Haier Appliances India Ltd., New Delhi V. DCIT, New Delhi

ITA 1515/DEL/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7254 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 09-08-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 13-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3); 92B; 37(1)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI KULDIP SINGH : JUDICIAL MEMBER ITA NO. 1515/DEL/2014 ASSTT. YR. 2009-10 HAIER APPLIANCES INDIA LTD., VS. DCIT CIRCLE 12(1 ), B-1/A-14, MOHAN CO-OP. NEW DELHI. INDL. ESTATE, MATHURA ROAD, NEW DELHI. PAN: AABCH 3162 L AND ITA NO. 1582/DEL/2014 ASSTT. YR. 2009-10 DCIT CIRCLE 12(1), VS. HAIER APPLIANCES INDIA LT D., NEW DELHI. B-1/A-14, MOHAN CO-OP. INDL. ESTATE, MATHURA ROAD, NEW DELHI. (APPELLANT ) ( RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA SHRI NEERAJ JAIN ADV. SHRI ABHISHEK AGARWAL CA REVENUE BY: SHRI MANISH KUMAR CIT(DR) DATE OF HEARING : 09/08/2016. DATE OF ORDER : 08/09/2016. O R D E R PER S.V. MEHROTRA, A.M: THE CAPTIONED APPEALS, PREFERRED BY THE ASSESSEE AS WELL AS THE DEPARTMENT, ARE DIRECTED AGAINST THE ASSESSMENT ORD ER DATED 16.01.2014 PASSED BY THE ASSESSING OFFICER U/S 143(3) READ WIT H SECTION 144C(5), 2 PURSUANT TO DIRECTIONS OF LD. DRP. BOTH THE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMPOSITE ORDER FOR T HE SAKE OF CONVENIENCE. ITA NO. 1515/DEL/2014 ( ASSESSEES APPEAL) : 2. THE ASSESSEE HAS RAISED SO MANY GROUNDS IN ITS GROUNDS OF APPEAL. HOWEVER, THE SOLE CONTROVERSY IS REGARDING ADJUSTME NT MADE BY THE TPO ON ACCOUNT OF AMP EXPENSES INCURRED BY THE ASSESSEE, A S PARTLY CONFIRMED BY LD. DRP. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, A WHOLLY OWNED SUBSIDIARY OF HAIER ELECTRICAL APPLIANCES CORP. LTD. (HAIER G ROUP), STARTED ITS BUSINESS OPERATIONS IN DECEMBER 2003 IN INDIA. IT D EALS WITH CONSUMER PRODUCTS ACROSS SIX PRODUCT CATEGORIES- REFRIGERATO RS, COLOUR TELEVISION/ DVDS, WASHING MACHINES, MICROWAVE OVENS AND DISHWAS HERS. THE ASSESSEE HAD REPORTED 8 INTERNATIONAL TRANSACTIONS, AS NOTED BY LD. TPO IN PARA 1.1 OF HIS ORDER, BUT HE NOTED FROM THE TP STUDY, SUBMITTE D BY ASSESSEE THAT THE TP STUDY WAS SILENT ABOUT MARKETING INTANGIBLES DEVEL OPED BY THE ASSESSEE IN INDIA FOR THE PRODUCTS OF ITS AE BY INCURRING HUGE AMP EXPENDITURE, ON THE GROUND OF ASSESSEE NOT HAVING ANY SIGNIFICANT INTAN GIBLE AND NO RESEARCH AND DEVELOPMENT OF NON-ROUTINE INTANGIBLES BEING UNDERT AKEN. HE NOTED THAT ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH HAIER ELECTRICAL APPLIANCES CORP. LTD. (IN SHORT HAIER CHINA). HE FURTHER NOT ED THAT AS PER THE AGREEMENT HAIER CHINA WAS THE OWNER OF TRADE NAME/ MARK AND WAS THE OWNER OF REGISTERED TRADE MARK IN INDIA. THE ASSESS EE HAD BEEN ALLOWED TO USE THE TRADEMARKS FOR THE FIRST 5 YEARS FREE OF CH ARGE. AFTER REPRODUCING RELEVANT PARTS OF THE AGREEMENT, LD. TPO NOTICED TH AT FOLLOWING IMPORTANT FACTS EMERGED FROM THE SAME: 3 (I) UNDER THE AGREEMENT THE ASSESSEE WAS AUTHORIZED TO USE TRADE MARK AND SALE OF PRODUCTS. (II) THE ASSESSEE WAS ALSO ASSIGNED LICENSE TO ASSEMBLE AND/ OR MANUFACTURE PRODUCT AS PER SPECIFICATION OF THE AE. (III) THE ASSESSEE WAS REQUIRED TO KEEP BUSINESS RECORDS OF SALE OF PRODUCT AND SHALL FURNISH THE SAME TO THE AE AS QUARTERLY REPORT. (IV) ALL THE FUNCTIONS RELATING TO PROTECTION OF TRADE M ARK AND RISK WERE ASSIGNED TO THE ASSESSEE. (V) IN CASE THE ASSESSEE ACQUIRES OR DEVELOPS ANY INTAN GIBLE THE SAME SHALL BE TRANSFERRED TO THE AE WITHOUT ANY COMPENSATION. (VI) NO ROYALTY WAS CHARGED FROM THE ASSESSEE FOR THE FI RST FIVE YEARS. (VII) IN PURSUANCE TO THE ABOVE EXTRACTED TERMS AND COND ITIONS OF THE AGREEMENT, THE ASSESSEE HAD LAUNCHED, PROMOTED AND PROTECTED HAIER BRAND IN INDIA AND HAD DEVELOPED MARKETING UNDER HEADS ADVERTISEMENT, MARKETING AND PROMOTIONAL EXPENDITURE IN THE YEAR UNDER CONSIDERA TION AND IN EARLIER YEAR. 3.1. HE, ACCORDINGLY, ISSUED SHOW CAUSE NOTICE TO A SSESSEE, INTER ALIA, POINTING OUT THAT ASSESSEE WAS MAKING SIGNIFICANT E FFORTS TO PROMOTE THE BRAND OF THE AE. HE POINTED OUT THAT ADVERTISEMENT EXPENSES OVER AND ABOVE THE NORMAL AMP EXPENSES INCURRED BY COMPARABLE COMP ANIES WAS TOWARDS BRAND BUILDING. HE COMPARED THE AMP/ SALES RATIO WI TH VIVEK LTD. AND OBSERVED THAT ASSESSEE HAD INCURRED 16.04% OF AMP T O GROSS SALES AS COMPARED TO 3.87% OF THE AMP TO GROSS SALES INCURRE D BY VIVEK LTD. HE, INTER ALIA, SHOW CAUSED THE ASSESSEE AS UNDER: 4 THIS SEGMENT IS PROPOSED TO BE BENCHMARKED USING C UP WITH A MARKUP TO THE CALCULATED OVER COSTS. IT MUST BE K EPT IN MIND THAT THIS PROCESS OF PROVIDING AMP SERVICES INVOLVE S DEPLOYING YOUR FUNDS. IT IS CONSIDERED PRUDENT THAT A MARK-UP OF AT LEAST EQUAL TO THE PRIME LENDING RATE OF THE STATE BANK O F INDIA BE APPLIED ON THIS ACCOUNT THE PLR OF SBI WAS 12.75% F OR THE FY 2008-09. IN THE WHOLE PROCESS, YOU HAVE NOT ONLY DE PLOYED YOUR FUNDS BUT ALSO ENGAGED YOUR TRAINED MANPOWER T OWARDS THIS TASK. YOU HAVE ALSO SPENT ON STAFF SALARIES, O FFICE EXPENSES, TRAVELLING AND CONVEYANCE, RENT, ELECTRICITY, COMMU NICATION COSTS ETC. ETC. THEREFORE, BECAUSE OF THESE INDIREC T EXPENSES MADE BY YOU, A FURTHER MARK UP OF AT LEAST 2.25% ON THE ABOVE AMP SPEND AMOUNT IS CONSIDERED APPROPRIATE. THEREFO RE, A TOTAL OF 15% MARKUP ON AMP SPEND IS CONSIDERED TO B E APPROPRIATE. 3.2. THE TPO AFTER CONSIDERING THE ASSESSEES SUBMI SSIONS DIRECTED FOR ADJUSTMENT OF RS. 13,59,01,632/- AS UNDER: ARMS LENGTH MEAN MARGIN (%) 15 TOTAL REVENUE OF THE ASSESSEE 2,916,711,067 ARMS LENGTH PRICE OF AMP EXPENSES (%) 3.87 ARMS LENGTH AMP EXPENSES (A) 112,876,718 AMP EXPENSES INCURRED BY THE ASSESSEE (B) 467,874,7 50 EXPENDITURE INCURRED ON CREATION OF INTANGIBLES (B- A) 354,998,032 MARK UP @ 15% 53,249,705 ARMS LENGTH VALUE OF CAPITAL GRANT 408,247,736 ACTUAL GRANT RECEIVED 272,346,104 DIFFERENCE 135,901,632 3.3. LD. DRP CONFIRMED THE TPOS ACTION BUT VARIED THE MARKUP APPLIED BY TPO FROM 15% TO 9% AND, THUS, REDUCED THE DIFFE RENCE TO BE ADJUSTED AT RS. 114,601,751/-. 5 4. AT THE TIME OF HEARING BOTH THE PARTIES AGREED T HAT IN VIEW OF THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE O F SONY ERICSSON MOBILE COMMUNICATIONS VS. CIT (2015) 374 ITR 118 (DEL), TH E MATTER NEEDS TO BE RESTORED BACK TO THE FILE OF LD. AO/TPO FOR DE NOVO CONSIDERATION. 5. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND HAVE PERUSED THE RECORD OF THE CASE. THE ASSESSEE IS A D ISTRIBUTOR OF VARIOUS PRODUCTS OF ITS AE. THE HONBLE DELHI HIGH COURT TH E CASE OF SONY ERICSSON MOBILE COMMUNICATIONS (SUPRA), HAS, INTER ALIA, OB SERVED AS UNDER: THE TEST OF ALLOWABILITY OF EXPENDITURE UNDER SECT ION 37(1) IS WHETHER THE EXPENDITURE IS INCURRED WHOLLY OR EXCLU SIVELY FOR THE BUSINESS CONSIDERATION. THE ISSUE OF ARM'S LENG TH PRICE PER SE DOES NOT ARISE WHEN DEDUCTION UNDER SECTION 37(1 ) IS CLAIMED. CHAPTER X OF THE ACT RELATES TO ARM'S LENG TH PRICING ADJUSTMENT- CHAPTER X IS NOT CONCERNED WITH DISALLO WANCE OF EXPENDITURE BUT RELATES TO DETERMINATION OF ARM'S L ENGTH PRICE OR COST OF AN INTERNATIONAL TRANSACTION BETWEEN TWO ASSOCIATED ENTERPRISES. IT RELATES TO INCOME OR RECEIPTS, AND ALSO EXPENSES AND INTEREST BUT IN A DIFFERENT CONTEXT. THUS, SECT ION 37(1) AND CHAPTER X PROVISIONS PERTAIN TO DIFFERENT FIELDS. T HE ARM'S LENGTH PROCEDURE PRESCRIBED IN CHAPTER X, ONCE APPL ICABLE HAS TO BE GIVEN FULL APPLICATION. THE IMPACT OF CHAPTER X OF THE ACT CANNOT BE CONTROLLED OR CURTAILED BY REFERENCE TO T HE ALLOWABILITY OF EXPENDITURE UNDER SECTION 37(1) OF THE ACT THE PURPOSE OF DETERMINATION OF ARM'S LENGTH PRICE IS T O FIND OUT THE FAIR AND TRUE MARKET VALUE OF THE TRANSACTION AND A CCORDINGLY THE ADJUSTMENT, IF REQUIRED, IS MADE. THE EXERCISE HAS ITS OWN OBJECT AND PURPOSE. ADVERTISING, MARKETING AND SALE S PROMOTION EXPENSES INCURRED BY THE ASSESSEE IN INDI A CAN BE TREATED AND CATEGORISED AS AN INTERNATIONAL TRANSAC TION UNDER SECTION 92B OF THE INCOME-TAX ACT, 1961. 6 LG. ELECTRONICS INDIA P. LTD. V. ASST. CIT [2013] 2 2 ITR (TRIB) 1 (DELHI) [5B] APPROVED ON THIS POINT . XXXX XXXX XXX XXX IT WOULD BE INCORRECT TO TREAT ADVERTISEMENT AS EQU IVALENT OR SYNONYMOUS WITH 'BRAND BUILDING' FOR THE LATTER IN A COMMERCIAL SENSE REFERS TO SEVERAL FACETS AND COMPO NENTS, THE PRIMARY BEING THE QUALITY AND REPUTATION OF THE PRO DUCT OR NAME, WHICH IS ACQUIRED GRADUALLY AND SILENTLY OVER A PASSAGE OF TIME. THE FOLLOWING FACTORS WOULD GOVERN THE DETERMINATIO N OF ARM'S LENGTH PRICE IN RELATION TO ADVERTISING, MARKETING AND PROMOTION EXPENSES: (I) IN THE CASE OF A DISTRIBUTOR AND A MARKETING AS SOCIATED ENTERPRISE, THE FIRST STEP IN TRANSFER PRICING IS T O ASCERTAIN AND CONDUCT A DETAILED FUNCTIONAL ANALYSIS, WHICH WOULD INCLUDE THE ADVERTISING, MARKETING AND PROMOTION FUNCTIONS/EXPE NSES. (II) THE SECOND STEP MANDATES ASCERTAINMENT OF COMP ARABLES OR COMPARABLE ANALYSIS. THIS WOULD HAVE REFERENCE TO T HE METHOD ADOPTED WHICH MATCHES THE FUNCTIONS AND OBLIGATION PERFORMED BY THE TESTED PARTY INCLUDING THE ADVERTISING, MARK ETING AND PROMOTION EXPENSES. (III) A COMPARABLE IS ACCEPTABLE, IF BASED UPON COM PARISON OF CONDITIONS A CONTROLLED TRANSACTION IS SIMILAR WITH THE CONDITIONS IN THE TRANSACTIONS BETWEEN INDEPENDENT ENTERPRISES. IN OTHER WORDS, THE ECONOMICALLY RELEVANT CHARACTER ISTICS OF THE TWO TRANSACTIONS BEING COMPARED MUST BE SUFFICIENTL Y COMPARABLE. THIS ENTAILS AND IMPLIES THAT THE DIFFE RENCE, IF ANY BETWEEN CONTROLLED AND UNCONTROLLED TRANSACTIONS, S HOULD NOT MATERIALLY AFFECT THE CONDITIONS BEING EXAMINED GIV EN THE METHODOLOGY BEING ADOPTED FOR DETERMINING THE PRICE OR THE 7 MARGIN. WHEN THIS IS NOT POSSIBLE, IT SHOULD BE ASC ERTAINED WHETHER REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE EFFECT OF SUCH DIFFERENCES ON THE PRI CE OR MARGIN. THUS, IDENTIFICATION OF POTENTIAL COMPARABLES IS TH E KEY TO THE TRANSFER PRICING ANALYSIS. AS A SEQUITUR, IT FOLLOW S THAT THE CHOICE OF THE MOST APPROPRIATE METHOD WOULD BE DEPE NDENT UPON AVAILABILITY OF POTENTIAL COMPARABLES KEEPING IN MIND THE COMPARABILITY ANALYSIS INCLUDING FITTING ADJUSTMENT S WHICH MAY BE REQUIRED. AS THE DEGREE OF THE COMPARABILITY INC REASES, THE EXTENT OF POTENTIAL DIFFERENCES WHICH WOULD RENDER THE ANALYSIS INACCURATE NECESSARILY DECREASES. (IV) THE ASSESSEE, I.E., THE DOMESTIC ASSOCIATED EN TERPRISE MUST BE COMPENSATED FOR THE ADVERTISING, MARKETING AND P ROMOTION EXPENSES BY THE FOREIGN ASSOCIATED ENTERPRISE. SUCH COMPENSATION MAY BE INCLUDED OR SUBSUMED IN A LOW P URCHASE PRICE OR BY NOT CHARGING OR CHARGING A LOWER ROYALT Y. DIRECT COMPENSATION CAN ALSO BE PAID. THE METHOD SELECTED AND COMPARABILITY ANALYSIS SHOULD BE APPROPRIATE AND RE LIABLE SO AS TO INCLUDE THE ADVERTISING, MARKETING AND PROMOTION FUNCTIONS AND COSTS (V) WHERE THE ASSESSING OFFICER/TRANSFER PRICING OF FICER ACCEPTS THE COMPARABLES ADOPTED BY THE ASSESSEE, WI TH OR WITHOUT MAKING ADJUSTMENTS, AS A BUNDLED TRANSACTIO N, IT WOULD BE ILLOGICAL AND IMPROPER TO TREAT THE ADVERTISING, MARKETING AND PROMOTION EXPENSES AS A SEPARATE INTERNATIONAL TRANSACTION, FOR THE SIMPLE REASON THAT IF THE FUNC TIONS PERFORMED BY THE TESTED PARTIES AND THE COMPARABLES MATCH, WITH OR WITHOUT ADJUSTMENTS, THE ADVERTISING, MARKE TING AND PROMOTION EXPENSES ARE DULY ACCOUNTED FOR. IT WOULD BE INCONGRUOUS TO ACCEPT THE COMPARABLES AND DETERMINE OR ACCEPT THE TRANSFER PRICE AND STILL SEGREGATE THE A DVERTISING, MARKETING AND PROMOTION EXPENSES AS AN INTERNATIONA L TRANSACTION. 8 (VI) THE ASSESSING OFFICER/TRANSFER PRICING OFFICER CAN REJECT A METHOD SELECTED BY THE ASSESSEE FOR SEVERAL REASONS INCLUDING WANT OF RELIABILITY IN THE ACTUAL MATRIX OR LACK/NO N-AVAILABILITY OF COMPARABLES (SECTION 92C(3) OF THE ACT). (VII) WHEN THE ASSESSING OFFICER/TRANSFER PRICING O FFICER REJECTS THE METHOD ADOPTED BY THE ASSESSEE, HE IS E NTITLED TO SELECT THE MOST APPROPRIATE METHOD, AND UNDERTAKE A COMPARABILITY ANALYSIS. SELECTION OF THE METHOD AND COMPARABLES SHOULD BE AS PER THE COMMAND AND DIRECT IVE OF THE ACT AND RULES AND JUSTIFIED BY GIVING REASONS. (VIII) DISTRIBUTION AND MARKETING ARE INTERCONNECTE D AND INTERTWINED FUNCTIONS. BUNCHING OF INTERCONNECTED A ND CONTINUOUS TRANSACTIONS IS PERMISSIBLE, PROVIDED TH E TRANSACTIONS CAN BE EVALUATED AND ADEQUATELY COMPAR ED ON AGGREGATE BASIS. THIS WOULD DEPEND ON THE METHOD AD OPTED AND COMPARABILITY ANALYSIS AND THE MOST RELIABLE MEANS OF DETERMINING THE ARM'S LENGTH PRICE. (IX) TO ASSERT AND PROFESS THAT BRAND BUILDING IS AN EQUIVALENT OR SUBSTANTIAL ATTRIBUTE OF ADVERTISEMENT AND SALES PROMOTION WOULD BE LARGELY INCORRECT. IT REPRESENTS A COORDIN ATED SYNERGETIC IMPACT CREATED BY ASSORTMENT LARGELY REP RESENTING REPUTATION AND QUALITY. 'BRAND' HAS REFERENCE TO NA ME, TRADE MARK OR TRADE NAME AND LIKE GOODWILL IS A VALUE OF ATTRACTION TO CUSTOMERS ARISING FROM NAME AND A REPUTATION FOR SK ILL, INTEGRITY, EFFICIENT BUSINESS MANAGEMENT OR EFFICIE NT SERVICE. BRAND CREATION AND VALUE, THEREFORE, DEPENDS UPON A GREAT NUMBER OF FACTS RELEVANT FOR A PARTICULAR BUSINESS. IT REFLECTS THE REPUTATION WHICH THE PROPRIETOR OF THE BRAND HAS GA THERED OVER A PASSAGE OR PERIOD OF TIME IN THE FORM OF WIDESPRE AD POPULARITY AND UNIVERSAL APPROVAL AND ACCEPTANCE IN THE EYES OF THE CUSTOMER. BRAND VALUE DEPENDS UPON THE NATUR E AND QUALITY OF GOODS AND SERVICES SOLD OR DEALT WITH. Q UALITY CONTROL 9 IS THE MOST IMPORTANT ELEMENT, WHICH CAN MAR OR ENH ANCE THE VALUE (X) THE BRIGHT LINE TEST HAS NO STATUTORY MANDATE A ND A BROAD- BRUSH APPROACH IS NOT MANDATED OR PRESCRIBED. THE E XERCISE TO SEPARATE 'ROUTINE AND 'NON-ROUTINE' ADVERTISING, MA RKETING AND PROMOTION OR BRAND BUILDING EXERCISE BY APPLYING TH E BRIGHT LINE TEST OF NON-COMPARABLES SHOULD NOT BE SANCTION ED. IT WOULD BE CONSPICUOUSLY WRONG AND INCORRECT TO TREAT THE S EGREGATED TRANSACTIONAL VALUE AS 'NIL' WHEN IN FACT THE TWO A SSOCIATED ENTERPRISES HAD TREATED THE INTERNATIONAL TRANSACTI ONS AS A PACKAGE OR A SINGLE AND CONTRIBUTIONS ARE ATTRIBUTE D TO THE AGGREGATE PACKAGE. IN A SPECIFIC CASE THIS CRITERIA AND EVEN ZERO ATTRIBUTION COULD BE POSSIBLE BUT THE FACTS SH OULD SO REVEAL AND REQUIRE. THIS WOULD BE NECESSARY WHEN THE ARM'S LENGTH PRICE OF THE CONTROLLED TRANSACTION CANNOT BE ADEQU ATELY OR RELIABLY DETERMINED WITHOUT SEGMENTATION OF ADVERTI SING, MARKETING AND PROMOTION EXPENSES. (XI) THE ASSESSING OFFICER/TRANSFER PRICING OFFICER FOR GOOD AND SUFFICIENT REASONS CAN DE-BUNDLE INTERCONNECTED TRANSACTIONS, I.E., SEGREGATE DISTRIBUTION, MARKETI NG OR ADVERTISING, MARKETING AND PROMOTION TRANSACTIONS. THIS MAY BE NECESSARY WHEN BUNDLED TRANSACTIONS CANNOT BE AD EQUATELY COMPARED ON AGGREGATE BASIS. (XII) WHEN SEGMENTATION OR SEGREGATION OF A BUNDLED TRANSACTION IS REQUIRED, THE QUESTION OF SET OFF AN D APPORTIONMENT MUST BE EXAMINED REALISTICALLY AND WI TH A PRAGMATIC APPROACH. TRANSFER PRICING IS AN INCOME A LL ALLOCATING EXERCISE TO PREVENT ARTIFICIAL SHIFTING OF NET INCOMES OF CONTROLLED TAXPAYERS AND TO PLACE THEM ON PARITY WITH UNCONTROLLED, UNRELATED TAX-PAYERS. THE EXERCISE U NDERTAKEN SHOULD NOT RESULT IN OVER OR DOUBLE TAXATION. THUS, THE ASSESSING OFFICER/TRANSFER PRICING OFFICER CAN SEGR EGATE THE ADVERTISING, MARKETING AND PROMOTION EXPENSES AS AN 10 INDEPENDENT INTERNATIONAL TRANSACTION BUT ONLY AFTE R ELUCIDATING GROUNDS AND REASONS FOR NOT ACCEPTING THE BUNCHING ADOPTED BY THE ASSESSEE AND EXAMINING AND GIVING THE BENEFIT O F SET OFF. SECTION 92(3) DOES NOT BAR OR PROHIBIT SET-OFF. (XIII) THE COST PLUS METHOD IS A RECOGNISED AND ACC EPTED METHOD UNDER LIE INDIAN TRANSFER PRICING REGULATION . IT CAN BE APPLIED BY THE ASSESSING OFFICER/TRANSFER PRICING O FFICER IN CASE THE ADVERTISING, MARKETING AND PROMOTION EXPEN SES ARE TREATED AS A SEPARATE INTERNATIONAL TRANSACTION, PR OVIDED THE COST PLUS METHOD IS THE MOST APPROPRIATE AND RELIAB LE METHOD. ADOPTION OF THE COST PLUS METHOD AND COMPUTATION O F COST AND GROSS PROFIT MARGIN COMPARABLE MUST BE JUSTIFIED. (XIV) THE OBJECT AND PURPOSE OF TRANSFER PRICING AD JUSTMENT IS TO ENSURE THAT THE CONTROLLED TAXPAYERS ARE GIVEN TAX PARITY WITH UNCONTROLLED TAXPAYERS BY DETERMINING THEIR TRUE TA XABLE INCOME. COSTS OR EXPENSES INCURRED FOR SERVICES PRO VIDED OR IN RESPECT OF PROPERTY TRANSFERRED, WHEN MADE A SUBJEC T MATTER OF THE ARM'S LENGTH PRICE BY APPLYING TILE COST PLUS M ETHOD, CANNOT BE AGAIN FACTORED OR INCLUDED AS A PART OF INTERCON NECTED INTERNATIONAL TRANSACTION AND SUBJECTED TO THE ARM 'S LENGTH PRICING. [MATTER REMANDED.] 5.1. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT, THE MATTER IS RESTORED TO THE FILE OF AO WITH THE DIREC TION TO EXAMINE ALL THE FUNCTIONS CARRIED OUT BY COMPARABLES VIS A VIS THE TESTED PARTY AND THEREAFTER SELECT THE COMPARABLES AS PER THE GUIDELINES LAID D OWN BY HONBLE DELHI HIGH COURT NOTED ABOVE. 6. ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PUR POSES. 11 ITA NO. 1582/DEL/2014 ( REVENUES APPEAL) : 7. SOLE EFFECTIVE GROUND RAISED BY THE REVENUE IN ITS APPEAL IS AS UNDER: WHETHER DRP-1, NEW DELHI WAS CORRECT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN DIRECTING T HE AO TO DELETE THE ADDITION OF RS. 2,93,89,615/- MADE ON AC COUNT OF DISALLOWANCE OF MARKET TO MARKET LOSS OF RESTATEMEN T OF ASSETS AND LIABILITIES AS ON BALANCE SHEET DATE ? 8. IN COURSE OF ASSESSMENT PROCEEDINGS THE AO REQUI RED THE ASSESSEE TO FURNISH DETAILS OF LOSS ON FOREIGN EXCHANGE FLUCTUA TIONS. HE REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY THE UNREALIZED LOSS S HOULD NOT BE DISALLOWED AS THE SAME WAS NOTIONAL. THE ASSESSEE RELIED ON THE D ECISION OF APEX COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA P. LTD. (2009) 312 ITR 254 (SC), WHEREIN IT HAS BEEN HELD THAT THE LOSS INCURR ED BY THE ASSESSEE ON THE DATE OF BALANCE-SHEET IS AN ALLOWABLE LOSS U/S 37(1 ). THE AO, HOWEVER, FOLLOWING THE CBDT INSTRUCTION NO. 3/2010 DATED 23. 3.2010, DISALLOWED THE ASSESSEES CLAIM. HOWEVER, LD. DRP ALLOWED THE ASSE SSEES CLAIM OBSERVING THAT THE SAME WAS FULLY COVERED BY AS-11 AND THE HO NBLE SUPREME COURTS DECISION IN THE CASE OF WOODWARD GOVERNOR INDIA P. LTD. (SUPRA). 9. LD. DR SUBMITTED THAT THE MATTER MAY BE RESTORED AS ASSESSEES APPEAL IS BEING RESTORED FOR AMP ISSUE. 10. WE HAVE HEARD BOTH THE PARTIES. WE FIND THAT LD . DRP HAS ELABORATELY CONSIDERED THIS ISSUE AND HAS NOTED FROM PARA 6.4.1 TO 6.4.3 AS UNDER: 6.4.1 THE PANEL HAS EXAMINED THE MATTER. IT IS NOTI CED THAT THE TAXPAYER HAS CLAIMED THE SAID LOSS OF RS.2,93,89,61 5/- ON ACCOUNT OF THE UNREALIZED EXCHANGE LOSS ON 31.3.200 9 BY MAKING MTM BENCH MARKING OF THE OUTSTANDING PAYMENT S ON 12 ACCOUNT OF IMPORT OF GOODS FROM OVERSEAS VENDORS. A CCORDING TO THE INFORMATION SUBMITTED BEFORE THE PANEL, SUCH OUT STANDINGS ARE WITH THE FOLLOWING BREAK UP : S. NO. NAME OF THE VENDOR MTM LOSS/GAIN 1 HAH HONGKONG COMPANY -28,947,584.41 2 HAIER AMERICA REFRIGERATORS COMPANY -296,667.80 3. ZHONGSHAN CHANGHONG ELECTRIC CO LTD. -145,636.56 4 HEFEI RONGSHIDA WASHING EQUIPMENT 273.34 TOTAL -29,389,615.43 THE SAID CLAIM IS MADE PURSUANT TO THE PROVISIONS O F AS-11 ISSUED BY THE ICAI. THE TAXPAYER HAS PLACED STRONG RELIANCE UPON THE DECISION ON HON'BLE SUPREME COURT IN THE C ASE OF WOODWARD GOVERNOR INDIA P. LTD (SUPRA). THUS, IT IS TO BE CONSIDERED IF THE CASE OF THE TAXPAYER IS COVERED BY IT OR NOT? THE REPORTED DECISION WAS RENDERED IN THE CONTEXT O F LOAN LIABILITY IN THE BOOKS OF ACCOUNT OF THE TAXPAYER. THE SAID LOAN WAS ON REVENUE ACCOUNT AS A MONETARY TRANSACTION AP PEARING IN THE BALANCE SHEET AND WAS RAISED IN THE FOREIGN EXCHANGE. THE TAXPAYER DEBITED THE UNREALIZED LOSS DUE TO FOR EIGN EXCHANGE FLUCTUATION AS ON THE 31ST MARCH OF THE AC COUNTING YEAR AND THE MATTER WAS ABOUT THE DETERMINATION OF THE SAID LOSS, WHICH WAS DIRECTLY IN CORRELATION WITH THE LI ABILITY APPEARING IN THE BALANCE SHEET. THE BASIS OF THE DE CISION CAN BE UNDERSTOOD FROM THE HYPOTHETICAL EXAMPLE GIVEN BY T HE COURT, REPRODUCED AS UNDER: 'A COMPANY IMPORTS RAW MATERIAL WORTH US $ 250000 I N JANUARY 15, 2002, WHEN THE EXCHANGE RATE WAS RS.46 PER US $. THE COMPANY RECORDS THE TRANSACTION AT THAT RATE. T HE PAYMENT FOR THE IMPORTS IS MADE ON APRIL 15, 2002, WHEN THE EXCHANGE RATE IS RS.49 PER US $. HOWEVER, ON THE BALANCE-SHE ET DATE, MARCH 31, 2002, THE RATE OF EXCHANGE IS RS.50 PER U S $. IN SUCH A CASE, IN TERMS OF AS- 11, THE EFFECT OF THE EXCHANGE DIFFERENCE HAS TO BE TAKEN INTO THE PROFIT AND LOSS ACCOUNT. 13 SUNDRY CREDITORS IS A MONETARY ITEM AND HENCE SUCH ITEM HAS TO BE VALUED AT THE CLOSING RATE, I.E. RS.50 AT MARCH 31, 2002, IRRESPECTIVE OF THE PAYMENT FOR THE SALE SUBSEQUENT LY AT A LOWER RATE. THE DIFFERENCE OF RS. 4 (50- 46) PER US $ IS TO BE SHOWN AS AN EXCHANGE LOSS IN THE PROFIT AND LOSS ACCOUNT AND IS NOT TO BE ADJUSTED AGAINST THE COST OF RAW MATERIALS'. (EMPHA SIS SUPPLIED) 6.4.2 THERE ARE TWO BROAD CATEGORIES OF FOREIGN EXC HANGE LOSSES: 1. TRANSACTION LOSSES: THESE LOSSES ARISE ON SETTL EMENT OF FOREIGN EXCHANGE TRANSACTIONS. THE EXCHANGE DIFFERE NCE BETWEEN THE DATE ON WHICH THE TRANSACTION IS ENTERE D INTO AND THE DATE OF SETTLEMENT OF FOREIGN EXCHANGE TRANSACT ION IS A FOREIGN EXCHANGE LOSS OR GAIN AS THE CASE MAY BE. 2. TRANSLATION LOSSES: THESE LOSSES ARE A PROVISION FOR RESTATEMENT OF UNPAID FOREIGN EXCHANGE LIABILITIES AS ON THE BALANCE SHEET DATE. THE FOREIGN EXCHANGE LIABILITIE S ARE CONVERTED INTO INDIAN RUPEES AS ON THE BALANCE SHEE T DATE AND THE DIFFERENCE IN THE VALUE OF THE LIABILITIES APPE ARING IN THE BOOKS OF ACCOUNTS VIS A VIS THE RESTATED LIABILITIE S IS BOOKED AS A FOREIGN EXCHANGE LOSS OR A GAIN AS THE CASE MAY BE. ACCOUNTING STANDARD 11 STATES THAT AL\ UNPAID MONET ARY LIABILITIES SHOULD BE RESTATED AT CLOSING VALUE AS ON THE BALANCE SHEET DATE. ANY EXCHANGE GAIN OR LOSS ARISING THERE ON IS CONSIDERED AS AN INCOME OR AN EXPENDITURE AS THE CA SE MIGHT BE 10.1. THEREAFTER LD. DRP CONSIDERED THE CBDT INSTRU CTION RELIED UPON BY AO AND OBSERVED THAT MTM LOSS CLAIMED BY THE TAX P AYER WAS ON ACTUAL MONETARY ITEMS APPEARING IN THE BALANCE-SHEET DUE TO THEIR REINSTATEMENT AND NOT ON FOREX DERIVATIVES. THE DEPARTMENT HAS NO T BROUGHT ANY MATERIAL TO 14 CONTROVERT THESE FACTUAL ASPECTS NOTED BY LD. DRP. WE, THEREFORE, SUSTAIN THE ORDER OF LD. CIT(A) FOLLOWING THE DECISION OF HONB LE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA P. LTD. (SUPRA). 11. REVENUES APPEAL IS DISMISSED. 12. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES AND THE REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCEMENT IN OPEN COURT ON 08/09/2016. SD/- SD/- (KULDIP SINGH) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 08/09/2016. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.