DCIT, Circle-7, Pune V. Tetra Pak India Pvt. Ltd., Pune

ITA 1647/PUN/2013

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 9961 (ITAT-PUNE)
• Duration Of Justice: 5 year(s) 8 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 12-03-2019
• Assessment Year: 2005-2006
• Appeal Filed On: 30-08-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJU KUMAR
• Keywords: Sale consideration of property below Jantri Value; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; Principle of natural justice; International transaction; Additional depreciation; Working capital adjustments; Revised return; Unabsorbed depreciation; Set aside
• Section: 271(1)(c); 143(3); 50C; 195; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUNE . , , BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1610/PUN/2013 / ASSESSMENT YEAR : 2005-06 TETRA PAK INDIA PVT. LTD., MAYFAIR TOWERS, WAKDEWADI, SHIVAJINAGAR, PUNE-411005. PAN : AAACT3467B ....... / APPELLANT / V/S. ACIT, CIRCLE-7, PUNE. / RESPONDENT . / ITA NO.1647/PUN/2013 / ASSESSMENT YEAR : 2005-06 DCIT, CIRCLE-7, PUNE. ....... / APPELLANT / V/S. TETRA PAK INDIA PVT. LTD., GROUND FLOOR, MAYFAIR TOWERS, MUMBAI-PUNE ROAD, SHIVAJI NAGAR, PUNE-411005. PAN : AAACT3467B / RESPONDENT . / ITA NO.1609/PUN/2013 / ASSESSMENT YEAR : 2005-06 TETRA PAK INDIA PVT. LTD., MAYFAIR TOWERS, WAKDEWADI, SHIVAJINAGAR, PUNE-411005. PAN : AAACT3467B ....... / APPELLANT / V/S. ACIT, CIRCLE-7, PUNE. / RESPONDENT 2 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 ASSESSEE BY : SHRI NIKHIL PATHAK REVENUE BY : SHRI RAJU KUMAR / DATE OF HEARING : 12.03.2019 / DATE OF PRONOUNCEMENT : 24.05.2019 / ORDER PER D. KARUNAKARA RAO, AM: THERE ARE THREE APPEALS UNDER CONSIDERATION INVOLVING THE ASSESSMENT YEAR 2005-06. THE APPEALS IN ITA NO.1610/PUN/2013 AND ITA NO.1647/PUN/2013 ARE THE CROSS-APPEALS FILED BY THE ASSESSEE AND THE REVENUE. ASSESSING OFFICER PASSED THE ASSESSMENT ORDER U/S 143(3) OF THE ACT. THEY ARE FILED AGAINST THE ORDER OF CIT(A)-IT/TP, PUNE DATED 25.06.2013. WHEREAS, THE APPEAL IN ITA NO.1609/PUN/2013 FILED BY THE ASSESSEE IS AGAINST THE ORDER OF CIT-IV, PUNE DATED 29.03.2011 AND IT RELATES TO THE FRESH ASSESSMENT MADE BY THE ASSESSING OFFICER CONSEQUENT TO THE REVISIONAL ORDER PASSED BY THE CIT-IV U/S 263 OF THE ACT. ASSESSING OFFICER PASSED RELEVANT ASSESSMENT ORDER U/S 143(3) R.W.S. 263 OF THE ACT. 2. WE SHALL NOW TAKE UP THE APPEAL-WISE ADJUDICATION IN THE FOLLOWING PARAGRAPHS. ITA NO.1609/PUN/2013 (BY ASSESSEE) 3. BRIEFLY STATED THE RELEVANT FACTS INCLUDE THAT THE ASSESSEE IS A COMPANY AND IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF PACKAGING MATERIAL, PACKAGING MACHINES AND SYSTEMS. THE ASSESSEE 3 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 FILED THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS.6,64,950/-. BRINGING OUR ATTENTION TO THE FRESH ASSESSMENT ORDER DATED 30.12.2011, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ORDER WAS PASSED IN CONNECTION WITH THE REVISIONAL ORDER MADE BY THE CIT-IV, PUNE U/S 263 OF THE ACT. FURTHER, BRINGING OUR ATTENTION TO THE SAID REVISIONAL ORDER, LD. COUNSEL SUBMITTED THAT THE SAME WAS SUBJECT-MATTER OF SCRUTINY BY THE TRIBUNAL IN ASSESSEES OWN CASE VIDE ITA NO.733/PN/2011 FOR THE ASSESSMENT YEAR 2005-06 DATED 18.11.2016. THE SAID REVISIONAL ORDER DATED 29.03.2011 WAS CONTESTED BY THE ASSESSEE BEFORE THE TRIBUNAL AND THE TRIBUNAL PASSED AN ORDER IN THIS REGARD VIDE ITS ORDER DATED 18.11.2016 (SUPRA). BRINGING OUR ATTENTION TO PARA 18 AND 19 OF THE SAID ORDER OF THE TRIBUNAL (SUPRA), LD. COUNSEL SUBMITTED THAT THE CITS DIRECTION IN CANCELLING THE ASSESSMENT ORDER DATED 10.12.2008 PASSED U/S 143(3) OF THE ACT WAS SET-ASIDE THEREBY ALLOWING THE GROUNDS RAISED BY THE ASSESSEE. FOR THE SAKE OF COMPLETENESS, WE PROCEED TO EXTRACT THE RELEVANT PARA 19 OF THE DECISION OF THE TRIBUNAL (SUPRA) AND THE SAME IS AS UNDER :- 19. BEFORE US, THE REVENUE HAS NOT PLACED ANY CONTRARY BINDING DECISION NOR HAS BROUGHT ANY MATERIAL ON RECORD TO DEMONSTRATE THAT THE VIEW TAKEN BY THE A.O. WAS CONTRARY TO LAW OR WAS AN IMPERMISSIBLE VIEW OR WAS UPON APPLICATION OF WRONG LEGAL PRINCIPLES AND THEREFORE REQUIRED INITIATING THE EXERCISE OF REVISIONARY POWERS UNDER SEC.263. IN VIEW OF THE AFORESAID FACTS, WE ARE OF THE VIEW THAT IN THE PRESENT CASE THE CIT WAS NOT JUSTIFIED IN RESORTING TO THE REVISIONARY POWERS UNDER SEC.263 OF THE ACT. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT CANCELLING THE ORDER DT. 10.12.2008 PASSED UNDER SEC.143(3) OF THE ACT. THUS, THE GROUNDS OF THE ASSESSEE ARE ALLOWED. 4 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 4. WITH THE CANCELLATION OF REVISION ORDER OF THE CIT-IV, PUNE, THE REGULAR ASSESSMENT ORDER SURVIVES AND THE SAME STANDS AS ON DATE. THEREFORE, THE FRESH ASSESSMENT ORDER BECOMES INVALID. THEREFORE, ON THIS PRELIMINARILY ISSUE ITSELF, WE ARE OF THE OPINION, THE ASSESSMENT ORDER DOES NOT HAVE LEGS TO STAND. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE HAVE TO BE ALLOWED. 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.1609/PUN/2013 IS ALLOWED. 6. NOW, WE SHALL TAKE UP THE CROSS APPEALS INCIDENTAL TO THE REGULAR ASSESSMENT ORDER DATED 25.06.2013 PASSED U/S 143(3) OF THE ACT. ITA NOS.1610 & 1647/PUN/2013 (CROSS APPEALS) 7. BRIEFLY STATED THE RELEVANT FACTS INCLUDE THAT THE ASSESSEE IS A COMPANY AND IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SUPPLYING OF CARTON PACKAGES FOR FOOD/DRINK PROJECTS BASED ON ASEPTIC TECHNOLOGY, WHICH HELPS TO KEEP PERISHABLE LIQUID FOODS FRESH AND NUTRITIOUS FOR MONTHS WITHOUT REFRIGERATION OR ADDED PRESERVATIVES. THE ASSESSEE FILED THE RETURN OF INCOME DECLARING AT NIL INCOME AFTER SET OFF OF BROUGHT FORWARD BUSINESS LOSSES. THE ASSESSEE FILED THE REVISED RETURN OF INCOME DECLARING LOSS OF RS.4,62,99,876/-. IN THE REVISED RETURN, THE ASSESSEE SUO MOTU MADE AN UPWARD TP ADJUSTMENT OF RS.8,04,23,860/- IN RESPECT OF THE INTERNATIONAL TRANSACTIONS WITH AES. DURING THE SCRUTINY 5 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 PROCEEDINGS, THE SAID INTERNATIONAL TRANSACTIONS WERE REFERRED TO THE TPO FOR BENCHMARKING THE SAME. THE TPO PASSED AN ORDER U/S 92CA(3) OF THE ACT VIDE HIS ORDER DATED 30.09.2008. 8. DURING THE PROCEEDINGS BEFORE THE TPO, THE FACTS RELATING TO THE QUANTIFICATION OF ADJUSTMENTS TO BE MADE QUANTIFIED BY THE ASSESSEE AT RS.8,04,23,860/-. ACCORDING TO THE ASSESSEE, LIST OF 13 COMPARABLES WERE TAKEN FOR ITS TP ANALYSIS. THE TNM METHOD WAS CONSIDERED AS MOST APPROPRIATE METHOD (MAM) AND THE ARITHMETIC MEAN OF THE PLI OF THE SAID 13 COMPARABLES IS AT 3.61%. THE TOTAL AMOUNT OF INTERNATIONAL TRANSACTIONS WORKS OUT TO RS.2,21,01,33,656/-. IN THE TP STUDY, THE ASSESSEE CONSIDERED THE COMPARABLES WHICH ARE FUNCTIONALLY SIMILAR TO THAT OF THE ASSESSEE. THE TPO CONSIDERED THE ABOVE TP ANALYSIS OF THE ASSESSEE AND CONSIDERED IT FIT TO DISREGARD THE SAID TP STUDY OF THE ASSESSEE. THE TPO ISSUED A SHOW-CAUSE NOTICE DATED 28.08.2008 PROPOSING TO APPLY THE TURNOVER FILTER OF RS.100 CRORES AND ABOVE . IF THE SAME IS CONSIDERED, THE ONLY TWO COMPARABLES QUALIFIES THE SAID RS.100 CRORES TURNOVER CRITERIA SUCH AS (I) BHARAT BOX FACTORY LTD. (RS.106.71 CRORES) AND (II) PAPER PRODUCTS LTD. (RS.397.90 CRORES). FURTHER, THE TPO ADDED TWO OTHER COMPARABLES SUCH AS (I) KARUR KCP PACKAGING LTD. AND (II) GAYATRI SHAKTI PEPERS & BOARDS LTD.. IN TOTAL, THE TPO LISTED FOUR COMPARABLES I.E. (I) BILLCARE LTD.; (II) PAPER PRODUCTS LTD.; (III) KARUR KCP PACKAGING LTD. AND (IV) GAYATRI SHAKTI PEPERS & BOARDS LTD. THE ARITHMETIC MEAN OF ALL THE FOUR COMPARABLES OF THE TPO WORKS 6 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 OUT 13.42%. FURTHER, THE TPO ANALYSED THE PLI OF THE ASSESSEE I.E. OP/OR AT 1.89%. THE TPO PROPOSED TO ADJUST THE SAID RATIO FROM 1.51% INSTEAD OF 1.82% APPLIED BY THE ASSESSEE. CONSIDERING THE DIFFERENCE IN PLI OF THE ASSESSEE (1.51%) WITH THAT OF THE FOUR COMPARABLES I.E. 13.42%, THE TPO PROPOSED TO MAKE ADJUSTMENTS TO THE TP RESULTS FURNISHED BY THE ASSESSEE. THE TPO ALSO DISCUSSED THE REASONS FOR REJECTING THE REST OF COMPARABLES OF THE ASSESSEE BEFORE QUANTIFYING THE ADJUSTMENTS AT RS.35,79,98,665/-. THE DETAILS GIVEN IN PARA 9 AND 10 BY THE TPO IN HIS ORDER ARE RELEVANT IN THIS REGARD. FOR THE SAKE OF COMPLETENESS, THE SAID PARAGRAPHS ARE EXTRACTED HEREUNDER :- 9. IN VIEW OF THE FACTS OF THE CASE, DELIBERATION AS ABOVE THE PLI ADOPTED IS PROFIT OVER THE SALES AND NOT THE ADJUSTED PROFIT OVER THE SALES AS SUBMITTED BY THE ASSESSEE AND THE SET OF COMPARABLES IS ADOPTED AS GIVEN IN THE SHOW CAUSE NOTICE WITH THE MEAN OPERATING PROFIT TO SALES OF FOUR COMPARABLES AT 13.42% AGAINST THE OPERATING PROFIT MARGIN OF THE ASSESSEE AT 1.51%. CONSIDERING THE ABOVE THE ADJUSTMENT IS WORKED OUT AS UNDER WHICH WOULD BE REQUIRED TO BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE HAVING REGARD TO ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS RELATING TO IMPORT OF RAW MATERIAL, SPARES, CONSUMABLES, EXPORT OF PACKAGING MATERIAL, IMPORT OF TRADED GOODS, IMPORT AND EXPORT OF CAPITAL GOODS AND MACHINERY, TECHNICAL SERVICES RECEIVED, TECHNICAL SERVICE PROVIDED AND COMMISSION INCOME. SALES OF THE ASSESSEE COMPANY =RS.300,58,66,208/- THE MEAN OPERATING PROFIT OF COMPARABLES IS 13.42% AND THE OPERATING PROFIT MARGIN OF THE ASSESSEE 1.51%. THE ADJUSTMENT REQUIRED TO ARRIVE AT THE ALP OF THE INTERNATIONAL TRANSACTIONS AS DETAILED ABOVE WOULD BE {13.42% - 1.51%} OF RS 300,58,66,208/-. = 11.91 X 300,58,66,208/- 100 = RS.35,79,98,665/- 10. AS DISCUSSED ABOVE, THE INTERNATIONAL TRANSACTIONS RELATING TO IMPORT OF RAW MATERIAL, SPARES, CONSUMABLES, EXPORT OF PACKAGING MATERIAL, IMPORT OF TRADED GOODS, IMPORT AND EXPORT OF CAPITAL GOODS AND MACHINERY, TECHNICAL SERVICES RECEIVED, TECHNICAL SERVICE PROVIDED AND COMMISSION 7 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 INCOME ARE ADJUSTED TO THE EXTENT WORKED OUT ABOVE I.E. RS. 35,79,98,665/- TO ARRIVE AT THE ARMS LENGTH PRICE OF THESE INTERNATIONAL TRANSACTIONS. ASSESSEE IN ANNEXURES OF FORM 3CEB HAS MENTIONED THAT HAVING REGARD TO ARMS LENGTH PRICE OF ITS INTERNATIONAL TRANSACTIONS AN ADJUSTMENT OF RS.8,04,23,860/- IS REQUIRED TO THE TOTAL INCOME OF THE ASSESSEE AND THAT SUCH ADJUSTMENT IS BEING OFFERED TO TAX BY FILING THE REVISED RETURN. IF THE FACTS BE SO THAN THE NET ADJUSTMENT AS PER THIS ORDER WOULD BE OF RS.27,75,44,805/- {RS.35,79,98,665/-(-) RS.8,04,23,860/-}. CONSEQUENTLY THIS WILL RESULT IN INCREASING THE INCOME OF THE ASSESSEE FURTHER BY RS.27,75,44,805/-. 9. THUS, THE TPO RECOMMENDED THE TOTAL ADJUSTMENTS OF RS.35,79,98,665/- AFTER CONSIDERING THE ADJUSTMENTS AS SUO MOTO QUANTIFIED BY THE ASSESSEE AMOUNTING TO RS.8,04,23,860/-. THE NET ADJUSTMENT RECOMMENDED BY THE TPO WORTH RS.27,75,44,805/-. ACCEPTING THE SAID ADJUSTMENTS OF THE TPO, THE ASSESSING OFFICER PASSED AN ORDER DATED 10.12.2008 DETERMINING THE BUSINESS PROFITS AFTER GIVING CREDIT TO THE BUSINESS LOSS AND UNABSORBED DEPRECIATION CARRIED FORWARD FROM THE EARLIER YEARS. 10. THE ASSESSING OFFICER PASSED THE ORDER ON 10.12.2008 INCORPORATING THE ABOVE ADJUSTMENTS AMOUNTING TO RS.27,75,44,805/-. THE TOTAL INCOME DETERMINED IS WORKED OUT TO RS.28,61,94,725/-. THE ASSESSING OFFICER GRANTED CERTAIN RELIEFS AND ALSO THE BENEFIT OF SET OFF OF BROUGHT FORWARD LOSSES BEFORE COMPUTING THE LOSS AT RS.6,64,950/-. 11. AGGRIEVED WITH THE ABOVE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A). THE ASSESSEE RAISED VARIOUS ISSUES SUCH AS :- 8 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 (1) ADDITION TO THE TOTAL INCOME ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. (2) TREATING ADDITIONAL DEPRECIATION CHARGED ON LEASED MACHINES AS AN ORDINARY OPERATING EXPENDITURE. (3) TREATING ADDITIONAL DEPRECIATION CHARGED ON LAND AND BUILDING HELD FOR DISPOSAL AS AN ORDINARY OPERATING EXPENDITURE. (4) TREATING THE COST OF MACHINERY GIVEN FREE TO A CUSTOMER AS AN ORDINARY OPERATING EXPENDITURE. (5) NOT PERMITTING ECONOMIC ADJUSTMENT ON ACCOUNT OF DIFFERENT RATES OF DEPRECIATION. (6) TURNOVER FILTER. (7) REJECTION OF BHARAT BOX FACTORY LIMITED AS A COMPARABLE COMPANY. (8) INCOHERENT APPROACH. (9) COMPANIES ENGAGED IN NON-COMPARABLE ACTIVITIES. (10) USE OF SINGLE YEAR DATA. (11) TRANSFER PRICING ADJUSTMENT WITHOUT GIVING BENEFIT OF +/- 5 PER CENT AS AVAILABLE UNDER PROVISO TO SECTION 92C(2). (12) INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. (13) REDUCTION IN CAPITAL LOSS PURSUANT TO SECTION 50C OF THE ACT. (14) DISALLOWANCE OF DONATION IN KIND. 12. AT THE END OF THE PROCEEDINGS BEFORE THE FIRST APPELLATE AUTHORITY, THE CIT(A) GRANTED PART RELIEF TO THE ASSESSEE AS PER DISCUSSION GIVEN IN PARA 5 OF HIS ORDER. FOR THE SAKE OF COMPLETENESS, THE SAID PARA 5 IS EXTRACTED HEREUNDER :- 5. SUMMARY OF FINDINGS AS UNDER: ITA 128/2008-09 GROUND 1 THE GR OUND IS GENERAL IN NATURE. THE FINDINGS ON THIS GROUND WILL BE COVERED BY THE FINDINGS ON THE OTHER GROUNDS OF APPEAL. GROUND 2 ADDITIONAL DEPRECIATION TO LEASED MACHINES IS NEITHER OPERATIONAL NOR EXTRAORDINARY IN NATURE. 9 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 GROUND 3 ADDITIONAL DEPRECIATIO N TO LAND AND BUILDING HELD FOR DISPOSAL SHOULD BE EXCLUDED FOR COMPUTING MARGIN OF THE APPELLANT. GROUND 4 COST OF MACHINES PROVIDED TO AMUL IS NEITHER OPERATIONAL NOR EXTRAORDINARY IN NATURE. GROUND 5 THE AO IS DIRECTED TO PROVIDE ADJUSTMENT ON ACCOUNT OF DIFFERENTIAL RATE OF DEPRECIATION AFTER VERIFICATION ACCORDING TO THE DIRECTIONS GIVEN IN THIS ORDER. GROUND 6 THE AO IS DIRECTED TO NOT TO APPLY LOWER TURNOVER FILTER OF RS 100 CR FOR THE COMPARABILITY. GROUND 7 THE LEARNED AO IS DIRECTED TO EXCLUDE BHARAT BOX FACTORY LIMITED FROM THE LIST OF THE COMPARABLE COMPANIES. GROUND 8 THE GROUND IS GENERAL IN NATURE. THE FINDINGS ON THIS GROUND WILL BE COVERED BY THE FINDINGS ON THE OTHER GROUNDS OF APPEAL. GROUND 9 THE AO IS DIRECTED TO INCLUDE BILCARE LTD AND KARUR KCP PACKAGING LTD AND EXCLUDE GAYATRISHAKTI PAPER AND BOARDS LTD FROM THE LIST OF COMPARABLE COMPANIES. GROUND 10 THE AO IS DIRECTED TO USE THE FINANCIAL DATA OF THE FINANCIAL YEAR IN WHICH INTERNATIONAL TRANSACTION WAS UNDERTAKEN. GROUND 11 BENEFIT OF +/- 5 % MAY BE GIVEN WITHOUT GRANTING STANDARD DEDUCTION. GROUND 12 THE GROUND OF APPEAL AGAINST INITIATION OF PENALTY IS PRE - MATURE AND IS DISMISSED. GROUND 13 THE AOS DECISION TO REDUCE CAPITAL LOSS OF RS 4,56,34,923 U/S 50C IS CONFIRMED. GROUND 14 THE AOS DECISION TO DISALLOW DONATION OF RS 1,24,12,500 IS CONFIRMED. ADDITIONAL GROUND PROPORTIONATE ADJUSTMENT IS NOT IN ACCORDANCE WITH LAW AND HENCE CANNOT BE GRANTED TO THE APPELLANT ITA 33/2011-12 GROUND 1 THE GROUND IS GENERAL IN NATUR E. THE FINDINGS ON THIS GROUND WILL BE COVERED BY THE FINDINGS ON THE OTHER GROUNDS OF APPEAL. 10 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 GROUND 2 THE DISALLOWANCE MADE ON ACCOUNT OF EXIT COST OF RS 12,66,65,008 IS A ROUTINE BUSINESS EXPENDITURE WHICH SHOULD BE INCLUDED WHILE COMPUTING OPERATING M ARGIN OF THE APPELLANT. GROUND 3 THE GROUND OF APPEAL AGAINST INITIATION OF PENALTY IS PRE - MATURE AND IS DISMISSED. 13. AGGRIEVED WITH THE ABOVE ORDER OF THE CIT(A), BOTH THE ASSESSEE AS WELL AS THE REVENUE ARE IN CROSS-APPEALS BEFORE THE TRIBUNAL WITH THE FOLLOWING GROUNDS :- ASSESSEES APPEAL - ITA NO.1610/PUN/2013 14. GROUND NO.1 IS GENERAL AND GROUND NO.5 IS NOT PRESSED. GROUND NOS.7 AND 8 ARE CONSEQUENTIAL IN NATURE AND GROUND NOS.10, 11 AND 12 ARE NOT PRESSED. THESE GROUNDS ARE DISMISSED, AS THE CASE MAY BE. THE BALANCE GROUNDS ARE EXTRACTED HEREUNDER :- GROUNDS RELEVANT TO COMPUTATION OF OPERATING MARGIN OF THE APPELLANT. 2. TREATING ADDITIONAL DEPRECIATION CHARGED ON LEASED MACHINES AS ORDINARY OPERATING EXPENDITURE. ERRED IN TREATING ADDITIONAL DEPRECIATION CHARGED ON LEASED MACHINES (AMOUNTING TO INR 25,25,561) AS ORDINARY OPERATING EXPENDITURE WHILE COMPUTING THE OPERATING MARGIN OF THE APPELLANT FOR THE FINANCIAL YEAR (HEREINAFTER REFERRED TO AS FY) 2004-05. 3. TREATING THE COST OF MACHINERY GIVEN FREE TO A CUSTOMER (I.E. AMUL) AS ORDINARY OPERATING EXPENDITURE. ERRED IN TREATING THE EXPENDITURE (INR 7,87,93,876/-) DEBITED TO THE PROFIT AND LOSS ACCOUNT OF THE APPELLANT ON ACCOUNT OF MACHINERY GIVEN FREE OF COST TO A CUSTOMER (I.E. AMUL) BY THE APPELLANT AS ORDINARY OPERATING EXPENDITURE WHILE COMPUTING THE OPERATING MARGIN OF THE APPELLANT FOR THE FY 2004-05. GROUNDS RELEVANT TO THE COMPARABILITY ANALYSIS 4. UNJUSTIFIED APPLICATION OF TURNOVER FILTER. 11 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 ERRED IN APPLYING A TURNOVER FILTER OF INR 10 CRORES FOR IDENTIFYING COMPARABLE COMPANIES AND ACCORDINGLY, REJECTING COMPANIES HAVING TURNOVER LESS THAN INR 10 CRORES. 6. REJECTION OF BHARAT BOX FACTORY LIMITED AS A COMPARABLE COMPANY. ERRED IN REJECTING BHARAT BOX FACTORY LIMITED FROM THE SET OF COMPARABLE COMPANIES BY MAKING AN INCORRECT OBSERVATION THAT SEGMENTAL INFORMATION OF THE COMPARABLE SEGMENT FOR THE AFORESAID COMPANY IS NOT AVAILABLE IN THE ANNUAL REPORT. 9. PROPOSING THE TRANSFER PRICING ADJUSTMENT IN CONNECTION WITH THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT BASED ON THE TOTAL OPERATING INCOME INSTEAD OF ADJUSTMENT ATTRIBUTABLE TO THE INTERNATIONAL TRANSACTIONS (WITHOUT PREJUDICE). ERRED IN PROPOSING THE TRANSFER PRICING ADJUSTMENT TO THE INCOME OF THE APPELLANT IN CONNECTION WITH THE INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES (HEREINAFTER REFERRED TO AS AES) BASED ON THE TOTAL OPERATING INCOME OF THE APPELLANT INSTEAD OF TRANSFER PRICING ADJUSTMENT ATTRIBUTABLE TO THE VALUE OF INTERNATIONAL TRANSACTIONS WITH THE AES. 15. THE ASSESSEE FILED ADDITIONAL GROUNDS BEFORE US AND THE SAME ARE EXTRACTED AS UNDER :- 1] THE ASSESSEE COMPANY SUBMITS THAT THE ADJUSTMENT MADE BY IT WHILE DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY IT OF RS.8,04,23,860/- IN ITS REVISED RETURN IS NOT JUSTIFIED AND THE LD. A.O. MAY BE DIRECTED TO DELETE THE SAME WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSEE COMPANY. 2] THE ASSESSEE COMPANY SUBMITS THAT WHILE DETERMINING THE OPERATING MARGINS OF THE COMPARABLE COMPANIES FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY UNDER TRANSACTIONAL NET MARGIN METHOD, THE ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL SHOULD BE GRANTED. REVENUES APPEAL - ITA NO.1647/PUN/2013 1. WHETHER THE LEARNED CIT(A)-IT/TP, PUNE IS JUSTIFIED IN LAW AND FACTS OF THE CASE WHILE DIRECTING THAT THE ADDITIONAL DEPRECIATION ON LAND AND BUILDING SHOULD BE EXCLUDED FROM COMPUTING MARGIN OF THE ENTITY, WHEN AS PER PROVISIONS OF RULE 10B(3) DIFFERENCES IN FINANCIALS OF BOTH THE COMPARABLES AND ASSESSEE'S NEED TO BE ADJUSTED. ALSO THE LD CIT(A) IT/TP, PUNE WAS NOT CORRECT IN TREATING DEPRECIATION ON LAND AND BUILDING AS NON- OPERATING EXPENDITURE WHEN CONSCIOUSLY AS PART OF THE BUSINESS PLAN AND RESTRUCTURING, COMPANY HAD BEEN DISPOSING OF THE FIXED ASSETS OVER THE YEARS. 12 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 2. WHETHER THE LEARNED CIT(A)-IT/TP, PUNE IS JUSTIFIED IN LAW AND FACTS OF THE CASE WHILE DIRECTING THAT THE DIFFERENTIAL RATES OF DEPRECIATION BE ADJUSTED WHEN AS PER THE FUNCTIONS ASSETS AND RISKS I.E. FAR ANALYSIS THERE WAS NO DIFFERENCES IN THE COMPARABLES AND THE TESTED PARTY. 3. WHETHER THE LEARNED CIT(A)-IT/TP, PUNE IS JUSTIFIED IN LAW AND FACTS OF THE CASE WHILE DIRECTING THAT RS.10 CRORES BE TAKEN AS LOWER FILTER WITHOUT GIVING ANY ECONOMIC OR JUDICIAL RATIONALE FOR THE SAME, WHEN THE ASSESSEE'S STAND ON REDUCTION IN NUMBER OF COMPARABLES AND CONSISTENCY OF THE TO FILTER HAD BEEN ALREADY DISCUSSED AND REJECTED IN THE TP ORDER. 4. WHETHER THE LEARNED CIT(A)-IT/TP, PUNE IS JUSTIFIED IN LAW AND FACTS OF THE CASE WHILE DIRECTING THAT GAYATRISHAKTI PAPER AND BOARDS LIMITED BE REJECTED AS COMPARABLE WHEN IT WAS SELECTED AFTER A CAREFUL FAR ANALYSIS AND WHEN TNM AS A COMPARABILITY METHOD IS TOLERANT TO FUNCTIONAL AND PRODUCT DIFFERENCES. 16. BEFORE US, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT APART FROM OTHERS, FOUR IMPORTANT ISSUES ARE REQUIRED TO BE ADJUDICATED BY THE BENCH IN THESE CROSS APPEALS. THE GROUNDS OF CROSS APPEALS ARE CONNECTED TO THESE FOUR ISSUES. THE LD. COUNSEL LISTED OUT THE SAME AND THE SAME IS AS UNDER :- A. DETERMINATION OF THE OPERATING MARGIN OF THE ASSESSEE COMPANY (PLI RELATED ADJUSTMENT). B. SELECTION OF COMPANIES BY APPLYING TURNOVER FILTER. C. SELECTION OF COMPANIES ON FUNCTIONAL COMPARABILITY. D. ALLOWANCE OF WORKING CAPITAL ADJUSTMENT. A. PLI RELATED ADJUSTMENTS 17. REFERRING TO THE FIRST ISSUE I.E. DETERMINATION OF THE OPERATING MARGIN OF THE ASSESSEE COMPANY, LD. COUNSEL FILED THE FOLLOWING WRITTEN SUBMISSION AND THE SAME IS EXTRACTED AS FOLLOWS :- 13 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 15] THE ASSESSEE COMPANY HAD COMPUTED ITS OPERATING MARGIN AT 1.82% IN THE TRANSFER PRICING STUDY REPORT. KINDLY REFER PAGE 133 OF THE PAPER BOOK. WHILE COMPUTING THE OPERATING MARGIN, THE ASSESSEE HAD EXCLUDED CERTAIN EXPENSES ON THE GROUND THAT THEY WERE EXTRAORDINARY ITEMS. FURTHER IN THE TRANSFER STUDY REPORT ON PAGE 111, IT WAS STATED THAT THE ASSESSEE HAD GIVEN MACHINERY OF RS.7,87,93,876/- TO AMUL FREE OF COST. THE ASSESSEE HAD STATED THAT THIS WAS AN EXTRAORDINARY COST BUT ON A CONSERVATIVE BASIS, IT WAS CONSIDERED AS PART OF OPERATING COST. SIMILARLY, IT WAS STATED THAT THE ASSESSEE HAD CHARGED DEPRECIATION AT HIGHER RATES THAN THE RATES PRESCRIBED UNDER SCHEDULE XIV OF THE COMPANIES ACT, 1956. THE ASSESSEE STATED THAT THE SUITABLE ADJUSTMENT SHOULD BE MADE ON ACCOUNT OF THE DIFFERENTIAL DEPRECIATION RATES OF THE ASSESSEE AND THE COMPARABLE COMPANIES. THE LEARNED TPO HAS NOT ACCEPTED THE CLAIM MADE BY THE ASSESSEE ON ACCOUNT OF EXCLUSION OF EXTRAORDINARY COSTS WHILE COMPUTING THE OPERATING MARGIN. HE HAS DISCUSSED THE VARIOUS ISSUES ON PAGES 19 TO 31 OF THE ORDER. THE FACTS IN RESPECT OF EACH OF THE ADJUSTMENT ARE AS UNDER - 15.1] ADJUSTMENT ON ACCOUNT OF ADDITIONAL DEPRECIATION ON LEASED MACHINES - A. THE ASSESSEE HAS CLAIMED THAT IT HAS CHARGED ADDITIONAL DEPRECIATION OF RS.25,25,561/- ON ACCOUNT OF REVISED ESTIMATES OF THE USEFUL LIFE OF THE LEASED MACHINES. THE ASSESSEE COMPANY PURCHASES PACKAGING, FILLING AND PROCESSING MACHINES FROM ITS AES. THE ASSESSEE SELLS THESE MACHINES TO THE VARIOUS CUSTOMERS IN INDIA AND ALSO GIVES THEM ON LEASE. IN CASE, WHERE THE MACHINES ARE GIVEN ON LEASE, THE ASSESSEE USED TO PROVIDE DEPRECIATION THEREON. TILL DECEMBER, 2004, THE ASSESSEE USED TO CHARGE DEPRECIATION @ 8.33%. HOWEVER, THE ASSESSEE REVISED ITS ESTIMATES OF THE USEFUL LIFE OF THESE LEASED MACHINES AND FROM JANUARY, 2005 ONWARDS IT DECIDED TO CHARGE DEPRECIATION @ 12%. THE RELEVANT DETAILS ARE GIVEN ON PAGE 37 OF THE PAPER BOOK. B. IN THIS CONTEXT, THE ASSESSEE HAS ALSO GIVEN A NOTE IN THE BALANCE SHEET WHEREIN IT IS STATED THAT ON ACCOUNT OF THE REVISED ESTIMATES OF THE USEFUL LIFE OF THE LEASED MACHINES, ADDITIONAL DEPRECIATION OF RS.25,25,561/- WAS PROVIDED. KINDLY REFER PAGE 42 OF THE PAPER BOOK. C. THUS, THIS ADDITIONAL DEPRECIATION OF RS.25,25,561/- IS ON ACCOUNT OF REVISION IN THE USEFUL LIFE OF THE ASSETS. FURTHER, THIS AMOUNT IS BASICALLY ON ACCOUNT OF THE LESSER DEPRECIATION PROVIDED IN THE EARLIER YEARS SINCE FROM JANUARY, 2005 THE ASSESSEE HAS STARTED CHARGING DEPRECIATION @ 12% AS AGAINST 8.33%. IN THIS CONTEXT, THE SUBMISSION TO THE LEARNED TPO IS ON PAGES 197 - 198 OF THE PAPER BOOK. D. THE LEARNED TPO HAS NOT ACCEPTED THE ABOVE CLAIM OF THE ASSESSEE. ACCORDING TO HIM, THE ASSETS ARE BUSINESS ASSETS AND THE NORMAL DEPRECIATION IS PART OF OPERATING COST AND HENCE, THE ADDITIONAL DEPRECIATION ON ACCOUNT OF THE REVISION IN THE USEFUL LIFE OF THE ASSETS IS ALSO TO BE CONSIDERED AS PART OF OPERATING COST. (REFER PAGE 21) E. THE LEARNED CIT(A) HAS DISCUSSED THIS ISSUE ON PAGE 11 OF HIS ORDER. ACCORDING TO HIM THIS ADDITIONAL DEPRECIATION PROVIDED CANNOT BE CONSIDERED AS AN EXTRAORDINARY COST AND HENCE, THE CLAIM OF THE ASSESSEE IS NOT ACCEPTABLE. 14 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 F. THE ASSESSEE SUBMITS THAT THIS ADDITIONAL DEPRECIATION IS PROVIDED ON ACCOUNT OF CHANGE IN THE ESTIMATED USEFUL LIFE OF THE ASSET. THIS ADDITIONAL DEPRECIATION IS BASICALLY ON ACCOUNT OF THE LESSER DEPRECIATION PROVIDED IN THE EARLIER YEARS AND HENCE, THE SAME NEEDS TO BE EXCLUDED AS AN EXTRAORDINARY COSTS. ACCORDINGLY, THE ASSESSEE REQUESTS THAT THE AMOUNT OF RS. 25,25,561/- MAY KINDLY BE EXCLUDED WHILE DETERMINING THE OPERATING MARGIN. 15.2] ADJUSTMENT ON ACCOUNT OF ADDITIONAL DEPRECIATION CHARGED ON LAND AND BUILDING - A. IN THE TRANSFER PRICING STUDY REPORT, THE ASSESSEE HAS ALSO MADE AN ADJUSTMENT OF RS.69,45,000/- BEING ADDITIONAL DEPRECIATION CHARGED ON LAND AND BUILDING AT ITOLA. THE RELEVANT DETAILS ARE GIVEN ON PAGE 133 OF THE PAPER BOOK. THE ASSESSEE HAS GIVEN A DETAILED NOTE IN ITS BALANCE SHEET WHEREIN IT IS STATED THAT IN THE SUBSEQUENT YEAR IT HAD ENTERED INTO AN MOU TO SELL ITS LAND AND BUILDING AT ITOLA FOR RS. 5,99,80,000/- (REFER PAGE 42, PARA 3.6). IT IS MENTIONED THAT THE ASSESSEE HAD PROVIDED ADDITIONAL DEPRECIATION OF RS.27,03,884/- AND RS.42,40,966/- ON LAND AND BUILDING RESPECTIVELY TO VALUE THE SAID ASSETS AT THEIR REALIZABLE VALUE. THE ASSESSEE HAS CONTENDED THESE COSTS SHOULD BE TREATED AS EXTRAORDINARY COSTS AND BE EXCLUDED WHILE COMPUTING THE OPERATING MARGIN. B. THE LEARNED TPO HAS NOT ACCEPTED THE ABOVE CONTENTION OF THE ASSESSEE. ACCORDING TO HIM, THE ASSESSEE HAS USED THESE ASSETS FOR ITS BUSINESS PURPOSES AND THEREFORE, THE ADDITIONAL DEPRECIATION PROVIDED CANNOT BE CONSIDERED AS A NON OPERATING COST. C. THE LEARNED CIT(A) HAS DISCUSSED THIS ISSUE ON PAGE 12 OF HIS ORDER. HE HAS ACCEPTED THE CLAIM OF THE ASSESSEE AND DIRECTED TO EXCLUDE THE ABOVE COSTS WHILE DETERMINING THE OPERATING MARGIN OF THE ASSESSEE. THE RELEVANT SUBMISSIONS ON THIS ISSUE TO THE LEARNED CIT(A) ARE GIVEN ON PAGE 218 OF THE PAPER BOOK. D. THE ASSESSEE SUBMITS THAT THIS COST DEBITED IN THE BOOKS IS ON ACCOUNT OF SHORTFALL IN THE REALIZATION OF THE CONSIDERATION TO BE RECEIVED ON SALE OF LAND AND BUILDING IN THE SUBSEQUENT YEAR VIS-A-VIS THE BOOK VALUE. NOW, THIS PROVISION IS MADE IN ORDER TO VALUE THE ASSETS AT ITS REALIZABLE VALUE. IF THE ASSESSEE HAD NOT MADE THIS PROVISION, IT WOULD HAVE DEBITED THE SAID AMOUNT AS A LOSS ON SALE OF ASSET IN THE SUBSEQUENT YEAR. NOW, LOSS ON SALE OF ASSET IS NOT AN OPERATING EXPENDITURE AND EVEN THE LEARNED TPO HAS ACCEPTED THE SAME IN THE ORDER. THUS, THE ASSESSEE SUBMITS THAT ON THE SAME LOGIC, THE ADDITIONAL DEPRECIATION PROVIDED ON LAND AND BUILDING SHOULD BE EXCLUDED WHILE DETERMINING THE OPERATING MARGIN. ACCORDINGLY, THE ASSESSEE SUBMITS THAT THE LEARNED CIT(A) IS JUSTIFIED IN ALLOWING THE SAID CLAIM. D. IT IS FURTHER SUBMITTED THAT FOR A.Y. 2004 - 05, THE LEARNED TPO HAS GRANTED ADJUSTMENT FOR THE ADDITIONAL DEPRECIATION PROVIDED ON THE ASSETS HELD FOR DISPOSAL. THE ORDER OF THE TPO IS ON PAGES 203 - 211 OF THE PAPER BOOK AND THE RELEVANT DISCUSSION IS ON PAGE 210. 15.3] MACHINERY GIVEN FREE OF COST TO AMUL- 15 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 A. AS STATED ABOVE, THE ASSESSEE IS IN THE BUSINESS OF PROVIDING PACKAGING MATERIAL WHICH IS BASED ON ASEPTIC TECHNOLOGY. THE BUSINESS OF THE ASSESSEE IS DEPENDENT UPON THE FOOD PROCESSING INDUSTRY. THE ASSESSEE CONSIDERED HUGE POTENTIAL IN MILK PACKAGING MARKET IN INDIA AS MOST OF THE INDIAN HOUSEHOLDS WERE PURCHASING MILK IN UNPACKED CONDITION OR IN PLASTIC POUCHES. THE ASSESSEE IN ORDER TO TAP HUGE POTENTIAL IN THE MILK MARKET DECIDED TO SUPPLY TWO LINES OF FILLING MACHINERY FREE OF COST TO AMUL WHICH IS THE LARGEST SUPPLIER OF MILK AND MILK PRODUCTS IN INDIA. BY PROVIDING THE FILLING MACHINERY, IT SERVED TWO MAIN PURPOSES FOR THE ASSESSEE. FIRSTLY, AMUL WOULD PURCHASE PACKAGING MATERIAL FROM THE ASSESSEE AND SECONDLY, ONCE THE INDUSTRY LEADER USES THE ASEPTIC TECHNOLOGY OF THE ASSESSEE, IT WOULD ENCOURAGE OTHER COMPANIES TO ALSO ADOPT THE SAID TECHNOLOGY. ACCORDINGLY, THE COST OF THE FREE MACHINERY OF RS.7,87,93,876/- PROVIDED TO AMUL WAS CONSIDERED AS AN EXTRAORDINARY COST BY THE ASSESSEE. B. THE ASSESSEE HAS GIVEN THE RELEVANT DETAILS ON PAGE 111 AS WELL AS ON PAGE 201 OF THE PAPER BOOK. THE LEARNED TPO HAS NOT ACCEPTED THE CLAIM OF THE ASSESSEE. THE RELEVANT DISCUSSION IS ON PAGES 28-31 OF THE ORDER. ACCORDING TO HIM, THE DECISION OF PROVIDING TWO LINES OF FILLING MACHINERY FREE OF COST TO AMUL WAS A BUSINESS DECISION AND IS NOTHING BUT BUSINESS PROMOTION EXPENDITURE OF THE ASSESSEE. C. THE LEARNED CIT(A) HAS DISCUSSED THIS ISSUE ON PAGE 12 - 13 OF HIS ORDER. ACCORDING TO HIM, SUCH ADJUSTMENT ON ACCOUNT OF BUSINESS STRATEGY CANNOT BE PERMITTED AND THEREFORE, HE HAS REJECTED THE CONTENTION OF THE ASSESSEE COMPANY. D. THE ASSESSEE SUBMITS THAT THIS IS AN EXTRAORDINARY COST INCURRED BY IT. THERE IS NO DISPUTE THAT THIS IS A BUSINESS DECISION. HOWEVER, THIS ACT OF GIVING TWO LINES OF FILLING MACHINERY FREE OF COST TO AMUL IS NOT AN EVERYDAY ACT. THIS IS A NON RECURRING TYPE OF COST AND HENCE, THE SAME SHOULD BE EXCLUDED WHILE COMPUTING THE OPERATING MARGIN OF THE ASSESSEE. E. THE ASSESSEE SUBMITS THAT SUCH TYPE OF COSTS ARE NON RECURRING IN NATURE AND HENCE, THE SAME SHOULD BE TREATED AS A NON OPERATING EXPENDITURE WHILE DETERMINING THE OPERATING MARGIN. IN THIS CONTEXT, THE ASSESSEE PLACES RELIANCE ON THE FOLLOWING DECISIONS 1. TRANSWITCH INDIA (P.) LTD. V. DCIT. 2. MARUBENI INDIA (P.) LTD. V. DIRECTOR OF INCOME-TAX [2013] 354 ITR 638]. 3. SKODA AUTO INDIA P. LTD. V. ACIT [30 SOT 319 (PUNE)]. 4. CAMGEMINI INDIA (P.) LTD. V. ACIT [147 ITD 330 (MUM)]. 5. TOYOTO KIRLOSKAR MOTORS P. LTD. V. ACIT [28 TAXMANN.COM 293 (BANG)]. 15.4] ADJUSTMENT OF ACCOUNT OF DIFFERENTIAL RATES OF DEPRECIATION - A. THE ASSESSEE IN ITS TRANSFER PRICING STUDY REPORT ON PAGE 111 OF THE PAPER BOOK HAD POINTED OUT THAT IT HAD CHARGED DEPRECIATION AT SIGNIFICANTLY HIGHER RATES THAN THE RATES PRESCRIBED IN SCHEDULE XIV OF THE 16 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 COMPANIES ACT, 1956. HOWEVER, WHILE COMPUTING THE OPERATING MARGIN IN THE TRANSFER PRICING STUDY REPORT, THE ASSESSEE DID NOT MAKE ANY ADJUSTMENT ON THIS GROUND. KINDLY REFER PAGE 37 OF THE PAPER BOOK WHEREIN THE ASSESSEE HAS GIVEN THE DEPRECIATION RATES CHARGED BY IT AND THE RATES PRESCRIBED IN SCHEDULE XIV. B. HOWEVER, IN THE COURSE OF THE PROCEEDINGS BEFORE THE LEARNED TPO, THE ASSESSEE SOUGHT AN ADJUSTMENT ON ACCOUNT OF THE DIFFERENTIAL RATES OF DEPRECIATION. THE ASSESSEE SUBMITTED A DETAILED REPLY ON THIS ISSUE TO THE LEARNED TPO AND THE COPY OF THE SAME IS GIVEN ON PAGES 179-182 OF THE PAPER BOOK. THE ASSESSEE FURTHER FILED ANOTHER REPLY TO THE LEARNED TPO WHICH IS GIVEN ON PAGES 191 TO 202 OF THE PAPER BOOK. ON PAGE 200, THE ASSESSEE HAD CLARIFIED TO THE TPO THAT SIMILAR ADJUSTMENT WAS GRANTED BY HIM FOR A.Y. 2004-05. C. THE LEARNED TPO HAS NOT ACCEPTED THE CLAIM OF THE ASSESSEE. ACCORDING TO HIM, SUCH ADJUSTMENT IS NOT JUSTIFIED. THE RELEVANT DISCUSSION IS ON PAGES 22 - 29 OF THE ORDER. D. THE LEARNED CIT(A) HAS DISCUSSED THIS ISSUE ON PAGES 13-15 OF THE ORDER. THE FINDINGS ARE GIVEN IN PARA 2.3.7 OF HIS ORDER WHEREIN HE HAS STATED THAT SUCH DIFFERENCE IN THE DEPRECIATION RATES BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES CONSTITUTES MATERIAL DIFFERENCE FOR WHICH ADJUSTMENT SHOULD BE MADE. ACCORDINGLY, HE HAS DIRECTED TO GRANT ADJUSTMENT AFTER PROPER VERIFICATION. E. THE ASSESSEE SUBMITS THAT SIMILAR ADJUSTMENT WAS GRANTED FOR A.Y. 2004 - 05 AND THE COPY OF THE ORDER PASSED BY THE LEARNED TPO IS ON PAGES 203 - 211 OF THE PAPER BOOK. ON PAGE 204 - 205, THE LEARNED TPO HAS ACCEPTED GRANTING OF ADJUSTMENT ON ACCOUNT OF DIFFERENTIAL DEPRECIATION RATES. THE ASSESSEE FURTHER SUBMITS THAT THE DIFFERENCE IN DEPRECIATION RATES AS CHARGED BY THE ASSESSEE AND THE COMPARABLES IS VERY CLEAR FROM THE ANNUAL REPORTS OF THE COMPANIES. FOR EXAMPLE, ON PAGE 482, THE FIXED ASSETS SCHEDULE OF KARUR KCP PACKAGING LTD. IS GIVEN WHEREIN THE RATES CHARGED ARE ALSO STATED. SIMILARLY, IN THE CASE OF PAPER PRODUCTS LTD., THE RELEVANT DETAILS ARE GIVEN ON PAGE 571 OF THE PAPER BOOK. ACCORDINGLY, THE ASSESSEE SUBMITS THAT THE LEARNED CIT(A) IS JUSTIFIED IN DIRECTING THE A.O TO ALLOW THE ADJUSTMENT ON ACCOUNT OF THE DIFFERENTIAL RATES OF DEPRECIATION. B. TURN OVER - FILTER 18. FURTHER, REFERRING TO THE TURNOVER FILTER ISSUE , THE ASSESSEES COUNSEL FILED FOLLOWING WRITTEN SUBMISSION :- 16] APPLICATION OF TURNOVER FILTER - A. THE ASSESSEE COMPANY HAD SELECTED 13 COMPANIES AS COMPARABLE ENTITIES. THE DETAILS OF THESE 13 COMPANIES ARE GIVEN ON PAGE 841 OF THE 17 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 PAPER BOOK. WHILE SELECTING THE COMPANIES, THE ASSESSEE DID NOT APPLY ANY TURNOVER FILTER. B. THE LEARNED TPO HAS APPLIED TURNOVER FILTER. HE HAS DISCUSSED THIS ISSUE IN PARA 8(I), PAGE 9 OF HIS ORDER. ACCORDING TO THE LEARNED TPO , TURNOVER IS A RELEVANT FACTOR FOR DECIDING THE COMPARABILITY OF ANY ENTITY. SINCE, THE TURNOVER OF THE ASSESSEE IS AROUND RS.300 CRS, HE HAS APPLIED THE TURNOVER FILTER OF RS.100 CRS AND HAS REJECTED ALL THE COMPANIES WHOSE TURNOVER IS LESS THAN RS. 100 CRS. C. THE LEARNED CIT(A) HAS DISCUSSED THIS ISSUE IS PARAS 2.4.1 TO 2.4.6 OF HIS ORDER. THE LEARNED CIT(A) HAS ACCEPTED THE CLAIM OF THE TPO THAT TURNOVER FILTER SHOULD BE APPLIED. HOWEVER, CONSIDERING THE FACTS OF THE CASE, HE HAS REDUCED THE LOWER FILTER FROM RS. 100 CRS TO RS. 10 CRS. 19. CONSIDERING THE SIGNIFICANCE OF THIS ISSUE OF TURNOVER FILTER, LD. AR FILED DETAILED WRITTEN SUBMISSION AND THE SAME ARE EXTRACTED AS UNDER :- 1] IN THIS CASE, THE ASSESSEE COMPANY HAS FOLLOWED TRANSACTIONAL NET MARGIN METHOD (TNMM) FOR DETERMINING ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS. THE TOTAL TURNOVER OF THE ASSESSEE COMPANY WAS RS. 292. 72 CRS. FOR THE YEAR UNDER CONSIDERATION. THE ASSESSEE COMPANY HAD NOT ADOPTED ANY TURNOVER FILTER WHILE SELECTING THE COMPARABLES. THE LEARNED TPO HAS APPLIED THE TURNOVER FILTER. ACCORDING TO HIM, THE TURNOVER OF THE ASSESSEE COMPANY IS AROUND RS. 300 CRS. AND THEREFORE, ONLY THOSE COMPANIES SHOULD BE SELECTED WHOSE TURNOVER IS MORE THAN RS. 100 CRS. ACCORDINGLY, THE LEARNED TPO EXCLUDED ALL THE COMPANIES WHOSE TURNOVER WAS LESS THAN RS. 100 CRS. THE LEARNED CIT(A) HAS HELD THAT THE TURNOVER FILTER ADOPTED BY THE TPO OF RS. 100 CRS. IS NOT CORRECT. HE HAS REFERRED TO THE DECISION OF BANGALORE ITAT IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) (P.) LTD. [20 TAXMANN.COM 715 (BANG)] HAS APPLIED THE TURNOVER FILTER AT RS.10 CRS. ACCORDINGLY, THE DEPT, IN ITS APPEAL HAS CHALLENGED THE DECISION OF CIT(A) IN LOWERING THE TURNOVER FILTER FROM RS. 100 CRS. TO RS. 10 CRS. 2] THE ASSESSEE SUBMITS THAT WHILE SELECTING THE COMPARABLES, VARIOUS PARAMETERS ARE TO BE CONSIDERED. IN FACT, SIZE AS A CRITERIA FOR SELECTION OF COMPARABLES IS ALSO RECOMMENDED BY OCED IN ITS TRANSFER PRICING GUIDELINES. THE OBSERVATION OF OCED IN PARA-3.43 OF THE CHAPTER ON GUIDELINES READS AS FOLLOWS; 'SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PARTIES MIGHT AFFECT THE RELATIVE COMPETITIVE POSITIONS OF THE BUYER AND SELLER AND THEREFORE COMPARABILITY'. 3] HOWEVER, OECD HAS FURTHER STATED IN PARA 3.38 OF THE SAID GUIDANCE NOTE THAT IDENTIFICATION OF POTENTIAL COMPANY HAS TO BE MADE WITH THE OBJECTIVE OF FINDING THE MOST RELIABLE DATA , RECOGNISING THAT THEY WILL NOT ALWAYS BE PERFECT. FOR INSTANCE, INDEPENDENT TRANSACTIONS MAY BE 18 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 SCARES IN CERTAIN MARKETS AND SOME INDUSTRIES. A PRAGMATIC SOLUTION IS TO BE FOUND ON A CASE BY CASE BASIS, SUCH AS BROADENING THE SEARCH . THUS, WHEN THERE ARE LIMITED COMPARABLES AVAILABLE, OECD HAS HELD THAT SEARCH CRITERIA CAN BE BROADENED . 4. NOW, THE ASSESSEE SUBMITS THAT IT IS ENGAGED IN MANUFACTURING PACKAGING MATERIAL BASED ON ASEPTIC TECHNOLOGY WHICH IS MAINLY USED FOR PACKAGING LIQUID FOOD ITEMS LIKE JUICES OR MILK. IT IS TO BE NOTED THAT IN THIS LINE OF BUSINESS, NOT MANY COMPANIES ARE INVOLVED. THEREFORE, IT IS SUBMITTED THAT THE TURNOVER FILTER OF RS. 100 CRS. APPLIED BY THE TPO IS VERY STRICT AND NARROW CONSIDERING THE FACT THAT THERE ARE LIMITED COMPARABLES IN THE LINE OF BUSINESS IN WHICH THE ASSESSEE IS INVOLVED. ACCORDINGLY, THE ASSESSEE SUBMITS THAT THE TURNOVER FILTER ADOPTED BY THE TPO OF RS.100 CRS. IS NOT CORRECT CONSIDERING THE FACTS OF THE CASE. 5. IT IS TO BE NOTED THAT IN THE CASE OF SOFTWARE INDUSTRY, THE NUMBER OF PLAYERS INVOLVED ARE MANY AND FOR EACH RANGE OF TURNOVER, THERE ARE NUMBER OF COMPANIES AVAILABLE. HOWEVER, IN THE CASE OF THE ASSESSEE, THE NUMBER OF COMPANIES INVOLVED IN FOOD PACKAGING BUSINESS ARE NOT MANY AND THEREFORE, A VERY NARROW TURNOVER FILTER SHOULD NOT BE ADOPTED. NOW, IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) (P.) LTD., THE ASSESSEE HAD RELIED ON THE REPORT OF DUN & BRADSTREET FOR CLASSIFYING THE COMPANIES. EVEN IN THAT CASE, ANOTHER REPORT PUBLISHED BY NASSCOM FOR CLASSIFYING THE COMPANIES ON THE BASIS OF TURNOVER WAS ALSO REFERRED. NASSOM HAD CATEGORIZED THE COMPANIES BASED ON THE TURNOVER AS FOLLOWS; A. GREATER THAN USD 1 BILLION (APPROXIMATELY 5,000 CRORES) B. BETWEEN USD 100 MILLION TO USD 1 BILLION(RS.500 CRORES TO RS.5,000 CRORES) AND C. OTHERS HAVING LESS THAN USD 100 MILLION (RS.500 CRORES) WHILE AS PER THE REPORT OF DUN AND BRADSTREET , IT HAD CLASSIFIED THE SOFTWARE COMPANIES INTO THE FOLLOWING CATEGORIES; A. LARGE SIZE FIRMS (RS.20,000 MN) B. MEDIUM SIZE FIRMS (RS.2,000-20,000 MN) C. SMALL SIZE FIRMS (RS.2,000 MN) 6] CONSIDERING BOTH THE REPORTS, HONBLE ITAT HELD THAT IN THE INDIAN CONTEXT, THE CLASSIFICATION MADE BY DUN AND BRADSTREET IS MORE APPLICABLE AND THEREFORE, THE CATEGORISATION OF COMPANIES AS PER THE SAID REPORT WAS ACCEPTED WHILE SELECTING THE COMPARABLES. 7] HOWEVER, THE SELECTION CRITERIA LAID DOWN IN CASE OF COMPANIES ENGAGED IN SOFTWARE DEVELOPMENT BUSINESS WOULD NOT BE STRICTLY APPLICABLE TO THE CASE OF ASSESSEE COMPANY. AS ALREADY CLARIFIED THAT NUMBER OF COMPANIES INVOLVED IN THE LINE OF FOOD PACKAGING BUSINESS ARE NOT MANY AND THEREFORE, THE TURNOVER FILTER SHOULD BE BROADENED IN ORDER TO FIND OUT THE COMPARABLES. IN FACT, HON'BLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. DCIT [376 ITR 183] HAS HELD THAT MERELY BECAUSE A COMPANY HAS MUCH HIGHER TURNOVER THEN THE 19 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 TESTED PARTY, IS NOT A REASON TO EXCLUDE THE SAME UNLESS THERE IS EVIDENCE TO PROVE THAT HIGH TURNOVER HAS MATERIALLY AFFECTS THE PRICE OR COST. 8] ON PAGE 841 OF THE PAPER BOOK, THE ASSESSEE HAS GIVEN THE DETAILS OF THE COMPANIES SELECTED BY IT IN THE TRANSFER PRICING STUDY REPORT. FROM THE PERUSAL OF THE OPERATING MARGINS OF THE SAID COMPANIES, IT WOULD BE NOTICED THAT THERE IS STANDARD PATTERN THAT COMPANIES WITH HIGHER TURNOVER HAS HIGHER MARGINS. IN FACT, GENERAL METALLIZERS LTD. WITH A TURNOVER OF RS.28.11 CRS. HAS THE HIGHEST OPERATING MARGIN OF 12.08 %. THUS, IN THE PRESENT CASE, THERE IS NO EVIDENCE THAT DIFFERENCE IN TURNOVER HAS AFFECTED THE OPERATING MARGINS OF THE COMPARABLE COMPANIES. ACCORDINGLY, IT IS SUBMITTED THAT IN THE ABSENCE OF ANY MATERIAL EVIDENCE TO INDICATE THAT TURNOVER HAS AFFECTED THE MARGINS, THE TURNOVER FILTER OF RS. 100 CRS. ADOPTED BY THE TPO IS NOT CORRECT. 9] THE ASSESSEE WOULD ALSO LIKE TO INVITE YOUR HONOURS ATTENTION TO THE SAFE HARBOUR RULES INTRODUCED BY CBDT. THE SAFE HARBOUR RULES INTRODUCED PROVIDE FOR CERTAIN MINIMUM PERCENTAGE OF PROFIT WHICH SHOULD BE EARNED. IN THAT CONTEXT, IN RESPECT OF ENTITIES ENGAGED IN SOFTWARE SERVICES, THE MINIMUM PROFIT PERCENTAGE TO BE EARNED IS SEPARATELY MENTIONED FOR COMPANIES HAVING TURNOVER LESS THAN RS. 500 CRS. AND MORE THAN RS. 500 CRS. HOWEVER, IN RESPECT OF MANUFACTURING ENTITY INVOLVED IN AUTO ANCILLARY BUSINESS, THERE ARE NO SUCH SLABS GIVEN ON THE BASIS OF TURNOVER. THIS FACT ALSO INDICATES THAT WHEN THE NUMBER OF ENTITIES INVOLVED ARE MUCH HIGHER THE COMPARABLES CAN BE SELECTED BY APPLYING A NARROW TURNOVER FILTER. HOWEVER, IN CASES WHERE THE NUMBER OF COMPARABLES ARE LESS, THERE IS NO REASON TO APPLY OF A RESTRICT TURNOVER FILTER AND ACCORDINGLY, THE TURNOVER FILTER ADOPTED IN THE CASE OF THE ASSESSEE OF RS. 100 CRS. BY THE TPO IS NOT CORRECT. 20. IN THIS REGARD, LD. AR SUBMITTED THAT THE DECISION OF CIT(A) IN CONSIDERING THE COMPARABLES WITH ABOVE RS.10 CRORES IS APPROPRIATE. REVENUE IS AGGRIEVED WITH THIS DECISION OF THE CIT(A). THE REVENUES CASE IS THAT, WITH RS.300 CRORES TURNOVER OF THE ASSESSEE, THE TURNOVER FILTER OF RS.100 CORES AND ABOVE IS APPROPRIATE. 21. RELYING ON THE ABOVE DISCUSSION, LD. COUNSEL FURTHER SUBMITTED THAT THE ADOPTING OF +/- 10 TIMES OF THE ASSESSEES TURNOVER WOULD MEET THE ENDS OF JUSTICE IN THE MANUFACTURING SECTORS LIKE THE ASSESSEE. FURTHER, ELABORATING THE ABOVE ARGUMENTS, LD. AR SUBMITTED THAT, WITH 20 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 THE ASSESSEES TURNOVER OF RS.300 CRORES OR SO, THE FILTER OF TURNOVER RANGE OF RS.30 CRORES AND ABOVE IS APPROPRIATE. IN THIS REGARD, LD. AR FILED DIFFERENT SCENARIOS OF THE PLI OF THE COMPARABLES WITH RS.30 CRORES TURNOVER AND ABOVE. C. FAR ANALYSIS 22. FURTHER ALSO, REFERRING TO THE FUNCTIONAL COMPARABILITY ISSUE , THE LD. COUNSEL FOR THE ASSESSEE FILED THE FOLLOW WRITTEN SUBMISSIONS :- 17] FUNCTIONAL COMPARABILITY - 17.1] AS STATED ABOVE, THE ASSESSEE HAD SELECTED 13 COMPANIES AS COMPARABLES. OUT OF THE 13 COMPANIES SELECTED, THE LEARNED TPO HAS REJECTED 12 COMPANIES AND HAS ONLY CONSIDERED PAPER PRODUCTS LTD. AS A COMPARABLE ENTITY. IN RESPECT OF THE 12 COMPANIES WHICH ARE REJECTED BY HIM, M/S. BHARAT BOX FACTORY LTD. IS REJECTED ON FUNCTIONAL BASIS WHILE REMAINING 11 COMPANIES WERE REJECTED ON TURNOVER FILTER. 17.2] THE LEARNED TPO FURTHER ADDED BILCARE LTD., KARUR KCP PACKAGING LTD. AND GAYATRISHAKTI PAPERS AND BOARDS LTD. AS COMPARABLE ENTITIES. THE ASSESSEE OBJECTED TO THE INCLUSION OF ALL THESE THREE ENTITIES BEFORE THE LEARNED CIT(A). THE CONTENTION OF THE ASSESSEE WAS ACCEPTED IN RESPECT OF GAYATRI SHAKTI PAPERS AND BOARDS LTD. AND THE LEARNED CIT(A) HELD THAT IT IS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE. HOWEVER, THE OBJECTIONS OF THE ASSESSEE WITH RESPECT TO BILCARE LTD. AND KARUR KCP PACKAGING LTD. HAVE BEEN REJECTED BY THE CIT(A) AND HE HAS HELD THAT THESE TWO COMPANIES ARE FUNCTIONALLY COMPARABLE WITH THE ASSESSEE COMPANY. 17.3] NOW, THE ASSESSEE IS OBJECTING TO THE INCLUSION OF BILCARE LTD. AND KARUR KCP PACKAGING LTD. AS COMPARABLE ENTITIES AND REJECTION OF BHARAT BOX FACTORY LTD. AS A COMPARABLE ENTITY. FURTHER, THE DEPT, HAS OBJECTED TO THE DECISION OF CIT(A) OF HOLDING THAT GAYATRISHAKTI PAPERS AND BOARDS LTD. IS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE COMPANY. IN RESPECT OF THE ABOVE REFERRED COMPANIES, THE ASSESSEE WOULD LIKE TO SUBMIT AS UNDER - 17.4] BILCARE LTD. - A. THE LEARNED TPO HAS CONSIDERED BILCARE LTD. AS A COMPARABLE ENTITY. HE HAS DISCUSSED THIS ISSUE ON PAGES 13 - 16 OF THE ORDER. THE LEARNED CIT(A) HAS CONFIRMED THE STAND TAKEN BY THE LEARNED TPO. IN PARA 21 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 2.7.2.1.1, HE HAS HELD THAT BILCARE IS COMPARABLE WITH THE ASSESSEE COMPANY. B. THE ASSESSEE SUBMITS THAT BILCARE IS ENGAGED IN PACKAGING OF PHARMACEUTICAL PRODUCTS. THE COPY OF THE BALANCE SHEET OF BILCARE LTD. IS GIVEN ON PAGES 349 - 420 OF THE PAPER BOOK. THE ASSESSEE COMPANY SUBMITTED TO THE TPO VIDE LETTER DATED 08.09.2008 THAT BILCARE IS FUNCTIONALLY NOT COMPARABLE WITH IT. THE RELEVANT SUBMISSIONS GIVEN ON PAGES 194 - 195 OF THE PAPER BOOK. C. THE ASSESSEE ALSO CLARIFIED TO THE LEARNED CIT(A) THAT BILCARE IS NOT COMPARABLE. THE RELEVANT SUBMISSION TO CIT(A) IS GIVEN ON PAGES 241 - 242 OF THE PAPER BOOK. D. FROM THE ANNUAL REPORT GIVEN IN THE PAPER BOOK, IT MAY KINDLY BE NOTED THAT BILCARE IS ENGAGED IN VARIOUS BUSINESSES. APART FROM THE PACKAGING OF PHARMACEUTICAL PRODUCTS, BILCARE IS ENGAGED IN PROVIDING CLINICAL SERVICES, RESEARCH SERVICES, DESIGN LAB, RESEARCH ACADEMY, PACKAGING SYSTEMS. THIS IS EVIDENT FROM THE ANNUAL REPORT AND THE RELEVANT PAGE IS ON PAGE 362 OF THE PAPER BOOK. ACCORDINGLY, IT IS VERY CLEAR THAT BILCARE IS ENGAGED IN VARIOUS BUSINESSES APART FROM PACKAGING AND NO SEGMENTAL DETAILS ARE AVAILABLE IN THE BALANCE SHEET. ACCORDINGLY, IN THE ABSENCE OF SEGMENTAL DATA IN THE ANNUAL REPORT OF BILCARE, THE ASSESSEE SUBMITS THAT THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. FOR THE PROPOSITION THAT IN THE ABSENCE OF SEGMENTAL DATA, THE COMPANY IS TO BE REJECTED AS A COMPARABLE, THE ASSESSEE PLACES RELIANCE ON THE FOLLOWING DECISIONS - 1. INVENSYS DEVELOPMENT CENTRE INDIA (P.) LTD. [79 TAXMANN.COM 204 (HYD)] 2. NESS TECHNOLOGIES (INDIA) (P.) LTD. [76 TAXMANN.COM 209 (MUM)] E. THE ASSESSEE FURTHER SUBMITS THAT SIMPLY BECAUSE PART OF THE BUSINESS ACTIVITY OF BILCARE IS MANUFACTURING PACKAGING MATERIAL FOR PHARMACEUTICAL PRODUCTS, IT DOES NOT MEAN THAT THE SAID COMPANY IS COMPARABLE WITH THE ASSESSEE. IT IS SUBMITTED THAT THE PRODUCTS MANUFACTURED BY THE ASSESSEE ARE PAPER BASED PRODUCTS WHILE THOSE OF BILCARE ARE PRIMARILY INCLUDE FILMS, FOILS AND WRAPS. F. THE ASSESSEE IS MANUFACTURING PACKAGING MATERIAL FOR FOOD PRODUCTS WHILE BILCARE IS MANUFACTURING FOR PHARMACEUTICAL PRODUCTS. THE ASSESSEE SUBMITS THAT CONSIDERING THE ABOVE FACTS, BILCARE IS TO BE REJECTED AS A COMPARABLE ENTITY. G. THE ASSESSEE FURTHER SUBMITS THAT IN THE SUBSEQUENT YEARS, BILCARE HAS SUFFERED HUGE LOSSES. THE COPY OF THE BALANCE SHEET OF BILCARE FOR F.YS. 2014 - 15 AND 2015 - 16 ARE GIVEN ON PAGES 843 TO 910 OF THE PAPER BOOK. IT IS TO BE APPRECIATED THAT ON A TURNOVER OF RS. 401.35 CRS. FOR F.Y. 2013 - 14, BILCARE INCURRED A LOSS BEFORE TAX OF RS. 157.34 CRS. FURTHER, FOR F.Y. 2014 - 15, ON A TURNOVER OF RS.331.33 CRS., IT HAS INCURRED A LOSS OF RS.212.06 CRS. THE RELEVANT P & L ACCOUNT IS ON PAGE 851 OF THE PAPER BOOK. SIMILARLY, FOR F.Y. 2015 - 16 ON A TURNOVER OF RS.255.97 CRS., BILCARE INCURRED A LOSS OF RS. 175.46 CRS. KINDLY REFER PAGE 887 OF THE PAPER BOOK. THIS ISSUE IS ALSO IMPORTANT TO DECIDE THE COMPARABILITY OF BILCARE SINCE IN 22 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 THE SUBSEQUENT YEARS, IT HAS INCURRED HUGE LOSSES WHILE THE ASSESSEE HAS INCREASED ITS PROFIT OVER THE YEARS. 17.5] KARUR KCP PACKAGING LTD. A. THE LEARNED TPO HAS SELECTED THIS COMPANY AS A COMPARABLE ENTITY. THE LEARNED CIT(A) HAS DISCUSSED REGARDING THIS COMPANY IN PARA 2.7.2.2.1 AND HAS CONTENDED THAT THE SAID COMPANY IS ENGAGED IN MANUFACTURING OF PAPER BAGS FOR CEMENT INDUSTRY WHICH IS NOTHING BUT A PACKAGING PRODUCT IN A DIFFERENT FORM. ACCORDINGLY, HE HAS REJECTED THE CONTENTION OF THE ASSESSEE. B. THE ASSESSEE SUBMITS THAT KARUR KCP IS MAINLY ENGAGED IN MANUFACTURE OF KRAFT PAPER FROM PULP AND WASTE PAPER. FURTHER, THIS COMPANY IS ALSO ENGAGED IN MANUFACTURING PAPER BAGS WHICH ARE REQUIRED IN CEMENT INDUSTRY. THE SUBMISSION BEFORE THE TPO ON THIS ISSUE IS GIVEN ON PAGE 195 OF PAPER BOOK. C. THE COPY OF THE BALANCE SHEET OF KARUR KCP IS GIVEN ON PAGES 452 - 498 OF THE PAPER BOOK. THE RELEVANT WEBPAGE IS GIVEN ON PAGE 451 WHEREIN IT IS CLEARLY STATED THAT KARUR KCP IS ENGAGED IN MANUFACTURING OF PACKING MATERIAL FOR CEMENT INDUSTRY. THE ASSESSEE SUBMITS THAT MANUFACTURING OF PACKING MATERIAL FOR CEMENT INDUSTRY IS TOTALLY DIFFERENT WITH THAT OF FOOD INDUSTRY. THE BASIC RAW MATERIAL REQUIRED BY TETRA PALE IS HIGHLY SOPHISTICATED WHILE MANUFACTURING PAPER BAGS FOR CEMENT INDUSTRY DOES NOT REQUIRE ANY SUCH SOPHISTICATED MATERIAL. FROM THE BALANCE SHEET, IT IS EVIDENT THAT KARUR IS ENGAGED MAINLY IN SALE OF PAPER AND PAPER BAGS. D. ON PAGE 464 OF THE PAPER BOOK, THE MANAGEMENT DISCUSSION IS GIVEN WHEREIN IT IS CLEARLY STATED THAT KARUR KCP IS ENGAGED IN MANUFACTURING PAPER, PAPER BAGS, POLY PROPYLENE BAGS AND FIBC BAGS. IT IS FURTHER STATED THAT MAJOR QUANTITY OF PAPER BAGS ARE SOLD TO CEMENT INDUSTRY. E. CONSIDERING THE ABOVE FACTS, THE ASSESSEE SUBMITS THAT SIMPLY BECAUSE KARUR KCP IS ALSO ENGAGED IN MANUFACTURING PACKING MATERIAL, IT DOES NOT MEAN THAT THE SAID COMPANY IS COMPARABLE WITH THE ASSESSEE. THE PRODUCT MANUFACTURED BY KARUR KCP IS TOTALLY DIFFERENT AND THE SAID COMPANY IS MAINLY CATERING TO CEMENT INDUSTRY. IT IS SUBMITTED THAT THE COMPANY MANUFACTURING PACKAGING MATERIAL FOR FOOD ITEMS CANNOT BE COMPARED WITH A COMPANY MANUFACTURING PACKING MATERIAL FOR CEMENT BUSINESS. ACCORDINGLY, THE ASSESSEE SUBMITS THAT THE SAID COMPANY SHOULD BE REJECTED AS A COMPARABLE. 17.6] GAYATRISHAKTI PAPERS AND BOARDS LTD. - A. THIS COMPANY HAS BEEN SELECTED AS A COMPARABLE BY THE LEARNED TPO. HOWEVER, THE LEARNED CIT(A) HAS ACCEPTED THE CLAIM OF THE ASSESSEE AND HAS HELD THAT GAYATRISHAKTI IS NOT COMPARABLE WITH THE ASSESSEE. HE HAS DISCUSSED THIS ISSUE IN PARA 2.7.2.2.1. THE LEARNED CIT(A) HAS ACCEPTED THE CLAIM OF THE ASSESSEE THAT THE SAID COMPANY IS ENGAGED IN MANUFACTURING PAPER AND NOT ENGAGED IN MANUFACTURING PACKAGING MATERIAL. ACCORDINGLY, HE HAS HELD THAT THE SAID ENTITY IS TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. THE RELEVANT SUBMISSION TO THE TPO ON THIS ISSUE IS GIVEN ON PAGE 195 OF THE PAPER BOOK. 23 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 17.7] BHARAT BOX FACTORY LTD. - A. THE LEARNED TPO HAS REJECTED THIS COMPANY ON THE GROUND THAT IT IS FUNCTIONALLY NOT COMPARABLE WITH THE ASSESSEE. IN PARA 8(II), PAGES 10 AND 11 OF THE ORDER, HE HAS DISCUSSED REGARDING BHARAT BOX FACTORY LTD. ACCORDING TO HIM, BHARAT BOX IS ENGAGED IN MANUFACTURING OF PRINTED, DUPLEX AND CORRUGATED CARTONS. ACCORDING TO THE TPO, THE CARTONS ARE MANUFACTURED ARE USED FOR PACKAGING. HE HAS STATED THAT WHILE MANUFACTURING CARTONS, BHARAT BOX DOES NOT USE PAPER AS ITS RAW MATERIAL AND IT IS THE CORRUGATED PAPER BOARD WHICH IS USED. HENCE, THE TPO HAS REJECTED THIS COMPANY AS A COMPARABLE. B. THE LEARNED CIT(A) HAS DISCUSSED THIS ISSUE IN PARA 2.5.1 TO 2.5.6. HE HAS REJECTED THIS COMPANY ON THE GROUND THAT SEGMENTAL DATA IS NOT AVAILABLE IN THE ANNUAL REPORT. ACCORDINGLY, HE HAS REJECTED THIS COMPANY AS A COMPARABLE. C. THE ASSESSEE SUBMITS THAT THE COPY OF THE ANNUAL REPORT OF BHARAT BOX IS GIVEN ON PAGES 750 TO 779 OF THE PAPER BOOK. FIRSTLY, IT IS TO BE NOTED THAT BHARAT BOX IS ENGAGED IN MANUFACTURING OF PACKAGING MATERIAL FOR FOOD ITEMS WHICH IS EVIDENT FROM ITS WEBSITE AND THE SNAPSHOT OF THE WEBPAGE IS GIVEN ON PAGE 749. D. AS REGARDS, THE CONTENTION OF THE CIT(A) THAT SEGMENTAL DATA IS NOT AVAILABLE IN THE BALANCE SHEET, IT IS SUBMITTED THAT THIS CONTENTION IS NOT CORRECT. ON PAGE 772 OF THE PAPER BOOK, THE RELEVANT SEGMENTAL REPORTING IS GIVEN AND THEREFORE, THE CLAIM OF THE CIT(A) THAT NO SEGMENTAL DETAILS ARE GIVEN IS NOT CORRECT. E. IT IS ALSO TO BE NOTED THAT FOR A.Y. 2006 - 07, THE LEARNED TPO HAD RAISED SIMILAR OBJECTIONS IN THE SHOW CAUSE NOTICE. THE ASSESSEE CLARIFIED THE FACTS AND ALSO SUBMITTED THE SEGMENTAL INFORMATION AVAILABLE FROM THE BALANCE SHEET. IN PARA 7.2 OF THE ORDER PASSED BY THE LEARNED TPO FOR A.Y 2006 - 07, HE HAS ACCEPTED THE SEGMENTAL RESULTS AND IT HAS CONSIDERED BHARAT BOX FACTORY LTD. AS A COMPARABLE ENTITY BY CONSIDERING THE SEGMENTAL DATA OF PACKAGING / PLASTIC SEGMENT. D. WORKING CAPITAL ADJUSTMENTS 23. FURTHER, REFERRING TO THE ISSUE RELATING TO THE ALLOWANCE OF WORKING CAPITAL ADJUSTMENTS , LD. COUNSEL FILED THE FOLLOWING WRITTEN SUBMISSIONS IN THIS REGARD :- 18] ALLOWANCE OF WORKING CAPITAL ADJUSTMENT -- 18.1] THE ASSESSEE COMPANY HAS RAISED AN ADDITIONAL GROUND OF APPEAL WHEREIN IT HAS CONTENDED THAT THE OPERATING MARGINS OF THE COMPARABLES SHOULD BE WORKED OUT AFTER ALLOWING WORKING CAPITAL ADJUSTMENT. IT IS 24 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 SUBMITTED THAT ALL THE FACTS RELATING TO THIS ISSUE ARE ON RECORD AND HENCE, THE ADDITIONAL GROUND RAISED BY THE ASSESSEE MAY KINDLY BE ADMITTED IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD. [229 ITR 383]. 18.2] THE ASSESSEE SUBMITS THAT WORKING CAPITAL ADJUSTMENT SHOULD BE GIVEN WHILE DETERMINING THE OPERATING MARGIN OF THE COMPARABLES. THE ASSESSEE PLACES RELIANCE ON THE FOLLOWING DECISIONS WHEREIN ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL HAS BEEN PERMITTED - A. ENDURANCE SYSTEMS (INDIA) PVT. LTD. (NOW MERGED WITH ENDURANCE TECHNOLOGIES PVT. LTD.) [2567/PN/12] B. ITO WARD 2(3), PUNE V. NEVIS NETWORKS (INDIA) PVT. LTD. [55 TAXMANN.COM 519]. SCENARIOS 24. FURTHER, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE COMPARABLES SUCH AS BILCARE LTD. AND KARUR KCP PACKAGING LTD. WITH LESS THAN 30 CRORES TURNOVER CAN BE EXCLUDED FROM THE LIST OF COMPARABLES FINALIZED BY THE TPO. FURTHER, THE COMPARABLES I.E. BHARAT BOX FACTORY LTD. SHOULD BE INCLUDED CONSIDERING THE FUNCTIONAL TEST AND OF-COURSE THE TURNOVER BASIS TESTS TOO. IF THE SAME IS ADOPTED, THE FIRST SCENARIO WITH THE 6 OF THE COMPARABLES SUCH AS (I) PAPER PRODUCTS LTD.; (II) PACKAGING INDUSTRIES LTD.; (III) GAYATRISHAKTI PAPERS & BOARDS LTD.; (IV) BHARAT BOX FACTORY LTD.; (V) KHEMKA CONTAINERS LTD. AND (VI) TWENTY FIRST CENTURY PRINTERS LTD. SHALL BE FINAL LIST OF COMPARABLES BASED THE TESTS AND THE AVERAGE ARITHMETIC MEAN OF THE PLI WORKED OUT TO 6.83% WITH THAT OF THE ASSESSEE COMPANY @ 4.89% IS VERY MUCH IN THE ALP. 25. EXPLAINING THE ANOTHER SCENARIO WITH 30 CRORES TURNOVER FILTERS, LD. COUNSEL SUBMITTED THAT THE BILCARE LTD. AND ALL THE OTHER COMPANIES 25 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 WITH WHOSE TURNOVER IS LESS THAN 30 CRORES CAN BE EXCLUDED AND INCLUDED THE BHARAT BOX IN VIEW OF THE FUNCTIONALLY TESTS. IN THAT CASE, THE AVERAGE ARITHMETIC MEAN OF THE 8 COMPARABLES IS 17.02%. FURTHER, LD. COUNSEL GIVEN A THIRD SCENARIO WHEREBY THE 10 CRORES TURNOVER IS A FILTER AND BILCARE LTD. TO BE EXCLUDED AND THE BHARAT BOX INCLUDED IN THAT CASE ALSO. OF-COURSE, THE ASSESSEE IS ENTITLED FOR WORKING CAPITAL ADJUSTMENTS IN VIEW OF THE WRITTEN SUBMISSIONS OF THE ASSESSEE AS WELL AS OTHER ADJUSTMENTS TO THE OPERATING EXPENSES LIKE DEPRECIATION. 26. ON THE OTHER HAND, LD. DR FOR THE REVENUE FILED A WRITTEN SUBMISSION ESPECIALLY WITH REFERENCE TO THE TURNOVER FILTER OR NOT FILTER. IT IS THE CASE OF THE LD. DR THAT THERE ARE NO GUIDELINES WITH REFERENCE TO THE TURNOVER FILTER MANUFACTURING SECTOR. IN THAT CASE, THE DECISION OF THE TPO TO GO FOR FILTER OF 100 CRORES AS SAID BY THE TPO DURING HIS TP STUDY. THE RELEVANT PARAGRAPHS FROM THE WRITTEN SUBMISSION OF THE LD. DR ARE EXTRACTED AS FOLLOWS :- UNJUSTIFIED APPLICATION OF THE TURNOVER FILTER THE ASSESSEE HAS CONTENDED AGAINST THE TURNOVER FILTER OF RS.100 CRS. IT MAY BE MENTIONED HERE THAT THE SIZE OF THE COMPANY IS ONE OF THE MAIN CRITERIA FOR SELECTION OF PEER SET. IT MAY BE NOTED THAT THE SIZE OF THE COMPARABLE IS AN IMPORTANT FACTOR OF COMPARABILITY AND THAT IT IS ALSO RECOGNIZED BY THE STATUTE, ESPECIALLY THE RULES. THE RULE 1013(3) LAYS DOWN GUIDELINES FOR COMPARING AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION AND AS PER THE SAID RULE DIFFERENCE FOR TRANSFER PRICING PURPOSES CAN BE OF TWO TYPES; A. DIFFERENCE IN TRANSACTIONS BEING COMPARED OR B. DIFFERENCE IN ENTERPRISES SIZE IS AN IMPORTANT FACET OF AN ENTERPRISE LEVEL DIFFERENCE. PEER SET SHOULD HAVE SOMETHING SIMILAR OR EQUIVALENT AND SHOULD POSSESS SAME OR ALMOST THE SAME CHARACTERISTICS. 26 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 2. TO USE A SIMILE, A PREMIER PADMINI OR AN AMBASSADOR CAR CANNOT BE COMPARED TO AUDI, EVEN THOUGH BOTH ARE CARS ONLY. UNUSUAL PATTERN, STRAY CASES, WIDE DISPARITIES HAVE TO BE ELIMINATED AS THEY DON'T SATISFY THE TEST OF COMPARABILITY. COMPANIES OPERATING ON LARGE SEALS, BENEFIT FROM ECONOMIES OF SCALE, HIGHER RISK TAKING CAPABILITIES, ROBUST DELIVERY AND BUSINESS MODELS AS OPPOSED TO THE SMALLER OR MEDIUM SIZED COMPANIES AND THEREFORE, SIZE MATTERS. TWO COMPANIES OF DISSIMILAR SIZE THEREFORE, CANNOT BE ASSUMED TO EARN COMPARABLE MARGINS AND THIS IMPACT OF DIFFERENCE IN SIZE COULD BE REMOVED BY AN QUANTITATIVE ADJUSTMENT TO THE MARGINS OR PRICE BEING COMPARED IF IT IS POSSIBLE TO DO SO REASONABLY ACCURATELY. THE SIZE AS ONE OF THE SELECTION CRITERIA HAS ALSO BEEN APPROVED BY VARIOUS BENCHES OF THE INCOME-TAX APPELLATE TRIBUNAL, IN THE FOLLOWING CASES; A. DCIT VS QUARK SYSTEMS PVT. LTD., 38 SOT 307 B. M/S EGAIN COMMUNICATIONS PVT. LTD., VS ITO 118 TTJ 354.(ITAT, PUNE) C. M/S SONY INDIA (P) LTD., VS DCIT 144 ITD 448 (ITAT DELHI) D. DCIT VS INDO AMERICAN JEWELLERY LTD., ITA NO.6194 (ITAT, MUM.) E. M/S PHILIPS SOFTWARE CENTRE PVT. LTD., 26 SOT 226 F. ALIT VS NIT 10 TAXMAN.COM 42 3. SIZE AS CRITERIA FOR SELECTION OF COMPARABLES IS ALSO RECOMMENDED BY OCED IN ITS TP GUIDELINES. THE OBSERVATION OF OCED IN PARA-3.43 OF THE CHAPTER ON GUIDELINES READS AS FOLLOWS; 'SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PARTIES MIGHT AFFECT THE RELATIVE COMPETITIVE POSITIONS OF THE BUYER AND SELLER AND THEREFORE COMPARABILITY THUS, THE TPO HAS APPLIED AN APPROPRIATE TURNOVER RANGE SHOULD BE APPLIED IN SELECTING A COMPARABLE OF UNCONTROLLED COMPANIES AND THE TO FILTER RS. 100 CRS. IS AMPLY JUSTIFIED. DURING THE COURSE OF HEARING BEFORE THE HONBLE ITAT, THE RELIANCE HAS BEEN PLACED ON THE FOLLOWING RATIO : (I) GENISYS INTEGRATING SYSTEMS (INDIA) (P) LTD VS DCIT, ITA NO. 1231/2010, (2012) 20 TAXMANN.COM 715 (BANG). (II) APTEAN SOFTWARE INDIA (P) LTD VS ITO (2014) 52 TAXMANN.COM 407 (BANG.TRIB) (III) HONEYWELL TECHNOLOGY SOLUTIONS LAB (P) LTD. VS DCIT (2013) 35 TAXMANN.COM 144 (BANG.TRIB). THE OECD IN TP GUIDELINES HAS ALSO OBSERVED AT PARA 3.43 THAT SIZE IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES IS AN IMPORTANT CRITERION AND AFFECT THE RELATIVE COMPETITIVE POSITION OF THE BUYER AND THE SELLER AND THEREFORE COMPARABLE IN THE ABOVE MENTIONED DECISION, CLASSIFICATION MADE BY DUN AND BRADSTREET HAS BEEN MADE WHICH IS MORE SUITABLE AND 27 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 REASONABLE MORE SO IN THE NON SERVICE INDUSTRIES WHICH IS THE CASE OF THE APPELLANT. IN THIS REGARD, RELIANCE IS ALSO PLACED IN THE CASE OF JURISDICTION HIGH COURT IN CIT VS PENTAIR WATER INDIA (P) LTD (2016) 69 TAXMANN.COM 180 (BOMBAY) IN 381 ITR 216 TO LAY A PREPOSITION THAT SIZE AND TURNOVER OF THE COMPANY ARE DECIDING FACTORS FOR TREATING IT AS COMPARABLE IN THE TP ADJUSTMENT. 27. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE WRITTEN SUBMISSIONS MADE BY THE COUNSELS AS WELL AS PAPER BOOK FILED BEFORE US. DEVIATING FROM THE GROUNDS RAISED BY THE ASSESSEE, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE RELATING TO TURNOVER FILTER ASSUMES SIGNIFICANT AND THE SAID ADJUDICATION ON SUCH TWO MINI OF THE GROUNDS RAISED BY THE REVENUE AS WELL AS BY THE ASSESSEE. SOME OF THE GROUNDS/ISSUES BECOME ACADEMIC AND INFRUCTUOUS. CONSIDERING THE SAME, WE ARE OF THE OPINION THE ISSUE RELATING TO THE TURNOVER FILTER ON ONE SIDE AND SELECTED TWO COMPARABLES SHOULD BE ADJUDICATED ON PRIORITY BASIS. IN CASE, IF THE ADJUDICATION OF THESE CORE ISSUES FAVOURED THE ASSESSEE THEN THE ASSESSEE IS AT HOME SO FAR AS ARMS LENGTH IS CONCERNED. IN THIS REGARD, WE SHALL NOW TAKE UP THE TURNOVER FILTER ISSUE AS WELL AS VARIOUS SCENARIOS PLACED BEFORE US RELATING TO THE TURNOVER FILTER CONSEQUENT UPON THE SELECTION OF FINAL SET OF COMPARABLES AND THEIR PLI FIGURES. 28. ASSESSEES TP STUDY : IN THE ASSESSEES TP STUDY, THE ASSESSEE DID NOT APPLY ANY TURNOVER FILTER WHILE SELECTING 13 COMPARABLES WHOSE AVERAGE ARITHMETIC MEAN OF THE PLI WORKS OUT 13.42% AGAINST THE ASSESSEES PLI 3.61%. 28 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 29. TPOS STUDY/AO'S STUDY : REJECTING THE ASSESSEES TP STUDY AND CONSIDERING THE ASSESSEES TURNOVER OF RS.300.58 CRORES, THE TPO APPLIED TURNOVER FILTER. THE TPO/ASSESSING OFFICER WAS OF THE VIEW THAT THE BENCHMARKING OF RS.300 CRORES TURNOVER TO THE COMPARABLES WITH RS.100 CRORES TURNOVER ONWARDS SHOULD BE REASONABLE. APPLYING THE SAME, THE TPO WORKED OUT THE PLI OF THE COMPARABLES 13.42%. THE TPO ALSO ADJUSTED THE OPERATIONAL COST OF THE ASSESSEE IN ORDER TO DECREASE PLI OF THE ASSESSEE AND FIXED RATE 1.51% I.E. HOW THE TPO QUANTIFIED THE ADJUSTMENT AT RS.27.75 CRORES AFTER CONSIDERING THE ADJUSTMENTS SUGGESTED BY THE ASSESSEE [RS.8.04 CRORES (ROUNDED OFF)]. 30. THE CIT(A)S DECISION : DURING THE FIRST APPELLATE PROCEEDINGS, IN PRINCIPLE, THE CIT(A) PARTLY CONFIRMED THE VIEWS OF THE TPO/ASSESSING OFFICER APPLYING THE TURNOVER FILTER TO THE PRESENT CASE. HOWEVER, THE CIT(A) DID NOT AGREE WITH THE RANGE OF RS.100 CRORES AND ABOVE TO THE TURNOVER FILTER SAID BY THE TPO. THE CIT(A) HELD THAT THE TURNOVER OF RS.10 CRORES AND ABOVE SHOULD BE REASONABLE TURNOVER FOR THIS TURNOVER FILTER. 31. AGGRIEVED WITH THE ABOVE, THE REVENUE IS IN APPEAL ASSERTING IN FAVOUR OF THE COMPARABLES WITH TURNOVER FILTER OF RS.100 CRORES AND ABOVE (GROUND NO.3 OF ITA NO.1647/PUN/2013. FURTHER, NOT ACCEPTING THE TURNOVER FILTER OF RS.10 CRORES ALSO, THE ASSESSEE IS IN APPEAL VIDE GROUND NO.4 OF THEIR APPEAL (ITA NO.1610/PUN/2013). 29 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 32. FROM THE ABOVE DISCUSSION ABOUT THE TURNOVER FILTER, THE CASE OF THE ASSESSEE IS THAT THERE ARE NO GOOD COMPARABLES IN THIS LINE OF MANUFACTURING ACTIVITY INVOLVING PACKAGING MATERIAL WITH ASEPTIC TECHNOLOGY. THEREFORE, IN TUNE WITH THE GUIDELINES OF THE OECD, THERE IS NEED FOR SEARCH OF COMPARABLES WITH BROADER RANGE OF TURNOVER RELATING TO SUCH CRITERIA. FURTHER, THE SAFE HARBOUR RULES, NOTIFIED BY THE CBDT, DO NOT RELATE TO THE MANUFACTURE SECTORS AS THEY ARE AIMED AT SOFTWARE COMPANIES ONLY. THE CLASSIFICATION OF COMPANIES INVOLVES THE TURNOVER OF CASES LESS THAN 100 CRORES AND MORE THAN 500 CRORES. THE LD. AR REFERRED TO THE CLASSIFICATION OF THE COMPANIES AS THE REPORT OF DUN & BRADSTREET WHERE LARGE SIZE FIRMS (20,000 MILLION), MEDIUM SIZE FIRMS (2,000 20,000 MILLION) AND SMALL SIZE FIRMS (2,000 MILLION). REFERRING TO CLASSIFICATION OF THE SOFTWARE COMPANIES AS NASSCOM, THE CLASSIFICATION INCLUDES (I) 500 CRORES OR LESS, (II) 500 CRORES TO 5,000 CRORES AND (III) 5,000 CRORES AND ABOVE. ALL THE ABOVE-SAID CLASSIFICATIONS WERE DONE IN THE CONTEXT OF THE SOFTWARE COMPANIES ONLY AND DO NOT RELATE TO THE MANUFACTURING SECTOR. THEREFORE, AS PER THE ASSESSEE, IT IS NOT APPROPRIATE TO HAVE A TURNOVER FILTER AT ALL, IN PRINCIPLE. THEREFORE, IN THE TP STUDY, THE ASSESSEE DID NOT CONSIDER THIS TURNOVER FILTER AS APPROPRIATE AND THUS, FINALIZED LIST OF 13 COMPARABLES WITHOUT HAVING ANY TURNOVER FILTER. WITHOUT PREJUDICE TO THE ABOVE CONTENTIONS, THE ALTERNATIVE CASE OF THE ASSESSEE IS THAT THE COMPARABLES WITH TURNOVER 30 CRORES AND ABOVE SHOULD BE APPROPRIATE CONSIDERING THE ASSESSEES TURNOVER OF 300 CRORES OR SO. HOWEVER, WITHOUT PREJUDICE, HE ALSO SUPPORTED THE ORDER OF THE CIT(A) WHO HAS OPTED FOR THE TURNOVER FILTERS FOR 10 CRORES AND ABOVE. IN 30 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 ANY CASE, THE ASSESSEE CONTENDS VERY PARTICULARLY ABOUT THE TURNOVER CRITERIA OF 100 CRORES AND ABOVE SELECTED BY THE TPO/ASSESSING OFFICER. FURTHER, LD. AR SUBMITTED THAT THE SUO MOTO TP ADJUSTMENTS AMOUNTING TO RS.8.02 CRORES STAND WITHDRAWN AND ARGUED IN FAVOUR OF WITHDRAWING THE SAME. 33. FURTHER, REFERRING TO THE SCENARIO NO.1 I.E. EXCLUDE BILCARE LTD. AND KARUR KCP PACKAGING LTD. AND ALL COMPARABLES HAVING TURNOVER OF LESS THAN 30 CRORES AND INCLUDE BHARAT BOX FACTORY LTD. (10 CRORES), LD. COUNSEL SUBMITTED THAT WITH THE WORKING CAPITAL ADJUSTMENTS THE ASSESSEES PLI OF 4.99% IS VERY MUCH WITHIN THE ACCEPTABLE RANGE OF THE PLI OF THE COMPARABLES. SIMILARLY, REFERRING TO SCENARIO NO.2, I.E. INCLUDE BILCARE LTD. AND KARUR KCP PACKAGING LTD. AND ALL COMPARABLES HAVING TURNOVER OF LESS THAN 30 CRORES AND EXCLUDE BHARAT BOX FACTORY LTD. (10 CRORES), LD. COUNSEL SUBMITTED THAT WITH THE WORKING CAPITAL ADJUSTMENTS GRANTED THE ASSESSEES PLI OF 4.98% IS WITHIN THE RANGE OF THE PLI OF THE COMPARABLES. HE FURTHER MENTIONED THAT THESE FEATURES MAY BE VERIFIED AT THE LEVEL OF THE ASSESSING OFFICER/TPO AFTER GIVING THE FINDING OF FACT ON THE TURNOVER FILER RANGES. FURTHER, REFERRING TO SCENARIO NO.3, I.E. EXCLUDE BILCARE LTD. AND INCLUDE BHARAT BOX FACTORY LTD. ALONG WITH OTHER COMPANIES APPLYING TURNOVER OF 10 CRORES AND ABOVE, THE LD. COUNSEL SUBMITTED THAT THE ASSESSEES PLI OF 4.98% IS WITHIN THE RANGE WITH THE WORKING CAPITAL ADJUSTMENTS GRANTED TO THE ASSESSEE. THE LD. COUNSEL GIVEN VARIOUS OPTIONS NOTWITHSTANDING THE ORIGINAL DEMAND ASSUMING THE TURNOVER FILTER ADOPTED BY THE TPO. 31 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 34. ON THE OTHER HAND, LD. DR FOR THE REVENUE HEAVILY RELIED ON THE TPOS ORDER BOTH IN MATTERS OF TAKING THE TURNOVER FILTER AND THE TURNOVER CRITERIA OF 100 CRORES AND MORE. 35. WE HEARD BOTH THE SIDES ON THIS ISSUE AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AND THE WRITTEN SUBMISSIONS PLACED BEFORE US. SO FAR AS TURNOVER FILTER RATIO IS CONCERNED, WE NEED EXAMINE THE FOLLOWING ISSUES :- (I) WHETHER THE TURNOVER FILTER IS PROPERLY TAKEN INTO CONSIDERATION BY THE TPO? (II) WHETHER THE TURNOVER FILTER HAVING 10 CRORES OR LESS OR 30 CRORES OR LESS? (III) WHETHER THE BILCARE LTD. AND KARUR KCP PACKAGING LTD. ARE REQUIRED TO BE EXCLUDED? (IV) WHETHER BHARAT BOX FACTORY LTD. HAS TO BE EXCLUDED; AND (V) WORKING CAPITAL ADJUSTMENTS. 36. EACH OF THESE ISSUES ARE TAKEN FOR ADJUDICATION IN THE FOLLOWING PARAGRAPHS. A. TURNOVER (TO) FILTER 37. THE ASSESSEE DID NOT UNDERTAKE ANY FILTER WHILE BENCHMARKING THE INTERNATIONAL TRANSACTIONS WITH THE AES IN ITS TP STUDY. ASSESSEE IDENTIFIED 13 COMPARABLES WITH NO REGARD FOR THEIR TURNOVER. IN SUPPORT, 32 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 THE ARGUMENTS OF THE ASSESSEE REVOLVES AROUND THE REQUIREMENT OF BROADER BASED SEARCH CRITERIA FOR IDENTIFYING THE GOOD COMPARABLES FOR THE INDUSTRY LIKE THE MANUFACTURING OF PACKAGING MATERIAL BASED ON THE ASEPTIC TECHNOLOGY. WITH TURNOVER FILTER, IT IS NOT POSSIBLE TO FIND GOOD AND ADEQUATE NUMBER OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS WITH AES. CRITICIZING THE TPOS ACTION ON IDENTIFYING THE COMPARABLES AMONG THE COMPANIES WITH TURNOVER OF 100 CRORES AND ABOVE, LD. COUNSEL SUBMITTED THAT THIS TPOS ACTION GIVES RISE TO ERRONEOUS BENCHMARKING-RESULTS. FURTHER, IT IS THE CONTENTION OF THE AR THAT THE TPOS CRITERIA OF RS.100 CRORES TURNOVER IS ON STRICTER-SIDE. HE SUPPORTED THE VIEW OF THE CIT(A). WITHOUT PREJUDICE TO THE ABOVE, LD. AR SUBMITTED THAT THE TURNOVER FILTER OF RS.30 CRORES AND ABOVE IS APPROPRIATE TO THE PRESENT COMPANY OF RS.300 CRORES. FURTHER, LD. AR PRAYS FOR ACCEPTING ONE OF THE 3 SCENARIOS DISCUSSED ABOVE. 38. ON THE OTHER HAND, THE CASE OF THE REVENUE IS THAT, FOR ANALYSING THE ALP TRANSACTIONS, THE TURNOVER FILTER IS AN ESSENTIAL AND THE SAME IS RELEVANT WITHIN THE INCOME TAX RULES, 1962. FURTHER, CRITICIZING THE ASSESSING OFFICERS OWN TP STUDY, LD. DR ARGUED STATING THAT THERE IS NO NEED FOR 13 COMPARABLES AS IDENTIFIED BY THE ASSESSEE WITHOUT APPLYING ANY TURNOVER FILTER. 39. THE ASSESSEE OPINES THAT THERE IS NO NEED FOR TURNOVER FILTER IN THIS CASE AS IT IS DIFFICULT TO FIND GOOD COMPARABLES FOR TP STUDY OF THE ASSESSEE WHO IS ENGAGED IN THE PACKAGING MATERIAL MANUFACTURER 33 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 INVOLVING ASEPTIC TECHNOLOGY. HOWEVER, ASSESSEE LANDED UP IN FINALIZATION OF 13 COMPARABLES. ON THE OTHER HAND, THE TPO AND THE CIT(A) APPLIED THE TURNOVER FILTER AND ALSO DISCOVERED GOOD NUMBER OF COMPARABLES. IT IS ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT APPLICATION OF TURNOVER FILTER DOES NOT HELP IN ANY MEANINGFUL TP STUDY. ON OBSERVING THAT THE ASSESSEE WILL GET A RELIEF EVEN IF TURNOVER FILTER IS APPLIED, THE LD. COUNSEL FOR THE ASSESSEE DID NOT PRESS THIS ISSUE. ON FINDING THE ABOVE DIVERSION STANDS OF THE PARTIES, WE ARE OF THE OPINION THE PROVISIONS OF THE ACT AND RULES PERMITS THE ADOPTING OF FILTERS IN GENERAL AND THE TURNOVER FILTER IN PARTICULAR. IN THIS REGARD, THE JURISDICTIONAL HIGH COURT JUDGEMENT IN THE CASE OF CIT VS. PENTAIR WATER INDIA PVT. LTD. IN TAX APPEAL NO.18 OF 2015 DATED 16.09.2015 SUPPORTS THE STAND OF THE IT AUTHORITIES. THE SAID JUDGEMENT HELD SO AFTER DULY CONSIDERING THE HONBLE DELHI HIGH COURT JUDGEMENT IN THE CASE OF AGNITY INDIA TECHNOLOGIES (P.) LTD., 36 TAXMANN.COM 289 (DELHI). FURTHER, THE BANGALORE BENCH OF THE ITAT IN THE CASE OF ACIT VS. M/S. MCAFEE SOFTWARE (INDIA) PVT. LTD. IN IT(TP)A NO.04/BANG/2012 AND OTHER DATED 18.03.2016 ALSO HELD THE ISSUE IN FAVOUR OF THE TURNOVER FILTER. THIS DISCUSSION, IN FACT, SUGGESTED THE BANDS OF TURNOVER FILTERS. THEREFORE, WE ARE OF THE OPINION, IN PRINCIPLE, THE TURNOVER FILTER ADOPTED BY THE TPO/ASSESSING OFFICER IS VERY MUCH WITHIN THE FRAME OF BENCHMARKING PROCEDURES. AS SUCH, LD. AR ALSO ADMITTED CONCESSION IN THIS REGARD, BY NOT PRESSING THIS ISSUE MUCH. THEREFORE, WE CONFIRM THE DECISION OF THE TPO/ASSESSING OFFICER AND THE CIT(A). THUS, THE RELEVANT ARGUMENTS RAISED BY THE ASSESSEE ON THIS ISSUE STAND DISMISSED. 34 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 NOW, WE SHALL TAKE UP THE ISSUE RELATING TO THE APPROPRIATE TURNOVER FILTER. B. TURNOVER FILTER OF RS.10 CRORES OR RS.30 CRORES AND MORE 40. HAVING DECIDED IN FAVOUR OF THE NEED FOR THE TURNOVER FILTER RELYING ON THE JURISDICTIONAL HIGH COURTS JUDGEMENT (SUPRA), NOW WE PROCEED TO EXAMINE THE TURNOVER FILTER RANGE I.E. UPPER SIDE AND LOWER SIDE MARGINS OF TURNOVER. WITH REFERENCE TO DIVERGENT STANDS, WE HAVE ALREADY COMMENTED IN THE PRECEDING PARAGRAPHS, THE TPO/ASSESSING OFFICER IS IN FAVOUR OF THE COMPARABLES WITH TURNOVER OF 100 CRORES AND ABOVE. THEREBY, THE TAX AUTHORITIES EXCLUDED ALL THE COMPARABLES FULLY WHICH REPORTED THE TURNOVER BELOW RS.100 CRORES TURNOVER. THIS EXERCISE RESULTED IN IDENTIFYING THE FINAL LIST OF FOUR COMPARABLES ONLY. THE DETAILS OF WHICH ARE ALREADY DISCUSSED ABOVE. HOWEVER, THE CIT(A) IN HIS ORDER HELD THAT THE EXCLUSION OF THE COMPARABLES WITH THE TURNOVER OF 100 CRORES IS NOT APPROPRIATE CONSIDERING THE NATURE OF PACKAGE MANUFACTURING INDUSTRY AND THE NON-AVAILABILITY OF THE GOOD COMPARABLES. INSTEAD, THE CIT(A) DIRECTED THE TPO TO EXCLUDE ALL THE COMPARABLES WITH THE TURNOVER OF LESS THAN 10 CRORES ONLY. BOTH THE ASSESSEE AND THE REVENUE ARE NOT HAPPY WITH THE DECISION OF THE CIT(A). DEVIATING FROM THE GROUNDS RAISED BEFORE US, THE ASSESSEE, WITHOUT PREJUDICE, ARGUED IN FAVOUR OF EXCLUSION THE COMPARABLES WITH TURNOVER OF RS.30 CRORES FROM THE PURVIEW OF IDENTIFICATION OF THE GOOD COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. HOWEVER, LD. AR DID NOT ADVOCATE FOR RESTRICTIONS ON THE UPPER SIDE OF THE TURNOVER FILTER. IT IS 35 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 IN THIS BACKGROUND, THE ASSESSEE FURNISHED VARIOUS SCENARIOS AND THE LIST OF COMPARABLES, THEIR PLI MARGINS ETC. THE LIST OF COMPARABLES EXCEEDING THE TURNOVER OF RS.30 CRORES AND ABOVE IS ONE SUCH SCENARIOS. CONSIDERING THE ABOVE, WE FIND THAT THE SCENARIO WITH TURNOVER OF RS.10 CRORES NEEDS TO BE DISMISSED. THUS, WE DISMISS THE TP STUDY WITHOUT ANY TURNOVER FILTER AND ALSO THE STUDY WITH TURNOVER FILTER OF RS.10 CRORES AND ABOVE. 41. WE SHALL NOW PROCEED TO EXAMINE IF TURNOVER FILTER WITH RS.30 CRORES AND ABOVE SHOULD BE APPROPRIATE OR NOT. WE HAVE DISCUSSED THAT THE ASSESSEES TURNOVER IS AROUND RS.300 CRORES. IT IS SETTLED LEGAL PROPOSITION ON THE TURNOVER FILTER ISSUE THAT HIGH-END COMPARABLES OR GIANT COMPANIES OR LARGE COMPANIES OR MINNOWS COMPANIES SHOULD BE AVOIDED FOR BENCHMARKING THE TRANSACTION WITH AES. IN FACT, IT IS SO HELD BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF PENTAIR WATER INDIA PVT. LTD. (SUPRA) THAT LARGE TURNOVER SHOULD NOT BE COMPARED WITH THE COMPANIES WITH SMALL TURNOVER. IN FACT, THE HCL COMNET SYSTEMS & SERVICES LTD. WITH TURNOVER RS.260 CRORES IS NOT FOUND TO BE A GOOD COMPARABLE IN THE CASE OF PENTAIR WATER INDIA PVT. LTD. (SUPRA) WHICH REPORTED THE TURNOVER ONLY RS.11 CRORES. IN FACT, THE HONBLE HIGH COURT DID NOT APPRECIATE THE TPOS DECISION TO COMPARE WITH COMPANIES LIKE INFOSYS BPO LTD. (RS.650 CRORES TURNOVER) AND WIPRO (RS.940 CRORES TURNOVER). MOST OF THE DECISIONS OF THE TRIBUNAL ARE IN FAVOUR OF OPTING FOR LIMIT AT LOWER-END OF 1/10 AND UPPER SIDE OF 10 TIMES OF THE TURNOVER OF THE COMPANY UNDER CONSIDERATION OF THE TP BENCHMARKING. THUS, THE 36 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 TURNOVER BAND (I.E. LOWER SIDE TURNOVER OF 1/10 TO TURNOVER OF 10 TIMES) OF THE COMPANIES UNDER CONSIDERATION IS THE DIRECTION OF THE TRIBUNAL IN THE CASE OF M/S MCAFEE SOFTWARE (INDIA) PVT. LTD. (SUPRA). THEREFORE, IN OUR VIEW ALSO, PICKING UP THE COMPARABLE CASES WITH 10 TIMES BELOW AND 10 TIMES ABOVE THE TURNOVER OF THE ASSESSEE, APPEARS APPROPRIATE TO OUR MINDS ACROSS THE COMPANIES, WHETHER THEY ARE IN SOFTWARE SECTOR OR MANUFACTURING SECTOR. BUT ONLY RESTRICTION IS THE AVAILABILITY OF THE FUNCTIONALLY COMPARABLE COMPANIES. IN ANY CASE, TURNOVER FILTER ISSUE VARY FROM COMPANY TO COMPANY DEPENDING ON THE AVAILABILITY OF THE FUNCTIONALLY COMPARABLE COMPANIES. THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT FOR THE PRESENT COMPANY OF RS.300 CRORES OR SO, THE TURNOVER FILTER COMPARABLES WITH THE TURNOVER OF RS.30 CRORES ON LOWER SIDE TO RS.3000 CRORES ON THE UPPER SIDE, SHOULD BE CONSIDERED AS VALID FOR THE PURPOSE OF IDENTIFYING THE COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE UNDER CONSIDERATION. THIS VIEW GETS STRENGTH FROM THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S MCAFEE SOFTWARE (INDIA) PVT. LTD. (SUPRA). THE CONTENTS OF PARA 8 OF THE SAID JUDGEMENT ARE RELEVANT. THE RELEVANT LINES FROM THE SAID PARA 8 ARE EXTRACTED AS UNDER :- GENERALLY, A TURNOVER FILTER IS ADOPTED TO AVOID SELECTION OF HIGH END COMPANIES (BIG COMPANIES) WITH THAT OF MINNOWS IN THE SIMILAR LINE OF BUSINESS. HOW TO ADOPT THE FILTER DEPENDS ON EACH CASE. SAY FOR EXAMPLE, IN THE TP ANALYSIS OF A COMPANY HAVING 20 CRORES RECEIPTS, A COMPANY WITH 2 CRORES TO 200 CRORES CAN BE STATED TO BE WITHIN THE RANGE I.E., FACTOR OF TEN AS UPPER AND LOWER LIMITS. IN CERTAIN CASES, THE ITAT ALSO ACCEPTED TURNOVER FILTER OF 1 CRORE TO 200 CRORES . BUT THE RANGE CANNOT BE FIXED, AS THE FACTS MAY VARY FROM CASE TO CASE. SIMPLY A COMPARABLE CAN NOT BE EXCLUDED ON UPPER TURNOVER LIMIT WHEN INFACT IN NUMBER OF CASES ASSESSEES DO NOT RAISE ANY OBJECTION ON INCLUSION OF COMPANIES WITH VERY SMALL TURNOVERS. THE 200 CRORES UPPER LIMIT ALSO CANNOT BE CONSIDERED IN A 37 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 CASE WHOSE TURNOVER IS, SAY 300 CRORES. THEREFORE, INSTEAD OF A FIXED 1CR 200 CRORE RANGE, WHAT ONE HAS TO CONSIDER IS THE TURNOVER/RECEIPTS OF ASSESSEE AND RANGE OF UPPER LIMIT AT TEN TIMES AND LOWER LIMIT ALSO TEN TIMES..I.E., ONE TENTH. THUS, FOR EXAMPLE THE RANGE FOR A 300 CRORES COMPANY CAN BE FROM 30 CRORES (1/10TH) TO 3000 CRORES (TEN TIMES). EVEN THIS HAS SOME LIMITATIONS. 42. THUS, THE ASSESSEES PROPOSITION IN MATTERS OF TURNOVER FILTER FOR CONSIDERING THE TURNOVER OF RS.30 CRORES AND ABOVE SHOULD BE CONSIDERED APPROPRIATE SUBJECTED TO THE UPPER LIMITS MENTIONED IN THE PARA ABOVE. ACCORDINGLY, THE TPOS PROPOSITION OF RS.100 CRORES TURNOVER OR THE CIT(A) PROPOSITION IN FAVOUR OF RS.10 CRORES STANDS ALTERED PRO TANTO . WE ALSO PROCEEDED TO RECOMMEND AND DIRECT THE ASSESSING OFFICER TO CONSIDER THE UPPER LIMIT FOR THE COMPARABLES QUA THE TURNOVER OF RS.3000 CRORES AS INDICATED BY THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. MCAFEE SOFTWARE (INDIA) PVT. LTD. (SUPRA). ACCORDINGLY, THE GROUND NO.3 OF THE REVENUE AND GROUND NO.4 OF THE ASSESSEE STAND PARTLY ALLOWED. C. EXCLUSION OF BILCARE LTD., KARUR KCP PACKAGING LTD. AND INCLUSION OF BHARAT BOX FACTORY LTD. 43. ASSESSEE SUBMITTED A SCENARIO WITH THE TURNOVER FILTER OF RS.30 CRORES AND MORE. IN THIS LIST, LD. AR FOUND NEED OF INCLUSION/EXCLUSION OF THE COMPARABLES ON ONE GROUND OR OTHER. WE SHALL DISCUSS EACH OF THESE 38 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 THREE COMPARABLES WHETHER THEY SHOULD BE EXCLUDED OR INCLUDED, AS THE CASE MAY BE. 44. BILCARE LTD. : THIS COMPARABLE IS CONSIDERED GOOD ONE BY THE TPO IN HIS TP STUDY. AS PER THE ASSESSEE, THE BILCARE LTD. IS ENGAGED IN PACKAGING OF PERISHABLE PRODUCTS AS AGAINST THE ASSESSEES FUNCTION OF ENGAGED IN PACKAGING OF MATERIAL FOR FOOD AND DRINK INDUSTRIES BASED ON THE ASEPTIC TECHNOLOGY. IT IS THE CASE OF THE ASSESSEE THAT PACKAGING MATERIAL REQUIRED FOR PERISHABLE PRODUCTS IS ENTIRELY DIFFERENT FROM THAT OF THE ASSESSEE. BRINGING OUR ATTENTION TO PAGE 4 TO 45 OF THE PAPER BOOK, LD. AR DEMONSTRATED THE ABOVE FACTS. IT IS THE CASE OF THE ASSESSEE THAT SUCH A COMPANY CANNOT BE A FUNCTIONAL COMPARABLE TO THAT OF THE ASSESSEE FOR BENCHMARKING. THE ABSENCE OF SEGMENTAL DATA FOR THE BILCARE LTD. IS ALSO ANOTHER ASPECT WHICH IS BROUGHT TO OUR NOTICE. MENTIONING THE DIFFERENCES IN PACKAGING MATERIAL FOR VARIOUS INDUSTRIES PRODUCTS, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE PRODUCTS MANUFACTURED BY THE ASSESSEE ARE PAPER BASED PRODUCT WHILE THOSE OF THE BILCARE LTD. ARE PRIMARILY INCLUDE THE WRAPS. CONSIDERING THE ABOVE FACTS AS DISCUSSED IN PARA 21 OF THIS ORDER, WE ARE OF THE OPINION BILCARE LTD. CANNOT BE CONSIDERED AS A GOOD COMPARABLE FOR BENCHMARKING OF THE ASSESSEE, WHO ENGAGED IN THE DRINKS INDUSTRIES WITH ASEPTIC TECHNOLOGY. THEREFORE, WE DIRECT THE TPO TO EXCLUDE THE SAME FROM THE LIST OF COMPARABLES IN RESPECT OF THE FULFILLING OF TURNOVER CRITERIA. 39 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 45. KARUR KCP PACKAGING LTD. : THE TPO CONSIDERED THIS IS A GOOD COMPARABLE IN HIS TP STUDY. THE CASE OF THE ASSESSEE AGAINST SUCH INCLUDE THAT THE SAID COMPANY IS ENGAGED IN THE MANUFACTURING OF CRAFT PAPER FROM WOOD PULP AND WASTE PAPER . FURTHER, THIS COMPANY ALSO ENGAGED IN THE MANUFACTURING OF POLYPROPYLENE BAGS , WHICH ARE REQUIRED IN THE CEMENT INDUSTRIES . THE TPO CONSIDERED THIS IS A GOOD COMPARABLE MERELY ON THE GROUND THAT THE SAME IS ENGAGED IN THE PACKAGING INDUSTRIES AND IGNORED THE FACT THAT THE PACKAGING BY THE SAID COMPANY IS FOR STORING OF CEMENT. IN THIS REGARD, LD. COUNSEL BROUGHT OUR ATTENTION TO PAGE 464 OF THE PAPER BOOK AND DEMONSTRATED THE DIFFERENCE IN THE PACKAGING MATERIAL AND USES OF SUCH MATERIAL BY THE RESPECTIVE INDUSTRIES. HE MENTIONED THAT THE SAID COMPANY IS ENGAGED IN MANUFACTURING OF POLYPROPYLENE BAGS PP & FIBC BAGS ETC. THEY ARE NOT CERTAINLY MADE FOR PRESERVATION OF POTABLE COOL DRINKS INDUSTRIES BASED ON THE ASEPTIC TECHNOLOGY SPECIALLY DEVELOPED FOR THE PRESERVATION OF THE PERISHABLE COOL DRINKS BY THE CONSUMERS. IN THIS REGARD, LD. COUNSEL SUBMITTED THAT THE SAME CANNOT BE A GOOD COMPARABLE. WE FIND MERIT IN THE CASE OF THE ASSESSEE AND DIRECTED THE TPO/ASSESSING OFFICER TO EXCLUDE THE SAME FROM THE LIST OF THE COMPARABLES. 46. BHARAT BOX FACTORY LTD. : ASSESSEE CONSIDERED THIS AS A GOOD COMPARABLE; WHEREAS THE TPO REJECTED THE SAME ON THE GROUND THAT IT IS NOT FUNCTIONALLY COMPARABLE TO THAT OF THE ASSESSEE. ACCORDING TO THE TPO, BHARAT BOCK FACTORY LTD. IS ENGAGED IN MANUFACTURING OF PRINTED PLAIN DUPLEX AND CORRUGATED CARTONS . THE SAID CARTONS ARE USED FOR 40 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 GENERAL PACKAGING. HOWEVER, THE TPO REJECTED THE SAME. FURTHER, THE CIT(A) ALSO REJECTED THE SAME ON THE GROUND THAT THERE ARE NO SEGMENTAL DATA IS AVAILABLE IN THE ANNUAL REPORT. IN THIS REGARD, BRINGING OUR ATTENTION TO PAGE 752 TO 779 OF THE PAPER BOOK, LD. COUNSEL DEMONSTRATED THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING OF PACKAGING MATERIAL FOR FOOD ITEMS ONLY AND THE SNAPSHOT OF THE WEBSITE AS GIVEN IN PAGE 749 OF THE PAPER BOOK AS BROUGHT TO OUR NOTICE. ON THE SEGMENTAL DATA ASPECT, LD. COUNSEL BROUGHT OUR ATTENTION TO PAGE 772 OF THE PAPER BOOK AND DEMONSTRATED THE FACT OF AVAILABILITY OF THE SEGMENT REPORTING OF THE COMPANY. 47. ON EXAMINING THE CONTENTION OF THE ASSESSEE, WE FIND MERIT IN THE CONTENTION OF THE ASSESSEE. THE SEGMENTAL DETAILS ARE VERY MUCH CLEAR ON PAGE 772 OF THE PAPER BOOK AND THE SAME ARE EXTRACTED HEREUNDER :- (18) SEGMENT REPORTING SEGMENT INFORMATION AS REQUIRED BY ACCOUNTING STANDARD (AS)-17 ON SEGMENT REPORTING ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND AS COMPLIED ON THE BASIS OF FINANCIAL STATEMENT IS DISCLOSED BELOW. BUSINESS SEGMENT: THE COMPANY OPERATES IN TWO SEGMENTS NAMELY PACKING/PLASTICS AND MOSQUITO COIL. THE SUMMARY OF TWO OPERATING SEGMENTS OF THE COMPANY IS PRESENTED IN THE TABLE BELOW : PARTICULARS PACKING/PLASTICS EXTERNAL SALES (NET) 7375 INTER SEGMENT SALES (NET) 653 OTHER INCOME 56 TOTAL REVENUE 8084 SEGMENT RESULTS: PROFIT BEFORE TAX INTT. 455 41 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 LESS INTT. 165 LESS : TAX 27 PROFIT AFTER TAX 263 CAPITAL EMPLOYED: (SEGMENT ASSETS SEGMENT LIABILITIES) 5324 48. THEREFORE, THE CIT(A) ERRED IN HOLDING AGAINST THE ASSESSEE ON THE FACT OF SEGMENTAL DATA ISSUE. CONSIDERING THE SAME, WE ARE OF THE OPINION THE BHARAT BOX FACTORY LTD. SHOULD BE INCLUDED IN THE LIST OF COMPARABLES. THE ASSESSING OFFICER IS DIRECTED TO INCLUDE THE BHARAT BOX FACTORY LTD. IN THE FINAL LIST OF COMPARABLES. ACCORDINGLY, RELEVANT GROUNDS OF THE ASSESSEE ARE ALLOWED. D. WORKING CAPITAL ADJUSTMENTS 49. ON THE ISSUE OF GRANT OF ADJUSTMENT ON ACCOUNT WORKING CAPITAL, WE FIND THAT IT IS A SETTLED LEGAL ISSUE BY THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. NEVIS NETWORK (INDIA) (P.) LTD. VIDE ITA NO.338/PUN/2012 DATED 24.12.2014; WHEREIN THE TRIBUNAL HELD THAT THE WORKING CAPITAL ADJUSTMENTS ARE REQUIRED TO BE GRANTED AS RAISED BY THE ASSESSEE VIDE ADDITIONAL GROUNDS PLACED BEFORE US. 50. CONSIDERING THE COVER NATURE OF THIS ISSUE, WE ARE OF THE OPINION THE ADDITIONAL GROUNDS SHOULD NOT ONLY BE ADMITTED BUT ALSO THE ASSESSING OFFICER SHOULD BE DIRECTED TO GRANT WORKING CAPITAL ADJUSTMENTS. FOR THIS PURPOSES, THE ABOVE TABLES INSERTED IN THE PRECEDING PARAGRAPHS OF THIS ORDER SHOULD BE REMANDED TO THE FILE OF THE TPO/ASSESSING OFFICER FOR INCORPORATING THE ABOVE DIRECTION AND 42 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 BENCHMARKING THE TRANSACTIONS DISCUSSED ABOVE. THE ASSESSING OFFICER SHOULD BE GRANTED REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE WHILE EXAMINING THE DATA AND GRANTING WORKING CAPITAL ADJUSTMENTS AS PER THE SET PRINCIPLES OF NATURAL JUSTICE. HENCE, RELEVANT GROUNDS STAND ALLOWED FOR STATISTICAL PURPOSES . 51. CONSIDERING THE ASSESSEES ARGUMENT THAT OTHER ISSUES RAISED IN OTHER GROUNDS IN THE APPEALS BOTH THE ASSESSEE AND THE REVENUE, WE ARE OF THE OPINION THE OTHER GROUNDS/ISSUES INCLUDING THE ISSUE RELATING TO SUO MOTO ADJUSTMENTS WORTH RS.8.02 CRORES ARE REQUIRED TO BE DISMISSED AS ACADEMIC OR INFRUCTUOUS OR CONSEQUENTIAL. 52. IN THE RESULT, THE CROSS APPEALS OF THE ASSESSEE AND THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. 53. RESULTANTLY, THE APPEAL OF THE ASSESSEE IN ITA NO.1609/PUN/2013 IS ALLOWED AND THE CROSS APPEALS OF THE ASSESSEE AS WELL AS THE REVENUE IN ITA NO.1610/PUN/2013 & ITA NO.1647/PUN/2013 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 24 TH DAY OF MAY, 2019. SD/- SD/- ( /VIKAS AWASTHY) ( . /D. KARUNAKARA RAO) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; / DATED : 24 TH MAY, 2019. SUJEET 43 ITA NO.1610/PUN/2013 ITA NO.1647/PUN/2013 ITA NO.1609/PUN/2013 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(A)-IT/TP, PUNE. 4. THE CCIT, PUNE. 5. , , , / DR, ITAT, A BENCH, PUNE. 6. / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE.