Honda Motorcycle & Scooters India Pvt. Ltd., Gurgaon V. ACIT, Gurgaon

ITA 1379/DEL/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90847 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 30-03-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 17-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JUDY JAMES
• Assessee Lawyers: VIJAY IYER
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction
• Section: 92C; 143(3); 92D; 92B; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI GEORGE GEORGE K ., JM ITA NO.1379/DEL/2011 ASSESSMENT YEAR : 2006-07 HONDA MOTORCYCLE & SCOOTERS INDIA PVT. LTD., PLOT NO.01, SECTOR-03, IMT MANESAR, GURGAON. PAN : AAACH7467D VS. ACIT, CIRCLE-1(1), GURGAON. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIJAY IYER, CA DEPARTMENT BY : SHRI JUDY JAMES, STANDING COUNSEL DATE OF HEARING : 30.03.2015 DATE OF PRONOUNCEMENT : .04.2015 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E FINAL ORDER PASSED BY THE ASSESSING OFFICER U/S 143(3) READ WITH SECT ION 144C OF THE INCOME- ITA NO.1379/DEL/2011 2 TAX ACT, 1961 (HEREINAFTER ALSO CALLED `THE ACT) O N 14.02.2011 IN RELATION TO THE ASSESSMENT YEAR 2006-07. 2. THE FIRST TWO GROUNDS OF THE APPEAL ARE GENERAL, WHICH DO NOT REQUIRE ANY SEPARATE ADJUDICATION. 3. GROUND NO. 3, THROUGH VARIOUS SUB-GROUNDS, IS A N ASSAIL TO THE MAKING OF ADDITION OF RS.19,53,79,302/- ON ACCOUNT OF TRAN SFER PRICING ADJUSTMENT. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A DEEMED PUBLIC LIMITED COMPANY WHICH WAS INCORPORATED IN INDIA ON 20.8.1999 AS A SUBSIDIARY OF HONDA, JAPAN. THE ASSESSEE IS ENGAGE D IN THE BUSINESS OF MANUFACTURE AND SALE OF MOTORCYCLES AND SCOOTERS IN INDIA. HONDA, JAPAN PROVIDES NECESSARY TECHNOLOGY AND SUPPORT TO THE AS SESSEE FOR MANUFACTURING TWO-WHEELERS IN INDIA. THE MANUFACTU RING ACTIVITY IS UNDERTAKEN BY THE ASSESSEE AND THE GOODS SO MANUFAC TURED, NAMELY, TWO WHEELERS, ARE LARGELY SOLD IN INDIA TO UNRELATED P ARTIES AND SOME PART OF THE TOTAL SALE IS EXPORTS MADE BOTH TO ASSOCIATED ENTER PRISES (AES) AND NON- ASSOCIATED ENTERPRISES (NON-AES). THE ASSESSEE REP ORTED THE FOLLOWING ITA NO.1379/DEL/2011 3 FOURTEEN INTERNATIONAL TRANSACTIONS WITH HONDA AND ITS OTHER OFFSHORE AFFILIATES:- S.NO. NATURE OF TRANSACTION METHOD USED BY ASSESSEE VALUE OF TRANSACTION RECEIVED VALUE OF TRANSACTION PAID METHOD PLI 1. PURCHASE OF MOTORCYCLE, SCOOTER PARTS, CONSUMABLES AND OTHER SUPPLIES TNMM OP/SALES 18,48,17,733 2. EXPORT OF SCOOTERS AND SCOOTER PARTS CUP/ TNMM OP/SALES 140,37,12,904 3. PURCHASE OF FIXED ASSETS TNMM OP/SALES 21,37,15 ,816 4. PAYMENT OF EXPORT COMMISSION CUP/ TNMM --- 7,44,24,255 5. PAYMENT OF ROYALTY CUP/ TNMM --- 57,26,60,430 6. PAYMENT OF TECHNICAL KNOW-HOW FEE CUP/ TNMM --- 18,88,50,000 7. PAYMENT OF TECHNICAL ASSISTANCE FEE CUP/ TNMM --- 2,42,24,247/- 8. AUTHORISED TEST SUPPORT FEE CUP/ TNMM --- 9,39,717/- 9. SERVICE FEE CUP/ TNMM --- 28,87,498 10. OWNERS MANUAL CHARGES CUP/ TNMM --- 34,13,309 11. PROTOTYPIC DEVELOPMENT CUP/ TNMM ---- 69,05,820 12. REIMBURSEMENT OF EXPENSES CUP/ TNMM --- 21,74,230 13. WARRANTY ON SCOOTERS CUP/ TNMM --- 1,89,59,146 14. RECOVERY OF EXPENSES CUP/ TNMM --- 4,64,06,214 ITA NO.1379/DEL/2011 4 4. CERTAIN COMPARABLES INSTANCES WERE GIVEN IN RESP ECT OF THE ABOVE TWELVE INTERNATIONAL TRANSACTIONS ON WHICH THE ASSE SSEE SUBSTANTIVELY APPLIED THE COMPARABLE UNCONTROLLED PRICE (CUP) MET HOD TO SHOW THAT THESE WERE AT ARMS LENGTH PRICE (ALP). THE DEMONST RATION OF SUCH INTERNATIONAL TRANSACTIONS AT ALP UNDER THE CUP MET HOD WAS FURTHER CORROBORATED WITH THE TRANSACTIONAL NET MARGIN METH OD (TNMM). IN RESPECT OF THE REMAINING TWO INTERNATIONAL TRANSACT IONS ON WHICH TNMM WAS APPLIED, THE ASSESSEE SHOWED THESE TO BE AT ALP WITH THE HELP OF THE ANALYSIS OF FIVE COMPARABLE COMPANIES WITH THEIR RE SPECTIVE PROFIT MARGINS, AS UNDER : - S.NO. NAME OF COMPANIES YEAR ENDED OPERATING PROFIT/SALES (%) 1. KINETIC MOTOR COMPANY LTD. 30.09.2005 (15.51) 2. LML LIMITED 31.03.2005 (20.60) 3. TVS MOTOR COMPANY LTD. 31.03.2006 7.64 4. MAJESTIC AUTO LTD. 31.03.2006 4.75 5. KINETIC ENGINEERING LTD. 30.09.2005 (9.84) AVERAGE (OP/SALES%) (6.71) AVERAGE OF OP/SALES % OF COMPARABLE COMPANIES -6.71 % OP/SALES OF THE ASSESSEE COMPANY 7.16% ITA NO.1379/DEL/2011 5 5. IN VIEW OF THE FACT THAT ITS ADJUSTED OP/SALE S OF 7.16% WAS MORE THAN THAT OF THE AVERAGE OF THE COMPARABLES AT () 6.71% , THE ASSESSEE CLAIMED ITS INTERNATIONAL TRANSACTIONS AT ALP. IN CALCULAT ING ITS OWN RATIO OF OPERATING PROFIT /SALES AT 7.16%, THE ASSESSEE ADJU STED ITS PROFIT MARGIN BY REDUCING 56% OF FIXED OPERATING OVERHEADS FOR THREE MONTHS FROM THE TOTAL OPERATING COSTS BY TREATING THEM AS NON-OPERATING, ON THE PREMISE THAT THERE WAS STRIKE IN ITS FACTORY DURING THIS PERIOD. 6. THE TRANSFER PRICING OFFICER (TPO) REJECTED KI NETIC MOTOR COMPANY LTD., LML LTD. AND KINETIC ENGINEERING LTD. FROM TH E LIST OF COMPARABLES BECAUSE OF NON-AVAILABILITY OF THEIR RELEVANT DATA FOR THE YEAR ENDING 31.03.2006. APART FROM RETAINING THE OTHER TWO COM PANIES, NAMELY, TVS MOTOR COMPANY LTD. AND MAJESTIC AUTO LTD., THE TPO EXPANDED THE LIST OF COMPARABLES BY ALSO INCLUDING BAJAJ AUTO LTD. THIS COMPANY WAS INCLUDED IN THE LIST OF COMPARABLES FOR THE REASON THAT THE ASSESSEE ITSELF TREATED THIS COMPANY AS COMPARABLE IN THE IMMEDIATELY PRECEDING YEAR, BUT CHOSE TO IGNORE THE SAME FOR THE YEAR IN QUESTION. AVERAGE O F THE PROFIT LEVEL INDICATOR (PLI) OF THESE THREE COMPANIES, BEING, TH E RATE OF OPERATING ITA NO.1379/DEL/2011 6 PROFIT/OPERATING REVENUE, WAS COMPUTED AT 7.44%. I N COMPUTING THE ASSESSEES PERCENTAGE OF OPERATING PROFIT/OPERATING REVENUE, THE TPO REJECTED THE ASSESSEES POINT OF VIEW OF REDUCING T OTAL OPERATING COSTS BY THE PROPORTIONATE OPERATING COSTS INCURRED FOR THRE E-MONTHS STRIKE PERIOD. THAT IS HOW, HE COMPUTED THE ASSESSEES OPERATING P ROFIT MARGIN AT 0.32% BY, INTER ALIA , INCLUDING THE AMOUNT OF DEPRECIATION AS PART OF O PERATING COST, WHICH WAS NOT CONSIDERED BY THE ASSESSEE IN ITS ORIGINAL CALCULATION. A TRANSFER PRICING ADJUSTMENT OF RS.19,53,79,302 WA S COMPUTED BY APPLYING THE DIFFERENTIAL PROFIT RATE OF 7.12% (7.4 4% MINUS 0.32%) ON THE TOTAL VALUE OF ALL INTERNATIONAL TRANSACTIONS REPOR TED BY THE ASSESSEE AT RS.274,40,91,319. IN OTHER WORDS, THE TPO APPLIED T RANSACTIONAL NET MARGIN METHOD (TNMM) ON ENTITY LEVEL OF THE ASSESSE E BY CONSIDERING ALL THE REPORTED FOURTEEN INTERNATIONAL TRANSACTIONS IN ONE GO. THIS WAS DONE IN CONTRAST TO THE ASSESSEE DETERMINING THE ALP OF TWE LVE INTERNATIONAL TRANSACTIONS BY CONSIDERING THE COMPARABLE UNCONTRO LLED METHOD (CUP) AS THE MOST APPROPRIATE METHOD, AND OF THE REMAINI NG TWO INTERNATIONAL TRANSACTIONS OF PURCHASE OF MOTORCYCLE, SCOOTER PA RTS, CONSUMABLES AND OTHER SUPPLIES AT SR. NO. 1 AND PURCHASE OF FIXED A SSETS AT SR. NO. 3 BY ITA NO.1379/DEL/2011 7 CONSIDERING THE TNMM AS THE MOST APPROPRIATE METHOD . THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THIS EVENTUALLY LED TO THE MAKING OF ADDITION OF RS.19.5 3 CRORE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT BY THE ASSESSING OFFICE R (AO) IN THE FINAL ORDER PASSED U/S 143(3) READ WITH SECTION 144C OF THE ACT . THE ASSESSEE IS AGGRIEVED AGAINST THE MAKING OF ADDITION OF RS.19.5 3 CRORE AND ODD. 7.1. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE ASSESS EE REPORTED FOURTEEN INTERNATIONAL TRANSACTIONS AND DETERMINED THE ALP O F TWELVE OF SUCH TRANSACTIONS BY APPLYING THE CUP AS THE MOST APPRO PRIATE METHOD, WHICH WAS ALSO CORROBORATED WITH THE HELP OF THE TNMM. T HE REMAINING TWO INTERNATIONAL TRANSACTIONS WERE SHOWN AT ALP UNDER THE TNMM. THE TPO PROCEEDED TO DETERMINE THE ALP OF ALL THE FOURTEEN TRANSACTIONS IN A COMBINED MANNER BY APPLYING THE TNMM ON ENTITY LEVE L. IN DOING SO, HE TOOK THE DECLARED VALUE OF ALL THE FOURTEEN INTERNA TIONAL TRANSACTIONS AT RS.274.40 CRORE AND APPLIED THE DIFFERENCE BETWEEN PROFIT MARGIN OF THE COMPARABLES AND THAT OF THE ASSESSEE, AS COMPUTED B Y HIM, FOR PROPOSING ITA NO.1379/DEL/2011 8 TRANSFER PRICING ADJUSTMENT OF RS.19.53 CRORE. IN RESORTING TO THE TNMM FOR ALL THE FOURTEEN INTERNATIONAL TRANSACTIONS, THE TPO DID NOT MENTION ANY REASON WORTH THE NAME AS TO WHY THE ALP OF TWEL VE INTERNATIONAL TRANSACTIONS WAS NOT DETERMINED BY HIM AS PER THE CUP METHOD, WHICH WAS CONSIDERED AND APPLIED BY THE ASSESSEE AS THE M OST APPROPRIATE METHOD. THE PRIMARY QUESTION WHICH FALLS FOR OUR C ONSIDERATION AND DETERMINATION IS AS TO WHETHER THE APPROACH ADOPTED BY THE TPO IN DETERMINING THE ALP OF ALL THE FOURTEEN INTERNATION AL TRANSACTIONS UNDER THE TNMM ON A COMBINED LEVEL IS CORRECT, WHEN THE ASSES SEE APPLIED THE CUP AS THE MOST APPROPRIATE METHOD ON TWELVE INTERNATIO NAL TRANSACTIONS. 7.2. SECTION 92(1) OF THE ACT PROVIDES THAT: ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE PROCEDURE FOR COMPUTATION OF AR MS LENGTH PRICE HAS BEEN SET OUT IN SECTION 92C. SUB-SECTION (1) OF SEC TION 92C PROVIDES THAT: THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATI ONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING T HE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR ITA NO.1379/DEL/2011 9 CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE. FIVE SPECIFIC METHODS HAVE BEEN ENSHRINED IN THIS PROVISION APART FROM ON E GENERAL METHOD, BEING : SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. OUT OF THE FIVE SPECIFIC METHODS, THE FIRST ONE IS COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AND THE FOURTH ONE IS TRANSACTIONAL NE T MARGIN METHOD (TNMM). A BARE READING OF SECTION 92C(1) BRINGS OU T THAT: (I) THE ALP IS REQUIRED TO BE DETERMINED OF AN INTERNATIONAL TRANSACTION; AND (II) THE ALP OF SUCH AN INTERNATIONAL TRANSACTION IS TO BE D ETERMINED BY APPLYING THE MOST APPROPRIATE METHOD OUT OF THE PRESCRIBED M ETHODS WHICH, INTER ALIA , INCLUDE CUP AND TNMM. THE FIRST INGREDIENT IS TH AT THE ALP SHOULD BE DETERMINED IN RELATION TO AN INTERNATIONAL TRANSACTION. THE TERM INTERNATIONAL TRANSACTION HAS BEEN DEFINED IN SEC TION 92B TO MEAN : ` A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, O R LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES, ... IT I S DISCERNIBLE FROM THE ABOVE ITA NO.1379/DEL/2011 10 DEFINITION OF INTERNATIONAL TRANSACTION GIVEN IN SE CTION 92B THAT IT REFERS TO A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES. THE T ERM TRANSACTION HAS BEEN DEFINED IN SECTION 92F(V) AN D ALSO IN RULE 10A(D) OF THE INCOME-TAX RULES, 1962. THE RULE DEFINES THE TERM TRANSACTION TO INCLUDE: A NUMBER OF CLOSELY LINKED TRANSACTIONS. ON GOING THROUGH THE ABOVE PROVISIONS, IT BECOMES PALPABLE THAT THE ARM S LENGTH PRICE IS ESSENTIALLY DETERMINED ON TRANSACTION-BY-TRANSACTIO N APPROACH FOR EACH INTERNATIONAL TRANSACTION SEPARATELY; AND FOR THAT PURPOSE, A TRANSACTION IN SINGULAR ALSO INCLUDES PLURAL FOR CLOSELY LINKED TR ANSACTIONS. IN OTHER WORDS, WHERE THE TRANSACTIONS ARE NOT CLOSELY LINK ED, THEN THEIR ALP SHOULD BE DETERMINED SEPARATELY FOR EACH INTERNATIO NAL TRANSACTION AND SUCH DETERMINATION OF ALP FOR AN INTERNATIONAL TRANSACTION AS PER SECTION 92C(1) IS DONE AS PER THE MOST APPROPRIATE METHOD, BEING ONE OF THE METHODS GIVEN IN THE PROVISION. TO PUT IT SIMPLY, EACH INTERNATIONAL TRANSACTION IS VIEWED SEPARATELY AND INDEPENDENT OF OTHER INTERNATIONAL TRANSACTIONS FOR DETERMINING ITS ALP BY USING ONE O F THE GIVEN METHODS, WHICH IS THE MOST APPROPRIATE METHOD HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR FUNCTIONS PE RFORMED, ETC. IT IS ITA NO.1379/DEL/2011 11 IMPERMISSIBLE TO COMBINE ALL THE INTERNATIONAL TRAN SACTIONS FOR DETERMINING THEIR ALP IN A UNIFIED MANNER WHEN SUCH TRANSACTION S ARE DIVERSE IN NATURE. 7.3. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND FROM THE NATURE OF INTERNATIONAL TRANSACTIONS REPRODUCED ABOVE THAT TH ESE INCLUDE PURCHASE OF SPARE PARTS; EXPORT OF SCOOTERS AND SCOOTER PARTS; PURCHASE OF FIXED ASSETS; PAYMENT OF EXPORT COMMISSION; PAYMENT OF ROYALTY, T ECHNICAL KNOWHOW FEE, TECHNICAL ASSISTANCE FEES; PAYMENT OF AUTHORIZ ED TEST SUPPORT FEE; AND REIMBURSEMENT EXPENSES, ETC. BY NO STANDARD, THE ABOVE FOURTEEN INTERNATIONAL TRANSACTIONS CAN BE CONSIDERED AS CL OSELY RELATED TO EACH OTHER, SO AS TO FALL FOR CONSIDERATION AS A SINGLE INTERNATIONAL TRANSACTION. IT CAN BE NOTICED FROM THE ASSESSEES TRANSFER PRICING STUDY REPORT AND ALSO AUDIT REPORT IN FORM NO. 3CEB THAT IT CLAIMED TWELV E OUT OF THE TOTAL INTERNATIONAL TRANSACTIONS AT ALP BY USING THE CUP AS THE MOST APPROPRIATE METHOD. THE TPO, WITHOUT ASSIGNING ANY REASON AS T O WHY THE CUP METHOD COULD NOT BE APPLIED, WENT AHEAD BY DETERMIN ING THE ALP OF ALL THE INTERNATIONAL TRANSACTIONS UNDER TNMM ON A CONSOLID ATED MANNER. ITA NO.1379/DEL/2011 12 7.4. IT GOES WITHOUT SAYING THAT IT IS THE ASSES SEE WHO KNOWS BEST ABOUT THE MOST APPROPRIATE METHOD FOR A PARTICULAR INTERN ATIONAL TRANSACTION UNDERTAKEN BY HIM. IT IS HIS PREROGATIVE TO INITIAL LY CHOOSE THE MOST APPROPRIATE METHOD FOR EACH INTERNATIONAL TRANSACTI ON HAVING REGARD TO THE NATURE OF TRANSACTION AND ALL OTHER RELEVANT FACTOR S AND THEN DETERMINE ITS ALP. HAVING CHOSEN A PARTICULAR METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSAC TION, IT THEN BECOMES OBLIGATORY FOR THE ASSESSEE TO SATISFY THE AO/TPO T HAT THE METHOD SO CHOSEN BY HIM IS, IN FACT, THE MOST APPROPRIATE M ETHOD AND FURTHER THAT THE DATA REQUIRED FOR THE DETERMINATION OF ALP UNDER SU CH A CHOSEN METHOD, IS PROPERLY AVAILABLE. THEN, COMES THE TURN OF THE AO/ TPO TO SATISFY HIMSELF THAT NOT ONLY THE CORRECT METHOD HAS BEEN APPLIED B Y THE ASSESSEE BUT ALSO THAT PROPER DATA FOR DETERMINATION OF ALP UNDER SUC H METHOD HAS ALSO BEEN MADE AVAILABLE. IF THE OFFICER GETS SATISFIED ON TH E ABOVE ASPECTS, THE MATTER ENDS. IF, HOWEVER, THE OFFICER COMES TO A CO NCLUSION THAT EITHER THE METHOD EMPLOYED BY THE ASSESSEE FOR DETERMINING THE ALP IS NOT THE MOST APPROPRIATE METHOD OR THAT THE METHOD IS APPROPRIAT E, BUT THE NECESSARY DATA FOR COMPUTATION OF THE ALP UNDER SUCH METHOD I S NOT AVAILABLE, THEN, ITA NO.1379/DEL/2011 13 IT IS OPEN TO HIM TO DISREGARD THE METHOD EMPLOYED BY THE ASSESSEE OR THE DATA SO PRODUCED AND SUBSTITUTE IT WITH THE CORRECT DATA, AND IF THE REQUISITE CORRECT DATA IS NOT AVAILABLE, THEN, WITH ANOTHER S UITABLE METHOD, BEING THE MOST APPROPRIATE METHOD. TO PUT IT SIMPLY, FIRST C HOICE IS ALWAYS OF THE ASSESSEE TO CHOOSE A PARTICULAR METHOD AS THE MOST APPROPRIATE METHOD. IT IS ONLY IF THE OFFICER IS NOT SATISFIED WITH SUCH C HOICE, THAT HE CAN REJECT SUCH A METHOD AND PROCEED TO DETERMINE THE ALP UNDE R ANOTHER MORE APPROPRIATE METHOD. HOWEVER, BEFORE APPLYING ANOTH ER METHOD, IT IS INCUMBENT UPON THE OFFICER TO GIVE SOME PLAUSIBLE A ND CONVINCING REASONS FOR REJECTING THE METHOD SELECTED BY THE ASSESSEE. THE OFFICER CANNOT ARBITRARILY REJECT THE ASSESSEES CHOICE OF METHOD AND SUBSTITUTE IT WITH ANOTHER METHOD, WHICH HE CONSIDERS AS THE MOST APPR OPRIATE METHOD. 7.5. REVERTING TO THE FACTS OF THE INSTANT CASE, W E FIND THAT THE ASSESSEE CHOSE CUP AS THE MOST APPROPRIATE METHOD IN RESPECT OF TWELVE INTERNATIONAL TRANSACTIONS, BUT, THE TPO SIMPLY BRU SHED ASIDE THE ASSESSEES CHOICE OF THE MOST APPROPRIATE METHOD AND PROCEEDED TO DETERMINE THE ARMS LENGTH PRICE OF ALL THE FOURTEEN TRANSACTIONS UNDER THE TNMM, ITA NO.1379/DEL/2011 14 WITHOUT GIVING ANY REASON WHATSOEVER, MUCH LESS ANY COGENT AND RATIONAL REASONS, FOR DISCARDING THE ASSESSEES CHOICE OF ME THOD. SUCH A COURSE OF ACTION ADOPTED BY THE TPO IS UNKNOWN TO THE LAW. W ITHOUT EXPRESSLY REJECTING THE ASSESSEES CONTENTION ABOUT THE APPLI CABILITY OF THE CUP AS THE MOST APPROPRIATE METHOD IN RESPECT OF TWELVE IN TERNATIONAL TRANSACTIONS, THE TPO COULD NOT HAVE PROCEEDED TO DETERMINE THE A LP OF THESE TWELVE INTERNATIONAL TRANSACTIONS ALSO UNDER THE TNMM. UN DER SUCH CIRCUMSTANCES, WE HAVE NO OPTION BUT TO SET ASIDE T HE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR DETERMIN ING THE ALP OF THE TWELVE INTERNATIONAL TRANSACTIONS, FIRSTLY, UNDER THE CUP METHOD AS WAS SUBSTANTIVELY CHOSEN BY THE ASSESSEE AS THE MOST A PPROPRIATE METHOD. IT IS ONLY IF THE TPO COMES TO THE CONCLUSION THAT EITHER THE CUP METHOD IS NOT APPROPRIATE TO SUCH INTERNATIONAL TRANSACTIONS OR T HAT THE DATA PROVIDED BY THE ASSESSEE IS NOT PROPER OR IS INADEQUATE, THAT H E CAN RESORT TO SOME OTHER METHOD, OF COURSE, AFTER CONFRONTING THE ASSESSEE W ITH HIS REASONS FOR THE PROPOSED REJECTION OF THE CUP METHOD. WE WANT TO M AKE IT CLEAR THAT WE HAVE ESCHEWED FROM UNDERTAKING THE EXERCISE OF CHEC KING THE APPLICABILITY OR OTHERWISE OF THE CUP METHOD TO SUCH TWELVE INTER NATIONAL TRANSACTIONS ITA NO.1379/DEL/2011 15 OR EXAMINING THE AVAILABILITY OR SUITABILITY OF THE DATA OF COMPARABLE UNCONTROLLED TRANSACTIONS GIVEN BY THE ASSESSEE. IN OTHER WORDS, THE ENTIRE EXERCISE HAS BEEN LEFT OPEN TO BE DONE BY THE TPO A S PER LAW. 8. NOW, WE ARE LEFT WITH THE REMAINING TWO INTERNAT IONAL TRANSACTIONS, VIZ., PURCHASE OF MOTORCYCLES, SCOOTER PARTS, CONS UMABLES AND OTHER SUPPLIES WORTH RS.18,48,17,733/- GIVEN AT SL. NO. 1; AND PURCHASE OF FIXED ASSETS WORTH RS.21,37,15,816/- GIVEN AT SL. NO. 3. THE ASSESSEE APPLIED THE TNMM AS THE MOST APPROPRIATE METHOD FOR SHOWING THAT THESE TRANSACTIONS WERE AT THE ALP. THE TPO ALSO APPLIED THE SAME METHOD. THUS, THERE IS NO DISPUTE AS REGARDS THE APPLICATIO N OF TNMM AS THE MOST APPROPRIATE METHOD. THE QUARREL IS ON TWO MAJOR ASP ECTS OF THE DETERMINATION OF ALP UNDER THIS METHOD, BEING, FIRS T, THE DETERMINATION OF THE OPERATING PROFIT MARGIN OF THE ASSESSEE AND SE COND, EXCLUSION/INCLUSION OF SOME COMPANIES AS COMPARABLE. 9. FIRSTLY, WE ESPOUSE THE DETERMINATION OF THE OPE RATING PROFIT MARGIN OF THE ASSESSEE, WHICH HAS TWO DISPUTED ASPECTS, NA MELY, NOT ALLOWING OF ITA NO.1379/DEL/2011 16 DEDUCTION FOR THE ABNORMAL OPERATING COSTS FOR THE THREE MONTHS PERIOD OF STRIKE; AND IMPROPER GRANT OF DEPRECIATION ALLOWANC E. 10.1. THE ASSESSEE DETERMINED ITS ADJUSTED OP/SAL ES AT 7.16% BY REDUCING THE TOTAL OPERATING COSTS BY A SUM OF RS.2391.57 LA CS. THIS AMOUNT OF RS.23.91 CRORE WAS COMPUTED BY INITIALLY TAKING THE ACTUAL FIXED OPERATING COSTS INCURRED FOR THREE MONTHS OF STRIKE FROM JUNE TO AUGUST, 2005. SUCH COSTS WERE REDUCED BY 56% TOWARDS IMPROPER UTILIZAT ION OF CAPACITY ON ACCOUNT OF DECLINE IN THE TURNOVER TO ACTUAL AMOUNT OF RS.277 CRORE AS AGAINST THE ESTIMATED TURNOVER WHICH OUGHT TO HAVE BEEN DURING NORMAL WORKING OF THESE THREE MONTHS AT RS.493 CRORE. THE TPO REFUSED TO REDUCE THE SAID SUM OF RS.23.91 CRORE FROM THE TOTAL OPERA TING COSTS IN WORKING OUT THE ASSESSEES PROFIT RATE. THE LD. AR VEHEMEN TLY ARGUED THAT THE STRIKE DURING THESE THREE MONTHS PERIOD OF JUNE TO AUGUST, 2005 CRIPPLED THE FUNCTIONING IN THE FACTORY AND, AS SUCH, IT WAS ESS ENTIAL TO REDUCE THE OPERATING COSTS WITH THE PROPORTIONATE DECLINE IN T HE TURNOVER DURING THIS PERIOD. AU CONTRAIRE, THE LD. DR. STRONGLY SUPPORT ED THE IMPUGNED ORDER. ITA NO.1379/DEL/2011 17 10.2. WE ARE NOT INCLINED TO ACCEPT THE CONTENTI ON URGED ON BEHALF OF THE ASSESSEE. ON A SPECIFIC QUERY FROM THE BENCH, IT W AS STATED THAT THE STRIKE COMMENCED ON 27.6.2005 AND CAME TO AN END ON 1.8.20 05. THIS SHOWS THAT THE ASSESSEES ACTION IN PROPORTIONATELY REDUC ING THE OPERATING COSTS FOR THE THREE MONTHS PERIOD IS WHOLLY INAPPROPRIATE BECAUSE THE SO-CALLED STRIKE CONTINUED ONLY FOR A PERIOD OF ONE MONTH AND FIVE DAYS. IT IS FURTHER DISCERNIBLE THAT THE ASSESSEE COMPUTED THE AMOUNT O F ABNORMAL FIXED COSTS AT RS.23.91 CRORE BY APPLYING 56% TO THE TOTAL OPER ATING COSTS INCURRED DURING THIS PERIOD OF THREE MONTHS. THIS 56% WAS D ETERMINED BY CONSIDERING THE RATIO OF ACTUAL SALES DURING THESE THREE MONTHS TO THE NORMAL SALES DURING SUCH PERIOD. PRIMA FACIE, GOING BY THE ASSESSEES OWN VERSION, IT SHOULD HAVE BEEN IN THE RATIO LOSS OF S ALE TO THE NORMAL SALES AND NOT ACTUAL SALES TO NORMAL SALES. THE LD. AR CANDI DLY CONCEDED THIS POSITION DURING THE COURSE OF HEARING BEFORE US. BE THAT AS IT MAY, WE FIND THAT THERE IS NO WARRANT FOR REDUCING ANY AMOUNT/PE RCENTAGE OF THE OPERATING COSTS FOR THESE THREE MONTHS PERIOD FROM THE TOTAL OPERATING COSTS. IF WE ACCEPT THE CONTENTION OF STRIKE, THEN THERE SHOULD BE SOME CORRESPONDING REDUCTION IN COSTS AS WELL. THE ASSES SEE HAS NOT ITA NO.1379/DEL/2011 18 DEMONSTRATED THAT THE OPERATING EXPENSES DURING THE MONTH PRECEDING AND SUCCEEDING THESE THREE MONTHS WERE AT ANY HIGHER LE VEL. APART FROM THAT, WE FIND FROM THE CHART OF MONTH-WISE PRODUCTION PLA CED ON PAGE 471 OF THE PAPER BOOK THAT PRODUCTION FOR THE MONTH OF MAY , 2005 STOOD AT 57063, THAT OF JUNE AT 32217, JULY AT 14853, AUGUST AT 44 173, SEPTEMBER AT 60225, NOVEMBER AT 54597 AND DECEMBER, 2005 AT 3917 0. IT IS PATENT THAT THAT THE AVERAGE PRODUCTION DURING THESE THREE MONT HS PERIOD AT 30415 IS QUITE CLOSE TO THE NORMAL PRODUCTION DURING DECEMBE R, 2005 AT 39170. EVEN DURING THE NORMAL WORKING, THE PRODUCTION IS F LUCTUATING AND NOT STATIC. FURTHER, THE ASSESSEE HAS NOT SHOWN THE FI GURES OF PRODUCTION DURING THE CORRESPONDING THREE MONTHS OF THE PRECEDING YEA R TO SHOW ANY DEVIATION DURING THESE THREE MONTHS. WE FAIL TO APP RECIATE THAT IF AT ALL THERE WAS A STRIKE, THEN HOW THERE COULD BE ANY PRO DUCTION AT ALL? IN VIEW OF THE FOREGOING REASONS, WE ARE SATISFIED THAT THE ASSESSEE WAS NOT JUSTIFIED IN REDUCING OPERATING EXPENSES WITH A SUM OF RS.23. 91 CRORE, BY TREATING IT AS ABNORMAL FIXED COSTS. ITA NO.1379/DEL/2011 19 10.3. THERE IS ANOTHER VITAL REASON FOR NOT ALLO WING THE DEDUCTION AS CLAIMED BY THE ASSESSEE. THIS IS THE MANDATE OF RU LE 10B(E), WHICH CONTAINS THE MODUS OPERANDI OF DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION UNDER THE TNMM, AS UNDER:- (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGA RD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED 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. ITA NO.1379/DEL/2011 20 10.4. SUB-CLAUSE (I) IN THE DETERMINATION OF AL P UNDER TNMM IS THE COMPUTATION OF NET OPERATING PROFIT MARGIN REALIZED BY THE ASSESSEE FROM AN INTERNATIONAL TRANSACTION. SUB-CLAUSE (II) IS T HE COMPUTATION OF NET OPERATING PROFIT MARGIN REALIZED BY AN UNRELATED EN TERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION. SUB-CLAUSE (I II) PROVIDES THAT THE NET PROFIT MARGIN REALISED BY A COMPARABLE COMPANY, DET ERMINED AS PER SUB- CLAUSE (II) ABOVE, IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, I F ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, ..... WHICH COULD MATERIALLY AFFECT T HE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. IT IS THIS ADJUSTED NET PROF IT MARGIN OF THE UNRELATED TRANSACTIONS OR OF THE COMPARABLE COMPANI ES, AS DETERMINED UNDER SUB-CLAUSE (III), WHICH IS USED FOR THE PURPO SES OF MAKING COMPARISON WITH THE NET PROFIT MARGIN REALIZED BY T HE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION AS PER SUB-CLAUSE (I). S UB-RULE (2) OF RULE 10B PROVIDES THAT THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFER ENCE TO CERTAIN FACTORS WHICH HAVE BEEN ENUMERATED THEREIN. RULE 10B(3) STA TES THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL ITA NO.1379/DEL/2011 21 TRANSACTION, IF EITHER THERE ARE NO DIFFERENCES BET WEEN THE TWO OR A REASONABLY ACCURATE ADJUSTMENT CAN BE MADE TO ELIMI NATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. WHEN WE READ SUB-CLAUSES (II) & (III) OF RULE 10B(1)(E) IN JUXTAPOSITION TO SUB-RULES (2) & (3) O F RULE 10B, THE POSITION WHICH EMERGES IS THAT THE NET OPERATING PROFIT MARG IN OF THE COMPARABLE COMPANIES CALLS FOR ADJUSTMENT IN SUCH A MANNER SO AS TO BRING BOTH THE INTERNATIONAL TRANSACTION AND COMPARABLE CASES AT T HE SAME PEDESTAL. IN OTHER WORDS, IF THERE ARE NO DIFFERENCES IN THESE T WO, THEN THE NET OPERATING PROFIT MARGIN OF THE COMPARABLE COMPANIES SHOULD BE CONSIDERED AS A BENCHMARK. HOWEVER, IN CASE THERE IS SOME DIFFERENC E, THEN SUCH DIFFERENCE SHOULD BE IRONED OUT BY MAKING SUITABLE ADJUSTMENT TO THE OPERATING PROFIT MARGIN OF THE COMPARABLES. THAT IS THE WAY FOR BRINGING BOTH THE TRANSACTIONS, NAMELY, THE INTERNATIONAL TR ANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION, ON THE SAME PL ATFORM FOR MAKING A MEANINGFUL AND EFFECTIVE COMPARISON. THE ABOVE ANAL YSIS OVERTLY TRANSPIRES THAT THE LAW PROVIDES FOR ADJUSTING THE PROFIT MARGIN OF COMPARABLES ON ACCOUNT OF THE MATERIAL DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION OF THE ASSESSEE AND COMPA RABLE UNCONTROLLED ITA NO.1379/DEL/2011 22 TRANSACTIONS. IT IS NOT THE OTHER WAY AROUND TO ADJ UST THE PROFIT MARGIN OF THE ASSESSEE. IN OTHER WORDS, THE NET OPERATING PR OFIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION IS TO BE COMPUTED AS SUCH, WITHOUT ADJUSTING IT ON ACCOUNT OF DIFFERENCES BETW EEN ITS INTERNATIONAL TRANSACTIONS AND THE COMPARABLE UNCONTROLLED TRANSA CTIONS. THE ADJUSTMENT, IF ANY, IS REQUIRED TO BE MADE ONLY IN THE PROFIT MARGIN OF THE COMPARABLES, AND THAT TOO, BY DEMONSTRATING SOME DI FFERENCE BETWEEN INTERNATIONAL TRANSACTION OF THE ASSESSEE AND COMPA RABLE UNCONTROLLED TRANSACTIONS. THE ASSESSEE IN THE INSTANT CASE HAS FAILED TO BRING ON RECORD ANY MATERIAL TO SHOW THAT THE PROFIT OF THE COMPARA BLE COMPANIES WAS NOT HIT BY ANY UNTOWARD INCIDENT. SUCH SOUTHWARDS ADJUS TMENT IN THE ASSESSEES OWN OPERATING COSTS AND THE RESULTANT NO RTHWARDS MOVEMENT IN ITS OWN PROFIT RATE, IS IMPERMISSIBLE UNDER THE LAW . IN VIEW OF THE FOREGOING REASONS, WE UPHOLD THE VIEW TAKEN BY THE TPO IN REJECTING THE CLAIM OF THE ASSESSEE FOR REDUCTION OF THE SO-CALLE D ABNORMAL OPERATING COSTS FROM THE TOTAL OPERATING COSTS. ITA NO.1379/DEL/2011 23 11.1. NOW, WE TAKE UP THE SECOND ISSUE OF ADJU STMENT TO THE OPERATING PROFITS OF THE ASSESSEE BY THE AMOUNT OF DEPRECIATI ON. THE LD. DR SUBMITTED THAT DEPRECIATION OUGHT NOT TO HAVE BEEN ALLOWED TO THE ASSESSEE. WE FAIL TO APPRECIATE THIS CONTENTION FOR THE REASON THAT D EPRECIATION IS AN INTEGRAL PART OF THE OPERATING COSTS. EVEN THOUGH THE ASSES SEE INITIALLY DID NOT CONSIDER THE AMOUNT OF DEPRECIATION ALLOWANCE AS A PART OF THE OPERATING COST, BUT THE TPO, IN OUR CONSIDERED OPINION, WAS R IGHT IN INCLUDING THE AMOUNT OF DEPRECIATION AS AN ELEMENT OF OPERATING C OST. 11.2. THE LD. AR SUBMITTED THAT THE ASSESSEE CHA RGED DEPRECIATION IN ITS PROFIT AND LOSS ACCOUNT ON STRAIGHT LINE METHOD AT THE RATES HIGHER THAN THOSE PRESCRIBED UNDER SCHEDULE XIV OF THE COMPANIE S ACT, WHEREAS THE COMPARABLE COMPANIES CHARGED DEPRECIATION AT THE RA TES SPECIFIED IN THE SCHEDULE, NECESSITATING ADJUSTMENT IN THE OPERATING PROFIT MARGIN, THEREBY REQUIRING AN UPWARD INCREASE IN THE AMOUNT OF DEPRE CIATION OF THE COMPARABLES AND THE RESULTANT REDUCTION IN THEIR OP ERATING PROFIT MARGINS. 11.3. SCHEDULE XIV TO THE COMPANIES ACT PROVIDES FOR RATES OF DEPRECIATION ON VARIOUS ASSETS UNDER DIFFERENT BLOC KS, BOTH ON WRITTEN DOWN ITA NO.1379/DEL/2011 24 VALUE METHOD AND STRAIGHT LINE METHOD. WE APPRECIA TE THAT SUB-CLAUSE (III) OF RULE 10B(E) PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY A COMPARABLE COMPANY, DETERMINED AS PER SUB-CLAUSE (I I) ABOVE, IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWE EN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN I N THE OPEN MARKET. IT IS THIS ADJUSTED NET PROFIT MARGIN OF THE COMPARABLE C OMPANIES, AS DETERMINED UNDER SUB-CLAUSE (III), WHICH IS USED FOR THE PURPO SE OF MAKING COMPARISON WITH THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION AS PER SUB-CLAUSE (I). 11.4. THERE CAN BE NO DISPUTE ON THE PRINCIPLE TH AT CALCULATION OF OPERATING PROFIT AS ENVISAGED UNDER RULE 10B(1)(E ) EMBRACES CUMULATIVE EFFECT OF ALL THE ITEMS OF INCOME AND EXPENSES WHIC H ARE OF OPERATING NATURE. ORDINARILY, THERE CAN BE NO QUESTION OF CON SIDERING EACH ITEM OF SUCH OPERATING EXPENSES OR INCOME IN ISOLATION DE HORS THE OTHER EXPENSES TO CLAIM ADJUSTMENT ON THE GROUND OF SUCH EXPENDITU RE OR INCOME OF THE ASSESSEE ON THE HIGHER SIDE SEEN INDIVIDUALLY OR AS A PERCENTAGE OF OTHER ITA NO.1379/DEL/2011 25 OPERATING EXPENSE/INCOMES IN COMPARISON WITH ITS CO MPARABLES. THE REASON IS OBVIOUS THAT WHEN WE CONSIDER THE OPERATI NG PROFIT MARGIN, THE EFFECT OF ALL THE INDIVIDUAL HIGHER OR LOWER ITEMS OF EXPENSES OR INCOMES GETS SUBSUMED IN THE OVERALL OPERATING PROFIT MARGI N, RULING OUT THE NEED FOR ANY ADJUSTMENT ON COMPARISON OF ONE-TO-ONE ITEM S RESULTING INTO THE DETERMINATION OF THE OPERATING PROFIT MARGIN. ONE C OMPANY MAY HAVE TAKEN A BUILDING ON RENT FOR CARRYING ON ITS BUSINE SS, IN WHICH CASE, IT WILL PAY RENT WHICH WILL FIND ITS PLACE IN THE OPERATING COSTS. FOR THE PURPOSES OF MAKING COMPARISON, ONE CANNOT CONTEND THAT THE PAYM ENT OF RENT BY ONE ENTERPRISE IN COMPARISON WITH A NON-PAYMENT OF RENT BY ANOTHER, SHOULD BE NEUTRALIZED BY GIVING PROPER ADJUSTMENT FROM THE OP ERATING PROFIT OF THE COMPARABLE. THE MANIFEST REASON IS THAT THE OTHER E NTERPRISE MAY HAVE ITS OWN OFFICE PREMISES AND IN THAT CASE, THE AMOUNT OF DEPRECIATION ON SUCH PREMISES WILL ALSO FORM PART OF ITS OPERATING COST. WHEN WE CONSIDER THE OPERATING PROFIT OF THE FIRST ENTERPRISE WHICH IS P AYING RENT AND THEN COMPARE IT WITH THE SECOND ENTERPRISE WHICH IS NOT PAYING ANY RENT BUT IS CLAIMING DEPRECIATION ON ITS OWN PREMISES, THE OVE RALL EFFECT OF RENT IN ONE CASE GETS COUNTERBALANCED WITH DEPRECIATION ON PREM ISES OF THE OTHER. ITA NO.1379/DEL/2011 26 SIMILAR IS THE POSITION OF A COMPANY HAVING PURCHAS ED NEW ASSETS CHARGING HIGHER AMOUNT OF DEPRECIATION ALLOWANCE IN ITS BOOK S OF ACCOUNTS VIS-A-VIS ANOTHER COMPARABLE COMPANY USING OLD ASSETS WITH LO WER AMOUNT OF DEPRECIATION. NO ADJUSTMENT ON ACCOUNT OF DIFFERENC E IN THE AMOUNTS OF DEPRECIATION OF TWO COMPANIES IS CALLED FOR WHEN TH E OPERATING PROFITS ARE DETERMINED BECAUSE IN THE CASE OF A COMPANY HAVING PURCHASED NEW ASSET, THERE WILL BE LOWER REPAIR COST AND VICE VERSA . THE EFFECT OF ALL THE INDIVIDUAL ITEMS OF OPERATING EXPENSES AND INCOMES CULMINATES INTO THE OVERALL OPERATING PROFIT MARGIN. THAT IS WHY, THE L EGISLATURE HAS PROVIDED FOR COMPARING THE RATIO OF OPERATING PROFIT MARGIN TO A SIMILAR BASE OF THE ASSESSEE WITH THAT OF ITS COMPARABLES, THEREBY DISP ENSING WITH THE NEED FOR MAKING ANY ADJUSTMENT ON ACCOUNT OF HIGHER OR LOWER AMOUNT OF INDIVIDUAL ITEMS OF EXPENSES AND INCOMES. MERELY BECAUSE THE AMOUNT OF DEPRECIATION OF ONE ENTERPRISE IS MORE OR LESS THAN THE OTHER, CAN NEVER BE A GROUND FOR SEEKING ADJUSTMENT. SUCH HIGHER AMOUNT O F DEPRECIATION MAY BE DUE TO LARGE SCALE OF THE COMPANY AND HOST OF OTHER FACTORS. BY CONSIDERING PERCENTAGE OF OPERATING PROFIT MARGIN UNDER THE TNM M OF THE ASSESSEE AS WELL AS COMPARABLES, THE HIGHER OR LOWER VOLUME OF TWO COMPANIES ITA NO.1379/DEL/2011 27 BECOMES IMMATERIAL AND SO IS THE QUANTUM OF DEPRECI ATION. THE NITTY-GRITTY OF THE MATTER IS THAT NO ADJUSTMENT CAN BE ALLOWED SIMPLY FOR THE REASON THAT ONE COMPANY HAS CHARGED HIGHER AMOUNT OF DEPRE CIATION VIS-A-VIS ITS COMPARABLE COMPANIES. NOT ONLY NO ADJUSTMENT ON TH IS SCORE IS PERMISSIBLE, THE ASSESSEE CANNOT ALSO SEEK AN EXCL USION OR INCLUSION OF A COMPANY ON THE GROUND THAT THE RATIO OF ITS DEPRECI ATION TO TOTAL EXPENSES IS MORE OR LESS IN COMPARISON WITH COMPARABLES. IT IS SO FOR THE REASON THAT SUCH HIGHER PERCENTAGE OF DEPRECIATION TO TOTAL EXP ENSES IS MARGINALIZED BY THE LOWER PERCENTAGE OF REPAIRS AND OTHER INCIDENTA L COSTS OF THE ASSETS AND VICE VERSA . 11.5. HOWEVER, THE POSITION MAY BE A LITTLE DIFFE RENT WHEN THERE IS A DIFFERENCE IN THE RATES OF DEPRECIATION CHARGED BY TWO COMPANIES ON SIMILAR CATEGORY OF ASSETS. ONE COMPANY MAY ADOPT THE POLIC Y OF CHARGING DEPRECIATION ON ITS ASSETS IN CONFORMITY WITH THE R ATES PRESCRIBED IN SCHEDULE XIV OF THE COMPANIES ACT AND OTHER COMPANY MAY ADOPT A POLICY OF CHARGING DEPRECIATION AT THE HIGHER RATES OR LOWER THAN THOSE PRESCRIBED UNDER SCHEDULE XIV. THIS CAN BE DEMONST RATED WITH THE HELP OF ITA NO.1379/DEL/2011 28 AN EXAMPLE. OTHER THINGS BEING EQUAL, IF THE OPERAT ING PROFIT OF COMPANY A, AFTER CLAIMING DEPRECIATION OF RS.10 ON THE VALU E OF ASSET WORTH RS.50 WITH RATE OF DEPRECIATION 20%, IS RS.100, THE OPE RATING PROFIT OF COMPANY B WITH EVERYTHING SAME INCLUDING THE VALUE OF ASSE TS AT RS.50, BUT WITH RATE OF DEPRECIATION 30%, WILL BE RS.95. IT SHOWS THAT THE COMPARABILITY IS JEOPARDIZED DUE TO HIGHER RATE OF DEPRECIATION CHAR GED BY COMPANY B AT 30% IN COMPARISON WITH LOWER RATE OF DEPRECIATION C HARGED BY COMPANY A AT 20%. IN SUCH A SITUATION, ALTHOUGH BOTH THE COMP ANIES USE SIMILAR TYPE OF ASSETS AND EVERYTHING ELSE IS ALSO EQUAL, BUT TH EIR RESPECTIVE OPERATING PROFIT PERCENTAGES UNDERGO CHANGE DUE TO HIGHER OR LOWER RATE OF DEPRECIATION, THEREBY DISTORTING THEIR COMPARABILIT Y. IT IS THIS DIFFERENCE IN THE AMOUNTS OF DEPRECIATION DUE TO DIFFERENT RATES OF DEPRECIATION AND NOT DUE TO DIFFERENT QUANTUM OF DEPRECIATION SIMIPLICIT OR, WHICH CALLS FOR BRINGING BOTH THE COMPANIES AT PAR. 11.6. REVERTING TO THE FACTS OF THE EXTANT CASE, WE FIND THAT THE TPO DID NOT HAVE ANY OCCASION TO CONSIDER THIS ISSUE, BECAU SE SUCH AN ARGUMENT HAS BEEN ADVANCED BEFORE US FOR THE FIRST TIME. IN OUR CONSIDERED OPINION, THE ITA NO.1379/DEL/2011 29 ENDS OF JUSTICE WOULD MEET ADEQUATELY, IF WE SET AS IDE THE IMPUGNED ORDER TO THIS EXTENT ALSO AND SEND THE MATTER BACK TO THE FILE OF THE TPO FOR ALLOWING ADJUSTMENT TO THE OPERATING PROFIT MARGIN OF THE COMPARABLE COMPANIES, IF THERE IS SOME DIFFERENCE IN RATES OF DEPRECIATION CHARGED BY THE ASSESSEE VIS--VIS THESE COMPANIES. IN OTHER W ORDS, THE AMOUNT OF DEPRECIATION OF THE COMPARABLE COMPANIES ON THEIR A SSETS SHALL BE RECOMPUTED UNDER STRAIGHT LINE METHOD ALONE AS PER THE RATES AT WHICH THE ASSESSEE HAS PROVIDED DEPRECIATION. TO CLARIFY, IF THE COMPARABLES HAVE CHARGED DEPRECIATION AT A HIGHER RATE IN COMPARISON WITH THE ASSESSEE ON SOME OF ITS ASSETS, THEN SUITABLE REDUCTION SHOULD BE MADE IN THE AMOUNT OF THEIR DEPRECIATION. THE TPO SHOULD NOT EQUALLY HESI TATE TO MAKE ADVERSE ADJUSTMENT, IF WARRANTED, WHICH MEANS THAT IF THE C OMPARABLE COMPANIES HAVE CHARGED DEPRECIATION AT A LOWER RATE IN COMPAR ISON WITH THE ASSESSEE, THEN SUITABLE INCREASE SHOULD BE MADE TO THEIR AMOU NT OF DEPRECIATION. IN DOING SO, THE TPO SHOULD SEE IF HE CAN CORRECTLY DE DUCE THE AMOUNT OF DEPRECIATION ON THE ABOVE LINES. IF DUE TO ONE REAS ON OR THE OTHER, SUCH PRECISE CALCULATION IS NOT POSSIBLE OR THE ASSESSEE FAILS TO PLACE IT BEFORE HIM, THEN NO ADJUSTMENT SHOULD BE CARRIED OUT IN TH E CALCULATION OF THE ITA NO.1379/DEL/2011 30 OPERATING PROFITS OF THE COMPARABLE COMPANIES. WE, THEREFORE, SUM UP OUR CONCLUSION ON THIS ASPECT OF THE MATTER BY HOLDING THAT IF THE ASSESSEE AS WELL AS THE COMPARABLE COMPANIES ARE USING THE SLM AND THERE IS SOME DIFFERENCE IN THE RATES OF DEPRECIATION CHARGED BY THEM VIS--VIS THE ASSESSEE, THEN SUITABLE ADJUSTMENT SHOULD BE MADE T O THE PROFITS OF THE COMPARABLES. 12.1. NOW, WE TAKE UP THE OBJECTION OF THE LD. AR ON THE QUESTION OF THE COMPARABLES. IT CAN BE NOTICED FROM THE FACTUAL MAT RIX DISCUSSED ABOVE THAT THE ASSESSEE INITIALLY CHOSE FIVE COMPANIES AS COMP ARABLE, OUT OF WHICH THREE WERE EXCLUDED BY THE TPO FOR WANT OF THE AVA ILABILITY OF THEIR NECESSARY DATA. APART FROM RETAINING TWO CASES OF THE ASSESSEES CHOICE, THE TPO ALSO INCLUDED THE CASE OF BAJAJ AUTO LTD., IN THE FINAL LIST OF COMPARABLES. 12.2. THE LD. AR CONTENDED THAT THE ASSESSEE INCL UDED KINETIC MOTOR COMPANY LTD., LML LTD., AND KINETIC ENGINEERING LTD ., IN THE LIST OF COMPARABLES WHICH WERE EXCLUDED BY THE TPO ON THE G ROUND THAT THE DATA FOR THESE THREE COMPANIES FOR THE YEAR ENDING 31.3. 2006 WAS NOT AVAILABLE ITA NO.1379/DEL/2011 31 AT THAT TIME. IT IS VIVID FROM THE ASSESSEES TRAN SFER PRICING STUDY REPORT AS WELL AS ITS REPRODUCTION ON PAGE 4 OF THE TPOS ORD ER THAT THE DATA OF THESE THREE COMPANIES WAS NOT GIVEN FOR THE YEAR ENDING 3 1.3.2006. WHEREAS THE DATA FOR KINETIC MOTOR COMPANY LTD. AND KINETIC ENG INEERING LTD. WAS GIVEN FOR THE YEAR ENDING 30.9.2005, THE ASSESSEE P ROVIDED DATA OF LML LTD. FOR PRECEDING YEAR ENDING 31.3.2005. IT IS OB VIOUS THAT IN THE ABSENCE OF THE RELEVANT DATA FOR THE YEAR ENDING 31.3.2006, THESE COMPANIES WERE LIABLE TO BE EXCLUDED. PRIMARILY, WE ARE IN AGREEM ENT WITH THE TPO IN SO FAR AS THE REJECTION OF THE DATA OTHER THAN THE REL EVANT FINANCIAL YEAR IS CONCERNED. THE SPECIAL BENCH OF THE TRIBUNAL IN TH E CASE OF AZTEC SOFTWARE AND TECHNOLOGY SERVICE LTD. (2007) 107 IT D 141 (BANG) (SB) HAS HELD THAT THE CURRENT YEARS DATA SHOULD BE PRE FERRED OVER THE MULTIPLE YEARS DATA. RULE 10B(4) READ WITH RULE 10D(4) ALS O SUPPORTS THIS PROPOSITION. AS SUCH, WE APPROVE THE VIEW TAKEN BY THE TPO IN USING ONLY THE CURRENT YEARS DATA. 12.3. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT THOUGH AT THE MATERIAL TIME THE RELEVANT DATA FOR THE CURRENT YEA R OF THESE THREE ITA NO.1379/DEL/2011 32 COMPANIES WAS NOT AVAILABLE, BUT, NOW THE ASSESSEE CAN PRODUCE THE RELEVANT DATA. WE FIND FROM THE TPOS ORDER THAT H E HAS EXCLUDED THESE THREE COMPANIES ONLY FOR THE NON-AVAILABILITY OF TH E DATA FOR THE CURRENT YEAR. THE OTHERWISE COMPARABILITY OF THESE COMPANIE S IS NOT IN DISPUTE. UNDER SUCH CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER AND DIRECT THE TPO TO CONSIDER THE COMPARABILITY OR OTHERWISE OF T HESE THREE COMPANIES ON THE BASIS OF THE DATA WHICH NOW ASSESSEE CLAIMS TO BE AVAILABLE. IN OTHER WORDS, IF THE ASSESSEE SUCCESSFULLY GIVES THE RELEVANT DATA OF THESE COMPANIES FOR THE YEAR IN QUESTION, WITHOUT ANY DIS TORTION OF THEIR ANNUAL ACCOUNTS, THEN, THESE COMPANIES SHOULD BE CONSIDERE D AS COMPARABLE. IN ANY OTHER EVENTUALITY, THESE COMPANIES SHOULD BE EX CLUDED. 12.4. AS REGARDS THE CONSIDERATION OF BAJAJ AUT O LTD. AS COMPARABLE BY THE TPO, WE FIND THAT THE VIEWPOINT OF THE REVENUE IN TREATING THIS COMPANY AS COMPARABLE, IS PERFECTLY IN ORDER. IT I S CLEAR THAT THE ASSESSEE ITSELF CHOSE BAJAJ AUTO LTD. AS ONE OF THE COMPARAB LES FOR THE IMMEDIATELY PRECEDING YEAR. ONCE A COMPANY IS CONSIDERED AS CO MPARABLE IN AN EARLIER YEAR AND THERE IS NOTHING TO JUSTIFY SHIFT FROM SUC H STAND, NO CHANGE CAN BE ITA NO.1379/DEL/2011 33 PERMITTED IN SO FAR AS INCLUSION OF SUCH COMPANY IN THE LIST OF COMPARABLES FOR THE SUCCEEDING YEAR IS CONCERNED. THE LD. AR A RGUED THAT BAJAJ AUTO LTD. WAS MAINLY INVOLVED IN THE SALE OF THREE WHEEL ERS, WHEREAS THE ASSESSEE WAS EXCLUSIVELY DEALING IN TWO WHEELERS. WE HAVE PERUSED THE ANNUAL ACCOUNTS OF THIS COMPANY, A COPY OF WHICH HA S BEEN PLACED ON RECORD BY THE LD. AR. IT IS MANIFEST FROM SUCH ANN UAL ACCOUNTS THAT THE SALES OF TWO WHEELERS IS ROUGHLY 90% OF TOTAL SAL ES OF THIS COMPANY. IN VIEW OF THE FACT THAT THE ASSESSEE ITSELF TREATED B AJAJ AUTO LTD., AS COMPARABLE FOR THE PRECEDING YEAR AND THE CONTENTIO N ABOUT THE PRE- DOMINANT SALE OF THIS COMPANY IN THE THREE WHEELER SEGMENT HAS TURNED OUT TO BE INCORRECT, WE SEE NO JUSTIFIABLE REASONS IN O VERRULING THE VIEW TAKEN BY THE TPO IN CONSIDERING BAJAJ AUTO LTD. AS COMPAR ABLE, WHICH IS HEREBY AFFIRMED. THIS CONTENTION OF THE LD. AR ON THIS AS PECT IS REPELLED. 13. OUR ABOVE DIRECTIONS WILL FACILITATE THE COMP UTATION OF PROFIT MARGIN OF THE ASSESSEE AND THOSE OF COMPARABLES. 14. NOW, WE COME TO THE REMAINING TWO INTERNATIONA L TRANSACTIONS, NAMELY, PURCHASE OF MOTORCYCLE/SCOOTER PARTS AMOUNT ING TO RS.18.48 CRORE ITA NO.1379/DEL/2011 34 AND PURCHASE OF FIXED ASSETS AMOUNTING TO RS.21.37 CRORE, WHICH THE ASSESSEE BENCHMARKED BY USING TNMM AS THE MOST APPR OPRIATE METHOD. AS SUCH, THERE CAN BE NO ARGUMENT ON THE INAPPLICAB ILITY OF THE TNMM ON THESE TRANSACTIONS BECAUSE THE TPO ALSO DID NOT DEN Y THE APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD. AS SUCH, WE DI RECT THE TPO TO DETERMINE ALP OF THE FIRST TRANSACTION OF THE PURCH ASE OF MOTORCYCLES AND SCOOTER PARTS, ETC. IN THE LIGHT OF THE OPERATING P ROFIT MARGIN OF THE ASSESSEE AND THAT OF COMPARABLES AS DETERMINED IN THE LIGHT OF OUR ABOVE DIRECTIONS. IF THE DIFFERENCE BETWEEN TWO MARGINS BREACHES THE SAFE HARBOR RULE, THEN, THE ADDITION ON ACCOUNT OF TP ADJUSTMENT SHOULD BE MADE. 15.1. COMING TO THE INTERNATIONAL TRANSACTION OF PURCHASE OF FIXED ASSET, IT IS SEEN THAT THE ASSESSEE RECORDED IT AT RS.21.3 7 CRORE AND SHOWED IT AS ALP UNDER THE TNMM. WE HAVE LAID DOWN THE MECHANIS M FOR COMPUTATION OF ALP OF SUCH TRANSACTION UNDER THE TN MM BY DIRECTING THE WAY IN WHICH THE PROFIT MARGIN OF THE COMPARABLES A ND THE ASSESSEE SHOULD BE COMPUTED. THE TPO SHOULD APPLY THE RECALCULATED PROFIT MARGIN OF THE ASSESSEE AND COMPARABLES TO THE VALUE OF THIS INTER NATIONAL TRANSACTION. IF ITA NO.1379/DEL/2011 35 THE RESULT CROSSES THE PERMISSIBLE PERCENTAGE, THEN THE ADDITIONAL AMOUNT WOULD GO TO AFFECT THE VALUE OF FIXED ASSETS. 15.2. IT IS NOTED THAT THE TPO PROPOSED THE TRAN SFER PRICING ADJUSTMENT ON THIS SCORE BY CONSIDERING THE VALUE OF THE TRANSACT ION AND THEN APPLYING THE DIFFERENTIAL PROFIT RATE OF 7.12% ON SUCH VALUE. I N OTHER WORDS, THE ADDITION HAS BEEN MADE ON THE VALUE OF INTERNATIONAL TRANSAC TION OF THE PURCHASE OF FIXED ASSETS. THE LD. AR CONTENDED THAT THE TPO WAS NOT JUSTIFIED IN PROPOSING THE TRANSFER PRICING ADJUSTING W.R.T. TH E VALUE OF PURCHASE OF FIXED ASSETS. IT WAS ARGUED THAT ONLY THE DEPRECIAT ION ELEMENT OF SUCH ADJUSTED VALUE OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF FIXED ASSETS WOULD CALL FOR ADJUSTMENT TO THE OPERATING PROFITS. 15.3. SECTION 92B GIVES THE MEANING OF AN `INTERN ATIONAL TRANSACTION. SUB-SECTION (1) PROVIDES THAT : `FOR THE PURPOSES O F THIS SECTION AND SECTIONS 92, 92C, 92D AND 92E, 'INTERNATIONAL TRANS ACTION' MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR ......... THE EXPLAN ATION ITA NO.1379/DEL/2011 36 BELOW SUB-SECTION (2) INSERTED BY THE FINANCE ACT, 2012 W.R.E.F. 1.4.2002 CLARIFIES, FOR THE REMOVAL OF DOUBTS THAT (I) THE EXPRESSION 'INTERNATIONAL TRANSACTION' SHALL INCLUDE (A) THE PURCHASE, SALE, TRANSFER, LEASE OR USE OF TANGIBLE PROPERTY INCLUDING BUILDING, TRANSPORTATION VEHICLE, MACHINERY, EQUIPMENT, TOOLS, PLANT, FURNITURE, COMMODITY OR AN Y OTHER ARTICLE, PRODUCT OR THING. IN VIEW OF THE ABOVE PLAIN AND UNAMBIGUOU S LANGUAGE OF THE PROVISION READ WITH ITS EXPLANATION, IT IS ABUNDANT LY CLEAR THAT THE PURCHASE OF FIXED ASSET IS ALSO AN INTERNATIONAL TRANSACTION . THE MOOT QUESTION IS WHETHER THE DIFFERENCE IN THE VALUE OF SUCH INTERNA TIONAL TRANSACTION AND ITS ALP WOULD CALL FOR MAKING A TRANSFER PRICING ADJUST MENT. IN OUR CONSIDERED OPINION, THE ANSWER TO THIS QUESTION HAS TO BE GIVEN IN NEGATIVE. THE MAIN SUBSTANTIVE PROVISION OF THE CHAPTERX OF THE ACT IS SECTION 92, WHICH PROVIDES THROUGH SUB-SECTION (1), THAT ANY I NCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP. TO PUT IT SIMPLY, SECTION 92 IS NOT A CHARGING BUT A P ROCEDURAL PROVISION FOR RECOMPUTING THE INCOME ARISING FROM AN INTERNATION AL TRANSACTION HAVING REGARD TO ITS ALP. BEFORE APPLYING THE MANDATE OF THIS PROVISION, IT IS OF UTMOST IMPORTANCE THAT THERE SHOULD BE SOME EXISTIN G INCOME CHARGEABLE TO ITA NO.1379/DEL/2011 37 TAX, WHICH IS SOUGHT TO BE RECOMPUTED HAVING REGAR D TO ITS ALP. IF THERE IS AN INTERNATIONAL TRANSACTION WHICH IN ITSELF GIVES RISE TO INCOME THAT IS CHARGEABLE TO TAX, THEN ITS ALP SHALL CONSTITUTE A BASIS FOR MAKING OF ADDITION ON ACCOUNT OF DIFFERENCE BETWEEN THE ASSIG NED VALUE AND ALP OF SUCH INTERNATIONAL TRANSACTION AS PER THE RELEVANT PROVISIONS. BUT IF THERE IS AN INTERNATIONAL TRANSACTION IN THE CAPITAL FIELD, WHICH DOES NOT OTHERWISE GIVE RISE TO ANY INCOME IN ITSELF, THEN EVEN THOUGH ITS ALP MAY BE COMPUTED IN CONSONANCE WITH THE PROVISIONS, BUT NO ADJUSTMENT CAN BE MADE FOR THE DIFFERENCE BETWEEN THE DECLARED VALUE AND THE ALP OF SUCH INTERNATIONAL TRANSACTION. AT THE SAME TIME, IT DOE S NOT MEAN THAT THE COMPUTATION OF THE ALP OF SUCH AN INTERNATIONAL TRA NSACTION IN THE CAPITAL FIELD IS JUST A RITUAL AND SHOULD NOT BE EMBARKED U PON. IN FACT, SUCH A COMPUTATION IS NECESSARY BECAUSE OF THE IMPACT OF S UCH A TRANSACTION OF CAPITAL NATURE ON THE TRANSACTIONS OF ITS REVENUE O FFSHOOTS. IN OUR PRESENT CONTEXT, THE INTERNATIONAL TRANSACTION OF PURCHASE OF FIXED ASSETS IS REQUIRED TO BE BENCHMARKED AS PER THE MOST APPROPRIATE METHO D. THE APPLICATION OF THE ALP, IF REQUIRED, WILL GIVE RISE TO THE RECOMPU TATION OF THE REVISED VALUE OF THE PURCHASE OF FIXED ASSETS. SUCH AN INCR EASE IN THE VALUE OF THE ITA NO.1379/DEL/2011 38 FIXED ASSETS, BEING A CAPITAL TRANSACTION IN ITSELF , WILL NOT GIVE RISE TO ANY ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT, BUT T HE DEPRECIATION ON SUCH ASSETS, BEING A REVENUE OFFSHOOT OF THE CAPITAL TRA NSACTION, WILL BE REQUIRED TO BE RECOMPUTED ON SUCH REVISED VALUE. ERGO, WE SE T ASIDE THE ADDITION MADE BY THE TPO DUE TO THE DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF FIXED ASSETS AND DIRECT THAT THE DEPRECIATION ON SUCH FIXED ASSETS BE COMPUTED ON THE ADJUSTED VALUE , IF PERMISSIBLE, AS PER THE RELEVANT PROVISIONS. NEEDLESS TO SAY, THE ASSE SSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. 16.1. GROUND NO. 4 OF THE ASSESSEES APPEAL IS AG AINST ALLOWING DEPRECIATION ON MOULDS USED IN PLASTIC GOODS FACTOR Y AT RS.1.35 CRORE AS AGAINST RS.2.37 CRORE CLAIMED BY THE ASSESSEE. 16.2. BRIEFLY STATED, THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE CLAIMED DEPRECIATION @ 30% AND 50% ON MOULDS USED IN PLASTI C GOODS FACTORIES. THE AO RESTRICTED SUCH RATE OF DEPRECIATION TO 15% BY CONSIDERING THE VIEW TAKEN BY HIM IN EARLIER YEARS. THE ASSESSEE IS AGGRIEVED AGAINST THE REDUCTION IN THE AMOUNT OF DEPRECIATION DUE TO APPL ICATION OF A LOWER RATE. ITA NO.1379/DEL/2011 39 16.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED THAT THE AO REDUC ED THE DEPRECIATION RATE ON PLASTIC MOULDS BY FOLLOWING THE VIEW TAKEN BY HI M IN THE PRECEDING YEARS. NEITHER THE LD. AR NOR THE LD. DR COULD SPE CIFICALLY POINT OUT THE FATE OF SUCH ADDITION IN THE EARLIER YEARS, INASMUC H AS WHETHER THE ASSESSEE ACCEPTED SUCH ADDITION OR IF ASSAILED, THEN THE FIN AL VIEW TAKEN BY THE TRIBUNAL IN THE PRECEDING YEARS ON THIS ISSUE. AS SUCH, WE SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND REMIT THE MATTER T O THE FILE OF AO FOR DECIDING IT IN CONFORMITY WITH THE FINAL VIEW TAKEN IN THE EARLIER YEAR. 17.1. THE LAST EFFECTIVE GROUND IS AGAINST THE D ISALLOWANCE OF SALES TOOLS EXPENSES AMOUNTING TO RS.1,00,22,142/-. THE ASSESS EE CLAIMED DEDUCTION FOR THE ABOVE SUM AS SALES TOOLS EXPENSES ON ACCOUN T OF AUTO SPARE PARTS TRADED. FOLLOWING THE VIEW TAKEN IN THE EARLIER YE ARS, THE AO DISALLOWED THIS AMOUNT. 17.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT POSITION ON THIS ISSUE IS AGAIN SIMILAR TO THAT OF THE IMMEDIATELY PRECEDING ISSUE INASMUCH AS NEITHER THE LD. AR ITA NO.1379/DEL/2011 40 NOR THE LD. DR IS AWARE OF THE FINAL POSITION ON TH IS ISSUE IN THE EARLIER YEARS. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND REMIT THE MATTER TO THE FILE OF AO FOR DECIDING IT IN CON SONANCE WITH THE FINAL VIEW TAKEN ON IT IN EARLIER YEARS. 18. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 13.04.201 5. SD/- SD/- [GEORGE GEORGE K.] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 13 TH APRIL, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.