Madhu Jayanti International Limited, Kolkata V. DCIT, Circle - 4(1), Kolkata, Kolkata

ITA 214/KOL/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 0845 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-12-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 14-02-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 15-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; International transaction; Rule of consistency; Earning of tax free income; Working capital adjustments
• Section: 92C; 143(3); 92D; 92E; 80HHC; 234B; 14A; 139(5); 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : KOLKATA [BEFORE HONBLE SHRI ABY. T. VARKEY, JM & SHRI M. BALAGANESH, AM ] I.T.A NO. 214/KOL/201 6 ASSESSMENT YEAR : 2011-1 2 MADHU JAYANTI INTERNATIONAL LTD. -VS- DCIT, CC-4(1), KOLKATA [PAN: AABCM 7502 R] (APPELLANT) (RESPONDE NT) FOR THE APPELLANT : SHRI AKASH MANSINK A, AR FOR THE RESPONDENT : SHRI G. MALLIKARJUNE, CI T DR DATE OF HEARING : 25.10.2017 DATE OF PRONOUNCEMENT : 01.12.2017 ORDER PER M.BALAGANESH, AM 1. THIS APPEAL IS DIRECTED AGAINST THE FINAL ORDER PASSED BY THE LEARNED DCIT, CIRCLE 4(1), KOLKATA [ IN SHORT THE LD AO] UNDER SECTION 1 43(3) READ WITH SECTION 92CA94) / 144C(13) OF THE INCOME TAX ACT, 1961 (HEREINAFTER R EFERRED TO AS THE ACT) , PURSUANT TO THE DIRECTIONS OF THE LEARNED DISPUTE RESOLUTION PANEL [ IN SHORT THE LD DRP] UNDER SECTION 144C(5) OF THE ACT DATED 15.10.2015 FOR THE ASST YEAR 2011-12. 2. THOUGH THE ASSESSEE HAD RAISED SEVERAL GROUNDS OF APPEAL BEFORE US WITH REGARD TO THE TRANSFER PRICING ADDITION, THE ONLY EFFECTIVE I SSUE TO BE DECIDED IN THIS APPEAL IS WITH REGARD TO THE DETERMINATION OF THE MOST APPROPRIATE METHOD (MAM) IN THE INSTANT CASE AND BASED ON WHICH WHETHER THE CONSEQUENTIAL ADJUST MENT TO ARMS LENGTH PRICE (ALP ) WAS JUSTIFIED IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSESS EE IS ENGAGED IN THE BUSINESS OF PROCESSING OF VARIOUS BLENDED TEA OF SINGULAR OR M ULTI ORIGIN. THE ASSESSEE COMPANY 2 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 2 OFFERS GREEN TEAS (BOTH PAN FRIED AND STEAMED THE JAPANESE SENCHA VARIETY), DECAFFEINATED TEAS BOTH BLACK AND GREEN, HERBAL A ND FRUIT TEAS ALONG WITH A LARGE VARIETY OF FLAVOURED TEAS AS THEY HAVE IN HOUSE FLA VOURING CAPABILITIES. IT HAS A LARGE CUSTOMER BASE BOTH IN INDIA AND ABROAD. THE COMPAN Y WAS INCORPORATED IN THE YEAR 1950 AND NOW HAS PROCESSING FACTORIES IN DIFFERENT PARTS OF INDIA FROM WHICH GUARANTEED QUALITY PRODUCTS ARE PROVIDED. IT HAS A COMPREHENS IVE IN HOUSE QUALITY SYSTEM CALLED QUALITY ASSURANCE SYSTEM (QAS). THIS COVERS VARIOU S ASPECTS INCLUDING CERTIFICATION OF ISO GUIDELINES, GMP (US FDAS GOOD MANUFACTURING PR ACTICES GUIDELINES) , HACCP (HAZARD ANALYSIS OF CRITICAL CONTROL POINTS, A FOOD SAFETY MONITORING SYSTEM OF THE FOOD INDUSTRY). THE ASSESSEES PRODUCT RANGE SPANS ACRO SS VARIOUS TYPES OF TEA PRODUCTS (INCLUDING BLACK TEA, GREEN TEA, RED TEA AND TEA BA GS). DURING THE RELEVANT TIME, THE ASSESSEES MANUFACTURING AND PACKAGING OPERATIONS SPAN ACROSS THREE KEY LOCATIONS NAMELY, KOLKATA, COIMBATORE AND GUWAHATI. THROUGH CONSISTENCY IN PRODUCT QUALITY, THE ASSESSEE HAS ESTABLISHED ITSELF AS ONE OF THE M OST RELIABLE AND TRUSTED NAMES IN THE USA, RUSSIAN, AUSTRALIAN AND EUROPEAN MARKETS. THE ASSESSEE COMPANY EXPORTS ITS PRODUCTS TO BOTH AES AND NON-AES AND HAD MAINTAINED THE TRANSFER PRICING DOCUMENTATION AS REQUIRED U/S 92D OF THE ACT. 3.1. THE RETURN OF INCOME FOR THE ASST YEAR 2011-12 WAS FILED ON 30.11.2011 DECLARING TOTAL LOSS OF RS 4,20,94,625/-. THE SAID RETURN WA S REVISED ON 30.11.2012 U/S 139(5) OF THE ACT DECLARING TOTAL LOSS OF RS 4,24,54,826/-. THE ASSESSEE HAS ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOC IATED ENTERPRISES (AES) DURING THE YEAR UNDER CONSIDERATION AND THE METHOD USED BY THE ASSESSEE AS PER FORM 3CEB FOR EACH OF THE TRANSACTIONS ARE AS UNDER:- EXPORT OF TEA RS 2913.74 LACS CPM AS MAM EXPORT OF PP BAGS / PP GEO FABRICS RS 454.93 LACS - CPM AS MAM EXPORT OF PACKING MATERIALS RS 246.36 LACS TN MM AS MAM 3 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 3 SALE OF MACHINERY PARTS RS 0.48 LACS TNMM AS MAM IMPORT OF PACKING MATERIAL RS 23.37 LACS TN MM AS MAM PAYMENT FOR AGENCY COMMISSION RS 33.74 LACS TNMM AS MAM CPM STANDS FOR COST PLUS METHOD TNMM STANDS FOR TRANSACTIONAL NET MARGIN METHOD MAM STANDS FOR MOST APPROPRIATE METHOD 3.2. THE LD TPO OBSERVED THAT THE ASSESSEE ADOPTED INTERNAL TNMM FOR THESE TRANSACTIONS. THE LD TPO ALSO OBSERVED THAT THE A SSESSEE HAD ADOPTED INTERNAL COST PLUS METHOD (CPM) FOR BENCHMARKING ITS INTERNATIONA L TRANSACTIONS IN RESPECT OF EXPORT OF TEA AND EXPORT OF PP BAGS / PP GEO FABRICS IN TH E SUMS OF RS 2913.74 LACS AND RS 454.93 LACS RESPECTIVELY. THE LD TPO OBSERVED T HAT THE DATA PROVIDED BY THE ASSESSEE IN JUSTIFYING THE INTERNAL CPM WAS ANALYSED AS UNDE R:- TEA AREA PARTICULARS SALES VALUE DIRECT EXPENSES ALLOCATED PERCENTAGE OF DIRECT EXPENSES ALLOCATED TO TOTAL SALES AT KOL/GUW TEA SALES TO NON-RELATED PARTY 45,12,94,184/- 7,28,55,586/- 17.33% TEA SALES TO RELATED PARTY 17,03,71,469/- 2,40,56,443/- 14.12% AT CBE TEA SALES TO NON-RELATED PARTY 3,97,55,421/- 70,09,497/- 17.63% TEA SALES TO 12,09,89,828/- 1,10,83,396/- 9.03% 4 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 4 RELATED PARTY PP BAGS AT MK PP SALES TO NON-RELATED PARTY 4,14,41,156/- 1,94,50,259/- 46.93% PP SALES TO RELATED PARTY 4,54,93,615/- 1,77,54,632/- 39.02% 3.3. THE LD TPO OBSERVED FROM THE AFORESAID TABLE T HAT WHILE ALLOCATING THE DIRECT COST TO AES AND NON-AES, THE ASSESSEE HAS SIGNIFICANTLY ALL OCATED LOWER COST TO THE RELATED PARTY SO AS TO INCREASE ITS PROFITABILITY AND CONSE QUENT TO IT, HELD THAT THE INTERNAL TNMM IS TO BE REJECTED. 3.4. FURTHER , HE OBSERVED THAT AS THE ASSESSEE IS ALSO ENGAGED IN SELLING OF BOTH BRANDED AND NON-BRANDED CATEGORIES OF TEAS, THE SAME SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF INTERNAL COMPARABILITY. THE CRUX IS TO COMPARE THE MARGIN OF SELLING BRANDED TEA TO AE WITH BRANDED TEA TO NON-AE. HOWEVER, THE ASSESSEE HAS NOT UNDERTAKEN THE SAME. IT HAS COMPARED THE MARGIN OF BRANDED TEA SO LD TO AES WITH THE MARGIN EARNED FROM SELLING OF BRANDED AND NON-BRANDED TEA TO NON- AES. IN VIEW OF THE SAME, THE TRANSFER PRICING ANALYSIS UNDERTAKEN BY THE ASSESSE E WAS REJECTED BY THE LD TPO. THE LD TPO IN THE SHOW CAUSE NOTICE U/S 92CA(2) OF THE ACT DATED 9.1.2015 ISSUED TO THE ASSESSEE STATED AS UNDER:- 4. NOW WHEN INTERNAL TNMM AND INTERNAL CPM IS REJE CTED A METHOD HAS TO BE ADOPTED TO FIND THE ALP OF THE TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. EVIDENTLY, THE CUP CANNOT BE APPLIED AS THE ASSESSEE DOES NOT IMPORT SAME OR SIMILAR PRODUCTS FROM THIRD PARTIES. EXTERNAL CPM AND RPM CANNOT BE APPLIED AS THE METHOD ENVISAGES CALCU LATION OF GROSS PROFIT. AS CALCULATION OF GP IS VERY SUBJECTIVE AND THE INDIA ACCOUNTING STANDARDS DOES NOT PROVIDE FOR THE PRESENTATION OF GROSS PROFIT. PROF IT SPLIT METHOD CANNOT BE 5 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 5 APPLIED AS THE COMPANY AND RELATED BOTH DO NOT HOLD ANY INTANGIBLE. THUS EXTERNAL TNMM IS THE MOST APPROPRIATE FOR DETERMINI NG THE ARMS LENGTH OF THE TRANSACTION WITH OPERATING PROFIT ON OPERATING COST AS PROFIT LEVEL INDICATOR (PLI). 3.5. THE LD TPO CALCULATED THE OPERATING PROFIT OF THE COMPANY FROM THE AUDITED PROFIT AND LOSS ACCOUNT AS UNDER AFTER EXCLUDING CERTAIN I NCOMES AND EXPENDITURES WHICH IN HIS OPINION ARE NON-OPERATING IN NATURE :- DESCRIPTION AMOUNT(RS.) NET SALES 152,20,84,000/- DUTY DRAWBACK 6,11,000/- DEPB CLAIM 1,26,01,000/- RENT 2,33,000/- MISCELLANEOUS RECEIPT 49,10,000/- 1,83,55,000/- LESS EXCHANGE GAIN 6,30,000/- 1,77,25,000/- OPERATING REVENUES 153,98,09,000/- EXPENDITURE DEBITED TO P& L ACCOUNT 181,98,66,000/- LESS BANK INTEREST AND CHARGES 3,58,73,000/- OPERATING EXPENDITURE 178,39,93,000/- OPERATING PROFIT 24,41,84,000/- OPERATING PROFIT/OPERATING COST (-)13.68% OPERATING PROFIT/OPERATING REVENUE (-)15.85% 3.6. THE LD TPO KEEPING IN VIEW OF THE BUSINESS PRO CESS CARRIED OUT BY THE ASSESSEE, CAME FORWARD WITH THE FOLLOWING COMPARABLES AS UNDE R :- 6 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 6 SL NO. NAME OF THE COMPANY OPERATING REVENUE(OR) OPERATING COST(OC) OPERATING PROFIT(OP) OP/OC OP/OR 1 JIVRAJ TEA LIMITED 12895.32 12311.09 584.22 4.75% 4.53% 2 MARVEL TEA ESTATE (INDIA) LTD. 14607.82 14026.73 581.09 4.14% 3.98% 3 MAHANI TEA LEAVES (P) LTD. 17569.88 16753.07 816.81 4.87% 4.65% 4 ASIAN TEA & EXPORTS LTD. 13787.84 13458.86 328.97 2.44% 2.39% 5 GUJARAT TEA PROCESSORS AND PACKERS LTD. 52693.32 48747.13 3946.19 8.09% 7.49% AVERAGE 4.8 6% 4.61% THE LD TPO CONCLUDED THAT THE OPERATING PROFIT MARG IN OF THE COMPARABLE SELECTED ARE SIGNIFICANTLY GREATER THAN THAT OF TESTED PARTY. I N VIEW OF THE ABOVE, HE SHOW CAUSED THE ASSESSEE AS TO WHY NOT THE ALP OF THE TRANSACTION B E CALCULATED BY USING THE TNMM AS THE MAM WITH OPERATING PROFIT ON REVENUE AS THE PLI . 3.7. THE ASSESSEE VIDE LETTER DATED 14.1.2015 RESPO NDED AS UNDER:- 1. REJECTION OF THE TRANSFER PRICING STUDY UNDERTA KEN BY MJIL (REFER POINT NO. 1,2,3 AND 4 OF THE SUBJECT NOTICE) DURING THE FY 2010-11, MJIL HAS EXPORTED FINISHED G OODS TO ITS AES IN THE NATURE OF TEA, PP BAGS. IN ORDER TO BENCHMARK THE INTERNATION AL TRANSACTION OF EXPORT OF FINISHED 7 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 7 GOODS (I.E. TEA AND PP BAGS), MJIL ADOPTED COST PLU S METHOD AS THE MOST APPROPRIATE METHOD IN THE TRANSFER PRICING STUDY REPORT. IN THE SUBJECT NOTICE, YOUR GOODSELF HAS HELD THAT THE CPM ANALYSIS FOR BENCHMARKING THE TRANSACTION OF EXPORT OF FINISHED GOODS IS NOT CORRECT AS THE DIRECT EXPENSES ALLOCATED BY MJIL BETWEEN THE SALES MADE TO RELATED AND NON-RELATED PARTY IS IN APPROPRIATE. YOUR GOODSELF HAS MENTIONED THAT THE D IRECT EXPENSES ALLOCATED TO AES ARE SIGNIFICANTLY LOWER COMPARED TO DIRECT EXPENSES ALL OCATED TO NON-AES. IN THIS REGARD, IT MAY BE NOTED THAT GENERALLY THE COMPANY SELLS ITS P RODUCE ONLY TO ITS AE IN THE JURISDICTION WHERE AE HAS PRESENCE. HOWEVER, IT IS HUMBLY SUBMITTED THAT YOUR GOODSELF WHILE COMPARING THE DIRECT COST OF EXPORTS TO RELAT ED AND NON-RELATED PARTIES HAVE IGNORED THAT THERE COULD BE VARIOUS FACTORS LEADING TO SUCH DIFFERENCE. FOR EXAMPLE, THE FREIGHT CHARGES COMPRISE OF ONE OF THE MAIN COMPONE NT OF DIRECT COST WHICH IS DIFFERENT FOR DIFFERENT COUNTRIES. FURTHER, REGULATIONS OR TH E MARKET REQUIREMENT OF ANY COUNTRY COULD LEAD TO INCREASED COSTS. IN VIEW OF THE SAME, THE ASSESSEE HUMBLY SUBMITS TH AT FOLLOWING ARE THE KEY REASONS FOR DIFFERENCE IN THE PERCENTAGE OPERATING COSTS: THE EXPORTS MADE TO THE AES ARE GENERALLY SHIPPED T O THE PORT OF VLADIVOSTOK, RUSSIA ONLY. HOWEVER, THE EXPORTS MADE TO NON-AES ARE SHIPPED TO PORTS OF WEST AFRICA, SWEDEN, FINLAND, SWEDEN ETC. THE FREIGHT CHARGES IN THE PORT OF VLADIVOSTOK RUSS IA IS APPROXIMATELY $2000 PER CONTAINER. HOWEVER, SIMILAR CHARGES IN WEST AFR ICA AND EUROPEAN COUNTIES RAGES BETWEEN $3500 - $4000 AND $2700 - $2800 RESPE CTIVELY. THUS, IT MAY BE NOTED BY YOUR GOODSELF THAT THE FREIGHT EXPENSES IN CURRED WHILE EXPORTING TO AE IS ALMOST DOUBLE THE FREIGHT EXPENSES INCURRED WHIL E EXPORTING TO NON-AE. FURTHER, THE ASSESSEE ALSO HUMBLY SUBMITS THAT THE NON-AES IN WEST AFRICA ARE SITUATED IN EXTREMELY INTERIOR AND REMOTE LOCATIONS . DUE TO THE GEOGRAPHICAL CONSTRAINT, THE DELIVERY TO THESE NON-AES REQUIRES A LOT OF TRANSSHIPMENTS WHICH LEADS TO FURTHER INCREMENT OF FREIGHT CHARGES. IT MAY ALSO BE NOTED THAT THE NUMBER OF BOXES PACKE D/STACKED IN CONTAINERS, SHIPPED TO VLADIVOSTOK, ARE HIGHER COMPARED TO NUMB ER OF BOXES PACKED IN CONTAINERS TO BE SHIPPED TO EUROPEAN COUNTRIES WHIC H ARE SHIPPED IN PALLETS FOR MECHANICAL UNLOADING. THIS IS BECAUSE IF THE BOXES ARE HEAVILY STACKED IN THE CONTAINERS IT WOULD REQUIRE MANUAL LABUOR FOR UNLOA DING THOSE CONTAINERS AND THE MANUAL LABOUR IS EXTREMELY EXPENSIVE IN EUROPEA N COUNTRIES COMPARED TO RUSSIA. HENCE, TO AVOID THE USAGE OF SUCH EXPENSIVE LABOURS, THE MATERIAL ARE SHIPPED IN PALLETS AND AS SUCH THE NUMBER OF BOXES STACKED IN CONTAINERS SHIPPED TO EUROPEAN COUNTRIES IS LOWER. HENCE, DUE TO THIS, THE FREIGHT CHARGES PER TONNE INCREASES WHICH INDIRECTLY AFFECT THE DI RECT EXPENSES. 8 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 8 FURTHER, THE PACKAGING OF SHIPMENTS TO NON-AE EUROP EAN CUSTOMERS ARE FACIER THAT SHIPMENTS MADE TO AE. AS SUCH THE NET QUANTITY OF TEA SHIPPED IN ONE CONTAINER TO NON-AE EUROPEAN CUSTOMERS IS LOWER THA N THOSE SHIPPED TO AE AS THE FANCY PACKAGING CONSUMES THE CONTAINER VOLUME. AS SUCH THE FREIGHT AND SHIPPING CHARGES PER TONE INCREASES WHICH INDIRECTL Y AFFECT THE DIRECT EXPENSES. ACCORDINGLY, YOUR GOODSELF HAS PROPOSED TO REJECT T HE TRANSFER PRICING (TP) REPORT FOR TRANSACTION RELATING TO EXPORT OF GOODS AND ADOPT T NMM AS THE MOST APPROPRIATE METHOD. THE ASSESSEE ALSO SUBMITTED IN DETAIL BY PLACING RE LIANCE ON THE OECD GUIDELINES THAT ONE OF THE TRADITIONAL TRANSACTION METHOD TO BE ADO PTED IS CPM. THE ASSESSEE ALSO PLACED RELIANCE ON VARIOUS TRIBUNAL DECISIONS FOR I TS JUSTIFICATION OF ADOPTING CPM AS THE MAM. THE ASSESSEE ALSO PLACED RELIANCE ON THE PROV ISIONS OF RULE 10B(1) OF THE RULES WITH REGARD TO THE APPROPRIATENESS OF CPM FOR A GIV EN SITUATION AS UNDER:- (B) COST PLUS METHOD, BY WHICH , ------ (I) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INC URRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SERVICES PROVIDE D TO AN ASSOCIATED ENTERPRISE, ARE DETERMINED. 3.7.1. THE ASSESSEE STATED THAT CPM IS TO BE USED F OR CASES WHERE THE ENTERPRISE HAS BEEN INVOLVED IN PRODUCTION ACTIVITIES AND THE DIRECT AN D INDIRECT COSTS CAN BE DETERMINED. THE ASSESSEE PLACED RELIANCE ON OECD GUIDELINES AND SUBMITTED THAT PARA 2.41 OF OECD GUIDELINES STATE THAT :- 2.41 FOLLOWING THE PRINCIPLES IN CHAPTER I, AN UNC ONTROLLED TRANSACTION IS COMPARABLE TO A CONTROLLED TRANSACTION (I.E. IT IS A COMPARAB LE UNCONTROLLED TRANSACTION) FOR PURPOSES OF THE COST PLUS METHOD IF ONE OF TOW COND ITIONS IS MET: 1. NONE OF THE DIFFERENCE (IF ANY) BETWEEN THE TRANSACTION BEING C OMPARED OR BETWEEN THE ENTERPRISES UNDERTAKING THOSE TRANSACTIONS COULD MATERIALLY AFF ECT THE COST PLUS MARKUP IN THE OPEN MARKET; OR 2. REASONABLY ACCURATE ADJUSTMENTS CAN B E MADE TO ELIMINATE THE MATERIAL EFFECT OF SUCH DIFFERENCES. BASED ON THE SAME, THE ASSESSEE SUBMITTED THAT MATE RIALLY THERE ARE NO SIGNIFICANT DIFFERENCES BETWEEN THE EXPORTS MADE TO AES AND NON -AES AND HENCE THE SAME WOULD 9 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 9 NOT AFFECT THE COST PLUS MARKUP. THE ASSESSEE PLACE D RELIANCE ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF LOREAL IN DIA PVT LTD REPORTED IN TS-58-HC- 2013-(BOM)TP . IN THE SAID CAES, LOREAL INDIA WAS ENGAGED IN T HE MANUFACTURE AND SALE OF COSMETICS AND BEAUTY PRODUCTS. IT ENTERED INTO VARIOUS TRANSACTIONS WITH ITS AES. DURING TRANSFER PRICING PROCEEDINGS, THE TPO APPLIE D TNMM REJECTING CPM ADOPTED BY THE ASSESSEE. ON FIRST APPEAL, THE CIT(A) DELET ED THE ADDITION. THE MUMBAI BENCH OF TRIBUNAL UPHELD THE ORDER OF THE CIT(A). THE TRIBU NAL OBSERVED THAT THE METHOD ADOPTED BY THE ASSESSEE WAS BASED ON THE FUNCTIONS PERFORMED AND NOT ON THE BASIS OF TYPES OF PRODUCT MANUFACTURED. THE TRIBUNAL FURTHE R OBSERVED THAT EVEN ACCORDING TO OECD GUIDELINES, METHODS REQUIRING COMPUTATION OF A LP DIRECTLY BASED ON GROSS MARGIN WERE PREFERRED OVER OTHER METHODS WHICH REQU IRED COMPUTATION OF ALP IN AN INDIRECT METHOD. THUS TRIBUNAL HELD THAT THE CIT( A) HAD RIGHTLY DELTED THE ADDITION. FURTHER, THE REVENUE WAS IN APPEAL BEFORE THE HONB LE BOMBAY HIGH COURT WHERE THE REVENUES APPEAL WAS DISMISSED UPHOLDING THE ORDER OF THE TRIBUNAL. 3.7.2. THE ASSESSEE FURTHER PLACED RELIANCE ON THE FOLLOWING DECISIONS:- FRIGOGLASS INDIA PVT LTD REPORTED IN TS-1121-ITAT-2 014(DEL)TP ALUMECO INDIA EXTRUSION LTD (FORMERLY KNOWN AS M/S PENNAR PROFILES LTD) REPORTED IN TS-143-ITAT-2013(HYD)TP DIAMOND DYE CHEM LTD REPORTED IN TS-97-ITAT-2010(MU M) 3.7.3. THE ASSESSEE FURTHER SUBMITTED THAT RELIABLE DATA FOR COMPUTATION OF GROSS MARGIN IS AVAILABLE AS UNDER :- ACCORDING TO RULE 10C(2) OF THE ACT, IN SELECTING THE MOST APPROPRIATE METHOD AS SPECI FIED IN SUB-RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT, NAMELY:- (A) .. (B) . 10 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 10 (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHOD (D) .. (E) .. (F) WITH DUE CONSIDERATION TO THE RULE, THE ASSESSEE HU MBLY SUBMITS THAT FOR COMPARING THE TRANSACTIONS OF EXPORTS MADE TO AES TO NON-AES, THE RELIABLE DATA REQUIRED FOR THE CALCULATION OF GROSS PROFIT MARGIN WAS AVAILABLE. T HUS, INTERNAL COMPARABLES WERE SELECTED AS IT EASILY PROVIDED DATA FOR THE CALCULA TION OF GROSS PROFIT MARGINS FOR MANUFACTURING ACTIVITIES. 3.7.4. THE ASSESSEE FURTHER SUBMITTED THAT IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTIONS OF EXPORT OF FINISHED GOODS, THE ASSES SEE ADOPTED CPM AS THE MAM IN THE PRECEDING ASSESSMENT YEARS. FURTHER, THE LD TPO HA S BEEN ACCEPTING SUCH METHOD OF BENCHMARKING IN THE PRECEDING ASSESSMENT YEARS. IN THIS RESPECT, THE ASSESSEE STATED THAT SINCE THERE IS NO DISTINGUISHING FACTOR THAT H AS BEEN NOTED BY THE LD TPO FOR REJECTION OF SUCH METHOD IN THE CURRENT FINANCIAL Y EAR AS AGAINST THE PRECEDING FINANCIAL YEARS, CONSISTENCY SHOULD BE MAINTAINED IN THIS RES PECT AND CPM SHOULD BE ADOPTED FOR PURPOSE OF BENCHMARKING THE TRANSACTION OF EXPORT O F FINISHED GOODS. 3.7.5. THE ASSESSEE GAVE THE FOLLOWING SUBMISSIONS WITH REGARD TO REJECTION OF TRANSFER PRICING STUDY REPORT FOR FY 2010-11 (I.E YEAR UNDER APPEAL) BY THE LD TPO :- REJECTION OF TRANSFER PRICING STUDY FOR FY 2010-11 FOR THE PURPOSE OF ESTABLISHING THE ARMS LENGTH PR ICE (ALP) OF THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES (AE), THE COMPANY HAD UNDERTAKEN A TRANSFER PRICING STUDY. A DETAILED ANALYSIS WAS UNDERTAKEN T O DETERMINE THE FUNCTIONS PERFORMED, RISKS ASSUMED AND ASSETS UTILIZED BY THE COMPANY IN RESPECT OF THE TRANSACTIONS UNDERTAKEN BY MIJL WITH ITS AE. FURTHER, THE ECONOM IC ANALYSIS FOR THE DETERMINATION OF THE ALP WAS UNDERTAKEN IN ACCORDANCE WITH THE PR OVISIONS OF THE INCOME TAX ACT, 1961 (THE ACT), READ WITH THE INCOME TAX RULES, 1 962 (THE RULES). BASED ON THE TRANSFER PRICING STUDY, MJIL CONCLUDED THAT THE PRI CE RECEIVED/PAID BY THEM IN RESPECT OF ITS TRANSACTIONS WITH AE IS AT ARMS LENGTH. 11 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 11 THE FACT THAT THE ANALYSIS UNDERTAKEN BY THE ASSES SEE WAS IN ACCORDANCE WITH ALP IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WIT H THE RULES IS EVIDENT FROM THE FOLLOWING: PRICE CHARGED IN THE INTERNATIONAL TRANSACTION HAS BEEN DETERMINED IN ACCORDANCE WITH INDIAN TRANSFER PRICING LAW. FURTHER, INFORMATION A ND DOCUMENTS RELATING TO THE INTERNATIONAL TRANSACTION HAVE BEEN KEPT AND MAINTA INED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISION CONTAINED IN SUB-SECTION (1) OF SECTION 92D OF THE ACT AND THE RULES MADE THERE UNDER. IN ACCORDANCE WITH PROVISIONS OF SECTION 92 OF THE ACT, THE ASSESSEE WAS REQUIRED TO AND HAD COMPUTED ITS INCOME ARISING FROM ITS INTERNATIO NAL TRANSACTION HAVING REGARD TO THE ARMS LENGTH PRICE. FOR THIS PURPOSE, THE ASSESSEE COMPLIED WITH PROVISIONS OF SECTION 92C OF THE ACT ALONG WITH RULE 10B AND RULE 10C PRE SCRIBED IN THIS REGARD. THE PROCEDURE UNDERTAKEN BY THE ASSESSEE FOR THIS PURP OSE HAS BEEN ILLUSTRATED BELOW: RULE 10A DEFINES UNCONTROLLED TRANSACTION AS TR ANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIATED ENTERPRISES, WHETHER RESIDENT OR NO N-RESIDENT. FOR ITS ANALYSIS, MJIL CONSIDERED ITS TRANSACTION WITH THE NON-AES, WHICH WAS SIMILAR TO THE TRANSACTIONS WITH THE AES, AS UNCONTROLLED T RANSACTION. FURTHER, RULE 10B(2) REQUIRED THAT FOR THE PURPOSE S OF SUB-RULE (1), THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION OR A SPECIFIED DOME STIC TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO THE F OLLOWING NAMELY- A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSF ERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; C) THE CONTRACTUAL TERMS (WHETHER OR 1101 SUCH TERMS A RE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITL Y HOW THE RESPONSIBILITIES. RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTI VE PARTIES TO THE TRANSACTIONS; D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE R ESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE. INCLUDING THE GEOGRAPHICAL LO CATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF L ABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS-ARE WHOLESALE OR RETAIL. ' IN ADDITION RULE 10B(3) STATES THAT, 'AN UNCONTROLL ED TRANSACTION SHED! BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF- A) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRA NSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM , SUCH TRANSACTIONS ILL THE OPEN MARKET: OR 12 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 12 B) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO E LIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. ' ACCORDINGLY, A DETAILED REVIEW OF THE FUNCTIONS PER FORMED, RISKS ASSUMED AND ASSETS EMPLOYED AND NATURE OF SERVICES RENDERED BY MJIL FO R EXPORTS MADE TO AES AND NON- AES WAS UNDERTAKEN. SECTION 92C(1) OF THE ACT REQUIRES THE COMPUTATION OF ARMS LENGTH PRICE BY APPLYING THE MOST APPROPRIATE METHOD. AS PER PROVISIONS OF S ECTION 92C(2) OF THE ACT READ WITH RULE 10C(L) OF THE RULES, THE MOST APPROPRIATE METH OD, 'SHALL BE THE METHOD WHICH IS BEST SUITED TO THE FA CTS AND CIRCUMSTANCES OF EACH PARTICULAR INTERNATIONAL TRANSACTION, AND WHICH PRO VIDES THE MOST RELIABLE MEASURE OF AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIO NAL TRANSACTION'. ACCORDINGLY, BASED ON THE FACTS OF THE CASE SUCH AS THE NATURE OF THE INTERNATIONAL TRANSACTION AND THE AVAILABILITY OF RELIABLE COMPAR ABLE DATA, CPM WAS CHOSEN AS THE MOST APPROPRIATE METHOD UNDER THE REGULATIONS FOR D ETERMINING THE ARM'S LENGTH PRICE FOR THE ASSESSEE'S INTERNATIONAL TRANSACTION. [A DE TAILED DISCUSSION ON THE SAME IS PROVIDED VIDE THE DOCUMENTATION MAINTAINED BY THE A SSESSEE UNDER SECTION 92D(1) OF THE ACT READ WITH RULE 10D OF THE RULES ALREADY SUB MITTED WITH YOUR GOODSELF]. THEREAFTER, IN ACCORDANCE WITH SECTION 92C(2) OF TH E ACT, CPM WAS APPLIED IN THE MANNER PRESCRIBED UNDER RULE 10B(1)(C) OF THE RULES . THE STEPS UNDERTAKEN BY THE ASSESSEE ARC LISTED BELOW FOR YOUR READY REFERENCE: THE DIRECT AND INDIRECT COSTS OF PRODUCTION 'INCURR ED BY THE ENTERPRISE IN RESPECT OR GOODS SOLD TO AN ASSOCIATED ENTERPRISE, WAS DETERMI NED [RULE 10B(1)(C )(I)] I) THE AMOUNT OF A NORMAL GROSS PROFIT MARK-UP TO S UCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) ARISING FROM THE EXPORT OF GOODS TO NON-AES WERE CALCULATED [RULE 10B(1)(E)(II)]. THE AFORESAID GROS S PROFIT MARGIN WAS FINALLY COMPARED TO THE PRICE EARNED BY THE ASSESSEE IN RESPECT OF T HE SUBJECT TRANSACTION. FURTHER, THE ASSESSEE HAD MAINTAINED A DETAILED REC ORD OF THE ABOVE MENTIONED PROCEDURE AND OTHER INFORMATION AND DOCUMENTS RELAT ING TO THE INTERNATIONAL TRANSACTION THAT WERE REQUIRED IN ACCORDANCE WITH T HE PROVISIONS CONTAINED IN SUB- SECTION (1) OF SECTION 92D AND THE RULES MADE THERE UNDER. IN ADDITION, THE ASSESSEE COMPLIED WITH THE REQUIREMENT OF SECTION 92E READ W ITH RULE 10E WHICH REQUIRES FURNISHING OF A REPORT FROM AN ACCOUNTANT BY PERSON S ENTERING INTO INTERNATIONAL TRANSACTIONS. THE ASSESSEE HAS THUS COMPLIED WITH ALL REQUIREMENT S AS PER SECTION 92, SECTION 92C, SECTION 92D, SECTION 92E, RULE 10B, 10C, 10D, 10E FOR COMPUTING ITS INCOME HAVING REGARD RE ARM'S LENGTH PRICE, AND MAINTAINING NECES SARY INFORMATION AND DOCUMENTATION FOR DETERMINATION OF ARM'S LENGTH PRI CE. THIS WAS DONE AS PER PROCEDURES OUTLINED AND IN GOOD FAITH TO COMPLY WIT H ALL THE PROVISIONS OF LAW AND TO 13 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 13 PROVIDE A TRUE AND FAIR ANALYSIS THAT WAS UNDERTAKE N WITH FAIR AND PRUDENT BUSINESS INTENT. IT WOULD BE EVIDENT FROM THE ABOVE THAT THE ASSESSE E'S ANALYSIS WAS BASED ON SOUND TRANSFER PRICING PRINCIPLES AND THAT THE ASSESSEE H AD NOT UNDERTAKEN THE TRANSACTION TO AVOID TAXES. TO CONCLUDE, AS PER SECTION 92C(3): WHERE DURING THE COURSE OF ANY PROCEEDING FOR THE A SSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OF DOCUMENT ILL HIS POSSESSION, OF THE OPINION THAT- (A) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL T RANSACTION HAS NOT BEEN DETERMINED ILL ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR (B) ANY INFORMATION AND DOCUMENT RELATING TO AN INT ERNATIONAL TRANSACTION HAVE 110T BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDA NCE WITH THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MA DE IN THIS BEHALF; OR (C) THE INFORMATION OR DATA USED IN COMPUTATION OF THE ARM'S LENGTH PRICE IS NOT RELIABLE OR CORRECT: OR (D) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTI CE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D, THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARM'S LENGTH PRICE ILL RELATION TO THE SAID INTERNATIONAL TRANSACTION OR SPECIFIED DOM ESTIC TRANSACTION IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2). ON THE BASIS OF SUCH MATE RIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM IT MAY BE NOTED THAT: -THE ASSESSEE HAD DETERMINED THE ARM'S LENGTH PRICE IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2) OF SECTION 92C -THE ASSESSEE HAD MAINTAINED PROPER DOCUMENTATION U NDER SECTION 92D -THE INFORMATION OR DATA USED IN COMPUTATION OF THE ARM'S LENGTH PRICE WAS FROM RELIABLE INTERNAL AS WELL AS EXTERNAL SOURCES. -THE ASSESSEE HAD FURNISHED ALL INFORMATION AND DOC UMENTATION SOUGHT BY YOUR GOODSELF BASED ON THE ABOVE, CLEARLY THE ANALYSIS UNDERTAKEN BY THE ASSESSEE WAS IN ACCORDANCE WITH ALP IN ACCORDANCE WITH THE PROVISIONS OF THE A CT READ WITH THE RULES, THE ANALYSIS UNDERTAKEN BY THE ASSESSEE SHOULD NOT BE REJECTED. IN THIS REGARD, WE FURTHER WISH TO SUBMIT AS UNDER THAT AS PER THE PROVISIONS OF SECTI ON 92C(3) OF THE ACT, IT IS CLEAR THAT THE ASSESSING OFFICER CAN DETERMINE THE PRICE ONLY UNDER THE CIRCUMSTANCES ENUMERATED 14 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 14 IN CLAUSES (A) TO (D) OF THE SAID SECTION. FURTHER, WE WOULD LIKE TO DRAW REFERENCE 10 THE CENTRAL BOARD OF DIRECT TAXES ('CBDT') CIRCULAR 14 ISSUED IN 2001 WHICH READ WITH SECTION 92C(3) OF THE ACT, PROVIDES THAT: 'UNDER THE NEW PROVISIONS THE PRIMARY ONUS IS ON TH E TAX-PAYER 10 DETERMINE AN ARMS LENGTH PRICE IN ACCORDANCE WITH THE RULES, AND TO S UBSTANTIATE THE SAME WITH THE PRESCRIBED DOCUMENTATION. WHERE SUCH ONUS IS DISCHA RGED BY THE ASSESSEE AND THE DATA USED FOR DETERMINING THE ARMS LENGTH PRICE IS RELIA BLE AND CORRECT, THERE CAN BE NO INTERVENTION BY THE ASSESSING OFFICER- THIS IS MADE CLEAR BY SUB-SECTION (3) OF SECTION 9 2C WHICH PROVIDES THAT THE ASSESSING OFFICER MAY INTERVENE ONLY IF HE IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION. OF THE OPINION THAT THE PRICE CH ARGED IN THE INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUBSECTI ONS (1) AND (2), OR INFORMATION AND DOCUMENTS RELATING TO THE INTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS C ONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE THERE UNDER; OR THE INFORMATION OR DATA USED ILL COMPUTATION OF THE ARM'S LENGTH PRICE IS NOT RELIAB LE OR CORRECT; OR THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY I NFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTICE ISSUED UNDER SUB-SE CTION (1) OF SECTION 92D. IF ANY ONE OF SUCH CIRCUMSTANCES EXISTS, THE ASSESSING OFFICER MA Y REJECT THE PRICE ADOPTED BY (HE ASSESSEE AND DETERMINE THE ARM'S LENGTH PRICE IN AC CORDANCE WITH THE SAME RULES. ' THE PRINCIPLE COMING OUT OF THE CBDT CIRCULAR ABOVE HAS ALSO BEEN IMPLICITLY BROUGHT OUT BY THE HON'BLE INCOME TAX APPELLATE TRIBUNAL (' ITAT'), DELHI BENCH IN MENTOR GRAPHICS (NOIDA) PVT. LTD'S CASE (109 ITD 101). THE HON'BLE ITAT HAS OBSERVED THAT: '46.2 ..IN OUR CONSIDERED VIEW, IT IS NOT NECESS ARY FOR THE TAXPAYER TO SATISFY ALL POINTS IN THE RANGE. EVEN IF ONE POINT IS SATISFIED , THE ASSESSEE CAN BE TAKEN TO HAVE ESTABLISHED ITS CASE AND IN THAT SITUATION, THE ONU S IS SHIFTED TO THE DEPARTMENT TO SHOW WHY TAXPAYER'S CASE BE NOT ACCEPTED,' 39.4 'THE TPO COULD HAVE CARRIED FRESH SEARCH O NLY IF THE COMPARABLES DRAWN BY THE TAXPAYER WAS INSUFFICIENT OR HAD OTHER DEFIC IENCY. ' THE ABOVE MENTIONED JUDGMENT HAS ALSO BEEN SUPPORTE D BY THE BANGALORE ITAT IN THE CASE OF PHILIPS SOFTWARE CENTRE PRIVATE LTD -VS- AC IT [119 TTJ 721], WHEREIN THE ITAT HELD AS FOLLOWS: . 'CIRCULAR NO. 14/2001 ISSUED BY THE CBDT IS BINDI NG UPON THE TPO .. THE TP STUDY CANNOT BE IGNORED BY THE TPO IN ABSENC E OF ANY DEFICIENCY OR INSUFFICIENCY' 15 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 15 IN ADDITION, TRANSFER PRICING IN INDIA BEING IN A N ASCENT STAGE, THE COMPANY SUBMITS THAT IT IS HIGHLY PROBABLE THAT THERE ARE VARIED IN TERPRETATION AS TO WHAT IS THE ALP. THIS IS ALSO IMPLICITLY RECOGNIZED IN CBDT CIRCULAR 12 O F 2001, WHICH STATES THAT: 'WHERE AN INTERNATIONAL TRANSACTION HAS BEEN PUT TO A SCRUTINY, THE AO CAN HOPE RECOURSE TO SUB-SECTION (3) OF SECTION 92C ONLY UND ER THE CIRCUMSTANCES ENUMERATED ILL CLAUSES (A) TO (D) O] THAT SUB-SECTI ON AND IN THE EVENT OF MATERIAL INFORMATION OR DOCUMENT IN HIS POSSESSION ON THE BA SIS OF WHICH AN OPINION CALL BE FANNED THAT ANY SUCH CIRCUMSTANCE EXISTS. IN ALL OTHER CASES, THE VALUE OF THE INTERNATIONAL TRANSACTION SHOULD BE ACCEPTED WITHOU T FURTHER SCRUTINY'. (EMPHASIS SUPPLIED) CIRCULAR 12 OF 2001, FURTHER STATES THAT: 'IN THE INITIAL YEARS OF IMPLEMENTATION (I.E. OF TH E TRANSFER PRICING LEGISLATION), THERE MAY BE ROOM FOR DIFFERENT INTERPRETATION LEADING TO UNCERTAINTIES WITH REGARD TO DETERMINATION OF ARMS LENGTH PRINCE OF AN INTERNAT IONAL TRANSACTION. WHILE IF WOULD BE NECESSARY TO PROTECT OUR TAX BASE, THERE IS A NEED TO ENSURE THAT THE TAXPAYERS ARE NOT PUT TO AVOIDABLE HARDSHIP IN THE IMPLEMENTATION (IF THESE REGULATIONS. ' (EMPHASIS SUPPLIED) THE ASSESSEE WOULD ALSO LIKE TO POINT OUT THAT IN S ONY INDIA'S CASE (2007) 288 ITR 52 (DEL), IT WAS HELD THAT: 'SUB-SECTION (3) OF SECTION 92C ENVISAGES THE AO HA VING TO FORM AN OPINION ON THE EXISTENCE OF THE FACTORS ENUMERATED IN CLAUSES (A) TO (D) AS A PRE-CONDITION TO PROCEEDING TO HIMSELF DETERMINE THE ARMS' LENGTH PRICE. IN OTHER WORDS, ACCEPTANCE OF THE ARMS' LENGTH PRICE DECLARED BY T HE ASSESSEE IS THE RULE AND ITS REJECTION IS THE EXCEPTION POSITED 011 THE PRES ENCE OF THE FACTORS ENUMERATED IN CLAUSES (A] TO (D) , (EMPHASIS SUPPL IED) I) FURTHER, THE HONBLE SUPREME COURT IN RAJESH KUM AR VS. DCIT (2006) 287 ITR 91 (SC) CLEARLY HELD AND OBSERVED THAT: 'IF AN ASSESSEE FILES A RETURN THE SAME IS NOT PRES UMED TO BE INCORRECT'. (EMPHASIS SUPPLIED) HENCE, IT IS CLEAR THAT WHERE AN INTERNATIONAL TRAN SACTION HAS BEEN PUT TO A SCRUTINY, THE ASSESSING OFFICER CAN HAVE RECOURSE TO SUB-SECTION (3) OF SECTION 92C ONLY UNDER THE CIRCUMSTANCES ENUMERATED IN CLAUSE (A) TO (D) OF TH AT SUB-SECTION AND IN THE EVENT OF MATERIAL INFORMATION OR DOCUMENT IN POSSESSION ON T HE BASIS OF WHICH AN OPINION CAN BE FORMED THAT ANY SUCH CIRCUMSTANCE EXIST. IN ALL OTH ER CASES, THE VALUE OF THE INTERNATIONAL TRANSACTION SHOULD BE ACCEPTED WITHOU T FURTHER SCRUTINY. ACCORDINGLY, IN THE ABSENCE OF ANY INFORMATION TO T HE CONTRARY, BASED ON THE PROVISIONS OF THE ACT READ WITH THE RULES, CBDT CIRCULARS AND RECENT COURT DECISIONS, IT IS NOT 16 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 16 JUSTIFIED TO REJECT THE TRANSFER PRICING ANALYSIS U NDERTAKEN BY THE COMPANY ON ACCOUNT OF THE FACT THAT THE ASSESSEE HAD FOLLOWED THE GUID ELINES LAID DOWN IN THE RULES. IN LIGHT OF THE ABOVE DISCUSSION, WE RESPECTFULLY S UBMIT THAT THE ASSESSEE HAD DULY COMPLIED WITH THE TRANSFER PRICING REGULATIONS AS E NVISAGED IN THE ACT. FURTHER, WE RESPECTFULLY SUBMIT THAT THERE EXIST NO CIRCUMSTANC ES AS ENUMERATED IN CLAUSES (A) TO (D) OF SECTION (3) OF SECTION 92C, WHICH WOULD WARRANT YOUR GOODSELF TO DISREGARD THE ANALYSIS UNDERTAKEN BY THE ASSESSEE AND UNDERTAKE A FRESH ANALYSIS.) 3.7.6. THE ASSESSEE POINTED OUT THE ERROR IN COMPUT ATION OF PLI BY THE LD TPO AS UNDER :- 2 ERROR IN COMPUTATION OF PLI OF THE ASSESSEE (REF ER POINT NO. 5 OF THE NOTICE) REFERENCE POINT NO. 5 OF THE SUBJECT NOTICE, WHEREI N YOUR GOODSELF HAS CONSIDERED THAT THE PLI OF MJIL AS - 13 .68%, THE ASSESSEE HUMBLY S UBMITS THAT YOUR GOODSELF HAS ELIMINATED THE FOLLOWING ITEMS FROM THE HEAD OF OPE RATING INCOME, IN SPITE OF THESE INCOME BEING OPERATING IN NATURE: DEPB CLAIM OF RS 1,26,01,000 AND DUTY DRAWBACK OF R S 6,11,000 MISCELLANEOUS RECEIPT OF RS 49,10,000 EXCHANGE GAIN OF RS 6,30,000 IT MAY BE NOTED BY YOUR GOODS ELF THE ABOVE MENTION ED INCOMES ARE OPERATING IN NATURE AND PERTAINS TO REGULAR BUSINESS OPERATIONS. THE CO NTENTIONS FOR THE SAME ARE AS FOLLOWS: DEPB CLAIM AND DUTY DRAWBACK THE ASSESSEE HUMBLY SUBMITS THAT DEPB (DUTY ENTITLE MENT PASS BOOK) IS ALL EXPORT INCENTIVE SCHEME OF INDIAN GOVERNMENT PROVIDED TO E XPORTERS IN INDIA. UNDER THE POST- EXPORT DEPB, WHICH IS ISSUED AFTER EXPORTS, THE EXP ORTER IS GIVEN A DUTY ENTITLEMENT PASS BOOK SCHEME AT A PRE-DETERMINED CREDIT ON THE FOB VALUE. CREDIT GIVEN UNDER DEPB SCHEMES IS UTILIZED FOR PAYMENT OF INDIAN CUST OMS DUTY ON IMPORT OF GOODS. FURTHER, DUTY DRAWBACK IS ANOTHER FORM OF REBATE OF IMPORT DUTY PROVIDE BY THE GOVERNMENT OF INDIA, UNDER THE DUTY DRAWBACK SCHEME THE TAXPAYER WOULD BE REFUNDED THE IMPORT DUTY PAID BY HIM AT THE TIME OF IMPORT, IF IT RE-EXPORTS THE SAID GOODS, WITH OR WITHOUT PROCESSING OR USING, ACCORDING TO THE SPECI FIED PROVISION OF THE CUSTOMS ACT, 1962 AND RELEVANT RULES AND REGULATIONS. IN VIEW OF THE ABOVE, THE ASSESSEE HUMBLY STATES TH AT IT HAS EXPORTED ITS FINISHED GOODS TO VARIOUS COUNTRIES OUTSIDE INDIA INCLUDING RUSSIA , SINGAPORE, EUROPEAN COUNTRIES ETC. IN THE SAID PROCESS OF THE EXPORTS, THE COMPANY HAS EARNED VARIOUS DEPB ENTITLEMENT AND DUTY DRAWBACK ENTITLEMENTS. 17 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 17 ACCORDINGLY, AS THE SAID ENTITLEMENTS ARE INCIDENTA L TO THE OPERATIONAL ACTIVITIES UNDERTAKEN BY THE COMPANY DURING THE YEAR, THE COMP ANY HAS TREATED THE SAME AS REVENUE/ OPERATING INCOME. THE ASSESSEE WISHES TO A PPRISE YOUR GOODSELF THAT THE ASSESSEE HAS DULY OFFERED THE SAID INCOME TO TAX IN THE COMPUTATION OF INCOME FOR THE SUBJECT ASSESSMENT YEAR. MISCELLANEOUS INCOME IN RESPECT OF MISCELLANEOUS INCOME, THE ASSESSEE HU MBLY SUBMITS THAT THE SAME IS OPERATING IN NATURE, CONSIDERING, THE ITEMS INCLUDE D, PLEASE NOTE THAT ALL THE ITEMS ARE IN RESPECT OF THE REGULAR BUSINESS OF MJJL AND HOLD S NO NEXUS APART FROM ITS BUSINESS ACTIVITIES. THE BREAK-UP OF MISCELLANEOUS INCOME: ACCORDINGLY, AS ALL THE ITEMS MENTIONED ABOVE HAVE COMPLETE NEXUS TO THE REGULAR BUSINESS ACTIVITIES OF MJIL, HENCE THEY ARE CONSIDE RED AS OPERATING IN NATURE BY THE ASSESSEE AND INCLUDED IN ITS OPERATING INCOME IN CO MPUTATION OF THE PLI FOREIGN EXCHANGE GAIN ARE OPERATING INCOME IN VIEW OF THE ABOVE, THE ASSESSEE HUMBLY SUBMITS T HAT THE EXCHANGE GAIN IS OPERATING IN NATURE. THE EXCHANGE GAIN/LOSS IN GENERAL COULD AR ISE ON ACCOUNT OF A NUMBER OF FACTORS. SOME OF SUCH FACTORS ARE AS FOLLOWS: EXPORT PROCEEDS AT A RATE HIGHER/LOWER THAN THE R ATE AT WHICH THEY WERE BOOKED; IMPORT PAYABLES AT A RATE LOWER/HIGHER THAN THE R ATE AT WHICH THEY WERE BOOKED; ADJUSTMENT OF CUSTOMER ADVANCES (RECEIVED IN FORE IGN CURRENCY) AGAINST EXPORT INVOICES, THE ASSESSEE SUBMITS THAT THE OECD VIDE ITS PARA 2. 82 STATES AS FOLLOWS: '2.82 WHETHER FOREIGN EXCHANGE GAINS AND LOSSES SHO ULD BE INCLUDED OR EXCLUDED FROM THE DETERMINATION OF THE NET PROFIT INDICATOR RAISE S A NUMBER OF DIFFICULT COMPARABILITY ISSUES. FIRST, IT NEEDS TO BE CONSIDERED WHETHER TH E FOREIGN EXCHANGE GAINS AND LOSSES ARE OF A TRADING NATURE (E.G. EXCHANGE GAIN OR /LOS S ON A TRADE RECEIVABLE OR PAYABLE) 18 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 18 AND WHETHER OR NOT THE TESTED PARTY IS RESPONSIBLE FOR THEM. SECOND, ANY HEDGING OF THE FOREIGN CURRENCY EXPOSURE ON THE UNDERLYING TRADE R ECEIVABLE OR PAYABLE ALSO NEEDS TO BE CONSIDERED AND TREATED IN THE SAME WAY IN DETER MINING THE NET PROFIT. IN EFFECT, IF A TRANSACTIONAL NET MARGIN IS APPLIED TO A TRANSACTIO N IN WHERE THE FOREIGN EXCHANGE RISK IS BORNE BY THE TESTED PARTY, FOREIGN EXCHANGE GAIN S OR LOSSES SHOULD BE CONSISTENTLY ACCOUNTED FOR (EITHER IN THE CALCULATION OF THE NET PROFIT INDICATOR OR SEPARATELY).' UNREALISED FOREIGN EXCHANGE GAINS/LOSS ON ACCOUNT O F RESTATEMENT (IN THE FINANCIAL STATEMENTS) OF THE FOLLOWING AS ON THE LAST DAY OF THE YEAR. EXPORT RECEIVABLES/IMPORT PAYABLES; ADVANCES RECEIVED FROM CUSTOMERS IN FOREIGN CURRE NCY. THE ASSESSEE SUBMITS THAT THAT EXCHANGE GAIN/LOSS A RISES IN THE NORMAL COURSE OF BUSINESS AND THEREFORE SHOULD BE CONSIDERED AS OPER ATING IN NATURE. THE AFORESAID VIEW OF THE ASSESSEE IS SUPPORTED BY THE VARIOUS JUDGMEN TS GIVEN BY A NUMBER OF COURTS IN INDIA. SOME OF WHICH ARE REPRODUCED BELOW: REALISED FOREIGN EXCHANGE FOUR SOFT LTD V. DEPUTY COMMISSIONER OF INCOME-TA X (62 DTR 308) 'WITH REGARD TO THE EXCLUSION OF GAIN OIL ACCOUNT O F FOREIGN EXCHANGE FLUCTUATION WHILE COMPUTING THE NET MARGIN, AS CLAIMED BY THE ASSESSE E, WE FIND THAT THE EXCHANGE FLUCTUATION GAINS ARISE OUT OF SEVERAL FACTORS, FOR INSTANCE, REALISATION OF EXPORT PROCEEDS AT HIGHER RATE, IMPORT DUES PAYABLE AT LOW ER RATE. SINCE THE GAIN OR LOSS ON ACCOUNT OF EXCHANGE RATE FLUCTUATION ARISES IN THE NORMAL COURSE OF BUSINESS TRANSACTION. THE SAME SHOULD BE CONSIDERED 'WHILE C OMPUTING THE NET MARGIN FOR THE INTERNATIONAL TRM1SACTIO12S WITH THE AES OF THE ASS ESSEE. OUR VIEW IN THIS BEHALF IS FORTIFIED BY THE DECISIONS OF THE BANGALORE BENCH O F THE TRIBUNAL IN THE CASE OF SAP LABS INDIA LTD. (SUPRA) AND BOMBAY BENCH OF THE TRI BUNAL IN THE CASE OF DEUTSCHE BANK A.G. VS. DY. CIT (2003) 86 ITD 431 (MUMBAI).' M/S TRILOGY E- BUSINESS SOFTWARE INDIA PRIVATE LIMI TED V DEPUTY COMMISSIONER OF INCOME-TAX (47 SOT 45) 'AS FAR AS FOREIGN EXCHANGE GAIN/LOSS BEING CONSIDE RED AS NOT FORMING PART OF THE OPERATING COST, THE REASONING OF THE REVENUE IS THA T SUCH LOSS OR GAIN CANNOT BE SAID TO BE ONE REALIZED FROM INTERNATIONAL TRANSACTION THOU GH THEY MAY FORM PART OF THE GAIN/LOSS OF THE ENTERPRISE AND THEREFORE THEY SHOU LD BE EXCLUDED WHILE DETERMINING OPERATING COST. ON THE ABOVE ISSUE WE FIND THAT TH E BANGALORE BENCH OF ITAT IN THE CASE OF SAP LABS INDIA (P) LTD. VS. ACIT (2011) 44 SOT 156 (BANG) HAS TAKEN THE VIEW THAT FOREIGN EXCHANGE FLUCTUATION GAINS ARE REQUIRE D TO BE ADDED TO OPERATING REVENUE. FOLLOWING THE SAME, THE AO IS DIRECTED TO ACCEPT THE CLAIM OF THE ASSESSEE IN THIS REGARD' 19 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 19 IN THE CASE OF SUJATA GROVER 74 TT J 347 (DEL) WHICH WAS IN THE CONTEXT OF DEDUCTION UNDER SECTION 80HHC OF THE ACT, THE COURT HELD AS F OLLOWS: 'BASICALLY EXCHANGE RATE FLUCTUATION DIFFERENCE IS NOTHING BUT PART OF SALES. WHEN THE GOODS ARE EXPORTED TO A COUNTRY OUTSIDE INDIA, THE INVOICE HAS TO BE RAISED IN TERMS OF THE FOREIGN CURRENCY PREVALENT IN THAT COUNTRY AND AT THE TIME OF MAKING EXPORTS. THE EXPORTER CONVERTS THAT CURRENCY INTO INDIAN RUPEES AT THE EXCHANGE RATE PREVALENT AT THAT TIME AND ACCORDINGLY TAKES COGNIZANCE OF THAT AMOUNT AS ITS EXPORT FIGURE IN ITS BOOKS OF ACCOUNTS. HOWEVER, WHEN THE INVOICE IS ACT UALLY REALIZED FROM FOREIGN COUNTRY AND THE AMOUNT IS REMITTED TO INDIA, THE EXCHANGE R ATE PREVALENT ON THAT DATE MAY BE EQUAL TO OR MORE OR LESS THAN THE ONE RECORDED IN T HE 900KS OF ACCOUNTS AT THE TIME OF MAKING THE SALES. IF THE EXCHANGE RATE IS MORE IT R ESULTS INTO INCOME FROM THE EXCHANGE RATE FLUCTUATION AND IN THE REVERSE CASE IF BECOMES LOSS ON THAT ACCOUNT. UNDER ALL CIRCUMSTANCES THE BASIC CHARACTER OF THE RECEIPT OF FOREIGN CURRENCY REMAINS THE SAME I.E., IT REMAINS ATTRIBUTABLE 10 THE EXPORT EFFECTE D BY THE ASSESSEE. WHETHER THERE IS A PROFIT OR A LOSS. IT ULTIMATELY GOES TO INCREASE OR REDUCE THE FIGURE OF EXPORT TURNOVER RECORDED INITIALLY BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS. IT, THEREFORE, SHOWS THAT THE INCOME FROM THE FOREIGN CURRENCY FLUCTUATION IS NOT HING BUT PART OF EXPORT TURNOVER AND IS A SORT OF ADDITIONAL SALES PRICE. '(EMPHASIS SUP PLIED) RENAISSANCE JEWELLERY (P) LTD. VS. INCOME-TAX OFFIC ER (2006) 101 ITD 830 (MUM ITAT) , IT WAS HELD THAT: 'THE PROFIT ON ACCOUNT OF FOREIGN EXCHANGE GAIN IS DIRECTLY REFERABLE TO THE ARTICLES AND THINGS EXPORTED BY THE ASSESSEE. SUCH PROFITS ARE. THEREFORE, IN THE SAME NATURE AS THE SALE PROCEEDS AND THERE IS NO REASON WHILE DEDUCTIO N UNDER SECTION 10A SHOULD NOT BE ALLOWED IN RESPECT OF EXCHANGE GAIN.' RUSABH DIAMONDS VS. ACIT [I.T.A. NO. 7217/MUM/2012] (MUM ITAT), IT WAS HELD THAT: '10.1 IF IS CLEAR THAT IN CASE OF HEDGING OF FOREI GN CURRENCY EXPOSURE ON THE UNDERLINING TRADE RECEIVABLE OR PAYABLE THE PROFIT OF LOSS WILL HE TREATED IN THE SAME 1-VAY IN DETERMINING THE NET PROFIT. 10.2 IN VIEW OF THE FACTS THAT THE ASSESSEE HAS EN TERED INTO FORWARD CONTRACTS FOR THE PURPOSE OF HEDGING OF FOREIGN CURRENCY EXPOSURE ON THE EXPORT AND IMPORT OF DIAMOND, THE GAIN OR LOSS ARISING OF THE SAID WILL BE TREATE D AS PART AND PARCEL OF THE OPERATING PROFIT' FURTHER, IN S NARENDRA VS. ACTT [ITA NO. 6839/MUM/2012) (MUM IT AT), IT WAS HELD THAT: 'THE PROPOSITION THAT GAIN ON FOREIGN EXCHANGE IF I T RELATES TO THE BUSINESS OF THE ASSESSEE IS PART AND PARCEL OF OPERATING INCOME IS WELL ESTABLISHED BY THE AFORE- MENTIONED DECISIONS OF THE COORDINATE BENCHES. IN T HE PRESENT CASE, NOTHING HAS BEEN 20 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 20 BROUGHT ON RECORD TO SUGGEST THAT THE GAIN MADE BY THE ASSESSEE ON FLUCTUATION OF FOREIGN EXCHANGE WAS NOT ON ACCOUNT OF BUSINESS TRA NSACTIONS OF THE ASSESSEE. IN ABSENCE OF ANY SUCH MATERIAL, FOLLOWING THE AFOREME NTIONED DECISIONS OF THE TRIBUNAL, IF HAS TO BE HELD THAT THE FOREIGN EXCHANGE GAIN OF THE ASSESSEE IS TO BE CONSIDERED AS PART AND PARCEL OF THE PROFIT OF THE ASSESSEE AND T HEREFORE SHOULD BE INCLUDED FOR THE PURPOSE OF COMPUTING THE PROFIT MARGIN OF THE ASSES SEE. UNREALISED FOREIGN EXCHANGE IN THE CASE OF DEUTSCHE BANK A. G. VS DEPUTY CIT 86 ITD 431 IT WAS HELD THAT BOTH UNREALISED LOSS AND PROFIT HAVE TO BE TAKEN INTO AC COUNT FOR DETERMINING THE CORRECT PROFITS OF THE BUSINESS. IN THE CASE OF BESTOBELL (INDIA) LTD. V. CIT 117 ITR 789 (CAL), IT WAS HELD THAT THE LIABILITY OF THE ASSESSEE WOULD INCREASE ON DEVALUA TION OF THE INDIAN CURRENCY WHERE THE ASSESSEE HAS MAINTAINED ITS ACCOUNTS ON MERCANTILE BASIS. THE LIABILITY WOULD ACCRUE DURING THE RELEVANT PERIOD AND CANNOT BE SAID TO BE A CONTINGENT LIABILITY OR AN ANTICIPATED FUTURE LOSS. [REFERENCE CAN ALSO BE MAD E TO THE DECISIONS IN THE CASE OF KHANDELWAL BROTHERS PVT. LTD. VS. CIT 117 ITR 452 ( CAL); CIT VS. OIL INDIA LTD. 143 ITR 848 (CAL); AND CIT VS. MARTIN AND HARRIS P. LTD . 154 ITR 460 (CAL)] THE DELHI ITA T IN THE CASE OF OIL AND NATURAL GAS CORPORATION LTD VS. DCIT [2003] 261 ITR 1 (DELHI ITAT - SB) HELD AS FOLLOWS: ' ... THE ASSESSEE'S CLAIM FOR LOSS ARISING AS A RE SULT OF FLUCTUATION IN FOREIGN EXCHANGE RATES ON THE CLOSING DAY OF THE YEAR HAS BEEN DISA LLOWED BY THE ASSESSING OFFICER INTER ALIA, ON THE GROUND THAT THIS LIABILITY WAS A CONTI NGENT LIABILITY AND THE LOSS WAS A NOTIONAL ONE. THE MAIN INGREDIENT OF A CONTINGENT L IABILITY IS THAT IF DEPENDS UPON HAPPENING OF A CERTAIN EVENT. WE ARE OF THE CONSIDE RED OPINION THAT IN THE CASE OF THE ASSESSEE, THE 'EVENT' I.E., THE CHANGE IN THE VALUE OF FOREIGN CURRENCY IN RELATION TO INDIAN CURRENCY HAS ALREADY TAKEN PLACE IN THE CURR ENT YEAR. THEREFORE, THE LOSS INCURRED BY THE ASSESSEE IS A FAIT ACCOMPLI AND NOT A NOTIONAL ONE. ' IT MAY BE HATED THAT THE ABOVE DECISION OF THE DELH I ITAT HAS ALSO BEEN AFFIRMED BY THE DELHI HIGH COURT IN THE CASE OF CIT V WOODWARD GOVERNOR INDIA (P) LTD [2007)162 TAXMAN 60. BASED ON THE AFORESAID PRINCIPLES, WE WISH TO SUBMI T THAT EXCHANGE GAINS/LOSSES IN CONNECTION WITH THE INCOME/EXPENSES EARNED/INCURRED IN FOREIGN CURRENCY RETAINS THE SAME CHARACTER OF THE INCOME/EXPENSE IN CONNECTION WITH WHICH IT HAS BEEN EARNED/INCURRED. THE RELEVANT ITEMS OF INCOME AND E XPENDITURE, ON WHICH THERE HAS BEEN A FOREIGN EXCHANGE GAIN OR LOSS, ARE OPERATING IN NATURE AND HAVE COMPLETE NEXUS WITH THE REGULAR BUSINESS ACTIVITIES OF MJIL. HENCE , SINCE THE RELEVANT ITEMS ARE CONSIDERED AS OPERATING ITEMS, EVEN THE FOREIGN EXC HANGE GAIN/LOSS IN RESPECT OF THE SHOULD BE CONSIDERED AS OPERATING IN NATURE. 21 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 21 HAVING REGARD TO ALL OF THE ABOVE, WE RESPECTFULLY WISH TO SUBMIT THAT FOREIGN EXCHANGE FLUCTUATION SHOULD BE CONSIDERED AS OPERATING INCOM E WHILE COMPUTING THE ARMS LENGTH MARGIN OF THE COMPARABLE COMPANIES. 3.7.7. WITH REGARD TO THE COMPARABLES CHOSEN BY THE LD TPO FOR APPLICATION OF TNMM, THE ASSESSEE SUBMITTED AS UNDER:- 3. COMPARABLES CHOSEN BY YOUR GOODSELF FOR APPLICAT ION OF TNMM (REFER POINT NO. 6 OF THE NOTICE) REFERENCE POINT NO. 5 OF THE SUBJECT NOTICE, YOUR G OODSELF HAS REJECTED THE TRANSFER PRICING STUDY I.E. THE INTERNAL COMPARABLES CHOSEN BY THE ASSESSEE AT THE TIME OF CONDUCTING THE TRANSFER PRICING STUDY AND HAS CHOSE N A NEW SET OF COMPARABLES (KINDLY REFER PAGE NO. 4 OF THE NOTICE). HOWEVER, THE COMPA RABLES CHOSEN BY YOUR GOODSELF DOES NOT SATISFY THE BASIC CRITERIAS INCLUDING FUNCTIONA L SIMILARITY AND SHOULD BE ELIMINATED. IN VIEW OF THE SAME THE ASSESSEE HUMBLY SUBMITS AS FOLLOWS: FUNCTIONALLY DIFFERENT IN RESPECT OF THE ABOVE MENTIONED ARGUMENT, THE ASS ESSEE HUMBLY SUBMITS THAT IF A COMPANY IS FUNCTIONALLY DIFFERENT THE SAME CANNOT B E HELD AS A COMPARABLE FOR THE TESTED PARTY. FOR A COMPANY TO BE FUNCTIONALLY SIMILAR, THE FOLLO WING TWO CONDITIONS ARE TO BE SATISFIED: - THE PRODUCT THAT IS TO BE COMPARED SHOULD BE SIMILA R TO THE TESTED PARTY'S PRODUCT EVEN IF NOT EXACTLY SAME. - THE COMPANY WHOSE PRODUCT IS BEING COMPARED, SHOULD PERFORM THE SAME KIND OF FUNCTIONS IN EARNING THE REVENUE FROM THAT PRODUCT. IF THE ABOVE MENTIONED BOTH THE CONDITIONS ARE SATI SFIED, THEN THE COMPANY MAY BE CONSIDERED AS A COMPARABLE POST CONSIDERING THE OTH ER FACTORS AS WELL. THE ASSESSEE HUMBLY SUBMITS THAT THE ASSESSEE'S FIN ISHED GOODS INCLUDES VAST VARIETIES OF TEAS, BLENDED WITH DIFFERENT MIX OF TEAS& FLAVORS H AVING DIFFERENT PRICES. ACCORDING THE ASSESSEE SUBMITS THAT DEGREE OF COMPARABILITY BETWE EN COMPARABLES WITHOUT COMPARING THE VARIETIES OF TEA PRODUCED WOULD BE UNJUST AND W OULD LED TO ABSURD CONCLUSIONS. IT MAY ALSO BE NOTED THAT COMPARABLES CHOSEN BY YOU R GOODSELF ARE NOT FUNCTIONALLY SIMILAR AS THEY ARE INVOLVED IN TRADING WHEREAS MJI L IS INVOLVED IN BLENDING/ MANUFACTURING OF TEA, 22 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 22 QUANTUM OF EXPORTS IN VIEW OF THE SAME, THE ASSESSEE HUMBLY SUBMITS TH AT SUBJECT, IT HAS EXPORTS AMOUNTING TO 58% OF TOTAL TURNOVER. HENCE, IT IS NEITHER A CO MPLETE EXPORT ORIENTED UNIT NOR IT ONLY EARNS REVENUE FROM DOMESTIC SALE. IT MAY BE NOTED T HAT THE COMPARABLES SELECTED FOR THE BENCHMARKING ANALYSIS SHALL BE SELECTED ON THE BASI S OF FUNCTIONS PERFORMED; ASSETS USED AND RISK PROFILE OF THE ASSESSEE. THE ECONOMIC CIRCUMSTANCE IN WHICH THE ASSESSEE IS OPERATING AND THE CIRCUMSTANCES IN WHICH THE COM PARABLE COMPANIES ARE OPERATING ARE VERY IMPORTANT. IT MAY BE FURTHER POINTED OUT T HAT THE EXPORT FILTER SHOULD BE APPLIED BECAUSE OF VARIATIONS IN: CONDITIONS PREVAILING IN THE MARKET ILL WHICH THE COMPANIES OPERATE GEOGRAPHICAL LOCATIONS SIZE OF THE COMPANIES TO WHICH THE COMPANY CATER S TO DIRECT COSTS SUCH AS MATERIAL LABOUR AS WELL AS C OST OF CAPITAL INCENTIVES LEVEL OF COMPETITION ETC. FURTHER, CONSIDERING THE QUANTUM OF EXPORTS OF MJIL , AN EXPORT FILTER OF 50% -75% CAN BE CONSIDERED AS APPROPRIATE. IN THIS REGARD, RELIANCE MAY BE PLACED ON THE DECIS ION OF CRM SERVICES INDIA P LTD., NEW. VS. ASSESSEE [I.T.A. NO. 4068/DEL/2009] WHERE THE DELHI ITAT HAS HELD THAT: 'WE HAVE CONSIDERED THE FACTS AND THE SUBMISSIONS M ADE IN THIS BEHALF. WE ARE OF THE VIEW THAT TERRITORY OF THE BUSINESS IS A MATERIAL F ACTOR IN DECIDING COMPARABILITY OF THE CASES. THE ASSESSEE RENDERS SERVICES IN USA WHILE S HREEJAL INFO HUBS LTD. RENDERS SERVICES IN INDIA. THIS FACT ALONE IS SUFFICIENT TO EXCLUDE THIS COMPARABLE. THUS, IT IS HELD THAT THE AO/TPO RIGHTLY REJECTED THIS CASE AS A C OMPARABLE CASE. - RANBAXY LABORATORIES LTD. V ACIT [299 ITR 175] WHERE THE DELHI TTAT HELD THAT THE ECONOMIC CONDITIONS PREVAILING IN THE MARKET SUCH A S GEOGRAPHICAL LOCATIONS, SIZE OF MARKET ETC. ARE TO BE CONSIDERED. SECRET COMPARABLES IN THIS REGARD IT IS PERTINENT TO NOTE THE OECD COM PARABILITY: PUBLIC INVITATION TO COMMENT ON A SERIES OF DRAFT ISSUE NOTES ALSO STATE S THAT THOUGH TAX ADMINISTRATIONS HAVE ACCESS TO CONFIDENTIAL INFORMATION THAT IS UNA VAILABLE TO THE TAXPAYER, THE RESOURCE TO CONFIDENTIAL INFORMATION BY TAX ADMINISTRATION F OLLOWS FROM THE ASYMMETRY SITUATION WHICH EXISTS BETWEEN TAXPAYERS AND TAX ADMINISTRATI ONS. SUCH INFORMATION QUALIFIES AS 'SECRET COMPARABLES'' AS SUCH INFORMATION IS CONFID ENTIAL IN NATURE. IT ALSO INDICATES THAT USAGE OF SUCH INFORMAL AND CONFIDENTIAL INFORMATION FROM THIRD PARTY SOURCES WHICH IS NOT AVAILABLE TO THE ASSESSEE IS NOT APPROPRIATE. 23 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 23 FURTHER, USAGE OF SUCH 'SECRET COMPARABLES/ INFORMA TION' RAISES A NUMBER OF CONCERNS ESPECIALLY WITH RESPECT TO THE FAIRNESS AND TRANSPA RENCY OF THE PROCESS. THE OECD DOES REPRESENT A VIEW OF THE MAJORITY OF THE OECD MEMBER COUNTRIES AND THE PRACTICES THEY ADOPT IN THEIR RESPECTIVE COUNTRIES WHILE EXAMINING TRANSFER PRICING PRACTICES. HENCE, THE VIEWS SHOULD HAVE A PERSUASIVE VALUE. EVEN THOU GH INDIA IS NOT A MEMBER OF THE OECD, AS OBSERVED BY THE ITAT, THE OECD HAS BEEN SU PPORTING EFFORTS OF TAX ADMINISTRATION IN INDIA TO PROPERLY AND EFFECTIVELY ADMINISTER AND IMPLEMENT TRANSFER PRICING POLICY. A USEFUL REFERENCE CAN ALWAYS BE MA DE TO OECD GUIDELINES/ REPORTS/ DOCUMENTS, FOR THE PURPOSES OF RESOLVING DISPUTE OF TRANSFER PRICING IN INDIA. GIVEN THE ABOVE, WE WISH TO SUBMIT THAT IT WOULD NO T BE APPROPRIATE TO USE SUCH LIMITED INFORMATION FOR THE PURPOSE OF UNDERTAKING THE COMP ARABILITY IF THE COMPARABLE DOES NOT FEATURE IN BOTH THE DATABASES I.E. PROWESS AND CAPITALINE, THE SAME CANNOT BE ACCEPTED AS COMPARABLE COMPANY. EXCEPTIONAL YEAR OF OPERATIONS THE ASSESSEE HUMBLY SUBMITS THAT A PARTICULAR COMPA NY CANNOT BE CONSIDERED AS A COMPARABLE IF THE YEAR UNDER ANALYSIS IS AN EXCEPTI ONAL YEAR OF OPERATION. BY THE TERM 'EXCEPTIONAL YEAR OF OPERATION', THE ASSESSEE MEANS THAT COMPANY UNDER CONSIDERATION HAS HAD SUBSTANTIAL CHANGE/ REORGANIZATION (LIKE ME RGER, ACQUISITION, AMALGAMATION, ETC) IN THE SUBJECT FY WHICH HAS A SIGNIFICANT IMPA CT ON THE BUSINESS DURING THE YEAR. RELIANCE IN THIS REGARD IS PLACED ON THE JUDGMENT P RONOUNCED BY THE HYDERABAD ITAT IN THE CASE OF CAPITAL IQ INFORMATION SYSTEMS (INDI A) PVT. LTD VS DCIT [ITA NO. 1961/ HYD/ 2011) WHEREIN THE ITAT HELD AS FOLLOWS: 'WE ALSO AGREE WITH THE AFORESAID VIEW OF THE DRP T HAT EXTRA-ORDINARY EVENT LIKE MERGER AND DEMERGER WILL HAVE AN EFFECT ON THE PROFITABILI TY OF THE COMPANY IN THE FINANCIAL YEAR IN WHICH SUCH EVENT TAKES PLACE .. ' 'IF IT IS FOUND UPON SUCH VERIFICATION THAT THE AMA LGAMATION IN FACT HAS TAKEN PLACE, THEN THE AFORESAID COMPARABLE HAS TO BE EXCLUDED' IN VIEW OF THE ABOVE ARGUMENTS, THE ASSESSEE HUMBLY SUBMITS THAT DUE TO THE FOLLOWING REASONS, THE COMPANIES SELECTED BY YOUR GOODSELF, A S COMPARABLES, CANNOT BE REGARDED AS THE SAME FOR APPLICATION OF TNMM: 24 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 24 25 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 25 26 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 26 3.7.8. WITH REGARD TO THE PLI CHOSEN FOR COMPUTATI ON OF ALP , THE ASSESSEE SUBMITTED AS UNDER:- 4. PLI CHOSEN FOR COMPUTATION OF ALP(REFER POINT N O. 7 OF THE SUBJECT NOTICE) IN VIEW OF THE ABOVE, THE ASSESSEE HUMBLY SUBMITS T HAT YOUR GOODSELF HAVE TAKEN THE OPERATING PROFIT TO OPERATING REVENUE AS THE PROFIT LEVEL INDICATOR CPU') FOR BENCHMARKING THE VARIOUS TRANSACTIONS UNDERTAKEN BY THE COMPANY WITH ITS AES. IN THIS REGARD, THE ASSESSEE HUMBLY SUBMITS THAT THE PLT SH OULD BE SELECTED AFTER TAKING ACCOUNT RESPECTIVE STRENGTHS AND WEAKNESSES OF THE VARIOUS POSSIBLE PLI. ACCORDINGLY, THE ASSESSEE AFTER CONSIDERING THE FACT THAT THE OP ERATING REVENUE OF THE COMPANY CONTAINS CONTROLLED TRANSACTIONS, HAS CONSIDER THE APPROPRIATE PU AS OPERATING PROFIT TO OPERATING COST. IN THIS REGARD, THE ASSESSEE PLACES ITS RELIANCE ON OECD GUIDELINES 'PARA 2.76 OF OECD GUIDELINE UPDATED IN JULY 2010 IT SHOULD TAKE ACCOUNT OF THE RESPECTIVE STRENGTHS AND WEAKNESSES OF THE VARIOUS POSSIBLE INDICATORS; THE APPROPRIATENESS OF THE IND ICATOR CONSIDERED IN VIEW OF THE NATURE OF THE CONTROLLED TRANSACTION, DETERMINED IN PARTICULAR THROUGH A FUNCTIONAL ANALYSIS; THE AVAILABILITY OF RELIABLE INFORMATION (IN PARTICULAR ON UNCONTROLLED COMPARABLES) NEEDED TO APPLY THE TRANSACTIONAL NET MARGIN METHOD BASED ALL THAT INDICATOR; AND THE DEGREE OF COMPARABILITY BETWEEN CONTROLLED AND UNCONTROLLED TRANSACTIONS, INCLUDING THE RELIABILITY OF COMPARAB ILITY ADJUSTMENTS THAT MAY BE NEEDED TO ELIMINATE DIFFERENCES BETWEEN THEM, WHEN APPLYIN G THE TRANSACTIONAL NET MARGIN METHOD BASED ON THAT INDICATOR PARA 2.87 OF OECD GUIDELINE UPDATED ILL JULY 2010 TYPICALLY, AND SUBJECT TO A REVIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE, SALES OR DISTRIBUTION OPERATING EXPENSES MAY BE AN APPROPRIA TE BASE FOR DISTRIBUTION ACTIVITIES, FULL COSTS OR OPERATING EXPENSES MAY BE AN APPROPR IATE BASE FOR A SERVICE OR 27 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 27 MANUFACTURING ACTIVITY, AND OPERATING ASSETS MAY BE AN APPROPRIATE BASE FOR CAPITAL- INTENSIVE ACTIVITIES SUCH AS CERTAIN MANUFACTURING ACTIVITIES OR UTILITIES. PARA 2.88 OF OECD GUIDELINE UPDATED IN JULY 2010 THE DENOMINATOR SHOULD BE REASONABLV INDEPENDENT FR OM CONTROLLED TRANSACTIONS. OTHERWISE THERE WOULD BE NO OBJECTIVE STARTING POI NT. PARA 2.92 OF OECD GUIDELINE UPDATED IN JULY 2010 COST-BASED INDICATORS SHOULD ONLY BE USED IN THOSE CASES WHERE COSTS ARE A RELEVANT INDICATOR OF THE VALUE OF THE FUNCTIONS PERFORMED, ASSETS USED AND RISKS ASSUMED BY THE TESTED PARTY FURTHER, ASSESSEE ALSO PLACES RELIANCE ON THE RECEN T JUDICIAL PRONOUNCEMENTS IN THE CASE OF.M/S. ST. JUDE MEDICAL INDIA PRIVATE LIMITED [ITA NO. 914/HYD/13] DATED 19 SEPTEMBER 2014, HYDERABAD ITAT HELD THAT: AS NOTED BY THE LEARNED CIT(A), THE PURPOSE OF ID ENTIFYING THE PLI IS TO ENSURE THAT THE COMPARABILITY OF THE CONTROLLED TRANSACTIONS IS OBJECTIVE AND REFERENCE IN THIS REGARD WAS MADE BY HIM TO THE OECD TRANSFER PRICING GUIDELINES 2010, WHEREIN IT WAS EXPLAINED THAT THE DENOMINATOR SHOULD BE REASON ABLY INDEPENDENT FROM CONTROLLED TRANSACTIONS, AS OTHERWISE THERE WOULD BE NO OBJECT IVE STARTING POINT. WE ARE OF THE VIEW THAT THE CIT(A) WAS FULLY JUSTIFIED IN ACCEPTI NG THE OPERATING PROFIT TO OPERATING REVENUE AS THE PLI, AS CLAIMED BY THE ASSESSEE FOR TRANSFER PRICING ANALYSIS, AND NOT OPERATING PROFIT TO OPERATING COST AS TAKEN BY THE ASSESSING OFFICER/TPO, RELYING ON THE RELEVANT OECD TRANSFER PRICING GUIDELINES, 2010 . BASED ON THE ABOVE JUDICIAL PRONOUNCEMENTS AND OEC D GUIDELINES THE ASSESSEE HUMBLY STATES THAT YOUR GOODSELF SHOULD APPLY THE PLI AS OPERATING PROFIT TO OPERATING COSTS. BASED THE ABOVE SUBMISSIONS, WE HUMBLY SUBMIT THAT THE ARMS LENGTH PRICE COMPUTED BY THE ASSESSEE SHOULD BE ACCEPTED AND NO ADJUSTMEN T IS WARRANTED IN THEIR CASE. 3.7.9. THE ASSESSEE ALSO ENCLOSED THE RELEVANT PAG ES OF THE SCHEDULES TO PROFIT AND LOSS ACCOUNT TOGETHER WITH THE NOTES ON ACCOUNTS CONTAIN ING THE QUANTITATIVE PARTICULARS OF GOODS , SEGMENTAL REPORTING ETC OF THE COMPARABLES IN SUPPORT OF ITS ARGUMENTS ADVANCED HEREINABOVE. 4. THE LD TPO OBSERVED IN HIS ORDER WITH REGARD TO THE SUBMISSIONS OF THE ASSESSEE AS UNDER:- 28 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 28 10.2 UNDERSIGNED OBSERVATION - THE VIEWS OF THE UN DERSIGNED ARE AS UNDER FOR THE ABOVE CONTENTIONS: 1) RUSSIA IS LOCATED FARTHER THAN EUROPE AND AFRICA N COUNTRIES. THUS, CONTENTION OF THE ASSESSEE, THAT THE FREIGHT CHARGES' ARE LOWER FOR R USSIA CANNOT BE ACCEPTED IN ABSENCE OF DOCUMENTARY EVIDENCE. 2) FURTHER, IN INTERNATIONAL BUSINESS OF SALES AND PURCHASE THE SELLING TERMS ARE EITHER FOB/CIF/ CFR. IN ANY CASE, THE RESPONSIBILITY OF SE LLER ENDS WHEN THE GOODS ARE REACHED AT THE DESTINATION PORT OF THE BUYER'S COUN TRY. FROM THE POINT OF THE PORT, IT IS THE BUYERS RESPONSIBILITY FOR TRANSSHIPMENT OF GOOD S. THUS, IT DOES NOT REALLY MATTER AS TO WHERE THE BUYER IS LOCALLY PLACED IT' ITS COUNTR Y. WHETHER IT IS NEAR TO THE PORT OR FAR AWAY FROM THE PORT, THE CHARGES FOR SHIPMENT OF GOO DS FROM PORT TO ITS PLACE IS NOT BORNE BY THE INTERNATIONAL SELLER. THUS, IN THE ABS ENCE OF ANY DOCUMENTARY EVIDENCE AND BASIS TO JUSTIFY, THE CONTENTION OF HIGHER SHIPMENT COST OF THE ASSESSEE TO NON-AES COULD NOT BE CONSIDERED. 3) THE OTHER REASONS WITH REGARD TO FANCIER PACKAGI NG ETC.. PROVES THE POINT OF THE UNDERSIGNED THAT THE ASSESSEE IS COMPARING THE PROF ITABILITY OF BRANDED TEAS WITH NON- BRANDED TEAS. FANCIER PACKING IS REQUIRED FOR BRAND ED TEAS WHEREAS NON-BRANDED TEAS ARE SOLD IN BULK. THIS RESULTS IN PREMIUM SALE PRIC E FOR BRANDED TEAS AND THUS HIGHER PROFITS AND THEREFORE A COMPARISON CANNOT BE MADE F OR PROFITS OF BRANDED TEAS WITH NON- BRANDED TEAS. 4) INCURRENCE OF EXCESS LABOUR COSTS ETC. ARE ALL R EGARDED AS BASELESS CONTENTIONS IN THE ABSENCE OF ANY DOCUMENTARY EVIDENCE. FURTHER, IN DE TERMINING SALE PRICE OF PRODUCT A BUSINESSMAN IS EXPECTED TO FACTOR ALL THE COSTS IN ITS SALE PRICE TO EARN AN ACCEPTABLE LEVEL OF PROFITS FOR EARNING PROFITS. THUS, IF LABO R COSTS ARE HIGHER, THAN THE SAME WOULD HAVE BEEN FACTORED. 10.3 IN VIEW OF THE ABOVE, THE CONTENTIONS OF THE A SSESSEE STANDS REJECTED. 10.4 WITH REGARD TO APPLICATION OF CPM - REJECTION OF CPM AS MOST APPROPRIATE METHOD HAS ALREADY BEEN DEALT WITH BY THE UNDERSIGN ED IN SHOW CAUSE NOTICE ALREADY REPRODUCED ABOVE. 10.5 WITH REGARD TO COMPUTATION OF PLI THE ASSESSEE SUBMITTED AS UNDER: REFERENCE POINT NO. 5 OF THE SUBJECT NOTICE, WHEREI N YOUR GOODS ELF HAS CONSIDERED 1 HAT THE PLI OF MJIL AS -13.68%, THE ASSESSEE HUMBLY SUB MITS THAT YOUR GOODSELJ HAS ELIMINATED THE FOLLOWING ITEMS FROM THE HEAD OF OPE RATING INCOME, INSPIRE OF THESE INCOME BEING OPERATING IN NATURE: DEPB CLAIM OF RS 1,26,01,000 AND DUTY DRAWBACK OF R S 6.11,000 29 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 29 MISCELLANEOUS RECEIPT OF RS 49,10,000 EXCHANGE GAIN OF RS 6,30,000 IT MAY BE NOTED BY YOUR GOODSELF THE ABOVE MENTIONE D INCOMES ORE OPERATING IN NATURE AND PERTAINS TO REGULAR BUSINESS OPERATIONS. 10.6 UNDERSIGNED OBSERVATION WITH REGARD TO THE ABOVE, UNDERSIGNS ACCEPTS THE CO NTENTION OF THE ASSESSEE FOR DEPB CLAIM AND DUTY DRAWBACK INCOME. WITH REGARD TO MISC ELLANEOUS INCOME AND EXCHANGE GAIN, THESE ITEMS OF INCOME ARE HELD TO BE NON-OPER ATING FOR THE BELOW REASONS: EXCHANGE GAIN - THE SAID ELEMENT OF INCOME IS EARNED ON THE BASI S OF EXTERNAL FACTORS WHICH ARE OUT OF ASSESSEE'S CONTROL. AS RIGHTLY SAI D BY THE ASSESSEE, SUCH INCOME IS RESULT OF FLUCTUATION IN EX RATE OF CURRENCY IN INT ERNATIONAL MARKETS WHICH ARE FACTOR OF VARIOUS ELEMENTS INCLUDING PREVAILING INTEREST RATE S, DEMAND SUPPLY OF PARTICULAR CURRENCY, GDP PERFORMANCE ETC. THERE COULD BE ADVER SE EFFECTS ON EXCHANGE FLUCTUATION AND MIGHT RESULT IN SUBSTANTIAL LOSSES FOR THE COMPANY. FURTHER, ASSESSEE IS NOT ILL THE BUSINESS OF TRADING EXCHANGE CURRENCIES AND DO NOT HAVE A PRIMARY MOTIVE TO EARN PROFITS FROM EXCHANGE FLUCTUATION. THUS, THE S AID ITEM CANNOT BE CONSIDERED AS OPERATING IN NATURE. MISCELLANEOUS INCOME - AT THE FOREMOST, THE ASSESSEE SHOULD HAVE PROVID ED DETAILS OF SUCH INCOME FOR CONSIDERATION OF IT IN THE OPERATIN G CATEGORY. IN GENERAL SENSE, MISCELLANEOUS MEANS 'OTHERS'. THUS, NOT A MAINSTREA M SOURCE OF INCOME FOR THE ASSESSEE. THESE INCOME MIGHT HAVE RESULTED WHICH DO NOT HAVE ANY CONNECTION WITH THE INTERNATIONAL TRANSACTIONS AND OPERATION OF THE ASS ESSEE. 10.7 CONSIDERING THE ABOVE, THE PLI OF THE ASSESSEE IS RECOMPUTED AS UNDER: DESCRIPTION AMOUNT(RS.) NET SALES 1,542,084,000/ - LESS EXCHANGE GAIN - 6,30,000/ - DUTY DRAWBACK 6,11,000/ - DEPB CLAIM 1,26,01,000/ - OPERATING REVENUES 155,46,66,000/- EXPENDITURE DEBITED TO P & L ACCOUNT 181,98,66,000/ - LESS BANK INTEREST AND CHARGES 3,58,73,000/ - OPERATING EXPENDITURE 178,39,93,000/- OPERATING LOSS 22,93,27,000/- OPERATING LOSS/OPERATING COST (-)12.85% OPERATING LOSS/OPERATING REVENUE (-)14.75% 30 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 30 10.8 WITH REGARD TO COMPARABLE COMPANIES CHOSEN THE SUBMISSION OF THE ASSESSEE ALONG WITH UNDERSIGN RESPONSE IS PROVIDED BELOW: 31 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 31 32 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 32 33 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 33 34 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 34 11. HENCE, ON THE BASIS OF ABOVE, THE FOLLOWING COM PANIES ARE CONSIDERED AS COMPARABLE COMPANIES: SL NO. NAME OF THE COMPANY OPERATING REVENUE(OR) OPERATING COST (OC) OPERATING PROFIT(OP) OP/OC 1 JIVRAJ TEA LIMITED 12895.32 12311.09 584.22 4.75% 2 MOHANI TEA LEAVES (P) LTD. 17569.88 16753.07 816.81 4.87% 3 ASIAN TEA & EXPORTS LTD. 13787.84 13458.86 328.97 2.44% 4 GUJARAT TEA PROCESSORS AND PACKERS LTD. 52693.32 48747.13 3946.19 8.09% AVERAGE 5.04% AMOUNT OF ADJUSTMENTS: PARTICULARS AMOUNT (RS.) OPERATING REVENUE (A) 1,554,666,000 35 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 35 OPERATING COST (B) 1,783,993,000 ARMS LENGTH MARGIN (C ) 5.04% ARMS LENGTH PROFIT (D=B*C) 89,868,647 ACTUAL MARGIN (E) - 12.85% ACTUAL PROFIT (F=B*E) - 229,327,000 DIFFERENTIAL PROFIT (G=D - F) 319,261,000 VALUE OF INTERNATIONAL TRANSACTION (H) 367,261,000 PROPORTION OF INTERNATIONAL TRANSACTION (I=H/A) 23.62% AMOUNT OF ADJUSTMENT (J=G*I) 75,404,050 48. BASED ON THE ABOVE, THE TOTAL UPWARD ADJUSTMENT OF THE TOTAL INCOME OF THE ASSESSEE IS COMPUTED AT RS. 75,404,050/-. 5. THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE LD DRP AND THE LD DRP OBSERVED AS UNDER WITH REGARD TO EACH OF THE OBJECTIONS FILED BY THE ASSESSEE:- A) WITH REGARD TO THE RULE OF CONSISTENCY IN APPLYI NG CPM AS THE MAM, THE LD DRP UPHELD THE ACTION OF THE LD TPO BY SIMPLY STATING T HAT THE PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE TO THE INCOME TAX PROCEEDINGS. B) WITH REGARD TO THE OBJECTION RAISED BY THE ASSES SEE THAT CPM HAS BEEN REJECTED BY THE ASSESSEE WITHOUT ASSIGNING PROPER REASONS AND WITH REGARD TO THE ALLEGATIONS RAISED ON THE LOW COST ALLOCATION AND THEREBY INCREASED PROFI TABILITY IN RELATED PARTY SEGMENT AND ON THE ASPECT THAT ONLY BRANDED PRODUCTS ARE EXPORT ED TO AES AND NON-BRANDED PRODUCTS TO AES THEREBY RESULTING IN PROFITABILITY NOT BEING COMPARABLE AND IN ADOPTING THE TNMM METHOD BY THE LD TPO, THE LD RP OBSERVED AS UN DER:- DRP DIRECTIONS: THE TPO HAS ANALYZED THE TP REPORT AND ARRIVED AT REASONED CONCLUSIONS UPON ANALYSIS OF THE PRICING OF BRANDED AND UN-BRANDED G OODS AS ALSO THE TRANS-SHIPMENT CHARGES. THOUGHT IT WAS SEEN FROM THE REMAND REPORT THAT THE SALES OF BRANDED AND 36 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 36 UNBRANDED GOODS WERE BOTH TO THE AES AND THE NON-AE S, BUT THE EXPENSES ALLOCATIONS AND PRICE BASE OF THE TWO CATEGORIES ARE DISTINGUIS HABLE. THE TPO HAS CONCLUDED THIS BY COMPARING AVERAGE PRICE REALIZATION IN ABSENCE O F MORE ROBUST INFORMATION. THE CONCLUSIONS DRAWN PER THE REMAND REPORT REINFORCE T HE TPO ACTION OF INVOKING TNMM WHEREIN THE ROUGH EDGES OF COMPARABILITY ARE SMOOTH ENED AND HENCE USE OF TNMM IS USEFUL IN THESE CIRCUMSTANCES TO COMPUTE ALP IN A REALISTIC AND PRACTICAL MANNER. THIS OBJECTION IS ACCORDINGLY DISMISSED. C) WITH REGARD TO THE USAGE OF COMPARABLES BY THE L D TPO BY APPLYING EXTERNAL TNMM FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSA CTIONS AND NOT APPLYING THE EXPORT TURNOVER FILTERS , MERGERS ETC, AND NOT GIVING CRED IT FOR WORKING CAPITAL ADJUSTMENTS , THE LD DRP OBSERVED AS UNDER:- TPO ASSESSEE DRP JIVRAJ TEA LIMITED IT IS A COMPARABLE BASIS THE METHODOLOGY OF STOCK MAINTENANCE. IT IS FUNCTIONALLY A COMPARABLE ENTITY. THIS COMPANY IS NOT INVOLVED IN BLENDING/MANUFACTURING OF TEA. ONLY IN TRADING OF TEA. FURTHER, IT MAY ALSO BE NOTED ITS MAJOR SALES ARE DONE DOMESTICALLY AND ONLY 1% OF ITS SALES ARE EXPORTS. ASSESSEE EXPORTS 58% OF ITS TOTAL SALES. THE COMPARABLE IS NOT SUITABLE IN VIEW OF FUNCTIONAL DIFFERENCES. HENCE, SHOULD BE EXCLUDED. MARVEL TEA ESTATE (INDIA) LIMITED FUNCTIONALLY COMPARABLE. THIS COMPANY IS NOT INVOLVED IN BLENDING/MANUFACTURING OF TEA. THE COMPANY IS NOT A MANUFACTURING THE COMPARABLE IS NOT SUITABLE IN VIEW OF FUNCTIONAL DIFFERENCES. HENCE, SHOULD BE 37 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 37 COMPANY BUT A TRADING COMPANY OF TEA. ALL ITS SALES ARE DONE DOMESTICALLY. EXCLUDED. MOHANI TEA LEAVES FUNCTIONALLY COMPARABLE. THIS DOES NOT FEATURE IN BOTH THE DATABASES I.E. PROWESS AND CAPITALINE. THE ANNUAL REPORT PROVIDED TO US BY YOUR GOODSELF CONTAINS ONLY THE BALANCE SHEET AND NO DETAILS OF THE PROFIT AND LOSS OF THE COMPANY IS PROVIDED. IT IS COMPARABLE BASIS FUNCTIONAL COMPARABILITY AS IN TP ORDER AND PROFILE OF THE COMPARABLE. IT IS VALIDLY CHOSEN. ASIAN TEA AND EXPORTS LIMITED FUNCTIONALLY COMPARABLE. THIS COMPANY IS ALSO ENGAGED IN TRADING. IT IS INVOLVED IN SALE OF MADE TEA. FURTHER, IT MAY ALSO BE NOTED THAT THE COMPANY EARNS IT MAXIMUM REVENUE FROM EXPORTS. THE COMPANY EXPORTS 98% AND HAS ONLY 2% DOMESTIC SALES. HENCE, IT ONLY SERVES TO CUSTOMERS OUTSIDE INDIA. IT IS COMPARABLE BASIS FUNCTIONAL COMPARABILITY AS IN TP ORDER AND PROFILE OF THE COMPARABLE. IT IS VALIDLY CHOSEN. 38 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 38 GUJARAT TEA PROCESSORS AND PACKERS LIMITED FUNCTIONALLY COMPARABLE. THIS COMPANY IS NOT INVOLVED IN BLENDING AND MANUFACTURING OF TEA. HOWEVER, THE SALE FROM BLENDED TEA IS ONLY 0.0024%. THE COMPANY IS MAJORLY INVOLVED IN SALE OF PACKED TEA AND NOT BLENDED TEA. ITS MAJOR SALES ARE DONE DOMESTICALLY AND ONLY 1% OF ITS SALES ARE EXPORTS. THE COMPARABLE IS NOT SUITABLE IN VIEW OF FUNCTIONAL DIFFERENCES. HENCE, SHOULD BE EXCLUDED. D) WITH REGARD TO THE OBJECTION THAT THE LD TPO ERR ED IN COMPUTATION OF PLI OF THE ASSESSEE BY CONSIDERING FOREIGN EXCHANGE GAIN AND M ISCELLANEOUS INCOME AS NON- OPERATING INCOME , THE LD DRP OBSERVED AS UNDER:- DRP DIRECTIONS: THE FOREIGN EXCHANGE FLUCTUATIONS THAT BEAR DIRECT NEXUS WITH THE OPERATIONS SHOULD BE TREATED AS OPERATING IN NATURE. THIS POSI TION HAS ALSO BEEN HELD SO IN WESTFALIA SEPARATOR INDIA PVT. LTD. VS. ACIT [TS-22 0-ITAT-2014(DEL)-TP]. THE MISCELLANEOUS INCOME OF THE ASSESSEE HAS BEEN S EEN. THE BREAK UP IS AS PER TABLE BELOW: PARTICULAR AMOUNT (INR) ELECTRICITY CHARGES RECEIVED 42,61,938 BROKERAGE AND COMMISSION CHARGES 1,451 DISCOUNT RECEIVED ON PURCHASE 1,14,206 MISC. RECEIPT 46,332 EMPLOYEES RENT RECOVERIES 11,001 39 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 39 SUNDRY ADJUSTMENT (INCLUDING PROVISIONS WRITTEN BACK DURING THE YEAR, TELEPHONE REFUND ETC.) 4,74,760 TOTAL 49,09,689 THE ABOVE CANNOT BE TREATED AS OPERATING IN NATURE AS CRUCIAL NEXUS WITH OPERATIONS IS ABSENT. THE SAME CANNOT BE TREATED AS OPERATING RECEIPTS. O NLY THE DISCOUNTS RECEIVED ON PURCHASES SHALL BE ALLOWED AS OPERATING SUBJECT TO VERIFICATI ON BY THE TPO THAT SUCH PURCHASES PERTAIN TO THE STOCK OR OPERATIONAL EQUIPMENT. THIS OBJECTION IS THUS DISPOSED OF. 6. THE LD AO PURSUANT TO THE DIRECTIONS OF THE LD D RP PASSED THE FINAL ORDER U/S 143(3) READ WITH SECTION 92CA(4)/144C(13) OF THE ACT DATED 27.11.2015 WHEREIN HE WORKED OUT THE REVISED PLI (OP/ TC) OF THE ASSESSEE AND DE TERMINED THE UPWARD ADJUSTMENT OF RS 6,93,27,744/- IN THE FINAL ASSESSMENT. 7. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US O N THE FOLLOWING GROUNDS :- 2. ADJUSTMENT IN RELATION TO THE INTERNATIONAL TRAN SACTION ENTERED INTO BY THE APPELLANT. 2.A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER ERRED IN NOT FOLLOWING THE RULE OF CONSISTENCY AN D REJECTING THE TRANSFER PRICING METHODOLOGY AS ADOPTED BY THE APPELLANT 2.B) THE IMPUGNED ORDER HAS FURTHER ERRED IN REJECT ING THE TRANSFER PRICING METHODOLOGY I.E. THE COST PLUS METHOD (CPM) ADOPT ED BY THE APPELLANT WITHOUT ASSIGNING ANY SPECIFIC REASON. 2.C) THUS, THE IMPUGNED ORDER HAS ERRED IN REJECTIN G MORE RELIABLE TRADITIONAL METHOD (I.E. CPM METHOD) AND IN ADOPTING TRANSACTIO NAL PROFIT METHOD [I.E. TRANSACTIONAL NET MARGIN METHOD (TNMM)] FOR THE DETERMINATION OF ARMS LENGTH PRICE (ALP). 2.D) THE IMPUGNED ORDER HAS FURTHER ERRED IN NOT CO NSIDERING THE FACT THAT THE EXPENSE ALLOCATION AND PRICE DIFFERENCE BETWEEN THE SALE OF BRANDED AND NON- BRANDED PRODUCTS TO ASSOCIATE ENTERPRISES (AE) AN D NON-AE IS DUE TO LOCATION CONSTRAINTS AND THE OTHER INEVITABLE REASONS. 40 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 40 2.E) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E IMPUGNED ORDER HAS ERRED IN APPLYING EXTERNAL TNMM BY CHOOSING COMPARABLE COMPA NIES WHICH ARE FUNCTIONALLY NOT SIMILAR AS COMPARED TO THE FUNCTIO NS OF THE APPELLANT. 2.F) THE IMPUGNED ORDER HAS ERRED IN NOT PROVIDING THE DETAILED SEARCH PROCESS FOR SELECTING HIS OWN SET OF COMPARABLES DURING THE TRANSFER PRICING ASSESSMENT AND IN CONDUCTING FRESH SEARCH AND ECONOMIC ANALYSI S. 2.G) WITHOUT PREJUDICE TO THE ABOVE, THE IMPUGNED O RDER HAS FURTHER ERRED IN NOT SHARING THE COMPLETE DATA I.E. THE COMPLETE FINANCI AL STATEMENTS, WHICH WAS REQUIRED FOR COMPUTING THE PROFIT LEVEL INDICATOR ( PLI) AND THE FUNCTIONALLY, OF THE COMPARABLES AND HENCE ERRED IN CHOOSING A SECRE T COMPARABLE. 2.H) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN THE LAW, THE IMPUGNED ORDER HAS ERRED IN CHOOSING SUCH COMPARABLES THAT H AVE AN EXCEPTIONAL YEAR OF OPERATION LIKE AMALGAMATION, MERGER ETC IN THE SUBJ ECT AY AND/OR ARE SOLELY INVOLVED IN BUSINESS OF EXPORTS. 2.I) WITHOUT PREJUDICE TO THE ABOVE AND ON THE FACT S AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNER ORDER HAS ERRED IN CO NSIDERING A SET OF ONLY TWO COMPARABLES FOR DETERMINING THE ALP. 2.J) WITHOUT PREJUDICE TO THE ABOVE AND ON THE FACT S AND CIRCUMSTANCES OF THE CASE AND IN LAW , THE IMPUGNER ORDER HAS ERRED IN N OT CONSIDERING THE CLOSING STOCK AND THE MISCELLANEOUS INCOME, AS OPERATING IT EMS, IN THE COMPUTATION OF THE PLI OF THE APPELLANT. 2.K) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E IMPUGNED ORDER HAS ERRED IN NOT GIVING EFFECT TO THE RECTIFIED DIRECTIONS OF TH E HONBLE DRP, ISSUED UNDER RULE 13 OF THE DRP RULES, DATED 10 TH DECEMBER, 2015 WHEREIN THE DRP HAS DIRECTED TO CONSIDER THE AMOUNT OF CLOSING STOCK IN COMPUTIN G THE PLI OF THE APPELLANT. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE ASSESSEE HAD APPLIED THE COST PLUS METHOD (CPM) AS THE MOST APPROPRIATE METHOD (MAM) FOR BENCHMARKING ITS INTER NATIONAL TRANSACTIONS. THE FACTS OF THE CASE HAD NOT CHANGED DURING THE YEAR UNDER A PPEAL AND HENCE THE METHOD ADOPTED 41 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 41 BY THE ASSESSEE AT CPM HAS BEEN THE SAME FOR THIS Y EAR UNDER APPEAL ALSO FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS. 8.1. WE FIND THAT THE LD TPO WHILE PASSING AN ORDER U/S 92CA(1) OF THE ACT FOR THE ASST YEAR 2007-08 HAD OBSERVED AS UNDER:- 2. THE PERUSAL OF FORM 3CEB SHOWED THAT THE ASSESSE E HAD ENTERED INTO TRANSACTIONS WITH ITS AES. THE ASSESSEE HAD USED CP M METHOD FOR DETERMINATION OF THE TRANSACTION. 3. AFTER DUE DELIBERATION, IT IS SEEN THAT NO TRANS FER PRICING ADJUSTMENT IS REQUIRED TO BE MADE U/S 92CA(3) OF THE IT ACT. THE TRANSACTION ENTERED INTO BY THE ASSESSEE IS ACCEPTED TO BE AT THE ARMS LENGTH PRICE. 8.1.1. WE FIND THAT THE LD TPO WHILE PASSING AN ORD ER U/S 92CA(1) OF THE ACT FOR THE ASST YEAR 2010-11 HAD OBSERVED AS UNDER:- 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF BLEND ING OF TEA AND PRODUCTION OF TEA BAGS. THE ASSESSEE HAD USED CPM METHOD FOR DET ERMINATION OF THE TRANSACTION. . 3. AFTER DUE DELIBERATION, IT IS SEEN THAT NO TRANS FER PRICING ADJUSTMENT IS REQUIRED TO BE MADE U/S 92CA(3) OF THE IT ACT. THE TRANSACTION ENTERED INTO BY THE ASSESSEE IS ACCEPTED TO BE AT THE ARMS LENGTH PRICE. 8.1.2. SIMILARLY NO TRANSFER PRICING ADJUSTMENTS WE RE MADE BY THE LD TPO FOR THE ASST YEARS 2008-09 AND 2009-10 VIDE HIS ORDER U/S 92CA(3 ) OF THE ACT DATED 28.10.2011 AND 29.1.2013 RESPECTIVELY. 8.2. WE FIND THAT THE LD TPO ERRED IN TAKING A DIFF ERENT STAND IN THE YEAR UNDER APPEAL IN SPITE OF THE SIMILAR FACTS PREVAILING IN THIS YEAR WHEN COMPARED TO THE EARLIER YEARS. THE PRINCIPLES OF RULE OF CONSISTENCY HAS BEEN GIVEN A GO BY THE LD TPO. WE FIND THAT THE NATURE OF INTERNATIONAL TRANSACTIONS, FUNCTIONS PER FORMED AND RISKS ASSUMED BY THE PARTIES AND METHOD ADOPTED AT CPM ARE SIMILAR TO TH OSE ADOPTED IN THE EARLIER YEARS BY THE ASSESSEE AND HENCE THERE IS NO REASON FOR THE L D TPO TO TAKE A DIFFERENT STAND IN THE 42 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 42 YEAR UNDER CONSIDERATION. WE DO NOT FIND ANY DISTIN GUISHING FEATURE POINTED OUT BY THE LD TPO / LD DRP OR BY THE LD DR DURING THIS YEAR SO AS TO DEVIATE FROM THE STAND ALREADY TAKEN BY THE LD TPO IN EARLIER YEARS. WE FIND TH AT THE RELIANCE PLACED ON THE DECISION OF THE HONBLE TELENGANA AND ANDHRAPRADESH HIGH COURT IN T HE CASE OF CIT VS M/S ALUMECO INDIA EXTRUSION LIMITED IN ITA NOS. 532 AND 563 OF 2014 DATED 6.11.2014 IS VERY WELL FOUNDED AND IS DIRECTLY APPLICABLE TO THE FACTS OF THE INSTANT CASE. THE QUESTION RAISED BEFORE THE HONBLE COURT IS AS UNDE R:- IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETHE R THE HONBLE TRIBUNAL (ITAT) IS CORRECT IN LAW IN DIRECTING THE ASSESSING OFFICER/TRANSFER PRICING OFFICER TO COMPUTE THE VALUE OF INTERNATIONAL TRANS ACTION BY USING INTERNAL COST PLUS METHOD UNDER SECTION 92CA OF THE ACT INSTEAD O F EXTERNAL TRANSACTION NET MARGIN METHOD? THE HONBLE COURT HELD AS FOLLOWS:- WE HAVE HEARD MR. B. NARASIMHA SHARMA, LEARNED COU NSEL FOR THE APPELLANT, AND PERUSED THE JUDGMENT AND ORDER UNDER APPEAL. IT APP EARS THAT THE LEARNED TRIBUNAL HAS RECORDED THE FACT THAT WHEN THE ASSESSEE HAS CHOSEN A MOST APPROPRIATE METHOD AND SUBSTANTIATED THE CHOICE IN ITS TRANSFER PRICING ST UDY IT IS UPTO THE TRANSFER PRICING OFFICER TO RECORD AND SUBSTANTIATE THE REASONS AS T O WHY THE ASSESSEES MOST APPROPRIATE METHOD WAS INCORRECT AND WHY SOME OTHER TRANSFER PRICING METHOD NEED TO BE THE MOST APPROPRIATE METHOD. THE TRIBUNAL DID NOT FIND ANY SUBSTANCE IN ANY OF THE TRANSFER PRICING OFFICERS MULTIPLE ARGUMENTS F OR REJECTION OF ASSESSEES INTERNAL COST PLUS METHOD AND ADOPTION OF EXTERNAL TRANSACTI ON NET MARGIN METHOD. IN OTHER WORDS, IT WAS FOUND BY THE TRIBUNAL THAT THE DECISI ON OF THE TRANSFER PRICING OFFICER WAS ABSOLUTELY ARBITRARY AND IRRATIONAL AND HENCE I T SET ASIDE THE ORDER OF THE TRANSFER PRICING OFFICER. WE DO NOT FIND ANY ELEMENT OF LAW FOR CONSIDERATION IN THESE APPEALS. THE APPEALS ARE THEREFORE DISMISSED. THERE WILL BE NO ORDER AS TO COSTS. 8.2.1. RESPECTFULLY FOLLOWING THE AFORESAID DECISIO N AND THE RATIO LAID DOWN BY THE HONBLE APEX COURT IN THE CASE OF RADHASAOMI SATSAN G REPORTED IN 193 ITR 321 (SC) , WE HEREBY DIRECT THE LD AO TO ADOPT THE CPM AS THE MAM FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. 8.3. WE ALSO FIND THAT THE ASSESSEE HAD SEGREGATED FINANCIALS INTO EXPORTS TO AE AND EXPORTS TO NON-AE BY ADOPTING INTERNAL TNMM METHOD FOR THE SAME. WE FIND THAT THE 43 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 43 LD TPO HAD NOT ACCEPTED THE INTERNAL CPM , HE HAD N OT ACCEPTED THE INTERNAL TNMM ALSO. WE FIND THAT THE LD TPO HAD OBSERVED IN PARA 7 OF HIS ORDER AS UNDER :- 7. FURTHER, AS THE ASSESSEE IS ALSO ENGAGED IN SEL LING OF BOTH BRANDED AND NON-BRANDED CATEGORIES OF TEAS, THE SAME SHOULD BE TAKEN INTO C ONSIDERATION FOR THE PURPOSE OF INTERNAL COMPARABILITY. THE CRUX IS TO COMPARE THE MARGIN OF SELLING BRANDED TEA TO AE WITH BRANDED MARGIN OF BRANDED TEA SOLD TO AES WITH THE MARGIN EARNED FROM SELLING OF BRANDED AND NON-BRANDED TEA TO NON-AES. BUT THE LD DRP HAD OBSERVED THAT FROM THE REMAND RE PORT OF THE LD TPO, THE SALES OF BRANDED AND UNBRANDED GOODS WERE BOTH TO THE AES AN D NON AES. HENCE THE OBSERVATION MADE BY THE LD TPO IN HIS ORDER HAD BEE N NULLIFIED BY HIS OWN OBSERVATION LATER IN THE REMAND REPORT WHICH HAS BEEN TAKEN COG NIZANCE BY THE LD DRP. HOWEVER, WE FIND THAT THE LD DRP HAD OBSERVED THAT THE EXPEN SES ALLOCATION AND PRICE BASE OF THE TWO CATEGORIES ( BRANDED AND UNBRANDED GOODS TO AE S AND NON AES) ARE DISTINGUISHABLE AND BASED ON THIS IT HAD UPHELD THE ACTION OF THE LD TPO. WE HOLD THAT THE LD TPO SHOULD ADOPT THE INTERNAL CPM AND INTERN AL TNMM FOR BENCHMARKING THE DIFFERENT INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH ITS AES, AND ACCORDINGLY THIS ASPECT OF THE ISSUE ALSO DESERVES TO BE REMANDED BACK TO THE FILE OF THE LD AO. 8.4. WITH REGARD TO THE LIST OF COMPARABLES CHOSEN BY THE LD TPO AND LATER MODIFIED BY THE LD DRP, WE FIND THAT THE LD TPO HAD ISSUED A SH OW CAUSE NOTICE DATED 9.1.2015 SEEKING THE PRESENCE OF THE ASSESSEE ON 14.1.2015. THE ASSESSEE HAD GIVEN THE FINANCIALS OF COMPARABLES CHOSEN BY THE LD TPO ON 1 0.1.2015. IT WAS ARGUED BY THE LD AR THAT THE ASSESSEE SOUGHT TIME FOR A DAY TO MAKE ITS DETAILED SUBMISSIONS BEFORE THE LD TPO WITH REGARD TO THE OBJECTIONS TO BE FILED FO R THE COMPARABLES AND DISPUTING THE MAM ADOPTED BY THE ASSESSEE AND THAT THIS REQUEST W AS REJECTED BY THE LD TPO. IN ANY CASE, THE ENTIRE EXERCISE OF DETERMINATION OF A LP HAD TO BE REDONE BY THE LD TPO AS PER THE DIRECTIONS CONTAINED HEREINABOVE BASED ON T HE INTERNAL CPM AND INTERNAL 44 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 44 TNMM TO BE ADOPTED AS MAM FOR BENCHMARKING DIFFEREN T TRANSACTIONS. HENCE IN THESE CIRCUMSTANCES, WE DEEM IT FIT AND APPROPRIATE , IN THE INTEREST OF JUSTICE AND FAIRPLAY, TO REMAND THIS ISSUE OF LIST OF COMPARABLES ALSO TO TH E FILE OF THE LD TPO FOR DENOVO ADJUDICATION. THE ASSESSEE IS ALSO GIVEN LIBERTY TO FILE FRESH LIST OF COMPARABLES, IF IT SO DESIRES, AND ALSO FILE FRESH OBJECTIONS AND EVIDENC ES IN SUPPORT OF ITS CONTENTIONS. 8.5. ACCORDINGLY THE GROUND NOS. 2(A) TO 2(K) RAIS ED BY THE ASSESSEE IN RESPECT OF TRANSFER PRICING ADJUSTMENTS ARE ALLOWED FOR STATIS TICAL PURPOSES. 9. THE NEXT ISSUE TO BE DECIDED IN THIS APPEAL IS A S TO WHETHER THE LD AO WAS JUSTIFIED IN MAKING DISALLOWANCE OF RS 1,07,065/- U/S 14A OF THE ACT READ WITH THIRD LIMB OF RULE 8D(2)(III) OF THE RULES, IN THE FACTS AND CIRCUMSTA NCES OF THE CASE. 9.1 THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSES SEE WAS IN RECEIPT OF DIVIDEND INCOME OF RS 4,14,000/- AND CLAIMED THE SAME AS EXEMPT. TH E LD AO OBSERVED THAT THE INVESTMENTS WERE MADE OUT OF OWN FUNDS AND HENCE NO DISALLOWANCE UNDER SECOND LIMB OF RULE 8D(2) OF THE RULES TOWARDS INTEREST IS TO B E MADE IN THIS CASE. HOWEVER, THE LD AO RESORTED TO MAKE DISALLOWANCE UNDER THIRD LIMB O F RULE 8D(2) OF THE RULES AND ARRIVED AT THE DISALLOWANCE OF RS 1,07,065/- IN THE ASSESSMENT WHICH WAS UPHELD BY THE LD DRP. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFO RE US ON THE FOLLOWING GROUNDS:- 3.DISALLOWANCE UNDER SECTION 14A OF THE ACT 3.A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER ERRED IN MAKING DISALLOWANCE OF RS. 1,07,065/- UNDE R SECTION 14A OF ACT READ WITH RULE 8D OF THE RULES. 3.B) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE IMPUGNED ORDER HAS ERRED IN DENYING THE APPELLANTS CONTENTION THA T NO EXPENSES HAVE BEEN INCURRED FOR EARNING EXEMPT INCOME AND HAS GROSSLY APPLIED RULE 8D WITHOUT APPRECIATING THE FACTS OF THE APPELLANTS CASE. 45 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 45 3.C) THE IMPUGNED ORDER HAS FURTHER ERRED IN NOT CO NSIDERING THAT THE ENTIRE INVESTMENTS HAVE BEEN MADE FROM THE APPELLANTS OWN FUNDS AND NO EXPENSES HAVE BEEN INCURRED FOR EARNING A NOMINAL EXEMPT INC OME AND HAS APPLIED RULE 8D WITHOUT APPRECIATING THE FACTS OF THE APPELLANT S CASE. 3.D) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E IMPUGNED ORDER HAS ERRED IN NOT ACKNOWLEDGING THAT THE PROVISIONS OF SECTION 14 A MANDATE THAT THE ONUS IN ON THE AO TO JUSTIFY THE BASIS FOR NOT BEING SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE APPELLANT IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER ACT. 3.E) THE IMPUGNED ORDER HAS FURTHER ERRED IN NOT AB IDING BY THE DECISION OF THE JURISDICTIONAL HIGH COURT WHEREIN IT WAS AFFIRMED A ND HELD THAT THE DISALLOWANCE SHOULD BE QUASHED IF NO COGENT REASONS FOR THE SAME HAS BEEN GIVEN. 3.F) WITHOUT PREJUDICE TO THE ABOVE, THE IMPUGNED O RDER HAS FURTHER ERRED IN ALSO CONSIDERING THOSE INVESTMENTS, FOR COMPUTATION OF D ISALLOWANCE, ON WHICH EXEMPT INCOME HAS NOT BEEN EARNED DURING THE SUBJEC T A.Y. 9.2. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE DISALLOWANCE U/S 14A OF THE ACT HAD BEEN MADE ONLY UNDER THE THIRD LIMB OF RULE 8D(2) OF THE RULES VIZ 0.5% OF AVERAGE OF VALUE OF INVESTMENTS. THE LD AR BEFORE US FILED THE LIST OF INVESTMENTS WHICH DID NOT FETCH ANY DIVIDEND INCOME AND PRAYED FOR EXCLUSION OF THOSE INVESTMENTS WHILE CALCULATING DISALLOWANCE UNDER RULE 8D(2)(III ) OF THE RULES IN THE LIGHT OF THE DECISION OF THIS TRIBUNAL IN THE CASE OF REI AGRO L TD REPORTED IN 144 ITD 141. THE LD DR FAIRLY AGREED FOR THE SAME. HENCE WE DIRECT TH E LD AO TO REWORK THE DISALLOWANCE UNDER RULE 8D(2)(III) OF THE RULES ONLY BY TAKING I NTO ACCOUNT THOSE INVESTMENTS WHICH HAD FETCHED DIVIDEND INCOME IN LIGHT OF DECISION OF THIS TRIBUNAL IN REI AGRO LTD SUPRA. ACCORDINGLY THE GROUND NOS. 3(A) TO 3(F) RAISED BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 10. THE GROUND NO.1(A) RAISED BY THE ASSESSEE IS GE NERAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 46 ITA NO.214/KOL/2016 MADHU JAYANTI INTERNATIONAL LTD. A.YR.2011-12 46 11. THE GROUND NOS 4 & 5 RAISED BY THE ASSESSEE WIT H REGARD TO CHARGEABILITY OF INTEREST U/S 234B / 234C OF THE ACT AND LEVY OF PENALTY U/S 271(1)(C ) OF THE ACT WHICH ARE ONLY CONSEQUENTIAL IN NATURE AND DOES NOT REQUIRE ANY SP ECIFIC ADJUDICATION. MOREOVER, THE GROUND RAISED TOWARDS PENALTY WAS NOT WITH REGARD T O LEVY OF THE SAME BUT ONLY FOR INITIATION OF THE SAME. HENCE WE REFRAIN TO GIVE OUR OPINION ON THE VALIDITY OF LEVY OF PENALTY U/S 271(1)(C ) OF THE ACT IN THIS ORDER. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 01.12.2017 SD/- SD/- [A.T. VARKEY] [ M.BALAGANESH ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 01.12.2017 SB, SR. PS COPY OF THE ORDER FORWARDED TO: 1. MADHU JAYANTI INTERNATIONAL LTD., 46, B.B. GANGU LY STREET, KOLKATA-700012 2. DCIT, CENTRAL CIRCLE4(1),KOLKATA, AAYAKAR BHAWAN , P-7, CHOWRINGHEE SQUARE, KOLKATA-700069. 3. C.I.T(A)- , KOLKATA 4. C.I. T.- KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PRIVAT E SECRETARY HEAD OF OFFICE/D.D.O., ITAT, KOLKATA BENCHE S