Terex India Pvt. Ltd., Bangalore V. DCIT, New Delhi

ITA 6783/DEL/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 0963 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 28-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: H K CHOUDARY
• Keywords: Capital asset; Depreciation; Transfer pricing; Business expenditure; International transaction; Wholly owned subsidiary; Revenue expenditure
• Section: 271(1)(c); 92C; 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMB ER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBE R ITA NO. 6775/DEL/2015 ASSESSMENT YEAR: 2011-12 DCIT, CIRCLE-25(1), C.R. BUILDING, NEW DELHI. VS TEREX INDIA PVT. LTD., 5 TH FLOOR, WEST WING, E-CITY, TOWER-2, #94/2 & 95/2, ELECTRONIC CITY PHASE-I, HOSUR MAIN ROAD, BANGALORE-560100 APPELLANT RESPONDENT ITA NO. 6783/DEL/2015 ASSESSMENT YEAR: 2011-12 TEREX INDIA PVT. LTD., 5 TH FLOOR, WEST WING, E-CITY, TOWER-2, #94/2 & 95/2, ELECTRONIC CITY PHASE-I, HOSUR MAIN ROAD, BANGALORE-560100 VS DCIT, CIRCLE-25(1), C.R. BUILDING, NEW DELHI. APPELLANT RESPONDENT ASSESSEE BY: SHRI VED JAIN, ADV. SHRI ASHISH CHADHA, ADV. DEPARTMENT BY: SHRI H.K. CHOUDARY, C.I .T. DR DATE OF HEARING: 17.01.2019 DATE OF PRONOUNCEMENT: 26.03.2019 O R D E R PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER : THESE ARE CROSS APPEALS ARISING FROM THE FINAL ASS ESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) CONSEQUE NT TO THE DIRECTIONS OF THE LD. DISPUTES RESOLUTION PANEL FOR ASSESSMENT YEAR (AY) 2011-12. 2.0 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE IS A WHOLLY OWNED SUBSIDIARY OF TEREX US AND IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND MARKETING OF CRUSHERS AND SCREENERS AND ALSO PROVIDED BUSINESS SUPPORT AND EN GINEERING DESIGN SERVICES TO ITS ASSOCIATED ENTERPRISES (AES) . FOR THE YEAR UNDER CONSIDERATION, THE RETURN OF INCOME WAS FILED DECLARING A LOSS OF RS. 32,04,68,240/-. SINCE, THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS DURING THE YEAR UNDER CO NSIDERATION, THE AO REFERRED ISSUE OF DETERMINATION OF THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS ENTERED INT O BY THE ASSESSEE TO THE TRANSFER PRICING OFFICER (TPO). 2.1 THE TPO PROPOSED ADJUSTMENT ON THREE ACCOUNTS AS UNDER: A. BUSINESS SUPPORT SEGMENT: RS.18,24,354/- B. TECHNICAL (ENGINEERING DESIGN) SUPPORT SERVICE: RS.1,20,99,788/- C. PURCHASE OF RAW MATERIAL: RS.12,93,90,068/- 2.2 THE AO, IN THE DRAFT ASSESSMENT ORDER, MADE TH E ADDITION AS PROPOSED BY THE TPO AND ALSO MADE ADDIT ION ON ACCOUNT OF FOREIGN EXCHANGE LOSS OF RS. 2,04,92,202 /- AND ON ACCOUNT OF PROVISION FOR WARRANTY OF RS. 1,97,33,00 0/-. 2.3 THE ASSESSEE FILED OBJECTIONS AGAINST THE DRAF T ASSESSMENT ORDER BEFORE THE LD. DRP. THE LD. DRP, VIDE ORDER DATED 07.09.2015, GAVE PARTIAL RELIEF IN RESPECT OF THE TRANSFER PRICING (TP) ADJUSTMENT. CONSEQUENT TO THAT, THE T PO PASSED ITS ORDER DATED 20.10.2015 WHEREBY THE ADJUSTMENTS ON A CCOUNT OF TP WERE AS UNDER: A. BUSINESS SUPPORT SEGMENT: NIL B. TECHNICAL (ENGINEERING DESIGN) SUPPORT SERVICE: RS.44,03,813 C. PURCHASE OF RAW MATERIAL: RS.8,28,99,850 2.4 THE LD. DRP DELETED BOTH THE ADDITIONS MADE BY AO ON CORPORATE ISSUES I.E. FOREIGN EXCHANGE LOSS AND PRO VISION FOR WARRANTY. 2.5 AGGRIEVED BY THE ORDER OF THE LD. DRP, BOTH RE VENUE AND ASSESSEE ARE IN APPEAL BEFORE US. 2.5.1 THE GROUNDS RAISED BY THE REVENUE IN ITA NO. 6775/DEL/2015 ARE AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE DRP-2 ERRED IN DIRECTING AO TO COMPLETE THE ASSESSM ENT AS PER OBSERVATION MADE BY DRP IN THE ORDER WHICH RESU LTING IN REDUCING THE ADDITION TO RS.8,73,03,663/- IN PLA CE OF ORIGINAL RECOMMENDED ALP OF RS.14,33,14,210/- FOR T HE INTERNATIONAL TRANSACTIONS UNDERTAKEN THE ASSESSEE COMPANY WITH ITS ASSOCIATE/PARENTS ENTERPRISE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE, THE DRP-2 ERRED IN DIRECTING TPO TO EXCLUDE BELOW MENTI ONED BELOW COMPANIES FROM THE FINAL SET OF COMPARABLES: I) GLOBAL PROCUREMENT CONSULTANT LTD. II) CERTIFICATION ENGINEERS INTERNATIONAL LTD. III) RITES LTD., IV) REC POWER DISTRIBUTION COMPANY LTD. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE DRP-2 ERRED IN DIRECTING TPO/AO TO IGNORE THE FIGUR ES OF DEPRECIATION AND MACHINERY REPAIRS AS ASSET BASED MANUFACTURING COMPANY LIKE TEREX INDIA, DEPRECIATIO N CANNOT BE SEGREGATED FROM THE COMPUTATION OF THE MA RGINS OF THE COMPANY WHICH FORMS AN INTEGRAL PART OF THE BUSINESS OPERATIONS OF THE COMPANY. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE DRP-2 ERRED IN DELETING THE ADDITION OF RS. 2,04,9 2,202/- AS PROPOSED BY ASSESSING OFFICER ON ACCOUNT OF FORE IGN EXCHANGE LOSS. 5. THE APPELLANT CRAVES, LEAVE OR RESERVING THE RIGHT TO AMEND MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) OF APPEA L AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. 2.5.2 THE GROUNDS RAISED BY THE ASSESSEE IN ITA NO . 6783/DEL/2015 ARE AS UNDER: 1. THE ORDER OF THE LEARNED DEPUTY COMMISSIONER OF INC OME TAX, CIRCLE- 25(1), NEW DELHI (ASSESSING OFFICER OR AO) PASSED PURSUANT TO THE ORDER OF THE LEARNED DEPUTY COMMISS IONER OF INCOME TAX (TRANSFER PRICING OFFICER) - 3 (2), (1), NEW DELHI (TRANSFER PRICING OFFICER OR TPO) AND THE DIRECT IONS ISSUED BY THE HONBLE DISPUTE RESOLUTION PANEL (THE DRP), T O THE EXTENT PREJUDICIAL TO THE APPELLANT, IS ERRONEOUS, BAD IN LAW AND CONTRARY TO THE FACTS AND CIRCUMSTANCES OF THE CASE . 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE TPO, AO AND DRP ERRED IN MAKING AN ADJUSTMENT OF IN R 8,73,03,663/-TO THE ARMS LENGTH PRICE (ALP) OF T HE APPELLANTS INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRI SES (AES). GROUNDS RELATING TO MANUFACTURING SEGMENT: 3. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND FACTS , BY NOT APPRECIATING THAT THE LOSSES INCURRED BY THE APPELL ANT WERE ON ACCOUNT OF VARIOUS ECONOMIC AND COMMERCIAL REASONS DUE TO THE FACT THAT THE SUBJECT YEAR IS THE INITIAL YEAR IN W HICH THE APPELLANT HAS COMMENCED ITS FULL-FLEDGED MANUFACTUR ING OPERATIONS. 4.THE DRP, OUGHT TO HAVE REJECTED MCNALLY SAYAJI EN GINEERING LTD AS A COMPARABLE SINCE THE SAID COMPANY IS ENGAG ED IN NON- COMPARABLE FUNCTIONS/ PRODUCTS AND DOES NOT SATISFY THE COMPARABILITY CRITERIA. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 6 5.THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FAC TS, IN NOT APPRECIATING THE BUSINESS/ ECONOMIC CIRCUMSTANCES F ACED BY THE APPELLANT AND CONSEQUENTLY NOT ALLOWING THE FOL LOWING ECONOMIC ADJUSTMENTS CLAIMED BY THE APPELLANT WHILE COMPARING THE OPERATING MARGINS: 5.1 ADJUSTMENT FOR DIFFERENCES IN CAPACITY UTILISATION THE TPO, AO AND DRP ERRED BOTH IN FACTS AND LAW BY NOT APPRECIATING THAT THE OVERHEADS RELATING TO MANUFACTURING SEGMENT WAS INCURRED FOR MANUFACTURING OF 238 UNITS (100% OF TOTAL CAPACITY) ALTHOUGH THE APPELLANT COULD PRODUCE ONLY 98 UNITS (41.18% OF TOTAL CAPACITY) DUE TO VARIOUS ECONOMIC AND COMMERCIAL REASONS. THE TPO, AO AND DRP ERRED BOTH IN FACTS AND LAW IN NOT ACCEPTING COMPUTATION OF APPROPRIATE PROFITABIL ITY EARNED FROM MANUFACTURING SEGMENT BY NOT APPRECIATING THE FACT THAT THE PROPORTIONATE OVERHE ADS INCURRED FOR UNUTILIZED CAPACITY CANNOT BE TREATED AS EXPENDITUR E INCURRED FOR DETERMINING THE PROFITABILITY EARNED F ROM MANUFACTURING SEGMENT. 5.2 ADJUSTMENT FOR DIFFERENCES IN CUSTOMS DUTY INCUR RED THE TPO, AO AND DRP ERRED BOTH IN FACTS AND LAW I N NOT ALLOWING ADJUSTMENT TO THE TUNE OF NON-CENVATABLE CUSTOMS DU TY ON IMPORTS MADE BY THE APPELLANT 5.3 ADJUSTMENT FOR ABNORMAL FOREIGN EXCHANGE FLUCT UATIONS THE DRP OUGHT TO HAVE CONSIDERED FOREIGN EXCHANGE L OSS ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 7 INCURRED BY THE APPELLANT AS ABNORMAL AND ACCORDING LY EXCLUDED THE SAME FROM THE OPERATING EXPENSES INCUR RED BY THE APPELLANT IN MANUFACTURING SEGMENT WITHOUT PREJUDICE TO THE ABOVE GROU ND, THE DRP OUGHT TO HAVE CONSIDERED 2,04,92,202 AS NON-OPERATING ITEM S INCE THE SAME RELATES TO EXCHANGE FLUCTUATIONS ON ACCOUN T OF PURCHASE OF FIXED ASSETS, WHICH IS A TRANSACTION IN THE NATURE OF NON-OPERATING ITEM. 6. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND FACTS, B Y DISREGARDING THE PRICING POLICY SUBMITTED BY THE AP PELLANT AND THE OVERSEAS BENCHMARKING CONDUCTED TO JUSTIFY THE ARMS LENGTH NATURE OF SUCH TRANSACTIONS. THUS, DRP , AND CONSEQUENTLY TPO AND AO, HAVE ERRED IN NOT APPRECIA TING THE FACT THAT THE AES HAVE NOT MADE EXCESSIVE MARGI NS ON THE EXPORTS MADE TO THE APPELLANT AND ACCORDINGLY, THE LOSS WAS NOT ATTRIBUTABLE TO THE INTERNATIONAL TRANSACTI ONS UNDERTAKEN BY THE APPELLANT WITH THE AES 7. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FACTS,BY NOT RESTRICTING THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF THE IMPORT OF RAW MATERIAL S TRANSACTION TO THE VALUE OF CONSUMPTION OF MATERIAL S OF THE APPELLANT. GROUNDS IN RELATION TO ENGINEERING DESIGN SERVICES (EDS) SEGMENT: 8. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTING THE ECONOMIC ANALYSIS IN RESPECT OF EDS SEGMENT UNDERTAKEN BY THE APPELLANT IN ACCORDAN CE ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 8 WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, THEREBY ARBITRARILY REJECTING THE COMPARABLES CHOSEN BY THE APPELLANTAND CONDUCTING A FRESH ECONOMIC ANALYSIS F OR THE DETERMINATION OF THE ALP IN CONNECTION WITH THE IMP UGNED INTERNATIONAL TRANSACTION TO HOLD THAT THE APPELLAN TS INTERNATIONAL TRANSACTION IS NOT AT ARMS LENGTH. 9. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FACTS, BY REJECTING THE ENTIRE BENCHMARKING ANALYSIS (C OMPARABLE SEARCH) PERFORMED BY THE APPELLANT FOR EDS SEGMENT WITHOUT PROVIDING ANY COGENT REASONS. THE ACTION OF ADHOC R EJECTION OF APPELLANTS BENCHMARKING ANALYSIS (COMPARABLE SE ARCH) BY TPO, AO AND DRP IS ARBITRARY AND ILLEGAL AND ACC ORDINGLY, THE ENTIRE COMPARABLE SET OF APPELLANT SHOULD BE RE INSTATED. 10. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FACTS , BY NOT PROVIDING THE DETAILS OF THE SEARCH PROCESS FOLLOWE D BY THEM IN RESPECT OF THE EDS SEGMENT. 11. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FACTS , BY SELECTING FOLLOWING COMPANIES AS COMPARABLES WHICH DO NOT SATISFY VARIOUS COMPARABILITY CRITERIA WITHOUT CONS IDERING THE SUBMISSION FILED BY THE APPELLANT: ASHOK LEYLAND PROJECT SERVICES LTD. BENGAL SREI INFRASTRUCTURE DEVELOPMENT LTD. IBI CHEMATUR (ENGINEERING & CONSULTANCY) LTD. MAHINDRA CONSULTING ENGINEERS LTD. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 9 MITCON CONSULTANCY & ENGG. SERVICES LTD. TCE CONSULTING ENGINEERS LTD. 12. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FACTS , BY APPLYING CERTAIN QUANTITATIVE AND QUALITATIVE FILTE RS WHICH ARE ARBITRARY IN NATURE FOR IDENTIFYING THE COMPARABLES IN RESPECT OF EDS SEGMENT. 13. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FACTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR V ARIOUS DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VI S--VIS THE COMPARABLES GROUNDS IN RELATION TO BUSINESS SUPPORT SERVICES (B SS) SEGMENT: THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FACTS , BY NOT ACCEPTING THE ECONOMIC ANALYSIS IN RESPECT OF BSS S EGMENT UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, THEREBY ARBITRARILY REJECTING THE COMPARABLES CHOSEN BY THE APPELLANT A ND CONDUCTING A FRESH ECONOMIC ANALYSIS, BY SELECTING COMPANIES WHICH ARE NOT COMPARABLE TO THE APPELLANT , FOR THE DETERMINATION OF THE ALP. GROUNDS COMMON TO BOTH EDS AND MANUFACTURING SEGMEN TS: THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN F ACTS, BY NOT CONSIDERING MULTIPLE YEAR DATA FOR DETERMINING THE ARMS LENGTH MARGIN/ PRICE AND RESTRICTING TO ONLY FINANC IAL YEAR (FY) 2010-11 DATA WHICH WAS NOT AVAILABLE TO THE AP PELLANT 1 14. 15. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 10 AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS. THE TPO, AO AND DRP HAVE ERRED, IN NOT ALLOWING THE BENEFIT OF +/- 5% UNDER THE PROVISO TO SECTION 92C(2) OF TH E INCOME- TAX ACT. 17. THE AO HAS GROSSLY ERRED IN LAW, FACTS AND CIRC UMSTANCES OF THE CASE BY INITIATING PENALTY PROCEEDINGS U/S. 271 (1)(C) OF THE ACT. 3.0 SINCE THE ISSUES INVOLVED IN THE CROSS APPEAL S ARE COMMON, BOTH ARE BEING TAKEN TOGETHER. 3.1 GROUND NOS. 1 AND 5 IN THE REVENUES APPEAL AR E GENERAL IN NATURE AND HENCE NEED NO ADJUDICATION. 3.2.0 IN GROUND NO. 2 OF ITS APPEAL, THE REVENUE I S CONTESTING THE EXCLUSION OF 4 COMPARABLES. OUT OF T HESE 4, ONE COMPARABLE, I.E. GLOBAL PROCUREMENT CONSULTANTS LTD . IS OF THE BUSINESS SUPPORT SEGMENT AND OTHER 3 ARE RELATED TO ENGINEERING SUPPORT SERVICES SEGMENT. IN THE BUSINE SS SUPPORT SEGMENT, THE ASSESSEE APPLIED TRANSACTIONAL NET MAR GIN METHOD (TNMM) TO DETERMINE THE ARMS LENGTH PRICE. THE PRO FIT LEVEL INDICATOR (PLI), I.E. OP/TC OF THE ASSESSEE WAS 14% AND THE PLI OF THE 8 COMPARABLES USED BY THE ASSESSEE IN ITS TP ST UDY WAS 12.66% AND, THUS, THE TRANSACTION WAS CONSIDERED AT ARMS 16. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 11 LENGTH. THE TPO, HOWEVER, REJECTED 4 COMPARABLES OU T OF THE 8 COMPARABLES SELECTED BY THE ASSESSEE COMPANY AND IN CLUDED 10 NEW COMPARABLES AFTER CARRYING OUT A FRESH SEARCH. THE TPO, THEREFORE, ON THE BASIS OF 14 COMPARABLES, WORKED O UT THE PLI OF THIS SEGMENT AT 21% AND THUS PROPOSED AN ADJUSTMENT OF RS.18,24,354/-. 3.2.1 AGGRIEVED BY THE ORDER OF THE TPO, THE ASSES SEE FILED OBJECTIONS BEFORE THE LD. DRP. THE LD. DRP, WHILE DECIDING THE ADJUSTMENT PROPOSED IN THE BUSINESS SUPPORT SERVICE SEGMENT, ACCEPTED THE CONTENTION OF THE ASSESSEE REGARDING T HE EXCLUSION OF ONLY 1 COMPARABLE BEING GLOBAL PROCUREMENT CONSU LTANTS LTD. ON THE GROUND THAT THIS COMPANY IS DOING WORLD BANK FUNDED PROJECTS AND THE FUNCTIONS ASSETS AND RISK (FAR) AN ALYSIS IS NOT SIMILAR TO THAT OF THE ASSESSEE COMPANY. CONSEQUENT TO THE ABOVE ORDER OF THE LD. DRP, THE TPO PASSED THE ORDER DATE D 20.10.2015 GIVING EFFECT TO THE LD. DRPS DIRECTIONS. THE MARG IN OF THE 13 REMAINING COMPARABLES HAS BEEN WORKED OUT AT 13.96% , WHICH IS LOWER THAN THE 14% OF THE MARGIN OF THE ASSESSEE CO MPANY AND HENCE, THE ADJUSTMENT ON THIS BUSINESS SUPPORT SEGM ENT WAS WORKED OUT AT NIL. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 12 3.2.2 THE LD. DEPARTMENTAL REPRESENTATIVE (CIT DR) SUBMITTED THAT THE LD. DRP WAS NOT CORRECT IN EXCLU DING THE COMPANY GLOBAL PROCUREMENT CONSULTANTS LIMITED AS I T IS FUNCTIONALLY SIMILAR. IT WAS STATED THAT THIS COMP ANY IS IN THE BUSINESS OF PROCUREMENT MANAGEMENT SERVICES AND HEN CE NEEDS TO BE INCLUDED. 3.2.3 THE LD. AUTHORISED REPRESENTATIVE (AR) SUBMI TTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS IS EVIDEN T FROM THE ANNUAL REPORT. IT WAS SUBMITTED THAT THIS COMPANY H AS BEEN PROMOTED BY THE EXPORT-IMPORT BANK OF INDIA AS IS E VIDENT FROM ITS ANNUAL REPORT PLACED AT PAPER BOOK PAGE 323 AND IT IS DOING MAINLY WORLD BANK SPONSORED PROJECTS AS CAN BE SEEN FROM PAPER BOOK PAGES 328 349. IT WAS SUBMITTED THAT TAKING INTO CONSIDERATION THESE FACTS, THE LD. DRP HAS RIGHTLY EXCLUDED THIS COMPANY BY HOLDING THAT THE FAR IS NOT SIMILAR TO T HAT OF THE ASSESSEE. 3.2.4 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE ALSO PERUSED THE ANNUAL REPORT OF THIS COMPANY. ON GOING THROUGH THE SAME WE NOTE THAT THIS IS A COMPANY PRO MOTED BY THE EXPORT-IMPORT BANK OF INDIA. FURTHER, THIS COM PANY IS DOING MAINLY WORLD BANK SPONSORED PROJECTS. KEEPING IT I NTO ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 13 CONSIDERATION THESE FACTS WE ARE OF THE VIEW THAT T HIS COMPANY CANNOT BE CONSIDERED TO BE A GOOD COMPARABLE AND TH E LD. DRP WAS CORRECT IN DIRECTING EXCLUSION OF THIS COMPARAB LE. ACCORDINGLY, WE UPHOLD THE ORDER OF THE LD. DRP IN EXCLUDING THIS COMPARABLE AND GROUND 2(I) OF REVENUE APPEAL IS DIS MISSED. 3.3.0 IN THE ASSESSEES APPEAL, GROUND NO. 14 IS O N BUSINESS SUPPORT SEGMENT REGARDING INCLUSION OF 9 COMPARABLE S SELECTED BY THE TPO AND EXCLUSION OF 4 COMPARABLES INCLUDED BY THE ASSESSEE IN ITS TP STUDY. 3.3.1 IT WAS SUBMITTED BY THE LD. AR THAT IN CASE THE EXCLUSION OF 1 COMPARABLE BY LD. DRP, I.E. GLOBAL P ROCUREMENT CONSULTANTS LTD. WHICH IS BEING CONTESTED BY THE RE VENUE IS UPHELD, THEN THE ASSESSEES GROUND NO. 14 REGARDING INCLUSION AND EXCLUSION OF COMPARABLES WILL BECOME ACADEMIC. 3.3.2 SINCE WE HAVE UPHELD THE EXCLUSION OF GLOBAL PROCUREMENT CONSULTANTS LIMITED BY THE LD. DRP AND AFTER EXCLUSION OF THIS COMPARABLE, THE MARGIN OF BUSINES S SUPPORT SEGMENT WILL BE WITHIN THE RANGE OF +/- 5%, ASSESSE ES GROUND NO. 14 REGARDING EXCLUSION OF 9 COMPARABLES TAKEN B Y THE TPO AND INCLUSION OF 4 COMPARABLES TAKEN BY THE ASSESSE E IN ITS TP ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 14 STUDY HAVE BECOME ACADEMIC IN NATURE AND ACCORDINGL Y, IS DISMISSED AS IN FRUCTUOUS . 3.4.0 IN GROUND NOS. 2(II), (III) & (IV), THE REVE NUE IS CHALLENGING THE EXCLUSION OF THREE COMPARABLES BY T HE LD. DRP IN THE TECHNICAL SUPPORT SERVICES (ENGINEERING DESIGN SERVICES) SEGMENT. 3.4.1 IN THE TECHNICAL SUPPORT SERVICE SEGMENT, TH E ASSESSEES MARGIN WAS 12.39%, AND ON THE BASIS OF M ARGIN OF 9 COMPARABLE COMPANIES CONSIDERED BY THE ASSESSEE IN THE TP STUDY AT 8.41%, THE TRANSACTION WAS CONSIDERED TO B E AT ARMS LENGTH. THE TPO, HOWEVER, CARRIED OUT A FRESH SEARC H. HE REJECTED ALL THE 9 COMPARABLES OF THE ASSESSEE AND CONSIDERE D 13 NEW COMPARABLES WITH AN AVERAGE MARGIN OF 33.89%, AND M ADE AN ADJUSTMENT OF RS.1,20,99,788/-. 3.4.2 AGGRIEVED BY THE ORDER OF THE TPO, THE ASSES SEE FILED OBJECTIONS BEFORE THE LD. DRP CHALLENGING INCLUSION AND EXCLUSION OF THE COMPARABLES AS WELL AS THE MARGINS OF THE COMPARABLES. THE OBJECTIONS WERE CLASSIFIED INTO TH REE PARTS, I.E. GOVERNMENT COMPANIES, ACCOUNTING BEING DIFFERENT AS ACCOUNTING STANDARD AS-7 HAS BEEN FOLLOWED WHICH IS DIFFERENT THAN THE ASSESSEE AND THE THIRD BEING OTHER FILTERS. THE LD. DRP ACCEPTED ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 15 THE CONTENTION OF THE ASSESSEE BY REJECTING THE FOL LOWING FOUR COMPARABLES: I. CERTIFICATION ENGINEERS INTERNATIONAL LTD. FAR DIFFERENT II. KITCO LTD. GOVERNMENT COMPANY III. RITES LTD. GOVERNMENT COMPANY IV. REC POWER DISTRIBUTION COMPANY LTD. - GOVERNMENT COMPANY 3.4.3 THE LD. DRP, HOWEVER, REJECTED THE CONTENTI ON OF THE ASSESSEE FOR EXCLUSION OF OTHER COMPARABLES. AGGRIE VED BY THE ORDER OF THE LD. DRP, THE REVENUE IN GROUND NOS. 2( II), (III) AND (IV) IS CHALLENGING THE EXCLUSION OF FOLLOWING THRE E COMPARABLES, I.E. I. CERTIFICATION ENGINEERS INTERNATIONAL LTD. II. RITES LTD. III. REC POWER DISTRIBUTION COMPANY LTD. 3.4.4 THE REVENUE HAS NOT CHALLENGED THE EXCLUSION OF KITCOLTD BY THE LD. DRP. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 16 3.4.5 THE ASSESSEE IN ITS GROUND NOS. 11 AND 12 IS CHALLENGING THE DIRECTIONS OF THE LD. DRP IN NOT EX CLUDING THE REMAINING COMPARABLES. 3.4.6 FIRST WE TAKE UP THE GROUND NOS. 2(II), (III ) AND (IV) WHERE THE REVENUE IS CHALLENGING THE EXCLUSION OF T HE COMPARABLES AS UNDER: (I) CERTIFICATION ENGINEERS INTERNATIONAL LTD.: IT WAS SUBMITTED BY THE LD. CIT DR THAT THE SERVICE S BEING PROVIDED BY THIS COMPANY ARE TECHNICAL IN NATURE AN D SIMILAR TO THAT OF THE ASSESSEE COMPANY. THE TPO H AS GIVEN DETAILED REASON IN ITS ORDER FOR INCLUSION OF THIS COMPARABLE AND THE LD. DRP WAS NOT JUSTIFIED IN EXCLUDING THIS COMPARABLE. IN REPLY IT WAS SUBMITTED BY THE LD. AR THAT THIS C OMPANY IS MAJORLY INVOLVED IN GOVERNMENT RELATED SERVICES AND IS A GROUP CONCERN OF ENGINEERS INDIA LTD., WHICH IS MAJ ORLY INVOLVED IN PERFORMING GOVERNMENT RELATED CONTRACTS . IN SUPPORT OF HIS SUBMISSION, THE LD. AR INVITED ATTEN TION TO THE ANNUAL REPORT OF THIS COMPANY PLACED AT PAGE 29 4 OF THE PAPER BOOK WHEREIN THE VARIOUS PROJECTS UNDERTAKEN BY THE COMPANY ARE LISTED. IT WAS SUBMITTED BY THE LD. AR THAT THE ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 17 LD. DRP HAS TAKEN INTO CONSIDERATION ALL THESE FACT S AND THAT THIS COMPANY HAS BEEN RIGHTLY EXCLUDED BY THE LD. DRP FROM THE LIST OF COMPARABLES, AS THE COMPANY IS NOT PERFORMING FUNCTIONS SIMILAR TO THE ASSESSEE COMPAN Y. THE LD. AR PLACED RELIANCE ON VARIOUS JUDGEMENTS WHERE GOVERNMENT UNDERTAKINGS HAVE NOT BEEN CONSIDERED AS COMPARABLE. ADJUDICATION ON THE COMPARABLE - CERTIFICATION ENGI NEERS INTERNATIONAL LTD. : WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS PASSED BY THE TPO AND THE LD. DRP. ON GOING THROUGH THE ANNUAL REPORT, WE NOTE THAT THIS COMPAN Y IS MAINLY INVOLVED IN GOVERNMENT RELATED SERVICES. FU RTHER, IT IS A GROUP CONCERN OF ENGINEERS INDIA LIMITED WHICH IS ALSO INVOLVED MAINLY IN PERFORMING GOVERNMENT RELATED CONTRACTS. ACCORDINGLY, WE UPHOLD THE DIRECTION OF THE LD. DRP IN EXCLUDING THE ABOVE COMPARABLE. OUR ABOVE V IEW GETS SUPPORTED FROM THE FOLLOWING JUDICIAL PRECEDEN TS: ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 18 I. ITAT DELHI IN THE CASE OF AT&T COMMUNICATION SERVICES INDIA PVT. LTD. V. ACIT IN ITA NO. 1016/DEL/2015 DATED 15.02.2018; II. ITAT BANGALORE IN THE CASE OF KHF COMPONENTS PVT. LTD. V. ITO IN ITA NO. 1748/BANG/2013 DATED 17.06.2016; III. ITAT DELHI IN THE CASE OF BECHTEL INDIA PVT. LTD. V . DCIT IN ITA NO. 1478/DEL/2015 DATED 21.12.2015 (II) RITES LTD.: IT WAS SUBMITTED BY THE LD. CIT DR THAT THE TPO HAS CONSIDERED THIS COMPANY AS A GOOD COMPARABLE AFTER TAKING INTO ACCOUNT THE FAR OF THIS COMPANY AND THAT OF TH E ASSESSEE. THE LD. CIT DR SUBMITTED THAT MERELY BEC AUSE THE COMPANY IS A GOVERNMENT COMPANY, IT CANNOT BE A GOOD GROUND FOR EXCLUSION OF SUCH COMPANY. IN RESPONSE, IT WAS SUBMITTED BY THE LD. AR THAT TH E TURNOVER OF THIS COMPANY IS MORE THAN RS.200 CRORES , WHICH WAS THE UPPER TURNOVER FILTER ADOPTED BY THE ASSESS EE COMPANY, AND THUS, THE COMPANY COULD NOT BE CONSIDE RED AS A COMPARABLE COMPANY. THIS FACT IS EVIDENT FROM THE ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 19 PROFIT & LOSS ACCOUNT OF THE COMPANY AT PAPER BOOK PAGE 211, WHEREIN THE INCOME OF THE COMPANY IS SHOWN AS RS.488.33 CRORES, AS COMPARED TO THE ASSESSEE COMPA NYS REVENUE OF RS.9.08 CRORES. FURTHER, THE COMPANY IS A GOVERNMENT OF INDIA UNDERTAKING AND MOSTLY MANAGES CONTRACTS PROVIDED BY THE GOVERNMENT OF INDIA. THE LD. AR PLACED RELIANCE ON VARIOUS JUDGEMENTS WHERE GOVERNM ENT UNDERTAKINGS HAVE NOT BEEN CONSIDERED AS COMPARABLE . ADJUDICATION ON THE COMPARABLE RITES LTD.: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS PASSED BY THE TPO AND THE LD. DRP. ON GOING THROUGH THE ANNUAL REPORT, WE NOTE THAT THIS COMPAN Y UNDERTAKES AND MANAGES MOSTLY THE CONTRACTS PROVIDE D BY GOVERNMENT OF INDIA. FURTHER, THE TURNOVER OF THIS COMPANY IS MORE THAN THE TURNOVER FILTER ADOPTED FOR THE PU RPOSE OF EXCLUSION AND INCLUSION OF THE COMPARABLE. THE TUR NOVER OF THE ASSESSEE IS 9.08 CRORE AS AGAINST 488.33 CRORE OF THIS COMPARABLE. IN VIEW OF THESE FACTS, WE UPHOLD THE D IRECTION OF THE LD. DRP IN EXCLUDING THIS COMPARABLE AND THE GROUND RAISED BY THE REVENUE IS REJECTED. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 20 (III) REC POWER DISTRIBUTION COMPANY LTD.: IT WAS SUBMITTED BY THE LD. CIT DR THAT THE TPO HAS SELECTED THIS COMPANY AS A COMPARABLE SINCE THE PRO FILE OF THE COMPANY IS SIMILAR TO THAT OF THE ASSESSEE COMP ANY. IT WAS SUBMITTED THAT THE LD. DRP WAS NOT JUSTIFIED IN REJECTING THE SAME ONLY ON THE GROUND THAT THIS COM PANY IS A GOVERNMENT OF INDIA UNDERTAKING. IN RESPONSE, IT WAS SUBMITTED BY THE LD. AR THAT TH E COMPANY DOES NOT QUALIFY THE 75% SERVICE REVENUE FI LTER ADOPTED BY THE TPO. THIS FACT IS EVIDENT FROM THE P ROFIT & LOSS ACCOUNT AND SCHEDULE 6 AT PAPER BOOK PAGES 273 AND 277 WHEREIN THE CONSULTANCY INCOME IS SHOWN AT RS. 6,92,57,295/-, OUT OF THE TOTAL INCOME OF RS. 20,44 ,65,943/- WHICH IS ONLY 33.87%. IT WAS CONTENDED THAT ON THIS GROUND ITSELF, THE COMPANY NEEDS TO BE EXCLUDED FROM THE L IST OF COMPARABLES. IT WAS FURTHER POINTED OUT BY THE LD. AR THAT THIS COMPANY IS A GOVERNMENT OF INDIA UNDERTAKING, AS IS EVIDENT FROM THE DIRECTORS REPORT AT PAPER BOOK PA GES 267 271 . ADJUDICATION ON THE COMPARABLE REC POWER DISTRIBU TION CO. LTD.: ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 21 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS PASSED BY THE TPO AND THE LD. DRP. ON GOING THROUGH THE ANNUAL REPORT, WE NOTE THAT THIS COMPAN Y HAS CONSULTANCY INCOME OF 6.93 CRORE OUT OF THE TOTAL I NCOME OF RS. 22.45 CRORE WHICH IS ONLY 34% OF THE TOTAL REVE NUE. THUS, THIS COMPANY FAILS THE 75% SERVICE REVENUE FI LTER ADOPTED BY THE TPO. FURTHER, FROM THE ANNUAL REPOR T IT IS EVIDENT THAT THIS COMPANY UNDERTAKES AND MANAGES MO STLY THE CONTRACTS PROVIDED BY GOVERNMENT OF INDIA. IN VIEW OF THESE FACTS, WE UPHOLD THE DECISION OF THE LD. DRP IN EXCLUDING THIS COMPARABLE AND GROUND RAISED BY THE REVENUE IS REJECTED. 3.4.7 GROUND NOS. 11 AND 12 IN THE ASSESSEES APPE AL ARE REGARDING EXCLUSION OF CERTAIN COMPARABLES IN THE E NGINEERING SERVICES SEGMENT. THE CONTENTION OF THE ASSESSEE I S THAT THE TPO AND THE LD. DRP BOTH HAVE GONE WRONG IN INCLUDING S EVEN COMPARABLES WHILE DETERMINING THE ARMS LENGTH PRIC E OF THE ENGINEERING DESIGN SERVICES SEGMENT. IT WAS SUBMITT ED BY THE LD. AR THAT THE ASSESSEE IS ENGAGED IN PROVIDING TECHNI CAL AND ENGINEERING SERVICES TO ITS AE AND ONLY SUCH COMPAR ABLES NEED TO BE CONSIDERED WHICH ARE PROVIDING SIMILAR SERVICES AND ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 22 ACCORDINGLY, THE LD. AR PLEADED FOR EXCLUDING THE 7 COMPARABLES. THE LD. CIT DR SUPPORTED THE ORDERS OF THE TPO AND THE LD. DRP CONFIRMING INCLUSION OF THESE 7 COMPARABLES. EACH OF THESE COMPARABLES IS BEING CONSIDERED AS UNDER: A) ASHOK LEYLAND PROJECT SERVICES LTD.: WE HAVE PERUSED THE FINANCIALS OF THE COMPANY PLACE D AT PAPER BOOK PAGES 375-432. ON GOING THROUGH THE SAM E, WE NOTE THAT THE FUNCTIONAL PROFILE OF THE COMPANY IS NOT SIMILAR TO THAT OF THE ASSESSEE COMPANY AS THE SAID COMPANY IS ENGAGED IN WIND FARM DEVELOPMENT. DURING THE YEAR U NDER CONSIDERATION THIS COMPANY HAS DISPOSED OF ITS WIND ENERGY DIVISION ON A SLUMP SALE, WHICH HAS AFFECTED THE PR OFITS DERIVED BY THE ENTITY DURING THE YEAR. THIS FACT IS ALSO EVIDENT FROM THE DIRECTORS REPORT OF THE COMPANY. THE MAJOR PROFITS EARNED BY THIS COMPANY WERE FROM THE DISCONTINUED OPERATIONS, I.E. THE WIND ENERGY DIVIS ION, AND THE COMPANY WAS INCURRING LOSSES IN THE OTHER DIVIS ION. THE FACT THAT THE COMPANY WAS MAJORLY INVOLVED IN THE W IND ENERGY DEVELOPMENT IS ALSO EVIDENT FROM THE FACT T HAT CONSULTANCY INCOME EARNED BY THE COMPANY DURING THE YEAR ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 23 WAS ONLY RS. 2,12,06,096/- IN COMPARISON TO THE INC OME FROM ENERGY CHARGES AMOUNTING TO RS. 7,30,89,013/-. MOREOVER, THIS COMPANY FOLLOWS THE PROJECT COMPLETI ON METHOD FOR ACCOUNTING OF ITS REVENUE FROM CONSULTAN CY SERVICES. TAKING INTO CONSIDERATION THE ABOVE FACT S, WE ARE OF THE VIEW THAT THE FUNCTIONAL PROFILE OF THIS COMPAN Y IS NOT COMPARABLE WITH THAT OF THE ASSESSEE COMPANY AND ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE THIS COMPA RABLE. B) BENGAL SREI INFRASTRUCTURE DEVELOPMENT LTD.: WE HAVE PERUSED THE FINANCIAL STATEMENTS OF THE COM PANY PLACED AT PAPER BOOK PAGE 433 460. ON GOING THRO UGH THE SAME, WE NOTE THAT THIS COMPANY, DURING THE YEAR, W AS MAJORLY INVOLVED INTO INFRASTRUCTURAL DEVELOPMENT A ND THAT TOO FOR GOVERNMENT OF INDIA. THIS FACT ALSO GETS SU PPORTED FROM THE DIRECTORS REPORT OF THE COMPANY AND THE S EGMENTAL REPORTING OF THE COMPANY WHEREIN IT HAS BEEN STATED THAT THE COMPANY IS PRIMARILY ENGAGED IN INFRASTRUCTURE PROJ ECT ADVISORY. TAKING INTO CONSIDERATION ALL THE ABOVE F ACTS, WE ARE OF THE VIEW THAT THE FUNCTIONAL PROFILE OF THIS COMPANY DOES NOT MAKE IT A GOOD COMPARABLE WITH THAT OF THE ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 24 ASSESSEE COMPANY AND, ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE THIS COMPARABLE. C) IBI CHEMATUR (ENGINEERING & CONSULTANCY) LTD. : WE HAVE PERUSED THE FINANCIAL STATEMENTS OF THE COM PANY PLACED AT PAPER BOOK PAGES 461 490. ON GOING THR OUGH THE SAME, WE NOTE THAT THIS COMPANY FAILS THE 75% S ERVICE REVENUE FILTER WHICH HAS BEEN ADOPTED BY THE TPO. THIS FACT IS CORROBORATED FROM THE PROFIT & LOSS ACCOUNT OF T HE COMPANY, WHEREIN THE ENGINEEERING SERVICE CHARGES O F THE COMPANY ARE SHOWN AT RS. 18,88,21,452/-, OUT OF THE TOTAL REVENUE OF THE COMPANY OF RS. 29,74,92,912/-. THERE FORE, THE SERVICE/REVENUE RATIO OF THE COMPANY COMES OUT TO 63.47%, WHICH IS LESS THAN 75%, WHICH IS ONE OF THE FILTERS ADOPTED BY THE TPO HIMSELF. MOREOVER, NO SEGMENTAL INFORMATION WITH REGARD TO THE DIFFERENT SEGMENTS O F THE COMPANY IS AVAILABLE IN THE FINANCIAL STATEMENTS. T HIS COMPANY HAS BEEN CONSIDERED BY THE ITAT DELHI BENCH IN THE CASE OF BECHTEL INDIA (P.) LTD. V. DCIT IN ITA NO. 1478/DEL/2015 DATED 21.12.2015 AND IN THE CASE OF B G EXPLORATION & PRODUCTION INDIA LTD. V. JCIT IN ITA NOS. 1170 & 1581/DEL/2015 DATED 24.04.2017 WHEREIN IT HAS BEE N ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 25 HELD TO BE NOT A GOOD COMPARABLE. TAKING INTO CONSI DERATION ALL THE ABOVE FACTS, WE ARE OF THE VIEW THAT THIS C OMPANY IS NOT A GOOD COMPARABLE WITH THAT OF THE ASSESSEE COM PANY AND, ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE THIS COMPARABLE. D) MAHINDRA CONSULTING & ENGG. SERVICES LTD.: WE HAVE PERUSED THE FINANCIAL STATEMENTS OF THE COM PANY PLACED AT PAPER BOOK PAGES 491 509. ON GOING THR OUGH THE SAME, WE NOTE THAT THIS COMPANY IS ENGAGED IN P ROVIDING A VARIETY OF SERVICES, ONLY ONE OF WHICH IS ENGINEE RING SERVICES AND SEGMENTAL INFORMATION ABOUT THE ENGINE ERING SERVICES IS NOT AVAILABLE. FURTHER, THIS COMPANY R ECOGNIZES ITS REVENUE ON PERCENTAGE COMPLETION METHOD, AS STA TED IN THE NOTES TO ACCOUNTS WHICH IS DIFFERENT THAN THE M ETHOD OF REVENUE RECOGNITION BEING FOLLOWED BY THE ASSESSEE COMPANY. THE REVENUE RECOGNITION METHOD IMPACTS THE PROFIT O F AN ENTERPRISE AND AS SUCH A COMPANY CANNOT BE COMPARED WITH ANOTHER COMPANY IN CASE WHERE METHODS OF REVENUE RECOGNITION ARE DIFFERENT. FURTHER, THIS COMPANY H AS BEEN HELD TO BE NOT A GOOD COMPARABLE BY THE ITAT DELHI BENCH IN ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 26 THE CASE OF ALCATEL-LUCENT INDIA LTD. V. ITO IN ITA NOS. 2154 & 2209/DEL/2014 DATED 06.04.2018 AND IN THE CASE OF ALCATEL-LUCENT INDIA LTD. V. DCIT IN ITA NO. 6856/D EL/2015 DATED 06.11.2017. TAKING INTO CONSIDERATION ALL THE ABOVE FACTS, WE ARE OF THE VIEW THAT THIS COMPANY IS NOT A GOOD COMPARABLE WITH THAT OF THE ASSESSEE COMPANY AND, ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE THIS COMPA RABLE E) MITCON CONSULTANCY & ENGG. SERVICES LTD.: WE HAVE PERUSED THE FINANCIAL STATEMENTS OF THE COM PANY PLACED AT PAPER BOOK PAGES 510 564. ON GOING THRO UGH THE SAME, WE NOTE THAT THIS COMPANY IS INTO PROVIDING T RAINING SERVICES, AND MORE THAN 25% OF THE INCOME HAS BEEN DERIVED FROM SUCH ACTIVITIES. THE FACT THAT THIS COMPANY IS INTO TRAINING SERVICES IS ALSO EVIDENT FROM THE DIRECTOR S REPORT OF THE COMPANY WHEREIN DIFFERENT ASSIGNMENTS UNDERTAKE N BY THE COMPANY ARE MENTIONED WHICH INCLUDE ENTREPRENEU RSHIP AND VOCATIONAL TRAINING DIVISION, MITCON E-SCHOOL A ND BT AND PHARMA CENTERS ETC. ON GOING THROUGH THE PROFIT AN D LOSS A/C OF THIS COMPANY PLACED AT PAPER BOOK PAGE 532, WE NOTE THAT THIS COMPANY HAS SUBSTANTIAL INCOME FROM VOCAT IONAL ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 27 TRAINING PROGRAMMES, INCOME FROM IT TRAINING AND IN COME FROM LABORATORIES. IT IS ALSO SEEN THAT THE INCOME FROM CONSULTANCY FEES EARNED BY THE COMPANY DURING THE Y EAR IS ONLY RS. 28,70,17,235/-, OUT OF THE TOTAL REVENUE O F RS. 47,81,96,289/-, WHICH IS ONLY 60.02%. THE TPO HAS APPLIED FILTER OF 75% SERVICE REVENUE. APPLYING THIS FILTER , THIS COMPANY FAILS THE TEST APPLIED BY THE TPO. WE ALSO NOTE FROM PAPER BOOK PAGE 536 THAT THIS COMPANY HAS RECE IVED VARIOUS GRANTS FROM THE GOVERNMENT OF INDIA WHICH H AS ALSO AFFECTED THE PROFITABILITY OF THE COMPANY. THIS COM PANY HAS ALSO BEEN REJECTED TO BE CONSIDERED AS A COMPARABLE BY THE HONBLE HIGH COURT OF DELHI IN THE CASE OF PR. CIT V. WSP CONSULTANTS INDIA (P.) LTD. IN ITA NO. 935 OF 2017 DATED 03.11.2017 AND ITAT DELHI BENCH IN THE CASE OF GRAN ITE SERVICES INTERNATIONAL (P.) LTD. V ACIT IN ITA NO. 532/DEL/2016 DATED 12.09.2017. TAKING INTO CONSIDER ATION ALL THE ABOVE FACTS, WE ARE OF THE VIEW THAT THIS C OMPANY IS NOT A GOOD COMPARABLE WITH THAT OF THE ASSESSEE COM PANY AND, ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE THIS COMPARABLE. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 28 F) TCE CONSULTING ENGINEERS LTD.: WE HAVE PERUSED THE FINANCIAL STATEMENTS OF THE COM PANY PLACED AT PAPER BOOK PAGE 565 650. ON GOING THROU GH THE SAME, WE NOTE THAT THIS COMPANY SHOULD NOT BE COMPA RED TO THE ASSESSEE AS THE COMPANY DOES NOT SATISFY THE UP PER TURNOVER FILTER ADOPTED BY THE ASSESSEE OF RS.200 C RORES. THIS FACT IS EVIDENT FROM THE INCOME STATEMENT OF THE CO MPANY AT PAPER BOOK PAGE 629, WHEREIN THE INCOME OF THE COMP ANY IS REFLECTED AT RS.416.02 CRORES, AS COMPARED TO ASSES SEE COMPANYS TURNOVER OF RS.9.08 CRORES. THE TURNOVER OF THIS COMPANY IS ALMOST 46 TIMES MORE THAN THAT OF THE AS SESSEE COMPANY, AND THEREFORE, THE COMPANY SHOULD NOT BE CONSIDERED AS A COMPARABLE TO THE ASSESSEE COMPANY. WE FURTHER NOTE THAT THE BRAND NAME HAS ENABLED THIS C OMPANY TO CAPTURE MAJOR GOVERNMENT CONTRACTS AND OTHER HIG H- PROFILE CUSTOMERS. FURTHER, THIS COMPANY RECOGNIZE S ITS REVENUE ON PERCENTAGE COMPLETION METHOD, AS IS EVID ENT FROM THE DISCLOSURE MADE BY THE COMPANY, WHICH IS D IFFERENT FROM THE METHOD OF REVENUE RECOGNITION BEING FOLLOW ED BY THE ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 29 ASSESSEE COMPANY. THIS COMPANY HAS BEEN REJECTED A S A GOOD COMPARABLE BY THE ITAT AHMEDABAD BENCH IN THE CASE OF SCHUTZ DISHMAN BIOTECH P. LTD. V. DCIT IN ITA NO . 954/AHD/2012 DATED 05.06.2018, ITAT MUMBAI BENCH IN THE CASE OF JACOBS ENGINEERING INDIA PVT. LTD. V. D CIT IN ITA NO. 7194/MUM/2012 DATED 17.05.2017 AND ITAT PUNE BENCH IN THE CASE OF MSC SOFTWARE CORPORATION INDIA PVT. LTD. V. ACIT IN ITA NO. 46/PN/2013 DATED 22.03.2017 . TAKING INTO CONSIDERATION ALL THE ABOVE FACTS, WE A RE OF THE VIEW THAT THIS COMPANY IS NOT A GOOD COMPARABLE WIT H THAT OF THE ASSESSEE COMPANY AND, ACCORDINGLY, WE DIRECT TH E AO TO EXCLUDE THIS COMPARABLE. (G) HSCC (INDIA) LTD.: WE HAVE PERUSED THE FINANCIAL STATEMENTS OF THE COM PANY. ON GOING THROUGH THE SAME, WE NOTE THAT THIS COMPAN Y IS A GOVERNMENT OF INDIA ENTERPRISE AND THE MAJOR PART O F THE BUSINESS IS FROM THE GOVERNMENT ITSELF. ACCORDINGL Y, WE HOLD THAT THIS IS NOT A GOOD COMPARABLE AND DIRECT THE AO TO EXCLUDE THE SAME. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 30 3.5.0 GROUND NO. 3 IN THE REVENUES APPEAL IS REGA RDING THE DIRECTION OF THE LD. DRP IN EXCLUDING THE AMOUNT OF DEPRECIATION AND MACHINERY REPAIRS WHILE COMPUTING THE MARGIN OF THE ASSESSEE AND THE COMPARABLE IN THE MANUFACTURING SE GMENT. GROUND NOS. 3 & 5.1 IN THE ASSESSEES APPEAL ARE RE GARDING THE ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION WHILE DETERMINING THE ARMS LENGTH PRICE IN THE MANUFACTURING SEGMENT . SINCE, THE ISSUE INVOLVED IN THE REVENUES APPEAL AND THE ASSE SSEES APPEAL IN THESE GROUNDS ARE COMMON, BOTH ARE BEING TAKEN T OGETHER. 3.5.1 IN THE MANUFACTURING SEGMENT, THE ASSESSEE C OMPANY COMPUTED ITS OP/SALES AT -31.28% IN COMPARISON TO T HE MARGIN OF ITS 3 COMPARABLES AT 7.30%. THE ASSESSEE MADE AN ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION AND CUSTOM DUTY ADJUSTMENT, FOREIGN EXCHANGE FLUCTUATION ON CAPITAL ASSETS IN I TS TP STUDY AND AFTER MAKING SUCH ADJUSTMENT IT WAS HELD IN THE TP STUDY THAT THE MARGIN IS AT ARMS LENGTH PRICE. THE TPO, HOWE VER, CARRIED OUT A FRESH SEARCH AND RECOMPUTED THE MARGIN AT 2.4 6% ON THE BASIS OF THREE COMPARABLES. THE TPO REJECTED THE AD JUSTMENTS ON ACCOUNT OF CAPACITY UTILIZATION, CUSTOM DUTY ADJUST MENT AND FOREIGN EXCHANGE FLUCTUATION ON CAPITAL ASSETS AND PROPOSED AN ADJUSTMENT OF RS. 12,93,90,068/-. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 31 3.5.2 BEFORE THE LD. DRP, THE ASSESSEE PLEADED FOR EXCLUSION OF MCNALLY SAYAJI ENGINEERING LTD. AS A COMPARABLE. THE ASSESSEE ALSO CONTENDED THAT THE COMPUTATION OF OPE RATING MARGIN AT 16.06% IS ALSO WRONG AND THAT THE CORRECT MARGIN IS 9.32%. THE ASSESSEE ALSO ASKED FOR CUSTOM DUTY ADJ USTMENT AS THE ASSESSEE IS HEAVILY RELIANT ON IMPORTS, CAPACIT Y UTILIZATION ADJUSTMENT AND FOREIGN EXCHANGE ADJUSTMENT. 3.5.3 THE LD. DRP IN ITS ORDER DATED 07.09.2015 RE JECTED THE CONTENTION OF THE ASSESSEE FOR EXCLUSION OF MCNALLY SAYAJI ENGINEERING LTD. ON THE ERROR IN COMPUTATION OF MAR GIN, THE LD. DRP DIRECTED THE TPO TO VERIFY THE SAME. ON THE CUS TOM DUTY ADJUSTMENT AND SUCH ADJUSTMENT IN ANY CASE TO BE RE STRICTED TO THE VALUE OF CONSUMPTION OF GOODS, THE LD. DRP REJE CTED THE CONTENTION OF THE ASSESSEE. THE LD. DRP REJECTED TH E CONTENTION OF THE ASSESSEE TO ALLOW ADJUSTMENT ON ACCOUNT OF C APACITY UTILIZATION IN THE ABSENCE OF NECESSARY INFORMATION BEING AVAILABLE. THE LD. DRP, HOWEVER, ALLOWED THE ASSESS EE PARTIAL RELIEF IN LIEU OF CAPACITY UTILIZATION ADJUSTMENT B Y DIRECTING THE TPO TO EXCLUDE THE AMOUNT OF DEPRECIATION AND MACHI NERY REPAIRS FOR COMPUTATION OF MARGINS OF THE COMPARABL ES AS WELL AS OF THE ASSESSEE. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 32 3.5.4 SUPPORTING GROUND NO. 3 IN REVENUES APPEAL, IT WAS CONTENDED BY THE LD. CIT DR THAT THE LD. DRP IN PAR A 9.3 ON PAGE 9 HAS GIVEN THE DIRECTION FOR EXCLUDING DEPREC IATION AND REPAIR OF MACHINERY SO AS TO REMOVE INEQUALITY WHIL E MAKING COMPARISON WITH THE COMPARABLES. IT WAS SUBMITTED THAT THE LD. DRP WAS NOT JUSTIFIED IN GIVING SUCH DIRECTIONS AS DEPRECIATION AND REPAIR OF MACHINERY ARE IMPORTANT COMPONENTS OF THE COST. 3.5.5 IN RESPONSE, IT WAS SUBMITTED BY THE LD. AR THAT WHILE MAKING COMPARISON THE VARIOUS INEQUALITIES HAVE TO BE REMOVED WHILE COMPARING THE MARGINS. IT WAS SUBMITTED THAT THE LD. DRP HAS GIVEN DETAILED REASONS AND AS SUCH THE DIRECTIO N GIVEN BY LD. DRP NEEDS TO BE SUSTAINED. 3.5.6 IN REPLY TO GROUND NO. 3 OF THE REVENUES AP PEAL AND SUPPORTING GROUND NOS. 3 & 5.1 OF THE ASSESSEES AP PEAL, IT WAS SUBMITTED BY THE LD. AR THAT THE ASSESSEE COMPANY H AS COMMENCED ITS COMMERCIAL OPERATIONS IN OCTOBER, 200 9 ONLY. IT WAS SUBMITTED THAT DURING THE YEAR UNDER CONSIDERAT ION, THE ASSESSEE COMPANY WAS ABLE TO PRODUCE ONLY 98 UNITS OF EQUIPMENT, WHEREAS THE INSTALLED CAPACITY WAS FOR 2 38 UNITS. THIS FACT IS EVIDENT FROM THE FINANCIAL STATEMENTS OF TH E ASSESSEE COMPANY, WHEREIN THESE DETAILS ARE REFLECTED AT PAP ER BOOK PAGE ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 33 19. IT WAS SUBMITTED THAT THIS FACT SHOWS THAT THE CAPACITY UTILIZATION RATIO OF THE ASSESSEE COMPANY IS 41.17% ONLY. IT WAS FURTHER SUBMITTED THAT DURING THE COURSE OF TRANSFE R PRICING PROCEEDINGS, AS WELL AS BEFORE THE LD. DRP, THE ASS ESSEE HAD DULY SUBMITTED ITS CAPACITY UTILIZATION FIGURES FOR A PE RIOD OF FIVE YEARS TO DEMONSTRATE THAT THE CAPACITY WAS HEAVILY UNUTIL IZED DURING THE YEAR UNDER CONSIDERATION. IT WAS SUBMITTED THAT THE LOSSES INCURRED BY THE ASSESSEE COMPANY DURING THE YEAR UN DER CONSIDERATION WAS ON ACCOUNT OF SUBSTANTIAL FIXED C OSTS, WHICH COULD NOT BE RECOVERED FULLY BECAUSE OF LESS CAPACI TY UTILIZATION. THUS, THE LOSSES COULD NOT BE ATTRIBUTED TO THE INT ERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE DURING THE YEAR. THE LD. AR SUBMITTED THAT THE COMPARABLES SELECTED BY T HE TPO WERE WELL ESTABLISHED COMPANIES, WHEREAS THE ASSESSEE WA S IN ITS FIRST YEAR OF OPERATION, AND IN ORDER TO COMPARE THE SAID COMPANIES WITH THE ASSESSEE, CAPACITY UTILIZATION ADJUSTMENT WAS REQUIRED TO BE MADE. IT WAS SUBMITTED THAT THE PURPOSE AND INTENT OF THE COMPARABILITY ANALYSIS IS TO EXAMINE WHETHER OR NOT , THE VALUES STATED FOR THE INTERNATIONAL TRANSACTIONS ARE AT AL P I.E. WHETHER THE PRICE CHARGED IS COMPARABLE TO THE PRICE CHARGE D UNDER AN UNCONTROLLED TRANSACTION OF SIMILAR NATURE. IT WAS SUBMITTED THAT ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 34 THE INCOME TAX REGULATIONS DO NOT PROVIDE THAT THE ADJUSTMENTS CANNOT BE MADE ON THE RESULTS OF THE TESTED PARTY. IT WAS PRAYED THAT THE ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZAT ION SHOULD BE PROVIDED TO THE ASSESSEE COMPANY. THE LD. AR, IN SU PPORT OF THE CONTENTION, PLACED RELIANCE ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. PETRO ARALD ITE PVT. LTD. IN ITA NO. 1540 OF 2014 DATED 26.04.2018 AND ON THE FOLLOWING JUDGMENTS: (I) ITAT BANGALORE IN THE CASE OF IKA INDIA PVT. LT D. V. DCIT IN ITA NO. 2192/BANG/2017 DATED 17.09.2018 RELEVANT FINDINGS BEING IN PARA 22 36; (II) ITAT BANGALORE IN THE CASE OF BIESSE MANUFACTU RING CO. PVT. LTD. V. ACIT IN ITA NO. 97, 493/BANG/2015 DATE D 06.11.2015 RELEVANT FINDINGS BEING IN PARA 10.4.1 10.4.8; (III) ITAT DELHI IN THE CASE OF DCIT V. PANASONIC A VC NETWORKS INDIA CO. LTD. IN ITA NO. 4620/DEL/2011 RELEVANT FINDINGS BEING IN PARA 5; 3.5.7 THE LD. AR ALSO INVITED OUR ATTENTION TO THE ORDER PASSED BY THE TPO WHEREBY THE TPO HIMSELF HAS APPRE CIATED THE ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 35 FACT THAT IF THERE ARE DIFFERENCES BETWEEN THE COMP ARABLES AND THE TAXPAYER, THEN THE EFFECT OF SUCH DIFFERENCES SHOUL D BE IRONED OUT BY MAKING SUITABLE ADJUSTMENT TO THE OPERATING MARG INS OF THE COMPARABLES. IT WAS SUBMITTED BY THE LD. AR THAT T HE TPO, AFTER APPRECIATING THIS FACT, HOWEVER, HAS NOT GIVEN THE ASSESSEE THE BENEFIT OF THIS ADJUSTMENT MERELY ON THE GROUND THA T THE DATA OF CAPACITY UTILIZATION WITH REGARD TO THE COMPARABLES WAS NOT AVAILABLE. IT WAS SUBMITTED THAT THIS CANNOT BE A REASON TO DENY CAPACITY ADJUSTMENT. THE LD. AR SUBMITTED THAT IF SOMETHING IS PRACTICALLY DIFFICULT, IT SHOULD NOT MEAN THAT WITH OUT ADJUSTING THE DIFFERENCES SUCH COMPARABLE WILL BECOME A GOOD COMP ARABLE. IN SUCH A SCENARIO, IT WAS SUBMITTED, THAT NO ADVERSE INFERENCE COULD BE DRAWN AGAINST THE ASSESSEE. 3.5.8 IT WAS FURTHER SUBMITTED BY THE LD. AR THAT THE TPO AS WELL AS THE LD. DRP HAVE NOT CONTROVERTED THE FACT THAT THE CAPACITY UTILIZATION OF THE ASSESSEE COMPANY WAS AR OUND 41.17% ONLY. THE LD. AR EMPHASISED THAT THE FACT THAT THE TPO HAS WIDE POWERS OF ISSUING NOTICE U/S 133(6) OF THE ACT AND CALLING FOR REQUISITE INFORMATION, WHICH THE TPO HAS NOT EXERCI SED, SHOWS THAT THE TPO HAS NOT MADE ANY EFFORTS TO FIND OUT A S TO WHAT WAS THE CAPACITY UTILIZATION LEVEL OF THE COMPARABLE CO MPANIES. IT WAS ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 36 SUBMITTED THAT THE MATTER MAY BE REMANDED BACK TO T HE TPO TO MAKE NECESSARY ENQUIRY AND, THEREAFTER, MAKE NECESS ARY ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION, AFTE R ANALYZING THE CAPACITY UTILIZATION RATIO OF COMPARABLES. IT WAS SUBMITTED THAT IN SIMILAR CIRCUMSTANCES, THE ITAT MUMBAI BENCH IN THE CASE OF JCIT V. KIARA JEWELLERY P. LTD. IN ITA NO. 8109/MUM /2011 HAS REMANDED BACK THE MATTER TO THE TPO TO MAKE NECESSA RY ENQUIRY AND, THEREAFTER, MAKE CAPACITY UTILIZATION ADJUSTME NT. FURTHER RELIANCE IN THIS REGARD WAS PLACED ON THE FOLLOWING JUDGMENTS: I. ITAT PUNE IN THE CASE OF TASTY BITE EATABLES LTD. V . ACIT IN ITA NO. 1682/PN/2011; II. ITAT MADRAS IN THE CASE OF MANDO INDIA STEERING SYSTEMS P. LTD. V. ACIT IN ITA NO. 2092/MDS/2012. 3.5.9 IN RESPONSE, THE LD. CIT DR SUBMITTED THAT I N ABSENCE OF CREDIBLE DATA, THE TPO WAS JUSTIFIED IN NOT ALLO WING THE CAPACITY UTILIZATION ADJUSTMENT. IT WAS SUBMITTED THAT IT IS THE ASSESSEES RESPONSIBILITY TO PROVIDE THE NECESSARY DETAILS AND DATA AND THAT IN ABSENCE OF SUCH DETAILS AND DATA, THE TPO WILL BE WELL WITHIN HIS RIGHT TO NOT TO MAKE ANY ADJUSTM ENT ON ACCOUNT OF THE DIFFERENCE IN THE CAPACITY UTILIZATI ON. IT WAS ALSO SUBMITTED THAT ADJUSTMENT, IF ANY, CAN BE MADE ONLY IN THE ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 37 COMPARABLES AND NOT TO THE TESTED PARTY. THE LD. C IT DR SUPPORTED THE ORDER PASSED BY THE TPO AND AS CONFIR MED BY THE LD. DRP. 3.5.10 WE HAVE HEARD THE RIVAL SUBMISSIONS HAVE ALS O PERUSED THE ORDER PASSED BY THE TPO AND THE LD. DRP . FROM THE FACTS, WE NOTE THAT THIS IS THE SECOND YEAR OF THE COMMERCIAL OPERATIONS BY THE ASSESSEE COMPANY. THE FACT THAT ONLY 41.18% OF ITS INSTALLED CAPACITY OF THE MANUFACTURING SEGM ENT WAS UTILIZED DURING THE YEAR IS ALSO NOT IN DISPUTE. I N FACT, THE TPO IN HIS ORDER, HAS STATED THIS FACT. HOWEVER, THE TPO HAS REJECTED THE ASSESSEES CONTENTION IN PARA 21 OF ITS ORDER BY ST ATING AS UNDER: 21. DISCUSSION ON CAPACITY ADJUSTMENT CLAIMED BY TAXPAYER THE TAXPAYER HAD CLAIMED CAPACITY ADJUSTMENT STATIN G THAT ONLY 41.18% OF ITS INSTALLED CAPACITY OF THE MANUFACTURING SEGMENT HAD BEEN USED. TAXPAYER HAS FURTHER STATED THAT THE COMPARABLES WE RE WELL ESTABLISHED COMPANIES WITH POSITIVE GROWTH RAT E DURING THE YEAR. IN ABSENCE OF DETAILS OF INSTALLED CAPACITY AND THE IR UTILIZATION IN CASE OF COMPARABLE COMPANIES, IT IS DIFFICULT TO FIND OUT WHETHER THE OTHER COMPANIES ARE WORKING TO THEIR FULL CAPACITY OR NOT. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 38 RULE 10B(3) PROVIDES FOR MAKING ADJUSTMENTS ONLY I F THE DIFFERENCES ARE MATERIAL AND REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. IN THIS CASE, NEITHER THE DIFFERENCES ARE MATERIAL NOR REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE AS THE DATA ON CAPACITY UTILIZATION OF OTHER COMPARABLE COMPANIES IS NOT AVAILABLE. TAXPAYER HAS QUOTED SEVERAL DECISIONS FOR RELIANCE ON CLAIM OF CAPACITY UTILIZATION ADJUSTMENT. HOWEVER, IT IS SEEN THAT IN ALL CASES, COURTS HAVE ENQUIRED WHETHE R THE DIFFERENCES ARE MATERIAL AND WHETHER REASONABLY ACCURATE ADJUSTMENT CAN BE MADE. AS IT IS NOT POSS IBLE TO KNOW WHETHER THERE IS MATERIAL DIFFERENCE BETWEE N CAPACITY UTILIZATION OF TAXPAYER AND COMPARABLE COMPANIES AND THEREAFTER GIVE REASONABLY ACCURATE ADJUSTMENT FOR THE SAME IN THE PRESENT CASE. HENCE , THE CLAIM OF CAPACITY UTILIZATION ADJUSTMENT IS NOT ACCEPTABLE. 3.5.11 THE TPO IN HIS ORDER ACCEPTS THAT RULE 10B(3 ) PROVIDES FOR MAKING THE ADJUSTMENT IF THE DIFFERENCES ARE MA TERIAL AND REASONABLY ACCURATE ADJUSTMENT CAN BE MADE TO ELIMI NATE THE MATERIAL EFFECT OF SUCH DIFFERENCES. HOWEVER, HE HA S REFUSED TO MAKE THE ADJUSTMENT, AS IS EVIDENT, FROM HIS ORDER ON THE ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 39 REASONING THAT NEITHER THE DIFFERENCES ARE MATERIAL NOR REASONABLY ACCURATE ADJUSTMENT CAN BE MADE AS THE DATA ON CAPA CITY UTILIZATION OF OTHER COMPARABLE COMPANY IS NOT AVAI LABLE. THE TPO HAS FURTHER STATED THAT IT IS NOT POSSIBLE TO K NOW WHETHER THERE IS MATERIAL DIFFERENCE BETWEEN THE CAPACITY U TILIZATION OF THE TAX PAYER AND THE COMPARABLE COMPANIES. AFTER GOING THROUGH THE FACTS WE ARE OF THE VIEW THAT THE FINDING OF THE TP O THAT DIFFERENCES ARE NOT MATERIAL IS FACTUALLY INCORRECT . IN FACT, IN THE SUBSEQUENT PARA OF HIS ORDER QUOTED HEREINABOVE, TH E TPO, HIMSELF, HAS CONTRADICTED HIMSELF BY STATING THAT I T IS NOT POSSIBLE TO KNOW WHETHER THERE IS MATERIAL DIFFERENCE BETWEE N CAPACITY UTILIZATION OF THE TAX PAYER AND THE COMPARABLE COM PANIES. ON GOING THROUGH THE FACTS, IT IS EVIDENT THAT THE ASS ESSEE COMPANY HAS BEEN ABLE TO UTILIZE ONLY 41.18% OF THE INSTALL ED CAPACITY AND THIS IS THE SECOND YEAR OF PRODUCTION WHICH IS INCR EASING IN THE SUBSEQUENT YEARS AS IS EVIDENT FROM THE TABLE IN TH E FIGURES PROVIDED BY THE ASSESSEE AS UNDER: A.Y. INSTALLED CAPACITY ACTUAL PRODUCTION CAPACITY UTILIZAT ION 2010-11 238 17 7.14% 2011-12 238 98 41.18% 2012-13 238 128 53.78% 2013-14 252 175 69.45% ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 40 3.5.12 THUS, THERE IS UNDER-UTILIZATION OF THE CAPA CITY IN THE YEAR UNDER CONSIDERATION. NOW, THE NEXT ISSUE IS W HETHER THE TPO WAS CORRECT IN CONCLUDING THAT IN ABSENCE OF DE TAILS/ DIFFICULTY IN FINDING OUT THE DETAILS ABOUT THE OTH ER COMPARABLES, THE BENEFIT OF CAPACITY ADJUSTMENT COULD NOT BE ALL OWED TO THE ASSESSEE. IN THIS REGARD, THE TPO HAS RELIED ON RU LE 10B (3). IT MAY BE RELEVANT TO QUOTE RULE 10B (3) WHICH READS A S UNDER: 10B (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPA RABLE TO AN INTERNATIONAL TRANSACTION [OR A SPECIFIED DOMES TIC TRANSACTION] IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSA CTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT T HE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. 3.5.13 ON GOING THROUGH THE ABOVE RULE WE NOTE THAT THE MANDATE OF THIS RULE IS THAT AN UNCONTROLLED TRANSA CTION SHALL BE COMPARABLE IF NONE OF THE DIFFERENCES ARE LIKELY TO MATERIALLY AFFECT THE PROFIT ARISING FROM SUCH TRANSACTION AND, FURTH ER, REASONABLE ACCURATE ADJUSTMENT CAN BE MADE TO ELIMINATE THE MA TERIAL ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 41 EFFECTS OF SUCH DIFFERENCES. ACCORDINGLY, IF THERE IS A DIFFERENCE WHICH MATERIALLY AFFECTS THE PROFIT AND SUCH DIFFER ENCE CAN BE ELIMINATED BY MAKING REASONABLY ACCURATE ADJUSTMENT THEN ONLY, THE TRANSACTION WILL BE COMPARABLE. IT DOES NOT ME AN THAT WHEN THERE IS MATERIAL DIFFERENCE AND ASSESSEE OR THE TP O IS NOT ABLE TO MAKE A REASONABLE ACCURATE ADJUSTMENT TO ELIMINATE THE EFFECT OF SUCH DIFFERENCE THEN THE TRANSACTION WILL BECOME CO MPARABLE. IN SUCH A SITUATION THE EXERCISE HAS TO BE ABATED AND TPO CANNOT GO AHEAD BY USING THE COMPARABLES WITHOUT MAKING ADJUS TMENT FOR THE DIFFERENCES. THE TP RULES ARE TO BE INTERPRETE D IN A FAIR AND EQUITABLE MANNER BOTH FOR THE TAX PAYER AND THE REV ENUE AND THEY CANNOT BE USED TO IN A WAY SO AS TO BE DISADVA NTAGEOUS TO THE TAX PAYER. THE WHOLE PURPOSE OF DETERMINING AR MS LENGTH PRICE IS TO FIND OUT THE VALUE WHICH IS INDEPENDENT OF ALL INFLUENCES, MAY IT BE, RELATED PARTY OR ANY OTHER C IRCUMSTANCE WHICH IS AFFECTING SUCH PRICE. THUS, WE HOLD THAT THE TPO WAS NOT CORRECT IN DENYING THE BENEFIT OF ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION. OUR VIEW IS SUPPORTED BY THE ORDER OF THE BANGALORE BENCH OF THE ITAT IN THE CASE OF IKA INDI A PRIVATE LIMITED VS. DCIT IT(TP)A NO. 2192/BANG/2017 DATED 17.09.2018 WHEREIN A SIMILAR ISSUE OF ADJUSTMENT ON ACCOUNT OF ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 42 CAPACITY UTILIZATION HAD COME UP. THE BANGALORE BE NCH ANALYZED THE STATUTORY PROVISIONS AND THE OECD GUIDELINES AN D AFTER REFERRING TO THE VARIOUS JUDGMENTS HELD THAT CAPACI TY ADJUSTMENT IS TO BE ALLOWED AND IT IS THE TPO WHO HAS TO USE H IS POWER TO COLLECT THE INFORMATION AND THAT THE TPO CANNOT REQ UIRE THE ASSESSEE TO PERFORM AN IMPOSSIBLE TASK. THE RELEVA NT FINDING READS AS UNDER: WE HAVE HEARD THE SUBMISSIONS OF THE ASSESSEE AND THE LD. DR ON THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO .7. 