The DCITKheda Circle, Nadiad V. GE India Industrial (P) Ltd., Nadiad

ITA 2154/AHD/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9586 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 8 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 11-06-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 01-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Rejection of books of accounts; Business income; Depreciation; Transfer pricing; Rectification of order; Opportunity of being heard; International transaction; Period of limitation; Source of fund; Retrospective amendment; Bad and doubtful debts; Revised return; Unabsorbed depreciation
• Section: 147; 148; 263; 154; 139

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD .. , , BEFORE SHRI BEFORE SHRI G.D. AGARWAL,VICE PRESIDEN T (AZ) AND SHRI KUL BHARAT, JUDICIAL MEMBER 1. ./ I.T.A.NO.2210/AHD/2012A.Y.2004-05 2. ./ I.T.A.NO.2154/AHD/2012A.Y.2004-05 1. GE INDIA INDUSTRIAL PRIVATE LIMITED ( FORMERLY GE LIGHTING INDIA (P) LTD. ) BUILDING NO.7A, 4 TH FLOOR, DLF CYBER CITY DLF PHASE-III, SECTOR 25A GURGAON 122 002 HARYANA 2. DY.CIT KHEDA CIRCLE,NADIAD / VS. 1. DY.CIT KHEDA CIRCLE NADIAD 2. GE INDIA INDUSTRIAL PVT.LTD.,NH NO.8, DHARAMSINH PARK NADIAD 387 002 ! '# ./ ./ PAN/GIR NO. : AAACG 4901 D ( !% / APPELLANTS ) .. ( &'!% / RESPONDENTS ) ASSESSEE BY : SHRI S.N. SOPARKAR WITH SACHIT JOLLY, ADV. MADHAVI RATHI, NISHANT PERIWAL & BANDISH SOPARKAR ARS REVENUE BY : SHRI T.P.KRISHNAKUMAR, CIT-DR WITH SHRI B.Y. CHAUHAN, TPO ( )* +# / DATE OF HEARING 11/06/2015 ,-./ * +# / DATE OF PRONOUNCEMENT 26/06/2015 '/ O R D E R PER BENCH : THESE TWO APPEALS BY THE ASSESSEE AND THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE LD.COMMISSIONER O F INCOME TAX(APPEALS)-IV, BARODA (CIT(A) IN SHORT) DATED 17/07/2012 ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 2 - PERTAINING TO ASSESSMENT YEAR (AY) 2004-05. THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLID ATED ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST, WE TAKE UP THE ASSESSEES APPEAL IN I TA NO.2210/AHD/2012 FOR AY 2004-05. THE ASSESSEE HAS RAISED THE FOLLOW ING GROUNDS OF APPEAL:- 1. THAT THE ORDER PASSED BY THE COMMISSIONER OF I NCOME- TAX(APPEALS)-IV, BARODA [HEREINAFTER REFERRED TO AS CIT(A)] UNDER SECTION 250 OF THE INCOME-TAX ACT, 1961 (THE ACT) TO THE EXTENT PREJUDICIAL TO THE APPELLANT, IS PERVERSE, E RRONEOUS ON FACTS AND BAD IN LAW. 2.1. THAT ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW, THE CIT(A) EXCEEDED ITS JURISDICTION CONTEMPLATED IN SE CTION 251 OF THE ACT, BY ENHANCING THE INCOME OF THE APPELLANT O N ACCOUNT OF DENIAL OF CLAIM FOR BAD DEBTS WRITTEN OFF THROUGH P ROVISION FOR BAD DEBT ACCOUNT OF RS.7,53,08,028. 2.2. WITHOUT PREJUDICE TO THE ABOVE, IN VIEW OF THE FACT S AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED C IT(A) ERRED IN DISALLOWING THE CLAIM OF BAD DEBTS OF RS.7,53,08 ,028 WRITTEN OFF THROUGH PROVISION FOR BAD DEBT ACCOUNT. 3.1. THAT THE LEARNED CIT(A) HAS ERRED IN COMPUTING THE TRANSFER PRICING ADJUSTMENT OF RS.7,62,29,166 FOR THE MANUFA CTURING SEGMENT OF POWER CONTROL DOMESTIC TARIFF AREA (PCD TA) DIVISION OF THE APPELLANT COMPANY. 3.2. THAT THE LEARNED CIT(A) HAS ERRED WHILE COMPUT ING THE RAW MATERIAL ADJUSTMENTS OF THE APPELLANT COMPANY AND T HE ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 3 - COMPARABLE COMPANIES IN THE MANUFACTURING SEGMENT O F THE PCDTA DIVISION AND CONSEQUENTLY ARRIVING AT THE REV ISED OPERATING MARGIN OF COMPARABLE COMPANIES. 3.3. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CI T(A) HAS ERRED IN NOT APPRECIATING THE ERROR MADE BY THE LEARNED TRAN SFER PRICING OFFICER IN COMPUTING THE RAW MATERIAL ADJUSTMENT AN D THE CONSEQUENT OPERATING MARGIN OF THE APPELLANT COMPAN Y. 3.4. THAT THE LEARNED CIT(A) HAS ERRED MATHEMATICAL LY BY ADDING THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER IN THE TRANSFER PRICING ORDER OF AN AMOUNT OF RS.21,155,611 TO THE REVISED ADJUSTMENT AS COMPUTED BASED ON THE LEARNED CIT(A) S APPROACH, INSTEAD OF SUBTRACTING IT FROM THE REVISE D ADJUSTMENT. THAT THE APPELLANT CRAVES LEAVE TO ADD TO AND/OR TO ALTER, AMEND RESCIND, MODIFY, THE GROUNDS HEREINABOVE OR PRODUCE FURTHER DOCUMENTS BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. 3. BRIEF FACTS OF THE CASE RECORDED BY THE LD.CI T(A) IN HIS ORDER READ AS UNDER: 10.1 THE BRIEF FACTS IN THE CASE OF APPELLANT ARE THAT AFTER AMALGAMATION / MERGER OF ABOVE ENTITIES IN TO IT AS PER ORDERS OF ABOVE HON'BLE COURTS, A REVISED RETURN OF INCOME ALONG WI TH AUDIT REPORT, TAX AUDIT REPORT, STATEMENT OF COMPUTATION OF INCOME ET C. WERE FILED ON 31- 03-2006. THE AO ON PERUSAL OF COMPUTATION OF INCOME NOTICED THAT THE APPELLANT COMPANY HAD CONSOLIDATED THE FIGURES OF B USINESS INCOME OF ITSELF AS WELL AS OF THE ABOVE ENTITIES BY VIRTUE O F SCHEME OF ARRANGEMENT / AGREEMENT, MERGED OR AMALGAMATED. AS PER THE AO T HE COMPUTATION INCLUDED INCOME FROM BUSINESS OPERATIONS, DISALLOWA BLES, ALLOWABLES, INCOME FROM OTHER SOURCES ETC. ACCORDINGLY AFTER CO NSOLIDATING THE INCOME AS PER THE REVISED AUDIT REPORT, THE APPELLA NT HAD FILED THE RETURN OF INCOME AT NIL. IN THIS REGARD IT MAY BE MENTIONE D THAT IN THE REVISED RETURN AS FILED BY THE APPELLANT THE INCOME FROM BU SINESS AND PROFESSION ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 4 - WAS SHOWN AT 2,59,69,283/- AND INCOME FROM OTHER SOURCES WAS SHOWN AT 4,64,712/- TOTALLING TO 2,64,33,995/-. HOWEVER, AFTER SETTING OF THE CARRIED FORWARD LOSSES AND DEPRECIATION, THE TOTAL INCOME WAS SHOWN AT NIL IN THE REVISED RETURN OF INCOME. AS PE R PARA-5 OF THE AUDIT REPORT, VIDE PARA L(B) IT WAS OBSERVED BY THE AO TH AT THE FINANCIAL STATEMENTS WERE PREPARED AND PRESENTED UNDER THE HI STORICAL COST CONVENTION ON THE BASIS OF ACCOUNTING ............ PROVISIONS OF THE COMPANIES ACT, 1956 TO THE EXTENT APPLICABLE. IT WA S ALSO STATED THAT, THESE FINANCIAL STATEMENTS HAVE BEEN PREPARED BASED ON THE ACCOUNTING PRACTICES AND POLICIES, HISTORICALLY FOLLOWED BY TH E CONCERNED COMPANIES IN THE SCHEME. IT WAS ALSO STATED THAT, T HE ACCOUNTING PRACTICES AND POLICIES HAVE NOT BEEN AND ARE NOT RE QUIRED TO BE ALIGNED UNDER THE SCHEME OF ARRANGEMENT. EVEN THE ORDER OF THE HON'BLE HIGH COURT HAS ALSO MADE IT MANDATORY NOT TO MAKE ANY AL IGNMENT IN THE ACCOUNTING PRACTICES AND POLICIES SUBSEQUENT TO THE SCHEME BEING MADE OPERATIONAL. 10.2 FROM THE PLAIN READING OF THE ORDER OF THE HON 'BLE HIGH COURT AS WELL AS THE ACCOUNTING PRACTICES AND POLICIES ADOPT ED BY THE BOARD OF DIRECTORS SUBSEQUENT TO THE MERGER/AMALGAMATION, AS PER THE A.O. THERE WAS NO SCOPE OF ANY ALIGNMENT IN THE ACCOUNTI NG PRACTICES AND POLICIES INCLUDING TAXATION MATTERS IN THE BOOKS OF ACCOUNTS OF THE NEW ENTITY I.E. THE APPELLANT. AS PER THE AO THE SCHEME OF MERGER WAS APPROVED WITH THE APPOINTED DATE WHICH WAS 01-04-20 03 AND ACCORDINGLY THE ARRANGEMENT/ AMALGAMATION/ MERGER B ECAME EFFECTIVE FROM THE FIRST DAY OF THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION. SINCE THE ORDER OF HON'BLE GUJARAT H IGH COURT REGARDING THE SCHEME OF ARRANGEMENT WAS PASSED ON 0 2-05-2005 WHEREAS ALL THE COMPANIES INCLUDING THE APPELLANT C OMPANY WERE LIABLE TO FILE THEIR RETURN OF INCOME AS PER PROVISIONS OF SECTION 139 OF THE ACT / SEC. 44AB-OF THE ACT FOR A.Y. 2004-05 ON OR BEFORE 31-10-2004 AND ACCORDINGLY SEPARATE RETURNS OF INCOME ALONG WITH S TATUTORY AUDIT REPORT AS WELL AS TAX AUDIT REPORT U/S 44AB OF THE ACT WERE FILED BY ALL THE COMPANIES BEFORE THE RESPECTIVE AOS AND DETAILS OF WHICH ARE MENTIONED BY THE AO ON PAGE NO.4 OF ASSESSMENT ORDE R. AS PER THE AO HAD THE SCHEME OF ARRANGEMENT/ AMALGAMATION/MERGER NOT TAKEN PLACE, ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 5 - FOR THE SAKE OF ARGUMENT, THEN ALL THE ABOVE REFERR ED COMPANIES AS SEPARATED AND DISTINCT ENTITIES WOULD HAVE BEEN ASS ESSED TO TAX BEFORE THEIR RESPECTIVE ASSESSING OFFICER. AS PER THE AO I N SUCH EVENTUALITY, THE RETURN INCOME AS CERTIFIED BY THE STATUTORY AUDITOR S AS WELL AS TAX AUDITORS, THE INCOME RETURN WOULD HAVE BEEN SUBJECT MATTER OF THE REGULAR ASSESSMENT PROCEEDINGS. AS PER THE AO SINCE , HOWEVER, THE HON'BLE GUJARAT HIGH COURT APPROVED THE SCHEME OF ARRANGEMENT/AMALGAMATION/MERGER VIDE ITS ORDER DATE D 02-05-2005 MADE OPERATIVE WITH RETROSPECTIVE EFFECT FROM THE A PPOINTING DATE AS PER THE PETITION OF THE APPELLANT FROM 01-04-2003, THE REVISED RETURN FILED BY THE APPELLANT COMPANY ARE TO HAVE BEEN SUBMITTED ON SIMPLE CONSOLIDATION BASIS BECAUSE THE PREVIOUS YEAR RELEV ANT TO A.Y. 2004-05 WAS OVER ON 31-03-2004 I.E. MUCH PRIOR TO THE ORDER OF GUJARAT HIGH COURT. THUS AS PER THE AO UNDER THE CIRCUMSTANCES, THE NE T RESULT OF DISALLOWABLE, ALLOWABLES, INCOME FROM OTHER SOURCES SHALL BE ON CONSOLIDATION BASIS AND THERE WAS NO SCOPE WHATSOEV ER TO MAKE ANY AMENDMENT/ ALTERATION, MODIFICATION IN THE CRYSTALL IZED AND CLOSED AND ADJUSTED BOOKS OF ACCOUNTS OF ALL THE COMPANIES INV OLVED IN THE SCHEME OF ARRANGEMENT/AMALGAMATION/MERGER. AS PER THE AO S IMPLE CONSOLIDATION PROCESS OUGHT TO HAVE BEEN CARRIED OU T. IN OTHER WORDS, WHATEVER INCOME/LOSSESS, ALLOWABLES AND DISALLOWABL ES WERE DECLARED BY EACH COMPANY IN ITS ORIGINAL RETURNS OF INCOME B ASED UPON ITS RESPECTIVE AUDIT REPORT AND AFTER CONSIDERING THE L EGAL AND FACTUAL POSITIONS AS WELL AS THE PROVISIONS OF INCOME TAX A CT, THE SAME SHOULD HAVE BEEN ADOPTED IN THE REVISED RETURN FILED BY TH E APPELLANT COMPANY I.E. GEII. AS PER THE AO HOWEVER, IN FACT, THE PICT URE WAS TOTALLY DIFFERENT AND THE SAME WAS SHOWING GROSS VIOLATION /DEVIATION FROM THE SO CALLED PRINCIPLES CLAIMED AND ADOPTED IN THE REV ISED AUDIT REPORT. AS PER THE AO SUCH VIOLATION / DEVIATION ARE AS UNDER: 10.2.1 AS PER THE AO ALL THE COMPANIES AS LISTED ABOVE WHICH WERE PART OF THE SCHEME OF ARRANGEMENT IN THEIR RESPECTI VE ORIGINAL RETURNS OF INCOME FILED ON THE BASIS OF THEIR RESPECTIVE AUDIT REPORTS CLAIMED / ADDED DISALLOWABLES AS PER ANNEXURE-A TO THIS ORDER . AS PER THE AO ON PERUSAL OF ANNEXURE-A, THE TOTAL DISALLOWABLE CONSI DERED BY THE RESPECTIVE COMPANIES IN THEIR RETURNS OF INCOME WER E TOTALING TO ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 6 - 62,63,45,413/-. THUS AS PER THE AO ACCORDINGLY WHIL E COMPUTING THE INCOME AS PER THE REVISED RETURN PREPARED TO GIVE E FFECT TO SCHEME OF ARRANGEMENT WITHOUT ANY ALIGNMENT IN THE ACCOUNTING PRACTICES AND POLICIES OF RESPECTIVE COMPANIES OUGHT TO HAVE CONS IDERED WITH DISALLOWABLE BEING ADDED TO THE INCOME AS PER PROFI T AND LOSS ACCOUNT SHOULD HAVE BEEN NATURALLY 62,63,45,413/-. AS PER THE AO HOWEVER ON PERUSAL OF REVISED RETURN OF INCOME SUCH DISALLOWAB LES WERE CONSIDERED AT 51,25,39,846/-. THUS AS PER THE AO THE ACT OF THE A PPELLANT COMPANY OF REDUCTION IN THE AMOUNT OF DISALLOWABLES TO THE TUNE OF 11,60,49,285/- WAS NEITHER JUSTIFIED NOR MAINTAINAB LE WITHIN THE PROVISIONS OF LAW. THE AO WAS OF THE VIEW THAT THE FIGURES SHOWN AS DISALLOWABLES IN THE RESPECTIVE RETURNS OF THE ABOV E COMPANIES / ENTITIES SHOULD HAVE BEEN APPEARED AS A CONSOLIDATED TOTAL I N THE REVISED RETURN OF THE APPELLANT COMPANY AND THERE WAS NO SCOPE FOR ANY RE-ALIGNMENT, OMISSION LEFT BECAUSE THE FIGURES WERE WORKED OUT B Y THE RESPECTIVE COMPANIES IN THEIR RESPECTIVE ORIGINAL RETURNS OF I NCOME AFTER CONSIDERING THE FACTUAL POSITIONS AS WELL AS THE PR OVISIONS OF THE ACT. AS PER THE AO FOR THE SAKE OF ARGUMENT, IF THE SCHEME OF ARRANGEMENT WOULD NOT HAVE COME INTO OPERATION, THE THEN RESPEC TIVE COMPANIES' RETURNS OF INCOME WOULD HAVE BEEN ASSESSED CONSIDER ING THE DISALLOWABLES OFFERED BY THEM WITHOUT ANY ALIGNMENT WHAT SO EVER. IN VIEW OF THIS THE AO HELD THAT THE APPELLANT COMPANY RE-CASTED THE QUANTUM OF DISALLOWABLES IN THE REVISED RETURN OF I NCOME WITH A VIEW TO REDUCE TAXABLE INCOME. ACCORDINGLY AO ADDED AN AMOU NT OF 11,60,49,285/- TO THE TOTAL INCOME OF THE APPELLANT . 10.2.2 LIKEWISE, THE AO ON PERUSAL OF THIS ANNEXUR E-B, FURTHER NOTICED THAT THE TOTAL ALLOWABLES CONSIDERED BY RESPECTIVE COMPANIES IN THE RETURNS OF INCOME WERE TOTALING TO 56,34,62,586/- AND THIS AMOUNT OUGHT TO HAVE BEEN CONSIDERED AS ALLOWABLE FOR REDU CING THE SAME FROM THE INCOME AS PER P&L ACCOUNT OF THE REVISED RETURN OF INCOME OF THE APPELLANT. AS PER THE AO HOWEVER, AN AMOUNT OF 54,09,84,981/- HAVE BEEN CONSIDERED AS ALLOWABLES. IN VIEW OF THIS THE AO HELD THAT THERE WAS SHORT ALLOWABLES TO THE TUNE OF 2,24,77,605/- AND WHICH IN HIS OPINION WAS REQUIRED TO BE DEDUCTED FROM THE TOTAL INCOME OF THE APPELLANT IN ALL FAIRNESS AS THERE WAS NO DEVIATION OR ALIGNMENT IN THE ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 7 - ACCOUNTING POLICIES OF THE RESPECTIVE COMPANIES. AC CORDINGLY, THE AO DEDUCTED THIS AMOUNT OF 2,24,77,605/- FROM THE TOTAL INCOME OF REVISED RETURN OF THE APPELLANT. 10.2.3 THE AO ON PERUSAL OF THIS ANNEXURE-C NOTICED THAT THE TOTAL INCOME FROM OTHER SOURCES CONSIDERED BY RESPECTIVE COMPANIES IN THEIR RETURNS OF INCOME WERE TOTALING TO 28,84,598/-. AS PER THE AO ACCORDINGLY WHILE COMPUTING THE INCOME AS PER THE R EVISED RETURN OF THE APPELLANT PREPARED TO GIVE EFFECT TO THE SCHEME OF ARRANGEMENT WITHOUT ANY ALIGNMENT IN THE ACCOUNTING PRACTICES AND POLIC IES OF RESPECTIVE COMPANIES OUGHT TO HAVE BEEN CONSIDERED THE INCOME FROM OTHER SOURCES AT 28,84,598/-. HOWEVER, AS PER THE AO IN THE REVISED RETURN OF INCOME OF THE APPELLANT SUCH INCOME FROM OTHER S OURCES HAVE BEEN CONSIDERED ONLY AT 4,64,712/-. IN VIEW OF THIS THE AO HELD THAT THE INCOME FROM OTHER SOURCES REDUCED TO THE TUNE OF 24,19,886/- (I.E. 28,84,598/- - 4,64,712/-) AND THE SAME WAS ADDED BY HIM TO THE TO TAL INCOME OF THE APPELLANT. 10.3 IN VIEW OF THE ABOVE DISCREPANCIES WITH REGARD TO DISALLOWABLES AND ALLOWABLE OF BUSINESS INCOME AND INCOME FROM OTHER SOURCES, THE AO HELD THAT THE REVISED RETURN OF INC OME OF THE APPELLANT WAS NOT SHOWING THE TRUE STATE OF AFFAIRS AND ACCOR DINGLY HE REJECTED THE BOOKS OF ACCOUNTS OF THE APPELLANT U/S 145(3) OF TH E IT ACT. 3.1. THE AO FURTHER MADE ADJUSTMENT AS PROPOSED BY TPO AND MADE ADDITION OF RS.2,11,55,611/-. 3.2 AGAINST THIS, THE ASSESSEE FILED AN APPEAL BEFO RE THE LD.CIT(A) WHO, AFTER CONSIDERING THE SUBMISSIONS PARTLY ALLOW ED THE APPEAL. THE LD.CIT(A) MADE DISALLOWANCE OF BAD DEBT OF RS.7,53, 08,029/-; THEREBY ENHANCED THE INCOME OF THE ASSESSEE. THE LD.CIT(A) ALSO MADE ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 8 - ENHANCEMENT INTO TRANSFER PRICING ADJUSTMENT. THE ASSESSEE FEELING AGGRIEVED BY THE ORDER OF THE LD.CIT(A), HAS FILED THE PRESENT APPEAL BEFORE US. 4. FIRST GROUND OF ASSESSEES APPEAL IS GENERAL IN NATURE WHICH REQUIRE NO INDEPENDENT ADJUDICATION. 5. GROUND NOS.2.1 & 2.2 ARE INTER-CONNECTED AND, TH EREFORE, THE SAME ARE DECIDED TOGETHER. THE LD.COUNSEL FOR THE ASSES SEE SUBMITTED THAT THE LD.CIT(A) TRAVELLED BEYOND THE RECORD AND MADE ENHA NCEMENT ON THE MATTER THAT WAS NEITHER CONSIDERED BY THE AO NOR WA S A SUBJECT MATTER OF APPEAL. IN SUPPORT OF THIS CONTENTION, THE LD.COUN SEL FOR THE ASSESSEE PLACED RELIANCE ON THE JUDGMENT OF HONBLE APEX COU RT RENDERED IN THE CASE OF CIT(CENTRAL), CALCUTTA VS. RAI BAHADUR HARD UTROY MOTILAL CHAMARIA REPORTED AT 1967-(066)-ITR-0443-SC AND OF CIT, BOMBAY VS. SHAPOORJI PALLONJI MISTRY REPORTED AT 1962-(044)-IT R-0891-SC. HE ALSO PLACED RELIANCE ON THE JUDGEMENT OF HONBLE GUJARAT HIGH COURT RENDERED IN THE CASE OF PRABHUDAS RAMJI VS. CIT REP ORTED AT 1966-(062)- ITR-0621-GUJ AND OF CIT,GUJARAT VS. JAGDISH MILLS L TD. REPORTED AT 1964-(051)-ITR-0266-GUJ. FURTHER, HE PLACED RELIAN CE ON THE JUDGEMENT OF HONBLE KARNATAKA HIGH COURT RENDERED IN THE CAS E OF STERLING CONSTRUCTION AND TRADING COMPANY VS. INCOME-TAX OFF ICER, CENTRAL CIRCLE-1, BANGALORE, AND OTHERS REPORTED AT 1975-(0 99)-ITR-0236-KAR. ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 9 - HE ALSO PLACED RELIANCE ON THE JUDGEMENT OF DELHI H IGH COURT RENDERED IN THE CASE OF CIT VS. UNION TYRES REPORTED AT 1999 -(240)-ITR-0556-DEL. AND OF CIT VS. SARDARI LAL & CO. REPORTED AT 2001-( 251)-ITR-0864-DEL. [FB]. FURTHER, HE PLACED RELIANCE ON THE JUDGEMENT OF HONBLE GUJART HIGH COURT RENDERED IN THE CASE OF SAHELI SYNTHETIC S (P.)LTD. VS. CIT REPORTED AT 2008(215)-CTR-0343-GUJ. THE LD.COUNSEL FOR THE ASSESSEE FURTHER PLACED RELIANCE ON THE WRITTEN NOTE THAT R EADS AS UNDER:- THE LD. CIT(A) EXCEEDED HIS JURISDICTION BY TRAVEL LING BEYOND RECORD TO MAKE ENHANCEMENT THE LD. CIT(A) DOES NOT HAVE THE JURISDICTION TO TR AVEL BEYOND THE RECORD AND SEEK EXTRANEOUS INFORMATION WITH A VIEW TO FIND AND ENHANCE INCOME. THIS CONTENTION HAS BEEN UPHELD BY THE SUPREME COURT IN THE CASE OF CIT V RAI BAHADUR HARDUTROY MOTILAL CHAMARIA (66 ITR 443) AND CIT V SHAPOORJI PALLONJI MISTRY (44 ITR 891). THE RELEVANT EXTRACTS OF THE JUDGMENTS ARE ATTACHED AS ANNEXURE 1. IN THE FACTS OF THE INSTANT CASE, CIT(A) VIDE THE N OTICE DATED JUNE 22, 2012 ISSUED UNDER SECTION 251(2) OF THE ACT SOUGHT DETAI LS AND EVIDENCES TO DEMONSTRATE THAT THE SUBJECT BAD DEBTS PERTAINED TO THE BUSINESS OF THE APPELLANT AND WAS CONSIDERED AS INCOME IN PRIOR YEA RS. FURTHER, THE LD. CIT(A) ALSO SOUGHT DETAILS AND EVI DENCES OF WRITE OFF OF THE SUBJECT DEBTS. IT IS SUBMITTED THAT THE TAXABILITY OF SUBJECT BAD DEBTS WAS NEITHER A SUBJECT MATTER OF APPEAL NOR WAS IT CONSIDERED BY THE LD. A O DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE ENHANCEMENT IS BAD IN LAW AS THE LD. CIT(A) HAS SOUGHT TO TAX A NEW SOURCE OF INCOME. THERE ARE NUMEROUS JUDGMENTS IN THE CONTEXT OF SECT ION 31 OF THE INCOME-TAX ACT, 1922 WHICH STATE THAT ITEMS OF INCOME WHICH HA VE NOT BEEN CONSIDERED DURING THE COURSE OF ASSESSMENT CANNOT BE ENCOMPASS ED IN THE ENHANCEMENT ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 10 - POWER OF THE AAC. RELIANCE IN PLACED ON THE JUDGMEN TS OF THE GUJARAT HIGH COURT IN THE CASE OF PRABHUDAS RAMJI V CIT (1966) ( 62ITRITR 621) AND CIT V JAGDISH MILLS LTD (1964) (51 ITR 266); KARNATAKA HIGH COURT IN THE CASE OF STERLING CONSTRUCTION AND TRADING COMPANY V ITO (19 75)(99 ITR 236). IT IS FURTHER CONTENDED THAT THE POWER OF ENHANCEME NT BY CIT(A) CONTEMPLATED IN SECTION 251 OF THE ACT DOES NOT INCLUDE THE POWE R TO DISCOVER NEW SOURCE OF INCOME. THIS CONTENTION WAS ALSO UPHELD BY THE DELH I HIGH COURT IN THE CASE OF CIT VS UNION TYRES (240 ITR 556) AND APPROVED BY THE FULL BENCH OF DELHI HIGH COURT IN THE CASE OF CIT V SARDARI LAL AND CO (251 ITR 864) AFTER PLACING RELIANCE ON THE JUDGMENTS OF CIT V RAI BAHA DUR HARDUTROY MOTILAL CHAMARIA (SUPRA) AND CIT V SHAPOORJI PALLONJI MISTR Y (SUPRA). THE FACTS OF THE INSTANT CASE ARE SIMILAR TO THE CA SE OF CIT V SARDARI LAL (SUPRA). IN BOTH THE CASES THE CIT(A) HAD SOUGHT E XTRANEOUS INFORMATION, UNCONNECTED WITH THE APPEAL OR PROCEEDINGS BEFORE T HE LOWER AUTHORITIES, WITH A VIEW TO ENHANCE INCOME OF THE APPELLANT. THE LD. CIT(A), TO EMPHASISE THAT THE POWERS CONFER RED IN HIS OFFICE ARE NOT RESTRICTED HAS RELIED ON THE JUDGMENTS OF THE SUPRE ME COURT IN THE CASES OF CIT V NIRVHERAM DALURAM (1997) (224 ITR 610), JUTE CORPORATION OF INDIA (1991) (187 ITR 688) AND CIT V KANPUR COAL SYNDICAT E (1964) (53 ITR 225). HOWEVER, THE RELIANCE PLACED BY THE LD. CIT(A) IS M ISPLACED VIZ A VIZ THE CONTENTION RAISED BY THE ASSESSEE. THESE JUDGEMENT HAVE HELD THAT THE POWER OF THE CIT(A) IS WIDE AND PLENARY, HOWEVER WHETHER SUCH WIDE AND PLENARY POWERS INCLUDE THE POWER TO DISCOVER NEW SOURCE OF INCOME HAS NOT BEEN COMMENTED UPON. THIS DISTINGUISHMENT, AFTER CONSIDE RING THE JUDGMENTS OF THE SUPREME COURT IN THE AFORESAID THREE CASES HAS ALSO BEEN MADE BY THE FULL BENCH OF DELHI HIGH COURT IN THE CASE OF CIT V SARD ARI LAL (SUPRA), THE RELEVANT EXTRACT OF WHICH IS ATTACHED AS ANNEXURE 2 . LD. CIT(A) HAS RELIED ON THE JUDGMENT OF GUJARAT HI GH COURT IN THE CASE OF SAHELI SYNTHETICS PVT LTD V CIT (302 ITR 126) TO CO NTEND THAT AN APPELLATE AUTHORITY CAN EVEN PROCESS A NEW SOURCE OF INCOME W HICH FORMS PART OF EITHER THE RETURN OF INCOME OR THE ORDER OF ASSESSMENT. ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 11 - HOWEVER, THIS RELIANCE IS ALSO MISPLACED AS THE SAI D JUDGMENT DEALS WITH THE RIGHT OF THE AO TO TAX NEW SOURCE OF INCOME WHILE F RAMING A DE NOVO ASSESSMENT ON THE DIRECTION OF THE CIT(A). MOREOVER , THE JUDGMENT ITSELF RECOGNIZES THAT 'POWERS AVAILABLE TO AN APPELLATE A UTHORITY ARE COEXTENSIVE AND COTERMINOUS WITH THAT OF THE ASSESSING AUTHORITY AND THOUGH SUCH POWERS ARE PLEN ARY POWERS, YET THE APPELLATE AUTHORITY HAS NO POWER TO ENHANCE THE ASS ESSMENT BY DISCOVERING A NEW SOURCE OF INCOME NOT MENTIONED IN THE RETURN OF INCOME FILED BY THE ASSESSEE OR CONSIDERED BY THE AO IN THE ASSESSMENT ORDER.' TO DRAW SUPPORT FROM THE AFORESAID JUDGMENT OF GUJA RAT HIGH COURT, IT IS SUBMITTED THAT THE CLAIM FOR BAD DEBTS HAD BEEN RED UCED FROM THE RETURN OF INCOME THEREBY MEANING THAT THIS SOURCE OF INCOME H AS BEEN REMOVED FROM THE TAX COMPUTATION. FURTHER, AS STATED EARLIER, TH E ISSUE OF BAD DEBTS HAD NOT BEEN CONSIDERED BY THE LD. AO DURING THE COURSE OF ASSESSMENT. TO BUTTRESS THE CONTENTION OF JURISDICTION, THE LD. CIT(A) RELIED ON THE JUDGMENT OF THE DELHI HC IN THE CASE OF GURINDER MO HAN SINGH NINDRAJOG V CIT (348 ITR 170). HOWEVER THE SAID RELIANCE IS ALS O MISPLACED AND DISTINGUISHABLE ON FACTS. IN THE SAID CASE, THE SUB JECT MATTER OF ENHANCEMENT WAS CONSIDERED BY THE AO AND AFTER RECEIVING A REPL Y FROM THE ASSESSEE, THE AO CHOSE NOT TO MAKE AN ADDITION. ACCORDINGLY, IT W AS HELD THAT THE AO HAD CONSIDERED THE MATTER. DRAWING A PARALLEL TO THE CASE UNDER CONSIDERATION, THE LD. AO, AT THE TIME OF ASSESSMENT, HAD NOT ENQUIRED ANYTHING ABOUT THE SUB JECT CLAIM OF BAD DEBT. THOUGH, THE SUBJECT BAD DEBTS DID FORM PART OF THE FINANCIAL STATEMENTS OF THE ASSESSEE FOR THE SUBJECT AY, IT WAS NOT ENQUIRED UP ON ON ANY ASPECT BY THE LD. AO. ACCORDINGLY, IT IS SUBMITTED THAT THE SUBJECT BAD D EBTS WERE NOT CONSIDERED BY THE LD. AO AND ENHANCEMENT BY THE LD. CIT(A) ON THA T ACCOUNT AFTER ROVING ENQUIRES WOULD TANTAMOUNT TO DISCOVERY OF NEW SOURC E OF INCOME WHICH IS BEYOND THE JURISDICTION OF HIS OFFICE. INDIRECT WAY OF MAKING ADDITIONS BEYOND THE LIMITAT IONS PERIOD ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 12 - WITHOUT PREJUDICE TO THE ABOVE, IT IS CONTENDED THA T ENHANCEMENT BASED ON INTIMATION BY THE LD. AO AFTER THE EXPIRY OF TIME L IMITS OF REOPENING ASSESSMENT WOULD TANTAMOUNT TO INDIRECTLY REOPENING THE ASSESSMENT. SUCH INDIRECT RE-OPENING BEYOND THE TIME LIMITS SPECIFIE D UNDER SECTION 148 IS NOT CONTEMPLATED IN THE INCOME-TAX ACT, 1961 AND GOES E NTIRELY AGAINST THE SCHEME OF THE ACT AND THE LIMITATIONS PRESCRIBED TH EREIN. THIS ACTION OF DOING AN ACT (IE. INDIRECTLY REOPENI NG THE ASSESSMENT BEYOND THE LIMITATIONS PERIOD) WHICH IS PROHIBITED LEGALLY , IN AN INDIRECT MANNER THROUGH A CIRCUITOUS CONTRIVANCE IS AGAINST THE SET TLED LEGAL PRINCIPLE OF 'QUANDO ALIQUID PROHIBETUR, PROHIBETUR AT OMNE PER QUOD DEVENITUR AD'ILLUD' MEANING THAT WHATEVER IS PROHIBITED BY LAW TO BE DO NE, CANNOT LEGALLY BE EFFECTED INDIRECTLY. RELIANCE PLACED ON THE JUDGMENT OF SUPREME COURT IN THE CASE OF U.P. COOPERATIVE FEDERATION VS. SINGH CONSULTANTS, 1988 (1) SCC 174 AND SANGRAMSINH VS. SHANTADEVI, 2005 (11) SCC 314. FURTHER RELIANCE TO SUBSTANTIATE THIS PRINCIPLES AP PLICABILITY IN THE CONTEXT OF INCOME-TAX IS PLACED ON THE FOLLOWING JUDGMENTS: ANUPAM SUSIL GARG V. CIT (265 ITR 474) CIT V. KALVINATOR OF INDIA LTD. [2002] 256 ITR 1 123 TAXMAN 433 (DELHI)(FB) J.N. SAHNI V. ITAT (DELHI HC) (257 ITR 16) CIT V. PAHARPUR COOLING TOWERS (219 ITR 618) SPECIFICALLY, IN THE CONTEXT OF ENHANCEMENT BY THE FIRST APPELLATE AUTHORITY BEYOND THE PERIOD OF LIMITATIONS FOR REOPENING THE ASSESSMENT, WE WISH TO RELY OF THE JUDGMENT OF THE LAHORE HIGH COURT IN THE CAS E OF CIT, PUNJAB V NAWAB SHAH NAWAZ KHAN (1937)(6 ITR 370) WHICH WAS IN THE CONTEXT OF SECTION 34 OF THE INCOME-TAX ACT, 1922. THE RELEVANT EXTRACT H AS BEEN ATTACHED AS ANNEXURE 3. THE LD. CIT(A) TO FORTIFY ITS CONTENTION THAT ENHAN CEMENT MAY BE MADE ON THE INTIMATION OF THE AO HAS RELIED ON THE JUDGMENT OF THE P&H HIGH COURT IN THE CASE OF GOEL DIE CAST LTD V CIT (297 ITR 72). HOWEV ER, THE COMPANY SUBMITS THAT THE SAID JUDGMENT IS DISTINGUISHABLE A S IN THE FACTS OF THAT CASE, THE ENHANCEMENT, ALBEIT ON AN INTIMATION BY THE AO, WAS WITHIN THE TIME LIMIT OF RE-OPENING OF ASSESSMENT. ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 13 - CLAIM OF BAD DEBTS - IN COMPLIANCE WITH THE PROVISI ONS OF SECTION 36(1) (VII) R.W,S 36(2) OF THE ACT THE DEBT HAS BECOME BAD IN THE CURRENT YEAR AND HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN THE BOOKS OF ACCOUNTS OF THE COMPA NY. ACCORDINGLY, THE SAME HAS BEEN CLAIMED AS DEDUCTION IN COMPLIANCE WITH TH E PROVISIONS OF SECTION 36(L)(VII) R.W.S 36(2) OF THE ACT. DURING THE YEAR UNDER CONSIDERATION, THE SUBJECT BA D DEBTS HAVE BEEN CREDITED TO THE DEBTOR'S ACCOUNT WITH A CORRESPONDING DEBIT TO THE 'PROVISION FOR BAD DEBT ACCOUNT'. THIS IN ITSELF WOULD DEMONSTRATE THA T THE SUBJECT DEBTS HAVE BEEN WRITTEN OFF FROM THE LEDGER OF THE DEBTOR. THE JUDGMENT OF CIT V HOTEL_AMBASSADOR (253 ITR 43 0) SOUGHT TO BE RELIED BY THE LD. AO IS DISTINGUISHABLE ON FACTS. IN THE S AID CASE, THE ASSESSEE WROTE OFF THE AMOUNT AS BAD DEBTS IN THE DEBTORS LEDGER, AFTER THE ACCOUNTS WERE FINALISED AND AUDITED. IN THAT CONTEXT, IT WAS HELD THAT DEDUCTION UNDER SECTION 36(L)(VII) CANNOT BE ALLOWED IF THE ASSESSEE WRITES OFF THE DEBT IN SOME OF THE BOOKS MAINTAINED BY IT, WHICH DO NOT FORM PART OF T HE AUDITED ACCOUNTS. HOWEVER, IN THE CASE OF THE APPELLANT, BAD DEBTS HA VE BEEN WRITTEN OFF FROM THE BOOKS OF ACCOUNTS WHICH HAVE BEEN FINALIZED AND AUDITED BY THE STATUTORY AUDITORS. FURTHER, THE LD. CIT(A) HAS RELIED ON THE JUDGMENT OF SAMPANNA KURIES BY THE KERALA HIGH COURT TO SUBSTANTIAL THAT EVEN AFTE R THE DELETION OF THE WORDS 'ESTABLISHED TO HAVE BECOME BAD IN THE PREVIOUS YEA R' FROM SECTION 36(L)(III), THE BAD DEBTS WRITTEN OFF SHOULD BE 'IRRECOVERABLE' . IT WAS HELD THAT SINCE NO MATERIAL HAS BEEN BROUGHT ON RECORD TO SHOW THAT TH E SUBJECT DEBTS HAVE INFACT BECOME IRRECOVERABLE, THE DEDUCTION WOULD NO T BE ALLOWED. HOWEVER, IT IS SUBMITTED THAT THE AFORESAID JUDGMENT NOW STANDS OVERRULED BY THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF TRF LT D (CIVIL APPEAL NO.5293 OF 2003 AND 5294 OF 2004). RELIANCE IS ALSO PLACE D ON THE JUDGMENTS OF THE GUJARAT HIGH COURT JUDGEMENT IN THE CASE OF CIT VS. GIRISH BHAGWATPRASAD (256 ITR 772), CIT VS SHAKTI CARGO MOVERS PVT LTD. (ITA NO.1515 OF 2010) AND CIT VS. FRONTLINE CORPORATION LTD. (TAX APPEAL NO.1943 OF 2010). ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 14 - THUS, GOING BY THE AFORESAID JUDGEMENT OF TRF LTD(S UPRA) IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT HAS BE COME BAD. IT SHOULD SUFFICE IF THE DEBTS ARE WRITTEN OFF IN THE BOOKS AS BAD AND H ENCE, NOT RECOVERABLE. RELIANCE IS PLACED ON CIRCULAR NO.551 DATED JANUARY 23, 1990 ISSUED BY THE CBDT. BY WAY OF THE SAID CIRCULAR, IT HAS BEEN CLA RIFIED THAT A MERE WRITE OFF IN THE BOOKS OF THE COMPANY IS ADEQUATE FOR CLAIM O F BAD DEBTS U/S.36(1)(VII) OF THE ACT. SUBMISSIONS DATED JULY 9, 2012 WAS FILED WHERE IT W AS INDICATED THAT PROVISION FOR BAD DEBT (THROUGH WHICH THE SUBJECT B AD DEBT WERE WRITTEN OFF) HAVE BEEN OFFERED TO TAX IN PRIOR YEARS. THE BAD DEBTS ARE GENUINE AND VOUCHED BY THE AUDIT ORS OF THE COMPANY. THE AUDITORS HAVE FORMED AN OPINION THAT THE ACCOUNTS R EFLECT A TRUE AND FAIR VIEW OF THE YEAR'S RESULTS. THE COMPANY HAS ALSO GOT ITS ACCOUNTS AUDITED U/S.44AB OF THE ACT. RELIANCE PLACED ON THE DECISION OF THE DELHI HIGH C OURT IN THE CASE OF ADDL.CIT VS. JAY ENGINEERING WORKS LIMITED (113 ITR 389). DEDUCTION TO BE ALLOWED AS LOSS INCURRED IN THE NOR MAL COURSE OF BUSINESS U/S 29 OF THE ACT EVEN OTHERWISE, THE AMOUNT WRITTEN OFF REPRESENTS D UE FROM CUSTOMERS NOT RECOVERABLE IN THE NORMAL COURSE OF BUSINESS. HENCE , THE SAME SHOULD BE ALLOWED AS BUSINESS LOSS U/S 29 OF THE ACT. DEDUCTION SHOULD BE ALLOWED IN THE YEAR IN WHICH TH E PROVISION WAS CREATED AND OFFERED TO TAX PROVISION FOR BAD DEBTS WAS OFFERED TO TAX IN THE P RECEDING YEARS IN WHICH THE SAID PROVISION WAS CREATED AND CHARGED TO PROFIT AN D LOSS ACCOUNT. DISALLOWANCE OF BAD DEBTS WRITTEN OFF IN THE CURREN T YEAR WOULD TANTAMOUNT TO DOUBLE DISALLOWANCE. ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 15 - HENCE, IN THE EVENT, BAD DEBT IS DISALLOWED IN THE CURRENT YEAR, DEDUCTION SHOULD BE ALLOWED WITH REGARD TO PROVISION CREATED IN THE PRECEDING YEARS. 5.1. ON THE CONTRARY, LD.CIT-DR ALSO SUBMITTED A N OTE AND REITERATED AS WERE MADE IN THE SUBMISSION, WHICH READS AS UNDER:- NOTE ON ENHANCEMENT OF INCOME BY THE COMMISSIONER (APPEALS) IT IS COMMONLY UNDERSTOOD THAT THE FIRST APPELLATE AUTHORITY VIZ. THE COMMISSIONER (APPEALS) HAS THE POWER OF ENHANCEMENT IN RELATION TO ANY MATTER CONNECTED WITH AN APPEAL BEFORE HIM. THI S PROPOSITION ARISES FROM THE WORDING IN SECTION 251(1) WHICH REA DS AS UNDER: IN DISPOSING OF AN APPEAL, THE COMMISSIONER (APPEALS) SHALL HAVE THE FOLLOWING POWERS - (A) IN AN APPEAL AGAINST AN ORDE R OF ASSESSMENT, HE MAY CONFIRM, REDUCE, ENHANCE OR ANNUL THE ASSESSMENT (EMPHASIS ADDED). HOWEVER, SOME DECISIONS HAVE BEEN RENDERED WHEREIN THE POWER OF ENHANCEMENT WAS SOUGHT TO BE RESTRICTED BY HOLDING THAT SUCH ENHANCEMENT WOULD NOT APPLY TO SOURCES OF INCOME WHICH HAD NOT BEEN CONSIDERED BY THE ASSESSING OFFICER -CIT, BOMBAY V. SHAPOORJI PALLONJI MISTRY (1962) 44 ITR 891 (SC). HOWEVER, THIS LINE O F THINKING WAS OVERTURNED BY A SERIES OF THE DECISIONS OF THE APEX COURT IN CIT V. KANPUR COAL SYNDICATE (1964) 53 ITR 225 (SC), JUTE CORPORATION OF INDIA LTD. V. CIT (1991) 187 ITR 688 (SC) AND THE L AST IN THE SERIES CIT V. NIRBHERAM DELURAM (1997) 091 TAXMAN 181 (SC). IN THE NIRBHERAM DELURAM CASE, THE APEX COURT TOOK SPECIFIC NOTE OF THE ISSUE AS TO WHETHER NEW SOURCE OF INCOME WHICH WERE NOT THE SUBJECT MATTER OF ASSESSMENT COULD BE CONSIDERED FOR THE PU RPOSE OF ENHANCEMENT OF INCOME. THE COURT TOOK COGNIZANCE OF THE FACT THAT THE APPELLATE AUTHORITY HAD PLENARY POWERS IN DISPOSING OF AN APPEAL AND THE SCOPE OF HIS POWER IS COTERMINOUS WITH THAT OF THE INCOME TAX OFFICER. HE CAN DO WHAT THE INCOME TAX OFFICER CAN DO AND ALSO DIRECT HIM TO DO WHAT HE HAS FAILED TO DO. THE COURT REFER RED TO THE FACT THAT ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 16 - THE APPELLATE AUTHORITY WAS ONLY SUBJECT TO THE RES TRICTIONS OR LIMITATIONS, IF ANY, PRESCRIBED BY THE STATUTORY PR OVISIONS. IN THE ABSENCE OF ANY STATUTORY PROVISIONS, THE APPELLATE AUTHORIT Y IS VESTED WITH ALL THE PLENARY POWERS WHICH THE SUBORDINATE AUTHORITY MAY HAVE IN THE MATTER. IN THESE CIRCUMSTANCES, THE APEX COURT UNEQUIVOCALL Y HELD THAT NEW SOURCES OF INCOME COULD ALSO BE THE BASIS FOR ENHAN CEMENT OF INCOME ASSESSED. THIS IS CLEAR FROM THE FOLLOWING WORDING FROM THE DECISION: ........MADHYA PRADESH HIGH COURT TO REFER THE FOLL OWING QUESTIONS OF LAW FOR OPINION. (1)WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS JUSTIFIED IN DELETING A SUM OF RS. 2,3 0,000/- FRESHLY ADDED BY THE APPELLATE ASSISTANT COMMISSIONER? (2) WHETHER THE SUM OF RS. 2,30,000/- WAS ADDED BY THE APPELLATE ASSISTANT COMMISSIONER ON NEW SOURCES OF INCOME OF ITEMS NOT CONSIDERED BY THE INCOME TAX OFFICERS FROM THE POIN T OF VIEW OF ASSESSABILITY? (3) WHETHER THE APPELLATE ASSISTANT COMMISSIONER HA D NO JURISDICTION OR POWER TO ADD THE SUM OF RS. 2,30,000/- IN THE FA CTS AND CIRCUMSTANCES IN WHICH HE HAS ADDED THE SAME? (EMPHASIS ADDED). THE COURT FURTHER GOES ON TO CONSIDER THESE ISSUES. IN PARA 1 MIDDLE IT CONSIDERED THE ASPECTS OF NEW SOURCE OF INCOME AS I S CLEAR FROM THE WORDING AGAIN: ACCORDING TO THE HIGH COURT, THE ITEMS CONTAINING T HAT AMOUNT CONSTITUTED NEW SOURCES OF INCOME WHICH WERE NOT TH E SUBJECT MATTER OF ASSESSMENT BEFORE THE ITO, THEREFORE IT WAS NOT OPE N IN APPEAL TO CONSIDER THESE SOURCES AND TO ASSESS THEM. AFTER REFERRING TO THE PLENARY POWERS OF THE ASSESS ING OFFICER, EARLIER STATED THE COURT CONCLUDED AS UNDER: ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 17 - THIS MEANS THAT EVEN IF QUESTION NO. 2 IS ANSWERED IN THE AFFIRMATIVE, QUESTION NOS. 1 AND3 MUST BE ANSWERED IN THE NEGATI VE. THE APPEAL IS THEREFORE ALLOWED............ THE APEX COURTS DECISION IS IN TUNE WITH THE WELL A CCEPTED LEGAL MAXIM THAT NO WORD CAN BE READ INTO A STATUTE IF IT IS NO T CLEARLY SO PROVIDED. NO WORD WHICH IS PROVIDED IN A STATUTE CAN ALSO BE EXCLUDED AS MEANINGLESS. IN OTHER WORDS, THERE HAS TO BE A STRI CT INTERPRETATION OF THE STATUTE AS IS CLEAR FROM THE WORDINGS: CAPE BRA NDY SYNDICATE V. IRC (1921) 1 KB 64, AV FERNANDEZ V. STATE OF KERALA AIR 1957 SC 657, CWT V. KRIPASHANKAR DAYASHANKAR WORAH 81ITR 763 (SC ). HOWEVER, SUBSEQUENT TO THE SUPREME COURT'S DECISION WHICH APPEARED TO HAVE SET AT REST FINALLY THE ISSUE AS TO WHETHER THE FIRST APPELLATE AUTHORITY HAD LIMITLESS POWERS OF ENHANCEMENT OF IN COME, COURT DECISIONS HAVE BEEN COMING SEEKING TO DISTINGUISH T HE DECISION OF THE SUPREME COURT CITED EARLIER. THUS, IN CIT V. UNION TYRES [1999] 240 ITR 556 (DELHI) AND IN CIT V. SARDARI LAL AND CO. [ 2002] 251 ITR 864 (DELHI) THE HIGH COURTS HAS SOUGHT TO DISTINGUISH T HE APEX COURT DECISION ON THE GROUND THAT THE APEX COURT DID NOT DEAL WITH A SITUATION WHERE A NEW SOURCE OF INCOME WAS CONSIDERED BY THE APPELLATE AUTHORITY FOR ENHANCEMENT. IN UNION TYRES CASE THE DELHI HIGH COURT DISTINGUISHEDED DELURAM CASE BY COMMENTING THAT THE APEX COURT DID NOT COMMENT ON THE ISSUE WHETHER THE WIDE POWERS OF THE FIRST APPELLATE AUTHORITY ALSO INCLUDED THE POWER TO DISC OVER A NEW SOURCE OF INCOME. A QUESTION REGARDING POWERS OF THE FIRST APPELLATE AUTHORITY CAME UP FOR CONSIDERATION BEFORE THE SUPREME COURT RECEN TLY IN CIT V. NIRBHERAM DELURAM (1997) 224 ITR 610 (SC). FOLLO WING THEIR EARLIER DECISIONS IN KANPUR COAL SYNDICATE AND JUTE CORPORATION OF INDIA'S CASES (SUPRA) THOUGH THEIR L ORDSHIPS REITERATED THAT THE APPELLATE POWERS CONFERRED ON T HE AAC UNDER SECTION 251 COULD NOT BE CONFINED TO THE MATTER WHI CH HAD BEEN CONSIDERED BY THE ITO, AS THE AAC IS VESTED WITH AL L THE PLENARY POWERS WHICH THE ITO MAY HAVE WHILE MAKING THE ASSE SSMENT, ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 18 - BUT DID NOT COMMENT ON THE ISSUE WHETHER THESE WIDE POWERS ALSO INCLUDE THE POWER TO DISCOVER A NEW SOURCE OF INCOM E. THEREFORE, THE PRINCIPLE OF LAW LAID DOWN IN SHAPOORJI AND CHA MARIA'S CASES (SUPRA) STILL HOLD THE FIELD (PARA 10 OF ORDE R). ACCORDINGLY, THE DELHI HIGH COURT HELD THAT THERE W AS A SOLITARY BUT SIGNIFICANT LIMITATION TO THE POWER OF REVISION IN THAT IT IS NOT OPEN TO THE AAC TO INTRODUCE IN THE ASSESSMENT A NEW SOURCE OF INCOME AND THE ASSESSMENT HAS TO BE CONFINED TO THOSE ITEMS OF INC OME WHICH WERE THE SUBJECT MATTER OF ORIGINAL ASSESSMENT: HOWEVER, THERE IS A SOLITARILY BUT SIGNIFICANT LIMI TATION TO THE POWER OF REVISION, VIZ. THAT IT IS NOT OPENED TO THE AAC TO INTRODUCE IN THE ASSESSMENT A NEW SOURCE OF INCOME AND THE ENHANCEME NT HAS TO BE CONFINED TO THOSE ITEMS OF INCOME WHICH WERE THE SU BJECT MATTER OF ORIGINAL ASSESSMENT (PARA 11 END). SIMILARLY, IN SARDARI LAL AND CO. CASE ALSO THE DEL HI HIGH COURT NOTED THAT THE APEX COURT HAD NOT SPECIFICALLY APPROVED E NHANCEMENT WHERE A TOTALLY NEW SOURCE OF INCOME WAS THE BASIS FOR ENHA NCEMENT. IT HELD THAT: WHENEVER THE QUESTION OF TAXABILITY OF INCOME FROM A NEW SOURCE OF INCOME IS CONCERNED, WHICH HAD NOT BEEN CONSIDER ED BY THE A.O., THE JURISDICTION TO DEAL WITH THE SAME IN APP ROPRIATE CASES MAY BE DEALT WITH U/S. 147 / 148 OF THE ACT AND SEC TION 263 OF THE ACT, IF REQUISITE CONDITIONS ARE FULFILLED. IT IS I NCONCEIVABLE THAT IN THE PRESENCE OF SUCH SPECIFIC PROVISIONS, A SIMILAR POWER IS AVAILABLE TO THE FIRST APPELLATE AUTHORITY. WE CAN SEE THAT A NEW ISSUE OF AVAILABILITY OF ALTE RNATE METHODS OF ENHANCEMENT LIKE 147, 263 ETC. ARE BEING DISCUSSED NOW. HERE, ONE CAN SEE THAT THE COURT ITSELF HAS ACCEPTED THE EXISTENC E OF ALTERNATE METHODS OF ENHANCEMENT - 147 / 148 OR 263 BUT PUT ITS FOOT DOWN ON ANOTHER ALTERNATE ENHANCEMENT METHOD - 251(1). THE FACT THA T THE DISTINCTION MADE REGARDING NEW SOURCE OF INCOME JUST NOT BEING THERE IS CLEAR FROM ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 19 - THE FACT THAT ENHANCEMENT BASED ON NEW SOURCE OF IN COME HAD BEEN CONSIDERED AND APPROVED BY THE APEX COURT IN DELURA M'S CASE ET AL, AND QUITE CLEAR FROM THE REPRODUCTION FROM THAT CAS E NOTED EARLIER. IT IS ALSO WORTH NOTING THAT IF THE WORDING IN SECTION 251(1)(A) READ AS UNDER: IN RESPECT OF ISSUES IN APPEAL, HE MAY CONFIRM, REDUCE, ENHANCE OR ANNUL THE ASSESSMENT, THEN, THE INTERPRETATION GIVEN BY THE VARIOUS HIGH COURTS MAY PERHAPS HAVE BEEN RELEVANT. WE HAVE ALSO NOTED THAT A STRIC T INTERPRETATION OF THE STATUTE IS THE NORM. IT IS ALSO INTERESTING TO NOTE THAT UNDER 251(2), THE COMMISSIONER (APPEALS) IS BOUND TO GIVE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE AN ENHANCEMENT I S MADE. THE EXPLANATION TO SUB CLAUSE (2) THEREIN FURTHER CATEG ORICALLY STATES THAT ISSUES NOT IN APPEAL BEFORE THE COMMISSIONER (APPEA LS) MAY ALSO BE DEALT WITH BY HIM IN RESPECT OF ANY MATTER ARISING OUT OF THE PROCEEDINGS IN WHICH THE ORDER APPEALED AGAINST WAS PASSED. ALL THESE FACTS WOULD ALSO SHOW THAT THERE IS NO RESTRICTION INTENDED ON THE ENHANCEMENT POWER OF THE COMMISSIONER (APPEALS). IN THIS VIEW OF THE MATTER, IT IS SUBMITTED THAT TH E DECISION OF THE APEX COURT HAS NOT REALLY BEEN DISTINGUISHED BY THE DELH I HIGH COURT DECISIONS CITED. THE ENHANCEMENT DONE BY THE CIT(A), IN ANY CASE IS ALSO RELATING TO THE SAME SOURCE OF INCOME, THAT IS BUSINESS INCOME. HENCE, ON ANY BASIS, THE ENHANCEMENT IS WITHIN THE PARAMETERS PROVIDED BY THE STATUTE AND THE LAID DOWN PRINCIPLE S OF JUDICIAL PRECEDENCE AND HENCE MAY BE APPROVED. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE CONTENTION OF THE ASSESSEE IN THESE GROUNDS (GR OUND NOS.2.1 & 2.2) ARE IN THREE FOLDS. FIRSTLY, THE CONTENTION OF THE ASSESSEE IS THAT UNDER THE ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 20 - FACT OF THE PRESENT CASE, THE LD.CIT(A) TRAVELLED B EYOND ITS JURISDICTION FOR MAKING DISALLOWANCE OF BAD DEBTS AS CLAIMED BY THE ASSESSEE AND THEREBY HE ACTED CONTRARY TO THE SETTLED LAW. SECONDLY, TH E CONTENTION OF THE ASSESSEE IS THAT DURING THE YEAR UNDER CONSIDERATIO N, THE SUBJECT BAD DEBTS HAVE BEEN CREDITED TO THE DEBTORS ACCOUNT WITH A C ORRESPONDING DEBIT TO THE PROVISION FOR BAD DEBT ACCOUNT. THIS IN ITSE LF WOULD DEMONSTRATE THAT THE SUBJECT DEBTS HAVE BEEN WRITTEN OFF FROM T HE LEDGER OF THE DEBTOR. IT IS ALSO CONTENDED THAT IN THE CURRENT YEAR THE D EBT HAS BECOME BAD AND HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN THE BOOKS OF ACCOUNTS OF THE COMPANY. ACCORDINGLY, THE SAME HAS BEEN CLAIMED AS DEDUCTION IN COMPLIANCE WITH THE PROVISIONS OF SECTION 36(1)(VII ) R.W.S.36(2) OF THE ACT. THIRDLY, THE CONTENTION OF THE ASSESSEE IS T HAT THE ENHANCEMENT IS AN INDIRECT WAY OF MAKING ADDITIONS BEYOND THE LIMI TATIONS PERIOD. IT IS THE CONTENTION OF THE ASSESSEE THAT ACTION OF DOIN G AN ACT (I.E. INDIRECTLY REOPENING THE ASSESSMENT BEYOND THE LIMITATIONS PER IOD) WHICH IS PROHIBITED LEGALLY, IN AN INDIRECT MANNER THROUGH A CIRCUITOUS CONTRIVANCE IS AGAINST THE SETTLED LEGAL PRINCIPLE OF QUANDO ALIQUID PROHIBETUR, PROHIBETUR AT OMNE PER QUOD DEVENITUR AD ILLUD . 6.1. THE LD.CIT(A) PROCEEDED ON THE BASIS THAT THE ASSESSEE HAS NOT COMPLIED WITH THE STATUTORY REQUIREMENT OF SECTION 36(1)(VII), THEREFORE FIRST WE WOULD EXAMINE WHETHER THE LD.CIT(A) WAS J USTIFIED IN HOLDING THAT THERE IS A NON-COMPLIANCE OF THE PROVISIONS OF SECTION 36(1)(VII) ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 21 - R.W.S.36(2) OF THE ACT; THEREBY THE CLAIM OF BAD DE BT COULD NOT HAVE BEEN ALLOWED. UNDISPUTEDLY, THE CONTENTION OF THE ASSES SEE IS THAT IT HAS COMPLIED WITH THE PROVISIONS OF SECTION 36(1)(VII) R.W.S.36(2) OF THE ACT. IT IS SUBMITTED THAT THE SUBJECT BAD DEBTS HAVE BEE N CREDITED TO THE DEBTORS ACCOUNT WITH A CORRESPONDING DEBIT TO THE PROVISION FOR BAD DEBT ACCOUNT. IN THIS CONTEXT OUR ATTENTION WAS D RAWN TO PAGE NOS.77 AND 78 OF THE PAPER-BOOK. IT IS ALSO CONTENDED THA T THE PROVISION FOR BAD DEBT WAS OFFERED TO TAX IN THE PRECEDING YEARS IN W HICH THE SAID PROVISION WAS CREATED AND CHARGED TO PROFIT AND LOSS ACCOUNT. THE DISALLOWANCE OF BAD DEBTS WRITTEN OFF IN THE CURRENT YEAR WOULD TAN TAMOUNT TO DOUBLE DISALLOWANCE. THE RELIANCE IS PLACED ON JUDGEMENT O F THE HONBLE APEX COURT RENDERED IN THE CASE OF TRF LTD. VS. CIT REPO RTED AT (2010) 323 ITR 397 (SC). WE FIND FORCE INTO THE CONTENTION OF LD.COUNSEL FOR THE ASSESSEE. THE HONBLE SUPREME COURT IN THE CASE OF TRF LTD. VS. CIT(SUPRA) HAS HELD AS UNDER:- 4. THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1ST APR IL, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DE BT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRIT TEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. HOWEVER, IN THE PR ESENT CASE, THE AO HAS NOT EXAMINED WHETHER THE DEBT HAS, IN FACT, BEE N WRITTEN OFF IN ACCOUNTS OF THE ASSESSEE. WHEN BAD DEBT OCCURS, THE BAD DEBT ACCOUNT IS DEBITED AND THE CUSTOMER'S ACCOUNT IS CREDITED, THU S, CLOSING THE ACCOUNT OF THE CUSTOMER. IN THE CASE OF COMPANIES, THE PROV ISION IS DEDUCTED FROM SUNDRY DEBTORS. AS STATED ABOVE, THE AO HAS NO T EXAMINED WHETHER, IN FACT, THE BAD DEBT OR PART THEREOF IS W RITTEN OFF IN THE ACCOUNTS OF THE ASSESSEE. THIS EXERCISE HAS NOT BEE N UNDERTAKEN BY THE ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 22 - AO. HENCE, THE MATTER IS REMITTED TO THE AO FOR DE NOVO CONSIDERATION OF THE ABOVE-MENTIONED ASPECT ONLY AND THAT TOO ONL Y TO THE EXTENT OF THE WRITE OFF. 6.2. THEREFORE, IN THE LIGHT OF THE RECENT JUDGE MENT OF THE HONBLE APEX COURT RENDERED IN THE CASE OF TRF LIMITED V. CIT(S UPRA) THE AO IS HEREBY DIRECTED TO VERIFY WHETHER THE PROVISION HAS BEEN DEDUCTED FROM SUNDRY DEBTORS AND IN CASE IF HE FINDS SO, HE WOULD DELETE THE ADDITION. SINCE WE HAVE RESTORED THE ISSUE BACK TO THE FILE O F AO FOR VERIFICATION, WE ARE NOT ADVERTING TO OTHER ISSUES RAISED BY THE ASSESSEE, IN CASE THE ASSESSEE SUCCEEDS ON THIS ISSUE OTHER ISSUES WOULD BECOME ACADEMIC. THUS, GROUND NOS.2.1 & 2.2 OF ASSESSEES APPEAL ARE ALLOWED FOR STATISTICAL PURPOSES. 7. GROUND NOS.3.1 TO 3.3 ARE INTER-CONNECTION AND, THEREFORE, THE SAME ARE DECIDED TOGETHER. THE RESPECTIVE REPRESEN TATIVES OF THE PARTIES REITERATED THEIR ARGUMENTS AS WERE MADE IN THE WRIT TEN SUBMISSIONS FILED BY THEM. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE LD.CIT(A) HAS DECIDED THIS ISSUE I N PARAS-13.3 TO 13.15 OF HIS ORDER BY OBSERVING AS UNDER:- 13.13 IN VIEW OF ABOVE SUBMISSION OF THE APPELLANT , NOW THE QUESTION ARISES WHETHER WHILE COMPUTING THE RAW-MAT ERIAL ADJUSTMENT, ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 23 - RM/OPERATING EXPENSES RATIO OF THE TESTED PARTY AND COMPARABLE COMPANIES CAN BE CONSIDERED AND CAN BE PROCEEDED TO COMPUTE THE RAW-MATERIAL ADJUSTMENTS OR NOT. IN THIS REGARD RE FERENCE IS MADE TO PARA-6.7 OF THE ORDER U/S.92CA(3) OF THE TPO, AHMED ABAD FOR A.Y. 2005-06. THE TPO IN SUCH ORDER ON PERUSAL OF P&L A CCOUNT REALIZED THAT THE COST OF RAW-MATERIAL WAS MAJOR COST AFFECT ING THE PROFIT OF THE APPELLANT AND HENCE IT WAS DECIDED TO MARK UP THE C OST OF RAW-MATERIAL OF THE COMPARABLES TO ARRIVE AT ADJUSTED VALUE OF T HE TOTAL PURCHASES OF THE APPELLANT SO THAT COSTLIER LOCAL PURCHASES DO N OT COLOUR THE APPELLANTS TRANSACTION WITH AES. HENCE, THE ENTI RE RAW-MATERIAL COST WAS REDUCED TO BRING INDUSTRY AT LEVEL. THE TPO OB SERVED THAT THE LOCAL RAW-MATERIAL PURCHASES OF THE APPELLANT WAS VERY HI GH (65.99%) AND DUE TO THESE HIGHER LOCAL COST OF PURCHASE, ITS RES ULTS WERE NOT COMPARABLE WITH LOCAL COMPARABLES. IT WAS ALSO OBS ERVED BY THE TPO THAT THE COST OF PURCHASE OF RAW-MATERIAL OF LOCAL COMPARABLE MAY BE NOT DUE TO EXISTENCE OF UNRECOGNIZED RAW-MATERIAL M ARKET. THUS AS PER PROVISION OF RULE 10B(E)(III) OF THE INCOME TAX RUL ES, ADJUSTMENT WAS MADE TO THE RESULTS OF THE COMPARABLE COMPANIES AND PURCHASE INEFFICIENCY OF THE APPELLANT WAS ADJUSTED, WHICH R ESULTS INTO MEAN ADJUSTED MARGIN TO SALES AT 1.22%. IN MY OPINION T HE TPO IN HIS ORDER FOR A.Y. 2005-06 HAS ADOPTED CORRECT METHOD BY CONS IDERING RM/OPERATING EXPENSES RATIO OF THE TESTED PARTY AND COMPARABLE COMPANIES AND BY PROCEEDING TO COMPUTE THE RAW-MATE RIAL ADJUSTMENTS. THUS IN MY OPINION THE SAME METHOD/APPROACH SHOULD BE FOLLOWED IN THE CASE OF APPELLANT FOR A.Y. 2004-05 ALSO WHICH I S THE YEAR UNDER CONSIDERATION. IT IS PERTINENT TO MENTION THAT IF THE ADJUSTED COST OF RAW- MATERIAL IS CALCULATED ON THE BASIS OF SALES TURNOV ER, THEN THE COST OF RAW-MATERIAL WILL ALSO INCLUDE THE PROFIT MARGIN OF SALES, WHICH INCREASES THE ADJUSTED COST OF RAW-MATERIAL WHICH I N TURN WILL REDUCE THE ACTUAL PROFIT MARGIN WHICH IS NOT CORRECT AND N OT COMPARABLE. THE CORRECT METHOD/APPROPRIATE BASE TO CALCULATE THE AD JUSTED COST OF RAW- MATERIAL IS IN PROPORTION TO THE TOTAL OPERATING CO ST. THE ELEMENT OF PROFIT IS TO BE ELIMINATED OR NOT TO BE CONSIDERED WHILE CALCULATING THE ADJUSTED COST OF RAW-MATERIAL. ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 24 - 13.14. IT IS FURTHER MENTIONED THAT THE TRANSACTI ONAL NET MARGIN METHOD OPERATES IN A SIMILAR WAY TO THE COST PLUS M ETHOD AND THE RESALE PRICE METHOD. HOWEVER, THE TRANSACTIONAL NE T MARGIN METHOD BENCHMARKS NET PROFITABILITY, I.E. IT TESTS NET PRO FITS EARNED IN CONTROLLED TRANSACTIONS AND COMPARES THEM TO THE NET PROFITS E ARNING IN UNCONTROLLED TRANSACTIONS. THAT MEANS THAT INSTEAD OF GROSS PROFIT THE TRANSACTIONAL NET MARGIN METHOD ANALYSISES THE NET PROFITS IN RELATION TO AN APPROPRIATE BASE SUCH AS COSTS, SALES, OR, AS TH E CASE MAY BE ASSETS. THIS IS DONE VIA NET MARGINS OR SO CALLED PROFIT LE VEL INDICATORS. IN CONTRAST TO THE COST PLUS METHOD, WHICH GENERALLY C OMPUTES THE MARK UP AFTER DIRECT AND INDIRECT COSTS OF PRODUCTION, THE TRANSACTIONAL NET MARGIN METHOD USES MARGINS COMPUTED AFTER OPERATING EXPENSES. 13.15 IN VIEW OF THE ABOVE DISCUSSION IT IS HELD TH AT THE TPO, AHMEDABAD HAS FOLLOWED THE CORRECT METHOD IN HIS OR DER U/S.92CA(3) OF AY 2005-06 BY COMPUTING THE RAW-MATERIAL ADJUSTMENT BY COMPARING THE RAW-MATERIAL ADJUSTMENT TO OPERATING COST RATIO OF THE TESTED PARTY VIS--VIS THE RAW-MATERIAL TO OPERATING COST RATIO OF EACH OF THE COMPARABLE COMPANY AND ACCORDINGLY BY MAKING ADJUST MENT TO THE RAW-MATERIAL EXPENSES OF THE COMPARABLE COMPANIES. I, THEREFORE, HOLD THAT THIS METHOD/APPROACH IS REQUIRED TO BE FOLLOWE D IN THE CASE OF APPELLANT FOR AY 2004-05 ALSO AND IN DOING SO THERE WILL BE TRANSFER PRICING ADJUSTMENT OF 7,62,29,166/-. IN VIEW OF THIS, THE AO IS DIRECTED TO FOLLOW THE ABOVE METHOD/APPROACH FOR AY 2004-05 AND TO MAKE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ARMS LEN GTH PRICE AT 7,62,29,166/- IN THE CASE OF APPELLANT. IN RESULT, THERE WILL BE ENHANCEMENT OF TRANSFER PRICING ADJUSTMENT OF 5,50,73,555/- ON ACCOUNT OF ARMS LENGTH PRICE IN THE CASE OF APPELL ANT FOR THE YEAR UNDER CONSIDERATION. THE ASSESSMENT IS ENHANCED BY AN AMOUNT OF 5,50,73,555/- ACCORDINGLY. THUS THE GROUNDS OF APP EAL NO.3,4,5,6 & 7 OF THE APPELLANT ARE DISMISSED. SINCE THE APPELLAN T HAS FILED INACCURATE PARTICULARS OF INCOME BY ADOPTING WRONG AND INCORRE CT METHOD IN RESPECT OF TRANSFER PRICING ADJUSTMENT WITH REGARD TO INTERNATIONAL TRANSACTIONS ENTERED INTO WITH AE IN VIEW OF THE RE ASONS AS DISCUSSED ABOVE AND THEREFORE THE PENALTY PROCEEDINGS U/S.271 (1)(C) OF THE IT ACT ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 25 - ARE ALSO INITIATED ON ENHANCED INCOME OF .5,50,73,555/- FOR FILING OF INACCURATE PARTICULARS OF INCOME. 8.1. THE SUBMISSIONS OF THE LD.COUNSEL FOR THE ASSE SSEE ARE REPRODUCED HEREUNDER:- B. ARGUMENTS BEFORE THE HON'BLE TRIBUNAL (GROUND NO. 3.1 AND 3.4): GROUND NO. 3.1 : THAT THE LEARNED CIT(A) HAS ERRED IN COMPUTING THE TRANSFER PRICING ADJUSTMENT OF INR 76,229,166 FOR THE MANUFACTURING SEGMENT OF THE POWER CONTROL DOMESTIC TARIFF AREA (PCDTA) DIVISION OF THE APPELLANT COMPANY. GROUND NO. 3.4: THAT THE LEARNED CIT(A) HAS ERRED MATHEMATICALLY BY ADDING THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER IN THE TRANSFER PRICIN G ORDER OF AN AMOUNT OF INR 21,155,611 TO THE REVISED ADJUSTMENT AS COMPUTED BA SED ON THE LEARNED CIT(A)'S APPROACH, INSTEAD OF SUBTRACTING IT FROM THE REVISE D ADJUSTMENT ORDER. 14. THESE GROUNDS ARE NOT SOUGHT TO BE PRESSED AS THE SAME HAVE ALREADY BEEN DEALT WITH AND RESOLVED IN TERMS OF THE CIT(A) RECTIFICAT ION ORDER DATED OCTOBER 25, 2012. [REFER PAGE 1 TO 8 OF THE PAPERBOOK (CIT(A) RECTIFI CATION ORDER)]. GROUND 3.3: WITHOUT PREJUDICE TO THE ABOVE THE LEAR NED CIT(A) HAS ERRED IN NOT APPRECIATING THE ERROR MADE BY THE LEARNED TRANSFER PRICING OFFICER IN COMPUTING THE RAW MATERIAL ADJUSTMENT AND THE CONSEQUENT OPERATIN G MARGIN OF THE APPELLANT COMPANY. 15. THE APPELLANT WOULD LIKE TO HIGHLIGHT THAT THE TPO HAS ACCEPTED THE FACT THAT PCDTA DIVISION'S RAW MATERIAL COST IS HIGHER BY 18. 50% OF SALES OF THE COMPARABLE COMPANIES [REFER PAGE 253 OF THE APPEAL MEMO]. ACCO RDINGLY, THE LEARNED TPO PROCEEDED TO MAKE A DOWNWARD ADJUSTMENT TO THE RAW MATERIAL COST OF PCDTA DIVISION AND CONSEQUENTLY THE ADJUSTED OPERATING MA RGIN OF THE DIVISION. HOWEVER, WHILE COMPUTING THE ADJUSTMENT THOUGH THE DIFFERENC E IN THE RAW MATERIAL TO SALES RATIO WAS 18.50% OF SALES, THE LEARNED TPO COMPUTED THE RAW MATERIAL ADJUSTME NT AS 18.50% OF COSTS AS AGAINST SALES. THE TPO FOLLOWED AN INCORRECT APPROACH BY ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 26 - COMPARING THE RAW MATERIAL ADJUSTMENT TO OPERATING COST RATIO OF TESTED PARTY VIS-A- VIS THE RAW MATERIAL TO COST RATIO OF EACH COMPARAB LE COMPANY AND ACCORDINGLY MAKING AN ADJUSTMENT TO THE RAW MATERIAL EXPENSE OF THE COMPARABLE COMPANY. WITHOUT PREJUDICE TO THE APPROACH ADOPTED BY THE TP O FOR THE RAW MATERIAL ADJUSTMENT, THE COMPUTATION OF THE RAW MATERIAL ADJ USTMENT PERFORMED BY THE TPO WAS ALSO INCORRECT. 16. FURTHER, THE CIT(A) ALSO ERRED IN NOT APPRECIA TING THE ERROR MADE BY THE LEARNED TRANSFER PRICING OFFICER COMPUTING THE RAW MATERIAL ADJUSTMENT AND THE CONSEQUENT OPERATING MARGIN OF THE COMPANY. 17. ASSUMING WITHOUT ADMITTING, THAT EVEN IF THE LEARNE D TPO'S APPROACH WAS CONSIDERED AND HAD THE LEARNED TPO CARRIED OUT THE CALCULATIONS CORRECTLY, THE ADJUSTED OPERATING MARGIN WOULD BE AS PROVIDED IN T HE TABLE BELOW. COMPUTATION OF THE PROPORTION OF INTERNATIONAL TRAN SACTION TO TOTAL COSTS PARTICULARS AMOUNT (IN INR) AMOUNT (IN INR) INCOME INCOME FROM OPERATIONS 1,045,039,761 EXPENDITURE TOTAL EXPENSES (EXCLUDING RAW MATERIAL COST) 417,262,348 TOTAL MATERIAL COST 709,346,049 LESS: DOWNWARD ADJUSTMENT OF MATERIALS COST AS PER MATERIAL COST OF COMPARABLES (1,045,039,761*18.50%) 193,332,356 516,013,693 TOTAL EXPENDITURE (AFTER ADJUSTMENT FOR RAW MATERIAL COST) 933,276,041 REVISED PROFIT 111,763,720 ADJUSTED OP/ SALES 10.69% ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 27 - 18. AS IS EVIDENT FROM THE TABLE ABOVE, IF THE CAL CULATION WOULD HAVE BEEN CORRECTLY FOLLOWED BY THE LEARNED TPO, THE ADJUSTED OPERATING MARGIN OF THE APPELLANT WOULD BE AT 10.69% WHICH IS HIGHER THAN THE ARITHMETIC ME AN OF 6.78% OF THE COMPARABLE COMPANIES. ACCORDINGLY, THIS LENDS SUPPORT TO THE F ACT THAT THE INTERNATIONAL TRANSACTIONS OF PCDTA MANUFACTURING SEGMENT CONTINU E TO BE DEMONSTRATED TO BE AT ARM'S LENGTH EVEN AS PER THE LEARNED TPO'S OWN ACCE PTED ANALYSIS. GROUND 3.2: THAT THE LEARNED CIT(A) HAS ERRED WHILE COMPUTING THE RAW MATERIAL ADJUSTMENTS OF THE APPELLANT COMPANY AND THE COMPAR ABLE COMPANIES IN THE MANUFACTURING SEGMENT OF THE PCDTA DIVISION AND CON SEQUENTLY ARRIVING AT THE REVISED OPERATING MARGIN OF COMPARABLE COMPANIES. USE OF APPROPRIATE BASE' / SELECTION OFPLI 19. THE APPELLANT SUBMITS THAT THE RAW MATERIAL AD JUSTMENT IS COMPUTED BY THE LD. TPO BY COMPARING THE RAW MATERIAL ('RM') TO OPERATI NG COST ('OC') RATIO OF THE TESTED PARTY VIS-A-VIS THE RAW MATERIAL TO COST RATIO OF E ACH OF THE COMPARABLE COMPANY. 20. IN THIS REGARD IT IS PERTINENT TO MENTION THAT THE TRANSACTIONAL NET MARGIN METHOD ('TNMM') WAS SELECTED AS THE MOST APPROPRIAT E METHOD AND THE PROFIT LEVEL INDICATOR (PLI) SELECTED BY THE APPELLANT IS OP / SALES. THE TNMM AND THE PLI IS ALSO DULY ACCEPTED BY THE LD. TPO WITHOUT ANY DEBAT E IN AY 2004-05 AND IN AY 2005-06 AND ALL SUBSEQUENT YEARS. 21. THE PLI COMPARES AND MEASURES RESULTS OF THE T ESTED PARTY AND THE UNCONTROLLED TRANSACTION TO DETERMINE THE ARM'S LENGTH OUTCOME O F THE PRICE IN THE CONTROLLED TRANSACTION. 22. THUS IT IS UNDISPUTED THAT SALES IS THE APPROPR IATE BASE FOR THE PURPOSES OF THE PLI IN THE INSTANT CASE. USE OF 'APPROPRIATE BASE' FOR COMPUTATION OF RAW MA TERIAL ADJUSTMENT 23. THE APPELLANT SUBMITS THAT, THE LD. TPO HAS TE CHNICALLY ERRED IN CARRYING OUT THE MATHEMATICAL COMPUTATION OF THE RAW MATERIAL ADJUST MENTS IN THE MANUFACTURING SEGMENT OF THE POWER CONTROLS DIVISION OF GEIIPL FO R AY 2004-05, BY COMPARING THE RATIO OF RAW MATERIAL COSTS TO OPERATING EXPENSES O F THE TESTED PARTY, WITH THE RAW MATERIAL COSTS TO OPERATING EXPENSES OF THE COMPARA BLE COMPANIES. ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 28 - 24. THE APPELLANT SUBMITS THAT THE MATHEMATICAL CO MPUTATION OF THE RAW MATERIAL ADJUSTMENT BY THE LD. TPO USING RM / OC RATIO IS PA RTICULARLY INCORRECT GIVEN THE FACT THAT THE PLI SELECTED IN THIS CASE IS OP / SAL ES WITH 'SALES' AS THE RELEVANT BASE SINCE THE IMPORT TRANSACTION OF THE TESTED PARTY IS SUBJECT MATTER OF TEST. ACCORDINGLY, THE RAW MATERIAL ADJUSTMENT SHOULD ALSO BE COMPUTED HAVING REGARD TO THE SAME RELEVANT BASE AND COMPARING THE RM / SALES RATIO OF THE TESTED PARTY WITH THE RM / SALES RATIO OF THE COMPARABLE COMPANIES. 25. IN THIS REGARD THE RELEVANT EXTRACTS OF THE RU LE 10B(E) OF THE INCOME-TAX RULES, 1962 ARE REPRODUCED BELOW FOR IMMEDIATE REFERENCE: 'TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRIS E FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPU TED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER O F SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANS ACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRI SE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III); (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION.' 26. FARTHER, THE APPELLANT ALSO WISHES TO DRAW R EFERENCE TO THE FOLLOWING PRINCIPLE PROVIDED IN THE OECD GUIDELINES: 'THE PROCESS OF CALCULATING WORKING CAPITAL ADJUSTM ENTS: ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 29 - A) IDENTIFY DIFFERENCES IN THE LEVELS OF WORKING CA PITAL GENERALLY TRADE RECEIVABLES, INVENTORY AND TRADE PAYABLES ARE THE THREE ACCOUNTS CONSIDERED. THE TRANSACTIONAL NET MARGIN METHOD IS APPLIED RELATIVE TO AN APPROP RIATE BASE, FOR EXAMPLE COSTS, SALES OR ASSETS (SEE PARAGRAPH 2.58 OF THE GUIDELIN ES). IF THE APPROPRIATE BASE IS SALES, FOR EXAMPLE, THEN ANY DIFFERENCES IN WORKING CAPITAL LEVELS SHOULD BE MEASURED RELATIVE TO SALES.' PARA 2.58: 'THE TRANSACTIONAL NET MARGIN METHOD EXAMINES THE N ET PROFIT RELATIVE TO AN APPROPRIATE BASE (E.G. COSTS, SALES, ASSETS) THAT A TAXPAYER REALIZ ES FROM A CONTROLLED TRANSACTION (OR TRANSACTIONS THAT ARE APPROPRIATE T O AGGREGATE UNDER THE PRINCIPLES OF PARAGRAPHS 3.9-3.12). THUS, A TRANSACTIONAL NET MAR GIN METHOD OPERATES IN A MANNER SIMILAR TO THE COST PLUS AND RESALE PRICE METHODS. THIS MEANS IN PARTICULAR THAT THE NET PROFIT IND ICATOR OF THE TAXPAYER FROM THE CONTROLLED TRANSACTION (OR TRANSACTIONS THAT ARE AP PROPRIATE TO AGGREGATE UNDER THE PRINCIPLES OF PARAGRAPHS 3.9-3.12) SHOULD IDEALLY B E ESTABLISHED BY REFERENCE TO THE NET PROFIT INDICATOR THAT THE SAME TAXPAYER EARNS I N COMPARABLE UNCONTROLLED TRANSACTIONS, I.E. BY REFERENCE TO 'INTERNAL COMPAR ABLES' (SEE PARAGRAPHS 3.27-3.28). WHERE THIS IS NOT POSSIBLE, THE NET MARGIN THAT WOU LD HAVE BEEN EARNED IN COMPARABLE TRANSACTIONS BY AN INDEPENDENT ENTERPRIS E ('EXTERNAL COMPARABLES') MAY SERVE AS A GUIDE (SEE PARAGRAPHS 3.29-3.35). 27. LN THIS REGARD THE APPELLANT SUBMITS THAT UNDE R TNMM THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TR ANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE ('AE') IS COMPUTED IN RELATIO N TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY TH E ENTERPRISE OR LEAVING REGARD TO ANY OTHER RELEVANT BASE. 28. IN THE INSTANT CASE, THE SUBJECT MATTER OF TEST IS THE TRANSACTION OF IMPORT OF RAW MATERIALS IN THE MANUFACTURING SEGMENT OF POWER CON TROLS DIVISION OF GEIIPL. THUS OP/ SALES (SALES BEING THE UNCONTROLLED BASE) HAS BEEN USED AS THE APPROPRIATE PLI. ACCORDINGLY, ANY ADJUSTMENTS THEREAFTER, UNDER TXMM , HAVE TO BE MADE WITH REFERENCE TO THE SAME RELEVANT BASE (I.E. SALES). A DOPTING A DIFFERENT, CONTROLLED BASE, WOULD VITIATE THE ANALYSIS BY CONSIDERING THE VERY TRANSACTION WHICH IS THE SUBJECT MATTER OF TEST FOR THE PURPOSE OF THE ADJUSTMENT. ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 30 - 29. THUS IN THE PRESENT CASE, THE RAW MATERIAL ADJ USTMENTS IN THE MANUFACTURING SEGMENT OF THE POWER CONTROLS DIVISION OF GEIIPL HA VE TO BE COMPUTED BY COMPARING THE RATIO OF RAW MATERIAL COSTS TO SALES OF THE TESTED PARTY WITH THE RATIO OF RAW MATERIAL COSTS TO SALES OF THE COMPARABLE COMPA NIES, THEREBY ADJUSTING THE OPERATING MARGINS OF THE COMPARABLE COMPANIES FOR T HE DIFFERENCES IN THIS RATIO. BASE CONSIDERED BY THE LD. TPO IN AY 2005-06 AND AY 2004-05 30. IN THIS REGARD THE APPELLANT SUBMITS WOULD ALSO LI KE TO HIGHLIGHT CERTAIN FACTUAL REFERENCES MADE BY THE LD. TPO IN THE TP ORDER FOR AY 2005-06 WHICH ALSO SUPPORT THE ABOVE PRINCIPLE. FOR THE PURPOSES OF COMPUTING THE RAW MATERIAL ADJUSTMENT, THE LD. TPO HAS COMPARED THE RM / SALES RATIO OF THE TE STED PARTY VIS-A-VIS THE COMPARABLE COMPANIES. ATTENTION IS DRAWN TO THE REF ERENCE MADE IN THE LD. TPO'S ORDER FOR AY 2005-06 (PARA 6.7 PAGE 7 LINE NO 5) AT TACHED HEREWITH AS ANNEXURE 1, WHEREIN THE LD. TPO HAS MADE A REFERENCE TO THE RAW MATERIAL RATIO OF THE TESTED PARTY OF '65.99%' WHICH IS ACTUALLY THE RM / SALES RATIO OF THE TESTED PARTY. 31. FURTHER THE LD. TPO HAS ALSO MADE A REFERENCE TO RM / SALES RATIO OF THE COMPARABLE COMPANIES AS WELL (PARA 6.8 ON PAGE 7 OF THE TP ORDER FOR AY 2005-06). 32. HOWEVER, WHILE COMPUTING THE RAW MATERIAL ADJUSTMENTS FOR AY 2004-05, THE LD. TPO HAS ERRONEOUSLY CONSIDERED RM / OPERATING E XPENSES RATIO OF THE TESTED PARTY AND COMPARABLE COMPANIES AND PROCEEDED TO COM PUTE THE RAW MATERIAL ADJUSTMENTS. 33. THEREFORE, THE INFERENCE IS THAT THE TPO SOU GHT TO MAKE THE ADJUSTMENT HAVING REGARD TO RM / SALES BUT EVENTUALLY RESORTED TO RM / COST AS IT WOULD RESULT IN AN ADJUSTMENT. COMPUTATION OF RAW MATERIAL ADJUSTMENT 34. BASED ON THE ABOVE PRINCIPLE THE APPELLANT SUBM ITS THAT THE RAW MATERIAL ADJUSTMENT HAS TO BE COMPUTED WITH SALES AS THE REL EVANT BASE AND ACCORDINGLY HAS COMPUTED THE RAW MATERIAL ADJUSTMENTS. THE APPELLAN T PROVIDES THE COMPUTATION OF THE RAW MATERIAL ADJUSTMENT AND CONSEQUENTLY THE AD JUSTED OPERATING PROFIT MARGIN OF THE COMPANIES AS CONSIDERED BY THE LD. TPO IN THE O RDER DATED DECEMBER 22, 2006 FOR AY 2004-05 AS ANNEXURE 2. ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 31 - 35. THE ARITHMETICAL MEAN OF THE ADJUSTED OPERATIN G PROFIT MARGIN OF THE COMPARABLE COMPANIES AFTER ADJUSTING FOR DIFFERENCES IN RAW M ATERIAL COSTS IS (11.73)%. 36. FOR EASE OF REFERENCE, THE COMPUTATION OF ADJU STMENT WITH SALES AS THE RELEVANT BASE IS PROVIDED BELOW. PARTICULARS AMOUNT (INR) INCOME FROM OPERATIONS (A) 1,045,039,761 PROFIT/ (LOSS) (B) -81,617,605 OP/SALES (C) =(B) / (A) -7.81% ARM' LENGTH MARGIN (%) BEFORE RAW MATERIAL ADJUSTMENT (D) 6.78% ARM' LENGTH MARGIN (%) POST RAW MATERIAL ADJUSTMENT - CONSIDERING SALES AS THE BASE (E) -11.73% ARM'S LENGTH OPERATING PROFIT (F)= (A)*(E) (122,583,164) ADJUSTMENT (G) =(F) - (B) NIL 37. EVIDENTLY, THE OPERATING PROFIT MARGIN EARNED BY APPELLANT AT (7.81)%, IS HIGHER THAN THE ARITHMETICAL OF THE ADJUSTED OPERATING PRO FIT MARGIN OF THE COMPARABLE COMPANIES (POST ADJUSTMENT FOR RAW MATERIAL COSTS) OF (11.73)%. ACCORDINGLY, THIS LENDS SUPPORT TO THE FACT THAT THE INTERNATIONAL TR ANSACTIONS OF THE APPELLANT IN THE MANUFACTURING SEGMENT OF POWER CONTROLS DIVISION CO NTINUE TO BE DEMONSTRATED TO BE AT ARM'S LENGTH EVEN AS PER THE LD. TPO'S OWN ACCE PTED ANALYSIS. WITHOUT PREJUDICE TO THE FALLACY OF THE ADJUSTMENTS IN TERMS OF OUR CONTENTIONS MADE ABOVE, THE APPELLANT FURTHER CONTENDS AS FOLLOWS: ADJUSTMENT TO BE MADE ON PROPORTIONATE BASIS 38. THE TRANSACTION RELATED TO PURCHASES FROM AS SOCIATED ENTERPRISES AND EXPENSES ON ACCOUNT OF TRANSACTING WITH RELATED ENTERPRISES AMOUNTS RS. 121,269,639 WHICH IS ONLY 10.76% OF THE TOTAL EXPENSES OF THE PCDTA MANU FACTURING SEGMENT WHICH ARE RS. 1,126,608,397 EXCLUDING UNUSUAL EXPENSES INCURR ED BY THE DIVISION DURING THE YEAR [AND ONLY 17% OF THE TOTAL MATERIAL COSTS]. TH E WORKINGS HAVE BEEN PROVIDED IN THE TABLE BELOW. COMPUTATION OF THE PROPORTION OF INTERNATIONAL TRAN SACTION TO TOTAL COSTS ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 32 - CALCULATION OF % OF AE TRANSACTIONS TO TOTAL COST AE TRANSACTIONS 121,269,639 TOTAL COSTS 1,126,608,397 % OF AE TRANSACTIONS TO TOTAL COST 10.76% COMPUTATION OF THE PROPORTION OF INTERNATIONAL TRAN SACTION TO TOTAL RAW MATERIAL COSTS CALCULATION OF % OF AE TRANSACTIONS TO TOTAL RAW MA TERIAL COST PURCHASE FROM AE'S 121,269,639 PURCHASE FROM NON AE'S 588,076,410 TOTAL RAW MATERIAL COSTS 709,346,049 % OF AE TRANSACTIONS TO TOTAL MATERIAL COST 17.10% 39. THUS IT IS CLEAR THAT THE RAW MATERIAL SOURCE D FROM AES, I.E., RAW MATERIAL AND OTHER EXPENSES INCURRED BY THE MANUFACTURING SEGMEN T OF PCDTA ARE EXTREMELY LOW COMPARED TO THE TOTAL EXPENSES OF THE SEGMENT ITSEL F. 40. ACCORDINGLY, CONSIDERING THE VERY LOW QUANTU M OF THE RAW MATERIAL COSTS REPRESENTING THE INTERNATIONAL TRANSACTION WITH ASS OCIATED ENTERPRISES OF THE MANUFACTURING SEGMENT FOR FY 2003-04 VIS-A-VIS THE TOTAL EXPENSES, WITHOUT PREJUDICE AND ASSUMING WITHOUT ADMITTING, IT IS CONTENDED THA T ANY SUCH ADJUSTMENT, IF AT ALL, COULD HAVE BEEN MADE ONLY ON A PROPORTIONATE BASIS I.E. RATIO OF THE MATERIAL COST FROM RELATED PARTIES TO TOTAL MATERIAL COSTS OR RAT IO OF THE MATERIAL COST FROM RELATED PARTIES TO TOTAL COSTS. THUS THE ADJUSTMENT OUGHT N OT, IN ANY CASE, TO HAVE EXCEEDED THE PROPORTIONATE AMOUNT OF ADJUSTMENT SO COMPUTED. ACCORDINGLY, THE APPELLANT CONTENDS THAT THE ENTIRE AMOUNT RESULTING FROM THE DIFFERENCE BETWEEN THE ARITHMETIC MEAN OF THE ADJUSTED NET OPERATING MARGIN OF THE CO MPARABLE COMPANIES AND MANUFACTURING SEGMENT OF PCDTA SHOULD NOT BE ADJUST ED ONLY TO THE MATERIAL COSTS ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 33 - OR EXPENSES REPRESENTING THE INTERNATIONAL TRANSACT ION WITH ASSOCIATED ENTERPRISES WHICH CONSTITUTES A MEAGRE 17% OF THE TOTAL MATERIA L COSTS. 41. IN THIS REGARD WE PROVIDE BELOW THE COMPUTATIO N OF THE PROPORTIONATE ADJUSTMENT THAT COULD HAVE BEEN CONSIDERED EVEN IF ONE WERE TO MAKE ANY ADJUSTMENT TO THE TRANSFER PRICES, BASED ON THE LEARNED TPO'S OWN FAU LTY APPROACH. 42. THE TP ADJUSTMENT AS COMPUTED BY THE LEARNED T PO IS GIVEN IN THE TABLE BELOW: ADJUSTMENT AS COMPUTED BY THE TPO PARTICULARS ARM'S LENGTH AT ADJUSTED RM AS PER THE TPO (RS.) TOTAL INCOME FROM OPERATIONS 1,045,039,761 AE TRANSACTIONS- IMPORTS FROM GE ENTITIES AND ROYAL TY (BALANCING FIGURE) 100,114,028 MATERIAL CONSUMED (PURCHASED FROM NON GE ENTITIES) 456,851,491 OTHER EXPENSES 417,262,348 TOTAL EXPENSES 974,227,867 OPERATING PROFIT 70,811,894 OPERATING PROFIT AFTER EXCLUDING UNUSUAL EXPENSES / SALES (%) 6.78 ACTUAL AE TRANSACTION 121,269,639 DIFFERENCE TP ADJUSTMENT 21,155,611 43. THE TABLE BELOW PROVIDES COMPUTATION OF A PROP ORTIONATE ADJUSTMENT: COMPUTATION OF PROPORTIONATE ADJUSTMENTS AS PER TABLES 9 AND 10 ABOVE TP ADJUSTMENT AS PER TPO (RS.) PROPORTIONATE ADJUSTMENT (RS.) ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 34 - ACTUAL AE COSTS TO ACTUAL TOTAL COSTS RATIO 10.76% 21,155,611 2,276,343 ACTUAL AE COSTS TO ACTUAL TOTAL MATERIAL COSTS RATIO 17.10% 21,155,611 3,617,609 44. BASED ON THE ABOVE, IN SUMMARY, THE APPELLANT CONTENDS THAT FOR THE REASON THAT THE INTERNATIONAL TRANSACTION VALUE IS MINISCULE TO THE TOTAL COSTS OF THE SEGMENT, IT WOULD BE HIGHLY UNREASONABLE TO ATTRIBUTE THE ENTIR E DIFFERENCE, BETWEEN THE ARITHMETICAL MEAN OF THE OPM OF THE COMPARABLE COMP ANIES VIS-A-VIS THE OPM OF THE MANUFACTURING SEGMENT OF PCDTA, TO THE TRANSFER PRI CES IN THE INTERNATIONAL TRANSACTIONS. ACCORDINGLY, BASED ON THE CALCULATION S PROVIDED IN THE ABOVE TABLE, THE APPELLANT CONTENDS THAT EVEN AS PER THE APPROACH FO LLOWED BY THE TPO THE ADJUSTMENT COULD HAVE BEEN ONLY RS. 2,276,343 AND N OT RS. 21,155,611 AS COMPUTED BY THE LEARNED TPO. 45. BASED ON THE ABOVE SUBMISSIONS, THE APPELLANT CONTENDS THAT THE LEARNED TPO AND CONSEQUENTLY THE LEARNED DCIT HAVE ERRED IN DET ERMINING AN ADJUSTMENT OF RS. 21,155,611 IN RESPECT OF THE MANUFACTURING SEGMENT OF PCDTA UNDER SECTION 92C(4) READ WITH SUBSECTIONS (3) AND (4) OF SECTION 92C(3) , THE DOMESTIC INDUSTRIAL BUSINESS DIVISION OF THE APPELLANT. 8.2. ON BEHALF OF THE REVENUE, THE SUBMISSIONS ARE AS UNDER:- THAT THE LEARNED CIT(A) HAS ERRED IN COMPUTING THE TRANSFER PRICING ADJUSTMENT OF RS.7,62,29,166 FOR THE MANUFACTURING SEGMENT OF POWER CONTROL DOMESTIC TARIFF AREA ('PCDTA') DIVISION OF THE APPELLANT COMPANY. TPO'S COMMENTS: THIS IS A GENERAL GROUND OF APPEAL. HOWEVER, THE FA CTS OF THE CASE ARE AS UNDER: (I) IN THIS CASE THE TPO HAD MADE ADJUSTMENT OF RS. 2,11,55,611/- IN THE POWER CONTROL DIVISION(MANUFACTURING SEGMENT) OF TH E APPELLANT VIDE ORDER DATED 22.12.2006 FOR AY 2004-05 . THIS ISSUE HAS BE EN DISCUSSED IN DETAIL IN THE TP ORDER. DURING THE COURSE OF TP PROCEEDINGS I T WAS OBSERVED BY THE ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 35 - TPO THAT TH INTERNATIONAL TRANSACTIONS RELATING TO MANUFACTURING ACTIVITY WERE NOT AT ARMS LENGTH PRICE BECAUSE THE TNMM METHOD WA S SELECTED AS MOST APPROPRIATE METHOD AND PL1 MARGIN OF TESTED PARTY W AS WORKED OUT TO (-) 7.81%(OP/SALES) WHEREAS THE PL1 MARGIN OF THE C OMPARABLES SELECTED BY THE ASSESSEE WAS 6.78%(OP/SALES). SINCE THE DIFFERE NCE BETWEEN PLI MARGIN OF THE TESTED PARTY AND THE COMPARABLES WAS BEYOND 5% VARIATION, THE ADJUSTMENT WAS WORKED OUT TO RS. 15,23,80,530/-. HO WEVER, THE VALUE OF INTERNATIONAL TRANSACTION SHOWN BY THE ASSESSEE WAS RS.12,12,69,639/-, THEREFORE TPO DID NOT ADOPT THIS AMOUNT OF RS.15.23 CRORES FOR ADJUSTMENT. THE TPO OBSERVED THAT THE COST OF RAW MATERIAL WAS A MAJOR COST AFFECTING THE PROFIT OF THE ASSESSEE AND THE TPO REMOVED THE RAW MATERIAL COST FROM THE ASSESSEE AS WELL AS THE COMPARABLES TO ARRIVE AT TH E ADJUSTED VALUE OF TOTAL PURCHASES. HOWEVER, THE TPO DID NOT EXCLUDE THE VAL UE OF RAW MATERIAL PURCHASED FROM AE AS THE SAME WAS AT ALP AS PER 3CE B REPORT AND THE ENTIRE EXERCISE WAS BEING CARRIED OUT TO FIND OUT W HETHER THE VALUE AS PER 3CEB IS AT ALP OR NOT. THE TPO WORKED OUT THE MARGI N OF RAW MATERIAL TO SALES IN THE CASE OF COMPARABLES WHICH WAS WORKED O UT TO 49.38%, WHEREAS THE MARGIN OF RAW MATERIAL WITH SALES IN THE CASE O F ASSESSEE WAS WORKED OUT TO 67.88%. THUS IT WAS FOUND THAT COST OF RAW MATER IAL OF THE ASSESSEE WAS MORE BY 18.50% AS COMPARED TO COMPARABLES. ACCORDIN GLY THE ADJUSTMENT WAS MADE TO THE COST OF RAW MATERIAL OF THE ASSESSE E AND THE OP/SALES MARGIN OF THE ASSESSEE WAS WORKED OUT TO 4.75%, WHEREAS TH E ALP MARGIN WAS 6.78%. AFTER APPLYING THE ALP PROFIT MARGIN, THE AL P COST OF MATERIAL WAS WORKED OUT TO RS. 10,01,14,028/- AND AFTER ALLOWING THE +7-5% VARIATION, THIS FIGURE WAS ARRIVED AT RS. 10,51,19,729/-, WHEREAS T HE VALUE OF INTERNATIONAL TRANSACTION WAS RS.12,12,69,639/-. SINCE THE VALUE OF INTERNATIONAL TRANSACTION WAS BEYOND THE BENEFIT +/-5%, THE DOWNW ARD ADJUSTMENT OF RS.2,11,55,611/-( 12,12,69,639/- (-) 10,01,14,028/- ) WAS MADE BY THE TPO. (II) THE CIT(A) UPHELD THE APPROACH OF THE TPO FOR MAKING ADJUSTMENT. HOWEVER, IT WAS FOUND ACTION OF TPO MAKING ADJUSTME NT TO ELIMINATE THE DIFFERENCE AS PER RULE 10B(E)(III) IN THE CASE OF A SSESSEE WAS FOUND INCORRECT BY THE CIT(A) BECAUSE AS PER RULE 10B(E)(III) ADJUS TMENT WAS REQUIRED TO BE MADE IN THE CASE OF COMPARABLES. ACCORDINGLY, THE C IT(A) ENHANCED THE ADJUSTMENT TO RS.7,62,29,166/-. THE RELEVANT PORTIO N OF THE CIT(A)'S ORDER (PAGE NO. 204 & 205, PARA 13.13 TO 13.15 OF CIT(A)' ORDER) IS REPRODUCED AS UNDER:- '13.13 IN VIEW OF ABOVE SUBMISSION OF THE APPELLANT , NOW THE QUESTION ARISES WHETHER WHILE COMPUTING THE RAW-MATERIAL ADJUSTMENT , RM/OPERATING EXPENSES RATIO OF THE TESTED PARTY AND COMPARABLE C OMPANIES CAN BE ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 36 - CONSIDERED AND CAN BE PROCEEDED TO COMPUTE THE RAW- MATERIAL ADJUSTMENTS OR NOT. IN THIS REGARD REFERENCE IS MADE TO PARA 6. 7 OF THE ORDER U/S 92CA(3) OF THE TPO, AHMEDABAD FOR AY 200506. THE TPO IN SUC H ORDER, ON PERUSAL OF P&L ACCOUNT REALIZED THAT THE COST OF RAW-MATERI AL WAS MAJOR COST AFFECTING THE PROFIT OF THE APPELLANT AND HENCE IT WAS DECIDED TO MARK UP THE COST OF RAW-MATERIAL OF THE COMPARABLES TO ARRIVE A T ADJUSTED VALUE OF THE TOTAL PURCHASES OF THE APPELLANT SO THAT COSTLIER L OCAL PURCHASES DO NOT COLOUR THE APPELLANT'S TRANSACTIONS WITH AE 'S. HEN CE, THE ENTIRE RAW- MATERIAL COST WAS REDUCED TO BRING AT INDUSTRY LEVE L. THE TPO OBSERVED THAT THE LOCAL RAW MATERIAL PURCHASES OF THE APPELLANT W AS VERY HIGH (65.99%) AND DUE TO THESE HIGHER LOCAL COST OF PURCHASES, IT S RESULTS WERE NOT COMPARABLE WITH LOCAL COMPARABLES. IT WAS ALSO OBSE RVED BY THE TPO THAT THE COST OF PURCHASE OF RAW-MATERIAL OF LOCAL COMPA RABLE MAY BE NOT DUE TO EXISTENCE OF UNRECOGNIZED RAW-MATERIAL MARKET. THUS AS PER PROVISION OF RULE 1 OB(E) (HI) OF THE INCOME TAX RULES, ADJUSTMENT WA S MADE TO THE RESULTS OF THE COMPARABLE COMPANIES AND PURCHASE INEFFICIENCY OF THE APPELLANT WAS ADJUSTED, WHICH RESULTS INTO MEAN ADJUSTED MARGIN T O SALES AT 1.22%. IN MY OPINION THE TPO IN HIS ORDER FOR AY 2005-06 HAS ADO PTED CORRECT METHOD BY CONSIDERING RM/OPERATING EXPENSES RATIO OF THE TEST ED PARTY AND COMPARABLE COMPANIES AND BY PROCEEDING TO COMPUTE THE RAW-MATE RIAL ADJUSTMENT. THUS IN MY OPINION THE SAME METHOD/APPROACH SHOULD BE FO LLOWED IN THE CASE OF APPELLANT FOR AY 2004-05 ALSO WHICH IS THE YEAR UND ER CONSIDERATION. IT IS PERTINENT TO MENTION THAT IF THE ADJUSTED COST OF R AW-MATERIAL IS CALCULATED ON THE BASIS OF SALES TURNOVER, THEN THE COST OF RAW-M ATERIAL WILL ALSO INCLUDE THE PROFIT MARGIN OF SALES, WHICH INCREASES THE ADJUSTE D COST OF RAW-MATERIAL WHICH IN TURN WILL REDUCE THE ACTUAL PROFIT MARGIN WHICH IS NOT CORRECT AND NOT COMPARABLE. THE CORRECT METHOD/APPROPRIATE BASE TO CALCULATE THE ADJUSTED COST OF RAW-MATERIAL PROPORTIONATE TO THE TOTAL OPERATING COST. THE ELEMENT OF PROFIT IS TO BE ELIMINATED OR NOT TO BE CONSIDERED WHILE CALCULATING THE ADJUSTED COST OF RAW-MATERIAL. 13.14 IT IS FURTHER MENTIONED THAT THE TRANSACTIONA L NET MARGIN METHOD OPERATES IN A SIMILAR WAY TO THE COST PLUS METHOD A ND THE RESALE PRICE METHOD. HOWEVER, THE TRANSACTIONAL NET MARGIN METHO D BENCHMARKS THE NET PROFITABILITY, I.E. IT TESTS THE NET PROFITS EARNED IN CONTROLLED TRANSACTIONS AND COMPARES THEM TO THE NET PROFITS EARNING IN UNCONTR OLLED TRANSACTIONS. THAT MEANS THAT INSTEAD OF GROSS PROFIT THE TRANSACTIONA L NET MARGIN METHOD ANALYSES THE NET PROFITS IN RELATION TO AN APPROPRI ATE BASE SUCH AS COSTS, SALES OR AS THE CASE MAY, ASSETS. THIS IS DONE VIA NET MARGINS OR SO CALLED PROFIT LEVEL INDICATORS. IN CONTRAST TO THE COST PL US METHOD, WHICH GENERALLY COMPUTES THE MARK UP AFTER DIRECT AND INDIRECT COST S OF PRODUCTION, THE TRANSACTIONAL NET MARGIN METHOD USES MARGINS COMPUT ED AFTER OPERATING EXPENSES. ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 37 - 13.15 IN VIEW OF THE ABOVE DISCUSSION IT IS HELD TH AT THE TPO, AHMEDABAD HAS FOLLOWED THE CORRECT METHOD IN HIS ORDER U/S 92CA(3 ) OF AY 2005-06 BY COMPUTING THE RAW-MATERIAL ADJUSTMENT BY COMPARING THE RAW-MATERIAL ADJUSTMENT TO OPERATING COST RATIO OF THE TESTED PA RTY VIS-A-VIS THE RAW- MATERIAL TO OPERATING COST RATION OF EACH OF THE CO MPARABLE COMPANY AND ACCORDINGLY BY MAKING ADJUSTMENT TO THE RAW-MATERIA L EXPENSES OF THE COMPARABLE COMPANIES.!, THEREFORE, HOLD THAT THIS M ETHOD/APPROACH IS REQUIRED TO BE FOLLOWED IN THE CASE OF APPELLANT FO R AY 2004-05 ALSO AND IN DOING SO THERE WILL BE TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ARM'S LENGTH PRICE AT RS.7,62,29,166/- IN THE CASE OF APP ELLANT.' (III) IN VIEW OF THE ABOVE FACTS, THE GENERAL G ROUND RAISED BY THE ASSESSEE REQUIRES TO BE REJECTED. GROUND NO. 3.2: THAT THE LEARNED CIT(A) HAS ERRED WHILE COMPUTING T HE RAW MATERIAL ADJUSTMENTS OF THE APPELLANT COMPANY AND THE COMPAR ABLE COMPANIES IN THE MANUFACTURING SEGMENT OF THE PCDTA DIVISION AND CON SEQUENTLY ARRIVING AT THE REVISED OPERATING MARGIN OF COMPARABLE COMPANIE S. TPO'S COMMENTS:- AS DISCUSSED IN THE COMMENTS ON GROUND NO.3.1 IN PA RA (II), THE DETAILED DISCUSSION HAS BEEN MADE BY THE LD. C1T(A) FOR COMP UTATION OF RAW MATERIAL ADJUSTMENT AND ACCORDINGLY REVISED OPERATING MARGIN S OF THE COMPARABLES WAS WORKED OUT. THE ASSESSEE HAS CLAIMED THAT C1T(A ) HAS COMPUTED RAW MATERIAL ADJUSTMENT USING OPERATING COST AS THE BAS E AND HAS ARRIVED THE REVISED TP ADJUSTMENT OF RS. 5,50,73,595/- BEING THE DIFFERENCE BETWEEN THE ARITHMETIC MEAN OF ADJUSTED OPM OF (-) 2.54% OF T HE COMPARABLE COMPANIES AND OPM OF (-) 7.81% OF THE ASSESSEE (TESTED PARTY) . THE CLAIM OF ASSESSEE THAT CIT(A) HAS USED OPERATIN G COST AS BASE IS INCORRECT. THE C1T(A) HAS DISCUSSED THIS ISSUE IN D ETAIL IN THE APPEAL ORDER AT PARA 13.13 WHICH IS ALREADY REPRODUCED IN THE COMME NTS OF TPO ON GROUND NO.3.1 ABOVE. IT IS CLEARLY MENTIONED THAT THE COST OF RAW MATERIAL IN THE CASE OF ASSESSEE WAS 65.99% (RM/SALES) FOR AY 2005-06 WH EREAS IN THE CASE OF COMPARABLES THIS RATIO WAS 54.18% (RM/SALES) ONLY. THEREFORE, TO ELIMINATE THE DIFFERENCES IN THE COST OF RAW MATERIAL IN THE CASE OF ASSESSEE VIS-A-VIS COMPARABLES, SUITABLE ADJUSTMENT WAS MADE BY THE TP O AND ACCORDINGLY THE ADJUSTED AVERAGE MARGIN OF PROFIT TO SALES OF THE C OMPARABLES WAS REVISED AT ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 38 - 1.22% AS AGAINST 9.93%. ACCORDINGLY, THE DOWNWARD A DJUSTMENT OF RS.2,28,56,144/- WAS MADE TO THE INTERNATIONAL TRAN SACTION OF PURCHASES OF RAW MATERIAL FROM AE. IN VIEW OF THE ABOVE FACTS, IT CAN BE SEEN THAT DUR ING AY 2005-06, THE TPO HAD TAKEN THE BASE OF PLI AS OP/SALES WHILE COMPUTI NG THE ADJUSTMENT TO BE MADE TO THE VALUE OF INTERNATIONAL TRANSACTION SHOW N BY THE ASSESSEE. THE CIT(A) HAS MADE THE UPWARD ADJUSTMENT OF RS.7.62 CR ORES FOR AY 2004-05 ON THE BASIS OF APPROACH ADOPTED BY THE TPO FOR AY 200 5-06 AS DISCUSSED ABOVE. HOWEVER, FOR COMPUTING THE ADJUSTED COST OF RAW MAT ERIAL THE CIT(A) HAS TAKEN THE BASE OF RM/TOTAL EXPENSES TO AVOID THE EF FECT OF PROFIT IF THE RM/SALES BASIS OF COMPUTATION IS CONSIDERED TO ELIM INATE THE DIFFERENCES. FOR ADOPTING THIS APPROACH THE CIT(A) HAS MENTIONED IN PARA 13.13 OF APPEAL ORDER THAT 'IT IS PERTINENT TO MENTION THAT IF THE ADJUSTED COST OF RAW-MATERIAL IS CALCULATED ON THE BASIS OF SALES TURNOVER, THEN THE COST OF RAW-MATERIAL WILL ALSO INCLUDE THE PROFIT MARGIN OF SALES, WHICH INCR EASES THE ADJUSTED COST OF RAW-MATERIAL WHICH IN TURN WILL REDUCE THE ACTUAL P ROFIT MARGIN WHICH IS NOT CORRECT AND NOT COMPARABLE. THE CORRECT METHOD/APPR OPRIATE BASE TO CALCULALE THE ADJUSTED COST OF RAW-MATERIAL PROPORT IONATE TO THE TOTAL OPERATING COST. THE ELEMENT OF PROFIT IS TO BE ELIM INATED OR NOT TO BE CONSIDERED WHILE CALCULATING THE ADJUSTED COST OF R AW-MATERIAL. ' THE ASSESSEE HAS CLAIMED THAT THE ADJUSTED MARGIN ( OP/SALES) OF THE COMPARABLES AFTER ALLOWING THE ADJUSTMENT FOR DIFFE RENCE IN COST OF MATERIAL, THE ARITHMETIC MEAN OF ADJUSTED OP/SALES COMES TO ( -) 11.73% AS PER THE METHODOLOGY ADOPTED BY TPO IN AY 2005-06 WHEREAS TH E PLI MARGIN OF THE ASSESSEE IS (-) 7.81% AND THEREFORE THE MARGIN OF T HE ASSESSEE IS BETTER THAN THE COMPARABLES AND HENCE THE INTERNATIONAL TRANSAC TION IS AT ALP. HOWEVER, THE CIT(A) HAS CHANGED THE METHODOLOGY FOR WORKING OUT THE ADJUSTMENT TO BE MADE TO ELIMINATE THE DIFFERENCES ON ACCOUNT OF COS T OF RAW MATERIAL BY TAKING THE RATIO OF COST OF RAW MATERIAL TO TOTAL EXPENSES TO AVOID THE EFFECT OF PROFIT INVOLVED IN THE SALES. THIS METHODOLOGY IS DISCUSS ED IN THE EARLIER PARA(UNDERLINED PORTION). THE CALCULATION OF RAW MA TERIAL ADJUSTMENT OF (-)2.54% IS MENTIONED BY THE CIT(A) IN THE ORDER U/ S 154 DATED 25.10.2012. A COPY OF RELEVANT PAGE OF ORDER U/S 154 IS ATTACHE D AS PER ANNEXURE-A. IN VIEW OF THE ABOVE, THE GROUND RAISED BY THE ASSESSE E MAY BE REJECTED. GROUND NO. 3.3 ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 39 - WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT(A) HAS ERRED IN NOT APPRECIATING THE ERROR MADE BY THE LEARNED TRANSFER PRICING OFFICER IN COMPUTING THE RAW MATERIAL ADJUSTMENT AND THE CONSE QUENT OPERATING MARGIN OF THE APPELLANT COMPANY. TPO'S COMMENTS: THE ASSESSEE HAS CLAIMED THAT THE ADJUSTED OPERATIN G MARGIN OF THE APPELLANT WOULD BE AT 10.69%(OP/SALES) INSTEAD OF 4.75% WORKE D OUT BY THE TPO. THE COMPUTATION OF 10.69% MARGIN WORKED OUT BY THE ASSE SSEE IS REPRODUCED AS UNDER: PARTICULARS AMOUNT(LNR) AMOUNT(INR) INCOME INCOME FROM OPERATIONS 104,50,39,761 EXPENDITURE TOTAL EXPENSES(EXCLUDING RAW MATERIAL COST) 41,72,62,348 TOTAL MATERIAL COST 70,93,46,049 LESS: DOWNWARD ADJUSTMENT OF MATERIAL COST OF COMPARABLES (104,50,39,761*18.50%) 19,33,32,356 51,60,13,693 TOTAL EXPENDITURE(AFTER ADJUSTMENT FOR RAW MATERIAL COST) 93,32,76,041 REVISED PROFIT 11,17,63,720 ADJUSTED OP/SALES 10.69% IT CAN BE SEEN FROM THE ABOVE TABLE THAT THE ASSESS EE HAS WORKED OUT THE DOWNWARD ADJUSTMENT OF MATERIAL COST BY CALCULATING 18.50% OF TOTAL SALES. IT MAY BE NOTED THAT TPO HAD OBSERVED THAT THE COST OF RAW MATERIAL WAS HIGHER ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 40 - BY 18.50% IN THE CASE OF THE ASSESSEE AS COMPARED T O THE COST OF RAW MATERIAL IN THE CASE OF COMPARABLES. THEREFORE, WITH A VIEW TO ELIMINATE THE DIFFERENCE ON ACCOUNT OF VARIATION BETWEEN COST OF RAW MATERIA L IN THE CASE OF ASSESSEE VIS-A-VIS COMPARABLES TPO MADE ADJUSTMENT TO BRING DOWN THE COST OF RAW MATERIAL AT INDUSTRY LEVEL. THEREFORE, TPO HAD REDU CED THE COST OF RAW MATERIAL BY 18.50% OF THE ASSESSEE. HOWEVER, THE AS SESSEE HAS WORKED OUT THE DOWNWARD ADJUSTMENT BY TAKING THE SALES FIGURE WHIC H IS TOTALLY INCORRECT METHOD. AS ALREADY POINTED OUT BY THE CIT(A), ADJUS TMENT WAS REQUIRED TO BE MADE IN THE CASE OF COMPARABLE AS PER RULE 10B(E) ( III) TO ELIMINATE THE DIFFERENCES IN THE COST OF MATERIAL, THE ACTION OF TPO IN MAKING ADJUSTMENT IN THE HANDS OF TESTED PARTY TO ELIMINATE DIFFERENCES WAS INCORRECT METHODOLOGY. THUS, THE CLAIM OF ASSESSEE IS TOTALLY INCORRECT AN D AGAINST THE PROVISIONS OF LAW. THEREFORE, THIS GROUND MAY BE REJECTED. GROUND NO. 3.4 THAT THE LEARNED CIT(A) HAS ERRED MATHEMATICALLY BY ADDING THE ADJUSTMENT MADE BY THE TRANSFER PRICING OFFICER IN THE TRANSFE R PRICING ORDER OF AN AMOUNT OF RS.21,155,611 TO THE REVISED ADJUSTMENT A S COMPUTED BASED ON THE LEARNED CIT(A)'S APPROACH, INSTEAD OF SUBTRACTING I T FROM THE REVISED ADJUSTMENT. TPO'S COMMENTS: THE CLAIM OF ASSESSEE IS CORRECT. HOWEVER, THE C1T( A) HAS ALREADY PASSED RECTIFICATION ORDER ON 25.10.2012 THROUGH WHICH THE ABOVE MATHEMATICAL ERROR HAS BEEN RECTIFIED AND THE REVISED ADJUSTMENT IS WORKED OUT TO RS.5,50,73,555/- (TP ADJUSTMENT MADE BY TPO OF RS. 2,11,55,611/- + ENHANCEMENT MADE BY CIT(A) OF RS. 3,39,17,984/-). T HEREFORE, THIS GROUND OF APPEAL IS REDUNDANT. 9. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO TH E RIVAL SUBMISSIONS MADE BY THE RESPECTIVE PARTIES. THE UN DISPUTED FACTS REMAIN IN THIS CASE ARE THAT THE ASSESSEE HAD TRANSACTIONS WITH RELATED PARTY AND THEREFORE, TRANSFER PRICING PROVISIONS WERE APPLICA BLE IN THE CASE OF THE ASSESSEE. THE ASSESSEE HAD OPERATING LOSS OF 7.81% AS UNDER:- ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 41 - I.B. ASSESSEE HAD TAKEN OP/SALES AS IT PLI. THE OP/SALES COMPUTED BY THE ASSESSEE IS -7.81%. THE CALCULATIO N OF MARGIN OF THE ASSESSEE IS AS UNDER:- OPERATING INCOME/SALES 1,045,039,761 TOTAL EXPENSES 1,126,608,397 OPERATING LOSS (81,568,636) OPERATING LOSS/SALES -7.81% 10. THE TPO NOTICED THAT AS PER LIST OF COMPARABLES PROVIDED BY THE ASSESSEE, THE OPERATING MARGIN OF THE COMPARABLES W AS 6.78%, AS UNDER:- I.B.1 THE ASSESSEE HAD PROVIDED A LIST OF COMPAR ABLES THE SAME IS PROVIDED AS UNDER:- S.NO. NAME OF COMPARABLES OPERATING PROFIT MARGIN 1 2 3 4 5 6 7 8 9 10 BHARTIA INDUSTRIES CONTROLS & SWITCHGEAR CONTRACTORS LTD CROMPTON GREAVES LTD LAKSHMI ELECTRICAL CONTROL SYSTEMS LTD HAVELLS INDIA LTD. INCAP LTD INDO ASIAN FUSEGEAR LTD JSL INDUSTRIES LTD MODISON METALS LTD VIJAI ELECTRICALS LTD 1.72% 5.77% 4.41% 10.35% 7.47% 5.72% 3.46% 1.62% 15.17% 12.07% AVERAGE 6.78% 11. THE TPO ALSO NOTICED THAT THE COST OF RAW MATER IAL OF THE ASSESSEE WAS HIGHER THAN THE COST OF RAW MATERIAL OF THE COM PARABLES. THEREFORE, ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 42 - HE WAS OF THE OPINION THAT THE ASSESSEE IS ENTITLED TO THE ADJUSTMENT OF EXCESS COST OF RAW MATERIAL INCURRED BY THE ASSESSE E AS COMPARED TO COMPARABLE CASES. HE NOTICED THAT THE COST OF RAW M ATERIAL TO SALES OF THE COMPARABLES WAS 49.38%, BUT IN THE CASE OF THE ASSE SSEE, IT WAS 67.88%. THUS, THERE WAS DIFFERENCE OF 18.50%. THE TPO ALLO WED THE ADJUSTMENT THEREFOR WHILE MAKING THE REVISED CALCULATION OF MA RGIN. AFTER ADJUSTMENT OF COST OF RAW MATERIAL, THE OPERATING P ROFIT OF THE ASSESSEE ON SALES WAS WORKED OUT TO 4.75%, AS UNDER:- I.C. 2 THE MARGIN OF RAW MATERIAL TO SALES OF THE ASSESSEE WAS ALSO COMPUTED WHICH WAS THEN COMPARED TO FIND OUT THE IN CREMENTAL COST OF RAW MATERIAL INCURRED BY THE ASSESSEE. THE CALCULATION OF THE SAME IS PROVIDED AS UNDER:- ASSESSEE COMPARABLES DIFFERENCE RM/SALES 67.88% 49.38% 18.50% I.C.3 FROM THE ABOVE TABLE IT CAN BE SEEN THAT THE COST OF RAW MATERIAL OF THE ASSESSEE IS MORE THAN 18.50% OF THE COST OF COMPARABLES. THUS BY USING THE DATA AS COMPUTED ABO VE THE MARGIN OF THE ASSESSEE WAS RECOMPUTED AS UNDER:- CALCULATION OF REVISED MARGIN INCOME INCOME FROM OPERATIONS 1,045,039,761 EXPENDITURE TOTAL EXPENSES EXCL MATERIAL COST 417,262,348 TOTAL MATERIAL COST 709,346,049 ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 43 - LESS : DOWNWARD ADJUSTMENT OF MATERIAL COST AS MATERIAL COST OF COMPETITORS ARE LESS 131,224,919 5 78,121,130 (709,346,049 * 18.50%) REVISED TOTAL EXPENDITURE 995,383, 478 REVISED PROFIT/LOSS 49,656,283 OP/SALES 4.75% 12. AT THE TIME OF HEARING BEFORE US, IT WAS POINTE D OUT BY THE LD. COUNSEL THAT WHILE WORKING OUT THE CONSUMPTION OF R AW MATERIAL BY THE ASSESSEE AS WELL AS COMPARABLES, THE ASSESSING OFFI CER WORKED OUT THE RATIO BY DIVIDING RAW MATERIAL TO THE SALES, WHICH WOULD BE EVIDENT FROM THE FOLLOWING WORKING BY THE TPO. I.C.1 THE MARGIN OF RAW MATERIAL TO SALES OF COM PARABLES WAS CALCULATED AS UNDER:- S. NO. NAME OF COMPARABLES RM/SALES 1 2 3 4 5 6 7 8 9 10 BHARTIA INDUSTRIES CONTROLS & SWITCHGEAR CONTRACTORS LTD CROMPTON GREAVES LTD LAKSHMI ELECTRICAL CONTROL SYSTEMS LTD HAVELLS INDIA LTD. INCAP LTD INDO ASIAN FUSEGEAR LTD JSL INDUSTRIES LTD MODISON METALS LTD VIJAI ELECTRICALS LTD 31.66% 37.73% 64.97% 42.38% 51.94% 63.20% 45.91% 49.12% 44.63% 62.24% AVERAGE 49.38% ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 44 - 13. THUS, ADMITTEDLY, THE TPO COMPARED THE RAW MATE RIAL OF THE ASSESSEE AS WELL AS COMPARABLES BY DIVIDING THE COS T OF RAW MATERIAL TO THE SALES. BUT, WHILE GIVING THE ADJUSTMENT, THE TP O ALLOWED THE ADJUSTMENT OF 18.50% OF THE TOTAL MATERIAL COST AND NOT OF THE SALES. THEREFORE, THE ONLY REQUEST BEFORE US FROM THE ASSE SSEES SIDE WAS TO ALLOW THE ADJUSTMENT OF THE 18.50% ON SALES. WE F IND THAT THE CIT(A), WHILE ADJUDICATING THIS ISSUE, HAS CONSIDERED THE O RDER OF THE TPO FOR ASSESSMENT YEAR 2004-05 AS WELL AS ASSESSMENT YEAR 2005-06 AND ARRIVED AT THE CONCLUSION THAT THE TPO HAS ADOPTED THE CORRECT METHOD IN ASSESSMENT YEAR 2005-06; THIS WOULD BE EVIDENT FROM THE FOLLOWING OBSERVATIONS OF THE CIT(A). 13.13 . IN MY OPINION THE TPO IN HIS ORDER FOR AY 2005- 06 HAS ADOPTED CORRECT METHOD BY CONSIDERING RM/OPE RATING EXPENSES RATIO OF THE TESTED PARTY AND COMPARABLE C OMPANIES AND BY PROCEEDING TO COMPUTE THE RAW-MATERIAL ADJUSTME NTS. THUS IN MY OPINION THE SAME METHOD/APPROACH SHOULD BE FOLLO WED IN THE CASE OF APPELLANT FOR A.Y. 2004-05 ALSO WHICH IS TH E YEAR UNDER CONSIDERATION. 14. AFTER CONSIDERING THE ARGUMENTS OF BOTH THE SID ES, WE ARE OF THE OPINION THAT THE CIT(A) WAS NOT JUSTIFIED IN GIVING ANY OPINION ABOUT THE CORRECTNESS OR OTHERWISE OF THE TPOS ORDER FOR ASS ESSMENT YEAR 2005- 06, BECAUSE THAT WAS NOT UNDER APPEAL BEFORE HIM. HOWEVER, BE THAT AS IT MAY BE, WE HAVE HEARD BOTH THE PARTIES WITH REGARD TO THE METHOD TO BE FOLLOWED WHILE COMPARING THE RAW-MATERIAL COMPONENT OF THE ASSESSEE AS ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 45 - WELL AS COMPARABLES. AFTER CONSIDERING THE ARGUMEN TS OF BOTH THE SIDES AND FACTS OF THE CASE, WE FIND FORCE IN THE CONTENT ION OF THE LD. COUNSEL OF THE ASSESSEE THAT THE RATIO OF RAW-MATERIAL/SALES W OULD BE A PROPER RATIO TO COMPARE THE CONSUMPTION OF RAW-MATERIAL BY THE ASSE SSEE AND COMPARABLE PARTIES, BECAUSE SALES IN THE CASE OF TH E ASSESSEE IS, ADMITTEDLY, UNCONTROLLED TRANSACTION. WE ALSO FIND THAT OECD GUIDELINES IN THIS REGARD READ AS UNDER:- 2.88 THE DENOMINATOR SHOULD BE REASONABLY INDEPEND ENT FROM CONTROLLED TRANSACTIONS, OTHERWISE THERE WOULD BE N O OBJECTIVE STARTING POINT. FOR INSTANCE, WHEN ANALYZING A TRANSACTION CONSISTING IN THE PURCHASE OF GOODS BY A DISTRIBUTOR FROM AN ASSOCIAT ED ENTERPRISE FOR RESALE TO INDEPENDENT CUSTOMERS, ONE COULD NOT WEIG HT THE NET PROFIT INDICATOR AGAINST THE COST OF GOODS SOLD BECAUSE TH ESE COSTS ARE THE CONTROLLED COSTS FOR WHICH CONSISTENCY WITH THE ARM S LENGTH PRINCIPLE IS BEING TESTED. SIMILARLY, FOR A CONTROLLED TRANSACT ION CONSISTING IN THE PROVISION OF SERVICES TO AN ASSOCIATED ENTERPRISE, ONE COULD NOT WEIGHT THE NET PROFIT INDICATOR AGAINST THE REVENUE FROM T HE SALE OF SERVICES BECAUSE THESE ARE THE CONTROLLED SALES FOR WHICH CO NSISTENCY WITH THE ARMS LENGTH PRINCIPLE IS BEING TESTED. WHERE THE DENOMINATOR IS MATERIALLY AFFECTED BY CONTROLLED TRANSACTION COSTS THAT ARE NOT THE OBJECT OF THE TESTING (SUCH AS HEAD OFFICE CHARGES, RENTAL FEES OR ROYALTIES PAID TO AN ASSOCIATED ENTERPRISE), CAUTIO N SHOULD BE EXERCISED TO ENSURE THAT SAID CONTROLLED TRANSACTION COSTS DO NOT MATERIALLY DISTORT THE ANALYSIS AND IN PARTICULAR THAT THEY ARE IN ACC ORDANCE WITH THE ARMS LENGTH PRINCIPLE. 2.89 THE DENOMINATOR SHOULD BE ONE THAT IS CAPABLE OF BEING MEASURED IN A RELIABLE AND CONSISTENT MANNER AT THE LEVEL OF THE TAXPAYERS CONTROLLED TRANSACTIONS. IN ADDITION, T HE APPROPRIATE BASE SHOULD BE ONE THAT IS CAPABLE OF BEING MEASURED IN A RELIABLE AND ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 46 - CONSISTENT MANNER AT THE LEVEL OF THE COMPARABLE UN CONTROLLED TRANSACTIONS. THIS IN PRACTICE LIMITS THE ABILITY TO USE CERTAIN INDICATORS, AS DISCUSSED AT PARAGRAPH 2.99 BELOW. FURTHER, THE TAXPAYERS ALLOCATION OF INDIRECT EXPENSES TO THE TRANSACTION UNDER REVIEW SHOULD BE APPROPRIATE AND CONSISTENT OVER TIME. B.3.4.1. CASES WHERE THE NET PROFIT IS WEIGHTED T O SALES 2.90 A NET PROFIT INDICATOR OF NET PROFIT DIVIDED BY SALES, OR NET PROFIT MARGIN, IS FREQUENTLY USED TO DETERMINE THE ARMS L ENGTH PRICE OF PURCHASES FROM AN ASSOCIATED ENTERPRISE FOR RESALE TO INDEPENDENT CUSTOMERS. IN SUCH CASES, THE SALES FIGURE AT THE DENOMINATOR SHOULD BE THE RE-SALES OF ITEMS PURCHASED IN THE CONTROLLED T RANSACTION UNDER REVIEW. SALES REVENUE THAT IS DERIVED FROM UNCONTR OLLED ACTIVITIES (PURCHASE FROM INDEPENDENT PARTIES FOR RE-SALE TO INDEPENDENT PARTIES) SHOULD NOT BE INCLUDE IN THE DETERMINATION OR TESTI NG OF THE REMUNERATION FOR CONTROLLED TRANSACTIONS, UNLESS TH E UNCONTROLLED TRANSACTIONS ARE SUCH THAT THEY DO NOT MATERIALLY A FFECT THE COMPARISON; AND/OR THE CONTROLLED AND UNCONTROLLED TRANSACTIONS ARE SO CLOSELY LINKED THAT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATE BASIS. ONE EXAMPLE OF THE LATTER SITUATION CAN SOMETIMES O CCUR IN RELATION TO UNCONTROLLED AFTER-SALES SERVICES OR SALES OF SPARE PARTS PROVIDED BY A DISTRIBUTOR TO INDEPENDENT END-USER CUSTOMERS WHERE THEY ARE CLOSELY LINKED TO CONTROLLED PURCHASE TRANSACTIONS BY THE D ISTRIBUTOR FOR RESALE TO THE SAME INDEPENDENT END-USER CUSTOMERS, FOR INS TANCE BECAUSE THE SERVICE ACTIVITY IS PERFORMED USING RIGHTS OR OTHER ASSETS THAT ARE GRANTED UNDER THE DISTRIBUTION ARRANGEMENT. SEE AL SO DISCUSSION OF PORTFOLIO APPROACHES IN PARAGRAPH 3.10. 15. IN THE INSTANT CASE, WHAT IS BEING TESTED IS WH ETHER PURCHASE FROM ASSOCIATED ENTERPRISES IS AT ARMS-LENGTH OR NOT. A DMITTEDLY, SALES BY THE ASSESSEE IS NOT TO THE ASSOCIATED PARTIES AND THERE FORE, IS UN-CONTROLLED TRANSACTION. IN VIEW OF ABOVE, IN THE LIGHT OF OEC D GUIDELINES, WHILE ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 47 - WORKING OUT RATIO OF RAW-MATERIAL SHOULD BE WORKED OUT BY COMPARING THE RAW-MATERIAL VIS--VIS SALES. IN THIS VIEW OF THE M ATTER, WE UPHOLD THE FINDING OF THE TPO FOR THE YEAR UNDER APPEAL WHEREI N HE ARRIVED AT THE CONCLUSION THAT THE ASSESSEE SHOULD BE ALLOWED THE ADJUSTMENT OF 18.50% BECAUSE OF EXCESS CONSUMPTION OF RAW-MATERIAL. HOWE VER, IN OUR OPINION, WHILE GIVING THE ADJUSTMENT, THE ASSESSEE SHOULD BE ALLOWED THE ADJUSTMENT OF 18.50% OF THE SALES AND NOT OF THE 18 .50% OF THE RAW- MATERIAL COST. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO ALLOW THE ADJUSTMENT OF 18.50% OF THE SALES WHILE WORKING OUT THE OPERATING PROFIT AND IF, AFTER THE ABOVE ADJUSTMENT, THE OPERATING P ROFIT OF THE ASSESSEE WORKS OUT TO MORE THAN 6.78% I.E. THE AVERAGE OF OP ERATING PROFIT OF COMPARABLES, THEN NO ADJUSTMENT SHOULD BE MADE. W ITH THIS DIRECTION, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AN D RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER. 16. BEFORE PARTING WITH THE MATTER, WE HEREBY CLARI FY THAT OUR OBSERVATION IS STRICTLY ON THE FACTS OF THE ASSESSM ENT YEAR 2004-05 AND WE HAVE NOT EXPRESSED ANY OPINION IN RESPECT OF THE ORDER OF TPO FOR ASSESSMENT YEAR 2005-06. 17. APROPOS TO GROUND NO.3.4 OF ASSESSEES APPE AL, SINCE THE ASSESSEE HAS NO GRIEVANCE LEFT AS THE LD.CIT(A) HAS RECTIFIE D THE MISTAKE, THEREFORE, THIS GROUND IS DISMISSED AS INFRUCTUOUS. ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 48 - 18. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED FOR STATISTICAL PURPOSES. 19. NOW, WE TAKE UP THE REVENUES APPEAL IN ITA NO. 2154/AHD/2012 FOR AY 2004-05, WHEREIN FOLLOWING GROUNDS HAVE BEEN TAKEN:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN ALLOWING SET OFF OF THE BUSINESS LOSS OF RS.2,64,32,995/- PERTAINING TO AY 1997-98 AGAINST P ROFIT OF AY 2004-05 WITHOUT CONSIDERING THE FACT THAT AS ON 31. 03.1997, GE PADIFIC LTD., SINGAPORE ALONE WAS ABLE TO CONTROL G E LIGHTING DIVISION I.E. ASSESSEE COMPANY, BUT AFTER MERGER, I T HAD LOST THE CONTROLLING POWER AS ITS NUMBER OF SHARE HOLDING WA S LESS THAN 51%. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESS ING OFFICER. 3. THE APPELLANT CRAVES LEAVE TO ADD TO, AMEND OR ALT ER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. RELIEF CLAIMED IN APPEAL. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE CIT( A) ON THE ISSUES RAISED IN THE AFORESAID GROUNDS BE SET ASIDE AND THAT OF T HE ASSESSING OFFICER BE RESTORED. 19.1. THE ONLY ISSUE IS TO BE EXAMINED WHETHER TH E LD.CIT(A) WAS JUSTIFIED IN ALLOWING SET OFF OF THE BUSINESS LOSS. THE LD.CIT-DR SUBMITTED THAT THE LD.CIT(A) WAS NOT JUSTIFIED IN A LLOWING THE SET OFF OF THE BUSINESS LOSS OF RS.2,64,32,995/- PERTAINING TO AY 1997-98 AGAINST ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 49 - PROFIT OF AY 2004-05 WITHOUT CONSIDERING THE FACT. HE SUBMITTED THAT THE LD.CIT(A) OUGHT O HAVE UPHELD THE ORDER OF THE AO. HE PLACED RELIANCE ON THE ORDER OF THE AO. 19.2. ON THE CONTRARY, LD.COUNSEL FOR THE ASSESSEE SUBMITTED AS UNDER:- AT THE OUTSET IT IS SUBMITTED THAT THE ASSESSEE CO MPANY HAS PURPORTED TO SET OFF LOSSES OF ONLY RS. 2,59,69,283 AND BALANCE RS. 464,712 PERTAINS TO UNABSORBED DEPRECIATION PURPORTED TO BE SET OFF IN THE REVISED RETURN OF INCOME FILED FOR THE YEAR UNDER C ONSIDERATION. THE BROUGHT FORWARD BUSINESS LOSSES OF RS 2,59,69,2 83 SET OFF DURING THE YEAR UNDER CONSIDERATION PERTAINS TO THE LOSSES INC URRED BY THE LIGHTING DIVISION (I.E. THE APPELLANT COMPANY) IN AY 1997-98 AND WERE SET OFF IN COMPLIANCE WITH THE CONDITIONS STIPULATED IN SECTIO N 79 OF THE ACT. SECTION 79 REQUIRES AN INQUIRY TO BE MADE AS TO WH O THE SHAREHOLDERS WERE AT TWO POINTS IN TIME I.E ON THE LAST DAY OF T HE PREVIOUS YEAR IN WHICH THE LOSSES ARE SET OFF AND ON THE LAST DAY OF THE PREVIOUS YEAR IN WHICH THE LOSSES WERE INCURRED. ON IDENTIFICATION OF PERSONS/ SHAREHOLDERS AT TWO P OINTS IN TIME, IT MUST BE ASCERTAINED WHAT THEIR SHARE HOLDING IN THE COMP ANY IS AT TWO POINTS IN TIME. SECTION 79 REFERS TO 'PERSONS' IN PLURALITY. THE RE FERENCE IS TO 'SHAREHOLDERS' AND NOT A SHAREHOLDER. THE COMPARISO N HAS TO BE OF THE COLLECTIVE HOLDINGS OF THESE PERSONS OR THE GROUP. RELIANCE PLACED ON THE RULING OF THE SUPREME COURT IN THE CASE OF CIT VS. ITALINDIA COTTON CO. P. LTD (1988) 174 ITR 160 AND MUMBAI TRIBUNAL DECISION IN THE CASE OF SUNANDA CAPITAL SE RVICES LTD. VS. JCIT (28 SOT 484). ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 50 - THE VIEW THAT THE REFERENCE IN SECTION 79 IS TO A G ROUP OF SHAREHOLDERS IS SUPPORTED BY JUDICIAL PRECEDENTS AND COMMENTARY BY KANGA AND PALKHIVALA IN 'THE LAW AND PRACTICE OF INCOME-TAX, EIGHTH EDITION, VOLUME 1, COMMENTARY BY CHATURVEDI AND PITHISARIA I N INCOME TAX LAW, 2ND EDITION, VOL 2, PAGE 1150. IN THE INSTANT CASE, AS EVIDENT FROM THE SHAREHOLDI NG PATTERN, AND ADMITTED BY THE LD. AO AS WELL AS LD. CIT(A) THAT G E PACIFIC PTE LTD, SINGAPORE AND GE PACIFIC (MAURITIUS) LTD COLLECTIVE LY CONTINUED TO HOLD MORE THAN 51% OF THE SHARES OF THE COMPANY IN THE Y EAR ENDED MARCH 31,1997, (THE YEARS IN WHICH LOSSES WERE INCURRED) AND MARCH 31, 2004 (THE YEAR OF SET OFF OF LOSSES). HENCE, BUSINESS LOSSES HAVE BEEN SET OFF AND CARRI ED FORWARD TO THE SUBSEQUENT YEARS IN COMPLIANCE WITH THE CONDITIONS PRESCRIBED IN SECTION 79 OF THE ACT. WITHOUT PREJUDICE, THE ULTIMATE HOLDING COMPANY IS GENERAL ELECTRIC COMPANY, US WHICH CONTINUES TO EXERCISE CONTROL OVE R THE ASSESSEE THROUGH ITS SUBSIDIARIES. ANY CHANGE IN THE SHAREHO LDING AMONGST THE MEMBERS OF THE GE GROUP WOULD NOT PREJUDICE THE RIG HT TO CARRY FORWARD THE LOSSES IN CASE OF ASSESSEE COMPANY AS L ONG AS GENERAL ELECTRIC CONTINUES TO HAVE CONTROL OVER IT THROUGH ITS SUBSIDIARIES. THE ULTIMATE BENEFICIARY INTEREST REMAINS WITHIN THE GE GROUP. RELIANCE ON BANGALORE TRIBUNAL RULING IN THE CASE OF AMCO POWER SYSTEMS LIMITED AND DELHI TRIBUNAL RULING IN THE CASE OF SELECT HOL IDAY RESORTS PVT. LTD. 20. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE LD.CIT(A) HAS GIVEN A FINDING ON F ACT IN PARAS-12.19 & 12.20 OF HIS ORDER, WHICH ARE REPRODUCED HEREUNDER: - ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 51 - 12.19. FROM THE ABOVE IT CAN BE SEEN THAT THE APPE LLANT COMPANY HAS CLAIMED SET OFF OF PART OF LOSSES OF 102,83,83,355/- AGAINST THE INCOME OF AY 2005-06 ALSO. FROM THE AB OVE ONE CAN SEE THAT THE AO HAS NOT DENIED SET OFF OF LOSSES OF THE APPELLANT AGAINST THE PROFIT OF AY 2005-06 MERELY ON THE BASI S THAT THE ENTIRE LOSSES OF 102,83,83,355/- HAS BEEN DISALLOWED TO BE CARRIED FORWARD AND SET OFF IN AY 2004-05. RATHER THE AO H AS STATED THAT THE APPELLANT WAS ONCE AGAIN CALLED UPON TO FURNISH DETAILS OF COMPANY-WISE LOSSES WHICH MERGED INTO THE APPELLANT COMPANY AND THE SHARE HOLDING PATTERN OF SUCH COMPANIES IN THE YEAR OF INCURRENCE OF LOSSES. THE AO HAS FURTHER STATED TH AT THE CONTENTION OF THE APPELLANT IS NOT CORRECT AS IT ITSELF HAS CL AIMED THE BENEFIT OF CARRIED FORWARD AND SETTING OFF OF THE LOSSES AND T HEREFORE, IT IS OBLIGATORY UPON IT TO SUBSTANTIATE THE CLAIM SPECIF ICALLY IN LIGHT OF THE PROVISIONS OF SEC.79 OF THE ACT. THUS IT IS C LEAR THAT AO HAD CALLED FOR DETAILS FROM THE APPELLANT DURING THE CO URSE OF ASSESSMENT PROCEEDINGS FOR AY 2005-06 ALSO FOR SUBS TANTIATING THE CLAIM OF THE APPELLANT SPECIALLY IN THE LIGHT OF PR OVISIONS OF SECTION 79 OF THE ACT. ONCE, THE ENTIRE LOSS HAS BEEN DISA LLOWED BY THE AO IN THE CASE OF APPELLANT IN AY 2004-05 ITSELF, THEN IT IS NOT CLEAR AS TO HOW CARRIED FORWARD AND SET OFF OF PART OF SUCH LOSSES OF .102,83,83,355/- CAN FURTHER BE CONSIDERED FOR THE PURPOSE OF ALLOWING OR DISALLOWING THE SAME U/S.79 OF THE IT A CT AGAINST THE PROFIT OF 2005-06. THESE FACTS SHOW THAT THE AO HA S CONTRADICTED HIMSELF BY STATING THAT THE APPELLANT WAS CALLED UP ON TO FURNISH DETAILS OF COMPANY-WISE LOSSES AND SHARE HOLDING PA TTERN OF SUCH COMPANY IN THE YEAR OF INCURRENCE OF LOSSES DURING THE COURSE OF ASSESSMENT PROCEEDINGS OF AY 2005-06. THE VERY FAC T IS THAT THE APPELLANT HAS CLAIMED CARRY FORWARD AND SET OFF OF PART OF THE LOSSES AGAINST THE PROFIT OF SUBSEQUENT YEAR ALSO I .E. AY 2005-06 AND THE AO HAS CALLED FOR DETAILS WITH REGARD TO SU CH CLAIM OF THE APPELLANT IN VIEW OF SECTION 79 OF THE IT ACT. THU S THE ACT OF THE AO ITSELF IS CONTRADICTORY TO HIS OWN STAND SO FAR AS AY 2005-06 IN THE CASE OF APPELLANT IS CONCERNED AS IN AY 2004-05 HE HAS ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 52 - DISALLOWED ENTIRE LOSSES OF 102,83,83,355/- AND IN ANOTHER YEAR I.E. IN AY 2005-06 HE IS AGAIN CALLING FOR DETAILS FOR THE PURPOSE OF EXAMINING THE CLAIM OF SUCH LOSSES OR PART OF SUCH LOSSES. HOWEVER, AS STATED IN EARLIER PARAGRAPHS, THE CLAIM OF SET OFF OF ANY LOSSES PERTAINING TO PCDTA & GEIIPL AGAINST THE PROFIT OF AY 2005-06 IS REQUIRED TO BE CONSIDERED BY THE AO A S PER LAW AND ON MERITS OF THE CASE WHILE COMPLETING THE ASSESSME NT OF SUCH ASSESSMENT YEAR. 12.20. IN VIEW OF THE ABOVE DISCUSSION, IT IS HEL D THAT THE APPELLANT (I.E. GEIIL) IS ENTITLED TO SET OFF OF TH E BUSINESS LOSS PERTAINING TO AY 1997-98 IN ITS CASE AGAINST ITS PR OFIT OF AY 2004- 05 IN VIEW OF PROVISIONS OF SECTION 79 OF THE IT AC T. AS REGARDS REMAINING LOSSES IN THE CASE OF APPELLANT, THE SAME CANNOT BE DENIED TO BE CARRIED FORWARD BY THE AO U/S.79 OF TH E ACT WHILE COMPLETING THE ASSESSMENT FOR AY 2004-05. AS STATE D ABOVE IN CASE IF REMAINING LOSSES OR PART OF SUCH REMAINING LOSSES WHICH ARE PERTAINING TO DIFFERENT YEARS OF GEPCDTA AND GE IIPL ARE CLAIMED BY THE APPELLANT AGAINST THE PROFIT OF SUBS EQUENT ASSESSMENT YEARS (I.E. AFTER AY 2004-05), ALLOWABIL ITY OR DISALLOWABILITY OF SUCH CLAIM OF LOSSES HAS TO BE C ONSIDERED BY THE AO ON MERITS AND SUBJECT TO FULFILLMENT OF CONDITIO NS AS LAID DOWN IN SECTION 79 AND ALSO SUBJECT TO FULFILLMENT OF CO NDITIONS AS LAID DOWN IN OTHER RELEVANT PROVISIONS OF THE IT ACT WHI LE COMPLETING THE ASSESSMENTS IN THE CASE OF APPELLANT FOR SUCH S UBSEQUENT ASSESSMENT YEARS. 20.1. THE ABOVE FINDING OF THE LD.CIT(A) IS NOT CON TROVERTED BY THE REVENUE BY PLACING ANY CONTRARY MATERIAL ON RECORD. THEREFORE, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF T HE LD.CIT(A), SAME IS HEREBY UPHELD. THUS, THIS GROUND OF REVENUES APPE AL IS REJECTED. ITA NO.2210/AHD/2012 (BY ASSESSEE) AND ITA NO.2154/AHD/2012 (BY REVENUE) GE INDIA INDUSTRIAL PVT.LTD. VS. DCIT ASST.YEAR 2004-05 - 53 - 21. GROUND NOS.2 & 3 ARE GENERAL IN NATURE WHICH REQUIRE NO INDEPENDENT ADJUDICATION. 22. IN THE COMBINED RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES, WHEREAS APPEAL OF THE REVENU E IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON FRIDAY, THE 26 TH DAY OF JUNE, 2015 AT AHMEDABAD. SD/- SD/- ( .. ) ( ) ( G.D. AGARWAL ) ( KUL BHARAT ) VICE PRESIDENT (AZ) JUDICIAL MEMBER AHMEDABAD; DATED 26/ 06 /2015 3+..( , .(../ T.C. NAIR, SR. PS !'#$%$&' / COPY OF THE ORDER FORWARDED TO : 1. !% / THE APPELLANT 2. &'!% / THE RESPONDENT. 3. 456 7 / CONCERNED CIT 4. 7 ( ) / THE CIT(A)-IV, BARODA 5. 8 9&(56 , +56/ , 4 / DR, ITAT, AHMEDABAD 6. 9 ;< ) / GUARD FILE. / BY ORDER, ' 8& //TRUE COPY// / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION STARTED..11/19.5.15 AND 18.6.15 (DICTATION-PAD 19+PAGES ATTACHED AT THE END OF T HIS FILE) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER .. 12/18/19.5.15 & 18.6.15 3. OTHER MEMBER... 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S./P.S.26.6.15 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 26.6.15 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER