Appeal Details
Counselvise Citation
[2014] 140 COUNSELVISE.COM (IT) 84049 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
8 month(s) 19 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
03-11-2014
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
K
Next Hearing Date
01-09-2014
Assessment Year
2009-2010
Appeal Filed On
13-02-2014
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUM BAI . . , , BEFORE SHRI I. P. BANSAL, JM AND SHRI SANJAY ARORA , AM ./ I.T.A. NO. 1008/MUM/2014 ( / ASSESSMENT YEAR: 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED FORTUNE 2000, 1 ST FLOOR, C-WING, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI-400 051 / VS. DY. CIT-9(2), AAYAKAR BHAVAN, M. K. ROAD, MUMBAI-400 020 ./ ./PAN/GIR NO. AACCN 0274 A ( /APPELLANT ) : ( !' / RESPONDENT ) # $ / APPELLANT BY : SHRI KANCHAN KAUSHAL & SHRI ALISAGAR RAMPURWALA !' # $ / RESPONDENT BY : SHRI S. D. SRIVASTAVA % &'( # )* / DATE OF HEARING : 02.09.2014 +,- # )* / DATE OF PRONOUNCEMENT : 03.11.2014 . / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE ARISING OUT OF IT S ASSESSMENT U/S.143(3) READ WITH DIRECTION U/S.144C(13) BY THE DISPUTE RESOLUTI ON PANEL-II, MUMBAI (DRP FOR SHORT), DATED 17/1/2014, FOR THE ASSESSMENT YEAR (A.Y.) 2009-10. 2. AT THE VERY OUTSET, THE ASSESSEES APPEAL WAS OB SERVED TO BE TIME BARRED BY 332 DAYS, I.E., AS PER THE NOTING BY THE REGISTRY. ON T HIS BEING BROUGHT TO HIS NOTICE, THE LD. AUTHORIZED REPRESENTATIVE (AR), THE ASSESSEES COUN SEL, POINTED OUT TO THE CLARIFICATION ISSUED BY THE ASSESSEE IN THIS REGARD VIDE ITS LETT ER DATED 25.02.2014, PER WHICH THE CORRECT DATE OF COMMUNICATION OF THE ORDER APPEALED AGAINST IS 17.01.2014, AS SPECIFIED IN THE 2 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT CORRECTED FORM-36B (THE RELEVANT APPEAL MEMO), FILE D SINCE, AND NOT 17.01.2013, AS STATED EARLIER. THERE WAS AS SUCH NO DELAY IN PREFE RRING THE APPEAL BEFORE THE TRIBUNAL. THE RECORD WAS PERUSED, TO FIND THE APPEAL IN TIME. THE SATISFACTION OF THE CONDITION OF STAY WAS ALSO FOUND TO HAVE BEEN MET; THE ASSESSEE HAVING MADE PAYMENT OF RS.50 LACS EACH ON 27.03.2014 AND 26.04.2014 (COPY OF THE CHAL LANS ON RECORD). THE HEARING IN THE MATTER WAS ACCORDINGLY PROCEEDED WITH. 3. THE ASSESSEE-COMPANY, INCORPORATED IN JANUARY, 2 005, IS A WHOLLY OWNED SUBSIDIARY OF NOBEL BIOCARE ASIA-AFRICA HOLDING AG (NBH), SWEDEN. THE NOBEL BIOCARE GROUP, IT IS STATED, IS A MEDICAL DEVICES G ROUP AND WORLD LEADER IN INNOVATIVE ESTHETIC DENTAL SOLUTIONS. THE ASSESSEE UNDERTAKES WHOLESALE TRADING OF NBHS DENTAL PRODUCTS/SOLUTIONS IN INDIA, ALSO PROVIDING THE REQ UISITE MARKETING, PRE-SALE/AFTER-SALE SUPPORT AND TRAINING TO CUSTOMERS IN INDIA. THE CUS TOMERS OF NOBEL INDIA ARE DENTAL SURGEONS, PROSTHODONTISTS, PERIODONTISTS, DENTAL LA BORATORIES AND GENERAL DENTISTS PRACTICING BY THEMSELVES OR IN HOSPITALS. IT FILED ITS RETURN OF INCOME FOR THE RELEVANT YEAR ON 31.03.2010 AT A TOTAL INCOME OF RS.29,584/-, AS INCOME FROM OTHER SOURCES, CLAIMING CARRY FORWARD BUSINESS LOSS AT RS.1,50,42,916/-, IN CLUDING UNABSORBED DEPRECIATION AT RS.76,22,509/- (REFER COMPUTATION OF INCOME/COPY ON RECORD). IT REPORTED THE FOLLOWING INTERNATIONAL TRANSACTIONS (ITS) AS PER THE TRANSFE R PRICING (TP) STUDY, QUA WHICH THE ADJUSTMENTS, AS MADE AND CONFIRMED, ARE ALSO LISTED ALONG WITH: (AMT. IN RS.) S. NO. TRANSACTION TRANSACTION AMOUNT METHOD ADOPTED BY ASSESSEE ADJUSTMENT MADE AND SUSTAINED 1 IMPORT OF DENTAL PRODUCTS 15,78,37,304 TNMM 10,58,51,772 2 IMPORT OF CAPITAL ASSETS 20,17,731 CUP NIL 3 BUSINESS DEVELOPMENT SUPPORT EXPENSES 1,57,28,407 TNMM 1,26,03,159 4 RECOVERY OF EXPENSES ON WORLD TOUR 4,09,14,987 CUP 85,99,000 5 REIMBURSEMENT OF PROFESSIONAL TRAINING, TRAVELING AND OTHER EXPENSES 9,52,277 CUP 6,04,911 3 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT IN ADDITION, ANOTHER ADJUSTMENT FOR RS.1,63,31,366/ - IN RESPECT OF BUSINESS DEVELOPMENT EXPENSES WAS MADE AND CONFIRMED. IT IS THESE ADJUST MENTS, APART FROM CERTAIN CORPORATE TAX DISALLOWANCES, THAT ARE THE SUBJECT MATTER OF T HE PRESENT APPEAL. BEFORE, HOWEVER, WE PROCEED TO DISCUSS THE SPECIFICS OF EACH ISSUE, IT WOULD BE RELEVANT TO DELINEATE THE BACKGROUND FACTS OF THE CASE, WHICH FORM THE BACKDR OP UNDER WHICH THE SAME WOULD STAND TO BE DECIDED, BESIDES BEING, AS WE SHALL PRE SENTLY SEE, OF CRUCIAL RELEVANCE. BACKGROUND FACTS 4. THE RELATIONSHIP BETWEEN THE ASSESSEE AND ITS PR INCIPAL NBH (ALSO REFERRED TO IN THIS ORDER AS THE ASSOCIATE ENTERPRISE (AE) OR TH E SUPPLIER) IS REGULATED BY A DISTRIBUTION AGREEMENT (DA). THE FIRST, DATED 14.03 .2005 (PB PGS.189-192), WAS ORIGINALLY VALID UP TO DECEMBER 31, 2007. THE SAME, AS IT APPEARS, WAS AGREED TO BE CONTINUED TILL THE ADOPTION OF THE NEW AGREEMENT, E FFECTIVE 01.10.2008 (PB PGS.194-214). THE RELEVANT FISCAL, I.E., FINANCIAL YEAR (F.Y.) 20 08-09, IS THUS GOVERNED BY TWO AGREEMENTS. THE LETTER OF CONTINUITY DATED 10.01.20 12 (PB PG. 193), HOWEVER, STATES THE FIRST AGREEMENT TO BE EFFECTIVE UP TO DECEMBER, 200 8. AS PER THE ORIGINAL AGREEMENT, ALL THE BUSINESS AND MARKET RISKS ARE TO BE BORNE BY TH E PRINCIPAL-NHB. THE BASIC CONTOURS AND THE ESSENTIAL ATTRIBUTES OF THE RELATIONSHIP CO NTINUE UNABATED IN THE SECOND AGREEMENT, WITH, RATHER, THE SUPPLIER ASSUMING A LARGER BASKET OF FUNCTIONAL RISKS, WHICH ARE UNDERSTOOD AS OF ESSENCE TO THE AGREEMENT (ARTICLE 14). BEGINNING 2007, THE SUPPLIER IS TO ENSURE THE DISTRIBUTOR AN OPERATING MARGIN IN THE R ANGE OF 2% TO 4% (OF THE TURNOVER). THIS IS TO BE BENCH-MARKED AGAINST THE OPERATING MA RGIN OF COMPARABLE UNCONTROLLED DISTRIBUTORS AND THE EXCESS (OVER 4%) OR SHORTFALL (I.E., BELOW 2%) IS TO BE PAID TO OR, AS THE CASE MAY BE, COMPENSATED BY THE SUPPLIER. PER T HE SECOND AGREEMENT, THE PARTIES AGREED TO AGAIN ADJUST THE PRICES SO AS TO ALLOW TH E ASSESSEE-DISTRIBUTOR MARGIN (RECKONED AS EARNINGS BEFORE INTEREST AND TAX (EBIT)) (I.E., ACCORDING TO MUTUALLY AGREED CALCULATIONS) WITHIN A TARGET RANGE (ARTICLE 10.1). THE SAID RANGE IS NOT DEFINED/SPECIFIED THEREIN, THOUGH IS STATED TO HAVE BEEN AGREED AT 4% FOR THE CURRENT YEAR. THE PARTIES BEFORE US, I.E., THE ASSESSEE AND THE REVENUE, HAVE PROCEEDED ON THE BASIS OF THE SAID 4 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT MARGIN, WHICH IS TO BE PAID OR RECEIVED, AS THE CAS E MAY BE, THROUGH CREDIT/DEBIT NOTE TO BE ISSUED BY THE SUPPLIER SUBSEQUENT TO THE CRYSTAL LIZATION OF THE FIGURES AFTER THE CONCLUSION OF THE RELEVANT YEAR (ALSO REFER PARA 11 .3 AND 11.4 OF THE TRANSFER PRICING OFFICER (TPO)S ORDER U/S.92CA(3) DATED 30.11.2012) . WE CHOOSE TO DWELL ON THIS ASPECT OF THE MATTER IN SOME DETAIL AS THE SUBSISTING ARGU MENT OF THE LD. AR DURING HEARING WAS THAT IN-AS-MUCH AS THE ASSESSEE HAS BEEN ALLOWED AL L THE EXPENSES INCURRED BY IT, BY ITS SUPPLIER (AE), ENSURING A DEFINITE MARGIN (WHICH TH E PARTIES REFER TO AS THE ARMS LENGTH MARGIN) THERETO, THE SAME HAVE IN FACT NOT BEEN INC URRED BY THE ASSESSEE, A LIMITED RISK DISTRIBUTOR, BUT BY THE SUPPLIER-AE, SO THAT NO TP ADJUSTMENT OUGHT TO ARISE OR FOLLOW. FINDINGS 5.1 THE ARGUMENT APPEARS TO RUN COUNTER TO THE CLEA R PROVISIONS OF CHAPTER X OF THE ACT. THE ASSESSEE IS THE TESTED PARTY, AND ITS VARI OUS INTERNATIONAL TRANSACTIONS, INVOLVING DIFFERENT ACTIVITIES/FUNCTIONS, ARE TO BE BENCH-MAR KED, PREFERABLY DETERMINING THE ARMS LENGTH PRICE (ALP) FOR EACH OF THEM SEPARATELY. IN FACT, THE ASSESSEE HAS ITSELF SO DONE, SO THAT IT HAS ONLY FOLLOWED THE CORRECT PROCEDURE. ANOTHER ASPECT IN THIS CONTEXT, RAISED ALONG WITH, IS THAT, EVEN SO, THE SAID TRANSACTION/ S BE NOT INDEPENDENTLY EVALUATED IN-AS- MUCH AS ALL THE COSTS, HAVING BEEN CLAIMED AS BUSIN ESS EXPENSES, GO TO DETERMINE ITS OPERATING MARGIN, ON THE ANVIL OR TOUCHSTONE OF WHI CH THE ALP (FOR THE PURCHASE OF DENTAL PRODUCTS) STANDS ASSESSED. THAT IS, THE (INTERNATIO NAL) TRANSACTIONS BY WAY OF IMPORT OF DENTAL PRODUCTS; BUSINESS DEVELOPMENT; RECOVERY OF WORLD TOUR (WT) EXPENSES; AND REIMBURSEMENT OF EXPENSES, DO NOT RETAIN ANY INDEPE NDENT IDENTITY IN-AS-MUCH AS THEY ALL FORM PART OF THE OPERATING COSTS, WHICH STAND TO BE EVALUATED ON THE BASIS OF ITS OPERATING MARGIN FOR THE RELEVANT PERIOD. THE ASSESSEE POSTIN G A SHORTFALL IN THE OPERATING MARGIN WITH REFERENCE TO THE TARGETED 4%, THE SAME WAS ALL OWED TO IT BY WAY OF WHAT IS CALLED ASSISTANCE FROM AE, RECEIVED AT RS.1683.09 LACS F OR THE CURRENT YEAR. THE SAME (ASSISTANCE), ACCORDINGLY, STANDS RIGHTLY TAKEN INT O ACCOUNT WHILE COMPUTING THE ALP OF THE PURCHASE OF THE DENTAL PRODUCTS. AS SUCH, THE N ON-REPORTING OF THE ASSISTANCE AS AN INDEPENDENT INTERNATIONAL TRANSACTION, WHICH IT QUA LIFIES AS, HAVING BEEN RECEIVED FROM AN 5 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT AE, WOULD BE OF NO MOMENT, BEING FACTORED INTO IN C OMPUTING THE OPERATING MARGIN, AND ON THE BASIS OF WHICH THE SAME HAS IN FACT BEEN DET ERMINED. THIS FORMED THE SUBSTRATUM OF THE ASSESSEES ARGUMENT BEFORE US. WE ARE, SUBJECT TO THE CAVEAT OR THE RIDER THAT EAC H OF THE EXPENSES, QUA WHICH ADJUSTMENT HAS BEEN MADE, STAND IN FACT DEBITED TO THE OPERATING STATEMENT (P & L ACCOUNT), AND CLAIMED AS AN EXPENSE, SO THAT IT GET S INCLUDED IN THE COMPUTATION OF OPERATING LOSS, WORKED OUT BY THE TPO AT