Semco Electric Pvt. Ltd, Pune V. Jt.Comm. income Tax Range 10, Pune

ITA 247/PUN/2011

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 0770 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 8 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 07-10-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 08-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Assessee Lawyers: SHARAD A SHAH
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Benefit of exemption
• Section: 92C; 10B; 10; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUN E , , !'!! # , $ % BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 247/PN/2011 $& ' !(' / ASSESSMENT YEAR : 2005-06 SEMCO ELECTRIC PVT. LTD., 154/1, 155 MAHALUNGE VILLAGE, POST-CHAKAN, CHAKAN TALEGAON ROAD, CHAKAN, DISTT.-PUNE-410501 PAN : AADCS9493H ....... / APPELLANT )& / V/S. JT. COMMISSIONER OF INCOME TAX, RANGE 10, PUNE / RESPONDENT / ITA NO. 264/PN/2011 $& ' !(' / ASSESSMENT YEAR : 2005-06 DY. COMMISSIONER OF INCOME TAX, CIRCLE - 10, PUNE ....... / APPELLANT )& / V/S. SEMCO ELECTRIC PVT. LTD., GAT NO. 154/1, MAHALUNGE, POST-CHAKAN, TAL.-KHED, PUNE PAN : AADCS9493H / RESPONDENT ASSESSEE BY : SHRI SHARAD A. SHAH REVENUE BY : SHRI S.K. RASTOGI / DATE OF HEARING : 07-10-2015 / DATE OF PRONOUNCEMENT : 07-12-2015 2 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 * / ORDER PER VIKAS AWASTHY, JM : THESE CROSS APPEALS BY THE ASSESSEE AND REVENUE ARE DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) -V, PUNE DATED 16-12-2010 FOR THE ASSESSMENT YEAR 2005-06. 2. THE BRIEF FACTS OF THE CASE ARE : THE ASSESSEE IS A COM PANY ENGAGED IN MANUFACTURING AND SALE OF ELECTRICAL WIRING ACCES SORIES. THE ASSESSEE IS REGISTERED AS 100% EXPORT ORIENTED UNIT AND IS CLAIMING EXEMPTION U/S. 10B OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRE D TO AS THE ACT). THE ASSESSEE EXPORT ITS ENTIRE PRODUCTION TO ITS ASSOCIATED ENTERPRISES (AE) M/S. SIGMA ELECTRIC MFG. CORPORATION OF USA (IN SHORT SIGMA). SIGMA IS A PROPRIETARY CONCERN OF SHRI SAJJAN KU MAR. HE ALONG WITH HIS WIFE ALSO OWNS 90% SHAREHOLDING (APPROXIMATELY ) IN THE ASSESSEE COMPANY. DURING THE PERIOD RELEVANT TO THE IM PUGNED ASSESSMENT YEAR THE ASSESSEE HAD INTERNATIONAL TRANSAC TIONS TO THE TUNE OF RS.160.71 CRORES WITH ITS AE. THE ASSESSEE COMPANY HAS SE T UP TWO UNITS AT CHAKAN, PUNE THAT ARE ELIGIBLE FOR CLAIMING EXE MPTION U/S. 10B OF THE ACT. DURING THE PERIOD RELEVANT TO THE ASSES SMENT YEAR UNDER APPEAL THE ASSESSEE CLAIMED EXEMPTION OF RS.22,52,38,7 12/- U/S. 10B OF THE ACT. HOWEVER, DURING THE COURSE OF ASS ESSMENT PROCEEDINGS, THE ASSESSING OFFICER RESTRICTED THE EXEMPTION U/S. 10B TO RS.18,79,38,086/- AS AGAINST THE CLAIM OF RS.22.52 CRORES. AP ART FROM THE ABOVE, THE ASSESSING OFFICER HELD THAT INCOME FROM SALE OF SCRAP, SALES TAX SET OFF, INTEREST FROM BANKS AND INTEREST ON DEP OSITS WITH MIDC AND BANK ARE NOT ELIGIBLE FOR EXEMPTION U/S. 10B OF TH E ACT. IN RESPECT OF INTERNATIONAL TRANSACTIONS WITH AE, THE MATTER WAS REFERRED TO THE TRANSFER PRICING OFFICER (TPO) U/S. 92CA OF THE ACT. THE TPO 3 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 MADE ADDITION OF RS.10,42,83,125/- IN RESPECT OF ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS WITH ITS AE. THE AS SESSING OFFICER ACCORDINGLY MADE DISALLOWANCE/ADDITION IN THE INCOME R ETURNED BY THE ASSESSEE. AGGRIEVED BY THE ASSESSMENT ORDER DATED 26-12-2008, T HE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONER OF I NCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) PARTLY ACCEPTED THE APPEAL OF THE ASSESSEE BY DELETING THE ADDITIONS MADE BY THE TPO U/S. 92CA(3) OF THE ACT. IN RESPECT OF DEPRECIATION ON CO MPUTER SOFTWARE, THE COMMISSIONER OF INCOME TAX (APPEALS) REJECTED THE CLAIM OF ASSESSEE. THE ASSESSEE HAD CLAIMED DEPRECIATION ON C OMPUTER SOFTWARE @ 25%, WHEREAS, THE ASSESSING OFFICER COMPUTED DE PRECIATION ON COMPUTER SOFTWARE @ 60%. THE COMMISSIONER OF INCOME TAX (APPEALS) UPHELD THE FINDINGS OF ASSESSING OFFICER ON THIS ISSUE. AS REGARDS QUANTUM OF EXEMPTION U/S. 10B, THE COMMISSIONER OF INCOME TAX (APPEALS) PARTLY ACCEPTED THE CONTENTIONS OF THE AS SESSEE AND RESTORED THE EXEMPTION CLAIMED BY THE ASSESSEE U/S. 10 B OF THE ACT IN RESPECT OF INCOME FROM SALE OF SCRAP AND SALES TAX SET OFF. AGAINST THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPE ALS) BOTH THE ASSESSEE AS WELL AS REVENUE ARE IN APPEAL BEFORE THE TRIB UNAL. ITA NO. 247/PN/2011 (APPEAL BY ASSESSEE) 3. THE ASSESSEE IN APPEAL HAS RAISED FOUR GROUNDS. THE GROUND NOS . 3 AND 4 ARE GENERAL IN NATURE. THE EFFECTIVE GROUNDS I.E. G ROUND NOS. 1 AND 2 RAISED IN THE APPEAL ARE AS UNDER: 1) THE LEARNED A.O. HAS ERRED (AND THE LEARNED CIT (A) ERRED IN UPHOLDING) BY RECOMPUTING WDV OF 'COMPUTER SOFTWARE ' (COMPRISING OF 4 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 LICENSE FEES PAID FOR USE OF SOFTWARE) BY ALLOWING DEPRECIATION @ 60% INSTEAD OF @ 25% . 1.1) THE LEARNED A.O. HAS ERRED (AND THE LEARNE D CIT (A) ERRED IN UPHOLDING) THAT THE RATE OF DEPRECIATION APPLICABLE TO LICENSED SOFTWARE IS THAT OF TANGIBLE ASSETS INSTEAD THAT OF INTANGIBLE ASSETS. 1.2) THE LEARNED A.O. HAS ERRED (AND THE LEARNE D CIT (A) ERRED IN UPHOLDING) BY REDUCING THE WDV OF LICENSED SOFTWARE BY INCREASING THE RATE OF DEPRECIATION TO 60% INSTEAD OF 25%. 2) THE LEARNED A.O. HAS ERRED (AND LEARNED CIT (A) ERRED IN UPHOLDING) BY DENYING THE BENEFIT OF TAX HOLIDAY UNDER SECTION 10 B OF THE INCOME TAX ACT, 1961 ON THE FOLLOWING INCOMES:- A. INTEREST FROM BANKS RS.59,49,487/- B. INTEREST FROM DEPOSITS IN MIDC AND BANKS RS.1, 89,254/- 4. SHRI SHARAD A. SHAH APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE GROUND NO. 1 IN APPEAL OF THE ASSESSE E IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF CO-O RDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 1125/P N/2011 FOR THE ASSESSMENT YEAR 2004-05 DECIDED ON 31-03-2015. IN TH E SAID CASE THE TRIBUNAL HAS REMITTED THE MATTER BACK TO THE FILE OF ASSE SSING OFFICER WITH A DIRECTION THAT IN CASE THE DEPRECIATION CLAIMED BY T HE ASSESSEE IS IN RESPECT OF LICENSE FOR USE OF COMPUTER SOFTWARE THEN TH E ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION @ 25%. IN RESPECT OF GROUN D NO. 2, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD EARNED INTEREST INCOME FROM BANKS RS.59,49,487/- AND INTEREST ON DEPOSITS WITH MIDC A ND BANKS RS.1,89,254/-. THE TRIBUNAL IN ASSESSEES OWN CASE IN IT A NO. 114/PN/2013 FOR THE ASSESSMENT YEAR 2008-09 DECIDED O N 12-09-2014 HAD REMITTED THE SIMILAR ISSUE BACK TO THE FILE OF ASSESSIN G OFFICER TO CONSIDER THE ALTERNATE ARGUMENT OF ASSESSEE FOR NETTING OFF OF INTEREST INCOME. 5 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 5. ON THE OTHER HAND SHRI S.K. RASTOGI REPRESENTING THE DEPARTMENT VEHEMENTLY SUPPORTED THE FINDINGS OF COMMISSIONER OF INCOM E TAX (APPEALS) IN CONFIRMING THE ABOVE SAID ADDITIONS. THE LD. DR PR AYED FOR DISMISSING THE APPEAL OF THE ASSESSEE. HOWEVER, THE LD DR ADMITTED THAT BOTH THESE ISSUES WERE CONSIDERED IN THE APPEALS OF THE ASSESSEE FOR EARLIER ASSESSMENT YEARS BY THE TRIBUNAL AND THE SAM E WERE REMITTED BACK TO THE FILE OF ASSESSING OFFICER FOR FRESH CONSIDERATION. 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENT ATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF AUTHORITIES BE LOW. THE FIRST ISSUE RAISED IN THE APPEAL OF THE ASSESSEE IS, THE CLAIM OF D EPRECIATION ON COMPUTER SOFTWARE. THE ASSESSEE HAD CLAIMED DEPRECIA TION @ 25% ON LICENSE FEES PAID FOR USE OF COMPUTER SOFTWARE. THE ASSESSING OFFICER ALLOWED THE DEPRECIATION @ 60% TREATING IT AS COMPUTER SO FTWARE. THE LD. AR OF THE ASSESSEE HAS REFERRED TO THE EARLIER DECISIO N OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 1125/PN/2011 (SUPRA). WE FIND THAT IDENTICAL ISSUE HAD COME UP BEFORE THE TRIBUNAL FO R CONSIDERATION IN THE SAID APPEAL. THE TRIBUNAL REMITTED TH E FILE BACK TO THE ASSESSING OFFICER FOR DECIDING THE ISSUE AFRESH. THE RELE VANT EXTRACT OF THE ORDER OF TRIBUNAL IS REPRODUCED HERE-IN-UNDER: 24. THE SECOND ISSUE RAISED BY THE ASSESSEE IS WIT H REGARD TO THE RATE OF DEPRECIATION TO BE ALLOWED ON COMPUTER SOFTWARE. THE PLEA OF THE ASSESSEE BEFORE US WAS THAT AS PER THE ENTRY IN APP ENDIX-1 TO THE INCOME TAX RULES, 1962 (IN SHORT RULES) I.E. REFE RENCE TO PART B INTANGIBLE ASSETS, IT IS PROVIDED THAT KNOW-HOW, PA TENTS, COPY RIGHTS, TRADE MARKS, LICENSES, FRANCHISES OR ANY OTHER BUSI NESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE ARE TO BE TAKEN AS INTANGI BLE ASSETS. AS AGAINST THE ENTRY NO.5 IN PART A, TANGIBLE ASSETS READS AS COMPUTERS INCLUDING THE COMPUTER SOFTWARE. FURTHER, THE CLAIM OF THE AS SESSEE WAS THAT THE SOFTWARE WAS LICENSED SOFTWARE RATHER THAN OWNED SO FTWARE AND ONCE WHEN THERE WAS SPECIFIC ENTRY FOR COPY RIGHTS, LICE NSES OR OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, THE GENERAL ENTRY FOR COMPUTER SOFTWARE SHOULD BE UNDERSTOOD FOR OWNED SOFTWARE, W HICH ONCE 6 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 PURCHASED AND THERE WAS NO QUESTION OF RENEWAL OF L ICENSE. RELIANCE IN THIS REGARD WAS PLACED ON SERIES OF DECISIONS BY TH E LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE, BUT SPECIAL RELIAN CE WAS PLACED ON THE RATIO LAID DOWN BY THE DELHI BENCH OF THE TRIBUNAL IN SONY INDIA PVT. LTD. VS. ADDL.CIT (2011) 56 DTR 156 (DELHI). IT WAS POIN TED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT IN CASE OF LICENSE FOR USE OF COMPUTER SOFTWARE, IT WAS HELD T HAT THE LICENSE WAS AN INTANGIBLE ASSET AS PER PART B OF APPENDIX-1 TO RUL ES, WHICH PRESCRIBES UNIFORM RATE OF 25% FOR DEPRECIATION ON ALL INTANGI BLE ASSETS. IN THE SCHEDULE TO INCOME TAX RULES, UNDER PART A IN BLOCK OF ASSETS AND PLANT & MACHINERY AT SERIAL NO.5, IT IS PROVIDED THAT DEP RECIATION AT 60% WOULD BE ALLOWED ON COMPUTERS INCLUDING COMPUTER SOFTWARE . THE SAID DEFINITION TO INCLUDE COMPUTER SOFTWARE WAS INTRODU CED W.E.F. ASSESSMENT YEAR 2006-07. UNDER PART B I.E. INTANGIB LE ASSETS, IT IS PROVIDED THAT KNOW-HOW, PATENTS, COPY RIGHTS, TRADE MARKS, LICENSES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGH TS OF SIMILAR NATURE ARE TO BE ALLOWED DEPRECIATION @ 25%. WHILE INTERPR ETING THE TERM LICENSE FOR USE OF COMPUTER SOFTWARE, THE DELHI BENCH OF TH E TRIBUNAL IN SONY INDIA PVT. LTD. VS. ADDL.CIT (SUPRA), HAD HELD THAT THE SAME WAS AN INTANGIBLE ASSET. THE RATIO LAID DOWN BY THE DELHI BENCH OF TRIBUNAL WAS WITH REGARD TO LICENSE FOR USE OF COMPUTER SOFTWARE . THE ACT ITSELF RECOGNIZED THE DISTINCTION BETWEEN THE COMPUTER SOF TWARE PERSE AND THE LICENSE, WHEREIN THE COMPUTER ALONG WITH COMPUTER S OFTWARE IS TERMED AS A TANGIBLE ASSET AND THE LICENSE IS COVERED AS INTA NGIBLE ASSET. THE DELHI BENCH OF TRIBUNAL HAS HELD THAT THE LICENSE FOR USE OF COMPUTER SOFTWARE IS AN INTANGIBLE ASSET ENTITLED TO DEPRECIATION @ 2 5%. HOWEVER, IN THE FACTS OF THE PRESENT CASE BEFORE US, THE NATURE OF ACQUISITION OF COMPUTER SOFTWARE IS NOT CLEAR WHETHER THE ASSESSEE HAS PURC HASED COMPUTER SOFTWARE PERSE OR HAS OBTAINED LICENSE FOR USE OF A NY COMPUTER SOFTWARE. IN CASE THE ASSET ACQUIRED BY THE ASSESSEE IS IN TH E FORM OF COMPUTER SOFTWARE, THEN THE SAME IS ENTITLED TO THE DEPRECIA TION @ 60% AND IN CASE, IT IS THE LICENSE FOR USE OF COMPUTER SOFTWAR E, THEN THE ASSESSEE IS ONLY ENTITLED TO DEPRECIATION @ 25% AS CLAIMED IN T HE RETURN OF INCOME. IN ORDER TO ESTABLISH THE NATURE OF ACQUISITION BY THE ASSESSEE IN THE FIELD OF COMPUTER SOFTWARE, WE DEEM IT FIT TO RESTORE THE IS SUE BACK TO THE FILE OF ASSESSING OFFICER, WHO SHALL DETERMINE THE SAME AND CONSEQUENTLY, ALLOW THE DEPRECIATION ON THE SAME. THE ASSESSEE SH ALL FURNISH THE NECESSARY EVIDENCE IN THIS REGARD BEFORE THE ASSESS ING OFFICER AND WHO IN TURN, SHALL DECIDE THE ISSUE. THE GROUND OF APPE AL NO.2 RAISED BY THE ASSESSEE IS THUS, ALLOWED FOR STATISTICAL PURPOSES. 7 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 WE OBSERVE FROM RECORDS IN THE PRESENT CASE AS WELL, TH AT IT IS NOT CLEARLY EVIDENT, WHETHER THE DEPRECIATION CLAIMED IS ON COM PUTER SOFTWARE OR LICENSE FEES PAID FOR USE OF COMPUTER SOFTWARE . THEREFORE, WE DEEM IT APPROPRIATE TO RESTORE THE ISSUE BACK TO T HE FILE OF ASSESSING OFFICER FOR DECIDING THIS ISSUE AFRESH IN THE LIGHT OF AFORESAID D ECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2004-0 5. 7. IN SO FAR AS THE INTEREST INCOME FROM BANK AND DEPOSIT S WITH MIDC AND BANKS IS CONCERNED, NOTHING HAS BEEN BROUGHT TO OUR NOTICE BY EITHER OF THE SIDES AS TO HOW THE ISSUE WAS DECIDED AFTER IT WAS REMANDED BACK TO ASSESSING OFFICER BY THE TRIBUNAL IN APPE AL OF THE ASSESSEE IN ITA NO. 114/PN/2013 FOR ASSESSMENT YEAR 20 08-09. THE TRIBUNAL REMITTED THE FILE BACK TO THE ASSESSING OFFICER WITH THE FOLLOWING OBSERVATIONS: 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDER OF THE AO/TPO AND THE DRP ON THIS ISSUE AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS RELIED ON BY THE LD. COUNSEL FOR THE ASSESSEE. SINCE THE ASSESSEE HAS NOT JUSTIFIED BEFORE THE AO THE REASON S FOR NOT EXCLUDING THE OTHER INCOME WHILE WORKING OUT THE EXEMPTION U/ S.10B AND SINCE NOTHING IS COMING OUT OF THE RECORDS AS TO WHAT HAS HAPPENED FINALLY IN THE PRECEDING ASSESSMENT YEARS, THEREFORE, WE DEEM IT PROPER TO RESTORE THIS ISSUE TO THE FILE OF THE AO FOR PASSING A SPEA KING ORDER ON THIS ISSUE. IT IS NOT KNOWN WHETHER THE STAND OF THE DEPARTMENT IN THE PAST HAS BEEN ACCEPTED BY THE ASSESSEE OR NOT. IF NOT, THEN WHAT IS THE OUTCOME IN APPEAL. THE AO IS THEREFORE DIRECTED TO ADJUDICATE THE ISSUE AFRESH AND IN ACCORDANCE WITH LAW. HE IS ALSO DIRECTED TO CONSIDE R THE ALTERNATE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE FOR NE TTING OFF OF INTEREST INCOME. THE AO SHALL DECIDE THE ISSUE IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. WE HOLD AND DIRECT ACCORDINGLY. GROUND OF APPEAL NO.2 BY THE AS SESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. THE LD. AR OF THE ASSESSEE HAS POINTED THAT THERE IS N O CHANGE IN FACTS AND CIRCUMSTANCES IN THE ASSESSMENT YEAR UNDER A PPEAL AND THE 8 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 ASSESSMENT YEAR IN WHICH THE ABOVE ORDER HAS BEEN PAS SED. THE LD. DR HAS NOT CONTROVERTED THIS STAND OF THE ASSESSEE. IN O RDER TO HAVE A CONSISTENT VIEW, WE DEEM IT APPROPRIATE TO REMIT THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER FOR DECIDING THE ISSUE AFRESH IN THE A FORESAID TERMS. 8. IN VIEW OF OUR ABOVE FINDINGS THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. ITA NO. 264/PN/2011 (APPEAL BY THE REVENUE) 9. NOW, WE PROCEED TO DECIDE THE APPEAL OF THE REVENUE. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL: 1. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE , AND IN LAW THE LD.CIT(A) WAS JUSTIFIED IN ACCEPTING THE CONTENTION OF THE ASSESSEE ON THE ISSUE OF SELECTION OF TESTED PARTY AND ACCORDINGLY HOLDING THAT SIGMA ELECTRIC MANUFACTURING CORP (SIGMA), THE AE OF THE ASSESSEE, CANNOT BE CONSIDERED AS TESTED PARTY EVEN THOUGH BASED ON FAR ANALYSIS, IT WAS ESTABLISHED BY TPO THAT SIGMA . UNDERTAKES LESS FUN CTIONS, EMPLOYS LESS ASSETS AND ASSUMES LESS RISKS THAN THE ASSESSEE AND FURTHER THAT THE ASSESSEE DOES NOT HAVE VALID COMPARABLE LOOKING TO ITS ACTIVITY OF MANUFACTURING AND EXPORT SALE OF ALMOST ENTIRE TURN OVER ?' 2. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE , AND IN LAW THE LD.CIT(A) WAS JUSTIFIED IN REJECTING DETERMINATION OF ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF SIGMA WITH REFERENCE TO THE OVERALL OPERATING PROFITS OF SIGMA RATHER THAN OPERATING PR OFITS MADE BY SIGMA ON ACCOUNT OF PURCHASES FROM THE ASSESSEE AND IN OV ERLOOKING THE FACT THAT THE ASSESSEE ITSELF HAD SUBMITTED THE TRANSFER PRICING REPORT BASED UPON THE COMBINED TRANSACTION APPROACH IN CASE OF S IGMA. 3. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE , AND IN LAW THE LD.CIT(A) WAS JUSTIFIED IN GIVING THE ASSESSEE THE BENEFIT OF 5% UNDER THE PROVISO OF SECTION 92C(2) EVEN THOUGH IN VIEW O F THE PROVISIONS OF THE LAW, DETAILS AND INTENTIONS AS ARE EVIDENT FROM THE PRESS NOTE ISSUED BY GOVT. OF INDIA ON 22/08/2001 AS WELL AS CIRCULAR NO .12 DATED 23/08/2001 OF THE CBDT, AND DECISION OF THE HON'BLE ITAT, DELHI IN CASE 9 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 OF GLOBAL VANTEDGE (P) INDIA LTD. VS. DCIT 1 ITR 32 6, THE BENEFIT OF THE SAFE HARBOR OF 5% IS NOT AVAILABLE TO THE ASSESSE E. 4. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW THE LD.CIT(A) WAS JUSTIFIED IN HOLDING THAT INCOME ARIS ING OUT OF SALE OF SCRAP IS DIRECTLY LINKED WITH THE EXPORT ACTIVITY OF THE ASSESSEE AND, THEREFORE, QUALIFIES FOR EXEMPTION U/S.10B. 5. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW THE LD.CIT(A) WAS JUSTIFIED IN DIRECTING TO ALLOW EXEMP TION IN RESPECT OF SALE OF SCRAP AND SALES TAX SET OFF WITHOUT APPRECIATING THAT EXEMPTION U/S.10B IS AVAILABLE ONLY ON INCOME DERIVED FROM TH E EXPORT OF GOODS. 6. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW THE LD.CIT(A) WAS JUSTIFIED IN NOT FOLLOWING THE RATIO OF DECISION OF SUPREME COURT IN THE CASE OF CIT VS. STERLING FOODS LTD. 23 7 ITR 579 AND THE CIT VS PANDIAN CHEMICALS 262 ITR 278 AND IN NOT FOLLOWI NG THE EARLIER APPELLATE ORDER OF A.Y.2002-03 AND 2003-04. 7. THE ORDER OF THE CIT(A) MAY BE VACATED AND THAT OF THE AO BE RESTORED. 8. THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTER A NY OF THE ABOVE GROUNDS OF APPEAL. 10. THE LD. DR SUBMITTED THAT THE COMMISSIONER OF INCOME T AX (APPEALS) HAS ERRED IN ACCEPTING THE CONTENTION OF THE AS SESSEE THAT THE ASSESSEE HAD PROVIDED A COMPARABLE SUMMARY OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS UNDERTAKEN BY SEMCO AND SIGM A TO SHOW THAT SEMCO IS LESS COMPLEX ENTITY WITHOUT CONTROVERTING O R DISPUTING THE FAR ANALYSIS IN RESPECT OF SEMCO AND SIGMA IN THE OR DER OF TPO. THE DECISION OF TPO TO TAKE SIGMA AS A TESTED PARTY WAS BASED ON ANALYSIS OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS UNDERTAKEN BY THE ASSESSEE AND ITS AE. THE ASSESSEE IS A CAPTIVE MANUFACTURE OF ITS AE, THEREFORE IN THE HANDS OF AE THERE CANNOT BE MU CH RISK IN RELATION TO OBSOLETE INVENTORY OR RISK RELATING TO PENALTIE S IN LATE DELIVERIES. FURTHER, THE PRODUCT MANUFACTURED BY THE A SSESSEE IS UL AND CSA CERTIFIED. THUS, THE RISK RELATING TO NON-PERFORM ANCE OF THE 10 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 PRODUCTS IS ALSO NEGLIGIBLE. AS FAR AS THE ASSETS EMPLOYED BY THE ASSESSEE, THEY ARE MUCH MORE AS COMPARED TO SIGMA. A S REGARDS THE SALE OF ITS PRODUCT IS CONCERNED THE ENTIRE SALE OF ASSESS EE IS ON ACCOUNT OF EXPORTS. THE ASSESSEE SHOULD HAVE APPLIED A FILTER OF EX PORT SALES TO TOTAL SALES OF AT LEAST 75%. FROM THE LIST OF COMPARABLES SELECTED, THERE IS NO COMPANY HAVING RATIO OF EXPORT SALES TO TOTAL SALES GREATER THAN 90% EXCEPT ONE. FOR VALID BENCHMARKING, A SET OF VALID CO MPARABLES IS A MUST AND WITHOUT THAT NO BENCHMARKING WOULD BE FEASIBLE. 10.1 THE LD. DR SUBMITTED THAT IT IS EVIDENT FROM FACTS OF TH E CASE THAT THE ASSESSEE HAS MORE FUNCTIONS TO PERFORM, EMPLOYS MORE ASSETS AND ASSUMES MORE RISKS. ITS WORKING IS THUS MORE COMPLEX T HAN ITS OVERSEAS ASSOCIATE SIGMA. IN THESE CIRCUMSTANCES TREA TING SIGMA AS TESTED PARTY IS JUSTIFIED FOR BENCHMARKING OF THE INTERNATIO NAL TRANSACTION. THE LD. DR REFERRED TO THE ORDER OF TRANSFE R PRICING OFFICER, (PARA 7) WHEREIN RELEVANT PARAS OF THE SHOW CAUSE NOTICE ARE REPRODUCED, TO EMPHASIS THAT SIGMA SHOULD BE TREATED AS TESTED PARTY. THE LD. DR FURTHER CONTENDED THAT THERE IS NO BAR THAT THE FOREIGN COMPANY CANNOT BE CONSIDERED AS TESTED PARTY. THE LD. DR CONTENDED THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN HOLDING THAT THE DATA RELATING TO INDIAN ENTITIES IS EASILY AVAILAB LE THAN THE OVERSEAS ENTITY. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS FAILED TO APPRECIATE THE FACT THAT DATA RELATING TO INDIAN ENTIT IES AS WELL AS OVERSEAS ENTITIES IS EXTRACTED FROM THE DATABASES AVAILAB LE IN PUBLIC DOMAIN. FURTHER, DURING TRANSFER PRICING ASSESSMENT PROCE EDINGS, THE ASSESSEE ITSELF PROVIDED DATA OF OVERSEAS ENTITIES. 10.2 THE LD. DR FURTHER CONTENDED THAT THE COMMISSIONER O F INCOME TAX (APPEALS) HAS ERRED IN STATING THAT WHILE THE PRINCIPLE OF RES 11 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 JUDICATA HAS NO APPLICATION TO THE INCOME TAX PROCEEDING S, THE FACT REMAINS THAT AS THERE WAS LITTLE CHANGE IN THE BUSINESS A CTIVITY OR THE FUNCTIONS OF SEMCO VIS-A-VIS SIGMA, THERE IS LITTLE APPARENT J USTIFICATION FOR ADOPTING THE OVERSEAS ENTITY AS A TESTED PARTY ONL Y FOR ONE PARTICULAR YEAR. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS OVERLO OKED THE FACT THAT SIGMA WAS TAKEN AS TESTED PARTY FOR BENCHMAR KING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE FOR SUBSEQUENT YEARS ALSO. HOWEVER, THERE ARE NO ADJUSTMENT IN SUBSEQUENT YEARS FOR THE REASON THAT THE OPERATING MARGIN OF SIGMA IS WITHIN THE 5% RANG E AS COMPARED TO THE COMPARABLES IDENTIFIED FOR THESE YEARS. 10.3 THE LD. DR SUBMITTED THAT THE SEGMENTAL P&L ACCOUNT OF SIGMA SUBMITTED BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CERTIFIED BY THE CA AND IT IS ALSO BASED UPON SOME APPROX IMATIONS WHERE ALL COSTS EXCEPT THE MATERIAL COST ARE ALLOCATED ON THE BASIS OF SALES RATIO. THE LD. DR SUBMITTED THAT WITHOUT PREJUDICE TO EARLIER CONTENTIONS, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS E RRED FACTUALLY IN ACCEPTING THE ASSESSEES VIEW THAT THERE IS NO JUSTIFICATION FOR ANY TP ADJUSTMENT EVEN BY TAKING SIGMA USA AS THE 'TESTED PARTY'. AS SIGMA'S PLI OF MATERIAL PROCURED FROM SEMCO IS 12.46% O NLY WHICH IS WITHIN THE ALLOWABLE THRESHOLD AVERAGE OF PLI OF COMPARAB LES TAKEN BY THE TPO. EVEN IF SIGMA'S PLI OF MATERIAL PROCURED FROM SEMCO IS 12.46%, THE ARM'S LENGTH PRICE SO DETERMINED EXCEEDS 5% OF THE PRICE AT WHICH INTERNATIONAL TRANSACTIONS HAD ACTUALLY BEEN UND ERTAKEN BETWEEN SIGMA AND SEMCO. 12 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 11. IN RESPECT OF GROUND NO. 3 THE LD. DR SUBMITTED THAT THE PROVISIONS OF SECTION 92C(2) HAVE BEEN AMENDED AND THUS T HE ASSESSEE IS NOT ELIGIBLE TO CLAIM THE BENEFIT OF 5% MARGIN. 12. THE LD. DR SUBMITTED THAT GROUND NOS. 4 TO 6 IN THE APPEAL OF REVENUE RELATES TO NON-TP ISSUES AND GROUND NOS. 7 AND 8 ARE GENERAL IN NATURE. THE LD. DR PLACED RELIANCE ON THE ORDER OF ASSE SSING OFFICER IN SUPPORT THEREOF. 13. ON THE OTHER HAND SHRI SHARAD A. SHAH APPEARING ON BEHALF OF THE ASSESSEE VEHEMENTLY SUPPORTED THE FINDINGS OF THE C OMMISSIONER OF INCOME TAX (APPEALS) IN RESPECT OF GROUNDS RAISED BY T HE REVENUE IN APPEAL. THE LD. AR CONTENDED THAT THE TPO IN NONE OF THE ASSESSMENT YEARS IN THE PAST AND THE SUBSEQUENT ASSESSMENT YEAR S HAS SELECTED SIGMA AS TESTED PARTY. IT IS ONLY IN THE IMPUGNED ASSE SSMENT YEAR THAT THE TPO HAS TAKEN SIGMA AS TESTED PARTY. THROUGHOUT THE DEPARTMENT HAS BEEN CONSIDERING INDIAN COMPANY AS TESTED PARTY. T HE LD. AR FURTHER SUBMITTED THAT THE RELEVANT DATA OF FOREIGN COMPA NIES IS NOT AVAILABLE IN PUBLIC DOMAIN. THEREFORE, FOREIGN COMPANIES CANNO T BE CONSIDERED AS A GOOD COMPARABLE. THE COMPANIES SELECTED BY TPO FOR COMPARATIVE STUDY ARE FUNCTIONALLY DIFFERENT. FOR SELECTING TESTED PARTY, THE COMPLEXITY OF THE ENTITIES HAS TO BE CONSIDERE D AND THE LEAST COMPLEX ENTITY SHOULD BE SELECTED AS TESTED PARTY. ON T HE PRINCIPLES OF CONSISTENCY THE LD. AR PLACED RELIANCE ON THE DECISION OF HO NBLE SUPREME COURT OF INDIA IN THE CASE OF RADHASOAMI SATSANG VS. CIT REPORTED AS 193 ITR 321 (SC). AS REGARDS 5% MARGIN, THE LD. DR CONTENDED THAT AMENDMENT TO SECTION 92C IS EFFECTIVE FROM 01-10- 2009. IN SUPPORT OF HIS SUBMISSIONS, THE LD. AR DRAWS OUR ATTEN TION TO CIRCULAR NO. 5 OF 2010 AND ITS CORRIGENDUM DATED 30-09-20 10 AT PAGES 13 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 1478 TO 1482 OF THE PAPER BOOK. IN THE CASE OF ASSES SEE THE TPO PASSED ORDER ON 30-09-2008 THEREFORE, IT WILL NOT BE APPLIC ABLE IN THE PRESENT CASE. THEREFORE, THE ASSESSEE CAN TAKE THE BE NEFIT OF 5% MARGIN IN TP ADJUSTMENT. 14. THE LD. AR IN RESPECT OF NON-TP ISSUES RAISED IN THE AP PEAL OF THE REVENUE RELATING TO EXEMPTION U/S. 10B ON INCOME FROM SALE OF SCRAP AND SALES TAX SET OFF SUBMITTED, THAT INCOME ARISING FROM S ALE OF SCRAP IS DIRECTLY LINKED WITH THE EXPORT ACTIVITY OF THE ASSESSEE . THEREFORE, IT QUALIFIES FOR EXEMPTION U/S. 10B OF THE ACT. THE LD. AR POINTE D OUT THAT BOTH THESE CONSTITUENTS OF INCOME HAD COME UP FOR CONSID ERATION IN THE ASSESSEES OWN CASE BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2004-05 IN ITA NO. 1328/PN/2007 DECIDED ON 26-02-2009. THE TRIBU NAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 15. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESE NTATIVES OF THE RIVAL SIDES AT LENGTH AND HAVE EXAMINED THE ORDERS O F THE AUTHORITIES BELOW AND DOCUMENTS ON RECORD. THE ASSESSE E DURING THE PERIOD RELEVANT TO THE IMPUGNED ASSESSMENT YEAR HAS EN TERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AE. SR. NO. TYPE OF TRANSACTION METHOD ADOPTED VALUE OF TRANSAC TION 1 PURCHASE OF RAW MATERIAL/CONSUMABLES TNMM RS.4,23,39,792/- 2 SALE OF FINISHED GOODS TNMM RS.1,56,45,41,799/- 3 PURCHASE OF CAPITAL GOODS TNMM RS.2,19,412/- TOTAL RS.1,60,71,01,003/- 14 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 THE ASSESSEE BENCHMARKED ITS INTERNATIONAL TRANSACTIONS TAKING THE COMBINED TRANSACTION APPROACH CONSIDERING EXTERNAL C OMPARABLES AND BY ADOPTING PLI AS OPERATING PROFIT MARGIN. THE OPER ATING PROFIT MARGIN OF THE ASSESSEE WAS ARRIVED AT 13.44% AND THE AR ITHMETIC MEAN OF THE PLI OF THE COMPARABLES WAS WORKED AT 9.44%. THE TPO DID NOT FIND FAVOUR WITH THE BENCHMARKING DONE BY THE ASSESSEE A ND REJECTED THE SAME FOR THE FOLLOWING REASONS: I. THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSES SEE ARE DIFFERENT IN THEIR NATURE AND SCOPE AND THE SAME HAVE NO T BEEN SEPARATELY BENCHMARKED. THE BENCHMARKING HAS NOT BEE N DONE IN ACCORDANCE WITH THE OECD GUIDELINES. II. THE ENTIRE SALES OF THE ASSESSEE DURING THE RELEVANT PER IOD IS ON ACCOUNT OF EXPORTS. WHILE SELECTING THE COMPARABLES THE A SSESSEE HAS NOT APPLIED THE FILTER TO SELECT THE COMPANIES WHICH AR E INVOLVED INTO SIMILAR MANUFACTURING ACTIVITY IN INDIA AND HAVE EXPORTS AT LEAT OF 75%. III. THE ASSESSEE IS ALSO SELLING ITS PRODUCTS TO TOPAZ (THIRD P ARTY) IN THE EXPORT MARKET. FROM THE DETAILS FILED BY ASSESSEE IT IS SEEN THAT IN RESPECT OF THE SAME PRODUCTS SOLD TO THIRD PAR TY AND AE, THERE ARE INSTANCES, AE HAS BEEN CHARGED LESS AS COMPAR ED TO THE PRICE THAT HAS BEEN CHARGED TO THIRD PARTY. IV. A STUDY OF TP REPORT SHOWS THAT IN COMPARISON TO THE C OMPLEX NATURE OF WORK, ASSETS EMPLOYED AND RISKS UNDERTAKEN BY THE ASSESSEE, SIGMA IS MUCH SIMPLER IN ITS OPERATION, SIGMA IS ENGAGED ONLY IN DISTRIBUTION AND PACKAGING OF ELECTRICAL PRO DUCTS AND DEALS MAINLY ON WHOLESALE BASIS. DURING THE YEAR 84% OF THE TOTAL SALES IS TO ONLY 10 CUSTOMERS. THERE IS VERY SMALL GOODWILL AND ADVERTISING EXPENSES FOR ITS SALES IS ALSO VERY SMALL. WHEREAS, THE ASSESSEE IS ENGAGED IN MANUFACTURING PROCES S. IT 15 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 HAS 639 EMPLOYEES, HAS EMPLOYED SEVERAL MACHINES. APART FROM ABOVE, THE ASSESSEE HAS NECESSARY OFFICE EQUIPMENT AND OTHER INFRASTRUCTURAL FACILITIES. IN THE BACKDROP OF THESE FACTS THE TPO SELECTED SIGMA A S TESTED PARTY. 16. THE ASSESSEE OBJECTED TO THE SELECTION OF SIGMA AS TESTED PARTY GIVING DETAILED REASONS TO THE TPO. THE TPO REJECTED TH E SAME AND PROCEEDED ON TO MAKE TP ADJUSTMENT BY SELECTING SIGMA AS TESTED PARTY AND SELECTING COMPARABLES, ACCORDINGLY. THE TPO MADE ADJ USTMENT OF RS.10,42,83,12/- WITH REGARD TO ALP OF INTERNATIONAL TRANSAC TIONS UNDERTAKEN BY THE ASSESSEE DURING THE YEAR. 17. IN FIRST APPEAL, THE COMMISSIONER OF INCOME TAX (APPEALS ) REVERSED THE FINDINGS OF TPO AND ACCEPTED THE CONTENTION S OF THE ASSESSEE. BEFORE US THE LD. AR HAS RELIED HEAVILY ON THE DETAILED FINDINGS GIVEN BY THE COMMISSIONER OF INCOME TAX (APPEALS) O N VARIOUS FACETS OF TP ADJUSTMENTS. IN RESPECT OF SELECTION OF TE STED PARTY, THE COMMISSIONER OF INCOME TAX (APPEALS) AFTER ANALYZING THE RE ASONS FOR SELECTING OVERSEAS ENTITY AS TESTED PARTY AND THE COMP ARABLES SELECTED BY TPO, AS WELL AS THE OBJECTIONS RAISED BY THE ASSESSEE AGAINST SUCH SELECTION, THE COMMISSIONER OF INCOME TAX (APPEALS) HELD AS UNDER: 22. I HAVE GIVEN CAREFUL CONSIDERATION TO THE MATT ER ''TESTED PARTY' IN TRANSFER PRICING REFERS TO THE PARTY WHOSE PRICES A ND PROFIT MARGINS ARE TESTED USING THE MOST APPROPRIATE METHOD. CHRONOLOG ICALLY SPEAKING, SELECTION OF TESTED PARTY WOULD PRECEDE THE DETERMI NATION OF MOST APPROPRIATE METHOD FOR COMPUTATION OF ARM'S LENGTH PRICE, IT IS BY NOW WELL-SETTLED THAT THE PARTY WHICH IS THE LEAST COMP LEX OF THE CONTROLLED TAXPAYERS AND DOES NOT OWN VALUABLE INTANGIBLE PROP ERTY OR UNIQUE ASSETS THAT DISTINGUISH IT FROM POTENTIAL COMPARABL ES, SHOULD BE THE TESTED PARTY. REFERENCE BY WAY OF EXAMPLE MAY BE HA D TO THE DECISION IN 16 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 DEVELOPMENT CONSULTANTS PVT . LTD V. DCIT (2008) 115 TTJ (KOL), RANBAXY LABORATORIES LTD. V. ADDITIONAL CIT 110 ITD 428. A NOTHER CRITERION TOR SELECTION OF TESTED PARTY IS THAT IT SHOULD BE AN E NTERPRISE WHOSE PRICES OR PROFIT MARGINS CAN BE VERIFIED USING THE AVAILABLE DATA. IT SHOULD REQUIRE VERY FEW ADJUSTMENTS AND FOR WHICH RELIABLE DATA IN RESPECT OF COMPARABLE UNCONTROLLED TRANSACTIONS CAN BE LOCATED . UPON CAREFUL CONSIDERATION OF THIS LEGAL POSITION AGAINST THE AB OVE MENTIONED FACTS & THE SUBMISSIONS OF THE APPELLANT, I FIND CONSIDERAB LE FORCE IN THE APPELLANT'S CONTENTIONS. IN THE WRITTEN SUBMISSIONS , A COPY OF WHICH HAD BEEN FORWARDED TO THE TPO, THE APPELLANT HAD PROVID ED A COMPARABLE SUMMARY OF FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS UNDERTAKEN BY SERRICO AND SIGMA TO PROVE THAT SEMCO WAS THE LE SS COMPLEX ENTITY OF THE TWO. THE APPELLANT HAD POINTED TO CERTAIN VERY SPECIFIC FACTS IN ITS SUBMISSIONS WHICH ARE SUMMARISED AT PARA-12 (SUPRA) . THE TPO, IN HIS REPLY, AS ALREADY MENTIONED, HAS NOT CONTESTED THES E FACTS, BUT RELIED ON THE TP ORDER. I ALSO FIND MERIT IN THE APPELLANT'S CONTENTION THAT DATA RELATING TO THE INDIAN ENTITY ARE MORE EASY TO COME BY THAN THE OVERSEAS ENTITY, FACILITATING GREATER COMPARABILITY. FINALLY , THE APPELLANT'S ARGUMENT THAT FOR ALL THE EARLIER AND LATER YEARS T HE TP ORDER HAS BEEN COMPLETED ADOPTING SEMCO AS THE TESTED PARTY ALSO C ANNOT BE EASILY BRUSHED ASIDE, THE APPELLANT HAS SUBMITTED COPIES O F TP ORDERS FOR EARLIER AND SUBSEQUENT YEARS WHICH ARE VERY BRIEF A ND SUGGEST NO ADJUSTMENT. WHILE THE PRINCIPLE OF RES JUDICATA HAS NO APPLICATION TO THE I.T. PROCEEDINGS, THE FACT REMAINS THAT AS THERE WA S LITTLE CHANGE IN THE BUSINESS ACTIVITY OR THE FUNCTIONS OF SEMCO VIS-A-V IS SIGMA, THERE IS LITTLE APPARENT JUSTIFICATION FOR ADOPTING THE OVERSEAS EN TITY AS A TESTED PARTY ONLY FOR ONE PARTICULAR YEAR. WE ARE OF THE CONSIDERED VIEW THAT THE REASONS GIVEN BY COMMISSIONER OF INCOME TAX (APPEALS) FOR REJECTING SIGMA AS TESTED PARTY ARE WELL FOUNDED. THE RISK ANALYSIS CONDUCTED BY T HE TPO ON SIGMA VIS--VIS SEMCO (ASSESSEE) IS NOT PROPER. THE TPO W ITHOUT PROPERLY APPRECIATING AND ANALYZING THE BUSINESS MODEL O F SIGMA AND THE BUSINESS ENVIRONMENT IN WHICH IT IS OPERATING HAS CON CLUDED THAT SIGMA IS MUCH SIMPLER IN ITS OPERATION. WE ARE OF THE CONSI DERED VIEW THAT THE COMMISSIONER OF INCOME TAX (APPEALS) IS JUSTIFIED IN REJECTING 17 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 SIGMA AS TESTED PARTY. ACCORDINGLY, THE FIRST GROUND OF A PPEAL OF THE REVENUE IS REJECTED. 18. THE SECOND GROUND IN THE APPEAL OF REVENUE IS WITH RE SPECT TO COMBINED TRANSACTION APPROACH FOLLOWED BY ASSESSEE TO BE NCHMARK INTERNATIONAL TRANSACTION. THE COMMISSIONER OF INCOME TAX (APPEALS) AFTER PLACING RELIANCE ON THE DECISION RENDERED IN THE CASE OF DCIT VS. STARLITE REPORTED AS 40 SOT 421 (MUM) HAS DECIDED THE IS SUE IN FAVOUR OF ASSESSEE. THE RELEVANT EXTRACT OF THE FINDINGS OF COMMIS SIONER OF INCOME TAX (APPEALS) ARE AS UNDER : 28. I HAVE GIVEN CAREFUL CONSIDERATION TO THE RIVA L VIEWS OF THE LEARNED TPO AND THE ASSESSEE. IN VIEW OF THE DECISION CITED BY THE APPELLANT ABOVE IN THE CASE OF STARLITE WHICH WAS NOT AVAILAB LE AT THE TIME OF PASSING OF THE TRANSFER PRICING ORDER, THE APPELLAN T'S CONTENTION THAT TNMM REQUIRES COMPARISON OF NET PROFIT MARGINS REAL IZED BY AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION OR AN AGGREGATE OF INTERNATIONAL TRANSACTIONS AND NOT COMPARISONS OF O PERATING MARGINS OF ENTERPRISES STANDS SUPPORTED. IN THEIR LETTER DATED NOVEMBER 18, 2009, WHICH WAS FORWARDED TO THE TPO FOR HIS COMMENT, IF ANY, THE APPELLANT HAD INTER ALIA RAISED THIS CONTENTION IN PARA-2,1,3 . AS ALREADY MENTIONED, THE TPO HAS NOT OFFERED ANY COMMENTS IN THIS REGARD , BUT RELIED ON THE TRANSFER PRICING ORDER. FOR THE REASONS CITED ABOVE , I AM IN AGREEMENT WITH THE APPELLANT'S SUBMISSIONS WITH REGARD TO THI S ISSUE. AS REGARDS THE ISSUE OF +/- 5%, HOWEVER, THE SAME IS DISCUSSED SEPARATELY (INFRA). THE LD. DR HAS NOT BEEN ABLE TO CONTROVERT THE FINDINGS O F COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE. WE DO N OT FIND ANY INFIRMITY IN THE ORDER OF COMMISSIONER OF INCOME TAX (APP EALS) ON THIS ISSUE. ACCORDINGLY, THE SECOND GROUND OF APPEAL OF TH E REVENUE IS DISMISSED. 19. IN THE THIRD GROUND OF APPEAL, THE REVENUE HAS ASSAILE D THE BENEFIT OF 5% MARGIN ALLOWED BY COMMISSIONER OF INCOME TAX 18 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 (APPEALS) TO THE ASSESSEE. THE PROVISO TO SECTION 92C HA S BEEN AMENDED BY THE FINANCE (NO. 2) ACT, 2009. THE CORRIGEND UM DATED 30- 09-2010 TO CIRCULAR NO. 5 DATED 03-07-2010 HAS CLARIFIED T HAT THE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECTIVE FROM 1 ST OCTOBER, 2009 AND SHALL APPLY IN RELATION TO ALL CASES IN WHICH PROCE EDINGS ARE PENDING BEFORE THE TRANSFER PRICING OFFICER ON OR AFTER SUCH DATE. IN THE PRESENT CASE THE TPO HAS PASSED ORDER ON 30-09-2008 . THUS, THE AMENDMENT WILL HAVE NO BEARING IN THE INSTANT CASE. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS GIVEN THE BENEFIT OF 5% SAFE HARBOR TO THE ASSESSEE BY FOLLOWING THE DECISION OF PU NE BENCH OF THE TRIBUNAL IN THE CASE OF SKODA AUTO INDIA LTD. VS. ASS T. CIT IN ITA NO. 202/PN/2007. THE REVENUE HAS DRAWN SUPPORT FROM T HE DECISION OF DELHI BENCH OF THE TRIBUNAL IN THE CASE OF GLOBAL VENTAGE (P) INDIA LTD. VS. DCIT, 1 ITR 320. AFTER PERUAL OF SAME, WE FIND THA T THE SAID DECISION IS NOT APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE AND THUS, THE SAME IS DISTINGUISHABLE. WE DO NOT FIND ANY REASON OR MATERIAL ON RECORD TO INTERFERE WITH THE FINDINGS OF COM MISSIONER OF INCOME TAX (APPEALS) ON THE ISSUE. ACCORDINGLY, THE THIRD GROUND OF APPEAL IS ALSO DISMISSED. 20. THE REVENUE IN GROUND NOS. 4 AND 5 HAVE ASSAILED TH E FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN GIVING THE BENEFIT OF EXEMPTION U/S. 10B ON INCOME ARISING FROM SALE OF SCRAP AN D SALES TAX SET OFF. THE LD. AR HAS SUBMITTED THAT THESE ISSUES WERE DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2004-05 IN ITA NO. 1328/PN/2007 (SUPR A). THE TRIBUNAL BY FOLLOWING THE DECISION OF CO-ORDINATE BENCH OF TRIB UNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2001-02 IN ITA NOS. 1075/PN/2005 AND 1374/PN/2005 DECIDED ON 25-03-2008 HAS HELD 19 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 THAT INCOME FROM SALE OF SCRAP AND SALES TAX SET OFF ARE E LIGIBLE FOR DEDUCTION U/S. 10B OF THE ACT. WE FIND THAT THIS ISSUE HA S BEEN REOCCURRING IN EARLIER ASSESSMENT YEARS. THE TRIBUNAL H AS BEEN CONSISTENTLY HOLDING THAT ON INCOME FROM SALE OF SCRAP AND SALES TAX SET OFF, THE ASSESSEE IS ELIGIBLE TO CLAIM DEDUCTION U/S. 10B OF TH E ACT. THE RELEVANT EXTRACT OF THE FINDINGS OF THE TRIBUNAL IN ITA NO . 1328/PN/2007 ARE REPRODUCED HERE-IN-UNDER: 4. AFTER NARRATING THE FACTUAL BACKGROUND LEARNED A.R. SHRI R.G. AGIWAL HAS STATED THAT NOW THE ISSUE STOOD COVERED BY THE DECISION OF RESPECTED ITAT 'B' BENCH, PUNE IN ASSESSEE'S OWN CASE FOR A.Y. 2001-02 BEARING ITA NO. 1075/PN/2005 AND 1374/PN/ 2005, ORDER DATED 25/03/2008 AND FOR A.Y. 2003-04 IN ITA NO. 9 44/PN/2006, ORDER DATED 28/03/2008. FOR REFERENCE, RELEVANT PARAS F ROM THE ORDER OF RESPECTED CO-ORDINATE BENCH FOR A.Y. 2003-04 ARE RE PRODUCED BELOW :- '2, THE FIRST ISSUE RAISED BY THE ASSESSEE IS DIREC TED AGAINST THE CIT(A)'S ORDER IN HOLDING THAT THE SUMS RECEIVED BY WAY OF SALE OF SCRAP AND SALES TAX SET OFF, THOUGH IN THE NATURE O F BUSINESS INCOME, DID NOT REPRESENT PROFIT DERIVED FROM BUSIN ESS OF ELIGIBLE EOU - EXPORT ORIENTED UNIT, AND WAS ACCORDINGLY NOT ELIGIBLE FOR GRANT OF DEDUCTION U/S 10B OF THE ACT. 3. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFULL Y GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. 4. THIS IDENTICAL ISSUE HAD COME UP FOR CONSIDERATI ON BEFORE THE ITAT, PUNE BENCH 'B', PANE IN THE ASSESSEE'S OWN CA SE PERTAINING TO THE A.Y. 2001-02 AND 2002-03, WHERE THE ISSUE HA S BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY HOLDING THAT T HE AFORESAID SUM WAS CONSIDERED TO BE THE PROFIT DERIVED FROM BU SINESS OF ELIGIBLE EOU AS PER ORDER DATED 25/03/2008. 5. THE FACTS BEING SIMILAR IN THE PRESENT YEAR, THE ISSUE IS, THUS, DECIDED IN FAVOUR OF THE ASSESSEE IN THE TERM S OF TRIBUNALS ORDER FOR THE A.Y. 2001-02 WHICH WAS FOLLOWED IN A. Y. 2002-03. THE ORDER OF THE COMMISSIONER OF INCOME TAX(A), IS, THUS, SET ASIDE, AND THE A.O. IS DIRECTED TO ALLOW DEDUCTION U/S. 10B IN RESPECT OF THE AFORESAID SUMS IN THE MANNER AS HELD BY THE TRIBUNAL IN ITS ORDER FOR THE A.Y. 2001-02. WE ORD ER ACCORDINGLY. 20 ITA NOS. 247 & 264/PN/2011, A.Y. 2005-06 THE LD. DR HAS NOT BEEN ABLE TO SHOW DISTINGUISHING FACTO R IN THE FACTS AND CIRCUMSTANCES IN THE ASSESSMENT YEAR UNDER A PPEAL. RESPECTFULLY FOLLOWING THE DECISION OF CO-ORDINATE BENCH, WE DISMISS GROUND NOS. 4 AND 5 OF THE APPEAL BY THE REVENUE. THE GROUND NO. 6 OF THE APPEAL IS IN SUPPORT OF GROUND NOS. 4 AND 5. SINCE, WE HAVE DISMISSED GROUND NOS. 4 AND 5 OF THE APPEAL, THE GROUND N O. 6 HAS TO BE DISMISSED. FOR THE REASONS GIVEN ABOVE, THE APPEAL OF THE REVENUE IS DISMISSED BEING DEVOID OF MERIT. 21. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED FO R STATISTICAL PURPOSE AND THE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON MONDAY, THE 07 TH DAY OF DECEMBER, 2015. SD/- SD/- ( . . / R.K. PANDA) ( ! ' / VIKAS AWASTHY) #' / ACCOUNTANT MEMBER $ % #' / JUDICIAL MEMBER / PUNE; &# / DATED : 07 TH DECEMBER, 2015 RK *+,$-.'/'(- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ' () / THE CIT(A)-V, PUNE 4. ' / THE CIT-V, PUNE 5. !*+ %%,- , ,- , . /01 , / DR, ITAT, A BENCH, PUNE. 6. + 2 34 / GUARD FILE. // ! % // TRUE COPY// #5 / BY ORDER, %6 ,1 / PRIVATE SECRETARY, ,- , / ITAT, PUNE