M/s. DIAMOND DYE CHEM LTD., MUMBAI V. DCIT Rg. 6(2), MUMBAI

ITA 3073/MUM/2006

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 2121 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 11 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Assessment Year: 2002-2003
• Appeal Filed On: 17-05-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJIT KUMAR SINHA
• Keywords: Transfer pricing; International transaction; Cost of acquisition; Set aside
• Section: 80HHC; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE SHRI R.K. PANDA, AM & SMT. ASHA VIJAYARAGHAV AN, JM I.T.A. NO. 3073/MUM/2006 (ASSESSMENT YEAR 2002-03) M/S. DIAMOND DYE CHEM LTD. CIBA HOUSE, PLOT NO. 37, CHANDIVALI FARM ROAD, CHANDIVALI, ANDHERI (EAST), MUMBAI-400 072 PAN: AAACD3478N VS. DCIT-RG.6(2) 5 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400 020 APPELLANT RESPONDENT APPELLANT BY: MR. RAHUL MITRA, MR. SATISH MODY, MS. AARTI AMONKAR RESPONDENT BY: MR. AJITKUMAR SINHA O R D E R DATE OF HEARING: 18.02.2010 DATE OF ORDER: 14.05.2010 PER R.K. PANDA, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGA INST THE ORDER DATED 20 TH MARCH, 2006 OF THE CIT(A)-VI, MUMBAI RELATING TO A SSESSMENT YEAR 2002-03. 4. CONCISE GROUNDS OF APPEAL NOS. 1 AND 2 BY THE ASSES SEE READ AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS)-VI , MUMBAI ERRED IN MAKING ENHANCEMENT ON ACCOUNT OF MODVAT CR EDIT TO THE CLOSING STOCK WITHOUT GRANTING OPPORTUNITY TO T HE APPELLANT UNDER SECTION 251(2) OF THE INCOME-TAX AC T, 1961 (THE ACT) AND, HENCE APPELLANT PRAYS THAT ENHANCEME NT MADE BY THE CIT(A) SHOULD BE TREATED AS BAD IN LAW. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING THE ADDITION MADE BY THE DEPUTY COMMISSIONER OF INCOME-TAX, RANG E 6(2), MUMBAI OF RS.23,95,132/- ON ACCOUNT OF UNUTILISED M ODVAT I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 2 CREDIT TO THE CLOSING STOCK AND FURTHER ERRED IN EN HANCING IT TO RS.26,64,545/-. 5. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT THE ASSESSEE HAS NOT INCLUDED UNUTILISED CENVAT CREDIT IN THE VALUE OF C LOSING STOCK AS ON 31 ST MARCH, 2002 TO THE EXTENT OF RS.23,95,132. HE NOTE D THAT WHILE DOING SO, THE ASSESSEE HAS DEVIATED FROM THE METHOD OF ACCOUN TING AS LAID DOWN IN SECTION 145A OF INCOME-TAX ACT, 1961 (THE ACT). AC CORDING TO THE ASSESSING OFFICER, AS PER THE PROVISIONS OF THE SEC TION, ONE HAS TO FOLLOW THE INCLUSIVE METHOD FOR VALUING THE CLOSING STOCK BY INCLUDING CENVAT CREDIT WHICH REMAINS UNUTILISED ON THE LAST DAY OF THE CONCERNED FINANCIAL YEAR. HOWEVER, THE ASSESSEE COMPANY IN THE INSTAN T CASE HAS FOLLOWED INCLUSIVE METHOD OF VALUING THE CLOSING STOCK AND T HE UNUTILISED CENVAT CREDIT IS REFLECTED UNDER THE HEAD LOANS AND ADVAN CES IN THE ASSETS SIDE OF THE BALANCE SHEET. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE SAME SHOULD NOT BE INCLUDED IN THE CL OSING STOCK IN VIEW OF THE PROVISIONS OF SECTION 145A OF THE ACT. NOT BEI NG SATISFIED WITH THE VARIOUS EXPLANATIONS GIVEN BY THE ASSESSEE AND RELY ING ON A COUPLE OF DECISIONS, THE ASSESSING OFFICER ADDED AN AMOUNT OF RS.23,95,132 BEING UNUTILISED CENVAT CREDIT IN THE CLOSING STOCK. 6. IN APPEAL, THE CIT(A) FOLLOWING HIS ORDER FOR THE P RECEDING ASSESSMENT YEAR DIRECTED THE ASSESSING OFFICER TO M AKE AN ADDITION OF RS.26,64,555 BY HOLDING AS UNDER: 2.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPEL LANT AND I HAVE NOTICED THAT SIMILAR ISSUE WAS CONSIDERED BY ME IN EARLIER YEAR ORDER AND I HAVE ADOPTED THE DIFFERENT METHOD OF WORKING OUT ANY ADJUSTMENT IF ANY REQUIRED TO BE MA DE IN THE CLOSING STOCK. THE OPERATIVE PORTION OF THE ABOVE ORDER IS AS UNDER: ACCORDINGLY, IT CAN BE NOTICED THAT IN A CASE WHE RE EXCLUSIVE METHOD IS FOLLOWED IF THE CENVAT ELEMENT WHICH IS REQUIRED TO BE ADDED IN THE CLOSING STOCK IS SAME A S THE CENVAT CREDIT YET TO BE AVAILED SHOWN ON THE ASSET SIDE OF THE BALANCE SHEET, NO ADDITION ON ACCOUNT OF APPLIC ABILITY OF 145A COULD BE MADE. HOWEVER, IF THE CENVAT ELEMENT TO BE I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 3 INCLUDED IN THE CLOSING STOCK IS MORE THAN THE CENV AT BALANCE AVAILABLE IN THE CENVAT CREDIT ACCOUNT OCCU RRING ON THE ASSET SIDE OF THE BALANCE SHEET, THE BALANCE I S REQUIRED TO BE ADDED. APPLYING THE ABOVE PRINCIPLE FOR THE YEAR ALSO IT MAY BE SEEN THAT CENVAT ELEMENT WHICH IS REQUIRED TO BE ADDED TO THE CLOSING STOCK IS RS.50,59,677/-. THE BALANCE A VAILABLE IN THE CENVAT CREDIT ACCOUNT OCCURRING ON THE ASSET SI DE OF THE BALANCE SHEET IS 23,95,132/-. I N VIEW OF ABOVE DI RECTION THE ADDITION TO THE CLOSING STOCK WOULD BE RS.26,64,545 /- AS SUCH THE AO IS DIRECTED TO ADD RS.26,64,545/- TO THE CLO SING STOCK INSTEAD OF RS.23,95,132/- MADE BY HIM. THE ABOVE CALCULATION ALSO FIND SUPPORT FROM THE WORKING GIVE N BELOW WHICH HAS BEEN GIVEN UNDER PROTEST BY THE APPELLANT COMPANY. THE CENVAT ELEMENT TO BE INCLUDED IN THE CLOSING STOCK RS.50,59,677/- SUBTRACT CENVAT ELEMENT TO BE INCLUDED IN THE OPENING STOCK. RS.71,32,473/- SUBTRACT CENVAT ELEMENT AVAILED ON ACCOUNT OF PURCHASE RS.4,24,19,091/- ADD: CENVAT UTILISED RS.4,71,56,342/- ---------------------- NET ADDITION RS.26,64,545/- ============= NATURALLY THE ABOVE ADDITION WOULD BE AVAILABLE AS INCREASE IN THE OPENING STOCK OF THE NEXT YEAR. THIS GROUND IS DISPOSED OF ACCORDINGLY. 7. AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BO TH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND MERIT IN THE SU BMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT IT HAS NIL EFFECT IN VIEW OF THE FOLLOWING CALCULATIONS. I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 4 SL. NO. PARTICULARS INCREASE IN PROFIT (RS.) DECREASE IN PROFIT (RS.) 1. INCREASE IN COST OF OPENING STOCK OF MATERIAL ON INCLUSION OF : A. CENVAT AVAILED 7,132,473 B. SALES TAX SET OFF AVAILED 42,258 2. INCREASE IN PURCHASE COST OF MATERIALS ON INCLUS ION OF A. CENVAT AVAILED 42,419,091 B. SALES TAX SET OFF AVAILED 231,621 3. INCREASE IN CLOSING STOCK OF MATERIALS ON INCLUS ION OF CENVAT AVAILED 5,059,677 4. ACCOUNTING OF CENVAT CREDIT/ SALES TAX SET OFF A VAILED AND UTILISED ON MATERIALS CONSUMED IN PAYMENT OF EXCISE DUTY & SALES TAX ON FINISHED GOODS ACCOUNTED ON THE BASIS OF MATERIALS CONSUMED. A. CENVAT AVAILED 44,491,887 B. SALES TAX SET OFF AVAILED 273,879 5. INCREASE IN SALES OF FINISHED GOODS ON INCLUSION OF SALES TAX COLLECTED ON SALES. 11,215,304 6. SALES TAX NOT INCLUDED AS PART OF TURNOVER 11,215,304 TOTAL 61,040,747 61,040,747 9. FURTHER WE FIND SIMILAR ISSUE HAD COME UP BEFORE T HE TRIBUNAL IN ASSESSEES OWN CASE IN THE IMMEDIATELY PRECEDING AS SESSMENT YEAR AND THE TRIBUNAL VIDE I.T.A. NO. 6136/MUM/04 ORDER DATE D 2 ND APRIL, 2008 FOR THE A.Y. 2001-02 DELETED THE ADDITION MADE BY THE A SSESSING OFFICER AND ENHANCED BY THE CIT(A) BY HOLDING AS UNDER: 7. WE HAVE HEARD THAT LD. REPRESENTATIVES OF BOTH PARTIES AND PERUSED THE RECORDS. WE FIND THAT THE ASSESSEE HAS ALREADY GIVEN EFFECT TO PROVISIONS OF SECTION145A I N RESPECT OF VALUATION OF PURCHASE AD SALE OF GOODS AND INVENTOR Y FOR THE PURPOSE OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION, WHICH IS EVIDENT FROM ANNEXURE-III ENCLOSED TO THE TAX AUDIT REPORT. THE REVENUE AUTHORITIES HAVE SIMPLY ADDED THE AMOUN T OF DIFFERENCE WITHOUT POINTING OUT WHETHER BALANCE IN MODVAT CREDIT ACCOUNT PERTAINS TO PURCHASE AD SALE OF GOOD S AND INVENTORY. SECTION145A REQUIRES THAT THE VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PU RPOSE OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD P ROFITS AND GAINS OF BUSINESS OR PROFESSION AND SHALL BE I N ACCORDANCE WITH THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE AND SHALL BE FURTHER ADJUS TED TO INCLUDE THE AMOUNT OF ANY TAX DUTY, CESS OR FEE ACT UALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO T HE PLACE OF ITS LOCATION AND CONDITION AS ON THE DATE OF VALUAT ION. FROM THE FACTS OF THE CASE WE FIND THAT THE ASSESSEE HAS GIVEN FULL EFFECT TO THE PROVISIONS OF SECTION 145A IN ITS BOO KS OF ACCOUNT. WE ARE NOT WITH THE VIEW OF THE ASSESSING OFFICER T HAT I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 5 WHATEVER THE BALANCE IN MODVAT CREDIT ACCOUNT IS TO BE ADDED. IT CANNOT BE ADDED UNLESS IT IS FOUND THAT EXCISE DUTY ACTUALLY PAID OR INCURRED BY THE ASSESSEE WAS RELAT ED TO BRING THE GOODS TO THE PLACE OF LOCATION AND CONDITION ON THE DATE OF VALUATION. THE ASSESSING OFFICER WITHOUT ESTABLISH ING NEXUS OF BALANCE IN EXCISE/MODVAT ACCOUNT WITH THE PURCHASE OR SALE OF GOODS AND INVENTORY, ADDITION CANNOT BE MADE. T HE ACTION OF THE ASSESSING OFFICER IS NOT CORRECT BECAUSE THE RE MAY BE A NUMBER OF ADJUSTMENT ENTRIES TO BE PASSED BY THE AS SESSEE FOR THIS ACCOUNT AND SUCH ADJUSTMENT ENTRIES ARE NOT RE LATED TO THE REQUIREMENT OF SECTION145A. SUCH BALANCE IN MO DVAT ACCOUNT NOT RELATED TO PURCHASE SALE AND INVENTORY IS NOT REQUIRED TO BE ADDED IN THE VALUATION OF PURCHASE A ND SALE OF GOODS AND INVENTORY FOR THE PURPOSE OF DETERMINING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE WE ARE OF THE CONSIDERED VIEW THAT ADDI TION MADE BY THE ASSESSING OFFICER AND ENHANCED BY THE LD. CI T(A) IS NOT SUSTAINABLE IN LAW. WE ACCORDINGLY DELETE THE ADDI TION. 10. SINCE THE CIT(A) HAS DECIDED THE ISSUE AGAINST THE ASSESSEE BY FOLLOWING HIS ORDER FOR THE PRECEDING ASSESSMENT YE AR WHICH HAS BEEN SET ASIDE BY THE TRIBUNAL, THEREFORE, RESPECTFULLY FOLL OWING THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, WE SET ASIDE THE ORDER OF THE CIT(A) ON THIS ISSUE AND THE ABOVE TWO GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 11. CONCISE GROUNDS OF APPEAL NO. 3 BY THE ASSESSEE REA DS AS UNDER: 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) ERRED IN NOT TREATING TH E INTEREST RECEIPT OF RS.76,747 AS INCOME FROM BUSINESS AND TH EREBY REDUCING THE SAME UNDER CLAUSE (BAA) OF EXPLANATION TO SECTION 80HHC OF THE ACT. 12. AFTER HEARING BOTH THE SIDES, WE FIND FROM THE DETA ILS FURNISHED BY THE ASSESSEE IN THE PAPER BOOK THAT THE INTEREST OF RS.76,747 CONSISTS OF OVERDUE INTEREST FROM CUSTOMERS AMOUNTING TO RS.41, 056, BANK INTEREST ON DEPOSITS RS.31,176, INTEREST ON FIXED DEPOSIT RS .979 AND WATER DEPOSITS RS.3,610. AFTER DEDUCTING INTEREST OF RS. 10,074 TOWARDS WEALTH- TAX, THE ASSESSEE HAS DEBITED NET INTEREST OF RS.76 ,747 ON WHICH IT HAS CLAIMED DEDUCTION U/S. 80HHC. IN OUR OPINION AND I N VIEW OF THE CONSISTENT DECISIONS OF THE CO-ORDINATE BENCHES OF THE TRIBUNAL INTEREST I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 6 ON DELAYED PAYMENTS FROM CUSTOMERS PARTAKES THE CHA RACTER OF TURNOVER OF THE ASSESSEE AND ACCORDINGLY THE ASSESSEE IS ENT ITLED TO DEDUCTION U/S. 80HHC OF THE ACT. HOWEVER, ON ACCOUNT OF OTHER INT EREST INCOME SINCE THE SAME IS NOT HAVING ANY NEXUS WITH THE EXPORT ACTIVI TY, THE ASSESSEE, IN OUR OPINION, IS NOT ENTITLED TO ANY BENEFIT U/S. 80HHC ON ACCOUNT OF SUCH INTEREST. THEREFORE, OUT OF RS.76,747 THE ASSESSEE IS ENTITLED TO THE BENEFIT OF DEDUCTION U/S. 80HHC ON RS.41,056 ONLY. AT THE SAME TIME, WE FIND MERIT IN THE SUBMISSIONS OF THE LEARNED DR THAT SUC H OVER DUE INTEREST FROM CUSTOMERS WAS NOT EXAMINED BY THE ASSESSING OF FICER. WE, THEREFORE, RESTORE THIS ISSUE TO THE FILE OF THE AS SESSING OFFICER TO VERIFY AS TO WHETHER OR NOT THE AMOUNT OF RS.41,056 IS RECEIV ED FROM CUSTOMERS ON ACCOUNT OF OVERDUE INTEREST AND UPON SATISFACTION A LLOW NECESSARY RELIEF. THIS GROUND BY THE ASSESSEE IS ACCORDINGLY PARTLY A LLOWED FOR STATISTICAL PURPOSES. 13. CONCISE GROUNDS OF APPEAL NOS. 4 TO 6 ARE AS UNDER: 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN ADOPTING THE CO ST PLUS METHOD (CPM) INSTEAD OF TRANSACTION NET MARGIN METH OD (TNMM) APPLIED BY THE APPELLANT FOR DETERMINING THE ARMS LENGTH PRICE IN RESPECT OF EXPORTS TO ASSOCIATED EN TERPRISES (AES). 5. WITHOUT PREJUDICE TO GROUND NO. 4, THE LEARNED C IT(A) ERRED: A) IN NOT ACCEPTING THE ADJUSTMENTS ON ACCOUNT OF VOLUME DISCOUNTS THAT IMPACT THE PRICE CHARGED TO AES, AND B) ALLOWING ONLY PARTIAL ADJUSTMENT FOR FOREIGN TRA VEL COST OF THE EMPLOYEES OF THE COMPANY. 6. WITHOUT PREJUDICE TO GROUND NOS. 4 & 5, THE LEAR NED CIT(A) ERRED IN NOT DETERMINING THE ARMS LENGTH PRI CE OF EXPORTS TO AE BY USING INTERNAL TNMM METHOD. 14. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED FROM FORM 10CEB THAT THE ASSESSEE DURING THE RELEVANT ASSESSMENT YEAR HAD IN TERNATIONAL I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 7 TRANSACTIONS WITH ASSOCIATED ENTERPRISES (AES)/CONC ERNS TO THE TUNE OF RS.34,32,69,351. IN ORDER TO DETERMINE THE ARMS L ENGTH PRICE (ALP) IN RELATION TO INTERNATIONAL TRANSACTIONS THE CASE WAS REFERRED TO THE TRANSFER PRICING OFFICER (TPO) U/S. 92CA(1). HE NO TED THAT THE TPO HAD PASSED THE ORDER U/S. 92CA(3) OF THE ACT ON 21 ST DECEMBER, 2004 WHEREIN THE ALP OF INTERNATIONAL TRANSACTIONS RELATING TO E XPORT TO AES HAS BEEN COMPUTED AT RS.37,40,58,731 AS AGAINST THE TRANSACT IONS VALUE OF RS.34,32,69,351 DECLARED BY THE ASSESSEE. THE ASSE SSING OFFICER ACCORDINGLY MADE THE ADDITION OF RS.3,07,89,380 TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF ADJUSTMENTS OF ALP OF INTERN ATIONAL TRANSACTIONS WITH AES. 15. BEFORE THE CIT(A), IT WAS SUBMITTED THAT THE ASSESS EE COMPANY HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH THE AE S AND AS PER THE TRANSFER PRICING REPORT PREPARED BY IT, THE MOST AP PROPRIATE METHOD IN DETERMINING THE ALP IS TRANSACTIONAL NET MARGIN MET HOD (TNM METHOD). HOWEVER, THE TPO DID NOT ACCEPT THE TNM METHOD AS A PPROPRIATE METHOD AND ADOPTED THE COST PLUS METHOD (CPM). IT WAS EXP LAINED THAT USE OF CPM USING THE GROSS PROFIT MARK UP EARNED BY THE AS SESSEE COMPANY FROM EXPORTS TO UNRELATED THIRD PARTIES WOULD NOT BE AN APPROPRIATE METHOD FOR DETERMINATION OF ALP IN RESPECT OF ITS INTERNAT IONAL TRANSACTIONS SINCE VARIOUS FUNCTIONAL AND OTHER DIFFERENCES EXIST BETW EEN EXPORTS TO AES AND EXPORTS TO UNRELATED PARTIES. THESE DIFFERENCES CA NNOT BE QUANTIFIED AND HENCE RELIABLE ADJUSTMENT IS NOT POSSIBLE TO BE MA DE TO THE GROSS PROFIT MARK UP. IT WAS SUBMITTED THAT THE TPO HAS RELIED ON PROVISIONS OF RULE 10B(2) ON COMPARABILITY. HOWEVER, RULE 10B(3) HAS NOT BEEN CONSIDERED. SIMILARLY, THE TPO HAS IGNORED THE PROVISIONS CONTA INED IN CLAUSES (D), (E), (F) OF RULE 10C(3) WHICH REQUIRES CONDITIONS REQUIR ED TO BE MET BEFORE THE MOST APPROPRIATE METHOD IS SELECTED. IT WAS EXPLAI NED THAT FUNCTIONAL AND RISK ANALYSIS FOR THE EXPORT TO AES AND UNRELATED P ARTIES CLEARLY SHOWS THAT TECHNICAL SUPPORT AND PRODUCT RISK AND CREDIT/ COLLECTION RISK WAS ASSUMED IN THIRD PARTIES EXPORTS WHEREAS IN THE CAS E OF AES THESE RISKS ARE NOT WITH THE ASSESSEE. THESE DIFFERENCES CANNO T BE QUANTIFIED IN MANY I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 8 TERMS AND, THEREFORE, THE ACTION OF THE TPO IN ADO PTING CPM IS NOT CORRECT IN VIEW OF FUNCTIONAL DIFFERENCES AND OTHER DIS-SIM ILARITIES BETWEEN THESE TWO PARTIES. THEREFORE, IT WAS EMPHASISED THAT THE MOST APPROPRIATE METHOD IS TNM METHOD. 16. FURTHER WITHOUT PREJUDICE TO THE ABOVE THE FOLLOWIN G ADJUSTMENTS WERE ALSO REQUESTED FOR BY THE ASSESSEE: 1. VOLUME DISCOUNT ADJUSTMENT TO ACCOUNT FOR THE DIFFERENCES IN THE VOLUME OF EXPORTS MADE TO THE AE S AND NON- AES (PROVIDED BY THE TPO AND CIT(A) TO THE ASSESSEE IN THE SUBSEQUENT YEAR I.E., A.Y. 2003-04). 2. STAFF AND TRAVELLING COST OF DEDICATED MARKETING PERSONNEL. 3. TRAVELLING COST OF MARKETING AND TECHNICAL PERSONS. 17. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE, TH E CIT(A) ALLOWED TO THE ASSESSEE, AN ADJUSTMENT ON ACCOUNT O F STAFF AND TRAVELLING COST OF DEDICATED MARKETING PERSONNEL. APPLYING T HE ABOVE APPROACH THE CIT(A) ARRIVED AT AN ALP OF 52.77% IN THE INSTANT C ASE. FURTHER, IN ITS ORDER THE CIT(A) ALSO ALLOWED TO THE ASSESSEE, THE BENEFIT OF THE (+/-) 5% RANGE. ACCORDINGLY, THE LD. CIT(A) UPHELD AN ADJUS TMENT OF RS.3,867,421 IN THE INSTANT CASE. 18. AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US. 19. THE LEARNED COUNSEL FOR THE ASSESSEE FILED A DETAIL ED WRITTEN SUBMISSION AND SUBMITTED THAT DURING THE RELEVANT A SSESSMENT YEAR THE COMPANY ENTERED INTO THE FOLLOWING INTERNATIONAL TR ANSACTIONS WITH THE AES: A.Y. 2002-03 S. NO. PARTICULARS AMOUNT (RS.) 1. EXPORT OF GOODS 343,269,351 2. REIMBURSEMENTS PAID 3,581,066 3. REIMBURSEMENTS RECEIVED 2,198,676 I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 9 HE SUBMITTED THAT FOR THE PURPOSE OF JUSTIFYING THE ARMS LENGTH PRICE FOR THESE INTERNATIONAL TRANSACTIONS THE COMP ANY APPLIED THE TNM METHOD USING OPERATING PROFITS/SALES AS THE PROFIT LEVEL INDICATOR. 20. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SAME SUBMISSIONS AS MADE DURING THE ASSESSMENT AND APPEL LATE PROCEEDINGS. REFERRING TO PAPER BOOK PAGES 90, 105, 106 AND 109, HE SUBMITTED THAT THERE ARE SUBSTANTIAL DIFFERENCES IN THE FUNCTIONAL AND RISK PROFILE OF THE ACTIVITIES UNDERTAKEN BY THE ASSESSEE IN RESPECT OF THE EXPORTS MADE TO THE AES AND NON-AES. HE SUBMITTED THAT THE ASSESSEE UN DERTAKES CERTAIN ADDITIONAL FUNCTIONS IN RESPECT OF THE EXPORTS MADE TO THE NON-AES WHICH PRIMARILY COMPRISE MARKETING, DISTRIBUTION AND SELL ING ACTIVITIES. THE FUNCTIONAL DIFFERENCES ON ACCOUNT OF THE COSTS INCU RRED BY THE COMPANY IN RESPECT OF THE MARKETING, DISTRIBUTION AND SELLING ACTIVITIES ARE NOT ACCOUNTED FOR IN THE ANALYSIS CARRIED OUT USING GRO SS MARGINS AS THE MARKETING, DISTRIBUTION AND SELLING COSTS FORM A PA RT OF THE OPERATING EXPENSES AND ARE NOT INCLUDED IN THE COST OF PRODUC TION. REFERRING TO RULE 10B(3)(II) OF THE INCOME-TAX RULES, 1962, HE SUBMIT TED THAT THE MATERIAL IMPACT OF THE MARKETING, DISTRIBUTION AND SELLING A CTIVITIES CANNOT BE ACCOUNTED FOR AND ADJUSTED IN AN ANALYSIS BASED ON GROSS MARGINS. 21. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTEN TION TO THE PROPOSED REVISION OF CHAPTERS I-III OF TRANSFER PRI CING GUIDELINES ISSUED BY THE OECD AND DREW OUR ATTENTION TO PARA 2.3 OF T HE SAME WHICH READS AS UNDER: 2.3 THERE ARE SITUATIONS WHERE TRANSACTIONAL PROFI T METHODS ARE FOUND TO BE MORE APPROPRIATE THAN TRADI TIONAL TRANSACTION METHODS. ONE EXAMPLE IS WHERE, CONSIDE RING THE FUNCTIONAL ANALYSIS OF THE CONTROLLED TRANSACTION U NDER REVIEW AND AN EVALUATION OF THE COMPARABLE UNCONTROLLED TRANSACTIONS, IT IS FOUND THAT A NET PROFIT MARGIN ANALYSIS IS MORE RELIABLE THAN A GROSS MARGIN ANALYSIS, E.G., B ECAUSE THERE ARE MATERIAL DIFFERENCES IN FUNCTIONS BETWEEN THE TESTED AND THE UNCONTROLLED TRANSACTION WHICH ARE REFLECTED ONLY IN OPERATING EXPENSES BELOW THE GROS S MARGIN LEVEL. ANOTHER EXAMPLE RELATES TO CASES WHERE THE PRESENCE OF SIGNIFICANT UNIQUE INTANGIBLES CONTRIBU TED BY I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 10 EACH OF THE PARTIES TO THE CONTROLLED TRANSACTION O R THE ENGAGEMENT IN HIGHLY INTEGRATED ACTIVITIES MAKES A TRANSACTIONAL PROFIT SPLIT MORE APPROPRIATE THAN A ONE-SIDED METHOD. FURTHERMORE, WHERE THERE IS NO OR LIMITED PUBLICLY AVAILABLE RELIABLE GROSS MARGIN INFORMATION ON THIR D PARTIES, TRADITIONAL TRANSACTION METHODS MIGHT BE DIFFICULT TO APPLY IN CASES OTHER THAN THOSE WHERE THERE ARE REASONABLY R ELIABLE COMPARABLES, AND A TRANSACTIONAL PROFIT METHOD MIGH T BE THE MOST APPROPRIATE METHOD IN VIEW OF THE AVAILABILITY OF REASONABLY RELIABLE INFORMATION. (EMPHASIS SUPPLIE D). 22. REFERRING TO THE SAME, HE SUBMITTED THAT IN CASES W HERE THE DIFFERENCES IN THE FUNCTIONAL PROFILE ARE SO MATER IAL THAT THE SAME CANNOT BE REASONABLY ADJUSTED WHILE CARRYING ON A GROSS PR OFIT ANALYSIS AS PER RULE 10B(1)(C)(III), IT MAY BE APPROPRIATE TO CO NSIDER A NET LEVEL ANALYSIS USING OPERATING MARGINS. THE LEARNED COUNSEL FOR T HE ASSESSEE SUBMITTED THAT IN LIGHT OF THE ABOVE AND WITHOUT PREJUDICE TO ALL THE OTHER SUBMISSIONS OF THE ASSESSEE, IF AT ALL AN INTERNAL COMPARISON IS TO BE CARRIED OUT IN THE INSTANT CASE, THEN IT SHOULD BE CARRIED OUT AT THE OPERATING LEVEL I.E., USING THE NET/OPERATING MARGI NS. 23. HE SUBMITTED THAT A NET/OPERATING LEVEL ANALYSIS US ING TNMM IS APPROPRIATE IN THE INSTANT CASE AS THE NET MARGIN A RE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES. HE SUBMITTED THAT UNDER THE TNMM, SOME LEVEL OF FUNCTIONAL DIVERSITY BETWEEN THE CONTROLLED AND UNCONTROLLED PARTIES IS ACCEPTABLE AS THE DIFFERENCES IN THE FUNCTIONS PERF ORMED BETWEEN ENTERPRISES ARE OFTEN REFLECTED IN VARIATIONS IN OP ERATING EXPENSES. CONSEQUENTLY, ENTERPRISES MAY HAVE A WIDE RANGE OF GROSS PROFIT MARGINS BUT STILL EARN BROADLY SIMILAR LEVELS OF NET PROFIT S. 24. THE LEARNED COUNSEL FOR THE ASSESSEE DREW THE ATTEN TION OF THE BENCH TO THE FOLLOWING ANALYSIS OF THE NET MARGINS EARNED BY THE ASSESSEE ON AE AND NON-AE EXPORTS: ASSESSEES OPERATING MARGIN ON AE EXPORTS BEFORE V OLUME DISCOUNT 20% ASSESSEES OPERATING MARGIN ON AE EXPORTS AFTER VO LUME DISCOUNT 26% ASSESSEES OPERATING MARGIN ON NON-AE EXPORTS 20.16% I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 11 25. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER BROUGH T TO OUR NOTICE THE DETAILS OF THE EXPORT SALES MADE TO THE AES AND NON-AES IN THE RELEVANT ASSESSMENT YEAR WHICH ARE AS UNDER: EXPORTS TO NON-AES 55,847,305 EXPORTS TO AES 343,262,520 26. HE SUBMITTED THAT SINCE THE EXPORTS TO AES ARE AT D ISCOUNTED PRICES ON ACCOUNT OF LARGE VOLUMES SINCE THE ASSESSEES EX PORT SALES TO THE AES ARE MORE THAN SIX TIMES THE EXPORT SALES MADE TO TH E NON-AES, THEREFORE, AN ADJUSTMENT ON ACCOUNT OF VOLUME DISCOUNT SHOULD BE ALLOWED TO THE ASSESSEE IN ORDER TO CARRY OUT A PRUDENT TRANSFER P RICING ANALYSIS. HE SUBMITTED THAT SIMILAR VOLUME DISCOUNT WORKINGS WER E ALSO PROVIDED TO THE TPO DURING THE ASSESSMENT PROCEEDINGS FOR THE S UBSEQUENT YEAR, I.E., A.Y. 2003-04 AND WERE ACCEPTED BOTH BY THE TPO AND THE CIT(A) AS APPROPRIATE. HE SUBMITTED THAT THE METHODOLOGY FOR COMPUTATION OF VOLUME DISCOUNT FOR A.Y. 2002-03 IS THE SAME AS THA T ADOPTED FOR A.Y. 2003-04, WHICH HAS ALREADY BEEN VERIFIED BY THE TPO AND UPHELD BY THE CIT(A). HE ACCORDINGLY SUBMITTED THAT THE VOLUME DISCOUNT BE ALLOWED IN THE INSTANT CASE. HE DREW THE ATTENTION OF THE BEN CH TO THE FOLLOWING VOLUME DISCOUNT WORKINGS FOR A.Y. 2002-03 CARRIED O UT BY THE ASSESSEE BASED ON THE METHODOLOGY ACCEPTED BY THE TPO/ CIT(A ) IN THE SUBSEQUENT YEAR I.E., A.Y. 2003-04. REVENUE FOR AE EXPORTS 343,269,351 DICOP FOR AE EXPORTS 239,183,280 GP FOR AE EXPORTS 104,079,240 GP/DICOP FOR AE SALES 44% VOLUME DISCOUNT PROVIDED IN NON-AE SALES 8% REVISED REVENUES FOR AE EXPORTS AFTER VOLUME DISCOU NT 373,395,540 DICOP FOR AE EXPORTS 239,183,280 GP 134,212,260 GP/DICOP 56.11% GP/DICOP ON NON-AE SALES AS DETERMINED BY THE TPO* 56.39% GP/DICOP ON NON-AE SALES AS DETERMINED BY THE CIT(A )** 52.77% * AFTER ALLOWING FOR ADJUSTMENTS ON ACCOUNT OF COM MISSIONS PAID TO NON-AES AND DIFFERENTIAL CREDIT PERIOD. ** AFTER ALLOWING FOR ADJUSTMENTS ON ACCOUNT OF S TAFF AND TRAVELLING COST OF DEDICATED MARKETING PERSONNEL. I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 12 27. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMIT TED THAT THE CIT(A) HAS ALLOWED TO THE ASSESSEE THE BENEFIT OF T HE -5% RANGE. HE SUBMITTED THAT IN THE ASSESSEES OWN CASE FOR THE S AME YEAR THE TRIBUNAL HAS UPHELD THE CIT(A)S ACTION OF ALLOWING THE -5% RANGE TO THE ASSESSEE. HE REFERRED TO THE FOLLOWING WORKING OF THE -5% RAN GE AS CARRIED OUT BY THE CIT(A): REVENUE FOR AE EXPORTS A 343,269,351 DICOP FOR AE EXPORTS B 239,183,280 GP FOR AE EXPORTS 104,079,240 GP/DICOP C 43.51% ADJUSTED ARMS LENGTH GP/DICOP DETERMINED BY CIT(A) D 52.77% DIFFERENCE FROM ARMS LENGTH GP/DICOP E = C D 9.26 % DIFFERENCE FROM ARMS LENGTH PRICE F = E * B 22,137,7 77 ARMS LENGTH PRICE AS DETERMINED BY CIT(A) G = A + F 365,407,128 -5% RANGE ALLOWED UNDER PROVISO TO 92C(2) OF THE AC T H = G * 95% 347,136,771 ADJUSTMENT AFTER INCLUDING -5% RANGE I = H A 3,867,4 20 28. HE ACCORDINGLY SUBMITTED THAT THERE SHOULD BE NO AD DITION ON ACCOUNT OF ALP. 29. THE LEARNED DR, ON THE OTHER HAND, REFERRED TO THE ORDER PASSED BY THE TPO AND SUBMITTED THAT THE TPO HAS PASSED A VER Y REASONABLE ORDER. HE SUBMITTED THAT WHEN THE LAW DOES NOT SPEAK ANYTH ING SPECIFICALLY, ONE CAN GO TO THE OECD. HE SUBMITTED THAT THE COMPANY HAS USED TNM METHOD FOR COMPUTING THE ALP. HOWEVER, IT HAS NOT IDENTIFIED THE UNCONTROLLED TRANSACTIONS ENTERED INTO BY THE COMPA NY SIMILAR TO THE INTERNATIONAL TRANSACTIONS WHICH IT COULD HAVE CONS IDERED WHILE DECIDING THE MOST APPROPRIATE METHOD. HE SUBMITTED THAT THE 26 COMPANIES GIVEN BY THE ASSESSEE AS COMPARABLES ARE NOT COMPARABLE A T ALL SINCE THEY ALL ARE ENGAGED IN CHEMICAL MANUFACTURING BUSINESS WHEREAS THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE O F OPTICAL BRIGHTENING AGENTS (OBAS). HE SUBMITTED THAT THE PRODUCTS MAN UFACTURED BY THE ASSESSEE ARE EXPORTED TO AES AND INDEPENDENT ENTERP RISES. THE COST DATA FOR THE MANUFACTURE OF PRODUCTS ARE AVAILABLE AS PE R COST AUDIT REPORT AND RELIABILITY THEREOF IS ASSURED. SINCE THE TPO HAS CONSIDERED THE ADJUSTMENTS FOR THE DIFFERENCES IN THE FUNCTIONS PE RFORMED IN BOTH TYPES I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 13 OF TRANSACTIONS, THEREFORE, CPM IS THE MOST APPROPR IATE METHOD. REFERRING TO RULE 10C OF THE I.T. RULES HE SUBMITTED THAT FOR THE PURPOSE OF SUBSECTION (1) OF SECTION 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUM STANCES OF EACH PARTICULAR INTERNATIONAL TRANSACTION AND WHICH PROV IDES THE MOST RELIABLE MEASURE OF AN ALP IN RELATION TO THE INTERNATIONAL TRANSACTIONS. 30. THE LEARNED COUNSEL FOR THE ASSESSEE, IN HIS REJOIN DER, SUBMITTED THAT RULE 10B HAS TO BE READ AS A WHOLE. HE SUBMITT ED THAT THE ADJUSTMENT ON ACCOUNT OF VOLUME SALES HAS BEEN DENIED BY THE C IT(A) ON THE GROUND THAT NO PRACTICE HAS BEEN SHOWN BY THE ASSESSEE THA T SALE PRICE IN RESPECT OF EXPORT IS FIXED DEPENDING UPON THE VOLUME OF THE SALE. REFERRING TO THE ORDER OF THE TPO FOR THE A.Y. 2003-04 (PAPER BOOK P AGES 272 TO 217) HE REFERRED TO INTERNAL PAGE 13 (PAPER BOOK PAGE 284) AND SUBMITTED THAT THE TPO HAS ALLOWED DISCOUNT ON SALE PRICE AS PER W ORKING GIVEN BY THE ASSESSEE AT 11.44%. REFERRING TO THE ORDER OF THE TPO FOR THE A.Y. 2004- 05 (PAPER BOOK PAGES 281 TO 302) HE REFERRED TO INT ERNAL PAGE 12 (PAPER BOOK PAGE 299) AND SUBMITTED THAT THE TPO HAS ALLOW ED DISCOUNT ON SALE PRICE AT 12.25% AS PER THE WORKING GIVEN BY THE ASS ESSEE. THEREFORE, THE CALCULATION GIVEN BY THE ASSESSEE FOR THIS YEAR SHO ULD BE ACCEPTED AND NO ADDITION SHOULD BE MADE. 31. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BO TH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE DURING THE RELEVANT ASSESSMENT YEAR HA S ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH AES: 1) EXPORT OF GOODS - 34,32,69,351 2) REIMBURSEMENT PAID - 35,81,066 3) REIMBURSEMENT RECEIVED - 21,98,676 32. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE ASSES SEE FOR THE PURPOSE OF JUSTIFYING THE ALP FOR ITS INTERNATIONAL TRANSACTIONS HAS FOLLOWED TNM METHOD USING OPERATING PROFIT/SALES AS THE PROFIT LEVEL I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 14 INDICATOR (PLI). THERE IS ALSO NO DISPUTE TO THE F ACT THAT THE TPO HAS COMPARED THE GROSS MARK UP ON COST EARNED BY THE AS SESSEE FROM EXPORTS TO THE AES AT 43.51% WITH THE GROSS MARK UP ON COST EARNED ON EXPORTS TO THE NON-AES AT 56.39% AND AFTER ADJUSTING COMMISSIO N PAID ON SALES MADE TO NON AES AND DEFICIT CREDIT PERIOD TO THE GR OSS MARK UP ON COST EARNED TO NON-AES THE TPO EFFECTED ADJUSTMENT OF RS .3,07,89,380/-. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE CIT(A ) WHILE UPHOLDING THE CPM ADOPTED BY THE TPO ALLOWED ADJUSTMENT ON ACCOUN T OF STAFF AND TRAVELLING COST OF DEDICATED MARKETING PERSONNEL AN D THE BENEFIT OF 5% RANGE AND SUSTAINED AN AMOUNT OF RS.38,67,421/- FOR WHICH THE ASSESSEE IS IN APPEAL AND THERE IS NO APPEAL FILED BY THE RE VENUE FOR THE RELIEF. IT IS THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSES SEE THAT THE ASSESSEE HAS TO UNDERTAKE CERTAIN ADDITIONAL FUNCTIONS IN RE SPECT OF THE EXPORTS MADE TO THE NON-AES FOR MARKETING, DISTRIBUTION AND SELLING ACTIVITIES. THEREFORE, TNM METHOD IS THE BEST SUITED METHOD IN THE FACTS OF THE CASE. 33. WE FIND AS PER THE PROVISIONS OF RULE 10B OF I.T. RULES, 1962 FOR THE PURPOSE OF SUBSECTION (2) OF SECTION 92C, THE A LP IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY, (A) COMPARABLE UNCONTROLLED PRICE METHOD (B) RESALE PRICE METHOD (C) COST PLUS METHOD (D) PROFITS SPLIT METHOD, AND (E) TRANSACTIONAL NET MARGIN METHOD 34. SIMILARLY WE FIND RULE 10C OF THE I.T. RULES WHICH SPEAKS OF THE MOST APPROPRIATE METHOD READS AS UNDER: MOST APPROPRIATE METHOD. 10C. (1) FOR THE PURPOSES OF SUB-SECTION (1) OF SECTION 92C, THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHI CH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTI CULAR INTERNATIONAL TRANSACTION, AND WHICH PROVIDES THE M OST RELIABLE I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 15 MEASURE OF AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SP ECIFIED IN SUB-RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT, NAMELY: (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRAN SACTION; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOY ED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN T HE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRAN SACTION AND BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJU STMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BET WEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INT O SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTI ONS REQUIRED TO BE MADE IN APPLICATION OF A METHOD. 35. WE FIND THE ASSESSEE IS MANUFACTURING OPTICAL BRIGH TENING AGENTS (OBAS) WHICH ARE BEING USED IN TEXTILE AND PAPER IN DUSTRIES AND WHICH ARE EXPORTED BY THE ASSESSEE TO THE AES AS WELL AS NON-AES. THEREFORE, WE DO NOT FIND ANY MERIT IN THE CONTENTION OF THE ASSE SSEE THAT THERE IS PRODUCT DISSIMILARITY BETWEEN GOODS EXPORTED TO AES AND UNRELATED PARTIES AND, THEREFORE, THE COST PLUS METHOD IS NOT APPLICABLE. FURTHER THE LEARNED COUNSEL FOR THE ASSESSEE ALSO COULD NOT SAT ISFACTORILY EXPLAIN AS TO WHAT ARE THE SUBSTANTIAL DIFFERENCES IN THE FUNCTIO NAL AND RISK PROFILES OF THE ACTIVITIES UNDERTAKING BY THE ASSESSEE IN RESPE CT OF THE EXPORTS MADE TO THE AES AND NON-AES. THEREFORE, WE DO NOT FIND MERIT IN THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN CASES WHERE THE DIFFERENCES IN FUNCTIONAL PROFILE ARE SO MATERIAL T HAT THE SAME CANNOT BE REASONABLY ADJUSTED WHILE CARRYING OUT A GROSS PROF IT ANALYSIS, IT MAY BE APPROPRIATE TO CONSIDER A NET LEVEL ANALYSIS USING OPERATING MARGIN IN VIEW OF RULE 10B(1)(C)(III). THEREFORE, THE SUBMIS SION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT IF AT ALL AN INTERNAL COMPARISON HAS TO BE CARRIED OUT IN THE INSTANT CASE THEN IT SHOULD BE C ARRIED OUT AT THE I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 16 OPERATING LEVEL I.E., USING THE NET/OPERATING MARGI N. FURTHER WE FIND FORCE IN THE SUBMISSION OF THE LEARNED DR THAT SINCE THE COST DATA FOR THE MANUFACTURE OF PRODUCTS ARE AVAILABLE AS PER COST A UDIT REPORT, THE RELIABILITY THERE OF IS ASSURED AND THEREFORE COST PLUS METHOD IS THE MOST APPROPRIATE METHOD. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED DISCUSSION BY THE LEARNED CIT(A), WE HOLD THAT THE COST PLUS METHOD (CPM) IS THE MOST SUITABLE METHOD FOR THE INTERNATI ONAL TRANSACTIONS WITH AES IN THE INSTANT CASE. 36. HOWEVER, WE FIND MERIT IN THE SUBMISSION OF THE LEA RNED COUNSEL FOR THE ASSESSEE THAT SINCE THE EXPORTS TO AES AT R S.34,32,62,520 IS ALMOST SIX TIMES OF THE EXPORTS TO NON-AES WHICH IS AT RS. 5,58,47,305, THEREFORE, AN ADJUSTMENT ON ACCOUNT OF VOLUME DISCOUNT SHOULD BE ALLOWED TO THE ASSESSEE IN ORDER TO CARRY OUT A PRUDENT TRANSFER P RICING ANALYSIS. WE FIND FROM THE ORDERS OF THE TPO THAT SIMILAR VOLUME DISC OUNTS WERE ALLOWED BY HIM FOR THE A.YS. 2003-04 AND 2004-05. SINCE THE M ETHODOLOGY FOR COMPUTATION OF VOLUME DISCOUNT FOR THE A.Y. 2002-03 IS THE SAME AS THAT WAS ADOPTED FOR THE A.Y. 2003-04 AND WHICH HAS ALRE ADY BEEN VERIFIED BY THE TPO AND ACCEPTED BY THE CIT(A), THEREFORE, IN O UR OPINION, VOLUME DISCOUNT SHOULD BE ALLOWED TO THE ASSESSEE FOR THE A.Y. 2002-03 ON THE BASIS OF METHODOLOGY ACCEPTED BY THE TPO AND THE CI T(A) IN THE SUBSEQUENT YEAR. WITH THESE OBSERVATIONS, WE RESTO RE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR CALCULATING THE NECESS ARY VOLUME DISCOUNT AND GIVE APPROPRIATE RELIEF TO THE ASSESSEE ON THE BASI S OF THE METHODOLOGY ADOPTED BY HIM IN THE SUB SEQUENT YEARS. THE GROUN DS RAISED BY THE ASSESSEE ARE PARTLY ALLOWED. 37. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 14 TH MAY, 2010. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (R.K. PANDA) ACCOUNTANT MEMBER MUMBAI, DATED 14 TH MAY, 2010 I.T.A. NO. 3073/MUM/06 M/S. DIAMOND DYE CHEM LTD. ==================== 17 COPY TO: (1) THE APPELLANT, (2) THE RESPONDENT, (3) THE CIT(A)-VI, MUMBAI, (4) THE CIT, MC-VI, MUMBAI, (5) THE DR, L BENCH, ITAT, MUMBAI. //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI TPRAO