUNSEL FOR THE ASSESSEE CONTENDED THAT IN A.Y.2009-10, DRP ACCEPTE D ITS CONTENTIONS AND DIRECTED THE TPO NOT TO MAKE ANY AD JUSTMENT ON SUCH ADHOC BASIS BECAUSE HE HAS NOT MADE ANY ANALYSIS ON ITS ALP. HE EMPHASISED THAT THERE IS NO SUCH MECHANISM PROVIDED IN ITA NO.1309/AHD/2012 AND 2 OTHERS 18 THE ACT FOR ADHOC DISALLOWANCE. HE ALSO RELIED UPO N THE ORDER OF THE CHENNAI BENCH IN THE CASE OF DCIT VS. FLAKT IND IA LTD., ITA NO.1032/MDS/2014. 19. THE LD.COUSNEL FOR THE ASSESSEE FURTHER CONTEND ED THAT IN ADDITIONAL GROUND OF APPEAL, THE ASSESSEE HAS PLEAD ED THAT IF AT ALL ANY ADJUSTMENT IS MADE ON THE MANAGEMENT FEES THEN CORRESPONDING ADJUSTMENT SHOULD BE MADE WHILE COMPU TING THE OPERATIVE MARGIN (OP DIVIDED BY TC) OF CHENNAI UNIT . ON THE OTHER HAND, THE LD.DR RELIED UPON THE ORDER OF THE CIT(A). 20. ON DUE CONSIDERATION OF THE ABOVE FACTS AND CIR CUMSTANCES, WE FIND THAT AS FAR AS TAKING ALP AT NIL WITH REGAR D TO THE FEES PAID TOWARDS INVOICE NO.DHQ007108 VIZ. BRUSSEL MANAE MENT FEES IS CONCERNED, THIS EXPENDITURE DOES NOT PERTAIN TO THIS ASSESSMENT YEAR. THEREFORE, THE LD.REVENUE AUTHORITIES HAVE R IGHTLY HELD THAT IT IS NOT ALLOWABLE IN THIS YEAR. THE ASSESSEE HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTANCY. IT SHOULD HAVE M ADE A PROVISION IN THE EARLIER YEAR. FINDING OF THE CIT( A) ON THIS ASPECT IS UPHELD. AS FAR AS 20% OF THE BALANCE MANAGEMENT FEE IS CONCERNED, IN THE ASSESSEES OWN CASE, DRP HAS GIVE N DIRECTION FOR DELETING SUCH ADHOC ADJUSTMENT OF MANAGEMENT FEES BECAUSE, THE TPO WAS REQUIRED TO DETERMINE ALP OF THE INTERNATIO NAL TRANSACTION WITH ITS AE. THERE IS NO SUCH MECHANISM TO MAKE DI SALLOWANCE ON ADHOC BASIS AT 20% OF THE VALUE OF TRANSACTION. EITHER TRANSACTION IS AT ALP OR IT IS TO BE RE-DETERMINED AFTER TAKING INTO CONSIDERATION METHOD OF ACCOUNTANCY AND OTHER COMPA RABLE CASES. IT IS ALSO IMPORTANT TO NOTE THAT REVENUE HAS NOT F ILED APPEAL AGAINST THE DIRECTION OF DRP IN THE ASSTT.YEAR 2009 -10. ITA NO.1309/AHD/2012 AND 2 OTHERS 19 THEREFORE, WE DELETE THE ADHOC DISALLOWANCE AT 20% OUT OF THE BALANCE MANAGEMENT FEES. 21. SINCE WE HAVE ACCEPTED THE STAND OF THE ASSESSE E WITH REGARD TO ITS CLAIM ON MANAGEMENT FEES EXCEPT A PAR T AMOUNT OF RS.6,40,712/- WE HAVE REMITTED BACK THE DETERMINATI ON OF ALP OF EXPORTS MADE BY THE CHENNAI UNIT. THE LD.TPO SHALL KEEP IN MIND THE IMPACT OF ADJUSTMENT OF RS.6,40,716/- IN THE MA NAGEMENT FEES WHILE DETERMINING THE OPERATIVE PROFIT/TOTAL C OST IN THE CHENNAI UNIT. 22. NOW WE TAKE UP ITA NO.1003/AHD/2016: 23. GRIEVANCE OF THE ASSESSEE IN THIS APPEAL RELATE S TO CONFIRMATION OF PENALTY LEVIED UNDER SECTION 271(1) (C) OF THE ACT. THE LD.AO HAS OBSERVED THAT IN THE ASSESSMENT ORDER DATED 30.12.2008, THERE WERE THREE ADDITIONS MADE TO THE TOTAL INCOME OF THE ASSESSEE FOR WHICH HE INITIATED PENALTY PROC EEDINGS. THESE ADDITIONS ARE - I) UPWARD ADJUSTMENT OF ARM LENGTH PRICE RS.2,21,04,72/ - II) DEDUCTION U/S.10B RS.1,83,82,531/- III) BAD DEBTS RS. 44,74,000/- HE OBSERVED THAT AFTER INITIATION OF THE PENALTY IN THE ASSESSMENT ORDER, THE LD.CIT(A) HAS REDUCED THESE ADDITIONS AN D DELETED THE DISALLOWANCE OF DEDUCTION CLAIMED UNDER SECTION 10B. IN OTHER WORDS, THE LD.CIT(A) HAS GRANTED RELIEF OF RS.1,83, 82,531/-. THE AO THEREAFTER INITIATED PENALTY FOR TWO ITEMS VIZ. I) ARM LENGTH PRICE : RS.2,06,30,624/- II) DEDUCTION U/S.10B : RS. 65,00,258/- ITA NO.1309/AHD/2012 AND 2 OTHERS 20 24. WITH THE ASSISTANCE OF THE LD.REPRESENTATIVES, WE HAVE GONE THROUGH THE RECORD CAREFULLY. AS FAR AS FIRST ITEM IS CONCERNED, I.E. ADJUSTMENT MADE IN THE ALP OF INTERNATIONAL TRANSAC TION, WE HAVE REMITTED THIS ISSUE TO THE FILE OF THE AO FRESH ADJ UDICATION. WE FIND THAT SUB-CLAUSE (III) OF SECTION 271(1)(C) PROVIDES MECHANISM FOR QUANTIFICATION OF PENALTY. IT CONTEMPLATES THAT TH E ASSESSEE WOULD BE DIRECTED TO PAY A SUM IN ADDITION TO TAXES, IF ANY, PAYABLE HIM, WHICH SHALL NOT BE LESS THAN BUT WHICH SHALL NOT EXCEED T HREE TIMES THE AMOUNT OF TAX SOUGHT TO BE EVADED BY REASON OF CONC EALMENT OF INCOME AND FURNISHING OF INACCURATE PARTICULARS OF INCOME. IN OTHER WORDS, THE QUANTIFICATION OF THE PENALTY IS DEPENDED UPON THE ADDITION MADE TO THE INCOME OF THE ASSESSEE. SINCE IN THE PRESENT CASE, ISSUE OF ADDITION QUA ALP PRICE ON WHICH IMPUGNED PENALTY HAS BEEN MADE S ET ASIDE TO THE FILE OF THE LOWER AUTHORITIES FOR FRESH ADJUDICATIO N, IMPOSITION OF PENALTY IS ALSO SET ASIDE TO THEIR FILES TO BE DECIDED AFRE SH ON THE BASIS OF OUTCOME IN SET ASIDE PROCEEDINGS BASIS. AFTER THE OUTCOME OF THE SET PROCEEDINGS, IT IS OPEN TO THE LD.REVENUE AUTHORITI ES WHETHER TO INITIATE PENALTY OR NOT UNDER SECTION 271(1)(C). THUS, THI S GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 25. AS FAR AS SECOND ITEM IS CONCERNED, WE HAVE DIS CUSSED THIS ISSUE IN THE QUANTUM ORDER. THE ASSESSEE HAS CLAIM ED DEDUCTION UNDER SECTION 10B OF THE ACT AT RS.1,83,52,531/-. H OWEVER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT FIL ED A LETTER DATED 29.12.2008 VIDE WHICH IT HAS CLAIMED DEDUCTIO N UNDER SECTION 10B ON THE INTEREST INCOME OF RS.65,00,258/- . THIS DEDUCTION WAS NOT ALLOWED TO THE ASSESSEE. THE ASS ESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD.CIT(A) AND THE C IT(A) HAS UPHELD DISALLOWANCE OF THIS DEDUCTION. THE AO HAS INITIATED PENALTY FOR THIS CLAIM AND ULTIMATELY IMPOSED THE P ENALTY. ITA NO.1309/AHD/2012 AND 2 OTHERS 21 26. IT IS PERTINENT TO NOTE THAT THIS WAS A CLAIM M ADE BY THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDING S BY WAY OF A LETTER. THE ASSESSEE WAS UNDER THE IMPRESSION THAT INTEREST INCOME WOULD ALSO BE ELIGIBLE FOR GRANT OF DEDUCTIO N UNDER SECTION 10B WHICH ULTIMATELY NOT ACCEPTED. IT HAS DISCLOSED ALL THE RELEVANT FACTS AND NOT MADE THIS CLAIM IN THE RETUR N OF INCOME. THE AO HAS ERRED IN OBSERVING THAT THE ASSESSEE HAS FURNISHED INACCURATE PARTICULARS OF INCOME BY CLAIMING INTERE ST INCOME AS EXEMPT. IT IS PERTINENT TO POINT OUT THAT THIS WAS A CLAIM MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS BY WAY OF A LETTER AND IT IS TO BE EXAMINED BY THE AO. THEREFORE, THE DISALLOWANCE DOES NOT CALL FOR VISITING THE ASSESSEE WITH PENALT Y UNDER SECTION 271(1)(C) OF THE ACT. WE CANCEL THE PENALTY QUA CLAIM OF DEDUCTION UNDER SECTION 10B. 27. IN THE RESULT, ITA NO.1312/AHD/2012 IS DISMISSE D. REST OF THE APPEALS I.E. ITA NO.1309/AHD/2012 AND 1003/AHD/ 2016 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE COURT ON 18 TH JULY, 2019. SD/- SD/- (PRADIPKUMAR KEDIA) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER AHMEDABAD; DATED 18/07/2019
