Asahi Glass Ltd., New Delhi V. DCIT, New Delhi

ITA 4242/DEL/2010

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8277 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 04-04-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 14-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Avoidance of tax
• Section: 92C; 143(3); 14A; 10B; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SHRI C.M. GARG, JM ITA NO.4242/DEL/2010 ASSESSMENT YEAR : 2006-07 ASAHI GLASS LTD., 38, OKHLA INDUSTRIAL AREA, PHASE-III, NEW DELHI. PAN: AADCA7706R VS. DCIT, CIRCLE-2(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.M. GUPTA, ADVOCATE DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR DATE OF HEARING : 04.04.2016 DATE OF PRONOUNCEMENT : 06.04.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (A O) U/S 143(3) READ ITA NO.4242/DEL/2010 2 WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HERE INAFTER ALSO CALLED THE ACT) ON 28.6.2010 IN RELATION TO THE ASSESSME NT YEAR 2006-07. 2. FIRST ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION OF RS.23.76 CRORE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE, AN INDIAN COMPANY, IS ENGAGED IN MANUFACTURING TOUGHENED GLAS S, LAMINATED GLASS AND FLOAT GLASS. IT IS INDIAS LARGEST MANUFACTURER OF AUTOMOTIVE SAFETY GLASSES PERFORMING ALL THE FUNCTIONS STARTING FROM PURCHASE OF RAW MATERIAL, PROCESSING IT INTO FINAL PRODUCT TILL THE STAGE OF CARRYING OUT THE MARKETING FUNCTIONS AND PROVIDING AFTER-SALES SERVI CES. ITS SHAREHOLDING COMPRISES OF 22.21% BY ASAHI GLASS COMPANY LTD., JA PAN; 22.01% BY B.M. LABROO & ASSOCIATES; 11.11% BY MARUTI UDYOG LT D.; AND 44.66% BY PUBLIC AT LARGE. THE ASSESSEE REPORTED TEN INTE RNATIONAL TRANSACTIONS IN FORM NO. 3CEB. ON A REFERENCE MADE BY THE AO TO THE TRANSFER PRICING OFFICER (TPO), IT WAS OBSERVED BY THE LATTE R THAT THE ASSESSEE WAS ENGAGED IN MANUFACTURING TWO TYPES OF GLASSES, VIZ. , TOUGHENED AND LAMINATED GLASS UNDER ITS AUTOMOTIVE SBU DIVISION A ND MIRROR AND ITA NO.4242/DEL/2010 3 REFLECTIVE GLASSES UNDER ITS FLOAT GLASS SBU DIVISI ON. IT WAS NOTICED FROM THE TRANSFER PRICING STUDY REPORT THAT THE ASS ESSEE WAS ASSUMING COMPLETE RISKS RELATING TO MANUFACTURING, INVENTORY , PROPERTY, MARKETING, ENVIRONMENT AND WARRANTY. THE ASSESSEE WAS FOUND T O BE PURCHASING RAW MATERIAL OF GLASS, STORES AND SPARES AND CAPITA L GOODS ALONG WITH SUPPLY OF TECHNICAL KNOW-HOW FROM ITS ASSOCIATED EN TERPRISES (AES). OUT OF TEN REPORTED INTERNATIONAL TRANSACTIONS, FIV E RELATED TO THE AUTOMOTIVE DIVISION AND THE REMAINING FIVE TO THE F LOAT DIVISION. THE TPO DID NOT QUESTION THE CORRECTNESS OF THE ARMS L ENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS UNDER AUTOMOTIVE SBU DIVISION. HE TOOK UP FOR CONSIDERATION ONLY THE INTERNATIONAL TRANSAC TIONS UNDER FLOAT GLASS SBU DIVISION. THE ASSESSEE HAD MAINTAINED ACCOUNTS ON ENTITY LEVEL COVERING BOTH THE DIVISIONS. HOWEVER, FOR THE PURPO SES OF BENCHMARKING, THE ASSESSEE SPLIT UP SUCH ACCOUNTS I NTO THE ABOVE REFERRED TWO SEGMENTS. THE TPO ACCEPTED THE INTERNA TIONAL TRANSACTION OF ROYALTY PAYMENT FOR USE OF TECHNICAL KNOW-HOW UN DER THE FLOAT GLASS DIVISION AT ALP, WHICH WAS BENCHMARKED BY THE ASSES SEE UNDER COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. THE TP O DISPUTED THE ITA NO.4242/DEL/2010 4 REMAINING FOUR INTERNATIONAL TRANSACTIONS OF FLOAT GLASS DIVISION, NAMELY, PAYMENT OF FEES FOR TECHNICAL & CONSULTANCY SERVICE S AT RS.16.50 CRORE; PURCHASE OF CAPITAL GOODS AT RS.124.82 CRORE; IMPOR T OF TIN BATH BLOCKS AND MACHINERY SPARES FOR RS.1.08 CRORE; AND IMPORT OF CLEAR FLOAT GLASS AND REFLECTIVE GLASS AT RS.6.38 CRORE. THESE FOUR INTERNATIONAL TRANSACTIONS WERE BENCHMARKED BY THE ASSESSEE UNDER TRANSACTIONAL NET MARGIN METHOD (TNMM) ON A COMBINED BASIS. THE TPO O BSERVED THAT THERE WAS NO CLARITY ABOUT THE PROFIT LEVEL INDICAT OR (PLI) INASMUCH AS THE ASSESSEE WAS SHOWING DIFFERENT PLIS, SUCH AS, P ROFIT BEFORE TAX/SALES, PROFIT BEFORE TAX AND DEPRECIATION AND NET PROFIT/S ALES. ON BEING CALLED UPON TO CLARIFY ABOUT THE CORRECT PLI, THE ASSESSEE CAME OUT WITH OP/TC OF THE FLOAT GLASS DIVISION, CALCULATED AT 3.88%. THE TPO OBSERVED THAT IN THIS CALCULATION, THE ASSESSEE DID NOT CONSIDER DEPRECIATION AS OPERATING COST. THE ASSESSEE REVISED THE FIGURE OF OP/TC, AFTER CONSIDERING DEPRECIATION, AT 3.39%, WHICH HAS BEEN REPRODUCED IN PARA 4.5 OF THE TPOS ORDER. ON A PERUSAL OF THIS CALCU LATION, IT WAS OBSERVED THAT THE ASSESSEE DEBITED A SUM OF RS.1244.41 LAC A S EXTRAORDINARY ITEMS ON THE EXPENDITURE SIDE OF ITS PROFIT & LOSS ACCOUNT WITH THE NOTE ITA NO.4242/DEL/2010 5 GIVEN IN SCHEDULE 14 THAT THERE WAS UNRELENTING RAI NFALL IN MAHARASHTRA IN JULY, 2005 WHICH LED TO SHUTTING DOWN OF ITS FLO AT SBU PLANT FROM 26.7.2005 TO 28.10.2005 DUE TO EXTENSIVE DAMAGE TO ASSETS/INVENTORIES AND HENCE THE EXPENDITURE WAS INCURRED ON REPAIR, P OWER AND FUEL AND UTILITIES FOR RESUMPTION OF OPERATIONS, WHICH WAS S HOWN AS EXTRAORDINARY ITEM IN THE PROFIT & LOSS ACCOUNT. THIS EXPENDITUR E WAS IGNORED BY THE ASSESSEE FOR CALCULATING THE ALP. THE TPO REFUSED T O ACCEPT THE ASSESSEES CONTENTION FOR THE EXCLUSION OF EXTRAORD INARY COST AT RS.12.44 CRORE FROM OPERATING COSTS. HE HELD THAT SINCE THE ASSESSEE WAS BEARING `ENVIRONMENTAL RISKS AS WELL, SUCH EXPENDITURE OF RS.12.44 CRORE COULD NOT BE REDUCED FROM THE OPERATING COSTS. BY CONSIDE RING EXTRAORDINARY ITEM OF LOSS DUE TO RAINFALL AT RS.12.44 CRORE AS A N ITEM OF OPERATING COST, THE TPO RECOMPUTED OP/TC OF THE FLOAT GLASS DIVISIO N AT 3.24%. THEREAFTER, CERTAIN COMPARABLES WERE TAKEN INTO CON SIDERATION, WHOSE MEAN MARGIN WAS DETERMINED AT 24.49%. APPLYING SUC H RATE AS ARMS LENGTH MARGIN ON THE TRANSACTED VALUE OF THE ABOVE REFERRED FOUR INTERNATIONAL TRANSACTIONS UNDER DISPUTE, THE TPO R ECOMMENDED TRANSFER PRICING ADJUSTMENT AT RS.31.61 CRORE. THE ASSESSEE RAISED CERTAIN ITA NO.4242/DEL/2010 6 OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP ) AGAINST THE DRAFT ORDER INCORPORATING ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. THE DRP ALLOWED CERTAIN RELIEF. THAT IS HOW, THE A O VIDE HIS FINAL ORDER HAS MADE THE ADDITION OF RS.23.76 CRORE WHICH IS DI SPUTED IN THE INSTANT APPEAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE HAVE NOTED ABOVE THAT THE TP O ACCEPTED ALL THE TRANSACTIONS OF AUTOMOTIVE DIVISION AND ROYALTY PAY MENT UNDER FLOAT GLASS DIVISION AT ALP. THE REMAINING FOUR INTERNATI ONAL TRANSACTIONS OF THE FLOAT DIVISION, WHICH WERE BENCHMARKED BY THE A SSESSEE UNDER THE TNMM, ARE UNDER CHALLENGE. THE TPO ACCEPTED THE ASS ESSEES APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD WITH THE PLI OF OP/TC. THE CONTROVERSY IS ABOUT THREE THINGS VIZ., TREATING EXTRAORDINARY COST OF RS.12.44 CRORE AS OPERATING C OST; CONSIDERING CAPITAL ITEMS ALSO FOR THE PURPOSES OF MAKING TRANS FER PRICING ADJUSTMENT UNDER THE TNMM; AND SELECTION OF CERTAIN COMPARABLE S. WE WILL TAKE UP THESE THREE ISSUES IN SERIATIM. ITA NO.4242/DEL/2010 7 I. TREATMENT OF EXTRAORDINARY COST BY THE TPO AS O PERATING COST 5.1. WE ESPOUSE THE FIRST ISSUE OF NOT REDUCING A SUM OF RS.12.44 CRORE FROM THE OPERATING COSTS OF THE FLOAT GLASS DIVISIO N. THE LD. AR CONTENDED THAT THE REVENUE COSTS INCURRED IN REACTI VATING ITS PLANT WHICH WAS SHUT DOWN FOR MORE THAN 90 DAYS DUE TO INUNDATE D RAINS, OUGHT TO HAVE BEEN REDUCED FROM THE ASSESSEES OPERATING COS TS IN THE CALCULATION OF ITS PROFIT MARGIN. WE FIND DETAIL OF SUCH EXPENS ES AVAILABLE ON PAGE 265 OF THE PAPER BOOK, WHICH CONSISTS OF LOSS OF RA W MATERIAL AMOUNTING TO RS.82.52 LAC; LOSS ON WRITING OFF OF METAL BATH/ HT PANEL AMOUNTING TO RS.2.97 CRORE; PLANT REVIVAL EXPENSES FOR REPAIR OF PLANT DAMAGED DUE TO FLOOD AT RS.3.89 CRORE; AND POWER, FUEL AND UTIL ITY CONSUMPTION DURING UNPRODUCTIVE PERIOD AT RS.4.76 CRORE. THE LD. AR F AIRLY ADMITTED THAT THESE EXPENSES TOTALING RS.12.44 CRORE ARE OTHERWIS E REVENUE AND NOT OF CAPITAL NATURE. IT WAS EMPHASIZED THAT SINCE THESE ARE EXTRAORDINARY OPERATING COSTS INCURRED BY THE ASSESSEE, THE SAME SHOULD HAVE BEEN REMOVED FROM ITS OPERATING COSTS IN THE CALCULATION OF PROFIT MARGIN. SOUNDING A CONTRA NOTE, THE LEARNED DEPARTMENTAL RE PRESENTATIVE ARGUED ITA NO.4242/DEL/2010 8 THAT THE TP PROVISIONS DO NOT PERMIT ALLOWING OF AN Y ADJUSTMENT FROM THE CALCULATION OF PROFIT MARGIN OF THE TESTED PART Y. HE ARGUED THAT ADJUSTMENT, IF ANY, CAN BE MADE ONLY IN COMPUTATION OF PROFIT MARGIN OF THE COMPARABLES. THUS, THE FOREMOST QUESTION FOR OU R CONSIDERATION IS WHETHER ANY ADJUSTMENT ON ACCOUNT OF DISSIMILARITY BETWEEN THE ASSESSEE AND COMPARABLES, IS WARRANTED IN THE ASSESSEES CAL CULATION OF PROFIT LEVEL INDICATOR OR THAT OF COMPARABLES. 5.2. CHAPTER-X OF THE ACT CONTAINS SPECIAL PROVIS IONS RELATING TO AVOIDANCE OF TAX. SECTION 92, WHICH IS THE FIRST SE CTION OF THIS CHAPTER, PROVIDES FOR COMPUTATION OF INCOME FROM AN INTERNAT IONAL TRANSACTION HAVING REGARD TO ARMS LENGTH PRICE. SUB-SECTION (1 ) OF THE SECTION PROVIDES THAT : ANY INCOME ARISING FROM AN INTERNA TIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SECTION 92C OF THE ACT ENSHRINES PROVISIONS RELATING TO COMPUTA TION OF ARMS LENGTH PRICE. SUB-SECTION (1) OF THE SECTION STATES THAT T HE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE D ETERMINED BY ANY OF THE METHODS LISTED HEREIN WHICH INCLUDE, INTER ALIA, THE TRANSACTIONAL NET ITA NO.4242/DEL/2010 9 MARGIN METHOD. SUB-SECTION (2) OF SECTION 92C PROVI DES THAT THE MOST APPROPRIATE METHOD REFERRED IN SUB-SECTION (1) SHAL L BE APPLIED FOR THE DETERMINATION OF ALP ` IN THE MANNER AS MAY BE PRESCRIBED . CALCULATION OF ALP UNDER THE TNMM HAS BEEN PRESCRIB ED UNDER RULE 10B(1)(E) OF THE INCOME-TAX RULES, 1962, WHICH STAT ES THAT FOR THE PURPOSES OF SECTION 92C(2), THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION SHALL BE DETERMINED AS UNDER : - `(E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPR ISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASS ETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III) ; ITA NO.4242/DEL/2010 10 (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. 5.3. A BARE PERUSAL OF SUB-CLAUSE (I) OF RULE 10B( 1)(E) BRINGS OUT THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION IS TO BE COMPUTED IN RELATION TO A PART ICULAR BASE. SUB-CLAUSE (II) PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM THE COMPARABLE UNCONTROLLED TRANSACTION IS COMPUTED HAV ING REGARD TO THE SAME BASE. SUB-CLAUSE (III) PROVIDES THAT THE NET P ROFIT MARGIN REALIZED BY A COMPARABLE COMPANY, DETERMINED AS PER SUB-CLAUSE (II) ABOVE, IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF A NY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS, ..... WHICH COULD MATERIALLY AFFECT THE AMOUNT OF N ET PROFIT MARGIN IN THE OPEN MARKET. IT IS THIS ADJUSTED NET PROFIT MARGI N OF THE UNRELATED TRANSACTIONS OR OF THE COMPARABLE COMPANIES, AS DET ERMINED UNDER SUB- CLAUSE (III), WHICH IS USED AS BENCHMARK FOR THE PU RPOSES OF MAKING COMPARISON WITH THE PROFIT MARGIN REALIZED BY THE A SSESSEE FROM ITS INTERNATIONAL TRANSACTION AS PER SUB-CLAUSE (I). SU B-CLAUSE (IV) STATES THAT ITA NO.4242/DEL/2010 11 THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE, AS REFERRED IN SUB CLAUSE (I), IS ESTABLISHED TO BE THE SAME AS THE NET PROF IT MARGIN REFERRED IN SUB- CLAUSE (III) OF THE COMPARABLES. SUB-CLAUSE (V) STA TES THAT THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTI ON. ON GOING THROUGH THE ABOVE SUB-CLAUSES OF RULE 10B(1)(E), IT BECOMES PAT ENT THAT AS PER THE FIRST STEP, THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION IS TO BE COMPUTED. USE OF THE WORD REALIZED IN THE PROVISION RICHLY INDICATES THAT IT IS THE CALCU LATION OF ACTUAL OPERATING PROFIT MARGIN OF THE ASSESSEE EARNED FROM INTERNATI ONAL TRANSACTION, WHICH IS NOT ANY ADJUSTED FIGURE. SIMILAR POSITION CAN BE TRACED FROM THE LANGUAGE OF SUB-CLAUSE (IV), WHERE AGAIN REFERENCE HAS BEEN MADE TO PROFIT MARGIN `REALIZED BY THE ASSESSEE FROM THE I NTERNATIONAL TRANSACTION. WHEN WE CONSIDER SUB-CLAUSES (II) AND (III), IT TURNS OUT THAT, FIRSTLY, THE NET OPERATING MARGIN ACTUALLY RE ALIZED FROM THE COMPARABLE UNCONTROLLED TRANSACTION IS COMPUTED, WH ICH IS DETERMINED IN THE SAME WAY AS THAT OF THE ASSESSEE AS PER CLAU SE (I), THAT IS, ACTUAL FIGURES WITHOUT MAKING ANY ADJUSTMENT. THEN SUB-CLA USE (III) TALKS OF ITA NO.4242/DEL/2010 12 ADJUSTING THE ACTUALLY REALIZED MARGIN OF COMPARABL ES TO BRING THE SAME AT PAR WITH THE INTERNATIONAL TRANSACTION UNDERTAKE N BY THE ASSESSEE, SO AS TO IRON OUT THE EFFECTS OF DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTION S. ON GOING THROUGH ALL THE SUB-CLAUSES OF RULE 10B(1)(E), THE NATURAL COROLLARY WHICH FOLLOWS IS THAT THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION IS TAKEN AS SUCH AND THE ADJUSTMENTS, IF ANY, DUE TO DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIO N AND COMPARABLE UNCONTROLLED TRANSACTIONS, ARE GIVEN EFFECT TO IN T HE PROFIT MARGIN OF COMPARABLES. ERGO, THE VIEWPOINT CANVASSED BY THE L EARNED AUTHORIZED REPRESENTATIVE FOR REDUCING EXTRA ORDINARY OPERATIN G COSTS AMOUNTING TO RS.12.44 CRORE FROM ITS TOTAL OPERATING COSTS, IS D EVOID OF MERIT AND CONTRARY TO THE LEGAL PROVISIONS, WHICH IS HEREBY R EPELLED. 5.4. THE LEARNED AUTHORIZED REPRESENTATIVE TRIED TO CONVINCE US ON HIS POINT OF VIEW OF NOT REDUCING SUCH EXTRA ORDINARY C OSTS FROM THE OVERALL OPERATING COSTS IN THE PROFIT MARGIN OF THE ASSESSE E, BY PRESSING INTO SERVICE SUB-RULE (3) OF RULE 10B, WHICH READS AS U NDER : ITA NO.4242/DEL/2010 13 `(3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABL E TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TR ANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST C HARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE O PEN MARKET ; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 5.5. A CURSORY LOOK AT THIS SUB-RULE INDICATES THA T AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION, IF EITHER THERE ARE NO DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION OR IF SUCH DIFF ERENCES EXIST, THEN A REASONABLY ACCURATE ADJUSTMENT CAN BE MADE TO ELIMI NATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. A PLAIN READING OF SUB -RULE (3) OF RULE 10B BRINGS TO THE FORE THAT THIS SUB-RULE IS MEANT ONLY FOR ASCERTAINING WHETHER OR NOT A PROBABLE COMPARABLE UNCONTROLLED T RANSACTION IS FIT FOR BEING TREATED AS ACTUAL COMPARABLE. THIS IS ONLY AN ENTRY LEVEL JUDGMENTAL PROVISION FOR ASCERTAINING THE COMPARABI LITY OF AN OTHERWISE BROADLY COMPARABLE UNCONTROLLED TRANSACTION. IN OTH ER WORDS, IF THE BROADER COMPARABLE UNCONTROLLED TRANSACTION IS SIMI LAR TO THE ITA NO.4242/DEL/2010 14 INTERNATIONAL TRANSACTION OR IF THERE ARE DIFFERENC ES BETWEEN THE TWO, WHICH ARE CAPABLE OF ADJUSTMENT, THEN SUCH BROADLY COMPARABLE UNCONTROLLED TRANSACTIONS GAINS ENTRY IN TO THE FIN AL LIST OF COMPARABLES TO BE CONSIDERED FOR THE PURPOSES OF SUB-CLAUSE (II) O F RULE 10B(1)(E). IF, ON THE OTHER HAND, THERE ARE DIFFERENCES BETWEEN THE T WO, WHICH ARE NOT CAPABLE OF ADJUSTMENT, THEN SUCH OTHERWISE BROADLY COMPARABLE UNCONTROLLED TRANSACTION GOES OUT OF RECKONING AND DOES NOT GAIN ENTRY IN THE FINAL TALLY OF COMPARABLES FOR THE PURPOSES OF COMPUTING ALP OF THE INTERNATIONAL TRANSACTION AS PER THE MANDATE OF RUL E 10B(1)(E). IN OTHER WORDS, ROLE OF SUB-RULE (3) TO RULE 10B IS ONLY TO FILTER OUT COMPARABLE UNCONTROLLED TRANSACTIONS QUALIFYING FOR INCLUSION IN THE DETERMINATION OF THE ALP UNDER RULE 10B(1). MECHANISM FOR DETERMINI NG ALP UNDER THE TNMM HAS BEEN ENSHRINED IN RULE 10B(1)(E) ALONE WHI CH CLEARLY PROVIDES FOR MAKING ADJUSTMENTS ON ACCOUNT OF DIFFE RENCES BETWEEN UNCONTROLLED TRANSACTION AND INTERNATIONAL TRANSACT ION IN THE PROFIT MARGIN OF COMPARABLES. SUB-RULE (3) IS NEITHER A MA CHINERY PROVISION IN ITSELF NOR A PART OF THE MACHINERY FOR CALCULATING ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION, WHICH FALLS EXCLUSIVELY AND IN THE SOLE DOMAIN ITA NO.4242/DEL/2010 15 OF SUB-RULE (1). IF WE ACCEPT THE CONTENTION OF THE LEARNED AUTHORIZED REPRESENTATIVE THAT RULE 10B(3)(II) IS TO BE CONSTR UED AS A PROVISION FOR ALLOWING ADJUSTMENT ON ACCOUNT OF DIFFERENCES BETWE EN UNCONTROLLED TRANSACTION AND INTERNATIONAL TRANSACTIONS FROM THE PROFIT MARGIN OF THE ASSESSEE, THEN WE WILL HAVE TO READ SUB-RULE (3) AS A PART OF MACHINERY FOR CALCULATING ALP UNDER RULE 10B(1)(E), WHICH HAS NO STATUTORY SANCTION. THUS, IT FOLLOWS FROM A CONJOINT READING OF RULE 10B(1)(E) WITH RULE 10B(3), THAT WHEREAS LATER RULE IS ONLY MEANT FOR DECIDING THE INCLUSION OR OTHERWISE OF A PROBABLE COMPARABLE IN THE FINAL LIST OF COMPARABLES, THE FORMER RULE DETERMINES THE ALP OF THE INTERNATIONAL TRANSACTION UNDER THE PRESCRIBED METHOD ON THE BASI S OF SUCH A LIST OF COMPARABLES DEDUCED INTER ALIA, BY APPLYING SUB-RULE (3). WE, THEREFORE, JETTISON THE ASSESSEES CONTENTION THAT THE EXTRA O RDINARY COSTS INCURRED BY THE ASSESSEE DUE TO RAINS BE REDUCED FROM ITS OP ERATING COSTS. OUR VIEW IS FORTIFIED BY SEVERAL ORDERS PASSED BY THE D ELHI BENCHES OF THE TRIBUNAL ON THIS ISSUE INCLUDING SAXO INDIA PVT. LT D. VS. ACIT (ITA NO.6148/DEL/2015) DATED FEBRUARY, 2016 AND DCIT VS. CLAAS INDIA PVT. LTD. (ITA NO.1783/DEL/2011) DT. 12.08.2015. EX CONSEQUENTI , IT IS HELD ITA NO.4242/DEL/2010 16 THAT SUCH ADJUSTMENT CAN BE LEGALLY MADE ONLY IN TH E PROFIT MARGIN OF THE COMPARABLES, IF OTHERWISE FACTUALLY WARRANTED. 5.6. THE FOREGOING DISCUSSION BRINGS US TO THE NE XT ISSUE OF GRANTING ADJUSTMENT IN THE CALCULATION OF PROFIT MARGIN OF C OMPARABLES ON ACCOUNT OF EXTRA ORDINARY COSTS/LOSS INCURRED BY THE ASSESS EE DUE TO RAINS, IF PERMISSIBLE. FIRST AND THE FOREMOST CONDITION FOR GRANTING ANY ADJUSTMENT IS THAT AN ASSESSEE MUST PROVE EXISTENCE OF SOME MATERIAL DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION U NDERTAKEN BY IT AND COMPARABLES. IN THIS REGARD, WE FIND THAT THE LD. A R HAS NOT DEMONSTRATED IN ANY MANNER THAT THE COMPARABLES FIN ALLY CHOSEN DID NOT SUFFER SUCH EXTRA-ORDINARY OPERATING LOSS. IT IS T RITE THAT UNDER THE TRANSFER PRICING PROVISIONS, ONUS IS ALWAYS ON THE ASSESSEE TO FURNISH NECESSARY PARTICULARS FOR CLAIMING ANY ADJUSTMENT. IF NECESSARY PARTICULARS ARE NOT FILED, THEN THERE CAN BE NO QUE STION OF THE TPO SUO MOTU ALLOWING ANY ADJUSTMENT. IN THE ABSENCE OF THE LD. AR SHOWING NON-INCURRING OF ANY EXTRA-ORDINARY COSTS BY THE CO MPARABLES, WE ARE NOT ITA NO.4242/DEL/2010 17 INCLINED TO GRANT ANY ADJUSTMENT IN THE PROFIT MARG IN OF COMPARABLES ON THIS SCORE. 5.7. BE THAT AS IT MAY, WE HAVE NOTED THE DETAIL S OF SUCH COSTS/LOSS, FROM WHICH IT IS MANIFEST THAT THESE EXPENSES ARE O THERWISE OF REVENUE NATURE, WHICH FACT HAS BEEN CONCEDED BY THE LD. AR AS WELL. THESE INCLUDE LOSS OF RAW MATERIALS DUE TO FLOOD AND LOSS ON WRITE OFF OF METAL BATH AND HT PANEL ETC. APART FROM PLANT REVIVAL EXP ENSES INCURRED FOR REPAIR OF PLANT. THE ASSESSEE IS A LISTED COMPANY A ND HAS AVAILED LOANS FROM FINANCIAL INSTITUTIONS. INSURANCE IS AN IMPORT ANT ASPECT AND A PRE- CONDITION FOR AVAILING OF CREDIT FACILITIES FROM FI NANCIAL INSTITUTIONS. IF THERE IS A LOSS INCURRED TO THE EXTENT OF RS.12.44 CRORE DUE TO FLOOD ETC., NATURALLY, THE ASSESSEE MUST HAVE BEEN COMPENSATED BY INSURANCE COMPANY FOR SUCH LOSS. IT IS NOT THE CASE OF THE AS SESSEE THAT INSURANCE CLAIM IS A NON-OPERATING REVENUE ITEM. SO, IF THERE IS LOSS BY MEANS OF SUCH COSTS, THERE WILL BE CORRESPONDING INCOME BY M EANS OF INSURANCE CLAIM AS WELL. AS BOTH THE ITEMS ARE OF OPERATING N ATURE, THEY WILL FIND THEIR PLACE IN THE COMPUTATION OF OPERATING PROFIT. ITA NO.4242/DEL/2010 18 5.8. THERE IS ANOTHER IMPORTANT ASPECT OF THE MAT TER, WHICH IS QUITE SIGNIFICANT. IT CAN BE NOTICED THAT THE ASSESSEE BE ARS ALL RISKS INCLUDING ENVIRONMENTAL RISK, WHICH POSITION IS BORNE OUT FRO M THE ASSESSEES TRANSFER PRICING STUDY REPORT AND HAS NOT BEEN DISP UTED BY THE LD. AR. THIS INDICATES THAT REVENUES OF THE ASSESSEE INCLUD E COMPENSATION FOR ENVIRONMENTAL LOSS AS WELL, WHICH HAS NOT BEEN TREA TED AS AN ITEM OF NON-OPERATING REVENUE. ONCE THERE IS SUCH ADDITION AL COMPENSATION ALSO, WHICH HAS BEEN TAKEN AS AN ITEM OF OPERATING REVENUE, THEN THE COSTS INCURRED IN BEARING SUCH RISKS HAVE TO BE NAT URALLY CONSIDERED AS OPERATING COSTS OF THE ASSESSEE. IN VIEW OF THE ABO VE DISCUSSION, WE ARE SATISFIED THAT THE TPO WAS FULLY JUSTIFIED IN NOT A LLOWING REDUCTION ON ACCOUNT OF EXTRA-ORDINARY COSTS TO THE TUNE OF RS .12.44 CRORE WHILE CALCULATING THE ASSESSEES OPERATING PROFIT MARGIN. WE, THEREFORE, REFUSE TO COUNTENANCE THE ASSESSEES CONTENTION ON THIS IS SUE. II. TP ADJUSTMENT IN RESPECT OF CAPITAL EXPENSES 6.1. SECOND ISSUE UNDER CHALLENGE IS ABOUT CONSIDER ING CAPITAL WORK-IN- PROGRESS FOR THE PURPOSES OF MAKING ADDITION ON ACC OUNT OF TRANSFER ITA NO.4242/DEL/2010 19 PRICING ADJUSTMENT. THE LD AR POINTED OUT THAT THE TPO WHILE COMPUTING TRANSFER PRICING ADJUSTMENT AT RS.31.61 C RORE, CONSIDERED BASE AMOUNT OF RS.148.78 CRORE FOR APPLYING ARMS LENGTH PROFIT MARGIN OF COMPARABLES AT 24.49%. REFERRING TO SUCH BASE AMOU NT OF RS.148.78 CRORE, THE LD. AR SUBMITTED THAT THIS COMPRISES OF TRANSACTED VALUE OF FOUR INTERNATIONAL TRANSACTIONS AS DISCUSSED ABOVE, THAT ALSO INCLUDE PURCHASE OF CAPITAL GOODS FOR A SUM OF RS.124.82 CRORE AND PAYMENT OF `FEES FOR TECHNICAL & CONSULTANCY SERVICES AT RS. 15.50 CRORE WHICH WAS IN RESPECT OF CAPITAL WORK-IN-PROGRESS CAPITALIZED IN THE BALANCE SHEET. THE LD. AR SUBMITTED THAT SINCE THESE TWO ITEMS BEL ONG TO BALANCE SHEET OF THE ASSESSEE AND WERE NOT ROUTED THROUGH THE PRO FIT & LOSS ACCOUNT, THERE WAS NO OCCASION FOR APPLYING PROFIT MARGIN OF THE COMPARABLES ON THESE TWO TRANSACTIONS AS WELL. THIS WAS OPPOSED B Y THE LD. DR. 6.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THERE ARE FOUR INT ERNATIONAL TRANSACTIONS WHICH HAVE BEEN CONSIDERED BY THE TPO FOR THE PURPO SES OF BENCHMARKING. TRANSACTION OF `IMPORT OF TIN BATH BLOCKS AND MACHINERY ITA NO.4242/DEL/2010 20 SPARES AND `IMPORT OF CLEAR FLOAT GLASS AND REFLEC TIVE GLASS ARE OBVIOUSLY ITEMS OF REVENUE NATURE, WHICH WOULD FIND THEIR PLACE IN THE PROFIT & LOSS ACCOUNT. THERE IS AN INTERNATIONAL T RANSACTION OF `PURCHASE OF CAPITAL GOODS AMOUNTING TO RS.124.82 CRORE, WHICH RESIDES IN SCHEDULE OF FIXED ASSETS. FOURTH INTERNATIONAL TRANSACTION IS `FEES FOR TECHNICAL AND CONSULTANCY SERVICES AMOUNTING TO RS .16.50 CRORE, WHICH IS IN TWO PARTS, NAMELY, RS.15.50 CRORE FOR CAPITAL WORK-IN-PROGRESS AND RS.1 CRORE FOR UNIT IN OPERATION. IN SO FAR AS FEES FOR TECHNICAL SERVICES FOR CAPITAL WORK-IN-PROGRESS IS CONCERNED, THE SAME HAS AGAIN BEEN CAPITALIZED BY THE ASSESSEE IN ITS SCHEDULE OF FIXE D ASSETS. THESE TWO ITEMS, NAMELY, `PURCHASE OF CAPITAL GOODS AT RS.12 4.82 CRORE AND `FEES FOR TECHNICAL & CONSULTANCY SERVICES AT RS.15.50 C RORE HAVE BEEN CAPITALIZED BY THE ASSESSEE AND HENCE CANNOT BE CON SIDERED FOR MAKING TRANSFER PRICING ADJUSTMENT UNDER THE TNMM. SINCE OPERATING PROFIT IS COMPUTED BY CONSIDERING THE ITEMS OF OPERATING COST S ALONE, THE VALUE OF THESE TWO ITEMS WHICH ARE CAPITAL IN NATURE AND HAV E BEEN CAPITALIZED IN THE BALANCE SHEET, CANNOT BE INCLUDED IN THE BASE A MOUNT FOR APPLYING THE OPERATING PROFIT MARGIN RATE OF THE COMPARABLES FOR COMPUTING THE ITA NO.4242/DEL/2010 21 AMOUNT OF TRANSFER PRICING ADJUSTMENT. WE, THEREFO RE, DIRECT TO EXCLUDE THEM FROM THE BASE AMOUNT OF RS.148.78 CRORE FOR AP PLYING THE MEAN PROFIT MARGIN RATE OF THE COMPARABLES TO DETERMINE THE AMOUNT OF TRANSFER PRICING ADJUSTMENT UNDER THE TNMM. 6.3. THIS, HOWEVER, DOES NOT MEAN THAT THESE TWO IN TERNATIONAL TRANSACTIONS SHOULD BE IGNORED FOR ALL PRACTICAL PU RPOSES. IN FACT, THESE TRANSACTIONS SHOULD HAVE BEEN SEPARATELY PROCESSED UNDER THIS CHAPTER AND THEIR ALP DETERMINED UNDER THE CUP METHOD DE HORS THE DETERMINATION OF ALP OF THE OTHER INTERNATIONAL TRA NSACTIONS UNDER THE TNMM. THE ALP OF THESE TWO TRANSACTIONS UNDER THE CUP METHOD WILL GIVE THE PRICE AT WHICH SUCH ASSETS SHOULD HAVE BEE N PURCHASED. SUCH ALP IS THEN REQUIRED TO BE CONSIDERED FOR THE PURPO SE OF ALLOWING DEPRECIATION IN THE YEAR UNDER CONSIDERATION AND SU BSEQUENT YEARS. IF HIGHER PURCHASE PRICE IS SHOWN VIS--VIS THE ALP AND RESULTANTLY EXCESS DEPRECIATION HAS BEEN CLAIMED, THEN SUCH EXCESS DEP RECIATION CALLS FOR DISALLOWANCE. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE TPO HAS CONSIDERED THESE TWO ITEMS UNDER THE OVERAL L TNMM, AS WAS ITA NO.4242/DEL/2010 22 WRONGLY DONE BY THE ASSESSEE ALSO AND THEN HE WENT ON TO CONSIDER THE VALUE OF THESE TWO TRANSACTIONS OF CAPITAL NATURE F OR MAKING TRANSFER PRICING ADJUSTMENT. THIS APPROACH OF BENCHMARKING THESE ITEMS OF BALANCE SHEET UNDER THE TNMM, AS DONE BY THE ASSESS EE AND THEN FOLLOWED BY THE TPO, IS NOT APPROPRIATE, THUS, CALL ING FOR CORRECTION. NO DOUBT, THE STAND OF THE ASSESSEE SEEKING EXCLUSION OF THESE TWO TRANSACTIONS OF CAPITAL NATURE FROM THE BASE AMOUNT FOR CALCULATING TRANSFER PRICING ADJUSTMENT UNDER THE TNMM IS JUSTI FIED, BUT, AT THE SAME TIME THESE TRANSACTIONS OF CAPITAL NATURE ARE REQUIRED TO BE BENCHMARKED BY CONSIDERING CUP AS THE MOST APPROPRI ATE METHOD. THE LD. AR DURING THE COURSE OF HEARING ADMITTED THIS P OSITION. SINCE THE TPO HAS NOT DONE BENCHMARKING IN A PROPER MANNER AS DISCUSSED ABOVE, WE SET ASIDE THE IMPUGNED ORDER AND DIRECT THE TPO/ AO TO BENCHMARK THESE TRANSACTIONS OF CAPITAL NATURE UNDER THE CUP METHOD INDEPENDENT OF OTHER TRANSACTIONS UNDER THE TNMM. ITA NO.4242/DEL/2010 23 III. SELECTION OF COMPARABLES 7.1. THE NEXT ISSUE RAISED IN THIS APPEAL IS AGAINS T SELECTION OF CERTAIN COMPARABLES. THE ASSESSEE INITIALLY SELECTED FIVE COMPANIES AS COMPARABLE. DURING THE COURSE OF PROCEEDINGS BEFOR E THE TPO, IT WAS FOUND THAT ALL THE COMPANIES SO SELECTED BY THE ASS ESSEE WERE NOT FULFILLING THE COMPARABILITY CRITERIA. PARA 5.5 OF THE TPOS ORDER SHOWS THAT A SEARCH WAS CARRIED OUT BY HIM AND THE COMPAN IES WERE SELECTED FROM THE ECONOMIC ACTIVITY WITH PRODUCT NAME FLOAT GLASS. SUCH SEARCH PROCESS THREW UP FIVE COMPANIES AS COMPARABLE. THE ASSESSEE WAS GIVEN OPPORTUNITY TO RAISE OBJECTIONS, IF ANY, AGAINST TH E COMPARABILITY OF THESE FIVE COMPANIES. AFTER ENTERTAINING THE OBJECTIONS RAISED ON BEHALF OF THE ASSESSEE, THE TPO SHORTLISTED THREE COMPANIES AS CO MPARABLE, NAMELY, GUJARAT GUARDIAN LTD. (PROFIT MARGIN OF 46.57%); HI NDUSTAN NATIONAL GLASS (14.78%) AND SAINT GOBAIN GLASS INDIA (12.13% ). THE ASSESSEE IS AGGRIEVED AGAINST THE EXCLUSION OF REMAINING TWO CO MPANIES, NAMELY, BHARAT GLASS TUBE LTD., AND TRIVENI GLASS LTD. APAR T FROM THAT, THE ASSESSEE IS ALSO AGAINST THE INCLUSION OF GUJARAT G UARDIAN LTD., WHICH, IN ITA NO.4242/DEL/2010 24 ITS OPINION, OUGHT TO HAVE BEEN EXCLUDED. WE WILL C ONSIDER THESE COMPANIES ONE BY ONE. (I) BHARAT GLASS TUBE LTD . 8.1. THE TPO HAS DISCUSSED THE ASSESSEES OBJECTION S AS REGARDS THIS COMPANY IN PARA 5.7 OF HIS ORDER IN WHICH IT HAS BE EN RECORDED THAT THE TURNOVER OF THIS COMPANY WAS ONLY RS.40 CRORE, WHER EAS THE TURNOVER OF THE ASSESSEE COMPANY STOOD AT RS.683 CRORE. THE TP O FURTHER RECORDED THAT NO OBJECTIONS WERE RAISED ON THE FUNCTIONAL CO MPARABILITY OF THIS COMPANY. CONSIDERING THE FACT THAT THERE WAS A VAS T DIFFERENCE IN THE TURNOVER OF THE ASSESSEE COMPANY AND BHARAT GLASS T UBE LTD., THE TPO CONSIDERED IT EXPEDIENT TO EXCLUDE THIS COMPANY FRO M THE LIST OF COMPARABLES. 8.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT IT WAS THE TPO WHO INITIALLY SELECTED THIS COMPANY AS COMPARABLE AND ASKED THE A SSESSEE TO RAISE OBJECTIONS, IF ANY, AGAINST ITS COMPARABILITY. THE TPO ACCEPTED AND RECORDED THE FUNCTIONAL COMPARABILITY OF THIS COMPA NY. EXCLUSION WAS ITA NO.4242/DEL/2010 25 MADE ONLY ON THE REASON OF HIGH TURNOVER OF THE ASS ESSEE COMPANY AT RS.683 CRORE AS AGAINST A LOW TURNOVER OF RS.40 CRO RE OF THIS COMPANY. APART FROM THIS TURNOVER DIFFERENCE, THE COMPARABIL ITY IS UNDISPUTED. IN SO FAR AS THE FIGURE OF RS.683 CRORE IS CONCERNED, WE FIND THAT THIS AMOUNT REPRESENTS TURNOVER OF BOTH THE FLOAT AND AU TOMOTIVE GLASS DIVISIONS. TURNOVER OF FLOAT GLASS DIVISION UNDER C ONSIDERATION IS RS.258.94 CRORE, LEAVING THE REMAINING AMOUNT FOR A UTOMOTIVE DIVISION. IN SO FAR AS THE DIFFERENCE IN TURNOVER AS THE RELE VANT CRITERIA FOR INCLUSION OR EXCLUSION OF A COMPANY IS CONCERNED, W E FIND THAT THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CRYSCAPITAL INVESTMENT ADVISORS (INDIA) (P) LTD. VS. DCIT (2015) 376 ITR 183 (DEL) IN WHICH IT HAS BEEN HELD THAT HIGH/LOW PROFIT AND HIGH/LOW TURNOVER CAN NOT BE A GROUND TO EXCLUDE AN OTHERWISE COMPARABLE COMPANY. SIMILAR V IEW HAS BEEN REITERATED BY THE HONBLE DELHI HIGH COURT IN RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT (2015) 279 CTR 441 (DEL). THE RELIANCE OF THE LD. DR ON A RECENT JUDGMENT OF THE HONBLE DELHI HIGH COURT IN ST MICROELECTRONICS PVT. LTD. VS. CIT 2016-TII-15-HC-DEL-TP IS MISCONCEIVED. IT CAN BE ITA NO.4242/DEL/2010 26 NOTICED FROM PARA 11 OF THE JUDGMENT THAT THE ASSES SEE ARGUED THAT THE TRIBUNAL DID NOT CONSIDER THE PRINCIPAL CONTENTION ABOUT THE FUNCTIONAL PROFILE OF THE COMPARABLES CHOSEN, WHICH WAS DIFFER ENT FROM THAT OF THE ASSESSEE. SETTING ASIDE THE TRIBUNAL ORDER AND RES TORING THE MATTER FOR A FRESH CONSIDERATION, THE HONBLE HIGH COURT HELD TH AT THE ITAT OUGHT TO HAVE CONSIDERED THE ASSESSEES CONTENTION ABOUT DIS SIMILARITIES AS TO THE RISK PROFILE OF THE ASSESSEE AND THE COMPARABLES US ED. THE HONBLE HIGH COURT ALSO FOUND THAT THE TRANSFER PRICING STUDY RE PORT SUBMITTED BY THE ASSESSEE WAS DEFICIENT AS THE ASSESSEE DID NOT MAKE A FUNCTIONAL COMPARISON WHICH WAS SOUGHT TO BE MADE BEFORE THE H ONBLE HIGH COURT. THUS, IT IS MANIFEST FROM THIS JUDGMENT OF THE HONBLE DELHI HIGH COURT IN ST MICROELECTRONICS (SUPRA) THAT FUNCTIONAL COMPARABILITY HAS TO BE NECESSARILY CONSIDERED BEFORE INCLUDING O R EXCLUDING A COMPANY FROM THE LIST OF COMPARABLES. NOWHERE HAS IT BEEN LAID DOWN IN THIS CASE THAT A COMPANY WITH HIGHER OR LOWER TU RNOVER CAN BE EXCLUDED MERELY FOR THIS REASON. WE, THEREFORE, DO NOT FIND ANY RELEVANCE OF THIS JUDGMENT IN SO FAR AS THE ISSUE B EFORE US IS CONCERNED. RESULTANTLY, FOLLOWING THE RATIO LAID DOWN IN CRYSCAPITAL INVESTMENT ITA NO.4242/DEL/2010 27 ADVISORS (SUPRA) AND RAMPGREEN SOLUTIONS PVT. LTD (SUPRA,) BHARAT GLASS TUBE LTD. IS DIRECTED TO BE INCLUDED IN THE F INAL SET OF COMPARABLES. (II) TRIVENI GLASS LTD . 9.1. IT HAS BEEN NOTICED IN PARA 5.10 OF THE TPOS ORDER THAT TRIVENI GLASS LTD. SUFFERED LOSS FROM OPERATIONS. THE TPO HAS FURTHER RECORDED THAT THIS COMPANY WAS PERSISTENT LOSS MAKING COMPAN Y AND, HENCE, WAS NOT A GOOD COMPARABLE. THE ASSESSEE IS AGGRIEVED A GAINST THE EXCLUSION OF THIS COMPANY. 9.2. AFTER GOING THROUGH THE RELEVANT MATERIAL, WE FIND THAT THE TPO EXCLUDED THIS COMPANY FROM THE LIST OF COMPARABLES SIMPLY ON THE GROUND THAT THERE WAS LOSS FROM OPERATIONS DURING T HE YEAR AND IT WAS CONSISTENTLY IN RED IN EARLIER YEARS AS WELL. WE H AVE GONE THROUGH THE ANNUAL REPORT OF THIS COMPANY AND THE ASSESSEES SU BMISSIONS BEFORE THE TPO QUA THIS COMPANY, A COPY OF WHICH IS AVAILABLE ON PAGE 259 OF THE PAPER BOOK. THE ASSESSEE STATED THAT THERE WAS PRO FIT OF RS.14.89 CRORE EARNED BY THIS COMPANY, AFTER CONSIDERING WRITE BAC K OF INTEREST AND ITA NO.4242/DEL/2010 28 TRANSFER OF DEBENTURE REDEMPTION RESERVES TO ITS PR OFIT & LOSS ACCOUNT AND IF THE EXCLUSION OF THESE EXTRAORDINARY ITEMS W AS MADE, THERE WOULD BE LOSS FROM OPERATIONS TO THE TUNE OF RS.1.69 CROR E. THERE IS NO REFERENCE TO ANY CONSISTENT LOSSES INCURRED BY THIS COMPANY, AS HAS BEEN RECORDED BY THE TPO IN HIS ORDER. IN SO FAR AS THE PROFIT FOR THIS YEAR IS CONCERNED, WE FIND THAT TRIVENI GLASS LTD. EARNED P ROFIT OF RS.14.89 CRORE WHICH WAS AFTER WRITE BACK OF INTEREST AND TR ANSFER OF DEBENTURE REDEMPTION RESERVES TO THE PROFIT & LOSS ACCOUNT. WHILE DISCUSSING THE COMPARABILITY OF BHARAT GLASS TUBE LTD. ABOVE, WE H AVE OBSERVED THAT THE HONBLE JURISDICTIONAL HIGH COURT HAS HELD THAT A LOWER OR A HIGHER PROFIT RATE/TURNOVER CANNOT BE A CRITERIA FOR EXCLU SION OF A COMPANY. UNLESS IT IS SHOWN THAT THERE WERE LOSSES DUE TO EX TRAORDINARY CIRCUMSTANCES WHICH WERE ONLY CASE SPECIFIC, A PROB ABLE COMPARABLE COMPANY CANNOT BE EXCLUDED FROM THE LIST OF COMPARA BLES. AS THERE ARE NO EXTRAORDINARY REASONS FOR INCURRING OF LOSS OF T RIVENI GLASS LTD. FOR THE YEAR AND THIS COMPANY IS NOT A CONSISTENT LOSS MAKING COMPANY, WE HOLD THAT THE SAME CANNOT BE EXCLUDED. WE ORDER AC CORDINGLY. ITA NO.4242/DEL/2010 29 (III) GUJARAT GUARDIAN LTD . 10.1. THE TPO INCLUDED THIS COMPANY IN THE LIST O F COMPARABLES BY NOTICING THAT IT WAS ONE OF THE MANUFACTURERS OF FL OAT GLASS. THE ASSESSEES OBJECTIONS THAT IT WAS EARNING DIVIDEND INCOME AND WAS ALSO HAVING CHEAPER POWER SUPPLY, WERE FOUND TO BE UNCO NVINCING. THE TPO OBSERVED THAT WHILE COMPUTING THE MARGIN OF THIS CO MPANY, INCOME FROM DIVIDEND, BEING A NON-OPERATIONAL INCOME, WAS LIABL E TO BE IGNORED. AS REGARDS THE ASSESSEES CONTENTION ABOUT ADJUSTMENT ON ACCOUNT OF POWER CONSUMPTION, THE TPO FOUND THAT THE ASSESSEE DID NO T ADVANCE ANY REASON SHOWING DIFFERENCE IN POWER CHARGES. THE OT HER OBJECTION OF THE ASSESSEE THAT IT WAS PAYING HUGE ROYALTY AND GUJA RAT GUARDIAN LTD. WAS NOT PAYING, WAS ALSO FOUND UNTENABLE BECAUSE GUJARA T GUARDIAN LTD. WAS PAYING TECHNICAL KNOW-HOW FEES TO ITS ASSOCIATED EN TERPRISE. THAT IS HOW, THE TPO TREATED THIS COMPANY AS COMPARABLE. 10.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THE ASSESSEES OBJECTIONS UNSUSTAINABLE. THE TPO HAS THOROUGHLY DEALT WITH A LL THE OBJECTIONS ITA NO.4242/DEL/2010 30 RAISED BY THE ASSESSEE, SUCH AS, EARNING OF DIVIDEN D INCOME BY GUJARAT GUARDIAN, DIFFERENCE IN POWER CONSUMPTION AND PAYME NT OF ROYALTY/FEES FOR TECHNICAL SERVICES, ETC. THE LD. AR HAS NOT BR OUGHT ANY MATERIAL ON RECORD TO FORTIFY HIS CONTENTION ABOUT DIFFERENCE I N POWER CONSUMPTION RATES OF THE ASSESSEE VIS--VIS THIS COMPANY. ACCORDINGLY, WE ARE OF THE CONSIDERED OPINION THAT THE TPO WAS RIGHT IN INCLUD ING THIS COMPANY IN THE LIST OF COMPARABLES. 11. IN VIEW OF THE FOREGOING DISCUSSION, WE SET ASI DE THE IMPUGNED ORDER ON THE QUESTION OF ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT OF FLOAT GLASS DIVISION AND REMIT THE MATTER TO THE FI LE OF AO/TPO FOR RECALCULATING THE ALP AND CONSEQUENTIAL ADDITION, I F ANY, IN RESPECT OF THE FOUR INTERNATIONAL TRANSACTIONS AS DIRECTED HER EINABOVE, AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSE SSEE. 12.1. THE ONLY OTHER GROUND RAISED IN THIS APP EAL IS AGAINST ADDITION OF RS.4,10,000/- MADE U/S 14A OF THE ACT. 12.2. BRIEFLY STATED, THE FACTS OF THE CASE AR E THAT THE ASSESSEE EARNED DIVIDEND INCOME OF RS.4,12,299/- WHICH WAS CLAIMED AS EXEMPT U/S ITA NO.4242/DEL/2010 31 10(34) OF THE ACT. THE AO INVOKED RULE 8D AND COMP UTED DISALLOWANCE AT RS.4,10,000/- U/S 14A. THIS ADDITI ON IS UNDER CHALLENGE BEFORE US. 12.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL ON RECORD. THE ASSESSMENT YEAR UNDER CONS IDERATION IS 2006-07. THE HONBLE JURISDICTIONAL HIGH COURT IN MAXOPP INVESTMENTS LTD. VS. CIT (2012) 347 ITR 272 (DEL), HAS HELD THAT THE PROVISIONS OF RULE 8D ARE APPLICABLE ONLY FROM THE ASSESSMENT YEAR 2008-0 9. IT HAS FURTHER BEEN HELD THAT IN THE PERIOD ANTERIOR TO THAT, THE DISALLOWANCE IS REQUIRED TO BE MADE ON SOME REASONABLE BASIS. IN VIEW OF TH E JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT ON THE POINT, WE CANNOT APPROVE THE VIEW TAKEN BY THE AO IN COMPUTING THE DISALLOWANCE U/S 14A AS PER THE MANDATE OF RULE 8D OF THE INCOME-TAX RULES. ACCORDI NGLY, THE IMPUGNED ORDER IS SET ASIDE ON THIS ISSUE AND THE M ATTER IS RESTORED TO THE FILE OF THE AO FOR MAKING DISALLOWANCE U/S 14A ON S OME REASONABLE BASIS AS HAS BEEN HELD BY THE HONBLE JURISDICTION AL HIGH COURT IN THE AFORE NOTED CASE. ITA NO.4242/DEL/2010 32 13. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 06.04.201 6. SD/- SD/- [C.M. GARG] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 06 TH APRIL, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.