RS.6,57,87 ,920/-, IN AGREEMENT WITH THE ASSESSEES CLAIM. FURTHER, WHERE AND TO THE EXTENT SO, AS WHERE THE AMOUNT IS DEBITED DIRECTLY TO THE ACCOUNT OF THE PRINCIPAL (FOR BEING RECEIVED), I.E., TREATED AS ON CAPITAL ACCOUNT, THE SAME SHALL STAND TO BE ADDED BOTH AS A N EXPENSE AND AS A RECEIPT. ALSO, SOME ADJUSTMENTS, AS FOR EXAMPLE FOR RS.31,25,248/-, BEI NG REGISTRATION FEE, WHICH STANDS REDUCED WHILE COMPUTING THE ALP OF PARTICIPATION FE E (INCURRED AT RS.1,50,29,094/-), FORMING PART OF THE BUSINESS DEVELOPMENT EXPENDITUR E, WOULD REQUIRE BEING FACTORED IN COMPUTING THE ALP OF THE PURCHASE OR ASSISTANCE, WH ICHEVER WAY ONE MAY CHOOSE TO SEE IT. SIMILARLY, THE TP ADJUSTMENT OF RS.85.99 LACS ( IN RESPECT OF HONORARIUM PAID TO DOCTORS, COMPRISING OF THREE AMOUNTS, I.E., RS.26.4 6 LACS, RS.31.185 LACS AND RS.28.35 LACS), WHICH WE OBSERVE STANDS MADE (AND CONFIRMED) IN THE ABSENCE OF THE ASSESSEE BEING ABLE TO SHOW OF THE SAME BEING A PART OF THE RECOVERY OF PROFESSIONAL EXPENSES AT RS.89,88,819/-, ITSELF FORMING PART OF RECOVERY OF WT EXPENSES (FOR RS.409.15 LACS), SINCE RECOVERED FROM THE AE, WOULD OBTAIN IF (AND T O THE EXTENT) NOT SHOWN TO BE SO, I.E., BY THE ASSESSEE BEFORE THE ASSESSING OFFICER (A.O.) , WHILE GIVING APPEAL EFFECT TO THIS ORDER (REFER PARA 7.3 OF THE TPOS ORDER). PER CONTRA , IN THE EVENT OF THE ASSESSEE BEING ABLE TO DEMONSTRATE THE SAME, NO ADJUSTMENT SHALL S URVIVE, TOWARD WHICH THE A.O. SHALL ISSUE A DEFINITE FINDING UPON EXAMINING ALL SUCH MA TERIAL AS THE ASSESSEE MAY FURNISH AND RELY UPON BEFORE HIM IN THE MATTER. 5.2 COMING BACK TO THE DISCUSSION QUA THE ARGUMENT AFORE-STATED, OUR REASON FOR BEING IN AGREEMENT, I.E., IN PRINCIPLE, WITH THE ASSESSEE ON THIS ASPECT OF THE MATTER IS TWO-FOLD. WE ARE UNABLE TO FIND ANY DIFFERENCE BETWEEN ANY ON E OPERATING EXPENSE INCURRED BY THE 6 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT ASSESSEE, I.E., ENTAILING PAYMENT TO THE SUPPLIER, AND ANOTHER. THIS IS AS ALL SUCH PAYMENTS, FORMING PART OF THE ASSESSEES OPERATING EXPENSES, WOULD STAND TO BE TAKEN INTO ACCOUNT, ALONG WITH THE OTHER NON-AE EXPENDITURE INCURRED BY THE ASSESSEE, IN RECKONING THE EBIT MARGIN AGREED TO BE ALLOWED BY THE PRINCIPAL TO THE ASSESSEE. THE PAYMENTS, IRRESPECTIVE OF THEIR NATURE, BEING ON REVENUE ACCOUNT, IMPACT T HE OPERATING MARGIN DIRECTLY AND, THEREFORE, COALESCE INTO ONE, RESULTANT SUM THAT WO ULD STAND TO BE RECEIVED BY THE ASSESSEE FROM THE AE IN CASE OF ANY SHORTFALL THEREIN (MARGI N) WITH REFERENCE TO THE TARGET MARGIN OF 4%. IT ACCORDINGLY BECOMES A ZERO SUM GAME FOR THE AE, WHICH THEREFORE HAS NO MOTIVATION OR PURPOSE IN OVER-PRICING GOODS TO THE ASSESSEE OR TO OTHERWISE SYPHON OFF THE ASSESSEES PROFITS THROUGH BUSINESS PAYMENTS TH ERETO IN ANY MANNER. FURTHER, IT IS THIS MARGIN WHICH IS BENCH-MARKED AGAINST THAT EXHIBITED BY THE COMPARABLES. THAT IS, THE METHOD ADOPTED FOR THE RESIDUARY (PURCHASE) TRANSAC TION WOULD APPLY WITH EQUAL JUSTIFICATION FOR THE OTHER ITS UNDER REFERENCE. PUT DIFFERENTLY, THE ONLY APPROPRIATE METHOD TO BE ADOPTED FOR EVALUATING ALL THE INTERNA TIONAL TRANSACTIONS UNDER REFERENCE, BEING WITH THE SAME AE, ITS LONE SUPPLIER, OF WHIC H THE ASSESSEE IS A DISTRIBUTOR, IS THE TNMM AT ENTITY LEVEL . WE ARE CONSCIOUS OF THE FACT, WHEN WE SAY SO, THAT THE ALP IN ALMOST ALL THE (NON- PURCHASE) TRANSACTIONS HAS BEEN DETERMINED AT NIL E ITHER IN VIEW OF THE ASSESSEE BEING NOT ABLE TO FURNISH THE COMPLETE DETAILS OR BECAUSE THE REVENUE IS OF THE VIEW THAT THERE WAS NO ECONOMIC JUSTIFICATION FOR THE ASSESSEE TO HAVE INCURRED THE RELEVANT EXPENDITURE. WE CONSIDER THIS AS OF LITTLE CONSEQUENCE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE REASON IS SIMPLE. ANY VARIATION, IF ANY, IN THE SUM AT WHICH ANY IT IS TRANSACTED, WHICH IS WHAT ANY ADJUSTMENT SEEKS OR PURPORTS TO DO, BRINGI NG IT AT PAR WITH AN ARMS LENGTH VALUE (ALP), WOULD GET REFLECTED IN THE SHORTFALL IN THE ASSISTANCE THAT THE AE IS OBLIGED TO PROVIDE TO THE ASSESSEE UNDER THE DA. HOW WOULD THEN, ONE MAY ASK, IT MATTER AS TO AT WHAT VALUE THEIR INDIVIDUAL ALP IS FIXED ? THE PAYMENTS TO, AND THE ASSISTANCE FROM THE AE HAVING CRYSTALLIZED, IT IS THE OPERATING MARGIN AS OBTAINING THAT IS TO BE DETERMINED, AND ON THE ADEQUACY OF WHICH, I.E., WITH REFERENCE TO THAT OF THE COMPARABLES, RECKONED ON AN AVERAGE, THAT THE TP ADJUSTMENT, IF ANY, SHALL A RISE. AS SUCH, THE REASON/S FOR EFFECTING 7 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT THE ADJUSTMENT NOTWITHSTANDING, IN OUR VIEW THE TNM M AT THE ENTITY LEVEL, AS AFORE- STATED, SHALL SUBSTITUTE AS THE MOST APPROPRIATE ME THOD FOR