Madura Coats Private Limited, Bangalore V. DCIT, Madurai

ITA 770/CHNY/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8093 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-11-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 08-11-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 28-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D N KAR IRS
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Transfer pricing; International transaction; Competent authority
• Section: 92C

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , !' . #$#% , & '' ( [BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ] ./I.T.A. NO.770/MDS/2014 / ASSESSMENT YEAR : 2009-2010 MADURA COATS PRIVATE LIMITED, NEW JAIL ROAD, MADURAI 625 001. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE I(1) MADURAI. [PAN AABCM 8279K] ( )* / APPELLANT) ( +,)* /RESPONDENT) / APPELLANT BY : SHRI. K.R. VASUDEVAN, ADVOCATE /RESPONDENT BY : SHRI. D.N. KAR, IRS, CIT. /DATE OF HEARING : 08-11-2016 ! /DATE OF PRONOUNCEMENT : 16-11-2016 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AG AINST AN ORDER DATED 28.01.2014 OF THE ASSESSING OFFICER PAS SED U/S.143(3) R.W.S. 144C(13) OF THE ACT. ITA NO.770/MDS/2014. :- 2 -: 2. ASSESSEE HAS TAKEN ALTOGETHER THREE GROUNDS OF WHIC H GROUND NO.1 IS GENERAL IN NATURE NEEDING NO SPECIFI C ADJUDICATION. 3. IN GROUND NO.2, ASSESSEE ASSAILS UPWARD ADJUSTMENT OF B2,31,14,990/- MADE ON THE VALUE OF ITS INTERNATIO NAL TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES (AES) . 4. FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN THE BUSI NESS OF MANUFACTURING AND SELLING SEWING THREADS, YARNS AND INDUSTRIAL FABRICS HAD FILED ITS RETURN OF INCOME FOR THE IMPUGNED ASS ESSMENT YEAR DECLARING INCOME OF B32,84,78,420/-. SINCE ASSESSE E COMPANY HAD ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AS SOCIATED ENTERPRISES EXCEEDING B 15 CRORES A REFERENCE WAS MADE BY THE L D. ASSESSING OFFICER TO THE TRANSFER PRICING OFFICER (TPO) U/S.9 2CA OF THE ACT. THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESS EE DURING THE RELEVANT PREVIOUS YEAR WERE AS UNDER:- SL.NO NATURE OF TRANSACTION AMOUNT (B) 1 IMPORT OF RAW MATERIAL 1,67,41,477 2 IMPORT OF SHADE CARDS 15,26,327 3 EXPORTS OF THREADS 241,16,32,540 4 IMPO RT OF MACHINERY/ PURCHASE OF COMPUTER SOFTWARE 2,50,42,305 5 PAYMENT OF REALITY 27,97,89,894 6 PAYMENT OF MANGEMENT SERVICES FEES 5,98,86,162 PAYMENT OF COMMISSION ON EXPORTS 7,84,20,835 7 REIMBURSEMENT OF EXPENSES PAID 13,54,24,482 8 REIMBURSEMENT O F EXPENSES RECEIVED 11,71,300 TOTAL 300,96,95,322 ITA NO.770/MDS/2014. :- 3 -: 5. IN ITS COATS INDIA DIVISION, ASSESSEE WAS MANUFACTU RING VARIOUS TYPES OF SEWING THREADS AND SELLING IT TO ITS ASSOCIATED ENTERPRISES SITUATED IN SIXTY THREE COUNTRIES. AS SESSEE HAD ADOPTED INTERNAL TRANSACTIONAL NET MARGIN METHOD (HEREINAFT ER REFERRED TO AS TNMM) TO BENCH MARK ITS INTERNATIONAL TRANSACT IONS WITH ITS ASSOCIATED ENTERPRISES. IN OTHER WORDS ASSESSEE MAD E A COMPARISON OF MARGIN EARNED ON EXPORT OF THREADS TO ASSOCIATED E NTERPRISES WITH THE MARGIN EARNED ON EXPORTS OF THREADS TO NON ASSOCIAT ED ENTERPRISES. AS PER ASSESSEE MARGINS EARNED ON EXPORTS TO NON A SSOCIATED ENTERPRISES WAS 7.02% AGAINST A MARGIN 17.76% EARN ED ON ITS EXPORTS TO ASSOCIATED ENTERPRISES. HENCE ACCORDING TO THE ASSESSEE THERE WAS NO REQUIREMENT FOR ANY ARMS LENGTH PRICE ADJUSTMENT. 6. LD. TPO ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE POINTING OUT A NUMBER OF INSTANCES OF THREAD SALES TO ASSOCI ATED ENTERPRISES, WHERE THE PRICES BILLED WERE MUCH LOWER THAN WHAT W AS BILLED BY THE ASSESSEE ON SALE OF SIMILAR TREADS TO NON ASSOCIAT ED ENTERPRISES AND SEEKING REASONS WHY COMPARABLE UNCONTROLLED PRICING METHOD (CUP) SHOULD NOT BE PREFERRED OVER TNMM. IN REPLY TO THE ABOVE, ASSESSEE SUBMITTED THAT THE DIFFERENCE IN PRICES ON SALE WAS DUE TO DIFFERENCE IN MARKET, DIFFERENCE IN MODE OF DELIVERY OF PRODUCTS, GEOGRAPHICAL DIFFERENCE AND DIFFERENCE IN VOLUME. OBJECTING TO THE PROPOSAL TO ITA NO.770/MDS/2014. :- 4 -: CONSIDER CUP IN THE PLACE OF TNMM, ASSESSEE ARGUED THAT FORMER WAS NOT APPROPRIATE SINCE THERE WERE DIFFERENCE BETWEEN QUALITY OF PRODUCTS SUPPLIED TO ASSOCIATED ENTERPRISES AND NON ASSOCIATED ENTERPRISES. FURTHER, AS PER ASSESSEE, THE CONTRAC T, TERMS WERE ALSO DIFFERENT. HOWEVER, TPO WAS NOT IMPRESSED. ACCORDI NG TO HIM, EACH TRANSACTION HAD TO INDIVIDUALLY ANALYZED AND APPROP RIATE METHOD APPLIED FOR ARRIVING ARMS LENGTH PRICE. AS PER TPO, ASSESSEE HAD NOT DONE A FAR ANALYSIS. FURTHER, ACCORDING TO HIM, AG GREGATION OF TRANSACTION COULD NOT BE DONE WHEN CUP COULD BE DE TERMINED FOR SIMILAR ITEMS SOLD BY THE ASSESSEE. IN RESPECT OF ASSESSEES ARGUMENT REGARDING DIFFERENCE IN GEOGRAPHICAL LOCATION, TPO TOOK A VIEW THAT SUCH DIFFERENCE DID NOT EXIST SINCE THERE WERE SALE S TO BOTH ASSOCIATED ENTERPRISES AND NON ASSOCIATED ENTERPRIS ES IN DEVELOPING COUNTRIES OF ASIA AND AFRICA. HE FOUND THAT ASSESS EE HAD IN RESPECT OF FORTY NINE ITEMS OF THREAD SOLD VERY SAME VARIETIE S TO NON ASSOCIATED ENTERPRISES ALSO. HE MADE AN ANALYSIS OF PRICE CHA RGED BY THE ASSESSEE ON SUCH THREADS TO THE ASSOCIATED ENTERPRI SE AS WELL AS THE NON ASSOCIATED ENTERPRISE AND FOUND THAT SELLING PR ICE BILLED ON NON ASSOCIATED ENTERPRISE WAS IN THE AGGREGATE HIGHER THAN THE SELLING PRICE OF SIMILAR ITEMS SOLD TO ASSOCIATED ENTERPRIS E. NUMBER OF SUCH ITEMS CAME TO FORTY NINE. APPLYING CUP METHOD ON THESE FORTY NINE ITEMS, HE RECOMMENDED AN UPWARD ADJUSTMENT OF B1,52 ,16,747/-. ITA NO.770/MDS/2014. :- 5 -: 7. WHEN A PROPOSAL ON THE ABOVE LINE WAS GIVEN TO THE ASSESSEE BY THE LD. ASSESSING OFFICER, ASSESSEE CHO SE TO MOVE THE DISPUTE RESOLUTION PANEL (DRP). ARGUMENT OF THE AS SESSEE BEFORE DRP WAS THAT ASSOCIATED ENTERPRISE TO WHICH THREAD WERE SOLD, WAS AN INTERMEDIARY IN A SUPPLY CHAIN, WHEREAS NON ASSOCIA TED ENTERPRISES REPRESENTED END CUSTOMERS. FURTHER AS PER THE ASSE SSEE DELIVERY OF PRODUCTS TO NON ASSOCIATED ENTERPRISES WERE THROUGH AIR. ASSESSEE ALSO SUBMITTED THAT PRICES CHARGED ON ASSOCIATED E NTERPRISE WERE FIXED CONSIDERING THE BULK PURCHASES THEY WERE MAKI NG. ASSESSEE ALSO BROUGHT TO THE NOTICE OF THE DRP, DIRECTIONS OF TH E CO-ORDINATE BENCH FOR ASSESSMENT YEARS 2002-03 TO 2004-05, 2006-07 & 2007-08 (ITA NOS. 2207, 2212, 2213/MDS/2007 & 19 & 2032/MDS/2011 , DATED 21.12.2012). AS PER ASSESSEE FOR THESE YEARS TRIBU NAL HAD REMITTED THE ISSUE OF FIXING THE ARMS LENGTH PRICE OF THE IN TERNATIONAL TRANSACTIONS BACK TO THE FILE OF THE DRP. 8. DRP AFTER CONSIDERING THE ABOVE ARGUMENTS OF THE ASSESSEE HELD THAT TRIBUNAL HAD IN ITS ORDER DATED 21.12.201 2 FOR ASSESSMENT YEARS 2002-03 TO 2004-05, 2006-07 & 2007-08 UPHELD APPLICATION OF CUP METHOD. AS PER DRP, TRIBUNAL HAD DIRECTED ASSE SSEE TO FURNISH EXTERNAL COMPARABLES ALSO SO THAT THE DRR COULD EFF ECTIVELY ADJUDICATE THE ISSUES RAISED BEFORE IT. IN ANY CASE, AS PER D RP, BY VIRTUE OF THE DECISION OF CO-ORDINATE BENCH IN THE CASE OF DELPHI TVS DIESEL SYSTEMS ITA NO.770/MDS/2014. :- 6 -: LTD VS. ACIT, (2013) 22 ITR (T) 478 (CHENNAI) , A TRANSACTION TO TRANSACTION COMPARISON WAS TO BE PREFERRED, WHILE MAKING A TRANSFER PRICING STUDY. FURTHER AS PER THE DRP, WHETHER BUYE R OF THE GOODS WAS A TRADER OR CONSUMER DID NOT AFFECT THE PRICE OF TH E GOODS. VIZ-A-VIZ CONTENTION OF THE ASSESSEE THAT VOLUME DISCOUNTS W ERE OFFERED TO ITS ASSOCIATED ENTERPRISE, LD. DRP NOTED THAT QUANTIT Y SOLD IN MANY OF THE VARIETIES LISTED BY THEM AT PARA 2.10 OF THEIR ORDER, TO ASSOCIATED ENTERPRISE AND NON ASSOCIATED ENTERPRISE WERE COMP ARABLE. LD. DRP NOTED FIVE SEPARATE ITEMS WHERE SALES TO NON ASSOCI ATED ENTERPRISES WERE IN SUBSTANTIAL QUANTITIES. THE ONLY ADJUSTMEN T RECOMMENDED BY THE LD. DRP WAS FOR FREIGHT DIFFERENCES. IN OTHER WORDS, LD. DRP CONFIRMED THE PROPOSAL OF THE ASSESSING OFFICER WIT H REGARD TO ADJUSTMENT TO INTERNATIONAL PRICING ON ACCOUNT OF S ALES EFFECTED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES AND ASSESSME NT WAS COMPLETED ACCORDINGLY. 9. NOW BEFORE US, LD. AUTHORISED REPRESENTATIVE STRONG LY ASSAILING THE ORDERS OF THE LOWER AUTHORITIES SUBMI TTED THAT ASSESSEE WAS MANUFACTURING MORE THAN THREE THOUSAND TWO HUN DRED DIFFERENT VARIETIES OF THREADS. AS PER LD. AUTHORISED REPRE SENTATIVE, IT HAD EIGHT DIFFERENT CLASSES OF INTERNATIONAL TRANSACTIONS WIT H ITS ASSOCIATED ENTERPRISE AND THEREFORE AGGREGATE VALUE OF ITS TR ANSACTIONS HAD TO BE CONSIDERED FOR ARMS LENGTH PRICE STUDY. AS PER LD. AUTHORISED ITA NO.770/MDS/2014. :- 7 -: REPRESENTATIVE CONSIDERING VARIOUS VARIETIES OF TH READS THAT ASSESSEE WAS DEALING WITH, AND VARIOUS CLASSES OF TRANSACTIO NS WITH THE ASSOCIATED ENTERPRISES, MOST APPROPRIATE METHOD WAS TNMM. THE LOWER AUTHORITIES AS PER LD. AUTHORISED REPRESENTAT IVE HAD REJECTED TNMM AND SELECTED FORTY NINE NUMBERS OF THREAD VARI ETIES OUT OF MORE THAN THREE THOUSAND TWO HUNDRED, FOR MAKING A SELEC TIVE APPLICATION OF CUP METHOD. AS PER LD. AUTHORISED REPRESENTATIVE S ELECTIVE USE OF CUP METHOD WAS NOT APPROPRIATE SINCE SEC. 92C OF TH E ACT MANDATED APPLICATION OF MOST APPROPRIATE METHOD ON A CLASS O F TRANSACTIONS. AS PER LD. AUTHORISED REPRESENTATIVE EXPORTS DONE BY T HE ASSESSEE AS A WHOLE HAD TO BE CONSIDERED AS A CLASS. FORTY NIN E ITEMS SELECTED BY THE LOWER AUTHORITIES DID NOT FALL IN A CLASS OF ITS OWN. RELIANCE WAS PLACED IN THE DECISIONS OF PUNE BENCH IN THE CASE O F AMPHENOL INTERCONNECT INDIA (P) LTD VS. DCIT, (2014) 107 DTR 337, MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF INTERVET INDI A PVT. LTD VS. DCIT (2010) 38 DTR 422 AND THAT OF CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF MAINETTI INDIA (P) LTD VS. ACIT, (2012) 77 DTR 60. FURTHER, ACCORDING TO HIM, GEOGRAPHICAL DIFFERENCE OF THE C OUNTRIES WHERE ASSOCIATED ENTERPRISE AND NON ASSOCIATED ENTERPRISE WERE FUNCTIONING MADE THE COMPARISON ATTEMPTED BY TPO INCORRECT. RE LIANCE WAS PLACED ON THE DECISION OF PUNE BENCH IN THE CASE O F CUMMINS INDIA P. LTD VS. ADDL. CIT, (2015) 119 DTR 0182. ITA NO.770/MDS/2014. :- 8 -: 10. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRONG LY SUPPORTING THE ORDERS OF THE AUTHORITIES BELOW SUBM ITTED THAT BY VIRTUE OF THE DECISION OF CO-ORDINATE BENCH IN THE CASE OF DELPHI TVS DIESEL SYSTEMS LTD (SUPRA) THE LOWER AUTHORITIES WERE JUSTIFIED IN PREFERRING CUP METHOD OVER TNMM SELECTED BY THE ASSESSEE. 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. THE QUESTION BEFO RE US IS WHETHER CUP METHOD WAS RIGHTLY ADOPTED BY THE LOWER AUTHORI TIES FOR EVALUATION OF THE INTERNATIONAL TRANSACTIONS UNDERT AKEN BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE, IN PREFERENCE TO TN M METHOD ADOPTED BY THE ASSESSEE. THE TPO AND DRP HAD TAKEN A VIEW T HAT FOR FORTY NINE VARIETIES OF THREADS SOLD BY THE ASSESSEE, CO MPARABLE UNCONTROLLED TRANSACTIONS WITH NON ASSOCIATED ENTER PRISE WERE READILY AVAILABLE FOR COMPARISON. FOR ASSESSMENT YEARS 2002 -03 TO 2004-05 , 2006-07 AND 2007-2008 ALSO, ASSESSEE HAD FOLLOWED T NM METHOD WHICH WAS DISREGARDED AND CUP METHOD APPLIED IN REL ATION TO SALE OF THREADS TO ASSOCIATED ENTERPRISE. THIS IS CLEAR FRO M THE PARA 4 IN THE ORDER OF THE CO-ORDINATE BENCH IN THE APPEALS FOR T HESE YEARS IN ITA NO.2207, 2212, 2213/MDS/2007, 192, 2032/MDS/2011 (S UPRA) WHEREIN THE ISSUES WERE SIZED UP :- ITA NO.770/MDS/2014. :- 9 -: 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE COMPANY IS ONE OF THE LARGEST TEXTILE COMPANY. IT I S OPERATING THROUGH ITS THREE DIVISIONS VIZ: 1. COATS INDIA; 2. MADURA INDUSTRIAL TEXTILES; & 3. GLOBAL THREAD SUPPLY, INDIA COATS INDIA DIVISION IS A MARKETER OF SEWING THREAD S THROUGHOUT THE WORLD. MADURA INDUSTRIAL TEXTILES MANUFACTURES WIDE RANGE OF TEXTILE PRODUCTS AND THE GLOBAL THREAD SUPPLY INDIA DIVISION MANAGES THE DAY -TO- DAY OPERATIONS AND ADMINISTRATION OF THE SPINNING A ND TWISTING FACILITIES . THE ASSESSEE IS AN EXPORTER O F THREAD AND OTHER ANCILLARY PRODUCTS. THE ASSESSEE HAD ADOP TED TNM METHOD TO ARRIVE AT ARMS LENGTH PRICE FOR THE EXPORT OF THREADS. AS REGARDS EXPORT OF GREY COTTON CANVAS S, THE ASSESSEE HAD APPLIED CUP METHOD. THE TPO VIDE ORDE R DATED 8.3.2005 FOR THE ASSESSMENT YEAR 2002-03 HELD THAT THE ASSESSEE HAS WRONGLY APPLIED TNMM FOR DETERMINI NG ARMS LENGTH PRICE FOR THE EXPORT OF THREADS. THE T PO REJECTED THE METHOD APPLIED BY THE ASSESSEE FOR DETERMINING THE ARMS LENGTH PRICE AND ADOPTED CUP METHOD STATING IT TO BE MOST PREFERRED METHOD OVER THE OTHER METHODS. THE TPO ALSO REJECTED THE ARMS LENG TH PRICE DETERMINED BY THE ASSESSEE ON ACCOUNT OF EXPO RT OF GREY COTTON CANVASS AS IT WAS DETERMINED FOR REPRESENTATIVE SAMPLE OF 52.68% OF THE TURNOVER. TH E ASSESSEE HAD ASKED FOR VOLUME DISCOUNT OF 15% IN CA SE CUP METHOD IS TO BE ADOPTED FOR DETERMINING THE ALP FOR EXPORT OF THREADS. THE TPO REJECTED THE CONTENTION OF THE ASSESSEE ON THE GROUND THAT VOLUME DISCOUNT OFFERED ON THE LOCAL SALES CANNOT BE ACCEPTED AS COMPARABLE FO R EXPORT SALES, ON ACCOUNT OF DIFFERENT MARKET CONDIT IONS ESPECIALLY WHEN THE ASSESSEE HAS NOT COMPARED LOCAL SALES TO EXPORT SALES OF ASSOCIATED ENTERPRISE IN T HE TRANSFER PRICING DOCUMENTATIONS. THE TPO REJECTED T HE ALP DETERMINED BY THE ASSESSEE ON TNMM ON ACCOUNT O F EXPORT OF THREADS AS WELL AS CUP METHOD ADOPTED FOR EXPORT OF GREY COTTON CANVASS. THIS TRIBUNAL IN ITS FINDINGS RECORDED AT PARA 11 A ND 12 OF ITS ORDER HAD OBSERVED AS UNDER:- 11. WE HAVE HEARD THE SUBMISSIONS MADE BY THE RESPECTIVE PARTIES. WE HAVE ALSO PERUSED THE ORDERS PASSED BY THE AUTHORITIES BELOW AND THE DOCUMENTS REFERRED TO. DURING THE COURSE OF SUBMISSIONS, A QU ERY WAS ITA NO.770/MDS/2014. :- 10 -: PUT TO THE LEARNED COUNSEL FOR THE ASSESSEE AS TO W HY ONLY INTERNAL COMPARABLES WERE GIVEN TO THE TPO FOR DETERMINING CUP METHOD. THE COUNSEL FOR THE ASSESSE E STATED THAT AT THAT TIME ONLY INTERNAL COMPARABLES WERE AVAILABLE. HE FURTHER SUBMITTED, NOW IF REQUIRED, E XTERNAL COMPARABLES CAN BE PLACED ON RECORD FOR DETERMINING THE INTERNATIONAL PRICING UNDER CUP METHOD. A PERUSAL OF THE ORDER OF THE CIT(A) SHOWS THAT THE SAME IS SKETCHY AND NON-SPEAKING. THE FINDINGS OF THE C IT(A) IN ASSESSMENT YEAR 2002-03 ARE REPRODUCED HEREIN BELOW :- 1. 2. 3. 4. I HAVE CAREFULLY CONSIDERED THE FACTS AND SUBMISSIONS MADE BY THE REPRESENTATIVES. THE AO I TPO IN THEIR ORDER S HAVE NOT DISCUSSED AS TO WHY TNMM IS NOT APPLICABLE IN THE CASE OF EXPORT OF THREADS AND AS TO WHY CUP METHOD IS THE MOST APPROPRIATE METHOD. THE BASIC REQUIREMENT OF CUP METHOD IS THAT THE PRODUCT SHOULD BE SOLD IN SIMILAR COMMERCE: ENVIRONMENT I .E. IN SIMILAR QUANTITIES, SIMILAR LOCATION WITH SIMILAR QUALITY EVEN THE OECD GUIDELINES DESCRIBES THE CUP METHOD AS A TRANSFER PRICING METHOD THAT COMPARES THE PRICE FOR PROPERTY OR SERVICES TRANSFERRED IN A COMPARABLE UNCONTROLLED TRANSACTIONS IN COMPARABLE CIRCUMSTANCES. BUT IN THE PRESENT CASE AS CAN BE SEEN FROM THE SUBMISSIONS MADE. THE PRODUCTS SOLD TO AES ARE NOT COMPARABLE TO WHAT IS BEING SOLD TO NON-AE'S. 7.1 IN THE CIRCUMSTANCES I AM INCLINED TO AGREE WITH THE APPELLANTS CONTENTION THAT CUP IS NOT APPLICABLE AS REGARDS EXPORT OF THREADS IN THE INSTANT CASE DUE TO THE FOLLOWING FACTORS. THE MARKETS ARE DIFFERENT CONDITIONS OF THE TRANSACTIONS ARE DIFFERENT A FEW TRANSACTIONS CANNOT BE SELECTED IN ISOLATION AND CUP CANNOT BE SELECTIVELY APPLIED. ACCORDINGLY I AGREE WITH THE METHOD OF TNMM ADOPTED BY THE APPELLANT WITH REGARD TO THE EXPORT OF THREAD. APPLYING THE TNMM METHOD THE APPELLANT HAS DEMONSTRATED THAT THE INTERNATIONAL TRANSACTION OF EXPORT OF THREAD WITH AES ARE AT ARMS LENGTH ITA NO.770/MDS/2014. :- 11 -: PRICE. THIS GROUND IS DECIDED I N FAVOUR OF THE ASSESSEE. THE ADDITION OF ` 113,32,042. IS DELETED. 7.2 EVEN IF CUP WERE TO BE APPLIED. I AGREE WITH THE APPELLANTS CONTENTION THAT THE PRICE IS TO BE ADJUSTED FOR VOLUME DISCOUNT IN MY OPINION , THE VOLUME DISCOUNT IS AN ACCEPTED INDUSTRY PRACTICE, THAT IS WELL RECOGNISED. RELYING ON THE SUPREME COURT JUDGEMENT S IN THE CASE OF MIRAH EXPORTS PRIVATE LIMITED VS. COLLECTOR OF CUSTOMS -(098J-EL T -0003 AND BASANT INDUSTRIES VS. ADDL CC [1996 (66) ECR 227 AND ALSO ON THE INTERNATIONAL GUIDELINES VIZ. THE OECD AND THE US TP REGULATIONS, VOLUME DISCOUNTS ARE NOT UNUSUAL AND THAT THEY NEED TO BE CONSIDERED AS A VALID FACTOR. AS I HAVE HELD THAT CUP CANNOT BE APPLIED TO THE EXPORT OF THREADS IN THE PRESENT CASE. THE ALTERNATIVE SUBMISSIONS ARE OF ACADEME VALUE EXPORT OF GREY COTTON CANVAS ` 48,71,239/- 7.3 THE APPELLANT APPLIED CUP METHOD FOR THE PURPO SE OF DETERMINING THE ALP IN THE CASE OF EXPORT OF GREY CANVAS. HOWEVER, , THE APPELLANT COMPANY HAS APPLIED THE CUP METHOD ON A R EPRESENTATIVES SAMPLE OF 52.68 % OF THE TURNOVER THE A.O/TPO ASKED THE APPELLANT COMPANY TO APPLY THE CUP METHOD TO THE ENTIRE TURNOVER OF GREY COTTON CANVAS BY TAKING ONLY THOSE PRODUCTS WHICH HAS ALSO BEEN SOLD TO AE'S AND NON-AES. 7.4 THE LEARNED REPRESENTATIVES CONTENDED THAT THE CUP METHOD COULD NOT BE APPLIED TO ALL TRANSACTIONS AS THE APPELLANT COMPANY WAS IN THE PROCESS OF CLOSING DOWN ITS CANVAS DIVISION AND HENCE THE ASSESSEE WAS DISPOSING OFF THE STOCK AT ITA NO.770/MDS/2014. :- 12 -: A DISCOUNTED PRICE. THE APPELLANT SUBMITTED THAT TRANSACTIONS OF DISTRESS SALES ENTERED INTO BY THE APPELLANT COULD NOT BE REGARDED UNDER NORMAL CIRCUMSTANCES AND THUS THE WORKINGS ALREADY SUBMITTED BY THE APPELLANT HOLD GOOD. THE A.O I TPO APPLIED THE CUP METHOD TO THE ENTIRE TURNOVER AND HAS ARRIVED AT A TRANSFER PRICING ADJUSTMENT OF ` 48,71,239 . 8. I HAVE CAREFULLY CONSIDERED THE FACTS AND SUBMISSIONS PUT FORTH BY THE APPELLANT'S REPRESENTATIVES. IT IS CLEAR FROM THE FACTS THAT TH E APPELLANT HAD APPLIED THE CUP METHOD ONLY TO 52.68% OF THE TRANSACTIONS BEING EXPORTS OF GREY CANVAS IN ARRIVING AT THE ALP. THE APPELLANT WHEN ASKED BY THE TPO WAS UNABLE TO APPLY ANY APPROPRIATE METHODOLOGY FOR THE BALANCE TRANSACTIONS. AS SUCH, I HAVE TO AGREE WITH THE DECISION OF TOE TPO IN APPLYING THE CUP METHOD FOR THE REST OF THE TURNOVER HOWEVER, IT IS ALSO TR UE THAT THE APPELLANT WAS IN THE PROCESS OF CLOSING DOWN ITS DIVISION OF GREY CANVAS AND AS SUCH THE SALES WERE DISTRESS SALES. IN CASES OF DISTRESS SALES A SELLER IS NOT BOTHERED ABOUT THE PRICE HE REALISES, INSTEAD HE IS MORE CONCERNED WITH DISPOSING OFF THE GOODS. AS SUCH, THE SELLER TENDS TO SELL THE GOODS AT MUCH LOWER RATES THAN NORMAL. WHEREAS I UPHOLD THE DECISION OF THE A.O. IN APPLYING CUP FOR THE ENTIRE TURNOVER OF EXPORT OF GREY COTTON CANVAS, HOWEVER WHILE ARRIVING AT THE TRANSFER PRICING ADJUSTMENT TO BE MADE THE A 0 SHALL GRANT APPROPRIATE RELIEF TO FACTOR IN THE CONDITION OF DISTRESS SALE AFTER GIVING OPPORTUNITY OF HEARING TO THE APPELLANT. THE CIT(A) HAS PASSED SIMILAR ORDER IN SUBSEQUENT A SSESSMENT YEARS. THE CIT(A) HAS NOT GIVEN ANY PLAUSIBLE REAS ON FOR ITA NO.770/MDS/2014. :- 13 -: ACCEPTING THE SUBMISSIONS OF THE ASSESSEE AND REJEC TING THE CONTENTIONS OF THE REVENUE. IT SEEMS THAT CIT(A) HA S LOST SIGHT OF THE FACT THAT IT HAS GOT CONCURRENT JURISDICTION TO MAKE ASSESSMENT, IN CASE THE AUTHORITIES BELOW HAVE NOT EXERCISED THEIR JURISDICTION. THE CIT(A) IN PARA 7 OF HIS OR DER STATED THAT THE ASSESSING OFFICER /TPO IN THEIR ORDERS HAVE NO T DISCUSSED AS TO WHY TNMM IS NOT APPLICABLE IN THE CASE OF EXP ORT OF THREADS AND AS TO WHY CUP METHOD IS THE MOST APPRO PRIATE METHOD. SIMILAR IS THE SITUATION WITH THE ORDER OF THE CIT(A). THE CIT(A) HAS ALSO FAILED TO GIVE VALID REASON FOR RE VERSING THE FINDINGS OF THE TPO AND HAS MERELY PLACED RELIANCE ON THE SUBMISSIONS MADE BY THE ASSESSEE WITHOUT ASSIGNING ANY VALID AND PLAUSIBLE REASONS. THE HONBLE MADRAS HIGH COUR T IN THE CASE OF VODAFONE ESSAR LTD. VS. DISPUTE RESOLUTION PANEL & OTHERS REPORTED AS 340 ITR 352 (DEL) HAS HELD AS UN DER:- BE IT NOTED, WHEN A QUASI-JUDICIAL AUTHORITY DEALS WITH A LIS, IT IS OBLIGATORY ON ITS PART TO ASCRIBE COGENT AND GERMANE REASONS AS THE SAME IS THE HEART AND SOUL OF THE MATTER, AND FURTHER, THE SAME ALSO FACILITATES APPRECIATION WHEN THE ORDER IS CALLED I N QUESTION BEFORE THE SUPERIOR FORUM. NEEDLESS TO SA Y THAT THE COMPETENT AUTHORITY, WHILE PASSING THE ORD ER, SHALL KEEP IN MIND THE ORDER DATED NOVEMBER 29, 2010, WHEREIN WE HAD DIRECTED THAT THE PERIOD FROM THE DATE OF FILING THE WRIT PETITION AND FOUR WEEKS AFTER ITS DISPOSAL SHALL STAND EXCLUDED, WHILE COMPUTING THE LIMITATION FOR THE DEPARTMENT TO PASS AN ASSESSMENT ORDER. 12. IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDERED OPINION THAT THE MATTER REQUIRES FRESH ADJUDICATION. THE O RDER PASSED BY THE DRP IS IN SUBSEQUENT YEARS TO THE ORDER OF CIT( A), THE ORDERS PASSED BY CIT(A) IN ASSESSMENT YEAR 2002-03 TO 2005- 06 WILL HAVE BEARING IN LATER YEARS. WE, THEREFORE , REMIT THE MATTER BACK TO THE CIT(A) FOR THE ASSESSMENT YEARS 2002-03 TO 2005-06 AND DRP FOR THE ASSESSMENT YEARS 2006-07 A ND 2007- 08 FOR DECIDING THE MATTER AFRESH BY PASSING A DET AILED AND SPEAKING ORDER. THE CIT(A)/DRP WHILE ADJUDICATING THE MATTER AFRESH SHALL INTER-ALIA, TAKE INTO ACCOUNT EXTERNAL COMPARABLES WHILE DETERMINING THE INTERNATIONAL PRICING. THE CO UNSEL FOR THE ASSESSEE HAS MADE A STATEMENT AT THE BAR THAT THE ASSESSEE WOULD PROVIDE DETAILS OF INTERNATIONAL COMPARABLES. THE CIT(A)/DRP SHALL ALSO TAKE INTO CONSIDERATION THE D IFFERENT MARKET CONDITIONS. THE MARKET CONDITIONS DOES NOT M EAN GEOGRAPHICAL CONDITION ALONE BUT ALSO INCLUDES THE SIZE OF THE ITA NO.770/MDS/2014. :- 14 -: MARKET, DEMAND AND OTHER RELEVANT FACTORS INFLUENCI NG THE MARKET CONDITIONS AS A WHOLE. 12. IN OUR OPINION, THE DECISION OF THE TRIBUNAL IS CL EAR IN THAT CUP METHOD WAS APPROPRIATELY USED IN PREFERENCE TO TNM METHOD. THE ONLY MODIFICATION SUGGESTED BY THE TRIBUNAL WAS TO CONSIDER THE EXTERNAL COMPARABLES ALSO AND THIS DIRECTION WAS G IVEN NOTING, THE SUBMISSIONS OF THE ASSESSEE THAT EXTERNAL COMPARABL ES COULD BE PLACED ON RECORD FOR DETERMINING THE ARMS LENGTH PRICE UN DER CUP METHOD, IF IT WAS GIVEN AN OPPORTUNITY. THE ABOVE DECISIO N WAS AVAILABLE WITH THE DRP WHEN IT WAS DEALING WITH THE MATTER FOR THE IMPUGNED ASSESSMENT YEAR. THAT ASSESSEE COULD NOT FURNISH AN Y EXTERNAL COMPARABLE HAS BEEN SPECIFICALLY NOTED BY THE LD. D RP AT PARA 2.7 OF ITS ORDER. HENCE, IN OUR OPINION ASSESSEE CANNOT SA Y THAT LD. DRP HAD NOT TAKEN PROPER COGNIZANCE OF THE TRIBUNAL ORDER F OR THE EARLIER YEARS. APART FROM THIS, WHAT WE FIND IS THAT THERE WERE FO RTY NINE NUMBER OF ITEMS IN WHICH INTERNAL COMPARABLES WHICH WERE TOTA LLY UNCONTROLLED WERE READILY AVAILABLE. NO DOUBT, IT IS TRUE THAT P UNE BENCH IN THE CASE OF AMPHENOL INTERCONNECT INDIA P. LTD (SUPRA ) HELD THAT CUP METHOD WAS NOT APPROPRIATE FOR EVALUATING PART OF THE EXP ORTS. BUT THE REASONS FOR TAKING THE SAID VIEW WAS ON ACCOUNT OF DIFFICULTIES IN CARRYING OUT THE ADJUSTMENTS FOR DIFFERENCES BETWE EN THE TRANSACTIONS ITA NO.770/MDS/2014. :- 15 -: WITH ASSOCIATED ENTERPRISE AND NON ASSOCIATED ENTER PRISE, WHICH IS NOT THE CASE HERE. 13. COMING TO THE CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE THAT SEC. 92C OF THE ACT MANDATES AD JUSTMENT AND DETERMINATION OF ARMS LENGTH PRICE ON A CLASS OF TR ANSACTIONS, IT IS NECESSARY TO HAVE A LOOK OF SEC. 92C(1) OF THE ACT, WHICH IS REPRODUCED HEREUNDER:- 1) THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCT IONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY : (A) COMPARABLE UNCONTROLLED PRICE METHOD ; (B) RESALE PRICE METHOD ; (C) COST PLUS METHOD ; (D) PROFIT SPLIT METHOD ; (E) TRANSACTIONAL NET MARGIN METHOD ; (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD . A READING OF THE ABOVE, CLEARLY INDICATE THAT THE M OST APPROPRIATE METHOD HAS TO BE SELECTED HAVING REGARD TO THE NATU RE OF TRANSACTIONS OR CLASS OF TRANSACTIONS. IN OUR OPINION, WHEN UNC ONTROLLED COMPARABLES ARE AVAILABLE INTERNALLY ON SOME OF THE ITEMS WHICH WAS ITA NO.770/MDS/2014. :- 16 -: SOLD TO ASSOCIATED ENTERPRISE THEN SUCH COMPARABLES WOULD FORM A SEPARATE CLASS OF ITS OWN. TPO HAD CONSIDERED FORT Y NINE THREAD TYPES FOR WHICH THERE WERE INTERNAL UNCONTROLLED TRANSAC TIONS AVAILABLE FOR COMPARISON. TPO HAD NOT MADE AN ADJUSTMENT FOR AN Y OF THE OTHER VARIETIES OF THREAD SALES MADE BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE. NEVERTHELESS, WE DO FIND THAT ATLEAST FOR EIGHT ITEMS AMONG THESE FORTY NINE THREAD TYPES, MENTIONED AT S L. NO.27,28,30,35,37,38,39 & 44, THERE WAS NEGATIVE D IFFERENCES ADJUSTMENT WHICH WERE IGNORED BY THE TPO, IN THE WO RK OUT AT ANNEXURE A OF ITS ORDER. WHEN A CLASS OF ITEMS ARE CONSIDERED FOR ADJUSTMENT, THE NEGATIVE EFFECT OF SOME OF THE ITEM S THEREIN CANNOT BE IGNORED. AS FOR CONTENTION OF THE ASSESSEE IS THAT THERE WERE GEOGRAPHICAL DIFFERENCE BETWEEN SUPPLIES MADE TO A SSOCIATED ENTERPRISE AND NON ASSOCIATED ENTERPRISE, THERE IS A CLEAR FINDING BY THE LD. DRP THAT ASSESSEE WAS CATERING TO ASIAN COU NTRIES AND ASSOCIATED ENTERPRISE WERE LOCATED IN SRI LANKA, MA URITIUS, PAKISTAN AND EGYPT AND NON ASSOCIATED ENTERPRISES WERE LOCAT ED IN SRILANKA, BANGLADESH, MALAWI ETC WITH NOT MUCH OF A GEOGRAPH ICAL DIFFERENCE. VIZ-A-VIZ VOLUME DISCOUNT MENTIONED BY THE LD. AUTH ORISED REPRESENTATIVE, LD. DRP HAD GIVEN A CLEAR FINDING THAT THERE WERE SUBSTANTIAL SALES IN ALTEAST IN FIVE ITEMS FALLING IN THE TABLE APPEARING IN PARA 2.10 OF ITS ORDER. CONSIDERING ALL THESE, WE ARE THE OPINION ITA NO.770/MDS/2014. :- 17 -: THAT LOWER AUTHORITIES WERE JUSTIFIED IN SELECTING CUP METHOD OVER TNM METHOD. HOWEVER, AS MENTIONED BY US, COMPUTATI ON OF THE ARMS LENGTH PRICE ADJUSTMENT REQUIRED ON FORTY NINE NUMB ER OF ITEMS MENTIONED IN THE ORDER OF TPO REQUIRES TO BE REWORK ED, SO THAT NEGATIVE AMOUNTS ARE ALSO CONSIDERED FOR AGGREGATIO N AND FOR WORKING OUT THE ARMS LENGTH PRICE ADJUSTMENT THAT IS REQUIR ED. FOR THIS LIMITED PURPOSE OF RECALCULATION, WE REMIT THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER/TPO. 14. GROUND NO.2 IS TREATED AS PARTLY ALLOWED FOR STATI STICAL PURPOSE. 15. VIDE GROUND NO.3, ASSESSEE ASSAILS DOWNWARD ADJUST MENT OF B7,84,20,835/- ON COMMISSION PAID TO ITS ASSOCIATED ENTERPRISES. 16. FACTS APROPOS ARE THAT AS MENTIONED AT PARA 4 A BOVE, ASSESSEE HAD PAID COMMISSION OF B7,84,20,835/- TO I TS ASSOCIATED ENTERPRISE FOR EXPORTS. LD. TPO PUT ASSESSEE ON NOT ICE AS TO HOW SUCH COMMISSION PAYMENT WAS JUSTIFIED. ASSESSEE RELYING ON AN AGREEMENT ENTERED WITH ITS ASSOCIATED ENTERPRISE SUBMITTED TH AT ASSOCIATED ENTERPRISE WAS APPOINTED AS A NON EXCLUSIVE AGENT FOR PROMOTING AND SELLING SEWING THREADS FOR A COMMISSION OF 1.5% ON INVOICE VALUE ITA NO.770/MDS/2014. :- 18 -: EXPORT OF EXISTING PRODUCTS AND 5% ON EXPORT OF NEW PRODUCTS. AS PER THE ASSESSEE AMOUNT WAS PAID BASED ON SUCH AGREEME NT, FOR THE SERVICES RENDERED BY THE ASSOCIATED ENTERPRISE. ASS ESSEE ALSO PRODUCED IN SUPPORT, COPIES OF INVOICES RAISED BY T HE ASSOCIATED ENTERPRISE AND THE EMAIL EXCHANGE BETWEEN THEM. R ELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES LTD (345 ITR 241 ). HOWEVER, LD. TPO WAS NOT IMPRESSED. ACCORDING TO HIM, NOTHING WAS PRODUCED B Y THE ASSESSEE TO SUBSTANTIATE ANY SERVICES RENDERED BY THE ASSOCIATE D ENTERPRISE TO IT. AS PER LD. TPO CORRESPONDENCE BETWEEN ASSESSEE AND ASSOCIATED ENTERPRISE WAS ROUTINE IN NATURE AND DID NOT DEMONS TRATE ANY SERVICES DONE BY ASSOCIATED ENTERPRISE. LD. TPO DISTINGUISHE D THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES LTD (SUPRA ) BY NOTING THAT EKL APPLIANCES LTD, WAS CONSISTENTLY INCURRING HUGE LOSSES. RELYING ON THE BANGALORE BENCH TRIBUNAL DECISION IN THE CASE OF GEMPLUS INDIA PVT. LTD VS. ACIT (ITA NO.352/BANG/20 09) , LD. TPO HELD THAT PAYMENT ON ACCOUNT OF MANGEMENT SERVICES UNLESS NOT SHOWN TO BE COMMENSURATE WITH THE VOLUME AND THE Q UALITY OF SERVICES RENDERED COULD NOT BE ALLOWED. HE HELD TH E ARMS LENGTH PRICE OF EACH SERVICES AS ZERO AND RECOMMENDED AN ADJUSTMENT OF B7,84,20,835/-. ITA NO.770/MDS/2014. :- 19 -: 17. WHEN A PROPOSAL ON THE ABOVE LINES WAS MADE TO THE ASSESSEE, ASSESSEE CHOSE TO MOVE TO LD. DRP. ARGUME NT OF THE ASSESSEE BEFORE LD. DRP WAS THAT ITS ASSOCIATED ENT ERPRISE WAS IDENTIFYING THE REQUIREMENTS OF THE PRODUCTS, REAC HING OUT TO OTHER ENTITIES AND ASSISTING IT IN PROCURING ORDERS, OB TAINING LICENSES, PERMITS ETC., FOR THE COUNTRIES WHERE IT WAS PROCUR ING ORDERS. ASSESSEE ALSO PLACED RELIANCE ON PARA 7.14 OECD GUI DELINES. IT ALSO STATED THAT THE ASSOCIATED ENTERPRISE WAS PROVIDING ROLLING FORECAST AND BENEFITS WAS DERIVED BY THE ASSESSEE THROUGH ACCEL ERATED GROWTH IN EXPORT SALES. AS PER THE ASSESSEE, CONSOLIDATION O F DEMAND FROM VARIOUS COUNTRIES REDUCED THE COST OF PRODUCTION A ND HELPED EFFICIENT SOURCING AND LOWERING OF RISK. 18. HOWEVER, LD. DRP WAS NOT IMPRESSED BY THE ABOVE ARGUMENTS. ACCORDING TO IT, ASSOCIATED ENTERPRISE M/S. TCA WAS SETUP BY THE GROUP IN WHICH ASSESSEE WAS A MEMBER, TO MA NAGE ITS OWN AFFAIRS. ACCORDING TO LD.DRP, M/S.TCA WAS NOT A SALES AGENT, SINCE THERE WAS NO NEED TO PROMOTE ASSESSEES SALES TO IT S OWN GROUP CONCERNS. AS PER LD. DRP, M/S. TCA WAS ONLY A CEN TRALIZED ENTITY DISTRIBUTING THE ORDERS FROM THE VARIOUS GROUP CON CERNS TO THE ASSESSEE. LD. DRP ALSO NOTED THAT ASSESSEE HAD NOT FURNISHED ANY EVIDENCE TO SHOW ANY SERVICES RENDERED BY M/S. TCA FOR JUSTIFYING THE ITA NO.770/MDS/2014. :- 20 -: SALES COMMISSION. FURTHER, AS THE LD. DRP, ASSES SEE WAS A LOW COST PRODUCTION COMPANY OF THE GROUP AND THE RECEIPT OF SERVICE WAS NOT SUPPORTED BY ANY EVIDENCE. HE THUS, UPHELD THE DI RECTIONS OF THE LD. TPO. 19. NOW BEFORE US, THE LD. AUTHORISED REPRESENTATIV E STRONGLY ASSAILING THE ORDERS OF THE LOWER AUTHORITIES SUBMI TTED THAT ASSESSEE HAD TO SUPPLY THREADS TO MORE THAN SIXTY CONCERNS LOCATED IN DIFFERENT COUNTRIES AND M/S. TCA WAS DOING THE CONSOLIDATION OF FRAGMENTAL REQUIREMENTS. AS PER LD. AUTHORISED REPRESENTATIVE IN THE SUBSEQUENT YEARS SUCH PAYMENT OF COMMISSION WAS CONSIDERED AT ARMS LENGTH PRICE BY TPO. ACCORDING TO HIM, AGREEMENT WITH M/S . TCS CLEARLY INDICATED THE TYPE OF SERVICES THAT WAS RENDERED. RELIANCE WAS ONCE AGAIN PLACED ON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES LTD (SUPRA ). RELIANCE WAS ALSO PLACED ON THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN THE CAS E OF M/S. MCCANN ERICKSON INDIA (P) LTD VS. ADDL. CIT (ITA NO.5871/D EL/2011 DATED 8 TH JUNE, 2012). 20. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE ST RONGLY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. ITA NO.770/MDS/2014. :- 21 -: 21. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PE RUSED THE ORDERS OF THE LOWER AUTHORITIES. IN THE FIRST PLACE WHAT WE NOTE IN THAT AGREEMENT BETWEEN ASSESSEE AND ASSOCIATED ENTERPRIS E NAMED THE CENTRAL AGENCY LIMITED WAS NOT FOR ANY MANAGERIAL S ERVICES. IT WAS PURE AND SIMPLE AGENCY AGREEMENT. RELEVANT PART OF SAID AGREEMENT IS REPRODUCED HEREUNDER:- SUPPLEMENTAL AGREEMENT THIS SUPPLEMENTAL AGREEMENT IS MADE THE 24 TH DAY OF MARCH, 2005 BETWEEN MADURA COATS PRIVATE LIMITED (FORMERLY MADURA COATS LIMITED), HAVING ITS REGISTERED OFFICE AT NEW JAIL ROAD, MADURAI 625 001 (HEREINAFTER REFERRED TO AS 'THE PR INCIPAL') OF THE ONE PART. AND THE CENTRAL AGENCY LIMITED WHOSE REGISTERED OFFICE IS AT PACIFIC HOUSE, 70, WELLINGTON STREET, GLASGOW G2 6 VB (HEREINAFTER REFERRED TO AS 'THE AGENT') OF THE OTH ER PART. WHEREAS THE PARTIES HAD SIGNED AN AGENCY AGREEMENT DATED ] ST APRIL 2001 ON CERTAIN TERMS AND CONDITIONS WHEREAS CONSEQUENT TO THE INTRODUCTION OF CERTAIN 'NEW PROD UCTS' FOR EXPORT. AND THE PROSPECT OF INTRODUCTION OF FURTHER VARIETIES, THE PARTIES NOW DESIRE TO AMEND THE AGENCY AGREEMENT DA TED 1ST APRIL 2001 TO INCLUDE THE 'NEW PRODUCTS' ON THE FOL LOWING REVISED TERMS AND CONDITIONS. NOW IT IS HEREBY AGREED / MODIFIED AS FOLLOWS 1. THE DEFINITION OF 'PRODUCTS' SET OUT UNDER DEF INITIONS IN THE PRINCIPAL AGREEMENT IS HEREBY DELETED AND SUBSTITU TED BY THE FOLLOWING: EXISTING PRODUCTS- : SHALL MEAN YARN AND SEWING THR EAD OR ALL TYPES, WHETHER IN FINISHED OR SEMI-FINISHED FORM, BUT EXCLUDING 'CORESPUN' PRODUCTS OF ALL KINDS. ITA NO.770/MDS/2014. :- 22 -: NEW PRODUCTS:- SHALL MEAN THE 'CORESPUN' VARIETY OF SEWING THREADS , WHETHER IN FINISHED OR SEMI-FINISHED FORM TOGETHER WITH ANY NEW VARIETIES OF SEWING THREADS WHICH MAY BE ADDED BY AGREEMENT OF THE PARTIES ILL WRITING. PRODUCTS :- SHALL MEAN EXISTING PRODUCTS AND NEW PRODUCTS TOGETHER. THE PARTIES FURTHER AGREE TO RETAIN/ AMEND THE QTHE R TERMS AS FOLLOWS: 1. WITH EFFECT FROM 1 APRIL 2005 FOR A PERIOD OF 5 YEARS THE PRINCIPAL HEREBY RE-APPOINTS THE AGENT AS ITS NON-EXCLUSIVE A GENT FOR THE PROMOTION AND SALE OF PRODUCTS, BOTH EXISTING AS WE LL AS NEW, TO CUSTOMERS IN THE TERRITORY. 2. THE PRINCIPAL AGREES TO PAY TO THE AGENT COMMISS ION: A. AT ONE AND A HALF PERCENT (1 .5%)ON. THE NET INVOICE VALUE IN RESPECT OF ORDERS FOR THE EXISTING PRODUCTS PROCURE D /BOOKED DIRECTLY BY OR THROUGH THE AGENT FOR AND ON BEHALF OF THE PRINCIPAL. B. AT FIVE PERCENT (5 %) ON THE NET INVOICE VALUE IN RESPECT OF ORDERS FOR THE NEW ; PRODUCTS PROCURED/BOOKED DIREC TLY BY OR THROUGH THE AGENT FOR AND ON BEHALF OF THE PRINCIPAL. 3. THE COMMISSION AS AFORESAID SHALL BE PAID BY THE PRINCIPAL TO THE AGENT ON OR BEFORE THE END OF THE QUARTER FOLLOWING THE QUARTER IN WHICH THE PRINCIPAL RECEIVES PAYMENT AGAINST THE OR DERS BOOKED BY THE AGENT. THE PRINCIPAL WILL PROVIDE TO THE AGENT A QUARTERLY STATEMENT OF COMMISSION DUE TO THE AGENT (SUCH STAT EMENT TO BE PROVIDED NOT LATER THAN THE END OF THE MONTH FOLLOW ING THE RELEVANT QUARTER) AND THE AGENT MAY (SUBJECT TO REASONABLE N OTICE) INSPECT THE PRINCIPAL'S ACCOUNTING RECORDS TO VERIFY SUCH S TATEMENT AND THE COMMISSION DUE TO IT. THE AGENT SHALL SUPPLY AN INV OICE FORTHWITH IN RESPECT 01' SUCH QUARTERLY COMMISSION PAID. WHAT THE ASSESSEE WAS BOUND TO PAY WAS COMMISSION B ASED ON NET INVOICE VALUE. WHAT THE AGENT WAS SUPPOSED TO DO W AS PROMOTE THE SALE OF THE ASSESSEE. FINDING OF THE LD. TPO IS TH AT NO SUCH SERVICES ITA NO.770/MDS/2014. :- 23 -: WERE RENDERED BY THE TCA TO THE ASSESSEE. IT IS NO T DISPUTED THAT INVOICES WERE RAISED BY THE TCA ON THE ASSESSEE, BA SED ON THE NET VALUE OF THE ORDER. IT IS ALSO NOT DISPUTED THAT SU PPLIES WERE MADE BY THE ASSESSEE ONLY TO ITS GROUP CONCERNS. THE QU ESTION THAT IS TO BE ADDRESSED IS WHETHER TCA HAD PROCURED THE ORDERS FO R THE ASSESSEE AS ITS AGENT. LD. ASSESSING OFFICER HAD GIVEN A CLEAR FINDING THAT NO SERVICES IN THE NATURE OF PROCUREMENT OF ANY ORDERS WERE DISCERNABLE FROM THE E-MAIL CORRESPONDENCE BETWEEN THE ASSESSEE AND M/S. TCA. ARGUMENT OF THE ASSESSEE BEFORE LD. TPO AND LD. DRP WAS THAT PRIMARY ROLE OF M/S. TCA WS TO INDENTIFY THE REQUIREMENTS O F THE ASSESSEE AND GET ORDERS. HOWEVER, NO EVIDENCE WHATSOEVER WAS PRODUCED BY THE ASSESSEE IN SUPPORT OF THIS CONTENTION. IT WAS FOR THE ASSESSEE TO SHOW THE SERVICES IT HAD RECEIVED FROM M/S. TCA. W HEN THE SUPPLIES WERE ALL TO GROUP CONCERNS, WE CANNOT FATHOM WHAT MARKETING SERVICES COULD HAVE BEEN DONE BY M/S. TCA. NO DOU BT, HONBLE DELHI HIGH COURT IN THE CASE OF M/S. EKL APPLIANCES LTD (SUPRA ) HAD HELD THAT LEGITIMATE BUSINESS NEEDS OF THE ASSESSEE SHO ULD BE UNDERSTOOD FROM THE POINT OF A PRUDENT BUSINESSMAN AND IT WAS NOT FOR THE ASSESSING OFFICER TO DICTATE WHAT THE BUSINESS NEED S. THERE CAN BE NO QUARREL ON THIS VIEW TAKEN BY THE HONBLE DELHI HIGH COURT. NOR CAN THERE BE ANY QUARREL ON THE VIEW TAKEN BY THE SAME COURT THAT LD. TPO SHOULD NOT QUESTION HOW TO CONDUCT THE BUSINESS. THESE JUDGMENTS ITA NO.770/MDS/2014. :- 24 -: CANNOT IN OUR OPINION BE EXTRA-POLATED TO MEAN THA T THERE RESTED NO ONUS ON THE ASSESSEE, TO SHOW THE BUSINESS PURPOSE FOR WHICH PAYMENTS WERE EFFECTED BY IT. COMMERCIAL NECESSITY OF A PAYMENT IS SOMETHING WHICH IS WELL WITHIN THE POWER OF AN ASS ESSEE TO DECIDE CONSIDERING ITS BUSINESS INTEREST. HOWEVER, IT CAN NOT SAY THAT SUCH COMMERCIAL NECESSITY OR EXPEDIENCY HAS TO BE PRESUM ED. ASSESSEE WAS BOUND TO SHOW THE AGENCY SERVICES RENDERED BY M /S. TCA WHICH IT FAILED TO DO. MERE RAISING OF BILLS CANNOT GIV E RISE TO PRESUMPTION OF RENDERING ANY SERVICES. AS ALREADY NOTED BY US THE ORDERS ON WHICH COMMISSION WAS PAID WAS ONLY ON ITEMS SOLD TO GROUP CONCERNS AND NOT TO ANY THIRD PARTIES. THERE IS MUCH STRENGTH I N THE ARGUMENT OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT IN SUCH A SITUATION ONUS OF THE ASSESSEE WAS MUCH MORE THAN IN A SCENARIO WHERE ORDERS ON WHICH COMMISSION WAS RECEIVED WERE ON SUPPLIES TO THIRD PARTIES. ASSESSEE HAD FAILED TO DISCHARGE THIS. CONSOLIDAT ION OF FRAGMENTED ORDERS COULD HAVE BEEN DONE BY THE ASSESSEE ITSELF AND DID NOT REQUIRE SERVICES OF AN ASSOCIATED ENTERPRISE OR KNO WLEDGE OF ANY SUBLIMS STALLS. WHEN ASSESSEE WAS UNABLE TO BRING ON RECORD ANYTHING TO SHOW FOR WHAT REASON AGENCY COMMISSION WAS PAID , IN OUR OPINION THERE AROSE AN EXCEPTIONAL CIRCUMSTANCE WHERE BY ARMS LENGTH PRICE COULD BE TAKEN AS NIL. AS FOR DECISION OF THE DELH I BENCH OF THE TRIBUNAL IN THE CASE M/S. MCCANN ERICKSON INDIA (P) LTD (SUPRA) ITA NO.770/MDS/2014. :- 25 -: STRONGLY RELIED BY THE LD. AUTHORISED REPRESENTATIV E, ASSESSEE THEREIN WAS ABLE TO DEMONSTRATE THE TYPE OF SERVICES, DESC RIPTION OF SERVICE AND BENEFITS RECEIVED BY THE IT FROM ITS ASSOCIATE D ENTERPRISE. FURTHER, THE PAYMENT WAS NOT AGENCY COMMISSION BUT MANAGEMENT COMMISSION FEES. IN THE HOST OF OTHER JUDICIAL DEC ISIONS RELIED BY THE LD. AUTHORISED REPRESENTATIVE ALSO THE QUESTION D EALT WAS ON THE MANAGEMENT FEES AND NOT ON AGENCY COMMISSION. IN TH ESE CIRCUMSTANCES, WE DO NOT FIND ANY REASON TO INTERFE RE WITH THE ORDERS OF THE LOWER AUTHORITIES. GROUND NO.3 STANDS DISMIS SED. 22. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON WEDNESDAY, THE 16TH DAY OF N OVEMBER, 2016, AT CHENNAI. SD/- SD/- ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( !' . #$#% ) (ABRAHAM P. GEORGE) & / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 16TH NOVEMBER, 2016 KV &' ()*) / COPY TO: 1 . / APPELLANT 3. +,' / CIT(A) 5. )-. / / DR 2. / RESPONDENT 4. + / CIT 6. .01 / GF