DCIT, New Delhi V. M/s Akzo Nobel Car Refinishers India P. Ltd., Bengalore

ITA 1925/DEL/2011

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5064 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-08-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 02-08-2017
• Assessment Year: 2003-2004
• Appeal Filed On: 19-04-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Gift; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Capital expenditure
• Section: 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER ITA NO.1925/DEL/2011 ASSESSMENT YEAR : 2003-04 ITA NO.6482/DEL/2012 ASSESSMENT YEAR : 2005-06 ACIT, CIRCLE 1(1), ROOM NO.390, CR BUILDING, IP ESTATE, NEW DELHI. VS. AKZO NOBEL CAR REFINISHES INDIA PVT. LTD., SHED NO.9, DSIDC, OKHLA INDUSTRIAL AREA, PHASE-II, SCHEME-II, NEW DELHI. PAN: AABCA0197Q ITA NO.4096/DEL/2011 ASSESSMENT YEAR : 2004-05 AKZO NOBEL CAR REFINISHES INDIA PVT. LTD., PLOT NO.62P, HOKOTE INDUSTRIAL AREA, BANGALORE. PAN: AABCA0197Q VS. ACIT, CIRCLE 1(1), ROOM NO.390, CR BUILDING, IP ESTATE, NEW DELHI (APPELLANT) (RESPONDENT) ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 2 ASSESSEE BY : S/SHRI S.P. SINGH; MANOMEET DALAL; GYAN SRIVASTAVA; JASVINDER SINGH, CA; & YISHU GOEL DEPARTMENT BY : SHRI KUMAR PRANAV, SR. DR DATE OF HEARING : 02.08.2017 DATE OF PRONOUNCEMENT : 04.08.2017 ORDER PER R.S. SYAL, VP: THIS BATCH OF THREE APPEALS COMPRISES OF ONE APPEA L BY THE REVENUE FOR EACH OF THE ASSESSMENT YEARS 2003-04 AN D 2005-06 AND ONE APPEAL BY THE ASSESSEE IS FOR THE ASSESSMENT YEAR 2 004-05. SINCE SOME COMMON ISSUES ARE RAISED IN THESE APPEALS, WE ARE, THEREFORE, PROCEEDING TO DISPOSE THEM OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ASSESSMENT YEAR 2003-04 2. THE FIRST ISSUE RAISED BY THE REVENUE IS AGAINST THE DELETION OF TRANSFER PRICING ADDITION AMOUNTING TO RS.3,21,70,5 40/- MADE BY THE ASSESSING OFFICER FROM THE INTERNATIONAL TRANSACTIO N OF `PURCHASE OF FINISHED GOODS. ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 3 3. SUCCINCTLY, THE FACTS OF THE CASE ARE THAT THE A SSESSEE IS A 100% INDIAN SUBSIDIARY OF AKZO NOBLE COATINGS INTERNATIO NAL, B.V. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DISTRIBUTION AND SALE OF CAR PAINTS AND REFINISHES AND ALSO UNDERTAKES CONTRACT RESEARC H AND DEVELOPMENT FOR THE AKZO GROUP. THE ASSESSEE REPORTED FIVE INT ERNATIONAL TRANSACTIONS IN FORM NO.3CEB. THE ASSESSING OFFICER REFERRED TH E MATTER OF DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTI ONS TO THE TRANSFER PRICING OFFICER (TPO). THE EXTANT DISPUTE RELATES TO THE DELETION OF TRANSFER PRICING ADDITION MADE BY THE AO FROM THE I NTERNATIONAL TRANSACTION OF PURCHASE OF FINISHED GOODS WITH TR ANSACTED VALUE OF RS.5,17,19,544/-. THE ASSESSEE APPLIED RESALE PRI CE METHOD (RPM) WITH PROFIT LEVEL INDICATOR (PLI) OF GROSS PROFIT/S ALES FOR DEMONSTRATING THAT ITS INTERNATIONAL TRANSACTION OF `PURCHASE OF FINISHED GOODS FOR RESALE WAS AT ARMS LENGTH PRICE. THE ASSESSEE CO MPUTED ITS OWN GROSS PROFIT MARGIN FROM SALES AT 37%. TWO COMPANIES WER E CHOSEN AS COMPARABLE, NAMELY, MAFATLAL DYES AND CHEMICALS L TD. AND VIPUL DYES AND CHEMICALS LTD.. THEIR MEAN MARGIN ON THE BASIS OF FIGURES FOR THE PRECEDING YEAR, NAMELY, YEAR ENDING 31.03.2002 WAS WORKED OUT AT ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 4 18%. THAT IS HOW, THE ASSESSEE CLAIMED THAT ITS IN TERNATIONAL TRANSACTION OF PURCHASE OF FINISHED GOODS WAS AT ARMS LENGTH P RICE. THE TPO OBSERVED THAT THE MEAN MARGIN OF THE TWO COMPANIES WAS BASED ON THE FIGURES OF EARLIER YEAR, THAT IS, YEAR ENDING MARCH , 2002 AS AGAINST THE RELEVANT FINANCIAL YEAR ENDING ON 31.03.2003. IT WA S FURTHER OBSERVED THAT THE COMPANIES CHOSEN BY THE ASSESSEE WERE IN T HE FIELD OF MARKETING AND MANUFACTURE OF DYES AND INTERMEDIATES. IT WAS SEEN FROM THE FINANCIALS OF MAFATLAL DYES AND CHEMICALS LTD. FOR THE YEAR ENDING 2003 THAT OUT OF A TOTAL SALE OF RS.25.33 CRORE, THE TRA DING SALES CONSTITUTED ONLY RS.9.52 CRORE AND THE BALANCE WAS OF THE MANU FACTURED GOODS. IT WAS OBSERVED THAT THE RESULTS OF THE COMPANIES CHOS EN BY THE ASSESSEE AS COMPARABLE DID NOT DEPICT THEIR TRUE COMPARABILITY. BOTH THESE COMPANIES WERE ERGO HELD TO BE INCOMPARABLE. IT WAS HELD THAT CLOSER COMPARABILITY OF PRODUCTS WAS NECESSARY FOR PRODUCI NG BETTER RESULTS UNDER THE RPM. IN THE ABSENCE OF APPROPRIATE COMPA RABLES CHOSEN BY THE ASSESSEE, THE TPO HELD THAT IN SUCH CIRCUMSTANC ES THE TRANSACTIONAL NET MARGIN METHOD (TNMM) WOULD BE THE MOST APPROPRI ATE METHOD AS IT IS NEUTRAL TO FUNCTIONAL DIFFERENCES TO SOME EXT ENT. WHILE WORKING OUT ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 5 THE ALP UNDER THE TNMM ON THE PREMISE THAT FUNCTION AL COMPARABILITY CAN BE COMPROMISED UNDER THE TNMM, THE TPO SELECTED FIVE MORE MANUFACTURING COMPANIES IN ADDITION TO TWO MANUFACT URING COMPANIES CHOSEN BY THE ASSESSEE. AVERAGE OP/SALES OF SEVEN C OMPANIES WAS COMPUTED AT 3.71% AS UNDER:- S.NO. NAME OF THE COMPANY OP/SALES (%) 1. AKSHARCHEM (INDIA) LIMITED 6% 2. AMAL 13% 3. METROCHEM INDUSTRIES LIMITED 8% 4. INDOKEM 8% 5. ORGANIC COATINGS LIMITED 5% 6. MAFATLAL DYES & CHEMICALS (16)% 7. VIPUL DYES & CHEMICALS 2% MEAN 3.71% 4. BY APPLYING 3.71% AS THE ARMS LENGTH MARGIN, THE TPO COMPUTED THE AMOUNT OF TRANSFER PRICING ADJUSTMENT FROM THE INTERNATIONAL TRANSACTION OF `PURCHASE OF FINISHED GOODS AT RS.3 ,21,70,540/-. THE ASSESSEE ASSAILED THE FINAL ASSESSMENT ORDER, GIVIN G EFFECT TO THE TPOS ORDER, BEFORE THE LD. CIT(A). THE LD. FIRST APPELL ATE AUTHORITY APPROVED THE METHOD ADOPTED BY THE ASSESSEE, NAMELY, RPM, AS THE MOST APPROPRIATE METHOD. HE FURTHER HELD THAT THE COMPA NIES CHOSEN BY THE ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 6 ASSESSEE WERE CORRECT THEREBY EXPUNGING THE FIVE CO MPANIES CHOSEN BY THE TPO AS COMPARABLE. EX CONSEQUENTI , THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT FROM THE INTERNATIONAL TRANSACTION OF `PURCHASE OF FINISHED GOODS GOT DELETED. THE REVE NUE IS AGGRIEVED AGAINST SUCH DELETION OF ADDITION. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. THERE ARE BASICALLY TWO LARGER ISSUES REQUIRING ADJUDICATION AT OUR END. FIRST IS THE SELECTION OF MOST APPROPRIATE METHOD AND THE SECOND IS ABOUT COMPARABLES. WE WILL ESPOU SE THESE ISSUES ONE BY ONE FOR CONSIDERATION AND DECISION. WHETHER RPM IS THE MOST APPROPRIATE METHOD ? 6. WHEREAS THE ASSESSEE CHOSE THE RPM, THE TPO REJECTED THE SAME AND TREATED THE TNMM AS THE MOST APPROPRIATE METHOD . HOWEVER, THE LD. CIT(A) RESTORED THE ASSESSEES POINT OF VIEW OF THE RPM AS THE MOST APPROPRIATE METHOD. THE REVENUES CONTENTION IS TH AT THE TNMM SHOULD BE APPLIED FOR BENCHMARKING THE INTERNATIONA L TRANSACTION OF `PURCHASE OF FINISHED GOODS. IN ORDER TO ANALYSE THE MOST APPROPRIATE ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 7 METHOD IN THE GIVEN FACTS AND CIRCUMSTANCES, IT IS NECESSARY TO NOTE THAT THE ASSESSEE PURCHASED FINISHED GOODS FROM ITS AE UNDER THIS SEGMENT AND THEN RESOLD THE SAME TO THE CUSTOMERS IN INDIA. ON A SPECIFIC QUERY, IT WAS SUBMITTED THAT THE ASSESSEE DID NOT CARRY OU T ANY VALUE ADDITION TO THE GOODS PURCHASED FROM ITS AE AND SOLD THE SAME A S SUCH. SECTION 92C(1) DEALS WITH THE COMPUTATION OF ALP AND STATES THAT ONE OF THE GIVEN METHODS SHALL BE CHOSEN AS THE MOST APPROPRIA TE METHOD FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION . SUB-SECTION (2) OF SECTION 92C PROVIDES THAT THE MOST APPROPRIATE METH OD REFERRED TO IN SUB-SECTION (1) SHALL BE APPLIED FOR DETERMINATION OF ALP, IN THE MANNER AS MAY BE PRESCRIBED. THE RPM IS ONE OF THE METHODS GIVEN U/S 92C(1). THE MECHANISM FOR DETERMINING THE ALP UNDER THIS ME THOD HAS BEEN SET OUT UNDER RULE 10B(1)(B), WHICH READS AS UNDER:- (B) RESALE PRICE METHOD, BY WHICH, (I) THE PRICE AT WHICH PROPERTY PURCHASED OR SERVI CES OBTAINED BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD OR ARE PROVIDED TO AN UNRELATED ENTERPRISE, IS IDENTIFIED ; (II) SUCH RESALE PRICE IS REDUCED BY THE AMOUNT OF A NORMAL GROSS PROFIT MARGIN ACCRUING TO THE ENTERPRISE OR TO AN UNRELATE D ENTERPRISE FROM THE PURCHASE AND RESALE OF THE SAME OR SIMILAR PROPERTY OR FROM OBTAINING AND ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 8 PROVIDING THE SAME OR SIMILAR SERVICES, IN A COMPAR ABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS ; (III) THE PRICE SO ARRIVED AT IS FURTHER REDUCED B Y THE EXPENSES INCURRED BY THE ENTERPRISE IN CONNECTION WITH THE PURCHASE OF P ROPERTY OR OBTAINING OF SERVICES ; (IV) THE PRICE SO ARRIVED AT IS ADJUSTED TO TAKE I NTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFERENCES, INCLUDING DIFFERENCES IN ACC OUNTING PRACTICES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRIS ES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMO UNT OF GROSS PROFIT MARGIN IN THE OPEN MARKET ; (V) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUSE (IV) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PURCHASE OF TH E PROPERTY OR OBTAINING OF THE SERVICES BY THE ENTERPRISE FROM THE ASSOCIAT ED ENTERPRISE ; 7. SUB-CLAUSE (I) OF RULE 10B(1)(B) GIVES THE FIRST STEP IN THE DETERMINATION OF THE ALP, BEING IDENTIFYING THE PRI CE AT WHICH PROPERTY PURCHASED BY THE ENTERPRISE FROM AN AE IS RESOLD. SUB-CLAUSE (II) PROVIDES THAT SUCH RESALE PRICE IS REDUCED BY THE N ORMAL AMOUNT OF GROSS PROFIT RATE RESULTING FROM COMPARABLE UNCONTROLLED TRANSACTIONS. SUB- CLAUSE (III) STATES THAT THE PRICE SO ARRIVED AS PE R SUB-CLAUSE (II) IS FURTHER REDUCED BY THE AMOUNT OF EXPENSES INCURRED BY THE E NTERPRISE IN CONNECTION WITH THE PURCHASE OF GOODS. THE PRICE S O ARRIVED AT IS ADJUSTED TO TAKE INTO ACCOUNT DIFFERENCES, IF ANY, UNDER SUB-CLAUSE (IV) AND THE ADJUSTED PRICE IS TAKEN AS ARMS LENGTH PRI CE IN RESPECT OF ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 9 PROPERTY PURCHASED. IT IS APPARENT FROM THE NOMENC LATURE OF THE METHOD, THAT IS, `RESALE PRICE METHOD AND THE MODUS OPERAN DI GIVEN IN RULE 10B(1)(B) THAT WHERE THE GOODS PURCHASED BY AN ENTE RPRISE ARE RESOLD AS SUCH, WITHOUT MAKING ANY VALUE ADDITION, THE RPM I S THE MOST APPROPRIATE METHOD AS IT SPECIFICALLY DEALS WITH TH E SITUATIONS OF RESALE OF THE GOODS PURCHASED BY AN ENTERPRISE FROM ITS AE. IN CONTRAST TO THAT, THE TNMM IS A METHOD OF LAST RESORT. WHEN NONE OF THE SPECIFIED METHODS OUT OF THE GIVEN METHODS IN SECTION 92C(1) CAN BE APPLIED, THEN, THE TNMM IS APPLIED FOR DETERMINING THE ALP O F AN INTERNATIONAL TRANSACTION. AS THE ASSESSEE IN THE INSTANT CASE I S DIRECTLY ENGAGED IN RESELLING THE GOODS, IN OUR CONSIDERED OPINION, THE RPM IS THE MOST APPROPRIATE METHOD IN THE GIVEN CIRCUMSTANCES. THE SAME IS DIRECTED TO BE APPLIED FOR BENCHMARKING THE INTERNATIONAL TRANS ACTION OF `PURCHASE OF FINISHED GOODS. COMPARABLES 8. NOW, WE TURN TO THE COMPARABILITY ANALYSIS DONE BY THE ASSESSEE AND ALSO THE TPO. IT CAN BE SEEN THAT THE ASSESSEE CHOSE TWO COMPANIES ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 10 AS COMPARABLE, NAMELY, MAFATLAL DYES & CHEMICALS LT D. AND VIPUL DYES & CHEMICALS LTD. WE HAVE NOTED ABOVE THAT THE ASSESSEE APPLIED RPM AND THE TPO SWITCHED OVER TO THE TNMM BY HOLDIN G THAT COMPARABILITY OF THE COMPANIES CAN BE COMPROMISED I N THE LATER METHOD. THAT IS HOW THAT INSPITE OF HOLDING THE TWO COMPANI ES SELECTED BY THE ASSESSEE AS NOT COMPARABLE, HE STILL INCLUDED THE S AME IN THE LIST OF COMPARABLES ALONG WITH HIS OWN SELECTION OF FIVE CO MPANIES WHICH WERE ALSO ENGAGED IN MANUFACTURING AS THE TWO COMPANIES CHOSEN BY THE ASSESSEE. THE LD. DR ALSO MADE THE SIMILAR OBSERVAT IONS BEFORE THE BENCH THAT THE TNMM SHOULD BE APPLIED AS IT IS MORE TOLERANT TO FUNCTIONAL DIFFERENCES AND, AS THE SEQUITUR, A WIDE R RANGE OF COMPANIES CAN BE ROPED IN UNDER THIS METHOD WHICH ARE NOT STR ICTLY COMPARABLE. WE WILL FIRST DEAL WITH THIS VIEW POINT OF THE TPO AS REITERATED BY THE LD. DR. 9. THIS CONTENTION IS NOT ACCEPTABLE FOR THE OBV IOUS REASON THAT SIMILARITY OF THE FUNCTIONS PERFORMED UNDER ANY OF THE METHODS FOR DETERMINING THE ALP IS ESSENTIAL AND CANNOT BE DISP ENSED WITH EVEN UNDER THE TNMM. THE HON'BLE JURISDICTIONAL HIGH CO URT IN RAMPGREEN ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 11 SOLUTIONS PVT. LTD . VS. CIT (2015) 377 ITR 533 (DEL) HAS HELD THAT THE SELECTION OF COMPARABLES DOES NOT DIFFER WITH THE M ETHOD ADOPTED AND THE COMPARABLES SHOULD BE SELECTED ON THE BASIS OF SIMILARITY FOUND EVEN UNDER THE TNMM. RELEVANT DISCUSSION MADE IN PARAS 4 2 AND 43 ACCENTUATES THE IMPORTANCE OF FUNCTIONAL SIMILARITY EVEN UNDER THE TNMM : ` BEFORE CONCLUDING, THERE IS YET ANOTHER ASPECT OF T HE MATTER THAT NEEDS CONSIDERATION. THE TRIBUNAL PROCEEDED ON THE BASIS THAT WHILE APPLYING TNMM METHOD, BROAD FUNCTIONALITY IS SUFFIC IENT AND IT IS NOT NECESSARY THAT FURTHER EFFORT BE TAKEN TO FIND A CO MPARABLE ENTITY RENDERING SERVICES OF SIMILAR CHARACTERISTICS AS TH E TESTED ENTITY. THE DRP HELD THAT TNMM ALLOWS FLEXIBILITY AND TOLERANCE IN SELECTION OF COMPARABLES, AS FUNCTIONAL DISSIMILARITIES ARE SUBS UMED AT NET MARGIN LEVELS, AS COMPARED TO RESALE PRICE METHOD OR COMPA RABLE UNCONTROLLED PRICE METHOD AND, THEREFORE, THE FUNCTIONAL DISSIMI LARITIES POINTED OUT BY THE ASSESSEE DID NOT WARRANT REJECTION OF ECLERX AN D VISHAL AS COMPARABLES. . IN OUR VIEW, THE AFORESAID APPROAC H WOULD NOT BE APPOSITE. INSOFAR AS IDENTIFYING COMPARABLE TRANSACTIONS/ENTI TIES IS CONCERNED, THE SAME WOULD NOT DIFFER IRRESPECTIVE O F THE TRANSFER PRICING ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 12 METHOD ADOPTED. IN OTHER WORDS, THE COMPARABLE TRANSACTIONS/ENTITIE S MUST BE SELECTED ON THE BASIS OF SIMILARITY WITH TH E CONTROLLED TRANSACTION/ENTITY. COMPARABILITY OF CONTROLLED AND UNCONTROLLED TRANSACTIONS HAS TO BE JUDGED, INTER ALIA, WITH REF ERENCE TO COMPARABILITY FACTORS AS INDICATED UNDER RULE 10B(2) OF THE INCOM E TAX RULES, 1962. COMPARABILITY ANALYSIS BY TNMM METHOD MAY BE LESS S ENSITIVE TO CERTAIN DISSIMILARITIES BETWEEN THE TESTED PARTY AN D THE COMPARABLES. HOWEVER, THAT CANNOT BE THE CONSIDERATION FOR DILUT ING THE STANDARDS OF SELECTING COMPARABLE TRANSACTIONS/ENTITIES. IT IS APPARENT FROM THE ABOVE THAT THERE IS NO COMPROMISE ON THE FUNCTIONAL SIMILARITY EVEN UNDER THE TNMM. THUS THE CONTENTION OF THE LD. DR IN THIS REGARD DOES NOT HOLD WATER. 10. NOW WE TAKE UP THE COMPANIES FOR CONSIDERAT ION CHOSEN BY THE TPO, WHICH WERE EXCLUDED BY THE LD. CIT(A). PAGE 2 0 OF THE IMPUGNED ORDER DISCUSSES THE NATURE OF BUSINESS CARRIED OUT BY THESE COMPANIES, WHICH IS ADMITTEDLY, `MANUFACTURING. IN THAT VIEW OF THE MATTER, IT BECOMES MANIFEST THAT NONE OF SUCH COMPANIES CAN BE CONSIDERED AS ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 13 COMPARABLE. AT THE SAME TIME, IT IS RELEVANT TO NOT E THAT THE TPO SWITCHED OVER TO THE TNMM ON THE UNDERSTANDING THAT FUNCTIONAL COMPARABILITY IS NOT RELEVANT UNDER THIS METHOD. TH AT IS WHY, EVEN AFTER HOLDING THE TWO COMPANIES CHOSEN BY THE ASSESSEE AS INCOMPARABLE, HE STILL INCLUDED THEM IN THE LIST OF SEVEN COMPARABLE S ON THE HYPOTHESIS THAT MANUFACTURING COMPANIES CAN ALSO BE COMPARED W ITH TRADING COMPANIES UNDER THE TNMM. ON A SPECIFIC QUERY, THE LD. AR FAIRLY AGREED THAT BOTH THE COMPANIES CHOSEN BY THE ASSESS EE ARE ALSO NOT FUNCTIONALLY SIMILAR TO THAT OF THE ASSESSEE, WHICH IS EXCLUSIVELY DOING TRADING UNDER THIS SEGMENT. THIS CONTENTION GETS FO RTIFIED FROM THE ANNUAL REPORTS OF BOTH THE COMPANIES WHICH HAVE BEE N PLACED ON RECORD. IT IS OBVIOUS THAT NONE OF THESE TWO COMPANIES IS E NGAGED IN THE PURCHASE AND SALE OF THE GOODS DEALT WITH BY THE AS SESSEE. BOTH THE COMPANIES ARE ALSO ENGAGED IN MANUFACTURING. EVEN THOUGH THE MANUFACTURING COMPONENT MAY BE A LITTLE LESS THAN T HE TRADING COMPONENT, BUT, THE CHARACTER OF TRADING COMPANY CA NNOT BE ASSIGNED TO THEM. IT IS SO FOR THE REASON THAT THE IMPACT OF PR OFIT FROM MANUFACTURING SEGMENT IN THE OVERALL KITTY OF THE PROFIT FROM THE ENTITY AS A WHOLE ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 14 CANNOT BE ASCERTAINED. SINCE BOTH THE COMPANIES AR E ENGAGED IN MANUFACTURING AS WELL AND THE TPOS SELECTION OF FI VE NEW COMPARABLES IS BASED ON A LEVEL PLAYING WITH THE TWO COMPANIES SELECTED BY THE ASSESSEE ON A MISUNDERSTANDING OF THE SCOPE OF SELE CTION OF COMPARABLES UNDER THE TNMM, WE CANNOT PERMIT THE TWO COMPANIES CHOSEN BY THE ASSESSEE TO STAND WHEN THE TPOS SELECTION HAS ALSO BEEN SET ASIDE NOT ONLY ON THE METHOD BUT ALSO THE COMPARABLES. THIS L EAVES US WITH NO COMPARABLE COMPANY EXISTING IN THE GIVEN CIRCUMSTAN CES. 11. AT THIS JUNCTURE, WE ARE REMINDED OF THE PR ESCRIPTION OF SECTION 92(1) OF THE ACT, WHICH PROVIDES THAT ANY INCOME AR ISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ALP. WHEN THIS POSITION WAS CONFRONTED, IT WAS FAIRLY AD MITTED BY BOTH THE SIDES THAT IN THE GIVEN CIRCUMSTANCES, IT WOULD BE APPROPRIATE IF THE QUESTION OF FINDING SUITABLE COMPARABLES IS RESTORE D TO THE FILE OF THE TPO. WE AGREE WITH THE SAME AND ORDER ACCORDINGLY. THE IMPUGNED ORDER TO THIS EXTENT IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF ASSESSING OFFICER/TPO FOR SELECTING A FRESH SET OF COMPARABLES AFTER DUE ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 15 OPPORTUNITY TO THE ASSESSEE AND THEN DETERMINING TH E ALP OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF GOODS. BE FORE PARTING, WE DEEM IT PERTINENT TO MENTION THAT IT TRANSPIRED DURING T HE COURSE OF HEARING THAT IN ADDITION TO THE SALE OF GOODS IMPORTED FROM ITS AE, THE ASSESSEE ALSO SOLD SOME SIMILAR GOODS PURCHASED FROM UNRELATED PA RTIES. THE TPO, IF CONSIDERED EXPEDIENT, MAY ALSO EXPLORE THE POSSIBIL ITY OF FINDING INTERNAL COMPARABLES PROVIDED THEY ARE REALLY COMPARABLE. 12. THE NEXT GROUND IS AGAINST THE DELETION OF ADDI TION OF RS.33,25,517/- ON ACCOUNT OF BUSINESS PROMOTION EXP ENSES. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE CLAIMED DE DUCTION OF RS.66,51,033/- ON ACCOUNT OF BUSINESS PROMOTION EXP ENSES. THE ASSESSING OFFICER OBSERVED THAT SUCH EXPENSES LED T O ENHANCEMENT OF VALUE OF BRAND OWNED BY THE PARENT COMPANY. HE, TH EREFORE, DISALLOWED 50% OF THE EXPENSES AMOUNTING TO RS.33,25,517/-. TH E LD. CIT(A) DELETED THE ADDITION. ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 16 13. WE HAVE GONE THROUGH THE RELEVANT MATERIAL ON R ECORD AND FIND THE DETAILS OF `BUSINESS PROMOTION EXPENSES AT PAGE 46 2 OF THE PAPER BOOK, AS UNDER :- DETAILS OF BUSINESS PROMOTION EXPENSES AMOUNT (IN RS.) GIVEAWAYS 368 ENTERTAINMENT 559,695 GIVEAWAYS LITERATURE, BROCHURES, LEAFLETS 30,310 GIVEAWAYS COLOR SWATCHES 1,677,866 GIVEAWAYS PREMIUM 23,700 LIBRARY MATERIAL 37,737 TRAINING CUSTOMERS 381,797 TEST MARKET MATERIAL 13,701 MARKET PENETRATION COST - SEMINARS 1,000 CONVENTION & MEETINGS 225,070 GIVEAWAYS PAINTS 1,574,453 OUTSIDE PROMOTIONS 952,370 PR EVENTS 964,676 GIFTS TO CUSTOMERS 208,291 TOTAL 6,651,033 14. IT IS VISIBLE FROM THE DETAILS OF BUSINESS PROM OTION EXPENSES THAT SOME OF THE EXPENSES DO NOT HAVE ANY RELATION WITH ENHANCING THE VALUE OF BRAND OWNED BY THE FOREIGN AE. SUCH EXPENSES CAN NOT BE CONSIDERED AS LEADING TO THE BRAND PROMOTION. FURTHER, SOME O F THE EXPENSES LIKE TRAINING CUSTOMERS AND ENTERTAINMENT, ETC., HAVE NO RELATION WHATSOEVER WITH THE BRAND PROMOTION. IN OUR CONSIDERED OPINIO N, THE ENDS OF JUSTICE ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 17 WOULD MEET ADEQUATELY IF THE IMPUGNED ORDER ON THIS ISSUE IS ALSO SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF ASS ESSING OFFICER. WE ORDER ACCORDINGLY AND DIRECT HIM TO EXAMINE DETAILS OF THE ITEMS EXTRACTED ABOVE. THE EXPENSES WHICH ARE NOT IN THE NATURE OF ADVERTISING, MARKETING AND PROMOTION, NOT LEADING T O THE ENHANCEMENT IN VALUE OF THE BRAND OWNED BY THE AE, SHOULD BE EXCLU DED. THE REMAINING AMOUNT SHOULD BE CONSIDERED FOR SEEING FIRSTLY, IF THERE IS AN INTERNATIONAL TRANSACTION AND IF YES, THEN, TO COMP UTE THE ALP OF SUCH INTERNATIONAL TRANSACTION IN THE LIGHT OF VARIOUS J UDGMENTS OF THE HONBLE JURISDICTIONAL HIGH COURT AS DISCUSSED BY THE DELHI TRIBUNAL IN ITS ORDER PASSED IN JULY, 2017 IN OLYMPUS MEDICAL SYSTEMS IND IA PVT. LTD VS. DCIT IN ITA NO. 890/DEL/2017. 15. THE NEXT GROUND IS AGAINST THE DELETION OF ADDI TION OF RS.3,63,461/- THE ASSESSEE CLAIMED DEPRECIATION ON COMPUTERS, UPS AND PRINTERS, ETC., @ 60%. THE ASSESSING OFFICER RESTRICTED SUCH DEPRE CIATION TO 25%. THIS LED TO AN ADDITION OF RS.3,63,461/-. THE LD. CIT(A) DELETED THE ADDITION. ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 18 16. HAVING HEARD BOTH THE SIDES AND PERUSED THE REL EVANT MATERIAL ON RECORD, WE FIND THAT THE TEST FOR HIGHER RATE OF DE PRECIATION IS THE NON- STANDALONE APPLICATION OF THE ITEMS DE HORS COMPUTER. THE HON'BLE DELHI HIGH COURT IN CIT VS. BSES YAMUNA POWERS LTD. (2010) TIOL- 636-HC-DEL-IT , HAS HELD THAT ROUTERS AND SWITCHES CAN BE CLASSIF IED AS COMPUTERS AND, HENCE, ENTITLED TO HIGHER DEPRECIATI ON @ 60%. SIMILAR VIEW HAS BEEN TAKEN BY THE SPECIAL BENCH OF THE TRI BUNAL IN DCIT VS. DATA CRAFT INDIA LTD. (2010) 133 TTJ (MUM) (SB) 377 . IN VIEW OF THE ABOVE DECISIONS, IT IS CLEAR THAT THE ITEMS OF COMP UTER PERIPHERALS, WHICH WORK IN TANDEM WITH COMPUTERS, CAN BE RIGHTLY CLASS IFIED AS COMPUTER FOR THE PURPOSE OF GRANTING DEPRECIATION AT THE ENH ANCED RATE. THE ITEMS TAKEN NOTE OF BY THE ASSESSING OFFICER FOR NOT GRAN TING HIGHER RATE OF DEPRECIATION ARE UPS AND PRINTERS. THESE ITEMS DO NOT HAVE ANY STAND ALONE APPLICATION WITHOUT COMPUTERS. GOING BY THE RATIO DECIDENDI OF THE ABOVE DECISIONS, WE HOLD THAT THESE ITEMS ARE ALSO ELIGIBLE FOR DEPRECIATION @ 60%. THE ADDITION THUS MADE IS HELD TO BE RIGHTLY DELETED. ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 19 17. THE LAST GROUND OF THIS APPEAL IS AGAINST DELET ION OF ADDITION OF RS.60,17,801/-, BEING THE AMOUNT OF TESTING MATERIA L PURCHASED. THE ASSESSEE CONSIDERED THIS AMOUNT AS A REVENUE EXPEND ITURE. THE ASSESSING OFFICER TREATED IT AS AN EXPENDITURE OF C APITAL NATURE AND, HENCE, DISALLOWED. THE LD. CIT(A) OVERTURNED THE A CTION OF THE ASSESSING OFFICER. 18. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS EXPENDITURE I NCLUDES COST OF EMPTY TINS, TEST CARDS, COLOUR PANELS FOR CHECKING THE CO LOUR SHADES AND DEVELOPING VARIANT COLOUR FORMULAE. THIS EXPENDITU RE HAS BEEN INCURRED TO CHECK THE QUALITY, COVERAGE AND SHADE OF COLOURS DEALT WITH BY THE ASSESSEE IN ITS BUSINESS. AFTER USE, THE TESTING M ATERIAL BECOMES WASTE PRODUCT HAVING NO VALUE. THIS SHOWS THAT THE EXPEN DITURE ON SUCH TESTING MATERIAL IS IN THE NATURE OF REVENUE FIELD AND, HENCE, CANNOT BE DISALLOWED AS A CAPITAL EXPENDITURE. IT HAS BEEN B ROUGHT TO OUR NOTICE THAT THE ASSESSING OFFICER HAS CONSISTENTLY ALLOWED DEDUCTION OF SUCH ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 20 EXPENSES IN EARLIER YEARS. WE, THEREFORE, COUNTENA NCE THE VIEW TAKEN BY THE LD. CIT(A) ON THIS ISSUE. THIS GROUND IS NOT A LLOWED. 19. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ASSESSMENT YEAR 2004-05 20. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER PASSED BY THE LD. CIT(A) ON 22.06.2011. 21. THE ONLY ISSUE RAISED IS AGAINST THE CONFIRMATI ON OF ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT FROM THE INT ERNATIONAL TRANSACTION OF `PURCHASE OF TRADED GOODS FROM THE AE. 22. AT THE VERY OUTSET, IT WAS CONTENDED BY THE LD. AR AS WELL AS THE LD. DR THAT THE FACTS AND CIRCUMSTANCES OF THIS APPEAL ARE SIMILAR TO THOSE OF THE APPEAL FOR ASSESSMENT YEAR 2003-04 WITH A SMALL MODIFICATION. WE FIND THAT THE ASSESSEE USED THE RPM AS THE MOST APP ROPRIATE METHOD FOR SHOWING PURCHASE OF FINISHED GOODS AT ALP. THE TPO APPLIED THE TNMM AS THE MOST APPROPRIATE METHOD. HOWEVER, THE LD. CIT(A) ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 21 APPROVED THE ACTION OF THE ASSESSING OFFICER/TPO IN APPLYING THE TNMM AS THE MOST APPROPRIATE METHOD WITH THE PROFIT LEVEL INDICATOR OF OP/SALES. AS THE NATURE OF TRANSACTIONS OF `PURCHA SE OF GOODS FROM ITS AES ADMITTEDLY REMAINS THE SAME AS IN THE PRECEDING YEAR, BEING THE SALE OF GOODS PURCHASED FROM AE WITHOUT ANY VALUE ADDITI ON, WE HOLD THAT RPM IS THE MOST APPROPRIATE METHOD IN THE GIVEN CIR CUMSTANCES. 23. FOR THIS YEAR, AGAIN, BOTH THE SIDES ARE AGRE EABLE THAT THE COMPARABLES CHOSEN BY THE ASSESSEE AS WELL AS THE T PO ARE DIFFERENT IN THEIR FUNCTIONAL PROFILES AND THE MATTER MAY BE RES TORED TO THE FILE OF TPO/ASSESSING OFFICER FOR ASCERTAINING FRESH COMPAR ABLES AND THEN DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO N OF PURCHASE OF GOODS BY APPLYING RPM. WE ORDER ACCORDINGLY. 24. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES. ASSESSMENT YEAR 2005-06 25. GROUND NOS.1 AND 2 OF THE REVENUES APPEAL ARE DIRECTED AGAINST THE REJECTION OF THE TNMM AS THE MOST APPROPRIATE M ETHOD AND ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 22 UPHOLDING THE RPM FOR DETERMINING THE ALP OF THE IN TERNATIONAL TRANSACTION OF `PURCHASE OF GOODS. FOR THIS YEAR, AGAIN, IT IS SEEN THAT THE ASSESSEE APPLIED THE RPM AS THE MOST APPROPRIAT E METHOD FOR INDICATING THAT THE INTERNATIONAL TRANSACTION OF `P URCHASE OF FINISHED GOODS WAS AT ALP. THE TPO APPLIED TNMM. TAKING A DIFFERENT VIEW FROM THE PRECEDING YEAR, THE LD. CIT(A) UPHELD THE APPLICATION OF RPM AS THE MOST APPROPRIATE METHOD FOR THIS YEAR. AS T HE NATURE OF INTERNATIONAL TRANSACTION CONTINUES TO REMAIN THE S AME, WE APPROVE THE APPLICATION OF THE RPM AS THE MOST APPROPRIATE METH OD. 26. AS REGARDS COMPARABLES, BOTH THE SIDES FAIR LY CONCEDED THAT NONE OF THE COMPARABLES CHOSEN EITHER BY THE ASSESSEE OR BY THE TPO IS FUNCTIONALLY SIMILAR WITH THE ASSESSEE AND IT WAS R EQUESTED THAT THE MATTER MAY BE EXAMINED AFRESH BY THE TPO FOR SELECT ING FRESH COMPARABLES. FOLLOWING THE VIEW TAKEN FOR EARLIER YEARS, WE SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND REMIT THE MATT ER TO THE FILE OF ASSESSING OFFICER/TPO FOR CHOOSING FRESH COMPARABLE S (EXTERNAL OR ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 23 INTERNAL) AND THEN DETERMINING THE ALP OF THE INTER NATIONAL TRANSACTION OF `PURCHASE OF GOODS BY APPLYING THE RPM. 27. GROUND NOS. 3 TO 5 DEAL WITH THE OTHER INTERNAT IONAL TRANSACTION OF `CONTRACT RESEARCH &DEVELOPMENT SEGMENT. THE FACT S OF THIS ISSUE ARE THAT THE ASSESSEE CARRIED OUT `CONTRACT R&D AND RE CEIVED A SUM OF RS.6,66,97,040/-. THE TNMM WAS APPLIED FOR SHOWING SUCH INTERNATIONAL TRANSACTION AT ALP WITH PLI OF OP/OC. THE TPO ACCEPTED TNMM AS THE MOST APPROPRIATE METHOD AND ALSO THE PL I. HOWEVER, IT WAS OBSERVED THAT THE COMPARABLES CHOSEN BY THE ASS ESSEE WERE, IN FACT, NOT COMPARABLE. THE TPO SELECTED HIS OWN COMPARABL ES AND PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.1,06,16,921/- BY ADOPTING AVERAGE OP/OC OF FIVE COMPARABLES AT 20.68%. THE LD. CIT(A ) RESTORED THE COMPARABLES CHOSEN BY THE ASSESSEE AND EXCLUDED THE COMPANIES SELECTED BY THE TPO. THE REVENUE IS AGGRIEVED AGAI NST THE ACTION OF THE LD. CIT(A) IN THIS REGARD. 28. HERE, AGAIN, BOTH THE PARTIES ARE CONSENSUS AD ITEM THAT THE COMPARABLES CHOSEN EITHER BY THE ASSESSEE OR BY THE TPO ARE NOT, IN FACT, ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 24 COMPARABLE TO THE INTERNATIONAL TRANSACTION OF `CON TRACT R&D. IT WAS COMMONLY REQUESTED THAT THE MATTER MAY BE RESTORED FOR SELECTION OF FRESH COMPARABLES. AGREEING WITH THE RIVAL, BUT, C OMMON SUBMISSION, WE SET ASIDE THE IMPUGNED ORDER AND DIRECT THE ASSE SSING OFFICER/TPO TO FIND OUT FRESH COMPARABLES UNDER THE SEGMENT OF `C ONTRACT R&D AND THEN FIND OUT THE ALP OF THE INTERNATIONAL TRANSACT ION. NEEDLESS TO SAY, THE ASSESSEE WILL BE GIVEN AN OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. 29. THE LAST GROUND OF THE REVENUES APPEAL IS AGAI NST THE GRANT OF WORKING CAPITAL ADJUSTMENT IN THE COMPUTATION OF AL P OF THE `CONTRACT R&D SEGMENT. THE LD. CIT(A) AGREED WITH THE ASSESS EE FOR GRANT OF WORKING CAPITAL ADJUSTMENT IN `CONTRACT R&D SEGMEN T. IN OUR CONSIDERED OPINION, THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF SEVERAL ORDERS PASSED BY THE TRIBUNAL PERMITTING THE GRANT OF WORKING CAPITAL ADJUSTMENT IN CASE OF COMPARABLES FINALLY SHORTLIST ED. WE, THEREFORE, UPHOLD THE ACTION OF THE LD. CIT(A) IN PRINCIPLE TH AT THE WORKING CAPITAL ADJUSTMENT SHOULD BE CONSIDERED. HOWEVER, IT WOULD HAVE TO BE DECIDED ITA NOS.1925 & 4096/DEL/2011 & ITA NO.6482/DEL/2012 25 AFRESH ONLY AFTER THE FRESH COMPARABLES ARE CHOSEN BY THE TPO WHICH ARE REALLY SIMILAR. 30. IN THE RESULT, THE APPEAL IS PARTLY ALLOWE D FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 04 .08.20 17. SD/- SD/- [BEENA A. PILLAI] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 04 TH AUGUST, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.