M/s. Caterpillar India Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 204/CHNY/2012

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4932 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 12-01-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 02-02-2012
• Court: TRIBUNAL
• Department Lawyers: MILIND MADHUKAR BHUSARI
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Depreciation; Transfer pricing; International transaction; Unabsorbed depreciation; Capital expenditure
• Section: 115JB; 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . ' # , $ #% BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER . / ITA NOS. 204 & 365/MDS/2012 / ASSESSMENT YEAR : 2007-08 M/S. CATERPILLAR INDIA PVT. LTD ., 7 TH FLOOR, INTERNATIONAL TECH PARK, TARAMANI ROAD, TARAMANI, CHENNAI 600 113. PAN AABCC4615K ( /APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-I, VELLORE. RESPONDENT) / APPELLANT BY : SHRI K.R.VASUDEVAN, ADVOCATE / RESPONDENT BY : SHRI MILIND MADHUKAR BHUSARI, CIT ! / DATE OF HEARING : 12.01.2017 '# ! / DATE OF PRONOUNCEMENT : 05.04.2017 & / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE TWO APPEALS IN ITA NO.204/MDS./12 & ITA NO.365/MDS/12 BY THE ASSESSEE ARE DIRECTED AGAINST THE ASSESSMENT ORDER DATED 28.10.2011 PASSED U/S.143(3) - - ITA 204 & 365/12 2 R.W.S.144C(13) OF THE ACT CONSEQUENT TO THE DIRECT IONS OF THE DRP PASSED U/S.144C R.W.S. 144C(8) OF THE ACT ON 2 8.9.2011 & SUPPLEMENTARY DIRECTION U/S.144C(5) R.W.RULE 13 OF IT(DRP) RULES, 2009 DATED 05.12.2011 RESPECTIVELY FOR THE S AME ASSESSMENT YEAR 2007-08. SINCE ISSUES INVOLVED IN THESE TWO ASSESSEES APPEALS ARE COMMON IN NATURE, THESE APPE ALS ARE CLUBBED TOGETHER, HEARD TOGETHER, DISPOSED OFF BY T HIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.204/MDS./12 (ASSESSEES APPEAL: A.Y 2007-08) 2. AT THE TIME OF HEARING, THE LD. AR HAS NOT PRES SED THIS APPEAL, AS IT IS A REPEATED APPEAL FOR THE SAME ASS ESSMENT YEAR. ACCORDINGLY, THIS APPEAL STANDS DISMISSED, AS NOT P RESSED. 3. NOW, WE TAKE UP ITA NO.365/MDS./12 TRANSFER PRICING RELATED ISUSES :- 4. THE FACTS OF THE CASE ARE THAT CATERPILLAR INDIA PRIVATE LIMITED (CIPL) INCORPORATED IN 2000, IS A WHOLLY- OWNED SUBSIDIARY OF CATERPILLAR COMMERCIAL SA, BELGIUM WH ICH IS ULTIMATELY HELD BY CATERPILLAR INC. USA. CIPL IS PR IMARILY ENGAGED IN MANUFACTURING AND SALE OF EARTHMOVING MACHINERY INCLUDING - - ITA 204 & 365/12 3 EXCAVATORS, BULLDOZERS, DUMPERS AND LOADERS, AND SP ARES FOR THE SAME. AS A PART OF ITS EXPANSION PLANS IN INDIA, CI PL HAS ACQUIRED EARTHMOVING EQUIPMENT DIVISION OF HINDUSTA N MOTORS LIMITED DURING 2001. THE APPELLANT IS ALSO ENGAGED IN FOLLOWING OTHER SERVICES TO ITS ASSOCIATED ENTERPRISES (AES ): PROVISION OF SERVICES ('EDC SEGMENT'); AND PROVISION OF ASIA-PACIFIC SHARED SERVICES ('APSS') I.E. ROUTINE BACK OFFICE ACCOUNTING AND FINANCE RELATED SERVICES TO CATERPILLAR GROUP COMPANIES. 4.1 DURING THE FINANCIAL YEAR 2006-07, CIPL HAD ENT ERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS A SSOCIATED ENTERPRISES AND ARE PROVIDED IN THE TABLE BELOW: SEGMENT INTERNATIONAL TRANSACTIONS METHODOLOGY ADOPTED VALUE(INR) SALE OF COMPONENTS AND PARTS TNMM 907,554,401 BUSINESS MANAGEMENT SUPPORT SERVICE(BMSS) CHARGES RECEIVED TNMM 38,665,486 MANUFACTURING SEGMENT PURCHASE OF ASSEMBLIES, SUB-ASSEMBLIES REPLACE- MENT PART TNMM 2,535,934,428 PAYMENT OF ROYALTY TNMM 86,790,005 BUSINESS MANAGEMENT SUPPORT SERVICE CHARGES PAID TNMM 48,766,455 COST OF FIXED ASSETS TNMM 480,387 SOFTWARE SERVICES RELATED TO EDC SEGMENT PROVISION OF SERVICES TNMM 773,205,110 INFORMATION TECHNOLOGY ENABLED SERVICES IN RES- PECT OF APSS SEGMENT GENERAL ACCOUNTING, FINANCE AND TAX RELATED SERVICES TNMM 16,096,220 INTEREST PAID ON EXTERNAL COMMERCIAL BORROWINGS (ECB) INTEREST PAID ON EXTERNAL COMMERCIAL BORROWINGS (ECB) CUP 4,131,888 - - ITA 204 & 365/12 4 REIMBURSEMENT OF EXPENSES PAID CIPL HAS PAID CERTAIN EXPENSES TO ITS AES FOR INCURRING EXPENSES ON ITS BEHALF ON A COST-TO- COST BASIS TNMM 249,493,126 REIMBURSEMENT OF EXPENSES RECEIVED CIPL INCURS CERTAIN TRAVEL AND RELATED EXPENSE ON BEHALF OF THE ASSOCIATED ENTERPRISE AND SAME IS RECOVERED WITHOUT ANY MARK-UP TNMM 16,397,280 THE TPO HAS MADE THE FOLLOWING ADJUSTMENTS. S.NO PARTICULARS AMOUNT(INR) 1 ADJUSTMENT IN RESPECT TO MANUFACTURING SEGMENT 11 0,03,69,250 2 ADJUSTMENT IN RESPECT TO EDC SEGMENT 5,43,20, 818 3 ADJUSTMENT IN RESPECT TO APSS SEGMENT 28,9 0,897 4 ADJUSTMENT IN RESPECT TO REIMBURSEMENT OF EXPENSES 3,27,946 TOTAL 115,79,08,911 THE DRP CONFIRMED THE SAME. AGGRIEVED, THE ASSESSE E IS IN APPEAL BEFORE US. 5. THE FIRST GROUND IN ITA NO.365/MDS/2012 IS WITH REGARD TO INTERNAL TNMM TO BE CONSIDERED OVER EXTER NAL TNMM AS THE MOST APPROPRIATE METHOD. 6. THE LD. AR ARGUED THAT T HE NON-CAT SEGMENT, WHICH COMPRISING OF PRODUCTS OF ERSTWHILE HINDUSTAN MOTOR S LIMITED, WHOSE FUNCTIONS, ASSETS AND RISKS ARE BROADLY COMPA RABLE TO THE CAT SEGMENT WAS IDENTIFIED AS A COMPARABLE SEGMENT FOR DETERMINATION OF ARMS LENGTH PRICE. THE LD. AR, S UBMITTED THAT - - ITA 204 & 365/12 5 THERE IS A BROAD FUNCTIONAL SIMILARITY BETWEEN THE CAT AND THE NON CAT SEGMENT AND THEREFORE, INTERNAL COMPARABILI TY HAS RELIABLY UNDERTAKEN TO DETERMINE THE ARMS LENGTH N ATURE OF THE INTERNATIONAL TRANSACTIONS IN THE MANUFACTURING SEG MENT (CAT SEGMENT) OF THE ASSESSEE. THE LD. AR FURTHER SUBM ITTED FEW ILLUSTRATIVE POINTS TO PROVE THAT THE CAT AND THE NON CAT SEGMENT ARE BROADLY FUNCTIONALLY COMPARABLE AND THA T INTERNAL COMPARABILITY IS BEST SUITED IN THE INSTANT CASE, W HICH IS AS UNDER: BOTH CAT AND NON-CAT SEGMENT ARE ENGAGED IN MANUFA CTURING AND SALE OF HEAVY EARTH MOVING EQUIPMENT. BOTH CAT AND NON-CAT CATEGORY HAVE BROAD SIMILARIT Y IN THE FUNCTIONS PERFORMED, RISKS ASSUMED AND ASSETS EMPLO YED. THE SALES OF THE CAT AND NON-CAT SEGMENT ARE 58% A ND 42% RESPECTIVELY OF THE TOTAL MANUFACTURING SALES OF TH E APPELLANT. THIS GOES TO DEMONSTRATE THAT BOTH SEGMENTS HAVE AL MOST EQUAL VOLUME OF SALES AND THEREFORE, THE COMPARABIL ITY ANALYSIS ON A COMPARISON OF THE TWO SEGMENTS WOULD NOT GIVE A DISTORTED PICTURE. BOTH CAT AND NON-CAT SEGMENT SELLS ITS PRODUCTS IN INDIA HAVING SAME MARKET, GEOGRAPHIC LOCATION, MARKET SIZ E, SAME GOVERNMENT REGULATIONS, SAME COST OF LABOUR AND CAP ITAL IN THE MARKET, OVERALL ECONOMIC DEVELOPMENT, LEVEL OF COMP ETITION ETC. - - ITA 204 & 365/12 6 6.1 THE LD. AR FURTHER SUBMITTED THAT THE ASSESSEE HAS APPLIED TNMM AS THE MOST APPROPRIATE METHOD WHICH E LIMINATES THE FUNCTIONAL DIFFERENCES WHICH EXISTS BETWEEN CON TROLLED AND UNCONTROLLED TRANSACTION, IF ANY. THEREFORE, INTERN AL COMPARABILITY BETWEEN CAT AND NON-CAT SEGMENT HAS TO BE CONSIDERE D AS MOST APPROPRIATE METHODOLOGY TO EVALUATE OF THE ARM S LENGTH NATURE OF INTERNATIONAL TRANSACTIONS PERTAINING TO MANUFACTURING SEGMENT. THE ARGUMENT OF THE LD. AR, THAT INTERNA L COMPARABILITY IS A BETTER INDICATOR OF COMPARABILITY AGAINST EXTE RNAL COMPARABILITY ALSO FINDS SUPPORT IN THE INDIAN TRAN SFER PRICING REGULATIONS AND ALSO THE OECD TRANSFER PRICING GUID ELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS ( OECD GUIDELINES). HE SUBMITTED THAT THE TPO REJECTED THE INTERNAL TNMM ON THE FOLLOWING REASONS FOR WHICH, HE PUT COU NTER ARGUMENTS : A. CAT AND NON-CAT SEGMENTATION IS NOT RELIABLE ONE OF THE REASONS PROVIDED BY THE TPO FOR REJECTIO N OF INTERNAL TNMM IS THAT THE SEGMENTAL DATA PROVIDED BY THE CIP L IS NOT RELIABLE TO FACILITATE THE INTERNAL COMPARABILITY A NALYSIS. IN THIS CONNECTION, THE AR SUBMITTED AS FOLLOWS: - - ITA 204 & 365/12 7 MOST OF THE EXPENDITURES IN THE SEGMENTAL ARE IDENT IFIED ON ACTUAL BASIS FOR RESPECTIVE SEGMENT. THE BROAD SUMMARY IS PROVIDED IN THE TABLE BELOW. BASIS OF ALLOCATION OF COST AMONG CAT AND NON-CAT C ATEGORIES: SL NO PARTICULARS ALLOCATION KEY % OF OPERATIN G COST REMARKS 1 2 3 4 1 RAW MATERIALS ACTUALS 67% THE COMPANY HAS SYSTEM IN PLACE TO IDENTIFY AND CAPTURE RAW MATERIAL PERTAINING TO BOTH CAT AND NON-CAT SEGMENT ON THE ACTUAL BASIS THROUGH PRODUCTION ORDERS. THIS IS DUE TO THE FACT THAT CIPL HAS SEPARATE PRODUCTION LINE FOR BOTH CAT AND NON CAT SEGMENT AND THIS FACILITATE TO CAPTURE THE RAW MATERIAL COST OF RESPECTIVE SEGMENTS. 2 ROYALTY AND OTHER SELLING EXPENSES ACTUALS 7% THE ROYALTY PAID BY CIPL IS IN RELATION TO PRODUCTS MANUFACTURED USING CAT TECHNOLOGY AND HENCE ENTIRE PAYMENT PERTAINS TO CAT SEGMENT. OTHER SELLING EXPENSES REPRESENTS PAYMENT TO DEALERS, COMMISSION TO AGENTS, WARRANTY CHARGES PAID, SALES PROMOTION EXPENSES ETC - FOR WHICH RESPECTIVE SEGMENTAL COST ARE IDENTIFIED AND REFLECTED IN THE SEGMENTAL. 3 EMPLOYEE COST ACTUALS (ACTUAL HOURS SPENT) 9% APPROPRIATE SYSTEMS ARE IN PLACE TO TRACK THE TIME SPENT ON EACH OF THE SEGMENT. EMPLOYEE COSTS ARE IDENTIFIED AND CAPTURED TO THE CAT AND NON-CAT PRODUCTS BASED ON THE RESPECTIVE PRODUCTION ORDER ROUTINGS. - - ITA 204 & 365/12 8 4 SALES TAX AND EXCISE DUTY ACTUALS 10% THE SALES TAX AND EXCISE DUTY PAID BY CIPL ARE LEVIED AND IDENTIFIED TO SPECIFIC CAT AND NON-CAT PRODUCTS. 5 SALE SALES 7% TURNOVER HAS BEEN CONSIDERED AS A BASIS ALLOCATE THE COST TOTAL 100% 6.2 HE SUBMITTED THAT 93% OF THE TOTAL OPERATING CO STS ARE ON ACTUAL BASIS AND MERE 7% OF THE TOTAL OPERATING COST WHICH REPRESENT OTHER EXPENSES HAVE BEEN ALLOCATED BASED ON THE TURNOVER WHICH IS A FAIR BASIS FOR ALLOCATION AND NOT BASED ON ESTIMATES AS THE LD. TPO HAS MENTIONED IN THE TP ORDER. 6.3 ACCORDING TO A.R, THESE DETAILS WERE NOT BEEN C ONSIDERED BY THE LD TPO DESPITE MAKING AVAILABLE AT THE TIME OF ASSESSMENT PROCEEDINGS AND HE DREW OUR ATTENTION C ONCERNED DETAILS IN PAPER BOOK SPECIFICALLY BOOK 3 PAGE 36 0-361 AND PAGE NO 16- 17 OF SUBMISSION BEFORE TPO DATED OCT 2 2, 2010. ACCORDING TO HIM THE LD. TPO HAS MERELY PRESUMED TH AT THE ALLOCATION ARE BASED ON ESTIMATES AND THEREFORE NOT RELIABLE FOR UNDERTAKING INTERNAL COMPARABILITY ANALYSIS. 6.4 FURTHER, HE DREW OUR ATTENTION TO THE COST ACCOUNTANT CERTIFICATION DATED OCTOBER 18, 2007 PLACED AT PAPE R - - ITA 204 & 365/12 9 BOOK 5- PAGE 936-938 VIDE SUBMISSION TO TPO DATED JUNE 10, 2010 WHEREIN STATED THAT THE SEGMENTAL INFORMATION (WHICH ALSO PROVIDES BIFURCATION BETWEE N CAT AND NON-CAT HAS BEEN PREPARED BASED ON PRUDENT AND GENERALLY ACCEPTED COST ACCOUNTING PRINCIPLES A ND CONFIRMING THE AUDITING OF SUCH WORKINGS BY THE COS T ACCOUNTANT. HOWEVER, THE LD. TPO HAS CONVENIENTLY IGNORED THE COST ACCOUNTANT CERTIFICATION RELATING TO SEGME NTAL WORKINGS AND CONCLUDED THAT SEGMENTAL INFORMATION IS NOT REL IABLE FOR INTERNAL COMPARABILITY ANALYSIS. 6.5 BASED ON THE ABOVE, HE SUBMITTED THAT THE SEGME NTAL INFORMATION PROVIDING THE BIFURCATION BETWEEN CAT A ND NON-CAT SEGMENT IS ROBUST AND RELIABLE DATA FOR UNDERTAKING THE INTERNAL TNMM ANALYSIS. 7. ACCORDING TO HIM, WHILE REJECTING THE INTERNAL TNMM, THE LD. TPO HAS PRESUMED FACTS AND PROVIDED CERTAIN SUB JECTIVE CONCLUSIONS AND REJECTED IN THE INTERNAL COMPARABILITY ANALYSIS UNDERTAKEN BY THE APPELLANT. - - ITA 204 & 365/12 10 8. THE DR RELIED ON THE ORDER OF THE LOWER AUTHORIT IES. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. WE ARE OF THE OPINION THAT THE DRP/TPO WAS RIGHT IN REJECTING THE USE OF INTERNAL TNMM, BY GIVING A CLE AR FINDING THAT THE NON-CAT CATEGORY IS NOT COMPARABLE TO THE CAT C ATEGORY OF THE MANUFACTURING SEGMENT. THE ESSENTIAL CRUX OF T HE TPOS ARGUMENT IS THAT THE CAT CATEGORY AND NON-CAT CATEG ORY ARE NOT COMPARABLE BUT IN SEPARABLE. THE FINE DISTINCT ION BETWEEN THE TWO HAS BEEN WELL BROUGHT BY THE TPO, IN THE OR DER. THE DIFFERENCE BETWEEN THE TWO MAY BE SUBTLE BUT IS OF SUBSTANTIAL IMPORT. THAT IS WHAT THE TPO HAS SUCCESSFULLY ARGU ED. THE TPO OBSERVED THAT WHILE THE CAT CATEGORY AND NON-CAT CA TEGORY ARE NOT COMPARABLE TO BE USED AS INTERNAL TNMM, BOTH TH E CATEGORIES ARE TO BE SEGREGATED. THE ASSESSEE DOES NOT APPEAR TO HAVE APPRECIATED THE DIFFERENCE BETWEEN THE TWO, BROUGHT OUT BY THE TPO. 9.1 IT WAS ALSO NOTED THAT THERE IS SUBSTANTIAL MER IT IN THE REASONS GIVEN BY THE TPO FOR REJECTING THE COMPARAB ILITY OF THE CAT CATEGORY AND NON-CAT CATEGORY, AS DISCUSSED BEL OW: - - ITA 204 & 365/12 11 (I) THE TECHNOLOGY OF THE TWO CATEGORIES IS ENTIREL Y DIFFERENT. WHILE NON-CAT CATEGORY USES THE OLD HM TECHNOLOGY, CAT CATEGORY USES THE MODERN TECHNOLOGY OF CATERPILLAR GROUP. EVEN THE TYPES OF MACHINES IN BOTH THE CATEGORIES A RE DIFFERENT WITH DIFFERENT SPECIFICATIONS. THE ASSES SEES STAND ON THIS POINT THAT BOTH THE TECHNOLOGIES ARE SAME A ND NEITHER OF THEM IS OLD NOR NEW HAS NO MERIT. THAT THE AGE OF THE MACHINERIES IN THE NON-CAT CATEGORY IS MUCH OLD ER AS COMPARED TO THE CAT CATEGORY IS A FACT, NOT REFUTED BY THE ASSESSEE ITSELF. SO, THE RISK PROFILE BETWEEN THE TWO CATEGORIES HAS TO BE DIFFERENT. (II) THERE WERE PRE EXISTING MARKETING ARRANGEMENTS OF THE NON CAT CATEGORY WHEREAS THE CAT CATEGORY IS A WELL KNO WN GLOBAL BRAND. HENCE, THE DISPARITY IN MARKETING EF FORTS BETWEEN THE TWO CATEGORIES CANNOT BE LOST SIGHT OF. THE ASSESSEES STAND THAT CATERPILLAR COMMERCIAL PRIVAT E LIMITED HAS BEEN PROVIDING MARKETING SUPPORT TO BOT H THE CATEGORIES DOES NOT, IN ANY WAY, EXPLAIN THE POINT RAISED BY THE TPO. THAT THERE WILL BE SUBSTANTIAL DISPARITY IN THE MARKETING EFFORTS AND SUCH DISPARITY MAKES THE TWO - - ITA 204 & 365/12 12 CATEGORIES INCOMPARABLE IS AN INEVITABLE CONCLUSION . (III) HM BRAND ON THE NON CAT CATEGORY DOES NOT GEN ERATE A MODERN IMAGE AS COMPARED TO THE CAT BRAND. THE ASSESSEES STAND THAT THE 2021 MODEL OF THE NON C AT CATEGORY ENJOYED MORE MARKET SHARE AND THEREFORE TH E BRAND IMAGE OF NON CAT DOES NOT IMPEDE PARTICULAR PRODUCT DEPENDS ON SEVERAL FACTORS, INCLUDING LONGE VITY OF THE PRODUCT, BRAND LOYALTY ETC. IT NEED NOT HAVE A NY DIRECT RELATIONSHIP WITH BRAND IMAGE, WHICH IS THE POINT M ADE BY THE TPO. THAT CAT CATEGORY ENJOYS THE BRAND IMAGE OF THE CAT BRAND, WHICH THE NON-CAT CATEGORY LACKS MAKES T HE TWO CATEGORIES INCOMPARABLE. (IV) THAT THE TWO BRANDS ARE QUALITATIVELY DIFFEREN T IS FAIRLY OBVIOUS. THE NON-CAT CATEGORY HAS NO INFUSION OF MODERNIZATION EFFORTS, WHEREAS CAT CATEGORY GETS CONTINUOUS EFFORTS FOR ADAPTING AND DEVELOPING THE PRODUCTS. WHILE ROYALTY PAID FOR TECHNICAL KNOW-HOW FOR CAT C ATEGORY. IT IS PERTINENT TO NOTE THAT THE NON CAT BRAND HAD A DIFFERENT SET OF CUSTOMERS WITH BRAND ROYALTY AND THE LATEST TECHNOLOGY OF THE CAT BRAND IS IMMATERIAL AND HENCE WOULD - - ITA 204 & 365/12 13 NOT MAKE ANY DIFFERENCE TO THE MARKET SHARE OF THE NON CAT BRAND. THE BRANDS THEREFORE ARE DIFFERENT AND CANNOT BE COMPARED. THE ASSESSEES OBJECTION IS THAT SINC E NO MODIFICATION EFFORTS ARE MADE FOR THE NON CAT CATEG ORY, THEREFORE NO ROYALTY IS PAID UNDER THIS CATEGORY. ALSO, THERE HAS BEEN UP-GRADATION OF TECHNOLOGY, LIKE FOR EXAMP LE, 1035 SPRINKLER. BUT, THE AVERMENT IS NOT VALID A S THIS UPGRADATION IS NOT SIMILAR TO THAT OF A 777 OR 773 AND THE TECHNOLOGICAL SUPERIORITY OF THE CATEGORIES OF PROD UCTS. (V) THE PROCESS OF MATERIAL ACQUISITION FOR CAT AN D NON- CAT IS TOTALLY DIFFERENT. WHILE THE MATERIALS ARE PROCURED LOCALLY FOR NON CAT CATEGORY, CAT CATEGORIES ARE PROPRIETARY PRODUCTS AND HOLDS WARRANTY. THE ASSES SEE CONTENDS THAT FOR THE CAT CATEGORY, LOCALIZATION E FFORTS ARE BEING MADE. THIS DOES NOT NEGATE THE FACT THAT THE PROCUREMENT PROCESS IS VERY DIFFERENT AND MOST OF T HE RAW MATERIAL ARE STILL BEING IMPORTED. (VI) NON CAT CATEGORY HAS HIGHER MARKET RISK THAN T HE CAT CATEGORY WHICH OWNS A BRAND. THE ASSESSEE CONTENDS THAT MERELY BECAUSE CAT IS WIDELY KNOWN BRAND, IT DOES N OT - - ITA 204 & 365/12 14 INCREASE THE MARKET RISK OF NON-CAT CATEGORY. FURT HER THE ASSESSEE MENTIONS THAT THE HM BRAND HAS CONTINUED I TS LEGACY AND LIKE IN THE CASE OF THE COCA COLA COMPAN Y ACQUIRING THE THUMPS UP BRAND DID NOT CHANGE THE BR AND NAME. IT IS PERTINENT TO NOTE HERE THAT THE CAT BR AND IN THAT SENSE HOLDS MORE BRAND VALUE THAN THE HM CATEGORY. FURTHER THE DYNAMICS OF THIS INDUSTRY OF HEAVY EART HMOVING MACHINERY CANNOT BE COMPARED WITH THAT OF THE COMMO DITY LIKE A BEVERAGE. THE FACT REMAINS THAT THERE IS A BIG DIFFERENCE IN MARKET RISK BETWEEN THE TWO CATEGORIE S. (VII) THE NON CAT CATEGORY IS EXPOSED TO MORE TECHN OLOGICAL RISK AS COMPARED TO THE CAT CATEGORY. THE ASSESSEE S ARGUMENT IN THIS CASE IS THAT 1035 SPRINKLER IS AN EXAMPLE OF IMPROVEMENTS MADE IN THE TECHNOLOGY OF THE NON CAT CATEGORY. AGAIN HERE THE SAME ARGUMENT HOLDS TRUE THAT THIS PRODUCT CANNOT BE COMPARED TO THE COMPLEXITY O F THE TECHNOLOGY OF THE 777 AND 773 OR THE LOCALIZATION E FFORTS MADE CANNOT BE COMPARED TO THE SIGNIFICANT TECHNOLO GICAL IMPROVEMENTS. ALSO, IMPROVEMENTS CAN MITIGATE OBSOLESCENCE BUT DOES NOT REDUCE TECHNOLOGY RISK. - - ITA 204 & 365/12 15 (VIII) R & D EFFORTS DO NOT HAVE MUCH SCOPE IN THE CASE OF THE NON CAT CATEGORY WHEREAS CONTINUOUS R & D EFFORTS A RE BEING MADE BY THE CATERPILLAR GROUP COMPANIES IN CA SE OF THE CAT CATEGORY. THE LD. AR ARGUMENTS OF IMPROVEM ENTS BEING DONE TO THE NON CAT CATEGORY PRODUCTS HAVE NO MERIT AS SUCH EFFORTS CANNOT BE COMPARED TO THE EFF ORTS MADE BY THE CATERPILLAR GROUP COMPANIES FOR PRODUCT IMPROVEMENT UNDER THE CAT CATEGORY WORLDWIDE. (IX) CAT CATEGORY IS EXPOSED TO EXCHANGE FLUCTUATIO NS AND NOT THE NON CAT CATEGORY. THE A.R ARGUED THAT LOCALIZA TION EFFORTS ARE BEING MADE TO REDUCE IMPORTS UNDER THE CAT CATEGORY. HOWEVER IT MAY BE NOTED HERE THAT THE LOCALIZATION EFFORTS ARE YET TO BE FULLY REALIZED A ND MOST OF THE RAW MATERIALS ARE STILL IMPORTED SINCE THEY ARE OF PROPRIETARY NATURE UNDER THE CAT CATEGORY. THE RIS K PROFILE DUE TO THIS RISK EXISTS. 10. IN VIEW OF ALL THE ABOVE FACTORS, WE ARE OF THE OPINION THAT THE NON CAT CATEGORY IS NOT COMPARABL E WITH THE CAT CATEGORY AND HENCE CANNOT BE USED FOR COMPARISO N, AS AN INTERNAL TNMM. THE ASSESSEES CONTENTION THAT THE T NMM DOES - - ITA 204 & 365/12 16 NOT MANDATE STRICT COMPARABILITY IS OF NO CONSEQUEN CE. THERE IS NOT EVEN BROAD COMPARABILITY BETWEEN THESE TWO CATE GORIES. COMPARABILITY IS A SINE QUO NON FOR ANY METHOD. TH EREFORE, WE AGREES WITH THE FINDINGS OF DRP AS WELL AS TPO THA T THESE TWO CATEGORIES ARE NOT COMPARABLE. HENCE, THIS OBJECTI ON OF THE ASSESSEE IS REJECTED. 11. THE NEXT ISSUE IN THIS APPEAL IS WITH REGARD TO RE- COMPUTATION OF MARGIN BY EXCLUDING CERTAIN ITEMS TH AT ARE OPERATING IN NATURE LIKE: (I) BMSS SERVICE INCOME RECEIVED PERTAINING TO MANUFACTURING SEGMENT AT . 11.49 CRORES (II) INTEREST ON CUSTOMERS OVERDUE DEPOSIT ( 0.28 CRORES) (III) MARKET PROMOTION FEES ( 0.31 CRORES); (IV) LIABILITIES NO LONGER REQUIRED WRITTEN BACK ( 1.12 CRORES) AND (V) OTHERS ( 0.12 CRORES). 12. THE LD. AR SUBMITTED THAT IT WAS EXCLUDED AN AMOUNT 11.49 CRORES DERIVED FROM BMSS. THE ASSESSEE HAS CALLED IT THE OPERATING INCOME WHICH IS INTEGRA L PART OF THE MANUFACTURING OPERATIONS AND CLAIMED THAT THE S ERVICES ARE ACTUALLY RENDERED BY THE EMPLOYEES OF THE THIRU VALLUR - - ITA 204 & 365/12 17 FACTORY. THEY DO NOT BELONG TO THE EDC AND APSS SEGMENTS. 12.1 DURING THE FINANCIAL YEAR 2006-07, THE ASSESSE E HAS SHOWN RECEIPT AS WELL AS THE PAYMENT TOWARDS THE BU SINESS MANAGEMENT SUPPORT SERVICES (BMSS) RECEIVED FROM AN D RENDERED TO THE GROUP COMPANIES. ASSESSEE SUBMITTE D THAT THERE ARE VARIOUS GENERAL MANAGEMENT AND ADMINISTRATIVE SUPPORT SERVICES PROVIDED TO THE GRO UP COMPANIES. ASSESSEE HAS FURTHER SUBMITTED THAT THE SE SERVICES ARE DELIVERED THROUGH MANUFACTURING PLANT LOCATED AT THIRUVALLUR IN INDIA. ALSO, COSTS INCURRED IN R ENDERING SUCH SERVICES ARE CAPTURED AS PART OF OPERATING EXP ENSES OF THE MANUFACTURING SEGMENT E.G. EMPLOYEE COST, PO WER AND FUEL, RENT, HIGHER CHARGES ETC. THESE SERVICES ARE NOT PROVIDED THROUGH THE SERVICE DIVISION (EDC AND APSS ) AND HENCE NEITHER ANY RECEIPT NOR ANY COSTS ARE SITTING IN THE SERVICE DIVISIONS. 12.2 IT WAS THE CONTENTION OF THE AR THAT IT IS NE CESSARY TO VISUALIZE FOR ANALYZING THE NATURE OF BMSS CHARGES RECEIVED. IT IS PERTINENT TO NOTE IN THIS REGARD T HAT - - ITA 204 & 365/12 18 MANUFACTURING PLANT IS ENGAGED IN THE BUSINESS OF MANUFACTURING THE EARTH MOVING MACHINES. CAN THE MANUFACTURING PLANT BE VISUALIZED AS HAVING EXPERTI SE IN GENERAL MANAGEMENT AND ADMINISTRATIVE SUPPORT SERVI CES? ACCORDING TO THE TPO, IT IS NOT HAVING EXPERTISE IN GENERAL MANAGEMENT AND SUPPORT SERVICES. THE ASSESSEE HAS ONE SPECIALIZED DIVISION KNOWN AS EDC DIVISION, WHICH I S LOCATED AT RMZ BUILDING TARAMANI, CHENNAI AND IS A SEPARATE DIVISION REGISTERED AS STP UNIT AND ENJOYI NG HOLIDAY UNDER SECTION 10A OF THE ACT. THIS UNIT PR OVIDES BMSS TO THE GROUP COMPANIES. THEREFORE, ON ONE HAN D ASSESSEE HAS ONE DIVISION CALLED EDC DIVISION, WHIC H IS REGISTERED AS STP UNIT, AND WHICH HAS EMPLOYEES WHO ARE EXPERT IN PROVIDING EDC. SAME TECHNICAL WORK HAS B EEN PROVIDED BY THE MANUFACTURING PLANT, BY EMPLOYEES N OT HAVING EXPERTISE IN ENGINEERING DESIGN SERVICES. 12.3 THE TPO OBSERVED THAT EVEN IF IT IS ACCEPTED T HAT THE SAME EMPLOYEES WHO ARE ENGAGED IN MANUFACTURING PLA NT HAVE RENDERED BMSS AND IT RESULTED IN RECEIPTS FOR 11.49 CRORES, STILL THE ISSUE REMAINS PENDING TO BE DECID ED IS AS TO - - ITA 204 & 365/12 19 WHETHER OR NOT AMOUNT OF 11.49 CRORES CAN BE TREATED AS OPERATING INCOME FROM MANUFACTURING ACTIVITY OR IT SHOULD BE EXCLUDED TREATING THE SAME AS INCOME FROM OTHER SOU RCES. ACCORDING TO THE TPO, THIS AMOUNT IS NOT ATTRIBUTAB LE TO MANUFACTURING ACTIVITY. IT HAS BEEN RECEIVED ON AC COUNT OF RENDERING BUSINESS MANAGEMENT SUPPORT SERVICES. IN PARA 2.2.1 OF THE TP DOCUMENTS THE ANALYSES OF BMSS CHARGES RECEIVED HAS BEEN SUMMARISED. AS PER SUMMA RY BMSS CHARGES HAVE BEEN CATEGORIZED AS ITES. IF T HE BMSS ARE ITES IN NATURE, THEN IT SHOULD NOT BE CRED ITED IN THE MANUFACTURING SEGMENT. ASSESSEE HAS EXPLAINED IN ITS REPLY DATED OCT. 22, 2010 THAT COSTS INCURRED IN R ENDERING SUCH SERVICES ARE CAPTURED AS PART OF OPERATING EXP ENSES OF THE MANUFACTURING SEGMENT E.G. EMPLOYEE COST, PO WER AND FUEL, RENT HIGHER CHARGES ETC. THESE SERVICES ARE NOT PROVIDED THROUGH THE SERVICE DIVISION (EDC AND APSS ) AND HENCE NEITHER ANY RECEIPT NOR ANY COSTS ARE SITTING IN THE SERVICE DIVISIONS. ACCORDING TO TPO, IT IS PROPER TO HOLD IN THIS REGARD THAT THE BMSS CHARGES RECEIVED ARE NOT DUE TO MANUFACTURING ACTIVITY CARRIED ON IN THE MANUFACTUR ING PLANT. - - ITA 204 & 365/12 20 THEY ARE IN THE NATURE OF ITES BUT NOT RENDERED BY THE EDC OR APSS DIVISIONS. THEREFORE, THEY ARE EXCLUDED FR OM THE MANUFACTURING DIVISION BUT NOT CONSIDERED IN EDC OR APSS DIVISIONS. 12.4 FURTHER, THE TPO OBSERVED THAT THOUGH THE RECE IPTS OF 11.49 CRORES HAVE BEEN EXCLUDED FROM MANUFACTURING DIVISION, BUT NO EXPENDITURE ATTRIBUTABLE TO THESE RECEIPTS ARE EXCLUDED FROM THE FINANCIALS OF THE MANUFACTURI NG DIVISION. THIS IS BECAUSE COSTS INCURRED IN RENDER ING SUCH SERVICES ARE CAPTURED AS PART OF THE OPERATING EXPE NSES OF THE MANUFACTURING SEGMENT. IN OTHER WORDS, EVEN IF THESE RECEIPT HAD NOT BEEN ARISEN, THE COST WOULD HAVE DE FINITELY BE INCURRED AS THEY CONSTITUTE INSEPARABLE PART OF OPERATING EXPENSES INCURRED DURING THE COURSE OF THE MANUFACT URING ACTIVITY. ACCORDINGLY, THE RECEIPTS OF 11.49 CRORES ARE EXCLUDED FROM THE MANUFACTURING DIVISION. 12.5 ANOTHER OBJECTION RAISED BY THE ASSESSEE PERTA INS TO PROPOSED EXCLUSION IN THE SHOW CAUSE OF CERTAIN NON - OPERATING INCOME ITEMS. ASSESSEE HAS SUBMITTED ON PAGE 21 OF THE REPLY DATED OCT. 22, 2010 THAT FEW ITEMS OF INCOME - - ITA 204 & 365/12 21 PROPOSED TO BE EXCLUDED ARE OPERATING REVENUES. OBJ ECTION ON EACH ITEMS IS AS UNDER : I) INCOME FROM ENGINEERING DESIGN SERVICE ( 78.77 CRORES): ASSESSEE WRITES ON PAGE 21 OF THE REPLY DATED OCT., 22, 2010 THAT THIS INCOME HAS NOT BEEN CONSIDERED UNDER MANUFACTURING SEGMENT. THEREFORE, IN VIEW OF ASSESSEES REPLY THE INCOME FROM ENGINEERING DESIGN SERVICES 78.77 CRORES IS EXCLUDED FROM MANUFACTURING DIVISION. II) PROFIT ON SALE OF ASSETS ( 0.70 CRORES): ASSESSEE AGREES WITH THIS EXCLUSION PROPOSED IN THE SHOW CAUSE. III) INTEREST ON CUSTOMS OVER DUES DEPOSIT ( 0.28 CRORES): IN THIS CONNECTION, THE REASONING GIVEN B Y THE ASSESSEE IS WRONG. ASSESSEE HAS REFERRED TO REVISED OECD TP GUIDELINES. 2.81. IN THOSE CASES WHERE THERE IS A CORRELATION BETWEEN THE CREDIT TERMS AND THE SALES PRICES, IT COULD BE APPROPRIATE TO REFLECT INTEREST INCOME IN RESPECT OF SHORT-TERM WORKING CAPITAL WITHIN THE CALCULATION OF THE NET PROFIT INDICATOR. THE REVISED GUIDELINES QUOTED BY THE ASSESSEE RELATES TO INTEREST INCOME ON SHORT TERM WORKING CAPITAL. AS AGAINST IT WHAT IS PROPOSED TO BE EXCLUDED AS PER SHOW CAUSE IS INTEREST ON CUSTOMS OVER DUES DEPOSIT. THEY ARE TWO DIFFERENT ISSUES AND THEREFORE IT CANNOT BE ALLOWED BASED ON REVISED OECD TP GUIDELINES QUOTED ABOVE. FURTHER, INTEREST ON CUSTOM OVER DUES DEPOSIT IS NOT CONSIDERED OPERATING INCOME AND HENCE EXCLUDED FROM MANUFACTURING DIVISION FOR THE PURPOSE OF CALCULATING PLI IN THE CASE OF THE ASSESSEE. - - ITA 204 & 365/12 22 IV) MARKET PROMOTION FEES: ( 0.31 CRORES); LIABILITY NO MORE REQUIRED ( 1.12 CRORES); OTHERS ( 0.12 CRORES): ASSESSEES SUBMISSION IN THIS REGARD IS NOT ACCEPTED AND HENCE REJECTED. LIABILITIES NO MORE REQUIRED MEANS THAT SERVICES REQUIRED HAVE ALREADY BEEN TAKEN BUT THE LIABILITY RELATED TO THE SERVICE IS NO MORE REQUIRED. WHILE CALCULATING THE PROFIT MARGIN AS PER TP GUIDELINES, FAR ANALYSES ARE MADE. ACCORDINGLY, IF ANY FUNCTION HAS BEEN PERFORMED THEN RECEIPT OR EXPENDITURE RELATED TO THAT FUNCTION MUST BE REFLECTED IN THE PROFIT AND LOSS ACCOUNT. IN TNMM NET PROFIT MARGIN WOULD LEVEL WILL DEPEND ON THE FUNCTIONS PERFORMED. IF T HE LIABILITY NO MORE REQUIRED IS TAKEN INTO CONSIDERAT ION THEN IT IMPLIES THAT FUNCTION WAS PERFORMED FOR THE ASSESSEE BUT ITS PRICE IS NOT CORRECTLY REFLECTED I N THE P&L ACCOUNT. COMPARISON WITH UNCONTROLLED TRANSACTIONS IS MADE IN TERMS OF FUNCTIONS PRESUMING THAT THE PRICE PAID FOR SERVICES TAKEN. THEREFORE, LIABILITY NO MORE REQUIRED IS EXCLUDED FROM THE MANUFACTURING DIVISION WHILE CALCULATING THE PLI AS IT WOULD DISTORT THE COMPARISON. VI) SALES TAX AND EXCISE DUTY : ASSESSEE AGREES THAT THESE ITEMS ARE PART OF OPERATING COST AND NOT OF OPERATING REVENUE. THEREFORE, AS PROPOSED IN THE SHOW CAUSE, EXCISE DUTY AND SALES TAX ARE NOT REDUCED FROM OPERATING REVENUE. INSTEAD THEY ARE ADDED IN THE TOTAL COST OF THE MANUFACTURING DIVISION. 13. BMSS SERVICE INCOME THE ASSESSEES MAIN OBJECTION IS THAT BMSS CHARGES RECEIVED ARE PERTAINING TO THE MANUFACTURING SEGMEN T INVOLVES PURCHASING SERVICES AND SERVICES RELATED T O GLOBAL PRODUCTION, PLANNING AND QUALITY ARE PURELY RELATED TO THE - - ITA 204 & 365/12 23 MANUFACTURING SEGMENT AND SHOULD THEREFORE BE CONSIDERED AS A PART OF THE OPERATING INCOME OF THE ASSESSEE FOR THIS SEGMENT. 13.1 THE CONTENTIONS OF THE TPO IN THIS REGARD AS PROVIDED IN PAGE NUMBER 58 OF HER ORDER ARE REPRODU CED BELOW: THOUGH THE RECEIPTS 11.49 CRORES HAVE BEEN EXCLUDED FROM MANUFACTURING DIVISION, BUT NO EXPENDITURE ATT RIBUTABLE TO THESE RECEIPTS ARE EXCLUDED FROM THE FINANCIALS OF THE MANUFACTURING DIVISION. THIS IS BECAUSE COSTS INCU RRED IN RENDERING SUCH SERVICES ARE CAPTURED AS PART OF THE OPERATING EXPENSES OF THE MANUFACTURING SEGMENT. I N OTHER WORDS, EVEN IF THESE RECEIPTS HAD NOT BEEN ARISE, T HE COST WOULD HAVE DEFINITELY BE INCURRED AS THEY CONSTITUT E INSEPARABLE PART OF OPERATING EXPENSES INCURRED DUR ING THE COURSE OF THE MANUFACTURING ACTIVITY. ACCORDINGLY, AS PROPOSED IN THE SHOW CAUSE, THE RECEIPTS 11.49 CRORES ARE EXCLUDED FROM THE MANUFACTURING DIVISION. 13.2 THE CONTENTION OF AR IS THAT: THE BMSS SERVICES ON THE OTHER HAND ARE MEANT FOR THE MANUFACTURING PROCESS AND ARE RENDERED BY PROFESSIO NALS WHO ARE PLANT ENGINEERS, TECHNICAL SKILLED OPERATOR S OBTAINING CONSTANT KNOWLEDGE FROM THE PRODUCTION LI NES AND MANUFACTURING PROCESS. THESE SERVICES ARE MAINLY PERFORMED BY THE PURCHASE/PROCUREMENT TEAM AND INCL UDE THE FOLLOWING : - - ITA 204 & 365/12 24 IDENTIFICATION OF RELIABLE VENDORS/SUPPLIERS WHO W ILL SUPPLY QUALITY PRODUCT (REPLACEMENT PRODUCTS) CO-ORDINATION SERVICES DOCUMENTATION THE RELEVANT KNOWLEDGE REQUIRED TO DELIVER THESE SE RVICES TO THE GROUP COMPANIES ARE THEREFORE AVAILABLE WITH THE PERSONNEL OF THE MANUFACTURING SEGMENT. HOWEVER, IN PARA 5.3.4.5 ON PAGE 58 OF THE IMPUGNED ORDER THE LD. TP O STATES THAT THE COST FOR RENDERING THE BMSS SERVICE S ARE INSEPARABLE AND HENCE HAVE BEEN RETAINED UNDER THE MANUFACTURING DIVISION. NO EXPENSES ATTRIBUTABLE T O THE RECEIPTS HAVE BEEN EXCLUDED FROM THE FINANCIALS OF THE MANUFACTURING DIVISION STATED THAT COSTS INCURRED F OR RENDERING THESE SERVICES ARE CAPTURED UNDER THE OPE RATING EXPENSES OF THIS DIVISION. 13.3 THE LD AR IS IN DISAGREEMENT WITH THE ABOVE STATEMENT AND HE SUBMITTED THAT, THE COST RELATED TO THE BMSS WAS RETAINED IN THE OPERATING COST OF THE MANUFACTURING SEGMENT WHEREAS THE INCOME RECEIVED F ROM THE BMSS SERVICES WERE EXCLUDED FOR THE COMPUTATION OF - - ITA 204 & 365/12 25 THE MARGIN OF THE SEGMENT WHICH IS VIOLATION OF THE ACCOUNTING POLICY OF MATCHING CONCEPT WHICH HELPS A VOID MISSTATING EARNINGS FOR A PERIOD. REPORTING COSTS FOR A PERIOD WITHOUT REPORTING THE REVENUES ARISING OUT O F THOSE COSTS, FOR INSTANCE, WOULD RESULT IN UNDERSTATEMENT OF PROFIT AS PERFORMED BY THE LD. AO/LD. TPO. HENCE THE APPR OACH TAKEN BY THE LD.AO/LD. TPO IS NOT JUSTIFIED. 14. IN ITS SUBMISSION THE ASSESSEE ALSO PROVIDED AN AFFIDAVIT IN SUPPORT OF ITS STATEMENT THAT BMSS CHA RGES RECEIVED ARE A PART OF THE MANUFACTURING SEGMENT. FURTHER, IT WAS SUBMITTED THAT THE TPO IN HER ORDER HAS NOT CLEARLY MENTIONED THE PROPER TREATMENT OF THE BMSS CHARGES RECEIVED, SINCE IT HAS NOT BEEN CONSIDERED AS A PAR T OF THE INCOME OF THE EDC SEGMENT AS WELL. 15. THE LD. DR RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 16. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE CONTENTION OF THE ASSESSEE IS THAT BMSS IS PART OF MANUFACTURING ACTIVITY BECAUSE IT W AS - - ITA 204 & 365/12 26 PERFORMED BY EMPLOYEES DEPLOYED IN THE MANUFACTURIN G SEGMENT AND THE COSTS INCURRED ARE BOOKED IN THE MANUFACTURING SEGMENT. THE TPOS VIEW IS THAT THE NATURE OF THE ACTIVITY IS SERVICES AND MERELY BECAUSE TH E SERVICES WERE RENDERED BY THE PERSONNEL OF MANUFACTURING SEG MENT, THE NATURE OF THE ACTIVITY CANNOT CHANGE FROM SERV ICES TO MANUFACTURING. ALSO, IT IS DIFFICULT TO ACCEPT T HE CONTENTION THAT PEOPLE IN THE MANUFACTURING SEGMENT ARE EQUIPP ED TO RENDER GENERAL MANAGERIAL AND ADMINISTRATIVE SUPPOR T SERVICES TO GROUP COMPANIES. MERELY BECAUSE THE ASSESSEE HAD BOOKED THESE UNDER MANUFACTURING SEGME NT DOES NOT RENDER IT A CHARACTER OF MANUFACTURING ACT IVITY. HENCE, WE ARE OF OPINION THAT BMSS SERVICE INCOME IS CERTAINLY NOT DERIVED FROM THE MANUFACTURING ACTIVI TY OF THE ASSESSEES AND HENCE SHOULD NOT BE CONSIDERED AS A PART OF THE OPERATING INCOME OF THE MANUFACTURING SEGMEN T, FOR COMPUTATION OF PLI. THEREFORE, THE GROUND RAISED B Y THE ASSESSEE IS REJECTED. 17. REGARDING OTHER OPERATING INCOME RECEIPTS I. E. INTEREST ON CUSTOMS OVERDUES ( 0.28 CRORES), THE TPOS CONTENTION IS AS UNDER:- - - ITA 204 & 365/12 27 III) INTEREST ON CUSTOMERS OVER DUES DEPOSIT ( 0.28 CRORES): IN THIS CONNECTION THE REASONING GIVEN BY THE ASSES SEE IS WRONG. ASSESSEE HAS REFERRED TO REVISED OECD TP GUIDELINES NO. 2.81: IN THOSE CASES WHERE THERE IS A CORRELATION BETWEEN THE CREDIT TERMS AND THE SALES PRICES, IT COULD BE APPROPRIATE TO REFLECT INTEREST INCOME IN RESPECT OF SHORT-TERM WORKING CAPITAL WITHIN THE CALCULATION O F THE NET PROFIT INDICATOR. ACCORDING TO TPO THE REVISED G UIDELINES QUOTED BY THE ASSESSEE RELATES TO INTEREST INCOME O N SHORT TERM WORKING CAPITAL. AS AGAINST IT WHAT IS PROPOS ED TO BE EXCLUDED IS INTEREST ON CUSTOMS OVER DUES DEPOSIT. THEY ARE TWO DIFFERENT ISSUES AND THEREFORE IT CANNOT BE ALL OWED BASED ON REVISED OECD TP GUIDELINES QUOTED ABOVE. FURTHE R, INTEREST ON CUSTOMER OVER DUES DEPOSIT IS NOT CONSI DERED OPERATING INCOME AND HENCE EXCLUDED FROM MANUFACTUR ING DIVISION FOR THE PURPOSE OF CALCULATING PLI IN THE CASE OF THE ASSESSEE. 17.1 THE CONTENTION OF THE AR IS THAT THE INTEREST ON CUSTOMER OVERDUE IS OPERATIONAL IN NATURE AND HAS B EEN CONSIDERED AS PART OF COMPUTATION OF THE OPERATING MARGIN, HENCE THE INTEREST ON THE CUSTOMERS OVER DUES WOULD THEREFORE BE CONSIDERED AS OPERATIONAL INCOME AS WE LL. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE , IN OUR OPINION THE INTEREST ON CUSTOMER OVERDUE IS TO BE CONSIDERED AS PART OF THE OPERATING ACTIVITIES OF T HE ASSESSEE, IF IT IS RELATING TO TRADE DEBTORS. HENCE , THIS - - ITA 204 & 365/12 28 GROUND RAISED BY THE ASSESSEE IS REMITTED TO AO FOR FRESH CONSIDERATION. 17.2 NEXT ISSUE WITH REGARD TO EXCLUSION OF FOLLOW ING ITEMS WHILE COMPUTING THE PLI: I) MARKET PROMOTION FEES: ( 0.31 CRORES) AND OTHERS ( 0.12 CRORES : THESE INCOME ITEMS ARE OPERATING IN NATURE AND ARE DERIVED FROM NORMAL BUSINESS OPERATIONS CAR RIED OUT BY THE ASSESSEE. HENCE, THERE IS APPARENTLY NO REASON WHY THE SAID ITEM SHOULD NOT BE CONSIDERED AS A PAR T OF THE OPERATING ACTIVITY. THE COMMENTS OF THE LD. TPO WER E HIGHLY IMAGINATIVE AND DEVOID OF PRACTICAL PRACTICES. THE MARKET PROMOTION FEES ARE IN FORM OF CASH REBATE RECEIVED FROM EXXON MOBILE WHICH IS DIRECTLY RELATED TO THE SALES VOLUME AND IS PAID AS A PART OF THE TIE-UP BETWEEN THE TWO COMPANIES TO PROMOTE SALES III) WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE LIABILITY NO MORE REQUIRED 1.12 CRORES . IT MEANS THAT SERVICES REQUIRED HAVE ALREADY BEEN - - ITA 204 & 365/12 29 TAKEN BUT THE LIABILITY RELATED TO THE SERVICE IS N O MORE REQUIRED. WHILE CALCULATING THE PROFIT MARGIN AS P ER TP GUIDELINES, FAR ANALYSES ARE MADE. ACCORDINGLY, IF ANY FUNCTION HAS BEEN PERFORMED THEN RECEIPT OR EXPENDI TURE RELATED TO THAT FUNCTION MUST BE REFLECTED IN THE P ROFIT AND LOSS ACCOUNT. IN TNMM NET PROFIT MARGIN WOULD LEVE L WILL DEPEND ON THE FUNCTIONS PERFORMED. IF THE LIABILIT Y NO MORE REQUIRED IS TAKEN INTO CONSIDERATION THEN IT IMPLIE S THAT FUNCTION WAS PERFORMED FOR THE ASSESSEE BUT ITS PRI CE IS NOT CORRECTLY REFLECTED IN THE P&L ACCOUNT. COMPARISON WITH UNCONTROLLED TRANSACTIONS IS MADE IN TERMS OF FUNCT IONS PRESUMING THAT THE PRICE PAID FOR SERVICES TAKEN. THEREFORE, LIABILITY NO MORE REQUIRED IS EXCLUDED FROM THE MANUFACTURING DIVISION WHILE CALCULATING THE PLI AS IT WOULD DISTORT THE COMPARISON. IN OUR OPINION, THE MARKET PROMOTION FEES ARE RELATING TO OPERATING ACTIVITY OF THE ASSE SSEE, THE OBJECTION OF THE ASSESSEE IS ALLOWED. 18. IN OUR OPINION, THE LIABILITY NO LONGER REQUIR ED WRITTEN BACK IS A PART OF THE OPERATING ACTIVITY OF THE AS SESSEE, IF IT IS RELATING TO THE OPERATING EXPENSES OF THE ASSESS EE. - - ITA 204 & 365/12 30 ACCORDING THE ISSUE IS REMITTED TO AO/TPO FOR FRESH CONSIDERATION. REGARDING OTHERS OF . 0.12 CRORES , IF THE ASSESSEE PROVES THAT IT IS AN OPERATIONAL INCOME, T HEN AO SHALL NOT EXCLUDE IT WHILE COMPUTING THE PLI. 19. THE NEXT ISSUE IS THAT THE TPO/DRP HAS ERRED IN NOT EXCLUDING 424 MODEL FROM MANUFACTURING SEGMENT AS THE MODEL WAS IN ITS START-UP PHASE. 20. THE LD AR SUBMITTED THAT MODEL 424 TO BE EXCLU DED TREATING THE SAME AS A DIFFERENT SEGMENT TO CALCULA TE THE PLI OF THE MANUFACTURING DIVISION WITHOUT CORRESPON DING FINANCIALS OF THE MODEL 424. THE TPO WRONGLY OBSERV ED THAT CAT CATEGORY IS A HOMOGENOUS CATEGORY IN WHICH MOST OF THE FUNCTIONS ARE SAME AND THEY CANNOT BE SEGREG ATED IN TERMS OF VARIOUS PRODUCTS MANUFACTURED. AS ALREADY DISCUSSED, IF FUNCTIONS ARE SAME, ANY ARTIFICIAL DI VISION, EVEN IF BASED ON SOME SCIENTIFIC BASIS, WOULD DISTORT TH E EXERCISE OF FINDING THE ARMS LENGTH PRICE. IT WOULD ALSO T AKE AWAY THE ADVANTAGE ACCRUING DUE TO SYNERGIC EFFECT OF SA ME FUNCTIONS PERFORMED ON A HOMOGENOUS UNIT. - - ITA 204 & 365/12 31 20.1 HE SUBMITTED THAT THE TPO VERSION IS THAT T HIS IS NOT THE FIRST YEAR OF 424 MODEL. IT WAS INTRODUCED IN 2004-05 AND IT IS THE THIRD YEAR OF PRODUCTION. IN CASE OF MANUFACTURING DIVISION ENGAGED IN PRODUCTION OF SEV ERAL PRODUCTS, IT WILL NOT BE THE RIGHT APPROACH TO EXCL UDE THE LOSS MAKING PRODUCTS AND MAKE COMPARISON RETAINING THE FINANCIAL RELATED TO PROFIT GENERATING PRODUCTS ONL Y. IN ANY ENTERPRISE DIFFERENT PRODUCES ARE IN DIFFERENT STAG E OF MATURITY. SOME WOULD HAVE BEEN JUST INTRODUCED, SO ME WOULD HAVE BEEN AT THEIR PRIME AND GENERATING HUGE PROFIT AND YET SOME OTHERS WOULD BE IN THE DECLINING STAGE AND MAY BE PHASED OUT SOON. IN SUCH A SITUATION IT WOU LD NOT BE PROPER TO DO AS MANY FRAGMENTATION OF MANUFACTUR ING DIVISION AS THE NUMBER OF DIFFERENT PRODUCTS IS. A PROPER APPROACH IN SUCH A SITUATION IS TO CONSIDER MANUFAC TURING DIVISION AS A UNIT AND FIND OUT ITS PLI. 20.2 THE LD AR SUBMITTED THAT IN FACT CATERPILLAR G ROUP IS A WELL ESTABLISHED GROUP WORLD OVER AND THEREFORE ASS ESSEE CANNOT CLAIM THAT IT IS INEXPERIENCED COMPARED TO O THER - - ITA 204 & 365/12 32 PLAYERS IN THE MARKET. INDIAN MARKET FOR THE KIND OF PRODUCTS THE ASSESSEE PRODUCES IS EVER ENLARGING AN D EXPANDING. THEREFORE, THERE IS ALWAYS A BRIGHT FUT URE FOR THE PRODUCTS IN INDIA WHICH ARE PRODUCED BY REPUTED COM PANIES LIKE CATERPILLAR ON THE BASIS OF INTENSIVE R&D EFFO RTS. BACKHOE LOADER IS NEITHER A NEW PRODUCT IN INDIA NO R CATERPILLAR BRAND IS NEW TO INDIA. FURTHER, ASSESS EE IS AN EXPERIENCE MANUFACTURE OF EARTH MOVING MACHINES AND IT HAS WELL ESTABLISHED SELLING AND DISTRIBUTING INFRA STRUCTURE IN INDIA THAT HAS BEEN USED FOR THE PURPOSE OF SELLING BACKHOE LOADER ALSO. THEREFORE, IN SUCH A SITUATION, ONLY IN THE INITIAL YEAR OF INTRODUCTION OF NEW PRODUCT SPECIAL TREATME NT CAN BE GIVEN TO THE ASSESSEE. THEREAFTER, TPO DOES NOT C ONSIDER IT IS PROPER THAT SPECIAL TREATMENT IS GIVEN TO THE ASSESSEE YEAR AFTER YEAR. 20.3 HE DREW OUR ATTENTION TO RULE 10B OF THE INC OME TAX RULES AND HAS SUPPLIED EMPHASIS ON CLAUSE (D) O F SUB- RULE(2) OF RULE 10B, WHICH SAYS THAT THE COMPARABIL ITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO CONDITIONS PREVAI LING THE - - ITA 204 & 365/12 33 MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRAN SACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SI ZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, C OSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER TH E MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE O F RETAIL. ACCORDINGLY, IN VIEW OF THE FACT THAT UNCO NTROLLED COMPARABLES ARE FROM SAME GEOGRAPHICAL AREA (INDIAN TERRITORY) IN THE CASE OF ASSESSEE ALL THE CONDITIO NS MENTIONED IN CLAUSE (D) ARE AUTOMATICALLY TAKEN CAR E OF. THIS IS AN ADVANTAGE ESPECIALLY IN EXTERNAL TNMM WH EREIN THE ARITHMETIC MEAN OF PLIS OF THE COMPARABLES IS T AKEN. ARITHMETIC MEAN OF PLI OF UNCONTROLLED COMPARABLES REPRESENTS IDEAL COMPARABLE TO ARRIVE AT THE ARMS LENGTH PRICE. THEREFORE, ASSESSEES REQUEST TO SEGREGATE THE 424 MODEL SEGMENT BEFORE THE EXTERNAL TNMM IS APPLIED I S NOT ACCEPTED. THE TNMM IS APPLIED ON THE AGGREGATED PR OFIT AND LOSS ACCOUNT WHICH INCLUDES CAT AND NON-CAT - - ITA 204 & 365/12 34 CATEGORIES AND FROM WHICH NO SEGMENT RELATED TO 424 MODEL IS REMOVED. 21. THE AR CONTENTION IS THAT THE IT HAS COME OUT OF THE INITIAL START-UP PHASE OF 424 MODEL AND THE ASS ESSEE SHOULD HAVE BEEN ABLE TO REDUCE ITS IMPORT PRICES A ND SHARED SOME OF THE LOSSES WITH THE OTHER GROUP CONC ERNS IN ORDER TO ATTAIN THE ARMS LENGTH RESULT OF THIS PAR TICULAR SEGMENT. 22. THE LD AR SUBMITTED THAT IT IS IMPORTANT FROM T HE TRANSFER PRICING PERSPECTIVE THAT THE BUSINESS STRA TEGY, THE MARKET PENETRATION STRATEGY ETC. AS PLACED ABOVE SH OULD BE TAKEN INTO ACCOUNT. THIS HAS ALSO BEEN PROVIDED IN THE OECD GUIDELINES AND THE INDIAN TRANSFER PRICING REGULATIONS. THE SAME IS ENCLOSED AS ANNEXURE 6 TO THIS SUBMISSION. 22.1 HE SUBMITTED THAT THE BUSINESS PENETRATION STR ATEGY ADOPTED BY THE CIPL HAS A DIRECT CORRELATION WITH T HE PROFITABILITY ACHIEVED BY CIPL. A COMPANY SEEKING TO ENTER A NEW MARKET OR EXPAND (OR DEFEND) ITS MARKET SHARE MIGHT TEMPORARILY INCUR HIGHER COSTS AND HENCE ACHIEVE LO WER - - ITA 204 & 365/12 35 PROFIT LEVELS THAN THE OTHER COMPANIES OPERATING IN THE SAME MARKET. SOME BUSINESS STRATEGIES INVOLVE REDUCTION S IN TAX PAYERS CURRENT PROFITS IN ANTICIPATION OF INCREASE D FUTURE PROFITS. THEREFORE, THE BUSINESS STRATEGIES SHOULD BE CONSIDERED IN DETERMINING COMPARABILITY FOR TRANSFE R PRICING PURPOSES. THEREFORE, IN ORDER TO MEASURE THE PROFI TABILITY OF THE CAT SEGMENT PROPERLY, GIVEN THE MARKET SCENARIO AND START UP PHASE OF THE 424 MODEL, THE LOSSES OWING T O THIS PRODUCT NEED TO BE SEPARATED FROM THE OVERALL CAT SEGMENT AND IN ORDER TO DEPICT THE ACTUAL FINANCIAL PERFORMANCE OF THE CAT SEGMENT. TO DEMONSTRATE THE EFFECT OF THE BUSINESS STRATEGY ADOPTED BY THE ASSE SSEE, THE LD. AR HAS DREW OUR ATTENTION TOWARDS THE NUMB ER OF UNITS SOLD BY THE ASSESSEE OVER THE YEARS. FINANCIAL YEAR NUMBER OF UNITS OF 424 NODEL 2005-06 212 2006-07 268 2007-08 818 HE SUBMITTED THAT FROM THE ABOVE TABLE, IT COULD BE APPRECIATE THAT THE SALES VOLUME ACHIEVED BY THE A SSESSEE HAS REGISTERED GROWTH WHICH PROVES THAT THE RELEVAN T - - ITA 204 & 365/12 36 FINANCIAL YEAR WAS UNDER START-UP PHASE AND SALES V OLUME WAS YET TO PICK UP. 22.2 HE EXPLAINED THE IMPACT OF LOSS OF THIS PRODU CT ON THE OVER-ALL CAT SEGMENT AND SUBMITTED THAT IF THE COST AND REVENUE OF 424 MODEL WERE REMOVED FROM THE LIST OF SEGMENTAL REVENUE OF CAT CATEGORY, THE MARGIN OF CA T SEGMENT IS 6.43% WHICH IS MORE THAN 0.48% OF NON-CA T SEGMENT. WITHOUT PREJUDICE, THE LD. AR SUBMITED TH AT EVEN IF THE EXTERNAL COMPARABILITY ANALYSIS HAS CONSIDER ED, THE TPO SHOULD CONSIDER THE CAT SEGMENT (WITHOUT 424 MO DEL IN ORDER TO ENSURE CLOSER AND EFFECTIVE COMPARABILI TY ANALYSIS. 22.3 HE HAS ALSO EXPLAINED THE COMPUTATION OF CAT SEGMENT WITHOUT 424 MODEL WHICH IS AS GIVEN BELO W: PARTICULARS CAT SEGMENT 424 MODEL CAT SEGMENT WITHOUT 424 MODEL OPERATING INCOME 5,359,107,728 489,041,957 4,870,065,771 LESS: OPERATING COST 5,250,647,590 693,525,166 4,557,122, 424 OPERATING PROFIT 108,460,137 (204,483,209) 312,943,347 OPERATING PROFIT/OPERATING REVENUE 2.03% -41.81% 6.43% - - ITA 204 & 365/12 37 THE LD. DR SUBMITTED THAT THE ASSESSEE HAS COME OUT OF THE INITIAL START UP PHASE OF THE 424 MODEL AND THE ASSESSEE SHOULD HAVE BEEN ABLE TO REDUCE ITS IMPORT PRICES A ND SHARED SOME OF THE LOSSES WITH THE OTHER GROUP CON CERNS IN ORDER TO ATTAIN THE ARMS LENGTH RESULT OF THIS PAR TICULAR SEGMENT. 23. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. AS RIGHTLY POINTED OUT BY THE LD.D.R., MODEL 424 CANNOT BE EXCLUDED TREATING THE SAME AS A DIFFERENT SEGMENT TO CALCULATE THE PLI OF THE MANUF ACTURING DIVISION WITHOUT CORRESPONDING FINANCIAL OF THE MOD EL 424. THE CAT CATEGORY IS A HOMOGENOUS CATEGORY IN WHICH MOST OF THE FUNCTIONS ARE SAME AND THEY CANNOT BE SEGREG ATED IN TERMS OF VARIOUS PRODUCTS. IN OUR OPINION, IF FUNC TIONS ARE SAME, ANY ARTIFICIAL DIVISION, EVEN IF BASED ON SOM E SCIENTIFIC BASIS, WOULD DISTORT THE EXERCISE OF FIN DING THE ARMS LENGTH PRICE. IT WOULD ALSO TAKE AWAY THE AD VANTAGE ACCRUING DUE TO SYNERGIC EFFECT OF SAME FUNCTIONS P ERFORMED ON A HOMOGENOUS UNIT. BEING SO, IN OUR OPINION, TH E LOWER - - ITA 204 & 365/12 38 AUTHORITIES ARE JUSTIFIED IN NOT EXCLUDING THE 424 MODEL FROM MANUFACTURING SEGMENT AND ALSO FIND NO MERIT I N THE LEGAL ARGUMENT ON THIS ISSUE. THIS GROUND OF APPEA L OF THE ASSESSEE IS REJECTED. 24. THE NEXT GROUND IS WITH REGARD TO TRANSFER PRIC ING (TP) ADJUSTMENT SHOULD BE RESTRICTED ONLY TO INTERN ATIONAL TRANSACTION AND NOT TO THE ENTIRE TURNOVER. 25. THE LD AR SUBMITTED THAT IT WOULD BE APPROPRI ATE TO CONSIDER THE MARGINS WITH RESPECT TO THE INTERNATIO NAL TRANSACTIONS (I.E. CONTROLLED MANUFACTURING SEGMENT ) AND NOT THE ENTERPRISE AS A WHOLE. HE RELIED ON THE JU DGMENTS OF TRIBUNAL, MUMBAI BENCH IN THE CASE OF ASST. COMMISSIONER OF INCOME-TAX VS. M/S. WOCKHARDT LIMIT ED (2010-TII-46-ITAT-MUM-TP), AND UCB INDIA P. LTD. VS ACIT (2009-TII-02-ITAT-MUM-TP) WHEREIN HELD THAT TRANSFER PRICING ADJUSTMENT CAN BE MADE ONLY ARISIN G FROM INTERNATIONAL TRANSACTIONS WHILE DETERMINING THE ALP. HOVER TPO HOLDS THE VIEW IN THIS REGARD THAT WHILE DETERMINING THE ARMS LENGTH PRICE, COMPARISON IS M ADE - - ITA 204 & 365/12 39 BETWEEN THE PLI OF THE ASSESSEE AND THE ARITHMETIC MEAN OF UNCONTROLLED ACOMPARABLES. WHILE DOING SO IT IS PRESUMED THAT EVERY OTHER FACTOR IS CONSTANT AND DI FFERENCE HAS ARISEN ONLY BECAUSE OF INTERNATIONAL TRANSACTIO NS. IF THIS PRESUMPTION IS NOT MADE, NO ADJUSTMENT IN ANY CASE MAY BE MADE AS THE ASSESSEE CAN ALWAYS MAKE AN ARGUMENT THAT THE DIFFERENCE IN PLI IS NOT DUE TO NON-INTERN ATIONAL TRANSACTIONS; RATHER IT IS DUE TO NON-INTERNATIO NAL TRANSACTIONS. THEREFORE, THE REQUEST OF THE ASSESS EE COMPANY IS NOT ACCEPTED BY TPO.. 25.1 HE SUBMITTED THAT THE PROFIT MARGIN OF MANUFA CTURING DIVISION OF THE ASSESSEE COMPANY IS (-) 0.06% AS AG AINST THE PROFIT MARGIN OF 11.87% IN THE CASE OF UNCONTRO LLED COMPANIES. HENCE, THE PLI OF THE ASSESSEE IS LESS BY 11.93% COMPARED TO THE PLI OF 11.87% IN CASE OF THE UNCONTROLLED COMPARABLES. THEREFORE, IN RESPECT TO INTERNATIONAL TRANSACTIONS, WHICH HAVE BEEN TAKEN I NTO CONSIDERATION FOR COMPUTING THE PROFIT OF MANUFACTU RING SEGMENT VIZ. MANUFACTURING AND SALE OF EARTHMOVING MACHINERY AND TRUCKS 90.75 CRORES, PURCHASE OF - - ITA 204 & 365/12 40 ASSEMBLIES, SUB-ASSEMBLIES AND REPLACEMENT PARTS, SERVICE MANUALS AND CATALOGUES . 239.59 CRORES AND ROYALTY . 8.67 CRORES, ADJUSTMENT OF 1,100,369,250 IS MADE. ACCORDING TO A.R, THE CALCULATION HAS BEEN M ADE AS FOLLOWS : PROFIT @ 11.93 (9172187404*11.93)/100=1,094,241,957 . THEREFORE ADJUSTMENT MADE IS RS.1,094,241,957- (61,27,293) =1,100,369,250/-. ACCORDING TO LD AR B ASED ON THE ARMS LENGTH MARGIN OF 11.87%( AS CALCULATED BY THE TPO), THE ARMS LENGTH PROFIT WOULD BE 1.104.587.59 6 (I.E 9,305,708,478-1,1104,587,596). THE SAID ARMS LENGT H PRICE OF OPERATING COST HAS BEEN APPORTIONED BETWEE N AE AND NON-AE ON THE BASIS OF COST RATION (I. 2, 748,582,838: 6,418,583,220). 25.2 THE LD. D.R RELIED ON THE ORDER OF LOWER AUTH ORITIES. 26. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, WHILE DETERMINI NG THE ALP, COMPARISON IS MADE BETWEEN THE PLI OF THE ASSE SSEE AND THE ARITHMETIC MEAN OF UNCONTROLLABLE COMPARABL ES. WHILE DOING SO, IT IS PRESUMED THAT EVERY OTHER FAC TOR IS - - ITA 204 & 365/12 41 CONSTANT AND DIFFERENCE HAS ARISEN ONLY BECAUSE OF INTERNATIONAL TRANSACTIONS. IF THIS PRESUMPTION IS NOT MADE, NO ADJUSTMENT IN ANY CASE MAY BE MADE AND THE ASSES SEE CAN ALWAYS MAKE AN ARGUMENT THAT DIFFERENCE IN PLI IS NOT DUE TO INTERNATIONAL TRANSACTIONS; IT IS DUE NON-IN TERNATIONAL TRANSACTIONS, THEREFORE WE ARE NOT IN A POSITION TO APPLY THE JUDGMENET OF BOMBAY HIGH COURT IN THE CASE OF THYSS EN KRUPP INDUSTRIES INDIA PVT LTD. CITED SUPRA, ACCORD INGLY THIS GROUND RAISED BY THE ASSESSEE IS REJECTED. 27. THE NEXT GROUND IN THIS APPEAL IS THAT THE TPO/ DRP HAVE ERRED IN NOT APPRECIATING THE FACTS TO COMPREH END THE NATURE OF REIMBURSEMENT OF EXPENSES RECEIVED TO BE INCOME ARISING OUT OF RENDERING AGENCY SERVICES TO ITS GROUP COMPANIES BY THE ASSESSEE AND CONSIDERED A MA RK- UP OF 2% TO BE CHARGED ON THE SAID RECEIPTS. HOWEV ER, THE TPO/DRP DID NOT PROVIDE THE BASIS OR THE METHOD OF ARRIVING AT THE SAID MARK-UP. 28. THE FACTS OF THE ISSUE ARE THAT DURING THE FY 2 006- 07, THE ASSESSEE HAS MADE CERTAIN RECOVERY OF EXPEN SES IN RELATION TO EXPENSES INCURRED AS SALARY COST OF THE - - ITA 204 & 365/12 42 EMPLOYEES OF THE CATERPILLAR GROUP WHO ARE SENT ON SECONDMENT TO CIPL. THESE EXPENSES ARE INITIALLY B ORNE BY CIPL AND LATER RECOVERED FROM THE RESPECTIVE CATERP ILLAR GROUP COMPANY. THE RECOVERY ALSO PERTAINS TO EXPEN SES INCURRED ON BUSINESS TRIPS OF OFFICIALS FROM THE AE S WHICH ARE INITIALLY INCURRED BY CIPL AND LATER RECOVERED FROM THE AES. 28.1 THE TPO HAS MADE AN ADJUSTMENT BY ADDING A 2% MARK-UP ON THE RECOVERY MADE THE ASSESSEE CONTENDIN G THAT THE ASSESSEE HAS PROVIDED SERVICES TO ITS AES AND THEREFORE SHOULD HAVE EARNED A MARK-UP ON THE SAME. 29. THE A.R SUBMITTED THAT IT HAS NOT RENDERED ANY SERVICES TO THE AES AND HAS UNDERTAKEN THE ACTIVITY ON BEHALF OF THE AES ONLY FOR ADMINISTRATIVE CONVENIEN CE. FURTHER, THESE ARE PURE COST TO COST RECOVERY AND A RE MERE PAS THROUGH COSTS. THEREFORE, THE ADJUSTMENT ON TH E SAME SHOULD BE DELETED. THE CONTENTIONS OF THE ASSESSEE IS SUPPORTED BY THE OECD GUIDELINES, INDIAN TRANSFER P RICING REGULATIONS AND ALSO US SERVICE REGULATIONS. - - ITA 204 & 365/12 43 30. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THE CLAIM OF THE ASSESSEE IS THAT IT IS ONLY REIMBURSEMENT TOWARDS THE SERVICES PROVIDED TO THE A.E AND IT DOES NOT INCLUDE ANY ELEMENT OF PROFIT SO AS TO MAR K UP OF 2%. IN OUR OPINION, NO UNRELATED PARTIES WOULD PROVIDE SUCH SERVICES ON REGULAR BASIS SO SOMEONE, UNLESS A REASONABLE PR OFIT IS INVOLVED IN IT. BEING SO, THE SERVICES RENDERED BY THE ASSESSEE TO ITS A.E CANNOT BE FREE OF CHARGE AND THERE SHOUL D BE ELEMENT OF PROFIT, TO THAT EXTENT TO ADD 2% TOWARDS PROFIT. BEING SO, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LOWER AUTHOR ITIES AND THE SAME IS CONFIRMED. HENCE, THIS GROUND IS REJECTED. 30.1 THE ASSESSEE RAISED THE ADDITIONAL GROUND THAT THE LD. TPO ERRED IN NOT CONSIDERING THE FOLLOWING COMPARAB LES, THOUGH THEY WERE COMING UP BASED ON THE FILTERS ADOPTED BY THE LD. TPO A) TIL LTD., B) ESCORTS LTD., C) MAGNUM MACHINES PVT LTD., D) WALCHANDNAGAR INDUSTRIES LTD., E) JOSTS ENGINEERING CO. LTD., F) SKYLINE MILLERS LTD ., - - ITA 204 & 365/12 44 THE LD. AR FILED PETITIONS FOR ADMISSION OF ADDITIO NAL GROUNDS STATING THAT DURING THE PREPARATION OF FORM 36B HAS TAKEN A GROUND AGAINST THE COMPUTATION OF ADJUSTMENT BY THE LD. TPO ON UNCONTROLLED TRANSACTIONS INSTEAD OF RESTRICTING TH E SAME TO THE CONTROLLED TRANSACTIONS. HOWEVER, IN ORDER TO BRIN G CLARITY ON THE EXISTING GROUND NO.B.1(III), THE ASSESSEE SUBMITTED THAT THE LD. TPO WHILE PROPOSING THE TRANSFER PRICING ADJUSTMENT WITH RESPECT TO THE MANUFACTURING SEGMENT OF THE APPELLANT, HAS NOT RESTRICTED THE ADJUSTMENT ONLY TO THE VALUE OF THE INTERNATION AL TRANSACTIONS ENTERED WITH ITS A.ES. FURTHER, IT HAS ALSO COME TO THE NOTICE THAT VARIOUS TRIBUNAL RULINGS AND HIGH COURT PRECED ENTS HAVE HELD THAT IF AT ALL THE ADJUSTMENTS HAVE TO BE MADE , IT IS SHOULD BE RESTRICTED TO THE PROPORTION OF INTERNATIONAL TRANS ACTION UNDERTAKEN BY THE ASSESSEE WITH ITS A.E. 31. AFTER HEARING THE BOTH THE PARTIES, WE ARE INC LINED TO ADMIT THE ADDITIONAL GROUND BY PLACING RELIANCE ON THE JUDGMENT OF SUPREME COURT IN THE CASE OF NTPC IN 228 ITR 383 (SC). HOWEVER, AS THE ASSESSEE HAS RAISED THIS GROUND FIR ST TIME BEFORE US, AND THE ASSESSING OFFICER HAS NO OCCASIO N TO EXAMINE - - ITA 204 & 365/12 45 THIS ISSUE, WE REMIT THE ABOVE ISSUE TO THE FILE OF ASSESSING OFFICER FOR HIS CONSIDERATION AFTER GIVING AN OPPOR TUNITY OF BEING HEARD TO THE ASSESSEE. ISSUES RELATING TO CORPORATE TAX 32. FIRST GROUND RELATING TO CORPORATE TAX WHICH IS FOR OUR CONSIDERATION, IS WITH REGARD TO MAKING AN ADDITION OF WEALTH-TAX PROVISION AND INCREMENTAL DEPRECIATION OF ` 4,52,000/- ADDED TO BOOK PROFIT. THE ASSESSEE HAS ALSO RAISED THE FOLLO WING SUB- GROUNDS FOR OUR ADJUDICATION. I) THE AO/TPO/DRP ERRED IN MAKING AN ADDITION OF WE ALTH TAX PROVISION AND INCREMENTAL DEPRECIATION ARISING ON REVISION OF ESTIMATED USEFUL LIFE OF ASSETS(LAPTOP COMPUTERS) T O BOOK PROFIT U/S.115JB OF THE ACT. II) PROVISION FOR WEALTH TAX CAN NEITHER BE TREATED AS PROVISIONS FOR INCOME TAX NOR AS PROVISIONS FOR DIMINUTION IN THE VALUE OF ASSETS AS PER CLAUSE (I) OF EXPLANATION TO SEC.115J B(2) OF THE ACT. III) THE INCREMENTAL DEPRECIATION CHARGE IS ON ACCO UNT OF REVIEW OF ESTIMATED USEFUL LIFE OF ASSETS AND IS NOT ON AC COUNT OF - - ITA 204 & 365/12 46 REVALUATION AS PER CLAUSE (IIA) OF EXPLANATION TO S EC.115JB(2) OF THE ACT. IV) THE ABOVE ADDITIONS TO THE BOOK PROFITS SHALL B E DELETED ACCORDINGLY. 33. THE LD. AR SUBMITTED THAT PROVISION FOR WEALTH- TAX CAN EITHER BE TREATED AS NEITHER PROVISION FOR INCOME-T AX NOR PROVISION FOR DIMINUTION IN THE VALUE OF ASSETS AS PER CLAUSE (I) OF EXPLANATION 2 TO SEC. 115 JB OF THE ACT. FURTHER, THE LD. AR SUBMITTED THAT THE INCREMENTAL DEPRECIATION CHARGE IS ON ACCOUNT OF REVIEW OF ESTIMATED USEFUL LIFE OF ASSETS AND IT IS NOT ON ACCOUNT OF RE-VALUATION, AS PER CLAUSE (IIA) OF EXP LANATION 2 TO SEC.115JB OF THE ACT. HE RELIED ON ACCOUNTING STAN DARD 6 ON DEPRECIATION ACCOUNTING. ACCORDING TO HIM, THERE I S DIFFERENCE BETWEEN REVISION IN USEFUL LIFE OF ASSETS AND REVAL UATION OF ASSETS WHICH ARE AS FOLLOWS : REVISION IN USEFUL LIFE REVALUATION OF ASSET ONLY DEPRECIATION RATE WILL UNDERGO A CHANGE VALUE OF THE ASSET ON WHICH DEPRECIATION IS CLAIMED WOULD UNDERGO A CHANGE - - ITA 204 & 365/12 47 34. THE LD. DR SUBMITTED THAT THESE AMOUNTS WERE AD DED TO THE BOOK PROFITS ON THE BASIS THAT PROVISION FOR WE ALTH TAX AND PROVISION FOR DIMINUTION IN THE VALUE OF ASSETS FAL LS UNDER THE CLAUSE-(I) OF EXPLANATION-1 TO SUB-SECTION (2) OF S EC.115JB OF THE ACT. ACCORDING TO LD.D.R, THE ARTIFICIAL DIFFERENC E CANNOT BE MADE BETWEEN REVISION IN USEFUL LIFE OF ASSETS AND REVAL UATION OF ASSETS. 35. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED OPINION, PROVISION FO R WEALTH TAX CANNOT BE CONSIDERED DIMINUTION IN THE VALUE OF ASS ET AND IT IS TO BE ADDED TO THE BOOK PROFIT OF THE ASSESSEE. INCRE MENTAL DEPRECIATION IS NOTHING BUT DEPRECIATION ON REVALUA TION OF ASSETS UNDER CLAUSE (IIA) OF THE EXPLANATION-1 SUB SECTIO N (2) OF SECTION 115JB OF THE ACT. THIS GROUND OF ASESSEE IS REJECTE D. 36. THE NEXT GROUND FOR OUR CONSIDERATION IS WITH REGARD TO SETTING OFF BROUGHT FORWARD OF BUSINESS LOSSES AND UNABSORBED DEPRECIATION OF EARLIER YEARS BEFORE ALLOWING DEDUC TION U/S.10A OF THE ACT. - - ITA 204 & 365/12 48 37. THE FACTS OF THE CASE ARE THAT THE AO MENTIONED IN THE ASSESSMENT ORDER THAT SECTION 10A ALLOWS DEDUCTION ONLY FROM TOTAL INCOME OF THE ASSESSEE AND NOT FROM THE INCOM E OF THE UNDERTAKING. TOTAL INCOME DEFINED UNDER SECTION 2(4 5) OF THE ACT WHICH MEANS THE TOTAL INCOME REFERRED TO IN SECTIO N 5, COMPUTED IN THE MANNER LAID DOWN IN THE ACT. ACCOR DING TO AO, THE TOTAL INCOME OF THE ASSESSEE HAS TO BE WORKED O UT IN THE MANNER LAID DOWN IN THE ACT WHICH WILL BE WORKED AF TER GIVING EFFECT TO PROVISION OF SECTION 71 AND 72 CONTAINED IN CHAPTER VI OF ACT WHICH PROVIDES FOR AGGREGATION OF INCOME AND SET OFF OR CARRY FORWARD OF LOSSES. THE AO PLACED RELIANCE ON THE FOLLOWING DECISIONS:- (A) M/S INTELLINET TECHNOLOGIES INDIA PRIVATE LIMIT ED VS. ITO [2010-TTIOL- 167-ITAT-BANGALORE. (B) CIT VS. HIMATASINGIKE SEIDE LIMITED [286 ITR 25 5]. (C) M/S SWORD J GLOBAL (I) PVT. LTD VS ITO [2008] 3 06 ITR 286 CHENNAI ITAT. 37.1 BEFORE US, THE LD.A.R SUBMITTED THAT THE LE GISLATURE CONTEMPLATES THAT PROFITS AND GAINS OF THE UNDERTAK INGS FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWA RE ARE TO BE DEDUCTED WHILE COMPUTING THE PROFITS AND GAINS OF B USINESS OR - - ITA 204 & 365/12 49 PROFESSION. THE DEDUCTION UNDER SECTION 10A(1) IS C OMPUTED WITH REFERENCE TO THE SUB-SECTION 10A(4) WHICH REFE RS TO THE PROFITS OF BUSINESS OF THE UNDERTAKING AND HARMON IOUS INTERPRETATION OF SECTION 10A(1) ALONG WITH SECTION 10A(4) INDICATES THAT DEDUCTION UNDER SECTION 10A OF THE A CT SHALL BE COMPUTED ON THE INCOME OF THE UNDERTAKING ONLY. FUR THER, LD.A.R SUBMITTED THAT EVEN THOUGH IT IS A DEDUCTION TO BE GIVEN, IT IS TO BE DEDUCTED WHILE ARRIVING AT THE PROFITS OF BUSINESS AND NOT FROM THE GROSS TOTAL INCOME AS ENVISAGED UNDER CHAPTER VI-A OF THE ACT. A DEDUCTION UNDER CHAPTER III OF T HE ACT IS TO BE GRANTED FIRST WHILE COMPUTING THE PROFITS AND GA INS OF BUSINESS ITSELF AND NOT FROM THE GROSS TOTAL INCOME . THE ASSESSEE CASE INVOLVES SET OFF OF UNABSORBED DEPREC IATION AND LOSSES FROM OTHER BUSINESS OR UNDERTAKINGS I. E. NO N 10A UNIT, AGAINST THE PROFIT OF THE 10A UNIT. THE LD.A.R FURT HER SUBMITTED THAT THE INTELLINET TECHNOLOGIES INDIA CASE UPON IS BASED ON THE KARNATAKA HIGH COURT RULING IN THE CASE OF HIMATSIN GIKE CASE THE HIMATASINGIKE CASE IS DISTINGUISHABLE ON FACTS SINCE IT WAS ON THE SET OFF OF UNABSORBED DEPRECIATION OF THE SA ME EOU UNIT. - - ITA 204 & 365/12 50 HOWEVER THE FACTS IN THIS CASE RELATE TO SET OFF OF UNABSORBED DEPRECIATION OF NON-EOU UNIT, WHICH WAS DECIDED BY THE LD.CIT(A) IN FAVOUR OF THE ASSESSEE FOR ASSESSMENT YEAR 2005-06. 38. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, THIS ISSUE IS SQUARELY C OVERED BY THE JUDGEMENT OF SUPREME COURT IN THE CASE OF CIT VS. M/S.YOKOGAWA INDIA LTD REPORTED IN 391 ITR 274 WHE REIN HELD THAT:- 16. FROM A READING OF THE RELEVANT PROVISIONS OF S ECTION 10A IT IS MORE THAN CLEAR TO US THAT THE DEDUCTIONS CONTEM PLATED THEREIN IS QUA THE ELIGIBLE UNDERTAKING OF AN ASSESSEE STAN DING ON ITS OWN AND WITHOUT REFERENCE TO THE OTHER ELIGIBLE OR NON- ELIGIBLE UNITS OR UNDERTAKINGS OF THE ASSESSEE. THE BENEFIT OF DEDUCT ION IS GIVEN BY THE ACT TO THE INDIVIDUAL UNDERTAKING AND RESULT ANTLY FLOWS TO THE ASSESSEE. THIS IS ALSO MORE THAN CLEAR FROM THE CONTEMPORANEOUS CIRCULAR NO. 794 DATED 9.8.2000 WHI CH STATES IN PARAGRAPH 15.6 THAT, THE EXPORT TURNOVER AND THE TOTAL TURNOVER FOR THE PURPOSES OF SECTIONS 10A AND 10B SHALL BE OF THE UNDERTAKING LOCATED IN SPECIFIED ZONES OR 100% EXPORT ORIENTED UNDERTAKINGS, AS THE CASE MAY BE, AND THIS SHALL NOT HAVE ANY MATERIAL RELATIONSHIP W ITH THE OTHER BUSINESS OF THE ASSESSEE OUTSIDE THESE ZONES OR UNITS FOR THE PURPOSES OF THIS PROVISION. - - ITA 204 & 365/12 51 17. IF THE SPECIFIC PROVISIONS OF THE ACT PROVIDE [FIRST PROVISO TO SECTIONS 10A(1); 10A (1A) AND 10A (4)] THAT THE UNI T THAT IS CONTEMPLATED FOR GRANT OF BENEFIT OF DEDUCTION IS T HE ELIGIBLE UNDERTAKING AND THAT IS ALSO HOW THE CONTEMPORANEOU S CIRCULAR OF THE DEPARTMENT (NO.794 DATED 09.08.2000) UNDERSTOOD THE SITUATION, IT IS ONLY LOGICAL AND NATURAL THAT THE STAGE OF DEDUCTION OF THE PROFITS AND GAINS OF THE BUSINESS OF AN ELIG IBLE UNDERTAKING HAS TO BE MADE INDEPENDENTLY AND, THEREFORE, IMMEDI ATELY AFTER THE STAGE OF DETERMINATION OF ITS PROFITS AND GAINS . AT THAT STAGE THE AGGREGATE OF THE INCOMES UNDER OTHER HEADS AND THE PROVISIONS FOR SET OFF AND CARRY FORWARD CONTAINED IN SECTIONS 70, 72 AND 74 OF THE ACT WOULD BE PREMATURE FOR APPLICA TION. THE DEDUCTIONS UNDER SECTION 10A THEREFORE WOULD BE PRI OR TO THE COMMENCEMENT OF THE EXERCISE TO BE UNDERTAKEN UNDER CHAPTER VI OF THE ACT FOR ARRIVING AT THE TOTAL INCOME OF T HE ASSESSEE FROM THE GROSS TOTAL INCOME. THE SOMEWHAT DISCORDANT USE OF THE EXPRESSION TOTAL INCOME OF THE ASSESSEE IN SECTIO N 10A HAS ALREADY BEEN DEALT WITH EARLIER AND IN THE OVERALL SCENARIO UNFOLDED BY THE PROVISIONS OF SECTION 10A THE AFORE SAID DISCORD CAN BE RECONCILED BY UNDERSTANDING THE EXPRESSION TOTAL INCOME OF THE ASSESSEE IN SECTION 10A AS TOTAL INCOME OF THE UNDERTAKING. 18. FOR THE AFORESAID REASONS WE ANSWER THE APPEALS AND THE QUESTIONS ARISING THEREIN, AS FORMULATED AT THE OUT SET OF THIS ORDER, BY HOLDING THAT THOUGH SECTION 1OA, AS AMEND ED, IS A PROVISION FOR DEDUCTION, THE STAGE OF DEDUCTION WOU LD BE WHILE COMPUTING THE GROSS TOTAL INCOME OF THE ELIGIBLE UN DERTAKING UNDER CHAPTER IV OF THE ACT AND NOT AT THE STAGE OF COMPUTATION OF THE TOTAL INCOME UNDER CHAPTER VI. - - ITA 204 & 365/12 52 IN VIEW OF THE ABOVE JUDGEMENT OF APEX COURT, WE AR E INCLINED TO ALLOW THE GROUND TAKEN BY THE ASSESSEE. 39. THE NEXT GROUND IS WITH REGARD TO EXCLUSION OF INTERNET (TELECOMMUNICATION) EXPENSES RS.47,860/- TOWARDS CH ARGES FOR DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA FROM EX PORT TURNOVER U/S.10A OF THE ACT. 40. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, THE DECISION OF THE CHENNAI SPECIAL BENCH IN THE CASE OF SAK SOFT LTD., 121 TTJ 865 IS SQUARELY COVERED THIS ISSUE WHEREIN HELD THAT PARITY NEEDS TO BE MAINTAINED BETWEEN EXPORT TURNOVER AND TOTAL TURNOV ER, DIRECTED THE AO TO REDUCE THE EXPENSES WHICH HAVE B EEN EXCLUDED FROM EXPORT TURNOVER, THE SAME TO BE EXCLU DED FROM THE TOTAL TURNOVER ALSO FOR PURPOSE OF COMPUTING DE DUCTION U/S.10B OF THE ACT. ACCORDINGLY, WE DIRECT THE AO T O FOLLOW THE DECISION OF THE DECISION OF SAK SOFT LTD., CITED SU PRA AND HELD THE ISSUE IN FAVOUR OF THE ASSESSEE. - - ITA 204 & 365/12 53 41. THE NEXT ISSUE IS WITH REGARD TO TREATING THE COST OF MOBILE PHONES AS CAPITAL EXPENDITURE. 42. THE CONTENTION OF THE LD.A.R IS THAT THE COST O F MOBILE PHONE AND TELEPHONE INSTRUMENTS TO BE TREATED AS RE VENUE EXPENDITURE AS THE LIFE OF THESE EQUIPMENTS IS VERY SHORT. 43. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, THE COST OF THESE DEVICE S NEEDS TO BE CAPITALIZED UNDER THE BLOCK OF ASSETS ELECTRICAL A ND ELECTRONIC EQUIPMENTS AS PER SECTION 32 OF THE ACT READ WITH DEPRECIATION SCHEDULE OF THE INCOME TAX RULES, 1962 WITH APPLICA BLE DEPRECIATION ALLOWANCE. ACCORDINGLY, THIS GROUND RA ISED BY THE ASSESSEE STANDS DISMISSED. 44. THE NEXT GROUND IS WITH REGARD TO DISALLOWANCE OF INTEREST OF RS.51,313/- ON DELAYED PAYMENT OF TDS. 45. BEFORE US, LD.A.R SUBMITTED THAT IT WAS PAID TOWARDS INTEREST ON DELAY IN REMITTANCE OF TDS , WHICH ITSE LF IS A PENALTY FOR NOT PAYING THE TDS IN TIME AND DISALLOWING THE INTEREST AGAIN WOULD AMOUNT TO DOUBLE PENALTY. THEREFORE, INTEREST ON DELAYED PAYMENT OF TDS MAY BE ALLOWED. - - ITA 204 & 365/12 54 46. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION, THIS INTEREST PAID FOR D ELAY IN REMITTANCE OF TDS CANNOT BE CONSTRUED AS PENALTY FO R VIOLATION OF ANY PROVISIONS OF LAW. BEING SO, THE INTEREST PA ID FOR DELAY IN REMITTANCE OF TDS WHICH IS A COMPENSATORY NATURE TO BE ALLOWED AS A DEDUCTION WHILE COMPUTING THE INCOME OF ASSESS EE. THIS GROUND OF ASSESSEE IS ALLOWED. 47. IN THE RESULT, THE ASSESSEES APPEAL IN ITA NO.204/MDS./12 IS DISMISSED AND ITA NO.365/MDS./12 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 5 TH APRIL, 2017. SD/- SD/- ( $% & ) ( ' ( ) $ ) *%+,-,./01,2345,.62,+778,293 : ;< /JUDICIAL MEMBER ! ;<=>>70.?,.?@A1BA2 ': /CHENNAI, C; /DATED, THE 5 TH APRIL , 2017. K S SUNDARAM ;D EFGF / COPY TO: 1 . / APPELLANT 3. H3 / CIT(A) 5. FIJ K / DR 2. / RESPONDENT 4. H / CIT 6. JLM / GF