Honda Trading Corporation India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 4811/DEL/2012

• Counselvise Citation: 481120114 RSA 2012
• Duration Of Justice: 1 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-03-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 27-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 10-09-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: YOGESH KUMAR VERMA
• Keywords: Related party transaction; Business income; Transfer pricing; Principle of natural justice; International transaction; Additional evidence
• Section: 234B; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI B.C. MEENA ITA NO. 4811/DEL/2012 ASSTT. YR: 2008-09 HONDA TRADING CORPN. INDIA PVT. LTD. VS. DCIT, CI RCLE 12(1), F-10, MANISH TWIN PLAZA, NEW DELHI. HOUSE NO. 3, DWARKA, NEW DELHI. PAN: AABCH 5556 J ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI AJAY VOHRA ADV. SHRI NEERAJ JAIN ADV. % SHRI PUNEET CHUGH ADV. RESPONDENT BY : SHRI YOGESH KUMAR VERMA CIT(DR) O R D E R PER R.P. TOLANI, J.M: : THIS IS ASSESSEES APPEAL AGAINST ASSESSMENT ORDER DATED 8-8-2012 PASSED BY THE DCIT CIRCLE 12(1), NEW DELHI U/S 143( 3)/144C PURSUANT TO DRP DIRECTIONS U/S 144C(5) OF THE INCOME-TAX ACT, 1 961. FOLLOWING GROUNDS ARE RAISED: 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN COMPLETING THE ASSESSMENT UNDER SECTION 144C/143(3) OF THE INCOME-TAX ACT, 1961 (THE ACT) AT AN INCOME OF RS . 12,24,31,931 AS AGAINST THE RETURNED INCOME OF RS. 4,45,96,480. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING TRANSFER PRICING ADJUSTMENT OF RS. 7,78,35,4 51 TO THE INCOME OF THE APPELLANT IN RESPECT OF THE INTERNATI ONAL ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 2 TRANSACTIONS OF IMPORT OF PARTS AND EQUIPMENTS UNDE RTAKEN WITH THE ASSOCIATED ENTERPRISE. 2.1. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN NOT CONSIDERING THE AUDITED SEGMENTAL PROFIT STA TEMENT OF THE APPELLANT SUBMITTED DURING THE COURSE OF ASSESSMENT , ALLEGEDLY ON THE GROUND THAT A. THE AUDITED SEGMENT REPORT IS ISSUED AND SIGNED BY THE SISTER CONCERN OF THE REPRESENTATIVES OF THE APPELL ANT AND THE RESULTS ARE AT VARIANCE FROM AUDITED ACCOUNTS A ND TP REPORT. B. THAT THE ANNUAL ACCOUNT OF THE APPELLANT DOES NO T PROVIDE SEPARATE VALUE OF DOMESTIC PURCHASES AND IMPORTS. C. THAT THE APPELLANT HAS FAILED TO PROVIDE THE ALL OCATION KEYS FOR PREPARING THE SEGMENT PROFIT REPORT. D. THAT THE AUDITORS HAVE CONDUCTED TEST CHECKS T O PREPARE THE SEGMENT PROFIT ANALYSIS OF THE APPELLANT. 2.2. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN NOT CONSIDERING THE COMBINED PROFITABILITY OF IN TERNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELLANT WITH ASSOC IATED ENTERPRISE AND TRANSACTIONS UNDERTAKEN WITH UNRELAT ED THIRD PARTIES IN DOMESTIC MARKET, FOR THE PURPOSE OF BENC HMARKING THE TRANSACTION OF IMPORT OF GOODS UNDERTAKEN WITH ASSOCIATED ENTERPRISE NOT APPRECIATING ONLY INTERNATIONAL TRAN SACTIONS UNDERTAKEN WITH ASSOCIATED ENTERPRISE ARE REQUIRED BENCH MARKED UNDER THE TRANSFER PRICING REGULATIONS. 2.3. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN CONSIDERING BHARAT POWER CORPORATION LIMITED AS A COMPARABLE COMPANY WITHOUT APPRECIATING THAT THE SA ME IS NOT FUNCTIONALLY COMPARABLE TO THE APPELLANT. 2.4. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN REJECTING SPECTRA INDUSTRIES LIMITED AS THE COMP ARABLE COMPANY ALLEGEDLY ON THE GROUND OF DECLINING SALES, WITHOUT ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 3 APPRECIATING THAT THE TURNOVER OF THE COMPANY HAS INCREASED SUBSTANTIALLY IN THE FUTURE YEARS. 3. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS A ND IN LAW IN INITIATING PENALTY UNDER SECTION 271AA OF THE AC T NOT APPRECIATING THAT T HE TRANSFER PRICING DOCUMENTATI ON WAS DULY PREPARED AND MAINTAINED BY THE APPELLANT BEFORE THE DUE DATE OF FILING OF RETURN OF INCOME. 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTION 234B AND SECTION 234 C OF THE ACT. 5. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS A ND IN LAW IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271 (1)(C) OF THE ACT. 2. THE APPELLANT IS A SUBSIDIARY OF HONDA TRADING C ORPORATION, JAPAN (HTC) WHICH, IN TURN, IS A SUBSIDIARY OF HONDA MO TOR CO. LTD., JAPAN. THE APPELLANT IS ENGAGED IN THE BUSINESS OF TRADING OF A VARIETY OF PRODUCTS SUCH AS STEEL PRODUCTS, DIES, COMPONENTS OF AUTOMOBILES, MOTORCYCLES, SCOOTERS AND OTHER AUTOMOTIVE COMPONENTS, AND EQUIPMENT ETC. 2.1. DURING THE PREVIOUS YEAR RELEVANT TO THE ASSES SMENT YEAR UNDER CONSIDERATION THE APPELLANT ENTERED INTO, INTER ALI A, THE FOLLOWING INTERNATIONAL TRANSACTIONS: SL. NO. INTERNATIONAL TRANSACTIONS AMOUNT RECEIPT METHOD APPLIED (I) EXPORT OF PARTS 7,747,651 RPM/ TNMM (II) IMPORT OF PARTS (584,158,892) TNMM (III) IMPORTS OF STEEL/ RESIN (161,738,642) TNMM ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 4 2.2. FOR THE PURPOSE OF BENCHMARKING THE INTERNATIO NAL TRANSACTIONS OF EXPORT OF PARTS, IMPORTS OF PARTS AND STEEL/RESIN, TRANSACTIONAL NET MARGIN METHOD (TNMM) WAS APPLIED AS THE MOST APPROPRIATE M ETHOD AND EACH OF SUCH TRANSACTIONS WERE SEPARATELY BENCHMARKED. 2.3. FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF EXPORT AND IMPORT OF PARTS AND STEEL/RESIN, SEARCH AND SCREENING PROC ESS UNDERTAKEN BY THE APPELLANT, IN THE TRANSFER PRICING DOCUMENT, RESULT ED IN 2 COMPARABLE COMPANIES, EARNING A MEAN OPERATING MARGIN OF 0.21% , AS UNDER: 2.4. IT WAS SUBMITTED THAT SINCE THE OPERATING PROF IT MARGIN (OP/OC%) OF THE APPELLANT COMPANY IN THE IMPORT SEGMENT AT 5% W AS MUCH HIGHER THAN THE AVERAGE OF TWO COMPARABLE COMPANIES AT 0.21%, T HE INTERNATIONAL TRANSACTIONS OF IMPORT OF PARTS AND STEEL/RESIN ENT ERED INTO BY THE APPELLANT WERE TO BE CONSIDERED AT ARMS LENGTH PRICE. 2.5. LD. TPO HOWEVER FOR BENCHMARKING PURPOSE, AGGR EGATED TWO TRANSACTIONS, NAMELY - INTERNATIONAL TRANSACTIONS W HEREIN THE APPELLANT PURCHASED GOODS FROM ASSOCIATED ENTERPRISE AND SOLD IT IN DOMESTIC MARKET - COMPANY NAME SALESCRS TRADING INCOME/ SALES (%) OP/OC (%) OP/SALES (%) STANES MOTOR PARTS LTD. 18.23 98.57% 3.44% 3.57% SPECTRA INDUSTRIES LTD. 21.58 96.39% (-3.07%) -3.15% AVERAGE PLI 0.18% 0.21% PLI OF ASSESSEE 5.00% ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 5 ALONG WITH DOMESTIC TRANSACTIONS WHEREIN, THE APPEL LANT PURCHASED GOODS FROM DOMESTIC MARKET AND SOLD IT AGAIN IN THE DOMES TIC MARKET, AS ONE TRANSACTION AND ACCORDINGLY COMPUTED THE PROFITABIL ITY OF THE APPELLANT WITH OPERATING PROFIT MARGIN OVER SALES AT -0.0988%, AS UNDER: IMPORTS DOMESTIC TOTAL SALES REVENUE 793,591,469 661,153,663 1,454,745,132 COST OF GOODS 758,653,475 660,158,020 141,881,1495 INDIRECT OPERATING EXPENSE 20,382,182 16,989,364 37,371,546 TOTAL OPERATING EXPENSE 779,035,657 677,147,384 1,456,183,041 OPERATING PROFIT -1,437,909 OP/SALES% -0.0988% OP/COST% -0.0987% 2.6. FURTHER, TPO REJECTED THE AUDITED SEGMENT PROF ITABILITY, DULY CERTIFIED BY AN INDEPENDENT FIRM OF CHARTERED ACCOUNTANTS, SU BMITTED BY THE APPELLANT DURING THE COURSE OF ASSESSMENT PROCEEDIN GS AND PREFERRED TO CONSIDER THE UNAUDITED SEGMENT PROFIT ANALYSIS WHIC H WAS SUBMITTED ALONG WITH THE TRANSFER PRICING DOCUMENTATION. 2.7. THE TPO ALSO CONDUCTED FRESH SEARCH FOR COMPAR ABLE COMPANIES. ONE NEW COMPARABLE, NAMELY, BHARAT POWER CORPORATION PV T. LTD. WAS INCLUDED IN THE FINAL SET OF COMPARABLE AND EXCLUDED SPECTRA INDUSTRIES LIMITED FROM THE FINAL SET OF COMPARABLES HOLDING THAT THE COMPA NY HAS DIMINISHING SALES. ACCORDINGLY, THE TPO ARRIVED AT A NEW SET OF TWO CO MPARABLE COMPANIES OP/SALES RATIO OF 8.82%, AS UNDER: ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 6 MARCH-08 MARCH-08 S.NO. COMPANY NAME SALES PBIT/(SALES- RENT_INC)*100 1 BHARAT POWER CORPORATION PVT. LTD. 446.2 13.63 2 STANES MOTOR PARTS LTD. 182.4 4.00 AVERAGE 8.82 2.8. ON THE BASIS OF THE DIFFERENCE IN ALLEGED ARMS LENGTH MARGIN OF 8.82% AND THE MARGIN EARNED BY ASSESSEE FROM THE INTERNAT IONAL TRANSACTIONS AT 0.0987%, TPO IN HIS ORDER COMPUTED AN ADJUSTMENT OF RS. 7,78,35,451/-. 2.9. THE DISPUTE RESOLUTION PANEL (DRP) BY ITS OR DER DATED 14.06.2012, UPHELD THE ORDER OF THE TPO. 2.10. THESE ADJUSTMENTS ARE CHALLENGED BY THE ASSES SEE AS UNSUSTAINABLE AND UNWARRANTED FOR FOLLOWING REASONS: 1. AUDITED PROFIT MARGIN OF THE APPELLANT: 3. TPO HAS CONSIDERED THE AMOUNT OF SALES, COST OF GOODS SOLD AND OTHER ITEMS OF INCOME AND EXPENSES FROM THE SEGMENTAL REP ORT SUBMITTED ALONG WITH THE TRANSFER PRICING STUDY. DURING PENDENCY OF TP PROCEEDINGS CERTAIN INADVERTENT ERRORS WERE FOUND BY ASSESSEE IN THE SA ID SEGMENTAL PROFITABILITY, CONSEQUENTLY SERVICES OF A FIRM OF CHARTERED ACCOUN TANTS WERE UNDERTAKEN FOR COMPUTATION AND CERTIFYING THE CORRECTNESS OF T HE SEGMENTAL PROFITABILITY. BY THEIR CERTIFICATE 26.08.2011,THE PROFIT EARNED B Y THE APPELLANT UNDER DIFFERENT SEGMENTS WAS FILED BEFORE THE TPO AND IS ENCLOSED AT PAGES 160- 166 OF THE PAPER BOOK. ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 7 3.1. IN TERMS OF THE AUDITED AND CERTIFIED SEGMENT PROFITABILITY OF THE APPELLANT, THE PROFIT MARGINS OF THE APPELLANT UNDE R TRADING SEGMENT ARE AS UNDER: PARTICULARS TRADING SEGMENT REVENUE EXPORT (AE'S) DOMESTIC SALE OF IMPORTED GOODS (AE'S) OTHER DOMESTIC SALE SERVICE/SALES REVENUE 77,47,651 79,35,91,469 66,11,53,663 EXPORT INCENTIVE 6,320 - - MISCELLANEOUS RECEIPTS - 4,38,545 - OPERATING INCOME 77,53,971 79,40,30,014 66,11,53,663 EXCHANGE FLUCTUATION INCOME 58,956 4,12,39,132 3,662 TOTAL OPERATING INCOME ( A) +( B) 78,12,927 83,52,69,146 66,11,57,325 EXPENDITURE COST OF SERVICE/ COGS 70,37,203 75,90,83,619 66,02,40,565 INDIRECT OPERATING EXPENSES 1,06,232 1,08,81,348 90,65,424 TOTAL OPERATING EXPENSES 71,43,435 76,99,64,967 66,93,05,989 OPERATING PROFIT 669,492 65,304,179 (8,148,664) OP/SALES % 8.64% 8.23% -1.23% 3.2. THE TPO HOWEVER DISREGARDED THE AFORESAID AUDI TED AND CERTIFIED SEGMENTAL ACCOUNTS OF THE APPELLANT, ON THE FOLLOWI NG GROUNDS: (I) THE SEGMENTATION IS ISSUED AND SIGNED BY THE SISTER CONCERN OF THE AR OF THE APPELLANT. SUCH SEGMENTATION DID NOT FIND A PLACE IN THE AUDITED ACCOUNTS. (II) THE RESULTS OF THE FRESH SEGMENTATION CERTIFIED BY THE SISTER CONCERN OF THE AR ARE AT VARIANCE WITH THOSE OF AUDITED ACCOUN TS AND TP REPORT. IT IS REALLY DOUBTFUL WHETHER THE SISTER CONCERN OF THE APPELLANT CAN OVERRIDE THE SEGMENTATION DONE BY THE STATUTORY AUD ITORS. ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 8 (III) THE SISTER CONCERN CHARTERED ACCOUNTANT HAS NOT GIV EN ANY REASON FOR DISAGREEING WITH THE SEGMENTATION DONE BY THE S TATUTORY AUDITORS. IT IS MENTIONED IN PARA 2 OF THEIR REPORT DATED 26. 08.2011 THAT THEY CONDUCTED THE TEST CHECKS TO ARRIVE AT NEW SEGMEN TATION. SUCH TEST CHECKS CAN NEVER BE THE BASIS OF REJECTION OF FULL AUDITED ACCOUNTS. (IV) FURTHER, IN THE NEW SEGMENTATION, NO REASONS FOR VA RIANCE WITH AUDITED ACCOUNTS AND TP REPORT HAVE BEEN GIVEN. THE REFORE, THIS SEGMENTATION DONE IN HINDSIGHT DOES NOT STAND VALID . 3.3. THE DRP, WHILE UPHOLDING THE ORDER OF THE TPO, ALSO HELD THAT THE APPELLANT HAS FAILED TO PROVIDE THE ALLOCATION KEYS CONSIDERED FOR PREPARING ITS SEGMENT PROFITABILITY STATEMENT. 4. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CERTIFIED SEGMENTAL PROFITABILITY OF THE APPELLANT WAS PLACED ON RECORD BEFORE THE TPO ON 26 TH AUGUST, 2011, WHILE, THE SHOW CAUSE NOTICE WAS ISSU ED BY THE TPO ONLY ON 29 TH AUGUST, 2011. THE TPO BY A TECHNICAL OBJECTION I.E . THE SEGMENTAL PROFITABILITY OF THE COMPANY WAS AUDITED AND CERTIF IED BY THE SISTER CONCERN; AND ON CONJECTURES AND SURMISES REJECTED THE PROPE R CERTIFIED SEGMENTAL PROFITABILITY, WITHOUT POINTING OUT ANY OBJECTIVE D EFECT IN IT. 4.1. LD. TPO HAS NOT SHOWN ANY VARIANCE BETWEEN CER TIFIED SEGMENTAL REPORT FILED AND SEGMENTAL PROFITABILITY SHOWN IN N OTES TO ACCOUNT OF THE ANNUAL REPORT, THUS IMPUGNED REJECTION THE IS MEREL Y ON THE BASIS OF HIS SURMISES AND CONJECTURES. 4.2. IN ITS FINANCIAL STATEMENTS, ASSESSE HAS SHOWN TWO SEGMENTS, NAMELY, EXPORT AND DOMESTIC SEGMENT, WHICH IS FURTHER BIFUR CATED INTO TRADING ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 9 SEGMENT AND COMMISSION AND SERVICE SEGMENT. THE SAID CERTIFIED FILED DURING THE TP PROCEEDINGS IS ALSO ON THE BASIS OF E XPORT AND DOMESTIC SALES AND THERE IS NO CHANGE IN METHODOLOGY AND FACTS AND FIGURES AS CONSIDERED IN THE SEGMENTAL PROFITABILITY AS SHOWN IN AUDITED FIN ANCIAL STATEMENTS VIS--VIS SEGMENTAL PROFITABILITY SUBMITTED BEFORE THE TPO ON 26.08.2011. 4.3. IN THIS BEHALF ASSESSEE FILED A DETAILED REASO N ON TPOS DISAGREEING WITH THE SEGMENT REPORT FILED AS ANNEXURE TO TP STU DY REPORT. THE SAME ARE AS UNDER: (I) COMMISSION AND SERVICE CHARGES SEGMENT HAS BEEN FUR THER BIFURCATED INTO DOMESTIC SEGMENT WHEREIN, THE APPELLANT HAS EA RNED COMMISSION FROM THE SUPPLIER OF THE GOODS WHICH WAS AN INDIAN ENTITY AND THE PURCHASER WAS ALSO AN INDIAN ENTITY. (II) TRADING SEGMENT HAS BEEN FURTHER BIFURCATED INTO DO MESTIC SEGMENT, WHEREIN THE APPELLANT HAS MERELY ACTED AS A RESELLE R/TRADER OF GOODS PURCHASED FROM AN INDIAN ENTITY AND SOLD IT TO AGAI N AN INDIAN ENTITY. (III) INTEREST INCOME AND INCOME FROM SALE OF FIXED ASSET S BEING WRONGLY CONSIDERED AS OPERATING INCOME HAS BEEN EXCLUDED FR OM OTHER OPERATING INCOME. (IV) EXCHANGE FLUCTUATION INCOME/LOSS HAS BEEN CONSIDERE D ON ACTUAL BASIS IN EVERY SEGMENT. ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 10 (V) INDIRECT OPERATING EXPENSE HAS BEEN RATIONALLY DIST RIBUTED AMONG VARIOUS SEGMENTS ON THE BASIS OF SALES RATIO. FOR T HIS, THE COMMISSION INCOME HAS BEEN GROSSED UP WITH THE AVERAGE MARK-UP OF 1.5%, SO AS TO REFLECT THE SALES VALUE. THE GROSSED UP VALUE OF COMMISSION INCOME AND VALUE OF TRADING SALES HAS BEEN CONSIDER ED FOR ALLOCATION OF INDIRECT OPERATING EXPENSE. 4.3. IT IS EVIDENT THAT THE SEGMENTAL ACCOUNT PREPA RED BY THE APPELLANT AT THE TIME OF PREPARATION OF TP STUDY REPORT WAS UNAU DITED AND THE SEGMENTS WERE NOT CORRECTLY PREPARED AND CONTAINED SOME INAD VERTENT ERRORS. IT IS TRITE LAW THAT ASSESSEE CAN FILE A CERTIFIED REPORT TO CO RRECT THEM BEFORE THE TP PROCEEDINGS. IT CANNOT BE SUMMARILY IGNORED BY TPO. IT IS AGAINST THE PRINCIPLES OF NATURAL JUSTICE WHICH ARE EQUALLY BIN DING IN TP PROCEEDINGS. 4.4. LD. TPO HAS ERRONEOUSLY HELD THAT THE SEGMENTA L ACCOUNT HAS BEEN PREPARED ON THE BASIS OF TEST CHECKS. FACTS ON RE CORD DEMONSTRATE THAT THE SEGMENTAL ACCOUNT IS PREPARED IN ACCORDANCE TO ACCO UNTING STANDARDS AND GENERALLY ACCEPTED ACCOUNTING PROCEDURES. THE ACCOU NTING STANDARDS REQUIRES THE AUDITOR TO OBTAIN REASONABLE ASSURANCE WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL MISSTATEMENT. AN AU DIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING THE AMOUNT AND DISCLOSURES IN THE FINANCIAL STATEMENTS. FURTHER, AS PER STANDARD OF A CCOUNTING (SA) 530 (REVISED) USE OF SAMPLING AND TEST CHECKS IS ALLOWE D TO DRAW TRUE AND FAIR PICTURE OF THE ACCOUNTS. 4.5. THE REASONS FOR THIS ARE: A. ECONOMIC : AUDIT BECOMES COST EFFECTIVE. B. TIME : COMPLETE CHECK WOULD TAKE SO LONG TIME. ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 11 C. PRACTICAL : USERS DO NOT EXPECT 100% ACCURACY. MATERIALLY IS IMPORTANT IN ACCOUNTING AS WELL AS IN AUDITING. D. FRUITFULNESS : A COMPLETE CHECK WOULD NOT ADD MUCH TO THE WORTH OF FIGURES IF FEW ERRORS WERE DISCOVERED. 4.6. ACCORDINGLY, THE EMPHASIS IN AUDITING OUGHT TO BE ON THE COMPLETENESS OF RECORD AND THE TRUE AND FAIR VIEW. LD. TPO HAS ERRED IN REJECTING THE SEGMENTAL PROFITABILITY WITHOUT PROVI DING ANY COGENT REASONS AND POINTING PUT ANY MATERIAL DEFECT. BESIDES AS PE R THE SETTLED PRINCIPLES OF NATURAL JUSTICE, WHEN THE AUDITED SEGMENTAL ACCOUNT S ARE AVAILABLE ON RECORD THEY ARE TO BE OBJECTIVELY CONSIDERED FOR THE PURPO SE OF BENCHMARKING. 4.7. RELIANCE IN THIS REGARD IS PLACED ON THE DECIS ION OF MUMBAI BENCH OF TRIBUNAL IN THE CASE OF TECHNIMOUNT ICB INDIA P. LT D. VS. ACIT [ITA NO. 7098/MUM/2010], WHEREIN THE TRIBUNAL QUA THE QUESTI ON, WHETHER FOR DETERMINING ALP, SEGMENTAL RESULTS SHOULD BE TAKEN INTO ACCOUNT OR WHETHER PROFITS AT THE ENTITY LEVEL NEEDS TO BE CONSIDERED, HAS HELD AS UNDER: THE ONLY OBJECTION FOR NOT CONSIDERING THE SAME WA S THAT THEY WERE NOT AUDIT. THIS WAS ONLY A PROCEDURAL REQUIREMENT A ND ONCE THE SAME WAS COMPLIED WITH, THE AUDITED SEGMENTAL ACCOUNTS S HOULD HAVE BEEN ADMITTED AS ADDITIONAL EVIDENCE BY THE DRP IN ORDER TO IMPART SUBSTANTIAL JUSTICE TO THE ASSESSEE. THEREFORE, THE AUDITED SEGMENTAL RESULTS FILED BY THE ASSESSEE IS ADMITTED AND THE M ATTER IS RESTORED BACK TO THE FILE OF ASSESSING OFFICER FOR DENOVO CO NSIDERATION IN ACCORDANCE WITH LAW 4.8. ACCORDINGLY, SINCE THE OPERATING PROFIT MARGIN OVER SALES EARNED BY THE APPELLANT IN UNDERTAKING THE TRANSACTION OF SAL E OF GOODS PURCHASED FROM ASSOCIATED ENTERPRISE, IN ACCORDANCE WITH THE AUDIT ED SEGMENT ACCOUNT, AT 8.23% IS WITHIN SAFE HARBOR RANGE OF +/- 5%, THAN T HE AVERAGE OPERATING ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 12 PROFIT MARGIN OF THE COMPARABLE COMPANIES CONSIDERE D BY THE TPO AT 8.82%, THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE APP ELLANT SHOULD BE CONSIDERED AT ARMS LENGTH. 4.9. EVEN IF THE METHODOLOGY ADOPTED BY TPO I.E. TO COMBINE THE INTERNATIONAL TRANSACTION OF IMPORT OF PARTS AND EQ UIPMENT FROM ASSOCIATED ENTERPRISE WITH DOMESTIC TRANSACTIONS UNDERTAKEN BY THE ASSESSEE, IS CONSIDERED; THEN ALSO THE AVERAGE PROFIT MARGIN OF 8.82%AS COMPARED TOASSESSEES3.92% IS ALSO WITHIN THE SAFE HARBOR RA NGE OF +/-5%. TRADING SEGMENT SALE OF IMPORTED GOODS OTHER DOMESTIC TRANSACTIONS AVERAGE SALES (A) 79,35,91,469 661,153,663 1,45,47,45,132 OPERATING PROFIT OVER SALES (B) 8.23% -1.23% TOTAL OPERATING PROFIT (A*B) 6,53,04,179 (81,48,664) 5,71,55,515 OP/SALES (ASSESSEE) 3.92% OP/SALES (COMPARABLES) 8.82% 4.10 FROM BOTH ANGLES, THE ADJUSTMENT PROPOSED BY T HE TPO ON THE ARMS LENGTH PRICE IN THIS BEHALF IS UNWARRANTED AND DESE RVES TO BE DELETED. 4.11. LD. COUNSEL MAKES FURTHER PROPOSITIONS IN THI S BEHALF: 1. ARMS LENGTH PRINCIPLE CANNOT BE APPLIED ON DOMES TIC TRANSACTIONS. 4.11. LD TPO, WHILE COMPUTING THE PROFIT OF TRADING ACTIV ITIES WITH AES ALSO INCLUDED THE TRANSACTION UNDERTAKEN BY THE ASS ESSEE WITH UNRELATED THIRD PARTIES, AS UNDER: ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 13 IMPORTS DOMESTIC TOTAL SALES REVENUE 793,591,469 661,153,663 1,454,745,132 COST OF GOODS 758,653,475 660,158,020 1,418,811,495 INDIRECT OPERATING EXPENSE 20,382,182 16,989,364 37,371,546 TOTAL OPERATING EXPENSE 779,035,657 677,147,384 1,456,183,041 OPERATING PROFIT -1,437,909 OP/SALES% -0.0988% OP/COST% -0.0987% 4.12. THE TPO, WHILE COMPUTING THE OPERATING PROFIT TO SALES RATIO ALSO CONSIDERED THE PROFIT EARNED FROM DOMESTIC SEGMENT, WHEREIN, THE APPELLANT HAD PURCHASED GOODS FROM THE DOMESTIC MARKET AND SO LD GOODS IN THE DOMESTIC MARKET. WHILE DOING SO IT IS ALLEGEDLY HEL D THAT IT IS DECIDED THAT BEING AN INDEPENDENT DISTRIBUTOR, IT IS IMPERATIVE THAT ALL YOUR TRADING TRANSACTIONS ARE LINKED TOGETHER TO CREATE SYNERGY IN ALL YOUR FUNCTIONS. THE TRADING TRANSACTIONS CANNOT BE JUDGED PIECEMEAL BUT TRADING SEGMENT MUST BE BENCHMARKED AS A WHOLE. 4.13. LD. TPO FAILED TO CONSIDER THAT ALP IS TO BE DETERMINED UNDER THE TP REGULATIONS BY BENCHMARKING RELEVANT INTERNATIONAL TRANSACTION SEPARATELY AND THE COMPARISON IS TO BE MADE OF THE PROFITABILI TY OF THE INTERNATIONAL TRANSACTIONS ON A STAND ALONE BASIS; AND ENTITY LEV EL COMPARISON IS TO BE RESORTED TO, ONLY WHEN SUCH STAND ALONE COMPARISON IS OTHERWISE NOT FEASIBLE. 4.14. RELIANCE IN THIS REGARD IS PLACED ON THE FOLL OWING DECISIONS, WHEREIN IT HAS BEEN HELD THAT ARMS LENGTH PRICE SHOULD BE DETE RMINED ON A TRANSACTION TO TRANSACTION BASIS: - DEVELOPMENT CONSULTANTS (P) LTD. VS. DCIT: 115 TT J 577 ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 14 - STAR INDIA LIMITED (ITA NO.3846 / 3585/M/2006) - AZTEC SOFTWARE AND TECHNICAL SERVICES LTD. VS. AC IT 107 ITD 141 (SB) 4.15. RELIANCE IS ALSO PLACED ON THE DECISION OF SP ECIAL BENCH OF TRIBUNAL IN THE CASE OF L.G. ELECTRONICS INDIA PVT. LTD. VS. ACIT (ITA NO.5140/DEL/2011), WHEREIN, IT IS HELD AS UNDER: 21.12. WE HAVE NOTICED ABOVE THAT SUB-SECTION (1) OF SECTION 92 READ WITH RULE 10B REQUIRES COMPUTATION OF INCOME FROM ` AN INTERNATIONAL TRANSACTION HAVING REGARD TO ITS ARMS LENGTH PRICE . IT MEANS THAT EACH INTERNATIONAL TRANSACTION IS REQUIRED TO BE SUBJECT ED TO THE TP PROVISIONS DISTINCTLY. 4.16. THUS LD. TPO IS NOT JUSTIFIED IN COMBINING TH E IMPORT SEGMENT WITH DOMESTIC SEGMENT FOR THE PURPOSE OF BENCHMARKING. B ESIDES UNDER THE DOMESTIC SEGMENT, NO INTERNATIONAL TRANSACTION WAS UNDERTAKEN BY THE APPELLANT WITH ASSOCIATED ENTERPRISE CONSEQUENTLY A LP WORKING CANNOT BE APPLIED TO DOMESTIC TRANSACTIONS UNDERTAKEN BY CONS IDERING THE COMBINED PROFITABILITY. 4.17. RELIANCE IN THIS REGARD IS PLACED ON THE DECI SION OF HYDERABAD BENCH OF TRIBUNAL IN THE CASE OF FOUR SOFT LTD. VS. DCIT [ITA NO. 1495/HYD/2010], WHEREIN THE HONBLE TRIBUNAL WHILE ADJUDICATING THE ISSUE, WHETHER FOR COMPUTING THE NET MARGIN OF THE APPELLANT FOR THE PURPOSES OF TRANSFER PRICING, ONLY THE COST RELATED TO THE T RANSACTION WITH THE ASSOCIATED ENTERPRISES HAS TO BE CONSIDERED, HELD A S UNDER: IN OUR CONSIDERED VIEW, FOR COMPUTING THE NET MARG IN OF THE APPELLANT FOR THE PURPOSES OF TRANSFER PRICING, ONL Y THE COST RELATED TO THE TRANSACTION WITH THE ASSOCIATED ENTERPRISES HAS TO BE CONSIDERED AND ACCORDINGLY, WE APPROVE THAT SEGMENTAL FINANCIA LS IS TO BE ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 15 CONSIDERED FOR THE PURPOSE OF ARRIVING AT THE NET M ARGIN ON THE INTERNATIONAL TRANSACTION WITH THE APPELLANTS ENTE RPRISE IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES. 4.18. ON THE SIMILAR ISSUE, THE MUMBAI BENCH OF TRI BUNAL IN THE CASE OF TECHNIMOUNT ICB INDIA P. LTD. VS. ACIT [ITA NO. 709 8/MUM/2010], HELD AS UNDER: COMING TO THE MAIN ISSUE AS TO WHETHER THE SEGMENT AL RESULTS ARE TO BE TAKEN INTO CONSIDERATION OR PROFIT MARGIN AT ENT ITY LEVEL IS TO BE CONSIDERED, IT IS SEEN THAT CHAPTER-X INCORPORATES SPECIAL PROVISIONS RELATING TO AVOIDING OF TAX IN REGARD TO INTERNATIO NAL TRANSACTIONS AND INCOME FROM INTERNATIONAL TRANSACTIONS HAS TO BE DE TERMINED AT ARMS LENGTH PRICE. THEREFORE, AS PER THE PROVISIONS CONT AINED UNDER SECTIONS 92 TO 94, INTERNATIONAL TRANSACTIONS ARE T O BE TAKEN INTO CONSIDERATION. THEREFORE, SEGMENTAL RESULTS ARE TO BE CONSIDERED AND NOT THE PROFIT AT ENTITY LEVEL 4.20. FOR THIS PROPOSITION RELIANCE IS ALSO PLACED ON FOLLOWING DECISIONS: - ACIT VS. TWINKLE DIAMOND : ITA NO. 5033/MUM/07 - ACIT VS. T TWO INTERNATIONAL PVT. LTD. : ITA NO. 56 44/MUM/2008 - ADDL. CIT VS. TEJDIAM : 130 TTJ 570 (MUM) - ABHISHEK AUTO INDUSTRIES LTD. VS. DCIT : ITA NO. 14 33/DEL/2009 - STARLITE VS. DCIT: ITA NO. 925/MUM/2006 - SMCC CONSTRUCTION INDIA LTD V. ADDL. CIT: 44 SOT 63 (DELHI) (URO) - EMERSON PROCESS MANAGEMENT (INDIA) PVT. LTD. VS. DC IT (ITA NO. 7878/MUM/2011), - PHOENIX MECANO (INDIA) LTD. VS. DCIT 49 SOT 515 - HINDUSTAN UNILEVER LTD. VS. ACIT (ITA NO. 7868/MUM/ 2010) - 3I INFOTECH LTD. VS. ITO (ITA NO. 21/MDS/2013) - SANDOZ (P) LTD. VS DCIT (25 ITR(TRIB) 347) ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 16 4.21. IT IS CLEAR THAT ASSESSES OP MARGIN OVER SALE S EARNED BY TRANSACTION OF SALE OF GOODS PURCHASED FROM ASSOCIATED ENTERPRISE, IN ACCORDANCE WITH THE AUDITED SEGMENT ACCOUNT, BEING WITHIN SAFE HARBOR R ANGE OF +/- 5% OF OP MARGIN OF THE COMPARABLE COMPANIES CONSIDERED BY TH E TPO AT 8.82%, THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE APPELLA NT SHOULD BE CONSIDERED AT ARMS LENGTH. 5. INCORRECT SELECTION OF BHARAT POWER CORPN. PVT. LTD. 4.22. THE TPO HAS CONSIDERED BHARAT POWER CORPN. PV T. LTD. IN THE FINAL SET OF COMPARABLE WITH OP OVER SALES AT 13.63%. THIS CO MPANY IS FUNCTIONALLY NOT COMPARABLE AS ITS A CENTRAL GOVERNMENT UNDERTA KING, RELATED TO COAL MINING INDUSTRY AND MAINLY PROVIDES SERVICES TO CO AL INDIA LTD. IT SUPPLIES HEAVY EARTH MOVING MACHINERY (HEMM) AND ITS PARTS . IT IS INCORPORATED FOR THE PURPOSE OF PROVIDING TRANSMISSION AND SUPPL Y OF EQUIPMENT SERVICES TO CENTRAL GOVERNMENT COMPANIES, SUCH AS COAL INDIA LIMITED AND ITS SUBSIDIARIES. (I) RELIANCE IN THIS REGARD IS PLACED ON THE DECISION O F MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF CHEMTEX GLOBAL ENGINEER S P. LTD VS. DOI (ITA NO.3590/MUM/2010), WHEREIN, THE HONBLE TRIBUN AL DIRECTED TO EXCLUDE ONE COMPANY RITES LIMITED FROM THE FINAL SE T OF COMPARABLES FOR THE VERY REASON THAT IT WAS A GOVERNMENT ENTERP RISE BY HOLDING AS UNDER: 25. EVEN WITH REGARD TO THE COMPARABLE COMPANIES WH ICH ARE TAKEN INTO CONSIDERATION BY THE AO/TPO THE LEARNED CIT(A) HAS CORRECTLY HELD THAT RITES LIMITED IS A GOVERNMENT O F INDIA ENTERPRISE AND CONSIDERING THE NATURE OF THE CONTRA CTS AND THE IMPLICIT GUARANTEE PROVIDED BY THE GOVERNMENT OF IN DIA, ETC. ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 17 RITES LIMITED CANNOT BE TAKEN AS A COMPARABLE CASE AND HENCE THE LEARNED CIT(A) WAS JUSTIFIED IN EXCLUDING THE S AME. 4.23. SIMILARLY, MUMBAI BENCH OF TRIBUNAL IN THE CA SE OF THYSSENKRUPP INDUSTRIES INDIA (P.) LTD. VS. ACIT (ITA NO.6460/MU M/2012), TOO, DIRECTED TO EXCLUDE A GOVERNMENT ENTERPRISE FROM COMPARABLES , BY HOLDING AS UNDER: 12.8.2 WE FIND IT AS UNDISPUTED THAT ENGINEERS IND IA LIMITED IS A GOVERNMENT COMPANY. IT HAS SEVERAL SEGMENTS WHICH ALSO INCLUDE TURNKEY PROJECT'. PAGE 700 OF THE PAPER BOO K IS A COPY OF ANNUAL REPORT OF ENGINEERS INDIA LIMITED ON TURN KEY PROJECT. IT CAN BE SEEN THAT THE REVENUE HAS ARISEN FROM COM PLETING PARAXYLENE PLANT OF IOCL AND FURTHER THAT COMPANY I S ENGAGED IN EXECUTION OF OTHER UNIT OF IOCL'S PANIPAT NAPHTH A CRACKER PROJECT. IN OUR CONSIDERED OPINION, THIS CASE SHOUL D NOT HAVE BEEN INCLUDED IN THE LIST OF FINAL COMPARABLES FOR TWO REASONS. FIRST REASON IS THAT PROFIT MOTIVE IS NOT A RELEVAN T CONSIDERATION IN CASE OF GOVERNMENT UNDERTAKINGS. MANY GOVERNMENT UNDERTAKINGS EVEN OPERATE ON LOSSES IN FURTHERANCE OF THE SOCIAL OBLIGATIONS OF THE GOVERN MENT. THE SECOND REASON IS THAT ENGINEERS INDIA LIMITED EARNE D INCOME FROM TURNKEY PROJECT BY SUCCESSFULLY COMPLETING THE PROJECT OF IOCL AND OTHER PUBLIC SECTOR UNDERTAKINGS. IN THAT SENSE OF THE MATTER, THE RELATED PARTY TRANSACTIONS ARE MUCH MORE THAN THE FILTER OF 25%. WE, THEREFORE, ORDER FOR THE EXC LUSION OF THIS CASE FROM THE LIST OF COMPARABLES. 4.24. THUS BHARAT POWER CORPN. WAS INCORPORATED ONL Y WITH AN OBJECTIVE OF PROVIDING SERVICES AND SUPPLIES TO COAL INDIA LIMIT ED AND ITS SUBSIDIARIES COMPANIES, IT HAS A FIXED CUSTOMER BASE WITH FIXED DEMAND AND SUPPLY. IT ASSUMES LESSER MARKET RISK AND INCURS LESS ON ACCOU NT OF MARKETING AND ADVERTISEMENT. IN VIEW OF THE AFORESAID, BHARAT POW ER CORPNSHALL BE EXCLUDED FROM THE FINAL SET OF COMPARABLE COMPANIES . (I) PRODUCTS DEALT BY THE COMPANY : BHARAT POWER CORPN IS UNDISPUTEDLY ENGAGED IN TRADING OF SPARE PARTS OF M INING AND EARTH MOVING MACHINERIES. FURTHER, CLAUSE 9 OF THE ANNUAL ACCOUNTS OF THE ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 18 COMPANY ALSO PROVIDES THAT THE COMPANY DEALS IN ONL Y ONE CLASS OF GOODS, SPARE PARTS FOR MINING AND EARTH MOVING MACH INERIES. WHEREAS ASSESSEE IS OPERATING IN AUTOMOBILE INDUSTRY AND EN GAGED IN THE BUSINESS OF TRADING OF SPARE PARTS OF AUTOMOBILE CA RS. IN CONTRADISTINCTION BHARAT POWER IS HAVING A DISTINC T PRODUCT PROFILE AS IT IS IN TRADING OF SPARE PARTS FOR MINING AND EART H MOVING EQUIPMENT. THUS IT IS NEITHER FUNCTIONALLY NOR ON FAR PARAMET ERS COMPARABLE WITH ASSESSEE, THEREFORE, IT SHOULD BE EXCLUDED FR OM THE FINAL SET OF COMPARABLES. (II) BUSINESS METHODOLOGY OF BHARAT POWER: IT IS A SOLE AUTHORIZED DISTRIBUTOR IN INDIA FOR PRODUCTS MANUFACTURED BY F OLLOWING COMPANIES: A. ALLISON TRANSMISSION INC., USA B. AVTEC LTD. (POWER PRODUCTS DIVISION), HOSUR, C. REIL ELECTRICALS INDIA LTD., PONDICHERRY D. PALL CORPORATION 4.24.1. IT ENJOYS THE BENEFIT OF MONOPOLISTIC ECONO MIES, WHEREIN, ONLY THE COMPANY HAS THE CONTROL TO SELL THE GOODS MANUF ACTURED BY AFORESAID WORLDWIDE RECOGNIZED COMPANIES, IN INDIA. HOWEVER, IN ASSESSEES CASE THE GOODS MANUFACTURED BY HONDA TRADING JAPAN OR ITS SI STER CONCERNS ARE ALSO TRADED IN INDIA THROUGH UNRELATED DISTRIBUTORS. THE APPELLANT SUPPLIES PARTS AND COMPONENTS TO THE VENDORS AND SUPPLIERS OF HOND A GROUP COMPANIES SUCH AS HONDA MOTORS AND SCOOTERS INDIA LIMITED AND HONDA SIEL CARS INDIA LTD. IT IS VERY COMMON IN INDIAN MARKET THAT THE SPARE PARTS OF HONDA ARE AVAILABLE AT THE AUTHORIZED SERVICE CENTRE OF H ONDA AS WELL AS OTHER NON RECOGNIZED/MULTI BRAND SHOWROOMS. ASSESSEE ONLY ACT S AS A CONDUIT BETWEEN THE CUSTOMERS IN INDIA AND THE ASSOCIATED ENTERPRIS ES. THE CUSTOMERS PLACES ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 19 ORDERS FOR AUTOMOBILE COMPONENTS AND SPARES ON THE APPELLANT. THE APPELLANT IN TURNS PLACES ORDER ON THE ASSOCIATED ENTERPRISES WHO HAS IDENTIFIES SUPPLIERS FOR SUPPLY SUCH PRODUCTS. THE ASSOCIATED ENTERPRISES NEGOTIATE WITH THE SUPPLIERS AND PLACES ORDERS FOR PROCUREMENT OF COMPONENTS. IT IS SUBMITTED THAT IN THE WHOLE TRANSACTION, THE APPELL ANT MERELY ACTS AS A CHANNEL FOR COMMUNICATION OF ORDER TO THE ASSOCIATE D ENTERPRISES. ON THE OTHER HAND, BPCL IS THE SOLE AUTHORIZED DISTRIBUTOR S OF SPECIALIZED EQUIPMENTS AND SPARES. IN VIEW OF THE AFORESAID, IT IS RESPECTFULLY SUBMITTED THAT THE FUNCTIONAL PROFILE OF THE APPELLANT IS ENT IRELY DIFFERENT FROM THE FUNCTIONAL PROFILE OF BHARAT POWER CORPORATION PVT LTD. 4.25. IN VIEW OF THE AFORESAID, SINCE THE BUSINESS MODEL OF THE BPC IS DIFFERENT FROM THE APPELLANT IN AS MUCH AS THE BPC ENJOYS A MONOPOLISTIC ECONOMY AND THE APPELLANT IS ESTABLISHED IN A COMPE TITIVE MARKET, THE SAME SHALL NOT BE CONSIDERED AS FUNCTIONALLY SIMILAR TO THE APPELLANT AND EXCLUDED FROM THE FINAL SET OF COMPARABLE COMPANIES. 4.26. RELIANCE IN THIS REGARD IS ALSO PLACED ON SUB -CLAUSE (2) OF CLAUSE B OF RULE 10 OF INCOME TAX RULES, REPRODUCED AS UNDER: 10 B .. (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: (A) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRE D OR SERVICES PROVIDED IN EITHER TRANSACTION; ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 20 (B) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, B Y THE RESPECTIVE PARTIES TO THE TRANSACTIONS; (C) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TER MS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE P ARTIES TO THE TRANSACTIONS; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INC LUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMEN T AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. 4.27. IT WOULD BE NOTED FROM THE ABOVE THAT, IN TER MS OF RULE 10B(2), THE COMPANY IS NOT COMPARABLE TO THE ASSESSEE FOR THE F OLLOWING REASONS AS UNDER; (I) SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRE D THE PRODUCTS DEALT BY THE COMPANY IS DIFFERENT AS THE C OMPANY IS ENGAGED IN TRADING OF SPARE PARTS FOR MINING AND EARTH MOVING EQUIPMENTS. (II) FUNCTIONS PERFORMED AND RISK ASSUMED : THE COMPANY WAS INCORPORATED ONLY WITH AN OBJECTIVE OF PROVIDING SE RVICES AND SUPPLIES TO COAL INDIA LIMITED AND ITS SUBSIDIARIES COMPANIES, IT HAS A FIXED CUSTOMER BASE WITH FIXED DEMAND AND SUP PLY. THE COMPANY IS ASSUMING LESSER MARKET RISK AND ALSO INC URRING LESS ON ACCOUNT OF MARKETING AND ADVERTISEMENT. ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 21 (III) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE R ESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE AND THE LEVEL O F MARKET: THE COMPANY ENJOYS A MONOPOLISTIC ECONOMY AS IT IS A SO LE AUTHORIZED DISTRIBUTOR OF PRODUCTS MANUFACTURED BY A NUMBER OF WORLDWIDE RECOGNIZED COMPANIES, IN INDIA. 4.28. BPCL WAS NOT CONSIDERED BY THE TPO IN THE FIN AL SET OF COMPARABLE COMPANIES IN THE PRECEDING ASSESSMENT YEAR, I.E. AY 2007-08. ON THIS COUNT ALSO THIS COMPANY IS NOT COMPARABLE TO THE ASSESSEE AND IS LIABLE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLE COMPANIES . 6. INCORRECT REJECTION OF SPECTRA INDUSTRIES LTD. 4.30. THE TPO HAS REJECTED SPECTRA INDUSTRIES LTD. IN THE SEARCH PROCESS ON BASIS OF DECLINING SALES. IN THIS REGARD, IT IS RES PECTFULLY SUBMITTED THAT REVENUE IS NOT A TRUE INDICATOR OF THE PERFORMANCE OF THE COMPANY AND THE EVALUATION OF COMPARABLE COMPANIES BASED ON REVENUE S IS NOT AN APPROPRIATE FILTER FOR THE FOLLOWING REASONS: A. REJECTION OF THE COMPANIES ON THE BASIS OF THE PROF IT MARGIN/DIMINISHING REVENUE RATHER THAN FUNCTIONAL O R ASSET PROFILE WOULD NOT MEET THE COMPARABILITY STANDARD REQUIRED IN APPLICATION OF TNMM. B. THE DIMINISHING REVENUES COMPANIES ARE AS MUCH A PA RT AND PARCEL OF AN INDUSTRY AS ARE INCREASING REVENUES MAKING COMPA NIES. A DECLINING REVENUE COMPANY MAY BE FACED WITH ISSUES SUCH AS CO MPETITION IN THE ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 22 MARKET PLACE, NEW TECHNOLOGY INTRODUCED BY COMPETIT ORS, CHOKED WORKING CAPITAL, THESE ISSUES ARE REFLECTIVE OF THE MARKET C. THE ARITHMETICAL MEAN IS A MEASURE OF CENTRAL TENDE NCY AND ELIMINATION OF DIMINISHING REVENUE MAKING COMPANIES WOULD INTRODUCE SKEWNESS IN THE SET OF COMPARABLES. ELIMI NATION OF COMPANIES WITH DIMINISHING REVENUE IS NOT REPRESENT ATIVE OF THE POPULATION D. THE RETENTION OF DIMINISHING REVENUE COMPANIES ALON GSIDE INCREASING REVENUE COMPANIES TENDS TO EVEN OUT THE RISK PROFIL E OF COMPARABLE COMPANIES. E. IF COMPANIES BASED ON DIMINISHING REVENUES/PERSISTE NT LOSSES ARE REJECTED THAN COMPANIES WITH ABNORMAL GROWTH IN REV ENUES/PROFITS SHOULD ALSO BE REJECTED FOR ARMS LENGTH ANALYSIS. F. THE DIMINISHING REVENUES SHOULD NOT BE CRITERIA TO REJECT COMPANIES THAT FULFILL OTHER COMPARABILITY CRITERIA AS COMPAR ABLES. THE COMPARABILITY ANALYSIS SHOULD BE BASED ON FAR ANALY SIS AND PROPER SELECTION OF COMPARABLES. G. A COMPANY WITH DIMINISHING REVENUES OVER A PERIOD O F TIME NEED NOT REFLECT THAT THE PERFORMANCE OF THE COMPANY IS DETE RIORATING AS IT MIGHT STILL HAVE POSITIVE PROFIT MARGIN. H. NEITHER OF THE COMPANIES SELECTED BY THE TAX PAYER HAS A BFIR REFERENCE NOR IS SICK ENTERPRISE AND HAS ONLY INCUR RED NORMAL BUSINESS ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 23 LOSSES AS A PART OF THEIR OPERATIONS. THE NET WORTH OF THESE COMPANIES IS ALSO POSITIVE. I. FURTHER, IF DIMINISHING REVENUE COMPANIES ARE TO BE ELIMINATED ON THE GROUNDS OF PREVIOUS YEAR REVENUES, THEN FOR OTHER S USTAINED COMPANIES, PREVIOUS YEAR AVERAGE FINANCIAL DATA SHO ULD ALSO BE TAKEN INTO ACCOUNT RATHER THAN SINGLE YEAR FINANCIAL INFO RMATION. J. THE TPO SHOULD RESTRICT THE FUNCTIONAL AND FINANCIA L DATA COMPARABILITY ONLY TO THE DATA OF THE RELEVANT FINA NCIAL YEAR. THE TPOS APPROACH BY APPLYING CRITERIA FAVORABLE TO TH E REVENUE WOULD BE PREJUDICIAL TO THE INTERESTS OF THE TAXPAYER. 4.31. FURTHER THE SALES OF THE COMPANY HAS INCREASE D SUBSTANTIALLY DURING THE YEAR 2009-10. IT COULD BE CLEARLY ANALYZED FROM THE BELOW TABLE THAT THE COMPANY HAS DOUBLED ITS SALES FROM 18 CRORES TO 36 CRORES DURING THE YEAR 2009-10. HENCE, IT COULD NOT BE A CASE WHERE THE CO MPANY IS UNDER NEGATIVE PHASE OF ECONOMIC CYCLE. FINANCIAL YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 SALES 39.17 27.06 21.58 18.76 36.26 4.32. IT WOULD ALSO BE PERTINENT TO NOTE THAT THE C OMPANY HAS WELL MANAGED TO MAINTAIN ITS PROFITS AND NET WORTH DURING THESE YEARS. TO CORROBORATE THIS FACT, A FIVE YEAR PROFIT ANALYSIS OF THE COMPANY IS GIVEN BELOW: FINANCIAL YEAR 2005-06 2006-07 2007-08 2008-09 2009-10 PBIT 0.91 1.06 -0.46 -0.61 0.89 NET WORTH 12.4 12.88 12 10.8 11.38 ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 24 4.33. IN VIEW OF THE AFORESAID, IT IS SUBMITTED THA T, SINCE THE COMPANY IS FUNCTIONALLY COMPARABLE TO THE APPELLANT WITH RESPE CT TO FUNCTIONS, ASSETS AND RISK, THE COMPANY SHALL BE INCLUDE IN THE FINAL LIS T OF COMPARABLE COMPANIES. FURTHER, SINCE THE SALES AND PROFITS OF THE COMPANY HAS INCREASED IN THE FUTURE YEARS, THE REASON OF ITS REJECTION IS ALSO C OULD NOT BE VALIDATED. 4.34. IT IS VEHEMENTLY ARGUED THAT IN PRECEDING ASS ESSMENT YEAR, DRP IN THE APPELLANTS OWN CASE HAS DIRECTED THE ASSESSING OFF ICER TO RE-COMPUTE THE ARMS LENGTH PRICE AFTER INCLUDING THE PROFIT/LOSS O F SPECTRA INDUSTRIES LIMITED, IN THE FINAL LIST OF COMPARABLE COMPANIES. THERE IS NO JUSTIFICATION TO DEVIATE FROM WHAT DRP ITSELF HAS ADOPTED IN PREC EDING YEAR. RE: FINAL COMPARABLE COMPANIES: 4.35. AFTER EXCLUDING BHARAT POWER LIMITED AND INCL UDING SPECTRA INDUSTRIES LIMITED AS COMPARABLE COMPANY IN THE FIN AL SET, THE AVERAGE PROFIT MARGIN OF THE FINAL COMPARABLE COMPANIES WORKS OUT TO 0.425% S.NO. COMPANY NAME PBIT/(SALES- RENT_INC)*100 1 STANES MOTOR PARTS LTD. 4.00 2 SPECTRA INDUSTRIES LIMITED -3.15 AVERAGE 0.425% 4.36. ACCORDINGLY, SINCE THE OPERATING PROFIT MARGI N OVER SALES EARNED BY THE APPELLANT IN UNDERTAKING THE TRANSACTION OF SAL E OF GOODS PURCHASED FROM ASSOCIATED ENTERPRISE, IN ACCORDANCE WITH THE AUDIT ED SEGMENT ACCOUNT, AT 8.23% IS HIGHER THAN THE AVERAGE OPERATING PROFIT M ARGIN OF THE COMPARABLE COMPANIES CONSIDERED ABOVE AT 0.425%, THE INTERNATI ONAL TRANSACTION UNDERTAKEN BY THE APPELLANT SHOULD BE CONSIDERED AT ARMS LENGTH. ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 25 4.37. FURTHER, EVEN IF CONSIDERING THE OPERATING PR OFIT MARGIN COMPUTED BY THE TPO AT () 0.0988%, THE MARGIN OF THE APPELLANT IS WITHIN SAFE HARBOR (+/-) 5% OF THE AVERAGE OF THE COMPARABLE COMPANIES AT 0.425%. FOR THIS REASON TOO, THE INTERNATIONAL TRANSACTION UNDERTAKE N BY THE APPELLANT SHOULD BE CONSIDERED AT ARMS LENGTH. 4.38. WITHOUT PREJUDICE, LD COUNSEL CONTENDS THAT T HE TPO IN THE PRECEDING ASSESSMENT YEAR CONSIDERED ONLY INTERNATIONAL TRANS ACTIONS (WITH RELATED PARTY) OF PURCHASE OF GOODS AND EXPORT OF GOODS FOR THE PURPOSE OF BENCHMARKING: 4.39. IT IS THUS SUBMITTED THAT, THE TPO IN THE PRE CEDING YEAR, SOUGHT TO BENCHMARK THE TRADING SEGMENT OF THE APPELLANT AND HAD COMBINED THE INTERNATIONAL TRANSACTION OF IMPORT OF GOODS AND EX PORT OF GOODS TO AND FROM THE ASSOCIATED ENTERPRISES. CONSISTENT WITH THE BEN CHMARKING OF INTERNATIONAL TRANSACTION OF TRADING SEGMENT IN THE PRECEDING YEA R BY THE TPO, THE OPERATING PROFIT MARGIN OF THE APPELLANT CONSIDERIN G THE INTERNATIONAL TRANSACTIONS UNDER TRADING SEGMENT, FROM THE AUDITE D AND CERTIFIED SEGMENT PROFIT STATEMENT, WORKS OUT TO 8.23%, AS UNDER: TRADING SEGMENT SALE OF IMPORTED GOODS EXPORT TO ASSOCIATED ENTERPRISES AVERAGE SALES (A) 79,35,91,469 7,747,651 80,13,39,120 OPERATING PROFIT OVER SALES (B) 8.23% 8.64% TOTAL OPERATING PROFIT (A*B) 6,53,04,179 6,69,492 6,59,73,671 OP/SALES (APPELLANT) 8.23% OP/SALES (COMPARABLES) 8.82% 4.40. ACCORDINGLY, SINCE THE OPERATING PROFIT MARGI N OVER SALES EARNED BY THE APPELLANT IN UNDERTAKING THE TRANSACTION OF EXP ORT OF GOODS AND SALE OF GOODS PURCHASED FROM ASSOCIATED ENTERPRISE, IN ACCO RDANCE WITH THE AUDITED ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 26 SEGMENT ACCOUNT, AT 8.23% IS WITHIN SAFE HARBOR RAN GE OF +/- 5%, THAN THE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLE C OMPANIES CONSIDERED ABOVE AT 8.82%, THE INTERNATIONAL TRANSACTION UNDER TAKEN BY THE APPELLANT SHOULD BE CONSIDERED AT ARMS LENGTH. 4.41. EVEN CONSIDERING THE UNAUDITED SEGMENTAL PROF IT RELIED UPON BY THE TPO, THE PROFIT MARGIN OF THE APPELLANT IN EXPORT A ND IMPORT SEGMENT WORKOUT TO 5.32%, AS UNDER: TRADING SEGMENT SALE OF IMPORTED GOODS EXPORT TO ASSOCIATED ENTERPRISES AVERAGE SALES (A) 793,591,469 77,47,651 801,339,120 OPERATING PROFIT OVER SALES (B) 5% 53% TOTAL OPERATING PROFIT (A*B) 3,85,55,625 40,92,138 4,26,47,763 OP/SALES (APPELLANT) 5.32% OP/SALES (COMPARABLES) 8.82% 4.42. CONSEQUENTLY, AS THE OPERATING PROFIT MARGIN OVER SALES OF THE APPELLANT, CONSIDERING INTERNATIONAL TRANSACTION OF EXPORT OF GOODS AND IMPORT OF GOODS FROM THE UNAUDITED SEGMENT ACCOUNTS AT 5.32% IS WITHIN SAFE HARBOR RANGE OF +/-5% OF THE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLE COMPANIES CONSIDERED BY THE TPO AT 8.82% , THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE APPELLANT SHOULD BE C ONSIDERED AT ARMS LENGTH. 5. LD. CIT DR SHRI YOGESH VERMA RELIED ON THE ORDER S OF LOWER AUTHORITIES. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN OUR CONSIDERED VIEW LD TPO AND DRP HAVE NOT APPRECIATED THE FACTS THAT ASSESSEE HAS MADE OUT A STRONG PRIMA FACIE CASE ITA NO. 4811/DEL/2012 HONDA TRADING CORPN. INDIA PVT. LTD. 27 ABOUT BHARAT POWER CORPN., BEING NOT AN APPROPRIAT E COMPARABLE IN TERMS OF FUNCTIONALITY AND FAR. WITH THE MATERIAL ON RECO RD BOTH THE AUTHORITIES OUGHT TO HAVE GIVEN OBJECTIVE FINDINGS ON THE SUBMI SSIONS MADE BY THE ASSESSEE IN THIS BEHALF. 6.1. BESIDES DRP ITSELF IN PRECEDING YEAR HAS ACCE PTED THE INCLUSION OF ASSESSEES COMPARABLE SPECTRA INDUSTRIES LIMITED, I N FINAL LIST OF COMPARABLE. THUS TPOS ORDER HAS NOT CONSIDERED THI S ASPECT. WE FIND NO JUSTIFICATION ON RECORD TO DEVIATE FROM WHAT DRP HA S ADOPTED. 6.2. IN THE GIVEN FACTS AND CIRCUMSTANCES THE ENDS OF JUSTICE WILL BE MET BY SETTING ASIDE THE ISSUES TO AO TO DECIDE THEM IN AC CORDANCE WITH LAW KEEPING IN VIEW OUR OBSERVATIONS, FACTS AND MATERIAL ON RE CORD. AO SHALL PASS A REASONED ORDER IN ACCORDANCE WITH LAW. 6.3. IN VIEW THEREOF APPEAL OF THE ASSESSEE IS ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 14-03-2014. SD/- SD/- ( B.C. MEENA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 14-03-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR