Haworth (India) Pvt. Ltd., Pune V. DCIT, New Delhi

ITA 5341/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4153 (ITAT-DELHI)
• Duration Of Justice: 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 03-03-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 29-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NARENDER K CHAND; A D MEHROTRA
• Assessee Lawyers: KUNJ VAIDYA
• Keywords: Related party transaction; Depreciation; Transfer pricing; Business expenditure; International transaction; Additional evidence; Wholly owned subsidiary; Difference of opinion; Arm length price; Revised return; Capital expenditure
• Section: 92C; 143(3); 92D; 10B; 37

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES C: NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA, VICE PRESIDENT AND SHRI I.P. BANSAL, JUDICIAL MEMBER ITA NO.5341/DEL/2010 ASSESSMENT YEAR: 2006-07 HAWORTH (INDIA) PVT. LTD., VS. DCIT, RAISONI INDUSTRIAL PARK, SITE NO.276, (OSD) CIT-IV, VILLAGE MAAN, TALUKA MULSHI, ROOM NO. 151, PUNE. C.R. BLDG., AAACH8417K NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI KUNJ VAIDYA, CA & SH. K.M. GU PTA, ADV. RESPONDENT BY : SH. NARENDER K. CHAND, SR. DR & SH. A.D. MEHROTRA, CIT(DR) ORDER PER I.P. BANSAL, J.M. THIS IS AN APPEAL FILED BY THE ASSESSEE UNDER THE PROVISIONS OF SEC. 253(1)(D) OF INCOME TAX ACT, 1961 (ACT) AGAINST THE ORDER PASSED BY ASSESSING OFFICER DATED 25 TH OCTOBER, 2010 U/S 143(3) READ WITH SECTION 144C OF THE ACT. THE MAIN ADDITION AGITATED IN THE PRESENT APPEAL IS AN AMOUNT OF RS. 5,45,54,363/- ON ACCOUNT OF VARIATION IN INCOME AS A CONSEQUENCE OF THE ORDER OF TRANSFER PRICING OF THE OFFICER (TPO) U/S 92C(III) OF THE ACT. THE OTHER DISALLOWANCES MADE ARE RS. 40,94,915/- IN RESPECT OF PROVISIONS MADE FOR CERTAIN EXPENSES. IN ITIALLY THE PROVISION WAS FOUND TO BE MADE IN RESPECT OF VARIOUS EXPENSES AT AN AGGREGATED SUM OF RS. 1,01,91,619/- AND ON QUERY RAISED BY THE AO A SUM OF RS. ITA NO. 5341/D/10 2 60,96,704/- WAS SUO MOTU DISALLOWED BY THE ASSESSEE , HENCE, NET ADDITION OF RS. 40,94,915/- WAS MADE. THE OTHER DISALLOWANC E IS A SUM OF RS. 13,73,781/- WHICH IS WITH RESPECT TO DISALLOWANCE O F EXCESS DEPRECIATION ON COMPUTER PERIPHERALS, UPS AND PRINTERS. THE ASSE SSEE HAD CLAIMED DEPRECIATION @ 60%. AS AGAINST THAT AO HAS ALLOWED THE CLAIM @ 15% AND IN THE CIRCUMSTANCES A NET ADDITION OF RS. 13,73,78 1/- IS MADE ON THAT ACCOUNT. ALL THESE ADDITIONS ARE AGITATED BY THE A SSESSEE IN THE PRESENT APPEAL. THE GROUNDS OF APPEAL READ AS UNDER: - TRANSFER PRICING MATTERS ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW; 1. THE LD. AO PURSUANT TO THE DIRECTIONS OF THE LD . DISPUTE RESOLUTION PANEL (LD. DRP) ERRED IN REJECTING THE APPROACH ADOPTED FOR TRANSFER PRICING ANALYSIS / CONTEMPORANEOUS DOCUMENTATION MAINTAINED BY THE APPELLANT AND THEREBY MAKING A TRANSFER PRICING ADJUSTMENT OF RSS. 54,554,363/- TO THE INCOME OF THE APPELLANT BY HOLDING THAT THE INTERNATIONAL TRANSAC TIONS OF THE MANUFACTURING SEGMENT AND THE MARKETING SUPP ORT SERVICES SEGMENT OF THE APPELLANT DO NOT SATISFY T HE ARMS LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME TAX ACT , 1961 (THE ACT). MARKETING SUPPORT SERVICES BUSINESS 2. THE LD. DRP/AO ERRED IN CONSIDERING COMMISSION EXPENSES OF RS. 13,209,105 AS OPERATING EXPENSES FO R THE PURPOSE OF TRANSFER PRICING ANALYSIS, DESPITE ACCEP TING THE SAME AS NOT BEING WHOLLY AND EXCLUSIVELY FOR THE PU RPOSE OF BUSINESS U/S 37OF THE ACT FOR COMPUTING TAXABLE INCOME, RESULTING IN DOUBLE TAXATION OF THE SAME INCOME. ITA NO. 5341/D/10 3 3. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, IF THE ABOVE EXPENSES OF RS. 13,209,105 ARE CONSIDERED AS OPERAT ING EXPENSES FOR TRANSFER PRICING PURPOSES, THEN THE LD . AO SHOULD HAVE ALLOWED THE SAME AS DEDUCTION U/S 37 AS BUSINESS EXPENDITURE FOR CORPORATE TAX ASSESSMENT A ND REDUCE THE APPELLANTS TAXABLE INCOME BY RS. 13,209 ,105. 4. THE LD. DRP/AO ERRED IN DISREGARDING THE DETAIL ED FACTUAL ANALYSIS AND FUNCTIONAL COMPARABILITY PRESE NTED BY THE APPELLANT IN RESPECT OF THE COMPARABLES SELECTE D BY THE APPELLANT AND DETERMINING THE ARMS LENGTH NATU RE OF THE TRANSACTIONS USING ONLY A SINGLE COMPARABLE. T HE LD. DRP DID NOT ATTEMPT TO FIND A LARGER SET OF COMPARA BLES AND ALSO IGNORED THE FRESH SET OF COMPARABLES SUBMI TTED BY THE APPELLANT WITHOUT PROVIDING ANY REASONS. MANUFACTURING BUSINESS 5. THE LD. DRP/AO ERRED IN CONSIDERING EXPENSES IN CURRED PRIOR TO COMMENCEMENT OF THE MANUFACTURING OPERATIO NS, AS OPERATING EXPENSES FOR THE PURPOSE OF COMPUTATIO N OF OPERATING PROFIT FOR APPLICATION OF TRANSACTIONAL N ET MARGIN METHOD (TNMM). 6. THE LD. DRP/AO ERRED IN REJECTING THE ADJUSTMEN TS MADE ON ACCOUNT OF UNDERUTILIZED CAPACITY, DISREGAR DING THE FACT THAT UNLIKE THE COMPARABLES, THE MANUFACTU RING BUSINESS OF THE APPELLANT WAS IN A START UP STAGE, AND ALSO DISREGARDING THE AUTHENTIC INFORMATION SUBMITTED BY THE APPELLANT TO ENABLE THE COMPUTATION OF SUCH AN ADJUSTMENT. 7. WITHOUT PREJUDICE TO THE OTHER GROUNDS, THE LD. DRP/AO ERRED IN COMPUTING THE QUANTUM OF ADJUSTMENT TO BE MADE TO THE PROFIT OF THE MANUFACTURING SEGMENT OF THE A SSESSEE BY APPLYING THE PROFIT LEVEL INDICATOR OF OPERATING PROFIT/SALES TO THE VALUE OF INTERNATIONAL TRANSACTI ON ITA NO. 5341/D/10 4 PERTAINING TO IMPORT OF RAW MATERIAL INSTEAD OF SAL ES FIGURE OF THE MANUFACTURING SEGMENT WHICH RESULTED IN AN INCREASE IN THE ADJUSTMENT BY RS. 2,691,806/-. GENERAL GROUNDS 8. THE LD. DRP/AO ERRED IN NOT GRANTING THE BENEFI T OF +/- 5% RANGE AS ENVISAGED BY THE PROVISO TO SEC. 92C(2) OF THE ACT. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. AO ERRED IN NOT APPRECIATING THE FACT THAT ADDI TIONS MADE TO THE TOTAL INCOME OF THE APPELLANT ARE MEREL Y DUE TO DIFFERENCE OF OPINION AND NOT DUE TO ANY MALA FI DE INTENT ON THE PART OF THE APPELLANT, THEREBY INITIA TING PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT ON THE PREMISE THAT THE APPELLANT HAS CONCEALED/ FURNISHED INACCURATE PARTICULARS OF INCOME. 10. THE LD. DRP ERRED IN ISSUING DIRECTIONS WHICH ARE INCOMPLETE WITH RESPECT TO: DISCUSSION ON REASONS FOR REJECTION OF THE APPELLANTS CONTENTIONS, EVIDENCES AND FACTUAL AND TECHNICAL ANALYSES; DISCUSSION FOR DISTINGUISHING THE CASE ON HAND FROM THE VARIOUS JUDICIAL PRECEDENTS SUBMITTED IN ITS SUPPORT BY THE APPELLANT AND; DISCUSSION ON THE ADDITIONAL EVIDENCE SUBMITTED BY THE APPELLANT IN THE FORM OF A FRESH SEARCH AND RECENT JUDICIAL PRECEDENTS. 11. THE LD. DRP/TPO ERRED IN USING DATA WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME IF CONDUCTIN G THE TRANSFER PRICING ANALYSIS FOR COMPUTING THE TRANSFE R PRICING ADJUSTMENT, NOT ALLOWING THE USE OF MULTIPLE YEAR D ATA AS PRESCRIBED UNDER RULE 10B(4) OF THE RULES THEREBY U NFAIRLY ITA NO. 5341/D/10 5 PENALIZING THE APPELLANT FOR AN ACT THAT WAS IMPOSS IBLE TO PERFORM ON THE PART OF THE APPELLANT. CORPORATE TAX MATTERS 12. PROVISION FOR EXPENSES THE LD. DRP/AO ERRED IN DISALLOWING A SUM OF RS. 40 ,94,915 TOWARDS PROVISION FOR CERTAIN EXPENSES BY CONSIDERI NG THE SAME AS CONTINGENT LIABILITY. THE APPELLANT HAD MADE PROVISION OF CERTAIN EXPENSE S OF RS. 1,01,91,619. OUT OF THE SAME THE COMPANY SUO M OTU DISALLOWED UNDER THE PROVISIONS O. DRP/AO ERRED IN DISALLOWING A SUM OF RS. 40,94,915 TOWARDS PROVISIO N FOR CERTAIN EXPENSES BY CONSIDERING THE SAME AS CONTING ENT LIABILITY. THE APPELLANT HAD MADE PROVISION OF CERTAIN EXPENSE S OF RS. 1,01,91,619. OUT OF THE SAME THE COMPANY SUO M OTU DISALLOWED UNDER THE PROVISIONS OF SECTION 40(A)(IA ) , A SUM OF RS. 60,96,704 ON ACCOUNT OF NON DEDUCTION/PAYMEN T OF TDS WITHIN THE DUE DATE. THE LD. DRP, WHILE GIVING CREDENCE TO THE APPELLANTS CONTENTION THAT CERTAIN EXPENSES THAT WERE SUO MOTU DISALLOWED UNDER THE PROVISIONS OF SECTION 40(A)(IA), ERRED FACTUALLY IN CONSIDERING THE ENTIRE PROVISIONS FOR THESE COST OF RS. 1,01,91,619 AS CONTINGENT LIABILITIES. 13. DISALLOWANCE OF EXCESS DEPRECIATION THE LD. DRP/AO ERRED IN CLASSIFYING COMPUTER PERIPHERALS, VIZ. PRINTERS, UPS AND OTHER COMPUTER PERIPHERALS IN THE BLOCK OF PLANT AND MACHINERY, BEING ELIGIBLE FOR DEPRECIATION AT 15%, AS AGAINST THE BLOCK OF COMPU TERS ELIGIBLE FOR DEPRECIATION AT 60%. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. ITA NO. 5341/D/10 6 YOUR APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER, WITHDRAW, MODIFY AND/OR SUBSTITUTE, AND TO WITHDRAW THE ABOVE GROUNDS OF APPEAL. 2. DRAFT ORDER CAME TO BE PASSED BY THE AO ON 2.1 2.09 WHICH WAS FORWARDED TO THE ASSESSEE. AGAINST DRAFT ORDER, TH E ASSESSEE OPTED TO REFER THE MATTER TO DISPUTE RESOLUTION PANEL (DRP), WHO VIDE ITS ORDER DATED 30.9.10 HAS PASSED ORDER U/S 144C(5) OF THE A CT. 3. TRANSFER PRICING STUDY HAS BEEN CONDUCTED BY PRI CE WATER HOUSE COOPERS AND COPY OF SUCH STUDY HAS BEEN PLACED BY T HE ASSESSEE IN THE PAPER BOOK AT PAGES 101 TO 170. 4. THE RETURN OF INCOME HAS BEEN FILED BY THE ASSES SEE ON 27.11.06 DECLARING A LOSS OF RS. 52,33,133/-. SUBSEQUENTLY, A REVISE RETURN WAS FILED ON 31.3.08 IN WHICH AN INCOME OF RS. 79,75,97 2/- WAS DECLARED AND ASSESSMENT HAS FINALLY CAME TO BE PASSED AT AN ASSE SSED INCOME OF RS. 6,79,99,031/- AFTER MAKING THE AFOREMENTIONED THREE ADDITIONS. 5. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACT URING, WHOLE SALE TRADING AND INSTALLATION OF FURNITURE AND IS A LSO PROVIDING MARKETING SERVICES. IT WAS INCORPORATED IN THE YEAR 1997 AS A WHOLLY OWNED SUBSIDIARY OF HAWORTH INC. TO PROMOTE THE SALE OF HAWORTH BRANDED FURNITURE TO THE INDIAN CLIENTS OF HAWORTH GROUP. IT ALSO PROVIDES MARKETING AND RELATED SUPPORT SERVICES TO HAWORTH , SINGAPORE. FROM ITA NO. 5341/D/10 7 DECEMBER, 2005 THE COMPANY HAS ALSO COMMENCED ITS M ANUFACTURING ACTIVITIES FOR ASSEMBLY OF CHAIRS, AT ITS NEWLY SET UP PLANTS IN HINJEWADI, PUNE. DURING THE YEAR THE ASSESSEE HAS UNDERTAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS: - TABLE 1 S.NO. DESCRIPTION OF TRANSACTION METHOD PLI RECEIVED (IN RS.) PAID (IN RS.) 1 PURCHASE OF RAW MATERIAL TNMM OP/SALES 5,93,36,409 2 IMPORT OF MODULAR FURNITURE TNMM OP/TC 59,78,0 72 3 IMPORT OF DISPLAY ITEMS AND MOCK-UPS TNMM OP/TC 24,40,429 4 PURCHASE OF FIXED ASSETS TNMM OP/TC 1,40,82,083 5 MARKETING & INSTALLATION SERVICES TNMM OP/TC 15,39,33,769 6 PURCHASE OF CATALOGUES TNMM OP/TC 7,89,028 7 REIMBURSEMENT OF EXPENSES PAID CUP -------- 31,76,157 8 REIMBURSEMENT OF EXPENSES RECEIVED CUP ------- 12,64,269 6. IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACT IONS, TWO SEGMENTS HAVE BEEN CREATED NAMELY: (1) IMPORT OF RAW MATERIA L FOR MANUFACTURING AND (2) MARKETING SUPPORT SERVICES. THE TRANSACTIO NS RELATING TO IMPORT OF RAW MATERIAL FOR MANUFACTURING ARE BENCHMARKED USIN G TNMM AS THE MOST APPROPRIATE METHOD WITH OP/SALES AS PROFIT LEVEL IND ICATOR (PLI). FOR THIS SEGMENT THE ASSESSEE HAS COMPUTED NET PROFIT MARGIN OF 13.50% (BY MAKING CERTAIN ADJUSTMENT ON ACCOUNT OF CAPACITY UT ILIZATION ETC.) IN ITS TP STUDY AS AGAINST MEAN MARGIN OF FIVE COMPARABLES AT 9.17% (AS PER TABLE 3 GIVEN IN ORDER OF TPO AND REPRODUCED BELOW AT THE END OF THIS ITA NO. 5341/D/10 8 PARA) AND IN THIS MANNER AS PER TP STUDY, THE TRANS ACTION HAS BEEN CONSIDERED AS TRANSACTION AT AN ARM LENGTH PRICE. TABLE 3 MANUFACTURING SEGMENT COMPANY NAME OP/SALES BP ERGO LTD. 9.46% GUNNEBO INDIA LTD. (STEELAGE INDUSTIES LTD.) - 13.86% SHAKTI MET - DOR LTD. 28.62% SUPREME INDU STRIES LTD. 4.28% APW PRESIDENT SYSTEMS LTD. 13.73% COUNT 5 AVERAGE 8.45% 7. WITH REGARD TO OTHER SEGMENT RELATING TO MARKET AND INSTALLATION SUPPORT SERVICES, THE BENCHMARK USED BY THE ASSESSE E IS ALSO TNMM BEING MOST APPROPRIATE METHOD WITH OP/TC AS PLI. FOR THI S SEGMENT THE NET PROFIT MARGIN HAS BEEN COMPUTED IN THE TP REPORT AT 1.35% AGAINST NET PROFIT MARGIN OF COMPARABLES AT 3.15%. FOR THIS SE GMENT THE MARGIN OF COMPARABLE DATA FOR MULTIPLE YEARS HAS BEEN USED IN THE TP REPORT. 8. THE SEGMENT WISE INTERNATIONAL TRANSACTIONS, AS DESCRIBED IN THE ORDER OF TPO IN TABLE 2 ARE AS UNDER: - TABLE 2 S.NO. PARTICULARS MANUFACTURING SEGMENT MARKETING SEGMENT TOTAL 1. IMPORT OF RAW MATERIALS 5,93,36,409 5,93,36,409 2. IMPORT OF MODULAR FURNITURE 5 9,78,072 59,78,072 3. IMPORT OF DISPLAY ITEMS AND MOCK- UPS 24,40,070 24,40,070 4. IMPORT OF FIXED ASSETS 1,40,82,082 1,40,82,082 5. MARKETING & INSTALLATION SERVICES 15,39,33,769 15,39,33,769 ITA NO. 5341/D/10 9 6. PURCHASE OF CATALOGUES 7,89,028 7,89,028 7. REIMBURS EMENT OF EXPENSES (PAID) 31,76,157 31,76,157 8. REIMBURSEMENT OF EXPENSES (RECEIVED) 12,64,269 12,64,269 TOTAL 5,93,36,409 17,72,23,021 24,09,99,856 COMMON 44,40,426 9. IT WAS NOTICED BY THE TPO THAT ASSESSEE HAS FOR MANUFACTURING SEGMENT COMPUTED ITS MARGIN AFTER CLAIMING AN ADJUS TMENT ON ACCOUNT OF CAPACITY UTILIZATION AND PREOPERATIVE EXPENSES. HE NOTICED THAT THESE ADJUSTMENTS WERE CLAIMED BY THE ASSESSEE WHILE COMP UTING THE MARGIN AT 13.50%. ADJUSTMENT ON ACCOUNT OF IDLE CAPACITY HAS BEEN MADE ON THE GROUND THAT MANUFACTURING ACTIVITY OF THE ASSESSEE HAD COMMENCED IN DECEMBER, 2005. IT IS THE CASE OF THE ASSESSEE THA T IT HAD ACHIEVED A CAPACITY UTILIZATION OF 30.58% AS AGAINST AVERAGE C APACITY UTILIZATION IN THE CASES OF COMPARABLE AT 70%. THE COST PERTAINING TO ABNORMAL UNDER UTILIZATION OF CAPACITY AMOUNTING TO RS. 44,38,709/ - WAS IGNORED FOR THE PURPOSE OF COMPUTING OPERATING PROFITS FROM THE MAN UFACTURING OPERATIONS DURING THE YEAR UNDER CONSIDERATION. FURTHER IT WA S NOTICED THAT EXCESSIVE OVERHEAD COST AMOUNTING TO RS. 1,28,04,653/- WAS IN CURRED DURING PRE- COMMENCEMENT PERIOD I.E. UPTO DECEMBER, 2005 AND TH E SAME WAS NOT CONSIDERED FOR THE PURPOSE OF COMPUTING OPERATING P ROFITS FROM THE MANUFACTURING OPERATIONS. SUCH POSITION HAS BEEN DE SCRIBED IN THE ORDER OF TPO IN TABLE 5 & 6 WHICH FOR THE SAKE OF CONVENI ENCE ARE BEING REPRODUCED BELOW: - ITA NO. 5341/D/10 10 TABLE 5 PARTICULARS MANUFACTURING SEGMENT AFTER CAPACITY ADJUSTMENT BEFORE CAPACITY ADJUSTMENT A D E INCOME SALES OF GOODS (GROSS) 5,01, 43,814 5,01,43,814 LESS: EXCISE DUTY SALES OF GOODS (NET) 5,01,43,814 5,01,43,814 TOTAL INCOME 5,01,43,814 5,01,43,814 EXPENDITURE RAW MATERIAL CONSUMED 4,10,37,556 4,10,37,556 EXCISE DUTY 16,85,845 16,85,845 (INCREASE)/DECREASE IN INVENTORIES (61,69,246) (61,69,246) SUBTOTAL VARIABLE COSTS 3,65,54,155 3,65,54,155 DEPRECIATION 20,65,181 PERSONAL EXPENSES 76,42,445 ADMINISTRATION & OTHER EXPENSES 1,43,57,069 NON - OPERATING EXPENSES (1,28,04,653) SUB TOTAL FIXED COSTS 68,21,3 33` 1,12,60,042 FINANCIAL CHARGES - - TOTAL EXPENDITURE 4,33,75,488 4,78,14,197 OPERATING COST 4,33,75,488 OPERATING PROFIT 67,68,326 OPERATING PROFIT/SALES 13.50% TABLE 6 NOTE 1: PARTICULARS REFERENCE PERCENTAGE CAPACITY UTILIZATION OF COMPARABLES A 70% NORMAL IDLE CAPACITY B = 100% - A 30% ACTUAL CAPACITY UTILIZATION OF HAWORTH INDIA C 30.58% NORMAL CAPACITY FOR HAWORTH INDIA D=B+C 60.58% CAPACITY ADJUSTMENT MADE CONSIDERING NORMAL CAPACIT Y OF HAWORTH INDIA OPERATING EXPENSES FROM FI XED COSTS = (RS. 1126042 * 60.58%) I.E. RS. 6,821,3 33 10. THE DETAILS OF PRE-OPERATIVE EXPENSES ARE DESCRI BED IN TABLE 7 AS BELOW: - ITA NO. 5341/D/10 11 TABLE 7 PARTICULARS AMOUNT (RS.) SALARIES & WAGES 31,44,719 FRINGE BENEFITS 19,93,198 CONSULTING 21,06,241 MAINTENA NCE 1,86,049 SUPPLIES 1,64,571 TRAVELLING COSTS 26,63,272 TELEPHONE 5,46,689 POSTAGE 81,438 LEASE RENTS 3,32,655 TRAINING/EDUCATION 2,56,264 LEGAL ACCOUNTING 10,63,150 ADVERTISING FAIRS 91,060 INSURANCE 1,64,226 OTHER SELLING AND GENERAL ADMINIST RATION EXPENSES 11,120 TOTAL 1,28,04,653 11. THUS, IT WAS FOUND BY THE TPO THAT ASSESSEE HAS BASED ITS CALCULATION OF MARGIN WHICH VARIED FROM THE AUDITED ANNUAL ACCOUNTS OF THE ASESSEE. FOR THE FOLLOWING REASONS, LD. TPO HA S REJECTED THE CLAIM OF THE ASSESSEE REGARDING THE ADJUSTMENTS TO BE GRANTE D TO THE ASSESSEE ON ACCOUNT OF CAPACITY UTILIZATION AND PRE-OPERATIVE E XPENSES: - (A) IT IS SEEN THAT NO PREOPERATIVE EXPENDITURE H AS BEEN SHOWN IN THE PROFIT AND LOSS ACCOUNT. IT IS AMPLY CLEAR FROM THIS FACT THAT THE STATUTORY AUDITORS HAVE NOT CONSIDERED ANY EXPENDITURE AS PREOPERATIVE EXPENDIT URE AND THE CLAIM OF PREOPERATIVE EXPENSES WAS MADE ONL Y FOR THE PURPOSE OF TRANSFER PRICING. (B) ADJUSTMENT HAS BEEN CLAIMED IN DEPRECIATION WH ICH HAS ALREADY BEEN CHARGED ONLY FOR PART OF THE YEAR SINCE THE MANUFACTURING ACTIVITIES STARTED IN DECEMBER, 2 005. WHEN THE DEPRECIATION HAS ALREADY BEEN CHARGED FOR PART OF THE YEAR THERE IS NO REASON FOR CLAIMING THE ITA NO. 5341/D/10 12 ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION ON TH E SAME. (C) SIMILARLY THE OTHER EXPENDITURE IN THE NATURE OF PERSONNEL AND OTHER ADMINISTRATIVE EXPENSES HAS ALR EADY BEEN INCURRED FOR ONLY A PART OF THE YEAR PARTICULA RLY ONLY AFTER THE PRODUCTION STARTED. (D) IN THE TRANSFER PRICING REPORT NO EVIDENCE WERE AVAILABLE TO EXAMINE THE CAPACITY UTILIZATION OF TH E COMPARABLES. 12. FOR MANUFACTURING SEGMENT, AFTER REJECTING SUCH ADJUSTMENTS CLAIMED BY THE ASSESSEE, LD. TPO HAS ARRIVED AT OPE RATING PROFIT/SALES RATIO AT (-) 20.88% AS PER ACCOUNT OF THE ASSESSEE AS PER TABLE 9 WHICH IS AS BELOW: - TABLES 9 PARTICULARS AMOUNT INCOME SALES OF GOODS (GROSS) 5,01,43,814 LESS: EXCISE DUTY - SALES OF GOODS (NET) 5,01,43,814 TOTAL INCOME 5,01,43,814 EXPENDITURE RAW MATERIAL CONSUMED 4,10,37,556 EXCISE DUT Y 16,85,845 (INCREASE)/DECREASE IN INVENTORIES (61,69,246) DEPRECIATION 20,65,181 PERSONNEL EXPENSES 76,42,445 ADMINISTRATION & OTHER EXPENSES 1,43,57,069 TOTAL EXPENDITURE 6,06,18,850 OPERATING COST OPERATING PROFIT - 1,04,75,036 OPERATING PROFIT/SALES - 20.88% 13. LD. TPO HAS THUS, WORKED OUT DIFFERENCE IN THE ARM LENGTH PRICE OF MANUFACTURING SEGMENT AT RS. 1,74,03,994/- AS PER TABLE 10: - ITA NO. 5341/D/10 13 TABLE 10 DETAILS AMOUNT VALUE OF INTERNATIONAL TRANSACTIONS 5,93,36,409 ARMS LENGTH OP/SALE @ 8.45% 39,521,183 ARMS LENGTH MARGIN 50,13,926 MARGIN SHOWN BY THE ASSESSEE @ ( - ) 20.88% 1,23,90,068 DIFFERENCE 1,74,03,994 % OF DIFFERENCE WITH THE VALUE AT WHICH THE INTERNATIONAL TRANSACTION HAS TAKEN PLACE 29.33% 14. SINCE THE VARIATION EXCEEDED 5% NO ADJUSTMENT HA S BEEN GIVEN TO THE ASSESSEE ON ACCOUNT OF VARIATION UP TO 5%. 15. SO AS IT RELATES TO MARKET SUPPORT SERVICE SEGME NT, IT IS NOTICED BY THE TPO THAT AS PER REVISED RETURN FILED FOR THE YE AR UNDER CONSIDERATION THE EARLIER MARGIN COMPUTED AT 1.13% WAS REVISED AN D RECOMPUTED AT 9.63% BY TAKING INTO CONSIDERATION THE DISALLOWED E XPENDITURES. HE FURTHER FOUND THAT OUT OF 5 COMPARABLES SUBMITTED B Y THE ASSESSEE CURRENT YEAR DATA WAS AVAILABLE ONLY WITH REGARD TO TWO PAR TIES WHOSE MEAN WAS WORKED OUT AT (-) 3.58%. THE NAMES OF THE TWO COM PANIES IN RESPECT OF WHOM CURRENT YEAR DATA WAS AVAILABLE ARE ALFRED HER BERT INDIA LIMITED & PRIYA INTERNATIONAL LIMITED. THE TPO NOTICED THAT ALFRED HERBERT INDIA LIMITED IS DERIVING INCOME FROM SALES, COMMISSION, CURRENT AND PROFIT ON SALE OF INVESTMENT. IT WAS OBSERVED THAT NO SEGMEN TAL INFORMATION WAS AVAILABLE AND, THEREFORE, LD. TPO REJECTED THE SAID COMPARABLE AND HE UTILIZED ONLY ONE COMPARABLE WHICH IS PRIYA INTERNA TIONAL LIMITED WHOSE MEAN MARGIN ON THE BASIS OF CURRENT FINANCIAL YEAR DATA IS CALCULATED AT ITA NO. 5341/D/10 14 22.58% AND THUS, IT HAS BEEN FOUND BY THE TPO THAT THERE WAS A DIFFERENCE IN ARM LENGTH PRICE OF RS. 3,71,50,369/-, WHICH HAS BEEN COMPUTED IN TABLE 11 WHICH IS DESCRIBED AS BELOW: - TABLE 11 DETAILS AMOUNT TOTAL COST AS SHOWN IN APPENDIX H OF THE TRANSFER PRICING REPORT 175,027,383 ARMS LENGTH OP/TC @ 22.58% 39,521,183 ARMS LENGTH PRICE 214,548,566 OPERATIVE INCOME SHOWN BY THE ASSESSEE 177,398,197 DIFFERENCE 37,150,369 % OF DIFFEREN CE WITH THE VALUE AT WHICH THE INTERNATIONAL TRANSACTION HAS TAKEN PLACE 20 .96% 16. LD. TPO HAS REJECTED THE CLAIM OF THE ASSESSEE REGARDING THE GRANT OF 5% ADJUSTMENT ON THE GROUND THAT THE DIFFERENCE IN ARM LENGTH PRICE EXCEEDED 5%. IN THE ABOVE MANNER, TOTAL ADJUSTMENT IN ARM LENGTH PRICE IS MADE BY THE LD. TPO AT RS. 5,45,54,363/- WHICH I S DESCRIBED IN FOLLOWING TABLE: - DETAILS REFERENCE AMOUNT ADJUSTMENT IN MANUFACTURING SEGMENT PARA 4.17 1,74,03,994 ADJUSTMENT IN MARKET SUPPORT SERVICE SEGMENT PARA 5.9 3,71,50,369 TOTAL ADJUSTMENT 5,45,54,363 17. THE FINDINGS OF DRP ON THE OBJECTIONS RAISED BY THE ASSESSEE ARE AS UNDER: - FINDINGS ON LEGAL ISSUES: - 1. DATA OF ONLY THE RELEVANT FINANCIAL YEAR OF THE COM PARABLE ENTITIES IS TO BE USED AS ASSESSEE DID NOT ESTABLISH THAT TH E DATA OF THE ITA NO. 5341/D/10 15 PRECEDING TWO YEARS DEMONSTRATED SETTLED FACTS WHIC H HAVE INFLUENCED THE RESULT OF THE FINANCIAL YEAR UNDER C ONSIDERATION. 2. ADJUSTMENT OF 5% AS PROVIDED UNDER THE SECOND PROVI SO TO SEC. 92C(2) OF THE ACT CANNOT BE GRANTED AS THE DIFFEREN CE COMPUTED BY THE TPO IN THE ARM LENGTH PRICE (ALP) IS MORE THAN 5% OF THE ALP DETERMINED BY THE TPO. 3. THE AO IS NOT UNDER AN OBLIGATION TO DEMONSTRATE TH E EXISTENCE OF TAX AVOIDANCE FOR INVOCATION OF TRANSFER PRICING PRO VISIONS ACCORDING TO THE DECISION OF SPL. BENCH IN THE CASE OF AZTECH SOFTWARE AND TECHNOLOGY LTD. VS. DCIT 107 ITD 141 (BANGLORE) (SB ). FINDINGS ON MANUFACTURING SEGMENT : - 1. ASSESSEES CLAIM FOR CONSIDERING A SUM OF RS. 1,28, 04,653/- AS PRE- COMMENCEMENT EXPENSES CANNOT BE ACCEPTED AS NO PREOP ERATIVE EXPENDITURES ARE SHOWN IN THE PROFIT AND LOSS ACCOUN T AND STATUTORY AUDITORS HAVE NOT CONSIDERED ANY EXPENDITURE AS PREO PERATIVE EXPENSES AND SUCH CLAIM IS MADE ONLY FOR THE PURPOSE OF TRANSFER PRICING. 2. ADJUSTMENT REGARDING CAPACITY UTILIZATION CANNOT BE GRANTED IN ABSENCE OF EVIDENCE BEING MADE AVAILABLE IN THE TRA NSFER PRICING REPORT FROM WHERE FACT REGARDING CAPACITY UTILIZATI ON OF COMPARABLES COULD BE EXAMINED. BEFORE TPO ONLY THE ASSESSEE HAS SUBMITTED INFORMATION IN THE CASE OF M/S STEEL AGE I NDUSTRIES LTD. FOR WHICH THE CAPACITY UTILIZATION WAS TAKEN AT 50. 72% BY THE ASSESSEE AND AS AGAINST THAT ANNUAL REPORT HAD SHOW N THAT THE ITA NO. 5341/D/10 16 INSTALLED CAPACITY OF THAT COMPANY WAS MUCH HIGHER THAN THE LICENSED CAPACITY AND THE ANNUAL PRODUCTION WAS ALS O HIGHER THAN THE LICENSED CAPACITY. IN THIS MANNER THE DATA REL ATING TO THAT COMPANY WAS UNRELIABLE/NOT CORRECT. 3. ACCORDING TO SETTLED LAW AS PER TRANSFER PRICING PR OVISIONS CONTAINED IN THE ACT, ONLY A REASONABLE ACCURATE AD JUSTMENT FROM ACCURATE AND RELIABLE DATA CAN ONLY BE MADE AND AS ASSESSEE COULD NOT PRODUCED THE DETAILS REGARDING ACCURATE AND REL IABLE DATA FROM WHERE REASONABLE ACCURATE ADJUSTMENT COULD BE SUGGE STED AND THUS, ASSESSEE CANNOT CLAIM ADJUSTMENT AS IT RELATE S TO CAPACITY UTILIZATION. MARKET SUPPORT SERVICE SEGMENT : - 1. ASSESSEES CLAIM REGARDING SUO MUTO DISALLOWANCE OF EXPENDITURES OF RS. 60,96,704/- IN THE REVISED RETURN CANNOT BE CONSIDERED FOR WORKING OUT NET PROFIT MARGIN OF THE ASSESSEE AS TP O HAS NOT DISCUSSED SUCH ISSUE IN HIS ORDER AND ONCE THE ASSE SSEE HAS GIVEN UP A CLAIM OF CERTAIN EXPENDITURE FROM SUCH SEGMENT, TH E SAME IS REASONABLY REQUIRE TO BE EXCLUDED FROM THE COST OF T HE ASSESSEE. IT IS ALSO NOT ESTABLISHED THAT THE EXPENDITURE WHICH H AVE BEEN SUO MUTO DISALLOWED IN THE REVISED RETURN WAS RELATING TO OPERATING PROFIT OF THE ASSESSEE. UNLESS IT IS ESTABLISHED T HAT SUCH EXPENDITURE WAS THE OPERATING EXPENDITURE, NO BENEFIT CAN BE GIVEN TO THE ASSESSEE IN THE TRANSFER PRICING ANALYSES. THE EXPENDITURE ARE IN THE NATURE OF PROCUREMENT, LEGAL AND ACCOUNT ING, ITA NO. 5341/D/10 17 CONSULTANCY AND PROFESSIONAL FEES AND ON THE FACE O F IT THESE EXPENDITURES ARE NON-OPERATIONAL EXPENSES. 2. THE REJECTION OF COMPARABLE M/S ALFRED HERBERT INDI A LIMITED IS CORRECT FOR THE REASONS DISCUSSED BY TPO IN HIS ORD ER AS THE FUNCTIONS OF THAT COMPANY WERE NOT SIMILAR TO THE F UNCTIONS OF THE ASSESSEE. THE DIRECTORS ANNUAL REPORT OF THAT COMPA NY INDICATED THAT THE COMPANY WAS CARRYING ON BUSINESS ACTIVITY OF THE REALITY AND BUSINESS SERVICE DIVISION WHICH HAS CONTRIBUTED TO THE INCREASED PROFITABILITY OF THE SAID COMPANY AND THAT THE EFFO RTS CONTINUE BY THE COMPANY TO IMPROVE THE SALE OF MARKET DIVISION AND THUS, IT CAN BE SEEN THAT THE SAID COMPANY WAS HAVING DIFFERENCE KIND OF BUSINESS. THERE WAS NO SEGMENTAL REPORT IN THE ANN UAL REPORT OF THE COMPANY. THEREFORE, THE RESULTS OF THE SAID CO MPANY CANNOT BE COMPARED WITH THE ASSESSEE. 3. THE TPO WAS CORRECT IN REJECTING THREE OUT OF FIVE COMPARABLES SELECTED BY THE ASSESSEE AS THE FINANCIAL DATA OF R ELEVANT FINANCIAL YEAR FOR THOSE COMPANIES WAS NOT AVAILABLE. THE TP O WAS JUSTIFIED IN TAKING INTO CONSIDERATION ONLY THE REMAINING COM PARABLE NAMELY M/S PRIYA INTERNATIONAL LIMITED. CORPORATE ISSUES : - 1. AO HAS RIGHTLY DISALLOWED A SUM OF RS. 40,94,950/- ON ACCOUNT OF PROVISION FOR EXPENSES BEING PRO-TYPE COST, PROMOTIO NAL MATERIAL, DISPLAY MATERIAL, PROMOTIONAL PROGRAMS AND PUBLIC R ELATION AS ASSESSEE HAS NOT FURNISHED ANYTHING TO SHOW THAT TH E EXPENDITURE ITA NO. 5341/D/10 18 IN QUESTION WAS CRYSTALLIZED IN THE FINANCIAL YEAR. THE ONLY ARGUMENT ADVANCED WAS THAT THE AMOUNT OF EXPENSES BO OKED IS CLOSELY PROXIMATE TO THE PROVISION MADE, THEREFORE, IT WAS NOT A CONTINGENT LIABILITY. 2. THE CLAIM OF THE ASSESSEE REGARDING DEPRECIATION @ 60% IN RESPECT OF PRINTERS, UPS, NETWORK ROUTERS IS RIGHTLY RESTRI CTED BY THE AO @ 15% AS THOSE EQUIPMENTS ARE NOT A NECESSARY PRE-REQ UISITE FOR RUNNING THE COMPUTER. 18. IN THE AFOREMENTIONED MANNER, DRP HAS UPHELD TH E DRAFT ASSESSMENT ORDER EXCEPT DELETING A DISALLOWANCE OF R S. 11,440/- MADE BY THE AO ON ACCOUNT OF CAPITAL EXPENDITURE IN RESPECT OF SOFTWARE. IN PURSUANCE OF THE DIRECTIONS OF DRP LD. AO HAS FRAME D THE IMPUGNED ASSESSMENT AT AN INCOME OF RS. 6,79,99,031/- AGAINS T RETURN LOSS OF RS. 52,33,133/- WHICH WAS REVISED BY A SUBSEQUENT RETUR N DECLARING INCOME AT RS. 79,75,972/-. AGGRIEVED BY SUCH ORDER ASSESSEE HAS FILED THE AFOREMENTIONED GROUNDS OF APPEAL CONTESTING ALL THE ADDITIONS MADE BY THE AO IN PURSUANCE OF DIRECTIONS OF THE DR. 19. BOTH THE PARTIES HAVE ARGUED THE APPEAL AT LENG TH AND AFTER CONCLUSION OF THE HEARING THEY HAVE SUBMITTED THE S YNOPSIS OF THEIR ARGUMENTS AND IN THIS MANNER THIS APPEAL WAS HEARD. ITA NO. 5341/D/10 19 20. AFTER NARRATING THE FACTS, FIRST AND FOREMOST O BJECTION RAISED BY LD. AR IS IN RESPECT OF GROUND NOS. 2 & 3 WHICH IS REGA RDING A SUM OF RS. 1.32 CRORE WHICH PERTAINED TO THE COMMISSION EXPENDITURE AND IS SUO MUTO DISALLOWED BY THE ASSESSEE IN THE REVISED RETURN AN D THE SAME WAS REQUIRED TO BE EXCLUDED FROM THE OPERATING COST AS THE INCOME TO THAT EXTENT WAS OFFERED BY THE ASSESSEE IN THE RETURN OF INCOME AND THE INCOME OF THE ASSESSEE WAS ASSESSED ON THE BASIS OF THE SAID DISALLOWANCE AND HENCE, DRP WAS WRONG IN NOT GRANTING THE RELIEF TO THAT EXTENT ON THE GROUND THAT ASSESSEE HAD GIVEN UP ITS CLAIM REGARDI NG THOSE EXPENDITURES. TO SUBSTANTIATE THE ARGUMENT THAT SUCH DISALLOWANCE HAS TO BE TAKEN OUT OF OPERATING COST, LD. AR HAS PLACED RELIANCE UPON THE DECISION OF TRIBUNAL IN THE CASE OF M/S SAP INDIA LIMITED VS. ACIT, COPY OF WHICH IS PLACED AT PAGE 43 OF THE COMPENDIUM. IT WAS SUBMITTED THAT I N ANY CASE IF THE SAID EXPENDITURE IS NOT ALLOWED FOR THE PURPOSE OF TP ANA LYSIS THEN THE SAME SHOULD BE ALLOWED AS DEDUCTION U/S 37 FOR CORPORATE TAX ASSESSMENT AND REDUCE THE ASSESSED INCOME TO THAT EXTENT TO AVOID D OUBLE TAXATION. 21. TOUCHING TO GROUND NO. 4 THE OBJECTION OF LD. C OUNSEL IS THAT ACCORDING TO SEARCH PROCESS CONDUCTED FOR TP STUDY TO IDENTIFY A SET OF BROADLY FUNCTIONAL COMPARABLE THE ASSESSEE HAD ARRI VED AT A SET OF FIVE BROADLY COMPARABLE COMPANIES/ENTITIES WITH A MEAN M ARGIN OF 3.15%. AS PER TABLE 13 BELOW: - ITA NO. 5341/D/10 20 TABLE 13: ARMS LENGTH RESULTS S.NO. NAME OF THE COMPANY DATA SOURCE OP/TC 1. FORTUNE COMMUNICATIONS LTD. PROWESS 4.11% 2. SHANTHI SALES LTD. PROWESS 1.61% 3. UJJWAL LTD. CAPITALINE 3.78% 4. PR IYA INTERNATIONAL LTD. PROWESS SEGMENTAL 17.15% 5. ALFRED HERBET (INDIA) LTD. CAPITALINE SEGMENTAL - 10.91% MEAN 3.15% MEDIAN 3.78% LOWER QUARTILE 1.61% UPPER QUARTILE 4.11% 22. HE SUBMITTED THAT OUT OF AFOREMENTIONED FIVE CO MPARABLES THREE WERE REJECTED BY THE TPO ON THE GROUND THAT CURRENT YEAR DATA WAS NOT AVAILABLE. HE SUBMITTED THAT ALFRED HERBERT INDIA LIMITED HAS BEEN REJECTED FROM THE LIST OF COMPARABLES ON THE GROUND THAT CURRENT YEAR DATA OF THE SAID COMPARABLE WAS AVAILABLE ON CONSOL IDATED BASIS AND THE OVERALL BUSINESS OF THE SAID COMPANY WAS NOT FUNCTI ONALLY COMPARABLE WITH THE ASSESSEE. IT WAS SUBMITTED THAT BEFORE DRP IT WAS THE CASE OF THE ASESSEE THAT WHILE COMPUTING THE ARM LENGTH PRICE, THE ASSESSEE HAS TAKEN INTO CONSIDERATION ONLY THE SEGMENTAL DATA OF ALFRE D HERBERT INDIA LIMITED (SALES AND MARKETING OPERATION) AND, THEREFORE, THE SAID RESULT WAS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE AND SHOUL D HAVE BEEN CONSIDERED FOR COMPARABILITY ANALYSIS. WITH RESPEC T TO CONSOLIDATED SEGMENT, IT WAS SUBMITTED THAT THE SUBSIDIARIES ARE INDIAN COMPANIES AND THOUGH THE SUBSIDIARIES MAY BE ENGAGED IN THE MANUF ACTURING BUT THE SEGMENT PERTAINED TO SALES AND MARKETING SERVICES W AS COMPARABLE DESPITE BEING REPORTED ON A CONSOLIDATED BASIS. HE IN THIS REGARD HAS ITA NO. 5341/D/10 21 RELIED UPON THE SUBMISSIONS MADE BEFORE DRP VIDE LE TTER DATED 7.1.10, COPY OF WHICH IS PLACED AT PAGES 172 TO 232 OF THE PAPER BOOK AND REFERENCE IN THIS REGARD WAS MADE TO THE SUBMISSION S CONTAINED AT PAGES 208 TO 210. 23. IT WAS FURTHER SUBMITTED THAT ONLY ONE COMPARAB LE CANNOT BE CONSIDERED FOR APPLICATION OF TNMM AND IN THAT CIRC UMSTANCES FRESH SEARCH WAS SUBMITTED TO DRP WITH A LARGER SET OF SIX COMPAR ABLES AND REFERENCE IN THIS REGARD WAS MADE TO PAGE 234 TO 236 OF THE P APER BOOK, WHEREBY THE FRESH SEARCH WAS SUBMITTED. HE SUBMITTED THAT SUCH OBJECTIONS HAVE WRONGLY BEEN REJECTED BY DRP. AT FIRST, IT WAS SUB MITTED THAT IF THE OLD SEARCH IS TAKEN INTO CONSIDERATION THEN TPO COULD H AVE CONSIDERED MULTI YEAR DATA OF THE THREE REJECTED COMPARABLES WHICH W AS AVAILABLE AT THE TIME OF PREPARING THE TP STUDY. SO FAR AS IT RELATE S TO EXCLUSION OF ALFRED HERBERT INDIA PRIVATE LIMITED THE SUBMISSION OF LD. AR AS UNDER: - 6.52 ALFRED HERBET INDIA LTD. : AS PER AS 17, A BUSINESS SEGMENT IS A DISTINGUISHABLE COMPONENT OF AN ENTERPRISE THAT IS ENGAGED IN PROVIDING AN INDIVIDUAL PRODUCT OR SERVICE OR A GROUP OF RELATED PRODUCTS OR SERVICES AND THAT IS SUBJECTS TO RISKS AND RETURNS THAT ARE DIFFERENT FROM THOSE OF OTHER BUSINESS SEGMENTS. THE FACT THAT THE CONSOLIDATED ANNUAL REPORT OF ALFRED INDIA LIMITED HAS SHOWN THE SALES AND MARKETING SEGMENT AS A SEPARATE PROVES THAT THIS IS A SEPARATE SERVICE PROVIDED BY THE COMPANY. ITA NO. 5341/D/10 22 THE CONSOLIDATED SEGMENT I.E. SALES AND MARKETING OPERATIONS IS FUNCTIONALLY COMPARABLE TO THE MSS SEGMENT OF THE APPELLANT. AS PRIYA INTERNATIONAL LTD. (INDENTING SEGMENT) HAS BEEN ACCEPTED AS A COMPARABLE, ALFRED HERBERT INDIA LTD. (SALES & MARKETING OPERATIONS SEGMENT) SHOULD ALSO BE CONSIDERED AS COMPARABLE AS THE SAID SEGMENT IS ENGAGED IN PROVIDING SIMILAR SERVICES AN D HAS RELATIVELY LOW VOLUME AS IS THE CASE FOR PRIYA INTERNATIONAL LIMITED (INDENTING SEGMENT). IF ALFRED HEBERT INDIA LIMITED (SALES & MARKETING SEGMENT) IS REJECTED AS IT HAS INCURRED AN SIGNIFIC ANT LOSS OF, THEN ON THE SAME LINES PRIYA INTERNATIONAL LIMITED (INDENTING SEGMENT) SHOULD ALSO BE REJECTED AS IT HAS A SIGNIFICANT HIGH PROFIT. IT CAN BE OBS ERVED THAT BOTH THE COMPARABLES WERE OUTLIERS IN RESPECT OF THEIR MARGINS EVEN IN THE SET SELECTED AS PER TH E TP STUDY REPORT (REFER TABLE 13 ON PAGE 153 OF THE PAPER BOOK). ALSO REFER DETAILED SUBMISSION DATED FEBRUARY 24, 2011 AS DIRECTED BY THE HONBLE BENCH. 24. IT WAS FURTHER SUBMITTED THAT UNDER TNMM, ALP S HOULD NOT BE COMPUTED USING ONLY ONE COMPARABLE AND A BROADER SE T OF COMPARABLE SHOULD BE LOOKED AT AND FOR THIS PURPOSE RELIANCE W AS PLACED ON FOLLOWING DECISIONS OF THE TRIBUNAL: - 1. M/S SAP LABS INDIA PVT. LTD. VS. ACIT [ITA NO. 398/BANG/2008 AND ITA NO. 418/BANG/2008]. 2. AZTEC SOFTWARE AND TECHNOLOGY VS. ACIT [294 ITR 32]. 3. MENTOR GRAPHICS (P) LTD. VS. DCIT [112 TTJ 408] . ITA NO. 5341/D/10 23 4. SONY INDIA (P) LTD. VS. DCIT [ITA NOS. 1181/D/20 05, 1656/DEL/2007]. 25. COMING TO GROUND NO. 5, IT WAS SUBMITTED BY LD. COUNSEL THAT THE COMMENCEMENT OF THE MANUFACTURING OPERATION WAS AN EXTENSION OF AN ONGOING BUSINESS AND THUS, THEY WERE NOT REQUIRED T O BE IDENTIFIED FOR REPORTING SEPARATELY EVEN AS PER REQUIREMENTS AS PE R COMPANIES ACT, 1956. THESE COSTS HAVE BEEN EXCLUDED MERELY FOR THE PURPOSE OF COMPARABILITY TO OBTAINED MARGINS EARNED FROM INTER NATIONAL TRANSACTIONS AND THUS, THEY WILL NOT LOOSE THE CHARACTER OF PRE- COMMENCEMENT EXPENSES FOR THE PURPOSE OF COMPUTING THE OPERATING MARGIN FOR COMPARABILITY PURPOSES. REFERRING TO RULE 10B(1)(E )(I) IT WAS SUBMITTED BY LD. AR THAT FOR THE PURPOSE OF COMPUTING NET OPERAT ING MARGIN THE COST WHICH CAN BE CONSIDERED ARE PERTAINING TO SUCH TRAN SACTIONS, THEREFORE, THE COST INCURRED PRIOR TO THE COMMENCEMENT OF COMM ERCIAL OPERATIONS HAVE NO NEXUS WITH THE INTERNATIONAL TRANSACTIONS AN D THUS, REQUIRED TO BE EXCLUDED WHILE COMPUTING THE OPERATING MARGINS. THE ASSESSEE HAS IDENTIFIED THESE EXPENSES TOTALING TO RS. 1.28 CRORE THE DETAILS OF WHICH IS FILED AT PAGE 263 OF THE PAPER BOOK. HE SUBMITTED THAT IF THE MATTER IS CONSIDERED FROM THE VIEW POINT OF LAW AS DESCRIBED IN RULE 10B(1)(E)(I) THE ASSESSEE HAS COMPUTED THE PROFIT MARGIN AS FOLLOW: - A) THE REVENUE EARNED FROM THE RAW MATERIAL DURIN G THE ACCOUNTING PERIOD (I.E. SALES EFFECTED USING THE IM PORTED RAW MATERIAL) TO BE CONSIDERED - RS. 50,143,814. ITA NO. 5341/D/10 24 B) THE VALUE OF IMPORTED RAW MATERIAL TO BE REDUCE D FROM THE SALES. C) THE CHANGE IN STOCK (BOTH RAW MATERIAL AND FINI SHED GOODS) DURING THE PERIOD BE ADDED TO (IN CASE OF INCREASE IN STOCK) OR REDUCED FROM (IN CASE OF DECREASE IN STOCK) FROM TH E SALES ARE THE CASE MAY BE. D) THE OTHER COSTS (DIRECT AND OVERHEADS) PERTAINI NG TO THESE SALES TO BE REDUCED FROM THE SALES. E) THE RESULTANT NET PROFIT WOULD REPRESENT PROFIT EARNED FROM THE INTERNATIONAL TRANSACTION DURING THE YEAR. F) THE OPERATING MARGIN TO BE COMPUTED BY DIVIDING THE SALES FROM THE PROFIT SO ARRIVED AT IT MAY BE NOTED THAT THE P ROFIT LEVEL INDICATOR OP/SALES IS NOT DISPUTED IN THE CASE. 26. THUS, IT WAS PLEADED THAT BY ADOPTING THE ABOVE MENTIONED STEPS THE EXPENSES INCURRED PRIOR TO COMMENCEMENT OF OPERA TIONS ARE NOT REQUIRED TO BE CONSIDERED WHILE COMPUTING THE OPERA TING MARGINS FOR THE INTERNATIONAL TRANSACTIONS. IT WAS SUBMITTED THAT THE MARGIN OF MANUFACTURING SEGMENT AFTER EXCLUDING PRE-COMMENCEM ENT COST IS 4.65% REFERENCE IN THIS REGARD WAS MADE TO ANNEXURE C EN CLOSED WITH THE WRITTEN SUBMISSIONS WHICH DESCRIBED THE NET PROFIT MARGIN AS UNDER: - ANNEXURE C COMPUTATION OF OPERATING MARGIN OF MANUFACTURING SEGMENT FOR 4 MONTH PERIOD OF OPERATI ONS PARTICULARS AMOUNTS (RS.) SALES 50,143,814 OPERATING EXPENSES COST OF MA TERIALS CONSUMED 41,037,556 INCREASE IN INVENTORY - 6,169,246 EXCISE DUTY 1,685,845 PERSONNEL COSTS 7,642,445 ADMIN AND OTHER COSTS 14,357,069 DEPRECIATION 2,065,181 L ESS: PRE - COMMENCEMENT EXPENSES - 12,804,653 ITA NO. 5341/D/10 25 OPERATING EXPENSES 47,814,197 OPERATING PROFIT OPERATING PROFIT/SALES 2,329,617 MARGIN OF COMPARABLES AS PER TPO 4.65% WITHIN +/ - 5% RANGE 8.45% 27. THE MARGIN AS COMPUTED BY TPO IN RESPECT OF COM PARABLE IS 8.45% AND THUS, THE DIFFERENCE BEING LESS THAN 5% THE BEN EFIT OF PROVISO TO SEC. 92C(2) IS AVAILABLE TO THE ASSESSEE AND THUS, IT WA S PLEADED THAT INTERNATIONAL TRANSACTION RELATING TO MANUFACTURING SEGMENT SHOULD BE CONSIDERED TO BE AT ARM LENGTH PRICE. 28. COMING TO GROUND NO. 6 WHICH RELATES TO ADJUSTM ENT ON ACCOUNT OF CAPACITY UTILIZATION, IT WAS SUBMITTED THAT ALL THE DETAILS WERE SUBMITTED BY THE ASSESSEE REGARDING THE STARTUP STAGE OF OPER ATIONS AND CAPACITY UTILIZATION DETAILS VIZ-A-VIZ THE DETAILS WITH REGA RD TO COMPARABLES AND ALSO THE LEGAL PRONOUNCEMENT IN FAVOUR OF THE ASSESSEE A ND REFERENCE IN THIS REGARD WAS MADE TO PAGE 264 TO 298 AND PAGES 245 TO 247 OF THE PAPER BOOK. HE SUBMITTED THAT NEITHER TPO NOR DRP HAS CO NTESTED DIFFERENCE BETWEEN THE STAGE OF OPERATIONS OF THE ASSESSEE AND THE COMPARABLE. THEY HAVE REJECTED THE ENTIRE ADJUSTMENT BASED ONLY ON ACCOUNT OF THE PRESUMED INCONSISTENCY WHICH HAS BEEN OBSERVED ONLY IN ONE OUT OF FIVE COMPARABLES WHICH IS ALSO PROVED TO BE INCORRECT AS THE LICENSED CAPACITY DOES NOT HAVE ANY RELEVANCE IN THE COMPUTATION OF C APACITY UTILIZATION AS AT THE PREVAILING TIME THERE WAS NO STATUTORY RESTR ICTIONS TO EXCEED THE PRODUCTION FROM LICENSED CAPACITY. REFERENCE IN TH IS REGARD WAS MADE TO ITA NO. 5341/D/10 26 PAGE 200 TO 201 OF THE PAPER BOOK. HE SUBMITTED TH AT LICENSED CAPACITY IS DISCLOSED IN THE ANNUAL ACCOUNTS MERELY TO COMPLY W ITH THE DISCLOSURE REQUIREMENTS WHICH ARE MORE RELEVANT TO LICENSING E RA I.E. PRE 1991. IT WAS SUBMITTED THAT IF LD. DRP/TPO WERE NOT IN AGREE MENT WITH THE RELIABILITY OF THE DATA OF THE ONE COMPARABLE USED BY THE ASSESSEE, THEY SHOULD HAVE CONSIDERED THE DATA FOR BALANCE COMPARA BLES TO MAKE ADJUSTMENT. ALTERNATIVELY, IT WAS PLEADED THAT ONU S WOULD BE ON DEPARTMENT TO MAKE ADJUSTMENTS FOR DIFFERENCES IN T HE STAGE OF OPERATIONS OF THE COMPARABLES AND THE ASSESSEE FOR AN APPROPRIATE COMPARABILITY ANALYSES. FOR THIS PURPOSE LD. AR RE LIED UPON THE FOLLOWING DECISIONS: - 1. ACIT VS. FLAT INDIA PVT. LTD. [HONBLE MUMBAI T RIBUNAL (ITA NO. 1848/MUM/2009)]. 2. SKODA AUTO INDIA (P) LTD. VS. ACIT [HONBLE PUNE TRIBUNAL (122 TTJ 699)]. 3. E-GAIN COMMUNICATION (P) LTD. VS. ITO [HONBLE PUNE TRIBUNAL (118 TTJ 354)]. 4. GLOBAL VANTEDGE PVT. LTD. VS. DCIT [HONBLE DEL HI TRIBUNAL (ITA NOS. 2763 & 2764/DEL/2009)]. 29. HE SUBMITTED THAT IN THE CASE OF E-GAIN COMMUNI CATION (P) LTD. VS. ITO (SUPRA), THE TRIBUNAL HAS HELD THAT DEPENDING U PON THE FACTS AND CIRCUMSTANCES OF THE CASE, IT WILL BE APPROPRIATE T O ADJUST OPERATIVE PROFIT OF THE TESTED PARTY AND COMPARABLE PARTIES. THUS, IT WAS PLEADED THAT IF AN ADJUSTMENT CANNOT BE MADE TO COMPARABLES TO ELIM INATE MATERIAL DIFFERENCES, APPROPRIATE ADJUSTMENT CAN BE MADE TO THE MARGINS OF THE ITA NO. 5341/D/10 27 TESTED PARTY AS HAS BEEN DONE BY THE ASSESSEE. IN THE ALTERNATIVE, IT WAS SUBMITTED THAT IF THE DEPARTMENT IS NOT IN FAVOUR O F MAKING AN ADJUSTMENT TO THE TESTED PARTY TO ACCOUNT FOR THE DIFFERENCE I N THE STAGE OF OPERATIONS, THE ONUS WAS ON THE DEPARTMENT TO MAKE SUITABLE ADJUSTMENTS TO THE COMPARABLES IN THAT REGARD. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE IS PLACING ON RECORD AN ALTERNATIVE WORKIN G PREPARED AFTER MAKING THE CAPACITY UTILIZATION ADJUSTMENT TO THE COMPARAB LE WHICH IS ENCLOSED AS ANNEXURE D. IT WAS SUBMITTED THAT ARITHMETIC M EAN OP/SALES OF THE COMPARABLES AFTER SUCH ADJUSTMENT IS (-) 7%, VIS-A- VIS THE MARGIN OF THE ASSESSEE FROM THE INTERNATIONAL TRANSACTION OF 4.65 % WHICH CLEARLY DEMONSTRATE THAT THE ARMS LENGTH NATURE OF THE TRA NSACTION RELATING TO MANUFACTURING SEGMENT, WHICH STANDS THUS IRRESPECTI VE OF THE APPROACH. 30. COMING TO GROUND NO.7, IT WAS ARGUED THAT TPO H AS APPLIED THE PLI OF OP/SALES TO THE VALUE OF THE INTERNATIONAL TRANSA CTION (WHICH IS IMPORT OF RAW MATERIAL) RATHER THAN TO SALES OF THE MANUFA CTURING SEGMENT OF THE ASSESSEE AND, THUS, LEARNED TPO HAS COMPUTED THE O PERATING MARGIN OF THE COMPARABLES ON SALES AND APPLIED THE OPERATING MARGIN ON THE ASSESSEES PURCHASES. THUS, IT WAS SUBMITTED THAT THERE IS A FUNDAMENTAL DIFFERENCE IN THE CALCULATION OF MEAN MARGIN. HE S UBMITTED THAT THE CORRECT COMPUTATION IN THIS RESPECT, IF THE SAME CR ITERIA IS ADOPTED, WILL BE AS UNDER:- SR. NO. PARTICULARS AMOUNT (RS.) 1. SALES 50,143,814 ITA NO. 5341/D/10 28 2. OP/SALES AS CALCULATED BY THE LD. TPO 8.45% 3. OP CONSIDERING THE ABOVE OP/SALES 4,237,152 4. OP AS CALCULATE D BY THE LD. TPO (10,475,036) 5. DIFFERENCE BEING THE ADJUSTMENT REQUIRED 14,712,188 31. THUS, IT WAS PLEADED THAT AN ADJUSTMENT OF ` 1, 47,12,188/- IS REQUIRED TO BE MADE IN THIS REGARD. 32. IT WAS FURTHER SUBMITTED THAT TNMM IS AN INDIRE CT METHOD FOR TESTING THE ARMS LENGTH NATURE OF THE PRICING OF A TRANSACTION. THE ARMS LENGTH NATURE IS TESTED BY COMPARISON OF THE MARGIN S DERIVED FROM CONTROLLED AND UNCONTROLLED TRANSACTIONS. IT WAS F URTHER SUBMITTED THAT THE CLOSING STOCK IS REFLECTED IN THE SUBSEQUENT YE ARS PROVIDED AS OPENING STOCK, WHICH IS CONSIDERED FOR COMPUTING PROFIT FOR THAT YEAR. IF THE TPOS APPROACH WERE TO BE FOLLOWED, THEN, THE ERRONEOUS C OMPUTATION FOR CURRENT YEAR WOULD ALSO AFFECT THE SUBSEQUENT YEARS , CREATING A CHAIN OF ERRORS. RECTIFYING THESE ERRORS SPANNING DIFFERENT PERIOD IS IMPRACTICABLE AND EFFECTIVELY THE RESULTS OF SUCH ANALYSIS WOULD BE ABSURD. IT WAS SUBMITTED THAT IT IS ALSO ARITHMETICALLY INCORRECT TO APPLY THE RATIO OF OP/SALES ON ANY OTHER BASE, BUT SALES. THE TPO HAS APPLIED THIS RATIO ON THE IMPORTS, WHICH IS A COST-DIAMETRICALLY OPPOSITE IN THE PROFITABILITY STATEMENT FROM THE DENOMINATOR I.E., SALES. THUS, IT WAS SUBMITTED THAT THE INCORRECT ADJUSTMENT AMOUNT OF ` 1,74,03,994/- WAS COMPUTED BY THE LD. TPO INSTEAD OF ` 1,47,12,188/- AND WITHOUT PREJ UDICE TO OTHER ITA NO. 5341/D/10 29 GROUNDS, LEARNED ASSESSING OFFICER MAY BE DIRECTED TO RECTIFY THIS ERRONEOUS COMPUTATION. 33. REFERRING TO GROUND NO.8, IT WAS ARGUED THAT 5% BENEFIT SHOULD BE ALLOWED IN THE DETERMINATION OF ARMS LENGTH PRICE AS THIS POSITION HAS BEEN MADE CLEAR BY VARIOUS DECISIONS OF ITAT AND IT IS ALSO CLEAR FROM THE MEMORANDUM TO FINANCE BILL, 2009 AND REFERENCE WAS MADE TO THE FOLLOWING DECISIONS:- A. M/S SAP LABS INDIA PVT. LTD. VS. ACIT (ITA NO.398/BANG/2008 AND ITA NO.418/BANG/2008). THE RE LEVANT PORTION OF PARA 62 WAS EXTRACTED AS BELOW:- .THE AMENDED PROVISO AS EXPLAINED ABOVE ARE NOT APPLICABLE TO THE PRESENT CASE IN HAND. THE PROVIS O APPLICABLE TO THE PRESENT CASE IS THE ONE WHICH STO OD BEFORE THE SUBSTITUTION BROUGHT IN BY THE FINANCE ( NO.2) ACT, 2009 W.E.F. 1.10.2009. B. DEVELOPMENT CONSULTANTS (P) LTD. VS. DCIT [115 TTJ 577]: PARA 22 THE ASSESSEE COMPUTED THE ARMS LENGTH PRICE CONSIDERING THE 5% TOLERANCE RANGE. THE RESULTS OF SUCH COMPUTATION ARE GIVEN BELOW. PARA 25 .WE CONCLUDE DCIL SHOULD RETAIN THE GROSS MARGI NS AS DETERMINED THROUGH THE BENCHMARKING EXERCISE BY T HE ASSESSEE DISCUSSED EARLIER IN THIS ORDER. C. SONY INDIA (P) LTD. VS. DCIT [ITA NOS.1181/DEL/2005, 1257/DEL/2007 & 1656/DEL/2007]. PARA 163 OPTION IS GIVEN TO THE TAX PAYER AS IN SOME CASES, VARIATION NOT EXCEEDING 5% OF ARITHMETIC MEAN MIGHT NOT SUIT THE TAX PAYER, AND, THEREFORE, TAXPAYER IN SUCH CASES SHOULD NOT BE PUT TO A PREJUDICE. OTHERWISE, THERE IS NO DIFFERENCE BETWEEN THE FIRST AND THE SECOND LIMB OF THE ITA NO. 5341/D/10 30 PROVISION AS FAR AS RIGHT OF THE TAXPAYER TO CHALLEN GE THE DETERMINED PRICE IS CONCERNED. THE SECOND LIMB ONL Y ALLOWS MARGINAL RELIEF TO THE TAX PAYER AT HIS OPTIO N TO TAKE ALP NOT EXCEEDING 5% OF THE ARITHMETIC MEAN. THEREFORE, IN LINE WITH THE VIEW TAKEN BY KOLKATA B ENCH OF THE TRIBUNAL, WE ARE OF THE VIEW THAT BENEFIT OF THE SECOND LIMB IS AVAILABLE TO ALL TAXPAYERS IRRESPECTI VE OF THE FACT THAT PRICE OF INTERNATIONAL TRANSACTION DI SCLOSED BY THEM EXCEEDS THE MARGIN PROVIDED IN THE PROVISION. D. SKODA AUTO INDIA (P) LTD. VS. ACIT 122 TTJ 699. PARA 20 THE ONLY OTHER ISSUE THAT IS ARGUED BEFORE US IS T HE ADJUSTMENT FOR +/- 5%. LEARNED REPRESENTATIVES AGRE E THAT THIS ISSUE IS NOW COVERED IN FAVOUR OF THE ASS ESSEE BY A SERIES OF TRIBUNAL DECISIONS INCLUDING DECISION I N THE CASE OF SONY INDIA LIMITED (SUPRA) EVEN AS LEARNED DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTED TH E STAND OF THE AUTHORITIES AND JUSTIFIED THE SAME. WE , THEREFORE, UPHOLD ASSESSEES GRIEVANCE IN THIS RESP ECT. E. ACIT VS. UE TRADE CORPORATION (INDIA) (P) LTD. (ITA NO.4460 (DEL)/2009). PARA 5.4 THE PROVISO, WHICH IS APPLICABLE TO THE PROCEEDING S OF THIS YEAR, CONTEMPLATES AN OPTION TO THE ASSESSEE T O CHOOSE A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PER CENT OF SUC H ARITHMETICAL MEAN. A SUBSTANTIVE PROVISION CAN BE AMENDED RETROSPECTIV ELY BY THE LEGISLATURE. HOWEVER, SUCH AMENDMENT IS TAK EN RETROSPECTIVELY ONLY IF IT HAS BEEN SO SPECIFICALLY PROVIDED BY THE LEGISLATURE ITSELF. THE PROVISO WAS SUBSTITUTED WITH EFFECT FROM 01.10.2009 AND NOT RETROSPECTIVELY . THEREFORE, IT COMES INTO OPERATION FROM ASSESSMENT YEAR 2009-10 AND APPLIES TO SUBSEQUENT YEARS. F. MEMORANDUM TO THE FINANCE BILL 2009. CLAUSE 40 OF THE FINANCE BILL 2009:- CLAUSE 40 OF THE FINANCE BILL 2009 40. IN SECTION 92C OF THE INCOME-TAX ACT, IN SUB-S ECTION (2) FOR THE PROVISO, THE FOLLOWING PROVISOS SHALL B E SUBSTITUTED WITH EFFECT FROM THE 1 ST DAY OF OCTOBER, 2009, NAMELY :- ITA NO. 5341/D/10 31 NOTES TO THE CLAUSE 40 OF THE FINANCE BILL 2009 THIS AMENDMENT WILL TAKE EFFECT FROM 1 ST OCTOBER, 2009. 34. IN RESPECT OF GROUND NO.9, 10 AND 11, IT WAS SU BMITTED THAT THESE ARE GENERAL GROUNDS RAISING VARIOUS OBJECTIONS AGAI NST THE ORDER FRAMED BY THE ASSESSING OFFICER, TPO AND DRP AND IT IS THE CO NTENTION OF THE ASSESSEE THAT WHILE DECIDING THE VARIOUS ISSUES, THEY DID NO T APPRECIATE THE ARGUMENTS, DOCUMENTS AND EVIDENCES SUBMITTED BY THE ASSESSEE AND THE ISSUES TOUCHED UPON IN THESE GROUNDS IS REGARDING I NITIATION OF PENALTY U/S 271(1)(C) AND IN RESPECT OF DRP ORDER THAT DRP FAIL ED TO CONSIDER OR APPRECIATE VARIOUS SUBMISSIONS, EVIDENCES AND DOCUM ENTS PLACED BEFORE IT AND FINALLY REGARDING THE USER OF CURRENT YEAR FINA NCIAL DATA AS AGAINST MULTIPLE YEAR DATA PRESCRIBED UNDER RULE 10B(4) OF THE IT RULES, 1962. HE SUBMITTED THAT AT APPROPRIATE PLACES THE DISCUSSION ON THESE ISSUES HAVE ALREADY BEEN MADE, HENCE, THESE GROUNDS MAY BE DECI DED ACCORDINGLY. 35. COMING TO GROUND NO.12, IT WAS SUBMITTED BY LEA RNED AR THAT THE ASSESSEE MADE PROVISIONS OF ` 40,94,915/-. THE ASS ESSEE HAD BOOKED THE ACTUAL EXPENDITURE OF ` 33,24,274/- IN THE NEXT FINA NCIAL YEAR I.E., FINANCIAL YEAR 2006-07. SUCH PROVISION TO THE EXTENT NOT BOOKED AGAINST THE ACTUAL EXPENDITURE IN FINANCIAL YEAR 2006-07 WAS REVERSED IN THE NEXT YEAR AND, IN THIS MANNER, EXCESS PROVISION WAS OFFE RED TO TAX IN THE NEXT YEAR. HE SUBMITTED THAT THE PROVISION AS ON MARCH 31, 2006 WAS ACTUALLY A ITA NO. 5341/D/10 32 SUM OF ` 47,40,969/- AND, ON THE BASIS OF ACTUAL EXP ENDITURE, AN AMOUNT OF ` 14,16,695/- WAS REVERSED IN FINANCIAL YEAR 200 6-07 AND HE DESCRIBED THE FOLLOWING TABLE:- PROVISION AS ON MARCH 31, 2006 (DISALLOWED AMOUNT 4,740,969 LESS : BOOKED AGAINST ACTUAL EXPENSES IN FY 2006 - 07 3,324,274 LESS : REVERSED (WRITTEN BAC K) IN FY 2006 - 07 1,416,695 BALANCE AS ON MARCH 31, 2007 0 36. TO DESCRIBE THE FACTUAL ASPECT HE SUBMITTED THA T ACCORDING TO PRINCIPLES OF MERCANTILE SYSTEM, THESE EXPENSES HAD ACCRUED IN THE YEAR ENDING 31 ST MARCH, 2006 AND THESE EXPENSES HAVE ACCRUED AND AR E INCURRED BY THE COMPANY FOR THE PURPOSE OF ITS BUSINESS AND ARE NOT IN THE NATURE OF CONTINGENT LIABILITY AND THESE ARE ALLOWABLE AS PER THE FOLLOWING DECISIONS:- 1. BHARAT EARTH MOVERS VS. CIT (245 ITR 428) 2. METAL BOX COMPANY OF INDIA LTD. VS. THEIR WORKMEN 73 ITR 53 3. CALCUTTA CO. LTD. VS. CIT 37 ITR 1. 37. THUS, IT WAS SUBMITTED THAT THESE EXPENSES ARE A LLOWABLE. IN THE ALTERNATIVE, IT WAS SUBMITTED THAT IF THESE EXPENSES ARE CONSIDERED AS CONTINGENT LIABILITY AND THE DISALLOWANCE IS SUSTAI NED, THEN, THE SAME SHOULD BE ADJUSTED WHILE COMPUTING TP MARGINS AND A RMS LENGTH PRICES. 38. SO AS IT RELATES TO GROUND NO.13, LEARNED AR SUB MITTED THAT THE DEPRECIATION @ 60% WAS CLAIMED BY THE ASSESSEE ON C OMPUTER PERIPHERALS ITA NO. 5341/D/10 33 VIZ., PRINTERS, UPS AND OTHER COMPUTER PERIPHERALS A ND AGAINST THE CLAIM OF THE ASSESSEE LEARNED ASSESSING OFFICER HAS ALLOW ED ONLY 15% AND, ACCORDINGLY, AN ADDITION OF ` 13,73,781/- WAS MADE TO THE TOTAL INCOME OF THE ASSESSEE. HE SUBMITTED THAT THE ASSESSING OFFI CER HAS CLASSIFIED THE COMPUTER PERIPHERALS, PRINTERS AND UPS OF ` 16,16,21 3/- AS PLANT & MACHINERY AND NOT COMPUTERS AND, THUS, THE DISALLOW ANCE SHOULD BE DELETED IN VIEW OF THE FOLLOWING DECISIONS:- A. DECISION OF THE MUMBAI ITAT SPECIAL BENCH IN THE CAS E OF DCIT VS. DATACRAFT INDIA LIMITED (2010-040-SOTS-0295) B. CALCUTTA ITAT RULING IN THE CASE OF ITO VS. SAMIRA N MAJUMDAR 280 ITR 74. 39. CONCLUDING HIS ARGUMENTS, HE SUBMITTED THAT APP ROPRIATE RELIEF SHOULD BE GRANTED TO THE ASSESSEE. 40. ON THE OTHER HAND, APROPOS GROUND NO. 2, IT WAS SUBMITTED BY LEARNED DR THAT THOUGH IF AN EXPENDITURE HAS BEEN DI SALLOWED FOR TAX COMPUTATION PURPOSES AND IF IT IS NOT REMOVED WHILE COMPUTING THE TRANSFER PRICING ADJUSTMENT, IT WOULD RESULT IN DOU BLE TAXATION, BUT IN THE PRESENT CASE THE ASSESSEE HAS NOT DEMONSTRATED THAT COMMISSION EXPENDITURE DISALLOWED IN THE RETURN OF INCOME WAS C ONSIDERED AS PART OF OPERATING EXPENSES IN THE TP ANALYSIS. THEREFORE, HE PLEADED THAT TO VERIFY SUCH FACT, THE MATTER MAY BE SENT BACK TO TH E FILE OF ASSESSING OFFICER/TPO. ITA NO. 5341/D/10 34 41. IN RESPECT OF GROUND NO.3, HE SUBMITTED THAT TH IS GROUND IS INTERRELATED TO GROUND NO.2 AND THE SAID AMOUNT HAS ALREADY BEEN SURRENDERED FOR TAXATION AND, THEREFORE, IT DOES NOT CALL FOR ADJUDICATION. 42. IN RESPECT OF GROUND NO.4, HE SUBMITTED THAT TH IS ISSUE HAS BEEN DISCUSSED BY TPO IN PARA 5. HE SUBMITTED THAT THE ASSESSEE HAS CONSIDERED FIVE COMPANIES AS COMPARABLES IN THE TP STUDY REPORT CONSIDERING MULTIPLE YEAR DATA. THE TPO ADOPTED CU RRENT YEAR DATA ON THE BASIS OF WHICH HE REJECTED THREE OUT OF FIVE CO MPARABLES. HE SUBMITTED THAT THE CURRENT YEAR DATA FOR THE SAID T HREE COMPARABLES WAS NOT EVEN AVAILABLE BEFORE DRP AND THE SAID DATA IS NOT AVAILABLE EVEN AS ON DATE. HE SUBMITTED THAT TPO HAS NOT DISTURBED A SSESSEES APPROACH OR METHOD OR PLI AND THEY HAVE BEEN ACCEPTED AS SUCH. HE SUBMITTED THAT THE CURRENT YEAR DATA WAS AVAILABLE ONLY WITH RESPE CT TO TWO COMPARABLES. HE SUBMITTED THAT ONE OF TWO FILTERED COMPARABLE AL FRED HERBERT IS REJECTED BY THE TPO FOR THE VALID REASONS RECORDED BY HIM. HE SUBMITTED THAT ASSESSEE CANNOT BE PERMITTED TO RELY ON SO CAL LED FRESH SEARCH SIMPLY FOR THE REASON THAT ONLY ONE COMPARABLE IS LEFT ON THE BASIS OF WHICH ALP IS COMPUTED. HE SUBMITTED THAT THE ASSESSEE MAY NOT BE PERMITTED TO USE THE PROCESS OF NEW OR FRESH SEARCH ONLY TO OBTAIN B IASED RESULT. HE SUBMITTED THAT THERE SHOULD BE SOME FINALITY AT SOM E STAGE, OTHERWISE SUCH PROCESS CAN CONTINUE AT LATER STAGE OF LITIGAT ION ALSO. ITA NO. 5341/D/10 35 43. HE FURTHER SUBMITTED THAT IN RESPECT OF TWO COM PARABLES OF WHOM THE CURRENT YEAR DATA WAS AVAILABLE, TPO HAS REJECT ED ONE COMPARABLE, NAMELY, ALFRED HERBERT INDIA LIMITED FOR THE DETAIL ED REASONS MENTIONED IN HIS ORDER. HE SUBMITTED THAT THE SAID COMPARABL E CANNOT BE TAKEN INTO ACCOUNT FOR THE FOLLOWING REASONS:- A. THE COMPANY IS INVOLVED IN COMPLETELY DIFFERENT BUS INESS ACTIVITIES. II) SALES AND MARKETING OPERATIONS FORM AN INSIGNIF ICANT PART OF THE OVERALL OPERATIONS OF THE COMPANY. III) THE TURNOVER OF THE SEGMENT IS VERY LOW (JUST RS.18 LAKHS). IV) THE SEGMENT HAS INCURRED LOSSES. V) THE SEGMENTED ACCOUNTS ARE AVAILABLE ONLY ON C ONSOLIDATED BASIS. 44. THUS, HE SUBMITTED THAT ACCORDING TO REMAINING ONE COMPARABLE, THE ARMS LENGTH MARGIN WAS 22.58%. THE TURNOVER O F THE COMPARABLE IS ` 151 LAC WHICH IS GOOD ENOUGH AND THE SAID COMPARABL E CANNOT BE REJECTED BY SAYING THAT THE TURNOVER WAS SIMILAR TO ONE REJE CTED BY THE TPO. HE SUBMITTED THAT THE VERY COMPARABLE WAS SELECTED BY THE ASSESSEE COMPANY BEING A VALID COMPARABLE AND NOW IT IS NOT OPEN TO THE ASSESSEE TO GO BACK FROM ITS STAND. HE SUBMITTED THAT THERE IS NOTHING IN LAW WHICH SAYS THAT ONE COMPARABLE CANNOT BE CONSIDERED FOR A PPLICATION OF TNMM. HE SUBMITTED THAT THE ASSESSEE DID NOT SUBMIT FRESH SEARCH DURING THE TP AUDIT PROCEEDING AND IT WAS SUBMITTED ONLY IN FRONT OF DRP. UNLESS DRP PASSES A SPEAKING ORDER ABOUT ADMISSION OF SUCH FRE SH SEARCH, THE SAID FRESH SEARCH CANNOT BE CONSIDERED. HE SUBMITTED TH AT FOLLOWING CASE LAWS ITA NO. 5341/D/10 36 SUPPORT THE CASE OF THE REVENUE THAT EVEN ONE COMPA RABLE IS GOOD ENOUGH TO COMPUTE ARMS LENGTH PRICE:- I) IN THE CASE OF VEDARIS TECHNOLOGY (P) LTD. VS. ACIT [ITA NO.4372 (DEL)/2009] REPORTED AS 131 TTJ 309 (DELHI) , THE ARMS LENGTH PRICE HAD BEEN DETERMINED CONSIDERING ONLY O NE COMPARABLE. THIS CASE IS ON TNMM. THE PARA RELIED UPON BY THE AR IS OF NO HELP TO THE ASSESSEE AS THE DECISION IS TA KEN BY THE TRIBUNAL ON MERITS AND NOT ON CONCESSION. II) IN THE CASE OF PETRO SYSTEMS TSI INDIA LTD. VS. DCIT [ITA NO.2320, 2321 AND 2322/DEL/2008) (REPORTED AS 2010- TIOL-51-ITAT- DEL-TP) WHEREIN THE ARMS LENGTH PRICE HAD BEEN DET ERMINED CONSIDERING ONLY ONE COMPARABLE. THIS DECISION WAS FURTHER RELIED UPON BY ITAT IN THE CASE OF U E TRADE AVAILABLE IN THE CASE LAW COMPILATION SUBMITTED BY AR OF THE ASSESSEE AT PAGE S 302-317 OF COMPENDIUM OF CASE LAWS (REPORTED AT 2011-TII-04-I TAT-DEL-TP). 45. HE SUBMITTED THAT THE DECISION OF CO-ORDINATE B ENCH IS BINDING UPON THE TRIBUNAL AND, FOR THIS PURPOSE, HE RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. ESC LTD. 23 1 ITR 255. THUS, HE SUBMITTED THAT APPROACH OF THE TPO SHOULD BE UPHELD . 46. COMING TO GROUND NO.5 HE SUBMITTED THAT THE IS SUE REGARDING SETTING UP OF BUSINESS OR DATE OF COMMENCEMENT HAS NOT BEEN BROUGHT OUT CLEARLY IN THE SUBMISSION/ARGUMENT. IT WAS SUBMITT ED THAT IF ASSESSEE CLAIMS THAT THE EXPENSES INCURRED PRIOR TO COMMENCEM ENT OF MANUFACTURING PORTION ARE TO BE EXCLUDED WHILE CALCU LATING THE OPERATING MARGINS OF MANUFACTURING SEGMENT, THEN, THE ONUS IS ON THE ASSESSEE TO ITA NO. 5341/D/10 37 PROVE THAT THESE EXPENDITURES WERE ACTUALLY INCURRED PRIOR TO COMMENCEMENT OF MANUFACTURING ACTIVITIES AND, THUS, DO NOT RELATE TO INTERNATIONAL TRANSACTION OF THIS SEGMENT. HE SUBM ITTED THAT THE ASSESSEE HAS NOT DISCHARGED THE INITIAL ONUS BY FURNISHING C REDIBLE EVIDENCE IN THE SHAPE OF AUDITORS OR ACCOUNTANTS CERTIFICATE. TH EREFORE, THE ASSESSEE IS NOT ENTITLED TO CLAIM SUCH BENEFIT AND REFERENCE IN THIS CASE IS MADE TO THE SPECIAL BENCH DECISION IN THE CASE OF AZTEC SOFTW ARE AND TECHNOLOGY LTD. VS. ACIT 107 ITR 141. IT WAS SUBMITTED THAT TH E ASSESSEE DID NOT CLASSIFY THE SAID EXPENSES AS PRE-OPERATIVE IN NATUR E AND IF THE ASSESSEE WANTS TO CONTEND SO, THEN, THE ONUS WILL BE ON THE ASSESSEE AND IT CANNOT BE SHIFTED TO THE DEPARTMENT. UNLESS THE ASSESSEE D ISCHARGE SUCH ONUS, THE CLAIM OF THE ASSESSEE CANNOT BE ALLOWED. 47. COMING TO GROUND NO.6, IT WAS SUBMITTED THAT SO AS IT RELATES TO ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION IN TH E CASES OF COMPARABLES, IT IS OBSERVED BY THE TPO THAT IT WAS NOT POSSIBLE TO MAKE ADJUSTMENT TO THE COMPARABLES AS SUFFICIENT DATA TO MAKE CAPACITY ADJUSTMENT IN THE CASE OF COMPARABLES WAS NOT MADE AVAILABLE AND MAKI NG SUCH ADJUSTMENT TO THE ACCOUNT OF THE TESTED PARTY IS NOT IN ACCORD ANCE WITH THE RULE 10B (1)(E)(III) READ WITH RULE 10B (3). REFERENCE WAS MADE TO THE DECISION OF ITAT IN THE CASE OF GLOBAL VANTEDGE PVT. LTD. 37 SO T 1 AND ALSO OF 2010 TIOL-24-ITAT-DELHI-TP (COPY OF WHICH IS FILED AT PA GES 318 TO 341 OF THE ASSESSEES COMPILATION CASE LAWS). HE SUBMITTED TH AT THE ASSESSEE HAS RELIED UPON PARA 14 OF THE ITATS ORDER. HE SUBMIT TED THAT WHOLE OF THE ITA NO. 5341/D/10 38 PARA SHOULD BE READ AND IT WILL SHOW THAT ADJUSTMEN TS ARE TO BE MADE TO THE COMPARABLES AND NOT TO THE TESTED PARTY AND SUC H POSITION WAS UPHELD BY ITAT. DISTINGUISHING THE DECISIONS IN THE CASE OF FIAT INDIA PVT. LTD. AND SKODA AUTO INDIA (P) LTD. HE SUBMITTED THAT THEY WERE GIVEN IN THE CONTEXT OF CAPITAL INTENSIVE INDUSTRIES, HENCE, COUL D NOT BE APPLIED TO THE CASE OF THE ASSESSEE. 48. IT WAS FURTHER SUBMITTED THAT ONE CAN VISIT TO OECD GUIDELINES ONLY WHEN THE PROVISIONS OF IT ACT OR RULES ARE NOT CLEA R AND, IN THE PRESENT CASE, THE LAW BEING CLEAR AND THE ADJUSTMENT BEING NOT IN ACCORDANCE WITH THE LAW, THE CLAIM OF THE ASSESSEE SHOULD BE R EJECTED. HE SUBMITTED THAT AS POINTED OUT BY THE DRP AND TPO, THE DATA CO NSIDERED FOR CAPACITY UTILIZATION OF ONE OF THE COMPARABLES, NAMELY M/S ST EEL AGE INDUSTRIES LTD. WAS NOT RELIABLE, HENCE, ADJUSTMENT ON THAT AC COUNT WAS RIGHTLY REJECTED. HE SUBMITTED THAT SINCE THE ASSESSEE BEA RS THE CAPACITY UTILIZATION RISK AS MENTIONED IN THE TP STUDY REPOR T, THE COST RELATING TO SUCH RISK SHOULD BE OPERATING COST OF THE ASSESSEE AND THE SAME SHOULD BE CONSIDERED IN THE COST BASE WHILE COMPUTING THE NET PROFIT MARGINS OF THE ASSESSEE. 49. HE FURTHER SUBMITTED THAT ACCORDING TO THE CALC ULATION SUBMITTED BY THE ASSESSEE THE TOTAL COST IS BIFURCATED INTO F IXED COST AND VARIABLE COST. THE FIXED COST REPRESENT THE COST WHICH DOES NOT VARY DUE TO CHANGE IN VOLUME OF PRODUCTION. VARIABLE COSTS ARE THOSE WHICH VARY ON INCREASE ITA NO. 5341/D/10 39 OR DECREASE IN THE VOLUME OF PRODUCTION AND SUCH BI FURCATION IS LARGELY THEORETICAL IN NATURE AND IN REALITY AND PRACTICE F IXED COSTS ARE NEVER FIXED AND VARIABLE COSTS ARE NEVER VARIABLE. THEY SOME HOW MOVE IN STEP DIRECTION. THE ASSESSEE DID NOT SUBMIT THE BASIS O F CLASSIFICATION AND EVIDENCE TO SUBSTANTIATE THAT THE MOVEMENT OF COST IS IN ACCORDANCE WITH THE CLAIM OF THE ASSESSEE. IN THE ABSENCE OF HISTO RY, THE ASSESSEE HAS ALSO NOT DEMONSTRATED THE MOVEMENT TAKING FIGURES OF SUB SEQUENT PERIOD AND, THUS, THE ASSESSEE HAS FAILED TO SUBSTANTIATE THE M OVEMENT OF FIXED AND VARIABLE COST IN A PARTICULAR WAY, THEREFORE, THE C LAIM SHOULD NOT BE ENTERTAINED EVEN WHEN THE ADJUSTMENT WAS TO BE MADE IN THE DATA OF THE TESTED PARTY THOUGH THE CLAIM OF THE DEPARTMENT IS THAT ADJUSTMENTS ARE ONLY TO BE MADE IN THE DATA OF THE COMPARABLES. 50. APROPOS GROUND NO.7, IT WAS PLEADED THAT THE AS SESSEE HAS REPORTED THE VALUE OF INTERNATIONAL TRANSACTION OF IMPORT OF RAW MATERIAL AT ` 5,93,36,409/-, THEREFORE, THE ARMS LENGTH PRICE HA S TO BE COMPUTED ON THE ENTIRE TRANSACTION EVEN IF A PART OF THE RAW MA TERIAL IS LEFT AS INVENTORY AND IS NOT PART OF THE OPERATING COST FOR THE RELEVANT YEAR. IT WAS SUBMITTED THAT IT IS NOT NECESSARY THAT THE TRA NSACTIONS SHOULD BE ROUTED THROUGH P & L ACCOUNT. FOR EXAMPLE, IN THE CASE OF TRANSACTION RELATING TO PURCHASE OF CAPITAL GOODS, THE ENTIRE V ALUE OF PURCHASE IS TESTED THROUGH THE PRINCIPLE OF ALP IN THE YEAR OF PURCHASE IRRESPECTIVE OF THE FACT THAT ONLY A PART OF THE VALUE WILL AFFECT THE PROFIT & LOSS ACCOUNT IN THE FORM OF DEPRECIATION FOR THAT PARTICULAR YEA R. IN THE SIMILAR ITA NO. 5341/D/10 40 MANNER, EVEN IF SOME OF THE IMPORTS ARE IN THE INVE NTORY, AN ADJUSTMENT SHOULD BE MADE TO THE ENTIRE PURCHASES DURING THE Y EAR UNDER CONSIDERATION. THUS, IT WAS SUBMITTED THAT TPO HAS RIGHTLY COMPUTED THE ADJUSTMENT IN THE MANUFACTURING SEGMENT TAKING THE VALUE OF INTERNATIONAL TRANSACTIONS REPORTED IN FORM 3CEB AN D IT IS FOR THE ASSESSEE TO ARGUE THAT THIS COULD POSSIBLY LEAD TO ANOMALY I N THE SUBSEQUENT YEAR WHEN THE UNUSED INVENTORY ENTERS THE PROFIT AND LOS S STATEMENT AND TNMM IS USED FOR DETERMINING ALP. THIS MAY REQUIRE SUIT ABLE ADJUSTMENT WHEN ALP IS DETERMINED IN THE NEXT YEAR. THIS WOULD BE A MATTER OF DETAILS AND CAN BE LEFT TO BE DECIDED IN THE NEXT YEAR IF SUCH A SITUATION ARISE. 51. APROPOS GROUND NO.8, IT WAS SUBMITTED BY LD. DR THAT IN THE CASE OF GLOBAL VANTEDGE PVT. LTD. LTD. 37 SOT 1, IT HAS BEEN HELD THAT IT IS NOT A STANDARD DEDUCTION. HE SUBMITTED THAT FOR MARKETIN G SUPPORT SEGMENT ONLY ONE COMPARABLE WAS SELECTED, THEREFORE, SINCE ONLY ONE ARMS LENGTH PRICE WAS SELECTED, THERE IS NO QUESTION OF ANALYZI NG THE VARIATION FROM THE TRANSFER PRICE OF THE INTERNATIONAL TRANSACTION AS THE PROVISO CLEARLY MENTIONS WHERE MORE THAN ONE PRICE IS DETERMINED B Y THE MOST APPROPRIATE METHOD AND SUCH POSITION OF LAW HAS BE EN UPHELD BY THE TRIBUNAL IN THE FOLLOWING CASES:- I) ACIT VS. UE TRADE CORPORATION (INDIA) (P) LTD. ITA NO.4405/DEL/2009. II) GLOBAL VANTEDGE PVT. LTD. VS. DCIT (ITA NOS.1432 & 2321/DEL/2009) ITA NO. 5341/D/10 41 III) PEROT SYSTEMS TSI INDIA LTD. VS. DCIT (ITA NO.2320, 2 321 AND 2322/DEL/2008) 52. THUS, IT WAS SUBMITTED THAT THE ASSESSEES CLAI M IS NOT SUSTAINABLE. 53. IT WAS FURTHER SUBMITTED THAT THE AMENDMENT BRO UGHT INTO THE PROVISIONS OF SECTION 92C(2) WAS CLARIFICATORY IN NA TURE, HENCE, APPLICABLE RETROSPECTIVELY. THIS AMENDMENT HAS BEEN BROUGHT T O UNDO THE UNINTENDED CONSEQUENCES AND, FOR THIS PURPOSE, LD. DR RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF M/ S ALLIED MOTORS 224 ITR 677 (SC). HE SUBMITTED THAT THE PROVISO TO SECT ION 92C(2) STATES AS FOLLOWS:- PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PR ICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER, THE PR ICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BE EN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH P RICE. 54. HE SUBMITTED THAT THE POSITION OF CIRCULAR NO.5 DATED 03.06.2010AND ITS CORRIGENDUM ISSUED ON 30.09.2010 HAS ALREADY BEEN PLACED ON RECORD. THE PROVISO WAS INSERTED BY FINA NCE ACT, 2009 W.E.F. 1 ST OCTOBER, 2009. ACCORDINGLY IT WILL BE APPLICABLE TO ALL THE CASES PENDING BEFORE TPO ON OR AFTER 1 ST OCTOBER, 2009. HE SUBMITTED THAT THE CORRIGENDUM DATED 30 TH SEPTEMBER, 2010 READ AS UNDER:- ITA NO. 5341/D/10 42 THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECT FROM 1 ST OCTOBER, 2009 AND SHALL ACCORDINGLY APPLY IN RELAT ION TO ALL CASES IN WHICH PROCEEDINGS ARE PENDING BEFORE T HE TRANSFER PRICING OFFICER (TPO) ON OR AFTER SUCH DATE. 55. THEREFORE, HE PLEADED THAT IT IS CLEAR THAT THE BENEFIT OF +/- 5% RANGE GRANTED BY THE PROVISO TO SECTION 92C(2) IS A VAILABLE ONLY IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE AND TRANSF ER PRICE DOES NOT EXCEED 5% OF THE TRANSFER PRICE. HE SUBMITTED THAT F OR THE REASON AFORESAID, THE CLAIM OF THE ASSESSEE REGARDING +/- 5% AS STANDARD DEDUCTION HAS RIGHTLY BEEN DENIED BY TPO. 56. APROPOS GROUND NO.11, IT WAS SUBMITTED THAT CUR RENT YEAR DATA IS ONLY THE RELEVANT DATA AS PER RULE 10B(4) AND SUCH ISSUE HAS BEEN SET AT REST BY THE DECISION OF APPELLATE TRIBUNAL IN THE C ASE OF CUSTOMER SERVICES INDIA PVT. LTD. 30 SOT486 WHEREIN IT HAS BEEN HELD AS UNDER:- IT WAS MANDATORY ON THE PART OF THE TPO TO USE THE ASSESSEE DATA RELATING TO FINANCIAL YEAR 2002-03 IN WHICH TH E INTERNATIONAL TRANSACTIONS WERE ADMITTEDLY ENTERED INTO BY THE AS SESSEE COMPANY WITH ITS ASSOCIATED ENTERPRISES. 57. HE SUBMITTED THAT AS PER WELL SETTLED LAW, SING LE YEAR DATA HAS TO BE CONSIDERED UNLESS THE ASSESSEE DEMONSTRATES THAT PRIOR YEARS DATA HAS HAD AN INFLUENCE ON THE SETTING OF TRANSFER PRICE O F INTERNATIONAL TRANSACTION EITHER AT THE TIME OF SETTING THEM OR B Y WAY OF ADJUSTING THEM SUBSEQUENT TO ENTERING INTO THE INTERNATIONAL TRANS ACTION TO ALIGN THEM TO THE ARMS LENGTH PRICE. THIS IS A CONDITION PRECEDE NT FOR USER OF THE ITA NO. 5341/D/10 43 MULTIPLE YEAR FINANCIAL DATA. FOR SUCH CONTENTION, HE ALSO PLACED RELIANCE ON THE FOLLOWING DECISIONS:- I) AZTEC SOFTWARE 107 ITD (AT) 141 (SB) (BANG). II) MENTOR GRAPHIC 109 ITD 101 (DEL) III) HONEYWELL LTD. 209-TIOL-104 (AT) (PUNE) 58. APROPOS GROUND NO.12, IT WAS SUBMITTED THAT THE ASSESSEE HAS NOT PROVIDED EVIDENCE FOR A SUM OF ` 40,94,915/- FOR MA KING PROVISION FOR CERTAIN EXPENSES WHICH HAVE BEEN CONSIDERED AS CONTI NGENT LIABILITY AND IN THE ABSENCE OF SUCH EVIDENCE, THE CLAIM OF THE ASSE SSEE HAS RIGHTLY BEEN REJECTED. SO AS IT RELATES TO GROUND NO.13, HE SUBM ITTED THAT THE ITEMS WHICH CAN WORK INDEPENDENTLY ON COMPUTER SHOULD NOT BE TREATED AS PART AND PARCEL OF COMPUTER AND, HENCE, DEPRECIATION CLA IMED BY THE ASSESSEE @ 60% SHOULD NOT BE ALLOWED. 59. IN THE REJOINDER, IT WAS SUBMITTED BY LEARNED A R THAT IT WAS IMPOSSIBLE FOR THE ASSESSEE TO ENVISAGE THAT WHETHE R CURRENT YEAR DATA FOR THE COMPARABLE SELECTED WOULD BE AVAILABLE IN THE P UBLIC DOMAIN OR NOT AT THE TIME OF TP ASSESSMENT WHICH WAS 2-3 YEARS LATER . THEREFORE, HE PLEADED THAT THERE WAS NO BASIS FOR THE ASSESSEE TO PREDICT THE ACTION OF THE LEARNED TPO FOR REJECTING ONE OF THE REMAINING TWO COMPARABLES. THE SELECTION OF THE ASSESSEE REGARDING COMPARABLE WAS IN GOOD FAITH AND WAS AT THE TIME OF PREPARING CONTEMPORANEOUS DOCUMENTA TION. THE ASSESSEE HAD SELECTED A SET OF FIVE COMPARABLES WITH THE BON A FIDE BELIEF THAT THE ENTIRE SET WOULD BE ACCEPTED AND IT WAS NEVER INTEN DED BY THE ASSESSEE TO ITA NO. 5341/D/10 44 USE ONLY ONE OF THE COMPARABLES TO ESTABLISH ARMS LENGTH TEST. HE SUBMITTED THAT IT HAS NEVER BEEN THE CONTENTION OF THE ASSESSEE THAT A SET OF TWO COMPARABLES WILL BE SUFFICIENT. ON THE CONT RARY, IT WAS SUBMITTED THAT A SET OF TWO COMPARABLES WOULD ALSO BE INSUFFI CIENT AND THE TPO SHOULD CONSIDER A LARGER SET OF COMPARABLES IF SING LE YEAR DATA OF THREE OUT OF FIVE COMPARABLES IS NOT AVAILABLE. REFERENCE IN THIS REGARD WAS MADE TO PARA 4.10.6 AT PAGE 259 OF THE PAPER BOOK. HE SUBM ITTED THAT MOSTLY CURRENT YEAR DATA FOR COMPARABLE COMPANIES IN THE P UBLIC DOMAIN IS NOT AVAILABLE UPTO THE DATE OF FILING THE RETURNS AND S UCH FACT IS ESTABLISHED BY THE STATISTICS PLACED AS ANNEXURE-A. HE SUBMITTED THAT AS PER ANNEXURE- B, THE SET OF COMPARABLES SELECTED BY THE TPO FOR F INANCIAL YEAR 2006-07 DURING ASSESSMENTS, CURRENT YEAR DATA WAS NOT AVAIL ABLE FOR ANY OF THE COMPARABLE COMPANIES IN THE PUBLIC DOMAIN AT THE TI ME OF STATUTORY TIME LINE TO FILE THE RETURNS AND SUCH FACT PROVE THAT I T IS IMPOSSIBLE FOR THE TAX PAYER TO USE CURRENT YEAR DATA WHILE PREPARING THE CONTEMPORANEOUS DOCUMENTS. HE SUBMITTED THAT WHILE DECIDING THE IS SUE REGARDING USER OF MULTIPLE YEAR DATA THE SUBMISSIONS OF THE ASSESSEE MADE BEFORE THE DRP VIDE PAGES 211-215 OF THE PAPER BOOK SHOULD BE CONS IDERED. 60. SO AS IT RELATES TO THE CONTENTION OF LEARNED DR THAT ONE COMPARABLE IS SUFFICIENT TO DETERMINE ARMS LENGTH PRICE, HE SUBMITTED THAT IT HAS NEVER BEEN THE CASE OF THE ASSESSEE THA T ANY OF THE COMPARABLES SELECTED BY IT SHOULD BE REJECTED. IN FACT, THE ASSESSEE HAS SELECTED AND ALL THROUGHOUT DISTINGUISHED THE SET O F COMPARABLES SELECTED ITA NO. 5341/D/10 45 IN ITS TP STUDY REPORT AND IT IS THE REQUEST OF THE ASSESSEE THAT WHOLE SET OF COMPARABLES SHOULD BE ACCEPTED AND REJECTION CRI TERIA SHOULD BE CONSISTENT. THEREFORE, THE DATA REGARDING ALFRED H ERBERT INDIA COULD NOT BE REJECTED ON THE GROUND OF LOW TURNOVER. IF THE SAID CRITERIA IS ADOPTED, THEN, THE DATA REGARDING PRIYA INTERNATIONAL LTD. W OULD ALSO BE LIABLE FOR REJECTION ON THE GROUND OF CONSISTENCY. CONVERSELY , IF THE DATA REGARDING PRIYA INTERNATIONAL LTD. IS APPLIED, THEN, OBVIOUSL Y, THE DATA RELATING TO ALFRED HERBERT INDIA SHOULD ALSO BE APPLIED. 61. SO AS IT RELATES TO ARGUMENTS OF LEARNED DR THAT THE ASSESSEE BEARS THE CAPACITY UTILIZATION RISK AND THE COST RELATING TO THIS RISK SHOULD BE OPERATING COST OF THE ASSESSEE AND THE SAME SHOULD BE CONSIDERED IN THE COST BASE WHILE COMPUTING THE NET PROFIT MARGIN OF THE ASSESSEE, IT WAS SUBMITTED THAT IF THE CAPACITY UTILIZATION RISK WAS NOT BORNE BY THE ASSESSEE, THEN, IT WOULD NOT HAVE ANY EXTRANEOUS COS T DUE TO CAPACITY UNDER UTILIZATION AS THEY WOULD NOT HAVE ACCRUED TO THE ASSESSEE IN ANY MANNER. THE QUESTION OF CAPACITY UNDER UTILIZATION AND ADJUSTMENT, THEREFORE, ARISES BECAUSE THE ASSESSEE BEARS THE CA PACITY UTILIZATION RISK IN THE FIRST PLACE. FURTHERMORE, THE RISK ANALYSIS AS PER TP STUDY IS INTENDED FOR HOLDING INAPPROPRIATE CHARACTERIZATION OF THE ASSESSEE VIS-A- VIS ASSOCIATED ENTERPRISES. IT HAS NOTHING TO DO WI TH THE CAPACITY UTILIZED BY THE ASSESSEE OR BY THE UNCONTROLLED COMPARABLES. ACCORDINGLY, THE CAPACITY RISK IS BORNE BY THE ASSESSEE VIS-A-VIS IT S ASSOCIATED ENTERPRISES AND THE ADJUSTMENT FOR UNDER UTILIZED CAPACITY IS DONE VIS-A-VIS ITA NO. 5341/D/10 46 UNCONTROLLED COMPARABLES WHICH ARE TWO DISTINCT ASP ECTS ALTOGETHER. IT WAS SUBMITTED THAT THE MANNER OF COMPUTATION OF ADJ USTMENT FOR CAPACITY UNDER UTILIZATION ALREADY ALLOWS FOR IDLE CAPACITY RISK AT COMPARABLE LEVELS WHICH FURTHER DEMONSTRATES THAT THE CAPACITY RISK B ORNE BY THE ASSESSEE IS DULY FACTORED IN THE COMPUTATION OF ADJUSTMENT. HE SUBMITTED THAT IN SHORT CAPACITY ADJUSTMENT WAS ESSENTIAL IRRESPECTIV E OF THE FACT THAT WHETHER CAPACITY WAS BORNE BY THE ASSESSEE OR NOT A S THE COMPARABLE COMPANIES AND THE TESTED PARTY WERE OPERATING AT SI GNIFICANTLY DIFFERENT CAPACITIES. ANY COMPARISON WITHOUT ADJUSTMENTS FOR THESE DIFFERENCES WOULD PROVIDE INAPPROPRIATE RESULTS. 62. IN THIS MANNER, BOTH THE PARTIES HAD CONCLUDED THEIR ARGUMENTS ON THE PRESENT APPEAL. 63. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS IN THE LIGHT OF MATERIAL PLACED BEFORE US. FIRSTLY WE TAKE THE GRI EVANCE OF THE ASSESSEE AS REPRESENTED IN GROUND NO. 2 TO 4 RELATING TO ADJ USTMENT MADE WITH REGARD TO MARKETING SUPPORT SERVICES SEGMENT. FIRS T AND FOREMOST OBJECTION OF THE ASSESSEE IS REGARDING NON-REDUCTIO N OF SUOMOTO DISALLOWANCE OF COMMISSION EXPENSES OF RS. 1,32,09,1 05/- FROM OPERATING EXPENSES FOR THE PURPOSE OF TP ANALYSIS. IT HAS BEE N THE CASE OF THE ASSESSEE THAT ON 31.3.08 IT HAS ELECTRONICALLY FILE D THE REVISE RETURN VIDE WHICH A SUM OF RS. 1,32,09,105/- WAS ADDED TO THE E ARLIER RETURNED INCOME ON ACCOUNT OF COMMISSION PAID TO DSF ADDED B ACK. COPY OF SUCH ITA NO. 5341/D/10 47 REVISE RETURN IS PLACED AT PAGES 1 TO 5 OF THE PAPE R BOOK ACCORDING TO WHICH TAXABLE INCOME OF THE ASSESSEE HAS BEEN COMPUT ED AT RS. 79,75,972/- AS AGAINST EARLIER RETURNED LOSS OF RS. 52,33,133/-. COPY OF ORIGINAL RETURN FILE IS PLACED AT PAGES 6 TO 30 OF THE PAPER BOOK. IT HAS ALSO BEEN THE SUBMISSION OF THE ASSESSEE BEFORE DRP THAT TPO HAS ERRONEOUSLY COMPUTED THE ARM LENGTH PRICE PERTAININ G TO MARKET SUPPORT SERVICES OF THE ASSESSEE AS HE DID NOT TAKE INTO CO NSIDERATION THE SUOMOTO DISALLOWANCE MADE BY THE ASSESSEE IN THE REVISE RET URN OF INCOME. THE SUBMISSION OF THE ASSESSEE BEFORE DRP AS CONTAINED IN PARA 6.4.1 AND 6.4.2 ARE AS UNDER (COPY OF THESE SUBMISSIONS MADE BY THE ASSESSEE BEFORE DRP VIDE LETTER DATED 7.1.10 ARE FILED AT PAGES 172 TO 232 OF THE PAPER BOOK): - 6.4.1 THE ASSESSEE SUBMITS THAT THE COMMISSION EX PENSE INCURRED BY THE ASSESSEE IS TOWARDS PAYMENTS TO LOC AL DEALERS FOR ASSISTING IN PROCURING ORDERS FOR PRODU CTS OF ITS ASSOCIATED ENTERPRISE FROM THE INDIAN CUSTOMERS. T HE ASSESSEE FILED A REVISED RETURN WHERE THE ASSESSEE SUO MOTO DISALLOWED THE EXCESSIVE COMMISSION PAID TO DE ALERS DURING THE YEAR ENDED MARCH 31, 2006. THIS EXPENDI TURE WAS UNAUTHORIZED AND WAS DISCOVERED AS A RESULT OF INTERNAL INVESTIGATION. THE ASSESSEE DISALLOWED TH E SAME CONSIDERING THAT THE RELIABLE EVIDENCE OF SUCH EXPE NDITURE MAY NOT BE READILY AVAILABLE. 6.4.2 ACCORDINGLY, THE REVISED MARGINS OF THE ASSE SSEES MARKETING SUPPORT SERVICES FOR THE PURPOSES OF TRAN SFER PRICING ANALYSIS WERE COMPUTED WHICH WORKED OUT TO 9.63%. ITA NO. 5341/D/10 48 64. IF THE AFOREMENTIONED SUBMISSION OF THE ASSESSE E IS TAKEN INTO CONSIDERATION IT WILL BE CLEAR THAT ACCORDING TO TH E SUBMISSION OF THE ASSESSEE THE COMMISSION EXPENDITURES WHICH HAVE BEEN DISALLOWED WERE PAYMENTS CLAIMED TO BE MADE TO LOCAL DEALERS FOR AS SISTANCE IN PROCURING ORDERS FOR THE PRODUCTS OF ASSESSEES ASSOCIATED EN TERPRISES FROM THE INDIAN CUSTOMERS. IT WAS, IN THE EARLIER COMPUTATI ON OF ARM LENGTH PRICE, IT CONSISTS OF OPERATING EXPENSES WHICH WAS LATER ON SUOMOTO DISALLOWED. THE ASSESSEE HAS ALSO PAID TAX UPON THAT. THIS CONT ENTION OF THE ASSESSEE HAS BEEN REJECTED BY DRP ON THE GROUND THAT TPO HAS NOT DISCUSSED THIS ISSUE IN HIS ORDER AND ONCE THE ASSESSEE HAS GIVEN UP A CLAIM OF CERTAIN EXPENDITURES FROM THE SEGMENT THEREFORE, IT WAS REAS ONABLY BE REQUIRED TO BE EXCLUDED FROM THE COST OF THE ASSESSEE. IT IS ALSO OBSERVED BY DRP THAT ASSESSEE DID NOT ESTABLISH THAT THE EXPENDITURE WHICH IS DISALLOWED IN THE REVISE RETURN OF INCOME WAS OPERATING PROFIT AN D UNLESS IT IS ESTABLISHED SO, NO BENEFIT CAN BE GRANTED TO THE AS SESSEE IN THE TP ANALYSIS. HERE IT WILL BE PERTINENT TO MENTION THA T DRP WHILE CONSIDERING THIS ISSUE HAS MISTAKENLY WRITTEN THE AMOUNT AS 60, 96,704/- AND THIS POSITION HAS BEEN CLARIFIED BY THE LD. AR IN HIS WR ITTEN SUBMISSIONS IN PARA 5.3.2 AS THE SAID SUM OF RS. 60,96,704/- RELATES TO GROUND NO. 12 IN CONNECTION WITH A CORPORATE TAX GROUND. SO THE SUM AS STATED IN DRPS ORDER AT PAGE 2 IN PARA 1(B) IS RELATING TO THE CLA IM OF THE ASSESSEE OF RS. 1,32,09,105/- INSTEAD OF RS. 60,96,704/-. ITA NO. 5341/D/10 49 65. THUS, IT CAN BE SEEN THAT THE CONTENTION OF THE ASSESSEE HAS BEEN REJECTED BY THE DRP WITHOUT PROPERLY APPRECIATING T HE CASE OF THE ASSESSEE. IT IS THE CASE OF THE ASSESSEE THAT TPO HAS WRONGLY COMPUTED THE MARGIN OF THE ASSESSEE AT 1.35% AND IF THE SAID SUM OF RS. 1,32,09,105/- IS TAKEN INTO CONSIDERATION THEN THE PROFIT MARGIN WILL BE 9.63% AND SUCH COMPUTATION HAS BEEN SHOWN IN THE FO LLOWING TABLE NO. 1 ANNEXED WITH THE WRITTEN ARGUMENTS: TABLE 1: COMPUTATION OF OPERATING MARGINS FOR MARKE TING SUPPORT SERVICES SEGMENT AMOUNT IN RS. PARTICULARS REFERENCE WITHOUT DISALLOWANCE AS PER TPO CONSIDERING DISALLOWANCE AS PER REVISED COMPUTATION BY APPELLANT COMMISSION INCOME 153,933,769 153,933,769 INSTALLATION REVENUE 14,455,751 14,455,751 REVENUE FROM INCIDENTAL SALE OF TRADED GOODS 9,008,677 9,008,677 TOTAL OPERATING INCOME A 177,398,197 177,398,197 OPERATING EXPENSES P ERSONNEL COSTS 31,881,328 31,881,328 ADMIN & OTHER COSTS - COMMISSION PAID (OTHERS) 18,613,265 18,613,265 - OTHER ADMIN EXPENSES 110,377,761 110,377,761 COST OF PROCUREMENT OF TRADED GOODS 11,204,766 11,204,766 DEPRECIATION 2,950,263 2,950,263 LE SS: COMMISSION EXPENSES OFFERED AS DISALLOWANCE IN THE REVISED RETURN - (13,209,105) OPERATING EXPENSES (TC) B 175,027,383 161,818,278 OPERATING PROFIT (OP)_ C=A - B 2,370,814 15,579,919 OP/TC 1.35% 9.63% ITA NO. 5341/D/10 50 66. IT CAN BE SEEN FROM THE ABOVE TABLE THAT THE MA JOR COMPONENT OF RECEIPT OF INTERNATIONAL TRANSACTION OF THE ASSESSE E IS COMMISSION INCOME AS IT CONSTITUTE RS. 15,39,33,769/- OF THE TOTAL OP ERATING INCOME OF RS. 17,73,98,197/-. THEREFORE, IT CANNOT BE SAID THAT COMMISSION EXPENSES WHICH HAVE BEEN SUOMOTO DISALLOWED BY THE ASSESSEE WERE NOT CLAIMED AS OPERATING EXPENSES WHILE COMPUTING THE ARM LENGTH PR ICE. IF THEY ARE SUBSEQUENTLY DISALLOWED SUOMOTO BY THE ASSESSEE IN THE REVISE RETURN, THEY ARE REQUIRED TO BE EXCLUDED FROM THE OPERATING COST AND THE CALCULATION OF THE ASSESSEE SHOULD HAVE BEEN ACCEPT ED THAT ITS PROFIT MARGIN SHOULD HAVE BEEN TAKEN ACCORDING TO THE INCO ME COMPUTED IN THE REVISE RETURN FOR WHICH THE ASSESSEE HAS ALSO PAID THE DUE TAXES. IN THIS MANNER, FINDING FORCE IN THE CONTENTIONS OF LD. AR, WE ARE OF THE OPINION THAT GROUND NO. 2 OF THE ASSESSEE IS TO BE ALLOWED AND ACCORDINGLY ALLOWED. GROUND NO. 3 IS THE ALTERNATIVE ARGUMENT A ND AS THE MAIN ARGUMENT OF THE ASSESSEE IS ACCEPTED WE NEED NOT RE QUIRED TO GO IN THE ALTERNATIVE CLAIM MADE BY THE ASSESSEE. 67. THE SECOND OBJECTION OF THE ASSESSEE RELATING T O MARKETING SUPPORT SERVICE BUSINESS IS CONVEYED IN GROUND NO. 4. FIRS T ISSUE RELATES TO REJECTION OF THREE COMPARABLES OUT OF FIVE COMPARAB LES SELECTED BY THE ASSESSEE. THREE COMPARABLES HAVE BEEN REJECTED ON THE GROUND OF NON- AVAILABILITY OF CURRENT YEARS FINANCIAL DATA. THE CURRENT YEAR FINANCIAL DATA OF THOSE THREE COMPARABLES HAS NOT BEEN AVAILA BLE EVEN BEFORE TRIBUNAL. ACCORDING TO WELL SETTLED LAW, AS EXPLAIN ED IN VARIOUS DECISIONS ITA NO. 5341/D/10 51 OF TRIBUNAL, ONLY CURRENT YEAR FINANCIAL DATA IS RE LEVANT FOR DETERMINATION OF ARM LENGTH PRICE AND THIS POSITION OF LAW IS WEL L SETTLED BY THE FOLLOWING DECISIONS OF THE TRIBUNAL : - 1. AZTEC SOFTWARE AND TECHNOLOGY SERVICES LTD. 294 I TR (AT) 32 2. MENTAL GRAPHICS PVT. LTD. 109 ITD 101 3. CUSTOMER SERVICE INDIA PVT. LTD. VS. ACIT 30 SOT 486. 68. MOREOVER, RULE 10(4) REGULATES SUCH POSITION OF LAW WHICH READ AS UNDER: - 10(4) THE DATA TO BE USED IN ANALYZING THE COMPARA BILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONA L TRANSACTION SHALL BE THE DATA RELATING TO THE FINAN CIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENT ERED INTO: PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALS O BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD H AVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES I N RELATING TO THE TRANSACTIONS BEING COMPARED. THUS, SUB-RULE (4) OF RULE 10B CLEARLY STATE THAT T HE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF UNCONTROLLED TRANSAC TION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATIN G TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERE D INTO. THE PROVISO CARVES OUT AN EXCEPTION THAT THE DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALS O BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE IN RELATING TO TRANSACTIONS BEING CO MPARED. THUS, ACCORDING TO THE LAW, THE DATA RELATING TO RELEVANT FINANCIAL YEAR IS ONLY THE ITA NO. 5341/D/10 52 CONTEMPORANEOUS DATA AND THE PROVISO IS APPLICABLE ONLY IN SOME SPECIFIED CONDITIONS. NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE ASSESSEE TO SUGGEST THAT THERE WERE CIRCUMSTANCES PREVAILING FO R APPLICATION OF PROVISO. THEREFORE, WE UPHOLD THE ACTION OF AO/DRP /TPO FOR REJECTION OF THREE COMPARABLES IN RESPECT OF WHOM CURRENT YEAR D ATA WAS NOT AVAILABLE. 69. NOW THE OBJECTION OF THE ASSESSEE IS AGAINST RE JECTION OF OTHER COMPARABLE NAMELY ALFRED HAWORTH INDIA LTD. THE SA ID COMPARABLE WAS REJECTED BY THE TPO ON THE GROUND THAT THE FINANCIA L DATA OF THE SAID CONCERN WAS AVAILABLE ON A CONSOLIDATED BASIS AND O VERALL BUSINESS OF THE SAID COMPANY WAS NOT FUNCTIONALLY COMPARABLE WITH T HE ASSESSEE. IT IS THE SUBMISSION OF LD. AR THAT WHILE CONSIDERING ALFRED HAWORTH INDIA LTD. AS COMPARABLE, ONLY THE SEGMENTAL DATA RELATING TO SAL ES AND MARKETING OPERATION WAS CONSIDERED AS COMPARABLE AND NOT ENTI RE BUSINESS OF THAT CONCERN, THEREFORE, THE SAID COMPARABLE COULD NOT B E REJECTED. THE RELEVANT SUBMISSION OF THE ASSESSEE BEFORE DRP ARE PLACED AT PAGES 208 TO 210 OF THE PAPER BOOK. IN PARA 6.5.6 ASSESSEE HAS ADMITTED THAT THE SAID COMPARABLE AND ITS SUBSIDIARIES WERE ALSO ENGAGED I N BUSINESSES NOT COMPARABLE TO THE MARKETING SUPPORT SERVICE SEGMENT OF THE ASSESSEE BUT ASSESSEE HAS CONSIDERED THE DATA ONLY ON A SEGMENT LEVEL AND NOT ON A COMPANY WIDE LEVEL. THIS ISSUE HAS BEEN DISCUSSED BY TPO IN PARA 5.6 AND AFTER GOING THROUGH THE REPORT OF THE DIRECTORS WIT H REGARD TO FINANCIAL PERFORMANCE OF THE SAID CONCERN, IT IS OBSERVED BY THE TPO THAT THE SAID ITA NO. 5341/D/10 53 CONCERN WAS HAVING DIFFERENT KIND OF BUSINESSES. T HE FINANCIAL REPORT OF THE SAID CONCERN IS FILED BY THE ASSESSEE IN THE PA PER BOOK AT PAGES 345 TO 397 AND AT PAGE 375 THE FOLLOWING FUNCTIONS OF THE SAID CONCERN ARE DESCRIBED AS PRIMARY SEGMENT: - 1. MANUFACTURING OPERATIONS 2. SALES AND MARKETING OPERATIONS 3. REALITY BUSINESS SERVICES 4. OTHERS. THE REVENUE EARNED BY THE SAID CONCERN FROM THESE A CTIVITIES AS DESCRIBED IN THE REPORT IS 1,670.13 LAKH, 18.78 LAKH, 42.79 L AKH & 917.15 LAKH, RESPECTFULLY FOR THE FINANCIAL YEAR ENDING ON 31.03 .2006. THUS, IT CAN BE SEEN THAT THE REVENUE OF THE SAID CONCERN FROM SALE S AND MARKETING OPERATIONS IS ONLY A SUM OF 18.78 AGAINST GROSS REV ENUE OF 2,648.85. TO SELECT A COMPARABLE, ACCORDING TO WELL RECOGNIZE PR INCIPLE, IT SHOULD ALSO BE FUNCTIONALLY COMPARABLE. A COMPANY WHICH IS MAJ ORLY DEALING IN OTHER SEGMENTS CANNOT BE ACCEPTED AS FUNCTIONALLY COMPARA BLE. IT CAN BE SEEN FROM THE ABOVE FIGURES THAT THE SAID CONCERN HAD DE ALT IN THE SEGMENT OF SALES AND MARKETING OPERATIONS AT A VERY MINIMUM LE VEL OF TOTAL REVENUE AND ON A SIMPLE TURNOVER OF 18.78 IT HAS SHOWN LOSS OF 7.59 WHICH MEANS THAT IT HAS INCURRED LOSS OF 40.41% FROM THE RELEVA NT SEGMENT. THEREFORE, GOING THROUGH THE BUSINESS OF THE SAID CONCERN, IT IS HELD THAT THE SAID CONCERN IS NOT FUNCTIONALLY COMPARABLE WITH THE ASS ESSEE AND HENCE HAS RIGHTLY BEEN REJECTED BY THE TPO AND DRP. THE REJ ECTION OF THE SAID COMPARABLE IS UPHELD. ITA NO. 5341/D/10 54 70. IT IS ALSO THE CASE OF THE LD. AR THAT ON THE B ASIS OF ONE COMPARABLE ONLY, THE ARM LENGTH PRICE OF THE ASSESSEE CANNOT B E DETERMINED AND IN SUCH A SITUATION, IT IS ADMISSIBLE THAT A FRESH SEA RCH OF COMPARABLES SHOULD TAKE PLACE AND IN FACT SUCH FRESH SEARCH WAS PLACED BEFORE DRP AND DRP HAS FAILED TO TAKE INTO CONSIDERATION SAID SEARCH A ND, THEREFORE, THE ADJUSTMENT MADE TO ARRIVE AT ARM LENGTH PRICE IS TO BE SET ASIDE. TO SUPPORT THE ARGUMENT THAT ON THE BASIS OF ONE COMPA RABLE ONLY THE ARM LENGTH PRICE COULD NOT BE DETERMINED. LD. AR HAS P LACED RELIANCE UPON FOLLOWING DECISIONS: - 1. M/S SAP LABS INDIA PVT. LTD. VS. ACIT [ITA NO. 398/BANG/2008 AND ITA NO. 418/BANG/2008]. 2. AZTEC SOFTWARE AND TECHNOLOGY VS. ACIT [294 ITR 32]. 3. MENTOR GRAPHICS (P) LTD. VS. DCIT [112 TTJ 408] 4. SONY INDIA (P) LTD. VS. DCIT [I.T.A. NOS. 1181/D EL/2005, 1257/DEL/2007 & 1656/DEL/2007] 71. ON THE OTHER HAND, IT IS THE CASE OF LD. DR THA T THE ARM LENGTH PRICE CAN BE COMPUTED EVEN ON THE BASIS OF ONE COMPARABLE AND TO SUPPORT SUCH CONTENTION HE HAS RELIED UPON: 1. VEDARIC TECHNOLOGY PVT. LTD. VS. ACIT (SUPRA) 2. PARROT SYSTEMS TSI INDIA LTD. VS. DCIT (SUPRA) 72. IN NONE OF THE CASES RELIED UPON BY LD. AR, IT HAS BEEN CATEGORICALLY HELD THAT IF ONLY ONE COMPARABLE IS LEFT, THE ENTIR E EXERCISE SHOULD BE ITA NO. 5341/D/10 55 CARRIED OUT FRESHLY. IN THE CASE OF M/S SAP LABS INDIA PVT. LTD. VS. CIT (SUPRA) 22 COMPARABLES WERE SELECTED BY THE ASSESSE E IN ITS TP REPORT. AS AGAINST THAT THE TPO HAD SELECTED 8 COMPARABLES AND OUT OF ALL THESE PARTIES THE TRIBUNAL HAS SELECTED 12 COMPARABLES FO R COMPUTING THE ARM LENGTH PRICE. THE MAIN OBSERVATION OF THE TRIBUNAL UPON WHICH THE ASSESSEE HAS PLACED RELIANCE READ AS FOLLOW: - 81. THE ARGUMENT OF THE ASSESSEE COMPANY CANNOT B E ACCEPTED AS SUCH, FOR VARIOUS REASONS. FIRST OF AL L, THE COMPARABLES AVAILABLE IN THE REVISED LIST OF TPO/AO IS ONLY THREE. THREE COMPARABLES ARE NOT A RELIABLE SAMPLE SIZE. FROM THE ABOVE OBSERVATIONS IT DOES NOT APPEAR THAT A PRINCIPLE OF LAW HAS BEEN LAID DOWN THAT IN CASE ONE COMPARABLE REMAINS, THE ENTIRE EXERCISE WOULD FAIL. 73. SIMILARLY IN THE CASE OF AZTEC SOFTWARE AND TECHN OLOGY SERVICES LTD. VS. ACIT (SUPRA) IT WAS OBSERVED THAT THE SAMP LE SIZE OF DATA TAKEN BY THE TAX PAYER, TO SUPPORT THE ARM LENGTH PRICE WAS TOO SMALL TO COME TO ANY GENERAL CONCLUSION. 74. IN THE CASE OF MENTOR GRAPHICS (NOIDA PVT. LTD. VS. DCIT) ALSO IT HAS NOT BEEN LAID DOWN THAT IF ONLY ONE COMPARABLE IS L EFT, THE ENTIRE EXERCISE WAS TO BE DONE AGAIN. ITA NO. 5341/D/10 56 75. IN THE CASE OF SAP LABS INDIA PVT. LTD. VS. DCIT (SUPRA), IT WAS OBSERVED THAT EVEN AS PER OECD GUIDE LINES LARGE NU MBER OF SIMILAR ENTITY SHOULD BE TAKEN TO MAKE COMPARISON BROAD BASED. 76. IN NONE OF THESE CASES IT HAS BEEN HELD THAT, I F ONE COMPARABLE IS LEFT, THE SAME CANNOT BE ADOPTED TO WORK OUT THE ME AN MARGIN TO ARRIVE AT ARM LENGTH PRICE. 77. NOW COMING TO THE CASE LAW RELIED UPON BY LD. D R WHICH CONVEY THAT ONLY ONE COMPARABLE IS SUFFICIENT AND IT HAS B EEN HELD BY THE TRIBUNAL IN OTHER CASES THAT ARM LENGTH PRICE CAN BE WORKED OUT EVEN ON THE BASIS OF ONE COMPARABLE. IN THE CASE OF VEDARIS TECHNOLOGY PVT. LTD. VS. ACIT (SUPRA) 20 COMPARABLES WERE SHORT LISTED AND MEAN M ARGIN WAS WORKED OUT AT 16.585% AND OUT OF THOSE ONLY ONE COMPARABLE WAS LEFT NAMELY SOPHIA SOFTWARE LTD. ON THE BASIS OF WHICH THE ARM LE NGTH PRICE WAS DETERMINED. HERE, IT IS THE CASE OF LD. AR THAT TH E SAID CASE IS NOT APPLICABLE TO ASSESSEES CASE AS IN THAT CASE BOTH THE PARTIES HAD ACCEPTED ONE COMPARABLE ONLY. BUT THAT IS NOT THE ONLY BASI S ON WHICH THE TRIBUNAL HAS RESTED ITS DECISION. THE OTHER CASE OF SIMILAR NATURE IS PARROT SYSTEMS TSI INDIA LTD. VS. DCIT (SUPRA). MOREOVER, THE COMP ARABLE WHICH HAS BEEN LEFT WAS SELECTED BY THE ASSESSEE ITSELF IN ITS TP STUDY AND NO REASON WHATSOEVER IS GIVEN THAT HOW THE SAID COMPARABLE CO ULD NOT BE TAKEN TO COMPUTE ARM LENGTH PRICE OF THE ASSESSEE. THEREFOR E, WE REJECT THE SUBMISSION OF THE ASSESSEE THAT ON THE BASIS OF ONE COMPARABLE, THE ARM ITA NO. 5341/D/10 57 LENGTH PRICE COULD NOT BE DETERMINED AND FRESH SEAR CH WAS REQUIRED TO BE TAKEN AS PER SUBMISSIONS MADE BEFORE DRP. THE FACT S OF THE PRESENT CASE DO NOT WARRANT THE FRESH SEARCH TO BE TAKEN INTO CO NSIDERATION AS THERE IS NO VALID REASON TO DO SO. 78. IN VIEW OF ABOVE DISCUSSION GROUND NO. 4 OF THE ASSESSEE IS REJECTED. 79. APROPOS GROUND NO. 5 IT IS THE CASE OF THE ASSE SSEE THAT THE FOLLOWING EXPENSES SHOULD BE CONSIDERED AS EXPENSES I NCURRED PRIOR TO THE COMMENCEMENT OF MANUFACTURING ACTIVITY HENCE SHOULD BE EXCLUDED FROM OPERATING EXPENSES: - TABLE 7 PREOPERATIVE EXPENSES PARTICULARS AMOUNT (IN RS.) SALARIES & WAGES 31,44,719 FRINGE BENEFITS 19,93198 CONSULTING 21,06,241 MAINTENANCE 1,86,049 SUPPLIES 1,64,571 TRAVELLING COSTS 26,63,272 TELEPHONE 5,46,689 POSTAGE 81 ,438 LEASE RENTS 3,32,655 TRAINING/EDUCATION 2,56,264 LEGAL ACCOUNTING 10,63,150 ADVERTISING FAIRS 91,060 INSURANCE 1,64,226 OTHER SELLING AND GENERAL ADMINISTRATION EXPENSES 11,120 TOTAL 1,28,04,653 80. TO SUPPORT THE CONTENTION THAT MANUFACTURING OP ERATION WAS STARTED ONLY IN THE MONTH OF DECEMBER, 2005 THE ASS ESSEE HAS PLACED RELIANCE ON THE CERTIFICATE ISSUED BY CENTRAL EXCISE AUTHORITIES DATED 30 TH MAY, 2005 VIDE WHICH THE ASSESSEE HAD SOUGHT REGIST RATION AS ITA NO. 5341/D/10 58 MANUFACTURER OF EXCISABLE GOODS AT HINJEWADI, PUNE A ND THE RELATED RETURNS WHICH WERE FILED IN THE MONTH OF DECEMBER, 2005 AND COPIES OF THESE DOCUMENTS ARE FILED AT PAGES 263 TO 298 OF TH E PAPER BOOK. IT MAY NOT BE A MATTER OF DOUBT THAT ASSESSEE HAS COMMENCE D ITS MANUFACTURING OPERATION IN DECEMBER, 2005 BUT THE QUESTION IS THA T WHETHER OR NOT ASSESSEE IS ENTITLE TO EXCLUDE THE AFOREMENTIONED EXP ENSES FROM OPERATIONAL EXPENSES ON THE GROUND THAT MANUFACTURIN G ACTIVITIES WERE STARTED ONLY IN DECEMBER, 2005 DESPITE THE FACT THA T THOSE VERY EXPENSES WERE RELATING TO MANUFACTURING ACTIVITY OF THE ASSE SSEE. 81. THE ASSESSEE TO SUPPORT ITS CONTENTION THAT THO SE EXPENSES ARE REQUIRED TO BE EXCLUDED FROM OPERATIONAL EXPENSES HAS MAINLY RELIED UPON THE PROVISIONS OF RULE 10B(1)(E)(I). TAKING SUPPOR T FROM THE ABOVE ARGUMENT IT IS THE CASE OF THE ASSESSEE THAT ACCORD ING TO THE STIPULATION IN THE AFOREMENTIONED PROVISION, THE EXPENSES INCURRED PRIOR TO COMMENCEMENT OF OPERATION SHOULD NOT BE CONSIDERED WHILE COMPUTING THE OPERATING MARGINS FROM THE INTERNATIONAL TRANSA CTION. IT IS THE SUBMISSION OF THE ASSESSEE THAT IF THE AFOREMENTION ED EXPENSES ARE EXCLUDED FROM OPERATIONAL EXPENSES THEN THE MARGIN OF THE ASSESSEE WOULD BE WITHIN THE PERMISSIBLE RANGE OF 5% AS DESC RIBED IN PROVISO TO SEC. 92C(2). 82. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS ON THIS ISSUE. WE FIND NO FORCE IN THE CONTENTION OF LD. AR THAT S UCH EXPENSES WERE ITA NO. 5341/D/10 59 REQUIRED TO BE EXCLUDED. THE REASON FOR NOT ACCEPTI NG SUCH ARGUMENT IS THAT WHAT IS OPERATIONAL EXPENSES IS THE EXPENSES WHI CH ARE INCURRED TO EARN THAT INCOME. IT IS NOT EVEN THE CASE OF THE A SSESSEE THAT THOSE EXPENSES DID NOT RELATE TO MANUFACTURING SEGMENT OF THE ASSESSEE OUT OF WHICH THE REVENUE WAS EARNED BY THE ASSESSEE. IF T HE EXPENSES HAVE NEXUS WITH THE REVENUE THEN THEY ARE TO BE CONSIDERE D AS OPERATIONAL EXPENSES AND THEY CANNOT BE EXCLUDED SIMPLY FOR THE REASON THAT THE DATE OF OCCURRENCE OF THE REVENUE IS LATER AND EXPENSES H AVE BEEN INCURRED PRIOR TO THAT. THEREFORE, GROUND NO. 5 OF THE ASSE SSEE IS REJECTED. 83. APROPOS GROUND NO. 6, IT IS ALREADY OBSERVED TH AT ASSESSEE HAS COMPUTED ITS MARGIN AFTER CLAIMING ADJUSTMENT ON CA PACITY UTILIZATION. THEREFORE, THE FIRST ISSUE TO BE DECIDED IS THAT WH ETHER ASSESSEE CAN DEVIATE FROM THE NET PROFIT SHOWN IN ITS BOOKS OF A CCOUNT FOR THE PURPOSE OF COMPUTING ARM LENGTH PRICE. THE METHOD ADOPTED BY THE ASSESSEE IS TNMM FOR THE PURPOSE OF COMPUTING ARM LENGTH PRICE. PROVISIONS OF RULE 10B(1)(E)(I) REGULATES SUCH METHOD AND READ AS UNDE R: - 10B(1)(E) TRANSACTIONAL NET MARGIN METHOD, BY WHIC H, - (I) THE NET PROFIT MARGIN REALIZED BY THE ENTERPRI SE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO CO STS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE, ITA NO. 5341/D/10 60 84. THE EXPRESSION NET PROFIT MARGIN REALIZED MEA NS THE NET PROFIT MARGIN ACTUALLY REALIZED AND ACTUAL COST INCURRED A ND SALE AFFECTED AND THUS, THERE IS NO ROOM FOR ANY ASSUMPTION FOR TAKIN G THE PROFIT MARGIN WHICH HAS BEEN REALIZED. IN THE CASE OF THE TESTED PARTY (ASSESSEE), IT IS NOT PERMISSIBLE TO DEVIATE FROM THE BOOK RESULTS ON THE GROUND OF CAPACITY UTILIZATION. THE ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION, IF ANY, IS PERMISSIBLE BY RULE 10B(3)(II) RULE 10B(3) READ AS UNDER: - (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARAB LE TO AN INTERNATIONAL TRANSACTION IF - (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPR ISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATER IALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 85. THEREFORE, IT IS CLEAR THAT IN THE CASE OF TEST ED PARTY (ASSESSEE), THERE CANNOT BE ANY DEVIATION IN THE NET PROFIT SHO WN IN THE BOOKS OF ACCOUNT AND THE ADJUSTMENT, IF ANY, CAN BE MADE TO THE SAME TO ELIMINATE THE MATERIAL AFFECTS TO SUCH DIFFERENCES TO THE EXTE NT OF THESE ADJUSTMENTS ARE REASONABLY ACCURATE. THEREFORE, TH E POSITION EMERGES IS THAT ADJUSTMENT CAN BE GRANTED TO THE ASSESSEE IN C OMPUTATION OF MEAN MARGIN ONLY TO THE EXTENT OF THESE BEING REASONABLY ACCURATE. IN THE LIGHT OF THESE PROVISIONS WE HAVE TO EXAMINE THAT WHETHER OR NOT DEPARTMENT IS RIGHT IN REJECTING THE CLAIM OF ASSESSEE REGARDING CAPACITY UTILIZATION. ITA NO. 5341/D/10 61 86. IT HAS BEEN THE SUBMISSION OF THE ASSESSEE THAT IT HAD ASSUMED THE CAPACITY UTILIZATION OF COMPARABLES TO BE 70% IN AC CORDANCE WITH RULE 10D(1)(K) IN ITS TP STUDY REPORT DUE TO UNAVAILABIL ITY OF REQUIRED DETAILS AT THAT POINT OF TIME AND HAS ALSO MADE APPROPRIATE DI SCLOSURE THEREIN. 87. RULE 10D(1)(K) AS DESCRIBED UNDER THE HEAD INF ORMATION AND DOCUMENTS TO BE KEPT AND MAINTAINED U/S 92D - 10D(1) EVERY PERSON WHO IS ENTERED INTO AN INTERNAT IONAL TRANSACTION SHALL KEEP AND MAINTAIN THE FOLLOWING INFORMATION AND DOC UMENTS NAMELY: - (A) TO (J). (K) THE ASSUMPTIONS, POLICIES AND PRICE NEGOTIATION S, IF ANY WHICH HAVE CRITICALLY AFFECTED THE DETERMINATION OF THE ARMS L ENGTH PRICE; 88. THE PERUSAL OF THE ABOVE PROVISION WILL REVEAL THAT EVERY PERSON WHO IS ENTERED INTO AN INTERNATIONAL TRANSACTION IS UNDER AN OBLIGATION TO KEEP AND MAINTAIN THE INFORMATION AND DOCUMENT WITH RESPECT TO THE ASSUMPTIONS, POLICIES AND PRICE NEGOTIATIONS, IF AN Y, WHICH HAVE CRITICALLY AFFECTED THE DETERMINATION OF THE ARMS LENGTH PRICE . TPO IN ITS REPORT HAS OBSERVED THAT ASSESSEE DID NOT SUBMIT ANY EVIDENCE FOR ASSUMING THE CAPACITY UTILIZATION OF THE COMPARABLES AND WHATEVE R DATA RELIED UPON BY THE ASSESSEE FOR SEEKING CAPACITY UTILIZATION ADJUS TMENT WAS EITHER UNRELIABLE OR INCORRECT. WHEN FIXED COST ITSELF IS INCURRED ONLY FOR A PART ITA NO. 5341/D/10 62 OF THE YEAR THE SAME CANNOT BE ADJUSTED FOR DIFFERE NTIAL CAPACITY UTILIZATION. 89. ACCORDING TO SUBMISSIONS MADE BEFORE DRP IT WAS SUBMITTED BY THE ASSESSEE THAT ASSUMPTION HAS BEEN MADE REGARDING CA PACITY UTILIZATION OF THE COMPARABLES AT 70% IN ACCORDANCE WITH RULE 10D( 1)(K) IN THE TP STUDY DUE TO THE UNAVAILABILITY OF THE REQUIRED DETAILS A T THAT POINT OF TIME AND APPROPRIATE DISCLOSURES WERE MADE. IT WAS SUBMITTE D THAT DETAILED WORKING IN CONNECTION WITH THE CAPACITY UTILIZATION IN THE COMPARABLES (I.E. 70%) WHICH SHOWED SIMILAR RESULTS AS MENTIONE D IN TP STUDY WAS FURNISHED AND REFERENCE IN THIS REGARD IS MADE TO P AGES 200 AND 335 OF THE PAPER BOOK. IT WAS SUBMITTED THAT ADJUSTMENTS ARE NEEDED TO BE MADE TO THE COST CONSIDERED FOR ARRIVING AT THE PROFITABILI TY OF THE TRANSACTION AS EXPENDITURE INCURRED FOR PRE-COMMENCEMENT PERIOD WAS NEEDED TO BE ADJUSTED. UNDER UTILIZED CAPACITY HAS BEEN COMPUTE D CONSIDERING ONLY THE RELEVANT PART OF THE YEAR I.E. AFTER THE COMMENCEME NT OF THE BUSINESS. DRP HAS OBSERVED THAT NO EVIDENCE HAS BEEN MADE AVA ILABLE IN THE TP REPORT TO EXAMINE THE CAPACITY UTILIZATION OF THE CO MPARABLES AND THE DATA RELIED UPON BY THE ASSESSEE FOR SEEKING SUCH A DJUSTMENT IS UNRELIABLE AND INCORRECT. BEFORE US IT WAS SUBMITTED THAT ALL THE DETAILS REGARDING START UP STAGE OF OPERATIONS AND CAPACITY UTILIZATI ON DETAILS OF THE ASSESSEE VIZ-A-VIZ THE COMPARABLES WERE FILED AND REFERENCE IN THIS REGARD IS MADE TO PAGES 264 TO 298 AND SUBMISSIONS AT PAGES 245 TO 247 OF THE PAPER BOOK. IT WAS SUBMITTED THAT TPO/DRP HAVE NOWHERE C ONTESTED DIFFERENCE ITA NO. 5341/D/10 63 BETWEEN THE STAGE OF THE OPERATION OF THE ASSESSEE AND THE COMPARABLES REFERENCE IN THIS REGARD IS MADE TO PAGE 405 TO 408 AND 414 TO 436. IT WAS SUBMITTED THAT TPO AND DRP HAVE REJECTED THE ENTIRE ADJUSTMENT BASED ONLY ON ACCOUNT OF THE PRESUMED INCONSISTENCY WHICH HAS BEEN OBSERVED IN ONE OUT OF THE FIVE COMPARABLES WHICH HAS BEEN PROV ED INCORRECT AS LICENSED CAPACITY DOES NOT HAVE ANY ROLE TO PLAY IN COMPUTING THE CAPACITY UTILIZATION. THERE WAS NO PROVISION TO RESTRICT TH E PRODUCTION ONLY UPTO CAPACITY AS SUCH RESTRICTION WAS APPLICABLE ONLY TO LICENSE ERA I.E. PRE 1991. FINALLY IT WAS SUBMITTED THAT IF THERE WAS A NY INCONSISTENCY WITH REGARD TO DATA OF ONE COMPARABLE THAN DATA REGARDIN G REMAINING COMPARABLES SHOULD HAVE BEEN CONSIDERED AND REFEREN CE IN THIS REGARD WAS MADE TO PAGE 203 OF THE PAPER BOOK. 90. FOR PROPER APPRECIATION OF THE SUBMISSION OF TH E ASSESSEE IT HAS TO BE SEEN THAT WHAT EVIDENCE HAS BEEN FILED BY THE AS SESSEE WITH REGARD TO ASSUMPTION MADE BY IT WITH REGARD TO CAPACITY UTILI ZATION OF 70% OF THE COMPARABLES. IT HAS ALREADY BEEN DESCRIBED THAT IT IS THE LEGAL OBLIGATION OF THE ASSESSEE TO KEEP AND MAINTAIN THE INFORMATIO N AND DOCUMENTS IN RESPECT OF ANY ASSUMPTION MADE BY IT WHICH ACCORDIN G TO ASSESSEE HAS CRITICALLY AFFECTED THE DETERMINATION OF ARMS LENGT H PRICE. IN THE WRITTEN SUBMISSIONS THE ASSESSEE HAS MADE REFERENCE TO EVID ENCE BEING PLACED AT PAGES 264 TO 298 AND SUBMISSIONS PLACED ON 245 TO 2 47 OF THE PAPER BOOK IN PARA 8.41. PAGES 264 TO 298 HAVE BEEN DESCRIBED AS ANNEXURE H IN THE INDEX OF PAPER BOOK AND THE NARRATION IS COPY O F APPLICATION AND ITA NO. 5341/D/10 64 SUBMISSION MADE BEFORE THE LD. TPO DATED OCTOBER 9, 2009. PAGE 264 IS THE CENTRAL EXCISE REGISTRATION CERTIFICATE OF THE A SSESSEE DATED 30 TH MAY, 2005. PAGE 265 TO 269 IS THE COPY OF FORMATION E.R .-1 BEING RETURN OF EXCISABLE GOODS AND AVAILMENT OF CENVAT CREDIT FOR T HE MONTH OF JUNE, 2005. SIMILARLY FROM PAGES 270 TO 274. 275 TO 279, 280 TO 284, 285 TO 289, 290 TO 294, 295 TO 297 ARE THE SIMILAR RETURNS FROM THE MONTH OF JULY, 2005 TO THE MONTH OF DECEMBER, 2005. PAGE 298 IS T HE EXTRACT FROM BUSINESS LINE FINANCIAL DAILY FROM THE HINDU GROU P OF PUBLICATION DATED 18.3.06 WHICH IS A NEWS ITEM UNDER THE HEAD HAWORT H INC. INAUGURATES FACILITY IN PUNE. NONE OF THESE DOCUMENTS HAVE DE SCRIBED THE CAPACITY UTILIZATION BY THE COMPARABLES. THUS, IT HAS BEEN W RONGLY CLAIMED BY THE ASSESSEE THAT IT HAS FURNISHED SUFFICIENT EVIDENCE WITH REGARD TO CAPACITY UTILIZATION IN THE CASES OF COMPARABLES. NO CREDIB LE INFORMATION HAS BEEN SUBMITTED BY THE ASSESSEE TO SEEK ADJUSTMENT ON ACC OUNT OF CAPACITY UTILIZATION AND WE HOLD THAT THE CASE LAW RELIED UP ON BY LD. AR IN THIS REGARD HAVE NO RELEVANCE AS ON FACTS OF THIS CASE A ND IT IS HELD THAT ASSESSEE HAS NOT BEEN ABLE TO FURNISH CREDIBLE AND ACCURATE INFORMATION WITH REGARD TO CAPACITY UTILIZATION AND SUCH ADJUST MENT CAN BE ALLOWED ONLY IN A CASE WHERE ASSESSEE IS ABLE TO FURNISH AC CURATE AND CREDIBLE EVIDENCE IN THIS REGARD. THEREFORE, THE DECISIONS IN THE FOLLOWING CASES CANNOT BE RELIED UPON TO GIVE RELIEF TO THE ASSESSE E. 1. ACIT VS. FIAT INDIA PVT. LTD. [HONBLE MUMBAI TRIBUNAL (ITA NO. 1848/MUM/2009)]. 2. SKODA AUTO INDIA (P) LTD. VS. ACIT [HONBLE PUNE TRIBUNAL (122 TTJ 699)]. ITA NO. 5341/D/10 65 3. E-GAIN COMMUNICATION (P) LTD. VS. ITO [HONBLE PUNE TRIBUNAL (118 TTJ 354)]. 4. GLOBAL VATEDGE PVT. LTD. VS. DCIT [HONBLE DELHI TRIBUNAL (ITA NOS. 2763 & 2764/DEL/2009)]. ACCORDINGLY, GROUND NO. 6 IS DISMISSED. 91. NOW COMING TO GROUND NO. 7, IT IS THE CASE OF T HE ASSESSEE THAT THE TPO/DRP HAS ERRED IN COMPUTING THE QUANTUM OF ADJUS TMENT TO BE MADE TO THE PROFIT OF THE MANUFACTURING SEGMENT OF THE A SSESSEE BY APPLYING THE PROFIT LEVEL INDICATOR OF OPERATING PROFIT/SALES TO THE VALUE OF INTERNATIONAL TRANSACTION PERTAINING TO IMPORT OF RAW MATERIAL IN STEAD OF SALES FIGURE OF MANUFACTURING SEGMENT WHICH HAS RESULTED IN AN INCR EASE OF ADJUSTMENT BY A SUM OF RS. 26,91,806/-. IT IS OBSERVED THAT T HESE SUBMISSIONS WERE MADE BY THE ASSESSEE BEFORE DRP AS PER COPY OF SUBM ISSIONS PLACED AT PAGES 205 AND 206 OF THE PAPER BOOK AND IT IS OBSER VED THAT LD. DRP HAS NOT PASSED ANY SPEAKING ORDER ON SUCH SUBMISSION OF THE ASSESSEE. IF SUCH SUBMISSION OF THE ASSESSEE WERE TO BE REJECTED THEN REASONS MUST SHOULD HAVE BEEN GIVEN FOR THE SAME. THERE BEING NO DISCU SSION ON THIS ISSUE IN THE ORDER PASSED BY DRP, WE CONSIDER IT JUST AND PR OPER TO RESTORE THIS ISSUE TO THE FILE OF DRP WITH A DIRECTION TO CONSID ER THE SUBMISSIONS OF THE ASSESSEE AND TO DECIDE THIS ISSUE BY WAY OF SPEAKIN G ORDER AFTER PROVIDING THE ASSESSEE A REASONABLE OPPORTUNITY OF HEARING. T HIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES IN THE MANNER AFORESAID. ITA NO. 5341/D/10 66 92. COMING TO GROUND NO. 8 THE ASSESSEE IS CLAIMING +/- 5% RANGE AS PER PROVISO TO SECTION 92C(2) OF THE ACT. PROVISO AS A PPLICABLE FOR THE YEAR UNDER CONSIDERATION READ AS UNDER: - PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PR ICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE TAXPAYER, A PRICE WHICH MA Y VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDI NG FIVE PER CENT OF SUCH ARITHMETICAL MEAN. 93. THIS PROVISO IS APPLICABLE IN A CASE WHERE MORE THAN ONE PRICE DETERMINED BY THE MOST APPROPRIATE METHOD. IN A CA SE WHERE ONLY ONE PRICE DETERMINED BY MOST APPROPRIATE METHOD THAN BE NEFIT OF 5% IS NOT AVAILABLE TO THE ASSESSEE. THEREFORE, SO AS IT REL ATES TO MARKETING SUPPORT SERVICE SEGMENT, ONLY ONE PRICE IS DETERMINED BY TH E MOST APPROPRIATE METHOD AS ONLY ONE COMPARABLE NAMELY PRIYA INTERNAT IONAL LTD. HAS BEEN LEFT ON THE BASIS OF WHICH ARM LENGTH PRICE OF THE ASSESSEE HAS BEEN DETERMINED. HENCE, THE BENEFIT OF PROVISO IS NOT A VAILABLE TO THE ASSESSEE WITH RESPECT TO MARKETING SUPPORT SERVICE SEGMENT. IN RESPECT OF MANUFACTURING SEGMENT MORE THAN ONE PRICES IS DETER MINED BY MOST APPROPRIATE METHOD BY TAKING INTO ACCOUNT FIVE COMP ARABLES WHICH HAVE BEEN ACCEPTED BY THE TPO AND THEY HAVE BEEN LISTED IN TABLE 3 OF HIS ORDER. THEREFORE, FOR THE SAID SEGMENT THE ADJUSTM ENT OF 5% IS AVAILABLE AT THE OPTION OF THE ASSESSEE IRRESPECTIVE OF THE F ACT THAT THE ARM LENGTH PRICE DETERMINED BY THE TPO EXCEEDS 5% OR NOT AND SO HAS BEEN HELD BY ITA NO. 5341/D/10 67 THE COORDINATE BENCH IN THE CASES OF SONY INDIA PRIV ATE LIMITED VS. DCIT (SUPRA) AND IN THE CASE OF M/S SAP LABS INDIA PVT. L TD. VS. ACIT (SUPRA). THIS ISSUE HAS BEEN DISCUSSED IN DETAIL IN THE DECI SION OF SONY INDIA PVT. LTD. (SUPRA) IN PARAS 157 TO 163.4 AND IT HAS BEEN CATEGORICALLY HELD THAT BENEFIT OF 5% IS AVAILABLE AT THE OPTION OF THE ASS ESSEE, EVEN IN A CASE WHERE ARM LENGTH PRICE HAS BEEN DETERMINED EXCEEDIN G %5 AND ASSESSEE DOES NOT GIVE UP ITS RIGHT TO CONTEST THE REMAINING ADDITION WHICH IS IN EXCESS OF 5% MARGIN AND IT WILL BE RELEVANT TO REPRO DUCE PARA 163.4 FROM THE SAID DECISION: - 163.3 THE CONTROVERSY IS RELATING TO THE SECOND LIMB/PORTION OF THE PROVISION WHERE AN OPTION IS GIVEN TO THE TAXPAYER TO TAKE ARMS LENGTH PRICE WHICH MAY V ARY FROM THE ARITHMETIC MEAN BY AN AMOUNT NOT EXCEEDING 5 PER CENT OF SUCH ARITHMETIC MEAN. HERE AGAIN, THERE IS NO CONTROVERSY THAT TAXPAYER CAN TAKE ARMS LENGTH PRI CE WHICH IS NOT EXCEEDING 5 PER CENT OF THE ARITHMETIC MEAN. THE OPTION, AS IS CLEAR FROM THE LANGUAGE IS TO T AKE ARMS LENGTH PRICE WHICH IS NOT IN EXCESS OF 5 PER CENT O F THE SAID MEAN. THE WORD OPTION AS PER THE LAW LEXICON IS SYNONYMOUS WITH CHOICE OR PREFERENCE. THEREFORE , IT IS THE CHOICE OF THE TAXPAYER TO TAKE ARMS LENGTH PRI CE WITH A MARGINAL BENEFIT AND NOT THE ARITHMETICAL MEAN DETERMINED AS THE MOST APPROPRIATE METHOD. THE CONTROVERSY IS IN CASES WHERE THE INTERNATIONAL PRI CE SHOWN IN RELATED PARTY TRANSACTION EXCEEDS 5 PER CENT OF THE ARITHMETIC MEAN ENVISAGED BY THE PROVISION AND SUCH ARMS LENGTH PRICE IS CONTESTED BY THE TAXPAYER. ACCORDIN G TO THE REVENUE, IN SUCH A SITUATION, THE SECOND LIMB OF TH E PROVISION IS NOT APPLICABLE. THE REASONS PUT FORTH IN SUPPORT ITA NO. 5341/D/10 68 OF SUCH A VIEW BY THE REVENUE HAVE ALREADY BEEN NOT ED. IT IS THEIR CONTENTION THAT THE SECOND PART/LIMB OF THE P ROVISION IS MEANT TO COVER MARGINAL CASES ONLY WHERE THE PRI CE SHOWN BY THE TAXPAYER DOES NOT EXCEED 5 PER CENT OF THE ARMS LENGTH PRICE REPRESE NTING ARITHMETIC MEAN BY THE MOST APPROPRIATE METHOD. WHE RE THE DIFFERENCE IS MUCH MORE THAN 5 PER CENT, THEN TAXPAYER CANNOT HAVE THE BENEFIT OF THE SAID PROVIS ION, PARTICULARLY WHERE THE TAXPAYER HAS NOT ACCEPTED SU CH ARITHMETIC MEAN. 163.4 THE OTHER VIEW IS THE ONE ACCEPTED BY KOLKATA A BENCH OF THE TRIBUNAL IN THE CASE OF DEVELOPMENT CONSULTANTS (P.) LTD. (SUPRA). AS PER THE SAID DECI SION, THE BENEFIT OF SECOND LIMB OF THE PROVISO WAS ALLOWED T O THE TAXPAYERS ALTHOUGH THE PRICE DISCLOSED BY IT WAS MO RE THAN 5 PER CENT OF ARITHMETIC MEAN. THE DECISION OF THE CO- ORDINATE BENCH IS BINDING ON US AND WE ARE INCLINED TO FOLLOW THE SAME. THAT APART, WE ARE OF THE VIEW THA T KOLKATA BENCH OF THE TRIBUNAL HAS TAKEN A RIGHT VIE W OF THE PROVISION. WE ARE TO GO BY THE LANGUAGE OF THE PROV ISION AND WHEN WE DO SO, WE DO NOT SEE ANYTHING IN THE LA NGUAGE TO RESTRICT THE APPLICATION OF THE PROVISION ONLY T O MARGINAL CASES WHERE PRICE DISCLOSED BY THE TAXPAYE R DOES NOT EXCEED 5 PER CENT OF THE ARITHMETIC MEAN. IN OU R CONSIDERED OPINION, THE ARMS LENGTH PRICE DETERMIN ED ON APPLICATION OF MOST APPROPRIATE METHOD IS ONLY AN APPROXIMATION AND IS NOT A SCIENTIFIC EVALUATION. THEREFORE, THE LEGISLATURE THOUGHT IT PROPER TO ALL OW MARGINAL BENEFIT TO CASES WHO OPT FOR SUCH BENEFIT. IN THE CASE OF A TAXPAYER WHO EXERCISES THE OPTION AND ACC EPTS ARMS LENGTH PRICE AS PER THE SECOND LIMB OF THE PR OVISO OR IN OTHER WORDS, HE ACCEPTS THE ARMS LENGTH PRICE E VEN ITA NO. 5341/D/10 69 EXCEEDING 5 PER CENT OF ARITHMETIC MEAN DETERMINED BY THE TAX AUTHORITY AS CORRECT AND IS READY TO PAY TA X ON THE DIFFERENCE BETWEEN PRICE DISCLOSED BY HIM AND THE A BOVE ARMS LENGTH PRICE. WE DO NOT SEE ANY VALID OBJECTI ON ON THE PART OF THE REVENUE TO THE APPLICATION OF ABOVE PROVISION TO SUCH A CASE. THE TAXPAYER HAS EXERCISE D THE OPTION AND TOOK ARMS LENGTH PRICE AS PER THE SECON D LIMB AS THE FINAL PRICE WITHOUT RAISING ANY DISPUTE. THE REFORE, THE PARAMETERS LAID DOWN AS PER THE SECOND LIMB ARE FULLY SATISFIED. IN OUR OPINION, THE LEGAL POSITION CANNOT BE DIFFERENT IN A CASE WHERE MINOR VARIATION OF 5 PER CENT IS NOT ACCEPTED AND ARMS L ENGTH PRICE IS FURTHER CHALLENGED IN APPEAL. MERE FACT OF ACCEPTANCE OR NON-ACCEPTANCE OF ARITHMETIC MEAN CAN BE TAKEN TO BE THE DETERMINING FACTOR RELATING TO RIGH T TO CONTEST ARMS LENGTH PRICE IN APPEAL. SUCH INFERENC E HAS NO SUPPORT OF LANGUAGE OF THE PROVISION. IN OUR VIE W, BOTH IN THE FIRST AS ALSO IN THE SECOND LIMB, IMPLICATIO NS OF DETERMINED ARMS LENGTH PRICE ARE THE SAME EXCEPT F OR THE MARGINAL BENEFIT ALLOWED TO THE TAXPAYER UNDER THE SECOND LIMB. HENCE, WE ARE OF THE VIEW THAT SECOND LIMB IS APPLICABLE EVEN TO CASES WHERE THE TAXPAYER INTENDS TO CHALLENGE ARMS LENGTH PRICE TAKEN AS ARITHMETIC ME AN AND DETERMINED THROUGH THE MOST APPROPRIATE METHOD. AS STATED ABOVE, THE SECOND PROVISO IS INTENDED TO GIV E MARGINAL RELIEF TO ALL TAXPAYERS AS DETERMINATION O F ARMS LENGTH PRICE IS NOT AN EXACT SCIENCE BUT IS AN APPROXIMATION. OPTION IS GIVEN TO THE TAXPAYER AS I N SOME CASES, VARIATION NOT EXCEEDING 5 PER CENT OF ARITHM ETIC MEAN MIGHT NOT SUIT THE TAXPAYER, AND, THEREFORE, TAXPAYER IN SUCH CASES SHOULD NOT BE PUT TO A PREJU DICE. OTHERWISE, THERE IS NO DIFFERENCE BETWEEN THE FIRST AND ITA NO. 5341/D/10 70 THE SECOND LIMB OF THE PROVISION AS FAR AS RIGHT OF THE TAXPAYER TO CHALLENGE THE DETERMINED PRICE IS CONCE RNED. THE SECOND LIMB ONLY ALLOWS MARGINAL RELIEF TO THE TAXPAYER AT HIS OPTION TO TAKE ALP NOT EXCEEDING 5 PER CENT OF THE ARITHMETIC MEAN. THEREFORE, IN LINE WITH THE VIEW TAKEN BY KOLKATA BENCH OF THE TRIBUNAL, WE ARE OF T HE VIEW THAT BENEFIT OF THE SECOND LIMB IS AVAILABLE TO ALL TAXPAYERS IRRESPECTIVE OF THE FACT THAT PRICE OF INTERNATIONAL TRANSACTION DISCLOSED BY THEM EXCEEDS THE MARGIN PROVIDED IN THE PROVISION. 94. IN THIS VIEW OF THE SITUATION, WE HOLD THAT BEN EFIT OF 5% IS NOT AVAILABLE TO THE ASSESSEE WITH RESPECT TO MARKETING SUPPORT SERVICE SEGMENT AND IT IS AVAILABLE TO THE ASSESSEE WITH RE GARD TO MANUFACTURING SEGMENT. THE AO WILL COMPUTE THE ARM LENGTH PRICE ACCORDINGLY. THIS GROUND IS PARTLY ALLOWED FOR STATISTICAL PURPOSES I N THE MANNER AFORESAID. 95. GROUND NO. 9 IS PRE-MATURE VIDE WHICH THE ASSES SEE HAS CONTESTED THE INITIATION OF CONCEALMENT PENALTY, THEREFORE, I T IS DISMISSED. 96. GROUND NO. 10 RELATES TO OBJECTION RAISED WITH RESPECT TO FINDING GIVEN BY DRP WHICH ACCORDING TO ASSESSEE ARE INCOMP LETE AS THE CONTENTIONS OF THE ASSESSEE HAVE BEEN REJECTED WITH OUT APPROPRIATE REASONS. WE HAVE DISCUSSED EACH AND EVERY ISSUE IN DETAIL AND WHEREVER WE FOUND THAT THE ISSUE HAS NOT BEEN PROPERTY DEALT WITH BY THE ITA NO. 5341/D/10 71 DEPARTMENTAL AUTHORITIES, WE HAVE DIRECTED THEM TO RE-CONSIDER THE SAME. THEREFORE, THIS GROUND DOES NOT NEED TO BE ADJUDICA TED SEPARATELY. 97. GROUND NO. 11 HAS ALREADY BEEN DISCUSSED AND IT HAS BEEN HELD THAT ONLY DATA OF RELEVANT FINANCIAL YEAR IS RELEVANT AN D HENCE THIS GROUND OF THE ASSESSEE IS DISMISSED. 98. APROPOS GROUND NO. 12 THE ASSESSEE IN ITS ORI GINAL RETURN HAD CLAIMED PROVISION FOR CERTAIN EXPENSES AT A SUM OF R S. 1,01,91,619/- THE DETAILS OF WHICH ARE AS UNDER: - THE ASSESSEE HAS MADE PROVISIONS FOR THE EXPENSES A S FOLLOWS: (A) PROTOTYPE COST RS. 3,39,072 (B) PROMOTIONAL MATERIAL RS. 4,501 (C) DISPLAY MATERIAL RS. 20,27,746 (D) PROMOTIONAL PROGRAMMES RS. 20,75,024 (E) PUBLIC RELATION RS. 2,94,626 (F) MEMBER PROCUREMENT RS. 2,20,023 (G) LEGAL & ACCOUNTING RS. 16,26,520 (H) PROFESSIONAL FEE RS. 24,89,733 (I) CONSULTANCY RS. 16,09,000 TOTAL RS.1,01,91,619 99. LATER ON, ON ACCOUNT OF APPLICABILITY OF 40(A)( IA) INTER-ALIA LEGAL AND ACCOUNTING, PROFESSIONAL FEES AND CONSULTANCY FEES WERE SUO MOTO DISALLOWED BY THE ASSESSEE IN THE REVISED RETURN AN D THE BALANCE SUM REMAINED AT RS. 40,94,915/-. IT HAS BEEN OBSERVED BY THE AO IN THE ITA NO. 5341/D/10 72 ASSESSMENT ORDER THAT ASSESSEE WAS GIVEN SPECIFIC O PPORTUNITY TO EXPLAIN THE ALLOWABILITY OR OTHERWISE OF THESE EXPENDITURES AND IN REPLY ASSESSEE HAS SUBMITTED THAT ACCORDING TO CONSISTENTLY FOLLOW ED MERCANTILE SYSTEM OF ACCOUNTING THESE EXPENSES WERE DEBITED TO PROFIT & LOSS ACCOUNT ON ACCOUNT OF PROVISION OF ACCRUED EXPENSES. IT WAS SU BMITTED THAT IT WAS NOT IN THE NATURE OF CONTINGENT LIABILITY. THE AO HAS FOUND THAT SUCH EXPLANATION OF THE ASSESSEE IS NOT ACCEPTABLE AND HE HAS DISALLOWED THE REMAINING AMOUNT OF RS. 40,94,915/-. BEFORE DRP AL SO, ARGUMENT OF THE ASSESSEE WAS THAT THESE EXPENSES WERE CLOSELY APPRO XIMATE TO THE PROVISIONS MADE WHICH CANNOT BE TERMED TO BE A CONT INGENT LIABILITY. IN THE WRITTEN SUBMISSIONS FILED BEFORE US IT IS SUBMI TTED THAT THE AUDITORS OF THE ASSESSEE COMPANY HAD NOT IDENTIFIED THESE EXPEND ITURES AS INADMISSIBLE. IT IS SUBMITTED THAT CORRECT AMOUNT IS NOT A SUM OF RS. 40,94,915/- BUT IT IS 47,40,969/- AND AGAINST THOSE EXPENDITURE THE EXPENSES BOOKED BY THE ASSESSEE COMPANY ARE 33,24,27 4/- AND THUS, ACTUAL INCURRENCE OF THESE EXPENDITURE IS IN THE NEA R PROXIMITY OF THE PROVISION OF THESE EXPENDITURE. HE SUBMITTED THAT EXCESS PROVISION WAS WRITTEN BACK IN FINANCIAL YEAR 2006-07 AND, THEREFO RE, TO THAT EXTENT THESE EXPENDITURE WERE OFFERED FOR TAXATION AND TO THAT EXT ENT THEY SHOULD NOT HAVE BEEN DISALLOWED. 100. WE HAVE CAREFULLY GONE THROUGH THE ARGUMENT SU BMITTED BY BOTH THE PARTIES. IT HAS NOT BEEN SHOWN BY THE ASSESSEE THAT HOW THESE EXPENDITURES, WHICH ARE CLAIMED AS PROVISION, HAD AC CRUED IN THE YEAR ITA NO. 5341/D/10 73 UNDER CONSIDERATION. NO DETAILS WHATSOEVER HAVE BE EN FILED IN THE PAPER BOOK AS NO REFERENCE IN THE WRITTEN SUBMISSION REGA RDING EVIDENCE HAS BEEN MADE. ONLY ON THE BASIS OF CERTAIN DECISIONS NAMELY BHARAT EARTHMOVER (SUPRA), METAL BOX COMPANY OF INDIA LTD. (SUPRA) AND CALCUTTA COMPANY LTD. (SUPRA) IT IS CLAIMED THAT THESE EXPEND ITURES ARE NOT IN THE NATURE OF CONTINGENT LIABILITY AND ARE ALLOWABLE. HOWEVER, NO EVIDENCE/DETAIL WHATSOEVER IS SUBMITTED BY THE ASSE SSEE TO PROVE THAT THESE EXPENDITURE WERE ACTUALLY ACCRUED DURING THE Y EAR UNDER CONSIDERATION. THERE BEING NO EVIDENCE ON RECORD T O PROVE THAT THESE PROVISIONS WERE NOT IN THE NATURE OF CONTINGENT LIA BILITY, WE FIND NO INFIRMITY IN THE DISALLOWANCE BEING UPHELD. WHENEV ER SUCH CLAIM IS MADE, THE ONUS IS ON THE ASSESSEE TO PROVE THAT THESE EXPE NSES HAVE ACTUALLY BEEN ACCRUED DURING THE YEAR UNDER CONSIDERATION. THE ASSESSEE WAS PROVIDED WITH MANY OPPORTUNITIES INCLUDING HEARING BEFORE DRP AND EVIDENCE HAVING NOT BEEN FURNISHED IN THIS REGARD, WE CONFIRM THE DISALLOWANCE. HOWEVER, THE ASSESSEE CAN SEEK RELIE F IN SUBSEQUENT YEARS AS PER PROVISIONS OF LAW, IF IT IS PERMISSIBLE TO D O SO. WITH THESE OBSERVATIONS THIS GROUND OF ASSESSEE IS REJECTED. 101. APROPOS GROUND NO.13 PRINTERS AND UPS OF THE VALUE OF RS. 16,16,213/- ARE CONSIDERED TO BE ELIGIBLE FOR DEPRE CIATION UNDER THE HEAD PLANT AND MACHINERY AND DEPRECIATION OF 15% HAS B EEN GRANTED. IT IS THE CLAIM OF THE ASSESSEE THAT THESE ITEMS ARE ELIG IBLE FOR DEPRECIATION @ 16% BEING COMPUTER PERIPHERALS AND RELIANCE HAS BEE N PLACED ON THE ITA NO. 5341/D/10 74 DECISIONS OF DCIT VS. DATA CRAFT INDIA LTD. (SUPRA) AND ITO VS. SAMIRAN MAZUMDA (SUPRA). 102. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OPINION THAT UPS AND PRINTERS FALL WITHIN THE COMPUTER PERIPHERAL HENCE ELIGIBLE FOR DEPRECIATION @ 16% THE AO IS DIRECTED TO COMPUTE TH E DEPRECIATION ACCORDINGLY AND THIS GROUND OF THE ASSESSEE IS ALLO WED. 103. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED IN THE MANNER AFORESAID. ORDER WAS PRONOUNCED IN THE OPEN COURT ON 29.4.11 SD/- SD/- (G.E. VEERABHADRAPPA) (I.P. BANSAL) VICE PRESIDENT JU DICIAL MEMBER * KAVITA DATED: COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR TRUE COPY BY ORDER DEPUTY REGISTRAR ITAT