ALL THE IMPUGNED INTERNATIONAL TRANSACTIONS IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 5.3 WE NEXT CONSIDER THE VALIDITY OF THE COMPARABLE S, THE MEAN OF WHICH WORKS TO 8.88%, AS AGAINST THE STATED 4% IN THE ASSESSEES C ASE. IN THIS REGARD, THE ASSESSEE HAS TAKEN THE FOLLOWING OBJECTIONS: A) THE ASSISTANCE FROM AE, INSTEAD OF AN ITEM OF INCOM E, AS CONSIDERED BY THE TPO, SHOULD BE AS A REDUCTION FROM THE COSTS IN-AS- MUCH AS IT GOES TO REDUCE THE PAYMENT TO THE AE, WHICH THEREFORE IS TO BE CON SIDERED AT NET, I.E., NET OF SUM/S RECEIVED THERE-FROM. THOUGH THE SAME WOULD HA VE NO BEARING ON THE OPERATING MARGIN, I.E., IN ABSOLUTE TERMS, IT ASSUM ES SIGNIFICANCE WHEN CONSIDERED IN TERMS OF PERCENTAGE OF REVENUE. B) INAPPROPRIATENESS OF THE COMPARABLES, TOWARD WHIC H IT HAS ALSO RELIED ON CASE LAW (ADDUCING A COMPILATION OF THREE DECISIONS BY T HE TRIBUNAL), TO THE EFFECT THAT WHERE SEGMENTAL RESULTS ARE NOT AVAILABLE, THE RELEVANT COMPANY WOULD STAND TO BE EXCLUDED FROM THE SET OF COMPARABLES. WE SHALL CONSIDER EACH OF THE OBJECTIONS IN SERIATI M: A) WE FIND SUBSTANCE IN THE ASSESSEES CONTENTION. THE REASON IS AGAIN SIMPLE, AND HAS ITS BASIS IN THE NATURE OF THE PAYMENT/S, WHICH IS QUA COST/S (OF THE ASSESSEE). THE ASSESSEES REVENUE STREAM IS FROM IT S CUSTOMERS IN INDIA. IT DOES NOT SELL ANY GOODS, OR RENDERS ANY SERVICES, TO ITS AE, BUT IMPORTS GOODS THERE- FROM AND, BESIDES, FOR THE CURRENT YEAR HAS ALSO IN CURRED SOME EXPENSES, ENTAILING PAYMENT THERETO, WHICH IT CLAIMS TO BE FO R THE PURPOSES OF ITS BUSINESS. THE DA PROVIDES FOR THE SUPPLIER TO BEAR ALL THE SUBSTANTIVE RISKS AND, RESULTANTLY, THE COSTS. IT IS FURTHER REQUIRED TO C ONTRIBUTE TOWARD THE LOSSES OF THE ASSESSEE-DISTRIBUTOR SUSTAINED IN PENETRATING THE I NDIAN MARKET. THE PRICE OF THE GOODS (DENTAL PRODUCTS), WHICH CONSTITUTES THE PRIN CIPAL ECONOMIC TRANSACTION BETWEEN THE ASSESSEE-DISTRIBUTOR AND THE AE, IS FIX ED IN ADVANCE, CONSIDERING THE PROJECTED SALES, BUDGETED COSTS, ETC. FOR THE Y EAR. WHERE, HOWEVER, THE PROFIT FALLS BELOW A PREDEFINED TARGET MARGIN RATE (4% FOR THE CURRENT YEAR), THE AE IS TO COMPENSATE THE ASSESSEE. THE SAME, ACCORDI NGLY, IS ONLY TOWARD AN ABATEMENT OF COSTS, OR REDUCTION THEREIN TO THAT EX TENT. THE ASSESSEES MARGIN SHALL BE ACCORDINGLY COMPUTED BY TREATING THE ASSIS TANCE FROM AE AS TOWARD A REDUCTION IN ITS OPERATING COSTS. B) THERE IS, EVEN AS CLARIFIED DURING HEARING, NO DISP UTE IN PRINCIPLE. THE COMPARABILITY SUFFERS AND IS RENDERED INAPPOSITE WH ERE SEGMENTED RESULTS, 8 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT WHICH ALONE ARE RELEVANT AND, THEREFORE, ARE TO BE COMPARED, ARE NOT AVAILABLE. THE MATTER IS THUS PRIMARILY FACTUAL, CONCERNING TH E APPLICATION OF THIS PRINCIPLE, TOWARD WHICH THE ASSESSEE HAS RELIED ON, AS AFORE-STATED, THREE DECISIONS BY THE TRIBUNAL. WE ENLIST THE LIST OF TH E COMPARABLES; THE ASSESSEE OBJECTING TO THE LAST TWO: SR. NO. NAME OF COMPARABLE COMPANIES PLI (%) 1 HICKS THERMOMETERS (INDIA) LTD. 4.56 2 SATAYTEJ COMMERCIAL COMPANY LTD. 0.55 3 ADS DIAGNOSTICS LTD. 21.80 4 ADVANCED MICRONIC DEVICES LTD. 8.60 5 ARITHMETIC MEAN 8.88 THE ASSESSEES OBJECTIONS, ALONG WITH REASON/S FOR ITS NON-ACCEPTANCE, APPEAR AT PARA 4 (PGS.10-11) OF THE ORDER U/S.144C(5) DATED 19.12.20 03 OF THE DRP. WE DISCUSS EACH OF THEM AS UNDER: I. ADS DIAGNOSTICS LTD. THE COMPANY HAS TWO SEGMENTS, NAMELY MEDICAL DIAGNO STICS SERVICES AND TRADING ACTIVITIES. THE TRADING, WHICH IS ALSO IN T HE HEALTH CARE SEGMENT, IS OF HIGH-END MEDICAL EQUIPMENTS, VIZ. BONE DENSTIMETERS, DIGITI ZERS, MAMMOGRAPHIC EQUIPMENTS. THE OTHER GROUND ON WHICH THE ASSESSEE SEEKS TO DISTINGUISH ITS CASE IS THAT THE SAID COMPANY HAS A LSO COMMISSION INCOME. AS SUCH, WITHOUT PREJUDICE, EVEN IF THE SAID COMPANY I S CONSIDERED AS A COMPARABLE, THE SAID INCOME OUGHT TO BE EXCLUDED WH ILE DRAWING THE COMPARISON, DOING WHICH WOULD REDUCE ITS INCOME TO 1.36%. THE SAME DID NOT FIND FAVOUR WITH THE REVENUE AS THE SAID COMPANY WA S ALSO ENGAGED IN DISTRIBUTION OF MEDICAL DEVICES AND EQUIPMENTS. THE COMMISSION INCOME WAS ONLY MARGINAL. WE FIND MERIT IN THE REVENUES CASE. BOTH THE ASSESSEE AND THE COMPARABLE ARE OPERATING IN THE HEALTH CARE SEGMENT , DEALING IN PREMIUM PRODUCTS. THE COMMISSION, IT IS TO BE APPRECIATED, IS ONLY ON THE DISTRIBUTION ACTIVITY (PB PG. 304), SO THAT THE INCOME IS ESSENT IALLY AGAINST SERVICES RELATING TO DISTRIBUTION ACTIVITY. THE ASSESSEES BUSINESS P ROFILE, WHICH ALSO INCLUDES MARKETING, PRE/AFTER SALES AND TRAINING SERVICES, T HUS MATCHES WITH THE COMPARABLE. EVENTS, AS THE WORLD TOUR EVENT, ORGANI ZED BY THE ASSESSEE DURING THE YEAR, ARE ONLY A PART OF ITS EFFORTS TO INCREAS E CUSTOMER AWARENESS AND PRODUCT REACH OF THE PRODUCTS IT SELLS OR DISTRIBUT ES. ITS OBJECTIONS ARE THEREFORE INFIRM. II. ADVANCED MICRONIC DEVICES LTD. 9 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT THE COMPANY HAS TWO SEGMENTS, NAMELY HEALTH CARE AN D INFORMATION TECHNOLOGY, WITH THE RESULTS OF THE HEALTH CARE DIV ISION BEING AVAILABLE, WHERE- UNDER IT PROVIDES MEDICAL EQUIPMENTS TO HOSPITALS, OPERATION THEATERS AND TEACHING INSTITUTIONS. THE ASSESSEE HAS OBJECTED TO THIS COMPARABLE IN VIEW OF THE SAID COMPANY BEING ALSO ENGAGED IN PROVIDING CU STOMER SOLUTIONS FOR CONSTRUCTION OF MODULAR OPERATION THEATRES, AMBULAN CES AND CUSTOMIZED MOBILE UNITS. THE REVENUE DID NOT FIND FORCE THEREIN IN-AS -MUCH AS THE ACTIVITIES OTHER THAN OF THE TRADING SEGMENT HAD NOT YET COMMENCED, SO THAT THE FINANCIAL RESULTS REFLECT ONLY THAT OF THE TRADING ACTIVITY. THE ASSESSEE COULD NOT REFUTE OR REBUT THE SAID FINDING BEFORE US IN ANY MANNER, SO THAT WE DO NOT FIND ANY SUBSTANCE IN ITS OBJECTION. HERE WE MAY ALSO CLARIFY THAT GIVEN THE BROAD RANGE OF THE ASSESSEES ACTIVITIES (AND FUNCTIONS), ITS STATING OF BEING A LIMITED RI SK DISTRIBUTOR IS INTERNALLY INCONSISTENT, IF NOT ANOMALOUS. TO BE FAIR TO IT THOUGH, WE MAY ADD, IT DOES NOT DISPUTE THE COMPARABLES ON THIS SCORE. ACCORDINGLY, BOTH THE AFORESAID COMP ARABLES HAVE BEEN RIGHTLY INCLUDED IN THE LIST OF COMPARABLES BY THE REVENUE, RESULTING I N THE PROFIT LEVEL INDICATOR (PLI), WHICH HAS BEEN ACCEPTED AS THE OPERATING MARGIN ON SALES, AT A MEAN OF 8.88%. THE ASSESSEE HAS RAISED ANOTHER ARGUMENT, I.E., THE FOREIGN EXCHANGE LOSS ARISING TO IT BEING, IN THE MAIN, ON OUTSTANDING LIABILITY/S, THE AE WAS IN TERMS OF THE CONTRACT, I.E., THE FIRST AGREEMENT THE SCOPE HAVING INCREASED ON LY PER THE SECOND AGREEMENT - NOT OBLIGED TO MEET IT, AND WHICH THEREFORE STANDS RIGH TLY EXCLUDED BY THE PARTIES IN COMPUTING THE ASSISTANCE FROM THE AE. THE ARGUMENT IS INVALID. THE PURVIEW OF THE REVENUE IS NOT TO SETTLE THE ACCOUNT BETWEEN THE AS SESSEE AND ITS AE. THE OPERATING MARGIN HAS TO BE COMPUTED ON THE BASIS OF ACTUALS, AND WHICH IS TO BE COMPARED WITH THAT OF THE COMPARABLES, I.E., UNDER TNMM. THE ARGUMENT ACCORDINGLY IS OF NO MOMENT. 5.4 FINALLY, WE MAY ADDRESS ANOTHER PERTINENT ASPEC T OF THE MATTER, ARISING IN THE COURSE OF HEARING. WITH REFERENCE TO THE DECISION B Y THE LARGER BENCH OF THE TRIBUNAL IN THE CASE OF L. G. ELECTRONICS INDIA (P.) LTD. VS. ASST. CIT [2013] 140 ITD 41 (DEL) (SB), IT WAS SUBMITTED ON BEHALF OF THE REVENUE THAT THE SAI D DECISION WOULD ESSTOP THE ASSESSEE FROM TAKING THE ARGUMENT BEING ADVANCED BEFORE US, AS ALSO PRECLUDE ITS ACCEPTANCE BY US. THE TRIBUNAL IN THAT CASE HAD CLEARLY HELD THAT AMP (ADVERTISEMENT, MARKETING AND 10 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT PROMOTION) EXPENSES CONSTITUTE A SEPARATE, INDEPEND ENT INTERNATIONAL TRANSACTION, AND THAT THE REVENUE WAS CORRECT BOTH IN TAKING COGNIZANCE O F THE SAME, I.E., DESPITE THE ASSESSEE NOT REPORTING IT U/S.92E, AS WELL AS DETERMINING IT S COST EMPLOYING THE BRIGHT LINE TEST. WE HAVE PERUSED THE SAID DECISION. IN THE FACTS OF THAT CASE, THE ASSESSEE, A WHOLLY OWNED SUBSIDIARY OF LGK, A KOREA-BASED COMPANY, WAS ENGAGED IN THE MANUFACTURE, SALES AND DISTRIBUTION OF THE LATTERS PRODUCTS. TH E ASSESSEE-COMPANY WAS FOUND BY THE A.O. TO HAVE INCURRED AMP EXPENSES AT 3.85% OF ITS SALES, I.E., FAR IN EXCESS OF THE NORMATIVE 1.39% OBTAINING FOR THE COMPANIES ENGAGED IN THE SAID BUSINESS. UNDER THE CIRCUMSTANCES, HE INFERRED THE EXCESS 2.46% TO BE T OWARD BRAND-BUILDING OF THE PRINCIPAL- AE. IT WAS ON THESE FACTS THAT THE TRIBUNAL IN THAT CASE CONFIRMED THE EXCESS TO CONSTITUTE A SEPARATE AND INDEPENDENT IT, FOR BEING EVALUATED UN DER THE TP LEGISLATION, AS ALSO THEREFORE THE DRPS HOLDING THAT THE ALP OF THE AMP EXPENSES OUGHT TO BE DETERMINED BY INCLUDING THE NORMATIVE MARGIN (OF 13%) ON SUCH COST. THE MATTER WAS HOWEVER REMANDED BACK BY IT FOR CONFIRMING THE VALIDITY OF THE COMPARABLES. THE SAID DECISION, EVEN AS CONTENDED BEFORE US BY T HE LD. AR, IS DISTINGUISHABLE AND NOT APPLICABLE IN THE PRESENT CASE. THE SAME, I F ANYTHING, SUPPORTS THE ASSESSEES CASE. IT IS ONLY THE EXCESS OVER THE NORMATIVE EXPE NDITURE WHICH WAS THE SUBJECT MATTER OF THE EXAMINATION AND ADJUSTMENT. NO SUCH EXERCISE HA S BEEN MADE BY THE REVENUE IN THE INSTANT CASE, WHOSE SOLE CHARGE IS THE LACK OF JUST IFICATION FOR, OR ABSENCE OF ANY ECONOMIC BENEFIT ARISING FROM INCURRING THE RELEVANT EXPENDI TURE. THE ASSESSEE, IN THE CASE AT HAND, IS A TRADER/DISTRIBUTOR, SO THAT THE EXPENDITURE ON PRODUCT PROMOTION FORMS AN INTEGRAL PART OF AND, CONSEQUENTLY, IS OF DIRECT BENEFIT TO ITS BUSINESS, WHICH IT HAS IN FACT ALSO EXHIBITED, I.E., TO THE EXTENT THE CIRCUMSTANCES AD MIT OF. THE TRIBUNAL IN L. G. ELECTRONICS INDIA (P.) LTD. (SUPRA) HAS ITSELF CLARIFIED OF ALL THE AGENTS INVO LVED IN THE MARKETING CHAIN TO BE THE ECONOMIC OWNERS OF THE BRAND. FURTHER, WI TH REGARD TO THE TRIBUNAL HOLDING THAT TNMM IS APPLICABLE QUA EACH IT SEPARATELY, WE MAY CLARIFY THAT OUR DECISIO N DOES NOT IN ANY MANNER IMPINGE ON THE VALIDITY OF THE SAME, I.E ., IN GENERAL, BUT IS QUA THE INAPPLICABILITY OF THE SAME IN THE FACTS AND CIRCUM STANCES OF THE CASE WHEREBY THE AE IS CONTRACTUALLY OBLIGED TO ENSURE A SPECIFIED MARGIN TO THE ASSESSEE (RENDERING EVEN THE 11 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT INCURRING OF THE EXPENDITURE AS OF LITTLE CONSEQUEN CE), THE ADEQUACY OF WHICH STANDS CONFIRMED FOR BEING BENCH-MARKED. AS SUCH, THE SAID ARGUMENT, AS WELL AS THE SAID ORDER, WOULD HAVE NO BEARING ON OUR DECISION. 5.5 THE FOREGOING DECIDES THE ASSESSEES GROUNDS 2 THROUGH 5. 6.1 VIDE ITS GROUNDS 1 AND 6, THE ASSESSEE AGITATE S THE ADJUSTMENT OF BUSINESS DEVELOPMENT EXPENSES AT RS.1,63,31,366/- U/S.92 R/W S.92C, AS WELL AS ITS DISALLOWANCE U/S.37(1) OF THE ACT, AND WHICH ALSO EXPLAINS BOTH, THE ASSESSEES ASSUMING TWO GROUNDS, WITHOUT PREJUDICE TO EACH OTHER, IN ITS RESPECT, AS ALSO OUR CONSIDERING THE SAME SEPARATELY. THE SAID EXPENDITURE, NOT REPORTED AS A N INTERNATIONAL TRANSACTION IN THE PRESCRIBED FORM (3CEB), STANDS INCURRED ON THE COST OF MATERIALS REQUIRED IN THE CONDUCT OF THE WORLD TOUR EVENT ORGANIZED BY THE ASSESSEE D URING THE RELEVANT YEAR IN MUMBAI (FROM APRIL 4, 2008 TO APRIL 6, 2008). THE DETAILS OF THE EXPENSES APPEARS AT PARA 6.3 OF THE TPOS ORDER. THE SAID MATERIAL IS IN THE FORM O F TRAINING MATERIAL AND KITS, WELCOME PACKAGES, ETC. PROVIDED TO THE PARTICIPANTS OF THE WORLD TOUR EVENT, BESIDES OTHER RELEVANT MATERIAL, COSTING A TOTAL OF $3.67 LACS THE IMPUG NED SUM REPRESENTING THE CONVERSION THEREOF IN INDIAN CURRENCY. THE BASIS OF THE REVENU ES ADJUSTMENT, WHICH ALSO FORMS THE REASON FOR THE DISALLOWANCE U/S. 37(1) (REFER PARA 6 (6.1 THROUGH 6.7) AND PARA 7.4 OF THE TPOS AND DRPS ORDER RESPECTIVELY) IS THAT THE SAI D EVENT WAS ORGANIZED ON BEHALF OF THE AE, I.E., TO PROMOTE ITS BRAND/PRODUCTS WORLD-WIDE. THE SAME BENEFITS THE AE IN THE PERFORMANCE OF ITS R&D FUNCTION; DEVELOPMENT OF MA RKETING INTANGIBLES, ETC., SO THAT IT IS THE SOLE BENEFICIARY OF THE CONDUCT OF SUCH EVEN T/S. THERE WAS ACCORDINGLY NO JUSTIFICATION FOR THE ASSESSEE TO INCUR THESE EXPEN SES, VALUING ITS ALP AT NIL. 6.2 WE HAVE ALREADY NOTED THAT ALL THE EXPENDITURE INCURRED BY THE ASSESSEE DURING THE YEAR AND, THEREFORE, INCLUDING ON THE WT EVENT, SHALL FORM PART OF ITS OPERATING STATEMENT FOR THE YEAR, EVEN CLARIFYING THAT EVEN W HERE ANY SUCH EXPENDITURE STANDS DIRECTLY RECOVERED, THE SAME WOULD NEED TO BE INCOR PORATED IN THE OPERATING STATEMENT. THAT IS, ALL SUCH SUMS STAND TO BE INCLUDED IN RECK ONING THE ASSESSEES OPERATING INCOME 12 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT AND, CONSEQUENTLY, THE SHORTFALL IN THE OPERATING M ARGIN WITH REFERENCE TO THE COMPARABLES. FURTHER, WE HAVE FOUND THE REVENUES O BJECTION UNTENABLE IN-AS-MUCH AS THE ASSISTANCE BEING CONTRACTUALLY LINKED TO A PRE- DEFINED MARGIN, IT BECOMES REVENUE NEUTRAL FOR THE ASSESSEE (REFER PARAS 5.1 TO 5.4 OF THIS ORDER). IT ALSO NEEDS TO BE BORNE IN MIND THAT THE REVENUE HAS COMPARED THE ASSESSEES O PERATING RESULTS WITH INDEPENDENT TRADERS/DISTRIBUTORS, AND WHICH WE HAVE VALIDATED. 6.3 THE REVENUE HAVING EFFECTED THE DISALLOWANCE U/ S. 37(1), WE SHALL ALSO CONSIDER THE SAME INDEPENDENTLY ON MERITS. WE, IN T HIS REGARD, ARE COMPLETELY UNABLE TO APPRECIATE THE REVENUES CASE. AS REGARDS THE NON-F URNISHING OF THE DETAILS BY THE ASSESSEE, CITING FINANCIAL IRREGULARITY BY ONE OF I TS EMPLOYEES, THE SAME MAY WELL HAVE ITS BASIS IN FACTS (REFER NOTE ON MISAPPROPRIATION OF F UNDS, FORMING PART OF THE NOTES TO THE ACCOUNTS FOR THE RELEVANT YEAR), EVEN AS WITHOUT DO UBT THE ONUS TO ESTABLISH THE SAME AS WELL AS ITS CLAIM IS ONLY ON THE ASSESSEE. CONTINU ING FURTHER, THE DISALLOWANCE IS WITH REFERENCE TO SPECIFIC EXPENDITURE, DETAILS OF WHICH ARE AVAILABLE, RENDERING THE SAID REASON, FORMING ONE OF THE GROUNDS OF THE REVENUES OBJECTION, AS STATED BY THE DRP, SUPERFLUOUS. IT FURTHER STATES NON-DEMONSTRATION OF ECONOMIC BENEFIT IN INCURRING THESE EXPENSES BY THE ASSESSEE AS THE REASON FOR SUSTAINI NG THE DISALLOWANCE. THE ECONOMIC BENEFIT OF EXPENDITURE MAY FLOW WITH A TIME LAG OR, PERHAPS, EVEN NOT IN A GIVEN CASE, SO THAT THE SAID REASON IS WITHOUT BASIS IN LAW. WHAT THOUGH IS RELEVANT IS THE ECONOMIC JUSTIFICATION. THE ASSESSEE, AS A PART OF ITS BUSIN ESS PROFILE, IS TO MARKET, SALE AND DISTRIBUTE THE PRINCIPALS PRODUCTS, AS WELL AS PRO VIDE TECHNICAL SERVICES RELATED THERETO. THE PARTICIPANTS ARE ALL DOCTORS FROM INDIA. HOW, WE WONDER, THEN, IS THE ORGANIZATION OF AN EVENT, WHICH IS A PART OF THE GLOBAL TRAINING PR OGRAM, IN INDIA, DESIGNED IN A SCIENTIFIC MANNER TO PROVIDE EDUCATION, INCLUDING LIVE DEMONST RATIONS, PRESENTATIONS, INTERACTIVE SESSIONS WITH EXPERTS, ETC. OF SOLUTIONS AND APPLIC ATION OF THE ASSESSEES PRODUCTS, ETC., COULD BE DOUBTED AS TO ITS ECONOMIC JUSTIFICATION, I.E., EVEN IF NO TANGIBLE BENEFIT/S COULD BE EXHIBITED BY THE ASSESSEE ? IN FACT, THE ASSESSEE CLAIMS A QUANTUM INCREASE ( OF NEARLY 55%) IN BOTH ITS SALE AS WELL AS CUSTOMER BASE, I. E., FOR THE RELEVANT YEAR, VIS--VIS THE 13 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT IMMEDIATELY PRECEDING YEAR, WITH THE MOST OF THE NE W CUSTOMERS BEING PARTICIPANTS OF THE SAID EVENT. THE ASSERTIONS HAVE NOT BEEN REBUTTED B Y THE REVENUE IN ANY MANNER. BUSINESS PURPOSE, IT IS EVEN OTHERWISE WELL-SETTL ED, IS A TERM OF WIDE IMPORT (REFER: CIT VS. MALAYALM PLANTATIONS LTD. [1964] 53 ITR 140 (SC)). AN INCIDENTAL THIRD PARTY BENEFIT WOULD NOT OUST THE CLAIM THE CLAIM FOR DEDUCTION U/ S. 37(1). WE, ACCORDINGLY, FIND NO MERIT IN THE REVENUES OBJECTION AND, ACCORDINGLY, ALLOW THE ASSESSEES BOTH THE GROUNDS. 7. GROUND NO. 7 BY THE ASSESSEE CHALLENGES THE DISA LLOWANCE OF PROVISION FOR OBSOLETE AND NON-MOVING INVENTORY. THE ASSESSEE, AS A PART OF ITS ACCOUNTING POLICY, CONSISTENTLY FOLLOWED, HAS MADE A PROVISION FOR NON -MOVING AND SLOW MOVING ITEMS (REFER, THE ASSESSEES REPLY DATED 22.01.2013, REPR ODUCED AT PARA 6.1 OF THE DRAFT ASSESSMENT ORDER). FURTHER, ITS ACCOUNTING POLICY O N INVENTORIES, FORMING PART OF ITS ACCOUNTS, READS AS UNDER: 3.5 INVENTORIES INVENTORIES ARE VALUED AT LOWER OF COST AND NET RE ALIZABLE VALUE. THE COMPARISON OF COST AND NET REALIZABLE VALUE IS MADE ON AN ITEM-BY-ITEM BASIS. COST OF INVENTORIES INCLUDES COST OF PURCHAS E AND ALL OTHER COSTS INCURRED IN BRINGING THEM TO THEIR CURRENT LOCATION AND CONDITION. COST IS DETERMINED ON MOVING WEIGHTED AVERAGE BASIS. THE SAME IS IN CONFORMITY WITH THE ACCOUNTING STAN DARD (AS)-2 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI). FURTHER, WE DO NOT FIND THE SAID PROVISION AMONGST THE OUTSTANDING PROVISIONS AS AT THE YEAR-END IN THE RELEVANT SCHEDULE (13) OF THE ANNUAL ACCOUNTS, IMPLYING THAT THE SAID AMOUNT STANDS REDUCED IN VALUING THE INVENTORIES AS AT THE YEAR-END (WITH THE CORRESPOND ING DEBIT TO THE P & L ACCOUNT). THE SAME CANNOT BE SAID TO A PROVISION IN THE STRICT SE NSE. WHAT THOUGH IS RELEVANT TO EXAMINE IS IF THE ASSESSEE HAS ACTUALLY OBSERVED ITS STATE D ACCOUNTING POLICY, I.E., VALUED THE INVENTORY FOLLOWING THE SAME. THE COST REFERRED TO THEREIN BEING THE HISTORICAL COST, WHICH THEREFORE GETS CRYSTALLIZED UPON INCURRING, THE LOW ER VALUE COULD ONLY BE ON ACCOUNT OF DIMINUTION IN THE NET REALIZABLE VALUE, SO THAT THE RE IS LOSS OF NOT ONLY THE PROFIT AND OPERATING COSTS, WHICH WOULD OTHERWISE STAND TO BE REALIZED ON SALES, BUT ALSO A PART OF THE 14 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT ACQUISITION COST. CLEARLY, NO SUCH EXERCISE HAS BEE N MADE NOR DO WE FIND FURNISHING OF ANY DETAILS IN ITS RESPECT BY THE ASSESSEE IN SUBST ANTIATION OF ITS CASE. IN FACT, AS WE OBSERVE, THE DROP IN THE SALE VALUE (RS.7.74 LACS), SEPARATELY PROVIDED, FORMS ONLY A PART OF THE TOTAL PROVISION OF RS.70.65 LACS, SO THAT TH E BASIS FOR THE BALANCE, STATED TO BE A PROVISION TOWARD NON-MOVING AND SLOW ITEMS, WOULD N EED TO BE ASCERTAINED AND VERIFIED. THIS WOULD ALSO MEET THE REVENUES OBJECTION, WHICH , IN ESSENCE, STATES OF THE PROVISION BEING CONTINGENT AND NOT BASED ON FACTS. IN THIS VI EW OF THE MATTER, WE ONLY CONSIDER IT FIT AND PROPER TO RESTORE THIS MATTER BACK TO THE FILE OF THE A.O. FOR AN EXAMINATION AND DECISION ON MERITS; THE LEGAL ASPECT OF THE MATTER BEING WELL-SETTLED, AND TOWARD WHICH THE ASSESSEE HAS RELIED ON SOME CASE LAW AND, FURTHER, ON WHICH WE OBSERVE NO DISPUTE IN PRINCIPLE. WE DECIDE ACCORDINGLY. 8. GROUND NO. 8 BY THE ASSESSEE DISPUTES, SIMILARLY , THE PROVISION FOR SALES RETURN, MADE AT RS.185.36 LACS. THE SAME IS STATED TO BE ON THE BASIS OF THE EMPIRICAL DATA FOR THE LAST THREE YEARS, SO THAT IT IS FACT, AS WELL AS, E VIDENCE BASED; FURTHER RELYING ON THE DECISION IN THE CASE OF CHAINRUP SAMPATRAM VS. CIT [1953] 24 ITR 481 (SC); BHARAT EARTH MOVERS VS. CIT [2000] 245 ITR 428 (SC); AND ROTORK CONTROLS INDIA (P) LTD. VS. CIT [2009] 314 ITR 62 (SC). AS IT WOULD APPEAR TO US, T HE SALE RETURNS ARISE ONLY ON THE EXERCISE OF THE OPTION THERE-FOR EXTENDED TO THE CU STOMERS THROUGH AND IN THE FORM OF PRODUCT WARRANTY AGAINST MANUFACTURING DEFECT/S. TH E SAME WOULD THEREFORE BE BACKED BY CORRESPONDING CLAIM BY THE ASSESSEE ON ITS PRINCIP AL, WHO IS IN FACT OBLIGED TO ENSURE A PARTICULAR RETURN/MARGIN, WHICH WOULD ONLY BE AFTER EXCLUDING COSTS, INCLUDING THE LOSS ON THE GOODS RETURNED. FURTHER, EVEN OTHERWISE, A SALE S RETURN IMPLIES THE RETURN OF CORRESPONDING GOODS, WHICH WOULD REQUIRE BEING VALU ED (AT COST OR NET REALIZABLE VALUE, WHICHEVER IS LESS), SO THAT THE PROVISION WOULD ONL Y BE FOR THE DIFFERENCE BETWEEN THE TWO SETS OF FIGURES. THE RELEVANT DETAILS, OR FACTS IN RELATION THERETO, ARE NOT ON RECORD. AGAIN, WE FIND FROM THE COPY OF THE SALE ACCOUNT F OR THE RELEVANT YEAR, FURNISHED DURING THE COURSE OF HEARING, THE ASSESSEE TO HAVE REVERSED THE PROVISION MADE AS ON 31.03.2008, I.E., THE IMMEDIATELY PRECEDING YEAR-EN D, AT RS.170 LACS. THE ADDITIONAL 15 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT PROVISION MADE FOR THE YEAR WOULD ONLY BE THE DIFFE RENCE BETWEEN THE TWO PROVISIONS, I.E., RS.15.36 LACS, AND WHICH ONLY COULD THEREFORE BE DI SALLOWED. AGAIN, THE PROVISION HAVING BEEN REVERSED IN FULL, AND WHICH WOULD ORDINARILY B E (OR IS TO BE) ABSORBED BY THE ACTUAL SALE RETURNS DURING THE YEAR, THE QUESTION THAT ARI SES IS AS TO WHERE AND HOW THE SAID SALE RETURNS, PROVISION FOR WHICH HAD BEEN MADE, STAND A CCOUNTED FOR. WE, ACCORDINGLY, ONLY CONSIDER IT FIT AND PROPER T O RESTORE THE MATTER BACK TO THE FILE OF THE A.O. TO ALLOW THE ASSESSEE AN OPPORTUNI TY TO STATE ITS CASE BEFORE HIM AND, CONSEQUENTLY, ENABLE ITS FACTUAL DETERMINATION, WH ICH IN FINE IS ALSO THE REVENUES GRIEVANCE IN-AS-MUCH AS IT CONSIDERS THE PROVISION AS CONTINGENT AND NOT FACT-BASED, WITH THE ASSESSEE CONTENDING OTHERWISE, SO THAT IT IS SU PPORTED BY EMPIRICAL DATA. THE ISSUE WITH REGARD TO ITS DEDUCTIBILITY PER SE , WE MAY THOUGH CLARIFY, IS DECIDED IN FAVOUR OF TH E ASSESSEE; THE LAW IN THE MATTER BEING WELL-SETTLED, AND TOWARD WHICH IT HAS RELIED ON CASE LAW. THE A.O. SHALL DECIDE THE MATTER BY ISSUING DE FINING FINDINGS OF FACT. 9. VIDE ITS GROUND NO. 9, THE ASSESSEE, WITHOUT PRE JUDICE, PRAYS FOR A DIRECTION TO RECOMPUTE ITS MARGIN AFTER REDUCING THE DISALLOWANC E FROM THE OPERATING COST. WE FIND NO MERIT THEREIN IN-AS-MUCH AS THE ASSESSEES ACCOUNTS ARE STATED TO REPRESENT THE ACTUAL STATE OF AFFAIRS, SO THAT IT IS NOT OPEN FOR IT TO CONTEN D THAT THE OPERATING COST/MARGIN AS REFLECTED PER ITS BOOKS OF ACCOUNT DOES NOT REPRESENT ITS TR UE AND CORRECT COST/MARGIN. THE DEDUCTIBILITY OF PROVISION IS IN LAW, AS OBSERVED E ARLIER, GOVERNED BY THE ACCOUNTING PRINCIPLES, SO THAT THE DISALLOWANCE COULD BE FOR V ARIOUS REASONS, AS WHERE THE ASSESSEE IS UNABLE TO ESTABLISH ITS CLAIM ON FACTS, I.E., WITH EVIDENCE. THE ASSESSEES CASE, BEING DE HORS AND IN DISREGARD OF ITS ACCOUNTS, CANNOT BE COUNT ENANCED. WE, ACCORDINGLY, DO NOT FIND ANY MERIT IN ITS CLAIM IN PRINCIPLE. WE DECID E ACCORDINGLY, DISMISSING THE SAID GROUND. 10. VIDE ITS GROUNDS 10 TO 12, THE ASSESSEE CONTES TS THE LEVY OF INTEREST U/SS. 234A, 234B AND 234D RESPECTIVELY. THE SAID GROUNDS WERE N OT PRESSED BEFORE US DURING HEARING. IN ANY CASE OF THE MATTER, THE LEVY OF THE INTEREST IS MANDATORY AND, IN FACT, NOT 16 ITA NO. 1008/MUM/2014 (A.Y. 2009-10) NOBEL BIOCARE INDIA PRIVATE LIMITED VS. DY. CIT APPEALLABLE. THE LAW PROVIDES FOR THE RECOURSE TO B E ADOPTED BY THE ASSESSEE IN CASES OF GENUINE HARDSHIP. FURTHER, ANY DIFFERENCE IN COMPUT ATION WOULD AGAIN STAND TO BE AGITATED FOLLOWING THE PROCEDURAL LAW IN THE MATTER. IN ANY EVENT, NO SUCH CASE HAS BEEN MADE FOR US TO INTERFERE. WE DECIDE ACCORDINGLY. 11. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES. /-)0 &12/) # 3. ' 4 ) 5 6# 789 3 : 3. ' 4 ) # ) ;< ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD NOVEMBER, 2014 SD/- SD/- (I. P. BANSAL) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER % ( MUMBAI; =& DATED : 03.11.2014 '.&../ ROSHANI , SR. PS ! ' #$%& '&$ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. !' / THE RESPONDENT 3. % >) ( ) / THE CIT(A) 4. % >) / CIT CONCERNED 5. A'BC !)&D1 , * D1- , % ( / DR, ITAT, MUMBAI 6. CE2 F( / GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , % ( / ITAT, MUMBAI
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