Boettcher India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 6610/DEL/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4456 (ITAT-DELHI)
• Duration Of Justice: 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 25-05-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 27-12-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Transfer pricing; International transaction; Rule of consistency; Initiation of penalty proceedings
• Section: 92C; 143(3); 92D; 92E; 10B; 144; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I -1 NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 6610/DEL/2016 AY: 2012-13 BOETTCHER INDIA PVT. LTD., WZ-139B, NARAINA, RING ROAD, NEW DELHI. (PAN: AACCB5375J) VS ACIT, CIRCLE 5(1), NEW DELHI APPELLANT BY: SHRI K. SAMPATH, ADV. RESPONDENT BY : SHRI AMRENDRA KUMAR, CIT DR DATE OF HEARING 15.09.2017 DATE OF PRONOUNCEMENT 27.09.2017 ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 31/10/2016 PASSED BY THE AO SUBSEQUENT TO THE DIRECTIONS OF THE HONBLE DRP-1, NEW DELHI VIDE ORD ER DATED 23.8.2016 AND PERTAINS TO ASSESSMENT YEAR 2012-13. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE ASSES SEE:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW- 1. THE IMPUGNED ORDER PASSED BY THE ACIT, CIRCLE-5 (1), NEW DELHI U/S. 143(3) READ WITH SECTION 144C OF THE I.T . ACT FOLLOWING DIRECTIONS OF LD. DRP-1 U/S. 144 (5) OF THE ACT IS UNJUSTIFIED AND ITA NO. 6610/DEL/2016 AY 2012-13 2 WRONG IN COMPUTING THE TOTAL INCOME AT RS.67,84,771/- AS AGAINST THE RETURNED LOSS OF RS.73,53,082/-; 2. THAT THE LD. DRP-1 ERRED IN CONFIRMING ADDITION OF RS. 1,41,36,214/- BY RECALCULATING ALP (ARMS LENGTH PR ICE) OF INTERNATIONAL TRANSACTION U/S 92 CA(5) OF THE ACT; 3. THAT THE LD. DRP-1 ERRED IN CONFIRMING AO/TPO'S ACTION IN APPLYING THE DERIVED OPERATING RATIO OF 7.98% ON TH E REVENUE CORRESPONDING TO THE INTERNATIONAL TRANSACTION UNDE R CUP (COMPARABLE UNCONTROLLED PRICE) METHOD; 4. THAT THE LD. DRP-1 ERRED IN REJECTING THE CALCU LATION OF ALP BY THE APPELLANT BY APPLYING TNMM (TRANSACTION AT NET MARGIN METHOD) ON THE REVENUE CORRESPONDING TO THE INTERNA TIONAL TRANSACTION AS HAD BEEN DONE BY THE ASSESSING OFFIC ER IN APPELLANT'S OWN CASE IN AY 2008-09; 5. THAT THE LD. DRP-1 ERRED IN NOT FOLLOWING THE R ULE OF CONSISTENCY WHEN THERE IS NO DIFFERENCE IN THE FACT S OF THE CASE FOR THE ASSESSMENT YEAR IN QUESTION; 6. THAT THE LD. DRP-1 ERRED IN CONFIRMING AO/TPO'S ACTION IN APPLYING THE OPERATING PROFIT RATIO ON THE ENTIRE T URNOVER INSTEAD OF DOING SO WITH THE TURNOVER GENERATED DUE TO TRAN SACTION WITH ASSOCIATED ENTERPRISES; 7. THAT THE LD. DRP-1 ERRED IN CONFIRMING AO/TPO S SELECTION OF ITDL IMAGETIC LIMITED AND TIRUPATI INKS LIMITED AMO NGST THE SET OFF COMPARABLE COMPANIES WHEN THEY ARE WHOLLY MANUF ACTURING COMPANIES WHILE APPELLANT IS ENTIRELY IN TRADING BU SINESS; 8. THAT THE LD. DRP-1 ERRED BY NOT DEDUCTING THE A MOUNT OF RS.36,98,683/- FROM THE ADJUSTMENT AMOUNT CALCULATE D BY AO/TPO WHICH HAD ALREADY BEEN ADDED BACK BY THE APP ELLANT IN THE COMPUTATION OF TAXABLE INCOME; ITA NO. 6610/DEL/2016 AY 2012-13 3 9. THAT THE LD. AO ERRED IN CHARGING INTEREST U/S 234A, 234B, 234C AND 234D OF THE INCOME-TAX ACT, 1961; 10. THAT THE LD. AO ERRED IN INITIATING PENALTY PR OCEEDINGS U/S 271 (1) (C) OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, DELETE, MODIFY A LL OR ANY OF THE ABOVE GROUNDS OF APPEAL. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF TRADING OF ROLLER, CH EMICAL, BLANKET, TESTING EQUIPMENTS, LINER, WEB CLOTHS AND OTHER ITEMS RELATED TO PRINTING INDUSTRY. IT IMPORTS MATERIAL M ANUFACTURED BY THE FELIX BOETTCHER GMBH & CO. KG, GERMANY, BOET TCHER THAILAND LIMITED, THAILAND AND KB ROLLER TECH KOPLE RWALZEN GMBH, GERMANY AND MARKET THE SAME TO INDIAN PRINTIN G INDUSTRY. IT IS A SUBSIDIARY OF BOETTCHER HOLDING G MBH & COMPANY, GERMANY WHICH MAKES PRODUCTS RELATED TO TH E PRINTING INDUSTRY. THE MATERIALS PURCHASED WERE SOL D WITHOUT FURTHER PROCESSING THE SAME. THE ASSESSEE COMPANY F ILED ITS RETURN FOR THE AY 2012-13 U/S 139(1) OF THE INCOME- TAX ACT, 1961 (HEREINAFTER CALLED THE ACT) DECLARING LOSS OF RS.73,53,082/-. AS PER FORM 3CEB FILED ALONG WITH T HE RETURN FOR THE AY 2012-13, THE ASSESSEE HAD ENTERED INTO I NTERNATIONAL ITA NO. 6610/DEL/2016 AY 2012-13 4 TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES/CONCER NS DURING THE YEAR. ACCORDINGLY, A REFERENCE WAS MADE BY THE AO TO THE TPO TO DETERMINE ARM'S LENGTH PRICE U/S 92CA (3) OF THE ACT IN RESPECT OF INTERNATIONAL TRANSACTION ENTERED INTO B Y THE ASSESSEE-COMPANY. ORDER U/S 92CA (3) OF THE ACT WAS PASSED BY THE TPO AFTER REJECTING THE ALP CALCULATED BY TH E ASSESSEE AND DERIVING OPERATING PROFIT RATIO OF 7.98% ON THE COMPARABLE COMPANIES AND APPLYING THE SAME ON THE ENTIRE TURNO VER INSTEAD OF APPLYING IT ON THE TURNOVER GENERATED FR OM TRANSACTIONS WITH ASSOCIATED ENTERPRISES. THE AO PR OCEEDED TO ADD BACK AN AMOUNT OF RS. 2,08,34,782/- AS ADJUSTME NT TO THE ALP. THE AO ALSO DID NOT ALLOW THE BENEFIT OF DEDUC TION OF RS. 36,98,683/- FROM THE ALP ADJUSTMENT WHICH HAD ALREA DY BEEN ADDED BACK BY THE ASSESSEE IN ITS COMPUTATION OF IN COME. 2.1 AGGRIEVED, THE ASSESSEE APPROACHED THE HONBLE DRP-I, NEW DELHI AGAINST THE AO'S DRAFT ORDER FOR DIRECTIO NS U/S 144C (5) OF THE ACT. HONBLE DRP-I PARTLY ENDORSED THE V IEW OF THE TPO AND APPROVED THE DRAFT ORDER. THEY DIRECTED AO/TPO TO CONSIDER ONLY THE TRANSACTION WITH THE AE'S FOR ADJUSTMENT A ND ALSO DIRECTED TO EXCLUDE THE SELF ADJUSTMENT MADE BY THE ASSESSEE AND TO INCLUDE THE FOREIGN CURRENCY EXCHANGE LOSS I N THE COST ITA NO. 6610/DEL/2016 AY 2012-13 5 ATTRIBUTABLE TO INTERNATIONAL TRANSACTION. 2.2 FOLLOWING THESE DIRECTIONS OF THE HONBLE DRP P ARTLY, THE TPO REVISED THE AMOUNT OF ADJUSTMENT U/S 92CA OF TH E ACT FROM RS.2,08,34,792/- TO RS. 1,41,36,214/- U/S 92CA(5) O F THE ACT. THE AO, HOWEVER, TOOK THE SAME AMOUNTS AS ORIGINALL Y TAKEN FOR THE AE TRANSACTIONS IN THE IMPUGNED ORDER. ACCORDIN GLY THE AO COMPUTED THE TOTAL INCOME AS UNDER: BUSINESS LOSS AS PER RETURN - RS.73,53,082/- ADJUSTMENT MADE U/S 92CA(3) AS PER PARA 4 ABOVE - RS.1,41,36,214/- ADDITION OF INTEREST INCOME (PARA 5) RS. 1,639/- TOTAL INCOME - RS. 67,84,771/- 2.3 NOW THE ASSESSEE IS BEFORE THE ITAT AGAINST THE ORDER GIVING EFFECT TO THE ORDER OF THE HONBLE DRP. 3. THE LD. AR SUBMITTED THAT THE APPELLANT OBJECTS TO THE AFORESAID ORDERS AND ADJUSTMENT MADE U/S 92CA (3) O F THE ACT BY THE AO IN ITS APPEAL AND ASSAILS THE SAME AND PL EADS FOR CORRECTION. THE LD. AR SUBMITTED THAT ON GROUND NO. L IT IS SUBMITTED THAT THE COMPUTATION OF TOTAL INCOME AT RS.67,84,771/- AS AGAINST RETURNED LOSS OF RS.73,53 ,082/- IN ITA NO. 6610/DEL/2016 AY 2012-13 6 THE IMPUGNED ORDER IS UNJUSTIFIED AND WRONG. THE RE TURNED LOSS IS SUPPORTED BY THE BOOKS OF ACCOUNTS WHICH ARE AUD ITED BY CHARTERED ACCOUNTANTS AS ALSO BY THE ACCOUNTANT'S R EPORT IN FORM 3CEB. IT WAS SUBMITTED THAT THE APPELLANT DULY COMPLIED WITH THE REQUIREMENTS OF SEC. 92E AND RULE 10E AND FORM NO.3CEB IN WHICH NO SPECIFIC DEFECT HAD BEEN POINTE D OUT BY THE AO/TPO. IT WAS THAT THE RETURNED LOSS MAY BE AC CEPTED AS FULLY EXPLAINED AND SUPPORTED BY BOOKS OF ACCOUNTS, DOCUMENTS, ETC. AS REQUIRED IN LAW. FURTHER, IT WAS SUBMITTED BY THE LD. AR THAT THE CORRECTIONS FOR AE-RELATED TRANSACTIONS AN D SELF ADDITIONS AND AE RATE ADJUSTMENTS, AS DIRECTED BY T HE HONBLE DRP, BE ALSO DIRECTED TO CARRIED OUT BY THE AO. 3.1 THE LD. AR FURTHER SUBMITTED THAT GROUND NOS.2, 3, 4 AND 5 ARE INTER-CONNECTED AND THAT THEY ARE DIRECTED AG AINST THE ADDITION OF RS. L,41,36,214/-BY RECALCULATING ALP O F INTERNATIONAL TRANSACTIONS U/S 92CA(5) OF THE ACT. IT WAS SUBMITTED THAT THE APPELLANT-COMPANY APPLIED TNMM M ETHOD I.E. TRANSACTIONAL NET MARGIN METHOD ON THE REVENUE CORRESPONDING TO THE INTERNATIONAL TRANSACTION AS H AD BEEN DONE BY THE AO IN APPELLANTS OWN CASE IN AY 2008-0 9. THE LD. AR SUBMITTED THAT IN THE APPEAL FOR THE AY 2008-09, THE HONBLE ITA NO. 6610/DEL/2016 AY 2012-13 7 DRP HAD HELD AS UNDER: '4.1 DRP HAS CONSIDERED THE SUBMISSION OF ASSESSEE AND CONCLUSION OF THE TPO. ACCORDINGLY NO INTERFERENCE IN CHOICE OF METHOD I.E. TNMM BY THE TPO IN VIEW OF FACTS IS CAL LED FOR. HOWEVER FOREX LOSS HAS DIRECTLY IMPACTED THE REVENU E FOR THIS YEAR HENCE IN OUR VIEW MUST BE INCLUDED IN COST ATT RIBUTABLE TO INTERNATIONAL TRANSACTION. THE TPO IS DIRECTED TO ACCORDINGLY RECALCULATE ALP. OBJECTION IS PARTLY ACCEPTED. 3.2 THE LD. AR FURTHER SUBMITTED THAT THE THE AO/TP O/DRP-I WERE NOT JUSTIFIED IN IGNORING THE PAST METHOD ADOP TED BY THE DEPARTMENT IN THIS CASE. THEIR ACTION IN REJECTING THE TNMM METHOD AND APPLYING ALTOGETHER NEW METHOD I.E. CUP METHOD IN THE ASSESSMENT YEAR IN QUESTION WERE ERRONEOUS, UNW ARRANTED AND UNCALLED FOR. THE FACTS OF THE CASE IN THE ASSE SSMENT YEAR IN QUESTION WERE SIMILAR TO THOSE IN THE AY 2008-09. T HERE WAS NO JUSTIFICATION FOR DEVIATING FROM THE EARLIER METHOD WHICH HAD ALSO BEEN CONFIRMED BY THE HONBLE DRP IN AY 2008-0 9. 3.3 IT WAS FURTHER SUBMITTED THAT THE APPELLANT HA D MAINTAINED COMPLETE RECORDS, DOCUMENTS AND INFORMAT ION AS REQUIRED U/S 92D AND RULE 10D. NO SPECIFIC DEFECTS HAD BEEN POINTED OUT. AO/TPO DID NOT POINT OUT ANY FAILURE O N THE PART OF THE APPELLANT IN COMPLYING WITH THE REQUIREMENTS OF SEC.92D ITA NO. 6610/DEL/2016 AY 2012-13 8 AND RULE 10D. THE LD. AR SUBMITTED THAT SUB. SEC. 3 OF SECTION 92C PROVIDES THAT THE AO MAY INTERVENE ONLY IF HE I S, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENTS IN HI S POSSESSION, OF THE OPINION THAT THE PRICE CHARGED IN THE INTERN ATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE W ITH SUB- SECTION 1 AND 2 OF SECTION 92C OR INFORMATION AND D OCUMENTS RELATING TO INTERNATIONAL TRANSACTIONS HAVE NOT BEE N KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH THE P ROVISIONS CONTAINED IN SUB-SECTION 1 OF SECTION 92D OF THE AC T AND THE RULES MADE THERE UNDER OR THE INFORMATION OR DATA U SED IN COMPUTATION OF THE ALP IS NOT RELIABLE OR CORRECT O R THE ASSESSEE HAS FAILED TO FURNISH ANY INFORMATION OR DOCUMENTS WHICH HE WAS REQUIRED TO FURNISH BY A NOTICE ISSUED UNDER SU B. SEC. 3 OF SECTION 92D OF THE ACT. IT WAS SUBMITTED THAT AO/TP O/DRP-I DID NOT POINT OUT ANY OF THE CIRCUMSTANCES APPLICAB LE IN APPELLANT'S CASE. THEY REJECTED THE APPELLANTS TRA NSFER PRICING ARBITRARILY. IT WAS URGED THAT THE ADDITION OF RS. L,41,36,214/- MAY KINDLY BE DELETED. 3.4 IT WAS FURTHER SUBMITTED BY THE LD. AR THAT DU RING THE YEAR 2011-12 RELEVANT TO AY 2012-13, THE APPELLANT HAD PURCHASED GOODS FROM ASSOCIATED ENTERPRISES OF ITA NO. 6610/DEL/2016 AY 2012-13 9 RS.5,34,88,788/- AND THE TOTAL AMOUNT OF GOODS PURC HASED INCLUDING GOODS PURCHASED FROM ASSOCIATED ENTERPRIS ES AWS RS.13,61,83,125/-. THE TOTAL TURNOVER OF THE APPELL ANT DURING THE PREVIOUS YEAR 2011-12 WAS RS.L8,45,31,019/- AND THE SAID REVENUE HAD BEEN EARNED BY WAY OF SALES OF GOODS PU RCHASED FROM ASSOCIATED ENTERPRISES AS WELL AS OTHER NON-RE LATED PARTIES. IT WAS SUBMITTED BY THE LD. AR THAT THE AP PELLANT CALCULATED ALP OF TRANSACTIONS WITH ASSOCIATED ENTE RPRISES UNDER TNMM METHOD AND MADE ADDITION OF RS.36,98,683 /- IN COMPUTATION OF TAXABLE INCOME. THE TNMM METHOD WAS FOLLOWED IN VIEW OF THE DIRECTIONS OF THE HONBLE DRP AS THE APPROPRIATE METHOD IN THE APPELLANTS CASE IN AY 2008-09 AND TH AT THERE WAS NO JUSTIFICATION FOR DEVIATING FROM THAT METHOD AND ADOPTING THE NEW METHOD. SUFFICIENT REASONS FOR CHANGING THE METHOD WERE NOT RECORDED. PROVISIONS OF RULE 10CA WAS NOT FOLLOWED IN ADOPTING THE NEW METHOD. THE FACTS OF THE CASE IN T HE AY 2012- 13 WERE SIMILAR TO THAT OF AY 2008-09. IT WAS SUBMI TTED THAT THE TNMM METHOD, AS FOLLOWED BY THE APPELLANT, IN THE C OMPUTATION SHOULD HAVE BEEN ACCEPTED IN ACCORDANCE WITH THE PR OVISION OF RULE 10CA. THERE WAS NO CIRCUMSTANCE OR SUFFICIENT REASONS AS PROVIDED IN RULE 10CA TO FOLLOW ANOTHER METHOD IN T HE CURRENT ITA NO. 6610/DEL/2016 AY 2012-13 10 YEAR. IT WAS SUBMITTED THAT THE JUSTIFICATION GIVE N BY THE AUTHORITIES FOR ADOPTING THE NEW METHOD FOR THE CUR RENT YEAR ARE NOT BORNE OUT AND SUPPORTED BY THE PROVISIONS OF RU LE 10CA IN ASSESSMENT YEAR 2008-09 IN THE ORDER U/S 92CA (3) I N APPELLANT'S CASE. 3.5 THE LD. AR ALSO ARGUED AGAINST THE TWO COMPARAB LES INCLUDED BY THE TPO AND SUBMITTED THAT THE COMPARAB LE CASES OF M/S ITDL IMAGETIC LTD. AND M/S TIRUPATI INKS LTD . SELECTED BY THE AUTHORITIES WERE IN FACT NOT APPROPRIATE AND COMPARABLE BECAUSE THESE COMPANIES ARE WHOLLY MANUFACTURING CO MPANIES WHILE THE APPELLANT IS ENTIRELY IN TRADING BUSINESS . IT WAS SUBMITTED THAT THE RISK PROFILE OF A MANUFACTURING COMPANY IS DIFFERENT FROM A TRADING COMPANY AND THE RESULT OF THE TWO ARE NOT COMPARABLE. IT WAS SUBMITTED THAT ITDL IMAGETIC LIMITED IS A SUBSIDIARY OF INDIAN TONER & DEVELOPERS LIMITED. BOTH THESE COMPANIES HAVE BEEN SELECTED BY THE TPO AS COMPARAB LE COMPANIES. WHILE INDIAN TONER & DEVELOPERS LIMITED IS INTO TRADING SEGMENT, ITS SUBSIDIARY ITDL IMAGETIC LIMIT ED IS INTO THE MANUFACTURING BUSINESS. THE OPERATIVE RATIO OF ITDL IMAGETIC LIMITED IS 20.23% WHILE THE OPERATING RATIO OF INDI AN TONERS & DEVELOPERS LIMITED IS 4.05% ONLY. THIS SHOWS THAT R ISK PROFILE ITA NO. 6610/DEL/2016 AY 2012-13 11 AND RESULTS THEREON OF A MANUFACTURING AND A TRADIN G COMPANY COULD NOT BE COMPARED AND THE OPERATING RESULTS OF ITDL IMAGETIC LIMITED AND INDIAN TONES & DEVELOPERS LIMI TED CONFIRM THE APPELLANTS CONTENTION. SIMILARLY, TIRU PATI INK LIMITED MANUFACTURES PRINTING INKS AND HENCE IT SHO ULD NOT BE CONSIDERED COMPARABLE TO A TRADING COMPANY. THE LD. AR SUBMITTED THAT THE AUTHORITIES DID NOT FOLLOW THE P ROVISIONS OF RULE 10C REGARDING SELECTION OF THE MOST APPROPRIAT E METHOD. THE TNMM METHOD ADOPTED BY THE APPELLANT WAS MOST APPROPRIATE WHICH HAD ALSO BEEN FOLLOWED BY THE AUT HORITIES IN THE CASE IN AY 2008-09. THE LD. AR SUBMITTED THAT I N RAMPGREEN SOLUTIONS PVT. LTD. V. CIT, THE HON'BLE D ELHI HIGH COURT OBSERVED THAT THE COMPARABLE TRANSACTIONS/ENTITIES MUST BE SELECTED ON THE BASIS OF SIMILARITY WITH THE CON TROLLED TRANSACTION/ENTITY COMPARABILITY OF CONTROLLED AND UNCONTROLLED TRANSACTIONS HAS TO BE JUDGED, INTER-ALIA, WITH REF ERENCE TO COMPARABILITY FACTORS AS INDICATED UNDER RULE 10B ( 2) OF THE INCOME-TAX RULES, 1962.' THE LD. AR SUBMITTED THAT THE TNMM METHOD ADOPTED BY THE APPELLANT AND THE RESULTANT C OMPUTATION OF ALP MAY KINDLY BE ACCEPTED AS PROPER AND REASONA BLE. I.T.A. NO. 6610/DEL/2016 ASSESSMENT YEAR: 2012-13 12 3.6 THE LD. AR FURTHER SUBMITTED THAT THE AUTHORITI ES BELOW ALSO ERRED IN NOT OBSERVING THE RULE OF CONSISTENCY IN D EVIATING FROM THE METHOD ADOPTED IN AY 2008-09 IN APPELLANTS CAS E. ATTENTION WAS DRAWN TO THE DECISION OF MUMBAI BENCH OF THE IT AT IN THE CASE OF CLARIANT CHEMICALS (I) LTD. V. JCIT (ITA NO.2393/MUM/2011) WHEREIN AFTER FINDING THAT THERE WAS A SIMILARITY IN FACTS OF THE CASE IN TWO DIFFERENT YE ARS, THE HONBLE ITAT HELD THAT WHEN THE FACTS ARE SAME THE QUESTION WILL BE THAT WHETHER ON THE SAME FACTS DEPARTMENT CAN TAKE A DIF FERENT STAND FOR THE YEAR UNDER CONSIDERATION WHICH IS AGAINST T HE RULE OF CONSISTENCY. WHEN THERE IS NO DIFFERENCE IN THE FAC TS OF PRECEDING YEAR WHERE THE CASE OF ASSESSEE HAS BEEN ACCEPTED B Y THE TPO EXPRESSLY, THEN IN OUR CONSIDERED VIEW TPO CANNOT T AKE A DIFFERENT STAND DURING THE YEAR UNDER CONSIDERATION AS THE AS SESSEE WILL BE ENTITLED TO GET BENEFIT OF THE STAND TAKEN BY THE R EVENUE IN IMMEDIATELY PRECEDING YEAR.' 3.7 IT IS FURTHER SUBMITTED BY THE LD. AR THAT RUL ES 10A TO 10E PROVIDE FOR THE FACTORS WHICH ARE TO BE CONSIDERED IN SELECTING THE MOST APPROPRIATE METHOD TO APPLY FOR TRANSFER PRICI NG. MAJOR FACTORS IN THIS REGARD HAVE BEEN SPECIFIED TO BE TH E AVAILABILITY, I.T.A. NO. 6610/DEL/2016 ASSESSMENT YEAR: 2012-13 13 COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPL ICATION OF THE METHOD, THE EXTENT AND RELIABILITY OF ASSUMPTIONS R EQUIRED TO BE MADE, AND THE DEGREE OF COMPARABILITY EXISTING BETW EEN THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRAN SACTION. IT WAS SUBMITTED THAT THE DEGREE OF COMPARABILITY BETW EEN THE INTERNATIONAL TRANSACTION OF THE APPELLANT AND THE UNCONTROLLED TRANSACTION OF THE AFORESAID SELECTED COMPANIES WAS NONEXISTENT AS WHILE APPELLANT IS MERE TRADER, THE SELECTED COM PANIES FOR COMPARISON ARE MANUFACTURERS. THE METHOD ADOPTED BY THE AUTHORITIES BELOW IS, THEREFORE, UNWARRANTED AND UN JUSTIFIED. 3.8 IT WAS EMPHASISED BY THE LD. AR THAT THE APPELL ANT HAD FULLY COMPLIED WITH THE REQUIREMENTS OF SEC.92D AND RULE 10D IN AS-MUCH-AS IT MAINTAINED THE REQUIRED INFORMATION A ND DOCUMENTS SPECIFIED BY RULES. THE APPELLANT ALSO FU LLY COMPLIED WITH THE REQUIREMENT OF SEC.92E AND RULE 10E AND FO RM 3 CEB AND FILED THE ACCOUNTANTS REPORT IN FORM NO.3 CEB WHICH FULLY SUPPORTED THE COMPUTATION MADE BY THE APPELLANT. TH E AUTHORITIES BELOW DID NOT FIND ANYTHING WRONG OR OT HERWISE IN THE ACCOUNTANT'S REPORT IN FORM NO.3CEB AND DID NOT POI NT OUT ANY MATERIAL TO SHOW THAT THE APPELLANT HAD NOT COMPLIE D WITH THE I.T.A. NO. 6610/DEL/2016 ASSESSMENT YEAR: 2012-13 14 REQUIREMENT OF SEC.92E, RULE 10E AND FORM NO.3 CEB. 3.9 ON GROUND NO 6, IT WAS SUBMITTED THAT THE AUTHO RITIES BELOW DID NOT CONSIDER THE FACTS THAT THE REVENUE FROM TH E TRANSACTIONS WITH UNRELATED ENTITIES WAS INCLUDED IN THE TOTAL W HICH SHOULD NOT BE PART OF ADJUSTMENT U/S 92CA OF THE ACT. IT W AS SUBMITTED THAT THE HON'BLE DRP-1 IN THEIR ORDER HAD HELD APPE LLANT'S OBJECTION AS VALID AND DIRECTED TO RESTRICT THE APP LICATION OF THE OPERATING PROFIT RATIO OF COMPARABLE COMPANIES ON I NTERNATIONAL TRANSACTIONS ONLY. THE TPO IN HIS REPORT DATED 05.1 0.2016 TO THE DCIT NOTED HONBLE DRPS OBSERVATIONS BUT IGNORED I T IN HIS CALCULATION OF ALP. THIS IS CLEAR MISTAKE. IN ACCOR DANCE WITH DIRECTIONS OF THE HONBLE DRP, THE RELEVANT LAW AND RULES, THE ALP OF TRANSACTIONS WITH ASSOCIATED ENTERPRISES ONLY SH OULD HAVE BEEN CALCULATED BY APPLYING THE SAID OPERATING PROFIT RA TIO OF COMPARABLE COMPANIES ON THE TURNOVER GENERATED DUE TO TRANSACTIONS WITH ASSOCIATED ENTERPRISES ONLY. IT W AS SUBMITTED THAT DURING THE YEAR THE APPELLANT COMPANY ACHIEVED OPERATING MARGIN RATIO OF (-)7.66% AND THE TOTAL VALUE OF TRA NSACTIONS WITH ASSOCIATED ENTERPRISES OF THE APPELLANT COMPANY WAS RS.5,34,88,788/-. THE TURNOVER GENERATED DUE TO INT ERNATIONAL I.T.A. NO. 6610/DEL/2016 ASSESSMENT YEAR: 2012-13 15 TRANSACTIONS WITH ASSOCIATED ENTERPRISES SHOULD BE CALCULATED BY APPLYING THE OPERATING MARGIN RATIO OF THE COMPANY ON THE SAID VALUE OF TRANSACTION. THE RESULTANT TURNOVER COMES TO RS.4,96,84,209/-. THE OPERATING PROFIT RATIO OF COM PARABLE COMPANIES AS DETERMINED BY TPO 7.98% SHOULD BE APPL IED ON THE ABOVE TURNOVER OF RS.4,96,84,209/- AND THE RESULTAN T ALP WILL BE RS.4,57,19,409/-. THE DIFFERENCE IS IN NEGATIVE I.E . (-) RS.39,50,000/-. THE LD. AR SUBMITTED THAT AS THE DI FFERENCE IS IN NEGATIVE NO ADDITION SHOULD BE MADE UNDER TRANSFER PRICING RULES. 3.10 ON GROUND NO 7, THE LD. AR SUBMITTED THAT THE TPO WORKED OUT AVERAGE OPERATING RATIO TO 7.98 OF THE COMPARAB LE ENTITIES AND COMPUTED ARMS LENGTH PRICE AT RS. 2,08,34,782/- . IT WAS SUBMITTED THAT THERE WAS WIDE VARIATION OF OPERATIN G RATIOS OF THE COMPARABLE ENTITIES SELECTED BY THE TPO. IT WAS ALS O SUBMITTED THAT COMPARABLE CASES OF ITDL IMAGETIC LIMITED AND TIRUPATI INKS LIMITED SELECTED BY THE AUTHORITIES WERE IN FACT NO T APPROPRIATE AND COMPARABLE BECAUSE THESE COMPANIES ARE WHOLLY MANUFACTURING COMPANIES WHILE THE APPELLANT IS ENTI RELY IN TRADING BUSINESS. THE LD. AUTHORITIES DID NOT FOLLO W THE PROVISIONS OF RULE 10C REGARDING SELECTION OF THE M OST APPROPRIATE METHOD. THE LD. AR REITERATED THAT THE TNMM I.T.A. NO. 6610/DEL/2016 ASSESSMENT YEAR: 2012-13 16 METHOD ADOPTED BY THE APPELLANT WAS MOST APPROPRIAT E WHICH HAD ALSO BEEN FOLLOWED BY THE AUTHORITIES IN THE CA SE IN AY 2008- 09. 3.11 ON GROUND NO.8, THE LD. AR SUBMITTED THAT THAT THE RETURNED LOSS OF RS.73,53,080/- WAS COMPUTED AFTER ADJUSTMENT OF RS.36,98,683/- UNDER TRANSFER PRICING RULES. THE AO IN HIS COMPUTATION OF TOTAL INCOME TOOK THE FIGURE OF RS.7 3,53,080/- TO WHICH HE ADDED RS. 1,41,36,214/-. THUS, THE ACTUAL ADDITION FOR ALP IS RS. L,41,36,214/- PLUS RS.36,98,683/- WHEREA S AS PER DRP/TPO IT HAS TO BE ONLY RS. L,41,36,214/-. IT WAS FURTHER SUBMITTED THAT THIS ISSUE WAS RAISED BEFORE THE HON BLE DRP WHO HELD APPELLANTS OBJECTION AS VALID. TPO ALSO REFER RED TO THAT IN HIS REPORT, BUT HE IGNORED IT IN HIS CALCULATION OF THE AMOUNT OF ALP TO BE ADDED AND CONSEQUENTLY AO ALSO IGNORED TH E SAME IN HIS IMPUGNED ORDER. 3.12 THE LD. AR SUBMITTED THAT GROUND NO.9 IS AGAIN ST THE CHARGING OF INTEREST U/S 234A, 234B, 234C AND 234D OF THE I.T. ACT, 1961AND URGED THAT ITAT MAY DIRECT THE AO TO M ODIFY THE ORDER IN THIS REGARD. I.T.A. NO. 6610/DEL/2016 ASSESSMENT YEAR: 2012-13 17 3.13 THE LD. AR SUBMITTED THAT GROUND NO.10 IS DIRE CTED AGAINST INITIATION OF PENALTY PROCEEDINGS U/S 271(1) (C) OF THE ACT. SINCE THERE WAS NO CONCEALMENT OF INCOME NOR FURNISHING O F INACCURATE PARTICULARS OF INCOME BY THE APPELLANT THE INITIATI ON OF PENALTY PROCEEDINGS U/S 271 (1) (C) OF THE ACT WAS UNJUSTIF IED AND WRONG AND THAT THE AO MAY BE DIRECTED TO DROP THE PENALTY PROCEEDINGS U/S 271 (1) (C) OF THE ACT. 4. THE LD. CIT DR SUPPORTED THE ORDERS OF THE AUTHO RITIES BELOW. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE PE RUSED THE MATERIAL ON RECORD. IT IS UNDISPUTED AND APPARENT FROM THE DIRECTIONS OF THE HONBLE DRP THAT THE HONBLE DRP IN PAGE 3 OF ITS DIRECTIONS DATED 23.08.2016 HAD DIRECTED THE TP O TO CALCULATE THE ALP BY RESTRICTING THE ADJUSTMENT TO THE INTERN ATIONAL TRANSACTION AND ALSO ALLOWING CREDIT OF AMOUNT OF R S. 3698683/- ALREADY ADDED BACK BY THE ASSESSEE IN THE COMPUTATI ON OF TAXABLE INCOME. IT IS VERY MUCH EVIDENT THAT WHILE PASSING THE ORDER SUBSEQUENT TO THE DIRECTIONS OF THE HONBLE DRP, TH E AO HAS NOT FOLLOWED THE DIRECTIONS OF THE HONBLE DRP IN THIS REGARD AND HAS I.T.A. NO. 6610/DEL/2016 ASSESSMENT YEAR: 2012-13 18 PROCEEDED TO CALCULATE THE ALP BY APPLYING THE ENTI TY LEVEL TURNOVER. THEREFORE, WE DEEM IT FIT TO RESTORE THI S ISSUE TO THE FILE OF THE TPO/AO FOR GIVING EFFECT TO THE DIRECTIONS O F THE HONBLE DRP IN A PROPER MANNER AFTER VERIFICATION AND AFTER AFFORDING DUE OPPORTUNITY TO THE ASSESSEE TO PRESENT ITS CASE. A CCORDINGLY, GROUND NO. 6 AND 8 OF THE ASSESSEES APPEAL STAND A LLOWED FOR STATISTICAL PURPOSES. 5.1 AS FAR AS GROUND NO. 7 OF THE APPEAL CHALLENGIN G SELECTION OF TWO COMPARABLES VIZ. ITDL IMAGETIC LTD. AND TIRUPAT I INCS LTD. ARE CONCERNED, ON GOING THROUGH THE PROFILES OF THE SE TWO COMPARABLES, IT IS UNDISPUTED THAT ITD IMAGETIC LTD . IS NOT MANUFACTURING BUSINESS WHEREAS TIRUPATI INC. LTD. MANUFACTURERS PRINTING INKS ON THE OTHER HAND, THE ASSESSEE IS A TRADING COMPANY. IT IS UNDISPUTED THAT THE RISK PR OFILE OF A MANUFACTURING COMPANY IS DIFFERENT FROM THAT OF A T RADING COMPANY. WE ARE OF THE CONSIDERED OPINION THAT THE RISK PROFILE AND THE FUNCTIONALITY OF THESE TWO COMPANIES BEING DIFFERENT THAN THAT OF THE ASSESSEE COMPANY, THESE TWO COMPANIES S HOULD NOT HAVE BEEN SELECTED AS A COMPARABLE. ACCORDINGLY, W E RESTORE THESE TWO COMPARABLES TO THE FILE OF THE TPO WITH THE DIRECTION I.T.A. NO. 6610/DEL/2016 ASSESSMENT YEAR: 2012-13 19 THAT THESE TWO COMPANIES BE EXCLUDED FROM THE FINAL SET OF COMPARABLES IF ON VERIFICATION IT IS CONFIRMED THAT BOTH THESE TWO COMPANIES CARRY OUT MANUFACTURING OPERATIONS. NEEDL ESS TO SAY, THE ASSESSEE WILL BE AFFORDED DUE OPPORTUNITY OF BE ING HEARD AT THE TIME OF VERIFICATION BY THE TPO. ACCORDINGLY, GROUND NO. 7 STANDS ALLOWED FOR STATISTICAL PURPOSES. 5.2 THE LD. AR HAS AGREED THAT IF GROUND NO. 6, 7 A ND 8 ARE ALLOWED FOR STATISTICAL PURPOSES, THEN GROUND NOS. 3, 4 AND 5 WILL BECOME ONLY ACADEMIC IN NATURE AND THE SAME NEED NO T BE ADJUDICATED. IN VIEW OF OUR ALLOWING GROUND NO. 6, 7 AND 8 FOR STATISTICAL PURPOSES, GROUND NOS. 4, 5 AND 6 ARE TR EATED AS ACADEMIC. 5.3 GROUND NO. 9 IS CONSEQUENTIAL. 5.4 GROUND NO. 10 IS PREMATURE AND IS DISMISSED AS SUCH. 6. IN THE FINAL RESULT, THE ASSESSEES APPEAL STAND S PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH SEPTEMBER, 2017. SD/- SD/- (R.S.SYAL) (SUDH ANSHU SRIVASTAVA) VICE PRESIDENT JUD ICIAL MEMBER DATED: 27 TH SEPTEMBER, 2017 GS I.T.A. NO. 6610/DEL/2016 ASSESSMENT YEAR: 2012-13 20 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT BY ORDER ASSTT. REGISTRAR