22. WE SHALL FIRST SEE THE STATUTORY PROVISIONS REL EVANT TO THE ISSUE. RULE 10B(1)(E) OF THE RULES STATES THAT ADJU STMENTS SHOULD BE MADE TO ACCOUNT FOR: '...THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRIS ES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET' . 23. RULE 10B (2) OF THE RULES PROVIDES COMPARABILIT Y OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION NEEDS TO BE JUDGED WITH REFERENCE TO CERTAIN SPECIF IED FACTORS. ONE SUCH FACTOR IS CONDITIONS PREVAILING IN THE MAR KETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OP ERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF L ABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMEN T AND ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 43 LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WH OLESALE OR RETAIL. 24. RULE 10B(3) OF THE RULES PROVIDE THAT: 'AN UNCO NTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF AN Y, IT(TP)A NO.2192/BANG/2017 PAGE 14 OF 39 BETWEEN THE TRANSAC TIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT T HE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM , SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL E FFECTS OF SUCH DIFFERENCES.' 25. AS PER SECTION 92C OF THE ACT, ALP IS REQUIRED TO BE COMPUTED USING ANY OF THE GIVEN SIX METHODS AND IN THE MANNER AS IS PRESCRIBED IN RULE 10B OF THE RULES. R ULE 10B IN TURN STATES THAT THE MOST APPROPRIATE METHOD WOULD BE ONE WHICH INTER ALIA PROVIDES THE MOST RELIABLE MEASURE OF ALP, AND ONE OF THE IMPORTANT FACTORS TO BE TAKEN INTO A CCOUNT HEREIN IS THE ABILITY TO MAKE RELIABLE AND ACCURATE ADJUSTMENTS. 26. THE OECD GUIDELINES ON THIS ASPECT IS AS FOLLOW S:- PARA 1.35 OF THE OECD GUIDELINES STATES AS FOLLOW IT(TP) A NO.2192/BANG/2017 PAGE 15 OF 39 CIRCUMSTANCES OF TH E PARTIES, AND THE BUSINESS STRATEGIES PURSUED BY THE PARTIES.' FURTHER, PARA 2.74 OF THE OECD GUIDELINES WHILE LAY ING DOWN THE COMPARABILITY CRITERIA TO BE ADOPTED WHILE APPL YING THE TRANSACTION NET MARGIN METHOD STATES AS FOLLOWS: ' .. THUS ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 44 WHERE THE DIFFERENCES IN THE CHARACTERISTICS OF THE ENTERPRISES BEING COMPARED HAVE A MATERIAL EFFECT ON THE NET MA RGINS BEING USED, IT WOULD NOT BE APPROPRIATE TO APPLY TH E TRANSACTIONAL NET MARGIN METHOD WITHOUT MAKING ADJU STMENTS FOR SUCH DIFFERENCES. THE EXTENT AND RELIABILITY OF THOSE ADJUSTMENTS WILL AFFECT THE RELATIVE RELIABILITY OF THE ANALYSIS UNDER THE TRANSACTIONAL NET MARGIN METHOD' (EMPHASI S SUPPLIED) 27. US TRANSFER PRICING REGULATIONS ON THIS ASPECT IS AS FOLLOWS :- IN ADDITION, THE US TRANSFER PRICING REG ULATIONS, U/S 482 OF THE INTERNAL REVENUE CODE (HEREINAFTER REFER RED TO AS 'THE US REGULATIONS') ALSO SUPPORT THE ABOVE. REGUL ATION 1.482-1(D)(2) OF THE US REGULATION STATES AS FOLLOW S: 'IN ORDER TO BE CONSIDERED COMPARABLE TO A CONTROLLED TRANSAC TION, AN UNCONTROLLED TRANSACTION NEED NOT BE IDENTICAL TO T HE CONTROLLED TRANSACTION, BUT MUST BE SUFFICIENTLY SI MILAR THAT IT PROVIDES A RELIABLE MEASURE OF AN ARM'S LENGTH RESU LT. IF THERE ARE MATERIAL DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS, ADJUSTMENTS MUST BE MADE IF THE EFFECT OF SUCH DIFFERENCES ON PRICES OR PROFITS CAN BE ASCERTAINED WITH SUFFICIENT ACCURACY TO IMPROVE THE RELIABILITY OF THE RESULTS. FOR PURPOSES OF THIS SECTION, A MAT ERIAL DIFFERENCE IS ONE THAT WOULD MATERIALLY AFFECT THE MEASURE OF AN ARM'S LENGTH RESULT UNDER THE METHOD BEING APPLI ED.' 28. THE INDIAN TRANSFER PRICING REGULATIONS, OECD G UIDELINES AND THE US TRANSFER PRICING REGULATIONS CALL FOR AN ADJUSTMENT TO BE MADE IN CASE OF MATERIAL DIFFERENCES IN THE T RANSACTIONS ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 45 OR THE ENTERPRISES BEING COMPARED SO AS TO ARRIVE A T A MORE RELIABLE ARM'S LENGTH PRICE/ MARGIN. WHILE THE IT(T P)A NO.2192/BANG/2017 PAGE 16 OF 39 INDIAN TRANSFER PRI CING REGULATIONS REFER TO THE ADJUSTMENTS ON UNCONTROLLE D TRANSACTIONS, HOWEVER THE SAME HAS TO BE READ WITH RULE10B(3) OF THE RULES WHICH CLEARLY EMPHASIZES TH E NECESSITY AND COMPULSION OF UNDERTAKING ADJUSTMENTS . HENCE IN CASE APPROPRIATE ADJUSTMENTS CANNOT BE MADE TO T HE UNCONTROLLED TRANSACTION, DUE TO LACK OF DATA, THEN IN ORDER TO READ THE PROVISIONS OF TRANSFER PRICING REGULATIONS IN HARMONY, THE ADJUSTMENTS SHOULD BE MADE ON THE TEST ED PARTY. IN THE FOLLOWING DECISIONS IT HAS BEEN HELD THAT ADJUSTMENT TO THE PROFIT MARGINS HAVE TO BE MADE ON ACCOUNT OF UNDERUTILIZATION OF CAPACITY: (I) IN THE CASE OF M/S. MANDO INDIA STEERING SYSTEM S PRIVATE LIMITED VS ASSISTANT COMMISSIONER OF INCOME TAX, [I.T.A. NO. 2092/MDS 12012], THE TRIBUNAL UPHE LD THE CONTENTION OF THE TAXPAYER FOR MAKING A SUITABL E ADJUSTMENT ON ACCOUNT OF IDLE CAPACITY FOR THE PURP OSE OF MARGIN COMPUTATION. THE RELEVANT EXTRACT IS REPRODUCED AS BELOW: '10. . WE ARE OF THE CONSIDERED VIEW THAT UNDERUTILIZATION OF PRODUCTION CAPACITY IN THE INITIAL YEARS IS A VITAL FACTOR WHI CH HAS BEEN IGNORED BY THE AUTHORITIES BELOW WHILE DETERMI NING THE ALP COST. THE TPO SHOULD HAVE MADE ALLOWANCE FO R THE HIGHER OVERHEAD EXPENDITURE DURING THE INITIAL PERIOD OF PRODUCTION.' (II) IN THE RULING OF DCIT VS PANASONIC AVC NETWORK S INDIA CO LTD (I.T.A. NO.: 4620/DE1/2011), IT WAS HE LD ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 46 THAT:- '5. .. CAPACITY UNDERUTILIZATION BY ENTERPR ISES IS CERTAINLY AN IMPORTANT FACTOR AFFECTING NET PROFIT MARGIN IN THE OPEN MARKET BECAUSE LOWER CAPACITY UTILIZATI ON RESULTS IN HIGHER PER UNIT COSTS, WHICH, IN TURN, R ESULTS IN LOWER PROFITS. OF COURSE, THE FUNDAMENTAL ISSUE, SO FAR AS ACCEPTABILITY OF SUCH ADJUSTMENTS IS CONCERTED, IS REASONABLE ACCURACY EMBEDDED IN THE MECHANISM FOR SUCH ADJUSTMENTS, AND AS LONG AS SUCH IT(TP)A NO.2192/BANG/2017 PAGE 17 OF 39 AN ADJUSTMENT MECHANISM CAN BE FOUND, NO OBJECTION CAN BE TAKEN T O THE ADJUSTMENT.' (III) IN THE CASE OF BIESSE MANUFACTURING COMPANY LIMITED (IT(TP) A NOS. 97 & 493/BANG/2015) FOR AY 2010-11, THE TRIBUNAL HELD AS FOLLOWS: '10.4.1. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFUL LY CONSIDERED THE SUBMISSIONS MADE AND MATERIAL ON RECORD; INCLUDING THE JUDICIAL PRONOUNCEMENTS CITED . THE ISSUE FOR CONSIDERATION IS WHETHER ADJUSTMENT FOR U NDER- UTILISATION OF CAPACITY IS ALLOWABLE IN THE CASE ON HAND AND IF SO, THE MANNER OF COMPUTATION THEREOF AND TH E QUANTUM OF ADJUSTMENT...... 10.4.5 IN THE ABOVE CITED CASE OF THE MUMBAI TRIBUNAL I.E. PETRO ARALDITE P. LTD. (SUPRA), THE TRIBUNAL HAS UPHELD T HE PRINCIPLE THAT ADJUSTMENT FOR CAPACITY UNDERUTILISA TION CAN BE GRANTED .. FOLLOWING THE DECISION OF THE ITAT, MUMBAI IN THE CASE OF PETRO ARALDITE P. LTD. (SUPRA), WE HOLD THAT ANY ADJUSTMENT FOR CAPACITY UNDERUTILISATION CAN BE GRANTED.....' (IV) IN THE RECENT CASE OF GE INTELLIGENT PLATFORM PRIVATE LIMITED (IT(TP)A NO. 148/BANG/2015 AND 164/BANG/2015) FOR AY 2010-11 WAS HELD AS FOLLOWS: '8 . NOW THE LAW IS QUITE SETTLED TO THE EXTENT THAT ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 47 ONCE THERE IS UNUTILIZED CAPACITY OR MEN POWER, SUC H UNDERUTILIZATION IMPACTS MARGIN AND THEREFORE, THE ADJUSTMENT SHOULD BE MADE WHILE COMPUTING THE ALP IF THE UNDERUTILIZATION IS MORE THAN AVERAGE UNDERUTILIZATION OF THE INDUSTRY THEN NECESSARY ADJUSTMENT IS REQUIRED TO BE MADE TO THE MARGIN OF COMPUTING ALP......' 29. MOREOVER, THE ABOVE ARGUMENT OF THE ASSESSEE FO R GRANT OF CAPACITY UTILIZATION ADJUSTMENT IS ALSO SUPPORTED B Y THE FOLLOWING DECISION OF BANGALORE ITAT IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD (ITA NO.1231/BANG/2010). RELEVANT EXTRACT OF THE DECISIO N IS UNDER:- '15.2 WE AGREE WITH THIS CONTENTION OF THE COUNSEL FOR THE ASSESSEE. ALL THE COMPARABLES HAVE TO BE COMPAR ED ON SIMILAR STANDARDS AND THE ASSESSEE CANNOT BE PUT IN A DISADVANTAGEOUS POSITION, WHEN IN THE CASE OF OTH ER COMPANIES ADJUSTMENTS FOR UNDER UTILIZATION OF MANPOWER IS GIVEN. THE ASSESSEE SHOULD ALSO BE GIVE N ADJUSTMENT FOR UNDER UTILIZATION OF ITS INFRASTRUCT URE. THE AO SHALL CONSIDER THIS FACT ALSO WHILE DETERMINING THE ALP AND MAKE THE TP ADJUSTMENTS. WITH THESE DIRECTIONS, THE APPEAL OF THE ASSESSEE IS DISPOSED OF. 30. THE RELIABILITY AND ACCURACY OF ADJUSTMENTS WOU LD LARGELY DEPEND ON AVAILABILITY OF RELIABLE AND ACCURATE DAT A. FOR CERTAIN TYPES OF ADJUSTMENTS, RELEVANT DATA FOR COM PARABLES MAY EITHER NOT BE AVAILABLE IN PUBLIC DOMAIN OR MAY NOT BE RELIABLY DETERMINABLE BASED ON INFORMATION AVAILABL E IN PUBLIC DOMAIN, WHEREAS, IT MAY BE POSSIBLE TO MAKE EQUALLY RELIABLE AND ACCURATE ADJUSTMENTS ON THE TESTED PAR TY (WHOSE DATA WOULD GENERALLY BE EASILY ACCESSIBLE). ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 48 31. IN SUCH A SCENARIO, ONE HAS TO RESORT TO THE PR OVISIONS OF RULE 10B(3)(II) WHICH PROVIDES FOR MAKING REASONAB LY ACCURATE ADJUSTMENTS FOR ELIMINATING ANY MATERIAL DIFFERENCES BETWEEN THE TWO TRANSACTIONS BEING COMP ARED. THE PURPOSE OR INTENT OF THE COMPARABILITY ANALYSIS IS TO EXAMINE AS TO WHETHER OR NOT, THE VALUES STATED FOR THE INTERNATIONAL TRANSACTIONS ARE AT ALP I.E., WHETHER THE PRICE CHARGES IS COMPARABLE TO THE PRICE CHARGES UNDER AN UNCONTROLLED TRANSACTION OF SIMILAR NATURE. THE REG ULATIONS DONT RESTRICT OR PROVIDE THAT THE ADJUSTMENTS CANN OT BE MADE ON THE RESULTS OF THE TESTED PARTY. THEREFORE, KEEP ING IN MIND THE AFORESAID OBJECTIVE, THE NET PROFIT MARGIN OF T HE TESTED PARTY DRAWN FROM ITS FINANCIAL ACCOUNTS CAN BE SUIT ABLY ADJUSTED TO FACILITATE ITS COMPARISON WITH OTHER UN CONTROLLED ENTITIES/TRANSACTIONS AS PER SUB-CLAUSE (I) OF RULE 10B(1)(E) OF THE RULES ITSELF. THE ABSENCE OF SPECIFIC PROVISION IN RULE 10B(1)(E)(III) OF THE RULES DOES NOT IMPEDE THE ADJ USTMENT OF THE PROFIT MARGIN OF TESTED PARTY. THE ABOVE VIEW H AS ALSO BEEN UPHELD IN THE FOLLOWING DECISIONS:- CAPEGEMI NI INDIA PVT. LTD. (ITA NO.7861/MUM/2011) DEMANG CRANES & COMPONENTS (INDIA) PVT LTD. [49 SOT 610 (PUNE)] 32. AS FAR AS DATA OF COMPARABLE COMPANIES ON CAPA CITY UTILIZATION BEING NOT AVAILABLE IN PUBLIC DOMAIN IS CONCERNED, IT IS PRACTICALLY NOT POSSIBLE TO OBTAIN DATA ON CA PACITY UTILIZATION OF COMPARABLE COMPANIES AND CONSEQUENTL Y COMPUTE ADJUSTMENT ON THE COMPARABLE COMPANIES, THE OPERATING COST OF THE TESTED PARTY IS ADJUSTED FOR CAPACITY UTILIZATION ADJUSTMENT. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 49 33. THE ASSESSEE HAS UNDER-UTILIZED CAPACITY DURING THE SUBJECT AY AND IS ACCORDINGLY FACTUALLY AND LEGALLY ELIGIBLE TO AN ADJUSTMENT FOR THE SAME. THEREFORE, SUCH A BENEF IT CANNOT BE DENIED TO THE ASSESSEE ONLY FOR THE REASON THAT THE DATA ABOUT COMPARABLE COMPANIES IS NOT AVAILABLE. REQUIR ING THE ASSESSEE TO PRODUCE SUCH A DATA WHICH IS NOT AVAILA BLE IN PUBLIC DOMAIN WOULD TANTAMOUNT TO REQUIRING THE APP ELLANT TO PERFORM AN IMPOSSIBLE TASK. THE ONLY WAY TO GET THE DATA IN THE CURRENT CASE, WOULD BE WHERE THE TPO COLLATES T HE SAME FROM THE COMPARABLE COMPANIES BY EXERCISING HIS POW ERS UNDER SECTION 133(6) OF THE ACT. THE RELEVANT EXTRA CTS OF THE SECTION ARE AS UNDER:- '(6) REQUIRE ANY PERSON, INCLUDING A BANKING COMPAN Y OR ANY OFFICER THEREOF, TO FURNISH INFORMATION IN RELA TION TO SUCH POINTS OR MATTERS, OR TO FURNISH STATEMENTS OF ACCOUNTS AND AFFAIRS VERIFIED IN THE MANNER SPECIFI ED BY THE ASSESSING OFFICER, THE DEPUTY COMMISSIONER (APPEALS), THE JOINT COMMISSIONER OR THE COMMISSION ER (APPEALS), GIVING INFORMATION IN RELATION TO SUCH P OINTS OR MATTERS AS, IN THE OPINION OF THE ASSESSING OFFICER , THE DEPUTY COMMISSIONER (APPEALS), THE JOINT COMMISSION ER OR THE COMMISSIONER (APPEALS), WILL BE USEFUL FOR, OR RELEVANT TO, ANY ENQUIRY OR PROCEEDING UNDER THIS A CT :' 34. IN THIS REGARD, WE FIND THAT THE MUMBAI ITAT IN CASE OF M/S KIARA JEWELLERY P.LTD. (I.T.A.NO.8109/MUM/2011) , HAS DIRECTED THE AO/ TPO TO OBTAIN THE EXACT DETAILS OF CAPACITY UTILIZATION OF COMPARABLE COMPANIES, IF NOT AVAILAB LE IN PUBLIC DOMAIN. THE RELEVANT EXTRACT OF THE AFORESAID DECIS ION IS AS UNDER:- ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 50 '11. KEEPING IN VIEW THE DECISION OF THE TRIBUNAL I N THE CASE OF PETRO ARALDITE (P) LTD (SUPRA) LAYING DOWN THE GUIDELINES ON THE ISSUE OF CAPACITY UTILIZATION, WE CONSIDER IT APPROPRIATE TO RESTORE THIS ISSUE RELAT ING TO ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION IN TH E CASE OF ASSESSEE COMPANY TO THE FILE OF AO/TPO FOR DECID ING THE SAME AFRESH KEEPING IN VIEW THE SAID GUIDELINES . IF THE EXACT DETAILS OF CAPACITY UTILIZATION OF THE COMPARABLE COMPANIES ARE NOT AVAILABLE IN THE PUBLI C DOMAIN, THE AO/TPO IS DIRECTED TO OBTAIN THE SAME DIRECTLY FROM THE CONCERNED PARTIES AND TO DECIDE T HIS ISSUE AFRESH AFTER GIVING ASSESSEE AN OPPORTUNITY O F BEING HEARD.' 35. ACCORDINGLY, WE DIRECT THE TPO TO EXERCISE POW ERS UNDER SECTION 133(6) OF THE ACT TO CALL FOR INFORMATION O N CAPACITY UTILIZATION OF THE COMPARABLE COMPANIES SUCH AS INSTALLED CAPACITY, ACTUAL PRODUCTION IN UNITS, BREAK-UP OF FIXED COST AND VARIABLE COST; SEGMENTAL/ PRODUCT WISE INFORMATION, IF ANY. 36. POST OBTAINING THE INFORMATION, HE IS REQUESTED TO PROVIDE THE ASSESSEE AN OPPORTUNITY BY SHARING THE DETAILS SO OBTAINED, AND ACCORDINGLY, GRANT THE ADJUSTMENT FOR CAPACITY UNDER-UTILIZED. GROUND NO.7 IS DECIDED ACCORDINGLY. 3.5.14 NOW, COMING TO THE METHODOLOGY TO BE ADOPTED FOR ALLOWING THE CAPACITY ADJUSTMENT IN THIS CASE. THE LD. DRP HAS TAKEN COGNIZANCE OF THE SAME BUT INSTEAD OF ALLOWIN G THE ADJUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION, IT H AS DIRECTED TO ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 51 EXCLUDE DEPRECIATION AND REPAIRS OF MACHINERY FROM THE COMPARABLES AS WELL AS THE ASSESSEE. WE ARE OF THE VIEW THAT CAPACITY ADJUSTMENT IS NOT LIMITED TO DEPRECIATION AND REPAIR OF MACHINERY. IN A BUSINESS ENTITY, THERE ARE CERTAIN FIXED OVERHEADS SUCH AS RENT, ADMINISTRATIVE EXPENSES ETC ., WHICH HAVE TO BE INCURRED IRRESPECTIVE OF THE PERCENTAGE OF CA PACITY UTILIZATION. THERE ARE VARIABLE EXPENDITURES WHICH ARE IN DIRECT PROPORTION TO THE PRODUCTION I.E. THE CAPACITY UTIL IZED. THE NET MARGIN OF AN ENTITY WILL VARY WITH THAT OF ANOTHER ENTITY IN CASE THERE IS A DIFFERENCE IN THE CAPACITY UTILIZATION. IF THERE IS HIGHER CAPACITY UTILIZATION, THEN THE FIXED OVERHEADS GET SPREAD OVER SUCH HIGHER CAPACITY UTILIZATION WITH THE RESULT TH AT THE NET MARGIN OF SUCH ENTITY WILL BE MUCH HIGHER AS COMPAR ED TO THE ANOTHER ENTITY WHERE THE CAPACITY UTILIZATION IS LO W AND AS SUCH THERE IS A HIGHER PROPORTION OF FIXED OVERHEADS WHI CH GET ALLOCATED TO SUCH LOWER CAPACITY/PRODUCTION. THUS, THE RIGHT METHOD IS TO IDENTIFY ALL THE FIXED EXPENSES INCLUD ING DEPRECIATION AND TO ADJUST THE SAME IN THE RATIO OF THE CAPACITY UTILIZED. IN VIEW OF THE ABOVE ANALYSIS, WE DIRECT THE TPO TO EX ERCISE HIS POWERS UNDER SECTION 133(6) OF THE ACT AND TO CALL FOR THE INFORMATION ON CAPACITY UTILIZATION OF COMPARABLE C OMPANIES. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 52 AFTER OBTAINING THE INFORMATION, HE WILL SHARE THE DETAILS SO OBTAINED WITH THE ASSESSEE AND GIVE AN OPPORTUNITY TO THE ASSESSEE AND GRANT ADJUSTMENT FOR CAPACITY UNDER-UT ILIZED. 3.5.15 GROUND NO. 3 OF REVENUES APPEAL AND GROUND NOS. 3 & 5.1 OF ASSESSEES APPEAL ARE DISPOSED OF A CCORDINGLY. 3.6.0 GROUND NO. 4 IN THE REVENUES APPEAL IS AGAI NST THE DIRECTION OF THE LD. DRP IN DELETING THE ADDITION O F RS. 2,04,92,202/- PROPOSED BY THE AO ON ACCOUNT OF FORE IGN EXCHANGE LOSS. THE ASSESSING OFFICER PROPOSED THIS ADDITION HOLDING THAT THE CLAIM OF THE ASSESSEE IS NOT ALLOW ABLE IN VIEW OF THE PROVISIONS OF SECTION 43A OF THE ACT. THE LD. DRP DIRECTED DELETION OF THE ADDITION BY HOLDING THAT THE SAME I S ALLOWABLE IN VIEW OF THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA PRIVATE LIMITED 312 ITR 254 (SC). 3.6.1 IT WAS SUBMITTED BY THE LD. CIT DR THAT THE LD. DRP HAS GONE WRONG IN ALLOWING THIS DEDUCTION IGNORING THE FACT THAT THIS LOSS HAS OCCURRED ON ACCOUNT OF FLUCTUATION IN FOREIGN EXCHANGE IN RESPECT OF LOAN TAKEN BY THE ASSESSEE F OR THE ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 53 PURPOSE OF CAPITAL ASSETS AND HENCE, THE SAME CANNO T BE ALLOWED AS REVENUE EXPENDITURE. 3.6.2 IN REPLY, THE LD. AR SUBMITTED THAT THE LD. DRP WAS RIGHT IN ALLOWING THE DEDUCTION AS THE ISSUE IS SQU ARELY COVERED BY THE JUDGEMENT OF THE HONBLE SUPREME COURT IN TH E CASE OF CIT VS. WOODWARD GOVERNOR INDIA PRIVATE LIMITED (SU PRA). THE LD. AR ALSO PLACED RELIANCE ON THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF PR. CIT VS. SEAGRAM MANUF ACTURING PRIVATE LIMITED IN ITA NO. 885/2016 DATED 09.12.201 6 AND PR. CIT VS. RAMPGREEN SOLUTIONS PRIVATE LIMITED IN ITA NO. 340/2016 DATED 27.05.2016. 3.6.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. O N GOING THROUGH THE DRAFT ASSESSMENT ORDER, WE NOTE THAT TH E ASSESSEE COMPANY HAS TAKEN AN ECB LOAN FROM TEREX CORPORATIO N FOR ACQUIRING CAPITAL ASSETS AND THIS AMOUNT REPRESENTS LOSS ARISING ON ACCOUNT OF THE FLUCTUATION IN THE EXCHANGE RATE OF THIS LOAN. THE ASSESSING OFFICER DISALLOWED THE SAME BY HOLDIN G THAT THE SAME WAS OF CAPITAL NATURE AND THAT IN VIEW OF THE PROVISIONS OF SECTION 43A OF THE ACT THE SAME WAS NOT REVENUE IN NATURE. THE LD. DRP HAS HELD THAT THE ASSETS WERE PURCHASED IN INDIA AND, THEREFORE, SECTION 43A IS NOT APPLICABLE. RELYING O N THE JUDGMENT ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 54 OF THE HONBLE SUPREME COURT IN THE CASE OF WOODWAR D GOVERNOR INDIA PRIVATE LIMITED (SUPRA), THE ADDITION WAS DIR ECTED TO BE DELETED. IT IS SEEN THAT PROVISIONS OF SECTION 43A ARE APPLICABLE IN RESPECT OF ANY ASSET ACQUIRED FROM A COUNTRY OUTSID E INDIA. IN SUCH CASE, ANY DIFFERENCE ARISING CONSEQUENT TO A C HANGE IN THE RATE OF EXCHANGE AFTER THE ACQUISITION OF SUCH ASSE T, THE DIFFERENCE IS ADJUSTED AGAINST ACTUAL COST/WRITTEN- DOWN VALUE OF SUCH ASSET. THUS, THE CONDITION FOR APPLICABILITY OF THIS SECTION IS THAT THE CAPITAL ASSET IS ACQUIRED FROM A COUNTRY O UTSIDE INDIA. IN THE PRESENT CASE, THE ASSETS WERE PURCHASED IN INDI A AND NOT ACQUIRED FROM THE COUNTRY OUTSIDE INDIA. THUS, THE LD. DRP WAS CORRECT IN HOLDING THAT PROVISIONS OF SECTION 43A, PROPOSED BY THE AO IN THE DRAFT ASSESSMENT ORDER, ARE NOT APPLICABL E. THIS ISSUE, AS RIGHTLY STATED BY THE LD. DRP, IS COVERED BY THE JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVER NOR INDIA PRIVATE LIMITED (SUPRA). SIMILAR ISSUE HAD COME UP BEFORE THE JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF PR. CIT VS. SEAGRAM MANUFACTURING PRIVATE LIMITED (SUPRA) AND RAMPGREEN SOLUTIONS PRIVATE LIMITED (SUPRA) WHEREIN BY RELYING ON THE J UDGEMENT IN THE CASE OF WOODWARD GOVERNOR INDIA PRIVATE LIMITED (SUPRA), IT ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 55 HAS BEEN HELD THAT SUCH LOSS WILL BE REVENUE IN NAT URE. IN VIEW OF THE ABOVE FACTS, WE UPHOLD THE ORDER OF THE LD. DRP . 3.6.4 GROUND NO. 4 IN REVENUES APPEAL IS DISMISSE D. 3.7.0 NOW WE TAKE UP REMAINING GROUNDS IN THE APPE AL OF THE ASSESSEE. 3.7.1 GROUND NOS. 1 & 2 IN THE ASSESSEES APPEAL A RE GENERAL IN NATURE AND, HENCE, NEED NO ADJUDICATION. 3.7.2 GROUND NO. 4 REGARDING REJECTION OF ONE COMP ARABLE NAMELY MCNALLY SAYAJI ENGINEERING LTD. IN THE MANUF ACTURING SEGMENT IS DISMISSED AS NOT PRESSED. 3.8.0 GROUND NO. 5.2 IN THE ASSESSEES APPEAL IS R EGARDING ADJUSTMENT ON ACCOUNT OF NON-CENVAT-ABLE CUSTOM DUT Y ON IMPORTS MADE BY THE ASSESSEE COMPANY WHILE COMPUTIN G MARGIN OF THE MANUFACTURING SEGMENT. 3.8.1 THE CONTENTION OF THE LD. AR IN THIS REGARD IS THAT THE COMPANY HAS HEAVILY RELIED ON IMPORTS AS THE END PR ODUCT NEEDS TO MEET THE QUALITY REQUIREMENTS OF THE CUSTOMERS. IT HAS BEEN SUBMITTED THAT THE RATIO OF IMPORTED RAW MATERIAL F ORMS 48% OF THE TOTAL RAW MATERIAL CONSUMED WHEREAS THE AVERAGE IMPORTED RAW MATERIAL CONSUMED BY THE COMPARABLES IS ONLY 5. 93%. ON ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 56 THIS BASIS, IT WAS CONTENDED BY THE LD. AR THAT THI S CLEARLY SHOWS THAT THE NON-CENVAT-ABLE CUSTOMS DUTY HAS IMPACTED THE MARGINS EARNED BY THE ASSESSEE COMPANY DURING THE YEAR. IT WAS SUBMITTED BY THE LD. AR THAT THE IMPACT OF THE CUST OMS DUTY ON THE PROFITABILITY OF THE ASSESSEE COMPANY IS OF AN EXTRA ORDINARY NATURE. THIS FACT IS EVIDENT FROM THE FIGURES OF IM PORT/SALES RATIO FOR FIVE YEARS WHICH WERE SUBMITTED BEFORE THE TPO AS WELL AS BEFORE THE LD. DRP. IT WAS CONTENDED BY THE LD. AR THAT SINCE THE IMPACT OF THE CUSTOM DUTY ON THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE IS OF EXTRA ORDINARY IN NATURE, THE SAME N EEDS TO BE EXCLUDED WHILE ARRIVING AT THE OPERATING MARGIN OF THE ASSESSEE COMPANY. IN SUPPORT OF ITS SUBMISSION THE LD. AR PL ACED ON THE ORDER OF ITAT PUNE BENCH IN THE CASE OF SKODA AUTO INDIA (P.) LTD. VS. ACIT [2009] 30 SOT 319 AND ON THE ORDER OF ITAT PUNE BENCH IN THE CASE OF DEMAG CRANES AND COMPONENTS IN DIA PVT. LTD. IN ITA NO. 202/PN/2007. 3.8.2 IN RESPONSE, THE LD. CIT DR SUBMITTED THAT T HIS TYPE OF ADJUSTMENT IS NOT PERMISSIBLE UNDER THE TP REGULATI ONS. IT WAS FURTHER SUBMITTED THAT IT DOESNT MATTER WHETHER TH E RAW MATERIAL USED IS IMPORTED OR INDIGENOUS. THE CUSTOM DUTY ON IMPORT IS A ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 57 PART OF THE COST AND THE SAME HAS TO BE TAKEN INTO ACCOUNT WHILE COMPUTING THE MARGIN. 3.8.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE ORDER PASSED BY THE AUTHORITIES BELOW. THE LD. DRP HAS REJECTED THIS CONTENTION OF THE ASSESSEE COMPANY ON THE GROUND THAT CUSTOM DUTY DOES NOT HAVE ANY IMPACT ON THE NE T PROFIT LEVEL OF THE ASSESSEE. WHILE DECIDING THE ISSUE OF THE C APACITY ADJUSTMENT, WE HAVE HELD THAT IN TERMS OF RULE 10B (3) ALL THE ADJUSTMENTS WHICH ARE MATERIALLY AFFECTING THE TRAN SACTION BEING COMPARED NEED TO BE ELIMINATED. THUS, IN CASE NON- CENVAT-ABLE CUSTOM DUTY ON IMPORT MADE BY THE ASSESSEE COMPANY IS MATERIALLY AFFECTING THE TRANSACTION VIS--VIS THE COMPARABLES BEING CONSIDERED BY THE TPO THEN THE SAME NEEDS TO BE ELIMINATED. SINCE, THIS ISSUE HAS NOT BEEN CONSIDE RED BY THE TPO AND CONSIDERING THE FACT THAT WE HAVE REMITTED THE MATTER BACK TO AO FOR ALLOWING ADJUSTMENT ON ACCOUNT OF CAPACITY U TILIZATION, WE DEEM IT FIT TO RESTORE THIS ISSUE ALSO TO THE TPO. THE TPO WILL EXAMINE WHETHER NON-CENVAT-ABLE CUSTOM DUTY ON IMPO RTS PAID BY THE ASSESSEE IS MATERIALLY AFFECTING THE PLI OF THE ASSESSEE COMPANY AND IF HE FINDS THAT THIS PAYMENT OF NON-CE NVAT-ABLE CUSTOM DUTY IS MATERIALLY AFFECTING THE TRANSACTION WITH THAT OF ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 58 THE COMPARABLES THEN HE WILL SUITABLY MAKE ADJUSTME NT THEREOF. 3.8.4 THE GROUND NO. 5.2 IS ALLOWED FOR STATISTICA L PURPOSES ACCORDINGLY. 3.9.0 GROUND NO.5.3 IN THE ASSESSEES APPEAL IS RE GARDING ADJUSTMENT FOR ABNORMAL FOREIGN EXCHANGE FLUCTUATIO N WHILE COMPUTING MARGIN OF THE MANUFACTURING SEGMENT. 3.9.1 IT WAS CONTENDED BY THE LD. AR THAT DURING T HE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS INCURRED FORE IGN EXCHANGE LOSS AMOUNTING TO RS. 9.79 CRORES. OUT OF THIS, AN AMOUNT OF RS. 2,04,92,202/- WAS ON ACCOUNT OF RESTATEMENT OF LOAN LIABILITY ON ACCOUNT OF CAPITAL ASSET/S PURCHASED. THEREFORE, TH E AMOUNT OF RS. 2,04,92,202/- SHOULD BE EXCLUDED FOR THE PURPOS E OF COMPUTING THE OPERATING MARGIN OF THE ASSESSEE COMP ANY FOR THE YEAR UNDER CONSIDERATION. IT WAS FURTHER CONTENDED BY THE LD. AR THAT THE BALANCE FOREIGN EXCHANGE LOSS, ONLY TO THE EXTENT IT IS RELATABLE TO THE MANUFACTURING SEGMENT, BE CONSIDER ED WHILE COMPUTING ITS MARGIN AND NOT THE ENTIRE FOREIGN EXC HANGE LOSS. 3.9.2 THE LD. CIT DR SUBMITTED THAT FOREIGN EXCHAN GE LOSS IS CONSIDERED TO BE AS NORMAL BUSINESS EXPENDITURE AND CANNOT BE EXCLUDED WHILE COMPUTING THE PLI OF THE ASSESSEE CO MPANY. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 59 3.9.3 WE HAVE CONSIDERED THE RIVAL CONTENTIONS. T HE ISSUE HERE IS EXCLUSION OF THE FOREIGN EXCHANGE LOSS OF R S. 2,04,92,202/- ON ACCOUNT OF RESTATEMENT OF LOAN LIA BILITY. THUS, THIS FOREIGN EXCHANGE LOSS IS NOT ON ACCOUNT OF PUR CHASES OR SALES OR ANY OTHER REVENUE ITEM. THE LD. CIT DR IS CORRE CT IN ITS CONTENTION THAT FOREIGN EXCHANGE LOSS IS CONSIDERED TO BE NORMAL BUSINESS EXPENDITURE WHILE COMPUTING MARGIN OF THE TESTED PARTY AS WELL AS THE COMPARABLES. HOWEVER, SUCH FOREIGN EXCHANGE LOSS IS OF THE NATURE RELATING TO REVENUE. IN THE PRESE NT CASE, THE ADMITTED FACT IS THAT THIS RELATES TO RESTATEMENT O F LOAN LIABILITY. SUCH EXPENDITURE, THOUGH, MAY BE ALLOWABLE AS BUSIN ESS EXPENDITURE WHILE COMPUTING THE TAXABLE INCOME BUT THE FACT THAT SUCH EXPENDITURE IS OF EXTRA-ORDINARY NATURE CANNOT BE IGNORED. THEREFORE, WE ARE OF THE VIEW THAT THIS EXCHANGE LO SS OF RS. 2,04,92,202/- NEEDS TO BE EXCLUDED WHILE COMPUTING THE PLI OF THE ASSESSEE. WE ARE ALSO IN AGREEMENT WITH THE CO NTENTION OF THE LD. AR THAT ONLY THE FOREIGN EXCHANGE LOSS PERT AINING TO THE MANUFACTURING SEGMENT NEEDS TO BE CONSIDERED WHILE COMPUTING MARGIN OF THE MANUFACTURING SEGMENT. ACCORDINGLY, WE DIRECT THE AO TO ALSO EXCLUDE FOREIGN EXCHANGE LOSS PERTAINING TO OTHER ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 60 SEGMENTS WHILE COMPUTING THE MARGIN OF THE MANUFACT URING SEGMENT. 3.9.4 GROUND NO. 5.3 IS ALLOWED FOR STATISTICAL PU RPOSES ACCORDINGLY. 3.10.0 GROUND NOS. 6 AND 7 IN THE ASSESSEES APPEAL ARE REGARDING TP ADJUSTMENT TO BE RESTRICTED TO THE VAL UE OF CONSUMPTION OF THE RAW MATERIAL PURCHASED FROM ASSO CIATE ENTERPRISE. 3.10.1 IT WAS SUBMITTED BY THE LD. AR THAT DURING T HE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY HAS MADE TOTAL PURCHASES FOR RS. 105,55,16,000/- FROM ITS AE. OUT OF THE ABOVE PURCHASES MADE FROM THE AE, RAW MATERIAL AMOUNTING TO RS. 41,34,29,000/- WAS LYING UNUTILIZED AS CLOSING STOC K, AS IS EVIDENT FROM THE SCHEDULE 12 OF THE BALANCE SHEET A T PAPER BOOK PAGE 13. IT WAS SUBMITTED THAT, THUS, WHILE COMPUT ING THE MARGIN ONLY THE FIGURE OF ACTUAL CONSUMPTION DURING THE YEAR NEEDS TO BE TAKEN AND THAT THE ADJUSTMENT IS TO BE RESTRICTED TO THE AMOUNT OF ACTUAL CONSUMPTION OF THE MATERIAL PU RCHASED FROM THE AE AND NOT TO THE TOTAL AMOUNT OF THE PURC HASES FROM ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 61 AE AS HAS BEEN DONE BY THE AO. IT WAS CONTENDED BY THE LD. AR THAT IT WILL NOT BE CORRECT TO MAKE THE ADJUSTMENT OF THE ENTIRE PURCHASES AND STILL VALUE THE CLOSING STOCK LYING U NUTILIZED AS ON THE LAST DATE OF THE YEAR AT COST WITHOUT REDUCING SUCH COST BY THE ADJUSTMENT BEING MADE ON ACCOUNT OF ARMS LENGTH PR ICE DETERMINED BY THE TPO FOR SUCH PURCHASES FROM THE A E. IT WAS SUBMITTED BY THE LD. AR THAT THE IMPACT ON THE PROF IT IN RESPECT OF SUCH MATERIAL WHICH IS LYING AS CLOSING STOCK WI LL BE REFLECTED IN THE PROFITS OF THE ASSESSEE COMPANY ONLY IN THE YEAR IN WHICH THE SAID RAW MATERIAL IS UTILIZED. THEREFORE, EVEN IF AN ADJUSTMENT HAS TO BE MADE TO THE PROFIT OF THE ASSESSEE COMPAN Y, THE SAME HAS TO BE RESTRICTED TO THE EXTENT OF RAW MATERIAL CONSUMED DURING THE YEAR BY THE ASSESSEE COMPANY. THE LD. A R ALSO SUBMITTED THAT IN CASE SUCH ADJUSTMENT IS TO BE MAD E ON THE ENTIRE PURCHASES THEN SUCH ADJUSTMENT NEEDS TO BE T AKEN INTO ACCOUNT WHILE VALUING THE CLOSING STOCK. 3.10.2 THE LD. CIT DR, IN RESPONSE, SUBMITTED THAT THIS ADJUSTMENT IS NOT PERMISSIBLE UNDER THE TP REGULATI ONS. THE LD. CIT DR RELIED UPON THE REASONING GIVEN BY LD. DRP T HAT THE ARGUMENTS RAISED BY THE ASSESSEE ARE NOT LEGALLY TE NABLE. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 62 3.10.3 WE HAVE CONSIDERED THE RIVAL CONTENTIONS. I T IS UNDISPUTED FACT THAT THE ASSESSEE HAS MADE PURCHASE S OF RS. 105,55,16,000/- DURING THE YEAR OUT OF WHICH MATERI AL WORTH RS. 41,34,29,000/- WAS NOT CONSUMED DURING THE YEAR AND , THEREFORE, THE IMPACT ON THE MARGIN, IF ANY, IN RES PECT OF SUCH PURCHASES DURING THE YEAR IS ONLY OF THE MATERIAL C ONSUMED AND NOT OF THE MATERIAL PURCHASED AND WHICH IS LYING UN UTILIZED AT THE END OF THE YEAR AS CLOSING STOCK. THE PURCHASE COS T DEBITED IN RESPECT OF SUCH RAW MATERIAL AND THE VALUATION OF S UCH MATERIAL AS CLOSING STOCK IS AT SAME COST. CONSIDERING THIS FACT, WE DIRECT THE TPO THAT IN CASE ANY ADJUSTMENT IS REQUIRED TO BE MADE AFTER GIVING EFFECT TO THE ADJUSTMENT ON ACCOUNT OF CAPAC ITY AND OTHER ISSUES DECIDED BY US IN THIS APPEAL THE SAME IS TO BE RESTRICTED TO THE MATERIAL PURCHASED FROM THE AE AND CONSUMED DUR ING THE YEAR. 3.10.4 GROUND NOS. 6 AND 7 STAND ALLOWED FOR STATIS TICAL PURPOSES. 3.11.0 GROUND NOS. 8 TO 10 IN THE ASSESSEES APPEAL ARE GENERAL IN NATURE AND NEED NO ADJUDICATION. 3.11.1 GROUND NOS. 11 & 12 OF THE ASSESSEES APPEAL HAVE ALREADY BEEN DISPOSED OF IN PARA 3.4.7 OF THIS ORDE R. ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 63 3.11.2 GROUND NO. 13 IS DISMISSED AS NOT PRESSED. 3.11.3 GROUND NO. 14 IS DISMISSED AS NOT PRESSED. 3.11.4 GROUND NO. 15 IS DISMISSED AS NOT PRESSED. 3.11.5 GROUND NO. 16 IS REGARDING ALLOWING THE BENE FIT OF +/- 5% UNDER THE PROVISO TO SECTION 92C (2) OF THE ACT. THIS GROUND IS A CONSEQUENTIAL GROUND AND THE AO IS DIRECTED TO ALLOW THIS BENEFIT AS PER LAW. 3.11.6 GROUND NO. 17 IS REGARDING INITIATION OF PEN ALTY UNDER SECTION 271(1)(C) OF THE ACT WHICH IS PRE-MATURE AN D HENCE, DISMISSED. 4.0 IN THE FINAL RESULT, THE APPEAL OF THE REVENUE IS DISMISSED AND THAT OF THE ASSESSEE IS ALLOWED FOR S TATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH MARCH, 2019 SD/- SD/- (N.K. BILLAIYA) (SUDHANSHU SRI VASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 26 TH MARCH, 2019 COPY FORWARDED TO: - 1) APPELLANT 2) RESPONDENT ITA NO. 6783/D/2015 ASSESSMENT YEAR 2011-12 64 3) CIT(A) 4) CIT 5) DR TRUE COPY BY ORDER ASSTT. REGISTRAR DATE OF DICTATION DICTATE BY DRAGON DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P S/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WE BSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER