M/s. MGE UPS System India Pvt. Ltd., Bangalore V. DCIT, New Delhi

ITA 5773/DEL/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7665 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 5 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 16-05-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 26-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Business income; Transfer pricing; International transaction
• Section: 143(3); 234B; 37(1); 10B

Judgement Text

1 ITA NO. 57 73/DEL/2011 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT ME MBER & SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER I.T.A .NO.-5773/DE L/2011 (ASSESSMENT YEAR-2007- 08) MGE UPS SYSTEM INDIA P. LTD. (NOW KNOWN AS AMERICAN POWER CONVERSION (INDIA) PVT. LTD.) 187/3 & 188/3, JIGANI, BANGALORE. AAECM6295N VS DCIT CIRCLE 6(1) NEW DELHI. ASSESSEE BY SH. HIMANSHU SINHA, ADV. SH. M. FAHED KHALID, CA REVENUE BY SH. AMRENDRA KUMAR, CIT DR ORDER PER S.V. MEHROTRA, ACCOUNTANT MEMBER : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGA INST THE ORDER OF AO, NEW DELHI, DATED 19.10.2011 PASSED UNDE R SECTION 143(3) R.W.S. 144C OF THE I.T. ACT FOR A.Y. 2007-08. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S A SUBSIDIARY OF MGE UPS SYSTEMS S.A., FRANCE WHICH PRO VIDES POWER PROTECTION SOLUTIONS FOR BUSINESS CONTINUITY FOR IN TERNATIONAL CUSTOMERS. ITS PRODUCTS PROVIDE UNINTERRUPTED POWE R SUPPLIES DATE OF HEARING 16.05.2016 DATE OF PRONOUNCEMENT 27.05.2016 2 ITA NO. 57 73/DEL/2011 SYSTEMS FOR USE BY CONSUMER ELECTRONICS, PCS, PRINT ERS, AND HOME THEATER USERS. MGE FRANCE OPERATES AS A SUBSIDIARY OF SCHNEIDER ELECTRIC S.A., FRANCE, WHICH IS THE WORLDS POWER AN D CONTROL SPECIALIST AND CATERS TO RESIDENTIAL, BUILDING, IND USTRY AND ENERGY AND INFRASTRUCTURE MARKETS. THE ASSESSEE WAS INCORP ORATED IN 2005 AND COMMENCED ITS OPERATIONS WITH DISTRIBUTION AND MARKETING SUPPORT SERVICES FOR UPS SYSTEMS AND ACCE SSORIES DURING THE FY 2006-07. THE ASSESSMENT YEAR UNDER C ONSIDERATION IS THE FIRST YEAR OF ASSESSEES OPERATION. THE ASS ESSEE IMPORTS FINISHED GOODS (UPS SYSTEMS AND BATTERIES) FROM ITS ASSOCIATED ENTERPRISES FOR RESALE IN THE DOMESTIC MARKET. THE PRODUCTS IMPORTED COMPRISED OF VARIOUS CATEGORIES/TYPES OF U PS SYSTEMS. THE ASESSEE ALSO PERFORMS CERTAIN MARKETING SUPPORT SERVICES IN CONNECTION WITH DIRECT SALES MADE BY THE ASSOCIATED ENTERPRISES TO CUSTOMERS IN INDIA, FOR WHICH IT RECEIVES A COMMISSI ON INCOME. THE ASSESSEE HAD FILED RETURN OF INCOME DECLARING N IL INCOME. AS THE ASSESSEE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS REFERENCE WAS MADE TO TRANSFER PRICING OFFICER FOR DETERMINATION OF ARMS LENGTH PRICE. THE FOLLOWING ARE THE DETAILS O F INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES AS PER FORM 3CEB: S.NO. DESCRIPTION OF TRANSACTION VALUE (IN RS.) 1. SALES PROMOTION EXPENSES 1,09,188 2. PURCHASE OF FINISHED GOODS FROM AE 12,38,16,952 3. RENDERING OF SERVICES (COMMISSION RECD.) 2,82,42 ,910 4. FREIGHT CHARGES 7,03,091 5. REIMBURSEMENT OF EXPENSES PAID 76,600 3. FOR DETERMINING THE ARMS LENGTH PRICE OF THESE INTERNATIONAL TRANSACTIONS, IN THE TRANSFER PRICING STUDY, THE 3 ITA NO. 57 73/DEL/2011 ASSESSEE ADOPTED RESALE PRICE METHOD AS THE MOST AP PROPRIATE METHOD WITH THE PROFIT LEVEL INDICATOR (PLI) AS GROS S PROFIT UPON SALES. THE ASSESSEE HAD SELECTED EIGHT COMPARABLES ON THE BASIS OF SEARCH CARRIED OUT BY THE ASSESSEE. AS THE GROSS P ROFIT OF ASSESSEE WAS 28% AS AGAINST MEAN GP OF 12% OF THE COMPARABLES , THE ASSESSEES CONCLUSION WAS THAT ITS INTERNATIONAL TR ANSACTIONS WERE AT ARMS LENGTH PRICE. 4. LD. TPO REJECTED THE USE OF RPM AND APPLIED TRANSACTIONAL NET MARGINAL METHOD (TNMM) AS THE MOS T APPROPRIATE METHOD. THE LD. TPO ALSO CARRIED OUT A FRESH SEARCH AND ON THAT BASIS FOUND OUT FOLLOWING FOUR COMPARABL ES: NAME OF THE COMPANY OP/SALES V-GUARD INDUSTRIES LTD. 14.22% PAE LTD. 0.66% KUNA IMPEX LTD. 1.71% PL ENTERPRISE 4.14% ARITHMETIC MEAN 5.18 % THE MAIN REASON FOR REJECTION OF COMPARABLES SELECT ED BY ASSESSEE WAS THAT THOSE COMPANIES WERE NOT ENGAGED IN TRADING OF UPS SYSTEM AND WERE DEALING IN DISSIMILAR CATEGORIES OF PRODUCTS. 5. LD. TPO DETERMINED THE ARMS LENGTH MARGIN TO B E 5.18% VIZ-A-VIZ -31.81% OF THE ASSESSEE, PLI BEING OPERAT ING PROFIT/OPERATING INCOME. LD. TPO COMPUTED THE ARM S LENGTH PRICE AND CORRESPONDING DIFFERENCE TO BE ADJUSTED AS UNDE R: 4 ITA NO. 57 73/DEL/2011 SINCE THE ASSESSEE HAS RAISED OBJECTIONS IN THE CA SE OF COMPARABLE (M/S PAE LTD.) ABOUT THE INCLUSION OF COMMISSION INCOME, THEREFORE, THE RESULTS SHOWN BY THE ASSESSEE ARE RECOMPUTED AS UNDER: 1. SALES (EXCLUDING OTHER INCOME) RS. 14,01,54,678 2. TOTAL COST (EXCLUDING FINANCE COST) RS. 18,47,41,095 3. OPERATING PROFIT RS. (4,45,86,417) 4. OP/TC -24.13% 5. OP/SALES -31.81% THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TION RELATING TO PURCHASE SEGMENT IS CALCULATED AS BELOW : TOTAL SALES : RS. 14,01,54,678 OP AT A MARGIN OF 5.59% : RS. 72,60,012 OP SHOWN : RS. (4,45,86,417) 1. PURCHASE OF FINISHED GOODS FROM AE (AMT. PAID BY THE ASSESSEE) 12,38,16,952 2. ARMS LENGTH PRICE OF THE PURCHASE OF FINISHED GOODS 7,19,70,523 DIFFERENCE : RS. 5,18,46,429 6. LD. DRP UPHELD THE APPLICATION OF TNMM OVER RPM BUT GAVE FOLLOWING TWO DIRECTIONS: FOR COMPUTING THE OPERATING INCOME THE COMMISSION I NCOME SHOULD BE INCLUDED BOTH FOR THE COMPARABLE COMPANIE S AS WELL AS THE ASSESSEE; FOR COMPUTING THE OPERATING EXPENSES, PRE-OPERATING EXPENSES SHOULD BE EXCLUDED. AFTER THESE TWO DIRECTIONS THE PLI OF THE ASSESSEE I NCREASED TO - 31.03% (WITHOUT INCLUDING COMMISSION INCOME) VIZ-A-V IZ THE ARMS LENGTH MARGIN OF 5.59% LEADING TO AN ADJUSTMENT OF ARMS LENGTH PRICE BY RS. 5,07,55,614/-. 5 ITA NO. 57 73/DEL/2011 7. THE ASSESSING OFFICER, ACCORDINGLY PASSED THE A SSESSMENT ORDER U/S 143(3) READ WITH SECTION 144C ON 19 TH OCTOBER, 2011 DETERMINING THE TOTAL INCOME AS UNDER: TOTAL LOSS AS PER COMPUTATION OF INCOME (91,62,665) ADD: (I) ADDITION ON A/C OF TRANSFER PRICING ADJUSTMENT 5,0 7,55,614 (II) CLAIM OF ROC EXPENSES INCURRED IN CONNECTION WITH INCREASE IN SHARE CAPITAL 1,30,500 (III) THE EXPENSES INCURRED IN RELATION TO START OF THE BUSINESS RESTRICTED TO RS. 10,90,815 10, 90,815 (IV) PROVISION FOR WARRANTY 16,99,465 5,36,76,394 TOTAL INCOME 4,45,13,729 8. BEING AGGRIEVED WITH THE AOS ORDER, THE ASSESSEE IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL: TRANSFER PRICING ADJUSTMENT 1. THE LD. AO AND THE LD. TPO GROSSLY ERRED IN LAW AN D FACTS OF THE CASE IN DETERMINING THE ARMS LENGTH PRICE O F THE INTERNATIONAL TRANSACTION OF THE APPELLANT AS RS. 7,30,61,338/- RECEIVED ON ACCOUNT OF PURCHASE OF FI NISHED GOODS AND THEREBY MAKING AN ADJUSTMENT OF RS. 5,07,55,614/- WITH RESPECT TO THE PURCHASE OF FINIS HED GOODS BY THE TAX PAYER U/S 92CA OF THE INCOME TAX A CT. 2. THE LD. AO AND THE LD. TPO ERRED IN REJECTING THE T RANSFER PRICING DOCUMENTATION WITHOUT APPRECIATING THE CONTENTIONS, AND EVIDENTIARY DATA PUT FORWARD BY TH E APPELLANT DURING THE COURSE OF THE PROCEEDINGS BEFO RE THEM, AND IN DOING SO HAVE GROSSLY ERRED: 2.1IN ACCEPTING V-GUARD INDUSTRIES LTD. AS COMPARAB LE SINCE THE FUNCTIONAL, RISK AND PRODUCT PROFILE OF V GUARD ARE DIFFERENT FROM THAT OF THE APPELLANT. 2.2 IN REJECTING COMPUAGE INFOCOM LTD. AND COMPUTER POINT LTD. BY STATING THAT THEY ARE NOT FUNCTIONALLY COMP ARABLE. FURTHER IF THE LD. TPO CONSIDERS THAT BROADLY SIM ILAR 6 ITA NO. 57 73/DEL/2011 PRODUCTS MAY BE CONSIDERED AS COMPARABLE, THE COMPANIES SELECTED, COMPUAGE INFOCOM LTD. AND COMPUTER POINT LTD. SHOULD BE CONSIDERED AS COMPARABLES AS THEY ARE ENGAGED IN TRADING OF COMPU TER PERIPHERALS AND RELATED ITEMS. 3. THE LD. AO AND THE LD. TPO OUGHT TO HAVE APPRECIATE D THAT FY 2006-07 (RELEVANT TO AY 2007-08) IS THE FIRST YE AR OF OPERATIONS AND LOSSES INCURRED DURING THE YEAR ARE SOLELY DUE TO BUSINESS OR COMMERCIAL REASONS THAN ON ACCOU NT OF TRANSFER PRICING. 4. THE LD. AO AND THE LD. TPO OUGHT TO HAVE APPRECIATE D THE FACT THAT THE APPELLANT INCURRED EXPENDITURE, THE B ENEFIT OF WHICH HAVE RESULTED IN THE SUBSEQUENT YEAR. 5. THE LD. AO ERRED IN EXCLUDING COMMISSION INCOME FRO M THE OPERATING INCOME OF THE APPELLANT CONTRARY TO THE DIRECTIONS OF THE HONBLE DRP VIDE THEIR ORDER DATE D 14 TH SEPTEMBER, 2011. NON-TRANSFER PRICING ADJUSTMENTS 1. ROC EXPENSES IN CONNECTION WITH THE ISSUE OF THE SH ARE CAPITAL: RS. 1,30,500 1.1 THE LD. AO/DRP ERRED IN CONFIRMING THE GROSS DISALLOWANCE OF RS. 130,500 INCURRED BY THE APPELLA NT TOWARDS FILING FEES WITH THE REGISTRAR OF COMPANIES IN CONNECTION WITH THE ISSUE OF THE SHARE CAPITAL OF T HE COMPANY. 1.2 NOTWITHSTANDING AND WITHOUT PREJUDICE TO ABOVE, SHOULD THE SAID EXPENDITURE BE TREATED AS CAPITAL I N NATURE, THE LD. AO ERRED IN NOT GRANTING THE DEDUCT ION U/S 35D OF THE ACT. 2. EXPENSES INCURRED BEFORE THE COMMENCEMENT OF OPERATIONS: RS. 1,090,815 2.1 THE LD. AO/DRP ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENSES INCURRED BEFORE COMMENCEMENT OF OPERATIONS AS CAPITAL IN NATURE. 2.2 THE LD. AO/DRP OUGHT TO HAVE OBSERVED THAT SAID EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR T HE PURPOSE OF BUSINESS OF THE APPELLANT AND THEREFORE, ALLOWABLE U/S 37(1) OF THE ACT. 7 ITA NO. 57 73/DEL/2011 2.3 NOTWITHSTANDING AND WITHOUT PREJUDICE TO ABOVE, SHOULD THE SAID EXPENDITURE BE TREATED AS CAPITAL I N NATURE, THE LD. AO ERRED IN NOT GRANTING THE DEDUCT ION U/S 35D OF THE ACT. 3. DISALLOWANCE OF PROVISION FOR WARRANTY: RS. 1,699,4 65 3.1 THE LD. AO/DRP ERRED IN CONFIRMING THE DISALLOWANCE OF PROVISIONS TOWARDS WARRANTY MADE BY THE APPELLANT A S A PERCENTAGE OF SALES MADE DURING THE YEAR BASED ON TECHNICAL ESTIMATE. 3.2 THE LD. AO/DRP OUGHT TO HAVE OBSERVED THAT THE APPELLANT FOLLOWS SCIENTIFIC BASIS AND A CONSISTENT POLICY WHILE MAKING PROVISION FOR WARRANTY. 3.3 THE LD. AO/DRP OUGHT TO HAVE OBSERVED THAT THE EXPENSES ARE INCURRED WHOLLY AND EXCLUSIVELY FOR TH E PURPOSE OF BUSINESS OF THE APPELLANT AND IS THEREFO RE, ALLOWABLE U/S 37(1) OF THE ACT. 3.4 THE LD. AO/DRP ERRED IN NOT FOLLOWING THE JUDICIAL PRECEDENTS IN THIS REGARD: ROTORK CONTROLS INDIA (P) LIMITED VS. CIT (314 ITR 62) (SC) CIT VS. INDIAN TRANSFORMERS LTD. 270 ITR 259 KERALA HIGH COURT JAY BEE INDUSTRIES VS. DCIT 61 TTJ 403 (ASR) BANGALORE ITAT IN WIPRO GE MEDICAL SYSTEMS LTD. VS. DCIT 80 TTJ 45 4. NO CREDIT FOR TAXES DEDUCTED AT SOURCE: RS. 601,915 4.1 THE LD. AO/DRP ERRED IN GRANTING NO CREDIT FOR TAXE S DEDUCTED AT SOURCE AMOUNTING TO RS. 601,915/- 4.2 THE LD. AO/DRP OUGHT TO HAVE RELIED ON FORM 16A ISSUED BY THE DEDUCTOR WHILE GIVING EFFECT TO THE T AXES DEDUCTED AT SOURCE. 5. CALCULATION OF INTEREST ON RESULTING ADJUSTMENT UND ER SECTION 234B OF THE ACT: RS. 8,240,827 5.1 THE LD. AO ERRED IN LEVYING INTEREST AMOUNTING TO R S. 8,240,827 UNDER SECTION 234B OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER AND MODIFY THE ABOVE GROUNDS DURING THE COURSE OF APPEAL. 8 ITA NO. 57 73/DEL/2011 FOR THE ABOVE AND ANY OTHER GROUNDS WHICH MAY BE RA ISED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE ASSESSING OFFICER BE SET ASIDE. 9. LD. COUSNEL FOR THE ASSESSEE SUBMITTED THAT FIR ST WE SHOULD CONSIDER GROUND NO. 3 & 4 BECAUSE LD. TPO HA S NOT ALLOWED THE ADJUSTMENT IN REGARD TO START UP OF PHASE. HE SUBMITTED THAT ASSESSEE WAS IN THE FIRST YEAR OF HIS OPERATIONS AND , THEREFORE, LOSSES WERE INCURRED. UNDER SUCH CIRCUMSTANCES, LD . TPO SHOULD HAVE ALLOWED ADJUSTMENT BECAUSE IT IS WELL SETTLED COMMERCIAL PRINCIPLE THAT BREAK EVEN COULD REACH ONLY AFTER A SUFFICIENT PERIOD OF OPERATIONS BY WHICH TIME THE INCOME IS SUFFICIENT TO CONTRIBUTE TOWARDS FIXED COST AND ALSO START EARNING PROFIT. H E SUBMITTED THAT ASSESSEE IS NOT DISPUTING THE APPLICABILITY OF TNMM METHOD BUT TNMM SHOULD BE APPLIED ONLY AFTER SIGNIFICANT DIFFE RENCES OF OPERATING COST BETWEEN THE COMPARABLES AND ASSESSEE ARE ADJUSTED. HE SUBMITTED THAT FIRST YEAR BUSINESS OPERATIONS CA NNOT BE COMPARED WITH OLD BUSINESS. 9.1 LD. COUNSEL POINTED OUT THAT THE COMPARABLES S ELECTED BY THE ASSESSEE WERE QUITE OLD WHICH WILL BE EVIDENT FRO M THE FOLLOWING TABLE: NAME OF THE COMPANY YEAR OF INCORPORATION V - GUARD INDUSTRIES LIMITED 1996 PAE LIMITED 1950 KUNA IMPEX 1998 PL ENTERPRISE 1992 9 ITA NO. 57 73/DEL/2011 10. LD. COUNSEL REFERRED TO PAGE 136 & 137 OF THE PAPER BOOK, WHEREIN THE OBJECTIONS RAISED BEFORE LD. DRP A RE CONTAINED IN WHICH IT WAS, INTER ALIA, STATED AS UNDER: THE ASSESSEE WISHES TO HIGHLIGHT TO THE HONBLE D RP PANEL THAT THE LD. TPO HAS NOT APPRECIATED THE FACT THAT FY 2006-07 WAS ASSESSEES FIRST YEAR OF BUSINESS OPERATIONS. THE LD. TPO HAS NOT PERFORMED APPROPRI ATE ADJUSTMENTS IN THIS RESPECT TO THE FINANCIALS OF TH E COMPARABLE COMPANIES (FOR E.G. V GUARD IS INTO 12 TH YEAR OF OPERATIONS IN FY 2006-07 AND P.L. ENTERPRISES IS INTO 16 TH YEAR OF OPERATIONS IN FY 2006-07). THE LD. TPO SHOULD HAVE IDEALLY EXAMINED AND CONSIDERED THE RESULTS OF FIRST YEAR OF OPERATIONS OF THE TPO SELE CTED COMPARABLES. THE ASSESSEE WOULD LIKE TO HUMBLY SUBMIT THAT THE N ET LOSS INCURRED BY THE ASSESSEE DURING FY 2006-07 IS NOT AS A RESULT OF HIGHER TRANSFER PRICE DETERMINED FOR THE INTERNATIONAL TRANSACTION RELATING TO PURCHASE OF G OODS, BUT IS PRIMARILY DUE TO THE FACT OF CERTAIN EXTRAOR DINARY AND FIXED COSTS INCURRED DURING THE FIRST YEAR OF OPERATIONS OF BUSINESS, WHICH WILL BE TRUE EVEN IN CASE OF THE COMPARABLES. THE DETAILED WORKING IN THIS R EGARD WOULD BE PRODUCED BY THE ASSESSEE AT THE TIME OF HEARING BEFORE THE HONBLE DRP. 10.1 WITH REFERENCE TO THE ABVOE OBJECTIONS RAISED BEFORE LD. DRP, LD. COUNSEL POINTED OUT THAT THOUGH THE ASSESS EE HAD NOT GIVEN ANY COMPUTATION BUT RAISED SPECIFIC POINT ON THIS ISSUE. HE, INTER ALIA, RELIED ON THE FOLLOWING CASE LAWS IN SUP PORT OF HIS SUBMISSION THAT ADJUSTMENT FOR EXPENSES INCURRED IN START UP PHASE HAS TO BE ALLOWED: S.NO. LIST OF CASE LAWS ON ECONOMIC ADJUSTMENTS NATURE OF ADJUSTMENT ITA NO. 1. AMDOCS BUSINESS SERVICES P. ADJUSTMENT FOR ITA NO. 10 ITA NO. 5 773/DEL/2011 LTD. EXPENSES INCURED IN START-UP PHASE 1412/PN/11 2. ARISTON THERMO INDIA LTD. ADJUSTMENT FOR EXPENSES INCURRED IN START-UP PHASE ITA NO. 1455/PN/2010 3. GLOBAL TURBINE SERVICES INC. ADJUSTMENT FOR EXPENSES INCURRED IN START-UP PHASE ITA NO. 3484/DEL/2011 11. LD. COUNSEL REFERRED TO ANNEXURE 3 OF SYNOPSIS FILED IN COURSE OF THE PROCEEDINGS AND SUBMITTED THAT THE MA TTER MAY BE RESTORED BACK TO THE FILE OF LD. TPO TO EXAMINE ALL THE DETAILS AND THEN MAKE THE ADJUSTMENTS TO OPERATING EXPENSES. 12. APROPOS GROUND NO. 2 DEALING WITH THE ISSUE REL ATING TO SELECTION OF COMPARABLES LD. COUNSEL POINTED OUT TH AT ALL THE COMPARABLES CHOSEN BY THE LD. TPO DOES NOT HAVE COM MISSION INCOME EXCEPT PAE LTD. HE FURTHER POINTED OUT THAT V-GUARD INDUSTRIES LTD. IS SELLING STABILIZERS AND UPS IS A VERY SMALL SEGMENT OF THIS COMPANY. HE FURTHER POINTED OUT THA T SEGMENTAL DETAILS ARE NOT AVAILABLE. HE, THEREFORE, SUBMITTE D THAT CONSIDERING ALL THESE ASPECTS FRESH COMPARABLES HAVING TRADING AND COMMISSION INCOME SHOULD BE TAKEN INCLUDING PAE WITH ADJUSTMENTS AS MANDATED BY LAW. 13. LD. DR SUBMITTED THAT THE COMPARABLES SELECTED BY THE TPO WERE PRIMARILY DEALING IN THE SAME LINE IN WHICH THE ASSESSEE WAS DEALING. HE SUBMITTED THAT IT IS THE FUNCTIONAL COMPARABILITY WHICH IS RELEVANT FOR SELECTION OF COMPARABLES. HE RELIED ON THE FOLLOWING DECISION: 11 ITA NO. 5 773/DEL/2011 ION TRADING INDIA PVT. LTD. ITA NO. 1035/DEL/2015 D ATED 07/12/2015 (TS-643-ITAT-2015(DEL)-TP AY 2010-11. 14. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE RECORD OF THE CASE. 14.1 WE FIND CONSIDERABLE FORCE IN THE SUBMISSION OF LD. COUNSEL FOR THE ASSESSEE THAT FOR DETERMINING THE A RMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS BETWEEN ASSOCIA TED ENTERPRISES IF THE COMPARABLE SELECTED ARE OPERATING SINCE LONG AN D THE ASSESSEE IS IN THE INITIAL STAGES OF OPERATION THEN CONSIDER ABLE ADJUSTMENTS HAS TO BE MADE TO THE OPERATING EXPENSES IN ORDER T O GIVE DUE LEVERAGE TO THE CONTRIBUTION OF INCOME TO THE FIXED COST. UNLESS THE FIXED COST IS FULLY RECOVERED, THE BREAK EVEN CANNO T BE ARRIVED AT. 14.2 UNDER SUCH CIRCUMSTANCES, THE LOSSES INCURRED BY THE ASSESSEE CANNOT BE THE BASIS FOR FINDING OUT THE AR MS LENGTH PRICE WITHOUT MAKING DUE ADJUSTMENTS TO THE OPERATING EXPE NSES SO AS TO BRING IT AT THE LEVEL PLAYING FIELD WITH THE COMP ARABLES. IN THE COURSE OF HEARING THE LD. COUNSEL POINTED OUT THAT BREAK EVEN WAS ARRIVED AT IN NEXT YEAR AND LD. TPO HAS ACCEPTED TH E TRANSACTIONS BEING AT ARMS LENGTH PRICE IN NEXT YEAR. ONE OF T HE CONTENTIONS OF THE LD. CIT DR WAS THAT THIS PLEA WAS NOT TAKEN BEFOR E LD. TPO BUT, AS REPRODUCED EARLIER, BEFORE LD. DRP, SPECIFIC OBJ ECTION TO THIS EFFECT HAD BEEN TAKEN. THEREFORE, MERELY ON THE GR OUND THAT THIS PLEA WAS NOT TAKEN, ASSESSEES CLAIM CANNOT BE DENIE D MORE PARTICULARLY BECAUSE NOT ALLOWING FOR THIS ADJUSTMEN T WOULD GO 12 ITA NO. 5 773/DEL/2011 AGAINST THE VERY PRINCIPLE OF COMPARABILITY CRITERI A CONTEMPLATED UNDER RULE 10B OF THE I.T. RULES. WE FURTHER FIND THAT THOUGH LD. DRP HAD GIVEN DIRECTION FOR INCLUSION OF COMMISSION INCOME AS PART OF THE OPERATING INCOME BUT EXCEPT PAE LTD. AL L OTHER COMPARABLES WERE NOT HAVING ANY COMMISSION INCOME. 14.3 UNDER SUCH CIRCUMSTANCES, AS RIGHTLY SUGGESTE D BY THE LD. COUNSEL FOR THE ASSESSEE, THE PROPER COURSE WOUL D BE TO RESTORE THE MATTER TO THE FILE OF LD. TPO TO FIND OUT FRESH COMPARABLES HAVING TRADING AND COMMISSION INCOME BOTH AND INCLU DE THE SAME AFTER MAKING ADJUSTMENTS AS MANDATED BY THE LAW. LD . TPO WILL ALSO EXAMINE THE DETAILS AS PER ANNEXURE 3 AND ANY FURTHER DETAILS AS MAY BE NECESSARY TO CONSIDER AND WILL MAKE ADJUST MENTS TO SALARY AND RENTAL INCOME AND OTHER ADJUSTMENTS SO A S TO BRING THE PROFITABILITY OF ASSESSEE INCONFORMITY WITH THE PROF ITABILITY OF THE COMPARABLE AFTER PROVIDING DUE OPPORTUNITY OF HEARI NG TO THE ASSESSEE. 15. IN THE RESULT, THE GROUNDS RELATING TO TRANSFE R PRICING ADJUSTMENTS ARE ALLOWED FOR STATISTICAL PURPOSES IN TERMS OF AFOREMENTIONED OBSERVATIONS. NON TRANSFER PRICING ISSUES 16. BRIEF FACTS APROPOS GROUND NO. 1 ARE THAT ASSE SSEE HAD CLAIMED ROC EXPENSES AGGREGATING TO RS. 1,30,500/- INCURRED IN CONNECTION WITH INCREASE IN AUTHORIZED SHARE CAPITAL OF ASSESSEE. 13 ITA NO. 5 773/DEL/2011 THE AO DISALLOWED THESE EXPENSES OBSERVING THAT THE SAME WAS OF CAPITAL NATURE. 17. BEFORE LD. DRP THIS ISSUE WAS NOT RAISED. HOWE VER, NOW ASSESSEE HAS TAKEN FRESH PLEA VIDE GROUND NOS. 1 & 1.2 RELYING ON THE DECISION OF THE HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS. MULTI METALS LTD., 188 ITR 151, WHEREIN THE ALTE RNATIVE SUBMISSION OF THE ASSESSEE IN REGARD TO ALLOWABILIT Y OF THE AMOUNT PAID AS FEE FOR REGISTRATION TO ROC FOR AMENDMENT O F THE MEMORANDUM OF ASSOCIATION FOR RAISING THE AUTHORIZE D CAPITAL BEING ELIGIBLE FOR DEDUCTION U/S 35D WAS ACCEPTED. LD. DR SUBMITTED THAT THE ISSUE IS COVERED AGAINST THE ASS ESSEE BY THE DECISION OF HONBLE SUPREME COURT IN 225 ITR 798 BR OOK BOND INDIA LTD. VS. CIT. 18. WE HAVE CONSIDERED THE SUBMISSION OF BOTH THE PARTIES. HONBLE SC IN THE CASE OF BROOK BOND INDIA LTD. (SU PRA) HAD CONSIDERED THE EXPENDITURE IN CONNECTION WITH ADDITI ONAL ISSUE OF SHARES AND HAD HELD THAT EXPENDITURE DIRECTLY RELAT ED TO EXPANSION OF CAPITAL BASE AND WAS THEREFORE, CAPITAL IN NATURE . THIS DECISION IS SUBSEQUENT TO THE DECISION RELIED UPON BY THE LD . COUNSEL FOR THE ASSESSEE IN THE CASE OF MULTI METALS LTD. WHICH IS D ATED 27 TH OCTOBER, 1990 AND, THEREFORE, WE ARE NOT INCLINED T O ACCEPT THE ADDITIONAL PLEA RAISED BY LD. COUNSEL FOR THE ASSES SEE. 19. IN THE RESULT, THESE GROUNDS ARE DISMISSED. 14 ITA NO. 5 773/DEL/2011 20. BRIEF FACTS APROPOS GROUND NO. 2 ARE THAT DURI NG THE ASSESSMENT PROCEEDINGS THE AO NOTICED THAT ASSESSEE HAD INCURRED RECRUITMENT EXPENSES OF RS. 20,58,421/-, TRAINING E XPENSES OF RS. 14,25,845/- AND ENTERTAINMENT EXPENSES OF RS. 30,48 ,460/-. HE POINTED OUT THAT THIS WAS THE FIRST YEAR OF ASSESSEE S BUSINESS AND THE ASSESSEE HAD INCURRED ALL THESE EXPENSES TO STA RT ITS BUSINESS. HE NOTICED FROM THE DETAILS OF ENTERTAINMENT EXPENS ES THAT THEY HAD BEEN INCURRED FOR THE LAUNCH OF THE BUSINESS OF THE ASSESSEE AT VARIOUS STATIONS LIKE HYDERABAD, PUNE, KOLKATA, MUM BAI, DELHI ETC. AFTER EXAMINING THE DETAILS HE CONCLUDED THAT ALL T HESE THREE EXPENSES AGGREGATING TO RS. 65,32,726/- WERE CAPITA L IN NATURE. 21. LD. DRP RELYING ON THE DECISION IN THE CASE OF EID PERI (INDIA) PVT. LTD. VS. CIT, 257 ITR 253 (MAD.) HELD THAT THESE WERE PRE-OPERATIVE EXPENSES INCURRED BY ASSESSEE PRIOR T O THE (COMMENCEMENT OF THE BUSINESS DT. 11 TH MAY, 2006) AND, THEREFORE, DIRECTED TO RESTRICT THE DISALLOWANCE TO RS. 10,90,8 15/-. 22. LD. COUNSEL SUBMITTED THAT LD. DRP HAS NOT CON SIDERED THE SET UP ASPECT OF THE BUSINESS AS HAS BEEN CLARI FIED IN THE CASE OF CIT VS. SAURASHTRA CEMENT INDUSTRIES (91 ITR 170 ) & 26 ITR 151 (MUM.) (HC) WESTERN INDIA VEGETABLE PRODUCTS LTD. V S. CIT AND, THEREFORE, THE MATTER MAY BE RESTORED BACK TO THE F ILE OF AO TO FIND OUT THE DATE OF SET UP OF THE BUSINESS. HE POINTED OUT THAT THERE IS A CLEAR DISTINCTION BETWEEN THE DATES OF COMMENCEME NT OF THE BUSINESS AND SET UP OF THE BUSINESS AND FOR THE PUR POSES OF THE 15 ITA NO. 5 773/DEL/2011 INCOME TAX ACT THE DATE OF SET UP OF THE BUSINESS A ND NOT THE DATE OF COMMENCEMENT OF THE BUSINESS IS TO BE CONSIDERED . 23. LD. CIT DR SUBMITTED THAT THE LD. DRP HAS ALRE ADY CONSIDERED THE ISSUE AND HAS ALLOWED CONSIDERABLE R ELIEF TO THE ASSESSEE. 24. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. BOTH THE DECISIONS RELIED UPON BY THE LD. COUNSEL OF THE ASSESSEE CLEARLY HOL D THAT THE RELEVANT DATE FOR DECIDING WHETHER AN EXPENDITURE IS PRE OPERATIVE OR POST OPERATIVE IS THE DATE OF SETTING UP OF BUSI NESS AND NOT THE DATE OF COMMENCEMENT OF BUSINESS. BOTH THE LOWER R EVENUE AUTHORITIES HAVE NOT EXAMINED THIS ASPECT AND, THER EFORE, WE RESTORE THIS ISSUE TO THE FILE OF AO TO EXAMINE THE ISSUE AFRESH WITH THE LIGHT OF AFOREMENTIONED DECISIONS. 25. IN THE RESULT, THIS GROUND IS ALLOWED FOR STAT ISTICAL PURPOSES. 26. BRIEF FACTS APROPOS GROUND NO. 3 ARE THAT ASSE SSEE HAD CLAIMED PROVISION FOR GRATUITY AGGREGATING TO RS. 1 6,99,465/-. THE ASSESSEE HAD MADE THIS PROVISION AS 6% OF THE SALES . THE AO DISALLOWED THE ASSESSEES CLAIM, INTER ALIA, OBSERV ING THAT ESTIMATION WAS NOT BASED ON ANY STATISTICAL ANALYSI S OR ANY HISTORICAL DATA BASE. HE FURTHER POINTED OUT THAT THIS WAS THE FIRST 16 ITA NO. 5 773/DEL/2011 YEAR OPERATION OF THE ASSESSEE AND, THEREFORE, ASSE SSEE WAS NOT HAVING ANY PRIOR EXPERIENCE. LD. DRP CONFIRMED THE AOS ORDER. 27. HAVING HEARD BOTH THE PARTIES, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF AO BECAUSE THE ESTIMA TION WAS NOT BASED ON ANY SCIENTIFIC BASIS. 28. IN THE RESULT, THIS GROUND IS DISMISSED. 29. APROPOS GROUND NO. 4 IS IN REGARD TO NOT GRANT ING CREDIT FOR TAXES DEDUCTED AT SOURCE AMOUNTING TO RS. 6,01, 950/-. THE AO SHOULD EXAMINE THE ASSESSEES CLAIM AND PASS THE OR DER IN ACCORDANCE WITH THE LAW. 30. GROUND NO. 5 DEALING WITH INTEREST U/S 234B IS CONSEQUENTIAL. 31. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER IS PRONOUNCED IN THE OPEN COURT ON 27.05.2016 SD/- SD/- (SUDHANSHU SRIVASTAVA) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 27.05.2016 *KAVITA ARORA 17 ITA NO. 5 773/DEL/2011 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 24.05.2016/26.05.16 2. DRAFT PLACED BEFORE AUTHOR 25.05.2016/26.5.16 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 5. APPROVED DRAFT COMES TO THE SR.PS/PS 27.05.2016 6. KEPT FOR PRONOUNCEMENT ON 27.05.2016 7. FILE SENT TO THE BENCH CLERK 27.05.2016 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.