IKA India Pvt Ltd , Bangalore V. Deputy Commissioner of Income TAx Circle-3(1)(1), Bangalore

ITA 2192/BANG/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 1098 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-09-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 15-11-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PADMA MEENKASHI
• Keywords: Business income; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Services rendered outside India; Question of law; Working capital adjustments; Initiation of penalty proceedings; Bad and doubtful debts; Avoidance of tax
• Section: 92C; 92; 92B; 234B; 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT (TP) A NO. 2192/BANG/2017 ASSESSMENT YEAR : 2012 - 13 IKA INDIA PVT. LTD., 814/475, SURVEY NO.129/1, MYSORE ROAD, KENGERI, BANGALORE 560 060. PAN: AABCI 9880Q VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(1), BANGALORE. APP ELL ANT RESPONDENT APPELLANT BY : SHRI VED JAIN, CA & SHRI DARPAN K R IPLANI, ADVOCATE RESPONDENT BY : SMT. PAD MAMEENAKSHI, JT.CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 19.07 .201 8 DATE OF PRONOUNCEMENT : 17 .09 .201 8 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL IS BY THE ASSESSEE AGAINST THE ORDER O F CIT(APPEALS)-3, BENGALURU DATED 12.09.2017 FOR THE ASSESSMENT YEAR 2012-13. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUF ACTURE AND TRADING OF LABORATORY AND PROCESSING EQUIPMENT. THE ASSESSEE IMPORTS PRODUCTS FROM IKA GROUP FOR SALE IN THE DOMESTIC MA RKET AND ALSO UNDERTAKES MANUFACTURING OPERATIONS LOCALLY TO EXPO RT THE PRODUCTS TO IKA GROUP. IN ADDITION, THE ASSESSEE ALSO PROVIDES RESE ARCH AND DEVELOPMENT IT(TP)A NO.2192/BANG/2017 PAGE 2 OF 39 SERVICES AND MARKETING AND TECHNICAL SUPPORT SERVIC ES TO GROUP COMPANIES. 3. THE ASSESSEE FILED ITS RETURN OF INCOME ON 28 NO VEMBER 2012, DECLARING A TAXABLE INCOME OF RS.1,03,08,770. THE F OLLOWING WERE THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE WITH ITS ASSOCIATED ENTERPRISE (AE) DURING THE RELEVANT PREVIOUS YEAR:- NATURE OF INTERNATIONAL TRANSACTION AMOUNT (RS.) IMPORT OF RAW MATERIALS AND COMPONENTS 4,95,41,241 EXPORT OF FINISHED GOODS 13,93,39,733 PURCHASE OF TRADED GOODS 3,01,05,940 RECEIPT OF MARKETING SUPPORT SERVICE FEE 53,12,346 RECEIPT OF RESEARCH AND DEVELOPMENT FEES 4,82,10,266 PAYMENT OF ROYALTY 2,43,31,671 PAYMENT OF INTEREST ON LOAN 21,81,641 PAYMENT OF PERSONNEL SUPPORT FEES 1,66,79,236 PURCHASE OF FIXED ASSETS / DEPRECIATION CHARGE 50,71,189 4. IN VIEW OF THE PROVISIONS OF SECTION 92 OF THE I NCOME-TAX ACT, 1961 [THE ACT], INCOME FROM AN INTERNATIONAL TRANSACTI ON HAD TO BE DETERMINED HAVING REGARD TO THE ARMS LENGTH PRICE (ALP). THE TRANSFER PRICING OFFICER (TPO) TO WHOM THE DETERMINATION OF ALP WAS REFERRED TO BY THE AO ACCEPTED THAT ALL INTERNATIONAL TRANSACTIONS CARRIE D OUT BY THE ASSESSEE WAS AT ARMS LENGTH, EXCEPT THE INTERNATIONAL TRANSACTI ON OF EXPORT OF FINISHED GOODS BY THE ASSESSEE TO ITS AE. THE DISPUTE RAISE D IN THIS APPEAL WHICH IS ONE OF THE SUBJECT-MATTER OF THIS APPEAL IS WITH RE GARD TO THIS INTERNATIONAL TRANSACTION. FOR THE PURPOSE OF ESTABLISHING THE A LP OF ITS INTERNATIONAL TRANSACTION WITH ITS AE, THE ASSESSEE FILED A TRANS FER PRICING (TP) STUDY. THE ASSESSEE CHOSE THE TRANSACTIONAL NET MARGIN MET HOD ('TNMM') AS THE MOST APPROPRIATE METHOD. IN ORDER TO IDENTIFY COMPANIES WHICH ARE COMPARABLE TO THE ASSESSEE, SEARCH WAS CONDUCTED ON CAPITALINE IT(TP)A NO.2192/BANG/2017 PAGE 3 OF 39 DATABASE (A DATABASE COMPILED AND MANAGED BY CAPITA L MARKET PUBLISHERS) FOR OBTAINING PUBLICLY AVAILABLE FINANC IAL INFORMATION OF COMPANIES IN INDIA ENGAGED IN SIMILAR BUSINESS ACTI VITY AS THE ASSESSEE. THE PROFIT LEVEL INDICATOR (PLI) CHOSEN FOR THE PUR POSE OF COMPARISON OF ASSESSEES PROFIT MARGIN WITH THAT OF COMPARABLE CO MPANIES WAS OPERATING PROFIT TO OPERATING COST (OP/OC). FOR THE COMPANI ES IDENTIFIED AS COMPARABLES, OPERATING MARGIN WAS COMPUTED USING TH E FINANCIAL DATA PERTAINING TO FY 2011-12 WHICH WAS AVAILABLE TO THE ASSESSEE AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATIO N REQUIREMENTS. THE OPERATING MARGIN OF THE ASSESSEE WAS ADJUSTED FOR U NDER-UTILIZATION OF CAPACITY DURING FY 2011-12 AS COMPARED TO THE COMPA RABLES. THE ADJUSTED NET MARGIN OF THE ASSESSEE WAS DETERMINED AS 12.97 PERCENT ON OPERATING COST AND 11.48 PERCENT ON OPERATING REVENUE. THE O PERATING MARGINS OF THE COMPARABLE COMPANIES WERE ADJUSTED TO ACCOUNT F OR DIFFERENCES IN THE LEVEL OF TRADE RECEIVABLES AND TRADE PAYABLES OF TH E COMPARABLE COMPANIES VIS-A-VIS THE ASSESSEE. 5. IN CONNECTION WITH THE INTERNATIONAL TRANSACTION OF FINISHED GOODS, THE ABOVE ANALYSIS YIELDED A SET OF 3 COMPARABLES WITH ARITHMETIC MEAN OF THE ADJUSTED NET MARGINS OF THE COMPARABLE COMPANIES BE ING 6.59% ON OPERATING REVENUE AND 7.08% ON OPERATING COST. AS T HE ASSESSEES NET MARGIN OF 11.48% ON OPERATING REVENUE AND 12.97% ON OPERATING COST WAS GREATER THAN OPERATING MARGIN EARNED BY THE COMPARA BLES, THE ASSESSEE CLAIMED THAT THE INTERNATIONAL TRANSACTION OF EXPOR T OF FINISHED GOODS WAS TO BE CONSIDERED TO BE AT ARM'S LENGTH IN ACCORDANCE W ITH THE INDIAN TRANSFER PRICING REGULATIONS. 6. THE LIST OF 3 COMPARABLES CHOSEN BY THE ASSESSEE WERE :- IT(TP)A NO.2192/BANG/2017 PAGE 4 OF 39 S.NO. PARTICULARS MARGIN (OP/OR) (%) MARGIN (OP/OR) (%) ACCEPTED/ REJECTED BY THE TPO 1 2 ALLENGERS MEDICAL SYSTEMS LIMITED 5.78% 6.14% ACCEPTED 2 GANSONS LIMITED 5.09% 5.37% REJECTED 3 SPAN DIAGNOSTIC LIMITED 8.88% 9.74% REJECTED ARITHMETIC MEAN 6.59% 7.08% 7. AS ALREADY STATED, THE TPO ACCEPTED THE PRICE PA ID OR RECEIVED BY THE ASSESSEE IN ALL THE INTERNATIONAL TRANSACTIONS AS AT ARMS LENGTH, EXCEPT THE INTERNATIONAL TRANSACTION IN RELATION TO THE MA NUFACTURING ACTIVITY WITH ITS AE. THE LEARNED TPO DID NOT ACCEPT THE ECONOMIC AN ALYSIS UNDERTAKEN BY THE ASSESSEE AND CONDUCTED A FRESH ECONOMIC ANALYSI S. THE TPO REJECTED 2 COMPANIES OUT OF 3 COMPANIES SELECTED AS COMPARAB LES BY THE ASSESSEE IN THE TP STUDY. THE TPO ON HIS SEARCH OF THE DATA BASE CHOSE 4 NEW COMPANIES AND SELECTED THE FOLLOWING 5 COMPANIES AS THE FINAL SET OF COMPARABLES WITH UNADJUSTED MARGIN OF 8.21% ON OPER ATING REVENUE:- S.NO. PARTICULARS MARGIN (OP/OR) (%) MARGIN (OP/OR) (%) 1 SHREE PACETRONIX LIMITED 5.41% 5.72% 2 CONTINENTAL CONTROLS LIMITED 8.19% 8.92% 3 HINDUSTAN SYRINGES & MEDICAL DEVICES LIMITED 12.37% 14.12% 4 CENTENIAL SURGICAL SUTURE LIMITED 6.38% 6.81% 5 ALLENGERS MEDICAL SYSTEMS LIMITED 8.70% 9.53% ARITHMETIC MEAN 8.21% 9.02% THE TPO CONSIDERED FOREIGN EXCHANGE GAIN/LOSSES AS NON-OPERATING IN NATURE WHILE COMPUTING THE OPERATING MARGIN OF THE COMPARABLE COMPANIES. HOWEVER, HE CONSIDERED THE FOREIGN EXCHANGE GAIN/LO SSES AS OPERATING IN NATURE WHILE COMPUTING THE OPERATING MARGIN OF THE ASSESSEE. THE TPO IT(TP)A NO.2192/BANG/2017 PAGE 5 OF 39 DID NOT MAKE SUITABLE ADJUSTMENTS TO ACCOUNT FOR DI FFERENCES IN THE WORKING CAPITAL POSITION OF THE ASSESSEE VIS--VIS THE COMP ARABLE COMPANIES. THE TPO ALSO DID NOT MAKE SUITABLE ADJUSTMENTS TO ACCOU NT FOR UNDER-UTILIZED CAPACITY OF THE ASSESSEE VIS-A-VIS THE COMPARABLE C OMPANIES. THE TPO COMPUTED ADDITION TO THE TOTAL INCOME CONSEQUENT TO DETERMINATION OF ALP AS FOLLOWS:- 8.3 IN VIEW OF THE DISCUSSIONS MADE ABOVE, THE TPO REJE CTS THE CLAIM OF ADJUSTMENTS ON ACCOUNT OF CAPACITY UTILIZA TION, WORKING CAPITAL, AND RISK ADJUSTMENT IN THE CASE OF THE TAX PAYER AND PROCEEDS TO MAKE ADJUSTMENT U/S 92CA OF THE INCOME- TAX ACT, 1961 USING THE SET OF 5 UNCONTROLLED COMPARABLES AS ABOVE WITH AVERAGE PLI (OP/OC%) OF 8.21% AS UNDER: PARTICULARS AMOUNT RS. PRICE RECEIVED (EXPORT OF FINISHED GOODS RS.3,31,50 ,982/- IS 8.46% OF RS,39,19,74,355/- MFG SEGMENT REVENUE) 3,31,50,982/- ARM'S LENGTH MEAN MARGIN 8.21% THEREFORE ARM'S LENGTH PRICE IS 91.79% OF OPERATING REVENUE 3,04,29,286/- OPERATING COST (8.46% OF RS.18,15,89,467/- MFG SEGM ENT OPERATING 1,53,62,469/- SHORTFALL BEING ADJUSTMENT U/S 92CA 1,50,66,817/- 11. THEREFORE AN ADJUSTMENT OF RS.1,50,66,817/- IS MADE U/S 92CA OF THE INCOME-TAX ACT, 1961 IN THE CASE OF THE TAXPAYER IN RESPECT OF ITS INTERNATIONAL TRANSACTIONS OF MANUFA CTURING SEGMENT. 8. AGGRIEVED BY THE ORDER OF THE TPO WHOSE DIRECTIO NS WERE INCORPORATED IN THE ORDER OF ASSESSMENT OF THE AO, THE ASSESSEE PREFERRED APPEAL BEFORE THE LEARNED CIT(A). THE ASSESSEE FILE D DETAILED SUBMISSION ON 27 JUNE 2017 AND VARIOUS ADDITIONAL SUBMISSIONS ON 03 AUGUST 2017 AND 29 AUGUST 2017, BEFORE THE LEARNED CIT(A) TO JU STIFY THE ARM'S LENGTH NATURE OF THE MANUFACTURING ACTIVITY UNDERTAKEN BY THE ASSESSEE. IT(TP)A NO.2192/BANG/2017 PAGE 6 OF 39 9. THE CIT(A) DID NOT PROVIDE ANY RELIEF TO THE ASS ESSEE ON THE TRANSFER PRICING MATTER. THE APPROACH OF THE CIT(A) WHILE DI SPOSING ASSESSMENT, IN DETERMINING THE ALP OF THE ASSESSEE IN RELATION TO THE MANUFACTURING ACTIVITY WITH ITS AE CAN BE SUMMARISED AS BELOW:- THE CIT(A) DIRECTED THE TPO TO RE-COMPUTE THE OPERA TING MARGINS OF THE ASSESSEE AND THE COMPARABLE COMPANIES. THE CIT(A) DIRECTED THE AO/TPO TO FOLLOW A CONSISTE NT APPROACH IN TREATMENT OF FOREIGN EXCHANGE FLUCTUATION BY CON SIDERING THE SAME AS OPERATING IN NATURE FOR THE ASSESSEE AND TH E COMPARABLE COMPANIES. IN RESPECT OF THE OTHER GROUNDS, THE CIT(A) PRIMARI LY AGREED WITH THE TPO'S APPROACH AND DID NOT APPRECIATE THE ASSES SEE'S SUBMISSION. IN ADDITION TO THE ABOVE, THE CIT(A) DIRECTED THE T PO TO RE- COMPUTE THE ALP AND TP ADJUSTMENT ON THE ENTIRE MAN UFACTURING SEGMENT INSTEAD OF RESTRICTING THE ADJUSTMENT TO AE TRANSACTION. 10. AGGRIEVED AGAINST THE ORDER PASSED BY LEARNED C IT(A), THE ASSESSEE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNA L ON THE FOLLOWING GROUNDS OF APPEAL. GROUNDS OF GENERAL NATURE GROUND 1: THE ORDER OF THE LEARNED CIT(A) IS BASED ON INCORRECT INTERPRETATION OF LAW AND FACTS AND THEREFORE IS BA D IN LAW; GROUNDS OF APPEAL RELATING TO TRANSFER PRICING MATT ERS GROUND 2: THE LEARNED CIT(A) HAS ERRED IN MAKING AN ADDITION TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF ADJUSTMENT IN THE ARM'S LENGTH PRICE ('ALP') RELATING TO THE MANUFACTURING ACTIVITY ENTE RED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISES ('AES') THEREBY HOL DING THAT THE INTERNATIONAL TRANSACTIONS DO NOT SATISFY THE ARM'S LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME TAX ACT, 1961 (THE 'ACT' ); IT(TP)A NO.2192/BANG/2017 PAGE 7 OF 39 GROUND 3: THE LEARNED CIT(A) HAS ERRED IN LAW AND F ACTS BY UPHOLDING THE ACTION OF AOTTPO IN NOT ACCEPTING THE ECONOMIC ANAL YSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME-TAX RULES, 1962 ('RULES'), AND CONDUCTING A FRESH ECONOMIC ANALYSIS FOR THE DETERMINATION OF THE ARM'S LENGTH PRICE IN CONNECTION WITH THE IMPUGNED INTERNATIONAL TRANSACTION AND HOLDING THAT THE APPELLANT'S INTERNATIONAL TRANSACTION IS NOT AT ARM'S LENGTH. 11. ON GROUND NOS. 2 & 3, IT WAS SUBMITTED THAT ON A PLAIN READING OF SECTION 92C(3) OF THE ACT, IT IS CLEAR THAT THE AO CAN DETERMINE THE PRICE ONLY UNDER THE CIRCUMSTANCES ENUMERATED IN CLAUSES (A) TO (D) OF THIS SECTION. THE ASSESSEE SUBMITTED THAT IT WAS NOT PRO VIDED WITH ANY INFORMATION, BASED ON WHICH, IT WAS CONSIDERED NECE SSARY TO DETERMINE AN ALP DIFFERENT FROM THE ALP DETERMINED BY IT. ACCOR DINGLY, IN THE ABSENCE OF ANY INFORMATION TO THE CONTRARY, THE LEARNED TPO WAS NOT JUSTIFIED IN REFUTING THE TRANSFER PRICING ANALYSIS UNDERTAKEN B Y THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES. 12. WE DO NOT AGREE WITH THE SUBMISSION OF THE LD . COUNSEL FOR THE ASSESSEE AND ARE OF THE VIEW THAT THE REASONS GIVEN IN THE ORDER OF TPO SETS OUT THE GROUNDS FOR REJECTING THE TP STUDY OF ASSESSEE. IT IS A DIFFERENT ISSUE AS TO WHETHER THOSE REASONS ARE SUSTAINABLE. GROUND NOS.2 & 3 ARE THEREFORE DISMISSED. GROUND 4: THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY CONSIDERING THE FOLLOWING COMPANIES AS FUNCTIONALLY SIMILAR TO THE APPELLANT AND FAILED TO APPRECIATE THE FACT THAT THE FOLLOWING COMPANIES AR E NOT FUNCTIONALLY COMPARABLE: A) SHREE PACETRONIX LIMITED B) CONTINENTAL CONTROLS LIMITED C) HINDUSTAN SYRINGES AND MEDICAL DEVICES LIMITED D) CENTENIAL SURGICAL SUTURE LIMITED E) ALLENGERS MEDICAL SYSTEMS LIMITED GROUND 5: THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY CONSIDERING THE FOLLOWING COMPANIES AS FUNCTIONALLY DISSIMILAR TO IT(TP)A NO.2192/BANG/2017 PAGE 8 OF 39 THE APPELLANT AND FAILED TO APPRECIATE THE FACT THA T THE FOLLOWING COMPANIES ARE FUNCTIONALLY COMPARABLE: A) GANSONS LIMITED B) SPAN DIAGNOSTICS LIMITED S. NO. NAME OF THE COMPARABLE REASONS FOR REJECTION BY TPO APPELLANTS CONTENTIONS 1. GANSONS LIMITED FUNCTIONALLY DIFFERENT COMPANY IS A MANUFACTURER OF PROCESS EQUIPMENTS LIKE FLUID BED PROCESSING EQUIPMENT, HIGH SHEAR MIXER GRANULATOR, ETC. FOR VARIOUS INDUSTRIES LIKE PHARMACEUTICAL, FOODS, PETROCHEMICALS, ETC. THESE EQUIPMENTS ARE SIMILAR TO THE EQUIPMENTS MANUFACTURED BY THE APPELLANT. COMPANY IS PREDOMINANTLY ENGAGED IN MANUFACTURING ACTIVITIES AND HAS EARNED 98.57% OF ITS OPERATING REVENUE FROM THE SALE OF MANUFACTURED GOODS. 2. SPAN DIAGNOSTICS LTD FUNCTIONALLY DIFFERENT ACCORDING TO THE ANNUAL REPORT, THE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING, MARKETING AND TRADING OF DIAGNOSTICS REAGENTS, DIAGNOSTICS INSTRUMENTS AND ALLIED PRODUCTS. THE COMPANY OPERATES IN A SINGLE SEGMENT I.E. 'DIAGNOSTIC PRODUCTS'. COMPANY IS PREDOMINANTLY ENGAGED IN MANUFACTURING ACTIVITIES AND HAS EARNED IT(TP)A NO.2192/BANG/2017 PAGE 9 OF 39 98.66% OF ITS OPERATING REVENUE FROM THE SALE OF MANUFACTURED GOODS. 13. IT WAS ARGUED THAT SHREE PACETRONIX SHOULD BE REJECTED ON ACCOUNT OF THE DIFFERENCE IN PRODUCTS MANUFACTURED BY SHREE PACETRONIX VIS-A-VIS THE ASSESSEE. IT WAS ARGUED THAT AS PER THE ANNUAL REPORT OF THE COMPANY FOR FY 2011-12, THE COMPANY WAS ENGAGED IN MANUFACT URING AND MARKETING OF PACEMAKERS. SINCE SHREE PACETRONIX W AS ENGAGED IN MANUFACTURING LIFE SAVING DEVICES SUCH AS PACEMAKER WHICH IS USED TO SUPPORT OR ENHANCE THE FUNCTIONS OF HEART BY IMPLAN TING IN THE HEART, THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE ENGAGED IN MANUFACTURING OF LABORATORY AND PROCESSING EQUIP MENTS WHICH ARE COMPLETELY DIFFERENT LINE OF PRODUCTS. 14. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. A R AND ARE OF THE VIEW THAT THE CONTENTIONS ARE NOT ACCEPTABLE. UNDE R RULE 10B(2) OF THE INCOME-TAX RULES [THE RULES], COMPARABILITY OF THE INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION HAS TO BE JUDGED K EEPING IN MIND THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRE D IN EITHER TRANSACTION. RULE 10B(2) OF THE INCOME TAX RULES, 1962 (RULES) S PECIFICALLY PROVIDES THAT FOR THE PURPOSES OF SUB-RULE (1) OF RULE 10B, THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRAN SFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSE TS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; IT(TP)A NO.2192/BANG/2017 PAGE 10 OF 39 15. THE OECD GUIDELINES ON THE ASPECT OF SPECIFIC C HARACTERISTICS OF THE PROPERTY TRANSFERRED IN EITHER TRANSACTION HAS TAKEN THE VIEW THAT DIFFERENCES IN THE SPECIFIC CHARACTERISTICS OF PROP ERTY OR SERVICES OFTEN ACCOUNT, AT LEAST IN PART, FOR DIFFERENCES IN THEIR VALUE IN THE OPEN MARKET. THEREFORE, COMPARISONS OF THESE FEATURES MAY BE USE FUL IN DETERMINING THE COMPARABILITY OF CONTROLLED AND UNCONTROLLED TRANSA CTIONS. THE SAID GUIDELINE ALSO SAYS THAT DIFFERENCES IN THE CHARACT ERISTICS OF PROPERTY OR SERVICES ARE ALSO LESS SENSITIVE IN THE CASE OF THE TRANSACTIONAL PROFIT METHODS THAN IN THE CASE OF TRADITIONAL TRANSACTION METHODS. PRODUCT DIFFERENCE TO THE EXTENT THEY AFFECT COMPARABILITY ON FUNCTIONS PERFORMED, ASSETS USED AND/OR RISKS ASSUMED BY THE TESTED PART Y, WOULD BE RELEVANT. IN PRACTICE, COMPARABILITY ANALYSES OFTEN PUT MORE EMPHASIS ON FUNCTIONAL SIMILARITIES THAN ON PRODUCT SIMILARITIES. IT MAY B E ACCEPTABLE TO BROADEN THE SCOPE OF THE COMPARABILITY ANALYSIS TO INCLUDE TRAN SACTIONS INVOLVING PRODUCTS THAT ARE DIFFERENT, BUT FUNCTIONALLY SIMIL AR. THE ACCEPTANCE OF SUCH AN APPROACH DEPENDS ON THE EFFECTS OF THE PRODUCT D IFFERENCES ON THE RELIABILITY OF THE COMPARISON AND ON WHETHER OR NOT MORE RELIABLE DATA ARE AVAILABLE. IN OTHER WORDS, IT CANNOT BE SAID THAT P RODUCT DIFFERENCE IS A FACTOR WHICH NEEDS TO BE EITHER IGNORED OR STRICTLY FOLLOWED. IT DEPENDS ON FACTS AND CIRCUMSTANCES OF EACH CASE. 16. IN THE PRESENT CASE, THE FACT THAT THE PRODUCT MANUFACTURED BY THE TESTED PARTY I.E. THE ASSESSEE VIZ., LABORATORY AND PROCESSING EQUIPMENT AND THE COMPARABLE COMPANY I.E., SHREE PACETRONIX V IZ., MANUFACTURE OF PACEMAKER FOR IMPLANTING IN HEART, CAN BE CATEGORIZ ED AS MANUFACTURE OF EQUIPMENT. THE RELEVANCY OF THE END USE OF EQUIPM ENT WHETHER BY CONSUMER OR AS COMPONENT MAY BE RELEVANT WHILE EVAL UATING FUNCTIONAL DISSIMILARITY, ASSETS EMPLOYED AND RISKS ASSUMED BU T NOT ON THE BASIS OF IT(TP)A NO.2192/BANG/2017 PAGE 11 OF 39 CHARACTERISTICS OF THE PROPERTY TRANSFERRED UNDER R ULE 10B(2)(B) OF THE RULES. 17. FOR THE REASONS GIVEN ABOVE, WE ARE OF THE VIE W THAT SHREE PACETRONIX WAS RIGHTLY NOT EXCLUDED FOR THE PURPOSE OF COMPARISON ON THE GROUND OF PRODUCT DIFFERENCE. 18. THE GROUNDS ON WHICH ASSESSEE SEEKS EXCLUSION OF (I) CONTINENANTAL CONTROLS LIMITED; (II) HINDUSTAN SYRI NGES AND MEDICAL DEVICES LIMITED; (III) CENTENIAL SURGICAL SUTURE LI MITED; (IV) ALLENGERS MEDICAL SYSTEMS LIMITED ARE IDENTICAL TO THE GROUND ON WHICH THE ASSESSEE SOUGHT EXCLUSION OF SHREE PACETRONIX. FOR THE REAS ONS GIVEN ABOVE, WE ARE OF THE VIEW THAT THE REVENUE AUTHORITIES WERE J USTIFIED IN RETAINING THE AFORESAID COMPANIES ARE COMPARABLE COMPANIES AND NE ED NOT BE EXCLUDED ON THE GROUND THAT THEY WERE MANUFACTURING DIFFEREN T PRODUCTS COMPARED TO THE ASSESSEE. 19. THE ASSESSEE SOUGHT INCLUSION OF M/S.GANSON LI MITED AND SPAN DIAGNOSTICS LIMITED WHICH WAS A COMPARABLE CHOSEN B Y IT IN ITS TRANSFER PRICING STUDY. THE TPO TOOK THE VIEW THAT THESE CO MPANIES ARE INTO ENGINEERING AND MANUFACTURE OF DIAGNOSTIC PRODUCTS AND THEREFORE CANNOT BE REGARDED AS COMPARABLE. THE CIT(A) UPHELD THE V IEW OF THE TPO. FOR THE REASONS GIVEN FOR REJECTING THE REQUEST OF THE ASSESSEE FOR EXCLUDING COMPARABLE COMPANIES CHOSEN BY THE TPO IN THE EARLI ER PARAGRAPHS, WE ARE OF THE VIEW THAT THESE TWO COMPANIES SHOULD BE INCLUDED IN THE LIST OF COMPARABLE COMPANIES. THE LEARNED DR HAS MADE SUBM ISSION BEFORE US THAT THESE TWO COMPANIES MANUFACTURE PRODUCTS THAT ARE NOT ULTIMATELY CONSUMED BUT USED AS COMPONENTS OF OTHER PRODUCTS. SHE POINTED OUT THAT THE ASSESSEE IN ITS TP STUDY FOR AY 13-14 HAS ADOPT ED SUCH AN APPROACH WHILE EXCLUDED A COMPANY CORE MEDICALS. WE HAVE AL READY HELD THAT SUCH IT(TP)A NO.2192/BANG/2017 PAGE 12 OF 39 BIFURCATION CAN BE SEEN ONLY AT THE STAGE OF FUNCTI ONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED AND NOT AT THE STAGE OF CHARACTERISTICS OF PROPERTY TRANSFERRED IN EITHER TRANSACTION. WE THE REFORE DIRECT THAT THESE TWO COMPANIES BE INCLUDED IN THE LIST OF COMPARABLE COMPANIES FOR THE PURPOSE OF COMPARISON. GR.NO.4 & 5 ARE DECIDED ACCO RDINGLY. GROUND 6: THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY TREATING FOREIGN EXCHANGE FLUCTUATION AS OPERATING IN NATURE FOR THE APPELLANT AS WELL AS THE COMPARABLE COMPANIES. 20. ON GROUND NO.6, THOUGH THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FA CTS, BY CONSIDERING FOREIGN EXCHANGE FLUCTUATION AS OPERATING IN NATURE WHILE COMPUTING THE OPERATING MARGIN OF THE ASSESSEE AND THE COMPARABLE COMPANIES, THE LIMITED PRAYER MADE AT THE CONCLUSION ON THIS ISSUE WAS RESTRICTED TO A DIRECTION TO THE TPO TO APPLY THE PRINCIPLE OF TREA TING FOREIGN EXCHANGE FLUCTUATION AS OPERATING IN NATURE UNDER BOTH SITUA TIONS, WHEN THERE IS A LOSS AS WELL AS WHEN THERE IS A GAIN. THE NEXT PRA YER WAS TO APPLY THE SAME PRINCIPLE TO DETERMINE THE PROFIT MARGINS OF T HE ASSESSEE AND THE COMPARABLE COMPANIES. THE LIMITED PRAYER SO MADE I S IN ACCORDANCE WITH THE SETTLED LEGAL POSITION IN THIS REGARD AND THE T PO IS DIRECTED TO COMPUTE THE PROFIT MARGINS OF ASSESSEE AND THE COMPARABLE C OMPANIES AS PRAYED FOR BY THE LD. COUNSEL FOR THE ASSESSEE. GROUND NO .6 IS DECIDED ACCORDINGLY. GROUND NO.7: THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY UPHOLDING THE ACTION OF THE AO/TPO IN REJECTING CAP ACITY ADJUSTMENT TO ACCOUNT FOR DIFFERENCES IN CAPACITY UTILIZATION OF THE APPELLANT VIS--VIS THE COMPARABLE COMPANIES. 21. THE ASSESSEE IN ITS TP DOCUMENTATION AS WELL AS BEFORE THE TPO AND THE CIT(A), HIGHLIGHTED THE FACT THAT THERE ARE SIGNIFICANT DIFFERENCES IN THE CAPACITY UTILIZATION BETWEEN THE ASSESSEE VIS- -VIS THE COMPARABLES. IT IT(TP)A NO.2192/BANG/2017 PAGE 13 OF 39 WAS ALSO BROUGHT TO THE NOTICE OF THE TPO AND THE C IT(A) THAT THE ASSESSEE WAS INCORPORATED IN FY 2008-09 AND FY 2011-12 (I.E. , FY RELEVANT TO THE IMPUGNED AY) WAS JUST THE THIRD YEAR OF COMMERCIAL OPERATION OF THE ASSESSEE DURING WHICH THE INSTALLED CAPACITY WAS UN DER-UTLIZED TO A SIGNIFICANT EXTENT. THE ASSESSEE PLEADED BEFORE TH E TPO AND CIT(A) TO PROVIDE AN ADJUSTMENT FOR IDLE CAPACITY. HOWEVER, THE TPO/CIT(A) DID NOT ALLOW ANY ADJUSTMENT TO ACCOUNT FOR THE DIFFERENCES IN THE CAPACITY UTILIZATION BY THE ASSESSEE VIS--VIS THE COMPARABL ES WHILE COMPUTING PROFIT MARGIN OF ASSESSEE AS WELL AS THE COMPARABLE COMPAN IES. 22. WE HAVE HEARD THE SUBMISSIONS OF THE ASSESSEE A ND THE LD. DR ON THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO.7. W E SHALL FIRST SEE THE STATUTORY PROVISIONS RELEVANT TO THE ISSUE. RULE 10B(1)(E) OF THE RULES STATES THAT ADJUSTMENTS SHOULD BE MADE TO ACCOUNT F OR: '...THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIO NAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEE N THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET' 23. RULE 10B(2) OF THE RULES PROVIDES COMPARABILITY OF AN INTERNATI ONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION NEEDS TO BE JUDGED WITH REFERENCE TO CERTAIN SPECIFIED FACTORS. ONE SUCH FA CTOR IS CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE P ARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SI ZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOU R AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. 24. RULE 10B(3) OF THE RULES PROVIDE THAT: 'AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFF ERENCES, IF ANY, IT(TP)A NO.2192/BANG/2017 PAGE 14 OF 39 BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIK ELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE M ATERIAL EFFECTS OF SUCH DIFFERENCES.' 25. AS PER SECTION 92C OF THE ACT, ALP IS REQUIRED TO BE COMPUTED USING ANY OF THE GIVEN SIX METHODS AND IN THE MANNER AS I S PRESCRIBED IN RULE 10B OF THE RULES. RULE 10B IN TURN STATES THAT THE MOST APPROPRIATE METHOD WOULD BE ONE WHICH INTER ALIA PROVIDES THE MOST REL IABLE MEASURE OF ALP, AND ONE OF THE IMPORTANT FACTORS TO BE TAKEN INTO A CCOUNT HEREIN IS THE ABILITY TO MAKE RELIABLE AND ACCURATE ADJUSTMENTS. 26. THE OECD GUIDELINES ON THIS ASPECT IS AS FOLLOW S:- PARA 1.35 OF THE OECD GUIDELINES STATES AS FOLLOWS: 'WHERE THERE ARE DIFFERENCES BETWEEN THE SITUATIONS BEING COMPARED THAT COULD MATERIALLY AFFECT THE COMPARISO N, COMPARABILITY ADJUSTMENTS MUST BE MADE, WHERE POSSI BLE, TO IMPROVE THE RELIABILITY OF THE COMPARISON. THEREFOR E, IN NO EVENT CAN UNADJUSTED INDUSTRY AVERAGE RETURNS THEMSELVES ESTABLISH ARM'S LENGTH CONDITIONS' PARA 1.36 OF THE OECD GUIDELINES STATES AS FOLLOWS: '. MATERIAL DIFFERENCES BETWEEN THE COMPARED TRANS ACTIONS OR ENTERPRISES SHOULD BE TAKEN INTO ACCOUNT. IN ORDER TO ESTABLISH THE DEGREE OF ACTUAL COMPARABILITY AND THEN TO MAKE APPROPRIATE ADJUSTMENTS TO ESTABLISH ARM'S LENGTH CONDITIONS (O R A RANGE THEREOF), IT IS NECESSARY TO COMPARE ATTRIBUTES OF THE TRANSACTIONS OR ENTERPRISES THAT WOULD AFFECT CONDITIONS IN ARM' S LENGTH DEALINGS. ATTRIBUTES THAT MAY BE IMPORTANT INCLUDE THE CHARACTERISTICS OF THE PROPERTY OR SERVICES TRANSFE RRED, THE FUNCTIONS PERFORMED BY THE PARTIES (TAKING INTO ACC OUNT ASSETS USED AND RISKS ASSUMED), THE CONTRACTUAL TERMS, THE ECONOMIC IT(TP)A NO.2192/BANG/2017 PAGE 15 OF 39 CIRCUMSTANCES OF THE PARTIES, AND THE BUSINESS STRA TEGIES PURSUED BY THE PARTIES.' FURTHER, PARA 2.74 OF THE OECD GUIDELINES WHILE LAY ING DOWN THE COMPARABILITY CRITERIA TO BE ADOPTED WHILE APPL YING THE TRANSACTION NET MARGIN METHOD STATES AS FOLLOWS: '.. THUS WHERE THE DIFFERENCES IN THE CHARACTERIST ICS OF THE ENTERPRISES BEING COMPARED HAVE A MATERIAL EFFECT O N THE NET MARGINS BEING USED, IT WOULD NOT BE APPROPRIATE TO APPLY THE TRANSACTIONAL NET MARGIN METHOD WITHOUT MAKING ADJU STMENTS FOR SUCH DIFFERENCES. THE EXTENT AND RELIABILITY OF THO SE ADJUSTMENTS WILL AFFECT THE RELATIVE RELIABILITY OF THE ANALYSI S UNDER THE TRANSACTIONAL NET MARGIN METHOD' (EM PHASIS SUPPLIED) 27. US TRANSFER PRICING REGULATIONS ON THIS ASPECT IS AS FOLLOWS:- IN ADDITION, THE US TRANSFER PRICING REGULATIONS, U /S 482 OF THE INTERNAL REVENUE CODE (HEREINAFTER REFERRED TO AS ' THE US REGULATIONS') ALSO SUPPORT THE ABOVE. REGULATION 1. 482-1(D)(2) OF THE US REGULATION STATES AS FOLLOWS: 'IN ORDER TO BE CONSIDERED COMPARABLE TO A CONTROLL ED TRANSACTION, AN UNCONTROLLED TRANSACTION NEED NOT B E IDENTICAL TO THE CONTROLLED TRANSACTION, BUT MUST BE SUFFICIENTL Y SIMILAR THAT IT PROVIDES A RELIABLE MEASURE OF AN ARM'S LENGTH R ESULT. IF THERE ARE MATERIAL DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS, ADJUSTMENTS MUST BE MAD E IF THE EFFECT OF SUCH DIFFERENCES ON PRICES OR PROFITS CAN BE ASCERTAINED WITH SUFFICIENT ACCURACY TO IMPROVE THE RELIABILITY OF THE RESULTS. FOR PURPOSES OF THIS SECTION, A MAT ERIAL DIFFERENCE IS ONE THAT WOULD MATERIALLY AFFECT THE MEASURE OF AN ARM'S LENGTH RESULT UNDER THE METHOD BEING APPLIED. ' 28. THE INDIAN TRANSFER PRICING REGULATIONS, OECD G UIDELINES AND THE US TRANSFER PRICING REGULATIONS CALL FOR AN ADJUSTM ENT TO BE MADE IN CASE OF MATERIAL DIFFERENCES IN THE TRANSACTIONS OR THE ENT ERPRISES BEING COMPARED SO AS TO ARRIVE AT A MORE RELIABLE ARM'S LENGTH PRI CE/ MARGIN. WHILE THE IT(TP)A NO.2192/BANG/2017 PAGE 16 OF 39 INDIAN TRANSFER PRICING REGULATIONS REFER TO THE AD JUSTMENTS ON UNCONTROLLED TRANSACTIONS, HOWEVER THE SAME HAS TO BE READ WITH RULE10B(3) OF THE RULES WHICH CLEARLY EMPHASIZES THE NECESSITY AND CO MPULSION OF UNDERTAKING ADJUSTMENTS. HENCE IN CASE APPROPRIATE ADJUSTMENTS CANNOT BE MADE TO THE UNCONTROLLED TRANSACTION, DUE TO LAC K OF DATA, THEN IN ORDER TO READ THE PROVISIONS OF TRANSFER PRICING REGULATI ONS IN HARMONY, THE ADJUSTMENTS SHOULD BE MADE ON THE TESTED PARTY. IN THE FOLLOWING DECISIONS IT HAS BEEN HELD THAT ADJUSTMENT TO THE PROFIT MARG INS HAVE TO BE MADE ON ACCOUNT OF UNDERUTILIZATION OF CAPACITY: (I) IN THE CASE OF M/S. MANDO INDIA STEERING SYSTEMS PRIVATE LIMITED V S ASSISTANT COMMISSIONER OF INCOME TAX, [I.T.A. NO. 2 092/MDS 12012], THE TRIBUNAL UPHELD THE CONTENTION OF THE TAXPAYER FOR MAKING A SUITABLE ADJUSTMENT ON ACCOUNT OF IDLE CAPACITY FOR THE PURPOSE OF MARGIN COMPUTATION. THE RELEVANT EXTRACT IS REPRODU CED AS BELOW: '10. . WE ARE OF THE CONSIDERED VIEW THAT UNDER - UTILIZATION OF PRODUCTION CAPACITY IN THE INITIAL Y EARS IS A VITAL FACTOR WHICH HAS BEEN IGNORED BY THE AUTHORITIES BE LOW WHILE DETERMINING THE ALP COST. THE TPO SHOULD HAVE MADE ALLOWANCE FOR THE HIGHER OVERHEAD EXPENDITURE DURIN G THE INITIAL PERIOD OF PRODUCTION.' (II) IN THE RULING OF DCIT VS PANASONIC AVC NETWORKS INDIA CO LTD (I.T.A. NO.: 4620/DE1/2011) , IT WAS HELD THAT:- '5. .. CAPACITY UNDERUTILIZATION BY ENTERPRISES I S CERTAINLY AN IMPORTANT FACTOR AFFECTING NET PROFIT MARGIN IN THE OPEN MARKET BECAUSE LOWER CAPACITY UTILIZATION RESULTS IN HIGHE R PER UNIT COSTS, WHICH, IN TURN, RESULTS IN LOWER PROFITS. OF COURSE, THE FUNDAMENTAL ISSUE, SO FAR AS ACCEPTABILITY OF SUCH ADJUSTMENTS IS CONCERTED, IS REASONABLE ACCURACY EM BEDDED IN THE MECHANISM FOR SUCH ADJUSTMENTS, AND AS LONG AS SUCH IT(TP)A NO.2192/BANG/2017 PAGE 17 OF 39 AN ADJUSTMENT MECHANISM CAN BE FOUND, NO OBJECTION CAN BE TAKEN TO THE ADJUSTMENT .' (III) IN THE CASE OF BIESSE MANUFACTURING COMPANY LIMITED (IT(TP) A NOS. 97 & 493/BANG/2015) FOR AY 2010-11, THE TRIBUNAL HELD AS FOLLOWS: '10.4.1. WE HAVE HEARD THE RIVAL CONTENTIONS AND PE RUSED AND CAREFULLY CONSIDERED THE SUBMISSIONS MADE AND MATER IAL ON RECORD; INCLUDING THE JUDICIAL PRONOUNCEMENTS CITED . THE ISSUE FOR CONSIDERATION IS WHETHER ADJUSTMENT FOR UNDER-U TILISATION OF CAPACITY IS ALLOWABLE IN THE CASE ON HAND AND IF SO , THE MANNER OF COMPUTATION THEREOF AND THE QUANTUM OF ADJUSTMEN T...... 10.4.5 IN THE ABOVE CITED CASE OF THE MUMBAI TRIBUN AL I.E. PETRO ARALDITE P. LTD. (SUPRA), THE TRIBUNAL HAS UPHELD T HE PRINCIPLE THAT ADJUSTMENT FOR CAPACITY UNDERUTILISATION CAN B E GRANTED .. FOLLOWING THE DECISION OF THE ITAT, MUMBAI I N THE CASE OF PETRO ARALDITE P. LTD. (SUPRA), WE HOLD TH AT ANY ADJUSTMENT FOR CAPACITY UNDERUTILISATION CAN BE GRA NTED.....' (IV) IN THE RECENT CASE OF GE INTELLIGENT PLATFORM PRIVATE LIMITED (IT(TP)A NO. 148/BANG/2015 AND 164/BANG/2015) FOR AY 2010-11 WAS HELD AS FOLLOWS: '8 . NOW THE LAW IS QUITE SETTLED TO THE EXTEN T THAT ONCE THERE IS UNUTILIZED CAPACITY OR MEN POWER, SUCH UNDERUTILIZATION IMPACTS MARGIN AND THEREFORE, THE ADJUSTMENT SHOULD BE MADE WHILE COMPUTING THE ALP IF THE UNDERUTILIZATION IS MORE THAN AVERAGE UNDERUTIL IZATION OF THE INDUSTRY THEN NECESSARY ADJUSTMENT IS REQUIRED TO BE MADE TO THE MARGIN OF COMPUTING ALP......' 29. MOREOVER, THE ABOVE ARGUMENT OF THE ASSESSEE FO R GRANT OF CAPACITY UTILIZATION ADJUSTMENT IS ALSO SUPPORTED BY THE FOL LOWING DECISION OF BANGALORE ITAT IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD (ITA NO.1231/BANG/2010) . RELEVANT EXTRACT OF THE DECISION IS UNDER:- IT(TP)A NO.2192/BANG/2017 PAGE 18 OF 39 '15.2 WE AGREE WITH THIS CONTENTION OF THE COUNSEL FOR THE ASSESSEE. ALL THE COMPARABLES HAVE TO BE COMPARED O N SIMILAR STANDARDS AND THE ASSESSEE CANNOT BE PUT IN A DISADVANTAGEOUS POSITION, WHEN IN THE CASE OF OTHER COMPANIES ADJUS TMENTS FOR UNDER UTILIZATION OF MANPOWER IS GIVEN. THE ASSESSE E SHOULD ALSO BE GIVEN ADJUSTMENT FOR UNDER UTILIZATION OF I TS INFRASTRUCTURE . THE AO SHALL CONSIDER THIS FACT ALSO WHILE DETERMINING THE ALP AND MAKE THE TP ADJUSTMENTS. WI TH THESE DIRECTIONS, THE APPEAL OF THE ASSESSEE IS DISPOSED OF. 30. THE RELIABILITY AND ACCURACY OF ADJUSTMENTS WOU LD LARGELY DEPEND ON AVAILABILITY OF RELIABLE AND ACCURATE DATA. FOR CER TAIN TYPES OF ADJUSTMENTS, RELEVANT DATA FOR COMPARABLES MAY EITHER NOT BE AVA ILABLE IN PUBLIC DOMAIN OR MAY NOT BE RELIABLY DETERMINABLE BASED ON INFORM ATION AVAILABLE IN PUBLIC DOMAIN, WHEREAS, IT MAY BE POSSIBLE TO MAKE EQUALLY RELIABLE AND ACCURATE ADJUSTMENTS ON THE TESTED PARTY (WHOSE DATA WOULD G ENERALLY BE EASILY ACCESSIBLE). 31. IN SUCH A SCENARIO, ONE HAS TO RESORT TO THE PROVI SIONS OF RULE 10B(3)(II) WHICH PROVIDES FOR MAKING REASONABLY AC CURATE ADJUSTMENTS FOR ELIMINATING ANY MATERIAL DIFFERENCES BETWEEN THE TW O TRANSACTIONS BEING COMPARED. THE PURPOSE OR INTENT OF THE COMPARABILI TY ANALYSIS IS TO EXAMINE AS TO WHETHER OR NOT, THE VALUES STATED FO R THE INTERNATIONAL TRANSACTIONS ARE AT ALP I.E., WHETHER THE PRICE CHA RGES IS COMPARABLE TO THE PRICE CHARGES UNDER AN UNCONTROLLED TRANSACTION OF SIMILAR NATURE. THE REGULATIONS DONT RESTRICT OR PROVIDE THAT THE ADJU STMENTS CANNOT BE MADE ON THE RESULTS OF THE TESTED PARTY. THEREFORE, KEE PING IN MIND THE AFORESAID OBJECTIVE, THE NET PROFIT MARGIN OF THE TESTED PART Y DRAWN FROM ITS FINANCIAL ACCOUNTS CAN BE SUITABLY ADJUSTED TO FACILITATE ITS COMPARISON WITH OTHER UNCONTROLLED ENTITIES/TRANSACTIONS AS PER SUB-CLAUS E (I) OF RULE 10B(1)(E) OF THE RULES ITSELF. THE ABSENCE OF SPECIFIC PROVISIO N IN RULE 10B(1)(E)(III) OF IT(TP)A NO.2192/BANG/2017 PAGE 19 OF 39 THE RULES DOES NOT IMPEDE THE ADJUSTMENT OF THE PRO FIT MARGIN OF TESTED PARTY. THE ABOVE VIEW HAS ALSO BEEN UPHELD IN THE FOLLOWING DECISIONS:- CAPEGEMINI INDIA PVT. LTD. (ITA NO.7861/MUM/2011) DEMANG CRANES & COMPONENTS (INDIA) PVT LTD. [49 SO T 610 (PUNE)] 32. AS FAR AS DATA OF COMPARABLE COMPANIES ON CAPAC ITY UTILIZATION BEING NOT AVAILABLE IN PUBLIC DOMAIN IS CONCERNED, IT IS PRACTICALLY NOT POSSIBLE TO OBTAIN DATA ON CAPACITY UTILIZATION OF COMPARABLE C OMPANIES AND CONSEQUENTLY COMPUTE ADJUSTMENT ON THE COMPARABLE C OMPANIES, THE OPERATING COST OF THE TESTED PARTY IS ADJUSTED FOR CAPACITY UTILIZATION ADJUSTMENT. 33. THE ASSESSEE HAS UNDER-UTILIZED CAPACITY DURING THE SUBJECT AY AND IS ACCORDINGLY FACTUALLY AND LEGALLY ELIGIBLE TO AN ADJUSTMENT FOR THE SAME. THEREFORE, SUCH A BENEFIT CANNOT BE DENIED TO THE A SSESSEE ONLY FOR THE REASON THAT THE DATA ABOUT COMPARABLE COMPANIES IS NOT AVAILABLE. REQUIRING THE ASSESSEE TO PRODUCE SUCH A DATA WHICH IS NOT AVAILABLE IN PUBLIC DOMAIN WOULD TANTAMOUNT TO REQUIRING THE APP ELLANT TO PERFORM AN IMPOSSIBLE TASK. THE ONLY WAY TO GET THE DATA IN T HE CURRENT CASE, WOULD BE WHERE THE TPO COLLATES THE SAME FROM THE COMPARABLE COMPANIES BY EXERCISING HIS POWERS UNDER SECTION 133(6) OF THE A CT. THE RELEVANT EXTRACTS OF THE SECTION ARE AS UNDER:- '(6) REQUIRE ANY PERSON, INCLUDING A BANKING COMPAN Y OR ANY OFFICER THEREOF, TO FURNISH INFORMATION IN RELATION TO SUCH POINTS OR MATTERS, OR TO FURNISH STATEMENTS OF ACCOUNTS AND A FFAIRS VERIFIED IN THE MANNER SPECIFIED BY THE ASSESSING OFFICER, THE DEPUTY COMMISSIONER (APPEALS), THE JOINT COMMISSIONER OR T HE COMMISSIONER (APPEALS), GIVING INFORMATION IN RELAT ION TO SUCH POINTS OR MATTERS AS, IN THE OPINION OF THE ASSESSI NG OFFICER, THE DEPUTY COMMISSIONER (APPEALS), THE JOINT COMMISSION ER OR THE IT(TP)A NO.2192/BANG/2017 PAGE 20 OF 39 COMMISSIONER (APPEALS), WILL BE USEFUL FOR, OR RELE VANT TO, ANY ENQUIRY OR PROCEEDING UNDER THIS ACT :' 34. IN THIS REGARD, WE FIND THAT THE MUMBAI ITAT IN CASE OF M/S KIARA JEWELLERY P.LTD. (I.T.A.NO.8109/MUM/2011), HAS DIRECTED THE AO/ TPO TO OBTAIN THE EXACT DETAILS OF CAPACITY UTILIZATION OF COMPARABLE COMPANIES, IF NOT AVAILABLE IN PUBLIC DOMAIN. THE RELEVANT EXTRAC T OF THE AFORESAID DECISION IS AS UNDER:- '11. KEEPING IN VIEW THE DECISION OF THE TRIBUNAL IN THE CASE OF PETRO ARALDITE (P) LTD (SUPRA) LAYING DOWN THE GUID ELINES ON THE ISSUE OF CAPACITY UTILIZATION, WE CONSIDER IT APPRO PRIATE TO RESTORE THIS ISSUE RELATING TO ADJUSTMENT ON ACCOUNT OF CAP ACITY UTILIZATION IN THE CASE OF ASSESSEE COMPANY TO THE FILE OF AO/T PO FOR DECIDING THE SAME AFRESH KEEPING IN VIEW THE SAID GUIDELINES . IF THE EXACT DETAILS OF CAPACITY UTILIZATION OF THE COMPARABLE C OMPANIES ARE NOT AVAILABLE IN THE PUBLIC DOMAIN, THE AO/TPO IS D IRECTED TO OBTAIN THE SAME DIRECTLY FROM THE CONCERNED PARTIES AND TO DECIDE THIS ISSUE AFRESH AFTER GIVING ASSESSEE AN O PPORTUNITY OF BEING HEARD .' (EMPHASIS SUPPLIED) 35. ACCORDINGLY, WE DIRECT THE TPO TO EXERCISE POWE RS UNDER SECTION 133(6) OF THE ACT TO CALL FOR INFORMATION ON CAPACI TY UTILIZATION OF THE COMPARABLE COMPANIES SUCH AS INSTALLED CAPACITY, ACTUAL PRODUCTION IN UNITS, BREAK-UP OF FIXED COST AND VARIABLE COST; SEGMENTAL/ PRODUCT WISE INFORMATION, IF ANY. 36. POST OBTAINING THE INFORMATION, HE IS REQUESTED TO PROVIDE THE ASSESSEE AN OPPORTUNITY BY SHARING THE DETAILS SO O BTAINED, AND ACCORDINGLY, GRANT THE ADJUSTMENT FOR CAPACITY UNDE R-UTILIZED. GROUND NO.7 IS DECIDED ACCORDINGLY. IT(TP)A NO.2192/BANG/2017 PAGE 21 OF 39 GROUND 8: THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY UPHOLDING THE ACTION OF THE AO/TPO IN NOT ALLOWING SUITABLE A DJUSTMENT TO ACCOUNT FOR THE DIFFERENCES IN THE WORKING CAPITAL POSITION OF THE APPELLANT VIS--VIS THE COMPARABLE COMPANIES. 37. THE ASSESSEE USED THE TNMM IN DETERMINING THE A LP FOR THE INTERNATIONAL TRANSACTION ENTERED INTO DURING THE F Y 2011-12. THE PROVISIONS OF RULE 10B OF THE RULES PRESCRIBES THE METHODS TO BE USED AND THE MANNER IN WHICH IT IS TO BE USED IN DETERMINING THE ALP RELATING TO ANY INTERNATIONAL TRANSACTION. THE RULES I.E., RULE 10 B(1)(E)(III), PROVIDE THAT A TRANSACTION CAN BE CONSIDERED AS COMPARABLE, IF REA SONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE DIFFERENCES TH AT ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST OR PROFIT BETWE EN A CONTROLLED AND AN UNCONTROLLED TRANSACTION. 38. ACCORDING TO THE ASSESSEE, THERE WERE SIGNIF ICANT DIFFERENCES IN WORKING CAPITAL BETWEEN THE TESTED PARTY, I.E. THE ASSESSEE AND THE COMPARABLE COMPANIES, AN APPROPRIATE ADJUSTMENT MAY BE REQUIRED FOR SUCH DIFFERENCE IN DETERMINING THE ARM'S LENGTH PRI CE IN VIEW OF THE- FOLLOWING:- THE EXTENT TO WHICH COMPANIES EXTEND AND RECEIVE C REDIT IN THE FORM OF ACCOUNTS PAYABLE AND RECEIVABLE AFFECTS THEIR SALES AND COST OF SALES. SELLERS EXTEND CREDIT TO PURCHASERS IN THE FORM OF AN ACCOUNTS RECEIVABLE BALANCE. SELLERS, THEREFORE, PERFORM TWO FUNCTIONS I.E. THEY SELL A PRODUCT/SERVICE AND EXTEND CREDIT. THE SELLING PRICE INCORPORATES TWO ELEMENTS: THE P RICE OF THE PRODUCT AND THE TIME VALUE OF MONEY LENT. IF A COMPANY WERE TO REQUIRE ALL SALES ON A CASH BASIS, IT WOULD BE WILLING TO ACCEPT A SL IGHTLY LOWER PRICE FOR ITS PRODUCTS THAN IF THE COMPANY WERE TO ALLOW ITS CUST OMERS TO PAY AT A LATER DATE. THE COST OF GOODS/SERVICE SOLD/RENDERED REFLECTS N OT ONLY THE PURCHASE PRICE OF GOODS BUT ALSO THE TIME VALUE FOR THE LOAN FROM THEIR SUPPLIERS. DIFFERENCE IN THE TERMS OF SALE AND PURCHASE CAN AF FECT COMPARISONS. IT(TP)A NO.2192/BANG/2017 PAGE 22 OF 39 39. THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING DECISIONS IN SUPPORT OF ITS CONTENTION THAT A WORKING CAPITAL ADJUSTMENT IS WARRANTED:- (I) IN THE CASE OF DEMAG CRANES & COMPONENTS (INDIA) PVT. LIMITED (ITA NO.120/PN/2011) , THE PUNE TRIBUNAL HELD AS FOLLOWS:- 'IN OUR OPINION, IT IS THE DUTY OF THE TPO TO APPLY THE PROVISIONS OF RULE 10B(1)(E) TO ESTABLISH THE ALP IN RELATION TO INTERNATIONAL TRANSACTION AS PER THE TNMM, WHICH IS AN UNDISPUTED METHOD FOUND APPLICABLE TO THE PRESENT C ASE BY BOTH THE PARTIES . IT IS A SETTLED ACCOUNTING PRINCIPLE THAT THE NET MARGINS CAN BE INFLUENCED BY SOME OF THE SAME FACTO RS WHICH CAN INFLUENCE PRICE OR GROSS MARGINS. FURTHER, IT IS THE REQUIREMENT OF THE RULES / PROVISIONS THAT ANY DIFFERENCE WHICH IS LIKELY TO MATERIALLY AFFECT THE NPM IN OPEN MARKET HAS TO BE ELIMINATED. TPO MUST KNOW THAT THE TNMM VISUALIZES THE UNDERTAK ING OF THE THOROUGH COMPARABILITY ANALYS AND ELIMINATION OF TH E DIFFERENCES THROUGH THE REQUISITE ADJUSTMENTS .. THEREFORE , WE DISMISS THE REVENUE'S CONTENTION THAT NO FURTHER AD JUSTMENT IF ANY IS ENTERTAINED ONCE THE COMPARABLES ARE SUPPLIE D BY THE ASSESSEE AND WHEN THEY ARE ACCEPTED BY THE TPO . THUS, WORKING CAPITAL IS A FACTOR WHICH INFLUENCE THE PRICE IN TH E OPEN MARKET AND THEREFORE THE NET PROFIT MARGIN OF THE BUSINESS SEG MENT OF THE ASSESSEE WHICH IS TARGETED BY THE TPO/AO/DRP. HENCE , IN PRINCIPLE, WE HOLD THAT THE TPO/AO/DRP HAS FAILED T O ENTERTAIN THE OBJECTIONS OF THE ASSESSEE ON THE 'WORKING CAPITAL' ADJUSTMENTS ISSUE. THEREFORE, WE DIRECT THEM TO ALLOW THE REQUI SITE ADJUSTMENT ON ACCOUNT OF THE IMPUGNED 'WORKING CAPITAL' WHILE DETERMINING THE ARM'S LENGTH OPERATING MARGIN OF THE COMPARABLE S.' (EMPHASIS SUPPLIED) (II) IN THE CASE OF CAPGEMINI INDIA PRIVATE LIMITED VS ASSTT. COMMISSIONER OF INCOME TAX (ITA NO.7861/MUM/2011), THE MUMBAI TR IBUNAL HELD AS FOLLOWS:- ... IN OUR VIEW, WORKING CAPITAL ADJUSTMENTS ARE REQUIRED TO BE MADE BECAUSE THESE DO IMPACT THE PROFITABILITY OF T HE COMPANY . IT(TP)A NO.2192/BANG/2017 PAGE 23 OF 39 RULE 10B(2)(D) ALSO PROVIDES THAT THE COMPARABILITY HAS TO BE JUDGED WITH RESPECT TO VARIOUS FACTORS INCLUDING TH E MARKET CONDITIONS, GEOGRAPHICAL CONDITIONS, COST OF LABOUR AND CAPITAL IN THE MARKET. ACCOUNTS RECEIVABLE/PAYABLE EFFECT THE COST OF WORKING CAPITAL. A COMPANY WHICH HAS A SUBSTANTIAL AMOUNT B LOCKED WITH THE DEBTORS FOR A LONG PERIOD CANNOT BE FULLY COMPA RABLE TO THE CASE WHICH IS ABLE TO RECOVER DEBT PROMPTLY...' '... IN OUR VIEW, WORKING CAPITAL ADJUSTMENT WILL IMPROVE THE COMPARABILITY. WE, THEREFORE, DIRECT THE AO/TPO TO MAKE THE WORKING CAPITAL ADJUSTMENT AFTER NECESSARY EXAMINATION IN THE LIGHT OF THE OBSERVATIONS MADE ABOVE AND AFTER ALLO WING OPPORTUNITY OF HEARING TO THE ASSESSEE.' (EMPHASIS SUPPLIED) (III) IN THE CASE OF MENTOR GRAPHICS PVT. LTD V DCIT [(2007) 109 ITD 101 (DELHI) ], THE DELHI ITAT HELD AS FOLLOWS:- 'DEPENDING ON FACTS OF THE CASE, FINAL SET OF COMPA RABLES MAY NEED TO ELIMINATE DIFFERENCES BY MAKING ADJUSTMENTS FOR THE FOLLOWING: A) WORKING CAPITAL B) ADJUSTMENT FOR RISK AND GROWTH C) ADJUSTMENT OF R&D EXPENSES' THE POSITION IN INDIA AS PER INDIAN REGULATIONS ON THE SUBJECT HAS BEEN NOTED EARLIER. IF THERE ARE DIFFERENCES WHICH CAN BE ADJUSTED, THEN ADJUSTMENTS ARE REQUIRED TO BE MADE. IF THE DIFFERENCE BETWEEN THE COMPANIES ARE SO MATERIAL TH AT ADJUSTMENT IS NOT POSSIBLE, THEN COMPARABLES ARE REQUIRED TO B E REJECTED.' (EMPHASIS SUPPLIED) 40. IN LIGHT OF THE PRINCIPLES EMBODIED IN THE AB OVE JUDGEMENT, THE ASSESSEE PRAYED THAT THE BENEFIT OF A WORKING CAPIT AL ADJUSTMENT SHOULD BE ACCORDED TO THE ASSESSEE IN THE INSTANT CASE. 41. THE CIT(A) REJECTED THE CLAIM OF THE ASSESSEE F OR THE REASON THE ASSESSEE HAS TO DEMONSTRATE THE IMPACT ON PROFIT MA RGINS BY REASON OF A IT(TP)A NO.2192/BANG/2017 PAGE 24 OF 39 PARTICULAR LEVEL OF WORKING CAPITAL REQUIREMENT IN THE CASE OF THE ASSESSEE AND THAT OF COMPARABLE COMPANIES. IN COMING TO THE ABOVE CONCLUSION, THE CIT(A) HAS PLACED RELIANCE ON DECISIONS OF CHENNAI ITAT IN THE CASE OF MOBIS INDIA, ITA NO.2112/MDS/2011 (AY 2007-08) AND SAM DEUTZ FAHR INDIA PVT. LTD., ITA NO.2666/MDS/2016 AY 2006-07, O RDER DATED 22.2.2017 . IN THOSE CASES, THE TRIBUNAL WAS DEALING WITH CASES WHERE DATA WAS NOT PROVIDED. IN THE PRESENT CASE THE ASSESSEE HAS GIV EN SUCH WORKING WHICH IS GIVEN AS ANNEX. 4 TO THE WRITTEN SUBMISSIONS FIL ED BEFORE US. SUCH WORKING WAS ALSO GIVEN IN PAGES 59 TO 64 OF SUBMISS IONS FILED BEFORE THE CIT(A). THEREFORE, THE TPO/AO IS DIRECTED TO CONSI DER THE CLAIM OF THE ASSESSEE AND ALLOW ADJUSTMENT TO PROFIT MARGINS TOW ARDS WORKING CAPITAL ADJUSTMENT IN ACCORDANCE WITH THE LAW, AFTER AFFORD ING ASSESSEE THE OPPORTUNITY OF BEING HEARD. GR.NO.8 IS DECIDED ACC ORDINGLY. GROUND 9: THE LEARNED CIT(A), HAS ERRED IN LAW AND IN FACTS, BY DIRECTING THE AO/ TPO TO MAKE THE TRANSFER PRICING ADJUSTMENT ON THE ENTIRE MANUFACTURING SEGMENT OF THE APPELLANT RATHE R THAN RESTRICTING THE SAME TO THE VALUE OF INTERNATIONAL TRANSACTIONS UNDERTAKEN WITH ASSOCIATED ENTERPRISES ONLY. WITHOUT PREJUDICE, IN CASE THE ADJUSTMENTS MADE TO INTERNATIONAL TRANSACTIONS ARE HELD TO BE VALID, THEN THE SAME DESERVES TO BE RESTRICTED IN PROPORTI ON TO INTERNATIONAL TRANSACTIONS IN THE INTEREST OF JUSTICE. 42. THE MANUFACTURING SEGMENT OF ASSESSEE SELLS P RODUCTS MANUFACTURED FROM BOTH AES AND THIRD PARTIES. SIMIL ARLY ASSESSEE PURCHASES RAW MATERIALS AND COMPONENTS THAT ARE USE D FOR MANUFACTURE OF FINISHED GOODS FROM BOTH AES AND THIRD PARTIES. HAS PURCHASES FROM BOTH AES AND THIRD PARTIES. 43. THE DETAILS OF AE SALES TO TOTAL SALES AND AE P URCHASES TO TOTAL PURCHASES IN RESPECT OF MANUFACTURING ACTIVITY OF T HE ASSESSEE IS AS PROVIDED BELOW:- IT(TP)A NO.2192/BANG/2017 PAGE 25 OF 39 RATIO OF AE SALES TO TOTAL SALES PARTICULARS AMOUNT (INR) AE SALES (A) 13,93,39,733 TOTAL SALES (B) 39,19,74,335 RATIO (C =A/B) 35.55% RATIO OF AE PURCHASES TO TOTAL PURCHASES PARTICULARS AMOUNT (INR) RAW MATERIAL PURCHASES FROM AE (D) 4,95,41,241 TOTAL RAW MATERIAL PURCHAS ES (E) 22,64,22,647 RATIO (F =D/E) 21.88% 44. SECTION 92(1) OF THE ACT PROVIDES AS UNDER:- 'ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTI ON SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE'. 45. SECTION 92B DEFINES THE TERM 'INTERNATIONAL TRA NSACTION' TO MEAN 'A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES .. . 46. A CONJOINT READING OF SECTION 92 WITH SECTION 92B CLEARLY BRINGS OUT THAT COMPUTATION OF INCOME AT ALP IS PERMISSIBLE ON LY IN RESPECT OF INTERNATIONAL TRANSACTION, WHICH, IN TURN, MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES. SIMILAR POSITION HA S BEEN REITERATED IN THE MACHINERY PROVISION CONTAINED IN SECTION 92C DEALIN G WITH THE MANNER OF COMPUTATION OF ALP. SUB-SECTION (1) OF SECTION 92C STIPULATES THAT:- 'THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATI ONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS .....'. IT(TP)A NO.2192/BANG/2017 PAGE 26 OF 39 47. IT IS THE PLEA OF THE ASSESSEE THAT ADDITION BY WAY OF TRANSFER PRICING ADJUSTMENT IS MANDATED ONLY IN RESPECT OF TRANSACTI ONS BETWEEN TWO OR MORE AES. THE PROFIT FROM COMPARABLE TRANSACTIONS O F THE ASSESSEE WITH NON-AES IS ONE OF THE SUBTLE AND MOST RELIABLE MODE S FOR DETERMINING ALP OF THE INTERNATIONAL TRANSACTIONS. THE ACT DOES NOT CONTEMPLATE AN ADDITION BY WAY OF TP ADJUSTMENT IN RESPECT OF TRANSACTION W ITH NON-AES. 48. THE TPO DETERMINED ADDITION TO TOTAL INCOME, CO NSEQUENT TO DETERMINATION OF ALP ONLY IN RELATION TO INTERNATIO NAL TRANSACTION I.E., TRANSACTIONS WITH AE IN THE EXPORT OF FINISHED GOOD S SEGMENT BY CONSIDERING THE VALUE OF INTERNATIONAL TRANSACTION AT RS.3,31,50,982 WHICH IS THE VALUE OF EXPORT OF FINISHED GOODS BY THE ASS ESSEE TO ITS AE AND NOT ON THE TOTAL SALES IN THE FINISHED GOODS SEGMENT OF RS.39,19,74,355 (VIDE PARA 8.3 OF THE TPOS ORDER). 49. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF PH OENIX MECANO (INDIA) PRIVATE LIMITED [ITA NO. 1182 OF 2014] , HAD TO DEAL WITH THE FOLLOWING QUESTION OF LAW SUGGESTED BY THE REVENUE: - 6.1 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE HON'BLE TRIBUNAL WAS CORRECT IN DIRECTING THE AO TO RESTRICT THE DETERMINATION OF THE ALP TO TRANSACTIONS WITH THE A E RATHER THAN ON THE ENTIRE TURNOVER OF THE COMPANY. 6.2 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE HON'BLE TRIBUNAL WAS CORRECT WHILE ISSU ING THE ABOVE DIRECTIONS WITHOUT APPRECIATING THE OBSERVATIONS OF THE DRP THAT THERE WAS NO SEGMENTAL AUDIT OF THE TRANSACTIONS OF AE AND NON AE AND THEREFORE THERE WAS NO METHOD WHEREBY THE AO CO ULD COME TO A FAIR DETERMINATION OF ALP BY ONLY RESTRICTING TO TRANSACTIONS WITH AE.' IT(TP)A NO.2192/BANG/2017 PAGE 27 OF 39 50. THE HONBLE BOMBAY HIGH COURT ON THE ABOVE QUES TIONS OF LAW HELD AS FOLLOWS:- 5. WITH THE ASSISTANCE OF THE LEARNED COUNSEL FOR RESPECTIVE PARTIES, WE HAVE CONSIDERED THE SUBMISSIONS AND THE JUDGMENT OF THE TRIBUNAL. THE TRIBUNAL IN PARA 7 OF ITS ORDER H AS OBSERVED AS UNDER:- '7. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTEN TION HAVE CAREFULLY BEEN CONSIDERED. SO FAR IT RELATES T O GRIEVANCE OF THE ASSESSEE THAT THE TP ADJUSTMENT CA N ONLY BE APPLIED TO INTERNATIONAL TRANSACTIONS OF THE ASS ESSEE WITH THE AE AND IT CANNOT BE APPLIED AT ENTITY LEVEL , THE ISSUE IS FOUND TO BE COVERED BY THE AFOREMENTIONED DECISION OF THE TRIBUNAL IN THE CASE OF THYSSEN KRU PP INDUSTRIES INDIA PVT. LTD. (SUPRA). THEREFORE, WE H OLD THAT DETERMINATION OF ARMS LENGTH PRICE SHOULD BE RESTRI CTED ONLY TO INTERNATIONAL TRANSACTION OF THE ASSESSEE W ITH ITS AE. IT WAS POINTED OUT THAT THE FIGURES ARE AVAILABL E WITH THE AO, DETAILS OF WHICH HAS ALSO BEEN FILED BEFORE US AT PAGE 170 OF THE PAPERBOOK. THEREFORE, WE DIRECT THE AO TO TAKE ONLY THE INTERNATIONAL TRANSACTIONS OF THE ASS ESSEE WITH ITS AE FOR THE PURPOSE OF DETERMINING ARMS LENG TH PRICE. WE DIRECT ACCORDINGLY.' 6. THE TRIBUNAL HAS HELD THAT THE FIGURES ARE AVAI LABLE WITH THE ASSESSING OFFICER, THE DETAILS OF WHICH HAS ALS O BEEN FILED WITH THE TRIBUNAL AT PAGE 170 OF THE PAPERBOOK. IT WOULD BE CLEAR THAT THE DETAILS OF THE INTERNATIONAL TRANSACTION ARE SP ECIFICALLY MADE AVAILABLE AND THEREFORE THE APPREHENSION OF TH E DEPARTMENT AS SUCH IS MISPLACED. .. 7. CONSIDERING THE PROVISIONS OF SECTION 92 OF THE INC OME TAX ACT, SO ALSO THE REASONING ADOPTED BY THE TRIBU NAL SUGGESTING THAT SEPARATE FIGURES OF INTERNATIONAL T RANSACTION ARE AVAILABLE, SO ALSO THE ORDER REFERRED ABOVE. NO SUBSTANTIAL QUESTION OF LAW ARISES FOR CONSIDERATION. AS SUCH T HE APPEAL IS DISMISSED WITH NO COSTS. ' (EMPHASIS SUPPLIED) IT(TP)A NO.2192/BANG/2017 PAGE 28 OF 39 51. THE HON'BLE MUMBAI TRIBUNAL IN THE CASE OF THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. [ITA NO. 7032/MUM/2011] H ELD THAT THE ALP CAN ONLY BE DETERMINED ON THE VALUE OF INTERNATIONA L TRANSACTION ALONE AND NOT ON THE ENTIRE TURNOVER OF THE ASSESSEE AT ENTIT Y LEVEL. THIS DECISION WAS FURTHER UPHELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. [ITA NO. 2201 OF 2 013], WHICH HELD AS BELOW:- '2. .............. (A) WHETHER ON FACTS AND THE CIRCUMSTANCES OF THE CASE AND LAW, THE TRIBUNAL WAS JUSTIFIED IN LAW IN RESTRICTING TH E TRANSFER PRICING (TP) ADJUSTMENT ONLY TO THE TRANSACTION BET WEEN THE ASSOCIATED ENTERPRISES (AES.)? 3. ........... .. (E) WE FIND THAT IN TERMS OF CHAPTER X OF THE ACT, RE- DETERMINATION OF THE CONSIDERATION IS TO BE DONE ON LY WITH REGARD TO INCOME ARISING FROM INTERNATIONAL TRANSAC TIONS ON DETERMINATION OF ALP. THE ADJUSTMENT WHICH IS MANDA TED IS ONLY IN RESPECT OF INTERNATIONAL TRANSACTION AND NO T TRANSACTIONS ENTERED INTO BY ASSESSEE WITH INDEPEND ENT UNRELATED THIRD PARTIES. THIS IS PARTICULARLY SO AS THERE IS NO ISSUE OF AVOIDANCE OF TAX REQUIRING ADJUSTMENT IN T HE VALUATION IN RESPECT OF TRANSACTIONS ENTERED INTO WITH INDEPE NDENT THIRD PARTIES. THE ADJUSTMENT AS PROPOSED BY THE REVENUE IF ALLOWED WOULD RESULT IN INCREASING THE PROFIT IN RESPECT OF TRANSACTIONS ENTERED TO WITH NON-AE. THIS ADJUSTMENT IS BEYOND T HE SCOPE AND AMBIT OF CHAPTER X OF THE ACT. 5. IN THE ABOVE VIEW, AS THE PROVISIONS OF THE ACT IN RESPECT OF TRANSFER PRICING ARE SELF EVIDENCE, QUESTION NO. (A) AS PROPOSED DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF L AW. THUS NOT ENTERTAINED. IT(TP)A NO.2192/BANG/2017 PAGE 29 OF 39 52. THE ITAT BANGALORE IN THE CASE OF KIRLOSKAR TO YOTA TEXTILE MACHINERY PVT. LTD. V. ACIT [IT(TP)A NO.1401/BANG/2 010 HELD AS UNDER:- TAKING INTO CONSIDERATION OF THESE FACTORS, WE ACC EPT THE FIRST FOLD OF SUBMISSION MADE BY THE LEARNED COUNSEL FOR THE A SSESSEE AND DIRECT THE ASSESSING OFFICER TO CONFINE THE ADJUSTM ENT, QUA THE PURCHASES MADE BY THE ASSESSEE FROM THE AE. TO BE MORE SPECIFIC, THE ADJUSTMENT IS TO BE MADE ONLY TO THE PURCHASES MADE FROM THE AE .. (EMPHASIS SUPPLIED) 53. THE CIT(A) IN EXERCISE OF HIS POWERS OF ENHANC EMENT OF INCOME TOOK THE VIEW THAT THE ALP HAS TO BE DETERMINED ON THE BASIS OF THE ENTIRE SALES IN THE FINISHED GOODS SEGMENT INCLUDING TRANS ACTIONS WITH NON-AE ALSO. THE REASONING ADOPTED BY THE CIT(A) FOR DOIN G SO WAS AS FOLLOWS:- 10.0 WHILE EXAMINING THE WORKING OF ALP IN THE CAS E OF APPELLANT, IT WAS OBSERVED THAT THE TPO HAS REDUCED THE ADJUSTMENT PROPORTIONATELY BY HOLDING THAT ONLY 8.46% OF REVEN UE OF THE APPELLANT IS FROM AE. SHE ACCORDINGLY ADOPTED 8.46% OF THE OPERATING REVENUE AND 8.46% OF THE OPERATING COST F OR PURPOSE OF THE DETERMINATION OF ALP. HOWEVER, THIS METHOD IS N OT THE CORRECT APPROACH AS THE ALP DETERMINATION SHOULD HAVE BEEN BASED ON THE ENTIRE OPERATING REVENUE AND ENTIRE OPERATING COST. SINCE THIS CHANGE IN METHOD WOULD HAVE AMOUNTED TO ENHANCEMENT OF THE INCOME OF THE APPELLANT, SO OPPORTUNITY OF BEING HE ARD WAS GIVEN TO THE APPELLANT VIDE ORDER SHEET ENTRY DATED 11.08 .2017, AS TO WHY THE PROPORTIONATE REDUCTION DONE BY THE TPO SHOULD NOT BE DISREGARDED. THE APPELLANT SOUGHT TIME TO FILE WRIT TEN SUBMISSIONS AND THE SAME WAS ALLOWED. THE APPELLANT FILED WRITT EN SUBMISSIONS VIDE LETTER DT 29.08.2017. THE SAME HAVE DULY BEEN CONSIDERED AND THE ISSUE IS BEING DECIDED AS FOLLOWS: 10.1 IN THE CASE UNDER CONSIDERATION, THE APPELLANT IS SELLING ITS PRODUCT TO AE AS WELL AS TO NON AES, FOR THE MANUFA CTURE OF WHICH, PART PURCHASES ARE FROM AES AND REMAINING FROM THE NON AES. THE TPO HAS CONSIDERED OP/OR FOR PURPOSE OF COMPUTATION OF THE IT(TP)A NO.2192/BANG/2017 PAGE 30 OF 39 ALP AS THE QUANTUM OF SALES TO AE ARE LESSER THAN T HE PURCHASE FROM AE AND THUS LESSER CONTROLLED. WHEN A PRODUCT IS SOLD, ONLY OVERALL PROFIT MARGIN IS RECORDED WITHOUT ANY DATA AS TO WHAT WOULD BE THE PROFIT IN RELATION TO PURCHASES FROM AE. SO THIS CANNOT BE PRESUMED THAT THE PROFIT PERCENTAGE EARNED IN RELAT ION TO COSTS RELATED TO AE TRANSACTIONS AS WELL AS NON-AE TRANSA CTIONS WAS SAME. SINCE COSTS ARE COMMON TO THE PRODUCTS ULTIMA TELY SOLD BY THE APPELLANT, AND THE SAME INCLUDES AE TRANSACTION S, SO IT IS ALWAYS POSSIBLE THAT THE MARGIN OF PROFIT PERCENTAG E VIS-A-VIS COSTS RELATED TO AE TRANSACTION IS NOT THE SAME AS PROFIT MARGIN ON COSTS RELATED TO NON-AE TRANSACTIONS BUT ULTIMATELY OVERA LL CERTAIN PROFITS ARE BEING SHOWN. FURTHER, THE TRANSACTIONS WITH NO N-AES CAN BE PRESUMED TO BE AT ARM'S LENGTH AS THERE IS NO REASO N TO EARN LESSER PROFIT. BUT IN CASE OF TRANSACTIONS WITH AES, THERE IS ALWAYS A LIKELIHOOD OF EARNING LESSER PROFITS AS TRANSACTION S ARE CONTROLLED AND DECISIONS ARE INFLUENCED BY AE. THUS THE OVERAL L PROFITS ON ACCOUNT OF TRANSACTIONS WITH AE AS WELL AS NON-AE G ETS SUPPRESSED. 54. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. C OUNSEL FOR THE ASSESSEE REITERATED SUBMISSIONS MADE BEFORE THE CIT (A) THAT TRANSACTION WITH NON-AE CANNOT BE SUBJECT MATTER OF DETERMINATI ON OF ALP BECAUSE SECTION 92 CLEARLY SPEAKS OF DETERMINATION OF ALP O NLY IN RESPECT OF TRANSACTIONS WITH AE. HE ALSO REFERRED TO CERTAIN DECISIONS OF THE TRIBUNAL FOR THE PROPOSITION THAT SECTION 92 OF THE ACT IS N OT APPLICABLE TO NON-AE TRANSACTIONS. THESE DECISIONS HAVE ALREADY BEEN EXT RACTED IN THE EARLIER PARAGRAPHS. THE LD. DR RELIED ON THE ORDER OF THE C IT(APPEALS). 55. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE REASONING OF THE CIT(A) FOR CONSIDERING THE ENTIRE SALES IN MANUFACT URED FINISHED GOODS SEGMENT FOR DETERMINATION OF ALP IS THAT CERTAIN CO MPONENTS AND RAW MATERIALS USED IN MANUFACTURE OF FINISHED GOODS ARE ALSO SOURCED FROM AE AND THERE IS A POSSIBILITY OF THE COST OF SUCH COMP ONENT HAVING BEEN BARGAINED AT A PRICE WHICH IS NOT AT ARMS LENGTH. THIS PRESUMPTION OF THE CIT(APPEALS) IS WITHOUT ANY BASIS. HE HAS NOT DEMO NSTRATED WITH ACTUAL IT(TP)A NO.2192/BANG/2017 PAGE 31 OF 39 FIGURES AS TO HOW THERE WOULD BE IMPACT ON PROFIT M ARGIN ON SALE OF FINISHED PRODUCTS TO AE BECAUSE OF PURCHASES OF SOME COMPONE NTS FROM AE. HE HAS GIVEN EXAMPLES WHICH ARE IMAGINARY FIGURES. AP ART FROM THIS, THE TPO HAS ACCEPTED THAT PURCHASE OF RAW MATERIAL AND COMP ONENTS BY THE ASSESSEE FROM ITS AE IS AT ARMS LENGTH. THEREFORE, THE BASIS ON WHICH THE CIT(A) PROCEEDED TO APPLY THE ALP TEST FOR TRANSACT IONS WITH NON-AE IS NEITHER CORRECT ON FACTS NOR PERMISSIBLE IN LAW. A S RIGHTLY CONTENDED BY THE ASSESSEE, SECTION 92 OF THE ACT CAN BE APPLIED ONLY IN RESPECT OF INTERNATIONAL TRANSACTIONS I.E., TRANSACTIONS WITH AE. 56. IN VIEW OF THE ABOVE TRANSFER PRICING PROVISION S AND VARIOUS JUDICIAL PRECEDENTS, WE HOLD THAT THE TRANSFER PRICING ADJUS TMENT SHOULD BE RESTRICTED ONLY TO THE AE RELATED TRANSACTIONS OF T HE ASSESSEE. ADDITIONAL GROUNDS 57. THE ASSESSEE HAS SOUGHT TO RAISE THE FOLLOWING ADDITIONAL GROUNDS VIDE APPLICATION DATED 14.3.2018 :- THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACTS , IN UPHOLDING THE DISALLOWANCE OF EXPENSES PERTAINING T O PREVIOUS YEAR OF RS.65,18,149 WHICH WAS CHARGED TO THE PROFIT AND LOSS ACCOUNT IN THE YEAR UNDER CONSIDERATION AND INCURRED FOR TH E PURPOSE OF BUSINESS OF THE APPELLANT WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT( A) HAS ERRED IN LAW AND IN FACTS, NOT GRANTING ALLOWANCE O F THE PRIOR PERIOD EXPENSES IN THE PREVIOUS YEAR ON ACCOUNT OF BEING I NCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE APPELLANT. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT(A ) OUGHT TO HAVE SET OFF THE PRIOR PERIOD INCOME OF RS.47,04,916 AGA INST THE PRIOR PERIOD EXPENDITURE OF RS.65,48,1490 AND THEREBY RES TRICTED THE NET DISALLOWANCE OF PRIOR PERIOD EXPENDITURE TO RS.18,4 3,233. IT(TP)A NO.2192/BANG/2017 PAGE 32 OF 39 58. IT IS NOT IN DISPUTE THAT IN AY 2013-14, THE A SSESSEE HAS CLAIMED THE SAME EXPENSES AS DEDUCTION BUT THE SAME WAS DIS ALLOWED BY THE AO ON THE GROUND THAT IT WAS EXPENDITURE RELATING TO A Y 2012-13 AND THEREFORE CANNOT BE ALLOWED AS DEDUCTION IN AY 2013-14 AS IT WAS PRIOR PERIOD EXPENDITURE. THE ADDITIONAL GROUND IS ADMITTED FOR ADJUDICATION AS THE CLAIM COULD NOT BE MADE BY THE ASSESSEE IN THE ASSE SSMENT AND APPELLATE PROCEEDINGS FOR AY 2012-13 AS IT WAS UNDER THE BONA FIDE BELIEF THAT THE DEDUCTION WOULD BE ALLOWED IN AY 2013-14. 59. AS FAR AS THE MERITS OF THE ADDITIONAL GROUND IS CONCERNED, WE ARE OF THE VIEW THAT THE DEDUCTION UNDER MERCANTILE SYSTEM OF ACCOUNTING HAS TO BE BASED ON CRYSTALLIZATION OF LIABILITY. IF THE L IABILITY IN QUESTION IS ESTABLISHED TO HAVE CRYSTALLIZED IN AY 2012-13, THE N THE ASSESSEE SHOULD BE ALLOWED THE DEDUCTION. WE HOLD AND DIRECT ACCOR DINGLY. ADDITIONAL GROUND 60. THE ASSESSEE HAS FILED AN APPLICATION DATED 7.2 .2018 SEEKING TO RAISE THE FOLLOWING ADDITIONAL GROUNDS:- THAT THE LEARNED TPO/AO HAS ERRED, IN LAW AND IN F ACT, BY WRONGLY COMPUTING THE OPERATING MARGIN OF THE APPEL LANT. 61. THE ABOVE ADDITIONAL GROUND IS PART OF THE GR OUND RELATING TO DETERMINATION OF ALP OF INTERNATIONAL TRANSACTION A ND HENCE ADMITTED FOR ADJUDICATION. ON THE ADDITIONAL GROUND, THE LD. A R SUBMITTED THAT THE TPO HAS ERRED IN COMPUTING THE OPERATING MARGIN OF THE ASSESSEE. FOR THE PURPOSE OF UNDERTAKING FINANCIAL ANALYSIS UNDER TNM M, OPERATING PROFITS ON OPERATING REVENUE WAS SELECTED AS THE PROFIT LEVEL INDICATOR (PLI). THE RATIO USED FOR THE TNMM ANALYSIS WAS AS FOLLOWS:- IT(TP)A NO.2192/BANG/2017 PAGE 33 OF 39 OPERATING PROFIT OPERATING COSTS OPERATING REVENUES = REVENUES FROM OPERATING ACTI VITIES [INCLUDES FOREX GAIN/LOSSES] EXCLUDING OTHER INCOME [I.E., INTEREST/DIVIDENDS RECEIVED] OPERATING COSTS = TOTAL COSTS [INCLUDES FOREX GAI NS/LOSSES] EXCLUDING EXTRAORDINARY EXPENSES/NON-RECURRING EXPE NSES [I.E., PROFIT/ (LOSS) ON SALE OF FIXED ASSETS, AMORTISATIO N OF PRELIMINARY EXPENSES, ANY INTEREST PAYMENTS, ETC] A ND TAX. OPERATING PROFIT = OPERATING REVENUES OPERATING COSTS. 62. THE ASSESSEES MARGIN WAS COMPUTED BASED ON THE ABOVE. ACCORDING TO THE ASSESSEE, IT HAS COME TO ITS NOTIC E THAT THE TPO HAS ERRONEOUSLY COMPUTED THE OPERATING PROFIT MARGIN OF THE ASSESSEE. IN THE CIT(A) ORDER DATED 12 SEPTEMBER 2017, THE CIT(A) HA S PROVIDED DIRECTIONS TO CONSIDER FOREIGN EXCHANGE FLUCTUATION AS OPERATI NG IN NATURE FOR THE ASSESSEE AND THE COMPARABLE COMPANIES. IT APPEARS T HAT THE ASSESSEE LATER NOTICED THAT THE TPO ERRED IN NOT CONSIDERING THE CORRECT AMOUNT OF FOREIGN EXCHANGE GAIN AND LOSS AND CORRECT AMOUNT O F BAD DEBTS ATTRIBUTABLE TO THE MANUFACTURING SEGMENT OF ASSESS EE FOR AY 2012-13. 63. IT WAS SUBMITTED THAT FOR FY 2011-12, THE ASSES SEE HAS RECORDED A TOTAL FOREIGN EXCHANGE GAIN OF INR 53,89,273 IN ITS BOOKS OF ACCOUNTS. 64. THE ASSESSEE IS ENGAGED IN BUSINESS OF MANUFACT URE AND TRADING OF LABORATORY AND PROCESSING EQUIPMENT AND ALSO PROVID ES RESEARCH AND DEVELOPMENT SERVICES AND MARKETING AND TECHNICAL SU PPORT SERVICES TO GROUP COMPANIES. ACCORDINGLY, THE ASSESSEE OPERATES IN FOUR SEGMENTS AND THE REVENUE FROM THESE SEGMENTS FOR FY 2011-12 IS AS FOLLOWS:- IT(TP)A NO.2192/BANG/2017 PAGE 34 OF 39 S.NO. BUSINESS SEGMENT REVENUE (INR) RATIO (%) 1 MANUFACTURING SEGMENT 39,19,74,335 80.21% 2 TRADING SEGMENT 4,31,94,581 8.84% 3 RESEARCH A ND DEVELOPMENT 53,12,346 1.09% 4 SUPPORT SERVICES 4,82,10,266 9.87% TOTAL 48,86,91,528 100% 65. ACCORDINGLY, THE TOTAL FOREIGN EXCHANGE GAIN OF INR 53,89,273 OF ASSESSEE SHOULD BE ALLOCATED AMONG ALL THE FOUR SEG MENTS ON A PROPORTIONATE BASIS. BASED ON THE ABOVE REVENUE RAT IO, THE FOREIGN EXCHANGE GAIN OF INR 43,22,679 IS ATTRIBUTABLE TO T HE MANUFACTURING SEGMENT OF ASSESSEE. HENCE, THE FOREIGN EXCHANGE GAIN OF INR 43,22,679 SHOULD BE CONSIDERED AS OPERATING IN NATURE AND INC LUDED IN THE COMPUTATION OF OPERATING REVENUE. ACCORDINGLY, THE REVISED OPERATING REVENUE OF ASSESSEE FOR THE MANUFACTURING SEGMENT W OULD BE INR 39,62,97,014 (I.E. INR 39,19,74,335 PLUS INR 43,22, 679). 66. IT WAS SUBMITTED THAT WHILE DETERMINING THE O PERATING EXPENSES OF ASSESSEE FOR AY 2012-13, THE TPO HAS CONSIDERED THE ENTIRE AMOUNT OF FOREIGN EXCHANGE LOSS AND BAD DEBTS, AS DISCLOSED I N THE FINANCIAL STATEMENTS. FOR COMPUTATION OF THE OPERATING EXPEN SES OF ASSESSEE, ONLY THE AMOUNT OF FOREIGN EXCHANGE LOSS AND BAD DEBTS T HAT IS ATTRIBUTABLE TO THE MANUFACTURING SEGMENT OF THE ASSESSEE SHOULD BE CONSIDERED. ACCORDINGLY, FOR COMPUTATION OF THE OPERATING EXPEN SE OF ASSESSEE, THE LD. AR REQUESTED FOR A DIRECTION TO CONSIDER THE PROPOR TIONATE AMOUNT OF FOREIGN EXCHANGE LOSS AND BAD DEBTS AS PROVIDED BEL OW:- IT(TP)A NO.2192/BANG/2017 PAGE 35 OF 39 PARTICULARS AS PER FINANCIALS ATTRIBUTABLE TO MANUFACTURING SEGMENT FOREIGN EXCHANGE LOSS 3,08,89,134 2,47,75,850 BAD DEBTS 9,61,329 7,71,071 67. ON CONSIDERATION OF THE ABOVE RECTIFICATION OF OPERATING REVENUE AND OPERATING EXPENSE OF ASSESSEE FOR AY 2012-13, THE O PERATING MARGIN OF ASSESSEE WOULD CHANGE FROM (-)2.50 PERCENT TO 0.21 PERCENT. ACCORDINGLY, THE REVISED OPERATING MARGIN OF ASSESSEE FOR AY 201 2-13 UPON RECTIFICATION, WOULD BE AS FOLLOWS:- PARTICULARS FY 2011 - 12 (INR) AS PER TPO AS PER ASSESSEE INCOME INDIGENOUS SALES 10,34,24,406 10,34,24,406 ADD: EXPORT SALES 28,85,49,929 28,85,49,929 ADD: FOREIGN EXCHANGE GAIN - 43,22,679 OPERATING REVENUES (A) 39,19,74,335 39,62,97,014 EXPENDITURE COST OF GOODS SOLD 22,31,25,515 22,31,25,515 ADD: SALARIES, WAGES & OTHER 3,82,66,904 3,82,66,904 ADD: DEPRECIATION & 59,30,947 59,30,947 ADD: OTHER EXPENSES (DETAILED COMPUTATION AS PER IKA INDIA ENCLOSED AS ANNEXURE 5) 13,53,16,993 12,90,13,451 ADD: BANK CHARGES 4,95,730 4,95,730 LESS: DONATIONS 13,03,400 13,03,400 LESS: LOSS ON SALE OF ASSET 68,590 68,590 OPERATING COST (B) 40,17,64,099 39,54,60,557 OPERATING PROFIT (C) (97,89,764) 8,36,457 OPERATING PROFIT/ OPERATING REVENUES (C/A) (2.50%) 0.21% IT(TP)A NO.2192/BANG/2017 PAGE 36 OF 39 68. ACCORDINGLY, THE LD. AR HAS SUBMITTED THAT THE REVISED OPERATING MARGIN OF ASSESSEE FOR AY 2012-13 SHOULD BE CONSIDE RED AS 0.21%. 69. ON THE FIRST ASPECT OF ALLOCATION OF FOREIGN EX CHANGE GAIN ON PROPORTIONATE BASIS, WE ARE OF THE VIEW THAT THE SA ME HAS TO BE ON ACTUALS. WITH REGARD TO CONSIDERING BAD DEBTS AS OPERATING E XPENSE, WE ARE OF THE VIEW THAT IT IS ONLY THE BAD DEBTS IN MANUFACTURING SEGMENT THAT SHOULD BE CONSIDERED AS EXPENSES OF MANUFACTURING SEGMENT FOR WORKING OUT THE OP/OC. WE HOLD AND DIRECT ACCORDINGLY ON THE AFORE SAID ADDITIONAL GROUNDS. GROUND 10: THE LEARNED CIT(A), HAS ERRED IN FACTS A ND LAW, IN NOT ALLOWING DEDUCTION IN RESPECT OF INADVERTENT AND SUO-MOTO DI SALLOWANCE OF SALES COMMISSION PAYABLE TO NON-RESIDENT AGENTS AMOUNTING TO RS 7,45,316 UNDER SECTION 40(A)(I) OF THE ACT. GROUND 11: THE LEARNED CIT(A) OUGHT TO HAVE APPRECI ATED THAT THE SALES COMMISSION PAYABLE TO NON-RESIDENTS WHO HAVE NO BUS INESS PRESENCE IN INDIA AND ENTIRELY RENDERED SERVICES FROM OUTSIDE I NDIA, WOULD NOT BE SUBJECT TO WITHHOLDING OF TAXES IN INDIA AND HENCE THE SAME SHALL NOT FALL UNDER SECTION 40(A)(I) OF THE ACT. GROUND 12: THE LEARNED CIT(A) OUGHT TO HAVE APPRECI ATED THAT THE SALES COMMISSION EXPENSE INCURRED BY THE APPELLANT, IS A GENUINE BUSINESS EXPENDITURE AND SHOULD BE ALLOWED AS A DEDUCTION FR OM THE BUSINESS PROFITS OF THE APPELLANT. 70. DURING THE FY 2011-12, THE ASSESSEE HAD PAID SA LES COMMISSION EXPENSES OF INR 7,45,316 TO NON-RESIDENT AGENTS TOW ARDS PROVISION OF SERVICES OUTSIDE INDIA. SUCH SALES COMMISSION PAID OUTSIDE INDIA CANNOT BE SAID TO HAVE ACCRUED OR ARISEN IN INDIA AND HENCE N OT SUBJECT TO WITHHOLDING TAXES IN INDIA. THE ASSESSEE DISALLOWED THE SAME UN DER SECTION 40(A)(I) IN FY 2011-12. IN VIEW OF THE ABOVE, THE ASSESSEE CLAI MED DEDUCTION OF THE AFORESAID EXPENSES IN THE FY 2012-13. IT(TP)A NO.2192/BANG/2017 PAGE 37 OF 39 71. IT APPEARS THAT IN HIS ASSESSMENT ORDER FOR FY 2012-13, THE AO HAS HELD THAT SALES COMMISSION PAID TO NON-RESIDENTS FO R SERVICES RENDERED OUTSIDE INDIA WOULD BE IN THE NATURE OF FEES FOR TE CHNICAL SERVICES ('FTS') AND IS DEEMED TO ACCRUE IN INDIA EVEN IF THE NON-RE SIDENT HAS NO PLACE OF BUSINESS IN INDIA OR EVEN IF SUCH SERVICES ARE NOT RENDERED OUTSIDE INDIA, AND HENCE NOT ALLOWED THE CLAIM MADE BY THE ASSESSE E. 72. ADMITTEDLY, THE ISSUE WAS NOT RAISED BY THE ASS ESSEE EITHER BEFORE THE AO OR CIT(A). THEREFORE, THIS ISSUE RAISED FOR THE FIRST TIME IN THE APPEAL BEFORE THE TRIBUNAL IN AY 2013-14 CANNOT BE ENTERTAINED. THE ASSESSEE IS AT LIBERTY TO AGITATE THE ISSUE IN AY 2 013-14 IN WHICH YEAR HE CLAIMED THE DEDUCTION IN QUESTION. GROUND 13: THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, BY NOT PROVIDING SPECIFIC DIRECTION TO THE AO TO PROVIDE THE BENEFIT OF MAT CREDIT AMOUNTING TO INR 5,59,895 AS AVAILABLE UNDER SECTION 115JAA O F THE ACT AND HOLDING THAT THE SAME IS CONSEQUENTIAL IN NATURE. 73. IT IS THE GRIEVANCE OF THE ASSESSEE IN GROUND N O.13 THAT IN THE ASSESSMENT ORDER, WHILE COMPUTING THE TAX LIABILITY OF THE ASSESSEE FOR AY 2012-13, THE LEARNED AO HAS NOT ALLOWED THE MAT CRE DIT OF INR 5,59,895 AS CLAIMED BY THE ASSESSEE IN ITS RETURN OF INCOME AS PER SECTION 115JAA OF THE ACT. 74. WE ARE OF THE VIEW THAT IT WOULD BE JUST AND AP PROPRIATE TO DIRECT THE AO TO VERIFY THE CLAIM OF ASSESSEE AND ALLOW THE CL AIM FOR MAT CREDIT IN ACCORDANCE WITH THE LAW. GROUND 14: THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, BY NOT PROVIDING DIRECTION TO THE AO TO DELETE THE INTEREST UNDER SE CTION 234A OF THE ACT AMOUNTING TO LNR 1,16,570 AND HOLDING THAT THE SAME AS CONSEQUENTIAL IN NATURE. IT(TP)A NO.2192/BANG/2017 PAGE 38 OF 39 75. IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE AO TO VERIFY THE CLAIM OF THE ASSESSEE THAT IT HAD FILED ITS RETURN OF INCOME BEFORE THE DUE DATE AND THEREFORE NO INTEREST IS PAYABLE U/S. 234A OF THE A CT. GROUND 15: THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, IN HOLDING THAT THE IMPOSITION OF INTEREST UNDER SECTION 234B AND 2 34C OF THE ACT BY THE LEARNED AO IS CONSEQUENTIAL IN NATURE. GROUND 16: THE LEARNED CIT(A) HAS ERRED, IN LAW AND FACTS, IN HOLDING THAT INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271 (1)(C) OF THE ACT BY THE LEARNED AO IS PREMATURE IN NATURE. 76. ON GROUND NO.15, THE AO IS DIRECTED TO GIVE CON SEQUENTIAL RELIEF IN RESPECT OF INTEREST U/S. 234B & 234C OF THE ACT. N O APPEAL LIES AGAINST THE INITIATION OF PENALTY U/S. 271(1)(C) OF THE ACT, HE NCE GROUND NO.16 IS DISMISSED. 77. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 17 TH DAY OF SEPTEMBER, 2018. SD/- SD/- ( INTURI RAMA RAO ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEM BER BANGALORE, DATED, THE 17 TH SEPTEMBER, 2018. / D ESAI S MURTHY / IT(TP)A NO.2192/BANG/2017 PAGE 39 OF 39 COPY TO: 1. APP ELL ANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.