DCIT, Circle - 10, Kolkata, Kolkata V. D I C India Ltd., Kolkata

ITA 1432/KOL/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 4487 (ITAT-KOLKATA)
• Duration Of Justice: 4 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 12-07-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 21-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KALYAN NATH J; SK ZAFARUL HAQUE TANWEER
• Assessee Lawyers: D S DAMLE
• Keywords: Related party transaction; Transfer pricing; Principle of natural justice; International transaction; Rule of consistency; Additional evidence
• Section: 92C; 43B; 92D; 80HHC; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH C KOLKATA BEFORE SHRI N.V.VASUDEVAN, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA NO. 181 / KOL / 2010 & ITA NO.1432/KOL/2011 ASSESSMENT YEARS :2004-05 & 2005-06 DCIT, CIRCLE-10 P-7, CHOWRINGHEE SQURE, 3 RD FLOOR, KOLKTA-700 069 V/S . M/S DIC INDIA LTD., TRANSPORT DEPOT ROAD, KOLKATA-700 088 [ PAN NO.AABCC 0703 C ] /APPELLANT .. / RESPONDENT /BY ASSESSEE SHRI D.S.DAMLE, AR /BY REVENUE SK. ZAFARUL HAQUE TANWEER & SHRI KALYAN NATH , JCIT-SR-DR /DATE OF HEARING 15-07-2016 ! /DATE OF PRONOUNCEMENT 21 - 09-2016 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:- BOTH APPEALS BY THE REVENUE ARE ARISING OUT OF DIF FERENT ORDERS OF COMMISSIONER OF INCOME TAX (APPEALS)-XXXII AND CIT( A)-XII, KOLKATA IN APPEAL NO.19/CIT(A)-XXXII/CIR-10/08-09 & 456/XII/R- 10,KOL DATED 17.09.2009 AND 31.12.2008. ASSESSMENTS WERE FRAMED BY DCIT CIR CLE-10 AND ACIT RAANGE-10 KOLKATA U/S 143(3)(II) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) VIDE THEIR ORDERS DATED 2 9.12.2006 AND 31.12.2008 FOR ASSESSMENT YEARS 2046-05 AND 2005-06 RESPECTIVELY. ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 2 SHRI D.S.DAMLE, LD. AUTHORIZED REPRESENTATIVE APPEA RED ON BEHALF OF ASSESSEE AND SK. ZAFARUL HAQUE TANWEER & SHRI KALYA N NATH, LD. DEPARTMENTAL REPRESENTATIVES APPEARED ON BEHALF OF REVENUE. 2. BOTH APPEALS ARE HEARD TOGETHER AND DEEM IT APPR OPRIATE TO DISPOSE OF THEM BY THIS COMMON ORDER. FIRST WE TAKE UP REVENUES APPEAL ITA NO.181/KOL/20 10 FOR A.Y 04-05. 3. REVENUE HAS RAISED FOLLOWING GROUNDS AS UNDER:- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.50,15,212/- MA DE BY THE TPO DUE TO ADJUSTMENT OF ARMS LENGTH PRICE ADOPTING RPM METHO D BEING THE MOST APPROPRIATE HAVING REGARD TO THE FACTS AND CIRCUMST ANCES OF EACH PARTICULAR TRANSACTION AFTER GIVING REASONABLE OPPO RTUNITY TO THE ASSESSEE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, LD. CIT(A) ERRED IN DIRECTING NOT TO INCLUDE SERVICE CHARGE AMOUNTING T O RS.90 LAKHS IN TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S. 80HHC OF TH E IT ACT. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, LD. CIT(A) ERRED DIN ALLOWING DEDUCTION OF CUSTOMS DUTY OF RS. 11,77,331/- WHICH WAS ADJUSTED AGAINST ADVANCE LICENSE BENEFIT AVAILA BLE TO THE COMPANY RATHER THAN PAYMENT THEREBY VIOLATING THE PROVISION OF SEC. 43B OF THE IT ACT. 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, LD. CIT(A) ERRED IN ACCEPTING ADDITIONAL EVIDENCE WHICH IS A V IOLATION OF RULE-46(A) OF IT RULES, 1962. 5. THAT THE APPELLANT CRAVES TO LEAVE TO ADD, TO AM END, TO ALTER OR MODIFY THE GROUNDS TAKEN ABOVE. 4. THE FACTS IN BRIEF AS HAVE BEEN BROUGHT ON RECOR D ARE THAT THE ASSESSEE IN THE PRESENT CASE IS A LIMITED COMPANY AND ENGAGE D IN THE BUSINESS OF MANUFACTURING, TRADING & SELLING OF PRINTED INKS, I NDUSTRIAL ADHESIVE & OTHER ALLIED PRODUCTS. DIC INDIA BELONGS TO THE DAINIPPON INK AND CHEMICALS GROUP, JAPAN (FOR SHORT DIC GROUP). THE DIC GROUP OPERATES IN MORE THAN 60 COUNTRIES THROUGH ITS SUBSIDIARIES. ACCORDINGLY, TH E ASSESSEE I.E. DIC INDIA IS A SUBSIDIARY OF DIC GROUP, JAPAN. THE ASSESSEE, DIC I NDIA HAS A NUMBER OF ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 3 TRANSACTIONS WITH ITS OVERSEAS GROUP COMPANIES. ALL OVERSEAS DIC GROUP COMPANIES WOULD BE ASSOCIATES ENTERPRISES (FOR SHOR T AE) AND ACCORDINGLY ALL THE TRANSACTIONS BETWEEN DIC INDIA AND OTHER AE WOU LD NEED TO SATISFY THE ARMS LENGTH PRICING (ALP FOR SHORT) STANDARD PRESC RIBED BY INDIAN REGULATIONS. 4.1 THE ASSESSEE, DURING THE RELEVANT YEAR ENGAGED IN THE BUSINESS OF MANUFACTURING, TRADING & SELLING OF PRINTING INKS, INDUSTRIAL ADHESIVE AND OTHER ALLIED PRODUCTS. IN THE RELEVANT YEAR, ASSESSEE HAD THE FOLLOWING TRANSACTIONS WITH ITS AE. SL. NO. NATURE OF TRANSACTION AMOUNT (IN INR) METHOD USED A) IMPORT OF PRODUCTS FOR TRADING 40.44 MILLION TNMM B) EXPORT OF MANUFACTURED GOODS 37.63 MILLION TNMM ALL THE ABOVE TRANSACTIONS WERE BENCHMARKED APPLYIN G THE TNMM METHOD PRESCRIBED IN SECTION 92C OF THE ACT. HOWEVER THE TPO U/S 92CA(3) THE TPO REJECTED THE ASSESSEES COMPUTATION AND EVALUATION OF ALP. 4.2 THE ASSESSEE IN ITS TRANSFER PRICE STUDY HAS WO RKED OUT THE MEAN PLI (OPERATING PROFIT/SALES) OF THE COMPARABLE COMPANIE S @ 3.10% IN RELATION TO ITS EXPORT TO ITS AE. THE ASSESSEE HAS DEMONSTRATED ITS OPERATING PROFIT IS @ 4.58% ON THE VALUE OF THE EXPORTS. ACCORDINGLY, ASS ESSEE SUBMITTED THAT THERE IS NO NEED TO MAKE ANY ADJUSTMENT IN THE AMOUNT OF PROFIT AS IT HAS EXPORTED THE GOODS TO ITS AE AT ALP OR IMPORTED THE GOODS FR OM AE AT ALP. HOWEVER, THE AO DISAGREED WITH THE METHOD ADOPTED BY THE ASS ESSEE FOR WORKING OUT ALP OF THE GOODS EXPORTED/ IMPORTED. THE AO OBSERVE D THAT THE TOTAL VALUE OF IMPORT/ EXPORT IS ONLY RS. 104 MILLION IN COMPARISO N TO THE TOTAL TURNOVER OF RS. 2334 MILLION OF THE ASSESSEE. THE TRANSACTIONS WITH AE ARE LESS THAN 5%, THEREFORE TNMM IS NOT THE MOST APPROPRIATE METHOD. THE AO ALSO OBSERVED THAT THE ASSESSEE FOR THE AY 2003-04 USED THE CPM M ETHOD FOR THE EXPORT TO ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 4 AE AND RPM METHOD FOR THE EXPORT FROM AE. SO THE AO ADOPTED THE CPM METHOD AND WORKED OUT THE ALP FOR THE EXPORTED GOOD S AS UNDER:- THE MANUFACTURING DETAILS SUBMITTED BY THE ASSESSEE ARE AS UNDER:- TOTAL DOMESTIC SALES EXPORT TO AES EXPORT TO NON-AES NET SALES 2,288,221,250 2,024,504,485 37,986,395 80,760,331 OTHER INCOME 45,519,716 RAW MATERIAL CONSUMPTION 1,616,195,407 1,400,627,381 32,271,826 63,842,458 GROSS PROFIT 672,025,843 623,877,104 5,714,569 16,9 17,873 GP ON SALES 29% 31% 15% 21% GP ON COST 42% 45% 18% 26% IT WAS OBSERVED THAT THE OVERALL GP MARGIN IS 42% O N TOTAL COSTS OF THE ASSESSEE. HOWEVER ON EXPORT TO AES, THE GP ON COST IS ONLY 18% AS COMPARED TO 26% EARNED ON THE EXPORT TO NON-AES. TH E AO FURTHER OBSERVED THAT THE FUNCTIONS PERFORMED BY THE ASSESSEE ARE SI MILAR IN BOTH THE CASES OF EXPORTS TO AE AND NON-AE. THEREFORE THE GP MARGIN S HOULD BE SIMILAR. THE ASSESSEE OBJECTED ON THE ASSUMPTION OF THE AO AND S TATED THAT THE PRODUCTS ARE DIFFERENT FOR EXPORT TO AE AND NON-AES. HOWEVER THE AO REJECTED THE PLEA BY OBSERVING THAT THE ASSESSEE HIMSELF USED CPM FOR AY 2003-04 TO DETERMINE THE ALP ON ITS EXPORT TRANSACTIONS WITH A E. UNDER THE CPM IT IS NOT NECESSARY THAT THERE SHOULD BE SIMILARITY IN THE PR ODUCTS EXPORTED TO AE AND NON-AE. HOWEVER IT IS IN THE CUP METHOD, THE EXACT COMPARABILITY OF THE PRODUCT IS NECESSARY. ACCORDINGLY THE AO DETERMINED ARMS LENGTH PRICE IN RESPECT OF EXPORTS AT 26% ON COST. THE AO FURTHER A LLOWED THE RELIEF 5% AND WORKED OUT ADJUSTED ALP AT 21% ONLY AND GP MARGIN S HOWN BY THE ASSESSEE IS ONLY 18%. HENCE, UPWARD ADJUSTMENT OF EXPORT TO AE @ 3% IS WORKED OUT AS UNDER :- COST OF GOODS EXPORTED TO AES = 32,271,826 TP ADJUSTMENT @ 3% = 9,68,154/- ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 5 HENCE, AN UPWARD ADJUSTMENT OF 9,68,154/- IS REQUIRED TO BE MADE ON CONSIDERATIONS RECEIVED BY THE ASSESSEE ON EXPORTS TO AES. 4.3 SIMILARLY, THE AO WORKED OUT THE ALP FOR THE TR ADING GOODS USING THE RE- SALE PRICE METHOD. IN RESPECT OF THE TRADING ACCOUN T, THE ASSESSEE PRODUCED THE FOLLOWING DETAILS:- PURCHASED FROM RELATED (DOMESTIC) AND SALES TO UNRELATED PURCHASED FROM RELATED (IMPORTED) AND SALES TO UNRELATED PURCHASED FROM UNRELATED AND SALES TO RELATED PURCHASED FROM UNRELATED AND SALES TO UNRELATED NET SALES 2,273,015 80,941,169 7,278,000 54,477,855 RAW MATERIALS CONSUMPTIONS 1,569,885 70,670,144 5,166,711 42,047,002 GROSS PROFIT 703,130 10,271,025 2,111,289 12,430,85 3 GP ON SALES 31% 13% 29% 23% IT WAS OBSERVED THAT THE GP IS 23% IN RESPECT OF TR ADING OF GOODS WITH UNRELATED PARTIES WHICH ARE THE UNCONTROLLED TRANSA CTIONS SO IT CONSIDERED THE ARMS LENGTH MARGIN. WHEREAS THE GP IN THE CASE OF I MPORT FROM RELATED PARTIES AND FURTHER SALES TO UNRELATED PARTIES, THE GP MARGIN EARNED BY THE ASSESSEE IS ONLY 13%. ON QUESTION BY THE TPO, THE A SSESSEE DEMONSTRATED THE PRODUCTS IMPORTED AND SOLD FROM RELATED PARTIES AND UNRELATED PARTIES ARE DIFFERENT. HOWEVER THE TPO DISREGARDED THE PLEA OF THE ASSESSEE BY OBSERVING THAT THE ASSESSEE HIMSELF USED RPM FOR AY 2003-04 TO DETERMINE THE ALP OF THE IMPORT TRANSACTIONS WITH. IT IS NOT NECESSARY THAT THE PRODUCT SHOULD BE SIMILAR. IT IS IN THE CUP METHOD, THE EXA CT COMPARABILITY OF THE PRODUCT IS A ESSENTIAL. UNDER THE RPM, THE SIMILARI TY OF THE FUNCTION IS NECESSARY WHICH IS MATCHING I.E. IN BOTH THE CASES OF IMPORTS FROM AE AND NON AE, THE FUNCTIONS PERFORMED ARE TRADING ONLY. BESID ES THE THERE IS NO SUBSTANTIAL VALUE ADDITION BY THE ASSESSEE IN THE T RADING GOODS. HENCE, RPM IS THE MOST APPROPRIATE METHOD IN THE GIVEN FACTS. ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 6 IN VIEW OF THE ABOVE, THE AL GP MARGIN ON SALES IN RESPECT OF IMPORTS IS CONSIDERED AS 23%. AFTER GIVING 5% RELIEF, ADJUSTED ALPO IS 18% ONLY. THE GP MARGIN SHOWN BY THE ASSESSEE IS ONLY 13%. 5. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL TO LD. C IT(A) WHEREAS ASSESSEE SUBMITTED THAT THE TPO REJECTED THE TRANSF ER PRICING STUDY WITHOUT FINDING OUT ANY DEFICIENCY IN IT. THE FINDING OF TH E AO THAT THE ASSESSEE HAS USED THE CPM METHOD IN THE AY 2003-04 IS INCORRECT AS THE ASSESSEE HAS USED ONLY TNMM METHOD FOR THAT YEAR. THE JUSTIFICAT ION GIVEN BY THE AO FOR ADOPTING THE CPM METHOD THAT THE TRANSACTION WITH A E IS LESS THAN 5% OF THE TOTAL VOLUME OF THE BUSINESS IS NOT TENABLE AS HIS LOGIC IS NOT BASED ON ANY PROVISION OF LAW OR ANY PRECEDENT OF CASE. HE HAS A PPLIED THIS LOGIC ON HIS OWN WHIMSY, CONJECTURE, PREMISES. WITHOUT PREJUDICE TO ABOVE THE TPO HAS APPLIED THE CPM METHOD INCORRECTLY WITHOUT DETERMIN ING THE DIRECT AND INDIRECT COST. THE TPO HAS TAKEN ONLY RAW MATERIAL CONSUMPTI ON AND HAS NOT TAKEN THE OTHER COST ASSOCIATED WITH THE PRODUCTION. AS P ER THE CPM METHOD THE PRODUCT SIMILARITY IS ALSO REQUIRED. THE TPO HAS TA KEN THE DISSIMILAR PRODUCTS WHICH ARE HAVING DIFFERENT PROFIT MARGINS. THE TPO ERRED IN TAKING THE GP ON THE COST RATHER HE SHOULD HAVE TAKEN THE GP ON THE SALES. THE TPO ALSO ERRED IN NOT COMPLYING WITH THE PROVISO 2 TO SECTION 92C WHICH STATES THAT WHERE TWO DIFFERENT ALPS ARE WORKED OUT BY USING TWO DIFFEREN T METHODS THEN THE TPO WAS REQUIRED TO WORK OUT THE ARITHMETICAL MEAN OF S UCH PRICES. SIMILARLY THE ASSESSEE SUBMITTED FOR IMPORTED GOODS THAT THE TNMM METHOD WAS USED TO DETERMINE THE ALP IN THE AY 2003-04 AND THE ALLEGATION OF THE TPO THAT THE ASSESSEE HAD USED RPM METHOD FOR DETER MINING THE ALP IS FACTUALLY INCORRECT. THE OBSERVATION OF THE TPO THA T COMPARABILITY OF THE PRODUCT IS NECESSARY IN THE CASE OF CUP METHOD AND NOT UNDER OTHER METHODS IS NOT CORRECT. THE SIMILARITY IN THE PRODUCT IS RE QUIRED FOR THE PURPOSE OF COMPARABILITY IN ORDER TO DETERMINE THE ALP. IN THE INSTANT CASE, THE TPO HAS SELECTED TOTALLY DISSIMILAR PRODUCTS. ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 7 HOWEVER, CONSIDERING THE SUBMISSION OF ASSESSEE AND FACTS OF THE CASE LD. CIT(A) DELETED THE ADDITION MADE BY THE AO BY OBSER VING AS UNDER : 6. I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELL ANT AND PERUSED THE DOCUMENTS FURNISHED IN SUPPORT OF ALP DETERMINED BY THE APPELLANT, RELYING ON TNMM METHOD. THE ASSESSEE FURNISHED BEFO RE ME THE REPORTS PREPARED BY ITS AUDITORS M/S PRICE WATERHOU SE U/S 92CA, FOR THE AYS 20-04 & 2004-05. ON GOING THROUGH TRANSFER PRIC ING REPORTS FOR AY 2003-04 * 2004-05 I FIND THE AUDITORS HAD EXAMINED MERITS & DEMERITS OF VARIOUS METHODS PRESCRIBED IN THE ACT FOR DETERM INATION OF ALP. ON COMPARATIVE ANALYSIS OF THE METHODS PRESCRIBED IN T HE ACT THE AUDITORS PREFERRED TO APPLY TRANSACTIONAL NET MARGIN METHOD (TNMM) FOR DETERMINATION OF ALP IN THE APPELLANTS CASE FOR AY 2003-04 & ALSO AY 2004-05. IT APPEARED FROM THE ORDER PASSED U/S. 93C A(3) FOR THE AY 2003-04 THAT NO ADJUSTMENT WAS PROPOSED IN RESPECT OF APPELLANT HAD JUSTIFIED ALP IN RESPECT OF ITS INTERNATIONAL TRANS ACTIONS WITH AES WITH REFERENCE TO TNMM METHOD. 7. I MAY HOWEVER HASTEN TO ADD THAT TNMM METHOD MAY NOT BE THE APPROPRIATE METHOD TO BE ADOPTED IN ALL CASES. IF T HE CIRCUMSTANCES SO DEMANDED, THE TPO WAS COMPETENT TO EXAMINE THE APPL ICATION OF ALTERNATE METHOD FOR DETERMINING ALPS. HOWEVER, BEF ORE MAKING DEPARTURE FROM A METHOD ADOPTED IN THE EARLIER YEAR ; IT WAS INCUMBENT UPON THE TPO TO ESTABLISH WITH COGENT REASONS THAT EARLIER ACCEPTED METHOD WAS NOT APPROPRIATE. IN THE APPELLANTS CASE THE TDPO REJECTED THE ASSESSEES RELIANCE ON TNMM METHOD ON THE GROUN D THAT IN THE IMMEDIATE PRECEDING YEAR THE ASSESSEE HAD ADOPTED C PM & RPM METHODS FOR DETERMINING ALP WITH AES WHEREAS IN THE YEAR UNDER CONSIDERATION ASSESSEE HAD ADOPTED TNMM METHOD TO J USTIFY ITS TRANSACTIONS WITH AES. IN THE LIGHT O THESE OBSERVA TIONS TPO PROPOSED ADJUSTMENTS TO ALP BY ADOPTING CPM & RPM METHODS WH ICH ACCORDING TO HIM WERE FOLLOWED BY THE ASSESSEE IN THE EARLIER YEAR. IN OTHER WORDS TPO JUSTIFIED ADOPTION OF CPM & RPM METHODS ON THE RULE OF CONSISTENCY & THEREBY REJECTED ASSESSEES TP REPORT WHICH WAS BASED ON TNMM METHOD. IN MY OPINION THE TPO WAS NOT JUSTI FIED IN REJECTING TNMM METHOD FOR THE REASONS SET OUT IN HIS ORDER BE CAUSE IN THE IMMEDIATELY PRECEDING YEAR ALSO, ASSESSEE HAD ADOPT ED THE SAME METHOD; JUSTIFYING ITS INTERNATIONAL TRANSACTIONS W ITH AES BY FOLLOWING TNMM. 8. NOW COMING TO THE MERITS OF THE ADJUSTMENTS CARR IED OUT, I NOTE THAT IN RESPECT OF EXPORTS TO ASSOCIATED ENTERPRISE, TPO PR OPOSED UPWARD REVISION IN THE EXPORT PRICE BY RS.9,68,154/- BECAU SE IN HIS OPINION PROFIT MARGIN DISCLOSED BY THE APPELLANT WAS ONLY 1 8%. I HOWEVER NOTE THE AO WORKED OUT THE GROSS PROFIT MARGIN, TAKING I NTO ACCOUNT ONLY DIRECT MATERIAL CONSUMPTION COST. HE TOTALLY IGNORE D & OVERLOOKED THE ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 8 PRODUCTION OVERHEADS & OTHER DIRECT SELLING COTS WH ICH HAD BEARING ON DETERMINATION OF SELLING PRICE. THE PROFITABILITY I N EXPORT SALE CANNOT BE DETERMINED SOLELY WITH REFERENCE TO COST OF RAW MAT ERIAL CONSUMED. APART FROM COST OF MATERIAL CONSUMPTION, OTHER MANU FACTURING COSTS, OVER-HEADS & SELLING EXPENSES HAVE BEARING ON THE D ETERMINATION OF EXPORT SALE PRICE & CONSEQUENT PROFITABILITY. WHILE DETERMINING ALP OF INTERNATIONAL TRANSACTIONS WITH AES THESE COSTS AND EXPENSES SHOULD HAVES BEEN CONSIDERED BY THE TPO. IN THE PRESENT CA SE, SAVE AND EXCEPT CONSIDERING THE RATIO OF MATERIAL CONSUMPTIO N TO GROSS PROFIT; TPO DID NOT HOWEVER TAKE INTO ACCOUNT OTHER COSTS A ND EXPENSES ASSOCIATED WITH MANUFACTURE & SALE OF GOODS TO NON AES. 9. AS POINTED OUT BY THE A/RS, THE ASSESSEE WAS PAY ING ROYALTY TO ITS PARENT COMPANY @ 2% OF SALES, OTHER THAN SALES MADE TO AES. IN WORKING OUT THE PROFIT MARGIN IN RESPECT OF EXPORTS TO NON AES THE AO THEREFORE SHOULD HAVE TAKEN INTO ACCOUNT IMPACT OF ROYALTY PAYMENT BECAUSE IN CASE OF EXPORTS TO AES; THE ASSESSEE DID NOT BEAR INCIDENCE OF ROYALTY. SIMILARLY, TO OBTAIN EXPORT ORDERS FOR SALE TO NON-AES; ASSESSEE HAD ENGAGED SERVICES OF AGENTS, TO WHOM CO MMISSION WAS PAID. WHEREAS ON EXPORTS TO AES THE ASSESSEE DID NO T BEAR INCIDENCE OF COMMISSION. IN RESPECT OF EXPORTS TO UNRELATED P ARTIES AMOUNTING TO RS.8,07,60,331/-, APPELLANT HAD PAID SALES COMMISSI ON OF RS.35,41,431/-. BESIDES THE SELLING OVERHEADS; TPO DID NOT CONSIDER INCIDENCE OF MANUFACTURING COSTS. IF THE TPO HAD CO NSIDERED DIRECT MATERIAL COST MANUFACTURING COST & SALES OVERHEADS THEN THE COMPARATIVE POSITION IN RESPECT OF EXPORTS TO RELAT ED AND UNRELATED PARTIES WOULD BE AS FOLLOWS: MANUFACTURING DOMESTIC SALES EXPORT TO RELATED UNRELATED NET SALES 2,024,504,485 37,986,395 80,760,331 RAW MATERIAL CONSUMPTION 1,414,761,409 32,271,826 6 3,842,458 MANUFACTURING COST (AS PER LIST ATTACHED) 206,499,457 3,874,612 8,237,554 ROYALTY 2% ON SALES 40,490,090 1,615,207 SALES COMMISSION 34,806,318 3,541,431 ADJUSTED COST 1,696,557,274 36,146,438 77,236,649 GROSS PROFIT 327,947,211 1,839,957 3,523,682 GROSS PROFIT MARGIN 16.20% 4.84% 4.36% 10. FROM THE COMPARATIVE ANALYSIS, IT IS NOTED THAT IF INCIDENCE OF MANUFACTURING COST, ROYALTY ON SALES & COMMISSION W AS TAKEN INTO ACCOUNT THEN ASSESSEES PROFIT MARGIN IN RESPECT OF EXPORTS TO AES WAS HIGHER AT 4.84% AGAINST PROFIT MARGIN OF 4.36% IN R ESPECT OF EXPORTS TO NON AES. IT APPEARED THAT IN HIS ORDER THE TPO TOOK INTO ACCOUNT ONLY THE DIRECT MATERIAL CONSUMPTION COST BUT FAILED TO CONSIDER THE PROPORTIONATE MANUFACTURING COST, ROYALTY & COMMISS ION PAYMENTS. ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 9 FROM THE FACTS AS ARE BROUGHT ON RECORD I FIND FORC E IN THE A/RS ARGUMENT THAT PROFIT MARGIN IN EXPORTS TO AES WAS H IGHER THAN THE PROFIT MARGIN IN EXPORTS TO NON AES. IN HIS REPORT U/S 92C A(3) TPO FAILED TO CONSIDER THE COST & MANUFACTURING SALES OVERHEADS. I HAVE THEREFORE NO HESITATION IN HOLDING THAT TPO DID NOT CORRECTLY WO RK OUT THE ALP IN RESPECT OF EXPORTS TO AES. IF HE HAD TAKEN INTO ACC OUNT THE COSTS AND EXPENSES ASSOCIATED WITH EXPORTS MADE TO UNRELATED PARTIES, THE PROFIT MARGIN OF THE APPELLANT IN EXPORTS TO AES COMPARED FAVOURABLY AS OPPOSED TO PROFIT MARGIN IN EXPORTS TO UNRELATED PA RTIES. FOR THE AFORESAID REASONS THEREFORE I DO NOT FIND MERIT IN THE UPWARD ADJUSTMENTS OF RS.9,68,154/- PROPOSED BY THE TPO IN RESPECT OF EXPORT TO AES. THE ADDITION OF RS.9,68,154/- IS THEREFORE DELETED. 11. WITH REGARD TO APPELLANTS TRADING TRANSACTIONS WITH AES; THE TPO REJECTED ASSESSEES WORKING OF ALP IN RESPECT OF CO ST OF IMPORTS MADE FROM RELATED PARTIES AND SALES MADE TO UNRELATED PA RTIES. ACCORDING TO TPO THE COST OF MATERIALS IMPORTED FROM AES WAS REQ UIRED TO BE ADJUSTED DOWNWARD BY 5%. IN SUPPORT OF HIS CONCLUSI ON, TPO HELD THAT THE APPROPRIATE METHOD OF DETERMINING ALP WAS RPM M ETHOD AND NOT TNMM METHOD. AS NOTED BY ME EARLIER; IN THE AY 2003 -04 ALSO APPELLANT HAD JUSTIFIED ITS TRANSACTIONS WITH AES W ITH REFERENCE TO TNMM METHOD AND NOT RPM METHOD WHICH WAS SPECIFICALLY RE JECTED BY THE AUDITOR, IN ITS REPORT U/S. 92CA. ACCORDING TO TPO IN RPM, MAIN REQUIREMENT WAS THE SIMILARITY OF THE FUNCTIONS PER FORMED. IN HIS OPINION IN CASE OF TRADING BUSINESS; FUNCTIONS PERFORMED WE RE NOT MATERIAL AS THERE IS NO SUBSTANTIAL VALUE ADDITION BY THE ASSES SEE. 12. AFTER CONSIDERING THE SUBMISSIONS OF THE A/R AN D THE ACTS ON RECORD HOWEVER, I FIND THAT THE TPO DETERMINED THE ALP BY MAKING COMPARISON OF DISSIMILAR PRODUCTS WHICH WERE HAVING DIFFERENT END USES & THE PRODUCTS DID NOT MATCH EACH OTHER IN ANY SPECIFIC M ANNER. THE TPO FIRST CONSIDERED PROFIT MARGIN IN MATERIALS IMPORTED FROM AES FOR TRADING PURPOSES WHICH WERE SOLD TO DOMESTIC UNRELATED PART IES WHEREIN THE PROFIT MARGIN WAS FOUND TO BE 13%. THE TPO THEN COM PARED SUCH PROFIT MARGINS WITH ASSESSEES TRADING TRANSACTIONS WHERE BOTH PURCHASES & SALES WERE CARRIED OUT WITH UNRELATED PARTIES. AS P ER THE TPOS WORKING; THE TOTAL PURCHASES (WHICH INCLUDED BOTH IMPORTED & DOMESTIC) FROM UNRELATED PARTIES WAS RS.4,20,47,002/- & TOTAL SALE S TO UNRELATED PARTIES WAS RS.5,44,77,855/- GIVING PROFIT MARGIN OF RS.1,2 4,30,853/- WHICH IN TERMS WAS 23%. IN THE COURSE OF HEARING THE ASSESSE E FURNISHED PRODUCT-WISE BREAK UP OF PURCHASE & SALES WITH UNRE LATED PARTIES & THIS STATEMENT IS ENCLOSED TO THIS ORDER AS ANNEXURE-I. 13. FROM THE COMPARATIVE CHART OF THE TRADING OPERA TIONS FURNISHED IT APPEARED THAT ASSESSEE IMPORTED PRINTING INK FROM A ES AT A COST OF RS.7,06,70,14/- AND SOLD TO LOCAL PARTIES FOR RS.8, 09,41,169/- AND ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 10 EARNED MARGIN OF RS.1,02,71,025/- WHICH IN PERCENTA GE TERM WAS 13%. THE COST OF PURCHASES EFFECTED FROM UNRELATED PARTI ES (DOMESTIC AND IMPORT) WAS ASCERTAINED BY TPO AT RS.4,20,47,002/-. THESE PURCHASES INTER ALIA INCLUDED 3 PRODUCTS VIZ., PRESS CHEMICAL S, BLANKETS & MACHINES. THE PRODUCTS PROCURED FROM UNRELATED PART IES & SOLD TO UNRELATED PARTIES WERE OTHER THAN PRINTING INK. IT APPEARED FROM THE COMPARATIVE STATEMENT THAT PURCHASES FROM UNRELATED PARTIES WERE IMPORTED AS FROM THE COMPARATIVE STATEMENT THAT PUR CHASES FROM UNRELATED PARTIES WERE IMPORTED AS WELL AS SOURCED LOCALLY. PROFIT MARGINS VARIED SUBSTANTIALLY FORM PRODUCT TO PRODUC T AND ALSO DEPENDING WHETHER THE PRODUCT WAS SOURCED LOCALLY O R IMPORTED. FOR EXAMPLE, IN THE CASE OF SALE OF PRESS CHEMICALS, TH E ASSESSEE EARNED PROFIT MARGIN OF 32% FROM LOCALLY SOURCED PRESS CHE MICALS WHEREAS IN THE CASE OF IMPORTED PRESS CHEMICALS PROFIT MARGIN WAS ONLY 14%. IN THE CASE OF IMPORTED BLANKETS SOLD TO UNRELATED PARTIES LOCALLY PROFIT MARGIN WAS 29% AND IN RESPECT OF MACHINES PROCURED LOCALLY & SOLD TO UNRELATED PARTIES LOCALLY PROFIT MARGIN WAS 9%. THE OVERALL PROFIT MARGIN IN TRADING OPERATIONS INVOLVING 3 PRODUCTS OTHER TH AN PRINTING INK WAS 23%. FROM ANALYSIS OF THESE FACTS & FIGURES, I HOWE VER FIND THAT IN RESPECT OF EACH PRODUCT PROFIT MARGINS VARIED SUBST ANTIALLY & PROFIT MARGIN OF 23% DID NOT REPRESENT GP MARGIN OF ANYONE SPECIFIC PRODUCT AND THEREFORE THE TPO WAS NOT JUSTIFIED IN ADOPTING OVERALL GROSS PROFIT RATE FOR MAKING COMPARISON OF PROFIT MARGINS OF DIS SIMILAR PRODUCTS. IT IS SETTLED PROPOSITION OF LAW THAT COMPARISON CAN ONLY BE MADE BETWEEN THE COMPARABLES. BEFORE MAKING COMPARISON OF PROFIT MARGINS OF TWO PRODUCTS, IT WAS NECESSARY FOR THE TPO TO ESTABLISH THAT THE PRODUCTS CONSIDERED FOR COMPARISON MATCHED EACH OTHER AT LEA ST IN THEIR ESSENTIAL ATTRIBUTES. IN THE PRESENT CASE THE TPO COMPARES PR OFIT MARGIN IN RESPECT OF PRINTING INK ON ONE HAND AND COMBINED PR OFIT MARGIN ON SALE OF PRESS CHEMICALS, BLANKETS & MACHINES. THE FACTS NOTED ABOVE HOWEVER ESTABLISHED THAT EACH OF THE 3 PRODUCTS WHI CH WERE PURCHASES & SOLD TO UNRELATED PARTIES; HAD INDEPENDENT AND VA RYING PROFIT MARGINS AND EVEN AMONGST THEN THESE PRODUCTS WERE NOT COMPA RABLE. THE FACTS FURTHER INDICATE THAT PROFIT MARGIN OF PRINTING CHE MICALS SOURCED LOCALLY WAS 31% WHEREAS PROFIT MARGIN FOR IMPORTED PRESS CH EMICALS WAS ONLY14%. THESE FACTS INDICATED THAT EVEN WITHIN THE SAME PRODUCT CATEGORY; PROFIT MARGINS SUBSTANTIALLY VARIED & IN RESPECT OF IMPORTED PRINTING CHEMICALS PROFIT MARGIN WAS 14% WHICH IS C OMPARABLE WITH PROFIT MARGIN OF 13% EARNED BY THE ASSESSEE IN RESP ECT OF TRADING IN IMPORT PRINTING INK. ON CONSIDERING THE TOTALITY OF THE FACTS & CIRCUMSTANCES OF THE CASE THEREFORE I FIND THAT TPO DID NOT APPRECIATE FACTS OF THE CASE IN PROPER PERSPECTIVE BUT MADE CO MPARISON OF PROFIT MARGINS OF DISSIMILAR PRODUCTS HAVING DIFFERENT END USES. THESE PRODUCTS DID NOT COMPARE WITH EACH OTHER IN THEIR E SSENTIAL ATTRIBUTES. EACH PRODUCT PERFORMED DIFFERENT FUNCTIONS OR HAD D IFFERENT END USES AND HAVING REGARD TO DISSIMILARITY OF THE PRODUCTS; THE NET PROFIT MARGINS ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 11 WERE SUBSTANTIALLY DIFFERENT AND THEREFORE PROFIT M ARGINS OF SUCH DISSIMILAR PRODUCTS COULD NOT BE CONSIDERED FOR DET ERMINATION OF ALP. SAVE AND EXCEPT THE REASONS DISCUSSED IN THE ORDER U/S 92AC(3), NEITHER THE AO NOR THE TPO BROUGHT ON RECORD ANY OT HER MATERIAL OR EVIDENCE TO JUSTIFY THE DOWNWARD ADJUSTMENTS IN THE COST OF PRINTING INKS IMPORTED FROM AES. ON THE OTHER HAND, IN THE REPORT S FURNISHED BEFORE THE AO; THE APPELLANT JUSTIFIED ITS TRANSACTIONS WI TH AES BY ADOPTING TNMM METHOD AND NO INFIRMITY IN THE WORKING OF ALP; MADE BY ADOPTING TNMM METHOD WAS PROVED BY THE AO OR THE TPO. IN ABS ENCE OF ANY OTHER ADVERSE MATERIAL OR INFIRMITY IN THE REPORT F URNISHED BY THE ASSESSEE BEFORE AO; I FIND NO JUSTIFICATION IN THE ADJUSTMENTS CARRIED MADE BY THE TPO IN RESPECT OF MATERIAL IMPORTED FRO M AES AND SOLD TO UNRELATED PARTIES. THE ADDITION OF RS.40,47,058/- I S THEREFORE ORDERED TO BE DELETED. 14. SINCE ON THE FACTS OF THE CASE I HAVE HELD THAT ADJUSTMENTS CARRIED OUT BY AO TO THE ALP WITH AES WERE UNJUSTIFIED & TH E RELIEF IS ALLOWED; THE OBJECTIONS RAISE BY THE APPELLANT AGAINST REFER ENCE MADE TO TPO FOR DETERMINATION OF ALP WITHOUT COMPLYING THE CONDITIO NS PRESCRIBED IN THE ACT; ARE NOW OF ACADEMIC INTEREST ONLY. I THEREFORE DO NOT DEEM IT NECESSARY TO ADJUDICATE THE GROUNDS CHALLENGING THE AOS REFERENCE FOR DETERMINATION OF ALP BY THE TPO. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) REVE NUE IS IN APPEAL BEFORE US. 6. BEFORE US LD. DR SUBMITTED THAT THE TPO NOTED TH AT THE ASSESSEE HAS JUSTIFIED ALL THE TRANSACTIONS UNDER THE TNMM. HE F OUND THAT THE VOLUME OF IMPORT AND EXPORT TRANSACTIONS WITH THE AES (RS.10A CRORES) WAS NOT SUBSTANTIAL (LESS THAN 5%) AS COMPARED TO TURNOVER. HE FELT THAT DUE TO THIS SMALL VOLUME, NET PROFIT FROM THE TRANSACTIONS WOUL D NOT GIVE A CORRECT PICTURE FOR COMPARISON. HE CALLED FOR DETAILS OF SEGMENTAL ACCOUNTS UNDER BOTH MANUFACTURING AND TRADING FUNCTIONS VIDE ORDER SHEE T NOTING DATED 04.08.2006 WHICH WERE SUBMITTED ON 01.09.2006 AS NOTED IN ORDE R SHEET NOTING. THESE PROVIDED THE WORKING OF THE GROSS MARGINS OVER SALE S UNDER THE TWO FUNCTIONS. WITH REGARD TO EXPORT TO AES UNDER THE MANUFACTURIN G FUNCTION, THE TPO SELECTED THE CPM AS THE MOST APPROPRIATE METHOD AS HE WAS USING THE GROSS LEVEL MARGINS. HE STRESSED ON FUNCTIONAL SIMILARITY WITH REGARD TO EXPORT TO AES (MARGIN = 18% OVER COST) AND EXPORT TO NON-AES (MAR GIN = 26% OVER COST). ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 12 BASED ON THESE, HE MADE UPWARD ADJUSTMENT TO THE AL P OF THE GOODS EXPORTED TO THE AES FOR RS. RS.9,68,1514.00. WITH REGARD TO THE TRADING FUNCTION, THE TPO NOTED THAT WHILE IN CASE OF PURCHASES MADE FROM UNRELATED PARTIES FOR MAKING SA LES TO UNRELATED PARTIES, THE GROSS LEVEL MARGIN ON SALES WAS 23%. THIS HE CO NSIDERED AS THE ARM'S LENGTH MARGIN FOR TRADING ACTIVITY IN UNCONTROLLED CIRCUMSTANCES AND SELECTED THE RPM AS THE MOST APPROPRIATE METHOD. HE NOTED TH AT IN RESPECT OF IMPORT FROM RELATED PARTIES FOR SALES TO UNRELATED PARTIES , THE GROSS PROFIT MARGIN WAS ONLY 13%. THE ASSESSEE EXPLAINED THAT THE PRODUCTS ARE DIFFERENT. BUT THE TPO WAS OF THE VIEW THAT IN THE RPM, THE MAIN REQUI REMENT IS SIMILARITY OF FUNCTIONS. THUS, HE MADE A DOWNWARD ADJUSTMENT TO T HE PRICE OF THE IMPORTS FROM AES FOR RS. 40,47,058.00. ON RECEIPT OF THESE DETERMINATIONS FROM THE TPO, TH E AO GAVE OPPORTUNITY TO THE ASSESSEE AND THEN PASSED THE ASSESSMENT ORDER O N THE SAME LINES AS PROPOSED IN THE ORDER OF THE TPO. THE ASSESSEE PREF ERRED AN APPEAL BEFORE LD. CIT(A) AND RAISED VARIOUS ARGUMENTS AGAINST THE ADJUSTMENTS TO THE TOTAL INCOME RESULTING FROM THE DETERMINATION OF THE ALP OF INTERNATIONAL TRANSACTIONS. LD.CIT(A) IN PARA 6 & 7 OF THE APPELLATE ORDER HAS HELD THAT THE TPO WAS NOT JUSTIFIED IN REJECTING THE TNMM USED BY THE ASSESSE E. LD. CIT(A) HAS ARRIVED AT THIS VIEW ON THE GROUND THAT THE TPO THOUGHT THA T THE ASSESSEE ITSELF HAD USED CPM AND RPM TO JUSTIFY THE ALP IN EARLIER YEAR AND THAT IS WHY HE REJECTED TNMM ON GROUND OF CONSISTENCY. HE FOUND TH AT THE ASSESSEE HAS USED TNMM IN ITS ANALYSIS AND NOT CPM OR RPM. THIS ASSERTION IS NOT CORRECT. AS MENTIONED ABOVE, THE TPO DID NOT CONSIDER THE TNMM AS THE MOST APPROPRIATE METHOD IN THE CIRC UMSTANCES OF THE ASSESSEE AS ITS INTERNATIONAL TRANSACTIONS WERE LES S THAN 5% OF THE TURNOVER. FURTHER, HE INTENDED TO ANALYZE THE TWO SEGMENTS VI Z. MANUFACTURING AND TRADING SEGMENTS, SEPARATELY. THIS IS CLEARLY MENTI ONED IN THE LAST PARA OF ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 13 PAGE 2 OF THE TPO'S ORDER. THE REFERENCE TO THE USE OF CPM AND RPM IN EARLIER YEAR WAS NOT MADE IN THE CONTEXT OF REJECTI ON OF THE TNMM. IT WAS MADE WHILE JUSTIFYING THESE TWO METHODS AS THE MOST APPROPRIATE METHOD FOR THE TWO RESPECTIVE FUNCTIONS OF THE ASSESSEE. TO AP PRECIATE THIS DISTINCTION, IT IS FELT NECESSARY THAT THE WHOLE PROCESS OF ARRIVIN G AT THE ALP OF AN INTERNATIONAL TRANSACTION IN THE CASE OF THE ASSESS EE BE SUMMARIZED. SECTION 92D REQUIRES ANY PERSON WHO HAS ENTERED INTO AN INT ERNATIONAL TRANSACTION TO KEEP AND MAINTAIN SUCH INFORMATION AND DOCUMENTS IN RESPECT THEREOF AS MAY BE PROVIDED. RULE 10D OF THE IT RULES PRESCRIBES IN A DETAILED MANNER THE INFORMATION AND DOCUMENTS WHICH HAVE TO BE KEPT AND MAINTAINED BY THE ASSESSEE. THE METHODS CONSIDERED FOR DETERMINATION OF THE ALP OF AN INTERNATIONAL TRANSACTION AND THE ACTUAL WORKING OF COMPUTATION OF ALP IS A PART OF SUCH INFORMATION. ON RECEIVING A REFERENCE FROM THE AO U/S 92CA(L) OF THE ACT, THE TPO INITIATED PROCEEDINGS U/S 92CA(2), DURING WHICH THE ASSESSEE SUBMITTED A REPORT PREPARED BY M/S PRICE W ATER HOUSE COOPERS AS PART OF THE DOCUMENTS AND INFORMATION KEPT AND MAIN TAINED BY IT. RULE 10D(E) CASTS A RESPONSIBILITY ON THE ASSESSEE TO KEEP AND MAINTAIN INFORMATION AND DOCUMENTS REGARDING DESCRIPTION OF FUNCTIONS PERFOR MED BY THE ASSESSEE AND ITS AES INVOLVED IN THE INTERNATIONAL TRANSACTIONS. IN THIS CONTEXT, REFERENCE IS MADE TO PART-IV OF THE REPORT SUBMITTED BY THE ASSE SSEE, WHICH CARRIES OUT THE FUNCTIONAL ANALYSIS. PAGES 22 AND 23 OF THIS RE PORT CLEARLY DESCRIBE THE FUNCTIONS PERFORMED AS CONSISTING OF, INTER ALIA, T RADING ACTIVITIES - WHERE THE ASSESSEE IS PURCHASING FOR RESALE AND ACTING AS A N ORMAL DISTRIBUTOR, AND MANUFACTURING ACTIVITIES - WHERE THE ASSESSEE IS CA RRYING OUT NORMAL MANUFACTURING FUNCTION WHICH ALSO INVOLVES IMPORTIN G RAW MATERIALS AND EXPORTING GOODS. FURTHER, AT PAGE 29 OF THIS REPORT , THE ASSESSEE HAS CLEARLY BEING CHARACTERIZED AS AN ENTITY HAVING ROUTINE MAN UFACTURING AND ROUTINE TRADING ACTIVITIES. A COPY OF THESE THREE PAGES IS ATTACHED AS ANNEXURE 1 TO THESE WRITTEN SUBMISSIONS. ONCE THE FUNCTIONAL ANALYSIS HAS BEEN MADE, THE ASS ESSEE IS REQUIRED TO SHOW THAT IT HAS CONDUCTED A COMPARABILITY ANALYSIS AND ALSO AN ANALYSIS OF ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 14 THE METHODS PRESCRIBED FOR DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTIONS. SO FAR AS THE ASSESSEE IS CONCERNED, THIS HAS TO BE DONE IN ACCORDANCE WITH SECTION 92C(1) & (2) OF THE ACT REA D WITH RULE 10B OF THE RULES. SECTION 92C(1) PROVIDES THAT THE ALP OF AN INTERNAT IONAL TRANSACTION IS TO BE DETERMINED BY ANY OF THE METHODS PRESCRIBED THEREIN (CLAUSES (A) TO (F) OF THIS SUB-SECTION), BEING THE MOST APPROPRIATE METHOD, HA VING REGARD TO THE FOLLOWING: (I) THE NATURE OF TRANSACTIONS, OR (II) CLASS OF TRANSACTIONS, OR (III) CLASS OF ASSOCIATED PERSONS, OR (IV) FUNCTIONS PERFORMED BY SUCH PERSONS, OR (V) SUCH OTHER RELEVANT FACTOR AS THE BOARD MAY PRE SCRIBE. 7. FURTHER, SECTION 92C(2) PROVIDES THAT THE MOST A PPROPRIATE METHOD MENTIONED IN SECTION 92C(1) IS TO BE APPLIED IN THE MANNER AS MAY BE PRESCRIBED. IN THIS CONTEXT, RULE 10B DESCRIBES THE MANNER IN WHICH THE EACH METHOD PRESCRIBED IN SECTION 92C(1) IS TO BE APPLIE D AND RULE 10C FURTHER PROVIDES THAT THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTI CULAR TRANSACTION. IT ALSO MENTIONS THE FACTORS WHICH HAVE TO BE TAKEN INTO AC COUNT WHILE SELECTING THE MOST APPROPRIATE METHOD. AS MENTIONED EARLIER, DUTY HAS BEEN CAST ON THE ASS ESSEE TO ANALYSE THE METHODS AND SHOW THE WORKING OF ALP. IN PART-V OF T HE REPORT MENTIONED ABOVE, THE METHODS PRESCRIBED BY THE ACT HAVE BEEN ANALYZED. THE ASSESSEE HAS REJECTED CUP AND THE PSM AND EVEN THE TPO DOES NOT HAVE ANY INFORMATION OR DOCUMENT IN HIS POSSESSION TO APPLY THESE METHODS. THUS, THE ONLY METHODS LEFT FOR ANALYSIS ARE THE CPM, RPM AND TNMM. AS PER RULE 10B(1)(C), CPM HAS TO BE APPLIED TO AN ENTITY WHICH IS INVOLVED IN PRODUCTION OF SOME PROPERTY OR SERVICES. AS THE ASS ESSEE HAS A MANUFACTURING FUNCTION, THIS METHOD CAN BE APPLIED FOR INTERNATIONAL ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 15 TRANSACTIONS CARRIED OUT UNDER THAT FUNCTION. ON PA GE 33 OF THE REPORT, THE ASSESSEE ACCEPTS THAT CPM COULD HAVE BEEN APPLICABL E IN CASE OF EXPORT OF MANUFACTURED GOODS, BUT HAS REJECTED THIS METHOD ON THE GROUND THAT (PARA 5.19): ' ... SINCE EXPORTS TO UNRELATED PARTIES IS VERY SM ALL, HENCE TRYING TO COMPARE MARGINS AT THE GROSS LEVEL FOR RELATED AND UNRELATED PARTY WILL NOT BE CORRECT BECAUSE OF THE VOLUME AND DIFFERENT GEOGRAPHICAL LOCATIONS. ' SIMILARLY, AS PER RULE 10B(1)(B), RPM HAS TO BE APP LIED TO AN ENTITY WHICH IS INVOLVED IN RESELLING OF PROPERTY OR SERVICES PURCH ASED. AS THE ASSESSEE HAS A TRADING FUNCTION, THIS METHOD CAN BE APPLIED FOR IN TERNATIONAL TRANSACTIONS CARRIED OUT UNDER THAT FUNCTION. ON PAGE 34 OF THE REPORT, THE ASSESSEE ACCEPTS THAT RPM COULD HAVE BEEN APPLICABLE IN CASE OF IMPORT OF FINISHED GOODS FOR RESALE IN THE INDIAN MARKET, BUT HAS REJE CTED THIS METHOD ON THE GROUND THAT (PARA 5.22): ' ... SINCE DIC IS ENGAGED IN TRADING OF DIFFERENT CLASSES OF GOODS, THE PROFITABILITY OF WHICH MAY VARY VASTLY (SINCE THE V ARIETY OF PRODUCTS THAT DIC TRADES IN HAS DIFFERENT PROFITABILITY LEVELS), THE MARGINS ON RELATED AND UNRELATED PARTY TRANSACTIONS CANNOT BE COMPARED RELIABLY.' THIS ONLY LEAVES THE TNMM. THE ASSESSEE HAS CONSIDE RED THE TNMM AS THE MOST APPROPRIATE METHOD. HOWEVER, IN APPLYING IT, I T HAS AGGREGATED ALL THE INTERNATIONAL TRANSACTIONS TOGETHER AND COMPARED TH E OPERATING PROFITS IN RELATION TO SALES WITH THOSE OF COMPARABLE ENTITIES SELECTED BY IT. AT THIS JUNCTURE, IT WOULD BE APPROPRIATE TO MAKE A REFERENCE TO RULE 10B(1)(E) WHICH PRESCRIBES THE MANNER IN WHICH TNMM IS TO BE APPLIED. THE RULE CLEARLY MENTIONS THAT IN THIS METHOD, THE NET MARGI N REALIZED FROM AN INTERNATIONAL TRANSACTION IS TO BE COMPUTED IN RELA TION TO A RELEVANT BASE AND THIS IS TO BE COMPARED WITH THE NET MARGIN REALIZED BY THE SAME ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A ONE OR MORE COMPA RABLE UNCONTROLLED TRANSACTIONS. THUS, THE TNMM PRESCRIBED IN RULE 10B (1)(E) IS BASED ON A TRANSACTIONAL ANALYSIS. FURTHER, IN DOING SO, AS PR OVIDED IN SECTION 92C(1) AND ALREADY MENTIONED ABOVE, THE FOLLOWING FACTORS HAVE TO BE TAKEN INTO ACCOUNT: ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 16 (I) THE NATURE OF TRANSACTIONS, OR (II) CLASS OF TRANSACTIONS, OR (III) CLASS OF ASSOCIATED PERSONS, OR (IV) FUNCTIONS PERFORMED BY SUCH PERSONS HOWEVER, THE ASSESSEE HAS NOT APPLIED THE TNMM BY T AKING INTO CONSIDERATION THE NATURE OF TRANSACTIONS (IMPORT OF RAW MATERIALS FOR MANUFACTURING, IMPORT OF FINISHED GOODS FOR TRADING , EXPORT OF FINISHED GOODS FOR TRADING, PAYMENT OF ROYALTY), THE CLASS OF TRAN SACTIONS (EXPORT, IMPORT), THE CLASS OF ASSOCIATED PERSONS (MANUFACTURES, TRADERS, TECHNICAL KNOWHOW PROVIDERS) OR THE FUNCTIONS PERFORMED (MANUFACTURIN G, TRADING). THE ASSESSEE HAS ALSO NOT TAKEN INTO ACCOUNT THE CO MPARABILITY FACTORS PRESCRIBED IN RULE 10B(2) WHICH REQUIRES TAKING INT O ACCOUNT (IN RESPECT TO BOTH CONTROLLED AND UNCONTROLLED TRANSACTIONS): I. CHARACTERISTICS OF THE PROPERTY TRANSFERRED II. FUNCTIONS PERFORMED, ASSETS USED ETC III. CONTRACTUAL TERMS IV. CONDITIONS PREVAILING IN THE MARKETS IN WHICH T HE PARTIES TO BOTH CONTROLLED AND UNCONTROLLED TRANSACTIONS ARE OPERAT ING. IT NEEDS TO BE MENTIONED HERE THAT, THESE REQUIREME NTS ARE COMMON TO ALL THE METHODS DESCRIBED IN RULE 10BB(1). THUS, THE ASSESS EE FAILED TO DRAW ANY DISTINCTION BETWEEN THE INTERNATIONAL TRANSACTIONS CARRIED OUT UNDER THE MANUFACTURING FUNCTION TAKING INTO ACCOUNT ASSETS U SED AND RISKS ASSUMED ON ONE HAND AND INTERNATIONAL TRANSACTIONS CARRIED OUT UNDER THE TRADING FUNCTION TAKING INTO ACCOUNT THE ASSETS USED AND RISKS ASSUM ED. THE TPO EXAMINED THE REPORT SUBMITTED BY THE ASSESS EE. IT NEEDS TO BE HIGHLIGHTED HERE THAT THE AO OR THE TPO IS NOT BURD ENED WITH THE RESPONSIBILITIES MENTIONED IN SECTION 92D READ WITH RULE 10D. SECTION 92C(3) OF THE ACT SIMPLY MENTIONS THAT IF DURING THE COURS E OF PROCEEDINGS, ON THE ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 17 BASIS OF INFORMATION OR DOCUMENTS IN HIS POSSESSION , THE AO OR THE TPO IS OF THE OPINION THAT, INTER ALIA, THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE W ITH SECTION 92C(1) &(2), THEN HE CAN PROCEED TO DETERMINE THE ALP OF THE INT ERNATIONAL TRANSACTION IN ACCORDANCE WITH SECTION 92C(1) & (2) ON THE BASIS O F INFORMATION AND DOCUMENTS AVAILABLE TO HIM. AS MENTIONED EARLIER, THE TPO WAS OF THE VIEW THAT DUE TO THE SMALL VOLUME OF INTERNATIONAL TRANSACTIONS IN RELATION TO THE TURNO VER, NET PROFIT FROM THE TRANSACTIONS WOULD NOT GIVE A CORRECT PICTURE FOR C OMPARISON. FURTHER, HE ALSO WANTED TO LOOK AT THE TWO FUNCTIONS - MANUFACTURING AND TRADING - SEPARATELY. 8. ON THE BASIS OF THE ABOVE, IT IS APPARENT THAT T HE TPO DID NOT REJECT TNMM ON THE BASIS OF ANY REFERENCE TO APPLICATION O F CPM AND RPM IN THE EARLIER YEAR. SECONDLY, EVEN IF THE TNMM IS CONSIDE RED TO BE THE MOST APPROPRIATE METHOD IN THE CIRCUMSTANCES OF THE ASSE SSEE, IT HAS NOT BEEN APPLIED CORRECTLY AS THE FUNCTIONS, ASSETS AND RISK S IN CASE OF MANUFACTURING FUNCTION ARE COMPLETELY DIFFERENT FROM THE FUNCTION S, ASSETS AND RISKS IN CASE OF TRADING FUNCTION. FURTHER, EVEN IN THE CASE OF TNM M, THE APPLICATION IS TRANSACTIONAL - THE TRANSACTIONS ARE TO BE TAKEN SE PARATELY BASED ON THE FACTORS MENTIONED SECTION 92C(1) OF THE ACT. THE REFERENCE TO CPM AND RPM USED IN EARLIER YEAR I .E. AY 2003-04, WAS MADE IN THE CONTEXT OF JUSTIFYING THE PRICE OF THE TRANSACTIONS 'DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO'. IT IS SEEN T HAT DURING PROCEEDINGS BEFORE THE TPO FOR AY 2003-04, THE GROSS MARGINS FO R THE TWO SEGMENTS WERE CALLED FOR, WHICH WERE SUBMITTED BY THE ASSESSEE. O N EXAMINATION, THE TPO FOUND THEY WERE WITHIN RANGE AND HENCE NO ADJUSTMEN TS WERE MADE. AS MENTIONED ABOVE, THIS REFERENCE WAS MADE IN THE CON TEXT OF SELECTION OF THESE TWO METHODS AS THE MOST APPROPRIATE METHODS FOR THE IR RESPECTIVE SEGMENTS AND NOT IN THE CONTEXT OF REJECTION OF THE TNMM. ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 18 IN PARA 8 TO 10 OF HIS APPELLATE ORDER, LD. CIT(A) HAS NEXT TAKEN UP THE ACTUAL APPLICATION OF CPM IN THE CONTEXT OF THE MANUFACTUR ING FUNCTION. IT IS SEEN THAT ON THE BASIS OF DETAILS FURNISHED BY THE ASSESSEE, LD. CIT(A) HAS ARRIVED AT A VIEW THAT VARIOUS COSTS, INCLUDING ROYALTY AND COMM ISSION PAYMENTS WERE NOT INCLUDED WHILE COMPUTING THE COST OF PRODUCTION UND ER THE CPM. AFTER ALLOWING FOR THESE COSTS, LD. CIT(A) FOUND THAT THE MARGINS WOULD NOT LEAD TO ANY ADJUSTMENTS IN THE ALP. IN THIS CONTEXT, IT HAS ALREADY BEEN MENTIONED ABOV E THAT THE DETAILS OF GROSS MARGINS FOR THE TWO SEGMENTS WERE CALLED FROM THE A SSESSEE ITSELF. THE SHEET SUPPLIED BY THE ASSESSEE TO THE TPO IN THIS REGARD IS ENCLOSED AS ANNEXURE 2 TO THIS SUBMISSION. IF ADDITIONAL DETAILS WERE SUBM ITTED BY THE ASSESSEE WITH REGARD TO COMPUTATION OF GROSS MARGINS, THE SAME SH OULD HAVE BEEN REMANDED TO THE AO /TPO FOR COMMENTS. THUS, THE NAT URE OF THESE ADDITIONAL MANUFACTURING COSTS REMAINED UN-EXAMINED FROM THE T PO'S SIDE. FURTHER, IT IS SEEN THAT ROYALTY AND COMMISSION PAYMENTS ARE INCLU DED IN THE COST SIDE FOR SALES TO UNRELATED PARTIES. THESE ARE OPERATIONAL C OSTS AND NOT COSTS OF PRODUCTION. EVEN IF THERE ARE NO SALES, THERE WOULD BE COST OF PRODUCTION AND THE GROSS MARGIN WOULD BE A LOSS, BUT THERE WOULD N OT BE ANY ROYALTY OR COMMISSION PAYMENT ON THE BASIS OF PERCENTAGE OF SA LES. ON THESE GROUNDS, IT IS PLEADED THAT THE DECISION OF LD. CIT(A) IS ER RONEOUS. SO FAR AS THE COMPUTATION OF ALP UNDER THE RPM IN C ASE OF TRADING FUNCTION IS CONCERNED, LD. CIT(A) HAS DEALT WITH IT IN PARA 11 TO 13 OF THE APPELLATE ORDER. THE MAIN ISSUES HIGHLIGHTED THEREIN IS THAT WHEREAS THE ASSESSEE IMPORTED PRINTING INKS FROM THE AES FOR SALE IN DOMESTIC MAR KET, IT PROCURED PRESS CHEMICALS, BLANKETS AND MACHINES FROM UNRELATED PAR TIES FOR RESALE. IN VIEW OF LD. CIT(A), THE MARGINS ON THESE DIFFERENT TYPES OF PRODUCTS ARE DIFFERENT. FURTHER, THERE IS NO INFIRMITY IN THE WORKING OF AL P UNDER TNMM (PARA 13, PAGE 24). ACCORDINGLY, IT WAS HELD THAT THE ADJUSTM ENTS MADE WERE NOT PROPER. ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 19 IN THIS CONTEXT, IT NEEDS TO BE MENTIONED HERE THAT RULE 10B(1)(B) PROVIDES THAT COMPARISON CAN BE MADE WITH PRODUCTS WHICH ARE SIMILAR. IN THAT CASE, COMPARISON COULD HAVE BEEN MADE TO MARGINS EARNED F ROM PRESS CHEMICALS. SECONDLY, THE INFIRMITY IN THE OVERALL APPLICATION OF TNMM TO THE TWO FUNCTIONS HAS ALREADY BEEN POINTED OUT. AS THE ASSESSEE HAS FILED AN APPLICATION UNDER RULE 27 OF THE APPELLATE TRIBUNAL RULES 1963, NO ARGUMENTS ARE MADE AGAINST OTHER OBJECTIONS RAISED BY THE ASSESSEE BEFORE LD. CIT(A) . 9. ON THE OTHER HAND THE LD. AR BEFORE US SUBMITTED THAT THIS APPEAL HAS BEEN PREFERRED BY THE DEPARTMENT AGAINST THE APPELL ATE ORDER PASSED U/S 250/143(3) DATED 17.09.2009 BY THE COMMISSIONER OF INCOME-TAX (APPEALS)- XXXII, KOLKATA ['CIT(APPEALS)']. IN THE COURSE OF L AST HEARING BEFORE THE BENCH, THE ID. DEPARTMENTAL REPRESENTATIVE ['D/R'] FURNISH ED WRITTEN ARGUMENTS OBJECTING TO THE REASONING & FINDINGS GIVEN BY THE ID. CIT(APPEALS) IN HIS APPELLATE ORDER AND SUPPORTING THE TRANSFER PRICING ORDER PASSED BY THE TRANSFER PRICING OFFICER ['TPO']. OUR REBUTTALS & C OMMENTS TO THE SUBMISSIONS FILED BY THE D / R ARE THEREFORE BEING PLACED FOR Y OUR KIND CONSIDERATION AND RECORD. THE ASSESSEE DURING THE RELEVANT YEAR WAS ENGAGED I N THE BUSINESS OF MANUFACTURING, TRADING & SELLING OF PRINTING INKS, INDUSTRIAL ADHESIVE AND OTHER ALLIED PRODUCTS. IN THE RELEVANT YEAR THE ASSESSEE HAD THE FOLLOWING TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES ('AES' ). SL NO. NATURE OF TRANSACTION AMOUNT (IN INR) METHOD USED (A) IMPORT OF PRODUCTS FOR TRADING 40.44 MILLION TN MM (B) IMPORT OF MATERIALS FOR MANUFACTURING 27.40 MILLION TNMM EXPORT OF MANUFACTURED GOODS 37.63 MILLION TNMM (D) COMMISSION RECEIVED 0.24 MILLION TNMM ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 20 (E) ROYALTY PAID 30.68 MILLION TNMM ALL THE ABOVE TRANSACTIONS WERE BENCHMARKED APPLYIN G THE TNMM METHOD PRESCRIBED IN SECTION 92C OF THE INCOME-TAX ACT, 19 61. IN THE ORDER PASSED U/S 92CA(3) THE TPO FOUND THE TRANSACTIONS MENTIONE D AT SI. NO. (B), (D) & (E) BENCHMARKED APPLYING THE TNMM METH TO BE 'AT ARMS LENGTH (ALP). HOWEVER AS REGARDS THE EXPORT OF MANUFACTURED PRODU CTS & IMPORT OF VARIOUS GOODS FOR TRADING, THE TPO REJECTED THE ASSESSEE'S COMPUTATION AND EVALUATION OF ARM'S LENGTH PRICING. THE TPO WITHOUT POINTING OUT ANY DEFECT IN THE BENCHMARKING EXERCISE OR IN THE REASONS STATED BY THE TRANSFER PRICING AUDITOR IN THE TRANSFER PRICING REPORT FOR TAKING T HE TNMM METHOD TO BE THE MOST APPROPRIATE METHOD BALDLY ALLEGED THAT SINCE T HE VOLUME OF IMPORT & EXPORT TRANSACTIONS WITH THE AES WAS NOT SUBSTANTIA L (BEING LESS THAN 5%), TNMM METHOD WAS NOT RELIABLE. APART FROM THE FOREGO ING RESERVATION WHICH IS CLEARLY NOT THE DECISIVE PARAMETER FOR CHOOSING THE MOST APPROPRIATE METHOD, THE TPO IN THE ENTIRE TRANSFER PRICING ASSESSMENT F RAMED IX] S 92CA(3) FAILED TO POINT OUT ANY INFIRMITY OR FALLACY IN THE BENCHM ARKING EXERCISE OR THE COMPARABLES USED BY THE ASSESSEE. EVEN IN HIS WRITT EN ARGUMENTS THE D/R HAS MERELY REITERATED THE TPO'S STAND THAT SINCE TH E VOLUME OF THE IMPORT & EXPORT TRANSACTIONS WAS NOT SUBSTANTIAL THE TNMM ME THOD WAS NOT SUITABLE. IN THIS REGARD IT IS SUBMITTED THAT NOWHERE DOES RU LE 10B OF THE I.T. RULES, 1962 REQUIRE THAT THE VOLUME OF THE TRANSACTIONS CO NDUCTED WITH AES IS A RELEVANT OR DECISIVE PARAMETER FOR APPLICATION OF T NMM METHOD. REFERENCE IN THIS REGARD MAY BE MADE TO RULE 10C WHICH LAYS DOWN THE DECISIVE PARAMETERS TO DETERMINE THE MOST APPROPRIATE METHOD . THE RELEVANT EXTRACTS ARE AS FOLLOWS: MOST APPROPRIATE METHOD (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRANS ACTION OR THE SPECIFIED DOMESTIC TRANSACTION; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAK ING INTO ACCOUNT ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 21 ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF D ATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN TH E INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION] AND THE UNCONTROLLED TRANSACTION AND BETWEEN THE ENTERPRISES ENTERING IN TO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUS TMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INT ERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INT O SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIO NS REQUIRED TO BE MADE IN APPLICATION OF A METHOD.' NOWHERE DOES IN THE ABOVE CLAUSE HAS THE VOLUME OR VALUE OF TRANSACTION IS MENTIONED AS THE DECISIVE OR RELEVANT CRITERIA TO E XAMINE THE APPROPRIATENESS OF ANY OF THE METHODS. ON THE OTHER HAND AT PAGES 3 3 & 34 OF THE TRANSFER PRICING REPORT [PAGES 55 & 56 OF THE PAPER BOOK], T HE TRANSFER PRICING AUDITOR HAS ELABORATELY STATED AS TO WHY THE CP METHOD & TH E RP METHOD COULD NOT BE APPLIED FOR BENCHMARKING THE ASSESSEE'S TRANSACT IONS WITH AES AND HAS JUSTIFIED THE APPLICATION OF TNMM METHOD. THEREFORE THE CONTENTION OF THE TPO & ARGUMENT OF THE D/R THAT BENCHMARKING EXERCISE CA RRIED BY THE ASSESSEE WAS NOT RELIABLE SINCE THE VOLUME OF THE IMPORT & E XPORT TRANSACTIONS WERE NOT SUBSTANTIAL IS ERRONEOUS AND BAD IN LAW. IT IS IMPERATIVE TO MENTION THAT THE TPO DID NOT DI SPUTE THE BENCHMARKING OF COMMISSION INCOME & ROYALTY PAYMENT UNDER THE TNMM METHOD ADOPTED BY THE ASSESSEE; JUSTIFYING TO BE ALP. THE COMMISSION PROCEEDS REPRESENTED ONLY A FACTION OF THE TOTAL TURNOVER OF THE ASSESSE E. THE TPO HOWEVER DID NOT DISPUTE THE APPLICATION OF TNMM METHOD FOR BENCHMAR KING THE COMMISSION INCOME. SIMILARLY ROYALTY PAYMENT OF RS.30.68 MILLI ON TO AE WAS ONLY 1.21% OF THE TOTAL EXPENSES DEBITED TO P&L AI C. EVEN THIS T RANSACTION WAS ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 22 BENCHMARKED APPLYING TNMM METHOD. THE TPO ACCEPTED THE ASSESSEE'S BENCHMARKING EXERCISE AND THE APPLICATION OF TNMM M ETHOD IN RESPECT OF ROYALTY PAYMENT WAS ACCEPTED AS WELL. IN THE CIRCUM STANCES THE ASSESSEE FAILS TO UNDERSTAND THAT IF THE APPLICATION OF TNMM WAS FOUND JUSTIFIABLE BY THE TPO IN RESPECT OF COMMISSION RECEIVED AND ROYALTY P AID WHICH WERE ADMITTEDLY LESS THAT 5% OF THE TOTAL TURNOVER EXPEN SES THEN WHY ONLY THE TRANSACTIONS REFERRED TO IN (A.) & (C) OF THE ABOVE CLIENT THE TPO & THE D/R FOUND THE SAME TNMM TO BE INAPPROPRIATE ON THE GROU ND THAT THESE WERE NOT SUBSTANTIAL. SUCH SELECTIVE &; CONTRADICTORY APPROA CH ADOPTED BY THE TPO WAS THEREFORE UNJUSTIFIED AND BAD IN LAW. THIS FURT HER PROVES THAT THE ALLEGATION OF THE TPO THAT TNML METHOD COULD NOT BE APPLIED TO IMPORTS I EXPORTS FROM AES SINCE IT CONSTITUTED LESS THAN 5% OF TOTAL TURN OVER WAS EX-FACIE FALLACIOUS. IT IS ALSO PERTINENT TO MENTION THAT SIMILAR QUANTU M OF IMPORTS/EXPORTS FROM AES WERE MADE IN THE EARLIER AY 2003-04 AND THE SUBSEQU ENT YEARS AS WELL. EVEN IN THE PRECEDING AY 2003-04 AND THE SUBSEQUENT AY 2 006-07 & ONWARDS, VALUE OF IMPORT/ EXPORT TRANSACTIONS WITH AES WAS N EAR ABOUT 5% OF THE TOTAL TURNOVER. HOWEVER NEITHER IN THE TP ORDER FOR THE E ARLIER YEAR NOR IN TRANSFER PRICING ORDERS FOR AYS 2006-07 & ONWARDS; THE APPLI CATION OF TNMM METHOD WAS REJECTED BY TPO ON THE GROUND THAT THE VALUE OF INTERNATIONAL TRANSACTIONS WITH AES WAS LESS THAN 5% OF TOTAL TURNOVER. THE AS SESSEE SUBMITS THAT PRINCIPLE OF RES JUDICATA THOUGH NOT STRICTLY APPLICABLE IN TAX PROCEEDINGS; YET THE ESTABLISHED RULE OF CONSISTENCY MUST ALSO BE FO LLOWED ON FACTUAL MATTERS PERMEATING THROUGH THE YEARS. IT IS A WELL SETTLED LEGAL POSITION THAT FACTUAL MATTERS WHICH PERMEATE THROUGH MORE THAN ONE ASSESS MENT YEAR, IF THE REVENUE HAS ACCEPTED A PARTICULAR VIEW OR PROPOSITI ON IN THE PAST, IT IS NOT OPEN FOR THE REVENUE TO TAKE A ENTIRELY CONTRARY OR DIFFERENT STAND IN A LATER YEAR ON THE SAME ISSUE, INVOLVING IDENTICAL FACTS U NLESS AND UNTIL A COGENT CASE IS MADE OUT BY THE AO ON THE BASIS OF CHANGE I N FACTS, POSITION OR IN LAW. IN FACT EVEN THE TPO IN HIS ORDER HIMSELF HAS ADVOC ATED THE PRINCIPLE THAT CONSISTENT METHOD SHOULD BE APPLIED OVER THE YEARS AND THE ASSESSEE CANNOT CHANGE THE METHOD EVERY YEAR WHERE THE FACTS & THE TRANSACTIONS WITH AES ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 23 ARE THE SAME. FOR THIS PURPOSE THE TPO HAS REFERRED THE PROCEEDINGS BEFORE HIS PREDECESSOR FOR AY 2003-04 WHO HAD ALLEGEDLY AD OPTED RPM & CPM FOR DETERMINING ALP IN AY 2003-04. THE OBSERVATIONS OF THE TPO AT PAGES 3 & 5 OF THE TP ORDER [PAGES 122 & 124 OF THE PAPER BOOK] ARE HOWEVER FACTUALLY INCORRECT. COPY OF THE TP STUDY FOR AY 2003-04 IS A T PAGES 126 TO 225 OF PAPER BOOK AND ORDER II] 92CA(3) FOR AY 2003-04 IS AT PAGE 226 OF PAPER BOOK. IT WILL BE NOTED FROM PAGES 154 TO 161 OF THE PAPER BOOK [PAGES 24 TO 31 OF TP STUDY] THAT EVEN IN THE AY 2003-04 THE TP AUDITOR HAD JUSTIFIED TNMM TO BE THE MOST APPROPRIATE METHOD AND IN THE T P ORDER FOR AY 2003-04 NO ADJUSTMENT WAS PROPOSED. IT IS THEREFORE SUBMITT ED THAT THE REJECTION OF TNMM METHOD APPLIED BY THE ASSESSEE ON THE GROUND T HAT THE VOLUME OF IMPORT & EXPORT TRANSACTIONS WITH THE AES WERE NOT SUBSTANTIAL IS TOTALLY UNWARRANTED AND INCORRECT. THE ASSESSEE FURTHER SUBMITS THAT BOTH THE TPO AND THE D/R HAVE SINGULARLY FAILED TO EXPLAIN AS TO WHY AND ON WHAT BASIS ANY O F THE OTHER FOUR METHODS PRESCRIBED IN SECTION 92C( 1) WAS FOUND OR CONSIDER ED MORE SUITABLE OR FOR THAT MATTER MORE RELIABLE THAN THE TNMM METHOD. IT APPEARS FROM THE TO ORDER THAT THE TPO PROCEEDED TO ARBITRARILY APPLY T HE ' COST PLUS METHOD ' FOR BENCHMARKING 'EXPORT OF MANUFACTURED GOODS' AND ' RESALE PRICE METHOD ' FOR 'TRADING OF VARIOUS GOODS'. THE TPO MADE FACTUA LLY INCORRECT STATEMENT IN THE IMPUGNED ORDER FOR HOLDING THAT 'CP METHOD' AND THE 'RP METHOD' WERE THE MOST SUITABLE METHODS FOR BENCHMARKING 'EXPORT OF MANUFACTURED GOODS' AND 'TRADING OF VARIOUS GOODS' RESPECTIVELY. THE TP O IGNORED THE FACT THAT BOTH OF THE AFORESAID METHODS FAILED TO SATISFY THE DECISIVE PARAMETERS LAID DOWN IN RULE 10B OF I.T. RULES, 1962 WHICH WERE REL EVANT & PERTINENT BEFORE PROCEEDING TO APPLY THESE METHODS. ON PAGES 55 & 56 OF THE PAPER BOOK [ PAGES 33 & 34 OF THE TRANSFER PRICING REPORT FOR FY 2003-04 ] THE TRANSFER PRICING AUDITOR HAS ELABORATELY SET OUT THE REASONS AS TO WHY THE CP METHOD & THE RP METHOD COULD NOT BE APPLIED FOR BENCHMARKI NG THE ALP. THE TPO HOWEVER FAILED TO DISTINGUISH THE REASONING FURNISH ED BY THE TRANSFER PRICING AUDITOR AND ARBITRARILY APPLIED CP METHOD & RP METH OD. FURTHERMORE EVEN THE ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 24 BENCHMARKING EXERCISE CONDUCTED BY THE TPO SUFFERED FROM FACTUAL INACCURACIES INFIRMITIES WHICH THEREFORE YIELDED IN CORRECT RESULTS. THE PRIMARY REASON CITED BY THE TPO FOR APPLYING CP METHOD & RP METHOD FOR BENCHMARKING 'EXPORT OF MANUFACTURED GOODS' AND 'TRADING OF VARIOUS GOODS' WAS THAT THE ASSESSEE HIMSELF ADOPTED THE AF ORESAID TWO METHODS IN THE IMMEDIATE PRECEDING YEAR I.E. AY 2003-04. THE R ELEVANT EXTRACTS OF THE TPO ORDER IS AS FOLLOWS: 'THE ASSESSEE HIMSELF USED CPM/ RPM FOR AY 2003-04 TO JUSTIFY ITS EXPORT TRANSACTIONS WITH AE DURING THE COURSE OF PR OCEEDINGS BEFORE THE TPO. NOW, THIS YEAR WHEN THE RESULTS ARE NOT IN FAV OUR THE ASSESSEE, IT CANNOT TURN BACK AND FIND FAULTS WITH THE APPROPRIA TENESS OF THE METHOD.' IT IS CLEARLY EVIDENT FROM THE ABOVE THAT THE TPO P ROCEEDED TO APPLY CP METHOD & RP METHOD ON THE PREMISE THAT THE ASSESSEE ITSELF BENCHMARKED ITS TRANSACTIONS USING THIS METHOD IN THE EARLIER YEAR AND THEREFORE IN THE RELEVANT YEAR THE ASSESSEE COULD NOT TURN AROUND AND QUESTIO N THE APPROPRIATENESS OF THIS METHOD. THIS OBSERVATION OF THE TPO IS PATENTL Y WRONG AND CONTRARY TO THE JURISDICTIONAL FACTS ON RECORD. THE ASSESSEE HAS PL ACED ON RECORD THE TRANSFER PRICING REPORT FOR AY 2003-04 [ PAGES 126 TO 225 OF PAPER BOOK] AND ALSO THE TRANSFER PRICING ORDER PASSED U/S 92CA(3) IN AY 200 3-04 AT PAGES 226 OF THE PAPER BOOK. ON PERUSAL OF PAGES 24 TO 31 OF TP STUD Y [PAGES 154 TO 161 OF PAPER BOOK] IT SHALL BE NOTED THAT THE ASSESSEE HAD APPLIED TNMM METHOD TO BENCHMARK ALL ITS INTERNATIONAL TRANSACTIONS IN AY 2003-04. THE ALLEGED FINDING OF THE TPO THAT THE ASSESSEE FOLLOWED CP METHOD & R P METHOD IN EARLIER YEAR IS THEREFORE FACTUALLY INCORRECT. EVEN THE D/R IN HIS WRITTEN ARGUMENTS HAS REITERATED THAT THE ASSESSEE HAD ADOPTED THE CP MET HOD & RP METHOD IN THE IMMEDIATE PRECEDING AY 2003-04. THIS SHOWS THAT EVE N THE D/R FAILED TO TAKE NOTE OF THE BASIC JURISDICTIONAL DOCUMENTS OF AY 20 03-04 WHICH WERE ADMITTEDLY BEFORE HIM IN THE FORM OF PAGES NOS. 126 TO 225 OF THE PAPER BOOK. THE ID. D/ R ALSO DID NOT CARE TO TAKE NOTE OF THE CATEGORICAL FINDINGS OF THE ID. CIT(APPEALS) AT PAGES 18 & 19 OF HIS ORDER WHERE HE HAD CLEARLY STATED THAT IN THE EARLIER YEAR THE ASSESSEE HAD JUSTIFIED ALP OF HIS TRANSACTIONS WITH AES ON ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 25 TNMM METHOD. THIS SHOWS THE NON-APPLICATION OF MIND BY THE D/R TO THE FACTS INVOLVED IN THE PRESENT CASE. THE ASSESSEE THEREFOR E SUBMITS THAT THE BASIC PREMISE OF THE TPO'S CONTENTION WHICH IS SUPPORTED BY THE D/R IN HIS ARGUMENTS ARE FACTUALLY INCORRECT AND PATENTLY WRON G. THE ASSESSEE REITERATES THAT IT HAD APPLIED TNMM METHOD TO JUSTIFY THE ARM' S LENGTH PRICE IN AY 2003- 04 AND NOT THE CP OR RP METHOD AS ALLEGED. 9. AT PAGE 2 OF HIS WRITTEN ARGUMENTS BY THE D/R; H AS FURTHER STATED THAT THE TPO DID NOT REJECT THE TNMM METHOD ON THE GROUN D THAT CP METHOD & RP METHOD WAS USED BY THE ASSESSEE IN EARLIER YEAR. IN D/R'S VIEW THEREFORE THE ID. CIT(APPEALS)'S FINDINGS TO THAT EXTENT WAS ERRO NEOUS. THE D/R HAS JUSTIFIED THE TPO'S ORDER BY STATING THAT THE REFERENCE TO TH E USE OF CPM & RPM IN EARLIER YEAR WAS MADE NOT TO REJECT THE TNMM BUT TO JUSTIFY THE TPO'S FINDINGS THAT THE ALTERNATE METHODS I.E. RPM & CPM WERE MOST APPROPRIATE METHODS THAN TNMM. THE APPELLANT SUBMITS THAT THE STATEMENT OF THE D/R IS SELF CONTRADICTORY AND BASED ON TWISTED LOGIC. IT SEEMS TO BE A PLOY OR RUSE TO CREATE UNNECESSARY & UNWARRANTED CONFUSION IN THE M INDS OF THE HON'BLE MEMBERS. ON ONE HAND THE D/R ADMITS THAT THE REFERE NCE TO EARLIER YEAR'S TP ORDER WAS TO JUSTIFY APPLICATION OF CP & RP METHOD BUT THEN CONTRADICTS HIMSELF BY STATING THAT SUCH REFERENCE WAS NOT MEAN T TO REJECT THE TNMM. UNDERSTANDABLY THE TPO COULD NOT HAVE APPLIED BOTH TNMM & CPM/RPM TO BENCHMARK THE TRANSACTIONS. IN ORDER TO APPLY CPM/R PM, THE TPO HAD TO FIRST REJECT TNMM SPECIFICALLY ADOPTED BY THE ASSESSEE I N ITS TP REPORT AND ONLY THEN HE COULD HAVE PROCEEDED TO APPLY ALTERNATE MET HODS. FROM BARE PERUSAL OF THE TPO'S ORDER AND ALSO FROM THE D/R'S ARGUMENT S, IT IS CLEAR THAT THE REFERENCE TO EARLIER YEAR WAS MADE TO JUSTIFY CPM/R PM; AND AS A COROLLARY TO REJECT TNMM. THE TPO CLEARLY STATES THAT IN THE YE AR IN QUESTION LE AY 2004- 05 THAT HE IS APPLYING CPM RPM SINCE THE SAID METH OD WAS FOLLOWED IN EARLIER YEAR AND THEREFORE REJECTED THE APPLICATION OF TNMM. THE ARGUMENT OF THE D/R THAT THE ID. CIT(APPEALS) WRONGLY ASSERTED THAT THE TPO HAD REJECTED ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 26 THE TNMM BECAUSE THE ASSESSEE HAD APPLIED CPM/RPM IN EARLIER YEAR IS CLEARLY UNTENABLE AND INCORRECT. 9.1 FROM THE WRITTEN ARGUMENTS, IT IS FURTHER STATE D THAT THE ID. D/R HAS NOT BEEN ABLE TO DISLODGE THE CIT(A) 'S FACTUAL FINDING WHICH ON THE FACTS INVOLVED IN THE ASSESSEE'S CASE HE HAD HELD THAT CP METHOD & RP METHOD WAS INCORRECTLY APPLIED BY THE TPO. THE CIT(A) IN HIS H AND POINTED OUT SPECIFIC FACTUAL FALLACIES OR INFIRMITIES COMMITTED BY THE O AND ON ACCOUNT OF WHICH THE CIT(A) HAD HELD THAT ALP AS DETERMINED HE TPO, BY F OLLOWING RPM & CPM DID NOT REPRESENT TRUE & CORRECT ALP. IN THE ARGUME NTS, PLACED BEFORE THE ITAT AT PAGE 6, THE D/R SHRUGGED OFF THE TPO'S RESP ONSIBILITY TO JUSTIFY ADOPTION OF ANOTHER METHOD VIS-A-VIS THE NOD ADOPTE D BY THE ASSESSEE. AT PAGE 6 OF HIS WRITTEN ARGUMENTS REFERRING SECTION 9 2C(3) OF THE ACT, LD. D/R HAS STATED THAT THE TPO IS ONLY REQUIRED TO FIRM OP INION THAT THE PRICE CHARGED BY THE ASSESSEE IS NOT IN ACCORDANCE WITH RELEVANT PROVISIONS AND / OR METHODS AND THEN HE CAN STRAIGHTAWAY PROCEED IMPUTE THE CORRECT ARM'S LENGTH PRICE. THE D/R IN HIS SUBMISSION HAS ARGUED THAT THE AO OR THE TPO WERE NOT OBLIGED TO DISCHARGE THE RESPONSIBILITY CA LL THEM BY THE SPECIFIC PROVISIONS OF SECTION 92D READ WITH RULE 10D. IN HI S MISSIONS THE ID. D/R HAS TRIED TO MAKE OUT A CASE THAT THE AO OR TPO ARE REQ UIRED TO JUSTIFY THE ARM'S LENGTH PRICE WITH REFERENCE TO THE CORRECT FACTS TR ANSACTIONAL DOCUMENTS OF THE ASSESSEE. GOING BY D/R'S LOGIC, THE AO 01: TPO HAS UNLIMITED, UNSPECIFIED AND UNBRIDLED POWERS TO REJECT THE BENCH-MAKING EXE RCISE CARRIED OUT BY THE ASSESSEE WITHOUT EVEN THE NEED TO SUBSTANTIATE IT W ITH REFERENCE TO THE TRUE FACTS, DETAILS & DOCUMENTS OF THE ASSES SUCH ARGUME NT OF THE D/R IS BLATANTLY ERRONEOUS AND CONTRARY TO THE PROVISIONS OF LAW AND ALSO THE PRINCIPLES OF NATURAL JUSTICE. BEFORE THE ID. CIT(APPEALS), THE ASSESSEE WITHOUT P REJUDICE TO ITS PRIMARY CONTENTION THAT TNMM METHOD WAS IN MOST APPROPRIATE METHOD HAD SUCCESSFULLY MADE OUT THE CASE THAT EVEN THE CP MET HOD & RP METHOD WAS APPLIED TO THE ASSESSEE'S CASE, EVEN THEN INTERNATI ONAL TRANSACTIONS WITH ITS AES WERE AT ARM'S LENGTH. IN SUPPORT OF INVESTMENTS THE ASSESSEE HAD RELIED ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 27 ON THE FACTS & FIGURES WHICH WERE AVAILING THE AUDI TED ACCOUNTS. THE ID. CIT(APPEALS) AFTER CONSIDERING THE EXPLAINS & CALCU LATIONS FURNISHED BY THE ASSESSEE ACCEPTED ITS CONTENTION AND THE: DELETED T HE UPWARD ADJUSTMENT PROPOSED BY THE TPO ON BEING SATISFIED T FACTUALLY THE TPO HAD WRONGLY COMPUTED THE ALP BECAUSE HE HAD NOT TAKEN INTO ACCO UNT THE TRUE; CORRECT AND THE RELEVANT FACTS. 9.2 THE LD. D/R IN HIS WRITTEN ARGUMENTS HAS BIER T RIED TO FIND FAULTS & ERRORS IN THE AFORESAID BENCHMARKING EXERCISED OUT BY THE CIT(APPEALS). THE ALLEGATIONS LEVELLED BY THE LD. D/R IN HIS WRITTEN ARGUMENTS ARE UNJUSTIFIED BOTH ON FACTS & IN LAW AT PAGE 7 OF HIS SUBMISSIONS THE LD. D/R HAS POINTED OUT ALLEGED FAULTS COMMITTED BY THE ID. CIT(APPEALS) WH ILE APPLYING CP METHOD & RP METHOD TO THE EXPORT OF MANUFACTURED PRODUCTS & TRADING OF VARIOUS GOODS RESPECTIVELY. IN THE FIRST INSTANCE, WE DEAL WITH THE ALLEGATIONS IN RESPECT OF BENCHMARKING OF THE ' EXPORT OF MANUFACTURED GOODS ' TO AES BY APPLYING THE CPM. ON PAGE 7 OF HIS ARGUMENTS THE LD. D/R HAS ALLEGED THAT THE ASSESSEE FILED DIFFERENT STATEMENTS OF ' GROSS PROFIT ' MARGIN BEFORE THE TPO AND THE ID. CIT(APPEALS). IT IS THE LD. D/R'S CONTENTION THAT THE DIFFERENT C ALCULATION SHEET FURNISHED BEFORE THE LD. CIT(APPEALS) WAS IN THE NATURE OF A DDITIONAL EVIDENCE AND THE AO /TPO WAS NEVER CONFRONTED WITH THESE FACTS & FIG URES FOR THEIR COMMENTS. IN THIS REGARD, IT IS SUBMITTED THAT THE OBSERVATIO NS OF THE LD. D/R ARE MISLEADING, ERRONEOUS & UNJUSTIFIED. AT THIS JUNCTU RE, IT WOULD BE RELEVANT TO PLACE BEFORE THE ITAT THE CORRECT FACTS IN THEIR PR OPER PERSPECTIVE. IN THE TRANSFER PRICING ASSESSMENT PROCEEDINGS U/S 92CA(3) , THE ASSESSEE HAD SUBMITTED THE DETAILS/ EXPLANATIONS JUSTIFYING THE APPLICATION OF TNMM TO BENCHMARK EXPORT OF MANUFACTURED GOODS TO AES. IN THE COURSE OF TP PROCEEDINGS THE TPO HOWEVER REQUIRED THE ASSESSEE T O FURNISH THE DETAILS OF SALES & PURCHASES OF BOTH TRADED GOODS & MANUFACTUR ED GOODS AND THE CONSEQUENTIAL GROSS MARGINS EARNED BY IT. THE TPO D ID NOT CALL FOR THE 'COST SHEET' OR THE COMPLETE ' COST WORKING ' OF THE MANUFACTURED GOODS WHICH WERE EXPORTED TO AES BUT ONLY REQUIRED THE ASSESSEE TO F URNISH THE DETAILS OF COST OF ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 28 RAW MATERIALS CONSUMED. THE TPO DID NOT CITE ANY RE ASONS FOR WHICH HE HAD SOUGHT THESE DETAILS. IN COMPLIANCE WITH THE DIRECT IONS OF THE TPO THE ASSESSEE FURNISHED THE BREAK-UP OF SALES MADE IN TH E MANUFACTURING & TRADING OPERATIONS TO BOTH RELATED & UNRELATED PARTIES. COR RESPONDING DETAILS OF THE COST OF MATERIALS CONSUMED VIS-A-VIS VALUE OF FINIS HED GOODS EXPORTED WERE ALSO FURNISHED IN RESPONSE TO TPO'S REQUISITION. TH E TPO NEVER INFORMED THE ASSESSEE THAT HE HAD DECIDED TO APPLY CP METHOD NOR HE REQUIRED THE ASSESSEE TO FURNISH RELEVANT DATA TO COMPARE THE GR OSS PROFIT MARGINS. IN FACT EVEN AFTER OBTAINING THE DETAILS OF SALES & COST OF RAW MATERIALS, THE TPO NEVER ISSUED ANY 'SHOW CAUSE' NOTICE REQUIRING THE ASSESSEE TO FURNISH THE STATEMENT GIVING DETAILS OF DIRECT & INDIRECT COSTS , FACTORY OVERHEADS AND POST MANUFACTURING EXPENSES INCURRED IN RELATION TO ITS EXPORTS TO AES & NON-AES. THE TPO ALSO NEVER SHOW CAUSED THE ASSESSEE TO EXPL AIN AS TO WHY TNMM SHOULD BE REJECTED OR FOR THAT MATTER WHY CPM SHOUL D NOT BE APPLIED TO ITS CASE. THE ASSESSEE WAS KEPT IN COMPLETE DARK AND WA S NEVER INFORMED BY THE TPO THAT HE WAS PROPOSING TO BENCHMARK THE ALP APPL YING CP METHOD. IT IS ONLY AFTER THE ASSESSEE RECEIVED THE TPO'S ORDER U/ S 92CA(3) THAT THE ASSESSEE BECAME AWARE THAT THE TPO HAD CHOSEN TO AR BITRARILY APPLY THE CPM METHOD IN RESPECT OF EXPORT OF MANUFACTURED GOO DS. THE TPO WHILE APPLYING THE CP METHOD SUO MOTO EQUATED THE 'GROSS MARGINS' AS BEING DIFFERENCE BETWEEN THE EXPORT SALES VALUE & CORRESP ONDING COST OF RAW MATERIALS CONSUMED. FROM THE PLAIN READING OF THE T O ORDER IT APPEARS THAT THE TPO WAS OF THE CONSIDERED OPINION THAT ' GROSS PROFIT MARGIN ' WAS THE DIFFERENCE BETWEEN THE EXPORT SALES VALUE & COST O F RAW MATERIALS CONSUMED AND NO OTHER ASSOCIATED COSTS WAS REQUIRED TO BE CO NSIDERED IN ARRIVING AT THE G.P. MARGIN. THE TPO WAS ALL ALONG WELL AWARE THAT HE HAD CALLED FOR ONLY THE DETAILS OF EXPORT SALES & CORRESPONDING COST OF RAW MATERIALS CONSUMED. TPO CONSCIOUSLY DID NOT CALL FOR FURTHER DETAILS OF MAN UFACTURING & MARKETING COSTS BECAUSE IN HIS VIEW FOR APPLYING CP METHOD, THE DAT A REQUIRED PERTAINED ONLY TO COST OF MATERIAL CONSUMPTION & NOTHING MORE. IN TPO'S VIEW OTHER DIRECT COSTS/ EXPENSES & INDIRECT OVERHEADS WERE NOT REQUI RED TO BE IMPUTED IN ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 29 ARRIVING AT THE ' GROSS PROFIT MARGIN ' FOR THE PURPOSES OF ARRIVING AT ALP OF MANUFACTURED GOODS WHILE APPLYING CP METHOD. THIS F ACT IS SUBSTANTIATED FROM THE TPO'S ORDER ITSELF. THE RELEVANT EXTRACTS FROM THE TPO'S ORDER IS AS FOLLOWS: 9.3 FROM THE ABOVE CALCULATION TABLE PREPARED BY TH E TPO HIMSELF, IT IS CLEARLY EVIDENT THAT THE TPO HAD REQUIRED THE ASSES SEE TO FURNISH ONLY THE DETAILS OF SALES & CORRESPONDING COST OF RAW MATERI ALS CONSUMED. REASON BEING THAT TPO HIMSELF HAD REQUISITIONED THIS LIMIT ED DATA FROM THE ASSESSEE. IT IS ALSO PERTINENT TO NOTE THAT THE TPO IN HIS OR DER NOWHERE ALLEGED THAT THE ASSESSEE FAILED TO PROVIDE ANY DETAILS OR THE COST BREAK-UP IN RESPECT OF GOODS MANUFACTURED BY IT. AS SUCH IT WILL BE APPRECIATED THAT IT WAS NEVER THE TPO'S CASE THAT INFORMATION RELATING TO MANUFACTURING AND OR MARKETING COST WAS REQUISITIONED BY HIM AND WHICH THE ASSESSEE FAILED TO FURNISH AND ON ACCOUNT OF SUCH FAILURE THE TPO HAD TO DETERMINE THE GP MAR GIN ONLY WITH REFERENCE TO COST OF MATERIAL CONSUMED. ON THE CONTRARY IT WAS A CASE WHERE THE TPO CONSCIOUSLY & KNOWINGLY BENCHMARKED THE TRANSACTION BY COMPUTING THE GROSS PROFIT MARGIN BECAUSE THE DIFFERENCE BETWEEN EXPORT SALE PRICE AND COST OF RAW MATERIALS CONSUMED. SUCH UNDERSTANDING & CALCULATIO N AND APPLICATION OF CP METHOD BY THE TPO WAS WHOLLY ERRONEOUS AND INCORREC T. AGGRIEVED BY THE SAME, THE ASSESSEE CHALLENGED IT BEFORE THE CIT(APP EALS). IN THE APPELLATE PROCEEDINGS, THE ASSESSEE DISPUTED THE MODE & THE MANNER IN WHICH THE TPO HAD APPLIED THE CPM METHOD. IT WAS EXPLAINED THAT IN ORDER TO APPLY CP METHOD, THE GROSS PROFIT MARGIN HAD TO BE COMPUTED AS THE DIFFERENCE BETWEEN ' VALUE OF SALES ' AND THE 'COST OF GOODS SOLD'. UNLIKE IN CASE OF TRADED GOODS, THE 'COST OF GOODS SOLD' OF M ANUFACTURED PRODUCTS IS DETERMINED BY AGGREGATING COST PERTAINING TO RAW MA TERIALS, LABOUR, FACTORY OVERHEADS, DIRECT & INDIRECT EXPENSES ETC. ALL THE AFORESAID COST HEADS ARE INCLUDED FOR DETERMINATION OF THE ' COST OF GOODS SOLD '. IT WAS EXPLAINED BEFORE THE CIT(A) THAT THE AO& TPO HAD ERRONEOUSLY CONSIDE RED ONLY THE COST OF RAW ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 30 MATERIALS AND OMITTED TO CONSIDER THE OTHER RELEVAN T EXPENSES/ OVERHEADS FOR THE PURPOSES OF COMPUTING THE ' COST OF GOODS SOLD '. IT WAS IN THIS BACKGROUND THAT THE ASSESSEE FURNISH ED A STATEMENT BEFORE THE CIT(APPEALS) CONTAINING ITS VERSION OF COMPUTATION OF GROSS PROFIT MARGIN ON EXPORT OF MANUFACTURED GOODS. THE D /R IN HIS WRITT EN ARGUMENTS HAS HOWEVER TRIED TO PROJECT AS IF THE ASSESSEE HAD INTENTIONAL LY TRIED TO CONCEAL TRUE FACTS AT THE STAGE OF ASSESSMENT AND DELIBERATELY FURNISHED DIFFERENT STATEMENTS BEFORE THE TPO & CIT(APPEALS) RESPECTIVELY. THE D/R HAS THEREFORE SUGGESTED THAT THE SAME SHOULD HAVE BEEN REMANDED B ACK. THE ASSESSEE SUBMITS THAT THE SAID ALLEGATION OF THE D /R IS COM PLETELY UNJUSTIFIED. BEFORE THE TPO, THE ASSESSEE HAD FURNISHED THE DETAILS OF SALES & COST OF MATERIAL CONSUMPTION BECAUSE ONLY SO MUCH OF THE DATA WAS RE QUISITIONED BY HIM. IT WAS THE TPO'S OWN UNDERSTANDING THAT FOR APPLYING C P METHOD, THE GROSS PROFIT MARGIN WAS TO BE COMPUTED ONLY WITH REFERENC E TO SALES & COST OF MATERIALS CONSUMED AND NOTHING MORE. IT IS FOR THIS REASON THE TPO HAS NOWHERE ALLEGED IN HIS ORDER THAT THERE WAS FAILURE ON THE ASSESSEE'S PART TO FURNISH THE RELEVANT INFORMATION. THE ASSESSEE BECA ME AWARE ABOUT TPO'S WRONG UNDERSTANDING OF CP METHOD ONLY WHEN THE ORDE R IS] S 92CA(3) WAS RECEIVED. ON NOTING THE FACTUAL INFIRMITIES COMMITT ED BY THE TPO IN COMPUTING ' PROFIT MARGIN ' AND THEREBY COMPUTING WRONG ALP, THE ASSESSEE CHA LLENGED THE TPO'S ORDER IN APPEAL. IN THE COURSE OF APPEAL, THE ASSESSEE IN SUPPORT OF ITS CONTENTION, EXPLAINED THAT FOR COMPUTING THE CO RRECT GROSS PROFIT MARGIN OF MANUFACTURED PRODUCTS, IN ADDITION TO COST OF MATER IALS CONSUMED OTHER DIRECT & INDIRECT COSTS & FACTORY OVERHEADS WERE ALSO REQU IRED TO BE INCLUDED. REFERENCE IN THIS REGARD WAS INVITED TO RULE 10B OF THE I.T. RULES, 1962 WHICH LAYS DOWN THE MANNER IN WHICH THE CP METHOD IS TO B E APPLIED. THE RELEVANT PART OF THE SAID RULE PROVIDES AS FOLLOWS: 'COST PLUS METHOD, BY WHICH,- (I) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INC URRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SERVICES PROV IDED TO AN ASSOCIATED ENTERPRISE, ARE DETERMINED; ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 31 (II) THE AMOUNT OF A NORMAL GROSS PROFIT MARK-UP TO SUCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) ARISING FRO M THE TRANSFER OR PROVISION OF THE SAME OR SIMILAR PROPERTY OR SERVIC ES BY THE ENTERPRISE, OR BY AN UNRELATED ENTERPRISE, IN A COMPARABLE UNCO NTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS DETERMINED; (III) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO I N SUB-CLAUSE (II) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OT HER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SUCH PROFIT MARK-UP I N THE OPEN MARKET; (IV) THE COSTS REFERRED TO IN SUB-CLAUSE (I) ARE IN CREASED BY THE ADJUSTED PROFIT MARK-UP ARRIVED AT UNDER SUB-CLAUSE (III); (V) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARM'S L ENGTH PRICE IN RELATION TO THE SUPPLY OF THE PROPERTY OR PROVISION OF SERVI CES BY THE ENTERPRISE.' FROM BARE PERUSAL OF THE ABOVE RULE, IT IS EVIDENT THAT FOR APPLYING CP METHOD, ONE HAS TO COMPUTE THE COST OF PRODUCTION W HICH SHALL INCLUDE BOTH DIRECT & INDIRECT COSTS. THE TPO WAS THEREFORE CLEA RLY WRONG IN CONSIDERING ONLY THE ' COST OF RAW MATERIALS ' AS THE COMPLETE ' COST OF PRODUCTION '. BEFORE THE CIT(APPEALS), ERRORS COMMITTED BY THE TP O WERE POINTED OUT. THE ASSESSEE ALSO FURNISHED THE CORRECT COMPUTATION OF ' GROSS PROFIT ' MARGIN WHICH SHOULD HAVE BEEN APPLIED BY THE TPO HIMSELF I N THE CONTEXT OF CP METHOD FOR BENCHMARKING EXPORT OF MANUFACTURED PROD UCTS. COMPARING THE CALCULATION OF THE PROFITS MARGIN AS DONE BY THE TP O AND BY THE ASSESSEE, THE LD. CIT(A) FOUND MERIT IN ASSESSEE'S CALCULATION OF THE PROFIT MARGIN. THE LD.CIT(A) FOUND THAT IF THE TPO HAD CORRECTLY COMPU TED THE ALP OF THE INTERNATIONAL TRANSACTIONS WITH AES THEN THE ASSESS EE'S PROFIT MARGIN WAS 4.84% WHEREAS THE PROFIT MARGIN EARNED BY THE ASSES SEE ON EXPORTS MADE TO IN AES WAS 4.36%. THE LD. CIT(A) THEREFORE HELD THA T ON ACCOUNT OF ADOPTION OF WRONG FACTS AND DATA THE ALP COMPUTED BY THE TP O IN CASE OF TRANSACTIONS WITH NON AES WAS ERRONEOUS AND HENCE N O ADVERSE INFERENCE COULD BE DRAWN AGAINST THE ASSESSEE ON THE BASIS OF SUCH WRONG COMPUTATION. THE CIT(A) ACCORDINGLY ALLOWED RELIEF TO THE ASSESS EE. THE HON'BLE ITAT WILL ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 32 THEREFORE APPRECIATE THAT IT WAS NOT A CASE WHERE T HE ASSESSEE FILED ADDITIONAL EVIDENCE OR HAD FURNISHED DIFFERENT STATEMENTS BEFO RE TPO AND CIT(APPEALS) AS ALLEGED BY THE ID. D/R IN HIS WRITTEN SUBMISSION S. THE CALCULATION SHEET FILED BY THE ASSESSEE WAS ITS SUBMISSION IN REBUTTAL TO T HE WRONG COMPUTATION OF PROFIT MARGINS AS MADE BY THE TPO IN HIS IMPUGNED O RDER. IT WAS NOT IN THE NATURE OF ADDITIONAL EVIDENCE. IT WAS ONLY THE CASE WHERE THE TPO'S & ASSESSEE'S VERSIONS OF COMPUTATION OF GROSS PROFIT MARGIN IN CP METHOD WERE DIFFERENT. THE FACTS & FIGURES WERE TAKEN BY BOTH F ROM THE AUDITED ACCOUNTS WHICH WERE AVAILABLE BOTH TO THE AO AND THE TPO. TH E CIT(A) MERELY DECIDED ON THE QUESTION AS TO WHICH OF THE TWO COMPUTATION STATEMENTS WAS MORE APPROPRIATE. THE D/R HAS HOWEVER WRONGLY STATED THA T THE ASSESSEE FILED ADDITIONAL EVIDENCE BEFORE THE CIT(A). IT IS FURTHE R PERTINENT & RELEVANT TO STATE THAT EVEN THOUGH THE ID. D/R HAS MADE ELABORATE WRI TTEN SUBMISSIONS, NO ATTEMPT WHATSOEVER HAS BEEN MADE BY HIM TO REBUT TH E CIT(A)'S FACTUAL FINDINGS BY POINTING OUT ANY FACTUAL INFIRMITIES OR FALSITY THEREIN. IT IS THEREFORE SUBMITTED THAT WHEN THE D /R HAS NOT POINTED OUT AN Y SPECIFIC ERROR IN THE FACTUAL FINDINGS OF THE LD. CIT(A), HIS REQUEST FOR REMAND CANNOT- BE ACCEPTED ONLY WITH A VIEW TO GIVE THE 'REVENUE ONLY THE SECO ND INNINGS FOR FRAMING THE ASSESSMENT AFRESH. IT IS ALSO PERTINENT TO MENTION THAT NOWHERE IN THE GROUNDS OF APPEAL HAS THE DEPARTMENT ALLEGED THAT THE CIT(A ) HAD ACTED IN VIOLATION OF RULE 46A OF THE LT. RULES, 1962 AND WRONGFULLY ADMI TTED ADDITIONAL EVIDENCE. IT IS NOT EVEN THE AO'S CASE THAT THE ASSESSEE HAD FILED ANY ADDITIONAL EVIDENCE. HAD THIS BEEN THE GRIEVANCE OF THE AO THE N HE WOULD HAVE CERTAINLY TAKEN IT UP BY RAISING SPECIFIC GROUND OF APPEAL. E VEN IN THE ORDER U/S 92CA(3) THE TPO HAS NOWHERE ALLEGED THAT THE ASSESSEE DID N OT FILE DETAILS PERTAINING TO COST BREAK- UP OF MANUFACTURED GOODS THOUGH REQU ISITIONED BY HIM. THESE FACTS THEREFORE SUPPORT THE ASSESSEE'S CONTENTION T HAT IT HAD NEVER FILED ADDITIONAL EVIDENCE BEFORE THE CIT(A). THE TPO HAD CONSCIOUSLY COMPUTED GROSS PROFIT MARGIN BY DEDUCTING FROM THE VALUE OF EXPORT SALES; ONLY THE COST OF RAW MATERIALS CONSUMED FOR APPLYING THE CP METHO D. IN THE CIRCUMSTANCES IT IS SUBMITTED THAT THE LD. DR HAS TRIED TO TWIST THE ACTUAL FACTS TO GIVE A ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 33 MISLEADING PICTURE THAT THE ASSESSEE HAD EITHER FIL ED ADDITIONAL DETAILS OR TWO SETS OF STATEMENTS BEFORE THE TPO AND CIT(A).; 9.2 IT IS ALSO IMPERATIVE TO NOTE THAT EVEN THOUGH IN HIS ORDER THE CIT(A) HAS POINTED OUT SPECIFIC INFIRMITIES & MISTAKES COMMITT ED BY THE TPO IN DETERMINING ALP OF NON-AE TRANSACTIONS THE D/R IN H IS WRITTEN ARGUMENTS HAS NOWHERE EVEN ATTEMPTED TO JUSTIFY THE MANNER IN WHI CH CP METHOD WAS APPLIED BY THE TPO. IN FACT THE D/R CONCEDED THAT R ULE 10B REQUIRED INCLUSION OF BOTH DIRECT & INDIRECT COST OF PRODUCTION FOR AP PLICATION OF CP METHOD. THIS THEREFORE SHOWS THAT THE D/R DID NOT HAVE ANY ADVER SE MATERIAL WITH HIM TO COUNTER THE CIT(A)'S FINDINGS RENDERED ON MERITS. T HE ASSESSEE SUBMITS THAT THE ARGUMENTS PLACED BY THE D/R NEEDS TO BE REJECTE D AS HE HAS NOT BEEN ABLE TO POINT OUT OR ESTABLISH ANY FACTUAL INFIRMIT Y OR FALSITY IN THE FINDINGS RECORDED BY THE CIT(A). IN THE WRITTEN ARGUMENTS TH E D/R HAS FURTHER SUBMITTED THAT THE ASSESSEE HAD ERRONEOUSLY INCLUDE D THE ROYALTY & COMMISSION PAID AS PART OF ' MANUFACTURING COSTS ' WHILE DETERMINING ALP UNDER THE CP METHOD. THE D/R CONTENDED THAT EVEN IF THERE ARE NO SALES, THERE WOULD STILL BE COST OF PRODUCTION AND THEREBY THE GROSS MARGIN WILL BE A LOSS. HOWEVER IN ABSENCE OF ANY SALE THERE WOULD BE NO EXPENDITURE OF ACCOUNT OF ROYALTY OR COMMISSION PAID. THE ARGUMENT OF THE D/R IS ABSURD, ILLOGICAL AND SELF-CONTRADICTORY. IF THERE ARE NO S ALES THERE WOULD BE NO NEED TO CARRY OUT BENCHMARKING EXERCISE. IF THE ASSESSEE DO ES NOT UNDERTAKE ANY ' SALES ' THEN THE ENTIRE COST OF PRODUCTION DEBITED TO THE PROFIT & LOSS ACCOUNT WOULD REFLECT IN THE CREDIT SIDE OF THE SAID PROFIT & LOSS ACCOUNT AS ' COST OF FINISHED GOODS IN STOCK ' AND ACCORDINGLY THERE WOULD NEITHER BE ANY - GROS S PROFIT OR LOSS. IT IS ONLY WHEN THE GOODS MANUFACTU RED ARE SOLD EITHER TO AES OR NON AES THE QUESTION OF COMPUTATION OF ALP CONSEQUE NTLY COMPUTATION OF THE PROFIT MARGIN WOULD ARISE. IT IS ONLY BECAUSE THE A SSESSEE HAD MADE SALES TO ITS AES THAT ALP WAS REQUIRED TO BE COMPUTED BY ADO PTING ONE OF THE RECOGNIZED BUT SUITABLE METHOD. HOWEVER THE FACT RE MAINS THAT ONE OF IMPORTANT PRE-REQUISITE TO APPLY CP METHOD IS THAT THERE SHOULD BE 'SALES' TO AE. IN ABSENCE OF ANY SALE OF MANUFACTURED GOODS TH E GROSS PROFIT MARGIN ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 34 WOULD BE UNASCERTAINABLE. THE GROSS PROFIT MARGIN I S THE DIFFERENCE BETWEEN SALES & COST OF GOODS SOLD. AS SUCH THE 'VALUE OF S ALES' IS THE ESSENTIAL INGREDIENT FOR COMPUTING GROSS PROFIT MARGIN AND IN ITS ABSENCE THERE CAN BE NO QUESTION OF ITS DETERMINATION. THE D/R IN HIS SU BMISSION THEREFORE REFERRED TO SUCH AN IRRECONCILABLE & TOTALLY IMPRACTICAL SIT UATION. AS REGARDS THE D/R'S STATEMENT THAT IN CASE OF NO S ALES THE GROSS PROFIT MARGIN WOULD BE A LOSS, IT IS SUBMITTED THAT EVEN THIS STA TEMENT IS FACTUALLY AS WELL AS THEORETICALLY INCORRECT. FIRST OF ALL, IN CASE OF N O ' SALES ' SITUATION, GROSS PROFIT MARGIN CANNOT BE COMPUTED. THE DOCTRINE OF IMPOSSIB ILITY SHALL OPERATE. EVEN IF FOR A MOMENT THE D/R'S LOGIC IS ACCEPTED AT ITS FACE VALUE THAT THE GROSS PROFIT CAN BE COMPUTED WITHOUT THE SALES VALUE, EVE N THEN THE GROSS PROFIT WOULD BE NIL. IN SUCH AN EVENTUALITY ENTIRE 'COST O F PRODUCTION' DEBITED ON THE DEBIT SIDE WOULD BE REFLECTED AS COST OF UNSOLD STO CK AND WILL ACCORDINGLY REFLECT ON THE CREDIT-SIDE OF THE P&L A/C. IN THE C IRCUMSTANCES THE GROSS PROFIT WOULD BE NIL. THE LD. D/R HAS FURTHER ARGUED THAT THE ROYALTY & C OMMISSION EXPENSES ARE NOT ' COST-SIDE ' RELATED EXPENSE BUT ' SALES-RELATED ' EXPENSE AND HENCE COULD NOT FORM PART OF ' COST OF PRODUCTION '. IN THIS REGARD WE SUBMIT THE LD. D/R HAS PROPERLY UNDERSTOOD THE TRUE MEANING OF THE ASS ESSEE'S SUBMISSIONS MADE BEFORE THE CIT(A). IT WAS NEVER THE ASSESSEE'S CASE THAT THESE 2 EXPENSES WERE TO BE CONSIDERED AS PART OF PRODUCTIO N COST. IN THE FIRST INSTANCE IT IS SUBMITTED THAT THE ASSESSEE NEVER IN CLUDED THE ROYALTY & COMMISSION AS PART OF MANUFACTURING COSTS OF THE AS SESSEE. INSTEAD THE SAME WERE EXCLUDED FROM VALUE OF EXPORT SALES MADE TO UN RELATED PARTIES TO MAKE THEM COMPARABLE TO THE SALES MADE TO AES AND ACCORD INGLY ASCERTAIN THE ARM'S LENGTH VALUE OF AN UNCONTROLLED TRANSACTION. THIS IS DONE BY THE ASSESSEE IN CONFORMITY WITH BOTH RULE 10B & 10C OF THE LT. RULES, 1962. THEREFORE THE ALLEGATION OF THE D/R THAT THE ASSESS EE HAD TREATED IT TO BE MANUFACTURING COSTS IS ERRONEOUS & INCORRECT. REFER ENCE IN THIS REGARD IS MADE TO CLAUSE (1) OF RULE 10B WHICH IN RESPECT OF CP METHOD CLEARLY STIPULATES THAT BOTH DIRECT & INDIRECT COSTS WILL H AVE TO BE CONSIDERED AND SUCH ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 35 COST OF GOODS SOLD WILL HAVE TO BE APPROPRIATELY MA RKED UP TO ASCERTAIN THE ARM'S LENGTH VALUE. SUCH MARK-UP WOULD BE THE GROSS PROFIT MARK-UP WHICH ONE WOULD EARN IN A COMPARABLE UNCONTROLLED TRANSAC TION. THE TERM COMPARABLE ' UNCONTROLLED TRANSACTION ' HAS BEEN DEFINED IN SUB-CLAUSE (3) OF RULE 10B WHICH READS AS FOLLOWS: 'AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOMESTIC TRANSACTION IF- - (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TR ANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST C HARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. ' SIMILAR PROVISION IS CONTAINED IN CLAUSE (C) OF RUL E 10B WHICH LAYS DOWN THE MANNER IN WHICH THE CP METHOD IS TO BE APPLIED. THE RELEVANT EXTRACTS OF THE AFORESAID RULE IS AS FOLLOWS: 'COST PLUS METHOD, BY WHICH,- ......... (III) THE NORMAL GROSS PROFIT MARK-UP REF ERRED TO IN SUB-CLAUSE (II) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OT HER DIFFERENCES. IF ANY. BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS. OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS. WHICH COULD MATERIALLY AFFECT SUCH PROFIT MARK-UP I N THE OPEN MARKET;' 10. IN VIEW OF THE AFORESAID STATUTORY PROVISIONS C ONTAINED IN RULE 10B & 10C ONE IS REQUIRED TO IDENTIFY THE MATERIAL DIFFER ENCES BETWEEN THE INTERNATIONAL TRANSACTION WITH AES AND THE COMPARAB LE UNCONTROLLED TRANSACTIONS WHICH COULD AFFECT ITS PRICING AND/ OR PROFITABILITY. SUCH DIFFERENCE IS REQUIRED TO BE QUANTIFIED OR REASONABLY ESTIMATE D AND ACCORDINGLY ADJUSTED FROM THE VALUE OF UNRELATED/ RELATED TRANSACTION, AS THE CASE MAYBE, SO AS TO MAKE THE INTERNATIONAL TRANSACTION WITH AES COMPARA BLE WITH UNCONTROLLED TRANSACTIONS. IN THE FACTS INVOLVED THE PRESENT CAS E THE ASSESSEE MADE EXPORT SALES TO AES AND ALSO TO UNRELATED PARTIES. IN RESP ECT OF EXPORT TO AES THE ASSESSEE HAD NO OBLIGATION TO PAY ROYALTY NOR WAS A NY COMMISSION PAID. IN ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 36 RESPECT OF EXPORT SALES TO UNRELATED PARTIES, THE A SSESSEE PAID ROYALTY TO ITS PARENT COMPANY AS WELL AS PAID COMMISSION TO AGENTS WHO PROCURED EXPORT ORDERS. AS SUCH THE EXPORT SALES PRICE OF UNRELATED PARTIES WAS MATERIALLY HIGHER THAN THE EXPORT SALE PRICE CHARGED FROM AES. IN TERMS OF RULE 10C & 10B(3)(II) IT WAS THEREFORE NECESSARY TO MAKE SUITA BLE ADJUSTMENT TO THE SALE PRICE REALIZED IN UNCONTROLLED TRANSACTIONS SO AS T O MAKE THEM COMPARABLE WITH THE TRANSACTIONS WITH AES. THE ASSESSEE THEREF ORE EXCLUDED THE ROYALTY & COMMISSION PAID ON SALES TO UNRELATED PARTIES SO AS TO ARRIVE AT THE COMPARABLE ARM'S LENGTH VALUE OF UNCONTROLLED TRANS ACTIONS IN CONFORMITY WITH RULE 10B & RULE 10C OF IT RULES, 1962. ACCORDINGLY THE NORMAL GROSS PROFIT MARK-UP WAS COMPUTED ONLY AFTER EXCLUDING THE ROYAL TY & COMMISSION COSTS. THE D/R HOWEVER FAILED TO APPRECIATE THE FOREGOING FACTS OF THE CASE AND WRONGLY ALLEGED THAT THE ASSESSEE TREATED COMMISSIO N & ROYALTY TO BE MANUFACTURING COSTS. THE ASSESSEE THEREFORE SUBMITS THAT THE ROYALTY & COMMISSION WHICH WERE PAID ON SALES TO UNRELATED PA RTIES WERE RIGHTLY DEDUCTED BY THE ID. CIT(A) WHILE COMPUTING THE GROS S PROFIT MARGIN. THE COMPUTATION OF THE ASSESSEE AND THE ID. CIT(A) WAS THEREFORE IN CONFORMITY WITH CLAUSE (1) & (3) OF RULE 10B OF THE LT. RULES, 1962. THE ALLEGATIONS OF THE D/R ARE THEREFORE FACTUALLY & LEGALLY UNJUSTIFI ED AND THEREFORE DEVOID OF ANY MERIT. AS REGARDS COMPUTATION OF ALP UNDER THE RP M ETHOD IN RESPECT OF TRADED GOODS, IT IS SUBMITTED THAT THE TPO HAD DETE RMINED THE ALP BY MAKING COMPARISON OF DISSIMILAR PRODUCTS HAVING DIFFERENT APPLICATIONS & USES AND THEREFORE HAVING DIFFERENT PROFIT MARGINS. THE TPO HOWEVER GP RATE OF MATERIALS (PRINTING INKS) IMPORTED FROM AES AND SOL D TO UNRELATED PARTIES COMPARED WITH GP RATE OF ALL PURCHASES & SALES MADE TO UNRELATED PARTIES FOR APPLICATION OF RP METHOD. COMPARING COMBINED GP RAT E OF TOTALLY DISSIMILAR PRODUCTS WITH GP RATE OF PRINTING INKS WAS WHOLLY I LLOGICAL AND WITHOUT MEANING. IT WAS FURTHER EXPLAINED BEFORE THE CIT(A) THAT THE PROFIT MARGINS SUBSTANTIALLY VARIED ON ACCOUNT OF GEOGRAPHICAL DIF FERENCES. THE PROFIT MARGINS OF PRODUCTS SOURCED LOCALLY OR IMPORTED VARIED SIGN IFICANTLY. THESE INFIRMITIES WERE POINTED OUT BEFORE THE ID. CIT(A). THE LD. CIT (A) OBSERVED THAT THE ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 37 ASSESSEE HAD THREE DIFFERENT TRADING ITEMS, BLANKET S, MACHINES & PRESS CHEMICALS WHICH WERE TOTALLY DISSIMILAR AND INCOMPA RABLE. THE LD. CIT(A) FURTHER OBSERVED THAT PROFITS MARGINS VARIED SUBSTA NTIALLY DEPENDING UPON THE FACT THAT THE PRODUCTS WERE EITHER SOURCED LOCALLY OR IMPORTED. THE LD. CIT(A) THEREFORE COMPARED PRODUCT-WISE & GEOGRAPHICAL-WISE PROFIT MARGINS OF TRADING TRANSACTIONS WITH AES VIS-A-VIS TRADING TRA NSACTIONS WITH UNRELATED PARTIES AND FOUND THEM TO BE ARM'S LENGTH. IN THE W RITTEN ARGUMENTS THE D/R HAS ADMITTEDLY NOT JUSTIFIED OR SUPPORTED THE MANNE R IN WHICH ALP WAS COMPUTED BY THE TPO. FURTHERMORE THE D/R HAS ALSO N OT DISPUTED THE OBSERVATIONS & FACTUAL FINDINGS RECORDED BY THE ID. CIT(A) HOLDING THAT- EVEN BY APPLYING RP METHOD THE TRANSACTIONS WITH AES WER E AT ARM'S LENGTH. THE D/R HAS FAILED TO PIN POINT ANY SPECIFIC INFIRMITY OR FALSITY IN THE APPELLATE ORDER PASSED BY THE ID. CIT(A). IN FACT THE D / R CONCURR ED WITH THE FINDINGS OF THE ID. CIT(A) THAT ONLY THE GP MARGINS OF SIMILAR PRODUCTS CAN BE COMPARED AND NOT OTHERWISE. THE D/ R IN FACT CONCURRED WITH THE ASSE SSEE'S CONTENTION AS WELL AS THE ID. CIT(A) FINDINGS THAT THE ONLY PRESS CHEM ICALS WAS COMPARABLE TO PRINTING INKS. BOTH THE ASSESSEE AS WELL THE ID. CI T(A) HAD COMPARED THE PROFIT MARGIN EARNED FROM SALE OF IMPORTED PRINTING INKS T O UNRELATED PARTIES WITH THE PROFIT MARGIN EARNED BY THE ASSESSEE FROM SALE OF I MPORTED PRESS CHEMICALS TO UNRELATED PARTIES. IN THE FACTS INVOLVED IN THE PRE SENT CASE THE ID. CIT(A) NOTED THAT THE ASSESSEE HAD IMPORTED PRINTING INKS FROM A ES WORTH RS.7.06 CRORES WHICH WAS SOLD TO UNRELATED PARTIES FOR RS.8.09 CRO RES RESULTING IN GROSS PROFIT MARGIN OF 13%. CORRESPONDINGLY THE ASSESSEE HAD IMP ORTED PRESS CHEMICALS FROM UNRELATED PARTIES WORTH RS.1.75 CRORES WHICH W AS SOLD TO UNRELATED PARTIES FOR RS.2.02 CRORES YIELDING PROFIT MARGIN O F 14%. WITHOUT PREJUDICE TO THE ASSESSEE'S CONTENTION THAT THE AFORESAID MARGIN S WOULD REQUIRE TURNOVER ADJUSTMENT AND WORKING CAPITAL ADJUSTMENT, IT IS SU BMITTED THAT THE MARGIN WAS 13% EARNED FROM TRANSACTIONS WITH RELATED PARTIES W AS FOUND COMPARABLE TO MARGIN OF 14% EARNED FROM UNCONTROLLED TRANSACTIONS AND WAS THEREFORE HELD TO BE AT ARM'S LENGTH BY THE CIT(A). THE DIFFERENCE IN MARGIN OF 1% WAS WELL WITHIN THE PERMITTED RANGE OF +/ - 5% ALLOWED IN SE COND PROVISO SECTION 92C OF ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 38 THE INCOME-TAX ACT, 1961. IN THE CIRCUMSTANCES IT S HALL BE APPRECIATED THAT BOTH THE ASSESSEE AND THE ID. CIT(A) HAD BENCHMARKE D THE TRADING OF IMPORTED PRINTING INKS TO TRADING OF IMPORTED PRESS CHEMICALS AS REQUIRED BY THE D/R IN HIS WRITTEN SUBMISSIONS. ON COMPARISON I T WAS FOUND TO BE AT ARM'S LENGTH. THEREFORE THERE IS NO DISPUTE BETWEEN THE A SSESSEE AND D/R ON THIS PARTICULAR ISSUE. IN THE WRITTEN SUBMISSIONS THE D/ R HAD NOTHING ADVERSE TO STATE IN THE CONTEXT OF COMPUTATION OF ALP UNDER RP M METHOD AS CONTENDED BY THE ASSESSEE AND APPLIED BY THE ID. CIT(A). IN T HE CIRCUMSTANCES THE APPEAL OF THE REVENUE TO THE EXTENT OF TP ADJUSTMEN T ON TRADING TRANSACTIONS ALSO FAILS. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE FACTS OF CASE HAVE ALREADY BEEN DISCUSSED IN DETAIL IN THE FOREGOING PARAGRAPHS. THEREFORE THE SAME ARE NO T ELABORATED HERE TO AVOID THE REPETITION. WE FIND THAT THERE IS NO PROV ISION UNDER THE ACT WITH REGARD TO THE VALUE OF THE TRANSACTIONS FOR SELECTI NG THE METHOD FOR THE DETERMINATION OF ALP. IN THE INSTANT CASE THE TPO H AS REJECTED THE TRANSFER PRICING STUDY OF THE ASSESSEE WITHOUT FINDING ANY D EFECT THEREIN. THE TPO FURTHER HELD THAT THE INTERNATIONAL TRANSACTION IS LESS THAN THE 5% TO THE BUSINESS THEREFORE HE ADOPTED THE OTHER METHOD FOR DETERMINING THE ALP. BUT CONTRARY TO HIS FINDING THE TPO HAS ACCEPTED THE OT HER INTERNATIONAL TRANSACTIONS WHERE THE VOLUME WAS AGAIN LESS THAN 5 % TO THE TOTAL TURNOVER OF THE ASSESSEE I.E. ROYALTY, COMMISSION ETC. IN THE E ARLIER YEARS AND SUBSEQUENT YEARS THE ASSESSEE ENTERED INTO INTERNAT IONALS TRANSACTIONS WITH SIMILAR VALUE BUT NO ADDITION WAS MADE. THEREFORE I N OUR CONSIDERED VIEW IT WAS NOT OPEN TO THE TPO TO TAKE A DIFFERENT BASE FO R THE WORKING OF ALP WITHOUT ASSIGNING COGENT REASONS THAN THAT OF THE M ETHOD FOLLOWED CONSISTENTLY. THE ARGUMENTS OF THE LD. DR THAT THE TPO DID NOT REJECT THE TNMM METHOD ON THE GROUND THAT CP METHOD & RP METHO D WERE USED BY THE ASSESSEE IN EARLIER YEAR BUT THE TPO WORKED THE ALP OF THE INTERNATIONAL TRANSACTIONS ON THE BASIS OF FUNCTIONAL ANALYSIS DO NOT HOLD GOOD. IN OUR VIEW ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 39 BEFORE ADOPTING THE CPM/RPM, THE TPO HAD TO FIRST R EJECT TNMM AND THAT TOO WITH REASONS FOR THE REJECTION. WE ALSO FURTHER FIN D THAT THE TPO HAS CONSIDERED ONLY COST OF RAW MATERIALS CONSUMED AND NO OTHER ASSOCIATED COSTS WAS CONSIDERED IN ARRIVING AT THE G.P. MARGIN . THE TPO IN ORDER TO APPLY CP METHOD COST PERTAINING TO RAW MATERIALS, LABOUR, FACTORY OVERHEADS, DIRECT & INDIRECT EXPENSES ETC SHOULD TAKE INTO CONSIDERAT ION. ALL THE AFORESAID COST HEADS ARE INCLUDED FOR DETERMINATION OF THE 'COST O F GOODS SOLD' AS PER RULE 10B OF THE I.T. RULES, 1962 WHICH LAYS DOWN THE MAN NER IN WHICH THE CP METHOD IS TO BE APPLIED. THE RELEVANT PART OF THE S AID RULE PROVIDES AS FOLLOWS: 'COST PLUS METHOD, BY WHICH,- (I) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INC URRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SERVICES PROV IDED TO AN ASSOCIATED ENTERPRISE, ARE DETERMINED; (II) THE AMOUNT OF A NORMAL GROSS PROFIT MARK-UP TO SUCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) A RISING FROM THE TRANSFER OR PROVISION OF THE SAME OR SIMILAR PROPER TY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTERPRISE, IN A COM PARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS D ETERMINED; (III) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO I N SUB-CLAUSE (II) IS ADJUSTED TO TAKE INTO ACCOUNT THE. FUNCTIONAL AND O THER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRIS ES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SUCH PR OFIT MARK-UP IN THE OPEN MARKET; (IV) THE COSTS REFERRED TO IN SUB-CLAUSE (I) ARE IN CREASED BY THE ADJUSTED PROFIT MARK-UP ARRIVED AT UNDER SUB-CLAUSE (III); (V) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARM'S L ENGTH PRICE IN RELATION TO THE SUPPLY OF THE PROPERTY OR PROVISION OF SERVI CES BY THE ENTERPRISE.' ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 40 FROM BARE PERUSAL OF THE ABOVE RULE IT IS EVIDENT T HAT FOR APPLYING CP METHOD, ONE HAS TO COMPUTE THE COST OF PRODUCTION WHICH SHA LL INCLUDE BOTH DIRECT & INDIRECT COSTS. THE TPO WAS THEREFORE CLEARLY WRONG IN CONSIDERING ONLY THE ' COST OF RAW MATERIALS ' AS THE COMPLETE ' COST OF PRODUCTION '. SIMILARLY THE PRODUCT SIMILARITY IN THE PRODUCTS IS ESSENTIAL FOR THE DETERMINATION OF ALP. THE PROFIT MARGINS OF PRODUCTS SOURCED LOCALLY OR IMPOR TED VARIED SIGNIFICANTLY. THESE INFIRMITIES WERE NOT CONSIDERED BY THE TPO. T HE PROFIT MARGINS VARIED SIGNIFICANTLY DEPENDING UPON THE FACT THAT THE PROD UCTS WERE EITHER SOURCED LOCALLY OR IMPORTED. FROM THE SUBMISSION WE FIND TH AT THE ASSESSEE HAD IMPORTED PRINTING INKS FROM AES WORTH RS.7.06 CRORE S WHICH WAS SOLD TO UNRELATED PARTIES FOR RS.8.09 CRORES RESULTING IN G ROSS PROFIT MARGIN OF 13%. CORRESPONDINGLY THE ASSESSEE HAD IMPORTED PRESS CHE MICALS FROM UNRELATED PARTIES WORTH RS.1.75 CRORES WHICH WAS SOLD TO UNRE LATED PARTIES FOR RS.2.02 CRORES YIELDING PROFIT MARGIN OF 14%. WITHOUT PREJ UDICE TO THE ASSESSEE'S CONTENTION THAT THE AFORESAID MARGINS WOULD REQUIRE TURNOVER ADJUSTMENT AND WORKING CAPITAL ADJUSTMENT, IT WAS OBSERVED THAT TH E MARGIN WAS 13% EARNED FROM TRANSACTIONS WITH RELATED PARTIES WAS FOUND CO MPARABLE TO MARGIN OF 14% EARNED FROM UNCONTROLLED TRANSACTIONS AND WAS THERE FORE HELD TO BE AT ARM'S LENGTH BY THE CIT(APPEALS). THE DIFFERENCE IN MARGI N OF 1% WAS WELL WITHIN THE PERMITTED RANGE OF +/ - 5% ALLOWED IN SECOND PROVIS O SECTION 92C OF THE INCOME-TAX ACT, 1961. IN VIEW OF ABOVE WE DO NOT FI ND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A). HENCE WE ALLOW ASSESSEES GROUND . 12. COMING TO NEXT ISSUE RAISED BY REVENUE IS THAT LD. CIT(A) ERRED IN DIRECTING THE AO NOT TO USE SERVICE CHARGE AMOUNTIN G TO RS 90 LAKHS IN THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S 80HHC OF THE ACT. THE ASSESSEE CLAIMED THE DEDUCTION U/S. 80HHC FOR T HE PROFIT OF THE BUSINESS. THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT THE PROFIT OF THE BUSINESS IS INCLUSIVE OF FEES FOR SERVICES F OR AN AMOUNT OF RS.90 LAKHS. THE ASSESSEE DID NOT DEDUCT 90% OF SUCH FEES OF SER VICES IN TERMS OF THIS ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 41 PROVISION OF THE EXPLANATION OF (BAA) TO SEC. 80HHC OF THE ACT. ACCORDINGLY, THE AO HAS REDUCED THE PROFIT OF THE ASSESSEES BUS INESS BY 90% OF RS.90 LAKHS BEING FEES FOR SERVICES. 13. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE LD. CIT(A), WHEREAS ASSESSEE SUBMITTED THAT THE FEES FOR SERVICES I.E. RS.90 LAKHS SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER OF THE ASSESSEE TO THE EXTENT OF 90%. LD. CIT(A) ACCORDINGLY, DIRECTED THE AO TO EXCLUDE THE 90% OF FEES FOR SERVICES FROM THE TOTAL TURNOVER OF THE ASSESSEE BY OBSERVIN G AS UNDER:- .. I HOWEVER FIND THAT THE IDENTICAL QUESTIONS WE RE CONSIDERED BY THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA IN THE ASSES SEES OWN CASE FOR AY 2003-04 IN ITA NO. 499/KOL/2007 & MA NO. 73/KOL/2008 DATED 30 TH APRIL, 2008 & DATED 24 TH DECEMBER, 2008 RESPECTIVELY. THE TRIBUNAL HELD THAT IN WORKING OUT PROFITS OF THE BUSINESS 90% OF SERVICE CHARGES RECEIVED FROM SUBSIDIARY COMPANY WERE LIABL E TO BE REDUCED IN TERMS OF EXPLANATION (BAA) TO SEC. 80HHC. IN THE LI GHT OF THE FINDING OF THE TRIBUNAL I UPHOLD THE ORDER OF THE AO REDUCING 90% OF THE SERVICE CHARGES INCOME FROM THE PROFITS & GAINS OF BUSINESS WHILE ARRIVING AT PROFITS OF THE BUSINESS U/S. 80HHC. THE TRIBUNAL HO WEVER HELD THAT THE INCOME FROM SERVICE CHARGES WAS NOT INCLUDIBLE IN T HE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 80HHC. FOLL OWING THE ORDER OF THE TRIBUNAL FOR AY 2003-04 I DIRECT THE AO TO EXCL UDE SERVICE CHARGES INCOME OF RS.90 LAKHS FROM THE TOTAL TURNOVER. THE AO SHALL ACCORDINGLY RECOMPUTED THE DEDUCTION U/S. 80HHC. BEING AGGRIEVED BY THIS ORDER OF LD. CIT(A) REVENUE IS IN APPEAL BEFORE US. 14. BOTH PARTIES RELIED ON THE ORDERS OF AUTHORITIE S BELOW AS FAVOURABLE TO THEM. 15. WE HAVE HEARD RIVAL PARTIES AND PERUSED THE MAT ERIALS AVAILABLE ON RECORD. AT THE OUTSET, WE FIND THAT ISSUE IS SQUARE LY COVERED IN FAVOUR OF ASSESSEE IN ASSESSEES OWN CASE IN ITA NO.499/KOL/2007 DATED 30.04.2008. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDIN ATE BENCH WE DISMISS THE APPEAL OF THE REVENUE. ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 42 16. COMING TO NEXT ISSUE IS AS REGARDS THAT LD. CIT (A) ERRED IN ALLOWING THE DEDUCTION OF CUSTOM DUTY OF RS.11,77,331/- AGAINST THE ADVANCE LICENSE AND THEREBY VIOLATING THE PROVISION OF SEC. 43B OF THE ACT. THIS ISSUE IS EMANATING FROM THE ASSESSMENT ORDER F OR THE AY 2003-04 FOR THE ADDITION MADE BY THE AO ON ACCOUNT OF NON-PAYMENT O F CUSTOM DUTY BEFORE FILING THE RETURN OF INCOME FOR THAT YEAR FOR RS. 1 1,77,331/- THE ASSESSEE HAS WRITTEN BACK IN THE PROFIT & LOSS ACCOUNT IN THE AY 2004-05 I.E. THE YEAR UNDER CONSIDERATION. THE AO AT THE TIME OF ASSESSMENT HAS NOT EXCLUDED THE SAME FROM THE TAXABLE INCOME OF THE ASSESSEE. 17. AGGRIEVED ASSESSEE FILED AN APPEAL BEFORE LD. C IT(A) WHO ALLOWED THE APPEAL IN FAVOUR OF ASSESSEE. BEING AGGRIEVED BY THIS ORDER OF LD. CIT(A) REVENUE IS IN APPEAL BEFORE US. 18. BEFORE US LD. DR RELIED ON THE ORDER OF AO WHER EAS LD. AR SUBMITTED THAT THIS AMOUNT WAS TAXED IN THE AY 2003-04 AND SA ME CANNOT BE TAXED AGAIN IN AY 2004-05 AND HE RELIED ON THE ORDER OF L D. CIT(A). 19. WE HAVE HEARD RIVAL CONTENTIONS OF BOTH THE PAR TIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. AT THE OUTSET, WE FI ND THAT THE AFORESAID AMOUNT HAD ALREADY BEEN TAXED IN EARLIER YEAR I.E. 2003-04 AS EVIDENT FROM THE AOS ORDER. AT THE TIME OF HEARING, LD. DR DID NOT BRING ANY CONTRARY TO THE FINDING OF LD. CIT(A). FROM THE FOREGOING DISCUSSION, WE FI ND NO REASON TO INTERFERE IN THE ORDER OF LD. CIT(A) AND WE UPHOLD THE SAME AND REVENUES GROUND IS DISMISSED. COMING TO REVENUES APPEAL IN ITA NO.1432/KOL/2011 FOR AY 05-06. 13. SOLE ISSUE RAISED BY REVENUE IS THAT LD. CIT(A ) ERRED IN DELETING THE ADJUSTMENT IN TAX VALUE OF INTERNATIONAL TRANS WITH AE FOR RS.41,45,237/-. ITA NO.181/KOL/2010 & 1432.KOL/2011 A.YS. 04-05 & 05-06 DCIT CIR-10 KOL. VS. M/S DIC INDIA LTD. PAGE 43 14. AS STATED EARLIER, THE ISSUE IN THIS YEAR IS SA ME AS THAT OF THE LAST YEAR. THE ONLY DIFFERENCE IS THE AMOUNT INVOLVED. SINCE T HE FACTS ARE EXACTLY, IDENTICAL BOTH PARTIES ARE AGREED WHATEVER VIEW TAK EN IN THE ABOVE APPEAL OF REVENUE MAY BE TAKEN IN THIS APPEAL OF REVENUE ALSO . WE HOLD ACCORDINGLY. 15. IN THE RESULT, BOTH APPEALS OF REVENUE STAND DISMIS SED. ORDER PRONOUNCED IN THE OPEN COURT 21/ 09/2016 SD/- SD/- (#$) () (N.V.VASUDEVAN) (WASEEM AHMED) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) KOLKATA, *DKP &'(- 21 / 09 /201 6 / COPY OF ORDER FORWARDED TO:- 1. /ASSESSEE-M/S DIC INDIA LTD., TRANSPORT DEPT ROAD, KOLKATA-700 088 2. /REVENUE-DCIT, CIRCLE-10, P-7, CHOWRINGHEE SQUARE 3 RD FLOOR, KOLKATA-69 3.'0'12 3 / CONCERNED CIT KOLKATA 4. 3- / CIT (A) KOLKATA 5.6 78$$12, 12!, / DR, ITAT, KOLKATA 6.8;<=> / GUARD FILE. BY ORDER/ , /TRUE COPY/ /' 12!,