ADVANCE POWER DISPLAY SYSTEMS LTD, MUMBAI V. ASST CIT RG 8(1), MUMBAI

ITA 6732/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3727 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 23-04-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 07-10-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: J D MISTRY
• Keywords: Related party transaction; Transfer pricing; Business expenditure; Residential status; International transaction; Retrospective amendment
• Section: 92C

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . . , ! BEFORE SHRI . R S SYAL, AM , & SHRI VIJAY PAL RAO, JM ./ I.T.A. NO. 6732/MUM/2011 ( !# !# !# !# $ $ $ $ / ASSESSMENT YEAR: 2003-04) & ./ I.T.A. NO. 6542/MUM/2011 ( !# !# !# !# $ $ $ $ / ASSESSMENT YEAR: 2003-04) ADVANCE POWER DISPLAY SYSTEMS LTD UNIT NO. 8 SDF I SEEPZ, ANDHERI (E) MUMBAI 96 # # # # / VS. THE ASST COMMR OF INCOME TAX 8(1), MUMBAI % ./ & ./ PAN/GIR NO. : AAACA5970G ( %' %' %' %' / APPELLANT/RESPONDENT/ ()%' ()%' ()%' ()%' ) .. ( ()%' ()%' ()%' ()%' RESPONDENT/APPELLANT/ %' %' %' %' ) %' %' %' %' * * * * / APPELLANT BY : SHRI J D MISTRY ()%' ()%' ()%' ()%' + ++ + * * * * /RESPONDENT BY : SHRI AJEET KUMAR JAIN # # # # + ++ + , , , , / DT. OF HEARING : 23 RD APRIL 2013 -.$ -.$ -.$ -.$ + ++ +, , , , / DT.OFPRONOUNCEMENT: 8 TH MAY 2013 / / O R D E R PER : , . . / VIJAY PAL RAO, JM THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 19.7.2011 OF THE COMMISSIONER OF INCOME TAX(APPEALS) FOR THE ASSESSMENT YEAR 2003-04. 2 IN ITA NO. 6732/M UM/2011, THE ASSESSEE HAS RAISE D THE FOLLOWING GROUNDS AS UNDER: ITA NO. 6542 & 6732/M/2011. . 2 1. THE CIT(A) ERRED IN CONFIRMING THE ORDER OF THE ASSESSING OFFICER DISALLOWING AN AMOUNT OF RS 80,90,907/- BEING EXPEN DITURE INCURRED BY THE APPELLANT FOR EXPORT PROMOTION. 2. BEING EXPORT PROMOTION EXPENSES ON THE GROUND TH AT THESE WERE NOT INCURRED FOR THE PURPOSE OF BUSINESS CONSIDERIN G THE BUSINESS MODEL ADOPTED BY THE APPELLANT. 3. THE CIT(A) FAILED TO APPRECIATE THE EVIDENCE IN SUPPORT OF APPELLANTS CLAIM ON ACCOUNT OF EXPORT PROMOTION EX PENSES OF RS 80,90,907/- WHICH WAS FILED BEFORE THE AO CLEARL Y ESTABLISHES THAT THE APPELLANT HAD INCURRED THE SAID EXPENDITURE FOR THE PURPOSE OF BUSINESS. THE APPELLANT PRAYS THAT THE SAID EXPENDITURE IN TH E NATURE OF EXPORT PROMOTION EXPENSES, INCURRED FOR THE PURPOSE OF BUSINESS AND DULY SUPPORTED BY EVIDENCE BE ALLOWED AS A DEDU CTION IN ARRIVING AT THEIR INCOME. 3 THE ONLY ISSUE RAISED BY THE ASSESSEE IN THIS APP EAL IS AGAINST THE DISALLOWANCE OF EXPORT PROMOTION EXPENSE OF `. 80,9 0,907/-. 3.1 THE ASSESSEE IS A 100% EXPORT ORIENTED UNIT ENG AGED IN MANUFACTURING (ASSEMBLY AND TEST) OF SWITCH MODE P OWER SUPPLIES (SMPS) USED IN COMPUTER INDUSTRY AND INFORMATION TE CHNOLOGY APPLICATION. THE ASSESSEE HAS ENTERED INTO THE MANUFACTURING CON TRACT DATED 3.7.200 WITH ITS ASSOCIATED ENTERPRISE NAMELY M/S QUALITY C OMPONENT & SYSTEMS PPE LTD (QCS) WHEREBY THE ASSESSEE AGREED TO MANUFA CTURE/ASSEMBLE SMPS FOR ITS AE/QCS AS PER THE TERMS AND CONDITIONS OF THE SAID AGREEMENT. 3.2 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, T HE ASSESSING OFFICER NOTICED FROM THE P&L ACCOUNT OF THE ASSESSEE THAT T HE ASSESSEE HAS CLAIMED ` 85,90,907/- UNDER THE HEAD EXPORT PROMO TION EXPENSES. IT WAS FURTHER SEEN THAT THIS PAYMENT WAS ON ACCOUNT O F FOREIGN TRAVELLING ITA NO. 6542 & 6732/M/2011. . 3 EXPENSES INCURRED FOR THE FAMILY MEMBERS OF THE DIR ECTOR. THE ASSESSING OFFICER OF THE OPINION THAT THE ASSESSEE COMPANY HA S CLAIMED THE PERSONAL EXPENSES OF THE RELATIVE OF THE DIRECTOR A S ITS BUSINESS EXPENSES. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAI N THE BUSINESS PURPOSE OF EXPORT PROMOTION EXPENSES ALONG WITH THE BILLS OF THE EXPENSES AND LEDGER EXTRACTS. 3.3 IN RESPONSE, THE ASSESSEE FILED LETTERS DATED 1 9.7.2005 AND 24.1.2006 AND SUBMITTED THAT THE EXPENSES ARE AC TUALLY MARKETING AND SALES EXPENSES. IT WAS SUBMITTED THAT THE FOREIGN TRAVELLING IS MADE BY THE PRESIDENT AND THE DIRECTORS OF THE COMPANY FOR THE PURPOSE OF THE BUSINESS. THE ASSESSEE FURNISHED BEFORE THE ASSESS ING OFFICER THE COPIES OF THE BILLS OF THE TRAVELLING EXPENDITURE INCURRED FOR THE SAID VISITS ALONG WITH THE DETAILS OF FOREIGN TRAVEL. 3.4 AFTER CONSIDERING THE ASSESSEES REPLY AND THE DETAILS, THE ASSESSING OFFICER HELD THAT THE ASSESSEE COMPANY SELLS ITS GO ODS TO M/S QUALITY COMPONENT & SYSTEMS P LTD, SINGAPORE (QCS). ONCE TH E GOODS ARE SOLD, IT IS THE RESPONSIBILITY OF THE QCS TO FURTHER MARKET THE PRODUCTS. THE AE/QCS IS THE SOLE PURCHASER OF THE ASSESSEES PRO DUCTS AND IF ANY FURTHER ACTIVITY IS CARRIED OUT BY QCS, IT IS NOT THE LIABILITY OF THE ASSESSEE. THE ASSESSEE COMPANY HAS NO CLIENTS IN COUNTRIES O THER THAN SINGAPORE. THEREFORE, FOREIGN TRAVEL EXPENDITURE WAS HELD THAT NOT FOR BUSINESS PURPOSE AND FOR PERSONAL PURPOSES TOO. THE ASSESS ING OFFICER, ACCORDINGLY THE ESTIMATED EXPENDITURE OF ` 5 LACS T OWARDS VISIT TO ITA NO. 6542 & 6732/M/2011. . 4 SINGAPORE AS BUSINESS EXPENDITURE AND THE BALANCE O F ` 80,90,907/- WAS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE. 3.5 ON APPEAL, THE COMMISSIONER OF INCOME TAX (APPE ALS) HAS CONCURRED WITH THE VIEW OF THE ASSESSING OFFICER AN D HELD THAT THE ASSESSEE HAS NO ROLE OR RESPONSIBILITY TOWARDS MARK ETING AND SALE EXCEPT FOR EXTENDING SOME TECHNICAL/ADVISORY SUPPORT IN RE SPECT OF ITS MANUFACTURING CAPABILITIES. THE COMMISSIONER OF I NCOME TAX (APPEALS) WAS OF VIEW THAT THE ASSESSEE HAS ABSOLUTELY NO ROL E AND RESPONSIBILITIES IN RESPECT OF CUSTOM DESIGN AND DEVELOPMENT AND MAT ERIAL PROCUREMENT FUNCTIONS. THE ASSESSEE IS PLAIN AND A SIMPLE CONT RACT MANUFACTURER WHICH CONVERTS THE RAW MATERIAL PROCURED FROM THE A E TO THE FINISHED GOODS AND SUPPLIES IT BACK TO THE AE. 4 BEFORE US, THE LD SR COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT BOTH THE PERSONS WHO VISITED FOREIGN COUNTRY ARE DI RECTORS OF THE ASSESSEE COMPANY; THEREFORE, THERE IS NO QUESTION OF FAMILY MEMBERS OF DIRECTOR VISITED TO THE FOREIGN COUNTRY AND THE ELEMENT OF P ERSONAL EXPENSES. THE FOREIGN TRAVEL IS MADE BY THE PRESIDENT AND THE DIR ECTORS FOR THE PURPOSE OF THE BUSINESS. HE HAS FURTHER CONTENDED THAT THE ASSESSEE IS A 100% EXPORT ORIENTED UNIT LOCATED IN SPECIAL ECONOMIC ZO NE (SEZ) AND HAS TO COMPETE WITH THE INTERNATIONAL COMPANIES OUTSIDE IN DIA. THE TOTAL BUSINESS ACTIVITY OF THE ASSESSEE IS MAINLY DEPENDE NT ON FOREIGN CUSTOMERS. THEREFORE, IT IS REQUIRED THAT A FAIR AMOUNT OF TIME IS SPENT IN MEETING CUSTOMERS AND SUPPLIERS. THE LD SR COUNSEL HAS SUBMITTED THAT ITA NO. 6542 & 6732/M/2011. . 5 THE ASSESSEES PRINCIPAL CUSTOMERS NAMELY HEWLETT P ACKARD, CISCO SYSTEMS, FOUNDRY NETWORKS, BROCADE COMMUNICATIONS A ND RIVERSTONE NETWORKS ARE ALL WORLD RENOWNED COMPANIES, PUBLIC L ISTED ON NEW YORK STOCK EXCHANGE. TO SECURE THEIR BUSINESS, EXTENSIV E DIRECT CONTRACTS ON REGULAR BASIS ARE NECESSARY. THE TOTAL TURNOVER D URING THE YEAR INVOLVED MANUFACTURING 23 MODELS OF DIFFERENT MANUFACTURING COMPLEXITY AND SALE QUANTITY. EACH MODEL HAS A UNIQUE DESIGN TO MEET CUSTOMER SPECIFICATIONS. THE MANUFACTURING OPERATIONS OF TH E ASSESSEE ARE IN MUMBAI AND ITS CUSTOMER QCS HAS MARKETING, SALES, D ESIGN, MATERIAL PROCUREMENT AND CUSTOMER SALES SUPPORT ACTIVITIES L OCATED IN USA AND SINGAPORE. THE ASSESSEE REQUIRES MORE THAN 3000 C OMPONENTS IN ITS MANUFACTURING OPERATIONS WHICH ARE PRODUCED BY MORE THAN 100 SUPPLIERS LOCATED OUTSIDE INDIA. THE ASSESSEE ASSISTS QCS IN TECHNICAL AND ADVISORY CAPACITY TO HELP IDENTIFY THE SOURCES FOR THESE COM PONENTS. TO COMPLETE THE DESIGN OF EVERY MODEL IT REQUIRES MULTIPLE FACE -TO-FACE MEETING. THE ASSESSEE AND ITS CUSTOMER I.E. QCS WORK TOGETHER TO SECURE THE DESIGN AND MANUFACTURING CONTRACTS. 4.1 THE LD SR COUNSEL HAS SUBMITTED THAT THE ASSESS EE HAS TO SATISFY THE ULTIMATE BUYER OF THE PRODUCT AND THEREFORE IT IS N ECESSARY TO DISCUSS WITH THE BUYERS FOR THE PURPOSE OF FINALISATION OF DESIG N, MODEL AND OTHER ISSUES AS PER THE REQUIREMENT AND SPECIFICATION OF THE BUYER. HE HAS REFERRED THE MANUFACTURING AGREEMENT WITH THE AE AN D SUBMITTED THAT THE PROCUREMENT OF ELECTRONIC COMPONENTS FROM WORLDWIDE MARKET WITH JOINT ITA NO. 6542 & 6732/M/2011. . 6 QUALITY INSPECTION FROM QCS AND THE ASSESSEE EXPERT S AS PER PURCHASE ORDERS PLACED BY THE ASSESSEE. THEREFORE, THE ASSES SEE HAS TO PARTICIPATE IN THE PROCUREMENT OF THE COMPONENTS BY QUALITY INS PECTION FOR MANUFACTURING OF SMPS. AS PER THE AGREEMENT, THE ASSESSEE HAS TO BEAR ALL THE FIXED AND VARIABLE COSTS NEEDED TO MANUFACT URE THE PRODUCTS AND THE AE WILL BUY ALL THE SMPS AT THE PRICE RANGE BET WEEN 1.30 TO 1.40 TIMES OF ITS CBOM. THE LD SR COUNSEL HAS REFERRED THE DET AILS OF THE EXPENSES AND FOREIGN VISITS AND SUBMITTED THAT IT IS CLEAR T HAT THE DIRECTORS OF THE ASSESSEE COMPANY VISITED TO THE PLACES WHERE THE CL IENTS OF THE ASSESSEE ARE SITUATED AND THEREFORE, THE EXPENDITURE WAS INC URRED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. HE HAS REFERRED T HE E-MAIL COMMUNICATION BETWEEN THE ASSESSEE AND THE BUYERS O F THE PRODUCTS AND SUBMITTED THAT WHEN THE ASSESSEE HAS BEEN WORKING A S PER THE REQUIREMENT AND SPECIFICATION OF THE BUYERS, THEN T HE EXPENDITURE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. 4.2 ON THE OTHER HAND, THE LD DR HAS SUBMITTED THAT AS PER THE MANUFACTURING AGREEMENT, DESIGN, MODEL AND DEVELOPM ENT OF THE PRODUCTS ARE TO BE PROVIDED BY THE AE/QCS OF THE A SSESSEE AND THE ASSESSEE HAS NO FUNCTION OR ROLE IN RESPECT OF THE SALES SUPPORT OR OTHER MARKETING OR PROMOTIONAL FUNCTIONS OF THE PRODUCTS. THE ENTIRE MANUFACTURED QUANTITY HAS TO BE TAKEN BY THE AE AND THE ASSESSEE IS UNDER NO OBLIGATION TO SATISFY THE CLIENT OF THE AE ONCE THE PRODUCT IS ITA NO. 6542 & 6732/M/2011. . 7 MANUFACTURED AS PER THE CUSTOM DESIGN AND MODEL PRO VIDED BY THE AE. THE ASSESSEE IS A SIMPLE CONTRACT MANUFACTURER AND THEREFORE, THE EXPENDITURE INCURRED ON FOREIGN VISITS, WHICH IS NO T TO THE ASSESSEES CLIENTS, CANNOT BE CONSIDERED AS THE EXPENDITURE IN CURRED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE COMPANY.. HE HAS RE LIED UPON THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS). 5 WE HAVE CONSIDERED THE RIVALS SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE MANUFACTURING ACTIVITY OF T HE PRODUCTS SMPS HAS BEEN UNDERTAKEN BY THE ASSESSEE AS PER THE MANUFACT URING CONTRACT DATED 7.7.2000WITH ITS AE. THE RECITAL AND THE REL EVANT CLAUSES OF THE AGREEMENT ARE AS UNDER: WHEREAS APDS IS ENGAGED IN THE MANUFACTURE-ASSEMBLI NG OF ELECTRONIC PRODUCT SWITCH MODE POWER SUPPLY (SMPS). WHEREAS QCS IS ENGAGED IN THE DESIGN, MARKETING AND SALES O F ELECTRONIC PRODUCT SMPS, APDS AND QCS DESIRE TO ENTER IN TO A MANUFACTURE- ASSEMBLING CONTRACT AGREEMENT WHEREBY APDS SHALL MA NUFACTURE- ASSEMBLE SMPS FOR QCS. THE MANUFACTURE SHALL BE CON DUCTED ACCORDING TO THE ASSEMBLY DRAWINGS, BILL OF MATERIA L ETC PROVIDED BY QCS FOR EACH MODEL TO BE MANUFACTURED BY APOS.QCS S HALL PLACE PURCHASE ORDERS WITH APDS FOR EACH SPECIFIED MODEL OF SMPS BE MANUFACTURED BY APDS. THIS MANUFACTURE-ASSEMBLING CONTRACT AGREEMENT SHAL L APPLY TO ALL MANUFACTURE AND ASSEMBLING PROJECTS SET FORTH IN TH E CURRENT AND FUTURE SIGNED INDIVIDUAL ORDERS. 1. OBJECT OF THE AGREEMENT: (1) FOR AND IN CONSIDERATION TO THE MUTUAL COVENANT S AND AGREEMENTS CONTAINED HEREIN, THE PARTIES HERETO AGR EE TO MANUFACTURE AND ASSEMBLING WORK OF & ELECTRONIC PRO DUCTS, SWITCH MODE POWER SUPPLIES (SMPS) AND SUB-ASSEMBLIES AS SE T FORTH IN DETAILED INDIVIDUAL ORDERS TO BE AGREED BETWEEN THE PARTIES. (2) PROCUREMENT OF ELECTRONIC COMPONENTS FROM WORLD WIDE MARKET WITH JOINT QUALITY INSPECTION FROM QCS AND APDS E XPERTS AND TO ITA NO. 6542 & 6732/M/2011. . 8 SHIP THE COMPONENTS TO APDS AS PER PURCHASE ORDERS PLACED BY APDS, (3) THE OBJECT OF THE AGREEMENT INCLUDES SUCH KNOWL EDGE AND EXPERTISE CONCERNING THE MANUFACTURE AND ASSEMBLING WORK WHICH IS ALREADY IN APDS POSSESSION. 2. MANUFACTURE-ASSEMBLING: 1) QCS WILL PROVIDE COMPLETE PRODUCT DESIGN AND BIL L OF MATE1AL (BOM) TO APDS FOR SMPS MODELS. UPON REQUEST FROM QQ S FOR THE SMPS MODEL, APDS WILL SUBMIT A COSTED BILL OF MATER IAL (CB0M) IDENTIFYING TOTAL CIF MATERIAL COST FOR EACH MODEL. APDS WILL RESPONSIBLE FOR ALL FIXED AND VARIABLE COSTS NEE DED TO MANUFACTURE THE PRODUCT AS PER QCS ORDERS. QCS WILL BUY THE SMP S MANUFACTURED ASSEMBLED BY APDS AT PRICE RANGING BET WEEN 1.30 TO 1.40 TIMES OF ITS CBOM. THE MULTIPLIER TO CBOM CAN VARY BUT WITH IN THE RANGE OF 1.30 AND 1.40 DEPENDING AN THE VOLU ME OF SMPS PRODUCED, COMPLEXITY OF ASSEMBLING THE SMPS, FLUCTU ATION IN MATERIAL COST & FOREIGN CURRENCY RATES. AFTER HAVIN G ACCEPTED THE CBOM, QCS WILL RELEASE PURCHASE ORDER FOR THE SMPS MODEL, SUCH ORDER WILL BE BINDING AND WILL BECOME AN INTEGRAL P ART OF THIS AGREEMENT. (2) APDS WILL UNDERTAKE THE MANUFACTURE AND ASSEMBL ING WORK ACCORDING TO THE DESIGN AND PURCHASE ORDER AND SHIP THE PRODUCT WITH THE TEST REPORTS AS PER THE TERMS AND CONDITIO NS AGREED IN THE ORDER AND TIME TO TIME DIRECTIONS. APDS HAS TO RAIS E THE SALES INVOICE FOR THE EACH SHIPMENT. (3) APDS IS NOT ENTITLED TO SUBCONTRACT THE MANUFAC TURE ASSEMBLING ACTIVITY OR PARTS THEREOF TO ANY THIRD PARTIES UNLE SS QCS HAS GIVEN ITS PRIOR CONSENT. APDS SHALL SET FORTH IN ANY AGRE EMENTS WITH THIRD PARTIES THAT SUCH THIRD PARTIES IN ADVANCE TRANSFER THEIR CLAIMS, IF ANY, TO INDUSTRIAL /INTELLECTUAL PROPERTY RIGHTS TO APDS. (4) QCS IS FREE TO ASSIGN THIRD PARTIES WITH THE SA ME MANUFACTURE- ASSEMBLING WORK. SUCH A THIRD PARTY MANDATE HAS NO EFFECT ON THIS AGREEMENT AND THE INDIVIDUAL ORDER. 5.1 AS AGREED BY THE PARTIES, THE ASSESSEE HAS TO MANUFACTURE/ASSEMBLE SMPS AS PER THE EACH SPECIFICA TION, MODEL OF THE PRODUCT TO BE ORDERED BY THE AE/QCS. AS PER THE TER MS OF THE AGREEMENT ITA NO. 6542 & 6732/M/2011. . 9 QCS WILL PROVIDE COMPLETE PRODUCT DESIGN AND BILL O F MATERIAL FOR SMPS MODEL TO THE ASSESSEE. THESE RAW MATERIAL HAS TO B E SUPPLIED BY THE AE AND THE FINISHED PRODUCTS HAS TO BE MANUFACTURED OR ASSEMBLED BY THE ASSESSEE AS PER THE PRODUCT DESIGN PROVIDED BY THE QCS. QCS WILL BUY ALL THE SMPS MANUFACTURED/ASSEMBLED BY THE ASSESSEE AT A PRICE RANGING BETWEEN 1.30 TO 1.40 TIMES OF ITS CBOM DEPENDING ON THE VOLUME OF SMPS PRODUCED, COMPLEXITY OF ASSEMBLING THE SMPS, F LUCTUATION IN MATERIAL COST AND FOREIGN CURRENCY RATES. 5.2 IT IS THE CASE OF THE ASSESSEE THAT THE DIRECTO R OF THE ASSESSEE VISITED FOREIGN COUNTRY TO HAVE MEETING AND DISCUSS ION WITH THE BUYERS OF THE FINISHED PRODUCTS. THEREFORE, THE PURPOSE OF TH E VISIT TO THE BUYER IS TO DISCUSS THE SPECIFIC REQUIREMENT AND DESIGN OF THE PRODUCT. THUS, THE ASSESSEE HAS CLAIMED THAT THE FOREIGN VISIT UNDERTO OK BY THE DIRECTORS IS TO SATISFY THE BUYERS THAT THE PRODUCT WOULD BE AS PER THE REQUIREMENT AND THEREFORE, THE ENTIRE EXPENDITURE HAS BEEN INCU RRED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. 5.3 IT IS TO BE NOTED THAT AS PER THE AGREEMENT, TH E ASSESSEE IS UNDER NO OBLIGATION TO DISCUSS THE PRODUCTS DESIGN WITH T HE BUYER WHEN THE ENTIRE MANUFACTURING/ASSEMBLING OF THE SMPS WAS TO BE DONE AS PER THE SPECIFIC DESIGN PROVIDED BY THE AE/QCS. THUS, PROVI DING THE DESIGN IS THE SOLE RESPONSIBILITY OF THE AE/QCS. THEREFORE, WHEN THE ASSESSEE HAS TO MANUFACTURE THE PRODUCT AS PER THE SPECIFICATION PR OVIDED BY THE QCS, ITA NO. 6542 & 6732/M/2011. . 10 THEN THE ONLY ROLE OF THE ASSESSEE TO PARTICIPATE IN THE JOINT INSPECTION OF THE RAW MATERIAL TO BE SUPPLIED BY THE AE. 5.4 EVEN IF THE FACT AS SUBMITTED BY THE ASSESSEE I S ACCEPTED THAT THE VISITS ARE IN CONNECTION WITH THE DISCUSSION WITH T HE BUYERS, THE SAME ARE PART OF THE BUSINESS ACTIVITY UNDERTAKEN BY THE ASS ESSEE AS PER THE AGREEMENT AND THEREFORE, AT THE MOST, THE VISITS OF THE DIRECTORS OF THE ASSESSEE COMPANY TO FOREIGN COUNTRIES OTHER THAN SI NGAPORE WERE ON BEHEST OF THE ASSESSEES AE/QCS. WHEN THE ENTIRE F INISHED PRODUCTS WAS TO BE SUPPLIED TO THE AE AND THE ASSESSEE IS A CAPT IVE SUPPLIER OF FINISHED GOODS TO THE AE, THE VISIT UNDERTAKEN BY THE DIRECT ORS OF THE ASSESSEE CANNOT BE SAID TO BE IN CONNECTION WITH WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE OF THE ASSESSEE. FOR ALLOWING THE EXPENDITURE, THE ONUS IS ON THE ASSESSEE TO PROVE THAT THE EXPENDITURE HA S BEEN LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. THE TERMS WHOLLY AND EXCLUSIVELY DENOTE THAT THE ENTI RE EXPENDITURE HAS BEEN LAID OUT SOLELY FOR THE PURPOSE OF THE BUSINES S OF THE ASSESSEE. THOUGH, THE ASSESSEE HAS PRODUCED THE DETAILS TO SH OW THAT THE ASSESSEE IS IN TOUCH WITH THE ULTIMATE BUYER OF THE PRODUCTS AND DISCUSS THE REQUIREMENT AND SPECIFICATION OF THE BUYER AS IT IS MENTIONED IN THE E-MAIL EXCHANGE BETWEEN THE ASSESSEE AND THE BUYERS ; HOWEVER, THE FOREIGN VISITS FOR THE PURPOSE OF MEETING WITH THE BUYERS OF THE ASSESSEES AE/QCS HAVE NO DIRECT NEXUS WITH THE MANUFACTURIN G ACTIVITY OF THE ITA NO. 6542 & 6732/M/2011. . 11 ASSESSEE. ACCORDINGLY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE ORDER OF THE AUTHORITIES BELOW, QUA THIS ISSUE. 6 IN ITA NO. 6542/MUM/2011, THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT (A)ERRED IN DELETING THE TRANSFER PRICING ADJUS TMENT MADE BY THE TPO/AO OF RS.4,90,00,000/- BY INCLUDING 3 NEW C OMPARABLES MERELY ON THE BASIS THAT THE DEPARTMENT HAD TREATED THESE ENTITIES AS COMPARABLE IN A.Y. 2006-07 & A.Y.2007-08. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN 1AW THE CIT(A) ERRED IN DELETING THE TRANSFER PRICING ADJUS TMENT WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE ITSELF HAD FOUND THE ABOVE 3 ENTITIES AS NOT CQMPARAB1E AB INITIO. 7 AS WE HAVE DISCUSSED ABOVE, THE ASSESSEE IS A CON TRACT MANUFACTURER. ITS GETS PURCHASE ORDER FROM ITS AE(Q CS), SINGAPORE AND MAINLY PROCURES THE REQUIRED RAW MATERIALS FROM TH E AES NAMELY QCS SINGAPORE, AND QCS SYSTEMS INC, USA. THE ASSESSEE IS NOT SELLING THE PRODUCTS OTHER THAN TO THE AE; THEREFORE, THE ENTIR E SALES OF THE ASSESSEE ARE TO THE AE. 7.1 DURING THE YEAR UNDER CONSIDERATION, THE ASSESS EE HAS VARIOUS INTERNATIONAL TRANSACTIONS, THE DETAILS OF WHICH AR E GIVEN BY THE TPO IN PARA 5 AS UNDER: SL.NO NATURE OF INTERNATIONAL TRANSACTIONS NAME OF THE A E AMOUNT IN ` `` ` 1 SALE OF POWER SUPPLIES QCS SINGAPORE 53,335,76,24 4 2 SALE OF POWER SUPPLIES QCS SYSTEM INC USA 16,931 3 PURCHASE OF RAW MATERIAL QCS SINGAPORE 41,08,15,579 4 PURCHASE OF RAW MATERIAL QCS SYSTEM INC. USA 1,12,68,130 5 PURCHASE OF FIXED ASSETS QCS SINGAPORE 1,14,36,809 ITA NO. 6542 & 6732/M/2011. . 12 6 PURCHASE OF FIXED ASSETS QCS SYSTEMS INC USA 92,32,058 7 PURCHASE RETURN OF FIXED ASSETS QCS SINGAPORE 6,75,188 7.2 THE ASSESSEE STATED TO HAVE USED COST PLUS METH OD TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS AND CLAIMED THAT TH E PROFIT MARK-UP OF THE ASSESSEE IS AT ARMS LENGTH AS COMPUTED BY TAKING FIVE COMPARABLES AS UNDER: I) ARTESIN (ASTN) II) POWER ONE (PWER) III) SOLECTRON (SLR) IV) CHEROKWEE (CHRK) V) FLEXTRONICS (FLEX) 7.3 THE TPO NOTED THAT THE INITIALLY THE ASSESSEE H AS MENTIONED ONLY THREE COMPARABLES, WHICH ARE AT SL. (II), (III) & ( V) ABOVE. THE COMPARABLES WERE SUBSEQUENTLY INCREASED TO FOUR BY INCLUDING CH EROKEE (SL NO (IV) AND FURTHER INCREASED BY INCLUDING ARTESIN (SL NO. (I). THE TPO WAS OF THE OPINION THAT THE ASSESSEE CANNOT CHANGE ITS COMPARA BLES AS AND WHEN IT WANTS. THE COMPARABLES SHOULD BE DONE ON THE BASIS OF DATA PUBLICLY AVAILABLE AS ON THE SPECIFIED DATE. THE ASSESSEE A RRIVED THE PROFITABILITY OF THE ABOVE FIVE COMPARABLES BEING NET PROFIT TO S ALES AT NEGATIVE FIGURES IN CASH ALL THE COMPARABLES WHEREAS THE ASSESSEES OWN PROFITABILITY HAS BEEN WORKED OUT AT 0.95%. SINCE THE OTHER COMPARAB LES WERE MAKING LOSS AND THE ASSESSEE IS SHOWING THE PROFIT IT IS CLAIMED THAT THE INTERNATIONAL TRANSACTIONS WITH ITS AES ARE AT ARM S LENGTH. 7.4 THE TPO OBJECTED TO THE COMPARABLES SELECTED BY THE ASSESSEE ON THE GROUND THAT THESE COMPARABLES ARE OF INTERNATIO NAL COMPANIES AND NOT ITA NO. 6542 & 6732/M/2011. . 13 BASED IN INDIA WHEREAS THE ASSESSEE IS BASED IN IND IA. FURTHER, NO DETAILS ARE AVAILABLE TO SUGGEST THAT ANY OF THESE COMPANIE S ARE ALSO HAVING RELATED PARTY TRANSACTIONS AND THE ASSESSEE HAS NOT DISCLOSED THE METHOD BY WHICH THESE COMPARABLES COMPANIES WERE SELECTED. ACCORDINGLY, THE TPO REJECTED THE COMPARABLES SELECTED BY THE ASSESS EE AND PROPOSED TO CONSIDER THE SEVEN COMPARABLES AS SELECTED BY THE T PO. 7.5 AFTER CONSIDERING THE OBJECTS OF THE ASSESSEE, THE TPO FINALLY CONSIDERED FOUR COMPARABLES FOR DETERMINING THE ARM S LENGTH PRICE BY APPLYING TNMN AS THE MOST APPROPRIATE METHOD AND OP ERATING PROFIT TO TOTAL COST (OP/TC) AS PLI. THE TPO WORKED OUT THE A RITHMETIC MEAN OF THE MARGINS OF THE FOUR COMPARABLES AT 9.22% IN COMPARI SON TO THE OPERATING PROFIT OF THE ASSESSEE AT 0.36% AS UNDER: FINANCIAL YEAR 2002-03 S/NO S/NO S/NO S/NO COMPANY NAME COMPANY NAME COMPANY NAME COMPANY NAME SALES SALES SALES SALES ( (( (` `` ` IN CR) IN CR) IN CR) IN CR) OPERATING OPERATING OPERATING OPERATING COST COST COST COST ( (( (` `` ` IN CR) IN CR) IN CR) IN CR) OPERATING OPERATING OPERATING OPERATING P PP PROFIT ROFIT ROFIT ROFIT ( (( (` `` ` IN CR) IN CR) IN CR) IN CR) OPERATING OPERATING OPERATING OPERATING PROFIT BY COST PROFIT BY COST PROFIT BY COST PROFIT BY COST IN % IN % IN % IN % 1 ADOR POWERTON LTD 18.44 16.51 1.93 11.69 2 AUTO IGNITIO LTD 65.98 57.02 8.96 15.71 3 N G TECHNOLOGIES LTD 17.45 16.66 0.79 4.74 4 TVS ELECTRONICS LTD 24.53 23.42 1.11 4.74 AVERAGE 9.22% ADVANCE POWER DISPLAY SYSTEMS LTD 53.36 53.17 0.19 0.36% 0.36% 0.36% 0.36% 7 .6 ACCORDINGLY, THE TPO MADE AN ADJUSTMENT OF ` 4.9 0 CRORES TOWARDS ALP. 7.7 ON APPEAL THE COMMISSIONER OF INCOME TAX (APPEA LS), THOUGH HELD THAT THE TNMM IS THE MOST APPROPRIATE METHOD IN THI S CASE; HOWEVER, THREE MORE COMPARABLES AS SUGGESTED BY THE ASSESSEE WERE ALSO INCLUDED ITA NO. 6542 & 6732/M/2011. . 14 AND ACCORDINGLY COMPUTED THE ARITHMETIC MEANS OF TH E OPERATING PROFIT OF THE 7 COMPARABLES AT 5.42%. THE GROUND FOR INCLUSI ON OF THE THREE MORE COMPARABLES, AS SUGGESTED BY THE ASSESSEE IS THAT I N THE SUBSEQUENT ASSESSMENT YEAR 2006-07 AND 2007-08, THE TPO HAS CO NSIDERED THESE COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRA NSACTIONS. THUS, THE COMMISSIONER OF INCOME TAX (APPEALS) HAS WORKED OUT THE ARITHMETIC MEANS OF 7 COMPARABLES AT 5.42% AGAINST THE ARITHME TIC MEANS DETERMINED BY THE TPO BY CONSIDERING FOUR COMPARABL ES AT 9.22%. 8 THE REVENUE HAS CHALLENGED THE ORDER OF THE COMMI SSIONER OF INCOME TAX(APPEALS) TO THE EXTENT OF INCLUSION OF T HREE COMPARABLES FOR DETERMINING OF THE ALP AND AGAINST THE BENEFIT OF + -5% BEING THE STANDARD DEDUCTION. 9 BEFORE US, THE LD DR HAS SUBMITTED THAT THE COMPA RABILITY OF AN ENTITY HAS TO BE TESTED INDEPENDENTLY FOR EACH ASSE SSMENT YEAR. THE COMPARABILITY SHOULD BE TESTED FOR THE FINANCIAL YE AR UNDER CONSIDERATION AND NOT ON THE BASIS OF FINANCIAL YEAR OTHER THAN T HE CURRENT FINANCIAL YEAR. AN ENTITY IS ACCEPTED AS COMPARABLE FOR A PARTICULA R FINANCIAL YEAR CANNOT BE AUTOMATICALLY ACCEPTED AS COMPARABLE FOR ANOTHER FINANCIAL YEAR WITHOUT EXAMINING OF THE COMPARABILITY AS PER TP RE GULATIONS AND RULES INDEPENDENTLY. 9.1 THE LD DR HAS FILED THE ANNUAL REPORT OF THE CO MPARABLES NAMELY M/S BCC FUBA INDIA LTD AND M/S ECE INDUSTRIES LTD AND SUBMITTED THAT THESE TWO COMPANIES ARE NOT FUNCTIONALLY COMPARABLES TO THE ASSESSEE. HE HAS POINTED OUT THAT IN THE CASE OF M/S BCC FUBA INDIA LTD IT IS A PERSISTING LOSS ITA NO. 6542 & 6732/M/2011. . 15 MAKING COMPANY AS EVIDENT FROM THE SCHEDULE TO THE BALANCE SHEET. THE LD DR HAS SUBMITTED THAT IN THE LAST MORE THAN THRE E YEARS THIS COMPANY IS MAKING LOSS AND THEREFORE, IN VIEW OF THE DECISION OF THE HYDERBAD BENCHES OF THE TRIBUNAL IN THE CASE OF M/S BRIGADE GLOBAL SERVICES P LTD AS WELL AS OF THIS TRIBUNAL IN THE CASE OF M/S PFIZ ER LTD , THIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARABLE. 9.2 AS REGARDS M/S ECE INDUSTRIES LTD., THE LD DR H AS SUBMITTED THAT THIS COMPANY IS ENTIRELY DIFFERENT FROM THE ASSESSEE WHI CH IS CLEAR FROM THE ANNUAL REPORT. FURTHER, THERE IS AN EXTRA ORDINARY EVENT DURING THE YEAR BEING SALE OF BUSINESS. HE HAS POINTED OUT IN THE P&L ACCOUNT OF THE SAID COMPANY AN EXTRA ORDINARY ITEM OF INCOME BEING SALE OF BUSINESS IS SHOWN; THEREFORE, THIS COMPANY CANNOT BE CONSIDERED AS COMPARABLE FOR THE PURPOSE OF DETERMINING THE ALP. 9.3 IN THE CASE OF M/S ALPHA TRANSFORMERS, THE LD D R HAS SUBMITTED THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS INCLUD ED THIS COMPANY ON THE BASIS OF THE SUBSEQUENT YEAR DECISION OF THE TP O WITHOUT ANY EXAMINATION AND FINDING ON THE COMPARABILITY FOR TH E YEAR UNDER CONSIDERATION. 9.4 ON THE OTHER HAND, THE LD SR COUNSEL FOR THE AS SESSEE HAS SUBMITTED THAT THE TPO REJECTED THE COMPARABLES SELECTED BY T HE ASSESSEE ON THE GROUND OF INTERNATIONAL COMPANY WHEREAS IN THE SUBS EQUENT YEAR, THESE COMPANIES WERE CONSIDERED BY THE TPO FOR THE PURPOS E OF DETERMINATION OF ALP. THEREFORE, WHEN THESE COMPANIES WERE ACCEP TED AS COMPARABLES ITA NO. 6542 & 6732/M/2011. . 16 IN THE SUBSEQUENT YEAR, THEN THE REJECTION ON THE G ROUND OF RESIDENTIAL STATUS IS NOT JUSTIFIED FOR THE YEAR UNDER CONSIDER ATION. 9.5 HE FURTHER POINTED OUT THAT THE COMMISSIONER OF INCOME TAX(APPEALS) ISSUED A REMAND ORDER AND IN THE REMAN D REPORT, THE TPO HAS ACCEPTED THREE COMPARABLES AS SUGGESTED BY TH E ASSESSEE THUS, THE LD SR COUNSEL FOR THE ASSESSEE HAS SUBMITTED TH AT ONCE THE TPO HAS ACCEPTED THE COMPARABLES, THEN THE DEPARTMENT CANNO T TAKE A DIFFERENT STAND IN THE APPEAL AND IT IS NOT OPEN TO THE DEPAR TMENT TO GO AGAINST THE ORDER OF THE TPO IN THE REMAND REPORT. HE HAS FURT HER SUBMITTED THAT IN THE CASE OF M/S BCC FUBA INDIA LTD, THE BROUGHT FOR WARD LOSS CANNOT BE SAID TO BE PERTAINING TO THE IMMEDIATELY PRECEDING YEAR TO PRESUME THE SAID COMPANY IS PERSISTING LOSS MAKING COMPANY. FU RTHER, ONLY ABNORMALLY OPERATING LOSS MAKING COMPANY MAY BE EX CLUDED AND NOT THE BUSINESS LOSS IN THE ORDINARY COURSE OF BUSINESS. IN THE ABSENCE OF ABNORMAL EVIDENT OR CIRCUMSTANCES CAUSING PERSISTIN G LOSS, AN ENTITY CANNOT BE EXCLUDED FROM THE COMPARABLES WHEN LOSS I S NORMAL BUSINESS LOSS. 10 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS REVISED THE ARITHMETIC MEANS OF OPERATING PROFIT OF THE COMPARABLES BY TAKING INTO CONSIDERATION THREE MORE COMPARABLES M AKING A TOTAL COMPARABLES AS 7 AS UNDER: ITA NO. 6542 & 6732/M/2011. . 17 SR.NO. NAME OF THE COMPARABLE PLI (OP/OC) 1 ADOR POWERTON LTD 11.69% 2 AUTO IGNITION LTD 15.71% 3 NG TECHNOLOGIES LTD 4.74% 4 TVS ELECTRONICS 4.74% 5 ALPHA TRANSFORMERS LTD 10.46% 6 BCC FUBA INDIA LTD -6.59% 7 ECE INDUSTRIES LTD -2.85% ARITHMETIC MEAN 5.42% THERE IS NO QUARREL ON THE POINT THAT THE COMPARABI LITY OF THE CASE IS TO BE TESTED FOR EACH AND EVERY YEAR INDEPENDENTLY AND SE PARATELY. FOR THE PURPOSE OF DETERMINATION OF ALP, THE INTERNATIONAL TRANSACTION HAS TO BE COMPARED WITH UNCONTROLLED AND UNRELATED TRANSACTIO NS BY USING THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNA TIONAL TRANSACTION HAS BEEN ENTERED INTO. THUS, AS PER RULE 10B(4) R.W.R 10D(4) CONTEMPORANEOUS INFORMATION AND DOCUMENTS SHOULD BE CONSIDERED AS FAR AS POSSIBLE FOR THE PURPOSE OF COMPARING UNCONTROL LED TRANSACTION WITH INTERNATIONAL TRANSACTIONS. THEREFORE, THE COMPA RABILITY OF AN UNCONTROLLED AND UNRELATED TRANSACTION WITH THE IN TERNATIONAL TRANSACTION HAS TO BE TESTED INDEPENDENTLY FOR THE RELEVANT YEA R BY USING THE CURRENT YEAR DATA. THE FACT THAT AN ENTITY HAS BEEN ACCEP TED AS COMPARABLE IN THE EARLIER YEAR OR IN THE SUBSEQUENT YEAR, IPSO F ACTO WOULD NOT LEAD TO THE CONCLUSION THAT THE SAID ENTITY IS ALSO COMPAR ABLE FOR THE CURRENT YEAR IN THE ABSENCE OF EXAMINATION OF THE DATA FOR THE Y EAR UNDER CONSIDERATION. 10.1 IN THE REMAND REPORT, THE COMMISSIONER OF INCO ME TAX(APPEALS) ASKED THE TPO TO COMMENT ON THE FACT WHETHER THE 3 COMPANIES ITA NO. 6542 & 6732/M/2011. . 18 SUGGESTED BY THE ASSESSEE WERE ACCEPTED AS COMPARAB LE IN THE SUBSEQUENT ASSESSMENT YEAR OR NOT AND ON THAT ASPEC T, THE TPO HAS STATED IN THE REMAND REPORT THAT THESE THREE COMPAR ABLES HAVE BEEN ACCEPTED BY THE DEPARTMENT IN THE SUBSEQUENT YEAR. NOWHERE, THE TPO HAS ACCEPTED THESE COMPANIES AS COMPARABLES FOR THE YEAR UNDER CONSIDERATION. 10.2 EVEN OTHERWISE WHEN THE COMPARABILITY OF THE C ASE HAS TO BE TESTED INDEPENDENTLY FOR EACH YEAR, THEN WITHOUT EXAMINATI ON OF THE COMPARABILITY, NO CASE CAN BE ACCEPTED AS A COMPARA BLE, SOLELY ON THE BASIS THAT IT HAS BEEN ACCEPTED AS COMPARABLE IN TH E SUBSEQUENT YEAR. FROM THE ANNUAL REPORT OF THE COMPANY M/S BCC FUBA INDIA LTD., IT IS CLEAR THAT THIS COMPANY IS SHOWING PERSISTING LOSS FROM Y EAR AFTER YEAR AND THEREFORE, IN VIEW OF THE SERIES OF DECISIONS OF TH IS TRIBUNAL ON THE POINT THAT PERSISTING LOSS MAKING COMPANY CANNOT BE CONSI DERED AS A GOOD COMPARABLE FOR THE PURPOSE OF DETERMINATION OF THE ALP. 10.3 FURTHER, IN THE CASE OF ECE INDUSTRIES LTD, IT IS EVIDENT FROM THE P&L ACCOUNT THAT AN EXTRA ORDINARY ITEM OF INCOME HAS B EEN SHOWN ON ACCOUNT OF SALE OF BUSINESS; THEREFORE, IN THIS CASE, THERE IS AN EXTRA ORDINARY EVENT DURING THE YEAR UNDER CONSIDERATION WHICH MAKES THI S COMPANY AS NOT A GOOD COMPARABLE FOR THE YEAR UNDER CONSIDERATION. 11 THE ISSUE BEFORE US IS LIMITED IN RESPECT TO THE INCLUSION OF THREE MORE COMPARABLES BY THE COMMISSIONER OF INCOME TAX( APPEALS) AS THE ASSESSEE HAS NOT CHALLENGED THE FOUR COMPARABLES ON THE BASIS OF WHICH THE TPO DETERMINED THE ALP. THE GRIEVANCE OF THE DE PARTMENT BEFORE US ITA NO. 6542 & 6732/M/2011. . 19 IS ONLY IN RESPECT OF INCLUSION OF THREE MORE COMPA RABLES BY COMMISSIONER OF INCOME TAX(APPEALS) AND THEREAFTER ARITHMETIC MEANS WORKED OUT AT 5.42% . THE THIRD COMPARABLE INCLUDED BY THE COMMI SSIONER OF INCOME TAX(APPEALS) IS ALPHA TRANSFORMERS LTD WHICH ITSE LF SHOWS THAT THE SAID COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE AS IN THE BUSINESS OF TRANSFORMERS WHICH CANNOT BE SAID TO BE IN THE SAME BUSINESS AS OF THE ASSESSEE. THEREFORE, WE ARE OF THE CONSIDERED OPIN ION THAT THESE THREE COMPANIES WHICH WERE ACCEPTED BY THE COMMISSIONER O F INCOME TAX(APPEALS) NAMELY M/S ALPHA TRANSFORMERS LTD, M/ S BCC FUBA INDIA LTD AND M/S ECE INDUSTRIES LTD CANNOT BE CONSIDERED AS A GOOD COMPARABLES OF THE ASSESSEE IN VIEW OF THE FACT AND REASONS DISCUSSED ABOVE. ACCORDINGLY, THESE COMPARABLES ARE EXCLUDED AND THEREFORE, THE ARITHMETIC MEANS COMPUTED BY THE TPO IS RESTORED. 13 THE REVENUE HAS ALSO RAISED AN ADDITIONAL GROUND AS UNDER: ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CO MMISSIONER OF INCOME TAX (APPEALS) ERRED IN ALLOWING (-)5% DEDUCTION TO ARRIVE A RAMS LENGTH PRICE BY INVOKING THE 2 ND PROVISO TO SECTION 92C WITHOUT APPRECIATING THAT NO SUCH STANDARD DEDUCTION OF 5% IS ENVISAGED IN TH E 2 ND PROVISO OF SEC. 92C OF THE ACT AND THEREFORE, THE DEDUCTION OF 5% A LLOWED BY THE LD COMMISSIONER OF INCOME TAX(APPEALS) IS CONTRARY TO THE PROVISIONS OF LAW., 14 WE HAVE HEARD THE LD DR AS WELL AS THE LD AR OF THE ASSESSEE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE G RIEVANCE OF THE REVENUE IS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HA S ALLOWED 5% AS STANDARD DEDUCTION AS PER 2ND PROVISO TO SEC. 92C(2 ) OF THE ACT WHEREAS IT IS ONLY TOLERANCE LIMIT. THE LD DR HAS REFERRED TO THE EXPLANATORY NOTE ON THE AMENDMENT VIDE FINANCIAL ACT 2009 WHEREBY RETRO SPECTIVE ITA NO. 6542 & 6732/M/2011. . 20 AMENDMENT W.E.F 1.4.2002 HAS BEEN BROUGHT TO THE PR OVISO TO SEC. 92C(2). 14.1 ON PRINCIPLE, THE LD SR COUNSEL FOR THE ASSESS EE HAS NOT DISPUTED THE LEGAL PROPOSITION THAT THE BENEFIT OF + _ 5% AS PRO VIDED UNDER THE PROVISO TO SEC. 92C(2) IS NOT STANDARD DEDUCTION. EVEN OTH ER WISE, AFTER THE RETROSPECTIVE AMENDMENT IN SEC 92C(2A) WHEREBY AN EXPLANATION HAS BEEN INSERTED, THERE IS NO AMBIGUITY ON THIS POINT THAT THIS TOLERANCE RANGE OF 5% IS NOT A STANDARD DEDUCTION FOR COMPU TING ALP BUT THIS IS A RANGE AND IF THE ASSESSEES PRICE IS WITHIN + -5% OF THE ARITHMETIC MEANS OF MORE THAN ONE PRICE OF COMPARABLE, THEN NO ADJUS TMENT IS REQUIRED TO BE MADE. HENCE, THE TPO/ASSESSING OFFICER IS DIRECT ED TO COMPUTE THE ALP ACCORDINGLY. 15 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DIS MISSED WHEREAS THE APPEAL OF THE REVENUE IS ALLOWED. 0 ,1 !# 0, + 2 0 + , 34 + 2 , 5 + , 34 ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 8 TH MAY 2013 / + .$ 2 6#1 8 TH 4 . + 7 SD/- SD/- ( . . ) ( R S SYAL ) ACCOUNTANT MEMBER ( ) ! (VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 8 TH AY 2013 ITA NO. 6542 & 6732/M/2011. . 21 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI