Reckitt Benckiser Scholl India Private Limited, Kancheepuram V. DCIT, CHENNAI

ITA 756/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7724 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 28-12-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 28-03-2016
• Court: TRIBUNAL
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Earning of tax free income; Working capital adjustments; Bad and doubtful debts; Scheme of amalgamation
• Section: 92C; 143(3); 14A; 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , . . , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NO.756/MDS/2016 / ASSESSMENT YEAR : 2011-12 M/S. RECKITT BENCKISER SCHOLL INDIA PRIVATE LIMITED (FORMERLY KNOWN AS M/S. RECKITT BENEKISER SCHOLL INDIA LIMITED). PLOT F 73/74, SIPCOT INDUSTRIAL PARK, IRUNGATTUKOTTAI, SRIPERUMBUDUR, KANCHEEPURAM 602 117 [PAN: AAFCS 5498 E] V. THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE V (1), CHENNAI ( /APPELLANT) ( !' /RESPONDENT) # / APPELLANT BY : SHRI S.P. CHIDAMBARAM, ADVOCATE !' # /RESPONDENT : SHRI MILIND MADHUKAR BHU SARI, CIT # /DATE OF HEARING : 28.12.2016 # /DATE OF PRONOUNCEMENT : 28.02.2017 / O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER : THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE DEPUTY COMMISSIONER OF INCOME TAX (APPEALS), CHENNA I DATED :-2-: 11.01.2016 AND PERTAINS TO THE ASSESSMENT YEAR 2011 -12. THE ASSESSEE CHALLENGED THE ORDER OF THE DRP/AO ON THE FOLLOWIN G GROUNDS OF APPEAL: 1. THE APPELLANT OBJECTS TO THE ORDER DATED 11.01.2016 PASSED UNDER SECTION 143(3) R.W.S. 144C (13) OF THE INCOME-TAX ACT, 1961 (THE ACT) BY THE DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE-5(1), CHENNAI (THE ASSESSING OFFICER/ AO) FOR THE AFORESAID ASSESSMENT YEAR ON THE FOLLOWING AMONG OTHER GROUNDS: TRANSFER PRICING GROUNDS : 2. UPWARD ADJUSTMENT TO THE VALUE OF INTERNATIONAL TRA NSACTION OF SALES MADE TO ASSOCIATED ENTERPRISES (AE). 2.1 THE TPOS RECOMMENDATION/COMPUTATION IN PURSUANCE OF DRP DIRECTIONS AND THE CONSEQUENTIAL FINAL ASSESSMENT OR DER PASSED BY THE AO IS ERRONEOUS IN SEEKING TO MAKE AN UPWARD ADJUSTM ENT OF RS.6,39,69,973/- TO INCOME/SALES DECLARED BY THE AP PELLANT. 2.2 THE AO/DRP ERRED IN FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, BY NOT MAKING AN ADJUSTMENT TO THE ARMS LENGTH MAR GIN FOR THE DIFFERENCES IN WORKING CAPITAL OF THE APPELLANT AS COMPARED TO EXTERNAL COMPARABLES ADOPTED FOR THE ARMS LENGTH ANALYSIS O N ACCOUNT OF THE APPELLANT HAS A POSITIVE WORKING CAPITAL. 2.3 THE AO/DRP ERRED IN CONSIDERING CERTAIN CLASS OF IN COME (I.E. CREDITOR CLAIM REVERSED AND PROVISION FOR BONUS) AS NON-OPER ATING IN NATURE WHILE DETERMINING THE ARMS LENGTH PRICE OF THE INT ERNATIONAL TRANSACTIONS WITHOUT APPRECIATING THAT THE BASE EXP ENSE RELATES TO ROUTINE BUSINESS OPERATIONS. 2.4 THE AO/DRP HAS ERRED IN REJECTING HIPOLIN LIMITED, STANDARD SURFACTANTS LIMITED AND CORONA PLUS INDUSTRIES LIMI TED AS COMPARABLE COMPANIES WITHOUT APPRECIATING THAT UNDER TNMM ONLY FUNCTIONAL PROFILE OF THE COMPANY IS RELEVANT AS AGAINST PRODU CT COMPARABILITY. 2.5 THE AO/DRP ERRED IN NOT CONSIDERING THE MANUFACTURI NG SEGMENT RESULTS OF ADOR MULTI-PRODUCTS LIMITED (ADOR) FO R THE PURPOSE OF BENCHMARKING ANALYSIS. 2.6 THE AO/DRP ERRED IN REJECTING ADOR AS A COMPARABLE ON THE GROUND THAT THE COMPANY AS A WHOLE HAS RELATED PARTY TRANS ACTIONS (RPT) ABOVE 25%. 2.7 THE AO/DRP ERRED IN NOT APPRECIATING THAT RPT WERE IN THE TRADING SEGMENT AND HENCE THE REASON FOR REJECTION OF ADOR BY APPLICATION OF THE RPT FILTER BY THE AO/DRP IS NOT TENABLE. 2.8 THE AO/DRP HAS ERRED, IN FACTS OF THE CASE, BY INCL UDING J K HELENE CURTIS LIMITED AS A COMPARABLE AS THE SAID COMPANY IS FUNCTIONALLY DIFFERENT FROM THE APPELLANT. 2.9 THE AO/DRP HAS ERRED, IN FACTS OF THE CASE, BY INCL UDING JIHS SVENDGAARD LABORATORIES LIMITED AS A COMPARABLE AS THE SAID COMPANY IS FUNCTIONALLY DIFFERENT AND IS INVOLVED IN RESEAR CH AND DEVELOPMENT ACTIVITIES AND HAS LOW RAW MATERIAL COST UNLIKE THE APPELLANT. 2.10 THE AO/DRP HAS ERRED, IN FACTS OF THE CASE BY INCLU DING JHS SVENDGAARD LABORATORIES LIMITED AS A COMPARABLE AS THE SAID COMPANY WAS INVOLVED IN A MERGER DURING THE AY 2011-12. 2.11 THE AO/DRP HAS ERRED, IN LAW AND IN FACTS OF THE CA SE, BY NOT PROVIDING THE MARKETING AND RESEARCH AND DEVELOPMENT ADJUSTME NTS SOUGHT BY THE APPELLANT ON ACCOUNT OF THE DIFFERENCES IN THE FUNCTIONAL PROFILE OF THE APPELLANT (CONTRACT MANUFACTURER) IN RESPECT OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY IT VIS-A-VIS THE FUNCT IONAL PROFILE OF THE COMPARABLE COMPANIES (ROUTINE MANUFACTURERS). :-3-: 2.12 THE AO/DRP HAS ERRED IN LAW BY NOT ADOPTING A METHO DICAL SEARCH PROCESS IN ARRIVING AT NEW COMPARABLES AND NOT PROV IDING THE SEARCH METHODOLOGY AND FILTERS ADOPTED TO ARRIVE AT THE AF ORESAID COMPARABLE COMPANIES. CORIORATE TAX GROUNDS : 3. EXCLUSION OF CERTAIN INCOMES FROM PROFITS OF THE BU SINESS WHILE COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT: 3.1 THE DRP/AO ERRED IN RESTRICTING THE CLAIM OF DEDUCTI ON UNDER SECTION 10B OF THE ACT. 3.2 THE DRP ERRED IN CONFIRMING THE ACTION OF THE AO IN EXCLUDING INCOME RECEIVED FROM BATA, INTEREST INCOME, REVERSAL OF PR OVISIONS NO LONGER REQUIRED, GAIN ON FOREIGN EXCHANGE FLUCTUATION AND OTHER MISCELLANEOUS INCOMES AMOUNTING TO RS.3,46,00,202/- FROM PROFITS AND GAINS OF THE BUSINESS OF THE UNDERTAKING WHILE COMP UTING THE DEDUCTION UNDER SECTION 10B OF THE ACT. 3.3 THE DRP AND AO FAILED TO APPRECIATE THAT INCOME FROM BATA FORMS INTEGRAL PART OF THE CORE BUSINESS ACTIVITY OF THE UNDERTAKING AND AS SUCH THE SAME CANNOT BE EXCLUDED FROM PROFITS OF TH E UNDERTAKING WHILE COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT. 3.4 THE DRP/AO ERRED IN NOT APPRECIATING THAT INTEREST I NCOME WAS RECEIVED FROM SHORT TERM BANK DEPOSITS WHICH WERE P RIMARILY MADE FOR THE PURPOSE OF BANK GUARANTEE REQUIREMENTS IN RELAT ION TO EXPORT OBLIGATIONS OF THE UNDERTAKING AND AS SUCH THE INTE REST EARNED ON SUCH DEPOSITS IS DIRECTLY/INEXTRICABLY LINKED WITH THE A CTIVITY OF THE UNDERTAKING. 3.5 THE DRP/AO ERRED IN EXCLUDING THE REVERSAL OF PROVIS IONS FROM PROFITS OF THE UNDERTAKING WITHOUT APPRECIATING THAT SUCH P ROVISION WAS A CHARGE AGAINST PROFITS OF THE UNDERTAKING IN THE EA RLIER YEARS AND AS SUCH THE REVERSAL OF THE SAME SHOULD BE CONSIDERED AS PART OF THE PROFITS OF THE UNDERTAKING. 3.6 THE DRP/AO OUGHT TO HAVE APPRECIATED THAT FOREIGN EX CHANGE FLUCTUATION GAIN WAS EARNED ON ACCOUNT OF RECEIVABL ES/PAYABLES IN RESPECT OF EXPORT ACTIVITY OF THE ELIGIBLE UNDERTAK ING AND AS SUCH IT IS INEXTRICABLY LINKED TO BUSINESS OF THE UNDERTAKING, CONSEQUENTLY, THE GAIN ON FOREIGN EXCHANGE FLUCTUATION SHOULD BE INCL UDED AS PART OF PROFITS AND GAINS OF THE UNDERTAKING WHILE COMPUTIN G DEDUCTION UNDER SECTION 10B OF THE ACT. 3.7 THE AO ERRED IN NOT APPRECIATING THAT MISCELLANEOUS INCOME INCLUDES SCRAP SALES, VENDOR DISCOUNTS AND CENVAT CREDIT ALL OF WHICH IS INEXTRICABLY CONNECTED WITH THE MANUFACTURING ACTIV ITY OF THE UNDERTAKING AND THEREFORE CANNOT BE EXCLUDED FROM PROFITS OF THE BUSINESS OF THE UNDERTAKING FOR THE PURPOSE OF DED UCTION UNDER SECTION10B OF THE ACT. 3.8 WITHOUT PREJUDICE TO THE ABOVE, IF THE ABOVE INCOME S ARE HELD TO EXCLUDIBLE FROM THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, THEN THE SAME SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVE R OF THE UNDERTAKING WHILE COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT 4. DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A OF TH E ACT 4.1 THE DRP GROSSLY ERRED IN CONFIRMING THE ACTION OF T HE AO IN DISALLOWING RS.4,49,823/- UNDER SECTION 14A OF THE ACT READ WIT H RULE 8D OF THE INCOME TAX RULES, 1962 (RULES) WITHOUT APPRECIATI NG THAT THE APPELLANT HAD ALREADY DISALLOWED THE SAID EXPENDITU RE WHILE COMPUTING ITS TOTAL INCOME. 4.2 THE DRP/AO GROSSLY FAILED TO APPRECIATE THAT DISALLO WING THE SAME AMOUNT AGAIN AMOUNTS TO DOUBLE DISALLOWANCE. :-4-: 4.3 THE DRP/AO GROSSLY ERRED IN FOLLOWING ITS OWN ORDER FOR THE PRECEDING AY 2010-11 WITHOUT CONSIDERING THAT THE EXPENDITURE HAD ALREADY BEEN DISALLOWED BY THE APPELLANT. 5. SET OFF OF BROUGHT FORWARD BUSINESS LOSS BEFORE ALL OWING DEDUCTION UNDER SECTION 10B OF THE ACT. 5.1 THE DRP/AO ERRED IN SETTING OFF THE BROUGHT FORWARD BUSINESS LOSS OF EARLIER YEARS FROM PROFITS OF THE UNDERTAKING BEFOR E ALLOWING DEDUCTION UNDER SECTION 10B OF THE ACT. 5.2 THE DRP/AO FAILED TO APPRECIATE THAT THE TERM TOTAL INCOME USED IN SECTION 10B OF THE ACT REFERS ONLY TO THE TOTAL INC OME OF THE UNDERTAKING AND NOT TOTAL INCOME AS DEFINED UNDER S ECTION 2(45) OF THE ACT. 5.3 THE DRP/AO FAILED TO APPRECIATE THAT SECTION 10B OF THE ACT FALLS UNDER CHAPTER-III OF THE ACT AND THE COMPUTATION OF TOTAL INCOME OF THE ASSESSEE BEGINS ONLY WITH CHAPTER-IV, CONSEQUENTLY, THE BROUGHT FORWARD LOSSES SHOULD BE NOT ADJUSTED BEFORE ALLOWI NG DEDUCTION UNDER SECTION 10B OF THE ACT. 5.4 IN ANY EVENT, THE DRP/AO OUGHT TO HAVE APPRECIATED THAT SECTION 10B OF THE ACT PROVIDES FOR A DEDUCTION OF SUCH PROFIT S AND GAINS AS ARE DERIVED BY A HUNDRED PERCENT EXPORT-ORIENTED UNDERT AKING AND NOT DEDUCTION OF SUCH INCOME OF THE UNDERTAKING. 6. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, SU BSTITUTE, RESCIND, MODIFY AND/OR WITHDRAW IN ANY MANNER WHATSOEVER ALL OR ANY OF THE FOREGOING GROUNDS OF APPEAL AT OR BEFORE THE HEARING OF THE APPEAL. 2.0 THE ASSESSEE HAS RAISED TRANSFER PRICING IN GROUND NO.2 AND CORPORATE TAXATION GROUNDS IN GROUND NOS.3 TO 6 IT S APPEAL. THE GROUND NO.1 & 2.1 ARE GENERAL IN NATURE, WHICH DO NOT REQU IRE SPECIFIC ADJUDICATION. FACTS IN BRIEF : SSL-TTK LTD IS A 100% EXPORT ORIENTED UNIT AND HAS A MANUFACTURING FACILITY AT IRRUNGATTUKOTTAI NEAR SRIPERUMBUDUR IN SIPCIT INDUS TRIAL PARK. THE COMPANY COMMENCED MANUFACTURING OPERATIONS DURING THE YEAR 2005-06. ALMOST 90%OF THE SALES ARE MADE TO SSL INTERNATIONAL PLC WITH THE BA LANCE BEING SOLD IN INDIA. THE PRODUCTS ARE MARKETED IN INDIA THROUGH TTK HEALTHCA RE LTD. THE PRODUCTS, SOLD UNDER THE BRAND NAME OF SCHOLL COME UNDER THE FOOT CAR E SEGMENT. THERE ARE 200 DIFFERENT VARIETIES OF PRODUCTS UNDER THIS SEGMENT: HOWEVER THE MANUFACTURING VOLUME FOR EACH PRODUCT IS NOT VERY SIGNIFICANT. HENCE DE TAILED PLANNING IS REQUIRED TO ENSURE FLEXIBILITY IN OPERATIONS AND TO AVOID BOTTLENECKS. IN THIS SITUATION INVENTORY CONTROL AND PRODUCTION FLOOR MANAGEMENT IS VERY VITAL. THE PRODUCTS MANUFACTURED INCLUDE MEDICATED AND NON-MEDICATED PRODUCTS. ORTHAHEEL, AN ORTHOTICS BRAND WAS LAUNCHED IN THE INDIAN MARKET IN THE INDIAN MARKET IN JUNE, 2008. IT COMPLEMENTS THE EXISTING SCHOOL RANGE AND CONNECTS BOTH FOOT CARE AND FOOTWE AR. THE PRODUCTS COME IN THREE CATEGORIES REGULAR, SHOCK ABSORBER, GEL HEEL DEVI CE. DURING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER FOUND THE FOLLOWI NG INTERNATIONAL TRANSACTION AS PER FORM 3CEB. 3.0 ASSOCIATED ENTERPRISES & DETAILS OF INTERNATIONAL TRANSACTIONS:- :-5-: NAME OF THE ASSOCIATE ENTERPRISES NATURE OF TRANSACTION AMOUNT (RS.) METHOD ADOPTED SSL INTERNATIONAL PIC.UK. SSL AUSTRALIA PTY LTD IMPORT OF GOODS 7,09,21,008 TNMM SSL INTERNATIONAL PIC UK EXPORT