SL Lumax Limited, Sriperambudur V. ACIT, CHENNAI

ITA 1915/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61072 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 02-05-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 29-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JUNIOR
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Depreciation; Transfer pricing; International transaction; Cost of acquisition
• Section: 14A; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER I.T.A. NO. 1915/MDS/2011 (ASSESSMENT YEAR : 2007-08) M/S SL LUMAX LIMITED, G-15, SIPCOT INDUSTRIAL PARK, IRRUNGATTUKOTTAI, SRIPERUMBUDUR 602 105. PAN : AAACL1857B (APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(1), CHENNAI - 600 034 . (RESPONDENT) APPELLANT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE RESPONDENT BY : SHRI K.E.B. RENGARAJAN, JUNIOR STANDING COUNSEL DATE OF HEARING : 02.05.2012 DATE OF PRONOUNCEMENT : 14.05.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE, IT ASSAILS T HE ORDER OF A.O., TPO AND DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP) WITH REFERENCE TO AN ADDITION OF ` 13,22,36,997/- TO ITS INCOME. OUT OF THIS ADDITION, ` 13.18 LAKHS PERTAINS TO A TRANSFER PRICING (TP) IS SUE, WHEREAS, THE BALANCE IS A DISALLOWANCE UNDER SECTI ON 14A OF I.T.A. NO. 1915/MDS/11 2 INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'). BOTH TH E ADDITIONS HAVE BEEN STRONGLY DISPUTED BY THE ASSESSEE. 2. ISSUE REGARDING ADDITION MADE UNDER THE TRANSFER PRICING PROVISION IS TAKEN UP FIRST. 3. FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN AUTO COMPONENTS MANUFACTURING AND SALE, ESPECIALLY OF LIGHT ASSEMBL ES, HAD INTERNATIONAL TRANSACTIONS WITH FOUR ASSOCIATED ENT ERPRISES (AE). SUCH INTERNATIONAL TRANSACTIONS COMPRISED OF IMPORT OF RAW MATERIALS, IMPORT OF MACHINERY AND PAYMENT FOR ROYALTY AND TEC HNICAL ASSISTANCE. AS PER THE ASSESSEE, SUCH INTERNATIONAL TRANSACTIONS CARRIED OUT WITH ITS AE WERE INEXTRICABLY RELATED T O ITS MAIN MANUFACTURING OPERATIONS AND THE TRANSACTIONS WERE SO CLOSELY LINKED AND CONTINUOUS THAT THEY COULD NOT BE EVALUATED ON A SEPARATE BASIS. THEREFORE, ASSESSEE CONSIDERED ALL THESE TRANSACTIO NS TOGETHER IN ITS TP ANALYSIS. AS PER THE TRANSFER PRICING REPORT FI LED BY THE ASSESSEE, FOR THE IMPUGNED ASSESSMENT YEAR (PAPER-B OOK PAGES 94 TO 135), THE TRANSACTIONS ENTERED BY THE ASSESSEE W ITH AES, WERE AS UNDER:- I.T.A. NO. 1915/MDS/11 3 NAME OF THE ASSOCIATE DETAILS OF TRANSACTION AMOUNT OF TRANSACTION (IN RS.) METHOD ADOPTED M/S SL TECH CORPORATION IMPORT OF 658100 NOS. OF COMPONENTS / RAW MATERIALS 52977 685 TNMM M/S SL ENGINEERING COMPANY LTD. IMPORT 586336 NOS. OF COMPONENTS / RAW MATERIALS 1,98,61,201 TNMM M/SHSL ELECTRONICS COMPANY LTD. IMPORT 349800 NOS. OF COMPONENTS / RAW MATERIALS 10,98,73,443 TNMM M/S SL CORPORATION ROYALTY , MSA FEE & TE CHNICAL ASSISTANCE FEE 3,54,18,419 TNMM 4. FOR THE PURPOSE OF JUSTIFYING THE TRANSACTION VA LUES, ASSESSEE ASCERTAINED THE ARM'S LENGTH PRICE (ALP) USING TRAN SACTIONAL NET MARGIN METHOD (TNMM). THE PROFIT LEVEL INDICATOR ( PLI) CONSIDERED WAS OPERATIING PROFIT TO TOTAL OPERATING INCOME, BA SED ON BOOK RESULTS. FOR THIS ANALYSIS, ASSESSEE TOOK TWO COMPANIES AS C OMPARABLES AFTER A SEARCH BASED ON THE PROWESS DATABASE OF THE CEN TRE FOR MONITORING INDIAN ECONOMY (CMIE) UNDER THE HEADING TRANSPORT EQUIPMENT - AUTOMOBILE ANCILLARIES. THE SAID SEAR CH GAVE AN INITIAL SET OF 439 COMPANIES IN THIS LINE OF BUSINESS. OUT OF THIS, 186 WERE EXCLUDED SINCE FINANCIAL RESULTS WERE NOT AVAILABLE , AND 196 WERE EXCLUDED SINCE TURNOVER OF SUCH COMPANIES WERE EITH ER LESS THAN 150 CRORES OR MORE THAN ` 300 CRORES. SINCE FIXED ASSETS UTILIZED BY THE ASSESSEE WERE ONLY 41% OF ITS SALES, COMPANIES HAVI NG RATIO LESS THAN 30% AND MORE THAN 70% WERE EXCLUDED. ON APPLY ING THIS FILTER, I.T.A. NO. 1915/MDS/11 4 25 COMPANIES WERE ELIMINATED. THEREAFTER, ASSESSEE EXCLUDED THOSE COMPANIES WHICH WERE NOT HAVING ACTIVITIES RELATED TO AUTO HEAD LIGHTS. THIS ELIMINATED ANOTHER 23 COMPANIES. WHA T WAS LEFT WERE TWO COMPANIES, NAMELY, ONE M/S HALONIX LTD. AND ONE M/S FIEM INDUSTRIES LTD. TAKING THESE TWO COMPANIES AS COMP ARABLES, ASSESSEE ARRIVED AT AN ARITHMETICAL MEAN OF 19.27% AS OPERATING PROFIT OF SUCH COMPANIES. THE OPERATIVE MARGIN OF THE ASSESSEE WAS 19.43%. THUS, AS PER THE ASSESSEE, THE PURCHASE PR ICE PAID FOR COMPONENTS STOOD JUSTIFIED. 5. FOR COMPUTATION OF ALP, ASSESSING OFFICER MADE A REFERENCE UNDER SECTION 92CA OF THE ACT, TO THE TRANSFER PRIC ING OFFICER (TPO). TPO ISSUED A SHOW CAUSE NOTICE WHEREIN SHE POINTED OUT THAT OTHER INCOME AND PRIOR PERIOD INCOME INCLUDING PROVISIONS WERE CONSIDERED AS A PART OF OPERATING INCOME AND PRIOR PERIOD EX PENSES WERE CONSIDERED AS OPERATING COST. AS PER THE TPO, ON LY OPERATING COST AND OPERATING INCOME COULD BE CONSIDERED FOR ARRIVI NG AT OPERATING MARGIN AND ITEMS OF THE TYPE MENTIONED ABOVE WERE N OT PART OF SUCH INCOME OR EXPENSES. SHE, THEREFORE, RE-WORKED THE PLI OF THE AFORESAID TWO COMPANIES AND FOR FIEM INDUSTRIES LTD ., THE PLI WORKED OUT BY HER WAS 8.12% AND FOR HALONIX LIMITED, 12.93 %, AVERAGING TO 10.52%. IT SEEMS ASSESSEE HAD FILED A REVISED COMP UTATION WHEREIN I.T.A. NO. 1915/MDS/11 5 ITS OWN PLI WAS RE-WORKED AT 5.13%. BASED ON THE P LI DETERMINED FROM THE OPERATING RESULTS OF THE COMPARABLE COMPAN IES, THE TPO RE- WORKED THE ARM'S LENGTH PRICE OF THE PURCHASES MADE BY THE ASSESSEE FROM AES. COMPARING IT WITH ACTUAL PURCHA SE COST CHARGED BY THE ASSESSEE FOR THE PURCHASES MADE FROM AES, TH E TPO WAS OF THE OPINION THAT A DOWNWARD ADJUSTMENT OF ` 13,22,13,231/- WAS REQUIRED TO BE MADE FOR BRINGING THE PURCHASE COST AT PAR WITH ARM'S LENGTH PRICE. ASSESSEE WAS PUT ON NOTICE OF THE AB OVE PROPOSAL, WHEREUPON THE OBJECTIONS SUBMITTED BY IT COULD BE S UMMARIZED AS UNDER:- (I) TRANSACTIONS WITH AES INCLUDED PURCHASES, SALES, SE RVICES, AND ROYALTY PAYMENT, I.E. BOTH REVENUE AND EXPENDITURE, WHICH WERE INTERMINGLED. THEREFORE, FIXING OF ALP BASED ON CO STS ALONE WILL NOT BE CORRECT. (II) THE NON-AE COST WAS CONSIDERED TO BE CONSTANT BY TH E TPO AND VARIATIONS WERE ENTIRELY SHIFTED TO THE TRANSACTION S WITH AES. THIS WAS INCORRECT SINCE AE COST AND NON-AE COST WE RE INTERDEPENDENT IN RESPECT OF THEIR COMPOSITION AND QUANTUM. (III) IF THE PLI OF COMPARABLE COMPANIES WERE TAKEN AS BA SIS, THEN SALE VALUE DETERMINED BASED ON SUCH PLI WILL BE WIT HIN THE RANGE OF + 5%. (IV) TREATMENT OF PROVISION AS NOT AN OPERATING COST WAS INCORRECT. (V) FOREIGN EXCHANGE GAINS/LOSS DIRECTLY RELATED TO OPE RATING COST AND HENCE COULD NOT BE EXCLUDED. (VI) DETERMINATION OF THE + 5% RANGE HAS TO BE DONE CONS IDERING REVENUE FROM OPERATIONS. 6. HOWEVER, TPO WAS NOT IMPRESSED BY ANY OF THE ABO VE OBJECTIONS. ACCORDING TO HIM, (I) ALP HAD TO BE D ETERMINED WITH I.T.A. NO. 1915/MDS/11 6 REFERENCE TO AE TRANSACTIONS AND NOT WITH REFERENCE TO ENTERPRISE LEVEL PROFITS. (II) VARIATIONS IN COMPOSITIONS OF COST AND INTERDEPENDENCIES BETWEEN NON-AE AND AE COSTS ARE A LL TAKEN CARE WHILE FIXING THE SALE PRICE AND IMPACT OF NON-AE CO ST IS TAKEN CARE BY SUCH PRICING. (III) BENEFIT OF + 5% VARIATION CO ULD NOT BE CONSIDERED AS STANDARD DEDUCTION. THUS, REJECTING THE CONTENT IONS TAKEN BY THE ASSESSEE, THE TPO DETERMINED THE ARM'S LENGTH PRICE AND THE REQUIRED ADJUSTMENT TO BE MADE ON ACCOUNT OF SUCH D ETERMINATION AS UNDER:- OPERATING MARGIN AY: 2007-08 PARTICULARS SL LUMAX LTD. (ASSESSEE) HALONIX LTD FIRM INDUSTRIES LTD. AMOUNT IN CRORES SALES SCRAP SALES INCOME FROM NON-FINANCIAL SERVICES CHANGE IN STOCK TOTAL (A) 264.33 1.21 - 0.29 265.83 289.31 0.68 0.44 (0.59) 289.84 193.32 0.24 1.14 4.10 198.80 RAW MATERIAL EXPENSES PACKAGING EXPENSES PURCHASE OF FINISHED GOODS POWER, FUEL & WATER CHARGES COMPENSATION TO EMPLOYEES INDIRECT TAXES ROYALTIES, TECHNICAL KNOW-HOW FEES, ETC. LEASE RENT & OTHER RENT REPAIRS & MAINTENANCE INSURANCE PREMIUM PAID OUTSOURCED MFG. JOBS (INCL. JOB WORKS, ETC.) OUTSOURCED PROFESSIONAL JOBS SELLING & DISTRIBUTION EXPENSES TRAVEL EXPENSES COMMUNICATION EXPENSES PRINTING & STATIONERY EXPENSES MISCELLANEOUS EXPENSES 175.88 - - 5.13 8.53 36.86 3.12 0.08 5.36 0.19 4.67 1.58 1.03 1.16 0.20 0.15 0.04 155.70 14.61 0.36 5.99 24.81 12.60 - 0.67 7.24 1.15 - 2.14 11.78 5.19 0.58 0.42 0.41 108.83 3.21 0.82 8.02 15.76 27.02 0.42 0.14 2.17 0.18 2.46 0.26 3.29 2.06 0.27 2.22 0.50 I.T.A. NO. 1915/MDS/11 7 DEPRECIATION AMORTIZATION TOTAL (B) 5.89 1.18 251.04 10.75 - 254.40 5.12 - 182.75 OPERATING PROFIT C = (A - B) OPERATING MARGIN C/A 16.02 6.00% 35.44 12.93% 16.15 8.12% COMPUTATION OF ARITHMETIC MEAN OF COMPARABLE COS HALANIX LIMITED 12.93 % FIEM INDUSTRIES LIMITED 8.12% TOTAL 21.05% ARITHMETIC MEAN 10.52% DETERMINATION OF ALP PLI BEING % OF OPERATING PROFIT/OPER ATING INCOME OF ASSESSEE COMPANY PLI BEING % OF OPERATING PROFIT/OPERATING INCOME COMPARABLE COMPANY 5.56% 10.52% OPERATING INCOME OF ASSESSEE COMPANY 265.83 C OPERATING COST OF ASSESSEE COMPANY 251.04 C OPERATING PROFI T OF ASSESSEE COMPANY 14.79 C IF OPERATING INCOME IS 100 AND OPERATING PROFIT IS 10.52, OPERATING COST = 89.48 IF OPERATING INCOME IS 100 AND OPERATING PROFIT IS 5.56, OPERATING COST = 94.44 ALP COST OF ASSESSEE COMPANY 251.04 X 89.48 94.44 237.86 C LESS: NON AE COST (TOTAL COST AE COST 2498619360 15,74,83 ,824) 235.29 C ALP OF AE PURCHASE COST 2.57 C LESS: ACTUAL AE PURCHASE COST 15.75 C DIFFERENCE TO BE ADJUSTED 13.18 C IN RESPECT OF ROYALTY AND MSA FEES, THE TPO DID NOT MAKE ANY ADJUSTMENT EXCEPT FOR SUBSTITUTING THE AMOUNTS STAT ED BY THE ASSESSEE WITH THE AMOUNTS MENTIONED IN ITS PROFIT & LOSS ACCOUNT. I.T.A. NO. 1915/MDS/11 8 7. THE A.O. BASED ON THE ORDER OF THE TPO, MADE A D RAFT ASSESSMENT AND COMMUNICATED IT TO THE ASSESSEE IN A CCORDANCE WITH SECTION 144C(1) OF THE ACT. THE ASSESSEE FILED OBJ ECTIONS AGAINST SUCH PROPOSAL BEFORE THE DRP. ONE OF THE MAIN OBJE CTIONS OF THE ASSESSEE WAS THAT TPO HAD APPLIED THE ADJUSTMENT EN TIRELY ON THE INTERNATIONAL TRANSACTIONS WITHOUT MAKING A PRO RAT A DIVISION BETWEEN AE COST AND TOTAL COST. SECONDLY, AS PER THE ASSES SEE, THE TPO DID NOT GRANT +5% SAFE HARBOUR BENEFIT. FINALLY, AS PE R THE ASSESSEE, TPO ERRED IN EXCLUDING THE PROVISION FOR EXPENSES W HILE COMPUTING THE OPERATING MARGIN OF THE COMPARABLE COMPANIES. ASSESSEE ALSO SOUGHT LEAVE FROM THE DRP TO INCLUDE THREE MORE COM PANIES TO THE TABLE OF COMPARABLES, I.E. IN ADDITION TO THE TWO C OMPANIES ALREADY TAKEN BY IT. HOWEVER, THE DRP WAS NOT AT ALL IMPRE SSED BY ANY OF THESE SUBMISSIONS. AS FAR AS ADDITION OF NEW COMPA RABLES WERE CONCERNED, THE DRP NOTED THAT ASSESSEE ITSELF HAD C HOSEN THE TWO COMPANIES INITIALLY AND THAT TOO AFTER EXHAUSTIVE S EARCH PROCESS. INSOFAR AS OBJECTION OF THE ASSESSEE FOR ADJUSTMENT BEING ENTIRELY MADE ON INTERNATIONAL TRANSACTIONS, DRP WAS OF THE OPINION THAT THE LIKELY IMPACT OF NON-AE COST WAS TAKEN CARE OF IN T HE PRICING AND THEREFORE, NO SUCH ATTRIBUTION WAS NECESSARY. INSO FAR AS 5% SAFE HARBOUR RANGE WAS CONCERNED, THE DRP NOTED THAT ASS ESSEE HAD I.T.A. NO. 1915/MDS/11 9 CONSIDERED REVENUE FROM OPERATIONS FOR COMPUTING SU CH 5% AND THIS WOULD NOT BE ACCEPTED. INSOFAR AS THE OBJECTIONS A GAINST EXCLUSION OF PROVISION FOR EXPENSES WHILE COMPUTING OPERATING MA RGIN OF COMPARABLES WAS CONCERNED, DRP WAS OF THE OPINION T HAT SUCH PROVISIONS WERE RIGHTLY EXCLUDED, SINCE ASSESSEE HA D NOT INCLUDED ANY PROVISIONS IN ITS OWN COMPUTATION OF PROFIT AS PER BOOKS. THUS, DRP CONFIRMED THE PROPOSAL MADE BY THE A.O. IN DRAF T ASSESSMENT AND THE A.O. PROCEEDED TO COMPLETE THE ASSESSMENT B Y MAKING AN ADDITION OF ` 13.18 CRORES TO THE INCOME RETURNED BY THE ASSESSE E. 8. NOW BEFORE US, LEARNED A.R., STRONGLY ASSAILING THE ORDER OF THE AUTHORITIES BELOW, SUBMITTED THAT NOT ONLY THERE WE RE ARITHMETICAL MISTAKES IN CALCULATING THE OPERATING MARGIN OF COM PARABLES, BUT, THE TPO HAD MADE A CARDINAL MISTAKE BY ADDING THE ENTIR E MARGINS ON ABSOLUTE TERMS ON THE INTERNATIONAL TRANSACTIONS WH EN THE ANALYSIS ITSELF WAS MADE BASED ON OPERATING COSTS. ACCORDIN G TO HIM, ASSESSEE HAD CORRECTLY SELECTED TWO COMPARABLES AND WORKED OUT THE PLI. IN RESPECT OF M/S HALONIX LTD., THE OPERATING MARGIN EVEN IF THE FIGURES ADOPTED BY THE TPO WERE ACCEPTED, WOULD COM E TO ONLY 12.23%. LEARNED A.R. SUBMITTED THAT THE ARITHMETIC MEAN OF THE PLIS OF THE TWO COMPARABLES WOULD THEREFORE BE ONLY 10.1 7%. THOUGH THE ASSESSEE HAD FILED A RECTIFICATION APPLICATION IN T HIS REGARD, IT WAS STILL I.T.A. NO. 1915/MDS/11 10 TO BE DEALT WITH. IN ANY CASE, ACCORDING TO HIM, T HE METHODOLOGY ADOPTED BY THE ASSESSING OFFICER WAS NOT LOGICAL. HE HAD EXCLUDED THE NON-AES COST TO WORK OUT THE ALP OF THE PURCHAS ES MADE FROM AES AND THIS HAD RESULTED IN ILLOGICAL CONCLUSIONS. ACCORDING TO LEARNED A.R., IF THE TPOS VERSION WAS ACCEPTED, AS SESSEE NEED TO HAVE EXPENDED ONLY 2.7 CRORES FOR 15.75 CRORES WORT H PURCHASES MADE BY IT FROM THE AES. LEARNED A.R. POINTED OUT THAT TOTAL RAW MATERIAL PURCHASES OF THE ASSESSEE CAME TO ` 175.88 CRORES OUT OF WHICH PURCHASES FROM AE CAME TO ONLY ` 15.75 CRORES. APPLICATION OF MARGIN DIFFERENCE IN COST IN ITS ENTIRETY TO THE AE PURCHASE AND DETERMINATION OF ALP ON ABSOLUTE TERMS WITHOUT APPL YING THE MARGINS BASED ON PERCENTAGE RATES HAD RESULTED IN AN ANOMAL Y. ADJUSTMENT REQUIRED UNDER TNM METHOD COULD NOT BE ADMINISTERED ENTIRELY ON THE INTERNATIONAL TRANSACTIONS WHEN THE PROFIT MARGIN W AS CONSIDERED ON A TOTALITY AGAINST THE COSTS. THE ADJUSTMENT COULD N OT BE ON ABSOLUTE TERMS BUT ONLY ON PERCENTAGE TERMS. TNMM REQUIRED DETERMINATION OF ALP BASED ON MARGINS AND SUCH MARGINS HAVE TO BE WORKED OUT BASED ON PLIS AS PERCENTAGES. WHEN THE COMPARABLES HAD SHOWN A MARGIN OF 10.17%, SUCH MARGIN OUGHT HAVE BEEN APPLI ED ON THE COST OF INTERNATIONAL TRANSACTIONS AS A PERCENTAGE AND N OT ON ABSOLUTE TERMS. RELYING ON RULE 10B(1)(E)(I) OF INCOME-TAX RULES, 1962, I.T.A. NO. 1915/MDS/11 11 LEARNED A.R. SUBMITTED THAT THE NET PROFIT MARGIN H AD TO BE COMPUTED IN RELATION TO COST OR SALES OR ASSETS EMPLOYED AND SUCH DETERMINATION HAD TO BE WITH REFERENCE TO INTERNATI ONAL TRANSACTIONS ONLY. FURTHER, ACCORDING TO HIM, IN THE CASE OF M/ S HALONIX LTD., IT WAS NOT AN ORIGINAL EQUIPMENT MANUFACTURER BUT WAS SUPP LYING TO RETAIL DISTRIBUTORS ALSO. AS AGAINST THIS, ASSESSEE WAS S UPPLYING ONLY TO ORIGINAL EQUIPMENT MANUFACTURERS (OEMS) AND WAS CON TRACTUALLY DEBARRED FROM SUPPLYING TO ANY RETAIL DISTRIBUTORS. ASSESSEE WAS FUNCTIONALLY NOT IN THE SAME KIND OF BUSINESS AND T HEREFORE, IF AT ALL A COMPARISON OUGHT HAVE BEEN MADE, THEN IN ACCORDANCE WITH CLAUSE (D) OF SUB-RULE (2) OF RULE 10B, ADJUSTMENTS WERE R EQUIRED TO BE CARRIED OUT. LEARNED A.R. SUBMITTED THAT EVEN IF A SMALL ADJUSTMENT WAS MADE FOR DIFFERENCE IN THE FUNCTIONALITIES, THE MARGIN WILL FALL WITHIN +5% RANGE AND ANY VARIATION IN ALP WOULD NOT BE REQUIRED. IN ANY CASE, ACCORDING TO HIM, ASSESSEE HAD SUBMITTED BEFORE DRP THREE MORE COMPARABLE COMPANIES AND THESE WERE REJE CTED WITHOUT GIVING ANY JUSTIFIABLE REASONS. A QUERY WAS PUT BY THE BENCH AS TO WHETHER M/S HALONIX LTD. WAS ALSO INVOLVED IN THE S AME BUSINESS LINE AS THAT OF THE ASSESSEE. FOR THIS, LEARNED A.R. RE PLIED THAT ASSESSEE WAS MANUFACTURING LIGHT ASSEMBLIES FOR CARS EXCLUDI NG ITS BULBS, WHEREAS, M/S HALONIX LTD. WAS MANUFACTURING ONLY BU LBS. I.T.A. NO. 1915/MDS/11 12 9. IN REPLY, D.R. SUBMITTED THAT THE COMPUTATION OF ALP DONE BY THE ASSESSING OFFICER WAS BASED ON THE AUDITED PROF IT & LOSS ACCOUNT OF THE ASSESSEE, FOR THE RELEVANT PREVIOUS YEAR. A CCORDING TO HIM, ASSESSING OFFICER HAD ANALYSED LOGICALLY WHILE ARRI VING AT THE ALP OF THE PURCHASES MADE BY THE ASSESSEE. WHEN SUCH AN A LP WAS COMPARED WITH ACTUAL PAYMENT MADE BY THE ASSESSEE, THERE WAS A DIFFERENCE OF ` 13.18 CRORES. IN OTHER WORDS, THE PURCHASE COST W AS OVERSTATED BY THAT AMOUNT. ASSESSING OFFICER HAD T AKEN OPERATING COST AS SHOWN BY THE ASSESSEE AND OPERATING PROFIT BASED ON THE RESULTS OF THE ASSESSEE. ACCORDING TO HIM, THEREFO RE, A.O. HAD CORRECTLY AND LOGICALLY ARRIVED AT THE ALP. AS FOR THE ARGUMENT THAT ADJUSTMENTS WERE MADE BY THE TPO ON ABSOLUTE TERMS, D.R. SUBMITTED THAT SUCH ABSOLUTE FIGURES WHICH WERE APP LIED FOR ARRIVING AT THE ALP OF THE PURCHASE COST, WERE WORKED OUT BA SED ON PLIS AND NOTHING ELSE. ACCORDING TO HIM, ASSESSEE HAD ON TH EOTHER HAND NOT ADOPTED A CLEAR METHOD IN THE COMPUTATION. ASSESSE E HAD PAID EXCESSIVELY ON THE ITEMS PURCHASED FROM THE AES FOR REDUCING ITS PROFITS. INSOFAR AS ADDITION OF NEW COMPARABLES WA S CONCERNED, D.R. SUBMITTED THAT THE DRP HAD RIGHTLY REJECTED SUCH CO MPARABLES SINCE TPO HAD NEVER GONE BEYOND THE ORIGINAL COMPARABLE S ET GIVEN BY THE ASSESSEE. IF SUCH AN EXERCISE WAS ALLOWED, ASSESSE E WOULD KEEP ON I.T.A. NO. 1915/MDS/11 13 ADDING NEW COMPARABLES TILL AN ALP WAS REACHED WHIC H WOULD BE FAVOURABLE TO IT. AS FOR ADJUSTMENT IN THE OPERATI NG MARGIN OF M/S HALONIX LTD. FOR DIFFERENCE IN FUNCTIONALITIES, D.R . SUBMITTED THAT THIS WAS A NEW GROUND WHICH WAS NEVER RAISED BY THE ASSE SSEE BEFORE ANY OF THE AUTHORITIES BELOW. ACCORDING TO HIM, TN M METHOD WAS ADOPTED ONLY BECAUSE STRICT COMPARABLE COMPANIES WI TH SAME FUNCTIONALITIES MIGHT NOT HAVE BEEN AVAILABLE. NEV ERTHELESS, BOTH THE COMPANIES WERE IN SAME LINE OF BUSINESS RELATING TO LIGHT ASSEMBLY FOR VEHICLES. 10. AD LIBITUM, LEARNED A.R. SUBMITTED THAT HE WAS CONCERNED WITH APPLICATION OF ABSOLUTE FIGURES TO DETERMINE THE AL P OF PURCHASES AND ON APPORTIONMENT OF THE PERCENTAGE OF AE COST AND T OTAL COST INCORRECTLY. AS PER LEARNED A.R., THE ENTIRE DIFFE RENCE BETWEEN THE TOTAL COST AND AE PURCHASE COST WAS ATTRIBUTED TO A E PURCHASE COST, WHEREAS, SUCH DIFFERENCE OUGHT HAVE BEEN PRO RATED BETWEEN AE AND NON-AE. INSOFAR AS NON-ADJUSTMENT FOR FUNCTIONAL D IFFERENCES BETWEEN COMPARABLE COMPANIES AND TESTED ASSESSEE, L EARNED A.R. SUBMITTED THAT IT WAS A STATUTORY REQUIREMENT UNDER THE RULES AND EVEN IF ASSESSEE HAD NOT MADE ANY SUCH ADJUSTMENT, ASSESSING OFFICER WAS BOUND TO CARRY OUT SUCH ADJUSTMENTS. I.T.A. NO. 1915/MDS/11 14 11. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. AT THE OUTSET WE DEAL WITH THE ISSUE REGARDING ADDI TION OF THREE NEW COMPARABLES BY THE ASSESSEE BEFORE THE DRP. ACCORD ING TO US, THIS WAS RIGHTLY REJECTED BY THE DRP. ASSESSEE ITSELF H AD SELECTED TWO COMPARABLE COMPANIES ORIGINALLY AND SUCH A SELECTIO N WAS DONE BASED ON A DETAILED ANALYSIS, WHICH HAS BEEN GIVEN BY THE ASSESSEE IN ITS TRANSFER PRICING REPORT (PAPER-BOOK PAGE 111 ). IT IS CLEARLY MENTIONED THAT PROWESS DATABASE WAS UTILIZED FOR SE LECTING THE TWO COMPARABLE COMPANIES. EXCLUSIONS WERE DONE BAS ED ON AVAILABILITY OF FINANCIAL RESULTS OF COMPARABLES, T URNOVER AND PROPORTIONATE PERCENTAGE OF FIXED ASSET AND SALES. EXCLUSIONS WERE ALSO DONE ON TYPE OF ECONOMIC ACTIVITY. THUS FROM 439, ASSESSEE ITSELF ELIMINATED 437 COMPANIES AND SELECTED TWO CO MPANIES, NAMELY, M/S HALONIX LTD. AND FIEM INDUSTRIES LTD. TPO HAD NOT DONE ANY DELETION OR ADDITION TO THIS LIST OF COMPARABLE S. IN THIS SITUATION, ASSESSEE CANNOT BE ALLOWED TO BRING IN A NEW SET OF COMPARABLES, FOR IF ALLOWED, IT WILL RESULT IN AN UNENDING EXERCISE SINCE ENDEAVOUR OF ALL ASSESSEES WOULD BE TO BRING THE ALP WITHIN COMPARAB LE RANGE. WE ARE, THEREFORE, OF THE OPINION THAT DRP WAS VERY WE LL JUSTIFIED IN NOT ALLOWING ANY NEW INDUCTIONS INTO THE COMPARABLES. I.T.A. NO. 1915/MDS/11 15 12. SECOND ISSUE TO BE DEALT WITH IS ON THE PLEA OF THE LEARNED A.R. THAT ADJUSTMENT OUGHT HAVE BEEN ALLOWED ON THE MARG INS WITH REFERENCE TO M/S HALONIX LTD., FOR A REASON THAT M/ S HALONIX LTD. HAD DIFFERENT FUNCTIONALITIES. IT MIGHT BE TRUE THAT M /S HALONIX LTD. WAS IN THE BUSINESS OF MANUFACTURING LAMPS, WHEREAS, ASSES SEE WAS IN THE BUSINESS OF MANUFACTURING OF LIGHT ASSEMBLES. IT M AY ALSO BE TRUE THAT M/S HALONIX LTD. WAS SELLING SOME OF ITS PRODU CTS THROUGH RETAIL DISTRIBUTOR, WHEREAS, ASSESSEE WAS OBLIGED TO SELL THROUGH ORIGINAL EQUIPMENT MANUFACTURERS ONLY. IN THE FIRST PLACE, THIS ISSUE WAS NEVER RAISED BY THE ASSESSEE EITHER BEFORE THE TPO OR THE A.O. OR THE DRP. SECONDLY, ALP ANALYSIS IS MADE UNDER TNM METH OD. TNM METHOD IS GENERALLY PREFERRED WHERE FUNCTIONS ARE N OT STRICTLY COMPARABLE, BUT WHEN THE TESTED AND COMPARABLES WER E IN THE SAME LINES OF BUSINESS. MULTIPLE TYPE OF MANUFACTURING WITHIN THE SAME LINE OF BUSINESS WILL NOT BY ITSELF CALL FOR ANY ADJUSTM ENT OF RISK FACTOR FOR MITIGATION OF FUNCTIONAL DISPARITIES, ESPECIALLY WH ERE SUCH DISPARITIES WERE MINISCULE. HERE, THE ASSESSEE WAS SUPPLYING T O ORIGINAL EQUIPMENT MANUFACTURERS AND ITS BUSINESS RISK STOOD MUCH MITIGATED WHEN COMPARED TO ITS COMPETITORS LIKE M/S HALONIX L TD. ANY DISADVANTAGE THE ASSESSEE WAS HAVING ON ACCOUNT OF ITS INABILITY TO SELL THROUGH RETAIL DISTRIBUTORS STOOD SQUARED UP B Y THE LOWER RISKS I.T.A. NO. 1915/MDS/11 16 UNDERTAKEN, SINCE IT WAS HAVING AN ASSURED CLIENTEL E WHICH FULLY LIFTED ITS PRODUCTIONS. THEREFORE, WE ARE OF THE OPINION THAT THIS PLEA ALSO CANNOT BE ACCEPTED. 13. THIS LEAVES US TO LAST ISSUE WHETHER THE METHOD OF COMPUTATION ADOPTED BY THE A.O. WHILE APPLYING THE TNM WAS CORR ECT. THIS HAS TO BE DECIDED BASED ON THE ALP WORKED OUT BY THE TPO W HICH HAS BEEN REPRODUCED AT PARA SIX ABOVE. THERE IS NO DISPUTE THAT OPERATING INCOME OF THE ASSESSEE WAS ` 265.83 CRORES AND OPERATING COST WAS 251.04 CRORES. THE FIGURES WERE RIGHTLY CONSIDERED FOR WORKING OUT THE PLI OF THE ASSESSEE AND ITS COMPARABLES AFTER E XCLUDING THOSE ITEMS WHICH DID NOT FALL WITHIN OPERATING EXPENSES OR OPERATING INCOME. SUCH EXCLUSIONS WERE CONFIRMED BY THE DRP AND ASSESSEE IS ALSO NOT AGITATED BY SUCH EXCLUSION BEFORE US. WHILE COMPUTING THE ARITHMETIC MEAN OF THE PLIS OF THE TWO COMPARABLES, NO DOUBT, THE OPERATING MARGIN OF M/S HALONIX LTD. HAS BEEN TAKEN AS 12.93%. THE OPERATING MARGIN EVEN GOING BY THE FIGURES GIVEN BY THE ASSESSING OFFICER WAS ONLY 12.23% AND NOT 12.73%. THIS IS A SHEER ARITHMETIC MISTAKE. WHEN 12.23% IS CONSIDERED, THE ARITHMETIC MEAN OF PLI COMES TO 10.17%. THIS ERROR NO DOUBT HAS TO BE REC TIFIED. FOR BETTER UNDERSTANDING, THE DETERMINATION OF ALP DONE BY THE TPO, WE ARE RE- I.T.A. NO. 1915/MDS/11 17 FORMATTING HIS WORK-OUT WITHOUT SUBSTITUTING THE CO RRECTED PLI, UPTO THE LEVEL OF ARRIVING AT THE OPERATING COSTS HEREUN DER:- OPERATING INCOME OF ASSESSEE - COMPANY 265.83 CRORES OPERATING COST OF ASSESSEE - COMPANY 251.04 CRORES OPERATING PROFIT OF ASSESSEE - COMPANY 14. 7 9 CR ORES OPERATING PROFIT AS A PERCENTAGE OPERATING INCOME OF ASSESSEE-COMPANY 5.56% OPERATING PROFIT AS A PERCENTAGE OF OPERATING INCOME IN THE CASE OF COMPARABLES 10.52% OPERATING COST OF THE ASSESSEE - COMPANY AS A PERCENTAGE OF ITS OPERATING INCOME (100 5.56) 94.44% OPERATING COST AS A PERCENTAGE OF OPERATING INCOME IN THE CASE OF COMPARABLE COMPANIES (100 10.52) 89.48% OPERATING COST OF ASSESSEE - COMPANY IF PERCENTAGE BASED ON PLI OF COMPARABLES IS ADOPTED 265.83 X 89.48 100 = 237.86 CRORES UPTO THIS LEVEL, THE FIGURES ARE EXACTLY WHAT HAS B EEN ARRIVED AT BY THE TPO. OF COURSE, WE HAVE TAKEN 10.52% AS THE PLI OF COMPARABLE COMPANIES, WHEREAS, THE ACTUAL PLI IS 10.15%. THI S HAS BEEN DONE WITH THE PURPOSE OF MAKING A MEANINGFUL ANALYSIS FO R FINDING OUT WHAT LOGICAL ERROR IF ANY WAS COMMITTED BY THE TPO WHILE WORKING OUT THE ALP. IN OUR OPINION, A LOGICAL ERROR HAPPENED IN T HE NEXT STAGE, I.E. DETERMINATION OF NON-AE COST. THE NON-AE COSTS ARE THE COSTS RELATABLE TO TRANSACTIONS WITH NON-ASSOCIATED ENTER PRISES AND THIS HAS BEEN TAKEN BY THE A.O. AS ` 235.29 CRORES. HE ARRIVED AT THIS I.T.A. NO. 1915/MDS/11 18 AMOUNT BY DEDUCTING FROM THE OPERATING COST OF ` 251.04 CRORES, A SUM OF ` 15.75 CRORES. THE LATTER AMOUNT OF ` 15.75 CRORES IS THE COST OF PURCHASES EFFECTED BY THE ASSESSEE FROM ASS OCIATED ENTERPRISES. WHAT WE LIKE TO EMPHASIZE IS THAT THI S WAS THE COST OF PURCHASES ONLY. FOR ARRIVING AT ALP OF PURCHASE, A SSESSING OFFICER HAS DEDUCTED FROM THE TOTAL COST INCLUDING MATERIAL COST, THE PURCHASE COST OF MATERIALS FROM ASSOCIATED ENTERPRISES. TOT AL COST OF ` 251.04 CRORES INCLUDED MANY NUMBER OF ITEMS IN ADDITION TO THE RAW MATERIALS, AND THIS IS EVIDENT FROM THE TABLE AT PA RA SIX ABOVE. IF THAT IS SO, WHEN FROM SUCH TOTAL COST, DEDUCTION OF ALP MATERIAL COST ALONE IS DONE, IT WILL NOT GIVE THE COST OF NON ALP PURCH ASES. THIS WILL NOT GIVE ANY MEANINGFUL FIGURE AT ALL. WHAT HAS TO BE DEDUCTED FROM TOTAL COST IS NOT ONLY THE MATERIAL COST PERTAINING TO PU RCHASE FROM AES BUT ALSO THAT PART OF OTHER EXPENSES ATTRIBUTABLE TO SU CH PURCHASE WHICH HAVE A BEARING ON TOTAL OPERATING MARGINS. IN OTHE R WORDS, ASSESSING OFFICER DIVIDED THE TOTAL OPERATING COST BETWEEN MA TERIAL COST RELATABLE TO AES AND COST RELATABLE TO NON-AES, WHI CH INCLUDED BOTH MATERIAL COST AS WELL AS OTHER COSTS. THUS THE ALP COST ARRIVED AT BY TPO WAS NOT LOGICAL. HE DEDUCTED FROM THE OPERATIN G COST, ONLY THE MATERIAL COST RELATABLE TO PURCHASES FROM AES AND N OT THE OPERATING COST ATTRIBUTABLE TO SUCH MATERIAL COST. THE RESUL TANT FIGURE WILL NOT I.T.A. NO. 1915/MDS/11 19 GIVE ALP OF THE PURCHASES MADE FROM AES. IF ALONG WITH THE MATERIAL COST PAID TO AES, OPERATIONAL COST ATTRIBUTABLE TO SUCH COST WAS ALSO CONSIDERED, THEN THE SUM OF ` 2.57 CRORES CONSIDERED BY THE TPO AS ALP OF AE PURCHASES, WOULD HAVE GONE UP SIGNIFICANT LY. IN OUR OPINION, THEREFORE, THE WORK OUT OF ALP OF THE PURC HASES FROM NON- AES HAS BEEN ERRONEOUSLY DONE. THE DIFFERENCE OF ` 13.18 CRORES ARRIVED AT IS HYPOTHETICAL. IF AT ALL RAW MATERIAL WAS DEDUCTED, OTHER COSTS EXCLUDING THE TOTAL RAW MATERIAL COST ALSO HA D TO BE PRO RATA DIVIDED AND DEDUCTED. NO DOUBT, THIS WILL RESULT I N A HIGHER ALP FOR THE PURCHASES MADE FROM AES. WHETHER THE COST WHEN SO DETERMINED FALLS WITHIN THE +5% SAFE MARGIN LIMITS CAN BE VERIFIED, ONLY AFTER A CORRECT COMPUTATION OF ALP IS MADE. W E ARE, THEREFORE, OF THE OPINION THAT THE MATTER REQUIRES A RE-VISIT BY THE ASSESSING OFFICER INSOFAR AS IT RELATES TO DETERMINATION OF A LP OF THE PURCHASES MADE FROM AES. THE QUESTION OF APPLICATION OF MARG INS ON ABSOLUTE TERMS OR PERCENTAGE TERMS IS NOT RELEVANT SINCE, WH ATEVER THE METHOD OF WORK-OUT, IT ALL STARTS FROM PLI BASED ON OPERAT ING MARGINS AS A PERCENTAGE. WE, THEREFORE, SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND REMIT THE ISSUE BACK TO THE FILE OF THE A.O. FO R CONSIDERATION AFRESH. THE A.O. IS FREE TO GET APPROPRIATE REPORTS FROM TPO, WHICH I.T.A. NO. 1915/MDS/11 20 HE DEEMS NECESSARY FOR THE PURPOSE. GROUND OF THE ASSESSEE WITH RESPECT TO CALCULATION OF ALP IS ALLOWED TO THE EXT ENT CITED ABOVE. 14. INSOFAR AS GROUND RELATING TO 14A DISALLOWANCE IS CONCERNED, WE ARE OF THE OPINION THAT THIS ALSO REQUIRES A FRESH LOOK BY THE A.O. SINCE RULE 8D HAS BEEN HELD BY HONBLE BOMBAY HIGH COURT IN GODREJ AND BOYCE MFG. CO. LTD VS. DY. CIT (328 ITR 81)S CASE, TO BE APPLICABLE PROSPECTIVELY AND NOT FOR EARLIER YEARS. HOWEVER, THEIR LORDSHIP DID OBSERVE THAT DISALLOWANCE COULD BE MADE FOR EARLIER YEARS BASED ON A REASONABLE CRITERIA. HENCE, WE SET ASIDE THE ORDER S OF THE AUTHORITIES BELOW INSOFAR AS DISALLOWANCE UNDER SECTION 14A IS CONCERNED AND REMIT IT BACK TO THE FILE OF A.O. FOR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. 15. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN THE COURT ON MONDAY, TH E 14 TH OF MAY, 2012, AT CHENNAI. SD/- SD/- (VIKAS AWASTHY) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 14 TH MAY, 2012. KRI. I.T.A. NO. 1915/MDS/11 21 COPY TO: (1) APPELLANT (2) RESPONDENT (3) TPO-VI, CHENNAI-34 (4) ITO, DRP, CHENNAI (5) D.R. (6) GUARD FILE