Deputy Commissioner of Income-tax, V. M/s. Eaton Power Quality P. Ltd., Pune

ITA 1025/PUN/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 9100 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 9 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 19-09-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 15-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIVEK AGGARWAL
• Keywords: Gross profit estimation; Transfer pricing; International transaction; Rule of consistency; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 1025 /P U N/20 1 4 / ASSESSMENT YEAR : 20 0 5 - 06 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 4, PUNE . / APPELLANT VS. EATON POWER QUALITY PVT. LTD., S NO.145, OFF MUMBAI PUNE ROAD, PIMPRI, PUNE 411018 . / RESPONDENT PAN: AAACC6943R / APPELLANT BY : SHRI VIVEK AGGARWAL / RESPONDENT BY : SHRI VISHAL KALRA / DATE OF HEARING : 1 3 . 12 .2017 / DATE OF PRONOUNCEMENT: 12 . 03 .201 8 / ORDER PER SUSHMA CHOWLA, JM: THE APPEAL FILED BY THE REVENUE IS AGAINST ORDER OF CIT(A) - IT/TP , PUNE , DATED 10 . 0 2 .201 4 RELATING TO ASSESSMENT YEAR 20 0 5 - 06 AGAINST ORDER PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961 (IN SHORT THE ACT). 2 . THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1 THE LEARNED COMMISSIONER OF INCOME - TAX(APPEALS) ERRED IN DELETING THE ADJUSTMENT OF RS.95,73,845/ - TO THE VALUE OF INTERNATIONAL TRANSACTION RELATING TO THE PURCHASE OF FINISHED GOODS AND SPARES BY THE ASSESSEE FROM ITS AES. 2 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. 2 THE LEARNED COMMISSIONER OF INCOME - TAX(APPEALS) ERRED IN DELETING SUCH ADJUSTMENT DE HORS THE FINDING OF THE TPO THAT THE EXPENSES SUCH AS CONSUMABLE ITEMS, CONSUMPTION OF SPARES, CABLES CONSUMED, LABOUR CHARGES AND CREDIT NOTES BEING BELOW THE LINE COULD NOT BE CONSIDERED WHILE COMPARING GROSS PROFIT MARGINS. 3 THE LEARNED COMMISSIONER OF INCOME - TAX(APPEALS) ERRED IN DELETI NG THE ADJUSTMENT TO THE VALUE OF INTERNATIONAL TRANSACTION MERELY ON THE ASSERTION THAT ADJUSTMENT BASED ON INCORRECT APPROACH COULD NOT BE SUSTAINED EVEN THOUGH UNEQUIVOCALLY CONCLUDING THAT THE APPELLANT'S VERSION AND DETAILS FURNISHED WERE 'NEITHER TRU THFUL NOR TRANSPARENT AND IS MISLEADING' AND CAN BE CONSIDERED UNRELIABLE. 4 THE LEARNED COMMISSIONER OF INCOME - TAX(APPEALS) ERRED IN DELETING THE ADJUSTMENT AFORESAID, INSTEAD OF REJECTING THE MISLEADING/UNRELIABLE VERSION OF THE ASSESSEE, WITHOUT COMPUT ING SUCH ADJUSTMENT HIMSELF OR DIRECTING THE ASSESSEE TO FILE TRUTHFUL, TRANSPARENT AND RELIABLE INFORMATION BEFORE THE ASSESSING OFFICER IN REMAND PROCEEDINGS TO COMPUTE THE GROSS PROFIT MARGINS OF THE AE AND NON - AE TRANSACTIONS. 3. THE ISSUE RAISED IN T HE APPEAL FILED BY THE REVENUE IS AGAINST DELETION OF TP ADJUSTMENT OF 95,73,845/ - RELATING TO THE PURCHASE OF FINISHED GOODS AND SPARES BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISES. THE REVENUE HAS RAISED SEVERAL GROUNDS OF APPEAL BUT ALL RELATE TO THE SAME ISSUE. 4. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD FURNISHED THE RETURN OF INCOME DECLARING TOTAL INCOME AT NIL. THE ASSESSEE COMPANY WAS ENGAGED IN TRADING IN UPS AND DC POWER SYSTEMS, SMPS POWER SUPP LY. THE ASSESSING OFFICER HAD MADE REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) UNDER SECTION 92CA(1) OF THE ACT VIS - - VIS INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. DURING THE COURSE OF TP PROCEEDINGS, THE TPO NOTED THAT THE ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS OF PURCHASE OF FINISHED GOODS AND SPARES AND ACCESSORIES FROM ASSOCIATED ENTERPRISES, FOR SALE IN INDIA, AMOUNTING TO 9,39,21,256/ - . THE ASSESSEE HAD USED RESALE PRICE METHO D (RPM) WITH GROSS MARGIN TO SALES AS PROFIT LEVEL INDICATOR. DURING THE COURSE OF TP PROCEEDINGS, 3 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. THE TPO EXAMINED THE SAME AND SOUGHT CERTAIN DETAILS FROM THE ASSESSEE. SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE TO EXPLAIN THAT BY APPLYING RPM METHOD , THE GROSS PROFIT EARNED FROM THE SAID TRANSACTION HAD BEEN WORKED OUT AT 34%, WHEREAS THE GROSS PROFIT FROM THE GOODS PURCHASED FROM UNRELATED ENTITIES WAS WORKED OUT AT 19%. THE TPO NOTED FROM THE DETAILS THAT IN CASE OF RESALE OF GOODS PURCHASED FROM ASSOCIATED ENTERPRISES, THE NAME OF PRODUCT HAS BEEN MENTIONED AS MIXED , FOR WHICH SALE VALUE HAS BEEN MENTIONED AS 57,68,917/ - AND COST OF PURCHASE HAS BEEN MENTIONED AS 25,35,802/ - AND THUS, GROSS PROFIT EARNED IS MENTIONED AT 32,31,115/ - . SIMIL ARLY, IN THE DETAILS OF SALE OF GOODS PURCHASED FROM NON ASSOCIATED ENTERPRISES, THE NAME OF PRODUCT HAS BEEN MENTIONED AS MIXED AND QUANTITY HAS BEEN SHOWN AS I, WHERE THE SALE VALUE HAS BEEN SHOWN AT 4,56,31,242/ - AND THE COST OF PURCHASE HAD BEEN SHOWN AT 6,72,85,449/ - AND THE RESULTANT GROSS PROFIT (LOSS) HAS BEEN ARRIVED AT ( - ) 2,16,54,207/ - . THE TPO ANALYZED THE COST OF PURCHASES OF VARIOUS ITEMS VIS - - VIS SALES AND ALSO NOTED THAT LOSS OF 44,59,053/ - HAD BEEN BOOKED TOWARDS CONSUMABLE I TEMS , OF 9,74,131/ - AGAINST THE CONSUMPTION OF SPARES, 8,43,671/ - FROM CABLES CONSUMED, OF 15,30,491/ - AGAINST LABOUR CHARGES AND 1,22,23,590/ - AGAINST CREDIT NOTES. THE TPO WAS OF THE VIEW THAT THESE ITEMS COULD NOT BE CONSIDERED WHILE COMPARING GROSS PROFIT MARGINS BECAUSE THE EXPENDITURE UNDER THE SAID HEADS OF EXPENSES WERE BOOKED AFTER GROSS PROFIT LEVEL TO ARRIVE AT THE NET PROFIT. THE TPO WAS OF THE VIEW THAT UNDER THE RESALE PRICE METHOD, IT WOULD BE ESSENTIAL TO ARRIVE AT GROSS PROFIT MAR GIN AFTER IGNORING THE PROFIT / LOSS EARNED AGAINST MIXED OF 32,31,115/ - AND LOSS OF 2,16,54,207/ - AS HAS BEEN INCLUDED PROFIT / LOSS ARISING FROM THE BUSINESS RELATING TO PURCHASE OF GOODS FROM RELATED PARTIES AND UNRELATED PARTIES, RESPECTIVELY. A FTER IGNORING THE DETAILS OF MIXED, THE GROSS PROFIT EARNED FROM PURCHASE OF 4 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. GOODS FROM UNRELATED PARTIES WAS WORKED OUT TO 6,22,97,399/ - AS AGAINST THE SALE OF 15,61,60,889/ - , WHICH WORKED OUT TO 39.89%. SIMILAR CALCULATION LEADS TO PROFIT OF 4,27,47,257/ - IN THE CASE OF RELATED PARTIES AGAINST SALES OF 13.11 CRORES , WHERE GROSS PROFIT WORKS AT 32.59%. THE TPO THUS, SHOW CAUSED THAT WHERE THE PROFIT RESULTING FROM PURCHASES FOR SALE OF GOODS FROM ASSOCIATED ENTERPRISES WAS LESS AS COMPARED T O THE SAME EARNED FROM NON ASSOCIATED ENTERPRISES BUSINESS, THEN WHY AN ADJUSTMENT CORRESPONDING TO THE DIFFERENCE IN GROSS PROFITS EARNED FOLLOWING RPM METHOD SHOULD NOT BE MADE. IN RESPONSE, THE ASSESSEE FURNISHED WRITTEN SUBMISSIONS AND POINTED OUT THA T IT WAS MAINTAINING THE DOCUMENTATION AND INFORMATION AS PRESCRIBED BY RULE 10D OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES) AND THE SAME WAS FILED IN THE AUDIT REPORT IN FORM NO.3CEB ALONG WITH RETURN OF INCOME. IT WAS FURTHER POINTED OUT BY THE ASSESSEE THAT FOR ASSESSMENT YEARS 2003 - 04 AND 2004 - 05, THE TRANSFER PRICING AUTHORITIES DID NOT FIND ANY REASON TO MAKE ANY ADJUSTMENT IN THE SAID INTERNATIONAL TRANSACTIONS OF PURCHASE OF GOODS FROM ASSOCIATED ENTERPRISES, FOR THE PURPOSE OF RESALE IN I NDIA. THE ASSESSEE FURTHER EXPLAINED ITS BUSINESS MODULE AND REITERATED THAT ALL THE GOODS PURCHASED BY IT WERE EVENTUALLY RESOLD EXCEPT IN A SITUATION LIKE REPLACING OF DAMAGED ITEMS. IT WAS FURTHER REITERATED THAT THE ASSESSEE COMPANY HAD SOLD GOODS WO RTH 33.87 CRORES AND HAD EARNED GROSS PROFIT OF 26%. THE GROSS PROFIT EARNINGS FROM THE SALE OF GOODS PURCHASED FROM ASSOCIATED ENTERPRISES WAS 34% AND THAT FROM NON ASSOCIATED ENTERPRISES WAS 20%. ACCORDINGLY, THE PRICE OF GOODS PURCHASED FROM ASSOCIA TED ENTERPRISES WAS HELD TO BE AT ARM'S LENGTH PRICE. IT WAS FURTHER POINTED OUT THAT THE GROSS PROFITABILITY ARRIVED AT FOLLOWING RPM METHOD CONSISTING OF COST OF COMPONENTS, WHICH WAS IN SEPARABLE ELEMENT OF COST OF GOODS SOLD AND IF THE SAID COST OF COM PONENTS IS SEPARATED FROM THE TOTAL COST OF GOODS, THEN THE PROFITS 5 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. EARNED FROM RESALE PRODUCTS PURCHASED FROM ASSOCIATED ENTERPRISES COULD NOT BE APPROPRIATELY COMPARED WITH THE PROFITS EARNED FROM RESALE OF PRODUCTS PURCHASED FROM NON ASSOCIATED ENTERPRI SES. IT WAS FURTHER STRESSED THAT REMOVING THE MIXED LINE ITEMS WHICH MAINLY INCLUDE THE PRODUCTS LIKE LVDB, TRANSFORMERS, COMPONENTS SUCH AS BATTERIES AND RACKS , WOULD SHOW INAPPROPRIATE RESULTS. THE ASSESSEE REFERRED TO THE REVISED ANALYSIS OF MATCHING OF SALES AND PURCHASES SUBMITTED, WHEREIN THE MAGNITUDE OF UNMATCHED ITEMS WAS REVISED BUT THE SAME WAS NOT CONSIDERED IN THE SHOW CAUSE NOTICE. IT WAS STRESSED THAT IGNORING OF MIXED ROW FIGURES WAS NOT JUSTIFIED. THE TPO REJECTED THE PLEA OF ASSESSEE ON ALL GROUNDS. THE TPO OBSERVED THAT THE ASSESSEE HAD PURCHASED FINISHED GOODS FOR TRADING IN INDIAN MARKET. THEREFORE, THE SUBMISSION OF ASSESSEE THAT IT HAD FURTHER INSTALLED CERTAIN SPARES AND COMPONENTS INTO SUCH FINISHED PRODUCTS, WAS NOT AS PER TH E FACTS OF CASE. IT WAS OBSERVED BY THE TPO THAT THE SPARES AND ACCESSORIES WHICH WERE PURCHASED BY THE ASSESSEE WERE PRIMARILY FOR RESALE TO THE DEALERS FOR MAINTENANCE AND SERVICES OF THE PRODUCTS SOLD AND THEREFORE, THERE WAS NO ADDITIONAL COST OF COMP ONENTS WHICH THE ASSESSEE INCURRED AFTER PURCHASE OF FINISHED GOODS FROM ASSOCIATED ENTERPRISES. THE CONTENTION OF ASSESSEE THAT FINAL PRODUCTS I.E. UPS WAS SALEABLE AFTER THE COMPONENTS WHICH WERE USED TO COMPLETE BODY OF PRODUCT WAS ALSO NOT ACCEPTED BY THE TPO, SINCE THE ASSESSEE WAS PURCHASING FINISHED GOODS FOR RESALE IN INDIA. REFERENCE WAS MADE TO ECONOMIC ANALYSIS UPDATION REPORT OF THE ASSESSEE IN THIS REGARD AND IT WAS POINTED OUT THAT NO SUCH DETAILS WERE FURNISHED IN THE SAID REPORT. THE TPO ALSO OBSERVED THAT THERE WAS NO REVISED ANALYSIS OF MATCHING SALES AND PURCHASES SUBMITTED BY THE ASSESSEE TOWARDS WHICH THE REFERENCE WAS MADE IN REPLY. IT WAS REITERATED BY THE TPO THAT EXPENSES BOOKED BY THE ASSESSEE WERE THE ITEMS WHICH WOULD FIGURE I N THE PROFIT 6 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. AND LOSS ACCOUNT BELOW THE GROSS PROFIT LEVEL AND HENCE, THE SAME WE RE NOT TO BE CONSIDERED WHILE ARRIVING AT THE GROSS PROFIT. THE TPO THUS, DIRECTED EXCLUSION OF SAID ITEMS AND AN ADJUSTMENT OF 95,73,845/ - WAS PROPOSED TO ARRIVE AT THE AR M'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF GOODS PURCHASED FROM ASSOCIATED ENTERPRISES BY TAKING DIFFERENCE BETWEEN GROSS PROFIT FROM PURCHASE OF GOODS AND RESALE OF UNRELATED PARTIES AT 39.89% AND COMPARING THE SAME WITH GROSS PROFIT FROM PURCHASE OF GOODS FROM AND RESALE FROM RELATED PARTIES I.E. ASSOCIATED ENTERPRISES AT 32.50%. THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER PROPOSED THE SAID ADJUSTMENT. 5 . THE ASSESSING OFFICER IN THE FINAL ASSESSMENT ORDER DID NOT MAKE ANY TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF INTERNATIONAL TRANSACTIONS RELATING TO PURCHASE OF FINISHED GOODS AND SPARES BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISES. 6 . BEFORE THE CIT(A) , THE ASSESSEE FILED OBJECTIONS AND REITERATED ITS EARLIER CONTENTION. THE FIRST AND FOREMOST WAS THE ACCEPTANCE OF SAID WORKING IN ASSESSMENT YEARS 2006 - 07 AND 2007 - 08 AND THEREAFTER ON THE MERITS OF CASE. THE CIT(A) DID NOT ACCEPT THE PLEA OF ASSESSEE AND OBSERVED THAT IN MIXED ITEMS, THE ASSESSEE HAD SHOWN PURCHASES OF 57,68,917/ - FROM ASSOCIATED ENTERPRISES AND 6.72 CRORES FROM NON ASSOCIATED ENTERPRISES, THUS, THE TOTAL PURCHASES WERE OF 7.30 CRORES AGAINST THE TURNOVER AT 34,67,41,438/ - . THE CIT(A) OBSERVED THAT THE ASSESSEE HAD SPEN T MORE THAN 26% ON CONSUMABLES AND SPARES WHICH ACCORDING TO THE ASSESSEE WERE INCIDENTAL TO THE POWER SOLUTIONS. THE CIT(A) DID NOT ACCEPT THE CONTENTION OF ASSESSEE IN THIS REGARD OBSERVING THAT WARRANTY EX PENSES ACCORDING TO THE INDUSTRY NORMS WERE BETWEEN 7 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. 2% TO 3% OF THE TURNOVER AND INCIDENTAL SPARES COULD BE 5% OR 7% OF THE TURNOVER. THE CIT(A) REJECTED THE CONTENTION OF ASSESSEE IN THE ABSENCE OF CORRECT NUMBERS. THE CIT(A) FURTHER OBSERVED THAT THE T POS SOLUTION OF EXCLUDING THE TRANSACTION ALTOGETHER FOR COMPUTATION OF GROSS PROFIT COULD NOT BE CONSIDERED AS CORRECT. IT WAS FURTHER OBSERVED BY THE CIT(A) THAT THE TPO SHOULD HAVE FOUND THE TRUTH OR IF NOT POSSIBLE TO GET CORRECT NUMBERS, THEN HE SHO ULD HAVE APPLIED TRANSFER PRICING METHODS. HOWEVER, THE ORDER OF TPO IN EXCLUDING THE SAID TRANSACTION ALTOGETHER FROM THE COMPUTATION OF GROSS PROFIT WAS FOUND TO BE NOT CORRECT. THE CIT(A) NOTING THAT THE ASSESSEE WAS OFFERING PACKAGE SOLUTIONS AS STAT ED IN THE TRANSFER PRICING REPORT AND THE SPARES AND ACCESSORIES USED AS PART OF PACKAGE COULD NOT BE CHARGED SEPARATELY, AGAIN SUCH EXPENDITURE WOULD CONSTITUTE COST OF GOODS SOLD AND WOULD BE ABOVE GROSS PROFIT LEVEL. THE CIT(A) THUS, HELD THAT THE TPO WAS INCORRECT IN CONCLUDING THAT THE SAID EXPENDITURE WOULD BE BELOW GP LEVEL EXCEPT FOR THE EXPENDITURE INCURRED ON REPAIRS DURING WARRANTY PERIOD WHICH WOULD BE BELOW THE GROSS PROFIT LEVEL. THE CIT(A) ACCEPTED THE PLEA OF ASSESSEE THAT IF SUCH ITEMS WE RE EXCLUDED FOR COMPUTATION OF GROSS PROFIT, THEN CORRESPONDING SALE VALUE ALSO SHOULD BE EXCLUDED FOR WORKING OF THE GROSS MARGINS OR IT MAY BE CONSIDERED THAT THE ASSESSEE HAD NOT MADE ANY PROFIT ON SALE OF SUCH PARTS BEING PART OF PACKAGE. HENCE, THE P URCHASE PRICE OF SAID PART MAY BE EXCLUDED FROM THE SALE VALUE OF SOLUTION . THE CIT(A) NOTED THAT THE TPO HAS NOT DONE THE SAID EXERCISE. THE CIT(A) THUS, WAS OF THE VIEW THAT IT WAS NOT POSSIBLE TO SEGREGATE SALE VALUE OF SUCH COMPONENTS WHICH FORM PART OF PACKAGE AS THERE WAS NO SEPARATE SALE VALUE OF THE SAID SPARES. NORMALLY, THERE WAS COMPOSITE PRICE OF THE PACKAGE AND FURTHER QUANTIFICATION OF PACKAGE VALUE AS PART OF TURNOVER VIS - - VIS INCOME FROM TRADING TURNOVER OF UPS AND SPARES WAS NOT DONE BY THE ASSESSEE AND THE 8 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. TPO. THEREFORE, THE CIT(A) HELD THAT IT WAS NOT POSSIBLE TO SUSTAIN THE ADJUSTMENT BASED ON INCORRECT APPROACH. CONSEQUENTLY, ADJUSTMENT MADE BY THE TPO WAS HELD TO BE NOT SUSTAINABLE AND THE SAME WAS DELETED BY THE CIT(A) . 7. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A) . 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE RELIED ON THE ORDER OF TPO. IT WAS FURTHER POINTED OUT THAT THERE WAS AN ERROR IN WORKING OF ASSESSEE AND THE CIT(A) STILL DELETED THE ADDITION. 9. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF IMPORT OF GOODS WITH SPARE PARTS FROM ASSOCIATED ENTERPRISES. THE TPO HOWEVER, ACCEPTED INTERNAL RPM METHOD SELECTED BY THE ASSESSEE A S MOST APPROPRIATE METHOD. HOWEVER, HE WAS OF THE VIEW THAT WHILE APPLYING THE SAID METHOD, PRODUCT - WISE PROFITABILITY HAD TO BE ADOPTED. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT UNDER RPM METHOD, THE TRADING MARGINS HAD TO BE APPLIED. OUR ATTENTION WAS DRAWN TO THE REMAND REPORT PLACED AT PAGES 11 TO 19 OF THE PAPER BOOK WITH SPECIAL REFERENCE TO PAGE 14 OF PAPER BOOK, WHEREIN SEGMENT - WISE DETAILS WERE PROVIDED FOR INTERNAL COMPARABLES. THE TPO HAD IN THE FIRST ROUND DISPUTE D THE MIXED PRODUCT ANALYSIS GIVEN BY THE ASSESSEE IN THE ABSENCE OF DETAILS BEING CORRECTLY FILED. THE TPO WAS OF THE VIEW THAT ONLY THE ITEMS WHICH WERE IMPORTED HAD TO BE BENCHMARKED AND THE SPARES HAD TO BE CONSIDERED IN THE PROFIT AND LOSS ACCOUNT LE VEL. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE WAS ENGAGED IN TRADING OF DIFFERENT UPS, LIST OF WHICH ARE PLACED AT PAGES 136 TO 138 OF THE PAPER BOOK. THE DOCUMENTS AT 9 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. PAGES 139 TO 142 OF PAPER BOOK RELATE TO A E SEGMENT AND AT PAGES 143 TO 153 OF PAPER BOOK RELATE TO NON - AE SEGMENT. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT REVISED MARGINS WORKED OUT BY THE ASSESSEE FOR AE SEGMENT WERE 34% AND FOR NON - AE SEGMENT WERE 20% AND SINCE AE SEGMENT MARGINS WERE HIGHER, NO TP ADJUSTMENT HAD TO BE MADE. ANOTHER POINT WHICH WAS STRESSED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT THE YEAR UNDER APPEAL WAS ASSESSMENT YEAR 2005 - 06. HOWEVER, THE ASSESSEE IS IN BUSINESS F OR THE PRECEDING AND SUCCEEDING ASSESSMENT YEARS, WHEREIN THE TPO HAD NOT MADE ANY TP ADJUSTMENT TO THE VALUE OF INTERNATIONAL TRANSACTIONS INCLUDING THE TRANSACTIONS OF IMPORT OF FINISHED GOODS, ACCESSORIES, COMPONENTS AND SPARES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS REFERRED TO THE ORDER OF TPO DATED 09.03.2006 FOR ASSESSMENT YEAR 2003 - 04, DATED 22.09.2006 FOR ASSESSMENT YEAR 2004 - 05 AND ORDER DATED 09.10.2009 OF TPO FOR ASSESSMENT YEAR 2006 - 07 AND ALSO ORDER DATED 26.10.2010 FOR AS SESSMENT YEAR 2007 - 08. THE COPIES OF ALL THESE ORDERS WERE FILED ON RECORD. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE IS WHOLLY OWNED SUBSIDIARY OF EATON CORPORATION. THE ASSESSEE PROVIDES POWER MANAGEMENT SOLUTIONS TO ITS CLIENTS AND FOR PROVIDING SUCH SERVICES, THE ASSESSEE WAS ENGAGED IN TRADING OF UNINTERRUPTED POWER S UPPLY (UPS) AND DIRECT CURRENT (DC) POWER SYSTEMS, SWITCH MODE POWER SUPPLY AND POWER DISTRIBUTION SYSTEM. THE ASSESSEE WAS IMPORTING UPS AND DC RECTIFIERS FROM ITS ASSOCIATED ENTERPRISES AND ALSO UPS AND DC SYSTEMS / RACKS FROM UNRELATED PARTIES. THE CASE OF ASSESSEE BEFORE US WAS THAT UPS IMPORTS FROM ASSOCIATED ENTERPRISES AND UNRELATED PARTIES WERE OF DIFFERENT CONFIGURATION. 10 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. 11. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD ENTERED INTO SEVERAL INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES. THE INTERNATIONAL TRANSACTIONS ON WHICH THE TP ADJUSTMENT HAS BEEN MADE IN THE HANDS OF ASSESSEE IS IMPORT OF FINISHED GOODS, ACCESSOR IES, COMPONENTS AND SPARES AT 9,39,21,256/ - . THE ASSESSEE IN THE YEAR UNDER CONSIDERATION HAD IMPORTED FINISHED GOODS AND SPARES FROM ASSOCIATED ENTERPRISES AS WELL AS FROM UNRELATED PARTIES. IN ADDITION, THE ASSESSEE REQUIRES COMPONENTS SUCH AS BATTER IES AND RACKS AND OTHER ACCESSORIES TO BE ASSEMBLED WITH THE PRODUCTS SO IMPORTED OR BOUGHT FROM UNRELATED PARTIES TO MAKE FINAL CONFIGURED SYSTEM OF SALEABLE IN THE MARKET. THE ASSESSEE HAD INCLUDED THE COST OF SUCH BATTERIES AND RACKS AND OTHER ACCESSOR IES AND COMPONENTS AS TOTAL COST OF FINAL PRODUCTS. THE ASSESSEE HAD USED INTERNAL RPM METHOD AS MOST APPROPRIATE METHOD WITH GROSS PROFIT / SALES AS PLI TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS OF IMPORT OF GOODS. THE ASSESSEE ACCORDINGLY, COMPARED T HE GROSS PROFIT MARGINS EARNED BY IT ON SALE OF FINISHED GOODS INCLUDING ACCESSORIES AND SPARES IMPORTED FROM ASSOCIATED ENTERPRISES WITH GROSS PROFIT MARGINS EARNED BY IT ON SALE OF FINISHED GOODS, SPARES AND ACCESSORIES PURCHASED FROM UNRELATED PARTIES. THE GROSS PROFIT MARGINS FROM ASSOCIATED ENTERPRISES WERE 3 4 % AND NON - ASSOCIATED ENTERPRISES WERE 19%, RESPECTIVELY. THE ASSESSEE THUS, HELD ITS INTERNATIONAL TRANSACTIONS OF IMPORT OF ITEMS AT ARM'S LENGTH. HOWEVER, THE TPO ASKED THE ASSESSEE TO FILE P RODUCE - WISE PROFITABILITY STATEMENT OF THE GOODS IMPORTED FROM ITS ASSOCIATED ENTERPRISES AND ALSO FROM UNRELATED PARTIES. THE SAID DETAILS WERE FILED BY THE ASSESSEE. THE MAIN PLEA OF ASSESSEE BEFORE THE TPO WAS THAT THE COMPONENTS, SPARES, ACCESSORIES, CONSUMABLES, ETC. WERE NOT TREATED SEPARATELY BY IT BUT THE Y FORM INTEGRAL PART OF FINISHED PRODUCTS AND COST OF SAID GOODS SOLD HAD TO BE CONSIDERED WITHIN TOTAL COST OF END - PRODUCTS SOLD. THE ASSESSEE ALSO 11 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. POINTED OUT THAT IT WAS NOT POSSIBLE TO WORK O UT THE PROFITS ON SUCH COMPONENTS AND CONSUMABLES WHICH WERE ALSO RE - SOLD BY THE ASSESSEE BUT AS PART OF END - PRODUCTS SOLD BY IT. CERTAIN COMPONENTS IN CONSUMABLES WERE SOLD SEPARATELY AS REPLACEMENT OF ADMITTED ITEMS I.E. BEING PART OF WARRANTY OBLIGATION. THE TPO REJECTING THE AGGREGATION APPROACH ADOPTED BY THE ASSESSEE, RECOMPUTED THE GROSS MARGINS FOR THE IMPORT TRANSACTIONS BY DETERMINING GROSS PROFIT MARGINS OF 39.89% ON SALE OF GOODS PURCHASED FROM UNRELATED PARTIES VIS - - VIS GROSS PROFIT MARGINS FROM SALE OF GOODS FROM ASSOCIATED ENTERPRISES AT 32.59%. THE TPO HAD EXCLUDED THE ITEMS UNDER THE HEAD MIXED AND HENCE, PROPOSED AN UPWARD ADJUSTMENT OF 95,73,845/ - . THE CIT(A) DELETED TP ADJUSTMENT ON ACCOUNT OF INTERNATIO NAL TRANSACTIONS OF IMPORT OF FINISHED GOODS, ACCESSORIES, COMPONENTS AND SPARES HOLDING THAT THE TPO S APPROACH OF EXCLUDING THE MIXED ITEMS TRANSACTION ALTOGETHER FOR COMPUTATION OF GROSS MARGINS COULD NOT BE CONSIDERED AS CORRECT. 12. THE ISSUE WHICH ARISES IN THE APPEAL FILED BY THE REVENUE IS WHETHER THE APPROACH OF ASSESSEE IS CORRECT IN COMPUTING THE GROSS PROFITS ON SALES FROM RE - SALE OF PRODUCTS IMPORTED FROM ASSOCIATED ENTERPRISES, WHICH INCLUDE THE VALUE OF COMPONENTS, SPARES, ACCESSORIES, CON SUMABLES, ETC. WHICH WE RE INCLUDED AS PART OF COST OF END - PRODUCTS. IN ORDER TO ADJUDICATE THE SAME, THE NATURE OF BUSINESS UNDERTAKEN BY THE ASSESSEE HAS TO BE APPRECIATED. THE ASSESSEE WAS A SOLUTIONS PROVIDER IN THE POWER MANAGEMENT SPACE TO ITS CUSTO MERS. IN ORDER TO ACHIEVE AND PROVIDE SOLUTIONS OF POWER MANAGEMENT, THE ASSESSEE IMPORTS CERTAIN ITEMS LIKE UPS AND DC POWER SYSTEMS AND ALSO IMPORTS CERTAIN OTHER COMPONENTS, SPARES, ACCESSORIES, CONSUMABLES, ETC. AND THE END - PRODUCT IS CONFIGURED TO SU IT THE REQUIREMENT OF CUSTOMERS. THE ASSESSEE PROVIDES 12 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. COMPLETE SOLUTIONS TO ITS CUSTOMERS, WHICH REQUIRE CONFIGURATION OF UPS / DS POWER SYSTEMS AS PER NEEDS OF CUSTOMERS. THE ASSESSEE IN THIS REGARD HAS EXPLAINED THAT WHERE CUSTOMER WANTS LONGER POWER BACKUP DUE TO LOAD SHEDDING IN HIS LOCALITY, THE REQUIREMENT OF ACCESSORIES I.E. BATTERIES, RACKS, CONSUMABLES, ETC. WOULD VARY VIS - - VIS THE CUSTOMER WHICH NEED SHORTER BACKUP. THE ASSESSEE AS A PRACTICE, WAS NOT CHARGING SEPARATE PRICE FOR COMPONENTS, A CCESSORIES, CONSUMABLES, ETC. BUT THE SAME WERE BILLED IN TOTAL SALE CONSIDERATION CHARGED FROM THE CUSTOMERS. IN SUCH CIRCUMSTANCES, THE CASE OF ASSESSEE WAS THAT WHILE WORKING OUT THE MARGINS EARNED ON RE - SALE OF GOODS IMPORTED FROM ITS ASSOCIATED ENTER PRISES OR BOUGHT FROM UNRELATED PARTIES, THEN THE COST OF ACCESSORIES, BATTERIES, COMPONENTS, ETC. NEED TO BE CONSIDERED , AS THE SALE PRICE OF SAID ITEMS WE RE ALREADY INCLUDED IN THE SALE VALUE CHARGED TO THE CUSTOMERS. WE FIND MERIT IN THE PLEA OF ASSESS EE. THE AUTHORITIES BELOW AND THE ASSESSEE HAD CHOSEN RPM AS MOST APPROPRIATE METHOD. THE REQUIREMENT OF SAID METHOD IS TO WORK OUT THE GROSS MARGINS ON THE GOODS SOLD BY THE ASSESSEE. THE ASSESSEE IS PROVIDING POWER SOLUTIONS TO ITS CUSTOMERS, FOR WHIC H IT IS NOT ONLY IMPORTING UPS OR DP POWER SYSTEMS FROM ITS ASSOCIATED ENTERPRISES BUT WAS ALSO ATTACHING VARIOUS OTHER COMPONENTS, SPARES, ACCESSORIES, CONSUMABLES TO IT IN CLUDING BATTERIES AND RACKS TO PROVIDE AN END - SOLUTION TO THE CUSTOMERS , WHICH WA S AS PER BUSINESS NEEDS OF EACH CUSTOMER. 13. ANOTHER ASPECT WHICH HA D ALSO TO BE NOTED THAT THE ASSESSEE HA D NOT SEPARATELY CHARGED FOR SUCH COMPONENTS, SPARES, ACCESSORIES, CONSUMABLES ON THE SALE OF ITS POWER SOLUTIONS WHICH HA D BEEN IMPORTED FROM IT S ASSOCIATED ENTERPRISES OR FROM THIRD PARTIES. WE FIND MERIT IN THE PLEA OF ASSESSEE THAT THE APPROACH ADOPTED BY ASSESSEE TO WORK OUT THE MARGINS OF PROFITS ON SALE OF 13 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. GOODS AFTER INCLUDING THE COST OF GOODS PLUS COST OF OTHER COMPONENTS, CONSUMABLES, B ATTERIES, ETC. NEEDS TO BE ACCEPTED. THE ASSESSEE HAD WORKED OUT THE MARGINS ON THE SALE OF GOODS IMPORTED FROM ASSOCIATED ENTERPRISES AT 34% AS AGAINST 19% ON SALE OF GOODS IMPORTED FROM ASSOCIATED ENTERPRISES BEING HIGHER. THERE IS NO MERIT IN THE APPR OACH OF TPO IN FIRST , HOLDING TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES AT ARM'S LENGTH AND THE N MAKING ANY TRANSFER PRICING ADJUSTMENT IN THE HANDS OF ASSESSEE. WE FIND NO MERIT IN THE APPROACH OF TPO IN EXCLUDING THE ITEMS BOOKED AS MIXED WHILE WORKING OUT THE GROSS MARGINS OF ASSESSEE ON THE SALE OF GOODS IMPORTED FROM ASSOCIATED ENTERPRISES AND IMPORTED FROM UNRELATED PARTIES. IT HAS ALSO BEEN NOTED THAT THESE ITEMS LIKE SPARES, ACCESSORIES, BATTERIES, ETC. WE RE ALSO USED BY THE ASSESSEE IN DISCHARGE ITS OBLIGATION OF WARRANTY OR REPLACEMENT OF DAMAGED ITEMS IN TRANSPORTATION, ETC. THE ASSESSEE IN THIS REGARD CLAIMED THAT THOUGH MOST OF THE PRODUCTS PURCHASED BY ASSESSEE WE RE EVENTUALLY RE - SOLD BUT SOME OF THE ITEMS, ACCE SSORIES, CONSUMABLES WE RE UTILIZED FOR WARRANTY OBLIGATION AND WE RE NOT RE - SOLD . THE ASSESSEE HA D MAINTAINED COMPLETE DATA IN THIS REGARD AND HA D ALSO FILED THE DETAILED INFORMATION IN THIS REGARD BEFORE ASSESSING OFFICER/TPO AND EVEN BEFORE US. IN THE ENTIRETY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES, WE UPHOLD THE ORDER OF CIT(A) IN DELETING TRANSFER PRICING ADJUSTMENT MADE IN THE HANDS OF ASSESSEE. 14. BEFORE PARTING, IT MAY ALSO BE NOTED THAT THE TPO IN PRECEDING YEARS I.E. ASSESSMENT YEARS 2003 - 04 AND 2004 - 05 AND ALSO IN SUCCEEDING YEARS I.E. IN ASSESSMENT YEARS 2006 - 07 AND 2007 - 08 WHILE APPLYING INTERNAL RPM METHOD THOUGH HAS PASSED TP ORDERS IN EACH OF THE YEARS, BUT HAS NOT DISTURBED AND MADE ANY ADJUSTMENT TO THE VALUE OF INTERNATIONAL TRANSACT IONS INCLUDING THE 14 ITA NO. 1025 /PUN/20 14 EATON POWER QUALITY PVT. LTD. TRANSACTION OF IMPORT OF FINISHED GOODS, ACCESSORIES, COMPONENTS AND SPARES FOR RE - SALE. THE RULE OF CONSISTENCY IS NOT APPLICABLE TO THE INCOME TAX PROCEEDINGS BUT WHERE THE ASSESSEE IS FOLLOWING A PARTICULAR BUSINESS MODULE FROM YEAR TO YEAR AND HAS WORKED OUT THE GROSS MARGINS OF PRODUCTS SOLD BY IT, THEN THERE IS NO MERIT IN DISTURBING THE SAME. ACCORDINGLY, WE HOLD SO. UPHOLDING THE ORDER OF CIT(A), WE DISMISS THE GROUNDS OF APPEAL RAISED BY THE REVENUE. 1 5 . IN THE RESULT, APPEA L OF REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 1 2 T H DAY OF MARCH , 201 8 . SD/ - SD/ - (ANIL CHATURVEDI) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 1 2 T H MARCH , 201 8 . G G C C V V S S R R / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT (A) - IT/TP , PUNE ; 4. THE C IT - I I / DIT (TP/IT) , PUNE ; 5. , , / DR B , ITAT, PUNE; 6. / GUARD FILE. / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE