Bekaert Industries Pvt. Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 146/PUN/2014

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 7851 (ITAT-PUNE)
• Duration Of Justice: 5 year(s) 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 22-04-2019
• Assessment Year: 2009-2010
• Appeal Filed On: 23-01-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARISE OUT OF FINAL ASSESSMENT
• Assessee Lawyers: AND OTHER
• Keywords: Depreciation; Transfer pricing; International transaction; Corroborative evidences; Avoidance of tax; Set aside
• Section: 92C; 92B; 92A; 10B; 28; 10; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER . / ITA NO.146/PUN/14 / ASSESSMENT YEAR : 2009-10 BEKAERT INDUSTRIES PRIVATE LIMITED, PLOT NO.1, RANJANGAON MIDC, TAL. SHIRUR, DIST. PUNE 412 209 PAN : AAACB8571E VS. DCIT, CIRCLE-1(1), PUNE (APPELLANT) (RESPONDENT) . / ITA NO.171/PUN/14 / ASSESSMENT YEAR : 2009-10 DCIT, CIRCLE-1(1), PUNE VS. BEKAERT INDUSTRIES PRIVATE LIMITED, PLOT NO.1, RANJANGAON MIDC, TAL. SHIRUR, DIST. PUNE 412 209 PAN : AAACB8571E (APPELLANT) (RESPONDENT) / ORDER PER R.S.SYAL, VP : THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND OTH ER BY REVENUE ARISE OUT OF THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) U/S.143(3) R.W.S.144C(13) OF THE INCOME- APPELLANT BY SHRI DHARMESH BAFNA RESPONDENT BY SHRI SARDAR SINGH MEENA DATE OF HEARING 22-04-2019 DATE OF PRONOUNCEMENT 24-04-2019 ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 2 TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2009-10. 2. FIRST ISSUE RAISED IN THE ASSESSEES APPEAL IS AGAINST THE REJECTION OF FOREIGN/ASSOCIATED ENTERPRISES (AES) AS TESTED PAR TY. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSE E WAS INCORPORATED IN INDIA IN 1996. IT IS A WHOLLY OWNED SUBSIDIAR Y OF N.V. BEKAERT S.A. BELGIUM. THE COMPANY IS ENGAGED IN THE MANUFACTURE OF STEEL TYRE CORD AND HOSE REINFORCEMENT WIRE . THE STEEL TYRE CORD IS USED AS REINFORCING MATERIAL FOR RADIAL TYRE S FOR PASSENGER CARS AND TRUCKS. MAJOR CUSTOMERS OF THE ASSE SSEE ARE CEAT, J.K. INDUSTRIES, MRF LTD. & GOOD YEAR. THE ASSES SEE FILED ITS RETURN DECLARING CERTAIN INTERNATIONAL TRANSACTIONS. THE AO REFERRED THE DETERMINATION OF THE ARMS LENGTH PRICE (ALP) O F SUCH INTERNATIONAL TRANSACTIONS TO THE TRANSFER PRICING OFFICER (TPO). INSTANTLY, WE ARE CONCERNED WITH THE INTERNATIONAL TRANSACTION OF IMPORT OF RAW MATERIAL WITH TRANSACTED VALUE AT RS.75,02,50 ,825/-. THE ASSESSEE APPLIED THE COST PLUS METHOD AS THE MOST APPROP RIATE METHOD FOR SHOWING THIS INTERNATIONAL TRANSACTION AT ALP. FOR DOING SO, THE ASSESSEE SELECTED SEVEN FOREIGN/AES SITUATED IN CHINA, BELGIUM, SPAIN AND BRAZIL COLLECTIVELY AS TESTED PARTY. CERTAIN ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 3 COMPARABLES QUA EACH OF THE FOREIGN/AES WERE CONSIDERED. THE TRANSFER PRICING OFFICER (TPO) REQUIRED THE ASSESSEE TO FUR NISH ANNUAL REPORTS AND FINANCIAL STATEMENTS OF THE SEVEN TESTED P ARTIES SELECTED BY THE ASSESSEE, WHICH IT DID NOT ON THE PREMISE THA T SUCH DOCUMENTS WERE IN RESPECTIVE REGIONAL LANGUAGE. FURTHER, TH E ASSESSEE ITSELF DEMONSTRATED THAT THESE FOREIGN/AES WERE ENGA GED IN MANY ACTIVITIES OTHER THAN SUPPLY OF MATERIAL TO THE ASSESSEE, A S WAS THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION BEFORE THE TP O. THE OFFICER REFUSED TO ACCEPT SEVEN FOREIGN/AES COLLECTIVELY AS TESTED PARTY ALONG WITH FOREIGN COMPARABLES SO DECLARED BY TH E ASSESSEE ON THE GROUND THAT THE ASSESSEE FAILED TO FURNISH FUNCTIONS, ASSETS AND RISKS (FAR) ANALYSIS IN RESPECT OF THE TESTED PAR TIES AND THE COMPARABLES WITH ANY RELIABLE SUPPORTING EVIDENCE. THE T PO ALSO REJECTED THE COST PLUS METHOD APPLIED BY THE ASSESSEE AS THE MOST APPROPRIATE METHOD. HE TREATED THE TRANSACTIONAL NET MA RGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD. AFTER CONSIDERING CERTAIN COMPARABLES IN CONSULTATION WITH THE ASSES SEE, THE TPO WENT ON TO RECOMMEND A TRANSFER PRICING ADJUSTMENT OF RS.15,35,50,429/- IN THIS INTERNATIONAL TRANSACTION. THE ASS ESSEE CHALLENGED THE DRAFT ORDER, INCORPORATING THE TRANSFER PRICIN G ADJUSTMENT PROPOSED BY THE TPO, BEFORE THE DISPUTE RESOLUTIO N ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 4 PANEL (DRP), INTER ALIA, REQUESTING THAT THE FOREIGN/AES BE RESTORED AS THE TESTED PARTY. THE DRP REJECTED THE ASSESSEES CONTE NTION AND HELD THAT FOREIGN/AES COULD NOT LEGALLY BE CONSIDERED AS TESTED PARTY. AGGRIEVED THEREBY THE ASSESSEE HAS APPROACHED THE TRIBUNAL. 4. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD. AT THIS STAGE, IT IS RELEVANT TO MENTION THAT THE ASSESSEE HAS NOT CHALLENGED THE REJECTION OF COST PLUS METHO D AND ADOPTION OF THE TNMM AS THE MOST APPROPRIATE METHOD FOR THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION. SIMILARLY, THERE IS NO CHALLENGE TO THE COMPARABLES. ONLY TWO ASPECTS HAVE BEEN AS SAILED, THE FIRST, BEING THE REJECTION OF FOREIGN/AES COLLECTIVELY AS TESTED PARTY AND SECOND, NOT ALLOWING ADJUSTMENT ON ACCOUNT OF EXCESS DEPRECIATION CLAIMED BY IT. 5. TESTED PARTY IS A PARTY IN WHOSE HANDS A TRANSACTION BE TWEEN THE TWO RELATED ENTERPRISES IS TESTED VIS--VIS OTHER COMPARA BLE UNCONTROLLED TRANSACTIONS FOR ENSURING THAT IS NOT STRUCTURED IN SUCH A WAY SO AS TO DEPRIVE THE INDIAN EXCHEQUER OF THE RIGHTFUL TAX DUE TO IT. UNDER THE TNMM, IT IS THE PROFIT RATE OF THE TESTED PARTY WHIC H IS COMPARED WITH THAT OF THE COMPARABLES, TO SEE IF THE PROFIT O N ACCOUNT OF TRANSACTIONS BETWEEN THE RELATED PARTIES HAS BEEN ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 5 DECLARED IN INDIA AT ALP. IN CASE, PROFIT RATE OF THE TES TED PARTY TURNS OUT TO BE LESS ON A COMPARATIVE ANALYSIS, THEN SUBJECT TO OTHER PROVISIONS, AN UPWARD INCREASE IN THE PROFIT OF THE INDIAN E NTITY IS MADE PRO TANTO . NOW THE QUESTION ARISES AS TO WHETHER THE FOREIGN/ASSOCIATED ENTERPRISE(S) CAN BE CONSIDERED AS TESTED PARTY OR ONLY THE INDIAN ENTITY, WHICH HAS RECORDED THE TRANSACTION IN ITS BOOKS OF ACCOUNT, CAN BE SO CONSIDERED? 6. FOR THIS PURPOSE, WE NEED TO VISIT THE PROVISIONS OF TH E CHAPTER X OF THE ACT WITH THE CAPTION 'SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX' DEALING WITH THE COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO ALP. SECTION 92(1) O F THE ACT PROVIDES THAT : 'ANY INCOME ARISING FROM AN INTERNATION AL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LE NGTH PRICE'. THUS, THIS PROVISION APPLIES TO INCOME OF AN ENTERPR ISE FROM AN INTERNATIONAL TRANSACTION, WHICH IS CHARGEABLE TO TAX UNDER THE ACT. THE TERM 'INTERNATIONAL TRANSACTION' HAS BEEN DEFINED IN SECTION 92B TO MEAN 'A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN TH E NATURE OF PURCHASE OF TANGIBLE . PROPERTY...... THE METHOD OLOGY FOR COMPUTATION OF ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION HAS BEEN SET OUT IN SECTION 92C(1) OF THE ACT TO BE AS PER ANY OF THE ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 6 PRESCRIBED METHODS, INCLUDING THE TNM METHOD. THE TPO ADOPTE D THIS METHOD AS THE MOST APPROPRIATE METHOD, WHICH IS NOT DISPUTE D. SUB-SECTION (3) OF SECTION 92C PROVIDES THAT : 'WHERE DURING THE COURSE OF ANY PROCEEDING FOR THE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT--(A) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2) ; O R.............., THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARM'S LE NGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSACTION IN ACCORDANC E WITH SUB-SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIA L OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM'. RULE 10B OF THE INCOME-TAX RULES, 1962, DEALING WITH THE DETERMINATION OF ARM 'S LENGTH PRICE UNDER SECTION 92C, PROVIDES THROUGH SUB-RULE ( 1) THAT FOR THE PURPOSES OF SUB-SECTION (2) OF SECTION 92C, THE A RM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMIN ED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD. THE MECHANISM FOR DETERMINING ALP UNDER THE TNM METHOD HAS BEEN ENSHRINED IN CLAUSE (E) OF RULE 10B(1), WHICH READS AS UNDER : ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 7 '(I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (II) ARISIN G 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 THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III) ; (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION.' 7. A CURSORY LOOK AT THE ABOVE PROVISIONS INDICATES THAT FIRSTLY, A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES IS CALLE D AN INTERNATIONAL TRANSACTION; SECONDLY, ANY INCOME FROM SUCH AN ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 8 INTERNATIONAL TRANSACTION IS REQUIRED TO BE DETERMINED AT ALP; THIRDLY, THE ALP IN RESPECT OF SUCH AN INTERNATIONAL TRANSACTION SHOULD BE DETERMINED BY ONE OF THE PRESCRIBED METHODS, W HICH ALSO INCLUDES THE TNMM. 8. THE TERM `ENTERPRISE UNDER THE TNM METHOD, AND FO R THAT MATTER ALL OTHER METHODS, HAS BEEN USED TO INDICATE THE ASSESS EE IN WHOSE HANDS THE BENCHMARKING OF THE INTERNATIONAL TRANSACTION IS DONE AND THE TERM `ASSOCIATED ENTERPRISE HAS BEEN USED TO DENOTE THE FOREIGN/AE, BEING THE OTHER RELATED PARTY TO THE INTERNATIONA L TRANSACTION. IT IS SO BORNE OUT FROM RULE 10B(1)(B)(I) UNDE R THE RESALE PRICE METHOD, WHICH PROVIDES THAT : `THE PRICE AT WHIC H PROPERTY PURCHASED . BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD IS IDENTIFIED. AS THIS METHOD IS USUALLY APPLIED IN THE HANDS OF THE PARTY PURCHASING THE GOODS AND THEN RESELLING IT, THERE REMAINS NO DOUBT THAT THE TERM `ENTERPRISE HAS BEEN USED FOR THE INDIAN ASSESSEE PURCHASING THE GOODS FOR RESALE AND THE TERM `ASSOCIATED ENTERPRISE HAS BEEN USED FOR A SELLER FOREIGN/AE. COMING BACK TO THE TNM METHOD, RULE 10B(1)(E) (I) PROVIDES THAT THE NET PROFIT MARGIN ` REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO ` WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 9 OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE, WHICH IS THEN COMPARED WITH THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATE D ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION. THE M ODUS OPERANDI OF DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION UNDER THIS METHOD IS THAT, FIRSTLY, THE PROFIT RATE REALIZED OR EARNED BY THE ASSESSEE FROM A TRANSACTION WITH ITS AE IS DETERMINED (SA Y, PROFIT A), WHICH IS THEN COMPARED WITH THE ADJUSTED RATE OF PROFIT O F COMPARABLE CASES (SAY, PROFIT B) SO AS TO ASCERTAIN IF `P ROFIT A IS AT ARM'S LENGTH VIS--VIS `PROFIT B. IF IT IS NOT, THEN, AN ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT, SUBJECT TO OTHER PROVIS IONS, IS MADE IN THE HANDS OF THE ASSESSEE HAVING REGARD TO THE DIFFERENCE BETWEEN THE RATES OF PROFIT A AND PROFIT B. THE RATE OF PR OFIT OF COMPARABLE CASES (PROFIT B) MAY BE COMPUTED FROM INTERNA LLY OR EXTERNALLY COMPARABLE CASES, DEPENDING UPON THE FAR ANALYS IS AND THE FACTS AND CIRCUMSTANCES OF EACH CASE. THUS THE CALCU LATION OF `PROFIT B MAY UNDERGO CHANGE WITH THE VARYING SET OF COMP ARABLE CASES. HOWEVER, INSOFAR AS CALCULATION OF `PROFIT A IS CON CERNED, THE SAME HAS TO NECESSARILY RESULT IN THE HANDS OF THE ASSESSEE -ENTERPRISE (INDIAN ENTITY) ONLY FROM THE TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, AS IS THE MANDATE OF SECTION 92 REA D WITH ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 10 SECTION 92B IN JUXTAPOSITION TO RULE 10B. THE NATURAL COROLLARY WHICH, ERGO, FOLLOWS IS THAT UNDER NO SITUATION CAN THE CALCULATIO N OF 'PROFIT A' BE SUBSTITUTED WITH ANYTHING OTHER THAN THE PROFIT RE ALIZED OR EARNED BY THE ASSESSEE-ENTERPRISE FROM THE INTERNATIONAL TRANSACTION. SO, UNDER THE TNM METHOD, IT IS THE NET PROFIT MARGIN REALIZED BY THE INDIAN ASSESSEE-ENTERPRISE FROM THE TRANSACTION WITH ITS FOREIGN/AE, WHICH IS COMPARED WITH THAT OF THE COMPARABLES. THERE CAN BE NO QUESTION OF SUBSTITUTING THE PROFIT REALIZED B Y THE INDIAN ENTERPRISE WITH THE PROFIT REALIZED BY THE FOREIGN/AE FOR THE PURPOSE OF DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION O F THE INDIAN ENTERPRISE WITH ITS FOREIGN AE. SCOPE OF TRANSFER PRICING ADDITION UNDER THE INDIAN TAXATION LAW IS LIMITED TO TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN/ AE. WE FAIL TO COMPREH END AS TO HOW THE PROFIT REALIZED BY THE FOREIGN/AE CAN BE RELEVAN T, WHEN THE PROFIT OF THE INDIAN ENTERPRISE IS SOUGHT TO BE ENSURED A T ALP. THE UNDERLYING OBJECT OF THE TRANSFER PRICING PROVISIONS IS, INTER ALIA, TO SEE THAT THERE IS NO PROFIT SHIFTING FROM THE INDIAN TAXATION BASE BY MEANS OF THE FOREIGN/AE CHARGING MORE THAN THAT C HARGED BY COMPARABLE INDEPENDENT CASES, WHICH FACT IS ENSURED B Y DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION. IF FOREIGN AE HAS, IN FACT, CHARGED MORE, THEN ITS PROFIT RATE WILL SHOOT UP AND THE ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 11 CORRESPONDING PROFIT OF THE INDIAN ENTERPRISE WILL BE SQUEEZE D. IN THAT SCENARIO, A COMPARISON OF THE PROFIT RATE OF THE FOREIGN /AE WILL RUN CONTRARY TO THE MANDATE OF THE PROVISIONS. WHEREAS, WE WERE REQUIRED TO DETERMINE IF THE PROFIT CHARGED BY THE FOREIGN AE IS NOT MORE THAN THAT CHARGED BY UNCONTROLLED COMPARABLES BY SEEIN G THE PROFIT RATE OF THE INDIAN ENTERPRISE, WE WILL END UP DOING A F UTILE EXERCISE OF RATHER VIEWING THE PROFIT RATE OF THE FOREIGN/AE, IF SUCH FOREIGN/AE IS TAKEN AS A TESTED PARTY FOR THE PURPOSES OF C OMPARISON WITH THE PROFIT RATE OF THE COMPARABLES. SUPPOSE THE FOREIGN/A E HAS CHARGED MORE, THEN ITS PROFIT RATE WILL TURN OUT TO BE HIGHER, WHICH WHEN COMPARED WITH THE LOWER RATE OF PROFIT MARGIN OF FOREIG N COMPARABLES, WILL SHOW THE TRANSACTION AT ALP, CALLING FOR NO TRANSFER PRICING ADJUSTMENT. THIS EXERCISE IS NOT ONLY OFF THE MARK, BUT ALSO RUNS COUNTER TO THE RULE AND SPIRIT OF THE TRANSFER P RICING PROVISIONS. 9. OUR POINT OF VIEW CAN BE BETTER APPRECIATED WITH THE HE LP OF A SIMPLE ILLUSTRATION OF AN INDIAN ENTERPRISE PURCHASING GOODS/S ERVICES FROM ITS FOREIGN/AE AND THEN SELLING THE SAME TO UNRELATED PA RTIES, IN TWO STAGES, WHERE THE TRANSFER PRICE IS AT ARMS LENGTH AND WHERE IT IS NOT SO. ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 12 A. ARMS LENGTH SITUATION - AVERAGE OPERATING PROFIT/SALES AVERAGE OPERATING PROFIT/SALES OF FOREIGN COMPARABLES 20% OF INDIA N COMPARABLES 20% SUPPOSE GOODS WORTH RS.200/- ARE TRANSFERRED BY FOREIG N/ASSOCIATED ENTERPRISE TO THE ASSESSEE/INDIAN ENTERPRISE AT ARMS LENGTH PRICE OF RS.200/-. POSITION OF OPERATING PROFIT/SALES OF THE FOREIGN/AE AN D THE ASSESSEE/INDIAN ENTERPRISE WILL BE AS UNDER : - FOREIGN/ASSOCIATED ENTERPRISE ASSESSEE/INDIAN ENTERPRISE PURCHASES 140 SALES TO AE 200 PURCHASES FROM AE 200 SALES 300 OPERATING EXPENSES 20 OPERATING EXPENSES 40 OPERATING PROFIT 40 OPERATING PROFIT 60 TOTAL 200 200 TOTAL 300 300 OPERATING PROFIT TO SALES OPERAT ING PROFIT TO SALES OF FOREIGN/A.E. 20% OF ASSE SSEE/INDIAN ENTERPRISE20% IT CAN BE SEEN FROM THE ABOVE THAT OP/SALES OF THE ASSESSEE IS 20%, WHICH IS AT ALP, WHEN SEEN IN THE LIGHT OF THE OP/SALES OF THE INDIAN COMPARABLES. B. NON ARMS LENGTH SITUATION NOW IF GOODS WITH ARMS LENGTH PRICE OF RS.200/- ARE ACTUA LLY TRANSFERRED BY THE FOREIGN/ASSOCIATED ENTERPRISE AT RS.208/- TO THE ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 13 ASSESSEE/INDIAN ENTERPRISE WITH A VIEW TO REDUCE THE INCIDENCE OF TAX IN INDIA, THE CHANGED POSITION OF OPERATING PROFIT/SALES OF THE FOREIGN/AE AND THE ASSESSEE/INDIAN ENTERPRISE IN THE ABOVE E XAMPLE WILL BE AS UNDER : - AVERAGE OPERATING PROFIT/SALES AVERAGE OPER ATING PROFIT/SALES OF FOREIGN COMPARABLES 20% OF INDIAN COM PARABLES 20% PURCHASES 140 SALES TO AE 208 PURCHASES FROM AE 208 SALES 300 OPERATING EXPENSES 20 OPERATING EXPENSES 40 OPERATING PROFIT 48 OPERATING PROFIT 42 TOTAL 208 208 TOTAL 300 300 OPERATING PROFIT TO SALES OPERAT ING PROFIT TO SALES OF FOREIGN/A.E. 23% OF ASSESS EE/INDIAN ENTERPRISE14% 10. IT CAN BE SEEN FROM THE ABOVE THAT BECAUSE OF SH OWING HIGHER TRANSFER PRICE IN THE HANDS OF THE ASSESSEE/INDIAN ENTERPRIS E, OP/SALES OF THE ASSESSEE/INDIAN ENTERPRISE HAS COME DOWN TO 14%, WHICH IN ARMS LENGTH SITUATION SHOULD HAVE BEEN 20%. IF W E APPLY TNM METHOD BY TAKING THE ASSESSEE AS A TESTED PARTY, IT WOULD CALL FOR MAKING TRANSFER PRICING ADDITION TO THE EXTENT OF REDUCTION IN THE PRICE MUTUALLY MANIPULATED BY THE FOREIGN/AE AND THE ASSESSEE/INDIAN ENTERPRISE BECAUSE OF THEIR ASSOCIATION. ON THE OTHER HAND, IF WE TAKE THE FOREIGN/AE AS A TESTED PARTY, IT WOULD SH OW A ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 14 ROSY PICTURE OF ITS OP/SALES AT 23%, BEING HIGHER THAN THAT OF FOREIGN OR INDIAN COMPARABLES, NOT NECESSITATING ANY TRANSFE R PRICING ADDITION. IN FACT, IT IS THIS ARRANGEMENT BETWEEN THE RELATED PAR TIES WHICH IS SOUGHT TO BE CURBED BY THE TRANSFER PRICING LEGISLA TION. GOING WITH THE FOREIGN/AE AS A TESTED PARTY IN NON-ARMS LENG TH SITUATION, WOULD INVARIABLY SHOW SKEWED RESULTS NOT REQUIRING A NY TRANSFER PRICING ADDITION, DEFEATING NOT ONLY THE LANGUAGE BUT A LSO THE PURPOSE AND INTENT OF THE TRANSFER PRICING PROVISIONS. 11. ESSENCE OF THE MATTER IS THAT IT IS THE PROFIT MARGIN OF THE INDIAN ENTERPRISE AND NOT THAT OF THE FOREIGN AE, WHICH SH OULD BE COMPARED WITH THE COMPARABLES TO SEE IF ANY INCREASE IN THE TOTAL INCOME OF THE ENTERPRISE CHARGEABLE TO TAX IN INDIA, IS WARR ANTED ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. THE CONTENTION OF THE LD. AR FOR CONSIDERING THE PROFIT OF THE FOREIGN/AE AS 'PROFIT A' FOR THE PURPOSES OF COMPARISON WITH PROFIT OF COMPARABLES, BEING 'PROFIT B', FOR DETERMINING THE ALP OF TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN AE, MISSES THE WOOD FROM THE TREE BY MAKING THE SUBSTANTIVE SECTION 92 OTIOSE AND THE DEFINITION OF 'INTERNATION AL TRANSACTION' U/S 92B AND RULE 10B BECOMING REDUNDANT. THIS IS PATENTLY AN UNACCEPTABLE PROPOSITION HAVING NO SANCTION UNDE R THE INDIAN TRANSFER PRICING LAW. IT IS AXIOMATIC AND AGAIN ACCENTU ATED ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 15 THAT THE REQUIREMENT UNDER THE INDIAN LAW IS TO COMPUTE THE IN COME FROM AN INTERNATIONAL TRANSACTION BETWEEN TWO AES HAVING REGA RD TO ITS ALP AND THE SAME IS REQUIRED TO BE STRICTLY ADHERED TO IN TH E MANNER AS PRESCRIBED. THUS, IT IS OVERT THAT THE OBLIGATION UN DER THE INDIAN LAW IS TO COMPUTE THE INCOME FROM AN INTERNATIONAL TRANSACTION BETWEEN TWO AES HAVING REGARD TO ITS ALP AND THE S AME IS REQUIRED TO BE STRICTLY DETERMINED AS STIPULATED. THE CONTENTIO N, THAT THE FOREIGN/AE BE CONSIDERED AS A TESTED PARTY FOR DETE RMINING THE ALP OF THE INTERNATIONAL TRANSACTION, HAVING NO STATUTORY SANCTION, IS SANS MERIT AND HENCE JETTISONED. 12. IT IS OBSERVED THAT SIMILAR VIEW OF NOT ACCEPTING FO REIGN/AE AS A TESTED PARTY, HAS BEEN TAKEN IN UMPTEEN NUMBER OF CASES , INCLUDING THE MUMBAI BENCH OF THE TRIBUNAL IN ONWARD TECHNOLOGY LTD. VS. DCIT (2013) 36 CCH 46 (MUMBAI) HOLDING THAT FOREIGN/ ASSOCIATED ENTERPRISE CANNOT BE A TESTED PARTY. THE MISCELLAN EOUS APPLICATION FILED AGAINST THIS ORDER ALSO CAME TO BE DISMISSED IN M.A. NO.203/MUM/13 VIDE ORDER DATED 17-01-2005. SIMILAR V IEW HAS BEEN TAKEN IN AURIONPRO SOLUTIONS LTD. VS. ACIT (TS-75-ITAT- 2013 (MUM)-TP) - (2013) 27 ITR (TRIB) 276 (MUMBAI). IN THE LIGHT OF THE FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT NO ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 16 EXCEPTION CAN BE TAKEN TO THE VIEW CANVASSED BY THE AUTHORITIE S BELOW IN REJECTING FOREIGN/ASSOCIATED ENTERPRISES AS A TESTED PA RTIES. 13. NOTWITHSTANDING THE ABOVE LEGAL POSITION, EVEN IF WE PRESUME FOR A MOMENT ON A HYPOTHETICAL BASIS THAT THE STAND OF THE A SSESSEE OF HAVING FOREIGN/AES AS A TESTED PARTY IS CORRECT, THE ASS ESSEE STILL CANNOT BE SAID TO HAVE SUCCESSFULLY ESTABLISHED THE PARTICULARS OF THE SO CALLED SEVEN FOREIGN/AES SIMULTANEOUSLY AS TESTED PARTY. NOT ONLY THE ASSESSEE FAILED TO FURNISH THE BASIC INFORMATION OF THE FOREIGN/AES, SUCH AS, ANNUAL REPORTS AND FINANCIAL STATEMENTS ETC., THE ASSESSEE CATEGORICALLY ADMITTED BEFORE THE TPO THAT THESE FOREIGN/AES WERE ENGAGED IN MANY ACTIVITIES OTHER THAN SUPPLY OF MATERIAL TO THE ASSESSEE. SIMILAR IS THE POSITION OF FOREIGN COMPARABLES CHOSEN BY THE ASSESSEE QUA EACH OF THE SEVEN FOREIGN/AES. IT IS TRITE THAT IF AN ASSESSEE HAS CHOSEN A CO MPARABLE, ONUS IS ON HIM TO PROVE THAT THE SAID COMPANY IS COMPARABLE TO THE INTERNATIONAL TRANSACTION. ADVERTING TO THE FACTS OF THE INSTANT CAS E, WE FIND THAT THE ASSESSEE CHOSE CERTAIN FOREIGN COMPANIES A S COMPARABLE, BUT ON BEING CALLED UPON BY THE TPO, FAILED TO LEA D ANY EVIDENCE TO SHOW THAT THEY WERE COMPARABLE. ERGO, WE ACC ORD OUR IMPRIMATUR TO THE VIEW CANVASSED BY THE LOWER AUTHORITIES ON THIS ISSUE. ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 17 14. NEXT ISSUE RAISED BY THE ASSESSEE IN ITS APPEAL IS AGAINS T NOT GRANTING APPROPRIATE ADJUSTMENT ON ACCOUNT OF HIGHER DEPREC IATION CLAIMED BY IT VIS--VIS THE COMPARABLES. 15. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE CLAI MED TO HAVE INCURRED HIGHER DEPRECIATION ALLOWANCE IN COMPARISON W ITH ITS COMPARABLES IN TERMS OF RATIO OF DEPRECIATION TO SALES. IT WAS URGED THAT A SUITABLE ADJUSTMENT BE ACCORDINGLY GRANTED IN COMPUTATION OF THE PLI. THE TPO DID NOT ACCEPT THIS CONTENTION BY HOLDING THAT THERE WAS NO DIFFERENCE IN SOFARAS THE RATE OF DEPRECIATION WAS CONCERNED AND IN THE ABSENCE OF THE ASSESSEE FURNISHING ANY REASONABLE ACCURATE WORKING OF THE ADJUSTMENT TO BE MADE, THE CLAIM OF THE ASSESSEE WAS LIABLE TO BE REJECTED. HE TURNED DOWN TH E ASSESSEES REQUEST FOR GRANTING ADJUSTMENT ON THE BASIS O F RATIO OF SALES TO DEPRECIATION. THE DRP EXPRESSED ITS OPINION IN PARA NO.2.2.25 OF THE DIRECTION THAT DIFFERENT RATES OF DEPREC IATION FOR THE SAME CLASS OF ASSETS BETWEEN THE ASSESSEE AND COMPARABLE COMPANIES CONSTITUTE MATERIAL DIFFERENCE FOR ADJUSTMENT IN TERM S OF RULE 10B(1)(E). SINCE THIS INFORMATION WAS NOT AVAILABLE, THE DRP REFUSED TO GRANT SUCH AN ADJUSTMENT. AGGRIEVED THEREBY, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 18 16. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RE LEVANT MATERIAL ON RECORD. THE CLAIM OF THE ASSESSEE IS THAT IT CHAR GED HIGHER AMOUNT OF DEPRECIATION IN ITS PROFIT AND LOSS ACCOUNT IN COMPARISON WITH ITS COMPARABLE COMPANIES AND HENCE AN UPW ARD INCREASE IN THE AMOUNT OF DEPRECIATION OF THE COMPARABLES AN D THE RESULTANT REDUCTION IN THEIR OPERATING PROFIT MARGINS IS WARRANTED . 17. SCHEDULE XIV TO THE COMPANIES ACT PROVIDES FOR RATES OF DEPRECIATION ON VARIOUS ASSETS UNDER DIFFERENT BLOCKS, BOTH ON WRITTEN DOWN VALUE METHOD AND STRAIGHT LINE METHOD. WE APPREC IATE THAT SUB-CLAUSE (III) OF RULE 10B(E) PROVIDES THAT THE NET PRO FIT MARGIN REALIZED BY A COMPARABLE COMPANY, DETERMINED AS P ER SUB- CLAUSE (II) ABOVE, IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFE RENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMO UNT OF NET PROFIT MARGIN IN THE OPEN MARKET. IT IS THIS ADJUSTED NE T PROFIT MARGIN OF THE COMPARABLE COMPANIES, AS DETERMINED UNDER SUB- CLAUSE (III), WHICH IS USED FOR THE PURPOSE OF MAKING COMPA RISON WITH THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION AS PER SUB-CLAUSE (I). ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 19 18. THERE CAN BE NO DISPUTE ON THE PRINCIPLE THAT CALCU LATION OF OPERATING PROFIT AS ENVISAGED UNDER RULE 10B(1)(E) EMBR ACES CUMULATIVE EFFECT OF ALL THE ITEMS OF INCOME AND EXPENSES WHIC H ARE OF OPERATING NATURE. ORDINARILY, THERE CAN BE NO QUESTION OF CONSIDERING EACH ITEM OF SUCH OPERATING EXPENSES OR INCOME IN ISOLATION DE HORS THE OTHER EXPENSES/INCOME TO CLAIM ADJUSTMENT ON THE GROUND OF SUCH EXPENDITURE OR INCOME OF THE ASSESSEE ON THE HIGHER OR LOWER SIDE SEEN INDIVIDUALLY OR AS A PERCENTAGE OF OTHER OPERATING EXPENSE/INCOMES IN COMPARISON WITH ITS COMPARABLES. THE REASON IS OBVIOUS THAT WHEN WE CONSIDER THE OPERATING PROFIT MARGIN, THE EFFECT OF ALL THE INDIVIDUAL HIGHER OR LOWER ITEMS O F EXPENSES OR INCOMES IS SUBSUMED IN THE OVERALL OPERATING PR OFIT MARGIN, RULING OUT THE NEED FOR ANY ADJUSTMENT ON COMPARIS ON OF ONE-TO-ONE ITEMS RESULTING INTO THE DETERMINATION OF THE OPERATING PROFIT MARGIN. ONE COMPANY MAY HAVE TAKEN A BUILDING ON RE NT FOR CARRYING ON ITS BUSINESS, IN WHICH CASE, IT WILL PAY RENT WHIC H WILL FIND PLACE IN THE OPERATING COSTS. FOR THE PURPOSE OF MAKING COMPARISON, ONE CANNOT CONTEND THAT THE PAYMENT OF RENT BY ONE ENTERPRISE IN COMPARISON WITH A NON-PAYMENT OF RENT BY ANO THER, SHOULD BE NEUTRALIZED BY GIVING PROPER ADJUSTMENT FROM THE OPERATING PROFIT OF THE COMPARABLE. THE MANIFEST REASON IS T HAT THE ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 20 OTHER ENTERPRISE MAY HAVE ITS OWN OFFICE PREMISES AND IN THA T CASE, THE AMOUNT OF DEPRECIATION ON SUCH PREMISES WILL ALSO FORM PA RT OF ITS OPERATING COST. WHEN WE CONSIDER THE OPERATING PROFIT OF TH E FIRST ENTERPRISE WHICH IS PAYING RENT AND THEN COMPARE IT WITH THAT OF THE SECOND ENTERPRISE WHICH IS NOT PAYING ANY RENT BUT IS CLAIMING DEPRECIATION ON ITS OWN PREMISES, THE OVERALL EFFECT OF RENT IN ONE CASE GETS COUNTERBALANCED WITH DEPRECIATION ON PREMISES OF THE OTHER. SIMILAR IS THE POSITION OF A COMPANY HAVING PURCHAS ED NEW ASSETS CHARGING HIGHER AMOUNT OF DEPRECIATION ALLOWANCE IN ITS BOOKS OF ACCOUNTS VIS-A-VIS ANOTHER COMPARABLE COMPANY USING OLD ASSETS WITH LOWER AMOUNT OF DEPRECIATION. NO ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN THE AMOUNT OF DEPRECIATION OF TWO COMPANIES IS CALLED FOR WHEN THE OPERATING PROFITS ARE DETERMINED BECAUS E IN THE CASE OF A COMPANY HAVING PURCHASED NEW ASSET, THERE WILL BE HIGHER DEPRECIATION AND SIMULTANEOUSLY LOWER REPAIR COST AND VICE VERSA . THE EFFECT OF ALL THE INDIVIDUAL ITEMS OF OPERATING EXPENSES AND INCOMES CULMINATES INTO THE OVERALL OPERATING PROFIT MARGIN. TH AT IS WHY, THE LEGISLATURE HAS PROVIDED FOR COMPARING THE RATIO OF OPERATING PROFIT MARGIN TO A SIMILAR BASE OF THE ASSESSEE WITH THAT OF ITS COMPARABLES, THEREBY DISPENSING WITH THE NEED FOR MAK ING ANY ADJUSTMENT ON ACCOUNT OF HIGHER OR LOWER AMOUNT OF INDIVID UAL ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 21 ITEMS OF EXPENSES OR INCOMES. MERELY BECAUSE THE AMOUNT OF DEPRECIATION OF ONE ENTERPRISE IS MORE OR LESS THAN THE OTHER , CAN NEVER BE A GROUND FOR SEEKING ADJUSTMENT. SUCH HIGHER AM OUNT OF DEPRECIATION MAY BE DUE TO LARGE SCALE OF THE COMPANY AND HOST OF OTHER FACTORS. BY CONSIDERING PERCENTAGE OF OPERATING PRO FIT MARGIN UNDER THE TNMM OF THE ASSESSEE AS WELL AS COMPARABLES, THE HIGHER OR LOWER VOLUME OF TWO COMPANIES BECOMES IMMATERIAL AND SO IS THE QUANTUM OF DEPRECIATION. THE NITTY-GRITTY OF THE MATTER IS THAT NO ADJUSTMENT CAN BE ALLOWED SIMPLY FOR THE REASON THAT ONE C OMPANY HAS CHARGED HIGHER AMOUNT OF DEPRECIATION VIS-A-VIS ITS COMPARABLE COMPANIES. NOT ONLY NO ADJUSTMENT ON THIS SCORE IS PERMISSIB LE, THE ASSESSEE CANNOT ALSO SEEK AN EXCLUSION OR INCLUSION OF A COMPANY ON THE GROUND THAT THE RATIO OF ITS DEPRECIATION TO TOTA L EXPENSES OR SALES ETC. IS MORE OR LESS IN COMPARISON WITH COMPARABLES. IT IS SO FOR THE REASON THAT SUCH HIGHER PE RCENTAGE OF DEPRECIATION TO TOTAL EXPENSES IS MARGINALIZED BY THE LOWER PERCENTAGE OF REPAIRS AND OTHER INCIDENTAL COSTS OF THE ASSE TS AND VICE VERSA . 19. HOWEVER, THE POSITION MAY BE DIFFERENT WHEN THERE IS A DIFFERENCE IN THE RATES OF DEPRECIATION CHARGED BY TWO COMP ANIES ON SIMILAR CATEGORY OF ASSETS. ONE COMPANY MAY ADOPT THE POLIC Y OF ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 22 CHARGING DEPRECIATION ON ITS ASSETS IN CONFORMITY WITH THE RATES PRESCRIBED IN SCHEDULE XIV OF THE COMPANIES ACT AND OTHER COMPANY MAY ADOPT A POLICY OF CHARGING DEPRECIATION AT THE H IGHER RATES THAN THOSE PRESCRIBED UNDER SCHEDULE XIV. THIS CAN BE DEMONSTRATED WITH THE HELP OF AN EXAMPLE. OTHER THINGS BEING EQUAL, IF THE OPERATING PROFIT OF COMPANY A, AFTER CLAIMING DEPRECIA TION OF RS.10 ON THE VALUE OF ASSET WORTH RS.50 WITH RATE OF DEPRE CIATION 20%, IS RS.100, THE OPERATING PROFIT OF COMPANY B WITH EVERYTHING SAME INCLUDING THE VALUE OF ASSETS AT RS.50, BUT WITH RATE OF DEPRECIATION 30%, WILL BE RS.95. IT SHOWS THAT THE COMPA RABILITY IS JEOPARDIZED DUE TO HIGHER RATE OF DEPRECIATION CHARGED BY COMPANY B AT 30% IN COMPARISON WITH LOWER RATE OF DEPRECIATIO N CHARGED BY COMPANY A AT 20%. IN SUCH A SITUATION, ALTHOUG H BOTH THE COMPANIES USE SIMILAR TYPE OF ASSETS AND EVERYTHING ELS E IS ALSO EQUAL, BUT THEIR RESPECTIVE OPERATING PROFIT PERCENTAGES UNDER GO CHANGE DUE TO HIGHER OR LOWER RATE OF DEPRECIATION, THEREB Y DISTORTING THEIR COMPARABILITY. IT IS THIS DIFFERENCE IN THE AMO UNTS OF DEPRECIATION DUE TO DIFFERENT RATES OF DEPRECIATION AND NO T DUE TO DIFFERENT QUANTUMS OF DEPRECIATION SIMPLICITOR, WHICH CALLS FOR BRINGING BOTH THE COMPANIES AT PAR. ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 23 20. REVERTING TO THE FACTS OF THE EXTANT CASE, IT IS SEEN TH AT THE LD. DRP HAS RECORDED A CATEGORICAL FINDING THAT THE ASSESSEE CO ULD NOT LEAD ANY EVIDENCE SHOWING DIFFERENCE IN THE RATES OF DEPRE CIATION CHARGED BY IT VIS--VIS THE COMPARABLES. PER CONTRA, THE LD. AR HAS PLACED ON RECORD A CHART SHOWING DIFFERENCE IN THE RATES OF DEPRECIATION CHARGED BY THE ASSESSEE AND COMPARABLES. WE FIND THAT THE AUTHORITIES BELOW DID NOT HAVE ANY OCCASION TO CONSIDER THIS CHART AS THE SAME HAS BEEN PLACED BEFORE US FOR THE FIR ST TIME. IN OUR CONSIDERED OPINION, THE ENDS OF JUSTICE WOULD MEET ADEQUATELY , IF WE SET ASIDE THE IMPUGNED ORDER TO THIS EXTENT AND SEND THE MAT TER BACK TO THE FILE OF THE AO/TPO FOR ALLOWING ADJUSTMENT TO THE OPERA TING PROFIT MARGIN OF THE COMPARABLE COMPANIES, IF THERE IS SOME DIFFERENCE IN RATES OF DEPRECIATION CHARGED BY THE ASSESSE E VIS--VIS THESE COMPANIES. IN OTHER WORDS, THE AMOUNT OF DEPRECIATIO N OF THE COMPARABLE COMPANIES ON THEIR ASSETS SHALL BE RECOMPUTED UN DER STRAIGHT LINE METHOD ALONE AS PER THE RATES AT WHICH THE ASSESS EE HAS PROVIDED DEPRECIATION. TO CLARIFY, IF THE COMPARABLES HAVE C HARGED DEPRECIATION AT A HIGHER RATE IN COMPARISON WITH THE ASSESSEE ON SOME OF ITS ASSETS, THEN SUITABLE REDUCTION SHOULD BE MADE IN THE AMOUNT OF THEIR DEPRECIATION AND IF THE COMPARABLE COMPANIE S HAVE CHARGED DEPRECIATION AT A LOWER RATE IN COMPARISON WITH THE ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 24 ASSESSEE, THEN SUITABLE INCREASE SHOULD BE MADE TO THEIR A MOUNT OF DEPRECIATION. WE, THEREFORE, SUM UP OUR CONCLUSION ON TH IS ASPECT OF THE MATTER BY HOLDING THAT IF THE ASSESSEE AS WELL AS TH E COMPARABLE COMPANIES ARE USING THE SLM AND THERE IS SOME DIFFERENCE IN THE RATES OF DEPRECIATION CHARGED BY THEM VIS--VIS THE ASSESSEE, THEN SUITABLE ADJUSTMENT SHOULD BE MADE TO THE PRO FITS OF THE COMPARABLES. WE ORDER ACCORDINGLY. 21. NOW WE TURN TO FIRST GROUND OF THE REVENUES APPEAL BY WHICH THE DECISION OF THE AO IN RESTRICTING THE TRANSFER PRICING A DJUSTMENT ONLY TO THE INTERNATIONAL TRANSACTIONS AND NOT TO THE ENTITY LEVEL, BASED ON THE DIRECTION OF THE DRP, HAS BEEN CHALLENGED. 22. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE TPO CO MPUTED TRANSFER PRICING ADJUSTMENT WITH REFERENCE TO THE ENTITY LEVEL TRANSACTIONS OF THE ASSESSEE, THAT IS, WITH BOTH THE ASSOCIATED ENTERPRISES AND NON-ASSOCIATED ENTERPRISES. THE ASSESSEE CHALLENGED SUCH A DECISION BEFORE THE DRP BY CONTENDING THAT THE TRANSF ER PRICING ADDITION SHOULD HAVE BEEN RESTRICTED ONLY TO THE INTERNATIO NAL TRANSACTIONS, WHICH GOT CONCURRENCE OF THE PANEL. THE REV ENUE IS AGGRIEVED BY SUCH A DECISION. ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 25 23. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND GOING THRO UGH THE RELEVANT MATERIAL ON RECORD, WE FIND THAT NO EXCEPTION CAN BE TAKEN TO THE DECISION OF THE DRP IN DIRECTING THAT THE TRANSFER PRICING ADDITION SHOULD BE RESTRICTED ONLY TO THE INTERNATIONAL TRANSACTIONS AND NOT THE NON-INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. FIR ST SUB- SECTION OF SECTION 92 OF THE ACT, WHICH IS THE FIRST SECTION OF THE CHAPTER X, PROVIDES IN UNAMBIGUOUS TERMS THAT : `ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE CHAPTER EXTENDS IN ITS APPLICATION ONLY TO THE INTERNATIONAL TRANSACTIONS, WHICH TERM HAS BEEN DEFINED IN SECTION 92B TO MEAN : `A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES . THUS IT IS PATENT THAT THE TRANSFER PRICING PROVISIONS APPLY ONLY TO THE TRANSACTIONS BETWEEN THE ASSOCIATED ENTERPRISES AND NOT UNRELATED OR NON-ASSOCIATED ENTERPRISES. THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. TARA JEWELS EXPORTS PVT. LTD. (2015) 94 CCH 032-MUMHC (BOM): (2016) 381 ITR 404 (BOM) HAS HELD THAT SECTIONS 92A AND 92B REQUIRE TRANSFER PRICING ADJUSTMENT TO BE DONE ONLY IN RESPE CT OF THE TRANSACTIONS ENTERED INTO BETWEEN THE ASSESSEE WITH ITS AES AND NOT WITH THE NON-AES. SIMILAR VIEW HAS BEEN REITERATED AGAIN BY THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. THYSSEN KRUPP ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 26 INDUSTRIES INDIA PVT. LTD. (2016) 381 ITR 413 (BOM.). AS THE VIEW CANVASSED BY THE DRP ACCORDS WITH THAT OF THE HONBLE JURISDICTIONAL HIGH COURT, WE ARE DISINCLINED TO INTERFERE WITH THE SAME. THIS GROUND IS NOT ALLOWED. 24. NEXT ISSUE RAISED BY THE REVENUE IN ITS APPEAL IS AGAINS T THE DELETION OF THE TRANSFER PRICING ADDITION BY THE AO IN RESPEC T OF THE INTERNATIONAL TRANSACTION OF IMPORT OF TRADING GOODS, ON THE DIRECTION OF THE DRP FOR APPLYING THE RESALE PRICE METHOD (RPM ) FOR BENCHMARKING THE INTERNATIONAL TRANSACTION. 25. THE FACTUAL MATRIX OF THIS ISSUE IS THAT THE ASSESSEE R EPORTED AN INTERNATIONAL TRANSACTION OF IMPORT OF TRADING STEEL CORD WITH TRANSACTED VALUE OF RS.7,93,19,045/-. THE RPM WAS APP LIED BY THE ASSESSEE FOR DEMONSTRATING THAT THIS TRANSACTION WAS AT ALP. THE TPO REFUSED TO ACCEPT THE APPLICATION OF THE RPM AS THE MOST APPROPRIATE METHOD. HE INVOKED THE TNMM IN RESPECT OF THIS INTERNATIONAL TRANSACTION AND ACCORDINGLY PROPOSED TRANSFER PR ICING ADJUSTMENT OF RS.76,68,310/-. THE AO MADE ADDITION FOR SUCH A SUM IN THE DRAFT ORDER. WHEN THE MATTER TRAVELLED TO THE DRP, IT APPROVED THE APPLICATION OF RPM AND ORDERED TO DELETE THE A DDITION ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 27 BECAUSE THE GROSS MARGIN OF TRADING SEGMENT WAS WITHIN 5% OF THE SAFE HARBOUR RANGE. 26. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELE VANT MATERIAL ON RECORD, IT IS SEEN THAT THE ISSUE RAISED ON THIS SC ORE IS TWO-FOLD. FIRST IS THE APPLICATION OF MOST APPROPRIATE METHOD AND THE SECOND IS THE DELETION OF ADDITION ON MERITS. WE ESPOUSE THE FIRST ISSUE. THE ASSESSEE ADMITTEDLY IMPORTED STEEL CORD FROM ITS A ES AND SOLD THE SAME TO THE NON-AES WITHOUT ANY VALUE ADDITION OR FU RTHER PROCESSING. THE RESALE PRICE METHOD, AS THE NAME ITSELF SU GGESTS, IS PREFERABLY USED WHEN THE GOODS ARE `RESOLD. THE MECH ANISM FOR THE COMPUTATION OF THE ALP UNDER THIS METHOD IS BASED ON THIS FOUNDATION. IN OUR CONSIDERED OPINION, THE RPM IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP IN CASE OF DISTRIBUTIO N OF GOODS. IN OTHER WORDS, IF THE GOODS PURCHASED ARE SOLD AS SUCH WITHOUT ANY FURTHER PROCESSING OR VALUE ADDITION, THEN THE RPM IS THE MOST APPROPRIATE METHOD. OUR VIEW IS FORTIFIED BY THE JUD GMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. LOREAL INDIA PVT. LTD. (2015) 276 CTR 0484 (BOM). WE, THEREFORE, COUNTENANCE THE IMPUGNED ORDER ON THIS SCORE AND HOLD THAT THE RPM IS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTIO N. ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 28 27. THE SECOND ASPECT OF THE ISSUE IS ABOUT THE DELETIO N OF ADDITION BY APPLICATION OF THE RPM. THE LD. AR FAIRLY POINTED THAT SIMILAR ISSUE WAS RAISED IN ITS APPEAL BEFORE THE TRIBUNAL FOR A PR ECEDING YEAR AND THE TRIBUNAL HAS APPROVED THE APPLICATION OF THE RPM BUT RESTORED THE MATTER TO THE TPO FOR DETERMINING THE ALP BY APPLY ING THIS METHOD. A COPY OF SUCH AN ORDER HAS BEEN PLACED O N RECORD. RESPECTFULLY FOLLOWING THE PRECEDENT, WE SEND THE MATTER TO THE AO/TPO WITH A DIRECTION TO COMPUTE THE ALP OF THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION BY APPLYING THE RPM. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING. 28. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH APRIL, 2019. SD/- SD/- (VIKAS AWASTHY) (R.S.SYAL ) JUDICIAL MEMBER VICE PRESIDENT PUNE; DATED : 24 TH APRIL, 2019. ITA NOS.146 & 171/PUN/2014 BEKAERT INDUSTRIES PVT. LTD., 29 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. ( ) / THE CIT (APPEALS)-13, PUNE 4. 5. THE PR. CIT-5, PUNE , , / DR A, ITAT, PUNE; 6. / GUARD FILE. // TRUE COPY // / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 22-04-2019 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 24-04-2019 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *