Swarovski India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 3472/DEL/2010

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8192 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 18-04-2016
• Assessment Year: 2002-2003
• Appeal Filed On: 15-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: SANJIV CHOUDHARY CAS
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 143(3); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM ITA NO.3472/DEL/2010 ASSESSMENT YEAR : 2002-03 SWAROVSKI INDIA PVT. LTD., 1 A-D, VANDHNA, 11, TOLSTOY MARG, NEW DELHI. PAN: AAGCS4052D VS. DCIT, CIRCLE 7(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI MANOJ KR. PARDASANI, SHRI S.K. AGARWAL & SHRI SANJIV CHOUDHARY, CAS DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR DATE OF HEARING : 19.04.2016 DATE OF PRONOUNCEMENT : 21.04.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER PASSED BY THE CIT(A) ON 30.4.2010 IN RELATION TO THE ASSESSMENT Y EAR 2002-03. ITA NO.3472/DEL/2010 2 2. THE ASSESSEE, VIDE GROUND NO. 8 OF THE APPEAL , IS AGGRIEVED AGAINST THE CONFIRMATION OF ADDITION OF RS.84,06,916/- TOWARDS TRANSFER PRICING ADJUSTMENT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE, AN INDIAN COMPANY, IS A PART OF SWAROVSKI GROUP WHICH IS GLOB ALLY FAMOUS FOR CRYSTAL AND CRYSTAL RELATED PRODUCTS. IT IS A GLOB AL LEADER IN CRYSTAL JEWELLERY AND ACCESSORIES, GRINDING AND DRESSING TO OLS, PRECISION OPTICAL EQUIPMENT AND SYNTHETIC GEMSTONES. THE ASSESSEE WAS INCORPORATED IN 1996 WITH A DIFFERENT NAME, WHICH WAS CHANGED ON 10 .11.2001 TO SWAROVSKI INDIA PVT. LTD. THE ASSESSEE HAS TWO UNI TS, VIZ., ONE 100% EOU IN PUNE, SET UP FOR COATING RAW BEADS AND THE OTHER IN DELHI ENGAGED IN IMPORT AND SALE OF CRYSTAL AND CRYSTAL RELATED P RODUCTS IN INDIA. THE ASSESSEE FILED ITS RETURN REPORTING SEVEN INTERNATI ONAL TRANSACTIONS, OUT OF WHICH ONLY THREE RELATED TO THE PUNE UNIT. ONE OF SUCH INTERNATIONAL TRANSACTIONS IS COATING OF RAW BEADS WITH TRANSAC TED VALUE OF RS.316,84,850/-, WHICH IS UNDER DISPUTE. THE ASSES SEE USED COST PLUS METHOD (CPM) AS THE MOST APPROPRIATE METHOD TO DEMO NSTRATE THAT THIS ITA NO.3472/DEL/2010 3 INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH PRICE (ALP). THE ASSESSING OFFICER (AO) MADE REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ALP OF THE REPORTED INTERNATIONAL T RANSACTIONS. THE TPO TOOK UP THE INTERNATIONAL TRANSACTION OF COATING O F RAW BEADS WHICH WAS SHOWN BY THE ASSESSEE AT ALP BY INDICATING ITS PROF IT MARK UP OVER COSTS AT AROUND 30% AGAINST THE GROSS MARK-UP OF 19 COMPARAB LE COMPANIES AT 11%. THE TPO OBSERVED THAT THE ASSESSEE DID JOB WO RK OF COLOURING RAW BEADS AT ITS PUNE PLANT AND WAS, HENCE, IN THE NATU RE OF A CONTRACT MANUFACTURER. IT WAS NOTICED THAT THE ASSESSEE REC EIVED RAW BEADS FROM ITS ASSOCIATED ENTERPRISES (AES) AND AFTER DOING COLOUR COATING, THE SAME WERE SENT BACK TO THE AE. FOR THIS, CONVERSION CHARGES T O THE TUNE OF RS.3.16 CRORE WERE RECEIVED BY THE ASSESSEE, WHICH CONSTITU TE THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION. THE TPO NOTICED F UNCTIONAL PROFILE OF THE ASSESSEE BY OBSERVING THAT THE PUNE UNIT WAS SET UP TO COLOUR BEADS FOR ONLY SWAROVSKI ENTITIES AND WAS 100% CAPTIVE UNIT T AKING MINIMAL RISKS AND ALL THE RAW MATERIALS WERE FURNISHED BY ITS AE FREE OF COST FOR WHICH THE FINISHED GOODS WERE SENT BACK TO THE AE. HE NO TED IN PARA 5 OF HIS ORDER THAT THE `COST BASE AS USED IN CPM WAS NOT D EFINED EITHER IN THE ITA NO.3472/DEL/2010 4 RULES OR IN THE OECD GUIDELINES. IT WAS FURTHER NO TED THAT CPM, UNLIKE THE RESALE PRICE METHOD, FOCUSES ON GROSS MARK-UP E ARNED ON COST OF PRODUCTION AND, ACCORDINGLY, IN THE CASE OF A CAPTI VE SERVICE PROVIDER, THE CPM RESEMBLES THE TRANSACTIONAL NET MARGIN METHOD ( TNMM) BECAUSE THE MARK-UP ON COSTS INCURRED IN THE PROVISION OF SERVI CES IS ACTUALLY THE OPERATING MARGIN AT THE NET LEVEL. HE COMPUTED THE COST BASE OF THE ASSESSEE, ON WHICH THE MARK UP COULD BE APPLIED, AS UNDER:- TOTAL EXPENDITURE AS PER AUDITED FINANCIALS RS.39,963,455 LESS: SALARY TO MD RS.1,099,288 RENT OF MD RS.73,400 CONVEYANCE OF MD RS.34,584 ENTERTAINMENT OF MD RS.101,852 BANK CHARGES, INTEREST, LOSS ON SALE OF FIXED ASSETS, ADVANCES WRITTEN OFF RS.2,52,253 RS.1,561,377 COST BASE RS.38,402,078 4. THEN, HE PROCEEDED TO DETERMINE THE ALP OF THE I NTERNATIONAL TRANSACTION OF RECEIPT OF REVENUE FOR COATING RAW B EADS. IN THIS REGARD, HE OBSERVED THAT THE ASSESSEE DURING THE COURSE OF PRO CEEDINGS SUBMITTED A LIST OF 19 COMPARABLE COMPANIES ENGAGED IN SIMILAR BUSIN ESS OF DIAMONDS AND SEMI PRECIOUS STONES WHOSE AVERAGE NET PROFIT MARGI N WAS WORKED OUT AT ITA NO.3472/DEL/2010 5 4.4% OF THE COSTS. APPLYING SUCH MARGIN AS A BENCH MARK, HE DETERMINED THE ALP OF THIS INTERNATIONAL TRANSACTION AS UNDER: - COSTS INCURRED IN PROVIDING JOB WORK SERVICES RS.38 ,402,078 ARMS LENGTH PRICE (COSTS PLUS 4.4%) RS.40,091,769 AMOUNT RECEIVED RS.31,684,853 DIFFERENCE WITH ALP IN RS. AND IN % TERMS RS.8,406, 916 (21%) 5. THAT IS HOW, HE RECOMMENDED A TRANSFER PRICING A DJUSTMENT AMOUNTING TO RS.84,06,916/-. THE AO WHILE FINALIZI NG THE ORDER U/S 143(3) MADE THIS ADDITION. THE ASSESSEE CHALLENGED TWO AS PECTS OF THIS ADDITION BEFORE THE LD. CIT(A), NAMELY, APPLICATION OF TNMM BY THE TPO AS THE MOST APPROPRIATE METHOD AND DETERMINATION OF ALP OF THIS INTERNATIONAL TRANSACTION. THE LD. CIT(A) AGREED WITH THE TPO IN APPLYING TNMM AS THE MOST APPROPRIATE METHOD. ON SECOND ASPECT ALSO , THE LD.CIT(A) ECHOED THE ASSESSMENT ORDER IN DETERMINING THE COST BASE A T RS.3.84 CRORE AND THE AMOUNT OF TRANSFER PRICING ADJUSTMENT AT RS.84,06,9 16/-. THE ASSESSEE IS IN APPEAL AGAINST THE CONFIRMATION OF THIS ADDITION. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE ARE BASICALLY TWO ISSUES RAISED ON BEHALF OF THE ITA NO.3472/DEL/2010 6 ASSESSEE IN THIS REGARD, VIZ., SELECTION OF THE MOS T APPROPRIATE METHOD AND COMPUTATION OF ALP UNDER SUCH METHOD. WE WILL ESPOU SE THESE ISSUES, ONE BY ONE. I. SELECTION OF MOST APPROPRIATE METHOD 7.1. FIRST ISSUE BEFORE US IS SELECTION OF THE MO ST APPROPRIATE METHOD. THE LD. AR SUBMITTED THAT THE ASSESSEE CORRECTLY APPLIE D CPM AS THE MOST APPROPRIATE METHOD TO BENCHMARK THIS INTERNATIONAL TRANSACTION BUT THE TPO FELL IN ERROR IN RESORTING TO THE TNMM. IN THE OPPOSITION, THE LD. DR SUBMITTED THAT THE TPO, IN FACT, APPLIED COST PLUS METHOD ONLY AS WAS EVIDENT FROM THE FACT THAT NOWHERE IN THE ORDER DID HE REFER TO THE APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD. IT IS TRUE THAT THE TPO HAS NOWHERE SPECIFICALLY MENTIONED THAT HE WAS APPLYING TNMM. AT THE SAME TIME, IT IS ALSO TRUE THAT THE LD. CIT(A) HAS SPECIFICALLY UPHELD THE APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD . IN VIEW OF THE CONFLICTING CLAIMS OF THE RIVAL PARTIES ON THIS PRE LIMINARY ISSUE, WE FIRST NEED TO PRECISELY ASCERTAIN THE METHOD APPLIED BY T HE TPO. ITA NO.3472/DEL/2010 7 7.2. WE HAVE NOTICED ABOVE THAT THE TPO DETERMIN ED COST BASE OF THE ASSESSEE AT RS.3.84 CRORE ON WHICH PROFIT MARGIN OF 4.4% HAS BEEN APPLIED TO DETERMINE THE ALP AT RS.4.00 CRORE. THIS 4.4% H AS BEEN ADOPTED ON THE BASIS OF CALCULATIONS GIVEN BY THE ASSESSEE DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO, A COPY OF WHICH IS AVAI LABLE ON PAGES 272- 275 OF THE PAPER BOOK. PARA 3 OF THE ACCOMPANYING LETTER DATED 17.01.2005 ADDRESSED TO THE TPO STATES THAT THE ASSESSEE HAS : `NOW COMPUTED MARK-UP ON COST CONSIDERING OVERHEAD EXPENSES IN RESPECT OF THE ASSESSEE COMPANY AND ALSO FOR COMPARABLE COMPANIES MAINLY IN DIAMOND BUSINESS. THIS SHOWS THAT THE MARK-UP OF THE ASSESSEE AND COMPARAB LES HAS BEEN COMPUTED IN THE SAME MANNER. SUCH A STATEMENT OF DE TERMINATION OF PROFIT MARGIN IS AVAILABLE ON PAGE 274 OF THE PAPER BOOK. WHEN WE PERUSE THIS PAGE, IT IS MANIFESTED THAT THE ASSESSEE ADOPTED TH REE YEARS DATA OF COMPARABLES. PROFIT MARGIN OF 4.4% OF COMPARABLES HAS BEEN DETERMINED BY CONSIDERING THREE FIGURES, NAMELY, TOTAL INCOME, TOTAL COST AND NET PROFIT. DUE TO NON-AVAILABILITY OF ANY ANNUAL REPO RT OF THE 19 COMPARABLE COMPANIES FOR ANY OF THE YEARS, THE MANNER OF COMPU TATION OF PROFIT RATE SO GIVEN IN THE TABLE ON PAGE 274 OF THE PAPER BOOK IS NOT CAPABLE OF ITA NO.3472/DEL/2010 8 VERIFICATION. BELOW THIS TABLE, THE ASSESSEE COMPU TED ITS OWN PROFIT MARGIN IN THE SIMILAR WAY BY CONSIDERING TOTAL INCO ME AT RS.3.25 CRORE, TOTAL COST AT RS.3.92 CRORE AND NET LOSS AT RS.0.67 CRORE AND IN PERCENTAGE TERMS AT (-) 17.09%. FIGURE OF TOTAL INCOME OF THE ASSESSEE IN THIS TABLE AT RS.3.25 CRORE HAS BEEN COMPUTED BY TAKING TOTAL OF INCOME SIDE OF ITS PROFIT & LOSS ACCOUNT OF THE PUNE UNIT AT RS.3.32 C RORE AS REDUCED BY NON- OPERATING INCOME OF RS.0.7 CRORE. THIS SHOWS THAT THE FIGURE OF RS.3.25 CRORE IS GROSS OPERATING REVENUE OF THE ASSESSEE. THE SECOND FIGURE OF TOTAL COST AT RS.3.92 CRORE HAS BEEN DETERMINED BY TAKING TOTAL OF ALL THE EXPENSES APPEARING IN THE PROFIT & LOSS ACCOUNT AT RS.3.99 CRORE AS REDUCED BY CERTAIN NON-OPERATING COSTS. WHEN WE CON SIDER THESE TWO FIGURES, NAMELY, TOTAL INCOME (OPERATING REVENUE) AND TOTAL COST (OPERATING COSTS) AS CALCULATED FOR THE ASSESSEE, A ND, THEN, VIEW IT IN THE SETTING OF THE TABLE DEPICTING CALCULATION OF SIMIL AR FIGURES OF THE COMPARABLES, THERE REMAINS NO DOUBT THAT 4.4% IS TH E AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLES. IN OTHER WORDS, PROFIT MARGIN OF 4.4% OF COMPARABLES IS OP/TC. THE TPO APPLIED THIS PROFIT MARGIN ON COSTS ITA NO.3472/DEL/2010 9 INCURRED IN PROVIDING JOB WORK SERVICES CALCULATED BY HIM AT RS.3.84 CRORE TO DETERMINE THE ALP AND THE RESULTANT TRANSFER PRI CING ADJUSTMENT. 7.3. THIS MANIFESTS THAT THE TPO HAS APPLIED TNM M AND NOT THE COST PLUS METHOD. THE REASON FOR OUR THIS CONCLUSION IS THAT THE CALCULATION OF ALP UNDER TNMM HAS BEEN PRESCRIBED UNDER RULE 10B(1 )(E) IN WHICH THE FIRST STEP IS TO COMPUTE THE NET PROFIT MARGIN REAL ISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION IN RELATION TO A PARTI CULAR BASE SUCH AS COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED. UNDER SUB-CLAUSE (II), THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION IS COMPUTED WIT H REGARD TO THE SAME BASE, WHICH IS, THEN, ADJUSTED UNDER SUB-CLAUSE (II I) ON ACCOUNT OF DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND COMPARABLE UNCONTROLLED TRANSACTION TO FIND OUT THE ARMS LENG TH MARGIN UNDER SUB- CLAUSE (IV). ON THE OTHER HAND, THE MANNER PRESCRI BED FOR CALCULATION OF ALP UNDER COST PLUS METHOD IS GIVEN UNDER RULE 10B( 1)(C). UNDER SUB- CLAUSE (I) OF THIS RULE, THE DIRECT AND INDIRECT CO ST OF PRODUCTION INCURRED BY THE ENTERPRISE ARE DETERMINED. UNDER SUB-CLAUSE (I I), THE AMOUNT OF NORMAL ITA NO.3472/DEL/2010 10 GROSS PROFIT MARK UP TO SUCH COSTS ARISING IN A CAS E OF COMPARABLE UNCONTROLLED TRANSACTION IS DETERMINED WHICH IS, TH EN, ADJUSTED UNDER SUB- CLAUSE (III) ON ACCOUNT OF DIFFERENCES BETWEEN INTE RNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION. THE COSTS REFERRED TO IN SUB- CLAUSE (I) ARE INCREASED BY THE ADJUSTED PROFIT MAR K UP ARRIVED AT UNDER SUB- CLAUSE (III) TO FIND OUT THE ALP OF THE INTERNATION AL TRANSACTION. ON A COMPARATIVE STUDY OF TNMM AND CPM, WE FIND THAT WHE REAS THE BASE IN CASE OF TNMM MAY BE `TOTAL OPERATING COSTS (IF NOT SALES EFFECTED OR ASSETS EMPLOYED ETC.) WITH THE `NET PROFIT ALWAYS AS NUMERATOR, THE BASE IN THE CASE OF CPM IS `DIRECT AND INDIRECT COSTS OF SERVICES RENDERED WITH THE `GROSS PROFIT ALWAYS AS NUMERATOR. NOT ONLY T HERE IS A DIFFERENCE IN THE NUMERATOR, BEING, GROSS PROFIT IN CPM AND NET P ROFIT IN TNMM, THE DENOMINATOR IS ALSO DIFFERENT. WHEREAS IN CPM THE DENOMINATOR IS ALWAYS DIRECT AND INDIRECT COSTS, BUT, IN TNMM WHEN WE TAK E THE BASE OF COSTS INCURRED, IT IS THE OPERATING COSTS WHICH ARE TAKEN INTO ACCOUNT. DIRECT COSTS INCLUDE COST OF RAW MATERIAL AND LABOUR ETC. AND INDIRECT COSTS INCLUDE DEPRECIATION, REPAIRS AND MAINTENANCE, ELECTRICITY, ETC. FOR THE PRODUCTION FACILITIES. WHILE ALL THE DIRECT COSTS CAN BE ASCER TAINED FROM THE TRADING ITA NO.3472/DEL/2010 11 ACCOUNT ALONE, SOME OF THE INDIRECT COSTS, LIKE DEP RECIATION ETC. ARE FOUND FROM THE PROFIT AND LOSS ACCOUNT. ON THE OTHER HAND , `OPERATING COSTS INCLUDE NOT ONLY DIRECT AND INDIRECT MANUFACTURING COSTS AS REFERRED TO IN THE CPM, BUT ALSO CERTAIN OTHER COSTS, SUCH AS, SEL LING AND ADMINISTRATIVE EXPENSES, WHICH CAN BE FOUND FROM THE PROFIT AND LO SS ACCOUNT. IN OTHER WORDS, `OPERATING COSTS ARE EQUAL TO `DIRECT AND I NDIRECT COSTS PLUS SOME OTHER COSTS. INSOFAR AS THE NUMERATOR IS CONCERNED , HERE AGAIN WE FIND THAT THE TERM `NET PROFIT IN TNMM DOES NOT LITERALLY ME AN THE AMOUNT OF NET PROFIT AT THE END OF THE PROFIT AND LOSS ACCOUNT, B UT `OPERATING NET PROFIT, WHICH IS CALCULATED BY REDUCING OPERATING COSTS FRO M THE GROSS REVENUE. SIMILARLY, THE TERM `GROSS PROFIT IN CPM DOES NOT LITERALLY MEAN THE AMOUNT OF GROSS PROFIT AT THE END OF TRADING ACCOUN T, BUT GROSS MARGIN, WHICH IS CALCULATED BY REDUCING ALL THE DIRECT AND INDIRECT COSTS FROM THE GROSS REVENUE. 7.4. WHEN WE VIEW THE CALCULATION MADE BY THE T PO IN DETERMINING THE ALP OF THIS INTERNATIONAL TRANSACTION, IT CLEARLY E MERGES THAT HE HAS TAKEN COSTS INCURRED AT RS.3.84 CRORE, WHICH ARE `OPERAT ING COSTS AS PER HIS ITA NO.3472/DEL/2010 12 CALCULATION AND PROFIT MARGIN OF 4.4% OF COMPARAB LES, WHICH IS RATIO OF OPERATING PROFIT TO TOTAL OPERATING COSTS. THUS, I T IS EVIDENT THAT THE TPO HAS APPLIED TNMM FOR DETERMINING ALP OF THIS INTERN ATIONAL TRANSACTION. THIS DISAPPROVES THE CONTENTION OF THE LD. DR THAT THE TPO APPLIED CPM AS THE MOST APPROPRIATE METHOD. 7.5. NOW, WE COME TO THE QUESTION OF THE MOST APPR OPRIATE METHOD IN THE GIVEN FACTS AND CIRCUMSTANCES. IT IS FOUND THAT TH E ASSESSEE IS DOING JOB WORK FOR AND ON BEHALF OF ITS AES. NEITHER THERE I S ANY PURCHASE OF RAW MATERIAL BY THE ASSESSEE NOR ANY SALE AT ITS OWN. RATHER, IT IS A CASE IN WHICH THE ASSESSEE RECEIVES RAW MATERIAL AND SENDS BACK THE FINISHED GOODS TO ITS FOREIGN AE AFTER DOING THE NECESSARY JOB WOR K, FOR WHICH IT HAS BEEN PAID A SUM OF RS.3.16 CRORE. THE LD. AR CONTENDED THAT THE ASSESSEE APPLIED CPM IN RESPECT OF SIMILAR INTERNATIONAL TRA NSACTION OF RECEIPT OF JOB CHARGES IN THE SUBSEQUENT YEARS AS WELL. A CHART H AS BEEN PLACED ON RECORD WHICH DIVULGES THAT RIGHT FROM THE ASSESSMENT YEAR 2002-03 (I.E. THE YEAR UNDER CONSIDERATION) UP TO THE A.Y. 2005-06, THE AS SESSEE HAD BEEN APPLYING CPM AS THE MOST APPROPRIATE METHOD FOR THE INTERNATIONAL ITA NO.3472/DEL/2010 13 TRANSACTION OF RECEIPT OF JOB CHARGES, WHICH STOOD ACCEPTED BY THE TPO. COPIES OF ORDERS ACCEPTING THIS METHOD HAVE BEEN PL ACED ON RECORD. THIS DIVULGES THAT THE TPO ACCEPTED THE APPLICATION OF C PM AS THE MOST APPROPRIATE METHOD FOR THE IMMEDIATELY SUCCEEDING T HREE YEARS. IT IS FURTHER NOTICED THAT PARA 6.2.20.2 OF THE UN TRANS FER PRICING GUIDELINES FOR DEVELOPING COUNTRIES PROVIDES THAT : `THE COST PLUS METHOD IS ALSO GENERALLY USED IN TRANSACTIONS INVOLVING A CONTRAC T MANUFACTURER, A TOLL MANUFACTURER OR A LOW RISK ASSEMBLER WHICH DOES NOT OWN PRODUCT INTANGIBLES AND INCURS LITTLE RISKS. AS THE ASSESS EE HAS BEEN ADMITTED BY THE TPO HIMSELF AS A `CONTRACT MANUFACTURER, WE FAIL T O SEE AS TO HOW THE CPM CAN NOT BE CONSIDERED AS THE MOST APPROPRIATE M ETHOD IN THE GIVEN CIRCUMSTANCES. NO CONTRARY VIEW HAS BEEN BROUGHT ON RECORD BY THE LD. DR HOLDING CPM AS NOT THE MOST APPROPRIATE METHOD IN T HE CASE OF RECEIPT OF JOB CHARGES BY A CONTRACT MANUFACTURER. EVEN OTHER WISE, WE FIND THAT THE CPM, LIKE THE CUP METHOD, IS A TRANSACTION SPECIFIC METHOD STRIVING TO DETERMINE ALP ON A MICRO LEVEL THEREBY LENDING MORE CREDIBILITY, RATHER THAN THE TNMM HAVING A NON-TRANSACTION SPECIFIC GEN ERALIZED APPROACH AIMING TO COMPUTE PROFIT ON A MACRO LEVEL. IN VIEW OF THE FOREGOING ITA NO.3472/DEL/2010 14 REASONS, WE ARE OF THE CONSIDERED OPINION THAT THE COST PLUS METHOD IS THE MOST APPROPRIATE METHOD IN THE GIVEN CIRCUMSTANCES. II. COMPUTATION OF ALP UNDER THE MOST APPROPRIATE M ETHOD 8.1. HAVING CHOSEN THE MOST APPROPRIATE METHOD AS C PM, THE NEXT VITAL QUESTION IS THE DETERMINATION OF ALP UNDER THIS MET HOD. WE FIND THAT THE TPO APPLIED TNMM FOR CALCULATING THE ALP OF THE INT ERNATIONAL TRANSACTION AND, AS SUCH, DID NOT HAVE ANY OCCASION TO EXAMINE THE CALCULATION GIVEN UNDER THE CPM. THE ASSESSEE HAS MADE CALCULATION OF ALP UNDER CPM IN ITS TRANSFER PRICING STUDY REPORT AS PER ANNEXURE-B. WHEN WE PERUSE SUCH ANNEXURE IN JUXTAPOSITION TO TH E PROFIT & LOSS ACCOUNT OF THE PUNE UNIT, IT COMES TO THE FORE THAT IN THE PROFIT & LOSS ACCOUNT, THERE IS A MENTION OF FIRST ITEM OF REVENU E AS SALES (INCLUDING TRADING) AT RS.3,16,84,853. IT IS THIS FIGURE OF RS.3.16 CRORE, WHICH HAS ALSO BEEN TAKEN IN ANNEXURE-B AS `PROCESSING CHARGE S TO WHICH AMOUNT OF FOREIGN EXCHANGE GAIN HAS BEEN ADDED FOR ARRIVING A T TOTAL AMOUNT OF REVENUE OF RS.3.24 CRORE. FROM THIS AMOUNT OF GR OSS REVENUE, CERTAIN DIRECT AND INDIRECT COSTS HAVE BEEN REDUCED TOTALIN G RS.2.48 CRORE TO ITA NO.3472/DEL/2010 15 COMPUTE GROSS PROFIT AT RS.76,47,114/-. WE FIND TH AT THERE IS DIFFERENCE IN SOME OF THE ITEMS OF DIRECT AND INDIRECT COSTS TAKE N IN ANNEXURE-B VIS-- VIS THE AMOUNTS APPEARING IN THE PROFIT & LOSS ACCOUN T. THOUGH SOME OF THE FIGURES, NAMELY, CHEMICAL AND CLEARING CHARGES OF CHEMICALS CONSUMED, PACKING MATERIAL AND SEWING THREAD CONSUM ED AND PURCHASE OF CONSUMABLES, ETC. GIVEN IN THE ANNEXURE ARE MATCHIN G WITH THE RESPECTIVE AMOUNTS GIVEN IN THE PROFIT & LOSS ACCOUNT, BUT, TH ERE ARE CERTAIN OTHER EXPENSES WHOSE FIGURES ARE NOT MATCHING. FOR EXAMP LE, IN ANNEXURE-B, THERE IS MENTION OF WAGES AT RS.18,98,976/-, SAL ARIES TO SUPERVISOR (APPROX.) AT RS.5,14,000/-. THESE AMOUNTS ARE NOT DIRECTLY TRACEABLE FROM THE ASSESSEES PROFIT & LOSS ACCOUNT. ON A POINTED QUERY, ALBEIT THE LD. AR SUBMITTED THAT THESE COSTS ARE PART OF `PERSONNE L EXPENSES AT RS.1,17,36,299/-, BUT, HE COULD NOT TALLY THE TOTAL OF THESE TWO ITEMS ALONG WITH OTHER SIMILAR EXPENSES WITH THE AMOUNT OF `PER SONNEL EXPENSES APPEARING IN THE PROFIT & LOSS ACCOUNT. SIMILARLY, THE AMOUNT OF DEPRECIATION HAS BEEN TAKEN AT RS.86 LAC IN ANNEXUR E-B WITH THE NARRATION (APPROX.). AS AGAINST THAT, THE AMOUNT OF DEPRECI ATION IN PROFIT & LOSS ACCOUNT IS RS.1.07 CRORE. THE LD. AR STATED THAT T HE REMAINING AMOUNT OF ITA NO.3472/DEL/2010 16 DEPRECIATION IS IN RELATION TO ADMINISTRATIVE WING OF PUNE UNIT, BUT, FAILED TO POINT OUT THE MANNER OF SUCH APPORTIONMENT. THE N, THERE IS AN ITEM OF RS.50 LAC CONSIDERED IN ANNEXURE-B WITH THE NARRATI ON MANAGEMENT COST (APPROX) AND OTHER EXPENSES (APPROX.). HERE AGAIN, THE ANSWER TO THE QUERY ABOUT THE MANNER OF DETERMINATION OF THIS COS T AT RS.50 LAC WAS VAGUE AND UNSUBSTANTIATED. TOTAL DIRECT AND INDIRE CT COSTS AS PER ANNEXURE-B HAVE BEEN TAKEN AT RS.2.48 CRORE. THIS IS IN CONTRAST TO TOTAL EXPENDITURE OF RS.3.99 CRORE DEBITED TO THE PROFIT & LOSS ACCOUNT. THE LD. AR COULD NOT STATE THE EXACT AMOUNT OF OVERHEADS DE BITED TO THE PROFIT & LOSS ACCOUNT INCLUDED IN SUCH TOTAL COST OF RS.3.99 CRORE WHICH ARE NOT INCLUDED IN RS.2.48 CRORE, BEING THE TOTAL DIRECT A ND INDIRECT PROCESSING COSTS. WHEN CONFRONTED WITH THE ABOVE VARIATIONS, THE LD. AR SUBMITTED THAT DURING THE COURSE OF PROCEEDINGS BEFORE THE TP O, THE ASSESSEE REVISED ITS CALCULATION AND ALSO FURNISHED A SUPPORTING CER TIFICATE FROM A CHARTERED ACCOUNTANT, A COPY OF WHICH IS PLACED ON PAGES 465 TO 483 OF THE PAPER BOOK. HE STATED THAT THAT THIS CERTIFICATE REPRESE NTS EXACT CALCULATIONS. WHEN WE PERUSE PAGE 466 OF THE PAPER BOOK, WHICH IS A PART OF THE CERTIFICATE ALONG WITH THE SUBSEQUENT PAGES, IT CO MES OUT THAT TOTAL ITA NO.3472/DEL/2010 17 EXPENSES HAVE BEEN ALLOCATED UNDER FOUR HEADS, NAME LY, COATING OF RAW BEADS, `TRADING, `TRANSFERS AND `CORPORATE. WH EREAS SOME OF THE EXPENSES ARE PARTICULAR TO COATING OF RAW BEADS A LONE, WHILE OTHERS HAVE BEEN BIFURCATED INTO OTHER THREE HEADS ALSO, NAMELY , TRADING, TRANSFERS AND CORPORATE. THE LD. AR CONTENDED THAT THE COSTS HAVE BEEN ALLOCATED TO TRADING, TRANSFERS AND CORPORATE HEADS AS WELL BECA USE SOME OF THE ACTIVITIES OF THE PUNE UNIT ALSO RELATED TO THESE H EADS. WHEN WE PERUSE THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE, IT DISCERNS THAT THERE IS AN ITEM OF REVENUE CHARACTERIZED AS SALES (INCLUDING TRADING) WITH THE VALUE OF RS.3,16,84,843/-. WE FIND THAT THIS IS THE EXACT AM OUNT OF THE REVENUE RECEIVED BY THE ASSESSEE FROM ITS AE AS JOB WORK CH ARGES. THIS IS ALSO FORTIFIED FROM THE TPOS ORDER IN WHICH THE INTERNA TIONAL TRANSACTIONS HAVE BEEN REPRODUCED AND THE TRANSACTION AT SL. NO.3 IS COATING OF RAW BEADS WITH VALUE OF RS.3,16,84,850/-. THIS INDICATES THAT THE ENTIRE REVENUE OF THE PUNE UNIT IS FROM `JOB WORK AND THERE IS NO TRANSA CTION OF REVENUE FROM TRADING OR TRANSFER, WHICH POSITION COULD NOT BE CO NTROVERTED BY THE LD. AR AS WELL. THUS IT IS PALPABLE THAT THE REVENUE I N THE PUNE UNIT IS ONLY FROM THE `JOB WORK AND THE MENTION OF THE WORDS I NCLUDING TRADING IN ITA NO.3472/DEL/2010 18 THE PROFIT & LOSS ACCOUNT IS SUPERFLUOUS. THE LD. AR HAS ALSO ADMITTED THAT THERE IS NO AMOUNT OF REVENUE FROM THE TRADING ACTIVITY OR ANY OTHER ACTIVITY CARRIED OUT BY THE ASSESSEE IN PUNE UNIT E XCEPT COATING OF RAW BEADS. ONCE IT IS ESTABLISHED THAT THE ASSESSEE DI D NOT CARRY OUT ANY INCOME-GENERATING ACTIVITY IN ITS PUNE UNIT EXCEPT `JOB WORK, WE FAIL TO COMPREHEND ANY LOGIC IN ALLOCATING COSTS TO NON-EXI STENT `TRADING AND `TRANSFERS HEADS ALSO, WHICH HAVE BEEN ARTIFICIALL Y CREATED SO THAT THE COSTS QUA `JOB WORK COULD BE REDUCED TO SHOW HIGHER ARTIFIC IAL PROFIT WITH A VIEW TO DEMONSTRATE THIS INTERNATIONAL TRANS ACTION AT ALP. EVEN OTHERWISE, WE FIND FROM PAGE 469 OF THE PAPER BOOK, WHICH IS PART OF THE CERTIFICATE GIVEN BY THE CHARTERED ACCOUNTANT, THAT THE APPORTIONMENT OF CERTAIN EXPENSES HAS BEEN DONE IN THE RATIO OF 30% TO COATING OF RAW BEADS, 30% TO TRADING, 10% TO TRANSFERS AND 30% TO CORPORATE. SIMILARLY, SOME OTHER EXPENSES HAVE BEEN ALLOCATED IN THE RATIO OF 50%, 10%, 0% AND 40%, WHILE STILL SOME OTHER EXPENSES HA VE BEEN ALLOCATED IN THE RATIO OF 60%, 0%, 0% AND 40%. ON A SPECIFIC QU ERY TO EXPLAIN THE BASIS OF SUCH APPORTIONMENT OF COSTS AMONGST THE S OLE EXISTING HEAD OF `COATING OF RAW BEADS AND OTHER NON-EXISTING HEADS , THE LD. AR STATED ITA NO.3472/DEL/2010 19 THAT IT WAS DONE AS PER THE SUBJECTIVE SATISFACTION OF THE MANAGEMENT. FIRSTLY, WE FIND THAT THERE IS NO TRADING OR ANY OT HER ACTIVITY AND ALLOCATION OF COSTS TO SUCH HEADS HAS BEEN MADE WITH THE ULTER IOR MOTIVE OF REDUCING THE COST BASE OF `JOB WORK AND, SECONDLY, SUCH ALL OCATION IS ABSOLUTELY ON AD HOC BASIS WITHOUT THERE BEING ANY PARAMETER TO JUSTIFY THE RATIONALITY OF SUCH ALLOCATION. IN VIEW OF THE ABOVE DISCUSSION, I T IS CLEAR THAT THE ASSESSEES DETERMINATION OF ALP UNDER CPM CANNOT BE ACCEPTED ON ITS FACE VALUE. AS THE TPO PROCEEDED TO DETERMINE THE ALP BY APPLYING TNMM, WHICH HAS NOT BEEN APPROVED BY US HEREINABOVE, WE A RE OF THE CONSIDERED OPINION THAT IT WILL BE JUST AND FAIR IF THE IMPUGN ED ORDER IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF AO/TPO FOR RE -DECIDING THE ALP OF THE INTERNATIONAL TRANSACTION OF JOB CHARGES OF THE PUN E UNIT UNDER COST PLUS METHOD. IT IS MADE CLEAR THAT WE HAVE NOT EXAMINED THE COMPARABILITY OR OTHERWISE OF THE COMPANIES CHOSEN BY THE ASSESSEE A S COMPARABLE. THIS ASPECT ALSO NEEDS TO BE DECIDED AT THE TPO/AOS END . CARE SHOULD BE TAKEN TO SELECT COMPARABLES WHICH ARE RENDERING JOB CHARGES IN THE CAPACITY OF A CONTRACT MANUFACTURER ALONE ASSUMING MINIMAL R ISKS AND NOT THE FULL- FLEDGED MANUFACTURERS PURCHASING RAW MATERIALS AND THEN SELLING SIMILAR ITA NO.3472/DEL/2010 20 FINISHED GOODS AT THEIR OWN ASSUMING ALL THE MANUFA CTURING RISKS AS WELL. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REA SONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. 9.1. THE NEXT ISSUE RAISED IN THIS APPEAL IS AGAINS T THE SUSTENANCE OF ADDITION AMOUNTING TO RS.22,17,399/- IN RESPECT OF AMOUNT WRITTEN OFF UNDER THE HEAD FIXED ASSETS WRITTEN OFF. THE ASSE SSEE HAS ALSO RAISED AN ADDITIONAL GROUND, WHICH READS AS UNDER:- WITHOUT PREJUDICE TO THE FOURTH GROUND OF APPEAL, THAT ON THE FACTS AND IN LAW, THE LD.AO MAY BE DIRECTED TO ALLOW DEPR ECIATION ON TOTAL COST OF THE FIXED ASSETS ACQUIRED DURING THE YEAR A ND ADDED TO THE WDV OF THE RESPECTIVE BLOCK OF ASSETS, INCLUDING TH E AMOUNT OF RS.22,17,399 WRITTEN OFF UNDER THE HEAD FIXED ASSE TS WRITTEN OFF, UNDER SECTION 32 OF THE INCOME TAX ACT, 1961. 9.2. NO SERIOUS OBJECTION WAS TAKEN BY THE LD. D R AGAINST THE ADMISSION OF THE ABOVE ADDITIONAL GROUND. THE SAME, BEING A L EGAL GROUND, IS HEREBY ADMITTED FOR CONSIDERATION. 9.3. BRIEFLY STATED, THE FACTS OF THESE GROUNDS ARE THAT THE ASSESSEE DEBITED A SUM OF RS.22,17,399/- ON ACCOUNT OF WRITE OFF IN RESPECT OF FIXED ASSETS. ON BEING CALLED UPON TO JUSTIFY THE CLAIM OF DEDUCT ION, IT WAS SUBMITTED ITA NO.3472/DEL/2010 21 THAT SPA AGENCIES (P) LTD. WAS THE ERSTWHILE DISTRI BUTOR OF SWAROVSKI CRYSTAL PRODUCTS BEFORE THE ASSESSEE COMPANY STARTE D ITS OPERATIONS IN INDIA AND IT WAS AGREED BY THE ASSESSEE COMPANY TO PURCHASE FIXED ASSETS FROM SPA AGENCIES WHICH WERE USED FOR THE SALE OF T HESE PRODUCTS. THESE ASSETS WERE STATED TO HAVE BEEN TAKEN OVER AT THE V ALUE APPEARING IN THEIR BOOKS OF ACCOUNT, NAMELY, RS.96,52,099/-. THE SAME WERE REVALUED AFTER ACQUISITION AT RS.74,34,700/- AND THE DIFFERENTIAL AMOUNT OF RS.22,17,399/- WAS WRITTEN OFF. THE AO TREATED THIS AMOUNT AS CAP ITAL LOSS AND DID NOT GRANT DEDUCTION FOR THE SAME. THE LD. CIT(A) APPRO VED THE ACTION OF THE AO IN THIS REGARD. 9.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. DETAIL OF THE ASSETS PURCHASED FROM SPA AGENCIES PVT. LTD. IS AVAILABLE AT PAGE 143 OF THE PAPER BOOK. T HE ASSETS SO PURCHASED INCLUDE LAND AT HAUZ KHAS, BUILDING AT HAUZ KHAS, P LANT AND MACHINERY INCLUDING COMPUTERS, PRINTERS AND SCANNERS ALONG WI TH GENERATOR AND OTHER ASSETS INCLUDING PHOTOCOPY MACHINE, FAX MACHINE, ET C. IN ADDITION TO FURNITURE AND FIXTURE. THE ASSESSEE PURCHASED THES E ASSETS INDIVIDUALLY AT A ITA NO.3472/DEL/2010 22 VALUE TOTALING RS.96.52 LAC. THE SAME WERE AGAIN REVALUED ITEM-WISE AND THE EXCESS PURCHASE PRICE OVER AND ABOVE THE REVALU ED FIGURE AMOUNTING TO RS.22.17 LAC WAS WRITTEN OFF, WHICH IS UNDER DISPUT E. THE LD. AR SUBMITTED THAT THE ASSESSEE WAS SET UP IN NOVEMBER, 2000 AND PRIOR TO THAT SPA AGENCIES WAS ACTING AS DISTRIBUTOR OF SWAROVSKI PRO DUCTS. ON BEING ASKED TO PRODUCE A COPY OF AGREEMENT, IF ANY, BETWE EN THE ASSESSEE AND SPA AGENCIES PVT. LTD., FOR ACQUIRING THEIR BUSINES S OF DISTRIBUTORSHIP, THE LD. AR CONTENDED THAT NO SUCH AGREEMENT WAS ENTERED INTO BECAUSE THE ASSESSEE DID NOT ACQUIRE BUSINESS OF DISTRIBUTORSHI P FROM SPA AGENCIES AND SIMPLY PURCHASED THESE ITEMS OF ASSETS PLUS SOM E INVENTORY ETC. AT THE VALUE AS APPEARING IN THEIR BOOKS OF ACCOUNT. THE EMPHASIS OF THE LD. AR WAS ON THE FACT THAT IT WAS A CASE OF PURCHASE OF F IXED ASSETS FOR A SEPARATE CONSIDERATION AND NOT ACQUISITION OF ANY BUSINESS A S SUCH COUPLED WITH ALL THE LIABILITIES ETC. THIS SHOWS THAT THE ASSESSEE PURCHASED THE FIXED ASSETS FROM SPA AGENCIES PVT. LTD. AND REVALUED THE SAME W HICH RESULTED INTO A LOSS. THAT BEING THE POSITION, WE FAIL TO SEE AS T O HOW SUCH DIFFERENTIAL AMOUNT ON ACCOUNT OF FIXED ASSETS WRITTEN OFF CAN B E CONSIDERED AS REVENUE LOSS DEDUCTIBLE IN THE COMPUTATION OF INCOME. IT I S A CLEAR CUT CASE OF ITA NO.3472/DEL/2010 23 CAPITAL LOSS RESULTING FROM THE VALUATION OF FIXED ASSETS. IN SUPPORT OF THE CONTENTION THAT IT WAS BUSINESS EXPEDIENCY OF THE ASSESSEE IN PURCHASING THESE FIXED ASSETS FROM SPA AGENCIES AND HENCE THE LOSS WRITTEN OFF BE ALLOWED AS DEDUCTION, THE LD. AR RELIED ON THE JUDG MENT OF THE HONBLE SUPREME COURT IN THE CASE OF PATNAIK AND CO. LTD. VS. CIT (1986) AIR 1483 (SC) . IN THAT CASE, THERE WAS A BUSINESS LOSS FROM SAL E OF GOVERNMENT BONDS OR SECURITIES WHICH HAD TO BE PURCHASED BY TH AT ASSESSEE AS A CONDITION FOR HAVING PURCHASE ORDERS FROM THE GOVER NMENT AND THE LOSS WAS HELD TO BE REVENUE. IN THAT CASE, THE ASSESSEE WAS TOLD THAT ONLY IF IT SUBSCRIBED FOR SUCH BONDS THAT THE PREFERENTIAL TRE ATMENT WOULD BE GIVEN TO HIM IN PLACING ORDERS FOR MOTOR VEHICLES REQUI RED BY THE VARIOUS GOVERNMENT DEPARTMENTS. THIS SHOWS THAT THE PURCHA SE OF GOVERNMENT BONDS WAS OBVIOUSLY A PRE-CONDITION FOR SECURING OR DERS FROM THE GOVERNMENT. IT WAS UNDER THOSE CIRCUMSTANCES THAT THE HONBLE SUPREME COURT HELD THE LOSS TO BE DEDUCTIBLE. THE FACTS OF THE EXTANT CASE ARE ENTIRELY DIFFERENT. IT IS NOT THE CASE THAT THE AS SESSEE HAD TO PURCHASE THE FIXED ASSETS FOR ACQUIRING THE DISTRIBUTORSHIP FROM SPA AGENCIES (P) LTD. THE ASSESSEES STAND AB INITIO HAS BEEN THAT THERE WAS NO ACQUISITION OF ITA NO.3472/DEL/2010 24 ANY BUSINESS AS SUCH BY THE ASSESSEE AND IT WAS A C ASE OF PURCHASE OF INDIVIDUAL FIXED ASSETS WITH SEPARATE VALUE INDICAT ED AGAINST EACH ASSET. SECONDLY, UNLIKE THAT CASE, THERE IS NO SALE OF ANY ASSETS ACQUIRED UNDER COMPULSION RESULTING INTO A LOSS. THIS DECISION, T HEREFORE, DOES NOT ADVANCE THE ASSESSEES VIEW POINT. AS THE LOSS ON R EVALUATION OF FIXED ASSETS IS IN CAPITAL FIELD, THE SAME CANNOT BE ALLO WED AS DEDUCTION. WE, THEREFORE, APPROVE THE IMPUGNED ORDER ON THIS SCORE BY DISMISSING THE ASSESSEES GROUND. 9.5. ON THE ADDITIONAL GROUND, THE LD. AR CONTE NDED THAT IF LOSS OF RS.22.17 LAC WAS NOT TO BE ALLOWED AS DEDUCTION, TH EN, SUCH LOSS WRITTEN OFF IN THE ACCOUNTS BY REDUCING THE VALUE OF BLOCK OF F IXED ASSETS, BE ADDED TO THE VALUE OF ASSETS SO AS TO RESTORE THE FULL VALUE OF PURCHASE PRICE OF SUCH ASSETS AND THE RESULTANT DEPRECIATION MAY BE CLAIME D ON THE FULL PURCHASE PRICE OF SUCH ASSETS. WE ARE IN AGREEMENT WITH THE ALTERNATE PRAYER MADE BY THE ASSESSEE THROUGH THE ADDITIONAL GROUND THAT SUCH AMOUNT OF RS.22.17 LAC SHOULD BE ADDED TO THE PURCHASE PRICE OF FIXED ASSETS. IT IS SO FOR THE REASON THAT ONCE THE AMOUNT WRITTEN OFF IS NOT DED UCTIBLE, IT WILL NATURALLY ITA NO.3472/DEL/2010 25 ADD TO THE COST OF ASSETS PURCHASED SO THAT THE ACT UAL PURCHASE PRICE CONSTITUTES ADDITION IN THE RESPECTIVE BLOCK OF ASS ETS DURING THE YEAR THEREBY ALLOWING DEPRECIATION ON THE FULL PURCHASE PRICE OF THE ASSETS. THUS, THE ADDITIONAL GROUND IS ALLOWED AND THE AO I S DIRECTED TO EXAMINE THE FACTS ON THIS SCORE AND RESTORE THE PURCHASE PR ICE OF SUCH FIXED ASSETS IN THE BLOCK OF FIXED ASSETS AND ALLOW DEPRECIATION AC CORDINGLY. 10.1. THE NEXT ISSUE RAISED IN THIS APPEAL IS AG AINST THE SUSTENANCE OF DISALLOWANCE OF AMOUNT CLAIMED UNDER THE HEAD PROV ISIONS FOR OBSOLETE GOODS AMOUNTING TO RS.99,95,581/-. FACTS OF THIS GROUND ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS REQUIRED TO FILE DETAIL OF VALUATION OF CLOSING STOCK AS ON 31.3.200 2. FROM THE DETAIL SO FILED, IT WAS OBSERVED THAT THE ASSESSEE COMPANY MA DE PROVISION FOR OBSOLETE ITEMS AMOUNTING TO RS.99,95,581/- UNDER TH E CATEGORY OF TRADED GOODS (CCD), TRADED GOODS (CGD) AND FINISHED GOODS. THE AO OBSERVED THAT THE ASSESSEE DID NOT SHOW SUCH PROVIS ION IN THE PROFIT & LOSS ACCOUNT AND, FURTHER, THERE WAS NO MENTION OF SUCH PROVISION IN THE NOTES TO ACCOUNTS. ON BEING SHOW CAUSED TO JUSTIFY THE D EDUCTIBILITY OF SUCH ITA NO.3472/DEL/2010 26 PROVISION, THE ASSESSEE CONTENDED THAT THOUSANDS OF VARIETIES OF CRYSTALS ARE MAINTAINED BY IT, OUT OF WHICH SEVERAL ITEMS GO OUT OF PRESENT TREND, WHICH ARE REQUIRED TO BE WRITTEN OFF. AMOUNT OF RS.99.95 LAC WAS CLAIMED AS LOSS FROM SUCH OBSOLESCENCE. THE ASSESSEE FURTHER STATE D THAT IN SOME CASES, THE STOCKS WRITTEN OFF WERE AS OLD AS 4-5 YEARS WHI LE IN OTHER CASES, THE OBSOLESCENCE WAS NOT FULL FOR WHICH VALUATION WAS P ROPORTIONATELY REDUCED. THE AO OBSERVED THAT THE ASSESSEE STARTED ITS CCD AND CGD BUSINESS IN NOVEMBER, 2000 ONLY AND THERE WAS NO PO SSIBILITY OF HAVING ANY GOODS 4-5 YEARS OLD. IN RESPONSE TO THAT, THE ASSESSEE STATED THAT STOCKS PURCHASED FROM SPA AGENCIES PVT. LTD. ALSO INCLUDED SUCH OBSOLETE STOCKS. THE ASSESSEE EXPLAINED THAT IN SOME ITEMS O F STOCK THERE WAS 100% OBSOLESCENCE AND THE STOCK WAS ACCORDINGLY WRITTEN OFF IN ENTIRETY, WHILE IN OTHERS, THE OBSOLESCENCE WAS LESS, FOR WHICH THE WRITE OFF WAS MADE TO THE EXTENT OF 80%. NOT CONVINCED WITH THE ASSESSEE S SUBMISSIONS, THE AO MADE ADDITION OF RS.99.95 LAC. THE LD. CIT(A) REQU IRED THE ASSESSEE TO SUBMIT BASIS OF VALUATION OF CLOSING STOCK AND ALSO THE MECHANISM FOR DECIDING ON THE WRITE OFF. THE ASSESSEE STATED THA T SWAROVSKI GROUP WAS FOLLOWING A GLOBAL POLICY OF WRITE OFF OF OBSOLETE ITEMS OF STOCK AND THE ITA NO.3472/DEL/2010 27 AMOUNT WRITTEN OFF BY IT WAS DETERMINED FOLLOWING S UCH POLICY ONLY. RELEVANT EXTRACT OF THE MANUAL DEALING WITH INVENTO RY VALUATION WAS ALSO PLACED ON RECORD. UNCONVINCED, THE LD. CIT(A) UPHE LD THE ADDITION. THE ASSESSEE IS BEFORE US AGAINST THE SUSTENANCE OF THI S ADDITION. 10.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND P ERUSING THE RELEVANT MATERIAL ON RECORD, IT IS NOTICED THAT THE ASSESSEE IS FOLLOWING : `COST PRICE OR MARKET VALUE, WHICHEVER IS LOWER AS THE METHOD OF VALUING ITS STOCK. IT IS THE CLAIM OF THE ASSESSEE THAT SINCE THE MARKET PRICE OF ITS CLOSING STOCK WAS LOWER BY RS.99.95 LAC THAN ITS COST PRICE, SO I T IS SUCH REDUCED PRICE WHICH WAS TAKEN INTO CONSIDERATION. IN SUPPORT OF DETERMINING THE MARKET PRICE AND THE RESULTANT LOSS FROM OBSOLESCENCE, THE ASSESSEE FURNISHED MANUAL OF SWAROVSKI GROUP LAYING DOWN MECHANISM FOR THE WRITE OFF OF CRYSTAL PRODUCTS. IT IS NOT THE CASE OF THE REVENU E THAT THE VALUATION DONE BY THE ASSESSEE DOES NOT ACCORD WITH THE METHOD OF VALUATION GIVEN IN SUCH MANUAL OR SUCH A GLOBAL POLICY IS DEFECTIVE. IT IS OBSERVED THAT THE ASSESSEE PURCHASED EN BLOC STOCK FROM SPA AGENCIES LTD., WHI CH CONSISTED OF BOTH GOOD AND OBSOLETE STOCKS. IT WAS A PACKAGE DEAL FO R PURCHASE OF STOCK. THE ITA NO.3472/DEL/2010 28 REVENUE HAS NOT DOUBTED SUCH PURCHASE TRANSACTION O F STOCK AS A WHOLE. ONCE THE ENTIRE TRANSACTION OF STOCK PURCHASE FROM SPA AGENCIES HAS BEEN ACCEPTED AS GENUINE AND IT IS FOUND THAT SOME OF TH E ITEMS OUT OF SUCH PURCHASE WERE FULLY OR PARTLY OBSOLETE, THERE CANNO T BE ANY BAR IN WRITING OFF SUCH OBSOLETE STOCK IN THE BOOKS OF ACCOUNT TO BRING THE SAME AT ITS MARKET VALUE. IN OUR CONSIDERED OPINION, THE LOSS S UFFERED BY THE ASSESSEE ON THE VALUATION OF CLOSING STOCK HAS TO BE AND IS HEREBY ALLOWED AS DEDUCTION. THIS GROUND IS THUS ALLOWED. 11.1. THE NEXT GROUND IS AGAINST THE CONFIRMATIO N OF DISALLOWANCE OF `PROVISION OF DOUBTFUL DEBTS AMOUNTING TO RS.2,89, 475/- AND `PROVISION FOR DOUBTFUL ADVANCES AMOUNTING TO RS.5,10,254/- AND `ADVANCE WRITTEN OFF AT RS.4,218/-. THE FACTS OF THIS GROUND ARE T HAT THE ASSESSEE CLAIMED DEDUCTION OF THESE THREE AMOUNTS. ON INQUIRY BY TH E AO, IT TRANSPIRED THAT THE PROVISION FOR DOUBTFUL DEBTS AMOUNTING TO RS.2, 89,475/- PERTAINED TO OLD DEBTS RECOVERABLE BY SPA AGENCIES, WHICH WERE TAKEN OVER BY THE ASSESSEE ALONG WITH OTHER ASSETS AND ACCORDINGLY WR ITTEN OFF AS PROVISION. NEXT AMOUNT OF RS.5,10,254/- WAS ON ACCOUNT OF PROV ISION FOR DOUBTFUL ITA NO.3472/DEL/2010 29 ADVANCES, WHICH REPRESENTED THE AMOUNT OF 1% SVB (S PECIAL VALUATION BRANCH) LOADING OF CUSTOMS DUTY WHICH CUSTOMS DEPAR TMENT CHARGED DUE TO IMPORT FROM ASSOCIATED COMPANIES. THERE WAS NO E XPLANATION FROM THE ASSESSEE FOR A SUM OF RS.4,218/-. THIS LED TO THE MAKING OF AN ADDITION OF RS.8,03,947/- (5,10,254+2,89,475+4,218). THE LD. CI T(A) ECHOED THE ACTION OF THE AO IN THIS REGARD. 11.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE CLAIM ED DEDUCTION FOR THESE THREE AMOUNTS U/S 36(1)(VII) AS A PROVISION FOR DOU BTFUL DEBTS/DOUBTFUL ADVANCES. THE CLAIM OF THE ASSESSEE THAT THE AMOUN TS BE ALLOWED AS DEDUCTION IN TERMS OF SECTION 36(1)(VII), IN OUR CO NSIDERED OPINION, IS NOT ACCEPTABLE IN VIEW OF THE FACT THAT FIRSTLY, DEDUCT ION UNDER THIS PROVISION IS ALLOWED ON ACTUAL WRITE OFF AND SECONDLY, THE CONDI TION PRECEDENT FOR SUCH DEDUCTIBILITY AS SET OUT U/S 36(2), HAS NOT BEEN FULFILLED. THIS LATTER PROVISION PROVIDES THAT NO DEDUCTION ON ACCOUNT OF BAD DEBTS OR ANY PART THEREOF SHALL BE ALLOWED UNLESS SUCH DEBT OR PART T HEREOF HAS BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSE E OF THE PREVIOUS YEAR ITA NO.3472/DEL/2010 30 IN WHICH THE AMOUNT OF SUCH DEBT OR PART THEREOF IS WRITTEN OFF OR OF AN EARLIER PREVIOUS YEAR, ETC. IN SO FAR AS THE FIRST AMOUNT OF RS.2,89,475/- IS CONCERNED, THIS REPRESENTS THE AMOUNT OF DEBTORS AC QUIRED BY THE ASSESSEE FROM SPA AGENCIES PVT. LTD. AND WRITTEN OFF DURING THE YEAR ITSELF. THIS AMOUNT HAS NEVER BEEN TAKEN INTO ACCOUNT IN COMPUTI NG THE INCOME OF THE ASSESSEE IN THE CURRENT YEAR OR ANY EARLIER YEAR. SUCH DEBTS MIGHT HAVE BEEN CONSIDERED IN THE COMPUTATION OF INCOME OF SPA AGENCIES LTD. IN EARLIER YEARS, BUT THAT DOES NOT SATISFY THE CONDIT ION IN THE HANDS OF THE ASSESSEE. THUS, THERE IS FAILURE ON THE PART OF TH E ASSESSEE TO FULFILL THE CONDITION OF SECTION 36(2) WHICH IS A PRE-REQUISITE FOR ALLOWING DEDUCTION U/S 36(1)(VII). 11.3. THE NEXT AMOUNT OF RS.5,10,254/- IS A PROVI SION FOR ADVANCES WRITTEN OFF. IT IS CLEAR AND ALSO ACCEPTED BY THE LD. AR THAT IT IS THE AMOUNT OF ADVANCES AND NOT THE DEBTS WRITTEN OFF. FIRSTLY, IT IS NOT A CASE OF PROVISION FOR BAD DEBTS AS THESE ARE ADVANCES AND N OT ANY DEBTORS. ONCE IT IS SO, THERE CAN BE NO QUESTION OF COMPLIANCE WITH THE CONDITION SET OUT IN SECTION 36(2). THE LD. ARS CONTENTION FOR TREATING THIS AMOUNT AS A ITA NO.3472/DEL/2010 31 `BUSINESS LOSS, IS AGAIN SANS MERIT. UNLIKE BAD D EBT, NO AMOUNT CAN BE ALLOWED AS A BUSINESS LOSS ON A MERE WRITE OFF. THE ASSESSEE IS REQUIRED TO EXPRESSLY PROVE THE OCCURRENCE OF LOSS. HERE IS A C ASE IN WHICH THE AMOUNT DUE FROM CUSTOMS DEPARTMENT HAS BEEN WRITTEN OFF. NO AMOUNT RECOVERABLE FROM THE GOVERNMENT CAN UNDER ANY CIRCU MSTANCE BE CONSIDERED AS LOSS. THIS AMOUNT IN OUR CONSIDERED OPINION HAS BEEN RIGHTLY DISALLOWED. 11.4. THE ASSESSEE HAS TENDERED NO EXPLANATION ON THE LAST AMOUNT OF RS.4,218/- WRITTEN OFF BY IT. WE, THEREFORE, APPRO VE THE ACTION OF THE LD. CIT(A) IN SUSTAINING THE DISALLOWANCE OF THE ABOVE THREE AMOUNTS. 12.1. THE LAST ISSUE RAISED IN THIS APPEAL IS A GAINST THE CONFIRMATION OF DISALLOWANCE OUT OF ADVERTISEMENT AND PUBLICITY EXP ENSES. THE ASSESSEE INCURRED A SUM OF RS.1,99,90,982/- ON ACCOUNT OF AD VERTISEMENT AND PUBLICITY (NET OF REIMBURSEMENT OF RS.31.84 LAC). THE AO HELD THAT 10% OF SUCH EXPENDITURE WAS OF CAPITAL NATURE BECAUSE O F THE BENEFIT FROM SUCH ADVERTISEMENT ALSO SPILLED OVER IN THE LATER YEARS AND A FURTHER 10% WAS DISALLOWED BY TREATING IT AS BRAND BUILDING OF SWAR OVSKI OWNED BY ITS AE ITA NO.3472/DEL/2010 32 ABROAD. IN REACHING THE LATTER CONCLUSION, THE AO O BSERVED THAT AS PER AGREEMENT DATED 15.1.2002, SWAROVSKI AG WAS COMPETE NT TO MAKE DIRECT SALES TO THE CUSTOMERS IN THE TERRITORY OF INDIA ON WHICH THE ASSESSEE WAS TO BE PAID COMMISSION @ 15% OF THE NET INVOICE VALUE. THE INCURRING OF ADVERTISEMENT EXPENSES, IN THE OPINION OF THE AO, R ESULTED IN BRAND BUILDING OF THE AE, WHICH WAS HAVING A CUSTOMER BAS E IN INDIA. THE LD. CIT(A) AFFIRMED THE ASSESSMENT ORDER ON THIS POINT. 12.2. WE HAVE HEARD BOTH THE SIDES AND PERUSED T HE RELEVANT MATERIAL ON RECORD. THE DISALLOWANCE SUSTAINED BY THE LD. CIT( A) IS IN TWO PARTS. THE FIRST IS 10% OF TOTAL EXPENDITURE ON ADVERTISEMENT AND PUBLICITY TREATED AS A CAPITAL EXPENDITURE TO THAT EXTENT. IN THIS REGARD , WE FIND THAT THERE IS NO DEARTH OF DECISIONS FROM VARIOUS HIGH COURTS HOLDIN G THAT THE EXPENDITURE INCURRED ON ADVERTISEMENT SHOULD BE ALLOWED AS DEDU CTION IN ENTIRETY AS REVENUE EXPENDITURE IN THE YEAR OF INCURRING AND NO PART OF THE SAME CAN BE CONSIDERED AS CAPITAL EXPENDITURE OR DEFERRED REVEN UE EXPENDITURE. THE HONBLE DELHI HIGH COURT IN CIT VS. CITI FINANCIAL CONSUMER FIN. LTD. 335 ITR 29 (DEL) HAS ALSO HELD TO THIS EXTENT. WE, THEREFORE, HOLD THAT THE ITA NO.3472/DEL/2010 33 LD. CIT(A) WAS NOT JUSTIFIED IN SUSTAINING THE DISA LLOWANCE @ 10% AMOUNTING TO RS.19,99,098/- ON ACCOUNT OF ADVERTISE MENT EXPENDITURE TREATED AS CAPITAL BY THE AO, WHICH IS HEREBY DELET ED. 12.3. AS REGARDS THE OTHER AMOUNT DISALLOWED BY THE AO AT 10% ON ACCOUNT OF BRAND BUILDING OF SWAROVSKI BRAND, WE FI ND THAT THERE IS A REFERENCE IN THE ASSESSMENT ORDER TO THE FACT THAT SWAROVSKI AG WOULD MAKE DIRECT SALES TO CUSTOMERS IN THE TERRITORY OF INDIA AND THE ASSESSEE WOULD BE PAID COMMISSION @ 15% OF THE NET VALUE OF THE DIRECT SALES TO THE LISTED CUSTOMERS. SUCH INCOME FROM COMMISSION I N THE HANDS OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION STANDS AT RS.15,06,754/-. WE DO NOT FIND MUCH DISCUSSION IN THE ASSESSMENT ORDER ABOUT THE REASONS LEADING TO SUCH CONCLUSION OF BRAND BUILDING ON BEH ALF OF THE AE. IN OUR CONSIDERED OPINION, IT WOULD BE IN THE FITNESS OF T HE THINGS IF THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF AO FOR DECIDING IT AFRESH AS PER LAW, AFTER GIVING DET AILED REASONS. WE ORDER ACCORDINGLY. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDING S. ITA NO.3472/DEL/2010 34 13. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 21.04.201 6. SD/- SD/- [C.M. GARG] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 21 ST APRIL, 2016. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.