DCIT, New Delhi V. M/s Nokia India Pvt. Ltd., Gurgaon

ITA 178/DEL/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81984 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 9 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 29-10-2014
• Assessment Year: 2002-2003
• Appeal Filed On: 12-01-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: VARSHA BHATTACHARYA
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 92C; 10B; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI GEORGE GEORGE K. , JM ITA NO.242/DEL/2010 ASSESSMENT YEAR : 2002-03 CO NO.77/DEL/2010 (ITA NO.178/DEL/2010) ASSESSMENT YEAR : 2002-03 NOKIA INDIA (P) LTD., 1 ST & 2 ND FLOOR, TOWER-A, SP INFOCITY, PLOT NO.243, UDYOG VIHAR, PHASE-I, DUDAHERA, GURGAON. PAN : AAACN2170R VS. DCIT, CIRCLE-13(1), CR BUILDING, NEW DELHI. ITA NO. 178 /DEL/201 0 ASSESSMENT YEAR : 2002-03 DCIT, CIRCLE-13(1), CR BUILDING, NEW DELHI. VS. NOKIA INDIA (P) LTD., 1 ST & 2 ND FLOOR, TOWER-A, SP INFOCITY, PLOT NO.243, UDYOG VIHAR, PHASE-I, DUDAHERA, GURGAON. PAN : AAACN2170R ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : S/ SHRI ATUL NINAWAT, AR, VIKAS SRIVASTAVA, ATUL MITTAL & MS VARSHA BHATTACHARYA, ADVOCATE DEPARTMENT BY : SHRI PEEYUSH JAIN, CIT, DR ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 2 ORDER PER R.S. SYAL, AM: THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE ALONG WITH A CROSS OBJECTION FILED B Y THE ASSESSEE ARISE OUT OF THE ORDER PASSED BY THE CIT(A) ON 16.1 1.09 IN RELATION TO THE ASSESSMENT YEAR 2002-03. 2. GROUND NOS. 2 AND 3 OF THE ASSESSEES APPEAL AND GROUND NOS. 3, 4, 5 AND 6 OF THE REVENUES APPEAL ARE AGAINST T HE PARTIAL SUSTENANCE/REDUCTION IN THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT UNDER THE NOKIA MOBILE PHONE SALES DIVIS ION (NMP SALES) [HEREINAFTER ALSO CALLED THE TRADING SEGMEN T]. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF NOKIA CORPORATION, FINLA ND. NOKIA GROUP IS ENGAGED IN PROVIDING NETWORK SOLUTIONS FOR PHONE OPERATORS AND INTERNET SERVICE PROVIDERS; MANUFACTU RING AND DISTRIBUTING MOBILE PHONES; PROVIDING STRATEGIC INP UTS FOR BUSINESS DEVELOPMENTS; AND PROVIDING R&D SUPPORT TO THE GROU P ENTITIES FOR MAINTAINING ITS TECHNOLOGICAL LEADERSHIP AND COMPET ITIVENESS. THE ASSESSEE HAS FOUR DISTINCT BUSINESS SEGMENTS. THE MAJOR SEGMENT IS NOKIA MOBILE PHONES SALES DIVISION OR THE TRADIN G SEGMENT. ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 3 UNDER THIS SEGMENT, THE ASSESSEE ACTS AS A DISTRIBU TOR OF MOBILE PHONES IMPORTED FROM NOKIA AFFILIATES THROUGHOUT IN DIA, MAINLY THROUGH HCL INFOSYSTEMS (THIRD PARTY DISTRIBUTOR). TO BE MORE SPECIFIC, THE ASSESSEE ACTS AS A TRADER OF NOKIA PH ONES WHICH ARE SOLD MAINLY TO SINGLE CUSTOMER, HCL INFOSYSTEMS, AF TER IMPORTING FROM ITS ASSOCIATED ENTERPRISES (AES). HCL INFOSYS TEMS FURTHER DISTRIBUTES THE PHONES THROUGH ITS OWN NETWORK OF D EALERS. THE ASSESSEE DECLARED SALES OF `59 CRORE AND OPERATING LOSS OF `13.9 CRORE UNDER THIS SEGMENT. IN BENCHMARKING THIS INTE RNATIONAL TRANSACTION, THE ASSESSEE SELECTED RESALE PRICE MET HOD (RPM) AS THE MOST APPROPRIATE METHOD. GROSS PROFIT MARGIN U NDER THIS SEGMENT AT 11% WAS STATED TO BE MORE THAN THE ARITH METIC MEAN OF SUCH MARGIN, ON A MULTIPLE YEAR DATA BASIS, OF 9 % IN RESPECT OF 23 COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE. TH E ASSESSEES LIST OF 23 COMPARABLES WITH THE BUSINESS DESCRIPTION AND THE RATIO OF GP/SALES HAS BEEN TABULATED ON PAGES 3 AND 4 OF THE TRANSFER PRICING OFFICERS (TPO) ORDER. THAT IS HOW , IT WAS CLAIMED THAT THE INTERNATIONAL TRANSACTIONS UNDER THIS SEGM ENT WERE AT ARMS LENGTH PRICE (ALP). THE TPO OBSERVED THAT T HE COMPANIES CHOSEN BY THE ASSESSEE WERE ENGAGED IN ALTOGETHER D IFFERENT NATURE OF BUSINESS. SOME WERE DISTRIBUTING FOOD PR ODUCTS, WHILE OTHERS WERE TRADING IN ELECTRONIC GOODS OR TEXTILES ETC. ON BEING ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 4 CALLED UPON TO EXPLAIN AS TO WHY RPM ADOPTED BY THE ASSESSEE BE NOT REJECTED ON ACCOUNT OF HIGH DEGREE OF FUNCTIONA L AND ECONOMIC DIVERGENCE AMONG THE COMPARABLES AND THE ASSESSEE, IT WAS STATED THAT ALL THE COMPARABLES PERFORMED THE BASIC FUNCTION OF TRADING AND DISTRIBUTION. UNCONVINCED WITH THE ASS ESSEES SUBMISSIONS, THE TPO HELD THAT SUCH A METHOD WAS NO T CAPABLE OF APPLICATION BECAUSE APART FROM DISSIMILARITY OF THE PRODUCTS DEALT WITH BY THE ASSESSEE VIS-A-VIS THE SO-CALLED COMPARABLES, EVEN THE DATA OF THE COMPARABLES CHOSEN BY THE ASSESSEE WAS NOT APPROPRIATELY AVAILABLE. HE, THEREFORE, REJECTED T HE APPLICATION OF RPM AND PROCEEDED TO DETERMINE THE ALP UNDER THE TR ANSACTIONAL NET MARGIN METHOD (TNMM). HE ADOPTED PROFIT LEVEL INDICATOR (PLI) OF THE INTERNATIONAL TRANSACTIONS UNDER THIS SEGMEN T AT OPERATING PROFIT MARGIN/SALES. BY APPLYING CERTAIN FILTERS, THE TPO SHORTLISTED SIX COMPARABLES AS LISTED ON PAGE 11 OF HIS ORDER, GIVING ARITHMETIC MEAN OF 3.5%. CONSIDERING THE FACT THAT THE ASSESS EE SPENT 23% OF ITS SALES ON MARKETING, WHEREAS THIS EXPENDITURE WAS MUCH LESS IN THE COMPARABLES SO CHOSEN BY HIM, THE TPO SUITAB LY AMENDED THE RATE OF OPERATING PROFIT. HOWEVER, VIDE PARA 1 1.2 OF HIS ORDER, THE TPO NOTICED THAT ACCOUNTS OF ONE OF THE CLOSE C OMPETITORS OF THE ASSESSEE (WHOSE NAME WAS NOT DISCLOSED FOR REAS ONS OF CONFIDENTIALITY) GAVE OP/SALES AT 2.64%, WHEREAS T HIS RATIO IN THE ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 5 CASE OF THE ASSESSEE WAS AT (-) 23%. AFTER CONSIDE RING CERTAIN FACTORS AND ALLOWING THE EFFECT OF HIGHER MARKETING EXPENSES, THE ADJUSTED PROFIT MARGIN OF THE ASSESSEE WAS WORKED O UT AT (-) 8.99%. THAT IS HOW, THE TRANSFER PRICING ADJUSTMEN T AMOUNTING TO `7,37,39,213/- IN THIS SEGMENT WAS MADE AT 12.49% [ 3.5%- (-) 8.99%]. 4. IN THE FIRST APPEAL, THE LD. CIT(A) CAME TO HOLD THAT RPM WAS NOT CAPABLE OF APPLICATION AS IT WAS DIFFICULT TO C OMPUTE GROSS MARGIN BY ANALYZING COSTS AND THEN ESTABLISH THE FU NCTIONAL COMPARABILITY OF THE COMPARABLES CHOSEN BY THE ASSE SSEE. HE UPHELD THE TPOS ACTION IN EMPLOYING TNMM AS THE MO ST APPROPRIATE METHOD. HE FURTHER NOTICED THAT BOTH T HE ASSESSEE AS WELL AS THE TPO WERE NOT JUSTIFIED IN NOT USING THE CURRENT YEAR DATA. RELYING ON CERTAIN DECISIONS, IT WAS HELD TH AT ONLY THE CURRENT YEARS DATA WAS REQUIRED TO BE EMPLOYED. T HEN, HE PROCEEDED TO EXAMINE THE COMPARABLE COMPANIES AS OF FERED BY THE ASSESSEE AND ALSO THOSE CHOSEN BY THE TPO. OUT OF 23 COMPARABLES CHOSEN BY THE ASSESSEE, THE LD. CIT(A) SHORTLISTED FOUR COMPANIES AS FUNCTIONALLY COMPARABLE UNDER THE TNMM . FROM THE COMPANIES CHOSEN BY THE TPO AS COMPARABLE, THE LD. CIT(A) ACCEPTED FOUR COMPANIES AS COMPARABLE, ONE OF WHICH IS COMMON ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 6 TO BOTH THE ASSESSEE AS WELL AS THE TPO. THAT IS H OW THE LD. CIT(A) INITIALLY SHORTLISTED THE FOLLOWING SEVEN COMPANIES :- (I) COMPUAGE INFOCOM LTD. (II) MEDIA VIDEO LTD. (III) BUSINESS LINK AUTOMATION (IV) PROCAL ELECTRONICS INDIA LTD. (V) REDINGTON (INDIA) LTD. (VI) AMZEL AUTOMOTIVE LTD. (VII) GOLD ROCK INVESTMENTS LTD. OUT OF THESE SEVEN COMPANIES, THE LD. CIT(A) EXCLUD ED PROCAL ELECTRONICS INDIA LTD. WHICH HAD A HIGH NEGATIVE MA RGIN OF (-) 39.58% DURING THE FINANCIAL YEAR RELEVANT TO THE AS SESSMENT YEAR UNDER CONSIDERATION, PRIMARILY DUE TO EXCESS DEPRE CIATION COST ALONG WITH SIGNIFICANT DROP IN THE SALES AS COMPARE D TO THE PREVIOUS YEAR. HE FURTHER EXCLUDED REDINGTON (INDIA ) LTD. ON THE PREMISE THAT IT HAD VERY HIGH TURNOVER IN COMPARISO N WITH THE ASSESSEE. THAT IS HOW, THE LD. CIT(A) WAS FINALLY CHOSE FIVE COMPANIES AS COMPARABLE WITH THEIR RESPECTIVE OP/SA LES MARGIN AS HEREUNDER:- ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 7 (I) COMPUAGE INFOCOM LTD. 2.25% (II) MEDIA VIDEO LTD. 6.77% (III) AMZEL AUTOMOTIVE LTD. 3.88% (IV) BUSINESS LINK AUTOMATION (INDIA) LTD. 2.81% (V) GOLD ROCK INVESTMENTS LTD. 0.35% AVERAGE 3.21% HE HELD THAT ONLY THE CURRENT YEARS DATA SHOULD HA VE BEEN CONSIDERED. HE FURTHER HELD THAT THE TPO WAS NOT JU STIFIED IN BENCHMARKING THE ASSESSEES INTERNATIONAL TRANSACTI ONS UNDER THIS SEGMENT WITH A COMPETITOR WHOSE NAME WAS NOT DISCLO SED. IN HIS OPINION, A DETAILED REVIEW OF ANNUAL REPORT AND DIR ECTORS REPORT, ETC., MUST BE MADE AVAILABLE TO THE ASSESSEE BEFORE CONSIDERING ANY CASE AS COMPARABLE. HE, THEREFORE, EXCLUDED TH E SECRETLY SELECTED CASE CHOSEN BY THE TPO. THEN, HE WENT ON TO CONSIDER ADVERTISEMENT AND MARKETING EXPENSES INCURRED BY TH E ASSESSEE AS WELL AS THE FINAL FIVE COMPARABLES. AFTER ALLOW ING A SUITABLE ADJUSTMENT ON THIS SCORE, THE TPO REDUCED THE ADDIT ION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT TO ` 3,41,62,617/-. BOTH THE SIDES ARE IN APPEAL AGAINST THEIR RESPECTIVE STANDS. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE FIRST MAJOR CONTR OVERSY RAISED BY ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 8 THE ASSESSEE IS ON THE SELECTION OF THE MOST APPROP RIATE METHOD FOR DETERMINING ALP OF THE INTERNATIONAL TRANSACTIO NS UNDER THIS SEGMENT. WHEREAS, THE STAND OF THE ASSESSEE IS THAT RPM WAS CORRECTLY EMPLOYED BY IT FOR BENCHMARKING ITS INTER NATIONAL TRANSACTIONS UNDER THIS SEGMENT, THE STAND OF THE R EVENUE IS THAT TNMM HAS BEEN RIGHTLY HELD TO BE THE MOST APPROPRI ATE METHOD FOR THE PURPOSES OF DETERMINATION OF THE ALP. 6. SECTION 92C(1) OF THE INCOME-TAX ACT, 1961 (HERE INAFTER ALSO CALLED THE ACT) PROVIDES THAT THE ARMS LENGTH P RICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING, THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRA NSACTIONS OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUC H PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCR IBE. FIVE SPECIFIC METHODS HAVE BEEN GIVEN, WHICH INCLUDE, RP M AND TNMM. THE SIXTH METHOD IS GENERAL AS MAY BE PRESCRIBED BY THE BOARD. THERE IS NO QUARREL ON THE POINT THAT THE SIXTH MET HOD, NOW PRESCRIBED UNDER RULE 10AB, IS NOT APPLICABLE TO TH E ASSESSMENT YEAR UNDER CONSIDERATION AS THE SAME IS OPERATIVE F ROM THE A.Y. 2012-13. SUB-SECTION (2) OF SECTION 92C PROVIDES THAT THE MOST APPROPRIATE METHOD REFERRED TO IN SUB-SECTION (1) S HALL BE APPLIED ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 9 FOR DETERMINATION OF ALP IN THE MANNER AS MAY BE PR ESCRIBED. RULE 10B SETS OUT THE PROCEDURE UNDER THE ABOVE REFERRED FIVE METHODS. SUB-RULE (1) OF RULE 10B REITERATES THAT THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE PRESCRIBED METHODS BEING THE MOST APPROPRIATE METHO D. WHEN WE READ SECTION 92C IN JUXTAPOSITION TO RULE 10B, T WO THINGS BECOME VIVID. FIRST IS THAT THE ALP OF AN INTERNAT IONAL TRANSACTION IS REQUIRED TO BE DETERMINED BY A MOST APPROPRIATE METHOD WHICH HAS TO BE EITHER OF THE FIVE GIVEN IN SECTION 92C(1 ) AT THE MATERIAL TIME. SECOND IS THAT SUCH COMPUTATION CAN BE DONE O NLY IN THE MANNER AS IS PRESCRIBED UNDER THE RULE. THE INSTANT CONTROVERSY NARROWS DOWN TO EXAMINING AND DECIDING AS TO WHETHE R RPM OR TNMM IS THE MOST APPROPRIATE METHOD IN THE PRESENT CIRCUMSTANCES. 7. BEFORE ASCERTAINING THE MOST APPROPRIATE METHOD AS MAY BE APPLICABLE IN THE FACTUAL SCENARIO OBTAINING INSTAN TLY, IT IS CRUCIAL TO HAVE A LOOK AT THE FUNCTIONS PERFORMED AND THE NATU RE OF ACTIVITY UNDERTAKEN BY THE ASSESSEE UNDER THIS SEGMENT. AT THE COST OF REPETITION, WE ARE MENTIONING THAT THE ASSESSEE PUR CHASED MOBILE PHONES AND ACCESSORIES FROM NOKIA GROUP COMPANIES S ITUATED OUTSIDE INDIA AND SOLD THE SAME TO LOCAL INDEPENDEN T CUSTOMERS, ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 10 MAINLY, HCL INFOSYSTEMS. THE TPO HAS ALSO ADMITTE D THIS FACT THAT THE INTERNATIONAL TRANSACTIONS UNDER THIS SEGMENT I NVOLVE IMPORT OF MOBILE PHONES AND ACCESSORIES FROM FOREIGN AES WHIC H ARE RESOLD IN INDIA TO HCL INFOSYSTEMS, WHICH IS AN UNRELATED PARTY. THUS, IT IS PALPABLE THAT THE NATURE OF WORK DONE BY THE ASSESS EE UNDER THIS SEGMENT IS THAT OF PURE A TRADER INASMUCH AS THE MO BILE PHONES AND ACCESSORIES IMPORTED FROM FOREIGN AES HAVE BEEN RESOLD AS SUCH TO THE LOCAL CUSTOMERS WITHOUT DOING ANY VALUE ADDITION OR ANY OTHER SORT OF PROCESSING WHATSOEVER. 8. WE TAKE UP THE FIRST ISSUE THAT THE ALP OF AN INTERNATIONAL TRANSACTION SHOULD BE DETERMINED BY A MOST APPROPRI ATE METHOD WHICH HAS TO BE EITHER OF THE FIVE GIVEN IN SECTION 92C(1) AT THE MATERIAL TIME. IT WILL BE APPOSITE TO FIRST SET OU T THE MODUS OPERANDI OF THE RPM, BEING THE METHOD CHOSEN BY THE ASSESS EE AS THE MOST APPROPRIATE METHOD, GIVEN UNDER RULE 10B(1 )(B) FOR DETERMINATION OF ALP AS UNDER:- (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 UNRELATED ENTERPRISE, IS IDENTIF IED ; ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 11 (II) SUCH RESALE PRICE IS REDUCED BY THE AMOUNT OF A NORMAL GROSS PROFIT MARGIN ACCRUING TO THE ENTERPRISE OR T O AN UNRELATED ENTERPRISE FROM THE PURCHASE AND RESALE O F THE SAME OR SIMILAR PROPERTY OR FROM OBTAINING AND PROV IDING THE SAME OR SIMILAR SERVICES, IN A COMPARABLE UNCONTROL LED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS ; (III) THE PRICE SO ARRIVED AT IS FURTHER REDUCED BY THE EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE P URCHASE OF PROPERTY OR OBTAINING OF SERVICES ; (IV) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE IN TO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING DIFFERE NCES IN ACCOUNTING PRACTICES, IF ANY, BETWEEN THE INTERNATI ONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF GROSS P ROFIT MARGIN IN THE OPEN MARKET ; (V) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUS E (IV) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PURCHASE OF THE PROPERTY OR OBTAINING OF THE SERVICES BY THE ENTERPRISE FROM THE ASSOCIATED ENTERPRISE ; ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 12 9. SUB-CLAUSE (I) OF CLAUSE (B) OF RULE 10B(1) DEAL S WITH IDENTIFYING THE PRICE AT WHICH THE GOODS PURCHASED FROM AN AE IS RESOLD. SUB-CLAUSE (II) OF CLAUSE (B) OF RULE 10B( 1) TALKS OF REDUCING THE AMOUNT OF NORMAL GROSS PROFIT MARGIN OF COMPARA BLE UNCONTROLLED TRANSACTIONS FROM SUCH RESALE PRICE OF THE ASSESSEE. SUB-CLAUSE (III) STATES THAT THE RESULT OF SUB-CLAU SE (II) IS FURTHER REDUCED BY THE EXPENSES INCURRED IN CONNECTION WITH THE PURCHASE OF GOODS AND SUB-CLAUSE (IV) PROVIDES THAT THE AMOU NT SO DEDUCED UNDER SUB-CLAUSE (III) IS ADJUSTED ON ACCOUNT OF DI FFERENCES IN THE INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLL ED TRANSACTIONS WHICH MATERIALLY AFFECT THE AMOUNT OF GROSS PROFIT MARGIN IN THE OPEN MARKET. FINALLY, SUB-CLAUSE (V) PROVIDES THAT THE ADJUSTED PRICE FOUND UNDER SUB-CLAUSE (IV) IS TAKEN AS ARMS LENGTH PRICE IN RESPECT OF PURCHASE OF GOODS FROM THE AE. WHEN WE CONSIDER THE METHODOLOGY GIVEN UNDER RPM, MORE SPECIFICALLY SUB- CLAUSES (I) AND (V), IT BECOMES PATENT THAT SUB-CLAUSE (I) REFE RS TO PROPERTY PURCHASED BY THE ENTERPRISE IS RESOLD AND SUB-CLAUSE (V) REFERS TO ARMS LENGTH PRICE IN RESPECT OF THE PURCHASE OF THE PROPERTY BY THE ENTERPRISE . A CLOSE SCRUTINY OF THE ABOVE TWO SUB-CLAUSES ALONG WITH THE REMAINING SUB-CLAUSES OF RULE 10B(1) (B) MAKES IT CLEAR BEYOND DOUBT THAT RPM IS BEST SUITED FOR DETE RMINING ALP OF AN INTERNATIONAL TRANSACTION IN THE NATURE OF PURC HASE OF GOODS ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 13 FROM AN AE WHICH ARE RESOLD AS SUCH TO UNRELATED PA RTIES. ORDINARILY, THIS METHOD PRE-SUPPOSES NO OR INSIGNIF ICANT VALUE ADDITION TO THE GOODS PURCHASED FROM FOREIGN AE. I N A CASE THE GOODS SO PURCHASED ARE USED EITHER AS RAW MATERIAL FOR MANUFACTURING FINISHED PRODUCTS OR ARE FURTHER SUBJ ECTED TO PROCESSING BEFORE RESALE, THEN RPM CANNOT BE CHARAC TERIZED AS A PROPER METHOD FOR BENCHMARKING THE INTERNATIONAL TR ANSACTION OF PURCHASE OF GOODS BY THE INDIAN ENTERPRISE FROM THE FOREIGN AE. 10. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSEE SIMPLY PURCHASED MOBILE PHONES AND ACCESSO RIES FROM NOKIA GROUP COMPANIES SITUATED OUTSIDE INDIA AND RE SOLD THE SAME AS SUCH WITHOUT ANY FURTHER VALUE ADDITION, MAINLY, TO HCL INFOSYSTEMS IN INDIA. SINCE THE GOODS IMPORTED FRO M THE FOREIGN AES REPRESENTING THE INTERNATIONAL TRANSACTION UNDE R THIS SEGMENT WERE NEITHER PROCESSED FURTHER NOR USED AS RAW MATE RIAL FOR MANUFACTURING ANY OTHER PRODUCT, IN OUR CONSIDERED OPINION, RPM IS THE FIRST CHOICE AS THE MOST APPROPRIATE METHOD FOR DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTION UNDER THIS SEGMENT. 11. THE LD. DR VEHEMENTLY ARGUED AGAINST THE APPL ICATION OF RPM IN THE GIVEN CIRCUMSTANCES AS THE MOST APPROPRIATE METHOD BY CONTENDING THAT THE ASSESSEE INCURRED HUGE ADVERTIS EMENT AND ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 14 MARKETING EXPENSES. IN VIEW OF SUCH INCURRING OF E XPENSES, THE LD. DR STATED THAT THE BETTER COURSE WOULD BE TO APPLY TNMM WHICH WOULD CONSIDER OPERATING PROFIT. WE ARE UNABLE TO ACCEPT THE CONTENTION ADVANCED ON BEHALF OF THE REVENUE. THE O BVIOUS REASON FOR THIS IS THAT THE INCURRING OF HIGH ADVERTISEMEN T AND MARKETING EXPENSES BY THE ASSESSEE VIS-A-VIS THE OTHER COMPARABLE COMPANIES DOES NOT IN ANY MANNER AFFECT THE DETERMI NATION OF ALP UNDER THE RPM. WHEN WE CONSIDER GROSS PROFIT IN NU MERATOR AND NET SALES IN DENOMINATOR, ALL THE EXPENSES DEBITED TO THE PROFIT & LOSS ACCOUNT AUTOMATICALLY STAND EXCLUDED. IT IS B UT NATURAL THAT ONLY THOSE EXPENSES CAN HAVE BEARING ON THE GROSS P ROFIT THAT ARE DEBITED TO THE TRADING ACCOUNT. AS THE AMOUNT OF A DVERTISEMENT AND MARKETING EXPENSES FALLS BELOW THE LINE AND F INDS ITS PLACE IN THE PROFIT AND LOSS ACCOUNT, THE HIGHER OR LOWER SP END ON IT CANNOT AFFECT THE AMOUNT OF GROSS PROFIT AND THE RESULTANT ALP UNDER THE RPM. IF THE ASSESSEE HAS INCURRED MORE EXPENSES ON ADVERTISEMENT AND PROMOTION, WHICH, IN THE OPINION OF THE LD. DR WENT ON TO BRAND BUILDING FOR AN AE, THEN, THE TRANSFER PRICING ADJU STMENT ON ACCOUNT OF SUCH AMP EXPENSES WAS SEPARATELY CALLED FOR. SI NCE THE TPO HAS NOT MADE ANY SEPARATE ADJUSTMENT ON ACCOUNT OF AMP EXPENSES AND HAS GIVEN EFFECT TO THE SAME UNDER TNM M, WE HOLD THAT THE INCURRING OF SUCH HIGHER ADVERTISEMENT AND MARKETING ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 15 SPEND WOULD NOT AFFECT THE CALCULATION OF ALP UNDER THE RPM. EX CONSEQUENTI , WE HOLD THAT RPM PRIMA FACIE APPEARS TO BE THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES O F THE INSTANT CASE. 12. AT THIS JUNCTURE, WE NOTE THE MANDATE OF RULE 1 0C WHICH DEFINES THE MOST APPROPRIATE METHOD. SUB-RULE (1 ) OF RULE 10C STATES THAT: FOR THE PURPOSES OF SUB-SECTION (1) O F SECTION 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH I S BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR I NTERNATIONAL TRANSACTION, AND WHICH PROVIDES THE MOST RELIABLE M EASURE OF AN ARMS LENGTH IN RELATION TO THE INTERNATIONAL TRANS ACTION. SUB-RULE (2) OF RULE 10C LISTS CERTAIN FACTORS WHICH SHOULD BE TAKEN INTO ACCOUNT IN SELECTING THE MOST APPROPRIATE METHOD AS SPECIFIED IN SUB-RULE (1). THESE FACTORS, INTER ALIA , INCLUDE - (C), THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECE SSARY FOR APPLICATION OF THE METHOD; AND (D) THE DEGREE O F COMPARABILITY EXISTING BETWEEN THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRANSACTION . AN OVERVIEW OF THE FACTORS PRESCRIB ED FOR CHOOSING THE MOST APPROPRIATE METHOD INDICATES THAT FIRSTLY, THE DATA NECESSARY FOR APPLICATION OF THE GIVEN METHOD SHOUL D BE AVAILABLE AND SECONDLY, THE UNCONTROLLED TRANSACTIONS SHOULD BE FUNCTIONALLY ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 16 SIMILAR, IF NOT IDENTICAL. A COMPANY, IN ORDER TO BE RANKED AS COMPARABLE UNDER THE RPM, SHOULD PREFERABLY BE ENGA GED IN DOING SIMILAR ACTIVITY AS THAT OF THE ASSESSEE OR AT LEAS T OF THE SAME GENUS OF THE ACTIVITY ALBEIT WITH A DIFFERENT SPECI ES. THE ABOVE DISCUSSION BOILS DOWN THAT IF A PARTICULAR METHOD T HOUGH ON THE FACE OF IT APPEARS TO BE THE MOST APPROPRIATE METHO D BY CONSIDERING THE NATURE OF TRANSACTION AND OTHER REL EVANT FACTORS, BUT, IS INCAPABLE OF APPLICATION EITHER BECAUSE OF THE NON- AVAILABILITY/UNRELIABILITY OF THE DATA OF THE COMPA RABLES AS REQUIRED UNDER THE GIVEN METHOD OR FOR WANT OF FUNCTIONAL SI MILARITY OF THE AVAILABLE CASES OR FOR ANY OTHER REASON AS GIVEN IN CLAUSE (2) OF RULE 10C, THEN, SUCH A METHOD INITIALLY CHOSEN AS C OMPARABLE, IS REQUIRED TO BE DISCARDED FOR REPLACEMENT WITH THE S ECOND BEST METHOD THAT SATISFIES THE REQUIREMENTS OF RULE 10C (2). 13. WE HAVE NOTICED ABOVE THAT IN THE GIVEN CIRCUMS TANCES, RPM IS THE FIRST CHOICE FOR CONSIDERATION AS THE MOST A PPROPRIATE METHOD. WHILE DISCUSSING THE MODUS OPERANDI GIVEN UNDER RPM, WE HAVE NOTICED THAT SUB-CLAUSE (II) PROVIDES FOR C ALCULATION OF GROSS PROFIT MARGIN AS A PERCENTAGE OF SALES IN RES PECT OF COMPARABLE UNCONTROLLED TRANSACTIONS. THIS PRIMARIL Y CONTAINS TWO ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 17 THINGS, VIZ., FIRST, THE SELECTION OF COMPARABLES A ND SECOND, THE AVAILABILITY OF THEIR DATA ENABLING COMPUTATION AS PRESCRIBED. 14. ESPOUSING THE FIRST ISSUE OF SELECTION OF C OMPARABLES, IT IS SEEN THAT THE ASSESSEE CHOSE THE RPM AS THE MOST AP PROPRIATE METHOD BY SELECTING 23 COMPANIES AS COMPARABLE IN I TS TP STUDY REPORT. A CURSORY LOOK AT THE FUNCTIONAL PROFILES O F THESE COMPANIES TRANSPIRES THAT SOME OF THEM ARE IN ENTIRELY DIFFER ENT LINE OF BUSINESS. OBVIOUSLY, SUCH COMPANIES CANNOT BE CONS IDERED AS COMPARABLE. THE LD. AR WAS FAIR ENOUGH TO CONCEDE THIS POSITION BY ADMITTING THAT THE COMPANIES WHICH ARE NOT COMPA RABLE SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. TO CUT S HORT THE CONTROVERSY, IT WAS STATED BY THE LD. AR THAT HE WA S AGREEABLE WITH THE FOUR COMPANIES CHOSEN BY THE LD. CIT(A) AS COMP ARABLE WITH THE EXCEPTION OF MEDIA VIDEO LTD. WHOSE EXCLUSION W AS ASSAILED. APART FROM THAT, THE LD. AR FURTHER REQUESTED FOR T HE INCLUSION OF PROCAL ELECTRONICS INDIA LTD., WHICH WAS INCLUDED BY THE LD. CIT(A) IN THE INITIAL LIST OF SEVEN COMPARABLES, BUT, WAS LATER ON EXCLUDED BY STATING THAT IT HAD HIGH NEGATIVE MARGIN OF 39.5 8%. 15. NOW, WE WILL EXAMINE AS TO WHETHER M/S MED IA VIDEO LTD., WAS RIGHTLY INCLUDED BY THE LD. CIT(A) IN THE LIST OF COMPARABLES. THE LD. AR CONTENDED THAT THE RELATED PARTY TRANSAC TIONS (RPTS) OF ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 18 THIS COMPANY WERE MORE THAN 40% AND, HENCE, THE SAM E SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. TO BOLSTER T HIS SUBMISSION, THE LD. AR INVITED OUR ATTENTION TOWARDS THE ANNUAL REPORT OF THIS COMPANY. HE REFERRED TO A CHART PREPARED BY HIM ON PAGE 520 OF THE PAPER BOOK DEDUCING FIGURES FROM THE ANNUAL REP ORT OF MEDIA VIDEO LTD. THE PERCENTAGE OF RPTS AT MORE THAN 40 OF THIS COMPANY WAS DEMONSTRATED BY TAKING IN THE NUMERATOR ALL THE INTERNATIONAL TRANSACTIONS OF (I) PURCHASE OF GOODS AND MATERIAL; (II) SALE OF GOODS AND RAW MATERIALS; (III) REND PAID; AND (IV) SERVICE INCOME. A SUM TOTAL OF THE VALUE OF THESE FOUR INTE RNATIONAL TRANSACTIONS WAS TAKEN AS NUMERATOR WITH THE FIGURE OF SALES AS THE DENOMINATOR. IT WAS FURTHER ARGUED THAT THE RPT FIL TER OF 15% WAS REASONABLE. THE SUM AND SUBSTANCE OF HIS SUBMISSION WAS THAT IF ALL THE RPTS OF A COMPANY ARE MORE THAN 15% OF ITS SALES, THEN SUCH COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE . 16. WE FIND THAT THIS SUBMISSION HAS TWO COMPONEN TS, VIZ., THE COMPOSITION OF NUMERATOR AND DENOMINATOR AND THE PE RCENTAGE OF SUCH NUMERATOR TO THE DENOMINATOR. WE AGREE IN PRIN CIPLE THAT IF ANY COMPANY THOUGH FUNCTIONALLY COMPARABLE, BUT, HA S MORE THAN A SPECIFIC PERCENTAGE OF THE RPTS, THEN, THE SAME S HOULD BE IGNORED BY TREATING IT AS A CONTROLLED TRANSACTION. HOWEVER, THE ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 19 PERCENTAGE OF RPTS TO MAKE A COMPANY AS INELIGIBLE FOR COMPARISON, IN OUR CONSIDERED OPINION, SHOULD BE TA KEN AS MORE THAN 25% AND NOT 15% AS SUGGESTED ON BEHALF OF THE ASSESSEE. THE VIEW ADOPTING MORE THAN 25% RPTS MAKING A COMPA NY INCOMPARABLE HAS BEEN TAKEN BY VARIOUS BENCHES OF T RIBUNAL INCLUDING AGLIENT TECHNOLOGIES INTERNATIONAL P. LTD. VS. ACIT (2013) 36 CCH 187 DEL TRIB ; STREAM INTERNATIONAL SERVICES PVT. LTD. VS. ADIT (IT) (2013) 152 TTJ (MUMBAI) 553 ; AND ACTIS ADVISERS PVT. LTD. VS. DCIT (2012) 20 ITR (TRIB) 138 (DELHI) . WE, THEREFORE, HOLD THAT A COMPANY CAN BE CONSIDERED AS INCOMPARABLE IF ITS RPTS EXCEED 25%. 17. NOW, WE TAKE UP THE SECOND ARGUMENT OF THE C OMPOSITION OF NUMERATOR AND DENOMINATOR. RATIO OF THE RPTS REPRES ENTS THE PROPORTION OF TRANSACTIONS WITH THE ASSOCIATED ENTE RPRISES (NUMERATOR) VIS-A-VIS THE TOTAL OF TRANSACTIONS (DENOMINATOR). IN ORDER TO DECIDE THAT WHAT SHOULD CONSTITUTE THE CON TENTS OF NUMERATOR AND DENOMINATOR FOR THE PURPOSES OF FINDI NG OUT THE PERCENTAGE OF RPTS, IT IS RELEVANT TO NOTE THE LOGI C BEHIND APPLYING THIS FILTER. IT IS MANIFEST THAT THE AIM OF THE TR ANSFER PRICING REGIME IS TO ENSURE THAT THE INTERNATIONAL TRANSACTIONS AR E RECORDED AT ARMS LENGTH PRICE. THIS IS DONE UNDER THE TNMM BY COMPARING THE ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 20 PROFIT EARNED FROM THE INTERNATIONAL TRANSACTION WI TH THAT EARNED BY THE COMPARABLE INDEPENDENT PARTIES IN AN UNCONTROLL ED SITUATION. THUS, WHILE CHOOSING COMPARABLES, IT MUST BE ENSURE D THAT THE PROFIT EARNED BY THEM CORRECTLY REFLECTS TRUE PROFI T AS IS EARNED BY AN ENTERPRISE FROM AN INDEPENDENT THIRD PARTY. IF SUCH A CHOSEN COMPANY, THOUGH FUNCTIONALLY COMPARABLE, HAS ALSO E NTERED INTO INTERNATIONAL TRANSACTIONS BEYOND A PARTICULAR PERC ENTAGE WITH THE RELATED PARTIES, IT IS QUITE POSSIBLE THAT ITS OVER ALL PROFIT MAY HAVE BEEN DISTORTED DUE TO SUCH TRANSACTIONS RENDERING I T AS INCOMPARABLE. THAT IS WHY, THIS FILTER IS APPLIED T O MAKE CERTAIN THAT A COMPANY SOUGHT TO BE CONSIDERED AS COMPARABLE SHO ULD HAVE ITS PROFIT UNINFLUENCED BY THE IMPACT OF THE RELATED PA RTY TRANSACTIONS. 18. IN VIEW OF THE FOREGOING DISCUSSION, IT IS M ANIFEST THAT THE TRANSACTIONS WHICH DO NOT IMPACT THE PROFITABILITY, SUCH AS LOAN GIVEN OR TAKEN OR OTHER ITEMS FINDING PLACE IN THE BALANCE SHEET, CAN HAVE NO PLACE EITHER IN THE NUMERATOR OR THE DE NOMINATOR OF THIS FORMULA. HOWEVER, ANY INCOME OR EXPENDITURE RESULTING/RELATING FROM/TO OR LIKELY TO RESULT/REL ATE FROM/TO SUCH ITEMS OF ASSETS OR LIABILITIES, SHOULD NOT BE CONFU SED WITH THE PER SE INTERNATIONAL TRANSACTIONS FINDING PLACE IN THE BAL ANCE SHEET OF THE COMPANY CALLING FOR EXCLUSION. ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 21 19. THE NUMERATOR OF THIS FORMULA CONSISTS OF AL L THE RELATED PARTY TRANSACTIONS OF A COMPANY SOUGHT TO BE CHOSEN AS CO MPARABLE WHICH AFFECT THE PROFIT EARNED DIRECTLY FROM OPERAT IONS. IF, HOWEVER A RELATED PARTY TRANSACTION IS OF SUCH A NATURE WHI CH DOES NOT DIRECTLY AFFECT OR INSIGNIFICANTLY AFFECTS THE PROF IT EARNED FROM THE BARE PROFIT PRODUCING ACTIVITY, THEN IT SHOULD NOT BE TAKEN INTO CONSIDERATION. THE REASON FOR THE EXCLUSION OF SUC H RELATED PARTY TRANSACTIONS FROM THE NUMERATOR IS THAT THEY HAVE N OT AT ALL OR VERY INSIGNIFICANTLY AFFECTED THE OPERATING PROFIT OF SU CH A COMPANY, WHICH IS THE DRIVING FORCE FOR THE PURPOSES OF MAKI NG A COMPARISON UNDER THE TNMM. TO CITE AN EXAMPLE, THE RPT OF RENT PAID BY A COMPANY WHICH IS ENGAGED IN THE BUSINESS OF TRADING OR MANUFACTURING CANNOT CONSTITUTE A PART OF THE NUMER ATOR, BECAUSE TRANSACTION OF RENT PAYMENT HAS NO DIRECT BEARING O N THE TRADING OR MANUFACTURING ACTIVITY. 20. NOW, WE TAKE UP THE CONTENTS OF THE DENOMINA TOR OF THIS FORMULA. THE PERCENTAGE OF NUMERATOR TO DENOMINATOR CAN BE CALCULATED ONLY WHEN THE CONTENTS OF A PART REPRESE NTING THE RPT OF A PARTICULAR NATURE IS SEEN WITH REFERENCE TO THE C ONTENTS OF WHOLE OF THAT NATURE. BOTH THE NUMERATOR AND DENOMINATOR HAVE TO HAVE THE SAME NATURE OF CONTENTS. THIS CAN BE DONE BY S EGREGATING ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 22 TRANSACTIONS OF ONE NATURE, LIKE, COMPARING RPT OF PURCHASE WITH THE TOTAL PURCHASES OR RPT OF SALES WITH THE TOTAL AMOUNT OF SALES OF THE COMPANY. IT IS ALSO POSSIBLE TO CLUB SMALL TRAN SACTIONS OF A DISTINCT BUT RELATED INCOME PRODUCING ACTIVITY WIT H A LARGE TRANSACTIONS OF MAJOR INCOME PRODUCING ACTIVITY AS ONE UNIT, BOTH IN THE NUMERATOR AS WELL AS IN THE DENOMINATOR. FOR EXAMPLE, RPT OF MAJOR SALE TRANSACTION AND MINOR JOB INCOME CAN BE COMBINED TO FIND OUT THE PERCENTAGE OF RPTS WITH THE TOTAL OF S ALES AND JOB INCOME TAKEN TOGETHER. IN A GIVEN CASE, SIMILAR TO WHAT IS PREVAILING BEFORE US, WHERE THE RPTS COMPRISE OF PU RCHASE, SALES, SMALL NON-OPERATING EXPENSES AND SERVICE INCOME, WE CAN PREFERABLY FIND OUT TWO PERCENTAGES OF RPTS BY IGNO RING THE RPT OF PAYMENT OF NON-OPERATING EXPENSE OF RENT, WHICH DOE S NOT DIRECTLY AFFECT THE PROFIT EARNED FROM TRADING ACTIVITY. FI RST PERCENTAGE OF RPT PURCHASES WITH TOTAL PURCHASES AND SECOND OF RP T SALES AND SERVICE INCOME AS ONE UNIT WITH THE TOTAL OF SALES AND SERVICE INCOME AGAIN AS ONE UNIT. THE DECISION AS TO WHETH ER SUCH A COMPANY BE INCLUDED IN THE LIST OF COMPARABLES BY A PPLYING THE FILTER OF MORE THAN 25% RPT, WOULD DEPEND ON THE OU TCOME OF TWO SUCH PERCENTAGES OF RPTS. IF EITHER OF THE TWO BRE ACHES THE 25% THRESHOLD, THEN THE COMPANY WILL CEASE TO BE COMPAR ABLE. IF HOWEVER, BOTH THE PERCENTAGES ARE LESS THAN 25%, TH EN THE ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 23 COMPANY WOULD BE LIABLE FOR INCLUSION IN THE LIST O F COMPARABLES. WE WANT TO MAKE IT CLEAR THAT THE ABOVE DISCUSSION ABOUT THE COMPONENTS OF RPT FORMULA IS RELEVANT ONLY IN THE C ASE OF AN ASSESSEE WHO IS A TRADER/DISTRIBUTOR AND NOT A SERV ICE PROVIDER/RECEIVER OR A MANUFACTURER. SINCE WE ARE CONCERNED IN THE EXTANT CASE WITH THE APPLICATION OF RPT FILTER IN THE CASE OF A TRADER, WE HAVE RESTRICTED OURSELVES ONLY TO A TRAD ER AND HAVE THUS DESISTED FROM EXAMINING THE CONTENTS AND OTHER RELE VANT CONSIDERATIONS IN THE APPLICATION OF THIS FILTER TO A SERVICE PROVIDER/RECEIVER OR A MANUFACTURER. 21. TURNING TO THE FACTS OF THE INSTANT CASE, IT IS SEEN THAT THE ASSESSEE HAS COMPUTED THE PERCENTAGE OF RELATED PAR TY TRANSACTIONS OF MEDIA VIDEO LTD. BY CLUBBING ALL TH E FOUR TYPES OF INTERNATIONAL TRANSACTIONS IN THE NUMERATOR, VIZ., PURCHASE OF GOODS AND MATERIALS; SALE OF GOODS AND MATERIALS; RENT PA ID; AND SERVICE INCOME, ALL TOTALING RS.22,43,46,000 AND THE AMOUN T OF NET SALES AS DENOMINATOR AT RS.55,25,22,266. WE FAIL TO APPR ECIATE THE RATIONALE OF THE MANNER IN WHICH THIS EXERCISE HAS BEEN CARRIED OUT BY THE ASSESSEE FOR COMPUTING THE PERCENTAGE OF RPT S OF THIS COMPANY AT 40.60%. ALL THE DEBIT AND CREDIT ITEMS OF TRADING AND PROFIT AND LOSS ACCOUNT REPRESENTING RELATED PARTY TRANSACTIONS ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 24 HAVE BEEN TAKEN AS NUMERATOR, BUT WHEN THE QUESTION OF CHOOSING DENOMINATOR CAME, THE ASSESSEE PREFERRED TO PICK ON LY THE FIGURE OF NET SALES OF THIS COMPANY. THIS APPROACH IS ABS OLUTELY ILLOGICAL AND LACKS CREDIBILITY. THE LD. AR ARGUED THAT EVEN IF THE APPROACH ADOPTED BY HIM WAS NOT ACCEPTABLE, STILL, THE RPTS OF MEDIA VIDEO LTD., WERE MORE THAN 25%. HOWEVER, HE ADMITTED NOT TO READILY HAVE SUCH FIGURES TO SUBSTANTIATE HIS CONTENTION. W E FIND THAT THE INTERNATIONAL TRANSACTIONS OF RENT PAID BY THIS COM PANY AT `1,46,000 IS QUITE INSIGNIFICANT AND THIS TRANSACTI ON HAS NO RELATION WITH ITS MAIN SOURCE OF THE INCOME PRODUCING ACTIVI TY, VIZ., SALES AND SERVICE CHARGES. THE SAME IS, THEREFORE, DIRECT ED TO BE EXCLUDED FROM CONSIDERATION IN THE NUMERATOR. IN S O FAR AS THE OTHER INTERNATIONAL TRANSACTIONS OF THIS COMPANY AR E CONCERNED, THEIR PERCENTAGE OF RPTS IS REQUIRED TO BE CONSIDER ED AS DISCUSSED ABOVE BY COMPARING THE RPTS OF PURCHASES WITH TOTAL PURCHASE AND THE RPTS OF SALES AND SERVICE INCOME WITH THE TOTAL OF SALES AND SERVICE INCOME. SINCE THOROUGH EXAMINATION OF THE ANNUAL ACCOUNTS OF THIS COMPANY IS NECESSARY TO DEDUCE THE SE FIGURES, WE ARE OF THE CONSIDERED OPINION THAT THIS EXERCISE SH OULD BE LEFT TO BE DONE BY THE TPO AT HIS END. WE, THEREFORE, DIRECT THE TPO TO REDO THIS EXERCISE FOR M/S MEDIA VIDEO LTD., IN ACCORDAN CE WITH OUR ABOVE DISCUSSION FOR ASCERTAINING WHETHER THIS COMP ANY SHOULD ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 25 CONTINUE IN OR BE EXCLUDED FROM THE FINAL LIST OF C OMPARABLES DRAWN BY THE LD. CIT(A). IF THE PERCENTAGE OF RPTS AS DI SCUSSED ABOVE FINALLY COMES TO MORE THAN 25%, THEN, THIS COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. IN THE OTHE RWISE SITUATION, THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPAR ABLES IS JUSTIFIED. 22. NOW, WE TURN TO M/S PROCAL ELECTRONICS INDIA LT D., WHICH THE LD. AR INSISTS FOR INCLUSION IN THE LIST OF COMPARABLES . THE LD. DR, ON THE PERUSAL OF THE ANNUAL ACCOUNTS OF THIS COMPANY, SUBMITTED THAT THIS COMPANY WAS ENGAGED IN MANUFACTURING AS WELL A S TRADING AND, HENCE, THE SAME CANNOT BE INCLUDED IN THE LIST OF COMPARABLES. THERE IS NO DISPUTE ON THE FACT THAT THE ASSESSEE IS SIMPLY ENGAGED IN THE TRADING ACTIVITY UNDER THIS S EGMENT. IN SUCH A SITUATION, A COMPANY CAN BE INCLUDED IN THE LIST OF COMPARABLES ONLY IF EITHER IT IS NOT ENGAGED IN MANUFACTURING O R THE SEGMENTAL RESULTS, IF ANY OF ITS TRADING SEGMENT ARE AVAILABL E. THE LD. AR WAS FAIR ENOUGH TO CONCEDE THAT IF THE SEGMENTAL RESULT S OF THIS COMPANY FROM THE TRADING SEGMENT ARE NOT AVAILABLE, THEN, IT SHOULD NOT BE INCLUDED IN THE LIST OF COMPARABLES. 23. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND REMIT THE MATTER TO THE FILE OF THE TPO/AO FOR EXAM INING AS TO WHETHER THE FINANCIAL RESULTS OF M/S PROCAL ELECTRO NICS INDIA LTD. ARE ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 26 AVAILABLE FOR THE TRADING SEGMENT. IF THESE ARE FO UND TO BE AVAILABLE, THEN, SUCH SEGMENTAL RESULTS SHOULD BE I NCLUDED. IN THE OTHERWISE SITUATION, THE ORDER EXCLUDING THIS COMPA NY FROM THE LIST OF COMPARABLES IS JUSTIFIED. 24. AS FAR AS THE REVENUES GROUND AGAINST THE EX CLUSION OF SOME OF THE COMPANIES CHOSEN BY THE TPO IS CONCERNED, TH E LD. DR, EXCEPT FOR RELYING ON THE ORDER PASSED BY THE TPO, COULD NOT POINT OUT ANY COGENT REASON FOR INCLUDING SUCH DISCLOSED COMPANIES IN THE FINAL LIST OF COMPARABLES WHICH WERE CHOSEN BY THE TPO, BUT, REJECTED BY THE LD. CIT(A). IT CAN BE SEEN THAT TH E LD. CIT(A) HAS GIVEN VALID REASONS FOR REJECTING THE DECLARED COMP ANIES CHOSEN BY THE TPO, SUCH AS, M/S BATLIBOI LTD. WHICH IS DEALI NG IN INDUSTRIAL MACHINERY AND M/S CONTROLLED PRINTING INDIA LTD., W HICH IS ENGAGED IN THE BUSINESS OF TRADING IN CODING AND MARKETING MACHINES. ERGO, WE UPHOLD THE IMPUGNED ORDER TO THE EXTENT OF EXCLU SION OF SOME OF THE DISCLOSED COMPANIES WHICH WERE CHOSEN BY THE TPO. THE LD. DR CONTENDED THAT THE UNDISCLOSED COMPANY (SECRET C OMPARABLE) WAS STRICTLY IN THE ASSESSEES LINE OF BUSINESS AND PRESENTED A GOOD COMPARABLE. IT WAS, THEREFORE, REQUESTED THAT THE S AME BE DIRECTED TO BE INCLUDED IN THE LIST OF COMPARABLES. WE PARTL Y AGREE WITH THE CONTENTION ADVANCED BY THE LD. DR ON THIS SCORE. TH ERE CAN BE NO ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 27 QUESTION OF A SECRET COMPARABLE. IT GOES WITHOUT SA YING THAT IF THERE IS A COMPANY WHICH IS COMPARABLE, THEN THE SA ME SHOULD BE INCLUDED IN THE LIST OF COMPARABLES, SO AS TO MAKE AN EFFECTIVE COMPARISON. AT THE SAME TIME, NO COMPANY CAN BE CO NSIDERED BY THE TPO AS COMPARABLE, UNLESS THE ASSESSEE IS GIVEN A CHANCE TO SHOW THAT IT IS NOT COMPARABLE. THIS CAN BE POSSIBL Y DONE ONLY WHEN ALL THE RELEVANT PARTICULARS OF SUCH COMPANY I NCLUDING ITS FUNCTIONAL PROFILE AND ANNUAL ACCOUNTS ARE MADE AVA ILABLE TO THE ASSESSEE GIVING IT AN EFFECTIVE AND SUBSTANTIVE OPP ORTUNITY. AS SUCH, WE DIRECT THE TPO TO DISCLOSE ALL THE NECESSA RY PARTICULARS OF SUCH A SECRET COMPANY INCLUDING ITS NAME ETC., IF T HE SAME IS PROPOSED TO BE INCLUDED IN THE LIST OF COMPARABLES. IF THE ASSESSEE SUCCEEDS IN SHOWING THAT THIS SO FAR SECRET COMPANY IS NOT COMPARABLE, THEN THE SAME BE EXCLUDED AND VICE VERSA . THIS DISPOSES OF THE ASPECT OF SELECTION OF COMPANIES AS COMPARABLE. 25. HAVING DEALT WITH THE FIRST COMPONENT OF SUB- CLAUSE (II) OF RULE 10B(1)(B) ABOUT THE SELECTION OF COMPARABLES COMPA NIES, NOW WE MOVE ON TO THE SECOND COMPONENT ABOUT THE AVAILABI LITY OF THEIR DATA ENABLING COMPUTATION AS PRESCRIBED. ON BEING C ALLED UPON TO EXPLAIN THE WORKING GIVEN BY THE ASSESSEE UNDER THE RPM IN RESPECT OF COMPANIES CHOSEN BY IT AS COMPARABLE, TH E LD. AR TOOK ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 28 US THROUGH SUCH CALCULATION, WHICH BROUGHT OUT THAT THE CALCULATION OF GROSS PROFIT HAS BEEN WRONGLY MADE BY REDUCING P URCHASES FROM THE FIGURE OF SALES WITH THE ADJUSTMENT ON ACCOUNT OF DIFFERENCE OF INVENTORY, WHEREVER APPLICABLE. IT GOES WITHOUT SA YING THAT THE CALCULATION OF GROSS PROFIT ENCOMPASSES THE CONSIDE RATION OF NOT ONLY THE FIGURE OF PURCHASE AS WELL AS INVENTORIES, BUT ALSO OF THE DIRECT EXPENSES WHICH ARE DEBITED TO THE TRADING AC COUNT. THE LD. AR ADMITTED THAT THE FIGURE OF GROSS PROFIT WAS COM PUTED BY THE ASSESSEE IN THE MANNER AS DEMONSTRATED, I.E., WITHO UT THE EFFECT ON DIRECT EXPENSES INCURRED BY THE COMPARABLE COMPA NIES. SUCH AN APPROACH IS TOTALLY MISPLACED INASMUCH AS IT IS NOT POSSIBLE TO TINKER WITH THE MODUS OPERANDI GIVEN IN THE FORMULA FOR CALCULATION OF THE ALP. THE NUMERATOR IN THE FORMULA UNDER THE RPM IS GROSS PROFIT. OBVIOUSLY, SUCH A NUMERATOR CANNOT BE SUBST ITUTED WITH ANYTHING LESS OR MORE THAN THE GROSS PROFIT. THE SP ECIAL BENCH OF THE TRIBUNAL IN THE CASE OF L.G. ELECTRONICS INDIA (P) LTD. VS. ACIT (2013) 152 TTJ 273 (DEL) (SB) HAS HELD THAT RULE 10B HAS SPECIFIED A SET PROCEDURE TO BE FOLLOWED FOR DETERMINING THE ALP DISTINCTLY UNDER THE FIVE METHODS. IT IS NOT PERMISSIBLE TO INVENT A NEW PROCEDURE AND TRY TO FIT SUCH PROCEDURE WITHIN ANY OF THE EXISTING PROCEDURES PRESCRIBED AS PER THESE METHODS. NO ONE IS AUTHORIZED TO ADD ONE OR MORE NEW STEPS IN THE PRESCRIBED PROC EDURE OR TO ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 29 SUBSTITUTE ANY OTHER MECHANISM WITH THE ONE PRESCRI BED UNDER THE RULE. IT IS NEITHER POSSIBLE TO INVENT A NEW METHOD NOR TO SUBSTITUTE A NEW METHODOLOGY IN PLACE OF THE ONE PRESCRIBED IN THE RULE. FURTHER SUB-SECTION (2) OF SECTION 92C MAKES IT ABU NDANTLY CLEAR THAT THE MOST APPROPRIATE METHOD REFERRED TO IN SUB -SECTION (1) SHALL BE APPLIED FOR DETERMINATION OF ALP IN THE MANNER AS MAY BE PRESCRIBED . IN THE LIGHT OF THE ABOVE DISCUSSION, IT IS EXPLI CIT THAT THE NUMERATOR IN THE FORMULA GIVEN UNDER THE RPM CA NNOT BE SUBSTITUTED WITH ANYTHING ELSE. TO BE MORE PRECISE, IF THE FIGURE OF GROSS PROFIT OF THE COMPARABLES IS NOT READILY AVAI LABLE FROM THEIR ANNUAL ACCOUNTS, THEN APPLICATION OF THE RPM AS THE MOST APPROPRIATE METHOD WOULD BE JEOPARDIZED. 26. WHEN THIS POSITION WAS CONFRONTED TO THE LD. A R, HE SUBMITTED THAT THE ASSESSEE CAN TRY TO FIND OUT THE FIGURE OF GROSS PROFIT OF THE FINAL LIST OF COMPARABLES FOR WORKING OUT THE RATIO OF GP TO SALES IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTIONS O F THE ASSESSEE UNDER THIS SEGMENT. UNDER SUCH CIRCUMSTANCES, WE A RE OF THE CONSIDERED OPINION THAT IT WOULD BE IN THE FITNESS OF THINGS IF THE IMPUGNED ORDER IS SET ASIDE AND THE MATTER IS RESTO RED TO THE TPO/AO. IT IS DIRECTED TO FIRST TRY TO DETERMINE T HE ALP UNDER RPM METHOD STRICTLY GOING BY THE MANDATE OF RULE 10B(1) (B). IF THE ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 30 ASSESSEE SUCCEEDS IN PLACING BEFORE THE TPO THE FIG URES OF GROSS PROFIT OF THE COMPARABLES, THEN, THE ALP SHOULD BE DETERMINED BY CONSIDERING GP/SALES OF THE COMPARABLE COMPANIES AS DISCUSSED ABOVE AND, THEREAFTER, THE PRESCRIPTION OF OTHER SU B-CLAUSES OF RULE 10B(1)(B) BE APPLIED. IF THE FIGURES OF GROSS PROF IT OF THE COMPARABLE COMPANIES ARE NOT AVAILABLE, THEN, THE R PM CANNOT BE CONSIDERED AS THE MOST APPROPRIATE METHOD. IN SUCH AN EVENTUALITY, TNMM SHOULD BE APPLIED WITH THE SUITAB LE PLI. 27. WITH THE ABOVE DIRECTIONS FOR A FRESH COMPUTATI ON OF ALP OF THE INTERNATIONAL TRANSACTIONS UNDER THE TRADING SE GMENT, THE GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED FOR STAT ISTICAL PURPOSES. GROUND NO. 3 OF THE REVENUES APPEAL IS DISMISSED I NASMUCH AS WE HOLD THAT ONLY THE CURRENT YEARS DATA SHOULD BE AP PLIED FOR COMPUTATION OF PLI OF THE TESTED PARTY AS WELL AS C OMPARABLES. GROUND NO.5 OF THE REVENUES APPEAL IN ALLOWING REL IEF ON ACCOUNT OF ADVERTISEMENT AND MARKETING EXPENSES CANNOT BE D ECIDED AT THIS STAGE BECAUSE OF OUR DIRECTION FOR FIRSTLY APP LYING RPM. ONLY IF RPM IS FOUND TO BE INAPPLICABLE, BECAUSE OF LACK OF DATA, ETC., THE TNMM WILL BE APPLIED. IF SUCH AN EVENTUALITY ARISE S, THEN, THE TPO WILL CONSIDER THE EFFECT OF ADVERTISEMENT AND MARKE TING EXPENSES AFRESH AS PER LAW, AFTER ALLOWING A REASONABLE OPPO RTUNITY OF BEING ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 31 HEARD TO THE ASSESSEE. GROUND NO.6 OF THE REVENUE S APPEAL IN ALLOWING ADJUSTMENT OF (+)/(-) 5% OF ALP IS CONSEQU ENTIAL WHICH HAS TO BE CONSIDERED IN THE FRESH DETERMINATION OF PROF IT RATE OF COMPARABLES AS WELL AS THAT OF THE ASSESSEE EITHER UNDER RPM OR, ALTERNATIVELY, UNDER TNMM. 28. GROUND NOS. 4 AND 5 OF THE ASSESSEES APPEAL AR E AGAINST THE CONFIRMATION OF DISALLOWANCE OF `26,19,816/- (AFTER ALLOWING DEPRECIATION @ 20% ON TOTAL EXPENSES OF `34,93,088/ -) TOWARDS MARKETING EXPENSES INCURRED BY THE ASSESSEE ON ACCO UNT OF PROVIDING HANDSETS TO AMSCS, DEALERS AND EMPLOYEES . 29. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS ISSU E IS NO MORE RES INTEGRA INASMUCH AS THE TRIBUNAL HAS RESTORED SUCH ISSUE T O THE FILE OF AO BY ITS ORDER IN THE APPEALS FOR ASSESSMENT YE ARS 2000-01 AND 2001-02. RESPECTFULLY FOLLOWING THE PRECEDENT, WE S ET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE AO FOR D ECIDING IT IN CONFORMITY WITH THE DIRECTION GIVEN BY THE TRIBUNAL IN ITS ORDER FOR THE IMMEDIATELY PRECEDING YEARS. 30. GROUND NO. 1 OF THE REVENUES APPEAL IS AGAINST THE DELETION OF DISALLOWANCE OF ` 58,72,028/- OUT OF FOREIGN TRA VELLING EXPENSES. THE LD.CIT (A) DELETED THIS DISALLOWANCE MADE BY TH E AO BY ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 32 FOLLOWING THE ORDER PASSED BY THE TRIBUNAL IN ASSES SEES OWN CASE FOR ASSESSMENT YEARS 2000-01 AND 2001-02. RESPECTF ULLY FOLLOWING THE PRECEDENT, WE UPHOLD THE IMPUGNED ORDER. THIS GROUND FAILS. 31. GROUND NO. 2 OF THE REVENUES APPEAL IS AGAINST THE DELETION OF DISALLOWANCE OF ` 77,95,857/- OUT OF WARRANTY PR OVISION. HERE AGAIN, WE FIND THAT THE TRIBUNAL HAS DECIDED THIS I SSUE IN ASSESSEES FAVOUR IN THE AFORENOTED ORDER. THIS GRO UND ALSO FAILS. 32. NOW WE MOVE ON TO THE REVENUES GROUND NO. 7, B Y WHICH IT IS AGGRIEVED AGAINST THE DELETION OF ADDITION ON ACCOU NT OF TRANSFER PRICING ADJUSTMENT IN NET R&D SEGMENT AND NIC R&D S EGMENT. THE FACTUAL SCENARIO OF THIS GROUND IS THAT THE ASS ESSEE RENDERED CONTRACT SERVICES TO NOKIA INTERNET COMMUNICATION ( NIC) RESEARCH CENTRE, HYDERABAD, CARRYING OUT RESEARCH ON NETWORK SECURITY APPLIANCES AND NETWORK MANAGEMENT SOLUTIONS, FOR WH ICH IT WAS REMUNERATED AT COST PLUS 5%. GROSS REVENUE UNDER T HIS SEGMENT AMOUNTED TO `5.9 CRORE. APART FROM THIS, THE ASSES SEE ALSO RENDERED CONTRACT R & D SERVICES TO NOKIA NETWORK T ECHNOLOGY, R & D DIVISION ON COST PLUS 7%. GROSS REVENUE UNDER THIS SEGMENT AMOUNTED TO `3.9 CRORE. THE ASSESSEE APPLIED TNMM AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THESE INTERNATI ONAL TRANSACTIONS WITH PLI OF OP/TC. THE ASSESSEE SELEC TED 51 ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 33 COMPARABLE CASES TO DEMONSTRATE THAT THE INTERNATIO NAL TRANSACTIONS UNDER THIS SEGMENT, ON A CONSOLIDATED BASIS, WERE AT ALP. THE MEAN MARGIN OF THESE COMPANIES, BY TAKING THE WEIGHTED AVERAGE FOR THE YEARS 1999-2000 AND 2000-01, WAS T AKEN AT 20%. ON ACCOUNT OF ECONOMIC DOWNTURN EXPERIENCED IN THIS YEAR OWING TO 11 TH SEPTEMBER DISASTER, A DOWNWARD ADJUSTMENT OF 5% WA S MADE IN SUCH MARGIN OF THE COMPARABLES. ANOTHER 5% DOWNWARD ADJUSTMENT WAS MADE TO THE MEAN MARGIN ON ACCOUNT O F WORKING CAPITAL ADJUSTMENT. THE TPO FOUND THAT THE MEAN MAR GIN BY USE OF THE CURRENT YEAR DATA WAS 19.17%. HE ROUNDED IT TO 20%. NO DEDUCTION ON ACCOUNT OF DOWNTURN, AS CLAIMED BY THE ASSESSEE AT 5%, WAS ALLOWED. HE TOOK ARMS LENGTH MARGIN AT 15% AFTER ALLOWING ADJUSTMENT OF 5% ON ACCOUNT OF WORKING CAP ITAL DIFFERENCE. AS AGAINST THE ASSESSEES LIST OF 51 C OMPARABLE CASES, THE TPO SELECTED 60 COMPANIES AS COMPARABLE, WHICH HAVE BEEN TABULATED ON PAGES 17 AND 18 OF HIS ORDER. THIS EX ERCISE DONE BY THE TPO RESULTED INTO TRANSFER PRICING ADJUSTMENT O F `85,20,942/-, WHICH WAS ADDED BY THE AO. THE LD. CIT(A) ACCEPTED THE TPOS ACTION IN NOT GRANTING DEDUCTION OF 5% ON ACCOUNT O F DOWNTURN. HE, HOWEVER, EXCLUDED THREE SETS OF COMPANIES FROM THE LIST OF COMPARABLES DRAWN BY THE TPO. AFTER SUCH EXCLUSION AND ALLOWING (+)/(-) 5% ADJUSTMENT, THE LD. CIT(A) FOUND THAT TH E PRICE CHARGED ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 34 BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISES WAS AT ALP. CONSEQUENTLY, THE ADDITION SO MADE BY THE AO CAME T O BE KNOCKED DOWN. THE REVENUE ASSAILS THE DELETION OF THIS ADD ITION. 33. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT T HERE IS NO DISPUTE ON ANY ASPECT OTHER THAN THE EXCLUSION OF THREE SET S OF COMPANIES BY THE LD. CIT(A), WHICH WERE CHOSEN BY THE TPO. W E WILL TAKE UP THESE THREE SETS OF COMPANIES ONE BY ONE FOR CONSID ERATION AND DECISION. 34. THE FIRST SET CONTAINS THIRTEEN COMPANIES T ABULATED ON PAGE 65 OF THE IMPUGNED ORDER, WHICH WERE EXCLUDED BY TH E LD. CIT(A) ON THE TOUCHSTONE OF THE FILTER OF REJECTING COMPAN IES WHOSE RATIO OF DEPRECIATION TO THE TOTAL COST WAS LESS THAN 5% AND MORE THAN 50%. IT CAN BE SEEN FROM THE TPOS ORDER THAT THIS FILTER WAS APPLIED BY THE TPO HIMSELF. HOWEVER, WHILE GIVING EFFECT TO THIS FILTER, THE TPO INADVERTENTLY FAILED TO EXCLUDE THE SE THIRTEEN COMPANIES FROM THE LIST OF COMPARABLES, ALBEIT THES E ADMITTEDLY DID NOT QUALIFY FOR THE INCLUSION ON THE BASIS OF S UCH FILTER. THIS CONTENTION RAISED BY THE ASSESSEE BEFORE THE LD. CI T(A) WAS REMITTED TO THE TPO FOR EXAMINATION. VIDE REMAND RE PORT DATED 24.08.09, THE TPO SIMPLY STATED THAT: THE PROPORTI ON OF ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 35 DEPRECIATION AS A PERCENTAGE OF COST IS A MATTER OF FACT AND THE SAME NEEDS TO BE DECIDED ACCORDINGLY. THUS, IT IS AMPLY BORNE OUT THAT THE TPO HIMSELF APPLIED THIS FILTER FOR REJECT ING SOME OF THE COMPANIES FROM THE LIST OF COMPARABLES AND BY APPLI CATION OF SUCH FILTER, THESE THIRTEEN COMPANIES WERE ALSO LIABLE TO BE EXCLUDED WHICH WERE INADVERTENTLY INCLUDED BY THE TPO IN THE LIST OF COMPARABLES. THE APPLICATION OF THIS FILTER AND TH ESE COMPANIES CONSEQUENTLY NOT QUALIFYING FOR INCLUSION HAS NOT B EEN DENIED BY THE TPO IN THE REMAND REPORT, THE RELEVANT PART OF WHICH HAS BEEN REPRODUCED ABOVE. 35. ORDINARILY, WE WOULD NOT HAVE APPROVED TH E APPLICATION OF THE FILTER OF EXCLUDING SOME COMPANIES ON THE BASIS OF LOWER OR HIGHER DEPRECIATION AS A PERCENTAGE OF TOTAL COSTS (NOT THE SIMPLICITOR QUANTUM OF DEPRECIATION ALLOWANCE) . I T IS AXIOMATIC THAT HIGHER AMOUNT OF DEPRECIATION FOLLOWS IN THE I NITIAL YEARS OF THE INSTALLATION OF MACHINERY OR OTHER ASSETS BECAUSE O F THE HIGHER BASE. WITH THE INCREASE IN THE AGE OF THE ASSET, T HE WRITTEN DOWN VALUE GOES ON DECREASING, WHICH RESULTS INTO DOWNWA RD SOJOURN OF THE ANNUAL AMOUNT OF DEPRECATION OVER THE YEARS. AT THE SAME TIME, IT IS EQUALLY TRUE THAT WHEN ASSET IS NEW, TH ERE ARE LOW COSTS OF REPAIRS AND OTHER INCIDENTAL EXPENSES CONNECTED WITH THE ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 36 OPERATION OF THE ASSETS. THUS IT IS EVIDENT THAT TH E EFFECT OF HIGHER AMOUNT OF DEPRECIATION IN THE INITIAL YEARS IS SET OFF BY THE LOWER AMOUNT OF THE COST OF REPAIRS ETC. BUT WITH THE INC REASE IN THE AGE OF THE ASSET, NO DOUBT, THE AMOUNT OF ANNUAL DEPREC IATION ALLOWANCE DECLINES, BUT AT THE SAME TIME, REPAIR CO STS ETC. BOOST UP. OPERATING COST INCLUDES NOT ONLY THE COST OF R EPAIRS ETC. BUT ALSO THE AMOUNT OF DEPRECIATION ALLOWANCE. CONSEQUE NTLY, OPERATING PROFIT ALSO CARRIES THE EFFECT OF BOTH TH E DEPRECIATION ALLOWANCE AND REPAIRS COST ETC. UNDER THE TNMM, THE NUMERATOR IS ALWAYS THE AMOUNT OF OPERATING PROFIT. WHEN THE A MOUNT OF OPERATING PROFIT EMBRACES THE EFFECT OF DEPRECIATIO N ALLOWANCE AND ALSO REPAIRS COST ETC., BOTH OF WHICH ORDINARILY RU N IN THE OPPOSITE DIRECTIONS, THERE IS NO REASON TO DISCARD AN OTHERW ISE COMPARABLE CASE SIMPLY ON THE GROUND OF HIGHER OR LOWER PERCEN TAGE OF AMOUNT OF DEPRECIATION ALLOWANCE. AS THE HIGHER AMOUNT OF DEPRECIATION IS USUALLY COUPLED WITH THE LOWER REPAIR COST ETC., AN D VICE VERSA , THERE CAN BE NO JUSTIFICATION IN APPLYING THE FILTE R OF REJECTING THE COMPANIES WITH DEPRECIATION HIGHER OR LOWER THAN A PARTICULAR PERCENTAGE OF TOTAL COSTS. 36. BE THAT AS IT MAY, IT IS NOTICED THAT THE T PO VENTURED TO APPLY THIS FILTER AND BY APPLYING THE SAME, EXCLUDE D SOME OF THE ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 37 COMPANIES WHICH WERE NOT SUITABLE TO HIM. HOWEVER, HE FORGOT TO EXCLUDE THESE THIRTEEN COMPANIES, WHICH WERE PROBAB LY FAVORING THE ASSESSEES CASE. AS THIS FILTER HAS BEEN APPLI ED AND ACTED UPON BY THE TPO PARTIALLY, WE ARE UNABLE TO ORDER AT THI S STAGE THAT THIS FILTER BE NOT APPLIED BECAUSE THE COMPANIES FAVORIN G THE ASSESSEE ON THIS FILTER MUST HAVE ALREADY BEEN EXCLUDED BY T HE TPO, WHICH NOW CANNOT BE BROUGHT BACK. SINCE THESE THIRTEEN C OMPANIES ARE LIABLE TO BE EXCLUDED ON THE BASIS OF THE FILTER AP PLIED BY THE TPO, WE HAVE NO OPTION BUT TO COUNTENANCE THE VIEW TAKEN BY THE LD. CIT(A) IN EXCLUDING THESE THIRTEEN COMPANIES FROM T HE LIST OF COMPARABLES ON THE STRENGTH OF THE SAME FILTER. 37. THE SECOND SET OF THE COMPANIES EXCLUDED BY THE LD. CIT(A) COMPRISES OF HCL TECHNOLOGIES LTD., AND MASTEK LTD. THESE COMPANIES WERE EXCLUDED ON THE BASIS OF THE FILTER OF REJECTION OF COMPANIES HAVING RELATED PARTY TRANSACTION OVER 25% . SINCE RPTS OF THESE TWO COMPANIES STOOD AT 36.89% AND 47.45%, RESPECTIVELY, THE LD. CIT(A) DIRECTED THEIR EXCLUSION. THE LD. D R FAILED TO POINT OUT WITH ANY COGENT MATERIAL THAT THE RELATED PARTY TRANSACTIONS OF THESE TWO COMPANIES WERE LESS THAN 25%. IN EARLIER PART OF THIS ORDER, WE HAVE HELD THAT THE COMPANIES HAVING RELAT ED PARTY TRANSACTIONS OF MORE THAN 25% CANNOT BE CONSIDERED AS ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 38 COMPARABLE AS THESE FAIL THE TEST OF UNCONTROLLED T RANSACTIONS. FOLLOWING THE SAME DECISION, WE HOLD THAT THE LD. C IT(A) WAS JUSTIFIED IN EXCLUDING THESE TWO COMPANIES, WHOSE P ERCENTAGE OF RPTS STOOD AT 36.89% AND 47.45%. AS SUCH, WE UPHOL D THE VIEW TAKEN BY THE LD. CIT(A) ON THE EXCLUSION OF THESE T WO COMPANIES. 38. THE LAST SET OF COMPANIES EXCLUDED BY THE LD. CIT(A) ON TURNOVER FILTER INCLUDES SEVENTEEN NAMES. THE TPO APPLIED THE FILTER REJECTING COMPANIES HAVING SALES LESS THAN ` 5 CRORE WITHOUT ANY UPPER CAP. THE ASSESSEE ARGUED BEFORE THE LD. CIT(A) THAT ITS TURNOVER UNDER THIS SEGMENT AMOUNTED TO `9.72 CRORE AND, AS SUCH, THERE WAS NO JUSTIFICATION IN EITHER EXCLUDIN G THE COMPANIES WITH SALES LESS THAN `5 CRORE OR INCLUDING THE COMP ANIES WITH TURNOVER OF MORE THAN `50 CRORE. AFTER OBTAINING T HE REMAND REPORT FROM THE TPO, THE LD. CIT(A) HELD THAT THESE SEVENTEEN COMPANIES WITH SALES OF MORE THAN `50 CRORE BE EXCL UDED FROM THE LIST OF COMPARABLES. 39. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ASSES SEES TURNOVER UNDER THIS SEGMENT IS TO THE TUNE OF `9.72 CRORE. THE TPO EXCLUDED THE COMPANIES WITH THE TURNOVER OF LESS THAN `5 CRO RE WITHOUT APPLYING ANY UPPER LIMIT OF THE TURNOVER. THE PREL IMINARY QUESTION ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 39 WHICH LOOMS LARGE BEFORE US IS WHETHER THE APPLICAT ION OF THIS FILTER IS CORRECT? IN THIS REGARD, IT IS RELEVANT TO NOTE THAT THE COMPUTATION OF ARM'S LENGTH PRICE UNDER THE INDIAN TRANSFER PRICING PROVISIONS IS EMBODIED IN SECTION 92C OF THE ACT. SUB-SECTION (1) OF THIS SECTION PROVIDES THAT THE ARM'S LENGTH PRICE I N RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE GIVEN METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO CERTAIN FACTORS. PROVISO TO SUB-SECTION (2), WHICH ASSUMES SIGNIFICANCE FOR THE PRESENT PURPOSE, STATES THAT : WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIAT E METHOD, THE ARM'S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES . IN CONTRAST, SOME COUNTRIES HAVE ADOPTED THE INTERQUARTILE RANGE, WHICH IS ALSO CALLED THE MIDSP READ OR MIDDLE FIFTY, INSTEAD OF ARITHMETIC MEAN OF ALL, AS USED I N INDIA. WHEN ARITHMETIC MEAN IS TAKEN OF THE ALL THE OTHERWISE C OMPARABLES COMPANIES, IT TENDS TO IRON OUT THE DIFFERENCES DU E TO HIGHER OR LOWER SIZE OF A COMPANY OR VACILLATING PROFITABILIT Y RATES. A COMPANY OTHERWISE FOUND TO BE FUNCTIONALLY COMPARAB LE CANNOT BE EXCLUDED EITHER ON THE GROUND OF HIGHER OR LOWER PR OFIT RATE OR HIGHER OR LOWER TURNOVER. THERE IS NO MENTION IN TH E LANGUAGE OF THE PROVISIONS FOR THE EXCLUSION OF POTENTIAL COMPA RABLE COMPANIES SIMPLY ON ACCOUNT OF HIGH OR LOW TURNOVER OR PROFIT RATE. THE SPECIAL ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 40 BENCH OF THE TRIBUNAL IN MAERSK GLOBAL CENTRES (INDIA) (P.) LTD. VS. ACIT (2014) 147 ITD 83 (MUM)(SB) HAS ALSO HELD THAT POTENTIAL COMPARABLES CANNOT BE EXCLUDED MERELY ON THE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGHER. THERE CAN BE NO JUSTIF IABLE REASON TO EXCLUDE SUCH HIGH OR LOW PROFIT COMPANIES UNLESS IT IS SHOWN THAT SUCH HIGH OR LOW PROFIT WAS DUE TO ABNORMAL FACTORS . SAME LOGIC APPLIES TO THE HIGH OR LOW TURNOVER COMPANIES ALSO. THE MERE FACT THAT A COMPANY HAS A HIGH OR LOW TURNOVER CAN BE NO REASON TO JUSTIFY ITS EXCLUSION IF IT IS OTHERWISE FUNCTIONAL LY COMPARABLE. THE EXCLUSION OF COMPANIES ON SUCH A RATIONALE RUNS CON TRARY TO THE EXPRESS PROVISIONS OF THE ACT. 40. AT THIS STAGE, WE CONSIDER IT OUR DUTY TO G O THROUGH THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT I N CIT VS. AGNITY INDIA TECHNOLOGIES (P.) LTD. (2013) 219 TAXMAN 26 ( DEL) . IN THAT CASE, THE ASSESSEE WAS A CAPTIVE UNIT PROVIDING SOF TWARE SERVICES TO ITS ASSOCIATED ENTERPRISES. THE HONBLE HIGH CO URT DIRECTED THE EXCLUSION OF INFOSYS LTD. FROM THE LIST OF COMPARAB LES, WHICH LIST OTHERWISE INCLUDED SEVERAL COMPANIES WITH HUGE TURN OVER. THE EXCLUSION WAS ORDERED ON ACCOUNT OF THE GIANTNESS O F THIS COMPANY, WHICH WAS, IN TURN, DETERMINED BY SEEING T HE CUMULATIVE EFFECT OF SEVERAL FACTORS, INCLUDING RISK PROFILE, NATURE OF SERVICES, ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 41 TURNOVER, OWNERSHIP OF BRANDED/PROPRIETARY PRODUCTS , ONSITE VS. OFFSHORE SERVICES, EXPENDITURE ON ADVERTISEMENT AND R&D ETC. THE HIGHER TURNOVER WAS ONLY ONE OF THE CRITERION AND N OT THE SOLE CRITERIA FOR THE EXCLUSION OF THIS COMPANY. IN VIE W OF THE ABOVE DISCUSSION, WE HOLD IN PRINCIPLE THAT NO POTENTIALL Y COMPARABLE COMPANY CAN BE EXPELLED FROM THE LIST OF COMPARABLE S SIMPLY FOR THE REASON OF HIGH OR LOW TURNOVER. 41. ADVERTING TO THE FACTS OF THE INSTANT CASE, IT IS SEEN THAT THE ASSESSEES TURNOVER UNDER THIS SEGMENT AMOUNTED TO LESS THAN `10 CRORE. THE TPO HAS APPLIED THE TURNOVER FILTER BY S ETTING A LOWER LIMIT OF TURNOVER AT `5 CRORE WITHOUT SETTING ANY U PPER CEILING OF TURNOVER. WE FAIL TO COMPREHEND ANY LEGALLY SUSTA INABLE REASON FOR APPLYING THE FILTER SETTING A LOWER LIMIT OF TU RNOVER AT AROUND HALF OF THE ASSESSEES TURNOVER AND LEAVING THE UPP ER LIMIT UNCAPPED. IT IS TRITE THAT LAW DOES NOT PERMIT A PERSON TO BOTH APPROBATE AND REPROBATE. THIS PROPOSITION HAS SANCT ION OF THE HONBLE SUPREME COURT IN R. N. GOSAIN VS. YASHPAL DHIR (1992) 4 SCC 683 . UNDER THIS RULE, A PERSON CANNOT BE PERMITTED T O BLOW HOT AND COLD IN THE SAME BREATH. AS THE TPO HAS HIM SELF APPLIED THE LOWER LIMIT AT HALF OF THE ASSESSEES TURNOVER, THERE IS JUSTIFICATION IN APPLYING SOME UPPER LIMIT AS WELL. TAKING A HOLISTIC ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 42 VIEW OF THE MATTER, WE APPROVE THE VIEW TAKEN BY TH E LD. CIT(A) IN THE PRESENT PECULIAR FACTS AND CIRCUMSTANCES BY FIX ING THE UPPER LIMIT OF TURNOVER FILTER AT `50 CRORE. THE SITUATIO N WOULD HAVE BEEN DIFFERENT IF THE TPO HAD EITHER SET NO OR A NOMINAL LOWER LIMIT OF THE TURNOVER FILTER, LEAVING THE UPPER LIMIT OPEN. IN THAT SITUATION, THERE WOULD HAVE BEEN NO REASON TO SET ANY UPPER TURNOVER FILTER AS WELL. ERGO, WE COUNTENANCE THE CONCLUSION DRAWN BY THE LD . CIT(A) IN THE PRESENT UNUSUAL CIRCUMSTANCES. 42. WHEN THE ABOVE THREE SETS OF COMPANIES ARE H ELD TO BE RIGHTLY EXCLUDED, THE PRICE CHARGED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISES IN THIS SEGMENT OF INTERNATI ONAL TRANSACTIONS COMES WITHIN (+)/(-) 5% RANGE AS PER PROVISO TO SEC TION 92C(2) OF THE ACT, WARRANTING NO ADDITION ON ACCOUNT OF TRANS FER PRICING ADJUSTMENT. WE, THEREFORE, UPHOLD THE DELETION OF THE ADDITION OF `85.20 LAC. 43. THE CROSS OBJECTION FILED BY THE ASSESSEE IS SI MPLY IN SUPPORT OF THE IMPUGNED ORDER GRANTING RELIEF TO THE ASSESSEE ON THE GROUNDS WHICH ARE SUBJECT MATTER OF THE REVENUES APPEAL. I N VIEW OF OUR DECISION ON THE APPEAL FILED BY THE DEPARTMENT, THE CROSS OBJECTION OF THE ASSESSEE HAS BECOME INFRUCTUOUS. ITA NOS.242 & 178/DEL/2010 CO NO.77/DEL/2010 43 44. IN THE RESULT, THE APPEALS OF THE REVENUE AN D THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE CROSS OBJECTION OF THE ASSESSEE IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 31.10.201 4. SD/- SD/- [ GEORGE GEORGE K. ] [ R.S. SYAL ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 31 ST OCTOBER, 2014. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.* *