Kirloskar Ebara Pumps Ltd, Pune V. Deputy Commissioner of Income tax, Pune

ITA 317/PUN/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 5628 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 5 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-07-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 02-05-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 08-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANOJ KUMAR GAUTAM
• Keywords: Transfer pricing; International transaction; Rule of consistency; Avoidance of tax
• Section: 143(3); 10B; 92

Judgement Text

, LH IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE , . , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI D. KARUNAKARA RAO, AM . / ITA NO.317/PUN/2017 / ASSESSMENT YEAR : 2012-13 KIRLOSKAR EBARA PUMPS LTD., PRIDE KUMAR SENATE BUILDING, SENAPATI BAPAT ROAD, PUNE-411016. PAN : AAACK7293A . /APPELLANT VS. DCIT, CIRCLE-14, PUNE. . / RESPONDENT ASSESSEE BY : SHRI SHARAD SHAH REVENUE BY : SHRI MANOJ KUMAR GAUTAM / DATE OF HEARING : 02.05.2019 / DATE OF PRONOUNCEMENT: 19.07.2019 / ORDER PER D. KARUNAKARA RAO, AM : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE ASSESSING OFFICER/TPO/DRP FOR THE ASSESSMENT YEAR 2012-13. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER :- 1. THE LD. A.O./TPO ERRED IN (LD. DRP ERRED IN CONFIRMING) TRANSFER PRICING ADJUSTMENT OF RS.4,09,39,453/- . 2. THE LD. TPO ERRED IN (LD. DRP ERRED IN CONFIRMING) USING THE PLI OF KEPL AT 12.94% CALCULATED BY AGGREGATING AE AS WELL AS NON-AE TRANSACTIONS AND EXCLUDING TURBO-GENSET BUSINESS. 3. THE LD. TPO ERRED IN EXCLUDING (LD. DRP ERRED IN CONFIRMING) MATHER AND PLATT PUMPS LTD. FROM THE SET OF COMPARABLE COMPANIES ON FOLLOWING COUNTS I) YEAR ENDING OF MATHER & PLATT PUMPS LTD. IS DECEMBER 2011 WHEREAS THE KEPLS FINANCIAL YEAR ENDS ON MARCH 2012 WHICH IS NOT IN LINE WITH RULE 10B (4). ITA NO.317/PUN/2017 2 II) MATHER & PLATT PUMPS LTD. HAS INCURRED ABNORMAL LOSSES DURING THE PERIOD. 4. THE LD. TPO ERRED IN (LD. DRP ERRED IN CONFIRMING) MAKING TP ADJUSTMENT ON TOTAL TURNOVER INSTEAD OF RESTRICTING THE ADJUSTMENT IN RESPECT OF TRANSACTION WITH ASSOCIATED ENTERPRISES (AE). 5. ONCE THE ABOVE GROUND ARE ADJUDICATED, THEN CONSEQUENTIALLY, THE LD. AO/TPO BE DIRECTED TO GIVE BENEFIT OF +/- 5% AS PER S.92C(2). 6. THE APPELLANT CRAVES ITS RIGHT TO ADD TO OR ALTER THE GROUNDS OF APPEAL AT ANY TIME BEFORE OR DURING THE COURSE OF HEARING OF THE CASE. 3. BRIEFLY STATED THE RELEVANT FACTS INCLUDE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF SINGLE STAGE AND MULTISTAGE INDUSTRIAL PROCESS PUMPS AND STEAM TURBINES. THE ASSESSEE IS A JOINT VENTURE COMPANY FORMED BETWEEN KIRLOSKAR BROTHERS LTD. AND EBARA CORPORATION, JAPAN. THE ASSESSEE FILED THE RETURN OF INCOME REPORTING INTERNATIONAL TRANSACTIONS WITH EBARA CORPORATION, JAPAN AND DECLARING THE TOTAL INCOME OF RS.2,41,47,940/-. 4. IN THE TP STUDY BY ASSESSEE, THE ASSESSEE DETERMINED THE FINAL LIST OF THREE COMPARABLES. THE PLIS OF THE THREE COMPARABLES ARE (SULZER) 17.55%, (WIPL) 13.42% AND (MPPL) -9.96%. ARITHMETIC MEAN OF THE SAME WORKS OUT TO 7%. THE LAST COMPARABLE IS NOT ONLY A LOSS MAKING COMPANY IN THE CURRENT YEAR BUT ALSO IT FOLLOWS THE CALENDAR YEAR (JANUARY TO DECEMBER) FOR ITS ACCOUNTING. REGARDING BENCHMARKING OF THE INTERNATIONAL TRANSACTIONS, THE ASSESSEE COMPUTED ITS OWN OPERATING PROFIT MARGIN (OPM) OF 6% AND 16.33% AND THE SAME IS THE PLI RELATABLE TO ONLY THE AES SEGMENT OF THE ASSESSEE. OTHERWISE, THE PLI OF THE ASSESSEE AT ENTITY LEVEL (EL) IS 12.94%. ON THESE FACTS AND FIGURES OF PLI, THE PLI OF THE ASSESSEE IS FOUND HIGHER. THUS, ASSESSEE CONCLUDED THAT THE INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH. ITA NO.317/PUN/2017 3 5. HOWEVER, IN THE TP PROCEEDINGS, THE TPO OBSERVED THAT THE ASSESSEE FOLLOWED BENCHMARKING AT EL AND NOT THE PLI OF ASSOCIATED ENTERPRISE TRANSACTIONS AND SWITCHED FROM THE ENTITY LEVEL TO THE AE SEGMENTAL REPORTING IN THE YEAR UNDER CONSIDERATION. ASSESSEE STARTED A NEW TURBO GENSET (TURBO) DIVISION IN THE YEAR UNDER CONSIDERATION AND IT REPORTED LOSSES. DESPITE THE LOSSES OF THE TURBO GENSET DIVISION HAS THE EFFECT OF LOWERING THE PROFITS MARGIN OF THE ASSESSEE AT THE ENTITY LEVEL, THE TPO ACCEPTED THE CLAIM OF THE ASSESSEE FOR IGNORING THE LOSSES OF THE NEW UNDERTAKING. OTHERWISE, THE ASSESSEE CONSIDERED THE ENTITY LEVEL MARGINS IN EARLIER YEARS AND NOT THE AE SEGMENTAL PROFIT MARGIN AS IN THE YEAR UNDER CONSIDERATION. THEREFORE, THE TPO ISSUED SHOW-CAUSE NOTICE ASKING THE ASSESSEE TO REPLY OR EXPLAIN THE FOLLOWING QUERIES :- (I) WHY PLI SHOULD NOT BE CONSIDERED AT ENTITY LEVEL INCLUDING THE LOSSES OF THE NEW UNDERTAKING ? (II) WHY MATHER & PLATT SHOULD NOT BE EXCLUDED FROM THE COMPARABLES ? (III) WHY ALP ADJUSTMENT BE NOT DONE ACCORDINGLY AFTER BENCHMARKING PLI AS OP/OR WITH ARITHMETIC MEAN OF OTHER TWO COMPARABLES SULZER AND WPIL ? 6. THE ASSESSEE SUBMITTED REPLY TO THE SAID QUERIES. TPO DID NOT ACCEPT THE ASSESSEES METHOD OF COMPARING THE COMPARABLES ENTITY LEVEL OPMS WITH THAT OF THE ASSESSEE SEGMENTALS LEVEL OPMS. ACCORDINGLY, THE TPO QUANTIFIED THE ADJUSTMENTS AS PER THE DISCUSSION GIVEN IN PARA 10 TO 15 OF HIS ORDER. THUS, THE TPO (1) REJECTED THE PLI OF 16.33% OF THE AE SEGMENT; (2) CONSIDERED THE ENTITY LEVEL OPM OF THE ASSESSEE AT 12.94%; AND (3) EXCLUDED THE COMPARABLE OF MATHER & PLATT PUMPS LTD., BEING A LOSS MAKING CALENDAR ITA NO.317/PUN/2017 4 YEAR BASED ONE. CONSIDERING ONLY THE REST OF THE TWO COMPARABLES I.E. (I) SULZER PUMPS INDIA LTD. AND (II) WPIL LTD., THE TPO CALCULATED THE ARITHMETIC MEAN OF THE COMPARABLES AT 15.49% AGAINST THE PLI (OP/OC) OF THE ASSESSEE AT 12.94%. THUS, THE ADJUSTMENTS QUANTIFIED BY THE TPO/ASSESSING OFFICER AS PER HIS ORDER IS RS.4,09,39,453/-. THE RELEVANT PARA 14 OF THE ORDER OF THE TPO SHOWING THE WORKING OF THE TP ADJUSTMENTS AND THE PLIS ARE EXTRACTED HEREUNDER :- 14. . CONSIDERING ALL THE FACTS OF THE CASE AND SUBMISSIONS MADE, THE BENCHMARK TNM MARGIN IS 15.49% I.E. ARITHMETIC MEAN OF MARGINS OF SULZER INDIA AND WPIL, WHEREAS THE ASSESSEE HAS EARNED 12.93% PLI (EXCLUDING THE TG BUSINESS) DURING THE YEAR. NAME OF COMPANY OPM AS PROFIT LEVEL INDICATOR PLI SULZER PUMPS INDIA LTD. 17.55% WPIL LIMITED 13.42% ARITHMETIC MEAN 15.49% AND THE ALP CALCULATION FOR THE ASSESSEE SHALL BE AS FOLLOWING : SALES & OPERATING INCOME (A) 1600279614.00 OPERATING COST (B) 1393335755.00 IMPORTS FROM AE (I) 349317778.00 ROYALTY TO AE (RO) 8673013.00 INTERNATIONAL TRANSACTION (IMPORTS + ROYALTY (IT) 357990791.00 OTHER OPERATING EXPENSES {H=(B-IT)} 1035344964.00 OPERATING PROFIT MARGIN (OPM) C = A-B 206943859.00 PLI = C/A (%) 12.93 PLI OF COMPARABLE COMPANIES (%) (D) 15.49 ALP CALCULATION OPERATING PROFIT AS PER COMPARABLE PLI {E= (A*D)} 247883312.21 OPERATING COST AS PER REVISED OPM {F = (A-E)} 1352396301.79 ALP FOR VALUE OF INTERNATIONAL TRANSACTION {G = F-H} 317051337.79 COMPUTATION OF +/- 5% MARGIN OPERATING REVENUE 1600279614.00 INTERNATIONAL TRANSACTION (IMPORTS + ROYALTY) (IT) 357990791.00 BENEFIT AT +5% 375890330.55 ITA NO.317/PUN/2017 5 BENEFIT AT -5% 340091251.45 ALP FOR VALUE OF INTERNATIONAL TRANSACTION {G = F-H} 317051337.79 ADJUSTMENT (J = IT-G) 40939453.21 SINCE THE ALP IS BEYOND THE ALLOWABLE VARIATION OF 5%, THE ABOVE INTERNATIONAL TRANSACTION IS NOT AT ARMS LENGTH. HENCE THE INTERNATIONAL TRANSACTION IS TAKEN AT RS.31,70,51,337.79 AND CORRESPONDING AN UPWARD ADJUSTMENT OF RS.4,09,39,453/- IS MADE. 15. ACCORDINGLY, ADJUSTMENT OF RS.4,09,39,453/- IS MADE. CONSEQUENT TO THIS ADJUSTMENT, THE INCOME OF THE ASSESSEE COMPANY SHALL BE INCREASED BY RS.4,09,39,453/-. 7. THUS, CONSIDERING THE PLIS OF THE ASSESSEE AND THAT OF THE COMPARABLES AT 12.93% AND 15.49% RESPECTIVELY, THE TPO PASSED AN ORDER U/S 92CA(3) OF THE ACT ON 30.11.2015 QUANTIFYING THE ADJUSTMENTS OF RS.4,09,39,453/-. IN QUANTIFYING, THE ASSESSING OFFICER/TPO ADOPTED AGGREGATE APPROACH AND CONSIDERED ENTIRE TURNOVER AT ENTITY LEVEL. THE ASSESSING OFFICER MADE A DRAFT ASSESSMENT ORDER AFTER MAKING COUPLE OF OTHER NON-TP ADDITIONS TOO I.E. (I) PENALTY OR FINE AND (II) BANK GUARANTEE COMMISSION EXPENSES. THE ASSESSING OFFICER PROPOSED THE TOTAL INCOME AT RS.6,69,93,950/- AGAINST THE RETURNED INCOME OF RS.2,41,47,940/-. 8. BEFORE THE DRP : AGGRIEVED WITH THE ORDER OF TPO AND DRAFT ASSESSMENT ORDER OF THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER TO THE DRP FOR DIRECTIONS. TO SUM UP, THE LIST OF THE ISSUED ADJUDICATED BY THE DRP, INCLUDES (1) REJECTION OF ASSESSEES AE-SEGMENT PLI OF 16.33% AND ADOPTING THE EL PLI OF 12.94%; (2) REJECTION OF PLI AT 7% OF THE COMPARABLES AND ADOPTING 15.49% INSTEAD; (3) EXCLUSION OF MATHER & PLATT PUMPS LTD. AS NOT A GOOD COMPARABLE FINALLY; AND, (4) AGGREGATE APPROACH AND QUANTIFICATION OF THE TP ADJUSTMENT ON THE ENTIRE TURNOVER OF THE ASSESSEE. ITA NO.317/PUN/2017 6 9. ON THE ISSUE NO.(1) OF THE LIST RELATING TO THE COMPUTATION OF PLI OF THE ASSESSEE AT ENTITY LEVEL BY THE ASSESSING OFFICER/TPO, THE DRP UPHELD THE DECISION OF THE TPO/ASSESSING OFFICER. THE DISCUSSION AS GIVEN IN PARA 3.16 OF THE DRPS ORDER IS RELEVANT. FOR THE SAKE OF COMPLETENESS, THE SAID PARA 3.16 IS EXTRACTED HEREUNDER :- 3.16 IN VIEW OF THE ABOVE DISCUSSION, THE SEGMENTAL FINANCIALS PREPARED BY THE ASSESSEE FOR AE TRANSACTIONS AND NON-AE TRANSACTIONS IN PUMPS ARE NOT RELIABLE, NOTWITHSTANDING THE CERTIFICATION OF THE SAME BY THE COST ACCOUNTANT. HENCE, WE CONFIRM THE APPROACH OF THE TPO TO REJECT THE USE OF SEGMENTAL PLI OF AE TRANSACTIONS IN PUMPS FOR BENCHMARKING ANALYSIS. WE AGREE WITH THE TPOS APPROACH OF USING THE PLI OF THE ASSESSEES ENTITY EXCLUDING THE NEW BUSINESS OF TURBO GENSETS FOR BENCHMARKING ANALYSIS. THE OBJECTION OF THE ASSESSEE IN THIS GROUND IS ACCORDINGLY REJECTED. 10. ON THE ISSUE NO.(2) AND (3), I.E. DRP/ASSESSING OFFICER/TPOS DECISION IN FAVOUR OF EXCLUSION OF MATHER & PLATT PUMPS LTD. (MPPL) AS A GOOD COMPARABLE, THE DRP UPHELD THE ORDER OF THE TPO/ASSESSING OFFICER IN REJECTING MATHER & PLATT PUMPS LTD. AS A GOOD COMPARABLE ON THE GROUNDS OF (I) A LOSS MAKING COMPANY ON ONE SIDE AND (II) THE DIFFERENTIAL FINANCIAL YEARS OF THE ASSESSEES COMPARABLE ON THE OTHER. THE CONTENTS OF PARA 4.17 AND 4.18 ARE RELEVANT IN THIS REGARD AND THE SAME ARE EXTRACTED AS UNDER :- 4.17 THOUGH IT HAS BEEN CONTENDED BY THE ASSESSEE THAT MATHER & PLATT PUMPS LTD. HAS BEEN REJECTED BY THE TPO ON THE GROUNDS OF A LOSS MAKING COMPANY ALSO, IT IS OBSERVED FROM THE ORDER OF THE TPO THAT HE REJECTED THIS COMPARABLE ONLY ON THE GROUND OF A DIFFERENT FINANCIAL YEAR END. IN THIS ORDER, THE TPO MERELY MADE AN OBSERVATION THAT THIS COMPANY MADE LOSSES DURING THE CALENDAR YEAR 2011 WHILE IT MADE PROFITS IN THE CALENDAR YEARS 2009 AND 2010 AND IT WOULD NOT BE POSSIBLE TO ASCERTAIN WHETHER IT MADE A PROFIT OR LOSS FOR THE FINANCIAL YEAR 2011-12 SINCE THE QUARTERLY FINANCIAL RESULTS ARE NOT AVAILABLE . THOUGH THIS OBSERVATION WAS MADE, IT IS NOTICED THAT IN THE END, THE REASON QUOTED BY THE TPO FOR REJECTION OF THIS COMPARABLE COMPANY IS ON ACCOUNT OF A DIFFERENT FINANCIAL YEAR END ONLY . HENCE, THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO.4 IS FACTUALLY INCORRECT AND THE SAME IS FOUND TO BE UNACCEPTABLE. 4.18 IN VIEW OF THE ABOVE DISCUSSION, THE ACTION OF THE TPO TO REJECT MATHER & PLATT PUMPS LTD. FROM THE SET OF COMPARABLES ON THE GROUNDS OF DIFFERENT FINANCIAL YEAR END IS CONSIDERED TO BE IN ORDER AND GROUND NOS.3 AND 4 ARE ACCORDINGLY DECIDED AGAINST THE ASSESSEE. ITA NO.317/PUN/2017 7 11. FURTHER, THE ASSESSEE IS AGGRIEVED WITH THE TPOS DECISION IN REJECTING THE MATHER & PLATT PUMPS LTD. AS LOSS MAKING COMPANY IN THE CURRENT YEAR. ON THIS ISSUE, DRP HAS NOT GIVEN THE CATEGORIZED FINDING ON THIS PART OF THE ARGUMENT. THUS, THE ASSESSEE IS AGGRIEVED WITH THE CALCULATION OF THE ARITHMETIC MEAN OF THE REST OF THE TWO COMPARABLES AT 15.49% AS WELL AS THE TP ADJUSTMENTS ON AGGREGATE BASIS. 12. ON THE ISSUE NO.(4) OF THE LIST RELATING TO THE COMPUTATION OF TP ADJUSTMENTS ON THE AGGREGATED TOTAL TURNOVER OF BOTH AE & OTHER SEGMENTS INSTEAD OF RESTRICTING TO THE INTERNATIONAL TRANSACTIONS WITH AES, THE DRP DISCUSSED THIS ISSUE IN PARA 6 ONWARDS. THE HONBLE BOMBAY HIGH COURT JUDGEMENT IN THE CASE OF RATILAL BECHARLAL & SONS (288 ITR 31) AND ALSO THE JUDGEMENT IN THE CASE OF FIRESTONE INTERNATIONAL PVT. LTD. (60 TAXMANN.COM 235) WERE CITED IN THE ORDER IN THE CONTEXT OF AN ADDITIONAL GROUND RAISED BY THE ASSESSEE BEFORE THE DRP. THE ADDITIONAL GROUND WAS REJECTED BY THE DRP AS PER DISCUSSION GIVEN IN PARA 6.5 TO 6.7 OF HIS ORDER. IN THE ORDER, THE DRP OBSERVED THAT THE JUDGEMENTS MENTIONED ABOVE HAVE NOT ATTAINED THE FINALITY BEFORE THE SUPREME COURT. THEREFORE, ON THIS ISSUE, THE DRP CONFIRMED THE VIEWS OF THE ASSESSING OFFICER/TPO ONLY FOR THE REASONS OF KEEPING THE ISSUE ALIVE TILL THE JUDGEMENT OF THE SUPREME COURT ON THIS ISSUE. 13. IN THE FINAL ASSESSMENT ORDER, THE ADDITION OF RS.4,09,39,453/- ON ACCOUNT OF TP ADJUSTMENTS AND THE ADDITION OF RS.34,500/- ON ACCOUNT OF DISALLOWANCE OF PENALTIES/FINES ARE THE TWO ADDITIONS MADE BY THE ASSESSING OFFICER AFTER THE DRP DIRECTION. EVENTUALLY, THE ASSESSING OFFICER MADE FINAL ITA NO.317/PUN/2017 8 ASSESSMENT ORDER ON 15.12.2016 U/S 143(3) R.W.S. 144C(1) OF THE ACT QUANTIFYING THE TOTAL INCOME AT RS.6,51,21,890/- AGAINST THE RETURNED INCOME OF RS.2,41,47,940/-. 14. AGGRIEVED WITH THE ORDER OF THE ASSESSING OFFICER/TPO/DRP, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL WITH THE ABOVE EXTRACTED GROUNDS. THE ISSUES RAISED IN THE GROUNDS RELATE TO TP ADJUSTMENTS ONLY. 15. NOW, WE SHALL ADJUDICATE EACH OF THE SAID ISSUES RAISED IN THE GROUNDS IN THE FOLLOWING PARAGRAPHS OF THIS ORDER. 16. GROUND NO.1 RELATES TO THE TRANSFER PRICING ADJUSTMENTS AND THE SAME IS GENERAL IN NATURE. THEREFORE, THE GROUND NO.1 IS DISMISSED AS GENERAL. 17. GROUND NO.2 RELATES TO THE TPO USING THE ENTITY LEVEL OF PLI OF KEPL AT 12.94%. ASSESSEE DESIRES THAT THE PLI OF AE SEGMENTAL AT 16.33% SHOULD ONLY BE CONSIDERED FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. RELEVANT FACTS AND THE MANNER OF ARRIVING AT THE PLI OF 12.94% OF THE ASSESSEE AT ENTITY LEVEL (EXCLUDING THE LOSS OF TURBO GENSET UNIT) ARE ALREADY DISCUSSED IN THE PRECEDING PARA OF THE ORDER. 18. BEFORE US, REITERATING THE ARGUMENTS MADE BEFORE THE TPO/ASSESSING OFFICER/DRP, LD. COUNSEL FOR THE ASSESSEE REITERATED THE ARGUMENTS AND FILED THE WRITTEN SUBMISSIONS. ELABORATING THE SAME, LD. AR JUSTIFIED BOTH THE AE SEGMENTAL PLI RESULTS OF THE ASSESSEE AS WELL AS THE BASIS OF THE ITA NO.317/PUN/2017 9 ALLOCATION OF EXPENSES BETWEEN THE AE & NON-AE SEGMENTS. IN THIS REGARD, LD. AR RELIED HEAVILY ON THE CERTIFICATE OF A COST ACCOUNTANT. FURTHER, THE ASSESSEE FILED THE WRITTEN SUBMISSION COVERING ALL THE DISPUTED ISSUES AND THE RELEVANT PARAS OF THE SAID WRITTEN SUBMISSION ARE EXTRACTED HERE UNDER :- NOTE NO 2) THE FOLLOWING GROUND IS TAKEN BY THE ASSESSEE THE LD. TPO ERRED IN (LD. DRP ERRED IN CONFIRMING) USING THE PLI OF KEPL AT 12.94% CALCULATED BY AGGREGATING AE AS WELL AS NON-AE TRANSACTIONS AND EXCLUDING TURBO-GENSET BUSINESS. I) THE ASSESSEE HAD SUBMITTED COST ACCOUNTANTS CERTIFICATE GIVING SEGMENTWISE DETAILS OF ITS MARGINS WHICH IS AT PAGE NO. 9 OF PAPER BOOK. THE CERTIFICATE IS SUPPORTED BY DETAILED WORKING WHICH IS AT PAGE 10 OF THE PAPER BOOK. WE ARE GIVING RELEVANT LINE ITEMS IN THIS NOTE FOR THE BREVITY SAKE. II) THIS WORKING WAS ALSO THE BASE IN THE TP STUDY REPORT AT PARA 5.1.21 (PAGE NO. 161 OF PAPER BOOK. THIS PARA CLEARLY INDICATES THAT THE ASSESSEE COMPARED ITS OPM ON TRANSACTIONS WITH AE (16.33%) WITH THE MARGINS OF COMPARABLE AND CONSIDERED THAT THE TRANSACTION PRICE WITH AE IS AT ARM'S LENGTH III) THE LD. TPO AND DRP IGNORED THE 0PM ON AE TRANSACTIONS FOR BENCHMARKING STATING THE FOLLOWING REASONS AND ACCORDINGLY, THEY ADOPTED THE ENTITY LEVEL MARGIN EXCLUDING THE TURBO GENSET SEGMENT (12.94%) 1) PRINCIPLE OF CONSISTENCY. THE ASSESSEE IN THIS YEAR FOR THE FIRST TIME ADOPTED THE APPROACH OF SEGMENTAL RESULTS. 2) COST ACCOUNTANT CERTIFICATE CANNOT BE RELIED UPON. PARTICULARS KIRLOSKAR EBARA PUMPS LTD - COMPANY LEVEL TRANSACTIONS WITH AE ALL TRANSACTIONS OTHER THAN AE TURBO GENSET BUSINESS ALL TRANSACTIONS OTHER THAN AE (EXCLUDINGS) KEPL- EXCLUDING TURBOGENSET BUSINESS SALES AND OPERATING INCOME 189.25 53.92 135.33 29.22 106.11 160.03 OPERATING PROFIT MARGINS (OPM) 3.83 8.80 (4.97) (16.87) 11.90 20.70 OPM AS PERCE NT OF SALES 2.02% 16.33% - 3.67% (57.73%) 11.21% 12.94% ITA NO.317/PUN/2017 10 IV) THE ASSESSEE SUBMITS THE FOLLOWING:- 1) THE WORKING IS FULLY SUPPORTED BY THE COST ACCOUNTANTS CERTIFICATE, WHICH CONSIDERS APPROPRIATE KEYS OF ALLOCATION OF COST SUCH AS SALES PROPORTION FOR SOME OVER HEADS AND MATERIAL COST PROPORTION IN SOME OTHER OVERHEADS. THIS IS THE CORRECT METHOD OF ALLOCATION OF VARIOUS OVERHEADS AND THEREFORE, THERE IS NO REASON TO DISREGARD THE CERTIFICATE OF COST ACCOUNTANT, WHO IS PROFESSIONALLY QUALIFIED AS WELL AS ETHICALLY BOUND BY THE PROFESSIONAL ETHICS AND PRACTICES. 2) IT IS ALSO PERTINENT TO NOTE THAT THE MARGIN ADOPTED BY TPO AND DRP (NAMELY 12.94%) IS ALSO BASED ON THE SAME CERTIFICATE OF THE COST ACCOUNTANT AND THUS, THE TPO AND DRP, BOTH HAVE RELIED UPON THE ALLOCATION OF OVERHEADS FOR WORKING OUT ENTITY MARGINS. THUS, THE LD. TPO AND DRP HAVE TAKEN DIFFERENT STAND ON THE SAME CERTIFICATE. THE ASSESSEE PRAYS THAT SUCH A DIFFERENT STAND IS NOT PROPER AND WHEN THE TPO AND DRP RELY ON THE CERTIFICATE, IT SHOULD BE ENTIRELY RELIED UPON. 3) ANOTHER ARGUMENT BY TRP AND DRP IS THAT OF CONSISTENCY. THE ASSESSEE DID NOT FIND IT NECESSARY TO COMPARE THE SEGMENTAL MARGINS. HOWEVER, IT HAS NOW DETAILS AND THE SUPPORT OF CERTIFICATE OF COST ACCOUNTANT AND THEREFORE, THE SAME SHOULD BE ALLOWED. 4) IT MAY ALSO BE NOTED THAT THE ASSESSEE STARTED NEW LINE OF BUSINESS (TURBO GENSET) DURING THE YEAR WHICH MADE IT NECESSARY TO ADOPT FOR SEGMENTAL PROFITABILITY WORKING. THUS, SEGMENTAL WORKING WAS THE NECESSITY OF CHANGED SITUATION. 5) IT MAY NOT BE OUT OF PLACE TO STATE THAT THE TPO ORDERS ALWAYS MENTION THAT THE FINDING AND DISCUSSIONS IN TP ORDER ARE WITH REFERENCE TO PARTICULAR ASSESSMENT ONLY. (PAGE NO. 17 AND 22 OF PAPER BOOK - COPY OF THE EARLIER TP ORDERS). EVEN PARA 16 OF THE TP ORDER FOR THE ASSESSMENT UNDER APPEAL ALSO INDICATES THE SAME THING. IT MAY ALSO BE NOTED THAT THE CONSISTENCY IS DENIED BY THE TPO AND DRP, WHEN IT DID NOT SUIT THEM (THE ISSUE OF COMPARABLES). 6) CONSIDERING ALL THE ABOVE, WE PRAY TO YOU TO CONSIDER AND ALLOWED THE BENCHMARKING BASED ON OPM OF 16.33% WHILE COMPARING WITH THE MARGINS OF COMPARABLE AND ALLOW THE GROUND ACCORDINGLY. 19. THE LD. DR FOR THE REVENUE RELIED ON THE ORDER OF THE ASSESSING OFFICER/TPO AND THE DRP. FURTHER, REFERRING TO THE TP STUDY OF THE ASSESSEE IN THE PAST ASSESSMENT YEARS, LD. DR ARGUED THAT THE ASSESSEE FOLLOWED ENTITY LEVEL PROFIT MARGINS AND NOT THE PLI OF THE AE SEGMENTAL MARGINS. REFERRING TO THE SAID DEVIATION, LD. AR SUBMITTED THAT THERE IS NO REASON WHY ASSESSEE SHIFTED TO THE PLI OF THE SEGMENT OF THE AE ITA NO.317/PUN/2017 11 TRANSACTIONS. ELABORATING THE FAIRNESS OF THE ASSESSING OFFICER/TPO, LD. DR SUBMITTED THAT THE FACT THAT TPO ALLOWED THE CLAIM RELATING TO THE NON- CONSIDERATION OF LOSS-YIELDING TURBO GENSET UNDERTAKING OF THE ASSESSEE. FURTHER, ON THE EXCLUSION OF MPPL FROM THE FINAL LIST, LD. DR SUBMITTED THAT THE ORDER OF THE TPO AND THE DRP ARE QUITE ELABORATE AND RELY ON THE REASONS GIVEN THE AUTHORITIES IN THEIR ORDERS. ON THIS ISSUE OF COMPUTATION OF TP ADJUSTMENT ON THE ENTIRE TURNOVER ON AN AGGREGATE BASIS, LD. DR SUBMITTED THAT THIS RELEVANT ISSUE IS YET TO REACH FINALITY BEFORE THE HONBLE SUPREME COURT OF INDIA. 20. WE HEARD BOTH THE SIDES ON THIS ISSUE RELATING TO THE ADOPTING OF 12.94% AS PLI OF THE ASSESSEE FOR BENCHMARKING OF THE INTERNATIONAL TRANSACTIONS. THE TPO ARRIVED AT THIS FIGURE IGNORING THE ASSESSEES FIGURE OF 16.33% RELATING TO AE SEGMENT ONLY. THIS APPROACH OF THE ASSESSEE I.E. RESTRICTING THE BENCHMARKING TO THE AE SEGMENT AGAINST THE PLI AT THE ENTITY LEVEL IS ADOPTED FOR THE FIRST TIME IN THIS YEAR. THIS APPROACH IS NOT APPRECIATED BY THE TPO AS WELL AS BY THE DRP. ON THIS FACT, WE HAVE TO DECIDE WHETHER TPO JUSTIFIED IN REJECTING THE ASSESSEES METHOD OF CONSIDERING THE PLI OF THE AES SEGMENT AND COMPARING THE SAME TO THAT OF THE COMPARABLES AT THE ENTITY LEVEL. IN THIS REGARD, WE HAVE CONSIDERED THE MANNER OF ALLOCATION OF EXPENSES TOO AMONG THE CONCERNS AND THE BASIS OF ALLOCATION OF EXPENSES IN THE LIGHT OF CERTIFICATE OF THE COST ACCOUNTANT AS WELL AS THE BASIS OF ALLOCATION ADOPTED BY HIM. AS INDICATED IN THE OPEN COURT, WE FIND THERE IS NO SUSTAINABLE REASON IS MADE OUT BEFORE US TO STRENGTHEN THE DEVIATION OF THE ASSESSEE FROM ENTITY LEVEL PLIS TO AES SEGMENT PLIS IN THE YEAR UNDER CONSIDERATION. THE ALLOCATION OF EXPENSES ITA NO.317/PUN/2017 12 AMONG THE SEGMENTS, IS ALSO NOT FREE FROM THE DISPUTE. WE FIND THAT ALLOCATION OF MANUFACTURING EXPENSES WAS DONE WITH RESPECT TO THE SALES. HOWEVER, WE FIND THAT THE ALLOCATION OF MANUFACTURING EXPENSES BETWEEN THE AE AND NON-AE SEGMENTS AT RS.2.37 CRORES AND RS.9.07 CRORES RESPECTIVELY IS NOT IN PROPER PROPORTION WITH THE SALES AND THE GAP IS QUITE HUGE. THE ALLOCATION OF EXPENSES BETWEEN THE CONCERNS AS NOT APPEARED TO BE ON THE SOUND BASED OF ALLOCATION OF EXPENSES. AS SUCH, WE FIND THE CERTIFICATE OF COST ACCOUNTANT IS THE SOLE BASIS RATHER THAN THE ACTUAL OF EXPENDITURE. IT IS ALSO DISCUSSED IN OPEN COURT THAT THIS ISSUE NEEDS TO TRAVEL TO THE FILE OF THE TPO FOR ADOPTING PROPER SUSTAINABLE BASIS OF ALLOCATION OF EXPENSES ON ONE SIDE AND THE REASONS FOR THE SAID DEVIATION FROM ENTITY LEVEL PLI TO THE PRESENT AES SEGMENT ON THE OTHER. IN THE REMAND PROCEEDINGS, THE ASSESSEE UNDER OBLIGATION TO JUSTIFY THE SAID DEPARTURE FROM THE EARLIER YEAR METHOD OF ADOPTING THE ENTITY LEVEL PLI OF THE ASSESSEE. THE ASSESSEE IS ALSO UNDER OBLIGATION TO DEMONSTRATE THE COMPARISON OF THE AES SEGMENTAL PLI THAT HOW IT IS COMPARABLE TO THE ENTITY LEVEL MARGINS OF THE SET OF FINAL COMPARABLES, IF THE ENTITY LEVEL HAS TO BE TAKEN AND THE COMPARABLE SHOULD BE AMONG THE ENTITIES ONLY. IF THE BENCHMARKING IS TO BE DONE WITH THE AES SEGMENTAL LEVEL AND THE BENCHMARKING SHOULD ALSO AMONG PROFITS OF THE AES SEGMENT. THE ASSESSEES ATTEMPT TO COMPARE THE PLI OF THE AES SEGMENT WITH THAT OF THE ENTITY LEVEL OF THE COMPARABLES IS NOT SUSTAINABLE. THEREFORE, WITH REFERENCE TO OUR FINDING, THE ISSUE RAISED IN GROUND NO.2 HAS TO BE REMANDED TO THE FILE OF THE TPO FOR FRESH ADJUDICATION IN THE MATTER. ACCORDINGLY, GROUND NO.2 IS ALLOWED FOR STATISTICAL PURPOSES. ITA NO.317/PUN/2017 13 21. GROUND NO.3 RELATES TO EXCLUSION OF MATHER & PLATT PUMPS LTD. (MPPL) AS A GOOD COMPARABLE ON THE GROUND OF (I) DIFFERENT FINANCIAL YEARS AND (II) LOSSES OF THE YEAR. ANY CHANGES IN THE LIST OF COMPARABLES HAS THE EFFECT ON THE PLI OF THE COMPARABLES WHICH IN TURN HAS THE EFFECT ON THE TP ADJUSTMENTS. 22. BACKGROUND FACTS INCLUDE THAT, IN THE TP STUDY, THE TPO NOTED THAT THE SAID COMPARABLE FOLLOWS A CALENDAR YEAR FOR PREPARATION OF FINANCIAL STATEMENTS ; WHEREAS THE ASSESSEE FOLLOWS THE FINANCIAL YEAR . THE TPO HELD THAT THE SAID COMPANY CANNOT BE A GOOD COMPARABLE DUE TO THE DIFFERENCE IN THE FINANCIAL YEAR. FURTHER, THE TPO ALSO OBSERVED THAT THE SAID COMPARABLE REPORTED LOSSES IN THE CURRENT YEAR WHILE THE PROFITS WERE REPORTED IN EARLIER TWO CALENDAR YEARS. CONSIDERING THE DIFFERENCES IN THE FINANCIAL YEAR AS WELL AS LOSSES OF THE SAID COMPARABLE, THE TPO CONCLUDED THAT THE SAID COMPARABLE NEEDS TO BE EXCLUDED FROM THE SET OF COMPARABLES. HOWEVER, IT IS STAND OF THE ASSESSEE THAT THE SAID COMPARABLE (MPPL) IS NOT A LOSS MAKING COMPANY AND THUS, THE SAME CAN BE A GOOD COMPARABLE. FURTHER, IT IS THE STAND OF THE ASSESSEE THAT THE MPPL WAS CONSIDERED AS A GOOD COMPARABLE BY THE TPO HIMSELF FOR THE ASSESSMENT YEARS 2010-11 AND 2011-12. ON THE DIFFERENCE IN THE FINANCIAL YEARS, IT IS ALSO A STAND OF THE ASSESSEE THAT 9 MONTHS PERIOD IS COMMON IN BOTH THE ASSESSEE AND HENCE, THE MPPL IS GOOD ENOUGH FOR COMPARISON. IN THIS REGARD, ASSESSEE RELIED ON VARIOUS DECISIONS INCLUDING THE HONBLE DELHI HIGH COURTS JUDGEMENT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) (P.) LTD. VS. DCIT, 376 ITR 183. HOWEVER, THE DRP CONSIDERED THE ABOVE DISCUSSION OF THE ASSESSEE AND THE TPO AND DEALT WITH THE SAME AS PER DISCUSSION GIVEN IN ITA NO.317/PUN/2017 14 PARA 4.3 TO 4.18 OF ITS ORDER. ON THE ISSUE OF DIFFERENCE IN FINANCIAL YEAR, IT IS FINDING OF THE DRP THAT IN EXCEPTIONAL CIRCUMSTANCES AND WHEN SUBSTANTIVE NUMBER OF COMPARABLES ARE NOT AVAILABLE FOR TP STUDY, THEN ONLY THE COMPARABLE WITH DIFFERENT ACCOUNTING YEAR COULD BE CONSIDERED IN TP STUDY. REFERRING TO RULE10B(4), THE DRP DISCUSSED THE RELEVANCE OF MANDATE USED OF DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTIONS WERE CARRIED OUT. 23. EVENTUALLY, THE DRP, ON THIS ISSUE OF DIFFERENCE IN FINANCIAL YEAR, UPHELD THE VIEW OF THE TPO STATING THE FOLLOWING :- 4.14 IN VIEW OF THE ABOVE DISCUSSION, WE HOLD THAT COMPANIES WHOSE ACCOUNTING YEAR ENDS ON A DIFFERENT DATE, AS COMPARED TO THE ASSESSEE COMPANY, SHOULD ONLY BE TAKEN AS A COMPARABLE IN EXCEPTIONAL CIRCUMSTANCES, WHEN SUFFICIENT NUMBER OF COMPANIES WITH THE SAME ACCOUNTING PERIOD ARE NOT AVAILABLE FOR COMPARISON AND THAT TOO IF THE ACCOUNTS FOR THE ACCOUNTING PERIOD OF THE ASSESSEE CAN BE DETERMINED TO REASONABLE DEGREE OF ACCURACY FOR SUCH COMPANIES. 4.15 IT IS OBSERVED THAT IN THE CASE OF THE ASSESSEE, ONLY 2 COMPARABLES REMAINED AFTER REJECTION OF MATHER & PLATT PUMPS LTD. THOUGH COMPARABILITY ANALYSIS BASED ONLY ON ONE COMPARABLE HAS BEEN HELD TO BE VALID BY THE HONBLE ITAT, DELHI IN THE CASE OF HAWORTH INDIA (131 ITD 215) AND VEDARIS TECHNOLOGY (P) LTD. (131 TTJ 309), CONTRARY VIEW HAS ALSO BEEN EXPRESSED BY THE HONBLE ITAT BANGALORE IN THE CASES OF SAP LABS INDIA PVT. LTD. (44 SOT 156). FURTHER, IT IS NOTICED THAT THE ASSESSEE IS UNABLE TO FURNISH PUBLISHED AUDITED QUARTERLY RESULTS OF THE COMPANY FOR THE QUARTER OF JANUARY TO MARCH 2011 AND JANUARY TO MARCH 2012 SO AS TO DEDUCE THE FINANCIAL RESULTS OF THE COMPANY FOR THE PERIOD ENDING 31.03.2012 ON THE GROUNDS THAT THE SAME ARE NOT AVAILABLE IN THE PUBLIC DOMAIN. 4.16 IN VIEW OF THE DISCUSSION ABOVE, THE ACTION OF THE TPO TO REJECT MATHER & PLATT PUMPS LTD. FROM THE SET OF COMPARABLES ON THE GROUNDS OF DIFFERENT FINANCIAL YEAR END IS CONSIDERED TO BE IN ORDER. 24. FROM THE ABOVE, IT IS EVIDENT THAT THE DRP DID NOT FIND IT RELEVANT TO DEFINE ON THE INCLUDIBILITY OF LOSS MAKING COMPANY IN THE FINAL LIST OF COMPARABLES. HOWEVER, DRP ADJUDICATED THE ISSUE AGAINST THE ASSESSEE ON THE ISSUE OF INCLUDIBILITY OF MPPL ON THE FINAL LIST OF COMPARABLES. ACCORDING TO THE DRP, ASSESSEE FAILED TO MAKE OUT THE EXCEPTIONAL ITA NO.317/PUN/2017 15 CIRCUMSTANCE AND FAILED TO PROVIDE THE AUDITED RESULT OF THE LAST QUARTER OF MPPL. 25. BEFORE US, LD. AR FOR THE ASSESSEE RELIED ON THE WRITTEN SUBMISSIONS MADE BEFORE THE DRP AND THE TPO. ACCORDINGLY, THE CASE OF THE ASSESSEE INCLUDES THAT THE MPPL IS NOT A LOSS MAKING COMPANY CONSISTENTLY. VARIOUS DECISIONS WERE RELIED IN THIS REGARD. THE FACT THAT THE MPPL WAS CONSIDERED IN THE PAST AS A GOOD COMPARABLE FOR ASSESSMENT YEARS 2010-11 AND 2011- 12 WAS ALSO SUBMITTED. ON THE ISSUE OF DIFFERENT ACCOUNTING YEARS, ASSESSEE SUBMITTED THAT THE PERIOD OF COMMON 9 MONTHS CONSTITUTES CONTEMPORANEOUS FOR BENCHMARKING EXERCISE. 26. PER CONTRA , THE CASE OF THE REVENUE IS THAT THE TPO EXCLUDED THIS COMPARABLE (MPPL) SUBSTANTIALLY FOR THE REASONS RELATED TO DIFFERENT ACCOUNTING YEARS AND NOT BECAUSE OF THE LOSSES OF THE COMPANY IN THE CURRENT YEAR. THE TPO MENTION ABOUT THE CURRENT YEAR LOSSES OF THE MPPL AND THE SAME CONSTITUTES A MATTER OF FACT AND NOT THE SALE REASON FOR REJECTED THE SAME. RELYING ON THE PROVISIONS OF RULE 10B(4) QUA THE SAME FINANCIAL YEAR, LD. DR SUBMITTED THAT THE DATA OF A FINANCIAL YEAR IS REQUIRED TO BE CONSIDERED AND NOT THE DATA OF THE 9 MONTH PERIOD ONLY. STATING THAT THE ASSESSEE FAILED TO MAKE OUT THE CASE ON THE PAUCITY OF COMPARABLES, NON-AVAILABILITY OF ADEQUATE NUMBER OF COMPARABLES FOR TP STUDY, LD. DR MENTIONED THAT THE ASSESSEE FAILED TO MAKE OUT A CASE ON THE EXCEPTIONALITY OF THE CIRCUMSTANCES. OTHERWISE, LD. DR RELIED ON THE ORDER OF THE DRP/TPO/ASSESSING OFFICER FOR EXCLUDING THE MPPL AS NOT A GOOD COMPARABLE. ITA NO.317/PUN/2017 16 27. WE HEARD BOTH THE PARTIES AND PERUSED THE RELEVANT ORDERS OF THE REVENUE AUTHORITIES AND THE PAPER BOOKS FILED BEFORE US. WE FIND THAT THE GROUND NO.3 HAS TWO SUB-GROUNDS. WHILE SUB-GROUND NO.3(I) RELATES TO DIFFERENT ASSESSMENT YEAR, THE GROUND NO.3(II) RELATING TO LOSSES OF MPPL. WE SHALL NOW TAKE EACH OF THE SUB-GROUND AS UNDER. 28. GROUND NO.3(I) RELATES TO THE DIFFERENCES IN THE ACCOUNTING YEARS. WE FIND THAT IT IS UNDISPUTED FACT THAT THERE IS OBVIOUSLY DIFFERENCE IN THE ACCOUNTING YEARS FOLLOWED BY THE ASSESSEE AND THE COMPARABLE - MPPL. THE AUDITED QUARTERLY DATA OF MPPL RELATING TO THE COMPANY FOR THE LAST QUARTER OF JANUARY TO MARCH 2011 IS NEITHER AVAILABLE IN PUBLIC DOMAIN NOR SUPPLIED BY THE ASSESSEE. IT IS NOT DEMONSTRATED BY THE ASSESSEES COUNSEL THAT THERE ARE INADEQUATE COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS THEREBY IT BECOMES A CASE OF EXCEPTIONALITY FOR CONSIDERING THE MPPL - COMPARABLE WITH THE DIFFERENT ACCOUNTING YEAR. THEREFORE, IN OUR VIEW, THE REASONING GIVEN BY THE DRP ALREADY EXTRACTED IN THE PRECEDING PARAGRAPHS OF THIS ORDER ARE FAIR AND REASONABLE. ON THIS ISSUE, THE ORDER OF THE DRP DOES NOT REQUIRE ANY AMENDMENT. ACCORDINGLY, SUB-GROUND NO.3(I) RAISED BY THE ASSESSEE STANDS DISMISSED . 29. COMING TO SUB-GROUND NO.3(II) , WE FIND THE SAME RELATES TO THE INELIGIBILITY OF MPPL AS A GOOD COMPARABLE AS IT REPORTED LOSSES IN THE CURRENT YEAR ONLY. IN OUR VIEW, IT IS A SETTLED LEGAL PROPOSITION THAT ONLY THE CONSISTENT LOSS MAKING COMPANIES DO NOT CONSTITUTE GOOD COMPARABLES. THUS, ON THIS REASONING, MPPL CONSTITUTES A GOOD COMPARABLE. IN ANY CASE, THE TPO EXCLUDED THE SAME MAINLY DUE TO ITS ACCOUNTING YEAR (I.E. CALENDAR ITA NO.317/PUN/2017 17 YEAR) NOT BECAUSE IT IS A LOSS MAKING COMPANY. THEREFORE, WE ARE OF THE OPINION, THE SUB-GROUND NO.3(II) HAS TO BE ALLOWED IN FAVOUR OF THE ASSESSEE. THUS, SUB-GROUND NO.3(II) STANDS ALLOWED . 30. GROUND NO.4 RELATES TO THE RESTRICTING THE TP ADJUSTMENTS TO THE INTERNATIONAL TRANSACTIONS OF THE AES ONLY AND NOT TO THE ENTIRE TURNOVER OF THE ASSESSEE. 31. THIS ISSUE WAS ELABORATED BY THE DRP IN PARA 6.1 TO 6.7 OF THE ORDER OF THE DRP. IT IS UNDISPUTED FACT THAT THE TPO COMPUTED THE ADJUSTMENTS AND THE ENTIRE TURNOVER OF THE ASSESSEE AT THE ENTITY LEVEL WITHOUT RESTRICTING TO THE INTERNATIONAL TRANSACTIONS WITH AES. THE TURNOVER OF THE INTERNATIONAL TRANSACTIONS IS ONLY RS.35.79 CRORES OUT OF THE OPERATING COST OF RS.139.33 CRORES. THE TPO CALCULATED THE ADJUSTMENTS WITH THE ENTIRE COST AND QUANTIFIED THE ADDITION OF RS.4.09 CRORES (ROUNDED OFF). WHILE ADJUDICATING THIS ISSUE, THE DRP DISCUSSED THIS ISSUE IN PARA 6.5 TO 6.7 OF HIS ORDER. IT IS AN OPINION OF THE DRP THAT IT WOULD NOT BE CORRECT TO APPORTION THE TRANSACTIONS WHEN IT COMES THE OPERATING COST. THE RELEVANT LINES FROM PARA 6.5 OF THE ORDER OF THE DRP ARE EXTRACTED HEREUNDER :- 6.5 ..........., IT WOULD NOT BE CORRECT TO APPORTION THE SAME TO THE AE TRANSACTIONS AND THE NON-AE TRANSACTIONS IN THE OPERATING COST AND CONSIDER ONLY THE APPORTIONED AMOUNT TO THE AE TRANSACTION AS THE TP ADJUSTMENT TO THE AE COST. THIS IS DUE TO THE REASON THAT THE ENTIRE DIFFERENCE IN THE EXPECTED OPERATING PROFIT, COMPUTED ON THE BASIS OF THE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLE COMPANIES, AND THE ACTUAL OPERATING PROFIT IS ATTRIBUTABLE ONLY TO THE COST OF AE TRANSACTIONS AND NO PART OF THE SAME CAN BE ATTRIBUTED TO THE NON-AE TRANSACTIONS WHICH ARE CONSIDERED TO BE AT ARMS LENGTH HAVING BEEN CARRIED OUT UNDER UNCONTROLLED CONDITIONS. IN VIEW OF THIS, WE CONCUR WITH THE TP ADJUSTMENT MADE TO THE AE COST BY ATTRIBUTING THE ENTIRE DIFFERENCE IN THE OPERATING PROFIT TO THE AE TRANSACTIONS AND REJECT THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IN THIS REGARD. ITA NO.317/PUN/2017 18 32. WHILE DECIDING THE ISSUE AGAINST THE ASSESSEE, VIDE PARA 6.6, THE DRP REFERRED TO THE JURISDICTIONAL HIGH COURTS JUDGEMENT IN THE CASE OF RATILAL BECHARLAL & SONS, 288 ITR 31 AND DID NOT FOLLOW THE SAME STATING THAT THE SLP FILED BY THE REVENUE IN THE CASE OF FIRESTONE INTERNATIONAL PVT. LTD., 60 TAXMANN.COM 235 STANDS ADMITTED BEFORE HONBLE SUPREME COURT. EXPLAINING THE ABOVE FACTS AND DEVELOPMENTS BEFORE THE DRP, LD. COUNSEL FOR THE ASSESSEE BROUGHT OUT ATTENTION TO THE NOTE NO.3 OF THE WRITTEN SUBMISSION FILED BEFORE US AND SUBMITTED THAT THE TP ADJUSTMENTS NEEDS TO BE RESTRICTED TO THE ADJUSTMENTS IN RESPECT OF TRANSACTION WITH AES ONLY. THE RELEVANT PART FROM THE SAID NOTE NO.3 IS EXTRACTED HEREUNDER :- THE ASSESSEE HAS TAKEN FOLLOWING GROUND. THE LD. TPO ERRED IN (LD. DRP ERRED IN CONFIRMING) MAKING TP ADJUSTMENT ON TOTAL TURNOVER INSTEAD OF RESTRICTING THE ADJUSTMENT IN RESPECT OF TRANSACTION WITH ASSOCIATED ENTERPRISES (AE). THE ASSESSEE SUBMITS THAT THE AFORESAID GROUND IS FULLY COVERED BY FOLLOWING JURISDICTIONAL BOMBAY HIGH COURT DECISIONS. I) RATILAL BECHARLAL & SONS BOMBAY HC 138 DTR 0316. COPY OF THE DECISION IS ALREADY SUBMITTED. II) CIT VS. ALSTOM PROJECTS INDIA LIMITED (BOMBAY HC) ITA NO.362 OF 2014 (2016) 97 CCH 0149 MUM HC. III) FIRESTONE INTERNATIONAL (P) LTD. BOM HC 378 ITR 0558. 33. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE RELIED HEAVILY ON THE ORDER OF THE TPO/DRP/ASSESSING OFFICER. 34. ON HEARING BOTH THE SIDES, WE FIND IT RELEVANT TO EXTRACT THE QUESTION RAISED BY THE REVENUE BEFORE THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF RATILAL BECHARLAL & SONS (SUPRA) ON THE ISSUE OF COMPUTATION OF ADJUSTMENTS RESTRICTED ONLY TO THE INTERNATIONAL TRANSACTIONS WITH THE AES INSTEAD OF ENTIRE TURNOVER OF THE ASSESSEE. THE SAME IS EXTRACTED HEREUNDER :- ITA NO.317/PUN/2017 19 QUESTION NO. (I) : WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE ADJUSTMENT ARISING OUT OF THE ARMS LENGTH PRICE (ALP) IS TO BE RESTRICTED TO ONLY INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES INSTEAD OF ENTIRE TURNOVER OF THE ASSESSEE? ........... (D) CHAPTER X OF THE ACT INTER ALIA DEALS WITH COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO THE ALP. SECTION 92 THEREOF SPECIFICALLY BRINGS TO CHARGE INCOME ARISING FROM INTERNATIONAL TRANSACTIONS WITH AN ASSOCIATED ENTERPRISE TO TAX ON COMPUTATION OF INCOME HAVING REGARD TO THE ALP OF THE TRANSACTIONS ENTERED INTO BETWEEN THE ASSOCIATED ENTERPRISES, AS THE HEADING OF CHAPTER X ITSELF INDICATES THAT THESE ARE SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX AND THE MANDATE IS TO ENSURE ADJUSTMENT IN RESPECT OF THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE OR SPECIFIED DOMESTIC TRANSACTION ON THE DETERMINATION OF ALP. IT DOES NOT ALLOW ADJUSTMENT OF THE INCOME ON THE BASIS OF DETERMINING OF ALP IN RESPECT OF ALL THE ASSESSEES TRANSACTIONS. IF THE CONTENTION OF THE REVENUE IS TO BE ACCEPTED, IT WOULD RESULT IN TAXING NON-EXISTING INCOME / PROFITS OF TRANSACTIONS ENTERED INTO BETWEEN THE RESPONDENT ASSESSEE AND INDEPENDENT THIRD PARTIES. THIS IN THE PRESENT FACT, EVEN IN THE ABSENCE OF AN ALLEGATION THAT THE TRANSACTIONS WITH PARTIES OTHER THAN ASSOCIATED ENTERPRISE IS NOT AT ALP. THE TRANSACTIONS WITH PARTIES OTHER THAN THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISE OR IN RESPECT OF SPECIFIED DOMESTIC TRANSACTIONS ARE NOT WITHIN THE AMBIT OF CHAPTER X OF THE ACT. IN FACT, A SIMILAR QUESTION AROSE FOR OUR CONSIDERATION IN TARA JEWELS EXPORTS PVT. LTD. (SUPRA) AND AN IDENTICAL CONTENTION WAS NEGATIVED. SO ALSO THE DELHI HIGH COURT IN KEIHIN PANALFA LTD. (SUPRA) HAS NEGATIVED A SIMILAR CONTENTION. 35. FROM THE ABOVE, IT IS EVIDENT THAT THE SETTLED LEGAL PROPOSITION IS THAT THE CALCULATION OF TP ADJUSTMENTS, IF ANY, CAN BE DONE ONLY RESTRICTING TO THE INTERNATIONAL TRANSACTIONS WITH AES ONLY INSTEAD OF ENTIRE TURNOVER OF THE ASSESSEE. CONSIDERING THE ABOVE SETTLED LEGAL PROPOSITION AT THE LEVEL OF JURISDICTIONAL HIGH COURT (SUPRA), WE ARE OF THE OPINION THE ASSESSEE IS ENTITLED TO RELIEF ON THIS ISSUE. ACCORDINGLY, GROUND NO.4 IS ALLOWED . 36. GROUNDS NO.5 RELATES TO DIRECTING THE ASSESSING OFFICER TO GRANT BENEFIT OF +/-5% AS PER SECTION 92C(2) OF THE ACT. ADJUDICATION OF THIS GROUND IS DEPENDENT ON THE LIKELY OUTCOME OF THE GROUND NO.2, WHICH IS REMITTED TO THE FILE OF THE TPO/ASSESSING OFFICER. IN THIS REGARD, LD. COUNSEL ITA NO.317/PUN/2017 20 SUBMITTED THAT ONCE THE GROUNDS NO.1 TO 4 ARE ADJUDICATED IN FAVOUR OF THE ASSESSEE, AS CONSEQUENCE THE ASSESSEE SHALL BE ENTITLED TO THE BENEFIT OF +/- 5% AS PER THE PROVISIONS OF SECTION 92C(2) OF THE ACT. IN THIS REGARD, THE FOLLOWING WRITTEN SUBMISSIONS ARE FURNISHED IN THE FORM OF NOTE NO.4 AND THE SAME READS AS UNDER :- ONCE THE ABOVE GROUND ARE ADJUDICATED, THEN CONSEQUENTIALLY, THE LD. AO/TPO BE DIRECTED TO GIVE BENEFIT OF +/-5% AS PER SECTION 92C(2). THIS GROUND IS CONSEQUENTIAL GROUND. IF THE GROUND NO.2 IS ALLOWED AND THE BENCHMARKING IS DONE ON THE BASIS OF OPM OF THE TRANSACTION WITH AE ONLY (16.33%), IT IS BETTER THAN THE AVERAGE MARGIN OF COMPARABLE ACCEPTED BY THE TPO AND AO (15.49%) AND THEREFORE, NO TP ADJUSTMENT IS TO BE REQUIRED TO BE MADE. IF HOWEVER, IF YOUR HONOUR DECIDES OTHERWISE BUT ALLOW THE GROUND NO.4 (ADJUSTMENT IN RESPECT OF TRANSACTIONS WITH AE INSTEAD OF ON TOTAL TURNOVER), THE TRANSACTION PRICE WILL BE WELL WITHIN THE MARGIN OF +/-5% OF THE ARMS LENGTH PRICE SO ARRIVED AT AND THEREFORE, NO ADJUSTMENT IS NECESSARY. WE HAVE, IN THE COURSE OF HEARING, SUBMITTED THE WORKING IN THIS REGARD. WE ARE ONCE AGAIN ATTACHING THE COPY OF THE WORKING WITH THIS NOTE AS ANNEXURE. WE ACCORDINGLY PRAY YOUR HONOUR TO ALLOW THE APPEAL AND DELETE THE TP ADJUSTMENT. 37. FROM THE ABOVE CONTENTION OF THE LD. AR FOR THE ASSESSEE, IT IS APPARENT THAT IN CASE ADJUSTMENT IS RESTRICTED TO AE LEVEL AND NOT ON THE ENTITY LEVEL THEN THE TRANSACTION PRICE WOULD BE WITHIN THE MARGIN +/-5% OF THE ARMS LENGTH PRICE SO ARRIVED AT. THEREFORE, THE LD. AR, IN THE WRITTEN SUBMISSION, PLEADED THAT NO ADJUSTMENT IS NECESSARY ON THIS ACCOUNT. APPLYING THE SAME, WE HOLD THAT IN CASE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ON AE LEVEL, IF DETERMINED, IS WITHIN +/-5% OF THE MEAN MARGIN OF THE COMPARABLES THEN NO ADJUSTMENT NEEDS TO BE MADE IN THE HANDS OF THE ASSESSEE. THIS IS DESPITE THE OUTCOME OF GROUND NO.2 I.E. DETERMINATION OF PLI IN THE HANDS OF THE ASSESSEE. ACCORDINGLY, GROUND NO.5 IS ALLOWED AS ABOVE . ITA NO.317/PUN/2017 21 38. GROUND NO.6 IS GENERAL. ACCORDINGLY, THE SAME IS DISMISSED. 39. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 19 TH DAY OF JULY, 2019. SD/- SD/- (SUSHMA CHOWLA) (D. KARUNAKARA RAO ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; DATED : 19 TH JULY, 2019. SUJEET / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE DRP-3, MUMBAI; 4. THE CIT(DRP-3), MUMBAI; 5. , , LH / DR C, ITAT, PUNE; 6. / GUARD FILE. / BY ORDER, //TRUE COPY// SENIOR PRIVATE SECRETARY , / ITAT, PUNE