M/s. Eaton Industrial Systems Pvt. Ltd., Pune V. Deputy Commissioner of Income-tax, Pune

ITA 505/PUN/2015

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 4647 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 29-01-2020
• Assessment Year: 2010-2011
• Appeal Filed On: 21-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Avoidance of tax; Competent authority; Set aside
• Section: 92C; 92D; 92B; 10B; 208; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER . / ITA NO.505/PUN/2015 / ASSESSMENT YEAR : 2010-11 EATON INDUSTRIAL SYSTEMS PVT. LTD., 145, OFF MUMBAI-PUNE ROAD, PIMPRI, PUNE 411 018 PAN : AABCE4955C VS. DCIT, CIRCLE-8, PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER DATED 18-02-2015 PASSED BY THE ASSESS ING OFFICER (AO) U/S.143(3) R.W.S.144C(13) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER CALLED THE ACT) IN RELATION TO THE ASSESSMENT YE AR 2010-11. 2. THE ASSESSEE HAS RAISED AN ADDITIONAL GROUND, WHICH RE ADS AS UNDER : APPELLANT BY SHRI VISHAL KALRA & SHRI SAUNYENDRA TONAR RESPONDENT BY SHRI T. VIJAYA BHASKAR REDDY DATE OF HEARING 21-11-2019 DATE OF PRONOUNCEMENT 25-11-2019 ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER PASSED BY TRANSFER PRICING OFFICER (TPO), THE CONSEQUENTIAL TRANSFER PRICING ADJUSTMENTS MADE INCLUDING THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) IS B AD IN LAW AND LIABLE TO BE QUASHED, AS THE ORDER DATED JANUARY 28, 2014 PASSED UNDER SECTION 92CA OF THE INCOME-TAX AC T, 1961 (ACT), HAS BEEN PASSED BY AN OFFICER NOT HAVING JURISDICTION TO ACT AS TPO UNDER CHAPTER-X OF THE ACT. 3. THE ASSESSEE, THROUGH THE ABOVE ADDITIONAL GROUND, HA S CALLED IN QUESTION THE VALIDITY OF THE FINAL ASSESSMENT ORDER ON THE RAISON DETRE THAT THE ORDER U/S.92CA(3), EVENTUALLY CULMINATING IN TO THE FINAL ASSESSMENT ORDER, CAME TO BE PASSED BY THE ADDL. COMMISSIONER OF INCOME-TAX, PUNE, WHO IS NOT COMPETENT TO P ASS SUCH AN ORDER. THE SAME BEING LEGAL GROUND NOT REQUIRIN G ANY FRESH EXAMINATION OF FACTS, IS ADMITTED FOR HEARING IN THE LIGHT OF THE JUDGMENT OF HONBLE SUPREME COURT IN NATIONAL THERMAL POWER COMPANY LTD. VS. CIT (1998) 229 ITR 383 (SC). 4. NOW WE ESPOUSE THE ADDITIONAL GROUND FOR CONSIDERATION ON MERITS. THE FACTUAL PANORAMA IS THAT THE ORDER U/S.92CA(3) OF THE ACT WAS PASSED BY THE ADDL. COMMISSIONER OF INCOME-TAX (TP)-1, PUNE, IN THE CAPACITY OF THE TRANSFER PRICING OFFICER OF T HE ASSESSEE. THE CRUX OF THE ARGUMENTS MADE BY THE LD. AR ON THIS ISS UE IS THAT A TRANSFER PRICING ORDER, AT THE MATERIAL TIME, COULD HAVE BEEN PASSED ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 3 BY THE JOINT COMMISSIONER OF INCOME-TAX (JCIT) OR DEPUTY COMMISSIONER OF INCOME-TAX (DCIT) OR ASSISTANT COMMISSIONE R OF INCOME-TAX (ACIT). SINCE THE IMPUGNED ORDER U/S. 92CA(3 ) OF THE ACT CAME TO BE PASSED BY THE ADDL. COMMISSIONER OF INCOME -TAX, THE LD. AR CONTENDED THAT THE FINAL ASSESSMENT ORDER, IMBIBIN G THE SUBSTANCE OF SUCH AN INVALID AND ILLEGAL ORDER, BE QUASHED. TO BUTTRESS THIS ARGUMENT, THE LD. AR SUBMITTED WITH REFERENCE TO ORDER NO.01/2003 DATED 06-02-2003, THAT THE AUTHORITIES COMPETENT TO FUNCTION AS THE TRANSFER PRICING OFFICERS WERE LISTED FOR THE FIRST TIME AND IN SO FAR AS THE PUNE JURISDICTION IS CONCERNED, ONLY THE JOINT COMMISSIONER OF INCOME-TAX (HEREINAFTER ALSO CALLED `TH E JCIT) (TP)-1, MUMBAI WAS AUTHORIZED TO ACT AS TRANSFER PRICING OFFICER (TPO). THEN HE REFERRED TO NOTIFICATION NO.196/200 5 DATED 09-09-2004 AS PER WHICH AGAIN ONLY THE JCIT, MUMBAI CO ULD ACT AS TPO FOR PUNE JURISDICTION. HE TOOK US THROUGH NOTIFICATION NO . 262/2006, DATED 14-09-2006, WHICH EXPANDED THE NUMBER O F AUTHORITIES ELIGIBLE TO ACT AS TPO COVERING NOT ONLY THE JCIT BUT ALSO THE DCIT OR THE ACIT FOR THE PUNE JURISDICTION. HE REF ERRED TO NOTIFICATION NO. 231/2007 DATED 22-08-2007 AGAIN PROVIDING FO R THE JCIT OR THE DCIT OR THE ACIT TO ACT AS THE TPO FOR THE PU NE JURISDICTION. REFERRING TO THE NOTIFICATION NO. 59/2014 DATED 0 3-11- ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 4 2014, THE LD. AR INVITED OUR ATTENTION TOWARDS THE ADDITIONAL COMMISSIONER OF INCOME-TAX HAVING ALSO BEEN ROPED INTO TO ACT AS TPO IN ADDITION TO THE JCIT/DCIT/ACIT. IN VIEW OF THE FACT TH AT THE ADDITIONAL CIT HAS BEEN AUTHORIZED TO ACT AS TPO ONLY W.E .F. 03-11-2014, THE LD. AR SUBMITTED THAT THE TRANSFER PRICING OR DER PASSED IN THE CASE OF THE ASSESSEE ON 28-01-2014 BY TH E ADDITIONAL CIT WAS VIOLATIVE OF THE MANDATE OF THE CIRCULARS/NOTIFICATIONS AN D THE SAME SHOULD BE QUASHED. THE LD. DR STRONGLY OBJECTED TO THE SAME. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH TH E RELEVANT MATERIAL ON RECORD. SECTION 92 PROVIDES THAT ANY INCOM E ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAV ING REGARD TO THE ARMS LENGTH PRICE. SECTION 92CA(1) PROVIDES THAT WHERE ANY ASSESSEE HAS ENTERED INTO AN INTERNATIONAL TRANSAC TION ETC. AND THE AO CONSIDERS IT NECESSARY SO TO DO, HE MAY, WITH TH E PREVIOUS APPROVAL OF THE COMPETENT AUTHORITY REFER THE COMP UTATION OF THE ARM'S LENGTH PRICE OF THE SAID INTERNATIONAL TRANSACTION ETC. TO THE TPO. DEFINITION OF TRANSFER PRICING OFFICER HAS BEEN G IVEN IN EXPLANATION BELOW SECTION 92CA(7), WHICH RUNS AS UNDER : ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 5 FOR THE PURPOSES OF THIS SECTION, 'TRANSFER PRICING OFFICER' MEANS A JOINT COMMISSIONER OR DEPUTY COMMISSIONER OR ASSISTANT COMMISSIONER, AUTHORISED BY THE BOARD TO PERFORM ALL OR ANY OF THE FUNCTIONS OF AN ASSESSING OFFICER SPECIFIED IN SECTIONS 92C AND 92D IN RESPECT OF ANY PERSON OR CLASS OF PERSONS.'. 6. THE CASE OF THE ASSESSEE IS THAT SINCE THE DEFINITION O F THE TRANSFER PRICING OFFICER HAS NO REFERENCE TO THE ADDITIONAL CIT, WHICH POSITION IS FURTHER FORTIFIED BY THE FACT THAT AT THE MATERIA L TIME ONLY THE JCIT AND BELOW WERE COMPETENT TO BE NOMINATED SO, THE ORDER PASSED IN THE CASE OF THE ASSESSEE BY THE ADDITIO NAL CIT IS BAD IN LAW. THE FIRST AND THE FOREMOST THING WHICH COMES OUT OF THE DEFINITION OF THE TRANSFER PRICING OFFICER, AS HAS BEEN RIGHTLY STATED BY THE LD. AR AS WELL, THAT THE SAME IS EXCLUSIVE AND HENCE CANNOT BE STRETCHED BY IMPLICATION. GOING BY THE MANDATE OF THE DEF INITION, IN SO FAR AS WE ARE CONCERNED, IT IS VIVID THAT THE REFEREN CE IS TO JOINT COMMISSIONER AND NOT THE ADDITIONAL COMMISSIONER OF INCOME TAX. THOUGH THE ARGUMENT OF THE ASSESSEE LOOKS ATTRACTIVE AT THE F IRST FLUSH, BUT LOSES ITS SHINE ON AN IN-DEPTH SCRUTINY. 7. SECTION 116 OF THE ACT DEFINES THE TERM `INCOME-TAX AUTHORITIES AND OPENS BY STATING THAT : `THERE SHALL BE THE FOLLO WING CLASSES OF INCOME-TAX AUTHORITIES FOR THE PURPOSES OF THIS AC T, NAMELY. THEN THE AUTHORITIES HAVE BEEN SPELT OUT. CLAUSE ( CC) TALKS ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 6 OF `ADDITIONAL DIRECTORS OF INCOME-TAX OR ADDITIONAL COMMISSIONERS OF INCOME-TAX OR ADDITIONAL COMMISSIONERS OF INCOME-TAX (APPEALS). CLAUSE (CCA) REFERS TO `JOINT DIRE CTORS OF INCOME-TAX OR JOINT COMMISSIONERS OF INCOME-TAX. THUS IT IS EVIDENT THAT THE RELEVANT AUTHORITIES FOR OUR PURPOSE ARE THE ADDITIONAL COMMISSIONERS OF INCOME-TAX (ADDTL. CIT) AND JOIN T COMMISSIONERS OF INCOME-TAX (JCIT). AT THIS STAGE, IT WOULD BE SIGNIFICANT TO NOTE THE DEFINITION SECTION 2 OF THE ACT - WHICH STAR TS WITH THE WORDS : `IN THIS ACT, UNLESS THE CONTEXT OTHERWISE REQ UIRES, WHICH MEANS THAT UNLESS THERE IS A DIFFERENT MEANING GIVEN IN THE RESPECTIVE SECTION, THE MEANING GIVEN TO THE TERMS AND EXPRES SIONS IN SECTION 2 SHALL PREVAIL. SECTION 2(1C) DEFINES `ADDITIONAL COMMISSIONER TO MEAN `A PERSON APPOINTED TO BE AN ADDITIONA L COMMISSIONER OF INCOME-TAX UNDER SUB-SECTION (1) OF SECTIO N 117. IN THE LIKE MANNER, SECTION 2(28C), AS INSERTED BY THE FINAN CE (NO.2) ACT, 1998 W.E.F. 1.10.1998, DEFINES `JOINT COMM ISSIONER TO MEAN `A PERSON APPOINTED TO BE A JOINT COMMISSIONER OF INC OME-TAX OR AN ADDITIONAL COMMISSIONER OF INCOME-TAX UNDER SUB-SEC TION (1) OF SECTION 117. ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 7 8. WHEN WE TURN TO THE DEFINITION OF `TRANSFER PRICING OF FICER, IT TRANSPIRES THAT THE SAME REFERS TO `JOINT COMMISSIONER AND NOT THE `JOINT COMMISSIONER OF INCOME-TAX. WHEREAS THE `JOINT COMMISSIONER OF INCOME-TAX IS AN AUTHORITY U/S 116(CCA) OF THE ACT, THE `JOINT COMMISSIONER AS DEFINED IN SECTION 2(28C) IS A TERM WHICH ENCOMPASSES TWO INCOME-TAX AUTHORITIES, NAMELY, JOIN T COMMISSIONER OF INCOME-TAX [BEING AN AUTHORITY U/S 116(CCA) ] AND `ADDITIONAL COMMISSIONER OF INCOME-TAX [BEING AN AUTHORITY U/S 116(CC)]. EXPLANATION BELOW SECTION 92CA(7) DEFINING THE TER M `TRANSFER PRICING OFFICER, INTER ALIA, REFERS TO THE TERM `JOINT COMMISSIONER AND NOT THE AUTHORITY `JOINT COMMISSIONER OF INCOME-TAX. IN THE ABSENCE OF ANY SEPARATE DEFINITION OF THE TERM `JOINT COMMISSIONER GIVEN IN CHAPTER-X OF THE ACT, ITS GENERA L DEFINITION AS GIVEN IN SECTION 2(28C) WOULD APPLY, AS PER WHIC H BOTH THE JCIT AND ADDTL. CIT CAN ACT AS TPO. ON HARMONIOUSLY RE ADING EXPLANATION BELOW 92CA(7) ALONG WITH SECTIONS 116 ON ONE HAN D AND SECTION 2(28C) ON THE OTHER, THE SEQUITUR IS THAT BOTH THE AUTHORITIES, NAMELY, JCIT AND ADDTL. CIT CAN ACT AS TPO AN D THERE IS NO STATUTORY PROSCRIPTION IN THE ADDTL. CIT ACTING AS TPO IN THE FACTS AND CIRCUMSTANCES OF THE CASE. AS THE IMPUGNED O RDER HAS BEEN PASSED BY THE ADDTL. CIT ON 28-01-2014, WHICH OBVIO USLY IS ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 8 AFTER THE INSERTION OF THE DEFINITION OF JOINT COMMISSIONER GIVEN IN SECTION 2(28C), WE HOLD THAT NO INFIRMITY CAN BE FOUND IN HIS PASSING THE ORDER U/S.92CA(3). ERGO, THE ADDITIONAL GROUND RAISED ON BEHALF OF THE ASSESSEE IS JETTISONED. 9. GROUND NOS. 2 TO 6 AND 8 CHALLENGE THE MAKING OF TRANS FER PRICING ADDITION AMOUNTING TO RS.3,83,29,479/-. 10. SUCCINCTLY, THE FACTUAL MATRIX OF THE GROUNDS IS THAT THE ASSESSEE IS AN INDIAN COMPANY, BEING AS ASSOCIATED ENTERP RISE (AE) OF EATON CORPORATION, USA, WHICH IS A GLOBAL TECHNOLOGY LEADER IN ELECTRICAL COMPONENTS AND SYSTEMS FOR POWER, QUALITY, DISTRIBUTIO N AND CONTROL ETC. THE ASSESSEE FILED ITS RETURN DECLARING TO TAL LOSS OF RS.5,06,03,760 REPORTING CERTAIN INTERNATIONAL TRANSACTIONS IN FORM NO.3CEB. THE AO MADE A REFERENCE TO THE TRANSFER PRIC ING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS. THE ASSESSEE REPORTED INTERNATIONAL TRANSACTIONS, INTER ALIA, OF IMPORT OF RAW MATERIALS AND EXPORT OF FINISHED GOODS IN THE TRUCKS MANUFACTURING SEGMENT. THE ASSESSEE BENCHMARKED THESE TWO TRANSACTIONS SEPARATELY. THE INTERNATIO NAL TRANSACTION OF IMPORT OF RAW MATERIAL WAS BENCHMARKED BY TAKING TWO FOREIGN AES AS TESTED PARTIES AND CERTAIN FOREIGN COMPAR ABLES. ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 9 THE INTERNATIONAL TRANSACTION OF EXPORT OF FINISHED GOODS WAS BENCHMARKED BY TREATING SELF AS THE TESTED PARTY. FOR PRO CESSING BOTH THE ABOVE TRANSACTIONS INDEPENDENTLY, THE ASSESSEE APP LIED TRANSACTIONAL NET MARGINAL METHOD (TNMM) AND CLAIMED THAT THESE TRANSACTIONS WERE AT ALP. THE TPO REJECTED THE SELECTION OF TWO AES AS TESTED PARTIES IN THE INTERNATIONAL TRANSACTION OF IMP ORT OF RAW MATERIALS BECAUSE OF THE ABSENCE OF ANY VERIFIABLE DATA FOR COMPUTATION OF THE ALP AND UNVERIFIABLE CONTENTIONS PUT FORTH ON BEHALF OF THE ASSESSEE. HE THUS AGGREGATED BOTH THE TRANS ACTIONS OF IMPORT OF RAW MATERIAL AND EXPORT OF FINISHED GOODS AND BENCHMARKED THEM ON A COLLECTIVE BASIS BY TAKING ASSESSEE ITSELF AS THE TESTED PARTY. THE TPO SELECTED THREE DOMESTIC COMPANIES AS COMPARABLE WITH THEIR AVERAGE ADJUSTED PROFIT LEVEL INDICATOR (PLI), AFTER CAPACITY UTILIZATION ADJUSTMENT, AT (-) 22.62%. THE AS SESSEES PLI OF (-)27.96% LED TO THE TRANSFER PRICING ADJUSTMENT OF RS.3,83,29,479/-. THE DISPUTE RESOLUTION PANEL (DRP) ECHO ED THE DRAFT ORDER INCORPORATING THE TRANSFER PRICING ADJUSTMENT AS PROPOSED BY THE TPO. AGGRIEVED THEREBY, THE ASSESSEE IS IN APPEAL B EFORE THE TRIBUNAL. ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 10 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE REPORTED 13 INTE RNATIONAL TRANSACTIONS. THE INTERNATIONAL TRANSACTIONS OF IMPORT OF RAW MATERIALS AND EXPORT OF FINISHED GOODS UNDER THE EXTANT DISPU TE FALL IN THE CATEGORY OF MANUFACTURING OF TRUCKS SEGMENT. IN A DDITION, THERE ARE OTHER SEGMENTS, NAMELY, TRADING ACTIVITIES, TEST LAB S, FILTRATION, AUTOMOTIVE, IITC+CORPORATE, WITH WHICH WE ARE NOT CONCERNED. THE ASSESSEE IMPORTED RAW MATERIAL FOR SUCH MANUFACTURING OF TRUCKS FROM ITS AES AND ALSO EXPORTED FINIS HED GOODS TO ITS AES IN ADDITION TO MAKING DOMESTIC SALES. THE AS SESSEE BENCHMARKED THE INTERNATIONAL TRANSACTION OF IMPORT OF RAW M ATERIAL INDEPENDENT OF THE INTERNATIONAL TRANSACTIONS OF EXPORT OF FINISH ED GOODS. FOR BENCHMARKING THE IMPORT OF RAW MATERIALS, THE ASSESSEE CHOSE TWO FOREIGN/ASSOCIATED ENTERPRISES AS TESTED PARTIES A ND CERTAIN FOREIGN COMPANIES AS COMPARABLE. WHEN THE TPO REQU IRED THE ASSESSEE TO PRODUCE THE FINANCIALS OF THE TESTED PARTIES AND ALSO OF THE COMPANIES CHOSEN AS COMPARABLE, THE ASSESSEE FAILE D TO DO SO AND RELIED ONLY ON SOME CERTIFICATE FROM AE. SUCH CERTIFICATE CANNOT OBVIOUSLY BE A SUBSTITUTE OF THE ANNUAL ACCOUNTS OF THE AES O N THE BASIS OF WHICH THE BENCHMARKING CAN BE DONE. NOT ONLY TH E FINANCIALS OF THE TWO AES, NAMELY, EATON, POLAND AND EATON, BRAZIL ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 11 WERE NOT MADE AVAILABLE TO THE TPO, EVEN THE DATA OF FOREIGN COMPANIES CHOSEN AS COMPARABLE WAS INCOMPLETE AND UNVER IFIABLE. 12. AT THIS STAGE, IT IS USEFUL TO NOTE THAT UNLIKE NORMAL PROVISIONS WHERE THE ONUS IS ON THE AO TO PROVE THAT APPARENT IS NOT RE AL AND THERE IS AN UNDERSTATEMENT OF INCOME, UNDER THE TRANSFER P RICING PROVISIONS, THE ONUS IS ON THE ASSESSEE TO PROVE THAT THE A PPARENT IS REAL AND THERE IS NO UNDERSTATEMENT OF INCOME ON ACCOUNT OF INTERNATIONAL TRANSACTIONS. THIS CAN BE DONE ONLY BY SHOWING TH AT THE PROFIT ETC. EARNED BY IT FROM THE INTERNATIONAL TRANSACTIONS IS AT THE SAME LEVEL AS WOULD HAVE ARISEN IN AN INDEPENDENT SITUATIO N BETWEEN UNCONTROLLED PARTIES. SINCE THE ENTIRE TRANSFER PRICING EXERCISE IS BASED ONLY ON COMPARING THE MARGIN ETC. OF THE TESTED PARTY WITH THE AVERAGE MARGIN ETC. OF THE COMPARABLES, WE H OLD THAT IN THE ABSENCE OF ANY RELIABLE AND VERIFIABLE DATA OF THE SO -CHOSEN TESTED PARTIES AND ALSO OF THE SO-CHOSEN COMPARABLES FACILITATIN G THE COMPARISON, THE TPO WAS JUSTIFIED IN DISCARDING THE ASSESSEE VERSION. ONCE IT IS HELD THAT THE ASSESSEE FAILED TO SUBSTANTIATE THE BENCHMARKING OF THE INTERNATIONAL TRANSACTION OF IMPORT OF RA W MATERIALS FOR WANT OF THE RELEVANT DATA, WE HOLD THAT NO EX CEPTION ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 12 CAN BE TAKEN TO THE VIEW CANVASSED BY THE TPO IN REJECTING THE SAME AND PROCEEDING WITH DETERMINING THE ALP IN HIS OWN WAY. 13. NOTWITHSTANDING THE ABOVE, IT IS RELEVANT TO NOTE THAT A TESTED PARTY IS A PARTY IN WHOSE HANDS A TRANSACTION BETWEEN THE TWO RELATED ENTERPRISES IS TESTED VIS--VIS OTHER COMPARABLE UNCONTROLLED TRANSACTIONS FOR ENSURING THAT IS NOT STRUCTURED IN SUCH A WA Y SO AS TO DEPRIVE THE INDIAN EXCHEQUER OF THE RIGHTFUL TAX DUE TO IT. UNDER THE TNMM, IT IS THE PROFIT RATE OF THE TESTED PARTY WHICH IS COMPAR ED WITH THAT OF THE COMPARABLES FOR ASCERTAINING IF THE PROFIT FROM THE TRANSACTIONS BETWEEN THE RELATED PARTIES HAS BEEN DECLARED IN INDIA AT ARMS LENGTH. IN CASE, PROFIT RATE OF THE TESTED PARTY TURN S OUT TO BE LESS ON A COMPARATIVE ANALYSIS, THEN SUBJECT TO OTHER PROVIS IONS, AN UPWARD INCREASE IN THE PROFIT OF THE INDIAN ENTITY IS MADE PRO TANTO . NOW THE QUESTION ARISES AS TO WHETHER THE FOREIGN/ASSOCIATED ENTERPRISE(S) CAN BE CONSIDERED AS TESTED PARTY OR ONLY TH E INDIAN ENTITY, WHICH HAS RECORDED THE TRANSACTION IN ITS BOOKS OF ACC OUNT, CAN BE SO CONSIDERED? 14. FOR THIS PURPOSE, WE NEED TO VISIT THE PROVISIONS OF THE CHAPTER-X OF THE ACT WITH THE CAPTION 'SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX' DEALING WITH THE COMPUTATION OF INCOME F ROM ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 13 INTERNATIONAL TRANSACTIONS HAVING REGARD TO ALP. SECTION 92(1) O F THE ACT PROVIDES THAT : 'ANY INCOME ARISING FROM AN INTERNATION AL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LE NGTH PRICE'. THUS, THIS PROVISION APPLIES TO INCOME OF AN ENTERPRISE FROM AN INTERNATIONAL TRANSACTION, WHICH IS CHARGEABLE TO TAX UNDER THE ACT. THE TERM 'INTERNATIONAL TRANSACTION' HAS BEEN DEFINED IN SECTION 92B TO MEAN 'A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN TH E NATURE OF PURCHASE OF TANGIBLE . PROPERTY...... THE METHOD OLOGY FOR COMPUTATION OF ARM'S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION HAS BEEN SET OUT IN SECTION 92C(1) OF THE ACT TO BE AS PER ANY OF THE PRESCRIBED METHODS, INCLUDING THE TNM METHOD. THE ASSESSEE ADOPTED THIS AS THE MOST APPROPRIATE METHOD, WHICH WAS NOT DISTURBED BY THE TPO. THE MECHANISM FOR DETERMINING THE ALP UNDER THE TNM METHOD HAS BEEN ENSHRINED IN CLAUSE (E) OF RULE 10B(1), WHICH RUNS AS UNDER : '(I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE ; ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 14 (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (II) ARISIN G IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY 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) ; (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION.' 15. THE TERM `ENTERPRISE UNDER THE TNM METHOD, AND F OR THAT MATTER ALL OTHER METHODS, HAS BEEN USED TO INDICATE THE ASSESS EE IN WHOSE HANDS THE BENCHMARKING OF THE INTERNATIONAL TRANSACTION IS DONE AND THE TERM `ASSOCIATED ENTERPRISE HAS BEEN USED TO DENOTE THE FOREIGN/AE, BEING THE OTHER RELATED PARTY TO THE INTERNATIONA L TRANSACTION. IT IS SO BORNE OUT FROM RULE 10B(1)(B)(I) UNDE R THE ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 15 RESALE PRICE METHOD, WHICH PROVIDES THAT : `THE PRICE AT WHIC H PROPERTY PURCHASED . BY THE ENTERPRISE FROM AN ASSOCIATED ENTERPRISE IS RESOLD IS IDENTIFIED. AS THIS METHOD IS USUALLY APPLIED IN THE HANDS OF THE PARTY PURCHASING THE GOODS AND THEN RESELLING IT, THERE REMAINS NO DOUBT THAT THE TERM `ENTERPRISE HAS BEEN USED FOR THE INDIAN ASSESSEE PURCHASING THE GOODS FOR RESALE AND THE TERM `ASSOCIATED ENTERPRISE HAS BEEN USED FOR A SELLER FOREIGN/AE. COMING BACK TO THE TNM METHOD, RULE 10B(1)(E) (I) PROVIDES THAT THE NET PROFIT MARGIN ` REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO ` WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE, WHICH IS THEN COMPARED WITH THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATE D ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION. THE MODUS OPERANDI OF DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION UNDER THIS METHOD IS THAT, FIRSTLY, THE PROFIT RATE REALIZED OR EARNED BY THE ASSESSEE FROM A TRANSACTION WITH ITS AE IS DETERMINED (SA Y, PROFIT A), WHICH IS THEN COMPARED WITH THE ADJUSTED RATE OF PROFIT O F COMPARABLE CASES (SAY, PROFIT B) SO AS TO ASCERTAIN IF `P ROFIT A IS AT ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 16 ARM'S LENGTH VIS--VIS `PROFIT B. IF IT IS NOT, THEN, AN ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT, SUBJECT TO OTHER PROVIS IONS, IS MADE IN THE HANDS OF THE ASSESSEE HAVING REGARD TO THE DIFFERENCE BETWEEN THE RATES OF PROFIT A AND PROFIT B. THE RATE OF PR OFIT OF COMPARABLE CASES (PROFIT B) MAY BE COMPUTED FROM INTERNA LLY OR EXTERNALLY COMPARABLE CASES, DEPENDING UPON THE FAR ANALYS IS AND THE FACTS AND CIRCUMSTANCES OF EACH CASE. THUS THE CALCU LATION OF `PROFIT B MAY UNDERGO CHANGE WITH THE VARYING SET OF COMP ARABLE CASES. HOWEVER, INSOFAR AS CALCULATION OF `PROFIT A IS CON CERNED, THE SAME HAS TO NECESSARILY RESULT IN THE HANDS OF THE ASSESSEE -ENTERPRISE (INDIAN ENTITY) ONLY FROM THE TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, AS IS THE MANDATE OF SECTION 92 REA D WITH SECTION 92B IN JUXTAPOSITION TO RULE 10B. THE NATURAL COROLLARY WHICH, ERGO, FOLLOWS IS THAT UNDER NO SITUATION CAN THE CALCULATIO N OF 'PROFIT A' BE SUBSTITUTED WITH ANYTHING OTHER THAN THE PROFIT RE ALIZED OR EARNED BY THE ASSESSEE-ENTERPRISE FROM THE INTERNATIONAL TRANSACTION. SO, UNDER THE TNM METHOD, IT IS THE NET PROFIT MARGIN REALIZED BY THE INDIAN ASSESSEE-ENTERPRISE FROM THE TRANSACTION WITH ITS FOREIGN/AE, WHICH IS COMPARED WITH THAT OF THE COMPARABLES. THERE CAN BE NO QUESTION OF SUBSTITUTING THE PROFIT REALIZED B Y THE INDIAN ENTERPRISE WITH THE PROFIT REALIZED BY THE FOREIGN/AE FOR THE ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 17 PURPOSE OF DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION O F THE INDIAN ENTERPRISE WITH ITS FOREIGN AE. SCOPE OF TRANSFER PRICING ADDITION UNDER THE INDIAN TAXATION LAW IS LIMITED TO TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN/ AE. WE FAIL TO COMPREH END AS TO HOW THE PROFIT REALIZED BY THE FOREIGN/AE CAN BE RELEVAN T, WHEN THE PROFIT OF THE INDIAN ENTERPRISE IS SOUGHT TO BE ENSURED A T ALP. THE UNDERLYING OBJECT OF THE TRANSFER PRICING PROVISIONS IS, INTER ALIA, TO SEE THAT THERE IS NO PROFIT SHIFTING FROM THE INDIAN TAXATION BASE BY MEANS OF THE FOREIGN/AE CHARGING MORE THAN THAT C HARGED BY COMPARABLE INDEPENDENT CASES, WHICH FACT IS ENSURED B Y DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION. IF FOREIGN/A E HAS, IN FACT, CHARGED MORE, THEN ITS PROFIT RATE WILL SHOOT UP AND THE CORRESPONDING PROFIT OF THE INDIAN ENTERPRISE WILL BE SQUEEZE D. IN THAT SCENARIO, A COMPARISON OF THE PROFIT RATE OF THE FOREIGN /AE WILL RUN CONTRARY TO THE MANDATE OF THE PROVISIONS. WHEREAS, WE WERE REQUIRED TO DETERMINE IF THE PROFIT CHARGED BY THE FOREIGN/AE IS NOT MORE THAN THAT CHARGED BY UNCONTROLLED COMPARABLES BY SEEIN G THE PROFIT RATE OF THE INDIAN ENTERPRISE, WE WILL END UP DOING A F UTILE EXERCISE OF RATHER VIEWING THE PROFIT RATE OF THE FOREIGN/AE, IF SUCH FOREIGN/AE IS TAKEN AS A TESTED PARTY FOR THE PURPOSES OF C OMPARISON WITH THE PROFIT RATE OF THE COMPARABLES. SUPPOSE THE FOREIGN/A E HAS ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 18 CHARGED MORE, THEN ITS PROFIT RATE WILL TURN OUT TO BE HIGHER, WHICH WHEN COMPARED WITH THE LOWER RATE OF PROFIT MARGIN OF FOREIG N COMPARABLES, WILL SHOW THE TRANSACTION AT ALP, CALLING FOR NO TRANSFER PRICING ADJUSTMENT. THIS EXERCISE IS NOT ONLY OFF THE MARK, BUT ALSO RUNS COUNTER TO THE RULE AND SPIRIT OF THE TRANSFER P RICING PROVISIONS. 16. OUR POINT OF VIEW CAN BE BETTER APPRECIATED WITH THE H ELP OF A SIMPLE ILLUSTRATION OF AN INDIAN ENTERPRISE PURCHASING GOODS/S ERVICES FROM ITS FOREIGN/AE AND THEN SELLING THE SAME TO UNRELATED PAR TIES, IN TWO STAGES, WHERE THE TRANSFER PRICE IS AT ARMS LENGTH AND WHERE IT IS NOT SO. A. ARMS LENGTH SITUATION - AVERAGE OPERATING PROFIT/SALES AVERAGE OPERATING PROFIT/SALES OF FOREIGN COMPARABLES 20% OF INDIA N COMPARABLES 20% SUPPOSE GOODS WORTH RS.200/- ARE TRANSFERRED BY FOREIG N/ASSOCIATED ENTERPRISE TO THE ASSESSEE/INDIAN ENTERPRISE AT ARMS LENGTH PRICE OF RS.200/-. POSITION OF OPERATING PROFIT/SALES OF THE FOREIGN/AE AN D THE ASSESSEE/INDIAN ENTERPRISE WILL BE AS UNDER : - ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 19 FOREIGN/ASSOCIATED ENTERPRISE ASSESSEE/INDIAN ENTERPRISE PURCHASES 140 SALES TO AE 200 PURCHASES FROM AE 200 SALES 300 OPERATING EXPENSES 20 OPERATING EXPENSES 40 OPERATING PROFIT 40 OPERATING PROFIT 60 TOTAL 200 200 TOTAL 300 300 OPERATING PROFIT TO SALES OPERAT ING PROFIT TO SALES OF FOREIGN/A.E. 20% OF ASSE SSEE/INDIAN ENTERPRISE20% IT CAN BE SEEN FROM THE ABOVE THAT OP/SALES OF THE ASSESSEE IS 20%, WHICH IS AT ALP, WHEN SEEN IN THE LIGHT OF THE OP/SALES OF THE INDIAN COMPARABLES. B. NON ARMS LENGTH SITUATION NOW IF GOODS WITH ARMS LENGTH PRICE OF RS.200/- ARE ACTUA LLY TRANSFERRED BY THE FOREIGN/ASSOCIATED ENTERPRISE AT RS.208/- TO THE ASSESSEE/INDIAN ENTERPRISE WITH A VIEW TO REDUCE THE INCIDENCE OF TAX IN INDIA, THE CHANGED POSITION OF OPERATING PROFIT/SALES OF THE FOREIGN/AE AND THE ASSESSEE/INDIAN ENTERPRISE IN THE ABOVE E XAMPLE WILL BE AS UNDER : - ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 20 AVERAGE OPERATING PROFIT/SALES AVERAGE OPER ATING PROFIT/SALES OF FOREIGN COMPARABLES 20% OF INDIAN COM PARABLES 20% PURCHASES 140 SALES TO AE 208 PURCHASES FROM AE 208 SALES 300 OPERATING EXPENSES 20 OPERATING EXPENSES 40 OPERATING PROFIT 48 OPERATING PROFIT 42 TOTAL 208 208 TOTAL 300 300 OPERATING PROFIT TO SALES OPERAT ING PROFIT TO SALES OF FOREIGN/A.E. 23% OF ASSESS EE/INDIAN ENTERPRISE14% 17. IT CAN BE SEEN FROM THE ABOVE THAT BECAUSE OF SH OWING HIGHER TRANSFER PRICE IN THE HANDS OF THE ASSESSEE/INDIAN ENTERPRIS E, OP/SALES OF THE ASSESSEE/INDIAN ENTERPRISE HAS COME DOWN TO 1 4%, WHICH IN ARMS LENGTH SITUATION SHOULD HAVE BEEN 20%. IF W E APPLY TNM METHOD BY TAKING THE ASSESSEE AS A TESTED PARTY, IT WOULD CALL FOR MAKING TRANSFER PRICING ADDITION TO THE EXTENT OF REDUCTION IN THE PRICE MUTUALLY MANIPULATED BY THE FOREIGN/AE AND THE ASSESSEE/INDIAN ENTERPRISE BECAUSE OF THEIR ASSOCIATION. ON THE OTHER HAND, IF WE TAKE THE FOREIGN/AE AS A TESTED PARTY, IT WOULD SH OW A ROSY PICTURE OF ITS OP/SALES AT 23%, BEING HIGHER THAN THAT OF FOREIGN OR INDIAN COMPARABLES, NOT NECESSITATING ANY TRANSFE R PRICING ADDITION. IN FACT, IT IS THIS ARRANGEMENT BETWEEN THE RELATED PAR TIES ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 21 WHICH IS SOUGHT TO BE CURBED BY THE TRANSFER PRICING LEGISLA TION. GOING WITH THE FOREIGN/AE AS A TESTED PARTY IN NON-ARMS LENG TH SITUATION, WOULD INVARIABLY SHOW SKEWED RESULTS NOT REQUIRING A NY TRANSFER PRICING ADDITION, DEFEATING NOT ONLY THE LANGUAGE BUT A LSO THE PURPOSE AND INTENT OF THE TRANSFER PRICING PROVISIONS. 18. ESSENCE OF THE MATTER IS THAT IT IS THE PROFIT MARGIN OF THE INDIAN ENTERPRISE AND NOT THAT OF THE FOREIGN AE, WHICH SHO ULD BE COMPARED WITH THE COMPARABLES TO SEE IF ANY INCREASE IN THE TOTAL INCOME OF THE ENTERPRISE CHARGEABLE TO TAX IN INDIA, IS WARR ANTED ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. THE CONTENTION OF THE LD. AR FOR CONSIDERING THE PROFIT OF THE FOREIGN/AE AS 'PROFIT A' FOR THE PURPOSES OF COMPARISON WITH PROFIT OF COMPARABLES, BEING 'PROFIT B', FOR DETERMINING THE ALP OF TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN AE, MISSES THE WOOD FROM THE TREE BY MAKING THE SUBSTANTIVE SECTION 92 OTIOSE AND THE DEFINITION OF 'INTERNATIONA L TRANSACTION' U/S 92B AND RULE 10B BECOMING REDUNDANT. THIS IS PATENTLY AN UNACCEPTABLE PROPOSITION HAVING NO SANCTION UNDE R THE INDIAN TRANSFER PRICING LAW. IT IS AXIOMATIC AND AGAIN ACCENTU ATED THAT THE REQUIREMENT UNDER THE INDIAN LAW IS TO COMPUTE THE IN COME FROM AN INTERNATIONAL TRANSACTION BETWEEN TWO AES HAVING REGA RD TO ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 22 ITS ALP AND THE SAME IS REQUIRED TO BE STRICTLY ADHERED TO IN TH E MANNER AS PRESCRIBED. THUS, IT IS OVERT THAT THE OBLIGATION UN DER THE INDIAN LAW IS TO COMPUTE THE INCOME FROM AN INTERNATIONAL TRANSACTION BETWEEN TWO AES HAVING REGARD TO ITS ALP AND THE S AME IS REQUIRED TO BE STRICTLY DETERMINED AS STIPULATED. THE CONTENTIO N, THAT THE FOREIGN/AES BE CONSIDERED AS A TESTED PARTIES FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION, HAVING NO STATUTORY SANCTION, IS SANS MERIT AND HENCE JETTISONED. SIMILAR VIE W OF NOT ACCEPTING FOREIGN/AE AS A TESTED PARTY HAS RECENTLY BEEN TAKEN BY THE PUNE BENCHES OF THE TRIBUNAL VIDE ITS ORDER DATED 24- 04- 2019 IN BEKAERT INDUSTRIES PRIVATE LIMITED VS DCIT (ITA NO.146/PUN/2014). THUS, WE ARE OF THE CONSIDERED OPINION THAT NO INFIRMITY CAN BE FOUND IN THE VIEW CANVASSED BY THE AUTHOR ITIES BELOW IN REJECTING FOREIGN/ASSOCIATED ENTERPRISES AS TESTED PAR TIES. 19. ONCE WE COME TO THE CONCLUSION THAT THE INTERNATIONAL TRANSACTION OF IMPORT RAW MATERIAL WAS NOT CORRECTLY BENCHMA RKED BY THE ASSESSEE AND THE TPO WAS JUSTIFIED IN REJECTING SUCH AL P DETERMINATION, WE HOLD THAT THE VIEW ADOPTED BY THE TPO IN CLUBBING THE INTERNATIONAL TRANSACTIONS OF IMPORT OF RAW MATERIAL AND EXPORT OF FINISHED GOODS, IN THE ABSENCE OF THE ASSESSEE PUTTING UP ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 23 ANY ALTERNATE WAY OF COMPUTATION OF THE ALP OF THE INTERNATIONA L TRANSACTIONS SEPARATELY, IS UNASSAILABLE. 20. THE LD. AR SUBMITTED THAT EVEN IN THE AGGREGATED APPRO ACH, THE TPO WAS NOT JUSTIFIED IN REJECTING THE ASSESSEES INTERNAL COMPARABLES. OUR ATTENTION WAS DRAWN TOWARDS PAGE 307 OF THE PAPER BOOK WHICH IS SEGMENTAL FINANCIAL INFORMATION OF THE ASSESSEE. THE LD. AR SUBMITTED THAT APART FROM EXPORT TO AE S AMOUNTING TO RS.18,18,38,027/- THE ASSESSEE ALSO MADE DO MESTIC SALES AMOUNTING TO RS.30,94,32,823/- IN THE MANUFACTURING SEGMENT OF TRUCKS. IT WAS, THEREFORE, PRAYED THAT THE INTERN ALLY COMPARABLE POSITION, NAMELY, THE PROFIT MARGIN FROM DOMESTIC SALES SHOULD HAVE BEEN CONSIDERED AS BENCHMARK. THIS ARGUME NT WAS OPPOSED BY THE LD. DR. 21. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELE VANT MATERIAL ON RECORD, IT IS SEEN THAT THE ASSESSEE EXPORTED FINIS HED GOODS UNDER THIS SEGMENT TO ITS AES SITUATED IN USA AND BRAZIL. WHAT THE ASSESSEE IS NOW CONTEMPLATING FOR COMPARISON IS ITS S ALES MADE IN INDIA FROM THE MANUFACTURING FACILITY SET UP IN INDIA. IT GOES WITHOUT SAYING THAT THE EFFORTS AND THE COSTS ENTAILED IN SELLING GOODS BY AN INDIAN PARTY IN INDIA ARE QUITE DIFFERENT FROM THE COSTS ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 24 ENTAILED IN SELLING GOODS ABROAD. IN THIS REGARD, IT IS PERTINEN T TO NOTE THAT THE MECHANISM FOR DETERMINATION OF THE ALP U/S.92C HAS B EEN SET OUT IN RULE 10B. RULE 10B(2) PROVIDES THAT FOR THE PUR POSE OF RULE 10B(1), THE COMPARABILITY OF INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION SHALL BE JUDGED WITH REFERENCE TO CERTA IN FACTORS AS SET OUT IN CLAUSES (A) TO (D) OF RULE 10B(2). THE RELEVANT FACTORS SET OUT IN CLAUSE (D) ARE: CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPE RATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COST OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. RULE 10B(3) PROVIDES THAT: `AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF NONE OF THE DIFF ERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED,. ARE LIKE LY TO MATERIALLY AFFECT THE . PROFIT ARISING, SUCH TRANSACTIONS IN THE OPEN MARKET OR A : `REASONABLY ACCURATE ADJUSTMENTS CAN BE M ADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. ON A CONJOINT READING OF SUB-RULES (2) AND (3) OF RULE 10B, IT IS MANIF ESTED THAT GEOGRAPHICAL LOCATION IS AN IMPORTANT FACTOR TO BE JUDGED FOR DETERMINING THE COMPARABILITY WITH AN UNCONTROLLED TRANSACTION. IT ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 25 IMPLIES THAT IF THE INTERNATIONAL TRANSACTION IS AT A PARTICULAR GEOGRAPHICAL LOCATION AND THE COMPARABLE TRANSACTION IS AT A DIFFERENT GEOGRAPHICAL LOCATION, THEN THE IMPACT OF SUCH GEOGRAPHICAL DIFFERENCE MUST BE REMOVED BEFORE MAKING A NY EFFECTIVE COMPARISON. WHEN WE READ SUB-RULE (3) OF RULE 10B, IT BECOMES EXPLICITLY CLEAR THAT IF THE IMPACT OF DIFFERENT GEOGRAP HICAL LOCATIONS ETC. CANNOT BE CREASED OUT, THEN COMPARABILITY ITSELF IS ECLIPSED. 22. TURNING TO THE FACTS OF THE INSTANT CASE, IT IS SEEN THA T THE ASSESSEE HAS A MANUFACTURING FACILITY IN INDIA. THE INTERNAL COMPARABLES WHICH THE ASSESSEE IS SEEKING TO RELY UPON ARE NOT THOSE OF EXPORTS MADE IN THE US OR BRAZIL, WHERE THE EXPORTS HAVE BEEN MADE TO THE AES, BUT THE SALES MADE IN INDIA ITSELF. S INCE THE SALES MADE TO NON-AES IN INDIA ARE AT AN ALTOGETHER DIFFEREN T GEOGRAPHICAL LOCATION VIS--VIS THE EXPORTS MADE TO AES IN THE USA AND BRAZIL, THE INTERNAL COMPARABLE, BEING, SALES MADE IN IN DIA CANNOT BE CONSIDERED AS A COMPARABLE TRANSACTION UNLESS TH E EFFECT OF DIFFERENCE IN THE GEOGRAPHICAL LOCATIONS ON THE PROFITABILITY IS IRONED OUT. THE ASSESSEE HAS NOT PUT FORTH ANY DATA ELIMINA TING THE EFFECT OF DIFFERENCE DUE TO VARIED GEOGRAPHICAL LOCATIONS I N SALES ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 26 MADE IN INDIA VIS--VIS BRAZIL AND THE USA. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PR. CIT VS. AMPHENOL INTERCONNECT INDIA (P) LTD. (2019) 410 ITR 373 (BOM.) HAS UPHELD THE EXCLUSION OF CERTAIN COMPARABLES BY THE TRIBUNAL, INTER ALIA, ON THE BASIS OF GEOGRAPHICAL DIFFERENCES AND TIMING DIFFERENCES ETC. IN TH E HUE OF THE FOREGOING DISCUSSION, IT IS HELD THAT THE ARGUMENT OF THE A SSESSEE FOR ADOPTING PROFIT ON SALES MADE IN INDIA TO NON-AES AS A COMPARABLE INSTANCE FOR DETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS INCLUDING EXPORTS MADE TO THE AES IN BRAZIL AND THE USA, CANNOT BE COUNTENANCED FOR LACK OF THE PROVISION BY TH E ASSESSEE OF ANY DATA OFFLOADING THE EFFECT OF SUCH GEOGR APHICAL DIFFERENCES IN THE PROFIT MARGINS. 23. THE NEXT ARGUMENT OF THE LD. AR WAS THAT THE TPO OUGHT TO HAVE CONSIDERED THE GROSS MARGINS OF THE ASSESSEE AS W ELL AS THE THREE COMPARABLES CHOSEN BY HIM BECAUSE OF UNDER-UTILIZATIO N OF THE INSTALLED CAPACITY BY THE ASSESSEE AS WELL AS THE COMPARABLES. 24. IT IS OBSERVED QUA THIS ISSUE THAT TPO DETERMINED THE UN- ADJUSTED PLI OF COMPARABLES AT 9.01%, 12.41% AND 17.88% RESPECTIVELY. THEREAFTER, HE CARRIED OUT THE CAPACITY UTILIZATIO N ADJUSTMENT IN THE COMPARABLES MARGIN AND THEN FINALLY DETERM INED ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 27 THE AVERAGE ADJUSTED PLI OF COMPARABLES AT (-)22.62%, W HICH WAS TAKEN AS A BENCHMARK FOR DETERMINING THE ALP. TO PUT IT SIM PLY, THE TPO ACCEPTED THE CONTENTION OF THE ASSESSEE FOR GRANTING CAPACITY UTILIZATION ADJUSTMENT. 25. THE ASSESSEE HAS SET UP TWO-FOLD ARGUMENTS HERE . FIRST IS THAT THE CAPACITY UTILIZATION ADJUSTMENT SHOULD HAVE BEEN CARRIED OUT IN THE PROFIT MARGIN OF THE ASSESSEE AND NOT THE COMPARABLES, WHICH ARGUMENT WAS NOT PRESSED DURING THE COURSE OF HEARING AND THE SECOND THAT THE GROSS MARGINS SHOULD HAVE BEEN CONSIDER ED FOR BENCHMARKING RATHER THAN THE OPERATING PROFIT MARGIN. 26. THE FIST FOLD OF THE ARGUMENT WHICH WAS INITIALLY RAISED BY THE LD. AR DURING THE COURSE OF HEARING BUT SUBSEQUENTLY NOT PR ESSED WAS THAT THE CAPACITY ADJUSTMENT OUGHT TO HAVE BEEN GRANTED IN THE HANDS OF THE ASSESSEE AND NOT THE COMPARABLES. SUCH A CO NTENTION HAS RIGHTLY BEEN NOT PRESSED IN VIEW OF THE CLEAR MANDATE GIV EN IN RULE 10B(1)(E) AS REPRODUCED HEREINABOVE. SUB-CLAUSE ( I) OF RULE 10B(1)(E) IN THE PROCESS OF DETERMINATION OF THE ALP UNDER THE TNMM TALKS OF THE COMPUTATION OF NET OPERATING PROFIT MARGIN REALIZED BY THE ASSESSEE FROM AN INTERNATIONAL TRANSACTION. S UB- CLAUSE (II) IS THE COMPUTATION OF NET OPERATING PROFIT MARGIN REA LIZED ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 28 BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION. THIS REFERS TO DETERMINING THE OPERATING PROFIT MA RGIN OF COMPARABLES WITH THE SAME BASE AS THAT OF THE ASSESSEE. SUB- CLAUSE (III) PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY A COMPARABLE COMPANY , DETERMINED AS PER SUB-CLAUSE (II) ABOVE, IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN TH E INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, ..... WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NE T PROFIT MARGIN IN THE OPEN MARKET. IT IS THIS ADJUSTED NET PROFIT MARGIN OF THE UNRELATED TRANSACTIONS OR OF THE COMPARABLE COMPANIES, AS DETERMINED UNDER SUB-CLAUSE (III), WHICH IS USED FOR THE PURPOSES OF MAKING COMPARISON WITH THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION AS PER SUB- CLAUSE (I). THUS IT IS OSTENSIBLE THAT ADJUSTMENT ON ACCOUNT O F DIFFERENCES, IF ANY, BETWEEN THE ASSESSEE AND COMPARABLE S, IS TO BE CARRIED OUT ONLY IN THE COMPUTATION OF THE MARGIN OF COMPARA BLES AND NOT THAT OF THE ASSESSEE. IT IS ERGO HELD THAT THE LD. AR WAS CORRECT IN NOT PRESSING THE FIRST LIMB OF HIS ARGUMENT, WHEN THE LEGAL POSITION IN THIS REGARD WAS PUT ACROSS TO HIM. ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 29 27. THE SECOND FOLD OF THE ARGUMENT IN THIS REGARD WA S THAT THE TPO SHOULD HAVE TAKEN GROSS MARGIN OF THE ASSESSEE AND COMPARABLES, THAT IS, BEFORE THE EFFECT OF DEPRECIATION ETC. WE DO NOT FIND ANY FORCE IN THE CONTENTION OF THE LD. AR URGING THE ADOPTION OF GROSS MARGINS FOR DETERMINING THE ALP UNDER THE TNMM AS NUMERATOR AS AGAINST THE OPERATING PROFIT MARGIN TAK EN BY THE TPO. WE HAVE SET OUT RULE 10B(1)(E) SUPRA . IT CAN BE SEEN THAT SUB-CLAUSE (I) PROVIDES FOR THE COMPUTATION OF NET OPERATING PROFIT MARGIN REALIZED BY THE ASSESSEE FROM AN INTERNATIONAL TRANSA CTION. SUB-CLAUSE (II) IS THE COMPUTATION OF NET OPERATING PROFIT MARGIN REALIZED BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCO NTROLLED TRANSACTION. SUB-CLAUSE (III) OF RULE 10B(1)(E) PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY A COMPARABLE COMPANY, DETERMINED AS PER SUB-CLAUSE (II) ABOVE, IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, WHICH COULD MATERIALLY AFF ECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. IT IS THIS ADJUSTED NET PROFIT MARGIN OF THE COMPARABLE COMPANIES, AS DETERMINED UNDER SUB-CLAUSE (III), WHICH IS USED FOR THE PUR POSE OF MAKING COMPARISON WITH THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION AS PER SUB-CLAUSE (I). ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 30 THUS, IT IS PALPABLE THAT THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AS WELL AS COMPARABLES IS COMPUTED IN RELATION TO A COMMON BASE, SUCH AS, COSTS INCURRED OR SALES EFFECTED ETC. SO, NUMERATOR IN THE FORMULA FOR COMPUTATION OF MARGIN IS ALWAYS NET PROFIT MARGIN AND DENOMINATOR VARIES, WHICH MAY BE COSTS INC URRED OR SALES EFFECTED OR ASSETS EMPLOYED ETC. MEANING OF THE TERM `NET PROFIT IN THE FORMULA HAS BEEN CONSIDERED BY THE HONBLE SUPREME COURT IN DIT (IT) VS. MORGAN STANLEY & COMPANY (2007) 292 ITR 416 (SC), IN WHICH IT HAS BEEN HELD THAT THE : `TNMM APPORTIONS THE TOTAL OPERATING PROFIT ARISING FROM THE TRANSACTION ON THE BASIS OF SALES, COSTS, ASSETS, ETC.. HENCE, IT IS EVIDENT THAT THE TE RM NET PROFIT OR THE OPERATING NET PROFIT AS USED IN RULE 10B(1)(E ) IS TO BE READ AS OPERATING PROFIT. NO SPECIFIC DEFINITION OF THE TERM OPERATING PROFIT HAS BEEN GIVEN IN THE I.T. RULES, 1962. IN COMMON PARLANCE, THE EXPRESSION `OPERATING PROFIT MEANS PROFIT FRO M BUSINESS OPERATIONS, THAT IS, OPERATIONAL REVENUE MINUS OPER ATING COSTS. OPERATING COSTS ARE THE COSTS WHICH ARE INCURRED IN R ELATION TO THE OPERATIONS OF A BUSINESS. SO, ALL THE COSTS WHICH FACILITATE TH E OPERATION OF A BUSINESS ARE OPERATING COSTS. LIKE RAW MATER IAL AND LABOUR COSTS, THERE CAN BE NO PRODUCTION OF GOODS WITHOUT TH E USE OF MACHINERY OR OTHER RELATED ASSETS. ONE CANNOT CONTEMPLATE ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 31 MANUFACTURE OF GOODS WITHOUT THE USE OF ASSETS FOR FETCHING SALES REVENUE, WHICH IS THE STARTING POINT FOR CALCULATING THE AMOUNT OF OPERATING PROFIT. IN FACT, IT IS THE USER OF THE ASSETS WHICH RESULTS INTO PRODUCTION AND THE RESULTANT OPERATING REVENUE. DEPRECIATIO N IS AN ALLOWANCE FOR WEAR AND TEAR OF THE ASSETS USED. THUS, D EPRECIATION IS AN INSEPARABLE AND AN INTEGRAL PART OF THE OPERATING COSTS. T HE HONBLE BOMBAY HIGH COURT IN CIT VS. WELSPUN ZUCCHI TEXTILES LTD. (2017) 292 CTR 1 (BOM.) HAD AN OCCASION TO DEAL WITH THE NATURE OF DEPRECIATION. QUESTION NO. (II) AS URGED BEFORE TH E HONBLE HIGH COURT READS: (II) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND DESPITE THE PRESCRIPTION OF P ARAMETERS OF COMPARABILITY BY RULE 10 B (2) OF THE INCOME TAX RULES , 1962, THE TRIBUNAL WAS CORRECT IN LAW, IN DIRECTING THE INCLUSION OF DE PB IN TURNOVER AND DEPRECIATION IN NET PROFIT FOR THE PURPOSE OF PROFIT MARGIN OF COMPARABLES AND ASSESSEE? THE TRIBUNAL IN TH AT CASE HELD THAT DEPRECIATION WAS INCLUDIBLE IN ARRIVING AT THE TOTAL OPERATING COSTS. AFFIRMING THE VIEW OF THE TRIBUNAL, THE HON BLE HIGH COURT HELD THAT: `SO FAR AS DEPRECIATION IS CONCERNED, WE FIND THAT THE ANALYSIS DONE BY THE TRIBUNAL TO INCLUDE DEPB BENEFIT TO HOLD IT TO BE AN OPERATING REVENUE TO DETERMINE OPERATING PROF IT, WOULD BE EQUALLY APPLICABLE IN CASE OF DEPRECIATION FOR THE P URPOSES ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 32 OF HOLDING IT TO BE AN OPERATING EXPENSES TO DETERMINE OPERA TING COSTS. FROM THE FOREGOING DISCUSSION, IT IS MANIFEST THAT DEPRECIATION HAS TO BE NECESSARILY CONSIDERED AS PART OF O PERATING COSTS IN THE PROCESS OF DETERMINING THE OPERATING PROFIT UNDER THE TNMM. AS SUCH, THERE CAN BE NO QUESTION OF EXCLUDING DEPRECIATION FROM THE AMBIT OF OPERATING COSTS FOR THE PURPOS ES OF DETERMINING OPERATING PROFIT. AT THIS STAGE, IT IS PERTINENT TO NOTE THAT AS AGAINST RULE 10B(1)(E) SPECIFICALLY PROVIDING FOR ADOPTIO N OF OPERATING MARGIN UNDER THE TNMM, RULE 10B(1)(B) AND 10B( 1)(C) CONTAINING MECHANISM FOR DETERMINING THE ALP UNDER THE RESALE PRICE METHOD AND COST PLUS METHOD SPECIFICALLY PROVIDE FOR ADOPTING THE GROSS MARGIN. THE CONTENTION, THEREFORE, RAISE D BY THE ASSESSEE THAT THE NUMERATOR IN THE FORMULA AS PER RULE 10B( 1)(E) SHOULD HAVE BEEN GROSS MARGIN RATHER THAN THE OPERATING M ARGIN AS APPLIED BY THE TPO, IS BEREFT OF ANY FORCE AND HENCE REP ELLED. 28. THE LAST CONTENTION RAISED BY THE LD. AR ON THIS SCORE WA S THAT THE TPO ERRED IN COMPUTING THE TRANSFER PRICING ADJUSTMENT WITH REFERENCE TO TRANSACTIONS WITH AES AS WELL AS NON-AES. 29. IT CAN BE SEEN FROM PAGE 307 OF THE PAPER BOOK TH AT THE TOTAL COST INCURRED BY THE ASSESSEE UNDER TRUCK DIVISION IS ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 33 RS.71,77,79,275/-. BREAK-UP OF SUCH COST IS GIVEN UND ER THE SPECIFIC HEADS. THE TOTAL COST QUA EXPORT TO AES RS.16,71,88,299/-. THE TOTAL COST QUA DOMESTIC SALES IS RS.52,09,69,353/- AND TOTAL COST QUA TRADING ACTIVITIES IS RS.2,96,21,623/-. TOTAL OF THE ABOVE THR EE ITEMS COMES TO RS.71,77,79,275/-, WHICH HAS BEEN ADOPTED B Y THE TPO ON PAGE 24 OF HIS ORDER FOR COMPUTING THE TRANSFER PRICING A DJUSTMENT OF RS.3.83 CRORE AND ODD. THUS IT CAN BE SEEN THAT THE TO TAL COST PERTAINING TO AE TRANSACTIONS IS ONLY RS.16,71,88,299/- AND NOT RS.71,77,79,275/-. 30. IT IS UNCONTROVERTED, AS IS ALSO APPARENT FROM THE TPOS ORDER, THAT THE TRANSFER PRICING ADJUSTMENT HAS BEEN MADE BY CONSID ERING TOTAL COSTS INCURRED BY THE ASSESSEE IN RESPECT OF TRANSACTION S BOTH WITH THE AES AND ALSO THE NON-AES. UNDER THE TNMM, THE PR OCESS IS SIMPLE IN INITIALLY FINDING OUT THE OPERATING PROFIT MARGIN OF TH E ASSESSEE AND THEN THE AVERAGE ADJUSTED OPERATING PROFIT MAR GIN OF COMPARABLES. SUCH ADJUSTED PROFIT MARGIN OF THE COMPARABLE S CONSTITUTES THE BENCHMARK MARGIN, WHICH IS THEN COMPARED WITH THE OPERATING PROFIT MARGIN FROM THE ASSESSEES INTERNATIONAL TRANSACTIONS, WHICH ONLY COMPRISE OF TRANSACTIONS WITH AES. I T IS NOT PERMISSIBLE TO MAKE TRANSFER PRICING ADJUSTMENT, BY AP PLYING THE ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 34 AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLES, ON THE ASSESSEES UNIVERSAL TRANSACTIONS ENTERED INTO WITH BOTH THE A ES AND THE NON-AES. AS THE ENTIRE EXERCISE UNDER CHAPTER-X OF TH E ACT IS CONFINED TO COMPUTING TOTAL INCOME OF THE ASSESSEE FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO THE ARMS LENGTH PRICE, THERE IS NO SCOPE FOR COMPUTING INCOME FROM NON-INTERNATIONA L TRANSACTIONS ALSO HAVING REGARD TO THE ALP. SINCE THE TPO HAS COMPUTED THE TRANSFER PRICING ADJUSTMENT QUA ALL THE TRANSACTIONS CARRIED OUT BY THE ASSESSEE WITH REFERENCE TO THE BASE O F TOTAL COSTS, ALSO INCLUSIVE OF COSTS RELEVANT FOR TRANSACTIONS WITH THE NON- AES, WE CANNOT APPROVE SUCH A POINT OF VIEW. 31. OUR VIEW IN HOLDING THAT NO TRANSFER PRICING ADJUS TMENT CAN BE MADE ON TRANSACTIONS WITH THE NON-AES IS SUPPORTED BY THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN CIT VS. KEIHIN PANALFA LTD. (2016) 381 ITR 407 (DEL), IN WHICH IT HAS BEEN HELD THAT THE TRANSFER PRICING ADJUSTMENT CAN BE MADE ONLY WITH RE FERENCE TO THE INTERNATIONAL TRANSACTIONS AND NOT THE TRANSACTIONS WITH THE NON-ASSOCIATED ENTERPRISES. SIMILAR VIEW HAS BEEN ESPOUSE D BY THE HON'BLE BOMBAY HIGH COURT IN CIT VS. THYSSEN KRUPP INDUSTRIES INDIA PRIVATE LTD. (2016) 381 ITR 413 (BOM) . IN VIEW OF THE ABOVE ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 35 DISCUSSION, IT IS CLEAR THAT THE TRANSFER PRICING ADJUSTMENT CA NNOT BE MADE WITH REFERENCE TO THE NON-AE TRANSACTIONS, BUT, THE SA ME HAS TO BE CONFINED ONLY TO THE INTERNATIONAL TRANSACTIONS. SINCE THE TPO/AO HAS PROPOSED/MADE THE ADDITION ON THE BASIS OF TRANSACTIONS EVEN WITH NON-AES, WE SET ASIDE THE IMPUGNED OR DER AND SEND THE MATTER BACK TO THE FILE OF THE AO/TPO FOR DECID ING THE ISSUE AFRESH AS PER LAW AFTER ALLOWING A REASONABLE OPPOR TUNITY OF HEARING TO THE ASSESSEE. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDINGS. 32. BEFORE PROCEEDING TO THE NEXT ISSUE, IT IS MADE CLE AR THAT THE LD. AR CANDIDLY ACCEPTED THAT THE OTHERWISE DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION BY THE TPO, SAVE AND EXCEP T THE ISSUES RAISED ABOVE IN THIS APPEAL WHICH HAVE BEEN DEA LT WITH, IS CORRECT AND WITHOUT ANY INFIRMITY. 33. THE NEXT ISSUE IN THIS APPEAL RAISED THROUGH GROUND NO. 7 IS AGAINST THE MAKING OF TRANSFER PRICING ADDITION TO THE TUNE OF RS.1,04,92,049/- WITH RESPECT TO THE INTERNATIONAL TRANSACTION OF IMPORT OF FIXED ASSETS. ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 36 34. THE ASSESSEE REPORTED AN INTERNATIONAL TRANSACTION, INTER ALIA, OF PURCHASE OF FIXED ASSETS WITH TRANSACTED VALUE OF RS.1,4 0,92,538/- NO METHOD WAS EMPLOYED FOR BENCHMARKING THIS INTERNATIONAL TRANSACTION. ON BEING CALLED UPON TO EXPLAIN THE REASONS FOR NOT BENCHMARKING THE TRANSACTION, THE ASSESSEE SUBMITTED THAT THE PURCHASE OF FIXED ASSETS WAS AT FAIR MARKET PRICE AND HEN CE AT ALP IN ACCORDANCE WITH THE COMPARABLE UNCONTROLLED PRICE METHOD (CUP). THE TPO REQUIRED THE ASSESSEE TO FURNISH SUPPORTIN G DOCUMENTS FOR IMPORT OF FIXED ASSETS FROM AES. THE ASS ESSEE SUBMITTED A CHARTERED ENGINEERS CERTIFICATE IN SUPPORT OF PUR CHASES OF RS.11,86,038/- ALONG WITH SUPPORTING INVOICES. THE AS SESSEE ALSO FURNISHED INVOICES WORTH RS.24,14,450/-. IN ALL, THE ASSE SSEE COULD PRODUCE INVOICES FOR PURCHASE OF FIXED ASSETS AMOUNTING TO RS.36,00,488/-. IN THE ABSENCE OF PRODUCTION OF ANY D OCUMENTARY EVIDENCE IN SUPPORT OF THE PURCHASE OF FIXED ASSETS FOR T HE REMAINING SUM OF RS.1,04,92,049/-, THE TPO PROPOSED A TRANSFER P RICING ADJUSTMENT FOR THE SAID SUM. THE ASSESSEE REMAINED UNSU CCESSFUL BEFORE THE DRP, AGAINST WHICH IT HAS APPROACHED THE TRIBUNA L. 35. HAVING HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD, IT IS NOTICED THAT THE AO PROPOSED TRANSFER ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 37 PRICING ADJUSTMENT OF RS.1.04 CRORE ON THE GROUND THAT THE ASSESSEE COULD NOT FURNISH DOCUMENTARY EVIDENCE IN SUPPORT OF PURCH ASE OF THE FIXED ASSETS TO THIS EXTENT. PAGE 110 OF THE PAPER BOOK IS A CHART CONTAINING DETAILS OF THE ASSETS PURCHASED FROM AES. THE LD . AR SUBMITTED THAT MAJORITY OF INVOICES WERE AVAILABLE, WHICH HAVE NOT BEEN PROPERLY CONSIDERED BY THE AUTHORITIES BELOW. IN VIEW OF THE FACT THAT THE ASSESSEE HAS PLACED ON RECORD CERTAIN DOCUME NTS EVIDENCING THE PURCHASE OF FIXED ASSETS, WHICH IS ALBEIT NOT COMPLETE, WE CONSIDER IT EXPEDIENT TO SET-ASIDE THE IMPUGNED ORDER ON THIS COUNT AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR EXAMINING SUCH EVIDENCE AND ASCERTAINING IF SUCH EVIDENCE R EALLY DOCUMENTS THE PURCHASE OF FIXED ASSETS. TO THE EXTENT, TH E EVIDENCE, NAMELY, INVOICES ETC. FOR THE PURCHASE OF THE FIXED ASSETS ARE AVAILABLE, THERE WILL NOT BE ANY QUESTION OF MAKING TRANSFER PRICING ADDITION. HOWEVER, TO THE EXTENT OF NON-AVAILABILITY OF INVOICES AND OTHER ACCOMPANYING DOCUMENTS SUPPORTING THE PURCHASE OF FIXED ASSETS, THE TRANSFER PRICING ADDITION WOULD BE CALLED FOR, BU T NOT TO THE VALUE OF PURCHASE OF SUCH FIXED ASSETS BUT ONLY TO THE EXTENT OF DEPRECIATION ON SUCH FIXED ASSETS CLAIMED IN THE COMPUTATION OF TOTAL INCOME. AT THE SAME TIME, NO FURTHER CLAIM OF DEPRECIATION ON SUCH ASSETS WILL BE ENTERTAINED IN NEXT YEARS AS WELL. WITH THE ABOV E ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 38 REMARKS, WE DIRECT THE AO/TPO TO DECIDE THIS ISSUE AFRESH AFTE R ALLOWING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 36. THE ONLY OTHER ISSUE WHICH SURVIVES IN THE INSTANT APPEAL IS AGAINST THE DISALLOWANCE OF RS.1,13,83,667/- U/S.37(1) OF THE ACT. 37. THE FACTS APROPOS THIS ISSUE ARE THAT CURRENT LIABILITIES A T RS.22.18 CRORE AND ODD WERE REPORTED IN THE BALANCE SH EET. AFTER PERUSING THE DETAILS SUBMITTED ON BEHALF OF THE ASSESSEE, THE AO OBSERVED THAT THERE WERE SUNDRY CREDITORS TO THE TUNE OF RS.1,31,36,105/-. ON BEING CALLED UPON TO PROVE THE GENU INENESS OF THE CREDITORS, THE ASSESSEE FURNISHED EVIDENCE ONLY FOR RS.17,55,437/-. THE DIFFERENTIAL AMOUNT OF RS.1,13,80,6 67/- WAS ADDED BY THE AO U/S.68 OF THE ACT. THE DRP CONSIDERED TH E CONTENTION OF THE ASSESSEE ABOUT THESE AMOUNTS PERTAINING TO C ERTAIN PROVISIONS AND NOT SUNDRY CREDITORS. IT WAS, THEREFORE, DIRECTED THAT IN THE ABSENCE OF ASSESSEE PROVIDING THE GENUINENESS OF THE PROVISIONS, THE DISALLOWANCE WAS CALLED FOR U/S.37 OF THE A CT RATHER THAN UNDER SECTION 68. THE ASSESSEE IS AGGRIEVED BY THE ADDITION OF RS.1.13 CRORE U/S.37 OF THE ACT. ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 39 38. THE LD. AR HAS FURNISHED SYNOPSIS OF THE GROUNDS, W HICH CONTAIN DETAILS OF THE PROVISIONS. THE LD. AR SUBMITTED THAT THE AMOUNT OF RS.1.13 CRORE, IN FACT, REPRESENTS PROVISIONS OF EXPENSES, SOME OF WHICH WERE SUO MOTU ADDED BACK BY THE ASSESSEE IN THE COMPUTATION OF INCOME WHILST OTHERS WERE REVERSED IN THE SUCCEEDING YEAR. IT WAS, THEREFORE, PRAYED THAT THE SAI D ADDITION BE DELETED. 39. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RE LEVANT MATERIAL ON RECORD. THE CLAIM OF THE ASSESSEE WHICH NOW S TANDS IS ABOUT THE DEDUCTIBILITY OR OTHERWISE OF THE PROVISIONS AMOUNTING TO RS.1.13 CRORE. THE LD. AR CONTENDED THAT SOME OF THE PR OVISIONS WERE VOLUNTARILY WRITTEN BACK BY THE ASSESSEE IN THE COMPUTATIO N OF INCOME. THE AO IS DIRECTED TO VERIFY THE CORRECTNESS OF TH IS CONTENTION. IN CASE THE SAME IS FOUND TO BE CORRECT, THEN NO ADDITION SHOULD BE MADE TO THAT EXTENT. WITH REFERENCE TO CERTAIN OTH ER PROVISIONS, THE LD. AR SUBMITTED THAT IT REPRESENTED CERTAIN PURC HASE OF GOODS MADE DURING THE YEAR FOR WHICH BILLS WERE ACTUALLY RECEIVED IN THE SUBSEQUENT YEAR. IT WAS STATED ON RECEIPT OF SUCH BILLS, THE AMOUNT OF PROVISION WAS REVERSED. THE AO IS DIR ECTED TO VERIFY THIS CONTENTION AS WELL. IN CASE, THE SAME IS FOUND TO BE ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 40 CORRECT TO THE EFFECT THAT THE PURCHASES WERE MADE DURING THE YEAR AND DEBITED TO THE PROVISION, THEN OF COURSE NO ADDITION SHOU LD BE MADE PROVIDED SUCH PROVISION HAS BEEN REVERSED IN THE SU BSEQUENT YEAR ON THE RECEIPT OF BILLS. QUA THE REMAINING PROVISION FOR WHICH THERE IS NO EVIDENCE, THE SAME IS LIABLE TO BE DISALLOWED IN THE ABSENCE OF THE ASSESSEE FURNISHING ANY JUSTIFIABLE REASONS. WE, THEREFORE, SEND THE MATTER BACK TO THE FILE OF AO FOR DECID ING THIS ISSUE AFTER ALLOWING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 40. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH NOVEMBER, 2019. SD/- SD/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 25 TH NOVEMBER, 2019 ITA NO.505/PUN/2015 EATON INDUSTRIAL SYSTEMS PVT. LTD., 41 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-13, PUNE 4. 5. 6. THE PR.CIT-V, PUNE , , / DR C, ITAT, PUNE; / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 21-11-2019 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 25-11-2019 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *