DCIT, Bangalore V. M/s Cisco Systems (India) Pvt. Ltd., Bangalore

ITA 1447/BANG/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0281 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 8 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 21-10-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing
• Section: 92C; 80HHC; 260A; 27; 10; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO , JUDICIAL MEMBER I.T. (T.P) A. NO. 1447/ BANG/201 3 (ASSESSMENT YEAR : 200 5 - 06 ) DY. COMMISSIONER OF INCOME TAX, CIRCLE 11( 2), BANGALORE. VS. M/S. CISCO SYSTEMS (INDIA) PVT. LTD., DIVYASHREE CHAMBERS B WING, NO.11, O SHUGHNESSEY ROAD, OFF LANGFORD ROAD, BANGALORE - 25 PAN AABCC 0258Q APPELLANT RESPONDENT. APPELLANT BY : SHRI G.R. REDDY, CIT - I (D. R.) RESPONDENT B Y : SHRI CHAVALI NARAYAN, C. A. DATE OF H EARING : 5.7.2016. DATE OF P RONOUNCEMENT : 15 .7 . 201 6 . O R D E R PER SHRI VIJAY P AL RAO, J. M. : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DT.19.12.2008 OF COMMISSIONER OF INCOME TAX (APPEALS) - IV, BANGALORE FOR THE ASSESSMENT YEAR 2005 - 06. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS : IT(TP)A NO.1447/BANG/2013 PAGE 2 OF 15 1. T HE ORDER OF THE LEARNED CIT (A) IS OPPOSED TO LAW AND FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LEARNED CIT (APPEALS) WAS NOT JUSTIFIED IN DIRECTING THE AO TO RECOMPUTE THE DEDUCTION ALLOWABLE U/S. 10A OF I.T. ACT, 1961 AFTER REDUCING THE CONCERNED EXPENDIT URE BOTH FROM THE EXPORT TURNOVER AND THE TOTAL TURNOVER. 3. THE CIT(A) ERRED IN DIRECTING THE AO TO EXCLUDE THE CONCERNED EXPENDITURE FROM THE TOTAL TURNOVER ALSO WHILE COMPUTING THE DEDUCTION U/S 10A OF THE I.T. ACT, WITHOUT APPRECIATING THE FACT THAT THER E IS NO PROVISION IN SECTION 10A THAT SUCH EXPENSES SHOULD BE REDUCED FROM THE TOTAL TURNOVER ALSO, AS CLAUSE (IV) OF THE EXPLANATION TO SECTION 10A PROVIDES THAT SUCH EXPENSES ARE TO BE REDUCED ONLY FROM THE EXPORT TURNOVER 4. THE CIT(A) ERRED IN NOT APPRECI ATING THE FACT THAT THE JURISDICTIONAL HIGH COURT'S DECISION IN THE CASE OF TATA ELXSI LIMITED 349 ITR 98 HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND AN APPEAL HAS BEEN FILED BEFORE THE HON'BLE SUPREME COURT. 5. THE LD. CIT(A) ERRED IN DIRECTING THE AO TO REC ONSIDER HIS WORKING AND REWORK THE ALP ACCORDINGLY TAKING INTO CONSIDERATION THE GUIDELINES ISSUED BY THE ITAT IN THE ASSESSEES OWN CASE FOR THE A.Y 2006 - 07 IN ITA NO 1410 OF 2010 WITHOUT APPRECIATING THE FACT THAT THE ITAT IN ITS ORDER HAD REMITTED THE IS SUE BACK TO THE FILE OF THE ASSESSING OFFICER TO RECOMPUTE THE ALP BY ADOPTING THE TNMM METHOD FOR ARRIVING AT THE ALP WHILE THE CIT(A) DOES NOT HAVE SUCH POWERS CONSEQUENT TO THE AMENDMENT OF SECTION 251(L)(A) BY THE FINANCE ACT, 2001 WEF 01.06.2001. 6. THE CIT(A) APPEALS ERRED IN, DIRECTING THE TPO TO RECONSIDER HIS WORKING AND REWORK THE ALP ACCORDINGLY TAKING INTO CONSIDERATION THE GUIDELINES ISSUED BY THE ITAT IN THE ASSESSEES OWN CASE FOR THE A.YS 2006 - 07 & 2007 - 08 WITHOUT APPRECIATING THE FACT THAT THE DIRECTIONS OF THE ITAT HAVE NOT REACHED A FINALITY AS APPEALS U/S 260A HAVE BEEN PREFERRED AGAINST THE SAID DIRECTIONS CONTAINED IN THE ORDERS DATED 30.08.2011 IN ITA NO. 1410/BANGALORE/2010 AND 28.03.2011 IN IT(TP) NO 1076/BANGALORE/2011 FOR THE A.YS 2006 - 07 AND 2007 - 08. 7. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE ORDER OF THE CIT (A) BE REVERSED IN SO FAR THE ABOVE ISSUE IS CONCERNED AND THAT OF THE A.O BE RESTORED. 8. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, TO AMEND OR TO DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. IT(TP)A NO.1447/BANG/2013 PAGE 3 OF 15 3. GROUND NO.1 IS GENERAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 4. GROUND NOS.2 TO 4 ARE REGARDING EXCLUSION OF EX PENDITURE INCURRED IN FOREIGN CURRENCY FROM THE EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVE R. 4 .1 WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL ON RECORD. THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF CIT V M/S TATA ELXSI LTD. & OTHER S 349 ITR 98 (KAR) HAD HELD THAT WHILE COMPUTING THE EXEMPTION U/S 10A, IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER IN THE DENOMINATOR. THE RELEVANT FINDING OF THE HON BLE JURISDICTIONAL HIGH COURT READS AS FOLLOWS: - ..SECTION 10A IS ENACTED AS AN INCENTIVE TO EXPORTERS TO ENABLE THEIR PRODUCTS TO BE COMPETITIVE IN THE GLOBAL MARKET AND CONSEQUENTLY EARN PRECIOUS FOREIGN EXCHANGE FOR THE COUNTRY. THIS ASPECT HAS TO BE BORNE IN MIND. WHILE COMPUTING THE CONSIDERATION RECEIVED FROM SUCH EXPORT TURNOVER, THE EXPENSES INCURRED TOWARDS FREIGHT, TELECOMMUNICATION CHARGES, OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA, OR EXPENSES IF ANY INCURRED IN FOREIGN EXCHANGE, IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA SHOULD NOT BE INCLUDED. HOWEVER, THE WORD TOTAL TURNOVER IS NOT DEFINED FOR THE PURPOSE OF THIS SECTION. IT IS BECAUSE OF THIS OMIS SION TO DEFINE TOTAL TURNOVER , THE WORD TOTAL TURNOVER FALLS FOR INTERPRETATION BY THIS COURT; IT(TP)A NO.1447/BANG/2013 PAGE 4 OF 15 ..IN SECTION 10A, NOT ONLY THE WORD TOTAL TURNOVER IS NOT DEFINED, THERE IS NO CLUE REGARDING WHAT IS TO BE EXCLUDED WHILE ARRIVING AT THE TOTAL TURNOVE R. HOWEVER, WHILE INTERPRETING THE PROVISIONS OF SECTION 80HHC, THE COURTS HAVE LAID DOWN VARIOUS PRINCIPLES, WHICH ARE INDEPENDENT OF THE STATUTORY PROVISIONS. THERE SHOULD BE UNIFORMITY IN THE INGREDIENTS OF BOTH THE NUMERATOR AND THE DENOMINATOR OF TH E FORMULA, SINCE OTHERWISE IT WOULD PRODUCE ANOMALIES OR ABSURD RESULTS. SECTION 10A IS A BENEFICIAL SECTION WHICH INTENDS TO PROVIDE INCENTIVES TO PROMOTE EXPORTS. IN THE CASE OF COMBINED BUSINESS OF AN ASSESSEE, HAVING EXPORT BUSINESS AND DOMESTIC BUSI NESS, THE LEGISLATURE INTENDED TO HAVE A FORMULA TO ASCERTAIN THE PROFITS FROM EXPORT BUSINESS BY APPORTIONING THE TOTAL PROFITS OF THE BUSINESS ON THE BASIS OF TURNOVERS. APPORTIONMENT OF PROFITS ON THE BASIS OF TURNOVER WAS ACCEPTED AS A METHOD OF ARRIV ING AT EXPORT PROFITS. IN THE CASE OF SECTION 80HHC, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSINESS INCOME OF THE ASSXCESSEE, WHEREAS IN SECTION 10 - A, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSINESS OF THE UNDERTAKING. EVEN IN THE CASE OF BUSINESS OF AN UNDERTAKING, IT MAY INCLUDE EXPORT BUSINESS AND DOMESTIC BUSINESS, IN OTHER WORDS, EXPORT TURNOVER AND DOMESTIC TURNOVER. TO THE EXTENT OF EXPORT TURNOVER, THERE WOULD BE A COMMONALITY BETWEEN THE NUMERATOR AND THE DENOMINATOR OF TH E FORMULA. IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED IN COMPUTING THE EXPORT TURNOVER AS A COMPONENT OF TOTAL TURNOVER IN THE DENOMINATOR. THE REASON BEING THE TOTAL TUR NOVER INCLUDES EXPORT TURNOVER. THE COMPONENTS OF THE EXPORT TURNOVER IN THE NUMERATOR AND THE DENOMINATOR CANNOT BE DIFFERENT. THEREFORE, THOUGH THERE IS NO DEFINITION OF THE TERM TOTAL TURNOVER IN SECTION 10A, THERE IS NOTHING IN THE SAID SECTION TO MANDATE THAT, WHAT IS EXCLUDED FROM THE NUMERATOR THAT IS EXPORT TURNOVER WOULD NEVERTHELESS FORM PART OF THE DENOMINATOR. WHEN THE STATUTE PRESCRIBED A FORMULA AND IN THE SAID FORMULA, EXPORT TURNOVER IS DEFINED, AND WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER, THE VERY SAME MEANING GIVEN TO THE EXPORT TURNOVER BY THE LEGISLATURE IS IT(TP)A NO.1447/BANG/2013 PAGE 5 OF 15 TO BE ADOPTED WHILE UNDERSTANDING THE MEANING OF THE TOTAL TURNOVER, WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER. IF WHAT IS EXCLUDED IN COMPUTING THE EXPORT TU RNOVER IS INCLUDED WHILE ARRIVING AT THE TOTAL TURNOVER, WHEN THE EXPORT TURNOVER IS A COMPONENT OF TOTAL TURNOVER, SUCH AN INTERPRETATION WOULD RUN COUNTER TO THE LEGISLATIVE INTENT AND IMPERMISSIBLE. THUS, THERE IS NO ERROR COMMITTED BY THE TRIBUNAL IN FOLLOWING THE JUDGEMENTS RENDERED IN THE CONTEXT OF SECTION 80HHC IN INTERPRETING SECTION 10A WHEN THE PRINCIPLE UNDERLYING BOTH THESE PROVISIONS IS ONE AND THE SAME . 4 .2 THE HON BLE MUMBAI HIGH COURT IN THE CASE OF CIT VS. GEM PLUS JEWELLERY INDIA LTD. 330 ITR 175, IN IDENTICAL CIRCUMSTANCES, HELD THAT SINCE THE EXPORT TURNOVER FORMS PART OF THE TOTAL TURNOVER, IF AN ITEM IS EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER TO MAINTAIN PARITY BETWEEN NUMERATOR AN D DENOMINATOR WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. THE RELEVANT FINDING OF THE HON BLE MUMBAI HIGH COURT READS AS FOLLOWS: - THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPORT AND THE TURN OVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUB - SECTION (4). EXPORT TURNOVER ALSO FORMS A CONSTITUENT ELEMENT OF THE DENOMINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. THE EXPORT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANING AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRESSION EXPORT TURNOVER IN EXPLN.2 TO S.10A W HICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED IN OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE IT(TP)A NO.1447/BANG/2013 PAGE 6 OF 15 EXPORT TURNOVER THE LEGISLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF THE REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES ARE LIABLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EXCLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVE NUE, HOWEVER, MISSES THE POINT THAT THE EXPRESSION TOTAL TURNOVER HAS NOT BEEN DEFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF S.10A. HOWEVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PUR POSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PROVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PREVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OTHER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF T HE CONTENTION OF THE REVENUE WERE TO BE ACCEPTED, THE SAME EXPRESSION VIZ. EXPORT TURNOVER WOULD HAVE A DIFFERENT CONNOTATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSION OF THE REVENUE WOULD LEAD TO A SITUATION WHERE FREIGHT AND INSURANCE, TH OUGH THESE HAVE BEEN SPECIFICALLY EXCLUDED FROM EXPORT TURNOVER FOR THE PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PART OF THE EXPORT TURNOVER WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMINATOR IN THE FORMULA. A CONSTRUCTION OF A ST ATUTORY PROVISION WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOVER, A RECEIPT SUCH AS FREIGHT AND INSURANCE WHICH DOES NOT HAVE ANY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTAL TURNOVER. FREIGHT AND INSURANCE CHARGES DO NOT HAVE ANY ELEMEN T OF TURNOVER. FOR THIS REASON IN ADDITION, THESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURNOVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRIPTION TO THE CONTRARY CIT V SUDARSHAN CHEMICALS INDUSTRIES LTD. (2000) 163 IT(TP)A NO.1447/BANG/2013 PAGE 7 OF 15 CTR (BOM) 596: ( 2000) 245 ITR 769 (BOM) APPLIED; CIT V LAKSHMI MACHINE WORKS (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) AND CIT V CATAPHARMA (INDIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON 4 .3 IN THE LIGHT OF THE ABOVE BINDING PRECEDENTS, WE DIRECT THE AO TO EXCLUDE THE ABOVE MENTIONED EXPENSES BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. 5. GROUND NOS.5 & 6 ARE REGARDING THE TRANSFER PRICING ADJUSTMENT AND ADOPTION O F TRANSACTIONAL NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD (MAM) FOR DETERMINING THE TRANSFER PRICING. 6. WE HAVE HEARD THE LEARNED AUTHORISED REPRESENTATIVE AS WELL AS LEARNED DEPARTMENTAL REPRESENTATIVE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT THIS ISSUE OF APPLYING TNMM AS MAM HAS BEEN CONSIDERED BY THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEARS 2006 - 07 TO 2009 - 10. FOR THE ASSESSMENT YEAR 2009 - 10, THE TRIBUNAL IN THE CASE OF ASSESSEE VIDE ITS ORDER DT.14.8.2014 IN IT(TP)A NO.271/BANG/2014 CONSIDERED AND DECIDED IN PARAS 30 TO 37 AS UNDER : 3 0 . A S C A N B E S EE N F RO M T H E A F O R E S A I D OB S E R V A T I ON S O F T H E T P O , TH E R I S K A D J U ST M EN T W A S N O T A L L O W E D F O R T H E REA S O N O F AB S E N C E O F P R O P E R BA SIS O F Q U AN TI F IC A T I O N . N O W T H A T T H E A S S E S S E E H A S G I V E N T H E B A S I S O F S U CH Q U AN TI F IC A T I O N , T H E TP O I S D I R E C T E D T O C O N SI D E R T H E S A M E . 3 1 . T H E I S S U E O F C O M P U T A T I O N O F A L P I S RE M AN D E D T O T H E TP O TO B E C O N S I D E R E D A F RE SH IN T H E L I G H T O F D I R E C T I O N S G I V E N E AR L I ER . T HU S, GROU N D N O S . B 4 T O 1 7 R A I S E D B Y T H E A S S E SS E E A R E D E CI D E D A C C O R D I N G L Y . 3 2 . IN G R OU N D N O S . B . 1 8 & 1 9 , T H E A S S E SS E E HA S C H A L L E NG E D T H E A DD ITI O N M A D E B Y T H E T P O W H ICH W A S C O N F I R M E D B Y TH E DRP I N T H E M A T T E R O F D E T ER M I N A TI O N O F A L P I N T H E SP A R E S R EP L A CEM EN T S ER V I C E S T R A N S A C TI O N WI T H T H E AE . IT(TP)A NO.1447/BANG/2013 PAGE 8 OF 15 3 3 . A S F A R A S T HE S E G R O U N D S A R E C ON C E R NED , T H E F A CT UA L A SP E CTS, A S WE H A V E A L R E AD Y S E E N , A R E T HA T T H E A S S E S SE E P R O V I D E S S P A RE S REP L A C E M E N T S E R V I C E S IN R E L A T I O N TO C S I P R O DU CTS S O LD B Y A F F IL I A T E IN I N D I A . T H E A S S E SS E E P R O C U R E S S PA R E P A R T S F RO M C S I A N D S UP P LI E S IT TO T H E C H A NNE L P A R T NER / C U S T O M ER S IN I ND I A . T H E P R ODU CT R E P L A C E M E N T S ER V I C E S A R E P R O V I DE D T HRO U G H T H I R D PAR T Y L O G I S TICS S ER VIC E S PRO V I D E R , W H O D E L I V ER S T H E S P AR E P A R TS TO C U ST O ME R S/C H A N N E L P A R T N ER S A S A N D W H E N REQU I R E D . T H E A S S E S S E E IS R E M U N E R A T E D O N A C O ST P L U S M AR K - U P BA S I S F O R PRO VIS I O N O F P R ODU CT REP L A C E M EN T S ER VI C E S. 3 4 . IN J U STI F IC A TI O N O F T H E PR I C E IT RE C E I V E D , T H E A SS E S S E E SU B M I T T E D A S F O L L O W S: - 4. 2 F U N CT I O N S BUY S SP ARE P A R T S FR O M C IS C O KE E P S I NV E N T O RY SUPP L I ES T O E N D C U S T O MERS AT I T S O W N C OS T SH I P S B A C K RE P L AC E M E N T T O C IS C O 4. 3 A S S ETS EM P L OY S O W N A S S E T S . T H E T A XP A Y ER K EE P S A H U G E I NV E N T O RY A S S H O W N B E L O W . 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N A M E O F T H E C O M P A R A B L E W E I GH T ED A V ERA G E O P ER A TI N G P R O F I T O N V A L U E A D D ED C O ST S I N P ERCE N T A G E % 1 A R SH I Y A I N T ER N A TI ON AL L T D . 7 % 2 A S SO C I A T E D RO AD C ARR I ERS L T D . 4 % 3 B L U E D ART E XP RE S S L T D . 14 % 4 CH AR T ER E D L OG IS T I CS L T D . 3 % 5 CO S T AL RO A D W A Y S L T D . 3 % 6 CON T A I N ER C O R PO RA TI O N O F I N D I A L T D . 33 % 7 EITA I ND I A L T D . - 2 % 8 G A I T 6 % 9 G O R D A O N W O O D F O F F E L OG I S TI C S L T D . 6 % 1 0 H A Y T RA N S (I N D I A) L T D . 2 % 1 1 I A L CON T A I N ER L I N E (I N D I A) L T D . 0 % 1 2 N E C C L OG IS T I CS L T D . 4 % 1 3 N O R T H EA S T ERN C ARR Y I N G CO RP L T D . 2 % 1 4 O V E R N I T E E X P RE S S L T D . 6 % 1 5 P L SH I PP I N G & L OG IS T I CS L T D . 4 % 1 6 P A T EL I N T E G RA T E D L OG IS T I CS L T D . 4 % 1 7 RO A D WA Y S I ND I A L T D . 1 % 1 8 S E R I N D US T R I ES L T D . - 1 % 1 9 S H R E Y A S R E L AY S Y ST E M S L T D . 4 % 2 0 S I CAL L OG I S TI CS L T D . 4 % 2 1 S K Y L I N E A I R L OG I S TI C S L T D . 31 % 2 2 S O U T H E RN R O A D C ARR I ERS L T D . 2 % 2 3 S P EE D Y M U L T I M O D ES L T D . 37 % 2 4 TM I N T ER N A T I O N A L L OG I S TI C S L T D . 10 % 2 5 D EE K S H A TRA V E L S P V T L T D . 16 % 2 6 D T D C COU R I ERS & C A R G O L T D . 6 % IT(TP)A NO.1447/BANG/2013 PAGE 10 OF 15 2 7 H I ND U S T AN C A R G O L T D . 5 % 2 8 I ND O A R Y A C E N T RAL TRA N S PO RT L T D . 4 % 2 9 P R I M I ER R O A D C ARR I ERS L T D . 0 % A V E RA G E M A R G I N 7 % A S P ER T H E A BO V E A N AL Y S I S , T H E T A X P A Y ER CL A I M E D T H A T IT S MAR G I N S F R O M T H E R E P L AC E ME N T S ER V I CES ARE AT P AR W IT H T H E C O M P ARA B L E S A N D H E N CE S H OU L D B E A C C E P T ED A T AR M S L E N G T H. 3 5 . 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CO M P A N Y N AME S A L E S TRA D I N G I N C O M E C H A NG E I N S T O CK PU RC H A S E O F F I N I SH ED GOO D S G R O S S P R O F I T G P / S A L ES PO I N T R ED TE L E C O M L T D . 24.7 4 24.6 7 0 . 3 9 23.9 3 1 . 1 3 4.57 % T V S I N T ERC ONN ECT SYS T E M S L T D . 4 04 . 5 1 2 0 8 . 1 5 - 6 . 2 3 145.4 5 5 6 . 4 7 13.96 % A R I T H ME TI C M EAN M A R G I N 9.26 % 4.1 3 C O M PU T A TI O N O F A R MS L E NG T H P R I CE : A R M S LE NG T H M EAN M AR G I N O N C O S T 9.26 % O P ERA T I N G CO S T 2,413,93 0 ,96 3 A R M S LE NG T H P R I CE ( A L P ) 1 0 9 . 2 6 % O F O P ERA T I N G CO S T 2,637,46 0 ,97 0 P R I C E R EC E I V ED 2,463,72 3 ,14 6 S H O RTF A L L B E I N G AD J U S T M E N T U / S . 92 C A 1 73,737,82 4 IT(TP)A NO.1447/BANG/2013 PAGE 11 OF 15 T H E A BOV E S HO R T FA L L O F R S . 1 73,737,824 / - I S T R E A T ED AS T RA NS F ER P R I C I N G A D J US T ME N T U / S . 92C A I N RE SP ECT O F P R ODU CT R E P L A CE M E N T S E R V I CES S E G M E N T O F T H E T A X P A Y E R S I N T ER N A TI O N AL T RA NS AC TI ONS . 3 6 . TH E D RP C O N F I R M E D TH E O RD E R O F T H E T P O . A T T H E T I M E O F HE A R I N G , IT W A S BR O U G H T T O O U R NO T I CE T HA T IN T H E C A S E O F A S S E S S E E F O R T H E A . Y . 20 0 6 - 0 7 , S I M IL A R IS SU E RE GARD I N G D E TE R M I NA T I O N O F A L P I N R E S PE CT O F P RO D U CT REP L A C E M EN T S ER V I C E S S E G ME N T H A D C O M E U P F O R C O N SI D E R A T I O N IN I T A N O . 1 4 1 0 / B A N G / 2 01 0 AN D T H E T R I B UNA L, IN I T S O R DE R DA T E D 30 . 8 . 2 0 11 , H A S H E L D A S F O L L O W S : - 7.1 . H A V I N G H E ARD BO T H T H E P AR T I ES A N D H A V I N G C O N S I D ERED T H E R I V AL C ON T E N T I O N S , W E F I N D T H A T T H E D E T E R M I N A T I O N O F AL P O F T H E I N T E R N A TI ON A L T RA N S A C T I O N B E T W EEN T H E A S S E S S EE A N D T H E A E I N U S A AS RE G AR D S T H E P R OD U C T RE P L A CE M E N T S ER V I C E I S B E FO RE U S . IT I S NO T I N D I S PU T E T H AT T H E I N T ER N A T I O N A L T R A NS AC T I O N W IT H T H E A S S O C I A T ED E N T E R P R I S ES H AS T O B E S CR U TI N I Z ED T O V ER I F Y , I F T H E S A M E I S AT A L P . T H E D I SPU T E B E F O R E U S I S W IT H RE G AR D T O T H E M E T HO D O F C O M PU T I N G T H E A LP A N D A L S O T H E C O M P A R A B L ES S E L E C T E D B Y T H E T P O . W E , T H ER E F O RE, F I R S T P R O CE E D T O D EC I D E T H E C O RRECT ME T HO D O F C O M PU TI N G T H E A L P . 7. 2 I N T H E CA S E B EF O RE U S , T W O D I F F ERE N T M E T H OD S ARE A DOP T ED T N M M B Y T H E A S S E S S E E A N D R P M B Y T H E T P O . W H I CH I S T H E M OS T A PP R OP R I A T E M E T H O D F O R ARR I V I N G A T T H E A LP I S T O B E E X A M I N E D . RU L E 1 0 B O F IT RU L ES P R OV I D E S F O R D I FFE R E N T ME T H O D S T O B E F O L L O W ED F O R D E T E R M I N A TI O N O F T H E AL P UN D E R S U B - S EC . 2 O F S EC .92 C O F T H E IT A C T . T H E F O L L O W I N G A R E T H E M E T HO D S F O R C O M PU TI N G T H E A L P . (A) C O M P AR A B L E U N C ON T R O LL ED P R I CE M E T HO D ( C U P ) I N W H I CH T H E P R I CE C H A R G E D O R P A I D F O R P R O P E R T Y T RA N S F ERRED O R S ER V I CES P R OV I D ED I N A C O M P A R A B L E UN C ON T R O L LE D T R A N S AC T I ON , O R A N U M B ER O F S U C H T RA N S A C TI ON S , I S I D E N T I F I ED A N D SU CH P R I CE I S A D J U S T ED T O A CC O U N T F O R D I F F ER E N CE S , I F A NY , B E T W EEN T H E I N T ER N A TI ON AL T RA N S AC T I O N A N D T H E C O M P AR A B L E UN C ON T R O L L ED T RA N S A C T I ON S O R B E T W EEN T H E E N T ER P R I S ES E N T ER I N G I N T O SU CH T RA NS A C TI ONS , W H I CH C O U L D M AT E R I A L L Y A F F E CT T H E P R I CE I N T H E OP EN MA R K E T A N D T H E A D J U S T ED P R I C E ARR I V ED A T I S T A K E N T O B E A N A RM S L E N G T H P R I CE I N RE SP ECT O F T H E P R OP ER T Y T RA N S F ERRED O R S E R V I CES P R OV I D ED I N T H E I N T ER N A TI ON AL T RA NS AC T I O N ; T HU S , I T CAN B E S E E N T H AT I N T H I S M E T H O D A C O M P AR IS O N H AS T O B E WI T H T RA NS AC T I O N O F A C O M P AR A B L E I N AN U N C ON T R O LL E D M AR K ET C OND IT I O N S IT(TP)A NO.1447/BANG/2013 PAGE 12 OF 15 I . E W IT H AN U N RE L A T E D T H I RD P AR T Y I N A F REE M AR K E T . IN T H E CA S E B E FO RE U S , T H E R E I S N O SU CH C O M P ARA B L E UN C ON T R O LL E D T RA NS AC T I O N T O B E C O M P ARED W IT H T H E T R A NS AC T I O N S O F T H E A S S E S S EE WI T H I T S A E. T H ERE F O RE, T H E C U P M E T HO D I S NO T A PP LI C A B L E. 9B ) R E S A L E P R I CE M E T HO D ( RP M ) B Y W H I C H T H E P R I CE A T W H I CH P R O P E R T Y P U RC H A S E D O R S ER V I C ES OB T A I N ED B Y T H E E N T ER P R I S E F R O M AN A S S O C I A T ED E N T E R P R I S E I S R E - SO L D O R ARE P R OV I D ED T O AN U N - RE L A T ED E N T E R P R I S E ( E M P H A S I S P R OV I D ED B Y US ) I S I D E N T I F IE D A N D SU CH RE - S A L E P R I CE I S RE D U CED B Y T H E A M OUN T O F A NO R M AL G R OS S P R O F I T M A R G I N A CCR U I N G T O T H E E N T ER P R I S E O R T O AN UN RE L A T ED E N T E R P R I S E F R O M T H E PU RC H A S E A N D RE S A L E O F T H E S AM E O R S I M IL A R P R OP ER T Y O R F R O M OB T A I N I N G A N D P R OV I D I N G T H E S A M E O R S I M IL AR S ER V I C E S , I N A C O M P ARA B L E UN C O N T R O L L ED T RA N S AC TI ON , O R A N U M B ER O F S U CH T RA NS AC T I O N S . T HUS , I T C AN B E S EEN T H AT T O A DO P T R E S A L E P R I CE M E T H OD , T H E P R OP ER T Y PU RC H A S E D O R S ER V I C E S OB T A I N ED B Y T H E E N T E R P R I S ES F R O M AN A SSO C I A T ED E N T ER P R I S E I S T O B E RE SO L D T O AN UN RE L A T ED P AR T Y . 7. 3 I N T H E C A S E B E F O RE U S , T H E P U RC H A S E F R O M A N D S A L E T O I S T H E S A M E A S S O C IA T ED E N T E R P R I S E. T H E R E A S O N G I V EN B Y T H E T P O F O R A DOP TI N G T H E R E - S A L E P R I CE M E T HO D I S T H AT T H E A S S E SS EE I S A T RA D ER / D I ST R I B U T O R O F T H E SP ARES O F IT S A SSO C I A T E D E N T ER P R IS E . WE ARE NO T A B L E T O A G REE W IT H T H I S F I ND I N G O F T H E T P O . A T RA D E R I S A ON E W H O PU RC H A S ES T H E GO O D S B Y T R A NS F ER O F O W N E R S H I P O V ER T H E G OOD S A N D I S F REE T O F I X T H E R E - S A L E P R I CE A N D A L S O I S F R EE T O C H O OS E T H E C US T O M ERS T O W HO M H E W O U L D S E L L T H E G O OD S . L I K EW I S E, I N T H E CA S E O F D I ST R I BU T I O N A L S O T H E RE - S A L E P R I CE C A N B E F I X ED B Y T H E D I S T R I BU T O R A N D S E L L ER H AS N O I N F L U E N CE W H A T S O E V ER I N F I X I N G SU CH A RE S A L E P R I CE . H O W E V E R , I N T H E CA S E B E F O RE U S , T H O UG H T H E A S S E S S EE I S B E C O M I N G T H E O W N ER O F T H E GOOD S I M PO R T E D , BU T , B Y V I R T U E O F T H E P R ODU CT RE P L A C E ME N T S ER V I CES A G RE E ME N T , H E H AS N O R I GH T T O F I X T H E RE S A L E P R I C E O R T O C HOOS E T H E C US T O MER T O W HO M T H E P R O DU C T S ARE T O B E S O L D . IT I S C L EAR F R O M T H E A G R EE M E N T T H AT T H E A S S E S S EE PU RC H A S E S T H E SP A RE P A R T S T O B E S O L D T O I T S A SSO C I A T ED E N T ER P R I S E ON L Y A N D F O R D O I N G S O , I T EAR N E D 1 % O F MARK U P O N T H E V A L U E O F T H E P R O D U C T S A N D T H E C O S T O F I M PO R T I N G T H E G O O D S . T H US , I T CAN B E S EEN T H AT T H E A S S E S S EE I S ON L Y A C US T O D I AN O F T H E GOOD S I M PO R T ED T I L L T H EY ARE D E LI V ERED T O T H E C LI E N T O R C US T O MER O F I T S P ARE N T C O M P A N Y O N I T S D I RE C T I ON S . T H ERE F O RE, T H E A S S E S S EE C A N N O T B E H E L D T O B E A T R A D E R O R D I S T R I BU T O R O F T H E G O O D S . W H EN T H E A S S E S S EE CA NNO T B E H E L D T O B E A T RA D ER O R D I S T R I BU T O R O F T H E SP ARE P AR T S , I T I S C L E AR T H AT T H E RE S A L E P R I CE M E T H O D I S N O T A PP L I CA B L E F O R ARR I V I N G AT T H E A L P O F T H E I N T E R N A TI ON AL T RA N S A C TI ON S . IT(TP)A NO.1447/BANG/2013 PAGE 13 OF 15 7. 4 T H E O T H ER M ET H O D S P R O V I D ED ARE C O S T P L U S M ET H O D W H I C H I S A PP LI C A B L E T O T H E T RA NS AC T I ON S RE L A TI N G T O M A N U F A C T U RE A N D S A L E O F GOO D S A N D P R O F I T SP L I T M E T H O D W H I C H I S A PP LI C A B L E M A I N L Y I N I N T E R N A TI ON A L T R A N S AC T I O N S I NVO L V I N G T R A N S F ER O F UN I Q U E I N T A NG I B L E S O R I N M U L TI P L E I N T ER N A T I O N AL T RA NS AC T I O N S W H I C H ARE S O I N T E R - RE L A T ED T H AT T H EY C A NNO T B E E V A L U A T ED S E P ARA T E L Y F O R T H E PU R POS E O F D E T E RM I N I N G T H E A LP O F A N Y O N E T RA N S A CT I ON . T H E S E T W O ME T H O D S CA NNO T B E M A D E A PP L I C A B L E T O T H E F AC T S B E F O R E US . T H E ON L Y REMA I N I N G ME T HO D I S T H E TRA N S A C TI ON AL N E T MAR G I N ME T H O D (T NMM ) B Y W H I C H T H E N ET P R O F I T M AR G I N REA L IZ ED B Y AN E N T E R P R I S E F R O M AN I N T ER N A TI ON AL T R A N S AC T I O N E N T ERED I N T O W I T H AN A SSO C I A T ED E N T E R P R I S E I S C O M PU T E D I N RE L A T I O N T O C OS T S I N C U RRED O R S A LE S EF F E CT ED O R A S S E T S E M P L O Y ED O R T O B E E M P L OY E D B Y T H E E N T ER P R I S E A N D I S C O M P ARED T O N E T P R O F I T M A R G I N RE A LI ZE D B Y A N U N RE L A T ED E N T E R P R I S E F R O M A N UN C ON T R O LL E D T R A NS AC T I O N O R A NU M B E R O F S U C H T RA NS AC T I O N S A N D T H E A D J U S T M E N T S F O R T H E D I F F E RE N CE I S MA D E. T H E A S S E S S EE H AS A D O P T E D T H E T RA N S A C TI O N AL N ET MAR G I N M E T HOD , AS T H E M O S T A P P R OP R I AT E ME T H O D A S S E EN A B O V E. W E H A V E A L REA D Y F O U N D T H AT T H E O T H E R M E T H O D S P RE S CR I B E D B Y RU L ES A RE NO T A PP L I CA B L E T O T H E F A C T S O F T H E CA S E B E F O R E A N D T H ER E F O RE, T H E T N M M M E T H O D I S T H E M O S T A P P R OP R I A T E M ET HO D F O R C O M PU T I N G T H E A LP R E L A T I N G T O T H E I N T ER N A T I ON A L T RA NS AC T I ON S O F T H E A S S E S S E E W IT H I T S A S S O C I A T ED E N T E R P R I S E. 8 . C O M I N G T O T H E N E X T IS S U E I . E S E L EC T I O N O F C O M P ARA B L E S , W E F I N D T H AT T H E RU L E - 10 B O F S U B - R U L E - 2 & 3 C L EAR L Y P R OV I D E S T H E CR I T ER I A T O B E C O N S I D E R E D I N S E L EC TI O N O F C O M P A RA B L E S . O N E O F T H E I M PO R T A N T CR I T ER I A I S T H E F A R A N A L Y SI S I . E F UN C T I O N S P E R F O R M E D , A S S E T S E M P L O Y ED A N D R I S K S U N D ER TA K EN B Y T H E A S S E S S EE AS W E L L A S T H E C O M P A RA B L E C O M P A N I E S . IN T H E SU B M I SS I O N S M A D E B Y T H E A S S E S S EE, I T I S C L E AR T H AT T H E A S S E S S EE I S P E R F O RM I N G T H E F UN C T I O N O F S T O R I N G T H E S P ARE P A R T S I M P O R T ED A N D SUP P L Y T H E M T O T H E C U S T O M E RS W H I L E B I LLI N G T H E U S C O M P A N Y F O R T H E S A L E O F T H E P R OD U C T S . T H E S ER V I CES P R O V I D ED B Y T H E A S S E S S E E A RE A K I N T O T H AT O F T H E C & F A G E N T S W H O ARE RE S PONS I B L E F O R T H E S A F E K E E P I N G A N D T RA NSP O RT O F T H E GOO D S T O T H E C LI E N T S O N T H E D I RE CT I O N O F T H E P R I N C I P A L . T H E C O M P ARA B L E S A DO P T ED B Y T H E A S S E S S EE ARE AL S O P E R F O R M I N G S IM IL AR F U N C TI ONS . 8. 1 A S A L RE A D Y B R O U G H T O U T B Y T H E C OUNS EL F O R T H E A S S E S S EE T H E A S S E T S E M P L O Y ED A N D T H E R I S K UND ER T A K EN B Y T H E A S S E SS EE ARE N I L . AL L T H E S E F A C T O R S ARE T O B E C O N S I D ERED W H I L E S E L EC TI N G T H E C O M P ARA B L E S , BU T T H E T P O H AS NO T C O N S I D ERED T H E S E A SP EC T S B E F O RE RE J E C TI N G T H E C O M P ARA B L ES S E L E C T ED B Y T H E A S S E SS EE. A S RE G AR D S T H E C O M P ARA B L E S S E L EC T E D B Y T H E T P O , AS R I G H T L Y PO I N T E D OU T B Y T H E C OUN S E L F O R T H E IT(TP)A NO.1447/BANG/2013 PAGE 14 OF 15 A SS E S S EE, T H REE O F T H E S E C O M P ARA B L ES E X CE P T I R I S C O M P U T ERS ARE I N V O L V E D I N T R A D I N G A N D M A N U F A CT U R I N G AC T I V IT IE S A N D T H E S E G M E N T AL B R EA K U P I S N O T G I V E N . FU R T H ER, T H E A S S E T S EM P L OY ED A N D T H E R I S K UND ER T A K E N B Y T H E S E C O M P A N I E S ARE A L S O H I GH ER T H AN T H E A S S E SS E E. T H E RE F O R E , W E ARE I N A G REE M E N T W I T H T H E L E A R N E D C OUNS EL F O R T H E A S S E S S E E T H AT T H E S E C O M P A N I E S H A V E T O B E RE J E C T ED AS T H E C O M P A R A B L E S . T H E O N L Y C O M P A R A B L E W H I CH CAN B E AC C E P T ED I S I R I S C O M P U T E R S A N D I S T O B E AC C E P T ED A N D T H E G R OS S P R O F I T AS PO I N T ED O U T B Y T H E L E AR N ED C O U N S EL F O R T H E A S S E S S EE S H OU L D AL S O RE C ONS I D E R ED B Y T H E T P O . H O L D I N G T H US , W E REM I T T H E I S S U E B ACK T O T H E T P O / A O W IT H A D I REC T I O N T O REC O M PU T E T H E AL P B Y A DOP T I N G T H E P R O P ER C O M P AR A B L ES A N D A L S O B Y US I N G T H E T N M M M E T HO D F O R ARR I V I N G A T T H E A L P . H E SH A L L A L S O C O N S I D ER T H E I S S U E O F A L L O W I N G T H E B E N E F I T O F 5 % RA NG E AS P R O V I D ED UND ER T H E ER S T W H I L E P R OV I S O T O S E C .92C ( 2 ) O F T H E AC T I N T H E L I GH T O F T H E J UD I C I AL P RE C E D E N T S T H E R E ON. 3 7 . W E AR E O F T H E V I E W TH A T T H E F A C T S AN D C I R C UM ST AN C E S O F T H E PR E S EN T A SS E SS M EN T Y E A R BE I N G I DEN T I C A L, T H E I S S U E O F D E TE R M I N I N G T H E A L P S HOU L D B E RE MA ND E D TO T H E T P O / A O F O R F RE SH C O N SI D E R A T I O N I N T H E L I G H T O F T H E D I R E CTI O N S G I V E N B Y T H E TR I BUN A L IN A . Y . 20 06 - 0 7 . W E HO L D A N D D I R E CT A CC O RD I NG L Y . T HU S, G R OU N D S N O S .1 8 & 1 9 AR E DE C I D E D A CC O RD I NG L Y . THUS IN THE IDENTICAL FACTS AND CIRCUMSTANCES, THE TRIBUNAL HAS SET ASIDE THE ISSUE OF DETERMINATION OF ARM S LENGTH PRICE (ALP) T O THE RECORD OF THE TPO/A.O FOR FRESH CONSIDERATION BY USING THE TNMM AS MAM. RESPECTFULLY FOLLOWING THE EARLIER ORDERS OF THE TRIBUNAL, WE SET ASIDE THIS ISSUE TO THE RECORD OF THE TPO/A.O IN THE SAME TERMS AS DIRECTED BY THE TRIBUNAL IN THE ORDER. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 15TH DAY OF JULY, 201 6 . SD/ - (ABRAHAM P GEORGE) ACCOUNTANT MEMBER SD/ - (VIJAY PAL RAO) JUDICIAL MEMBER *REDDY GP