OF GOODS 107,15,41 ,551 SSL INTERNATIONAL PIC UK, SSL AUSTRALIA PTY LTD SERVICES RECEIVED 7,58,312 SSL INTERNATIONAL PIC UK REIMBURSEMENT OF FREIGHT AND INSURANCE EXPENSES 7,22,58,749 - REIMBURSEMENT OF TESTING FEES 10,953 REIMBURSEMENT FOR OBSOLETE STOCK 43,86,156 REIMBURSEMENT OF OTHER EXPENSES 3,46,880 RECOVERY OF PACKING EXPENSES 36,73,914 TOTAL 122,38,97,523 4.0 THE ASSESSEE IS 100% EXPORT ORIENTED UNIT WHICH HA S ENTERED IN TO THE INTERNATIONAL TRANSACTION WITH ASSOCIATED ENTER PRISES (AE) TO THE EXTENT OF RS.122,38,97,523/- AS ABOVE AND THE ASSES SING OFFICER REFERRED THE INTERNATIONAL TRANSACTION TO THE TRANSFER PRICI NG OFFICER (TPO) UNDER SECTION 92C OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) FOR DETERMINING THE ALP ADJUSTMENT. THE TPO HAS CHARA CTERIZED THE ASSESSEE AS A CONTRACT MANUFACTURER ASSUMING MINIMU M RISK. THE ASSESSEE IS TESTED PARTY AND THE ASSESSEE ADOPTED T NMMS AS MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATION AL TRANSACTION OF IMPORT AND EXPORT OF FOOT CARE PRODUCTS AND PAYMENT FOR RECEIPT OF SERVICES FROM THE AE. PLI ADOPTED IS OPERATING PROF IT / OPERATING COST AND THE ASSESSEE HAS SHOWN PLI AT 4.58% AS AGAINST THE COMPARABLE MARGIN OF 0.74% AND CLAIMED THAT INTERNATIONAL TRANSACTION WAS AT ARMS LENGTHY. THE TPO HAS GONE THROUGH THE T.P STUDY OF THE ASSES SEE AND RECALCULATED THE OPERATING MARGIN AS UNDER:- :-6-: RS. IN MILLION OPERATING REVENUE RS.1071.54 SCRAP SALES RS. 0.26.00 TOTAL INCOME RS.1071.80 ------------------- OPERATING COST RS.1029.99 OPERATING PROFIT RS.41.81 OP/OC 4.06% AND ARRIVED AT OPERATING MARGINS AT 4.06%. THE ASS ESSEE HAS SELECTED FOUR COMPARABLES AS UNDER: SL.NO. NAME OF THE COMPARABLES REASONS FOR REJECTION 1. ADOR MULTIPRODUCTS LIMITED RELATED PARTY TRANSACTION >25% 2. HIPOLIN LIMITED FUNCTIONALLY DISSIMILAR AS THEY ARE INVOLVED IN MANUFACTURING DETERGENTS 3. STANDARD SURFACTANTS LIMITED FUNCTIONALLY DISSIMILAR AS THEY ARE INVOLVED IN MANUFACTURING DETERGENTS 4. CORONA PLUS INDUSTRIES LIMITED DATA NOT AVAILABLE IN PROWESS THE TPO HAS REJECTED THE COMPARABLES AS PER THE RE ASONS GIVEN AGAINST THE COMPARABLES AND HAS SELECTED THE FOLLOW ING FRESH COMPARABLES AFTER MAKING DUE SEARCH PROCESS: SL.NO. NAME OF THE COMPARABLES PROFIT MARGIN 1. J H S SEVENDGAARD LABORATORIES LIMITED 12.89% 2. HIFLY FOOTWEAR LIMITED 4.33% 3. J K HELENE CURTIS LIMITED 13.60% AVERAGE 10.27 THE TPO HAS WORKED OUT THE AVERAGE MARGIN AT 10.27 % AS AGAINST 4.06% OF THE ASSESSEE. THE TPO HAS REJECTED THE CREDITORS CLAIM REVERSED AMOUNTING TO SUM OF RS.34.80 LAKHS AND PROVISION F OR BONUS RS.18.6 LAKHS FROM THE WORKING OF OPERATING REVENUE . THE ASSESSEE HAS ASKED FOR THE ADJUSTMENT OF WORKING CAPITAL AND THE SAME WAS REJECTED BY :-7-: THE TPO AND ARRIVED AT THE UPWARD ADJUSTMENT OF RS. 63,96,973/- APPLYING THE PLI OF 10.27% AGAINST THE PLI OF THE ASSESSEE A T 4.06%. THE ASSESSING OFFICER ISSUED DRAFT ASSESSMENT ORDER PRO POSING THE ADJUSTMENTS SUGGESTED BY THE TPO. 5.0 THE ASSESSEE MOVED PETITION BEFORE THE DRP AND RAIS ED VARIOUS OBJECTIONS AGAINST THE DRAFT ASSESSMENT ORDER. I) BEFORE THE DRP, THE ASSESSEE HAS RAISED OBJECTIONS FOR WORKING CAPITAL ADJUSTMENT AND THE DRP HAS REJECTED THE ASSESSEES OBJECTIONS FOR ADJUSTMENT OF WORKING CAPITAL. II) THE ASSESSEE RAISED OBJECTIONS FOR CONSIDERING THE CREDITORS CLAIM REVERSED AND PROVISION FOR BONUS FOR INCLUSION IN OPERATING INCO ME AND THE DRP HAS REJECTED THE ASSESSEES CLAIM AND HELD THAT ABOVE ITEMS WOULD NO T FORM PART OF OPERATING INCOME. III) THE ASSESSEE HAS RAISED OBJECTIONS FOR REJECTING TH E COMPARABLE COMPANIES, M/S.ADOR MULTI-PRODUCTS LIMITED, HIPOLIN LIMITED, S TANDARD SURFACTANTS LIMITED AND CORONA PLUS INDUSTRIES LIMITED SELECTED BY THE ASSE SSEE. THE LD. DRP REJECTED THE CLAIM OF THE ASSESSEE, THE ASSESSEE OBJECTED FOR IN CLUSION OF ADDITIONAL COMPARABLE COMPANIES JK HELENE CURTIS LIMITED, JHS SVENDGAARD LABORATORIES LIMITED. AFTER CONSIDERING THE ASSESSEES ARGUMENT THE LD. DRP HAS REJECTED THE OBJECTIONS OF THE ASSESSEE. IV) THE ASSESSEE HAS FURTHER REQUESTED FOR ADJUSTMENT I N RESPECT OF MARGIN AND RESEARCH AND DEVELOPMENT ADJUSTMENT ON ACCOUNT OF T HE DIFFERENCE IN FUNCTIONAL PROFILE OF THE ASSESSEE. THE DRP HAS REJECTED THE OBJECTIONS OF THE ASSESSEE. V) SIMILARLY, THE ASSESSEE REQUESTED FOR SET OFF OF BR OUGHT FORWARD LOSSES BEFORE ALLOWING DEDUCTION UNDER SECTION 10B OF THE ACT AND THE DRP HAS REJECTED THE CLAIM OF THE ASSESSEE. VI) THE ASSESSEE OBJECTED DISALLOWANCE UNDER SECTION 14 A OF THE ACT AND THE DRP HAS REJECTED. VII) THE ASSESSEE OBJECTED FOR EXCLUDING OF INCOME, INTE REST DIVIDEND, PROVISION FOR FOREIGN EXCHANGE, ETC., FOR DEDUCTION U/S.10B WHICH WAS REJECTED BY THE DRP AND UPHELD THE ORDER OF THE TPO. CONSEQUENT TO THE DRP ORDER, THE ASSESSING OFFICER PASSED THE ASSESSMENT ORDER UNDER SECTION 143(3) R. W.S. 144C OF THE ACT ON 11.01.2016 MAKING THE ABOVE ADJUSTMENTS COMPUTING THE TOTAL INCOME OF RS.11,66,01,928/- ON WHICH THE ASSESSEE FILED APPEA L BEFORE US. 6.0 GROUND NO.2.2 RELATES TO THE WORKING CAPITAL ADJUS TMENT. THE ASSESSEE REQUESTED FOR WORKING CAPITAL ADJUSTMENT A MONG THE COMPANY COMPARABLE COMPANIES. THE TPO IN HIS ORDER HAD REJ ECTED THE CLAIM OF THE ASSESSEE STATING AS UNDER: 8.6 ADJUSTMENT OF WORKING CAPITAL: ASSESSEE SUBMITT ED THAT THE COMPARABLES MARGIN SHOULD ADJUSTED FOR WORKING CAPITAL INTENSITIES. T HIS CONTENTION WOULD BE RELEVANT ONLY IN THE EVENT OF ASSESSEES WORKING CAPITAL BEING NE GATIVE. TO VERIFY, THE DATA FROM THE FINANCIALS IS PRESENTED HEREUNDER: :-8-: PARTICULARS 31.03.2010 31.03.2011 AVERAGE