M/s Landis+Gyr Limited, Kolkata V. DCIT, Circle -1, Kolkata, Kolkata

ITA 1623/KOL/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 4789 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 8 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 21-06-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 07-11-2012

Judgement Text

1 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOL KATA [BEFORE SHRI M. BALAGANESH, AM & SHRI S. S. VISWAN ETHRA RAVI, JM] I.T.A NO. 37/KOL/2012 ASSESSMENT YEAR: 2007-08 & I.T.A NO. 1623/KOL/2012 ASSESSMENT YEAR: 2008-09 LANDIS + GYR LIMITED VS. DEPUTY COMMISSIONER OF INCOME-TAX, (PAN: AAACV9922B) CIRCLE-1, KOLKATA. ( ASSESSEE ) ( RESPONDENT ) DATE OF HEARING: 21.06.2016 DATE OF PRONOUNCEMENT: 03.08.2016 FOR THE ASSESSEE: SHRI RAHUL MITRA, AR FOR THE RESPONDENT: SHRI G. MALLIKARJUNA, CIT , DR ORDER PER SHRI M. BALAGANESH, AM: BOTH THESE APPEALS BY ASSESSEE FOR AYS 2007-08 AND 2008-09 ARE ARISING OUT OF SEPARATE ORDERS OF DISPUTE RESOLUTION PANEL, KOLKAT A VIDE THEIR F. NO. DRP/KOL/2011- 12/278-285 DATED 29.09.2011 AND F. NO. DRP/KOL/2011 -12/327-331 DATED 24.08.2012 IN WHICH DIRECTIONS ARE GIVEN TO THE LEARNED AO U/S 14 4C(5) READ WITH SECTION 144C(8) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS TH E ACT). AS THE ISSUES INVOLVED IN BOTH THE APPEALS ARE IDENTICAL IN NATURE, THEY ARE TAKEN UP TOGETHER AND DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. DISALLOWANCE OF PROVISION FOR LEAVE ENCASHMENT RS . 5,27,580/- THE ASSESSEE CLAIMED DEDUCTION TOWARDS PROVISION FO R LEAVE ENCASHMENT IN THE RETURN OF INCOME TO THE TUNE OF RS. 5,27,580/- WHICH WAS D ISALLOWED BY THE LEARNED AO BY INVOKING THE PROVISIONS OF SECTION 43B(F) OF THE AC T. THE SAME WAS ALSO UPHELD BY THE LEARNED DISPUTE RESOLUTION PANEL (DRP IN SHORT). A GGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 2.1. WE HAVE HEARD THE RIVAL SUBMISSIONS. AT THE O UTSET, WE FIND THAT THE CIT(A) CONFIRMED THE DISALLOWANCE AS MADE BY THE LD. AO ON ACCOUNT OF CLAIM FOR PROVISION FOR 2 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 LEAVE ENCASHMENT. LD. COUNSEL FOR THE ASSESSEE STAT ED THAT THE DEDUCTION ON ACCOUNT OF PROVISION FOR LEAVE ENCASHMENT WAS MADE ON THE BASI S OF THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF EXIDE INDU STRIES LTD. VS. UNION OF INDIA (2007) 292 ITR 470 (CAL) BUT HE FAIRLY CONCEDED THAT SUBSEQUEN TLY HON'BLE SUPREME COURT HAS STAYED THIS JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT VIDE ORDER 08-05-2009 BY FOLLOWING OBSERVATIONS:- PENDING HEARING AND FINAL DISPOSAL OF THE CIVIL AP PEALS, DEPARTMENT IS RESTRAINED FROM RECOVERING PENALTY AND INTEREST WHICH HAS ACCRUED T ILL DATE. IT IS MADE CLEAR THAT AS FAR AS THE OUTSTANDING INTEREST DEMAND AS OF DATE IS CONCERNED , IT WOULD BE OPEN TO THE DEPARTMENT TO RECOVER THAT AMOUNT IN CASE CIVIL APPEAL OF THE DEP ARTMENT IS ALLOWED. WE FURTHER MAKE IT CLEAR THAT THE ASSESSEE WOULD, D URING THE PENDENCY OF THIS CIVIL APPEAL, PAY TAX AS IF SECTION 43B(F) IS ON THE STATUE BOOK BUT AT THE SAME TIME IT WOULD BE ENTITLED TO MAKE A CLAIM IN ITS RETURNS. IN VIEW OF THE ABOVE, LD. COUNSEL FOR THE ASSESSEE FAIRLY STATED THAT LET HON'BLE SUPREME COURT DECIDE THE ISSUE AND BY THAT TIME THE MATTER CAN BE REMITTED BACK TO THE FILE OF LD AO FOR FRESH ADJUDICATION IN TERMS OF THE DECISION OF HON'BLE SUPREME COURT. ON THIS, LD. CIT DR HAS NOT OBJECTED TO THE SAME. ACCORDINGLY, WE S ET ASIDE THIS ISSUE TO THE FILE OF THE AO TO AWAIT THE DECISION OF HON'BLE SUPREME COURT AND DECIDE THE ISSUE ACCORDINGLY. THIS ISSUE OF ASSESSEES APPEAL IS REMITTED BACK TO THE FILE O F AO AND ACCORDINGLY GROUND NO. 1 IN ITA NO. 37/KOL/2012 RAISED BY ASSESSEE IS ALLOWED FOR S TATISTICAL PURPOSES. 3. DISALLOWANCE OF DEPRECIATION ON INTELLECTUAL PR OPERTY RIGHTS AND GOODWILL THE ASSESSEE IS A CLOSELY HELD COMPANY ENGAGED IN T HE BUSINESS OF MANUFACTURING AND DISTRIBUTION OF ELECTRIC METERS AND RELATED COMPONE NTS. THE ASSESSEE HAD BEEN A MANUFACTURER AND SUPPLIER OF ELECTRO-MECHANICAL MET ERS TILL 2005 WHILE THE MARKET HAD MIGRATED FROM ELECTRO-MECHANICAL METERS TO STATIC M ETERS DUE TO AVAILABILITY OF ANTI TAMPERING FEATURES AND COMMUNICATION FACILITIES IN STATIC METERS. IT ALSO DID NOT HAVE ANY DEDICATED RESEARCH & DEVELOPMENT WING TO SUPPORT AN Y ELECTRONIC BUSINESS. THE CENTRAL ELECTRICITY AUTHORITY VIDE ITS NOTIFICATION NO. 502 /70/CEA/DP&D DATED 17.3.2006 NOTIFIED THE CENTRAL ELECTRICITY AUTHORITY (INSTALLATION AND OPERATION OF METERS) REGULATIONS, 2006 WHICH INTER ALIA, PROVIDED THAT ALL INTERFACE METER S, CONSUMER METERS AND ENERGY ACCOUNTING AND AUDIT METERS SHALL BE OF STATIC TYPE. THE METE RS NOT COMPLYING WITH THESE REGULATIONS WERE TO BE REPLACED AS PER THE DIRECTION OF THE CEN TRAL ELECTRICITY AUTHORITY. FACED WITH THIS CHALLENGE , ASSESSEE WANTED TO QUICKLY SET UP ITS R &D DEPARTMENT AND ACQUIRE SOME OF THE INTELLECTUAL PROPERTY IN THIS FIELD. ACCORDINGLY, IT ACQUIRED A SOLE PROPRIETORSHIP UNIT NAMED 3 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 TECHNOLOGY & RESEARCH STPI (TECRES) VIDE BUSINE SS TRANSFER AGREEMENT DATED 12.11.2006. THE SOLE PROPRIETORSHIP CONCERN WAS RU N BY MR. GULJEET SINGH GANDHI ( AN UNRELATED PARTY TO THE ASSESSEE). MR GANDHI THROU GH HIS BUSINESS UNIT NAMED TECRES HAD DEVELOPED CERTAIN METERING RELATED SOFTWARE AND WAS ENGAGED IN THE BUSINESS OF SALE (BOTH DOMESTIC AND EXPORT) OF SUCH SOFTWARE ALONG WITH RE LATED SERVICES. RESEARCH AND DEVELOPMENT EXPENSES WERE INCURRED IN THE SAID BUSI NESS. MR GANDHI AND HIS PERSONNEL THROUGH THEIR TECHNICAL INTELLIGENCE AND EXPERTISE DEVELOPED KNOW-HOW FOR PRODUCING METERING RELATED SOFTWARES. SINCE TECRES POSSESSED THE REQUISITE KNOW-HOW, A KEY TO SURVIVAL IN THE MARKET FOR STATIC METERS, THE ASSES SEE ENTERED INTO BUSINESS TRANSFER AGREEMENT FOR ACQUISITION OF BUSINESS OF TECRES. T HEO ENTIRE TEAM OF THE SAID TECRES ALONG WITH THEIR DEVELOPED CODES AND DOMAIN REPOSIT ORY HAD JOINED THE ASSESSEE PURSUANT TO THE BUSINESS TRANSFER AGREEMENT. THE INTELLECTUAL PROPERTY RIGHTS ACQUIRED BY THE ASSESSEE CONSISTED OF DESIGNS, SOFTWARE, DATA BASE, RESEARCH AND DEVELOPMENT MATERIAL AND FACILITY, TECHNICAL KNOW-HOW, PROCESS KNOW-HOW, CONFIDENTIAL INFORMATION, BASIC AND DETAILED DRAWINGS, OPERATION AND MAINTENANCE MANUALS RELATIN G TO THE BUSINESS CARRIED OUT BY TECRES. THE LD AO OBSERVED THAT THE INCOME TAX R ULES RECOGNIZES INTANGIBLE ASSETS SUCH AS KNOWHOW, PATENTS, COPYRIGHTS, TRADEMARKS, L ICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE AND THESE ASSETS MUST POSSESS CERTAIN CERTIFICATION / AUTHENTICITY / SANCTITY AND OR RECO GNITION FROM GOVERNMENT OR FROM COMPETENT AUTHORITY. HE FURTHER OBSERVED THAT THE NATURE OF THE IP ASSETS ACQUIRED BY THE ASSESSEE DOES NOT FALL IN ANY OF THE CATEGORY OR SIMILAR NATURE A S MENTIONED IN IT RULES. THEREFORE, HE HELD THAT THE ASSETS ARE NOT INTANGIBLE ASSETS ELIG IBLE FOR DEPRECIATION AND DISALLOWED THE CLAIM OF RS. 61,50,000/- IN THE DRAFT ASSESSMENT OR DER. THE ASSESSEE PREFERRED OBJECTIONS BEFORE THE HONBLE DISPUTE RESOLUTION PANEL (DRP). THE LD DRP APPROVED THE CONTENTIONS OF THE LD AO. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS:- 2. (A) THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE ASSESSING OFFICER ERRED IN DISALLOWING DEPRECIATION ON THE INTELLECTUAL PROPER TIES (IP) ACQUIRED BY THE ASSESSEE WITHOUT APPRECIATING THAT SUCH IP IS AN INTANGIBLE ASSETS I N THE NATURE OF KNOW-HOW ON WHICH DEPRECIATION AS PER THE PROVISION OF THE ACT IS ALL OWABLE. (B) THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE ASSESSING OFFICER ERRED IN STATING THAT INTANGIBLE ASSETS SPECIFIED IN THE ACT MUST POSSESS CERTIFICATION OR RECOGNITION FROM GOVERNMENT OR COMPETENT AUTHORITY FOR BEING EN TITLED TO TAX DEPRECIATION. C) THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ASSESSING OFFICER ERRED IN CONFIRMING THE ORDER OF THE DRP WHERE THE HON'BLE MEMBERS OF T HE PANEL HAD QUESTIONED THE BUSINESS EXPEDIENCY OF THE ASSESSEE IN ACQUIRING THE NEW COM PANY TECRES THUS VIOLATING THE SETTLED PRINCIPLE OF LAW THAT THE REVENUE AUTHORITIES CANNO T STEP INTO THE SHOES OF BUSINESS MAN. 4 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 D) THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE ASSESSING OFFICER ERRED IN CONFIRMING THE ORDER OF THE DR WHERE THE HON'BLE ME MBERS OF THE PANEL HAD DECIDED THE ISSUE AGAINST THE ASSESSEE ON GROUNDS ON WHICH NO OPPORTU NITY FOR HEARING HAD BEEN GIVEN, THUS VIOLATING THE PRINCIPLES OF NATURAL JUSTICE. 3.1. THE LEARNED AO ERRED IN ALLEGING THAT THE INT ELLECTUAL PROPERTY NEEDS TO HAVE RECOGNITION FROM GOVERNMENT AND DOES NOT FALL IN AN Y OF THE CATEGORY OF INTANGIBLE ASSETS AS MENTIONED IN THE INCOME TAX RULES AND ACCORDINGLY D ENIED THE CLAIM OF DEPRECIATION. HE ARGUED THAT THE TECRES, WHICH WAS TAKEN OVER FROM M R. GANDHI HAD TOTAL ASSETS OF RS 40.17 LAKHS AND CURRENT LIABILITIES OF RS. 4.69 LAK HS, WAS EVALUATED AT RS. 4.92 CRORES WHEREIN THE MAJOR SHARE OF THE CONSIDERATION WAS AT TRIBUTED TOWARDS THE INTELLECTUAL PROPERTY THE SAID BUSINESS POSSESSED. THE ENTIRE TEAM TOGET HER WITH THE DOMAIN KNOWLEDGE HAD BEEN TRANSFERRED TO THE ASSESSEE PURSUANT TO THE AGREEME NT. THE SAME HAD BEEN USED BY THE ASSESSEE FOR ITS VERY SURVIVAL IN THE BUSINESS OF S TATIC METERS TO BE IN LINE WITH THE REGULATIONS OF THE CENTRAL ELECTRICITY AUTHORITY AN D HENCE THE USE OF INTELLECTUAL PROPERTY FOR THE PURPOSE OF BUSINESS HAD BEEN DULY DEMONSTRATED BY THE ASSESSEE AND IT IS NOT A COLOURABLE DEVICE AS ALLEGED BY THE LEARNED DRP. HE ARGUED THAT THE ALLEGATION OF THE LEARNED DRP IS WITHOUT ANY BASIS BY IGNORING THE FA CT THAT THE KNOWHOW IN THE INSTANT CASE HAS BEEN ACTUALLY ACQUIRED BY PAYING A CONSIDERATIO N OF RS.4.92 CRORES (PURSUANT TO INDEPENDENT VALUATION BY AN EXPERT) TO MR GANDHI P URSUANT TO BUSINESS TRANSFER AGREEMENT. HE ARGUED THAT THE PROVISIONS OF THE ACT IN MORE TH AN ONE SECTION HAD, IN ITS WISDOM, HAD DEFINED INTANGIBLE ASSETS AS KNOWHOW, PATENTS, COPY RIGHTS, TRADE MARKS, LICENCES , FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMIL AR NATURE. HENCE KNOWHOW IS AN INDEPENDENT ITEM OF INTANGIBLE ASSET. SIMILARLY PA TENT IS AN INDEPENDENT ITEM OF INTANGIBLE ASSET. THE LEARNED DRP HAD ERRED IN MIXING THE TER M PATENT WITH KNOWHOW AND OBSERVED THAT SINCE THE KNOWHOW ACQUIRED HAD NOT BEEN REGIST ERED WITH INDIAN GOVERNMENT AND HENCE THE SAME DOES NOT HAVE ANY RECOGNITION FROM GOVERNM ENT AND ACCORDINGLY DOES NOT FALL IN THE CATEGORY OF INTANGIBLE ASSETS. HE FURTHER ARGU ED THAT THERE IS NO MANDATE IN THE LAW THAT THE KNOWHOW NEEDS TO BE REGISTERED WITH THE INDIAN GOVERNMENT TO FALL UNDER THE CATEGORY OF INTANGIBLE ASSET FOR CLAIMING DEPRECIATION U/S 3 2 OF THE ACT. HE FURTHER STATED THAT THE LD DRP HAD ALLOWED THE CLAIM OF DEPRECIATION ON ACTUAL COST BASIS IN THE SUBSEQUENT YEAR AND IF THE CLAIM OF DEPRECIATION IS DIRECTED TO BE ALLOWED IN THE YEAR UNDER APPEAL, THEN A DIRECTION MAY BE GIVEN TO THE LD AO TO REVISE THE WRITTEN DOW NVALUE (WDV) ACCORDINGLY AND REWORK THE DEPRECIATION IN SUBSEQUENT YEAR ACCORDIN GLY AS IT IS CONSEQUENTIAL. HE 5 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 ALTERNATIVELY ARGUED THAT IF THE CONSIDERATION PAID IN THE SUM OF RS. 4.92 CRORES TOWARDS KNOWHOW IS NOT ACCEPTED BY THE REVENUE, THEN THE SA ME HAS TO BE ACCEPTED AS PAID TOWARDS ACQUISITION OF GOODWILL OF THE CONCERN (I.E. TECRES ) WHICH AGAIN ENTITLES THE ASSESSEE TO CLAIM DEPRECIATION AS PER THE RATIO LAID DOWN BY TH E HONBLE APEX COURT IN THE CASE OF CIT VS SMIFS SECURITIES LTD REPORTED IN (2012) 348 ITR 302 (SC) AS THE ASSESSEE HAD PAID THE CONSIDERATION OF RS. 6,07,89,093/- IN TOTO AND AFTE R BIFURCATING THE SAME TOWARDS THE SPECIFIC ASSETS, THE BALANCE LEFT OVER I.E. RS. 4,92,00,000/ - SHOULD BE ATTRIBUTED TOWARDS ACQUISITION OF GOODWILL. 3.2. THE LEARNED DR ARGUED THAT THE IPS ACQUIRED BY THE ASSESSEE HAVE NOT BEEN APPROVED BY ANY AUTHORITY AND HENCE NOT RECOGNIZED BY THE INDIAN GOVERNMENT. HENCE THE CLAIM OF PURCHASE OF IP FROM A PRIVATE UNRELATED EN TITY IS MERELY A SELF SERVING STATEMENT AND NOT SUPPORTED BY ANY EVIDENCES. HE FURTHER ARGUED THAT THE UNIT HAVING ASSETS OF JUST RS 40.17 LAKHS HAD BEEN GIVEN A FANCY VALUATION OF RS. 4.92 CRORES WHICH IS VERY UNLIKELY. MOREOVER, THE COMPONENTS OF ASSETS PREDOMINANTLY CO MPRISED OF COMPUTERS WORTH RS 1.93 LAKHS AND SOFTWARE OF RS 1.34 LAKHS, FURNITURE OF R S. 10.84 LAKHS , CAR OF RS. 8.56 LAKHS, AMONG OTHERS. 3.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE PAPER BOOK FILED BY THE ASSESSEE COMP RISING OF RELEVANT EXTRACTS OF CENTRAL ELECTRICITY AUTHORITY (INSTALLATION AND OPERATION O F METERS) REGULATIONS, 2006 (PAGES 47 TO 66 OF PAPER BOOK) WITH REGARD TO THIS ISSUE. WE FI ND THAT THE ASSESSEE HAD CAPITALIZED THE FOLLOWING ASSETS UNDER INTELLECTUAL PROPERTIES:- A. LOW COST SINGLE PHASE STATIC METER IP FOR DOMESTIC SEGMENT. B. LOW COST SINGLE PHASE STATIC METER IP FOR SOUTH ASI AN MARKET LIKE VIETNAM, ETC. C. RF AMR RADIO FREQUENCY ACCELERATED METER READING IP D. SALEM 3T METERING MODULE IP E. SALEM 1G HVDS IP F. PL COMM EVALUATION MODEM IP 3.3.1. IT WAS ARGUED THAT THE INTELLECTUAL PROPERT Y RIGHTS ACQUIRED BY THE ASSESSEE CONSISTED OF DESIGNS, SOFTWARE, DATA BASE, RESEARCH AND DEVEL OPMENT MATERIAL AND FACILITY , TECHNICAL KNOW HOW, PROCESS KNOW HOW , CONFIDENTIAL INFORMATI ON, BASIC AND DETAILED DRAWINGS, OPERATION AND MAINTENANCE MANUALS RELATING TO THE B USINESS CARRIED OUT BY TECRES. THE 6 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 VALUATION OF THE SAME WAS CARRIED OUT BY AN INDEPEN DENT EXPERT AND VALUATION REPORT IS ENCLOSED IN PAGES 25 TO 82 OF PAPER BOOK. WE FIND THAT THE OECD TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX AD MINISTRATIONS ISSUED IN JULY 2010 (ENCLOSED IN PAGES 67 TO 73 OF PART A OF PAPER BOOK ) PROVIDES THAT THE TERM INTANGIBLE PROPERTY INCLUDES RIGHTS TO USE INDUSTRIAL ASSETS SUCH AS PATENTS, TRADEMARK, TRADE NAMES, DESIGNS OR MODELS. IT ALSO INCLUDES LITERARY AND A RTISTIC PROPERTY RIGHTS AND INTELLECTUAL PROPERTY SUCH AS KNOWHOW AND TRADE SECRETS. THESE INTANGIBLES ARE ASSETS THAT MAY HAVE CONSIDERABLE VALUE EVEN THOUGH THEY MAY HAVE NO BOO K VALUE IN THE COMPANYS BALANCE SHEET. WE FIND IN PARA 1.155 OF THE OECD / G20 BA SE EROSION AND PROFIT SHIFTING (BEPS) REPORT ON ACTIONS 8-10 (2015) ALIGNING TRANSFER P RICING OUTCOMES WITH VALUE CREATION, ISSUED IN THE YEAR 2015, THAT IN SOME SITUATIONS, THE TRANSFER OR SECONDMENT OF ONE OR MORE EMPLOYEES MAY, DEPENDING ON THE FACTS AND CIRCUMSTA NCES, RESULT IN THE TRANSFER OF VALUABLE KNOWHOW OR OTHER INTANGIBLES FROM ONE ASSOCIATED EN TERPRISE TO ANOTHER. EVEN THOUGH IN THE INSTANT CASE, THE TRANSACTION IS BETWEEN TWO UN RELATED ENTERPRISES, THE PRINCIPLES ENUNCIATED THEREIN WOULD SQUARELY APPLY. FURTHER P ARA 6.20 OF THE SAID ACTION PLAN, PROVIDE THAT KNOWHOW AND TRADE SECRETS ARE PROPRIETARY INFORMAT ION OR KNOWLEDGE THAT ASSISTS OR IMPROVE A COMMERCIAL ACTIVITY, BUT THAT ARE NOT REG ISTERED FOR PROTECTION IN THE MANNER OF PATENT OR TRADEMARK. KNOWHOW AND TRADE SECRETS GEN ERALLY CONSIST OF UNDISCLOSED INFORMATION OF AN INDUSTRIAL, COMMERCIAL OR SCIENTI FIC NATURE ARISING FROM PREVIOUS EXPERIENCE, WHICH HAS PRACTICAL APPLICATION IN THE OPERATION OF AN ENTERPRISE. KNOWHOW AND TRADE SECRETS MAY RELATE TO MANUFACTURING , MARKETI NG, RESEARCH AND DEVELOPMENT, OR ANY OTHER COMMERCIAL ACTIVITY. THE VALUE OF KNOW- HOW AND TRADE SECRETS IS OFTEN DEPENDENT ON THE ABILITY OF THE ENTERPRISE TO PRESERVE THE CONFI DENTIALITY OF THE KNOW HOW OR TRADE SECRET. IN CERTAIN INDUSTRIES THE DISCLOSURE OF INFORMATION NECESSARY TO OBTAIN PATENT PROTECTION COULD ASSIST COMPETITORS IN DEVELOPING ALTERNATIVE SOLUTIONS. ACCORDINGLY, AN ENTERPRISE MAY, FOR SOUND BUSINESS REASONS, CHOOSE NOT TO REGI STER PATENTABLE KNOWHOW, WHICH MAY NONETHELESS CONTRIBUTE SUBSTANTIALLY TO THE SUCCESS OF THE ENTERPRISE. THE CONFIDENTIAL NATURE OF KNOWHOW AND TRADE SECRETS MAY BE PROTECTE D TO SOME DEGREE BY (I) UNFAIR COMPETITION OR SIMILAR LAWS, (II) EMPLOYMENT CONTRA CTS, AND (III) ECONOMIC AND TECHNOLOGICAL BARRIERS TO COMPETITION. KNOWHOW AND TRADE SECRETS ARE INTANGIBLES. . HENCE, IT COULD BE SAFELY CONCLUDED THAT EVEN OECD HAS LAID DOWN THE PRINCIPLE THAT INTELLECTUAL PROPERTY IN THE FORM OF KNOWHOW IS NOT REQUIRED TO BE REGISTERED. 7 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 3.3.2. WE FIND THAT THE ASSESSEE HAD FILED A COPY O F THE BUSINESS TRANSFER AGREEMENT (BTA) ENTERED INTO WITH MR. GANDHI AS AN ADDITIONAL EVIDE NCE. IT WAS SUBMITTED BY THE LD AR THAT THE SAID AGREEMENT WAS NEVER CALLED FOR BY THE LOWE R AUTHORITIES AND HENCE THERE WAS NO OCCASION FOR THE ASSESSEE TO FILE THE SAME AND IT W AS ALSO SUBMITTED THAT THE ACQUISITION OF BUSINESS FROM MR GANDHI BY THE ASSESSEE WAS NEVER A SUBJECT MATTER OF DEBATE. IN THESE CIRCUMSTANCES, WE DEEM IT FIT AND APPROPRIATE TO AD MIT THE SAID ADDITIONAL EVIDENCE FOR BETTER APPRECIATION OF THE FACTS TO RESOLVE THE ISSUE UNDE R DISPUTE BEFORE US. 3.3.3. WE FIND FORCE IN THE ARGUMENT ADVANCED BY T HE LD AR THAT THE TRANSFER OF EMPLOYEES WOULD ALSO RESULT IN TRANSFER OF KNOWHOW ALSO. WE FIND THAT THE EXPLANATION 4 TO SECTION 32(1) OF THE ACT DEFINES KNOWHOW AS ANY INDUSTRIA L INFORMATION OR TECHNIQUE LIKELY TO ASSIST IN THE MANUFACTURE OR PROCESSING OF GOODS OR IN THE WORKING OF A MINE, OIL-WELL OR OTHER SOURCES OF MINERAL DEPOSITS (INCLUDING SEARCH ING FOR DISCOVERY OR TESTING OF DEPOSITS FOR THE WINNING OF ACCESS THERETO). SECTION 32(1)( II) OF THE ACT PROVIDES FOR DEPRECIATION ON INTANGIBLE ASSETS INCLUDING KNOWHOW, PATENTS, COPYR IGHTS, TRADE MARKS, LICENCES, FRANCHISES, OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMIL AR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER 1 ST DAY OF APRIL 1998. HENCE FROM THE COMBINED READIN G OF OECD, DEFINITION OF KNOWHOW AND PROVISIONS OF SECTION 32 OF THE ACT IN RESPECT OF INTANGIBLE ASSETS, IT COULD BE SAFELY CONCLUDED THAT DEPRECIAT ION IS ALLOWED ON INTELLECTUAL PROPERTY BEING KNOWHOW AND SUCH INTELLECTUAL PROPERTY IS NOT REQUIRED TO BE REGISTERED WITH ANY GOVERNMENT AUTHORITY. KNOW HOW IS AN INTANGIBLE PR OPERTY, RIGHTS IN RESPECT OF WHICH CAN BE BOUGHT AND SOLD. AS PER THE LAW LEXICON DICTION ARY, KNOWHOW INDICATES SOMETHING ESSENTIALLY DIFFERENT FROM SECRET AND CONFIDENTIAL INFORMATION. IT INDICATES THE WAY IN WHICH A SKILLED MAN DOES HIS JOB WITH HIS SKILL AND EXPER IENCE. IT WAS ALSO STATED THAT KNOWHOW IS A CLOSELY HELD UNPATENTED INVENTIONS, FORMULAE, DES IGN, DRAWINGS, PROCEDURES AND METHODS TOGETHER WITH ACCUMULATED SKILLS AND EXPERIENCE IN THE HANDS OF A LICENSOR FIRMS PROFESSIONAL PERSONNEL. 3.3.4. IT IS NOT IN DISPUTE THAT ASSESSEE HAD ACQU IRED FROM TECRES SIX DIFFERENT IPS WHICH WERE INDEPENDENTLY VALUED BY THE INDEPENDENT EXPERT BEFORE THE COMPANY WAS TAKEN OVER BY THE ASSESSEE COMPANY. ADMITTEDLY TECRES WAS ENGAGE D IN THE RESEARCH AND DEVELOPMENT OF METERING RELATED TO SOFTWARE AND COMMUNICATION T ECHNOLOGY WHICH IS USEABLE IN MEASUREMENT OF ELECTRICAL AND MANAGEMENT OF ENERGY. IT IS NOT IN DISPUTE THAT THE SAID 8 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 COMPANY HAD BEEN DELIVERING SERVICE IN THE FIELD OF METERING SOFTWARE DEVELOPMENT OF STATIC METERS FOR MAJOR INDIAN MANUFACTURERS IN THE METERI NG INDUSTRY NAMELY L & T , GENUS, HPL SOCOMEC ETC APART FROM DOING WORK FOR OTHER OVERSEA S CLIENTS. WE FIND THAT THE ASSESSEE IN ORDER TO MIGRATE INTO THE NEW LUCRATIVE BUSINESS OF MANUFACTURING STATIC METERS WAS LOOKING FOR PARTNER WHICH COULD HELP IT OUT IN ITS NEW VENT URE. THEREFORE, AFTER A DETAILED STUDY AND INFORMED BUSINESS DECISION, THE ASSESSEE DECIDED TO BUY OUT THE ENTIRE UNIT OF TECRES ALONG WITH ITS SPECIALIZED RESEARCH ENGINEERS WHO H AD ENORMOUS EXPERIENCE AND DOMAIN KNOWLEDGE IN RESPECT OF STATIC METERS WHICH THE ASS ESSEE COULD LEVERAGE IN DEVELOPING NEW MARKETABLE PRODUCTS. THEREFORE, IN ESSENCE WHAT TH E ASSESSEE HAS ACQUIRED IS KNOWHOW IN DEVELOPING NEW TYPE OF METERS WHICH WERE DIGITAL ME TERS WITH ANTI-TAMPERING AND OTHER COMMUNICATION FACILITIES. WE FIND THAT THE RELIANC E PLACED BY THE LD AR ON THE CO-ORDINATE BENCH DECISION OF PUNE TRIBUNAL IN THE CASE OF MODU LAR INFOTECH P LTD VS DCIT REPORTED IN 131 TTJ 243 (PUNE) IS WELL FOUNDED. IN THE SAID CASE, THE ASSESSEE C OMPANY WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND ALSO LICEN SING OF SOFTWARE. IT HAD TAKEN OVER THE BUSINESS OF A FIRM NAMELY M/S MODULAR SYSTEMS AND C LAIMED DEPRECIATION @ 25% ON AN AMOUNT OF RS. 4,27,00,000/- PERTAINING TO THE VALUE OF IPR PAID TO THE FIRM. THE AO DISALLOWED THE CLAIM OF DEPRECIATION ON IPR AGAINST WHICH ASSESSEE FILED APPEAL BEFORE THE LD CITA. DURING THE APPELLATE PROCEEDINGS WITH THE CITA, THE ASSESSEE POINTED OUT THAT THE AMOUNT OF RS. 4.27 CRORES INCLUDED COMPOSITE CONSID ERATION IN RESPECT OF ALL THE INTANGIBLE ASSETS OF THE FIRM NAMELY IPRS AND THE GOODWILL AND SUBMITTED A FRESH VALUATION OF THE ASSETS INCLUDING THAT OF THE GOODWILL AT RS. 79,50, 000/-. THE CITA DISALLOWED DEPRECIATION ON GOODWILL OF RS. 79,50,000/- AND ALLOWED ASSESSEE S CLAIM OF DEPRECIATION IN RESPECT OF BALANCE IPR PAYMENT. ON APPEAL FILED BEFORE THE TRI BUNAL, IT WAS HELD THAT WHERE ASSESSEE COMPANY TOOK OVER BUSINESS OF A FIRM AT VALUE ASSES SED BY PROFESSIONALS AND VALUE SO DETERMINED WAS MADE PART OF AGREEMENT, IT WAS WRONG TO PRESUME THAT THERE WAS A NOTIONAL AMOUNT WHICH WAS TRANSACTED BETWEEN PARTIES, HENCE DISALLOWANCE OF DEPRECIATION ON INTELLECTUAL PROPERTY RIGHTS ON GROUND THAT VALUE W AS ASSIGNED TO AN ASSET WHICH WAS NON- EXISTENT WAS NOT JUSTIFIED. WE FIND THAT THE FACTS OF THE ASSESSEES CASE ARE ALSO SIMILAR TO THE FACTS BEFORE THE PUNE TRIBUNAL SUPRA. IT IS NOT IN DISPUTE THAT THE TURNOVER OF THE ASSESSEE HAD SUBSTANTIALLY INCREASED FROM THE YEAR UNDER APPEAL ON ACCOUNT OF ACTIVITIES OF THE R&D CENTRE WHICH THE ASSESSEE HAD ACQUIRED FROM MR GAND HI. THE ELEMENT OF KNOW HOW IS INHERENT IN THE STATIC METERS MANUFACTURED BY THE A SSESSEE PURSUANT TO ACQUISITION OF TECRES. IT IS NOT IN DISPUTE THAT THE ENTIRE RESE ARCH & DEVELOPMENT TEAM OF TECRES 9 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 ALONG WITH THEIR DEVELOPED CODES AND DOMAIN DEPOSIT ORY HAVE JOINED THE ASSESSEE. HENCE IT CANNOT BE SAID THAT THE ASSESSEE HAD NOT ACQUIRED A NY INTELLECTUAL PROPERTIES FROM MR GANDHI. THE TOTAL CONSIDERATION PAID BY THE ASSESSE E IN THE SUM OF RS. 6,07,89,093/- TO MR. GANDHI HAS NOT BEEN DISPUTED. OUT OF THIS TOTAL CO NSIDERATION, THE ASSESSEE HAD BIFURCATED THE VALUE TOWARDS IP RIGHTS TO THE TUNE OF RS. 4.92 CRORES BASED ON AN INDEPENDENT VALUATION FROM AN EXPERT. THE MAIN EMPHASIS FOR DISALLOWANCE IS ONLY ON THE POINT THAT THE INTELLECTUAL PROPERTIES IS NOT APPROVED BY ANY GOVE RNMENT OR ANY COMPETENT AUTHORITY. NOWHERE THE INCOME TAX ACT MANDATES THE REGISTRATIO N OF THE INTELLECTUAL PROPERTIES FOR THE PURPOSE OF GRANTING DEPRECIATION U/S 32 OF THE ACT. GETTING THE INTELLECTUAL PROPERTIES REGISTERED IS WITHIN THE DOMAIN OF THE ASSESSEE AND IT ONLY OFFERS PROTECTION TO THE ASSESSEE FROM PREVENTING OTHER PARTIES TO USE THE SAME. THE REVENUE CANNOT THRUST THE MANDATE OF REGISTRATION OF THE SAME AND MERE NON-REGISTRATION OF THE SAME DOES NOT MAKE THE TRANSACTION INGENUINE OR SHAM. HENCE THE VERSION OF THE REVEN UE THAT IP SHOULD BE CERTIFIED BY THE GOVERNMENT AUTHORITY AND IT DOES NOT FALL WITHIN TH E ASSETS SPECIFIED IN IT RULES IS WITHOUT ANY BASIS AND NOT TENABLE. 3.3.5. IN VIEW OF THE AFORESAID FINDINGS AND RESPECTFULLY FOLLOWING THE JUDICIAL PRECEDENT RELIED UPON HEREINABOVE, WE ALLOW THE GRO UNDS 2(A) TO 2(D) RAISED BY THE ASSESSEE FOR THE ASST YEAR 2007-08 AND GROUNDS 12(1 ) TO 12(C ) RAISED FOR THE ASST YEAR 2008-09. THE LD AO IS ALSO DIRECTED TO REWORK TH E OPENING WDV OF THIS ASSET IN THE SUBSEQUENT YEAR AND REWORK THE ALLOWABILITY OF DEPR ECIATION ON THE SAME PURSUANT TO THIS ORDER. IN VIEW OF THIS DECISION, WE ARE NOT I NCLINED TO ENTERTAIN THE ALTERNATIVE CLAIM OF THE ASSESSEE VIDE GROUND NO. 1(A) THAT THE CONSIDERATION SO PAID IN THE SUM OF RS. 4,92,00,000/- HAS TO BE CONSTRUED AS GOODWILL A ND DEPRECIATION HAS TO BE GRANTED ACCORDINGLY. 3.3.6. WITH REGARD TO THE ADDITIONAL GROUND RAISED BY THE ASSESSEE VIDE GROUND NO. 1(B) AND 1(C ) ON THE ALLOWABILITY OF DEPRECIATION ON GOODWI LL AMOUNTING TO RS. 93,41,680/- FOR ASST YEAR 2007-08 AND RS. 81,73,970/- FOR ASST YEAR 2008 -09, WE FIND THAT THE HONBLE APEX COURT IN THE CASE OF CIT VS SMIFS SECURITIES LTD RE PORTED IN 348 ITR 302 (SC) HAD HELD THAT THE ASSESSEE IS ENTITLED FOR DEPRECIATION ON GOODWI LL. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD PAID CONSIDERATION TOWARDS ACQUISITION OF GOOD WILL. THIS ISSUE IS NOW WELL SETTLED AND NOT WITH ANY DISPUTE. WE FIND LOT OF FORCE IN THE ARGUMENT ADVANCED BY THE LD AR THAT THE 10 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 BENEFIT OF DECISION OF THE APEX COURT SUPRA WAS NOT AVAILABLE DURING THE PENDENCY OF PROCEEDINGS BEFORE THE LD AO AND LD CITA. THE FACT S RELATING TO THE SAME ARE ALREADY ON RECORD AND DOES NOT REQUIRE ANY INVESTIGATION. AC CORDINGLY WE ADMIT THE ADDITIONAL GROUND RAISED BY THE ASSESSEE WITH REGARD TO THE CLAIM OF DEPRECIATION ON GOODWILL IN THE LIGHT OF THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF N TPC LTD VS CIT REPORTED IN 229 ITR 383 (SC). RESPECTFULLY FOLLOWING THE RATIO LAID DOWN IN THE A PEX COURTS DECISION IN 348 ITR 302 SUPRA, WE ALLOW THE CLAIM OF THE ASSESS EE AND THE ADDITIONAL GROUND RAISED BY THE ASSESSEE FOR BOTH THE YEARS IN THAT REGARD. 4. LEVY OF INTEREST U/S 234 C THE GROUND NO. 3 RAISED BY THE ASSESSEE ON THE CHAR GEABILITY OF INTEREST U/S 234 C OF THE ACT. WE FIND THAT THE PROVISIONS OF SECTION 234C OF THE ACT ARE VERY CLEAR WITHOUT ANY AMBIGUITY THAT THE SAME IS CHARGEABLE ONLY ON THE RETURNED IN COME. HENCE, THE GROUND NO. 3 RAISED BY THE ASSESSEE IS ALLOWED. 5. ADJUSTMENT TO ARMS LENGTH PRICE ITA NO. 37/K OL/2012 ASST YEAR 2007-08 THE ASSESSEE IS A CLOSELY HELD COMPANY ENGAGED IN T HE BUSINESS OF MANUFACTURING AND DISTRIBUTION OF ELECTRIC METERS AND RELATED COMPONE NTS. IN THE COURSE OF ITS BUSINESS OPERATIONS, THE ASSESSEE HAS ENTERED INTO CERTAIN I NTERNATIONAL TRANSACTIONS. FOR THE PURPOSE OF BENCHMARKING THE PRICES OF THE INTERNATIONAL TRA NSACTIONS, THE ASSESSEE IN ITS TRANSFER PRICING REPORT, SEGREGATED THE ABOVE TRANSACTIONS I NTO TWO BROAD SEGMENTS- 'MANUFACTURING' AND 'TRADING'. THE INTERNATIONAL TRANSACTIONS ENTER ED INTO BY THE ASSESSEE UNDER EACH OF THE ABOVE DEPICTED SEGMENTS, HAVE BEEN SUMMARIZED BELOW : INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES SEGMENT OF THE ASSESSEE AMOUNT (RS.) IMPORT OF RAW MATERIALS & COMPONENTS MANUFACTURING SEGMENT DOMESTIC SALES 2,31,08,062 PAYMENT OF ROYALTY 1,99,84,917 SOFTWARE REVISION CHARGES 5,61,600 TECHNICAL SUPPORT CHARGES 6,54,363 EXPORT OF FINISHED GOODS MANUFACTURING SEGMENT EXPORT 7,22,26,989 PURCHASE OF FINISHED GOODS TRADING OF FINISHED GOODS 3,93,62,040 PAYMENT OF MANAGEMENT FEES OTHERS 1,81,96,263 REIMBURSEMENT OF EXPENSES 12,93,345 PAYMENT OF BANK GUARANTEE FEES 5,94,482 11 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 THE LD AO BASED ON THE ORDER PASSED BY THE LD TPO U /S 92 CA(3) OF THE ACT HAD MADE ADDITIONS/DISALLOWANCES AGAINST THE INTERNATIONAL T RANSACTIONS UNDERTAKEN BY THE ASSESSEE AS ENCOMPASSED UNDER THE 'MANUFACTURING SEGMENT - DOME STIC' AND 'TRADING SEGMENT' BY IMPUTING A DOWNWARD ADJUSTMENT OF RS. 43,27,604/- A ND RS. 51,29,012/- RESPECTIVELY. ALL OTHER INTERNATIONAL TRANSACTIONS OF THE ASSESSEE HA VE BEEN DETERMINED TO BE AT ARM'S LENGTH. 5.1 TRADING SEGMENT THE TRANSACTIONS ENCOMPASSED UNDER THE TRADING SEGM ENT HAVE BEEN SUMMARIZED BELOW:- A) PURCHASE OF FINISHED GOODS - RS. 3,93,62,040/- B) PAYMENT OF CONSULTANCY CHARGES FOR EMPS - RS. 9,25,716/- THE ASSESSEE HAD JUSTIFIED THE ARMS LENGTH NATURE OF ITS INTERNATIONAL TRANSACTIONS UNDER THE TRADING SEGMENT BY CONSIDERING ITSELF AS THE TESTED PARTY, WHEREIN IT BENCHMARKED THE PROFITABILITY OF ITS TRADING SEGMENT USING RESALE P RICE METHOD (RPM) AGAINST THIRD PARTY COMPANIES ENGAGED IN COMPARABLE ACTIVITIES. ACCORD INGLY, GP / SALES WAS CONSIDERED TO BE THE APPROPRIATE PROFIT LEVEL INDICATOR (PLI). ACCO RDINGLY, 11 COMPARABLE COMPANIES WERE IDENTIFIED BY THE ASSESSEE. THE ARITHMETIC MEAN OF THE PLI FOR ALL THE 11 COMPARABLE COMPANIES CONSIDERING MULTIPLE YEAR DATA (AS THE SINGLE YEAR DATA WERE NOT AVAILABLE AT THE TIME OF TRANSFER PRICING DOCUMENTATION) CAME TO 14.81% . THE MARGIN EARNED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS ENTERE D INTO UNDER THIS SEGMENT IS 18.70%. ACCORDINGLY , THE VALUE OF THE INTERNATIONAL TRANSA CTIONS ENCOMPASSED UNDER THE TRADING SEGMENT WAS DETERMINED TO BE AT ARMS LENGTH BY THE ASSESSEE. THE LD TPO ACCEPTED THE RESALE PRICE METHOD ADOPTED BY THE ASSESSEE AS THE MOST APPROPRIATE METHOD (MAM) AND GP/ SALES AS THE MOST APPROPRIATE PLI. HOWEVER, WI TH RESPECT TO SELECTION OF COMPARABLE COMPANIES, THE LD TPO REJECTED 4 OUT OF 11 COMPARAB LE COMPANIES ON THE BASIS OF INCOMPARABILITY OF PRODUCTS. THE LD TPO THEN CON SIDERED THE SINGLE YEAR MARGIN I.E FY 2006-07 FOR 3 COMPARABLE COMPANIES OUT OF 7 COMPARA BLE COMPANIES SELECTED BY THE ASSESSEE AS THE SINGLE YEAR MARGIN WERE NOT AVAILAB LE FOR THE OTHER 4 COMPANIES. THE LD TPO ACCEPTED THE FOLLOWING 3 COMPARABLES OF THE AS SESSEE :- NAME OF THE COMPANY GP / SALES FOR FY 2006-07 GEMINI TRAZE R FID PVT LTD 23.49% MEDIA VIDEO LTD 33.90% TAK MACHINERY & LEASING LTD 25.60% 12 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 THE LD TPO REJECTED THE FOLLOWING 4 COMPARABLES OF THE ASSESSEE :- NAME OF THE COMPANY GP / SALES FOR FY 2006-07 CHLORIDE INTERNATIONAL LTD 11.97% PRIYA LTD 14.61% REDINGTON (INDIA) LTD 0.52% VIVEK LTD NA 5.1.1. THE LD AR SUBMITTED BEFORE US THAT THOUGH TH E LD TPO HAD REJECTED COMPARABLES ON THE BASIS OF PRODUCT NON-COMPARABILITY OF THE PRODU CTS, THE LD TPOS REAL INTENTION WAS TO REJECT LOW PROFIT MAKING COMPANIES AND RETAIN HIGH PROFIT MAKING COMPANIES IN THE FINAL SET OF COMPARABLES CHOSEN BY THE LD TPO. ACCORDINGLY, THE LD TPO COMPUTED THE ARITHMETIC MEAN RATE OF GP/SALES FOR 3 COMPARABLE COMPANIES WH ICH CAME TO 27.66% AND CONCLUDED THAT THE INTERNATIONAL TRANSACTIONS UNDER THE TRADI NG SEGMENT OF THE ASSESSEE WERE NOT AT ARMS LENGTH AND HENCE A DOWNWARD ADJUSTMENT OF RS. 51,29,012/- WAS WARRANTED ON THE PRICES OF THE INTERNATIONAL TRANSACTIONS. 5.1.2. THE LD AR SUBMITTED THE SINGLE YEAR MARGINS OF REMAINING 4 COMPARABLE COMPANIES, WHICH COULD NOT BE PRODUCED BEFORE THE LD TPO AS TH E SAME WERE NOT AVAILABLE AT THE TIME OF TRANSFER PRICING ASSESSMENT, AS BELOW:- NAME OF THE COMPANY GP / SALES FOR FY 2006-07 AMZEL AUTOMOTIVE LTD NA ALERT FIRE PROTECTION SYSTEMS LTD NA REMI SALES & ENGG. LTD NA DIGITECHTRONICS LTD NA 5.1.3. THE LD AR ARGUED THAT, AS PER PARAGRAPHS 2.2 3 AND 2.24 OF CHAPTER II : TRANSFER PRICING METHODS OF THE OECD TRANSFER PRICING GUIDE LINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS 2010 , WITH REGARD TO THE EXTENT OF PRODUCT COMPARABILITY WHEN RPM IS CONSIDERED AS MAM, BROADER DIFFERENCES ARE MORE LIKELY TO BE REFLECTED IN DIFFERENCES IN FUNCTIONS PERFORMED BETWEEN THE PART IES TO THE CONTROLLED AND UNCONTROLLED TRANSACTIONS. HENCE, LESS PRODUCT COMPARABILITY IS TO BE COMPARED WHILE USING THE RPM WHILE MORE EMPHASIS SHOULD BE LAID ON THE FUNCTIONA L COMPARABILITY OF THE COMPARABLES. 13 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 5.1.4. THE LD AR ARGUED THAT IN ANY CASE, THE MARG INS OF THE COMPARABLE COMPANIES SELECTED BY THE LD TPO SHOULD BE COMPUTED FROM THE AUDITED F INANCIALS WHICH HAS MORE AUTHENTICITY AND IF IT IS CONSIDERED, THEN THE INTERNATIONAL TRA NSACTIONS OF THE ASSESSEE WOULD BE AT ARMS LENGTH ON ACCOUNT OF 5% TOLERANCE LIMIT PERMITTED U /S 92C(2) OF THE ACT. HE SUBMITTED THE FOLLOWING TABLE IN SUPPORT OF HIS CONTENTIONS:- NAME OF THE COMPANY GP / SALES FOR FY 2006-07 GEMINI TRAZE RFID PVT LTD 23.47% MEDIA VIDEO LTD 11.29% TAK MACHINERY & LEASING LTD 27.98% AVERAGE 20.91% 5.1.5. THE LD AR STATED THAT THE LD TPO AND LD DRP CONTRADICTED THEMSELVES BY ACCEPTING GEMINI TRAZE RFID P LTD AS A COMPARABLE COMPANY WHI CH TRADES IN COMPUTER NETWORK PRODUCTS IN SPITE OF THE LD TPO EXPLICITLY REJECTI NG COMPANIES DEALING IN COMPUTER PERIPHERALS NAMELY, REDINGTON INDIA LTD AND PRIYA LTD. SIMILARLY HE ARGUED THAT THE LOWER AUTHORITIES CONTRADICTED THEMSELVES BY ACCEPTING M EDIA VIDEO LTD AS COMPARABLE COMPANY WHICH TRADES IN VCD/DVD INSPITE OF THE LD TPO EXP LICITLY REJECTING A COMPANY DEALING IN TELEVISION AND AUDIO PRODUCTS BEING VIVEK LTD. A CCORDINGLY HE REQUESTED FOR EXCLUSION OF BOTH THE COMPANIES FROM THE LIST OF COMPARABLES. HE PLACED A TABLE EXCLUDING GEMINI TRAZE RFID P LTD WHEREIN THE AVERAGE MARGIN WAS ARR IVED AT 15.97% AS AGAINST THE GP/SALES EARNED BY THE ASSESEE AT 18.70%. SIMILARL Y HE PLACED A TABLE EXCLUDING MEDIA VIDEO LTD WHEREIN THE AVERAGE MARGIN WAS ARRIVED AT 14.91% AS AGAINST THE GP/SALES EARNED BY THE ASSESEE AT 18.70%. HE ALSO SAID TH AT THE ARMS LENGTH MARGIN ON INCLUSION OF REDINGTON INDIA LTD AND PRIYA LTD AS WELL INTO THE FINAL LIST OF COMPARABLES WOULD WORK OUT TO 14.58% AS AGAINST 18.70% EARNED BY THE ASSESSEE. ACCORDINGLY HE ARGUED THAT IN ALL THE CASES, THE TRANSACTIONS AS ENCOMPASSED UNDER THE TR ADING SEGMENT WOULD BE AT ARMS LENGTH. HE PRAYED FOR SETTING ASIDE OF THIS ASPECT FOR VERIFICATION BY THE LD TPO TO PROCEED WITH THE DETERMINATION OF ARMS LENGTH PRICE BASED ON THE MARGINS COMPUTED FROM THE AUDITED FINANCIALS WITH EITHER OF THE FOLLOWING OPT IONS:- A) TO ACCEPT THE COMPARABLES AS SELECTED BY THE ASSESS EE AT THE TIME OF TRANSFER PRICING DOCUMENTATION WITH THE MARGINS COMPUTED FROM AUDITE D FINANCIALS , OR 14 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 B) TO ACCEPT THE COMPARABLES AS SELECTED BY THE LD TPO WHOSE SINGLE YEAR MARGINS WERE AVAILABLE AT THE TIME OF TRANSFER PRICING ASSESSMEN T WITH THE MARGINS COMPUTED FROM AUDITED FINANCIALS , OR C) TO ACCEPT THE COMPARABLES AS SELECTED BY THE LD TPO INCLUDING THE COMPARABLES WHOSE MARGINS WERE NOT AVAILABLE AT THE TIME OF TRA NSFER PRICING ASSESSMENT WITH THE MARGINS COMPUTED FROM AUDITED FINANCIALS. 5.1.6. IN RESPONSE TO THIS, THE LD DR FAIRLY AGREED FOR SETTING ASIDE OF THIS ISSUE TO THE FILE OF THE LD TPO FOR DETERMINE THE MARGINS BASED ON AUDIT ED FINANCIALS AND ALSO GIVE THE BENEFIT OF 5% TOLERANCE LIMIT. 5.1.7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE PAPER BOOK COMPRISING OF RELEVANT EX TRACT OF OECD TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX AD MINISTRATIONS ISSUED IN JULY 2010 (PAGES 67 TO 73) ; RELEVANT EXTRACT OF OECD / G20 BASE EROSION AND PROFIT SHIFTING (BEPS) REPORT ON ACTIONS 8-10 (2015) ALIGNING TRANSFER P RICING OUTCOMES WITH VALUE CREATION (PAGES 74 TO 79) AMONG OTHERS. THE FACTS STATED HE REINABOVE REMAIN UNDISPUTED AND HENCE THE SAME ARE NOT REITERATED FOR THE SAKE OF BREVITY . THERE IS NO DISPUTE WITH REGARD TO THE MOST APPROPRIATE METHOD (IN THE INSTANT CASE RESALE PRICE METHOD) CHOSEN BY THE ASSESSEE FOR ITS TRADING SEGMENT. THERE IS NO DISPUTE WITH REGARD TO THE IDENTIFICATION OF PROFIT LEVEL INDICATOR. THE DISPUTE IS ONLY ON ACCOUNT OF SELEC TION OF RELATED COMPARABLES AND ADOPTION OF SINGLE YEAR MARGINS BASED ON AUDITED FINANCIALS. IN VIEW OF THE DETAILED SUBMISSIONS MADE HEREINABOVE , WE DEEM IT FIT AND APPROPRIATE, TO SET ASIDE THIS I SSUE TO THE FILE OF THE LD TPO / LD AO TO ACCEPT THE COMPARABLE COMPANI ES WHO ARE ENGAGED IN THE RELATED FIELD AS THAT OF ASSESSEE AND ADOPT THE SIN GLE YEAR MARGINS BASED ON AUDITED FINANCIALS OF THOSE COMPARABLE COMPANIES FOR THE PU RPOSE OF DETERMINATION OF ARMS LENGTH PRICE. THE ADJUSTMENT TOWARDS THE TOLERANCE LIMIT OF 5% IS ALSO ENTITLED FOR THE ASSESSEE WHILE DETERMINING THE ARMS LENGTH PRICE. 5.2. MANUFACTURING SEGMENT THE ASSESSEE HAD ENTERED INTO THE FOLLOWING INTERNA TIONAL TRANSACTIONS WITH REGARD TO ITS MANUFACTURING SEGMENT (DOMESTIC) :- 15 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES SEGMENT OF THE ASSESSEE AMOUNT (RS.) IMPORT OF RAW MATERIALS & COMPONENTS MANUFACTURING SEGMENT DOMESTIC SALES 2,31,08,062 ROYALTY 1,99,84,917 SOFTWARE REVISION CHARGES 5,61,600 TECHNICAL SUPPORT CHARGES 6,54,363 THE ASSESSEE HAD MANUFACTURED SINGLE AND POLY PHASE ELECTRO MECHANICAL ENERGY METERS DURING THE YEAR UNDER CONSIDERATION IMPORTING RAW M ATERIALS AND COMPONENTS FROM ITS GROUP COMPANIES. IT HAS CLAIMED TO HAVE PAID ROYALTY FOR THE TECHNOLOGY RELATING TO THE MANUFACTURING ACTIVITY. THE ASSESSEE USES THE BRAN D NAME LANDIS + GYR FOR MARKETING THE METERS IN INDIA, THE CUSTOMERS BEING USUALLY THE ST ATE ELECTRICITY BOARDS IN THE GOVERNMENT SECTORS. FOR THE MANUFACTURING SEGMENT WITH TWO FURTHER SUB-SEGMENTS OF DOMESTIC SALES AND EXPORTS, THE LD TPO FOUND ITS BIFURCATION UNTEN ABLE BECAUSE DESPITE CALLING TWO SUB- SEGMENTS AS TWO SEPARATE ONES, THE ASSESSEE HAD MER ELY DIVIDED VARIOUS COSTS ON THE BASIS OF TURNOVERS, EXCEPT THE EXPORT INCENTIVE AND EXCISE D UTY WHICH HAD BEEN DONE ON THE ACTUAL BASIS. THE COST OF RAW MATERIALS AND COST OF MANPO WER HAD MERELY BEEN PROPORTIONATELY ALLOCATED. THE LD TPO WAS OF THE VIEW THAT THE COM BINED PROFIT LEVEL INDICATOR (PLI) WOULD REFLECT A MORE APPROPRIATE INDICATOR. THE A SSESSEE HAD JUSTIFIED THE ARMS LENGTH NATURE OF THE AFORESAID INTERNATIONAL TRANSACTIONS SELECTING ITSELF AS THE TESTED PARTY WHEREIN IT BENCHMARKED THE GROSS PROFITABILITY OF ITS MANUFACT URING SEGMENT USING COST PLUS METHOD (CPM). THE LD TPO REJECTED SOME OF THE COMPARABLES SELECTED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY EITHER ON THE CONTENTION THA T THESE COMPARABLES DO NOT HAVE IMPORT OF RAW MATERIALS AS THEIR INTERNATIONAL TRANSACTIONS O R BECAUSE THEY HAD HIGH EXPORT TO TURNOVER RATIO. FOR THE REMAINING COMPARABLES, THE LD TPO R EJECTED APPLICATION OF CPM AS THE MOST APPROPRIATE METHOD (MAM) AND ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) FOR BENCHMARKING INTERNATIONAL TRANSACTIONS UNDER THE M ANUFACTURING (DOMESTIC) SEGMENT AND CONSIDERED NET MARGINS [OPERATING PROFIT / SALES (O P / SALES) ] OF THE ASSESSEE AS WELL AS THE COMPARABLES INSTEAD OF THE GROSS MARGINS [GROSS PRO FIT / DIRECT AND INDIRECT COST OF PRODUCTION (GP / DICOP) ]. AS A RESULT, THE LD TP O ARRIVED AT RESULTS WHICH SHOWED THAT THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE AS SESSEE UNDER THE MANUFACTURING (DOMESTIC) SEGMENT WERE NOT AT ARMS LENGTH. ACCOR DINGLY, THE LD TPO MADE A DOWNWARD ADJUSTMENT OF RS. 43,27,604/- TO THE INTERNATIONAL TRANSACTIONS. THIS ACTION OF THE LD TPO 16 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 WAS APPROVED BY THE LD DISPUTE RESOLUTION PANEL (DR P). AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 5.2.1. THE LD AR ARGUED THAT IN TRANSFER PRICING ANALYSIS A TRANSACTION BY TRANSACTION APPROACH SHOULD BE UNDERTAKEN FOR BENCH MARKING ANA LYSIS TO DETERMINE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS BEING ENTER ED INTO. THE PRINCIPLE OF UNDERTAKING TRANSACTION BY TRANSACTION ANALYSIS FOR DETERMINATI ON OF ARM'S LENGTH PRICE HAS BEEN EMBEDDED UNDER THE INDIAN TRANSFER PRICING REGULATI ONS, OECD TRANSFER PRICING GUIDELINES, 2010 UPDATED VIA BASE EROSION AND PROFI T SHIFTING ACTION PLAN 8-10, 2015 (HEREIN REFERRED TO AS 'OECD TP GUIDELINES') AND UN TP MANUAL, 2013. 5.2.2. HE ARGUED THAT A PLAIN READING ABOUT THE AP PLICATION OF THE METHODS FROM THE INCOME- TAX RULES, 1962 WOULD AMPLY CLEAR ASSESSEE'S CONTEN TION: - 10B (1)(A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH,- (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFER RED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANS ACTIONS, IS IDENTIFIED; ... 10B (1)(B) RESALE PRICE METHOD, BY WHICH,- (I) THE PRICE AT WHICH PROPERTY PURCHASED OR SERVIC ES OBTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD OR ARE PROVIDED TO AN UNRELATE D ENTERPRISE, IS IDENTIFIED; ... 10B(L )(C) COST PLUS METHOD, BY WHICH,- (I) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INC URRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SERVICES PROVIDED TO AN ASSOCIATED E NTERPRISE, ARE DETERMINED; ... 10B(1)(D) PROFIT SPLIT METHOD, BY WHICH- (I) THE COMBINED NET PROFIT OF THE ASSOCIATED ENTER PRISES ARISING FROM THE INTERNATIONAL TRANSACTION IN WHICH THEY ARE ENGAGED, IS DETERMINED: .... 10B(1)(E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH ,- (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATI ON TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE; .... THEREFORE, IT HAS BEEN WARRANTED IN EACH OF THE MET HODS THAT THE PRICE/PROFIT EARNED FROM 'THE (RELEVANT) INTERNATIONAL TRANSACTION' SHOULD BE TES TED. 5.2.3. THE OECD TP GUIDELINES ALSO STATES IN PARA 3 .9 OF THE DOCUMENT AS UNDER: 17 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 3.9 IDEALLY, IN ORDER TO ARRIVE AT THE MOST PRECIS E APPROXIMATION OF ARM'S LENGTH CONDITIONS, THE ARM'S LENGTH PRINCIPLE SHOULD BE APPLIED ON A T RANSACTION-BY-TRANSACTION BASIS. HOWEVER, THERE ARE OFTEN SITUATIONS WHERE SEPARATE TRANSACTIONS ARE SO CLOSELY LINKED OR CONTINUOUS THAT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATE BASIS.... 5.2.4. THE UNITED NATIONS PRACTICAL MANUAL ON TRANS FER PRICING FOR DEVELOPING COUNTRIES, 2013 ALSO STATES IN PARA 5.3.1.6 OF THE DOCUMENT AS UNDER: 5.3.1.6. THE TRANSFER PRICING ANALYSIS SHOULD IDEAL LY BE MADE ON A TRANSACTION-BY- TRANSACTION BASIS. HOWEVER, THERE ARE CASES WHERE S EPARATE TRANSACTIONS ARE SO CLOSELY LINKED THAT SUCH AN APPROACH WOULD NOT LEAD TO A RE LIABLE RESULT. WHERE TRANSACTIONS ARE SO CLOSELY INTERRELATED OR CONTINUOUS THAT APPLICATION OF THE ARM'S LENGTH PRINCIPLE ON A TRANSACTION-BY-TRANSACTION BASIS WOULD BECOME UNREL IABLE OR CUMBERSOME, TRANSACTIONS ARE OFTEN AGGREGATED FOR THE PURPOSES OF THE ANALYSIS . .. 5.2.5. THE LD AR ARGUED THAT IT COULD BE OBSERVED FROM THE ABOVE READINGS OF INTERNATIONAL GUIDELINES THAT BOTH OECD TP GUIDELINES AND UN TP M ANUAL HAVE GIVEN PRIMARY PREFERENCE TO UNDERTAKE A TRANSACTION BY TRANSACTIO N ANALYSIS. IT IS ONLY UNDER CERTAIN EXCEPTIONAL CIRCUMSTANCES, WHERE SEPARATE TRANSACTI ON LEVEL ANALYSIS COULD NOT BE UNDERTAKEN OR SEPARATE TRANSACTIONS ARE SO CLOSELY INTER-LINKED, THAT AGGREGATION OF TRANSACTION APPROACH HAS BEEN WARRANTED. HOWEVER, IN THE INSTANT CASE, EACH OF THE TRANSACTIONS UNDERTAKEN BY THE ASSESSEE ON WHICH TP ADJUSTMENT HAS BEEN IMPUTED WERE DISTINCT, INDEPENDENT AND WARRANT SEPARATE ANALYSIS TO DETERMINE THE ARM'S LENGTH PRICE. LIKE FOR INSTANCE, PAYMENT FOR ROYALTY IS IN RELATION TO TECHNOLOGY RECEIVED FROM AE TO ENABLE TO MANUFACTURE THE PRODUCT FOR THE PURPOSE OF BUSINESS , WHEREAS, WITH RESPECT TO PURCHASE OF COMPONENTS, THE ASSESSEE NEEDS TO ENSURE THAT THOSE ARE APPROPRIATELY USED IN ITS MANUFACTURING PROCESS TO PRODUCE GOODS WITH DESIRAB LE PERFORMANCE QUALITY AND MEET END CUSTOMERS REQUIREMENT. THUS, THE TWO PRIMARY IMPUGN ED TRANSACTIONS I.E. PAYMENT OF ROYALTY AND PURCHASE OF RAW MATERIALS ARE SEPARATE AND DISTINCT FROM EACH OTHER AND DO REQUIRE A SEPARATE TRANSACTION LEVEL ANALYSIS TO DE TERMINE ARM'S LENGTH PRICE. IN SUPPORT OF HIS CONTENTION, HE PLACED RELIANCE ON THE CO-ORDINA TE BENCH DECISION OF DELHI TRIBUNAL IN THE CASE OF BENETTON INDIA (P) LTD VS ITO REPORTED IN (2012) 134 ITD 229 (DELHI TRIB.) WHEREIN IT WAS HELD THAT :- 7 ... THE FIRST AND FOREMOST QUESTION IN THIS CASE IS TO DETERMINE WHETHER THE ACTION OF TPO IN UNDERTAKING ENTITY LEVEL BENCH MARKING BY TN M METHOD COMBINING ALL THE INTERNATIONAL TRANSACTIONS IS JUSTIFIABLE OR THE TP ANALYSIS PROVIDED BY ASSESSEE, BASED ON 'TRANSACTION TO TRANSACTION' BASIS IN RESPECT OF DIFFERENT SEGMENTS SHOULD BE ADOPTED. 18 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 7.1 FROM THE FACTS MENTIONED ABOVE, IT IS CLEAR THA T ASSESSEE'S MANUFACTURING EXPORT ACTIVITIES: BUYING/SOURCING AND COMMISSION EARNING ACTIVITIES ARE INDEPENDENT OF EACH OTHER. EACH ACTIVITY HAS DIFFERENT FACTORS IN RESP ECT OF SOURCE, IDENTIFICATION OF VENDORS, MERCHANDISE, DESIGNS QUALITY CONTROL, HAND LING ETC. THE FAR ANALYSIS IN EACH OF THE ACTIVITY WILL HAVE DISTINCT AND SEPARATE CON SIDERATIONS. 7.2 WE FIND MERIT IN THE ARGUMENT OF THE LEARNED CO UNSEL THAT THE TPO SHOULD HAVE ACCEPTED THE METHOD OF ASSESSEE'S BENCHMARKING ANAL YSIS ON THE BASIS OF TRANSACTION TO TRANSACTION BASIS IN RESPECT OF DIFFERENT SEGMEN TS OF ASSESSEE'S INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES. IN OUR VI EW, ASSESSEE'S FUNCTIONS, RISK AND ASSETS FAR CONSIDERATIONS, WHICH ARE GIVEN IN THE A BOVE TABLE, DESERVES TO BE MERITED. TPO DID NOT APPRECIATE THE ASSESSEE'S TRANSACTIONS CORRECTLY AND APPLIED ENTITY LEVEL BENCH MARKING ON TNMM METHOD BY COMBINING ASSESSEE' S ALL INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE WITHOUT JU STIFICATION. 7.3 OUR VIEW IS SUPPORTED BY ITAT JUDGMENTS - MUMBA I BENCH IN THE CASES OF UCB INDIA (P) LTD. VS. ACIT (2009) 30 SOT 95 (MUM.); A CIT V. STAR INDIA LTD. (ITA NO.S 3585 & 3846 (M) OF 2006); AND KOLKATA BENCH IN THE CASE OF DEVELOPMENT CONSULTANTS (P) LTD. (2008) 23 SOT 455 (KOL.). ALL THESE CASES CLEARLY LAY DOWN THAT ALP WOULD BE DETERMINED BASED ON THE NATURE OF SERV ICE PROVIDED BY ASSESSEE FOR EACH CLASS OF TRANSACTION BASED ON VARIOUS FACTORS AND ANALYSIS. IN THE CASE OF STAR INDIA LTD. (SUPRA), ALSO THE TPO TREATED ALL THE AC TIVITIES OF THE ASSESSEE AS ONE AND DETERMINED THE ALP AT ENTITY LEVEL WITHOUT APPRECIA TING THAT ONE CANNOT COMPARE THE FAR OF A PRINCIPAL AND AGENT ON SAME FOOTING. 7.4. IN OUR VIEW, IN THE ASSESSEE'S CASE THERE ARE DIFFERENT SEGMENTAL ACTIVITIES, WHICH ARE INDEPENDENT OF EACH OTHER. THEY ARE REQUIRED TO BE ANALYZED ON TRANSACTION TO TRANSACTION BASIS AND NOT BY COMBINING ALL ACTIVITI ES. CONSEQUENTLY, WE UPHOLD THE ASSESSEE'S METHOD OF ALP. CONSIDERATION OF TRANSACTION BY TRANSACTION APPROAC H FOR DETERMINATION OF THE ARM'S LENGTH PRICE HAS ALSO BEEN UPHELD IN THE FOLLOWING MENTION ED JUDICIAL PRECEDENTS: ANKIT DIAMONDS ( 2011) 43 SOT 523( MUMBAI TRIB.) AVINEON INDIA (P) LTD, TS-308-ITAT-2013(HYD)-TP DCIT -VS- M/S STARLITE (133 TTJ 425) (MUMBAI TRIB .) SYMANTEC SOFTWARE SOLUTIONS (P) LTD., (2011) 46 S OT 48 (MUMBAI TRIB) TECNIMOUNT ICB (P) LTD., (2011) 11 TAXMANN.COM 49 (MUMBAI TRIB.) ACCORDINGLY, HE ARGUED THAT THE TRANSACTION BY TRA NSACTION APPROACH ADOPTED BY THE ASSESSEE SHOULD BE CONSIDERED FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. 5.2.6. IN RESPONSE TO THIS, THE LD DR FILED A WR ITTEN SUBMISSION AND ALSO MADE ARGUMENTS IN SUPPORT OF HIS WRITTEN SUBMISSIONS. THE LD DR VEH EMENTLY RELIED ON THE DECISION OF THE CO- ORDINATE BENCH OF MUMBAI TRIBUNAL IN THE CASE OF ON WARD TECHNOLOGIES LTD VS DCIT REPORTED IN (2014) 44 TAXMANN.COM 295 (MUMBAI TRIB. ) WHEREIN IT WAS HELD THAT AE 19 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 PROFITABILITY CANNOT BE CONSIDERED FOR BENCHMARKING THE PROFITABILITY OF INTERNATIONAL TRANSACTIONS. 5.2.7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE PAPER BOOK FILED BY THE ASSESSEE AND THE WRITTEN SUBMISSIONS OF THE LD DR. WE FIND THAT THE ASSESSEE HAD IMPORTED RAW MATERIAL S AND COMPONENTS FROM THE FOLLOWING ASSOCIATED ENTERPRISES (AES) :- NAME OF AES RAW MATERIALS IMPORTED AMOUNT (IN RS.) LANDYS+GYR (BASED IN GREECE) LANDYS + GYR (BASED IN USA)\ AMPY EMAIL METERING (BASED IN AUSTRALIA) DALIAN EMAIL METERING (BASED IN CHINA) I)GRAPHITE BEARING II) HOLLOW RIVET FO III)MM BASE ASSEMBL IV) MM BASE ASSEMBL (VOLTAGE ASSY) V) ROTOR ASSY VI) ROTOR SPINDLE VII) TAB FOR BASE AU VIII) TERMINAL COVER IX) VOLTAGE ELEMENT X) SUSPENSION MAGNET XI) SENSOR ASSEMBLIES XII) THEREAD CUTTING SCREWS 8,489,007 13,885,122 30,213 703,720 WE FIND THAT THE ASSESSEE HAD CONTENDED THAT UNDER THE MANUFACTURING (DOMESTIC) SEGMENT, THE ASSESSEE BEING ENGAGED IN IMPORTING RAW MATERIA LS AND COMPONENTS (I.E. SEMI FINISHED GOODS FROM ITS AES FOR MANUFACTURING ELECTRIC METER S WHICH ARE SUBSEQUENTLY SOLD IN THE DOMESTIC MARKET, THE GOODS SO PURCHASED BY THE ASSE SSEE BEING SEMI-FINISHED IN NATURE, FINDING CLOSE COMPARABLE COMPANIES ENGAGED IN IMPOR T OF SUCH PRODUCTS BECOMES DIFFICULT. HENCE, IN SUCH A SITUATION IT WOULD BE IDEAL TO BE NCHMARK THE TRANSACTION OF THE OVERSEAS ENTITIES (I.E THE AES) MANUFACTURING AND SALE OF T HOSE SEMI-FINISHED GOODS TO THE ASSESSEE. THE ASSESSEE HAD FURTHER STATED THAT SINCE THE BULK OF THE PURCHASES OF RAW MATERIALS AND COMPONENTS WERE MADE BY THE ASSESSEE FOR TWO OF ITS AES BASED IN USA AND GREECE AND THEREFORE, IT HAD CONDUCTED A BENCHMARKING ANALYSIS BY USING THE WIDELY RECOGNIZED GLOBAL SYMPOSIUM DATABASE TO IDENTIFY POTENTIALLY UNCONTRO LLED COMPARABLES LOCATED IN USA AND GREECE WHICH ARE ENGAGED IN THE SALE OF PARTS AND C OMPONENTS/ SEMI FINISHED GOODS SIMILAR TO THAT SOLD BY THE ASSESSEES AE BASED IN USA AND GREECE. THE LD AR ALSO SUBMITTED A BRIEF NOTE ON EACH OF THE TRANSACTIONS AND BENCHMAR KING METHODOLOGY ADOPTED BY THE ASSESSEE TO DETERMINE THE ARM'S LENGTH PRICE. 20 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 5.2.8. PURCHASE OF RAW MATERIALS & COMPONENTS - MA NUFACTURING DOMESTIC SEGMENT WITH RESPECT TO THE ABOVE, AN ADJUSTMENT COMPUTED A S A PERCENTAGE OF TRANSACTION VALUE TO THE TOTAL COSTS OF THE MANUFACTURING SEGME NT WAS UNDERTAKEN BY THE LD. TPO. WE FIND THAT THE ASSESSEE IS TRYING TO JUSTIFY ITS ARM S LENGTH PRICE BY FOLLOWING TRANSACTION-BY- TRANSACTION APPROACH, ENCOMPASSED IN ITS 'MANUFACTU RING - DOMESTIC' SEGMENT, SELECTING ITSELF AS THE TESTED PARTY WHEREIN IT BENCH MARKED THE GROSS PROFITABILITY OF ITS MANUFACTURING SEGMENT USING COST PLUS METHOD (CPM) AGAINST THIRD PARTY COMPANIES ENGAGED IN COMPARABLE ACTIVITIES. ACCORDINGLY, GROSS PROFIT/DI RECT & INDIRECT COST OF PRODUCTION (GP/DICOP) WAS CONSIDERED TO BE THE APPROPRIATE PRO FIT LEVEL INDICATOR (PLI). A SEARCH FOR UNCONTROLLED COMPARABLE COMPANIES WERE UNDERTAKEN A ND PLI WAS DETERMINED FOR COMPARISON WITH ASSESSEE'S PLI. 5.2.9. WE FIND THAT THE LD TPO HAD REJECTED THE CO MPARABLES CHOSEN BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY FOR THE FOLLOWING REASONS :- 1. ACCURATE TRANSFORMERS LTD FUNCTIONALLY INCO MPARABLE PAGE 89 OF PART B 2. RTS POWER CORPORATION LTD AS THEY HAVE SIGNIF ICANT OF PAPER BOOK 3. GUPTA MACHINE TOOLS LTD EXPORT TRANSACTI ONS 4. CONTROLS AND SWITCHGEARS FUNCTIONALLY INCO MPARABLE PAGE 89 OF PART B CONTRACTORS LTD AS THEY HAVE NO IMPO RTS OF PAPER BOOK 5. PITTI LAMINATORS LTD 6. REMAINING 7 COMPANIES TPO ADOPTED TNMM BY PAGE 89 OF PART B OF REJECTING CPM AND PAPER BOOK CONSIDERED OP / SALES INSTEAD OF GP / DICOP 5.2.10. AS A RESULT, THE LD. TPO ARRIVED AT RESUL TS WHICH SHOWED THAT THE ARM'S LENGTH OP/SALES OF COMPARABLE COMPANIES IS 13.09% VIS-A-V IS 3.24% FOR THE ASSESSEE. CONSEQUENTLY, THE INTERNATIONAL TRANSACTIONS UNDERT AKEN BY THE ASSESSEE UNDER THE MANUFACTURING (DOMESTIC) SEGMENT WERE NOT AT ARM'S LENGTH. ACCORDINGLY, THE LD. TPO MADE A DOWNWARD ADJUSTMENT TO THE INTERNATIONAL TRA NSACTIONS INCLUDED UNDER THE MANUFACTURING DOMESTIC SEGMENT. (ENCLOSED IN PAGE 9 0 AND 91 OF PART B OF THE PAPER BOOK) . IT IS WELL SETTLED THAT FOR THE PURPOSE OF TRANS FER PRICING ANALYSIS AND SELECTING MOST APPROPRIATE METHOD, I.E. EITHER CPM OR TNMM, ONE NE EDS TO APPROPRIATELY EVALUATE THE FUNCTIONS PERFORMED, RISKS ASSUMED AND ASSETS UTILI ZED OF THE PARTIES INVOLVED IN THE 21 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 TRANSACTION AND IDENTIFY THE LEAST COMPLEX PARTY AS THE TESTED PARTY FOR SUCH TRANSACTION. THE CONCEPT OF LEAST COMPLEX PARTY HAS BEEN VERY WE LL EXPLAINED IN THE OECD TP GUIDELINES AS BELOW:- 2.59 A TRANSACTIONAL NET MARGIN METHOD IS UNLIKELY TO BE RELIABLE IF EACH PARTY TO A TRANSACTION MAKES VALUABLE, UNIQUE CONTRIBUTIONS, S EE PARAGRAPH 2.4. IN SUCH A CASE, A TRANSACTIONAL PROFIT SPLIT METHOD WILL GENERALLY BE THE MOST APPROPRIATE METHOD, SEE PARAGRAPH 2.109. HOWEVER, A ONE-SIDED METHOD (TRAD ITIONAL TRANSACTION METHOD OR TRANSACTIONAL NET MARGIN METHOD) MAY BE APPLICABLE IN CASES WHERE ONE OF THE PARTIES MAKES ALL THE UNIQUE CONTRIBUTIONS INVOLVED IN THE CONTROLLED TRANSACTION, WHILE THE OTHER PARTY DOES NOT MAKE ANY UNIQUE CONTRIBUTION. IN SUCH A CASE, THE TESTED PARTY SHOULD BE THE LESS COMPLEX ONE. SEE PARAGRAPHS 3.1 8-3.19 FOR A DISCUSSION OF THE NOTION OF TESTED PARTY. 5.2.11. WE FIND THAT THE CONCEPT OF OVERSEAS TESTE D PARTY AND FOREIGN COMPARABLE COMPANIES IS WELL RECOGNIZED AND ACKNOWLEDGED BY INDIAN REVEN UE AS COULD BE SEEN FROM INDIAS COMMENTARY IN UNITED NATIONS PRACTICAL MANUAL ON TR ANSFER PRICING FOR DEVELOPING COUNTRIES WHICH WERE PLACED ON RECORD BY THE LD AR, WHEREIN, THE FOLLOWING HAS BEEN STATED:- 10.4.1. TRANSFER PRICING REGULATIONS IN INDIA 10.4.1.3. THE INDIAN TRANSFER PRICING ADMINISTRATI ON PREFERS INDIAN COMPARABLES IN MOST CASES AND ALSO ACCEPTS FOREIGN COMPARABLES IN CASES WHERE THE FOREIGN ASSOCIATED ENTERPRISE IS THE LESS OR LEAST COMPLEX ENTITY AND REQUISITE I NFORMATION IS AVAILABLE ABOUT THE TESTED PARTY AND COMPARABLES. IN THE INSTANT CASE, ALL THE REQUISITE INFORMATION WAS AVAILABLE FOR UNDERTAKING OVERSEAS BENCHMARKING STUDY AND THE SAME WAS ALSO MADE AVAIL ABLE TO THE LD TPO AND LD DRPS PERUSAL. WE FIND THAT THE RELIANCE PLACED BY THE LD AR ON THE DECISION OF THE CO-ORDINATE BENCH OF DELHI TRIBUNAL IN THE CASE OF RANBAXY LABO RATORIES LTD VS ACIT REPORTED IN (2016) 68 TAXMANN.COM 322 (DELHI TRIB.) IS VERY WELL FOUNDED WHEREIN THE CONCEPT OF OVERSEAS TESTED PARTY AND FOREIGN COMPARABLE COMPAN IES FOR DETERMINATION OF ARMS LENGTH PRICE HAS BEEN ACCEPTED. IT WAS HELD AS UNDER:- 33. LD. AR HAS CITED MANY DECISIONS, WHICH ARE ON T HE PRINCIPLE OF SELECTION OF TESTED PARTY, WHICH IS LEAST COMPLEX. WE ARE OF THE VIEW T HAT THERE IS NO DISPUTE ON THIS PRINCIPLE AS IT IS WELL RECOGNIZED AND WELL ACCEPTE D IN ALL THOSE DECISIONS. THIS TOO HAS BEEN HELD BY COORDINATE BENCH IN THE CASE OF TH E ASSESSEE FOR A.Y. 2004-05. WE HAVE PERUSED THOSE DECISIONS AND APPLIED THE SAME I N REASONING AND OUR FINDINGS 35. THEREFORE, FOR THE REASONS STATED ABOVE, GROUND NO. 2.2 OF THE APPEAL IS ALLOWED WITH A DIRECTION THAT OVERSEAS ASSOCIATED ENTERPRIS ES ARE ACCEPTED AS TESTED PARTY BEING THE LEAST COMPLEX OF THE TRANSACTING ENTITY F OR THE YEAR FOR COMPARABILITY ANALYSIS OF INTERNATIONAL TRANSACTIONS OF THE ASSES SEE ASSESSEE. 22 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 5.2.12. WE FIND THAT IN THE TRANSFER PRICING ANALY SIS WITH RESPECT TO PURCHASE OF MATERIALS, THE LD TPO HAD CONTINUED TO SELECT ASSESSEE AS THE TESTED PARTY FOR IMPORTS OF RAW MATERIALS OF RS. 2.31 CRORES WHICH IS CONSUMED IN THE MANUFAC TURING SEGMENT WITH A TURNOVER OF RS. 90.45 CRORES. THE MARGIN EARNED FROM THE ENTIRE SEG MENT CANNOT BE A REPRESENTATION OF 2.55% OF THE INTERNATIONAL TRANSACTION ENCOMPASSED THEREIN. HENCE THE SELECTION OF THE ASSESSEE AS THE TESTED PARTY WOULD RESULT IN AN ABN ORMAL OUTCOME IN THE TRANSFER PRICING ADJUSTMENTS. THE SAME COULD BE OBSERVED FROM THE FACT THAT POST APPLYING TNMM, THE LD TPO PRODUCED AN OUTCOME WHEREIN THE VALUE OF TP ADJ USTMENT (AS INITIALLY ARRIVED OF RS. 8.90 CRORES) WAS DETERMINED TO BE MORE THAN THE VAL UE OF INTERNATIONAL TRANSACTIONS OF RS. 4.25 CRORES WHICH IS PRACTICALLY NOT POSSIBLE. THE REFORE, TO COVER UP THE FALLACY IN ITS APPROACH OF TRANSFER PRICING ANALYSIS, THE LD TPO T HEN PROPORTIONED THE VALUE OF ADJUSTMENT TO THE VALUE OF INTERNATIONAL TRANSACTION ENCOMPASS ED IN THE MANUFACTURING SEGMENT TO ARRIVE AT AN ADJUSTMENT VALUE OF RS. 43,27,604/-. WE FIN D THAT THIS IS MODIFIED APPLICATION OF TNMM AND NOT EITHER AS PER THE INTENTION OF THE ACT OR OECD GUIDELINES. HENCE WITH REGARD TO CORRECT APPLICATION OF CPM OR TNMM, THE A SSOCIATED ENTERPRISES OF THE ASSESSEE SHOULD BE SELECTED AS TESTED PARTY TO THE TRANSACTI ON, AS BEING THE LEAST COMPLEX ENTITY. SUBSEQUENTLY, AN ANALYSIS OF GROSS MARGIN OR NET MA RGIN BY APPLYING EITHER CPM OR TNMM RETAINED BY AES SHOULD BE UNDERTAKEN FOR BENCHMARKI NG THE TRANSACTION PRICE PERTAINING TO PURCHASE OF MATERIALS AND COMPONENTS. IN THIS REGA RD, WE FIND THAT THE ASSESSEE HAD SUBMITTED THE ECONOMIC ANALYSIS FOR THE CONSIDERATI ON OF LD DRP AND LD TPO IN THE COURSE OF PROCEEDINGS WHEREIN AES WERE SELECTED AS TESTED PARTY FOR THE ANALYSIS AND PROFITABILITY RETAINED BY THEM WERE BENCHMARKED. THE ASSESSEE PR OVIDED THE LD TPO WITH THE GROUP TRANSFER POLICY WHEREIN IT WAS STATED THAT THE SUPP LIER OF THE COMPONENTS WOULD RETAIN A MAXIMUM MARGIN OF 5% ON COSTS ON SUPPLY OF MATERIAL S TO MEMBERS OF THE GROUP (VIDE PAGE 215 OF THE PAPER BOOK). ACCORDINGLY, THE COMPARABL E COMPANIES WERE IDENTIFIED AND ARITHMETIC MEAN WAS COMPUTED. THE PRICES OF SUCH T RANSFER OF MATERIALS AND COMPONENTS WERE DETERMINED TO BE AT ARMS LENGTH. THE DETAIL ED BENCHMARKING ANALYSIS AS SUBMITTED BEFORE THE LD DRP AND LD TPO IS ENCLOSED IN PAGES 2 11 TO 227 OF THE PAPER BOOK. HOWEVER, WE FIND THAT THE LD TPO IN HIS REMAND REPO RT DATED 8.8.2011 HAD REJECTED THE ANALYSIS ON THE FOLLOWING GROUNDS (VIDE PAGES 228 T O 236 OF THE PAPER BOOK) :- A) STATING THAT PRODUCT PROFILE OF THE COMPARABLE COMP ANIES IS NOT COMPARABLE WITH ASSESSEE . WE FIND THAT NO COGNIZANCE OF DIFFERENCES WAS BROUG HT INTO THE RECORDS BY THE LD TPO. 23 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 B) USE OF MULTIPLE YEAR DATA WE FIND FROM THE WORKINGS THAT EVEN CONSIDERING THE SINGLE YEAR DATA , IT COMES UNDER THE ARMS LENGTH PRICE. C) NO FAR ANALYSIS UNDERTAKEN AND IT COULD NOT BE DETE RMINED THAT THE COMPARABLE COMPANIES HAVE A BRANCH OR AE IN INDIA. WE FIND THAT THIS IS IRRELEVANT WHETHER THE COMPARA BLE COMPANIES HAVE A PE OR A BRANCH IN INDIA AS THE ASSESSEE HAD BENCHMARKED THE PROFITABI LITY EARNED IN THE REGIONS OF THE AES. 5.2.13. WE FIND THAT THE LD DRP FAILED TO UNDERSTA ND THE BENCHMARKING APPROACH AS SUBMITTED BY THE ASSESSEE. THE LD DRP DID NOT RECO GNIZE THE FACT THAT ASSESSEE WAS COMPARING AES MARGIN WITH COMPARABLE COMPANIES IN A ES REGION RATHER THAN COMPARING THE LATTER WITH ASSESSEES MARGIN EARNED IN INDIA ( VIDE PAGE 316 OF THE PAPER BOOK). THUS THE LD DRP SUMMARILY REJECTED THE TRANSACTION BY TR ANSACTION APPROACH ADOPTED BY THE ASSESSEE. WE FIND THAT THE REVENUE HAD NOT BROUG HT ANYTHING CONCRETE ON RECORDS EITHER FACTUALLY OR LEGALLY TO NEGATE THE ASSESSEES APPRO ACH OF DETERMINING THE ARMS LENGTH TRANSACTION PRICE. 5.2.14. PAYMENT OF ROYALTY MANUFACTURING DOMESTI C SEGMENT WE FIND THAT THE ASSESSEE HAD RECEIVED TECHNOLOGY A ND TECHNICAL ASSISTANCE FOR MANUFACTURE OF ELECTRIC AND STATIC METERS UNDER A TECHNOLOGY LI CENSE AGREEMENT ENTERED INTO WITH THE AES. THE ASSESSEE HAD DULY DOCUMENTED THE TERMS OF SUCH AGREEMENT, DESCRIPTION OF TECHNOLOGY, TECHNICAL ASSISTANCE ETC IN THE TRANSFE R PRICING STUDY REPORT PREPARED AND SUBMITTED FOR THE PERUSAL OF THE LD TPO VIDE PAGE 3 9 OF THE PAPER BOOK. THE LD AR FAIRLY SUBMITTED THAT WITH REGARD TO INTERNATIONAL TRANSAC TION PERTAINING TO PAYMENT OF ROYALTY, DUE TO PAUCITY OF ACCESSABILITY TO THE RELEVANT INFORMA TION, THE ASSESSEE, AT THE TIME OF MAINTAINING CONTEMPORANEOUS DOCUMENTATION, HAD CLUB BED THE BENCHMARKING ANALYSIS FOR ITS INTERNATIONAL TRANSACTION, PAYMENT OF ROYALTY W ITH THE INTERNATIONAL TRANSACTIONS ENCOMPASSED UNDER MANUFACTURING DOMESTIC SEGMEN T. HOWEVER, IN SUBSEQUENT YEARS, THE ASSESSEE GOT ACCESS TO A DATABASE NAMED ROYALTY STAT WHICH HAS REPOSITORY OF ROYALTY AGREEMENTS ENTERED INTO BETWEEN THE PARTIES AROUND THE WORLD. THE DETAILS ABOUT ROYALTYSTAT DATABASE HAS BEEN PROVIDED BY THE ASSES SEE IN PAGE 1 OF THE PAPER BOOK AS ADDITIONAL EVIDENCE. CONSEQUENTLY, THE ASSESSEE UND ERTOOK A SEPARATE BENCHMARKING STUDY FOR PAYMENT OF ROYALTY, CONSIDERING COMPARABLE UNCO NTROLLED PRICE (CUP) METHOD AS THE 24 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 MOST APPROPRIATE METHOD. THE DETAILS OF THE BENCHM ARKING STUDY HAS BEEN PROVIDED AS EXHIBIT A OF THE PAPER BOOK RELATING TO ADDITIONAL EVIDENCE FILED BEFORE US. THE LD AR PROVIDED THE SUMMARY OF BENCHMARKING STUDY AS BELOW :- RATE OF ROYALTY PAID BY THE ASSESSEE TO ITS AE - 4% ARMS LENGTH RATE OF ROYALTY AS DETERMINED FROM BEN CHMARKING STUDY- 4.34% 5.2.15. WE HAVE GONE THROUGH THE RIVAL SUBMISSIONS AND WE DEEM IT NECESSARY TO ADMIT THE ADDITIONAL EVIDENCES FILED BY THE ASSESSEE TOGETHER WITH THE RELATABLE PAPER BOOK FOR BETTER APPRECIATION OF THE FACTS RELATING TO THE PAYMENT O F ROYALTY BY DULY APPRECIATING THE GENUINE HARDSHIP SUFFERED BY THE ASSESSEE AT THE TIME OF IN ITIALLY BENCHMARKING THE TRANSFER PRICING STUDY IN RESPECT OF PAYMENT OF ROYALTY. WE ALSO FIND THAT THE CUP METHOD IS THE MOST APPROPRIATE METHOD TO DETERMINE THE ARMS LENGTH PR ICE OF INTERNATIONAL TRANSACTION BEING PAYMENT OF ROYALTY. WE WOULD LIKE TO PLACE RELIAN CE ON THE FOLLOWING DECISIONS IN SUPPORT OF THIS PROPOSITION :- BENETTON INDIA P LTD VS ITO REPORTED IN (2012) 134 ITD 229 (DELHI TRIB.) CASTROL INDIA LIMITED VS DCIT REPORTED IN (2014) 40 CCH 764 (MUMBAI TRIB.) THE LD AR SUBMITTED THAT IN THE COURSE OF TP ASSESS MENT FOR SUBSEQUENT YEARS I.E AYS 2009-10, 2010-11 & 2011-12 , THE SAID TRANSACTION H AS BEEN CONSIDERED TO BE AT ARMS LENGTH BY THE LD TPO (FOR AY 2009-10 & AY 2011-12 ) AND ALSO CONFIRMED BY THE LD DRP (AY 2010-11) WHEREIN, SAME ECONOMIC ANALYSIS HAS BE EN ADOPTED BY THE ASSESSEE TO DETERMINE THE ARMS LENGTH PRICE OF THE TRANSACTION . WE HOLD THAT THE STUDY MADE BY THE ASSESSEE WITH REGARD TO PAYMENT OF ROYALTY USING CU P METHOD AS THE MAM AND USING SPECIFIC DATABASE ROYALTYSTAT FOR BENCHMARKING RO YALTY TRANSACTIONS WHICH HAS BEEN ACCEPTED BY THE REVENUE IN THE SUBSEQUENT YEAR S, SHOULD BE APPLIED FOR THE YEARS UNDER APPEAL ALSO TO PUT AN END TO THIS CONTROVERSY . HENCE IN ORDER TO MEET THE ENDS OF JUSTICE, WE DIRECT THE LD TPO/ LD AO ACCORDINGLY. 5.2.16. WE FIND THAT ADOPTION OF TNMM BY THE LD TP O FOR PURCHASE OF RAW MATERIALS & COMPONENTS UNDER MANUFACTURING DOMESTIC SEGMENT, H AD RESULTED IN AN ABNORMAL OUTCOME IN THE TRANSFER PRICING ADJUSTMENT WHICH WAS EVEN M ORE THAN THE VALUE OF INTERNATIONAL TRANSACTIONS. HENCE IT WOULD BE JUST AND FAIR TO I GNORE THE SAME. THE LD TPO HAD MADE THE ADJUSTMENT OF RS. 43,27,604/- TO ARMS LENGTH PRICE BASED ON A FALLACIOUS APPROACH WHICH 25 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 IS NEITHER INTENDED BY THE ACT NOR IN OECD GUIDELIN ES. IN VIEW OF THE ABOVE DISCUSSIONS, IN ORDER TO MEET THE ENDS OF JUSTICE IN THE FACTS A ND CIRCUMSTANCES OF THE CASE, WE DEEM IT FIT AND APPROPRIATE, TO SET ASIDE THIS ISSUE TO THE FILE OF THE LD TPO / LD AO FOR DETERMINATION OF ARMS LENGTH PRICE BASED ON TRANSA CTION TO TRANSACTION APPROACH SUBMITTED BY THE ASSESSEE TAKING THE AE AS A TESTED PARTY USING CPM AS THE MOST APPROPRIATE METHOD. ACCORDINGLY, THE GROUNDS RAISED IN THIS REGARD ARE ALLOWED FOR STATISTICAL PURPOSES. 6. ADJUSTMENT TO ARMS LENGTH PRICE ITA NO. 1623 /KOL/2012 ASST YEAR 2008-09 THE ASSESSEE IS A CLOSELY HELD COMPANY ENGAGED IN T HE BUSINESS OF MANUFACTURING AND DISTRIBUTION OF ELECTRIC METERS AND RELATED COMPONE NTS. IN THE COURSE OF ITS BUSINESS OPERATIONS, THE ASSESSEE HAS ENTERED INTO CERTAIN I NTERNATIONAL TRANSACTIONS. FOR THE PURPOSE OF BENCHMARKING THE PRICES OF THE INTERNATIONAL TRA NSACTIONS, THE ASSESSEE IN ITS TRANSFER PRICING REPORT, SEGREGATED THE ABOVE TRANSACTIONS I NTO TWO BROAD SEGMENTS- 'MANUFACTURING' AND 'TRADING'. THE INTERNATIONAL TRANSACTIONS ENTER ED INTO BY THE ASSESSEE UNDER EACH OF THE ABOVE DEPICTED SEGMENTS, HAVE BEEN SUMMARIZED BELOW : INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES SEGMENT OF THE ASSESSEE AMOUNT (RS.) EXPORT OF FINISHED GOODS MANUFACTURING SEGMENT - EXPORT 7,06,66,978 IMPORT OF RAW MATERIALS & COMPONENTS MANUFACTURING SEGMENT DOMESTIC SALES 2,53,18,093 PAYMENT OF ROYALTY 2,14,28,538 PAYMENT OF MANAGEMENT FEES 2,76,66,442 PURCHASE OF FINISHED GOODS TRADING OF FINISHED GOODS 6,73,03,783 PURCHASE OF CAPITAL ASSET OTHERS 1,53,118 REIMBURSEMENT OF EXPENSES 22,95,649 PAYMENT OF BANK GUARANTEE FEES 6,62,772 THE LD TPO HAD MADE VARIOUS DISALLOWANCES AGAINST T HE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE AS ENCOMPASSED UNDER THE MANUFACTURING SEGMENT EXPORT & MANUFACTURING SEGMENT DOMESTIC AND IMPUTED AN A DJUSTMENT OF RS. 84,35,423/-. THE 26 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 LD AR REITERATED HIS SUBMISSIONS MADE FOR THE ASST YEAR 2007-08 THAT IN TRANSFER PRICING ANALYSIS, A TRANSACTION BY TRANSACTION APPROACH SHO ULD BE UNDERTAKEN FOR BENCHMARKING ANALYSIS TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS BEING ENTERED INTO. 6.1. THE LD AR REITERATED THE ARGUMENTS ADVANCED FOR THE ASST YEAR 2007-08 WITH REGARD TO THE OECD TP GUIDELINES AND UN TP MANUAL WHEREIN THEY HAD GIVEN PRIMARY PREFERENCE TO UNDERTAKE A TRANSACTION BY TRANSACTION ANALYSIS. HE STATED THAT IT IS ONLY UNDER CERTAIN EXCEPTIONAL CIRCUMSTANCES, WHERE SEPARATE TRANSACTI ON LEVEL ANALYSIS COULD NOT BE UNDERTAKEN OR SEPARATE TRANSACTIONS ARE SO CLOSELY INTER-LINKED, THAT AGGREGATION OF TRANSACTION APPROACH COULD BE ADOPTED. HE ARGUED T HAT HOWEVER, IN THE INSTANT CASE, EACH OF THE FOUR TRANSACTIONS UNDERTAKEN BY THE ASSESSEE ON WHICH TP ADJUSTMENT HAS BEEN IMPUTED WERE DISTINCT, INDEPENDENT AND WARRANT SEPARATE ANA LYSIS TO DETERMINE THE ARM'S LENGTH PRICE. LIKE FOR INSTANCE, PAYMENT OF MANAGEMENT SER VICE FEE PERTAINS TO AMOUNT PAID FOR VARIOUS MANAGERIAL LEVEL OF SERVICES RENDERED FROM THE AE IN RELATION TO UNDERTAKE SMOOTH CONDUCT OF BUSINESS WHEREAS PAYMENT FOR ROYALTY IS IN RELATION TO TECHNOLOGY RECEIVED FROM AE TO ENABLE TO MANUFACTURE THE PRODUCT FOR THE PUR POSE OF BUSINESS. SIMILARLY, WITH RESPECT TO EXPORT SALE, THE ASSESSEE IS NOT REQUIRE D TO PERFORM CERTAIN FUNCTIONS LIKE MARKETING ACTIVITY AND DO NOT ASSUME CERTAIN RISKS LIKE PRODUCT PERFORMANCE RISKS WHEN COMPARED TO ITS DOMESTIC SALE BUSINESS. HOWEVER, WITH RESPECT TO PURCHASE OF COMPONENTS, THE ASSESSEE NEEDS TO ENSURE THAT THOSE ARE APPROPR IATELY USED IN ITS MANUFACTURING PROCESS TO PRODUCE GOODS WITH DESIRABLE PERFORMANCE QUALITY AN D MEET END CUSTOMERS REQUIREMENT. THUS, THE FOUR IMPUGNED TRANSACTIONS ARE SEPARATE A ND DISTINCT FROM EACH OTHER AND DO REQUIRE A SEPARATE TRANSACTION LEVEL ANALYSIS TO DE TERMINE ARM'S LENGTH PRICE. 6.2. IN RESPONSE TO THIS, THE LD DR FILED A WRIT TEN SUBMISSION AND ALSO MADE ARGUMENTS IN SUPPORT OF HIS WRITTEN SUBMISSIONS. 6.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE PAPER BOOK FILED BY THE ASSESSEE AND THE WRITTEN SUBMISSIONS OF THE LD DR. WE WOULD LIKE TO GIVE OUR FINDINGS IN RESPECT OF EA CH OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE DURING THE FINANCIAL Y EAR 2007-08 AS UNDER:- 6.3.1. SALE OF FINISHED GOODS MANUFACTURING (EXP ORT) SEGMENT 27 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 DURING THE FINANCIAL YEAR 2007-08, THE ASSESSEE MAN UFACTURED AND SOLD ELECTRIC METERS AND COMPONENTS WORTH RS. 108.35 CRORES OUT OF WHICH GOO DS WORTH RS. 7.35 CRORES WERE EXPORTED TO AE. THE DETAILS OF THE SAME ARE ENCLOS ED IN PAGE 306 OF THE PAPER BOOK. FOR THE PURPOSE OF DETERMINATION OF ARMS LENGTH PRICE, THE ASSESSEE UNDERTOOK A DETAILED FUNCTIONAL ANALYSIS AND DETERMINED ITSELF TO BE A T ESTED PARTY TO THE TRANSACTION. THE ASSESSEE UNDERTOOK SEGMENTAL LEVEL PROFITABILITY ANALYSIS TO DETERMINE THE PROFIT EARNED FROM EXPORT OF FINISHED GOODS. THE ASSESSEE ALSO SUBMITTED A C ERTIFIED COPY OF THE SEGMENTAL PROFITABILITY ANALYSIS BEFORE THE LD TPO AND LD DRP WHICH ARE ENCLOSED IN PAGES 305 & 306 OF THE PAPER BOOK. ON EVALUATION OF THE METHODS PR ESCRIBED UNDER THE TP REGULATIONS, THE ASSESSEE CONSIDERED TNMM AS THE MAM AND OP/SALES AS THE MOST APPROPRIATE PLI. THEREAFTER, THE ASSESSEE UNDERTOOK A SCIENTIFIC SEA RCH PROCESS TO IDENTIFY UNCONTROLLED COMPARABLE COMPANIES HAVING A REASONABLE LEVEL OF R EVENUE FROM EXPORT SALES. THE DETAILS OF THE SAME ARE ENCLOSED IN PAGES 65-67 OF THE PAPE R BOOK. SIX COMPARABLE COMPANIES WERE IDENTIFIED TO BE DEALING IN MANUFACTURING OF M ETER BUSINESS HAVING SUBSTANTIAL LEVEL OF EXPORT SALES. ON COMPARING THE AVERAGE OP/SALES OF THESE COMPARABLE COMPANIES WITH OP/SALES EARNED BY THE ASSESSEE UNDER THE 'MANUFACT URING EXPORT' SEGMENT, THE TRANSACTION VALUE OF EXPORT SALES WAS DETERMINED TO BE AT ARM'S LENGTH, APPLYING PROVISO TO SECTION 92C(2). THE LD. TPO ALSO ACKNOWLEDGED THAT TNMM SH OULD BE THE MOST APPROPRIATE METHOD AND OP/SALES AS THE MOST APPROPRIATE PLI. HO WEVER, THE LD. TPO PREFERRED TO CONSIDER THE COMBINED 'MANUFACTURING SEGMENT' OF TH E ASSESSEE (MANUFACTURING DOMESTIC SEGMENT AND MANUFACTURING EXPORT SEGMENT) TO DETE RMINE THE PLI AS PER CERTIFIED SEGMENTAL FINANCIALS (ENCLOSED IN PAGE 306 OF THE P APER BOOK). FURTHER, THE LD. TPO CONSIDERED SINGLE YEAR DATA OF COMPARABLES SELECTED BY THE ASSESSEE UNDER BOTH THE SUB- SEGMENT OF 'MANUFACTURING SEGMENT' TO DETERMINE THE ARM'S LENGTH PLI AND IMPUTED AN ADJUSTMENT ON THE VALUE OF INTERNATIONAL TRANSACTIO NS OF THE ASSESSEE. (ENCLOSED IN PAGE 84 OF THE PAPER BOOK). THE CONTENTION RAISED BY THE LD. T PO IN THE COURSE OF ASSESSMENT TO DISREGARD THE ECONOMIC ANALYSIS UNDERTAKEN BY THE A SSESSEE, ARE AS UNDER: I) A COMBINED PLI OF BOTH THE SEGMENTS (MANUFACTURI NG DOMESTIC SEGMENT AND MANUFACTURING EXPORT SEGMENT) WOULD REFLECT THE PLI OF THE CONCERN MORE APPROPRIATELY FOR MANUFACTURING SECTOR. 28 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 WITH REGARD TO THE ABOVE, THE LD AR SUBMITTED THAT THE FUNCTIONS PERFORMED AND RISKS ASSUMED BY THE ASSESSEE IN CASE OF THE INTERNATIONA L TRANSACTIONS COVERED UNDER THE TWO SEGMENTS I.E. 'MANUFACTURING - DOMESTIC' SEGMEN T AND' MANUFACTURING - EXPORT' SEGMENT ARE DISTINCT AND SEPARATE FROM ONE ANOTHER. IT WAS SUBMITTED THAT WITH REGARD TO 'MANUFACTURING - DOMESTIC' SEGMENT, THE A SSESSEE UNDERTAKES FULL-FLEDGED MARKETING EFFORTS TO SECURE CUSTOMER CONTRACTS. IT HAS TO ENSURE APPROPRIATE APPLICATION OF LICENSED TECHNOLOGY FROM THE AE FOR MANUFACTURING OF PRODUCTS TO MEET CUSTOMER REQUIREMENT AND SATISFACTION. THE ASS ESSEE ALSO HAS TO BEAR PRODUCT PERFORMANCE RISKS TOWARDS END CUSTOMERS. FURTHER, T HE ASSESSEE ALSO BEARS CREDIT RISK WITH RESPECT TO ITS DOMESTIC OPERATIONS. WHILE ON THE OTHER HAND, UNDER 'MANUFACTURING - EXPORT' SEGMENT, THE ASSESSEE RECE IVES PRODUCT SPECIFICATION FROM ITS AE AND ACCORDINGLY MANUFACTURES AND SUPPLIES TH E PRODUCT. IT IS NOT LIABLE TO END CUSTOMERS FOR PRODUCT PERFORMANCE. ALSO, NO ROYALTY IS PAID BY THE ASSESSEE ON EXPORT OF PRODUCTS TO ITS AES. IT IS ALSO NOT UNDERTAKING ANY MARKETING EFFORTS IN THE EXPORT MARKET TO SECURE CONTRACTS AND DOES NOT BEAR ANY CR EDIT RISK AS IT RECEIVES PAYMENT FROM ITS AES. HE ARGUED THAT HOWEVER, THE LD. TPO AND LD. DRP HAS OVERLOOKED THE FUNCTIONAL AND RISK DIFFERENCES ARISING BETWEEN UND ER THE RELEVANT SUB-SEGMENTS OF THE MANUFACTURING SEGMENT. HE FURTHER ARGUED THAT I T WOULD BE NECESSARY TO APPRECIATE THE FACT THAT MARKET DYNAMICS AND ECONOM IC CIRCUMSTANCES OF THE EXPORT MARKET AND DOMESTIC MARKET CANNOT BE COMPARED DUE T O VARIED FACTORS. FURTHER, THE EXPORT MARKET IS LIKELY TO HAVE A DIFFERENT REALIZA TION FROM THE DOMESTIC MARKET AND THEREFORE THE TWO SUB-SEGMENTS CANNOT BE COMPARED F OR ANALYSIS PURPOSES. FURTHER, IT NEEDS TO BE CONSIDERED HEREIN THAT THE VALUE OF 'MANUFACTURING - EXPORT' SALES WAS ONLY RS. 7.35 CRORES WHEREAS VALUE OF ENTIRE MANUFA CTURING SEGMENT SALES WAS AROUND RS. 108.35 CRORES. HE FURTHER ARGUED THAT HOW CAN PROFITABILITY FROM ENTIRE SALES VALUE OF RS. 108.35 CRORES WOULD BE A BETTER REFLEC TION OF RS. 7.35 CRORES SALES RATHER THAN PROFITABILITY DETERMINED FROM RS. 7.35 CRORES SALES ITSELF. ACCORDINGLY HE ARGUED THAT THE ACTION OF COMBINING THE SEGMENTS BY THE LD. TPO IS ERRONEOUS AND DO NOT REFLECT THE APPROPRIATE PLI FO R BENCHMARKING PURPOSES AS IT IGNORES THE FUNCTIONAL AND RISK ANALYSIS WHICH FORM S THE GENESIS OF ANY TRANSFER PRICING ANALYSIS. 29 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 HE FURTHER ARGUED THAT THE SEGMENTATION UNDERTAKEN BY THE ASSESSEE WAS TO ACHIEVE GREATER FUNCTIONAL COMPARABILITY AND THE BENCHMARKI NG WAS ALSO UNDERTAKEN KEEPING IN MIND THE SPECIFIC CHARACTERISTICS OF THE INTERNA TIONAL TRANSACTIONS CAPTURED WITHIN THE RELEVANT SEGMENTS. THE INDIAN TP REGULATION REQ UIRE A THOROUGH ANALYSIS OF THE FUNCTIONS PERFORMED BY ANY COMPANY BEFORE DETERMINI NG THE ARM'S LENGTH NATURE OF THE INTERNATIONAL TRANSACTIONS. FURTHER, IN THE C ONTEXT OF COMPARABILITY AND FAR ANALYSIS, IT WOULD NOT BE OUT OF PLACE TO QUOTE THE FOLLOWING PARAS OF OECD TP GUIDELINES SINCE THE INDIAN TRANSFER PRICING LAW IS LARGELY BASED ON THE PRINCIPLES AND TECHNICALITIES LAID DOWN IN THESE GUIDELINES. PARA 1.51 OF THE OECD TP GUIDELINES TAKES DUE COGNIZANCE ON FACTORS DETERMINING COMPARA BILITY AND STATES THAT, 'IN TRANSACTIONS BETWEEN TWO INDEPENDENT ENTERPRISE S, COMPENSATION USUALLY WILL REFLECT THE FUNCTIONS TIT AT EACH ENTERPRISE P ERFORMS (TAKING INTO ACCOUNT ASSETS USED AND RISKS ASSUMED). THEREFORE, IN DELIN EATING THE CONTROLLED TRANSACTION AND DETERMINING COMPARABILITY BETWEEN C ONTROLLED AND UNCONTROLLED TRANSACTIONS OR ENTITIES, A FUNCTIONAL ANALYSIS IS NECESSARY. THIS FUNCTIONAL ANALYSIS SEEKS TO IDENTIFY THE ECONOMICA LLY SIGNIFICANT ACTIVITIES AND RESPONSIBILITIES UNDERTAKEN, ASSETS USED OR CONTRIB UTED, AND RISKS ASSUMED BY THE PARTIES TO THE TRANSACTIONS. [EMPHASIS ADDED) HE ALSO PLACED RELIANCE ON THE CO-ORDINATE BENCH DECISION OF DELHI TRIBUNAL IN THE CASE OF MENTOR GRAPHICS (NOIDA) PVT. LTD VS DCIT RE PORTED IN (2007) 109 ITD 101 (DELHI TRIB.), WHEREIN IT WAS HELD THAT :- THE FUNCTION THAT NEED TO BE IDENTIFIED WHILE CARR YING COMPARISON AS PER OECD GUIDELINES INCLUDE DESIGN, MANUFACTURING, ASSE MBLING, RESEARCH AND DEVELOPMENT, SERVICING, PURCHASING, DISTRIBUTION, M ARKETING, ADVERTISING, TRANSPORTATION, FINANCIAL AND MANAGEMENT ACTIVITIES . IT IS ALSO NECESSARY TO EXAMINE AS TO WHAT IS THE PRINCIPAL FUNCTION OF THE ENTITIES. ' [EMPHASIS ADDED] WE FIND THAT EVEN FOR COMPARABILITY PURPOSES, THE A SSESSEE HAS UNDERTAKEN TWO DISTINCT SEARCH STRATEGIES FOR BENCHMARKING ITS INTERNATIONA L TRANSACTIONS ENCOMPASSED UNDER MANUFACTURING DOMESTIC SEGMENT AND MANUFACTURIN G EXPORT SEGMENT. THE ASSESSEE HAS GIVEN DUE CONSIDERATION TO IDENTIFY CO MPARABLE COMPANIES HAVING A REASONABLE EXPORT OPERATION SO AS TO HAVE SIMILAR ECONOMIC CON SIDERATION FOR COMPARABILITY ANALYSIS. THE DETAILS OF THE SAME ARE ENCLOSED IN PAGES 61-62 AND 65-67 OF THE PAPER BOOK. WE FIND THAT THE LD TPO HAD FAILED TO DECIPHER THAT FAR ANA LYSIS IS ONE OF THE CRITICAL FACTORS IN ESTABLISHING THE ARMS LENGTH PRICE OF THE INTERNAT IONAL TRANSACTION AND FORGETTING THE FACT THAT FUNCTIONS UNDERTAKEN AND RISKS ASSUMED FOR THE INTERNATIONAL TRANSACTIONS WITHIN THE TWO 30 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 SEGMENTS ARE COMPLETELY DIFFERENT AND HENCE A COLLE CTIVE BENCHMARKING ANALYSIS FOR THE SAME WOULD ONLY DISTORT THE PRINCIPLES OF TRANSFER PRICING AND WILL RENDER THE COMPARISON DEFECTIVE. THE SEGMENTATION PROVIDED BY THE ASSES SEE WERE ON PROPORTIONATE BASIS AND NOT ON ACTUAL AS COULD BE EVIDENT FROM PAGE 311 OF THE PAPER BOOK. WITH REGARD TO LD. TPO'S ABOVE CONTENTION RELATING TO DETERMINATION OF SEGMENTAL PROFITABILITY, THE ASSESSEE WOULD HUMBLY LIKE TO SU BMIT HEREIN THAT THE ASSESSEE HAS RE-SUBMITTED THE SEGMENTAL PROFITABILITY AFTER CONS IDERING THE DIRECT COST AT ACTUAL AND INDIRECT COST ALLOCATED ON THE BASIS OF SALES. ALSO , TO INFUSE AUTHENTICITY ON THE SEGMENTAL PROFITABILITY, THE ASSESSEE ALSO HAD THE SEGMENTAL FINANCIALS AUDITED AND CERTIFIED BY A CHARTERED ACCOUNTANT WHICH ARE ENCLOSED IN PAGE 305 & 306 OF THE PAPER BOOK. HE SUBMITTED THAT WHERE THE INTERNATIONAL TRANSACTION( S) COULD BE MORE SPECIFICALLY RELATED TO A PARTICULAR BUSINESS SEGMENT OF THE ASSESSEE AND THE SEGMENTED RESULT WITH RESPECT TO SUCH SEGMENTS COULD BE OBTAINED, USE OF SEGMENTED PROFIT ABILITY WOULD PROVIDE A BETTER AND MORE SCIENTIFIC METHOD FOR DETERMINING THE ARM'S LENGTH OPERATIONS OF THE COMPANY RATHER THAN ADOPTING AN OVERALL/ENTITY LEVEL TNMM APPROACH. I N THIS REGARD HE DREW OUT ATTENTION TO PARA 2.78 OF CHAPTER 11 OF TRANSFER PRICING METHODS OF THE OECD TP GUIDELINES AS UNDER:- 'AN ANALYSIS UNDER THE TRANSACTIONAL NET MARGIN MET HOD SHOULD CONSIDER ONLY THE PROFITS OF THE ASSOCIATED ENTERPRISE THAT ARE ATTRI BUTABLE TO PARTICULAR CONTROLLED TRANSACTIONS. THEREFORE, IT WOULD BE INAPPROPRIATE TO APPLY THE TRANSACTIONAL NET MARGIN METHOD ON A COMPANY-WIDE BASIS IF THE COMPAN Y ENGAGES IN A VARIETY OF DIFFERENT CONTROLLED TRANSACTIONS THAT CANNOT BE AP PROPRIATELY COMPARED ON AN AGGREGATE BASIS WITH THOSE OF AN INDEPENDENT ENTERP RISE. ' SINCE THE ASSESSEE WAS ABLE TO APPROPRIATELY SEGREG ATE ITS BUSINESS OPERATIONS IN TO ITS VARIOUS BUSINESS/FUNCTIONAL SEGMENTS, THE ARM'S LEN GTH NATURE OF THE INTERNATIONAL TRANSACTION(S), WHICH COULD BE DIRECTLY RELATED TO SUCH SEGMENTS, SHOULD BE DETERMINED BASED ON THE RELEVANT SEGMENTED PROFITABILITY. WE DRAW SUPPORT FROM THE FOLLOWING DECISIONS IN SUP PORT OF THIS PROPOSITION:- BENETTON INDIA P LTD VS ITO REPORTED IN (2012) 134 ITD 229 (DELHI TRIB.) BIRLASOFT (INDIA) LTD VS DCIT REPORTED IN (2011) 44 SOT 664 (DELHI TRIB.) GENERAL MOTORS INDIA PVT LTD VS DCIT REPORTED IN (2 013) 146 ITD 559 (AHD TRIB.) 31 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 MOREOVER, WE FIND THAT THE LD TPO HAD ACCEPTED THE CERTIFIED SEGMENTAL PROFITABILITY AS HE HAS CONSIDERED MANUFACTURING SEGMENT PROFITABILIT Y FROM THE SAME. HOWEVER, HE DID NOT CONSIDER THE SUB-SEGMENT PROFITABILITY OF MANUFACTU RING SEGMENT INTO MANUFACTURING (DOMESTIC) SEGMENT AND MANUFACTURING (EXPORT) SEGME NT BASED ON DIFFERENCE IN FAR ANALYSIS TO DETERMINE THE PROFITABILITY FROM SALE O F FINISHED GOODS. THE LD AR FURTHER STATED THAT THE LD TPO IN THE EARLIER YEARS HAS CON SIDERED PRICES OF INTERNATIONAL TRANSACTION PERTAINING TO EXPORT OF GOODS TO AES TO BE AT ARMS LENGTH WHEREIN THE ASSESSEE FOLLOWED THE SAME ECONOMIC ANALYSIS TO DETERMINE THE ARMS L ENGTH PRICE. IN VIEW OF THE AFORESAID FINDINGS AND IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND RESPECTFULLY FOLLOWING THE JUDICIAL PRECEDENTS RELI ED UPON HEREINABOVE, WE DIRECT THE LD TPO / LD AO TO CONSIDER THE CERTIFIED SEGMENTAL PRO FITABILITY TO DETERMINE THE ARMS LENGTH PRICE OF THE RELEVANT INTERNATIONAL TRANSACT IONS AND HEREBY REJECT THE COMBINED SEGMENT APPROACH ADOPTED BY THE LD TPO. 6.3.2. PURCHASE OF RAW MATERIALS & COMPONENTS MA NUFACTURING (DOMESTIC) SEGMENT THE OBSERVATIONS AND FINDINGS GIVEN BY US FOR THE A SST YEAR 2007-08 IN RESPECT OF PURCHASE OF RAW MATERIALS & COMPONENTS IN MANUFACTURING (DOM ESTIC) SEGMENT WOULD APPLY WITH EQUAL FORCE FOR THE ASST YEAR 2008-09 ALSO. WE FI ND THAT THE LD TPO BY SELECTION OF WRONG TESTED PARTY PRODUCED AN ABNORMAL OUTCOME WHEREIN A LOSS OF 5.81% (8.31% - 2.50%) WAS DETERMINED TO HAVE OCCURRED FOR A TRANSACTION VALUE OF 2.47% OF THE ENTIRE SEGMENT. HENCE IT WOULD BE JUST AND FAIR TO IGNORE THE SAME. THE LD TPO HAD MADE THE DOWNWARD ADJUSTMENT TO ARMS LENGTH PRICE BASED ON A FALLACI OUS APPROACH WHICH IS NEITHER INTENDED BY THE ACT NOR IN OECD GUIDELINES. IN VIEW OF THE ABOVE DISCUSSIONS, IN ORDER TO MEET THE ENDS OF JUSTICE IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE DEEM IT FIT AND APPROPRIATE, TO SET ASIDE THIS ISSUE TO THE FILE OF THE LD TPO / LD AO FOR DETERMINATION OF ARMS LENGTH PRICE BASED ON TRANSACTION TO TRANSACT ION APPROACH SUBMITTED BY THE ASSESSEE TAKING THE AE AS A TESTED PARTY USING CPM AS THE MOST APPROPRIATE METHOD. 6.3.3. PAYMENT OF ROYALTY MANUFACTURING (DOMESTIC ) SEGMENT THE LD TPO WHILE PASSING THE ORDER U/S 92CA(3) OF T HE ACT IGNORED THE CUP ANALYSIS UNDERTAKEN BY THE ASSESSEE FOR JUSTIFYING THE ARMS LENGTH NATURE OF THE INTERNATIONAL 32 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 TRANSACTION AND INSTEAD WENT AHEAD AND CLUBBED THE TRANSACTION UNDER THE TNMM ANALYSIS UNDERTAKEN BY LD TPO WITH RESPECT TO MANUFACTURING SEGMENT. MOREOVER, WHEN THE LD DRP REMANDED BACK THE CASE TO THE FILE OF THE LD TPO FO R ANALYSIS OF THE CUP BENCHMARKING AND PROVIDING GROUND WISE OBSERVATIONS FOR GROUNDS FILE D IN FORM 35A, THE LD TPO DID NOT OFFER ANY ADVERSE COMMENTS WITH REGARD TO THE PAYMENT OF ROYALTY. THESE ARE ENCLOSED IN PAGES 311 AND 143 OF THE PAPER BOOK. THE FINDINGS GIVEN BY US FOR THE ASST YEAR 2007-08 WOULD APPLY WITH EQUAL FORCE FOR THE ASST YEAR 2008 -09 ALSO WITH REGARD TO PAYMENT OF ROYALTY. 6.3.4. PAYMENT OF MANAGEMENT SERVICE FEES MANUFA CTURING (DOMESTIC) SEGMENT THE ASSESSEE SUBMITTED THAT IT HAD RECEIVED VARIED NATURE OF MANAGEMENT SERVICES UNDER A SERVICE AGREEMENT ENTERED INTO WITH ITS AE. FOR TH E PURPOSE OF COMPLIANCE WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS, THE AS SESSEE DOCUMENTED IN ITS TRANSFER PRICING STUDY REPORT AND SUBMITTED IN THE COURSE OF ASSESSM ENT, THE MANAGEMENT SERVICES FRAMEWORK WHEREIN THE DESCRIPTION OF SERVICES RECEIVED, PAYME NT TERMS, DETAILS OF COST ALLOCATION MECHANISM, EVIDENCES OF BENEFITS RECEIVED FROM SUCH SERVICES ETC WERE EXPLAINED TO THE REVENUE. THESE ARE ENCLOSED IN PAGE 39 AND PAGES 2 94 TO 295 OF THE PAPER BOOK. WE FIND THAT THE ASSESSEE HAD CONSIDERED PAYMENT OF MANAGEM ENT SERVICE FEE TO BE A DIFFERENT CLASS OF TRANSACTION, DISTINCT FROM OTHER INTERNATIONAL T RANSACTIONS. ACCORDINGLY, BASED ON FUNCTIONAL ANALYSIS, AE WAS DETERMINED AS THE LEAST COMPLEX PARTY AND ACCORDINGLY DETERMINED TO BE THE TESTED PARTY FOR THE PURPOSE O F THE ANALYSIS. FURTHER , TNMM WAS DETERMINED TO BE THE MAM. WE FIND THAT THE ASSESSE E UNDERTOOK TO IDENTIFY COMPARABLE COMPANIES RENDERING SIMILAR SERVICES AND THE INTERN ATIONAL TRANSACTION WAS DETERMINED TO BE AT ARMS LENGTH. THESE ARE ENCLOSED IN PAGES 295 - 303 OF THE PAPER BOOK. THE LD TPO WHILE PASSING THE ORDER U/S 92CA(3) OF THE ACT IGNO RED THE SEPARATE TRANSACTION LEVEL ANALYSIS UNDERTAKEN BY THE ASSESSEE FOR JUSTIFYING THE ARMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTION AND INSTEAD WENT AHEAD AN D CLUBBED THE TRANSACTION UNDER THE TNMM ANALYSIS UNDERTAKEN BY LD TPO WITH RESPECT TO MANUFACTURING SEGMENT. MOREOVER, WHEN THE LD DRP REMANDED BACK THE CASE TO THE FILE OF THE LD TPO FOR ANALYSIS OF THE SEPARATE TRANSACTION LEVEL ANALYSIS AND PROVIDING G ROUND WISE OBSERVATIONS FOR ARGUMENTS RAISED BY THE ASSESSEE BEFORE THE LD DRP, THE LD T PO DID NOT OFFER ANY ADVERSE COMMENTS WITH RESPECT TO ECONOMIC ANALYSIS CARRIED OUT BY TH E ASSESSEE FOR TRANSACTION PERTAINING TO 33 ITA NO. 37/KOL/2012 LANDIS + GYR LIMITED, AY 2007-08 THE PAYMENT OF MANAGEMENT SERVICE FEES. THESE ARE ENCLOSED IN PAGES 307-311 AND PAGES 294-303 OF THE PAPER BOOK. THE LD AR SUBMITTED THA T IN THE COURSE OF TP ASSESSMENT FOR SUBSEQUENT YEARS I.E AYS 2009-10, 2010-11 & 2011-12 , THE SAID TRANSACTION HAS BEEN CONSIDERED TO BE AT ARMS LENGTH BY THE LD TPO (FOR AY 2009-10) AND ALSO CONFIRMED BY THE LD DRP (FOR AY 2010-11 AND AY 2011-12) WHEREIN, SAME ECONOMIC ANALYSIS HAS BEEN ADOPTED BY THE ASSESSEE TO DETERMINE THE ARMS LENG TH PRICE OF THE TRANSACTION. WE HOLD THAT THE STUDY MADE BY THE ASSESSEE WITH REGARD TO PAYMENT OF MANAGEMENT SERVICE FEES WHICH HAS BEEN ACCEPTED BY THE REVENUE IN THE SUBSEQUENT YEARS, SHOULD BE APPLIED FOR THE ASST YEAR 2008-09 ALSO TO PUT AN EN D TO THIS CONTROVERSY. HENCE IN ORDER TO MEET THE ENDS OF JUSTICE, WE DIRECT THE LD TPO/ LD AO ACCORDINGLY. 6.4. ACCORDINGLY, THE GROUNDS RAISED IN THIS REGAR D ARE ALLOWED FOR STATISTICAL PURPOSES. 7. IN THE RESULT, THE APPEALS OF THE ASSESSEE IN ITA NO. 37/KOL/2012 FOR ASST YEAR 2007- 08 AND ITA NO. 1623/KOL/2012 FOR ASST YEAR 2008-09 ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 03.08.2016 SD/- SD/- (S. S. VISWANETHRA RAVI) (M. BALAGANESH) JUDICIAL MEMBER ACCOUNTAN T MEMBER DATED :3 RD AUGUST, 2016 JD.(SR.P.S.) COPY OF THE ORDER FORWARDED TO: 1 . ASSESSEE LANDIS + GYR LIMITED, DIAMOND HARBOUR RO AD, PO JOKA, 24 PARGANAS (SOUTH), PIN-700 014. 2 RESPONDENT DCIT, CIRCLE-1, KOLKATA. 3 . THE CIT(A), KOLKATA 4. 5. ITO, DRP, KOLKATA DR, KOLKATA BE NCHES, KOLKATA / TRUE COPY, BY ORDER, ASSTT. REGISTRAR .