GE India Industrial (P) Ltd., Haryana V. The ACIT.,Kheda Circle, Nadiad

ITA 2781/AHD/2012

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9863 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 11 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-12-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 05-05-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 10-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SIDDHARTH JOSHI
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Rule of consistency; Retrospective amendment; Question of law; Working capital adjustments; Bad and doubtful debts; Corroborative evidences; Avoidance of tax; Revised return; Unabsorbed depreciation
• Section: 92C; 143(3); 244A; 92E; 234B; 10B

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH I-2, NEW DELHI BEFORE : SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 2781/AHD/2012 ASSESSMENT YEAR: 2008-09 GE INDIA INDUSTRIAL PRIVATE LIMITED, BUILDING NO. 7A, 4 TH 6 TH FLOOR, DLF CYBER CITY, DLF PHASE-III, SECTOR-25A, GURGAON. (PAN-AAACG4901D) (APPLICANT) VS. ACIT, KHEDIA CIRCLE NADIAD. (RESPONDENT) APP LICANT BY SH. SACHIT JOLLY, ADVOCATE & SH. SIDDHARTH JOSHI, ADVOCATE RESPONDENT BY SH. H.K. CHOUDHARY, CIT/DR ORDER PER L.P. SAHU, A.M. : THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINS T THE FINAL ORDER PASSED BY THE ASSESSING OFFICER U/S. 143(3) R.W.S. 144C(13) D ATED 31.10.2012 ON THE FOLLOWING GROUNDS : 1. THAT THE ORDER OF THE LD. AO, PURSUANT TO THE DIREC TIONS GIVEN BY THE HONBLE DRP, TO THE EXTENT DETRIMENTAL TO THE APPELLANT, IS PERVERSE, ERRONEOUS ON FACTS AND BAD IN LAW AND HAS BEEN PASSED IN VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE. 2.1 THAT THE LD. AO AND LD. DRP ERRED IN DENYING THE SET OFF OF UNABSORBED DEPRECIATION TO THE EXTENT OF RS. 46,29,00,427. DATE OF HEARING 1 1 . 10 .2018 DATE OF PRONOUNCEMENT 04.12.2018 ITA NO. 278/DEL/2012 2 2.2 THAT THE LD. AO AND LD. DRP HAS ERRED IN TREATIN G THE SET OFF OF UNABSORBED DEPRECIATION OF RS.46,29,00,427 AS CLAIMED IN THE R ETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION AS SET OFF OF BROUGHT FORWARD B USINESS LOSS. 3. THAT THE LD. AO AND LD. DRP ERRED IN DISALLOWING THE EXPENDITURE BOOKED UNDER THE HEAD WARRANTY AND REPLACEMENT EXPENSES OF RS.5,27,13,406. 4.1 THAT THE LD. AO AND LD. DRP ERRED IN DISALLOWING THE CLAIM FOR BAD DEBTS WRITTEN OFF IN PROFIT' & LOSS ACCOUNT OF RS. 4,34,6 4,346. 4.2 THE LD. AO AND LD. DRP ERRED IN NOT ALLOWING THE DEDUCTION OF BAD DEBTS IN THE YEARS IN WHICH THE SAID BAD DEBTS HAVE ACTUALLY CRYSTALLIZED. 4.3 THE LD.AO AND LD. DRP ERRED IN NOT ALLOWING DEDU CTION OF BAD DEBTS AS LOSS IN THE NORMAL COURSE OF BUSINESS UNDER SECTION 29 OF T HE ACT. 4.4 WITHOUT PREJUDICE TO THE ABOVE AND EVEN ASSUMIN G BUT NOT ADMITTING, THAT THE BAD DEBTS WRITTEN OFF ARE DISALLOWED IN THE CURRENT YEAR UNDER CONSIDERATION, THE CORRESPONDING PROVISION MADE AND OFFERED TO TAX IN THE PAST YEARS OUGHT TO BE ALLOWED IN THE RESPECTIVE YEARS. 5. THAT THE LD. AO HAS ERRED IN NOT GRANTING CREDIT OF TAXES DEDUCTED AT SOURCE TO THE EXTENT OF RS6,71,995. 6. THAT THE LD. AO HAS ERRED IN NOT GRANTING THE SE T OFF OF BROUGHT FORWARD MAT CREDIT OF RS.10,80,83,186 UNDER SECTION 115JAA OF T HE ACT. 7. THAT THE LD. AO AND THE LD. DRP, WHILE MAKING TR ANSFER PRICING ADJUSTMENT TO THE VARIOUS DIVISIONS OF THE APPELLANT, ERRED IN UP HOLDING THE REJECTION OF COMPARABILITY ANALYSIS OF THE APPELLANT IN THE TRANS FER PRICING (TP) DOCUMENTATION BY THE LD. TRANSFER PRICING OFFICER ( LD. TPO) AND CONFIRMING THE COMPARABILITY ANALYSIS ADOPTED BY THE LD. TPO. 8. THAT THE LD. AO AND THE LD. DRP, WHILE MAKING TRA NSFER PRICING ADJUSTMENT TO THE VARIOUS DIVISIONS OF THE APPELLANT, ERRED IN DI SREGARDING APPLICATION OF PRIOR YEAR DATA AS USED BY THE APPELLANT IN THE TP D OCUMENTATION AND HOLDING THAT ONLY CURRENT YEAR (I.E. FINANCIAL YEAR 2007- 0 8) DATA FOR COMPARABLE COMPANIES SHOULD BE USED. ITA NO. 278/DEL/2012 3 9. THAT THE LD. AO AND THE LD. DRP, WHILE MAKING TR ANSFER PRICING ADJUSTMENT TO THE VARIOUS DIVISIONS OF THE APPELLANT, ERRED IN RE JECTING THE TURNOVER FILTER APPLIED BY THE APPELLANT IN THE TP DOCUMENTATION AND APPLYING THE LOWER TURNOVER THRESHOLD LIMIT OF 50% LESS THAN THE TURNO VER OF THE RESPECTIVE DIVISIONS OF THE APPELLANT TO REJECT COMPANIES AS C OMPARABLES. 10. THAT THE LD. AO AND THE LD. DRP, WHILE MAKING TR ANSFER PRICING ADJUSTMENT TO THE POWER CONTROLS AND WATER AND PROCESS TECHNOLOGIE S DIVISION, ERRED IN MAKING AN ADJUSTMENT FOR THE COMPLETE SEGMENT LEVEL , INCLUDING THE DOMESTIC TRANSACTIONS AS WELL. 11. THAT THE LD. AO AND THE LD. DRP ERRED IN UPHOLDI NG THE ADJUSTMENT OF INR 2,25,93,835 IN THE POWER CONTROLS DIVISION (MANUFAC TURING SEGMENT) AND IN UPHOLDING THE TP ADJUSTMENT EVEN FOR THE NON ASSOCIA TED ENTERPRISE TRANSACTIONS OF THE APPELLANT. 12. THAT THE LD. AO AND THE LD. DRP ERRED IN UPHOLDI NG THE ADJUSTMENTS OF INR 25,97,724 IN THE LIGHTING DIVISION (DISTRIBUTION SE GMENT) OF THE APPELLANT BY THE LD. TPO. 13. THAT THE LD. AO AND THE LD. DRP ERRED IN CONFIRM ING THE USE OF TRANSACTIONAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD BY THE LD. TPO INSTEAD OF THE USE OF RESALE PRICE METHOD BY THE APPELLANT FOR THE LIGHTING DIVISION. 14. THAT THE LD. AO AND LD. DRP ERRED IN UPHOLDING T HE ADJUSTMENT OF INR 1,18,33,756 TO THE TRANSPORTATION DIVISION OF THE AP PELLANT BY THE LD. TPO AND IN DOING SO ERRED IN NOT PROVIDING APPROPRIATE ADJU STMENT ON ACCOUNT OF HIGHER IMPORT CONTENT. 15. THAT THE LD. AO AND THE LD. DRP ERRED IN UPHOLDI NG THE ADJUSTMENT OF INR 3,12,02,495 IN THE WATER AND PROCESS TECHNOLOGIES DI VISION (MANUFACTURING SEGMENT) AND IN UPHOLDING THE TP ADJUSTMENT EVEN FOR THE NON ASSOCIATED ENTERPRISE TRANSACTIONS OF THE APPELLANT. 16. THAT THE LD. AO AND THE LD. DRP, ERRED IN UPHOLD ING THE ADJUSTMENT OF INR 6,27,66,919 IN RESPECT OF THE MARKETING SUPPORT SER VICES RENDERED BY DIFFERENT DIVISIONS, AND ERRED IN NOT GRANTING APPROPRIATE WO RKING CAPITAL ADJUSTMENTS. ITA NO. 278/DEL/2012 4 17. THAT THE LD. AO/ LD. DRP ERRED, IN LAW AND FACTS , IN COMPUTING THE ARMS LENGTH PRICE WITHOUT GIVING BENEFIT OF +/- 5 PERCEN T UNDER THE PROVISO TO SECTION 92C OF THE ACT. 18. THAT THE LD. AO ERRED IN CONSEQUENTLY LEVYING I NTEREST UNDER SECTION 234B OF THE ACT TO THE EXTENT OF RS. 12,35,68,005. 19. THAT THE LD. AO ERRED IN EXCESS QUANTIFICATION AND LEVY OF INTEREST OF RS 12,27,135 UNDER SECTION J 234C OF THE ACT. 20. THAT THE LD. AO ERRED IN CONSEQUENTLY LEVYING IN TEREST UNDER SECTION 234D OF RS 1,46,99,349 AND WITHDRAWING INTEREST UNDER SECTI ON 244A OF RS 91,88,339. 2. THE BRIEF FACTS OF THE CASE ARE THAT GE INDIA IN DUSTRIAL PRIVATE LIMITED (GEIIPL, THE COMPANY OR THE APPELLANT) IS A C OMPANY INCORPORATED IN INDIA WITH ITS PRINCIPAL LOCATION IN NADIAD, GUJARAT. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF ELECTRIC L AMPS AND OTHER ELECTRICAL GOODS, MANUFACTURING AND SALE OF SPECIALITY CHEMICA LS, SALE AND SERVICE OF VIBRATION MONITORING SYSTEMS AND ITS RELATED PARTS, EXPORT AND MARKETING OF COMPUTER SOFTWARE, WIND TURBINE GENERATORS AND PROV IDING AFTER SALES SERVICES, PROVIDING TRAINING TO EMPLOYEES OF G.E. GROUP ETC. DURING THE FINANCIAL YEAR 2007- 08, TWELVE DIVISIONS OF GEIIPL VIZ. PLASTICS DIVISI ON, LIGHTING DIVISION, TRANSPORTATION DIVISION, WATER AND PROCESS TECHNOLO GIES DIVISION, DRUCK DIVISION, BENTLY NEVADA INDIA DIVISION, BENTLY NEVADA SALES & SERVICE DIVISION, POWER CONTROLS DIVISION, WIND DIVISION, TRAINING DIVISION , MARKETING SUPPORT DIVISION, AND INSPECTION TECHNOLOGIES DIVISION HAD RELATED PA RTY TRANSACTIONS. THE INTERNATIONAL TRANSACTIONS OF GEIIPL, RELEVANT TO T HE ASSESSMENT YEAR 2008-09 WERE REFERRED FOR DETERMINATION OF ARMS LENGTH PRI CE BY THE ASSISTANT COMMISSIONER OF INCOME TAX, KHEDA CIRCLE, NADIAD ( ASSESSING OFFICER OR AO) TO THE ADDITIONAL COMMISSIONER OF INCOME-TAX (TPO)-I, AHMEDABAD (TRANSFER ITA NO. 278/DEL/2012 5 PRICING OFFICER OR TPO). THE LEARNED (LD.) TPO AFTER THE ASSESSMENT PROCEEDINGS UNDER SECTION 92C OF THE INCOME TAX ACT , 1961 (THE ACT) PROPOSED AN ADJUSTMENT OF INR13,92,32,889 IN RESPECT OF CERTAIN INTERNATIONAL TRANSACTIONS OF SOME OF THE DIVISIONS OF THE APPELL ANT,AS PER THE ORDER DATED OCTOBER 28, 2011 (THE TP ORDER). 3. SUBSEQUENTLY, THE AO ISSUED THE DRAFT ASSESSMENT ORDER, INTER ALIA, INCORPORATING THE ADJUSTMENT MADE BY THE TPO TO THE TRANSFER PRICE OF THE APPELLANT. AGAINST THE DRAFT ASSESSMENT ORDER OF TH E AO, THE APPELLANT FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (THE DRP) ON JANUARY 30, 2012 AFTER CONSIDERING THE SUBMISSIONS MADE AND THE DETA ILED HEARING, THE DRP ISSUED ITS DIRECTIONS VIDE ORDER DATED SEPTEMBER 26, 2012 AND PARTLY UPHELD THE ARGUMENTS OF GEIIPL AGAINST THE ARMS LENGTH PRICE DETERMINED BY THE LD. TPO FOR THE MARKETING SUPPORT SERVICES AND ACCORDINGLY, A R ELIEF OF APPROXIMATELY INR 82 LAKHS HAS BEEN PROVIDED TO THE APPELLANT. THE DRP H AS HOWEVER UPHELD THE VIEW OF THE LD. TPO IN RESPECT OF TRANSFER PRICING ADJUS TMENT MADE TO THE OTHER DIVISIONS. THE LD. AO/TPO MADE THE FOLLOWING ADJUST MENTS DIVISION-WISE : SL.NO. PARTICULARS AMOUNT (IN INR) 1 POWER CONTROLS DIVISION (MANUFACTURING SEGMENT) 22,593,835 2 LIGHTING DIVISION (DISTRIBUTION SEGMENT) 2,597,724 3 TRANSPORTATION DIVISION (IMPORT AND ASSEMBLING OF SIGNALING EQUIPMENTS) 11,833,756 4 WATER AND PROCESS TECHNOLOGIES DIVISION (MANUFACTURING SEGMENT) 31,202,495 5 MARKETING SUPPORT SERVICES DIVISION (MARKETING SUPPORT SEGMENT) 56,906,719 6 SENSING DIVISION (MARKETING SUPPORT SEGMENT) 3,737,355 ITA NO. 278/DEL/2012 6 7 INSPECTION TECHNOLOGIES DIVISION (MARKETING SUPPORT SEGMENT) 2,104,995 8 WATER & PROCESS TECHNOLOGIES DIVISION (MARKETING SUPPORT SEGMENT) 17,849 TOTAL 130,994,728 IN ADDITION TO THE ABOVE, THE AO ALSO MADE FOLLOWIN G ADDITIONS : (I). UNABSORBED BUSINESS LOSS & DEPRECIATION RS.46 ,29,00,427/- (II). PROVISION FOR WARRANTY RS.5,27,13,403/- (III). BAD DEBTS WRITTEN OFF RS.4,34,64,346/- (IV). NON GRANT OF TDS CREDIT RS.6,71,995/- (V) NON-GRANT OF SET OFF OF BROUGHT FORWARD MAT CREDIT. RS.10,80,83,186/- THE AO FURTHER NOTICED THAT THE ASSESSEE HAD CLAIME D BROUGHT FORWARD BUSINESS/DEPRECIATION LOSS OF EARLIER YEARS TO THE TUNE OF RS. 46,29,00,427/- THROUGH THE FILLING OF REVISED RETURN. IN THIS RE GARD IN RESPONSE TO THE QUERY RAISED BY THE ASSESSING OFFICER, THE ASSESSEE SUBMI TTED DETAILS OF BUSINESS LOSS/DEPRECIATION LOSS BROUGHT FORWARD SINCE 01.04. 2004 TO 31.03.2007 WHICH HAVE BEEN DULY INCORPORATED IN THE ASSESSMENT ORDER . THE AO OBSERVED THAT IN ASSESSMENT YEAR 2005-06, OUT OF TOTAL BROUGHT FORWA RD LOSSES OF EARLIER YEARS OF RS.111,81,89,583/-, THE BROUGHT FORWARD LOSSES TO T HE EXTENT OF ASSESSED INCOME OF RS.101,25,07,648/- WAS ALLOWED TO BE SET OFF AND REMAINING BROUGHT FORWARD LOSSES OF RS.10,56,81,935/- WAS ALLOWED TO BE CARRI ED FORWARD TO SUBSEQUENT YEAR AND THIS AMOUNT OF RS.10,56,81,935/- WAS ALLOWED TO BE SET OFF IN THE ASSESSMENT ORDER FOR A.Y. 2006-07. SINCE THE BROUGHT FORWARD L OSSES OF EARLIER YEARS STOOD ABSORBED/SET OFF IN THE ASSESSMENT YEARS 2005-06 AN D 2006-07, THE CLAIM OF SUCH BROUGHT FORWARD LOSSES OF RS.108,05,32,201/- MADE B Y THE ASSESSEE IN A.Y. 2007- 08 WAS DISALLOWED DUE TO THE EFFECT OF SETTING OFF OF TOTAL LOSSES IN A.Y. 2005-06 AND 2006-07. THE AO WAS FURTHER OF THE OPINION THAT SINCE, THE ASSESSMENTS OF A.Y. ITA NO. 278/DEL/2012 7 2005-06 AND 2006-07 ARE PENDING IN APPEAL, THEREFOR E, THE CLAIM FOR LOSS OF RS. 46,29,00,427/- PERTAINING TO ASSESSMENT YEAR 2001-0 2, 2002-03 & 2003-04 OF DTA DIVISION OF GEPC AND LIGHTING DIVISION WAS NOT ALLOWABLE DUE TO THE MERGER PROCESS BY VARIOUS COMPANIES INTO THE ASSESSEE COMP ANY. SINCE THE SHAREHOLDING PATTERN WAS LESS THAN 51% IN THE NEW COMPANY, THERE FORE, SECTION 79 WAS INVOKED AND THE SET OFF OF LOSS CLAIMED TO THE EXTENT OF RS . 46,29,00,427/- WAS DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE. 4. HE FURTHER OBSERVED THAT THE ASSESSEE HAS DEBITE D TO PROFIT & LOSS ACCOUNT UNDER THE HEAD PROVISION OF RS. 5,27,13,403/- FOR WARRANTY AND REPLACEMENT EXPENSES. THE AO DISALLOWED THE ABOVE CLAIM FOR PRO VISION FOR WARRANTY ON THE PREMISE THAT SIMILAR DISALLOWANCE HAS BEEN CONSISTE NTLY MADE IN A.Y. 2005-06, 2006-07 & 2007-08 HOLDING THE SAME AS UNASCERTAINED LIABILITY. THE DISALLOWED WAS MADE ON THE IDENTICAL ARGUMENTS OF THE ASSESSEE . IT WAS ALSO OBSERVED THAT NO ANY SCIENTIFIC BASIS WAS ADOPTED BY THE ASSESSEE FO R THIS PROVISION AND IT WAS MADE ON ADHOC BASIS . THE YEAR WISE PROVISION AND ITS UTILIZATION IS AS UNDER FOR THE LAST THREE YEARS: PARTICULARS F.Y. 2004 - 05 F.Y.2005 - 06 F.Y.2006 - 07 F.Y.2007 - 08 OPENING BALANCE 1,91,41,737 6,74,17,700 5,61,03,266 4,30, 05,886 ADD: PROVISION CREATED (GROSS) 6,36,06,725 2,43,96,674 2,92,64,198 5,27,13,403 LESS: UTILIZATION /WRITTEN BACK 1,53,30,762 3,57,11,108 4,23,61,578 5.57,55,889 CLOSING BALANCE 6,74,17,700 5,61,03,266 4,30,05,886 3,99,63,400 SALES 346,94,93,178 359,53,80,977 337,17,99,597 348,67,54,718 % UTILIZATION OVER PROVISION 18.53 38.89 49.62 58.25 % OF UTILIZATION OVER SALES 0.44 0.99 1.26 1.60 ITA NO. 278/DEL/2012 8 IN SUPPORT OF HIS CLAIM, THE ASSESSEE SUBMITTED THA T IT HAS BEEN MADE ON THE BASIS OF PAST EXPERIENCE AND IT CAN NOT BE SAID THAT IT I S A CONTINGENT LIABILITIES AND RELIED ON THE DECISION OF M/S ROTORK CONTROLS INDIA (P) LTD. OF HONBLE S.C. THE A.O. OBSERVED THAT THE ASSESSEE HAS NOT CARRIED OUT ANY OF THE EXERCISE AS MANDATED / ADVOCATED BY THE HONBLE SUPREME COURT , WHILE MAKING PROVISION FOR WARRANTY. NO ANY EVIDENCE WAS LED BY THE ASSESSEE F OR ESTABLISHING THAT THERE IS RELATIONSHIP BETWEEN THE PROVISION MADE AND UTILIZE D IN SUBSEQUENT YEAR WITH SALES MADE BY THE ASSESSEE. THE ASSESSEE WAS ALSO UNABLE TO FURNISH THE RE- ESTIMATION OF THE WARRANTY ESTIMATES AS MANDATED/AD VOCATED BY HONBLE SUPREME COURT. THE AO ALSO OBSERVED THAT THERE ARE HUGE BALANCES APPEARING IN THE PROVISION FOR WARRANTY EXPENSES. HAD THE ASSESS EE ADOPTED ANY SCIENTIFIC METHOD FOR ESTIMATING THE PROVISION FOR WARRANTY, T HERE WOULD NOT BE BALANCE OF SUCH A HUGE AMOUNT IN THE PROVISION FOR WARRANTY. T HE ASSESSEE FILED DETAILS OF THE ACTUAL UTILIZATION OF WARRANTY AND WRITTEN BACK WIT H THE SUPPORTING VOUCHERS BEFORE THE DRP OF RS.5,57,55,889/- (40384937 + 1537 0952). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND AS PER DIRECTIO N OF THE DRP, THE AO ALLOWED THE CLAIM TO THE EXTENT OF RS.5,57,55,889/- AND DIF FERENCE WAS ADDED BACK TO THE INCOME OF THE ASSESSEE. 5. FURTHER, THE AO OBSERVED THAT THE ASSESSEE HAS D EBITED RS.4,34,64,346/- INTO THE PROFIT AND LOSS ACCOUNT TOWARDS BAD DEBTS WRITTEN OFF. THE ASSESSEE WAS ASKED TO JUSTIFY THE SAME. IN RESPONSE, THE ASSESSE E VIDE LETTER DATED 31.10.2011 SUBMITTED THAT THE SAME ARE ALLOWABLE UNDER PROVISI ONS OF SECTION 36(1)(VII) AND 36(2) OF THE ACT. HE RELIED ON THE DECISION IN TRF LTD. VS. CIT (CIVIL APPEAL NO. 5293 AND 5294 OF 2003)(SC). THE ASSESSEE ALSO SUBMI TTED THE DETAILS OF THE DEBTORS ON 05.12.2011 AS UNDER : ITA NO. 278/DEL/2012 9 SL. NAME OF DEBTORS AMOUNT 1 INDIAN RAILWAY 34,59,309 2. TATA STEEL 6,65,735 3. ONGC 43,611 4. TATA IRON & STEEL CO. LTD. 83,776 5. TAMILNADU ELECTRICITY BOARD 19,27,406 6. WEST BENGAL POWER DEVT. COPN. 18,18,423 7. M.P. STATE ELECTRICITY BOARD 5,31,002 8. TRANSMISSION CORPN. OF A.P. 22,21,480 THE ASSESSING OFFICER OBSERVED THAT THE ABOVE COMPA NIES ARE CASH RIGHT COMPANIES AND THE DEBTS GIVEN TO THEM CANNOT BE BEL IEVED TO BE BAD. THE ASSESSEE WAS UNABLE TO PRODUCE ANY CORRESPONDENCE WITH THE S AID COMPANIES TO JUSTIFY THE DEBTS WRITTEN OFF BEING BAD. THE AO, THEREFORE, OBS ERVED THAT IT IS IN THE NATURE OF LIQUIDATED DAMAGES OR DISCOUNTS LIKE DISPUTE ON PER FORMANCE INCENTIVES, DISCOUNT DIFFERENCES, POOR QUALITY MATERIALS AND HENCE LESS PAYMENT, QUALITY ISSUES, OBSOLETE MATERIALS, TURNOVER DISCOUNT NOT GIVEN, CU STOMERS CLAIMING THAT MATERIALS NOT RECEIVED IN THE FIRST PLACE, AMC CONT RACT NOT PROPERLY MANAGED, SO CUSTOMERS REFUSED TO PAY, MATERIALS WERE SHORT SUPP LY, DEFECTIVE MATERIALS, SO CUSTOMERS REUSED TO PAY AND DESIGNED DISCREPANCY AN D SHORT PAYMENT, NOT PERTAINING TO CURRENT ASSESSMENT YEARS. THE AO FURT HER OBSERVED THAT SUCH REASONS FOR WRITE OF AS LIQUIDATED DAMAGES LIABLE B E ALLOWED IN THE YEAR OF SHORT PAYMENT OR WHEN THE AMOUNT WITHHELD ARE RECOVERED F ROM THE ASSESSEE. THE BAD DEBTS AND LIQUIDATED DAMAGES ARE LOSS TO THE BUSINE SS BUT THE FORMER IS RELATED TO FINANCIAL PROBLEMS OF THE DEBTORS AND THE LATTER IS RELATED TO OTHER REASONS AS MENTIONED ABOVE. THE ASSESSEE HAS FAILED TO SUBMIT SEPARATE DETAILS SOLELY RELATED TO DEBTORS WHOSE DEBTS HAVE BEEN WRITTEN OFF DUE TO REASONS CLOSED BUSINESS, NOT TRACEABLE FOR SEVERAL YEARS, DEBTS TIME BARRED AND NO LEGAL ACTION WOULD BE TAKEN, DEFAULT IN SETTLEMENT, BANKRUPT DEBTORS ETC., THE A LLEGED BAD DEBTS CLAIM IS CONSIDERED IN THE NATURE OF LIQUIDATED DAMAGES. HE ACCORDINGLY DISALLOWED THIS ITA NO. 278/DEL/2012 10 CLAIM FOR THE REASONS THAT THE ASSESSEE WAS FOLLOWI NG MERCANTILE SYSTEM OF ACCOUNTING SO THE ACCRUED LIABILITY CAN BE ALLOWED ONLY IN THE YEAR OF ACCRUAL. ONLY BAD DEBTS ARE ALLOWED IN THE YEAR OF WRITE OFF U/S. 36(1)(VII), BUT THERE ARE NO PROVISIONS IN THE ACT TO CLAIM LIQUIDATED DAMAGES I N THE YEAR OF WRITE OFF. 6. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASS ESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 7. GROUND NO.1 IS GENERAL IN NATURE. IT DOES NOT RE QUIRE SEPARATE ADJUDICATION. GROUND NO. 2.1 & 2.2 RELATES TO DENIAL OF SET OFF O F UNABSORBED DEPRECIATION TO THE TUNE OF RS.46,29,00,427/-. IN THIS REGARD, THE LD. AR OF THE ASSESSEE STATED THAT THE ISSUE INVOLVED IN THIS GROUND IS SQUARELY COVERED I N FAVOUR OF THE ASSESSEE BY THE DECISION OF ITAT AHMEDABAD BENCH IN THE CASE OF ASS ESSEE ITSELF FOR A.Y. 2004-05 (REVENUES APPEAL NO. 2154/AHD/2012). ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 8. AFTER HEARING BOTH THE SIDES AND PERUSING THE EN TIRE MATERIALS AVAILABLE ON RECORD AND CASE LAW CITED, WE FIND THAT THE ISSUE I NVOLVED IN THIS GROUND NO. 2 IS STATED BY THE ASSESSEE TO BE SQUARELY COVERED BY TH E DECISION OF AHMEDABAD BENCH OF TRIBUNAL IN ASSESSEES CASE FOR A.Y. 2004- 05 AS REFERRED TO ABOVE. WE DEEM IT APPROPRIATE TO REPRODUCE THE OBSERVATIONS O F TRIBUNAL MADE IN PARA 19.1 TO 20.1 OF THE ORDER AS UNDER : 19.1. THE ONLY ISSUE IS TO BE EXAMINED WHETHER TH E LD.CIT(A) WAS JUSTIFIED IN ALLOWING SET OFF OF THE BUSINESS LOSS. THE LD.CIT-DR SUBMI TTED THAT THE LD.CIT(A) WAS NOT JUSTIFIED IN ALLOWING THE SET OFF OF THE BUSINESS LOSS OF RS .2,64,32,995/- PERTAINING TO AY 1997-98 ITA NO. 278/DEL/2012 11 AGAINST PROFIT OF AY 2004-05 WITHOUT CONSIDERING TH E FACT. HE SUBMITTED THAT THE LD.CIT(A) OUGHT O HAVE UPHELD THE ORDER OF THE AO. HE PLACED RELIANCE ON THE ORDER OF THE AO. 19.2. ON THE CONTRARY, LD.COUNSEL FOR THE ASSESSEE SUBMITTED AS UNDER:- AT THE OUTSET IT IS SUBMITTED THAT THE ASSESSEE COM PANY HAS PURPORTED TO SET OFF LOSSES OF ONLY RS. 2,59,69,283 AND BALANCE RS. 464,712 P ERTAINS TO UNABSORBED DEPRECIATION PURPORTED TO BE SET OFF IN THE REVISED RETURN OF INC OME FILED FOR THE YEAR UNDER CONSIDERATION. THE BROUGHT FORWARD BUSINESS LOSSES OF RS 2,59,69,283 SET OFF DURING THE YEAR UNDER CONSIDERATION PERTAINS TO THE LOSSES INCURRED BY TH E LIGHTING DIVISION (I.E. THE APPELLANT COMPANY) IN AY 1997-98 AND WERE SET OFF IN COMPLIAN CE WITH THE CONDITIONS STIPULATED IN SECTION 79 OF THE ACT. SECTION 79 REQUIRES AN INQUIRY TO BE MADE AS TO WHO THE SHAREHOLDERS WERE AT TWO POINTS IN TIME I.E ON THE LAST DAY OF THE PREVIOUS YEAR IN WH ICH THE LOSSES ARE SET OFF AND ON THE LAST DAY OF THE PREVIOUS YEAR IN WHICH THE LOSSES WERE I NCURRED. ON IDENTIFICATION OF PERSONS/ SHAREHOLDERS AT TWO P OINTS IN TIME, IT MUST BE ASCERTAINED WHAT THEIR SHARE HOLDING IN THE COMPANY IS AT TWO P OINTS IN TIME. SECTION 79 REFERS TO 'PERSONS' IN PLURALITY. THE RE FERENCE IS TO 'SHAREHOLDERS' AND NOT A SHAREHOLDER. THE COMPARISON HAS TO BE OF THE COLLEC TIVE HOLDINGS OF THESE PERSONS OR THE GROUP. RELIANCE PLACED ON THE RULING OF THE SUPREME COURT IN THE CASE OF CIT VS. ITALINDIA COTTON CO. P. LTD (1988) 174 ITR 160 AND MUMBAI TRIBUNAL DECISIO N IN THE CASE OF SUNANDA CAPITAL SERVICES LTD. VS. JCIT (28 SOT 484). THE VIEW THAT THE REFERENCE IN SECTION 79 IS TO A G ROUP OF SHAREHOLDERS IS SUPPORTED BY JUDICIAL PRECEDENTS AND COMMENTARY BY KANGA AND PAL KHIVALA IN 'THE LAW AND PRACTICE OF INCOME-TAX, EIGHTH EDITION, VOLUME 1, COMMENTARY BY CHATURVEDI AND PITHISARIA IN INCOME TAX LAW, 2ND EDITION, VOL 2, PAGE 1150. IN THE INSTANT CASE, AS EVIDENT FROM THE SHAREHOLDI NG PATTERN, AND ADMITTED BY THE LD. AO AS WELL AS LD. CIT(A) THAT GE PACIFIC PTE LTD, SINGAPO RE AND GE PACIFIC (MAURITIUS) LTD COLLECTIVELY CONTINUED TO HOLD MORE THAN 51% OF THE SHARES OF THE COMPANY IN THE YEAR ENDED MARCH 31,1997, (THE YEARS IN WHICH LOSSES WER E INCURRED) AND MARCH 31, 2004 (THE YEAR OF SET OFF OF LOSSES). ITA NO. 278/DEL/2012 12 HENCE, BUSINESS LOSSES HAVE BEEN SET OFF AND CARRIED FORWARD TO THE SUBSEQUENT YEARS IN COMPLIANCE WITH THE CONDITIONS PRESCRIBED IN SECTION 79 OF THE ACT. WITHOUT PREJUDICE, THE ULTIMATE HOLDING COMPANY IS GENERAL ELECTRIC COMPANY, US WHICH CONTINUES TO EXERCISE CONTROL OVER THE ASSESSEE THR OUGH ITS SUBSIDIARIES. ANY CHANGE IN THE SHAREHOLDING AMONGST THE MEMBERS OF THE GE GROUP WOU LD NOT PREJUDICE THE RIGHT TO CARRY FORWARD THE LOSSES IN CASE OF ASSESSEE COMPANY AS L ONG AS GENERAL ELECTRIC CONTINUES TO HAVE CONTROL OVER IT THROUGH ITS SUBSIDIARIES. THE ULTIMATE BENEFICIARY INTEREST REMAINS WITHIN THE GE GROUP. RELIANCE ON BANGALORE TRIBUNAL RULING IN THE CASE OF AMCO POWER SYSTEMS LIMITED AND DELHI TRIBUNAL RULING IN THE CAS E OF SELECT HOLIDAY RESORTS PVT. LTD. 20. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE LD.CIT(A) HAS GIVEN A FINDING ON FACT IN PARAS-12.19 & 12.20 OF HIS ORDER , WHICH ARE REPRODUCED HEREUNDER:- 12.19. FROM THE ABOVE IT CAN BE SEEN THAT THE APPELL ANT COMPANY HAS CLAIMED SET OFF OF PART OF LOSSES OF 102,83,83,355/- AGAINST THE INCO ME OF AY 2005-06 ALSO. FROM THE ABOVE ONE CAN SEE THAT THE AO HAS NOT DENIED SET OFF OF L OSSES OF THE APPELLANT AGAINST THE PROFIT OF AY 2005-06 MERELY ON THE BASIS THAT THE ENTIRE LOSSE S OF 102,83,83,355/- HAS BEEN DISALLOWED TO BE CARRIED FORWARD AND SET OFF IN AY 2004-05. RATHER THE AO HAS STATED THAT THE APPELLANT WAS ONCE AGAIN CALLED UPON TO FURNISH DETAILS OF COMPANY-WISE LOSSES WHICH MERGED INTO THE APPELLANT COMPANY AND THE SHARE HOL DING PATTERN OF SUCH COMPANIES IN THE YEAR OF INCURRENCE OF LOSSES. THE AO HAS FURTHER S TATED THAT THE CONTENTION OF THE APPELLANT IS NOT CORRECT AS IT ITSELF HAS CLAIMED THE BENEFIT OF CARRIED FORWARD AND SETTING OFF OF THE LOSSES AND THEREFORE, IT IS OBLIGATORY UPON IT TO SU BSTANTIATE THE CLAIM SPECIFICALLY IN LIGHT OF THE PROVISIONS OF SEC.79 OF THE ACT. THUS IT IS C LEAR THAT AO HAD CALLED FOR DETAILS FROM THE APPELLANT DURING THE COURSE OF ASSESSMENT PROCEEDIN GS FOR AY 2005-06 ALSO FOR SUBSTANTIATING THE CLAIM OF THE APPELLANT SPECIALLY IN THE LIGHT OF PROVISIONS OF SECTION 79 OF THE ACT. ONCE, THE ENTIRE LOSS HAS BEEN DISALLOWED BY THE AO IN THE CASE OF APPELLANT IN AY 2004-05 ITSELF, THEN IT IS NOT CLEAR AS TO HOW CARR IED FORWARD AND SET OFF OF PART OF SUCH LOSSES OF .102,83,83,355/- CAN FURTHER BE CONSIDER ED FOR THE PURPOSE OF ALLOWING OR DISALLOWING THE SAME U/S.79 OF THE IT ACT AGAINST T HE PROFIT OF 2005-06. THESE FACTS SHOW THAT THE AO HAS CONTRADICTED HIMSELF BY STATING THA T THE APPELLANT WAS CALLED UPON TO FURNISH DETAILS OF COMPANY-WISE LOSSES AND SHARE HO LDING PATTERN OF SUCH COMPANY IN THE YEAR OF INCURRENCE OF LOSSES DURING THE COURSE OF A SSESSMENT PROCEEDINGS OF AY 2005-06. THE VERY FACT IS THAT THE APPELLANT HAS CLAIMED CAR RY FORWARD AND SET OFF OF PART OF THE LOSSES AGAINST THE PROFIT OF SUBSEQUENT YEAR ALSO I .E. AY 2005-06 AND THE AO HAS CALLED FOR DETAILS WITH REGARD TO SUCH CLAIM OF THE APPELLANT IN VIEW OF SECTION 79 OF THE IT ACT. THUS THE ACT OF THE AO ITSELF IS CONTRADICTORY TO HIS OW N STAND SO FAR AS AY 2005-06 IN THE CASE OF ITA NO. 278/DEL/2012 13 APPELLANT IS CONCERNED AS IN AY 2004-05 HE HAS DISA LLOWED ENTIRE LOSSES OF 102,83,83,355/- AND IN ANOTHER YEAR I.E. IN AY 200 5-06 HE IS AGAIN CALLING FOR DETAILS FOR THE PURPOSE OF EXAMINING THE CLAIM OF SUCH LOSSES O R PART OF SUCH LOSSES. HOWEVER, AS STATED IN EARLIER PARAGRAPHS, THE CLAIM OF SET OFF OF ANY LOSSES PERTAINING TO PCDTA & GEIIPL AGAINST THE PROFIT OF AY 2005-06 IS REQUIRED TO BE C ONSIDERED BY THE AO AS PER LAW AND ON MERITS OF THE CASE WHILE COMPLETING THE ASSESSMENT OF SUCH ASSESSMENT YEAR. 12.20. IN VIEW OF THE ABOVE DISCUSSION, IT IS HEL D THAT THE APPELLANT (I.E. GEIIL) IS ENTITLED TO SET OFF OF THE BUSINESS LOSS PERTAINING TO AY 1997-9 8 IN ITS CASE AGAINST ITS PROFIT OF AY 2004- 05 IN VIEW OF PROVISIONS OF SECTION 79 OF THE IT AC T. AS REGARDS REMAINING LOSSES IN THE CASE OF APPELLANT, THE SAME CANNOT BE DENIED TO BE CARRIED FORWARD BY THE AO U/S.79 OF THE ACT WHILE COMPLETING THE ASSESSMENT FOR AY 2004-05. AS STATED ABOVE IN CASE IF REMAINING LOSSES OR PART OF SUCH REMAINING LOSSES WHICH ARE P ERTAINING TO DIFFERENT YEARS OF GEPCDTA AND GEIIPL ARE CLAIMED BY THE APPELLANT AGAINST THE PROFIT OF SUBSEQUENT ASSESSMENT YEARS (I.E. AFTER AY 2004-05), ALLOWABILITY OR DISALLOWABIL ITY OF SUCH CLAIM OF LOSSES HAS TO BE CONSIDERED BY THE AO ON MERITS AND SUBJECT TO FULFI LLMENT OF CONDITIONS AS LAID DOWN IN SECTION 79 AND ALSO SUBJECT TO FULFILLMENT OF CONDI TIONS AS LAID DOWN IN OTHER RELEVANT PROVISIONS OF THE IT ACT WHILE COMPLETING THE ASSES SMENTS IN THE CASE OF APPELLANT FOR SUCH SUBSEQUENT ASSESSMENT YEARS. 20.1. THE ABOVE FINDING OF THE LD.CIT(A) IS NOT CON TROVERTED BY THE REVENUE BY PLACING ANY CONTRARY MATERIAL ON RECORD. THEREFORE, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE LD.CIT(A), SAME IS HEREBY UPHELD. THUS, THIS GROUND OF REVENUES APPEAL IS REJECTED. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS ON THE ISSU E AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE HAS RELIED ON THE ORDER IN ITS OWN CASE FOR A.Y. 2004-05 (SUPRA) AND THE APPEAL UNDER CONSIDERATION PERTAINS TO ASSESSMENT YEAR 2008-09. THE LD. DRP HAS ALSO AFFIRMED THE DISALLOW ANCE OF CARRY FORWARD OF LOSSES AS DONE BY THE AO. WHILE PERUSING THE ORDER OF TRIB UNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-07 AND 2007-08 IN ITA NO. 3064/AHD/2010 D ATED 08.08.2013, THE CONTENTION OF THE ASSESSEE IN THAT CASE WAS THAT TH E ASSESSEE WAS LEGALLY ENTITLED FOR CARRY FORWARD OF LOSSES AS PER SECTION 79 BECAU SE HE FULFILLED THE CONDITIONS AS STIPULATED IN THE SECTION FOR VOTING RIGHTS OF MORE THAN 51% OF THE SHARE HOLDING, ITA NO. 278/DEL/2012 14 WHEREAS IN THE INSTANT CASE, WE OBSERVE FROM THE OR DER OF THE ASSESSING OFFICER THAT THE AO HAS OBSERVED THAT THERE IS NON-EXISTENC E OF SHARE HOLDING OF 51% DUE TO MERGER OF VARIOUS COMPANIES INTO THE NEW COMPANY . THE ASSESSEE HAS NOT PRODUCED BEFORE US THE SHARE HOLDING PATTERN AFTER MERGER OF VARIOUS COMPANIES SO AS TO EXAMINE THE ISSUE IN THE LIGHT OF SECTION 79 OF THE ACT. THE ASSESSEE HAS ALSO NOT PRODUCED BEFORE US THE OUTCOME OF ALL PREC EDING YEARS OF ASSESSMENTS AFTER ORDERS OF APPELLATE AUTHORITIES SO AS TO EXAM INE THE ALLOWABILITY OF BROUGHT FORWARD LOSSES CLAIMED DURING THE YEAR UNDER CONSID ERATION. WE, THEREFORE, DEEM IT JUST AND PROPER TO SET ASIDE THIS ISSUE TO THE F ILE OF AO FOR DECIDING THE SAME AFRESH AFTER ASCERTAINING/DETERMINING THE CARRY FOR WARD LOSSES BASED ON THE OUTCOME OF THE DECISIONS FOR THE EARLIER YEARS, WHI CH SHALL BE SUBMITTED BY THE ASSESSEE BEFORE THE AO. NEEDLESS TO SAY, THE ASSESS EE SHALL BE GIVEN REASONABLE OPPORTUNITY OF BEING HEARD. ACCORDINGLY, GROUND NO. 2 IS ALLOWED FOR STATISTICAL PURPOSES. 10. IN RESPECT TO GROUND NO. 3 REGARDING PROVISION FOR WARRANTY AMOUNTING TO RS.5,27,13,403/-, THE LD. AR OF THE ASSESSEE RELIED ON THE DECISION OF TRIBUNAL IN ITS OWN CASE FOR A.Y. 2006-07 (SUPRA), WHEREIN THE TRIB UNAL HAS RESTORED THE ISSUE BACK TO THE FILE OF AO TO DECIDE THE SAME AFRESH AF TER CONSIDERING THE DECISION OF HONBLE SUPREME COURT IN ROTORK CONTROLS INDIA (P) LTD., 314 ITR 62. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 11. HAVING HEARD THE SUBMISSIONS OF BOTH THE PARTIE S AND PERUSING THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE AO HAS GIVEN OPPORTUNITY TO THE ASSESSEE TO ITA NO. 278/DEL/2012 15 SATISFY THE PRINCIPLES LAID DOWN BY HONBLE SUPREME COURT IN THE AFORESAID DECISION. THE LD. AUTHORITIES BELOW HAVE CATEGORICA LLY OBSERVED THAT THE ASSESSEE FAILED TO SUBMIT ANY EVIDENCE TO ESTABLISH THAT HE HAD CAPTURED THE RELATIONSHIP BETWEEN THE NATURE OF SALES, WARRANTY PROVISIONS MA DE AND THE ACTUAL EXPENSES INCURRED AGAINST IT, AS LAID DOWN BY HONBLE SUPREM E COURT. THE OTHER GUIDELINE GIVEN IN THE DECISION OF HONBLE APEX COURT IS THAT THE ASSESSEE HAS TO MAKE RE- ESTIMATION OF PROVISION FOR WARRANTY YEAR TO YEAR, BUT THE ASSESSEE HAD FAILED TO PROVE ANY SUCH RE-ESTIMATION MADE BY IT. NOTHING IS UTTERED ON BEHALF OF THE ASSESSEE TO REBUT THE FINDING OF THE AO THAT THE AS SESSEE HAS NO RECORDS OR REGISTERS PERTAINING TO EXPENSES RELATING TO WARRAN TY EXPENSES TO PROVE THAT WORKING OF WARRANTY PROVISION COMMENSURATE TO THE C RITERIA GIVEN IN THE DECISION OF HONBLE APEX COURT. 12. ON PERUSING OF WORKING GIVEN BY THE ASSESSEE WI TH RESPECT TO PROVISION FOR WARRANTEE, AS DETAILED IN THE TABLE ABOVE, WE FIND THAT IN F.Y. 2004-05, THE PROVISION INCLUDING OPENING BALANCE WAS OF RS.82748 462/-, OUT OF WHICH THE ASSESSEE HAS SHOWN UTILIZATION OF ONLY RS.1,53,30,7 62/- REPRESENTING TO 18.53%. THERE HAS BEEN DRASTIC INCREASE IN THIS PERCENTAGE OF UTILIZATION UPTO F.Y. 2007-08 UPTO 58.25%. SIMILAR IS THE POSITION WITH RESPECT TO PERCENTAGE OF UTILIZATION OVER SALES, WHICH HAS BEEN DRASTICALLY INCREASED FROM 0. 44% IN F.Y. 2004-05 TO 1.60% IN F.Y. 2007-08, WHEREAS WE DO NOT FIND ANY SUBSTAN TIAL OR PROPORTIONATE CHANGES IN THE SALES OF THE ASSESSEE DURING THESE YEARS. W E ALSO FIND THAT THE AMOUNTS OF PROVISIONS FOR WARRANTY CLAIMED BY THE ASSESSEE DO NOT APPEAR TO HAVE ANY BASIS EITHER IN TERMS OF SALES OR IN TERMS OF ITS UTILIZA TION. FOR INSTANCE, THE ASSESSEE HAS MADE PROVISION FOR RS.6,36,06,725/- AGAINST SALE OF RS.346.94 CR AND ODDS AND ITA NO. 278/DEL/2012 16 UTILIZATION THEREOF AT RS.1.53 CR. IN THE F.Y. 2004 -05. HOWEVER, THIS RATIO DOES NOT EXISTS IN SUBSEQUENT FINANCIAL YEARS 2005-06 TO 200 708, AS IN CLEAR FROM THE TABLE ABOVE. THIS SHOWS THAT THE ASSESSEE HAS NOT ADOPTED ANY PARTICULAR PRUDENTIAL SYSTEM FOR CLAIMING THE PROVISIONS FOR WARRANTY. IN SUCH STATE OF AFFAIRS, IN OUR CONSIDERED OPINION, THE LD. AUTHORITIES BELOW HAVE COMMITTED NO ERROR WHILE ALLOWING SUCH PROVISIONS FOR WARRANTY ON THE BASIS OF ACTUAL UTILIZATION/WRITTEN BACK THEREOF. THEREFORE, WE FIND NO INFIRMITY IN TH E ORDER OF AO ON THIS COUNT. ACCORDINGLY, THIS GROUND OF APPEAL IS DISMISSED. 13. IN RESPECT OF GROUND NO. 4.1 TO 4.4 PERTAINING TO DISALLOWANCE OF BED DEBTS, THE CONTENTION OF THE LD. AR IS THAT THE IDENTICAL ISSUE HAS BEEN REMANDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-07 AN D 2007-08 ON THE PREMISE THAT THE AO HAS NOT EVALUATED THE FACTS IN THE LIGHT OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF TRF LTD. (CIVIL APPEAL NO.5293 AND 5294 OF 2003). THE AO HAS TREATED THE BAD DEBTS AS LIQUIDATED DAMAGES ONLY ON HIS PRESUMPTION WITHOUT REFERRING TO ANY MATERIAL IN SUPPORT OF SUCH PRESUM PTION AND THE LD. DRP DID NOT ADJUDICATE UPON THIS LAPSE OF THE AO. RELIANCE IS ALSO PLACED ON THE FOLLOWING DECISIONS : GIRISH BHAGWAT PRASAD, 256 ITR 772 (GUJ) TEXA INDIA LTD. (ITA NO. 962/DEL/2009) (MUM. ITAT) MORGAN SECURITIES & CREDITS, 292 ITR 339 (DEL) SHAKTI CARGO MOVERS PVT. LTD. (TAX APPEAL NO. 1515 OF 2010 (GUJ-HC) FRONTLINE CORPORATION LTD (APPEAL NO. 1943 OF 2010 ) (GUJ HC). ITA NO. 278/DEL/2012 17 THE LD. DR RELIED ON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE HAD DEBITED THE BAD DEBT IN THE PROFIT & L OSS ACCOUNT, WHICH IS NOT THE BAD DEBT FOR THE YEAR UNDER CONSIDERATION. 14. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE ENTIRE MATERIAL AVAILABLE ON RECORD, WE FIND THAT VARIOUS EVENTUALI TIES GIVEN BY THE AO FOR TREATING THE IMPUGNED CLAIM AS THAT OF LIQUIDATED DAMAGES CA USED TO THE ASSESSEE, ARE NOT SUPPORTED BY ANY MATERIAL ON RECORD SO AS TO ASCERT AIN THAT SUCH DAMAGES WERE CAUSE DUE TO ANY OF SUCH EVENTUALITIES. THEREFORE, IN OUR CONSIDERED OPINION, UNLESS THERE IS MATERIAL ON RECORD TO SUBSTANTIATE ANY OF THE ABOVE EVENTUALITIES GIVEN BY THE AO, THE IMPUGNED CLAIM CANNOT BE TREAT ED AS THAT OF LIQUIDATED DAMAGE. WE, HOWEVER, FIND CONSIDERABLE SUBSTANCE IN THE FINDINGS OF THE AO THAT THE DEBTORS, SUCH AS INDIAN RAILWAYS, ONGC, TATA IR ON AND STEEL COL. LTD., TAMLNADU ELECTRICITY BOARD, WEST BENGAL POWER DEVEL OPMENT CORPORATION, MP STATE ELECTRICITY BOARD, TRANSMISSION CORPORATION O F ANDHRA PRADESH, AGAINST WHOM HUGE AMOUNTS DUE HAVE BEEN WRITTEN OFF BY ASSE SSEE AS BAD DEBT, ARE WELL KNOWN ENTITIES HAVING GOVT. MACHINERIES, WHICH COUL D NOT BE BELIEVED TO BE THE BAD DEBTORS IN COMMON PARLANCE. THE ASSESSEE HAS AL SO NOT FURNISHED ANY MATERIAL ON RECORD BEFORE US TO SATISFY THE REQUIRE MENTS OF SECTION 36(2) OF THE ACT OR TO ESTABLISH AS TO HOW THE AMOUNTS WRITTEN O FF BECAME IRRECOVERABLE OR BAD DEBTS FROM THE ENTITIES OF SUCH A REPUTE. IN PRESEN CE OF THIS FACT, THE ASSESSEE WAS REQUIRED TO COMMENT SPECIFICALLY ON THE EVENTUALITI ES OF LIQUIDATED DAMAGES GIVEN BY THE AO, WHICH HE FAILED TO DO SO BUT SIMPLY SAID THAT IT WAS ONLY THE PRESUMPTION OF THE AO. WE, THEREFORE, KEEPING IN VI EW THE AFORESAID FACTS, DECISION OF HONBLE APEX COURT IN THE CASE OF TRF L TD. (SUPRA) AND THE ORDER OF TRIBUNAL IN ASSESSEES OWN CASES FOR A.YRS. 2006-07 AND 2007-08 (SUPRA) ON THE SAME ISSUE, REMIT THE MATTER BACK TO THE FILE OF AO FOR DECIDING THE SAME AFRESH ITA NO. 278/DEL/2012 18 AFTER CONSIDERING ALL THE RELEVANT MATERIAL ON RECO RD. THE ASSESSEE IS DIRECTED TO FURNISH ALL THE RELEVANT MATERIAL/EVIDENCE AS REQUI RED BY THE AO IN THE REMAND PROCEEDINGS. THE AO MAY ALSO CONSIDER ALTERNATE GRO UND NO. 4.4 RAISED BY THE ASSESSEE BEFORE US IN ACCORDANCE WITH LAW, IF NEEDE D. NEEDLESS TO SAY, THE ASSESSEE SHALL BE GIVEN REASONABLE OPPORTUNITY OF BEING HEAR D. THE ISSUE WHICH CAME UP FOR CONSIDERATION IN A.YRS. 2006-07 AND 2007-08 BEFORE THE TRIBUNAL ALONGWITH THEIR FINDINGS READ AS UNDER : 49. GROUND NO. 12 AND ITS SUB-GROUNDS ARE WITH RESP ECT TO THE CLAIM OF RS. 28,52,492/- TOWARDS OF DEBT WRITTEN OFF:- AO NOTICED THAT ASSESSEE HAS CLAIMED DEDUCTION OF R S. 28,52,492/- ON ACCOUNT OF BAD AND DOUBTFUL DEBTS WRITTEN OFF DIRECTLY AGAINST THE PROVISION ACCOUNT. HE ALSO NOTICED THAT AN AMOUNT OF RS. 59,54,433/- WAS DEBITED TO TH E PROFIT AND LOSS ACCOUNT ON ACCOUNT OF BAD DEBTS AND WAS NOT ADJUSTED AGAINST THE PROVI SION ACCOUNT. THE ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM. ON PERUSING THE DETAIL S SUBMITTED BY THE ASSESSEE, AO NOTICED THAT THE AMOUNTS INVOLVED WERE MOSTLY IN THE NATURE OF LIQUIDATED DAMAGES AND ACCORDING TO HIM IT WERE NOT ON THE NATURE OF BAD D EBTS. HE NOTED THAT IN RESPECT OF RS. 4.7 CRORE NO DETAILS AND EVEN THE PARTY-WISE BREAK- UP WAS FILED. IN RESPECT OF RS. 3.01 CRORE, ONLY PARTY-WISE BREAK-UP ALONG WITH ONE LINE REASONS IN SOME OF THE CASES WERE SUBMITTED. HE ALSO NOTED THAT THE THERE WAS NO EXT ERNAL CORRESPONDENCES IN ANY OF THE CASES WHERE THE SUMS WERE WRITTEN OFF. HE THUS CON CLUDED THAT THE ASSESSEE HAS FAILED TO PROVE THAT THE TRADE LOSS HAD OCCURRED DURING THE Y EAR UNDER CONSIDERATION AND HAS ALSO FAILED TO PROVE JUSTIFICATION FOR CLAIMING SUCH DED UCTION. HE ALSO NOTICED THAT SOME OF THE PARTIES INVOLVED WERE GOVERNMENT COMPANIES/ORGANIZA TIONS OR BIG CONCERNS HAVING GOOD FINANCIAL BASE. HE ALSO NOTICED THAT WITH RES PECT TO LIQUIDATED DAMAGES WRITTEN OFF NO DETAILS WITH RESPECT TO PAYMENT SOUGHT AS LIQUID ATED DAMAGES ETC WAS MADE AVAILABLE. HE THUS CONCLUDED THAT THE ASSESSEE HAS FAILED TO P ROVE AS TO WHY THE AMOUNT CAN BE TREATED AS BAD DEBTS, MORE SO, WHEN IT WAS ADJUSTED AGAINST THE PROVISION ACCOUNT INSTEAD OF DEBITING IT TO THE PROFIT AND LOSS ACCOU NT. HE THEREFORE HELD THAT THE CLAIM OF ASSESSEE WAS NOT ALLOWABLE. DRP ALSO HAS CONFIRMED THE ACTION OF AO IN DISALLOWANCE OF THE CLAIM. 50. AGGRIEVED BY ORDER OF AO ASSESSEE CARRIED THE M ATTER BEFORE DRP. DRP UPHELD THE ACTION OF AO BY HOLDING AS UNDER: 10.3 THE ASSESSEES SUBMISSIONS HAVE BEEN CONSIDERED CAREFULLY, BUT THE SAME ARE FOUND NOT ACCEPTABLE. THE ASSESSEE IN THE REVISED COMPUTATION OF INCOME HAD CLAIMED DEDUCTION OF RS. 28,00,52,402/- ON ACCOUNT OF BAD AND DOUBTFUL DEBTS WR ITTEN OFF DIRECTLY AGAINST THE PROVISION ACCOUNT. THE AO HAD OBSERVED THAT PERUSAL OF PROFIT AND LOSS ACCOUNT, REVEALED THAT AN AMOUNT OR RS. 59 ,54,433/- HAS BEEN DEBITED T O PROFIT AND LOSS ACCOUNT ON ACCOUNT ITA NO. 278/DEL/2012 19 OF BAD DEBTS WRITTEN OF WHICH IS CHARGED TO PROFIT AN D LOSS ACCOUNT AND WHICH HAS NOT BEEN ADJUSTED AGAINST THE PROVISION ACCOUNT. SCHEDULE 9 OF THE BALANCE SHEET CONTAINING DETAILS OF SUNDRY DEBTORS REVEALED THAT PROVISION FOR DOUBTFU L DEBTS HAS DECREASED FROM RS. 45,26,24,979/- AS ON 31.03.2005 TO RS. 17,44.28 ,068/- AS ON 31.03.2006. THE DIFFERENCE BETWEEN THE TWO IS COMING TO RS. 27,81,96,911/- WHIC H ALONG WITH OTHER PROVISIONS AND ADJUSTMENTS HAS BEEN ADJUSTED AGAINST THE BAD DEBTS WR ITTEN OFF. THE AO HAS RIGHTLY HELD THAT THE BAD DEBTS WRITTEN OFF HAS TO BE CHARGED TO P ROFIT AND LOSS ACCOUNT AND ITS ADJUSTMENT AGAINST ANY PROVISION ACCOUNT WITHOUT TO UCHING THE PROFIT AND LOSS ACCOUNT DURING THE YEAR IS NOT A WRITE OFF TO BE ALLOWED UND ER SECTION 36(1)(VII) READ WITH SECTION 36(2). RELIANCE IN THIS RESPECT IS PLACED ON DECISI ON OF THE HONBLE KERALA HC IN THE CASE OF CIT V. HOTEL AMBASSADOR [2002] 253 ITR 430 (KER), WH EREIN THE HON'BLE HC HAS HELD AS UNDER: WE FEEL THAT WRITING OFF BAD DEBTS, WITHOUT CHARGIN G THE SAME IN THE PROFIT AND LOSS ACCOUNT IS NOT WRITE OFF AT ALL BECAUSE THE ASSESSME NT IS MADE BASED ON THE AUDITED ACCOUNTS AND THE PROFIT AND LOSS ACCOUNT AND THE BA LANCE SHEET FILED ALONG WITH THE RETURNS. IT IS NOT ENOUGH IF THE ASSESSEE WRITES OFF THE SAM E IN SOME OF THE BOOKS MAINTAINED BY IT, WHICH DO NOT FORM PART OF THE AUDITED ACCOUNTS INCL UDING THE PROFIT AND LOSS ACCOUNT BASED ON WHICH ASSESSMENT IS MADE. UNLESS THE WRITE OFF TOOK PLACE AT THE TIME OF FINALIZATION OF ACCOUNTS AND IS REFLECTED INTO THE BOOKS OF ACCOUNTS , IT CANNOT BE TREATED AS WRITTEN OFF AT ALL. HENCE IT IS HELD THAT THE CONDITIONS OF WRITING OF THE DEBTS IN THE BOOKS AS STIPULATED IN SECTION 36(1)(VII) R.W.S. 36(2) HAS NOT BEEN FULFILL ED IN THIS CASE AND ACCORDINGLY THE ABOVE REFERRED CLAIM OF BAD DEBT IS NOT ALLOWABLE. 10.4 WITHOUT PREJUDICE TO ABOVE LEGAL GROUND THE AO HAS HELD THAT ON FACTS ALSO THE ASSESSEE'S CLAIM OF BAD DEBT IS NOT ALLOWABLE. BEFORE US THE ASSESSEE HAS NOT MADE ANY SUBMISSIONS IN RESPECT OF FACTUAL FINDING OF THE AO GIVEN IN THE DRAFT ASSESSMENT ORDER. HENCE IT IS PRESUMED THAT THE ASSESSEE HAS NOTHING TO SAY ON THE FACTUAL FINDING GIVEN BY THE AO ON THIS ISSUE IN THE DRAFT ASSESSMENT ORDER. THE ASSESSEE HAS NOT CONTROVERTED THE ACTUAL FINDING OF THE AO GIVEN IN THE DRAFT ASSESSMENT ORD ER THAT IN MOST OF THE CASES, THE ASSESSEE HAS NOT SUBMITTED THE DETAILS OF THE PARTIES. THE NA TURE OF DEBTS, WHY SAID DEBTS HAVE BEEN CONSIDERED AS BAD AND THE EVIDENCE THAT THE SAID DE BTS HAVE BEEN ACTUALLY WRITTEN OFF AS IRRECOVERABLE IN ITS ACCOUNTS. EVEN BEFORE US THE ASS ESSEE HAS NOT SUBMITTED ANY DETAILS IN THIS REGARD. 10.5 SIMILARLY IN THE DRAFT ASSESSMENT ORDER THE AO HAS GIVEN FACTUAL FINDING THAT ON PERUSAL OF THE DETAILS FILED IT IS FOUND THAT THE A MOUNTS INVOLVED ARE MOSTLY IN THE NATURE LIQUIDATED DAMAGES AND NOT THE BAD DEBTS IN ITS TRUE SENSE PERSE, THE ASSESSEE HAS NOT MADE ANY SUBMISSION ON THE SAID FINDING OF THE AO AND HEN CE IT IS PRESUMED THAT THE ASSESSEE HAS NOTHING TO SAY ON THE SAID FINDING OF THE AO. THE A O HAS RIGHTLY HELD THAT THE YEAR IN WHICH ANY LIABILITY IS TO BE ALLOWED IN CASE OF SUCH LIQUID ATED DAMAGES ARE VERY MUCH RELEVANT. IN CASE OF LIQUIDATED DAMAGES THE RELEVANT ISSUE IS TO EXAMINE THE NATURE OF DISPUTE, THE YEAR IN WHICH THE CUSTOMER DEDUCTED THE AMOUNT PAYABLE TO THE ASSESSEE. THE REASONS FOR DEDUCTION ARE ALSO RELEVANT. IN CASE THE ASSESSEE H AS FAILED TO FULFILL ANY CONTRACTUAL ITA NO. 278/DEL/2012 20 OBLIGATION AND THE OTHER PARTIES HAVE DEDUCTED LIQU IDATED DAMAGES IN EARLIER YEARS, THE LIABILITY TOWARDS SUCH LOSS HAS TO BE TAKEN CRYSTALLI ZED IN THE EARLIER YEARS. THE UNILATERAL DECISION OF THE ASSESSEE NOT TO CLAIM THOSE LIABILIT IES IN EARLIER YEAR AND TO CARRY FORWARD AND CLAIMING AS DEDUCTION IN SUBSEQUENT YEAR AT ITS OWN CONVENIENCE CANNOT BE ALLOWED. IT IS A SETTLED LAW THAT, WHERE THE ASSESSEE FOLLOWS M ERCANTILE SYSTEM OF ACCOUNTING, LOSS/LIABILITY IS ALLOWABLE IN THE YEAR OF ACCRUAL P ROVIDED IT IS AN ESSENTIAL LIABILITY. TRADING ALLOWANCE NOT ALLOWED NOT FOR SOME REASON IN THE YE AR IN WHICH IT HAS INCURRED IS NOT AN ALLOWABLE DEDUCTION IN SUBSEQUENT YEAR. IN THE CURRE NT YEAR THE DEDUCTION CAN BE PERMITTED IN RESPECT OF ONLY THOSE LOSSES WHICH ARE INCURRED IN THE RELEVANT ACCOUNTING YEAR. THE AO HAS FURTHER HELD THAT IN THIS CASE, THE ASSESSEE HA S FAILED TO PROVE THAT THE SAID TRADING LOSS HAS OCCURRED DURING THE YEAR UNDER CONSIDERATION. T HE ASSESSEE HAS FAILED TO PROVE JUSTIFICATION FOR CLAIMING SUCH DEDUCTIONS DURING T HE YEAR. THE AO HAS RIGHTLY HELD THAT ON FACTUAL GROUND ALSO THE ASSESSEE'S CLAIM OF BAD DEBTS IS NOT ALLOWABLE. IN VIEW OF ABOVE THE PROPOSED DISALLOWANCE OF RS. 28 ,00,52,402/- ON ACC OUNT OF BAD DEBT IS CONFIRMED. 51. AGGRIEVED BY THE AFORESAID ORDER OF DRP THE ASS ESSEE IS IN APPEAL BEFORE US. 52. BEFORE US LD. AR SUBMITTED THAT THE AMOUNT OF R S. 28,00,52,402/ REPRESENTED THE ACTUAL BAD DEBTS INCURRED DURING THE YEAR AND HAS B EEN RIGHTLY WRITTEN OFF IN THE BOOK OF ACCOUNTS DIRECTLY FROM THE PROVISION FOR DOUBTFUL D EBTS ACCOUNT. HE FURTHER SUBMITTED THAT THE PROVISION FOR DOUBTFUL DEBTS WHICH WERE DE BITED TO THE PROFIT AND LOSS ACCOUNT IN THE PAST YEARS WERE ADDED IN THE COMPUTATION OF INC OME IN THE RESPECTIVE PAST YEARS WHEN PROVISION WAS MADE, AS THE SAME WAS NOT ALLOWA BLE AS DEDUCTION AS PER EXPLANATION 2 TO SECTION 36(1)(VII) OF THE ACT. ON CE THE DEBT BECAME BAD IN THE CURRENT YEAR, THE SAME WERE WRITTEN OFF AS IRRECOVERABLE IN THE BOOKS OF ACCOUNTS BY DEBITING PROVISION OF DOUBTFUL DEBTS AND CREDITING DEBTOR S ACCOUNT. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS DULY APPLIED THAT THE PROVISI ON OF SECTION 36(I)(VII) READ WITH 36(2) OF THE ACT. LD. AR FURTHER SUBMITTED THAT AFTER AM ENDMENT MADE TO CLAUSE (VII) OF SUB- SECTION 1 OF SECTION 36, IT IS NOT NECESSARY FOR T HE ASSESSEE TO ESTABLISH THAT THE DEBT HAS BECOME BAD AND IT WOULD SUFFICE IF THE DEBTS ARE ME RELY WRITTEN OFF IN THE BOOKS AS BAD, AND HENCE NOT RECOVERABLE. HE ALSO PLACED RELIANCE ON THE DECISION OF APEX COURT IN THE CASE OF TRF LTD VS. (CIVIL APPEAL NO. 5293 OF 2003 ) LD. AR ALSO RELIED ON THE DECISION OF GUJARAT HIGH COURT IN THE CASE OF TORRENT CABLE ON THE MATTER OF LIQUIDATED DAMAGES. LD. DR ON THE OTHER HAD SUBMITTED THAT THE BAD DEBTS WE RE NOT WRITTEN OFF IN THE PROFIT AND LOSS ACCOUNT. HE FURTHER SUBMITTED THAT THE PARTY- WISE DETAILS, NATURE OF DEBTS, WHEN THE SAME WAS OFFERED TO TAX WAS NOT SUBMITTED BY TH E ASSESSEE. IN CASE OF LIQUIDATED DAMAGES, THE NATURE OF DISPUTE, THE YEAR IN WHICH T HE CUSTOMER DEDUCTED THE AMOUNT, THE REASON FOR DEDUCTION WERE ALSO NOT SUBMITTED BY THE ASSESSEE, AND THUS HE SUPPORTED THE ORDER OF AO & DRP. 53. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. FROM THE DETAILS PLACED ON RECORD IT IS SEEN THAT BAD DEBTS WRITTEN OFF ALSO INCLUDES LIQUIDATED DAMAGES LIKE NATURE OF DISPUTE, THE YEAR IN WHICH T HE CUSTOMER DEDUCTED THE AMOUNT, REASONS FOR DEDUCTION ETC. BEFORE US THE LD DR HAS STATED THAT THE DETAILS OF LIQUIDATED DAMAGES HAVE NOT BEEN FURNISHED BY ASSESSEE WE FURT HER FIND THAT THE MATTER WITH RESPECT TO LIQUIDATED DAMAGES HAS NOT BEEN COMMENTE D BY THE AO AND THEREFORE THERE IS ITA NO. 278/DEL/2012 21 NO FINDING OF AO. THE HONBLE APEX COURT IN THE C ASE OF TRF LTD (SUPRA) HAS HELD AS UNDER:- AFTER 1.4.1989, IT IS NOT NECESSARY FOR THE ASSESS EE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT I S WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. 54. IN VIEW OF THE AFORESAID FACTS, WE FEEL THAT TH E MATTER NEEDS FRESH EXAMINATION MORE SO IN THE LIGHT OF THE AFORESAID DECISION OF HONBL E APEX COURT. WE THEREFORE REMIT THE MATTER TO THE FILE OF AO TO DECIDE THE ISSUE AFRESH AND ALSO DIRECT TO HIM TO EXAMINE THE ISSUE OF LIQUIDATED DAMAGES FOR WRITING OFF. THE AS SESSEE IS ALSO DIRECTED TO CO-OPERATE BY SUBMITTING PROMPTLY THE DETAILS REQUIRED BY ASSESSI NG OFFICER FOR DECIDING THE ISSUE. THUS THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTI CAL PURPOSE. ACCORDINGLY, GROUNDS NOS. 4.1 TO 4.4 OF ASSESSEE DE SERVE TO BE ALLOWED FOR STATISTICAL PURPOSES. 15. GROUND NO. 5 RELATES TO NON-GRANTING OF TDS CRE DIT TO THE EXTENT OF RS.6,71,995/-. IN THIS REGARD, THE AO IS DIRECTED T O VERIFY THE ACTUAL TDS DEDUCTIONS AND CREDIT IS TO BE ALLOWED AS PER LAW. 16. GROUND NO. 6 HAS NOT BEEN PRESSED BY THE LD. AR OF THE ASSESSEE. THE SAME IS, THEREFORE, DISMISSED AS NOT PRESSED. 17. ON THE TP ADJUSTMENT, GROUND NO. 7 RAISED BY AS SESSEE IS GENERAL IN NATURE AND NEEDS NO SPECIFIC ADJUDICATION. 18. GROUND NO. 8 RELATES TO TRANSFER PRICING ADJUST MENTS FOR VARIOUS DIVISIONS FOR USING OF APPLICATION OF PRIOR YEAR DATA USED BY THE APPELLANT IN THE TP DOCUMENTATION, WHICH HAS BEEN REJECTED BY THE AO/TP O/DRP. IN THIS REGARD THE ASSESSEE SUBMITS AS UNDER : ITA NO. 278/DEL/2012 22 1. THE LD. TPO AND THE LD. DRP REJECTED THE USE OF LAT EST FINANCIAL YEAR DATA AS WAS AVAILABLE IN THE DATABASES AND USED FOR THE PURPOSES OF BENCHMARKING ANALYSIS AT THE TIME OF PREPARING TP DOCUMENTATION. [REFER PAGE 188 OF THE APPEAL MEMO (TP ORDER) AND P AGE 23 OF THE APPEAL MEMO (DRP ORDER)]. 2. USE OF PRIOR YEAR DATA, I.E., FY 2005-06 AND FY 200 6-07 IS SPECIFICALLY PERMITTED BY THE RULES. THE ENTIRE APPROACH OF THE APPELLANT IS DETAILED IN THE TP STUDY OF EACH OF THE DIVISION. [REFER PAGE 116 TO 2535 OF THE PAPER BOOK FOR THE TP STUDY OF EACH DIVISION] 3. HOWEVER, GIVEN THE RECENT JUDICIAL PRECEDENTS WHICH ARE NOT IN FAVOUR OF THE APPELLANTS STAND, THE APPELLANT WISHES TO NOT PRESS ON THIS GROUND. IN THE WRITTEN SYNOPSIS SUBMITTED BY ASSESSEE AS AB OVE, THIS GROUND HAS NOT BEEN PRESSED BY THE AR OF ASSESSEE. THEREFORE, THIS GROU ND IS REJECTED. 19. IN RESPECT OF GROUND NO. 9, THE LD. AR AGITATED THE TURNOVER FILTER REGARDING THE COMPANIES WHOSE TURNOVER IS LESS THAN 50% OF T HE TURNOVER OF THE ENTIRE DIVISION. IN RESPECT OF MANUFACTURING SEGMENT, I.E. , POWER CONTROL DIVISION, THE LD. TPO HAS APPLIED THE TURNOVER FILTER OF LESS THAN 10 CR. THE LD. TPO SOUGHT TO REJECT COMPANIES MERELY BASED ON THE TURNOVER FILTER WHICH WERE OTHERWISE FUNCTIONALLY COMPARABLE COMPANIES AND THUS PRUNE THE SET THAT RE SULTED IN VERY LIMITED NUMBER OF COMPARABLES. BASED ON THE REVISED SET, TH E TPO ARRIVED AT THE REVISED MEAN MARGIN OF THE COMPARABLE COMPANIES FOR THE PUR POSE OF THE COMPARABILITY ANALYSIS AND ACCORDINGLY CONSIDERED TRANSFER PRICIN G ADJUSTMENT IN THE FOLLOWING DIVISIONS AND SEGMENT OF THE COMPANY. (I) POWER CONTROL DIVISION (MANUFACTURING SEGMENT) (II) LIGHTENING DIVISION (DISTRIBUTION SEGMENT) (III) TRANSPORTATION DIVISION (IMPORT AND ASSEMBLY OF SIG NALING EQUIPMENT) (IV) WATER AND PROCESS TECHNOLOGY DIVISION(MANUFACTURING SEGMENT AND MARKETING SUPPORT SERVICE SEGMENT) (V) MARKETING SUPPORT DIVISION (MARKETING SUPPORT SERVI CE SEGMENT ) ITA NO. 278/DEL/2012 23 (VI) SENSING DIVISION (MARKETING SUPPORT SEGMENT) (VII) INSPECTION TECHNOLOGIES DIVISION (MARKETING SUPPORT SEGMENT) (VIII) WATER & PROCESS TECHNOLOGIES DIVISION (MARKETING SU PPORT SEGMENT). FURTHER HE SUBMITTED THAT THE TURNOVER FILTER IS NO T A CRITERIA FOR COMPARABILITY TEST IF THE COMPANIES ARE OTHERWISE FUNCTIONALLY CO MPARABLE. IN SUPPORT, THE AR OF THE ASSESSEE RELIED ON THE FOLLOWING JUDGMENTS : (I). CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) P. L TD V. DCIT, 376 ITR 183 (DELHI), WHEREIN IT IS OBSERVED AS UNDER : 23 . THE ASSESSEE'S ARGUMENT IS THAT ENTITIES EARNING 'SUPER NORMAL' OR 'ABNORMAL' PROFITS SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES. FO R THIS PURPOSE, IT RELIED ON SEVERAL RULINGS OF VARIOUS BENCHES OF THE ITAT. THESE ARE ADOBE SYSTEMS INDIA (P.) LTD. ( SUPRA ); TEVA INDIA (P.) LTD. ( SUPRA ); SAPIENT CORPN. (P.) LTD. ( SUPRA ); MAERSK GLOBAL SERVICES CENTRE (INDIA) (P.) LTD . ( SUPRA ); SYMANTEC SOFTWARE SOLUTIONS (P.) LTD. ( SUPRA ) AND A DIVISION BENCH RULING OF THIS COURT IN AGNITY INDIA TECHNOLOGIES (P.) LTD . ( SUPRA ). BESIDES, THIS COURT NOTICES THAT A SIMILAR REASO NING - OF APPLYING WHAT IS KNOWN AS THE 'TURNOVER' FILTE R OR THE EXCLUSION OF 'SUPERPROFIT' MAKING COMPANIES REASONING WAS APPLIED IN CONTINUOUS COMPUTING INDIA (P.) LTD. V. ITO [2012] 52 SOT 45 (URO)/21 TAXMANN.COM 137 (BANG.) ; CENTILLIUM INDIA (P.) LTD. V. DY. CIT [2012] 23 TAXMANN.COM 34/53 SOT 145 (BANG.) AND ADDL CIT V. FROST AND SULLIVAN INDIA (P.) LTD SIC (SUPRA). THE REVENUE HAS ON THE OTHER HAND, RELIED ON CONTRARY VIEWS IN ACTIS ADVISERS (P.) LTD. V. DY. CIT [2011] 10 TAXMANN.COM 24 (DELHI) ; 24/7 CUSTOMER.COM. (P.) LTD. V. DY. CIT [2012] 28 TAXMANN.COM 258/[2013] 140 ITD 344 (BANG.) AND WILLIS PROCESSING SERVICES (I) (P.) LTD. V. DY. CIT [2013] 30 TAXMANN.COM 350/57 SOT 339 (MUM.) . SUCH VIEWS ARE ECHOED IN TRILOGY E-BUSINESS SOFTWARE INDIA (P.) LTD . V. DY. CIT [2013] 29 TAXMANN.COM 310/140 ITD 540 (BANG.) AND STREAM INTERNATIONAL SERVICES (P.) LTD. V. ASSTT. DIT (INTERNATIONAL TAXATION) [2013] 31 TAXMANN.COM 227/141 ITD 492 (MUM.) . 33 . SUCH BEING THE CASE, IT IS CLEAR THAT EXCLUSION O F SOME COMPANIES WHOSE FUNCTIONS ARE BROADLY SIMILAR AND WHOSE PROFILE - IN RESPECT OF T HE ACTIVITY IN QUESTION CAN BE VIEWED INDEPENDENTLY FROM OTHER ACTIVITIES-CANNOT BE SUBJE CT TO A PER SE STANDARD OF LOSS MAKING COMPANY OR AN 'ABNORMAL' PROFIT MAKING CONCERN OR H UGE OR 'MEGA' TURNOVER COMPANY. AS EXPLAINED EARLIER, RULE 10B (2) GUIDES THE SIX METH ODS OUTLINED IN CLAUSES (A) TO (F) OF RULE 10B(1), WHILE JUDGING COMPARABILITY. RULE 10B (3) O N THE OTHER HAND, INDICATES THE APPROACH TO BE ADOPTED WHERE DIFFERENCES AND DISSIMILARITIES AR E APPARENT. THEREFORE, THE MERE CIRCUMSTANCE OF A COMPANY - OTHERWISE CONFORMING TO THE STIPULATIONS IN RULE 10B (2) IN ALL DETAILS, PRESENTING A PECULIAR FEATURE - SUCH AS A HUGE PROFIT OR A HUGE TURNOVER, IPSO FACTO DOES ITA NO. 278/DEL/2012 24 NOT LEAD TO ITS EXCLUSION. THE TPO, FIRST, HAS TO B E SATISFIED THAT SUCH DIFFERENCES DO NOT 'MATERIALLY AFFECT THE PRICE...OR COST'; SECONDLY, AN ATTEMPT TO MAKE REASONABLE ADJUSTMENT TO ELIMINATE THE MATERIAL EFFECT OF SUCH DIFFERENCES H AS TO BE MADE. (II). TECHBOOKS INTERNATIONAL PVT. LTD. VS. DCIT ( ITA NO. 240/DEL/2015) DATED 06.07.2015, WHERE IT IS HELD AS UNDER : 12.2.1. THE ASSESSEE INCLUDED THE SEGMENTAL FIGURES OF THIS COMPANY IN THE LIST OF COMPARABLES. THE TPO ELIMINATED THIS COMPANY ON THE GROUND THAT IT W AS PROVIDING SOFTWARE SERVICES AND ITES AND ITS TURNOVER FROM ITES WAS ONLY 0.83 CRORE, WHICH W AS LESS THAN THE REQUISITE TURNOVER. 12.2.2. HAVING HEARD BOTH THE SIDES ON THIS ISSUE, WE FIND T HAT THE TPO HAS ACCEPTED THE FUNCTIONAL COMPARABILITY OF THIS COMPANY ON SEGMENTAL LEVEL. TH E LD. DR WAS ALSO FAIR ENOUGH TO CANDIDLY ACCEPT THE FUNCTIONAL SIMILARITY OF THE RELEVANT SE GMENT OF THIS COMPANY. IN SUCH CIRCUMSTANCES, THE QUESTION ARISES AS TO WHETHER THE RELEVANT SEGM ENT OF THIS COMPANY CAN BE EXCLUDED FROM THE LIST OF COMPARABLES MERELY ON THE GROUND THAT THE RE VENUE FROM THIS SEGMENT IS ONLY RS.83 LACS? IN OUR CONSIDERED OPINION, THE QUANTUM OF TURNOVER CAN BE NO REASON FOR THE EXCLUSION OF A COMPANY WHICH IS OTHERWISE COMPARABLE. WE HAVE NOTICED ABOVE THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT A DVISORS (INDIA) P. LTD (SUPRA) IN WHICH IT HAS BEEN HELD THAT HIGH TURNOVER OR HIGH PROFIT CAN BE N O REASON TO ELIMINATE AN OTHERWISE COMPARABLE COMPANY. THE SAME APPLIES WITH FULL FORCE IN THE CO NVERSE MANNER AS WELL TO A LOW TURNOVER/LOW PROFIT COMPANY. WE, THEREFORE, HOLD THAT A COMPANY CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND OF ITS LOW TURNOVER. IN PR INCIPLE, WE DIRECT THE INCLUSION OF THE RELEVANT SEGMENT OF THIS COMPANY IN THE LIST OF COMPARABLES. THE TPO IS DIRECTED TO INCLUDE THE OPERATING PROFIT/OPERATING COSTS OF THE ITES SEGMENT OF THIS COMPANY IN THE LIST OF COMPARABLES, AFTER DUE VERIFICATION OF THE NECESSARY FIGURES FOR DETERMINA TION OF THE OPERATING PROFIT MARGIN ETC. IN ADDITION TO THE ABOVE JUDGMENT, HE ALSO RELIED O N THE WRITTEN SYNOPSIS SUBMITTED. 20. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ER OF THE LOWER AUTHORITIES. HE ALSO SUBMITTED THAT IF THE TURNOVER IS NOT THE CRIT ERIA FOR COMPARABLE, THEN THE MATTER SHOULD GO TO AO/TPO FOR RE-EXAMINATION. 21. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. RESPECTFULLY FOLLOWIN G THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT AND THE COORDINATE BENCH, THIS MATTER IS SENT BACK TO THE ITA NO. 278/DEL/2012 25 AO/TPO FOR RE-EXAMINATION THAT THE TURNOVER SHOULD NOT BE CRITERIA FOR EXCLUSION OF THE COMPANIES WHICH ARE OTHERWISE FUNCTIONALLY C OMPARABLES. 22. IN RESPECT OF GROUND NO. 10 & 11, THE ASSESSEE HAS SUBMITTED WRITTEN SYNOPSIS AS UNDER : BACKGROUND AND INTERNATIONAL TRANSACTIONS: 4. GEIIPL POWER CONTROL DIVISION (GEPC INDIA) OFFE RS A WIDE RANGE OF LOW VOLTAGE SWITCHGEAR COMPONENTS FOR INDUSTRIAL AND DOMESTIC U SE. GEPC INDIA IS ENGAGED IN MANUFACTURING OF LOW VOLTAGE ELECTRICAL PRODUCTS FO R SALE TO ITS CUSTOMERS. IT PERFORMS FUNCTIONS AND UNDERTAKES RISKS THAT ARE NORMALLY PE RFORMED AND UNDERTAKEN BY A MANUFACTURER ENTREPRENEUR. COMPONENTS ARE IMPORTED FROM THE ASSOCIATED ENTERPRISES AS WELL AS BOUGHT LOCALLY FOR MANUFACTURING THE FIN ISHED PRODUCTS OF GEPC INDIA. 5. GEPC INDIA IMPORTED COMPONENTS REPRESENTS AROUND 7% OF THE TOTAL OPERATING COSTS (AND ABOUT 10% OF THE TOTAL MATERIAL CONSUMED) INCURRED BY GEPC INDIA. INTERNATIONAL TRANSACTIONS FOR FY 2007-08 PERTAININ G TO MANUFACTURING SEGMENT OF THE POWER CONTROL DIVISION: PARTICULARS AMOUNT IN INR OUTCOME OF TP ORDER IMPORT OF COMPONENTS FOR MANUFACTURING OF PRODUCTS 141,889,745 ADJUSTMENT OF INR22,593,835 GE PC INDIAS SPECIFIC CONTENTIONS I. REJECTION OF ELPRO INTERNATIONAL LIMITED AS A COMPA RABLE 6. THE LD. TPO REJECTED THE COMPARABLE ELPRO INTERNATI ONAL LIMITED ON THE GROUND THAT THE COMPANY IS ENGAGED IN MANUFACTURING OF A SINGLE PRO DUCT I.E. SURGE ARRESTORS. FURTHER, THE LD. TPO MENTIONED THAT ELPRO INTERNATIONALS SINGLE PRO DUCT HAS SPECIFIC MARKET IN THE POWER SECTOR AND THEREFORE ITS PRODUCTS MAY GENERATE HIGH PROFIT OR HIGH LOSS AND THUS CANNOT BE COMPARED TO THAT OF THE APPELLANT. 7. IN THIS REGARD, THE ASSESSEE WOULD LIKE TO SUBMIT T HAT A COMPARABLE CANNOT BE REJECTED MERELY ON THE GROUND THAT THE COMPANY IS MANUFACTURING ONL Y ONE PRODUCT. BASED ON OUR REVIEW OF THE WEBSITE OF THE COMPANY WE NOTE THAT THE COMPANY IS ENGAGED IN MANUFACTURING OF THE FOLLOWING PRODUCTS; SURGE ARRESTERS, DISTRIBUTION CLASS ARRES TERS, STATION CLASS ARRESTERS, SECONDARY SURGE ARRESTERS, UNDER OIL SURGE ARRESTERS, ACCESSORIES, ZINC OXIDE DISCS AND VARISTORS. THOUGH THE PRODUCTS ARE CLASSIFIED UNDER ONE CATEGORY AS ARRES TORS, EACH PRODUCT HAS ITS OWN APPLICATION IN DESIGNATED FIELDS. THUS THE COMPANY IS ENGAGED IN MANUFACTURING WIDE RANGE OF ARRESTORS. RELEVANT EXTRACTS FROM WEBSITE OF THE COMPANY ARE P ROVIDED AS ANNEXURE 1 TO THE EXECUTIVE SUMMARY. 8. FURTHER REVIEW OF ANNUAL REPORT FOR FINANCIAL YEAR 2008 REVEALS THAT THE COMPANY IS ALSO INTO MANUFACTURING OF ISOLATORS IN ADDITION TO VARISTORS AND ARRESTORS. RELEVANT EXTRACTS FROM THE ANNUAL REPORT OF THE COMPANY ARE PROVIDED AS ANNEXURE 2 TO THE EXECUTIVE SUMMARY. ITA NO. 278/DEL/2012 26 IN ORDER TO UNDERSTAND THE VARIOUS PRODUCTS MANUFAC TURED BY ELPRO INTERNATIONAL, AND FOR A BETTER UNDERSTANDING, DEFINITIONS 1 OF ARRESTORS, VARISTORS AND ISOLATORS, AND ARE PRO VIDED BELOW: ARRESTOR: A LIGHTNING ARRESTER, ALSO KNOWN AS LIGHTNING COND UCTOR, IS A DEVICE USED ON ELECTRICAL POWER SYSTEMS AND TELECOMMUNICATIONS SYSTEMS TO PRO TECT THE INSULATION AND CONDUCTORS OF THE SYSTEM FROM THE DAMAGING EFFECTS OF LIGHTNING. VARISTORS: A VARISTOR IS AN ELECTRONIC COMPONENT WITH A 'DIODE -LIKE' NONLINEAR CURRENTVOLTAGE CHARACTERISTIC. THE NAME IS A PORTMANTEAU OF VARIAB LE RESISTOR. VARISTORS ARE OFTEN USED TO PROTECT CIRCUITS AGAINST EXCESSIVE TRANSIENT VOLTAG ES BY INCORPORATING THEM INTO THE CIRCUIT IN SUCH A WAY THAT, WHEN TRIGGERED, THEY WILL SHUNT TH E CURRENT CREATED BY THE HIGH VOLTAGE AWAY FROM SENSITIVE COMPONENTS. A VARISTOR IS ALSO KNOWN AS VOLTAGE-DEPENDENT RESISTOR (VDR). A VARISTORS FUNCTION IS TO CONDUCT SIGNIFICANTLY INC REASED CURRENT WHEN VOLTAGE IS EXCESSIVE. ISOLATOR: AN ISOLATOR IS A TWO-PORT DEVICE THAT TRANSMITS MI CROWAVE OR RADIO FREQUENCY POWER IN ONE DIRECTION ONLY. IT IS USED TO SHIELD EQUIPME NT ON ITS INPUT SIDE, FROM THE EFFECTS OF CONDITIONS ON ITS OUTPUT SIDE; FOR EXAMPLE, TO PREV ENT A MICROWAVE SOURCE BEING DETUNED BY A MISMATCHED LOAD. THE ABOVE, SUBSTANTIATES THE PRIMARY FACT THAT ELPR O IS NOT A SINGLE PRODUCT COMPANY AS MENTIONED BY THE LD. TPO TO REJECT THIS COMPANY. GI VEN THE ABOVE ANALYSIS THE APPELLANT SUBMITS THAT THE LD. TPO ERRED IN REJECTING ELPRO I NTERNATIONAL LIMITED STATING THAT IT IS A SINGLE PRODUCT COMPANY. THE SEARCH WAS CARRIED OUT WITH TH E OBJECTIVE OF SELECTION OF BROADLY COMPARABLE COMPANIES TO ARRIVE AT THE ARMS LENGTH MARGIN. THEREFORE REJECTION OF ELPRO INTERNATIONAL LIMITED ON BASIS OF SINGLE PRODUCT GR OUND IS INCORRECT AND THE COMPANY SHOULD BE CONSIDERED AS PART OF COMPARABLES SET. II. MODIFICATION OF TURNOVER FILTER 9. THE REVENUE OF THE APPELLANT FROM THE POWER CONTROL S DIVISION IN THE CURRENT YEAR WAS INR 250.82 CRORES. 10. THE LD. TPO MODIFIED THE TURNOVER FILTER AND REJECT ED THE COMPANIES HAVING TURNOVER LESS THAN INR 10 CRORES AND REJECTING COMPANIES OTHERWISE FUN CTIONALLY COMPARABLE [REFER PAGE 143 OF THE APPEAL MEMO] . THE TURNOVER OF THE DIVISION IN FY 2007-08 WAS A T INR 250.08 CRORES AND THE LD. TPO INITIALLY APPLIED THE LOWER TURNOVER FI LTER OF INR 125.41 CRORES TO ELIMINATE COMPANIES LESS THAN THE LOWER TURNOVER FILTER. AS THIS RESULTED ONLY IN ONE COMPARABLE, THE LD. TPO APPLIED TURNOVER FILTER OF LESS THAN INR 10 CRO RES FILTER AND STATED THAT IN ORDER TO RETAIN ENOUGH COMPARABLES A FILTER OF INR 10 CRORES IS APP LIED. THE LD. DRP UPHELD THE FILTER MODIFIED BY THE TPO [REFER PAGE 18 OF THE APPEAL MEMO] . 11. IN THIS REGARD, THE APPELLANT SUBMITS THAT THERE IS NO MERIT IN MODIFICATION MADE BY THE LD. TPO/ DRP. THE APPELLANT ALSO SUBMITS THAT GIVEN THE LIMI TATION OF THE AVAILABILITY OF DATA IT WAS REASONABLE TO CONSIDER ALL POSSIBLY AVAILABLE, FUNC TIONALLY COMPARABLE COMPANIES AND RELAXING OR NOT APPLYING THE TURNOVER FILTER, RATHER THAN AP PLYING SUCH A STRINGENT AND ARBITRARY FILTER WHICH SKEWS THE COMPARABILITY ANALYSIS. 12. THE REJECTION OF COMPARABILITY ANALYSIS OF THE TAXP AYER BY THE TPO WITHOUT COGENT REASONS IS ALSO SUPPORTED BY VARIOUS CASES NAMELY: CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) (P.) LTD. V. DCIT [2015] 376 ITR 183. 33. SUCH BEING THE CASE, IT IS CLEAR THAT EXCLUSION OF SOME COMPANIES WHOSE FUNCTIONS ARE BROADLY SIMILAR AND WHOSE PROFILE-IN RESPECT OF THE ACTIVITY IN QUESTION CAN BE VIEWED ITA NO. 278/DEL/2012 27 INDEPENDENTLY FROM OTHER ACTIVITIES-CANNOT BE SUBJEC T TO A PER SE STANDARD OF LOSS MAKING COMPANY OR AN 'ABNORMAL' PROFIT MAKING CONCERN OR HU GE OR 'MEGA' TURNOVER COMPANY. AS EXPLAINED EARLIER, RULE 10B (2) GUIDES THE SIX METH ODS OUTLINED IN CLAUSES (A) TO (F) OF RULE 10B(1), WHILE JUDGING COMPARABILITY. RULE 10B (3) ON THE OTHER HAND, INDICATES THE APPROACH TO BE ADOPTED WHERE DIFFERENCES AND DISSIMI LARITIES ARE APPARENT. THEREFORE, THE MERE CIRCUMSTANCE OF A COMPANY-OTHERWISE CONFORMING TO THE STIPULATIONS IN RULE 10B (2) IN ALL DETAILS, PRESENTING A PECULIAR FEATURE-SUCH AS A HUGE PROFIT OR A HUGE TURNOVER, IPSO FACTO DOES NOT LEAD TO ITS EXCLUSION. THE TPO, FIRS T, HAS TO BE SATISFIED THAT SUCH DIFFERENCES DO NOT 'MATERIALLY AFFECT THE PRICE...OR COST'; SEC ONDLY, AN ATTEMPT TO MAKE REASONABLE ADJUSTMENT TO ELIMINATE THE MATERIAL EFFECT OF SUCH DIFFERENCES HAS TO BE MADE. TECHBOOKS INTERNATIONAL PVT. LTD. V. DCIT: ITA NO24 0/DEL/2015 WHICH FOLLOWED CHRYSCAPITAL AND HELD THAT COMPARABLES CANNOT BE RE JECTED ON THE BASIS OF LOW TURNOVER. CARLYLE INDIA ADVISORS PRIVATE LIMITED V ACIT ((201 2)17 ITR(TRIB) 24 (MUMBAI)) WHICH OBSERVED THAT TPOS ACTION OF REJECTING TRANS FER PRICING STUDY BASED ON THE ARGUMENT THAT TAXPAYER HAD REJECTED CERTAIN COMPARA BLES AFTER APPLYING QUANTITATIVE FILTERS WITHOUT GIVING REASONS FOR REJECTION, DID N OT SUSTAIN, SINCE THE SUMMARY OF SEARCH PROCESS WAS PROVIDED IN THE TRANSFER PRICING STUDY. INDO AMERICAN JEWELLERY LIMITED V DCIT ((2012) 50 S OT 528 (MUMBAI)). WE FURTHER FIND THE EXTERNAL COMPARABLES SELECTED B Y THE ASSESSEE ARE FROM THE PUBLIC DATA BASE AND THE ASSESSEE HAS FOLLOWED A DETAILED SEARCH PROCESS AND MADE AN ANALYSIS CONSIDERING THE VARIOUS FACTORS OF SELECTING THE EX TERNAL COMPARABLES AS REQUIRED UNDER TRANSFER PRICING REGULATIONS AND GUIDELINES. THEREF ORE, THE TRANSFER PRICING STUDY OF THE ASSESSEE AND ALP OF INTERNATIONAL TRANSACTIONS DETE RMINED ON THE BASIS OF SUCH STUDY SIMPLY CANNOT BE REJECTED WITHOUT ANY COGENT REASONS . NOKIA INDIA PVT. LTD . ( ITA NO.242/DEL/2010) [APPROVED BY THE DELHI HIGH CO URT IN ITA NO.676/2015] WHICH OBSERVED THE ARITHMETIC MEAN TENDS TO IRON OU T DIFFERENCES DUE TO HIGHER OR LOWER SIZE OF COMPANY OR FLUCTUATI NG PROFITABILITY. THE COMPANY OTHERWISE FOUND TO BE FUNCTIONALLY COMPARABLE CANNO T BE EXCLUDED ON THE GROUND OF HIGHER OR LOWER TURNOVER. THE RELEVANT EXTRACTS OF THE JUDGEMENT ARE GIVEN BELOW: THE TPO APPLIED THE FILTER REJECTING COMPANIES HAV ING SALES LESS THAN RS.5 CRORE WITHOUT ANY UPPER CAP. THERE IS NO MENTION IN THE LANGUAGE OF THE PROVISIO NS FOR THE EXCLUSION OF POTENTIAL COMPARABLE COMPANIES SIMPLY ON ACCOUNT OF HIGH OR LO W TURNOVER OR PROFIT RATE. THE SPECIAL BENCH OF THE TRIBUNAL IN MAERSK GLOBAL CENTRE S (INDIA) (P.) LTD. VS.ACIT (2014) 147 ITD 83 (MUM)(SB) HAS ALSO HELD THAT POTENTIAL COMPA RABLES CANNOT BE EXCLUDED MERELY ON THE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGHER. THERE CAN BE NO JUSTIFIABLE REASON TO EXCLUDE SUCH HIGH OR LOW PROFIT SAME LOGIC APPLIES TO THE HIGH OR LOW TURNOVER COMP ANIES ALSO. THE MERE FACT THAT A COMPANY HAS A HIGH OR LOW TURNOVER CAN BE NO REASON TO JUSTIFY ITS EXCLUSION IF IT IS OTHERWISE FUNCTIONALLY COMPARABLE. THE EXCLUSION OF COMPANIES ON SUCH A RATIONALE RUNS CONTRARY TO THE EXPRESS PROVISIONS OF THE ACT. ADVERTING TO THE FACTS OF THE INSTANT CASE, IT IS S EEN THAT THE ASSESSEES TURNOVER UNDER THIS SEGMENT AMOUNTED TO LESS THAN RS.10 CRORE. THE TPO HAS APPLIED THE TURNOVER FILTER BY SETTING A LOWER LIMIT OF TURNOVER AT RS.5 CRORE WIT HOUT SETTING ANY UPPER CEILING OF TURNOVER. WE FAIL TO COMPREHEND ANY LEGALLY SUSTAINABLE REASON FOR APPLYING THE FILTER SETTING A LOWER ITA NO. 278/DEL/2012 28 LIMIT OF TURNOVER AT AROUND HALF OF THE ASSESSEES TURNOVER AND LEAVING THE UPPER LIMIT UNCAPPED. THE SITUATION WOULD HAVE BEEN DIFFERENT IF THE TPO H AD EITHER SET NO OR A NOMINAL LOWER LIMIT OF THE TURNOVER FILTER, LEAVING THE UPPER LIM IT OPEN. IN THAT SITUATION, THERE WOULD HAVE BEEN NO REASON TO SET ANY UPPER TURNOVER FILTER AS W ELL. 13. THE APPELLANT WISHES TO PLACE RELIANCE ON THE DECIS ION OF THE SPECIAL BENCH OF THE HONBLE CHANDIGARH TRIBUNAL IN THE CASE OF QUARK SYSTEMS PV T LTD V/S ITO((2009)132 TTJ 1) WHEREIN, THE HONBLE CHANDIGARH TRIBUNAL UPHELD THA T THE SELECTION OF COMPARABLE COMPANIES NEED TO BE BASED ON A DETAILED ANALYSIS OF FUNCTION S PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED (FAR ANALYSIS) OF THE TESTED PARTY AND THE COMPARABLE COMPANIES. THIS DECISION HAS BEEN SUBSEQUENTLY AFFIRMED BY THE HONBLE PUNJAB AND HARYANA HIGH COURT [(2011 )244 CTR 542] . 14. ACCORDINGLY, RELAXING A TURNOVER CRITERION IS PREFE RABLE TO APPLYING SUCH A STRINGENT CRITERION, AS IT SEEKS TO BRING IN ITS FOLD ALL FUNCTIONALLY COMP ARABLE COMPANIES, AS OPPOSED TO ONLY THOSE WHICH ARE ARRIVED AT BY THE APPLICATION OF A HIGHLY SUBJECTIVE FILTER THAT DOES NOT HAVE A REASONABLE BASIS AND IS APPARENTLY IMPOSED UPON THE ASSESSEE WITH THE OBJECTIVE OF MAKING A TRANSFER PRICING ADJUSTMENT. [REFER PAGE 143 TO 146 OF THE APPEAL MEMO]. 15. THOUGH, THE APPELLANT HAD RELAXED THE TURNOVER FILT ER, THE APPELLANT HAD ELIMINATED SMALLER OR STARTUP COMPANIES. NO COMPANY HAVING TURNOVER LESS THAN INR 1 CRORE WAS CONSIDERED FOR THE PURPOSES OF ANALYSIS. THE RESULTS OF THE SEARCH PRO CESS INTER ALIA IS PROVIDED BELOW: AMOUNT (INR IN CRORES) SL. NO. PARTICULARS YEAR SALES OPERATING COSTS OPERATING PROFIT OPM 1 AMTECH ELECTRONICS (INDIA) LTD. 200803 22.81 22.21 0.6 2.63% 2 B C H ELECTRIC LTD. 200803 208.95 200.07 8.88 4.25% 3 ELPRO INTERNATIONAL LTD. 200803 26.4 32.3 -5.9 - 22.35% 4 GUARDIAN CONTROLS LTD. 200803 3.43 3.36 0.07 2.04% 5 INCAP LTD. 200803 11.56 10.71 0.85 7.35% 6 INTEGRA INDIA GROUP CO. LTD. 200803 13.94 13.16 0.78 5.60% 7 KAYCEE INDUSTRIES LTD. 200803 23.55 22.42 1.13 4.80% MEAN 0.62% 16. BASEDON THE ABOVE TABLE, THE OPM OF 3.88% EARNED BY GE PC AS AGAINST ARITHMETIC MEAN OF 0.62% 2 EARNED BY COMPARABLES IS DEMONSTRATED TO BE AT ARM S LENGTH. IT IS THUS EVIDENT THAT THE TURNOVER FILTER APPLIED BY THE TPO AND UPHELD BY TH E DRP IS WITHOUT ANY REASONABLE BASIS. 17. AS RESULT OF THE INR 10 CRORE FILTER, THE COMPARABL E COMPANY GUARDIAN CONTROLS WAS REJECTED. AS ALREADY DISCUSSED IN PARAGRAPH NUMBER 13, THE LD . TPO REJECTED ELPRO INTERNATIONAL LIMITED. THIS RESULTED IN FIVE COMPARABLE COMPANIES IN THE F INAL SET. ITA NO. 278/DEL/2012 29 18. ACCORDINGLY THE FOLLOWING MARGIN AND ARITHMETIC MEA N OF 5 COMPANIES WAS CONSIDERED BY THE LD. TPO AND PROCEEDED TO COMPUTE THE TP ADJUSTMENT [PAGE 234OF THE APPEAL MEMO]. SL. NO. PARTICULARS YEAR SALES (INR IN CRORES) OPERATING PROFIT (INR IN CRORES) OPM 1 AMTECH ELECTRONICS INDIA LTD 200803 22.81 0.6 2.63% 2 BCH ELECTRIC LTD 200803 208.95 8.88 4.25% 3 INCAP LTD 200803 11.56 0.85 7.35% 4 INTEGRA INDIA GROUP CO. LTD. 200803 13.94 0.78 5.60% 5 KOYCEE INDUSTRIES LIMITED 200803 23.55 1.13 4.80% MEAN 4.93% 19. BASEDON THE ABOVE, IT IS AMPLY CLEAR THAT THE MODIF ICATION OF THE FILTER IS ONLY WITH FOR THE PURPOSES OF CHANGING THE ARITHMETIC MEAN SUCH THAT IT LEADS TO AN ADJUSTMENT. 20. IN ADDITION, THE APPELLANT WOULD ALSO LIKE TO PLACE RELIANCE ON THE FOLLOWING JUDGMENTS, IN WHICH THE LOWER TURNOVER OF INR 1 CRORE HAS BEEN ACCEPTED TO BE A REASONABLE LIMIT FOR THE APPLICATION OF TURNOVER FILTER. ADAPTEC (INDIA) PRIVATE LIMITED (ITA NO.1758/HYD/20 12); M/S ANALOG DEVICES INDIA PVT.LTD.(IT(TP)A NO.1161(B NG.)/2010); TESCO HINDUSTAN SERVICE CENTRE PVT.LTD. (IT(TP).A N O.1317/BANG/2010); I.P. UNITY COMMUNICATIONS PVT.LTD. (I.T (T.P) A. NO .L535/BANC YEAR/2012); M/S GENISYS INTEGRATING SYSTEMS (INDIA) PVTLTS (ITA NO.1231(BANG.)/2010); MARKET TOOLS RESEARCH PVT. LTD. (ITA NO. 2066/HYD/2 011) III. PROPORTIONATE ADJUSTMENT - POWER CONTROL DIVISION 21. WITHOUT PREJUDICE TO THE OTHER CONTENTIONS, CONSIDE RING THE MINISCULE PROPORTION OF INTERNATIONAL TRANSACTIONS, AMOUNTING TO 9.72% OF T HE RAW MATERIAL COSTS FROM ASSOCIATED ENTERPRISES TO TOTAL MATERIAL COSTS, IF AT ALL AN A DJUSTMENT WERE TO BE CONSIDERED, THE ENTIRE ADJUSTMENT CANNOT BE ATTRIBUTED TO THE PURCHASES FR OM RELATED PARTIES. THE TRANSFER PRICING ADJUSTMENT SHOULD BE LIMITED TO THE PROPORTIONATE V ALUE OF THE INTERNATIONAL TRANSACTIONS OF PURCHASE FROM ASSOCIATED ENTERPRISES, THEREBY LIMITING ANY ADJUSTMENT TO 9.72% OF THE TURNOVER. [REFER PAGE 153 TO PAGE 156 OF THE APPEAL MEMO]. PARTICULARS AMOUNT (INR) TOTAL COGS 1,460,205,121 IMPORT OF COMPONENTS FOR MANUFACTURING THE PRODUCTS FROM AE 141,889,745 IMPORTS FROM AE/ TOTAL COGS 9.72% 22. IN THIS REGARD, THE APPELLANT PLACES RELIANCE ON TH E FOLLOWING DECISION OF THE HONBLE DELHI HIGH COURT IN COMMISSIONER OF INCOME TAX V. KEIHIN PANALFA LTD. [ 2016] 381 ITR 407 (DELHI) WHICH HELD; ITA NO. 278/DEL/2012 30 11. THE CONTENTION THAT THE ADJUSTMENT ON ACCOUNT OF EXPENSES AS DETERMINED BY THE TRANSFER PRICING OFFICER MUST BE ATTRIBUTED ENTIRELY TO THE I NTERNATIONAL TRANSACTION IS BEREFT OF ANY MERITS. DURING THE FINANCIAL YEAR 2003-04 RELATING TO THE A SSESSMENT YEAR 2004-05, THE ASSESSEE HAD REPORTED AN OPERATING INCOME OF RS. 72,24,22,000. T HE TOTAL EXPENSES FOR THE SAID PERIOD AMOUNTED TO RS. 68,00,88,000. ADMITTEDLY, THE INTERNATIONAL TRANSACTIONS IN QUESTION AMOUNTED TO RS. 15,90,66,935 WHICH WERE ONLY 23.38 PER CENT IN VALU E OF THE TOTAL EXPENSES. THE TRANSFER PRICING OFFICER HAD DETERMINED THE PROFIT LEVEL INDICATOR ( OPERATING PROFIT OVER TOTAL COST) OF COMPARABLE CASES AT 8.29 PER CENT AGAINST 6.22 PER CENT AS DEC LARED BY THE ASSESSEE. APPLYING THE PROFIT LEVEL INDICATOR OF COMPARABLE CASES, THE ADJUSTED TOTAL EX PENSES WERE COMPUTED AT RS. 66,71,17,924, THUS, INDICATING AN ADJUSTMENT OF RS. 1,29,70,076. AS IN APPARENT FROM THE ABOVE, THE SAID ADJUSTMENT RELATED TO THE ENTIRE EXPENSES AND NOT J UST THE INTERNATIONAL TRANSACTIONS ALONE. SINCE THE INTERNATIONAL TRANSACTIONS ONLY CONSTITUTED 23. 38 PER CENT, A TRANSFER PRICING ADJUSTMENT PROPORTIONATE TO THAT EXTENT COULD BE MA DE IN RESPECT OF SUCH INTERNATIONAL TRANSACTIONS. THUS, ONLY AN ADJUSTMENT OF RS. 30, 3 3,593 COULD BE ATTRIBUTED TO THE INTERNATIONAL TRANSACTIONS IN QUESTION . THE SAME WAS ACCEPTED BY THE COMMISSIONER OF INCO ME- TAX (APPEALS) AS WELL AS THE TRIBUNAL. WE DO NOT FIN D ANY INFIRMITY WITH THEIR DECISION. 23. FOLLOWING KEIHIN PANALFA , THE HONBLE BOMBAY HIGH COURT IN THE COMMISSIONER OF INCOME TAX-1, MUMBAI V. ALSTOM PROJECTS INDIA LIMITED ITA NO. 362 OF 2014 , HELD: 12.WE ARE IN RESPECTFUL AGREEMENT WITH THE VIEW OF THE DELHI HIGH COURT IN KEIHIN PANALFA LTD. (SUPRA). ONE MUST NOT LOSE SIGHT OF THE FACT T HAT THE TRANSFER PRICING ADJUSTMENT IS DONE UNDER CHAPTER X OF THE ACT. THE MANDATE THEREIN IS ONLY TO RE-DETERMINE THE CONSIDERATION RECEIVED OR GIVEN TO ARRIVE AT INCOME ARISING FROM FOR INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES. THIS IS PARTICULARLY SO AS IN RESPECT OF TRANSACTION WITH NON ASSOCIATED ENTERPRISES, CHAPTER X OF THE ACT IS NOT TRIGGERED TO MAKE ADJUSTMENT TO CONSIDERATIONS RECEIVED OR PAID UNLESS THEY ARE SPE CIFIED DOMESTIC TRANSACTIONS. THE TRANSACTION WITH NON-ASSOCIATED ENTERPRISES ARE PRE SUMED TO BE AT ARMS LENGTH AS THERE IS NO RELATIONSHIP WHICH IS LIKELY TO INFLUENCE THE PR ICE. IF THE CONTENTION OF THE REVENUE IS ACCEPTED, IT WOULD LEAD TO ARTIFICIAL INCREASE IN T HE PROFITS OF TRANSACTIONS ENTERED INTO WITH NON ASSOCIATED ENTERPRISES BY APPLYING THE MARGIN A T ENTITY LEVEL WHICH IS NOT THE OBJECT OF CHAPTER X OF THE ACT. ABSENCE OF SEGMENTAL ACCOUNTI NG IS NOT AN INSURMOUNTABLE ISSUE, AS PROPORTIONATE BASIS COULD BE ADOPTED AS DONE BY THE D ELHI HIGH COURT IN KEIHIN PANALFA LTD. (SUPRA). 24. MOREOVER, THE HONBLE DELHI ITAT IN THE CASE OF IL JIN ELECTRONICS INDIA PVT LTD ((2010) 36 SOT 227) INTER ALIA HELD AS FOLLOWS: THE ASSESSEE HAS ALSO TAKEN ONE ALTERNATIVE GROUND OUT OF THE TOTAL RAW MATERIALS CONSUMED BY THE ASSESSEE FOR MANUFACTURING PRINT CIRCUIT BOAR DS, ONLY 45.51% OF THE TOTAL RAW MATERIALS WERE IMPORTED THROUGH ASSESSEES ASSOCIAT E CONCERNS, AND, THEREFORE, ANY ADJUSTMENT, IF ANY CALLED FOR, CAN ONLY BE MADE TO THE 45.51% OF THE TOTAL TURNOVER , AND NOT TO THE TOTAL TURNOVER OF THE ASSESSEE. AFTER C ONSIDERING THE FACTS OF THE CASE, WE DO NOT FIND ANY DIFFICULTY IN ACCEPTING THIS CONTENTION OF THE ASSESSEE THAT AT BEST ONLY 45.51% OF THE OPERATING PROFIT CAN BE ATTRIBUTED TO IMPORTED RAW MATERIAL ACQUIRED FROM ASSESSEES ASSOCIATE CONCERNS. IN THE PRESENT CASE, THE AO HA S CALCULATED THE OPERATING PROFIT ON THE ENTIRE SALES OF THE ASSESSEE, WHICH IN OUR CONSIDER ED OPINION, IS NOT JUSTIFIED, WHEN IT IS ADMITTED POSITION THAT ONLY 45.51% OF RAW MATERIAL HAS BEEN ACQUIRED BY THE ASSESSEE FROM ITA NO. 278/DEL/2012 31 ITS ASSOCIATE CONCERNS FOR THE PURPOSE OF MANUFACTU RING ITEMS. WE, THEREFORE, DIRECT THE AO TO MODIFY THE ASSESSMENT AND MAKE THE ADJUSTMENT ON LY TO THE EXTENT OF DIFFERENCE IN THE ARMS LENGTH OPERATING PROFIT WITH ADJUSTED PROFIT WITH REFERENCE TO THE 45.51% OF THE TURNOVER, AND NOT TO THE TOTAL TURNOVER OF THE ASSE SSEE. 25. IN SIMILAR LINES, APPELLANT PLACES RELIANCE ON THE DECISION OF HONBLE MUMBAI ITAT IN THE CASE OF PENNZOIL QUAKER STATE INDIA LIMITED (ITA NO. 8885/M UM/2010) AND FIRESTONE INTERNATIONAL (P) LTD (ITA NO. 4520/MUM/2011). THE RELEVANT EXTRACTS ARE REPRODUCED BELOW: PENNZOIL QUAKER STATE INDIA LIMITED ADJUSTMENT HAS TO BE MADE ONLY WITH RESPECT TO PURC HASES WITH ASSOCIATE ENTERPRISES. IN OUR VIEW THE CLAIM OF THE ASSESSEE IS VERY REASONABLE AS THE ADJUSTMENT HAS TO BE MADE ONLY WITH RESPECT TO TRANSACTIONS WITH ASSOCIATE ENTERPRISES BASED ON ARMS-LENGTH PRICE AND NOT WITH RESPECT TO TOTAL PURCHASES/SALES. THIS VIEW IS SUPP ORTED BY SEVERAL DECISIONS OF THE TRIBUNAL, SOME OF WHICH HAVE BEEN REFERRED TO BY THE LD. AR IN PARA-4 EARLIER. WE, THEREFORE, RESTORE THE ISSUE TO THE FILE OF AO/TPO FOR FRESH COMPUTATION O F TRANSFER PRICING ADJUSTMENT AFTER NECESSARY EXAMINATION IN THE LIGHT OF THE OBSERVATI ONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. FIRESTONE INTERNATIONAL (P) LTD RESPECTFULLY FOLLOWING, WE HOLD THAT THE CIT (A) O RDER IS IN TUNE WITH THE PROVISIONS OF THE ACT AS INTERPRETED BY THE ABOVE ORDERS OF THE ITAT. SINCE THE ARMS LENGTH PRICE HAS TO BE DETERMINED ONLY WITH REFERENCE TO THE INTERNATIONAL TRANSACTIONIF THIS SORT OF ADJUSTMENT IS PERMITTED THIS WILL RESULT IN INCREASING THE PRO FIT OF ASSESSEE ON THE ENTIRE NON-AE SALES ALSO, WHICH IS NOT ACCORDING TO THE PROVISIONS OF TRANSFE R PRICING MANDATED BY THE ACT FOR THE IMPUGNED ASSESSMENT YEAR. THEREFORE, THE REVENUE GR OUNDS ON THIS ARE REJECTED. 26. THE APPELLANT WOULD LIKE TO DRAW YOUR KIND ATTENTIO N TO THE DECISIONS OF HONBLE BOMBAY HIGH COURT IN THE CASE OF M/S. THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. (APPE AL NO. 2201 OF 2013) AND M/S TARA JEWELS EXPORTS PVT. LTD. (APPEAL NO. 1814 OF 2013). THE RELEVANT EXTRACTS ARE REPRODUCED BELOW: M/S. THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. E) WE FIND THAT IN TERMS OF CHAPTER X OF THE ACT, REDETERMINATION OF THE CONSIDERATION IS TO BE DONE ONLY WITH REGARD TO INCOME ARISING FROM INTERNATION AL TRANSACTIONS ON DETERMINATION OF ALP . THE ADJUSTMENT WHICH IS MANDATED IS ONLY IN RESPE CT OF INTERNATIONAL TRANSACTION AND NOT TRANSACTIONS ENTERED INTO BY AS SESSEE WITH INDEPENDENT UNRELATED THIRD PARTIES. THIS IS PARTICULARLY SO AS THERE IS NO ISS UE OF AVOIDANCE OF TAX REQUIRING ADJUSTMENT IN THE VALUATION IN RESPECT OF TRANSACTIONS ENTERED IN TO WITH INDEPENDENT THIRD PARTIES. THE ADJUSTMENT AS PROPOSED BY THE REVENUE IF ALLOWED WO ULD RESULT IN INCREASING THE PROFIT IN RESPECT OF TRANSACTIONS ENTERED INTO WITH NON AE. T HIS ADJUSTMENT IS BEYOND THE SCOPE AND AMBIT OF CHAPTER X OF THE ACT. M/S TARA JEWELS EXPORTS PVT. LTD. 6. THE QUESTION AS PROPOSED BY THE REVENUE DOES NO T SEEMS TO ARISE FROM THE IMPUGNED ORDER OF THE TRIBUNAL NOR IS THE METHOD OF DETERMINATION O F ALP ON APPLICATION OF TNMM ARRIVING AT THE MARGIN OF 4.79% IS DISPUTED BEFORE TRIBUNAL OR BEFORE US. WE ARE UNABLE TO UNDERSTAND THE GRIEVANCE OF THE REVENUE AS FORMULATED IN THE P ROPOSED QUESTION. THE RESPONDENT- ASSESSEE HAS NOT CHALLENGED THE APPLICATION OF TNMM AND ARRIVING AT THE MARGIN OF 4.79% ARRIVED AT BY THE TPO TO DETERMINE ALP. THE GRIEVAN CE OF THE RESPONDENT-ASSESSEE BEFORE THE TRIBUNAL IS ONLY WITH THE MARGIN OF 4.79% BEING APPLI ED IN RESPECT OF ALL IT'S SALES AND NOT ITA NO. 278/DEL/2012 32 RESTRICTED TO THE INTERNATIONAL TRANSACTIONS ENTERE D INTO BY THE RESPONDENT-ASSESSEE WITH IT'S AES. IT IS EVIDENT FROM THE PROVISIONS OF CHAPTER X OF T HE ACT THAT THE ADJUSTMENT WHICH HAS TO BE DONE TO ARRIVE AT ALP IS ONLY IN RESPECT OF THE TRANSACTION WITH IT'S AES. THUS NO FAULT CAN BE FOUND WITH THE ORDER OF THE TRIBUNA L. 7. MR. PINTO IS UNABLE TO POINT OUT HOW THE AFORESA ID FINDING OF THE TRIBUNAL IS INCORRECT IN LAW IN THE FACE OF THE CLEAR PROVISIONS IN CHAPTER X OF THE ACT. THE QUESTION AS FRAMED BY THE REVENUE TO OUR MIND DO NOT ARISE FROM THE IMPUGNED ORDER OF THE TRIBUNAL AS THE ISSUE RAISED IN THE PROPOSED QUESTION IS NOT DISPUTED. ACCORDINGLY, WE SEE NO REASON TO ENTERTAIN THE PROPOSED REFRAMED QUESTION OF LAW AS IT DOES NOT GI VE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. 27. IN THIS REGARD, THE APPELLANT ALSO PLACES RELIANCE ON THE FOLLOWING DECISIONS OF THE VARIOUS HONBLE INCOME TAX APPELLATE TRIBUNALS WHICH HAVE U PHELD THE ABOVE PRINCIPLE: TWO INTERNATIONAL (ITA NO 5644/MUM/2008) (MUMBAI) . KYUNGSHIN INDUSTRIAL MOTHERSON VS DCIT (ITA NO. 139 6(DEL)/2009) (DELHI) . TWINKLE DIAMOND V. ACIT (ITA NO. 5033/MUM/07) , ADDL. CIT V. TEJ DIEM ((2010) 130 TTJ 570) (MUMBAI) UCB INDIA PRIVATE LIMITED V ACIT ((2009) 317 ITR 29 2) (MUMBAI) DEMAG CRANES & COMPONENTS (INDIA) PRIVATE LIMITED V DCIT ((2012) 144 TTJ 320) (PUNE) AND SL LUMAX LIMITED V ACIT (ITA NO. 1915/MDS/2011) (CH ENNAI) 28. FURTHER, IT IS NOTEWORTHY THAT IN THE SAME ORDER IS SUED BY THE LD. TPO FOR THE AY 2008-09, THE PRINCIPLE OF PROPORTIONATE ADJUSTMENT HAS BEEN ACCE PTED BY THE LD. TPO IN THE LIGHTING DIVISION. THE RELEVANT EXTRACTS FROM THE TP ORDER IS PROVIDED AS ANNEXURE 3(I) TO THIS EXECUTIVE SUMMARY. AS THE PRINCIPLE OF PROPORTIONATE ADJUSTME NT IS GRANTED IN THE LIGHTING DIVISION IN THE INSTANT CASE, THE APPELLANT REQUESTS THAT THE SAME SHOULD BE GRANTED FOR THE POWER CONTROL DIVISION AS WELL. IN ADDITION, THE APPELLANT DRAWS REFERENCE TO THE O RDER OF HONBLE DRP FOR THE AY 2009-10, WHERE THE HONBLE DRP HAS ALSO ACCEPTED THE PRINCIP LE OF PROPORTIONATE ADJUSTMENT AND DIRECTIONS WERE GIVEN TO THE LD. TPO TO LIMIT ADJUS TMENTS PROPORTIONATE TO THE VALUE OF INTERNATIONAL TRANSACTIONS. THE RELEVANT EXTRACTS F ROM THE HONBLE DRP ORDER IS PROVIDED VIDE ANNEXURE 3(II) OF THIS EXECUTIVE SUMMARY. ALSO IT IS RELEVANT TO MENTION THAT THE LD. TPO HIM SELF, FOR THE AY 2010-11,IS IN AGREEMENT WITH THIS PRINCIPLE AND THEREBY LIMITED THE ADJUSTMENT P ROPORTIONATE TO VALUE OF INTERNATIONAL TRANSACTIONS. THE RELEVANT EXTRACTS OF THE TP ORDE R IS PROVIDED VIDE ANNEXURE3(III) OF THIS EXECUTIVE SUMMARY . 29. ACCORDINGLY, THE APPELLANT SUBMITS THAT CONSIDERING THE VERY LOW QUANTUM OF THE MATERIAL COSTS REPRESENTING THE INTERNATIONAL TRANSACTION OF THE S EGMENT FOR FY 2007-08 VIS--VIS THE TOTAL EXPENSES AND TOTAL MATERIAL COSTS OF THE SEGMENT, A NY SUCH ADJUSTMENT, IF AT ALL, CAN BE MADE ONLY TO THE PROPORTIONATE SALES MADE OUT OF RAW MAT ERIALS IMPORTED FROM THE ASSOCIATE CONCERNS AND NOT IN RESPECT OF TOTAL SALES OF MANUFACTURED I TEMS WHICH WERE MANUFACTURED FROM THE TOTAL RAW MATERIALS PROCURED FROM THIRD PARTIES AS WELL. ITA NO. 278/DEL/2012 33 30. THE COMPUTATION OF THE PROPORTIONATE ADJUSTMENT IS THUS PROVIDED BELOW: 31. PARTICULARS AMOUNT (INR.) ACTUAL SALES PRO - RATED TO 9.72% SALES 208,997,259 MATERIAL COST 141,889,745 OPERATING EXPENSES 67,771,996 ADD: OTHER INCOME 8,777,260 OPERATING PROFIT (A) 8,112,777 OPERATING PROFIT MARGIN 3.88% ADJUSTED TO ALP OF 4.93% (B) 10,303,565 DIFFERENCE IN ALP AND ACTUAL C= A - B 2,190,788 ACTUAL IMPORT PRICE (D) 141,889,745 ALP IMPORT PRICE E = D - C 139,698,957 1.05 OF D 148,984,232 3 0.95 OF D 134,795,258 ALP IMPORT PRICE IN THE 5% RANGE YES ADJUSTMENT NIL ACCORDINGLY, THE ABOVE ALP IMPORT PRICE FALLS IN TH E WITHIN +/-5% RANGE AND HENCE NO ADJUSTMENT IS REQUIRED TO THE TRANSFER PRICE. 23. THE LD. DR RELIED ON THE ORDERS OF AO/TPO AND D RP. 24. AFTER HEARING THE SUBMISSIONS OF BOTH THE SIDES AND PERUSING THE ENTIRE MATERIAL AVAILABLE ON RECORD AND WE FIND THAT THE A SSESSEE IN HIS WRITTEN SYNOPSIS HAS MADE EXTENSIVE ARGUMENTS PERTAINING TO THE ISSU E AND HAS ALSO RELIED ON SEVERAL DECISIONS, WHICH HAVE NOT BEEN PROPERLY CON TROVERTED ON BEHALF OF THE REVENUE. WE, HOWEVER, FIND THAT SINCE THESE DECISIO NS WERE NOT RELIED UPON BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW, THE FINDINGS OF THE AUTHORITIES BELOW IS LACKING ON THE SAME. IN PRESENCE OF THESE FACTS, WE REMIT THIS MATTER TOO BACK TO THE FILE OF AO/TPO TO DECIDE THE SAME AFRESH AFTER CONSIDERING THE EXTENSIVE PLEAS TAKEN IN THE WRITTEN ARGUMENTS BEFORE US AS WELL AS THE CASE LAWS RELIED IN SUPPORT. THE ASSESSEE IS DIRECTED TO PUT UP ITS CAS E BEFORE THE AO WITH ALL ITA NO. 278/DEL/2012 34 SUPPORTING EVIDENCES AND DECISIONS IN SUPPORT. NEED LESS TO SAY, THE ASSESSEE SHALL BE GIVEN REASONABLE OPPORTUNITY OF BEING HEARD. ACC ORDINGLY, GROUNDS NOS. 10 & 11 ARE ALLOWED FOR STATISTICAL PURPOSES. GROUND NO. 12 & 13 : BACKGROUND AND INTERNATIONAL TRANSACTIONS: 25. THE LIGHTING DIVISION IS ENGAGED IN THE PURCHAS E, MARKETING AND DISTRIBUTION OF A WIDE RANGE OF LIGHTING PRODUCTS IN INDIA FOR C OMMERCIAL AND INDUSTRIAL USE. GELI SELLS ITS PRODUCTS ONLY TO THIRD PARTIES IN IN DIA AND SOURCES ITS PRODUCTS PRIMARILY FROM UNRELATED PARTIES. IT ALSO SOURCES A SMALL PORTION OF THE GOODS FROM THE ASSOCIATED ENTERPRISES (AES). THE MAJOR FUNCT IONS OF THE DIVISION ARE TAKING TITLE AND HOLDING INVENTORY, CUSTOMER DEVELOPMENT, PURCHASE AND SALES PLANNING, PRICING, THE PROCESSING OF WARRANTY CLAIMS, MARKETI NG, PACKAGING AND LABELING AND ADVERTISING. DURING THE YEAR, THE ASSESSEE HAD IMPO RTED GOODS IN THE LIGHTENING DIVISION OF RS.4,30,80,809/- AND THE AO/TPO HAD MAD E UPWARD ADJUSTMENT OF RS.25,97,724/- BY FOLLOWING TNMM METHOD WHEREAS THE ASSESSEE HAD APPLIED RESALE PRICE METHOD FOR CALCULATING PLI. IN THE TP STUDY REPORT, THE GROSS MARGIN WAS TAKEN AT 23.47% AND GROSS MARGIN OF COMPARABLES CHOSEN BY THE ASSESSEE WAS 9.29%. THEREFORE, THE ASSESSEE HAD NOT ADDED AN Y UPWARD ADJUSTMENT. THE ASSESSEE COMPANY HAD CHOSEN COMPARABLES FOR THE LIG HTENING DIVISION FOR COMPUTING BENCHMARKING OF THE FOLLOWING THREE COMPA NIES: SL. NO. COMPANY NAME GROSS PROFIT MARGIN % OPERATING PROFIT MARGIN % 1 AMZEL LTD. 11.71% 2.50% 2 CHLORIDE INTERNATIONAL LIMITED 15.08% 2.51% 3 KARUNA/GLOBUS CORPORATION LIMITED 0.59% 2.79% ITA NO. 278/DEL/2012 35 26. THE LD. AR RELIED ON THE SUBMISSIONS MADE BY HI M AS UNDER: INTERNATIONAL TRANSACTIONS FOR FY 2007-08 PERTAININ G TO DISTRIBUTION SEGMENT: PARTICULARS AMOUNT (INR) OUTCOME OF TP ORDER IMPORTS OF FINISHED PRODUCTS FOR TRADING 43,080,809 ADJUSTMENT OF INR 2,597,724 REJECTION OF THE METHOD APPLIED 32. AS PER THE TP STUDY REPORT OF THE LIGHTING DIVISION , THE MOST APPROPRIATE METHOD USED BY THE APPELLANT IN RESPECT OF DISTRIBUTION SEGMENT IS RPM . THIS METHOD HAS BEEN CONSISTENTLY APPLIED ON A YEAR ON YEAR BASIS AND ALSO ACCEPTED BY THE LD . TPOS OFFICE IN THE PAST AND ALSO IN THE SUBSEQUENT YEAR. 33. GIVEN THE FACT THAT THE FUNCTIONS OF THE APPELLANT HAVE REMAINED THE SAME, THE METHOD AND THEREFORE THE PLI USED BY THE LD. TPO SHOULD ALSO H AVE BEEN CONSISTENT FOR ALL THE YEARS. IN SUPPORT OF THE SAME, THE APPELLANT DRAWS REFERENCE TO THE TABLE BELOW HIGHLIGHTING THE FACT THE LD. TPO IN THE PAST ACCEPTED THE COMPARABILITY ANAL YSIS INCLUDING THE RPM METHOD. PARTICULARS AY 2006 - 07 AY 2007 - 08 AY 2008 - 09 IMPORT OF TRADED GOODS 111,426,016 124,536,186 43,080,809 METHOD APPLIED BY GELI RPM RPM RPM GM OF GELI IN TP STUDY 13.24% 16.29% 23.47% GM OF COMPARABLES 10.63% 10.11% 9.29% SALES 823,423,545 953,547,836 897,033,502 METHOD APPLIED BY TPO RPM ACCEPTED RPM ACCEPTED RPM REJECTED AND TNMM APPLIED 34. ALSO, IT IS NOTEWORTHY THAT THE GROSS MARGIN OF THE APPELLANT HAS BEEN INCREASING YEAR ON YEAR AND IT DOES NOT HOLD ANY MERIT TO DEVIATE FROM RPM METHOD AND THE LD. TPOS INTENTION IS ONLY TO IMPOSE AN ADJUSTMENT WITHOUT ANY BASIS. I. APPLICABILITY OF RPM 35. THE RPM BEGINS WITH THE PRICE AT WHICH A PRODUCT TH AT HAS BEEN PURCHASED FROM AN AE IS RESOLD TO AN INDEPENDENT ENTERPRISE. THIS PRICE (THE RESAL E PRICE) IS THEN REDUCED BY AN APPROPRIATE GROSS MARGIN (THE RESALE PRICE MARGIN) REPRESENTI NG THE AMOUNT OUT OF WHICH THE RESELLER WOULD SEEK TO COVER ITS SELLING AND OTHER OPERATING EXPENSES AND, IN THE LIGHT OF FUNCTIONS PERFORMED (TAKING INTO ACCOUNT ASSETS USED AND RISK S ASSUMED), MAKE AN APPROPRIATE PROFIT. IDEALLY, THE DISTRIBUTOR SHOULD NOT ADD A SIGNIFICA NT AMOUNT OF VALUE TO THE PRODUCTS THEY RESELL ITA NO. 278/DEL/2012 36 OR OWN VALUABLE, NON-ROUTINE INTANGIBLES THAT MAY A FFECT THE PROFITS EARNED ON THE PRODUCTS THEY RESELL. 36. IN THIS REGARD, THE APPELLANT SUBMITS THAT THE APPE LLANT IS A ROUTINE DISTRIBUTOR ENGAGED IN TRADING OF LIGHTING PRODUCTS, ADDING NO VALUE TO TH E PRODUCTS PURCHASED FROM ITS AES PRIOR TO RESALE TO INDEPENDENT CUSTOMERS. 37. THE APPELLANT DRAWS REFERENCE TO THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) ON INTERNATIONAL TRAN SACTIONS UNDER SECTION 92E OF THE ACT ALSO PROVIDES JUSTIFICATION FOR THE APPLICATION OF RPM W ITH RESPECT TO DISTRIBUTORS. PARA 19.2 OF THE GUIDANCE NOTE ISSUED BY ICAI MENTI ON THE APPLICATION OF RPM AS FOLLOWS: '19.2 TYPICALLY TRANSACTIONS WHERE THE RESALE PRIC E METHOD MAY BE ADOPTED ARE DISTRIBUTION OF FINISHED PRODUCTS OR OTHER GOODS INV OLVING NO OR LITTLE VALUE ADDITION.' 38. THIS AGAIN GOES TO PROVE THAT RPM HAS BEEN CORRECTL Y APPLIED FOR GELIS DISTRIBUTION ACTIVITY AS INDICATED IN THE GUIDANCE NOTE ISSUED BY THE ICAI. FURTHERMORE, THE ASSESSEE SUBMITS THE FACT THAT THE COMPANY IS ENGAGED IN THE DISTRIBUTION OF LIGHTING PRODUCTS. ACCORDINGLY THE COMPARABLES OF T HE ASSESSEE BEING DISTRIBUTORS OF BROADLY SIMILAR PRODUCTS AND HENCE ARE FUNCTIONALLY CLOSE C OMPARABLES FOR THE PURPOSES OF APPLICABILITY OF RPM. 39. IN THIS REGARD REFERENCE IS MADE TO PARA 2.29 OF TH E OECD GUIDELINES: '2.29 AN APPROPRIATE RESALE PRICE MARGIN IS EASIES T TO DETERMINE WHERE THE RESELLER DOES NOT ADD SUBSTANTIALLY TO THE VALUE OF THE PRODUCT. IN CONTRAST, IT MAY BE MORE DIFFICULT TO USE THE RESALE PRICE METHOD TO ARRIVE AT AN ARMS LENGT H PRICE WHERE, BEFORE RESALE, THE GOODS ARE FURTHER PROCESSED OR INCORPORATED INTO A MORE COMPL ICATED PRODUCT SO THAT THEIR IDENTITY IS LOST OR TRANSFORMED' IN THIS REGARD, THE APPELLANT WOULD LIKE TO PLACE R ELIANCE ON THE JUDGMENT OF THE BOMBAY HIGH COURT IN COMMISSIONER OF INCOME TAX V. LOREAL INDIA (P) LTD . (2015) 276 CTR (BOM) 484 WHEREIN THE HONBLE COURT ACCEPTED THE APPLICATION OF RPM AS THE MOST APPROPRIATE METHOD FOR TESTING THE TRANSACTION PERTAINING TO BUYING PRODUC TS FROM ITS AES FOR RESALE TO THIRD PARTIES WITHOUT ANY VALUE ADDITION/ FURTHER PROCESSING AND HELD: 7. AFTER HAVING PERUSED THE RELEVANT PART OF THE O RDER PASSED BY THE CIT(A) AND THE TRIBUNAL ON THIS QUESTION, WE ARE IN AGREEMENT WITH MR. PARD IWALLA THAT THE TRIBUNAL DID NOT COMMIT AN ERROR OF LAW APPARENT ON THE FACE OF THE RECORD NOR CAN THE FINDINGS BE SAID TO BE PERVERSE. THE TRIBUNAL HAS FOUND THAT THE TPO HAS PASSED AN OR DER EARLIER ACCEPTING THIS METHOD. THE TRIBUNAL HAS NOTED IN PARA 19 OF THE ORDER UNDER CHA LLENGE THAT THIS METHOD IS ONE OF THE STANDARD METHOD AND THE OECD (ORGANIZATION OF ECONO MIC COMMERCIAL DEVELOPMENT) GUIDELINES ALSO STATE IN CASE OF DISTRIBUTION OR MAR KETING ACTIVITIES WHEN THE GOODS ARE PURCHASED FROM ASSOCIATED ENTITIES AND THERE ARE SA LES EFFECTED TO UNRELATED PARTIES WITHOUT ITA NO. 278/DEL/2012 37 ANY FURTHER PROCESSING, THEN, THIS METHOD CAN BE AD OPTED. THE FINDINGS OF FACT ARE BASED ON THE MATERIALS WHICH HAVE BEEN PRODUCED BEFORE THE CIT (A) AS ALSO THE TRIBUNAL. FURTHER, IT WAS HIGHLIGHTED BEFORE THE CIT(A) AS ALSO THE TRIBUNA L THAT THE RPM HAS BEEN ACCEPTED BY THE TPO IN THE PRECEDING AS WELL AS SUCCEEDING ASSE SSMENT YEARS. THAT IS IN RESPECT OF DISTRIBUTION SEGMENT ACTIVITY OF THE ASSESSEE. IN SU CH CIRCUMSTANCES, AND WHEN NO DISTINGUISHING FEATURES WERE NOTED BY THE TRIBUNAL, IT DID NOT COMMIT ANY ERROR IN ALLOWING THE ASSSESSEES APPEAL. SUCH FINDINGS DO NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW. THE APPEAL IS DEVOID OF MERITS AND IS, THEREFORE, DISMISSED. T HERE WOULD BE NO ORDER AS TO COSTS. THE APPELLANT WOULD ALSO LIKE TO PLACE RELIANCE ON THE DECISION OF BANGALORE ITAT IN THE CASE OF M/S. SANYO INDIA PVT. LTD. (IT(TP)A NO.224/BANG/20 14) AND THE DECISION OF DELHI ITAT IN THE CASE OF NOKIA INDIA (P) LTD. (ITA NO.242/DEL/2010). THE RELEVANT EXTRACTS ARE REPRODUCED BELOW. M/S. SANYO INDIA. PVT. LTD. (IT(TP)A NO.224/BANG/20 14) .PRIMARILY ENGAGED IN THE BUSINESS OF DISTRIBUTION A ND SALE OF CONSUMER DURABLES. 10. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBU NAL REFERRED TO ABOVE, THAT RPM IS THE MOST APPROPRIATE METHOD. NOKIA INDIA (P) LTD. (ITA NO.242/DEL/2010) ASSESSEE SIMPLY PURCHASED MOBILE PHONES AND ACCESSO RIES FROM NOKIA GROUP COMPANIES SITUATED OUTSIDE INDIA AND RESOLD THE SAME AS SUCH WITHOUT ANY FURTHER VALUE ADDITION 13. WE HAVE NOTICED ABOVE THAT IN THE GIVEN CIRCUMST ANCES, RPM IS THE FIRST CHOICE FOR CONSIDERATION AS THE MOST APPROPRIATE METHOD. THE APPELLANT WOULD ALSO LIKE TO PLACE RELIANCE ON THE DECISION OF DELHI ITAT IN THE CASE OF M/S. YAMAHA MOTOR INDIA PVT. LTD (ITA NO.5748/DEL./ 2011) AND THE DECISION OF DELHI ITAT IN THE CASE OF LUXOTTICA INDIA EYEWEAR P. LTD. (ITA NO.1115/DEL/2014). THE RELEVANT EXTRACTS ARE REPRODUCED BELOW. M/S. YAMAHA MOTOR INDIA PVT. LTD 8.7 ACCORDING TO THE PROVISIONS OF SECTION 92C AND RULE 10B, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION HAS TO BE D ETERMINED BY FOLLOWING ANY OF THE APPROPRIATE METHOD. THE RESALE PRICE METHOD AND THE COST PLUS METHOD OP ERATE AT GROSS PROFIT MARGIN LEVEL REQUIRING FUNCTIONAL RATH ER THAN PRODUCT COMPARABILITY. THE PROFIT SPLIT METHOD AND THE TNMM OPERATE AT OPE RATING MARGIN LEVEL USED FOR A COMPLEX AND INTEGRATED ENTERPRISE. THE METHOD WHICH PROVIDES MOST RELIABLE WAY OF ARRIVING AT ARMS LENGTH PRICE IS CONSIDERED AS MOS T APPROPRIATE METHOD. A COMPARATIVE ANALYSIS IS DONE FOR COMPARISON OF THE CONTROLLED TRANSACTION WITH AN UNCONTROLLED TRANSACTION AND CONTROLLED AND UNCONTR OLLED TRANSACTIONS ARE COMPARABLE IF NONE OF THE DIFFERENCE BETWEEN THE TRANSACTIONS CAN MATERIALLY AFFECT THE FACTOR BEING EXAMINED BY ADOPTING ANY OF THE METHODOLOGY AS MENT IONED IN SECTION 92C. ITA NO. 278/DEL/2012 38 8.8 WE ARE OF THE VIEW THAT WHERE AN ASSESSEE HAS FOLLO WED ONE OF THE STANDARD METHOD FOR DETERMINING THE ARMS LENGTH PRICE, SUCH A METHOD CANNOT DISCARDED IN PREFERENCE OVER OTHER METHOD. IN FACT THE TRANSACTI ONAL NET MARGIN METHOD I.E. TNMM SHOULD BE APPLIED ONLY WHEN STANDARD OR TRADITIONAL METHODS ARE INCAPABLE OF BEING APPLIED IN THE FACTS OF THE CASE BECAUSE WHILE TRADITIONAL METHOD SEEKS TO COMPUTE T HE PRICE AT WHICH INTERNATIONAL TRANSACTIONS WOULD NOR MALLY BE ENTERED INTO BY THE ASSOCIATED ENTERPRISE BUT FOR THEIR INTERDEPENDENCE AND RELATIO NSHIP, TRANSACTIONAL PROFIT METHOD SEEKS TO COMPUTE THE PROFIT THAT THE TESTED PARTY WOULD N ORMALLY EARN ON SUCH TRANSACTION WITH UNRELATED PARTIES. IN THE FACTS AND CIRCUMSTANCES O F THE CASE, WE ARE OF THE VIEW THAT TNMM METHOD APPLIED BY THE TPO FOR DETERMINING THE ARMS LENGTH PRICEIS NOT THE MOST APPROPRIATE METHOD. M/SLUXOTTICA INDIA EYEWEAR P.LTD 10.4. AS THE UNDISPUTED FACT IS THAT THE FUNCTIONAL PROFILE OF THE ASSESSEE IS THAT OF A TRADER AND AS THE CHARACTERISATION OF THE TRANSACTI ON IS PURCHASE AND SALE OF GOODS, WE HOLD THAT RSPM IS THE MAM BY APPLYING THE FOLLOWING DECISIONS OF THE CO-ORDIN ATE BENCH OF THE TRIBUNAL. BASED ON THE ABOVE, THE APPELLANT SUBMITS THAT RPM IS THE MOST APPROPRIATE METHOD FOR TESTING THE INTERNATIONAL TRANSACTIONS OF DISTRIBUT ION SEGMENT. II. INCONSISTENCY IN THE LD. TPOS APPROACH 40. AS REGARDS THE CONSISTENT APPLICATION OF RPM AS THE MOST APPROPRIATE METHOD, IT WOULD ALSO BE RELEVANT TO DRAW REFERENCE TO THE PRINCIPLE LAID OU T IN THE CASE OF LENOVO (INDIA) PRIVATE LIMITED [TS-178-ITAT-2012(BANG)] , WHEREIN THE HONBLE BANGALORE TRIBUNAL INTER ALIA HELD AS FOLLOWS: 12 . THERE HAS TO BE A CONTINUITY AND UNIFORMITY IN THE A PPROACH OF THE REVENUE TOWARDS AN ISSUE AND PARTICULARLY IN THE CASE OF THE SAME ASSE SSEE. WHEN THE FACTS AND CIRCUMSTANCES ARE EXACTLY THE SAME, THE REVENUE CANNOT BE PERMITTED TO TAKE A DIFFERENT APPROACH IN TWO DIFFERENT ASSESSMENT YEARS. THE ABOVE PRINCIPLE OF CONSISTENCY HAS ALSO BEEN UP HELD IN THE CASES OF: ACIT V NGC NETWORKS (INDIA) PRIVATE LIMITED (ITA NO . 5307/M/2008) (MUMBAI) BRINTONS CARPETS ASIA PRIVATE LIMITED V DEPUTY COMM ISSIONER OF INCOME TAX (ITA NO. 1321/PN/2011) (PUNE) CIT V GOPAL PUROHIT (228 CTR 582) (BOMBAY HIGH COUR T) KUEHNE + NAGEL PRIVATE LIMITED V ACIT (ITA NO. 5648 /DEL/2010) (DELHI) DCIT V BACARDI MARTINI INDIA LTD (ITA NO. 2933(DEL) /2010) (DELHI) ITA NO. 278/DEL/2012 39 41. ACCORDINGLY, THE APPELLANT SUBMITS THAT THE LD. TPO WAS INCONSISTENT IN THE APPROACH AND APPLIED TNMM FOR TESTING THE INTERNATIONAL TRANSACT IONS RELATING TO IMPORT FROM RELATED PARTIES IN THE DISTRIBUTION SEGMENT WITHOUT ANY ECONOMIC RA TIONALE. 42. FURTHER, THE APPELLANT DRAWS REFERENCE TO PARAGRAPH NUMBER 39 WHEREIN THE LD. TPO HAS ACCEPTED THE METHOD APPLIED BY THE APPELLANT IN THE PAST. THEREBY THE COMPARABLES CHOSEN IN THE TP STUDY WERE ALSO ACCEPTED BY THE LD. TPO. IN THIS REGARD, THE APPELLANT DRAWS REFERENCE TO MUMBAI RULING IN THE CASE OF NGC NETWORKS (INDIA) PRIVATE LIMITED (ITA NO. 5307/M/2008) WHEREIN THE HONBLE TRIBUNAL HELD AS FOLLOWS: 15.......THESE COMPARABLES AND THE METHOD OF COMPU TATION OF ARMS LENGTH PRICE HAS BEEN ACCEPTED BY THE DEPARTMENT IN THE SUBSEQUENT ASSESS MENT YEAR I.E 2004-05. THEREFORE IN OUR VIEW COMPARABLES SELECTED BY THE ASSESSEE HAVE TO BE ADOPTED FOR THE PURPOSE OF COMPUTATION OF TRANSFER PRICING ADJUSTMENTS THIS YEAR ALSO. 43. ALSO, RELIANCE IS PLACED ON BANGALORE RULING IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PRIVATE LIMITED[ITA NO. 789/BANG/2010], WHEREIN IT WAS STATED THAT 43 ....UNIFORMITY AND CONSISTENTLY IN APPROACH IS ESSENTIAL FOR BOTH THE REVENUE AS WELL AS THE ASSESSEE ALIKE UNLESS THE CIRCUMSTANCES WARRANT OTH ERWISE. THEREFORE, IT IS WORTH MENTIONING THAT DUE TO CONSI STENT APPROACH FOLLOWED BY THE APPELLANT WHILE CARRYING OUT THE ECONOMIC ANALYSIS, ONE SUCH COMPARABLE AMZEL AUTOMOTIVE LIMITED WAS CHOSEN CONSISTENTLY ON A YEAR ON YEAR BASIS AND ALS O ACCEPTED BY THE LD. TPO IN THE EARLIER YEARS. THEREFORE, IT MAKES NO RATIONALE TO REJECT T HIS COMPARABLE FOR THIS YEAR WHEN FACTS AND CIRCUMSTANCES CONTINUE TO BE THE SAME. 44. THEREFORE, THE APPELLANT SUBMITS THAT, WITHOUT PREJ UDICE TO THE TP STUDY COMPARABILITY ANALYSIS, EVEN IF THE COMPARABLE COMPANIES SELECTED BY THE LD . TPO ARE TESTED ALONG WITH AMZEL AUTOMOTIVE LIMITED, THE GM OF 17.08% (AS COMPUTED B ELOW) IS LOWER THAN THE GM OF 23.47% OF THE APPELLANT. [REFER PAGE 157 TO 161 OF THE APPEAL MEMO]. S.NO. COMPANY NAME GROSS MARGIN NET MARGIN 1 AMZEL AUTOMOTIVE LTD. 9.26% 2.76% 2 BAJAJ ELECTRICAL LTD. 19.49% 7.50% 3 BIRLA POWER LTD. 22.49% 15.92% ARITHMETIC MEAN 17.08% 8.73% GELIS MARGIN 23.47% 6.53% 45. ALSO , THE NET MARGIN OF 6.53% EARNED BY THE APPELLANT IS AT ARMS LENGTH AFTER EXERCISING ITS OPTION AS PER PROVISO TO SECTION 92C(2) OF THE ACT. THE COMPUTATION OF ALP AND THE PROVISO TO SECTION 92C(2) IS SHOWN IN THE TABLE BELOW. PARTICULARS ACTUALS ALP 5% - 5% ITA NO. 278/DEL/2012 40 SALES 4 56,332,726 56,332,726 56,332,726 56,332,726 COGS (AE PURCHASES) 43,080,809 41,839,576 45,234,849 40,926,769 OPERATING EXPENSES 9,575,303 9,575,303 9,575,303 9,575,303 OPERATING PROFIT 3,676,614 4,917,847 1,522,574 5,830,655 OP/SALES 6.53% 8.73% 2.70% 10.35% THE ABOVE ALP OF 8.73% FALLS WITHIN THE +/-5% RANGE AND HENCE NO ADJUSTMENT IS REQUIRED TO THE TRANSFER PRICE. 46. IT IS TO SAY THAT ULTIMATELY, THE PROFIT LEVEL INDI CATOR IS ONLY A MEASURE OF DETERMINING WHETHER THE TRANSFER PRICES OF THE COMPANY ARE AT ARMS LEN GTH. THE APPELLANT THEREFORE SUBMITS THAT WHERE IT IS ESTABLISHED THAT BY VIRTUE OF THE GROSS PROFIT ITSELF BEING AT ARMS LENGTH, THE TRANSFER PRICES (THE IMPORT TRANSACTION WITH AES FOR RESALE TO THIR D PARTIES) IN TURN ARE AT ARMS LENGTH, THERE IS NO POSSIBILITY OF INFERRING THAT THERE IS ANY UNDER-REPORTING OF THE INCOME MERELY BY A CHANGE IN PROFIT LEVEL INDICATOR (METHOD) . BASED ON THE ABOVE, THE INTERNATIONAL TRANSACTION O F THE APPELLANT RELATING TO THE IMPORTS OF GOODS FOR DISTRIBUTION IN THE LIGHTING DIVISION CON TINUES TO BE DEMONSTRATED AT ARMS LENGTH FOR FY 2007-08. 47. UNDER THESE CIRCUMSTANCES, WHERE IT IS CLEARLY DEMO NSTRATED THAT THERE IS NO EVASION OF TAX, ANY ADJUSTMENT TO THE TRANSFER PRICES IS NOT ONLY FUNDA MENTALLY INCORRECT BUT IS ALSO AGAINST THE BASIC TENETS OF TRANSFER PRICING AND ALSO ONEROUS T O THE APPELLANT. 27. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ER OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE LOWER AUTHORITIES HAVE MADE UPWARD ADJUSTMENT OF RS.25,97,724/-BY FOLLOWING TNMM METHOD. THE COMPARA BLES CHOSEN BY THE AUTHORITIES BELOW ARE QUITE APPLICABLE IN THE PRESE NT CASE. THE RES JUDICATA DOES NOT APPLY IN THE INCOME-TAX PROCEEDINGS. EVERY YEAR IS A SEPARATE ASSESSMENT YEAR, AS HELD BY MANY HONBLE COURTS. 28. AFTER HEARING BOTH THE SIDES AND PERUSING THE E NTIRE MATERIAL AVAILABLE ON RECORD, WE OBSERVE THAT THE ASSESSEE HAS USED RESAL E PRICE METHOD FOR BENCHMARKING/PLI WHEREAS THE LOWER AUTHORITIES HAVE CONFIRMED THE TRANSACTION ITA NO. 278/DEL/2012 41 NET MARGIN METHOD. THE RESALE PRICE METHOD IS A DIR ECT METHOD WHICH COMPARES THE GROSS MARGINS (I.E., GROSS PROFIT OVER SALES) E ARNED IN TRANSACTIONS BETWEEN RELATED AND UNRELATED PARTIES FOR THE DETERMINATION OF THE ARMS LENGTH PRICES. THE RPM METHOD REQUIRES HIGH LEVEL OF FUNCTIONAL COMPAR ABILITY AND IS MAINLY APPLICABLE WHERE THE CONTROLLED PARTY IS A DISTRIBU TOR. PRACTICALLY, THE APPLICATION OF RPM IS FOUND BY WORKING BACKWARDS FROM TRANSACTI ONS TAKING PLACE AT THE NEXT STAGE IN THE SUPPLY CHAIN, AND IS DETERMINED BY SUB TRACTING AN APPROPRIATE GROSS MARK-UP FROM THE SALE PRICE TO AN UNRELATED THIRD P ARTY, WITH THE APPROPRIATE GROSS MARGIN BEING DETERMINED BY EXAMINING THE COND ITIONS UNDER WHICH THE GOODS OR SERVICES ARE SOLD AND COMPARING THE SAID T RANSACTION TO OTHER, THIRD- PARTY TRANSACTIONS. GENERALLY THE RPM IS USED IN TH E FOLLOWING SITUATIONS. (1). THE RPM BEGINS WITH THE PRICE AT WHICH A PRODU CT THAT HAS BEEN PURCHASED FROM AN ASSOCIATED ENTERPRISE IS RESOLD TO AN INDEP ENDENT ENTERPRISE. THEREFORE, THE USE OF RPM IS IDEAL FOR DISTRIBUTION ACTIVITY, WHEREBY THE TESTED PARTY PURCHASES THE PRODUCTS OR OBTAINS THE SERVICE FROM ITS ASSOCIATED ENTERPRISES AND RESELLS THE PRODUCTS/SERVICES TO INDEPENDENT ENTERP RISES; (2). RPM IS THE MOST APPROPRIATE IN A SITUATION WHE RE THE SELLERS ADD RELATIVELY LITTLE VALUE TO THE GOODS AND NOT ALTER THE GOODS P HYSICALLY BEFORE THE RESALE. PACKAGING, REPACKING, LABELING OR MINOR ASSEMBLY DO ES NOT ORDINARILY CONSTITUTE PHYSICAL ALTERATION; (3). RPM IS USED IN CASES WHERE RESELLER DOES NOT A PPLY INTANGIBLE ASSETS TO ADD VALUE. THE GREATER THE VALUE-ADDED TO THE GOODS BY THE FUNCTIONS PERFORMED BY THE SELLER, THE MORE DIFFICULT IT WILL BE TO DETERMINE APPROPRIATE RESALE MARGIN. THIS IS ESPECIALLY TRUE IN A SITUATION WHERE THE SELLER CON TRIBUTES TO THE CREATION OR ITA NO. 278/DEL/2012 42 MAINTENANCE IF A INTANGIBLE PROPERTY, SUCH AS A MAR KETING INTANGIBLE, IN ITS ACTIVITIES; 29. IT IS CLEAR FROM THE SUBMISSIONS OF BOTH THE SI DES THAT THE ASSESSEE IS ROUTINE DISTRIBUTOR ENGAGED IN TRADING OF LIGHTENING PRODUC TS TO THE INDEPENDENT CUSTOMERS WITHOUT ANY VALUE ADDITION TO THE PRODUCT S PURCHASED FROM ITS AES. THEREFORE, THE ASSESSEE HAS RIGHTLY APPLIED RPM MET HOD. WE FURTHER OBSERVE THAT WHILE CALCULATING PLI FOR THE ASSESSMENT YEAR 2006- 07 AND 2007-08, THE LD. TPO/AO HAD ALSO ACCEPTED THE RPM METHOD APPLIED BY THE ASSESSEE. THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE ASSESSEE IS DEALING IN THE SAME BUSINESS AS WAS IN EARLIER YEARS. THEREFORE, T HE RULE OF CONSISTENCY IS APPLICABLE IN THE PRESENT CASE, AS DECIDED IN VARIO US DECISIONS. THE RULE OF CONSISTENCY IS ALSO SUPPORTED BY RULE 10D(4) AND TH E DECISION OF THE VISHAKHAPATTAM BENCH OF ITAT IN THE CASE OF KTC FER RO ALLOYS (P) LTD. VS. ACIT (2014) 43 TAXMANN.COM 152 WHEREIN FOLLOWING THE DEC ISION OF DELHI BENCH OF THE ITAT IN THE CASE OF HOSLEY INDIA PVT. LTD. VS. DCIT (ITA NO. 5904/DEL/2010 DATED 25.10.2012) AND THE PUNE BENCH OF ITAT IN THE CASE OF BRINTONS CARPETS ASIA PVT. LTD. VS. DCIT (2011) 46 SOT 289 (PUNE) HELD AS UNDE R : AS SEEN FROM THE ORDERS OF THE TPO IN LATER TWO YEAR S, WE ARE OF THE OPINION THAT CUP IS THE MOST APPROPRIATE METHOD AND ACCORDINGLY, WE ARE OF THE OPINION THAT TPO SHOULD HAVE BASED HIS ANALYSIS ON THE BASIS OF THE CUP METHOD ALONE, AS IN LATER YEARS. RULE OF CONSISTENC Y ALSO APPLIES TO THE FACTS OF THIS CASE. THE AO/TPO IS ACCORDINGLY DIRECTED TO ADOPT RPM ME THOD FOR CALCULATING THE PLI IN RESPECT OF LIGHTENING DIVISION. 30. THE RELEVANT FACTS RELATING TO GROUND NO. 14 ARE TH AT GET INDIA DOES ASSEMBLY OF SIGNALING PRODUCTS. FOR THIS PURPOSE IT IMPORTS PANELS FROM GE ITA NO. 278/DEL/2012 43 TRANSPORTATION SYSTEMS GLOBAL SIGNALING, LLC (GETS GS) AND GE TRANSPORTATION SYSTEMS SPA (GETS SPA). GET INDIA ASSEMBLES SIGNA LING PRODUCTS AND SELLS THEM TO INDIAN CUSTOMERS, MAINLY INDIAN RAILWAYS. IN THI S DIVISION, THE ASSESSEE HAS EARNED OPM OF (-) 132.72% WHEREAS THE ASSESSEE COMP ANY HAS COMPUTED 4.23% MARGIN OF COMPARABLES SELECTED BY HIM. IF THE LOW M ARGIN TURNOVER ARE EXCLUDED THEN THE AVERAGE PLI RISES TO 6.23%. THE ASSESSEE H AS NOT MADE ANY ADJUSTMENTS TO THE MARGINS IN LIGHT OF A DETAILED NOTE GIVEN BY HIM. THE HEAVY LOSS INCURRED BY ASSESSEE IN THIS DIVISION DUE TO NOT GRANTING APPRO VAL BY RDSO TIMELY. THE ASSESSEE HAD REQUESTED FOR ENTERTAINING ADJUSTMENT ON ACCOUNT OF HIGH IMPORT DUTY CONTAINED IN THE GOODS IMPORTED BY THIS ASSESS EE COMPANY FOR MANUFACTURING SIGNALING EQUIPMENTS. HE ALSO SUBMITT ED DETAILED WORKING OF IMPORT CONTENTS IN RESPECT OF OTHER COMPARABLES. BU T THE LD. AO/TPO DID NOT ACCEPT HEAVY OPERATING EXPENSES INCURRED AS A FIXED COST ON ACCOUNT OF DELAY IN THE APPROVAL OF ASSESSEES PRODUCTS BY VARIOUS AUTH ORITIES. ACCORDINGLY, THEY CALCULATED AVERAGE GROSS PROFIT MARGIN TO 23.50% AN D MADE THE FOLLOWING ADJUSTMENTS : INTERNATIONAL TRANSACTIONS FOR FY 2007-08 PERTAININ G TO IMPORT AND ASSEMBLING OF SIGNALING PRODUCTS SEGMENT: PARTICULARS AMOUNT (INR) OUTCOME OF TP ORDER IMPORT OF SIGNALING PRODUCTS 32,345,481 ADJUSTMENT OF INR 11,833,756 IN THIS REGARD, THE AR OF THE ASSESSEE MADE FOLLOWI NG WRITTEN SUBMISSIONS : ADJUSTMENT ON ACCOUNT OF HIGHER IMPORT CONTENT 48. THE LD. TPO EXAMINED GET INDIAS CONTENTION THAT TH E LOSSES WERE INCURRED ON ACCOUNT OF RDSO APPROVAL TO THE EQUIPMENT IMPORTED BY IT, WHICH RES ULTED IN HIGH OPERATING EXPENSES AND WHICH ITA NO. 278/DEL/2012 44 EVENTUALLY HAS CONTRIBUTED TO THE HIGH LOSSES INCUR RED BY THE COMPANY AND THEREBY COMPARED THE MARGINS AT GROSS LEVEL. HOWEVER THE LD. TPO FAI LED TO APPRECIATE THE CLAIM OF GET INDIA ON ACCOUNT OF EXCESS CUSTOM DUTY PAID BY TRANSPORTATIO N DIVISION AND MENTIONED THAT GET INDIA HAS NOT CARRIED OUT SIMULTANEOUS ADJUSTMENT ON ACCO UNT OF HIGHER PRICE REALIZATION. 49. THE COMPANY SUBMITS THAT THE TOTAL COST OF GOODS SO LD OF SIGNALING SEGMENT OF GET INDIA INCLUDES 64 PERCENT OF IMPORT COSTS WHEREAS IN CASE OF COMPARABLES THE AVERAGE IMPORT OVER TOTAL COSTS OF GOODS SOLD RATIO IS ONLY 14 PERCENT AS MENTIONED IN THE TABLE BELOW: AMOUNT (INR. IN CRORES) NAME OF THE COMPANY INCOME COST OF GOODS SOLD (COGS) IMPORTS IMPORTS AS % OF COGS GET INDIA 4.38 5.04 3.23 64.23% COMPARABLES ADTECH SYSTEMS LTD . 20.48 13.05 5.39 41.30% K DHANDAPANI& CO. LTD. 42.8 36.85 0.00 0.00% REMI SALES &ENGG. LTD. 45.59 36.37 0.00 0.00% AVERAGE IMPORT AS % OF COGS OF COMPARABLES 13.77% 50. THIS IMPLIES THAT GET INDIA IS SUBJECT TO PAY HIGHE R CUSTOM DUTY ON EXCESS IMPORT CONTENT OF AROUND 50 PERCENT HIGHER VIS--VIS ITS COMPARABLE C OMPANIES. THEREFORE, IN ORDER TO FUNCTIONALLY COMPARE THE RESULTS OF TRANSPORTATION DIVISION WITH THE OM OBTAINED BY COMPARABLES COMPANIES, AN ADJUSTMENT ON ACCOUNT OF EXCESS CUSTOM DUTY PAID BY TRANSPORTATION DIVISION IS WARRANTED. 51. IN THIS REGARD THE APPELLANT WOULD LIKE TO DRAW REF ERENCE ON THE PUNE TRIBUNAL DECISION IN THE CASE OF SKODA AUTO INDIA (P) LTD. VS ACIT ITA NO. 202/PN/07 , A.Y. 2003-04 . THE TRIBUNAL ACKNOWLEDGED THE DIFFERENCES ON ACCOUNT OF ADDITION AL IMPORT COST BETWEEN THE ASSESSEE AND THE COMPARABLES AND THEREFORE ALLOWED ADJUSTMENT ON ACCOUNT OF HIGHER COSTS INCURRED BY THE ASSESSEE. ON SIMILAR LINES, THE APPELLANT FURTHER RELIED ON THE DELHI TRIBUNAL RULING IN THE CASE OF DEMAG CRANES AND COMPONENTS (INDIA) PVT. LIMITED V/ S DCIT ITA NO. 120/PN/2011, A.Y. 2006-07 . THE TRIBUNAL RELIED ON THE DECISION IN THE CASE OF SKODA AUTO INDIA (P) LIMITED AND THEREFORE GRANTED ADJUSTMENT ON ACCOUNT OF ADDI TIONAL COSTS INCURRED BY THE ASSESSEE. 52. MOREOVER, IN TOYOTA KIRLOSKAR MOTORS PVT. LTD. V. ACIT ITA NO. 8 28/BANG/2010, AY: 2003- 04 THE HONBLE BANGALORE TRIBUNAL, WHILE REMITTING TH E MATTER TO THE TPO HAD OBSERVED THAT EVEN THOUGH A HIGHER IMPORT CONTENT DOES NOT WARRAN T AN AUTOMATIC ADJUSTMENT, WHAT IS REALLY TO BE SEEN IS WHETHER THE HIGH IMPORT CONTENT WAS N ECESSITATED BY CIRCUMSTANCES BEYOND THE ASSESSEES CONTROL. ITA NO. 278/DEL/2012 45 53. BASED ON THE ABOVE MENTIONED JUDICIAL PRECEDENTS, T HE APPELLANT SUBMITS THAT THE EXCESS CUSTOM DUTY PAID BY TRANSPORTATION DIVISION ON EXCE SS IMPORTS IS REQUIRED TO BE ADJUSTED TOWARDS THE COGS TO DETERMINE THE ADJUSTED GM OF GE T INDIA. PARTICULARS AMOUNT (INR) % IMPORT/ COGS OF TESTED PARTY A 64.23% % IMPORT /COGS OF COMPARABLES B 13.77% EXCESS IMPORTS C = A B 50.46% CUSTOM DUTY PAID DURING THE YEAR D 10,151,470 EXCESS CUSTOM DUTY E = (D*C)/A 7,975,385 THE COMPANY SUBMITS THAT IF THE GROSS MARGIN OF THE SEGMENT WAS ADJUSTED TO THE EXCLUDE THE ADDITIONAL COSTS INCURRED FOR CUSTOM DUTY AND THUS THE ADJUSTED GROSS MARGIN OF TRANSPORTATION DIVISION IS CONSIDERED, THE TRANSFER PRICING ADJUST MENTS AS PROPOSED IN THE TP ORDER BY THE LD. TPO NEEDS TO BE REVISED. ACCORDINGLY, THE COMPANY SUBMITS THAT THE TP ADJUST MENT IF ANY SHOULD NOT EXCEED THE FOLLOWING: PARTICULARS AMOUNT (INR) TP ADJUSTMENT CONSIDERED BY THE LD. TPO IN THE TP ORDER 11,833,756 LESS : CUSTOM DUTY ADJUSTMENT AS MENTIONED ABOVE 7,975,385 MAXIMUM POSSIBLE TP ADJUSTMENT 3,858,371 ACCORDINGLY, IF AT ALL ANY ADJUSTMENT IS DONE, EXCE SS IMPORT DUTY ADJUSTMENT SHOULD BE GRANTED AND ACCORDINGLY, THE TP ADJUSTMENT OUGHT NOT TO HAV E EXCEEDED INR 3,858,371. 31. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ER OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE LOSSES INCURRED DUE TO DELAY IN APPROVAL FROM RDSO AND INCURRED HEAVY IMPORT DUTY IS A REASON OTHER THAN I NTERNATIONAL TRANSACTIONS. IN ORDER TO SUPPLY THE SIGNALING EQUIPMENTS, THE ASSES SEE SHOULD HAVE OBTAINED APPROVAL FROM RDSO IN ADDITION TO INDIAN RAILWAY AP PROVALS. THE PILOT PROJECTS WERE FIXED PRICE CONTRACT WITHOUT AN ESCALATION CLA USE. HE FURTHER SUBMITTED THAT THE CASE LAWS RELIED BY THE ASSESSEE ARE ON DIFFERE NT FOOTINGS. THEREFORE, THE CASE LAWS DO NOT SUPPORT THE ASSESSEE. ITA NO. 278/DEL/2012 46 32. AFTER HEARING BOTH THE SIDES AND PERUSING THE E NTIRE MATERIAL AVAILABLE ON RECORD, WE OBSERVE THAT THE TOTAL COST OF GOODS SOL D OF SIGNALING SEGMENT INCLUDES 64% OF IMPORT COST, BUT IN THE COMPARABLES SELECTED BY THE AO/TPO, THE AVERAGE IMPORT OVER TOTAL COST OF GOODS SOLD IS ONLY 14%. I N THIS REGARD, THE LD. DRP HAS RIGHTLY DISCUSSED THIS ISSUE IN DETAIL AS UNDER : THUS WE FIND THAT ASSESSEE HAS INCURRED LOSS EVEN AT THE GROSS PROFIT LEVEL. IT MEANS THAT ASSESSEES EMPHASIS ON MAINTENANCE CHARGES IS MISPLACED, IN SO FAR AS THE ALP OF THE INTERNATIONAL TRANSACTIONS RELATED TO IMPORT OF MATERIAL FROM THE AES IS CONCERNED. THEREFORE, WE CONFINE OURSELVES TO ASSESSEES ARGUMENTS RELATED TO IMPORT CONTENT. BUT WE FIND THAT THE COST IS THE AMOUNT SPENT TO BRING THE GOODS TO PRESENT LOCATION AND CONDITION. IN CASE OF MATERIAL PURCHASED, THE COST OF MATERIAL IS NOT JUST THE PURCHASE PRICE, BUT INCLUDES THE DUTIES PAID AS WELL AS THE CARRIAGE & HANDLING COSTS. THIS FUNDAMENTAL PRINCIPLE OF ACCOUNTING IS EXPLICITLY SPELT OUT IN SECTION 145A OF THE INCOME TAX ACT. HENCE, COST OF GOODS SOLD CANNOT BE WORKED OUT EXCLUDING THE DUTIES. NO INDEPENDENT ENTERPRISE WOULD AGREE FOR A PURCHAS E PRICE WITHOUT TAKING INTO ACCOUNT THE DUTY STRUCTURE OR CARRIAGE COST. IGNORING THE DUTIE S FOR MAKING A PURCHASE DECISION OR BUDGETING FOR PROFITS IS NOT A NORMAL BUSINESS PRACTI CE. THE CUSTOMS DUTY IS PAID ON THE IMPORTS MADE FROM I TS AES. SO, IT FORMS PART OF THE COST OF PURCHASE OF MATERIAL. EVEN IN THE CASE OF INDEPENDE NT PARTIES, THE SAME WOULD FORM PART OF COST. IT IS A COMMERCIAL DECISION TO IMPORT OR TO P URCHASE LOCALLY. THE OTHER COMPARABLE COMPANIES PAY EXCISE DUTY AS W ELL AS SALES TAX ON THE INPUTS USED BY THEM. FURTHER, THE RATES OF EXCISE DUTY VARY ACROSS THE NATURE OF INPUTS. THUS, THESE ADJUSTMENTS ARE NOT WARRANTED AS MINOR FUNCTIONAL DIFFERENCES L IKE THAT OF SOURCING OF RAW MATERIALS LOCALLY OR IMPORTS WOULD NOT AFFECT NET MARGINS AS THE PRIC ING OF GOODS WOULD TAKE ALL THESE INTO ACCOUNT BY THESE COMPANIES. THE ITAT DELHI IN THE CASE OF SONY INDIA PVT. LTD. VS. DCIT (114 ITD 448 (DEL) HELD THAT THE IMPORT DUTY FORMS PART OF THE COST AND NO ADJUSTMEN T IS REQUIRED ON ACCOUNT OF CUSTOM DUTY. THE INDIAN ECONOMY IS GLOBALIZED ECONOMY AND IT DOES NOT SUFFER NOW WITH ISOLATION CREATED BY HIGH WALLS OF TARIFF TO PROTECT THE INDIGENOUS INDU STRY. THE TARIFF RATES RATHER BY CREATING THE PURCHASE PRICE PARITY CREATE A CHOICE BEFORE THE BUSI NESS ENTITIES AS TO WHETHER TO BUY THE MATERIAL FROM ABROAD OR LOCALLY. IF THERE IS NO LEVY OF TARIFFS, IT WILL LEAVE THE SCOPE OF PRICE DIFFERENCE BETWEEN THE TWO MARKETS AND THEREFORE, TH E FLOW OF TRADE WILL BE SUCH THAT ENTIRE PURCHASES OF GOODS WILL BE FROM CHEAPER MARKET AND G OODS WILL BE SOLD IN EXPENSIVE MARKET. THE TRADE FLOW WILL REMOVE THE DIFFERENCE IN THE PR ICE IN TWO MARKETS BUT IN THIS PROCESS MANUFACTURERS IN THE EXPENSIVE MARKET WILL SUFFER D UE TO RELATIVELY EXPENSIVE GOODS PRODUCED BY THEM ARE NOT SOLD AND, THEREFORE, BY TARIFFS LEV IED BY THE GOVERNMENTS THE PRICE PARITY IS CREATED IN GLABALIZED MARKET AND HIGH TARIFF WALLS A RE NOT CREATED TO PROTEST THE DOMESTIC INDUSTRIES. THUS THE CHOICE IS LEFT WITH THE BUYERS TO DECIDE AS TO THE MARKET FROM WHERE TO MAKE THE PURCHASES OF COMPARABLE GOODS. IF FOR COMPA RABLE GOOD, STILL HIGHER PRICE IS PAID BY ITA NO. 278/DEL/2012 47 THE BUYER, THEN IT IS QUITE POSSIBLE THAT IT IS DUE T O RELATED PARTY TRANSACTIONS. THE PURPOSE OF TRANSFER PRICING IS TO FIND OUT DIFFERENCE IN THE P RICES DUE TO FCTORS SUCH AS RELATED PARTY TRANSACTIONS BY COMPARING IT WITH SIMILAR TRANSACTI ONS BY UNDERTAKEN BY THE THIRD PARTIES AND THEREFORE, CALLING BASIC CUSTOM DUTY AS ADVANTAGEOUS IS AGAINST THE PRINCIPLES OF COMPARABILITY AND EXCLUSION THEREOF FROM PURCHASE PRICE WOULD CRE ATE THE DISTORTION IN THE PRICE OF TESTED PARTY AND IT WILL DECREASE THE COMPARABILITY. IMPORT OF INPUTS IS ASSESSEES CONSCIOUS CHOICE AND THERE ASSESSEE SHOULD NOT MAKE EFFORTS TO ARTIFICIA LLY IMPROVE THE PROFIT LEVEL BY REDUCING THE DENOMINATOR IN THE CALCULATION OF PROFIT LEVEL INDI CATOR. THIS APPROACH OF THE ASSESSEE WILL BE AT THE EXPENSE OF THE BASICS OF TRANSFER PRICING PRINCI PLES. IN THIS MATTER, IT MAY BE SAID THAT THE PURPOSE OF ANY ADJUSTMENT SHOULD BE TO IMPROVE THE COMPARABILITY BETWEEN THE INTERNATIONAL TRANSACTION(S ) UNDERTAKEN BY THE TESTED PARTY AND THE TRANSACTIONS UNDERTAKE BY UNCONTROLLED COMPARABL ES WITH UNRELATED PARTIES. THE PURPOSE WHILE MAKING ANY ADJUSTMENT CAN ALSO BE TO IMPROVE T HE COMPARABILITY BETWEEN THE TESTED PARTY AND THE UNCONTROLLED COMPARABLES. BUT IN OUR V IEW THE PURPOSE OF ANY ADJUSTMENT CAN NEVER BE TO IMPROVE THE PROFITABILITY OF THE TESTED P ARTY SO THAT IT COMPARES WELL WITH THE UNCONTROLLED COMPARABLES. THEREFORE, ANY EFFORT MAD E BY THE ASSESSEE TO PLEAD FOR AN ADJUSTMENT THAT WILL IMPROVE ITS PROFITABILITY IS MI SDIRECTED AND THEREFORE, SHOULD NOT BE ACCEPTED. THE ASSESSEE RELIES UPON SKODA AUTO INDIA PVT. LTD. VS ACIT- 2009-TIOL-214-ITAT, PUNE. THEREFORE, IT IS NECESSARY TO DISCUSS THE FACTS OF THAT CASE. THE BASIC FACTS IN THAT CASE WERE AS FOLLOWS : I. THE YEAR UNDER CONSIDERATION WAS THE FIRST YEAR OF OPERATION. II. THE IMPORT CONTENT OF RAW MATERIAL WAS AS HIGH AS 9 8.55% THE MAIN ARGUMENTS BY THE PUNE BENCH IN THE CASE OF SKODA WERE THAT: A. NO DOUBT, A HIGHER IMPORT CONTENT OF RAW MATERIAL BY ITSELF DOES NOT WARRANT AN ADJUSTMENT IN OPERATING MARGINS, AS WAS HELD IN SON Y INDIA LIMITEDS CASE (SUPRA), BUT WHAT IS TO BE REALLY SEEN IS WHETHER THIS HIGH IMPOR T CONTENT WAS NECESSITATED BY THE EXTRAORDINARY CIRCUMSTANCES BEYOND ASSESSEES CONTRO L. B. THE ARGUMENT BEFORE ITAT WAS THAT IT WAS FIRST YEAR OF ASSESSEES OPERATIONS AND COMPLETE FACILITIES ENSURING REASONABLE INDIGENOUS RAW MATERIAL CONTENT WAS NOT IN PLACE THE ASSESSEES CLAIM IS THAT IT WAS IN THESE CIRCUMSTANCES THAT THE ASSESSEE HAD TO SELL THE CARS WITH SUCH HIGH IMPORT CONTENTS, AND E SSENTIALLY HIGH COSTS, WHILE THE NORMAL SELLING PRICE OF THE CAR WAS COMPUTED IN THE LIGHT OF THE COSTS AS WOULD APPLY WHEN THE COMPLETE FACILITIES OF REGULAR PRODUCTION ARE IN PLACE. C. THE ITAT REMITTED THIS MATER TO THE FILE OF THE TRA NSFER PRICING OFFICER FOR FRESH ADJUDICATION IN THE LIGHT OF ITS OBSERVATIONS AND P ARTICULARLY DEALING WITH THE CONTENTION THAT THE PRESENT YEAR BEING FIRST FULL YE AR OF OPERATIONS, THE ASSESSEE WS FORCED TO HAVE HIGHER IMPORT CONTENT IN RAW MATERIA L AS THE MANUFACTURING FACILITIES, AND VENDOR DEVELOPMENT WAS NOT COMPLETE, AS ALSO DE ALING WITH THE CONTENTION THAT THE BUSINESS MODEL IN THIS YEAR OF OPERATION WAS FUNDAME NTALLY DIFFERENT FROM THE BUSINESS MODEL OF THE COMPARABLE CONCERNS. THE TRANSFER PRICI NG OFFICER WAS ALSO ASKED TO CONSIDER WHETHER THE IMPORT CONTENT OF THE RAW MATE RIAL HAVE SUBSTANTIALLY COME DOWN IN SUCCEEDING YEARS AND WILL TAKE INTO ACCOUNT THE CONCLUSIONS THAT CAN BE DRAWN FROM SUCH A DECLINE OR CONSISTENCY AS THE CASE MAY BE, OF THE IMPORT CONTENT IN THE RAW ITA NO. 278/DEL/2012 48 MATERIAL. IN CASE THE TRANSFER PRICING OFFICER COME TO THE CONCLUSION THAT ADJUSTMENTS IN OPERATION PROFITS MARGIN ON ACCOUNT OF PECULIARITIE S OF BUSINESS MODEL RESULTING IN HIGHER IMPORT DUTIES, THE TRANSFER PRICING OFFICER WILL CONSIDER THE MANNER IN WHICH IMPACT OF THE SAME CAN BE REASONABLY NEUTRALIZED IN A PRACTICAL MANNER. THUS, THE HONBLE ITAT HELD THAT ADJUSTMENT FOR CUST OM DUTY NEED NOT BE MADE IN ALL CASES UNLESS SPECIAL CIRCUMSTANCES WARRANT SUCH ADJUSTMEN T. THUS, IN THE INITIAL YEARS WHEN MNC VEHICLE MANUFACTURERS DO NOT HAVE SUFFICIENT FACILI TIES TO INDIGENIZE THE COMPONENTS, THEN THERE NEEDS TO BE AN ADJUSTMENT FOR CUSTOMS DUTY. TH OUGH THE HON. TRIBUNAL IN THE CASE OF SKODA ACCEPTED THAT USE OF EXTRA ORDINARY HIGH CONT ENT OF IMPORTED MATERIAL WAS NOT A CHOICE OF THE COMPANY, RATHER IT WAS THE COMPULSION OF THE COMPANY; STILL IT IS IMPORTANT TO NOTE THAT THE HON. TRIBUNAL HAS NOT SUGGESTED THAT T HE CUSTOM DUTY SHOULD BE EXCLUDED FROM THE PURCHASE PRICE. RATHER, THE HON. TRIBUNAL H ELD THAT THE TPO SHOULD FIND OUT THE MEANS OF NEUTRALIZING THE IMPACT OF HIGH CUSTOM DUT Y RATE IN THE CASE OF SKODA. THERE IS NO PECULIAR CIRCUMSTANCE IN THE CASE OF ASSESSEE. THE ASSESSEE IS IN A PREMIUM SEGMENT WHEREIN IT WAS INTENDING TO IMPORT SIGNALING EQUIPM ENTS AND SUPPLY THE SAME TO RAILWAYS AFTER SUITABLE MANUFACTURING TO BE EFFECTED IN INDIA TO SUIT THE INDIAN REQUIREMENTS. IMPORT OF INPUTS IS NOT A COMPULSION IN ITS CASE. RATHER, IT IS A CONSCIOUS DECISION OF THE COMPANY IN THE GIVEN CIRCUMSTANCES AND THEREFORE, PAYMENT OF BA SIC DUTY IS NOT A COMPULSION IN THE CASE OF ASSESSEE. THEREFORE, THERE IS NO NEED OF EV EN NEUTRALIZING THE IMPACT OF CUSTOM DUTY PAID. CLAIM FOR EXCLUDING CUSTOM DUTY FROM PURCHASE PRICE IS ASKING FOR TOO MUCH IN THE GIVEN CIRCUMSTANCES. 33. FROM THE ABOVE FINDING OF THE LD. DRP, THE AO A ND TPO HAVE RIGHTLY MADE ADDITION OF RS.1,18,33,756/- IN THE TRANSPORTATION DIVISION. AFTER CONSIDERING ALL THE SUBMISSIONS FROM BOTH THE SIDES, WE FIND NO INF IRMITY IN THE ORDER OF THE DRP/ AO/TPO ON THIS COUNT. THEREFORE, THIS GROUND IS REJ ECTED. 34. IN RESPECT OF GROUND NO. 15, AT THE OUTSET OF HEARI NG, THE LD. AR DID NOT PRESS THE PROVISION FOR ONEROUS CONTRACT ISSUE. THE BRIE F FACTS OF THE CASE ARE THAT GEWPT INDIA IMPORTS RAW MATERIALS FROM AES AND LOCA L THIRD PARTY SUPPLIERS. GEWPT INDIA IS ENGAGED IN THE MANUFACTURE OF SPECIA LTY CHEMICALS, MORE SPECIFICALLY, WATER TREATMENT CHEMICALS AND PULP AN D PAPER PRODUCT CHEMICALS. THE LD. AO/TPO OBSERVED THAT THE GROSS MARGIN DECLI NED FROM 55.35% IN 2006-07 TO 48.92% IN 2007-08 RESULTING INTO DECLINE IN GROS S MARGIN OF 6.43%. THE GROSS MARGIN SHOWN BY THE ASSESSEE WAS MUCH LOWER THAN TH E MARGINS SHOWN BY ITS ITA NO. 278/DEL/2012 49 COMPARABLES SELECTED BY THE ASSESSEE. IN THIS REGAR D, A SHOW CAUSE NOTICE WAS GIVEN TO THE ASSESSEE. THE ASSESSEE SUBMITTED DETAI LED REPLY DATED 13.10.2011 AND TRIED TO JUSTIFY THE DECLINE IN MARGIN DUE TO D ECLINE IN THE MARGIN ON SOME OF THE LARGE VALUE CONTRACTS ENTERED INTO BY THE COMPA NY DURING THE YEAR AND OPERATING COST DID NOT DECLINE PROPORTIONATELY AND INCREASE IN PERSONAL COST, OTHER OPERATING COSTS, PROVISION FOR ONEROUS CONTRACTS AN D LONG TERM CONTRACTS. BUT THE LD. AO/TPO DID NOT ACCEPT THE CONTENTION OF THE ASS ESSEE AND MADE UPWARD ADJUSTMENT AS UNDER : INTERNATIONAL TRANSACTIONS FOR FY 2007-08 PERTAININ G TO IMPORT OF RAW MATERIALS/REAGENTS FOR MANUFACTURE OF SPECIALTY CHE MICALS PARTICULARS AMOUNT (INR) OUTCOME OF TP ORDER IMPORT OF RAW MATERIALS/ REAGENTS FOR MANUFACTURE OF SPECIALTY CHEMICALS 37,879,772 ADJUSTMENT OF INR 31,202,495 THE ASSESSEE HAS SUBMITTED A WRITTEN SUBMISSION WHI CH READS AS UNDER : 54. THE APPELLANT SUBMITS THAT DURING THE YEAR THE MANU FACTURING SEGMENT OF WATER DIVISION HAS INCURRED LOSSES (-0.63%). 55. PROVISION FOR ONEROUS CONTRACTS: WATER DIVISION CREATED A PROVISION FOR ONEROUS CON TRACTS OF INR 5,631,443. THIS WAS AN UNUSUAL EXPENSE BOOKED A S WATER DIVISION FORESEES NON-PAYMENT ON ACCOUNT OF FEW OF ITS CUSTOMERS. 56. RE-COMPUTATION OF NORMAL OPERATING MARGIN -THE APPELLANT WOULD LIKE TO SUBMIT THAT WHILE COMPUTING THE OPERATING MARGIN OF THE MANUFACTURING SEGMENT OF THE WATER DIVISION IN THE TP STUDY, THE PROVISION FOR ONEROUS CONTRACTS OF INR 5 ,631,443 WHICH IS AN EXTRAORDINARY EXPENDITURE HAS TO BE EXCLUDED FROM THE TOTAL COSTS . YOUR GOOD SELF WOULD APPRECIATE THE FACT THAT THIS IS AN UNUSUAL EXPENSE AND SHOULD BE EXCLU DED WHILE COMPUTING THE NORMAL OPERATING PROFIT MARGIN FOR THE PURPOSES OF COMPARABILITY ANA LYSIS. 57. IN THIS REGARD, THE APPELLANT WOULD LIKE TO PLACE R ELIANCE ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN COMMISSIONER OF INCOME TAX V. TRANSWITCH INDIA PVT. LTD. ITA 678 OF 2012 WHERE THE HONBLE COURT WAS DEALING WITH ASSESSEES CONTENTION OF COMPARABILITY ADJUSTMENT ON ACCOUNT OF RELOCATION AND OTHER EXPENSES INCURRE D (EXTRAORDINARY EXPENSE), TO THE ASSESSEES OPERATING MARGIN. THE COURT WHILE ACCEPTING THE ITA T DECISION OBSERVED AS UNDER: ITA NO. 278/DEL/2012 50 IT IS NOT DISPUTED THAT IF THE FIGURE OF RS. 1,11, 73,078/- IS DULY ACCOUNTED FOR AND TAKEN INTO CONSIDERATION, THEN THE OPERATING MARGIN OF THE RES PONDENT/ASSESSEE COMES TO 17.80%, WHICH IS HIGHER THAN THE COMPARABLE OPERATING MARGIN OF 17.09 %, TAKEN AS A BENCHMARK BY THE TPO. SUBMISSION ON BEHALF OF THE APPELLANT THAT THE PARENT COMPANY SHOULD HAVE SHARED THE BURDEN OR A PART THEREOF IS NOT LEGALLY TENABLE. THE SAID EXPE NDITURE WAS INCURRED BY THE INDIAN COMPANY BECAUSE OF PECULIAR PROBLEMS FACED BY THEM AS A RESUL T OF WHICH THEY HAD TO SHIFT THE PLACE FROM WHERE THEY WERE OPERATING. THE ABNORMALITY AND DIFF ICULTY RESULTING IN EXTRA EXPENDITURE WAS NOT CREATED OR CAUSED BY THE ASSOCIATED ENTERPRISE. THE Y WERE NOT RESPONSIBLE OR LIABLE FOR THE SAID PAYMENTS/EXPENDITURE. THE ASSOCIATED ENTERPRISE DID NOT HAVE LEGAL OR CONTRACTUAL OBLIGATION TO MAKE EXTRA OR ADDITIONAL PAYMENT BEYOND THE TRUE AN D CORRECT VALUE OF THE TRANSACTION. 58. SIMILARLY, THE HONBLE DELHI BENCH OF THE ITAT HAS ALLOWED A COMPARABILITY ADJUSTMENT ON ACCOUNT OF INCURRING OF EXTRAORDINARY EXPENSES, IN ORDER TO ELIMINATE FUNCTIONAL DIFFERENCES, IN THE FOLLOWING CASES- GLOBAL TURBINE SERVICES INC. V. ADIT ITA NO. 3484/D EL/2011 : ADJUSTMENT ALLOWED ON ACCOUNT OF UNDER CAPACITY UTILIZATION. G4S SECURE SOLUTIONS V. ACIT ITA NO. 1540/DEL/2012 : ADJUSTMENT ALLOWED ON ACCOUNT OF EXTRAORDINARY EXPENSES. HCL TECHNOLOGIES BPO SERVICES LTD . V. ACIT ITA NO. 3547/DEL/2010. HONDA TRADING CORP. INDIA PVT. LTD. V. ACIT (2014) 146 ITD 591 (DELHI) : ADJUSTMENT ALLOWED ON ACCOUNT OF EXCHANGE RATE FLUCTUATIONS. 59. IN LIGHT OF THE ABOVE JUDICIAL DECISIONS, THE APPEL LANT HAS COMPUTED THE CORRECT OPERATING PROFIT MARGIN OF THE MANUFACTURING SEGMENT OF THE WATER DI VISION WHICH IS PROVIDED BELOW FOR YOUR GOOD SELFS REFERENCE: PARTICULARS OM AS PER TP STUDY ADJUSTED OM SALE OF MANUFACTURED GOODS 421,297,311 421,297,311 MATERIAL COSTS 216,827,164 216,827,164 DECREASE/ (INCREASE) INVENTORIES OF WORK IN PROGRESS (1,879,352) (1,879,352) GROSS PROFIT 206,349,499 206,349,499 GROSS PROFIT MARGIN 48.98% 48.98% OPERATING EXPENSES 207,296,346 207,296,346 PROVISION OF ONEROUS CONTRACTS 5,631,443 ADD: OTHER INCOME 3,920,114 3,920,114 OPERATING PROFIT (2,658,176) 2,973,267 OPERATING MARGIN (OM) - 0.63% 0.71% ITA NO. 278/DEL/2012 51 PROPORTIONATE SEGMENTATION FOR LOW PURCHASES FROM R ELATED PARTY 60. WITHOUT PREJUDICE TO THE TP STUDY, THE COMPANY WISH ES TO SUBMIT THAT THE DIVISION HAS PURCHASES FROM RELATED AND UNRELATED PARTY AS WELL. THE RATIO OF MATERIALS PURCHASED FROM AES TO THE TOTAL MATERIAL COSTS IS AS FOLLOWS: PARTICULARS AMOUNT (INR) TOTAL MATERIAL COST 216,827,164 COST OF GOODS PURCHASED FROM RELATED PARTIES 37,879,772 IMPORTS FROM AE/ TOTAL RAW MATERIAL COST 17.47% 61. CONSIDERING THE MINISCULE PROPORTION OF INTERNATION AL TRANSACTIONS, AMOUNTING TO 17.47% OF THE RAW MATERIAL COSTS FROM ASSOCIATED ENTERPRISES TO T OTAL MATERIAL COSTS, IF AT ALL AN ADJUSTMENT WERE TO BE CONSIDERED, THE ENTIRE ADJUSTMENT CANNOT BE ATTRIBUTED TO THE PURCHASES FROM RELATED PARTIES. THE TRANSFER PRICING ADJUSTMENT SH OULD BE LIMITED TO THE PROPORTIONATE VALUE OF THE INTERNATIONAL TRANSACTIONS OF PURCHASE FROM ASS OCIATED ENTERPRISES, THEREBY LIMITING ANY ADJUSTMENT TO 17.47% OF THE TURNOVER . [REFER PAGE 166 TO PAGE 170 OF THE APPEAL MEMO]. 62. IN THIS REGARD THE APPELLANT DRAWS REFERENCE TO PAR AGRAPH NUMBERS 31 TO 33 OF POWER CONTROL DIVISION OF THIS EXECUTIVE SUMMARY WHERE DETAILED R EFERENCES ON PROPORTIONATE ADJUSTMENT ARE DISCUSSED AT LENGTH. THE SAME ARE SQUARELY APPLICA BLE TO WATER AND PROCESS DIVISION AS WELL. 63. ACCORDINGLY, THE APPELLANT SUBMITS THAT CONSIDERING THE VERY LOW QUANTUM OF THE MATERIAL COSTS REPRESENTING THE INTERNATIONAL TRANSACTION OF THE S EGMENT FOR FY 2007-08 VIS--VIS THE TOTAL EXPENSES AND THE TOTAL MATERIAL COSTS OF THE SEGMEN T, ANY SUCH ADJUSTMENT, IF AT ALL, CAN BE MADE ONLY TO THE PROPORTIONATE SALES MADE OUT OF RAW MAT ERIALS IMPORTED FROM THE ASSOCIATE CONCERNS AND NOT IN RESPECT OF TOTAL SALES OF MANUFACTURED I TEMS WHICH WERE MANUFACTURED FROM THE TOTAL RAW MATERIALS PROCURED THIRD PARTIES AS WELL. 64. THE COMPUTATION OF THE PROPORTIONATE ADJUSTMENT IS PROVIDED BELOW: PARTICULARS IF ADJUSTMENT FOR ONEROUS CONTRACT IS PROVIDED IF ADJUSTMENT FOR ONEROUS CONTRACT IS NOT PROVIDED ACTUAL SALES PRO - RATED TO 17.47% (AMOUNT IN INR) SALES 73,600,769 73,600,769 MATERIAL COST 37,879,772 37,879,772 INVENTORY - 328,323 - 328,323 OPERATING EXPENSES 36,214,735 37,198,550 ITA NO. 278/DEL/2012 52 ADD: OTHER INCOME 684,845 684,845 OPERATING PROFIT 519,431 - 464,384 OPERATING PROFIT MARGIN (%) 0.71% - 0.63% ADJUSTED TO ALP OF 6.78% 4,990,132 4,990,132 DIFFERENCE IN ALP AND ACTUAL 4,470,702 5,454,517 THE APPELLANT DRAWS REFERENCE TO PARAGRAPH NUMBERS 31-33 IN THE POWER CONTROL DIVISION AND TO ORDERS ISSUED BY TPO AND DRP FOR RESPECTIVE YEAR S AS THEY ARE SQUARELY APPLICABLE TO WATER AND PROCESS DIVISION AS WELL. THE APPELLANT SUBMIT S THAT IF AT ALL ANY ADJUSTMENT IS WARRANTED, IT OUGHT NOT TO HAVE EXCEEDED INR 4,470,702. WITHOUT P REJUDICE TO THE STAND CONSIDERED IN THE TP STUDY, IF ONEROUS CONTRACTS ADJUSTMENT IS NOT GRANT ED, THE ADJUSTMENT WOULD STILL NOT EXCEED INR 5,454,517. 35. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ER OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE ASSESSEE ITSELF HAD SELECTED THE COMPARABLES IN THE TP STUDY AND NO EXCEPTIONAL REASON HAS BEEN CITED BY THE ASSESSEE C OMPANY FOR THE SUGGESTED DEVIATION FROM THE MARGIN OF THE COMPARABLES. THE CASE LAWS C ITED BY THE LD. AR ARE NOT APPLICABLE BECAUSE THE AR WAS UNABLE TO SHOW THAT T HE FACTS OF THE CASE ARE SIMILAR WITH THE CASE LAWS CITED BY THE AR OF THE ASSESSEE. 36. AFTER HEARING BOTH THE SIDES AND PERUSING THE E NTIRE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE LD. DRP/AO/TPO HAS PASSED A GOOD R EASONED ORDER AND DETAILED ANALYSIS HAS BEEN MADE FROM THE SUBMISSIONS MADE BY THE ASSESSEE. THE FINDINGS REACHED BY THE LOWER AUTHORITIES ARE AS UNDER : 11.3. THE REPLY GIVEN BY THE ASSESSEE IS NOT ACCEP TABLE IN LIGHT OF THE FACT THAT THE COMPARABLES HAVE BEEN SELECTED BY THE ASSESSEE. IT IS CLEAR THAT THE COMPARABLES WOULD ALSO BE UNDER THE SIMILAR TRAIN FACED BY THE ASSESSEE COMPANY. NO EXCEPTIONAL REASON HAS BEEN CITED BY THE ASSESSEE COMPANY FOR THE SUGGESTED DEVIATION FROM THE MARGIN OF THE COMPARABLES. THE COMPANY HAS CONTINUED TO EMPLOY FURTHER MANPOWER. THIS S NOT TH E FIRST YEAR OF ASSESSEE MANUFACTURING ACTIVITY. AS REGARDS THE PROVISION FOR ONEROUS CONTRACTS, THE AS SESSEE HAS NOT BEEN ABLE TO DEMONSTRATE THE SAME FROM ITS BOOKS OF ACCOUNTS. HENCE, THE CLAIM OF ONE ROUS CONTRACTS IS NOT FOUND ACCEPTABLE. THIS IS A CLAIM MADE FOR THE FIRST TIME AND THE ASSESSEE SHOU LD HAVE PROVIDED SUITABLE SUPPORTING DOCUMENTATION FOR THE SAME. THE ASSESSEE HAS ALSO C LAIMED THAT PROPORTIONATE DISALLOWANCE SHOULD BE MADE IN ITS CASE AS THE IMPORTED COSTS ARE MEREL Y 17% OF THE TOTAL RAW MATERIAL COSTS INCURRED BY THE ASSESSEE COMPANY. AS ALSO DISCUSSED ABOVE, SUCH CLAIM OF THE ASSESSEE COMPANY IS LIABLE TO BE ITA NO. 278/DEL/2012 53 REJECTED IN LIGHT OF THE RATIONALE OF ATTRIBUTING A NY VARIATION IN THE PLI BETWEEN THE ASSESSEE AND TH E COMPARABLE SET TO THE RELATED PARTY TRANSACTIONS. THUS WE FIND THAT THERE IS NOTHING WHICH THE TPO HA S NOT CONSIDERED AND THERE IS NOTHING MORE WE HAVE TO CONSIDER NOW. WE AGREE WITH THE TPO THAT TH E COMPARABLES ARE IDENTIFIED BY THE ASSESSEE, AND THAT THE COMPARABLES WOULD ALSO BE UNDER THE SI MILAR STRAIN AS FACED BY THE ASSESSEE COMPANY. IN ABSENCE OF ANY REASON TO DISAGREE WITH THE TPO WE U PHOLD THE APPROACH. FROM THE ABOVE SUBMISSIONS OF THE ASSESSEE, THERE I S NO EXTRAORDINARY EVENT PROVED BY THE ASSESSEE. THE HIGH CUSTOM DUTY IS A ROUTINE TRA NSACTION, WHICH IS APPLICABLE AT THE TIME OF IMPORT OF GOODS. AFTER CONSIDERING THE SUB MISSIONS FROM BOTH THE SIDES, WE, THEREFORE, FIND NO INFIRMITY IN THE ORDERS OF THE L D. AUTHORITIES BELOW ON THIS ACCOUNT. ACCORDINGLY, THIS GROUND OF APPEAL IS REJECTED. IN RESPECT OF GROUND NO. 16, THE DIVISION-WISE FACT S, IN BRIEF, ARE AS UNDER : 1. MARKETING SUPPORT DIVISION (MSD): MSD IS ENGAGED IN UNDERTAKING MARKET RESEARCH ACTIVITIES, IDENTIFYING AND SEEKING BUSINESS OPPORT UNITIES, PROVIDING INFORMATION RELATING TO PRODUCTS AND SERVICES, ACTING AS A CHANNEL OF COMMU NICATION AND GATHERING AND PROVIDING INFORMATION ON CURRENT TRENDS, TECHNOLOGICAL DEVELO PMENTS, COMPETITORS AND GOVERNMENT POLICIES. 2. SENSING DIVISION: THE SENSING DIVISION PERFORMS MARKETING SUPPORT SE RVICES FOR THE SALE OF THE EQUIPMENT IN INDIA. IT IDENTIFIES, MAINTAINS AND DE VELOPS LOCAL RELATIONSHIPS WITH CUSTOMERS AND CLARIFIES THE PRODUCTS REQUIREMENTS OF CUSTOMERS. 3. INSPECTION AND TECHNOLOGIES DIVISION: THE INSPECTION TECHNOLOGIES DIVISION PERFORMS MARKETING SUPPORT SERVICES FOR THE SALE OF BIG EQUI PMENT IN INDIA, WHICH ARE DIRECTLY SHIPPED FROM RELATED PARTIES. IT IDENTIFIES, MAINTAINS AND DEVELOPS LOCAL RELATIONSHIPS WITH CUSTOMERS. THE DIVISION RECOMMENDS IMPROVEMENTS TO SALES PLANS , ASSISTS IN THE DEVELOPMENT OF STRATEGY, AND CLARIFIES THE PRODUCTS REQUIREMENTS OF CUSTOMER S AND ALSO ASSISTS IN RESOLUTION OF CUSTOMER CLAIMS AND COMPLAINTS ON QUALITY, DELIVERY, ETC. BY COORDINATING WITH AES. 4. WATER AND PROCESS TECHNOLOGIES DIVISION: ONE OF THE EMPLOYEES OF GEWPT INDIA PROVIDED MARKETING SUPPORT SERVICES FOR GE OSMONICS INC., US IN INDIA. THE SERVICES PROVIDED WERE IN THE NATURE OF IDENTIFYING AND SEEKING BUSINESS OPPORTUN ITIES AND PROVIDING INFORMATION RELATING TO PRODUCTS AND SERVICES OF GE OSMONICS INC. AND ITS A FFILIATE ENTITIES TO POTENTIAL CUSTOMERS IN INDIA. HE ACTED AS A CHANNEL OF COMMUNICATION BETWE EN CUSTOMERS IN INDIA AND GE OSMONICS AND ITS AFFILIATE ENTITIES. THESE SERVICES WERE PRO VIDED DURING THE MONTHS FROM APRIL TO JUNE 2007. THE LD. TPO/AO MADE THE FOLLOWING ADJUSTMENTS : ITA NO. 278/DEL/2012 54 PARTICULARS AMOUNT (INR) ADJUSTMENT AS PER TP ORDER (INR) ADJUSTMENT AS PER DRP DIRECTIONS (INR) MARKETING SUPPORT DIVISION 509,395,183 64,038,252 56,906,719 SENSING DIVISION 61,019,533 4,620,326 3,737,355 INSPECTION TECHNOLOGIES DIVISION 18,889,891 2,332,902 2,104,995 WATER AND PROCESS TECHNOLOGIES DIVISION 291,742 13,599 17,849 TOTAL 589,596,349 71,005,079 62,766,919 37. THE LD. AR OF THE ASSESSEE MADE FOLLOWING WRITTEN S UBMISSIONS AND RELIED ON THE SAME : I. ERRONEOUS SELECTION OF COMPARABLE COMPANIES THE COMPANY SUBMITS THAT THE LD. TPO GROSSLY ERRED IN SELECTING COMPARABLE COMPANIES. AS PER THE DIRECTIONS GIVEN BY THE LD. DRP, THE LD. TPO EX CLUDED ONE COMPARABLE COMPANY AND ADOPTED THE CORRECT OPERATING MARGIN FOR TWO COMPAR ABLE COMPANIES. THE ARITHMETIC MEAN OF THE COMPARABLES AS PER THE DRP DIRECTIONS IS PROVID ED IN THE TABLE BELOW. SL. NO. NAME OF THE COMPARABLES OP/TC 1 BEST MULYANKAYAN CONSULTANTS LTD 12.85% 2 CHOKSI LABORATORIES LTD 27.54% 3 GENINS INDIA LTD 9.22% 4 IDC (INDIA) LIMITED 15.48% 5 INDIA CEMENTS CAPITAL LTD 30.91% 6 INDUS TECHNICAL & FINANCIAL CONSULTANTS LTD. 14.56% 7 RITES LIMITED 15.93% 8 TECHNICOM CHEMIE (I) LIMITED 7.32% ARITHMETIC MEAN 16.73% GIVEN THE ABOVE EIGHT COMPARABLE COMPANIES, THE APP ELLANT CONTENDS THAT THE COMPARABLES CHOSEN BY THE LD. TPO DO NOT FALL IN SIMILAR CATEGO RY OF PROVIDING SUPPORT SERVICES AND THUS DO NOT SATISFY THE FUNCTIONAL COMPARABILITY. FOR THESE PURPOSES THE APPELLANT SUBMITS BELOW THE REASONS FOR REJECTING A FEW OF THE COMPARABLE COMPA NIES. II. ASSESSEES CONTENTIONS - COMPANIES TO BE EXCLUDED CHOKSI LABORATORIES LIMITED (CHOKSI): THE SERVICE OFFERINGS OF THE COMPANY INCLUDE CONTRACT LABORATORY SERVICES, INSTRUMENT CALIBRATIO N & VALIDATION SERVICES, ENVIRONMENT MANAGEMENT SERVICES, CLINICAL RESEARCH, CONSULTANCY AND ASSAYING &HALLMARKING. HENCE, THE APPELLANT CONTENDS THAT CHOKSI CANNOT BE COMPARED T O THE MARKETING SUPPORT ACTIVITY. ITA NO. 278/DEL/2012 55 FURTHER, INFORMATION FROM THE PROWESS DATABASE ALSO SUBSTANTIATES THE FACT THAT CHOKSIS MAIN ACTIVITY IS IN MEDICAL TESTING CENTRES/LABS. IT WOU LD BE RELEVANT TO MENTION THAT A REVIEW OF THE PROWESS DATABASE REVEALS THAT CHOKSI IS CLASSIFIED UNDER THE CATEGORY OF 'MEDICAL TESTING CENTERS AND LAB' AND IS LISTED UNDER HOSPITAL ACTIV ITIES. IT IS A COMPANY WHICH IS LISTED WHEN A SEARCH IS CONDUCTED UNDER THE SEARCH STRING 'MEDICA L TESTING CENTERS AND LAB' IN PROWESS DATABASE. RELEVANT EXTRACTS FROM THE DATABASE ARE PROVIDED AS ANNEXURE4 FOR READY REFERENCE. THIS FURTHER STRENGTHENS THE APPELLANTS ARGUMENT T HAT CHOKSI CANNOT BE TAKEN AS A COMPARABLE BY THE LD. TPO. IN ADDITION TO THE ABOVE, THE APPELLANT THINKS IT I S RELEVANT TO ALSO DRAW REFERENCE TO THE MUMBAI TRIBUNAL 5 RULING IN THE CASE OF EVONIK DEGUSSA INDIA PRIVATE LIMITED. THE COMPANY EVONIK DEGUSSA INDIA PRIVATE LIMITED WAS ENGAGED IN ANALYTICAL SUPPORT SERVICES (R&D SUPPORT SERVICES AND TESTING ACTIVITIES). IN THIS CASE, CHOKSI WAS CONSIDERED AS A COMPARABLE TO EVONIK DEGUSSA INDIA PRIVATE LIMITED AND THE SAME WAS ACCEPTED BY THE TPO, THE COMPANY A ND THE TRIBUNAL. IN ADDITION TO CHOKSI, OTHER SIMILAR COMPANIES, NAMELY, (I) GVK BIOSCIENCE PRIVATE LIMITED, (II) TCG LIFE SCIENCE LIMITED, AND (III) VIMTA LABS WERE ALSO CONSIDERED. A RELEVANT EXCERPT FROM THE RULING IS PROVIDED BELOW FOR QUICK REFERENCE. THIS EMPHASIZE S THE FACT THAT CHOKSI CANNOT BE COMPARED TO MARKETING SUPPORT ACTIVITY. 21.. IN VIEW OF OUR AFORESAID FINDINGS, ONLY FOUR SET OF COMPANIES WHICH HAS BEEN ACCEPTED BY BOTH THE TPO AS WELL AS THE ASSESSEE VIZ. CHOKSI LABS LTD., VIMTA LAB LTD., G.V.K. BIOSCIENCES P. LTD. AND TCG LIFESCIENCE LTD., SHOUL D BE INCLUDED FOR THE PURPOSES OF COMPARABILITY ANALYSIS AND THE ARITHMETIC MEAN OF TH E PLI OF THESE FINAL SET OF COMPANIES BY TAKING OPERATING PROFIT OF THE TOTAL COST SHOULD BE TAKEN FOR THE PURPOSE OF DETERMINING THE ALP. THE APPELLANT WOULD ALSO LIKE TO PLACE RELIANCE ON THE DECISION HONBLE DELHI ITAT IN THE CASE OF OF YUM! RESTAURANTS (INDIA) PRIVATE LTD.(ITA NO.6168/D EL./2012), AND CIENA INDIA PVT. LTD. (ITA NO.3324/DEL/2013), WHEREIN CHOKSI HAS NOT BEEN CONSIDERED AS COMPARABL E TO COMPANIES PROVIDING MARKET SUPPORT SERVICES. THE R ELEVANT EXTRACTS ARE REPRODUCED BELOW: YUM! RESTAURANTS (INDIA) PRIVATE LTD. THE ASSESSEE HAS RAISED THE ISSUE THAT DRP/TPO HAS ERRED IN CONSIDERING AN INAPPROPRIATE SET OF COMPANIES WHICH HAS BEEN TAKEN AS COMPARABLE T O THE SUPPORT SERVICES OUTSIDE INDIA SEGMENT OF THE ASSESSEE. SIMILARLY, COMPARABILITY WITH M/S. CHOKSI LABORATORI ES LTD. IS NOT JUSTIFIED AS THE COMPANYS ASSETS EMPLOYED COMPRISES SIGNIFICANTLY OF TESTING EQUIPMENTS WHICH FURTHER EMPHASIZES THE FACT THAT THE COMPANYS FUNCTIONAL PROFILE IS DIFFE RENT VIS--VIS THE ASSESSEE. ACCORDINGLY, WE DIRECT TO RECOMPUTE THE ALP BY EXCL UDING THE FOLLOWING COMPARABLES TAKEN BY THE TPO :- (I) M/S. SAKET PROJECTS LIMITED; ITA NO. 278/DEL/2012 56 (II) M/S. CHOKSI LABORATORIES LIMITED; (III) M/S. WAPCOS (INDIA) LIMITED; AND (IV) M/S. RITES LIMITED. CIENA INDIA PVT. LTD. (ITA NO.3324/DEL/2013) CHOKSI LABORATORIES LTD. 15. .WE FAIL TO APPRECIATE AS TO HOW MARKETING SUP PORT SERVICES CAN BE EQUATED WITH TESTING SERVICES ..BY NO STANDARD, THIS COMPANY CAN BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE COMPANY. WE, THEREFORE, DIRECT THE EXCLUSION OF THI S COMPANY FROM THE LIST OF COMPARABLES. WITHOUT PREJUDICE, THE APPELLANT THUS SUBMITS THAT IF AT ALL CHOKSI HAD TO BE CONSIDERED AS A COMPARABLE COMPANY, THEN THE ABOVE MENTIONED SIMILA R COMPANIES SHOULD ALSO BE CONSIDERED AND ALL OTHER COMPANIES LISTED UNDER MEDICAL TESTIN G CENTERS AND LAB ALSO OUT TO BE ANALYSED. BUT THIS WILL LEAD TO AN UNENDING SEARCH FOR COMPARABLE COMPANIES. WHILE IT IS APPRECIATED THAT FOR TNMM, A BROAD LEVEL OF FUNCTIONAL SIMILARITY IS CON SIDERED IT CANNOT STILL BE EXTENDED TO ANY AND ALL SERVICES OR ACTIVITIES. HAVING SAID THIS, THE APPELLANT SUBMITS THAT THESE COMPANIES I.E. MEDICAL TESTING, CLINICAL RESEARCH ETC. COMPANIES WHICH ARE ALIGNED TO A SPEC IFIC INDUSTRY CERTAINLY CANNOT BE FUNCTIONALLY COMPARABLE TO THE MARKETING SUPPORT SERVICES ACTIVI TIES OF THE APPELLANT AND THUS THERE IS NO MERIT IN EVEN GOING TO DO A SEARCH FOR MEDICAL TEST ING COMPANIES. THE APPELLANT SUBMITS THAT ON ONE HAND THE TPO HAS REJECTED THE APPELLANTS COMPAN IES MENTIONING THAT THESE ARE FUNCTIONALLY DISSIMILAR, THEN THERE IS NO MERIT IN THE LD. TPO'S COMPARABLE AS WELL IN THE CASE OF CHOKSI. THUS IT IS CLEARLY DEMONSTRATED THAT CHOKSI SHOULD BE EX CLUDED FROM THE LIST OF COMPARABLE COMPANIES. RITES LIMITED (RITES): AT THE OUTSET, BASED ON THE INFORMATION AVAILABLE, RITES OFFERS COMPREHENSIVE DESIGN CONSULTANCY FOR INSTITUTIONAL AND OFFICE COMPLEXES, GROUP HOUSING, EDUCATIONAL CAMPUSES, TRANSPORT TERMINALS, HOSPITAL S, BUILDINGS FOR THE PHYSICALLY DISADVANTAGED, WORKSHOPS, INDUSTRIAL BUILDINGS, REC REATION CENTRES, CONVENTION CENTRES ETC., AS PER THE INFORMATION AVAILABLE IN PUBLIC DOMAIN 6 , 'RITES LTD., A GOVERNMENT OF INDIA ENTERPRISE WAS E STABLISHED IN 1974, UNDER THE AEGIS OF INDIAN RAILWAYS. RITES IS INCORPORATED IN INDIA AS A PUBLIC LIMITED COMPANY UNDER THE COMPANIES ACT, 1956 AND IS GOVERNED BY A BOARD OF DIRECTORS WHICH INCLUDES PERSONS OF EMINENCE FROM VARIOUS SECTORS OF ENGINEERING AND MANAGEMENT. RITES LTD., AN ISO 9001-2008 COMPANY, IS A MULTI- DISCIPLINARY CONSULTANCY ORGANIZATION IN THE FIELDS OF TRANSPORT, INFRASTRUCTURE AND RELATED TECHNOLOGIES. IT PROVIDES A COMPREHENSIVE ARRAY OF SERVICES UNDER A SINGLE ROOF AND BELIEVES N TRANSFER OF TECHNOLOGY TO CLIENT ORGANIZATIONS. ' RITES EMPLOYS OVER 2000 STAFF INCLUDING OVER 1200 S PECIALISTS OF HIGH PROFESSIONAL STANDING IN THE FIELDS OF ENGINEERING, MANAGEMENT AND PLANNI NG. BESIDES FULL TIME PROFESSIONALS, RITES ALSO HAS ON ITS PANEL A LARGE NUMBER OF EXPERTS, WH OSE SERVICES CAN BE DRAWN UPON AT SHORT NOTICE. THIS PROVIDES THE COMPANY UNMATCHED STRENGT H IN MEETING THE NEEDS OF ITS CLIENTS WORLDWIDE 7 ' ITA NO. 278/DEL/2012 57 IT IS CLEAR FROM THE ABOVE THAT RITES IS AN END-TO END MULTI-DISCIPLINARY SERVICES COMPANY PROVIDING A RANGE OF SERVICES INCLUDING ENGINEERING AND MANAGEMENT CONSULTANCY SERVICES. EVEN BASED ON THE INFORMATION FROM THE PROWESS DATA BASE IT IS SEEN THAT THE MAIN ACTIVITY OF RITES IS IN MANAGEMENT CONSULTANCY SERVICES. THEREF ORE, RITES CANNOT BE CONSIDERED AS COMPARABLE TO MARKET SUPPORT ACTIVITY OF THE APPELL ANT. RELEVANT EXTRACTS FROM THE DATABASE ARE PROVIDED VIDE ANNEXURE5. FURTHER, THE APPELLANT WOULD LIKE TO DRAW REFERENCE TO THE DELHI TRIBUNAL 8 RULING IN THE CASE OF MCI COM INDIA PRIVATE LIMITED (MCI), (NOW KNOWN A S VERIZON INDIA PRIVATE LIMITED). THE TRIBUNAL RULING STATES THAT MCI BEING A MARKETING S UPPORT SERVICES PROVIDER, IT CANNOT BE FUNCTIONALLY COMPARED TO TURN-KEY ENGINEERING SERVI CES COMPANIES OR END-TO-END SOLUTIONS PROVIDING COMPANIES NAMELY, RITES, ENGINEERS INDIA LIMITED, TCE CONSULTING ENGINEERS LIMITED AND WATER & POWER CONSULTANCY SERVICES LIMITED (WAP COS). THE APPELLANT WOULD ALSO LIKE TO PLACE RELIANCE ON THE DECISION OF DELHI ITAT IN THE CASE OF NORTEL NETWORKS INDIA P. LTD. (ITA NOS. 4765/DEL/20 11 & 427/DEL/2013), YUM! RESTAURANTS (INDIA) PRIVATE LTD., CIENA INDIA PVT. LTD. (ITA NO.3324/DEL/2013) AND THE DECISION OF THE HONBLE HIGH COURT IN THE CASE OF VERIZON INDIA PVT LTD (ITA 271/2013 & ITA 277/2013), WHEREIN RITES HAS NOT BEEN CONSIDERED AS COMPARABL E TO COMPANIES PROVIDING MARKET SUPPORT SERVICES. THE RELEVANT EXTRACTS ARE REPRODUCED BELOW: NORTEL NETWORKS INDIA P. LTD. (ITA NOS. 4765/DEL/20 11 & 427/DEL/2013) WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. APROPOS THE ISSUE OF COMPARABILITY AND THE EXCLUSION OF CHOK SI, RITES AND WAPCOS, DELHI TRIBUNAL IN THE CASES OF M/S MCI COM INDIA P. LTD. AND M/S VERI ZON INDIA P. LTD. HAS HELD THAT COMPANIES LIKE EIL, RITES, WAPSOS AND TCE ARE ENGINEERING COM PANIES WHICH PROVIDE END TO END SOLUTIONS AND THEREFORE THEY CANNOT BE COMPARED WITH ASSESSEES WHO PROVIDE MARKETING SUPPORT SERVICES TO THE PARENT COMPANY. THEY WERE H ELD TO BE FUNCTIONALLY NOT COMPARABLE WITH THEE ENGINEERING COMPANIES. YUM! RESTAURANTS (INDIA) PRIVATE LTD. ITA NO. 6168/ DEL/2012 THE ASSESSEE HAS RAISED THE ISSUE THAT DRP/TPO HAS ERRED IN CONSIDERING AN INAPPROPRIATE SET OF COMPANIES WHICH HAS BEEN TAKEN AS COMPARABLE T O THE SUPPORT SERVICES OUTSIDE INDIA SEGMENT OF THE ASSESSEE. SIMILARLY, COMPARABILITY WITH M/S. CHOKSI LABORATORI ES LTD. IS NOT JUSTIFIED AS THE COMPANYS ASSETS EMPLOYED COMPRISES SIGNIFICANTLY OF TESTING EQUIPMENTS WHICH FURTHER EMPHASIZES THE FACT THAT THE COMPANYS FUNCTIONAL PROFILE IS DIFFE RENT VIS--VIS THE ASSESSEE. ACCORDINGLY, WE DIRECT TO RECOMPUTE THE ALP BY EXCL UDING THE FOLLOWING COMPARABLES TAKEN BY THE TPO :- (I) M/S. SAKET PROJECTS LIMITED; (II) M/S. CHOKSI LABORATORIES LIMITED; (III) M/S. WAPCOS (INDIA) LIMITED; AND (IV) M/S. RITES LIMITED. H AND M HENNES AND MAURITZ INDIA (P) LTD. V. DCIT I TA NO. 4704/DEL/2012 ITA NO. 278/DEL/2012 58 WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE MAT ERIAL ON RECORD. THE ONLY SURVIVING DISPUTE BEFORE US, AS SEEN FROM THE ABOVE, IS AS TO W HETHER RITES LTD. AND WAPCOS LTD. ARE TO BE MAINTAINED AS COMPARABLES. THIS DISPUTE STANDS SETTLED IN FAVOUR OF THE ASSESS EE IN 'DEPUTY CIT V. MCI COM INDIA P. LTD. [2012] 19 ITR (TRIB) 42 (DELHI)'. MCI COM, AS PER P ARA 3 OF THE SAID ORDER WAS INTO RENDERING MARKETING SUPPORT SERVICES TO ITS PARENT COMPANY, W HICH INCLUDED THE FOLLOWING SERVICES (PAGE 44): (A) MARKET DEVELOPMENT (B) PROVIDING INFORMATION ON POTENTIAL CUSTOMERS (C) LIAISONING WITH POTENTIAL CUSTOMERS FOR DISSEMI NATING INFORMATION REGARDING THE PRODUCTS OF THE ASSOCIATED ENTERPRISES (AE'S) AND F OR OBTAINING FEEDBACK FROM POTENTIAL CUSTOMERS AND (D) EXPLORING NEW SERVICE LINES/VENTURES FOR ASSOCI ATE ENTERPRISES IN INDIA. UNDENIABLY, THESE SERVICES CAN BE SQUARELY EQUATED WI TH THOSE RENDERED BY THE PRESENT ASSESSEE, I.E., OF PROVIDING SOURCING AND PROCUREME NT SERVICES. IN 'DEPUTY CIT V. MCI COM INDIA P. LTD. [2012] 19 ITR (TRIB) 42 (DELHI)', RIT ES LTD. (SUPRA) AND WAPCOS LTD. (SUPRA) WERE EXCLUDED AS COMPARABLES, HOLDING THAT MARKETING SUPPORT SERVICES CANNOT BE COMPARED WITH TURNKEY ENGINEERING SERVICES THAT RITES LTD. AND WAPCOS LTD. ARE ENGINEERING COMPANIES, PROVIDING END TO END SOLUTIONS, WHEREAS 'MCI COM.' PROVIDED MARKETING SUPPORT SERVICES TO ITS PARENT COMPANY. THE SERVICES OF 'MC I COM' QUA RITES LTD. AND WAPCOS LTD. WERE NOT FOUND FUNCTIONALLY COMPARABLE. ON THIS BASIS , WE FIND 'MCI COM' TO BE SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE, AS HER EIN ALSO, THE SERVICES PROVIDED BY THE ASSESSEE ARE NOT AT ALL COMPARABLE WITH RITES LTD. A ND WAPCOS LTD. NO DECISION TO THE CONTRARY HAS BEEN BROUGHT TO OUR NOTICE. THEREFORE, WE HEREBY EXCLUDE RITES LTD. AND WAPCOS LTD. AS COMPARABLES FOR THE PURPOSES OF THE ASSESSEE'S CASE. THE GRIEVANCE OF THE ASSESSEE IS, THUS, FOUND JUSTIFIED TO THIS EXTENT AND IS ACCEPTED AS SUCH. VERIZON INDIAPVT LTD (ITA 271/2013 & ITA 277/2013) MARKETING SUPPORT SERVICES CANNOT BE COMPARED WITH TURN KEY ENGINEERING SERVICES. WE AGREE WITH THE VIEW OF THE FIRST APPELLATE AUTHORIT Y THAT EIL, RITES, WAPCOS AND TCE ARE ENGINEERING COMPANIES THAT PROVIDE END-TO-END SOLUT IONS AND WHEREAS THE ASSESSEE COMPANY PROVIDES MARKETING SUPPORT SERVICES TO THE PARENT C OMPANY, WHICH IS IN THE NATURE OF SUPPORT SERVICE AND HENCE NOT FUNCTIONALLY COMPARABLE. INCIDENTALLY, WAPCOS WAS EXCLUDED BY THE LD. TPO BA SED ON THE CONTENTIONS RAISED BY THE APPELLANT IN REPLY TO SHOW CAUSE NOTICE. THEREFORE , PLACING RELIANCE ON THE SAME AND RULING OF THE DELHI TRIBUNAL IN PARAGRAPH NUMBER 80, THE APPE LLANT SUBMITS THAT IF WAPCOS IS REJECTED, ACCORDINGLY RITES LTD. SHOULD ALSO BE REJECTED AS A COMPARABLE. IN ADDITION TO THE ABOVE RULING, THE APPELLANT ALSO DRAWS REFERENCE TO THE MUMBAI TRIBUNAL RULING OF CHEMTEX GLOBAL ENGINEERING PRIVATE LIMITED 9 . AN EXCERPT FROM THE RULING IS PROVIDED BELOW FOR QUICK REFERENCE. ITA NO. 278/DEL/2012 59 EVEN WITH REGARD TO THE COMPARABLE COMPANIES WHICH ARE TAKEN INTO CONSIDERATION BY THE AO/TPO THE LEARNED CIT(A) HAS CORRECTLY HELD THAT R ITES LIMITED IS A GOVERNMENT OF INDIA ENTERPRISE AND CONSIDERING THE NATURE OF THE CONTRA CTS AND THE IMPLICIT GUARANTEE PROVIDED BY THE GOVERNMENT OF INDIA, ETC. RITES LIMITED CANN OT BE TAKEN AS A COMPARABLE CASE AND HENCE THE LEARNED CIT(A) WAS JUSTIFIED IN EXCLUDING THE SAME. THIS RULING STRENGTHENS THE APPELLANTS ARGUMENT THA T RITES CANNOT BE CONSIDERED AS COMPARABLE TO THE MARKETING SUPPORT SERVICES ACTIVITY OF THE A PPELLANT. INDIA CEMENTS CAPITAL LIMITED (ICCL): AT THE OUTSET, IT IS NOTEWORTHY TO MENTION THAT ICC L IS ENGAGED IN DIVERSIFIED ACTIVITIES NAMELY, FOREIGN E XCHANGE, MIDAS ADVISORY, SHARE BROKING AND COROMANDEL TRAVELS. BASED ON THE INFORMATION AVAIL ABLE IN THE COMPANYS WEBSITE 10 , INDIA CEMENTS CAPITAL LTD. (ICCL) IS A PART OF THE CHENNAI-BASED BUSINESS HOUSE OF THE INDIA CEMENTS LTD. MR. N SRINIVASAN, THE MD OF THE INDIA CEMENTS LTD., IS THE CHAIRMAN OF THE COMPANY. ICCL IS ENGAGED IN THE FOLLOWING FEE-BASE D ACTIVITIES: FOR X CHANGE FOR X CHANGE IS THE BRAND NAME UNDER WHICH THE COMPA NY EXTENDS MONEY CHANGING SERVICES AS AN RBI APPROVED AUTHORISED DEALER CATEGORY-II. T HE DIVISION OPERATES OUT OF 17 CENTRES SPREAD OVER THE COUNTRY AND BUYS AND SELLS A LL MAJOR CURRENCIES. FOR X CHANGE ALSO STOCKS AND SELLS AMEX TRAVELLERS CHEQUES, FOREX PRE PAID CARDS OF HDFC, AMEX AND AXIS, IN ADDITION TO ENCASHING VISA AND MASTERS TRAVELERS CH EQUES. THE DIVISION IS HEADED BY MR. PREMNATH, WHO STARTED HIS CAREER WITH THOMAS COOK A ND HAS OVER 25 YEARS OF EXPERIENCE IN THE INDUSTRY. MIDAS ADVISORY THE COMPANY ALSO EXTENDS ADVISORY SERVICES ON THE F OREX MARKET TO EXPORTERS AND IMPORTERS , UNDER THE BRAND NAME OF MIDAS ADVISORY. SUPPORTED BY THE LATEST INFORMATION SYSTEM FROM REUTERS, THE DIVISION OFFERS ADVICE ON THE FOREX MA RKET THROUGH PERIODIC REPORTS. SHARE BROKING ICCL HAS A SUBSIDIARY COMPANY BY NAME INDIA CEMENTS INVESTMENT SERVICES LTD. WHICH IS A CORPORATE MEMBER OF THE NSE AND IS ENGAGED IN SHARE BROKING ACTIVITIES. THE COMPANY DEALS IN CASH MARKET AND FUTURES & OPTIONS AND EXTENDS DP SERVICES. COROMANDEL TRAVELS COROMANDEL TRAVELS IS THE DIVISION ENGAGED IN EXTEN DING COMPREHENSIVE TRAVEL RELATED SERVICES LIKE TICKETING (INTERNATIONAL AND DOMESTIC ), HOTEL BOOKINGS, CAR RENTALS, LEISURE PACKAGES WITHIN INDIA AND ABROAD, AND MISCELLANEOUS SERVICES LIKE PASSPORT ISSUANCE AND VISA PROCESSING .THE SERVICES ARE EXTENDED OUT OF S EVEN LOCATIONS NAMELY CHENNAI, MUMBAI, NEW DELHI, KOLKATA, BANGALORE, HYDERABAD, AND GUWAHA TI. FROM THE ABOVE, IT IS EVIDENT THAT ICCL OPERATES IN FINANCE INDUSTRY. THIS IS FURTHER SUBSTANTIATED THROUGH FACTS GATHERED FROM PROWESS D ATABASE. EVEN BASED ON THE INFORMATION FROM THE PROWESS DATABASE IT IS SEEN THAT THE MAIN ACTIVITY OF ICCL IS IN FINANCIAL CONSULTANCY AND ADVISORY SERVICES. ALSO, IT IS SEEN FROM THE P ROWESS DATABASE THAT THE ECONOMIC ACTIVITY OF THE COMPANY IS ENGAGED IN HIRE PURCHASE AND LEASING SERVICES. FURTHER, THIS COMPANY IS ALSO PLANNING TO VENTURE INTO THE INSURANCE BUSINESS. ITA NO. 278/DEL/2012 60 FURTHER, FROM A COMPARABILITY ANALYSIS PERSPECTIVE, IT IS IMPORTANT TO CONSIDER COMPARABLES OPERATE IN SAME INDUSTRY. IN THIS REGARD, THE APPE LLANT DRAWS REFERENCE TO OECD GUIDELINES ON COMPARABILITY ANALYSIS AS MENTIONED BELOW 3.7 THE BROAD-BASED ANALYSIS IS AN ESSENTIAL STEP IN THE COMPARABILITY ANALYSIS. IT CAN BE DEFINED AS AN ANALYSIS OF THE INDUSTRY, COMPETITION , ECONOMIC AND REGULATORY FACTORS AND OTHER ELEMENTS THAT AFFECT THE TAXPAYER AND ITS ENV IRONMENT, BUT NOT YET WITHIN THE CONTEXT OF LOOKING AT THE SPECIFIC TRANSACTIONS IN QUESTION . THIS STEP HELPS UNDERSTAND THE CONDITIONS IN THE TAXPAYERS CONTROLLED TRANSACTION AS WELL AS THOSE IN THE UNCONTROLLED TRANSACTIONS TO BE COMPARED, IN PARTICULAR THE ECONOMIC CIRCUMSTANCE S OF THE TRANSACTION 3.38 A PRAGMATIC SOLUTION MAY NEED TO BE FOUND, ON A CASE-BY-CASE BASIS, SUCH AS BROADENING THE SEARCH AND USING INFORMATION ON UNCON TROLLED TRANSACTIONS TAKING PLACE IN THE SAME INDUSTRY AND A COMPARABLE GEOGRAPHICAL MARK ET. THEREFORE, AS A PRINCIPLE OF COMPARABILITY AND BASE D ON THE ABOVE INFORMATION, ICCL CANNOT BE CONSIDERED AS COMPARABLE TO MARKET SUPPORT ACTIVITY OF THE APPELLANT. RELEVANT EXTRACTS FROM THE DATABASE ARE PROVIDED VIDE ANNEXURE 6. THE APPELLANT WOULD ALSO LIKE TO PLACE RELIANCE ON THE DECISION OF THE HONBLE MUMBAI TRIBUNAL IN ROCHE PRODUCTS (INDIA) PVT. LTD. V. ACIT, MUMBAI IT A NO. 7035/MUM/2012 WHEREIN WHILE EXCLUDING INDIA CEMENTS CAPITAL SERVICES AS A COMPARABLE IN THE CASE OF ASSESSEE PROVIDING MARKETING SUPPORT SERVICES, THE TRIBUNAL OBSERVED: IN THE CASE UNDER CONSIDERATION, THE TPO HAD SELEC TED COMPARABLES WHICH HAD NO SIMILARITY AT ALL WITH THE ACTIVITIES OF THE ASSESSEE. WE ARE UNABLE TO UNDERSTAND IS HOW THE RESULTS OF COMPANIES DEALING IN FOREIGN EXCHANGE/MAINTAINING F REIGHT STATION OR ENGAGED IN PROVIDING END-TO-END ENGINEERING SERVICES CAN BE COMPARED WITH MARKETING AND ALLIED SERVICES. ACCORDINGLY, WE HOLD THAT THE SELECTION MADE BY THE TPO OF COMPARABLES WAS NEITHER METHODICAL NOR SCIENTIFIC. III. ASSESSEE'S CONTENTIONS -COMPANIES TO BE INCLUDED 1. TATA SERVICES LIMITED THE COMPANY SUBMITS THAT THERE IS NO MERIT IN REJEC TING THIS COMPANY ON THE GROUNDS THAT THE COMPANY PROVIDED IN-HOUSE SUPPORT TO THE TATA GROUP AND FUNCTIONS ON A NO PROFIT NO LOSS BASIS. THIS IS INCORRECT SINCE THE COMPANY HAS EARNED PROF IT DURING THE YEAR AND DOES NOT OPERATE ON A NO PROFIT NO LOSS BASIS. FURTHER, AS PER ANNUAL RE PORT OF TATA SERVICES LIMITED, THE COMPANY HAS NO RELATED PARTY TRANSACTIONS AND THE SUPPORT SERVI CES SEGMENT OF THIS COMPANY INCLUDE SERVICES SUCH AS I.E., ACCESS CONTROL SERVICES, ADM INISTRATIVE SUPPORT SERVICES, BOMBAY HOUSE TELEPHONE EXCHANGE, CENTRAL RECEIVING SECTION, FORT CHAMBERS, HOLIDAY HOMES, MEDICAL SERVICES, NETWORK COMMUNICATION SYSTEM, STAFF CANTEEN ETC., I S SIMILAR TO THE SERVICES RENDERED BY THE COMPANY. HENCE WITHOUT PREJUDICE TO THE TP STUDY, I T IS SUBMITTED THAT IF THE SEARCH STRATEGY ADOPTED BY THE LD. TPO IS TO BE CONSIDERED, THEN TA TA SERVICES LIMITED IS TO BE ACCEPTED AS A COMPARABLE. IT IS OBSERVED THAT TATA SERVICES OPERATES IN NORMA L BUSINESS CIRCUMSTANCES AND DOES NOT OPERATE IN NO LOSS OR NO PROFIT BASIS. THE SAME CAN BE SEEN FROM THE TABLE BELOW WHICH REFLECTS THAT THE COMPANY REPORTED PROFITS IN THE EARLIER YE ARS AND IN THE SUBSEQUENT YEAR AS WELL. PARTICULARS FY 2006 FY 2007 FY2009 ITA NO. 278/DEL/2012 61 AMOUNT IN INR CRORES SALES 41.03 47.34 60.19 OPERATING COST 38.68 45.70 59.53 OPERATING PROFIT 2.35 1.64 0.66 OP/TC% 6% 4% 1% FURTHER, IT WAS SUBSTANTIATED THROUGH FINANCIAL STA TEMENTS THAT THERE WERE NO RELATED PARTY TRANSACTIONS TO THE LD. DRP AND NO FURTHER CONTENTI ON WAS RAISED BY THE LD. DRP / LD. TPO IN THIS REGARD. THEREFORE, THE APPELLANT SUBMITS THAT IF THE SEARCH STRATEGY OF THE LD. TPO IS ADOPTED, TATA SERVICES LIMITED SHOULD BE CONSIDERED AS A COMPARAB LE COMPANY. THUS, THE COMPANY SUBMITS THAT THE SEARCH STRATEGY OF COMPARABLES ADOPTED BY THE LD. TPO APPARENTLY IS INCONSISTENT. WITHOUT PREJUDICE TO THE TP STUDY AND THE APPELLANT S ARGUMENTS, EVEN IF THE LD. TPOS APPROACH HAS TO BE CONSISTENTLY APPLIED, CHOKSI, RI TES , ICCL SHOULD BE REJECTED AND TATA SERVICES LIMITED SHOULD BE CONSIDERED AS COMPARABLE . ACCORDINGLY, THE REVISED ARITHMETIC MEAN OF THE COM PARABLES BASED ON THE APPELLANTS ARGUMENTS ON THE COMPARABLE COMPANIES IS SHOWN IN T HE TABLE BELOW. SL. NO. NAME OF THE COMPARABLES OP/TC 1 BEST MULYANKAYAN CONSULTANTS LTD 12.85% 2 GENINS INDIA LTD 9.22% 3 IDC (INDIA) LIMITED 15.48% 4 INDUS TECHNICAL & FINANCIAL CONSULTANTS LTD. 14.56% 5 TECHNICOMCHEMIE (I) LIMITED 7.32% 6 TATA SERVICES LIMITED 7.57% ARITHMETIC MEAN 11.17% IV. WORKING CAPITAL ADJUSTMENT THE COMPANY SUBMITS THAT THE LD. TPO ERRED IN NOT G RANTING WORKING CAPITAL ADJUSTMENT FOR MARKET SUPPORT DIVISION. THE MARKET SUPPORT DIVISIO N HAS TWO SEGMENTS NAMELY, MARKET SUPPORT SERVICES AND ADMINISTRATION SERVICES. IN THIS REGARD, REFERENCE IS DRAWN TO THE RULE 10C(3) OF INCOME-TAX RULES, 1962 (RULES) WHICH INTERALIA STATES AS FOLLOWS: (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABL E TO AN INTERNATIONAL TRANSACTION IF: I. NONE OF THE DIFFERENCES , IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTI ONS 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 ITA NO. 278/DEL/2012 62 II. REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. FURTHER , THE ABOVE IS ALSO SUPPORTED BY THE TRANSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX ADMINISTRATIONS (OECD GUIDELIN ES) ISSUED BY THE ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD), WHI CH ALSO PROVIDE FOR WORKING CAPITAL ADJUSTMENTS AS FOLLOWS: 2.81. IN THOSE CASES WHERE THERE IS A CORRELATION BETWEEN THE CREDIT TERMS AND THE SALES PRICES, IT COULD BE APPROPRIATE TO REFLECT INTEREST INCOME IN RESPECT OF SHORT-TERM WORKING CAPITAL WITHIN THE CALCULATION OF THE NET PROFIT IN DICATOR AND/OR TO PROCEED WITH A WORKING CAPITAL ADJUSTMENT. IT IS FURTHER SUBMITTED TO LD. DRP (REFER PAGE 180 OF THE APPEAL MEMO) THE RATIONALE FOR USING WORKING CAPITAL ADJUSTMENT BY THE APPELLANT. V. COMPARABILITY ADJUSTMENTS FURTHERMORE, THE OECD GUIDELINES ALSO PROVIDE THAT TO IMPROVE THE COMPARABILITY, CERTAIN ADJUSTMENTS CAN BE UNDERTAKEN. THE RELEVANT EXTRACT FROM THE OECD GUIDELINES IS PROVIDED BELOW FOR YOUR REFERENCE. 3.47 THE NEED TO ADJUST COMPARABLES AND THE REQUIRE MENT FOR ACCURACY AND RELIABILITY ARE POINTED OUT IN THESE GUIDELINES ON SEVERAL OCCA SIONS, BOTH FOR THE GENERAL APPLICATION OF THE ARMS LENGTH PRINCIPLE AND MORE SPECIFICALLY IN THE CONTEXT OF EACH METHOD. AS NOTED AT PARAGRAPH 1.33, TO BE COMPARABLE MEANS THAT NONE OF T HE DIFFERENCES (IF ANY) BETWEEN THE SITUATIONS BEING COMPARED COULD MATERIALLY AFFECT TH E CONDITION BEING EXAMINED IN THE METHODOLOGY OR THAT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE EFFECT OF ANY SUCH DIFFERENCES.... ALSO, THE CLAIM OF WORKING CAPITAL ADJUSTMENTS IS S UPPORTED IN THE CASE OF DEMAG CRANES & COMPONENTS (INDIA) PVT. LIMITED, PUNE V. DCIT ITA N O. 120/PN/2011 , WHERE IT IS OBSERVED THAT 33. IN OUR OPINION, THE EXISTENCE OF DIFFERENCE @ 3.41%, WHICH IS WORTH RS 31,72,099/-, ATTRIBUTABLE TO THE WORKING CAPITAL OUGHT TO AMOUNT TO THE MATERIAL DIFFERENCE CONSIDERING THE EXISTING UNADJUSTED OPERATING MARGIN OF THE COM PARABLES AT 7.18%. IN THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE SAID WORKING CAPITAL DIFFERENCES CONSTITUTES QUANTITATIVELY LIKELY TO MATERIALLY AFFECT THE ALP / AL OPERATING MARGI O F THE COMPARABLE. THEREFORE, THE CLAIMS OF THE ASSESSEE ARE ALLOWED. IN ADDITION TO THE ABOVE, THE MUMBAI RULING IN THE CASE OF CAPGEMINI INDIA PRIVATE LIMITED[TS-45-ITAT-2013 (MUM)], STATED THAT 6. IN OUR VIEW, WORKING CAPITAL ADJUSTMENTS ARE RE QUIRED TO BE MADE BECAUSE THESE DO IMPACT THE PROFITABILITY OF THE COMPANY. RULE 108(2)(D) ALS O PROVIDES THAT THE COMPARABILITY HAS TO BE ;JUDGED WITH RESPECT TO VARIOUS FACTORS INCLUDING T HE MARKET CONDITIONS, GEOGRAPHICAL CONDITIONS, COST OF LABOR AND COST OF CAPITAL IN TH E 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 BE FULLY COMPARABLE T O THE CASE WHICH IS ABLE TO RECOVER THE ITA NO. 278/DEL/2012 63 DEBT PROMPTLY. IN OUR VIEW, THE AVERAGE OF OPENING AND CLOSING BALANCE IN THE ACCOUNT RECEIVABLE/PAYABLE FOR THE RELEVANT YEAR MAY BE ADOPTE D WHICH MAY BROADLY GIVE THE REPRESENTATIVE LEVEL OF WORKING CAPITAL OVER THE YE AR. EVEN IF THERE IS SOME DIFFERENCE WITH RESPECT TO THE REPRESENTATIVE LEVEL, IT WILL NOT EF FECT THE COMPARABILITY AS THE SAME METHOD WILL BE APPLIED TO ALL CASES. WORKING CAPITAL ADJUSTMENT CANNOT BE DENIED TO THE ASSESSEE ONLY ON THE GROUND THAT THE ASSESSEE HAD NOT MADE ANY CLAIM IN THE TP STUDY IF IT IS POSSIBLE TO MAKE SUCH ADJUSTMENT. IN OUR VIEW, WORKING CAPITAL ADJU STMENT WILL IMPROVE THE COMPARABILITY. WE THEREFORE, DIRECT THE AO/TPO TO MAKE THE WORKING CA PITAL ADJUSTMENT AFTER NECESSARY EXAMINATION IN THE LIGHT OF THE OBSERVATIONS MADE A BOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. PLACING RELIANCE ON THE ABOVE, THE COMPANY SUBMITS THAT APPROPRIATE ADJUSTMENTS BE MADE TO FACTOR THE DIFFERENCES IN THE WORKING CAPITAL LEVEL OF THE COMPANIES VIS--VIS THE APPELLANT. VI. PRO-RATED TO SEGMENT REVENUE THE APPELLANT SUBMITS THAT THE MARKET SUPPORT DIVIS ION HAS TWO SEGMENTS NAMELY, MARKET SUPPORT SERVICES AND ADMINISTRATION SERVICES. IN TH E ORDER, THE LD. TPO STATED THAT BIFURCATION OF PAYABLES AND RECEIVABLES AMONG THESE TWO SEGMENT S WAS NOT CLEAR DUE TO CONSOLIDATED ACCOUNTS AND HENCE DID NOT GRANT WORKING CAPITAL AD JUSTMENT. IN THIS REGARD, THE APPELLANT SUBMITS THAT MARKET S UPPORT DIVISION IS THE SIGNIFICANT REVENUE CONTRIBUTOR TO THE DIVISION, WHICH IS ABOUT 93% AS SHOWN IN THE TABLE BELOW. PARTICULARS OPERATING REVENUE OPERATING EXPENSES MARKET SUPPORT SERVICES 509,395,183 485,138,270 DIVISION TOTAL 548,752,224 552,941,415 MARKET SUPPORT SERVICES (AS % OF TOTAL) 92.83% 87.74% AS THE MARKET SUPPORT ACTIVITY CONTRIBUTES SIGNIFIC ANT PORTION OF REVENUE FOR THIS DIVISION, THE DATAFOR RECEIVABLES AND PAYABLES HAVE BEEN CONSIDER ED PROPORTIONATE TO THE MARKET SUPPORT SEGMENT REVENUE. THE SAME IS SHOWN IN THE TABLE BE LOW. YEAR RECEIVABLE PAYABLE MARCH - 08 7,206,139 56,853,139 MARCH - 07 171,871,832 164,512,130 AVERAGE 89,538,986 110,682,635 PRO - RATED TO 93% 83,117,162 102,744,369 THE COMPUTATION OF ALP AND 5% RANGE BASED ON THE PR OVISO TO SECTION 92C(2) FOR EACH DIVISION IS SHOWN BELOW. SENSING DIVISION PARTICULARS ACTUALS ALP 5% - 5% REVENUE 61,019,533 61,737,455 64,070,510 57,968,556 TOTAL COST 55,532,769 55,532,769 55,532,769 55,532,769 OPERATING PROFIT 5,486,764 6,204,686 8,537,741 2,435,787 RETURN ON TOTAL COST 9.88% 11.17% 15.37% 4.39% ITA NO. 278/DEL/2012 64 WATER & PROCESS DIVISION PARTICULARS ACTUALS ALP 5% - 5% REVENUE 291,742 294,853 306,329 277,155 TOTAL COST 265,220 265,220 265,220 265,220 OPERATING PROFIT 26,522 29,633 41,109 11,935 RETURN ON TOTAL COST 10.00% 11.17% 15.50% 4.50% MARKET SUPPORT DIVISION PARTICULARS ACTUALS ALP 5% - 5% REVENUE 509,395,183 525,593,512 534,864,942 483,925,424 TOTAL COST 485,138,270 485,138,270 485,138,270 485,138,270 OPERATING PROFIT 24,256,913 40,455,243 49,726,673 (1,212,846) RETURN ON TOTAL COST 5.00% 8.34 11 % 10.25% - 0.25% INSPECTION DIVISION PARTICULARS ACTUALS ALP 5% - 5% REVENUE 18,889,891 19,950,439 19,834,386 17,945,396 TOTAL COST 17,945,397 17,945,397 17,945,397 17,945,397 OPERATING PROFIT 944,494 2,005,042 1,888,989 (1) RETURN ON TOTAL COST 5.26% 11.17% 10.53% 0.00% FROM THE ABOVE, ALP FOR SENSING AND WATER & PROCESS DIVISIONS FALL WITHIN THE +/-5% RANGE AND HENCE NO ADJUSTMENT IS REQUIRED TO THE TRANSFER PRI CE FOR THE MARKET SUPPORT SERVICES RENDERED BY THE APPELLANT. 38. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORD ER OF THE LOWER AUTHORITIES AND TRIED TO JUSTIFY THE INCLUSION OF VARIOUS COMPARABL ES AS INCLUDED BY THE TPO AND CONFIRMED BY DRP BY REFERRING THEIR ANNUAL REPORTS. HE FURTHER SUBMITTED THAT THE LOWER AUTHORITIES HAVE CHOSEN THOSE COMPANIES AS CO MPARABLES WHOSE FUNCTIONAL PROFILES ARE SIMILAR . IN CASE OF INDIA CEMENT LTD. THE ASSESSEE HAS PRODU CED THE FUNCTIONAL PROFILE OF THE COMPANY ON THE BASIS OF P RINT OUT FROM THE WEBSITE AS ON DATE WHICH CAN NOT BE ACCEPTED . THE ASSESSEE WAS ALSO UNABLE TO PRODUCE CURRENT ASSETS AND CURRENT LIABILITIES SEPARATELY IN CASE O F MARKETING SUPPORT SERVICE DIVISIONS. THEREFORE, THE LOWER AUTHORITIES HAVE RI GHTLY DENIED WORKING CAPITAL ADJUSTMENTS. HE FURTHER SUBMITTED THAT THE CASE LAW S RELIED BY THE AR IS NOT ITA NO. 278/DEL/2012 65 APPLICABLE IN PRESENT CASE . DURING THE COURSE OF H EARING THE LD. DR. WAS ASKED TO FILE THE ANNUAL REPORT OF THE THREE COMPANIES NAMEL Y CHOKSI LABORITIES LIMITED, RITES AND INDIA CEMENTS CAPITAL LTD. THE LD. DR F URTHER DREW OUR ATTENTION ON THE FINANCIAL STATEMENTS OF CHOKSI LABORATORIES LIM ITED AND THEIR SCHEDULE NO. 14 SR NO. 08 SEGMENTAL REPORTING : THE COMPANY TREA TS ANALYTICAL CHARGES & CONSULTANCY RECEIPTS AS A SINGLE SEGMENT AND THEREF ORE DETAILS OF SEGMENTS ARE NOT SEPARATELY SHOWN. THE COMPANY IS COMMERCIAL TES TING HOUSE ENGAGED IN TESTING OF VARIOUS PRODUCTS AND ALSO OFFERS SERVICE S IN THE FIELD OF POLLUTION CONTROL AS ALLIED ACTIVITY. THE COMPANY IS MANAGED ORGANIZA TIONALLY AS A UNIFIED ENTITY WITH VARIOUS FUNCTIONAL HEADS REPORTING TO THE TOP MANAGEMENT AND IS NOT ORGANIZED ALONG SEGMENTS. THERE ARE, THEREFORE, NO SEPARATE SEGMENTS WITHIN THE COMPANY AS DEFINED BY AS-17 (SEGMENT REPORTING) ISS UED BY THE ICAI. HE ALSO INVITED OUR ATTENTION TO SR. NO. 13 OF SCHEDULE 14 CAPACITY AND PRODUCTION (B) INSTALLED CAPACITY : THE COMPANY PRODUCES EFFLUENT TREATMENT PLANT AS PER CUSTOMERS NEED. THIS IS ONLY INCIDENTAL TO COMPANY S SERVICES ACTIVITIES. AS SUCH INSTALLED CAPACITY OF THE COMPANY IS NOT APPLICABLE . IN THE CASE RITES LTD. THE LD. DR DREW OUR ATTENTION ON THE ANNUAL REPORTS AT PAGE NO. 7, 47 AND 63 OF THE ANNUAL REPORT WHICH READS AS UNDER : THE SALIENT FEATURES OF DOMESTIC BUSINESS DURING TH E YEAR WERE AWARD OF PRESTIGIOUS ASSIGNMENTS OF ADVISORY CONSULTANCY SERVICES FOR TA J EXPRESSWAY FROM GREATER NOIDA TO AGRA, GENERAL CONSULTANCY FOR BANGALORE METRO, DETAILED E NGINEERING F MUTP PHASE II WORK OF MRVC, PMC FOR UPGRADATION OF RAILWAY INFRASTRUCTURE IN RO URKELA STEEL PLANT, REHABILITATION ON 290 BOXN WAGONS OF EAST COAST RAILWAY AND TRAINING OF 3 60 SUPERVISORS OF INDIAN RAILWAYS. DURING THE YEAR, RITES HAS SECURED A NUMBER OF CONT RACTS RELATING TO EXPORT OF ROLLING STOCK AND TECHNICAL ASSISTANCE THEREOF. THESE INCLU DE AWARD OF PRESTIGIOUS ASSIGNMENT OF LEASING OF 23 MG COACHES TO TRL TANZANIA FOR FIVE YEARS AND RE HABILITATION OF 10 NOS. 73 CLASS LOCOMOTIVES OF TRL. SEVENTEEN NEW PASSENGER COACHES, TWELVE GANG C ARS, INSPECTION CARS AND RAIL-CUM-ROAD VEHICLES WERE EXPORTED AND TECHNICAL ASSISTANCE PRO GRAMME FOR LUBANGO WORKSHOP MODERNIZATION WAS COMPLETED DURING THE PERIOD, IN A N ONGOING EXPORT PROJECT IN ANGOLA. ITA NO. 278/DEL/2012 66 IN CONSTRUCTION MANAGEMENT/SUPERVISION CONTRACTS, F EE IS CALCULATED AS A PERCENTAGE ON THE VALUE OF WORK DONE/BUILT-UP COST O F EACH CONTRACT AS DETERMINED BY THE MANAGEMENT, PENDING CUSTOMERS APPROVAL, IF ANY. V- GENERIC NAMES OF THREE PRINCIPAL PRODUCTS/SERVI CES OF COMPANY (AS PER MONETARY TERMS) (RS. IN THOUSANDS) ITEM CODE NO. (ITC CODE) : NA PRODUCT DESCRIPTION : A) CONSULTANCY 29,83,398 B) EXPORT SALES 20,83,065 C) INSPECTION 5,47,957 D) LEASE SERVICES 1,90,843 IN CASE OF INDIA CEMENTS CAPITAL LTD., THE LD. DR R ELIED ON PAGE 9 OF THE ANNUAL REPORT WHICH READS AS UNDER : FEE BASED ACTIVITIES THE VARIOUS FEE-BASED DIVISIONS OF THE COMPANY HAVE SHOWN CREDITABLE PERFORMANCE. FOR XCHANGE : THIS DIVISION WHICH IS FULL FLEDGED M ONEY CHANGER IS AT PRESENT OPERATING AT 28 LOCATIONS AND HAS ESTABLISHED ITSEL F AS A LEADING MONEY CHANGER IN THE SOUTH. IN ADDITION TO BUYING AND SEL LING OF ALL MAJOR CURRENCIES AND TRAVELERS CHEQUES, THE DIVISION ALSO STOCKS AME X TRAVELERS CHEQUES AND CITIBANK WORLD MONEY CARDS AND AXIS BANK TRAVEL CURR ENCY PREPAID CARDS. THEY ARE ALSO SUBAGENTS FOR WESTERN UNION MONEY TRAN SFER. COROMANDEL TRAVELS : THIS DIVISION IS HAVING 7 IATA APPROVED BRANCHES AT CHENNAI, MUMBAI (TWO IATA ACCREDITED BRANCHES), BAN GALORE, DELHI, CALCUTTA AND HYDERABAD. APART FROM HANDING TICKETING FOR DOM ESTIC AND INTERNATIONAL TRAVEL, THIS DIVISION IS ALSO HANDLING INBOUND AND OUTBOUND TOURS. HE FURTHER SUBMITTED THAT THE PRINT OUT OF FUNCTION AL ACTIVITIES OF INDIA CEMENTS CAPITAL, TAKEN FROM THE WEB-SITE IS NOT ACCEPTABLE AT ALL. HE, THEREFORE, CONTENDED THAT THE COMPARABLES SELECTED BY THE TPO/DRP ARE CO MPARABLE TO THE FUNCTIONAL PROFILE OF THE ASSESSEE AND MOST OF THE RECEIPTS OF THE COMPARABLES ARE FROM ITA NO. 278/DEL/2012 67 SERVICE SECTOR. ON WORKING CAPITAL ADJUSTMENT, THE LD. DR RELIED ON THE ORDER OF THE DRP. 39. AFTER HEARING BOTH THE SIDES AND PERUSING ENTIR E MATERIAL AVAILABLE ON RECORD, AND WRITTEN SYNOPSIS SUBMITTED BY THE ASSES SEE, WE OBSERVE THAT THE ASSESSEE HAS RAISED OBJECTION ON BOTH REJECTION OF ASSESSEES COMPARABLES AS WELL AS COMPARABLES SELECTED BY THE TPO BEFORE US. AS TH ESE HAVE ALREADY BEEN CONSIDERED BY THE TPO AND DISCUSSED IN DETAILS IN T P ORDER, WE DO NOT CONSIDER IT NECESSARY TO REPEAT THE SAME HERE. WE, HOWEVER, OBS ERVE THAT THE DRP HAS DONE GOOD REASONED ORDER. IN THIS REGARD, THE FINDINGS O F THE LD. DRP ARE REPRODUCED AS UNDER : PANEL: THE TPO HAS HOWEVER GIVEN THE DETAILS OF SERVICE RE CEIPTS IN A TABLE AND HAS CONCLUDED THAT LOOKING TO VERY HIGH PERCENTAGE OF S ERVICE COMPONENT IN THE RECEIPTS OF THE COMPARABLES AND RPT BEING NOT VERY HIGH, THE ASSESSEES OBJECTIONS AGAINST DIFFERENT COMPARABLES ARE NOT TENABLE. THE RELEVANT PART OF TP ORDER IN THIS REGARD IS REPRODUCED BELOW 7.6.14.THE DETAILED SUBMISSION MADE BY THE ASSESSEE HAS BEEN PERUSED. THE CHART SHOWING SEVICE INCOME AS % AGE OF TOTAL INCOME IS AS REPROD UCED BELOW : SI. NO . NAME DATABASE TOTAL INCOME (RS.CR.) SERVICE INCOME (%) RPT (%| 1 APITCO LTD. PROWESS 10.67 98.5 0 2 BEST MULYANKAYAN CONSULTANTS LTD. PROWESS 1.11 92.79 11 3 CHOKSI LABORATORIES LTD. CAPITALINE 9.45 98.7 0 4 GENINS INDIA TP A LTD. PROWESS 5.34 96.69 0 5 IC R A MANAGEMENT CONSULTING SERVICES LTD. PROWESS 18.39 96.16 13.41 6 ID C (INDIA) LTD. PROWESS 15.77 99.43 0.95 7 INDIA CEMENTS CAPITAL LTD. PROWESS 7.95 97.48 0.72 8 INDUS TECHNICAL & FINANCIAL CONSULTANTS LTD. PROWESS 1.15 98.26 0 9 0 RG INFORMATICS LTD. (SEG.) PROWESS 13.61 77.02 1 10 RITES LTD. (SEG.) PROWESS 353.13 84.43 3.49 ITA NO. 278/DEL/2012 68 11 TECHNICOM - CHEMIE (INDIA) LTD. PROWESS 1.97 94.42 0 12 VAPI WASTE & EFFLUENT MGMT. CO. LTD. PROWESS 19.9 79.85 0 13 WAPCOS LTD. (SEG.) CAPITALINE 81.97 97.55 0 IT IS CLEAR FROM THE ABOVE THAT ALTHOUGH THE COMPAR ABLES MAY BE CLAIMING TO BE OPERATING IN VARIOUS SEGMENT, AS CLEAR FROM THE ABO VE CHART, FINANCIALLY, THE DOMINANT INCOME IS OUT OF THEIR SERVICE ACTIVITY. N ONE OF THE ASSESSEE COMPANIES HAVE SUBSTANTIAL RELATED PARTY TRANSACTIONS. IN LIG HT OF THE ABOVE FACT, THE CLAIM MADE BY THE ASSESSEE COMPANY IN ITS SUBMISSION REFE RRED ABOVE RELATING TO SERVICE ACTIVITY IS NOT FOUND ACCEPTABLE AND IS REJ ECTED. 7.6.15 HOWEVER, THE CLAIM OF THE ASSESSEE COMPANY WITH REL ATION TO THE NATURE OF CONSULTANCY ACTIVITY HAS BEEN EXAMINED. I N THE CASES OF APITCO LTD., I C R A MANAGEMENT CONSULTANCY LTD., O R G INFORMATICS LTD. (SEG.) AND WAPCOS LTD. (SEG.), THE ISSUES RAISED BY THE ASSESSEE ARE FOUND TO BE ACCEPTABLE. ACCORDINGLY, THESE COMPANIES ARE EXCLUDED FROM THE ABOVE SET, BEING FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY'S MARKETING SUPPORT SERVICES. IN LIGHT OF THE DISCUSSION ABOVE, THE COMPARABLE SE T SELECTED BY THIS OFFICE IS REDUCED TO THE FOLLOWING TABLE. SL. NO. NAME DATABASE TOTAL INCOME (RS.CR.) SERVICE INCOME (%) RPT (%) PBIT COST(%) 1 BEST MULYANKAYAN CONSULTANTS LTD. PROWESS 1.11 92.79 11 12.85 2. CHOKSI LABORATORIES LTD. CAPITALINE 9.45 98.7 0 29.2 3 GENINS INDIA T P A LTD. PROWESS 5.34 96.69 0 9.22 4 ID C (INDIA) LTD. PROWESS 15.77 99.43 0.95 15.48 5 INDIA CEMENTS CAPITAL LTD. PROWESS 7.95 97.48 0.72 30.91 6 INDUS TECHNICAL & FINANCIAL CONSULTANTS LTD. PROWESS 1.15 98.26 0 14.56 7 RITES LTD. (SEG.) PROWESS 353.13 84.43 3.49 25.77 8 TECHNICOM - CHEMIE (INDIA) LTD. PROWESS 1.97 94.42 0 7.32 9 VAPI WASTE & EFFLUENT MGMT. CO. LTD. PROWESS 19.9 79.85 0 18.53 AVERAGE 18.20 ITA NO. 278/DEL/2012 69 BROADLY SPEAKING THE CONCLUSION OF THE TPO IS CONVI NCING. BUT STILL WE FIND THAT IN RESPECT TO SOME COMPARABLES IDENTIFIED BY THE TPO THERE IS ENO UGH FORCE IN THE ARGUMENTS GIVEN BY THE ASSESSEE AGAINST THEM. THOUGH VERY HIGH SERVICES CO MPONENT IS A PREREQUISITE IN TP STUDY CARRIED OUT TO FIND OUT THE ARMS LENGTH PRICE, BUT WE CANNOT IGNORE THE PROFIT EARNED ON SUCH SERVICES. IF PROFIT IS NOT THE MOTIVE THEN UNCONTRO LLED ENTITIES ON THE BASIS OF SERVICES ALONE CANNOT BE COMPARABLE. ACCORDINGLY, VAPI WASTE & EFF LUENT MGMT. CO. LTD. IS NOT CONSIDERED A SUITABLE COMPARABLE. ASSESSEE SUBMITS IN THIS REGAR D THAT THE COMPANY IS A NON PROFIT, NON EQUITY CO-OPERATIVE WORKING ON CORPORATE CULTURE FO R BETTERMENT OF ENVIRONMENT AND SUSTAINABLE DEVELOPMENT. FURTHER AS PER THE INCOME STATEMENT THE COMPANY RECEIVES INCOME ONLY FROM MEMBERS. THE COMPANY ALSO HAS HUGE EXPENS ES ON CONSUMABLES AMOUNTING TO RS.1.07 CRORES. THE COMPANY RECEIVES HUGE CONTRIBUT IONS FROM GOVERNMENT OF INDIA AND ALSO FROM NOTIFIED AREA. FURTHER AS PER NOTES TO ACCOUNT S, THE COMPANY IS INVOLVED IN INDUSTRIAL INFRASTRUCTURE UP GRADATION PROJECT AND ROAD UP GRA DATION PROJECT. THE ASSESSEE HAS ALSO SUBMITTED THAT VANIYAMBADI TANNERS ENVIRO CONTROL S YSTEMS LIMITED & PALLAVARAM TANNERS INDL. EFFLUENT TREATMENT CO. LTD. SHOULD ALSO BE CO NSIDERED BY THE TPO AS COMPARABLES. THESE COMPANIES HAVE BEEN REJECTED BY THE TPO ON THE GROU ND THAT THEY ARE OPERATING EFFLUENT TREATMENT PLANT. HOWEVER, VAPI WASTE & EFFLUENT MGM T. CO. LTD., A COMPARABLE SELECTED BY THE TPO IS ALSO OPERATING THE BIGGEST EFFLUENT TREATMEN T PLANT. IN THIS REGARD THE ASSESSEE COMPANY HAS SUBMITTED THAT, WITHOUT PREJUDICE TO THE TP STU DY AND OUR ARGUMENTS IN REGARD TO THE COMPARABLES SELECTED BY THE LEARNED TPO, IN CASE TH E TPOS APPROACH HAS TO BE CONSISTENTLY APPLIED, THE ABOVE COMPANIES ALSO NEED TO BE CONSID ERED. WE HAVE DIRECTED THE TPO TO EXCLUDE VAPI WASTE & EFFLUENT MGMT. CO. LTD. AND THEREFORE, FOR THE SAKE OF CONSISTENCY WE CANNOT AGREE WITH THE REQUEST OF THE ASSESSEE TO INCLUDE VANIYAM BADI TANNERS ENVIRO CONTROL SYSTEMS LIMITED & PALLAVARAM TANNERS INDL. EFFLUENT TREATME NT CO. LTD. THE ASSESSEE HAS ALSO SUBMITTED THAT THE TPO HAS REJECTED TATA SERVICES L IMITED ON THE GROUNDS THAT THE COMPANY PROVIDED IN-HOUSE SUPPORT TO THE TATA GROUP AND FUN CTIONS ON A NO PROFIT A LOSS BASIS. IN THIS REGARD, THE ASSESSEE HAS ALSO SUBMITTED THAT VAPI W ASTE & EFFLUENT MGMT. CO. LTD. IS ALSO A NON- PROFIT MAKING COMPANY, RENDERING SERVICES ONLY ITS MEMBERS AND YET HAS BEEN SELECTED AS A COMPARABLE. FURTHER, AS PER ANNUAL REPORT OF TATA S ERVICES LIMITED, THE COMPANY HAS NO RELATED PARTY TRANSACTIONS AND THE SUPPORT SERVICES SEGMENT OF THIS COMPANY INCLUDE SERVICE SUCH AS I.E. ACCESS CONTROL SERVICES, ADMINISTRATIVE SUPPOR T SERVICES, BOMBAY HOUSE TELEPHONE EXCHANGE, CENTRAL RECEIVING SECTION, FORT CHAMBERS, HOLIDAY HOMES, MEDICAL SERVICES, NETWORK COMMUNICATION SYSTEM, STAFF CANTEEN ETC., IS SIMILA R TO THE SERVICES RENDERED BY ASSESSEE. HENCE WITHOUT PREJUDICE TO THE TP STUDY, THE ASSESSEE SUB MITS THAT IF THE SEARCH STRATEGY ADOPTED BY THE TPO IS TO BE CONSIDERED, THEN TATA SERVICES LIM ITED IS TO BE ACCEPTED AS A COMPARABLE. IN THIS CONNECTION, WE AGAIN WRITE THAT WE HAVE ALREAD Y DIRECTED THE AO TO EXCLUDED VAPI WASTE & EFFLUENT MGMT. CO. LTD, AND HENCE TATA SERVICES LIM ITED CANNOT BE INCLUDED IN THE SET OF COMPARABLES. THE ASSESSEE HAS ALSO SUBMITTED THAT T HE TPO HAS REJECTED CHARMS INDUSTRIES LIMITED ON FUNCTIONAL BASIS MENTIONING THAT IT IS E NGAGED IN TRADING OF FOREIGN CURRENCY. BUT THE ASSESSEE SUBMITS THAT INDIA CEMENT CAPITAL LIMITED IS ALSO ENGAGED IN SIMILAR SERVICE UNDER THE BRAND FOR XCHANGE. YET, INDIA CEMENTS CAPITAL LIM ITED IS SELECTED AS A COMPARABLE BY THE TPO. WE FIND THAT THE ASSESSEE HAS, EXCEPT SAYING THAT C HARMS INDUSTRIES LIMITED IS ALSO ENGAGED IN TRADING OF FOREIGN CURRENCY, NOT PROVIDED OTHER INF ORMATION ABOUT THIS COMPANY. IN OUR VIEW TRADING IN FOREIGN CURRENCY IS DIFFERENT FROM THE B USINESS OF FOREIGN CURRENCY RELATED SERVICES. ITA NO. 278/DEL/2012 70 THEREFORE ON THE BASIS OF LIMITED INFORMATION PROVI DED BY THE ASSESSEE WE CANNOT GIVE DIRECTION TO THE AO TO INCLUDE CHARMS INDUSTRIES LI MITED IN THE SET OF COMPARABLES. THE ASSESSEE HAS ALSO SUBMITTED THAT IN CASE OF M/S. CH OKSI LABORATORIES LIMITED AND M/S. RITES LIMITED THE TPO HAS COMMITTED ERROR IN COMPUTATION OF MARGINS. IN CASE OF M/S. CHOKSI LABORATORIES LIMITED THE ASSESSES HAS SUBMITTED THA T THE TPO HAS INCLUDED OTHER INCOME AND OPERATING INCOME WHILE THE SAME PERTAINS TO INTERES T AND OTHER INCOME. THE ASSESSEE HAS ALSO SUBMITTED THAT WHILE COMPUTING THE OPERATING EXPENS ES, THE TPO HAS CONSIDERED LISTING FEES TO BE AN OPERATING EXPENSE. WE FIND THAT IN COMPUTATIO N OF OPERATING INCOME OTHER INCOME IS INTEREST AND OTHER INCOME IS EXCLUDED, BUT THE TPO HAS NOT DONE SO IN CASE OF CHOKSI LABORATORIES LIMITED. WE, THEREFORE, DIRECT THE TPO TO EXCLUDE INTEREST AND OTHER INCOME RS. 1,245,676/- IN THE CASE OF CHOKSI LABORATORIES LIMI TED. WE FIND THAT IN THE CASE SYNOPSES WHICH THE ASSESSEE HAS FILED DURING THE DRP HEARINGS ON P AGE 16 THE ASSESSEE HAS SUBMITTED THAT THE TPO HAS NOT INCLUDED IN OPERATING EXPENSES RS.22,50 0/-. IF THE TPO HAS CONSIDERED RS.22,500/- AS OPERATING EXPENSES THEN THE TPO SHOULD HAVE INCL UDED THIS AMOUNT IN OPERATING EXPENSES BUT IN THE COMPUTATION AS PER TPO, REPRODUCED BY TH E ASSESSEE ON PAGE 16, RS.22,500/- HAS NOT BEEN INCLUDED IN THE OPERATING EXPENSES IN THE CASE OF CHOKSI LABORATORIES LIMITED. THEREFORE, IN VIEW OF THE FACT THAT THIS AMOUNT HAS NOT BEEN I NCLUDED IN OPERATING EXPENSES BY THE TPO, WE UPHOLD THE DECISION OF NOT INCLUDING RS.22,500/- AS OPERATING EXPENSES AS WE CONSIDER THAT THIS EXPENDITURE IS NOT REVENUE IN NATURE. IN THE CASE O F RITES LIMITED THE TPO HAS NOT EXCLUDED RS.299,580,000/- WHICH IS IN THE NATURE OF OTHER IN COME. WE FIND THAT THE TPO SHOULD HAVE EXCLUDED THIS AMOUNT WHILE COMPUTING THE OPERATING PROFIT MARGIN IN THE CASE OF THIS COMPANY. THEREFORE, WE DIRECT THE TPO TO EXCLUDE AMOUNT RS.2 99,580,000/- APPEARING AS OTHER INCOME IN THE COMPUTATION OF OPERATING PROFIT MARGIN IN TH E CASE OF RITES LIMITED. WORKING CAPITAL ADJUSTMENT : THE ASSESSEE HAS REQUESTED FOR WORKING CAPITAL ADJU STMENT IN RESPECT TO MARKETING SUPPORT DIVISION. PANEL: THE ASSESSEE HAD MADE REQUEST BEFORE THE TPO ALSO DURING TP PROCEEDINGS BUT THE TPO HAS NOT ALLOWED THE CLAIM OF THE ASSESSEE. WHY THE TPO HAS REJECTED THE CLAIM OF THE ASSESSEE, TO THIS WE HAVE REFERRED TO THE TP ORDER. THE RELEVANT PARAGRAPH FROM THE TP ORDER IS REPRODUCED BELOW - 7.6.16 CLAIM FOR WORKING CAPITAL ADJUSTMENT: THE ASSESSEE HAS SOUGHT WORKING CAPITAL ADJUSTMENT IN THE CASE OF MARKETIN G SUPPORT GROUP STATING THAT IN THAT GROUP, IT HAS BEEN POSSIBLE TO BIFURCA TE THE DEBTORS AND CREDITORS AND HENCE IT IS POSSIBLE TO WORK OUT THE WORKING CA PITAL ADJUSTMENT. THE CLAIM MADE BY THE ASSESSEE HAS BEEN PERUSED. IT IS SEEN THAT MARKETING SUPPORT GROUP FUNCTIONS ALONGWITH GLOBAL SERVICES G ROUP. THE ASSESSEE HAS GIVEN NO THUMB-RULE OR BASIS ON WHICH IT HAS BIFURC ATED THE VARIOUS ASSETS IN THE BALANCE SHEET OF THE GROUP AND THERE IS SUFFICI ENT FUNCTIONALITY SIMILARITY IN BOTH SERVICES. THE ASSESSEE OPERATES ON COST PLU S MODEL AND THE TOTAL TURNOVER OF MARKETING SUPPORT SERVICES IS RS.50.94 CRORES. HOWEVER, IT IS SEEN THAT THE GBS DIVISION AS A WHOLE, AFTER INCLUDING T HE TWO DIFFERENT SERVICES RENDERED BY THE DIVISION, HAS INCURRED A LOSS. HOW THE ACCOUNTS OF THE DIVISION HAVE BEEN SEGMENTED SO THAT THE ASSESSEE H AS SHOWN PAYABLES OF ITA NO. 278/DEL/2012 71 RS.11.04 CRORE AND RECEIVABLES OFRS.9.55 CRORE WITH REFERENCE TO ONLY MARKETING SUPPORT GROUP IS NOT CLEAR IN LIGHT OF CO NSOLIDATED ACCOUNTS. SINCE THE MAJOR COST, AS PER FUNCTIONAL EXPLANATION GIVEN ABOVE IS SALARY TO EMPLOYEES, THE ABOVE VOLUME OF RECEIVABLES AND PAYA BLES ARE NOT TAKEN AT CORRECTLY, ESPECIALLY AS THE SEGMENT IS NOT INDEPEN DENT AND FORMS A PART OF THE DIVISION. IN VIEW OF LACK OF INFORMATION AS WEL L AS LACK OF JUSTIFICATION IN LIGHT OF THE NATURE OF WORK OF THE MARKETING SUPPOR T GROUP, THE REQUEST FOR WORKING CAPITAL ADJUSTMENT IN THE CASE OF MARKETING SUPPORT GROUP IS NOT FOUND CORRECT AND IS REJECTED. IN RESPECT OF OTHER DIVISIONS, NO WORKING CAPITAL ADJUSTMENT HAS BEEN CLAIMED BY THE ASSESSEE COMPANY . WE AGREE WITH THE TPO THAT THE PURPOSE OF MAKING AN Y ADJUSTMENT IN TP CASES IS TO IMPROVE THE COMPARABILITY. THEREFORE, THE ADJUSTMENT SHOULD BE MADE ONLY IF REASONABLY ACCURATE ADJUSTMENT CAN BE MADE. THE ASSESSEE HAS NOT EXPLAI NED THE BASIS OF FIGURES OF DEBTORS AND CREDITORS TAKEN IN MARKETING SUPPORT GROUP WHICH IS JUST A SEGMENT. THEREFORE, IN ABSENCE OF ACCURATE DETAILS, WE UPHOLD THE ACTION OF THE TPO O F NOT ACCEPTING THE CLAIM OF WORKING CAPITAL ADJUSTMENT. IN RESPECT TO OTHER DIVISIONS, NEITHER THE ASSESSEE HAS CLAIMED ADJUSTMENT NOR WAS IT GRANTED BY THE TPO. 40. FROM THE ABOVE FINDING OF LD. DRP, WE OBSERVE T HAT IN CASE OF CHOKSI LABORATORIES LTD. AND RITES LTD., THE ASSESSEE HAD CHALLENGED ONLY THE CALCULATION MISTAKES REGARDING THE OPERATIONAL INCOME/EXPENSES WHICH HAS BEEN DULY DECIDED BY THE LD. DRP BY REMITTING THE MATTER BACK TO THE AO/TPO, WHILST THE ASSESSEE HAS CHALLENGED BEFORE US THE FUNCTIONAL CO MPARABILITY OF ABOVE COMPANIES WHICH WAS NOT AGITATED BEFORE THE DRP. HE HAS ALSO RELIED VARIOUS CASE LAWS, AS REPRODUCED IN THE ABOVE WRITTEN SYNOPSIS. FURTHER, IN CASE OF INDIA CEMENTS CAPITAL LTD., THE ASSESSEE DID NOT PROVIDE DETAILS BEFORE THE DRP, BUT ITS ANNUAL REPORT HAS BEEN SUBMITTED BEFORE US. CONSIDE RING THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE AND SUBMISSIONS OF THE AS SESSEE, WE THINK IT PROPER TO SEND THE MATTER BACK TO THE AO/TPO FOR FRESH CALCUL ATION OF ADJUSTMENT AFTER CONSIDERING THE PLEAS MADE BY ASSESSEE IN ITS WRITT EN SYNOPSIS, IF IT IS FOUND SUITABLE COMPARABLE. FURTHER IN HIS WRITTEN SYNOPS IS, THE AR OF THE ASSESSEE HAS PLEADED THAT TATA SERVICES LTD. BE INCLUDED FOR THE COMPARABILITY TEST, BUT WE FIND THAT THE LD. DRP HAS PROPERLY DEALT WITH THIS PLEA IN THEIR ORDER AND WE DO NOT FIND ANY INFIRMITY IN IT ON THIS COUNT. IN CASE OF WORKI NG CAPITAL, THE LD. DRP HAS DONE ITA NO. 278/DEL/2012 72 GOOD REASONED ORDER AND IT DOES NOT REQUIRE ANY INT ERFERENCE. WE, THEREFORE, FINDING NO INFIRMITY IN THE ORDER OF DRP AFFIRM THE SAME. THIS GROUND IS, THUS, ALLOWED FOR STATISTICAL PURPOSE. 41. IN RESPECT OF GROUND NO. 17, THE ASSESSEE HAS R AISED ISSUE REGARDING BENEFIT OF +/- 5 PER CENT AS PER SECTION 92C(2) OF THE IT ACT, WHI CH IS A STATUTORY STANDARD DEDUCTION. THE LD. DRP HAS EXAMINED THE ISSUE ON THE BASIS OF CASE LAWS CITED BY THE ASSESSEE AND HAS DIRECTED AS UNDER : THE ASSESSEE HAS NOT MENTIONED ABOUT ITS CLAIM DIV ISION WISE. IN ABSENCE OF PROPER REPRESENTATION, IT IS DIFFICULT TO KNOW ABOUT THE VE RACITY OF ASSESSEES CLAIM. HOWEVER, WE MAKE IT CLEAR IN THIS REGARD THAT MARGINAL VARIATION OF 5% IS NOT ALLOWED AS STANDARD DEDUCTION. HOWEVER, WITH DUE RESPECT TO VARIOUS DECISIONS CITED BY THE ASSESSEE, WE HOLD THAT MARGINAL VARIATION OF 5% PRICE IS ALLOWED ONLY IF THE PRICE OF INTERNATIONAL TRANSACTIONS DISCLOSED BY THE ASSESSEE DOES NOT EXCEED THE MARGIN PROVIDED IN THE PROVISION OF SECO ND LIMB OF PROVISO TO SECTION 92C(2) OF THE ACT. IF THE PRICE OF INTERNATIONAL TRANSACTIONS DISCLOSE D BY THE ASSESSEE EXCEEDS THE MARGIN THEN DEDUCTION IS NOT AT ALL PERMISSIBLE. THEREFORE, THE TPO IS DIRECTED TO REVIEW THE ADDITIONS SUGGESTED BY HIM TO ENSURE THAT THEY ARE IN ACCORDANCE TO OUR VIEW ON THIS MATTER. 42. THE CONTENTION OF THE LD. AR HAS BEEN THAT IN VIEW OF THE RETROSPECTIVE AMENDMENT TO THE PROVISO TO SECTION 92C OF THE ACT IN FINANCE BILL 2012, THE ASSESSEE WOULD GET THE BENEFIT IF IT FALLS WITHIN + /- 5 PERCENT RANGE AS SPECIFIED IN THE PROVISO. WE HAVE GONE THROUGH THE ORDER OF THE AO AND WE FIND THAT THE AO THOUGH HAS REPRODUCED THE FINDINGS OF LD. DRP IN TH E ORDER, BUT HAS NOT ANALYSED THE ISSUE REGARDING BENEFIT OF +/- 5% OF THE PRICE OF INTERNATIONAL TRANSACTIONS, AS DIRECTED BY THE LD. DRP. HOWEVER, WE FIND THAT THE ASSESSEE HAS SUBMITTED SEGMENT-WISE MARGINAL VARIATION OF +/- 5 PER CENT, WHICH IS NOT CORRECT. IT SHOULD BE CALCULATED FOR WHOLE INTERNATIONAL TRANSACTIONS DECLARED BY THE ASSESSEE DURING THE YEAR. THEREFORE, THE AO/TPO IS ACCORDINGLY DIRE CTED TO CONSIDER THIS ISSUE IN THE LIGHT OF DIRECTIONS OF THE DRP AND ALSO KEEPING IN VIEW THE AMENDMENT MADE ITA NO. 278/DEL/2012 73 IN PROVISO TO SECTION 92C OF THE ACT BY FINANCE BIL L, 2012, AS CONTENDED BY THE LD. AR. HENCE, THIS GROUND IS ALLOWED FOR STATISTICAL P URPOSES. 43. GROUND NO.18 & 19 PERTAIN TO CHARGING OF INTERE ST U/S. 234B AND 234C OF THE IT ACT TO THE EXTENT OF RS.12,35,68,005/- AND R S.12,27,135/- RESPECTIVELY, WHICH IS CONSEQUENTIAL IN NATURE. THE AO IS DIRECTE D TO GIVE CONSEQUENTIAL EFFECT THEREOF. 44. GROUND NO. 20 REGARDING INTEREST U/S. 234D OF R S.1,46,99,349/- AND WITHDRAWAL OF INTEREST U/S. 244A OF RS.91,88,339/- IS DISMISSED AS NOT PRESSED BY THE LD. AR. 45. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED AS DISCUSSED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH DECEMBER, 2018. SD/- SD/- (BHAVNESH SAINI) (L.P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE:04.12.2018 COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI