Cornell Overseas P Ltd., New Delhi V. DCIT, New Delhi

ITA 1158/DEL/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6737 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-10-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 27-07-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 28-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMIT RAJ
• Assessee Lawyers: MRS VANDANA BHANDARI
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 : NEW DELHI BEFORE I.C.SUDHIR , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 1158/DEL/2014 (ASSESSMENT YEAR: 2006 - 07 ) CORNELL OVERSEAS P LTD, C - 1, PANCHSHEEL ENCLAVE, NEW DELHI PAN:AAACC0034F VS. DCIT, CIRCLE - 3(1), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : MRS. VANDANA BHANDARI, CA REVENUE BY: SH. AMIT RAJ, SR. DR DATE OF HEARING 27/07/ 2016 DATE OF PRONOUNCEMENT 24 / 10 /2016 O R D E R PER PRASHANT MAHARISHI, A. M. 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD ASSESSING OFFICER DATED 26.09.2014 FOR THE ASSESSMENT YEAR 2006 - 07. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1) LD DISPUTE RESOLUTION PANEL , ID AO AND ID TPO ERRED IN INCLUDING THE ABNORMAL LOSS OF RS 2,40,79,629/ - IN THE COST OF CONSUMPTION OF RAW MATERIAL FOR THE PURPOSES OF CALCULATION OF NORMAL GROSS PROFIT MARK - UP OVER COST. THE ABNORMAL LOSS IS PURELY DURING THE COURSE OF NORMAL MANUFACTURING OPERATIONS AND DOES NOT CONSTITUTE/IS NOT ATTRIBUTABLE TO ANY INTERNATIONAL TRANSACTION BETWEEN ASSESSEE CO. AND ITS AE. THIS HAS LED TO THE TOTAL DISALLOWANCE OF RS 2,80,09,153/ - ON ACCOUNT OF DIFFERENCE IN ARM'S LENGTH PRICE. 2) ENTIRE TRANSFER PRICING ORDER IS BASED O N THE FALSE UNDERSTANDING OF TP LAWS AND REGULATIONS AS APPLICABLE IN INDIA. 3) LD DISPUTE RESOLUTION PANEL, ID AO AND ID TPO ERRED IN ELIMINATING LOSS MAKING COMPANIES FROM THE COMPARABLES AND HAS RECOMPUTED THE AVERAGE GROSS MARK - UP BY USING ONLY HEAVY PROFIT MAKING COMPANIES. THE ID. TPO HAS NOT ADOPTED ANY SCIENTIFIC METHODOLOGY IN SELECTING THE COMPARABLES AND IN DETERMINATION OF ARM'S LENGTH MARGIN. 4) THE LD. AO HAS NOT FOLLOWED THE DIRECTIONS GIVEN BY THE LD. DISPUTE RESOLUTION PANEL W.R. T. TO THE SELECTION OF CERTAIN COMPANIES WHICH WERE NOT INCURRING PERSISTENT LOSSES. THE LD, AO HAS FINALIZED THE DRAFT ASSESSMENT ORDER WITHOUT CONSIDERING THE ABOVE DIRECTIONS. PAGE 2 OF 10 5) LD AO ERRED IN NOT RECTIFYING FACTUAL INACCURACIES AS APPARENT ON FACE OF THE RECORD, IN THE COMPUTATION OF AVERAGE GROSS MARGIN OF COMPARABLES AND THE APPELLANT CO. 6) LD AO ERRED IN CHARGING CONSEQUENTIAL INTEREST AND INITIATING PENALTY PROCEEDINGS. 3. DURING THE COURSE OF HEARING, THE APPELLANT RAISED ADDITIONAL GROUNDS OF APPEAL VIDE APPLICATION DATED 27/07/2016 WHERE 5 GROUNDS ARE RAISED. IT WAS CONTENDED THAT THE ABOVE GROUNDS ARE LEGAL IN NATURE AND GO TO THE ROOT OF THE MATTER AND THAT THE SAID FACTS ARE ALREADY ON RECORD. THEREFORE, SAME MAY BE ADMITTED. IT WAS FURT HER SUBMITTED THAT THESE GROUNDS ARE SPECIFICALLY WITH REFERENCE TO GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE AND THEREFORE THEY MAY NOT BE CONSIDERED AS AN INDEPENDENT ADDITIONAL GROUNDS AND NEW ISSUES BUT THE EXISTING ISSUES IN THE GROUNDS OF THE APPEA L ARE ELABORATED . THE ABOVE GROUNDS OF APPEAL AS UNDER: - 1. THE TPO/AO/DRP FAILED TO APPRECIATE THAT REVALUATION OF INVENTORY BY THE ASSESSEE AND THE CONSEQUENT LOSS OF RS. 2.5 CRORE DOES NOT CONSTITUTE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE. 2. W ITHOUT PREJUDICE, THE TPO/AO/DRP FAILED TO APPRECIATE THAT EVEN IF BY ANY STRETCH OF IMAGINATION, REVALUATION OF INVENTORY BY ASSESSEE AND RESULTANT LOSS OF RS. 2.5 CRORE IS CONSIDERED INTERNATIONAL TRANSACTIONS, THE ARMS LENGTH PRICE OF THE SAME IS NIL, AS IS SIMILARLY PLACED, CONDITIONS, AND UNCONTROLLED ENTITY HAS BEEN PAID RUPEES NIL. 3. WITHOUT PREJUDICE, THE TPO/AO/DRP FAILED TO APPRECIATE THAT EVEN IF BY ANY STRETCH OF IMAGINATION, REVALUATION OF INVENTORY BY ASSESSEE AND RESULTANT LOSS OF RS. 2.5 CROR E IS EQUATED WITH EXPORT SALES TO AE AND HENCE TREATED AS INTERNATIONAL TRANSACTIONS, THE ARMS LENGTH PRICE OF THE SAME IS 5% OF THE DEBT OUTSTANDING AS IN THE SIMILARLY PLACED, CONDITIONS, AND UNCONTROLLED ENTITY HAS BEEN PAID JUST 5% OF DEBT OUTSTANDING . 4. WITHOUT PREJUDICE, THE TPO/AO/DRP ERRED IN APPLYING THE DIFFERENCE IN A LB MARKUP AND ASSESSEE IS MARKUP AND ENTITY LEVEL, AND THEREBY RESULTED IN MAKING THE TRANSFER PRICING ADDITION BOTH IN RESPECT OF RELATED PARTY TRANSACTIONS AS WELL AS NON - RELATED P ARTY TRANSACTIONS, WHEREAS ADJUSTMENT ON ACCOUNT OF TRANSFER PRICING HAS TO BE RESTRICTED ON THE VALUE OF INTERNATIONAL TRANSACTION WITH AES AND THERE CANNOT BE ANY ADDITIONAL VALUE OF UNCONTROLLED TRANSACTIONS. 5. THE AO/TPO ERRED IN INCREASING THE ADDITION ON ACCOUNT OF TRANSFER PRICING FROM RUPEES 280, 09155/ - TO RUPEES 282016916/ IN THE ORDER UNDER SECTION PAGE 3 OF 10 154/144C READ WITH SECTION 143 (3) DATED 26/09/2014 WITHOUT PROVIDING ANY OPPORTUNITY OF HEARING OR WORKING OF THE SAME. 4. THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT ADDITIONAL GROUND OF APPEAL RAISED BY THE APPELLANT MAY NOT BE ADMITTED AS IT INVOLVES THE INVESTIGATION OF THE FRESH FACTS. 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. ONLY BECAUSE THE LD. THAT AUTHORIZED REPRESENTATIVE OF THE APPELLANT HAS SUBMITTED THAT THESE GROUNDS ARE ONLY ARGUMENTS WITH RESPECT TO GROUND NO. 1 OF THE APPEAL OF THE APPELLANT AND SAME NOT DISPUTED BY THE LD DR AND AS HE COULD NOT POINT OUT WHAT FRESH FACT S NEEDS TO BE INVESTIGATED, SAME ARE ADMITTED AND ADJUDICATED SEPARATELY. 6. T HE APPELLANT IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT OF READY - MADE GARMENTS AND HOME FURNISHING ITEMS. THIS COMPANY SELLS MERCHANDISE TO THE ASSOCIATED ENTERPRISE AND OTHER GROUP COMPANIES OF CORNELL TRADING GROUP. THE APPELLANT FILED ITS RETURN OF INCOME ON 29. 11 . 2006 DECLARING A LOSS OF 28875663/ . DURING THE YEAR THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES AND THEREFORE REFERENCE WAS MADE TO THE LD. TRANSFER PRICING OFFICER TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF EXPORT OF READY - MADE GARMENTS OF RS. 162465043/ . THE APPELLANT IN ITS TRANSFER PRICING STUDY REPORT H AS BENCHMARKED THIS TRANSACTION APPLYING THE COST PLUS METHOD A S THE MOST APPROPRIATE METHOD AND COMPUTED THE MARGIN OF THE ASSESSEE AT 18.23%. THE ASSESSEE SELECTED COMPARABLES USING PRO WESS DATABASE AND 40 COMPANIES WERE SELECTED AS COMPARABLE AND AVERAG E PLI FOR 3 YEARS OF COMPARABLE WAS 17.65 % AND THEREFORE THE ASSESSEE WAS OF THE OPINION THAT THE TRANSACTION OF THE EXPORT OF READY - MADE GARMENTS TO ITS ASSOCIATED CONCERN IS AT ARMS LENGTH. LD. TRANSFER PRICING OFFICER WAS OF THE OPINION THAT BASED ON THE AUDITED FINANCIAL STATEMENT OF THE ASSESSEE VALUE OF THE RAW MATERIAL IS SHOWN AT RS. 158743940 / - IN SCHEDULE 17 OF THE PROFIT AND LOSS ACCOUNT , HOWEVER, THE APPELLANT HAS CONSIDERED ONLY RS. 1 3466 4309/ WHILE COMPUTING THE MARGIN OF THE TESTED PARTY FOR THE PURPOSE OF THE TRANSFER PRICING STUDY REPORT. THE LD. TRANSFER PRICING OFFICER WAS OF THE VIEW THAT THE AUDIT REPORT OF THE STATUTORY AUDITORS NOWHERE POINTED OUT THAT THERE IS SOME EXTRAORDINARY COST DEBITED TO THE PROFIT AND LOSS ACCOUNT AND THEREFORE LD. PAGE 4 OF 10 TRANSFER PRICING OFFICER RECOMPUTED THE DIRECT COST AND INDIRECT COST OF THE APPELLANT AND RECOMPUTED THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. BASED ON THE ABOVE C OMPUTATION THE MARGIN OF THE TESTED PARTY FOR THE PURPOSE OF COMPARABILITY WAS COMPUTED AT 6.02% AS GROSS PROFIT/COST. BY TAKING TOTAL COST AT RS. 233215285/ . BASED ON THE ABOVE WORKING THE LD. TRANSFER PRICING OFFICER ACCEPTED THE APPLICABILITY OF COST PLUS METHOD A S THE MOST APPROPRIATE METHOD. HOWEVER HE REJECTED THE CONTENTION OF THE ASSESSE THAT THE LOSS ON ACCOUNT OF CANCELLATION OF ORDERS IS NON - OPERATING EXPENDITURE . HE THEREFORE TOOK THE COST BASE FOR THE PURPOSE OF COMPUTATION OF ARMS LENGTH P RICE AT RS. 2 3321 5285/ AND PROPOSED AN ADJUSTMENT OF RS. 2 80, 09155/ TO THE INCOME OF THE ASSESSEE. THE ABOVE ADJUSTMENT WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER PASSED UNDER SECTION 143 (3) OF THE INCOME TAX ACT WHEREIN OVER AND ABOVE THE OTHE R ADDITION, THE TOTAL LOSS OF RS. 2 887 5663 DECLARED BY THE ASSESSEE WAS COMPUTED AT TOTAL INCOME OF RS. 1418843 / - . IN THE 1 ST ROUND OF APPEAL, THE MATTER TRAVELLED UP TO THE COORDINATE BENCH WHO V IDE ORDER DATED 18/08/2011 RESTORED IT BACK TO THE FILE OF THE LD DRP FOR PASSING THE SPEAKING ORDER. CONSEQUENTLY, THE LD. DISPUTE RESOLUTION PANEL ISSUED DIRECTION UNDER SECTION 144C (5) OF THE INCOME TAX ACT ON 24 /09/ 2013. THE MAIN DIRECTION GIVEN BY THE LD. DISPUTE RESOLUTION PANEL WAS WITH RESPECT TO THE MARGIN OF THE TESTED PARTY WHICH WAS COMPUTED BY THE LD TPO AT 6.02% AS AGAINST THE ASSESSEES CLAIM OF 18.23% , IT WAS HELD THAT THE ACTION OF THE LD. TRANSFER PRICING OFFICER NEEDS NO DEVIATION AND IS THEREFORE UPHELD. CONSEQUENTLY, THE ADJUSTMENT TO TH E ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION TO THE EXTENT OF RS. 280,09155/ WAS ONCE AGAIN MADE. 7. THE 1 ST GROUND OF APPEAL OF THE ASSESSEE IS AGAINST NOT CONSIDERING THE LOSS OF RS. 2 407 9629 AS THE ABNORMAL COST OF CONSUMPTION OF RAW MATERIAL F OR THE PURPOSE OF CALCULATION OF NORMAL GROSS PROFIT MARKUP OVER C OST. ACCORDING TO THE APPELLANT, ABNORMAL LOSSES PURELY DURING THE COURSE OF NORMAL MANUFACTURING OPERATIONS AND DOES NOT CONSTITUTE AND NOT ATTRIBUTABLE TO ANY INTERNATIONAL TRANSACTION BE TWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISE. ACCORDINGLY, APPELLANT HAS SUBMITTED THAT THIS DISALLOWANCE OF RS. 2 80, 09153/ HAS RESULTED IN TO DIFFERENCE IN ARMS LENGTH PRICES. MAINLY THE DIFFERENCE HAS ARISEN BECAUSE OF THE COMPUTATION OF PROFIT LEVEL INDICATOR AT 18.23% BY THE ASSESSEE AND COMPUTED BY THE LD. PAGE 5 OF 10 TPO AT 6.02%. THERE IS NO DIFFERENCE BETWEEN THE VALUE OF THE SALES DETERMINED BY THE RIVAL PARTIES. HOWEVER, THE REAL DIFFERENCE ARISES THAT THE DIRECT AND INDIRECT COST TAKEN BY THE ASSESS EE IS AT RS. 2 0913 5656/ WHEREAS THE LD. TPO/ LD ASSESSING OFFICER HAS COMPUTED IT AT RS. 2 3321 5285/ . THEREFORE THERE IS A DIFFERENCE IN THE INDIRECT COST AND DIRECT COST COMPUTED BY THE PARTIES AMOUNTING TO RS. 24079629/ WHICH HAS RESULTED INTO THE ABOVE DIFFERENCE IN THE PLI COMPUTED BY THE PARTIES. 8. THE LD. AUTHORIZED REPRESENTATIVE SUBMITTED BEFORE US THAT IN JANUARY 2006 ONE OF THE BIGGEST BUYER OF THE ASSESSEE DECLARED ITSELF BANKRUPT AND ASSESSEE DECIDED TO NOT TO SELL GOODS TO THIS PARTY. AS A RESULT EXPORT ORDERS FROM THIS BUYER WERE TAKEN AS CANCELLED. ON RECEIVING THE NEWS OF THIS BANKRUPTCY INVENTORY REV ALUATION EXERCISE WAS TAKEN BY THE ASSESSEE TO IDENTIFY RAW MATERIAL / SEMI FINISHED GOODS WHICH WAS PURCHASE D AND WAS TO BE DEVELOPED FOR T HE ABOVE BUYER. SINCE THE PRODUCT WAS SPECIFICALLY FOR THAT BUYER , ITEMS WERE REVALUED AT PRESENT REALISABLE SCRAP VALUE ON ACCOUNT OF CANCELLATION OF EXPORT ORDER FOR WHICH COMPANY HAD INCURRED EXPENSES LIKE COST OF FABRIC, PRINTING CHARGES ETC WHICH ARE ALSO EMBEDDED IN COST OF SEMI FINISHED GOODS. THEREFORE, THE REVALUATION OF INVENTORY BY ASSESSEE LEADS TO LOSS OF RS. 2.4 CRORES. THE CLOSING INVENTORY WAS FURTHER SOLD AS SCRAP TO THIRD - PARTY BY THE ASSESSEE IN THE NEXT YEAR AS CONTENDED BY THE APPEL LANT . THEREFORE, FOR THE YEAR UNDER CONSIDERATION , ASSESS EE HAS DEBITED THIS LOSS ON REVALUATION OF INVENTORY, BUT HAS NOT CONSIDERED THE SAME WHILE COMPUTING PLI AS IT AS AN ABNORMAL LOSS. THE APPELLANT FURTHER SUBMITTED THAT UNDISPUTEDLY THE COST PLUS METHOD HAVE BEEN TAKEN BY THE ASSESSEE WHICH HAS BEEN ACCEPTED BY THE REVENUE . THEREFORE, COMPARISON OF NORMAL GROSS PROFIT MARKUP OF THE ASSESSEE COMPANY AND UNCONTROL LED COMPARABLES IS REQUIRED TO BE MADE. HE FURTHER STATED THAT GROSS PROFIT MARKUP CAN BE NORMAL ONLY WHEN THE REVENUE AND COST CONSIDERED FOR DETERMINATION OF THIS PLI ARE ALSO NORMAL AND NOT AFFECTED BY THE ABNORMAL ITEM / EXTRAORDINARY ITEM AND NOT SUBJE CT TO ANY ABNORMAL CIRCUMSTANCES. THEREFORE, HE STATED THAT ABNORMAL LOSS IN ACCORDANCE WITH THE INDIAN ACCOUNTING PRINCIPLE MEANS THAT LOSS THAT IS SO SERIOUS THAT IT THREATENS THE VIABILITY OF THE ENTERPRISE AND SUCH LOSSES ARE TO BE IGNORED FOR THE PURP OSE OF COMPARISON OF PROFIT LEVEL INDICATOR IN THE PLUS METHOD. HE THEREFORE SUBMITTED THAT WHILE CALCULATING THE PLI OF THE ASSESSEE THE ABOVE COST PAGE 6 OF 10 NEEDS TO BE REMOVED. TO SUPPORT HIS CONTENTION HE SUBMITTED THAT ACCORDING TO THE RULE 10 C WHICH DEALS WIT H THE METHODOLOGY TO BE APPLIED IN APPLYING THE COST PLUS METHOD, THE AMOUNT OF NORMAL GROSS PROFIT IS REQUIRED TO BE COMPUTED AND SAME IS COMPARABLE. THEREFORE, HIS SUBMISSION WAS THAT THAT THE ABOVE LOSS ON THE VALUATION OF INVENTORY IS AN ABNORMAL EXPEN DITURE CHARGED TO THE PROFIT AND LOSS ACCOUNT WHICH NEEDS TO BE EXCLUDED. IT WAS FURTHER THE SUBMISSION OF THE LD. AUTHORIZED REPRESENTATIVE THAT THE LD. T RANSFER PRICING OFFICER HAS FAILED TO CONSIDER THE DIFFERENCE BETWEEN THE TNMM METHOD AND THE COST PL US METHOD. TO BUTTRESS HIS CLAIM, HE FURTHER RELIED UPON THE DECISION OF THE ASSISTANT COMMISSIONER OF INCOME TAX VERSUS MSS INDIA PRIVATE LIMITED [ 32 SOT 132 ( PUNE) ] . HE FURTHER SUBMITTED THAT THE CONTENTION OF THE LD. TRANSFER PRICING OFFICER THAT TH E LOSS INCURRED BY THE APPELLANT ON ACCOUNT OF DI MINUTION IN VALUE OF THE INVENTORY SHOULD HAVE BEEN RECOVERED FROM THE ASSOCIATED ENTERPRISES IS ALSO AGAINST THE ACCEPTED BUSINESS PRACTICES. HE FURTHER SUBMITTED THAT THE TREND OF THE RAW MATERIAL CONSUMPT ION SHOWN BY THE ASSESSEE IN THE PAST YEAR WILL ALSO JUSTIFY THE CLAIM OF THE ASSESSEE THAT DURING THE YEAR THE CONSUMPTION OF RAW MATERIAL 61.24% OVER TOTAL INCOME AS COMPARED TO AVERAGE CONSUMPTION OF 54% IN THE PAST 3 YEARS . T HIS ITSELF SHOWS THAT THE ASSESSEE HAS INCURRED ABNORMAL COST. HE FURTHER REFERRED TO THE DECISION OF SKODA AUTO INDIA PRIVATE LIMITED VERSUS ASSISTANT COMMISSIONER OF INCOME TAX [ 30 SOT 319 (PUNE) ] WHEREIN IT WAS HELD THAT EXTRAORDINARY CIRCUMSTANCES BEYOND THE ASSESSEES CONTROL ARE REQUIRED TO BE ELIMINATED FOR THE PURPOSE OF COMPUTING THE PLI. HE FURTHER REFERRED TO THE DECISION OF THE ASSISTANT COMMISSIONER OF INCOME TAX VERSUS FIAT INDIA PRIVATE LIMITED (2010 TII 30 ITAT MUM T P). HE REFERRED TO THE COMMENTARY OF O EC D TRANSFER PRICING GUIDELINES 2009 AND SUBMITTED THAT THE TRANSACTION BETWEEN THE PARTIES SHOULD BE COMPARED OF LIKE CONDITIONS. THE LOSSES O N ACCOUNT O F ACCOUNT OF CANCELLATION OF EXPORT ORDERS DUE TO THE BANKRUPTCY OF THE BUYER IS OUTSIDE THE CONTROL OF THE ASSESSEE AND CANNOT BE LABELED AS ANY ARRANGEMENT TO EVADE THE TAXES. THEREFORE, HIS CONTENTION WAS THAT THAT FOR THE WORKING OF THE PLI OF THE ASSESSEE ABOVE COST OF RS. 2.40 CRORES INCURRED BY THE ASSESSEE IN REVALUATION OF THE INVENTORY ON ACCOUN T OF CANCELLATION OF THE EXPORT ORDER DUE TO THE BANKRUPTCY OF THE ONE OF THE BUYER OF THE COMPANY SHALL BE EXCLUDED FOR WORKING OF THE PLI. PAGE 7 OF 10 9. THE LD. THAT DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDERS OF THE LD. DISPUTE RESOLUTION PANEL AND THE ASSESSI NG OFFICER. HE SUBMITTED THAT CANCELLATION OF ORDERS TO SUPPLY GOODS AND SUBSEQUENTLY REVALUATION OF RAW MATERIAL I S A NORMAL BUSINESS RISK ASSUMED BY ANY BUSINESS OPERATING IN THE SEGMENT OF THE BUSINESS ENTERPRISES . A CCORDINGLY, SAME IS REQUIRED TO BE INCLUDED IN THE TOTAL COST OF THE ASSESSEEE CONSIDERING THE ABOVE RISK INVOLVED. THEREFORE, ACCORDING TO THE LD. DEPARTMENTAL REPRESENTATIVE THE ABOVE LOSS IS A NORMAL LOSS WHICH CANNOT BE EXCLUDED WHILE COMPUTING THE PLI OF THE ASSE SSEE. 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS . THE COST PLUS METHOD IS USED TO DETERMINE THE APPROPRIATE PRICE TO BE CHARGED BY A SUPPLIER OF PROPERTY OR SERVICES TO A RELATED PURCHASER. THE PRICE IS DETERMINED BY ADDING TO COSTS INCURRED BY THE SUPPLIER AN APPROPRIATE GROSS MARGIN SO THAT THE SUPPLIER WILL MAKE AN APPROPRIATE PROFIT IN THE LIGHT OF MARKET CONDITIONS AND FUNCTIONS PERFORMED. WE AGREE WITH THE CONTENTION OF THE APPELLANT THAT IF THE COSTS WHICH ARE NOT RELATED TO SALE OF THE GOODS WHICH ARE EXPORTED SAME CANNOT BE CONSIDERED AS THE DIRECT COST / INDIRECT COST WHILE WORKING OUT THE NORMAL GROSS PROFIT OF THE APPELLANT. THEREFORE, IN NUTSHELL, IF THERE ARE EXTRAORDINARY COSTS WHICH ARE BEYOND THE CONTROL OF THE ASSESSEE AND WHICH ARE NOT RELATED TO THE SALE OF THE GOODS, THEN SUCH COSTS ARE REQUIRED TO BE EXCLUDED. WE ALSO DRAW SUPPORT FROM THE SAFE HARBOUR RULES WHEREIN IT PROVIDES THAT OPERATING EXPENSES MEANS THE COST INCURRED IN THE PREVIOUS YEAR BY THE ASSESSEE IN RELATION TO THE INTERNATIONAL TRANSACTION DURING THE COURSE OF ITS NORMAL OPERATIONS, INCLUDING DEPRECIATION AND AMORTISATION EXPENSES RELATING TO THE ASSETS USED BY THE ASSESSEE, BUT IT DOES NOT INCLUDE EXTRAORDINARY EXPENSES. THE CONTENTION OF THE ASSESSEE IS THAT IT H AS INCURRED AN EXTRAORDINARY EXPENDITURE BY VALUATION OF THE INVENTORY WHICH WAS FOR A SPECIFIC PRODUCT AND TO A SPECIFIC CUSTOMER ORDERS WHICH WERE CANCELLED AND THEREFORE THE INVENTORY OF FINISHED GOODS AND SEMI FINISHED GOODS WITH RESPECT TO THAT ORDE R WAS WRITTEN OFF. HOWEVER, ON LOOKING AT T HE BALANCE SHEET OF THE COMPANY, WE COULD NOT FIND OUT IN THE PROFIT AND LOSS ACCOUNT ITSELF OR IN THE SCHEDULES ATTACHED THERETO RELATING TO THE PROFIT AND LOSS ACCOUNT WHERE SUCH EXTRAORDINARY EXPENDITURE HAVE BEEN SPECIFICALLY SHOWN WHICH IS A REQUIREMENT OF THE ACCOUNTING STANDARD. FURTHERMORE ANALYSIS OF THE PAGE 8 OF 10 TRANSFER PRICING STUDY REPORT SUBMITTED BY THE ASSESSEE , IT IS NOTED THAT THE COMPANY SELLING APPROXIMATELY 70% OF EXPORT SALES TO ITS ASSOCIATED ENTERPR ISES. HOWEVER, THERE ARE 3 CONCERNS TO WHOM THE GOODS ARE BEING SOLD NAMELY IN USA, CANADA AND HONG KONG. THESE 3 COMPANIES ARE SELLING THIS PRODUCT THROUGH APPROXIMATELY 115 RETAIL OUTLETS AND ABOUT 3000 WHOLESALE CUSTOMERS. IT WAS ALSO MENTIONED THAT O NE OF THE BIGGEST CUSTOMERS OF THE ASSESSEE DECLARED ITSELF A S BANKRUPT UNDER CHAPTER 11 OF THE US COURTS IN JANUARY 2006 AND THEREFORE THE COMPANY WAS UNABLE TO RECO VER RS. 2.7 CRORES AGAINST WHICH GOODS WERE ALREADY EXPORTED TO US COMPANY. T HEREFORE TH E COMPANY WHICH PURCHASED AND DEVELOPED MATERIAL FOR THIS BUYER SPECIFICALLY HAD NO ALTERNATIVE USE OTHERWISE, ALL SUCH ITEMS WERE REVALUED AT ITS PRESENT REALISABLE VALUE OR SCRAP PRICE AND AS A RESULT OF THIS, THE GROSS PROFIT RATIO REDUCED SIGNIFICANTL Y. IT WAS ALSO STATED THAT THERE WERE CANCELLATION OF EXPORT ORDERS FOR WHICH THE COMPANY HAD INCURRED EXPENSES LIKE COST OF FABRIC PRINTING CHARGES ETC AND SUCH IMPACT WAS TO THE EXTENT OF RS. 2.4 CRORES. THEREFORE IT IS APPARENT THAT THE ASSESSEE HAS INC URRED CERTAIN COSTS WHICH ARE EXTRAORDINARY IN NATURE. HOWEVER, THE CLAIM OF THE ASSESSEE IS HALF - HEARTED AS ASSESSEE HAS NOT FURNISHED THE DETAILS OF THE CANCELLATION OF ORDER AND W HAT ARE THE MATERIALS, WHICH WERE PROCURED BY THE ASSESSEE AGAINST WHICH ORDER OF THE BUYER WHO GOT BANKRUPT. FURTHER, THERE ARE NO DETAILS AVAILABLE THAT WHAT THE REALISABLE VALUE OF THOSE MATERIALS IS AND HOW THE VALUATION LOSS OF RS. 2. 4 CRORES WERE DETERMINED. ACCORDING TO THE LD. TRANSFER PRICING OFFICER, THE CLAIM OF THE ASSESSEE WAS ALSO REJECTED FOR THE REASON THAT THE ASSESSEE IS NOT ONLY SUPPLYING GOODS TO THE PARTY WOULD FAILED BUT ALSO SUPPLYING GOODS TO 3 OTHER ASSOCIATED ENTERPRISES. IT HAS NOT BEEN SHOWN BY THE ASSES SEE THAT RAW MATERIAL WAS PURCHASED BY THE ASSESSEE FOR THE SUPPLY IS TO BE MADE TO THAT PARTY. AGREEING WITH THE CONTENTION OF THE ASSESSEE THAT EXTRAORDINARY COST/ ABNORMAL COST CANNOT BE INCLUDED IN THE COST FOR WORKING PLI OF THE ASSESSEE, BUT ASSESSE E HAS PROVE FIRST ABOUT THE ACTUAL LOSS INCURRED LEADING CONCRETE EVIDENCES. IN VIEW OF THIS , WE SET ASIDE THIS ISSUE TO THE FILE OF THE LD. TRANSFER PRICING OFFICER/ASSESSING OFFICER TO EXAMINE WITH RESPECT TO QUANTITY, PRICE AND QUALITY OR SPECIFICATION OF THE MATERIAL REVALUED WITH RESPECT TO THE MATERIAL WHICH WAS PURCHASED OR DESIGNED BY THE ASSESSEE SPECIFIC ALLY FOR THAT BUYER WHO CANCELLED THE ORDERS AND GONE BANKRUPT. THE PAGE 9 OF 10 APPELLANT IS ALSO DIRECTED TO FURNISH ALL THIS INFORMATION TO JUSTIFY ITS CLA IM AND ALSO TO SHOW THE NATURE AND EXTENT OF EXTRAORDINARY LOSS INCURRED BY THE ASSESSEE WITH EVIDENCES . IN VIEW OF THIS GROUND NO. 1 AND 2 OF THE ORIGINAL GROUNDS OF APPEAL AND GROUND NO. 1, 2 AND GROUND NO. 3 OF THE ADDITIONAL GROUNDS RAISED BY THE ASSES SEE ARE DISPOSED OF ACCORDINGLY. 11. GROUND NO. 4 OF THE APPEAL WAS WITH RESPECT TO THE DIRECTIONS GIVEN BY THE LD. DISPUTE RESOLUTION PANEL WITH RESPECT TO THE SELECTION OF CERTAIN COMPANIES WHICH WERE INCURRING PERSISTENT LOSSES. THE LD. ASSESSING OFFICER I N DRAFT ASSESSMENT ORDER WITHOUT CONSIDERING THE ABOUT DIRECTION OF THE LD. DISPUTE RESOLUTION PANEL HAS CONTINUED WITH THE ADJUSTMENT . THE GRIEVANCE OF THE ASSESSEE WAS ONLY WITH RESPECT TO THE ONLY ONE COMPARABLE THAT IS SCOTT INDUSTRIES LTD . IT WAS SUBM ITTED BY THE LD. AR ARE THAT THE LD. DISPUTE RESOLUTION PANEL V IDE ORDER DATED 24/09/2013 H AS DIRECTED THE LD. TPO / AO TO VERIFY WHETHER THE SCOTT INDUSTRIES LTD IS HAVING NEGATIVE PROFIT MARKUP FOR FINANCIAL YEAR ENDED ON 31 ST OF MARCH 2014. THE LD. T RANSFER PRICING OFFICER HAS REFUSED TO GIVE EFFECT TO THE DIRECTION OF THE LD. DRP ON T HE GROUND THAT THE ANNUAL REPORT OF THE COMPANY IS NOT AVAILABLE IN PUBLIC DOMAIN. IT WAS SUBMITTED BY THE LD. AUTHORIZED REPRESENTATIVE THAT ASSESSEE HAS SUBMITTED T HE COPY OF THE PROFIT AND LOSS ACCOUNT OF THE PARTY FOR 3 YEARS FROM PRO WESS DATABASE, WHICH HAS NOT BEEN CONSIDERED BY THE T RANSFER PRICING OFFICER. LD. DEPARTMENTAL REPRESENTATIVE ALSO SUBMITTED THAT SAME MAY BE CONSIDERED IF THE PROPER INFORMATION IS PR OVIDED BY THE APPELLANT TO THE LD. ASSESSING OFFICER. IN VIEW OF THIS WE SET ASIDE GROUND NO. 3 AND 4 OF THE APPEAL OF THE APPELLANT TO THE FILE OF THE LD. TRANSFER PRICING OFFICER TO CONSIDER THE LETTER SUBMITTED ON 28/11/2013 BEFORE HIM FOR EXCLUSION OF THE ABOVE COMPARABLE, AS DIRECTED BY THE LD. DRP , IF HE IS SATISFIED ABOUT THE CORRECTNESS OF THE INFORMATION, WHICH SHOULD BE RELIABLE AND AUTHENTIC . IN THE RESULT GROUND NO. 3 AND 4 OF THE APPEAL OF THE ASSESSEE IS DISPOSED OFF A CCORDINGLY. 12. GROUND NO. 4 OF THE ADDITIONAL GROUND RAISED BY THE APPELLANT IS WITH RESPECT TO THE APPLICABILITY OF THE TRANSFER PRICING ADJUSTMENT ONLY TO TRANSACTIONS WITH RELATED PARTIES. THE LD. AUTHORIZED REPRESENTATIVE SUBMITTED THAT LD. TRANSFER PRICING OFFICER HAS APPLIED THE DIFFERENCE IN ARMS LENGTH PRICE MARKUP TO TRANSACTIONS BOTH WITH RELATED PARTY TRANSACTION AS WELL AS NOT RELATED PARTY TRANSACTION, WHEREAS THE ADJUSTMENT PAGE 10 OF 10 ON ACCOUNT OF TRANSFER PRICING HAS TO BE RESTRICTED ON THE VALUE OF THE INTERNATIONAL TRANSACT IONS WITH ASSOCIATED ENTERPRISE ONLY AND THEREFORE THERE CANNOT BE ANY ADDITION ON THE VALUE OF UNCONTROLLED TRANSACTIONS. HIS MAIN CONTENT ION WAS THAT THAT THE ASSESSEE HAS EXPORT TO ASSOCIATED ENTERPRISES TO THE EXTENT OF 70% OF THE TOTAL TURNOVER. THER EFORE, ADJUSTMENT, IF ANY, IS TO BE RESTRICTED TO 70% OF THE TOTAL TRANSACTION . TO SUPPORT HIS CONTENTION HE RELIED UPON THE DECISION OF THE HONOURABLE JURISDICTIONAL HIGH COURT AS WELL AS OF HONBLE BOMBAY HIGH COURT AND ON THE DECISION OF THE COORDINATE BENCH. THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDERS OF LOWER AUTHORITIES. 13. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND WE DO NOT HAVE ANY HESITATION IN HOLDING THAT THE TRANSFER PRICING ADJUSTMENT SHOULD BE RESTRICTED TO THE INTERNA TIONAL TRANSACTIONS ONLY AND IT CANNOT BE APPLIED TO UNCONTROLLED TRANSACTIONS . RECENTLY HONOURABLE BOMBAY HIGH COURT IN CIT V HINDUSTAN UNILEVER LIMITED [72 TAXMANN.COM 325 ] HAS HELD THAT WHILE DETERMINING ALP OF INTERNATIONAL TRANSACTIONS, BENCHMARKING HAS TO BE DONE ONLY ON AE TRANSACTIONS AND NOT FOR ENTIRE TURNOVER . THEREFORE RESPECTFULLY FOLLOWING THAT DECISION WE DIRECT LD TPO/AO TO RESTRICT THE ADJUSTMENT ON ACCOUNT OF ALP TO THE EXTENT OF THE TRANSACTION WITH AE ONLY. IN THE RESULT GROUND NO 4 O F THE ADDITIONAL GROUNDS RAISED BY THE APPELLANT IS ALLOWED. 14. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 4 / 10 /2016. - S D / - - S D / - ( I.C.SUDHIR ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 2 4 / 10 /2016 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI