EMERSON PROCESS MANAGEMENT (INDIA), MUMBAI V. ADDL CIT RG 3(1, MUMBAI

ITA 8118/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54860 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 19-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 24-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: K RAVIKARAN; JAY KUMAR VIJAY SHANKAR
• Keywords: Business income; Transfer pricing; International transaction; Additional evidence; Fair market value; Bad and doubtful debts
• Section: 92C; 143(3); 10B; 92

Judgement Text

ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 1 OF 21 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI E BENCH, MUMBAI [CORAM : PRAMOD KUMAR AM AND V DURGA RAO, JM] ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006-07 EMERSONS PROCESS MANAGEMENT INDIA PVT LTD ...APPELLANT DELPHI B WING, 601 AND 602 CENTRAL AVENUE HIRANANDANI BUSINESS PARK POWAI, MUMBAI 400 076 [PAN : AAACF1167F] VS. ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 3(1), MUMBAI RESPONDENT APPEARANCES: ARVIND SONDE, WITH ALOK SARDA, FOR THE ASSESSEE JAY KUMAR, VIJAY SHANKAR AND K RAVIKARAN, FOR THE REVENUE DATE OF HEARING: MAY 19 , 2011 DATE OF PRONOUNCEMENT: AUGUST 12 , 2011. O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSEE APPELLANT HA S CALLED INTO QUESTION CORRECTNESS OF ORDER DATED 20 TH SEPTEMBER 2010, PASSED IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2006-07. AS THE ASSESSMENT HAS BEEN MADE AFTER ASSESSEES OBJECTION TO THE DRAFT ASSESSMENT HAVING BEEN EXAMINED BY THE DISPUT E RESOLUTION PANEL, THIS IS A DIRECT APPEAL TO THE TRIBUNAL AGAINST THE ASSESSMEN T SO MADE BY THE ASSESSING OFFICER. ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 2 OF 21 2. IN THE FIRST GROUND OF APPEAL, THE ASSESSEE IS A GGRIEVED OF THE ASSESSING OFFICER DISALLOWING A CLAIM OF DEDUCTION OF RS 25, 47,394 O N ACCOUNT OF WRITING OFF THE OBSOLETE INVENTORY. 3. BRIEFLY STATED, THE RELEVANT MATERIAL FACTS ARE LIKE THIS. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTIC ED THAT THE ASSESSEE HAS WRITTEN OFF OBSOLETE INVENTORY AMOUNTING TO RS. 25,47,394, AND CLAIMED DEDUCTION, IN COMPUTATION OF BUSINESS INCOME, IN RESPECT OF THIS WRITE OFF. IN RESPONSE TO ASSESSING OFFICERS REQUISITION FOR THE NATURE AND DETAILS OF THIS WRITE OFF, IT WAS SUBMITTED BY THE ASSESSEE THAT, IN ACCORDANCE WITH THE ACCOUNTING POLICY REGULARLY FOLLOWED BY THE ASSESSEE, THE ASSESSEE REGULARLY ID ENTIFIES AND WRITES OFF OBSOLETE INVENTORY. THE ITEMS SO IDENTIFIED INCLUDE THE INV ENTORY ITEMS WHICH ARE LYING IN STOCK FOR MORE THAN TWO YEARS, INVENTORY ITEMS WHIC H HAVE NO PROBABLE OR FORECASTED USE AND OBSOLESCENCE ARISING OUT OF TECHNOLOGICAL CHANGES. THE LIST OF ITEMS TO BE SO WRITTEN OFF, ACCORDING TO THE ASSESSEE, ARE PREPARE D FOR EACH DIVISION AS ON A DATE AND FINALLY APPROVED BY THE DIVISIONAL CHIEF FINANCIAL OFFICER. IT WAS ALSO SUBMITTED BY THE ASSESSEE THAT THESE OBSOLETE INVENTORY ITEMS ARE KE PT SEPARATELY FOR DISPOSAL, AND, AFTER NECESSARY INTERNAL APPROVALS, DESTROYED OR SO LD AS SCRAP MATERIAL. IT WAS ALSO SUBMITTED THAT THE SALE PROCEEDS AS SCRAP MATERIAL IS ACCOUNTED FOR AS AND WHEN THE SAME IS REALIZED. THE ASSESSING OFFICER WAS NOT IMP RESSED BY ANY OF THESE SUBMISSIONS. HE WAS OF THE VIEW THAT THE ASSESSEE H AS FAILED TO ESTABLISH THAT ALL THESE ITEMS, WHICH HAVE BEEN CLASSIFIED AS OBSOLETE STOCK, WERE SLOW MOVING DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2006-07 AND THAT ADMITTEDLY THE VALUE OF THESE ITEMS IS NOT INCLUDED IN THE VALUE OF CLOSIN G STOCK. THE ASSESSING OFFICER ALSO REFERRED TO HONBLE BOMBAY HIGH COURTS JUDGMENT IN THE CASE OF CIT VS HEREDILLA CHEMICALS LIMITED (225 ITR 532) WHEREIN, ACCORDING TO THE ASSESSING OFFICER, IT HAS BEEN HELD THAT THE MERE WRITE OFF OF AN ASSET IS NO T SUFFICIENT TO CLAIM THE DEDUCTION, AND THE DEDUCTION CAN ONLY BE CLAIMED IN THE YEAR I N WHICH THE ASSET IS ACTUALLY SOLD OFF. THE ASSESSING OFFICER FINALLY CONCLUDED THAT THE FACT REMAINS THAT THE VALUE OF ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 3 OF 21 THESE SO CALLED INVENTORIES IS NOT INCLUDED IN THE CLOSING STOCK. THE OBJECTION RAISED BY THE ASSESSEE BEFORE THE DISPUTE RESOLUTION PANEL WAS , RELYING UPON THE CIT(A)S ORDER FOR THE IMMEDIATELY PRECEDING YEAR, WAS SUMMA RILY REJECTED. THE ASSESSEE IS AGGRIEVED OF THE DISALLOWANCE SO MADE BY THE ASSESS ING OFFICER AND IS IN APPEAL BEFORE US. 4. HAVING CONSIDERED THE RIVAL CONTENTION AND HAVIN G PERUSAL THE MATERIAL ON RECORD, WE ARE INCLINED TO UPHOLD THE GRIEVANCE OF THE ASSESSEE. IT IS ONLY ELEMENTARY, AND AS HAS BEEN RECOGNIZED BY HONBLE SUPREME COURT S LANDMARK JUDGMENT IN THE CASE OF CHAINRUP SAMPATRAM VS CIT (24 ITR 481), AN ANTICIPATED LOSS WITH REGARD TO THE VALUE OF STOCK IS TO BE PROVIDED FOR BY ADOPTIN G THE VALUE OF STOCK AT THE MARKET PRICE, WHEN THE SAME IS LOWER THAN THE COST PRICE. THEIR LORDSHIPS NOTED THAT WHILE ANTICIPATED LOSS IS THUS TAKEN INTO ACCOUNT, ANTICI PATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUG HT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASED PROFIT BEFORE I TS ACTUAL REALISATION. THIS PRINCIPLE, WHICH IS ALSO REFLECTED BY ACCOUNTING TH EORY OF CONSERVATISM, JUSTIFIES TAKING INTO ACCOUNT ALL REASONABLY ANTICIPATED LOSS ES WHILE COMPUTING THE BUSINESS PROFITS. IN THE CASE BEFORE US, THE ITEMS OF STOC K ARE NOT MOVING FOR A PERIOD OF MORE THAN TWO YEARS, OR THE ITEMS HAVE BEEN FOUND TO BE USELESS OR OBSOLETE BY A SOUND INTERNAL CONTROL MECHANISM. THE SAME PARAMETERS FOR IDENTIFICATION AND WRITE OFF OF OBSOLETE STOCKS HAVE BEEN USED FROM YEAR TO YEAR, A ND REVENUE AUTHORITIES DONOT EVEN QUESTION BONAFIDES OF THESE PARAMETERS. EVEN I N THE PRESENT YEAR, THE OBJECTIVITY OR BONAFIDES OF THIS MECHANISM HAVE NOT BEEN CALLED INTO QUESTION BY THE REVENUE AUTHORITIES. AS WE FIND FROM THE ADMITTED FACTS ON RECORD, THE ISSUE REALLY BEFORE US IS WHETHER THE ASSESSEE WAS JUSTIFIED IN NOT INCLUDING THE VALUE OF THE SLOW MOVING INVENTORY, SO WRITTEN OFF, IN THE CLOSING STOCK. IT IS ONLY ELEMENTARY THAT CLOSING STOCK IS TO BE VALUED AT THE COST PRICE OR MARKET PRICE WH ICHEVER IS LESS. HOWEVER, IN THE PRESENT CASE AND PARTICULARLY BEARING IN MIND THE F ACT THAT IN THE PRESENT CASE THE INVENTORY ITEMS SO EXCLUDED FROM CLOSING STOCK ARE THE ITEMS WHICH HAVE NOT BEEN MOVING IN STOCK FOR OVER TWO YEARS, WHICH HAVE NO L IKELY USE AND WHICH HAVE BEEN ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 4 OF 21 APPROVED, THROUGH A SOUND INTERNAL CONTROL MECHANIS M, FOR BEING DISCARDED, BY WAY OF DESTRUCTION OR SALE AS SCRAP, WE SEE JUSTIFICATI ON IN ADOPTING MARKET VALUE OF THESE ITEMS AS NIL. IN EFFECT, EVEN AS IT IS TERMED AS W RITE OFF OF OBSOLETE STOCK, IT IS ADOPTING NIL VALUE IN RESPECT OF MARKET VALUE OF THE ITEMS O F OBSOLETE STOCK. WE HAVE ALSO NOTED THAT THIS IS A CONSISTENT POLICY FOLLOWED BY THE AS SESSEE, AND IT HAS BEEN ACCEPTED, RIGHTLY SO, BY THE REVENUE AUTHORITIES ALL ALONG. 5. THE OBJECTION OF THE ASSESSING OFFICER MAINLY R ESTS ON HIS RELIANCE ON HONBLE BOMBAY HIGH COURTS JUDGMENT IN THE CASE OF HEREDIL LA CHEMICALS (SUPRA). THAT, HOWEVER, WAS A CASE IN WHICH ASSESSEE HAD WRITTEN O FF A PAN CATALYST BUT THERE WAS NO PARTICULAR JUSTIFICATION EVEN FOR THE WRITE OFF IN THAT PARTICULAR YEAR. THEIR LORDSHIPS HAVE OBSERVED THAT, IT IS THE CASE OF TH E ASSESSEE THAT OVER THE COURSE OF YEARS THE PRODUCTION PROCESS OF THE CHEMICAL WAS CH ANGED WHEREBY THE CATALYST PLANT WAS RENDERED SUPERFLUOUS AND AS A RESULT THER EOF, THE PAN CATALYST BECAME OBSOLETE AND THAT MOREOVER, THE PRODUCTION PROCES S OF CHEMICAL IN THE FACTORY OF THE ASSESSEE DID NOT UNDERGO THE CHANGE IN THE YEAR UNDER CONSIDERATION. ADMITTEDLY AS SET OUT IN PARA 8 OF THE STATEMENT OF THE CASE, THE PRODUCTION PROCESS HAD BEEN CHANGED OVER THE COURSE OF THE YEARS. IN S UCH A SITUATION THE ASSESSEE CANNOT CLAIM DEDUCTION FOR THE COST OF THE PAN CATA LYST IN ANY YEAR HE LIKES. THERE WAS THUS NO GOOD REASON AS TO WHY THE DEDUCTION WAS CLAIMED OR WRITE OFF WAS MADE IN THAT PARTICULAR YEAR. IT WAS IN THIS BACKDROP T HAT THEIR LORDSHIPS OBSERVED THAT MERELY BY WRITING OFF THE VALUE THEREOF, THE ASSES SEE IS NOT ENTITLED TO CLAIM DEDUCTION IN THE YEAR IN WHICH HE HAD WRITTEN OFF T HE SAME. THERE MUST BE SOMETHING POSITIVE TO SHOW THAT ITS VALUE BECAME NI L IN THE PARTICULAR YEAR TO JUSTIFY THE CLAIM FOR DEDUCTION IN THAT YEAR.. ONE MUST, HOWEVER, BEAR IN MIND THE FACT THAT THE OBSERVATIONS MADE BY THE JUDGES MUST BE CONSIDE RED IN THE LIGHT OF THE FACTS WHICH WERE BEFORE THEM; THESE ARE NOT WORDS OF THE STATUTE. HONBLE SUPREME COURT HAS, IN THE CASE OF CIT VS SUN ENGINEERING PVT LTD (198 ITR 297), BEAUTIFULLY SUMMED UP THE RIGHT APPROACH TO SUCH SITUATIONS BY LAYING DOWN THE PRINCIPLES LIKE THIS : ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 5 OF 21 IT IS NEITHER DESIRABLE NOR PERMISSIBLE TO PICK OU T A WORD OR A SENTENCE FROM THE JUDGMENT OF THIS COURT, DIVORCED FROM THE CONTE XT OF THE QUESTION UNDER CONSIDERATION AND TREAT IT TO BE THE COMPLETE 'LAW' DECLARED BY THIS COURT. THE JUDGMENT MUST BE READ AS A WHOLE AND THE OBSERVATIO NS FROM THE JUDGMENT HAVE TO BE CONSIDERED IN THE LIGHT OF THE QUESTIONS WHICH WERE BEFORE THIS COURT. A DECISION OF THIS COURT TAKES ITS COLOUR FR OM THE QUESTIONS INVOLVED IN THE CASE IN WHICH IT IS RENDERED AND, WHILE APPLYIN G THE DECISION TO A LATER CASE, THE COURTS MUST CAREFULLY TRY TO ASCERTAIN THE TRUE PRINCIPLE LAID DOWN BY THE DECISION OF THIS COURT AND NOT TO PICK OUT WORDS OR SENTENCES FROM THE JUDGMENT, DIVORCED FROM THE CONTEXT OF THE QUESTION S UNDER CONSIDERATION BY THIS COURT, TO SUPPORT THEIR REASONING. 6. IN THE LIGHT OF THE ABOVE OBSERVATIONS, WE DONOT THINK THAT OBSERVATIONS MADE BY HONBLE BOMBAY HIGH COURT IN THE CASE OF HEREDIL LA (SUPRA), WHICH WERE DEALING WITH A SITUATION IN WHICH THE YEAR IN WHICH THE MAC HINE HAD BECOME OBSOLETE COULD NOT BE IDENTIFIED ON THE BASIS OF ANY OBJECTIVE CRI TERION AND IN WHICH ASSESSEE HAD NO JUSTIFICATION FOR WRITE OFF OF THE OBSOLETE MACHINE IN THAT PARTICULAR YEAR, WOULD APPLY TO THE FACT SITUATION THAT WE ARE NOW IN SEISIN OF . IN A LATER JUDGMENT, HONBLE BOMBAY HIGH COURT, IN THE CASE OF ALFA LAVAL INDIA LTD VS DCIT (186 ITR 390) [WHICH HAS BEEN APPROVED BY HONBLE SUPREME COURT IN THE JUDGMENT RE PORTED AS CIT VS ALFA LAVAL INDIA LTD (295 ITR 451)] , UPHELD THE ASSESSEES CLAIM OF WRITE OFF OF 90% O F SLOW MOVING STOCK IN AN EARLIER THAN THE YEAR IN WHICH SUCH OBS OLETE STOCK WAS ACTUALLY SOLD. THIS WRITE OFF WAS ALLOWED ON THE BASIS OF AUDITORS CER TIFICATION WHICH WAS NOT CHALLENGED BY THE ASSESSING OFFICER. THIS JUDGMENT THUS CLEARL Y INDICATE THAT THE OBSERVATION MADE BY HONBLE BOMBAY HIGH COURT JUDGMENT IN THE CASE OF HEREDILLA (SUPRA), TO THE EFFECT THAT DEDUCTION IS TO BE ALLOWED IN THE YEAR IN WHICH ASSET IS ACTUALLY SOLD, IS NOT OF UNIVERSAL APPLICATION. IT WOULD, IN OUR HUMBLE U NDERSTANDING, ONLY APPLY IN A SITUATION IN WHICH THERE IS NO SPECIFIC AND ACCEPTA BLE EXPLANATION FOR WRITE OFF FOR A PARTICULAR YEAR. IN ANY EVENT, WE HAVE TO READ THE SE JUDGMENTS IN A HARMONIOUS MANNER, AND THAT IS WHAT A HARMONIOUS READING LEADS US TO. LETS NOT FORGET THAT RIGHT ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 6 OF 21 NOW WE ARE DEALING WITH A CASE IN WHICH WRITE OFF I S JUSTIFIED ON THE BASIS OF APPLICATION OF A UNIFORM CRITERION WHICH HAS BEEN A PPLIED CONSISTENTLY OVER THE YEARS, IS DONE IN AN OBJECTIVE MANNER AND THE BONAF IDES OF THE MANNER OF PROVISIONING IS NOT CALLED INTO QUESTION AND THE SA ME HAS NOT BEEN OBJECTED TO BY THE REVENUE AUTHORITIES. THAT LEAVES US WITH ONLY TH E OBJECTION THAT SCRAP VALUE REALIZED IN THE CASE OF OBSOLETE STOCK HAS NOT BEEN ACCOUNTE D FOR IN THE YEAR OF WRITE OFF, OR, IN OTHER WORDS, WRITE OFF IS CLAIMED ON GROSS BASIS AN D NOT NET BASIS. THERE IS NOT MUCH MERIT IN THIS OBJECTION EITHER. IN MANY OF THE CAS ES, AS IS SUBMITTED BY THE ASSESSEE- AND NOT DISPUTED BY THE ASSESSING OFFICER, THE OBSO LETE INVENTORY IS TO BE DESTROYED AS SELLING THE SAME EVEN AS SCRAP WILL ADVERSELY AFFEC T THE COMMERCIAL INTERESTS, AND THE VALUE REALIZED THUS MAY NOT BE SIGNIFICANT AT ALL, OR BE EVEN NEGATIVE VALUE. ONE OF THE FUNDAMENTAL ACCOUNTING PRINCIPLE IS OF MATERIALITY, AND UNLESS THE SCRAP VALUE IS MATERIAL ENOUGH, IT IS NOT REALLY NECESSARY TO ACCO UNT FOR THE SAME WHILE ACCOUNTING FOR WRITE OFF OF THE ASSET. IN ANY EVENT, THESE REA LIZATIONS HAVE BEEN ACCOUNTED FOR IN THE YEAR OF RECEIPT, AND IT IS NOBODYS CASE THAT S UCH REALIZATION VALUES COULD BE REASONABLY ESTIMATED OR WERE MATERIAL ENOUGH. IN VI EW OF THESE DISCUSSIONS, AND BEARING IN MIND ENTIRETY OF THE CASE AND PARTICULAR LY PAST HISTORY OF THE CASE, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE OF RS 25,47,394. THE ASSESSE E GETS THE RELIEF ACCORDINGLY. 7. GROUND NO. 1 IS THUS ALLOWED. 8. GROUND NO. 2 IS BASICALLY AN ALTERNATIVE GROUND OF THE ASSESSEE, WHICH WOULD HAVE BEEN RELEVANT ONLY IN THE EVENT OF FIRST GROUN D OF APPEAL HAVING BEEN DISMISSED. HOWEVER, AS GROUND NO. 1 IS ALLOWED, THIS GRIEVANCE OF THE ASSESSEE IS RENDERED ACADEMIC AND INFRUCTUOUS. WE, THEREFORE, SEE NO NEE D TO DEAL WITH THIS GRIEVANCE. 9. GROUND NO. 2 IS THUS DISMISSED AS INFRUCTUOUS. 10. IN GROUND NO. 3, THE ASSESSEE HAS RAISED A GRI EVANCE AGAINST THE ARMS LENGTH PRICE ADJUSTMENT OF RS 6,25,82,5634 MADE TO THE INC OME OF THE ASSESSEE. THERE ARE ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 7 OF 21 SEVERAL SUB GROUNDS TO THIS GROUND OF APPEAL, BUT S INCE ALL THESE SUB GROUNDS OF APPEAL ARE PRIMARILY ARGUMENTS IN SUPPORT OF THE MA IN GRIEVANCE AGAINST THE ALP ADJUSTMENT, WE TAKE ALL THESE GROUNDS OF APPEAL TOG ETHER. 11. LEARNED COUNSEL HAS RAISED AN OBJECTION, WHICH HE TERMS AS PRELIMINARY OBJECTION, CALLING INTO QUESTION VALIDITY OF REFERE NCE MADE BY THE ASSESSING OFFICER TO THE TRANSFER PRICING OFFICER. IT IS HIS CONTENTION THAT, IN VIEW OF HONBLE DELHI HIGH COURTS JUDGMENT IN THE CASE OF SONY INDIA PVT LTD VS UNION OF INDIA (288 ITR 52) READ WITH THE PROVISIONS OF LAW AS THEY STOOD AT TH E RELEVANT POINT OF TIME, THE ASSESSING OFFICER COULD NOT HAVE MADE A REFERENCE T O THE TRANSFER PRICING OFFICER, WITHOUT GIVING AN OPPORTUNITY OF HEARING TO THE ASS ESSEE. HE SUBMITS THAT SINCE THE ASSESSING OFFICER HAD ANY NOT GIVEN ANY OPPORTUNITY OF HEARING TO THE ASSESSEE, BEFORE HE MADE THE REFERENCE TO THE TRANSFER PRICIN G OFFICER, THE VERY EXERCISE OF DETERMINATION OF ARMS LENGTH PRICE BY THE TRANSFER PRICING OFFICER IS DEVOID OF JURISDICTION AND, AS SUCH, NON EST. ELABORATING UPON HIS OBJECTION, LEARNED COUNSEL INVITES OUR ATTENTION TO THE INTERPLAY BETWEEN SECT ION 92 C(3) AND 92 CA (1) OF THE INCOME TAX ACT. IT IS SUBMITTED THAT WHILE THE ASSE SSING OFFICER HIMSELF CAN DETERMINE THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION, AS ENVISAGED UNDER SECTION 92C(3), THE ASSESSING OFFICER CAN ALSO, WHE N HE CONSIDERS IT EXPEDIENT OR EXPEDIENT SO TO DO , WITH THE PREVIOUS APPROVAL OF HIS COMMISSIONER, REFER TO THE COMPUTATION OF ARMS LENGTH PRICE OF INTERNATIONAL T RANSACTION TO THE TRANSFER PRICING OFFICER. HE SUBMITS THAT ONCE HE REFERS THE DETERMI NATION OF THE ARMS LENGTH PRICE THE TRANSFER PRICING OFFICER, THE RESULTANT DETERMINATI ON OF ALP BY THE TRANSFER PRICING OFFICER IS BINDING ON THE ASSESSING OFFICER SINCE, IN VIEW OF THE PROVISIONS OF SECTION 92 CA (4)- AS THEY STAND AMENDED WITH EFFECT FROM 1 ST JUNE 2007 BY THE FINANCE ACT 2007. HE INVITES OUR ATTENTION TO THE FACT THAT PRI OR TO THIS AMENDMENT IN SECTION 92 CA(4), THE ASSESSING OFFICER WAS TO COMPUTE TOTAL I NCOME OF THE ASSESSEE HAVING REGARD TO THE DETERMINATION OF ALP IN THE ORDER PA SSED BY THE TRANSFER PRICING OFFICER UNDER SECTION 92CA(3), BUT, POST THIS AMEND MENT, THE ASSESSING OFFICER WAS TO COMPUTE TOTAL INCOME OF THE ASSESSEE IN CONFORM ITY WITH THE ALP DETERMINED IN ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 8 OF 21 THE ORDER PASSED BY THE TRANSFER PRICING OFFICER UN DER SECTION 92CA(3). THE PARADIGM SHIFT IN THE AMENDMENT IS THAT WHAT WAS EA RLIER SEEN AS ONE OF THE INPUTS FOR DETERMINATION OF ALP BY THE ASSESSING OFFICER I NASMUCH AS THE ASSESSING OFFICER HAD THE DISCRETION TO ACCEPT OR NOT TO ACCEPT THE T RANSFER PRICING OFFICERS ORDER, POST AMENDMENT THE ASSESSING OFFICER HAS NO CHOICE IN TH E MATTER AND HE IS TO DETERMINE THE ALP ON THE BASIS OF THE ORDER OF THE TRANSFER P RICING OFFICER. HAVING EXPLAINED THE AMENDMENT IN THE SCHEME OF SECTION 92CA(3), LEARNED COUNSEL TAKES US THROUGH THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF SONY INDIA (SUPRA) WITH A VIEW TO HIGHLIGHT THAT WHAT PREVAILED UPON THEIR LORDSHIPS IN UPHOLDING THE CBDT INSTRUCTIONS DIRECTING ALL INTERNATIONAL TRANSACTIO NS BEYOND A PARTICULAR THRESHOLD MONETARY LIMIT WAS THAT , AT THE STAGE OF MAKING A REFERENCE TO THE TRANSFER PRICING OFFICER, A PRIMA FACIE VIEW OF THE ASSESSING OFFICE R IS SUFFICIENT, SINCE HE WILL ANYWAY ANOTHER OPPORTUNITY WHEN HE CAN FORM A CONSIDERED V IEW AS TO WHETHER TO ACCEPT THE ORDER PASSED BY THE TRANSFER PRICING OFFICER, OR NO T. LEARNED COUNSEL SUBMITS THAT, IN VIEW OF THE AMENDMENT IN LAW AND HAVING REGARD TO T HE FACT THAT THE ORDER PASSED BY THE TRANSFER PRICING OFFICER BINDS THE ASSESSING OF FICER, IT IS NOW INCUMBENT UPON THE ASSESSING OFFICER TO FORM A CONSIDERED OPINION ON W HETHER TO MAKE THE REFERENCE TO THE TRANSFER PRICING OFFICER UNDER SECTION 92 CA(1) , OR TO DETERMINE ALP ON HIS OWN UNDER SECTION 92C(3), AND SINCE THE ASSESSING OFFIC ER HAS NOT CONDUCTED THIS EXERCISE, THE VERY REFERENCE MADE BY THE ASSESSING OFFICER IS LEGALLY INVALID. LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, STR ONGLY OPPOSES THESE SUBMISSIONS. HE SUBMITS THAT THE ASSESSEE HAS NOT CHALLENGED THE VALIDITY OF REFERENCE TO THE TRANSFER PRICING OFFICER, EITHER B EFORE THE ASSESSING OFFICER OR EVEN BEFORE THE DISPUTE RESOLUTION PANEL, AND THAT THERE IS NO SPECIFIC GROUND OF APPEAL CHALLENGING THE REFERENCE. HE FURTHER SUBMITS THAT THIS REFERENCE IS IN NO WAY PREJUDICIAL TO THE INTERESTS OF THE ASSESSEE, AS TH E ASSESSEE WAS ENTITLED TO PROPER HEARING BY THE TRANSFER PRICING OFFICER AS WELL. IT IS ALSO POINTED OUT THAT SINCE THE ASSESSEE FULLY PARTICIPATED IN THE PROCEEDINGS BEFO RE THE TPO, IT IS NO LONGER OPEN TO HIM TO QUESTION THE SAME. IT IS FURTHER SUBMITTED T HAT THE ASSESSING OFFICER CAN NEVER FORM A CONSIDERED VIEW SINCE TRANSFER PRICING IS A HIGHLY SPECIALIZED AND TECHNICAL SUBJECT, AND ALL THAT THE TRANSFER PRICING REPORT A CCOMPANYING THE INCOME TAX RETURN ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 9 OF 21 HAS IS SOME BASIC DATA WHICH, BY ITSELF, CANNOT LE AD TO ANY CONSIDERED OPINIONS BEING DRAWN. LEARNED DEPARTMENTAL REPRESENTATIVE THEN SUB MITS THAT THE SCOPE OF SECTION 92 C(3) AND 92CA(3) IS MUTUALLY EXCLUSIVE AND QUANT ITATIVELY DIFFERENT, BUT WHICHEVER BE THE COURSE FOLLOWED, IT DOES NOT ADVERSELY AFFEC T THE ASSESSEE INASMUCH AS THE ASSESSEE GETS A FULL OPPORTUNITY OF HEARING BEFORE THE ALP IS DETERMINED. LEARNED DEPARTMENTAL REPRESENTATIVE THEN POINTS OUT THAT HO NBLE DELHI HIGH COURTS JUDGMENT IN THE CASE OF SONY INDIA (SUPRA) WAS IN A WRIT JURISDICTION, AND THE OBSERVATIONS SO MADE IN THE JUDGMENT MUST BE CONSID ERED IN THAT LIGHT. IT WAS SUBMITTED THAT ASSESSEE IS AT LIBERTY TO APPROACH T HE HONBLE HIGH COURT IN WRIT JURISDICTION BUT IT CANNOT BE OPEN TO THE TRIBUNAL TO EXAMINE VALIDITY OF LAW IN NOT PROVIDING FOR AN OPPORTUNITY OF HEARING AT THE STAG E OF MAKING THE REFERENCE TO THE TRANSFER PRICING OFFICER. LEARNED DEPARTMENTAL REP RESENTATIVE ALSO SUBMITS THAT, IF ANYTHING, THIS JUDGMENT SUPPORTS THE CASE OF THE AS SESSING OFFICER INASMUCH AS THEIR LORDSHIPS HAVE RECOGNIZED THE CENTRAL BOARD OF DIR ECT TAX (CBDT)S POWERS OF ISSUING DIRECTIONS FOR ASSESSING OFFICER MAKING REF ERENCES TO THE TRANSFER PRICING OFFICER, AS ALSO THE CBDTS POWERS TO REVIEW THE MO NETARY THRESHOLD LIMITS FROM TIME TO TIME. IT SUBMITTED THAT THE ASSESSING OFFICER HAS MADE THE REFERENCE BY FOLLOWING THE INSTRUCTIONS WHICH ARE FULLY BINDING ON HIM UND ER SECTION 119 OF THE ACT, AND WHICH HAVE NOT BEEN HELD BY ANY JUDICIAL FORUM TO B E UNLAWFUL. LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER SUBMITS THAT THE ISSUES BEIN G RAISED BY THE ASSESSEE ARE PURELY CONSTITUTIONAL ISSUES, WHICH QUESTION CORREC TNESS OF LEGAL PROVISIONS OF THE STATUTE, AND THESE ISSUES CANNOT BE RAISED BEFORE T HIS TRIBUNAL WHICH ITSELF IS A CREATURE OF THE STATUTE. LEARNED DEPARTMENTAL REP RESENTATIVE THUS URGES US TO REJECT THIS GRIEVANCE OF THE ASSESSEE. IN REJOINDER, LEAR NED COUNSEL REITERATES HIS SUBMISSIONS AND POINTS OUT THAT THERE IS INDEED A S PECIFIC GROUND OF APPEAL COVERING THIS GRIEVANCE, AS, IN GROUND OF APPEAL NO. 3.9, TH E ASSESSEE HAS STATED THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TPO AND THE AO HAS ERRED IN PROPOSING, AND THE HONBLE DRP HAS FURTHER ERRED I N UPHOLDING / CONFIRMING THE ACTION OF THE TPO IN NOT STATING ANY REASONS TO SHO W THAT EITHER OF THE CONDITIONS MENTIONED IN CLAUSES (A) TO (D) OF SECTION 92 C(3) OF THE ACT WERE SATISFIED BEFORE MAKING AN ADJUSTMENT OF INCOME TO THE APPELLANT. IT IS FURTHER SUBMITTED THAT THE ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 10 OF 21 ASSESSING OFFICERS DECISION TO OUTSOURCE DETERMINA TION OF ALP, AS REFERENCE UNDER SECTION 92CA(1) ESSENTIALLY IMPLIES, AFFECTS LEGITI MATE INTERESTS OF THE ASSESSEE, AND THERE CANNOT BE ANY JUSTIFICATION IN DEPRIVING THE ASSESSEE OF A HEARING BEFORE SUCH A DECISION IS TAKEN, AND, IN ANY CASE, THERE HAS TO B E SOME AND MATERIAL ON RECORD THAT IT WAS CONSIDERED VIEW OF THE ASSESSING OFFICER TO DO SO. LEARNED COUNSEL THEN ONCE AGAIN TAKES US THROUGH THE PROVISIONS OF SECTION 92 C(3) AND 92 CA(1) TO SHOW QUALITATIVE DIFFERENCE BETWEEN TWO, AND SUBMITS THA T THE PROVISIONS OF SECTION 92 C(3) ARE FAIRLY RESTRICTED , AND THAT SUBJECTING TH E ASSESSEE TO MUCH WIDER AND RATHER UNFETTERED SCOPE OF SECTION 92CA(1) DOES ACT TO ASS ESSEES PREJUDICE. IT IS THEN SUBMITTED THAT THE VEILED REFERENCE TO SECTION 292 BB IS MISPLACED BECAUSE IT IS NOT MERELY A QUESTION OF WRONG SECTION AND IT AFFECTS T HE ASSESSEE IN SUBSTANTIAL MANNER. IT IS THEN SUBMITTED THAT MERELY BECAUSE THE ASSESS EE HAS PARTICIPATED IN THE PROCEEDINGS, IT CANNOT BE SAID THAT THE ASSESSEE HA S LOST HIS RIGHT TO QUESTION THE JURISDICTION. ACQUIESCENCE, ACCORDING TO THE LEARN ED COUNSEL, CANNOT VEST THE JURISDICTION , WHEN STATUE DOES NOT VEST IT. AS FO R THE HEARING BEFORE THE TRANSFER PRICING OFFICER AND THE DISPUTE RESOLUTION PANEL, L EARNED COUNSEL SUBMITS THAT THE SAME IS NOT A COMPULSORY PROCESS AND QUALITATIVELY DIFFERENT FROM THE HEARING BEFORE THE ASSESSING OFFICER. HE THEN SUBMITS THAT THE RAT IONALE OF THE JUDGMENT, AND THE LINE OF REASONING ADOPTED BY THEIR LORDSHIPS, WHICH CANN OT BE QUESTIONED BY A LOWER FORUM, SUPPORTS THE CASE OF THE ASSESSEE, AND THAT IS WHAT LEARNED COUNSEL HAS ATTEMPTED TO DEMONSTRATE IN HIS ARGUMENTS. WHETHER LAW IS LAID DOWN IN A WRIT PROCEEDINGS, OR APPELLATE PROCEEDINGS, THE LAW SO L AID DOWN IS BINDING ON THE FORUMS LOWER IN JUDICIAL HIERARCHY. WE ARE THUS ONCE AGAI N URGED TO REJECT THE VERY REFERENCE BY THE ASSESSING OFFICER TO THE TRANSFER PRICING OF FICER. 12. COMING TO THE MERITS OF THE ALP ADJUSTMENTS, TH E RELEVANT MATERIAL FACTS ARE AS FOLLOWS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING PROCESS MANAGEMENT SOLUTIONS, WITH HELP AUTOMATE, CONTROL AND MANAGE C OMPLEX PLANT PROCESSES, TO VARIOUS INDUSTRIES SUCH AS CHEMICALS, FOOD AND BEVE RAGES, HYDRO CARBONS, LIFE SCIENCES AND LIKE. FOR THE PROVISION OF SUCH SOLUTIONS, THE ASSESSEE IMPORTS ANALYTICAL, FLOW AND MEASURING INSTRUMENTS FROM ITS ASSOCIATED ENTERPRIS ES ABROAD. THE PRODUCT RANGE OF ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 11 OF 21 THE ASSESSEE INCLUDES MASS FLOW METERS, LIQUID AND GAS ANALYTICAL INSTRUMENTATION AND SYSTEMS, TEMPERATURE TRANSAMITTERS, AND LEVEL INSTR UMENTATION. THE ASSESSEE HAS MANUFACTURING FACILITIES AT THREE LOCATIONS, AND SA LES AND SERVICE OFFICES LOCATED ALL OVER INDIA. IN THE COURSE OF THE BUSINESS SO CARRIE D OUT, THE ASSESSEE HAS ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS: SR NO. NATURE OF TRANSACTION AMOUNT ALP DETERM INATION METHOD USED BY THE ASSESSEE 1. IMPORT OF RAW MATERIAL 110,04,38,208 TRANSACTI ONAL NET AND OTHER SUPPLIES MARGIN METHOD I.E. TNMM 2. EXPORT OF FINISHED GOODS 1,25,73,836 TNM M 3. IMPORT OF TESTING EQUIPMENT 1,68,21,496 TNM M 4. PAYMENT OF ROYALTY 10,23,098 TNMM 5. PROVISION FOR SUPPORT SERVICES 1,36,23,536 TNMM 6. AVAILING OF SERVICES 9,60,716 TNMM 7. RECEIPT OF COMMISSION INCOME 55,95,166 T NMM 8. REIMBURSEMENT OF EXPENSES 1,01,62,651 TNMM TOTAL 116,11,98,707 13. IN THE TRANSFER PRICING STUDY SUBMITTED BY THE ASSESSEE, THE ASSESSEE HAD IDENTIFIED 12 COMPARABLES, NAMELY ADOR POWERTON LIM ITED, AIMIL, AVTECH LIMITED, CHEMTROLS ENGINEERING LIMITED, CONTINENTAL CONTROLS LIMITED, ETHOS HAVAC SYSTEMS LIMITED, HIND RECTIFIERS, MEGATECH CONTROL LIMITED, RSB TRANSMISSION INDIA LIMITED, REMI EQUIPMENT, REMI MOTORS LIMITED AND VXL TECHNOL OGICALS. THE ASSESSEE TOOK INTO CONSIDERATION THEIR RESULTS FOR THREE YEARS, I .E. 2004, 2005 AND 2006, AND COMPUTED WEIGHTED AVERAGE OF THESE YEARS. THE MEAN FOR THE RESPECTIVE YEARS WORKED OUT TO 5.25%, 4.90% AND 7.93 %, AND THE WEIG HTED MEAN FOR THESE THREE YEARS WAS COMPUTED AT 5.34%. AFTER MAKING ADJUSTME NT FOR THE WORKING CAPITAL AND PROVISION FOR DOUBTFUL DEBTS, THE ASSESSEE COMPUTED ADJUSTED MARGIN AT 4.19% AS AGAINST ITS OWN MARGIN AT 4.82%. IN THE COURSE OF PROCEEDINGS BEFORE THE TRANSFER ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 12 OF 21 PRICING OFFICER, AS A RESULT OF REFERENCE HAVING BE EN MADE BY THE ASSESSING OFFICER TO HIM FOR DETERMINATION OF ARMS LENGTH PRICE, THE TPO TOOK OBJECTION TO MULTIPLE YEAR DATA BEING TAKEN INTO ACCOUNT FOR COMPARABILITY ANA LYSIS. THE ASSESSEES CONTENTION TO THE EFFECT THAT REFERENCE TO PAST TWO YEARS DAT A FOR THE PURPOSE OF COMPARABILITY ANALYSIS SHOULD BE AN AUTOMATIC, ADEQUATE AND SUFF ICIENT COMPLIANCE OF THE PROVISION OF RULE 10B (4) WAS REJECTED BY THE TRAN SFER PRICING OFFICER. REFERRING TO THE WORDING OF RULE 10 B(4), HE OBSERVED THAT THE DATA FOR LAST TWO YEARS PRIOR TO THE YEAR IN WHICH INTERNATIONAL TRANSACTIONS HAVE TAKEN PLACE CAN BE TAKEN INTO ACCOUNT ONLY WHEN SUCH DATA REVEAL FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF ARMS LENGTH PRICE IN RELATION TO THE TRANSACTIO N BEING COMPARED. SINCE, ACCORDING TO THE TRANSFER PRICING OFFICER, THE ASSESSEE HAS N OT DEMONSTRATED AS TO HOW THIS CONDITION IS SATISFIED, ASSESSEES RELIANCE ON MULT IPLE YEAR DATA WAS REJECTED. THE NEXT OBJECTION OF THE TRANSFER PRICING OFFICER WAS THAT WHILE THE ASSESSEE HAD HIMSELF TAKEN APLAB LIMITED, ASHCO INDUSTRIES LIMITED AND ELECON ENGINEERING CO LTD AS COMPARABLES IN THE PRECEDING ASSESSMENT YEAR, THE A SSESSEE DID NOT INCLUDE THESE CASES AS COMPARABLES IN THE CURRENT ASSESSMENT YEAR . OUT OF THESE THREE COMPANIES, ELECON ENGINEERING CO LTD WAS LATER EXCLUDED BY THE DISPUTE RESOLUTION PANEL, AND THE DISPUTE IS THUS CONFINED TO APLAB AND ASHCO. A S REGARDS THE ISSUE AS TO WHETHER OR NOT APLAB SHOULD BE INCLUDED IN THE COMPARABLES, THE STAND OF THE ASSESSEE WAS DURING THE RELEVANT YEAR, TWO OF THE SUBSIDIARIES O F APLAB LIMITED, NAMELY APLAB DISPLAY DEVICES & SYSTEMS LIMITED AND SWICON MICRO SYSTEMS LIMITED HAVE MERGED IN APLAB LIMITED, AND, THEREFORE, APLAB CAN NO LONG ER BE SAID TO BE COMPARABLE WITH THE ASSESSEE. AS REGARDS ASHCO INDUSTRIES LIMITED, THE STAND OF THE ASSESSEE WAS THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT INASMUCH AS IT IS ENGAGED IN THE BUSINESS OF FOOD TESTING LABORATORIES AND RESIDUAL ANALYSIS OF PESTICIDES INDUSTRIES WHICH IS MATERIALLY DIFFERENT FROM ASSESSEES BUSINESS. IT WAS ALSO POINTED OUT BY THE ASSESSEE THAT, AS EVIDENT FROM ANNUAL REPORT OF ASHCO, THIS COMPANY WAS ENGAGED IN A NUMBER OF TRANSACTIONS WITH ITS AES, AND, FOR THIS REASON ALSO, ITS PROFITS CAN BE TREATED AS A BENCHMARK FOR THE ASSESSEE. IT WAS FURTHER SUBMIT TED BY THE ASSESSEE THAT THE COMPANY HAS RECENTLY CHANGED ITS POLICY WITH REGARD TO BAD DEBTS, AS A RESULT OF WHICH AN EXCEPTIONAL PROVISION OF RS 2,36,90,877 HA D TO BE CREATED. IT WAS ALSO NOTED ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 13 OF 21 THAT THERE IS A MAJOR PROVISION FOR DIFFERENTIAL CH ARGES IN RESPECT OF CERTAIN DUTY CLAIMED ON RETROSPECTIVE BASIS. THE TPO AGREED TO E XCLUDE THE ITEMS, BUT FURTHER NOTED THAT MARGIN OF COMPARABLES SHALL ALSO BE ACCO RDINGLY ADJUSTED. THE ASSESSEE FURTHER ASKED FOR AN ADJUSTMENT IN RESPECT OF WORKI NG CAPITAL, WHICH TPO AGREED TO GRANT , AND WAS GRANTED AT 0.66%. THE TPO ALSO NOTE D THAT THE ASSESSEE HAS A COMMISSION INCOME OF RS 56,43,077 IN RESPECT OF DIR ECT SALES BY AES, AND EXCLUDED THE SAME. THE ASSESSEES CONTENTION THAT THE ASSESS EE HAS TO INCUR COSTS ON WARRANTY SERVICES, IN RESPECT OF THIS COMMISSION, AND IT IS THUS AN OPERATIONAL INCOME, WAS REJECTED BY THE TPO. HE WAS OF THE VIEW THAT COMMIS SION INCOME, BEING OF AN ENTIRELY DIFFERENT NATURE AND INVOLVES DIFFERENT TYPES OF FU NCTIONS AND RISKS, CANNOT BE BENCHMARKED ALONGWITH INDUSTRIAL ACTIVITY OF THE AS SESSEE. THE TPO FURTHER NOTED THAT THE ASSESSEE HAS NOT IDENTIFIED SPECIFIC COSTS INCURRED IN EARNING THIS COMMISSION INCOME, AND THUS COMMISSION INCOME WAS E XCLUDED ON GROSS BASIS. FINALLY, THE ASSESSEE CLAIM OF DEDUCTION OF 5%, UND ER PROVISO TO SECTION 92C(4), WAS REJECTED ON THE GROUND THAT WHEN VARIATION BETWEEN PRICE AT WHICH TRANSACTION HAS BEEN ENTERED INTO VIS--VIS ARMS-LENGTH PRICE COMPU TED IS MORE THAN 5%, NO SUCH DEDUCTION IS TO BE GIVEN. IT WAS ALSO CONTENDED THA T AMENDMENT IN SECTION 92C(4) MAKES IT CLEAR THAT LEGISLATIVE INTENTION WAS ONLY TO ACCEPT THE TRANSACTION VALUE WHEN IT WAS WITHIN 5% DEVIATION FROM THE COMPUTED ALP, A ND NOT THAT 5% WAS TO BE GRANTED AS A STANDARD DEDUCTION IN COMPUTING THE AR MS LENGTH PRICE. THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL BEFORE US. 14. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE A PPLICABLE LEGAL POSITION. 15. WE WILL DEAL WITH THE MERITS, RATHER THAN TECHN ICAL OBJECTION RAISED BY THE ASSESSEE, FIRST. TO BEGIN WITH, WE WILL FIRST OF AL L TAKE UP THE WORKING CAPITAL ADJUSTMENT ISSUE. WE HAVE NOTED THAT EVEN THOUGH TH E TRANSFER PRICING OFFICER HAS AGREED TO GRANT WORKING CAPITAL ADJUSTMENT, AND HAS GRANTED THE SAME AT 0.66%, THE BASIS ON WHICH THE WORKING CAPITAL ADJUSTMENT HAS B EEN WORKED OUT IS NOT AT ALL CLEAR FROM THE RECORDS. EVEN THOUGH WE PUT SPECIFIC QUEST IONS TO THE LEARNED DEPARTMENTAL ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 14 OF 21 REPRESENTATIVES, AS ALSO THE TRANSFER PRICING OFFIC ER WHO WAS ALSO BEFORE US, THERE WAS NO JUSTIFICATION WHATSOEVER FOR THIS FIGURE OF .66% AS WORKING CAPITAL ADJUSTMENT. THE COMPUTATION FOR THE WORKING CAPITAL ADJUSTMENT, AS GIVEN BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW WHICH IS ALSO PLACED BEFORE US AT PAGES 388 TO 391 OF THE PAPERBOOK, TAKES INTO ACCOUNT INVENTORY, DEBTORS AN D CREDITORS AND COMPUTES THE WORKING CAPITAL ADJUSTMENT AT 1.55%. IT APPEARS TH AT THE TPO HAS EXCLUDED THE INVENTORY FROM COMPUTATION OF WORKING CAPITAL ADJUS TMENT, BUT THERE CANNOT BE ANY JUSTIFICATION FOR DOING SO. ONCE HE AGREES IN PRINC IPLE TO MAKE AN ADJUSTMENT FOR EFFICIENCY IN WORKING CAPITAL, AS HE HAS DONE IN TH IS CASE, THERE CAN NOT BE ANY GOOD REASONS TO EXCLUDE INVENTORY FROM THE COMPUTATION F OR WORKING CAPITAL ADJUSTMENT. IN THIS VIEW OF THE MATTER, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE THAT THE WORKING CAPITAL ADJUSTMENT SHOULD HAVE BEEN TAKEN AT 1.55%, AS WAS CLAIMED BY THE ASSESSEE AND WHICH HAS NOT BEEN SPECIFICALLY REJECTED BY THE TPO, AS AGAINST 0.66% MADE BY THE TPO. 16. SECONDLY, WE HAVE NOTED THAT TWO COMPANIES, NA MELY APLAB AND ASHCO, HAVE BEEN TAKEN AS COMPARABLES- DESPITES ASSESSEES VEHE MENT OBJECTION TO THE INCLUSION OF THESE COMPANIES AS COMPARABLES. AS FAR AS ASHCO IS CONCERNED, WE FIND THAT, AS EVIDENT FROM THEIR DIRECTORS REPORT A COPY OF WHI CH IS PLACED AT PAGES 280-281 OF THE PAPERBOOK, THIS COMPANY IS ENGAGED IN THE BUSI NESS OF PROVIDING ALL TYPES OF TESTING FACILITIES FOR THE FOOD INDUSTRY AND THAT IT SPECIALIZES IN RESIDUAL ANALYSIS OF PESTICIDES ANTIBIOTICS, PCBS, PHA, SUDAN I, II AND III, ALL TYPES OF FOOD INCLUDING WATER AND SOFT DRINKS. THIS BUSINESS ACTIVITY, IN OUR HUMBLE UNDERSTANDING, IS QUALITIATIVELY DIFFERENT FROM THE BUSINESS CARRIED ON BY THE ASSES SEE, I.E. PROVIDING PROCESS MANAGEMENT SOLUTIONS, WITH HELP AUTOMATE, CONTROL A ND MANAGE COMPLEX PLANT PROCESSES AND, IN THE PROCESS, MANUFACTURE AND DEA L IN INCLUDES MASS FLOW METERS, LIQUID AND GAS ANALYTICAL INSTRUMENTATION AND SYSTE MS, TEMPERATURE TRANSAMITTERS, AND LEVEL INSTRUMENTATION. THE ASSESSEE IS, THEREF ORE, QUITE JUSTIFIED IN ITS CLAIM FOR EXCLUSION OF THIS COMPANY. THE FACT THAT THIS COMPA NY WAS INCLUDED AS ONE OF THE COMPARABLE, BY ASSESSEE HIMSELF, IN THE PRECEDING ASSESSMENT YEAR CANNOT BE PUT AGAINST THE ASSESSEE, AS WHETHER OR NOT AN COMPARAB LE IS TO BE INCLUDED MUST DEPEND ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 15 OF 21 ON ITS MERITS RATHER THAN BE SOLELY GUIDED BY THE E VENTS OF EARLIER YEAR PARTICULARLY WHEN ASSESSEE IS SUCCESSFULLY ABLE TO DEMONSTRATE T HAT THE ENTITY SOUGHT TO BE USED AS A COMPARABLE IS NOT ENGAGED IN SAME OR MATERIALLY S IMILAR BUSINESS AT LEAST IN THE PRESENT YEAR. AS FAR AS APLAB IS CONCERNED, WE HAV E NOTED THAT, AS EVIDENT FROM ITS NOTES TO ACCOUNTS FOR THE YEAR ENDED 31 ST MARCH 2006- A COPY OF WHICH WAS PLACED BEFORE US AT PAGES 276 ONWARDS OF THE PAPERBOOK, TW O COMPANIES, NAMELY APLAB DISPLAY DEVICES AND SYSTEMS LIMITED AND SWICON MICR O SYSTEMS PVT LTD, MERGED IN APLAB LIMITED IN PURSUANCE OF AMALGAMATION SCHEME D ULY APPROVED BY HONBLE BOMBAY HIGH COURT. THE RESULTS SHOWN BY APLAB LIMIT ED THUS INCLUDED THE RESULTS OF THESE TWO SUBSIDIARIES AND, TO THAT EXTENT AND AS N OTED IN NOTE NUMBER 3 TO THE NOTES ON ACCOUNTS, FIGURES OF THE CURRENT YEAR ARE NOT C OMPARABLE WITH THOSE OF THE PREVIOUS YEAR. HERE IS A CASE IN WHICH FIGURE OF A PLAB LIMITED ARE NOT COMPARABLE WITH ITS FIGURES OF THE PREVIOUS YEAR, BUT YET THE AUTHORITIES BELOW INSIST THAT THESE FIGURES SHOULD BE TAKEN INTO ACCOUNT BECAUSE THE AS SESSEE HAD INCLUDED THIS COMPARABLE IN THE PRECEDING PREVIOUS YEAR. THIS AP PROACH PROCEEDS ON THE FALLACIOUS ASSUMPTION THAT THE ACTIVITY OF THE ASSESSEE MUST E SSENTIALLY THE SAME AS IN THE PRECEDING YEAR, AND IT OVERLOOKS THE FACT THAT IN T HE RELEVANT PERIOD THE FIGURES SHOWN BY APLAB INCLUDE THE FIGURES OF TWO NEW COMPANIES. AS THESE TWO NEW COMPANIES, INCLUDING A PRIVATE COMPANY THE ACTIVITIES OF WHICH ARE NOT IN PUBLIC DOMAIN ANYWAY, HAVE MERGED IN APLAB, AND AS THERE IS NOTHING ON RE CORD TO SHOW THAT THESE TWO COMPANIES WERE ALSO ENGAGED IN THE SAME BUSINESS, T HERE CANNOT INDEED BE ANY JUSTIFICATION FOR INCLUDING THE SAME AS A COMPARABL E FOR THE PRESENT YEAR. THE INFORMATION ABOUT PRECISE BUSINESS ACTIVITIES ARE N OT IN PUBLIC DOMAIN AND, AS HELD IN THE CASE OF SKODA INDIA LTD ACIT (122 TTJ 699), THE ASSESSEE CANNOT BE EXPECTED TO GET THE DETAILS WHICH ARE NOT IN PUBLIC DOMAIN. WHE N TPO IS INSISTING FOR INCLUSION OF THIS COMPARABLE, THE ONUS IS ON HIM TO DEMONSTRATE THAT THE COMPARABLE ENTITY IS ENGAGED IN THE SAME OR MATERIALLY SIMILAR ACTIVITY. WE, THEREFORE, ALSO UPHOLD ASSESSEES GRIEVANCE AGAINST INCLUSION OF APLAB LIM ITED AS A COMPARABLE. IN EFFECT, THUS, WE HOLD THAT APLAB LIMITED AND ASHCO INDUSTRI ES LIMITED CANNOT BE INCLUDED IN THE LIST OF COMPARABLES FOR THE PURPOSES OF BENCHMA RKING FIRST, BECAUSE, TWO NEW COMPANIES HAVE MERGED INTO THIS COMPANY AND THERE I S NOTHING ON RECORD TO SHOW ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 16 OF 21 THAT THESE COMPANIES WERE ENGAGED IN THE SAME OR MA TERIALLY SIMILAR ACTIVITY; AND, SECOND, BECAUSE, THE BUSINESS ACTIVITY OF THIS COMP ANY IS SIGNIFICANTLY DIFFERENT FROM THE BUSINESS ACTIVITY OF THE ASSESSEE. 17. THIRDLY, THE COMMISSION INCOME, WHICH HAS BEEN EXCLUDED FROM THE PROFITABILITY OF THE ASSESSEE, IS NOT A PASSIVE INCOME BUT AN OP ERATIONAL INCOME ON THE FACTS OF THIS CASE. THE ASSESSEE IS THE LOCAL CONTACT POINT FOR THE AES AND IS A VIRTUAL PROJECTION FOR THE AES IN INDIA GIVING THEM VISIBILITY AND PRESENC E, IS ENGAGED IN RENDERING WARRANTY SERVICES FOR THESE DIRECT SALES ON WHICH C OMMISSION IS EARNED, AND A PART OF ITS MARKETING EFFORTS ALSO CONTRIBUTE TO THIS EARNI NG. IN THESE CIRCUMSTANCES, AND PARTICULARLY AS RELATED COSTS HAVE NOT BEEN SEGREGA TED EVEN ON ESTIMATION BASIS WHICH SUCH AN ALLOCATION ESSENTIALLY INVOLVES, WE CONSIDE R IT APPROPRIATE THAT COMMISSION INCOME ON DIRECT SALES SHOULD NOT BE EXCLUDED FROM THE PROFITABILITY OF THE ASSESSEE. ON THIS ASPECT ALSO, WE MUST UPHOLD THE GRIEVANCE O F THE ASSESSEE. 18. FOURTHLY, THE QUESTION WHETHER BENEFIT OF + 5% EVEN WHEN THE VARIATION IN VALUE OF INTERNATIONAL TRANSACTION WITH AES AND ITS ALP IS MORE THAN 5%, PRIOR TO AMENDMENT IN SECOND PROVISO TO SECTION 92 C WITH EF FECT FROM 1 ST OCTOBER 2009, THE ISSUE IS NO LONGER RES INTEGRA . IN THE CASE OF ACIT VS UE TRADE CORPORATION INDIA PVT LTD (44 SOT 457), A COORDINATE BENCH HAS TAKEN THE VIEW THAT THIS AMENDMENT IS ONLY PROSPECTIVE, AND THAT SO FAR AS PRE 1 ST OCTOBER 2009 POSITION IS CONCERNED, THE ADJUSTMENT OF 5% IS TO BE ALLOWED EVEN IN THE CASES WHERE DIFFERENCE IN VALUE OF INTERNATIONAL TRANSACTIONS AND ITS ALP IS MORE THAN 5%. WE ARE IN CONSIDERED VIEW OF THE VIEWS SO ARTICULATED BY THE COORDINATE BENCH. R ESPECTFULLY FOLLOWING THE SAME, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO GRANT A DEDUCTION OF 5% IN COMPUTATION OF ARMS LENGTH PRICE , IN ACCORDANCE WITH THE LEGAL POSITION ELABORATED UPON BY THE COORDINATE BENCH. 19. FIFTHLY, AS HAS BEEN CONSISTENTLY HELD BY THE C OORDINATE BENCHES, THE TRANSFER ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 17 OF 21 PRICING ADJUSTMENT IS TO BE MADE WITH RESPECT TO IN TERNATIONAL TRANSACTION AND NOT THE ENTIRE SALES. LEARNED DEPARTMENTAL REPRESENTATI VE DID NOT EVEN DISPUTE THIS POINT SERIOUSLY. WE, THEREFORE, DIRECT THE ASSESSING OFFI CER TO COMPUTE THE TRANSFER PRICING ADJUSTMENT IN THE LIGHT OF THIS LEGAL POSITION. 20. WE HAVE ALSO NOTED THAT THE ASSESSEES CLAIM IS THAT MARGIN IN RESPECT OF THE COMPARABLES HAS BEEN INCORRECTLY CALCULATED BY THE TRANSFER PRICING OFFICER. IN PAGE 4 OF THE POWER POINT PRESENTATION FILED BEFORE US, TH E ASSESSEE HAS FILED A CHART OF SHOWING, WHAT THE ASSESSEE CLAIMS TO BE, CORRECT FI GURES. IT IS SUBMITTED THAT THE ASSESSEE HAD GIVEN THE COMPUTATION OF THESE MARGINS BEFORE THE TPO AS WELL, BUT, WITHOUT ASSIGNING ANY REASONS, THE TPO HAS REJECTED THE SAME. WE, THEREFORE, DEEM IT FIT AND PROPER TO REMIT THIS ISSUE TO THE FILE OF T HE ASSESSING OFFICER FOR DEALING WITH THE COMPUTATION OF CORRECT MARGINS, AFTER GIVING AS SESSEE AN OPPORTUNITY OF HEARING ON THIS ISSUE, AND BY WAY OF A SPEAKING ORDER. 21. TO SUM UP, SO FAR AS MERITS OF THE TRANSFER ADJ USTMENTS ARE CONCERNED, WE REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATION DE NOVO IN THE LIGHT OF OUR ABOVE OBSERVATIONS AND SPECIFIC DIRECTIONS. WHI LE DOING SO, THE ASSESSING OFFICER WILL GIVE A DUE AND FAIR OPPORTUNITY OF HEARING TO THE ASSESSEE AND DEAL WITH THE CONTENTIONS OF THE ASSESSEE BY WAY OF A SPEAKING OR DER. 22. IN THE COURSE OF HEARING BEFORE US, IT WAS SUBM ITTED BY LEARNED COUNSEL THAT EVEN THOUGH HE HAS BEGUN BY TAKING A TECHNICAL OBJE CTION TO THE ASSESSING OFFICERS REFERENCE TO THE TRANSFER PRICING OFFICER, IN THE E VENT HE SUCCEEDS ON MERITS ON THE ISSUES OF WORKING CAPITAL ADJUSTMENT, EXCLUSION OF APALB AND ASHCO AS COMPARABLE AND + 5% ADJUSTMENT UNDER SECOND PROVISO TO SECTION 92C , THIS OBJECTION WILL BE RENDERED ACADEMIC INASMUCH AS IMPUGNED TRANSFER PRI CING ADJUSTMENT WILL THEN NOT SURVIVE. IN THE PRECEDING PARAGRAPHS, WE HAVE UPHEL D THESE CONTENTIONS. THEREFORE, THE QUESTION REGARDING VALIDITY OF REFERENCE, WHATE VER BE ITS MERITS OR LACK THEREOF, IS PURELY AN ACADEMIC QUESTION ON THE FACTS OF THIS CA SE. IN VIEW OF THE SUBMISSIONS OF THE LEARNED COUNSEL, THEREFORE, WE DECLINE TO DEAL WITH THIS TECHNICAL OBJECTION. ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 18 OF 21 SIMILARLY, VERY ELABORATE SUBMISSIONS WERE MADE ON THE QUESTION WHETHER THE DECISIONS OF THIS TRIBUNAL, AS ALSO HONBLE COURTS ABOVE, BIND THE DISPUTE RESOLUTION PANEL OR NOT, AND IF THESE PRECEDENTS ARE TO BE TAK EN AS OF BINDING NATURE ON THE DRP, HOW CAN THE ASSESSING OFFICER PROTECT HIS INTERESTS OF PURSING THE MATTER IN FURTHER APPEALS AGAINST SUCH JUDICIAL PRECEDENTS, BUT, AS G IVEN THE ACADEMIC NATURE OF THESE DISCUSSIONS IN THE PRESENT SITUATION, WE SEE NO NEE D TO DEAL WITH THIS ASPECT OF THE MATTER EITHER. ON THE QUESTION OF USE OF MULTIPLE YEAR DATA ALSO, IT IS NOT REALLY NECESSARY, ON THE FACTS OF THIS CASE, TO ADJUDICATE THE ISSUE ON MERITS. THESE ISSUES ARE ANYWAY LEFT OPEN FOR ADJUDICATION IN A FIT CASE. 23. GROUND NO. 3 IS THUS ALLOWED FOR STATISTICAL PU RPOSES IN THE TERMS INDICATED ABOVE. 24. IN GROUND NO. 4, THE ASSESSEE IS AGGRIEVED THAT THE ASSESSING OFFICER ERRED IN DISALLOWING AN AMOUNT OF RS 74,33,557 UNDER SECTION 40(A)(IA) ON ACCOUNT OF PAYMENT MADE TO EECIPL. 25. TO ADJUDICATE ON THIS GRIEVANCE, IT IS SUFFICIE NT TO TAKE NOTE OF THE FACT THAT THE AMOUNT IS ADMITTEDLY TOWARDS REIMBURSEMENT OF EXPEN SES TO EMERSON ELECTRIC CO INDIA PVT LTD, UNDER A COST SHARING ARRANGEMENT. TH E DISALLOWANCE HAS BEEN MADE AS TAXES HAVE NOT BEEN DEDUCTED AT SOURCE, EVEN THOUGH , IN THE DRAFT ASSESSMENT ORDER, THE ASSESSING OFFICER PROPOSED TO MAKE A DISALLOWAN CE UNDER SECTION 40A(2)AS EXCESSIVE OR UNREASONABLE. AS THE DISALLOWANCE IS F INALLY MADE, PURSUANT TO DRP DIRECTIONS, ON THE GROUND THAT TAXES HAVE NOT BEEN DEDUCTED AT SOURCE, THAT ASPECT OF THE MATTER IS NO LONGER RELEVANT. 26. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING P ERUSED THE MATERIAL ON RECORD, WE FIND THAT IT IS ADMITTEDLY A CASE OF REIMBURSEME NT OF EXPENSES AND IT IS A SETTLED LEGAL POSITION THAT TAX DEDUCTION AT SOURCE REQUIRE MENTS DO NOT COME INTO PLAY IN THE CASE OF REIMBURSEMENT OF EXPENSES. UNDOUBTEDLY THE SE PAYMENTS ARE MADE FOR THE SERVICES RENDERED BUT THE TDS REQUIREMENTS WOULD C OME INTO PLAY AT THE POINT OF ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 19 OF 21 TIME WHEN SERVICES ARE MADE TO THE PERSON WHO IS RE NDERING THE SERVICES OR TO THE PERSON WITH WHOM CONTRACT FOR RENDERING OF THESE SE RVICES IS ENTERED INTO. RIGHT NOW WE ARE DEALING WITH A SITUATION IN WHICH PAYMENT IS MADE TO A GROUP CONCERN UNDER A COST SHARING ARRANGEMENT AND THE PAYMENT IS THUS NO T FOR SERVICES BUT AS REIMBURSEMENT OF EXPENSES. IN OUR CONSIDERED VIEW, TDS REQUIREMENTS DO NOT COME INTO PLAY AT THIS STAGE. ACCORDINGLY, THE IMPUGNED DISALLOWANCE MUST BE DELETED. WE DIRECT THE ASSESSING OFFICER TO DO SO. 27. GROUND NO. 4 IS THUS ALLOWED. 28. IN GROUND NO. 5, THE ASSESSEE IS AGGRIEVED OF D ISALLOWANCE OF RS 58,35,000, OUT OF PAYMENT MADE TO EMERSON EXPORT ENGINEERING CENTR E- A DIVISION OF EMERSONS ELECTRIC CO INDIA PVT LTD, UNDER SECTION 40A(2)(B) OF THE INCOME TAX ACT. 29. SO FAR AS THIS GRIEVANCE OF THE ASSESSEE IS CON CERNED, THE MATERIAL FACTS ARE LIKE THIS. DURING THE COURSE OF THE ASSESSMENT PROCEEDIN GS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS MADE A PAYMENT OF RS 1,49,91, 446 TO EEEC TOWARDS SERVICE CHARGES BUT THESE CHARGES HAVE GROWN BY 204% VIS-- VIS EXPENSES IN THE PRECEDING YEAR, WHEREAS THE INCREASE IN TURNOVER IS ONLY 85%. WHILE THE ASSESSING OFFICER HAD PROPOSED A DISALLOWANCE OF 20%, THE DRP ALLOWED THE INCREASE IN THE EXPENSES ONLY TO THE EXTENT THE INCREASE OF TURNOVER WAS IN THE S AME RATIO. THE ASSESSEE IS AGGRIEVED AND IS IN APPEAL BEFORE US. 30. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING P ERUSED THE MATERIAL ON RECORD, WE ARE NOT INCLINED TO UPHOLD THE IMPUGNED DISALLOW ANCE. THE DISALLOWANCE UNDER SECTION 40A(2)(B) CAN BE MADE ONLY TO THE EXTENT TH E PAYMENT FOR THE SERVICES IS EXCESSIVE OR UNREASONABLE VIS--VIS THE MARKET PRIC E OF SUCH SERVICES, BUT THEN WHAT IS ESSENTIALLY REQUIRES IS THAT THE MARKET PRICE OF THESE SERVICES IS ESTABLISHED AND THEN AMOUNT PAID IN EXCESS OF SUCH MARKET PRICES IS TO BE DISALLOWED. THE ASSESSING OFFICER HAS NOT EVEN GONE THROUGH THE MOTIONS OF TH IS EXERCISE. A DISALLOWANCE UNDER SECTION 40A(2)(B) ON ADHOC BASIS, AS A PERCENTAGE O F TOTAL EXPENDITURE INCURRED, IS ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 20 OF 21 INHERENTLY BAD IN LAW BECAUSE SUCH A DISALLOWANCE C AN NEVER HAVE REASONABLE NEXUS WITH THE MARKET PRICE OF SERVICES FOR WHICH PAYMEN T IS MADE. THE ASSESSING OFFICER, UNDER THE GUIDANCE OF DRP, HAS GONE A STEP FURTHER. HE HAS DISALLOWED THE EXPENDITURE TO THE EXTENT THIS HAS NOT INCREASED IN THE SAME RA TIO AS THE TURNOVER. WE ARE UNABLE TO SEE ANY MERITS, PERHAPS BEYOND SHEER SIMPLICITY OF CALCULATION, IN THIS APPROACH, NOR CAN WE UNDERSTAND THE JUSTIFICATION FOR THIS AP PROACH. THE BENEFIT DERIVED FROM AN EXPENDITURE AND ITS QUANTUM CANNOT ALSO GO HAND IN HAND, AND TO ASSUME THAT IT MUST ALSO MOVE IN THE RATIO IS TOO UNREALISTIC AN A SSUMPTION TO BE ADOPTED. THERE IS NOTHING ON RECORD TO EVEN SUGGEST THAT THE SERVICE CHARGES ARE IN EXCESS OF ITS FAIR MARKET VALUE. UNDER THESE CIRCUMSTANCES, IN OUR CON SIDERED VIEW, THE IMPUGNED DISALLOWANCE OF ANY LEGALLY SUSTAINABLE MERITS. ACC ORDINGLY, WE DIRECT THE ASSESSING OFFICER TO DELETE THIS DISALLOWANCE AS WELL. 31. GROUND NO. 5 IS ALLOWED. 32. IN GROUND NO. 6, THE ASSESSE IS AGGRIEVED OF AS SESSING OFFICERS ADDING THE PROVISION FOR DIFFERENTIAL DUTY OF RS 55,08,545 AND PROVISION FOR VARIABLE PAY AMOUNTING TO RS 1,02,00,000 FOR THE PURPOSE OF COMP UTING BOOK PROFITS UNDER SECTION 115 JB OF THE ACT. 33. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, TH E ASSESSING OFFICER MADE THE ADJUSTMENTS IN RESPECT OF PROVISION FOR DIFFERENTIA L DUTY AND FOR VARIABLE PAY, AS HE TREATED THE SAME AS UNASCERTAINED LIABILITIES IN TH E ABSENCE FROM ANYTHING FROM THE ASSESSEE TO DEMONSTRATE THAT THESE ARE ASCERTAINED LIABILITIES. LEARNED COUNSEL NOW CONTENDS THAT THESE LIABILITIES ARE ASCERTAINED LIA BILITIES, AND, THEREFORE, THESE LIABILITIES ARE NOT REQUIRED TO BE ADDED BACK TO TH E BOOK PROFITS. THE ASSESSEE HAS NOW FILED ADDITIONAL EVIDENCE, AT PAGES 9 TO 13 OF THE ADDITIONAL PAPERBOOK, IN SUPPORT OF THE CONTENTION THAT THESE LIABILITIES ARE WELL A SCERTAINED LIABILITIES. LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, HAS STRONGLY OPPOSED ADMISSION OF ADDITIONAL EVIDENCE AS THE SAME WAS NOT PRODUCED BE FORE THE ASSESSING OFFICER. HE FURTHER SUBMITS THAT IF THE ADDITIONAL EVIDENCE IS TO BE ADMITTED AT ALL, THE MATTER ITA NO. 8118/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 21 OF 21 SHOULD BE REMITTED TO THE FILE OF THE ASSESSING OFF ICER FOR FRESH ADJUDICATION IN THE LIGHT OF SUCH ADDITIONAL EVIDENCE. 34. HAVING HEARD THE RIVAL CONTENTIONS, AND HAVING PERUSED THE MATERIAL ON RECORD, WE DEEM IT FIT AND PROPER TO ADMIT THE ADDITIONAL E VIDENCE AND REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATION DE N OVO IN THE LIGHT OF THESE ADDITIONAL EVIDENCES AND SUCH OTHER MATERIAL AS THE ASSESSEE M AY WISH TO RELY UPON, TO SUBSTANTIATE HIS CLAIM THAT THE LIABILITIES IN QUES TION ARE ASCERTAINED LIABILITIES. THE ASSESSING OFFICER SHALL DECIDE THE MATTER BY WAY OF A SPEAKING ORDER, IN ACCORDANCE WITH THE LAW, AND AFTER GIVING A FAIR OPPORTUNITY O F HEARING TO THE ASSESSEE. 35. GROUND NO. 6 IS THUS ALLOWED FOR STATISTICAL PU RPOSES. 36. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH AUGUST, 2011 SD/- SD/- (V DURGA RAO ) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNT ANT MEMBER MUMBAI; 12 TH DAY OF AUGUST , 2011 . COPY FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER , MUMBAI 4. COMMISSIONER (APPEALS) , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH, MUMBAI 6. GUARD FILE TRUE COPY BY O RDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI