JCB India Ltd., Pune V. ACIT, Pune

ITA 1456/PUN/2010

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0270 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 5 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Assessment Year: 2006-2007
• Appeal Filed On: 16-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y S KAKKAR; VIKRAM SAHAY
• Assessee Lawyers: G C SRIVASTAVA; SAURABH SRIVASTAVA
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 92C; 10B; 2; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY, JM ITA NO.1456/PUNE/2010 ASSESSMENT YEAR :2006-07 JCB INDIA LIMITED (FORMERLY KNOWN AS JCB MANUFACTURING LTD.), TALEGAON FLORICULTURE & INDUSTRIAL PARK, VILLAGE AMBI, NAVLAKH UMBHRE, TAL. MAVAL, TALEGAON DABHADE, DIST. PUNE 410 507. PAN: AABCJ4286D VS. ACIT, CIRCLE-9, AKURDI, PUNE. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI G.C. SRIVASTAVA, ADVOCATE & SHRI SAURABH SRIVASTAVA, FCA DEPARTMENT BY : SHRI VIKRAM SAHAY, CIT, DR & MS Y.S. KAKKAR, SR. DR DATE OF HEARING : 08.06.2015 DATE OF PRONOUNCEMENT : 10.06.2015 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE EMANATES FROM THE FINA L ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 20.10.2010 U/S 14 3(3) READ WITH ITA NO.1456/PUNE/2010 2 SECTION 144C(13) OF THE INCOME-TAX ACT, 1961 (HEREI NAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2006- 07. 2. THE FIRST CHALLENGE IN THIS APPEAL TO THE ADDITI ON ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.21,75,4 2,500/-. 3.I. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT JCB, UK, IS A MAJOR PLAYER IN THE GLOBAL CONSTRUCTION AND AGRICULTURE S ECTORS. JCB INDIA LTD., IS A WHOLLY OWNED SUBSIDIARY OF JCB, UK. IN TURN, JCB MANUFACTURING LTD. (I.E., THE ASSESSEE) WAS SET UP BY JCB INDIA A S ITS 100% SUBSIDIARY ON 21.06.2004. THE ASSESSEE COMMENCED ITS BUSINESS ON 20.6.2005. IT IS A MATTER OF RECORD THAT THE ASSESSEE COMPANY GOT MERGED WITH JCB INDIA BY VIRTUE OF THE JUDGMENT OF THE HONBLE HIGH COURT DATED 26.5.2010 W.E.F. 1.4.2009. THUS, IN SO FAR AS THE YEAR UNDER CONSIDERATION IS CONCERNED, THE ASSESSEE WAS A SUBS IDIARY OF JCB INDIA. THE ASSESSEE MANUFACTURED COMPONENTS SUCH AS BACK B LADES, BUCKETS, DIPPERS, CHASSIS, LOADER ARM, TRACK BEAM, ETC., WHI CH FORM PARTS OF EARTH MOVING MACHINES. FIVE INTERNATIONAL TRANSACTIONS WE RE REPORTED BY THE ASSESSEE IN FORM NO.3CEB FOR THE YEAR IN QUESTION. FIRST TRANSACTION IS ITA NO.1456/PUNE/2010 3 EXPORT OF FINISHED GOODS AMOUNTING TO RS.20,21,62 ,339/- AND THE SECOND TRANSACTION IS IMPORT OF RAW MATERIALS TO THE TUNE OF RS.73,73,270/-. THE ASSESSEE BENCHMARKED THESE TWO INTERNATIONAL TRANSACTIONS JOINTLY BY APPLYING THE TRANSACTIONAL NET MARGIN METHOD (TNMM). APART FROM THE ABOVE TWO, THE ASSESSEE ALS O ENTERED INTO THREE MORE INTERNATIONAL TRANSACTIONS, NAMELY, IMP ORT OF MACHINERY, JIGS AND FIXTURES, `REIMBURSEMENT OF EXPENSES PAID AND `REIMBURSEMENT OF EXPENSES RECEIVED.. THESE THREE INTERNATIONAL TRANSACTIONS WERE DEMONSTRATED AT ARMS LENGTH PRIC E (ALP) BY APPLYING THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. TH ERE IS NO DISPUTE IN SO FAR AS THE LAST THREE INTERNATIONAL TRANSACTI ONS ARE CONCERNED. ON A REFERENCE MADE BY THE AO TO THE TRANSFER PRICING OF FICER (TPO), IT WAS FOUND BY THE LATTER THAT THE ASSESSEE ADOPTED PROFI T LEVEL INDICATOR (PLI) OF OPERATING PROFIT TO SALES FOR THE INTERNATIONAL TRANSACTION OF `IMPORT OF RAW MATERIAL AND OPERATING PROFIT/TOTAL COST FO R THE INTERNATIONAL TRANSACTION OF `EXPORT OF FINISHED GOODS. THE AS SESSEE AGGREGATED THESE TWO INTERNATIONAL TRANSACTIONS OF IMPORT OF R AW MATERIALS AND EXPORT OF FINISHED GOODS AND CARRIED OUT ENTITY LEV EL BENCHMARKING. THE ITA NO.1456/PUNE/2010 4 TPO DID NOT DISPUTE THE APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD, NOR DID HE DISAGREE WITH THE AGGREGATION OF THESE INTERNATIONAL TRANSACTIONS. THE ASSESSEE USED 10 COMPANIES AS COM PARABLES, WHICH HAVE BEEN ENLISTED ON PAGE 5 OF THE TPOS ORDER. T HE TPO EXCLUDED TWO COMPANIES FROM SUCH LIST, NAMELY, AHMEDABAD S TEELCRAFT LTD. WITH OP/TC AT (-)16.71% AND SHIV AGRICO IMPLEMENTS LTD. (SEG.) WITH OP/TC AT (-)50.79%. ARITHMETICAL MEAN OF THE REMA INING 8 COMPARABLE COMPANIES WAS COMPUTED BY THE TPO AT 13.47%. 3.II. ON PERUSAL OF THE DETAILS FURNISHED BY THE ASSESSEE ON THE ISSUE OF ITS DETERMINATION OF PLI, THE TPO OBSERVED THAT THE ASSESSEE HAD ADJUSTED ITS PLI TO 10.79% AS AGAINST THE UNADJUSTE D OP/TC AT (-) 45.23%. ON BEING CALLED UPON TO EXPLAIN AS TO HOW IT COULD SUBSTITUTE ITS ACTUAL OPERATING PROFIT MARGIN WITH SOME HYPOTH ETICAL ADJUSTED FIGURE, THE ASSESSEE SUBMITTED THAT BECAUSE OF ITS FIRST YE AR OF OPERATION, THE OPERATING COSTS WERE HIGH DUE TO LOWER PRODUCTIVITY ON ACCOUNT OF WORKMEN BEING IN LEARNING PHASE; HIGHER CONSUMPTION OF ELECTRICITY ON ACCOUNT OF DIESEL GENSETS; AND HIGHER DISTRIBUTION COST AND FIXED ITA NO.1456/PUNE/2010 5 OVERHEADS ON ACCOUNT OF LOWER VOLUMES. THE ASSESSE E INVITED THE ATTENTION OF THE TPO TOWARDS ANNEXURE H TO THE TRAN SFER PRICING STUDY REPORT, GIVING THE WORKING OF THE ADJUSTED OPERATIN G PROFIT. THE TPO OBSERVED THAT NOTHING WAS MENTIONED AS TO HOW THE A DJUSTED FIGURES WERE ARRIVED AT AND, FURTHER, THE BASIS OF SUCH ADJ USTMENT WAS UNKNOWN. HE REFUSED TO ALLOW THIS ADJUSTMENT AS, IN HIS OPIN ION, ANY ADJUSTMENT CAN BE MADE ONLY TO THE PROFIT MARGIN OF THE COMPAR ABLES UNDER RULE 10B(1)(E)(III) AND NOT TO THE PROFIT MARGIN OF THE ASSESSEE UNDER RULE 10B(1)(E)(I). DISCARDING THE ADJUSTED POSITIVE PRO FIT MARGIN DECLARED BY THE ASSESSEE AT 10.79% ON A HYPOTHETICAL BASIS, THE TPO ADOPTED UNADJUSTED PROFIT MARGIN OF THE ASSESSEE AT (-)45.2 3%. BY CONSIDERING THE ARITHMETICAL MEAN OF THE OPERATING PROFIT MARGI N OF THE COMPARABLES AT 13.47%, THE TPO APPLIED BENCHMARK OF OPERATING P ROFIT/TOTAL COST AT 58.70% (45.23% +13.47%) ON THE INTERNATIONAL TRANSA CTION OF EXPORT OF FINISHED GOODS. THIS RESULTED INTO RECOMMENDATION FOR A TRANSFER PRICING ADJUSTMENT TO THE TUNE OF RS.2175.425 LAC. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THAT ITA NO.1456/PUNE/2010 6 IS HOW, THE AO IN THE IMPUGNED ORDER MADE ADDITION FOR A SUM OF RS.21.75 CRORE AND ODD. THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE IS NOT SATISFIED WITH THE ORDER OF THE AO/TPO ONLY ON TWO COUNTS VIZ., (I) NON-ADOPTION OF ADJUSTED OPERATING PROFIT RATE; AND (II) REMOVAL OF TWO COMPANIES FROM THE LIST OF COMPARABLES. APART FROM THE ABOVE, ALL OTHER ASPEC TS OF THE TP ANALYSIS CARRIED OUT BY THE TPO, HAVE BEEN ACCEPTED BY THE A SSESSEE. WE WILL DEAL WITH THE ABOVE REFERRED TWO ISSUES ONE BY ONE. I. NON-ADOPTION OF ADJUSTED PLI OF THE TESTED PARTY . 5. IT IS AN UNDISPUTED POSITION THAT THE ASSESSEES UNADJUSTED PLI (OP/TC) STOOD AT LOSS OF (-)45.23%. THE ASSESSEE, HOWEVER, ADJUSTED SUCH PLI TO 10.79%. THIS WAS DONE BY ADOPTING THE AMOUNT OF OPERATING EXPENSES FOR TRANSFER PRICING ANALYSIS AT RS.1831.98 LAC AS AGAINST THE ACTUAL OPERATING EXPENSES INCURRED BY I T DURING THE YEAR IN QUESTION AT RS. 3706.55 LAC. THUS, IT IS APPARENT T HAT THE ASSESSEE HAS REDUCED OPERATING EXPENSES BY MORE THAN 50% OF ACTU AL AMOUNT SPENT ITA NO.1456/PUNE/2010 7 FOR THE PURPOSES OF TRANSFER PRICING ANALYSIS. THI S WAS TRIED TO BE JUSTIFIED BEFORE THE TPO BY ARGUING THAT THE COMPAN Y STARTED ITS OPERATION IN JUNE, 2005 AND, HENCE, THE YEAR UNDER CONSIDERATION WAS NOT EVEN FIRST FULL YEAR OF OPERATIONS. IT WAS FURTHER SUBMITTED THAT IT HAD INCURRED COSTS WHICH WERE EXTRAORDINARY AND NON-OPE RATING IN NATURE DUE TO THE START-UP RELATED REASONS. IT WAS FURTHER S UBMITTED THROUGH ITS LETTER DATED 15.6.2009 THAT THE COSTS FOR THE CURRENT YEAR WERE CONSIDERED ON THE BASIS OF THE COSTS INCURRED FOR THE FINANCIAL Y EAR 2008-09 AS A FIRST POINT OF REFERENCE AND ALSO THE AUDITED ACCOUNTS FO R FINANCIAL YEAR 2007- 08, WHERE THE FIGURES FOR FINANCIAL YEAR 2008-09 WE RE NOT AVAILABLE. THIS HAS BEEN MENTIONED IN PARA 2.7 OF THE ASSESSEE S LETTER DATED 15.6.2009 ADDRESSED TO THE TPO DURING THE COURSE OF THE TP PROCEEDINGS. THUS, IT IS APPARENT THAT INSTEAD OF THE ACTUAL COSTS INCURRED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION IN RESPECT OF THE INTERNATIONAL TRANSACTION, IT OPTED FOR THE FIGURES OF STANDARD COSTS BY RELYING ON THE FIGURES FOR THE ASSESSMENT YEARS 200 9-10 AND 2008-09. THE QUESTION ARISES AS TO WHETHER THE COURSE OF ACT ION ADOPTED BY THE ASSESSEE IN SUBSTITUTING THE ACTUAL COSTS INCURRED WITH SOME STANDARD ITA NO.1456/PUNE/2010 8 COSTS IS PERMISSIBLE UNDER LAW. TO BE MORE PRECISE, WHETHER ANY ADJUSTMENT IS PERMISSIBLE IN THE ASSESSEES OWN PROFIT MARGIN? 6. IN ORDER TO ANSWER THIS QUESTION, WE NEED TO HAVE A LOOK AT THE PROVISIONS RELATING TO COMPUTATION OF INCOME FROM I NTERNATIONAL TRANSACTION HAVING REGARD TO THE ARMS LENGTH PRICE CONTAINED IN CHAPTER- X OF THE ACT. SUB-SECTION (1) OF SECTION 92 PROVID ES THAT: ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. COMPUTATION OF ARMS LENGTH PRICE HAS BEEN ENSHRINED IN SECTION 92C OF THE ACT. SUB-SECT ION (1) OF SECTION 92C PROVIDES THAT: `THE ARM'S LENGTH PRICE IN RELA TION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE N ATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERS ONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FA CTORS AS THE BOARD MAY PRESCRIBE. . THEN FIVE SPECIFIC METHODS HAVE BEEN SET OUT IN THIS PROVISION AND THE SIXTH ONE IS: SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. RULE 10B DEALS WITH THE DETERMINATIO N OF ARMS LENGTH ITA NO.1456/PUNE/2010 9 PRICE U/S 92C WITH THE METHODS AS PRESCRIBED UNDER THE ACT. ADVERTING TO THE FACTS OF THE INSTANT CASE, IT IS FOUND THAT THE ASSESSEE APPLIED THE TNMM AS THE MOST APPROPRIATE METHOD, WHICH HAS BEEN CONCURRED WITH BY THE TPO. THE MODUS OPERANDI FOR THE COMPUTATION OF ALP UNDER THIS METHOD HAS BEEN SET OUT IN RULE 10B(1)(E) AS UNDER: - (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGA RD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III) ; ITA NO.1456/PUNE/2010 10 (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELAT ION TO THE INTERNATIONAL TRANSACTION. 7. RULE 10B(2) PROVIDES THAT FOR THE PURPOSES OF SU B-RULE (1), THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO VARIO US FACTORS GIVEN IN THIS PROVISION, SUCH AS, THE SPECIFIC CHARACTERISTICS O F THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACT ION ; THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR T O BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS ; THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FO RMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLI CITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVI DED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS ; AND CONDI TIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRAN SACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAP ITAL IN THE MARKETS, ITA NO.1456/PUNE/2010 11 OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. 8. RULE 10B(3) STIPULATES THAT AN UNCONTROLLED TR ANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION, IF, (I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET ; OR (II) REASONABL Y ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SU CH DIFFERENCES. 9. WHEN WE READ SUB-RULES (2) AND (3) IN JUXTAPO SITION TO RULE 10B(1)(E), IT EMERGES THAT THE ARMS LENGTH PRICE U NDER TNMM CAN BE DETERMINED BY COMPARING THE PROFITABILITY OF AN INT ERNATIONAL TRANSACTION WITH THAT OF THE COMPARABLE UNCONTROLLED TRANSACTIO N. IN ORDER TO MAKE SUCH A COMPARISON, IT IS RELEVANT TO SEE THE DIFFER ENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND COMPARABLE UNCONT ROLLED TRANSACTION. IF THERE ARE NO DIFFERENCES BETWEEN THE TWO SETS OF TR ANSACTIONS OR THE DIFFERENCES, IF EXIST, ARE NOT LIKELY TO MATERIALLY AFFECT THE PRICE/PROFIT ITA NO.1456/PUNE/2010 12 FROM SUCH TRANSACTION, THEN, THE MATTER ENDS AND TH E COMPARABLES ARE DETERMINED AND THE ALP CAN BE WORKED OUT. THE OTHE R SITUATION MAY BE WHEN THERE ARE DIFFERENCES BETWEEN THE INTERNATIONA L TRANSACTION AND UNCONTROLLED TRANSACTION, WHICH MATERIALLY AFFECT T HE PRICE OR PROFIT FROM SUCH TRANSACTIONS. IN SUCH A SITUATION, THE LAW CON TEMPLATES OF MAKING A REASONABLY ACCURATE ADJUSTMENT TO THE UNCONTROLLED TRANSACTION FOR ELIMINATING THE MATERIAL EFFECTS OF SUCH DIFFERENCE S. COMING BACK TO THE MODUS OPERANDI GIVEN IN RULE 10B(1)(E) FOR THE DETERMINATION OF A LP UNDER TNMM, WE FIND THAT SUB-CLAUSE (I), BEING THE FIRST STEP, PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRI SE FROM AN INTERNATIONAL TRANSACTION SHOULD BE COMPUTED IN RELATION TO A BAS E, SUCH AS, COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED, ETC. UNDER SUB-CLAUSE (II), WHICH IS THE SECOND STEP IN THE DETERMINATION OF AL P UNDER TNMM, THE NET PROFIT MARGIN FROM A COMPARABLE UNCONTROLLED TR ANSACTION IS COMPUTED HAVING REGARD TO THE SAME BASE AS ADOPTED UNDER SUB-CLAUSE (I), NAMELY, COSTS INCURRED OR SALES EFFECTED OR AS SETS EMPLOYED, ETC. UNDER SUB-CLAUSE (III), WHICH IS THE THIRD STEP, TH E PROFIT MARGIN OF THE UNCONTROLLED TRANSACTION REALIZED IN SUB-CLAUSE (II ) IS ADJUSTED TO TAKE ITA NO.1456/PUNE/2010 13 INTO ACCOUNT THE DIFFERENCES BETWEEN THE INTERNATIO NAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION. IT IS THIS AD JUSTED PROFIT MARGIN OF COMPARABLES WHICH IS CONSIDERED FOR BENCHMARKING TH E PROFIT MARGIN REALIZED BY THE ASSESSEE FROM INTERNATIONAL TRANSAC TION AS PER SUB-CLAUSE (I). ON GOING THROUGH THE MANDATE OF RULE 10B(1)(E ), IT IS MANIFEST THAT SUB-CLAUSE (I) CLEARLY REFERS TO THE COMPUTATION OF ` THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TR ANSACTION. THERE IS NO STIPULATION UNDER THE PROVISION WHICH CALLS FOR ADJUSTING THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION DUE TO ONE REASON OR THE OTHER. WHEN THE PRESCRIPTION OF THE PROVISION IS EXPLICITLY PATENT IN PROVIDING FOR COMPUTING THE PR OFIT MARGIN OF THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION AS SUCH , WE FAIL TO APPRECIATE AS TO HOW ANY ADJUSTMENT CAN BE MADE TO THE PROFIT MARGIN OF THE ASSESSEE UNDER SUB-CLAUSE (I) DUE TO REASONS, SUCH AS, THE INCURRING OF EXTRAORDINARY AND NON-OPERATING COSTS DUE TO START UP RELATED REASONS. IF SUCH AN ADJUSTMENT IS MADE, THE RESULTANT FIGURE WI LL SHED THE CHARACTER OF THE NET PROFIT MARGIN REALIZED, WHICH IS CONTRARY TO THE EXPRESS LANGUAGE OF THE PROVISION. IT IS OBVIOUS THAT IN T HE COMPUTATION OF ITA NO.1456/PUNE/2010 14 OPERATING PROFIT MARGIN FROM AN INTERNATIONAL TRANS ACTION, ALL NON- OPERATING COSTS DO NOT FORM PART OF THE COST BASE W HICH ARE THUS EXCLUDED AT THE VERY OUTSET. IN SO FAR AS THE OPERATING COS TS ARE CONCERNED, THESE FIND THEIR PLACE IN THE COMPUTATION IRRESPECTIVE OF THE FACT WHETHER THEY ARE HIGHER OR LOWER DUE TO ANY REASON WHATSOEVER. THE RATIONALE BEHIND THE ENTIRE TRANSFER PRICING REGIME IS TO COMPARE TH E COSTS/PROFITS INCURRED/EARNED BY THE ASSESSEE FROM AN INTERNATION AL TRANSACTION AS IT IS WITH AN UNCONTROLLED TRANSACTION AND COMPUTE INCOME FROM SUCH INTERNATIONAL TRANSACTION HAVING REGARD TO ITS ALP DETERMINED ON THE BASIS OF A COMPARABLE UNCONTROLLED TRANSACTION. IF THE OPERATING COSTS INCURRED BY THE ASSESSEE FROM THE INTERNATIONAL TRA NSACTION ARE ADJUSTED AT THE VERY THRESHOLD, THEN HOW THE TRANSFER PRICIN G PROVISIONS WOULD APPLY TO DETERMINE THE ALP OF AN INTERNATIONAL TRAN SACTION, IS BEYOND OUR COMPREHENSION. THE MANDATE OF THE PROVISION IS CRYSTAL CLEAR THAT WHATEVER BE THE OPERATING COSTS INCURRED BY THE ASS ESSEE IN RELATION TO AN INTERNATIONAL TRANSACTION, THESE ARE LIABLE TO BE C ONSIDERED AS SUCH WITHOUT MAKING ANY ADJUSTMENT WHATSOEVER IN DETERMI NING THE NET PROFIT MARGIN REALIZED . IF ANY ADJUSTMENTS ARE ALLOWED TO THE ASSESSEES PROFIT ITA NO.1456/PUNE/2010 15 MARGIN, THEN THE ENTIRE TRANSFER PRICING EXERCISE W ILL BE THROWN TO THE WINDS, THEREBY MAKING THE PROVISIONS OF CHAPTER-X A S A REDUNDANT PIECE OF LEGISLATION. ONCE THE LEGISLATURE PROVIDES FOR COMPUTING PROFIT MARGIN EARNED BY THE ASSESSEE FROM AN INTERNATIONAL TRANSA CTION WITHOUT ANY ADJUSTMENT, IT HAS TO BE THE OPERATING PROFIT MARGI N AS PER THE BOOKS OF ACCOUNT STRICTLY IN CONFORMITY WITH THE BUSINESS CO NDITIONS AS THEY EXIST WITHOUT ANY PLUS OR MINUS. 10. THE ABOVE DISCUSSED IS NOT THE END OF THE RO AD. WE WANT TO MAKE IT CLEAR THAT IT IS NOT AS IF THE DIFFERENCE BETWEE N THE INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTION , NOT RECKONED IN THE OPERATING PROFIT MARGIN OF THE ASSESSEE, REMAINS UN ADDRESSED TO. FOR GIVING EFFECT TO SUCH DIFFERENCES AND ALLOWING ADJU STMENT FOR BRINING THE INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLL ED TRANSACTION AT PAR, THE MANDATE OF SUB-CLAUSE (III) OF RULE 10B(1)(E) C OMES INTO PLAY. THIS SUB-CLAUSE PROVIDES THAT: ` THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION ITA NO.1456/PUNE/2010 16 AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. WHIC H COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN... THUS, IT IS VIVID FROM THE PRESCRIPTION OF THE PROVISION THAT IF THERE ARE DIF FERENCES IN TERMS OF RULE 10B(2) BETWEEN THE INTERNATIONAL TRANSACTION AND UN CONTROLLED TRANSACTION AND SUCH DIFFERENCES HAVE BEARING ON TH E AMOUNT OF NET PROFIT MARGIN, THEN SUCH DIFFERENCES SHOULD BE ADJUSTED IN THE NET PROFIT MARGIN OF THE COMPARABLES AS PER SUB-CLAUSE (III) OF RULE 10B(1)(E), SO THAT THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSE E BECOMES COMPARABLE WITH THE UNCONTROLLED TRANSACTION. THE CRUX OF THE MATTER IS THAT THE ADJUSTMENT DUE TO DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTION IS ALWAYS ADJUSTED IN THE PROFIT MARGIN OF THE COMPARABLES AS PER SUB- CLAUSE (III) AND NOT IN THE PROFIT MARGIN OF THE ASSESSEE AS PER SUB-CLAUS E (I) OF RULE 10B(1)(E). 11. HAVING HELD THAT ADJUSTMENT IS WARRANTED I N THE OPERATING MARGIN OF THE COMPARABLES FOR NEUTRALIZING THE MATERIAL EF FECTS OF THE DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION A ND UNCONTROLLED TRANSACTIONS, WE WANT TO ACCENTUATE THAT THE SIMPLE FACT OF THE ASSESSEE ITA NO.1456/PUNE/2010 17 INCURRING A PARTICULAR OPERATING COST HIGHER THAN I TS COMPARABLES, CANNOT CALL FOR ANY ADJUSTMENT. IT CAN BE NOTICED THAT THE TNMM CONTEMPLATES COMPARISON OF THE PERCENTAGE OF THE OPERATING PROFI T MARGIN EARNED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION WIT H SUCH A PERCENTAGE OF THE OPERATING PROFIT MARGIN EARNED BY COMPARABLES I N UNCONTROLLED TRANSACTIONS. FIRSTLY, WHEN WE TAKE INTO CONSIDERA TION THE PERCENTAGE OF THE OPERATING PROFIT MARGINS, THE EFFECT OF QUANTIT ATIVE DIFFERENCES BETWEEN THE TWO SETS OF TRANSACTIONS IS AUTOMATICAL LY WIPED OUT. SECONDLY, WHEN WE CONSIDER THE OPERATING PROFIT MAR GIN, IT CARRIES THE OVERALL EFFECT OF ALL OPERATING COSTS/REVENUE. IN THE CASE AN ASSESSEE HAVING NEWLY SET UP ITS BUSINESS, THE AMOUNT OF DEP RECIATION MAY BE HIGHER. ONE CANNOT SIMPLY MAKE AN ADJUSTMENT BY CO MPARING THE HIGHER AMOUNT OF DEPRECIATION CHARGED BY THE ASSESSEE VIS--VIS ITS COMPARABLES. IT IS SO FOR THE REASON THAT WHEN DUR ING THE INITIAL YEARS, THE AMOUNT OF DEPRECIATION IS HIGHER, THE REPAIR CO STS IS ON THE LOWER SIDE. IN LATER YEARS OF OPERATION, WHEN THE AMOU NT OF DEPRECIATION GOES SOUTHWARDS, THE REPAIR COST GOES NORTHWARDS. WHEN W E TAKE UP OPERATING PROFIT FOR COMPARISON UNDER THE TNMM, SUCH FIGURE O F OPERATING PROFIT ITA NO.1456/PUNE/2010 18 COUNTERBALANCES THE EFFECT OF ALL SUCH HIGHER AND LOWER INDIVIDUAL COSTS WHICH EVENTUALLY SUBSUME INTO THE OPERATING PROFIT. AS SUCH, IT IS IMPERMISSIBLE TO PICK UP INDIVIDUAL ITEMS OF COSTS OR REVENUES FOR MAKING A COMPARISON AND THEN ADJUSTING THEM IN THE ULTIMATE FIGURE OF OPERATING PROFIT, UNLESS SUCH INCREASED OR REDUCED COST/REVENUE IS DUE TO THE EXTRAORDINARY AND ABNORMAL FACTORS DE HORS A MERE HIGHER OR LOWER QUANTUM ASPECT. FIRST YEAR OF OPERATION OF A BUSIN ESS PER SE IS NOT AN EXTRAORDINARY EVENT. THE ASSESSEE, AS A MATTER OF R IGHT, CANT CLAIM ANY ADJUSTMENT IN THE FIRST YEAR OF ITS OPERATION WITHO UT SPECIFICALLY POINTING OUT THE DIFFERENCES WITH COMPARABLES INDICATING THE INCURRING OF ABNORMAL COSTS. AS A MATTER OF FACT, ANY YEAR OF OP ERATION CAN BE AN EXTRAORDINARY DEPENDING UPON THE FACTS AND CIRCUMST ANCES OF EACH CASE AND THERE CAN BE NO THUMB RULE THAT THE FIRST YEAR OF OPERATION IS ALWAYS EXTRAORDINARY. BEFORE CLAIMING ANY ADJUSTMENT IN THE FIRST YEAR OF OPERATION, IT IS INCUMBENT UPON THE ASSESSEE TO SPE CIFICALLY DELINEATE THAT WHICH OF ITS OPERATING EXPENSES ARE ABNORMAL CONFIN ED TO THE START UP PHASE ONLY, WHICH ARE USUALLY NOT INCURRED AFTER TH E FIRST YEAR OF OPERATION. IT IS ONLY WHEN THE ASSESSEE SATISFIES T HIS BASIC CONDITION OF ITA NO.1456/PUNE/2010 19 SHOWING THE PRESENCE OF SOME SPECIFIC EXPENSES CONF INED TO THE INITIAL PHASE WHICH ARE ABSENT IN THE REGULAR PHASE OF BUSI NESS, THAT IT BECOMES ENTITLED TO CLAIM ADJUSTMENT IN THE PROFIT MARGIN O F ITS COMPARABLES. THE BROAD-BRUSH CLAIM OF HIGHER UNUSUAL OPERATING EXPEN SES IN THE FIRST YEAR OF OPERATION, WITHOUT ANY SUBSTANTIATION, CANNOT BE ALLOWED. 12. REVERTING TO THE FACTS OF THE INSTANT CASE, IT IS NOTICED THAT THE ASSESSEE ACTUALLY INCURRED OPERATING EXPENSES FOR T HE YEAR IN QUESTION AT RS. 3706.55 LAC. HOWEVER, FOR THE PURPOSES OF THE T RANSFER PRICING ANALYSIS, THE ASSESSEE REDUCED SUCH OPERATING EXPEN SES TO RS.1831.98 LAC AND COMPUTED ITS PROFIT MARGIN WITH SUCH REDUCED OP ERATING EXPENSES. THIS EXERCISE WAS DONE BY THE ALLEGED STANDARDIZATI ON OF THE ACTUAL OPERATING COSTS ON THE BASIS OF SUCH COSTS INCURRED BY IT DURING THE PERIODS RELEVANT TO THE ASSESSMENT YEARS 2008-09 AN D 2009-10. THE METHODOLOGY ADOPTED BY THE ASSESSEE FOR CARRYING OU T TRANSFER PRICING ANALYSIS IS SIMPLY DEVOID OF ANY STATUTORY SANCTION , TOTALLY UNACCEPTABLE AND A GLARING EXAMPLE OF TRAVESTY OF THE TRANSFER P RICING PROVISIONS. AS AGAINST THIS, THE TP ANALYSIS SHOULD HAVE STARTED W ITH THE ACTUAL ITA NO.1456/PUNE/2010 20 OPERATING COSTS OF RS. 3706.55 LAC AND THEN THE AS SESSEE SPECIFICALLY SHOWING HOW SOME OF THE FIRST YEAR OF OPERATION SPE CIFIC EXPENSES WERE ABSENT IN THE CASE OF COMPARABLES, REQUIRING ADJUS TMENT IN THE PROFIT MARGIN OF THE COMPARABLES. NOTHING OF THIS SORT HAS BEEN DONE BY THE ASSESSEE. 13. WE NOTICE THAT THE ASSESSEE VIDE ITS LETTER DATED 7.9.2009 ADDRESSED TO THE TPO, A COPY OF WHICH IS AVAILABLE ON PAGE 10 04 OF THE PAPER BOOK, SUBMITTED WITH PREJUDICE TO ITS EARLIER SUBMISSIONS THAT IF THE ADJUSTMENT AS COMPUTED BY IT WAS NOT ACCEPTABLE, THAT IS, THE ABNORMAL COSTS WERE NOT EXCLUDED, THEN THE COMPARABLES SO CHOSEN BY IT WOULD CEASE TO BE COMPARABLE. SIMILAR CONTENTION WAS MADE BY THE ASSE SSEE BEFORE THE DRP VIDE ITS LETTER DATED 20.7.2010. WE FIND THAT T HE TPO/DRP HAVE NOT CONSIDERED THIS ARGUMENT OF THE ASSESEE. THEY SIMPL Y HELD THAT NO ADJUSTMENT IS WARRANTED IN THE COMPUTATION OF THE O PERATING PROFIT OF THE ASSESSEE, WITH WHICH WE ALSO AGREE. HOWEVER, THEY F AILED TO CONSIDER IF THE ASSESSEE HAD IN FACT, INCURRED ANY EXTRAORDINAR Y OR ABNORMAL COSTS DUE TO ITS FIRST YEAR OF OPERATION. IF, IN FACT, SUCH ABNORMAL COSTS WERE ITA NO.1456/PUNE/2010 21 INCURRED, THEN IT WAS MANDATORY ON THE PART OF THE AUTHORITIES TO ADJUST THE PROFIT MARGIN OF COMPARABLES TO THAT EXTENT. IT APPEARS THAT BOTH THE ASSESSEE AS WELL THE TPO DID NOT PROPERLY APPROACH THE TRANSFER PRICING ANALYSIS IN A RIGHT PERSPECTIVE. THE ASSESSEE KEPT ON HARPING ON THE ADJUSTMENT TO ITS PROFIT ON AN UNREALISTIC BASIS AN D THE TPO IGNORED TO EXAMINE, IF THE ASSESSEE WAS AT ALL RIGHTLY ENTITL ED TO ANY ADJUSTMENT ON ACCOUNT OF ITS FIRST YEAR OF OPERATION. IN OUR CO NSIDERED OPINION, THE PROPER TRANSFER PRICING ANALYSIS CAN BE DONE ONLY BY FIRST FINDING OUT SUITABLE COMPARABLES WITH OR WITHOUT MAKING ADJUSTM ENT IN THEIR PROFIT MARGINS IN TERMS RULE 10B(1)(E)(III). IF, IN ANY CASE, EITHER THE COMPARABLES ARE NOT AVAILABLE OR THE ADJUSTMENT AS DISCUSSED ABOVE IS NOT FEASIBLE, THEN, THE TNMM CANNOT BE CONSIDERED A S THE MOST APPROPRIATE METHOD, WHICH SHOULD BE IGNORED AND SUB STITUTED WITH ANOTHER SUITABLE METHOD FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF `EXPORT OF FINISHED GOODS.. II. REMOVAL OF TWO COMPARABLES ITA NO.1456/PUNE/2010 22 14. THE ASSESSEE HAS, BY MEANS OF SPECIFIC GROUN DS, OBJECTED TO THE REMOVAL BY THE TPO OF AHMEDABAD STEELCRAFT LTD. AND SHIV AGRICO IMPLEMENTS LTD. (SEG.) FROM THE LIST OF COMPARABLES . HERE IT IS PERTINENT TO MENTION THAT THE ASSESSEE CHOSE SOME COMPANIES A S COMPARABLE UNDER THE TNMM AND THE TPO, ACCEPTING THE APPLICABILITY O F THIS METHOD, EXCLUDED THESE TWO COMPANIES. AS SUCH EXCLUSION HAS BEEN CHALLENGED, WE NEED TO EXAMINE WHETHER THESE TWO COMPANIES ARE IN FACT COMPARABLE. IT IS SIGNIFICANT TO MENTION THAT THE F OLLOWING EVALUATION IS ON THE PRESUMPTION THAT THE TNMM IS APPLICABLE AS T HE MOST APPROPRIATE METHOD. AS SUCH, WE PROCEED TO EXAMINE THE COMPARAB ILITY OR OTHERWISE OF THESE TWO COMPANIES, ONE BY ONE. (I) AHMEDABAD STEELCRAFT LTD. 15. THE ASSESSEE CHOSE THIS COMPANY AS COMPARABLE W ITH OP/TC AT (-)16.71%. THE TPO REMOVED IT FROM THE FINAL SET O F COMPARABLES BY NOTICING THAT THE SAME APART FROM BEING FUNCTIONALL Y DIFFERENT, ALSO SUFFERED LOSSES BECAUSE OF CHANGE IN THE GOVERNMENT POLICY AND ON ITA NO.1456/PUNE/2010 23 ACCOUNT OF RETRENCHMENT OF EMPLOYEES AND OTHER EXTR AORDINARY FACTORS. THE ASSESSEE IS AGGRIEVED AGAINST THE EXCLUSION OF THIS COMPANY. 16. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE ANNUAL REPORT OF THIS COMPANY, WHICH IS AVAILABLE ON PAGES 553 ONWARDS OF THE PAPER BOOK, IT CAN BE SEEN THAT THIS COMPANY IS USI NG ITS OWN WIND MILL AGAINST THE ASSESSEE USING GENERATOR SETS OF PRODUC TION. THESE TWO MODELS OF PRODUCTION HAVE DIFFERENT IMPLICATIONS ON THE OPERATING COSTS. APART FROM THAT, IT IS OBSERVED THAT THE TURNOVER O F THIS COMPANY SIGNIFICANTLY REDUCED TO RS.9.92 CRORE IN THE CURRE NT YEAR FROM RS.36.68 CRORE IN THE PRECEDING YEAR DUE TO CHANGE IN THE G OVERNMENT POLICIES. IT HAS BEEN SO RECOGNIZED IN THE DIRECTORS REPORT OF THIS COMPANY. IT HAS FURTHER BEEN MENTIONED IN SUCH REPORT THAT THIS COM PANY RETRENCHED 105 EMPLOYEES AND COMPENSATION AGGREGATING TO RS.42.39 LAC WAS PAID DURING THE YEAR. IN OUR CONSIDERED OPINION, THE AB OVE CITED EXTRAORDINARY AND ABNORMAL DIFFERENCES MAKE THIS CO MPANY INCOMPARABLE WITH THE ASSESSEE. WE, THEREFORE, HOL D THAT THE TPO WAS RIGHT IN EXCLUDING THIS COMPANY FROM THE LIST OF CO MPARABLES. ITA NO.1456/PUNE/2010 24 (II) SHIV AGRICO IMPLEMENTS LTD. (SEG.) 17. THE ASSESSEE INCLUDED THIS COMPANY ON SEGMENT L EVEL IN THE LIST OF COMPARABLES WITH OP/TC AT (-)50.79%. THE TPO HELD THIS COMPANY TO BE NON-COMPARABLE BY OBSERVING THAT IT HAS THREE BU SINESS SEGMENTS, NAMELY, FOUNDRY, ROLLING AND FORGING; ENGINEERING & FABRICATION; AND OTHERS. HE NOTICED THAT ALL THE PRODUCTS MADE BY T HE COMPANY FROM FOUNDRY, ROLLING AND FORGING DIVISION PASS ON TO TH E ENGINEERING & FABRICATION UNIT, THEREBY IMPACTING THE PROFITABILI TY OF THE ENGINEERING DIVISION. HE FURTHER NOTICED THAT THE FIXED ASSETS USED IN THESE TWO SEGMENTS WERE NOT PROPERLY IDENTIFIABLE. THE ASSES SEE IS AGGRIEVED AGAINST THE EXCLUSION OF THIS COMPANY ON SEGMENT LE VEL. 18. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD INCLUDING THE ANNUAL REPORT OF T HIS COMPANY FOR THE YEAR IN QUESTION, WE FIND THAT THIS COMPANY HAS REP ORTED ITS REVENUES IN THREE SEGMENTS AS DISCUSSED ABOVE. THE ASSESSEE HA S CHOSEN ENGINEERING AND FABRICATION SEGMENT OF THIS COMPA NY TO BE COMPARABLE. WE ARE DISINCLINED TO ACCEPT THE VIEW POINT OF THE TPO/AO ITA NO.1456/PUNE/2010 25 IN EXCLUDING THIS COMPANY FOR THE REASON OF THE GOO DS FROM FOUNDRY, ROLLING AND FORGING SEGMENT MOVING TO ENGINEERING A ND FABRICATION SEGMENT. IT IS OBVIOUS THAT WHEN THE GOODS MOVE FR OM ONE SEGMENT TO ANOTHER, THEIR PROFITABILITY IS ACCORDINGLY TAKEN I NTO CONSIDERATION UNDER THE RESPECTIVE SEGMENT. ONCE THIS COMPANY HAS SHOW N ITS SEGMENTAL RESULTS AND THE TPO HAS NOT POINTED OUT AS TO HOW I TS ENGINEERING AND FABRICATION SEGMENT IS DISSIMILAR WITH THAT OF THE ASSESSEE, WE HOLD THAT THIS COMPANY ON SEGMENT BASIS SHOULD BE INCLUDED IN THE FINAL SET OF COMPARABLES. 19. IN VIEW OF THE FOREGOING DISCUSSION, WE SET ASI DE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF TPO/AO FO R A FRESH DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANS ACTION OF `EXPORT OF FINISHED GOODS IN ACCORDANCE WITH OUR ABOVE OBSERV ATIONS/DIRECTIONS. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REA SONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. 20. THE ONLY OTHER GROUND WHICH SURVIVES IN THIS AP PEAL IS AGAINST THE AD HOC DISALLOWANCE OF EXPENSES TO THE TUNE OF RS.2 LAC. THE FACTS ITA NO.1456/PUNE/2010 26 APROPOS THIS GROUND ARE THAT THE ASSESSEE APPOINTED A CLEARING & FORWARDING AGENT, VIZ., HAULAGE CORPORATION. ON BE ING CALLED UPON TO PRODUCE DETAILS OF SUCH EXPENSES, THE ASSESSEE SUBM ITTED ALL THE NECESSARY DETAILS ALONG WITH SAMPLE SUPPORTING INVO ICES AND CORRESPONDING CONFIRMATION FROM HAULAGE CORPORATION . THE AO OBSERVED THAT THESE EXPENSES WERE IN THE NATURE OF TRANSPORTATION CHARGES, CUSTOM CLEARING AND REIMBURSEMENT OF EXPEN SES. HE DISALLOWED A SUM OF RS.2 LAC ON AD HOC BASIS BY MENTIONING THAT THE ASSESSEE FAILED TO FURNISH INVOICES IN SUPPORT OF R EIMBURSEMENT OF EXPENSES, WHICH WERE TO THE TUNE OF RS.34.81 LAC. THE ASSESSEE HAS ASSAILED THIS ADDITION. 21. AFTER CONSIDERING THE RIVAL SUBMISSIONS, IT IS OBSERVED THAT THESE EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE BY WAY OF PAYMENT TO CLEARING & FORWARDING AGENT, VIZ., HAULAGE CORPORAT ION. EVEN THE REIMBURSEMENT OF EXPENSES HAVE BEEN MADE TO SUCH AG ENT ONLY. WHEN THE ASSESSEE FURNISHED ALL THE DETAILS ABOUT SUCH E XPENSES INCLUDING SAMPLE SUPPORTING INVOICES AND CONFIRMATION FROM HA ULAGE CORPORATION, ITA NO.1456/PUNE/2010 27 WE CANNOT COUNTENANCE THE ADDITION MADE ON AD HOC BASIS WITHOUT THE AO SPECIFICALLY POINTING OUT ANY LACUNA IN THE DETA ILS SUBMITTED BY THE ASSESSEE. WE, THEREFORE, ORDER FOR THE DELETION OF THIS ADDITION. 22. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 10.06.201 5. SD/- SD/- [A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 10 TH JUNE, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.