RECEIVABLES 14,36,71,806 21,66,98,474 18,01,85,140 INVENTORY 23,97,56,799 16,36,71,602 20,17,14,200 PAYABLES 14,87,26,248 14,29,23,480 14,58,24,864 WORKING CAPITAL 23,47,02,357 23,74,46,596 23,60,74,476 SALES 108,95,29,646 118,99,14,594 - PERCENTAGE 21.54% 19.95% THE DATE IN THE ABOVE TABLE SHOWS THAT THE WORKING CAPITAL OF THE ASSESSEE IS NOT NEGATIVE. THEREFORE THERE CAN BE NO GRIEVANCE FOR THE ASSESSEE THAT ITS MARGINS ARE AFFECTED BY NEGATIVE WORKING CAPITAL. ANOTHER REAS ON IS THAT THE TRANSACTIONS WITH AE ARE ONLY EXPORTS BY THE ASSESSEE AS A CONTRACT MANU FACTURER. THEREFORE, ASSESSEES CLAIM FOR WORKING CAPITAL ADJUSTMENT IS REJECTED. RELIANCE IS PLACED ON THE DECISION OF THE HONOURABLE ITAT C BENCH CHENNAI IN ITA NO.211 2/MDS/2011 (AY 2007-08) IN THE CASE OF MOBIS INDIA LIMITED VS DEPUTY COMMISSIONER OF INCOME TAX. IN THIS CASE THE APPELLANT HAD NEGATIVE WORKING CAPITAL. DESPITE TH IS FACT, THE HONBLE ITAT HELD THAT THE ASSESSEE HAS NOT BEEN ABLE TO JUSTIFY THE ADJU STMENTS THAT WERE REQUIRED TO BE MADE ON ACCOUNT OF NEGATIVE WORKING CAPITAL. THER EFORE THE ASSESSEES CLAIM IS REJECTED. 6.1 THE LD.DRP REJECTED THE CLAIM OF THE ASSESSEE STAT ING THAT THE DETAILED WORKING WAS NOT FURNISHED BY THE ASSESSEE. THE SAME ISSUE HAS COME FOR ADJUDICATION BEFORE THIS TRIBUNAL FOR THE ASSESSMENT YEAR 2010- 11 IN ITA NO.949/MDS/2014 DATED 28.10.2016 AND THE TRIBUNAL IN PARA NO.45 PAGE NO.23 OF THE ORDER, REMITTED THE MATTER BACK TO THE FILE OF THE AO TO MAKE APPROPRIATE ADJUSTMENTS .THE RELEVANT PA RT OF THE ORDER IS EXTRACTED AS UNDER: 45. IN THIS REGARD, WE ARE OF THE OPINION THAT ADJU STMENT FOR WORKING CAPITAL IS A NECESSARY INGREDIENT FOR WORKING OUT THE PLI OF ASS ESSEE. THE AO/TPO HAS TO CONSIDER THE WORKING CAPITAL ADJUSTMENT, WHICH IS REQUIRED C ONSIDERING THE COMPARABLES AND THEREAFTER GIVE SUCH ALLOWANCE TO THE ASSESSEE, WHI LE WORKING OUT ITS PLI. WE DIRECT THE AO/TPO TO RE-WORK THE PLI OF THE ASSESSEE GIVING IT APPROPRIATE WORKING CAPITAL ADJUSTMENT AS REQUIRED UNDER LAW BASED ON THE COMPA RABLES FINALLY CONSIDERED, ORDERED ACCORDINGLY. GROUND NO.1.9 IS TREATED AS ALL OWED FOR STATISTICAL PURPOSES. 6.2 FOLLOWING THAT DECISION OF THIS ITAT WE DIRECT THE ASSESSING OFFICER TO CONSIDER THE WORKING CAPITAL ADJUSTMENT AS REQUI RED UNDER LAW BASED :-9-: ON THE COMPARABLES FINALLY CONSIDERED. ACCORDINGLY GROUND NO.2.2 IS ALLOWED IS FOR STATISTICAL PURPOSE. 7.0 GROUND NO.2.3 IS RELATING TO THE CREDITOR CLAIM RE VERSED AND PROVISIONS NO LONGER REQUIRED AND WRITTEN BACK. TH E ASSESSEE CLAIMED THE CREDITORS CLAIMS REVERSED RS.34,80,000/- AND PROVI SIONS FOR BONUS RS.18.06 LAKHS AS OPERATING INCOME. THE TPO HAS RE JECTED THE CLAIM OF THE ASSESSEE AND THE DRP CONFIRMED THE ACTION OF TP O. THE AR OF THE ASSESSEE ARGUED THAT PROVISIONS AND EXPENSES WERE C ONSIDERED AS OPERATING EXPENDITURE IN THE EARLIER YEARS AND REVE RSAL IS ON ACCOUNT OF NORMAL BUSINESS OPERATIONS AND HENCE IS IN THE NATU RE OF OPERATING INCOME. ON THE SIMILAR ISSUE THE HONBLE ITAT FOR THE ASSESSMENT YEAR 2009-10 HAD REJECTED THE CLAIM OF THE ASSESSEE, REM ARKING THAT NOTHING WAS BROUGHT ON RECORD TO SHOW THAT SUCH PROVISIONS HAD BEEN TREATED AS OPERATING EXPENSES IN THE YEAR IN WHICH THE PROVISI ONS WERE CREATED. THE AR STATED THAT THE APPELLANT HAS CONSISTENTLY COMPU TED THESE MARGINS FOR COMPUTING PLI AS OPERATING INCOME/EXPENDITURE. THE APPELLANT HAS SUBMITTED WORKING OF ITS MARGINS COMPUTED FOR THE A SSESSMENT YEAR 2010-11 IN THE PAPER BOOK FILED IN PAGE NO.149 AND MARGIN COMPUTATIONS FOR THE ASSESSMENT YEAR 2009-10 AND 2010-11 HAVE AL SO BEEN ENCLOSED IN ANNEX-1. ACCORDING TO THE LD.AR, THE PROVISIONS REV ERSED ARE OPERATING INCOME AND THE PLEA OF THE ASSESSEE IS THAT THESE I TEMS HAVE BEEN CONSTITUTED OPERATIVE COST OF THE EARLIER YEARS AND THEREFORE, THE REVERSAL SHALL BE TREATED AS OPERATING INCOME. :-10-: 7.1 ON THE OTHER HAND THE LD.D.R ARGUED THAT FOR BEN CHMARKING THE OPERATING PROFIT OF THE ASSESSEE, PROFIT IS COMPUTE D TAKING INTO ACCOUNT THE REVENUES GENERATED ON COST INCURRED FROM THE RE GULAR PORTIONS OF THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR WHICH MA Y BE EITHER THE COST INCURRED AND PAID FOR, THE COST INCURRED BUT NOT PA ID AND COST PROVIDED FOR. THE REVERSAL OF SUCH PROVISION IN A LATER YEA R IS A BOOK ENTRY WHICH WOULD NOT GENERATE ANY OPERATING PROFIT. THE INCOM E AND EXPENDITURE RELEVANT TO THE PREVIOUS YEAR HAS TO BE CONSIDERED FOR MAKING OUT THE OPERATING INCOME BUT NOT THE EARLIER INCOMES OR EXP ENSES WHICH DO NOT HAVE IMPACT ON THE CURRENT YEARS INCOME. 7.2 THE DRP REJECTED THE ASSESSEES CLAIM FOR NON-SUBM ISSION OF THE DATA RELATING TO BALANCE FOR SUPPLIERS AND BONUS PR OVISION. THE ASSESSEE DID NOT FURNISH SUCH DETAILS BEFORE THE TRIBUNAL AL SO. THE ITAT D BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2009- 10 IN ITA CITED SUPRA HELD UNDER: 28. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PE RUSED THE ORDERS OF THE AUTHORITIES BELOW. TO A QUESTION BY THE BENCH WHETHER THE PROVI SIONS CLAIMED TO HAVE BEEN CONSIDERED AS OPERATING EXPENDITURE WAS RECKONED WH ILE COMPUTING PLI OF SUCH EARLIER YEARS, LD,A.R WAS UNABLE TO GIVE A SATISFACTORY REP LY. UNLESS AND UNTIL IT CAN BE SHOWN BY THE ASSESSEE THAT THE PROVISION WAS CONSIDERED A S OPERATING EXPENDITURE WHEN IT WAS CREATED AND SO RECKONED WHILE COMPUTING THE PLI OF THE EARLIER YEARS FOR THE ALP ANALYSIS, WE CANNOT ACCEPT TO THE CONTENTION OF THE ASSESSEE THAT REVERSAL OF SUCH PROVISION WOULD BE NORMAL BUSINESS INCOME. LD. DRP HAS GIVEN A SPECIFIC FINDING THAT IT WAS A ONETIME EVENT AND NO SUPPORTING DOCUMENTS WER E FILED BY THE ASSESSEE TO PROVE THE OPERATING NATURE OF SUCH WRITE BACK. IN SUCH A SITUATION, THE DECISION OF SONY INDIA (INDIA) (P) LTD.(SUPRA) RELIED ON BY THE LD.A.R WOU LD NOT FURTHER ITS' CASE IN ANY MANNER. THOUGH THE LD.A.R HAS RELIED ON SCHEDULE-1 4 WHICH REFLECT THE CREATION OF A PROVISION OF 22,000,000/- OF BAD AND DOUBTFUL DEBTS FOR THE YEAR ENDED 31.03.2008 AND REVERSAL OF 1,41,28,202/- FOR YEAR ENDING 31.03.2009, NOTHING W AS BROUGHT ON RECORD TO SHOW THAT SUCH PROVISION WHEN MADE FOR YE AR ENDING 31.03.2008 WAS CONSIDERED AS OPERATIONAL IN NATURE. WE ARE THEREFO RE OF THE OPINION THAT THE LOWER :-11-: AUTHORITIES WERE JUSTIFIED IN TAKING A VIEW THAT WR ITE BACK OF PROVISION COULD NOT BE CONSIDERED AS OPERATING INCOME. GROUND NO.1.1 OF AS SESSEE STANDS DISMISSED. DURING THE APPEAL HEARING ALSO, THE ASSE SSEE HAS NOT FURNISHED ANY SUCH DETAILS OF BALANCE OF THE SUPPLIERS AND DE TAILS OF BONUS PROVISIONS MADE. THE LD.DRP OBSERVED THAT INCOME A RISING ON ACCOUNT OF REVERSAL OF ENTRIES MADE IN THE CURRENT YEAR WOULD NOT FORM PART OF OPERATING INCOME. THE LD.DRP ALSO RELIED ON THE SA FE HARBOUR RULES. THE ASSESSEES AR DID NOT DEMONSTRATE HOW THE EARLI ER YEAR PROVISION OF EXPENSES REVERSED DURING THE YEAR WOULD HAVE MATERI AL IMPACT ON THE MARGIN OF CURRENT YEAR. THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE DIRECTION OF THE DRP ON THIS GROUND OF APPEAL AND THE SAME IS DISMISSED. 8.0 GROUND NO.2.4 IS RELATED TO THE REJECTION OF COMPA RABLES. HIPOLIN LIMITED, STANDARD SURFACTANTS LTD AND CORONA PLUS I NDUSTRIES LIMITED WERE REJECTED BY THE TPO AND CONFIRMED BY THE DRP. HIPOLIN LIMITED AND STANDARD SURFACTANTS LIMITED WERE REJECTED BECAUSE OF FUNCTIONAL DISSIMILARITY AND THEY ARE INVOLVED IN MANUFACTURIN G OF DETERGENTS. THE CORONA PLUS INDUSTRIES WAS REJECTED SINCE THE DATA WAS NOT AVAILABLE IN PROWESS. THE HONBLE ITAT IN APPEAL NO.962/MDS/201 5 FOR THE ASSESSMENT YEAR 2010-11 REJECTED THE ASSESSEES ARG UMENT TO INCLUDE THE HIPOLIN & STANDARD SURFACTANTS LTD IN PARA NO. 62 O F PAGE 30 AS UNDER: WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. IN SO FAR AS M/S.HIPOLIN LTD., IS CONCERNED, IT MIGHT BE TRUE THAT STOCK, PRODUCTION AND PURCHASE TURNOVER HAVE BEEN SEGMENTE D IN ITS ANNUAL REPORT. HOWEVER, SEGMENTAL APPORTIONING OF EXPENDITURE IS NOT AVAILA BLE. FORMER DETAILS ALONE WOULD NOT :-12-: BE SUFFICIENT TO ARRIVE AT THE SEGMENTAL RESULTS. F URTHER, THE SAID COMPANY WAS PREDOMINANTLY DOING MANUFACTURING DETERGENTS WHEREA S THE ASSESSEE WAS IN FOOTWEAR BUSINESS. THESE TWO TYPES OF BUSINESS, IN OUR OPINI ON WERE POLES APART. ALMOST SIMILAR IS THE SITUATION IN THE CASE OF M/5.STANDARD SURFAC TANTS LTD., ALSO. NO DOUBT, IN THE CASE OF M/S. STANDARD SURFACTANTS LTD., SEGMENTAL R EPORT WITH SEGMENTAL RESULTS WERE AVAILABLE, HOWEVER, THE SEGMENTS IN WHICH M/S.STAND ARD SURFACTANTS LTD., WAS FUNCTIONING WERE CHEMICAL AND SURFACE ACTIVE SYNTHE TIC DETERGENT SEGMENT. AS AGAINST THIS, FUNCTIONAL PROFILE OF THE ASSESSEE SHOWS THAT IT WAS IN FOOT WEAR BUSINESS. IN OUR OPINION, THESE COMPANIES WERE THEREFORE NOT FUNCTIO NALLY COMPARABLE WITH THAT OF THE ASSESSEE AND WERE RIGHTLY REJECTED BY THE LOWER AUT HORITIES. 8.1 FOLLOWING THE DECISION OF THIS TRIBUNAL, THE ASSESSE ES GROUND NO.2.4 FOR INCLUSION OF M/S.HIPOLIN LTD AND M/S.STANDARD SURFACTANTS LIMITED IS DISMISSED SINCE THERE IS NO C HANGE IN THE FACTS. WITH REGARD TO M/S.CORONA PLUS INDUSTRIES, IT WAS REJECTED BY THE ASSESSING OFFICER FOR NON-AVAILABILITY OF DATA. FO R THE FINANCIAL YEAR 2009- 10 AND 2011-12, THE ASSESSEE HAS FURNISHED THE AUDI TED FINANCIAL STATEMENT IN RESPECT OF M/S. CORONA PLUS INDUSTRIES AND AS PER THE PROFIT & LOSS ACCOUNT, THE CORONA PLUS INDUSTRIES IS NOT E NGAGED IN THE MANUFACTURING ACTIVITY AND ONLY ENGAGED IN TRADING. WHEREAS THE ASSESSEE IS ENGAGED IN MANUFACTURING AND TRADING AN D THE ASSESSEES FUNCTIONS ARE NOT SIMILAR TO THAT OF CORONA PLUS. HENCE, CORONA PLUS IS NOT A GOOD COMPARABLE. THEREFORE, THE ASSESSEES REQUE ST TO INCLUDE M/S.CORONA PLUS INDUSTRIES AS A NEW COMPARABLE IS R IGHTLY REJECTED BY THE DRP AND THE ORDERS OF THE DPR/AO IS UPHELD AND ASSE SSEES GROUND NO.2.4 IS DISMISSED. 9.0 GROUND NO.2.5, 2.6 & 2.7 ARE RELATED TO THE REJECT ION OF COMPARABLE IN CASE OF ADOR MULTI-PRODUCTS LIMITED WITH RELATIV E PARTY TRANSACTION (RPT) OF MORE THAN 25%, THE DRP CONFIRMED THE ACTIO N OF THE TPOS ORDER :-13-: FOR EXCLUSION OF THE COMPARABLE. THE AR ARGUED THA T RPT TRANSACTION IS ONLY IN THE TRADING SEGMENT BUT NOT IN THE MANUFACT URING SEGMENT AND IN MANUFACTURING SEGMENT, THERE WAS A MINIMUM RELATED PARTY TRANSACTION. FOR THE ASSESSMENT YEAR 2009-10 & 2010-11, THE ITAT HAS DECIDED THIS ISSUE AGAINST THE ASSESSEE STATING THAT IT WAS NOT ESTABLISHED THAT RPT WAS IN THE TRADING SEGMENT. THE LD. AR OF THE ASS ESSEE PLACED ON RECORD THE ANNUAL REPORT OF THE COMPANY IN THE PAPER BOOK PAGE NO.87 WHEREIN HE WAS MENTIONED THAT 99% OF THE RELATED PARTIES TR ANSACTIONS WERE PURCHASE OF GOODS AMOUNTING TO RS.4,13,93,389/- AND IT APPEARS THAT THERE WAS NO RPT IN MANUFACTURING SECTOR. HOWEVER, IT WAS NOT CLEAR WHETHER THE ENTIRE PURCHASES WERE USED FOR TRADING PURPOSE OR FOR THE PURPOSE OF MANUFACTURING ALSO. FURTHER, AS PER THE ASSESSEES PROFILE, THE ASSESSEE IS ENGAGED IN MANUFACTURING AS WELL AS TRA DING. THE APPLICATION OF RPT HAS TO BE APPLIED CONSIDERING THE FUNCTIONS OF THE ASSESSEE AS WELL AS THE COMPARABLE COMPANY. HENCE, THIS ISSUE REQUI RES FURTHER VERIFICATION. THEREFORE, WE REMIT THE MATTER BACK T O THE ASSESSING OFFICER TO CONSIDER THE SUBMISSION OF THE AR REGARDING RPT FILTER AND DECIDE THE ISSUE AFRESH ON MERITS. GROUND NOS.2.5 TO 2.7 ARE ALLOWED FOR STATISTICAL PURPOSES. 10.0 GROUND NO.2.8 RELATES TO THE SELECTION OF COMPARAB LE M/S.J K HELENE CURTIS LIMITED. THE TPO HAS SELECTED M/S.J K HELEN E CURTIS LIMITED AS COMPARABLE. ACCORDING TO THE ASSESSEE (AS PER THE FINANCIAL STATEMENTS ENCLOSED IN THE PAPER BOOK PAGE NO.89), THE COMPANY IS CATEGORIZED AS :-14-: TRADING INDUSTRY AND ALSO IN THE PROWESS DATABASE. THE ASSESSEE HAS NOT ENCLOSED THE COMPLETE FINANCIAL STATEMENT AND WE AR E UNABLE TO DECIDE THE ISSUE IN THE ABSENCE OF COMPLETE INFORMATION. AS PER THE INFORMATION FURNISHED BEFORE US, IT APPEARS THAT M/S. J K HELEN E CURTIS IS ENGAGED ONLY IN THE TRADING ACTIVITY AND ON THE SIMILAR REASONS, WE UPHELD THE REJECTION OF COMPARABLE IN THE CASE OF M/S. CORONA PLUS INDUS TRIES. THEREFORE, WE REMIT THEMATTER BACK TO THE FILE OF THE AO TO CONSI DER THE EXCLUSION OF M/S.J K HELENE CURTIS LIMITED AS COMPARABLE ON FUNC TIONAL DISSIMILARITY AFTER VERIFICATION OF FACTS. THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 11.0 GROUND NO.2.9 & 2.10 ARE RELATED TO THE EXCLUSION OF M/S.JHS SVENDGAARD LABORATORIES LIMITED AS COMPARABLE. THE TPO HAS SELECTED M/S.JHS SVENDGAARD LABORATORIES AS A COMPARABLE. T HE ASSESSEE CONTENDED THAT THE COMPANY WAS INVOLVED IN A MERGER IN THIS YEAR AND THE SAME IS EXTRAORDINARY EVENT. THE DRP HAS CONFI RMED THE TPOS ORDER STATING THAT THERE WAS NO MENTION OF ADVERSE IMPACT ON THE MARGINS OF THE COMPANY DUE TO THE MERGER. THE AR FURNISHED FI NANCIAL SUMMARY FOR FY ENDING 2009 TO 2011 M/S.JHS STVENDGAARD LABORATO RIES WHICH SHOWS THAT THERE WAS A DIP IN THE MARGINS FOR THE ASSESSM ENT YEAR 2010-11. 11.1 WE HEARD BOTH THE PARTIES. THE DRP HAS REJECTED THE ASSESSEES REQUEST TO EXCLUDE M/S. JHS SVENGAARD LABORATORIES AS COMPARABLE ON THE REASONING THAT THERE WAS NO IMPACT ON MARGIN OF THE COMPANY ON :-15-: ACCOUNT OF THE MERGER. HOWEVER, AS PER THE FINANC IAL STATEMENT, THE PROFIT BEFORE TAX WAS RS.7.57 CRORES AS AGAINST THE TOTAL REVENUE OF RS.88.72 CRORES AND THE IMMEDIATELY PRECEDING YEAR, THE PBT WAS RS.6.61 CRORES ON THE TOTAL REVENUE OF RS.51.16 CRORES AS P ER THE DIRECTORS REPORT ENCLOSED AS ANNEX-2 BY THE ASSESSEE. THE SCHEME OF AMALGAMATION OF M/S. JSH SVENGAARD LABORATORIES LIMITED HAS BEEN AP PROVED BY THE DELHI HIGH COURT ON 30.08.2011. IT APPEARED THAT THE TPO HAS TAKEN THE CONSOLIDATED P&L ACCOUNT INCLUDING MERGER AS STATED BY THE AR. THERE WAS SUBSTANTIAL IMPACT ON MARGIN AFTER THE MERGER A ND THE ASSESSEE HAS STATED THAT THE COMPANY ALSO INVOLVED IN RESEARCH A ND DEVELOPMENT ACTIVITIES AND THE EXPENDITURE OF R&D WAS DISCLOSED AS A SEPARATE LINE OF ITEM. THE ASSESSEE FURTHER ARGUED THAT THE COMPANY WAS INVOLVED IN MANUFACTURING OF TOOTH BRUSHES, THE MATERIAL COST A ND OPERATING COST IS MINIMAL AND LEADS TO FUNCTIONAL DIS-SIMILARITY. FO R THE ASSESSMENT YEAR 2010-11 IN THE ASSESSEES OWN CASE (CITED SUPRA), T HE TRIBUNAL HAS REMANDED THE ISSUE TO THE DRP FOR AFRESH ADJUDICATI ON. THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT THIS COMPARABLE IS T O BE RE-ADJUDICATED CONSIDERING THE OBJECTIONS RAISED BY THE ASSESSEE. THEREFORE, THE ISSUE OF COMPARABILITY OF M/S. JHS SVENGAARD LTD. REMITTED B ACK TO THE FILE OF AO AND THE ASSESSEES GROUND IS ALLOWED FOR STATISTICA L PURPOSES. 12.0 GROUND NO.2.11 IS RELATED TO THE ADJUSTMENT FOR M ARKETING AND RESEARCH AND DEVELOPMENT .THE ISSUE HAS BEEN RAISED BY THE ASSESSEE BEFORE THE DRP AND DRP HAS REJECTED THE ASSESSEES REQUEST FOR :-16-: ADJUSTMENT. THE RELEVANT PART OF THE DIRECTIONS OF THE DRP ARE EXTRACTED FOR THE SAKE OF CONVENIENCE AS UNDER: GROUND NO.12: THE TPO ERRED IN NOT APPRECIATING THE MARKETING AND RESEARCH & DEVELOPMENT ADJUSTMENTS SOUGHT BY THE ASSESSEE ON ACCOUNT OF TH E DIFFERENCES IN THE FUNCTIONAL PROFILE OF THE ASSESSEE (CONTRACT MANUFACTURER IN RESPECT OF T HE INTERNATIONAL TRANSACTIONS ENTERED INTO BY IT VIS-A-VIS THE FUNCTIONAL PROFILE OF THE COMPA RABLE COMPANIES. THE ASSESSEE WISHES TO SUBMIT THAT IT IS A CONTRACT MANUFACTURER AND DOES NOT UNDERTAKE ANY MARKETING ACTIVITIES IN RESPECT OF THE SALE OF GOOD S BY IT TO ITS ASSOCIATED ENTERPRISE. THE ASSESSEE ALSO DOES NOT CARRY OUT ANY RESEARCH & DEV ELOPMENT ACTIVITY NOR DOES IT DEVELOP ANY NEW PRODUCT SPECIFICATIONS. HOWEVER, THE COMPARABLE S WERE FULL-FLEDGED ENTREPRENEURS WHO UNDERTAKE A GREAT DEGREE OF RESEARCH AND DEVELOPMEN T AND MARKETING EXPENSES. HENCE, THE MARGINS OF THE ASSESSEE NEED TO BE COMPARED WITH TH E AVERAGE MARGIN OR COMPARABLE COMPANIES WHICH HAVE BEEN COMPUTED IN SIMILAR MANNE R AND BASED ON THE SIMILAR ACTIVITIES. 5.1 IT WAS FURTHER SUBMITTED THAT: AS THE ASSESSEE DOES NOT INCUR ANY MARKETING EXPENS ES IN THE EXPORT SEGMENT, IT HAS MADE AN ATTEMPT TO QUANTIFY THE AMOUNT OF ADJUSTMENT TO BE MADE IN RESPECT OF THE MARKETING EXPENSES INCURRED BY COMPARABLES. PARTICULARS TOTAL MARKETING EXPENSES NET SALES MARKETING EXPENSES TO NET SALES AVERAGE HILFY FOOTWEARS LTD. 0.31 8.80 3.52% 11.52% JHS SVENDGAARD LABORATORIES LTD. 1.16 58.41 1.36% J K HELENE CURTIS LTD. 46.50 156.70 29.67% FROM THE ABOVE, IT IS EVIDENT THAT ALL THE COMPARAB LE COMPANIES ARE INCURRING EXPENSES IN RELATING TO MARKETING, ADVERTISEMENT AND SALES PROM OTION ACTIVITIES, WHEREAS THE ASSESSEE HAS NOT INCURRED ANY OF SUCH EXPENSES. HENCE, THE C OMPARABLE COMPANIES WOULD MINIMAL EXPECT A RETURN OF 11.52% ON THE SALES FOR THEIR MA RKETING ACTIVITY. THE 11.52% RETURN WOULD ONLY BE SUFFICIENT TO COVER THE COSTS OF SUCH ACTIVITIES, THE COMPANIES WOULD ALSO EXPECT A MINIMAL PROFIT MARGIN OF 2% ON SALES. HENCE, THE RETURN FOR THE MARKETING ACTIVITY WOULD BE 13.52% (COST OF 11.52% + MARKUP OF 2%). THEREFORE, AN ADJUSTMENT OF 14% ON ARM S L ENGTH PRICE IS REQUIRED TO NEUTRALIZE THE IMPACT OF DIFFERENCE IN THE FUNCTIONS CARRIED O UT BY THE ASSESSEE AND THE COMPARABLE COMPANIES. THE ASSESSEE PLEADS BEFORE THE HONBLE DISPUTE RESO LUTION PANEL, THAT THE ABOVE MENTIONED RELIEF SHOULD BE PROVIDED ON ACCOUNT OF T HE DIFFERING RISK PROFILES OF THE ASSESSEE AND THE COMPARABLE COMPANIES. 12.1 THE ASSESSEE HAS SUBMITTED THE ABOVE DETAILS OF MA RKETING EXPENSES INCURRED BY THE COMPARABLES BUT NOT FURNIS HED THE THE MATERIAL IMPACT OF MARKETING EXPENDITURE ON THE COMPARABLE C OMPANIES. UNLESS THE ASSESSEE ESTABLISHES THE MATERIAL IMPACT ON THE MARGINS OF THE COMPANY WITH DOCUMENTARY EVIDENCES WE DO NOT FIND A NY REASON TO MAKE :-17-: ADJUSTMENT TOWARDS THE MARKETING AND RESEARCH. ON T HE SAME ISSUE COORDINATE BENCH IN THE ASSESSEES OWN CASE FOR THE AY 2010-11 REJECTED THE CLAIM WHICH WAS CONSIDERED BY THE DRP. BY MEREL Y FURNISHING THE EXPENSES OF MARKETING OF COMPARABLE COMPANIES WITHO UT BRINGING THE EVIDENCES FOR ESTABLISHING THE MATERIAL IMPACT ON T HE MARGINS OF THE COMPARABLE COMPANY WE DO NOT FIND ANY JUSTIFYING RE ASON TO ALLOW THE ADJUSTMENT. THEREFORE, FOLLOWING THE ORDER OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE AY 2010-11 (CITED SUPRA ) WE DISMISS THE GROUND OF THE ASSESSEE. 13.0 GROUND NO.2.12 IS RELATED TO NOT ADOPTING THE MET HODICAL SEARCH PROCESS IN ARRIVING AT THE COMPARABLE. THIS GROUND WAS RAISED BY THE ASSESSEE BEFORE THE LD.DRP AND THE DRP REJECTED THI S GROUND AS PER THE FOLLOWING DISCUSSION. 6.1 THE TPO HAS DONE ANALYSIS OF THE TP DOCUMENT SUB MITTED BY THE ASSESSEE AND HAS FOUND THAT THE COMPARABLES SELECTED BY ASSESSEE ARE NOT ACCEPTABLE FOR VARIOUS REASONS LIKE FAILING RPT FILTER, FUNCTIONALLY DISSIMILAR, A ND DATA NOT AVAILABLE IN PUBLIC DOMAIN. TPO HAS MENTIONED THAT THE DUE SEARCH WAS CARRIED OUT I N THE PROWESS DATABASE FOR APPROPRIATE COMPARABLES. THE ASSESSEE WAS GIVEN PRO PER OPPORTUNITY TO RAISE HIS OBJECTIONS TO THE FRESH SEARCH AND COMPARABLES UNDE RTAKEN BY THE TPO. THE CONCERNS OF THE ASSESSEE HAVE DULY BEEN CONSIDERED AND MENTIONE D IN THE TP ORDER. THEREFORE, OBJECTION OF THE ASSESSEE THAT THE TPO HAS NOT ADOPT ED A METHODICAL SEARCH PROCESS DOES NOT APPEAR TO HAVE ANY SUBSTANCE BEFORE THIS TRIBUNAL THE ASSESSEE RELIED ON THE GR OUND AND DID NOT MAKE ANY FURTHER ARGUMENT. THE LD.DR RELIED ON THE TPOS ORDER. WE HAVE GONE THROUGH THE TPOS ORDER AND THE DRP DIREC TIONS. THE LD TPO IN HIS ORDER CLEARLY MENTIONED THAT FRESH SEARCH HAS B EEN CONDUCTED AND PROPER OPPORTUNITY WAS GIVEN TO THE ASSESSEE. THERE FORE, WE DO NOT FIND :-18-: ANY ERROR IN THE ORDER OF THE DRP AND THE SAME IS U PHELD. THE GROUND OF THE AASESSE ON THIS ISSUE IS DISMISSED. 14.0 GROUND NO.3 IS RELATED TO DEDUCTION U/S 10B. GROU ND NOS.3.1 TO 3.7 ARE RELATED TO INCLUSION OF OTHER INCOME FOR THE PU RPOSE OF COMPUTING THE DEDUCTION U/S 10B.THIS GROUND HAS BEEN RAISED BY TH E ASSESSEE BEFORE THE DRP AND THE LD.DRP REJECTED THE ASSESSEES CONT ENTION. THE RELEVANT PART OF THE DRP ORDER IS EXTRACTED AS UNDER: 3.1 AS REGARDS THE ABOVE OBJECTIONS OF THE ASSESSEE , IT IS FOUND THAT IN THE DRAFT ORDER THE AO HAS EXCLUDED FOLLOWING ITEMS OF INCOME AS OTHER IN COME: PARTICULARS AMOUNT (IN RS.) COMMISSION FROM BATA INDIA LTD. 2,45,16,430.00 INTEREST FROM BANKS 13,70,993.00 DIVIDEND RECEIVED FROM MF INVESTMENTS 44,58,787.00 PROVISION NO LONGER REQUIRED WRITTEN BACK 53,44,771 .00 GAIN ON FOREX FLUCTUATION (NET.) 27,69,662.00 MISC. INCOME 5,98,346.00 TOTAL 3,90,58,989.00 SINCE THE ABOVE INCOMES ARE NOT DERIVED FROM THE ELIGIBLE UNDERTAKING FROM THE EXPORT OF ARTICLE, THESE AMOUNTS WERE EXCLUDED FROM THE PROFI T FOR THE PURPOSE OF COMPUTING DEDUCTION US.10B OF THE ACT. BEFORE US THE ASSESSEE HAS CHALLENGED THE ACTION OF THE TPO FOR EXCLUDED AN AMOUNT OF RS.3,46,00,202/- OUT OF T HE ABOVE. PRESUMABLY EXCLUSION OF RS.44,58,787/- IN RESPECT OF DIVIDEND RECEIVED FROM MUTUAL FUNDS HAS NOT BEEN CHALLENGED. 3.2 THE IDENTICAL ISSUE WAS UNDER CONSIDERATION BEF ORE EH DRP FOR THE AY 2010-11 WHERE THE OBJECTIONS OF THE ASSESSEE WAS REJECTED A FTER CONSIDERING THE SUBMISSION OF THE TAXPAYER AND THE REASONING OF THE AO. THIS PANEL AFT ER CAREFUL CONSIDERATION OF THE MATTER, IS IN AGREEMENT WITH THE VIEW OF THE DRP FOR AY 201 0-11. HENCE, THE OBJECTIONS OF THE ASSESSEE CANNOT BE ACCEPTED. 5.1 DURING THE EAR, THE AO NOTED THAT, THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS,44,58,787/-. THE ASSESSEE COMPANYS AVERAGE VALU E OF INVESTMENT DURING THE YEAR WAS WORKED OUT TO BE RS.8,99,64,619/-. HOWEVER, THE AO FOUND THAT NO EXPENDITURE HAS BEEN DISALLOWED BY THE COMPANY ATTRIBUTABLE TO SUCH INVE STMENT. THE AO OBSERVED THAT THE ASSESSEE COULD NOT HAVE EARNED EXEMPT INCOME WITHOU T INCURRING ANY EXPENDITURE AND THUS RECORDED HIS NON-SATISFACTION ABOUT THE CORREC TNESS OF CLAIM OF THE ASSESSEE. CONSEQUENTLY, PROVISIONS OF SECTION 14A READ WITH R ULE 8D WAS APPLIED AND A SUM OF RS.4,49,823/- WAS DISALLOWED AS EXPENDITURE RELATAB LE TO EXEMPT INCOME. 5.2 THE SUBMISSION OF THE ASSESSEE AND OBJECTIONS H AVE DULY BEEN CONSIDERED. SIMILAR ISSUE WAS UNDER CONSIDERATION OF THE DRP FOR AY 201 0-11 WHERE THE OBJECTIONS OF THE ASSESSEE HAVE BEEN REJECTED AFTER DUE CONSIDERATION OF THE ARGUMENTS OF THE ASSESSEE AND :-19-: DUE DELIBERATIONS IN THE ORDER. THIS PANEL, AFTER C AREFUL CONSIDERATION, FINDS ITSELF IN AGREEMENT WITH THE VIEW TAKEN FOR AY 2010-11 AND TH EREFORE, THE ACTION OF THE AO DOES NOT CALL FOR ANY INTERFERENCE. 14.1 THE ASSESSEE RELIED ON THE GROUNDS OF APPEAL ON TH IS ISSUE AND THE LD.DR RELIED ON THIS TRIBUNAL ORDER IN THE ASSESSEE S OWN CASE FOR THE AY 2010-11. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. THE DEDUCTION U/S 10B IS ALLOWABLE IN RESPE CT OF EXPORT INCOME. THE ITEMS OF INCOME MENTIONED ABOVE ARE NOT DERIVED FROM THE EXPORT INCOME OR THE INCOME DERIVED FROM THE INDUSTRIAL AC TIVITY. IN THE CASE OF COMMISSION FROM BATA INDIA LTD IT WAS RECEIVED FROM M/S BATA FOR THE OPERATIONS IN INDIA THEREFORE THE INCOME WAS NOT RE LATED TO EXPORTS MADE AND IS NOT ELIGIBLE FOR DEDUCTION UNDER SECTION 10B . IT WAS EXPRESSLY MENTIONED IN THE AGREEMENT ENCLOSED IN THE PAPER BO OK SUBMITTED BY THE ASSESSEE, THAT COMMISSION IS PAID ON SALES IN INDIA . THE ENTIRE ISSUE IS SQUARELY COVERED BY THIS TRIBUNAL ORDER FOR THE ASS ESSMENT YEAR 2010-11. THIS TRIBUNAL IN THE ORDER CITED (SUPRA) HELD THAT EXCEPT FOREIGN EXCHANGE FLUCTUATION NONE OF THE OTHER ITEMS OF INCOME WAS E LIGIBLE FOR DEDUCTION U/S.10B OF THE ACT. THEREFORE, WE DIRECT THE AO/DR P TO INCLUDE GAIN ON FOREIGN EXCHANGE FLUCTUATION AMOUNTING TO RS 29,69, 662/- FOR THE PURPOSE OF DEDUCTION UNDER SECTION 10B AND THE ASSESSES RE QUEST FOR INCLUSION OF OTHER ITEMS OF INCOME FOR DEDUCTION UNDER SECTION 1 0B ARE REJECTED. THE ASSESSES GROUNDS OF APPEAL ON THIS ISSUE ARE PARTL Y ALLOWED. :-20-: 14.2 GROUND NO.3.8 IS RELATED TO EXCLUSION OF THE PROFIT S OF OTHER INCOME FROM THE TOTAL TURNOVER WHILE COMPUTING THE DEDUCTI ON U/S.10B OF IT ACT. THE ASSESSEE CONTENDED THAT IF THE OTHER INCOME IS HELD TO BE EXCLUDED FROM THE PROFITS OF THE BUSINESS UNDERTAKING THEN I T SHOULD BE EXCLUDED FROM TOTAL TURNOVER. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MAT ERIAL PLACED ON RECORD. THE ASSESSEE HAD OTHER INCOME OF RS.3,90,58,989/- AND ARGUED FOR INCLUSION OF THE OTHER INCOME FOR THE PURPOSE OF DE DUCTION U/S.10B. WE DECIDED THE ISSUE OF DEDUCTION U/S.10B AGAINST THE ASSESSEE PLACING RELIANCE ON THIS TRIBUNAL ORDER FOR THE AY 2009-10 AND 2010-11 IN ASSESSEES OWN CASE AND HELD THAT EXCEPT THE GAIN O N FOREIGN EXCHANGE FLUCTUATION OF RS.27,69,662/- OTHER ITEMS OF INCOME WOULD NOT BE INCLUDIBLE FOR DEDUCTION U/S.10B. ALTERNATIVELY, TH E ASSESSEE ARGUED THAT IF THE OTHER INCOME IS HELD TO BE NOT INCLUDIBLE FOR T HE PURPOSE OF DEDUCTION U/S.10B, THE SAME SHOULD BE EXCLUDED FROM TOTAL TUR NOVER. THE RECEIPTS OF OTHER INCOME DO NOT RELATED TO EXPORTS AND THE S AME CANNOT BE INCLUDED IN EXPORT TURNOVER. HOWEVER, THE ENTIRE RE CEIPTS RELATED TO THE BUSINESS INCOME AND IT SHOULD BE INCLUDED EITHER IN DOMESTIC TURNOVER OR THE EXPORT TURNOVER OR OTHERWISE IT SHOULD BE ASSES SED AS INCOME FROM OTHER SOURCES SEPARATELY. THE ASSESSING OFFICER HA S NOT MADE OUT A CASE FOR INCOME FROM OTHER SOURCES. THE LD.AR HAS NOT B ROUGHT ON RECORD ANY OF THE DECISION TO SUPPORT HIS CONTENTION. THE TOT AL TURNOVER CONSTITUTES DOMESTIC TURNOVER PLUS EXPORT TURNOVER. SINCE THE MISCELLANEOUS RECEIPTS :-21-: WERE NOT ASSESSED AS INCOME FROM OTHER SOURCES AND THE FACT THAT THE RECEIPTS RELATED TO BUSINESS INCOME AND DERIVED FRO M DOMESTIC OPERATION IS NOT DISPUTED, WE HOLD THAT THE CONTENTION OF THE ASSESSEE IS NOT TENABLE AND IT SHOULD BE INCLUDED IN TOTAL TURNOVER. THIS GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED . 15.0 GROUND NUMBER 4 IS RELATED TO THE DISALLOWANCE U/ S.14A READ WITH RULE 8D OF IT RULES AMOUNTING TO RS.4,49,823/-. BOT H THE LD AR AND DR RELIED ON THE ORDERS OF THIS TRIBUNAL IN THE ASSESE ES OWN CASE FOR THE ASSESSMENT YEAR 2009-10 AND 2010-11 CITED (SUPRA). THIS TRIBUNAL IN PARA NO. 82 OF PAGE NO. 41 HELD THAT THE ASSESSING OFFIC ER HAS RIGHTLY APPLIED SUB RULE (2)(III) OF RULE 8D IN THE ASSESSEES OWN CASE. ASSESSEE SUBMITTED THAT THE EXPENDITURE OF RS.4,49,823/- WAS ALREADY D ISALLOWED BY THE ASSESSEE AND FURTHER DISALLOWANCE WOULD LEAD TO DOU BLE TAXATION OF THE SAME AMOUNT. THE ASSESSEE HAS ENCLOSED THE COMPUTAT ION STATEMENT SHOWING THE DISALLOWANCE MADE BY IT. THEREFORE WE D IRECT THE ASSESSING OFFICER TO EXCLUDE THE DISALLOWANCE AFTER VERIFICAT ION OF THE FACTS. THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 16.0 GROUND NO. 5 IS RELATED TO SET OFF OF BROUGHT FOR WARD BUSINESS LOSS BEFORE ALLOWING DEDUCTION UNDER SECTION 10B OF THE IT ACT. 16.1 THE LD DRP HAS REJECTED THE ASSESSEES GROUND ON T HE REASON THAT NO FACTUAL DETAILS ARE SUBMITTED BY THE ASSESSEE. T HE SAME ISSUE HAS COME FOR THE ADJUDICATION BEFORE THIS TRIBUNAL FOR THE ASSESSMENT YEAR :-22-: 2009-10, 2010-11, IN THE ASSESSEES OWN CASE AND TH E TRIBUNAL ALLOWED THE ASSESSEES APPEAL IN PAGE 41 PARA NO. 84 PLACIN G RELIANCE ON CIT VS. YOKOGAWA LTD OF KARNATAKA HIGH COURT. THE HONBLE S UPREME COURT DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN THE CITED JUDGMENT OF YOKOGAWA CASE. THEREFORE, RESPECTFULLY FOLLOWING TH E DECISION OF HONBLE SUPREME COURT WE DIRECT THE ASSESSING OFFICER TO AL LOW THE DEDUCTION UNDER SECTION 10B BEFORE SETTING OFF OF BROUGHT FOR WARD LOSSES. THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 17.0 IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PART LY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH FEBRUARY, 2017 AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER ( . . ) (D.S.SUNDER SINGH) /ACCOUNTANT MEMBER /CHENNAI, /DATED: 28 TH FEBRUARY, 2017. TLN !' #$!% /COPY TO: 1. #'&'( /APPELLANT 4. ) /CIT 2. * '( /RESPONDENT 5. !+,& -. /DR 3. ) ( #'& ) /CIT(A) 6. 1 2 /GF