Addl. CIT, Ghaziabad V. M/s. Progressive Tools & Components Pvt. Ltd., Ghaziabad

ITA 56/DEL/2011

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6475 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-03-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 09-03-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 06-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAMANJANEYULU
• Assessee Lawyers: RAKESH GUPTA
• Keywords: Depreciation; Transfer pricing; International transaction; Avoidance of tax; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 92D; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-2 : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.56/DEL/2011 ASSESSMENT YEAR : 2005-06 ADDL. CIT, RANGE-2, GHAZIABAD. VS. PROGRESSIVE TOOLS & COMPONENTS PVT. LTD., 8/3A, SITE-IV, INDL. AREA, SAHIBABAD, GHAZIABAD. PAN : AACHP2255L (APPELLANT) (RESPONDENT) ASSESSEE BY : DR. RAKESH GUPTA & SHRI TARUN KUMAR, ADVOCATES DEPARTMENT BY : SHRI RAMANJANEYULU, SR. DR DATE OF HEARING : 09.03.2017 DATE OF PRONOUNCEMENT : 10.03.2017 ORDER PER R.S. SYAL, AM: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER PASSED BY THE CIT(A) ON 12.10.2010 IN RELATION TO T HE ASSESSMENT YEAR 2005-06. ITA NO.56/DEL/2011 2 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE DELETION OF TRANSFER PRICING ADDITION AMOUNTING TO RS.74,70,729 /- MADE BY THE ASSESSING OFFICER (AO). 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACT URING AUTO PARTS AND COMPONENTS. IT IS WORKING FROM TWO DIFFERENT LO CATIONS, THAT IS, UNIT- 1 AT SAHIBABAD AND UNIT-2 AT BULANDSHAHAR ROAD INDU STRIAL AREA, GHAZIABAD. AT UNIT -1, THE ASSESSEE IS MANUFACTURIN G DIES, JIGS, GAUGES, MACHINERY PARTS ETC. UNIT-2 IS FOR EXCLUSIVE MANUFA CTURING OF AUTOMOBILE PARTS. THE ASSESSEE FILED RETURN DECLARI NG NIL INCOME. THREE INTERNATIONAL TRANSACTIONS, VIZ., PURCHASE OF MATER IAL WORTH RS.6,78,21,310; ROYALTY PAID FOR PROVIDING TECHNICA L KNOW-HOW WORTH RS.35,88,664; AND TECHNICAL FEE PAID FOR PROVIDING TECHNICAL ASSISTANCE WORTH RS. 10,96,337, WERE REPORTED. THE AO MADE RE FERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THESE INTERNATIONAL TRANSACTIONS. THE TPO DISPUTED ONLY THE INTERNATIONAL TRANSACTION OF PURCHASE OF MATERIAL BY THE ASSESSEE FROM ITA NO.56/DEL/2011 3 ITS ASSOCIATED ENTERPRISE (AE), F- TECH, JAPAN. TH E OTHER TWO INTERNATIONAL TRANSACTIONS WERE IMPLIEDLY ACCEPTED AT ARMS LENGTH PRICE (ALP). THE ASSESSEE DID NOT APPLY ANY PRESCRIBED ME THOD FOR DEMONSTRATING THAT THE INTERNATIONAL TRANSACTION OF `PURCHASE OF MATERIALS WAS AT ALP. AS A MATTER OF FACT, NO METH OD WAS EMPLOYED FOR ANY OF THE THREE INTERNATIONAL TRANSACTIONS, WHICH IS APPARENT FROM THE REMARKS `NONE GIVEN UNDER THE COLUMN `METHOD EMPLO YED. TO JUSTIFY NON-APPLICATION OF ANY METHOD FOR BENCHMARKING, THE ASSESSEE STATED THAT NO COMPARABLES WERE AVAILABLE. THE TPO, FOLLOW ING HIS VIEW FOR AN EARLIER YEAR, NOTICED THAT THE AE OF THE ASSESSEE W AS SUPPLYING SIMILAR MATERIAL TO OTHER PARTIES IN INDIA ALSO. HE TOOK U PON HIMSELF THE TASK OF DETERMINING THE ALP OF THIS INTERNATIONAL TRANSACTI ON BY APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD. SEVEN COMPANIES, WHICH WERE CHOSEN AS COMP ARABLE FOR THE A.Y. 2003-04, WERE PICKED UP BY THE TPO AS COMPARAB LE FOR THIS YEAR AS WELL. DURING THE COURSE OF PROCEEDINGS, THE ASSESS EE ALSO SUPPLIED DATA OF THREE COMPARABLE COMPANIES. THE TPO WORKED OUT T HE AVERAGE NET PROFIT MARGIN OF THE TEN COMPARABLE COMPANIES AS UN DER :- ITA NO.56/DEL/2011 4 TABLE - 1 NAME OF THE COMPANY SALES NET PROFIT RICO AUTO INDUSTRIES 598 35.23 RANE ENGINE VAL 176.07 23.02 JBM AUTO COMPONENTS 90.22 8.65 JMT AUTO 98.16 11.57 GOETZE INDIA 511.7 32.5 AMTEK INDIA 347.27 58.19 PRICOL 448.97 62.25 ANG AUTO LIMITED 13.88 0.59 GS AUTO INTERNATIONAL LTD. 61.44 1.07 CLUTCH AUTO LTD. 92.75 7.53 TOTAL 2438.46 240.6 AVERAGE PLI 240.6 X 100/2438.46 9.87% 4. THAT IS HOW, THE AVERAGE PLI OF THE COMPARABLES WAS DETERMINED AT 9.87%. THEREAFTER, THE TPO TOOK THE ENTITY LEVEL F IGURES OF SALES AND JOB WORK CHARGES FROM THE ASSESSEES ANNUAL ACCOUNT S TOTALING RS.24,68,58,202/. THE ASSESSEES NET PROFIT MARGIN WAS DETERMINED AT 4.25% AS UNDER:- TABLE - 2 TOTAL SALE OF AUTOMOBILE PARTS AND JOB WORK OF THE ASSESSEE (SALE PLUS JOB WORK I.E., 23.71+0.97) 24.68 TOTAL EXPENDITURES ON SALE OF AUTOMOBILES PARTS AND OTHER HEADS BY THE ASSESSEE (TOTAL EXPENDITURE LESS INTEREST & BAN K CHARGES I.E., 24.31-0.68) 23.63 NET MARGIN OF THE ASSESSEE (24.68-23.63) 1.05 NET MARGIN RATIO 4.25% ITA NO.56/DEL/2011 5 5. BY APPLYING AVERAGE PLI OF COMPARABLES AT 9.87% TO THE ASSESSEES TOTAL SALE OF AUTOMOBILE PARTS AND JOB WORK AT RS.24.68 CRORE, THE TPO DETERMINED THE ASSESSEES ENTITY LEV EL PROFIT AT RS.2,43,64,904/-. OUT OF THE SAID MARGIN, AN AMOUN T ALREADY DECLARED AT RS.40,57,981/-, WAS REDUCED AND THE REMAINING AMOUN T OF RS.2,03,06,923/- WAS TREATED AS ADDITIONAL NET MARG IN ON THE ENTIRE MANUFACTURING/TRADING ACTIVITY. THEN, THE VALUE OF INTERNATIONAL TRANSACTION OF PURCHASE OF RAW MATERIAL AT RS.6.78 CRORE WAS CONSIDERED AS AGAINST THE TOTAL PURCHASES MADE BY THE ASSESSEE AT RS.18,43,51,793/-. THUS, THE NET PROFIT MARGIN ATTRIBUTABLE TO THE INT ERNATIONAL TRANSACTION ON PROPORTIONATE BASIS WAS DETERMINED AT RS.74,70,729/ - (RS.2,03,06,923 X RS.6,78,21,319/RS.18,43,51,793/-). THIS RESULTED I N THE TPO HOLDING THAT THE PURCHASES FROM AE WERE INFLATED BY A SUM O F RS.74,70,729, WHICH WAS PROPOSED AS THE TRANSFER PRICING ADJUSTME NT. THE AO MADE THE ADDITION FOR THE EQUIVALENT SUM. THE LD. CIT(A) DELETED THE ADDITION, AGAINST WHICH THE REVENUE IS IN APPEAL BEFORE US. ITA NO.56/DEL/2011 6 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE ONLY IN TERNATIONAL TRANSACTION IN DISPUTE IS `PURCHASE OF MATERIAL FROM F-TECH, JAPA N. THE ASSESSEE DID NOT APPLY ANY OF THE RECOGNIZED METHODS FOR DEMONST RATING THAT THIS INTERNATIONAL TRANSACTION WAS AT ALP. IN FACT, NO METHOD AT ALL WAS EMPLOYED FOR FINDING OUT THE ALP OF THE INTERNATION AL TRANSACTION. THIS WAS ON THE PREMISE THAT NO FUNCTIONALLY COMPARABLE COMPANY WAS AVAILABLE AND, HENCE, THE TRANSFER PRICING PROVISIO NS COULD NOT APPLY. PAGES 30 AND 31 OF THE PAPER BOOK, DESIGNATED AS T RANSFER PRICING STUDY REPORT, REITERATE THE ASSESSEES STAND THAT NO IND EPENDENT THIRD PARTY IS FUNCTIONALLY SIMILAR. IN THIS SO-CALLED TRANSFER PR ICING STUDY REPORT, THE ASSESSEE HAS MENTIONED THAT IN THE ABSENCE OF A SUI TABLE COMPARABLE UNCONTROLLED PRICE, THE ONLY OPTION AVAILABLE IS TO USE THE INFORMATION PERTAINING TO FUNCTIONALLY COMPARABLE COMPANIES. T HEREAFTER, A FEW COMPANIES HAVE BEEN DISCUSSED IN CERTAIN PARAS AND IT HAS BEEN MENTIONED AT THE END OF EACH SUCH PARA THAT THE COM PANY DISCUSSED HEREIN IS FUNCTIONALLY DIFFERENT. THIS REPORT ENDS ON PAGE 31 WITH THE NARRATION : THUS IN THE CIRCUMSTANCES, THERE IS NO OTHER OPTION, BUT, TO ITA NO.56/DEL/2011 7 ACCEPT THE BOOK VALUE OF THESE INTERNATIONAL TRANSA CTIONS ENTERED BY THE COMPANY AT (SIC AS) ARMS LENGTH PRICE. 7. AT THIS JUNCTURE, IT IS PERTINENT TO NOTE TH AT SECTION 92D PROVIDES FOR MAINTENANCE AND KEEPING OF INFORMATION AND DOCUMENT BY PERSONS ENTERING INTO AN INTERNATIONAL TRANSACTION. SUB-SE CTION (1) OF THIS SECTION STATES THAT : `EVERY PERSON WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION SHALL KEEP AND MAINTAIN SUCH INFORMATIO N AND DOCUMENT IN RESPECT THEREOF, AS MAY BE PRESCRIBED. THE INFOR MATION AND DOCUMENTS TO BE MAINTAINED HAVE BEEN PRESCRIBED UNDER RULE 10 D WITH THE CAPTION : `INFORMATION AND DOCUMENTS TO BE KEPT AND MAINTAINE D UNDER SECTION 92D. SUB-RULE (1) PROVIDES THAT EVERY PERSON WHO HAS ENTERED INTO AN INTERNATIONAL TRANSACTION SHALL KEEP AND MAINTAIN T HE INFORMATION AND DOCUMENTS AS SET OUT IN CLAUSES (A) TO (M). CLAUSE (G) REQUIRES THE MAINTENANCE OF `A RECORD OF UNCONTROLLED TRANSACTI ONS TAKEN INTO ACCOUNT FOR ANALYSING THEIR COMPARABILITY WITH THE INTERNAT IONAL TRANSACTIONS ENTERED INTO, INCLUDING A RECORD OF THE NATURE, TER MS AND CONDITIONS RELATING TO ANY UNCONTROLLED TRANSACTION WITH THIRD PARTIES WHICH MAY BE ITA NO.56/DEL/2011 8 OF RELEVANCE TO THE PRICING OF THE INTERNATIONAL TR ANSACTIONS. IN THE LIKE MANNER, CLAUSE (H) MANDATES TO MAINTAIN `A RECORD O F THE ANALYSIS PERFORMED TO EVALUATE COMPARABILITY OF UNCONTROLLED TRANSACTIONS WITH THE RELEVANT INTERNATIONAL TRANSACTION. IN THE LI KE MANNER, CLAUSE (I) REQUIRES THE MAINTENANCE OF `A DESCRIPTION OF THE METHODS CONSIDERED FOR DETERMINING THE ARMS LENGTH PRICE IN RELATION TO E ACH INTERNATIONAL TRANSACTION OR CLASS OF TRANSACTION, THE METHOD SEL ECTED AS THE MOST APPROPRIATE METHOD ALONG WITH EXPLANATIONS AS TO WH Y SUCH METHOD WAS SO SELECTED, AND HOW SUCH METHOD WAS APPLIED IN EAC H CASE. CLAUSE (J) TALKS OF MAINTAINING `A RECORD OF THE ACTUAL WORKIN G CARRIED OUT FOR DETERMINING THE ARMS LENGTH PRICE, INCLUDING DETAI LS OF THE COMPARABLE DATA AND FINANCIAL INFORMATION USED IN APPLYING THE MOST APPROPRIATE METHOD, AND ADJUSTMENTS, IF ANY, WHICH WERE MADE TO ACCOUNT FOR DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION A ND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRIS ES ENTERING INTO SUCH TRANSACTIONS. CLAUSE (L) IS AGAIN RELEVANT, WHICH PROVIDES THAT THE ASSESSEE SHALL MAINTAIN `DETAILS OF THE ADJUSTMENTS , IF ANY, MADE TO TRANSFER PRICES TO ALIGN THEM WITH ARMS LENGTH PRI CES DETERMINED UNDER ITA NO.56/DEL/2011 9 THESE RULES AND CONSEQUENT ADJUSTMENT MADE TO THE T OTAL INCOME FOR TAX PURPOSES. THE ABOVE INFORMATION HAS TO BE NECESSAR ILY INCORPORATED IN THE TRANSFER PRICING STUDY REPORT. 8. WHEN WE ADVERT TO THE CONTENTS OF THE SO-CALL ED `TRANSFER PRICING STUDY REPORT PREPARED BY THE ASSESSEE, IT COMES TO THE FORE THAT THE SAME IS ABSOLUTELY DEVOID OF THE RELEVANT INFORMATION AS REQUIRED TO BE MANDATORILY MAINTAINED. WHAT TO TALK OF MAINTAINING `A RECORD OF UNCONTROLLED TRANSACTIONS TAKEN INTO ACCOUNT FOR AN ALYSING THEIR COMPARABILITY WITH THE INTERNATIONAL TRANSACTIONS E NTERED INTO, THE ASSESSEE HAS SIMPLY STATED THAT NO COMPARABLE IS AV AILABLE. THEN, AS AGAINST THE REQUIREMENT OF GIVING `A DESCRIPTION OF THE METHODS CONSIDERED FOR DETERMINING THE ARMS LENGTH PRICE I N RELATION TO EACH INTERNATIONAL TRANSACTION OR CLASS OF TRANSACTION, THE METHOD SELECTED AS THE MOST APPROPRIATE METHOD ALONG WITH EXPLANATIONS AS TO WHY SUCH METHOD WAS SO SELECTED, AND HOW SUCH METHOD WAS APP LIED IN EACH CASE, THE ASSESSEE HAS MERELY SAID THAT NO METHOD IS APPLICABLE. IN VIEW OF THE ABOVE POSITION, THE ASSESSEE CANNOT BE SAID TO HAVE MAINTAINED `A ITA NO.56/DEL/2011 10 RECORD OF THE ANALYSIS PERFORMED TO EVALUATE COMPAR ABILITY OF UNCONTROLLED TRANSACTIONS WITH THE RELEVANT INTERNA TIONAL TRANSACTION OR `A RECORD OF THE ACTUAL WORKING CARRIED OUT FOR DET ERMINING THE ARMS LENGTH PRICE, INCLUDING DETAILS OF THE COMPARABLE D ATA AND FINANCIAL INFORMATION USED IN APPLYING THE MOST APPROPRIATE M ETHOD, AND ADJUSTMENTS, IF ANY. THUS, IT IS UNAMBIGUOUS THAT THE ASSESSEE DID NOT UNDERTAKE ANY TRANSFER PRICING ANALYSIS IN THE MANN ER PRESCRIBED. IN SUCH CIRCUMSTANCES, THE TPO WAS FULLY JUSTIFIED IN HOLDI NG THAT THE ASSESSEE DID NOT MAINTAIN ANY WORTHWHILE DOCUMENTATION OR U NDERTAKE ANY VALID TRANSFER PRICING STUDY. 9. NOW, WE WILL EXAMINE AND EVALUATE THE REASONS GIVEN BY THE LD. CIT(A) IN DELETING THE TRANSFER PRICING ADDITION 10. (A). THE LD. CIT(A) RECORDED ON PAGE 12 OF T HE IMPUGNED ORDER THAT : `THERE ARE NEITHER ANY UNRECORDED TRANSACTIO NS NOR ANY UNDISCLOSED FACTS REFLECTING THE ASSESSEES INTENT TO AVOID TAX . 11. THE ABOVE REASONING HAS ABSOLUTELY NO PLACE IN DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION. SECTION 92(1) FALLS UNDER CHAPTER X ITA NO.56/DEL/2011 11 WITH THE MARGINAL NOTE : `SPECIAL PROVISIONS RELAT ING TO AVOIDANCE OF TAX. SUB-SECTION (1) OF SECTION 92 PROVIDES THAT : ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THUS EACH AND EVERY INTERNATIO NAL TRANSACTION HAS TO PASS THROUGH THE HAMMER OF TRANSFER PRICING ANALYSI S AND INCOME SHOWN BY THE ASSESSEE FROM AN INTERNATIONAL TRANSACTION I S REQUIRED TO BE COMPUTED HAVING REGARD TO ITS ALP AS DETERMINED BY ONE THE METHODS ENSHRINED U/S 92C(1). THIS EXERCISE CANNOT BE DISPE NSED WITH SIMPLY ON THE GROUND THAT THERE ARE NO UNRECORDED TRANSACTION S OR UNDISCLOSED FACTS REFLECTING THE ASSESSEES INTENT TO AVOID TAX. THE LAW DOES NOT PROVIDE THAT IF THERE ARE NO UNRECORDED TRANSACTIONS ETC, T HEN NO BENCHMARKING SHOULD BE DONE OF THE INTERNATIONAL TRANSACTION. TH E PROCESS OF DETERMINING THE ALP HAS TO BE NECESSARILY CARRIED O UT EVEN IN THE ABSENCE OF ANY UNRECORDED TRANSACTION OR INTENT TO AVOID TAX. THE VIEW POINT OF THE LD. CIT(A) IN THIS REGARD IS, THEREFOR E, COMPLETELY EXTRANEOUS IN SO FAR AS THE DETERMINATION OF ALP OF AN INTERNA TIONAL TRANSACTION IS CONCERNED. ITA NO.56/DEL/2011 12 12. (B) THE LD. CIT(A) RECORDED IN PARA 1.4 OF T HE IMPUGNED ORDER THAT: IT IS NOWHERE PRESCRIBED TO COMPARE THE NET PROFIT MARGIN OF THE ORGANIZATION AS A WHOLE (WHICH INCLUDES THE NET PRO FIT MARGIN EVEN OF TRANSACTIONS WHICH HAVE NO RELATION WITH THE INTERN ATIONAL TRANSACTION) WITH OTHER ORGANIZATIONS AND TO ESTIMATE THE NET PR OFIT OF THE ASSESSEE FOR THE ENTIRE TRANSACTIONS INCLUDING TRANSACTIONS OTHE R THAN THE INTERNATIONAL TRANSACTION. 13. WE AGREE IN PRINCIPLE THAT THE TRANSFER PRIC ING PROVISIONS ARE APPLICABLE ONLY QUA THE INTERNATIONAL TRANSACTIONS. IF AN ASSESSEE HAS TRANSACTIONS BOTH WITH AE AND NON-AES, THE TRANSFER PRICING ADJUSTMENT CAN BE MADE ONLY IN RESPECT OF TRANSACTIONS WITH AE S AND NOT NON-AES. THIS IS OTHERWISE ALSO A SETTLED POSITION OF LAW AS LAID DOWN BY THE HONBLE DELHI HIGH COURT IN CIT VS. KEIHIN PANALFA LTD. (2016) 381 ITR 407 (DEL). SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. THYSSEN KRUPP INDUSTRIES INDIA P. LTD. (201 6) 381 ITR 413 (BOM) AND CIT VS. TARA JEWELS EXPORTS P. LTD. (2016) 381 ITR 404 (BOM) . ITA NO.56/DEL/2011 13 14. HOWEVER, WE FIND THAT THE RECORDING BY THE LD. CIT(A) THAT THE TPO MADE TRANSFER PRICING ADJUSTMENT ON ENTITY LEVE L, IS FACTUALLY INCORRECT. IT CAN BE SEEN THAT THE TPO FIRST COMPUT ED THE ASSESSEES NET PROFIT MARGIN AT 4.25%. HE THEN DETERMINED THE ARM S LENGTH MARGIN OF COMPARABLES AT 9.87%, WHICH WAS THEN APPLIED TO THE ENTITY LEVEL FIGURE OF SALE OF AUTOMOBILE PARTS AND JOB WORK TOTALING R S.24.68 CRORE. THE AMOUNT OF ARMS LENGTH MARGIN SO DETERMINED AT RS.2 .43 CRORE, AS BEING REDUCED BY THE ASSESSEES OWN PROFIT MARGIN AT RS.4 0.57 LAC, WAS APPORTIONED BETWEEN THE INTERNATIONAL TRANSACTION O F PURCHASE OF MATERIAL FROM AES AND TOTAL RAW MATERIAL PURCHASED FROM AES AND NON- AES. TRANSFER PRICING ADDITION HAS BEEN MADE ONLY FOR A SUM OF RS.74.70 LAC IN RESPECT OF THAT PART OF THE EXCESS PROFIT WHICH RELATES TO THE INTERNATIONAL TRANSACTION OF PURCHASE OF RAW MA TERIAL FROM THE AES. THUS, IT IS NOT CORRECT ON THE PART OF THE LD. CIT( A) TO HOLD THAT THE TRANSFER PRICING ADDITION WAS MADE ON ENTITY LEVEL. 15. (C) THE LD. CIT(A) EXCLUDED FIVE COMPANIE S HAVING TURNOVER RANGING BETWEEN RS.176 CRORE TO RS.598 CRORE OUT OF TEN COMPANIES ITA NO.56/DEL/2011 14 CHOSEN BY THE TPO. THIS WAS DONE ON THE PREMISE THA T THE ASSESSEES TURNOVER AT RS.27.71 CRORE COULD NOT BE COMPARED WI TH THOSE FIVE COMPANIES CONSIDERED BY THE TPO HAVING MUCH HIGHER TURNOVER. THE VIEW ADOPTED BY THE LD. CIT(A), IN OUR CONSIDERED OPINION, CANNOT BE COUNTENANCED BECAUSE OF THE DIRECT JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) P. LTD. VS. DCIT (2015) 376 ITR 18 3 (DEL) IN WHICH IT HAS BEEN HELD THAT HIGH OR LOW TURNOVER IS NOT A CR ITERIA FOR EXCLUDING AN OTHERWISE COMPARABLE COMPANY. LOGICALLY ALSO, WHE N AVERAGE PLI OF COMPARABLES, CONSISTING OF COMPANIES HAVING SIMILA R OR HIGH OR LOW TURNOVER, IS CONSIDERED FOR BENCHMARKING, EFFECT OF DIFFERENT VOLUMES OF TURNOVER IS AUTOMATICALLY IRONED OUT. IN VIEW OF T HE ABOVE DISCUSSION AND RESPECTFULLY FOLLOWING THE PRECEDENT, WE ARE SA TISFIED THAT THE LD.CIT(A) WAS NOT JUSTIFIED IN EXCLUDING FIVE COMPA NIES AND EVENTUALLY BRINGING DOWN AVERAGE PROFIT MARGIN OF COMPARABLES FROM 9.87% AS COMPUTED BY THE TPO TO 5.07% AND THEREBY HOLDING TH AT THE ASSESSEES PROFIT MARGIN WAS AT ALP. ITA NO.56/DEL/2011 15 16. (D) THE LD. CIT(A) NOTICED AND RIGHTLY SO THA T THE ASSESSEE HAS TWO UNITS. HE, HOWEVER, WENT ASTRAY BY RECORDING I N PARAS 1.6 (D) AND (F) THAT THE NET PROFIT MARGIN OF UNIT-2, WHICH WAS ONL Y DEALING WITH MANUFACTURE AND SALE OF AUTOMOBILE COMPONENTS, AT 5 .34% WAS TO BE CONSIDERED AND NOT THE MARGIN FROM JOB WORK RECEIPT S HAVING NO RELATION WITH THE INTERNATIONAL TRANSACTION. 17. IT IS AN ADMITTED POSITION THAT THE ASSESSE E EARNED INCOME FROM TWO UNITS. INITIALLY, THE LD. AR ALSO ARGUED THAT THE ENTIRE JOB WORK WAS DONE UNDER UNIT-1 AND THE MANUFACTURING WAS DONE UN DER UNIT-2 AND HENCE PROFIT MARGIN FROM UNIT-2 ALONE OUGHT TO HAV E BEEN TAKEN INTO CONSIDERATION. ON PERUSAL OF THE ANNUAL ACCOUNTS O F THE ASSESSEE DURING THE COURSE OF HEARING ITSELF, SUCH A CONTENTION WA S FOUND WANTING. WHEN CONFRONTED, THE LD. AR ADMITTED THIS POSITION. 18. THE ASSESSEES OVERALL PROFIT & LOSS ACCOUNT IS AVAILABLE AT PAGE 11 OF THE PAPER BOOK, WHICH HAS THE FIGURE OF SALES (NET OF EXCISE DUTY) AT RS.23.71 CRORE. THE NEXT FIGURE IS JOB WORK AMOU NTING TO RS.97.49 LAC. PAGE 27 OF THE PAPER BOOK IS PROFIT & LOSS ACC OUNT OF THE ASSESSEE ITA NO.56/DEL/2011 16 FOR UNIT-2 ALONE WHICH SHOWS THE FIGURE OF SALES (N ET OF EXCISE DUTY) AT RS.22.25 CRORE AND THAT OF JOB WORK AT RS.82.91 LAC . THUS, IT IS MANIFEST THAT AS AGAINST THE TOTAL JOB WORK RECEIPTS OF RS.9 7.49 LAC, THE JOB WORK RECEIPTS PERTAINING TO UNIT-2 STAND AT RS.82.91 LAC . THIS IMPLIES THAT THE REMAINING JOB WORK RECEIPTS OF RS.14.58 LAC (RS.97. 49 LAC MINUS RS.82.91) ARE IN RELATION TO UNIT-1. ERGO, IT IS AP PARENT THAT THE RECORDING BY THE LD. CIT(A), AS ALSO INITIALLY ARGUED BY THE LD. AR, THAT UNIT-2 DEALS ONLY WITH MANUFACTURING AND SALE OF AUTOMOBILE COMPONEN TS, IS FACTUALLY INCORRECT AS IT ALSO HAS JOB WORK RECEIPT S. 19. IT CAN BE SEEN THAT THE LD. CIT(A) HAS PROC EEDED ON THE PREMISE THAT ALL THE IMPORTS FROM AE WERE UTILIZED ONLY IN THE MANUFACTURING OF UNIT-2. THAT IS WHY, HE FOCUSED ON PLI FROM UNIT-2 AT 5.34%. AS AGAINST THIS, THE TPO HAS PROCEEDED WITH THE ASSUMP TION THAT THE INTERNATIONAL TRANSACTION OF MATERIAL PURCHASED FRO M THE AE WAS USED IN BOTH THE UNITS. THAT IS THE REASON FOR HIS FIRSTLY COMPUTING PROFIT FROM BOTH THE UNITS AND THEN PROPORTIONATELY REDUCING IT WITH THE AMOUNT OF PURCHASES FROM AE VIS-A-VIS TOTAL PURCHASES. THE PRESUMPTION DRAWN BY ITA NO.56/DEL/2011 17 THE LD. CIT(A) THAT ALL THE IMPORTS FROM AE WERE UT ILIZED ONLY IN THE MANUFACTURING OF UNIT-2, IS UNSUBSTANTIATED AND NOT BORNE OUT FROM HIS ORDER OR RECORD. ON A PERTINENT QUERY, THE LD. AR COULD NOT POINT OUT THE DESCRIPTION OF MATERIAL PURCHASED FROM AE AMOUNTING TO RS.6.78 CRORE FROM WHICH IT COULD BE ASCERTAINED IF SUCH MATERIA L WAS CONSUMED ONLY FOR MANUFACTURING IN UNIT-2 OR UNIT-1 AS WELL. 20. (E) THE NEXT POINT WHICH WEIGHED WITH THE LD . CIT(A) IN DELETING THE ADDITION IS HIS RECORDING IN PARA 1.7 OF THE IM PUGNED ORDER THAT HE PERSONALLY MADE AN EFFORT TO PERUSE THE FINANCIAL S TATISTICS OF THE ASSESSEES AE I.E., F-TECH INC., JAPAN, WHICH IS EN GAGED IN THE MANUFACTURING OF THE SAME PARTS AS BEING MANUFACTUR ED BY THE ASSESSEE. AFTER TABULATING CERTAIN FIGURES, HE COMPUTED MARGI N OF AE AT 2.40%, WHICH IN HIS OPINION PROVIDED `SOME BASIS FOR COMPA RISON. IT IS BEYOND OUR COMPREHENSION AS TO HOW THE MARGIN OF AE CAN BE CONSIDERED AS A COMPARABLE UNCONTROLLED TRANSACTION FOR THE PURPOSE S OF DETERMINING THE ALP OF THE ASSESSEES INTERNATIONAL TRANSACTION WIT H THE SAME AE. ITA NO.56/DEL/2011 18 21. (F). THE NEXT POINT TAKEN NOTE OF BY THE LD. CIT(A) IS THAT DEPRECIATION ON ED PLANT CAPITALIZED DURING THE YEA R (EXCLUSIVELY REQUIRED FOR EARNING REVENUE FROM JOB WORK), SHOULD NOT BE CONSIDERED. AFTER EXCLUDING THE EFFECT OF SUCH DEPRECIATION, HE DETERMINED THE NET PROFIT MARGIN OF UNIT-2 AT 7.03% AND FOUND THE SAME AT ARMS LENGTH. 22. THIS FINDING IS AGAIN NOT SUSTAINABLE. FIRST LY, THERE IS NO DISCUSSION TO FORTIFY HIS VIEW THAT ED PLANT WAS EXCLUSIVELY REQUIRED FOR EARNING REVENUE FROM JOB WORK. SECONDLY, IT IS NOT CLEAR IF PURCHASE OF MATERIAL WAS ALSO USED FOR JOB WORK. IN SUCH CIRCUMSTANCES, THE EXCLUSION OF DEPRECIATION ON ED PLANT FROM THE OPERATING COSTS F OR DETERMINING THE OPERATING PROFIT MARGIN, AND THAT TOO, BY RESTRICTI NG THE COMPUTATION ONLY TO THE UNIT-2, CANNOT BE JUSTIFIED. 23. THE LD. CIT(A) DELETED THE ADDITION BY SUMMIN G UP HIS POINT OF VIEW IN PARA 1.8 OF THE IMPUGNED ORDER AS UNDER:- 1.8. NOW, LOOKING TO SUCH A STATE OF AFFAIRS, WHEN THE TPO HAS NOT DISCHARGED THE REQUIRED ONUS, WHILE FOLLOWING INFER ENCES AS DISCUSSED EARLIER:- (A) THAT THE NET PROFIT MARGIN OF UNIT-2 OF THE ASSESSE E COMPANY, WHICH ONLY DEALS WITH MANUFACTURING & SALES OF AUTO MOBILE ITA NO.56/DEL/2011 19 COMPONENTS (INCLUDING TRANSACTIONS PERTAINING TO IN TERNATIONAL TRANSACTIONS) & FOR WHICH ASSESSEE HAS MAINTAINED S EPARATE BOOKS OF ACCOUNTS & NO ADVERSE FINDING IN RESPECT OF THE SAME HAS BEEN RECORDED BY TPO/AO, COMES TO 5.34%; (B) THAT AFTER ELIMINATING THE DIFFERENCE ON ACCOUNT OF DEPRECIATION OF ED PLANT CAPITALIZED DURING THE YEAR (EXCLUSIVEL Y REQUIRED FOR EARNING REVENUE FROM JOB WORK), THE NET PROFIT MARG IN OF UNIT-2 COMES TO 7.03%; (C) THAT THE NET PROFIT MARGIN OF COMPANIES WHICH ARE H AVING COMPARABLE TURNOVER WITH THE ASSESSEE COMPANY ARE J UST 5.07%; (D) ON THE BASIS OF SEARCH MADE BY ME INDEPENDENTLY & A S PER THE FINANCIAL STATEMENT OF ASSESSEES ASSOCIATED ENTERP RISE M/S F. TECH INC. AS AT 31.03.05, ITS NET PROFIT MARGIN BEI NG JUST 2.40%, AND THUS, THE NP OF ASSESSEE BEING BETTER THAN THAT OF ITS AE; (E) AND THE FACT THAT ADJUSTMENTS WERE NOT MADE BY TPO AS PER TRANSFER PRICING REGULATIONS. I CONCLUDE THAT THERE APPEARS TO BE NO REASONS FOR MAKING ANY ADJUSTMENTS IN THE RESULTS DECLARED BY THE ASSESSEE COMPANY ON THE BASIS OF COMPARISONS MADE BY THE TPO. ACCORDINGLY, I DELETE THE ADDITION OF RS.74,70,729/- MADE BY THE AO. (RELIEF: RS.74,70,729/-) 24. IN VIEW OF THE DISCUSSION MADE IN PRECEDING PAR AS, IT IS OBVIOUS THAT ALL THE POINTS TAKEN NOTE OF BY THE LD. CIT(A) IN DELETING THE TRANSFER PRICING ADDITION LACK VALID REASONING AND SUFFER F ROM CERTAIN ITA NO.56/DEL/2011 20 INCONSISTENCIES. WE, THEREFORE, HOLD THAT THE IMPU GNED ORDER DELEING THE TRANSFER PRICING ADDITION MADE BY THE AO, CANNOT BE SUSTAINED. 25. HAVING SET ASIDE THE IMPUGNED ORDER, LET US SEE IF THE ADDITION MADE BY THE AO ON THE RECOMMENDATION OF THE TPO CAN BE UPHELD. WE HAVE NOTICED SUPRA THAT THE ASSESSEE DID NOT APPLY ANY METHOD OR FOR THAT MATTER, DID NOT AT ALL DETERMINE THE ALP OF THE INT ERNATIONAL TRANSACTION. IN SUCH COMPELLING CIRCUMSTANCES, IT CAME UPON THE TPO TO DETERMINE THE ALP BY APPLYING A SUITABLE METHOD. HE CHOSE TNM M AS THE MOST APPROPRIATE METHOD. THE CHOICE OF METHOD BY THE TPO HAS NOT BEEN DISPUTED BY THE ASSESSEE. IN APPLYING THIS METHOD, HE TOOK THE PROFIT LEVEL INDICATOR (PLI) OF NET PROFIT TO SALES, BOTH FOR THE ASSESSEE AS WELL AS COMPARABLES, WHICH IS EVIDENT FROM TABLES 1 AND 2 ABOVE. THE TRANSFER PRICING ADJUSTMENT WAS COMPUTED BY APPLYIN G THIS PLI. 26. RULE 10B(1)(E) CONTAINS THE MECHANISM FOR A PPLYING THE TRANSACTIONAL NET MARGIN METHOD. SUB-CLAUSES (I) AN D (II) OF THIS RULE READ AS UNDER :- ITA NO.56/DEL/2011 21 (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPR ISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFF ECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAV ING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPR ISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING RE GARD TO THE SAME BASE ; 27. SUB-CLAUSE (I) DEALS WITH THE COMPUTATION OF THE NET OPERATING PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATI ONAL TRANSACTION IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASS ETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE. SUB-CLAUSE (II) PROVIDES THAT THE NET OPERATING PRO FIT MARGIN REALISED BY A COMPARABLE UNCONTROLLED TRANSACTION SHOULD BE COMPU TED HAVING REGARD TO THE SAME BASE AS THAT TAKEN IN SUB-CLAUSE (I) FOR THE ASSESSEE. IN THE FORMULA FOR CALCULATING THE PROFIT MARGIN UNDER RUL E 10B(1)(E) UNDER SUB-CLAUSES (I) AND (II), THERE CAN BE ANY DENOMINA TOR, SUCH AS, COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED. HOWEVER, THE NUMERATOR IS UNIFORM, WHICH IS, NET OP ERATING MARGIN. IN FACT, THE NUMERATOR IS `OPERATING PROFIT AND NOT T HE `NET PROFIT AS HAS ITA NO.56/DEL/2011 22 BEEN TAKEN BY THE TPO IN MAKING TRANSFER PRICING AD JUSTMENT. WHEREAS, OPERATING PROFIT IS THE EXCESS OF OPERATING REVENUE OVER THE OPERATING COSTS, NET PROFIT IS THE EXCESS OF REVENUE OVER ALL COSTS, BOTH OPERATING AND NON-OPERATING. THE HONBLE SUPREME COURT IN DIT (I.T.) VS. MORGAN STANLEY AND CO. (2007) 162 TAXMANN 165 (SC) HAS HELD THAT `OPERATING PROFIT FROM THE INTERNATIONAL TRANSACTI ON IS COMPARED WITH THE OPERATING PROFIT MARGIN OF THE COMPARABLES UNDE R THE TNMM. THUS THE ADDITION BASED ON THE TRANSFER PRICING ADJUSTME NT, ON THE STRENGTH OF `NET PROFIT AS NUMERATOR IN CONTRAST TO `OPERATING PROFIT, CANNOT BE UPHELD. THE SAME IS REQUIRED TO BE CORRECTED ACCORD INGLY. 28. IT IS FURTHER NOTICED THAT THE TPO CONSIDERED S EVEN COMPANIES AS COMPARABLES ON THE BASIS OF HIS DECISION TAKEN FOR THE A.Y. 2003-04. THE LD. AR CONTENDED THAT THE VIEW TAKEN BY THE TPO IN HIS ORDER FOR THE A.Y. 2003-04 HAS BEEN SET ASIDE BY THE TRIBUNAL AND THE MATTER HAS BEEN RESTORED FOR A DE NOVO ADJUDICATION. A COPY OF SUCH ORDER HAS BEEN PLACED ON RECORD. IT IS PATENT FROM THE EXTANT TPO S ORDER ITSELF THAT HE CHOSE SEVEN COMPANIES AS COMPARABLE ON THE BASIS OF HIS ORDER FOR THE ITA NO.56/DEL/2011 23 A.Y. 2003-04. WE FIND FROM THE TRIBUNAL ORDER THAT THE COMPUTATION OF ALP HAS BEEN SIMPLY SET ASIDE AND THERE IS NO SEPAR ATE DISCUSSION ABOUT THE COMPARABILITY OR OTHERWISE OF THE SEVEN COMPANI ES. THE LD. AR DISPUTED THE COMPARABILITY OF THESE COMPANIES AS WE LL. 29. IN VIEW OF THE FOREGOING DISCUSSION AND CON SIDERING THE TOTALITY OF FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, WE ARE OF THE CONSIDERED OPINION THAT IT WILL BE IN FITNESS OF THE THINGS IF THE IMPUGNED ORDER IS SET ASIDE AND THE MATTER IS REMITTED TO THE FILE OF AO/ TPO FOR A FRESH DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANS ACTION. WE ORDER ACCORDINGLY. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDINGS. 30. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 10.03.201 7. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 10 TH MARCH, 2017. DK ITA NO.56/DEL/2011 24 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.