ACIT - CIR. - 8(1), MUMBAI V. M/s. CELETRONIX INDIA PVT. LTD., MUMBAI

ITA 1560/MUM/2006

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9204 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-12-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 08-11-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 06-03-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MADHAV KHANDELWAL; KANCHUN KAUSHAL RAJU VAKHARIA
• Assessee Lawyers: AJEET KUMAR JAIN; SASMITA MISRA
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Source of fund; Cost of acquisition; Wholly owned subsidiary; Competent authority; Revised return
• Section: 92C; 143(3); 80HHC; 80IB; 154

Judgement Text

ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 1 OF 29 IN THE INCOME TAX APPELLATE TRIBUNAL 'K' BENCH, MUMBAI BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO.1284/MUM/2006 (ASSESSMENT YEAR: 2002-03) M/S CELETRONIX INDIA PVT. LTD, UNIT NO.9, SDF-I, SEEPZ, ANDHERI (EAST),MUMBAI 400096 PAN: AAACT 7548 K VS. ASSTT. COMMISSIONER OF INCOME TAX, RANGE-8(1) ROOM NO.210, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400020 (APPELLANT) (RESPONDENT) ITA NO.1560/MUM/2006 (ASSESSMENT YEAR: 2002-03) ASSTT. COMMISSIONER OF INCOME TAX, RANGE-8(1) ROOM NO.210, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400020 VS. M/S CELETRONIX INDIA PVT. LTD, UNIT NO.9, SDF-I, SEEPZ, ANDHERI (EAST),MUMBAI 400096 PAN: AAACT 7548 K (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI AJEET KUMAR JAIN & SMT. SASMITA MISRA, CIT (DR) DEPARTMENT BY: S/SHRI KANCHUN KAUSHAL, RAJU VAKHARIA & MADHAV KHANDELWAL DATE OF HEARING: 08/11/2012 DATE OF PRONOUNCEMENT: 24/12/2012 O R D E R PER B. RAMAKOTAIAH, A.M. THESE ARE CROSS APPEALS BY ASSESSEE AND THE REVENU E AGAINST THE ORDER OF THE CIT (A)-8 MUMBAI DATED 22.12.2005. ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE MANUFACTURE OF HEAD STACK ASSEMBLIES AND HEAD GIMBLE ASSEMBLIES, MEMORY MODUL ES, VOICE COILS ASSEMBLIES, SMART CARD COILS AND FLEX CABLE A SSEMBLIES. ASSESSEE FILED RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION ON ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 2 OF 29 31.10.2002 DECLARING TOTAL INCOME OF .3,07,56,750. FURTHER DURING OCTOBER 2004 ASSESSEE FILED REVISED RETURN DECLARIN G TOTAL INCOME AT .10,02,36,369. AO PASSED ORDER UNDER SECTION 143(3) DETERMINING TOTAL INCOME AT .90,67,18,490. AO INTER ALIA MADE NUMBER OF ADDITIONS INCLUDING ADDITION UNDER THE PROVISIONS S ECTION 92CA CONSEQUENT TO THE ORDER UNDER SECTION 92CA(3) OF TH E I.T. ACT BY ADDITIONAL CIT (T.P) MUMBAI. 2. THE LEARNED CIT (A) CONFIRMED CERTAIN ADDITIONS AND GAVE RELIEF ON SOME OTHER ISSUES. ACCORDINGLY THE CROSS APPEALS ARE FILED. ITA NO.1284/MUM/2006 (ASSESSEES APPEAL) 3. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE ACTI ON OF THE ASSESSING OFFICER IN SETTING OFF THE LOSSES OF LOSS MAKING UNITS AGAINST PROFITS OF PROFIT MAKING UNITS WHILE CALCULATING DEDUCTION UNDER SECTION 80 HHC OF THE A CT. 1.2 THE LEARNED CIT(A) OUGHT TO HAVE DIRECTED THE ASSESSING OFFICER TO ALLOW DEDUCTION UNDER SECTION 80 HHC OF THE ACT ON THE BASIS OF PROFITS OF THE BUSIN ESS OF EACH UNIT SEPARATELY. 2.1 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN TR EATING INTEREST OFRS.7,44I,000 ON FIXED DEPOSITS PLACED WI TH THE BANK AS SECURITY FOR OBTAINING EXPORT CREDIT FA CILITIES, AS 'INCOME FROM OTHER SOURCES' AND NOT 'BUSINESS IN COME' AND THEREBY REDUCING THE BUSINESS PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC OF THE ACT. 2.2 WITHOUT PREJUDICE TO AFORESAID GROUND, THE LEAR NED CIT(A) HAS ERRED IN LAW AND ON FACTS IN REJECTING Y OUR APPELLANTS CONTENTION THAT ONLY THE NET INTEREST I. E. EXCESS OF INTEREST RECEIVED OVER INTEREST PAID SHOU LD BE REDUCED UNDER EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT. ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 3 OF 29 3 THE LEARNED CIT (A) HAS ERRED IN LAW AND IN FACTS IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER THAT SERVICES CHARGES OF RS. 600,000 WOULD NOT BE ELIGIB LE FOR DEDUCTION U/S. 80HHC OF THE ACT IN VIEW OF EXPLANAT ION (BAA) OF THE SAID SECTION. 4 THE TEAMED CIT(A) HAS ERRED IN LAW AND ON FACTS I N NOT ADJUDICATING UPON THE ISSUE OF WHETHER (I) INTEREST ON DEPOSITS OFRS.5,413, (II) INCOME FROM INVESTMENT OF RS.1 ,120, (III) INTEREST ON INCOME TAX REFUND OF RS.7 4,638 AND (IV) OTHER MISCELLANEOUS RECEIPTS OF RS.94,363 SHOULD BE REDUCED FROM BUSINESS PROFITS UNDER EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT. 5 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN TREATING SALE OF SCRAP AMOUNTING TO RS. 317,359 AS A PART OF TOTAL TURNOVER FOR THE PURPOSE OF CALCULATION OF DE DUCTION UNDER SECTION 80HHC OF THE ACT. 6.1 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON F ACTS IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN REDUCING SUM OF RS. 18,234,314 AS AGAINST THE CORRE CT AMOUNT OF RS. 26,190 FROM THE EXPORT TURNOVER, BEIN G EXPORT SALES PROCEED REALIZED BEYOND THE STIPULATED PERIOD, WHILE CALCULATING DEDUCTION UNDER SECTION 8 0HHC OF THE ACT. 6.2 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON F ACTS IN HOLDING THAT THE APPELLANT HAS NOT BEEN ABLE TO PRODUCE ANY EVIDENCE IN SUPPORT OF EXTENSION OF TIME LIMIT BY THE RESERVE BANK OF INDIA WHERE AS YOUR APPELLANT HAD F ILED SUFFICIENT EVIDENCE TO ADDUCE THE FACT THAT THE TIM E LIMIT WAS EXTENDED BY THE COMPETENT AUTHORITY. 7 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS IN NOT DIRECTING THE ASSESSING OFFICER TO CONSIDER THE EXCHANGE DIFFERENCE ON DOLLAR ACCOUNT REALIZED BEYO ND SIX MONTHS FROM THE END OF THE FINANCIAL YEAR ENDED MAR CH 31, 2002 BUT WITHIN EXTENDED PERIOD WHILE COMPUTING THE EXPORT TURNOVER UNDER SECTION 80HHC(2)(A) OF THE ACT. 8 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN NOT ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 4 OF 29 ADJUDICATING UPON THE ISSUE OF WHETHER THE UNREALIZ ED EXCHANGE GAIN OF RS. 288,239, SHOULD BE EXCLUDED FR OM THE TOTAL TURNOVER WHILE COMPUTING THE DEDUCTION UN DER SECTION 80HHC OF THE ACT. 9 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN NOT DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE EXCH ANGE DIFFERENCE ON ASSETS OF RS. 878,253, WHILE COMPUTIN G TOTAL TURNOVER FOR THE PURPOSE OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. 10 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS IN REJECTING YOUR APPELLANTS CONTENTION TO DIRECT THE ASSESSING OFFICER TO RE-COMPUTE THE DEPRECIATION ALLOWANCE FOR THE ASSESSMENT YEAR 2002-03 AND ALLOW DEPRECIAT ION OF RS. 200,102,930 AS CLAIMED BY YOUR APPELLANT IN THE RETURN OF INCOME, IN THE EVENT THAT DEPRECIATION ADJUSTMENT MADE BY THE ASSESSING OFFICER IN ASSESSM ENT YEAR 2001-02 IS NOT UPHELD BY THE HIGHER AUTHORITIE S IN THAT YEAR. 11.1 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FAC TS IN HOLDING THAT THE GROUND NO. 1.2 TO 1.3 RAISED BEFOR E HIM IN CONNECTION WITH TRANSFER PRICING ASSESSMENT ARE GEN ERAL IN NATURE AND THEREBY DO NOT CALL FOR ANY ADJUDICATION . 11.2 WITHOUT PREJUDICE TO THE AFORESAID GROUND, YOU R APPELLANT SUBMITS THAT THE ASSESSING OFFICER HAS ER RED IN LAW AND ON FACTS IN MAKING ADJUSTMENTS ON ACCOUNT O F TRANSFER PRICING BY MERELY FOLLOWING THE TRANSFER P RICING OFFICER'S ORDER AND THEREBY NOT APPLYING HIS MIND W HILE PASSING THE ORDER UNDER SECTION 143(3) OF THE ACT 11.3 YOUR APPELLANT ALSO SUBMITS THAT THE ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN NOT PROVIDING ADEQ UATE TIME AND OPPORTUNITY TO THE APPELLANT TO MAKE HIS SUBMISSION AGAINST THE TRANSFER PRICING OFFICER'S O RDER BEFORE PASSING THE ORDER UNDER SECTION 143(3) OF TH E ACT. 11.4 IN VIEW OF THE GROUND NO. 11.2 AND 11.3, YOUR APPELLANT SUBMITS THAT THE ORDER PASSED UNDER SECTI ON 143(3) OF THE ACT TO THE EXTENT OF THE AFORESAID GR OUND IS BAD AND ILLEGAL IN LAW AND HENCE SHOULD BE CANCELLE D. 12 THE LEARNED CIT(A) ERRED ON THE FACTS AND CIRCU MSTANCE OF THE CASE AND IN LAW, BY CONFIRMING THE DISALLOWA NCE OF RS.84,993,806, BEING TRANSFER PRICING ADJUSTMENTS ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 5 OF 29 MADE BY THE ASSESSING OFFICER WHILE DETERMINING THE ARM'S LENGTH PRICE UNDER SECTION 92C OF THE ACT. 13 THE LEARNED CIT(A) ERRED IN LAW AND FACTS IN UP HOLDING THE ACTION OF THE TRANSFER PRICING OFFICER IN HOLDI NG THAT CELETRONIX INTERNATIONAL LIMITED IS NOT AN ENTREPRE NEUR. 14 THE LEARNED CIT(A) ERRED IN LAW AND FACTS, IN UPHOLDING THE ACTION OF THE TRANSFER PRICING OFFICER IN DISRE GARDING THE APPELLANT AS THE TESTED PARTY AND IN NOT CONSIDERIN G THE COMPARABILITY ANALYSIS SUBMITTED BY YOUR APPELLANT. 15 THE LEARNED CIT(A) ERRED IN LAW AND FACTS IN U PHOLDING THE ACTION OF THE TRANSFER PRICING OFFICER OF TAKIN G THE GROSS PROFIT MARGIN OF CELETRONIX INTERNATIONAL LIMITED AS 2.08% AS AGAINST THE ACTUAL GROSS MARGIN OF (1.0 8%) EARNED BY CELETRONIX INTERNATIONAL LIMITED. 16 THE LEARNED CIT(A) ERRED IN LAW, IN NOT ADJUD ICATING ON THE ACTION OF THE TRANSFER PRICING OFFICER IN CALCU LATING THE ARMS LENGTH PRICE, BY DISREGARDING THE MACHINERY PROVISIONS DEALING WITH METHOD AND CALCULATION OF T HE ARMS LENGTH PRICE, AS CONTAINED IN SUB-SECTIONS (1) AND (2) OF SECTION 92C OF THE ACT READ WITH RULES 1OB AND 10C OF THE INCOME TAX RULES, 1962. 4. GROUND NO.1 IS WITH REFERENCE TO SETTING OFF THE LOSSES OF LOS S MAKING UNITS WITH PROFIT MAKING UNITS FOR CALCULATI NG THE DEDUCTION UNDER SECTION 80HHC. IT WAS ASSESSEES CONTENTION T HAT THE LOSSES ARE TO BE IGNORED AND THE DEDUCTION IS TO BE COMPUT ED ONLY ON PROFITS OF EACH UNIT. IT WAS FAIRLY ADMITTED THAT T HIS ISSUE HAS BEEN DECIDED AGAINST ASSESSEE IN NUMBER OF CASES INCLUDI NG THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF IPCA LA BORATORY LTD VS. DCIT, 266 ITR 521 (SC). THE ISSUE IS KEPT ALIVE ONL Y FOR THE PURPOSE OF KEEPING THE MATTER ALIVE. AS THE ISSUE IS DECIDE D AGAINST ASSESSEE, BY THE HON'BLE SUPREME COURT IN THE CASE OF IPCA LA BORATORY LTD (SUPRA) AND BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SHIRKE CONSTRUCTION EQUIPMENTS LTD, 246 ITR 429 AND FURTHER BY ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 6 OF 29 THE HON'BLE SUPREME COURT IN THE CASE OF MYSODET P. LTD. V. COMMISSIONER OF INCOME-TAX 305 ITR 276, THIS GROUND OF ASSESSEE IS REJECTED AND ACTION OF AO IS UPHELD. 5. GROUND NO.2 THIS GROUND IS ON THE ISSUE OF EXCLUDING THE INTEREST EARNED ON FIXED DEPOSITS AT .74,41,000 BY AO WHILE WORKING OUT THE DEDUCTION UNDER SECTION 80HHC. IT IS ASSESS EES CONTENTION THAT SUCH DEPOSITS WERE PLACED OUT OF THE BUSINESS FUNDS FOR AVAILING EXPORT CREDIT AS MARGIN MONEY. THEREFORE, INTEREST RECEIVED IS PART OF BUSINESS PROFITS AND SHOULD NOT BE EXCLU DED. EVEN IF THIS IS TO BE EXCLUDED ONLY NET INTEREST HAS TO BE EXCLU DED, NOT THE ENTIRE GROSS AMOUNT. ON THE ISSUE OF EXCLUDING THE NET INT EREST THE HON'BLE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAPSULE S P. LTD VS. CIT (2012) 247 CTR 372/343 ITR 89 (SC) HAS CLEARLY ENUNCIATED THAT ONLY NET INCOME CAN BE EXCLUDED UNDER THE PROV ISIONS OF EXPLANATION BAA TO SECTION 80HHC. HOWEVER, WHETHE R THIS IS BUSINESS INCOME OR OTHER SOURCES OF INCOME CANNOT B E EXAMINED ON THE FACTS PLACED BEFORE US. THE CIT (A) IN HIS ORDE R HAS CLEARLY STATED THAT THE INTEREST EARNED ON DEPOSITS WHICH WERE REN EWED. HOWEVER, WHETHER THE DEPOSITS ARE MADE IN THE COURSE OF BUSI NESS FOR EXPORT CREDITS OR NOT HAS NOT BEEN EXAMINED. IN THE ASSESS MENT YEAR 2001- 02 THE AO TREATED THE INTEREST INCOME AS INCOME FRO M BUSINESS AND HAS NOT TREATED THE SAME AS INCOME FROM OTHER SOURC ES, ON THIS BACKGROUND THE ITAT ACCEPTED THE CONTENTIONS OF ASS ESSEE THAT ONLY 90% OF THE NET INTEREST SHOULD BE EXCLUDED. HOWEVER , IN THIS YEAR AO HAS TREATED THE INCOME AS INCOME FROM OTHER SOUR CES. CONSIDERING THE FINDINGS OF THE CIT (A), WE ARE NOT IN A POSITION TO EXAMINE WHETHER THE SAME FIXED DEPOSITS WHICH ARE T REATED AS BUSINESS INCOME IN EARLIER YEARS HAVE BEEN RENEWED AND EARNED INTEREST THEREON. THEREFORE, IN ORDER TO EXAMINE WH ETHER THE INTEREST ON DEPOSITS ARE TO BE TREATED AS BUSINESS INCOME OR INCOME FROM OTHER SOURCES, THE ISSUE IS RESTORED TO THE FILE OF AO TO EXAMINE THE ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 7 OF 29 NATURE OF THE DEPOSITS AFTER GIVING DUE OPPORTUNITY TO ASSESSEE AND DECIDE WHETHER THESE ARE TO BE TREATED AS PART OF B USINESS INCOME OR INCOME FROM OTHER SOURCES. IN CASE IT IS TREATED AS BUSINESS INCOME NEEDLESS TO STATE THAT ONLY NET INTEREST HAS TO BE EXCLUDED AFTER CONSIDERING THE INTEREST ATTRIBUTABLE TO THE BORROW ED FUNDS INVESTED IN THE FIXED DEPOSITS. THE NEXUS HAS TO BE ESTABLIS HED AND ACCORDINGLY THE DECISION IS TO BE TAKEN WHETHER TO EXCLUDE UNDER THE NET INTEREST OR NOT. THEREFORE, THE ISSUE IN GROUND NO.2 IS RESTORED TO THE FILE OF AO TO DECIDE THE MATTER AFTER EXAMIN ING THE FACTS AND LAW. 6. GROUND NO.3 IS ON THE ISSUE OF SERVICE CHARGES DISALLOWED UNDER EXPLANATION BAA TO SECTION 80HHC. IN THIS G ROUND ASSESSEE IS CONTESTING THE ACTION OF AO AND THE CIT (A) IN E XCLUDING THE AMOUNT OF .6.00 LAKHS RECEIVED FROM M/S CELETRON INDIA PVT. L TD TOWARDS SERVICE CHARGES. AO VIDE PARA NO.5.6 SIMPLY RECORDED THE FACT THAT ASSESSEE HAD A RECEIPT OF .6 LAKHS FROM M/S CELETRON INDIA PVT. LTD. ON ACCOUNT OF PROVIDING ADMINISTRATIVE AN D PERSONNEL SUPPORT SERVICES AND ASSESSEE CLAIMED DEDUCTION UND ER SECTION 80HHC ON THESE RECEIPTS ALSO WITHOUT REDUCING 90% O F THESE RECEIPTS FROM PROFITS OF BUSINESS. BEFORE THE CIT ( A) IT WAS CONTENDED THAT THESE ARE RECOVERED COSTS WHICH WAS INCURRED BY ASSESSEE FOR PROVIDING ADMINISTRATIVE AND PERSONNEL SUPPORT SERVICES TO OTHER CONCERNS. SINCE THESE ARE PART OF THE BUSINESS ACTIVITIES, IT WILL REDUCE THE COST OF EXPENDITURE BUT NOT A SEPARATE INCOME SO AS TO BE EXCLUDED UNDER EXPLANATION BAA TO SECTION 80HHC. THE CIT (A) HOWEVER, DID NOT ACCEPT AND HELD THAT THIS AMOUNT IS INCIDENTAL TO BUSINESS OF THE ASSESSEE CO MPANY THEREFORE, 90% OF THE RECEIPTS ARE TO BE REQUIRED TO BE EXCLUD ED BY THE OPERATING CLAUSE OF EXPLANATION BAA TO SECTION 80 HHC. ASSESSEE ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 8 OF 29 HAS CONTENDED THAT THE SERVICE CHARGES WERE RECEIVE D FROM M/S CELETRON INDIA PVT. LTD TOWARDS FOLLOWING SERVICES RENDERED: 1. PROVIDING SECURITY STAFF 2. ORGANIZING TRANSPORT CONTRACTORS AND PROCESS MONTHL Y BILLINGS. 3. LIASE WITH FACTORY INSPECTORS 4. COORDINATE WITH SEEPZ AUTHORITIES FOR LEASE RENT AN D MUNICIPAL TAX PAYMENTS. 5. COORDINATE WITH MIDC AUTHORITIES FOR PAYMENT OF WAT ER CHARGES 6. ATTENDING INSPECTIONS UNDER FACTORIES ACT AND OTHER LABOUR LAWS. 7. REPAIRS AND MAINTENANCE OF COMPRESSORS (EVERY TWO M ONTHS) AND AIR CONDITIONERS (MONTHLY) AT KTI OFFICES AND P LANTS. 8. COMMON INTERCOM FACILITY. 9. PLUMBING SERVICES. 10. ANNUAL MEDICAL CHECK P FOR OPERATORS 11. EMERGENCY MEDICAL TREATMENT FOR KTI STAFF & OPERATO RS. CHARGES OF ABOVE SERVICES .35,000/- P.M. 1. MATERIAL HANDLING AND RELATED SERVICES CHARGES OF ABOVE SERVICES .15,000/- P.M. TOTAL SERVICES CHARGES RECEIVED: 35000 * 12 = 4,20,000 15000* 12 = 1,80,000 TOTAL = 6,00,000 ======= 7. AS SEEN FROM THE ABOVE DETAILS, IT SEEMS ASSESSEE I S RECOVERING PART OF COMMON SERVICES RENDERED TO THE OTHER COMPANIES WHICH IN OUR VIEW WILL GO TO REDUCE THE COST BEING INCURRED BY ASSESSEE AND CANNOT BE TREATED AS SEPARATE RECEIPT TO BE CONSIDERED AS INCOMES PROVIDED UNDER THE PROVISIONS OF EXPLANA TION BAA TO SECTION 80HHC. FOLLOWING THE PRINCIPLES LAID DOWN B Y THE COORDINATE BENCH IN THE CASE OF CLAAS INDIA LTD. VS . ACIT, 119 TTJ 173 (DEL), WE ARE OF THE OPINION THAT THIS IS O NLY A RECOVERY OF THE EXPENDITURE COST. THEREFORE NO NEED TO BE CONSI DERED FOR ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 9 OF 29 EXCLUSION AT 90% OF THE RECEIPTS UNDER CLAUSE BAA OF SECTION 80HHC. THE GROUND IS CONSIDERED ALLOWED. 8. GROUND NO.4 IS NOT PRESSED. 9. GROUND NO.5 PERTAINS TO TREATING THE SALE OF SCRAP AT .3,17,359 AS TOTAL TURNOVER FOR THE PURPOSE OF CALC ULATION OF DEDUCTION UNDER SECTION 80HHC. AO HAS CONSIDERED, M ANY OF THE AMOUNTS EXCLUDED UNDER THE PROVISIONS OF BAA, AS PART OF TURNOVER. THE CIT (A) VIDE PARA 64 OF THE ORDER HOWEVER, EXCL UDED MOST OF THE RECEIPTS EXCEPT RECEIPT BY WAY OF SALE OF SCRAP. AS SESSEE IS CONTESTING THE SAME. ASSESSEE RELIED ON THE DECISIO N OF THE ITAT IN THE CASE OF CLAAS INDIA LTD. (119 TTJ 173 (DEL) AND THE COORDINATE BENCH DECISION IN THE CASE OF LEGRAND INDIA PVT. LT D VS. ACIT IN ITA NO.1540/MUM/2009 DATED 05.10.2012. CONSIDERING THE ABOVE COORDINATE BENCH DECISIONS, WE ARE OF THE OPINION T HAT RECEIPTS FROM SALE OF SCRAPS GENERATED WOULD ONLY GO TO REDU CE THE COST OF MANUFACTURE AND HENCE THE SAME WOULD NOT FORM PART OF THE TOTAL TURNOVER. MOREOVER THIS AMOUNT IS NOT BY WAY OF PRO CESSING CHARGES OR ANY OTHER SURCHARGES WHICH WERE CONSIDERED BY TH E DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. RA VINDRANATHAN NAIR 295 ITR 228 (SC) RELIED UPON BY THE CIT (A) IN THE ORDER. SINCE FACTS OF THE ABOVE SAID CASE ARE DIFFERENT, WE ARE OF THE OPINION THAT SALE OF SCRAP CANNOT BE CONSIDERED AS PART OF TOTAL TURNOVER UNLESS THE SCRAP IS SEPARATELY SOLD BY ASSESSEE AS A TRADA BLE ITEM. SINCE THIS AMOUNT OF .3,17,359 WAS OUT OF SALE PROCEEDS OF SCRAP INCIDENTALLY GENERATED DURING THE COURSE OF MANUFAC TURE, THE SAME WOULD REDUCE THE COST OF MANUFACTURE. THEREFORE, AO IS DIRECTED TO EXCLUDE THE ABOVE AMOUNT FROM THE TOTAL TURNOVER. T O THAT EXTENT CIT (A) ORDER IS MODIFIED. GROUND IS ALLOWED. ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 10 OF 29 10. GROUND NO.6 PERTAINS TO THE ISSUE OF REDUCING A SUM OF .1,82,34,314 FROM THE EXPORT TURNOVER BEING EXPORT SALES PROCEEDS REALIZED BEYOND THE STIPULATED PERIOD WHILE CALCULA TING THE DEDUCTION UNDER SECTION 80HHC OF THE INCOME TAX ACT . AO EXCLUDED THE ABOVE AMOUNT WHILE COMPUTING THE DEDUCTION. IN THIS RESPECT ASSESSEE SUBMITTED BEFORE THE CIT (A) THAT ASSESSEE ORIGINALLY SUBMITTED A WORKING IN WHICH EXPORT PROCEEDS ARE RE CEIVED BEYOND THE STIPULATED PERIOD WAS INADVERTENTLY CONSIDERED AT .1,82,34,314 WHEREAS THE CORRECT AMOUNT THAT HAS TO BE REDUCED W AS ONLY .26,910. IT WAS FURTHER SUBMITTED THAT A REVISED RE PORT IN FORM 10CCAC WAS SUBMITTED VIDE LETTER DATED 17.11.2004 B EFORE AO. IT WAS FURTHER SUBMITTED THAT AO HAS NOT CONSIDERED TH E CORRECT AMOUNT BUT HAS EXCLUDED THE ORIGINAL AMOUNT WRONGLY STATED BY ASSESSEE. IT WAS FURTHER SUBMITTED THAT APPLICATION UNDER SECTION 154 WAS FILED BEFORE AO VIDE LETTER DATED 13.06.200 5 WHICH WAS PENDING BEFORE AO. THE LEARNED CIT (A) HOWEVER, UPH ELD THE SAID DISALLOWANCE AFTER ANALYZING THE PROVISIONS OF SECT ION 80HHC. HOWEVER, HE HAS OBSERVED THAT IF RBI EXTENSION WAS OBTAINED ACTION UNDER SECTION 155 (13) CAN BE TAKEN UP. SUBJECT TO THE ABOVE OBSERVATION, THE GROUND WAS DISPOSED OF BY CIT(A). 11. IT WAS THE CONTENTION THAT OUT OF THE AMOUNT ADDED BACK DURING THE ASSESSMENT, THE CORRECT AMOUNT WHICH CAN ONLY BE EXCLUDED IS AS UNDER: AMOUNT ADDED BACK DURING ASSESSMENT 1,82,34,313 LESS: AMOUNT PERTAINING TO PREVIOUS YEARS: A.Y 1998-99 - . 4,53,848 A.Y. 2001-02 - .1,66,96,487 ( .170,50,335) - .10,83,978 LESS: EXPORT PROCEEDS REALIZED WITHIN A PERIOD ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 11 OF 29 OF 6 MONTHS FROM THE END OF THE PREVIOUS YEAR UPTO 30.09.2002 ( .9,29.458) .1,54,520 LESS: IMPORTED MATERIAL RETURNED (RE-EXPORT) ( .1,28,330) EXPORT PROCEED REALIZED BEYOND 30.09.2002 AND 365 DAYS . 26,190 SINCE THESE ASPECTS REQUIRE VERIFICATION OF THE REC ORD, IN THE INTEREST OF JUSTICE, WE RESTORE THE ISSUE TO THE FILE OF AO TO EXAMINE THE ABOVE CONTENTIONS AND ALLOW THE NECESSARY RELIEF. THE GRO UND IS CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. 12. GROUND NO.7 IS LINKED TO THE REVENUE GROUND, THEREFORE, IT WILL BE CONSIDERED ALONG WITH THE REVENUE GROUND IN THE REVENUE APPEAL. 13. GROUND NO.8 PERTAINS TO EXCLUSION OF UNREALIZED EXCHANGE GAIN TO AN EXTENT OF .2,88,239. WHILE EXCLUDING THE AMOUNT FROM THE EXPORT TURNOVER AS THE EXCHANGE GAIN WAS NOT RE ALIZED DURING THE YEAR, AO HOWEVER, DID NOT EXCLUDE THE SAME FROM THE TOTAL TURNOVER. IT IS THE CONTENTION WHATEVER AMOUNT IS E XCLUDED FROM THE EXPORT TURNOVER SHOULD BE EQUALLY EXCLUDED FROM THE TOTAL TURNOVER. IN VIEW OF THIS, FOLLOWING THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF LAKSHMI MACHINE TOOLS LTD, 290 ITR 667, AO IS DIRECTED TO EXCLUDE THE ABOVE AMOUNT IN CASE THE SAME IS EXCLUDED FROM THE EXPORT TURNOVER. THE GROUND IS CO NSIDERED ALLOWED. 14. GROUND NO.9 PERTAINS TO EXCLUSION OF FOREIGN EXCHANGE DIFFERENCE ON ASSETS WHILE COMPUTING THE TOTAL TURN OVER UNDER SECTION 80HHC. THE AMOUNT OF .8,78,253 WAS INCLUDED IN THE EXPORT TURNOVER. THE CIT (A) HAS DIRECTED AO AS UND ER: ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 12 OF 29 85. THE APPELLANT IS SILENT ABOUT THE NATURE OF GA IN ARISING ON ASSETS AMOUNTING TO .8,78,253/-. IF THE GAIN RELATES TO ACQUISITION OF ASSETS THAT REMAINED PART OF THE BLOCK ON WHICH DEPRECIATION HAS BEEN ALLOWED, THE AMOUNT IS REQUIRED TO BE ADJUSTED AGAINST THE WRITT EN DOWN VALUE ON WHICH THE DEPRECIATION IS ALLOWED. IF ON THE OTHER HAND, IT REPRESENTS ASSETS SOLD THEN THE SAID GAIN IS TO BE TAKEN AS PART OF THE CONSIDERATION IN THE DETERMINATION OF THE SHORT TERM CAPITAL GAIN CHARGE ABLE TO TAX UNDER SECTION 50 OF THE ACT. AO SHALL EXAMIN E THIS ASPECT AND ACT ACCORDINGLY. APPEAL IN RESPECT OF GR OUND NOS.9 AND 10 ARE DISPOSED OFF AS PARTLY ALLOWED. SINCE THE CIT (A) HAS ALREADY DIRECTED AO ON THE IS SUE, THERE SHOULD NOT BE ANY GRIEVANCE. HOWEVER, AO IS DIRECTED TO IM PLEMENT THE DIRECTION OF THE CIT (A). ACCORDINGLY THE GROUND IS CONSIDERED ALLOWED. 15. GROUND NO.10 IS ON THE ISSUE RE-COMPUTING THE DEPRECIATION OF .20,01,02,930 WAS NOT PRESSED. 16. GROUND NOS.11 TO 16 PERTAINS TO THE ISSUE OF TRANSFER PRICING. 16.1 BRIEFLY STATED, CIPL IS 99.99% OWNED BY CELETR ON MAURITIUS LTD., WHICH IS A WHOLLY OWNED SUBSIDIARY OF CELETRO N INTERNATIONAL LTD., BERMUDA. CIPL IS ELECTRONIC MANUFACTURING PRO VIDER AND DELIVERS SOLUTIONS TO THE NEEDS OF ORIGINAL EQU IPMENT MANUFACTURERS. THE COMPANY MANUFACTURES HEADS STACK ASSEMBLIES AND HEAD GLMBLE ASSEMBLIES, SMART CARDS AND VOICE COILS, MEMORY MODULES AND FCBAS. MOST OF THE RAW MA TERIALS REQUIRED FOR THE PURPOSE OF MANUFACTURING ARE IMPOR TED FROM CELETRON INTERNATIONAL LTD. AND OTHER GROUP ENTITIE S, WHO IN TURN PURCHASES THE RAW MATERIAL FROM THIRD PARTY SUPPLIE RS. THE FINISHED PRODUCTS MANUFACTURED ARE SOLD TO THE GROUP ENTITIE S, WHO IN- TURN SELL TO THE ORIGINAL EQUIPMENT MANUFACTURERS. THE M AIN PRODUCT OF THE COMPANY IS MANUFACTURE OF HEAD STACK ASSEMBLY (HSA), CONSTITUTING AROUND 90% OF THE TURNOVER AND ARE SOURCED BY ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 13 OF 29 HARD DISK DRIVE MANUFACTURERS. THE OPERATIONS OF TH E COMPANY ARE CARRIED OUT IN SPECIAL ECONOMIC ZONES LOCATED AT SE EPZ, MUMBAI, NOIDA AND CHENNAI. THE SALES OF THE COMPANY DURING THE YEAR WERE OF RS.10,332.14 MILLION, AS AGAINST SALES OF R S.8,669.324 MILLION, DURING LAST YEAR. THE PROFIT BEFORE TAX DU RING THE YEAR WAS OF RS.387.343 MILLION, AS AGAINST RS.221.136 MILLIO N DURING LAST YEAR. OUT OF THE TOTAL SALES OF RS.10,332.14 MILLIO N, RS.10,014.007 MILLION, ARE SOLD TO ASSOCIATED ENTERPRISES(AES). DURING THE YEAR, THE COMPANY HAD INTERNATIONAL TRANSACTIONS WITH CEL ETRON GROUP ENTITIES BASED IN BERMUDA, BARBADOS, USA, SRI LANKA , MALAYSIA AND SINGAPORE. THESE INTERNATIONAL TRANSACTIONS ARE SUMMARIZED AS BELOW : (I) PURCHASE OF RAW MATERIAL - RS. 920,81,30,92 0 (II) EXPORT OF FINISHED GOODS - RS. 1001,40,07,30 4 (III) PURCHASE OF CAPITAL GOODS - RS. 17,05, 55,297 (IV) SA1E OF CAPITAL GOODS - RS. 8,65,96, 257 (V) PAYMENT FOR REPAIRS - RS. 21,83,5 85 THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS COMPUTED BY THE ASSESSEE IS SAME AS TRANSACTION VALUE RECORD ED IN THE BOOKS OF ACCOUNT. THE TRANSACTIONAL NET MARGIN METHOD IS USED BY AGGREGATING ALL THE INTERNATIONAL TRANSACTIONS, FOR COMPUTING THE ARM'S LENGTH PRICE. 17. ASSESSEE SUBMITTED A COPY OF THE TRANSFER PRICING D OCUMENT DEALING WITH FUNCTIONAL AND ECONOMIC ANALYSIS OF IN TERNATIONAL TRANSACTIONS. ASSESSEE BENCHMARKED ITSELF AS A TEST ED ENTITY ON ENTITY BASIS. IT HAS CLASSIFIED ITSELF AS MANUFACTU RE WITH NO RISK. ASSESSEE HAS TAKEN EIGHT COMPARABLES AND SUBMITTED THE REPORT THAT ITS OPERATING MARGIN OF THE SELECTED COMPANIES WAS AT 3.31% WHEREAS THE ASSESSEE OPERATING MARGIN WAS 4.10%. TH EREFORE, THE PRICES PAID AT ARE AT ARMS LENGTH. THE TPO DID NOT AGREE WITH THE ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 14 OF 29 ANALYSIS OF THE ASSESSEE COMPANY AND SUBJECTED FOR FRESH SEARCH AND AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE U NDERTOOK THE ANALYSIS ON PROFITS METHOD. IN THE COURSE OF SUBMIS SIONS ASSESSEE SUBMITTED THAT SALES TO WESTERN DIGITAL WAS AMOUNTI NG TO US$ 176,426,222 AND IN THE TOTAL TRANSACTIONS THE MATER IAL MARGIN WAS AT (-1901652) AT -1.08%. ON FURTHER INQUIRY BY THE TPO CERTAIN SALES INVOICES RAISED BY CIL ON WESTERN DIGITALS FO R THE PERIOD ENDING 31.03.2003 WAS SUBMITTED (APPROXIMATELY TOP 100 INVOICES IN VALUE TERMS) AND ON THAT BASIS AO ARRIVED AT A G ROSS MARGIN OF 3.66%. THE TPO FURTHER INQUIRED ABOUT THE WORKING M ARGIN AND AT THE END CONCLUDED AS UNDER: (I) IN THE SUBMISSION, IT IS MENTIONED THAT CIL IS THE ENTREPRENEUR ENTITY THAT BEARS THE BUSINESS, COMMER CIAL AND ENTREPRENEUR RISK. REGARDING CIL, THE COMPANY V IDE LETTER DATED 24-12-2004 HAD SUBMITTED THAT DURING F .Y 2001-02, CIL SUPPLIED COMPONENTS TO CIPL AND PURCHASED FINISHED GOODS FROM CIPL THAT WERE THEN S OLD BY CIL TO WESTERN DIGITAL. CILS TRANSACTIONS WITH CIPL AND WESTERN DIGITAL WERE EXECUTED ON CILS BEHALF B Y EMPLOYEES OF CELETRON, USA A GROUP COMPANY. CIL HAD NO EMPLOYEES OF ITS OWN IN BERMUDA OR ELSEWHERE. CO STS INCURRED BY CELETRON USA ASSOCIATED WITH CILS TRANSACTION WERE CHARGED TO CIL. THIS SUBMISSION INDICATES THAT CIL BERMUDA DOES NOT HAVE ANY EMPLOY EE OF ITS OWN AND IT IS NOT PROVED THAT HOW MUCH COSTS WAS INCURRED BY CELETRON USA FOR CIL AND HOW MUCH OF TH E SAME WAS RECOVERED. FROM THE DETAILS FILED BY THE COMPANY, IT IS SEEN T HAT ALL THE SALES BY CIPL ARE BEING DIRECTLY MADE TO WESTER N DIGITAL. GOODS ARE BEING SHIPPED TO WESTERN DIGITAL AND CIL BERMUDA APPEARS TO BE A BILLING ENTITY. PRIOR T O INCORPORATION CIL, THE CIPL WAS SUPPLYING THE GOODS DIRECTLY TO WESTERN DIGITAL. THEREFORE, THE CONTENT ION OF THE COMPANY, CIL IS AN ENTREPRENEUR IS NOT ACCEPTED . (II) REGARDING THE DESIGN AND SPECIFICATION SUPPLIE D BY CIL FOR THE PRODUCTS, THE SAME IS NOT PROVED THA T IT IS RECEIVED FROM CIL. (III) CIL IS CLAIMED TO HAVE PERFORMED VARIOUS FUNCTIONS, BUT THIS IS ALSO NOT PROVED. ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 15 OF 29 CONSIDERING ALL THE FACTS AS STATED ABOVE, AND ALSO THE ECONOMIC ANALYSIS CARRIED OUT BY THE COMPANY, IN TH E TP REPORT, WHICH IS REJECTED, AS MENTIONED IN THE SHOW CAUSE NOTICE, IT IS HELD THAT, FOR THE FUNCTIONS PE RFORMED BY CIL, IF ANY, A GROSS PROFIT MARGIN OF 1% OF SALE S WOULD BE AN APPROPRIATE COMPENSATION, AS AGAINST A MARGIN OF 2.08% EARNED BY CIL IN THE TRANSACTION. THE TOTAL SALES MADE BY THE CIL, BERMUDA ARE OF .7,869,796,864/-. ON THIS TRANSACTION, THE CIL BERM UDA HAS EARNED A GROSS PROFIT MARGIN OF 2.08% WHICH WOR KS OUT TO .163,691,774/-. AS MENTIONED ABOVE, THE ARMS LENGTH GROSS PROFIT MARGIN IN CASE OF CIL BERMUDA I S COMPUTED AT 1% WHICH WOULD BE .78,697,968/-. THE DIFFERENCE OF GROSS PROFIT MARGIN OF .84,993,806/- EARNED BY CIL, BERMUDA, IS THE EXCESS PROFIT EARNED . BECAUSE OF EXCESS PROFIT EARNED BY CIL BERMUDA, IT IS HELD THAT THE PROFIT TO THIS EXTENT, IS SHIFTED BY CIPL TO CIL, BERMUDA IN THE FORM OF FIXING THE TRANSFER PRI CE, AT A PRICE LESS THAN ARMS LENGTH. DUE TO THIS, THIS AMO UNT IS REQUIRED TO BE ADDED TO THE SALE PRICE TO CIL, BERM UDA. THE ARMS LENGTH SALE PRICE TO CIL, BERMUDA IS COMP UTED AT .7,956,790,670/- AS AGAINST .7,869,796,864/-. THIS RESULTS INTO AN ADDITION OF .84,993,806/- TO THE INCOME OF ASSESSEE. ACCORDINGLY AO MADE AN ADDITION OF .8,49,93,806. 18. BEFORE THE CIT (A), ASSESSEE CONTESTED THE ACTION O F THE TPO OBJECTING TO: A) THAT BEFORE THE COMPANY WAS TAKEN BY THE CIL WHICH WAS FORMALLY MADE DURING 2001, THE BUSINESS WAS DONE BY M/S TANDON ASSOCIATES LTD, BARBADOS WHICH WAS ENTITY TH AT WAS RESPONSIBLE FOR MARKETING RULES TO WESTERN DIGITAL, A KEY CUSTOMER RELATIONSHIP LOGISTIC AND COORDINATION ACT IVITIES WERE MANAGED BY TAL. IN SUPPORT IT PRODUCED VARIOUS CORR ESPONDENCE TO SUBMIT THAT ASSESSEE MANUFACTURE ONLY WHEREAS CI L IS THE ENTREPRENEUR ENTITY PERFORMING OF THE SIGNIFICANT F UNCTIONS AND ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 16 OF 29 UNDERTAKEN THE SIGNIFICANT REASONS ASSOCIATED WITH CONTRACT MANUFACTURE OF COMPANY. B) WITH REFERENCE TO THE NATURE OF TRANSACTIONS IT WAS SUBMITTED THAT IN REGARD TO THE NATURE OF THE TRANSACTION, AS SESSEES REPRESENTATIVE SUBMITTED THAT CIPL MANUFACTURED AND SOLD GOODS TO CIL (THE PRINCIPAL) BASED ON ORDERS RECEIV ED FROM CIL. CIL, IN TURN SOLD THESE GOODS TO THIRD PARTY CUSTOM ERS. THESE FINISHED GOODS WERE HOWEVER SHIPPED DIRECTLY TO THE CUSTOMER OF CIL, AS PER THE DIRECTION RECEIVED FROM CIL. DURING FINANCIAL YEAR 2001-02 WESTERN DIGITAL (WD) WAS THE MAJOR CUSTOMER OF CIL AND CIPL SHIPPED THE FINISHED GOODS TO MALAYSIA FOR ULTIMATELY DELIVERY TO WDS MANUFACTURING FACILITY IN MALAYSIA . THE MECHANISM WAS SUCH THAT: I) CIPL RAISE AN INVOICE ON CIL AND THEN SHIPPED THE FINISHED GOODS TO MALAYSIA. II) ON REACHING MALAYSIA THESE FINISHED GOODS WOULD LIE IN A WAREHOUSE OF A THIRD PARTY LOGISTICS COMPANY. UNT IL WD PULLED THE GOODS FROM THE WAREHOUSE, THE GOODS WERE OWNED BY CIL. III) EACH DAY CIL WOULD RECEIVE A SUMMARY FROM WD, OF INVENTORY PULLED FROM THE WAREHOUSE. AT THAT TIME A N INVOICE WAS RAISED BY CIL ON WD AND SALES WOULD BE RECORDED IN THE BOOKS OF CIL. HENCE, FOR CIL THERE WAS A TIME LAG IN THE PURCHASE OF GOODS FROM CIPL AND SALE OF GOODS TO ULTIMATE CUSTOMER WHICH W AS REFLECTED AS STOCKS. ADDITIONALLY, AS ON MARCH 31 OF ANY GIVEN F INANCIAL YEAR, APART FROM UNSOLD FINISHED GOODS AT SUCH WAREHOUSE, CIL WOULD ALSO HAVE CERTAIN STOCK IN TRANSIT. CIL USED THE SE RVICES OF A THIRD PARTY LOGISTICS COMPANY TO COORDINATE THE LOGISTICS FUNCTION IN MALAYSIA. THE FINISHED GOODS INVENTORY REFLECTED IN THE CERTIFIED ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 17 OF 29 FINANCIAL STATEMENT REPRESENTS THE INVENTORY HELD A T LOCATION OF SUCH THIRD PARTY LOGISTICS COMPANY IN MALAYSIA. AS PER THE MECHANISM EXPLAINED ABOVE, THESE GOODS WERE ULTIMAT ELY SOLD AND DELIVERED TO WESTERN DIGITAL BY CIL. AS REGARD THE VARIOUS SERVICES PROVIDED BY CISA TO CIL, IT MAY BE NOTED THAT IN FI NANCIAL YEAR 2001-02 WHILE CISA DID UNDERTAKE VARIOUS FUNCTIONS ON BEHALF OF CIL, CISA AND CIL DID NOT HAVE ANY FORMAL INTERCOMP ANY AGREEMENT AND ACCORDINGLY THERE WERE NO CHARGES FROM CISA TO CIL. HOWEVER, IT IS PERTINENT TO NOTE THAT THE SAME DOES NOT HAVE ANY IMPACT FROM AN INDIAN TRANSFER PRICING PERSPECTIVE. C) IN RESPECT OF BASIS OF ADJUSTMENT MADE, IT WAS SUBM ITTED THAT THE TPO PROCEEDED TO CALCULATE THE AVERAGE UNIT SEL LING PRICE OF HAS (DIVIDING HAS SALES BY THE SALES UNITS) AT USD 24.051 AND THE AVERAGE UNIT PURCHASE PRICE OF HAS (DIVIDING HA S PURCHASES BY THE PURCHASE UNITS) AT USD 23.55. ACCORDINGLY TH E TPO ARRIVED AT A MATERIAL MARGIN OF USD 0.51 PER UNIT W HICH WORKS OUT TO 2.08% (I.E. USD 0.501 AS A PERCENTAGE OF USD 24.051). IT WAS SUBMITTED THAT THE TPO WAS INCORRECT IN DISREGA RDING THE CERTIFIED FINANCIAL STATEMENTS OF CIL SUBMITTED BY ASSESSEE. FURTHER THE TPO HAS ERRED IN THE MODE OF CALCULATIO N OF THE MATERIAL MARGIN OF CIL ON ACCOUNT OF THE FOLLOWING FACTORS. I) IT WAS SUBMITTED THAT THE ANALYSIS PREPARED BY THE TPO IS NOT ACCRUAL BASED ACCOUNTING BUT MORE SIMILAR TO CASH B ASED. SPECIFICALLY, THE TPO SIMPLY DIVIDED THE TOTAL SALE S FIGURE OF USD 176,426,222 BY THE NUMBER OF UNITS SOLD, 7,335, 504 FOR AN AVERAGE UNIT PRICE OF USD 24.051. ADDITIONAL LY THE TPO DIVIDED THE TOTAL PURCHASE COST OF USD 180,413, 945 BY THE NUMBER OF UNITS PURCHASED, 7,659,188 FOR AN AVERAGE UNIT COST OF USD 23.55. THIS RESULTS IN A P ER UNIT GROSS MARGIN OF USD 0.501 OR 2.08%. HOWEVER, TPO ER RED IN NOT TAKING COGNIZANCE OF THE FACT THAT THERE WAS ALSO A ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 18 OF 29 GROWTH IN INVENTORY ON CILS BOOKS FROM FINANCIAL Y EAR 2000-01 TO FINANCIAL YEAR 2001-02OF USD 2,086,071. THIS SHOULD HAVE BEEN FACTORED INTO THE TPOS CALCULATIO NS AS IT IS CLEAR THE PURCHASES BY CIL FROM CIPL EXCEEDED TH E SALES FROM CIL TO WD. THE CERTIFIED FINANCIAL WHICH WERE PROVIDED DOES FACTOR IN THE INVENTORY CHANGE. II) FURTHER THE METHOD OF CALCULATION OF GROSS MATERIAL MARGIN OF THE HAS BUSINESS OF CIL BY THE TPO IS ERRONEOUS AS IT FAILS TO TAKE INTO CONSIDERATION THAT HAS UNITS ARE OF SE VERAL KINDS SUCH AS SINGLE HEAD UNITS, THREE HEAD UNIT S ETC. PRICES FOR THE VARIOUS UNITS WOULD THEREFORE, VARY. ON A SAMPLE BASIS, THE PRICES OF VARIOUS HAS UNITS: S.NO UNIT NO. DESCRIPTION OF UNITS UNIT PRICE 1 37641 CENTURIAN XL2 APFA 6.846 2 37610 CENTURIAN TALON 2X 22.47 3 37162 CENTURIAN XL2 2X 22.30 4 36477 2X TAN/RR INVADER XL2 PRIME 21.30 5 37861 CENTURIAN TALON 3X 29.38 6 36480 3X TAN/RR INVADER XL2 PRIME 27.88 7 37841 CENTURIAN XL2 4X 31.32 8 37615 CENTURIAN TALON 4X 36.30 9 36512 4X TAN/RR INVADER XL 2 PRIME 34.46 10 38519 CENTURIAN TALON 6X 50.19 19. THE LEARNED CIT (A) HOWEVER, DID NOT ACCEPT THE CON TENTIONS AND AFTER ANALYZING THE DATA AS SUBMITTED BY ASSESS EE VIDE LETTER DATED 01.12.2005 (PARA 123 OF THE ORDER) CAME TO TH E CONCLUSION THAT THE DIFFERENCE IN UNIT PRICE VARIES FROM 0.29 TO 6.08% AND ACCORDINGLY THE PROFITS OF 2.08% DETERMINED BY THE TPO AS HAVING BEEN EARNED BY THE CIL FOR THE ENTIRE ARRANGEMENT W AS HELD TO BE REASONABLE. THEREFORE, HE AGREED THAT THE ORDER OF THE TPO ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 19 OF 29 RESTRICTING THE MARGIN TO 1% OF THE SALE INVOICE AN D MAKING ADDITION OF 1.08% IN THE PROCESS. 20. THE LEARNED COUNSEL REFERRING TO THE ORDERS OF THE TPO AND THE CIT (A) ORDER SUBMITTED THAT THE ORDERS ARE CON CEPTUALLY AND PROVISIONALLY WRONG. THE TPO HAS ANALYZED THE GROSS SALE PRICES WITHOUT CONSIDERING (A) THAT THE MARKETING AND OTHE R COSTS ARE INVOLVED BY THE CIL AND (B) HAS NOT CONSIDERED THE STOCK AVAILABLE WITH THE THIRD PARTY GODOWN AT THE END OF THE YEAR AND FURTHER THE AMOUNTS CONSIDERED IN THE ORDERS WERE NOT CORRECT. HE REFERRED TO THE OBJECTIONS MADE BY ASSESSEE BEFORE THE CIT (A). IT WAS FURTHER SUBMITTED THAT THE CIT (A) ALSO HAS WRONGLY CONSIDE RED THE DIFFERENCE FROM 2.95% TO 6.09% AND ARRIVED AT THE C ONCLUSION THAT 2.08% DETERMINED BY THE TPO IS CORRECT IGNORING THE FACT THAT ASSESSEES OPERATING MARGIN IS ITSELF ABOUT 4% AND THIS DIFFERENCE ARRIVED AT BY THE CIT (A) IS TO BE CONSIDERED THE C OST INVOLVED IN OTHER EXPENDITURE INCURRED BY THE CIL. THEN HE SUBM ITTED TO THE DETAILS FURNISHED WITH THE TPO THAT THE CIL IS A NE GATIVE MARGIN IN THE TRANSACTIONS. THEREFORE, THERE CANNOT BE ANY PR OFIT ATTRIBUTED AS WAS DONE BY THE TPO. IT WAS FURTHER SUBMITTED THAT THIS YEAR IS THE FIRST YEAR OF THE TRANSFER PRICING ANALYSIS AND THE T.P. ADDITIONS MADE IN ASSESSMENT YEAR 2003-04 WAS DELETED BY THE CIT (A) AS IN THAT YEAR THE PROFIT MARGIN WORKED OUT BY AO WAS LE SS THAN 1% ATTRIBUTED TO THE CIL AND ALSO SUBMITTED THAT IN AS SESSMENT YEAR 2004-05 TO 2007-08 THE TPO HAS ACCEPTED ASSESSEES TP STUDY AND NO ADDITIONS WERE PROPOSED. IT WAS ALSO FURTHER SUB MITTED THAT THERE IS NO BASIS FOR ALLOCATION OF ONLY 1% OF THE PROFIT TO THE CIL ON THE SO CALLED WORKING MADE BY THE TPO WHICH IS AN ADHOC DE TERMINATION OF PROFITS. IT WAS ALSO FURTHER SUBMITTED THAT THE ARG UMENTS MADE BY ASSESSEE BEFORE THE CIT (A) WERE ACCEPTED IN LATER YEARS AND PLACED THE ORDER OF THE CIT (A) IN ASSESSMENT YEAR 2003-04 ON RECORD. CONSIDERING THAT THE BUSINESS MODEL WAS ACCEPTED IN SUBSEQUENT ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 20 OF 29 YEARS, IT WAS THE SUBMISSION THAT THE ADDITION MADE BY AO/TPO SHOULD BE DELETED. 21. THE LEARNED DR IN REPLY RELIED ON THE ORDERS OF THE TPO AND THE CIT (A) AND POINTED OUT THAT ASSESSEE DID NOT F URNISH THE RELEVANT DATA. HE ACCEPTED THAT ASSESSEES TP STUDY WAS ON TNMM BASIS WHEREAS AO CONSIDERED THE METHOD ON PROFIT SP LIT METHOD. 22. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE DETAI LS PLACED ON RECORD IN THE FORM OF PAPER BOOK AS WELL. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT ASSESSEE DE CLARED ITSELF AS A LOW RISK MANUFACTURER AND AS SEEN FROM THE SUBMISSI ONS, THERE ARE NO ADDITION IN OTHER AMOUNTS ACCEPTED ON THE SALES MADE TO CIL BERMUDA. ON THIS ALSO THERE IS NO BASIS FOR ARRIVIN G AT 2.08% OF THE PROFIT ON THE BASIS OF FEW TRANSACTIONS AS ANALYZED BY THE TPO THAT IS APPROXIMATELY 100 INVOICES OUT OF 3000 INVOICES AND THAT TOO WITHOUT CONSIDERING THE CLOSING STOCK. AS SUBMITTED BY ASSESSEE BEFORE THE CIT (A), THE LEARNED TPO ONLY CONSIDERED THE PURCHASE AND SALE VALUE WITHOUT CONSIDERING THE INVENTORY PE RIOD. THIS CERTAINLY HAS GIVEN RISE TO 2.03% AS ADOPTED BY THE TPO, WHEREAS AS PER THE DETAILS SUBMITTED AND ACCEPTED BY THE TPO T HE MARGIN PERCENTAGE BY THE CIL WAS AT A NEGATIVE -1.08%. THE REFORE, THE WORKING OF THE TPO ITSELF PER SE CANNOT BE ACCEPTED . EVEN THE LEARNED CIT (A) ALSO RELYING ON THE SO CALLED FEW T RANSACTIONS LISTED OUT IN PARA 123 OF HIS ORDER (EXTRACTED ABOVE ALSO) CAME TO A CONCLUSION THAT THE MARGIN OF PROFIT WITH REFERENCE TO CERTAIN SALES VARIED BETWEEN 2.98% TO 6.08%. THIS DOES NOT INCLUD E THE COST TO BE INCURRED WITH REFERENCE TO MARKETING, STOCK PROTECT ION AND RISK TAKEN. THE CIT (A) ALSO DID NOT CONSIDER THE COST I NVOLVED IN TRANSPORTING THE GOODS TO MALAYSIA. THESE ASPECTS W ILL COME IN PRICING OF THE COST. UNLESS THERE IS CONCRETE EVIDE NCE THAT ASSESSEE IS PASSING ON PROFITS TO CIL BERMUDA, WITHOUT ANY B ASIS THE SO CALLED ANALYSIS OF FEW TRANSACTIONS DOES NOT CONFIR M THAT ASSESSEES ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 21 OF 29 BUSINESS MODEL IS NOT TO BE ACCEPTED. AS SEEN FROM THE RECORD THE TPO HIMSELF HAS MODIFIED HIS METHODOLOGY IN LATER Y EARS WHICH THE CIT (A) DELETED ON WHICH THERE IS NO REVENUE APPEAL . THE BUSINESS MODEL IN ASSESSMENT YEAR 2004-05 TO 2007-08 HAS BEE N ACCEPTED. THE TP STUDY MADE BY ASSESSEE IN WHICH IT HAS SELEC TED SOME COMPANIES TO BENCH MARK THAT IT IS ON PROFITS HAS N OT BEEN REJECTED BY THE TPO AND WITHOUT ANY BASIS SHIFTED TO PROFITS METHOD AND THAT TOO WITHOUT CONSIDERING THE ACTUAL PROFITS EARNED B Y THE ENTITIES IN THE TRANSACTIONS. IN VIEW OF THIS WE ARE UNABLE TO UPHOLD THE ORDER OF THE TPO AS WELL AS THE CIT (A). KEEPING THE FACT THAT ASSESSEES OWN TNMM STUDY HAS INDICATED THAT ITS PROFIT MARGIN S ARE MORE THAN THE COMPARABLE CASES AND ALSO KEEPING THE FACT THAT THERE ARE NO ADDITIONS IN THE SUBSEQUENT YEARS, WE DELETE THE ADDITIONS MADE ON VARIOUS PRESUMPTIONS AND ASSUMPTIONS WITHOUT ANY PROPER STUDY. THUS, ASSESSEES GROUND IS ALLOWED. AO IS DI RECTED TO DELETE THE ADDITIONS SO MADE. ITA NO.1560/MUM/2006 23. THIS IS A REVENUE APPEAL IN WHICH THE REVENUE HAS R AISED THE FOLLOWING FOUR GROUNDS: (I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE CIT (A) ERRED IN HOLDING THAT ASSES SEE IS ENTITLED TO CLAIM DEPRECIATION @ 50% ON MOTOR VEHIC LES, WITHOUT APPRECIATING THE FACTS OF THE CASE. (II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE CIT (A) ERRED IN HOLDING THAT WRITT EN BACK ( .35.29 LAKHS) AND MISCELLANEOUS RECEIPTS ( .13.67 LAKHS) INCLUDING SALE OF SCRAPE ARE PART OF THE PRO FIT OF THE BUSINESS ELIGIBLE FOR DEDUCTION UNDER SECTION 8 0HHC WITHOUT APPRECIATING THE FACTS OF THE CASE. (III) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT (A) ERRED IN HOLDING THAT FOREI GN EXCHANGE GAIN IS A PART OF EXPORT TURNOVER AND PROF IT OF BUSINESS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC , WITHOUT APPRECIATING THE FACTS OF THE CASE. ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 22 OF 29 (IV) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE CIT (A) ERRED IN HOLDING THAT AN AM OUNT OF .64,60,000 BEING GAIN ON DISPOSAL OF ASSETS IS REQUIRED TO BE REDUCED FROM THE BUSINESS PROFIT AS WELL AS TOTAL TURNOVER FOR THE PURPOSE OF CALCULATION, W ITHOUT APPRECIATING THE FACTS OF THE CASE. 24. GROUND NO.1 PERTAINS TO THE ISSUE OF CLAIM OF DEPRECIATION AT 50% ON MOTOR VEHICLES. ASSESSEE HAS CLAIMED DEPRECI ATION AT 50% OF .61,21,802 ON MOTOR CARS PURCHASED DURING FINANCIAL YEAR 2001- 02 BEING THE DATE OF DEPRECIATION PRESCRIBED IN ENT RY NO.(III)D OF SUB ITEM NO.2 OF ITEM NO.(III) WERE RELATING TO THE MAC HINERY AND PLANT OF PART-A OF APPENDIX-I OF THE INCOME TAX RULES, 1962 APPLICABLE TO NEW COMMERCIAL VEHICLES ACQUIRED DURING THE YEAR. A O TREATED THE SAID MOTOR CARS AS NOT BEING IN THE NATURE OF COMME RCIAL VEHICLE HAS ALLOWED DEPRECIATION ON SUCH MOTOR CARS AT 20% OF .24,48,720 BEING THE RATE PRESCRIBED IN SUB ITEM NO.(1A) OF I TEM NO.III RELATING TO MACHINERY AND PLANT OF PART A APPLICABLE TO MOTO R CARS OTHER THAN THOSE USED IN RUNNING THEM IN HIRE. BEFORE THE CIT (A) IT WAS SUBMITTED THAT THE DEFINITION OF COMMERCIAL VEHICLE AS PROVIDED IN THE NOTES TO THE APPENDIX I MEANS A LIGHT MOTOR VEH ICLE AS PER THE DEFINITION OF LIGHT MOTOR VEHICLE PROVIDED UNDER TH E MOTOR VEHICLES ACT, 1988, MOTOR CARS ARE INCLUDED AS COMMERCIAL VE HICLES THEREFORE, DEPRECIATION SHOULD BE ALLOWED AT 50%. A SSESSEE RELIED ON THE DECISION OF THE ITAT IN THE CASE OF GARWARE WAL L ROPES LTD, 89 ITD 221. 25. THE LEARNED CIT (A) AFTER CONSIDERING THE RULES IN THE DEFINITION OF NEW COMMERCIAL VEHICLES ALLOWED 50% O F THE DEPRECIATION. THEREFORE, THE REVENUE IS AGGRIEVED. 26. AT THE OUTSET IT WAS FAIRLY ADMITTED THAT THIS ISSU E WAS DECIDED BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. MR. SHAH RUKH KHAN IN ITXA NO.1206 OF 2010 DATE D ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 23 OF 29 29.08.2011. CONSIDERING THE EXTRACTS OF MOTOR VEHIC LES ACT 1988 AND ITS DEFINITION AND RATES OF DEPRECIATION AS PER ENTRY NO.(III)D OF SUB ITEM NO.2 OF ITEM NO.(III) ASSESSEE IS ENTITLED FOR 50% OF THE DEPRECIATION ON THE MOTOR CARS PURCHASED DURING THE RELEVANT PERIOD. ACCORDINGLY THE ORDER OF THE CIT (A) IS UPH ELD. REVENUE GROUND IS REJECTED. 27. GROUND NO.2 PERTAINS TO THE ISSUE OF WRITTEN BACK OF .35.29 LAKHS AND MISCELLANEOUS RECEIPTS OF .13.67 LAKHS INCLUDING THE SALE OF SCRAP AS PART OF PROFITS OF THE BUSINESS ELIGIBL E FOR DEDUCTION UNDER SECTION 80HHC. THIS ISSUE ARISES IN THE SENSE THAT AO HAS EXCLUDED THE ABOVE AMOUNT AS NOT PART OF THE PROFIT S OF THE BUSINESS WHILE COMPUTING DEDUCTION UNDER SECTION 80HHC. THE LEARNED CIT (A) AFTER CONSIDERING ASSESSEES SUBMISSIONS VIDE P ARA 61 OF THE ORDER DIRECTED AO TO TREAT THESE AS PART OF BUSINES S PROFITS. 28. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT (A) A S THE COSTS UNDER THE PROVISIONS OF WRITTEN BACK IS ARISING OUT OF TH E PROVISIONS PROVIDED FROM THE BUSINESS AMOUNT IN THE EARLIER YE ARS. THEREFORE, THE SAME IS PART OF INCOME UNDER SECTION 41(1) OF T HE INCOME TAX ACT. THEREFORE, THE SAME HAS TO BE CONSIDERED AS PR OFITS OF THE BUSINESS. IN THE SAME WAY THE MISCELLANEOUS RECEIPT S ARE CONSIDERED BY THE CIT (A) WHICH INCLUDE SERVICE CHA RGES, SALE OF SCRAP AND OTHER RECEIPTS, THE RELEVANT SUBMISSIONS OF ASSESSEE ARE MENTIONED IN PARAS 49 TO 51 OF THE CIT (A)S ORDER AND HIS CONCLUSIONS ARE IN PARA 61 OF THE ORDER. ALL THE RE CEIPTS OF THE ITEMS OF COSTS UNDER THE PROVISIONS OF WRITTEN BACK AND M ISCELLANEOUS RECEIPTS ARE DIRECTLY CONNECTED TO THE BUSINESS OPE RATIONS AND HENCE SUCH ITEMS CANNOT BE REDUCED FROM BUSINESS PR OFITS FOR COMPUTATION OF DEDUCTION. THE SAME WAS ALSO UPHELD BY THE COORDINATE BENCH IN THE CASE OF CALAS INDIA LTD VS. ACIT 119 TTJ, ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 24 OF 29 173 (DEL) AND POLYPLEX CORPORATION LTD, 112 TTJ 94 9 (DEL). FURTHER IT IS NOTICED THAT AO ALLOWED RELIEF AFTER VERIFICA TION IN THE ORDER GIVING EFFECT DATED 30.01.2006 AND SUBSEQUENT ORDER UNDER SECTION 154 DATED, 08.05.2006. CONSIDERING THE NATURE OF TH E AMOUNTS, WE DO NOT SEE ANY REASON TO UPHOLD THE GROUNDS RAISED BY THE REVENUE. THE ORDERS OF THE CIT (A) TO THAT EXTENT ARE CONFIR MED AND THE GROUNDS ARE REJECTED. 29. GROUND NO.3 PERTAINS TO THE ISSUE OF HOLDING FOREIGN EXCHANGE GAIN AS PART OF EXPORT TURNOVER AND PROFIT OF BUSINESS ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC. THIS GR OUND ARISES IN THE SENSE THAT AO EXCLUDED THE AMOUNT OF .4,03,18,066 BEING GAIN ON ACCOUNT OF EXCHANGE DIFFERENCE NOT TO BE TAKEN A S PART OF EXPORT TURNOVER BUT HAS TAKEN AS PART OF THE TOTAL TURNOVE R. THE REASONS FOR THIS IS THAT THE GAIN CANNOT BE HELD AS CLAIMED FRO M THE EXPORT ACTIVITIES. BEFORE THE CIT (A) IT WAS SUBMITTED THA T ASSESSEE HAS EARNED TOTAL FOREX GAIN OF .4,09,59,612 WHICH WAS REFLECTED IN SCHEDULE 13 OF THE AUDITED ACCOUNTS. OUT OF THE ABO VE AMOUNT OF .4,03,18,066 IS ON ACCOUNT OF NET EXCHANGE DIFFEREN CE ON DOLLAR ACCOUNT IN RESPECT OF PURCHASE AND SALE. THE EXCHAN GE GAIN IS ON ACCOUNT OF EXPORT GAIN ONLY. SINCE THE EXCHANGE GAI N IS RELATED TO THE EXPORT OF GOODS, ASSESSEE HAS CONSIDERED THE SA ME AS PART OF EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDER SEC TION 80HHC OF THE ACT. IT RELIED ON THE DECISION OF THE ITAT IN T HE CASE OF SUJATA GROVER VS. DEPUTY CIT, 74 TTJ 347 (DEL) AND SHARP C REDIT LTD VS. DCIT 4 SOT 880. AO ADDED THE ENTIRE EXCHANGE GAIN O F .4.09 CRORES TO THE TOTAL TURNOVER, WHEREAS AN AMOUNT OF .4.03 CRORES IS TO BE CONSIDERED AS PART OF EXPORT TURNOVER. IT WAS FURTH ER SUBMITTED THAT ALL THE SALE PROCEEDS AND PAYMENTS FOR IMPORT ARE R OUTED THROUGH THE EEFC ACCOUNT AND SUBMITTED THAT THE EXCHANGE DI FFERENCE GAIN ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 25 OF 29 IS NOT ON ACCOUNT OF WITHDRAWAL OF MONEY FROM EEFC ACCOUNT BUT AROSE DUE TO THE EXCHANGE RATE DIFFERENCE BETWEEN I NVOICES, WHICH IS FIXED BY THE CUSTOMS DEPARTMENT EVERY MONTH AT THE TIME OF EXPORT OF GOODS AND THE AVERAGE EXCHANGE RATE PREVALENT IN THE MONTH OF REALIZATION OF SALE PROCEEDS FOR SUCH EXPORT. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE CIT (A) CONSIDERED AS UNDER: 80. THE SUBMISSION MADE BY THE APPELLANTS REPRESENTATIVE HAS BEEN CONSIDERED. FURTHER, THOUGH THE FOREIGN EXCHANGE GAIN AMOUNT SHOWN BY THE APPELLANT IN THE PRESENT ACCOUNTING YEAR IS SUBSTANTIAL, THE APPELLANTS REPRESENTATIVE HAS CLARIFIED THAT THIS GAIN HAD ARISEN NOT ON ACCOUNT OF SALE PROCEEDINGS HAVIN G BEEN KEPT DEPOSITED IN THE EEFC ACCOUNT IN INDIA BU T ON ACCOUNT OF DIFFERENCE IN RATE OF US$ ON THE DATE ON WHICH THE SALES WERE RECORDED AND THE DATES ON WHICH SALE PROCEEDS WERE RECEIVED. 81. THUS, IN THE INSTANT CASE, THE APPELLANT HAS GO T THE BENEFIT OF FOREIGN EXCHANGE GAIN ON ACCOUNT OF EXPO RT SALES MADE IN US$ THAT THE VALUE OF DOLLARS ON THE DATE OF RECEIPT OF SALE PROCEEDS BEING HIGHER THAN ITS V ALUE WHEN THE EXPORTS WERE MADE AND SALES WERE RECORDED BY THE APPELLANT COMPANY. THE AMOUNT OF SALE CONSIDERATION RECEIVED BY THE APPELLANT COMP ANY IN CONVERTIBLE FOREIGN EXCHANGE REMAINED UNCHANGED. THEREFORE, GAIN ARISING TO THE APPELLANT CANNOT BE TAKEN AS COMPENSATION GIVEN BY THE GOVERNMENT BUT HAS TO BE TAKEN AS PART OF THE SALE CONSIDERATION. 82. IN THIS RESPECT IT IS ALSO TO BE SAID THAT THER E IS NOTHING ON RECORD TO SUGGEST THAT THE APPELLANT HAD ANY COLLUSIVE ARRANGEMENT WITH THE BUYERS TO ENABLE THE LATTER TO HOLD BACK REMITTANCES OF THE SALE CONSIDE RATION THAT IN TURN ENABLED THE APPELLANT TO HAVE FOREIGN EXCHANGE GAIN DUE TO DEPRECIATION IN THE VALUE OF I NDIAN RUPEES VIS--VIS US $. THE AMOUNT HAS ALSO BEEN RECEIVED TO AUTHORIZED BANKING CHANNEL IN THE NORMA L COURSE. 83. MOREOVER, THE ACT ITSELF PROVIDES THE APPELLANT TO BE ENTITLED FOR DEDUCTION UNDER THE SECTION IN CASE WH ERE THE SALE PROCEEDS ARE RECEIVED WITHIN THE PERIOD OF SIX MONTHS FROM THE LAST DATE OF THE ACCOUNTING YEAR OR WITHIN FURTHER PERIOD AS MAY BE ALLOWED BY THE COMPETENT AUTHORITY WHICH IS THE RBI IN THE INSTANT CASE. ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 26 OF 29 IN THAT PERIOD AFTER THE CLOSE OF THE ACCOUNTING YE AR, THE POSSIBILITY OF GAINS/LOSS ARISING ON ACCOUNT OF FOR EIGN EXCHANGE RATE VARIATION CANNOT BE RULED OUT. THAT I N RESPECT OF SUCH GAINS, THE APPELLANT IS ENTITLED FO R BENEFIT UNDER SECTION 80HHC OF THE ACT HAS ALSO BEEN ACCEPT ED BY THE HON'BLE ITAT IN THEIR DECISIONS IN THE CASES OF SMT. SUJATA GROVER VS. DCIT 74 TTJ 347 (DEL.), S.S. INDUSTRIES VS. INCOME TAX OFFICER, ITA NO.2732/MUM/ 97 DATED 31.07.2000 AND PRIYANKA GEMS VS. ACIT 3 SOT 818 (AHD.). 84. IN VIEW THEREFORE, THE FOREIGN EXCHANGE GAIN AR ISING TO THE APPELLANT IS TO BE TAKEN AS PART OF EXPORT T URNOVER AS WELL AS THE BUSINESS PROFITS OF THE APPELLANT EN ABLING IT TO GET THE BENEFIT UNDER SECTION 80HHC OF THE AC T IN RESPECT OF THAT GAIN TO THE EXTENT IT IS COVERED BY THE PROVISIONS OF SECTION 2(A) OF THE SECTION. HOWEVER, CONSIDERING THAT THE WHOLE OF THE GAIN HAS ACCRUED TO THE APPELLANT, THE ENTIRE AMOUNT IS TO BE TAKEN AS PART OF THE TOTAL TURNOVER. AO IS DIRECTED TO GRANT THE BENEFIT ACCORDINGLY. 30. SINCE THE ISSUE IS NOT ONLY EXAMINED FACTUALLY BUT ALSO LEGALLY, WE DO NOT SEE ANY REASON TO DIFFER FROM THE FINDING S OF THE CIT (A). FURTHER THE ISSUE IS ALSO SETTLED IN FAVOUR OF ASSE SSEE BY THE ORDER OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS . RACHANA UDYOG LTD 230 CTR 72 GIVEN IN THE CONTEXT OF ELIGIBILITY UNDER SECTION 80IB AND FURTHER IN THE CASE OF CIT VS. UNITED RICELAND LTD IN ITA NO.6997 OF 2010 DATED 31.03.2012. IN VIEW OF THIS T HE REVENUE GROUND IS REJECTED. 31. GROUND NO.4 PERTAINS TO THE ISSUE OF GAIN ON DISPOSAL OF ASSETS. ASSESSEE HAS CLAIMED AN AMOUNT OF .64,60,000 THE NET GAIN ON DISPOSAL OF FIXED ASSETS AS PART OF BUSINESS PRO FITS AND CLAIMED DEDUCTION UNDER SECTION 80HHC ON THE ABOVE AMOUNT. AO WITHOUT ASSIGNING ANY REASONS INCLUDED THE SAME AS PART OF TOTAL TURNOVER WHICH WAS CONTESTING BEFORE THE CIT (A). THE LEARNE D CIT (A) ANALYZED THE ISSUE AND DIRECTED AO AS UNDER: 92. THE SUBMISSION MADE BY THE APPELLANTS REPRESENTATIVE HAS BEEN CONSIDERED. IN THIS RESPECT IT ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 27 OF 29 HAS TO BE SAID THAT ANY GAIN ARISING ON ACCOUNT OF TRANSFER OF FIXED ASSETS IN WHICH DEPRECIATION HAS BEEN ALLOWED IS TO BE CHARGED TO TAX AS SHORT TERM CAPIT AL GAINS IN TERMS OF SECTION 50 OF THE ACT. IF SUCH GA IN IS LIABLE TO BE TAKEN AS PART OF THE INCOME CHARGEABLE TO TAX, IN CASE THE CONDITIONS PRESCRIBED IN THE SAID SECTION ARE SATISFIED. ON THE OTHER HAND IF THE ENTIRE BLOC K OF ASSETS IS NOT SOLD OR SALE CONSIDERATION RECEIVED O N DISPOSAL OF PART OF THE BLOCK DOES NOT EXCEED ITS W RITTEN DOWN VALUE, THE AMOUNT OF RECEIPT IS TO BE REDUCED IN THE COMPUTATION OF THE SAID WRITTEN DOWN VALUE IN T ERMS OF SECTION 43(6) OF THE ACT. 93. IN ANY CASE THE GAIN SO ARISING CANNOT BE SUBJE CTED TO TAX AS PART OF THE BUSINESS PROFITS. THE APPELLA NT IN THE INSTANT CASE HAS PRIMA FACIE SOUGHT TO INCLUDE THE SAID GAIN AS PART OF THE BUSINESS PROFITS, BUT DOES NOT WANT IT TO BE TAKEN AS PART OF THE TOTAL TURNOVER I N THE COMPUTATION OF THE ELIGIBLE AMOUNT FOR DEDUCTION UN DER SECTION 80HHC OF THE ACT. BOTH THE ACTION OF THE APPELLANT AS WELL AS THE CLAIM IN THIS REGARD AS INDICATED ABOVE ARE NOT LEGALLY CORRECT. THE GAIN I S TO BE EXCLUDED FROM THE BUSINESS PROFITS AS WELL AS FROM THE TOTAL TURNOVER. 94. AO IS DIRECTED TO DO THE NEEDFUL IN THE COMPUTA TION OF THE AMOUNT ELIGIBLE FOR DEDUCTION UNDER SECTION 80HHC OF THE ACT. ON THE OTHER HAND, HE SHALL EXCLU DE THE AMOUNT FROM THE TOTAL TURNOVER. HE SHALL ALSO B RING THE SAID GAIN TO TAX AS SHORT TERM CAPITAL GAIN UND ER SECTION 50 OF THE ACT OR MAKE ADJUSTMENT IN THE DEPRECIATION. THE APPEAL IN RESPECT OF GROUND NO.12 IS DISPOSED OFF AS PARTLY ALLOWED. 32. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE DO NOT SEE ANY REASON TO DIFFER FROM THE FINDINGS OF THE CIT (A). HE HAS RIGHTLY DIRECTED AO TO COMPUTE THE GAIN ON ASSETS AS SHORT TERM CAPITAL GAIN UNDER SECTION 50 OR TO MAKE ADJUSTMENT IN THE DEPRECIATION SCHEDULE. CONSEQUENTLY THE GAIN DOES NOT SURVIVE FO R INCLUSION EITHER AS BUSINESS ASSET OR AS PART OF THE TURNOVER ONCE THESE ARE ADJUSTED EITHER IN THE BLOCK OF ASSETS OR AS PART O F COMPUTATION OF CAPITAL GAINS. THEREFORE, THE ORDER OF THE CIT (A) IS UPHELD AND THE REVENUE GROUND IS REJECTED. 33. IN THE RESULT THE REVENUE APPEAL IS DISMISSED. ITA NOS.1284 AND 1560 OF 2006 CELETRONIX INDIA PVT LTD MUMBAI PAGE 28 OF 29 ORDER PRONOUNCED IN THE OPEN COURT ON 24TH DECEMBE R, 2012. SD/- SD/- (AMIT SHUKLA) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 24TH DECEMBER, 2012. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI