Imsofer Manufacturing India Pvt. Ltd., Pune V. DCIT, New Delhi

ITA 1049/DEL/2016

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8069 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 29-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M BAVANWAL
• Keywords: Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Question of law; Working capital adjustments
• Section: 143(3); 92D; 13; 92

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELH I BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE, JUDICIAL MEMBER (THROUGH VIDEO CONFERENCING) ITA NO.5158/DEL/2015 & ITA NO.1049/DEL/2016 [A.Y 2009-10 & 2010-11] IMSOFER MANUFACTURING INDIA PVT. LTD. DCIT 2 ND FLOOR, PENTAGAON TOWER-I, CIRCLE-11(1) MAGARPATTA CITY, HADAPSAR ROOM NO.312, PUNE -411028 C. R. BUILDING NEW DELHI PAN NO. AABCI6450N APPELLANT BY : SH.AJIT KUMAR JAIN, CA RESPONDENT BY : SH. M. BAVANWAL, SR. DR. DATE OF HEARING : 11.08.2020 DATE OF PRONOUNCEMENT : 21 .08.2020 ORDER PER N. K. BILLAIYA , AM : ITA NO.5158/DEL/2015 AND 1049/DEL/2016 ARE TWO SEPA RATE APPEALS BY THE ASSESSEE PREFERRED AGAINST TWO SEPARATE ORDERS OF THE CIT(A)-44, NEW DELHI DATED 29.05.2015 AND 19.10.2015 PERTAINING TO A.Y. 2009-10 AND 2010- 11 RESPECTIVELY. SINCE COMMON GROUNDS ARE INVOLVE D IN THESE APPEALS, 2 THEREFORE, THEY WERE HEARD TOGETHER AND ARE BEING D ISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. WE FIRST TAKE UP ITA NO.5158/DEL/2015 FOR A.Y. 2 009-10. 3. THE GROUNDS RAISED BY THE ASSESSEE FOR A.Y.2009- 10 ARE AS UNDER :- BASED ON THE FACTS AND IN LAW, THE APPELLANT RESPEC TFULLY CRAVES LEAVE TO PREFER AN APPEAL UNDER SECTION 253 OF THE INCOME-TA X ACT, 1961 (THE ACT) AGAINST THE ORDER PASSED BY LEARNED ASSESSING OFFIC ER (AO) PASSED UNDER SECTION 143(3) READ WITH SECTION 144C(13) OF THE AC T AND THE ORDER OF THE HONOURABLE COMMISSIONER OF INCOME TAX (APPEALS), NE W DELHI (HEREINAFTER REFERRED TO AS THE HON. CIT(A)) PASSED ON 29 MAY 2015 RECEIVED BY THE APPELLANT ON 18 JUNE 2015. 1. TRANSFER PRICING GROUNDS 1.1 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. TRANSFER PRICING OFFICER (TPO)/AO HAS ERRED AND T HE HON. CIT(A) HAS FURTHER ERRED IN UPHOLDING/CONFIRMING THE ACTION OF THE LD. TPO/AO BY MAKING TRANSFER PRICING ADDITION OF RS. 152,075,072 TO THE APPELLANTS INCOME. 1.2 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. TPO/AO HAS ERRED AND THE HON. CIT(A) HAS FURTHER ER RED IN UPHOLDING/CONFIRMING THE ACTION OF THE LD. TPO/AO B Y DISREGARDING THE BENCHMARKING ANALYSIS AND COMPARABLE COMPANIES SELE CTED BY THE APPELLANT BASED ON THE CONTEMPORANEOUS DATA IN THE TRANSFER P RICING STUDY REPORT MAINTAINED AS PER SECTION 92D OF THE ACT READ WITH RULE 10D OF THE INCOME- TAX RULES, 1962 (THE RULES) AND THE VARIOUS SUBMI SSIONS MADE BY THE APPELLANT. 1.3 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. TPO/AO HAS ERRED AND THE HON. CIT(A) HAS FURTHER ER RED IN UPHOLDING/CONFIRMING THE ACTION OF THE LD. TPO/AO B Y REJECTING THE TRANSACTION BY TRANSACTION BENCHMARKING ANALYSIS PERFORMED IN THE TRANSFER PRICING STUDY REPORT TO JUSTIFY THE ARMS LENGTH NA TURE OF THE INTERNATIONAL TRANSACTIONS AND HAS INSTEAD ADOPTED THE AGGREGATI ON APPROACH. 3 1.4 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. TPO/AO HAS ERRED AND THE HON. CIT(A) HAS FURTHER ER RED IN UPHOLDING/CONFIRMING THE ACTION OF THE LD. TPO/AO B Y REJECTING COMPARABLE UNCONTROLLED PRICE (CUP) METHOD WHICH IS A DIRECT METHOD AND INAPPROPRIATELY APPLYING TRANSACTIONAL NET MARGIN M ETHOD (TNMM) METHOD WHICH IS A PROFIT BASED METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF IMPORT OF RAW MATERIALS, PACKING MA TERIALS, SEMI-FINISHED PRODUCTS AND EXPORT OF FINISHED GOODS. 1.5 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. TPO/AO HAS ERRED AND THE HON. CIT(A) HAS FURTHER ER RED IN UPHOLDING/CONFIRMING THE ACTION OF THE LD-. TPO/AO BY SELECTING HEINZ INDIA PVT. LTD HAVING VERY HIGH ECONOMIES OF SCALE AND REJECTING GODREJ HERSHEY LTD. (INCORRECTLY MENTIONING TURNOVER OF RS .2,000 CRORES AND PERSISTENT LOSS MAKING) SELECTED BY THE APPELLANT. 1.6 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. TPO/AO HAS ERRED AND THE HON. CIT(A) HAS FURTHER ER RED IN UPHOLDING/CONFIRMING THE-ACTION OF THE LD. TPO/AO B Y NOT ALLOWING THE ECONOMIC ADJUSTMENTS LIKE CAPACITY UNDERUTILIZATION , RISK ADJUSTMENTS ADJUSTMENT ON ACCOUNT OF INCREMENTAL COSTS ASSOCIAT ED WITH THE IMPORT OF GOODS IN ORDER TO REDUCE THE DIFFERENCE WHILE CO MPARING THE APPELLANT, BEING A START-UP COMPANY, WITH ALREADY E STABLISHED COMPANIES. 1.7 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. TPO/AO HAS ERRED AND THE HON. CIT(A) HAS FURTHER ER RED IN UPHOLDING/CONFIRMING THE ACTION OF THE LD. TPO/AO B Y NOT PROVIDING ANY REASON TO REJECT THE ALTERNATIVE BENCHMARKING CARRI ED OUT BY THE APPELLANT WHEREIN THE AE IS CONSIDERED AS TESTED PA RTY FOR ARMS LENGTH PRICE. 1.8 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. TPO/AO HAS ERRED AND THE HON. CIT(A) HAS FURTHER ER RED IN UPHOLDING/CONFIRMING THE ACTION OF THE LD. TPO/AO B Y NOT GRANTING THE BENEFIT OF +/- 5 PERCENT AS PER PROVISO TO SECTION 92C(2) OF THE ACT. 2. CORPORATE TAX GROUNDS 2.1 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASEAN D IN LAW, THE LD. TPO/AO HAS ERREDAND THE HON. CIT(A)HAS FURTHER ERRE D IN UPHOLDING/CONFIRMING THE ACTION OF THE LD.TPO/AO BY DISALLOWING MISCELLANEOUS EXPENSES. 4 2.2ON THE FACTS AND IN CIRCUMSTANCES OF THE CASEAND IN LAW, THE LD. TPO/AO HAS ERREDAND THE HON. CIT(A)HAS FURTHER ERRE D IN UPHOLDING/CONFIRMING THE ACTION OF THE LD. TPO/AO BY NOT CONSIDERING THE ACCUMULATED BROUG HT FORWARD LOSSES UP TO THE CAPTIONED ASSESSMENT YEAR AMOUNTIN G TO RS. 1,22,04,525, WHILE DETERMINING THE ASSESSED INCOME OF THE APPELLANT. THE ABOVE GROUNDS OF APPEAL ARE ALL INDEPENDENT A ND WITHOUT PREJUDICE TO ONE ANOTHER. THE APPELLANT CRAVES LEAVE TO SUPPLEMENT, TO CANCEL , AMEND, ADD AND/OR OTHERWISE ALTER OR MODIFY, ANY OR ALL, GROUN DS OF APPEAL STATED HEREINABOVE. 4. GROUND NO.1.1 AND 1.2 WHICH ARE GENERAL IN NATUR E AND NEEDS NO SEPARATE ADJUDICATION. 5. GROUND NO.1.3 AND 1.4 ARE NOT PRESSED AND ARE AC CORDINGLY DISMISSED. 6. GROUND NO.1.5 THE ASSESSEE ALLEGED THAT THE CIT ERRED IN UPHOLDING/ CONFIRMING THE ACTION OF THE AO BY SELECTING HEINZ INDIA PVT. LTD. AND REJECTING GODREJ HERSHEY LTD. 7. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E APPELLANT COMPANY WAS INCORPORATED ON 08.02.2007 AND IS A WHOLLY OWNE D SUBSIDIARY OF FERROR S.P.A WITH ULTIMATE HOLDING COMPANY BEING FERRERO I NTERNATIONAL SA. 8. THE APPELLANT COMPANY ALONGWITH ITS GROUP COMPA NIES IS ENGAGED IN THE BUSINESS OF MANUFACTURING CHOCOLATE AND OTHER C ONFECTIONARY PRODUCTS. 5 9. THE APPELLANT HAS BEEN ESTABLISHED WITH THE OBJE CT OF MANUFACTURING AND SELLING ITS PRODUCTS ON WHOLESALE BASIS IN INDI A AND CONFECTIONARIES. 10. THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY TH E ASSESSEE WITH ITS AES DURING THE YEAR UNDER CONSIDERATION AS UNDER : - S.N NATURE OF TRANSACTION METHOD USED TRANSACTION VALUE (RS.) 1. IMPORT OF RAW MATERIAL FOR KINDER JOY CHOCOLATES CUP CUSTOMS VALUE 90,123,537 2. IMPORT OF PACKING MATERIAL CUP CUSTOMS VALUE 788,893 3. IMPORT OF RAW MATERIAL (TOYS) CUP CUSTOMS VALUE 141,118,967 4. IMPORT OF SEMIFINISHED PRODUCT (TICTAC PILLS) CUP CUSTOMS VALUE 6,848,697 5. IMPORT OF PACKING MATERIAL (FOR TIC TAC MINT) CUP CUSTOMS VALUE 291,081 6. IMPORT OF PACKING MATERIAL (SERVICE TRAY) CUP CUSTOMS VALUE 52,018 7. IMPORT OF PACKING MATERIAL (BLISTERS, PAPER DISPLAY, ETC) CUP CUSTOMS VALUE 150,762 8. EXPORT OF FINISHED PRODUCT (KINDER JOY) CUP INTERNAL BENCHMARK 84,453,325 9. EXPORT OF SEMIFINISHED PRODUCT (TICTAC ) TNMM 3,097,513 10. EXPORT OF PACKING MATERIAL (KINDER JOY) TNMM 3,321,087 11. IMPORT OF SERVICES CUP 1,314,859 12. IMPORT OF FIXED ASSETS CUP INDEPENDENT VALUATION 23,316,104 13. REIMBURSEMENT OF EXPENSES BY THE COMPANY NO BENCHMARKING REQUIRED 20,329,613 6 11. FOR BENCHMARKING INTERNATIONAL TRANSACTIONS THE ASSESSEE USED CUP METHOD USING CUSTOM DUTY VALUATION DATA, FOR IMPORT OF RAW MATERIAL, PACKING MATERIAL, SEMI FINISHED PRODUCTS AND IMPORT OF SERVICES. 12. THE TPO DISREGARDED THE TRANSACTION BY TRANSACT ION BENCHMARKING ANALYSIS CONDUCTED BY THE ASSESSEE USING CUP METHOD AND INSTEAD OF APPLIED AGGREGATION APPROACH USING TNMM AS THE MOST APPROPR IATE METHOD. THE TPO IDENTIFIED FRESH COMPARABLES AND ALSO DISREGARD ED THE ECONOMIC ADJUSTMENTS (WORKING CAPITAL ADJUSTMENTS AND CUSTOM DUTY ADJUSTMENT) THEREBY MAKING UPWARD ADJUSTMENTS OF RS.15,20,75,07 2/-.FOLLOWING COMPARABLES WERE FINALLY SELECTED FOR THE BENCHMARK ING OF THE INTERNATIONAL TRANSACTION :- 7 13. PROCEEDING FURTHER THE AO DISALLOWED 10%OF MISC ELLANEOUS EXPENSES OF RS.2897951/- CLAIMED BY THE ASSESSEE AND MADE AN AD DITION OF RS.289800/- ON AD-HOC BASIS. ASSESSEE CHALLENGED THE ASSESSMEN T BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. 14. BEFORE US THE COUNSEL FOR THE ASSESSEE ASSAILED THE APPROACH OF THE LOWER AUTHORITIES ON THE FOLLOWING ISSUES :- 1. EXCLUSION OF HEINZ INDIA PRIVATE LIMITED AS COMPARA BLES 2. ADJUSTMENT ON ACCOUNT OF CUSTOM DUTY AND CAPACITY U TILISATION 3. AD-HOC DISALLOWANCE OF MISCELLANEOUS EXPENSES 4. ALLOW SET OFF OF BROUGHT FORWARD ACCUMULATED LOSSES 15. IT IS THE SAY OF THE COUNSEL THAT IT WAS CHALLE NGED BEFORE THE TPO FOR THE EXCLUSION OF HEINZ INDIA AS A COMPARABLE IN THE FINAL SET OFF COMPARABLES ON THE GROUND THAT THE TURNOVER OF HEINZ INDIA PVT. LTD. WAS RS. 720 CRORES AND THAT OF THE ASSESSEE IS ONLY 34 CRORES. 16. THE COUNSEL VEHEMENTLY STATED THAT SUCH HIGHER TURNOVER COMPANY SHOULD NOT BE USED AS COMPARABLE WITH A LOW TURNOVE R COMPANY LIKE THE ASSESSEE. 17. THE COUNSEL CONTINUED BY STATING THAT THE COMPA NY ENGAGED IN MANUFACTURING OPERATIONS HAVING VARIED TURNOVERS CA NNOT BE COMPARED TO 8 EACH OTHER AS THE DIFFERENCE IN THEIR SIZES AND SCA LE OF OPERATIONS HAVE A DIRECT IMPACT ON THEIR PROFITABILITY. 18. THE COUNSEL FURTHER POINTED OUT THAT THE CIT(A) UPHELD THE ACTION OF THE AO/ TPO BY RELYING UPON THE DECISION GIVEN IN T HE CASE M/S. WILLS PROCESSING SERVICES VS. DCIT 30 TAXMAN.COM 350 WHER EIN THE COORDINATE HONBLE MUMBAI ITAT BENCH HAS HELD THAT TURNOVER CR ITERIA IS NOT A VALID CRITERIA. 19. IT IS THE SAY OF THE COUNSEL THAT HEINZ INDIA I S FUNCTIONALLY NOT COMPARABLE AS IT IS ENGAGED IN MANUFACTURING OF PRO DUCTS LIKE ENERGY DRINKS/ (COMPLAN AND GLUCON-D), PRICKLY HEAT POWER (NYCIL), TOMATO KETCHUP AND GHEE WHEREAS THE ASSESSEE IS A MANUFACTURER OF CHOC OLATE AND CONFECTIONARIES. THE COUNSEL PRAYED FOR THE EXCLUS ION OF HEINZ INDIA LTD. FROM THE FINAL SET OFF COMPARABLES. 20. PER CONTRA THE DR STRONGLY SUPPORTED THE FINDIN GS OF THE CIT(A). 21. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELOW AND HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IN OUR CONSIDERED OPINION, IN COMMERCIAL WORLD, THE MA NUFACTURES IN ORDER TO EARN HIGHER TURNOVER AT TIMES REDUCE THEIR MARGIN O F PROFIT. IT MEANS HIGHER TURNOVER LOWER THE MARGIN OF THE PROFIT, THEREFORE, MERELY BECAUSE A COMPARABLE COMPANY AS A HIGHER TURNOVER CANNOT BE T HE GROUND FOR ITS 9 EXCLUSION. HOWEVER, WE FIND THAT HEINZ INDIA LTD. CANNOT BE A GOOD COMPARABLE AS IT IS ENGAGED IN A DIFFERENT SET OF P RODUCTS. AS MENTIONED ELSEWHERE HEINZ INDIA MANUFACTURES PRODUCTS LIKE DR INKS, PRICKLY HEAT POWER (NYCIL), TOMATO KETCHUP AND GHEE WHEREAS THE APPELL ANT IS A MANUFACTURER OF CHOCOLATE AND CONFECTIONARIES GOODS. BEING FUNC TIONALLY DISSIMILAR, HEINZ INDIA FAILS THE TEST OF FUNCTIONAL SIMILARITY AND D ESERVES TO BE EXCLUDED. THE DR HAD VEHEMENTLY STATED THAT UNDER THE TNMM METHOD COMPARABLES CANNOT BE ON THE SAME PLATFORM AND SOME LEVERAGE HAS TO BE GIVEN. 22. WE DO NOT FIND ANY MERIT IN THIS CONTENTION OF THE DR. THE HONBLE HIGH COURT OF DELHI IN THE CASE OF RAMPGREEN SOLUTI ON PRIVATE LIMITED 377 ITR 533 HAVE OBSERVED AS UNDER :- 43. IN OUR VIEW, THE AFORESAID APPROACH WOULD NOT BE APPOSITE. INSOFAR AS IDENTIFYING COMPARABLE TRANSACTIONS/ENTITIES IS CONCERNED, THE SAME WOULD NOT DIFFER IRRESPECTIVE OF THE TRANSFER PRICI NG METHOD ADOPTED, IN OTHER WORDS, THE COMPARABLE TRANSACTIONS/ENTITIES M UST BE SELECTED ON THE BASIS OF SIMILARITY WITH THE CONTROLLED TRANSACTION /ENTITY. COMPARABILITY OF CONTROLLED AND UNCONTROLLED TRANSACTIONS HAS TO BE JUDGED, INTER ALIA, WITH REFERENCE TO COMPARABILITY FACTORS AS INDICATED UND ER RULE 10B(2) OF THE INCOME TAX RULES, 1962. COMPARABILITY ANALYSIS BY T NMM METHOD MAY BE LESS SENSITIVE TO CERTAIN DISSIMILARITIES BETWEE N THE TESTED PARTY AND THE COMPARABLES. HOWEVER, THAT CANNOT BE THE CONSIDERAT ION FOR DILUTING THE 10 STANDARDS OF SELECTING COMPARABLE TRANSACTIONS/ENTI TIES. A HIGHER PRODUCT AND FUNCTIONAL SIMILARITY WOULD STRENGTHEN THE EFFI CACY OF THE METHOD IN ASCERTAINING A RELIABLE ALP. THEREFORE, AS FAR AS P OSSIBLE, THE COMPARABLES MUST BE SELECTED KEEPING IN VIEW THE CO MPARABILITY FACTORS AS SPECIFIED. WIDE DEVIATIONS IN PIT MUST TRIGGER F URTHER INVESTIGATIONS/ ANALYSIS. 23. IN THE LIGHT OF THE AFORESAID OBSERVATIONS OF T HE HONBLE HIGH COURT OF DELHI WE DIRECT THE AO / TPO TO EXCLUDE HEINZ INDIA FROM THE FINAL SET OF COMPARABLES. 24. THE NEXT ISSUE RELATES TO THE ADJUSTMENT ON ACC OUNT OF CUSTOM DUTY. 25. THE APPELLANT COMPANY CLAIMED CUSTOM DUTY ADJUS TMENTS SINCE THE YEAR UNDER CONSIDERATION IS THE FIRST FULL YEAR OF OPERATION, THE ASSESSEE DID NOT PROCURE ANY RAW MATERIAL LOCALLY AND IMPORTED 1 00% OF RAW MATERIAL AND FINISHED PRODUCTS. 26. BEFORE US THE COUNSEL FOR THE ASSESSEE VEHEMENT LY STATED THAT THE COMPARABLE COMPANIES ARE NOT DEPENDENT ON IMPORTS W HEREAS THE ASSESSEE HAS 100% IMPORTS OF RAW MATERIALS. IT IS THE SAY O F THE COUNSEL THAT IN THE LIGHT OF THE PECULIAR FACTS CUSTOM DUTY ADJUSTMENT NEED TO BE GIVEN. 11 27. THE DR STRONGLY SUPPORTING THE FINDINGS OF THE CIT(A) STATED THAT NO RELIABLE DATAS ARE AVAILABLE. 28. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUT HORITIES BELOW. THE UNDISPUTED FACT IS THAT THE ASSESSEE HAS IMPORTED 1 00% OF ITS RAW MATERIAL WHEREAS THE AVERAGE IMPORT IN THE CASE OF THE COMPA RABLE COMPANIES IS ONLY 0.56% AS CAN WE SEEN FROM THE FOLLOWING CHART :- 29. THE COORDINATE BENCH IN THE CASE OF TEREX INDIA PRIVATE LIMITED IN ITA NO.6775 AND 6783/DEL/2015 HAS HELD AS UNDER :- 12 13 30. CONSIDERING THE FACTUAL MATRIX AS DISCUSSED HER E IN ABOVE IN THE LIGHT OF THE DECISION OF THE COORDINATE BENCH (SUPRA) WE DIRECT THE AO/TPO TO ALLOW THE ADJUSTMENT OF CUSTOM DUTY. 31. THE NEXT ISSUE RELATES THE ADJUSTMENT ON ACCOUN T OF CAPACITY UTILISATION. BEFORE US THE COUNSEL FOR THE ASSESSE E VEHEMENTLY STATED THAT SINCE THIS YEAR IS THE FIRST FULL YEAR OF OPERATION S HENCE, THE ASSESSEE COULD NOT UTILISE ITS INSTALMENT CAPACITY TO THE FULLEST AND COULD UTILISE ONLY 45.34% OF IT CAPACITY IN RELATION THE PRODUCTION OF FINISH ED GOODS WHEREAS THE AVERAGE CAPACITY UTILISATION OF THE COMPARABLES IS 71%. IT IS THE SAY OF THE COUNSEL THAT THE CIT(A) DISREGARDED THIS ADJUSTMENT ON THE BASIS THAT THERE WAS PRACTICAL DIFFICULTY IN FINDING OUT THE RELEVAN T DATA FOR CARRYING OUT THE CAPACITY ADJUSTMENT OF THE COMPARABLES. THE COUNSEL PRAYED FOR THE ALLOWANCE FOR ADJUSTMENT OF CAPACITY UTILISATION. 32. THE DR STRONGLY SUPPORTING THE FINDINGS OF THE CIT(A). 33. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUT HORITIES BELOW. AT THE VERY OUTSET WE DO NOT AGREE WITH THE FINDINGS OF TH E CIT(A) WHO STATED THAT THERE IS A PRACTICAL DIFFICULTY IN FINDING OUT RELE VANT DATA. 34. IN OUR CONSIDERED OPINION THE FINANCIAL REPORT OF EVERY COMPANY CONTAINS THE DETAILS RELATING TO THE CAPACITY UTILI SATION AND THE SAME ARE AVAILABLE IN THE PUBLIC DOMAIN ALSO. THE FINANCIAL REPORTS OF THE COMPARABLE 14 COMPANIES USED BY THE TPO DO CONTAIN THE CAPACITY U TILISATION DETAILS AND THE SAME CAN BE USED FOR GIVING THE BENEFIT OF UNDE R UTILISATION OF CAPACITY BY THE APPELLANT COMPANY. WE ACCORDINGLY DIRECT TH E AO /TPO TO ALLOW ADJUSTMENT OF CAPACITY UTILISATION BY COMPARING THE DATA OF THE COMPARABLE COMPANIES IN SO FAR AS CAPACITY UTILISATION IS CONC ERNED WITH THAT OF THE ASSESSEE. IN ALTERNATE THE ASSESSEE SHALL FURNISH T HE RELEVANT DATA AND THE AO / TPO SHALL EXAMINE THE SAME AFTER GIVING A REAS ONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 35. THE NEXT ISSUE RELATES TO THE AD-HOC DISALLOWAN CE OF MISCELLANEOUS EXPENSES OF RS.50,000/- 36. FACTS ON RECORD SHOW THAT THE AO HAS DISALLOWED RS.289800/-BEING 10% OF THE MISCELLANEOUS EXPENSES INCURRED DURING THE Y EAR AND THE CIT( HAS RESTRICTED THE DISALLOWANCE TO RS.50,000/-. IN OUR UNDERSTANDING OF THE FACTS THE FIRST APPELLATE AUTHORITY HAS ALREADY GIV EN SUBSTANTIAL RELIEF TO THE ASSESSEE AND CONSIDERING THE SMALLNESS OF THE AMOUN T WE DECLINE TO INTERFERE. THIS GROUND IS ACCORDINGLY DISMISSED. 37. THE NEXT GRIEVANCE RELATES TO NON GRANTING OF S ET OF BROUGHT FORWARD LOSSES. 38. WE FIND THAT IN A.Y.2008-09 THE ASSESSED LOSS W AS DETERMINED BY THE AO. THE SAME WAS BROUGHT FORWARD IN A.Y. 2009-10 AT RS.12204535/-. THE AO IS DIRECTED TO ALLOW SET OF BROUGHT FORWARD LOSS ES AS PER THE PROVISIONS OF THE LAW. 15 39. IN THE RESULT THE APPEAL BY THE ASSESSEE IS ALL OWED IN PART FOR STATISTICAL PURPOSE. ITA NO.1049/DEL/2016 (A.Y. 2010-11) 1. FACTS RELATING TO THE BUSINESS PROFILE OF THE AS SESSEE REMAIN THE SAME. THE DETAILS OF INTERNATIONAL TRANSACTION BY THE ASS ESSEE ARE AS UNDER :- S. NO. INTERNATIONAL TRANSACTION AMOUNT FIN RS.} 1 IMPORT OF RAW MATERIAL, SEMI - FINISHED PRODUCT, PACKING MATERIAL 360,550,033 2 IMPORT OF FIXED ASSETS 26,230,289 3 IMPORT OF SERVICES 1,725,461 4 EXPORT OF FINISHED PRODUCT 214,193,927 5 EXPORT OF PACKING MATERIAL 6,286,772 6 REIMBURSEMENT OF EXPENSES TO AES 14,967,395 7 ISSUE OF EQUITY SHARE CAPITAL 271,200,000 2. THE TPO DISREGARDED THE BENCHMARKING ANALYSIS CO NDUCTED BY THE ASSESSEE USING TNMM AS THE MOST APPROPRIATE METHOD AND REJECTED ONE OF THE COMPARABLES NAMELY CANDICO INDIA LIMITED. THE TPO FURTHER DISREGARDED THE ECONOMIC ADJUSTMENT THAT IS WORKING CAPITAL ADJUSTMENT CUSTOM DUTY ADJUSTMENT AND CAPACITY UTILISATION ADJ USTMENT. THE TPO FURTHER CONSIDERED THE PROVISION FOR IMPAIRMENT OF ASSETS AMOUNTING TO 16 RS.1537275/- AS AN OPERATING EXPENSES. THE PROCEED ING WERE COMPLETED BY MAKING AN UPWARD ADJUSTMENT OF RS.119114362/-. 3. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A ) BUT WITHOUT ANY SUCCESS. 4. BEFORE US THE COUNSEL FOR THE ASSESSEE HAS CHALL ENGED THE ORDER OF THE CIT(A) ON THE FOLLOWING ISSUES :- 1. TREATMENT OF PROVISION FOR IMPAIRMENT OF ASSETS AS NON OPERATION 2. EXCLUSION OF CANDICO 8. THE APPELLANT 5. BEFORE US THE COUNSEL FOR THE ASSESSEE STATED TH AT THE AO/TPO HAVE GROSSLY ERRED IN TAKING PROVISION FOR IMPAIRMENT OF ASSETS AMOUNTING TO RS.1537275/- AS AN OPERATING EXPENSES WHILE CALCULA TING THE OPERATING COST OF THE ASSESSEE. THE COUNSEL EXPLAINED THE FACTS S TATING THAT DURING THE YEAR THE ASSESSEE PURCHASED MACHINERY IN THE PRODUC TION OF POLY PACK OF TIC TAK. THESE MACHINES WERE LYING UNDER CAPITAL WORK I N PROGRESS AS ON 31.03.2010 AS THE COMPANY COULD NOT START THE LINE OF PACKING AND DID NOT CAPITALISE THESE MACHINES. THE COUNSEL FURTHER EXPL AINED THAT THE MANAGEMENT DECIDED NOT TO ENTER INTO THE LINE OF PR ODUCTION IN THE POLY PACK AND SOLD THE MACHINERY AS SCRAP. ACCORDINGLY T HE COMPANY HAS PROVIDED FOR IMPAIRMENT OF LOSSES TO BE INCURRED ON SALE OF MACHINES. IT IS THE SAY OF THE COUNSEL THAT THE TREATMENT GIVEN BY THE ASSESSE E IS IN COMPLIANCE WITH THE ACCOUNTING STANDARD ISSUED BY THE ICAI AND HENC E THE IMPAIRMENT OF ASSET SHOULD BE CONSIDERED AS NON OPERATING EXPENSE S. 6. PER CONTRA THE DR SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. 17 7. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF THE A UTHORITIES BELOW. THERE IS NO DISPUTE THAT THE MACHINERY PURCHASED BY THE ASSESSEE WAS LYING IN CAPITAL WORK IN PROGRESS. IT IS ALSO NOT IN DIS PUTE THAT THE TREATMENT GIVEN BY THE ASSESSEE IS IN LINE WITH THE ACCOUNTING STAN DARD ISSUED BY THE ICAI. IN OUR CONSIDERED OPINION A PROVISION FOR IMPAIRMENT O F ASSETS IS NOT A DEPRECIATION CHARGE NOR AMORTISATION OF FIXED ASSET S BUT IT IS A PROVISION MADE TO THE CARRING AMOUNT OF THE FIXED ASSETS WHIC H IS REVERSIBLE IN NATURE. MOREOVER SECTION 92 (1) OF THE ACT REQUIRES THAT AN Y INCOME ARSING FROM AN INTERNATIONAL TRANSACTION / ALLOWANCE FOR ANY EXPEN SES SHALL BE COMPUTED HAVING REGARD TO ARMS LENGTH PRICE. IN OUR CONSIDE RED VIEW IMPAIRMENT OF ASSETS CANNOT BE RELATED AS INTERNATIONAL TRANSACTI ON OF THE ASSESSEE. FURTHER THE PROVISION FOR IMPAIRMENT OF ASSETS IS N OT REGULAR BUSINESS EXPENDITURE SINCE IT IS NOT RECURRING IN NATURE AND IS NOT RELATED NORMAL BUSINESS OPERATION AND HENCE NOT IN THE NATURE OF O PERATION EXPENSES, THEREFORE, IN OUR CONSIDERED OPINION THE SAME CANNO T BE TREATED AS OPERATING EXPENDITURE FOR THE CALCULATION OF PLI OF THE ASSESSEE. WE ACCORDINGLY DIRECT THE AO / TPO TO EXCLUDE PROVISIO N OF IMPAIRMENT OF ASSETS AS OPERATING EXPENDITURE. THIS GROUND IS ACCORDING LY ALLOWED. 8. THE NEXT GRIEVANCE RELATES TO THE EXCLUSION OF C ANDICO INDIA LTD. IN THE FINAL SET OF COMPARABLES. 9. FACTS ON RECORD SHOW THAT THIS COMPANY WAS REJEC TED BY THE TPO AND SUCH REJECTION WAS UPHELD BY THE CIT(A) SOLELY ON T HE GROUND THAT THIS COMPANY IS A PERSISTENT LOSS MAKING COMPANY. 10. BEFORE US THE COUNSEL FOR THE ASSESSEE VEHEMENT LY STATED THAT CANDICO INDIA IS NOT A PERSISTENT LOSS MAKING COMPANY IN AS MUCH AS IN F.Y.2007-08. IT HAS SHOWN PROFIT 0.13% THOUGH IN F.Y. 2008-09 AN D F.Y.2009-10 IT SHOWED LOSSES. 11. IT IS THE SAY OF THE COUNSEL THAT A PERSISTENT LOSS MAKING MEANS CONTINUES LOSS MAKING FOR MORE THAN 3 YEARS. FOR T HIS PROPOSITION RELIANCE WAS PLACED ON THE DECISION OF THE TRIBUNAL MUMBAI B ENCH IN THE CASE OF TPG CAPITAL INDIA IN ITA NO.7594/MUM/2014/ 18 12. PER CONTRA THE DR SUPPORTED THE ORDERS OF THE A O / TPO/ CIT(A). 13. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF THE AUTHORITIES BELOW. THE UNDISPUTED FACT IS THAT CANDICO INDIA FULFILS ALL T HE QUANTITATIVE AND QUALITATIVE FILTERS APPLIED BY THE ASSESSEE AS WELL AS THE TPO. THE ONLY REASON BY THE LOWER AUTHORITIES FOR REJECTING CANDI CO FROM THE FINAL SET OF COMPARABLES IS THAT IT IS A PERSISTENT LOSS MAKING COMPANY. HOWEVER, AS MENTIONED ELSEWHERE IN THE PAST 3 YEARS CANDICO IND IA HAS SHOWN LOSS ONLY IN 2 YEARS. FURTHER THE ASSESSEE ITSELF IS A LOSS MAK ING COMPANY WHICH IS EVIDENT FROM THE ASSESSMENT ORDERS. IN F.Y.2008-09 THE ASSESSEE RETURNED LOSS OF RS.13.13 CRORES AND DURING THE YEAR UNDER C ONSIDERATION THE ASSESSEE HAS RETURNED LOSS OF RS.9.02 CRORES. THE HONBLE B OMBAY HIGH COURT IN THE CASE OF GOLD SASH INDIA SECURITIES PRIVATE LIMITED IN ITA NO. 2222 OF 2013 HAD THE OCCASION TO CONSIDER THE FOLLOWING SUBSTANT IAL QUESTION OF LAW :- 19 14. THE RELEVANT FINDINGS OF THE TRIBUNAL IN ITA NO .7724/MUM/2011 READS AS UNDER :- 20 15. CONSIDERING THE FACTS IN TOTALITY IN THE LIGHT OF THE JUDICIAL DECISIONS REFERRED HERE IN ABOVE WE DIRECT THE AO / TPO TO IN CLUDE CANDICO INDIA IN THE FINAL SET OF COMPARABLES. 16. THE NEXT ISSUE RELATES THE ADJUSTMENT ON ACCOUN T OF CUSTOM DUTY AND CAPACITY UTILISATION THIS ISSUE HAS BEEN DISCUSSED BY US AT LENGTH IN ITA NO. 5158/DEL/2015 FOR A. Y.2009-10 (SUPRA) IN DETAILED DISCUSSION THEREIN WE ORDER ACCORDINGLY. 17. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED IN PART FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 21.08.2020. SD/- SD/- [SUCHITRA KAMBLE] [ N. K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 21.08.2020 *NEHA* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR ITAT, NEW DELHI DATE OF DICTATION 17.08.2020 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 21.08.2020 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER 21.08.2020 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS 21.08.2020 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 21.08.2020 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS 21.08.2020 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WE BSITE OF ITAT 28.08.2020 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH FILE GOES TO THE HEAD CLERK. THE DATE ON WHICH FILE GOES TO THE ASSISTANT REGISTRA R FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER