Appeal details
Counselvise Citation
147724514 RSA 2010
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 1 month(s) 13 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
11-02-2014
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
A
Next Hearing Date
05-11-2012
Assessment Year
2006-2007
Appeal Filed On
29-12-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHE A, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO.1477/PN/2010 (ASSESSMENT YEAR : 2006-07) AKZO NOBEL CHEMICALS (INDIA) LIMITED, TELLUS BUILDING, 2 ND FLOOR, 209/1B/1A, RANGE HILLS, PUNE 411 020 PAN : AAADCA3941N . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(1), PUNE. . RESPONDENT ITA NO.1659/PN/2011 (ASSESSMENT YEAR : 2007-08) AKZO NOBEL CHEMICALS (INDIA) LIMITED, TELLUS BUILDING, 2 ND FLOOR, 209/1B/1A, RANGE HILLS, PUNE 411 020 PAN : AAADCA3941N . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(1), PUNE. . RESPONDENT ASSESSEE BY : MR. YOGESH THAR & MR. AJAY KERING DEPARTMENT BY : MR. AJIT KORDE ORDER PER G. S. PANNU, AM BOTH THE CAPTIONED APPEALS HAVE BEEN PREFERRED BY T HE SAME ASSESSEE PERTAINING TO THE TWO DIFFERENT ASSESSMENT YEARS, I .E. 2006-07 AND 2007-08, INVOLVING CERTAIN COMMON ISSUES, THEREFORE, BOTH AP PEALS HAVE BEEN HEARD TOGETHER AND A CONSOLIDATED ORDER IS BEING PASSED F OR THE SAKE OF CONVENIENCE AND BREVITY. ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 2. FIRSTLY, WE SHALL TAKE-UP THE APPEAL IN ITA NO.1 477/PN/2010 FOR ASSESSMENT YEAR 2006-07, WHICH IS DIRECTED AGAINST THE ORDER OF THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 1(1), PUNE (IN S HORT THE ASSESSING OFFICER) PASSED U/S 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 25.11.2010, WHICH IS IN CONFORMITY WITH THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL, PUNE (IN SHO RT THE DRP) DATED 30.09.2010. 3. IN THIS APPEAL, GROUNDS OF APPEAL RAISED BY THE ASSESSEE READ AS UNDER: -. ON THE FACT AND CIRCUMSTANCES OF THE CASE, AND IN LAW; 1. THE LD. ASSESSING OFFICER ('AO'), PURSUANT TO TH E DIRECTIONS GIVEN BY THE LD. DISPUTE RESOLUTION PANEL ('DRP'), ERRED IN RULI NG THAT THE TRANSACTIONS PERTAINING TO ROYALTY PAYMENT, EXPORT OF CERTAIN FI NISHED GOODS AND PROVISION OF MARKETING AND SALES SUPPORT SERVICES H AVE NOT BEEN CONDUCTED AT ARM'S LENGTH, AND THEREBY MAKING A TRA NSFER PRICING ADJUSTMENT OF RS.11,475,285 TO THE INCOME OF THE AP PELLANT. IN THE PROCESS, THE LD. DRP/AO ERRED IN: FOR ROYALTY PAYMENTS: CONSIDERING THE CONTROLLED ROYALTY RATE (PREVAILING BETWEEN TWO OF THE APPELLANT'S GROUP COMPANIES) AS A COMPARABLE TO THE RATE OF ROYALTY AT WHICH THE APPELLANT PAID ROYALTY TO ITS ASSOCIAT ED ENTERPRISES ('AE'), FOR BENCHMARKING PURPOSE UNDER THE COMPARABLE UNCON TROLLED PRICE ('CUP') METHOD. HOLDING THAT THE ROYALTY AMOUNT (IN CONNECTION WITH PROVISION OF TECHNOLOGY) NEEDS TO COMPUTED BY DEDUCTING THE COST OF RAW MATERIALS FROM THE SALES VALUE, THEREBY REJECTING T HE METHODOLOGY ADOPTED BY THE APPELLANT FOR COMPUTING ROYALTY PAID TO THE AE. REJECTING THE SPECIFIC CLARIFICATIONS OBTAINED FROM DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTIONS ('DIPP') WHICH SUP PORTS THE METHODOLOGY ADOPTED BY THE APPELLANT. FOR EXPORT OF CERTAIN FINISHED GOODS: DISREGARDING THE UNDERLYING TRANSACTIONAL DIFFERE NCES WHILE CONSIDERING THE PRICES CHARGED (FOR CERTAIN PRODUCT S) TO THIRD PARTIES IN INDIA AS CUPS FOR DETERMINING THE ARM'S LENGTH NATU RE OF SIMILAR PRODUCTS EXPORTED TO THE AE. FOR MARKETING AND SALES SUPPORT SERVICE: REJECTING CERTAIN COMPARABLES IDENTIFIED BY THE A PPELLANT WITHOUT PROVIDING ANY COGENT REASONS 2. THE LD. DRP / AO ERRED IN NOT GRANTING THE BENEF IT OF +/- 5% RANGE AS PER THE PROVISO TO SECTION 92C(2) AS IT STOOD BEFORE TH E AMENDMENT. 3. THE LD. AO ERRED IN INITIATING THE PENALTY PROCE EDINGS UNDER SECTION 271 (1)(C) OF THE INCOME-TAX ACT, 1961, ON THE PREMISE THAT THE APPELLANT HAS FURNISHED INACCURATE PARTICULARS OF INCOME MERELY O N THE PREMISE OF TRANSFER PRICING ADJUSTMENT BEING MADE WHICH IS NOT IN ACCORDANCE WITH THE LAW. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 YOUR APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, W ITHDRAW, MODIFY AND/OR SUBSTITUTE, AND TO WITHDRAW THE ABOVE GROUNDS OF AP PEAL. 4. IN BRIEF, THE BACKGROUND OF THE DISPUTE IS THAT ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE INDIAN COM PANIES ACT, 1956 AND IS INTER-ALIA, ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF ORGANIC PEROXIDES, WHICH ACT AS INITIATORS IN POLYMERIZATIO N REACTIONS AND ARE USED IN MAKING OF POLYMERS LIKE PVC, LDPE, HDPE, POLYACRYLI TE, ABS, ETC. . THE MANUFACTURING FACILITIES OF THE ASSESSEE COMPANY AR E LOCATED AT MAHAD, RAIGAD DISTRICT OF MAHARASHTRA. THE APPELLANT IS A WHOLLY-OWNED SUBSIDIARY OF AKZO NOBEL CHEMICALS INTERNATIONAL B.V., WHICH IN-T URN IS A WHOLLY-OWNED SUBSIDIARY OF AKZO NOVEL N.V., NETHERLANDS. FOR TH E ASSESSMENT YEAR UNDER CONSIDERATION, APPELLANT COMPANY FILED A RETURN OF INCOME ON 31.10.2006 DISCLOSING A TOTAL INCOME OF RS.22,29,94,554/-, WHI CH WAS SUBJECT TO SCRUTINY ASSESSMENT. IT WAS NOTICED THAT ASSESSEE HAD UNDER TAKEN CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES (IN SHORT THE AES) WHICH WERE SUBJECT TO A TRANSFER PRICING ANALYSIS B Y THE TRANSFER PRICING OFFICER (IN SHORT TPO), AS A CONSEQUENCE OF A REFERENCE M ADE BY THE ASSESSING OFFICER IN TERMS OF SECTION 92CA(1) OF THE ACT. TH E TPO VIDE HIS ORDER U/S 92CA(3) DATED 08.10.2009 PROPOSED AN ADDITION OF RS .1,14,75,285/- TOWARDS TRANSFER PRICING ADJUSTMENT TO THE STATED VALUES OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE AES. THE ASSESSIN G OFFICER HAS THEREAFTER PASSED ORDER U/S 143(3) R.W.S.144C(13) OF THE ACT D ATED 25.11.2010 MAKING AN ADDITION OF RS.1,14,75,285/- IN CONFORMITY WITH THE ORDER OF THE TPO DATED 08.10.2009 AND ALSO IN ACCORDANCE WITH THE DIRECTIO NS OF THE DRP CONTAINED IN ITS ORDER DATED 30.09.2010, WHO WAS APPROACHED BY T HE ASSESSEE RAISING OBJECTIONS AGAINST THE DRAFT ASSESSMENT ORDER PROPO SED BY THE ASSESSING OFFICER ON 08.10.2009. THE AFORESAID ADDITION OF R S.1,14,75,285/- MADE TO THE RETURNED INCOME IS THE SUBJECT-MATTER OF DISPUTE IN THE PRESENT PROCEEDINGS. ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 5. BEFORE WE PROCEED TO ADJUDICATE THE SPECIFIC OBJ ECTIONS RAISED IN THE GROUNDS OF APPEAL, THE BACKGROUND OF THE DISPUTE CA N BE SUMMARIZED AS FOLLOWS. IN THE COURSE OF PROCEEDINGS BEFORE THE T PO, IT WAS NOTICED THAT THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION S WITH ITS AES ON SEVERAL ASPECTS, WHICH WERE SEGREGATED BY THE ASSESSEE INTO TWO SEGMENTS, AND WERE BENCHMARKED BY THE ASSESSEE FOLLOWING THE TRANSACTI ONAL NET MARGIN (TNM) METHOD. AS PER THE TRANSFER PRICING STUDY CONDUCTE D BY ASSESSEE, THE STATED VALUES OF THE INTERNATIONAL TRANSACTIONS WAS AT AN ARMS LENGTH PRICE. THE TWO SEGMENTS SEGREGATED BY THE ASSESSEE WERE, VIZ. (I) MANUFACTURING SEGMENT WHERE THE TRANSACTIONS RELATING TO IMPORT OF RAW MA TERIALS, EXPORT OF FINISHED GOODS AND PARTS, IMPORT OF BULK RAW MATERIAL GOODS FOR TRADING AND REPACKING, AND PAYMENT OF ROYALTY HAD BEEN GROUPED; AND, (II) MARKETING AND SALES SUPPORT SEGMENT WHERE THE VARIOUS MARKETING AND S ALES SUPPORT ACTIVITIES WERE GROUPED, AND WERE SEPARATELY BENCHMARKED. THI S ASPECT OF THE TRANSFER PRICING STUDY CONDUCTED BY THE ASSESSEE WAS NOT FOU ND APPROPRIATE BY THE TPO INASMUCH AS ACCORDING TO HIM, THE AGGREGATING O F ALL TRANSACTIONS OTHER THAN MARKETING AND SALES SUPPORT ACTIVITIES WAS INA PPROPRIATE. ACCORDING TO THE TPO, EACH TRANSACTION WAS DIFFERENT IN ITS NATU RE AND SCOPE AND COULD NOT BE SAID TO BE CLOSELY INTERLINKED WITH EACH OTHER A ND FURTHER AS PER THE TPO, SEPARATE PROFITABILITY IN RESPECT OF THE TRANSACTIO NS CAN BE ARRIVED AT, IF AN ATTEMPT WAS SO MADE. THEREAFTER, THE TPO HAS CONCL UDED THAT THE BENCHMARKING DONE BY THE ASSESSEE IN RESPECT OF EXP ORT OF FINISHED GOODS, PAYMENT OF ROYALTY AND MARKETING AND SALES SUPPORT SERVICES WAS NOT ACCEPTABLE AND ACCORDINGLY HE HAS PROCEEDED TO MAKE ADJUSTMENT TO THE STATED VALUES OF THE AFORESAID THREE TRANSACTIONS I N ORDER TO ARRIVE AT THEIR ARMS LENGTH PRICE (IN SHORT ALP). FIRSTLY, IN R ESPECT OF EXPORT OF FINISHED GOODS, THE TPO MADE AN ADJUSTMENT OF RS.11,34,000/- . IN THIS CONTEXT, THE TPO ADOPTED THE INTERNAL COMPARABLE UNCONTROLLED PR ICE (CUP) METHOD I.E. THE DIFFERENCE IN PRICE CHARGED BY THE ASSESSEE ON SALE OF A PRODUCT TO ITS AE AND THE PRICE CHARGED ON THE SALE OF SAME PRODUCT T O A THIRD PARTY IN INDIA. ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 SECONDLY, WITH RESPECT TO THE ROYALTY PAYMENT TO IT S AE, THE TPO CONSIDERED INTERNAL CUP METHOD AS THE MOST APPROPRIATE METHOD AND MADE CERTAIN ADJUSTMENTS. AN ADJUSTMENT WAS ALSO MADE IN RESPEC T OF ROYALTY BY INTERPRETING THE EXPRESSION NET SALES AS SALES AS REDUCED BY BOUGHT-OUT COMPONENTS AND ALSO BY BENCHMARKING THE ROYALTY PAI D/PAYABLE IN RESPECT OF EXPORT SALES @ 5% AS AGAINST 8%, CLAIMED BY THE ASS ESSEE. THUS, FOR THE AFORESAID REASONS, TOTAL ADJUSTMENT IN RESPECT OF R OYALTY WAS DETERMINED AT RS.91,66,061/-. THIRDLY, THE TPO DETERMINED ADJUST MENT IN RESPECT OF OTHER SEGMENT I.E. MARKETING AND SALES SUPPORT SEGMENT OF RS.11,75,224/-. AS A RESULT, THE TOTAL ADJUSTMENT ON ACCOUNT OF THE TRAN SFER PRICING ANALYSIS OF THE AFORESTATED INTERNATIONAL TRANSACTIONS WAS DETERMIN ED BY THE TPO AT RS.1,14,75,285/-, AND ACCORDINGLY THE ASSESSING OFF ICER, BEING BOUND BY THE DIRECTIONS OF THE TPO AS PER SECTION 92CA(4) OF THE ACT IN RESPECT TO THE DETERMINATION OF ARMS LENGTH PRICE, ENHANCED THE R ETURNED INCOME OF THE ASSESSEE BY THE SAID SUM. THE AFORESAID ACTION OF THE ASSESSING OFFICER, BASED ON TRANSFER PRICING ADJUSTMENT OF RS.1,14,75, 285/- DETERMINED BY THE TPO, IS THE SUBJECT-MATTER OF DISPUTE BEFORE US, IN TERMS OF THE STATED GROUNDS OF APPEAL. 6. IN THE ABOVE BACKGROUND, THE RIVAL COUNSELS HAVE BEEN HEARD. THE APPELLANT HAS FURNISHED VOLUMINOUS PAPER BOOKS WHIC H INTER-ALIA CONTAIN THE SUBMISSIONS AND MATERIAL FURNISHED TO THE LOWER AUT HORITIES, AND THE SAME HAS BEEN REFERRED DURING THE COURSE OF HEARING. THE LE ARNED CIT(DR) HAS ALSO REFERRED TO THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE WRITTEN SUBMISSIONS IN SUPPORT OF THE CASE OF THE REVENUE. THE RIVAL SUBMISSIONS HAVE BEEN HEARD AND THE RELEVANT MATERIAL PERUSED. 7. THE FIRST SUBJECT-MATTER OF THE DISPUTE IS WITH REGARD TO AN ADDITION OF RS.91,66,061/- MADE ON ACCOUNT OF INTERNATIONAL TRA NSACTION OF PAYMENT OF ROYALTY TO THE AE. THE APPELLANT HAS ASSAILED THE ACTION OF THE ASSESSING ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 OFFICER ON THIS ASPECT, WITHOUT PREJUDICE TO ITS PR ELIMINARILY GRIEVANCE THAT THE ADOPTION OF THE CUP METHOD FOR THE PURPOSES OF BENC HMARKING INTERNATIONAL TRANSACTION OF ROYALTY IS NOT JUSTIFIED INASMUCH AS THE ASSESSING OFFICER WAS WRONG IN REJECTING THE ASSESSEES APPROACH OF AGGRE GATING SUCH TRANSACTION WITH THOSE OF MANUFACTURING SEGMENT AND THEREAFTER BENCHMARKING IT UNDER THE TNM METHOD. THE RELEVANT FACTS ARE THAT ASSESSEE H AS ENTERED INTO A TECHNICAL COLLABORATION AGREEMENT WITH M/S AKZO NOV EL B.V., NETHERLANDS (HEREINAFTER REFERRED TO AS THE AE), WHICH HAS BE EN APPROVED BY THE GOVT. OF INDIA, MINISTRY OF COMMERCE AND INDUSTRY, DEPARTMEN T OF INDUSTRIAL POLICY AND PROMOTION (SIA), NEW DELHI ON 11.02.2005 FOR A PERI OD OF SEVEN YEARS W.E.F. 19.12.2004. IN TERMS OF SUCH APPROVAL, ASSESSEE WA S AUTHORIZED TO PAY ROYALTY TO ITS AE I.E. M/S AKZO NOVEL CHEMICALS B.V ., NETHERLANDS @ 5% ON DOMESTIC SALES AND @ 8% ON EXPORT SALES. FURTHER, IN TERMS OF CLAUSE (8)(I) OF THE SAID APPROVAL, A COPY OF WHICH HAS BEEN PLACED IN THE PAPER BOOK AT PAGES 259 TO 261, ROYALTY PAYABLE IS REQUIRED TO BE CALCULATED IN ACCORDANCE WITH THE PROVISIONS OF FOREIGN EXCHANGE CONTROL MAN UAL OF RBI AND OTHER SUBSISTING INSTRUCTIONS OF THE GOVT. OF INDIA/RESER VE BANK OF INDIA. AS PER THE SAID APPROVAL, ASSESSEE COMPUTED THE ROYALTY OF RS. 1,35,28,221/- ON ITS DOMESTIC SALES, AND RS.81,28,514/- ON ITS EXPORT SA LES THEREBY TOTALING TO RS.2,60,56,735/-. THE AFORESAID INTERNATIONAL TRAN SACTION HAS NOT BEEN ACCEPTED BY THE TPO/ASSESSING OFFICER AS BEING AT A N ARMS LENGTH PRICE. PRIMARILY, THE AREAS OF DIFFERENCE BETWEEN THE ASSE SSEE AND THE TPO, WHICH HAVE BEEN ARTICULATED BEFORE US BY THE APPELLANT, A RE TWO FOLD. FIRSTLY, AS PER THE TPO, THE COST OF CERTAIN RAW MATERIALS, WHICH A CCORDING TO HIM, ARE MERE CONSTITUENT MATERIAL NEED TO BE DEDUCTED FROM THE SALES VALUES TO ARRIVE AT NET SALES VALUE ON WHICH ROYALTY IS TO BE COMPUTE D. THUS, AS PER THE TPO, ROYALTY HAS BEEN CALCULATED BY THE ASSESSEE IN EXCE SS OF WHAT IS OTHERWISE WARRANTED. SECONDLY, AS PER THE TPO, THE ROYALTY P AID TO THE AE FOR EXPORT SALES @ 8% IS NOT AT AN ARMS LENGTH PRICE FOR REAS ON THAT ROYALTY PAID BY ANOTHER AKZO GROUP COMPANY I.E. TIANJIN AKZO NOBEL PEROXIDES, CHINA ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 (HEREINAFTER REFERRED TO AS TANPC) TO THE SAME AE WAS @ 5%; AND, THEREFORE THE TPO ADOPTED THE RATE OF 5% TO DETERMINE THE ARM S LENGTH ROYALTY PAYABLE BY ASSESSEE TO THE AE ON THE EXPORT SALES. THE AFO RESAID POSITION HAS SINCE BEEN AFFIRMED BY THE DRP ALSO. 8. ON BOTH THE AFORESAID ASPECTS, THE LEARNED COUNS EL FOR THE ASSESSEE VEHEMENTLY SUBMITTED THAT THE LOWER AUTHORITIES HAV E ERRED IN LAW AS WELL ON FACTS. FIRSTLY, IT IS CONTENDED THAT THE EXPRESSIO N NET SALES, WAS REQUIRED TO BE INTERPRETED IN TERMS OF THE STANDARD TERMS AND C ONDITIONS PRESCRIBED BY THE RESERVE BANK OF INDIA, WHICH ARE APPLICABLE TO ALL AGREEMENTS PERTAINING TO ROYALTY PAYMENTS ON TECHNOLOGY TRANSFERS TO INDIAN COMPANIES. IN THIS REGARD, OUR ATTENTION WAS DRAWN TO THE MEANING OF EXPRESSIO N NET SALES PROVIDED IN PARA 3.3 OF CHAPTER III OF THE MANUAL FOR FOREIGN D IRECT INVESTMENT POLICY & PROCEDURES ISSUED BY DEPARTMENT OF INDUSTRIAL POLIC Y & PROMOTION, MINISTRY OF COMMERCE & INDUSTRY, GOVERNMENT OF INDIA, IN TERMS OF WHICH ONLY THE COST OF STANDARD BOUGHT-OUT COMPONENTS AND THE LANDED COST OF IMPORTED COMPONENTS WAS LIABLE TO BE REDUCED WHEREAS IN THE PRESENT CAS E THE TPO HAS REDUCED THE COST OF CERTAIN RAW MATERIALS BY TERMING THEM A S CONSTITUENT CHEMICALS, AN ACTION WHICH IS STATED TO BE INCONSISTENT WITH R ELEVANT GOVERNMENT MANUALS. IT WAS ALSO POINTED OUT THAT THE COST S OUGHT TO BE REDUCED BY THE TPO WAS THE COST OF RAW MATERIALS, AND THE SAME COU LD NOT BE EQUATED TO BOUGHT-OUT COMPONENTS. IT IS ALSO POINTED OUT TH AT DURING THE PROCEEDINGS BEFORE THE LOWER AUTHORITIES, ASSESSEE HAD OBTAINED CLARIFICATIONS FROM THE DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION, MINIST RY OF COMMERCE & INDUSTRY, GOVERNMENT OF INDIA IN THIS CONNECTION, COPIES OF W HICH HAVE BEEN PLACED IN THE PAPER BOOK AT PAGES 41 TO 45, WHICH CLEARLY SUG GEST THAT THE ACTION OF THE TPO WAS WRONG. THE LEARNED COUNSEL SUBMITTED THAT EVEN SUCH SPECIFIC CLARIFICATIONS OBTAINED FROM THE DEPARTMENT OF INDU STRIAL POLICY & PROMOTION, GOVERNMENT OF INDIA HAVE BEEN IGNORED. ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 9. FURTHER, THE ADOPTION OF THE RATE OF 5% FOR ROYA LTY PAYABLE ON EXPORT SALES TO DETERMINE THE ARMS LENGTH PRICE WAS ALSO ASSAILED ON THE GROUND THAT THE TRANSACTION OF ROYALTY PAYMENT BY TANPC, CHINA TO THE AE WAS NOT AN UNCONTROLLED COMPARABLE TRANSACTION. MOREOVER, IT WAS POINTED OUT THAT THE ROYALTY OF 5% PAID BY TANPC TO THE AE WAS SUBJECT T O CERTAIN REGULATORY RESTRICTIONS IN CHINA AND THEREFORE IN TERMS OF RUL E 10B(2)(D) OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES) THE EXISTENCE OF SUCH GOVERNMENTAL RESTRICTION ARE REQUIRED TO BE CONSIDERED FOR THE P URPOSES OF DETERMINING THE COMPARABILITY OF A TRANSACTION. IT WAS, THUS, POIN TED OUT THAT THE PAYMENT OF ROYALTY @ 5% BY TANPC WAS NOT A COMPARABLE TRANSACT ION. FURTHERMORE, IT IS POINTED OUT THAT THE TRANSACTION OF ROYALTY PAYMENT BY TANPC TO THE AE WAS A CONTROLLED TRANSACTION AND THEREFORE IT COULD NOT H AVE BEEN CONSIDERED AS A TRANSACTION FALLING WITHIN THE SCOPE OF CUP METHOD. IN SUPPORT OF SUCH PROPOSITION, RELIANCE HAS BEEN PLACED ON THE JUDGEM ENT OF THE SKODA AUTO INDIA PVT. LTD.30 SOT 319 (PUNE). EVEN OTHERWISE I T IS SOUGHT TO BE MADE OUT BY REFERRING TO THE ROYALTY AGREEMENT BETWEEN ASSES SEE AND THE AE, THAT THE SAME IS QUITE DIFFERENT FROM THE AGREEMENT BETWEEN THE CHINESE ENTITY TANPC AND THE AE, COPIES OF WHICH HAVE BEEN PLACED IN THE PAPER BOOK AT PAGES 376 TO 386 OF THE PAPER BOOK FOR ASSESSMENT YEAR 20 06-07 AND AT PAGE 186 OF THE PAPER BOOK FOR ASSESSMENT YEAR 2007-08 RESPE CTIVELY. IN THIS CONTEXT, IT IS SOUGHT TO BE MADE OUT THAT THE PERIOD OF THE AGREEMENT AND THE PRODUCTS COVERED ARE DIFFERENT INASMUCH AS THE INDIAN AGREEM ENT IS FOR SEVEN (7) YEARS WHEREAS THE CHINAS AGREEMENT IS FOR TWENTY (20) YE ARS. THE PRODUCTS COVERED UNDER THE TWO AGREEMENTS ARE ALSO DIFFERENT INASMUCH AS THE INDIAN AGREEMENT HAS 22 PRODUCTS WHEREAS CHINAS AGREEMENT HAS 33 PRODUCTS. IT IS SUBMITTED THAT WHERE THE PERIOD AND THE PRODUCTS CO VERED ARE DIFFERENT, SUCH TRANSACTIONS CANNOT BE CONSIDERED AS COMPARABLE AND REFERENCE HAS BEEN MADE TO THE DECISION OF THE PUNE BENCH OF THE TRIBU NAL IN THE CASE OF KIRLOSKAR EBARA PUMPS LTD. 47 SOT 20 (PUNE) IN THIS REGARD. THIRDLY, IT IS SOUGHT TO BE MADE OUT THAT THERE IS AN ERROR IN THE ADDITION MAD E ON ACCOUNT OF ROYALTY ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 INASMUCH AS A SUM OF RS.3,07,170/- HAS BEEN ADDED I N EXCESS, EVEN IF THE STAND OF THE TPO WAS LIABLE TO BE UPHELD. 10. ON THE OTHER HAND, THE LEARNED CIT(DR) APPEARIN G FOR THE REVENUE HAS REFERRED TO THE ORDERS OF THE AUTHORITIES BELOW IN SUPPORT OF THE CASE OF THE REVENUE. THE LEARNED CIT(DR) SUBMITTED THAT THE ME THODOLOGY ADOPTED BY THE ASSESSEE FOR COMPUTING ROYALTY PAYABLE TO ITS A E WAS CORRECTLY REJECTED BY THE TPO AND IN THIS CONTEXT A REFERENCE HAS BEEN MA DE TO PARA 8.3 OF THE ORDER OF THE TPO. IT WAS EMPHASIZED THAT FOR MANUF ACTURING THE SPECIALITY CHEMICALS, ASSESSEE WAS USING HYDROGEN PEROXIDE AND HYDROPEROXIDE, CHOLORFORMATE AND CHLORIDE, CATALYST AND OTHERS WHI CH WERE MERE CONSTITUENT CHEMICALS AND NOT RAW MATERIALS. ACCORDING TO THE REVENUE, THESE CONSTITUENT CHEMICALS ARE EQUIVALENT TO THE EXPRE SSION BOUGHT-OUT COMPONENTS OR IMPORTED COMPONENTS WHICH ARE REQU IRED TO BE REDUCED FROM THE GROSS VALUE OF SALES BEFORE COMPUTING THE AMOUN T OF ROYALTY PAYABLE. JUSTIFYING THE CONSIDERATION OF SUCH CHEMICALS AS M ERE CONSTITUENT CHEMICALS IT WAS POINTED OUT THAT SUCH CHEMICALS ARE NOT MANU FACTURED BY THE ASSESSEE FROM THEIR BASIC RAW MATERIALS AND THE SAME BEING M ERELY CONSTITUENT CHEMICALS, THERE IS NO VALUE ADDITION ON THESE MAT ERIAL IN THE MANUFACTURING PROCESS; THUS, THE SAME ARE EXCLUDIBLE FROM THE VAL UE OF SALES TO COMPUTE THE AMOUNT OF ROYALTY PAYABLE. IN THIS MANNER, THE DET ERMINATION OF THE FIGURE OF NET SALE BY THE TPO FOR THE PURPOSE OF COMPUTATIO N OF ROYALTY PAYABLE HAS BEEN DEFENDED. THE ADOPTION OF THE RATE OF 5% ON E XPORT SALES FOR PAYMENT OF ROYALTY AS AGAINST 8% ADOPTED BY THE ASSESSEE, HAS ALSO BEEN DEFENDED. IN THIS REGARD A REFERENCE HAS BEEN MADE TO PARA 1.70 OF THE OECD GUIDELINES TO JUSTIFY THE ADOPTION OF THE TRANSACTION OF ROYALTY PAYMENT BY TANPC TO THE AE AS A COMPARABLE TRANSACTION FOR THE PURPOSES OF COM PARABILITY ANALYSIS. ACCORDING TO THE LEARNED CIT(DR), THE AFORESAID GUI DELINE OF OECD SUGGESTS THAT USEFUL INFORMATION COULD NOT BE IGNORED BY APP LYING STRICT STANDARDS OF COMPARABILITY AND EVEN EVIDENCE FROM THE ENTERPRISE S ENGAGED IN CONTROLLED ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 TRANSACTIONS WITH ASSOCIATED ENTERPRISES MAY ALSO B E USEFUL IN CARRYING OUT THE COMPARABILITY ANALYSIS. IT WAS, THEREFORE, CONTEND ED THAT THE APPLICATION OF A RATE OF 5% FOR PAYMENT OF ROYALTY ON EXPORT SALE BA SED THE TRANSACTION OF ROYALTY PAYMENT BY TANPC TO THE AE, WAS JUSTIFIED U NDER THE CUP METHOD. A REFERENCE HAS ALSO BEEN MADE TO THE DISCUSSION MADE BY THE DRP IN THIS REGARD WHEREIN IT IS SOUGHT TO BE STATED THAT THE T RANSACTION ON ROYALTY PAYMENT BY TANPC TO ITS AE @ 5% WAS A PERFECT COMPARABLE WH ILE APPLYING THE CUP METHOD AND THUS THE ACTION OF THE TPO IS SOUGHT TO BE JUSTIFIED. 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS ON THIS ASPECT. BEFORE PROCEEDING TO ADJUDICATE THE ADDITION OF RS. 91,66,061/- MADE ON ACCOUNT OF ROYALTY PAYMENT, IT WOULD BE RELEVANT TO NOTE THE PERTINENT FACTS. THE APPELLANT COMPANY IS PAYING ROYALTY TO THE AE F OR TRANSFER OF TECHNOLOGY IN TERMS OF A FOREIGN TECHNOLOGY COLLABORATION AGREEME NT, WHICH HAS BEEN DULY APPROVED BY THE GOVERNMENT OF INDIA, A COPY OF SUCH AGREEMENT IS PLACED AT PAGES 259 TO 261 OF THE PAPER BOOK. IN TERMS OF TH E SAID AGREEMENT, ROYALTY PAYMENTS ARE AUTHORIZED ON DOMESTIC SALES AND ON EX PORT SALES @ 5% AND 8% RESPECTIVELY OF NET SALES, SUBJECT TO TAXES. THE ITEMS OF MANUFACTURE COVERED BY THE FOREIGN COLLABORATION ARE POLYMERIZ ATION INITIATORS, WHICH IS A PRODUCT MANUFACTURED BY THE ASSESSEE FOR USE AS CAT ALYST IN MANUFACTURING OF POLYMERS. THE APPROVAL PRESCRIBES THAT THE ROYALTY PAYABLE SHALL BE CALCULATED IN ACCORDANCE WITH THE PROVISIONS OF THE FOREIGN EX CHANGE CONTROL MANUAL OF RBI AND OTHER SUBSISTING INSTRUCTIONS OF GOVT. OF I NDIA/RESERVE BANK OF INDIA. IN THIS CONTEXT, A REFERENCE HAS BEEN MADE TO THE C HAPTER III OF THE MANUAL FOR FOREIGN DIRECT INVESTMENT ISSUED BY DEPARTMENT OF I NDUSTRIAL POLICY AND PROMOTION, GOVT. OF INDIA WHICH CONTAINS, INTER-ALI A, THE POLICY & PROCEDURES CONCERNING THE FOREIGN TECHNOLOGY AGREEMENTS. IN P ARA 3.3, IT IS PRESCRIBED THAT THE ROYALTY PAYMENTS FOR FOREIGN TECHNOLOGY CO LLABORATION BY INDIAN COMPANIES ARE LIMITED TO CERTAIN PERCENTAGE OF SALE S AND ARE NET OF TAXES AND ARE CALCULATED ACCORDING TO STANDARD CONDITIONS. IT IS FURTHER PRESCRIBED THAT ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 THE ROYALTY IS TO BE CALCULATED ON THE BASIS OF NET EX-FACTORY SALE PRICE OF THE PRODUCT, EXCLUSIVE OF EXCISE DUTIES, MINUS THE COST OF THE STANDARD BOUGHT-OUT COMPONENTS AND THE LANDED COST OF IMPORTED COMPONEN TS, IRRESPECTIVE OF THE SOURCE OF PROCUREMENT, INCLUDING OCEAN FREIGHT, INS URANCE, CUSTOM DUTIES, ETC. THE FIRST BONE OF CONTENTION BETWEEN THE ASSESSEE A ND THE REVENUE IS WITH REGARD TO THE BASIS, ON WHICH THE ROYALTY IS PAYABL E. AS PER THE APPELLANT, THE AMOUNT OF ROYALTY PAYABLE CALCULATED BY IT IS IN LI NE WITH THE APPLICABLE INSTRUCTIONS OF THE GOVT. OF INDIA AND/OR RBI. THE REVENUE, ON THE OTHER HAND, CONTENDS THAT CERTAIN CHEMICALS USED IN THE MANUFAC TURING PROCESS, BEING HYDROGEN PEROXIDE AND HYDROPEROXIDE, CHOLORFORMATE AND CHLORIDE, CATALYST AND OTHERS AMOUNTING TO RS.21,34,016/- ARE MERE CON STITUENT CHEMICALS, AND COST OF THE SAME IS TO BE REDUCED ON PRO RATA BASIS FROM THE FIGURE OF DOMESTIC SALES AND EXPORT SALES AND ONLY ON THE REMAINING AMOUNT OF NET SALES ROYALTY PAYABLE IS TO BE CALCULATED. THE CLAIM OF THE ASSESSEE IS THAT SUCH CHEMICALS ARE INDEED RAW MATERIALS USED BY THE ASSE SSEE IN ITS MANUFACTURING PROCESS, AND FOR THE PURPOSE OF COMPUTING ROYALTY P AYABLE IN TERMS OF FOREIGN TECHNOLOGY COLLABORATION AGREEMENT, COST OF RAW MAT ERIAL IS NOT PRESCRIBED AS A DEDUCTIBLE ITEM IN ORDER TO CALCULATE NET SALES . THEREFORE, WHILE CALCULATING THE ROYALTY PAYABLE, ASSESSEE HAS NOT REDUCED THE C OST OF ANY OF THE RAW MATERIALS CONSUMED. THE ASSESSEE HAS COMPUTED ROYA LTY PAYABLE WITH REFERENCE TO SALES OF RS.37,21,70,846/- WHILE THE TPO HAS DONE SO WITH REFERENCE TO SALES OF RS.24,98,13,470/-. BE THAT A S IT MAY, THE FIRST POINT OF DIFFERENCE IS MEANING OF THE EXPRESSION NET SALES , BECAUSE THE ROYALTY PAYABLE IS TO BE CALCULATED ON THE NET SALES, SUBJECT TO TAXES, AS PER THE APPROVAL OF GOVT. OF INDIA. 12. BEFORE WE PROCEED FURTHER ON THIS ASPECT, IT WO ULD BE APPROPRIATE TO REFER TO A PERTINENT POINT ASSERTED BY THE APPELLAN T, WHICH IS TO THE EFFECT THAT THE AMOUNT OF ROYALTY REMITTED TO THE FOREIGN COLLA BORATION, I.E. THE AE, IS AS PER THE PROVISIONS OF FOREIGN EXCHANGE CONTROL MANUAL O F RBI. NOTABLY, THE ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 APPROVAL BY THE DEPARTMENT OF INDUSTRIAL POLICY & P ROMOTION (SECRETARIAT FOR INDUSTRIAL ASSISTANCE) DATED 11.02.2005 ITSELF PRES CRIBES THAT ROYALTY SHALL BE PAYABLE IN ACCORDANCE WITH THE PROVISIONS OF FOREIG N EXCHANGE CONTROL MANUAL OF RBI AND OTHER SUBSISTING INSTRUCTIONS OF THE GOVT. OF INDIA/RESERVE BANK OF INDIA. THERE IS NO MATERIAL ON RECORD TO S UGGEST THAT THE CALCULATION OF ROYALTY MADE BY THE ASSESSEE HAS BEEN FOUND TO BE V IOLATIVE OF THE RESPECTIVE PROVISIONS OF FEMA OR OTHER SUBSISTING INSTRUCTIONS OF THE GOVT. OF INDIA/RESERVE BANK OF INDIA. IN THIS BACKGROUND, A MOOT QUESTION WHICH ARISES IS WHETHER THE TPO IS COMPETENT TO REWORK THE ROYA LTY PAYMENT ON THE BASIS OF HIS INTERPRETATION OF THE MEANING OF EXPRESSION NET SALES, FOR THE PURPOSE OF DETERMINING ITS ARMS LENGTH PRICE UNDER THE C UP METHOD. 13. IN OUR CONSIDERED OPINION, THE ACTION OF THE TP O IN RE-WORKING THE AMOUNT OF ROYALTY PAYABLE BASED ON HIS INTERPRETATI ON OF THE EXPRESSION NET SALES FOR THE PURPOSES OF DETERMINING ITS ARMS LE NGTH PRICE IS NOT A RIGHT DECISION. THE TPO WAS EXPECTED TO EXAMINE THE INTE RNATIONAL TRANSACTION OF ROYALTY PAYMENT AS HE ACTUALLY FOUND IT OR IN OTHER WORDS, AS IT WAS TRANSACTED BETWEEN THE PARTIES; AND, THEN MAKE SUITABLE ADJUST MENTS, IF REQUIRED, IN ORDER TO DETERMINE ITS ARMS LENGTH PRICE, BUT IT WAS IMP ERMISSIBLE FOR HIM TO RE-WORK OR RE-CAST THE TRANSACTION BASED ON HIS OWN UNDERST ANDING OF THE TERMS AND CONDITIONS OF AGREEMENT UNDERLYING THE TRANSACTION. WE SAY SO IN THE BACKGROUND OF THE FACT THAT THE TERMS AND CONDITION S OF THE AGREEMENT ON THE BASIS OF WHICH ASSESSEE HAS COMPUTED THE ROYALTY PA YABLE HAS BEEN APPROVED BY THE GOVT. OF INDIA; AND, IT IS MANDATED THAT THE CALCULATIONS OF ROYALTY ARE SUBJECT TO THE RELEVANT PROVISIONS OF F OREIGN EXCHANGE CONTROL MANUAL OF RBI AND OTHER INSTRUCTIONS OF THE GOVT. O F INDIA/RESERVE BANK OF INDIA. NOTABLY, THERE IS NO MATERIAL TO SUGGEST TH AT THE AMOUNT OF ROYALTY CALCULATED BY THE ASSESSEE HAVE BEEN FAULTED BY ANY STATUTORY AUTHORITY FOR BEING INCONSISTENT WITH THE FOREIGN EXCHANGE CONTRO L MANUAL OF RBI OR ANY OTHER SUBSISTING INSTRUCTIONS OF THE GOVT. OF INDIA /RESERVE BANK OF INDIA. ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 RATHER THE AFORESAID ASSERTION OF THE ASSESSEE, HAS BEEN REJECTED BY THE TPO ON THE BASIS OF HIS OWN SUBJECTIVE INTERPRETATION O F THE EXPRESSION NET SALES. 14. AT THIS STAGE, WE MAY REFER TO THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES LTD. (2 012) 345 ITR 241 (DEL). IN THE SAID CASE, ASSESSEE HAD ENTERED INTO AN INTERNA TIONAL TRANSACTION BY WAY OF PAYMENT OF BRAND FEE/ROYALTY TO ITS ASSOCIATED E NTERPRISE UNDER AN AGREEMENT. THE REVENUE WAS REQUIRED TO DETERMINE T HE ARMS LENGTH PRICE OF THE TRANSACTION. WHILE DOING SO, THE TPO NOTICED T HAT ASSESSEE HAS BEEN INCURRING LOSSES YEAR AFTER YEAR, AND CONSIDERING S UCH PERPETUAL LOSSES THE TPO HELD THAT THE PAYMENT OF ROYALTY DID NOT APPEAR JUSTIFIED AS THE TECHNICAL KNOWHOW/BRAND FEE AGREEMENT WITH THE ASSOCIATED ENT ERPRISE HAD NOT BENEFITED THE ASSESSEE IN ACHIEVING PROFITS FROM IT S OPERATIONS. FOR THE SAID REASON, THE TPO HELD THAT THE BRAND FEE PAYMENT MAD E BY THE ASSESSEE TO THE ASSOCIATED ENTERPRISE WAS UNJUSTIFIED AND THE ARMS LENGTH PRICE OF THE TRANSACTION SHOULD BE TAKEN AS NIL. THE HONBLE HIGH COURT DISAPPROVED THE ACTION OF THE TPO, AND AFTER REFERRING TO THE OECD S TRANSFER PRICING GUIDELINES OBSERVED THAT THE TPO WAS EXPECTED TO EXAMINE THE I NTERNATIONAL TRANSACTIONS AS HE ACTUALLY FOUND THEM. IN OUR CONSIDERED OPINI ON, THE AFORESAID PARITY OF REASONING LAID DOWN BY THE HONBLE DELHI HIGH COMES INTO PLAY IN THE PRESENT FACT-SITUATION ALSO, AS OUR FOLLOWING DISCUSSION WO ULD SHOW. 15. IN THE CASE BEFORE THE HONBLE DELHI HIGH COURT , THE TPO HAD APPLIED THE CUP METHOD WHILE EXAMINING THE PAYMENT OF BRAND FEE/ROYALTY, WHICH ALSO IS THE POSITION IN THE CASE BEFORE US. THE HONBLE HIGH COURT REFERRED TO THE OECDS TRANSFER PRICING GUIDELINES FOR MULTINATIO NAL ENTERPRISES AND TAX ADMINISTRATIONS, AND REPRODUCED PARAS 1.36 TO 1.41 OF SUCH GUIDELINES, WHICH PROVIDE FOR RECOGNITION OF THE ACTUAL TRANSACTIONS UNDERTAKEN . THEREAFTER, THE HONBLE HIGH COURT OPINED AS UNDER :- 17. THE SIGNIFICANCE OF THE AFORESAID GUIDELINES L IES IN THE FACT THAT THEY RECOGNISE THAT BARRING EXCEPTIONAL CASES, THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHER TRANSACTIONS FOR THEM ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 AND THE EXAMINATION OF A CONTROLLED TRANSACTION SHO ULD ORDINARILY BE BASED ON THE TRANSACTION AS IT HAS BEEN ACTUALLY UNDERTAK EN AND STRUCTURED BY THE ASSOCIATED ENTERPRISES. IT IS OF FURTHER SIGNIFICAN CE THAT THE GUIDELINES DISCOURAGE RESTRUCTURING OF LEGITIMATE BUSINESS TRA NSACTIONS. THE REASON FOR CHARACTERISATION OF SUCH RESTRUCTURING AS AN ARBITR ARY EXERCISE, AS GIVEN IN THE GUIDELINES, IS THAT IT HAS THE POTENTIAL TO CREATE DOUBLE TAXATION IF THE OTHER TAX ADMINISTRATION DOES NOT SHARE THE SAME VIEW AS TO H OW THE TRANSACTION SHOULD BE STRUCTURED. 18. TWO EXCEPTIONS HAVE BEEN ALLOWED TO THE AFORESAID PRINCIPLE AND THEY ARE (I) WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FORM; AND (II) WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BUT ARRANGEMENTS MADE IN RELATION TO THE TRANSACTIO N, VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER. 16. FROM THE AFORESAID, IT FOLLOWS THAT THE EXAMINA TION OF A CONTROLLED TRANSACTION SHOULD ORDINARILY BE BASED ON THE TRANS ACTION AS IT HAS BEEN ACTUALLY UNDERTAKEN AND STRUCTURED BY THE ASSOCIATE D ENTERPRISES. THUS, THE TPO SHOULD NOT DISREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHER TRANSACTIONS FOR THEM. THE TWO EXCEPTIONS WHICH HA VE BEEN PRESCRIBED ARE (I) WHERE THE ECONOMIC SUBSTANCE DIFFERS FROM ITS FORM; AND, (II) WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION IS THE SAME BUT AR RANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN ITS TOTALITY , DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVI NG IN A COMMERCIALLY RATIONAL MANNER. NOW, COMING BACK TO THE FACT-SITU ATION OF THE PRESENT CASE. IN THIS CASE, THE TPO HAS REWORKED THE ROYALTY PAYA BLE BY THE ASSESSEE TO ITS AE ON THE BASIS OF HIS INTERPRETATION OF THE EXPRES SION NET SALES FOR THE PURPOSES OF DETERMINING ARMS LENGTH PRICE OF THE I NTERNATIONAL TRANSACTION OF ROYALTY PAYMENT TO THE AE, WHILE APPLYING THE CUP M ETHOD. THE MOOT POINT TO BE CONSIDERED IS WHETHER THE ACTION OF THE TPO IN I NTERPRETING THE EXPRESSION NET SALES, CONTAINED IN THE FOREIGN TECHNOLOGY CO LLABORATION AGREEMENT APPROVED BY THE GOVT. OF INDIA, DIFFERENTLY FROM WH AT HAS BEEN UNDERSTOOD BY THE ASSESSEE IS JUSTIFIED AND FALLS WITHIN THE EXCE PTIONS PROVIDED IN THE OECD GUIDELINES WHICH PERMIT THE TPO TO RE-WRITE THE TRA NSACTION OR TO DISREGARD ACTUAL TRANSACTIONS. CONSIDERED IN THE CONTEXT OF THE OECD GUIDELINES WHICH HAVE BEEN EXHAUSTIVELY REFERRED BY THE HONBLE DELH I HIGH COURT IN THE CASE OF EKL APPLIANCES LTD. (SUPRA) THE IMPUGNED SITUATION DOES NOT FIT INTO THE TWO ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 EXCEPTIONS. FIRSTLY, NEITHER THE REVENUE HAS ALLEG ED AND NOR IS THERE ANY MATERIAL ON RECORD TO SUGGEST THAT THE ECONOMIC SUB STANCE OF THE IMPUGNED TRANSACTION DIFFERS FROM ITS FORM. SECONDLY, THERE IS NO MATERIAL ON RECORD TO SUGGEST THAT THERE IS AN ARRANGEMENT BETWEEN ASSESS EE AND THE AE MADE IN RELATION TO THE IMPUGNED TRANSACTION WHICH WOULD DI FFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER. WE SAY SO FOR THE RE ASON THAT THE ENTIRE GAMUT OF ROYALTY PAYMENT BY THE ASSESSEE TO THE AE IS IN TERMS OF THE FOREIGN TECHNOLOGY COLLABORATION AGREEMENT, WHICH IS DULY A PPROVED BY GOVT. OF INDIA IN TERMS OF ITS POLICY, WHICH IS APPLICABLE ACROSS THE SPECTRUM. MOREOVER, IT IS NOT THE CASE OF THE TPO OR EVEN OF THE REVENUE BEFO RE US THAT THE ROYALTY REMITTED BY THE ASSESSEE TO THE AE HAS BEEN FOUND T O BE INCONSISTENT OR VIOLATIVE OF THE RESPECTIVE GOVERNMENT OR RBI GUIDE LINES OR ANY OTHER AUTHORITY IN LAW. THUS, THE TPO ERRED IN CALCULATING ROYALTY PAYABLE ON SALES OF RS.24,98,13,475/- AS AGAINST RS.37,21,70,846/- CONS IDERED BY THE ASSESSEE FOR THE PURPOSE OF DETERMINING ITS ARMS LENGTH PRI CE. 17. EVEN OTHERWISE, THE ACTION OF THE TPO IN CONSID ERING CERTAIN RAW MATERIALS USED IN THE PRODUCTION PROCESS AS MERE C ONSTITUENT CHEMICALS AND EQUATING IT TO STANDARD BOUGHT-OUT COMPONENTS SO AS TO REDUCE THE COST OF SUCH MATERIAL FROM THE SALES FOR THE PURPOSES OF CO MPUTING NET SALES ELIGIBLE FOR ROYALTY PAYMENT, IS WITHOUT ANY COGENT BASIS. AT THE TIME OF HEARING, ASSESSEE WAS ASKED TO EXPLAIN ITS MANUFACTURING PRO CESS AND IN RESPONSE A NOTE WAS FURNISHED EXPLAINING THE PROCESS UNDERTAKE N AND THE MATERIALS USED, WHICH IS REPRODUCED HEREIN :- PROCESS : THE MANUFACTURING PROCESS IS DESIGNED BY THE PARENT COMPANY FOR UTMOST SAFE OPERATIONS AND ALL THE NECESSARY PROCESS SAFETY INTERLOCKS AND SYSTEMS ARE DESIGNED AND VERIFIED BY THE PARENT COMPANY. TH E RAW MATERIALS LIKE HYDROGEN PEROXIDE ARE REACTED AT CERTAIN PROCESS STAGES WITH RECOMMENDED PROCESS PARAMETERS (LIKE FLOW RATES, TEMPERATURE, PH ETC) TO FORM AN INTERMEDIATE (SAY, NA2O2) AND THE SAME IS FURTHER REACTED WITH THE KEY RAW MATERIAL, NAMELY CHLOROFORMATES. THIS REACTION GIVES A MOLECULE OF ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 CRUDE PRODUCT (I.E. PEROXIDE WHICH CONTAINS WEAK OXYGEN BOND). TO GET FURTHER CONVERSION, POST REACT ION TIME IS ALLOWED. THIS CRUDE PRODUCT IS FURTHER PURIFIED AND DILUTED TO GET THE NECESSARY PURITY. NO SIDE PRODUCTS ARE FORMED IN THE PROCESS. A DIAGRAMMATIC FLOW CHART AND SIMPLIFIED VERSION OF PROCESS AND CHEMICAL REACTIONS IS ATTACHED HEREWITH . TECHNOLOGY : THE PROCESS KNOW HOW IS OWNED BY AKZO NOBEL. THE TECHNOLOGY USED FOR HIGHER CONVERSION AND SAFE OPERATION IS 'SIMULTANEOUS DOSING' PROCESS OF MANUFACTURING. THIS DESCRIBES IMPORTANT PARAMETERS LIKE THE QUALITY OF RAW MATERIALS TO BE USED, SEQUE NCE OF DOSING RAW MATERIALS, THEIR RATIOS, FLOWRATES, AND TIME ALLOWED FOR REACTIONS, MIXING REQUIREMENTS, SEPARAT ION TECHNIQUES PURIFYING STAGES ETC. THE R & D OF PAREN T COMPANY ALWAYS SUGGESTS FURTHER IMPROVEMENTS IN PROCESS FOR BETTER CONVERSIONS AND STABILITY OF THE FINISHED GOODS. THE MATERIAL OF CONSTRUCTION FOR REACTORS, CONCENTRATION OF RAW MATERIALS, IN-PROCES S CHECKS ARE THE OTHER KEY FACTORS REACTION : THE REACTION IS IRREVERSIBLE IN NATURE. ONLY THERMAL DECOMPOSITION IS POSSIBLE. DECOMPOSITION : THE PRODUCT CAN DECOMPOSE AT CERTAI N TEMPERATURE. SUCH DECOMPOSITION CAN PRODUCE PRODUCTS LIKE CARBON DIOXIDE (CO2), CARBON MONOXIDE AND 2- ETHYLHEXANOL. HOWEVER NONE OF THE ORIGINAL RAW MATERIALS LIKE HYDROGEN PEROXIDE OR CHLOROFORMATES CAN BE RETRIEVED. 18. FURTHER, THE DIFFERENCE BETWEEN THE KEY RAW MAT ERIAL AND THE FINISHED GOODS HAVE ALSO BEEN BROUGHT OUT AS FOLLOWS :- CRITERIA CHLOROFORMATE FINISHED GOOD STORAGE CONDITIONS MISCIBLE/REACTIVITY IN WATER PURITY APPLICATION APPEARANCE HAZARD CLASS AMBIENT IMMISCIBLE WITH WATER AND REACTS 98% TO MANUFACTURE ORGANIC CHEMICALS CLEAR LIQUID TOXIC (6.1) -15 DEG C MAX MISCIBLE WITH WATER 50 TO 60% INITIATOR TO PVC POLYMERIZATION WHITE EMULSION OXIDISING AGENT (5.2) 19. ON THE BASIS OF THE ABOVE, IT WAS SOUGHT TO BE CANVASSED THAT THE CHEMICALS SOUGHT TO BE CLASSIFIED BY THE TPO AS CON STITUENT MATERIAL ARE INDEED RAW MATERIALS. IT IS CANVASSED THAT THE RAW MATERIALS USED BY THE ASSESSEE IN ITS PRODUCTION PROCESS INCLUDING THE SO -CALLED CONSTITUENT CHEMICALS CLASSIFIED BY THE TPO, UNDERGO A CHEMICA L REACTION IN THE MANUFACTURING PROCESS, WHICH IS IRREVERSIBLE. IT I S FURTHER EXPLAINED THAT THE PROPERTIES AND USAGE OF THE FINISHED GOODS ACHIEVED , NAMELY, POLYMERIZATION INITIATORS, IS QUITE, DISTINCT FROM THE RAW MATERIA LS CONSUMED AND NONE OF THE RAW MATERIALS, INCLUDING THE SO-CALLED CONSTITUENT CHEMICALS USED IN THE ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 MANUFACTURE OF FINISHED GOODS, CAN BE RETRIEVED AFT ER THE END OF THE MANUFACTURING PROCESS. 20. THE EFFORT OF THE TPO TO CLASSIFY CERTAIN INPUT MATERIAL AS CONSTITUENT CHEMICALS (INSTEAD OF RAW MATERIAL) AND EQUATE IT TO STANDARD BOUGHT-OUT COMPONENTS IS BECAUSE OF THE FOLLOWING STATEMENT C ONTAINED IN THE MANUAL FOR FOREIGN DIRECT INVESTMENT POLICY & PROCEDURES ISSUE D BY DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION, GOVT. OF INDIA :- THE ROYALTY WILL BE CALCULATED ON THE BASIS OF THE NEXT EX-FACTORY SALE PRICE OF THE PRODUCT, EXCLUSIVE OF EXCISE DUTIES, M INUS THE COST OF THE STANDARD BOUGHT-OUT COMPONENTS AND THE LANDED COST OF IMPORT ED COMPONENTS, IRRESPECTIVE OF THE SOURCE OF PROCUREMENT, INCLUDIN G OCEAN FRIGHT, INSURANCE, CUSTOM DUTIES, ETC. 21. IN TERMS OF THE AFORESAID, APART FROM OTHER SUM S THE COST OF THE STANDARD BOUGHT-OUT COMPONENTS AND THE LANDED COS T OF IMPORTED COMPONENTS IS TO BE REDUCED FROM THE SALE PRICE OF THE PRODUCT IN ORDER TO CALCULATE THE ROYALTY PAYABLE. AS PER THE TPO, CER TAIN MATERIAL USED IN THE PRODUCTION PROCESS, NAMELY, HYDROGEN PEROXIDE AND H YDROPEROXIDE, CHOLORFORMATE AND CHLORIDE, CATALYST AND OTHERS ARE NOT MANUFACTURED BY THE ASSESSEE FROM THEIR BASIC RAW MATERIALS AND THE SAM E BEING MERELY CONSTITUENT CHEMICALS, THERE IS NO VALUE ADDITION ON THESE MATERIAL IN THE MANUFACTURING PROCESS; THUS, THE SAME ARE EXCLUDIBL E FROM THE VALUE OF SALES TO COMPUTE THE AMOUNT OF ROYALTY PAYABLE. 22. IN THIS CONTEXT, WE HAVE PERUSED THE CLARIFICAT ION ISSUED BY MINISTRY OF COMMERCE & INDUSTRY (DEPARTMENT OF INDUSTRIAL POLIC Y & PROMOTION) TO SOME OF THE QUERIES PUT BY THE ASSESSEE, COPIES OF THE S AME HAVE BEEN PLACED IN THE PAPER BOOK AT PAGES 41 TO 45. WE ARE TEMPTED TO REPRODUCE HEREINAFTER THE FOLLOWING RELEVANT EXTRACT OF THE CLARIFICATION ON COMPUTATION OF ROYALTY :- MINISTRY OF COMMERCE & INDUSTRY DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION BULLETIN BOARD FOLLOW UP ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 COMPUTATION OF ROYALTY QUERY : DEAR SIR, ONE OF OUR CORPORATE CLIENT WANTS TO REMI T ROYALTY (NO TECHNICAL KNOWHOW PAID AND ROYALTY RATE IS 5%, HENC E COVERED UNDER AUTOMATIC ROUTE) TO ITS PARENT COMPANY ABROAD. FOR CALCULATION OF ROYALTY, AMONG OTHER DEDUCTIONS, LANDED COST OF IMPORTED COM PONENTS, STANDARD BOUGHT OUT COMPONENTS USED IN THE MANUFACTURE OF TH E FINAL PRODUCT HAVE TO BE REDUCED FROM THE SALE PRICE, ON WHICH ROYALTY IS PAYABLE. THE QUERY IS: OUR CLIENT IS A MANUFACTURING COMPANY, IN WHICH IT IS U SING IMPORTED RAW MATERIALS, WHICH ARE MIXED AND USED TO MANUFACTURE THE FINAL P RODUCT. SHOULD THIS RAW MATERIALS ALSO BE TREATED AT PAR WITH THE IMPORTED COMPONENTS/ BOUGHT-OUT COMPONENTS? AND BE DEDUCTED FROM SALE PRICE TO CALC ULATE ROYALTY. WOULD HIGHLY APPRECIATE YOUR GUIDANCE ON THE SAME. REPLY : DEAR SIR, IN OUR OPINION, NO. REGARDS BB SHARMA. QUERY : THANKS FOR THE REPLY. JUST TO CONFIRM YOUR VIEW ON COMPUTATION, DOES IT MEAN THAT ONLY BOUGHT OUT COMPONENTS ON WHICH NO FURTHER PROCESSING IS REQUIRED IN THE COMPANY AND ARE DIRECTLY FITTED INT O THE FINAL PRODUCTS ARE TO BE SUBTRACTED FROM THE SELLING PRICE? YOUR GUIDANCE IN THIS REGARD WOULD BE HIGHLY APPRECIATED. REPLY : DEAR SIR: YOUR UNDERSTANDING SEEMS TO BE CORRECT RE GARDS B B SHARMA 23. FROM THE AFORESAID, IT IS CLEAR THAT WHAT IS LI ABLE TO BE CONSIDERED AS STANDARD BOUGHT-OUT COMPONENTS ARE SUCH MATERIAL ON WHICH NO FURTHER PROCESSING IS REQUIRED AND ARE DIRECTLY FITTED INTO THE FINAL PRODUCT; AND, COST OF SUCH MATERIAL ONLY NEEDS TO BE DEDUCTED FROM THE SA LE PRICE TO COMPUTE THE ROYALTY PAYABLE. APPLYING THE SAID CLARIFICATION T O THE PRESENT SITUATION, CONSIDERING THE MANUFACTURING PROCESS EXPLAINED, IT CANNOT BE CONSTRUED THAT THE SO-CALLED CONSTITUENT MATERIAL ARE MERELY FITTE D INTO THE FINAL PRODUCT; ON THE CONTRARY, IT IS A CASE WHERE SUCH MATERIAL ALSO UND ERGOES A CHEMICAL REACTION IN THE PROCESS OF PRODUCING THE FINAL PRODUCT AND T HE SAME ARE IRRETRIEVABLE ONCE THE FINISHED PRODUCT IS MANUFACTURED. FOR THE SAID REASON ALSO, IN OUR CONSIDERED OPINION, THE SO-CALLED CONSTITUENT MATE RIALS CLASSIFIED BY THE TPO CANNOT BE EQUATED TO STANDARD BOUGHT-OUT COMPONENTS SO AS TO REDUCE THEIR COST FROM THE SALES VALUE TO COMPUTE THE ROYALTY PA YABLE. FOR ALL THE ABOVE REASONS, WE THEREFORE FIND NO JUSTIFICATION ON THE PART OF THE TPO IN REJECTING THE METHODOLOGY ADOPTED BY THE ASSESSEE TO CALCULAT E NET SALES FOR THE PURPOSES OF COMPUTING THE ROYALTY PAYABLE. ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 24. THE SECOND CONTROVERSY IS WITH RESPECT TO THE A CTION OF THE TPO IN CONSIDERING 5% RATE OF ROYALTY PAYMENT ON EXPORT SA LES AS ARMS LENGTH PRICE AS AGAINST 8% PAID BY THE ASSESSEE. IN DOING SO, T HE TPO HAS APPLIED THE CUP METHOD. AS PER THE TPO, A GROUP COMPANY IN CHI NA I.E. TANPC WAS PAYING ROYALTY @ 5% TO THE AE, WHEREAS ASSESSEE WAS PAYING ROYALTY @ 8% TO AE ON EXPORT SALES. ACCORDING TO THE TPO, THE R ATE OF ROYALTY BEING CHARGED BY THE AE TO ANOTHER GROUP ENTITY ENGAGED IN MANUFA CTURE OF SIMILAR PRODUCTS, IS A GOOD COMPARABLE FOR THE PURPOSE OF BENCHMARKIN G ASSESSEES INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT. IN T HIS CONTEXT, CLAUSE (A) OF SUB- RULE (1) OF RULE 10B OF THE RULES PRESCRIBES THE MA NNER IN WHICH THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSA CTION IS TO BE DETERMINED UNDER CUP METHOD, WHICH READS AS UNDER :- (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHIC H, - (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFER RED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFEREN CES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUS E (II) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION; 25. THE AFORESAID THREE STEPS WOULD REVEAL THAT TH E ACTION OF THE TPO IN THE PRESENT CASE IS CONTRARY TO THE PRESCRIPTION CO NTAINED IN SUB-CLAUSE (I) OF CLAUSE (A) OF SUB-RULE (1) OF RULE 10B OF THE RULES . OSTENSIBLY, IN TERMS OF SUB- CLAUSE (I), THE PRICE CHARGED OR PAID IN A COMPARABLE UNCONTROLLED TRANSACTION IS TO BE IDENTIFIED FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION BEING TESTED. IT IS STAR KLY EVIDENT THAT IN THE PRESENT CASE, THE COMPARABLE TRANSACTION PICKED-UP BY THE T PO, NAMELY, ROYALTY PAYMENT BY TANPC TO THE AE IS A TRANSACTION BETWEEN TWO RELATED/ASSOCIATED ENTERPRISES AND THEREFORE IT IS A CONTROLLED TRANSA CTION AND NOT A UNCONTROLLED ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 TRANSACTION. SUCH A TRANSACTION UNDERTAKEN BETWEE N TWO CONTROLLED ENTITIES, IN OUR VIEW CANNOT BE CONSIDERED AS A COMPARABLE UNCONTROLLED TRANSACTION , AS ENVISAGED IN CLAUSE (A) OF SUB-RULE (1) OF RULE 10B OF THE RULES. HENCE, ON THIS COUNT ITSELF, IN OUR VIEW, THE ADJUSTMENT MADE BY THE TPO BY CONSIDERING 5% ON EXPORT SALES AS AN ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT HAS TO FAIL. 26. APART THEREFROM, FACTUALLY SPEAKING, ASSESSEE H AS BROUGHT OUT DIFFERENCES BETWEEN THE TWO AGREEMENTS I.E. AGREEME NT BETWEEN ASSESSEE AND THE AE AND THE AGREEMENT BETWEEN TNAPC AND THE AE ON THE OTHER HAND. THE TWO AGREEMENTS DIFFER IN THEIR PERIOD OF OPERATION AS ALSO THE PRODUCTS COVERED; AND SUCH A FACTUAL MATRIX HAS NOT BEEN REBUTTED BY THE REVENUE BEFORE US. HENCE, ON THIS COUNT TOO, THE T RANSACTION OF ROYALTY PAYMENT BY THE CHINESE COMPANY, M/S TNAPC TO THE AE CANNOT BE CONSIDERED AS A COMPARABLE TRANSACTION FOR THE PURP OSES OF DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT ON EXPORT SALES, UNDER THE CUP METHOD APPLIED BY THE TPO. 27. AS A RESULT OF THE AFORESAID DISCUSSION, WE HOL D THAT THE TPO ERRED IN (I) RE-WORKING THE STATED VALUE OF THE INTERNATIONAL TR ANSACTION OF ROYALTY PAYMENT BASED ON HIS INTERPRETATION OF THE EXPRESSION NET SALES AND, (II) CONSIDERING THE ROYALTY PAYMENT BY TNAPC TO THE AE AS A COMPARA BLE TRANSACTION UNDER THE CUP METHOD FOR THE PURPOSES OF DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT CLAIME D BY THE ASSESSEE. AS A CONSEQUENCE THE ADJUSTMENT/ADDITION OF RS.91,66,061 /- MADE IN RESPECT OF ROYALTY PAYMENT IS DIRECTED TO BE DELETED. 28. NOW, WE MAY TAKE-UP THE ADDITION OF RS.11,34,00 0/- WHICH HAS BEEN MADE ON ACCOUNT OF THE INTERNATIONAL TRANSACTION ON EXPORT OF A PRODUCT, NAMELY, TRIGONOX 25C75 TO THE AE. THE TPO NOTICED THAT ASSESSEE HAD ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 MADE EXPORT SALE OF ONE PRODUCT, NAMELY, TRIGONOX 2 5C75 TO ITS AE AT A PRICE, WHICH WAS LOWER THAN THE PRICE AT WHICH THE SAME PR ODUCT WAS SOLD TO A THIRD PARTY IN INDIA. IN ORDER TO BENCHMARK THE SAID INT ERNATIONAL TRANSACTION OF EXPORT OF TRIGONOX 25C75 TO THE AE, THE TPO APPLIED THE INTERNAL CUP METHOD BY ADOPTING THE TRANSACTION OF SALE TO THE THIRD PA RTY IN INDIA AS A COMPARABLE UNCONTROLLED TRANSACTION, AND MADE ADJUSTMENT TO T HE STATED VALUE OF THE EXPORT SALE CORRESPONDING TO THE DIFFERENCE BETWEEN THE PRICE CHARGED TO THIRD PARTY IN INDIA AND THAT CHARGED TO THE AE; AND, BY MULTIPLYING SUCH DIFFERENCE TO THE QUANTITY EXPORTED TO AE, AN ADJUSTMENT OF RS .11,34,000/- HAS BEEN WORKED OUT. 29. THE OBJECTION OF THE ASSESSEE IS TO THE EFFECT THAT THERE IS NO JUSTIFICATION TO BENCHMARK THE AFORESAID TRANSACTIO N IN ISOLATION BY APPLYING THE CUP METHOD WHEREAS THE ASSESSEE HAS APPLIED THE TNM METHOD FOR DETERMINING ARMS LENGTH PRICE OF ITS ACTIVITY OF E XPORT OF FINISHED GOODS; AND, IT IS FURTHER POINTED OUT THAT IT IS ONLY IN RELATION TO THE EXPORT SALE OF TRIGONOX 25C75 THAT THE PRICE CHARGED FROM THE AE HAS BEEN F OUND TO BE ON A LOWER SIDE THAN THE PRICE CHARGED FROM A THIRD PARTY IN D OMESTIC SALE, WHEREAS IN RESPECT OF OTHER PRODUCTS SOLD/EXPORTED TO AES THE PRICES CHARGED ARE HIGHER THAN THOSE CHARGED FROM THE DOMESTIC BUYERS. IN TH IS REGARD, A REFERENCE HAS BEEN MADE TO A COMPARATIVE CHART PLACED AT PAGE 253 OF THE PAPER BOOK. APART FROM THE AFORESAID, ASSESSEE POINTED OUT BEFO RE THE TPO THAT TRIGONOX 25C75, WHICH WAS EXPORTED TO THE AE AT A PRICE OF R S.239/- PER KG. WAS RE- SOLD BY THE AE TO THE ULTIMATE CUSTOMER FOR AN AMOU NT EQUIVALENT TO RS.288/- PER KG.; AND, ON THIS BASIS IT IS ASSERTED THAT THE PRICE CHARGED BY THE AE FROM THE ULTIMATE THIRD PARTY CAN BE CONSTRUED AS THE PR EVAILING INTERNATIONAL MARKET PRICE, I.E. RS.288/- PER KG. IT IS POINTED OUT THA T CONSIDERING THE FUNCTIONS AND THE RISKS PERFORMED BY THE AE IN SUCH A TRANSACTION , IT IS TO BE UNDERSTOOD THAT UNDER NO CIRCUMSTANCES, ASSESSEE COULD HAVE CHARGED A PRICE HIGHER THAN THE PRICE PREVAILING IN THE INTERNATIONAL MARKET I.E. R S.288/- PER KG. MINUS THE COST ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 INCURRED BY THE AE FOR PERFORMING ITS FUNCTIONS. T HUS, THE ADJUSTMENT COULD AT BEST BE LIMITED TO THE PREVAILING INTERNATIONAL MAR KET PRICE OF THE PRODUCT. APART FROM THE AFORESAID OBJECTIONS, ASSESSEE POINT ED OUT THAT THE TRANSACTION OF EXPORT TO THE AE AND THE DOMESTIC SALE OF THE PR ODUCT CANNOT BE CONSIDERED COMPARABLE ON ACCOUNT OF VOLUME, GEOGRAPHICAL, FUNC TIONAL AND RISK DIFFERENCES. IN THIS CONNECTION, IT IS STATED THAT THE EXPORT TO AE IS A SINGLE SALE IN BULK QUANTITY WHEREAS THE LOCAL PARTY SALES ARE MULTIPLE SALES IN SMALLER QUANTITIES. FURTHER, IT IS POINTED OUT THAT THE PR ICES VARY DEPENDING ON THE COUNTRY WHERE THE BUYER IS LOCATED. IT IS ALSO POI NTED OUT THAT IN THE PRESENT CASE THE SALE TO THE AE DID NOT INVOLVE ANY RISK OF RECOVERIES, ETC. . IT IS ALSO POINTED OUT THAT THE AE HAS SOLD THE PRODUCT TO THE ULTIMATE BUYER WHEREAS THE THIRD PARTY TO WHOM ASSESSEE HAD SOLD IN DOMESTIC M ARKET IS FOR SELF- CONSUMPTION. FOR ALL THE AFORESAID REASONS, IT IS SOUGHT TO BE POINTED OUT THAT THE ADDITION MADE BY THE ASSESSING OFFICER IS UNJUS TIFIED AND FOR THAT REASON THE TRANSACTION OF EXPORT SALE TO AE AND THE SALE O F SAME PRODUCT IN DOMESTIC MARKET ARE NOT COMPARABLE AND THEREFORE THE CUP MET HOD HAS BEEN WRONGLY INVOKED. 30. THE TPO HAS REJECTED THE PLEAS OF THE ASSESSEE ON THE GROUND THAT THE DIFFERENCES IN THE TWO TRANSACTIONS CANVASSED BY TH E ASSESSEE HAVE NOT BEEN ELABORATED SO AS TO REQUIRE ANY ADJUSTMENT. JUSTIF YING THE USE OF CUP METHOD, THE TPO POINTED OUT THAT SAME PRODUCT HAS B EEN EXPORTED TO THE AE AND ALSO SOLD TO THIRD PARTY IN INDIA. ELABORATING THE SIMILARITY, IT HAS BEEN NOTED BY THE TPO THAT THE SALE TO THE AE HAD TAKEN PLACE ON 20.09.2005 AND THE SALES TO THE DOMESTIC PARTY, WHICH HAVE BEEN TA KEN AS COMPARABLE UNCONTROLLED TRANSACTION HAD TAKEN PLACE IN JULY, AUGUST AND SEPTEMBER, 2005. THEREFORE, TPO INFERRED THAT SALES TO DOMEST IC PARTY AND THE AE HAVE BEEN MADE IN A PROXIMATE PERIOD, WHEREAS THE PRICES DIFFERED. THE PRICE CHARGED FROM THE THIRD PARTY IN INDIA WAS UNIFORM A T RS.365 PER KG. FOR ALL THE TRANSACTIONS, WHEREAS ASSESSEE CHARGED RS.239/- PER KG. FROM ITS AE. ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 ACCORDINGLY, THE DIFFERENCE BETWEEN THE PRICE CHARG ED FROM THE DOMESTIC PARTY AND THE PRICE CHARGED FROM THE AE WAS MULTIPLIED BY THE QUANTITY SOLD TO THE AE AND THE RESULTANT DIFFERENCE OF RS.11,34,000/- H AS BEEN ADDED TO THE STATED VALUE OF THE INTERNATIONAL TRANSACTION IN OR DER TO ARRIVE AT ITS ARMS LENGTH PRICE. THE AFORESAID STAND OF THE TPO HAS BEEN AFF IRMED BY THE DRP ALSO AND IN THE COURSE OF HEARING BEFORE US, THE LEARNED CIT (DR) HAS SOUGHT TO DEFEND THE SAME BY ADVERTING TO THE REASONING CONTAINED IN THE ORDER OF THE TPO, WHICH WE HAVE ALREADY BEEN NOTED IN THE EARLIER PAR AGRAPHS AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 31. FACTUALLY SPEAKING, IN THE PRESENT CASE ASSESSE E HAS EXPORTED FINISHED GOODS TO ITS AES AND ONE SUCH EXPORT WAS OF A PRODU CT TRIGONOX 25C75. IN SEPTEMBER, 2005 ASSESSEE EXPORTED 9000 KG. OF TRIG ONOX 25C75 AT A PRICE RATE OF RS.239/- PER KG. TO THE AE, WHEREAS THE SAM E PRODUCT WAS ALSO SOLD BY THE ASSESSEE ON THREE OCCASIONS IN JULY, AUGUST AND SEPTEMBER; 2005 TO A PARTY IN INDIA IN QUANTITIES OF 1000, 700 AND 1000 KG. RESPECTIVELY @ RS.365 PER KG. . FOR THE SAID REASON, THE TPO CONSIDERED THE SALE OF THE PRODUCT TO THE INDIAN PARTY AS AN INTERNAL COMPARABLE WHILE AP PLYING THE CUP METHOD AND DETERMINED THE ARMS LENGTH PRICE OF THE EXPORT TRANSACTION BY ADOPTING THE RATE/PRICE CHARGED FROM THE DOMESTIC PARTY AS T HE ARMS LENGTH PRICE. IN OUR CONSIDERED OPINION, THERE IS NO INFIRMITY ON TH E PART OF THE TPO IN INVOKING THE CUP METHOD BECAUSE THE PRODUCT SOLD IS IDENTICA L. MOREOVER, IT IS ALSO NOT THE CASE OF THE ASSESSEE THAT THE SALE TO THE AE, T HOUGH A SOLITARY INSTANCE, IS NOT A SALE IN THE ORDINARY COURSE OF ITS BUSINESS. THE FACT THAT SOME OTHER PRODUCT HAS BEEN EXPORTED TO THE AE AT RATE HIGHER OTHER THAN THE RATE AT WHICH IT HAS BEEN SOLD IN THE LOCAL MARKET IS NO RE ASON TO DEFEAT THE ACTION OF THE TPO IN BENCHMARKING THE IMPUGNED INTERNATIONAL TRANSACTION BY APPLYING THE CUP METHOD. BE THAT AS IT MAY, WE MAY NOW CONS IDER THE ALTERNATIVE PLEA OF THE ASSESSEE SEEKING ADJUSTMENTS IN THE PRICE CH ARGED FROM THE DOMESTIC BUYER SO AS TO ACCOUNT FOR THE DIFFERENCES BETWEEN THE INTERNATIONAL ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 TRANSACTION OF EXPORT OF THE PRODUCT TO THE AE AND THE COMPARABLE UNCONTROLLED TRANSACTION. ON THIS POINT, WE ARE NOT PERSUADED B Y THE ACTION OF THE TPO IN DISREGARDING THE POINTS RAISED BY THE ASSESSEE AND HOLDING THAT NO ADJUSTMENTS ARE REQUIRED. OSTENSIBLY, THE COMPARIS ON OF SUCH TRANSACTIONS, WHICH IS ELUCIDATED AT PAGE 253 OF THE PAPER BOOK S HOW THAT THE SALE TO AE IS ON A CREDIT OF 30 DAYS WHEREAS THE TERMS OF CREDIT TO THE LOCAL PARTY IS OF 60 DAYS; SECONDLY, THE SALE TO THE AE IS ON A SINGULAR OCCASION OF 9000 KG. WHEREAS THE SALES TO THE INDIAN PARTY HAS BEEN MADE ON THREE DIFFERENT OCCASIONS OF 1000, 700 AND 1000 KG. . THIRDLY, THE ASSESSEE POINTED OUT THAT THE PRODUCT WAS NOT EXPORTED TO THE ULTIMATE CUSTOM ER BUT THE AE CONTRACTED THIS PRODUCT FROM THE ASSESSEE FOR ONWARD SALE TO T HE ULTIMATE INDUSTRIAL CONSUMER. THIS ASPECT OF THE MATTER IS EVIDENT FRO M PAGES 199 200 OF THE PAPER BOOK WHEREIN IS PLACED THE COPY OF EXPORT INV OICES/DELIVERY DETAILS OF THE PRODUCT EXPORTED TO THE AE. THE AE ON ITS PART , SOLD THE GOODS TO THE ULTIMATE CONSUMER AT A PRICE EQUIVALENT TO RS. 288/ - PER KG., AFTER BUYING FROM THE ASSESSEE AT RS.239/- PER KG. . THE LOCAL SALE, ON THE OTHER HAND, IS CLAIMED TO HAVE BEEN MADE TO A CUSTOMER, WHO HAS UTILIZED I T FOR ITS OWN CONSUMPTION. FOURTHLY, ASSESSEE HAS POINTED OUT THAT THE SALES T O THIRD PARTIES REQUIRE CERTAIN LEVEL OF ADDITIONAL COSTS, VIZ. SELLING, MA RKETING, PAYMENT FOLLOW-UP ETC., WHICH IS NOT SO IN CASE OF EXPORT TO THE AE. FIFTH LY, IT IS POINTED OUT THAT THE EXPORT MADE TO THE AE HAS RESULTED IN AN INDIRECT E CONOMIC BENEFIT BY WAY OF OBTAINING ADVANCE LICENSE FOR DUTY FREE IMPORTS. A ROUGH CALCULATION IN THIS REGARD HAS BEEN FURNISHED AT THE TIME OF HEARING IN TERMS OF WHICH IT IS POINTED OUT THAT SUCH ECONOMIC BENEFIT WAS TO THE TUNE OF R S.10-11 PER KG. . THE AFORESAID POINTS BROUGHT OUT BY THE ASSESSEE, IN OU R VIEW, ARE BONAFIDE GROUNDS TO PERMIT ADJUSTMENT TO THE COMPARABLE UNCO NTROLLED PRICE BEING CONSIDERED IN ORDER TO BENCHMARK THE TRANSACTION OF EXPORT. NOTABLY, SUCH ADJUSTMENT IS CALLED FOR, HAVING REGARD TO THE PROV ISIONS OF SUB-CLAUSE (II) OF CLAUSE (A) OF SUB-RULE (1) OF RULE 10B OF THE RULES AND KEEPING IN MIND THE AFORESAID DIFFERENCES. A PERTINENT POINT HAS ALSO BEEN MADE OUT BY THE ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 ASSESSEE THAT AFTER EXPORT TO THE AE, THE SAME PROD UCT HAS BEEN ULTIMATELY SOLD BY THE AE TO A UNCONTROLLED PARTY AT A PRICE, WHICH CAN BE TAKEN TO BE THE THEN PREVAILING INTERNATIONAL PRICES. THEREFORE, I T IS SOUGHT TO BE MADE OUT THAT THE MAXIMUM PRICE, WHICH ASSESSEE COULD HAVE REALIZ ED ON EXPORT OF THE PRODUCT TO A NON-AE WOULD BE THE PREVAILING INTERNA TIONAL PRICE, WHICH WAS THE PRICE FOR WHICH THE AE SOLD THE PRODUCT TO THE ULTI MATE CUSTOMER. IT WAS THEREFORE POINTED OUT THAT CONSIDERED IN THE SAID L IGHT, THE ADJUSTMENT PERMISSIBLE IN ORDER TO BRING THE TRANSACTION TO TH E LEVEL OF ARMS LENGTH PRICE CAN IT BEST BE RESTRICTED TO THE DIFFERENCE BETWEEN THE PRICE CHARGED BY THE AE FROM THE ULTIMATE CUSTOMER AND THE PRICE CHARGED BY ASSESSEE TO THE AE. 32. CONSIDERING THE AFORESAID SUBMISSIONS PUT-FORTH , IN OUR VIEW, IT WOULD BE IN THE FITNESS OF THINGS THAT A CERTAIN LEVEL OF ADJUSTMENT IS MADE TO THE COMPARABLE UNCONTROLLED PRICE OF RS.365/- PER KG. C ONSIDERED BY THE TPO IN ORDER TO MAKE IT COMPARABLE WITH THE IMPUGNED INTER NATIONAL TRANSACTION. PRESENTLY, THE TPO HAS WORKED OUT THE DIFFERENTIAL AT RS.126/- PER KG. {I.E RS.365/- (SALE PRICE TO INDIAN BUYER) MINUS RS.239/- (EXPORT PRICE TO AE)}. CONSIDERING THE DIFFERENCES ON ACCOUNT OF : (I) VOL UME OF SALES; (II) EXPORT TO AE AND THEREOF SALE TO ULTIMATE CUSTOMER AND THE DO MESTIC SALE BEING TO THE DIRECT CUSTOMER; (III) A PORTION OF THE PROFIT BEIN G RETAINED BY THE AE FOR ITS FUNCTIONS PERFORMED; (IV) THE BENEFIT ON ACCOUNT OF LICENSE TO IMPORT GOODS AT CONCESSIONAL IMPORT DUTY; (V) INCURRENCE OF MARKETI NG/SELLING COST ON DOMESTIC SALES; (VI) DIFFERENCE IN CREDIT TERMS; ETC., IN OU R CONSIDERED OPINION, IT WOULD MEET THE ENDS OF JUSTICE IF THE PRICE OF RS.365/- PER KG. IS ADJUSTED TO RS.300/- PER KG. . THE ADJUSTED PRICE OF RS.300/- PER KG., IN OUR VI EW, IS LIABLE TO BE TAKEN AS AN ARMS LENGTH PRICE IN RESPECT OF EXPORT OF TRIGONOX 25C75 TO THE AE INSTEAD OF THE STATED PRICE OF RS.239/- PER KG. . AS A RESULT, THE ADDITION OF RS.11,34,000/- MADE BY THE TPO ON THIS COUNT SHALL BE SCALED DOWN TO RS.5,49,000/-. ACCORDINGLY, WE DIRECT THE ASSESSIN G OFFICER TO RESTRICT THE ADJUSTMENT ON ACCOUNT OF INTERNATIONAL TRANSACTION OF EXPORT TO THE AE TO ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 RS.5,49,000/- INSTEAD OF RS.11,34,000/-. THUS, ON THIS ASPECT, ASSESSEE PARTLY SUCCEEDS. 33. THE NEXT ADJUSTMENT IN DISPUTE IS WITH REGARD T O THE MARKETING AND SALE SUPPORT SEGMENT. IN THIS SEGMENT, ASSESSEE HAD UND ERTAKEN AN INTERNATIONAL TRANSACTION RELATING TO RECEIPT ON INTENDING COMMIS SION AND MARKETING SUPPORT FEE AMOUNTING TO RS.81,66,970/-. FOR THE PURPOSES OF BENCHMARKING OF THE INTERNATIONAL TRANSACTION, ASSESSEE USED THE TNM ME THOD AND THE OPERATING PROFIT DIVIDED BY TOTAL COST (OP/TC) HAS BEEN SELEC TED AS THE PROFIT LEVEL INDICATOR (PLI) AND FOR THE PURPOSES OF COMPARABILI TY A SET OF 5 COMPARABLE CONCERNS WAS SELECTED. THE PLI OF THE FIVE COMPARA BLES WAS CONSIDERED BASED ON THE FINANCIAL DATA FOR THE LAST THREE YEAR S AND THE MEAN PLI WAS DETERMINED 3.15% AND THE SAME BEING 10% IN THE CASE OF THE ASSESSEE, IT WAS THE CASE OF THE ASSESSEE BEFORE THE TPO THAT TH E INTERNATIONAL TRANSACTION RELATING TO RECEIPT OF INTENDING COMMISSION AND MAR KETING SUPPORT FEES WAS AT AN ARMS LENGTH PRICE. HOWEVER, DURING THE COURSE OF THE PROCEEDINGS BEFORE THE TPO, ASSESSEE WAS REQUIRED TO GIVE THE FUNCTION AL DETAILS OF THE COMPARABLES AS WELL AS PLI BASED ON THE SINGLE YEAR FINANCIAL DATA PERTAINING TO THE FINANCIAL YEAR UNDER CONSIDERATION I.E. 2005 -06. ON THAT BASIS, IT WAS FOUND THAT FOR THE TWO OF THE COMPARABLES, THE DATA FOR THE YEAR UNDER CONSIDERATION WAS NOT AVAILABLE IN PUBLIC DOMAIN WH EREAS IN CASE OF A THIRD COMPARABLE IT WAS FOUND THAT THE COMPARABLE FUNCTIO NS OF MARKETING BUSINESS OPERATIONS WAS DISCONTINUED. ACCORDINGLY, THE THRE E COMPARABLES WERE REJECTED. THE FOURTH COMPARABLE, NAMELY, ALFRED HE RBERT (INDIA) LTD. (IN SHORT ALFRED) WAS FOUND TO BE ENGAGED IN MARKETING AND SALE SUPPORT ACTIVITY OF A DIFFERENT PRODUCT AND HAD INCURRED LOSSES AND THERE FORE, IT WAS SOUGHT TO BE REJECTED. THIS LEFT ONLY ONE COMPARABLE WHICH WAS CONSIDERED ACCEPTABLE BY THE TPO, NAMELY, PRIYA INTERNATIONAL LTD. (INTENDIN G SEGMENT) WITH THE PLI OF 22.58%. ASSESSEE OBJECTED THAT IT COULD NOT BE APP ROPRIATE TO BENCHMARK THE INTERNATIONAL TRANSACTION ONLY ON THE BASIS OF SING LE COMPARABLE AND ASSESSEE ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 REQUIRED THAT A FRESH SEARCH BE CARRIED OUT. THE T PO ALLOWED THE ASSESSEE FURTHER TIME FOR CONDUCTING A FRESH SEARCH AND IN S UCH PROCESS ASSESSEE PUT BEFORE THE TPO THE FOLLOWING FIVE COMPARABLES :- S.NO. NAME OF THE COMPANY OP/TC F.Y. 2005-06 DATA ONLY 1 GAUR & NAGI LTD. -19.67% 2 IDC (INDIA) LTD. 14.49% 3 AGRIMA CONSULTANTS INTERNATIONAL LTD. -7.76% 4 ALFRED HERBERT INDIA LIMITED (SALES AND MARKETING SEGMENT) -29.52% 5 PRIYA INTERNATIONAL LTD. (INTENDING SEGMENT) 22.58% MEAN -3.98% 34. THE SUBMISSION OF THE ASSESSEE WAS THAT MEAN PL I OF THE COMPARABLES WAS - 3.98% AND THE SAME BEING 10% IN THE CASE OF THE ASS ESSEE, THUS, THE INTERNATIONAL TRANSACTION RELATING TO A RECEIPT OF INTENDING COMMISSION AND MARKETING SUPPORT FEES WAS THAT AN ARMS LENGTH PRI CE. THE TPO FOUND THE THREE COMPARABLES, NAMELY, (I) GAUR & NAGI LTD.; (I I) IDC (INDIA) LTD.; AND, (III) AGRIMA CONSULTANTS INTERNATIONAL LTD. AS FUNCTIONALLY INCOMPARABLE FOR THE REASON THAT THE SAID CONCERNS WERE ENGAGED IN PROVI DING SUPPORT SERVICES WITH RESPECT TO MARKET RESEARCH (MARKET INTELLIGENCE FUN CTION AND RELATED SERVICES). THE FOURTH COMPARABLE, NAMELY, ALFRED WAS ALSO EXCL UDED BY THE TPO FOR THE REASON THAT IT WAS ENGAGED IN THE FIELD OF MARKETIN G OF MACHINES, TOOLS AND SPARES AND IT WAS ALSO INCURRING LOSSES AND THUS AC CORDING TO HIM IT WAS FUNCTIONALLY INCOMPARABLE. IT WAS ALSO LOSS-MAKING CONCERN, WHEREAS ASSESSEE WAS A COST-PROTECTED CONCERN, WHO WAS BEIN G PAID BY THE AE ON THE BASIS OF COST PLUS MARKUP. AS A RESULT, THE ONLY C OMPARABLE WHICH REMAINED WAS PRIYA INTERNATIONAL LTD. (INTENDING SEGMENT) WI TH THE PLI OF 22.58%, AND THE SAME WAS CONSIDERED FOR THE PURPOSES OF BENCHMA RKING THE INTERNATIONAL TRANSACTION. ACCORDINGLY, THE PLI OF THE COMPARABL E BEING 22.58% AND THAT BEING 10% OF THE ASSESSEE, AN ADJUSTMENT CORRESPOND ING TO THE DIFFERENCE I.E. 12.58% WAS MADE TO THE STATED VALUES OF THE INTERNA TIONAL TRANSACTION IN ORDER TO ARRIVE AT ITS ARMS LENGTH PRICE. THUS RESULTED IN AN ADJUSTMENT OF RS.11,75,224/- TO THE RETURNED INCOME OF THE ASSESS EE. ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 35. BEFORE US, THE SHORT POINT RAISED BY THE ASSESS EE IS WITH REGARD TO THE EXCLUSION OF TWO COMPARABLES, NAMELY, IDC (INDIA) L TD. AND ALFRED. ACCORDING TO THE APPELLANT ALFRED IS A CONCERN WHICH WAS ENGA GED IN SIMILAR FUNCTIONS OF SALES AND MARKETING, ALBEIT OF MACHINES, TOOLS AND SPARES. ACCORDING TO THE ASSESSEE, THE PRODUCT DIFFERENTIATION IS NO GROUND TO SAY THAT THE SAID CONCERN IS FUNCTIONALLY INCOMPARABLE BECAUSE IN THE TNM MET HOD, IT IS THE NATURE OF ACTIVITY WHICH IS MATERIAL AND NOT THE PRODUCTS. T HE LEARNED COUNSEL ALSO ASSAILED THE ARGUMENT OF THE TPO THAT THE SAID CONC ERN WAS INCOMPARABLE FOR THE REASON THAT ASSESSEE IS A COST-PROTECTED, WHICH IS NOT SO IN THE CASE OF ALFRED. ACCORDING TO THE LEARNED COUNSEL, THE APPR OACH OF THE TPO IS INCONSISTENT BECAUSE EVEN THE CONCERN M/S PRIYA INT ERNATIONAL LTD. (INTENDING SEGMENT) WHICH HAS BEEN SELECTED BY TPO IS NOT A CO ST-PROTECTED ENTITY AND YET IT HAS BEEN CONSIDERED AS A COMPARABLE CONCERN. IT WAS THUS CONTENDED THAT THE REJECTION OF ALFRED WAS UNJUSTIFIED. 36. WITH REGARD TO THE EXCLUSION OF IDC (INDIA) LTD ., THE LEARNED COUNSEL SUBMITTED THAT THE SAID CONCERN WAS ALSO TAKEN AS A COMPARABLE CONCERN WHILE BENCHMARKING THE INTERNATIONAL TRANSACTION OF THE ASSESSEE IN THE SUBSEQUENT ASSESSMENT YEAR OF 2007-08 AND THE SAID POSITION HAS BEEN ACCEPTED BY THE TPO. IT WAS THEREFORE, CONTENDED T HAT THE SAID CONCERN HAS BEEN UNJUSTLY EXCLUDED BY THE TPO FROM THE LIST OF COMPARABLES. 37. APART FROM THE AFORESAID SPECIFIC ARGUMENTS REL ATING TO THE EXCLUSION OF TWO AFORESTATED COMPARABLES, THE LEARNED COUNSEL PO INTED OUT THAT IN ANOTHER SEGMENT OF THE ASSESSEE, NAMELY, TRADING SEGMENT WH ERE ASSESSEE WAS ENGAGED IN TRADING OF GOODS MANUFACTURED BY ITS AES AND SELLING TO THE NON- AES, THE PLI OF THE ASSESSEE WAS 12% AND SUCH TRANS ACTIONS HAVE BEEN ACCEPTED AT AN ARMS LENGTH PRICE BY THE TPO AND NO ADJUSTMENT HAD BEEN MADE. THUS, ACCORDING TO HIM, ON ONE HAND THE TPO FOUND PROFIT MARGIN OF 12% IN TRADING SEGMENT AS AN ARMS LENGTH PRICE, TH EN ADOPTION OF A MARGIN OF ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 22.58% IN RELATION TO INTENDING COMMISSION AND MARK ETING SUPPORT SERVICES SEGMENT WAS INDEED VERY HIGH, WHICH IS UNJUSTIFIED. 38. ON THE AFORESAID ASPECTS, THE LEARNED CIT(DR) H AS PRIMARILY REFERRED TO THE ORDERS OF THE AUTHORITIES BELOW IN SUPPORT OF T HE CASE OF THE REVENUE, WHICH WE HAVE ALREADY NOTED IN THE EARLIER PARAGRAP HS AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 39. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. THE FIRST POINT IS WITH REGARD TO THE REJECTION OF ONE COMPARABLE I.E. ALFRED. THE SAME HAS BEEN REJECTED ON TWIN GROUNDS. THE FIRST GROUND IS THAT THE SAID CONCERN IS IN THE FIELD OF MARKETING OF MACHINES, TOOLS AND SPARES WH EREAS THE COMPARABLE MARKETING ACTIVITY OF THE ASSESSEE IS IN THE FIELD OF SALE OF CHEMICALS MANUFACTURED BY ITS AE. ON THIS ASPECT, WE ARE INC LINED TO AGREE TO THE PLEA OF THE ASSESSEE THAT MERELY BECAUSE OF DIFFERENCE IN T HE PRODUCTS DEALT WITH, THE TWO CONCERNS CANNOT BE CONSIDERED AS FUNCTIONALLY I NCOMPARABLE SO LONG AS THEY ARE ENGAGED IN PERFORMING SAME FUNCTIONS, ESPE CIALLY WHEN THE BENCHMARKING ANALYSIS IS BEING CARRIED OUT UNDER TH E TNM METHOD. NEVERTHELESS, THE OTHER OBJECTION TAKEN BY THE TPO IN ORDER TO REJECT THE SAID CONCERN FOR THE PURPOSES OF THE COMPARABILITY ANALY SIS, IN OUR VIEW, IS QUITE JUSTIFIED. THE SAID CONCERN IS REPORTED TO HAVE IN CURRED A LOSS AND ITS PLI IS SAID TO BE - 29.52%. AT THE TIME OF HEARING, IT WAS ALSO NOTICE D THAT IN THE IMMEDIATE PRECEDING ASSESSMENT YEAR THE SAID CONCER N REPORTED A VERY HIGH PROFIT MARGIN AND IN THE ASSESSMENT YEAR PRIOR THER EOF IT REPORT A LOSS. OSTENSIBLY, THE FINANCIAL DATA REFLECTS INCONSISTEN T RESULTS, AND IN THE ABSENCE OF ANY CREDIBLE EXPLANATION FOR THE INCONSISTENCIES , IT HAS BEEN RIGHTLY EXCLUDED FROM THE LIST OF COMPARABLES. 40. NOW, WE MAY CONSIDER THE EXCLUSION OF THE CONCE RN M/S IDC (INDIA) LTD. FROM THE LIST OF COMPARABLE, WHICH IS BEING AGITATE D BY THE ASSESSEE. FIRSTLY, ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 THERE IS NO DISPUTE TO THE POSITION ASSERTED BY THE ASSESSEE THAT THE SAID CONCERN HAS BEEN CONSIDERED AS A COMPARABLE IN SUBS EQUENT ASSESSMENT YEAR 2007-08; AND, THERE IS ALSO NO CHANGE IN THE A CTIVITY PROFILE OF THE SAID CONCERN. SECONDLY, WE SEE FROM THE DISCUSSION IN P ARA 8.4(5) OF THE ORDER OF THE TPO THAT THE SAID CONCERN ALONGWITH TWO CONCERN S, NAMELY, GAUR & NAGI LTD. AND AGRIMA CONSULTANTS INTERNATIONAL LTD. WERE REJECTED FOR BEING FUNCTIONALLY ON THE GROUND THAT THEY WERE ENGAGED I N PROVIDING SUPPORT SERVICES WITH RESPECT TO MARKET RESEARCH (MARKET IN TELLIGENCE FUNCTION AND RELATED SERVICES). IN THIS CONNECTION, WE FIND THA T IN SO FAR AS , GAUR & NAGI LTD. AND AGRIMA CONSULTANTS INTERNATIONAL LTD. ARE CONCERNED, THE SAID CONCERNS ARE INDEED ENGAGED IN PROVIDING AN ARRAY O F SERVICES IN THE FIELD OF MARKET RESEARCH AND INTELLIGENCE GATHERING, WHICH I S QUITE DISTINCT FROM THE ACTIVITY OF MARKETING OF PRODUCTS. THEREFORE, WHIL E THE TPO WAS JUSTIFIED IN REJECTING M/S GAUR & NAGI LTD. AND AGRIMA CONSULTAN TS INTERNATIONAL LTD. AS BEING FUNCTIONALLY INCOMPARABLE, HOWEVER IN THE CAS E OF IDC (INDIA) LTD. THE FUNCTIONAL PROFITS IS DIFFERENT AS IT IS ENGAGED IN THE FIELD OF MARKETING ACTIVITY ALONE. PERHAPS, THE ABOVE DISTINCTION ESCAPED THE ATTENTION OF THE TPO FOR THE YEAR UNDER CONSIDERATION BECAUSE IN THE NEXT ASSESS MENT YEAR 2007-08 THE SAID CONCERN HAS BEEN ACCEPTED AS FUNCTIONALLY COMP ARABLE. THUS, FOR THE AFORESAID REASONS, WE HOLD THAT ASSESSEE IS JUSTIFI ED IN CLAIMING THAT CONCERN IDC (INDIA) LTD. BE CONSIDERED AS A COMPARABLE FOR THE PURPOSES OF BENCHMARKING INTERNATIONAL TRANSACTIONS OF INTENDIN G COMMISSION AND MARKETING SUPPORT FEES. THE TPO IS DIRECTED TO RE- WORK THE ADJUSTMENT, IF ANY ON THIS ASPECT AND ACCORDINGLY ASSESSEE PARTLY SUCC EEDS. 41. THE AFORESAID DISCUSSION TAKES CARE OF THE ISSU ES RAISED BY THE ASSESSEE AT THE TIME OF HEARING FOR ASSESSMENT YEAR 2006-07. IN ORDER TO IMPART COMPLETION TO THIS ORDER, VIS--VIS THE GROU NDS OF APPEAL RAISED, WE HOLD AS UNDER :- ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 (I) GROUND OF APPEAL NO.1 STANDS PARTLY ALLOWED, I N VIEW OF OUR AFORESAID DISCUSSION. (II) GROUND OF APPEAL NO. 2 RELATING TO A GRANT OF BENEFIT OF +/- 5% IS RENDERED ACADEMIC AS A RESULT OF SUBSEQUENT AMENDME NTS IN LAW. (III) GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE IS WITH REGARD TO INITIATION OF PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT, WHICH, IN OUR VIEW IS QUITE PREMATURE AND IS ACCORDINGLY DISMISSE D. 42. IN THE RESULT, APPEAL OF THE ASSESSEE IN ITA NO .1477/PN/2010 FOR ASSESSMENT YEAR 2006-07 IS PARTLY ALLOWED. 43. SO FAR AS THE APPEAL FOR ASSESSMENT YEAR 2007-0 8 IS CONCERNED, IT WAS A COMMON POINT BETWEEN THE PARTIES THAT THE ISSUES RAISED THEREIN, SUBSTANTIVELY STAND ON THE SAME FOOTING AS HAS BEEN CONSIDERED BY US IN THE APPEAL FOR ASSESSMENT YEAR 2006-07, EXCEPT IN RELAT ION TO THE MARKETING AND SALES SUPPORT SEGMENT WHEREIN ASSESSEE CONTESTS THE INCLUSION OF ONE COMPARABLE, NAMELY, ICRA ONLINE LTD. (INFORMATION S ERVICES SEGMENT). AS PER THE ASSESSEE, THE SAID CONCERN IS EXCLUDIBLE FROM T HE LIST OF COMPARABLES FOR THE SAME REASONS, WHICH HAVE BEEN APPLIED BY THE TP O FOR ASSESSMENT YEAR 2006-07 WHILE EXCLUDING, M/S GAURI & NAGVI LTD. AND M/S AGRIMA CONSULTANTS INTERNATIONAL LTD. . IN THIS CONNECTION, WE FIND THAT THE SAID CONCERN HAS BEEN CONSIDERED AS COMPARABLE IN RELATION TO ITS INFORMA TION SERVICES SEGMENT ALONE. THE SAID SEGMENT OF ICRA ONLINE LTD. IS ENG AGED IN THE BUSINESS OF RESEARCH AND SUPPORT IN CAPITAL MARKETS (PRIMARILY ASSISTING THE MUTUAL FUNDS) AND PROVIDING RESEARCH REPORTS. IT IS ALSO EMERGIN G FROM RECORD THAT THE SAID CONCERN IS AN INFORMATION SERVICES AND TECHNOLOGY CONSULTATION PROVIDER AND ITS PRODUCTS INCLUDE RESEARCH AND ANALYSIS, FINANCI AL HEALTH MANAGEMENT AND OPERATIONS MANAGEMENT. CONSIDERING THE AFORESAID F UNCTIONAL PROFILE OF THE SAID CONCERN, IN OUR VIEW, ASSESSEE IS JUSTIFIED IN ASSERTING THAT THE SAME IS FUNCTIONALLY INCOMPARABLE WITH THE NATURE OF ACTIVI TY BEING PERFORMED BY THE ITA NO.1477/PN/2010 ITA NO.1659/PN/2011 ASSESSEE IN ITS MARKETING AND SUPPORT SERVICES SEGM ENT. THE NATURE OF ACTIVITY BEING PERFORMED BY THE ASSESSEE IN ITS MAR KETING AND SALES SUPPORT SEGMENT HAVE ALREADY BEEN NOTED BY US IN THE EARLIE R PARAGRAPHS AND ON THAT BASIS WE UPHOLD ASSESSEES PLEA FOR EXCLUSION ON IC RA ONLINE LTD. (INFORMATION SERVICES SEGMENT) FOR THE PURPOSES OF BENCHMARKING ITS INTERNATIONAL TRANSACTION OF INTENDING COMMISSION A ND MARKETING SUPPORT FEE FOR THE ASSESSMENT YEAR 2007-08. ACCORDINGLY, THE TPO IS DIRECTED TO RE-WORK THE ADJUSTMENT ON ACCOUNT OF THE MARKETING AND SALE S SUPPORT SERVICES SEGMENT BY EXCLUDING ICRA ONLINE LTD. FROM THE LIST OF COMPARABLES. THUS, ON THIS ASPECT, ASSESSEE PARTLY SUCCEEDS. 44. IN THE RESULT, APPEAL OF THE ASSESSEE IN ITA NO 1659/PN/2011 FOR ASSESSMENT YEAR 2007-08 IS ALSO PARTLY ALLOWED. 45. RESULTANTLY, BOTH THE CAPTIONED APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED, AS ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH FEBRUARY, 2014. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 11 TH FEBRUARY, 2014. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE DRP, PUNE; 4) THE DR, A BENCH, I.T.A.T., PUNE; 5) GUARD FILE. BY ORDER //TRUE COPY// SR. PRIVATE SECRETARY I.T.A.T., PUNE
