M/s. Drilbits International P. Ltd., Nashik V. DCIT Circle-1, Nashik

ITA 1361/PUN/2010

• Counselvise Citation: 136124514 RSA 2010
• Duration Of Justice: 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 22-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NARENDRA KUMAR
• Assessee Lawyers: SUNIL PATHAK NIKHIL PATHAK
• Keywords: Depreciation; Transfer pricing; International transaction; Rule of consistency; Bad and doubtful debts; Valuation report; Revenue expenditure; Capital expenditure
• Section: 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE SHRI I.C. SUDHIR (JM) AND SHRI G.S. PANNU (AM) ITA NO. 1361/PN/2010 (ASSTT. YEAR : 2006-07) M/S. DRILBITS INTERNATIONAL P.LTD. ... APPELLANT PLOT NO. 66, MIDC ESTATE, SATPUR, NASHIK PAN : AACCD1726B V. DCIT, CIRCLE 1, NASHIK RESPONDENT APPELLANT BY : S/SHRI SUNIL PATHAK/NIKHIL PAT HAK RESPONDENT BY : SHRI .NARENDRA KUMAR ORDER PER I.C. SUDHIR, JM THE ORDER OF THE A.O/DRP HAS BEEN QUESTIONED BY T HE ASSESSEE ON SEVERAL GROUNDS. 2. GROUND 1 IS GENERAL IN NATURE WHEREIN THE ASSESS EE HAS QUESTIONED THE ACTION OF THE A.O/DRP IN ASSESSING THE TOTAL INCOME AT R S.2,40,71,880/- AS AGAINST THE RETURNED INCOME OF RS.15,53,466/-. 3. IN GROUND NOS. 2 & 2.1, THE ASSESSEE HAS QUESTI ONED THE ACTION OF THE A.O IN DISALLOWING THE CLAIM OF DEPRECIATION ON LEASEHOLD LAND OF RS.47,87,204/-. GROUND NO. 2.2 IS ALTERNATIVE TO THE ABOVE GROUNDS WHEREIN IT HAS BEEN SUBMITTED THAT THE A.O/DRP OUGHT TO HAVE ALLOWED AMORTIZATION OF COST OF THE LEASEHOLD RIGHTS WHILE COMPUTING THE INCOME OF THE ASSESSEE COMPANY. ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 2 4. IN GROUND NOS. 3, 3.1 & 3.2, THE ASSESSEE HAS I MPUGNED THE ACTION OF THE A.O/DRP IN HOLDING THAT THE ASSESSEE COMPANY WAS NO T ENTITLED TO DEPRECIATION ON THE AMOUNT PAID TOWARDS ACQUISITION OF TECHNICAL KN OWHOW AND OTHER BUSINESS AS WELL AS COMMERCIAL RIGHTS, AND FURTHER IN HOLDING THAT RS.5,08,00,000/- WAS PAID TOWARDS GOODWILL AND THEREFORE, THE ASSESSEE COMPAN Y WAS NOT ENTITLED TO CLAIM DEPRECIATION ON THE SAID AMOUNT. 5. BESIDES ABOVE, THE ASSESSEE HAS SOUGHT PERMISSIO N TO RAISE FOLLOWING ADDITIONAL GROUND FOR THE ADJUDICATION OF THE TRIBU NAL : 1] WITHOUT PREJUDICE TO THE GROUNDS OF APPEAL RAIS ED, THE APPELLANT REQUESTS THAT THE AMOUNT OF RS.5.09 CRS. PAID TO GR EAVES COTTON LTD. FOR ACQUIRING KNOW HOW AND BRAND NAME, TRADEMARK AND LO GO BE ALLOWED AS A REVENUE EXPENDITURE. 6. THE LD. A.R. SUBMITTED THAT THE ISSUE RAISED IN THE ADDITIONAL GROUND IS LEGAL IN NATURE WHICH GOES TO THE ROOT OFF THE MATTER AND ADJUDICATION OF WHICH DOES NOT REQUIRE CONSIDERATION OF FRESH MATERIAL OUTSIDE THE RECORD. THE LD. D.R OPPOSED THE ABOVE APPLICATION. 7. CONSIDERING THE ABOVE SUBMISSION, WE FIND SUBSTA NCE IN THE SUBMISSION OF THE LD. A.R THAT THE ISSUE RAISED IN THE ADDITIONAL GRO UND IS LEGAL IN NATURE WHICH GOES TO THE ROOT OF THE MATTER, AND ADJUDICATION OF WHICH D OES NOT REQUIRE CONSIDERATION OF FRESH MATERIAL OUTSIDE THE RECORD. WE THUS ALLOWED THIS ADDITIONAL GROUND FOR OUR CONSIDERATION AND ADJUDICATION. 8. IN GROUND NOS. 4, TO 4.15, THE ASSESSEE HAS BA SICALLY QUESTIONED THE ACTION OF THE A.O/DRP IN MAKING AN ADDITION OF RS. 58,54,1 28/- U/S 92C OF THE INCOME TAX ACT WITHOUT APPRECIATING THAT THE CUP OR TNMM METH OD WAS THE MOST PROPER ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 3 METHOD FOR DETERMINING THE ALP OF THE INTERNATIONA L TRANSACTION RELATING TO EXPORT OF FINISHED GOODS TO ITS ASSOCIATED ENTERPRISES (AE). 9. WE HAVE HEARD AND CONSIDERED THE ARGUMENTS ADVAN CED BY THE PARTIES IN VIEW OF ORDERS OF AUTHORITIES BELOW, MATERIAL AVAIL ABLE ON RECORD AND THE DECISIONS RELIED UPON BY THEM. GROUND NO.2, 2.1 AND 2.2 10. THE RELEVANT FACTS ARE THAT THE A.O DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT IN THE RETURN OF INCOME THE ASSESSEE HAD ADDED AN AMOUNT OF RS.47,87,204/- TO THE COST OF THE BUILDING AND HAD CLAIMED DEPRECIATION AT THE RATE OF 10% THEREOF. ON BEING POINTED OUT BY THE A .O THAT LAND IS NOT INCLUDED IN THE DEPRECIABLE ASSETS U/S. 32 OF THE ACT, THE ASSE SSEE CLAIMED THAT LEASE-HOLD RIGHTS OVER THE LAND MAY BE TREATED AS AN INTANGIBLE ASSET U/S. 32(1)(II) AND DEPRECIATION MAY BE ALLOWED AT THE RATE OF 25%. THE A.O DID NOT AGREE WITH THE ASSESSEE ON THE BASIS THAT THE ACT DOES NOT ENVISAGE DEPRECIATION O N LAND OR THE LEASEHOLD RIGHTS OVER THE LAND. THE A.O ACCORDINGLY DISALLOWED THE CLAIMED DEPRECIATION ON LEASEHOLD LAND AT RS. 47,87,204/-. 11. IN SUPPORT OF THE GROUNDS, THE LD. A.R. SUBMITT ED THAT THE ASSESSEE COMPANY HAS ACQUIRED THE RUNNING UNIT OF GREAVES COTTON LTD . SITUATED AT NASHIK. THE UNIT AT NASHIK IS ENGAGED IN MANUFACTURING OF DRILLING EQUIPMENTS FOR OIL FIELDS, BLAST HOLE DRILLING (MINING) AND WATER WAY DRILLING APPLI CATION. IT IS THE FIRST YEAR OF BUSINESS OPERATION OF THE COMPANY. AS PER THE AGRE EMENT FOR PURCHASE OF UNIT, ALL THE MOVABLE AND IMMOVABLE PROPERTIES OF THE UNIT AR E ACQUIRED BY THE ASSESSEE. THE UNIT IS SITUATED ON A LEASEHOLD LAND WHICH IS TAKEN FROM MAHARASHTRA INDUSTRIAL DEVELOPMENT CORPORATION (MIDC). AT THE TIME OF EN TERING INTO THE AGREEMENT, THE UNEXPIRED PERIOD OF LEASE WAS ABOUT 60 YEARS. THE LD. A.R. SUBMITTED THAT THE ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 4 ASSESSEE HAD VALUED THE LEASEHOLD RIGHT IN THE LAND AT RS.4,18,17,600/-. THE ASSESSEE SUBMITTED BEFORE THE A.O THAT THE LEASEHOL D RIGHTS IN THE LAND ARE ENTITLED TO DEPRECIATION AND THEREFORE, THE CLAIMS SHOULD BE ALLOWED. IT WAS SUBMITTED THAT THERE WAS NO OWNERSHIP OF LAND WITH IT AND THE LEA SEHOLD RIGHT ACQUIRED ARE DIFFERENT FROM OWNERSHIP RIGHTS. THE LD. A.R. SUBM ITTED FURTHER THAT LEASEHOLD RIGHT DEPRECIATE WITH THE REDUCTION IN THE LEASE PERIOD S INCE THEY ARE ENJOYABLE FOR A LIMITED PERIOD. HENCE, IT WAS SUBMITTED BY HIM TH AT THE CLAIM OF THE ASSESSEE IS JUSTIFIED. THE LD. A.R. SUBMITTED THAT HONBLE SUP REME COURT HAS REVERSED THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT O F BOMBAY RENDERED IN THE CASE OF TECHNO SHARES, 323 ITR 69 (SC). 12. THE LD. CIT- D.R., ON THE OTHER HAND, TRIED TO JUSTIFY THE ASSESSMENT ORDER ON THE ISSUE. HE SUBMITTED THAT THE TERMS FREE HOLD AND LEASEHOLD ARE USED IN CONNECTION WITH LAND PROPERTY, THESE ARE TWO DIFFER ENT WAYS IN WHICH PROPERTY CAN BE OWNED. LEASEHOLD RIGHTS IN A PROPERTY ARE NOTHI NG BUT A TOOL TO ENJOY AND EXPLOIT THAT PROPERTY. UNTIL THE END OF THE LEASE PERIOD, THE LEASEHOLD HAS THE RIGHT TO REMAIN IN OCCUPATION AS AN ASSURED TENANT PAYING A N AGREED RENT TO THE OWNER. THE LD. D.R. HAS SUBMITTED AS NO DEPRECIATION IS AL LOWABLE ON LAND, NO DEPRECIATION CAN BE ALLOWED ON THE ROAD TO USE THAT LAND. SHE S UBMITTED THAT ON PERUSAL OF SECTION 32 OF THE ACT AS AMENDED W.E.F. 1.4. 1998, IT CAN BE SEEN THE LEGISLATURE HAS EXTENDED DEPRECIATION TO THE ENJOYABLE ASSET WH ICH WAS ONLY THEN RESTRICTED TO BUILDINGS, MACHINERY, PLANT OR FURNITURE. EVEN AFT ER AMENDMENT, THE DEPRECIATION U/S. 32 OF THE ACT IS RESTRICTED TO THE TANGIBLE/IN TANGIBLE ASSETS WHICH ARE SPECIFICALLY ENUMERATED THEREIN AND DEPRECIATION IS NOT ALLOWABL E ON ALL TANGIBLE/INTANGIBLE ASSETS. THE LD. D.R. SUBMITTED THAT THE INTANGIBLE ASSETS ON WHICH DEPRECIATION IS MADE ALLOWABLE U/S. 32(1)(II) OF THE ACT ARE, KNOW- HOW, PATTERNS, PRODUCTS, TRADEMARKS, LICENSES, FRANCHISES OR ANY OTHER BUSIN ESS OR COMMERCIAL RIGHTS ON SIMILAR NATURE ACQUIRED ON OR AFTER 1.4.1998. THE LD. D.R. SUBMITTED THE EXPRESSION BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE IN SEC. 32(1)(II) OF THE ACT HAS TO BE ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 5 CONSTRUED BY APPLYING THE PRINCIPLES OF EJUSDEM GEN ERIS AND SO READ IT WOULD BE CLEAR THAT THE EXPRESSION BUSINESS OR COMMERCIAL R IGHTS ON SIMILAR NATURE IN SEC. 32(1)(23)(2) OF THE ACT WOULD TAKE COLOUR FROM THE PRECEDING YEARS NAMELY KNOW- HOW, PATENTS, COPY RIGHTS, TRADE MARK AND FRANCHISE S WHICH BELONGED TO A CLASS OF INTELLECTUAL PROPERTY RIGHTS. SHE SUBMITTED THAT P ROVISIONS OF ACT CANNOT BE INTERPRETED TO MEAN THAT RIGHTS, GRANTING SOME TYPE OF OWNERSHIP OVER LAND WOULD ALSO QUALIFY AS INTANGIBLE ASSETS FOR THE PURPOSE O F DEPRECIATION UNDER THE ACT. THE LD. D.R. SUBMITTED THAT THE DECISION OF HONBLE SUP REME COURT IN THE CASE OF TECHNO SHARES(SUPRA) WAS RENDERED WITH A SPECIFIC R EFERENCE TO THE MEMBERSHIP CARD OF THE STOCK EXCHANGE AND HENCE, IT IS NOT APP LICABLE IN THE PRESENT CASE. BESIDES, THE AMOUNT OF RS.4,78,72,039/- INVESTED IN ACQUIRING THE LEASEHOLD LAND IS DISCLOSED IN THE BALANCE SHEET AS LEASEHOLD LAND A ND NOT AS A LEASEHOLD RIGHT DISTINCT FROM THE LAND. 13. AFTER CONSIDERING THE ABOVE SUBMISSIONS, WE DO NOT FIND SUBSTANCE IN THE CONTENTION OF THE LD. A.R. THAT THE LEASEHOLD RIGHT S IN THE LAND ARE ENTITLED TO DEPRECIATION. THE DECISION OF HONBLE SUPREME COUR T IN THE CASE OF TECHNO SHARES (SUPRA) IS NOT HELPFUL TO THE ASSESSEE AS THE HONB LE SUPREME COURT HAS BEEN PLEASED TO HOLD IN ITS DECISION IN THAT CASE THAT T HEIR JUDGMENT SHOULD NOT BE CONSTRUED TO MEAN THAT EVERY BUSINESS OR COMMERCIAL RIGHT WOULD CONSTITUTE A LICENSE OR FRANCHISE IN TERMS OF SEC. 32(1)(II) OF THE ACT. THE DEPRECIATION EVEN UNDER THE AMENDED SEC. 32 OF THE ACT IS ALLOWABLE O NLY ON THE RESTRICTED CATEGORIES OF TANGIBLE/INTANGIBLE ASSETS WHICH ARE SPECIFICALL Y ENUMERATED IN THE SECTION. THE INTANGIBLE ASSET ON WHICH THE DEPRECIATION IS ALLOW ABLE U/S. 32(1)(II) OF THE ACT ARE KNOW-HOW, PATENT, COPY RIGHTS, TRADE MARKS, FRANCHI SE OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE ACQUIRED ON OR AFTER 1.4.1998. UNDER THESE CIRCUMSTANCES, WE FULLY CONCUR WITH THE SUBMISSION OF THE LD. D.R. THAT THE PROVISIONS OF THE ACT CANNOT BE INTERPRETED TO MEAN THAT LEASEHOLD RIGHTS GRANTING SUCH TYPE OF OWNERSHIP OVER LAND ETC., WOULD ALSO Q UALIFY AS INTANGIBLE ASSETS FOR THE ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 6 PURPOSE OF DEPRECIATION UNDER THE ACT. CERTAINLY, THIS WOULD LEAD TO A CONFLICTING SITUATION WHERE LAND ACQUIRED ON FREEHOLD BASIS WO ULD NOT BE ELIGIBLE FOR DEPRECIATION BUT SIMILAR LAND ACQUIRED ON LEASEHOLD BASIS WOULD BE ELIGIBLE FOR DEPRECIATION THAT TOO AT A HIGHER RATE. UNDER THES E CIRCUMSTANCE, WE ARE NOT INCLINED TO INTERFERE WITH THE ACTION OF THE A.O IN DISALLOWING THE CLAIMED DEPRECIATION IN QUESTION ON LEASEHOLD RIGHTS OVER T HE LAND TREATING THE SAME AS INTANGIBLE ASSET U/S. 32(1)(II) OF THE ACT. THE GRO UND NOS. 2 & 2.1 ARE THUS REJECTED. 14. SINCE NO ARGUMENT HAS BEEN ADVANCED IN SUPPORT OF THE ALTERNATIVE GROUND GROUND NO. 2.2 TO JUSTIFY THE CLAIM OF THE ASSESSEE THAT A.O SHOULD HAVE ALLOWED AMORTIZATION OF COST OF THE LEASEHOLD RIGHT WHILE C OMPUTING INCOME OF THE ASSESSEE COMPANY, THE SAME IS REJECTED AS NOT PRESSED. GROUND NOS. 3, 3.1 AND 3.2. 15. THE RELEVANT FACTS ARE THAT THE ASSESSEE CLAIME D ACCORDING TO THE WORKING DONE BY REGISTERED VALUER, THE MARKET VALUE OF THE USER OF THE GREAVES BRAND AT RS. 2.67 CRORE AS ROYALTY EXPENDITURE, SINCE THE A SSESSEE WAS ALLOWED TO USE THIS BRAND FOR A PERIOD OF 3 YEARS. THE CLAIM WAS DISAL LOWED BY THE A.O ON THE BASIS THAT THERE WAS A CLEAR CLAUSE IN THE AGREEMENT WIT H THE GREAVES COTTON THAT THE ASSESSEE WOULD BE ALLOWED TO USE ALL THE GREAVES L OGO AND TRADEMARK FREE OF COST FOR A PERIOD OF 3 YEARS. THE ASSESSEE ALSO CLAIMED DEPRECIATION ON THE KNOW-HOW TRANSFERRED AS PART OF THE SLUMP SALE. THE ASSESS EE GOT A VALUATION REPORT FROM AN APPROVED VALUER TO CLAIM THAT THE MARKET VALUE OF T HE KNOW-HOW TRANSFERRED AS PART OF THE SLUMP SALE WAS RS. 2.41 CRORE AND THE SAME S HOULD BE CONSIDERED FOR DEPRECIATION U/S. 32(1) (II) OF THE ACT. THE A.O. DISALLOWED THIS CLAIM ALSO BASICALLY BECAUSE THOUGH THE AGREEMENT MENTIONS ABOUT KNOWH OW, IN THE BALANCE SHEET OF THE TRANSFEROR COMPANY NO INTANGIBLE ASSETS WERE DI SCLOSED. THIS CLEARLY SUGGESTS ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 7 THAT THERE WERE NO WORTHWHILE INTANGIBLES TO BE TRA NSFERRED AND HENCE THE VALUATION IS ONLY OF HYPOTHETICAL INTANGIBLE ASSETS. 16. IN SUPPORT OF THESE GROUNDS, THE LD. A.R. SUBMI TTED THAT THE ASSESSEE ACQUIRED THE RUNNING UNIT OF GREAVES COTTON LTD. AT NASHIK WHICH WAS MANUFACTURING ROCK ROLLER, BITES. AS PER THE AGREEMENT OF PURCHA SE OF THE UNIT, THE ASSESSEE ACQUIRED THE UNIT ON SLUMP SALES BASIS CONSISTING O F ALL ITS ASSETS WHICH INCLUDED INTELLECTUAL PROPERTY RIGHTS SUCH AS DESIGNS, DRAWI NG, MANUFACTURING PROCESS AND TECHNICAL KNOW-HOW. THE CONTENTS OF THE AGREEMENT, COPY WHEREOF MADE AVAILABLE AT PAGE NOS. 2431 TO 2437 OF PAPER BOOK CLEARLY ST ATES THAT THE KNOWHOW IS ACQUIRED. THE LD. A.R. SUBMITTED THAT THE ASSESSEE COMPANY PAID A TOTAL CONSIDERATION OF RS. 17.01/- FOR ACQUIRING THE SAID UNIT. SINCE ALL THE ASSETS AND LIABILITIES OF THE UNIT WERE ACQUIRED BY WAY OF SLU MP SALES, NO INDIVIDUAL VALUES WERE ASSIGNED TO THE ASSETS ACQUIRED. THEREAFTER, REGIS TERED VALUER WAS ENGAGED IN VALUING THE VARIOUS ASSETS ACQUIRED BY THE ASSESSEE AND HE VALUED THE KNOWHOW ACQUIRED AT RS. 2.41 CRORES AND ROYALTY PAYABLE FO R USE OF BRAND NAME, TRADE MARK, LOGO ETC, AT RS. 2.67 CRORES. IN THIS REGARD, THE LD. A.R. REFERRED PAGE NOS. 303 OF THE PAPER BOOK I.E. RELEVANT PAGE OF THE SUBMISSION S MADE BY THE ASSESSEE TO THE A.O ON 26.11.2009. THE LD. A.R. SUBMITTED THAT THE RE IS NO DISPUTE ABOUT THE VALUATION OF THE ABOVE RIGHTS, THE A.O HAS DISALLOW ED THE CLAIMED DEPRECIATION ON THE BASIS THAT AS PER AGREEMENT, THE ASSESSEE HAS N OT PURCHASED ANY KNOW-HOW FROM GREAVES COTTON LTD. AND THE ASSESSEE IS ENTI TLED TO USE TRADE MARKET, LOGO AND BRAND NAME OF GREAVES COTTON LTD. FREE OF COST FOR A PERIOD OF 3 YEARS. 17. THE LD. A.R. DREW OUR ATTENTION TO CLAUSE 1.2.6 ON PAGE 243 OF THE PAPER BOOK STATING THAT ASSESSEE WOULD BE ACQUIRING ALL INTELLECTUAL PROPERTY RIGHTS SUCH AS DESIGNS, DRAWINGS, MANUFACTURING PROCESSES AND TECH NICAL KNOWHOW IN RESPECT OF THE PRODUCTS MANUFACTURED BY THE UNIT. ACCORDINGL Y, IT IS CLEAR THAT THE ASSESSEE HAD ACQUIRED TECHNICAL KNOWHOW FROM GREAVES COTTON LTD. THE LD. A.R. SUBMITTED ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 8 THAT THE A.O HAS REFERRED TO ANNEXURE 8 OF THE AGRE EMENT WHEREIN THERE IS NO MENTION OF TECHNICAL KNOWHOW (PAGE NO. 277 OF PAPE R BOOK). THUS, THE A.O HAS STATED THAT SINCE NO KNOWHOW HAS BEEN ACQUIRED, TH E CLAIM OF DEPRECIATION CANNOT BE ALLOWED. THE LD. A.R. SUBMITTED THAT ENCLOSURE 8 OF THE AGREEMENT GIVES THE BOOK VALUE OF THE ASSETS OF GREAVES AS ON 31 ST MARCH 2005 AS PER BOOKS OF ACCOUNT OF GREAVES AND IT IS NOT THE COMPREHENSIVE LIST OF THE ASSETS ACQUIRED BY THE ASSESSEE. TECHNICAL KNOW WAS NOT SHOWN IN THE BALAN CE SHEET AND HENCE, IT IS NOT SHOWN THERE. HE SUBMITTED FURTHER THAT SINCE KNOWH OW IS NOT REFLECTED IN THE BALANCE SHEET OF GREAVES COTTON, IT DOES NOT MEAN T HAT THERE WAS NO KNOWHOW AVAILABLE. THE FACT THAT THE ASSESSEE IS BEING ABL E TO MANUFACTURE THESES ITEMS AFTER ACQUIRING THE PLANT FROM THE GREAVES ITSELF I NDICATED THAT THE KNOWHOW WAS ACQUIRED. 18. THE LD. A.R. SUBMITTED FURTHER THAT GREAVES COT TON LTD. HAS TRANSFERRED ALL THE RIGHTS & PRIVILEGES PERTAINING TO THE INTELLECT UAL PROPERTIES AND THIS IS REFERRED IN CLAUSE 5.3.2 OF THE AGREEMENT ON PAGE 248 OF THE PA PER BOOK. HE SUBMITTED FURTHER THAN CLAUSE 1.2 OF THE AGREEMENT CLEARLY MENTIONS T HAT ASSESSEE HAS ACQUIRED KNOWHOW AND THEREFORE, THERE IS NO REASON FOR NOT A LLOWING DEPRECIATION ON THE AMOUNT OF RS.2.47 CRORES. THE A.O HAS HELD THAT TH IS AMOUNT IS TOWARDS GOODWILL AND HENCE, DEPRECIATION IS NOT ALLOWABLE. 19. REGARDING THE CLAIM MADE BY THE ASSESSEE FOR AL LOWING DEPRECIATION ON AN AMOUNT OF RS.2.67 CRORES PAID FOR USE OF TRADEMARK, LOGO AND BRAND NAME, THE LD. A.R. SUBMITTED THAT SIMPLY BECAUSE IN THE AGREEMENT IT IS MENTIONED THAT THESE ITEMS WOULD BE ALLOWED TO BE USED BY THE ASSESSEE F OR 3 YEARS FREE OF COST, IT DOES NOT MEAN THAT THERE IS NO VALUE FOR THAT. THE VALU ER HAS VALUED THIS RIGHT AT RS. 2.67 CRORES. SECONDLY, THE ASSESSEE HAS PAID RS. 1 7.01 CRORES AT THE LUMPSUM AMOUNT WHICH NEEDS ATTRIBUTED TO THE ASSETS ACQUIR ED. ACCORDINGLY, IT WAS ARGUED ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 9 THAT ASSESSEE PAID RS. 2.67 CRORES FOR THE ABOVE AS SETS TO BE USED FOR A PERIOD OF 3 YEARS. 20. THE LD. A.R. SUBMITTED FURTHER THAT THE AGREEME NT BETWEEN THE SELLER AND PURCHASER DOES NOT PUT RESTRICTIONS ON THE RIGHT OF THE PURCHASER TO RECORD THE ASSETS AT IT FAIR VALUE IN THE BOOKS. THE CLAUSE IN THE AGREEMENT THAT THERE WOULD BE NO COST FOR THE USER OF ITEMS LIKE TRADEMARK, LO GO AND BRAND NAME ALLOWED TO THE ASSESSEE FOR 3 YEARS BY GREAVES IMPLIES THAT THERE IS NO SEPARATE COST FOR THIS USER. 21. THE LD. A.R. SUBMITTED FURTHER THAT THE A.O HA S ERRED IN HOLDING THAT THE ABOVE PAYMENTS OF RS. 5.08 CRORES IS FOR GOODWILL. IN FACT, IT IS FOR THE COMMERCIAL ASSETS MENTIONED ABOVE AND HENCE, DEPRECIATION IS A LLOWABLE. IN SUPPORT, HE PLACED RELIANCE ON THE FOLLOWING DECISIONS : I) SKYLINE CATERERS P. LTD., 116 ITD 348 (MUM) II) B. RAVINDRAN PILLAI V/S. CIT, 47 DTR 81 (KERALA) III) HINDUSTAN COCO COLA BREVERAGE PVT. LTD. V/S. DCIT, 43 DTR 416 (DELHI) 22. THE LD. A.R. SUBMITTED THAT SPECIAL BENCH OF TH E TRIBUNAL IN THE CASE OF AMWAY INDIA, 111 ITD 112 (SB) HELD THAT IF THE SOFT WARE IS USEABLE/USED FOR MORE THAN 2 YEARS, IT IS A CAPITAL EXPENDITURE AND IF IT IS FOR LESS THAN 2 YEARS, IT IS A REVENUE EXPENDITURE. 23. WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS, THE LD. A.R. SUBMITTED THAT AS PER THE AGREEMENT, THE TRADE MARK, LOGO AND BRAND N AME CAN BE USED BY THE ASSESSEE FOR A LIMITED PERIOD OF 3 YEARS ( 7.1, PA GE 251), THEREFORE, SINCE THE ASSESSEES RIGHT OF USER OF THESE ASSETS IS LIMITED TO ONLY FOR 3 YEARS, AMOUNT PAID ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 10 SHOULD BE ALLOWED AS A REVENUE EXPENDITURE. IN THI S CONTEXT, THE LD. A.R. ALSO ADVANCED AN ALTERNATIVE ARGUMENT ON THE FOLLOWING ADDITIONAL GROUND : : 1] WITHOUT PREJUDICE TO THE GROUNDS OF APPEAL RAIS ED, THE APPELLANT REQUESTS THAT THE AMOUNT OF RS.5.09 CRS. PAID TO GR EAVES COTTON LTD. FOR ACQUIRING KNOW HOW AND BRAND NAME, TRADEMARK AND LO GO BE ALLOWED AS A REVENUE EXPENDITURE. 24. THE LD. CIT- D.R. HAS BASICALLY PLACED RELIANCE ON THE ASSESSMENT ORDER. HE REITERATED THE BASIS ON WHICH THE AUTHORITIES BELOW HAVE DISALLOWED THE CLAIMED DEPRECIATION AS THE AGREEMENT HAD PERMITTED THE ASS ESSEE TO USE THE GREAVES LOGO FREE OF COST FOR A PERIOD OF 3 YEARS. HE SUBMITTED THAT WHEN A WRITTEN CONTRACT IS AVAILABLE AND TERMS OF THE CONTRACT ARE UNAMBIGUOUS AND CLEAR, IT IS NOT PERMISSIBLE FOR THE REVENUE TO LOOK INTO THE ALLEGED INTENTIONS OF THE PARTIES. A CONTRACT SHOULD BE READ AS A WHOLE, NO PART OF THE CONTRACT SHOULD BE TREATED AS SUPERFLUOUS OR LESS IMPORTANT. 25. REGARDING DISALLOWANCE OF CLAIM OF DEPRECIATION ON THE KNOWHOW, THE LD. D.R. SUBMITTED THAT IT WAS PART OF THE SLUMP SALE. HE SUBMITTED THAT IN THE BALANCE SHEET OF THE TRANSFEROR COMPANY, NO INTANGIBLE ASSE T WERE DISCLOSED, WHICH CLEARLY SUGGESTS THAT THERE WERE NO WORTHWHILE INTANGIBLE T O BE TRANSFERRED AND HENCE, THE VALUATION IS ONLY OF HYPOTHETICAL INTANGIBLE ASSETS . 26. IN REJOINDER, THE LD A.R. SUBMITTED THAT THE AG REEMENT HAS TO BE READ AS A WHOLE. SIMPLY BECAUSE IN THE AGREEMENT IT IS MENTI ONED THAT BRAND NAME, TRADEMARK AND LOGO WOULD BE ALLOWED TO BE USED BY T HE ASSESSEE FOR 3 YEARS FREE OF COST, IT DOES NOT MEAN THAT THERE IS NO VALUE FOR T HAT. HAD THE ASSESSEE NOT PURCHASED THEIR UNIT, THEY WOULD NOT HAVE GIVEN THE ABOVE ASSET FREE OF COST. IT IS TO BE STATED THAT THE CLAUSE IN THE AGREEMENT THAT THERE WOULD BE NO COST FOR THE USER OF ITEMS LIKE TRADEMARK, LOGO AND BRAND NAME ALLOWED TO THE ASSESSEE FOR 3 ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 11 YEARS BY GRAVES, IMPLIES THAT THERE IS NO SEPARATE COST FOR THIS USER. IN SUPPORT OF THE ALTERNATIVE PLEA RAISED IN THE ADDITIONAL GROUN D, THE LD. A.R. SUBMITTED THAT AS PER THE AGREEMENT, THE TRADEMARK, LOGO AND BRAND NA ME COULD BE USED BY THE ASSESSEE FOR A LIMITED PERIOD OF 3 YEARS. THEREFOR E, SINCE THE ASSESSEES RIGHT OF USER OF THIS ASSETS IS LIMITED FOR ONLY 3 YEARS, T HE AMOUNT PAID SHOULD BE ALLOWED AS A REVENUE EXPENDITURE. IN SUPPORT HE PLACED RELIAN CE ON THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AMWAY INDIA, 1 11 ITD 112 (SB). 27. ON THE ISSUE OF ELIGIBILITY TO CLAIM DEPRECIAT ION IN RESPECT OF TECHNICAL KNOWHOW, THE LD. A.R. REJOINED WITH THIS SUBMISSION THAT THE AGREEMENT ENTERED INTO, GREAVES COTTON LTD. CLEARLY MENTION THAT INT ELLECTUAL PROPERTIES RENDS IN THE FORM OF DESIGNS, DRAWINGS, MANUFACTURING PROCESSES AND TECHNICAL KNOWHOW ARE BEING TRANSFERRED TO THE ASSESSEE COMPANY. THE ASS ESSEE DID NOT HAVE ANY EXPERIENCE IN THIS LINE OF BUSINESS AND WAS TOTALLY DEPENDENT ON THE TECHNICAL KNOW PURCHASED BY IT FROM GREAVES COTTON FOR MANUFACTU RING THE VARIOUS PRODUCTS. SECONDLY, SIMPLY BECAUSE THERE WAS NO SPECIFIC VALU E SHOWN TO THE INTANGIBLE ASSETS IN THE BALANCE SHEET OF GREAVES, DID NOT MEAN THAT THERE WAS NO INTANGIBLE ASSETS IN THE FORM OF TECHNICAL KNOWHOW, DRAWINGS, DESIGNS ET C., THE LD. A.R. SUBMITTED THAT THE VALUATION REPORT WAS SUBMITTED BEFORE THE A.O A S WELL AS BEFORE THE DRP. THE A.O. HAS HELD THAT AMOUNT PAID BY ASSESSEE TOWARDS TECHNICAL KNOWHOW IS IN FACT, PAYMENT MADE TOWARDS GOODWILL AND SINCE DEPRECIATIO N IS NOT ALLOWABLE ON GOODWILL, THE AMOUNT OF DEPRECIATION CLAIMED BY ASS ESSEE HAS BEEN DISALLOWED BY HIM. HOWEVER, THE A.O HAS NEVER STATED THAT THE VA LUATION MADE BY ASSESSEE TOWARDS TECHNICAL KNOWHOW AND ROYALTY IS VERY HIGH. HE SUBMITTED THAT AS PER THE AGREEMENT ENTERED INTO WITH GREAVES, IT HAS PAID RS . 2.41 CRORES FOR TECHNICAL KNOWHOW AND RS. 2.67 CRORES FOR BRAND NAME, TRADEMA RK AND LOGO AND HENCE, DEPRECIATION ON THE SAME SHOULD BE ALLOWED WHILE CO MPUTING THE INCOME. ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 12 28. CONSIDERING THE ABOVE SUBMISSIONS, WE FIND SUBS TANCE IN THE CONTENTION OF THE LD. A.R. BOTH THE SIDES IN THEIR ARGUMENTS HAV E STATED THAT THE CONTENTS OF SALE/PURCHASE AGREEMENT BETWEEN THE ASSESSEE AND G REAVES COTTON LTD. SHOULD BE READ IN ITS TOTALITY FOR CLEAR UNDERSTANDING OF TER MS AND CONDITIONS AGREED UPON THEREIN. IT IS ALSO AN UNDISPUTED FACT THAT THE AS SESSEE HAS PAID THE AGREED CONSIDERATION OF RS. 7.01 CRORES AS A LUMPSUM AMOUN T TO PURCHASE THE UNIT IN ITS ENTIRETY. THUS, A LOGICAL INFERENCE IS THAT THE A SSESSEE HAS PAID FOR THE UNITS IN ITS ENTIRETY I.E. THE UNIT CONSISTING OF USER OF ITEMS LIKE TRADEMARK, LOGO AND BRAND NAME, DESIGNS, DRAWINGS, MANUFACTURING PROCESSES AN D TECHNICAL KNOWHOW. SIMPLY BECAUSE, IN THE AGREEMENT TO PURCHASE, IT IS MENTIONED THAT USER ALL ITEMS LIKE TRADEMARK, LOGO AND BRAND NAME ALLOWED T O THE ASSESSEE FOR 3 YEARS BY GREAVES FREE OF COST, WE ARE OF THE VIEW THAT IT DO ES NOT MEAN THAT THERE IS NO VALUE FOR USER OF THESE ITEMS. LIKEWISE, SIMPLY BECAUSE THERE WAS NO SPECIFIC VALUE DONE TO THE ACQUISITION RIGHT OVER THE INTANGIBLE ASSET S LIKE DESIGNS, DRAWINGS, MANUFACTURING PROCESSES AND TECHNICAL KNOWHOW BEING TRANSFERRED TO THE ASSESSEE COMPANY IN THE BALANCE SHEET OF THE TRANSFEROR, DOE S NOT MEAN THAT THERE WERE NO INTANGIBLE ASSETS IN THE FORM OF TECHNICAL KNOWHOW , DRAWINGS, DESIGNS ETC. AT PAGE NO.243 OF THE PAPER IS THE RELEVANT PAGE OF THE AG REEMENT, WHEREIN IN CLAUSE NO. 1.2.6 IT IS CLEARLY STATED THAT THE ASSESSEE WOULD BE ACQUIRING ALL INTELLECTUAL PROPERTY RIGHTS SUCH AS DESIGNS, DRAWINGS, MANUFACT URING PROCESSES AND TECHNICAL KNOWHOW IN RESPECT OF PRODUCTS MANUFACTURED BY THE UNIT. FURTHER IN CLAUSE NO. 5.3.2 OF THE AGREEMENT AT PARA NO. 248, IT HAS BEEN MENTIONED THAT GREAVES HAS TRANSFERRED ALL THE RIGHTS AND PRIVILEGES PERTAININ G TO THE INTELLECTUAL PROPERTIES. IN PARA NO. 7.1 OF THE AGREEMENT AT PAGE NO. 251 IS WR ITTEN THAT THE TRADEMARK, LOGO AND BRAND NAME COULD BE USED BY THE ASSESSEE FOR A PERIOD OF 3 YEARS. IN OUR VIEW, THE AVAILABILITY OF USER OF THE ABOVE ASSETS, BY TH E ASSESSEE WAS THERE DUE TO PURCHASE OF THE UNIT IN ITS ENTIRETY, HENCE, IT IS NOT POSSIBLE TO DRAW AN INFERENCE OF INDEPENDENT EXISTENCE OF THESE USER WHICH WERE MADE POSSIBLE ONLY BECAUSE ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 13 ENTERING INTO THE AGREEMENT TO PURCHASE IN QUESTION THE UNIT IN ITS ENTIRETY. WE ALSO FIND SUBSTANCE IN THE SUBMISSION OF THE LD. A.R. T HAT THE AGREEMENT BETWEEN THE SELLER AND PURCHASER DOES NOT PUT RESTRICTION ON TH E RIGHT OF THE PURCHASER TO RECORD THE ASSET AT ITS FAIR VALUE IN ITS BOOKS. THE FACT THAT THE ASSESSEE PAID LUMPSUM AMOUNT OF RS. 17.01 CRORES FOR ALL THESE RIGHTS AND ASSETS IS VERY CLEAR AND HENCE, THE APPORTIONMENT THEREOF AMONGST THE VARIOUS ASS ETS AND RIGHTS HAS TO BE MADE AND WHICH HAS BEEN DONE IN THE PRESENT CASE AS PER THE VALUERS REPORT. THE APPROVED VALUER HAS VALUED THE KNOWHOW ACQUIRED AT RS. 2.41 CRORES AND ROYALTY PAYABLE FOR USE OF BRAND NAME, TRADEMARK, LOGO AT R S. 2.67 CRORES (PAGE NO. 303 OF THE PAPER BOOK). THE AUTHORITIES BELOW HAVE NOT DI SPUTED THE ABOVE VALUES DETERMINED BY APPROVED VALUER. THE SPECIAL BENCH O F THE TRIBUNAL IN THE CASE OF AMWAY INDIA (SUPRA) HAS HELD THAT IF THE SOFTWARE I S USEABLE/USED FOR MORE THAN 2 YEARS, IT IS A CAPITAL EXPENDITURE AND IF IT IS FOR LESS THAN 2 YEARS, IT IS REVENUE EXPENDITURE. WE THUS FOLLOWING THE RATIO LAID DOWN THEREIN COME TO THE CONCLUSION THAT IN THE PRESENT CASE, SINCE THE ASSESSEE HAD PU RCHASED THE USER OF BRAND NAME, TRADEMARK, LOGO FOR 3 YEARS AND SIMILARLY, THE INTE LLECTUAL PROPERTY RIGHT SUCH AS DESIGN, DRAWINGS, MANUFACTURING PROCESSES AND TECHN ICAL KNOWHOW IN RESPECT OF THE PRODUCTS MANUFACTURED BY UNIT WAS ACQUIRED, WE HOLD THAT THE EXPENDITURE INCURRED IN THIS REGARD AS VALUED BY THE APPROVED V ALUER IS CAPITAL EXPENDITURE ON WHICH THE CLAIMED DEPRECIATION WAS ALLOWABLE. IN TH IS REGARD WE ALSO FIND SUPPORT FROM THE CITED DECISION OF DELHI BENCH OF THE TRIBU NAL IN THE CASE OF HINDUSTAN COCA COLA BEVERAGES (P) LTD VS. DCIT (SUPRA) HOLDING THA T EVEN IF AN AMOUNT IS TERMED AS GOODWILL IN THE BOOKS OF ACCOUNT BUT IT IS A B USINESS OR COMMERCIAL RIGHT IN THE NATURE OF KNOW-HOW, PATENT, COPYRIGHTS, TRADEMARKS, LICENSES, FRANCHISES, THE CLAIM OF DEPRECIATION IS INDEED ADMISSIBLE THEREUPON. WE ACCORDINGLY DIRECT THE A.O TO ALLOW THE CLAIMED DEPRECIATION ON THE ABOVE ASSETS. THE GROUND NOS. 3, 3.1 AND 3.2 ARE THUS ALLOWED. IN VIEW OF THIS FINDING ON THES E GROUNDS, THE ISSUE RAISED IN THE ADDITIONAL GROUND HAS BECOME INFRUCTUOUS AND THE S AME IS REJECTED AS SUCH. ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 14 GROUND NOS. 4, 4.1 TO 4.4. 29. THE RELEVANT FACTS ARE THAT DURING THE YEAR, TH E ASSESSEE COMPANY SOLD GOODS TO ITS ASSOCIATE ENTERPRISES (AE) AMOUNTING TO RS. 3,10,04,164/- . THE TOTAL TURNOVER WAS RS. 13.87 CRORES AND THE DOMESTIC SALES WERE RS . 10.76 CRORES. INITIALLY, WHILE FILING THE RETURN OF INCOME, THE ASSESSEE HAD ADOPT ED THE COMPARABLE UN-CONTROLLED PRICE METHOD (CUP) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) IN RESPECT OF EXPORTS TRANSACTION UNDERTAKEN WITH THE AE. THEREA FTER IN THE PROCEEDINGS BEFORE THE LD TPO, THE ASSESSEE CONTENDED THAT EVEN AS PER TRANSACTIONAL NET MARGIN METHOD (TNMM), THE TRANSACTIONS OF EXPORT OF GOODS ARE AT ALP. THE REVISED FORM NO. 3CEB WAS FILED AND DETAILS OF THE COMPANY SELEC TED AS COMPARABLE WERE FURNISHED. THE LD TPO DID NOT AGREE WITH THE SUBM ISSIONS OF THE ASSESSEE AND HELD THAT THE CUP METHOD AND TNMM ARE NOT APPLICABLE FO R DETERMINING THE ALP. THE LD. TPO HAS CONSIDERED THE GROSS MARGIN EARNED BY THE ASSESSEE IN THE EXPORT SEGMENT VIS--VIS GROSS MARGIN EARNED IN THE DOMEST IC SEGMENT. ACCORDINGLY, HE HAS HELD THAT THE GROSS MARGIN IN THE DOMESTIC SEGM ENT IS MUCH HIGHER THAN THE MARGIN EARNED IN THE EXPORT SEGMENT AND HENCE, HE H AS MADE AN ADDITION OF RS. 58,54,128/-. THE GROSS MARGINS IN THE DOMESTIC SEG MENT HAS BEEN COMPUTED BY HIM AT 23.54% AND GROSS MARGIN IN THE TOTAL EXPORT SEGMENT HAS BEEN COMPUTED BY HIM AT 5.42%. THE ASSESSEE HAS QUESTIONED THIS ACTI ON OF THE LD TPO BEFORE US . 30. IN SUPPORT OF THE GROUNDS, THE LD. A.R. SUBMITT ED THAT BEFORE PURCHASING OF THE RUNNING UNIT OF GREAVES COTTON LTD., BY THE ASS ESSEE, THE GREAVES COTTON USED TO SELL THE PRODUCTS TO DRILTOOLS DUBAI. SINCE SIM ILAR PRODUCTS WERE SOLD BY GROUPS TO ITS AE IN THE EARLIER YEARS, AND THE RATE CHARGE D BY GREAVES WAS LESSER THAN THE RATES CHARGED BY THE ASSESSEE COMPANY, THE TRANSAC TIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE ARE AT ALP. IN THIS REGARD, H E REFERRED PAGE NOS. 144 AND 162 OF THE PAPER BOOK WHEREIN DETAILS OF THE PRODUCTS S OLD BY GREAVES TO THE AE OF ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 15 ASSESSEE ARE GIVEN. THE LD. AR SUBMITTED THAT AS P ER THE LD TPO, THE COMPARABLE PRICES ARE AVAILABLE ONLY FOR 9 PRODUCTS WHILE THE ASSESSEE HAS SOLD AROUND 61 PRODUCTS TO ITS AE AND THEREFORE, THE CUP METHOD CA NNOT BE CONSIDERED AS THE MOST APPROPRIATE METHOD. 31. THE LD. A.R SUBMITTED THAT THERE ARE EVIDENCES OF COMPARABLE PRICES IN RESPECT OF 9 PRODUCTS AND THE RATES CHARGED BY THE ASSESSEE IS MUCH HIGHER. THEREFORE, THIS FACT INDICATES THAT THE TRANSACTION S ENTERED INTO BY ASSESSEE WITH ITS AE ARE AT ALP. SIMPLY BECAUSE, THE COMPARABLE TRANS ACTIONS ARE AVAILABLE IN RESPECT OF 9 PRODUCTS, IT DOES NOT MEAN THAT CUP METHOD IS TO BE REJECTED. ON THE OTHER HAND, THE FACT THAT THE ASSESSEE HAS CHARGED HIGHER RATES IN RESPECT OF 9 PRODUCTS CLEARLY INDICATES THAT THE ASSESSEES TRANSACTIONS WITH ITS AES ARE AT ALP. ON THE BASIS OF THESE 9 PRODUCTS, ONE CAN CONTEND THAT ALL THE TRANSACTIONS WITH THE AE ARE AT ALP. 32. WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS, THE LD. A.R. SUBMITTED FURTHER THAT IN RESPECT OF THE 9 TRANSACTIONS, THE EXPORT T URNOVER IS RS. 83,14,789/- WHICH IS 26.82 % OF EXPORTS TO AE AND THEREFORE, THE ADDITIO NS SHOULD NOT BE MADE IN RESPECT OF THESE TRANSACTIONS. 33. WITHOUT PREJUDICE TO THE CONTENTION OF THE ASSE SSEE THAT CUP METHOD IS TO BE APPLIED, THE LD AR SUBMITTED THAT THE ALP SHOULD B E DETERMINED BY ADOPTING THE TNMM METHOD. THE ASSESSEE HAS CONSIDERED 5 COMPANI ES AS COMPARABLE AND THE NET MARGIN EARNED BY THE ASSESSEE IS MUCH HIGHER TH AN THE AVERAGE NET OPERATIVE MARGIN EARNED BY THE 5 COMPARABLE COMPANIES. IN TH IS REGARD, HE REFERRED PAGE NOS. 4 & 5 OF THE ORDER OF THE LD TPO. THE LD. A .R. ALSO REITERATED CONTENTS OF THE WRITTEN NOTE FILED BY HIM ON THE APPLICABILITY OF CUP METHOD, TNMM, AND COST PLUS METHOD (CPM). ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 16 34. THE LD. D.R. ON THE OTHER HAND TRIED TO JUSTIFY THE ORDER OF THE TPO ON THE ISSUE. HE REFERRED THE CONTENTS OF WRITTEN REPLY FILED ON BEHALF OF THE DEPARTMENT ON THE APPLICABILITY OF CUP METHOD, TNMM AND CPM. WE WILL DISCUSS THE SAME IN OUR FINDING IN THE SUCCEEDING PARAGRAPHS. THE LD. D.R. POINTED OUT THAT THE ASSESSEE HIMSELF HAD REJECTED THE TNMM IN THE ORIGI NAL TP STUDY. THE ASSESSEE HAS TAKEN A STAND THAT TNMM WAS ACCEPTED BY THE TPO IN THE FOLLOWING A.YS., AND THEREFORE, FOR THE SAKE OF CONSISTENCY, THE SAME M ETHOD SHOULD HAVE BEEN APPLIED IN THE YEAR UNDER CONSIDERATION AS WELL. THE LD. D .R. IN THIS REGARD SUBMITTED THAT CONSISTENCY CANNOT BE RETROSPECTIVE. CONSISTENCY A CTUALLY REQUIRED IS THAT THE A.O. SHOULD HAVE FOLLOWED THE CPM (FOLLOWED IN A.Y. 2006 -07) IN THE SUCCEEDING A.Y. 2007-08 AND NOT VICE VERSA. SHE SUBMITTED THAT IN THE A.Y. 2007-08, THE ASSESSEE HAD DISCLOSED PROFIT MARGINS OF 10.89% FROM AE TRAN SACTIONS AND MARGIN OF 11.71% FROM NON-AE TRANSACTIONS AS AGAINST THE PROFIT MAR GINS DISCLOSED IN THE A.Y. 2006- 07 AT THE RATE OF 5.42% AND 23.5% FROM AE AND NON-A E TRANSACTIONS RESPECTIVELY. IN FACT, ALP ADJUSTMENT WAS REQUIRED IN A.Y. 2006-0 7, THOUGH THE SAME CANNOT BE SAID OF A.Y. 2007-08. THE LD. A.R. SUBMITTED THAT EVEN IF THE TRIBUNAL CONSIDERS THE ASSESSEES CLAIM THAT UNITED DRILLING MAY BE A CCEPTED AS A COMPARABLE, THE ADJUSTMENT ON ACCOUNT OF SIGNIFICANT INTANGIBLES CL AIMED BY THE ASSESSEE SHOULD BE ALLOWED BECAUSE NONE OF THE COMPARABLES SELECTED BY THE ASSESSEE HAS THIS SORT OF INTANGIBLES. THE ASSESSEE ALSO CLAIMED TO HAVE AC QUIRED A VERY SUBSTANTIAL BRAND WHICH HAS BEEN VALUED IN CRORES OF RUPEES. AN APPRO PRIATE ADJUSTMENT WILL HAVE TO BE CONSIDERED IN THE ALLEGED BRAND VALUE AS WELL. HE SUBMITTED FURTHER THAT IF THE ISSUES RAISED IN THE QUANTUM APPEAL SUCH AS THOSE OF ROYALTY PAYMENTS, OWNING OF INTANGIBLES ETC., RAISED IN THE SAME APPEAL ARE ALL OWED IN FAVOUR OF ASSESSEE, THERE WILL BE A CHANGE IN ASSESSEES PLI AS WELL AS BUSIN ESS PROFILE. 35. ON THE CONTENTION OF THE LD. A.R. THAT DOMESTIC MARKET AND THE EXPORT MARKET ARE NOT COMPARABLE, THE LD. D.R. SUBMITTED T HAT THE EXTERNAL COMPARABLE SELECTED BY THE ASSESSEE UNITED DRILLING DOES NOT SHOW ANY EXPORT INCOME, STILL THE ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 17 COMPANY IS ASSESSEES FAVOURITE COMPARABLE. THE LD . D.R. SUBMITTED FURTHER THAT THE ASSESSEE HAS TAKEN ABOUT MARKETING RISK, BAD DE BT RISK ETC., BUT HAS NOT GIVEN QUANTIFICATION OF THE ADJUSTMENT ON THIS ACCOUNT. H E SUBMITTED THAT IT IS AN ACCEPTED PREMISES THAT RISK ADJUSTMENTS CANNOT BE ALLOWED AS A STANDARD ADJUSTMENT. IN SUPPORT, HE REFERRED THE DECISION IN THE CASE OF S YSTEMATIC SOFTWARE AND SOLUTIONS PVT. LTD., 2011 T11 6- - ITAT MUM TP. 36. THE LD. D.R. SUBMITTED THAT THE COST ALLOCATION CLAIMED BY THE ASSESSEE BETWEEN THE DOMESTIC AND EXPORT SEGMENT HAS BEEN CO NSIDERED IN GREAT DETAIL BY THE TPO. THE ASSESSEES CLAIMS THAT EMPLOYEE COST BE ATTRIBUTED AT 92.50% TO THE NON-AE SEGMENT AND ONLY 7.5% BE ALLOCATED TO THE A E THOUGH WRITTEN OVER RATIO BETWEEN THE TWO SEGMENTS IS 74 : 26. THE ASSESSEES CLAIM IS BASED ON GENERAL ARGUMENTS. IT IS AN ADMITTED FACT THAT IN OUR COU NTRY, EXPORT REGULATION INVOLVE LOT OF PAPER PUSH AND FOLLOW UP. 37. IN REJOINDER, THE LD. A.R. SUBMITTED THAT THE L D. TPO HAS GIVEN A CHART IN RESPECT OF A FEW PRODUCTS AS PER WHICH, THE PRICE C HARGED TO THIRD PARTY IS MUCH HIGHER THAN THE PRICE CHARGED TO THE AE. IT HAS B EEN REFERRED BY THE LD CIT DR WHILE DISCUSSING THE APPLICABILITY OF CUP METHOD FO R DETERMINING THE ALP. THE LD. A.R. SUBMITTED THAT THE RATES CHARGED TO THE THIR D PARTIES IN THE DOMESTIC MARKET CANNOT BE COMPARED WITH THE RATES CHARGED TO THE AE IN THE EXPORT MARKET. THE LD. A.R ALSO MADE A BRIEF REJOINDER TO THE REPLY FURNIS HED BY THE LD CIT DR, WHICH WE WILL DISCUSS IN THE SUCCEEDING PARAGRAPHS. 38. CONSIDERING THE SUBMISSIONS OF THE PARTIES IN V IEW OF ORDERS OF THE LOWER AUTHORITIES AND MATERIAL AVAILABLE ON RECORD, WE FI ND THAT THE ISSUE INVOLVED IS AS TO WHAT WOULD BE THE PROPER METHOD TO ADOPT IN THE PRE SENT CASE TO FIND OUT ARMS LENGTH PRICE. THE ASSESSEE COMPANY DURING THE YEAR HAS SOLD GOODS TO ITS AE AMOUNTING TO RS.3,10,04,164/- OUT OF THE TOTAL TURN OVER OF RS. 13.87 CRORES, THUS ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 18 THE DOMESTIC SALES WERE RS. 10.76 CRORES. INITIALL Y WHILE FILING THE RETURN OF INCOME, THE ASSESSEE HAD ADOPTED THE CUP METHOD FOR DETER MINING THE ARMS LENGTH PRICE IN RESPECT OF THE EXPORT TRANSACTIONS UNDERTAKEN WI TH AE. SUBSEQUENTLY, DURING THE COURSE OF PROCEEDINGS BEFORE THE LD TPO, THE ASSES SEE CONTENDED THAT EVEN AS PER TNMM, THE TRANSACTION OF EXPORT OF GOODS ARE AT AL P. IN THIS REGARD, REVISED FORM NO. 3CEB WAS FURNISHED, A COPY WHEREOF HAS BEEN MAD E AVAILABLE AT PAGE NOS. 61 TO 71 OF THE PAPER BOOK. THE DETAILS OF THE COMPAN Y SELECTED AS COMPARABLES HAVE BEEN MADE AVAILABLE ON PAGE NO. 146 OF THE PAPER BO OK. THE LD TPO DID NOT AGREE WITH THE ASSESSEE AND HELD THAT THE CUP METHOD AND TNMM ARE NOT APPLICABLE FOR DETERMINING THE ALP. THE LD TPO HAS ADOPTED THE CO ST PLUS METHOD (CPM) FOR DETERMINING THE ALP. THE LD TPO HAS HELD THAT THE GROSS MARGIN IN THE DOMESTIC SEGMENT IS MUCH HIGHER THAN THE MARGIN EARNED IN TH E EXPORT SEGMENT AND HENCE, HE HAS MADE ADDITION OF RS. 58,54,128/-. THE GROS S MARGIN IN THE DOMESTIC SEGMENT HAS BEEN COMPUTED BY HIM AT 23.54% AND THE GROSS MARGIN IN THE EXPORT SEGMENT HAS BEEN COMPUTED BY HIM AT 5.42% (PAGE NO. 39 OF HIS ORDER ). 39. ON THE APPLICABILITY OF DIFFERENT METHOD TO FIN D OUT ARMS LENGTH PRICE, THE PARTIES HAVE ARGUED AT LENGTH. APPLICABILITY OF CUP METHOD 40. ON THE APPLICABILITY OF CUP METHODS FOR DETERMI NING THE ALP, THE SUBMISSION OF THE LD. A.R. REMAINED THAT THE ASSESSEE HAS PU RCHASED THE RUNNING UNIT OF GREAVES COTTON LTD. EARLIER GREAVES COTTON LTD. US ED TO SELL PRODUCTS TO DRILTOOLS DUBAI. SINCE SIMILAR PRODUCTS WERE SOLD BY GREAVES COTTON TO ITS AE IN THE EARLIER YEARS AND THE RATE CHARGED BY GREAVES WAS LESSER T HAN THE RATE CHARGED BY THE ASSESSEE COMPANY, THE TRANSACTIONS ENTERED INTO BY ASSESSEE WITH ITS AE ARE AT ALP. THE RELEVANT DETAILS OF THE PRODUCTS SOLD BY GREAVE S TO THE AE OF THE ASSESSEE ARE GIVEN AT PAGE NOS. 144 & 162 OF THE PAPER BOOK. T HE LD TPO HAS HELD THAT CUP ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 19 METHOD CANNOT BE CONSIDERED AS MOST APPROPRIATE ME THOD SINCE THE COMPARABLE PRICES ARE AVAILABLE ONLY FOR 9 PRODUCTS WHILE THE ASSESSEE HAS SOLD AROUND 61 PRODUCTS TO ITS AES. THE SUBMISSION OF THE LD. A.R . IN THIS REGARD REMAINED THAT THERE ARE EVIDENCES OF COMPARABLE PRICES IN RESPECT OF 9 PRODUCTS AND RATES CHARGED BY THE ASSESSEE IS HIGHER. THEREFORE, THIS FACT IN DICATES THAT TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE ARE AT ALP. WE FI ND SUBSTANCE IN THIS SUBMISSION OF THE LD AR THAT SIMPLY BECAUSE THE COMPARABLE TRANSA CTIONS ARE AVAILABLE ONLY IN RESPECT OF 9 PRODUCTS, IT DOES NOT MEAN THAT THE CU P METHOD IS TO BE REJECTED. THE LD. A.R. HAS ALSO RAISED AN ALTERNATIVE PLEA THAT IN RESPECT OF THESE 9 TRANSACTIONS, THE EXPORT TURNOVER IS RS.83,14,789/- WHICH IS 26.8 2% OF EXPORTS TO AE, THEREFORE ADDITIONS SHOULD NOT BE MADE IN RESPECT OF THESE TR ANSACTIONS. WE ALSO FIND SUBSTANCE IN THIS ALTERNATIVE PLEA OF THE LD A.R TH AT TAXING SHOULD NOT BE MADE IN RESPECT OF THESE TRANSACTIONS. 41. ON THE SUBMISSION OF THE LD. D.R., THAT AE HAS BEEN CHARGED LESS ON AVERAGE BY 28%, I.E. AVERAGE PRICE CHARGED TO AE IS 28% LE SS THAN THE AVERAGE PRICE CHARGED TO THIRD PARTY, THE REPLY OF LD AR REMAINED THAT THE RATES CHARGED TO THE THIRD PARTIES IN THE DOMESTIC MARKET CANNOT BE COMP ARED WITH THE RATES CHARGED TO AE IN THE EXPORT MARKET. THERE ARE VARIOUS FACTORS WHICH AFFECT THE PRICING OF THE PRODUCT IN THE DOMESTIC MARKET VIS--VIS THE EXPORT MARKET AND THEREFORE, THE PRICE CANNOT BE COMPARED. WE FIND SUBSTANCE IN THE CONTE NTION OF THE LD. AR IN THIS REGARD THAT ASSESSEE HAS TO BEAR SUBSTANTIAL MARKET ING COST IN THE DOMESTIC SEGMENT; THERE IS NO BAD DEBT RISKS IN RESPECT OF T HE SALES MADE TO THE AE AND NO PRODUCT LIABILITY RISK. ASSESSEE HAS EXPLAINED ALL THESE FACTORS AT PAGE NOS. 148 TO 151 OF THE PAPER BOOK. BESIDES, IT IS ALSO A MATER IAL ASPECT THAT ASSESSEE HAS TO BEAR WARRANTY RISK IN THE DOMESTIC SEGMENT AND THE SAID RISK IS TO BE BORNE IN THE EXPORT SEGMENT. WE THUS AGREE WITH THE LD. AR THAT DUE TO THESE FACTORS, THE ASSESSEE HAS TO CHARGE HIGHER RATES IN THE DOMESTIC SEGMENTS AND THEREFORE, ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 20 COMPARISON OF THE RATES OF THE PRODUCTS IN THE DOM ESTIC SEGMENTS AND THE EXPORT SEGMENTS IS NOT JUSTIFIED. 42. WE ALSO FIND SUBSTANCE IN THE SUBMISSION OF THE LD. A.R. THAT THE RATES CHARGED BY THE ASSESSEE ARE MUCH HIGHER THAN THE R ATES CHARGED BY GREAVES WHILE SELLING THE PRODUCTS TO ITS AES IN EARLIER YEARS. IT CAN BE VERIFIED FROM PAGE NO. 162 OF THE PAPER BOOK I.E. EXTRACT OF SUBMISSION COMPAR ING RATES CHARGED BY GREAVES COTTON LTD. AND THE ASSESSEE. THUS, WE ARE OF THE VIEW THAT THE DATE OF GREAVES TRANSACTION IS IRRELEVANT AND SHOULD BE CONSIDERED. GREAVES SALE TRANSACTIONS ARE RANGING IN THE PERIOD FROM DECEMBER 2004 TO APRIL 2 005 AND ASSESSEES TRANSACTIONS ARE RANGING DURING THE PERIOD FROM AUGUST 2005 TO MARCH 2006. EVEN THOUGH, THE RULE 10B(4) STATES THAT THE COMPARABLE DATE SHOULD BE RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION IS ENTERED I NTO, WHEN THE TRANSACTIONS ARE ENTERED INTO BY THE GREAVES AND THE ASSESSEE IN THE SAME CALENDAR YEAR THOUGH THE FINANCIAL YEAR IS DIFFERENT, STILL THE SAME SHOULD BE TREATED AS COMPARABLE TRANSACTIONS. SECONDLY, THE PROVISO TO RULE 10B(4) PROVIDES DATE RELATING TO PERIOD NOT BEING MORE THAN 2 YEARS PRIOR TO THE F.Y. CAN B E CONSIDERED. THUS, AS PER THE PROVISO, THE DATE OF EARLIER F.Y CAN CERTAINLY BE C ONSIDERED. THE LD CIT DR HAS REFERRED TO THE DECISION OF ITA MUMBAI BENCH IN THE CASE OF SYSTEMATIC SOFTWARE SOLUTIONS (P) LTD., (SUPRA) FOR THE PROPOSITION THA T EARLIER YEAR DATA CANNOT BE USED UNLESS A CASE HAS BEEN MADE UNDER PROVISO TO RULE 1 0B(4). WE NOTE THAT IN THAT CASE, THE ASSESSEE WAS NOT ABLE TO DEMONSTRATE THAT THE EARLIER YEAR DATA WAS RELEVANT FOR DETERMINING THE ALP WHILE IN THE PRESE NT CASE, THE FACT THAT GREAVES WAS OWNING THE UNIT BEFORE SELLING IT TO THE ASSESS EE AND WAS ALSO SELLING THE PRODUCTS MANUFACTURED TO THE AE OF THE ASSESSEE, TH E RATES CHARGED BY THE GREAVES TO AE OF THE ASSESSEE ARE CERTAINLY CONSTITUTING AN IMPORTANT EVIDENCE TO BE CONSIDERED AND HENCE, THE SAID DATA SHOULD BE CONSI DERED. THE APPLICABILITY OF TNMM ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 21 43. THE LD. A.R SUBMITTED THAT THE LD TPO HIMSELF H AS ACCEPTED THAT UNITED DRILLING TOOLS LTD. IS ENGAGED IN SIMILAR BUSINESS . WITHOUT PREJUDICE TO HIS EARLIER SUBMISSIONS, THE LD. A.R. SUBMITTED THAT IF ONLY UN ITED DRILLING IS CONSIDERED AS COMPARABLE, IT CAN BE NOTED THAT THE NET MARGIN OF UNITED DRILLING IS 1.60% AS AGAINST OVER NET OPERATING MARGIN OF 12.93 % OF TH E ASSESSEE. HENCE IT IS AS PER TNMM, THE TRANSACTIONS ARE AT ALP. THE LD. AR SUBM ITTED THAT EVEN IF ONLY ONE COMPARABLE REMAINS, THE SAME SHOULD BE CONSIDERED AND RELIANCE HAS BEEN PLACED ON THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN T HE CASE OF HAWORTH (INDIA) PVT. LTD. V/S. DCIT, ITA NO. 5341/DEL/2010 (A.Y. 2006-0 7) (COPY SUPPLIED). THE LD AR SUBMITTED FURTHER THAT FOR THE A.Y. 2007-08, THE A SSESSEE HAS ADOPTED TNMM FOR DETERMINING THE ALP AND THE LD TPO HAS ACCEPTED THE SAME. THE COPY OF THE ORDER OF THE LD TPO FOR THE SAID A.Y. HAS BEEN MADE AVAI LABLE AT PAGE NOS. 311 TO 312. WE NOTE FROM THE ORDER OF THE TPO FOR THE A.Y. 2007 -08 THAT THE LD TPO HAS ACCEPTED THE CASE OF UNITED DRILLING AS ONE OF THE COMPARABLE. THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF BRINTON CARPETS ASIA PV T. LTD., ITA NO 1296/PN/2010 (A.Y. 2006-07), ORDER DATED 15 TH JUNE 2011, COPY SUPPLIED RELIED UPON BY THE LD AR HAS HELD THAT IF THE TNMM IS ACCEPTED TO BE THE MOS T APPROPRIATE METHOD IN THE SUBSEQUENT YEAR, THEN THE SAID METHOD SHOULD BE CON SIDERED FOR DETERMINING THE ALP IN THIS YEAR. WE, THUS, ALSO FIND SUBSTANCE IN THE ALTERNATIVE SUBMISSIONS OF THE LD AR THAT TNMM CAN ALSO BE ACCEPTED DURING THE YEA R FOR DETERMINING THE ALP. 44. ON THE APPLICABILITY OF TNMM, THE CONTENTION OF THE LD AR AS AN ALTERNATIVE SUBMISSION REMAINED THAT THE ALP SHOULD BE DETERMIN ED. HE SUBMITTED THAT THE ASSESSEE HAS CONSIDERED 5 COMPANIES AS COMPARABLE A ND THE NET MARGIN EARNED BY THE ASSESSEE IS MUCH HIGHER THAN THE AVERAGE NET OP ERATING MARGIN EARNED BY THE 5 COMPARABLE COMPANIES. IN THIS REGARD, THE ASSESSEE HAS ELABORATELY CLARIFIED ON PAGE NOS. 146 AND 147 OF THE PAPER BOOK THAT THESE 5 COMPANIES ARE COMPARABLE, ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 22 HENCE TNMM METHOD SHOULD HAVE BEEN ADOPTED FOR DETE RMINING ALP. LD TPO HAS REJECTED THE SUBMISSION OF THE ASSESSEE ON THE BASI S THAT 5 COMPANIES SELECTED ARE NOT COMPARABLE WITH THE ASSESSEE COMPANY. THE LD T PO HAS STATED THAT BUT FOR UNITED DRILLING LTD., ALL OTHER COMPANIES ARE OPERA TING IN DIFFERENT FIELD. REGARDING UNITED DRILLING, THE LD TPO HAS FURTHER STATED THAT IT ALSO MANUFACTURES HOLE TOOLS, GAS LIFT EQUIPMENT, WIRE LINE ETC. THE CONTENTION OF THE LD. AR IN THIS REGARD REMAINS THAT THE 5 COMPANIES SELECTED BY IT ARE COM PARABLE AND THE DETAILS OF THE COMPANIES ARE GIVEN ON PAGE 146 OF THE PAPER BOOK. APPLICABILITY OF CMP 45. THE LD TPO HAS ADOPTED THE CPM ON THE BASIS THA T THE ASSESSEE HAD A JOINT FACILITY ARRANGEMENT OR A LONG TERM BUY AND SUPPLY ARRANGEMENT WITH ITS AE. THE CONTENTION OF THE LD A.R. REMAINED THAT THE ASSESSE E COMPANY HAD PURCHASED THE RUNNING UNIT OF GREAVES COTTON LTD. IT WAS SUBMITTE D THAT A JOINT FACILITY ARRANGEMENT IS WHERE A COMPANY PURCHASES SOME FINIS HED GOODS FROM THE PRINCIPAL, CARRIES OUT OPERATIONS AND SELLS THE FINISHED GOO DS BACK TO THE PRINCIPAL INVOLVING IN SOME CASES THE TRANSFER OR LICENSING OF INTANGIBLE PROPERTY FROM THE PRINCIPAL TO THE MANUFACTURER. IN CASE OF JOINT FACILITY ARRANGEME NTS, THE CRITERIA ARE LIKE LONG TERM BUY AND SUPPLY ARRANGEMENTS , THE ASSOCIATED ENTERP RISE IS A CONTRACT MANUFACTURER CARRYING LOW RISKS AND CARRYING OUT LOW LEVEL FUNC TIONS. THUS, IN CONTRACT MANUFACTURING, THE MANUFACTURER USES NON-ROUTINE IN TANGIBLE FOR MANUFACTURING THE GOODS FOR THE PRINCIPAL ON THE BASIS OF RAW MATERIA L SUPPLIED BY THE PRINCIPAL. THE MANUFACTURER DOES NOT CARRY RISK, WHEN ITS ENTIRE OUTPUT IS GUARANTEED TO BE BOUGHT BY THE PRINCIPAL. LOW RISK MEANS LOW MARGI N AT ARMS LENGTH. THE CONTRACT MANUFACTURER IS COMPENSATED FOR THE MANUFACTURING S ERVICES RATHER THAN THE PARTICULAR PRODUCT MANUFACTURED. HE FURNISHED AN E XAMPLE THAT A SUBSIDIARY COMPANY IS REQUIRED TO DO SOME JOB WORK ON THE SEMI FINISHED GOODS SHIPPED BY THE PARENT COMPANY. THE MANUFACTURING ACTIVITIES DO NOT INVOLVE ANY COMPLEX ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 23 MANUFACTURING REQUIRING NO TECHNICAL SERVICE, PRODU CTION SCHEDULE OR MATERIAL PURCHASING. NO MATERIAL INVENTORY RISK IS INVOLVED . THE FINISHED PRODUCT IS THEN TRANSFERRED TO THE PRINCIPLE TO BE SOLD BY IT. THE SUBSIDIARY CHARGED IS A MARK UP WHICH IS COMPARED WITH THE ONE OF SIMILAR SERVICES PROVIDED BY IT TO UNRELATED PARTIES. 46. THE FURTHER CONTENTION OF THE LD A.R. REMAINED THAT IN THE PRESENT CASE, THE ASSESSEE ALSO SALES ITS PRODUCTS IN THE DOMESTIC MA RKET. MORE THAN 74% OF THE TURNOVER IS FROM DOMESTIC SEGMENT AND HENCE THE PR ESSING PRESUMPTION OF THE TPO FOR ADOPTING COST METHOD IS TOTALLY INCORRECT. THE LD. A.R. SUBMITTED THAT AS PER CUP METHOD AND TNMM, THE TRANSACTIONS OF EXPOR T OF GOODS TO THE AE ARE CLEARLY AT ARMS LENGTH PRICE AND THEREFORE, THE LD TPO WAS NOT JUSTIFIED IN REJECTING THESE 2 METHODS AND ADOPTING THE COST PLUS METHOD. HE SUBMITTED THAT THE LD TPO HAS COMPARED THE GROSS MARGIN IN EXPORT SEGMENT VIS --VIS GROSS MARGIN IN DOMESTIC SEGMENT WITHOUT APPRECIATING THAT THERE AR E VARIOUS DIFFERENCES IN FUNCTIONS PERTINENT AND THE RISK ASSUMPTION IN THES E TWO SEGMENTS AND THEREFORE, THE SAME CANNOT BE CONSIDERED AS COMPARABLES FOR DE TERMINING THE ALP. HE SUBMITTED THAT THERE IS NO MARKETING REASON IN THE EXPORT SEGMENT WHEREAS IN THE DOMESTIC SEGMENT, THE ASSESSEE HAS TO BEAR SUBSTAN TIAL MARKETING COST. THERE IS NO RISKS OF BAD DEBT IN EXPORTS WHILE THE ASSESSEE HAS TO BEAR THE SAID RISKS IN DOMESTIC SEGMENTS. THERE IS NO PRODUCT LIABILITY R ISKS (LIKE RETENTION MONEY, BANK GUARANTEE, WARRANTY ETC.,), IN EXPORTS SEGMENT, BU T THE ASSESSEE HAS TO BEAR THE SAID RISKS IN THE DOMESTIC SEGMENTS. THE CONTRACTU AL TERMS ALSO DEFER IN THE DOMESTIC SEGMENT VIS--VIS THE EXPORT SEGMENT. THE LD. AR SUBMITTED FURTHER THAT IN THE DOMESTIC SEGMENT, THE PUBLIC SECTOR UNDERTA KINGS ARE THE MAIN CUSTOMERS OF THE ASSESSEE, WHEREIN MORE FOLLOW UP AT EVERY STAGE TILL THE RECOVERY OF DUE PAYMENT IS REQUIRED TO BE DONE. ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 24 47. WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS, THE LD. A.R. SUBMITTED THAT THE ADDITION MADE BY THE LD TPO BY ADOPTING THE CPM IS NOT JUSTIFIED. THE LD TPO HAS COMPUTED THE GROSS PROFIT MARGIN IN THE DOMESTIC SE GMENT AT 23.54% WHILE IN THE EXPORT SEGMENT AT 5.42%. THE DIFFERENCE BETWEEN TH E 2 IS CALCULATED AT 18.12% AND THE SAME IS APPLIED TO THE TOTAL COST OF PRODUC TION OF GOODS SOLD TO THE AE AND THE ADDITION OF RS. 58,54,128/- HAS BEEN MADE. HE SUBMITTED THAT THE WORKING OF THE GROSS MARGINS HAS BEEN GIVEN BY THE LD TPO AT P AGE NO. 9 OF ITS ORDER. IN THIS WORKING, THE LD. AR SUBMITTED THAT CERTAIN POINTS A RE IMPORTANT. IN THIS YEAR, THE ASSESSEE HAS PAID PROCESSING CHARGES TO THE LOCAL CONTRACTOR OF RS. 16,98,742/-. IT WAS CLARIFIED TO THE LD TPO THAT THESE CHARGES ARE PAID ONLY IN RESPECT OF THE PRODUCTS SOLD IN THE DOMESTIC SEGMENTS AND HENCE TH E SAID AMOUNT SHOULD BE CONSIDERED ONLY IN THE DOMESTIC SEGMENT AND SHOULD NOT BE ALLOCATED TO THE EXPORT SEGMENT. THE LD. AR REFERRED PAGE NOS. 155 AND 156 OF THE PAPER BOOK I.E. SUBMISSION MADE BEFORE THE LD TPO. REGARDING THE P ROCESSING CHARGES PAID FOR THE DOMESTIC SEGMENT ONLY, WHICH HAS NOT BEEN DISP UTED BY THE LD TPO. THE LD A.R. SUBMITTED FURTHER THAT THE ASSESSEE HAD ALSO ENCLOSED THE DETAILS OF THE PRODUCTS FOR WHICH PROCESSING CHARGES ARE PAID, MAD E AVAILABLE AT PAGE NOS. 205 TO 208 OF THE PAPER BOOK BUT THE LD TPO HAS ERRED IN A LLOCATING THE CHARGES PERTAINING TO THE DOMESTIC SEGMENT AND TO THE EXPORT SEGMENT A LSO. THE LD AR SUBMITTED FURTHER THAT THE ASSESSEE HAS ALSO INCURRED EMPLOYM ENT COST. THE DIRECT LEVEL COST PERTAINING TO THE MANUFACTURING IS LOCATED BETWEEN 2 SEGMENTS ON TURNOVER BASIS. AS REGARDS THE EMPLOYMENT OF COST OF PERSONS OTHER THAN DIRECT LABOUR, THE LD. AR SUBMITTED THAT MAJOR TIME OF THE JUNIOR AND SENIOR STAFF IS UTILIZED FOR THE DOMESTIC SEGMENT. IT WAS CLARIFIED THAT THE ASSESSEE DEALS WITH VARIOUS PUBLIC SECTOR UNITS AND LOT OF FOLLOW UP, COLLECTION OF THE ORDERS, PHY SICAL DISPATCH OF GOODS, FOLLOW UP FOR THE PAYMENT ETC., IS REQUIRED TO BE DONE. THER EFORE, OUT OF THE TOTAL EXPENDITURE OF RS.1,50,31,941, 92.50% IS ALLOCATED TO THE DOMES TIC UNIT AND BALANCE 7.5% IS ALLOCATED TO THE EXPORT SEGMENT. IN THIS REGARD, HE REFERRED PAGE NOS. 126 TO 129 OF THE PAPER BOOK I.E. THE DETAILED SUBMISSION MADE TO THE LD TPO IN THIS REGARD. ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 25 LD A.R. SUBMITTED THAT THE APPORTIONMENT OF THESE C OSTS IS JUSTIFIED BECAUSE MAJOR TIME OF THE EMPLOYEES IS DEVOTED TOWARDS THE DOMEST IC SEGMENT. 48. APART FROM THE ABOVE, THE ASSESSEE HAS TO INCUR SELLING AND ADMINISTRATIVE EXPENSES, FREIGHT EXPENSES, BANK INTERESTS ETC., WH ICH HAS BEEN IGNORED BY THE LD TPO SINCE THESE EXPENSES FORM PART OF PROFIT & LOS S ACCOUNT AND NOT TRADING A/C., SUBMITTED THE LD. A.R. HE SUBMITTED FURTHER THAT W ORKING OF THE NET PROFITS OF THE 2 SEGMENTS IS GIVEN ON PAGE NO. 141 OF THE PAPER BOO K AND THE NET PROFIT OF THE DOMESTIC SEGMENT IS 13.04% AND THAT OF EXPORT SEGME NT IS 12.55%. HENCE, THERE IS HARDLY ANY DIFFERENCE BETWEEN TWO SEGMENTS. 49. APART FROM THE ABOVE FACTORS, THE LD AR SUBMITT ED THAT IN RESPECT OF TRANSACTIONS WITH AE, THE ASSESSEE DOES NOT HAVE TO BEAR THE BAD DEBT RISK, PRODUCT/WARRANTIES ETC., AT LEAST 40 % DEDUCTION SH OULD BE GIVEN IN THE MARGIN COMPUTED OF THE DOMESTIC SEGMENT FOR THE ABOVE RISK S. HE SUBMITTED THAT THIS VIEW HAS BEEN ACCEPTED IN THE CASE OF SONI (INDIA) LTD. , 118 TTJ 865, WHEREIN ON ACCOUNT OF DIFFERENCE IN THE VARIOUS FACTORS/FUNCTI ONS PERFORMED, THE TRIBUNAL GAVE REDUCTION OF 20%. HE SUBMITTED THAT BECAUSE OF THE DIFFERENCE IN THE FUNCTIONS PERFORMED AND THE RISK UNDERTAKEN, SUCH BENEFITS HA S TO BE ALLOWED. 50. CONSIDERING THE ABOVE SUBMISSIONS, VIS--VIS TH E METHOD I.E. CPM (COST PLUS METHOD) ADOPTED BY THE LD TPO TO DETERMINE THE ARMS LENGTH PRICE, WHICH HAS BEEN RELIED UPON BY THE LD. D.R, WE FIND THAT THE L D TPO WHILE ADOPTING CPM HAS FAILED TO APPRECIATE SEVERAL MATERIAL ASPECTS OF T HE ISSUE AS DISCUSSED ABOVE. IN OUR VIEW, THE LD TPO WAS NOT JUSTIFIED IN COMPARI NG THE GROSS MARGIN IN EXPORT SEGMENT VIS--VIS GORSS MARGINS IN DOMESTIC SEGMENT . THERE ARE VARIOUS DIFFERENCES IN THE FUNCTIONS PERFORMED AND THE RISK ASSUMED IN THESE TWO SEGMENTS AND THEREFORE, THE SAME CANNOT BE CONSIDERED AS COMPA RABLE CASES FOR DETERMINING THE ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 26 ALP. THERE IS NO MARKETING RISK IN THE EXPORT SEGM ENT, NO RISK OF BAD DEBTS, NO PRODUCT LIABILITY RISK IN EXPORT SEGMENTS WHEREAS T HE ASSESSEE HAS TO BEAR ALL THESE RISKS IN THE DOMESTIC SEGMENT. THE CONTRACTUAL STAT EMENTS ALSO DEFER IN THE DOMESTIC SEGMENT VIS--VIS EXPORT SEGMENTS. THERE ARE DIFFERENT CHARACTERISTICS AND CONTRACTUAL TERMS IN THE TWO SEGMENTS AND FURTHER G EOGRAPHICAL AND MARKED DIFFERENCES ARE ALSO PRESENT . THUS, WE ARE OF THE VIEW THAT IT IS VERY DIFFICULT TO MAKE SUITABLE ADJUSTMENTS FOR THESE DIFFERENCES, H ENCE THE CMA METHOD IS NOT APPROPRIATE METHOD FOR DETERMINING THE ALP. THE LD TPO, IN OUR VIEW, HAS THUS ERRED IN ADOPTING THE CMA METHOD AS APPROPRIATE ME THOD. 51. WE ALSO FIND SUBSTANCE IN THE ALTERNATIVE PLEA OF THE LD. A.R. IN THE DEFECTIVE WORKING OUT OF THE TOTAL OF PRODUCTION OF THE GOODS SOLD TO THE AE BY THE LD TPO. THE LD TPO HAS COMPUTED GROSS PROFIT MARG INS IN THE DOMESTIC SEGMENT AT 23.54% WHILE IN THE EXPORT SEGMENT AT 5.42 %. THE DIFFERENCE BETWEEN THE 2 HAS BEEN CALCULATED AT 18.12 % AND THE SAME IS EMPL OYED TO THE TOTAL COST OF PRODUCTION OF THE GOODS SOLD TO THE AE AND ADDITION OF RS.58,54,128/- HAS BEEN MADE. IN THIS WORKING, THE LD TPO HAS FAILED TO AP PRECIATE THAT DURING THE YEAR, THE ASSESSEE HAS PAID PROCESSING CHARGES TO THE LOCAL C ONTRACTORS OF RS. 16,98,742 I.E. IN RESPECT OF PRODUCTS SOLD IN THE DOMESTIC SEGMENT , HENCE THE SAME SHOULD NOT HAVE BEEN ALLOCATED TO THE EXPORT SEGMENT. BESIDES , THERE IS NO REASON TO DOUBT THE SUBMISSION OF THE ASSESSEE THAT MAJOR TIME OF T HE JUNIOR AND SERIOR STAFF IS UTILIZED FOR THE DOMESTIC SEGMENT SINCE WHILE DEALI NG WITH VARIOUS PUBLIC SECTOR UNITS BY THE ASSESSEE SEVERAL FOLLOW UPS LIKE COLL ECTION OF THE ORDERS, PHYSICAL DISPATCH OF GOODS, FOLLOW UP FOR THE PAYMENT ETC., ARE REQUIRED TO BE DONE, HENCE MAJOR PART OF THE TOTAL EXPENDITURE IS TO BE ALLOCA TED TO THE DOMESTIC UNIT AND BALANCE TO THE EXPORT SEGMENTS. WE ARE THUS OF THE VIEW THAT LD TPO WAS NOT JUSTIFIED IN REJECTING SUCH SUBMISSION OF THE ASSES SEE TREATING THE SAME HAS HAVING NO BASIS. IN OUR VIEW, THE APPORTIONMENT OF THESE COSTS IS JUSTIFIED BECAUSE MAJOR TIME OF THE EMPLOYEES IS DEVOTED TOWARDS THE DOMEST IC SEGMENT. WE ALSO FIND ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 27 SUBSTANCE IN THE SUBMISSION OF THE LD A.R. THAT AS SESSEE HAS ALSO TO INCUR SELLING AND ADMINISTRATIVE EXPENSES, FREIGHT EXPENSES, BANK INTERESTS ETC., WHICH CANNOT BE IGNORED AS ULTIMATELY THE INCOME TAX IS LEVIED ON N ET PROFIT AND THEREFORE, COMPARISON OF THE NET PROFIT OF THE DOMESTIC EXPORT SEGMENT IS MORE PROPER. THE ASSESSEE AT PAGE NO. 141 OF THE PAPER BOOK HAS GIVE N WORKING OF THE NET PROFIT OF THE 2 DIVISIONS AS PER WHICH, THE NET PROFIT OF THE DOMESTIC SEGMENT IS 13.04 % AND THAT OF THE EXPORT SEGMENT IS 12.55%. WE FIND THAT THERE IS HARDLY ANY DIFFERENCE BETWEEN 2 SEGMENTS. WE ALSO FIND SUBSTANCE IN THE SUBMISSION OF THE LD AR THAT IN RESPECT OF TRANSACTION WITH AE, THE ASSESSEE ALSO DOES NOT HAVE TO BEAR BAD DEBT RISKS, PRODUCT/WARRANTY RISKS ETC., HENCE SOME % OF REDUCTION SHOULD HE GIVEN IN THE MARGIN COMPUTED FOR THE DOMESTIC SEGMENT FOR THE A BOVE RISK. 52. CONSIDERING THE ABOVE MATERIAL FACTS IN TOTALIT Y, WE ARE OF THE VIEW THAT THE LD TPO WAS NOT JUSTIFIED IN ADOPTING THE COST PLUS METHOD (CPM) AS THE MOST APPROPRIATE METHOD. ON THE BASIS THAT THE ASSESSEE HAD A JOINT FACILITY ARRANGEMENT OR A LONG TERM BUY AND SUPPLY ARRANGEM ENT WITH ITS AE, AS WE HAVE DISCUSSED HEREINABOVE, WE FIND THAT THERE WAS NO SU FFICIENT REASONS WITH THE LD TPO TO REJECT CUP METHOD OR TNMM ADOPTED BY THE AS SESSEE TO DETERMINE THE ARMS LENGTH PRICE (ALP). WE THUS HOLD THAT THE ADD ITION MADE BY THE LD TPO AS A RESULT OF INCORRECT APPLICATION OF COST PLUS METHOD IS NOT JUSTIFIED. IT IS PERTINENT TO NOTE THAT IN THE SUCCEEDING A.Y. 2007-08, THE ASSE SSEE HAS ADOPTED TNMM FOR DETERMINING THE ALP, WHICH HAS BEEN ACCEPTED BY TH E LD. TPO. IN THE CASE OF BRINTONS CARPET ASIA P.LTD. VS. DCIT (SUPRA), PUNE BENCH OF THE TRIBUNAL HAS FOLLOWED THE DECISION OF MUMBAI BENCH OF THE TRIBUN AL IN THE CASE OF NOIC NETWORK (INDIA) P. LTD. ITA NO. 5307/M/2006 DATED 23.02.201 1 (PARA 15) ON THE RULE OF CONSISTENCY AND NEED FOR NOT TAKING THE DOMESTIC CO MPARABLES AND NEED FOR TAKING UP THE EXTERNAL COMPARABLE IN MATTERS OF THE TRAN SFER PRICING ADJUSTMENTS. IT WAS HELD FURTHER THAT THE UNCONTROLLED TRANSACTIONS AN D THE EXTERNAL COMPARABLES WHICH WAS ADOPTED BY THE OFFICER IN SUBSEQUENT YEAR HOLDS RELEVANT FOR CURRENT ITA . NO1 361/PN/2010 M/S.DRILBITS INTERNATIONAL P. LTD. A.Y. 2006-07 PAGE OF 28 28 ASSESSMENT YEAR AS WELL. WE THUS WHILE SETTING ASI DE ORDER IN QUESTION OF THE LD TPO, DIRECT THE LD TPO TO ACCEPT CLAIM OF THE ASSES SEE REGARDING THE ARMS LENGTH PRICE BASED ON TNMM. THE ISSUE RAISED IN THE RELAT ED GROUNDS IS DECIDED IN FAVOUR OF THE ASSESSEE. 53. CONSEQUENTLY, APPEAL IS ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 23RD AUGUST 2011. SD/- SD/- ( G.S. PANNU ) ACCOUNTANT MEMBER ( I.C. SUDHIR ) JUDICIAL MEMBER PUNE, DATED THE 23RD AUGUST, 2011 US COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT- CONCERNED,NASHIK 4. THE D.R. B BENCH, PUNE 5. GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL PUNE