M/s Cargill India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 3242/DEL/2011

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 4161 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 6 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 28-06-2017
• Assessment Year: 2003-2004
• Appeal Filed On: 15-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: NAGESHWAR RAO ADV SHRI PARTH
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 92

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 2988/DEL/2011 AY: 2003-04 DCIT, VS CARGILL INDIA PVT. LTD., CIRCLE 3(1), 13, ABUL FAZAL ROAD, NEW DELHI. BENGALI MARKET, NEW DELHI. ITA NO. 3242/DEL/2011 AY: 2003-04 CARGILL INDIA PVT. LTD., VS DCIT, NEW DELHI. CIRCLE 3(1), NEW DELHI (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI AMRENDER KUMAR CIT DR SHRI KUMAR PRANAV, SR. DR ASSESSEE BY: SHRI NAGESHWAR RAO, ADV. SHRI PARTH, ADV. DATE OF HEARING: 11.10.2017 DATE OF PRONOUNCEMENT: 09.01.2018 ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER THESE ARE CROSS APPEALS AND PERTAIN TO ASSESSMENT YEAR 2003-04. ITA NO. 2988/DEL/2011 HAS BEEN PREFERRED BY THE DEPARTMENT AGAINST THE ORDER DATED 31.03.2011 PASSE D BY THE LD. COMMISSIONER OF INCOME TAX (A)-XX, NEW DELHI WHEREA S ITA NO. 3242/DEL/2011 IS THE ASSESSEES CROSS APPEAL. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF CARGILL INC., USA, WHICH IS THE ULTIMATE ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 2 PARENT COMPANY OF THE CARGILL GROUP. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF IMPORT, EXPORT AND TRADING OF VA RIOUS AGRICULTURAL ACTIVITIES/FOOD PRODUCTS DURING THE YE AR UNDER CONSIDERATION. DURING THE ASSESSMENT YEAR UNDER CO NSIDERATION, THE ASSESSEE WAS ALSO ENGAGED IN THE PROCESSING OF CRUDE EDIBLE OIL. THE RETURN OF INCOME WAS FILED DECLARING LOS S OF RS. 285,618,909/- AND THE ASSESSMENT WAS COMPLETED AT N IL INCOME AFTER ALLOWING SET OFF OF CARRY FORWARD LOSSES AND DEPRECIATION AMOUNTING TO RS.285,618,909/- AND THE ASSESSMENT WA S COMPLETED AT NIL INCOME AFTER ALLOWING SET OFF OF C ARRY FORWARD LOSSES AND DEPRECIATION TO THE TUNE OF RS. 266,218, 592/-. THE FOLLOWING ADDITIONS/DISALLOWANCES WERE MADE BY THE ASSESSING OFFICER:- S. NO. PARTICULARS AMOUNT (RS.) 1. TRANSFER PRICING ADDITION 501,708,483 2. MISCELLANEOUS PRIOR PERIOD EXPENDITURE 251,368 3. BAD DEBTS 5,126,148 4. ADVANCE OF SERVICE INCOME WRITTEN OFF 5,298,635 5. MANAGERIAL REMUNERATION 13,489,178 6. QUALITY ALLOWANCE 5,281,914 7. LEGAL AND PROFESSIONAL EXPENSES 19,972,977 8. DEPRECIATION ON COMPUTER ACCESSORIES 708,798 2.1 DURING THE YEAR UNDER CONSIDERATION, THE ASSESS EE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WIT H ITS ASSOCIATED ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 3 ENTERPRISES OUT OF WHICH THE FOLLOWING WERE SUBJECT ED TO A TRANSFER PRICING ADJUSTMENT:- PARTICULARS TRANSACTION VALUE (RS CRORES) TP ADJUSTMENT VALUE (RS CRORES) TP METHOD ADOPTED BY APPELLANT IN TP DOCUMENTATION MERCHANTING TRADE TRANSACTIONS (PURCHASE) 684.24 38.02 TRANSACTIONAL NET MARGIN METHOD (TNMM)) MERCHANTING TRADE TRANSACTIONS (SALE) 684 85 PURCHASE OF FERTILIZERS 138.26 8.83 COMPARABLE UNCONTROLLED PRICE (CUP) METHOD SALE OF RICE 18.04 4.14 CUP METHOD TOTAL 50.17 2.2 THE ASSESSEE USED OP/SALES TO CALCULATE THE PRO FIT LEVEL INDICATOR (PLI) AND RELIED UPON 20 COMPARABLES TO S UBSTANTIATE THE ARMS LENGTH PRICE (ALP) IN RESPECT OF THE INTE RNATIONAL TRANSACTIONS.. THE ASSESSEES MARGIN WAS CALCULATE D AT 0.09% WHEREAS A MARGIN OF THE COMPARABLES WAS -6.95%. IT WAS THE ASSESSEES CLAIM THAT THE TRANSACTIONS WERE AT ARM S LENGTH BY VIRTUE OF BEING WITHIN THE 5% RANGE. HOWEVER, ON A REFERENCE BEING MADE TO THE TRANSFER PRICING OFFICER (TPO), T HE TPO WAS OF THE OPINION THAT THE ASSESSEE HAD NOT ALLOCATED ANY OTHER OPERATING EXPENSES TO THE MERCHANTING TRADE SEGMENT AND HE CONCLUDED THAT THE ASSESSEE HAD EFFECTIVELY TESTED ITS PROFITABILITY AT GROSS PROFIT LEVEL AND HAD THEREBY, IN EFFECT, A PPLIED THE RESALE PRICE METHOD (RPM). THE TPO DISREGARDED THE TNMM A PPLIED BY ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 4 THE ASSESSEE IN ITS TP STUDY AND INSTEAD CHOSE RPM AS THE MOST APPROPRIATE METHOD AND FOR THIS PURPOSE, THE TPO CO MPARED THE ASSESSEES OP/SALES WITH THE CORRESPONDING GP/SALES MARGIN OF THE 20 COMPARABLES SELECTED BY THE ASSESSEE IN ITS TRANSFER PRICING (TP) STUDY. THEREAFTER, THE TPO PROCEEDED TO RECOMMEND TRANSFER PRICING ADJUSTMENT OF RS. 38.02 CRORE IN R ESPECT OF SALE AND PURCHASE/MERCHANTING TRADE TRANSACTIONS. 2.3 SIMILARLY, IN RESPECT OF TRADING OF COMMODITIES , THE TPO REJECTED THE CUP METHOD APPLIED BY THE ASSESSEE AND INSTEAD DETERMINED THE TNMM AS THE MOST APPROPRIATE METHOD. THE TPO ALSO INTRODUCED TWO NEW COMPARABLES FOR THE PURPOSE OF DETERMINATION OF ARMS LENGTH PRICE AND THEREAFTER PROCEEDED TO DETERMINE THE OP/TC MARGIN AT 2.5% AND AFTER OBSERV ING THAT THE ASSESSEES CORRESPONDING OP/TC MARGIN OF -3.02% FEL L OUTSIDE THE 5% RANGE, RECOMMENDED A TRANSFER PRICING ADJUSTME NT OF RS. 8.83 CRORE IN RESPECT OF PURCHASE OF FERTILISERS. 2.4 SIMILARLY, IN RESPECT OF INTERNATIONAL TRANSACT ION RELATING TO SALE OF RICE, THE ASSESSEE HAD JUSTIFIED ITS SALE T RANSACTION BY APPLYING CUP METHOD WHEREAS THE SALE PRICE WAS COMP ARED WITH CORRESPONDING PREVAILING COMPARABLE UNCONTROLLED MA RKET PRICE BUT THE TPO REJECTED THE CUP METHOD AND DETERMINED TNM AS THE ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 5 MOST APPROPRIATE METHOD. THE TPO ALSO INTRODUCED T HREE NEW COMPARABLES AND THEREAFTER PROCEEDED TO CALCULATE T HE OP/SALES AT 7.11% AND CONSIDERING THE ASSESSEES CORRESPONDI NG OP/SALES MARGIN OF -3.9%, A TP ADJUSTMENT OF RS. 4.14 CRORE WAS RECOMMENDED. SUBSEQUENTLY, THE ASSESSING OFFICER G AVE EFFECT TO THE TOTAL TP ADJUSTMENT OF RS. 50.17 CRORE RECOMMEN DED BY THE TPO. 2.5 AGGRIEVED, THE ASSESSEE CARRIED THE ISSUES TO T HE LD. COMMISSIONER OF INCOME TAX (A). IN RESPECT OF THE CORPORATE TAX GROUNDS, THE LD. COMMISSIONER OF INCOME TAX (A) ALL OWED THE ASSESSEES CLAIM OF EXPENDITURE AND DELETED THE DIS ALLOWANCES IN RESPECT OF MISCELLANEOUS EXPENDITURE, MANAGERIAL RE MUNERATION, QUALITY ALLOWANCE, LEGAL AND PROFESSIONAL EXPENSES AND DEPRECIATION ON COMPUTER PERIPHERALS. HOWEVER, THE LD. COMMISSIONER OF INCOME TAX (A) UPHELD THE ORDER OF THE ASSESSING OFFICER IN DISALLOWING WRITE OFF OF SERVI CE INCOME RECEIVABLE. 2.6 IN RESPECT OF THE TRANSFER PRICING ADDITIONS WI TH REGARD TO MERCHANTING TRADE TRANSACTION, THE LD. COMMISSIONER OF INCOME TAX (A) CONSIDERED RESALE PRICE METHOD (RPM) AS THE MOST APPROPRIATE METHOD AND BENCHMARKED THE TRANSACTIONS AND, ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 6 THEREAFTER, USED GROSS PROFIT/COST OF GOODS SOLD FO R CALCULATING PLI UNDER THE RPM. IN RESPECT OF TRADING OF COMMODITIE S, THE LD. COMMISSIONER OF INCOME TAX (A) REJECTED CUP AND APP LIED RPM AS THE MOST APPROPRIATE METHOD TO BENCHMARK THE TRANSA CTIONS. HERE ALSO, THE LD. COMMISSIONER OF INCOME TAX (A) U SED GP/COST OF GOODS SOLD TO CALCULATE THE PLI. 2.7 AGGRIEVED BY THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX(A), THE ASSESSEE IS IN APPEAL BEFORE THE ITAT A ND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- GROUNDS RELATING TO TRANSFER PRICING MATTERS 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - XX (CIT (A)) ERRED IN MODIFYING THE O RDER PASSED BY THE LEARNED ASSESSING OFFICER (AO) AND THEREBY MODIFYING THE DRAFT ORDER PASSED BY THE LEA RNED TRANSFER PRICING OFFICER (TPO) UNDER SECTION 92CA (3) THE INCOME TAX ACT, 1961 (THE ACT), THEREBY ENHAN CING THE ADJUSTMENT TO APPELLANTS TOTAL INCOME BY RS. 388,081,397 ON ACCOUNT OF TRANSFER PRICING MATTERS IN ADDITION TO THE ADJUSTMENT OF RS. 501,708,483 MADE BY THE TPO. 1.2 THE LEARNED CIT (A) DID NOT GIVE THE APPELLANT AN OPPORTUNITY TO PUT FORTH ARGUMENTS AGAINST THE APPR OACH FINALLY ADOPTED IN MAKING THE ADJUSTMENT TO INCOME, THEREBY, VIOLATING THE PRINCIPLES OF NATURAL JUSTICE . 1.3 THE LEARNED CIT (A) ERRED IN REJECTING THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MO ST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIO NAL TRANSACTION PERTAINING TO MERCHANTING ACTIVITIES. ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 7 1.4 THE LEARNED CIT (A) ERRED IN REJECTING THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION PERTAINING TO THE EXPORT OF RICE AND IMPORT OF FERTILIZERS. 1.5 THE LEARNED CIT (A) ERRED IN CONSIDERING THE RESALE PRICE METHOD (RPM) AS THE MOST APPROPRIAT E METHOD FOR THE IMPUGNED INTERNATIONAL TRANSACTIONS . 1.6 THE LEARNED CIT (A) ERRED IN REJECTING THE COMPARABLE COMPANIES SELECTED BY THE APPELLANT AND IN USING AN INAPPROPRIATE SET OF COMPARABLE COMPANIES FOR BENCHMARKING THE IMPUGNED INTERNATIONAL TRANSACTION S. 1.7 THE LEARNED CIT (A) ERRED IN CALCULATING THE GROSS MARGIN OF THE APPELLANT AND THE COMPARABLE COMPANIE S THAT WERE FINALLY CONSIDERED FOR THE PURPOSE OF BENCHMARKING THE IMPUGNED INTERNATIONAL TRANSACTION S. 1.8 THE LEARNED CIT (A) ERRED IN USING AN INAPPROPRIATE PROFIT LEVEL INDICATOR (PLI) OF GRO SS PROFIT TO COST OF GOODS SOLD WHILE COMPUTING THE MARGIN OF THE APPELLANT AND COMPARABLE COMPANIES FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTION RELATING TO IMPORT OF FERTILISERS. 1.9 THE LEARNED CIT (A) HAS ERRED IN REJECTING CORROBORATIVE BENCHMARKING ANALYSIS AND PLI USED BY THE APPELLANT FOR ITS MERCHANTING BUSINESS, I.E., BERRY RATIO WHILE APPLYING HE TNMM FOR BENCHMARKING THE INTERNATIONAL TRANSACTION PERTAINING TO MERCHANTING ACTIVITIES. 1.10 THE LEARNED CIT (A) ERRED IN COMPUTATION OF T HE ARMS LENGTH PRICE, WHICH IS NOT IN ACCORDANCE WITH THE PROVISO TO SECTION 92 C (2) OF THE ACT. 2. GROUNDS RELATING TO CORPORATE TAX MATTERS 2.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) - XX (HEREINAFTER LEARNED CIT(A)) HAS ERRED IN U PHOLDING ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 8 THE DISALLOWANCE AMOUNTING TO RS 52,98,635 ON ACCOU NT OF SERVICE INCOME RECEIVABLE WRITTEN OFF DURING THE SU BJECT YEAR. 2.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) HAS ERRED IN NOT ALLOWING THE D EDUCTION OF SERVICE INCOME WRITTEN OFF UNDER SECTION 36(1)(V II) OF THE INCOME TAX ACT, 1961 (ACT) EVEN THOUGH ALL THE COND ITIONS OF SECTION 36(L)(VII) R/W SECTION 36(2) OF THE ACT HAV E BEEN SATISFIED IN THE PRESENT CASE. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, SUPPLEMEN T, AMEND, VARY, WITHDRAW OR OTHERWISE MODIFY THE GROUN D MENTIONED HEREIN ABOVE AT OR BEFORE THE TIME OF HEA RING. 2.8 IN CROSS APPEAL, THE FOLLOWING GROUNDS HAVE BEE N RAISED BY THE DEPARTMENT- 1. THE LD.CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS.251368/- ON ACCOUNT OF DISALLOWANCE OF MISCELLANEOUS EXPENSES TREATING THE SAME AS PRIOR PERIOD EXPENSES IGNORING THAT THE ASSESSEE FAILED TO SUBMIT REQUISITE DETAILS DURING THE ASSESSMENT PROCEEDINGS. ALSO, THE LD.CIT(A) ENTERTA INED THE FRESH EVIDENCE/SUBMISSION FILED BY THE ASSESSEE WITHOUT AFFORDING REASONABLE OPPORTUNITY TO THE AO DURING THE APPELLATE PROCEEDINGS. 2. THE LD.CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELE TING ADDITION OF RS. 1,34,89,178/- MADE ON ACCOUNT OF RESTRICTING THE CLAIM OF THE ASSESSEE ON MANAGERIAL REMUNERATION. THE LD.CIT(A) FAILED TO APPRECIATE TH E FEATURES OF RULE 46A WHICH REQUIRE AFFORDING REASONABLE OPPORTUNITY TO THE AO TO CONSIDER FRESH EVIDENCE FILED BY THE ASSESSEE DURING THE APPELLATE PROCEEDINGS. 3. THE LD.CIT(A) HAS ERRED ON FACTS AND IN LAW IN DE LETING ADDITION OF RS.5281914/- ON ACCOUNT OF DISALLOWANCE OF QUALITY ALLOWANCE PAID TO DEALERS IGNORING THAT THE ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 9 ASSESSEE FAILED TO SUBMIT REQUISITE DETAILS DURING THE ASSESSMENT PROCEEDINGS. ALSO, THE LD.CIT(A) ENTERTA INED THE FRESH EVIDENCE/SUBMISSION FILED BY THE ASSESSEE WITHOUT AFFORDING REASONABLE OPPORTUNITY TO THE AO DURING THE APPELLATE PROCEEDINGS. 4. THE LD.CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELE TING ADDITION OF RS. 19912911/- ON ACCOUNT OF DISALLOWAN CE OF LEGAL & PROFESSIONAL EXPENSES IGNORING THAT THE ASSESSEE FAILED TO SUBMIT REQUISITE DETAILS DURING THE ASSESSMENT PROCEEDINGS. ALSO, THE LD.CIT(A) ENTERTAINED THE FRESH EVIDENCE/SUBMISSION FILED BY THE ASSESSEE WITHOUT AFFORDING REASONABLE OPPORTUNITY T O THE AO DURING THE APPELLATE PROCEEDINGS. 5. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING ADDITION OF RS. 2524146/- ON ACCOUNT OF DISALLOWANC E OF EXTRA DEPRECIATION ON COMPUTER PERIPHERALS/ACCESSOR IES IGNORING THAT AS PER THE IT RULES 60% DEPRECIATION IS ALLOWABLE ONLY ON COMPUTER AND COMPUTER SOFTWARE AN D NOT ON COMPUTER PERIPHERALS AND ACCESSORIES. 3. THE DEPARTMENTS APPEAL WAS TAKEN UP FIRST AND I N RESPECT OF GROUND NO. 1 PERTAINING TO DELETION OF ADDITION OF RS. 2,51,368/- ON ACCOUNT OF DISALLOWANCE OF MISCELLANE OUS EXPENSES, THE LD. CIT DR SUBMITTED THAT THE ASSESSE E HAD FAILED TO SUBMIT THE REQUISITE DETAILS DURING THE ASSESSME NT PROCEEDINGS AND FURTHER SUBMITTED THAT THE LD. CIT( A) HAD ENTERTAINED FRESH EVIDENCES/SUBMISSIONS FILED BY TH E ASSESSEE WITHOUT AFFORDING A REASONABLE OPPORTUNITY TO THE A SSESSING OFFICER TO COUNTERACT THE SAME. OUR ATTENTION WAS ALSO DRAWN TO THE RELEVANT PARAGRAPHS OF THE IMPUGNED ORDER AND I T WAS ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 10 SUBMITTED THAT THE LD. CIT (A) HAD ALLOWED THE RELI EF TO THE ASSESSEE WITHOUT ANY DISCUSSION. 3.1 IN RESPONSE, THE LD. AR PLACED RELIANCE ON THE ORDER OF THE LD. CIT (A) BUT FAIRLY CONCEDED THAT SINCE THE DETA ILS WERE NOT AVAILABLE FOR BEING PRODUCED BEFORE THE BENCH, THE ISSUE MAY BE RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR DE NOVO EXAMINATION AND VERIFICATION. 3.2 IN RESPECT OF GROUND NO. 2 RELATING TO DELETION OF ADDITION OF RS. 1,34,89,178/- ON ACCOUNT OF RESTRICTING THE CLA IM OF THE ASSESSEE ON MANAGERIAL REMUNERATION, THE LD. CIT DR SUBMITTED THAT THE LD. CIT(A), WHILE ALLOWING RELIEF TO THE A SSESSEE, HAD FAILED TO APPRECIATE THE MANDATE OF RULE 46A OF THE INCOME TAX RULES, 1962 WHICH REQUIRED AFFORDING A REASONABLE O PPORTUNITY TO THE ASSESSING OFFICER TO CONSIDER FRESH EVIDENCES F ILED BY THE ASSESSEE DURING THE COURSE OF APPELLATE PROCEEDINGS . 3.3 IN RESPONSE, THE LD. AR SUBMITTED THAT THE IMPU GNED MANAGERIAL REMUNERATION HAD BEEN APPROVED BY THE MI NISTRY OF LAW, JUSTICE & COMPANY AFFAIRS, GOVT. OF INDIA AMOU NTING TO RS. 31,434,739/- VIDE TWO LETTERS DATED 31.03.2003 AND 22.3.2002 AND THE ASSESSING OFFICER HAD HELD THAT SINCE REMUN ERATION OF RS. 13,489,178/- OUT OF THE TOTAL REMUNERATION HAD BEEN APPROVED ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 11 BY LETTER DATED 22.3.2002, THE SAME SHOULD HAVE BEE N CLAIMED IN ASSESSMENT YEAR 2002-03 AND NOT IN THE YEAR UNDER CONSIDERATION. LD. AR SUBMITTED THAT ALTHOUGH THIS LETTER WAS DATED 22.3.2002, THE SAME WAS ACTUALLY RECEIVED BY THE ASSESSEE ON 8.4.2002 WHICH FELL IN ASSESSMENT YEAR 2003-04 I .E. THE YEAR UNDER CONSIDERATION. IT WAS FURTHER SUBMITTED THAT THE LD. CIT (A) HAD CORRECTLY APPLIED THE LAW AS LAID DOWN BY T HE JUDGMENT OF THE HONBLE APEX COURT IN THE CASE OF NONSUCH TEA E STATE REPORTED IN 1998 ITR 189 (SC) WHEREIN IT WAS HELD T HAT THE LIABILITY TO PAY THE REMUNERATION TO THE MANAGING A GENTS CRYSTALLIZED IN THE YEAR IN WHICH THE APPROVAL FROM THE CENTRAL GOVERNMENT WAS OBTAINED AND, THEREFORE, THE SAME WA S DEDUCIBLE IN THE YEAR IN WHICH THE APPROVAL WAS REC EIVED. 3.4 IN RESPECT OF GROUND NO. 3 RELATING TO DISALLOW ANCE OF QUALITY ALLOWANCE PAID TO DEALERS DELETED BY THE LD. CIT (A ), THE LD. CIT DR SUBMITTED THAT AS THERE WAS A SUBSTANTIAL INCREA SE IN THE QUANTUM OF QUALITY ALLOWANCE AS COMPARED TO THE EAR LIER YEARS, THE ASSESSEE WAS ASKED TO SUBSTANTIATE THE SAME ALO NG WITH RELEVANT DOCUMENTS AND THE ASSESSEE WAS NOT ABLE TO PRODUCE THE DETAILS TO WHOM THE ALLOWANCES WERE MADE AND OTHER DOCUMENTARY EVIDENCES WERE ALSO NOT AVAILABLE AND, THEREFORE, ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 12 THE ASSESSING OFFICER PROCEEDED TO DISALLOW THE INC REASE IN QUALITY ALLOWANCE WHICH WAS DELETED BY THE LD. CIT(A) BY TA KING ASSESSEES SUBMISSION ON RECORD REGARDING COMPUTATI ON OF QUALITY ALLOWANCE. IT WAS FURTHER SUBMITTED THAT THE RELIE F WAS GIVEN TO THE ASSESSEE WITHOUT OBTAINING ANY REMAND REPORT FR OM THE ASSESSING OFFICER IN RESPECT OF THIS DELETION. 3.5 IN RESPONSE, THE LD. DEPARTMENTAL REPRESENTATIV E SUBMITTED THAT THE LD. CIT (A) HAD DELETED THE ADDITION ON TH E GROUND THAT THE ASSESSING OFFICER HAD NOT ASKED THE ASSESSEE TO PROVIDE LEDGER ACCOUNTS AND OTHER DOCUMENTARY EVIDENCES AND HAD ONLY ASKED THE ASSESSEE TO EXPLAIN THE NATURE AND METHOD OLOGY OF CALCULATING THE SAME. IT WAS SUBMITTED THAT THIS O BSERVATION FINDS MENTION IN THE IMPUGNED ORDER OF THE LD. CIT (A) AND THEREFORE, IF THE ASSESSEE WAS NOT ASKED TO PRODUCE THE DETAILS, IT CANNOT BE FAULTED FOR NOT SUBMITTING THE SAME. 3.6 IN RESPECT TO GROUND NO. 5, THE LD. CIT DR SUBM ITTED THAT THERE WAS A SUBSTANTIAL INCREASE IN THE LEGAL AND P ROFESSIONAL EXPENSES IN THE YEAR UNDER CONSIDERATION AS COMPARE D TO THE IMMEDIATELY PRECEDING YEAR AND THE ASSESSEE COMPANY WAS ASKED BY THE ASSESSING OFFICER TO FURNISH DETAILS OF THE SAME ALONG WITH RELEVANT DOCUMENTARY EVIDENCES AND PROOF OF TAX HAV ING BEEN ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 13 DEDUCTED AT SOURCE. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE COMPANY COULD PRODUCE TDS DOCUMENTS IN RESPECT OF O NLY TWO PARTIES AND, THEREFORE, THE ASSESSING OFFICER PROCE EDED TO DISALLOW 50% OF THE UNSUBSTANTIATED AMOUNT. IT WAS FURTHER SUBMITTED BY THE LD. CIT DR THAT THE LD. CIT (A) HAD ALLOWED REL IEF TO THE ASSESSEE BASED ONLY ON THE SUBMISSIONS MADE BEFORE HIM AND FURTHER THAT THE LD. CIT (A) HAD NOT DULY VERIFIED THE ASSESSEES CLAIM OF EXPENDITURE AND NOR HAD AFFORDED REASONABL E OPPORTUNITY TO THE ASSESSING OFFICER TO EXAMINE THE SAME DURING THE COURSE OF APPELLATE PROCEEDINGS AND, THEREFORE, THE DELETION WAS BAD IN LAW. 3.7 IN RESPONSE, THE LD. AR SUBMITTED THAT THE POWE RS OF THE LD. CIT (A) WAS CO-TERMINUS WITH THAT OF THE ASSESSING OFFICER AND FURTHER THAT THE LD. CIT(A) WAS VERY WELL WITHIN HI S RIGHTS TO HAVE VERIFIED AND EXAMINED THE EXPENDITURE AND GIVEN APP ROPRIATE RELIEF TO THE ASSESSEE. 3.8 IN RESPECT TO GROUND NO. 6 RELATING TO DISALLOW ANCE OF DEPRECIATION ON COMPUTER PERIPHERALS, THE LD. CIT D R SUBMITTED THAT THE ASSESSING OFFICER HAD ALLOWED DEPRECIATION @25% AS AGAINST 60% CLAIMED BY THE ASSESSEE AND HE PLACED R ELIANCE ON THE ORDER OF THE ASSESSING OFFICER IN THIS RESPECT. ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 14 3.9 IN RESPONSE, THE LD. AR SUBMITTED THAT THE ISSU E WAS NO LONGER RES INTEGRA AND WAS SETTLED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF CIT VS. BSES RAJDHANI POWER LTD. VIDE ORDER DATED 31ST AUGU ST, 2010 IN ITA NO. 1266/2010. 4. COMING TO THE ASSESSEES APPEAL CAPTIONED ITA NO . 3242/DEL/2011, THE LD. AR SUBMITTED THAT IN RESPECT OF TRANSFER PRICING ADJUSTMENTS RELATING TO MERCHANDISING ACTIV ITY, THE FOLLOWING TRANSACTIONS WERE UNDER DISPUTE:- PURCHASE OF CORN BY USING TNMM 72,05,26,464 PURCHASE OF SOYABEANS USING TNMM 5,63,26,75,209 SALE OF CORN USING TNMM 72,11,48,869 SALE OF SOYABEANS USING TNMM 5,48,78,02,610 4.1 THE LD. AR SUBMITTED THAT MERCHANTING ACTIVITY WAS CARRIED OUT BY THE ASSESSEE WITHOUT EMPLOYING ANY ASSETS AN D ASSUMING ANY KIND OF RISKS. IT WAS FURTHER SUBMITTED THAT T HE ASSESSEE DID NOT UNDERTAKE ANY MARKETING ACTIVITY IN RELATION TO THE MERCHANTING TRADE TRANSACTIONS AND THE FUNCTIONS OF THE ASSESSEE WERE LIMITED TO THE EXTENT OF LIAISONING WITH THE A SSOCIATED ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 15 ENTERPRISE (AE) FOR EXECUTING BUY/SELL CONTRACTS AN D OTHER STANDARD TRADE DOCUMENTS. IT WAS FURTHER SUBMITTED THAT SINCE THE BUY/SELL TRANSACTIONS WERE EXECUTED ALMOST INST ANTLY, THE ASSESSEE OPERATED IN A RISK FREE BUSINESS ENVIRONME NT AT A NOMINAL PROFIT MARGIN AND, ACCORDINGLY, THE RELATED MARGINAL COSTS WERE ALSO EXTREMELY MINUSCULE IN COMPARISON T O THE OVERALL COST BASE AND, THEREFORE, THE ASSESSEE DID NOT ALLO CATE ANY OPERATING EXPENSES TO THE MERCHANT TRADE SEGMENT. IT WAS FURTHER SUBMITTED THAT THE TPO DID NOT APPRECIATE T HE RATIONALE BEHIND THE ASSESSEE IN NOT ALLOCATING ANY OPERATING EXPENSES TO THE MERCHANTING TRADE SEGMENT AND WAS ERRONEOUS IN DRAWING THE CONCLUSION THAT THE ASSESSEE HAD, IN EFFECT, AP PLIED RESALE PRICE METHOD. IT WAS ALSO SUBMITTED THAT THE TPO D ID NOT PROVIDE THE ASSESSEE ANY OPPORTUNITY OF BEING HEARD BEFORE REPLACING THE TNMM WITH THE RPM. IT WAS ALSO SUBMITTED THAT THIS ISSUE WAS ALSO RAISED BEFORE THE LD. CIT (A). IT WAS FURTHER SUBMITTED THAT THE LD. CIT (A) FURTHER PROCEEDED TO CHARACTERIZE T HE MERCHANTING ACTIVITY AS A TRADING ACTIVITY AND, THEREAFTER, PRO CEEDED TO COMPUTE THE PLI BY CONSIDERING THE GROSS PROFIT MAR GIN BASED ON COST OF GOODS SOLD. IT WAS ALSO SUBMITTED THAT THE LD. CIT (A) REJECTED TWO OUT OF THE FIVE COMPARABLES OF THE ASS ESSEE VIZ. ELF ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 16 TRADING & CHEMICALS MANUFACTURING LTD. AND GODREJ F OODS LIMITED. THE LD. AR ALSO SUBMITTED THAT ITAT DELHI BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 HAD IN ITA NO. 4095/DEL/2010 RESTORED THE ISSUE OF TRANSFER PRICIN G IN RESPECT OF MERCHANTING ACTIVITY TO THE FILE OF THE ASSESSIN G OFFICER FOR RE- ADJUDICATION. OUR ATTENTION WAS DRAWN TO THE RELEV ANT PARAGRAPHS OF THE SAID ORDER DATED 28.11.2013. IT WAS ALSO SUBMITTED THAT IN IMMEDIATELY SUCCEEDING ASSESSMENT YEAR I.E. ASSESSMENT YEAR 2004-05, THE TPO HAD NOT DRAWN ANY ADVERSE INFERENCE IN SIMILAR CIRCUMSTANCES WHEREIN THE ASSE SSEE HAD APPLIED OP/VAE (BERRY RATIO) FOR BENCHMARKING TRANS ACTIONS PERTAINING TO MERCHANTING TRADE. THE LD. AR ALSO P LACED ON RECORD THE ORDER OF THE TPO DATED 30.01.2015 FOR AS SESSMENT YEAR 2006-07 WHICH WAS PASSED SUBSEQUENT TO THE REM AND TO THE OFFICE OF THE ASSESSING OFFICER BY THE ITAT AND IT WAS SUBMITTED THAT AS PER THE SAID ORDER OF THE TPO, THE DEPARTME NT HAS ACCEPTED THE ASSESSEES APPROACH FOR BENCHMARKING T HE TRANSACTION RELATING TO MERCHANTING TRADE ACTIVITIE S BY APPLYING BERRY RATIO (OP/VAE). THE LD. AR SUBMITTED THAT IT WOULD MEET THE ENDS OF JUSTICE IF THE ISSUE WAS RESTORED TO TH E FILE OF THE ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 17 ASSESSING OFFICER FOR VERIFICATION WITH DIRECTIONS AS PER THE EARLIER ORDER OF THE ITAT PERTAINING TO ASSESSMENT YEAR 200 6-07. 4.2 IN RESPONSE, THE LD. CIT DR SUBMITTED THAT HE H AD NO OBJECTION IF THE ISSUE WAS BEING RESTORED TO THE FI LE OF THE ASSESSING OFFICER/TPO. 4.3 WITH RESPECT TO TRANSFER PRICING ADJUSTMENTS RE LATING TO TRADING OF COMMODITIES, THE LD. AR SUBMITTED THAT T HE TPO HAD NOT ACCEPTED CUP AS THE MOST APPROPRIATE METHOD FOR JUSTIFICATION OF THE ALP IN THE CASE OF INTERNATION AL TRANSACTION IN RESPECT OF FERTILIZERS. THE LD. AR SUBMITTED THAT THE ASSESSEE HAD USED PRICES DECLARED BY FERTECON, (A CORPORATE BO DY FORMED BY A GROUP OF INDUSTRY ANALYSTS, SPECIALIZING IN FERTILI ZERS AND RELATED PRODUCTS SUCH AS SULPHUR/AMMONIA ETC.) AS CUP. IT WAS SUBMITTED THAT IN THE CASE OF FERTILIZERS, THE PRIC E CONSISTED OF TWO COMPONENTS FOB PRICE AND FREIGHT AND FOR BOTH THE SE COMPONENTS THE ASSESSEE HAD RELIED ON THE PRICES RE COMMENDED BY FERTECON. IT WAS FURTHER SUBMITTED THAT THE TPO REJECTED THE CUP AND APPLIED TNMM WHICH WAS MODIFIED TO RPM BY T HE LD. CIT (A). IT WAS FURTHER SUBMITTED THAT WHILE APPL YING RPM, THE LD. CIT (A) HAD CALCULATED THE PLI BY USING THE MET HOD COST OF GOODS SOLD/GROSS PROFIT WHEREAS THE CORRECT FORMULA WOULD BE ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 18 GROSS PROFIT/SALES. IT WAS SUBMITTED THAT THE WORK ING OF THE LD. CIT (A) WITH RESPECT TO RPM WAS INCORRECT. WITH RE SPECT TO THE JUSTIFICATION OF USING FERTECON AS CUP BY THE ASSES SEE, THE LD. AR SUBMITTED THAT EVEN PUBLIC SECTOR UNDERTAKINGS LIKE IFFCO, MMTC, NATIONAL FERTILIZERS LTD. AND SINOCHEM SUBSCR IBED TO THE JOURNAL PUBLISHED BY FERTECON AND CONSIDERED THE RA TES AS REPORTED IN FERTECONS JOURNAL FOR THEIR PRICING. IT WAS ALSO SUBMITTED THAT IN ASSESSEES OWN CASE OF CARGILL FO ODS LIMITED (KNOWN AS CARGILL INDIA LTD. AFTER MERGER), THE ITA T PUNE BENCH HAD ACCEPTED THIRD PARTY/BROKERS QUOTATION AS VALI D CUP. IT WAS SUBMITTED THAT THE RATES PUBLISHED BY FERTECON WERE BETTER THAN THIRD PARTY/BROKERS QUOTES AND, THEREFORE, THE ASS ESSEES CASE STOOD ON A STRONGER FOOTING. IT WAS ALSO SUBMITTED THAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 IN ITA NO. 4095/DEL/201, THE ITAT HAD NOT DRAWN ANY ADVERSE IN FERENCE IN REGARD TO VALIDITY OF CUP PERTAINING TO TRADING OF COMMODITIES UNDERTAKEN BY THE ASSESSEE AND FURTHER IN SUBSEQUEN T ASSESSMENT YEARS 2007-08, 2008-09, 2009-10 AND 2010 -11 AND 2011-12, THE TPO HAS NOT DRAWN ANY ADVERSE INFERENC E IN REGARD TO VALIDITY OF CUP PERTAINING TO TRADING OF COMMODI TIES UNDERTAKEN BY THE ASSESSEE. THE LD. AR ALSO OBJECT ED TO THE ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 19 INCLUSION OF SHIVA FERTILIZERS LTD. AS A COMPARABLE ON THE GROUND THAT THIS COMPANY WAS A MANUFACTURER WHEREAS THE A SSESSEE WAS ONLY INTO TRADING OF FERTILIZERS. 4.4 IN RESPONSE, THE LD. CIT DR PLACED RELIANCE ON THE ORDER OF THE TPO AND SUBMITTED THAT CUP HAD BEEN RIGHTLY REJ ECTED BY THE TPO. IT WAS ALSO SUBMITTED THAT FERTECON DOES NOT HAVE THE RECOGNITION OF THE GOVERNMENT AND AS SUCH, THE SAME SHOULD NOT BE USED AS A CUP. THE LD. CIT DR ALSO EMPHASIZED THAT THE PLI HAD BEEN CORRECTLY CALCULATED BY THE LOWER AUTHORIT IES. 4.5 WITH RESPECT TO INTERNATIONAL TRANSACTION RELAT ING TO SALE OF RICE, IT WAS SUBMITTED THAT THE ASSESSEE HAD APPLIE D CUP BASED ON QUOTATION OF A BROKER WHEREAS THE TPO HAD APPLIE D TNMM METHOD. IT WAS ALSO SUBMITTED THAT THE TPO HAD INT RODUCED KRBL LTD., SATNAM OVERSEAS LTD. AND KRIBHCO AS COMP ARABLES WHICH WAS BEING OBJECTED TO. IT WAS SUBMITTED THAT KRBL WAS NOT ENGAGED IN TRADING PER SE BUT WAS ENGAGED IN PROCESSING OF PADDY INTO RICE WHEREAS THE ASSESSEE WAS ENGAGED IN THE RESALE OF RICE WITHOUT ANY VALUE ADDITION AND, THEREFORE, IT WAS NOT A COMPARABLE DUE TO DISSIMILAR FUNCTIONALITY. IN RE SPECT TO SATNAM OVERSEAS LTD., IT WAS SUBMITTED THAT THIS COMPARABL E WAS ENGAGED IN PROCESS OF PADDY INTO RICE AND WAS ALSO ENGAGED IN THE ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 20 BUSINESS OF VALUE ADDED PRODUCTS SUCH AS READY-TO-E AT RICE PRODUCTS, WHEREAS THE ASSESSEE WAS PURELY ENGAGED I N TREADING IN RICE AND THEREFORE, THIS COMPANY WAS NOT A FIT C OMPARABLE. IN RESPECT TO KRIBHCO LTD., IT WAS SUBMITTED THAT KRIB HCO HAD BENEFIT OF RECEIPT OF SUBSIDY FROM THE GOVERNMENT A ND THE ASSESSEE DID NOT RECEIVE ANY SUBSIDIES AND, THEREFO RE, THE SAME WAS ALSO NOT A FIT COMPARABLE. THE LD. AR ALSO SUB MITTED THAT THE TPOS LIST OF COMPARABLES DID NOT INCLUDE FCI B UT THE LD. CIT(A) HAD INCLUDED FCI AS A COMPARABLE AND THE SAM E WAS BEING OBJECTED TO ON THE GROUND THAT FCI WAS ALSO A HUGEL Y SUBSIDIZED COMPANY WHICH RECEIVED HUGE AMOUNT OF SUBSIDIES FRO M THE GOVERNMENT. 4.6 IN RESPONSE, THE LD. CIT DR PLACED RELIANCE ON THE FINDINGS OF THE TPO/LD. CIT (A) IN RESPECT OF COMPARABLES BE ING OBJECTED TO BY THE ASSESSEE. 4.7 IN RESPECT OF CORPORATE GROUND OF THE ASSESSEE CHALLENGING THE ACTION OF THE LD. CIT (A) IN UPHOLDING THE DISA LLOWANCE OF SERVICE INCOME RECEIVABLE WRITTEN OFF, IT WAS SUBMI TTED THAT IT IS NOT IN DISPUTE THAT THE AMOUNTS WERE WRITTEN OFF IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. IT WAS SUBMITTED THAT TH ESE CLAIMS WERE SIMILAR TO BAD DEBTS AND IT WAS NOT REQUIRED T O PROVE THAT ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 21 THEY HAD ACTUALLY BECOME BAD. THE LD. AR SUBMITTED THAT THE LD. CIT (A) HAD NOT ACCEPTED THE ASSESSEES CONTENTION THAT THESE CLAIMS WERE IN THE NATURE OF BAD DEBTS. OUR ATTENT ION WAS ALSO DRAWN TO THE LEDGER ACCOUNTS OF THE ADVANCE WRITTEN OFF ACCOUNTS TO DEMONSTRATE THAT THE SAME HAD BEEN WRITTEN OFF I N THE BOOKS OF THE ACCOUNTS OF THE ASSESSEE. 4.8 IN RESPONSE, THE LD. CIT DR SUBMITTED THAT THE ISSUE MAY BE RESTORED TO THE FILE OF THE ASSESSING OFFICER WI TH A DIRECTION TO VERIFY THE ASSESSEES CLAIM. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. AS FAR AS THE DEPARTM ENTS APPEAL IS CONCERNED, IT IS SEEN THAT IN RESPECT OF GROUND NO. 1 CHALLENGING THE ACTION OF THE LD. CIT (A) IN DELETING THE ADDIT ION OF RS. 251,368/- ON ACCOUNT OF DISALLOWANCE OF MISCELLANEO US EXPENSES IS CONCERNED, THE LD. AR HAS SUBMITTED THAT HE HAS NO OBJECTION IF THE ISSUE IS RESTORED TO THE FILE OF THE ASSESSI NG OFFICER FOR VERIFICATION. ACCORDINGLY, WE RESTORE THE ISSUE OF DISALLOWANCE OF MISCELLANEOUS EXPENSES TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THE CLAIM OF THE ASSESSEE IN LIGHT OF THE DETAILS AND EVIDENCES WHICH THE ASSESSEE WOULD LIKE TO FILE IN THIS REGARD AND THEREAFTER ADJUDICATE THE ISSUE IN ACCOR DANCE WITH LAW ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 22 AFTER GIVING PROPER OPPORTUNITY TO THE ASSESSEE TO PRESENT ITS CASE. THUS, GROUND NO. 1 OF THE DEPARTMENTS APPEAL STAND S ALLOWED FOR STATISTICAL PURPOSES. 5.1 COMING TO GROUND NO. 2 WHICH CHALLENGES THE DEL ETION OF ADDITION OF RS. 1,34,89,178/- ON ACCOUNT OF MANAGER IAL REMUNERATION, IT IS UNDISPUTED THAT THE ISSUE IS CO VERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT OF HONBLE APEX COU RT IN THE CASE OF NONSUCH TEA ESTATE (SUPRA). HOWEVER, IT IS THE CONTENTION OF THE DEPARTMENT THAT THE ASSESSING OFFICER WAS NOT G IVEN AN OPPORTUNITY TO EXAMINE AND CONSIDER THE LETTER OF A PPROVAL BASED ON WHICH THE LD. CIT(A) HAS ALLOWED RELIEF TO THE A SSESSEE. LOOKING INTO THE FACTS OF THE CASE, WE FIND THAT SI NCE THE LETTER OF APPROVAL HAS EMANATED FROM A GOVERNMENT BODY AND TH E SAME HAS BEEN DULY EXAMINED AND CONSIDERED BY AN INCOME TAX AUTHORITY WHOSE POWER IS CO-TERMINUS WITH THE POWER OF THE ASSESSING OFFICER, THERE IS NO NEED TO INTERFERE WI TH THE FINDINGS OF THE LD. CIT (A) ON THIS ISSUE. ACCORDINGLY, GRO UND NO. 2 OF THE DEPARTMENTS APPEAL IS DISMISSED. 5.2 GROUND NO. 3 CHALLENGES THE DELETION OF ADDITIO N OF RS. 5,281,914/- ON ACCOUNT OF QUALITY ALLOWANCE PAID TO DEALERS. THE ASSESSING OFFICER HAD DISALLOWED THIS AMOUNT BY OBS ERVING THAT ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 23 THE ASSESSEE DID NOT PROVIDE LEDGER ACCOUNTS AND OT HER DOCUMENTARY EVIDENCES IN SUPPORT OF THE CLAIM WHERE AS THE LD. CIT (A) ALLOWED RELIEF TO THE ASSESSEE ON THE GROUN D THAT THE ASSESSING OFFICER HAD NOT ASKED THE ASSESSEE TO PRO VIDE LEDGER ACCOUNTS AND OTHER DOCUMENTARY EVIDENCE AND HAD ONL Y ASKED THE ASSESSEE TO EXPLAIN THE NATURE AND METHODOLOGY OF CALCULATING THE QUALITY ALLOWANCE. HOWEVER, THE FA CT DOES REMAIN THAT THE DOCUMENTARY EVIDENCES IN SUPPORT OF THE AS SESSEES CLAIM OF DEDUCTION IN RESPECT OF QUALITY ALLOWANCE WAS NOT EXAMINED BY EITHER OF THE LOWER AUTHORITIES. ACCOR DINGLY, IT WILL BE IN THE FITNESS OF THINGS IF THE ISSUE IS RESTORE D TO THE FILE OF THE ASSESSING OFFICER FOR RE-EXAMINING THE ISSUE IN LIG HT OF ALL THE DOCUMENTARY EVIDENCES WHICH THE ASSESSEE WOULD WISH TO SUBMIT IN SUPPORT OF ITS CLAIM AFTER GIVING DUE OPPORTUNIT Y TO THE ASSESSEE. WE DIRECT ACCORDINGLY AND GROUND NO. 3 OF THE DEPARTMENTS APPEAL STANDS ALLOWED FOR STATISTICAL PURPOSES. 5.3 WITH RESPECT TO GROUND NO. 4 RELATING TO DELETI ON OF ADDITION OF RS. 1,99,72,977/- OUT OF LEGAL AND PROFESSIONAL EXPENSES, THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE CO ULD SUBMIT TDS DOCUMENTS IN RESPECT OF ONLY TWO OF THE PARTIES . THEREAFTER, THE ASSESSING OFFICER HAS NOT MENTIONED WHETHER THE ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 24 DOCUMENTARY EVIDENCES IN RESPECT OF OTHER PARTIES W ERE AVAILABLE OR NOT OR WHETHER THE SAME WERE EXAMINED BY HIM OR NOT AND HE HAS PROCEEDED TO DISALLOW 50% OF THE BALANCE AMOUNT ON AN AD HOC BASIS. THE LD. CIT (A), WHILE ALLOWING RELIEF TO THE ASSESSEE, HAS GIVEN RELIEF TO THE ASSESSEE ON THE GROUND THAT THE EXPENSES WERE INCURRED IN THE NORMAL COURSE OF BUSINESS AND FURTHER THAT THE ASSESSING OFFICER COULD NOT QUESTION THE COMMER CIAL EXPEDIENCY OF THE ASSESSEE. HOWEVER, THE FACT REMA INS THAT THE EVIDENCES IN SUPPORT OF THE EXPENSES HAVING BEEN IN CURRED WERE NOT EXAMINED AT ANY STAGE. ACCORDINGLY, THIS ISSUE IS ALSO RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR T HE PURPOSE OF EXAMINING THE ISSUE AFRESH IN LIGHT OF THE EVIDENCE S AND EXPLANATIONS WHICH THE ASSESSEE MIGHT LIKE TO FILE IN THIS REGARD. THE ASSESSING OFFICER IS DIRECTED TO AFFORD A PROPE R OPPORTUNITY TO THE ASSESSEE BEFORE ADJUDICATION OF THE ISSUE. ACC ORDINGLY, GROUND NO. 4 OF THE DEPARTMENTS APPEAL STANDS ALLO WED FOR STATISTICAL PURPOSES. 5.4 WITH RESPECT TO GROUND NO. 5 PERTAINING TO DELE TION OF ADDITION RELATING TO DIFFERENTIAL RATE IN DEPRECIAT ION AMOUNTING TO RS. 25,24,146/-, WE ARE IN AGREEMENT WITH THE AVERM ENTS OF THE LD. AR THAT THE ISSUE STANDS COVERED IN FAVOUR OF T HE ASSESSEE BY ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 25 A JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE C ASE OF BSES RAJDHANI POWER LTD. (SUPRA) AND ACCORDINGLY, WE FIN D NO REASON TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A) ON THIS ISSUE. ACCORDINGLY, GROUND NO. 5 OF THE DEPARTMENTS APPEA L STANDS DISMISSED. 5.5 IN THE RESULT, THE DEPARTMENTS APPEAL STANDS P ARTLY ALLOWED FOR STATISTICAL PURPOSES IN TERMS OF OUR OBSERVATIO NS AS CONTAINED IN PRECEDING PARAGRAPHS. 6. COMING TO THE APPEAL OF THE ASSESSEE, AS FAR AS GROUND NOS. 1.1 TO 1.10 RELATING TO TRANSFER PRICING ADJUSTMENT S ARE CONCERNED, IT IS SEEN THAT IN ASSESSEES OWN APPEAL FOR ASSESSMENT YEAR 2006-07 IN ITA NO. 4095/DEL/2010, V IDE ORDER DATED 28.11.2013, ITAT DELHI BENCH HAD REMITTED THE ENTIRE ISSUE RELATING TO TRANSFER PRICING TO THE OFFICE OF THE ASSESSING OFFICER FOR RE-ADJUDICATION DE NOVO . THE LD. AR HAS ALSO CITED THIS ORDER BEFORE US AND HAS SUBMITTED THAT THE ISSUE RE LATING TO MERCHANTING ACTIVITY MAY BE RESTORED TO THE FILE OF THE ASSESSING OFFICER WITH APPROPRIATE DIRECTIONS AND THE LD. CIT DR ALSO DID NOT HAVE ANY OBJECTION IN THE ISSUE BEING RESTORED TO THE FILE OF THE ASSESSING OFFICER/TPO. APART FROM THIS, THE LD . AR HAS ALSO ARGUED AT LENGTH ON THE TRANSACTIONS RELATING TO PU RCHASE OF ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 26 FERTILIZERS AND ON THE JUSTIFICATION OF THE ASSESSE E USING CUP AND ALSO THE USE OF FERTECON AS CUP. IT IS SEEN THAT T HE TPO HAS REJECTED THE CUP AND HAS APPLIED TNMM AND ON APPEAL , THE LD. CIT (A) HAS MODIFIED THE USE OF TNMM BY THE TPO AND HAS APPLIED RPM. IT IS ALSO THE ASSESSEES SUBMISSION THAT THE WORKING OF THE LD. CIT (A) IN RESPECT OF CALCULATIO N OF PLI BY APPLICATION OF RPM IS INCORRECT. THE LD. AR HAS AL SO OBJECTED TO THE INCLUSION OF SHIVA FERTILIZERS LTD. AS A COMPAR ABLE ON THE GROUND THAT THIS COMPANY WAS A MANUFACTURER WHEREA S THE ASSESSEE WAS ONLY INTO TRADING OF FERTILIZERS. THU S, IT IS APPARENT FROM THE ENTIRE FACTUAL MATRIX THAT THE ISSUE HAS N OT BEEN DEALT WITH PROPERLY BY THE LOWER AUTHORITIES SO AS TO REA CH A LOGICAL AND REASONABLE CONCLUSION. SIMILARLY, WITH RESPECT TO THE INTERNATIONAL TRANSACTION RELATING TO SALE OF RICE, THE ASSESSEE HAS APPLIED CUP WHICH WAS BASED ON QUOTATIONS OF A BROK ER WHEREAS THE TPO HAS APPLIED TNMM. THE TPO HAS INCLUDED COM PARABLES LIKE SATNAM OVEDRSEAS LTD. AND KRBL LTD. WHICH WERE INTO MANUFACTURING WHEREAS THE ASSESSEES CASE IS THAT I T WAS ONLY INTO TRADING ACTIVITY. FURTHER, THE LD. CIT (A), W HILE CONFIRMING THE INCLUSION OF SATNAM OVERSEAS LTD. AND KRBL LTD. , HAS ALSO INCLUDED FCI AND KRIBHCO LTD. TO WHICH THE ASSESSEE S ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 27 OBJECTION IS THAT THESE BOTH WERE HUGELY SUBSIDIZED COMPANIES WHEREAS THE ASSESSEE DID NOT HAVE ANY BENEFIT OF AN Y SUBSIDY AND, THEREFORE, THE PLI WOULD BE AT A GREAT VARIANC E IF THESE TWO COMPANIES WERE CONSIDERED AS COMPARABLES. THUS, TH E ASSESSEE IS AGGRIEVED BY THE ACTION OF BOTH THE LOWER AUTHOR ITIES IN RESPECT OF TRADING SEGMENTS ALSO AND ANALYSIS OF THE FACTUA L MATRIX SHOWS THAT THE LOWER AUTHORITIES HAVE ALSO NOT DULY CONSI DERED THE AVERMENTS OF THE ASSESSEE IN RESPECT OF THE TRADING TRANSACTIONS. THE ITAT DELHI BENCH IN ASSESSEES OWN CASE FOR ASS ESSMENT YEAR 2006-07 IN ITA NO. 4095/DEL/2010 HAS OBSERVED IN PA RAS 28, 29 AND 31 AS UNDER:- 28. HERE IN THE PRESENT CASE, THE ASSESSEE WAS ENGAGED INTO THREE DISTINCT ACTIVITIES OF MANUFACTU RING, PHYSICAL TRADE AND MERCHANTING. INVOLVEMENT OF ASSE TS INTO THREE DIFFERENT BUSINESS ACTIVITIES CANNOT BE THE SAME. IN THE CASE OF MANUFACTURING ACTIVITY THERE C AN BE HUGE INVESTMENTS IN THE FORM OF FIXED ASSETS AND WORKING CAPITAL WHEREAS IN THE CASE OF MERCHANTING TRADE THERE IS MINIMUM REQUIREMENT OF FIXED ASSETS AND WORKING CAPITAL. SIMILARLY IN THE CASE OF PHYSICAL TRADE THERE IS LESS AMOUNT INVOLVED AS CAPITAL AS COMPARA BLES TO MANUFACTURING ACTIVITY BUT MORE'THAN AS REQUIRED IN MERCHANTING TRADE. THEREFORE, IF THE AMOUNT OF CAPI TAL INVOLVED IN THREE DIFFERENT ACTIVITIES ARE DIFFEREN T AND NATURALLY RISK WILL BE DIFFERENT IN THESE CATEGORIE S OF BUSINESS. THEREFORE, THE THREE BUSINESS ACTIVITIES CARRIED DIFFERENT FUNCTIONS AND RISK PROFILE. THEREFORE, IF THE ASSESSING OFFICER COMBINED ALL THE THREE BUSINESS ACTIVITIES FOR THE PURPOSE OF DETERMINING COMPANY W IDE TNMM IT SHOULD HAVE BEEN COMPARED WITH TNMM OF COMPARABLES HAVING SAME FUNCTIONS AND RISK PROFILE. IN ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 28 THE ALTERNATIVE, THE MARGIN OF THREE DIFFERENT ACTI VITIES SHOULD HAVE BEEN SEPARATELY CALCULATED AND COMPARED WITH THE MARGIN OF COMPARABLES ENTERPRISES HAVING SIMILAR FUNCTIONS AND RISK PROFILE. THEREFORE, WE C OME TO THE CONCLUSION THAT ASSESSEE WAS ENTITLED TO SELECT MOST APPROPRIATE METHOD FOR A GROUP OF SIMILAR TRANSACTI ONS. IN DOING SO, HE IS FREE TO CHOOSE DIFFERENCE METHOD S FOR DIFFERENT BUSINESS ACTIVITIES WHICH IN THE PRESENT CASE ARE MANUFACTURING PHYSICAL TRADE & MERCHANTING. 29. ON SELECTION OF COMPARABLES, WE FIND THAT TPO HAD SELECTED FIVE COMPANIES NAMELY:- 1. K.S. OILS LTD. 2. FOOD CORPORATION OF INDIA. 3. KOHINOOR FOODS LTD. 4. RENUKA SUGAR MILLS. LTD. 5. MURLI INDUSTRIES LTD. OUT OF THESE FIVE COMPANIES FOUR COMPANIES ARE MANUFACTURING COMPANIES WHICH ARE NOT FULLY COMPARABLE WITH THE BUSINESS PROFILE AND RISK PROFI LE OF THE ASSESSEE COMPANY. ------------ 31. IN VIEW OF ALL FACTS AND CIRCUMSTANCES OF THE CASE AS EXPLAINED ABOVE WE DEEM IT APPROPRIATE TO REMIT BAC K THE WHOLE ISSUE RELATING TO TRANSFER PRICING TO THE OFFICE OF ASSESSING OFFICER WHO WILL RE-ADJUDICATE THE ISSUE KEEPING IN VIEW ALL FACTS AND CIRCUMSTANCES. THE ASSESSEE WILL BE FREE TO ARGUE ITS CASE FROM ALL AN GLES. NEEDLESS TO SAY THAT ASSESSEE WILL BE GIVEN SUFFICI ENT OPPORTUNITY OF BEING HEARD. IN VIEW OF THE ABOVE, GROUND NO. 1 IS ALLOWED FOR STATISTICAL PURPOSES. 6.01 IT IS SEEN THAT THE FACTS IN AY 06-07 AND IN T HE YEAR UNDER CONSIDERATION ARE IDENTICAL EXCEPT THE FACT THAT DU RING THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS NOT INTO ANY ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 29 MANUFACTURING ACTIVITY EXCEPT PROCESSING OF CRUDE O IL. ACCORDINGLY, IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE DEEM IT APPROPRIATE TO REMIT THE ENTIRE ISSUE OF TRANSFER PRICING TO THE OFFICE OF THE ASSESSING OFFICER/ TPO WHO WILL RE- ADJUDICATE THE ISSUE DE NOVO AND THE ASSESSEE WILL BE FREE TO ARGUE ITS CASE FROM ALL ANGLES. NEEDLESS TO SAY, T HE ASSESSEE WILL BE GIVEN SUFFICIENT OPPORTUNITY OF BEING HEARD. AC CORDINGLY, GROUND NOS. 1.1 TO 1.10 STAND ALLOWED FOR STATISTIC AL PURPOSES. 6.1 AS FAR AS GROUND NOS. 2.1 AND 2.2 RELATING TO C ONFIRMATION OF DISALLOWANCE AMOUNTING TO RS. 52,98,635/- ON ACCOUN T OF SERVICE INCOME RECEIVABLE WRITTEN OFF DURING THE YEAR IS CO NCERNED, IT IS NOT IN DISPUTE THAT THE AMOUNTS WERE WRITTEN OFF. THE LD. AR HAS REFERRED TO RELEVANT PAGES IN THE LEDGER ACCOUNT AN D AS CONTAINED IN PAGES 783 AND 784 OF THE PAPER BOOK AND HAS SUBM ITTED THAT IN VIEW OF THIS EVIDENCE OF THE WRITE OFF, THE AMOU NTS SHOULD BE ALLOWED. THE LD. CIT DR HAS SUBMITTED THAT THE ISS UE MAY BE DECIDED IN FAVOUR OF THE ASSESSEE ONLY AFTER VERIFI CATION BY THE ASSESSING OFFICER. THEREFORE, LOOKING INTO THE FACT S OF THE CASE, WE RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFF ICER WITH THE DIRECTION THAT THE ASSESSING OFFICER SHOULD VERIFY WHETHER THE IMPUGNED AMOUNTS WERE WRITTEN OFF DURING THE YEAR U NDER ITA NO. 2988/D/2011 & 3242/D/2011 ASSESSMENT YEAR 2003-04 30 CONSIDERATION OR NOT AND IF THEY HAVE BEEN SO WRITT EN OFF, HE IS DIRECTED TO ALLOW THE SAME AS DEDUCTION. ACCORDING LY, GROUND NOS. 2.1 AND 2.2 STAND ALLOWED FOR STATISTICAL PURP OSES. 6.2 IN THE RESULT, THE ASSESSEES APPEAL STANDS ALL OWED FOR STATISTICAL PURPOSES. 7. IN THE FINAL RESULT, THE DEPARTMENTS APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES WHEREAS THE ASSESSEES APP EAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 09.01.2018. SD/- SD/- (R.S. SYAL) (SUDHANSHU SRIVASTAVA) VICE PRESIDENT JUDIC IAL MEMBER DT. 09 TH JANUARY 2018 GS COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER ASSTT. REGISTRAR