ACIT, CHENNAI V. Greenland Exporters Pvt Ltd., CHENNAI

ITA 1927/CHNY/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96602 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2015
• Appeal Filed By: Department
• Bench Allotted: D
• Assessment Year: 2008-2009
• Appeal Filed On: 31-08-2015
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: G SEETHARAMAN
• Keywords: Transfer pricing; Search and seizure; Opportunity of being heard; International transaction; Tangible material; Difference of opinion; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 143(3); 147; 148

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , ! ' ! # . $ , & '( ) [ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ] ./ I.T.A.NO.1927/MDS/2015 / ASSESSMENT YEAR : 2008-09 THE ASSTT. COMMISSIONER OF INCOME-TAX CORPORATE CIRCLE 2(1) CHENNAI VS. M/S GREENLAND EXPORTS PVT. LTD 14, SIR THIYAGARAYA ROAD T. NAGAR, CHENNAI 600 017 [PAN AAACG 3488 P ] ( *+ / APPELLANT) ( ,-*+ /RESPONDENT) / APPELLANT BY : SHRI A V SREEKANTH, JCIT /RESPONDENT BY : SHRI G SEETHARAM AN, ADVOCATE / DATE OF HEARING : 10 - 12 - 2015 / DATE OF PRONOUNCEMENT : 28 - 1 2 - 2015 . / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)VI, CHE NNAI, 6.3.2015 FOR ASSESSMENT YEAR 2008-09. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 2.1. THE LD. CIT(A) ERRED IN HOLDING THAT THE INTE RNAL TNMM METHOD CAN BE TAKEN FOR JUSTIFYING THE ALP DETERMINATION. ITA NO. 1927/15 :- 2 -: 2.2. THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THAT T HE UNCONTROLLED ENTITIES MAINTAINED BY THE ASSESSEE AR E ALSO IN THE NATURE OF ASSOCIATE ENTERPRISES AS PER 92A(2)U) OF THE IT ACT, 1961 AND THE UNCONTROLLED ENTITIES AS SPECIFI ED BY THE ASSESSEE ARE THEIR GROUP COMPANIES ONLY. 2.3. THE LD. CIT(A) ERRED IN NOT OBSERVING THE SECTIO N 92A(2)U) WHEREIN IT HAS BEEN STATED THAT THE CONCERNS OPERATED BY RELATIVES ARE TO BE TREATED AS ASSOCIAT ED ENTERPRISES ONLY. .4. THE DECISION OF THE HON'BLE ITAT IN THE ASSESSEE 'S OWN CASE FOR THE A.Y.2006-07, RELIED ON BY THE ID. CIT(A) H AS NOT BEEN ACCEPTED BY THE DEPARTMENT AND APPEAL BEFO RE THE HON'BLE HIGH COURT IS PENDING IN TCA NO.456 OF 2012 3. THE FACTS OF THE ISSUE ARE THAT THE ASSESSING OFFIC ER MADE AN ADDITION OF `. 1,76,00,000/- ON ACCOUNT OF THE ADJUSTMENTS TO THE ALP OF THE INTERNATIONAL TRANSACTIONS PROPOSED BY T HE TPO IN HIS ORDER. THE ASSESSEE DURING THE FINANCIAL YEAR 2007 -08 ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AES, IN THE FORM OF EXPORT OF GARMENTS FOR ` 15,91,90,661/-. THE PLI OF THE ASSESSEE'S OPERATING PROFIT TO THE TOTAL COST OF THE ASSESSEE WITH RESPECT TO THE AE TRANSACTIONS WAS SHOWN AT 1.6% AND IN THE CA SE OF NON- AE TRANSACTIONS IT WAS SHOWN AT 3.5%. THE ASSESSEE IN ITS TP REPORT ADOPTED THE TNMM AS THE MOST APPROPRIATE MET HOD OF DETERMINING THE ALP OF THE TRANSACTIONS. THE TPO IN HIS ORDER SELECTED TWO COMPARABLES WITH ARITHMETIC MEAN OF 9. 81% (OPERATING PROFIT/OPERATING COST). THE PLI OF THE A SSESSEE IS ITA NO. 1927/15 :- 3 -: 2.46%. BY ADOPTING THE ARITHMETIC MEAN OF 9.81%, AS THE DESIRED PROFIT, THE TPO DETERMINED THE ALP OF THE A SSESSEE'S AE TRANSACTIONS AT ` 18.18 CRORES, AS AGAINST THE DECLARED AE TRANSACTIONS OF ` 16.42 CRORES. ACCORDINGLY THE TPO PROPOSED AN UPWARDS ADJUSTMENT OF ` 1.76 CRORES. BASED ON THE SAID ORDER OF THE PTO, THE ASSESSING OFFICER MADE AN ADDITION OF ` 1.76 CRORES TO THE RETURNED INCOME OF THE ASSESSEE. 4. IN THE COURSE OF HEARING, BOTH THE PARTIES AGREED TH AT THIS ISSUE IS SQUARELY COVERED BY THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 IN I.T.A.NO.2107/MDS/2011, DATED 19.7.2012. THE TRIBUN AL HAS IN FACT, DISCUSSED THE ISSUE IN DETAIL AND OBSERVED AS UNDER: 9. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVA L SUBMISSIONS. THE QUESTION REGARDING VALIDITY OF RE - ASSESSMENT GOES TO ROOT OF THE MATTER. HENCE IT WO ULD BE APPROPRIATE TO DEAL WITH THIS ISSUE BEFORE WE GO INTO THE MERITS OF THE CASE. WITHOUT DOUBT, THE ORIGINA L RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE ACT. THE RE WAS NO SCRUTINY PROCEEDING UNDER SECTION 143(3) OF THE ACT. A NOTICE UNDER SECTION 148 WAS ISSUED ON 22.4.2008. REASON FOR REOPENING IS MENTIONED IN PA RA 2 OF THE DRAFT ASSESSMENT ORDER DATED 28.12.2010, WHI CH READS AS UNDER:- ON VERIFICATION OF ANNEXURE TO FORM 3CEB SUBMITTED BY THE ASSESSEE ALONG WITH RETURN OF INCO ME FOR THE AY 2006-07, IT IS OBSERVED THAT THE VALUE OF INTERNATIONAL TRANSACTION ENTERED BY THE ASSESSEE COMPANY IS ABOVE ` 15 CRORES AND THEREFORE, THIS CASE COMES UNDER COMPULSORY SCRUTINY. ITA NO. 1927/15 :- 4 -: A READING OF THE ABOVE CLEARLY SHOWS THAT THE RE- ASSESSMENT PROCEEDINGS WERE INITIATED ONLY FOR A RE ASON THAT INTERNATIONAL TRANSACTIONS EXCEEDED ` 15 CRORES AND THEREFORE, THE CASE WAS TO BE COMPULSORILY SCRUTINI ZED. NOW WE HAVE TO SEE WHETHER THIS SATISFIES THE REQUIREMENT OF SECTION 147 OF THE ACT. JUDGMENTS O F HONBLE APEX COURT IN THE CASE OF RAJESH JHAVERI ST OCK BROKERS (P) LTD. (SUPRA) AND LATER IN THE CASE OF C IT V. KELVINATOR OF INDIA LTD. (320 ITR 561) ARE VERY REL EVANT HERE. AFTER MAKING A DEEP STUDY OF SECTION 143(1) OF THE ACT AS IT STOOD BEFORE AND AFTER THE AMENDMENT WHIC H CAME INTO EFFECT FROM 1 ST JUNE, 1999, AND ALSO SECTIONS 147 PRIOR TO AND AFTER ITS EXCLUSION BY DIRECT TAX LAWS (AMENDMENT) ACT, 1987, IT WAS HELD AS UNDER BY HON BLE APEX COURT IN PARAS 17 AND 18 OF ITS ORDER IN THE C ASE OF RAJESH JHAVERI STOCK BROKERS (P) LTD. (SUPRA):- 17. THE SCOPE AND EFFECT OF S. 147 AS SUBSTITUTED WITH EFFECT FROM 1 ST APRIL, 1989, AS ALSO SS. 148 TO 152 ARE SUBSTANTIALLY DIFFERENT FROM THE PROVISIONS AS THEY STOOD PRIOR TO SUCH SUBSTITUTION. UNDER THE O LD PROVISIONS OF S. 147, SEPARATE CLS. (A) AND (B) LAID DOWN THE CIRCUMSTANCES UNDER WHICH INCOME ESCAPING ASSESSMENT FOR THE PAST ASSESSMENT YEARS COULD BE ASSESSED OR REASSESSED. TO CONFER JURISDICTION UND ER S. 147(A) TWO CONDITIONS WERE REQUIRED TO BE SATISFIE D FIRST THE A.O. MUST HAVE REASON TO BELIEVE THAT INCOME PROFITS OR GAINS CHARGEABLE TO INCOME-TAX HAV E ESCAPED ASSESSMENT, AND SECONDLY HE MUST ALSO HAVE REASON TO BELIEVE THAT SUCH ESCAPEMENT HAS OCCURRED BY REASON OF EITHER (I) OMISSION OR FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FULLY OR TRULY ALL MATE RIAL FACTS NECESSARY FOR HIS ASSESSMENT OF THAT YEAR. BOTH THESE CONDITIONS WERE CONDITIONS PRECEDENT TO BE SATISFIED BEFORE THE A.O. COULD HAVE JURISDICTIO N TO ISSUE NOTICE UNDER S. 148 R/W S. 147(A). BUT UNDER THE SUBSTITUTED S. 147 EXISTENCE OF ONLY THE FIRST CONDITION SUFFICES. IN OTHER WORDS IF THE A.O. FOR WHATEVER REASON HAS REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT IT CONFERS JURISDICTION TO ITA NO. 1927/15 :- 5 -: REOPEN THE ASSESSMENT. IT IS HOWEVER TO BE NOTED THAT BOTH THE CONDITIONS MUST BE FULFILLED IF THE C ASE FALLS WITHIN THE AMBIT OF THE PROVISO TO S. 147. THE CASE AT HAND IS COVERED BY THE MAIN PROVISION AND N OT THE PROVISO. 18. SO LONG AS THE INGREDIENTS OF S. 147 ARE FULFILLED, THE A.O. IS FREE TO INITIATE PROCEEDING UNDER S. 147 AND FAILURE TO TAKE STEPS UNDER S. 143(3) WILL NOT RENDER THE A.O. POWERLESS TO INITIATE REASSESSMENT PROCEEDINGS EVEN WHEN INTIMATION UNDER S. 143(1) HAD BEEN ISSUED. THEREFORE, IT IS CLEAR FROM THE ABOVE THAT EVEN AFT ER THE SUBSTITUTION OF SECTION 147, EXISTENCE OF FIRST CON DITION IS A MUST. SUCH FIRST CONDITION IS THAT THE A.O. MUST H AVE REASON TO BELIEVE THAT INCOME, PROFITS OR GAINS CHARGEABLE TO INCOME-TAX HAD ESCAPED ASSESSMENT. THIS POSITION I S REITERATED BY THEIR LORDSHIP IN THEIR JUDGMENT IN T HE CASE OF KELVINATOR OF INDIA LTD. (SUPRA) AT PARA 4, WHICH I S REPRODUCED HEREUNDER:- 4. ON GOING THROUGH THE CHANGES, QUOTED ABOVE, MADE TO S. 147 OF THE ACT, WE FIND THAT, PRIOR TO DIRECT TAX LAWS (AMENDMENT) ACT, 1987, REOPENING COULD BE DONE UNDER ABOVE TWO CONDITIONS AND FULFILLMENT OF THE SAID CONDITIONS ALONE CONFERRED JURISDICTION ON THE A.O. TO MAKE A BACK ASSESSMENT, BUT IN S. 147 OF THE ACT (W.E.F. 1 ST APRIL, 1989), THEY ARE GIVEN A GO BY AND ONLY ONE CONDITION HAS REMAIN ED, VIZ. THAT WHERE THE A.O. HAS REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT, CONFERS JURISDICTION TO REOPEN THE ASSESSMENT. THEREFORE, POST 1 ST APRIL, 1989, POWER TO REOPEN IS MUCH WIDER. HOWEVER, ONE NEEDS TO GIVE A SCHEMATIC INTERPRETATION TO THE WOR DS REASON TO BELIEVE FAILING WHICH, WE ARE AFRAID, S . 147 WOULD GIVE ARBITRARY POWERS TO THE A.O. TO REOPEN ASSESSMENTS ON THE BASIS OF MERE CHANGE OF OPINION , WHICH CANNOT BE PER SE REASON TO REOPEN. WE MUST ALSO KEEP IN MIND THE CONCEPTUAL DIFFERENCE BETWEEN POWER TO REVIEW AND POWER TO REASSESS. THE A.O. HA S ITA NO. 1927/15 :- 6 -: NO POWER TO REVIEW; HE HAS THE POWER TO REASSESS. BUT REASSESSMENT HAS TO BE BASED ON FULFILLMENT OF CERTAIN PRE-CONDITION AND IF THE CONCEPT OF CHANGE OF OPINION IS REMOVED, AS CONTENDED ON BEHALF OF THE DEPARTMENT, THEN, IN THE GARB OF REOPENING THE ASSESSMENT, REVIEW WOULD TAKE PLACE. ONE MUST TREA T THE CONCEPT OF CHANGE OF OPINION AS AN IN-BUILT T EST TO CHECK ABUSE OF POWER BY THE A.O. HENCE, AFTER 1 ST APRIL, 1989, A.O. HAS POWER TO REOPEN, PROVIDED THERE IS TANGIBLE MATERIAL TO COME TO THE CONCLUSION TH AT THERE IS ESCAPEMENT OF INCOME FROM ASSESSMENT. REASONS MUST HAVE A LIVE LINK WITH THE FORMATION OF THE BELIEF. OUR VIEW GETS SUPPORT FROM THE CHANGES MADE TO S. 147 OF THE ACT, AS QUOTED HEREINABOVE. UNDER THE DIRECT TAX LAWS (AMENDMENT) ACT, 1987, PARLIAMENT NOT ONLY DELETED THE WORDS REASON TO BELIEVE BUT ALSO INSERTED THE WORD OPINION IN S. 147 OF THE ACT. HOWEVER, ON RECEIPT OF REPRESENTATIONS FROM THE COMPANIES AGAINST OMISSION OF THE WORDS REASON TO BELIEVE, PARLIAMENT RE-INTRODUCED THE S AID EXPRESSION AND DELETED THE WORD OPINION ON THE GROUND THAT IT WOULD VEST ARBITRARY POWERS IN THE A .O. WE QUOTE HEREINBELOW THE RELEVANT PORTION OF CIRCUL AR NO.549, DT. 31 ST OCT., 1989 [(1990) 82 CTR (ST) 1], WHICH READS AS FOLLOWS: 7.2 AMENDMENT MADE BY THE AMENDING ACT, 1989, TO RE-INTRODUCE THE EXPRESSION REASON TO BELIEVE I N S. 147 A NUMBER OF REPRESENTATIONS WERE RECEIVED AGAINST THE OMISSION OF THE WORDS REASON TO BELIEV E FROM S. 147 AND THEIR SUBSTITUTION BY THE OPINION O F THE A.O. IT WAS POINTED OUT THAT THE MEANING OF TH E EXPRESSION, REASON TO BELIEVE HAD BEEN EXPLAINED I N A NUMBER OF COURT RULINGS IN THE PAST AND WAS WELL SETTLED AND ITS OMISSION FROM S. 147 WOULD GIVE ARBITRARY POWERS TO THE A.O. TO REOPEN PAST ASSESSMENTS ON MERE CHANGE OF OPINION. TO ALLAY THESE FEARS, THE AMENDING ACT, 1989, HAS AGAIN AMENDED S. 147 TO REINTRODUCE THE EXPRESSION HAS REASON TO BELIEVE IN PLACE OF THE WORDS FOR REASO NS TO BE RECORDED BY HIM IN WRITING, IS OF THE OPINION. ITA NO. 1927/15 :- 7 -: OTHER PROVISIONS OF THE NEW S. 147, HOWEVER, REMAIN THE SAME. THEREFORE, WHAT COMES OUT FROM THE ABOVE IS THAT EV EN IF THE ORIGINAL RETURN WAS SUBJECT ONLY TO A PROCESSING UN DER SECTION 143(1) OF THE ACT, FOR RESORTING TO SECTION 147, THE BASIC CONDITION TO BE SATISFIED IS THAT A.O. SHOULD HAVE A REASON TO BELIEVE THAT INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT. THIS IS FUNDAMENTAL. IN THIS LEGAL PERSPECTIVE, IF WE LOOK AT THE REASON MENTIONED BY THE ASSESSING OFFICER HERE, CAN WE SAY THAT IT IS RELEV ANT? NO DOUBT, SUFFICIENCY CANNOT BE QUESTIONED BUT RELEVAN CE, IS ALWAYS IMPORTANT. AS HELD BY HONBLE APEX COURT AS EARLY AS IN THE YEAR 1993, IN THE CASE OF PHOOLCHAND BAJR ANG DAL V. ITO 203 ITR 456, REASON HAS TO BE HELD IN GOOD F AITH AND SHOULD NOT BE SUBJECTIVE. TURNOVER OF AN ASSESSEE IN INTERNATIONAL TRANSACTION EXCEEDING ` 15 CRORES, AND RULES OF DEPARTMENT REQUIRING A COMPULSORY SCRUTINY OF SUCH CASES, CANNOT IN ANY WAY BE DEEMED AS A REASON TO BELIEVE THAT THERE WAS ESCAPEMENT OF INCOME. NO REASONABLE MAN CAN COME TO SUCH A BELIEF BASED ON SUCH A REASONING. T HERE WAS NO RELEVANCE OF THE REASON CITED, WITH THE REOP ENING DONE. WE ARE, THEREFORE, OF THE OPINION THAT THE R E-OPENING SUFFERED FROM A FUNDAMENTAL FLAW, GOING TO THE ROOT S AND VITIATING THE RE-ASSESSMENT PROCESS. 10. COMING TO THE MERITS, CASE OF THE ASSESSEE IS T HAT ITS INTERNAL COMPARABLE HAD TO BE CONSIDERED SINCE IT W AS HAVING TRANSACTION WITH NON-AES ALSO. ADMITTEDLY, ASSESSEE WAS A 100% EXPORTER AND ALL ITS CUSTOMERS WERE ABRO AD. ASSESSEE CLAIMS THAT THE INDIRECT EXPENSES, IF IT W AS DISTRIBUTED IN THE RATIO OF THE TURNOVER, THEN A TN MM ANALYSIS BASED ON SUCH A COMPARISON OF INTERNAL RES ULTS, CANNOT BE BRUSHED ASIDE. ONLY REASON WHY THE A.O. AND THE TPO HAD REJECTED THE TNMM WAS THAT IT WAS BASED ON INTERNAL SEGREGATION OF AE AND NON-AE TRANSACTIONS AND COST DISTRIBUTION FOR INDIRECT COST WAS NOT CORRECT LY DONE. WORK OUT PRODUCED BY THE ASSESSEE FOR ARRIVING AT T HE PLI FOR ITS TRANSACTIONS WITH AES AND NON-AES, WERE AS UNDER:- ITA NO. 1927/15 :- 8 -: PARTICULARS AE NON AE ` ` SALES 19,95,49,239 2,73,56,909 EXPORT INCENTIVE 63,73,920 8,73,824 GROSS INCOME 20,59,23,159 2,82,30,733 LESS: DIRECT EXPENSES 19,34,62,415 2,63,79,116 GROSS PROFIT 1,24,60,744 18,51,617 LESS: INDIRECT EXPENSES 47,93,359 6,57,138 OPERATING PROFIT 76,67,385 11,94,479 GROSS PROFIT RATIO 6.1% 6.6% OP/OE RATIO 3.9 % 4.4% BOTH THE TPO AS WELL AS DRP AGREE THAT THE DIRECT EXPENSES WERE CORRECTLY DISTRIBUTED SINCE THESE WER E CHARGED TO AE TRANSACTIONS AND NON-AE TRANSACTIONS, WITHOUT ANY APPORTIONMENT, BUT BASED ON ACTUALS. 11. THIS LEAVES US WITH INDIRECT EXPENSES. AGAINST TOTAL DIRECT EXPENSES OF ABOUT 21.97 CRORES, THE TOTAL IN DIRECT EXPENSES CAME TO ONLY ` 54.5 LAKHS. OBVIOUSLY, INDIRECT EXPENSES WERE MINISCULE WHEN COMPARED TO DIRECT EXPENSES. AS ALREADY MENTIONED BY US, ALL THE AUTH ORITIES BELOW AGREED THAT DIRECT EXPENSES WERE CORRECTLY DI STRIBUTED BY THE ASSESSEE. ASSESSEE HAD APPORTIONED THE INDI RECT EXPENSES ON THE BASIS OF AE AND NON-AE TURNOVER. E VEN WHEN A COMPARISON IS DONE WITH AN EXTERNAL PARTY OR CONCERN, AND WHERE SUCH EXTERNAL CONCERN IS ALSO HA VING AE AND NON-AE TRANSACTIONS, IT BECOMES NECESSARY TO APPORTION EXPENSES OF SUCH EXTERNAL CONCERNS ALSO, FOR TESTING IT WITH THE RESULTS OF THE TESTED PARTY. T HEREFORE, WE CANNOT SAY JUST BECAUSE ASSESSEE APPORTIONED THE IN DIRECT ITA NO. 1927/15 :- 9 -: EXPENSES ON TURNOVER BASIS, THE WHOLE OF THE ANALYS IS HAS TO BE IGNORED. AS ALREADY MENTIONED BY US, ASSESSE ES INDIRECT EXPENSES WERE MINISCULE. THE PLI FOR NON- AE TRANSACTIONS WERE 4.4% AND THAT OF AE TRANSACTIONS CAME TO 3.9%. IT IS NOTEWORTHY THAT TPO HERSELF HAD, VIDE LETTER DATED 18.4.2012, MADE A RECTIFICATION OF ARM'S LENG TH PRICE DETERMINED BY HER AND SCALED DOWN THE SUGGESTED UPW ARD ADJUSTMENT FROM ` 1,65,73,606/- ORIGINALLY FIXED, TO ` 32,58,847/-. IN OUR OPINION, TURNOVER BASED DISTRI BUTION OF INDIRECT COST, OUGHT NOT HAVE BEEN CONSIDERED AS A REASON FOR REJECTION OF THE METHOD ADOPTED BY THE ASSESSEE . IN EVERY TP ANALYSIS, AN ELEMENT OF ESTIMATION WILL ST EP IN, AT SOME STAGE OF THE WORKING. TURNOVER BASED APPORTIO NMENT, IN THE ABSENCE OF OTHER BETTER YARDSTICKS CANNOT BE CONSIDERED AS SUBJECTIVE OR NON-SCIENTIFIC. THE VI EW TAKEN BY TPO AND DRP THAT TNMM COULD NOT BE ADOPTED WHERE AN INTERNAL ANALYSIS MADE CANNOT, THUS BE ACCEPTED. IN TAKING THIS VIEW, WE ARE FORTIFIED BY THE DECISION OF CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF BIRL ASOFT (INDIA) LTD. V. DCIT IN I.T.A. NO. 4776/D/2011 RELI ED ON BY LEARNED A.R., WHICH HELD AS UNDER AT PARAS 3 AND 4 OF ITS ORDER:- 3. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF THE AO IN TERMS OF DIRECTIONS CONTAINED IN ORDER DATED 10TH AUGUST OF THE DRP. WH ILE INVITING OUR ATTENTION TO THE DIRECTIONS OF THE DRP , THE LEARNED AR CONTENDED THAT THE ADDITION HAS BEEN MADE,INTER ALIA, ON THE BASIS OF SIMILAR FACTS AND CIRCUMSTANCES OBTAINING IN THE PRECEDING ASSESSMENT YEAR 2006-07 WHEREIN THE ITAT VIDE THEIR ORDER DATED 29.01.2011 CONCLUDED ON THIS ISSUE AS UNDER:- 17. IN THE LIGHT OF THE DISCUSSIONS MADE ABOVE, WE THEREFORE,HOLD THAT THE ASSESSEE WAS JUSTIFIED IN UNDERTAKING INTERNAL BENCH MAKING ANALYSIS ON STAND ALONE BASIS BY PLACING ON RECORD WORKING OF OPERATING PRO FIT MARGIN FROM INTERNATIONAL TRANSACTIONS WITH AES AND TRANSACTIONS WITH UNRELATED PARTIES UNDERTAKEN IN S IMILAR FUNCTIONAL AND ECONOMIC SCENARIO, AND THE SAME SHOU LD BE THE BASIS FOR DETERMINATION OF ARMS LENGTH PRICE I N RESPECT OF INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ITA NO. 1927/15 :- 10 -: ASSOCIATED ENTERPRISE. IN THE LIGHT OF THE FACTS OF THE PRESENT CASE AS DISCUSSED ABOVE, WE THEREFORE, HOLD THAT THE TRANSFER PRICING OFFICER HAD NO MANDATE TO HAVE RECOURSE TO EXTERNAL COMPARABLES WHEN, IN THE PRESEN T CASE, INTERNAL COMPARABLES WERE AVAILABLE, WHICH COULD BE APPLIED FOR DETERMINING THE ARMS LENGTH PRICE OF INTERNATI ONAL TRANSACTIONS WITH AES. WE, THEREFORE, DIRECT THE AS SESSING OFFICER/TRANSFER PRICING OFFICER TO DETERMINE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS WITH AES BY MAK ING INTERNAL COMPARISON OF THE NET MARGIN EARNED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES AND THE PROFIT EARNED BY THE ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS WITH U NRELATED PARTIES. IN THIS RESPECT, THE ASSESSEE HAS ALREADY GIVEN HIS WORKING BY ALLOCATING REVENUE AND EXPENSES TO BOTH T HE SEGMENTAL AND DETERMINED SEPARATE PROFITABILITY. HO WEVER, ON PERUSAL OF THE TPOS ORDER, WE FIND THAT THE TPO HAS NOT UNDERTAKEN ANY EXERCISE TO EXAMINE THE CORRECTNESS OF THE WORKINGS DONE BY THE ASSESSEE. WE, THEREFORE, RESTO RE THIS MATTER BACK TO THE FILE OF THE ASSESSING OFFICER/TP O FOR FRESH ADJUDICATION AND FOR THE PURPOSE OF DETERMINI NG THE ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ASSOCIATED ENTERPR ISE BY MAKING INTERNAL COMPARISON OF PROFITABILITY FROM TH E INTERNATIONAL TRANSACTIONS WITH UNRELATED PARTIES A FTER ALLOCATING RESPECTIVE REVENUES AND EXPENSES TO BOTH THE SEGMENTAL. THE ASSESSING OFFICER/TPO SHALL PROVIDE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. THE ASSESSEE SHALL FURNISH ALL THE DETAILS AND PARTICUL ARS BEFORE /THE AUTHORITIES BELOW TO ENABLE THEM TO MAKE INTER NAL COMPARISON OF THE PROFITABILITY FROM THE INTERNATIO NAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE /AND UNRELA TED PARTIES UNDERTAKEN BY THE ASSESSEE IN THE SIMILAR F UNCTIONAL AND ECONOMIC SCENARIO. WE ORDER ACCORDINGLY. 18. SINCE WE HAVE ACCEPTED THE ASSESSEES STAND THAT ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIO NS UNDERTAKEN WITH ASSOCIATED ENTERPRISES IS TO BE DET ERMINED ON THE BASIS OF INTERNAL COMPARISON OF PROFIT EARNE D FROM THE INTERNATIONAL TRANSACTIONS WITH AES AND PROFIT EARNED FROM INTERNATIONAL TRANSACTIONS WITH UNRELATED ITA NO. 1927/15 :- 11 -: PARTIES, WE DO NOT GO TO DECIDE WHETHER THE EXTERNAL COMPARABLES SELECTED BY THE TPO WERE PROPER OR JUST IFIED TO MAKE ARMS LENGTH PRICE IN THE PRESENT CASE AS T HAT ISSUE HAS BECOME ACADEMIC AT THIS STAGE. 3.1 ON THE OTHER HAND, THE LD. DR SUPPORTED THE FIND INGS OF THE AO IN TERMS OF THE DIRECTIONS OF THE DRP. 4. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH T HE FACTS OF THE CASE AS ALSO THE AFORESAID DECISION DA TED 20TH JANUARY, 2011 OF THE ITAT FOR THE AY 2006-07.WE FIND THAT THE ITAT IN THE PRECEDING ASSESSMENT YEAR CONC LUDED THAT THE ASSESSEE WAS JUSTIFIED IN UNDERTAKING INTE RNAL BENCH MARKING ANALYSIS ON STAND ALONE BASIS BY PLAC ING ON RECORD WORKING OF OPERATING PROFIT MARGIN FROM INTERNATIONAL TRANSACTIONS WITH AES AND TRANSACTION S WITH UNRELATED PARTIES UNDERTAKEN IN SIMILAR FUNCTIONAL AND ECONOMIC SCENARIO, AND THE SAME SHOULD BE THE BASIS FOR DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH THE ASSO CIATED ENTERPRISE. IT WAS FURTHER CONCLUDED THAT THE TPO H AD NO MANDATE TO HAVE RECOURSE TO EXTERNAL COMPARABLES WHE N, IN THE PRESENT CASE, INTERNAL COMPARABLES WERE AVAILAB LE, WHICH COULD BE APPLIED FOR DETERMINING THE ARMS LE NGTH PRICE OF INTERNATIONAL TRANSACTIONS WITH AES. ACCOR DINGLY, THE ITAT DIRECTED THE ASSESSING OFFICER/TRANSFER PR ICING OFFICER TO DETERMINE ARMS LENGTH PRICE OF INTERNAT IONAL TRANSACTIONS WITH AES BY MAKING INTERNAL COMPARISON OF THE NET MARGIN EARNED BY THE ASSESSEE FROM THE INTERNAT IONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES AND THE PR OFIT EARNED BY THE ASSESSEE FROM THE INTERNATIONAL TRANS ACTIONS WITH UNRELATED PARTIES. FOR THIS PURPOSE, THE ITAT RESTORED THE MATTER BACK TO THE FILE OF THE AO/TPO FOR FRESH ADJUDICATION AND FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSA CTIONS UNDERTAKEN WITH THE ASSOCIATED ENTERPRISE BY MAKING INTERNAL COMPARISON OF PROFITABILITY FROM THE INTER NATIONAL TRANSACTIONS WITH UNRELATED PARTIES AFTER ALLOCATIN G RESPECTIVE REVENUES AND EXPENSES TO BOTH THE SEGMENT AL. THE AO/TPO WERE DIRECTED TO PROVIDE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE WHILE TH E ITA NO. 1927/15 :- 12 -: ASSESSEE WAS DIRECTED TO FURNISH ALL THE DETAILS AN D PARTICULARS TO ENABLE THE AO/TPO TO MAKE INTERNAL COMPARISON OF THE PROFITABILITY FROM THE INTERNATIO NAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE /AND UNRELA TED PARTIES UNDERTAKEN BY THE ASSESSEE IN THE SIMILAR F UNCTIONAL AND ECONOMIC SCENARIO. IN THE INSTANT CASE, FACTS A ND CIRCUMSTANCES IN THE YEAR CONSIDERATION ARE , INDIS PUTABLY, PARALLEL TO THE FACTS AND CIRCUMSTANCES IN THE PREC EDING ASSESSMENT YEAR WHILE THE DIRECTIONS OF THE DRP ARE ALSO BASED ON THE CONCLUSION OF THE ITAT IN THE PRECEDIN G ASSESSMENT YEAR. THE REVENUE HAVE ALSO NOT PLACED B EFORE US ANY MATERIAL SO AS TO ENABLE US TO TAKE A DIFFER ENT VIEW IN THE MATTER. IN SUCH A SITUATION, WE FIND MERIT I N THE CONTENTIONS THE LD.AR AND THEREFORE, RESTORE THE MA TTER TO THE FILE OF AO/TPO WITH SIMILAR DIRECTIONS AS HAVE BEEN ISSUED BY THE ITAT IN THE PRECEDING ASSESSMENT YEAR . WITH THESE OBSERVATIONS, GROUND NOS. 2 TO 2.23 ARE DISPOSED OF. 12. TRANSFER PRICING ADJUSTMENT BASED ON TNM METHOD ARE TO BE APPLIED ON TRANSACTION LEVELS AND NOT AT ENTERPRISE LEVEL. IF THAT BE SO, NOTHING STOPS AN ASSESSEE FR OM MAKING INTERNAL TNM STUDY, FOR JUSTIFYING THE VALUE OF ITS INTERNATIONAL TRANSACTIONS, AS LONG AS IT CAN SHOW THAT IT HAD SUFFICIENTLY UNCONTROLLED TRANSACTION WITH NON-AES, WHICH COULD GIVE A MEANINGFUL ANALYSIS. THE BENCHMARKING THAT HAS TO BE DONE IN TNMM CAN BE EITHER WITH AN EXTERN AL PARTY OR BASED ON SEGMENTAL RESULT OF THE ASSESSEE ITSELF. INTERNATIONAL TRANSFER PRICING METHODOLOGY DOES NOT REJECT AN INTERNAL TNM METHOD OR STIPULATE THAT TNMM BASED CO ULD BE BASED ONLY ON EXTERNAL COMPARABLES. IN A NUTSHE LL, THE VIEW TAKEN BY THE LOWER AUTHORITIES THAT TNMM COULD NOT BE ADOPTED ON INTERNAL ANALYSIS, CANNOT BE ACCEPTED. 13. THIS LEAVES WITH THE QUESTION OF APPLICATION OF SAFE HARBOUR RULES, AND TO WHAT EXTENT IT CAN BE DONE HE RE. PROVISO TO SECTION 92C(2) OF THE ACT, AS IT STOOD T HEN, READ AS UNDER:- PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM' S LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A ITA NO. 1927/15 :- 13 -: PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PER CENT OF SUCH ARITHMETICAL MEAN. 14. NO DOUBT, ONCE THE EXTERNAL COMPARABLE TAKEN BY TPO IS REJECTED, ONLY ONE PRICE REMAINS FOR COMPARI SON, HERE. QUESTION THEN IS WHETHER THE PROVISO CAN BE APPLIED AT ALL. THE PROVISO REQUIRES THAT MORE THAN ONE PR ICE IS DETERMINED. IN OTHER WORDS, UNLESS MORE THAN ONE P RICE IS DETERMINED, SAFE HARBOUR RULE OF + 5% CANNOT BE APPLIED. THIS IS THE PLAIN MEANING OF THE ABOVE PROVISO. PR OVISO DOES NOT GIVE ANY ROOM FOR INTERPRETATION BY INTEND MENT. HERE, NO DOUBT, ASSESSEE BY APPLYING TNM METHOD BAS ED ON INTERNAL COMPARABLE, HAD COME TO A PLI OF 4.4%. AS AGAINST THIS, THE TPO ADOPTING AN EXTERNAL COMPARAB LE, HAD COME TO A PLI OF 5.38%, AS IT IS CLEAR FROM HER REC TIFICATION ORDER DATED 18.4.2012. WE HAVE ALREADY HELD THAT ASSESSEE WAS JUSTIFIED IN FOLLOWING INTERNAL TNM ME THOD FOR JUSTIFYING THE VALUE OF ITS INTERNATIONAL TRANSACTI ON. SINCE ASSESSEES CLAIM THAT TNM METHOD BASED ON INTERNAL COMPARABLE HAS TO BE ADOPTED, IS ACCEPTED, THERE IS ONLY ONE PRICE THAT CAN BE DETERMINED. AS MENTIONED BY US, ONLY ONE PRICE IS THERE, THERE CAN BE NO APPLICATION OF THE ABOVE PROVISO AT ALL. ADMITTEDLY, THE PLI FOR AE TRANSAC TION WAS 3.91% ONLY AS PER ASSESSEES OWN WORKING, AGAINST 4 .4% FOR NON-AE TRANSACTIONS. THUS BY ADOPTING 4.4% AS THE COMPARABLE PLI, THE EXPECTED OPERATING PROFIT ON OP ERATING COST OF ` 22,52,92,028 WILL BE ` 99,12,849/-. THE OPERATING PROFIT SHOWN BY THE COMPANY IS ` 88,61,863/-. SO, THE UPWARD REVISION THAT CAN BE MADE BY ADOPTING ALP WI LL BE ` 10,50,986.23. A.O. IS DIRECTED TO CONSIDER THIS AM OUNT AS THE UPWARD ADJUSTMENT NECESSARY ON ACCOUNT OF FIXAT ION OF ALP. ORDERED ACCORDINGLY. 5. AS THE FACTS ARE SIMILAR IN THE ASSESSMENT YEAR UND ER CONSIDERATION, IN VIEW OF THE ABOVE ORDER OF THE TR IBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07, WE CONFIRM ITA NO. 1927/15 :- 14 -: THE ORDER OF THE CIT(A) AND DISMISS THE GROUNDS R AISED BY THE REVENUE. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMIS SED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH DECEMBER, 2015, AT CHENNAI. SD/- SD/- ( ! ' ! # . $ ) ( DUVVURU RL REDDY ) & / JUDICIAL MEMBER ( ) ( CHANDRA POOJARI ) / ACCOUNTANT MEMBER !' / CHENNAI #$ / DATED: 28 TH DECEMBER, 2015 RD $%&& '(&)( / COPY TO: & 1 . / APPELLANT 4. & * / CIT 2. / RESPONDENT 5. (+,& - / DR 3. & *&./ / CIT(A) 6. ,0&1 / GF