DCIT RG 5(3), MUMBAI V. SCHLAFHORST MARKETING CO. LTD, MUMBAI

ITA 1425/MUM/2009

• Counselvise Citation: 142519914 RSA 2009
• Duration Of Justice: 2 year(s) 5 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 26-07-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 03-03-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Keywords: Related party transaction; Transfer pricing; International transaction
• Section: 92B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE SHRI, J. SUDHAKAR REDDY, ACCOUNTANT MEMBER A ND SHRI V. DURGA RAO, JUDICIAL MEMBER ITA NO. 1960/MUM./2007 (ASSESSMENT YEAR : 2003-04 ) ASSTT. COMMISSIONER OF INCOME TAX RANGE-5(3), AAYAKAR BHAVAN M.K. ROAD, MUMBAI 400 004 .. APPELLANT V/S M/S. SCHLAFHORST MARKETING CO. LTD. JYOTI STUDIO COMPOUND, K.B.A. IRANI BRIDGE (KENNEDY BRIDGE) MUMBAI 400 007 PAN AABCS5345Q .... RESPONDENT ITA NO. 1425/MUM./2009 (ASSESSMENT YEAR : 2004-05 ) ASSTT. COMMISSIONER OF INCOME TAX RANGE-5(3), AAYAKAR BHAVAN M.K. ROAD, MUMBAI 400 004 .. APPELLANT V/S M/S. SCHLAFHORST MARKETING CO. LTD. EMPIRE IND. COMPLEX 4/4, SENAPATI BAPAT MARG LOWER PAREL, MUMBAI 400 013 PAN AAACS5703R .... RESPONDENT REVENUE BY : MR. JITENDRA YADAV ASSESSEE BY : MR. KANCHAN KAUSHAL A/W MR. RAJU WAHARIA DATE OF HEARING 27.7.2011 DATE OF ORDER 12.8.2011 M/S. SCHLAFHORST MKTG. CO. LTD. A.YS - 2003-04 & 2004-05 2 O R D E R PER J. SUDHAKAR REDDY, A.M. THE APPEAL PREFERRED BY REVENUE IN ITA NO.1960/MUM ./2007, FOR ASSESSMENT YEAR 2003-04, IS DIRECTED AGAINST THE IM PUGNED ORDER DATED 22 ND DECEMBER 2006. THE APPEAL IN ITA NO.1425/MUM./2009, FOR ASSESSMENT YEAR 2004-05 IS DIRECTED AGAINST ORDER DATED 26 TH SEPTEMBER 2008, PASSED BY THE COMMISSIONER (APPEALS)-V, MUMBAI. SINCE THE ISSUES ARISING IN THESE APPEALS ARE COMMON, FOR THE SAKE OF CONVENIENCE, TH ESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY WAY OF THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. BRIEF FACTS OF THE CASE, AS BROUGHT OUT IN PARA-1 O F THE ORDER PASSED BY THE COMMISSIONER (APPEALS) FOR ASSESSMENT YEAR 2003 -04, IS EXTRACTED BELOW FOR READY REFERENCE:- 1. BACKGROUND SCHLAFHORST MARKETING COMPANY LTD. (MERGED WITH SAU RER INDIA PVT. LTD. W.E.F. 01.01.2004) (SMCL OR THE APPELLANT) WAS INCORPORATED IN 1993, FOR PROVIDING SALES AND SUPPORT SERVICES, FOR HIGHLY SOPHISTICATED TEXTILE MACHINERY MANUFACTURED BY W. SCHLAFHORST AG & CO., GERMANY (WSC). IT ALSO PROVIDES TECHNICAL SERVICES TO CUS TOMERS IN AND OUTSIDE INDIA OF ITS ASSOCIATED ENTERPRISE (AE) N AMELY WSC AND TO THIRD PARTY CUSTOMERS IN INDIA. THE SERVICES ARE RE NDERED MAINLY IN RESPECT OF MACHINERIES SOLD BY WSC TO ITS CUSTOMERS . WSC MANUFACTURES ONLY TWO TYPES OF MACHINES NAMELY, AUT OCORO WELDING MACHINERY AND AUTOCORO (ROTOR MACHINERY). THE APPELLANT HAD INTERNATIONAL TRANSACTIONS AS DEF INED IN SECTION 92B OF THE ACT WITH ITS ASSOCIATED ENTERPRISES FOR THE CONCERNED PREVIOUS YEAR. THE SAID INTERNATIONAL TRANSACTIONS WERE DULY REPORTED IN THE ACCOUNTANTS REPORT IN FORM NO.3CEB FILED ALONG WIT H THE RETURN OF INCOME. IN ORDER TO DETERMINE THE ARMS LENGTH PRIC E FOR THE SAID INTERNATIONAL TRANSACTIONS, A REFERENCE WAS MADE UN DER SECTION 92CA(1) BY THE ACIT, RANGE-5(3), MUMBAI, TO THE ADD L. CIT (TP-IV), MUMBAI (TPO). THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE APPELLANT, RELEVANT TO THE TRANSFER PRICING REGULATIONS, ARE AS UNDER:- M/S. SCHLAFHORST MKTG. CO. LTD. A.YS - 2003-04 & 2004-05 3 SR. NO. PARTICULARS AMOUNT (IN ` ) METHOD USED A MARKETING SERVICES SEGMENT 1 AGENCY COMMISSION 6,665,051 TNMM 1 B TECHNICAL SERVICES SEGMENT 1 SERVICE CHARGES 30,870,049 TNMM 2 IMPORT OF COMPONENTS 4,671,501 TNMM 3 IMPORT OF CAPITAL ITEMS 29,234 TNMM 4 REIMBURSEMENT OF EXPENSES RECEIVED 19,498,738 CUP 2 C DISTRIBUTION SEGMENT RPM 2 1 IMPORTS OF SPARE PARTS FOR RESALE 5,363,717 3. THE SOLE ISSUE BEFORE THAT WE ARE REQUIRED TO ADJUD ICATE IN BOTH THE YEARS UNDER CONSIDERATION IS, WHETHER OR NOT THE CO MMISSIONER (APPEALS) WAS JUSTIFIED IN DELETING TRANSFER PRICING ADJUSTME NT MADE WITH RESPECT TO THE TECHNICAL SERVICES SEGMENT. 4. THE ASSESSEE ADOPTED TRANSACTIONAL NET MARGIN METHO D AND COMPARED THE MARGIN DERIVED BY IT FROM INTERNATIONAL TRANSAC TIONS WITH THE MARGIN DERIVED BY FROM THE TRANSACTION ENTERED INTO WITH T HIRD PARTIES. THE TRANSFER PRICING OFFICER (FOR SHORT TPO ), REJECTED THE SAME ON THE GROUND THAT THE SERVICES RENDERED TO ASSOCIATE ENTERPRISES AND SERV ICES RENDERED TO THIRD PARTIES ARE NOT IDENTICAL AND REJECTED THE TRANSFER PRICING STUDY AND ANALYSIS UNDERTAKEN BY THE ASSESSEE. HE TOOK THE THIRD PARTY COMPARABLE CASES IDENTIFIED BY THE ASSESSEE AND EVALUATED THE SAME T O DETERMINE THE COMPARABILITY. FOR ASSESSMENT YEAR 2003-04, THE TPO , IN HIS ORDER DATED 14 TH MARCH 2006, ISSUED UNDER SECTION 92CA(3) OF THE AC T, VIDE PARA-4, HELD THAT ONLY THE CASE OF L&T SERGEANT LUNDY LTD. APPEA RS TO BE CLOSELY COMPARABLE TO THE ASSESSEE AS THE INCOME TO THESE P ARTIES IS ON ACCOUNT OF ENGINEERING SERVICES FEES. HE TOOK THE OPERATING PR OFIT OF THIS CONCERN, WHICH M/S. SCHLAFHORST MKTG. CO. LTD. A.YS - 2003-04 & 2004-05 4 IS 52% AND SUGGESTED A TOTAL ADJUSTMENT OF ` 40,00,000. THE TPO, IN THIS YEAR, REJECTED M/S. VIMTA LABS, AS NOT A COMPARABLE CASE ON THE GROUND THAT THIS COMPANY IS ENGAGED IN PROVIDING CLINICAL AND P RE-CLINICAL CONTRACT RESEARCH SERVICES AND THAT IT ALSO OFFERED CLINICAL DIAGNOSTIC SERVICES. THE TPO HAS NOT GIVEN ANY COMPARABLE CASES FROM HER SIDE. 5. THE TPO FOR ASSESSMENT YEAR 2004-05, IN HIS ORDER D ATED 28 TH NOVEMBER 2006, PASSED UNDER SECTION 92CA(3) OF THE ACT, REJECTED ALL THE THIRD PARTY COMPARABLE IDENTIFIED BY THE ASSESSEE E XCEPT M/S. VIMTA LABS. IN THIS YEAR, THE TPO REJECTED L&T SERGEANT LUNDY LTD. AS A COMPARABLE CASE BY OBSERVING THAT THE COMPANY IS ENGAGED IN CONSTRU CTION ACTIVITIES AND ALSO CARRIES ON BUSINESS OF PROVIDING ENGINEERING AND AS SOCIATED SERVICES FOR THERMAL, HYDRO AND COMBINE CYCLE PURCHASE. HENCE, I N TERMS OF FUNCTION PERFORMED, THIS COMPANY IS NOT COMPARABLE TO THE AS SESSEE. THE TPO IN THIS YEAR ACCEPTED M/S. VIMTA LABS, AS THE COMPARABLE BY OBSERVING THAT THE COMPANY IS ENGAGED IN CONTRACT RESEARCH SERVICES WH ICH IS AKIN TO TECHNICAL SUPPORT SERVICES AND IS FOUND TO BE CLOSELY COMPARA BLE AND, HENCE, ACCEPTED. WE HAVE TO MENTION THAT FOR THE ASSESSMENT YEAR 200 3-04, L&T HAD OPERATING PROFITS TO COST AT 52%, WHEREAS FOR ASSES SMENT YEAR 2004-05, THE FIGURE WAS (-) 11.97%. IN THE CASE OF M/S. VIMTA LA BS., FOR THE ASSESSMENT YEAR 2003-04, THE OPERATING PROFIT OF COST WAS 29% AND WHEREAS FOR ASSESSMENT YEAR 2004-05, THE FIGURE WAS 61.4%. IN T HE ASSESSMENT YEAR 2004-05, THE TPO SUGGESTED ON ADJUSTMENT OF ` 58,80,625, BY APPLYING THE MARGIN @ 61.40%. 6. THE CASE OF THE ASSESSEE IS THAT, IT HAS EARNED RET URN OF 34% ON RELATED PARTY TRANSACTIONS AND WHEREAS IT HAS EARNE D A MARGIN OF JUST 5% ON UNRELATED PARTY TRANSACTIONS AND, HENCE, THE MARGIN EARNED FROM RELATED PARTY TRANSACTION ARE MUCH HIGHER AND, THUS, ARE AT ARMS LENGTH AND NO ADJUSTMENT IS CALLED FOR. 7. FOR BOTH THE YEARS UNDER CONSIDERATION, THE MATTER TRAVELED TO THE FIRST APPELLATE AUTHORITY, WHEREIN THE COMMISSIONER (APPE ALS), WHILE AGREEING WITH THE ARGUMENT OF THE ASSESSEE, HELD THAT THE MA RGIN RATE IN UNCONTROLLED M/S. SCHLAFHORST MKTG. CO. LTD. A.YS - 2003-04 & 2004-05 5 TRANSACTIONS ENTERED BY THE ASSESSEE IS 5.53% VIS- -VIS THE MARGIN RATE OF 34.43% EARNED BY THE ASSESSEE IN THE TRANSACTION WI TH ASSOCIATED ENTERPRISE (FOR SHORT A.E ). HE HELD THAT THE TPO IS NOT CORRECT IN REJECTING THE INTERNAL T&M METHOD ADOPTED BY THE ASSESSEE. HE ALSO HELD TH AT THE TPO HAS NOT GIVEN ANY COGENT REASON FOR ADOPTING L&T AS AN EXTE RNAL BENCH-MARK COMPARABLE IN CONTRAST WITH OTHER COMPANIES. FOR TH E ASSESSMENT YEAR 2004-05, THE COMMISSIONER (APPEALS) NOTED THE CONTR ADICTION IN THE EXTERNAL COMPARABLES ADOPTED BY THE ASSESSING OFFICER AS COM PARED TO THE DECISIONS OF TPO IN THE EARLIER YEAR. HE AGREED WITH THE FIND INGS OF HIS PREDECESSOR AND REJECTED THE GROUND OF RAISED BY THE ASSESSEE. AGGR IEVED, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL RAISING SOLE COMMON GROU ND IN BOTH THE YEARS UNDER ASSESSMENT:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER LAW, THE LEARNED CIT(A) ERRED IN IGNORING OBSERVATION MADE B Y THE TPO THAT THE INTERNAL TRANSACTIONAL NET METHOD IS NOT COMPARABLE AS THE SERVICES RENDERED BY THE ASSESSEE TO THE A.E. AND THIRD PART IES ARE DIFFERENT IN NATURE AND THERE IS A LARGE VARIATION IN THE MARGIN EARNED FROM THE SERVICES RENDERED TO THE A.E. (34.43% AND THE THIRD PARTIES (5.53%) AND HAS FURTHER ERRED IN OBSERVING THAT THE INTERNA L TRANSACTIONAL NET MARGIN METHOD ADOPTED BY THE ASSESSEE IS JUSTIFIED. 8. LEARNED DEPARTMENTAL REPRESENTATIVE, MR. JITENDRA Y ADAV, SUBMITS THAT (A) THERE IS A DIFFERENCE IN NATURE OF SERVI CE INASMUCH AS THE SERVICES TO A.E. ARE DIFFERENT FROM SERVICES RENDERED TO THE THIRD PARTY AND THIS FACT IS ADMITTED BY THE COMPANY IN ITS TRANSFER PRICING STU DY PAGE-54/PARA-5.66, CONTAINED IN ASSESSEES PAPER BOOK AT PAGE-63(B). T HE COMMISSIONER (APPEALS), IN HIS ORDER AT PAGE-2, HAS ENUMERATED T HE NATURE OF SERVICES AND THAT A PERUSAL OF THE SAME DEMONSTRATES THAT THE AS SESSEE PROVIDED DIFFERENT TYPES OF SERVICES. IF THE SERVICES RENDERED TO THE A.E. ARE MUCH COSTLIER THAN THE SERVICES RENDERED DIRECTLY TO THE THIRD PARTY, NO CUSTOMER WOULD APPROACH THE A.E., AS IT WOULD BE A BAD BUSINESS DE CISION. HENCE, THE INTERNAL COMPARABLE IS RIGHTLY REJECTED; (B) THE BI LLING IS BASED ON TIME SHEET, A COPY OF WHICH IS AVAILABLE AT PAGE-51 OF ASSESSEE S PAPER BOOK AND THIS TIME SHEET CATEGORISES SERVICES INTO FIVE DIFFERENT TYPES; (C) THE TPO, FOR THE ASSESSMENT YEAR 2003-04, HAS RIGHTLY REJECTED EACH OF THE COMPARABLE AND M/S. SCHLAFHORST MKTG. CO. LTD. A.YS - 2003-04 & 2004-05 6 SELECTED L&T AS THE ONLY COMPARABLE COMPANY FOR THE PURPOSE OF BENCH- MARKING AND THIS ANALYSIS SHOULD BE ACCEPTED. 9. LEARNED COUNSEL, MR. KANCHAN KAUSHAL, APPEARING ON BEHALF OF THE ASSESSEE, SUBMITS THAT THE TRANSFER PRICING STUDY, VIDE PARA-5.66 / PAGE-54, WAS NOT PROPERLY AND COMPLETELY READ BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, WHICH IS LEADING TO WRONG INTERPRET A-TION (I) THAT THE TRANSFER PRICING STUDY HAS CLEARLY STATED THAT IF C UP METHOD IS ADOPTED, THEN THE STANDARD OF COMPARABILITY IS VERY HIGH AND WHEN SUCH HIGH COMPARABILITY IS USED, THEN THERE IS A DIFFERENCE IN THE NATURE O F SERVICE; (II) THAT THE TRANSACTIONAL NET MARGIN METHOD (FOR SHORT TNMM ) IS MORE BROAD BASED AND IT ALLOWS HIGHER VARIATION THAN UNDER THE CUP M ETHOD. THE BROAD CATEGORY IS THE SAME I.E., SERVICES; (III) THAT L&T WAS FIXED UP AS AN EXTERNAL COMPARABLE SOLELY FOR THE REASON THAT THE OPERATING MARGIN WAS 52% AND THIS COMPARABLE WAS REJECTED IN ASSESSMENT YEAR 200 4-05 AS THE OPERATING MARGIN FELL TO (-)11.97%; (IV) THAT M/S. VIMTA LABS LTD. WAS REJECTED AS A COMPARABLE IN THE ASSESSMENT YEAR 2003-04, AS ITS O PERATING MARGIN WAS 29% AND WAS ACCEPTED AS AN EXTERNAL COMPARABLE FOR THE ASSESSMENT YEAR 2004-05, AS IT IS OPERATING MARGIN WAS 61.40%; (V) THAT IN THE NEXT THREE DAYS, THE TPO ACCEPTED THE INTERNAL COMPARABLE AND HAS NOT MADE ANY ADJUSTMENT AND ON THE VERY SAME FACTS AND CIRCUMSTA NCES; (VI) THAT THE ASSESSEE DEPUTES THE VERY SAME PERSONNEL FOR PERFOR MANCE OF SERVICES EITHER THROUGH THE A.E. OR DIRECTLY TO THE THIRD PARTY; AN D (VII) THE PERCENTAGE OF INTERNAL MARGINS EARNED BY THE ASSESSEE, FOR SERVIC ES PROVIDED THROUGH A.E. AND FOR SERVICES PROVIDED DIRECTLY TO THE THIRD PAR TIES ARE NOT ON FACTS DENIED BY THE ASSESSING OFFICER. LEARNED COUNSEL RELIED ON PAGES-9 AND 10 OF THE ORDER PASSED BY THE COMMISSIONER (APPEALS). 10. LEARNED DEPARTMENTAL REPRESENTATIVE, IN REPLY, SUBM ITS THAT THE ASSESSEE SHOULD NOT BE ALLOWED TO TAKE ADVANTAGE OF A WRONG FINDING GIVEN BY THE ASSESSING OFFICER IN ANY PARTICULAR ASSESSME NT YEAR. HE SUBMITS THAT THE TRIBUNAL IS THE FINAL FACT FINDING AUTHORITY AN D IT HAS TO DETERMINE AS TO WHAT IS CORRECT, INSTEAD OF BEING SWAYED AWAY BY TH E FACT THAT DIFFERENT TPOS M/S. SCHLAFHORST MKTG. CO. LTD. A.YS - 2003-04 & 2004-05 7 HAVE TAKEN DIFFERENT VIEWS. HE PRAYED THAT THE CORR ECT POSITION SHOULD BE UPHELD. 11. BOTH THE PARTIES RELIED ON DIFFERENT CASE LAWS. 12. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON PERUSAL OF THE PAP ERS ON RECORD, AS WELL AS THE CASE LAWS CITED BEFORE US, WE HOLD AS FOLLOWS:- 13. THE ASSESSEE SUPPLIES ONLY TWO CATEGORIES OF MACHIN ERY. THE SALE IS DONE EITHER DIRECTLY TO THE THIRD PARTY OR THROUGH ITS A.E. THE INCOME OF THE ASSESSEE COMPANY ARISES FROM (I) MARKETING OF MAC HINERY AND (II) FEE FOR COMMISSIONING AND INSTALLATION AND (III) FEE FOR AF TER-SALE-SERVICES. THE UNDISPUTED FACT IS THAT THE ASSESSEE CHARGES TECHNI CAL SERVICES FEE ON THE BASIS OF PER ENGINEER PER DAY. THE RATE FOR SERVICE S IN INDIA AS WELL AS FOR SERVICES IN BANGLADESH AND SRI LANKA, WHICH ARE BE ING DONE NO BEHALF OF THE PRINCIPAL IS ` 3,200 PER ENGINEER PER DAY. IN CONTRAST FOR SIMILA R SERVICES RENDERED IN OTHER COUNTRIES, THE RATE CHARGED IS ` 4,300 PER ENGINEER PER DAY. THE ASSESSEE ALSO OFFERS AFTER-SALES-SERVICE T O THE THIRD PARTY CUSTOMER DIRECTLY AND IN SUCH CASES, CHARGES THEM @ ` 1,650 PER ENGINEER PER DAY. 14. COMING TO THE NATURE OF SERVICES, FROM TIME SHEET, WHICH IS AT PAGE-51 OF THE PAPER BOOK, IT CAN BE SEEN THAT THESE ARE (I) NEW ERECTION; (II) MACHINERY RE-LOCATION/DISMANTLING; (III) UPGRADE/CO NVERSION, OVERHAUL REPAIRS; (IV) REPAIRS AND SERVICES ON ELECTRIC EQUI PMENT. THOUGH THE NATURE OF SERVICES DO VARY, THE FACT REMAINS THAT THEY BROADL Y FALL UNDER A COMMON CATEGORY OF INSTALLATION SERVICES, WARRANTY SERVICE S AND AFTER-SALES-SERVICES. IN OUR OPINION, THE NATURE OF SERVICES DOES NOT VAR Y SIGNIFICANTLY. IT IS NOT ALSO IN DISPUTE THAT THE SAME ENGINEERS ARE DEPUTED FOR ALL THESE SERVICES AND THE SAME RATE IS CHARGED. UNDER THESE CIRCUMSTA NCES, WE ARE OF THE CONSIDERED OPINION THAT THE FINDING OF THE FIRST AP PELLATE AUTHORITY THAT THE TNMM METHOD ADOPTED BY THE ASSESSEE TO ARRIVE AT AR MS LENGTH PRICE WAS JUSTIFIED. TNMM IS MORE BROAD BASED AND THE VARIATI ON IN THE TYPE OF SERVICES, AS IN THIS CASE CAN BE ABSORBED IN THIS M ETHOD. M/S. SCHLAFHORST MKTG. CO. LTD. A.YS - 2003-04 & 2004-05 8 15. COMING TO TRANSFER PRICING STUDY AT PAGE-54/PARA-4. 6, WHILE EVALUATING AND DETERMINATION AS TO WHICH IS THE MOST APPROPRIA TE METHOD, THE AUDITORS HAVE NOTED THE DIFFERENCE IN THE NATURE OF SERVICES AND CLAIMED THAT AS THE CUP METHOD REQUIRES VERY HIGH DEGREE OF COMPARABILI TY, THE METHOD IS TO BE REJECTED. SUCH A RECORDING IN TRANSFER PRICING STUD Y, IN OUR OPINION, DOES NOT LEAD TO A CONCLUSION THAT TNMM METHOD WITH INTERNAL COMPARABLES IS TO BE REJECTED. IT IS WELL SETTLED THAT THE TNMM METHOD I S MORE TOLERANT TO VARIATION IN COMPARABILITY AND IS MORE SUITABLE WHE N THERE IS NO HIGH DEGREE OF COMPARABILITY BETWEEN THE TRANSACTIONS. 16. LOOKING AT THE ISSUE FROM ANOTHER ANGLE, WE FIND TH AT THE TPO FAILED TO BRING OUT APPROPRIATE EXTERNAL COMPARABLES FOR BENC H-MARKING THE TRANSACTIONS. IT APPEARS THAT THE BASIS OF SELECTIO N OF A COMPARABLE DEPENDED UPON THE QUANTUM OF ADJUSTMENT THAT IT WOULD PERMIT RATHER THAN OTHER FACTORS. AS PER THE ASSESSING OFFICER, IT SEEMS THE STAND IS THE HIGHER THE MARGIN THE GREATER THE COMPARABILITY. THIS APPROACH HAS TO BE NECESSARILY QUASHED. WHAT HAS BEEN ACCEPTED AS A COMPARABLE FUN CTIONALLY, IN YEAR ONE AND IS ALSO TO BE AN ACCEPTABLE COMPARABLE, IN THE SECOND YEAR. L&T CANNOT BE ACCEPTED AS A COMPARABLE IN THE FIRST YEAR AS IT HAS AN OPERATING MARGIN OF 52% AND REJECTED AS A COMPARABLE IN THE SECOND Y EAR, AS IT HAS A NEGATIVE MARGIN OF (-)11.97%. SIMILAR IS THE CASE W ITH M/S. VIMTA LABS. IF THE AVERAGE OF TWO YEARS MARGIN IN CASE OF L&T AS WELL AS IN THE CASE OF M/S. VIMTA LABS, ARE TAKEN, THEN THE MARGIN DISCLOSED BY THE ASSESSEE IN RELATED PARTY TRANSACTIONS WOULD BE AT ARMS LENGTH. 17. IN VIEW OF THE FORGOING DISCUSSIONS, WE UPHOLD THE FINDINGS OF THE COMMISSIONER (APPEALS) THAT (I) THE TPO HAS NOT S UBSTANTIATED HIS FINDING THAT THE SERVICES RENDERED BY THE ASSESSEE TO THIRD PARTIES ARE DIFFERENT IN NATURE AS COMPARED TO THE SERVICES RENDERED THROUGH RELATED A.E; (II) THAT THE TNMM METHOD ADOPTED BY THE ASSESSEE IS JUSTIFIE D; (III) THAT INTERNAL COMPARABLES WITH THIRD PARTY TRANSACTIONS SHOULD BE PREFERRED WHEREVER POSSIBLE TO EXTERNAL COMPARABLES; (IV) THE REASONS GIVEN BY THE TPO IN REJECTING CERTAIN EXTERNAL COMPARABLES AND IN ACCEP TING EXTERNAL COMPARA- M/S. SCHLAFHORST MKTG. CO. LTD. A.YS - 2003-04 & 2004-05 9 BLES ARE NOT SOUND; (V) THAT THE TRANSFER PRICING A DJUSTMENT MADE IN BOTH THE YEARS ARE TO BE DELETED. WE ORDER ACCORDINGLY. 18. IN THE RESULT, REVENUES APPEALS FOR BOTH THE YEARS UNDER ASSESSMENT ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 12.8.2011 SD/- V. DURGA RAO JUDICIAL MEMBER SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI, DATED: 12.8.2011 COPY TO : (1) THE ASSESSEE; (2) THE RESPONDENT; (3) THE CIT(A), MUMBAI, CONCERNED; (4) THE CIT, MUMBAI CITY CONCERNED; (5) THE DR, L BENCH, ITAT, MUMBAI. TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT, MUMBAI BENCHES, MUMBAI