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

ITA 1120/DEL/2015

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5522 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-04-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I2
• Next Hearing Date: 15-06-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 25-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SHRIN NAGESHWAR RAO
• Keywords: Transfer pricing; International transaction; Rule of consistency
• Section: 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DLEHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER I.T.A. NO.1120/DEL/2015 ASSESSMENT YEAR: 2010-11 DY. COMMISSIONER OF INCOME-TAX, VS JDSU INDIAN PVT. LTD. CIRCLE 13(1), NEW DELHI. 25/38, WEST PATEL NAGAR , NEW DELHI. (PAN: AAACW0654M) CROSS OBJECTION NO.217/DEL/2016 (IN I.T.A. NO.1120/DEL/2015) ASSESSMENT YEAR: 2010-11 JDSU INDIAN PVT. LTD. VS DY. COMMISSI ONER OF INCOME-TAX, 25/38, WEST PATEL NAGAR, CIRCLE 13(1), NEW D ELHI. NEW DELHI. (PAN: AAACW0654M) (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRIN NAGESHWAR RAO, ADVOCATE DEPARTMENT BY: SHRI H.K. CHOUDHARY, CIT- DR SHRI SANJAY YADAV, SR. DR DATE OF HEARING: 14.03.2018 DATE OF PRONOUNCEMENT: 02 .04.2018 ORDER PER K. NARASIMHA CHARY, JM THE APPEAL FILED BY THE REVENUE AND THE CROSS OBJECT ION FILED BY THE ASSESSEE EMANATE FROM THE ORDER DATED 16.12.2014 P ASSED BY THE LEARNED DISPUTE RESOLUTION PANEL-IV, NEW DELHI (LD. DRP) AND THE ASSESSMENT ORDER DATED 28.1.2015. 2 2. BRIEF FACTS OF THE CASE RELEVANT FOR THE DISPOSA L OF THE APPEAL ARE THAT THE ASSESSEE, FORMERLY KNOWN AS JDSU INDIA PRIVATE LIMIT ED AND PRESENTLY KNOWN AS VIAVI SOLUTIONS INDIA PRIVATE LIMITED IS ENGAGED IN IMPORT OF HIGH TECHNOLOGY, PRECISION TESTING EQUIPMENT FROM GROUP C OMPANIES FOR RESALE TO VARIOUS GOVERNMENT AND PRIVATE SECTOR COMPANIES IN THE TELECOM SECTOR. THEY ALSO PROVIDE OTHER SERVICES WHICH INCLUDE INSTALLAT ION, POST INSTALLATION SUPPORT, MAINTENANCE SERVICES AND WARRANTY, POST WARRANTY SERV ICES FOR PRODUCTS THAT ARE SOLD IN INDIA BY THEM OR BY THEIR GROUP COMPANIES DIRECTLY IN INDIA. IN ADDITION THE ASSESSEE ALSO PROVIDES INDENTING SERVI CES TO FACILITATE SALE OF ITS OVERSEAS GROUP COMPANIES PRODUCTS IN INDIA TO THOS E CUSTOMERS WHO DESIRE TO IMPORT SUCH PRODUCTS DIRECTLY FROM THE OVERSEAS COMP ANIES ON COMMISSION BASIS. FOR THIS ACTIVITY ALSO ASSESSEE PROVIDES THE ALLIED MARKETING SUPPORT SERVICES AND IS RESPONSIBLE FOR PROVIDING INSTALLAT ION, WARRANTY, AND POST INSTALLATION/WARRANTY SUPPORT AND MAINTENANCE SERVIC ES TO CUSTOMERS IN RELATION TO PRODUCTS SOLD TO THEM BY THE OVERSEAS CO MPANIES. APART FROM THIS ACTIVITY, THE ASSESSEE PROVIDES SIMILAR SERVICES TO THOSE THIRD PARTIES WHO DIRECTLY PURCHASED THE PRODUCTS FROM THE FOREIGN ASS OCIATED ENTERPRISE (AE). 3. FOR THE ASSESSMENT YEAR 2010-11, THEY HAVE FILED A RETURN OF INCOME ON 13.10.2011 DECLARING A TOTAL INCOME OF RS.7,32,34,4 05/- AND REVISED THE SAME SUBSEQUENTLY. ASSESSEE ADOPTED TNMM AS THE MOST APPR OPRIATE METHOD TO BENCH MARK THE INTERNATIONAL TRANSACTIONS. SELECTE D FIVE COMPARABLE WHOSE AVERAGE MARGIN WAS ON USING MULTIYEAR DATA WAS 7.44% AS AGAINST THE MARGIN OF THE TAX PAYER AT 13.18%. BASING ON THIS, THE ASS ESSEE SUBMITTED THAT THEIR INTERNATIONAL TRANSACTIONS WERE AT ARMS LENGTH. 4. DURING SCRUTINY, LD. ASSESSING OFFICER REFERRED THE INTERNATIONAL 3 TRANSACTION FOR THE CONSIDERATION OF LD. TPO. ACCO RDING TO THE ASSESSEE, THE INTERNATIONAL TRANSACTIONS INCLUDE: S.N NATURE OF INTERNATIONAL TRANSACTION VALUE (RS.) 1 PURCHASE OF SPARE/TRADED GOODS 12,75,96,651/- 2 RECEIPT OF COMMISSION INCOME 7,05,18,893/- 5. LD. TPO REJECTED THE BENCHMARKING ANALYSIS CONDUC TED BY ASSESSEE AND SEGREGATED THE FINANCIALS OF THE ASSESSEE IN TWO SE GMENTS, VIZ., DISTRIBUTION AND COMMISSION SEGMENTS IN PROPORTION TO SALES BY TH E ASSESSEE IN DISTRIBUTION BUSINESS AND COMMISSION INCOME FROM IN DENTING ACTIVITIES. BY ADOPTING THIS METHOD, LD. TPO REACHED THE MARGIN EA RNED BY THE ASSESSEE IN DISTRIBUTION SEGMENT AT -2.17% AND ON THAT BASIS, I N VIEW OF THE MARGINS OF THE COMPARABLES AT 7.08%, MADE AN ADJUSTMENT OF RS.2,07 ,14,077/- TO THE INCOME OF THE ASSESSEE. 6. INSOFAR AS THE COMMISSION SEGMENT IS CONCERNED, LD. TPO MADE AN OBSERVATION THAT THE AGREEMENT PRODUCED BY THE ASSES SEE PROVIDES FOR 25% OF COMMISSION ON THE TOTAL VALUE OF THE ORDERS PROCURE D BUT IN RESPECT OF CERTAIN INVOICES, A LESSER COMMISSION WAS SHOWN TO HAVE BEE N EARNED BY THE ASSESSEE, AS SUCH, THE EXPLANATION OF THE ASSESSEE WAS SOUGHT . ASSESSEE EXPLAINED THAT FURTHER TO THE AGREEMENT CONSIDERED BY THE LD. TPO T HERE WAS AN UPDATE IN THE JDSU GROUP COMPANIES AGENCY COMMISSION POLICY, WHEREI N A CHANGE IN THE COMMISSION RATE WAS SPECIFIED WITH RESPECT TO CERTA IN PRODUCTS SOLD BY THE GROUP LIKE ON INSTRUMENTS 25%, ON SYSTEMS 18%, AND C PO 18%, WHEREAS THE INVOICES ENUMERATED BY THE LD. TPO AT PAGE NOS. 18 T O 20 PERTAIN TO THOSE PRODUCTS ONLY AND INVOICES WERE ENCLOSED FOR THE PER USAL OF THE LD. TPO. ASSESSEE FURTHER SUBMITTED THAT IN RESPECT OF THE I NVOICE RELATING TO THE 4 COMMISSION OF 10%, IT PERTAINS TO A ONE TIME CONSUL TANCY AGREEMENT WITH JDSU, MALAYSIA WHEREIN JDSU INDIA WAS ENTITLED TO A COMMISSION OF 10% AND SUCH AN AGREEMENT WAS ALSO ENCLOSED. 7. HOWEVER, LD. TPO REJECTED THIS EXPLANATION AND H ELD THAT AS PER THE AGREEMENT FURNISHED, COMMISSION WAS FIXED AT 25% AN D THE SAME HAS TO BE APPLIED UNIFORMLY TO ALL THE TRANSACTIONS UNDERTAKEN UNDER THE UMBRELLA OF THAT AGREEMENT AND IN THE ABSENCE OF ANY EVIDENCE SU PPORTING THE UPDATE IN JDSU GROUP COMMISSION POLICY, THE PLEA OF DIFFERENT COMMISSION RATES CANNOT BE ACCEPTED. HOLDING SO, LD. TPO PROCEEDED TO APPL Y CUP METHOD TO THE RATE OF COMMISSION AND MADE AN ADDITION OF RS.1,13,18,91 5/- TO THE INCOME OF THE ASSESSEE. LD. TPO MADE AN ADDITION OF RS.65,61,939 /- TOWARDS THE INTEREST RECEIVABLE ON DELAYED RECEIPT OF COMMISSION OVER AND ABOVE THEIR CREDIT PERIOD. 8. LD. AO PROPOSED TO ADD THE TRANSFER PRICING ADJU STMENT TO THE INCOME OF THE ASSESSEE. HE ALSO PROPOSED TO ADD, INTER ALIA, A SUM OF RS.6,60,547/- ON ACCOUNT OF DISALLOWANCE OF THE TRAVELLING EXPENSES. 9. ASSESSEE CARRIED THE MATTER BEFORE THE LD. DRP O N SEVERAL GROUNDS RAISING THE FOLLOWING ISSUES ON THE ASPECT OF TRANS FER PRICING ADJUSTMENTS,- (I) WHETHER THE AO/TPO IS RIGHT IN REJECTING THE TNMM AS THE MOST APPROPRIATE METHOD WHILE COMPUTING THE ARMS L ENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. (II) WHETHER THE AO/TPO IS RIGHT IN DENYING AND ADJUSTMEN T ON ACCOUNT OF WORKING CAPITAL WHILE WORKING OUT THE AV ERAGE MARGINS OF THE COMPARABLES. (III) WHETHER THE AO/TPO IS RIGHT IN CHARGING THE INTERES T ON THEN RECEIVABLES FROM THE AES. 5 10. LD. DRP CONSIDERED THE ABOVE TRANSFER PRICING I SSUES AND ALSO THE ISSUE RELATING THE DISALLOWANCE OF THE TRAVELLING EXPENSE S IN DETAILS. LD. DRP CONSIDERED THE ARGUMENTS ADVANCED ON BEHALF OF THE ASSESSEE AND DIRECTED THE LD. TPO TO APPLY THE TNMM AND WORK OUT THE ARMS LEN GTH PRICE OF THE INTERNATIONAL TRANSACTION IN CONSONANCE WITH THE DE CISION OF THE LD. DRP HAS TAKEN IN THE PRECEDING ASSTT. YEAR 2009-10. LD. D RP ALSO DIRECTED THE LD. AO TO GIVE WORKING CAPITAL ADJUSTMENT. LASTLY, LD. DRP FURTHER DIRECTED THE DELETION OF THE DISALLOWANCE ON ACCOUNT OF THE FORE IGN TRAVEL EXPENSES. 11. THE ID. DISPUTE RESOLUTION PANEL (DRP) HAS AL SO NOTED IN ITS DIRECTION THAT THE REVENUE HAS FAILED TO PROVE THAT THE INTER NATIONAL TRANSACTIONS UNDER DISPUTE ARE NOT SAME AS IN THE PREVIOUS YEARS I.E. AY 2007-08, 2008-09 AND 2009-10. IT IS ALSO OBSERVED BY THE LD. DRP THAT TH E BUSINESS MODEL OF THE ASSESSEE HAS NOT CHANGED FROM THE PREVIOUS YEAR AND THERE IS NO CHANGE IN THE FUNCTIONS, ASSETS AND RISK ('FAR) PROFILE OF THE A SSESSEE. LD. TPO HAS FAILED TO DEMONSTRATE HOW A COMPLETELY DIFFERENT APPROACH FROM TNMM ON AN ENTITY LEVEL MARGIN AND THE APPLICATION OF CUP TO BENCHMAR K COMMISSION INCOME IS JUSTIFIED. 12. CHALLENGING THE DIRECTIONS OF THE LD. DRP TO DE LETE THE TRANSFER PRICING ADJUSTMENT AND TRAVELLING EXPENSES AND ALSO DIRECTI NG THE LD. TPO TO GIVE THE WORKING CAPITAL ADJUSTMENT, REVENUE IS IN THIS APPE AL BEFORE US; WHEREAS WHILE SUPPORTING THE DIRECTION OF THE LD. DRP AND BEING A GGRIEVED BY NOT GIVING SET OFF OF EXCESS PROFITS EARNED IN COMMISSION SEGMENT WHIL E DETERMINING THE ADJUSTMENT FOR DISTRIBUTION SEGMENT, ASSESSEE PREFE RRED CROSS OBJECTION. 13. LD. DR HEAVILY RELIED ON THE ORDER OF THE LD. TP O. ACCORDING TO HIM, THE 6 LD. TPO CORRECTLY IDENTIFIED THAT THE ASSESSEE IS IN VOLVED IN TRADING AND MARKETING SUPPORT SERVICES - FROM TRADING SEGMENT A SSESSEE EARNED PROFITS AND MARKETING SUPPORT SERVICE SEGMENT ASSESSEE EARNS CO MMISSION INCOME. HE FURTHER SUBMITTED THAT IN THE TRADING SEGMENT, THE ASSESSEE IMPORTS THE PRODUCTS AND SELLS THE SAME TO THE INDIAN ENTITIES WHILE PROVIDING THEM SERVICES ALSO, WHEREAS IN THE MARKETING SUPPORT SER VICE SEGMENT, THE ASSESSEE EARNS INCOME ON THE SALES FACILITATED BY IT OF ITS A ES TO THE INDIAN CUSTOMERS. ON THIS PREMISE, LD. DR SUBMITS THAT THE FUNCTIONS PERFORMED BY THE ASSESSEE IN THESE TWO SEGMENTS ARE DIFFERENT AND RIGHTLY SEGR EGATED BY THE LD. TPO. ACCORDING TO THE LD. DR, TRADING AND SERVICE CANNOT BE AGGREGATED INASMUCH AS TRADING INVOLVES INVENTORIES WHEREAS COMMISSION IS PURELY EARNED BY SERVICE. HE FURTHER SUBMITTED THAT THE STAND TAKEN BY THE LD. TPO TO BIFURCATE THE FINANCIALS OF THE ASSESSEE ON THE BASIS OF THE INCO ME EARNED FROM THESE TWO SEGMENTS. 14. PER CONTRA, IT IS ARGUED BEFORE US ON BEHALF OF THE ASSESSEE AND THE RECORD REVEALS THAT IT WAS SO ARGUED BEFORE THE LD. DRP, THAT AS PER THE INDUSTRY PRACTICE IN THE TELECOM INDUSTRY, MOST OF TH E CONTRACTS ARE COMPOSITE IN NATURE WHEREIN RESPECTIVE PRODUCTS ARE MARKETED/ SOLD ALONG WITH AMC/WARRANTY SERVICES, NECESSITATING CLOSE INTEGRATI ON OF THE BUSINESS PROFILE AND SERVICES TO BE PERFORMED WITH COMMON MANAGEMENT , STRATEGIES, EMPLOYEES AND FACILITIES, AS SUCH, IN VIEW OF THIS C LOSELY INTER-LINKED TRANSACTIONS THEY HAVE TO BE AGGREGATED AND ANY SEGRE GATION OF SERVICES IN SUCH CASES IS HIGHLY UNRELIABLE. IT IS FURTHER ARGU ED BEFORE US THAT IN THIS MATTER REALIZING THIS PRACTICAL ASPECT FOR ALL THE EARLIER ASSESSMENT YEARS TNMM WAS ACCEPTED ON THE AGGREGATED FINANCIALS. HE, THEREFO RE, PRAYED THAT THE ORDERS OF 7 THE LD. DRP CANNOT BE DISTURBED. 15. WE HAVE CAREFULLY GONE THROUGH THE RECORD IN THE LIGHT OF THE SUBMISSIONS ON EITHER SIDE. THOUGH THE LEARNED DR SUBMITTED THAT ISSUES RELATING TO THE ASSTT. YEARS 2007-08 TO 2009-10 ARE DIFFERENT IN SO FAR AS TRANSFER PRICING ADJUSTMENT IS CONCERNED, NO DOCUME NT IS PLACED ON RECORD TO CONTROVERT THE FINDINGS OF THE LD. DRP VIDE PARAGRP AHNO.7.2 OF THEIR ORDER. HOWEVER, ORDER U/S 92CA(3) OF THE INCOME-TAX ACT FO R AY 2007-08, ORDER U/S 92CA(3) OF THE ACT FOR AY 2008-09 AND ORDER U/S 92C A(3) OF THE ACT FOR AY 2009-10 IN ASSESSEES OWN CASE CLEARLY ESTABLISH THA T THE SAME INTERNATIONAL TRANSACTIONS ARE BENCH MARKED AND THE BUSINESS MODE L OF THE ASSESSEE IS IDENTICAL AND THERE IS NO CHANGE IN THE FAR ANALYSIS FOR AY 2010-11 AND IN THE PREVIOUS ASSESSMENT YEARS. THE VERY SAME COMPARABLE COMPANIES WERE CHOSEN TO BENCHMARK THE INTERNATIONAL TRANSACTIONS. NOTHING IS PLACED ON RECORD TO DISCREDIT THE OBSERVATIONS OF THE LD. DRP THAT FOR AY 2009-10 THE LD. DRP UPHELD THE VIEW OF THE AO OF DETERMINING THE AR MS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION BY TREATING THE TNMM AS TH E MOST APPROPRIATE METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTION. 16. IT COULD BE SEEN FROM THE ORDER OF THE LD. TPO, HE SEGREGATED THE FINANCIALS OF THE ASSESSEE INTO TRADING AND COMMI SSION SEGMENTS IN PROPORTION TO SALES BY THE ASSESSEE IN DISTRIBUTION BUSINESS AN D COMMISSION INCOME. ASSESSEE SERIOUSLY OBJECTS TO THIS APPROACH AND SUBM ITTED THAT THE APPROACH OF THE LD. TPO IS AGAINST THE ESTABLISHED PRINCIPLES O F LAW. ACCORDING TO HIM, BRINGING THE COMMISSION FROM INDENTING SEGMENT AND THE TURNOVER IN THE TRADING SEGMENT ON ONE PLATFORM FOR COMPARISON IS B AD. 8 17. ON THE OTHER HAND, IT IS SUBMITTED ON BEHALF OF THE ASSESSEE THAT IF AT ALL, THE LD. TPO THINKS IT NECESSARY TO BIFURCATE THE SAM E, HE SHOULD HAVE TAKEN THE GROSS PROFIT FROM THE DISTRIBUTION BUSINESS MINUS T HE COST RELATED TO THE MAINTENANCE OF THE INVENTORY, RISK AND OTHER RELATED COST TO BE COMPARED WITH THE GROSS COMMISSION FROM THE INDENTING ACTIVITIES AS HAS BEEN APPROVED IN THE CASE OF M/S BAYER MATERIAL SCIENCE P. LTD. (ITA 7977 /MUM/2010). IT WAS FURTHER SUBMITTED, IN THE ALTERNATIVE, THAT THE EXP ENSES COULD BE BIFURCATED ON THE BASIS OF SALES MADE BY THE ASSESSEE IN TRADING S EGMENT VIS-A-VIS THE SALES MADE BY THE AES TO FINAL CUSTOMERS FOR WHICH THE AS SESSEE EARNS COMMISSION INCOME. IT IS DEMONSTRATED BEFORE THE LD. DRP THAT UNDER EITHER OF THE METHODS, THE INTERNATIONAL TRANSACTIONS IN RESPECT OF BOTH THE SEGMENTS MEET THE ARMS LENGTH STANDARDS. 18. AS A MATTER OF FACT, LD. DRP INCORPORATED ALL T HESE DETAILS IN THEIR ORDER AND HAVING CONSIDERED THE ENTIRE GAMUT OF CONTENTIO NS OF THE ASSESSEE, HE HELD THAT THE PAST HISTORY OF THE ASSESSEE SHOWS THAT TH E LD. DRP IN AY 2009-10 UPHELD THE VIEW OF THE AO OF DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION BY TREATING THE TNMM AS TH E MOST APPROPRIATE METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTIONS. IT FURTHER HELD THAT IN THE YEAR UNDER CONSIDERATION, THE SAME INTERNATIONAL TRA NSACTIONS ARE BENCHMARK AND THE BUSINESS MODEL OF THE ASSESSEE IS IDENTICAL AND THERE IS NO CHANGE IN THE FAR ANALYSIS FOR THE YEAR UNDER CONSIDERATION AS WELL AS IN THE PRECEDING YEAR. LD DRP FURTHER OBSERVED THAT THE LD. AO/TPO H AD NOT GIVEN ANY COMPELLING REASONS AS TO WHY IN THE YEAR UNDER CONSID ERATION, THE TNMM HAS BEEN REJECTED AND CUP HAS BEEN APPLIED TO BENCHMARK THE COMMISSION INCOME SEPARATELY. HAVING OBSERVED SO, LD. DRP CONCLUDED T HAT THE METHOD ADOPTED 9 BY THE LD. TPO WAS NOT ACCEPTABLE AND DIRECTED THE T PO TO APPLY THE TNMM AND WORK OUT THE ARMS LENGTH PRICE OF THE INTERNAT IONAL TRANSACTIONS IN CONSONANCE WITH THE DECISION OF THE DRP TAKEN IN TH E PRECEDING ASSTT. YEAR 2009-10. 19. AS HAS BEEN OBSERVED BY US IN THE PRECEDING PAR AGRAPHS, NO COMPELLING REASONS ARE FORTHCOMING EVEN BEFORE US AS TO WHY THE LD. TPO SHOULD DISCARD THE METHOD OF TNMM WHICH HAS BEEN CONSISTENTLY AND C ONTINUOUSLY ADOPTED IN THE LAST THREE PRECEDING YEARS. FROM THE ORDER O F THE LD. TPO FOR THE ASSTT. YEAR 2008-09, WE FIND THAT THERE IS COMMISSION INCO ME DURING THAT YEAR ALSO. LD. TPO OBSERVED THAT RULE OF CONSISTENCY CANNOT BE APPLIED FOREVER WHEN FACTS WERE NOT CONSIDERED AND DISCUSSED IN THE EARLIER YEA RS. HE FURTHER STATED THAT THE HIGHER APPELLATE AUTHORITIES HAVE NOT DECIDED O N THE ISSUE AT ALL AND, THEREFORE, THERE IS NO QUESTION OF ACCEPTING THE ST AND OF THE ASSESSEE THAT THE AGGREGATION APPROACH WAS ACCEPTED IN THE EARLIER YEA RS. 20. A BALD STATEMENT THAT IN THE EARLIER YEARS THE FACTS WERE NOT CONSIDERED OR DISCUSSED CANNOT BE A GROUND TO DISTURB A CONSIS TENT VIEW TAKEN BY THE REVENUE. IN THIS MATTER, THE SUPPORT SERVICES LIKE INSTALLATION, WARRANTY AND MAINTENANCE TO THE CUSTOMERS IS THE RESPONSIBILITY O F THE ASSESSEE NOT ONLY FOR THE SO CALLED TRADING SEGMENT, BUT IT IS ALSO THERE WHERE THE ASSESSEE PROVIDES INDENTING SERVICES TO FACILITATE SALE OF ITS OVERSE AS COMPANIES PRODUCTS IN INDIA TO THOSE CUSTOMERS WHO WISH TO IMPORT THESE PRODUCT S DIRECTLY FROM THE OVERSEAS GROUP COMPANIES. BASING ON THIS, THE ASSE SSEE SUBMITS THAT IN TELECOM INDUSTRY LIKE MOST OF THE CONTRACTS, THE TRA NSACTIONS OF THE ASSESSEE ARE COMPOSITE IN NATURE WITH THE BUSINESS PROFILE O F THE ASSESSEE BEING CLOSELY INTEGRATED AND SERVICES ARE PERFORMED FOR BOTH THE ACTIVITIES WITH COMMON 10 MANAGEMENT STRATEGIES, EMPLOYEES AND FACILITIES. 21. WE ARE IN AGREEMENT WITH THE LD. DRP AND THE LD . AR TO HOLD THAT IN THIS SITUATION SEGREGATION OF ACCOUNTS SOLELY BASING ON THE INCOME BUT WITHOUT REFERENCE TO EITHER GROSS PROFIT OR SALES IS MOST U NRELIABLE AND THE ADOPTION OF TNMM METHOD AT ENTITY LEVEL IS SAFE AND PLAUSIBLE ME THOD. UNLESS AND UNTIL THERE ARE COMPELLING REASONS TO DISTURB THIS FUNCTI ONAL INTEGRITY OF THE ASSESSEE, MERELY BECAUSE IT IS POSSIBLE TO HAVE TWO SEGMENTS THEORETICALLY SEPARATE, IT IS NOT SAFE TO BIFURCATE THE FINANCIAL S ARBITRARILY. THE CONTENTION OF THE ASSESSEE THAT THE EXCESS PROFITS EARNED IN COMM ISSION SEGMENT HAVE TO BE GIVEN SET OFF WHILE DETERMINING THE ADJUSTMENT FOR TRADING SEGMENT CANNOT BE BRUSHED ASIDE. PERHAPS KEEPING ALL THIS IN VIEW, L D. DRP FOUND THAT IN THE BACKDROP OF SIMILARITY OF THE INTERNATIONAL TRANSACT IONS TO BE BENCH MARKED AND THE BUSINESS MODEL OF THE ASSESSEE OVER THE PAS T FEW YEARS, IN THE ABSENCE OF ANY COMPELLING REASONS, THE CONSISTENTLY APPLIED T NMM SHOULD NOT HAVE BEEN REJECTED AND CUP METHOD SHOULD NOT HAVE BEEN A PPLIED TO BENCH MARK THE COMMISSION INCOME SEPARATELY. WE DO NOT FIND AN Y REASON TO DISAGREE WITH THE LD. DRP IN VIEW OF THE FACT THAT THE VIEW TAKEN BY THE LD. DRP IS ALSO ONE OF THE PLAUSIBLE VIEWS AMONGST THE SEVERAL OPTI ONS PUT FORTH BEFORE THEM BY THE ASSESSEE WHICH ARE REFLECTED IN THE ORDER OF THE LD. DRP. WE, THEREFORE, UPHOLD THE FINDING OF THE LD. DRP AND FIND GROUND N O.1 DEVOID OF MERITS. 22. NOW COMING TO THE 2 ND GROUND IN REVENUES APPEAL, IT RELATES TO THE DIRECTION GIVEN BY LD. DRP TO THE LD. AO/LD. TPO TO GIVE WORKING CAPITAL ADJUSTMENT WHILE WORKING OUT THE AVERAGE MARGINS OF THE PARABLES. IT COULD BE SEEN FROM THE IMPUGNED ORDER, LD. DRP OPINED THAT I N VIEW OF RULE 10 B (3), TO IMPROVE THE COMPATIBILITY IN THE FACTS OF THE CASE B Y COMPARING MARGINS OF THE 11 TESTED PARTY WITH THE INCOMPARABLE, ADJUSTMENT SHOUL D BE MADE FOR THE WORKING CAPITAL FOR WHICH THE RELIABLE DATA HAS TO BE PROVIDED BY THE TAXPAYER. WHILE DIRECTING THE TAXPAYER TO PROVIDE THE NECESSAR Y DATA/DETAILS WITH COMPUTATION OF THE WORKING CAPITAL OF THE TESTED PA RTY AND COMPARABLES, LD. DRP DIRECTED THE LD. TPO TO GIVE THE WORKING CAPITA L ADJUSTMENT. FOR THIS PURPOSE LD. DRP TOOK STRENGTH FROM THE DECISIONS IN THE CASES OF MENTOR GRAPHICS (109 ITD 101), SONY INDIA (288 ITR 52 DELHI -ITAT) AND PHILIPS SOFTWARE (26 SOT 226 BANGALORE-ITAT). 23. IN VIEW OF THE IMPACT OF THE TRADE RECEIVABLES, TRADE PAYABLES AND INVENTORY ON THE INTEREST COST AND DEPENDING UPON T HE INTEREST COST THE MARGINS CHANGE THEIR VOLUMES; WE DO NOT FIND ANY ILL EGALITY OR IRREGULARITY IN THE DIRECTIONS GIVEN BY THE LD. DRP IN RESPECT OF THE WO RKING CAPITAL ADJUSTMENT. WE SEE NO REASON TO INTERFERE WITH SUCH A DIRECTION . THIS GROUND OF APPEAL IS, ACCORDINGLY, DISMISSED. 24. INSOFAR AS THE 3 RD GROUND IN REVENUES APPEAL, NAMELY, DIRECTION TO DETERMINE THE ALP IN RESPECT OF DETERMINATION OF IN TEREST ON RECEIVABLES OUTSTANDING WITH THE AES AND TO COMPUTE THE INTERES T FORGONE AND OUTSTANDING AND GIVE BENEFIT OF THE SAME AND BRING TO TAX ONLY THE NET INTEREST INCOME IS CONCERNED, THE IMPUGNED ORDER REVEALS THAT THEY LD. DRP CONSIDERED THE CONTENTION OF THE TAXPAYER THAT NO INTEREST WAS CHAR GED BY THEIR AES ON THE AMOUNT DUE TO THEM. LD. DRP FOUND THAT THE PAYMENT I N THIS CASE HAS TO BE RECEIVED WITHIN THE PERIOD OF 30 DAYS AND ANY DELAY BE YOND A PERIOD OF 30 DAYS, IN AN ARMS LENGTH SITUATION WOULD HAVE WARRAN TED A RETURN BASED ON OPPORTUNITY COST OF THE MONEY AS SUCH SINCE AS ON THE AMOUNT OUTSTANDING BEYOND 30 DAYS ON THE TRANSACTIONS ENTERED WITH THE C ASE, THE TAXPAYER HAS NOT 12 CHARGED INTEREST THEREON, THEREFORE, TAXPAYER IS TO PROVIDE THE NECESSARY DATA IN THIS REGARD AND LD. TPO WAS DIRECTED TO COMPUTE THE INTEREST FORGONE ON THIS OUTSTANDING AND GIVE BENEFIT OF THE SAME AND BRING TO TAX ONLY THE NET INTEREST INCOME. FURTHER, LD. DRP DREW SUPPORT FROM SAFE HAR BOR RULES WHICH CAME INTO FORCE IN SEPTEMBER, 2013 STATING THAT THOUGH THEY AR E NOT APPLICABLE IN THE YEAR UNDER CONSIDERATION, BUT THE PRINCIPLE IS JUSTI FIABLY APPLICABLE IN THE CASE OF THE TAXPAYER FOR THE INTERNATIONAL TRANSACTION TO BE BENCHMARKED. IN THE CIRCUMSTANCES LD. DRP DIRECTED THE LD. TPO TO VERIF Y THE AMOUNTS OF RECEIVABLES, STATING THAT IN CASE THE AGGREGATE AMO UNT OF RECEIVABLES FROM THE AES DOES NOT EXCEED THE RS. 50 CRORES, TO APPLY SBI BASE RATE AS ON 30 TH OF JUNE OF RELEVANT THE PREVIOUS YEAR +150 BASIS POINTS, AND IN CASE THE AGGREGATE AMOUNT OF RECEIVABLES FROM THE AES EXCEED RS. 50 CR ORES, APPLY SBI BASE RATE AS ON 30 TH OF JUNE OF RELEVANT PREVIOUS YEAR +300 BASIS POINTS . 25. IT IS NOT DEMONSTRATED BEFORE US AS TO HOW THIS DIRECTION IN THE GIVEN SITUATION IS BAD EITHER ON FACTS OR UNDER LAW. THE REASONING FOLLOWED BY THE LD. DRP IS NEITHER ILLEGAL NOR IRREGULAR AND IT DOES NO T WARRANT ANY INTERFERENCE AT OUR END. IN THE ABSENCE OF ANY COMPELLING REASONS, W E DO NOT FIND IT JUST OR PROPER TO INTERFERE WITH SUCH DIRECTION OF THE LD. DRP. WE THEREFORE UPHOLD THE SAME AND DISMISS THIS GROUND OF APPEAL. 26. LAST GROUND OF REVENUES APPEAL DEAL WITH THE D IRECTION OF THE LD. DRP TO DELETE THE ADDITION OF RS. 6,60,547/-MADE BY THE LD. AO BY WAY OF DISALLOWANCE OF TRAVELLING EXPENSES STATING IT TO BE PRIOR PERIO D EXPENSE. ON THIS ASPECT, AFTER HAVING GONE THROUGH THE ASSESSEE SUBMISSION AND ORD ER OF THE LD. AO, AS A MATTER OF FACT LD. DRP FOUND THAT THE COMPANY RECEIV ED A CONTRACT FOR WHICH IT WAS REQUIRED TO RENDER SERVICES TILL APRIL, 2009, T HE INVOICING FOR WHICH WAS 13 DONE IN APRIL, 2009 AND THE REVENUE WAS RECOGNIZED IN THE FY 2009-10. IT IS FURTHER OBSERVED THAT THE COMPANY INCURRED TRAVELLIN G EXPENSES FOR THIS PROJECT FROM DECEMBER, 2008 TO APRIL, 2009 WHEREAS INCOME F ROM THIS PROJECT WAS NOT RECOGNIZED IN THE BOOKS DURING THE FY 2008-09 AND T HE CORRESPONDING TRAVEL EXPENSES FY 2008-09. HOWEVER, SUBSEQUENTLY IN THE FY 2009-10, THE INCOME FROM THE PROJECT WAS RECOGNIZED AND THE CORRESPONDI NG TRAVELLING EXPENSES WERE CHARGED IN THE BOOKS OF ACCOUNTS. LD. DRP RECO RDED THAT MERELY BECAUSE AN EXPENSE RELATES TO A TRANSACTION OF AN EARLIER YEAR IT DOES NOT BECOME A LIABILITY PAYABLE IN THE EARLIER YEAR UNLESS IT CAN BE SAID THAT THE LIABILITY WAS DETERMINED AND CRYSTALLIZED IN THE YE AR IN QUESTION ON THE BASIS OF MAINTAINING ACCOUNTS ON THE MERCANTILE BASIS, AND I N EACH CASE WHERE THE ACCOUNTS ARE MAINTAINED ON MERCANTILE BASIS IT HAS TO BE FOUND IN RESPECT OF ANY CLAIM WHETHER SUCH LIABILITY WAS CRYSTALLIZED A ND QUANTIFIED DURING THE PREVIOUS YEAR AS REQUIRED TO BE ADJUSTED IN THE BOO KS OF ACCOUNT OF THE PREVIOUS YEAR. IF ANY LIABILITY, THOUGH RELATING TO THE EARL IER YEAR DEPENDS UPON MAKING A DEMAND AND ITS ACCEPTANCE BY THE ASSESSEE AND SUCH LIABILITY HAS BEEN ACTUALLY CLAIMED AND PAID IN THE LATER PREVIOUS YEARS, IT CA NNOT BE DISALLOWED AS DEDUCTION MERELY ON THE BASIS THAT ACCOUNTS ARE MAI NTAINED ON MERCANTILE BASIS AND THAT IT RELATES TO THE TRANSACTION OF THE PREVIOUS YEAR. THE TRUE PROFIT AND GAIN OF A PREVIOUS YEAR ARE REQUIRED TO BE COMP UTED FOR THE PURPOSE OF DETERMINING TAX LIABILITY. THE BASIS OF TAXING INCO MES IS ACCRUAL OF INCOME AS WELL AS ACTUAL RECEIPT. IF FOR WANT OF NECESSARY MA TERIAL CRYSTALLIZING THE EXPENDITURE IS NOT IN EXISTENCE IN RESPECT OF WHICH SUCH KNOWN INCOME OR EXPENSES RELATES, THE MERCANTILE SYSTEM DOES NOT CA LL FOR AN ADJUSTMENT IN THE BOOKS OF ACCOUNT ON ESTIMATE BASIS. IT IS ACTUALLY KNOWN INCOME ARE EXPENSE, RIGHT TO RECEIVE OUR LIABILITY TO PAY WHICH HAS COM E TO BE CRYSTALLIZED IS TO BE TAKEN INTO ACCOUNT UNDER MERCANTILE SYSTEM OF MAINT AINING BOOKS OF ACCOUNT. AN ESTIMATED INCOME OR RELIABILITY, WHICH IS YET TO BE CRYSTALLIZED, CAN ONLY BE ADJUSTED AS CONTINGENCY ITEM AT NORTON AS ON ACCRUE D INCOME OR RELIABILITY OF THE TF. THIS PROPOSITION HAS BEEN HELD BY HONBLE HI GH COURT OF GUJARAT IN THE CASE OF SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES L IMITED VERSUS CIT REPORTED IN 213 ITR 523. IN THE INSTANT CASE, THE EXPENDITURE IN REGARD TO T RAVELLING EXPENSES HAS ACCRUED AND ARISEN DURING THE YEAR AND ACCORDINGLY THE SAME IS ALLOWABLE AS DIRECTION WHILE COMPUTING THE PROFITS FOR THE FY 20 09-10. THE ASSESSING OFFICER 14 IS, THEREFORE, DIRECTED TO DELETE THE ADDITION OF I NR 6,60,547. 27. THIS REASONING OF THE LD. DRP IS PERFECTLY LEGAL . WE FIND NO REASON TO INTERFERE WITH THE SAME. WE, THEREFORE, UPHOLD THE SAME AND DISMISS THE GROUND NO. 4 OF REVENUES APPEAL. 28. IN VIEW OF OUR FINDINGS ON GROUND NO. 1 OF REVE NUES APPEAL, THE GROUND URGED BY THE ASSESSEE IN CROSS OBJECTION HAVE BECOME INFRUCTUOUS AND DO NOT REQUIRE ANY SPECIFIC AND SEPARATE ADJUDICATION. WE, THEREFORE, DISMISSED THE CROSS OBJECTIONS AS INFRUCTUOUS. 29. IN THE RESULT, BOTH THE APPEAL AND THE CROSS OB JECTIONS OR DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND APRIL, 2018. SD/- SD/- (R.K. PANDA) (K. NARASIM HA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 2 ND APRIL, 2018 VJ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) BY ORDER 5. DR, ITAT ASSTT. REGISTRA R, ITAT