Brintons Carpets Asia Pvt. Ltd., Pune V. DCIT, Circle-1(1), Pune

ITA 1296/PUN/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49848 (ITAT-PUNE)
• Duration Of Justice: 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 25-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 11-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HARESHWAR SHARMA
• Assessee Lawyers: RAHUL MITRA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Rule of consistency; Retrospective amendment; Question of law; Commercial expediency
• Section: 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI I C SUDHIR, JM AND SHRI D. KARUNAKARA RAO, AM ITA NO.1296/PN/10 (ASSTT. YEAR 2006-07) BRINTONS CARPETS ASIA P LTD. GHAT NO 414/415/416, A/P URAWADE TAL MULSHI, DT PUNE 411 012 PAN AAACB7059H APPELLANT VS. DY.CIT CIRCLE 1(1) PUNE . RESPONDENT APPELLANTS BY : SHRI RAHUL MITRA RESPONDENT BY : SHRI HARESHWAR SHARMA, CIT DR ORDER PER D. KARUNAKARA RAO, AM THIS IS THE APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER DT 27.09.10 FOR THE AY 2006-07, WHICH WAS PASSED UNDER SECTION 143( 3) READ WITH SECTION 144C OF THE INCOME TAX ACT, 1961 OF THE ACT AFTER CONSID ERING THE GUIDELINES OF THE DISPUTE RESOLUTION PANEL, PUNE DATED 30.7.10. INITI ALLY, THE APPEAL WAS FILED IN FORM NO 36 INADVERTENTLY. SUBSEQUENTLY, CONSIDERING THE FACT OF RULE 14 OF THE INCOME TAX DISPUTE RESOLUTION PANEL RULES 2009, THE ASSESSEE FILED A LETTER DATED DECEMBER 28, 2010 ENCLOSING THE CORRECT FORM NO 36B AND THE GROUNDS AND THE SAME ARE ACCEPTED FOR THE PROCEEDINGS UNDER CONSIDERATION. 2. THE GROUNDS RAISED BY THE ASSESSEE READ AS UNDER :- 1. THE LD. ASSESSING OFFICER (AO) PURSUANT TO THE D IRECTIONS OF THE LD DISPUTE RESOLUTION PANEL (DRP) ERRED IN REJECTING T HE BENCHMARKING APPROACH ADOPTED BY THE APPELLANT IN THE TRANSFER P RICING STUDY AND THEREBY MAKING A TRANSFER PRICING ADJUSTMENT OF RS. 161,98,390 TO THE INCOME OF THE APPELLANT BY HOLDING THAT THE INT ERNATIONAL TRANSACTION OF EXPORT OF CARPETS OF THE APPELLANT DOES NOT SATISFY THE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE INCO ME TAX ACT, 1961 (THE ACT). 2. THE LD.DRP/AO ERRED IN CONSIDERING THE DOMESTIC SEGMENT OF CARPETS BUSINESS (DOMESTIC SEGMENT) AS COMPARED TO THE EXPORT 2 SEGMENT OF CARPETS BUSINESS (EXPORT SEGMENT) FOR BE NCHMARKING, WITHOUT APPRECIATING THE FACT THAT THE DOMESTIC SEG MENT IS A CONTROLLED SEGMENT AS IT ENTAILS INTERNATIONAL TRAN SACTION PERTAINING TO IMPORT OF RAW MATERIALS FROM THE ASSOCIATED ENTE RPRISES AND HENCE, NON-COMPARABLE. LD.DRP/AO OUGHT TO HAVE CONS IDERED THE EXTERNAL UNCONTROLLED COMPARABLES AND NOT THE INTER NAL CONTROLLED COMPARABLE FOR DETERMINING THE ARMS LENGTH PRICE O F THE IMPUGNED INTERNATIONAL TRANSACTION. 3. THE LD.DRP/AO ERRED IN NOT GRANTING AN ECONOMIC ADJUSTMENT ON ACCOUNT OF LABOUR UNREST WHILE CONDUCTING THE CO MPARABILITY ANALYSIS. THE LD.DRP/AO ERRED IN NOT CONSIDERING T HE IMPACT OF LABOUR UNREST ON THE APPELLANTS PROFITABILITY FROM ITS INTERNATIONAL TRANSACTIONS AND THEREBY NOT COMPARING THE ADJUSTED PROFITABILITY WITH THE EXTERNAL COMPARABLES. 4. ON A WITHOUT PREJUDICE BASIS, THE LD.DRP/AO ERRE D IN DISREGARDING THE DIFFERENCES IN THE FUNCTIONAL, ASSET AND RISK ( FAR) PROFILE OF THE APPELLANTS EXPORT SEGMENT AND THE DOMESTIC SEGMENT WHILE UNDERTAKING THE BENCHMARKING ANALYSIS. ALSO, THE LD.DRP/AO ERRED IN DISREGARDING THE ADJUSTMENTS MADE BY THE A PPELLANT IN CONNECTION WITH CERTAIN FAR DIFFERENCES BETWEEN THE AFORESAID SEGMENTS WHILE THE ONUS IS ON THE LD. AO TO MAKE RE ASONABLY ACCURATE ADJUSTMENTS TO ELIMINATE THE ABOVE DIFFERE NCES. 5. THE LD.DRP/AO ERRED IN UPHOLDING THE TPOS STAN CE OF ADJUSTMENT OF 44.54% BEING GRANTED, FOR THE DIFFERE NCES IN FAR PROFILE BETWEEN THE EXPORT AND DOMESTIC SEGMENT, WH EN IN FACT NO SUCH ADJUSTMENT HAS BEEN GRANTED. 6. THE LD.DRP/AO ERRED IN MAKING A TRANSFER PRICING ADJUSTMENT OF RS.161,983,90, WITHOUT APPRECIATING THE FACT THAT T HE APPELLANT IS AVAILING TAX HOLIDAY BENEFITS U/S 10B OF THE ACT AND HENCE, THERE WOULD NOT HAVE BEEN ANY UNTOWARD MOTIVE OF DESIRING A TAX ADVANTAGE BY MANIPULATING TRANSFER PRICES OF IT INT ERNATIONAL TRANSACTIONS. 7. THE LD.DRP/AO ERRED IN NOT GIVING COGNIZANCE TO THE EXPLANATORY CIRCULAR ISSUED BY THE CBDT WHICH CLARIFIES THAT TH E AMENDMENT TO THE PROVISO TO SEC 92C(2) IS APPLICABLE IN RESPECT OF ASSESSMENT YEAR 2009-10 AND ONWARDS. THUS, THE LD.DRP/AO ERRE D IN NOT GRANTING THE BENEFIT OF +/- 5% RANGE AS PER THE PRO VISO TO SEC. 92C(2) AS IT STOOD BEFORE THE AMENDMENT. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD.AO ERRED IN INITIATING THE PENALTY PROCEEDINGS U/S 271 (1)(C)OF THE ACT ON THE PREMISE THAT THE APPELLANT HAS FURNISHED INACCU RATE PARTICULARS OF INCOME WITHOUT APPRECIATING THE FACT THAT THE TR ANSFER PRICING ADJUSTMENT SO MADE IS NOT IN ACCORDANCE WITH LAW. 3 3. A. BRIEFLY STATED RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE BRINTONS CARPETS ASIA P LTD (IN SHORT BRASIA) IS A 100% SU BSIDIARY OF BRINTONS LTD, UK (IN SHORT BLK) AND BRASIA CLAIMED BENEFITS U/S 10B OF THE ACT. BRASIA IS A CONTRACT MANUFACTURER IN INDIA FOR BLK AND EXPORT T HE SAME AS PER THE AGREEMENT. BRASIA ALSO MADE DOMESTIC SALE OF THE CA RPETS. BRASIAS ACTUAL FIGURES VIS A VIS BLK IS 459,217 SQ MTS AGAINST THE TARGET OF 758,032 SQ METERS AND ITS DOMESTIC FIGURES ARE 44,589 SQ MTS AGAINST THE TARGET OF 42,525 SQ METERS. BRASIA COULD NOT MEET THE EXPORT COMMITMENT S TO THE BLK AND SHORTAGE IN THIS REGARD IS JUST ABOVE 3 LAKHS SQ ME TERS OF CARPET. THERE WAS LABOUR UNREST IN THE COMPANY RESULTING IN THE GO-SL OW APPROACH OF THE LABOURERS, LABOUR STRIKE AND LOCK OUTS, WHICH EFFECT ADVERSELY THE BUDGETED PRODUCTION. B. ASSESSEE FILED THE RETURN OF INCOME REPORTING TH E INTERNATIONAL TRANSACTIONS. DURING THE YEAR, THE ASSESSEE IMPORTE D RAW MATERIALS, SPARES AND CONSUMABLES AS WELL AS THE CAPITAL GOODS. AT THE SA ME TIME, THE ASSESSEE EXPORTED THE YARN AND CARPETS TOO. ALTHOUGH THERE A RE FOUR OF SUCH INTERNATIONAL TRANSACTIONS, THE DISPUTED TRANSACTIONS RELATES TO THE EXPORT OF THE CARPETS AND THE EXPORT SALES AMOUNT INVOLVED WORKS OUT TO 34,33 ,26,376/-. IT INCLUDES THE SCRAPE SALES OF RS. 35.20 LAKHS (ROUNDED OFF) TOO. CORRESPONDING UNADJUSTED TOTAL COST IS RS 39,83,86,412/-. THUS, NET EFFECT IS THE EXPORT LOSS TO THE ASSESSEE DURING THE YEAR TO THE TUNE OF -13.57% WIT HOUT ADJUSTMENTS . PER CONTRA, ON THE DOMESTIC SEGMENT FRONT, THE MARG IN IS 27.09%. WHILE FILING THE RETURN, IN VIEW OF THE APPLICABILITY OF THE TR ANSFER PRICING PROVISIONS TO THE INTERNATIONAL TRANSACTIONS, THE ASSESSEE ADOPTED TH E TRANSACTIONAL NET MARGIN METHOD - TNMM AND MADE ADJUSTMENTS TO THE SAID T OTAL COST RELATABLE TO THE UNABSORBED OVERHEADS AND SUCH ADJUSTMENTS AS PER THE ASSESSEE WORKS OUT TO RS 7,31,73,120/-. IN OTHER WORDS, THE SAID TOTAL CO ST OF RS 38,93,86,412/- WAS UNDER ABSORBED BY THE ASSESSEE DURING THE YEAR DUE TO THE UNDISPUTED LABOUR UNREST AND THEREFORE, IT CALLS FOR ADJUSTMENTS AS P ER THE TRANSFER PRICING GUIDELINES - ARMS LENGTH PRINCIPLES. ACCORDINGLY, ASSESSEE MADE THE SAID ECONOMIC ADJUSTMENT OF RS 7,31,73,120/- TO THE TOTA L COST RELATABLE TO THE EXPORTS TO THE BRASIA. THUS, AS PER THE ASSESSEE, T HE ADJUSTED OPERATING MARGIN OF THE EXPORT SEGMENT IS 5.88%. ASSESSEE COMPARED THE SAME WITH OPERATING MARGIN OF THE AVERAGE OF THE EXTERNAL COMPARABLES W ITH 7.12% AND OPINED THAT IN VIEW OF THE BELOW 5% VARIATION (7.17-5.88), TH E SAME IS PROPER AFTER EXERCISING THE +/- 5% RANGE PROVIDED IN THE AMENDED PROVISIONS OF THE PROVISO 4 TO SECTION 92C(2) OF THE ACT. THIS IS THE POSITION AS PER THE ASSESSEE AS REPORTED IN THE RETURN OF INCOME. C. IN ACCORDANCE WITH THE SET GUIDELINES, AO REFERR ED THE MATTER TO THE TPO AND THE TPO INVOKED THE PROVISIONS OF SECTION 9 2C OF THE ACT. IN EFFECT, THE TPO REJECTED THE NOT ONLY THE ASSESSEES CLAIM RELA TING TO THE ADJUSTED OPERATING MARGIN AT 5.88% BUT ALSO REJECTED THE ECONOMIC ADJU STMENTS TO THE TOTAL COST AT RS 7,31,73,120/-. IN THE PROCESS, THE TPO SUMMARILY REJECTED THE EXTERNAL COMPARABLE WITHOUT ANY DISCUSSION OR REASONING. INS TEAD, THE TPO PROCEEDED TO COMPARE THE UNADJUSTED OPERATING MARGIN OF THE EXPO RT SEGMENT WITH -13.57% WITH THAT OF THE DOMESTIC SEGMENT WITH 27.09%. THUS , TPO COMPARED THE INTERNATIONAL TRANSACTIONS WITH THE DOMESTIC TRANSA CTIONS. AT THE END OF THE PROCEEDINGS, U/S 92CA(3) OF THE ACT, TPO PROPOSED T HE ADDITION OF RS 16,19,83,910/- EQUALENT OF THE DIFFERENCE OF NEARLY 40% IE (FROM -13.57% TO 27.09%). THE AO ADOPTED THE SAID ORDER OF THE TPO I N HIS ORDER AND PROPOSED ADDITION OF RS 16.20 CRORES (ROUNDED OFF). IN RESPO NSE, AS PER THE OPTIONS AVAILABLE TO THE ASSESSEE, THE BRASIA APPROACHED TH E DISPUTE RESOLUTION PANEL (DRP). ON HEARING THE ASSESSEE AND ITS OBJECTIONS A ND SUBMISSIONS, THE DRP CONFIRMED THE DRAFT ORDER PASSED BY THE AO AND CONF IRMED THE PROPOSED ADDITION OF RS 16.20 CRORES TO THE EXPORT SEGMENT. FINALLY, THE AO PASSED THE IMPUGNED ORDER DT 27.09.2010 FOR THE AT 2006-07 UNDER SECTIO N 143(3) READ WITH SECTION 144C OF THE I T ACT 1961 OF THE ACT IN THE LIGHT OF THE GUIDELINES OF THE DRP, PUNE DATED 30.7.2010. 4. AGGRIEVED WITH THE SAME, THE ASSESSEE FILED THE PRE SENT APPEAL BEFORE US. DURING THE PROCEEDINGS BEFORE US, SHRI RAHUL MITRA, LD COUNSEL FOR THE ASSESSEE NARRATED THE FACTS OF THE CASE AND SUBMITT ED THAT THE AO/TPO/DRP ERRED IN NOT UPHOLDING THE DECISIONS OF THE ASSESSE E AND CONFIRMING THE ADDITIONS MADE BY THE REVENUE. AS PER MR MITRA, A COUPLE OF K EYS ISSUES FOR ADJUDICATION BY THE TRIBUNAL ARE AS UNDER: (I) EXPORT SEGMENT CANNOT BE COMPARED WITH THE DOME STIC SEGMENT; AND EXTERNAL COMPARABLES WOULD BE MORE APPROPRIATE; AND (II) ECONOMIC ADJUSTMENT ON ACCOUNT OF LABOUR UNRES T IS WARRANTED TO ARRIVE AT CORRECT PROFITABALILITY OF THE INTERNATIONAL TRA NSACTION PERTAINING TO EXPORT OF CARPETS. 5 IN THIS REGARD, THE LEARNED COUNSEL EXPLAINED THE G ROUNDS RAISED IN THE APPEAL AND PROCEEDED TO MAKE VARIOUS ARGUMENTS. SOME OF TH EM ARE AS FOLLOWS: (I) WHEN THE EXTERNAL COMPARABLES OF THE AVAILABLE FOR MAKING THE TRANSFER PRICING ADJUSTMENTS TO THE EXPORT SEGMENT OF THE CA RPET, THE DECISION OF THE AO/TPO COMBINE IN RESORTING TO THE INTERNAL COMPARA BLES IS NOT PROPER. THIS IS FOR THE REASON IN THE INSTANT CASE DOMESTIC COMPARA BLE CASES ARE CONTROLLED ONES WHICH CANNOT BE COMPARED WITH THE UNCONTROLLED TRANSACTIONS. DEMONSTRATION THE INCORRECTNESS OF PICKING UP THE D OMESTIC COMPARABLE, MR MITRA REFERRED TO 4 OF THE REASONS GIVEN IN THE WRI TTEN SYNOPSIS FILED BEFORE US AND THEY ARE: A. DOMESTIC SEGMENT ENTAILS CONTROLLED TRANSACTION S AND USE OF A CONTROLLED TRANSACTION TO BENCHMARK AN INTERNATIONA L TRANSACTION IS NOT IN ACCORDANCE WITH THE LAW. B. THERE ARE SIGNIFICANT DIFFERENCES IN THE F UNCTIONAL, A SSETS AND R ISK EMPLOYED (FAR PROFILE) BETWEEN THE DOMESTIC AND EX PORT SEGMENT FOR WHICH REASONABLY ACCURATE ADJUSTMENTS CANNOT BE MAD E. C. SIGNIFICANT VOLUME DIFFERENCE BETWEEN THE TWO SE GMENTS EXPORT SEGMENT CONSTITUTES 91.14% OF CARPETS MANUFACTURED WHILE DOMESTIC SEGMENT CONSTITUTES 8.86% OF CARPETS MANUFACTURED. D. THE TPO, ON SIMILAR FACTS, HAS ACCEPTED THAT EXP ORT SEGMENT CANNOT BE COMPARED WITH THE DOMESTIC SEGMENT IN SUBSEQUENT A.Y I.E. AY 2007-08. FURTHER ALSO, MR MITRA ARGUED TO SUM UP STATING THA T WHILE THE ARGUMENT AT A ABOVE RELATES TO THE TECHNICALITIES, B RELATES TO THE FUNCTIONAL ASPECT, WHEREAS C REFERS TO THE QUANTITATIVE AND ARGUMENT AT D QUESTIONS DEPARTMENTAL APPROACH OF LACK OF INCONSISTENCY. (II) LATER, LD COUNSEL MENTIONED THAT THE AO/TPO COMPLETED THE ASSESSMENT FOR AY 2007-08, THE SUBSEQUENT AY AND TH E AO/TPO RELIED UPON THE SIX (6) EXTERNAL COMPARABLE PRICES. AS PER THE COUN SEL, THE AO/TPO DID NOT REPEAT THE PICKING UP OF THE DOMESTIC COMPARABLE CA SES BUT INSTEAD RELIED ON THE SIX EXTERNAL COMPARABLE PRICES SUPPLIED BY THE ASSE SSEE. IN THIS REGARD, THE LD COUNSEL MENTIONED THAT THE AO/TPO CANNOT BE ALLOWED TO PICK UP THE DOMESTIC COMPARABLE CASES WHILE THERE EXISTS EXTERNAL COMPAR ABLE CASES, WHICH THE DEPARTMENT CONSIDERED VALID ONES IN THE SUBSEQUENT YEAR. (III) SRI MITRA LD COUNSEL FOR THE ASSESSEE DEMONST RATED THE ERRONEOUS NATURE OF THE DECISIONS/ GUIDELINES OF THE AO/TPO/D RP IN RESORTING/SUSTAINING OF THE DECISION OF THE TPO/AO IN PICKING UP THE CONTRO LLED DOMESTIC COMPARABLE FOR 6 MAKING THE TRANSFER PRICING ADJUSTMENTS AND FILED V ARIOUS WRITTEN SUBMISSION AND CITATIONS TO SUPPORT HIS ARGUMENTS. MORE PARTICULAR LY, LD COUNSEL FILED A COPY OF A RECENT ORDER OF THE TRIBUNAL, MUMBAI BENCHES IN THE CASE OF NGC NETWORK (INDIA) P LTD. ITA NO 5307/M/2008 DATED 23.02.2011 AND TOOK US THROUGH THE CONTENTS OF PARAGRAPH15 FOR THE PROPOSITION THAT TH E AO HAS TO MAINTAIN THE RULE OF CONSISTENCY UNLESS THERE IS CHANGE FACTS MATERIALLY. COMPARABLE CASES ACCEPTED BY THE DEPARTMENT IN THE SUBSEQUENT ASSESSMENT YEAR SHOULD BE ADOPTED FOR THE PURPOSE OF COMPUTING THE TRANSFER PRICING A DJUSTMENTS FOR THE CURRENT YEAR ALSO. LD COUNSEL ALSO NARRATED THE FAC TS OF THAT CASE AND STATED THAT THE AO/TPO INITIALLY PICKED UP THE DOMESTIC COMPARA BLE CASES IN THAT CASE TOO AS IN THE CASE OF THE PRESENT ASSESSEE AND SUCH A D ECISION WAS NOT ACCEPTED BY THE TRIBUNAL VIDE THE CITED ORDER DATED 23.2.2011. FINALLY, LD COUNSEL SUMMED UP STATING THAT THE AO/TPOS PICKED UP OF THE DOMES TIC COMPARABLE CASES IN PLACE OF THE 6 EXTERNAL COMPARABLES PICKED UP IN TH E SUBSEQUENT ASSESSMENT YEAR ERRONEOUSLY AND IT IS CONTRARY TO THE ESTABLIS HED BINDING DECISIONS OF THE TRIBUNAL IN THE MATTER. FURTHER, THE COUNSEL MENTIO NED THAT THE MATTER MAYBE SET ASIDE FOR THE AO/TPO TO REJECT THE DOMESTIC COMPARA BLES AND ADOPT THE EXTERNAL COMPARABLES WHICH WERE ADOPTED IN THE SUBSEQUENT YE AR OR ANY OTHER EXTERNAL COMPARABLE CASES. IN THIS REGARD, LD COUNSEL PRAYED FOR SETTING ASIDE THE IMPUGNED ORDER WITH THE DIRECTION TO THE AO TO DECI DE THE ISSUE AFRESH HONORING THE COORDINATE BENCH DECISION OF THE MUMBAI TRIBUNA L CITED ABOVE. 5. DRAWING OUT ATTENTION TO THE REQUIREMENT AND ESS ENTIALITY OF MAKING ECONOMIC ADJUSTMENTS TO THE EXPORT SEGMENTS IN VIEW OF THE LABOUR UNREST AND OTHER FACTORS, LD COUNSEL MENTIONED THAT THE ORDER OF THE AO IS DEFICIENT IN THIS REGARD AND SIMILARLY THE GUIDELINES OF THE DRP IS A LSO NOT SPEAKING ORDER ON THE TOPIC. REFERRING TO THE CONTENTS OF PARA 6 OF THE D RPS GUIDELINES DATED 30/7/2010, LD COUNSEL MENTIONED THAT THE DRP MERELY TRAVELLED ON THE COMMONALITY OF THE MANUFACTURE AND ADMINISTRATIVE I NFRASTRUCTURE FOR BOTH DOMESTIC AND EXPORT SEGMENTS. FURTHER, HE WAS CRITI CAL OF THE FINDING IN PARA 6.4 OF THE SAID GUIDELINES THAT THE LOCK OUT OF THE COM PANY IS ONLY FOR THE PERIOD OF 19 DAYS IN THE PREVIOUS YEAR. IN THE PROCESS, THE DRP SUMMARILY ADJUDICATED THE UNDISPUTED FACT OF LABOURS DECISION TO GO FOR THE GO-SLOW APPROACH FOR NEARLY FOR MORE THAN 6 MONTHS (APRIL TO AUGUST/SEPTEMBER) IN T HE PY. AS PER THE COUNSEL, THE COMPANY TOOK FURTHER TIME TO COME TO THE NORMAL PRODUCTION LEVELS. AS PER THE COUNSEL, ALL THE RELEVANT OBJECTIONS RAISED BY THE ASSESSEE WERE NOT ADJUDICATED BY THE DRP. ACCORDING TO HIM, DRP HAS NOT ANALYSED THE PROBLEMS OF THE UNREST FACED BY THE ASSESSEE AND ITS ILL-EFF ECTS ON THE PRODUCTION CAPACITY OF THE ASSESSEE. FURTHER, HE REASONED THAT THE ASSE SSEE KEPT PLANT AND 7 MACHINERY IN PLACE AND EMPLOYED THE SKILLED AND UNS KILLED EMPLOYEES WERE EMPLOYED KEEPING IN VIEW THE CONTRACTS ON HAND BOTH DOMESTIC AND THE EXPORT ORDERS FROM THE BLK, UK AND RELATED PRODUCTION TARG ETS AND THE SAID TARGETS WERE COMPLETELY DISTURBED AND IN FACT, THE EXPORT PRODUC TION TARGETS WENT HAYWIRE COMPLETELY DUE THE DISLOYALTY OF THE EMPLOYEES BY W AY OF THEIR UNREST, LOCK OUT AND THEIR GO-SLOW ATTITUDES. AS PER THE COUNSEL, SU CH ABNORMAL EVENTS WERE DIRECTLY EVIDENCED BY WAY OF THE RESOLUTIONS, WHICH ARE PLACED IN THE FILES BEFORE US AND THEY CERTAINLY HAVE THE EFFECTS ON THE PROFI TS MARGINS AND THEREFORE, THEY REQUIRE ECONOMIC ADJUSTMENTS. THE REVENUE AUTHORITI ES HAVE FAILED TO CONSIDER THE ARGUMENTS OF THE ASSESSEE IN PROPER PERSPECTIVE . IN THIS REGARD, THE COUNSEL RELIED ON VARIOUS DOCUMENTS AND CITATIONS. IN FACT, LD COUNSEL PRAYED FOR SETTING ASIDE THE RELEVANT GROUNDS TO THE FILES OF THE AO F OR CONSIDERING THE REALITY OF THE UNREST AND REQUIREMENT OF THE MAKING ECONOMIC ADJUS TMENTS TO THESE FACTS OF THE UNREST. 6. PER CONTRA, SRI HARESHWAR SHARMA, LD DR DUTIFULLY RELIED ON TH E ORDERS/ GUIDELINES OF THE REVENUE. FURTHER, ON THIS ISSUE R ELATING TO DOMESTIC COMPARABLE VS. EXTERNAL COMPARABLE AND THE RULE OF CONSISTENCY , THE LD DR ARGUED VEHEMENTLY STATING THAT THE PRINCIPLE OF RES JUDICATA DOES NOT APPLY TO THE INCOME- TAX MATTERS AND MENTIONED THAT EVERY ASSESSMENT YEA R IS INDEPENDENT. ON THE COMPARABLE, LD DR IS OF OPINION, THE ONUS IS ON THE ASSESSEE TO BRING CORRECT COMPARABLE TO JUSTIFY ITS CLAIM AND THE NON REQUIRE MENT OF THE TRANSFER PRICING ADJUSTMENTS. CONSEQUENTLY, AS PER THE LD DR, THE SI X EXTERNAL COMPARABLES USED BY THE AO/TPO IN SUBSEQUENT YEARS NEED NOT BE ADOPT ED FOR THE CURRENT ASSESSMENT YEAR. TRIBUNALS FINDING 7. WE HAVE HEARD THE PARTIES AND PERUSED THE DRAFT ORDER/ORDERS/GUIDELINES OF THE DRT OF THE REVENUE AS WELL AS THE CITED DECI SION BEFORE US. CORRECT OPERATING MARGIN OF THE EXPORT SEGMENT AND THE NEED FOR THE ADJUSTMENTS BASED THE CORRECT COMPARABLES IN ACCORDANCE WITH THE TRAN SFER PRICING GUIDELINES ARE THE BROAD AREA OF DISPUTES. IN THIS REGARD, THE RIV AL STANDS ARE AS FOLLOWS. ASSESSEES CASE IS THAT THE UNADJUSTED OPERATING MA RGIN OF THE EXPORT SEGMENTS WITH 91.14% OF THE TOTAL ANNUAL SALES OF THE ASSESS EE IS -13.57%. THIS LOWER OPERATING MARGIN IS DUE TO LABOUR UNREST AND THEREF ORE, THE CAPACITY OF THE COMPANY WAS UNDER-UTILIZED IE THE OVERHEADS EXPENDED AS PER THE ORIGINAL TARGETS FIXED WERE NOT ABSORBED BY THE COMPANY TO I TS FULL EXTENT DUE TO GO SLOW APPROACH AND LOCK OUT OF THE LABOUR. THEREFORE, THE UNADJUSTED OPERATING MARGIN OF 13.57% (-VE) NEEDS TO BE ADJUSTED BY ADJUSTING T HE TOTAL COST OF THE EXPORT 8 SEGMENT. SUCH ADJUSTMENTS, WHICH ARE ATTRIBUTABLE T O THE UNDER ABSORBED OVERHEADS, WORK OUT TO RS 7.32 CR (ROUNDED OFF). IN EFFECT, THE ADJUSTED OPERATING MARGIN WORKS OUT TO 5.88% AS AGAINST THE OPERATING MARGIN OF 7.12% OF THE EXTERNAL COMPARABLE. THE DIFFERENCE BEING ONLY BELO W 2%, THE SAME HAS TO BE IGNORED IN VIEW OF THE PROVISO TO SECTION 92C(2) OF THE ACT. FURTHER, THE AS PER THE ASSESSEE, THE DOMESTIC COMPARABLES IS IMPROPER HERE AS THE AO REJECTED THE EXTERNAL COMPARABLE PRICES SUMMARILY AND HONOURED T HE SAME IN THE SUBSEQUENT YEAR AND THEREFORE, THERE IS INCONSISTENCY IN AOS APPROACH, WHICH IS IMPROPER. FURTHER, IN THESE MATTERS OF SUCH INCONSISTENCY, TH E ASSESSEE RELIED ON DECISIONS OF THE TRIBUNAL IN THE CASES OF FIAT INDIA P LTD (S UPRA) AND E-GAIN COMMUNICATION P LTD (SUPRA). 8. PER CONTRA, THE CASE OF THE REVENUE IS THAT THE PRINCIPLE OF RES JUDICATA IS INAPPLICABLE TO THE INCOME TAX MATTERS AND AO/TPO/D RP IS FREE TO DECIDE THE ISSUE AY-WISE DEPENDING ON THE FACTS OF THE CASE OF THAT YEAR. THE UNANSWERED QUERIES OF THE REVENUE ARE AS TO HOW THERE CAN BE T WO DIFFERENT OPERATING MARGINS IE -13.57% AND 27.09% FOR EXPORT AND DOMEST IC SEGMENTS RESPECTIVELY OF THE SAME PRODUCT IN THE SAME YEAR. FURTHER, HOW THE LABOUR UNREST EFFECTED THE EXPORT SEGMENT OF THE CARPET MANUFACTURE AND NOT TH E DOMESTIC. THEREFORE, THESE TWO OPERATING MARGINS ARE JUSTLY COMPARED AND DIFFERENT BEING ABOVE 40% IE -13.57% TO 27.09%, THE ADDITION OF RS 16,20 CROR ES IS JUSTIFIED AND CONSEQUENTLY, THERE IS NO NEED FOR ECONOMIC ADJUSTM ENTS TO THE LABOURS PRESSURE TACTICS TO GET THEIR DEMANDS MET IE GO-SLO W APPROACH,LOCK OUT ETC. 9. THE ABOVE RIVAL STANDS ARE CONSIDERED AND WE NOW PROCEED TO ADJUDICATE THE TWO FOCAL ISSUES UNDERLINED BY THE LD COUNSEL F OR THE ASSESSEE. WE SHALL TAKE UP THE FIRST ISSUE FIRST AND THE SAME IS WHETHER THE EXPORT SEGMENT C AN BE COMPARED WITH THE DOMESTIC SEGMENT WHEN THE AO ACCE PTED THE EXTERNAL COMPARABLES WERE ACCEPTED AS APPROPRIATE IN THE SUB SEQUENT AY. THIS ISSUE HAS VARIOUS FACETS AND THEY ARE: (I) WHAT IS WRONG WITH THE EXTERNAL COMPARABLE ADOPTED BY THE ASSESSEE; (II) WHETHER, IT IS JUSTIF IED TO ADOPT THE DOMESTIC COMPARABLE WHERE THE DOMESTIC SEGMENT CONSISTS OF O NLY 8.86% AGAINST THE 91.14% OF THE EXPORT SEGMENT IN TERMS OF VOLUME; (I II) RULE OF CONSISTENCY; AND (IV) THE EXISTING DECISION ON THIS ISSUE ETC. 10. TO DISCUSS THE ABOVE, ON THE ISSUE OF EXTERNAL COMPARABLE VERSUS THE DOMESTIC COMPARABLE, THE REVENUE AUTHORITIES OR T HE DRP DELIBERATED ON THE ACCEPTABILITY OF THE SIX COMPARABLE FURNISHED BY TH E ASSESSEE. WE FIND THEY HAVE SUMMARILY DISMISSED THE ASSESSEES SUBMISSIONS IN T HIS REGARD. IN OUR OPINION, 9 THE SAME IS NOT PROPER THAT THE AO/TPO HAVE NOT FIN D MISTAKE WITH THE SIX EXTERNAL COMPARABLE FILED BY THE ASSESSEE. THEY MER ELY HELD THAT THE DOMESTIC COMPARABLES ARE TO BE RELIED AS THE LABOUR RELATED PROBLEMS ARE COMMON TO BOTH EXPORT AND DOMESTIC SEGMENTS. IN FACT, CONSIDERING THE FACTS RELEVANT TO THE SUBSEQUENT AY WHERE THE AO/TPO ACCEPTED THE SIX EXT ERNAL COMPARABLE FOR THE PURPOSE OF THE TNMM, THE LD COUNSEL FOR THE ASSESSE E CONVEYED NO OBJECTION FOR GOING TO THE FILES OF THE AO/TPO IN THIS REGARD . PARA 6.4 OF THE DRP EXPLAINS THE DEPTH OF THE TRAVEL BY THE PANEL ON THE ISSUE. FOR THE SAKE OF THE COMPLETENESS OF THE ORDER, RELEVANT PARAGRAPH IS RE PRODUCED AS UNDER. 6.4. THE ASSESSEES SUBMISSION HAS BEEN CONSIDERED. SI NCE THE SAME RESOURCES, THE SAME LABOUR, THE SAME MACHINES ARE BEING USED FOR EXPORT AS WELL AS DOMESTIC SEGMENTS, IT IS DIFFICULT TO ACCEPT THE CONTENTION OF THE ASSESSEE THAT THE LABO UR UNREST AFFECTED ONLY EXPORT AND NOT A DOMESTIC SEGMENT. IN FACT, INITIALLY THE ASESSEE HAD DENIED HAVING TWO SEPARAT E SEGMENTS. THE ASSESSEE HAS GIVEN THE BREAK UP ON ESTIMATE BAS IS. SINCE THE SAME SET UP OF FACILITIES ARE BEING USED THE SA ME MAN POWER, THE SAME MACHINES AND SAME LABOUR EMPLOYED F OR MANUFACTURING CARPETS FOR EXPORT AND FOR DOMESTIC S ALE, IT CANNOT BE ACCEPTED THAT THE LABOUR STRIKE OR UNDER UTILIZA TION OF CAPACITY AFFECTED EXPORT SEGMENT ONLY AND THE PROFITABILITY WENT DOWN BECAUSE OF THE LABOUR STRIKE. MOREOVER, IT WAS FOR A LIMITED PERIOD AND THE LOC OUT, ADMITTEDLY HAS BEEN FOR 19 DAYS ONLY. IN THESE CIRCUMSTANCES, WE DO NOT CONSIDER IT NECES SARY TO INTERFERE WITH THE DECISION OF AO/TPO. 11. REGARDING THE RULE OF CONSISTENCY AND THE REL EVANT DECISIONS ON THE TOPIC, WE HAVE EXAMINED THE FACTS FOR THE AY 2006-07 AND 2 007-08. SO FAR AS THE EXTERNAL COMPARABLES, TURN OVER DETAILS OF EXPORT A ND DOMESTIC SEGMENTS AND OTHER RELEVANT FACTS ARE CONCERNED, WE FIND SIMILAR ITY OF THE FACTS BETWEEN BOTH THE YEARS. THE ARGUMENT OF THE ASSESSEE IS THAT THE EXTERNAL COMPARABLE PRICES FOR THE IMPUGNED AY 2006-07 SUPPLIED BY THE ASSESSE E, WHEN ACCEPTED BY THE AO FOR THE AY 2007-08, MUST BE ACCEPTED FOR THAT YE AR IN VIEW OF THE ABSENCE OF MATERIAL FACTS AND ALSO IN VIEW OF THE RULE OF CONS ISTENCY. WE HAVE CONSIDERED THIS ARGUMENT AND IN OUR OPINION, IT IS A SETTLED L AW THAT THE PRINCIPLE OF RES JUDICATE IS INAPPLICABLE TO INCOME TAX MATTERS. HOWEVER, TH E SAME IS TRUE AS LONG AS THE FACTS OF DIFFERENT IN DIFFERENT AYS. OTHERWI SE, THE RULE OF CONSISTENCY IS RELEVANT TO INCOME TAX MATTERS AND AO CANNOT BE IGN ORE THE SAME. THERE OUGHT TO BE UNIFORMITY IN TREATMENT AND CONSISTENCY WHEN THE FACTS AND CIRCUMSTANCES ARE IDENTICAL AS HELD BY THE MUMBAI TRIBUNAL REPORT ED IN 122 TTJ 87. RECENT JUDGMENT OF THE MUMBAI HIGH COURT IN THE CASE OF GO PAL PUROHIT (228 CTR 582) 10 (MUM), OF COURSE, IN CONNECTION WITH THE ISSUE OF P ROPER HEAD OF INCOME FOR TAXING THE GAINS ON SALE OF THE SHARES IS RELEVANT FOR THE CONCLUSION AND IT READ AS FOLLOWS. . THERE OUGHT TO BE UNIFORMITY IN TREATMENT AND CONSISTENCY IN VARIOUS YEARS WHEN THE FACTS AND CIR CUMSTANCES ARE IDENTICAL NO SUBSTANTIAL QUESTION OF LAW ARISES. 12. FURTHER, WE HAVE PERUSED THE DECISION OF THE MU MBAI BENCHES IN THE CASE OF NGC NETWORK (INDIA) P LTD. ITA NO 5307/M/2008 DA TED 23.02.2011 RELIED UPON BY THE ASSESSEE ON THE OF RULE OF CONSISTENCY AND NEED FOR NOT TAKING THE DOMESTIC COMPARABLES AND THE NEED FOR TAKING UP THE EXTERNAL COMPARABLE IN MATTERS OF THE TRANSFER PRICING ADJUSTMENTS. THE PERUSAL OF PARAGRAPH 15 WHICH IS REPRODUCED AS UNDER UNDERLINES THE PRINCIPLE THA T THE UNCONTROLLED TRANSACTIONS AND THE EXTERNAL COMPARABLES WHICH WAS ADOPTED BY T HE OFFICER IN SUBSEQUENT YEAR HOLDS RELEVANT FOR THE CURRENT ASSESSMENT YEAR AS WELL. FOR THE SAKE OF COMPLETENESS, PARAGRAPH 15 IS REPRODUCED AS UNDER: 15. WE HAVE CONSIDERED THE VARIOUS ASPECTS. THE AO HAD ACCEPTED THE LICENSE FEES FOR THE MONTH OF FEBRUARY AND MARCH 20 03 TO BE AT ARMS LENGTH. HOWEVER THE STEEP INCREASE GIVEN FROM THE B EGINNING OF THE YEAR WITH RETROSPECTIVE EFFECT HAS NOT BEEN ACCEPTED. TH E REASONS GIVEN BY THE AO IS THAT OVER THE YEAR THERE HAS BEEN DECLINE IN RATE OF HIRING TRANSPONDERS/SATELLITE DUE TO AVAILABILITY OF HIGHE R CAPACITY DIGITAL TRANSPONDERS AND HIGHER COMPETITION AMONGST VARIOUS TRANSPORTERS. THERE WOULD HAVE BEEN NO DIFFICULTY IF RETROSPECTIVE INCR EASE WAS WITH RESPECT TO AN UNRELATED PARTY BECAUSE THESE ARE COMMERCIAL DEC ISIONS WHICH THE ASSESSEE MAY TAKE ACCORDING TO ITS BUSINESS NEEDS A ND CANNOT BE QUESTIONED UNLESS THEY ARE FOUND NOT GENUINE. THE P OSITION IS HOWEVER DIFFERENT IN CASE OF TRANSACTIONS WITH A RELATED PA RTY AS IN THE PRESENT CASE, WHICH HAS TO BE COMPARED TO UNRELATED PARTY TRANSAC TIONS TO FINE OUT THE ARMS LENGTH PRICE. IN THIS CASE ARMS LENGTH PRICE HAS BEEN COMPUTED BY THE ASSESSEE WITH RESPECT TO CERTAIN COMPARABLES AS MENTIONED IN PARA 4 USING TNMM. THESE COMPARABLES AND THE METHOD OF COMPUTATION OF ARMS LENGTH PRICE HAS BEEN ACCEPTED BY THE DEPARTM ENT IN THE SUBSEQUENT ASSESSMENT YEAR I.E. 2004-05. THEREFORE IN OUR VIEW COMPARABLES SELECTED BY THE ASSESSEE HAVE TO BE ADOPTED FOR THE PURPOSE OF COMPUTATION OF TRANSFER PRICING ADJUSTME NTS THIS YEAR ALSO. HOWEVER, IT IS NOTED THAT THE ASSESSEE HAS WORKED OUT THE ARMS LENGTH PRICE ON THE BASIS OF TRANSACTIONS RELATING TO THE COMPARABLE FOR A.Y 002-03 AS AT THE RELEVANT POINT OF TIME COMPLETE DE TAILS IN RESPECT OF A.Y 2003-04 WERE NOT AVAILABLE. IN OUR VIEW WHEN THE FACTS AND FIGURES IN RELATION TO THE RELEVANT ASSESSMENT YEAR I.E. AY 20 03-04 ARE NOW AVAILABLE THEN THE TRANSFER PRICING ADJUSTMENTS HAV E TO BE COMPUTED BASED ON THE SAID FACTS AND FIGURES. IN CASE WORKING IS TO BE MADE ON THE BASIS OF FIGURES FOR AY 2002-03, THEN IN OUR VI EW THE TRANSACTIONS IN ASSESSEES OWN CASE FOR THE SAID YEAR WHICH HAVE BE EN FOUND TO BE AT 11 ARMS LENGTH IN THAT YEAR SHOULD BE ADOPTED AS BASI S AS THE BUSINESS BEING SAME, IT WILL GIVE BETTER RESULTS. MERELY BEC AUSE THE TRANSACTION IS WITH AN ASSOCIATE ENTERPRISE CANNOT BE THE GROUND T O REJECT IT AS A COMPARABLE WHEN THE TRANSACTION IS AT ARMS LENGTH. HOWEVER AS WE HAVE HELD EARLIER, IN OUR VIEW IT WILL BE MOST APPROPRIA TE TO COMPARE THE TRANSACTIONS FOR THE SAME YEAR I.E. AY 2003-04 FOR WHICH THE FIGURES ARE AVAILABLE IN RESPECT OF COMPARABLES WHICH HAVE ALREADY BEEN ACCEPTED BY THE DEPARTMENT. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER TO THE FILE OF AO FOR REWORK ING OF THE TRANSFER PRICING ADJUSTMENTS USING TNMM ON THE BASIS OF FACTS AND FI GURES AVAILABLE FOR AY 2003-04 IN RESPECT OF THE COMPARABLE SELECTED BY THE ASSESSEE AND PASS FRESH ORDER AFTER ALLOWING OPPORTUNITY OF HEAR ING TO THE ASSESSEE. 13. FROM THE ABOVE, IT IS EVIDENT THAT COMPARABLES AND THE METHOD OF COMPUTATION OF ARMS LENGTH PRICE HAS BEEN ACCEPTED BY THE DEPARTMENT IN THE SUBSEQUENT ASSESSMENT YEAR I.E. 2004-05. THEREFORE IN OUR VIEW COMPARABLES SELECTED BY THE ASSESSEE HAVE TO BE ADOPTED FOR THE PURPOSE OF COMPUTATION OF TRANSFER PRICING ADJUSTMENTS THIS YEAR ALSO. WE FIND NO REASON TO NOT ACCEPT THE ABOVE PROPOSITION CONSIDER ING THE COMMONALITY OF THE FACTS IN THE INSTANT CASE. THEREFORE, WE ARE OF THE CONSIDERED OPINION IN THE INSTANT CASE THAT FOR MAKING THE TRANSFER PRICING A DJUSTMENTS, THE AO CANNOT RESORT TO THE DOMESTIC COMPARABLE IN THE INSTANT AY . HERE, THE AO/TPO ENTERTAINED THE EXTERNAL COMPARABLE IN THE SUBSEQUE NT AY 2007-08 FOR THE SAID PURPOSE OF DETERMINING THE TRANSFER PRICING ADJUSTM ENTS TO THE EXPORT SEGMENTS. IN OUR OPINION, CONSIDERING THE COMPARABILITY OF TH E RELEVANT FACTS IN BOTH THE AYS AND THE RULE CONSISTENCY IS REQUIRED TO BE HONORED BY THE REVENUE. CONSEQUENTLY, IN THIS CASE AND FOR THIS YEAR, THE REVENUE NEEDS TO RESIST FROM ADOPTING THE DOMESTIC COMPARABLE AND PROCEED TO ADO PT THE EXTERNAL COMPARABLES AS SUPPLIED BY THE ASSESSEE OR ANY OTHE R EXTERNAL COMPARABLES FOR THE PURPOSE OF MAKING TRANSFER PRICING ADJUSTMENTS TO THE EXPORT SEGMENTS OR THE INTERNATIONAL TRANSACTIONS INVOLVING THE AE. IF THE EXTERNAL COMPARABLES ARE AVAILABLE, AO/TPO MAY EVEN ATTEMPT THE COMPUTE THE OPERATING PROFITS AS PER THE TNMM CONSIDERING THE EXTERNAL COMPRABLES THAT F ALL IN THE PERIODS OF LABOUR UNREST AND UNREST-FREE PERIOD OF THE SAME AYS TOO. IN ANY CASE, ADMITTEDLY AND UNDISPUTEDLY, THE AO/TPO HAVE NOT RECKONED AND ADOP TED THE EXTERNAL COMPARABLE CASES CITED BY THE ASSESSEE FOR MAKING T HE TRANSFER PRICING ADJUSTMENTS AND THE ORDERS ARE FREE OF ANY REASONIN G BY THE AO/TPO/DRP. THEREFORE, WE ARE OF THE OPINION THAT THE MATTER SH OULD BE SET ASIDE FOR EXAMINING THE ISSUE DE NOVO AFTER GRANTING THE REAS ONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, ALL THE RELEVAN T GROUNDS RAISED IN THIS REGARD ARE SET ASIDE . 12 14. THE OTHER KEY ISSUE RAISED BY THE COUNSEL RELAT ES TO ECONOMIC ADJUSTMENTS ON ACCOUNT OF LABOUR UNREST WARRANTED T O ARRIVE AT THE CORRECT PROFITABILITY OF THE INTERNATIONAL TRANSACTION PERT AINING TO EXPORT OF CARPETS. AS DISCUSSED IN THE OTHER PARAGRAPHS OF THE ORDER, ASS ESSEE MADE ADJUSTMENT TO THE TOTAL COST AND THE SAID ADJUSTMENT WORKS OUT TO RS 7,31,73,120/- ON ACCOUNT OF UNABSORBED OVERHEADS AND UNDERUTILIZATION OF THE CA PACITY. AO/TPO REJECTED THE CLAIM AS THEY RESORTED TO CONSIDER THE DOMESTIC COM PARABLE AS PROPER IN THIS CASE STATING THAT THE SAID LABOUR UNREST IS COMMON TO BOTH EXPORT AND DOMESTIC SEGMENT. IN THIS REGARD, THE COUNSEL RELIED UPON TH E DECISION OF THE MUMBAI BENCH IN THE CASE OF FIAT INDIA P LTD (2010-TII-30- ITAT-MUM-TP) FOR THE PROPOSITION THAT IN CASES OF ADOPTION OF TNMM, THE ASSESSEE ARE ENTITLED TO ADJUSTMENTS ON ACCOUNT OF UNDER UTILIZATION OF CAPA CITY. WE HAVE EXAMINED THE ISSUE IN DEPTH AND FIND THERE IS NO DISPUTE ON THE FACTS RELATING TO THE LABOUR UNREST. NEVERTHELESS, THERE IS SOME CONFUSION ON TH E LENGTH/PERIOD OF THE LABOUR UNREST OR AGITATIONS. THE REVENUE HOLDS THE COMPANY WAS CLOSED FOR 19 DAYS AND ON THE CONTRARY THE ASSESSEE HOLDS THAT THE SAID PE RIOD RUN INTO MORE THAN 5/6 MONTHS IN THE YEAR UNDER CONSIDERATION. THUS, CONSI DERING OUR DECISION THAT THE NEED FOR THE AO/TPO TO ADOPT THE EXTERNAL COMPARABL E FOR THE REASONS GIVEN ABOVE, THERE IS NEED FOR SETTING ASIDE THIS KEY ISS UE ALSO TO THE FILES OF THE AO FOR EXAMINING THE ISSUE OF ECONOMIC ADJUSTMENTS. PHILOS OPHICALLY, IN MATTERS OF TNMM CASES, THE AO IS EMPOWERED TO MAKE THE ADJUSTM ENTS AND THE RELEVANT RULES ARE REPRODUCED AS UNDER. SEC.10B(A)-(D).. (E) TRANSACTIONAL NET MARGIN METHOD , BY WHICH-. (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRE D OR SALES EFFECTED OR ASSET EMPLOYED O TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKING INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED 13 TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMO UNT OF NET PROFIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. 15. FROM THE ABOVE, IT IS CLEAR THE AO HAS AUTHORIT Y VIDE CLAUSE (III) ABOVE TO MAKE THE ADJUSTMENTS. SUCH ADJUSTMENTS ARE NECESSAR Y ONLY TO REMOVE OR MINIMIZE THE DIFFERENCES IN THE COMPARABLE OR ANOMA LY IN THE SAID COMPARABLE. SUCH ADJUSTMENTS ARE AUTHENTICATED BY THE OECD GUID ELINES TOO. IN THIS REGARD, WE HAVE PERUSED THE IMPORTANT FINDINGS OF THE TRIBU NAL IN THE CASE OF THE FIAT INDIA P LTD (SUPRA) PLACED AT PAGE 191 OF THE PAPER BOOK. FOR THE SAKE COMPLETENESS, THE SAME IS REPRODUCED AS UNDER. ++ AS REGARDS THE ADJUSTMENTS MADE BY THE ASSESSEE TO WORK OUT ITS OPERATING MARGIN FOR COMPARING THE SAME WIT H THE PROFIT MARGIN OF COMPARABLE CASES, IT WAS HELD THAT THERE WAS A MATERIAL DIFFERENCE IN THE FACTS OF THE ASSESSEES CASE AND THAT OF THE COMPARABLE CASES IN TERMS OF CAPACITY UTILIZATION AS WELL AS IN OTHER TERMS. APPROPRIATE ADJUSTMENTS THUS WERE REQUIRED TO BE MADE TO ELIMINATE SUCH DIFFERENCES . FURTHER, THE TPO HIMSELF HAS ALLOWED SIMILAR ADJUST MENTS MADE BY THE ASSESSEE IN THE IMMEDIATE PRECEDING YEARS I. E. AY 2002- 03, 2003-04 AS WELL AS IN THE IMMEDIATE SUCCEEDING YEARS I.E. 005-06 AND 2006-07 WHEREIN THE FACTS INVOLVED WERE SIMILAR TO THAT OF THE YEAR UNDER CONSIDERATION I.E. AY 2004- 05; + ACCORDINGLY, NO INFIRMITY IS FOUND IN THE IMPUGNE D ORDER OF THE CIT(A) AS THE ADJUSTMENTS MADE BY THE ASSESSEE IN T NMM ANALYSIS WERE REASONABLE AND ACCURATE AND AS REFLEC TED IN THE SAID ANALYSIS, INTERNATIONAL TRANSACTIONS MADE BY T HE ASSESSEE COMPANY WITH ITS ASSOCIATED CONCERNS DURING THE YEA R UNDER CONSIDERATION WERE AT ARMS LENGTH REQUIRING NO ADJUSTMENT/ADDITION ON THIS ISSUE. 16. FROM THE ABOVE, IT IS EVIDENT THAT THE ASSESSEE IS ENTITLED TO ECONOMIC ADJUSTMENTS IN THE CIRCUMSTANCES OF UNDER CAPACITY UTILIZATION OF THE COMPANY. OF COURSE, SUCH ADJUSTMENTS MUST BE RESTRICTED TO FIXE D COST/OVERHEADS ONLY. IN THE 14 INSTANT CASE, THE AO/TPO DID NOT HAVE THE OCCASION TO GO INTO THE PERIOD OR THE EXTENT OF THE LABOUR UNREST, BREAK UP OF THE CLAIME D ADJUSTMENTS AMOUNTING RS 7.32 CRORES (ROUNDED OFF), FIXED COST VERSUS THE VA RIABLE COST ETC AS THEY SUMMARILY REJECTED THE EXTERNAL COMPARABLES IN VIEW OF THEIR PREFERENCE TO THE OPERATING PROFITS OF THE DOMESTIC SEGMENT OF THE CA RPETS. THEREFORE AND CONSEQUENTLY, THIS KEY ISSUE ALSO HAS TO BE SET ASI DE TO THE FILES OF THE TPO/AO FOR FRESH EXAMINATION OF THE ISSUE. PRIMA FACIE, WE SEE THE NEED FOR SUCH ECONOMIC ADJUSTMENTS TO THE TOTAL COST OF THE CARPE T OF THE EXPORT SEGMENTS. WE REFUSE TO COMMENT ON THE FACTS RELATING TO THE FIGU RES AS NONE OF THE AUTHORITIES HAS GONE INTO THE DETAILS OF SUCH ECONOMIC ADJUSTME NTS AND THEY SUMMARILY REJECTED THE CLAIMS. AS SUCH, THE REQUISITE ADJUSTM ENTS ARE BORNE OUT OF THE RELEVANT RULES/PROVISIONS AND THEREFORE, THE CLAIM IS BONA FIDE AND HAS SUPPORT OF THE LAW. FOR THIS, THE ASSESSEE PREFERS TO GO TO TH E FILES OF THE AO FOR WANT OF A SPEAKING ORDER ON THIS ISSUE. IN OUR OPINION, THE R EQUEST OF THE ASSESSEE DESERVES TO BE CONSIDERED FAVOURABLE. 17. IN THE SET ASIDE PROCEEDINGS, THE AO/TPO NEEDS TO EXAMINE (I) TOTAL COST AMOUNTING TO RS 39.84 CR BY ANALYZING THE SAME CONS IDERING THE FIXED COST AND THE OTHERS; (II) NEEDS TO DETERMINE THE EXACT PERI OD OF UNREST OF THE LABOUR; (III) NEEDS TO DETERMINE BALKANIZATION OF THE SAID UNREST PERIOD IE THE PERIOD OF GO SLOW APPROACH OF THE LABOUR AND ITS ADVERSE EFFECT ON THE PRODUCTION OF THE CARPETS FOR THE EXPORT AND THE PERIOD OF NIL PRODUC TION OF THE CARPETS FOR THE EXPORT, ETC. (IV) COMPARE THE ECONOMIC ACTIVITY OF THE COMPANY DURING THESE DISTURBED PERIODS WITH THAT OF THE NORMAL PERIOD OF THE YEAR; (V) IF FACT THE AUTHORITIES MAY COMPARE THE OPERATING PROFITS OF TH E COMPANY CONSIDERING THE EXTERNAL COMPARABLES IE PRICES THAT FALL IN THE LA BOUR UNREST AND THAT FALL IN THE NORMAL PERIOD OF THE PREVIOUS YEAR AS THE AY REGIST ERS BOTH THE PERIODS; (VI) REGARDING THE VARIABLE COST SEGMENT OF THE CLAIMED OVERHEADS, THERE IS NEED FOR EXAMINING THE ESSENTIALITY OF THE INCURRING OF SUCH EXPENDITURE CONSIDERING THE PRUDENCE OF THE MANAGEMENT AND THE FACTORS RELATING TO THE COMMERCIAL EXPEDIENCY OF THE CONDUCTING OF THE BUSINESS. TPO/A P SHALL PASS A SPEAKING ORDER IN THIS REGARD. AO/TPO IS REQUIRED TO GRANT R EASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN THE SET ASIDE PROCEEDINGS. ACCORDINGLY, THE RELEVANT GROUNDS ARE SET ASIDE . 18. THERE ARE OTHER GROUNDS RAISED IN THE APPEAL RE LATING TO APPLICABILITY OF THE PROVISIONS OF SECTION 10B OF THE ACT, THE APPLICABI LITY OF THE PROVISIONS OF THE PROVISO TO SECTION 93C(2) OF THE ACT ETC. ON HEARIN G THE PARTIES, WE FIND THESE ISSUES SHOULD GO TO THE FILES OF THE AO AS THEY ARE DEPENDENT ON THE OUTCOME OF 15 THE KEY ISSUES SET ASIDE ABOVE. AO IS DIRECTED TO P ASS A SPEAKING IN THIS REGARD TOO DEPENDING ON THE OUTCOME IN THE SET ASIDE PROCE EDINGS AND ALSO CONSIDERING THE PLETHORA OF JUDGMENTS ON THE SAID PROVISO. ACCO RDINGLY, THE SAID GROUNDS ARE SET ASIDE TOO. 19. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED PRO TANTO FOR STATISTICAL PURPOSE ORDER PRONOUNCED IN THE COURT ON 15 TH DAY OF JUNE, 2011. SD/- SD/- (I C SUDHIR) (D.KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED THE 15 TH JUNE, 2011 B COPY OF THE ORDER IS FORWARDED TO: 1. ASSESSEES AS MENTIONED IN THE CAUSE TITLE 2. DY.CIT, CIR 1(1), PUNE. 3. DRP, PUNE. 4. CIT CONCERNED, 5. D.R. ITAT A BENCH, PUNE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR I.T.A.T PUNE