Daniel Measurement & Control (India) Pvt.Ltd., Baroda V. The ACIT., Circle-1(1), Baroda

ITA 3800/AHD/2007

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60282 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 14-02-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 05-10-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAHUL KUMAR
• Assessee Lawyers: M K PATEL
• Keywords: Gross profit estimation; Transfer pricing; International transaction; Bad and doubtful debts
• Section: 271(1)(c); 143(3); 10B

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD , .. !', #$ # % BEFORE SHRI MUKUL KR.SHRAWAT, JUDICIAL MEMBER AND SHRI B.P.JAIN, ACCOUNTANT MEMBER 1. ./ I.T.A.NO.3800/AHD/2007 - ' ' ' ' ' ' ' '/ // / A.Y. 2002-03 2. ./ I.T.A.NO.3811/AHD/2007 - ' ' ' ' ' ' ' '/ // / A.Y. 2002-03 1. M/S.DANIEL MEASUREMENT AND CONTROL (I) PVT.LTD. 299/300, GIDC ESTATE MAKARPURA, BARODA 2. THE DCIT CIRC.1(1), AHMEDABAD ' ' ' ' / VS. 1. THE ACIT CIR-1(1) BARODA 2. DANIEL MEASUREMENT & CONTROL(I) PVT.LTD., BARODA ( #$ ./ ) ./ PAN/GIR NO. : AABCD3608 F ( (* / // / APPELLANTS ) .. ( +,(* / RESPONDENTS ) ASSESSEE BY : SHRI M.K.PATEL, A.R. REVENUE BY : SHRI RAHUL KUMAR, SR.D.R. '- . /$/ // / DATE OF HEARING : 14.2.12 01' . /$ / DATE OF PRONOUNCEMENT : 3.5.12 #2/ O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THESE ARE CROSS APPEALS ARISING FROM THE ORDER OF CIT(APPEALS)-I, BARODA DATED 24.7.2007. WE SHALL FIRST TAKE UP TH E APPEAL FILED BY THE ASSESSEE. [A] ASSESSEES APPEAL, ITA NO.3800/AHD/2007 2. THE ONLY GROUND RAISED BEFORE US IS REPRODUCED BELOW:- ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 2 - 01. THE LD.CIT APPEAL HAS ERRED IN CONFIRMING THE ADDIT ION OF RS.24,74,800/- MADE U/S.92C(3)(C) OF THE ACT BY THE ASSESSING OFFICER. THE APPELLANT COMPANY HAS INTER NATIONAL TRANSACTIONS WITH ASSOCIATE ENTERPRISE WHICH ARE CO VERED U/S.92A OF THE ACT. THE APPELLANT HAS ADOPTED TRAN SACTIONAL NET MARGIN METHOD (TNMM), METHOD TO DETERMINE THE P RICE AS ARMS LENGTH PRICE (ALP). THIS HAS BEEN CONSIDER ED MOST APPROPRIATED METHOD FOR DETERMINATION OF THE A LP BY THE DEPARTMENT IN ALL SUBSEQUENT ASSESSMENT YEARS. THE FACTS AND CIRCUMSTANCES OF THE APPELLANT CASE SUGGE ST THAT TNMM IS THE ONLY METHOD AND THE MOST APPROPRIATE ME THOD TO ARRIVE AT ALP AND HENCE THERE IS NO NEED TO MAKE DEVIATION FROM THE DECLARED RESULT OF PROFIT. 3. FACTS OF THE CASE, IN BRIEF, AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S. 143(3) OF THE ACT DATE D 15.3.2005 WERE THAT THE ASSESSEE IS IN THE BUSINESS OF PROVIDING DESIGN, PROJECT MANAGEMENT, INSTALLATION, COMMISSIONING. IT WAS NOTICED THAT THERE WAS FALL IN THE GROSS PROFIT FROM 41.87%, PROFIT OF THE PRECEDING YEAR, TO 23.96%, PROFIT FOR THE YEAR UNDER CONSIDERATION. A N ANOTHER FACT HAS ALSO BEEN NOTED BY THE AO THAT THE COST OF MATERIAL CONSUMED HAD INCREASED DURING THE YEAR UNDER CONSIDERATION. FOR THE YEAR UNDER CONSIDERATION, COST OF MATERIAL CONSUMED WAS 85% OF THE VALUE OF FINISHED GOODS PRODUCED, AS AGAINST THE PERCENTAGE OF COST OF MATERIAL CONSUMED AT 82.37% IN THE F.Y. 2000-01 AND 80.28% D URING THE F.Y. 2002-03. THIRD POINT WHICH WAS NOTED BY THE AO W AS THAT OUT OF THE TOTAL MATERIAL PURCHASED OF RS.16.24 CRORES, THE ASSESSEE HAS IMPORTED THE MATERIAL OF RS.4.60 CRORES FROM ITS ASSOCIATE ENTERPRISES (AE) AS DEFINED U/S.92A(1) OF IT ACT. AT THE OUTSET, IT IS WORTH TO MENTION THAT THERE WAS NO REFERENCE TO THE TPO BY THE AO. THIS F ACT ITSELF APPEARED ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 3 - FROM THE ASSESSMENT ORDER. IT IS ALSO NOT IN DISPU TE THAT THE REVENUE AS WELL AS THE ASSESSEE BOTH HAVE ACCEPTED THAT THE TR ANSACTIONAL NET MARGIN METHOD (TNMM) IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH STANDARD FOR THE BUSINESS OF THE ASSESSEE. FOR DETERMINING THE ALP IN RESPECT OF INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND THE AE, THE AUDITOR HAS ANALYZED T HE NATURE OF THE BUSINESS AND THE FUNCTIONAL PROFILE OF THE COMPANY. THE AUDITOR HAS SEARCHED CERTAIN COMPARABLE INDEPENDENT COMPANIES. THE AUDITOR HAS LISTED/SELECTED FIVE COMPANIES FOR THE PURPOSE OF COMPARISON OF THE NET OPERATING PROFIT MARGIN. THE FIVE COMPANIES SELEC TED WERE AS UNDER:- NAME OF THE CO. FUNCTIONS CARRIED OUT TURNOVER RS.IN CRORES FY NET PROFIT MARGIN RS.IN CRORE WEIGHTED AVERAGE ISGEE COVEMA LTD. ERRECTION AND COMMISSIONING OF BOILERS AND OTHER EQUIPMENTS OF SUGAR FACTORIES 1.32 00-01 1.74 01-02 N.A. 02-03 (3.9) 2.79 N.A. (0.30) TECHNO ELECTRIC ENGG.LTD. UNDERTAKING PROJECTS LIKE ELECTRIFICATION OF INDUSTRIAL PLANTS, LIGHTING, RECEIVING AND INTERCONNECTING STATIONS 66.87 00-01 61.09 01-02 75.46 02-03 2.58 4.68 3.61 3.59 HIGH QUALITY STEELS LTD. ERECTION AND COMMISSIONING OF BOILERS AND SUGAR MILL MACHINERY 0.96 00-01 0.56 01-02 1.26 02-03 6.12 3.57 3.94 4.63 RAUNAQ UNDERTAKING 12.12 00-01 11.16 5.14 ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 4 - INTERNATIONAL LTD. ENGG. PROJECTS LIKE FIRE PROTECTION, DETECTION & ALARM SYSTEMS, ETC. 37.08 01-02 N.A. 02-03 3.15 N.A. PETRON ENGINEERING COST.LTD. FABRICATION AND ERECTION OF HEATERS FOR PETROLEUM CORPN.LTD. MECHANICAL ERECTION / PIPING WORK 127.28 00-01 122.16 01-02 N.A. 02-03 5.73 7.13 N.A. 6.39 3.1. THE AO HAS OBJECTED THAT THE TURNOVER OF THE COMPANY AT SL.NO.1 AND AT SL.3 HAVE A VERY LOW TURNOVER IN COMPARISON TO THE TURNOVER OF THE ASSESSEE-COMPANY. THE AO HAS ALSO OBJECTED THAT THE SAID TWO COMPANIES DO NOT HAVE IDENTICAL NATURE OF BUSINESS. HE HAS THEREFORE ASKED THE ASSESSEE AS TO WHY THESE TWO COMPANIES BE NOT TREAT ED AS UN-COMPARABLE AND SHOULD BE EXCLUDED WHILE COMPUTING THE NET OPER ATION PROFIT MARGIN. ON ONE HAND, THE AUDITOR HAS TAKEN THE WEIGHTED AVE RAGE OF NET PROFIT MARGIN, HOWEVER AS AGAINST THAT, THE AO HAS PROPOSE D FOR APPLYING SIMPLE AVERAGE METHOD FOR COMPUTING NET PROFIT MARG IN. THE ASSESSEE HAS ADOPTED THE NET OPERATING PROFIT MARGIN AT 3.9% , HOWEVER, AS AGAINST THAT, THE AO HAS PROPOSED THAT THE NET OPERATING PROFIT MARGIN BE ADOPTED AT 5.38% BY INVOKING THE PROVISIO NS OF SECTION 92C(3)(C) OF IT ACT. THE ASSESSEES REPLY WAS THAT THE CALCULATION OF THE TNMM WAS MADE AS PER RULE 10B OF IT RULES. ABOUT F ALL IN GROSS PROFIT, THE ASSESSEE HAS SUBMITTED THAT THE COST OF CONSUMPTION HAD GONE UP DURING THE YEAR UNDER CONSIDERATION. FOR THE YE AR UNDER CONSIDERATION, THE COST OF CONSUMPTION WAS 64.64% AS COMPARED TO T HE PERCENTAGE OF ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 5 - CONSUMPTION IN A.YS. 2000-01 AND 2001-02 RESPECTIVE LY AT 50.21% AND 49.29%. ON THAT POINT, THE OBSERVATION OF THE AO W AS THAT THERE WAS CERTAIN INCREASE, ABOUT 25%, IN THE COST OF CONSUMP TION OF COMPONENT SOLELY PURCHASED FROM AE. THE AO HAS TAKEN INTO C ONSIDERATION THE PROFIT MARGIN ONLY IN RESPECT OF THE TWO COMPANIES AND THEREAFTER ARRIVED AT THE CONCLUSION THAT NET OPERATING PROFIT MARGIN BE ADOPTED AT 5.38% INSTEAD OF 3.9% ADOPTED BY THE ASSESSEE. THE DIFF ERENCE BETWEEN THE TWO WAS CALCULATED AT RS.24,74,800/- WHICH WAS HEL D AS EXCESS AMOUNT PAID ON PURCHASES MADE FROM THE AE AND THE VARIANCE BEING MORE THAN 5%, THE SAID AMOUNT WAS ADDED IN THE TOTAL INCOME O F THE ASSESSEE, RELEVANT PARAGRAPHS ARE REPRODUCED BELOW:- 4.8. I HAVE GONE THROUGH THE SUBMISSION OF THE ASS ESSEE BUT THE SAME IS NOT FOUND FULLY TENABLE. THE OBJECTION RAI SED AGAINST THE PROPOSED REWORKING OF ARMS LENGTH PRICE HAS ALSO B EEN CONSIDERED. IT IS SIGNIFICANT TO MENTION HERE THAT A SUDDEN INCREASE OF APPROXIMATELY 25% IN THE COST OF CONSUMPTION OF COMPONENT CANNOT BE ATTRIBUTABLE SOLELY TO THE FACTOR THAT TH E SAME DEPENDS ON THE ORDERS EXECUTED AND TYPE OF COMPONENTS USED ESPECIALLY WHEN THESE COMPONENTS ARE PURCHASED SOLELY FROM AE. 4.9. IT IS SIGNIFICANT TO MENTION THAT THE PROFITAB ILITY IS COMPARABLE IN THOSE CASES WHERE OPERATING RECEIPTS ARE ALSO COMPARABLE ALONGWITH THE NATURE OF SERVICES PROVIDE D BY THE COMPANY. IT CAN BE SEEN THAT BUSINESS ACTIVITY IN CASE OF TWO COMPANIES NAMELY ISGEE COVERMA LTD. & HIGH QUALITY STEEL LTD. IN WHOSE CASE TURNOVER IS ALSO NOT COMPARABLE, IS O F ERECTION AND COMMISSIONING OF BOILER AND SUGAR MILL MACHINERIES. WHILE ASSESSEE COMPANYS BUSINESS IS TOTALLY DIFFERENT. THEREFORE, THE ABOVE TWO COMPANIES ARE NOT COMPARABLE WITH THE ASS ESSEE COMPANY AT ALL. NOW COMING TO THE SECOND OBJECTION OF THE ASSESSEE COMPANY THAT IF THE COMPANIES WITH EXTREME LY LOW TURNOVER ARE EXCLUDED THEN THE COMPANY WITH VERY HI GH TURNOVER ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 6 - SHOULD ALSO BE EXCLUDED. THIS CONTENTION OF ASSESS EE IS ACCEPTED. THEREFORE NET PROFIT MARGIN DATA ARE TAKEN IN CASE OF THE COMPANIES WHICH ARE HAVING ALMOST SIMILAR FUNCTION AND TURNOVER. THE COMPARABLE DATA FOR THREE YEARS IS AVAILABLE AN D THE SAME IS CONSIDERED HERE. 4.10. SINCE ASSESSEE HAS NO OBJECTION FOR ACCEPTIN G SIMPLE AVERAGE OF NET PROFIT MARGIN AS PROVIDED IN RULE 10 B(I) (E) OF IT RULES 1962, THE SAME WOULD BE TAKEN FOR COMPUTING N ET PROFIT MARGIN. THEREFORE, IN VIEW OF ABOVE DISCUSSION AND AFTER CONSIDERING ASSESSEES CONTENTION, THE ARMS LENGTH PRICE IS REWORKED AS UNDER:- NAME OF THE CO. NET PROFIT MARGIN RS.IN CRORE AVERAGE TECHNO ELECTRIC & ENGG.CO.LTD. 2.58 4.68 3.61 3.79 RAUNAQ INTERNATIONAL LTD. 11.16 3.15 6.61 6.97 TOTAL 5.38 4.11. THEREFORE IN VIEW OF THE ABOVE OBSERVATIONS A ND FACTS, THE NET OPERATING PROFIT MARGIN OF 3.9% ADOPTED BY ASSE SSEE FOR ARRIVING AT ARMS LENGTH PRICE IS REJECTED AND THE NET OPERATING PROFIT MARGIN OF 5.38% INVOKING THE PROVISIONS OF S ECTION 92C(3)(C) OF IT ACT IS BEING ADOPTED. THE DIFFEREN CE COMES OUT TO BE RS.24,74,800/-. ASSESSEE HAS PAID EXCESS AMOUNT TO THE EXTENT OF RS.24,74,800/- ON PURCHASE MADE FROM A.E. THE T OTAL PURCHASE FROM A.E. IS OF RS.4.6 CRORES AND THE VARIANCE IS M ORE THAN 5% OF THE PURCHASES FROM A.E. THEREFORE, ADDITION OF RS. 24,74,800/- IS MADE TO THE ASSESSEES INCOME. PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) IS SEPARATELY INITIATED. (ADDITION RS.24,74,800/-) ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 7 - 4. WHEN THE MATTER REACHED BEFORE THE LD.CIT(A), IT WAS CONTESTED THAT THERE WAS A SHIFT IN THE BUSINESS AND THE BUSI NESS SEGMENT OF METERING (MET) WAS MORE THAN THE TERMINAL AUTOMATIO N(TA). A COMPARATIVE FIGURES OF TA BUSINESS AND MET BUSINESS , YEAR-WISE WAS EXPLAINED TO THE AO. IT WAS FURTHER EXPLAINED TH AT DURING THE YEAR UNDER CONSIDERATION, CERTAIN COMPANIES, SUCH AS, GAIL, ON GC, ETC. STARTED EXPANDING GAS DISTRIBUTION AND, THEREFORE, STARTED SUPPLYING GAS METERING RELATED PRODUCTS. THEREFORE THE EXISTING INSTALL ATION OF TA BUSINESS WAS MODIFIED. THE EXPLANATION OF THE ASSESSEE BEFORE LD.CIT(A) WAS AS UNDER:- THE APPELLANT HAS ARGUED THAT IN THE DYNAMIC BUSIN ESS WORLD IT HAD TO CHANGE EMPHASIS FROM TA BUSINESS TO MET BUSI NESS SO THAT GP WHICH WAS HIGH IN TA BUSINESS CAME DOWN SINCE TH E SAME WAS MUCH LOWER IN THE MET BUSINESS. IT FURTHER EXPLAIN ED THAT ITS DECISION TO SHIFT FOCUS TO GAS METERING MET BUSINES S, DESPITE ITS BEING A LESS PROFITING BUSINESS, PROVED TO BE A PRU DENT DECISION AS IS SHOWN BY THE TURNOVER IN THE TABLE ABOVE. IT WA S FURTHER ARGUED THAT THIS RESULTED IN AN INCREASE IN THE COST OF GOODS SOLD AND MATERIAL CONSUMED. HOWEVER, EVERYTHING HAD BEEN DONE AS A PRUDENT BUSINESSMAN AND IN THE LONG TERM INTEREST O F THE COMPANY. THE APPELLANT HAS FURTHER ARGUED THAT NO ADDITION H AS BEEN MADE IN THE NEXT A.Y. BY THE TRANSFER PRICING OFFICER EV EN WHEN THE SAMPLE OF COMPANIES USED FOR THE COMPUTATION OF ALP HAS THE SAME EXCEPT WITH THE ADDITION OF ONE MORE COMPANY. THE APPELLANT HAS ALSO SUBMITTED THAT THE AE FROM WHOM THE MATERIAL / COMPONENTS HAVE BEEN PURCHASED DURING THE YEAR IS A MINORITY HOLDER IN THE JOINT VENTURE SINCE THE MAJORITY HOLD ING IS WITH THE INDIAN SHAREHOLDERS. IT HAS ARGUED THAT THE GENERA L PERCEPTION IS THAT A FOREIGN COLLABORATOR WOULD BE FAVOURED BY SU CH AN ALP IF IT HAPPENED TO BE A MAJORITY STAKE HOLDER. HOWEVER, I N THIS CASE THE INDIAN COMPANY IS THE MAJORITY HOLDER AND, THEREFOR E, THE AE ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 8 - WOULD NOT HAVE AGREED FRO SUCH AN ALP SINCE IT WOUL D NOT HAVE REALLY FAVOURED IT. UNDER THE CIRCUMSTANCES, THE A PPELLANT HAS ARGUED THAT THE ADDITION MADE BY THE ASSESSING OFFI CER IS UNREASONABLE AND THERE WAS NO JUSTIFICATION FOR RES ORTING TO THE PROVISIONS OF SEC. 92C(3)(C) OF THE ACT. 4.1. HOWEVER, LD.CIT(A) WAS NOT CONVINCED AND DECID ED THE ISSUE IN FAVOUR OF THE REVENUE BY ASSIGNING FOLLOWING REASON S:- 5. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED THAT AS REGARDS THE REASONS FOR THE FALL IN THE GP MARG IN DURING THE YEAR AS EXPLAINED BY THE APPELLANT, THE ASSESSING O FFICER HAS NOT MADE ANY OBSERVATIONS WITH REGARD TO THE DIFFERENT FACTORS EXCEPT TO THAT OF HIGHER COST OF MATERIAL INCURRED DURING THE YEAR. IN THIS REGARD IT HAS BEEN POINTED OUT THAT FROM OUT OF THE TOTAL MATERIAL PURCHASED OF RS.16.24 CRORES MATERIAL WORTH OF RS.4 .6 CRORES HAS BEEN PURCHASED FROM AES. THEREFORE, IT IS TO BE S EEN IF THE ALP HAS BEEN DETERMINED CORRECTLY OR THAT THERE IS A GR OUND FOR DETERMINING THE SAME BY INVOKING THE PROVISIONS OF SEC. 92C(3)(C) OF THE ACT AS DONE BY THE ASSESSING OFFICER. IN TH IS CONTEXT, IT IS OBSERVED THAT THE MATERIAL OBJECTION RAISED BY THE APPELLANT WAS THAT THE EXCLUSION OF CERTAIN COMPANIES FORM THE CO MPARABLE SAMPLE ADOPTED BY THE AUDITORS SHOULD BE DONE ON A UNIFORM BASIS. THIS OBJECTION WAS FAIRLY ACCEPTED BY THE ASSESSING OFFICER BY EXCLUDING BOTH, THE COMPANIES WITH COMPARATIVE HIGH ER TURNOVER AS WELL AS WITH LOWER TURNOVER. IN THAT SENSE, THE ASSESSING OFFICERS APPROACH IS FOUND TO BE JUDICIOUS. IT IS FURTHER NOTED THAT THE APPELLANT HAS HAD NO OBJECTION TO THE ADOPTION OF RULE 10B SINCE IN ITS REPLY DATED 10-3-2005 BEFORE THE ASSES SING OFFICER IT STATED THAT IT HAD ADOPTED THE TRANSACTIONAL NET MA RGIN METHOD FOR COMPUTING THE ALP WHICH WAS AS PER RULE 10B OF THE IT RULES. IN THESE CIRCUMSTANCES, THE APPELLANT HAS NO REASON FO R OBJECTION TO THE ADOPTION OF THE NET PROFIT MARGIN FIGURES BY TH E ASSESSING OFFICER IN RESPECT OF THE REMAINING TWO COMPANIES F ROM OUT O THE AUDITORS SAMPLE NAMELY TECHNO ELECTRIC AND ENGG.CO .LTD. AND RAUNAQ INTERNATIONAL LTD. IT IS NOT THE APPELLANT S CASE THAT THE WORKING OF THE NET PROFIT MARGIN AND THEIR AVERAGE AT 3.79% AND ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 9 - 5.97% IN RESPECT OF THESE TWO COMPANIES IS DEFECTIV E. FROM THIS, A CONVERGENCE OF APPROACH IS NOTICED WITH REGARD TO T HE ADOPTION OF THE NAMES OF THESE TWO COMPANIES AND THE FIGURES OF AVERAGE NP MARGIN IN RESPECT OF THE SAME FOR THE PURPOSES OF A RRIVING AT THE ALP. THAT BEING THE CASE, IT IS FOUND THAT THE ADO PTION OF FIGURE OF 3.9% OF NET OPERATING PROFIT MARGIN BY THE APPELLAN T IN ITS CASE FOR ARRIVING AT ALP IS NOT REASONABLE AS AGAINST THE FI GURE OF THE AVERAGE NET OPERATING PROFIT MARGIN OF 5.38% WORKED OUT AS ABOVE IN RESPECT OF THESE TWO AES NAMED ABOVE. IT IS OBS ERVED THAT ALL OTHER POINTS ARGUED BY THE APPELLANT FOR EXPLAINING LOWER GROSS PROFIT DURING THE YEAR DO NOT ADDRESS THE ISSUE OF HIGH COST OF MATERIALS PURCHASED FROM AES WHICH CONSTITUTES ABOU T 25% OF THE TOTAL COST OF MATERIALS. IT IS FURTHER OBSERVED TH AT THE ARGUMENT THAT IN THE SUBSEQUENT YEARS THE TPO HAS NOT MADE A NY ADDITIONS AND HAS ACCEPTED THE APPELLANTS ALP AS REASONABLE IS OF NOT ANY GREAT HELP TO TH APPELLANT FOR THE REASON THAT THE PRINCIPLE OF RESJUDICATA DOES NOT APPLY TO THE INCOME-TAX PROCEE DINGS. UNDER THE CIRCUMSTANCES, THE ORDER OF THE ASSESSING OFFIC ER IN ADOPTING THE FIGURE OF 5.38% OF NET OPERATING PROFIT MARGIN FOR ARRIVING AT THE ALP IN THIS CASE IS UPHELD. CONSEQUENTLY, THE ADDITION OF RS.24,74,800/- IS CONFIRMED. 5. WE HAVE HEARD BOTH THE SIDES AT SOME LENGTH. W E HAVE PERUSED THE MATERIAL PLACED BEFORE US. IN THE BEGINNING ITS ELF IT IS WORTH TO MENTION THAT SECTION 92CA PRESCRIBES THAT WHERE ANY PERSON HAS ENTERED INTO AN INTERNATIONAL TRANSACTION AND THE AO CONSID ERS ITS NECESSARY, HE MAY REFER THE COMPUTATION OF THE ARMS LENGTH PRINCE IN RELA TION TO THE SAID INTERNATIONAL TRANSACTION TO THE TPO. IN THI S CASE, THE AO HAS DECIDED NOT TO REFER THE MATTER TO THE TPO AND TO W ORK OUT THE ADJUSTMENT ON HIS OWN, AS DISCUSSED HEREINABOVE. HOWEVER, IT HAS BEEN INFORMED THAT IN THE SUBSEQUENT AYS I.E. 2003-04, 2004-05 RE SPECTIVELY BY THE TPO VIDE ORDERS U/S.92CA(3) DATED 14/02/2006 AND 27 /10/2006 HAVE ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 10 - APPROVED THE TNMM METHOD AND THE NET OPERATING PROF IT MARGIN HAS ALSO NOT BEEN DISTURBED. THE ALP OF THE TRANSACTIO NS AS REPORTED BY THE ASSESSEE WERE THEREFORE ACCEPTED IN BOTH THOSE ASSE SSMENT YEARS. IN VIEW OF THIS, IT WAS VEHEMENTLY CONTESTED THAT ONCE THE TPO HIMSELF HAS ACCEPTED THE PROFIT MARGIN AS DISCLOSED BY THE ASSE SSEE IN RESPECT OF THE IMPUGNED TRANSACTION, THEREFORE THERE WAS NO SCOPE LEFT FOR THE REVENUE TO REJECT THE ACCEPTED PRINCIPLE OF TNMM METHOD AND THE NET PROFIT MARGIN ADOPTED. THE ARMS LENGTH RESULT UNDER THIS TNMM METHOD IS DETERMINED BY REFERENCE TO NET PROFIT MARGIN OF A COMPARABLE TRANSACTION UNDER COMPARABLE CIRCUMSTANCES. THE PROFITABILITY (PROFIT LEVEL INDICATORS) DERIVED FROM UNCONTROLLED PARTY ENGAGED IN SIMILAR BUSINESS ACTIVITY UNDER SIMILAR CIRCUMSTANCES, IS THE MEASUR E OF ARMS LENGTH RESULT. SEVERAL FACTORS ARE REQUIRED TO BE CONSIDE RED. IT IS COMPUTED IN RELATION TO COSTS (COMPUTED AS DIRECT COST OF AN OU TPUT OF PRODUCT OR SERVICES, I.E., MATERIAL AND LABOUR, AND PRODUCTION OVERHEAD), SALES (AMOUNT OF TOTAL RECEIPTS FROM THE SALE OF GOODS AN D PROVISION OF SERVICES, LESS RETURNS AND ALLOWANCES) OR ASSETS [ANY OWNED P HYSICAL OBJECT (TANGIBLE) OR RIGHT (INTANGIBLE) HAVING ECONOMIC VA LUE OF ITS OWNER; AN ITEM OR SOURCE OF WEALTH] EMPLOYED OR TO BE EMPLOY ED OR HAVING REGARD TO ANY OTHER BASE, AS A RATIO THAT MEASURES RELATIO NSHIP BETWEEN PROFITS AND COSTS OR RESOURCES EMPLOYED. NET PROFIT MARGIN [GROSS PROFIT (OPERATING REVENUE LESS COST OF GOODS OR SERVICES S OLD) LESS OPERATING EXPENSES (EXPENSES INCURRED IN CONDUCTING THE ORDIN ARY ACTIVITIES AND INCLUDES ORDINARILY SUCH EXPENSES AS ASSOCIATED WIT H ADVERTISING, PROMOTION, SALES, MARKETING, WAREHOUSING, AND DISTR IBUTION, ADMINISTRATION, AND A REASONABLE ALLOWANCE FOR DEPR ECIATION AND ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 11 - AMORTIZATION] AS DECLARED BY THE CONTROLLED ENTERPR ISE IS COMPARED TO THE COMPARABLE NET PROFIT MARGIN DERIVED BY USING A BAS E OF THE UNCONTROLLED COMPARABLES, AND ADJUSTED, IF REQUIRED, FOR THE MAT ERIAL DIFFERENCES IN THE CONDITIONS AND CIRCUMSTANCES OF THE CONTROLLED AND THE UNCONTROLLED TRANSACTIONS. NET PROFIT MARGIN MEASURED AS A RA TIO OF NET PROFIT TO THE COSTS OR SALES (NORMALLY REFERRED TO AS FINANCIAL R ATIOS), OR TO ASSETS (AS A RETURN ON CAPITAL EMPLOYED). THE ASSESSEE HAS ARR IVED AT THE NET PROFIT MARGIN BY COMPARING THE RESULTS OF THE FOLLOWING CO MPARABLE INSTANCES. SUMMARY NET PROFIT MARGIN COMPUTATION NAME OF THE COMPANY 2000 2001 2002 WT.AVG NP MARGIN ISGEE COVEMA LTD. (3.90) 2.79 NA (0.30) TECHNO ELECTRIC & ENGG.CO.LTD. 2.58 4.68 3.61 3.59 HIGH QUALITY STEELS LTD. 6.12 3.57 3.94 4.63 RAUNAQ INTERNATIONAL LTD. 11.16 3.15 NA 5.14 PETRON ENGINEERING CONSTRUCTION LTD. 5.73 7.13 NA 6.39 AVERAGE 3.89% 5.1. ON THE BASIS OF ABOVE CHART, THE OPERATIVE PR OFIT MARGIN WAS ADOPTED BY THE ASSESSEE AT 3.89%. THE AOS ACTION T O SELECT ONLY FAVOURABLE INSTANCES AND IGNORE REST OF THE INSTANC ES WAS NOT JUSTIFIED. EVEN A QUESTION HAS BEEN RAISED TO EXPLAIN THE BASI S OF THE DISCRIMINATION. THE ASSESSEE HAS, ON THE OTHER HAND, INFORMED THAT THE COMPARABLE INSTANCES HAVE SIMILAR NATURE OF BUSINESS TRANSACTI ON AND THE COMPARISON OF THOSE CASES WAS SUITABLE TO THE FUNCTION OF THE ASSESSEE. WE HAVE ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 12 - NOTED THAT EXCEPT IGNORING SOME OF THE COMPARABLE I NSTANCES, THE AO HAS NOT PIN-POINTED ANY DEFECT IN RESPECT OF THE PROFIT MARGIN DISCLOSED BY THE ASSESSEE. THIS TYPE OF PICK AND CHOOSE METHOD OF THE AO CANNOT BE APPROVED. THE EXCLUSION OF CERTAIN COMPANIES WAS T HEREFORE UNCALLED FOR. IN THE ABSENCE OF ANY CONTRARY MATERIAL IN P OSSESSION OF THE AO, THERE WAS NO REASON TO REJECT THE ASSESSEES COMPAR ABLE INSTANCES, HENCE ACCORDING TO US, BOTH AO & CIT(A) HAVE GONE WRONG I N ARRIVING AT A HIGHER MARGIN PROFIT. WE THEREFORE HOLD THAT THE A DJUSTMENT WAS UNWARRANTED, HENCE HEREBY DIRECTED TO DELETE THE SA ME. [B] REVENUES APPEAL, ITA NO.3811/AHD/2007 6. GROUND NOS.1 & 2 RAISED BEFORE US ARE REPRO DUCED BELOW:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT(A) ERRED IN ALLOWING THE CLAIM FOR DEDUC TION OF RS.52.35 LACS U/S.36(1)(VII) AS BAD DEBT , DESPITE THE FACT THAT THE ASSESSEE WAS PURSUING THE MATTER OF RECOVERY TH ROUGH ARBITRATION PROCEEDINGS, CLEARLY EVIDENCING LACK OF HONEST CONVICTION ON ITS PART REGARDING IMPOSSIBILITY OF C OLLECTION, WHICH RENDERED THE DEBT AS NOT A BAD DEBT AS PER TE ST LAID DOWN IN THE CASE OF SOUTH INDIA SURGICAL COL.LTD. V S ACIT 287 ITR 62 (MAD) DEALING WITH THE LAW AS IT STANDS AFTER AMENDMENT W.E.F. 01-04-1989. 2. THE LD.CIT(A) DID NOT AT ALL CONSIDER THE RATIO OF CIT VS INDIA THERMET CORPORATION LTD. 56 ITD 307 (DEL TRIB ), WHICH WAS SPECIFICALLY RELIED UPON THE ASSESSING OF FICER WHILE MAKING THE DISALLOWANCE U/S.36(1)(VII) AND TH US ACTED IN CONTRAVENTION OF THE ESTABLISHED NORMS OF JUDICI AL DISCIPLINE. 6. THE ASSESSEE HAS CLAIMED DEDUCTION OF 52.35 LACS AS BAD DEBTS WHICH WAS FOUND WRITTEN OFF IN THE BOOKS OF ACCOUNT BY THE ASSESSEE. ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 13 - AN AMOUNT OF RS.52.35 LACS WAS HELD BACK BY THE IOC L OUT OF THE TOTAL WORK ORDER OF RS.5.35 CRORES ON ACCOUNT OF LIQUIDAT ED DAMAGES. THE MATTER WAS BEFORE ARBITRATION, HOWEVER, AO HAS HELD THAT THE SAID AMOUNT COULD NOT BE TREATED AS BAD DEBTS. ON THOSE FACTS, LD.CIT(A) HAS HELD THAT THE AMOUNT IN QUESTION THAT OFFERED FOR TAXATION IN THE PAST AND THERE WAS NO ALTERNATIVE WITH THE ASSESSEE EXCEPT TO WRITE OF F THE SAID AMOUNT. IT WAS HELD THAT THE CONDITIONS PRESCRIBED U/S.36(1)(V II) AND U/S.37 WERE SATISFIED. WE FIND NO FALLACY IN THE JUDGEMENT OF LD.CIT(A), RELEVANT PORTION REPRODUCED BELOW:- 7. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS CLEAR THAT UNDER THE EXISTING PROVISIONS OF SEC.36(1)(VII), THE APPE LLANT IS NOT REQUIRED TO ESTABLISH THE DEBT HAD BECOME BAD IN TH E PREVIOUS YEAR. IT IS OBSERVED THAT THE ASSESSING OFFICER HA S NOT DOUBTED THE GENUINENESS OF THE CLAIM. THE FACT THAT THE LITIGA TION WAS CONTINUING IN THE ARBITRATION PROCEEDINGS CANNOT PR EVENT THE APPELLANT FROM CLAIMING IT AS A BAD DEBT BECAUSE IN THE EVENT THAT THE APPELLANT WINS THE CASE IN ITS FAVOUR, IT IS OB LIGED TO RETURN THE RECOVERED AMOUNT FOR TAXATION. IT IS NOTED THAT THE DEBT HAS BEEN INCURRED IN THE COURSE OF NORMAL BUSINESS PROCEEDIN GS AND THE INCOME RELATING TO THE SAME HAD ALREADY BEEN TAXED. THUS, ALL THE NECESSARY CONDITIONS STAND SATISFIED. UNDER THE CI RCUMSTANCES, THE CLAIM OF BAD DEBT OF RS.52.35 LAKHS IS ALLOWED AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS CANCE LLED. 6.1 WE HAVE HEARD THE PARTIES. LOOKING TO THE TOTAL ITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT, IN THE INS TANT CASE, THE ISSUE IS COVERED BY THE DECISION OF HONBLE SUPREME COURT I N THE CASE OF T.R. F. LTD. VS. CIT REPORTED AS (2010) 323 ITR 397 (SC). THE LATEST LEGAL POSITION IS THAT THE HON'BLE SUPREME COURT IN THE C ASE OF T.R. F. LTD. VS. ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 14 - CIT HAS TAKEN INTO CONSIDERATION THE POSITION OF L AW, AFTER 01/04/1989 AND HELD AS UNDER:- THIS POSITION IN LAW IS WELL-SETTLED. AFTER APRI L 1, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DE BT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. HOW EVER, IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT EXAMINE D WHETHER THE DEBT HAS, IN FACT, BEEN WRITTEN OFF IN THE ACCOUNTS OF THE ASSESSEE. WHEN A BAD DEBT OCCURS, THE BAD DEBT ACCOUNT IS DEB ITED AND THE CUSTOMERS ACCOUNT IS CREDITED, THUS, CLOSING THE A CCOUNT OF THE CUSTOMER. IN THE CASE OF COMPANIES, THE PROVISION IS DEDUCTED FROM SUNDRY DEBTORS. AS STATED ABOVE, THE ASSESSI NG OFFICER HAS NOT EXAMINED WHETHER, IN FACT, THE BAD DEBT OR PART THEREOF IS WRITTEN OFF IN THE ACCOUNTS OF THE ASSESSEE. THIS EXERCISE HAS NOT BEEN UNDERTAKEN BY THE ASSESSING OFFICER. HENCE, T HE MATTER IS REMITTED TO THE ASSESSING OFFICER FOR DE NOVO CONSI DERATION OF THE ABOVEMENTIONED ASPECT ONLY AND THAT TOO ONLY TO THE EXTENT OF THE WRITE-OFF. 6.2. ONCE THE HON'BLE COURT HAS HELD THAT IT IS ENO UGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE, THEN IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DE BT, IN FACT, HAD BECOME IRRECOVERABLE. WE ARE GOVERNED BY THE VIEW TAKEN BY THE HON'BLE SUPREME COURT AND, THEREFORE, ALL THE ARGUMENTS AS RAISED FROM THE SIDE ITA NOS.3800 & 3811/AHD/2007 M/S.DANIEL MEASUREMENT & CONTROL (I) P.LTD. VS. ACIT (CROSS APPEALS) ASST.YEAR 2002-03 - 15 - OF THE REVENUE HAVE, THUS, RENDERED FUTILE. THU S, GROUNDS RAISED BY THE REVENUE ARE, THEREFORE, DISMISSED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED AND APPEAL OF THE REVENUE IS DISMISSED. SD/- SD/- ( .. !' ) ( ) #$ ( B.P. JAIN ) ( MUKUL KR. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL ME MBER AHMEDABAD; DATED 3/ 5 /2012 NOMINATED MEMBERS SD/- SD/- 3.5.12 (A.C.) (J.M.) 3/..', .'../ T.C. NAIR, SR. PS #2 . +4 5#4' #2 . +4 5#4' #2 . +4 5#4' #2 . +4 5#4'/ COPY OF THE ORDER FORWARDED TO : 1. (* / THE APPELLANT 2. +,(* / THE RESPONDENT. 3. 6 / CONCERNED CIT 4. 6() / THE CIT(A)-I, BARODA 5. 49: +' , , / DR, ITAT, AHMEDABAD 6. :; <- / GUARD FILE. #2' #2' #2' #2' / BY ORDER, ,4 + //TRUE COPY// = == =/ // / ( DY./ASSTT.REGISTRAR) , , , , / ITAT, AHMEDABAD 1. DATE OF DICTATION..23.4.12 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 23.4.12 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S.3.5.12 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 3.5.12 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 9. DATE OF DESPATCH OF THE ORDER