M/s IKA India Pvt Ltd , Bangalore V. Assistant Commissioner of INcome TAX Circle-3(1)(1), Bangalore

ITA 2476/BANG/2017

• Counselvise Citation: [2018] 122 COUNSELVISE.COM (IT) 4082 (ITAT-BANGALORE)
• Duration Of Justice: 10 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 22-11-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SREENANDINI DAS
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction; Question of law; Working capital adjustments; Initiation of penalty proceedings; Avoidance of tax
• Section: 27; 37; 92C; 92; 92B; 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. 2476/BANG/2017 ASSESSMENT YEAR : 2013 - 14 IKA INDIA PVT. LTD., 814/475, SURVEY NO.129/1, MYSORE ROAD, KENGERI, BANGALORE 560 060. PAN: AABCI 9880Q VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(1), BANGALORE. APP ELL ANT RESPONDENT APPELLANT BY : SHRI VED JAIN & SHRI DARPAN KIRPALANI, CAS RESPONDENT BY : SMT. SREE NAND INI DAS, ADDL.CIT(DR)(ITAT), BENGALURU. DATE OF HEARING : 03.10 .201 8 DATE OF PRONOUNCEMENT : 12 .10 .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 2013-14. 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.2476/BANG/2017 PAGE 2 OF 35 SERVICES AND MARKETING AND TECHNICAL SUPPORT SERVIC ES TO GROUP COMPANIES. 3. THE ASSESSEE FILED ITS RETURN OF INCOME ON 30 TH NOVEMBER 2013, DECLARING A TAXABLE INCOME OF RS.82,39,710. THE FOL LOWING 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 8,53,90,600 EXPORT OF FINISHED GOODS 14,40,84,509 PURCHASE OF TRADED GOODS 2,62,99,700 PROVISION OF MARKETING SUPPORT SERVICES 2,59,94,545 PROVISION OF RESEARCH AND DEVELOPMENT FEES 6,29,16,160 PAYMENT OF ROYALTY 2,06,19,173 PAYMENT OF INTEREST ON LOAN 16,65,636 PAYMENT OF PERSONNEL SUPPORT FEES 2,42,63,031 PURCHASE OF FIXED ASSETS 18,84,045 REIMBURSEMENT OF EXPENSES TO AE 68,71,417 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 IT(TP)A NO.2476/BANG/2017 PAGE 3 OF 35 COMPARABLE TO THE ASSESSEE, SEARCH WAS CONDUCTED ON CAPITALINE 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 2012-13 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 2012-13 AS COMPARED TO THE COMPA RABLES. THE ADJUSTED NET MARGIN OF THE ASSESSEE WAS DETERMINED AS 18.97 PERCENT ON OPERATING COST AND 15.95 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 EXPORT OF FINISHED GOODS, THE ABOVE ANALYSIS YIELDED A SET OF 3 COMPAR ABLES WITH ARITHMETIC MEAN OF THE ADJUSTED NET MARGINS OF THE COMPARABLE COMPANIES BEING 4.77% ON OPERATING REVENUE AND 4.80% ON OPERATING C OST. AS THE ASSESSEES NET MARGIN OF 18.97% ON OPERATING REVENU E AND 15.95% ON OPERATING COST WAS GREATER THAN OPERATING MARGIN EA RNED BY THE COMPARABLE COMPANIES, THE ASSESSEE CLAIMED THAT THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS WAS TO BE C ONSIDERED TO BE AT ARM'S LENGTH IN ACCORDANCE WITH THE INDIAN TRANSFER PRICI NG REGULATIONS. 6. THE LIST OF 3 COMPARABLES CHOSEN BY THE ASSESSEE WERE :- IT(TP)A NO.2476/BANG/2017 PAGE 4 OF 35 S.NO. PARTICULARS MARGIN (OP/OR) (%) MARGIN (OP/OR) (%) ACCEPTED/ REJECTED BY THE TPO 1 ALLENGERS MEDICAL SYSTEMS LIMITED 6.97% 7.10% ACCEPTED 2 GANSONS LIMITED 2.99% 3.00% REJECTED 3 SYSTRONICS INDIA LTD.(SEG.) 4.36% 4.38% REJECTED ARITHMETIC MEAN 4.77% 4.80% 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 12 NEW COMPANIES AND SELECTED THE FOLLOWING 13 COMPANIES A S THE FINAL SET OF COMPARABLES WITH UNADJUSTED MARGIN OF 8.61% ON OPER ATING REVENUE:- S.NO. PARTICULARS MARGIN (OP/OR) (%) MARGIN (OP/OC) (%) 1 HINDUSTAN SYRINGES & MEDICAL DEVICES LTD. 10.14 11.28 2. ARTIFICIAL LIMBS MFG. CORPORATION OF INDIA 16.90 20.34 3. ALLENGERS MEDICAL SYSTEMS LTD. 9.88 10.96 4. ELICO LIMITED 12.99 14.93 5. PREMIER MEDICAL CORPORATION PVT. LTD. 2.20 2.25 6. CENTENIAL SURGICAL SUTURE LTD. 6.72 7.20 7. BLUE NEEM MEDICAL DEVICES PVT. LTD. 15.63 18.52 8. ISCON SURGICALS LTD. 8.83 9.68 9. JOHARI DIGITAL HEALTHCARE LTD. 5.75 6.10 10. HEMANTH SURGICAL INDUSTRIES LTD. 7.01 7.54 11. SHREE PACETRONIX LTD. 8.73 9.57 12. CONTINENTAL CONTROLS LTD. 8.24 8.98 13 CARE MEDICAL DEVICES LTD. - 1.14 - 1. ARITHMETIC MEAN 8.61 9.7 1 IT(TP)A NO.2476/BANG/2017 PAGE 5 OF 35 8. THE TPO CONSIDERED FOREIGN EXCHANGE GAIN/LOSSES AS NON-OPERATING IN NATURE WHILE COMPUTING THE OPERATING MARGIN OF T HE COMPARABLE COMPANIES. HOWEVER, HE CONSIDERED THE FOREIGN EXCHA NGE GAIN/LOSSES AS OPERATING IN NATURE WHILE COMPUTING THE OPERATING M ARGIN OF THE ASSESSEE. THE TPO DID NOT MAKE SUITABLE ADJUSTMENTS TO ACCOUN T FOR DIFFERENCES IN THE WORKING CAPITAL POSITION OF THE ASSESSEE VIS-- VIS THE COMPARABLE COMPANIES. THE TPO ALSO DID NOT MAKE SUITABLE ADJU STMENTS TO ACCOUNT FOR UNDER-UTILIZED CAPACITY OF THE ASSESSEE VIS-A-V IS THE COMPARABLE COMPANIES. THE TPO COMPUTED ADDITION TO THE TOTAL INCOME CONSEQUENT TO DETERMINATION OF ALP AS FOLLOWS:- 4.20 IN VIEW OF THE DISCUSSIONS MADE ABOVE, THE TPO IN T HE CASE OF THE TAXPAYER PROCEEDS TO MAKE ADJUSTMENT U/ S 92CA OF THE INCOME-TAX ACT, 1961 USING THE SET OF 13 UNCONTROLL ED COMPARABLES AS ABOVE WITH AVERAGE PLI (OP/OC%) OF 8.61% AS UNDER: PARTICULARS AMOUNT RS. OPERATING COST 39,20,72,536 ARM'S LENGTH MEAN MARGIN 8.61% THEREFORE ARM'S LENGTH PRICE IS 108.61% OF OPERATIN G REVENUE 42,58,29,981 OPERATING REVENUE 40,08,75,618 EXCESS COST BEING ADJUSTMENT U/S 92CA 2,49,54,363/- 9. 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). 10. THE CIT(A) DID NOT PROVIDE ANY RELIEF TO THE AS SESSEE ON THE TRANSFER PRICING MATTER. THE APPROACH OF THE CIT(A) WHILE DI SPOSING ASSESSMENT, IN IT(TP)A NO.2476/BANG/2017 PAGE 6 OF 35 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 CONSIDER ANALYTI CAL INSTRUMENT SEGMENT OF ELICO LTD., FOR MARGIN COMPU TATION AND COMPARABILITY PURPOSE. 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 OPERATING MARGINS OF THE COMPARABLE COM PANIES AND THE ASSESSEE BY CONSIDERING OPERATING PROFIT ON OPE RATING COST AS PROFIT LEVEL INDICATOR. 11. 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' ); 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 IT(TP)A NO.2476/BANG/2017 PAGE 7 OF 35 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. 12. 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. 13. 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 FACTS BY UPHOLDING THE ACTION OF AO/TPO IN DETERMINATION OF THE ARMS LENG TH MARGIN OR PRICE USING ONLY FY 2012-13 DATA WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMEN TATION REQUIREMENTS: 14. IN THE WRITTEN SUBMISSIONS AT PAGE-7 REFERENCE WAS MADE TO SOME JUDICIAL PRECEDENTS. HOWEVER, IN THE CHART FILED B EFORE US AT THE TIME OF HEARING, NO SPECIFIC ARGUMENTS WERE ADVANCED NOR AN Y ORAL SUBMISSIONS MADE ON GR.NO.4 AND HENCE, GR.NO.4 IS DISMISSED. GROUND 5: 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: IT(TP)A NO.2476/BANG/2017 PAGE 8 OF 35 A) HINDUSTAN SYRINGES AND MEDICAL DEVICES LIMITED B) ARTIFICIAL LIMB MANUFACTURING CORPORATION OF IND IA C) ALLENGERS MEDICAL SYSTEMS LIMITED D) ELICO LIMITED E) CENTENIAL SURGICAL SUTURE LIMITED F) BLUE NEEM MEDICAL DEVICES PRIVATE LIMITED G) ISCON SURGICALS LIMITED H) HEMANT SURGICIAL INDUSTRIES LIMITED I) SHREE PACETRONIX LTD. J) CONTINENTAL CONTROLS LTD. GROUND 6: THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY CONSIDERING THE FOLLOWING COMPANIES AS FUNCTIONALLY DISSIMILAR TO THE APPELLANT AND FAILED TO APPRECIATE THE FACT THA T THE FOLLOWING COMPANIES ARE FUNCTIONALLY COMPARABLE: A) SYSTRONICS INDIA LIMITED B) GANSONS LIMITED 15. GR.NO.5 & 6 ARE ON THE ACTION OF TPO IN INCLUD ING 10 COMPARABLE COMPANIES AND IN EXCLUDING 2 COMPARABLE COMPANIES C HOSEN BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY. AT THE TIM E OF HEARING IT WAS AGREED BY THE PARTIES THAT ON IDENTICAL ISSUE OF INCLUSION OF EXCLUSION OF COMPARABLE COMPANIES, THIS TRIBUNAL IN ASSESSEES OWN CASE IN IT(TP)A.NO.2192/BANG/2017 FOR AY 2012-13 ORDER DATE D 17.9.2018 IN ASSESSEES OWN CASE RULED REGARDING INCLUSION OF TH E FOLLOWING COMPARABLE COMPANIES IN FAVOUR OF THE REVENUE WITH THE FOLLOWI NG OBSERVATIONS: 14. 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 T HAT AS PER THE ANNUAL REPORT OF THE COMPANY FOR FY 2011-12, THE CO MPANY WAS ENGAGED IN MANUFACTURING AND MARKETING OF PACEMAKER S. SINCE SHREE PACETRONIX WAS ENGAGED IN MANUFACTURING LIFE SAVING DEVICES SUCH AS PACEMAKER WHICH IS USED TO SUPPORT OR ENHAN CE THE FUNCTIONS OF HEART BY IMPLANTING IN THE HEART, THIS COMPANY CANNOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE ENGAGED IN IT(TP)A NO.2476/BANG/2017 PAGE 9 OF 35 MANUFACTURING OF LABORATORY AND PROCESSING EQUIPMEN TS WHICH ARE COMPLETELY DIFFERENT LINE OF PRODUCTS. 16. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. A R AND ARE OF THE VIEW THAT THE CONTENTIONS ARE NOT ACCEPTABLE. UNDER RULE 10B(2) OF THE INCOME-TAX RULES [THE RULES], COMPARABILITY OF THE INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION HAS TO BE JUDGED KEEPING IN MIND THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED IN EITHER TRANSACTION. RULE 10B(2) OF THE INCOME TAX RULES, 1962 (RULES) SPECIFICALLY PROVIDES THAT FOR THE PURPOSES OF SUB-RULE (1) OF RULE 10B, THE COMPARABILITY OF AN I NTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION 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 RESPEC TIVE PARTIES TO THE TRANSACTIONS; 17. THE OECD GUIDELINES ON THE ASPECT OF SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED IN EITH ER TRANSACTION HAS TAKEN THE VIEW THAT DIFFERENCES IN THE SPECIFIC CHA RACTERISTICS OF PROPERTY OR SERVICES OFTEN ACCOUNT, AT LEAST IN PAR T, FOR DIFFERENCES IN THEIR VALUE IN THE OPEN MARKET. THEREFORE, COMPARIS ONS OF THESE FEATURES MAY BE USEFUL IN DETERMINING THE COMPARABI LITY OF CONTROLLED AND UNCONTROLLED TRANSACTIONS. THE SAID GUIDELINE A LSO SAYS THAT DIFFERENCES IN THE CHARACTERISTICS OF PROPERTY OR S ERVICES ARE ALSO LESS SENSITIVE IN THE CASE OF THE TRANSACTIONAL PROFIT M ETHODS THAN IN THE CASE OF TRADITIONAL TRANSACTION METHODS. PRODUCT D IFFERENCE TO THE EXTENT THEY AFFECT COMPARABILITY ON FUNCTIONS PERFO RMED, ASSETS USED AND/OR RISKS ASSUMED BY THE TESTED PARTY, WOULD BE RELEVANT. IN PRACTICE, COMPARABILITY ANALYSES OFTEN PUT MORE EMP HASIS ON FUNCTIONAL SIMILARITIES THAN ON PRODUCT SIMILARITIE S. IT MAY BE ACCEPTABLE TO BROADEN THE SCOPE OF THE COMPARABILIT Y ANALYSIS TO INCLUDE TRANSACTIONS INVOLVING PRODUCTS THAT ARE DI FFERENT, BUT FUNCTIONALLY SIMILAR. THE ACCEPTANCE OF SUCH AN APP ROACH DEPENDS ON THE EFFECTS OF THE PRODUCT DIFFERENCES ON THE RE LIABILITY OF THE COMPARISON AND ON WHETHER OR NOT MORE RELIABLE DATA ARE AVAILABLE. IN OTHER WORDS, IT CANNOT BE SAID THAT PRODUCT DIFF ERENCE IS A FACTOR WHICH NEEDS TO BE EITHER IGNORED OR STRICTLY FOLLOW ED. IT DEPENDS ON FACTS AND CIRCUMSTANCES OF EACH CASE. IT(TP)A NO.2476/BANG/2017 PAGE 10 OF 35 18. 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 PA CETRONIX VIZ., MANUFACTURE OF PACEMAKER FOR IMPLANTING IN HEART, C AN BE CATEGORIZED AS MANUFACTURE OF EQUIPMENT. THE REL EVANCY OF THE END USE OF EQUIPMENT WHETHER BY CONSUMER OR AS COMP ONENT MAY BE RELEVANT WHILE EVALUATING FUNCTIONAL DISSIMILARI TY, ASSETS EMPLOYED AND RISKS ASSUMED BUT NOT ON THE BASIS OF CHARACTERISTICS OF THE PROPERTY TRANSFERRED UNDER RULE 10B(2)(B) OF THE RULES. 19. 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. 20. THE GROUNDS ON WHICH ASSESSEE SEEKS EXCLUSION OF (I) CONTINENTAL CONTROLS LIMITED; (II) HINDUSTAN SYRING ES 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 PACETR ONIX. FOR THE REASONS GIVEN ABOVE, WE ARE OF THE VIEW THAT THE RE VENUE AUTHORITIES WERE JUSTIFIED IN RETAINING THE AFORESA ID COMPANIES ARE COMPARABLE COMPANIES AND NEED NOT BE EXCLUDED ON TH E GROUND THAT THEY WERE MANUFACTURING DIFFERENT PRODUCTS COM PARED TO THE ASSESSEE. 21. THE ASSESSEE SOUGHT INCLUSION OF M/S.GANSON LI MITED AND SPAN DIAGNOSTICS LIMITED WHICH WAS A COMPARABLE CHO SEN BY IT IN ITS TRANSFER PRICING STUDY. THE TPO TOOK THE VIEW THAT THESE COMPANIES ARE INTO ENGINEERING AND MANUFACTURE OF D IAGNOSTIC PRODUCTS AND THEREFORE CANNOT BE REGARDED AS COMPAR ABLE. THE CIT(A) UPHELD THE VIEW OF THE TPO. FOR THE REASONS GIVEN FOR REJECTING THE REQUEST OF THE ASSESSEE FOR EXCLUDING COMPARABLE COMPANIES CHOSEN BY THE TPO IN THE EARLIER PARAGRAP HS, WE ARE OF THE VIEW THAT THESE TWO COMPANIES SHOULD BE INCLUDE D IN THE LIST OF COMPARABLE COMPANIES. THE LEARNED DR HAS MADE SUBM ISSION BEFORE US THAT THESE TWO COMPANIES MANUFACTURE PROD UCTS THAT ARE NOT ULTIMATELY CONSUMED BUT USED AS COMPONENTS OF O THER PRODUCTS. SHE POINTED OUT THAT THE ASSESSEE IN ITS TP STUDY F OR AY 13-14 HAS ADOPTED SUCH AN APPROACH WHILE EXCLUDED A COMPANY C ORE MEDICALS. WE HAVE ALREADY HELD THAT SUCH BIFURCATI ON CAN BE SEEN ONLY AT THE STAGE OF FUNCTIONS PERFORMED, ASSETS EM PLOYED AND RISKS ASSUMED AND NOT AT THE STAGE OF CHARACTERISTICS OF PROPERTY TRANSFERRED IN EITHER TRANSACTION. WE THEREFORE DI RECT THAT THESE TWO IT(TP)A NO.2476/BANG/2017 PAGE 11 OF 35 COMPANIES BE INCLUDED IN THE LIST OF COMPARABLE COM PANIES FOR THE PURPOSE OF COMPARISON. GR.NO.4 & 5 ARE DECIDED ACCO RDINGLY. 15. FOLLOWING THE AFORESAID RULING, WE HOLD THAT T HE FOLLOWING COMPANIES WERE RIGHTLY INCLUDED BY THE TPO AS COMPARABLE COMP ANIES. 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 IT IS NOT DISPUTED BEFORE US THAT THE ABOVE RULING WILL APPLY TO COMPARABLE COMPANIES CHOSEN BY TPO, VIZ., ISCON SURGICALS LTD. AND HEMANT SURGICAL INDUSTRIES LTD. ALSO AND THEREFORE THE INCLUSION OF THESE COMPANIES BY THE TPO IN THE LIST OF COMPARABLE COMPANIES HAS TO BE U PHELD. SIMILARLY, FOLLOWING THE PRECEDENT IN ASSESSEES OWN CASE, WE HOLD THAT M/S.GANSONS LTD., AND M/S.SYSTRONICS INDIA LTD., CO MPARABLE CHOSEN BY THE ASSESSEE WHICH WAS REJECTED BY THE TPO BECAUSE OF DIFFERENCE IN PRODUCTS MANUFACTURED SHOULD BE INCLUDED AS COMPARA BLE COMPANY. 16. THE REMAINING COMPANIES IN THE LIST OF COMPANI ES WHICH WAS ADDED BY THE TPO AND WHOSE INCLUSION IS CHALLENGED BY THE AS SESSEE IN GR.NO.5 WILL NOW BE TAKEN UP FOR CONSIDERATION. 17. ARTIFICIAL LIMB MANUFACTURING CORPORATION OF I NDIA, WHICH IS A COMPARABLE COMPANY CHOSEN BY THE TPO WAS CHALLENGED AS NOT COMPARABLE COMPANY FOR THE REASON THAT IT WAS A GOV ERNMENT COMPANY. THIS ARGUMENT IS LIABLE TO BE REJECTED IN VIEW OF T HE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SAME DEUTZ FAHR INDIA PRIVATE LIMITED TAX CASE (APPEAL) NO.567 OF 2017 ORDER DATE D 5.12.2017 WHEREIN IT WAS HELD IN PARA 17 & 18 THAT THERE IS NO REASON WH Y A GOVERNMENT OWNED IT(TP)A NO.2476/BANG/2017 PAGE 12 OF 35 COMPANY CANNOT BE TREATED AS COMPARABLE. IT WAS FU RTHER SUBMITTED THAT THE MARGIN COMPUTATION OF THIS COMPANY IS ERRONEOUS IN AS MUCH AS PROVISION FOR BAD AND DOUBTFUL DEBT OF RS.34,80,000 WAS CONSIDERED AS NON-OPERATING IN NATURE. THE TPO IS DIRECTED TO E XAMINE AS TO WHETHER THE PROVISION IN QUESTION IS IN RELATION TO THE BUS INESS WHICH IS SUBJECT MATTER OF COMPARISON AND IF SO CONSIDER THE SAME AS OPERATING IN NATURE. THE ARGUMENT WITH REGARD TO FUNCTIONAL COMPARABILIT Y IS REJECTED FOLLOWING THE DECISION IN ASSESSEES OWN CASE IN AY 2012-13. NO OTHER ARGUMENTS WERE ADVANCED IN THE NOTE FILED AT THE TIME OF HEAR ING BEFORE US AND THE ARGUMENTS ADVANCED WERE RESTRICTED ONLY TO THE NOTE FILED BEFORE US ON ALL THE GROUNDS OF APPEAL. 18. AS FAR AS COMPARABLE COMPANY, ELICO LIMITED CH OSEN AS COMPARABLE COMPANY BY THE TPO, THE ARGUMENT WITH REGARD TO FUN CTIONAL COMPARABILITY IS REJECTED FOLLOWING THE DECISION IN ASSESSEES OW N CASE IN AY 2012-13. THE FURTHER ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US WAS THAT SEGMENTAL DETAILS OF THE TRADING AND MANUF ACTURING ACTIVITY OF THIS COMPANY IS NOT AVAILABLE. AFTER HEARING THE RIVAL SUBMISSIONS OF THE PARTIES, WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROP RIATE TO DIRECT THE AO/TPO TO CALL FOR THE DETAILS WITH REGARD TO SEGME NTAL REVENUE OF THIS COMPANY IN EXERCISE OF THE AO/TPOS POWERS U/S.133( 6) OF THE ACT FROM THE SAID COMPANY AND IF ALLOCATION OF EXPENSES THAT ARE COMMON IS POSSIBLE THEN CONSIDER THE SEGMENTAL MARGIN OF THE MANUFACTU RING SEGMENT AFTER SUCH ALLOCATION. THE AO/TPO WILL CONFRONT THE ASSE SSEE WITH THE MATERIAL THAT IS GATHERED BY THEM AND AFTER AFFORDING THE AS SESSEE OPPORTUNITY OF BEING HEARD, DETERMINE WHETHER THIS COMPANY CAN BE REGARDED AS COMPARABLE BECAUSE OF AVAILABILITY OF SEGMENTAL MAR GIN OF MANUFACTURING SEGMENT AND IF YES, THEN DETERMINE THE CORRECT OP/O C AFTER ALLOCATION OF EXPENSES TO THE RELEVANT SEGMENT. IT(TP)A NO.2476/BANG/2017 PAGE 13 OF 35 19. AS FAR AS COMPARABLE COMPANY CHOSEN BY THE TPO , MEDICAL DEVICES PRIVATE LIMITED IS CONCERNED, THE ARGUMENT WITH REG ARD TO FUNCTIONAL COMPARABILITY IS REJECTED FOLLOWING THE DECISION IN ASSESSEES OWN CASE IN AY 2012-13. THE LEARNED COUNSEL FOR THE ASSESSEE S UBMITTED THAT THIS COMPANY DOES BOTH TRADING AND MANUFACTURING AND THE TPO HAS NOT CONSIDERED THE OP/OC OF THE MANUFACTURING SEGMENT F OR THE PURPOSE OF COMPARISON. IT WAS ALSO HIGHLIGHTED THAT THE REVEN UE FROM MANUFACTURING IS NOT MORE THAN 75% OF THE TOTAL REVENUE AND THIS WAS A FILTER FOR INCLUSION OF COMPANIES CHOSEN BY THE TPO. AFTER HEARING THE RI VAL SUBMISSIONS OF THE PARTIES, WE ARE OF THE VIEW THAT IT WOULD BE JUST A ND APPROPRIATE TO DIRECT THE AO/TPO TO CALL FOR THE DETAILS WITH REGARD TO SEGME NTAL REVENUE OF THIS COMPANY IN EXERCISE OF THE AO/TPOS POWERS U/S.133( 6) OF THE ACT FROM THE SAID COMPANY AND FIND OUT WHETHER SEGMENTAL INFORMA TION IS POSSIBLE AND FURTHER EXAMINE IF MORE THAN 75% OF THE REVENUE OF THIS COMPANY IS FROM MANUFACTURING. THE AO/TPO WILL CONFRONT THE ASSE SSEE WITH THE MATERIAL THAT IS GATHERED BY THEM AND AFTER AFFORDING THE AS SESSEE OPPORTUNITY OF BEING HEARD, DETERMINE WHETHER THIS COMPANY CAN BE REGARDED AS COMPARABLE. 20. GROUND NOS. 5 & 6 ARE DECIDED ACCORDINGLY. GROUND 7: 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. 21. AT THE TIME OF HEARING IT WAS AGREED BY THE PAR TIES THAT THAT ON IDENTICAL ISSUE OF INCLUSION OF EXCLUSION OF COMPAR ABLE COMPANIES, THIS TRIBUNAL IN ASSESSEES OWN CASE IN IT(TP)A.NO.2192/ BANG/2017 FOR AY 2012-13 ORDER DATED 17.9.2018 IN ASSESSEES OWN CAS E RULED ON SIMILAR ISSUE WITH THE FOLLOWING OBSERVATIONS: IT(TP)A NO.2476/BANG/2017 PAGE 14 OF 35 20. ON GROUND NO.6, THOUGH THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACTS, BY CONSIDERING FOREIGN EXCHANGE FLUCTUATION AS OPERATI NG IN NATURE WHILE COMPUTING THE OPERATING MARGIN OF THE ASSESSEE AND THE COMPARABLE COMPANIES, THE LIMITED PRAYER MADE AT TH E CONCLUSION ON THIS ISSUE WAS RESTRICTED TO A DIRECTION TO THE TPO TO APPLY THE PRINCIPLE OF TREATING FOREIGN EXCHANGE FLUCTUATION AS OPERATING IN NATURE UNDER BOTH SITUATIONS, WHEN THERE IS A LOSS AS WELL AS WHEN THERE IS A GAIN. THE NEXT PRAYER WAS TO APPLY THE SAME PRINCIPLE TO DETERMINE THE PROFIT MARGINS OF THE ASSESSEE AND TH E COMPARABLE COMPANIES. THE LIMITED PRAYER SO MADE IS IN ACCORD ANCE WITH THE SETTLED LEGAL POSITION IN THIS REGARD AND THE TPO I S DIRECTED TO COMPUTE THE PROFIT MARGINS OF ASSESSEE AND THE COMP ARABLE COMPANIES AS PRAYED FOR BY THE LD. COUNSEL FOR THE ASSESSEE. GROUND NO.6 IS DECIDED ACCORDINGLY. 22. THE TPO IS DIRECTED TO FOLLOW THE DIRECTIONS A S GIVEN ABOVE IN THE ORDER FOR AY 2012-13 IN THE PRESENT AY ALSO. GROUND NO.8 WAS NOT PRESSED AND HENCE DISMISSED AS NOT PRESSED. GROUND NO.9: 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 23. AT THE TIME OF HEARING IT WAS AGREED BY THE PAR TIES THAT THAT ON IDENTICAL ISSUE OF INCLUSION OF EXCLUSION OF COMPAR ABLE COMPANIES, THIS TRIBUNAL IN ASSESSEES OWN CASE IN IT(TP)A.NO.2192/ BANG/2017 FOR AY 2012-13 ORDER DATED 17.9.2018 IN ASSESSEES OWN CAS E RULED REGARDING ON SIMILAR ISSUE WITH THE FOLLOWING OBSERVATIONS: 21. THE ASSESSEE IN ITS TP DOCUMENTATION AS WELL A S 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 WAS ALSO BROUGHT TO THE NOTICE OF THE TPO AND THE CIT(A) THAT THE ASSESSEE WAS INCORPORATED IN FY 2008-09 AND FY 2011-12 (I.E., FY RELEVANT TO THE IMPUGNED AY) W AS JUST THE THIRD YEAR OF COMMERCIAL OPERATION OF THE ASSESSEE DURING WHICH THE INSTALLED CAPACITY WAS UNDER-UTLIZED TO A SIGNIFICA NT EXTENT. THE IT(TP)A NO.2476/BANG/2017 PAGE 15 OF 35 ASSESSEE PLEADED BEFORE THE TPO AND CIT(A) TO PROVI DE AN ADJUSTMENT FOR IDLE CAPACITY. HOWEVER, THE TPO/CIT (A) DID NOT ALLOW ANY ADJUSTMENT TO ACCOUNT FOR THE DIFFERENCES IN TH E CAPACITY UTILIZATION BY THE ASSESSEE VIS--VIS THE COMPARABL ES WHILE COMPUTING PROFIT MARGIN OF ASSESSEE AS WELL AS THE COMPARABLE COMPANIES. 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. WE 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 FOR: '...THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIO NAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSAC TIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PRO FIT MARGIN IN THE OPEN MARKET' 23. RULE 10B(2) OF THE RULES PROVIDES COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION NEEDS TO BE JUDGED WITH REFERENCE TO CERTAIN SPECIFIED FACTO RS. ONE SUCH FACTOR IS CONDITIONS PREVAILING IN THE MARKETS IN W HICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER TH E MARKETS ARE WHOLESALE OR RETAIL. 22. 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, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BE TWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. ' 23. 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 IS PRESCRIBED IN RULE 10B OF THE RULES. RULE 10B IN TURN STATES THAT THE MOST APPROPRIATE METHOD WOULD BE ONE WHICH INTE R ALIA PROVIDES IT(TP)A NO.2476/BANG/2017 PAGE 16 OF 35 THE MOST RELIABLE MEASURE OF ALP, AND ONE OF THE IM PORTANT FACTORS TO BE TAKEN INTO ACCOUNT HEREIN IS THE ABILITY TO M AKE RELIABLE AND ACCURATE ADJUSTMENTS. 24. 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. THERE FORE, 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 TRANSACTIONS OR ENTERPRISES SHOULD BE TAKEN INTO AC COUNT. IN ORDER TO ESTABLISH THE DEGREE OF ACTUAL COMPARAB ILITY AND THEN TO MAKE APPROPRIATE ADJUSTMENTS TO ESTABLI SH ARM'S LENGTH CONDITIONS (OR A RANGE THEREOF), IT IS NECESSARY TO COMPARE ATTRIBUTES OF THE TRANSACTIONS OR ENTERPRISES THAT WOULD AFFECT CONDITIONS IN ARM'S L ENGTH 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 TER MS, THE ECONOMIC CIRCUMSTANCES OF THE PARTIES, AND THE BUSI NESS STRATEGIES PURSUED BY THE PARTIES.' FURTHER, PARA 2.74 OF THE OECD GUIDELINES WHILE LAY ING DOWN THE COMPARABILITY CRITERIA TO BE ADOPTED WHILE APPLYING THE TRANSACTION NET MARGIN METHOD STATES A S FOLLOWS: '.. THUS WHERE THE DIFFERENCES IN THE CHARACTERIST ICS OF THE ENTERPRISES BEING COMPARED HAVE A MATERIAL EFFE CT ON THE NET MARGINS BEING USED, IT WOULD NOT BE APPROPR IATE TO APPLY THE TRANSACTIONAL NET MARGIN METHOD WITHOUT MAKING ADJUSTMENTS FOR SUCH DIFFERENCES. THE EXTENT AND IT(TP)A NO.2476/BANG/2017 PAGE 17 OF 35 RELIABILITY OF THOSE ADJUSTMENTS WILL AFFECT THE RE LATIVE RELIABILITY OF THE ANALYSIS UNDER THE TRANSACTIONAL NET MARGIN METHOD' (EMPHASIS SUPPLIED) 25. 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. REGUL ATION 1.482-1(D)(2) OF THE US REGULATION STATES AS FOLLOW S: '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 B E SUFFICIENTLY SIMILAR THAT IT PROVIDES A RELIABLE ME ASURE OF AN ARM'S LENGTH RESULT. IF THERE ARE MATERIAL DIFFE RENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTION S, ADJUSTMENTS MUST BE MADE IF THE EFFECT OF SUCH DIFFERENCES ON PRICES OR PROFITS CAN BE ASCERTAINED WITH SUFFICIENT ACCURACY TO IMPROVE THE RELIABILITY OF T HE RESULTS. FOR PURPOSES OF THIS SECTION, A MATERIAL DIFFERENCE IS ONE THAT WOULD MATERIALLY AFFECT THE MEASURE OF AN ARM'S LENGTH RESULT UNDER THE METHOD BEING APPLIED.' 26. THE INDIAN TRANSFER PRICING REGULATIONS, OECD G UIDELINES AND THE US TRANSFER PRICING REGULATIONS CALL FOR AN ADJ USTMENT TO BE MADE IN CASE OF MATERIAL DIFFERENCES IN THE TRANSACTIONS OR THE ENTERPRISES BEING COMPARED SO AS TO ARRIVE AT A MORE RELIABLE A RM'S LENGTH PRICE/ MARGIN. WHILE THE INDIAN TRANSFER PRICING REGULATIO NS REFER TO THE ADJUSTMENTS ON UNCONTROLLED TRANSACTIONS, HOWEVER T HE SAME HAS TO BE READ WITH RULE10B(3) OF THE RULES WHICH CLEARLY EMPHASIZES THE NECESSITY AND COMPULSION OF UNDERTAKING ADJUSTMENTS . HENCE IN CASE APPROPRIATE ADJUSTMENTS CANNOT BE MADE TO THE UNCONTROLLED TRANSACTION, DUE TO LACK OF DATA, THEN IN ORDER TO READ THE PROVISIONS OF TRANSFER PRICING REGULATIONS IN HARMONY, THE ADJ USTMENTS SHOULD BE MADE ON THE TESTED PARTY. IN THE FOLLOWING DECISIO NS IT HAS BEEN HELD THAT ADJUSTMENT TO THE PROFIT MARGINS HAVE TO BE MA DE ON ACCOUNT OF UNDERUTILIZATION OF CAPACITY: IT(TP)A NO.2476/BANG/2017 PAGE 18 OF 35 (I) IN THE CASE OF M/S. MANDO INDIA STEERING SYSTEMS PRIVATE LIMITED VS ASSISTANT COMMISSIONER OF INCOME TAX, [I .T.A. NO. 2092/MDS 12012], THE TRIBUNAL UPHELD THE CONTENTION OF THE TAXPAYER FOR MAKING A SUITABLE ADJUSTMENT ON ACCOUN T OF IDLE CAPACITY FOR THE PURPOSE OF MARGIN COMPUTATION. THE RELEVANT EXTRACT IS REPRODUCED 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 AUTHORIT IES BELOW WHILE DETERMINING THE ALP COST. THE TPO SHOUL D HAVE MADE ALLOWANCE FOR THE HIGHER OVERHEAD EXPENDITURE DURING 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 UTILIZATI ON RESULTS IN HIGHER PER UNIT COSTS, WHICH, IN TURN, R ESULTS IN LOWER PROFITS. OF COURSE, THE FUNDAMENTAL ISSUE, SO FAR AS ACCEPTABILITY OF SUCH ADJUSTMENTS IS CONCERTED, IS REASONABLE ACCURACY EMBEDDED IN THE MECHANISM FOR SUCH ADJUSTMENTS, AND AS LONG AS SUCH AN ADJUSTMENT MECHANISM CAN BE FOUND, NO OBJECTION CAN BE TAKEN T O 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 MATERIAL ON RECORD; INCLUDING THE JUDICIAL PRONOUNCEMENTS CITED. THE ISSUE FOR CONSIDERATION I S WHETHER ADJUSTMENT FOR UNDER-UTILISATION OF CAPACIT Y IS ALLOWABLE IN THE CASE ON HAND AND IF SO, THE MANNER OF COMPUTATION THEREOF AND THE QUANTUM OF ADJUSTMENT.. .... IT(TP)A NO.2476/BANG/2017 PAGE 19 OF 35 10.4.5 IN THE ABOVE CITED CASE OF THE MUMBAI TRIBUN AL I.E. PETRO ARALDITE P. LTD. (SUPRA), THE TRIBUNAL H AS UPHELD THE PRINCIPLE THAT ADJUSTMENT FOR CAPACITY UNDERUTI LISATION CAN BE GRANTED .. FOLLOWING THE DECISION OF THE ITAT, MUMBAI IN THE CASE OF PETRO ARALDITE P. LTD. (SUPRA), WE HOLD THAT ANY ADJUSTMENT FOR CAPACITY UNDERUTILISATION CAN BE GRANTED.....' (IV) IN THE RECENT CASE OF GE INTELLIGENT PLATFORM PRIVATE LIMITED (IT(TP)A NO. 148/BANG/2015 AND 164/BANG/2015) FOR A Y 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 UNDERUTILIZATION OF THE INDUSTRY THEN NECES SARY ADJUSTMENT IS REQUIRED TO BE MADE TO THE MARGIN OF COMPUTING ALP......' 27. MOREOVER, THE ABOVE ARGUMENT OF THE ASSESSEE FO R GRANT OF CAPACITY UTILIZATION ADJUSTMENT IS ALSO SUPPORTED B Y THE FOLLOWING 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:- '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 ADJUSTMENTS FOR UNDER UTILIZATION OF MANPOWER IS GIVEN. THE ASSESSEE SHOULD ALSO BE GIVE N ADJUSTMENT FOR UNDER UTILIZATION OF ITS INFRASTRUCT URE . THE AO SHALL CONSIDER THIS FACT ALSO WHILE DETERMIN ING THE ALP AND MAKE THE TP ADJUSTMENTS. WITH THESE DIRECTI ONS, THE APPEAL OF THE ASSESSEE IS DISPOSED OF. 28. THE RELIABILITY AND ACCURACY OF ADJUSTMENTS WOU LD LARGELY DEPEND ON AVAILABILITY OF RELIABLE AND ACCURATE DAT A. FOR CERTAIN TYPES OF ADJUSTMENTS, RELEVANT DATA FOR COMPARABLES MAY EITHER NOT BE AVAILABLE IN PUBLIC DOMAIN OR MAY NOT BE RELIABL Y DETERMINABLE IT(TP)A NO.2476/BANG/2017 PAGE 20 OF 35 BASED ON INFORMATION AVAILABLE IN PUBLIC DOMAIN, WH EREAS, IT MAY BE POSSIBLE TO MAKE EQUALLY RELIABLE AND ACCURATE ADJU STMENTS ON THE TESTED PARTY (WHOSE DATA WOULD GENERALLY BE EASILY ACCESSIBLE). 29. IN SUCH A SCENARIO, ONE HAS TO RESORT TO THE PROVI SIONS OF RULE 10B(3)(II) WHICH PROVIDES FOR MAKING REASONAB LY ACCURATE ADJUSTMENTS FOR ELIMINATING ANY MATERIAL DIFFERENC ES BETWEEN THE TWO TRANSACTIONS BEING COMPARED. THE PURPOSE OR IN TENT OF THE COMPARABILITY ANALYSIS IS TO EXAMINE AS TO WHETHER OR NOT, THE VALUES STATED FOR THE INTERNATIONAL TRANSACTIONS AR E AT ALP I.E., WHETHER THE PRICE CHARGES IS COMPARABLE TO THE PRIC E CHARGES UNDER AN UNCONTROLLED TRANSACTION OF SIMILAR NATURE. THE REGULATIONS DONT RESTRICT OR PROVIDE THAT THE ADJUSTMENTS CANNOT BE MADE ON THE RESULTS OF THE TESTED PARTY. THEREFORE, KEEPING IN MIND THE AFORESAID OBJECTIVE, THE NET PROFIT MARGIN OF THE TESTED PART Y DRAWN FROM ITS FINANCIAL ACCOUNTS CAN BE SUITABLY ADJUSTED TO FACI LITATE ITS COMPARISON WITH OTHER UNCONTROLLED ENTITIES/TRANSAC TIONS AS PER SUB- CLAUSE (I) OF RULE 10B(1)(E) OF THE RULES ITSELF. THE ABSENCE OF SPECIFIC PROVISION IN RULE 10B(1)(E)(III) OF THE RU LES DOES NOT IMPEDE THE ADJUSTMENT OF THE PROFIT 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)] 30. 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 COMPANIES AND CONSEQUENTLY COMPUTE ADJUS TMENT ON THE COMPARABLE COMPANIES, THE OPERATING COST OF THE TESTED PARTY IS ADJUSTED FOR CAPACITY UTILIZATION ADJUSTMENT. 31. THE ASSESSEE HAS UNDER-UTILIZED CAPACITY DURING THE SUBJECT AY AND IS ACCORDINGLY FACTUALLY AND LEGALLY ELIGIBL E TO AN ADJUSTMENT FOR THE SAME. THEREFORE, SUCH A BENEFIT CANNOT BE D ENIED TO THE ASSESSEE ONLY FOR THE REASON THAT THE DATA ABOUT CO MPARABLE COMPANIES IS NOT AVAILABLE. REQUIRING THE ASSESSEE TO PRODUCE SUCH A DATA WHICH IS NOT AVAILABLE IN PUBLIC DOMAIN WOUL D TANTAMOUNT TO REQUIRING THE APPELLANT TO PERFORM AN IMPOSSIBLE TA SK. THE ONLY WAY TO GET THE DATA IN THE CURRENT CASE, WOULD BE WHERE THE TPO COLLATES THE SAME FROM THE COMPARABLE COMPANIES BY EXERCISIN G HIS POWERS IT(TP)A NO.2476/BANG/2017 PAGE 21 OF 35 UNDER SECTION 133(6) OF THE ACT. THE RELEVANT EXTRA CTS OF THE SECTION ARE AS UNDER:- '(6) REQUIRE ANY PERSON, INCLUDING A BANKING COMPAN Y OR ANY OFFICER THEREOF, TO FURNISH INFORMATION IN RELA TION TO SUCH POINTS OR MATTERS, OR TO FURNISH STATEMENTS OF ACCO UNTS AND AFFAIRS VERIFIED IN THE MANNER SPECIFIED BY THE ASS ESSING OFFICER, THE DEPUTY COMMISSIONER (APPEALS), THE JOI NT COMMISSIONER OR THE COMMISSIONER (APPEALS), GIVING INFORMATION IN RELATION TO SUCH POINTS OR MATTERS A S, IN THE OPINION OF THE ASSESSING OFFICER, THE DEPUTY COMMIS SIONER (APPEALS), THE JOINT COMMISSIONER OR THE COMMISSION ER (APPEALS), WILL BE USEFUL FOR, OR RELEVANT TO, ANY ENQUIRY OR PROCEEDING UNDER THIS ACT :' 32. 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 UTI LIZATION OF COMPARABLE COMPANIES, IF NOT AVAILABLE IN PUBLIC DO MAIN. THE RELEVANT EXTRACT OF THE AFORESAID DECISION IS AS UN DER:- '11. KEEPING IN VIEW THE DECISION OF THE TRIBUNAL IN THE CASE OF PETRO ARALDITE (P) LTD (SUPRA) LAYING DOWN THE GUIDELINES ON THE ISSUE OF CAPACITY UTILIZATION, WE CONSIDER IT APPROPRIATE TO RESTORE THIS ISSUE RELATING TO ADJUS TMENT ON ACCOUNT OF CAPACITY UTILIZATION IN THE CASE OF ASSE SSEE COMPANY TO THE FILE OF AO/TPO FOR DECIDING THE SAME AFRESH KEEPING IN VIEW THE SAID GUIDELINES. IF THE EXACT DETAILS OF CAPACITY UTILIZATION OF THE COMPARABLE COMPANIES ARE NOT AVAILABLE IN THE PUBLIC DOMAIN, T HE AO/TPO IS DIRECTED TO OBTAIN THE SAME DIRECTLY FROM THE CONCERNED PARTIES AND TO DECIDE THIS ISSUE AFRESH A FTER GIVING ASSESSEE AN OPPORTUNITY OF BEING HEARD .' (EMPHASIS SUPPLIED) 33. ACCORDINGLY, WE DIRECT THE TPO TO EXERCISE POWE RS UNDER SECTION 133(6) OF THE ACT TO CALL FOR INFORMATION O N CAPACITY UTILIZATION OF THE COMPARABLE COMPANIES SUCH AS INSTALLED CAPACITY, ACTUAL PRODUCTION IN UNITS, BREAK-UP OF FIXED COST AND VARIABLE COST; IT(TP)A NO.2476/BANG/2017 PAGE 22 OF 35 SEGMENTAL/ PRODUCT WISE INFORMATION, IF ANY. 34. 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. 24. THE TPO IS DIRECTED TO FOLLOW THE DIRECTIONS AS GIVEN ABOVE IN THE ORDER FOR AY 2012-13 IN THE PRESENT AY ALSO. GROUND 10: THE LEARNED CIT(A) HAS ERRED, IN LAW AN D 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. 25. AT THE TIME OF HEARING IT WAS AGREED BY THE PAR TIES THAT THAT ON IDENTICAL ISSUE OF INCLUSION OF EXCLUSION OF COMPAR ABLE COMPANIES, THIS TRIBUNAL IN ASSESSEES OWN CASE IN IT(TP)A.NO.2192/ BANG/2017 FOR AY 2012-13 ORDER DATED 17.9.2018 IN ASSESSEES OWN CAS E RULED ON SIMILAR ISSUE WITH THE FOLLOWING OBSERVATIONS: '37. THE ASSESSEE USED THE TNMM IN DETERMINING THE ALP 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 DE TERMINING THE ALP RELATING TO ANY INTERNATIONAL TRANSACTION. THE RULES I.E., RULE 10B(1)(E)(III), PROVIDE THAT A TRANSACTION CAN BE CONSIDERED AS COMPARABLE, IF REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE DIFFERENCES THAT ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST OR PROFIT BETWEEN A CONTROLLED AND AN UNCONTRO LLED TRANSACTION. 38. ACCORDING TO THE ASSESSEE, THERE WERE SIGNIF ICANT DIFFERENCES IN WORKING CAPITAL BETWEEN THE TESTED PARTY, I.E. T HE ASSESSEE AND THE COMPARABLE COMPANIES, AN APPROPRIATE ADJUSTMENT MAY BE REQUIRED FOR SUCH DIFFERENCE IN DETERMINING THE ARM 'S LENGTH PRICE IN VIEW OF THE-FOLLOWING:- THE EXTENT TO WHICH COMPANIES EXTEND AND RECEIVE C REDIT IN THE FORM OF ACCOUNTS PAYABLE AND RECEIVABLE AFFECTS THE IR SALES AND COST OF SALES. SELLERS EXTEND CREDIT TO PURCHASERS IN THE FORM OF IT(TP)A NO.2476/BANG/2017 PAGE 23 OF 35 AN ACCOUNTS RECEIVABLE BALANCE. SELLERS, THEREFORE, PERFORM TWO FUNCTIONS I.E. THEY SELL A PRODUCT/SERVICE AND EXTE ND CREDIT. THE SELLING PRICE INCORPORATES TWO ELEMENTS: THE P RICE OF THE PRODUCT AND THE TIME VALUE OF MONEY LENT. IF A COMP ANY WERE TO REQUIRE ALL SALES ON A CASH BASIS, IT WOULD BE WILL ING TO ACCEPT A SLIGHTLY LOWER PRICE FOR ITS PRODUCTS THAN IF THE C OMPANY WERE TO ALLOW ITS CUSTOMERS 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 AN D PURCHASE CAN AFFECT COMPARISONS. 39. THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING D ECISIONS IN SUPPORT OF ITS CONTENTION THAT A WORKING CAPITAL AD JUSTMENT 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 I N RELATION TO INTERNATIONAL TRANSACTION AS PER THE TN MM, WHICH IS AN UNDISPUTED METHOD FOUND APPLICABLE TO T HE PRESENT CASE BY BOTH THE PARTIES . IT IS A SETTLED ACCOUNTING PRINCIPLE THAT THE NET MARGINS CAN BE INFLUENCED BY SOME OF THE SAME FACTORS WHICH CAN INFLUENCE PRICE OR GROSS MARGINS. FURTHER, IT IS THE REQUIREMENT OF THE RULES / PROVISIONS THAT ANY DIFFERENCE WHICH IS LIKELY TO MATERIALLY A FFECT THE NPM IN OPEN MARKET HAS TO BE ELIMINATED. TPO MUST KNOW THAT THE TNMM VISUALIZES THE UNDERTAKING OF TH E THOROUGH COMPARABILITY ANALYSIS AND ELIMINATION OF THE DIFFERENCES THROUGH THE REQUISITE ADJUSTMENTS .. THEREFORE, WE DISMISS THE REVENUE'S CONTENTION THAT NO FURTHER ADJUSTMENT IF ANY IS ENTERTAINED ONCE THE COMPARABLES ARE SUPPLIED BY THE ASSESSEE AND WHEN T HEY ARE ACCEPTED BY THE TPO . THUS, WORKING CAPITAL IS A FACTOR WHICH INFLUENCE THE PRICE IN THE OPEN MARKET AND TH EREFORE THE NET PROFIT MARGIN OF THE BUSINESS SEGMENT OF TH E ASSESSEE WHICH IS TARGETED BY THE TPO/AO/DRP. HENCE, IN PRIN CIPLE, IT(TP)A NO.2476/BANG/2017 PAGE 24 OF 35 WE HOLD THAT THE TPO/AO/DRP HAS FAILED TO ENTERTAIN THE OBJECTIONS OF THE ASSESSEE ON THE 'WORKING CAPITAL' ADJUSTMENTS ISSUE. THEREFORE, WE DIRECT THEM TO ALL OW THE REQUISITE ADJUSTMENT ON ACCOUNT OF THE IMPUGNED 'WO RKING CAPITAL' WHILE DETERMINING THE ARM'S LENGTH OPERATI NG MARGIN OF THE COMPARABLES.' (EMPHASIS SUPPLIED) (II) IN THE CASE OF CAPGEMINI INDIA PRIVATE LIMITED VS ASSTT. COMMISSIONER OF INCOME TAX (ITA NO.7861/MUM/2011), THE MUMBAI TRIBUNAL HELD AS FOLLOWS:- ... IN OUR VIEW, WORKING CAPITAL ADJUSTMENTS ARE REQUIRED TO BE MADE BECAUSE THESE DO IMPACT THE PROFITABILITY OF THE COMPANY . RULE 108(2)(D) ALSO PROVIDES THAT THE COMPARABILITY HAS TO BE JUDGED WITH RESPEC T TO VARIOUS FACTORS INCLUDING THE 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 BLOCKED WITH THE DEBTORS FOR A LONG PERIOD CANNOT B E FULLY COMPARABLE TO THE CASE WHICH IS ABLE TO RECOVER DEB T 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 A BOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESS EE.' (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 ADJUSTM ENTS FOR THE FOLLOWING: A) WORKING CAPITAL B) ADJUSTMENT FOR RISK AND GROWTH IT(TP)A NO.2476/BANG/2017 PAGE 25 OF 35 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 REQUIRE D TO BE MADE. IF THE DIFFERENCE BETWEEN THE COMPANIES ARE SO MATERIAL THAT ADJUSTMENT IS NOT POSSIBLE, THEN COMP ARABLES ARE REQUIRED TO BE REJECTED.' (EMPHASIS SUPPLIED) 40. IN LIGHT OF THE PRINCIPLES EMBODIED IN THE ABO VE JUDGEMENT, THE ASSESSEE PRAYED THAT THE BENEFIT OF A WORKING C APITAL ADJUSTMENT SHOULD BE ACCORDED TO THE ASSESSEE IN THE INSTANT C ASE. 41. THE CIT(A) REJECTED THE CLAIM OF THE ASSESSEE FOR THE REASON THE ASSESSEE HAS TO DEMONSTRATE THE IMPACT ON PROFI T MARGINS BY REASON OF A PARTICULAR LEVEL OF WORKING CAPITAL REQ UIREMENT IN THE CASE OF THE ASSESSEE AND THAT OF COMPARABLE COMPANI ES. IN COMING TO THE ABOVE CONCLUSION, THE CIT(A) HAS PLACED RELI ANCE 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, ORDER DATED 22.2.2017 . IN THOSE CASES, THE TRIBUNAL WAS DEALING WITH CASES WHERE DA TA WAS NOT PROVIDED. IN THE PRESENT CASE THE ASSESSEE HAS GIV EN SUCH WORKING WHICH IS GIVEN AS ANNEX. 4 TO THE WRITTEN SUBMISSIO NS FILED BEFORE US. SUCH WORKING WAS ALSO GIVEN IN PAGES 59 TO 64 OF SU BMISSIONS FILED BEFORE THE CIT(A). THEREFORE, THE TPO/AO IS DIRECT ED TO CONSIDER THE CLAIM OF THE ASSESSEE AND ALLOW ADJUSTMENT TO P ROFIT MARGINS TOWARDS WORKING CAPITAL ADJUSTMENT IN ACCORDANCE WI TH THE LAW, AFTER AFFORDING ASSESSEE THE OPPORTUNITY OF BEING HEARD. GR.NO.8 IS DECIDED ACCORDINGLY. 26. THE TPO IS DIRECTED TO FOLLOW THE DIRECTIONS AS GIVEN ABOVE IN THE ORDER FOR AY 2012-13 IN THE PRESENT AY ALSO. GROUND 11: 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, IT(TP)A NO.2476/BANG/2017 PAGE 26 OF 35 THEN THE SAME DESERVES TO BE RESTRICTED IN PROPORTI ON TO INTERNATIONAL TRANSACTIONS IN THE INTEREST OF JUSTICE. 27. AT THE TIME OF HEARING IT WAS AGREED BY THE PAR TIES THAT THAT ON IDENTICAL ISSUE OF INCLUSION OF EXCLUSION OF COMPAR ABLE COMPANIES, THIS TRIBUNAL IN ASSESSEES OWN CASE IN IT(TP)A.NO.2192/ BANG/2017 FOR AY 2012-13 ORDER DATED 17.9.2018 IN ASSESSEES OWN CAS E RULED ON SIMILAR ISSUE WITH THE FOLLOWING OBSERVATIONS: 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 THI RD 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:- 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 PURCHASES (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 '. IT(TP)A NO.2476/BANG/2017 PAGE 27 OF 35 45. SECTION 92B DEFINES THE TERM 'INTERNATIONAL TR ANSACTION' TO MEAN 'A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTER PRISES .. . 46. A CONJOINT READING OF SECTION 92 WITH SECTION 92B CLEARLY BRINGS OUT THAT COMPUTATION OF INCOME AT ALP IS PER MISSIBLE ONLY IN RESPECT OF INTERNATIONAL TRANSACTION, WHICH, IN TUR N, MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES. SIMILAR POSITION HAS BEEN REITERATED IN THE MACHINERY PROVI SION CONTAINED IN SECTION 92C DEALING 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 FOLLO WING METHODS.....' 47. IT IS THE PLEA OF THE ASSESSEE THAT ADDITION B Y WAY OF TRANSFER PRICING ADJUSTMENT IS MANDATED ONLY IN RESPECT OF T RANSACTIONS BETWEEN TWO OR MORE AES. THE PROFIT FROM COMPARABLE TRANSACTIONS OF THE ASSESSEE WITH NON-AES IS ONE OF THE SUBTLE A ND MOST RELIABLE MODES FOR DETERMINING ALP OF THE INTERNATIONAL TRAN SACTIONS. THE ACT DOES NOT CONTEMPLATE AN ADDITION BY WAY OF TP A DJUSTMENT IN RESPECT OF TRANSACTION WITH NON-AES. 48. THE TPO DETERMINED ADDITION TO TOTAL INCOME, C ONSEQUENT 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 T HE ASSESSEE 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 P HOENIX MECANO (INDIA) PRIVATE LIMITED [ITA NO. 1182 OF 201 4] , 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 TRANSAC TIONS WITH THE AE RATHER THAN ON THE ENTIRE TURNOVER OF THE CO MPANY. 6.2 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE HON'BLE TRIBUNAL WAS CORRECT W HILE IT(TP)A NO.2476/BANG/2017 PAGE 28 OF 35 ISSUING THE ABOVE DIRECTIONS WITHOUT APPRECIATING T HE 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 COULD COME TO A FAIR DETERMINATION OF ALP BY ONLY RESTRICTING TO TRANSAC TIONS WITH AE.' 50. THE HONBLE BOMBAY HIGH COURT ON THE ABOVE QUE STIONS OF LAW HELD AS FOLLOWS:- 5. WITH THE ASSISTANCE OF THE LEARNED COUNSEL FOR RESPECTIVE PARTIES, WE HAVE CONSIDERED THE SUBMISSI ONS AND THE JUDGMENT OF THE TRIBUNAL. THE TRIBUNAL IN PARA 7 OF ITS ORDER HAS OBSERVED AS UNDER:- '7. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENTION HAVE CAREFULLY BEEN CONSIDERED. SO FAR I T RELATES TO GRIEVANCE OF THE ASSESSEE THAT THE TP ADJUSTMENT CAN ONLY BE APPLIED TO INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH THE AE AND IT CANNOT BE APPLIED AT ENTITY LEVEL, THE ISSUE IS FOU ND TO BE COVERED BY THE AFOREMENTIONED DECISION OF THE TRIBUNAL IN THE CASE OF THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. (SUPRA). THEREFORE, WE HOLD THAT DETERMINATION OF ARMS LENGTH PRICE SHOULD BE RESTRICTED ONLY TO INTERNATIONAL TRANSACTION OF THE ASSESSEE WITH ITS AE. IT WAS POINTED OUT THAT THE FIGURES ARE AVAILABLE 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 ASSESSEE WITH ITS AE FOR THE PURPOSE OF DETERMINING ARMS LENGTH PRICE. WE DIRECT ACCORDINGLY.' 6. THE TRIBUNAL HAS HELD THAT THE FIGURES ARE AVAI LABLE WITH THE ASSESSING OFFICER, THE DETAILS OF WHICH HA S ALSO BEEN FILED WITH THE TRIBUNAL AT PAGE 170 OF THE PAP ERBOOK. IT WOULD BE CLEAR THAT THE DETAILS OF THE INTERNATI ONAL TRANSACTION ARE SPECIFICALLY MADE AVAILABLE AND THE REFORE THE APPREHENSION OF THE DEPARTMENT AS SUCH IS MISPLACED. IT(TP)A NO.2476/BANG/2017 PAGE 29 OF 35 .. 7. CONSIDERING THE PROVISIONS OF SECTION 92 OF THE INCOME TAX ACT, SO ALSO THE REASONING ADOPTED BY TH E TRIBUNAL SUGGESTING THAT SEPARATE FIGURES OF INTERNATIONAL TRANSACTION ARE AVAILABLE, SO ALSO TH E ORDER REFERRED ABOVE. NO SUBSTANTIAL QUESTION OF LAW ARIS ES FOR CONSIDERATION. AS SUCH THE APPEAL IS DISMISSED WITH NO COSTS. ' (EMPHASIS SUPPLIED) 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 INTERNATIONAL TRANSACTION ALONE AND NOT ON THE ENTIRE TURNOVER OF THE ASSESSEE AT ENTITY LEVEL. THIS DECISION WAS FURTHER UPHELD BY T HE HON'BLE BOMBAY HIGH COURT IN THE CASE OF THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. [ITA NO. 2201 OF 2013], 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 THE TRANSFER PRICING (TP) ADJUSTMENT ON LY TO THE TRANSACTION BETWEEN THE ASSOCIATED ENTERPRIS ES (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 TRANSACTIONS ON DETERMINATION OF ALP. THE ADJUSTMENT WHICH IS MANDATED IS ONLY IN RESPECT OF INTERNATIONAL TRANSACTION AND NOT TRANSACTIONS ENTERED INTO BY ASSESSEE WITH INDEPENDENT UNRELATED THIRD PARTIES. THIS IS PARTICULARLY SO AS THERE IS NO ISSUE OF AVOIDANCE OF TAX REQUIRING ADJUSTMENT IN THE VAL UATION IN RESPECT OF TRANSACTIONS ENTERED INTO WITH INDEPE NDENT IT(TP)A NO.2476/BANG/2017 PAGE 30 OF 35 THIRD PARTIES. THE ADJUSTMENT AS PROPOSED BY THE RE VENUE IF ALLOWED WOULD RESULT IN INCREASING THE PROFIT IN RESPECT OF TRANSACTIONS ENTERED TO WITH NON-AE. THIS ADJUST MENT IS BEYOND THE SCOPE AND AMBIT OF CHAPTER X OF THE A CT. 5. IN THE ABOVE VIEW, AS THE PROVISIONS OF THE ACT IN RESPECT OF TRANSFER PRICING ARE SELF EVIDENCE, QUES TION NO.(A) AS PROPOSED DOES NOT GIVE RISE TO ANY SUBSTANTIAL Q UESTION OF LAW. THUS NOT ENTERTAINED. 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 COUNSE L FOR THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO CONFINE THE ADJUSTMENT, QUA THE PURCHASES MADE BY THE ASSESSEE FROM THE AE. TO BE MORE SPECIFIC, THE ADJUSTMENT I S 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 DETERMI NED ON THE BASIS OF THE ENTIRE SALES IN THE FINISHED GOODS SEG MENT INCLUDING TRANSACTIONS WITH NON-AE ALSO. THE REASONING ADOPT ED BY THE CIT(A) FOR DOING 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 8.4 6% OF REVENUE OF THE APPELLANT IS FROM AE. SHE ACCORDINGL Y ADOPTED 8.46% OF THE OPERATING REVENUE AND 8.46% OF THE OPERATING COST FOR PURPOSE OF THE DETERMINATION OF ALP. HOWEVER, THIS METHOD IS NOT THE CORRECT APPROACH AS THE ALP DETERMINATION SHOULD HAVE BEEN BASED ON THE ENT IRE 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 BEIN G HEARD WAS GIVEN TO THE APPELLANT VIDE ORDER SHEET ENTRY D ATED IT(TP)A NO.2476/BANG/2017 PAGE 31 OF 35 11.08.2017, AS TO WHY THE PROPORTIONATE REDUCTION D ONE BY THE TPO SHOULD NOT BE DISREGARDED. THE APPELLANT SO UGHT TIME TO FILE WRITTEN SUBMISSIONS AND THE SAME WAS A LLOWED. THE APPELLANT FILED WRITTEN 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, FO R THE MANUFACTURE OF WHICH, PART PURCHASES ARE FROM AES A ND REMAINING FROM THE NON AES. THE TPO HAS CONSIDERED OP/OR FOR PURPOSE OF COMPUTATION OF THE ALP AS THE QUANTUM OF SALES TO AE ARE LESSER THAN THE PURCHASE FROM AE AND THUS LESSER CONTROLLED. WHEN A PRODUCT IS SO LD, ONLY OVERALL PROFIT MARGIN IS RECORDED WITHOUT ANY DATA AS TO WHAT WOULD BE THE PROFIT IN RELATION TO PURCHASES FROM A E. SO THIS CANNOT BE PRESUMED THAT THE PROFIT PERCENTAGE EARNE D IN RELATION TO COSTS RELATED TO AE TRANSACTIONS AS WEL L AS NON- AE TRANSACTIONS WAS SAME. SINCE COSTS ARE COMMON TO THE PRODUCTS ULTIMATELY SOLD BY THE APPELLANT, AND THE SAME INCLUDES AE TRANSACTIONS, SO IT IS ALWAYS POSSIBLE THAT THE MARGIN OF PROFIT PERCENTAGE VIS-A-VIS COSTS RELATED TO AE TRANSACTION IS NOT THE SAME AS PROFIT MARGIN ON COS TS RELATED TO NON-AE TRANSACTIONS BUT ULTIMATELY OVERALL CERTA IN PROFITS ARE BEING SHOWN. FURTHER, THE TRANSACTIONS WITH NO N-AES CAN BE PRESUMED TO BE AT ARM'S LENGTH AS THERE IS N O REASON TO EARN LESSER PROFIT. BUT IN CASE OF TRANSACTIONS WITH AES, THERE IS ALWAYS A LIKELIHOOD OF EARNING LESSER PROF ITS AS TRANSACTIONS ARE CONTROLLED AND DECISIONS ARE INFLU ENCED BY AE. THUS THE OVERALL PROFITS ON ACCOUNT OF TRANSACT IONS WITH AE AS WELL AS NON-AE GETS SUPPRESSED. 54. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. COUNSEL FOR THE ASSESSEE REITERATED SUBMISSIONS MADE BEFORE THE CIT (A) THAT TRANSACTION WITH NON-AE CANNOT BE SUBJECT MATTER OF DETERMINATION OF ALP BECAUSE SECTION 92 CLEARLY SPEAKS OF DETERMINAT ION OF ALP ONLY IN RESPECT OF TRANSACTIONS WITH AE. HE ALSO REFERR ED TO CERTAIN DECISIONS OF THE TRIBUNAL FOR THE PROPOSITION THAT SECTION 92 OF THE ACT IS NOT APPLICABLE TO NON-AE TRANSACTIONS. THESE DEC ISIONS HAVE ALREADY BEEN EXTRACTED IN THE EARLIER PARAGRAPHS. T HE LD. DR RELIED ON THE ORDER OF THE CIT(APPEALS). IT(TP)A NO.2476/BANG/2017 PAGE 32 OF 35 55. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE REASONING OF THE CIT(A) FOR CONSIDERING THE ENTIRE SALES IN MANU FACTURED FINISHED GOODS SEGMENT FOR DETERMINATION OF ALP IS THAT CERT AIN COMPONENTS AND RAW MATERIALS USED IN MANUFACTURE OF FINISHED G OODS ARE ALSO SOURCED FROM AE AND THERE IS A POSSIBILITY OF THE C OST OF SUCH COMPONENT HAVING BEEN BARGAINED AT A PRICE WHICH IS NOT AT ARMS LENGTH. THIS PRESUMPTION OF THE CIT(APPEALS) IS WI THOUT ANY BASIS. HE HAS NOT DEMONSTRATED WITH ACTUAL FIGURES AS TO H OW THERE WOULD BE IMPACT ON PROFIT MARGIN ON SALE OF FINISHED PROD UCTS TO AE BECAUSE OF PURCHASES OF SOME COMPONENTS FROM AE. H E HAS GIVEN EXAMPLES WHICH ARE IMAGINARY FIGURES. APART FROM T HIS, THE TPO HAS ACCEPTED THAT PURCHASE OF RAW MATERIAL AND COMPONEN TS BY THE ASSESSEE FROM ITS AE IS AT ARMS LENGTH. THEREFORE, THE BASIS ON WHICH THE CIT(A) PROCEEDED TO APPLY THE ALP TEST FO R TRANSACTIONS WITH NON-AE IS NEITHER CORRECT ON FACTS NOR PERMISS IBLE IN LAW. AS RIGHTLY CONTENDED BY THE ASSESSEE, SECTION 92 OF TH E ACT CAN BE APPLIED ONLY IN RESPECT OF INTERNATIONAL TRANSACTIO NS I.E., TRANSACTIONS WITH AE. 56. IN VIEW OF THE ABOVE TRANSFER PRICING PROVISION S AND VARIOUS JUDICIAL PRECEDENTS, WE HOLD THAT THE TRANSFER PRIC ING ADJUSTMENT SHOULD BE RESTRICTED ONLY TO THE AE RELATED TRANSAC TIONS OF THE ASSESSEE. 28. THE TPO IS DIRECTED TO FOLLOW THE DIRECTIONS AS GIVEN ABOVE IN THE ORDER FOR AY 2012-13 IN THE PRESENT AY ALSO. NO ARG UMENTS WERE ADVANCED ON GR.NO.12 AND THE SAME IS THEREFORE DISMISSED. GROUND 13: DISALLOWANCE OF PRIOR PERIOD EXPENSES -I NR 65,48,149 A) THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT S, 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 CONSIDERA TION AND INCURRED FOR THE PURPOSE OF BUSINESS OF THE APPELLA NT. B) WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CI T(A) HAS ERRED IN LAW AND IN FACTS, NOT GRANTING ALLOWANCE OF 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. IT(TP)A NO.2476/BANG/2017 PAGE 33 OF 35 C) WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CI T(A) OUGHT TO HAVE SET OFF THE PRIOR PERIOD INCOME OF RS.47,04,91 6 AGAINST THE PRIOR PERIOD EXPENDITURE OF RS.65,48,1490 AND T HEREBY RESTRICTED THE NET DISALLOWANCE OF PRIOR PERIOD EXP ENDITURE TO RS.18,43,233. 29. AT THE TIME OF HEARING IT WAS AGREED BY THE PAR TIES THAT THAT ON IDENTICAL ISSUE OF INCLUSION OF EXCLUSION OF COMPAR ABLE COMPANIES, THIS TRIBUNAL IN ASSESSEES OWN CASE IN IT(TP)A.NO.2192/ BANG/2017 FOR AY 2012-13 ORDER DATED 17.9.2018 IN ASSESSEES OWN CAS E RULED THAT THE EXPENSES SHOULD BE ALLOWED ON THE BASIS OF CRYSTILI ZATION. THE AO IS DIRECTED TO FOLLOW THE AFORESAID DIRECTION CONTAINE D IN PARAGRAPH 58 & 59 OF THE AFORESAID ORDER ON THIS ISSUE, WHICH READS AS F OLLOWS: 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 DISALLOWED BY THE AO ON THE GROUND THAT IT WAS EXPE NDITURE RELATING TO AY 2012-13 AND THEREFORE CANNOT BE ALLO WED AS DEDUCTION IN AY 2013-14 AS IT WAS PRIOR PERIOD EXPE NDITURE. THE ADDITIONAL GROUND IS ADMITTED FOR ADJUDICATION AS T HE CLAIM COULD NOT BE MADE BY THE ASSESSEE IN THE ASSESSMENT AND A PPELLATE 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 LI ABILITY. IF THE LIABILITY IN QUESTION IS ESTABLISHED TO HAVE CRYSTA LLIZED IN AY 2012- 13, THEN THE ASSESSEE SHOULD BE ALLOWED THE DEDUCTI ON. WE HOLD AND DIRECT ACCORDINGLY. GROUND NO.14: DISALLOWANCE OF PROVISION FOR VARIOU S EXPENSES BY TREATING AS PROVISION FOR CONTINGENT LIABILITY INR 1,00,62 ,131 A) THE LEARNED CIT(A), HAS ERRED IN FACTS AND LAW, IN NOT ALLOWING DEDUCTION IN RESPECT OF INADVERTENT AND SUO-MOTO DI SALLOWANCE IT(TP)A NO.2476/BANG/2017 PAGE 34 OF 35 MADE BY THE APPELLANT OF THE PROVISION FOR EXPENSES UNDER SECTION 40(A)(IA) AND SECTION 40(A)(I) ON ACCOUNT OF NOT WI THHOLDING OF TAXES. B) THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT S, IN DISALLOWING THE PROVISION FOR VARIOUS EXPENSES UNDER SECTION 37 OF THE ACT BY TREATING THE SAME AS UNASCERTAINED/CONTINGENT LIABI LITY IN NATURE. C) THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THA T THE APPELLANT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND ACCOR DINGLY PROVISIONS ARE CREATED IN RESPECT OF THE LIABILITIE S ACTUALLY INCURRED/CRYSTALIZED DURING THE YEAR BUT THE INVOIC ES HAVE NOT YET BEEN RECEIVED FROM VENDORS BY THE END OF THE YEAR. D) THE CIT(A) OUGHT TO HAVE APPRECIATED THAT ALTHOU GH THE SAID PROVISIONS ARE REVERSED NEXT YEAR, THE FACT THAT CO RRESPONDING INVOICES HAVE BEEN ACCOUNTED AND TAX DEDUCTION IS D ONE DEMONSTRATES THAT THE PROVISIONS ARE IN THE NATURE OF ASCERTAINED/CRYSTALIZED LIABILITIES. E) THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THA T APPELLANT HAS PROVIDED A ONE-TO-ONE MATCH BETWEEN THE AMOUNTS DIS ALLOWED UNDER SECTION 40(A)(IA) AND THE EXPENSES RECORDED IN SUBS EQUENT YEAR UPON ACTUAL RECEIPT OF INVOICE. 30. ON THE AFORESAID GROUND OF APPEAL, THE LIMITED SUBMISSION THAT WAS MADE ON BEHALF OF THE ASSESSEE WAS THAT THE EXPENSE S IN QUESTION WERE DISALLOWED BY THE REVENUE AUTHORITIES ON THE GROUND THAT THEY WERE NOT ASCERTAINED LIABILITY AND WERE MERE PROVISION WHICH CANNOT BE ALLOWED AS DEDUCTION. THE ASSESSEE HAD MADE DISALLOWANCE OF T HE DISPUTED SUM FOR THE REASON THAT TAX WAS NOT DEDUCTED AT SOURCE ON T HE PROVISION SO MADE IN THE BOOKS AND IN VIEW OF THE PROVISIONS OF SEC.40(A )(IA) OF THE ACT FOR NON DEDUCTION OF TAX AT SOURCE, THE EXPENDITURE CANNOT BE ALLOWED AS DEDUCTION. THE LIMITED PRAYER OF THE LEARNED COUNS EL FOR THE ASSESSEE WAS THAT AS AND WHEN TDS IS PAID THE DEDUCTION IN QUEST ION HAS TO BE ALLOWED. WE ARE OF THE VIEW THAT THE PRAYER FOR ALLOWING DED UCTION OF EXPENSES IN THE YEAR IN WHICH TDS IS PAID TO THE GOVERNMENT IS ACCE PTABLE SUBJECT TO THE CONDITION THAT THE LIABILITY IN QUESTION SHOULD BE CRYSTALIZED/ASCERTAINED. IT IS IT(TP)A NO.2476/BANG/2017 PAGE 35 OF 35 MADE CLEAR THAT CRYSTALLIZATION EVEN IF IT IS IN EA RLIER PERIOD SHOULD NOT RESULT IN DISALLOWANCE U/S.40(A)(IA) OF THE ACT AND ON PAY MENT OF TDS THE DEDUCTION SHOULD BE ALLOWED SUBJECT TO SUCH EXPENSE S BEING OTHERWISE ALLOWABLE. GR.NO.14 IS DECIDED ACCORDINGLY. 31. GROUND NO.15 IS REGARDING LEVY OF INTEREST U/S .234B OF THE ACT, WHICH IS MANDATORY BUT THE AO SHOULD GIVE CONSEQUENTIAL RELI EF BASED ON THE ULTIMATE DETERMINATION OF TOTAL INCOME. GR.NO.16 I S REGARDING ACTION OF THE AO IN INITIATION OF PENALTY PROCEEDINGS UNDER SECTI ON 271(1)(C) OF THE ACT. NO APPEAL LIES AGAINST THE INITIATION OF PENALTY U/ S. 271(1)(C) OF THE ACT, HENCE GROUND NO.16 IS DISMISSED. 32. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 12 TH DAY OF OCTOBER, 2018. SD/- SD/- ( INTURI RAMA RAO ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 12 TH OCTOBER, 2018. / D ESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.