Carlton Overseas Pvt. Ltd, New Delhi V. DCIT, New Delhi

ITA 3204/DEL/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 52734 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 2 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 08-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 28-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K CHAND SENIOR
• Assessee Lawyers: S D KAPILA R R MAURYA; PARVESH SHARMA S
• Keywords: Sale consideration of property below Jantri Value; Depreciation; Transfer pricing; Business expenditure; Principle of natural justice; International transaction; Bad and doubtful debts
• Section: 92C; 143(3)

Judgement Text

BEFORE THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH B, NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.3204/DEL.2010 (ASSESSMENT YEAR : 2006-07) M/S. CARLTON OVERSEAS PVT. LTD., VS. DCIT, CIRCLE 3 (1), J 5, (3 RD FLOOR), SAKET, NEW DELHI. NEW DELHI. (PAN NO.AAACC0482B) (APELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI S.D. KAPILA, R.R. MAURYA AND PARVESH SHARMA, ADVOCATES DEPARTMENT BY : SHRI N.K. CHAND, SENIOR DR O R D E R PER B.C. MEENA, ACCOUNTANT MEMBER : THIS APPEAL FILED BY THE ASSESSEE ARISES OUT OF TH E ORDER OF THE ASSESSING OFFICER PASSED U/S 143(3) READ WITH SECTI ON 144C OF THE INCOME-TAX ACT, 1961 DATED 07.05.2010. THE GROUNDS OF APPEAL READ AS UNDER :- 1. THE REFERENCE TO TPO AND HIS ORDER DETERMINING ARMS LENGTH PRICE ARE WRONG INVALID AND ARE BAD IN LAW A ND ON FACTS IN AS MUCH AS MANDATORY SHOW CAUSE NOTICE AS REQUIR ED U/S 92C(3) WAS NOT GIVEN ON MATTERS DECIDED AGAINST THE ASSESSEE. 2. THE DRAFT ORDER OF ASSESSMENT, THE DIRECTIONS OF DRP AND THE FINAL ORDER OF ASSESSMENT MADE BY AO ARE ALL BA D IN LAW AND ON FACTS AND ARE MADE MECHANICALLY AND WITHOUT APPL ICATION OF MIND. ITA NO.3204/DEL/2010 2 3. TPO/AO/DRP ERRED IN NOT ACCEPTING THE TRANSACTIO N VALUE AS REPRESENTING ALP AND THEREFORE REQUIRING N O ADDITION IN THE INCOME OF THE ASSESSEE. 4. THE DETERMINATION OF ALP IS ARBITRARY, WRONG AND BAD IN LAW INASMUCH AS THE TPO/ AO/DRP HAVE ERRED IN: A) IGNORING AND REJECTING THE SEGMENTED ACCOUNTING RESULTS ON FLIMSY, INVALID AND UNWARRANTED REASONS; B) NOT APPRECIATING THAT IN EARLIER YEARS THE AO/TP O HAVE ACCEPTED RESULTS ON SIMILAR SEGMENTED ACCOUNTS; C) ADOPTING FINANCIALS AT ENTITY LEVEL AS A WHOLE; D) REJECTING RPM AS THE MOST APPROPRIATE METHOD FOR BENCH MARKING IN RESPECT OF IMPORT OF GOODS FOR RESALE; E) ADOPTING TNMM AS MAM AND THAT TOO IN VIOLATION OF RULES OF NATURAL JUSTICE AS WELL AS SUB RULES (2 ) AND (3) OF RULE 10B. F) NOT ALLOWING COMPARABILITY ADJUSTMENT FOR - I) UNDER UTILISATION OF CAPACITY, AND - II) ECONOMIC AND FINANCIAL COMPARABILITY, - A) HARDENING OF RUPEE; - B) LOWER EXPORT BENEFIT/PROFITABILITY DURING THE YEAR; - C) DIFFERENCE FOR FAR; - D) LARGE VOLUME OF BUSINESS WITH AES; G) REJECTING THE COMPARABLES WITHOUT CARRYING OUT RESEARCH UNDER TNMM AS MAM. H) ADOPTING A COMPARABLE RATE OF PROFIT AT THE RAT E OF 4.05% AND LOSS RATE AT 4.56 IN ASSESSEES' CASE; ITA NO.3204/DEL/2010 3 I) USING RANGE OF TURNOVER AS THE CRITERIA FOR SEL ECTING COMPARABLES WITHOUT CARRYING OUT FAR ANALYSIS AND INVOKING PROVISIONS OF RULE 10B(4). J) DETERMINING ADJUSTMENT OF RS.L,94,06,594 IN ALP ON ALL THE TRANSACTIONS AND NOT RESTRICTING IT ONLY TO THE INTERNATIONAL TRANSACTION WITH AES. 5. THE DRP HAS MECHANICALLY AND WITHOUT APPLICATION OF MIND UPHELD THE ORDER OF AO/TPO BY OBSERVING THAT ' ALLOCATION KEYS WERE NOT CLEAR', WHICH OBSERVATIONS ARE CONTRA RY TO MATERIAL AND SUBMISSIONS ON RECORD. 6. THE AO/TPOIDRP ERRED IN NOT ALLOWING THE ADJUSTM ENT OF AND MAKING ADDITION OF LOSS INCURRED BY THE ASSE SSEE IN RETAIL BUSINESS SEGMENT. WHEN PROFIT IS ESTIMATED BY ADOPT ING A FLAT RATE, NO SEPARATE ADDITION FOR BOOK LOSS CAN BE MAD E. 7. TPO/AO/DRP ERRED IN NOT ALLOWING BENEFIT OF +/- 5% VARIATION UNDER SECTION 92C(2) OF THE ACT. 8. TPO/AOIDRP ERRED IN NOT APPRECIATING THE FINANCI ALS RESULTS OF ASSOCIATE ENTERPRISES PLACED ON RECORD B Y THE ASSESSEE AND DETERMINATION OF ARM'S LENGTH PRICE ON THE BASIS OF OPERATING PERFORMANCE OF COMPARABLE COMPANIES ID ENTIFIED BY THE ASSESSING OFFICER ALONE IS NOT LEGAL AND COR RECT, PARTICULARLY, THE ASSESSING OFFICER HAS NOT COME TO THE FINDING RELATING TO TAX AVOIDANCE BY THE ASSESSEE BY ABUSE OF TRANSFER PRICING. 9. TPO/AO/DRP ERRED IN NOT ALLOWING DEPRECIATION ON COMPUTERS/ ACCESSORIES @ 60%. 10. ALL THE ABOVE GROUNDS AND SUB GROUNDS ARE INDEP ENDENT AND WITHOUT PREJUDICE TO EACH OTHER. 11. THE ASSESSEE RESERVES THE RIGHT TO ADD ALTER AN D/OR AMEND ANY GROUND AT THE TIME OF HEARING. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF LEATHER FOOTWEAR. IN GROUND NOS.1 TO 8, THE ISSUE INVOLVED IS ITA NO.3204/DEL/2010 4 RELATED TO TRANSFER PRICING. DURING THE YEAR, THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES OF RS.14,7 3,04,527. THE AO REFERRED THE ISSUE TO THE TRANSFER PRICING OFFICER AFTER OBTAINING PRIOR APPROVAL OF THE CIT, DELHI-1, NEW DELHI. THE TPO P ASSED AN ORDER FOR AN UPWARD ADJUSTMENT OF RS.1,94,06,594/-. THE DRP DEALT THIS ISSUE AS UNDER :- GROUND NO.1 TO 9 RELATE TO TP ADJUSTMENTS OF RS.1,94,06,594/-. WE HAVE PERUSED THE ORDERS OF TP O AND THE DETAILS FILED BY THE ASSESSEE IN THE PRECEDING BEFO RE US. HIS REVISED SUBMISSIONS FILED ALONG WITH REVISED GROUND S OF OBJECTIONS HAS ALSO BEEN SEEN IN DETAIL. IN THE AR GUMENTS MADE BEFORE USE, IT WAS POINTED OUT THAT TPO HAS OBJECTE D TO SEGMENTATION OF EXPENSES AS THE ALLOCATION KEYS WER E NOT CLEAR. SH. GOEL ARGUED THAT EXPENSES HAVE BEEN SEGMENTED O N TURNOVER BASIS. THE TPO HAS DISCUSSED IN DETAIL IN PARA 5.1 THE RESULTS OF SCRUTINY OF SEGMENTED ACCOUNTS. WE DO NOT FIND ANY REASON TO GIVE ANY FURTHER DIRECTIONS REGARDING THIS SELECTIO N OF NEW COMPARABLES BY TPO. THE AR FOR THE ASSESSEE HAS SU GGESTED THAT THERE SHOULD BE ADJUSTMENTS FOR FOREIGN EXCHAN GE LOSS, CAPACITY UTILIZATIONS ETC. THERE IS NO CLEAR CUT M ETHODOLOGY SUGGESTED BY THE AR FOR THE ASSESSEE. IN THE CASE OF PHILLIPS SOFTWARE CENTRE (P) LIMITED 2009 TIOL 123-HC-KARNAT AKA-IT, KARNATAKA HIGH COURT HAS ADMITTED THE QUESTION OF L AW. IT AROSE FROM TRIBUNALS ORDER WHERE CERTAIN ADJUSTMENTS WER E MADE BY HON'BLE ITAT,. AS THE PROCEDURAL OF ADJUSTMENTS S OUGHT BY THE ASSESSEE ARE NOT CLEAR, WE DECLINE TO INTERFERE IN THE ADJUSTMENTS ORDERED BY TPO. 3. THE LEARNED AR PLEADED THAT THE ASSESSEE WAS ISS UED A SHOW CAUSE NOTICE BY TPO ON 04.08.2008, WHICH IS PLACED AT PAG E 207 OF THE PAPER BOOK AND ASSESSEE SUBMITTED THE REPLY FOR THE SAME, WHICH IS PLACED AT PAGES 209 TO 217 OF THE PAPER BOOK ALONG WITH THE A NNEXURES AVAILABLE AT PAGES 218 TO 221. THEREAFTER, NO SHOW CAUSE NOTICE WAS ISSUED TO THE ITA NO.3204/DEL/2010 5 ASSESSEE. HE SUBMITTED THAT IT WAS MANDATORY TO IS SUE A SHOW CAUSE NOTICE AS REQUIRED U/S 92C(3) IN THE MATTERS DECIDE D AGAINST THE ASSESSEE. HE ALSO SUBMITTED THAT THE ACCOUNTING STANDARD-17 C OMES INTO PLAY WHEN THE TURNOVER IS MORE THAN RS.50 CRORES. THEREFORE, THE AS-17 IS NOT APPLICABLE TO THE ASSESSEES CASE AS THE TURNOVER W AS NOT EXCEEDING THE THRESHOLD OF RS.50 CRORES DURING THE RELEVANT PERIO D. ASSESSEE WAS NOT REQUIRED TO GET THE SEGMENT ACCOUNT AUDITED. HE P LEADED THAT THE DRP HAS MECHANICALLY GIVEN THE DIRECTION FOR THE PROPOS ED ORDER OF THE AO WITHOUT APPLICATION OF MIND AND DEALING WITH ASSESS EES OBJECTIONS. HE PLEADED THAT THE BENEFIT OF 5% +/- IS ALSO NOT ALLO WED TO THE ASSESSEE. HE FINALLY PRAYED THAT THE MATTER MAY BE RESTORED BACK TO DRP. THE LEARNED AR ALSO SUBMITTED WRITTEN SUBMISSION AND INSISTED T O INCORPORATE SAME IN OUR ORDER WHICH READ AS UNDER :- THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF LEATHER FOOTWEAR SINCE 1993. HOWEVER, SIN CE AUGUST 2003 THE COMPANY ALSO STARTED BUSINESS IN PURCHASE AND SALE OF SHOES IN THE SHOWROOMS LEASED OUT BY IT. THE ASSESSEE OPERATES TWO BUSINES S SEGMENTS, NAMELY, EXPORT BUSINESS AND RETAIL BUSINESS, FOR WHICH A LL NECESSARY DETAILS WERE GIVEN IN TP REPORT AND DURING ASSESSMENT PROCEEDING S. DURING THE YEAR THE ASSESSEE HAD UNDERTAKEN INTERN ATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES/CONCERNS TO THE TUNE OF RS.1 4,73,04, 527. TO DETERMINE ARM'S LENGTH PRICE IN RELATION TO THESE INTERNATION AL TRANSACTIONS THE CASE WAS REFERRED TO TRANSFERRED PRICING OFFICER (TPO) WHO P ASSED ORDER U/S 92CA (3) DATED 01.09.2009. TPO MADE AN UPWARD ADJUSTMENT OF RS.1,94,06,594 TO THE TRANSACTION VALUE DECLARED BY THE ASSESSEE. THE ASSESSEE OBJECTED TO THE ADJUSTMENT VIDE ITS RE PLY DATED 06.11.2009 AND POINTED OUT THAT THE TPO HAS PASSED THE ORDER WITHO UT CONSIDERING THE FACTS, CIRCUMSTANCES AND PAST HISTORY OF THE ASSESSEE COMP ANY; THAT THE 'SEGMENT ACCOUNTS' FOR 'EXPORT BUSINESS' AND 'RETAIL BUSINES S ' WERE MAINTAINED AND NECESSARY EVIDENCE IN PROOF THEREOF AND SEPARATE BO OKS OF ACCOUNTS FOR RETAIL BUSINESS SEGMENT OF THE ASSESSEE WERE SUBMITTED AS DESIRED BY THE TPO AND ITA NO.3204/DEL/2010 6 THE ASSESSEE HAD WORKED OUT ALP AS IN PAST; THAT TH E TPO MADE ASSESSMENT BY BENCHMARKING INTERNATIONAL TRANSACTIONS AT 'ENTITY LEVEL'. THE REASONS GIVEN BY THE TPO FOR NOT ACCEPTING THE SEGMENT ACCOUNTS ARE BASED ON SURMISES WHICH ARE CONTRARY TO THE FACTS O N RECORD AND HAVE BEEN GIVEN WITHOUT CALLING UPON THE ASSESSEE TO EXPLAIN THE SO-CALLED DISCREPANCIES. FURTHER, THE TPO HAS NOT ALLOWED ADJUSTMENT WHILE W ORKING OUT THE ALP OF THE ASSESSEE IN RESPECT OF UNDER UTILIZATION OF CAP ACITY AND RISK FOR ENVIRONMENT IN WHICH EXPORT BUSINESS WAS CARRIED OU T AS COMPARED TO THE COMPANIES CHOSEN AS COMPARABLES. THE ASSESSEE HAD ASKED FOR ADJUSTMENT IN THE PRICE POINTING OUT THAT IT, THE ASSESSEE HAD GIVEN IN A GREATER DETAIL THE FUNCTION AL ANALYSIS, ASSETS EMPLOYED AND RISK UNDERTAKEN (FAR) BY AES. AS THE ASSESSEE I S DEALING IN RISK FREE ENVIRONMENT WHILE DEALING WITH AES, IT DOES NOT HAV E RISKS OF BUSINESS WHILE DEALING WITH THEM PARTICULARLY, WITH RESPECT OF CRE DIT AND COLLECTION RISK, PRODUCT LIABILITY RISK ETC., WHICH ARE VERY IMPORTA NT AND HAS SUBSTANTIAL BEARING ON THE PRICES. THE REASONS GIVEN BY TPO FOR NOT ALLOWING ADJUSTMEN TS ON ACCOUNT OF CAPACITY UTILIZATION AND LOW RISK. THE TPO HAS MADE PRICE ADJUSTMENT BY ADOPTING PLI A T ENTITY LEVEL WHICH IS CONTRARY TO LAW. THE ASSESSEE HAD MAINTAINED ACCOUN TS ON SEGMENT BASIS THOUGH IN FINAL ACCOUNTS THESE ARE CONSOLIDATED AND A CONSOLI DATED AUDIT REPORT WAS PREPARED. IN ANY CASE THE ASSESSEE HAS SUBMITTED THE FOLLOWING I NFORMATION / DOCUMENTS WITH RESPECT TO SEGMENT ACCOUNTS DURING ASSESSMENT PROCE EDINGS: I. SEGMENT ACCOUNTS ALONG WITH ALL SCHEDULES WERE SUBM ITTED WITH TP REPORT. (REFER PAGE 143 TO 146 OF PAPER BOOK) II. COPIES OF TRIAL BALANCES OF RETAIL BUSINESS IN PR OOF OF MAINTENANCE OF SEPARATE BOOKS OF ACCOUNTS WERE SUBMITTED VIDE LETT ER DATED 13.07.2009 AS REQUIRED BY AO/TPO. (REFER PAGE 174 TO 206 OF PAPER BOOK) III. DETAILED EXPLANATION WAS GIVEN ON SEGMENT ACCOUNTS VIDE LETTER DATED 13.7.2009 IN RESPONSE TO THE QUERY OF AO/TPO ON NOT ING SHEET. (REFER PAGE 164 OF PAPER BOOK) IV. AO/TPO IN PARA 6 OF SHOW CAUSE NOTICE DATED 04.08.0 9 HAS ASKED FOR INVENTORY WISE SALE IN RESPECT OF FINISHED GOODS IM PORTED BY ASSESSEE FROM AES FOR THE YEAR UNDER AUDIT. THIS WAS REQUIRED BY HIM TO ASCERTAIN THE CLAIM OF THE ASSESSEE OF MAINTAINING SEGMENT ACCOUNTS. TH E ASSESSEE HAS SUBMITTED THE DESIRED INFORMATION VIDE LETTER DATED 11.08.09. (REFER PAGE 218 TO 220 OF PAPER BOOK) OPERATING PERFORMANCE OF BOTH THE BUSINESS SEGMENT IS SUMMARIZED HEREUNDER: ITA NO.3204/DEL/2010 7 TURNOVER PROFIT /(LOSS) BEFORE TAX EXPORT BUSINESS 171,798,523 13,321,895 RETAIL BUSINESS 28,193,751 (23,820,947) HO-UNALLOCABLE (3,231,026) -------------- --------------- TOTAL 199,992,274 (13,730,078) --------------- -------------- VIDE PARAGRAPH NOS. 1 AND 5 OF SHOW CAUSE NOTICE D ATED 4.8.2008 THE TPO OBSERVES:- 1. A PERUSAL OF THE DOCUMENTS RESTING ON RECORDS RE VEALS THAT YOU HAVE USED SEGMENT ACCOUNTS WHILE COMPUTING PLI OF THE EX PORT AND THE RETAIL SEGMENT WHEREAS NO SUCH SEGMENTAL IS PRESENT IN YOUR AUDITED ACCOUNTS. MOREOVER, YOU HAVE USED THE SAME SET OF COMPARABLE S WHILE ANALYZING THE EXPORT AND RETAIL SEGMENT. IN THE LI GHT OF THE SAME, THE VIEW GOT STRENGTHENED THAT IN ENTIRETY BOTH THE EXP ORT AND RETAIL BUSINESS NEED TO BE EXAMINED IN UNISON. IN THIS CO NTEXT, YOU ARE REQUIRED TO SHOW-CAUSE AS TO WHY PROFITABILITY AT T HE ENTITY LEVEL MAY NOT BE EXAMINED. 5. SINCE YOU CLAIM TO HAVE MAINTAINED SEPARATE ACCO UNTS. IN RESPECT OF RETAIL AND EXPORT SEGMENTS, YOU ARE REQUIRED TO PRO DUCE THE INVENTORY WISE SALES IN RESPECT OF THE FINISHED GOODS IMPORTE D BY YOU FROM YOUR ASSOCIATED ENTERPRISES FOR THE YEAR UNDER AUDIT. (P.207/PAPER BOOK 1) I. THE ASSESSEE EXPLAINED THE POSITION IN DETAIL VI DE LETTER DATED 11.08.09 ( PAGE 209 TO 221 OF PAPER BOOK) STATING THAT THE A SSESSEE NOT BEING A LISTED COMPANY AND NOR HAVING TURNOVER OF RS.50CROR ES IS NOT REQUIRED TO GET THE SEGMENT ACCOUNTS AUDITED. II. IT MAY BE NOTED THE SAID SHOW CAUSE NOTICE OF 4 TH AUGUST, 2009 CLEARLY DOES NOT POINT OUT AND NOR DOES IT ANY FINDING THAT THE SEGMENTAL ANY MISTAKE IN THE SEGMENT ACCOUNTS SUBMITTED BY THE AS SESSEE AND NOR DATA USED BY THE ASSESSEE IN COMPUTING OF ALP WAS N OT RELIABLE OR CORRECT. III. THE AO WANTED TO HAVE INVENTORY WISE SALES OF FINI SHED GOODS IMPORTED BY THE ASSESSEE TO AS PROOF OF MAINTAINING SEPARATE ACCOUNTS FOR BUSINESS ACTIVITIES UNDERTAKEN BY THE ASSESSEE. THE INFORMATION WAS ITA NO.3204/DEL/2010 8 PROVIDED TO HIM REFER PAGE 174 TO 206 OF PAPER BO OK, WHICH HAS BEEN ACCEPTED BY THE TPO. IT IS SUBMITTED THAT THE MATTERS DECIDED AGAINST TH E ASSESSEE (DETAILS GIVEN AT PAGE 26 -27 OF APPEAL) BY MAKING A NUMBER OF FACTUA LLY INCORRECT FINDINGS ADVERSE TO THE ASSESSEE WITHOUT GIVING ANY FURTHER OPPORTUNITY. PARAWISE COMMENT ON TPO ADVERSE FINDING GIVEN AS PE R HIS ORDER U/S 92CA(3) ARE AS UNDER:- PARA 5.1.2(A ) IT IS EVIDENT FROM NOTES ON ACCOUNT FILED ALONG WI TH AUDITED P&L A/C AND BALANCE SHEET OF THE ASSESSEE AND FORM 3CD REPO RT OF TAX AUDITOR U/S 44AB OF THE INCOME TAX ACT. THAT THE ASSESSEE IS NOT MAINTA INING SEPARATE AUDITED FINANCIAL FOR EXPORT SALES AND RETAIL SALES . COMMENTS:- TPO HAS IGNORED OUR EXPLANATION THAT AS17 DOES NOT APPL Y TO THE FACTS OF OUR CASE. (REFER PAGE 165 OF VOL-I) AND PAGE 209-210 OF VOL-I ) ALL ADVERSE FINDINGS OF TPO IN PARA 5 OF HIS ORDER ARE UNILATERAL AND WITHOUT GIVING AN OPPORTUNITY TO ASSESSEE. DRP HAS ALSO FAI LED TO CONSIDER THE EXPLANATION .(PAGES 41-117 APPEAL MEMO ) PARA-WISE RESPONSE ON THE ISSUES RAISED BY AO/TPO U NDER PARA 5.1.2 OF HIS ORDER WAS GIVEN TO THE DRP AS UNDER : A. THE TAX AUDITOR, IN ITS REPORT IN FORM NO. 3CD HAS CLEARLY MENTIONED THE FOLLOWING TWO BUSINESSES: (REFER PAGE 12 OF PAP ER BOOK) I. MANUFACTURING OF FOOTWEAR II. TRADING AND RETAIL OF FOOTWEAR SAME FACTS HAVE ALSO BEEN GIVEN IN FORM NO. 1 FOR F ILING OF RETURN OF INCOME UNDER S. NO. 31 RELATING TO NATURE OF BUSINE SS OF THE COMPANY . TAX AUDITOR IN FORM 3CD AT PAGE 35 OF VOL I HA S GIVEN THE QUANTITATIVE INFORMATION OF TRADING AND MANUFACTURI NG. PARA 5.1.2 (B) IT IS SEEN FROM INFORMATION DISCLOSED IN COLOUMN NO. 9(A) & (D) OF FORM NO. 3CD REPORT U/S 44AB OF THE ACT THAT ASSESS EE HAS MAINTAINED ONLY CASH BOOK ,BANK BOOK, JOURNAL BOOK ,PURCHASE BOOK, SALE BOOK, LEDGER AND STOCK FOR ITS BUSINESS. THE TAX AUDITOR WHO HAS VERIFY BOOKS OF A CCOUNTS OF THE ASSESSEE DURING AUDIT HAS NOT MENTIONED MAINTENANCE OF SEPARATE BOO KS OF ACCOUNTS FOR EXPORT ,RETAIL AND HEAD QUARTER SEGMENTS AS CLAIMED BY THE ASSESSE E IN ITS LETTER DT. 11-8-2009 AND IN ITS TRANSFER PRICING REPORT DROWN UNDER RULE UND ER 10B. IN VIEW OF THIS CREDIBLE EVIDENCE THE CLAIM OF ASSESSEE FOR MAINTAINING SEPA RATE BOOKS OF ACCOUNT FOR EXPORT AND RETAIL BUSINESS SEPARATELY IS HELD AS AN AFTER THOUGHT. ITA NO.3204/DEL/2010 9 THE INFORMATION IN COLUMN NO. 9(A) AND (B) OF FORM NO. 3CD REPORTED UNDER SECTION 44AB OF THE ACT HAS BEEN GIVEN IN RESPECT OF TYPES OF BOOKS MAINTAINED BY THE COMPANY. THIS DOES NOT REQUIRE FURNISHING INFORMATION WITH R ESPECT TO MAINTENANCE OF BOOKS OF ACCOUNTS IN RESPECT OF EACH CLASS OF BUSINESS OF TH E ASSESSEE. THEREFORE, THERE IS NO REQUIREMENT TO PROVIDE DETAILS OF BOOKS MAINTAINED FOR EACH SEGMENT OF BUSINESS. THE EXISTENCE OF SEPARATE ACCOUNTS IS CLEARLY INDIC ATED BY THE FOLLOWING DOCUMENTS:- (I) (PAGE 41 TO 59 OF APPEAL MEMO) (II) (FORM 3CD AT PAGE 12 AND 35 OF VOL-1) (III) (CODES IN FORM 3CD AT PAGE 20 OF VOL-1) (IV) (ITR RETURN CODE AT PAGE 60 OF VOL-1) (V) (DIRECTOR REPORT AT PAGE 20 OF VOL-1) IN THE CASE OF THE ASSESSEE, THE FACTS IN AY 2005-0 6 AND AY 2006-07 ARE SIMILAR WITH RESPECT TO BUSINESS ACTIVITIES AND PRE PARATION OF SEGMENT ACCOUNTS. IN THESE YEARS ALSO THE SEGMENT ACCOUNTS WERE NOT A UDITED. ON THE BASIS OF SIMILAR UNAUDITED SEGMENT ACCOUNTS THE ASSESSEE HAD BENCHMARKED ITS INTERNATIONAL TRANSACTIONS ON THE BASIS OF PROFITAB ILITY OF INDIVIDUAL BUSINESS SEGMENT AND THE TPO HAS ACCEPTED UNAUDITED SEGMENT ACCOUNTS AFTER DUE ENQUIRY IN THE MATTER. (PAGES AT 222-307 OF VOL-I) (RELEVANT PAGES 275-279 AND 294-298) PARA 5.1.2(C) IT IS EVIDENT FROM SEGMENTAL INFORMATION AS DISCLOS ED IN ANNEXURE 1 TO TRANSFER PRICING THE HEAD QUARTER SEGMENT HAS CREDI TED BY THE ASSESSEE TO PART UNALLOCATED EXPENSES OF RS. 32,31,026/- AND NO INC OME OR RECEIPT IN THIS SEGMENT IS CREDITED. THIS UNALLOCATED EXPENSES OF RS. 32,31,0 26 ACTUALLY PERTAIN TO EXPORT AND RETAIL BUSINESS OF THE ASSESSEE BUT THIS EXPENDITUR E WERE DELIBERATELY KEPT OUT OF EXPORT BUSINESS AND RETAIL BUSINESS SEGMENT TO REDU CE LOSSES. COMMENTS:- DETAILS OF EXPENSES OF RS. 32,31,026/- SHOWN IN HE AD OFFICE ACCOUNT HAS BEEN GIVEN IN THE SEGMENT ACCOUNTS. IT CAN BE SEEN THAT THESE EXPENSES ARE UNALLOCABLE EXPENSE / NON OPERATING EXPENSES AND OF EXTRA-ORDINARY NATURE, NAMELY, KEYMAN INSURANCE OF RS. 13.97 LAKHS, BAD DE BTS OF RS. 1.95 LAKHS, PROVISION FOR DOUBTFUL DEBTS OF RS. 5.04 LAKHS ETC. THESE ARE NOT NORMAL BUSINESS EXPENSES, AND THEREFORE, CANNOT BE TAKEN I N EITHER OF THE SEGMENT FOR THE PURPOSE OF DETERMINATION OF WORKING RESULT FOR TP STUDY. SIMILAR EXPENSES WERE ALSO EXCLUDED IN WORKING OUT OPERATING OF THE COMPARABLE COMPANIES. (REFER PAGE 145 VOL-I) PARA 5.1.2(D) A CAREFUL COMPARISON OF UNAUDITED SEGMENTAL ACCOUN TS AS REPORTED IN TRANSFER PRICING REPORT AND AUDITED FINANCIAL ACCOU NTS OF THE ASSESSEE HAS REVILED THAT ITA NO.3204/DEL/2010 10 THE ASSESSEE HAS MANIPULATED AUDITED FINANCIAL OF T HE ASSESSEE WHILE DIVIDING IT TO EXPORT SALES AN LOCAL SALES IN SEGMENTAL ACCOUNT FO R TRANSFER PRICING PURPOSE AS EVIDENT FROM FOLLOWING TABLE:- AS PER AUDITED A/C RS. IN CRORES) AS PER SEGMENTAL A/C FILED WITH TRANSFER PRICING REPORT (RS. IN CRORE) EXPORT SALE 16.52 17.18 LOCAL SALE 3.48 2.82 COMMENTS:- AO/TPO HAS MADE SERIOUS ALLEGATION THAT ASSESSEE HA S MANIPULATED AUDITED ACCOUNTS WHILE PREPARING SEGMENT ACCOUNTS AS THE AMOUNT OF EXPORT & LOCAL SALE IN AUDITED ACCOUNTS AND SEGMENT ACCOUNTS VARY. EXPORT SALE AND LOCAL SALE HAS BEEN CORRECTLY SHOWN IN THE SEGMENT ACCOUNTS AND THERE ARE NO DIFFERENCE WHAT SO EVER. SEGMENT ACCOUNTS HAVE BEEN PREPARED IN TABULAR FORM AND INFORMATION OF INCOME AND EXPENDITURE OF ALL BUSINESS SEGMENTS HAV E BEEN GIVEN SEPARATELY. FURTHER, ONE COLUMN TITLED TOTAL HAS BEEN GIVEN A LONGSIDE OF INDIVIDUAL FIGURES WHICH REPRESENTS TOTAL FIGURE OF ALL BUSINE SS SEGMENT (COMBINED). THE FIGURE IN TOTAL COLUMN IS THE SAME AS IN AUDITED ACCOUNTS. SEGMENT ACCOUNTS HAVE BEEN DRAWN EXACTLY IN THE SAME FORMAT AND MANN ER AS IN THE CASE OF AUDITED ACCOUNTS AND ALL SCHEDULES OF INCOME & EXPE NSE HAVE ALSO BEEN GIVEN. AO/TPO HAS TRIED TO CONFUSE THE MATTER AND HAS GIVE N THE FIGURES OF SALE IN HIS ORDER WHICH IS CONTRARY TO THE FIGURES AS GIVEN IN SEGMENT ACCOUNTS. AMOUNT AS PER SEGMENT ACCOUNTS ARE: SCH EXPORT BUSINESS RETAIL BUS INESS TOTAL EXPORT SALE 10 16,52,10,398 16,52,10,398 LOCAL SALE 10 65,88,125 2,81,93,751 3,47,81,876 TOTAL 17,17,98,523 2,81,93,751 19,99,92,274 AO/TPO HAS GIVEN TOTAL SALE OF EXPORT DIVISION AT RS 17.18 CRORES. HE HAS COMPARED THIS WITH EXPORT SALE OF RS 16.52 CRORES A ND CAME TO THE CONCLUSION THAT THERE ARE DIFFERENCE IN THE SALE AS PER AUDITE D ACCOUNTS AND SEGMENT ACCOUNTS. IN FACT, HE HAS COMPARED TOTAL SALE OF E XPORT DIVISION WITH THAT OF EXPORT SALE ALONE, WHEREAS THE EXPORT DIVISION HA D ALSO MADE SOME LOCAL SALES WHICH HAVE BEEN NOT CONSIDERED BY THE TPO . (REFER PAGES 143-146 VOL-I) (PAGE 46 APPEAL MEMO) ITA NO.3204/DEL/2010 11 PARA 5.1.2 (E) IT IS FURTHER NOTED FROM SCHEDULE 6 TO FORM NO. 3CD THAT 10,860 PAIRS OF SHOES MANUFACTURED BY THE ASSESSEE WERE TRANSFERRED TO TRADING SALES (THAT IS LOCAL SALES) WHERE AS PER SCHEDULE 13 OF SEGMENTAL ACCOUN T FILED ALONG WITH TRANSFER PRICING REPORT THIS TRANSFER WAS NOT MENTIONED AND IT WAS NOTED THAT FINISH GOODS PURCHASED FOR TRADING EXPORT WERE TRANSFER TO RETAI L SALE. COMMENTS:- THE ASSESSEE HAS TRANSFERRED 10,860 PAIR OF SHOES F ROM EXPORT DIVISION TO RETAIL DIVISION. THIS FACT HAS BEEN CLEARLY MENTIO NED IN FORM NO. 3CD. FURTHER, THE COST OF SUCH GOODS COSTING TO RS. 71, 67,528/- HAS BEEN ALLOCATED AS INTER SEGMENT REVENUE AND HAVE PROPERLY DISCLOSE D IN THE SEGMENT ACCOUNTS. SCHEDULE 13 EXPORT RETAIL TOTAL TRADING PURCHASES 38,416,601 11,154,536 49,571,137 ADD/LESS : STOCK TRANSFER TO RETAIL DIVISON (-)71,67,528 71,67,528 _ ADD: OPENING STOCK 899,379 21,890,926 22,790,305 LESS: CLOSING STOCK 1,358,675 18,363,989 19,722,664 TOTAL 30,789,777 21,849,000 52,638,778 (REFER PAGE 35 AND 145 VOL-I) PARA 5.1.2.(F) SINCE AS PER TAX AUDIT0R REPORT THE ASSESSEE HAS NO T MAINTAINED SEGMENTAL ACCOUNT FOR EXPORT AND RETAIL SALE, THE A LLOCATION OF EXPENDITURE BETWEEN THESE TWO SEGMENTS WITHOUT ANY EXPLAINED OR DISCLOSED ALLOCATION KEY CAN NOT BE RELIED UPON TO DETERMINE CORRECT SEGMENT AL RESULT. COMMENTS:- WITH REGARD TO DISCLOSURE OF INFORMATION WITH RESPE CT TO MAINTENANCE OF SEGMENT ACCOUNTS IN TAX AUDIT REPORTS, WE HAVE EXPL AINED THE LEGAL POSITION UNDER PARA (B) ABOVE. ALL DIRECT AND INDIRECT EXPE NSES RELATABLE TO AN INDIVIDUAL BUSINESS SEGMENT HAS BEEN ACCOUNTED FOR IN THE RESPECTIVE BUSINESS SEGMENT. HOWEVER, THE COMMON OVERHEAD EXPENSES HAV E BEEN ALLOCATED TO BOTH THE BUSINESS SEGMENTS ON THE BASIS OF TURNOVER AS PER THE STANDARD ACCOUNTING PRACTICES AND THE PAST PRACTICE. THE COMPLETE BASIS OF ALLOCATION OF COMMON OVERHEAD EXPENSES HAVE BEEN PLACED ALONG WIT H THE SEGMENT ACCOUNTS FILED ALONG WITH TP DOCUMENTATION. THE AO /TPO HAS NOT FOUND ANY DEFECT IN ALLOCATION OF EXPENSES AND HAS ROUTINELY COMMENTED ON THIS ASPECT IN PARA 5.1.2(F). THE DRP HAS WRONGLY OBSERVED THAT NO ALLOCATION K EY WAS PROVIDED. (REFER PAGE 148 VOL-I) (PAGES 47 APPEAL MEM O) PARA 5.1.2.(G) I HAVE PERUSED THE PURPORTED TRIAL BALANCE PRODUCE D ON RECORD AND THEY ARE ALLEGED TO CONTAIN THE RETAIL SALES AC COUNT OF THE HEAD OFFICE AND VARIOUS OTHER OUTLETS PERTAINING TO RETAIL SALES. A SERIES OF CHECK ON TEST BASIS ITA NO.3204/DEL/2010 12 SHOWED THAT AN AMOUNT OF RS. 12,24,891/- HAS BEEN C UMULATIVELY DEBITED TOWARDS ADVERTISEMENT CHARGES AND ALL THE ACCOUNT P ERTAINING TO RETAIL DIVISION WHEREAS AS PER SCHEDULE 15 OF THE AUDITED PROFIT & LOSS ACCOUNT ON AMOUNT OF ONLY RS. 6813/- HAS BEEN DEBITED AS ADVER TISEMENT CHARGES. THERE HAS BEEN NO DOCUMENT WHICH HAS RECONCILED THE TRIAL BALANCES OF EXPORT AND RETAIL WITH THE AUDITED ACCOUNTS. COMMENTS:- THE TRIAL BALANCES OF RETAIL BUSINESS HAVE BEEN PLA CED ON RECORD IN PROOF OF MAINTENANCE OF SEPARATE BOOKS OF ACCOUNTS FOR RETAI L BUSINESS. THE TOTAL EXPENDITURE ON ADVERTISEMENT OF RS. 12,37,292/- (AO/TPO HAS MENTIONED RS 12,24,891/- WHICH IS NOT CORRECT) HAS BEEN DULY SHOWN IN THE SEGMENT ACCOUNTS IN TWO DIFFERENT SCHEDULES (SCHEDULE NO. 15 AND 17) AS PER DETAILS GIVEN HEREUNDER: SCHEDULE REFERENCE AMOUNT (RS.) I. SCHEDULE 15 450 II. SCHEDULE 17 12, 36, 842 ___________ TOTAL 12, 37, 292 ========= HOWEVER, THE AO/TPO HAS MENTIONED THAT AS PER SCHED ULE 15 OF THE AUDITED PROFIT LOSS ACCOUNT, AN AMOUNT OF RS. 6,813/- HAS B EEN DEBITED AS ADVERTISEMENT CHARGES. IN FACT, RS. 6,813/- IS TOT AL OF ADVERTISEMENT EXPENSES OF EXPORT DIVISION (RS. 6363/-) AND RETAIL DIVISION (RS. 450/-). HE HAS NOT CONSIDERED THE EXPENDITURE OF RS. 12,36,842/- SHOWN UNDER THE HEAD SELLING EXPENSES IN SCHEDULE 17. (REFER PAGES 52, 145-146,174-206,207 VOL-I) (PAGE 47 APPEAL MEMO) PARA 5.2 REASON FOR DRAWING SEGMENTAL A/CS BY THE ASSESSEE . THE OBSERVATIONS OF THE AO/TPO THAT THE ASSESSEE HA S AVOIDED MAINTAINING AUDITED SEGMENTAL ACCOUNTS AND HAS FILED UN-AUDITED SEGMENTAL ACCOUNT WHICH WAS FOUND INCORRECT IS NOT WARRANTED AS THE ASSESSE E HAS GIVEN DETAILED EXPLANATION TO EACH ONE OF THE POINTS RAISED BY THE TPO IN THE SUBMISSIONS GIVEN IN GROUND NO. 1 AND IT CAN BE SEEN THAT ACCOU NTS ARE TRUE AND CORRECT. HOWEVER FOR THE SATISFACTION OF THE TPO WE ARE WILL ING TO GET THE ACCOUNTS AUDITED AS SUGGESTED BY THE LD. DRP THE TPO HAS RAISED UNFOUNDED DOUBTS AND HAS PUT MOT IVES ON THE PART OF THE ASSESSEE FOR PRESENTATION OF SEGMENT ACCOUNTS AS AN AFTERTHOUGHT IGNORING THE SIMILAR ACCOUNTING PRACTICE DULY ACCEPTED IN THE PA ST AFTER DETAILED EXAMINATION. IT IS SUBMITTED THAT THE TPO HAS MIS-APPRECIATED AT THE SEGMENT ACCOUNTS. THE ASSESSEE HAS INCURRED LOSS BEFORE TAXATION OF RS. 1 ,37,30,078/- AT THE ENTITY ITA NO.3204/DEL/2010 13 LEVEL AND THE NET LOSS AFTER PROVISION FOR TAXATION WAS RS. 99,36,478/-. THERE IS NO DIFFERENCE IN THE LOSS AS PER SEGMENT ACCOUNTS A ND AS PER AUDITED ACCOUNTS. THE REASONS GIVEN BY TPO [VIDE PARA 5.2 (C)] FOR NO T ACCEPTING THE SEGMENT ACCOUNTS ARE NOT BASED ON FACTS AND CIRCUMSTANCES O F THE CASE AS UNDER: A. IT IS SUBMITTED THAT SELECTION OF SAME SET OF COMPA RABLES FOR EXPORT AND RETAIL BUSINESS SEGMENT IS INDEPENDENT AND SEPARATE EXERCISE AND THIS IS IN NO WAY CONNECTED WITH SEGMENT ACCOUNTS OF THE ASSESSEE. THE SO CALLED RETAIL SEGMENT CONSISTS OF INSIGNIFI CANT AMOUNT OF PURCHASE OF FINISHED GOODS AMOUNTING TO RS. 17.99 L AKHS FROM ITS ASSOCIATE ENTERPRISE. REST OF THE RETAIL SEGMENT COMPRISE WHOLLY DOMESTI C PURCHASE AND SALE OF ABOUT RS.3 CRORES TO CUSTOMERS VISITING THE SHOW ROOMS, WHICH IS NOT SUBJECT TO TRANSFER PRICING ADJUSTMENT. THE ASSESSEE FURTHER SUBMITTED THAT THE RETAIL SALE S ARE SUBJECT TO THE SALE TAX AND EXPORT SALE ARE SUBJECT TO EXPORTS BENEFITS AND HENCE THE ACCOUNTS NECESSARILY HAD TO MAINTAIN SEPARATELY. (REFER PAGES 35,209,210) PARA 5.3 BENCH MARKING INTERNATIONAL TRANSACTIONS AT ENTIT Y LEVEL. COMMENTS: - THE TPO HAS PROCEEDED TO DETERMINE ARMS LENGTH PRIC E OF INTERNATIONAL TRANSACTION USING FINANCIALS OF ENTITY LEVEL AND HA S IGNORED SEGMENT RESULTS (5.3 OF ORDER). BECAUSE OF ADVERSE FINDINGS CONTAINED PA RA 5, OF HIS ORDER. IT HAS ALREADY BEEN DISCUSSED IN DETAIL IN THE PRECEDING P ARAGRAPHS AS TO HOW THESE FINDINGS ARE BASELESS AND CONTRARY TO THE FACTS ON RECORD. HENCE HIS ACTION IN REJECTING THE SEGMENTAL COMPARISON OF TRANSACTIONS AND IN ADOPTING PLI AT ENTITY LEVEL IS ILLEGAL AND UNSUSTAINABLE IN LAW. THE TPO HAS AGAIN BASED HIS DECISION ON THE UNILATE RAL FINDINGS ON THE SEGMENT ACCOUNTS. IT HAS ALREADY BEEN DEMONSTRATED THAT ALL THESE FINDI NGS FACTUALLY INCORRECT. (REFER PAGES 41-59) PARA 5. 4 WHETHER ASSESSEE HAS CORRECTLY CHOSEN RPM TO BENCH MARK INTERNATIONAL TRANSACTION TO RETAIL SEGMENT. COMMENTS:- THE TPO ERRED IN REJECTING THE RPM ADOPTED BY THE A SSESSEE AS MAM FOR PURCHASE OF FINISHED GOODS FOR RESALE. ITA NO.3204/DEL/2010 14 TOTAL RETAIL SALE IS OF RS.2.81 CRORES AND THE PURC HASE FROM AES FOR RESALE IS VERY NOMINAL I.E 17.99 LAKHS. HENCE, IT IS FAIR, TO ADOPT THE SAME MARK UP AS IN THE CASE OF REST OF UNCONTROLLED DOMESTIC SALES. THE TPO HAS NEITHER GIVEN SHOW CAUSE TO THE ASSESSE E FOR NOT ACCEPTING RPM AND NOR HAS BE GIVEN ANY REASON FOR NOT ACCEPTING T HE MARK UP. RETAIL BUSINESS SEGMENT, WHICH WAS STARTED IN A SMALL MANNER IN FY 2003- 04 AND EXPANDED IN FY 2004-05 AND FY 2005-06, HAS I NCURRED SUBSTANTIAL LOSSES DURING THE YEARS BEING A START UP OPERATION DUE TO LOWER LEVEL OF SALES, FIXED OVERHEAD COST ETC. THE TNMM CAN NOT BE APPLIE D ON THE FACTS AND CIRCUMSTANCES OF THE CASE. (REFER PAGES 85-89 APPEAL MEMO) (PAGES -108-111 VOL-I) PARA 5.5.1 CAPACITY ADJUSTMENT CAPACITY ADJUSTMENT: I. THE ASSESSEE HAS EXPLAINED THE BASIS OF WORKING OF CAPACITY IN RESPECT OF ASSESSEE COMPANY VIDE ITS LETTER DATED 13.7.2009 AND 11.8.2009. II. THE CAPACITY OF ASSESSEE IS W.R.T. UPPER & FOOTW EAR. HOWEVER, AO/TPO IN HIS SHOW CAUSE NOTICE HAS HELD THAT THE CAPACITY OF THE ASSESSEE IS IN RESPECT OF SHOE UPPER AND HEE LS AND ALLEGED THAT THE ASSESSEE HAVE ONLY CONSIDERED THE CAPACITY FOR UPPERS. THIS IS NOT BASED ON FACTS. III. PRODUCTION PROCESS: PRODUCTION OF FOOTWEAR INVOLVES VARIOUS PROCESSES AS PER DETAILS GIVEN IN ANNEXURE B OF TP REPORT. PROCESS INVOLVES PATTERN MAKING, CUTTING OF LEATHE R, MAKING OF UPPER, MAKING OF HEEL / SOLE / INSOLE / SOCK, LASTING OF V ARIOUS COMPONENTS, FINISHING AND PACKING. IV. IT CAN BE SEEN THAT THERE ARE CERTAIN INTERMEDI ATE PROCESS FOR ACHIEVING PRODUCTION OF FINISHED PRODUCT. IN THE CASE OF ASSE SSEE, FOOTWEAR IS FINISHED PRODUCT AND THEREFORE, PRODUCTION OF FOOTW EAR ALONE IS IMPORTANT AND RELEVANT FOR ASCERTAINING CAPACITY UT ILIZATION. THEREFORE, PRODUCTION / FABRICATION OF VARIOUS COMPONENTS REQU IRED FOR PRODUCTION OF FINISHED PRODUCT CAN NOT BE CONSIDERED AS INDEPE NDENT PRODUCTION. PRODUCTION OF FINISHED FOOTWEAR HAS BEEN CONSIDE RED AS PRODUCTION FOR THE PURPOSE OF WORKING OUT OF CAPACITY UTILIZAT ION. THE ASSESSEE HAS NOT PRODUCED UPPERS FOR SALE DURING THE YEAR. FURTH ER SMALL QUANTITY OF ITA NO.3204/DEL/2010 15 SOLE / INSOLE HAVE BEEN SOLD ( RS 37.62 LACS ) AS F INISHED PRODUCT AND THE SAME HAS BEEN TAKEN AS PRODUCTION IN THE AUDITE D ACCOUNTS . V. THE AO/TPO HAS NOT APPRECIATED THE PRODUCTION PROCE SS OF THE ASSESSEE AND HAS ADDED PRODUCTION OF ALL INTERMEDIA TE COMPONENTS WHICH ARE PUT TOGETHER TO MAKE FOOTWEAR AND CLUBBED THE SAME WITH PRODUCTION OF FOOTWEAR AND HAS ARRIVED AT TOTAL PRO DUCTION OF 10,07,646 PAIRS AS UNDER: A. FOOTWEAR PAIRS 3,05,737 B. UPPER PAIRS 3,05,737 C. SOLE /INSOLE PAIRS 3,05,737 D. SOLE / INSOLE PAIRS 90,435 ------------ TOTAL PAIRS 10,07,646 ------------ THE BASIS OF QUANTITY OF INTERMEDIATE COMPONENTS (U PPERS, SOLE / INSOLE) TAKEN BY TPO IS ABSURD AND TOTALLY AGAINST COMMERCIAL PRACTICE FOR DETERMINING PRODUCTION CAPACITY. BY COUNTING THE COMPONENTS WHICH WENT INTO MAKING T HE FINISHED FOOTWEAR, THE TPO HAS ARTIFICIALLY INCREASED THE QU ANTITY OF PRODUCTION FROM 3,05,737 TO 10,07,646 WITHOUT ANY BASE. THE ASSESSEE MANY A TIMES MAKE PURCHASE OF COMPONEN TS AS A BOUGHT OUT ITEM AND DOES NOT PRODUCE IN HOUSE. ASSESSEE HAS THIS YEAR PRODUCED 3,05,737 PAIRS OF F OOT WEAR AND 90,435 PAIRS OF SOCKS. VI. PRODUCTION OF COMPONENTS CAN NOT BE TAKEN AS AN INDEPENDENT PRODUCTION AS THE CAPACITY OF THE ASSESSEE IS FOR F OOTWEAR. VII. COMPARABLE COMPANIES: INFORMATION ON CAPACITY UTILIZATION IN RESPECT OF COMPARABLE COMPANIES WAS GIVEN IN THE TP REPORT. THE INFORMATION OF INST ALLED CAPACITY AND PRODUCTION WAS GIVEN IN RESPECT OF FOOTWEAR ALONE . THUS, CAPACITY UTILIZATION OF COMPARABLE COMPANIES AS WELL AS ASSE SSEE IS REQUIRED TO BE MEASURED IN TERMS OF PRODUCTION OF FOOTWEAR AL ONE. THE INFORMATION OF CAPACITY UTILIZATION IN RESPECT OF NINE COMPARABLE COMPANIES CHOSEN BY THE ASSESSEE IN TP REPORT IS GI VEN AT PAGE 150 OF PAPER BOOK. CAPACITY UTILIZATION OF ASSESSEE HAS BEEN ADJUSTED ON ADHOC BASIS BY AO/TPO, WHEREAS, NO SUCH ADJUSTMENT WAS MADE IN RES PECT OF COMPARABLE COMPANIES. ITA NO.3204/DEL/2010 16 II. THE AO/TPO HAS NOT OBJECTIVELY APPRECIATED THE WORK ING OF FIXED COST FOR THE PURPOSE OF ADJUSTMENT AND SUMMARILY REJECTE D THE CLAIM OF THE ASSESSEE WITH OUT GIVING AN OPPORTUNITY TO EXPLAIN. III. FROM THE SHOW CAUSE IT CAN BE SEEN THAT THE AO / TP O HAS ISSUED SHOW CAUSE ON DIFFERENT ISSUE AND FINALLY DECIDED THE MA TTER AGAINST THE ASSESSEE ON ENTIRELY DIFFERENT ISSUES. (REFER PAGE 67-77 APPEAL MEMO) (PAGES 55, 103,147,150,165,212-213 VOL-I) PARA 5.5.2 ADJUSTMENT ON FAR ADJUSTMENT FOR ECONOMIC & FINANCIAL ASPECTS ETC THE AO/TPO HAS NOT APPRECIATED THE FOLLOWING IMPORT ANT FACTORS: I. ECONOMICAL AND FINANCIAL ASPECTS OF THE BUSINESS OF THE ASSESSEE IN WHICH IT OPERATE. II. RISK PROFILE OF ASSESSEE IS LOW AS IT OPERATES WITH ITS ASSOCIATES AND THEREFORE, IT DOES NOT HAVE RISKS OF BUSINESS W HILE DEALING WITH THEM, PARTICULARLY, WITH RESPECT TO CREDIT AND COLLECTION RISK , PRODUCT LIABILITY RISK ETC., WHICH ARE VERY IMPORTANT AND HAS SUBSTANTIAL BEARING ON THE PRICES. III. GEOGRAPHICAL AREA OF OPERATION AND CUSTOMER PR OFILE OF ASSESSEE AND COMPARABLE COMPANIES THAT IT IS FURTHER SUBMITTED THAT THE ASSESSEE HAS PLAYED IN THE SAFER ZONE AS THERE WAS NO CREDIT RISK, DEVELOPMENT OF MARKETING RISK AND ASSURED ORDER FROM AE.S (REFER PAGE 67-77 APPEAL MEMO) (PAGES 102- 103,,149-213-215 VOL- I) IN GROUND NO. 10 THE ASSESSEE HAS CLAIMED THAT BENE FIT OF 5% VARIATION SHOULD HAVE BEEN ALLOWED IT. COMPUTATION OF ARMS LENGTH PRICE IS REGULATED AS P ER PROVISIONS OF SECTION 92C OF INCOME TAX ACT, 1961. THE PROVISO TO SUB SEC TION 2 OF SECTION 92C AS IT EXISTED THEN READS AS UNDER: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMIN ED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PER CENT OF SUCH ARITHMETICAL ME AN. ITA NO.3204/DEL/2010 17 IN THE NEWLY SUBSTITUTED PROVISOS, THE OPTION OF TH E ASSESSEE IN THE HIGHLIGHTED PORTION AFORESAID IS TAKEN AWAY. IT MAY BE STATED T HAT THE PROVISO HAS BEEN AMENDED BY THE FINANCE (NO. 2) ACT, 2009, W.E.F. 1. 10.2009 TAKING AWAY THIS POWER. BUT, THE TPO ORDER HAS BEEN PASSED ON 1.9.20 09 AND THEREFORE, OLD PROVISIONS AS APPLICABLE BEFORE AMENDMENT ARE APPLI CABLE TO THE FACTS OF THE CASE. THE ASSESSEE RELIES ON THE FOLLOWING CASES FO R THIS PROPOSITION: I. DEVELOPMENT CONSULTANTS PVT LTD VS CIT (2008) 23 SO T 455 (KOLKOTTA0 II. SONY INDIA PVT LTD VS DCIT [2009] 315 ITR 150 ( DEL HI TRIBUNAL) III. SKODA AUTO INDIA PVT LTD VS ACIT [2009] TIOL 439 (P UNE TRIBUNAL) IT IS SUBMITTED THAT BENEFIT OF VARIATION OF 5% SHO ULD BE ALLOWED IN WORKING OUT THE ARMS LENGTH PRICE ON THE BASIS OF PROVISIO NS OF LAW AS APPLICABLE AS ON THE DATE OF ORDER. IT IS SUBMITTED THAT THE DISALLOWANCE MADE BY THE A O IS NOT AS PER PROVISIONS OF LAW AND SHOULD BE SET ASIDE. IN ANY EVENT THERE IS CLEARY VIOLATION OF PRINCIPLES OF NATURAL JUSTICE BY THE TPO. SIMILARLY , DENIAL OF NATURAL JUSTICE AND NON-CONSIDERATION OF ASSESSEES DETAILED OBJECTIONS MAKES THE ORDER U/S.144C PASSED BY DRP ILLEGAL AND BAD IN LAW. IN THIS VIEW OF THE MATTER, IT IS REQUESTED THAT THE ASSESSMENT MAY BE SET ASIDE TO THE TPO WIT H APPROPRIATE DIRECTIONS. 4. LEARNED DR FIRSTLY RELIED ON THE ORDERS OF THE A UTHORITIES BELOW. HOWEVER, FINALLY HE WAS ALSO NOT HAVING ANY SERIOUS OBJECTION TO THE RESTORATION OF MATTER TO THE DRP. 5. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. AFTE R CAREFUL PERUSAL OF THE ORDER OF DRP, WE HOLD THAT ORDER IS NOT A SPEAK ING ORDER. IN VIEW OF THIS MATTER AND IN THE INTEREST OF JUSTICE AND EQUI TY, WE FIND IT PROPER TO RESTORE THE ISSUE TO THE FILE OF THE DRP. WE ORDER ACCORDINGLY. IN VIEW OF THIS, GROUND NOS.1 TO 8 ARE DECIDED ACCORDINGLY AS ABOVE. ITA NO.3204/DEL/2010 18 6. IN THE GROUND NO.9, THE ISSUE INVOLVED IS ALLOWI NG THE DEPRECIATION ON COMPUTERS/ACCESSORIES @ 60%. THE AO RESTRICTED THE DEPRECIATION @ 15% TREATING THE COMPUTER ACCESSORIES AND PERIPHERA LS AS PLANT AND MACHINERY. WE HAVE HEARD BOTH THE SIDES ON THE ISS UE AND HOLD THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY VARIO US DECISIONS OF ITAT CO-ORDINATE BENCHES. WE ALSO FIND THAT THE ISSUE A LSO STANDS ADMITTEDLY COVERED BY THE SPECIAL BENCH OF MUMBAI TRIBUNAL IN THE CASE OF CIT VS. DATACRAFT INDIA LTD., (2011) 133 TTJ 377. FURTHER IN THE CASE OF EXPEDITORS INTERNATIONAL (INDIA) (P) LTD. VS. ADDIT IONAL CIT, (2008) 13 DTR (DEL.)(TRIB.) 435, IT HAS BEEN INTER ALIA HELD THAT PERIPHERALS SUCH AS PRINTERS, SCANNERS, NT SERVER ETC. FORM INTEGRAL PA RT OF THE COMPUTER AND, THEREFORE, ARE ELIGIBLE FOR DEDUCTION OF DEPRECIATI ON @ 60% AS APPLICABLE TO THE COMPUTERS. RESPECTFULLY FOLLOWING THESE DEC ISIONS, WE SET ASIDE THE ORDER OF THE AO ON THIS ISSUE AND ALLOW THE GRO UND NO.9 OF ASSESSEES APPEAL. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THE 16 TH DAY OF SEPTEMBER, 2011. SD/- SD/- (RAJPAL YADAV) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : THE 16 TH DAY OF SEPTEMBER, 2011 TS ITA NO.3204/DEL/2010 19 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.DRP-I, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR/ITAT