ASB INTERNATIONAL PVT. LTD., THANE V. ACIT CIR-1, KALYAN, KALYAN

ITA 2137/MUM/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8886 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2011-2012
• Appeal Filed On: 01-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: KARSHIMA PHATARPHEKAR
• Keywords: Transfer pricing; International transaction; Additional evidence; Wholly owned subsidiary; Fair market value; Revised return
• Section: 92

Judgement Text

INCOME-TAX APPELLATE TRIBUNAL -KBENCH MUMBAI , ,, , , , , , , ,, , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND SAKTIJIT DEY,JUDICIAL MEMBER / ITA(TP)/NO.2137/MUM/2016 : /ASSESSMENT YEAR-2011-12 ASB INTERNATIONAL PVT. LTD. E-09, MIDC, ADDL. AMBERNATH INDL. AREA, ANAND NAGAR, AMBERNATH EAST THANE-421 506. PAN:AAACA 8424 F VS. ACIT-CIRCLE-1 1 ST FLOOR, MOHAN PLAZA, WAYALE NAGAR, KHADAKPADA, KALYAN (W) MUMBAI. ( /APPELLANT ) ( / RESPONDENT) / ITA (TP)NO.1978/MUM/2016 : /ASSESSMENT YEAR-2011-12 ACIT-CIRCLE-1 1 ST FLOOR, MOHAN PLAZA, WAYALE NAGAR, KHADAKPADA, KALYAN (W) VS. ASB INTERNATIONAL PVT. LTD. E-09, MIDC, ADDL. AMBERNATH INDL. AREA, THANE-421 506 ( /APPELLANT ) ( / RESPONDENT) R EVENUE BY: SHRI N.K. CHAND-CIT ASSESSEE BY: MS. KARSHIMA PHATARPHEKAR & SHRI HARSH SHAH / DATE OF HEARING: 20.10.2016 / DATE OF PRONOUNCEMENT: 04.01.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , / PER RAJENDRA A.M. - CHALLENGING THE DIRECTIONS OF THE DISPUTE RESOLUTIO N PANEL(DRP),--I,MUMBAI THE ASSESSEE AND THE ASSESSING OFFICER(AO)HAVE FILED CROSS APPEA LS FOR THE YEAR UNDER CONSIDERATION. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF MANUFAC TURE OF INJECTION BLOW MOULDING MACHINES TO ITS ASSOCIATED ENTERPRISE(AE),FILED ITS RETURN OF INCOME, DECLARING INCOME OF RS.37.05CRORES.SUBSEQUENTLY,A REVISED RETURN WAS FI LED BY THE ASSESSEE ON 28.3.2013 DECLARING TOTAL INCOME AT RS.36.85 CRORES. DURING T HE ASSESSMENT PROCEEDINGS,THE ASSESSING OFFICER(AO)MADE A REFERENCE TO THE TRANSFER PRICING OFFICER(TPO)TO DETERMINE ARMS LENGTH PRICE(ALP)OF THE INTERNATIONAL TRANSACTIONS (IT.S).AFTER RECEIVING THE ORDER OF THE TPO THE AO PROPOSED ADDITION OF RS.27,31,73,211/-IN HIS DRAFT ORDER.THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP.THE DRP PARTLY UPHELD THE ORDERS OF THE AO/TPO.IN PURSUANCE OF THE DIRECTIONS OF THE DRP,THE AO COMPLETED THE ASSE SSMENT U/S.143 (3)R.W.S.144C OF THE ACT,ON 29.01.2016,DETERMINING THE INCOME OF THE ASS ESSEE AT RS.50.99 CRORES. 2. ASSESSEE,A 100% SUBSIDIARY OF THE NISSEI ASB MACHIN E CO.LTD.JAPAN(ASBJ),IS ENGAGED IN MANUFACTURING OF INJECTION STRETCH BLOW-MOULDING MA CHINES, MOULDS AND PARTS, COMPONENTS AND SUB ASSEMBLIES OF MACHINES AND MOULDS.DURING TH E ASSESSMENT PROCEEDINGS, THE AO 2137 & 1978/M/16 ASB INTERNATIONAL PVT.LTD. 2 FOUND THAT THE ASSESSEE HAD ENTERED INTO INTERNATIO NAL TRANSACTIONS (IT.S) WITH ITS ASSOCIATED ENTERPRISES (AE.S).HE MADE A REFERENCE TO THE TRANS FER PRICING OFFICER (TPO) TO DETERMINE THE ARMS LENGTH PRICE(ALP)OF THE TRANSACTIONS. AFT ER RECEIVING THE ORDER OF THE TPO,THE AO ISSUED A DRAFT ORDER INCLUDING THE ADJUSTMENT SUGGE STED BY THE TPO.THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP.AS PER THE DIRECTIONS OF THE DRP,THE AO COMPLETED THE ASSESS - MENT ON 29/01/2016, U/S.143 (3) R.W.S.144C (13) OF THE ACT.HE DETERMINED THE INCOME OF THE ASSESSEE AT RS.50.99 CRORES. 3. FIRST EFFECTIVE GROUND OF APPEAL (GOA1-10)IS ABOUT MAKING AN UPWARD ADJUSTMENT OF RS. 14.13 CRORES TO THE TOTAL INCOME OF THE ASSESSEE.DU RING THE TRANSFER PRICING (TP) PROCEEDINGS, THE TPO FOUND THAT THE ASSESSEE HAD ENTERED INTO FO LLOWING IT.S.WITH ITS AE.S : SN. DESCRIPTION METHOD AMOUNT (IN RS.) 1. PURCHASE OF RAW MATERIAL TNMM 11,36,22,102/- 2. SALE OF FINISHED GOODS TNMM 171,65,55,009/- 3. PAYMENT OF ROYALTY TNMM 9,63,35,542/- 4. AVAILING OF TECHNICAL SERVICES TNMM 75,89,293/- 5. PAYMENT OF INTEREST ON LOAN TNMM 60,49,555/- 6. REDEMTION OF PREFERENCE SHARES SECTION 92 100,00 0,000/- PLI WAS TAKEN BY CONSIDERING OP/OC.HE FOUND THAT TH E ASSESSEE HAD AGGREGATED ALL THE IT.S AND HAD CONDUCTED AN ENTITY LEVEL ANALYSIS.A SUMMAR Y OF THE MARGIN EARNED BY THE ASSESSEE AND ITS COMPARABLE COMPANIES WAS AS UNDER: METHOD USED OVERALL TNMM PROFIT LEVEL INDICATOR NET COST PLUS MARGIN- OP/OC NET COST + MARGIN OF ASB INDIA 14.01% NET COST + MARGIN COMPARABLES 3 YEAR WEIGHTED AVER AGE 12.64% THE ASSESSEE CLAIMED THAT THE NET COST PLUS MARGIN (14.01%)SHOWN BY IT WAS HIGHER THAN THE MARGIN OF THE COMPARABLE COMPANIES(12.64%),THAT THE IT.SENTERED INTO IT WERE AT ARMS LENGTH.THE ASSESSEE ALSO SUBMITTED THE SINGLE YEAR UPDATED MARGIN OF THE COMPARABLES AND IT WAS 9.26%. THE TPO DIRECTED THE ASSESSEE TO SUBMIT SEGMENTAL P ROFIT AND LOSS ACCOUNT BETWEEN THE AE AND THE NON-AE SEGMENTS.THE SEGMENTAL RESULT WAS AS UNDER: PARTICULARS AE SEGMENT NON-AE-SEGMENT NET COST PLUS MARGIN (OP/OC) 6.42% 26% CONSIDERING THE SEGMENTAL DETAILS,THE TPO MADE AN A DJUSTMENT OF RS.27.31 CRORES TAKING IN TO CONSIDERATION THE OP/OC FOR AE SEGMENT AT 23% [2 6%(-)3%,AN ALLOWANCE FOR DELAY IN RECEIVABLES AND AFTER SALES SERVICES AND OTHER EFFO RTS MADE UNDER THE NON-AE BUSINESS]. 2137 & 1978/M/16 ASB INTERNATIONAL PVT.LTD. 3 4. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP.IT ALS O FILED ADDITIONAL EVIDENCES.IT WAS ARGUED BEFORE THE DRP THAT THE TPO DID NOT CONSIDER THE FACT THAT THERE WAS DIFFERENCE IN FUNCTIONAL AND RISK PROFILE OF AE-BUSINESS VIS-A-VI Z THE NON AE-BUSINESS,THAT HE HAD GIVEN AN AD HOC RELIEF OF 3%,THAT HE DID NOT CONSIDER THE DI FFERENCE IN THE PROFILES OF THE AE AND NON- AE BUSINESSES.IT FILED DETAILED NOTE ABOUT THE RISK PROFILE OF BOTH THE BUSINESSES AND SUBMITTED THAT IN THE CASE OF AE-BUSINESS IT WAS NO T THE SELLER OF THE PRODUCTS,THAT IT WAS RATHER A PROVIDER OF MANUFACTURING SERVICES CONDUCT ED AS PER THE AES ORDER, SPECIFICATIONS AND SCHEDULES WITH LIMITED RISK,THAT IN MOST OF THE CASES THE AE.S WOULD UNDERTAKE THE PAINTING ADDITIONAL CUSTOMISATION OF THE SEMI-FINIS HED GOODS AS PER THE REQUIREMENTS OF THE END CUSTOMERS OF THE AE.S,THAT IN CASE OF NON-AE BU SINESS IT OPERATED AS AN ENTREPRENEUR TO SELL ITS PRODUCTS TO THE END USERS,THAT PRICE OF TH E PRODUCTS FOR NON-AE BUSINESS SOLELY DEPENDED ON THE MARKET ACCEPTABILITY AND VARIOUS RI SK UNDERTAKEN BY IT,THAT IN CASE OF AE BUSINESS THE ASSESSEE WAS AKIN TO A CONTRACTOR MANU FACTURER OR A LIMITED RISK MANUFACTURER ,THAT THE BUSINESS MODEL IN BOTH THE CASES WERE QUI TE DIFFERENT, THAT INTERNAL TNMM SHOULD NOT HAVE BEEN APPLIED FOR DETERMINING THE ALP CONSI DERING THE PECULIAR FACTS OF THE CASE .THE ASSESSEE RELIED UPON THE CASE OF WRIGLEY INDIA PVT. LTD. (ITA/5648.5649 AND 5650/DEL/12 , PIAGIO VEHICLE PVT.LTD.(ITA/1480/PN/2010);DRILBITS INTERNATIONAL PVT.LTD.(ITA/1361/PN/ 2010).IT WAS FURTHER ARGUED THAT THE AE-BUSINESS SH OULD BE COMPARED WITH THE COMPANIES WHO HAD SIMILAR FUNCTION PROFILE AS THAT OF THE ASS ESSEE VIS-A-VIZ ITS AE BUSINESS,THAT IT HAD CONDUCTED A SEARCH FOR COMPARABLES ENGAGED IN CONTR ACT MANUFACTURING ACTIVITIES OF MACHI - NERY/EQUIPMENTS,THAT IT HAD IDENTIFIED FOUR COMPARA BLES IN THAT REGARD, THAT THE AVERAGE MEAN OP/OC MARGIN OF THE IDENTIFIED COMPARABLES FOR THE AY.2011-12 WAS 8.41% AS AGAINST THE MARGIN EARNED BY THE ASSESSEE FROM ITS AE BUSINESS OF 6.42%, THAT THE VARIATION WAS WELL WITHIN THE PLUS/MINUS 5% RANGE, THAT THE PRICING OF THE IT WAS AT ARMS LENGTH. IT WAS FURTHER ARGUED THAT THE ADJUSTMENTS MADE BY TPO BY REJECTIN G THE ENTITY LEVEL AT TNMM AND ADOPTING INTERNAL TNMM WAS INCORRECT.VIDE LETTER 29 .6.15 THE ASSESSEE SUBMITTED ADDITIONAL EVIDENCES AND CONTENDED THAT IT WAS GRANTED THE EOU STATUS SINCE 29/01/2007, THAT IT WAS RENEWED REGULARLY AND EXISTED TILL THE DATE OF ASSE SSMENT ORDER,THAT IT WAS ESTABLISHED AS AN EOU TO MANUFACTURE AND SELL GOODS TO ITS AE.S,THAT AN AGREEMENT WAS SIGNED ON 1.10.2010 WITH THE AE FOR SUPPLYING GOODS,THAT IT HAD FOLLOWE D THE SAME TERMS IN THE FIRST HALF OF THE YEAR TOO,THAT THE DOCUMENTS SUBMITTED BY IT WERE RE LEVANT FOR THE ENTIRE PERIOD, THAT THE TPO DID NOT CONSIDER CLAUSE 3.1 OF THE SALES AND PURCHA SE AGREEMENT OF THE 100% GUARANTEE PURCHASE AGREEMENT,THAT IT WAS NOT EXPOSED TO THE M ARKET RISK, THAT IRRESPECTIVE OF MARKET CONDITIONS,THAT IT WAS GUARANTEED THE REMUNERATION FIXED AS PER THE AGREEMENT,THAT THE TPO 2137 & 1978/M/16 ASB INTERNATIONAL PVT.LTD. 4 HAD NOT CONSIDERED SUBMISSION DTD. 24.9.15 WITH REG ARD TO SALE OF MACHINES TO THE AE.S AND NON-AE.S,THAT THE NATURE OF THE MACHINES SOLD TO TH E AE.S AND NON-AE.S WAS VASTLY DIFFERENT, THAT IT WOULD SELL MOSTLY SEMI-FINISHED GOODS TO TH E AE.S AND NON AE.S ,THAT FOR EACH SALE IT HAD A CUSTOMISED SPECIFICATION LIST,THAT FOR THE SA LE OF SEMI FINISHED GOODS TO AE.S THE SPECIFICATION LIST WAS STANDARD,THAT FOR SALE OF MA CHINES TO NON-AE.S THE SPECIFICATION LIST WOULD BE PRETTY DETAILED AND WOULD BE BASED ON THE REQUIREMENTS OF A PARTICULAR BUYER,THAT THE MERE DESCRIPTION OF THE PRODUCTS IN THE INVOICE COULD NOT BE CONSIDERED A DECIDING FACTOR WITH REGARD TO NATURE OF PRODUCT SUPPLIED BY IT,THA T THE NON-AE BUSINESS INCLUDED AE TRANSACTIONS-LIKE ROYALTY AND PURCHASE OF RAW MATER IAL FROM AE,THAT NON-AE BUSINESS COULD NOT BE CONSIDERED TO CONSIST ONLY OF NON-AE TRANSAC TIONS, THAT THE CONTENTION OF THE TPO CONSIDERING INTERNAL TNMM WAS NOT CORRECT. THE ASSE SSEE REFERRED TO THE CASE OF THYSSEN KRUPP INDUSTRIES INDIA PVT.LTD.(TS-721-ITAT-2012 )A ND SUBMITTED THAT AE-SEGMENT SHOULD NOT HAVE BEEN COMPARED WITH THE NON AE SEGMENT, THA T IT WOULD BE APPROPRIATE TO BENCH MARK THE AE SEGMENT WITH EXTERNAL CONTRACT MANUFACT URING ENTITIES. 4.1. AFTER CONSIDERING THE AVAILABLE MATERIAL,THE DRP HE LD THAT THE TPO HAD RIGHTLY REJECTED THE TRANSFER PRICING STUDY CONDUCTED BY THE ASSESSE E, THAT THE AE AND NON-AE TRANSACTIONS OF THE ASSESSEE WERE NOT SIMILAR AND SHOULD NOT HAVE B EEN BUNDLED TOGETHER,THAT APPLICATION OF TNMM AT ENTITY LEVEL DID NOT PROPERLY BENCHMARK THE AE TRANSACTIONS,THAT THE ASSESSEE HAD FAILED TO PROVE THAT IT WAS ENGAGED IN CONTRACT MAN UFACTURING FOR ITS AE.S, THAT NO SUCH CLAIM HAD BEEN MADE BY IT IN THE STUDY REPORT,THAT IT WAS NOT ENTITLED TO ANY FIXED REMUNERATION ON COST PLUS BASIS, THAT EXAMINATION OF THE AGREEMENT WITH THE AE SHOWED THAT SALE PRICE OF GOODS WERE FIXED ON MUTUAL NEGOTIATIONS AND SAME WE RE VALID FOR A PERIOD OF 1 YEAR,THAT THE ASSESSEE WOULD BEAR RISKS INVOLVED IN FLUCTUATION O F RAW MATERIAL PRICES,THAT IT WOULD ALSO BEAR FOREIGN EXCHANGE FLUCTUATION RISK AND OTHER NO RMAL RISK ASSOCIATED IT OTHER MANUFACTURING ACTIVITIES,THAT AT BEST THE AE COULD BE CONSIDERED A BULK CUSTOMER, THAT THE SALES MADE TO NON- AE.S WERE RETAIL SALES, THAT IN RETAIL SALES IT WAS INVOLVED IN MARKETING AS WELL AS DESIGNING OF THE MOULDS, THAT IN RESPECT OF AE-SALES NO MARKETIN G WAS REQUIRED MOULD DESIGNS WERE BASED ON REQUIREMENT OF AE.S DEPENDING UPON THE REQUIREME NT OF END USERS,THAT IN CASE OF NON-AE SALES IT WAS REQUIRED TO LOOK AFTER THE AFTER SALES SERVICES, THAT THE NON-AE SALES WERE SALE OF FINISHED GOODS,THAT IT WAS REQUIRED TO PAY ROYALTY FOR USE OF BRAND NAMES,THAT THE AE-SALES WERE NOT OF FULLY FINISHED GOODS, THAT THEY WERE SU BSTANTIALLY FINISHED,THAT INTERNAL TNMM COULD NOT BE APPLIED STRAIGHT AWAY, THAT SUITABLE A DJUSTMENTS HAD TO BE MADE IN RESPECT OF FUNCTIONAL AND RISK DIFFERENCES,THAT TPO HAD ALREAD Y GIVEN ALLOWANCE OF 3% FOR DELAY IN 2137 & 1978/M/16 ASB INTERNATIONAL PVT.LTD. 5 RECEIVABLES AND OTHER FACTORS WHILE COMPUTING THE M ARGIN, FURTHER ADJUSTMENTS FOR BULK MANUFACTURING ORDERS RECEIVED FROM AE.S AND GEOGRAP HICAL FACTORS ONLY WERE REQUIRED TO BE GIVEN,THAT AE.S SEGMENT ACCOUNTED FOR APPROX 63% OF TOTAL OPERATING COST, THAT IT WAS THE MAINSTAY OF THE OPERATIONS OF THE ASSESSEE , THAT T HE ASSESSEE ENJOYED A DOMINANT POSITION IN THE DOMESTIC MARKET.THE DRP GRANTED ADJUSTMENT OF 8 %.IT WAS FURTHER MENTIONED THAT REVISED MARGIN WOULD ALSO BECOME COMPARABLE WITH TH E MEAN MARGIN OF THE CONTRACT MANUFA -CTURER GIVEN BY THE ASSESSEE THAT WORKED OUT TO 11 .94%. THE DRP FURTHER OBSERVED THAT THE ASSESSEE HAD SUBMITTED A LIST OF FOUR COMPARABLES C ONTRACT MANUFACTURERS, THAT OUT OF THE FOUR ONE WAS A LOSS MAKING COMPANY,THAT CONTRACT MANUFAC TURERS WOULD HAVE ASSURED RETURN ON COST, THAT IT COULD NEVER INCUR A LOSS, THAT IF THE LOSS MAKING COMPARABLE WAS REJECTED THE MEAN MARGIN OF REMAINING THREE COMPARABLES WOULD WORK OU T TO 11.94%.FINALLY,IT DIRETED THE AO /TPO TO WORK OUT THE AMT OF ADJUSTMENTS ACCORDINGLY .AFTER RECEIVING THE ORDER OF THE DRP, THE AO MADE AN ADJUSTMENT OF RS.14.13 CRORES TO THE OPERATING INCOME OF THE ASSESSEE . 5. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE(AR)ARGUED THAT BUSINESS MODELS OF AE AND NON-AE SEGMENTS WERE NOT COMPARABLE, THAT THE TPO AND THE DRP HAD WRONGLY COMPARED WHOLESALE LEVEL TO RETAIL LEVEL, THAT THERE WAS QUALITATIVELY DIFFERENCE BETWEEN THE PRODUCT SOLD TO BOTH THE SEG MENTS,THAT IN THE NON-AE SEGMENT PRODUCTS WERE SOLD TO THE CUSTOMERS, THAT IN THE AE -SEGMENT THE ASSESSEE WOULD BE SELLING SERVICES,THAT BOTH THE SEGMENTS WERE DIFFERENT AT T HE MARKET LEVEL THAT REGULATED THEIR RESPECTIVE PRICES AND THE STRUCTURE WHICH DETERMINE D THEIR REMUNERATIONS, THAT THE REVENUE AUTHORITIES HAD COMPARED BOTH THE SEGMENTS STATING THAT THERE WAS NO DIFFERENCE BETWEEN THEM , THAT TPO AND THE DRP HAD PROVIDED ADJUSTMENT S FOR VARIOUS DIFFERENCES WHICH THEY DEEMED WERE EXISTENT BETWEEN THOSE TWE SEGMENT,THAT THE TPO HAD ADOPTED THE INTERNAL TNMM APPROACH CONSIDERING THE FACT THAT PROFIT MARG IN OF NON-AE SEGMENT WERE HIGHER THAN AE-SEGMENT,THAT TPO HAD NOT CONSIDERED THE FACT THA T NON-AE-SEGMENT TOO HAD CONTROLLED TRANSACTIONS LIKE ROYALTY AND PURCHASE PAYMENT,THAT THERE WAS GLARING DIFFERENCE IN THE FAR OF THE AE AND THE NON-AE SEGMENTS,THAT THE AE SEGM ENT CARRIED OUT ONLY FOUR FUNCTIONS WHEREAS THE NON-AE SEGMENT HAD TO UNDERTAKE 13 FUNC TIONS, THAT A SEGMENT WHICH WOULD BEAR ONLY LIMITED RISKS COULD NOT BE COMPARED TO A SEGME NT WHICH WOULD BEAR ALL RISKS,THAT A CONTRACT MANUFACTURER COULD NOT BE COMPARED WITH AN ENTREPRENEUR,THAT THE REVENUE AUTHORITIES HAD RECOGNISED THAT MARKETS OF THE AE - SEGMENT(EXPORT) AND THE NON-AE SEGMENT (DOMESTIC)WERE COMPLETELY DIFFERENT,THAT EVEN THEN THEY COMPARED THOSE SEGMENTS,THAT IT WAS AN ENTREPRENEUR IN INDIA AND SOLD ITS GOODS DIRECTL Y TO ITS CUSTOMER, THAT THE PRICING WOULD BE 2137 & 1978/M/16 ASB INTERNATIONAL PVT.LTD. 6 BASED ON COMPLETION SCENARIO IN THE COUNTRY, THAT I N NON-AE SEGMENT IT WAS RENDERING CONTRACT MANUFACTURING SERVICES, THAT ANY IMPORT OF SIMILAR MACHINES WOULD ATTRACT DUTY UPTO 21.52% ALONG WITH THE FREIGHT/HANDLING COST, THAT T HE ASSESSEE WAS ABLE TO TRANSLATE THESE FACTORS WHO EARN HIGHER MARGIN,THAT THE TPO AND THE DRP HAD GRANTED ADJUSTMENT FOR VARIOUS FACTORS TO FORCIBLY APPLY INTERNAL TNMM ,THAT IF TH E ADJUSTMENTS COULD NOT BE MADE IN A REASONABLE AND ACCURATE MANNER COMPARABLES HAVE TO BE DROPPED,THAT BOTH THE AUTHORITIES HAD FAILED TO APPRECIATE THAT IN THE AE SEGMENT THE ASS ESSEE WAS ACTING AS A CONTRACT MANUFAC - TURER,THAT THE TPO/DRP HAD NOT APPRECIATED THE FACT THAT IT WAS A 100% SUBSIDIARY OF ASBJ AND IT DID NOT HAVE THE ABILITY OF MANUFACTURING TH E MACHINES ON ITS OWN, THAT IT WAS ONLY BECAUSE OF THE TECHNOLOGY AND INSTRUCTIONS RECEIVED FROM THE AE THAT IT COULD MANUFACTURE THE MACHINES,THAT A CONTRACT MANUFACTURER WOULD FOL LOW THE INSTRUCTION TO WHOM HE HAD TO SUPPLY THE GOODS, THAT IT HAD TO GIVE ASSURANCE ON QUALITY AND DEFINE AND SUPPLY THE GOODS OF DEFINED QUALITY, THAT DRP HAD ACCEPTED THE EXTERNAL COMPARABLES EXCEPT FOR ONE LOSS MAKING COMPANY,THAT IT HAD REJECTED THE COMPARABLE ON THE GROUND THAT CONTRACT MANUFACTURER COULD NOT INCUR A LOSS, THAT CONTRACT MANUFACTURER ALSO C OULD SUFFER LOSS, THAT MERELY BECAUSE A COMP -ARABLE WAS INCURRING LOSSES IT CANNOT BE TAKEN OUT OF LIST OF VALID COMPARABLES,THAT NO TP ADJUSTMENTS WERE MADE FROM AY.2002-03 TO 2009-10.IT WAS ALSO ARGUED THAT IF THE ASSESSEE IS NOT CONSIDERED A CONTRACT MANUFACTURER IN THE AE SE GMENT, THE AE SEGMENT SHOULD BE BENCH - MARKED WITH EXTERNAL COMPARABLES IN THE ASSESSEES TP STUDY REPORT AFTER GRANTING APPROPRIATE ADJUSTMENTS FOR DIFFERENCES IN RISK WHILE APPLYING TNMM . HE RELIED UPON THE CASES OF MERCK LIMITED(37TAXMANN .COM433);DRILLBITS INTERNATONAL PVT. LTD.(SUPRA);TECHNIMONT ICB INDIA (ITA/5085 /MUM/201 0);REEBOK INDIA CO.(63 TAXMANN. COM367);SONY ERICSSON MOBILE COMMUNICATIONS LTD.(37 4ITR118);CHRYS CAPITAL INVEST - MENT ADVISORS(INDIA)(P.)LTD.(56TAXMANN.COM 417) AND MAERSK GLOBAL SERVICE CENTRE (INDIA) (P.) LTD. (133ITD 543). THE DEPARTMENTAL REPRESENTATIVE(DR)ARGUED THAT THE ASSESSEE HAD NOT CHARACTERISED ITSELF AS CONTRACT MANUFACTURER IN THE TP STUDY ,THAT IT HAD MENTIONED ITSELF AS AKIN TO CONTRACT MANUFACTURER, THAT NON AE SEGMENT HAD RISKS LIKE MARKETING,DESIGNING,BAD DEBT EXPENS ES WHICH INCREASED THE COST AND REDUCED THE PROFIT MAR GIN OF THE ASSESSEE , THAT THE SAID FACTORS AMOUNTED TO AUTOMATIC GRANT OF ADJUSTMENT IN NON A E SEGMENT, THAT ONUS WAS ON THE ASSESSEE TO PROVIDE DATA IF HE WANTED CERTAIN ADJUS TMENT , THAT THE ASSESSEE AHD NOT BROUGHT ON RECORD ANYTHING TO PROVE THAT IT WAS SEMI FINISHED GOODS TO TWO OF ITS AE.S, THAT NON AE SEGMENT COULD BE SUED TO BENCH MARK THE AE SEGMENT TRANSACTIONS, THAT THE ASSESSEE HAD NOT 2137 & 1978/M/16 ASB INTERNATIONAL PVT.LTD. 7 PREPARED SEPARATE SEGMENTS FOR COMMISSIONING AFTER SALES MARKETING DESIGNING ANY OTHER ACTIVITIES,THAT THE AE WAS NOT HAVING ANY OTHER SIG NIFICANT VALUE ADDED FUNCTIONS. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE WAS SUPPLYING GOODS TO ITS AE.S AND NON-AE .S,THAT ASSESSEE HAD CONSIDERED THE ENTITY LEVEL DATA FOR DETERMINING THE ALP OF THE IT .S.,THAT THE TPO APPLIED INTERNAL TNMM AND MADE AN UPWARD ADJUSTMENT OF RS. 27.31CROES,THA T HE GAVE AN ALLOWANCE OF 3% ON ACCOUNT OF DELAY IN RECEIVABLES AND AFTER SALES SE RVICES AND OTHER EFFORTS MADE UNDER THE NON- AE BUSINESS,THAT THE ASSESSEE FILED ADDITIONAL EVI DENCES BEFORE THE DRP AND ARGUED THAT IT WAS A CONTRACT MANUFACTURER OR AKIN TO CONTRACT MAN UFACTURER, THAT THE DRP HELD THAT INTERNAL TNMM COULD NOT BE APPLIED STRAIGHT AWAY,THAT THE AS SESSEE HAD FILED A LIST OF FOUR COMPARA - BLES,THAT THE DRP REJECTED ONE OF THE COMPARABLES H OLDING THAT IT WAS SUFFERING LOSSES AND THAT CONTRACT MANUFACTURER COULD NOT SUFFER LOSSES,THAT NO ADJUSTMENT WAS ALLOWED ON ACCOUNT OF CAPITAL EMPLOYED. 6.1. SECTION 92 AND THE RULES DEALING WITH TP PROCEEDING S WERE BROUGHT ON STATUTE TO ENSURE THAT THE PRICE PAID BY AN ASSESSEE TO ITS AE FOR TH E GOODS SOLD/PURCHASED OR SERVICES RENDERED/ AVAILED IS NOT LESS THAN THE FAIR MARKET VALUE.IN S HORT,FOR AN IT,THE ASSESSEES SHOULD CHARGE THE SAME PRICE FROM ITS AE AS IT WOULD HAVE CHARGED FRO M A UNKNOWN THIRD PARTY.FOR DETERMINING ALP ONE OF THE SEVERAL METHODS CAN BE USED AND SEV ERAL FACTORS HAVE TO BE CONSIDERED. BUT, THE BASE REMAINS THE SAME I.E.DETERMINATION OF FAIR MARKET VALUE OF A TRANSACTION ENTERED IN TO.FAIRNESS DEMANDS THAT THE ASSESSEE AS WELL AS TH E REVENUE AUTHORITIES SHOULD AVOID ARBITRARI -NESS ,WHILE DETERMINING ALP OF AN IT.BOTH SHOULD U SE SOME REASONABLE DATA TO PROVE THAT IT IS ABOVE BOARD. ADHOC ADJUSTMENTS, IN OUR OPINION,G OES AGAINST THE BASIC CONCEPT OF TP.IN THE CASE UNDER CONSIDERATION 3% AND 8% ALLOWANCE WAS GI VEN BY THE TPO AND THE DRP.BUT,HOW THEY ARRIVED AT THOSE FIGURES IS NOT KNOWN.THE REAS ONS FOR ADOPTING A CERTAIN PERCENTAGE DOES NOT FIND PLACE IN THEIR ORDERS.THEY HAVE NOT DISCUS SED AS TO WHAT WAS THE MATERIAL THAT GAVE THEM THE BASIS FOR ALLOWING 3% AND 8% ADJUSTMENT O N ACCOUNT OF DELAY IN RECEIVABLES AND AFTER SALES SERVICES AND CONSIDERING THE FACTORS L IKEBULK MANUFACTURING ORDERS RECEIVED FROM AE.S AND GEOGRAPHICAL LOCATIONS.BUT,BOTH THE AUTHO RITIES HAVE NOT CITED THE INSTANCES WHERE AN INDEPENDENT ASSESSEE,IN SIMILAR CIRCUMSTANCES,HA D CLAIMED THAT ADJUST -MENT ON ACCOUNT DELAY IN RECEIVABLES GEOGRAPHICAL FACTORS ETC. WAS APPROXIMATELY 3% OR 8%.NO JUDICIAL FORUM HAS ADOPTED THE SAID PERCENTAGE ON ACCOUNT OF DELAY IN RECEIVABLES/ BULK MANUFACTU- RING/GEOGRAPHICAL LOCATION.EVEN IF THEY HAD SOME MA TERIAL SUPPORTING THEIR STAND,SAME HAS 2137 & 1978/M/16 ASB INTERNATIONAL PVT.LTD. 8 NOT BEEN BROUGHT ON RECORD.THUS,THE ORDER PASSED BY THEM IS A NON-SPEAKING ORDER AND IT FALLS UNDER THE CATEGORY OF AN ORDER PASSED WITHOUT ASSIG NING REASONS.SUCH ORDERS CANNOT BE ENDORSED.AS A REPRESENTATIVES OF THE STATE,THEY ARE SUPPOSED TO RAISE AND COLLECT ONLY DUE TAXES FROM THE SUBJECTS.AS PER THE SCHEME AND PROVI SIONS OF THE ACT,DUE TAXES CANNOT BE DETE -RMINED BY MAKING ADHOC ALLOWANCES/DISALLOWANCES.BE FORE THE DRP,THE ASSESSEE HAD FILED A LIST OF COMPARABLES AND IT WAS NOT CONSIDERED IN PR OPER PERSPECTIVE. A COMPARABLE CANNOT AND SHOULD NOT BE REJECTED ONLY ON THE BASIS OF LOSS SU FFERED BY IT FOR A PARTICULAR YEAR.A PERSISTENT LOSS MAKING COMPARABLE CAN BE EXCLUDED.B UT, IN THE CASE UNDER CONSIDERATION,THE COMPARABLE HAD NOT SUFFERED LOSS YEAR AFTER YEAR.AF TER ADMITTING THAT INTERNAL TNMM COULD NOT HAVE BEEN APPLIED STRAIGHT AWAY,THE DRP SHOULD HAVE DELIBERATED UPON THE ISSUE OF DETER -MINATION OF ALP IN A MORE RATIONAL MANNER.BUT,IT J UST ADOPTED THE EASIEST ROUTE- AN AD HOC ALLOWANCE.IT IS A FACT THAT MORE THAN 60% OF THE SA LES TURNOVER OF THE ASSESSEE IS WITH NON- AE.S AND THE PROFIT RATIOS OF NON-AE.S AND AE.S CAN NOT BE SAME. BESIDES,THE ASSESSEE HAD ENTERED IN TO AN AGREEMENT WITH ITS AE FOR SUPPLY O F GOODS AND WORKING CAPITAL ADJUSTMENT IS REQUIRED TO BE MADE.ALL THESE FACTORS WOULD AFFECT THE ALP OF THE TRANSACTIONS.CONSIDERING THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE,WE ARE OF THE OPINION THAT THE MATTER NEEDS FURTHER VERIFICATION AND INVESTIGATION.SO,IN THE IN TEREST OF THE JUSTICE,WE ARE RESTORING THE MATTER TO THE FILE OF THE TPO/AO TO DECIDE THE ISSU E AFRESH.WHILE DETERMINING THE ALP,HE SHOULD CONSIDER THE DATA OF THE COMPANIES WHO ARE E NGAGED IN SUCH ACTIVITIES THAT ARE SIMILAR OR CLOSER TO THE ACTIVITIES OF THE ASSESSEE AND THE TURNOVER WITH THE AE.S AND NON-AE.S SHOULD BE OF SIMILAR VOLUMES.IN SHORT,SOME REASONABLE COMP ARABLES SHOULD BE SELECTED AFTER CONSIDER -ING THE FAR ANALYSIS OF SUCH COMPARABLE AND ONLY T HEN EXERCISE OF DETERMINING ALP SHOULD BE COMPLETED.EFFECTIVE GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE,IN PART. ITA/1976/MUM/2016: 7. THE ONLY ISSUE RAISED IN THE DEPARTMENTAL APPEAL IS ABOUT THE DIRECTION GIVEN BY THE DRP TO THE AO.IN THE EARLIER PART OF OUR ORDER,WE HAVE MEN TIONED THAT THE DRP HAD HELD THAT INTERNAL TNMM COULD NOT BE APPLIED STRAIGHT AWAY,THAT ADJUST MENTS FOR BULK MANUFACTURING ORDERS RECEIVED FROM AE.S AND GEOGRAPHICAL FACTORS WERE RE QUIRED TO BE GIVEN WHILE DETERMINING THE ALP OF THE IT.S.AS PER THE DIRECTIONS OF THE DRP,TH E AO ALLOWED ALLOWANCE OF 8%,WHILE FINALISING THE ASSESSMENT. 8. BEFORE US,THE DR SUPPORTED THE ORDER OF THE TPO AND THE AR RELIED UPON THE ORDER OF THE DRP.WHILE DECIDING THE APPEAL,FILED BY THE ASSESSEE ,WE HAVE RESTORED BACK THE ISSUE OF 2137 & 1978/M/16 ASB INTERNATIONAL PVT.LTD. 9 DETERMINING OF ALP TO THE FILE OF THE AO.THEREFORE, WE ARE OF THE OPINION THAT MATTER UNDER CONSIDERATION SHOULD ALSO BE DECIDED BY THE TPO/AO AFRESH.EFFECTIVE GROUND OF APPEAL,RAISED BY THE AO,IS PARTLY ALLOWED. AS A RESULT, APPEALS FILED BY THE ASSESSEE AND THE AO STAND PARTLY ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH JANUARY, 2017. 04 , 2017 SD/- SD/- ( / SAKTIJIT DEY ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 04.01.2017 JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR K BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.