M/s Toyota Kirloskar Motor Private Ltd, Bidadi V. ACIT, Bangalore

ITA 828/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63803 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 4 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 11-07-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 23-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D K GUPTA
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; Diversion of income; International transaction; Period of limitation; Retrospective amendment; Additional evidence; Cost of acquisition; Competent authority; Block assessment; Time period of passing order
• Section: 92C; 143(3); 92E; 154; 15; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. NO. 828 /BANG/20 1 0 (ASSESSMENT YEAR : 2003-04) M/S. TOYOTA KIRLOSKAR MOTORS PVT LTD., PLOT NO.21, BIDADI INDL. AREA, RAMANAGAR INDL. AREA, BANGALORE 562 109 PAN AAACT 5415B VS. ASST. COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE. APPELLANT RESPONDENT. APPELLANT BY : SHRI PADAMCHAND KHINCHA. RESPONDENT BY : SHRI D.K.GUPTA & SHRI AJIT KUMAR JA IN. DATE OF HEARING : 26.09.2012. DATE OF PRONOUNCEMENT : 22.11.2012. O R D E R PER SHRI JASON P. BOAZ : THIS APPEAL BY THE ASSESSEE-COMPANY IS DIRECTED A GAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-IV, BANGALORE DATED 31.3.2010 FOR ASSESSMENT YEAR 2003-04. 2. THE FACTS OF THE CASE, IN BRIEF, ARE AS UNDER : 2.1 THE ASSESSEE-COMPANY (HEREINAFTER REFERRED TO A S THE ASSESSEE) IS AN INDIAN COMPANY ENGAGED IN THE MANUFACTURE AND TRADING OF A UTOMOBILES NAMELY, PASSENGER CARS (COROLLA) AND MULTI UTILITY VEHICLES (QUALIS). THE MAJOR SHAREHOLDER OF THE ASSESSEE IS TOYOTA MOTOR CORPORATION, JAPAN (HEREINAFTER REFERR ED TO AS TMC) WITH 74% FOREIGN 2 ITA NO.828/BANG/2010 EQUITY PARTICIPATION AND KIRLOSKAR SYSTEMS INDIA LT D ;WITH 26% HOLDING. THE ASSESSEE IMPORTS COMPONENTS FOR MANUFACTURE OF AUTOMOBILES F ROM TMC AND OTHER GROUP COMPANIES. TMC PROVIDES THE ASSESSEE WITH TECHNICAL KNOW-HOW F OR WHICH IT IS PAID ROYALTY AND FEES FOR TECHNICAL ASSISTANCE RECEIVED. 2.2 THE ASSESSEE FILED ITS RETURN OF INCOME FOR ASS ESSMENT YEAR 2003-04 ON 27.11.2003 DECLARING A LOSS OF RS.6,21,90,723. ALO NG WITH THE RETURN OF INCOME THE ASSESSEE FILED THE REPORT AS REQUIRED UNDER SECTION 92E OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS 'THE ACT'). THE RETUR N WAS PROCESSED UNDER SECTION 143(1) AND THE CASE WAS TAKEN UP FOR SCRUTINY BY ISSUE OF NOTICE UNDER SECTION 143(2) OF THE ACT. THE ASSESSING OFFICER REFERRED THE CASE TO THE TRAN SFER PRICING OFFICER (TPO) UNDER SECTION 92CA(1) OF THE ACT FOR CONDUCTING THE TRANS FER PRICING AUDIT TO DETERMINE THE ARMS LENGTH PRICE (ALP) IN RESPECT OF THE FOLLOWING INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN THE RELEVANT PERIOD : A. MANUFACTURING SEGMENT SL.NO. INTERNATIONAL TRANSACTIO N AMOUNT RS. 1. PURCHASE OF COMPONENTS 36 2 ,51,10,000 2. SALE OF PROTOTYPES 33,73,008 3. PURCHASE OF CAPITAL GOODS 6,72,44,889 4. ROYALTY PAID 37,57,21,640 5. SOFTWARE LICENSE FEES PAID 20,13,533 6. TECHNICAL ASSISTANCE FEES PAID 12,58,42,778 7. TRADING & DEVELOPMENT PAID 19,94,075 8. R & D PAID 2,51,875 9. SALES PROMOTION EXPENSES PAID 25,95,608 10. OTHER EXPENSES PAID 1,40,448 11. RETURN OF RE C KS RECEIVED 23,49, 817 12. EXPENSES REIMBURSED AT COST 10,56,914 3 ITA NO.828/BANG/2010 B. TRADING SEGMENT SL.NO. INTERNATIONAL TRANSACTION AMOUNT RS. 1. PURCHASE OF AUTOMOBILES & SPARES FOR RESALE. 44,27,00,000 2.3 THE T.P. DOCUMENTATION OF THE ASSESSEE WAS PREP ARED ON A CONSOLIDATED BASIS (AT THE ENTITY / ENTREPRISE LEVEL), WITHOUT SEGMENTATIO N BETWEEN THE MANUFACTURING AND TRADING / DISTRIBUTION BUSINESS. THE TPO CALLED F OR SEGMENTAL BENCH MARKING ANALYSIS, SEPARATELY FOR MANUFACTURING AND DISTRIBUTION, WHIC H WAS PROVIDED BY THE ASSESSEE WITHOUT PREJUDICE TO ITS CONTENTION THAT THE ASSESSEE'S TRA NSACTIONS HAD TO BE CONSIDERED ON AN AGGREGATED BASIS. IN RESPONSE TO THE ECONOMIC ANAL YSIS AND BENCH MARKING STUDY OF THE SEGMENTED FINANCIALS OF THE ASSESSEE, THE TPO ISSUE D A SHOW CAUSE NOTICE TO THE ASSESSEE REJECTING THE CUSTOMS DUTY AND EXCISE DUTY ADJUSTME NTS AND MAKING AN OPERATING EXPENSE ADJUSTMENT. THE TPO PROPOSED AN ADJUSTMENT OF RS.1 96.09 CRORES AND REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE IMPORT PRICES OF MATERIALS IMPORTED BY THE ASSESSEE FROM ASSOCIATED ENTERPRISES (AES) SHOULD NOT BE RED UCED TO THIS EXTENT. 2.4 THE TPO, AFTER CONSIDERING THE SUBMISSIONS FILE D BY THE ASSESSEE PASSED AN ORDER UNDER SECTION 92CA OF THE ACT ON 7.3.2006 COMPUTIN G THE ALP OF FOREIGN TRANSACTIONS AND PROPOSING AN ADJUSTMENT OF RS. 196.09 CRORES. THIS FIGURE WAS ARRIVED AT BY ADOPTING THE TRANSACTION NET MARGIN METHOD (TNMM) AFTER MAKING A DJUSTMENT OF THE PROFITS OF COMPARABLE COMPANIES ON ACCOUNT OF DIFFERENCES IN OPERATIONAL EFFICIENCY AND DEPRECIATION. IN TNMM, THE OPERATIVE MARGIN BEFORE DEPRECIATION HAS BEEN COMPARED. 4 ITA NO.828/BANG/2010 THE TPO HAS OPINED THAT THE MARGINS WERE LOWER BECA USE OF THE FACT THAT THE PRICE PAID FOR THE PURCHASE OF COMPONENTS FROM AES OVERSTATED . THE ADJUSTMENT WAS MADE TO RESTATE THE PURCHASE PRICE AT A LOWER FIGURE THAN T HE REPORTED FIGURE BY A SUM OF RS.196.09 CRORES. ON RECEIPT OF THE TPOS ORDER UN DER SECTION 92CA OF THE ACT, THE ASSESSING OFFICER PASSED THE ORDER OF ASSESSMENT FO R ASSESSMENT YEAR 2003-04 UNDER SECTION 143(3) OF THE ACT ON 28.3.2006 WHEREIN I) T.P. ADJUSTMENT OF RS.196.09 CRORES WAS MADE ON ACCOUNT OF THE PROPOSED ADJUSTMENT TO THE ALP BY THE TPO. II) THE ASSESSING OFFICER ALSO DISALLOWED EXPENDIT URE AMOUNTING TO RS.9,03,028 INCURRED ON SOFTWARE, HOLDING IT TO BE CAPITAL IN NATURE AND ALLOWED DEPRECIATION THEREON. 2.5 AGGRIEVED BY THE ORDER OF ASSESSMENT FOR ASSESS MENT YEAR 2003-04 DT.28.3.2006, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT (APPEALS )-IV, BANGALORE. THE ASSESSEE ALSO FILED A LETTER SEEKING RECTIFICATION UNDER SECTION 154 OF THE ACT OF THE ORDER OF ASSESSMENT INCLUDING THE TPOS ORDER UNDER SECTION 92CA OF THE ACT. IN THE RECTIFICATION APPLICATION, THE ASSESSEE CONTENDED THAT THE INTERN ATIONAL TRANSACTIONS OF PURCHASES WITH RELATED PARTIES CONSTITUTED ONLY 37% OF THE TOTAL P URCHASES AND THEREFORE THE ADJUSTMENT UNDER SECTION 92CA OF THE ACT ON ACCOUNT OF HIGH M ATERIAL COST SHOULD HAVE BEEN RESTRICTED TO THE PERCENTAGE OF MATERIAL PURCHASED FROM ASSOCIATED ENTERPRISES (AES). THE TPO VIDE ORDER DT.31.8.2006 REJECTED THE ASSESS EE'S RECTIFICATION APPLICATION. AGGRIEVED BY THE TPOS ORDER DT.31.8.2006 REJECTING THE RECTIFICATION APPLICATION UNDER SECTION 154 OF THE ACT, THE ASSESSEE FILED AN APPEA L BEFORE THE CIT (APPEALS). 5 ITA NO.828/BANG/2010 2.6 THE CIT (APPEALS) DISPOSED OFF THE APPEALS AGA INST BOTH ASSESSMENT UNDER SECTION 143(3) DT.28.3.2006 AND THE ORDER UNDER SECTION 15 4 OF THE ACT BY A COMMON ORDER DT.31.3.2010 UPHOLDING THE ADJUSTMENTS MADE BY THE TPO.THE LEARNED CIT (APPEALS) ALSO DIRECTED THE ASSESSING OFFICER /TPO TO EXAMINE OTHE R ITEMS OF EXPENDITURE INCURRED BY THE ASSESSEE SUCH AS CAPITALIZED VALUE OF CAR , DISCARDING OF DIES AND MOULDS OF OLD MODELS, LOSS ON SALE OF ASSETS AND AMORTIZATION OF TECHNICA L FEES; WHETHER THESE EXPENSES ARE OPERATING EXPENSES OR EXTRAORDINARY EXPENSES TO BE EXCLUDED FROM OPERATING COST. IN RESPECT OF EXPENDITURE INCURRED ON SOFTWARE LICENSE S, THE LEARNED CIT (APPEALS) DIRECTED THE ASSESSING OFFICER TO ASCERTAIN THE TRUE NATURE OF THE SOFTWARE LICENSES AND DECIDE THE QUESTION OF DEDUCTIBILITY OF THE SAID EXPENDITU RE IN THE LIGHT OF THE DECISION OF THE SPECIAL BENCH OF THE DELHI TRIBUNAL IN THE CASE OF AMWAY INDIA ENTERPRISES VS. DCIT (2008) 114 TTJ (DEL)(SB) 476. 3.0 AGGRIEVED BY THE ORDER OF THE CIT (APPEALS)-IV, BANGALORE FOR ASSESSMENT YEAR 2003-04 DT.31.3.2010, THE ASSESSEE IS NOW IN APPEAL BEFORE THIS TRIBUNAL. THE ASSESSEE INITIALLY FILED ELABORATE GROUNDS THAT WERE NARRAT IVE AND ARGUMENTATIVE. HOWEVER, SUBSEQUENTLY IT FILED REVISED GROUNDS OF APPEAL ON 21.9.2011 WHICH ARE REPRODUCED AS UNDER : A. THE LOWER AUTHORITIES (THE LEARNED ASSESSING O FFICER, LEARNED TRANSFER PRICING OFFICER AND LEARNED COMMISSIONER OF INCOME TAX (APPEALS-IV) HAVE ERRED IN 1. PASSING THE ORDER DISREGARDING THE PRINCIPLES OF NATURAL JUSTICE. 2. MAKING A REFERENCE TO TRANSFER PRICING OFFICER FOR DETERMINING ARMS LENGTH PRICE. 3. NOT APPRECIATING THAT THE CHARGING OR COMPUTATIO N PROVISION RELATING TO INCOME UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION DO NOT REFER 6 ITA NO.828/BANG/2010 TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X AND THEREFORE ADDITION UNDER CHAPTER X IS BAD IN LAW. 4. NOT APPRECIATING THAT THERE BEING NO DISALLOWA NCE UNDER SECTION 40A(2) FOR PURCHASE OF PARTS AND COMPONENTS, ADJUSTMENT UNDER CHAPTER X OUGHT NOT TO BE MADE. 5. PASSING THE ORDER WITHOUT DEMONSTRATING THE APP ELLANT HAD MOTIVE OF TAX EVASION. 6. MAKING TRANSFER PRICING ADJUSTMENT FOR THE YEAR UNDER CONSIDERATION, ALTHOUGH, THE METHOD ADOPTED, THE ASSOCIATED ENTERP RISES, THE NATURE OF TRANSACTIONS AND THE COMPARABLES WERE SAME AS IN TH E EARLIER YEARS OR SUBSEQUENT YEARS IN WHICH NO SIMILAR ADJUSTMENT HAD BEEN MADE. 7. NOT APPRECIATING THAT THE VALUE OF THE IMPORTED COMPONENTS HAVING BEEN ACCEPTED BY THE CUSTOMS TRIBUNAL, THE SAME THEREFOR E DESERVES TO BE ACCEPTED BY THE INCOME TAX AUTHORITIES ALSO. 8. CONSIDERING DATA WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TP DOCUMENTATION REQUIREMENTS. 9. ADOPTING A FLAWED METHODOLOGY AND PROCESS IN AR RIVING AT THE ALP. 10. NOT APPRECIATING THAT THE TRADING AND MANUFAC TURING SEGMENTS ARE INTERTWINED AND INTER-RELATED WARRANTING A COMBINE D TRANSACTION APPROACH IN ARRIVING AT THE ARMS LENGTH PRICE. 11. MAKING A FLAWED ADJUSTMENT ON ACCOUNT OF OPERA TIONAL EFFICIENCIES IN ARRIVING AT THE ALP. 12. NOT EXCLUDING EXCISE DUTY IN SALES AND MATERIA L COST WHILE COMPUTING ARMS LENGTH PRICE. 13. NOT APPRECIATING THAT A CUSTOMS DUTY ADJUSTMEN T WAS REQUIRED TO BE MADE IN ORDER TO PUT ALL COMPARABLES ON A LEVEL PLAYING FIELD. 14. NOT CONSIDERING CASH PLI WHICH IS AN ACCEPTED PARAMETER OF DETERMINING ARMS LENGTH PRICE. 15. NOT MAKING ADJUSTMENT FOR VARIOUS EXTRAORDINAR Y EXPENSES INCURRED WHILE COMPUTING ARMS LENGTH PRICE. 16. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LE VEL AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLANT AND THE COMPARABL E COMPANIES. 17. NOT APPRECIATING THAT THE LAW DOES NOT COMPEL ADOPTING MANY (OR ANY MINIMUM) COMPANIES AS COMPARABLES AND THAT THE APPE LLANT COULD JUSTIFY THE PRICE PAID / CHARGED ON THE BASIS OF ANY ONE COMPAR ABLE ONLY. 18. NOT ALLOWING THE BENEFIT OF THE + / - 5% RANG E AS PER THE PROVISO TO SECTION 92C(2). B. THE LEARNED CIT (APPEALS)-IV HAS ERRED IN RESTO RING THE FOLLOWING MATTERS TO THE FILE OF AO/TPO WITHOUT APPRECIATING THAT UND ER SECTION 251 CIT (APPEALS) CANNOT RESTORE THE MATTER BACK TO AO/TPO : 7 ITA NO.828/BANG/2010 A) COMPUTATION OF ALP RESTRICTING THE ADJUSTMENT TO PURCHASE OF COMPONENTS FROM ASSOCIATED ENTERPRISE; B) TREATMENT OF EXTRAORDINARY ITEMS LIKE LOSS ON SA LE OF ASSETS, AMORTIZATION OF TECHNICAL FEES, DISCARDING OF OLD DIES AND MOULDS A ND COMMISSION INCOME; AND C) DETERMINING THE NATURE OF SOFTWARE LICENSE PURCH ASED. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUND S / SUB-GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFORE OR AT T HE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE INCOME-TAX APPELLATE TR IBUNAL TO DECIDE THE APPEAL ACCORDING TO LAW. 4.1 T.P. ANALYSIS OF THE ASSESSEE . FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS ENGAGED IN THE MANUFACTURE OF PASSENGER CARS AND ALSO IN TRADING / DISTRIBUTION OF PASSENGER CARS, (CAMRY) AND SPARES. IN THE T.P. ANALYSIS, THE ASSE SSEE ADOPTED THE TNMM AS THE MOST APPROPRIATE METHOD AND CARRIED OUT THE T.P. AN ALYSIS AT THE ENTITY LEVEL MERGING BOTH THE TRADING AND MANUFACTURING SEGMENTS (COMBIN ED TRANSACTION METHOD). USING THE PROWESS DATABASE, THE ASSESSEE SELECTED THE F OLLOWING SEVEN COMPANIES AS COMPARABLES WHOSE BUSINESS ACTIVITY WAS CLASSIFIED AS COMMERCIAL VEHICLES AND PASSENGER CARS : I) ASHOK LEYLAND LTD II) BAJAJ TEMPO LTD. III) EICHER MOTORS LTD. IV) HINDUSTHAN MOTORS LTD. V) MAHINDRA & MAHINDRA LTD VI) SWARAJ MAZDA LTD. VII) TATA ENGINEERING & LOCOMOTIVE COMPANY LTD. (TELCO). 8 ITA NO.828/BANG/2010 THE DATA UTILIZED IN THE ASSESSEE'S T.P. ANALYSIS P ERTAINED TO FINANCIAL YEAR 2000-01 AND 2001-02. THE ASSESSEE ADOPTED CASH PROFIT TO S ALES AS THE PROFIT LEVEL INDICATOR (PLI) AND OPERATING PROFIT TO SALES AS AD DITIONAL PLI AND MADE ADJUSTMENTS FOR EXCISE DUTY AND CUSTOMS DUTY WHILE COMPUTING TH E ALP. SINCE THE CASH PROFIT MARGIN AND OPERATING MARGIN AS WORKED OUT BY THE AS SESSEE AT 8% WAS HIGHER THAN THAT OF THE COMPARABLE COMPANIES, THE ASSESSEE CONT ENDED THAT ITS INTERNATIONAL TRANSACTIONS WERE AT ARMS LENGTH. 4.2 T.P. ANALYSIS OF THE TPO THE TPO ON EXAMINATION OF THE ASSESSEE'S T.P. STU DY ACCEPTED TNMM AS THE MOST APPROPRIATE METHOD AND ALSO THE COMPARABLES SE LECTED BY THE ASSESSEE. THE TPO, HOWEVER, DID NOT ACCEPT THE FOLLOWING ASPECTS OF THE T.P. STUDY CARRIED OUT BY THE ASSESSEE. I) COMBINING THE MANUFACTURING AND DISTRIBUTION FUNCTI ONS AND APPLYING TNMM AT THE ENTITY LEVEL. II) USE OF EARLIER YEARS DATA AGAINST THE MANDATORY US E OF CURRENT YEAR AS PER THE ACT. III) EXCLUSION OF CUSTOMS AND EXCISE DUTY WHILE COMPUTIN G THE COST OF GOODS SOLD. IV) NO ADJUSTMENTS MADE FOR THE DIFFERENCES IN THE RELA TIVE OPERATIONAL EFFICIENCY LEVELS AND DEPRECIATION COSTS BETWEEN TH E ASSESSEE AND THE COMPARABLE COMPANIES CONSIDERED BY IT. V) THE TPO ACCORDINGLY CARRIED OUT A FRESH ANALYSIS OF THE COMPARABLE COMPANIES CONSIDERED BY THE ASSESSEE USING THE CURRENT YEARS DATA I.E. FOR F.Y. 2002-03 AND SEPARATE EVALUATION OF THE MANUFACTURING AND DISTRI BUTION SEGMENTS. IN RESPECT OF THE MANUFACTURING SEGMENT, THE TPO CONSIDERED CUSTO MS AND EXCISE DUTY BY THE 9 ITA NO.828/BANG/2010 ASSESSEE AS PART OF COST OF GOODS SOLD. BASED ON T HIS ANALYSIS THE TPO ACCEPTED THE PRICE CHARGED BY THE ASSESSEE IN ITS INTERNATIONAL TRANSACTIONS IN THE DISTRIBUTION SEGMENT. IN REGARD TO THE MANUFACTURING SEGMENT, U PON COMPARISON OF RATIO OF MATERIAL COSTS TO SALES, THE TPO OBSERVED THAT THE COST OF MATERIALS CAME TO AROUND 85% OF SALES OF THE ASSESSEE AS AGAINST 73% IN THE CASE OF COMPARABLE COMPANIES. EVEN IF CUSTOMS DUTY AND EXCISE DUTY WERE EXCLUDED, THE ASSESSEE'S MATERIAL COSTS STOOD AT 74% OF ITS SALES AS AGAINST 64% OF SALES I N THE CASE OF COMPARABLES. THE TPO THEN PROCEEDED TO COMPARE THE OPERATING EFFICIE NCY LEVELS OF THE ASSESSEE VIS- -VIS THE COMPARABLE COMPANIES AND NOTED THAT THE O PERATING EFFICIENCY OF THE ASSESSEE AT 14% WAS MUCH HIGHER THAN 22.57% OF THE COMPARABLE COMPANIES. THUS, THE TPO MADE AN ADJUSTMENT FOR DIFFERENCES THEREIN TO NULLIFY THE EFFECT OF OPERATIVE EFFICIENCY BETWEEN THE ASSESSEE AND COMPA RABLE COMPANIES. SIMULTANEOUSLY, THE TPO ALSO MADE A DEPRECIATION AD JUSTMENT TO NULLIFY THE EFFECT OF DIFFERENCES IN THE RELEVANT LEVELS OF DEPRECIATION BETWEEN THE ASSESSEE STANDING AT 5.8% ON SALES AND THAT OF COMPARABLE COMPANIES AT 2.78% OF SALES HAD ON THE PROFITS. AS PER THE ADJUSTMENTS MADE OUT ABOVE, TH E TPO ARRIVED AT THE ARITHMETICAL MEAN MARGIN OF 7.56% ON SALES, WHEN CO MPARED TO THE ASSESSEE'S MARGIN OF (-) 4.56% ON SALES. BASED ON THE ABOVE, THE TPO PROPOSED AN ADJUSTMENT OF RS.196.09 CRORES TOWARDS RAW MATERIAL PURCHASED FRO M A.ES. 4.3 WE HAVE HEARD BOTH PARTIES, CAREFULLY PERUSED A ND CONSIDERED THE ORDERS PASSED BY THE TPO UNDER SECTION 92CA OF THE ACT, TH E ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2003-04 DT.28.3.2006, THE GROUNDS O F APPEAL RAISED, THE ORDER OF 10 ITA NO.828/BANG/2010 THE LEARNED CIT (APPEALS), WRITTEN SUBMISSIONS FILE D AND THE JUDICIAL DECISIONS RELIED UPON AND PROCEED TO DISPOSE OFF THE GROUNDS OF AP PEAL RAISED BY THE ASSESSEE. VIOLATION OF PRINCIPLES OF NATURAL JUSTICE. 5.0 IN SUPPORT OF THE GROUNDS RAISED AT A-1 , THE LEARNED COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THE ASSESSING OFFICER HAD ERRED IN PASSING THE ORDER DISREGARDING THE PRINCIPLES OF NATURAL JUSTICE BY P ASSING THE ORDER AT THE FAG END OF THE LIMITATION PERIOD; IN A HURRIED MANNER AND WIT HOUT AFFORDING PROPER OPPORTUNITY OF BEING HEARD AND THEREFORE THE ORDER OF ASSESSMEN T IS BAD IN LAW AND LIABLE TO BE QUASHED. WE HAVE ALSO HEARD THE LEARNED DEPARTMENT AL REPRESENTATIVE AND PERUSED THE RECORD. WE FIND NO MERIT IN THE CLAIM OF THE A SSESSEE THAT THE ASSESSING OFFICER HAD NOT AFFORDED THE ASSESSEE ADEQUATE OPPO RTUNITY OF BEING HEARD. NO EVIDENCE HAS BEEN BROUGHT ON RECORD BEFORE US BY TH E ASSESSEE TO ESTABLISH THE VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE BY T HE ASSESSING OFFICER AS CLAIMED AND WE THEREFORE REJECT THIS GROUND RAISED BY THE ASSES SEE AS INFRUCTUOUS. 6.1 REFERENCE TO TPO IN THE GROUND OF APPEAL AT A-2 , THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT THE ASSESSING OFFICER HAS ERRED IN MAKING A RE FERENCE TO THE TPO FOR DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTI ONS ENTERED INTO BY THE ASSESSEE, AS A REFERENCE COULD BE MADE TO THE TPO ONLY IN CIR CUMSTANCES WHERE THE ASSESSING OFFICER CONSIDERS IT NECESSARY OR EXPEDIENT TO DO S O. IT WAS CONTENDED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ASSESSING OFFICER HAS NOT DEMONSTRATED TH AT THE CONDITIONS NECESSARY FOR 11 ITA NO.828/BANG/2010 REFERENCE WERE SATISFIED AND AS SUCH THE REFERENCE TO THE TPO HAS BEEN MADE IN A ROUTINE AND MECHANICAL MANNER WITHOUT APPLICATION O F MIND IS BAD IN LAW AND THE ASSESSMENT ORDER BASED ON SUCH REFERENCE IS LIABLE TO BE QUASHED. IT WAS FURTHER CONTENDED THAT THE CIT HAS ERRED IN ACCORDING APPRO VAL FOR MAKING A REFERENCE TO THE TPO TO DETERMINE THE ALP OF INTERNATIONAL TRANS ACTION IN A ROUTINE AND MECHANICAL MANNER WHICH IS BAD IN LAW. 6.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE CBDTS CIRCULAR NO.3 OF 2003 AS PER WHICH IT IS MANDATORY TO REFER ALL CASE S, WHERE THE AGGREGATE VALUE OF INTERNATIONAL TRANSACTIONS EXCEED RS.5 CRORES. AS THE AGGREGATE VALUE OF INTERNATIONAL TRANSACTIONS EXCEED RS.5 CRORES IN THE INSTANT CASE , THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSING OFFICER HAD CORRECTLY MADE A REFERENCE TO THE TPO TO DETERMINE THE ALP. SIMILARLY, THE COMM ISSIONER OF INCOME TAX IN ORDER TO APPROVE THE MAKING OF REFERENCE TO THE TPO HAD TO O NLY SATISFY THREE THINGS BASED ON FORM 3CEB SUBMITTED BY THE ASSESSEE NAMELY; (I) WHE THER THERE ARE AES; (II) THAT THERE ARE INTERNATIONAL TRANSACTIONS AND (III) WHETHER TH E AGGREGATE VALUE OF INTERNATIONAL TRANSACTIONS EXCEED RS.5 CRORES DURING THE RELEVANT PERIOD. 6.3 IN THE DECISION OF A CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF TALLY SOLUTIONS PVT LTD VS. DCIT (ITA NO.1235/BANG/2010 DT.26.9.201 1), IT WAS OBSERVED THAT : THERE IS NOTHING IN SECTION 92CA TO SUGGEST THAT THE ASSESSING OFFICER SHOULD HEAR THE ASSESSEE OR RECORD REASONS BEFORE M AKING A REFERENCE TO THE TPO NOR IS THERE ANYTHING TO SUGGEST THAT THE ASSES SING OFFICER SHOULD ASK THE ASSESSEE WHETHER HE SHOULD HIMSELF PROCEED TO DETER MINE THE ARMS LENGTH PRICE OR SHOULD INVOLVE THE TPO FOR THIS PURPOSE. THE REFERENCE IS A STEP IN THE COLLECTION OF MATERIAL WHICH MIGHT BE USEFUL FOR MA KING ASSESSMENTS. NO VIOLATION OF ANY CIVIL RIGHTS OF THE ASSESSEE IS IN VOLVED HERE. MERE REFERENCE 12 ITA NO.828/BANG/2010 DOES NOT TANTAMOUNT TO ANY ADVERSE ASSESSMENT OR US E OF ADVERSE MATERIAL. MOREOVER, BY VIRTUE OF BOARD INSTRUCTION NO.3 OF 20 03 DT.20.5.2003 THE CBDT DECIDED THAT WHENEVER THE AGGREGATE VALUE OF INTERN ATIONAL TRANSACTIONS EXCEEDS RS.5 CRORES, THE CASE SHOULD BE PICKED UP F OR SCRUTINY AND REFERENCE UNDER SECTION 92CA BE MADE TO THE TPO. THUS, IT IS MANDATORY FOR THE ASSESSING OFFICER TO REFER ALL THE CASES WHENEVER THE AGGREGATE VALUE OF INTERNATIONAL TRANS ACTIONS IS MORE THAN RS.5 CRORES. THESE INSTRUCTIONS ARE BINDING ON ALL ASSE SSING OFFICERS. IN THESE CASES, THERE IS NO NEED FOR THE ASSESSING OFFICER T O MAKE A PRIMA FACIE OPINION, EXCEPT THAT HE/SHE NEEDS TO EXAMINE THE 3CEB REPORT TO SEE THE AGGREGATE VALUE OF INTERNATIONAL TRANSACTIONS. IN THE INSTAN T CASE, AS THE AGGREGATE VALUE OF INTERNATIONAL TRANSACTIONS BASED ON 3CEB REPORT FILED BY THE TAXPAYER BEFORE THE ASSESSING OFFICER, EXCEEDED RS.5 CRORES, HE REFERRED THE CASE TO THE TPO. THEREFORE, WE SEE NO INFIRMITY IN REFERRI NG THE MATTER TO THE TPO WITHOUT FORMING A CONSIDERED OPINION. IN THE LIG HT OF THE ABOVE REASONING, THE FIRST LEGAL POINT RAISED BY THE ASSESSEE, NAMELY, T HE REFERENCE TO THE TPO BY THE ASSESSING OFFICER WITHOUT FORMING A CONSIDERED OPINION DOES NOT STAND THE TEST OF LAW AND CANNOT BE SUSTAINED, THEREFORE THIS PLEA OF THE ASSESSEE IS REJECTED. IT IS ORDERED ACCORDINGLY. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDI NATE BENCH OF THIS TRIBUNAL IN THE CASE OF TALLY SOLUTIONS PVT LTD (SUPRA), WE HOLD TH AT THERE IS NOTHING IN SECTION 92CA TO SUGGEST THAT THE ASSESSING OFFICER SHOULD HEAR THE ASSESSEE OR RECORD REASONS BEFORE MAKING A REFERENCE TO THE TPO AND THEREFORE IN THE INSTANT CASE THERE IS NO INFIRMITY IN THE ACTION OF THE ASSESSING OFFICER IN REFERRING TH IS CASE TO THE TPO. ACCORDINGLY THIS GROUND OF THE ASSESSEE IS DISMISSED. APPROVAL OF COMMISSIONER OF INCOME TAX 7.1 REGARDING THE APPROVAL OF THE COMMISSIONER OF I NCOME TAX, SINCE THE WORD APPROVAL IS NOT DEFINED UNDER THE ACT, WE HAVE PE RUSED VARIOUS JUDICIAL PRONOUNCEMENTS. THE HON'BLE APEX COURT IN THE CASE OF VIJAYADEVI NA VALKISHORE BHARTIA & ANOTHER VS. LAND ACQUISITION OFFICER & ANOTHER (2003) 5 SCC 83, HELD : 13 ITA NO.828/BANG/2010 WHAT IS PROVIDED UNDER THE PROVISO TO SECTION 11( 1) IS THAT THE PROPOSED AWARD MADE BY THE COLLECTOR MUST HAVE THE APPROVAL OF THE APPROPR IATE GOVERNMENT OR SUCH OFFICER AS THE APPROPRIATE GOVERNMENT MAY AUTHORIZE IN THAT BEHALF . IN OUR OPINION, THIS POWER OF GRANTING OR NOT GRANTING PREVIOUS APPROVAL CANNOT B E EQUATED WITH APPELLATE POWER. BLACKS DICTIONARY, 6 TH EDITION, DEFINES APPROVAL TO MEAN AN ACT CONFIRM ING, NOTIFYING, ASSERTING, SANCTIONING OR CONSENTING TO SOME ACT OR THING DONE BY ANOTHER. IN THE CONTEXT OF AN ADMINISTRATIVE ACT, THE WORD APPROVAL IN OUR OPIN ION, DOES NOT MEAN ANYTHING MORE THAN EITHER CONFIRMING, RATIFYING, ASSENTING, SANCTIONIN G OR CONSENTING. IT WILL BE DOING VIOLENCE TO THE SCHEME OF THE ACT IF WE HAVE TO CONSTRUE AND ACCEPT THE ARGUMENT OF THE LEARNED COUNSEL FOR THE RESPONDENTS THAT THE WORD APPROVAL FOUND IN PROVISO TO SECTION 11(1) OF THE ACT UNDER THE SCHEME OF THE ACT AMOUNTS TO AN A PPELLATE POWER. ON THE CONTRARY, WE ARE OF THE OPINION THAT THIS IS ONLY AN ADMINISTRAT IVE POWER WHICH LIMITS THE JURISDICTION OF THE AUTHORITY TO APPLY ITS MIND TO SEE WHETHER THE PROPOSED AWARD IS ACCEPTABLE TO THE GOVERNMENT OR NOT. IN THAT PROCESS FOR THE PURPOSE OF FORMING AN OPINION TO APPROVE OR NOT TO APPROVE THE PROPOSED AWARD, THE COMMISSIONER MAY SATISFY HIMSELF AS TO THE MATERIAL RELIED UPON BY THE COLLECTOR BUT HE CANNOT REVERSE THE FINDING AS IF HE IS AN APPELLATE AUTHORITY FOR THE PURPOSE OF REMANDING TH E MATTER TO THE COLLECTOR AS CAN BE DONE BY AN APPELLATE AUTHORITY; MUCH LESS CAN THE COMMISSIONER EXERCISING THE SAID POWER OF PRIOR APPROVAL GIVE DIRECTION TO THE STATUTORY A UTHORITY IN WHAT MANNER HE SHOULD ACCEPT/APPROPRIATE THE MATERIAL ON RECORD IN REGARD TO THE COMPENSATION PAYABLE. IF SUCH A POWER OF ISSUING DIRECTIONS TO THE COLLECTOR BY T HE COMMISSIONER UNDER THE PROVISION OF LAW REFERRED TO HEREINABOVE IS TO BE ACCEPTED THEN IT WOULD MEAN THAT THE COMMISSIONER IS 14 ITA NO.828/BANG/2010 TO EXAMINE THE SAID POWER TO SUBSTITUTE HIS OPINION FOR THAT OF THE COLLECTORS OPINION FOR THE PURPOSE OF FIXING COMPENSATION, WHICH IN OUR VI EW IS OPPOSED TO THE LANGUAGE OF SECTION 11 OF THE ACT. 7.2 IN THE CASE OF KAILASH MOUDGIL VS. DCIT (2000) 72 ITD 97 (DELHI) THE ISSUES BEFORE THE HON'BLE TRIBUNAL OF DELHI WAS WHETHER TH E COMMISSIONER IS REQUIRED BY LAW TO GIVE AN OPPORTUNITY OF HEARING TO THE ASSESSEE BEFO RE GIVING APPROVAL FOR BLOCK ASSESSMENTS AND ALSO WHETHER THE COMMISSIONER IS RE QUIRED BY LAW TO RECORD HIS REASONS IN WRITING WHILE APPROVING THE ORDER OF THE ASSESSING OFFICER. THE TRIBUNAL HELD AS UNDER : 10. THEN, WHAT IS THE ROLE OF THE COMMISSIONER WHILE GRANTING APPROVAL TO THE ASSESSMENT ORDER PREPARED BY THE ASSESSING OFFICER AND PUTTING IT BEFORE HIM FOR APPROVAL. WE HAVE ALREADY SEEN WHAT IS MEANT BY A PPROVAL. THE WORD APPROVAL MEANS TO BE SATISFIED WITH, TO SANCTION OFFICIALLY, TO RATIF Y, TO PRONOUNCE GOOD, THINK OR JUDGE WELL OF; ADMIT THE PROPRIETY OR EXCELLENCE OF; TO BE PLE ASED WITH; DISTINGUISHABLE FROM AUTHORISE, MEANING TO PERMIT A THING TO BE DONE I N FUTURE. THEREFORE, THE ORDINARY MEANING OF THE WORD APPROVAL CAN NEVER BE SYNONYMOU S TO SATISFACTION WHICH IS DERIVED FROM OUT OF JUDICIAL PROCEEDINGS. ON THE OTHER HAND , IT MEANS THAT THE COMMISSIONER IS ADMINISTRATIVELY SATISFIED WITH THE ASSESSMENT. IT MEANS TO CONFIRM, RATIFY, SANCTION OR CONSENT TO SOME ACT OR THING DONE BY ANOTHER, TO SA NCTION OFFICIALLY. THE MEANING OF THE WORD APPROVAL DOES NOT CARRY ANY MEANING OF AUTHO RIZATION. IN ORDER TO SATISFY HIMSELF, THE COMMISSIONER CAN GO THROUGH THE ASSESSMENT AND AFTER GOING THROUGH, HE CAN CONFIRM, RATIFY, SANCTION OR GIVE CONSENT OR GIVE SANCTION OFFICIALLY. THEREFORE, THE INTENDMENT OF THE WORD APPROVE IS ONLY TO GIVE OFFICIAL SANCTIO N AND NOTHING MORE. THERE IS NO SCOPE 15 ITA NO.828/BANG/2010 THAT THE WORD APPROVE ADMITS OF ANY JUDICIAL PROC EEDINGS. THERE IS NO QUESTION OF AUDI ALTERAM PARTEM RULE TO APPLY. WE ARE INCLINED TO T HINK THAT UNDER THE FACTS AND CIRCUMSTANCES AND THE SET UP IN WHICH PROVISO UNDER 158BG WAS OBTAINING, APPROVE MEANS EXERCISE OF ADMINISTRATIVE AUTHORITY. 7.3 THE HON'BLE APEX COURT IN THE CASE OF SANT LAL GUPTA & OTHERS VS. MODERN CO-OP. G.H. SOCIETY LTD & OTHERS (CIVIL APPEAL NO.9439 OF 2003) APPROVED ITS EARLIER DECISION IN THE CASE OF VIJAYADEVI NAVALKISHORE BHARTIA (SUPRA ) AND HELD THAT APPROVAL MEANS CONFIRMING, RATIFYING, ASSENTING, SANCTIONING OR CO NSENTING TO SOME ACT OR THING DONE BY ANOTHER. THOUGH THE DECISION OF VIJAYADEVI NAVALKI SHORE BHAATIA (SUPRA) WAS RENDERED IN THE CONTEXT OF LAND ACQUISITION ACT, THE SAME WOUL D BE EQUALLY APPLICABLE TO ADMINISTRATIVE APPROVALS UNDER THE INCOME TAX ACT, 1961. AS HELD BY THE HON'BLE APEX COURT (SUPRA), THE POWER OF APPROVAL IS ONLY AN ADM INISTRATIVE POWER AND LIMITS THE JURISDICTION OF THE AUTHORITY I.E. THE COMMISSIONER , TO APPLY ITS MIND TO SEE WHETHER THE PROPOSAL SENT BY THE ASSESSING OFFICER IS ACCEPTABL E OR NOT. IN THE CONTEXT OF SECTION 92CA(1) OF THE ACT, THE WORD APPROVAL, IN OUR OPI NION, DOES NOT MEAN ANYTHING MORE THAN CONFIRMING, RATIFYING, ASSENTING, SANCTIONING OR CO NSENTING. IT WILL BE DOING VIOLENCE TO THE SCHEME OF THE ACT IF WE HAVE TO CONSTRUE AND ACCEPT THE GROUND RAISED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE WORD APPROVAL AMO UNTS TO AN APPELLATE POWER AND THEREBY THE COMMISSIONER WOULD HAVE TO GIVE DETAILE D REASONS FOR APPROVAL. FURTHER, IN VIEW OF THE DECISION OF THE HON'BLE APEX COURT (SUP RA), THE COMMISSIONER CANNOT GO BEYOND THE MATERIAL PLACED BEFORE HIM BY THE ASSESS ING OFFICER LIKE RECORDS OF ASSESSMENT, FORM 3CEB ETC. THEREFORE, IN OUR VIEW, THE APPROVAL OF THE COMMISSIONER TO 16 ITA NO.828/BANG/2010 THE ASSESSING OFFICERS PROPOSAL FOR MAKING A REFER ENCE TO THE TPO AS PER SECTION 92CA(1) OF THE ACT IS AN ADMINISTRATIVE APPROVAL BA SED ON APPRAISAL OF FORM 3CEB WHICH CONTAINS INFORMATION ON INTERNATIONAL TRANSACTIONS ENTERED INTO AND THE QUANTUM OF SUCH TRANSACTIONS, SUFFERS FROM NO LEGAL INFIRMITY ONCE THE AGGREGATE VALUE OF SUCH INTERNATIONAL TRANSACTIONS EXCEED RS.5 CRORES IN TH E RELEVANT PERIOD. THEREFORE, WE DISMISS THIS GROUND RAISED BY THE ASSESSEE. 8.1 IN RESPECT OF THE GROUND RAISED AT A-3 , THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT THE AUTHORITIES BELOW HAVE ERRED IN NOT APPRECIATING THAT THE CHARGING OR COMPUTATION PROVISIONS RELATING TO INCOME UNDER THE HEAD PROFITS & GAINS FROM BUSINESS OR PROFESSION DO NOT REFER TO INCLUDE AMOUNTS COMPUT ED UNDER CHAPTER X OF THE ACT AND THEREFORE THE ADDITIONS UNDER CHAPTER X ARE BAD IN LAW. IT WAS ALSO CONTENDED THAT THERE IS NO AMENDMENT TO THE DEFINITION OF THE TERM INCO ME TO INCLUDE AMOUNTS COMPUTED UNDER CHAPTER X OF THE ACT. 8.2 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE SUBMITTED THAT SECTION 92(1) OF THE ACT MAKES IT VERY CLEAR THAT I NCOME OR EXPENSE ARISING OUT OF AN INTERNATIONAL TRANSACTION IS TO BE COMPUTED HAVING REGARD TO THE ALP. 8.3 ON A CAREFUL CONSIDERATION OF THE SUBMISSIONS M ADE ON THIS ISSUE, WE ARE OF THE VIEW THAT THE T.P. PROVISIONS IN CHAPTER X OF THE A CT ARE SPECIAL PROVISIONS AND SECTION 92(1) THEREOF MANDATES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE (A LP). THE EXPLANATION TO SECTION 92(1) CLARIFIES THAT THE ALLOWANCE FOR ANY EXPENSE OR INT EREST ARISING FROM AN INTERNATIONAL TRANSACTION SHALL ALSO BE DETERMINED HAVING REGARD TO THE ALP. AS THESE ARE ANTI- 17 ITA NO.828/BANG/2010 AVOIDANCE PROVISIONS OF THE ACT, AND ALSO SPECIAL P ROVISIONS TO PROTECT THE TAX BASE OF THE COUNTRY FROM BEING ERODED, THEY WILL OVER-RIDE ALL OTHER PROVISIONS OF THE ACT. WE, THEREFORE, SEE NO MERIT IN THIS GROUND RAISED BY TH E ASSESSEE THAT THE DEFINITION OF INCOME UNDER THE ACT IS NOT AMENDED TO INCLUDE TH E T.P. ADJUSTMENTS AS INCOME AND ACCORDINGLY DISMISS THIS GROUND. 9.0 IN SUPPORT OF THE GROUNDS RAISED AT A-4 , THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT WHEN THERE WAS NO DISALLOWANCE UNDER SECTION 40A(2) OF THE ACT FOR PURCHASE OF SPARE PARTS AND COMPONENTS, ADJUSTMENTS UNDER CHAPTER X OF THE ACT OUGHT NOT TO BE MADE. IN THIS REGARD, AS HELD IN PARA 8. 3 OF THIS ORDER (SUPRA), WE ARE OF THE VIEW THAT CHAPTER X BEING BROUGHT IN AS ANTI-AVOIDA NCE MEASURES TO PROTECT THE TAX BASE OF THE COUNTRY, THEN PROVISIONS THEREOF WOULD OVER- RIDE THE OTHER PROVISIONS OF THE ACT, INCLUDING SECTION 40A(2). THE EXPLANATION TO SECTI ON 92(1) OF THE ACT CLARIFIES THAT THE ALLOWANCE FOR ANY EXPENSE OR INTEREST ARISING FROM AN INTERNATIONAL TRANSACTION SHALL ALSO BE DETERMINED HAVING REGARD TO THE ALP AND THEREFOR E THE DISALLOWANCE IS MADE UNDER SECTION 92(1) AND NOT UNDER SECTION 40A(2) OF THE A CT. WE, THEREFORE, FINDING NO MERIT IN THE ARGUMENTS PUT FORTH BY THE ASSESSEE THAT DISALL OWANCE EVEN FOR TP ADJUSTMENTS REQUIRE TO BE MADE UNDER SECTION 40A(2) OF THE ACT, DISMISS THIS GROUND OF THE ASSESSEE. 10.1 IN SUPPORT OF THE GROUND RAISED AT A-5 , THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT THE AUTHORITIES BELOW HAVE ERRED IN PAS SING THE ORDERS MAKING THE TP ADJUSTMENT AND THEREBY ENHANCING THE ASSESSEE'S INC OME WITHOUT DEMONSTRATING THAT THE ASSESSEE HAD MOTIVE FOR TAX EVASION OR THAT THE PR OFITS OF THE ASSESSEE WERE DIVERTED ELSEWHERE OR THAT THERE HAS BEEN ANY EROSION IN THE BASE OF TAXABLE INCOME IN INDIA. THE 18 ITA NO.828/BANG/2010 MAIN ARGUMENTS OF THE LEARNED COUNSEL FOR THE ASSES SEE IS THAT THE ASSESSEE DID NOT INTEND TO TRANSFER / SHIFT PROFITS OUTSIDE INDIA AND THUS THE TPO OUGHT NOT TO HAVE MADE ANY ADJUSTMENT WITHOUT ESTABLISHING THAT THE ASSESSEE S HIFTED PROFITS OUTSIDE INDIA. THE LEARNED DEPARTMENTAL REPRESENTATIVES SUBMISSIONS WERE ALSO HEARD. 10.2 WE HAVE HEARD BOTH SIDES ON THIS ISSUE. WE HA VE PERUSED THE DECISION OF THE ITAT, PUNE BENCH IN THE CASE OF ACIT VS. MSS INDIA PVT LTD (2009-TIOL-416-ITAT- PUNE) WHEREIN THE TRIBUNAL DISCUSSED BOTH THE DECIS IONS OF THE CO-ORDINATE BENCHES OF THE BANGALORE BENCH IN THE CASES OF (I) AZTECH SO FTWARE TECHNOLOGY SERVICES LTD REPORTED IN 107 ITD 141 (BANG) (SB) AND (II) PHILLI PS SOFTWARE CENTRE PVT LTD REPORTED IN (2008-TIOL-471-ITAT-BANG). THE TRIBUNAL WAS OF THE VIEW THAT THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AZTECH SOFTWARE TECHNOLOGY SERVICES LTD (SUPRA) WOULD PREVAIL AND HELD THAT IT IS NOT NECES SARY FOR THE TPO TO DEMONSTRATE TAX AVOIDANCE AND DIVERSION OF INCOME FOR INVOKING THE PROVISIONS OF SECTION 92C AND 92CA OF THE ACT. IN THE CASE OF COCA COLA INDIA INC VS. AC IT REPORTED IN 309 ITR 194 (P & H), THE HON'BLE PUNJAB & HARYANA HIGH COURT DEALT WITH THE MATTER OF ANTI-AVOIDANCE AND T.P. IN DETAIL AND HELD THAT IT IS NOT NECESSARY FOR THE AS SESSING OFFICER / TPO TO DEMONSTRATE THAT PROFITS ARE SHIFTED OUT OF INDIA IN ORDER TO D ETERMINE THE ARMS LENGTH NATURE OF ANY INTERNATIONAL TRANSACTION. IN PARA 52 OF THE JUDGMENT THEIR LORDSHIPS HAVE HEL D THAT - THE INCOME ARISING FROM INTERNATIONAL TRANSACT IONS IS TO BE COMPUTED HAVING REGARD TO ARMS LENGTH PRICE AS PER THE GUIDELINES LAID DOWN IN SECTION 92C OF THE ACT BY ADOPTING ONE OF THE LAID DOWN METHODS, AT THE DISCRETION OF THE COMPETENT AUTHORITY. 19 ITA NO.828/BANG/2010 IN PARA 53 OF THE SAID JUDGMENT THEIR LORDSHIPS HAV E HELD THAT : 53. WE DO NOT FIND ANY AMBIGUITY OR ABSURD CONSE QUENCE OF APPLICATION OF CHAPTER X TO PERSONS WHO ARE SUBJECT TO THE JURISDI CTION OF TAXING AUTHORITIES IN INDIA NOR DO WE FIND ANY STATUTORY REQUIREMENT O F ESTABLISHING THAT THERE IS A TRANSFER OF PROFITS OUTSIDE INDIA OR THAT THERE I S EVASION OF TAX. ONLY CONDITION PRECEDENT FOR INVOKING PROVISIONS OF CHAP TER X IS THAT THERE SHOULD BE INCOME ARISING FROM INTERNATIONAL TRANSACTION AN D SUCH INCOME HAS TO BE COMPUTED HAVING REGARD TO ARMS LENGTH PRICE. IN PARA 54 OF THE SAID JUDGMENT, THEIR LORDSHIPS HA VE HELD THAT - 54. WE, THUS, DO NOT FIND ANY MERIT WHATSOEVER IN THE CONTENTION THAT PROVISIONS OF CHAPTER X CANNOT BE MADE APPLICABLE T O PARTIES WHICH ARE SUBJECT TO THE JURISDICTION OF THE TAX AUTHORITIES IN INDIA , WITHOUT THERE BEING ANY MATERIAL TO SHOW TRANSFER OF PROFITS OUTSIDE INDIA OR EVASION OF TAX BETWEEN THE TWO PARTIES RESPECTFULLY FOLLOWING THE DECISIONS OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF COCA COLA INDIA INC (SUPRA) AND OF THE ITAT , PUNE BENCH IN THE CASE OF MSS INDIA PVT LTD (SUPRA) AND OF THE BANGALORE ITAT, SPECIAL BENCH IN THE CASE OF AZTEC SOFTWARE TECHNOLOGY SERVICES LTD (SUPRA), WE DO NOT FIND ANY MERIT IN THE GROUND RAISED THAT NO T.P. ADJUSTMENT COULD BE MADE IN THE ASSESSEE'S CAS E WITHOUT THERE BEING ANY MATERIAL OR FINDING BY THE TPO TO SHOW THAT THERE WAS TRANSFER OF PROFITS OUTSIDE INDIA OR EVASION OF TAX IN INDIA AND THEREFORE DISMISS THIS GROUND RAIS ED BY THE ASSESSEE. 11. IN THE GROUND RAISED AT A-6 , IT HAS BEEN SUBMITTED THAT THE TPO MADE A T.P. ADJUSTMENT FOR THE YEAR UNDER CONSIDERATION, ALTHOU GH THE METHOD ADOPTED, THE AES, THE NATURE OF TRANSACTIONS AND THE COMPARABLES WERE SAM E AS IN EARLIER YEARS OR SUBSEQUENT YEARS IN WHICH NO SIMILAR ADJUSTMENT WAS MADE. 11.2 IN THIS REGARD, AFTER CONSIDERATION OF THE SUB MISSIONS, WE ARE OF THE VIEW THAT THE DETERMINATION OF ALP IS A FACTUAL MATTER AND THERE WOULD CERTAINLY BE VARIATIONS / 20 ITA NO.828/BANG/2010 DIFFERENCES IN THE ACTIVITIES OF BOTH THE ASSESSEE AND COMPARABLES FROM YEAR TO YEAR AND THEREFORE IN THE FACT SITUATION THE TPO ON EXAMINAT ION OF THE MATERIAL PLACED BEFORE HER FOUND DIFFERENCES LEADING TO THE TP ADJUSTMENT. MO REOVER, AS RES JUDICATA IS NOT APPLICABLE FOR INCOME TAX PROCEEDINGS, AS THE TPO, BASED ON THE MATERIAL AVAILABLE WITH HER COULD FIND THAT IN THE RELEVANT PERIOD THERE AR E MAJOR DIFFERENCES BETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES MAINLY ON ACC OUNT OF BETTER OPERATIONAL EFFICIENCY OF THE ASSESSEE. WE, THEREFORE, DISMISS THIS GROUN D AS BEING DEVOID OF ANY MERIT. USE OF MULTIPLE YEAR DATA 12.1 IN SUPPORT OF THE GROUND RAISED AT S.NO.8 , THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDS THAT THE AUTHORITIES BELOW HAVE ERRED IN D ETERMINING THE ALP USING F.Y. 2002-03 DATA OF COMPARABLES WHICH WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF COMPLYING WITH THE TP DOCUMENTATION REQUIREMENT. IT WAS FURTHER S UBMITTED THAT THE TPO / LEARNED CIT(APPEALS) HAVE ERRED IN NOT APPRECIATING THAT UN DER THE RELEVANT RULES, DATA PERTAINING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO THE RELEVANT FINANCIAL YEAR MAY ALSO BE USED IN COMPARABILITY ANALYSIS. 12.2 THE ARGUMENTS OF THE ASSESSEE HAVE BEEN CAREFU LLY CONSIDERED. IN RESPECT OF THE ASSESSEE'S CLAIM THAT THE AUTHORITIES BELOW HAD ERR ED IN DETERMINING THE ALP ON THE BASIS OF DATA OF THE COMPARABLE COMPANIES PERTAINING TO F .Y. 2002-03 WHICH WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF T.P. DOCUMENTATION, WE ARE OF THE VIEW THAT SUCH NON- AVAILABILITY WILL NOT DISPENSE WITH THE MANDATORY R EQUIREMENTS OF RULE 10B(4) OF INCOME TAX RULES, 1962 (HEREINAFTER REFERRED TO AS THE RU LES) FOR USING THE DATA OF THE CURRENT FINANCIAL YEAR IN CONDUCTING COMPARABILITY ANALYSIS AND IN DETERMINING THE ALP IN 21 ITA NO.828/BANG/2010 ACCORDANCE WITH SECTION 92C(1) AND 92C(2) OF THE AC T. IN THIS VIEW OF THE MATTER, THE TPO IS BOTH EMPOWERED AND ALSO DUTY BOUND TO DETERM INE THE ALP USING SUCH CONTEMPORANEOUS DATA FOR THIS PURPOSE EVEN IF IT IS NOT AVAILABLE TO THE ASSESSEE IN THE PUBLIC DATA BASES AT THE TIME OF PREPARATION OF IT S REPORT ON THE T.P. STUDY. WE, THEREFORE, HOLD THAT THERE IS NO INFIRMITY IN THE A CTION OF THE TPO BY USING DATA AT THE TIME OF THE TRANSFER PRICING AUDIT, THOUGH THE SAME WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF PREPARATION OF STATUTORY T.P. DOCUMENTA TION. 12.3 THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDE D THAT THE TPO ERRED IN NOT APPRECIATING THAT UNDER THE RELEVANT RULES, MULTIPL E YEARS DATA PERTAINING TO PERIOD OF NOT MORE THAN TWO YEARS PRIOR TO THE RELEVANT PERIOD MA Y BE USED IN THE T.P. DOCUMENTATION. THE SUBMISSIONS MADE ARE CAREFULLY CONSIDERED WITH REFERENCE TO THE ACTION OF THE TPO. WE FIND THAT AS MANDATED BY RULE 10B(4) OF IT RULES, 1962, THE TPO USED DATA PERTAINING TO THE CURRENT YEAR I.E. FINANCIAL YEAR 2002-03. WE ARE ALSO OF THE VIEW THAT THE TPO / CIT(APPEALS) HAD RIGHTLY REJECTED THE ASS ESSEE USE OF MULTIPLE YEAR DATA AS THE ASSESSEE FAILED TO DEMONSTRATE BEFORE THEM HOW SUCH DATA PERTAINING TO THE PRIOR YEARS HAD AN INFLUENCE OR BEARING ON PRICES IN THE CURREN T FINANCIAL YEAR. MULTIPLE YEAR DATA MAY BE USED IN CASE THERE IS ANY EFFECT IN THE CASE OF THE ASSESSEE OR OF THE COMPARABLES ON THEIR PROFITABILITY. THE ASSESSEE HAS FAILED TO ES TABLISH HOW THE USE OF MULTIPLE YEAR / PRIOR YEARS DATA INFLUENCED THE DETERMINATION OF TR ANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. IN OUR CONSIDERED OPI NION THE USE OF EARLIER YEARS DATA WAS NOT WARRANTED IN THE FACTS OF THE INSTANT CASE AND WE FIND THAT THE TPO APTLY USED ONLY DATA OF THE RELEVANT FINANCIAL YEAR AND THEREFORE U PHOLD HER ACTION. 22 ITA NO.828/BANG/2010 13.1 IN THE GROUND RAISED AT S.NO.9 , IT IS SUBMITTED THAT THE TPO ADOPTED A FLAWED METHODOLOGY AND PROCESS IN ARRIVING AT THE ALP. ON PERUSAL OF THE MATERIAL ON RECORD, WE FIND THAT THE TPO HAD REJECTED THE ASSESSEE'S T. P . DOCUMENTATION MAINLY ON THREE POINTS I) THE ASSESSEE DID NOT USE DATA OF THE RELEVANT FI NANCIAL YEAR 2002-03 II) THE ASSESSEE DID NOT MAKE ANY ADJUSTMENTS TO AC COUNT FOR THE MATERIAL DIFFERENCES IN OPERATING EFFICIENCY AND DEPRECIATION AND III) THE ASSESSEE CLAIMED UNWARRANTED ADJUSTMENTS T OWARDS CUSTOMS DUTY AND EXCISE DUTY. WHEN THE TPO IS BOUND TO ENSURE THAT THE DATA USED FOR DETERMINING ALP IN CORRECT AND RELIABLE, IT IS BUT NATURAL THAT THE TP O CAN REJECT DOCUMENTATION AND INFORMATION THAT IS UNRELIABLE AND INCORRECT. FURT HER, THE TPO IS EMPOWERED TO GATHER SUCH INFORMATION AS IS USEFUL IN DETERMINING THE AL P. AS THE TPO HAS AFFORDED SUFFICIENT OPPORTUNITY TO THE ASSESSEE FOR REBUTTAL AND CONSID ERED THE ARGUMENTS PUT FORTH IN HER ORDER, WE FIND NO INFIRMITY WITH THE PROCEDURE ADOP TED BY THE TPO IN MODIFYING THE ASSESSEE'S T.P. DOCUMENTATION, CONDUCTING HER OWN T .P. ANALYSIS AND IN ARRIVING AT HER OWN CONCLUSIONS. 14. SEGMENTATION BETWEEN MANUFACTURING AND TRADING OPER ATIONS. 14.1 IN SUPPORT OF THE GROUNDS RAISED AT A-10, 16 & 17 , THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE AUTHORITIES BELOW H AVE ERRED IN CONCLUDING THAT THE TRADING AND MANUFACTURING SEGMENT ARE DISTINCT WITH OUT APPRECIATING THAT BOTH THE SEGMENTS ARE INTERTWINED AND INTER-RELATED WARRANTI NG A COMBINED TRANSACTION APPROACH IN ARRIVING AT THE ALP. IT IS SUBMITTED THAT IN TH E RELEVANT PERIOD, THE ASSESSEE WAS 23 ITA NO.828/BANG/2010 ENGAGED BOTH IN MANUFACTURE OF PASSENGER CARS (VIZ . COROLLA AND QUALIS) AND ALSO IN TRADING / DISTRIBUTION OF PASSENGER CARS (VIZ. CAMRY) AND S PARE PARTS AND COMPONENTS. IT IS SUBMITTED THAT THE T.P. ANALYSIS PERFORMED BY THE A SSESSEE AT ENTITY / ENTERPRISE LEVEL USING THE COMBINED TRANSACTION METHOD WAS FOR TH E FOLLOWING REASONS : I) THAT ITS VARIOUS ACTIVITIES WERE INTER-TWINED A ND INTER-RELATED AS A PART OF THE TRADING ACTIVITIES WERE AS A RESULT OF MANUFACTURING ACTIVI TIES INCLUDING WARRANTY COMMITMENTS; II) THE DATA IN THE PUBLIC DOMAIN WAS AVAILABLE ONL Y AT THE ENTITY LEVEL AND WAS NOT DETAILED ENOUGH TO MAKE A COMPARISON OF RESULTS AT THE TRANS ACTION LEVEL; AND III) IN THE PECULIAR CIRCUMSTANCES INVOLVING VARIO US TYPES OF TRANSACTIONS ENTERED INTO, IT WAS NOT POSSIBLE TO SPLIT THE FINANCIAL DATA TO AR RIVE AT THE NET RESULT FROM PARTICULAR TRANSACTIONS. IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE AS SESSEE THAT INSPITE OF THE ASSESSEE DEMONSTRATING THE UNIFIED NATURE OF THE M ANUFACTURING AND TRADING SEGMENTS, THE TPO HAD MODIFIED THE T.P. ANALYSIS BY SEGMENTIN G THE MANUFACTURING AND TRADING OPERATIONS. IT WAS SUBMITTED THAT THE LEARNED CIT (APPEALS) CONCURRED WITH THE VIEW OF THE TPO THAT THE ACTIVITIES OF MANUFACTURING AND T RADING SEGMENTS WERE DIFFERENT AND DISTINCT EACH HAVING ITS OWN FUNCTIONS, ASSETS AND RISKS. IT IS SUBMITTED THAT THE LEARNED CIT (APPEALS) HAD FURTHER HELD THAT THE IMPORT OF C OMPONENTS FOR MANUFACTURE OF PASSENGER CARS AND IMPORT OF CAMRY PASSENGER CAR FO R DISTRIBUTION IS A DISTINCT CLASS OF TRANSACTION AND REQUIRES SEPARATE ANALYSIS. IN SUP PORT OF HIS CONCLUSION, THE LEARNED CIT (APPEALS) RELIED ON THE DECISION OF THE TRIBUNAL IN THE CASE OF STAR INDIA PVT LTD VS.ACIT 24 ITA NO.828/BANG/2010 REPORTED IN 2008-TIOL-426-ITAT-MUMBAI AND UCB INDIA PVT LTD REPORTED IN 124 TTJ 289. 14.2 BEFORE US, THE LEARNED COUNSEL FOR THE ASSESS EE SUBMITTED THAT TO DETERMINE WHETHER THE PRICES CHARGED / PAID IN INTE RNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE ARE AT ARMS LENGTH, A T.P. METHOD MAY BE APPLIED TO EACH TRANSACTION SEPARATELY ON TO A GROUP OF TRANSACTIONS. RELIANCE WAS PLACED ON PARA 3.9 OF THE OECD T.P. GUIDELINES 2010, WHICH PROVIDE THAT A COMBINE D TRANSACTION METHOD CAN BE ADOPTED IN CASE THE TRANSACTIONS ARE CLOSELY LINKED OR CONT INUOUS AND CANNOT BE ADEQUATELY EVALUATED ON THEIR INDIVIDUAL BASIS. IN SUCH A SIT UATION, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITS THAT, RATHER THAN ASSESSING THE AR MS LENGTH TERMS OF THE TRANSACTIONS INDIVIDUALLY, THESE DIFFERENT INTERNATIONAL TRANSAC TIONS COULD BE BETTER EVALUATED TOGETHER IF THEY ARE CLOSELY LINKED OR CONTINUOUS. THIS, IT IS SUBMITTED, IS ALSO IN ACCORDANCE WITH RULE 10A (D) OF THE RULES WHICH DEFINE TRANSACTION TO INCLUDE A NUMBER OF CLOSELY LINKED TRANSACTIONS AND DOES NOT MANDATE THAT THE TRANSACT IONS SHOULD BE IDENTICAL OR SIMILAR. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEES TRADING AND MANUFACTURING SEGMENTS ARE CLOSELY LINKED AND INTER DEPENDENT SINCE A PART OF THE TRADING ACTIVITY WERE A RESULT OF THE MANUFACTURING ACTIVIT Y, INCLUDING WARRANTY COMMITMENTS. 14.3 AN AUTOMOBILE MANUFACTURER HAS TO INEVITABLY E NGAGE IN TRADING ACTIVITIES GIVEN THE FACT THAT IT HAS TO PROVIDE AFTER SALES SUPPORT TO ITS CUSTOMERS AND SO IS THE CASE WITH THE ASSESSEE ALSO. IT WAS FURTHER SUBMITTED THAT EVEN THE COMPARABLE COMPANIES ARE ENGAGED IN BOTH MANUFACTURE AND TRADING ACTIVITIES. IN SUP PORT OF THIS PROPOSITION, THE ASSESSEE PROVIDED THE FOLLOWING DETAILS IN TABULAR FORM: 25 ITA NO.828/BANG/2010 IN CASE OF COMPARABLES NAME OF THE COMPANY PAGE NO. OF ANNUAL REPORT PURCHASE OF FINISHED GOODS (IN CRORES) (A) TOTAL OPERATING COST & DEPRECIATION (IN CRORES) (B) PERCENTAGE OF A/B ASHOK LEYLAND 38 58.33 3012.4 1.94 EICHER MOTORS 20 29.86 646.48 4.62 MAHINDRA & MAHINDRA 66 108.37 4,570.99 2.37 SWARAJ MAZDA 27 13.47 398.98 3.18 TATA MOTORS 30 360.77 10,553.49 3.42 IN THE CASE OF ASSESSEE ASSESSEE 23 122.02 1,804.53 6.76 THE LEARNED COUNSEL FOR THE ASSESSEE ALSO INVITED O UR ATTENTION TO THE RELEVANT EXTRACTS FROM THE ANNUAL REPORTS OF THE COMPARABLE COMPANIES SUBMITTING THAT THOUGH PURCHASE OF TRADED GOODS ARE SEPARATELY STATED THEREIN, THE SA LES FIGURE IN SOME COMPANIES ARE THE AGGREGATE OF TRADING AND MANUFACTURING ITEMS. FOR E G., IN THE CASE OF TATA MOTORS ON PAGE 7 OF THE ANNUAL REPORT, A CUMULATIVE FIGURE OF RS.1 0,604.04 CRORES IS STATED AS SALE OF PRODUCTS AND SERVICES. SIMILARLY, IN THE CASE OF MAHINDRA & MAHINDRA LTD, PAGE 65 OF THE ANNUAL REPORT GIVES A SINGLE FIGURE OF SALES MANU FACTURED AND TRADED GOODS. IT IS SUBMITTED THAT DUE TO LACK OF DETAILS IN THE PUBLIC DOMAIN, IT IS NOT POSSIBLE TO HAVE SEGMENTAL ANALYSIS OF COMPARABLES. THE LEARNED COU NSEL FOR THE ASSESSEE ALSO SUBMITTED THAT FOR ASSESSMENT YEAR 2004-05, THE TPO ACCEPTED THE T.P. ANALYSIS OF THE ASSESSEE WITHOUT SEGMENTING THE RESULTS BETWEEN TRADING AND MANUFACTURING SEGMENTS. BASED ON 26 ITA NO.828/BANG/2010 THE ABOVE, THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT SEGMENTATION OF ITS RESULTS BETWEEN TRADING AND MANUFACTURING WAS NOT C ALLED FOR AND IS BAD IN LAW. 14.3 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPOR TED THE ORDERS OF THE LEARNED CIT (APPEALS) IN UPHOLDING THE ACTION OF THE TPO IN TAK ING THE SEGMENTAL BREAK UP OF TRADING AND MANUFACTURING OPERATIONS. THE LEARNED DEPARTMEN TAL REPRESENTATIVE SUBMITTED THAT I) THE TWO ACTIVITIES OF MANUFACTURE AND TRADING AR E DISTINCT; EACH WITH THEIR OWN FUNCTIONS, ASSETSAND RISKS INVOLVED AND THEREFORE C ANNOT BE CLUBBED TOGETHER AND REQUIRES TO BE ANALYSED SEPARATELY AS PER RULE 10C(2)(A). II) THE TAX PAYERS ARGUMENT THAT BOTH TRADING AND M ANUFACTURING SEGMENTS ARE CLOSELY LINKED IS WITHOUT BASIS AS THE COMPLETELY BUILT UNI TS CBUS ARE SOLD INDEPENDENTLY OF THE SALE OF MANUFACTURED VEHICLES AND THE PRICING IN TH E TRADING ACTIVITY IS NOT DEPENDENT ON THE PRICING OF THE MANUFACTURED PASSENGER VEHICLE. THUS THE PURCHASE AND SALE OF CBUS (CAMRY) ARE TO BE INDEPENDENTLY ANALYSED FROM THE M ANUFACTURED VEHICLE. III) WITH RESPECT TO THE ASSESSEE'S ARGUMENTS THAT EVEN THE COMPARABLE COMPANIES ARE ENGAGED IN MANUFACTURING AS WELL AS TRADING ACTIVIT IES, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE TRADING ACTIVITIE S OF THE COMPARABLES IS MINIMAL AND ARE IN RESPECT OF SPARES ONLY WHERE THE ASSESSEE SELLS MANUFACTURED CARS ALSO AND THEREFORE ENTITY LEVEL MARGINS SHOULD BE ADOPTED. IV) WITH RESPECT TO THE ASSESSEE'S CONTENTION THAT THE SUPPORT FUNCTIONS AND MARKETING SET UP IS COMMON, THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUBMITTED THAT ONE HAS TO LOOK AT THE IMPORTANT FUNCTIONS AND NOT SUPPORT FUNCTIO NS. 27 ITA NO.828/BANG/2010 V) THE LEARNED DEPARTMENTAL REPRESENTATIVE RE LIED ON PARA 2.78 OF THE OECD GUIDELINES IN SUPPORT OF THE PROPOSITION THAT IT WO ULD BE INAPPROPRIATE TO APPLY TNMM TO ENTITY LEVEL MARGINS. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED T HAT BOTH SEGMENTS, IE. TRADING AND MANUFACTURING BEING DISTINCT AND DIFFERENT, THEREFO RE THE SEGMENTAL LEVEL T.P. ANALYSIS CARRIED OUT BY THE TPO IS CORRECT AND OUGHT TO BE U PHELD. 14.4 THE LEARNED COUNSEL FOR THE ASSESSEE IN REJOIN DER SUBMITTED THAT : I) IN RESPECT OF THE LEARNED DEPARTMENTAL REPRESENT ATIVES SUBMISSION THAT THE ASSESSEE'S TRADING SEGMENT COMPRISES ONLY OF TRADING IN CBUS, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ITS TRADING SEGMENT IS NOT JUST CON FINED TO TRADING IN CBUS BUT ALSO INCLUDES PURCHASES AND SALES OF SPARE PARTS AND COM PONENTS WHICH COMPRISES ALMOST 50% OF THE TRADING ACTIVITY. II) WITH RESPECT TO THE LEARNED DEPARTMENTAL REPRES ENTATIVES SUBMISSIONS THAT THE TRADING ACTIVITY IN THE CASE OF THE COMPARABLES IS MINIMAL AND BELOW THRESHOLD AND ENTITY LEVEL MARGINS ARE REQUIRED TO BE ADOPTED, THE LEARN ED COUNSEL FOR THE ASSESSEE SUBMITS THAT THEN ON A PARITY OF REASONING, IN THE ASSESSEE 'S CASE ALSO MARGINS NEED TO BE COMPUTED AT ENTITY LEVEL. III) IN RESPECT OF THE LEARNED DEPARTMENTAL REPRES ENTATIVES SUBMISSION THAT THE TRADING ACTIVITY OF THE COMPARABLES IS MAINLY IN TRADING OF SPARES AND NOT IN CBUS, THE LEARNED COUNSEL FOR THE ASSESSEE DRAWING OUR ATTENTION TO T HE EXTRACTS OF THE ANNUAL REPORTS OF THE COMPARABLE COMPANIES CONTENDED THAT THEIR TRADI NG ACTIVITIES ARE NOT CONFINED TO 28 ITA NO.828/BANG/2010 SPARES ALONE BUT TO OTHER ITEMS ALSO AND IN SUCH CI RCUMSTANCES TO SINGLE OUT THE ASSESSEE ALONE FOR EVALUATION OF TRADING ACTIVITY RESULTS S EPARATELY IS INAPPROPRIATE. V) THE LEARNED COUNSEL FOR THE ASSESSEE STRONGL Y ARGUED THAT WHEN THE LEARNED DEPARTMENTAL REPRESENTATIVE HAD ACCEPTED THAT BOTH THE ASSESSEE AS WELL AS THE COMPARABLE COMPANIES ARE ENGAGED IN TRADING IN SPAR ES, COMPARISON OF SEGMENT PROFITS OF THE ASSESSEE WITH ENTERPRISE / ENTITY LEVEL RESULT S OF THE COMPARABLE COMPANIES WOULD BE INCORRECT. VI) WITH RESPECT TO THE LEARNED DEPARTMENTA L REPRESENTATIVE RELIANCE ON PARAS 2.78 OF THE OECD GUIDELINES TO SUPPORT THE PROPOSITION T HAT IT WOULD BE INAPPROPRIATE TO APPLY TNMM AT ENTITY LEVEL MARGINS, THE LEARNED COUNSEL F OR THE ASSESSEE SUBMITS THAT THE OBSERVATIONS IN PARA 2.78 ARE MADE IN THE CONTEXT W HEREIN A COMPANY IS ENGAGED IS A VARIETY OF CONTROLLED TRANSACTIONS WHICH ARE NOT CL OSELY LINKED. HOWEVER, IN THE ASSESSEE'S CASE THE TRANSACTIONS ARE CLOSELY LINKED AND INTER- RELATED AND THEREFORE THE RELIANCE PLACED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE I S WITHOUT BASIS. VII) DRAWING OUR ATTENTION TO PARA 2.90 OF THE OEC D GUIDELINES, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT AFTER SALES SUPPORT SER VICES ON SALES ARE TO BE CONSIDERED AS CLOSELY LINKED TO PURCHASE TRANSACTIONS EVEN IF AFT ER SALES SERVICE OR SALES ARE WITH OWN RELATED PARTIES. IN THE CASE OF THE ASSESSEE, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITS, THE SALE OF SPARES IS CLOSELY LINKED TO IT S MANUFACTURING EFFORTS AND THEREFORE THEY OUGHT TO BE EVALUATED TOGETHER. BRIEFLY, THE LEARNED COUNSEL FOR THE ASSESSEE RELY ING ON EARLIER SUBMISSIONS MADE, ARGUED THAT BOTH THE TRADING AND MANUFACTURING ACTI VITIES OF THE ASSESSEE BEING CLOSELY 29 ITA NO.828/BANG/2010 INTER LINKED, THEY SHOULD BE EVALUATED TOGETHER AT THE ENTITY / ENTITY LEVEL USING THE COMBINED TRANSACTION APPROACH. 14.5.1 WE HAVE HEARD BOTH SIDES AT LENGTH AND PERU SED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF PASSENGER CARS AND ALSO TRADING / DISTRIBUTION OF PASSENGER CAR MODEL CAMRY AND SPARE PARTS AND COMPONENTS. IN THE RELEVANT PERIOD, THE ASSESSEE HAD ENTERED IN TO VARIOUS INTERNATIONAL TRANSACTIONS WITH AES. THE LEARNED COUNSEL FOR THE ASSESSEE SU BMITTED THAT THE ASSESSEE CARRIED OUT ITS T.P.STUDY DOCUMENTATION AT THE ENTITY / ENTERPR ISE LEVEL USING THE COMBINED TRANSACTION APPROACH AND NOT AT THE SEGMENTAL LEVE L, FOR THE REASON THAT ITS TRADING AND MANUFACTURING ACTIVITIES ARE CLOSELY INTER-LINKED. IT WAS ALSO SUBMITTED THAT PART OF THE TRADING ACTIVITIES WERE AS A RESULT OF THE MANUFACT URING ACTIVITIES INCLUDING WARRANTY COMMITMENTS. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT THE DATA REGARDING COMPARABLE TRANSACTIONS WERE AVAILABLE ON LY AT ENTITY / ENTERPRISE LEVEL AND NOT AT THE INDIVIDUAL LEVEL AND THAT THEREFORE THE ADOP TION OF THE COMBINED TRANSACTION APPROACH IS CORRECT. ON THE OTHER HAND, THE LEARNE D DEPARTMENTAL REPRESENTATIVE CONTENDS THAT FUNCTIONALLY, ASSETS AND RISKS OF BOT H SEGMENTS BEING DIFFERENT, THEREFORE THE COMBINING OR MERGING OF BOTH SEGMENTS IS INAPPR OPRIATE. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO SUBMITTED THAT THOUGH THE COMPA RABLE COMPANIES HAVE MINIMAL TRADING ACTIVITIES, THOSE ARE CONFINED TO SPARE PARTS ONLY AND NOT CBUS AS IN THE CASE WITH THE ASSESSEE. THE LEARNED COUNSEL FOR THE ASSESSEE COU NTERED THIS BY SUBMITTING THAT EVEN IN THE ASSESSEE'S TRADING SEGMENT, 50% OF SALES IS FRO M SALE OF SPARE PARTS. 30 ITA NO.828/BANG/2010 14.5.2 TAKING INTO CONSIDERATION THE SUBMISSIONS M ADE AND THE FACTS AND CIRCUMSTANCES OF THE CASE, WE AGREE WITH THE SUBMIS SIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE. W HILE IT IS TRUE THAT FUNCTION, ASSETS AND RISKS OF THE TRADING AND MANUFACTURING SEGMENTS GENERALLY DIFFER, HOWEVER CIRCUMSTANCES MA Y WARRANT COMBINING BOTH OF THEM. IT IS ONLY IN THE SPECIFIC FACTS OF THE CASE THAT T HE COMBINING OF BOTH SEGMENTS IS ADVISABLE. IN THE INSTANT CASE OF THE ASSESSEE, TH E SALE OF SPARE PARTS IS TRIGGERED AS A RESULT OF THE MANUFACTURING ACTIVITIES, INCLUDING W ARRANTY COMMITMENTS. THEREFORE, WE ARE OF THE VIEW THAT IT WOULD NOT BE IN THE FITNESS OF THINGS FOR THE SALE OF SPARE PARTS AND COMPONENTS TO BE CONSIDERED IN ISOLATION FROM THE S ALE OF MANUFACTURED VEHICLES. THIS VIEW IS SUPPORTED BY THE OECD T.P. GUIDELINES, 2010, RE LIED ON BY THE ASSESSEE. THIS VIEW IS ALSO BUTTRESSED BY THE FACT THAT THE COMPARABLE COM PANIES ARE ALSO TRADING IN SPARE PARTS AND COMPONENTS. ON A OVERALL CONSIDERATION, IT CAN BE CONCLUDED THAT TRADING IN SPARE PARTS IS CLOSELY INTER-LINKED WITH THE MANUFACTURIN G SEGMENT OF THE ASSESSEE. WE ARE OF THE VIEW THAT NO MEANINGFUL PURPOSE WOULD BE SERVED IN SEGREGATING THE TRADING AND MANUFACTURING SEGMENTS, PARTICULARLY WHEN THE ASSES SEE AND THE COMPARABLE COMPANIES ARE AT PAR WITH REGARD TO THE NATURE AND SCALE OF COMBI NED ACTIVITIES. NEEDLESS TO ADD THAT THIS FINDING / DECISION BY ITS VERY NATURE HAS TO B E CASE-SPECIFIC AND YEAR-SPECIFIC AS THE DECISION IS BASED ON THE FACTS AND CIRCUMSTANCES OF THIS PARTICULAR CASE AND OF THIS PARTICULAR YEAR AND IS NOT TO BE CONSTRUED AS LAYIN G DOWN THE PRINCIPLE IN THIS REGARD. WE, THEREFORE, DIRECT THE ASSESSING OFFICER / TPO TO C OMPUTE THE ALP AT THE ENTITY / ENTERPRISE LEVEL BY COMBINING THE TRADING AND MANUF ACTURING SEGMENTS. 31 ITA NO.828/BANG/2010 OPERATING EFFICIENCY ADJUSTMENT 15.1 IN THE GROUNDS RAISED AT A-11 , THE LEARNED COUNSEL FOR THE ASSESSEE ARGUED THAT IN THE COMPARABILITY ANALYSIS, THE AUTHORITIES BELOW H AVE ERRED IN MAKING AN ADJUSTMENT ON ACCOUNT OF OPERATIONAL EFFICIENCY WITHOUT APPRECIAT ING THAT THE SAME DOES NOT CONSTITUTE EITHER FUNCTIONS PERFORMED OR RISKS ASSUMED OR ASSE TS EMPLOYED AND THEREFORE IS NOT AN ADJUSTMENT CONTEMPLATED UNDER THE LAW. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO OBSERVED THAT RULE 10B( 3 ) PROVIDES F OR ADJUSTMENT OF DIFFERENCE BETWEEN THE ASSESSEE AND THE COMPARABLES. THE TPO WAS OF T HE VIEW THAT IN CASE OF MANUFACTURING CONCERNS LIKE AUTOMOBILE SECTOR, OPERATING MARGINS ARE AFFECTED BY FOUR FACTORS NAMELY, (1) SALES PRICE; (2) MATERIAL COST; (3) OPERATIVE E FFICIENCY AND (4) DEPRECIATION. IT IS SUBMITTED THAT THE TPO OBSERVED THAT 86% OF THE ASS ESSEE'S INTERNATIONAL TRANSACTIONS RELATED TO THE MATERIAL COST SEGMENT AND THEREFORE ITS ARMS LENGTH CONDITIONS NEEDED TO BE EXAMINED. THE TPO ALSO OBSERVED THAT OPERATING EFFICIENCY AND DEPRECIATION HAVE AN IMPACT ON PROFITABILITY. IT WAS SUBMITTED THAT IN THIS CONTEXT, THE TPO ANALYSED THE RATIO OF OPERATING EXPENSES (INCLUDING DEPRECIATION) TO S ALES OF THE ASSESSEE AT 14.04% VIS--VIS THAT OF THE COMPARABLES AT 22.57% AND CONCLUDED THA T SINCE THE ASSESSEE HAS A HIGH DEGREE OF OPERATIVE EFFICIENCY, THE DIFFERENCE IN O PERATING EFFICIENCY NEEDS TO BE NULLIFIED AND PROCEEDED TO MAKE THE SAID ADJUSTMENT FOR OPERA TING EFFICIENCY. IT WAS SUBMITTED THAT THE LEARNED CIT (APPEALS) SUSTAINED THE TPOS ACTION HOLDING THAT OPERATING EFFICIENCY IS AN ENTERPRISE LEVEL ADJUSTMENT AND TH EREFORE IS REQUIRED TO BE CARRIED OUT TO ELIMINATE MATERIAL EFFECT OF DIFFERENCES IN OPERATI ONAL EFFICIENCY OF THE ASSESSEE VIS--VIS THE COMPARABLES. 32 ITA NO.828/BANG/2010 15.2 THE SUBMISSIONS OF THE ASSESSEE OPPOSING THE O PERATIONAL EFFICIENCY ADJUSTMENT MADE BY THE TPO IS AS UNDER : (I) OPERATING EFFICIENCY ADJUSTMENT IS NOT CONTEM PLATED BY LAW : THE LAW CONTEMPLATES AN ADJUSTMENT TO BE MADE FOR T RANSACTION LEVEL DIFFERENCE OR AN ENTERPRISE LEVEL DIFFERENCE. THES E DIFFERENCES CAN EITHER BE IN THE FUNCTIONS PERFORMED OR ASSETS EMPLOYED OR RI SKS ASSUMED. AN OPERATING EFFICIENCY DOES NOT FALL WITHIN ANY OF THE PARAMETE RS WARRANTING AN ADJUSTMENT. THE DIFFERENCE IN OPERATING EXPENSES IS NEITHER A D IFFERENCE IN TRANSACTIONS NOR ENTERPRISES. AN ADJUSTMENT FOR OPERATING EFFIC IENCY IS THUS NOT CONTEMPLATED UNDER THE LAW. THE RATIO OF THE MUMBA I TRIBUNAL JUDGMENT IN THE CASE OF CAPITAL ASSETS COMPUTER ASSOCIATES PVT LTD VS. DCIT 2010-TIOL- 68-ITAT-MUM, SUPPORTS THIS ARGUMENT. (II) COMPANIES WITH DIFFERENT OPERATING EFFICIENCY CANNOT BE COMPARED. IF THERE ARE SUBSTANTIAL DIFFERENCES IN THE PERFORM ANCE OF OTHER COMPANIES, THEY CANNOT BE CHOSEN AS A COMPARABLE AT ALL. THE DIFFERENCES MAY ARISE BECAUSE OF PRODUCTS MANUFACTURED, THE SCALE OF OPER ATIONS, ASSETS EMPLOYED ETC. ASSUMING THAT OPERATING EFFICIENCY COULD ALSO BE ONE OF THE RELEVANT FACTORS IN CHOOSING A COMPANY AS COMPARABLE, IF THE RE EXISTS A WIDE DISPARITY IN SUCH EFFICIENCY, THE CONCERNED COMPANY MUST BE DISC ARDED AS A COMPARABLE, WHICH HAS NOT BEEN DONE BY THE TPO. (III) AFTER ADJUSTMENT COMPARABLES CANNOT BE COMPA RED . THE IMPACT OF THE OPERATING EFFICIENCY ADJUSTMENT A S CARRIED OUT BY THE TPO HAS RESULTED IN STARTLING EFFECT. THE FINANCIAL RE SULTS OF SOME OF THE COMPARABLE COMPANIES BEFORE AND AFTER THE ADJUSTMEN T ARE AS UNDER : NAME OF THE COMPANY OPERATING MARGINS (AS PER FINANCIALS) (RS. IN CRORES) OPERATING MARGINS (AFTER THE OPERATING ADJUSTMENT) (RS. IN CRORES) ADJUSTMENT QUANTUM (RS. IN CRORES) HINDUSTAN MOTORS ( - ) 37.12 69.48 106.60 MAHENDRA & MAHENDRA ( - ) 72.74 378.29 451.03 BAJAJ TEMPO (+) 4.48 89.09 84.61 THE APPELLANT SUBMITS THAT ADJUSTMENTS ARE OF ASTRO NOMICAL AMOUNTS KEEPING IN VIEW THE ACTUAL PERFORMANCE. IT CONVERTS LOSS MAKI NG COMPANIES TO HIGHLY PROFITABLE VENTURES. THE COMPARISON MOVES TO A HYP OTHETICAL ANALYSIS THAN AN ACTUAL REALITY; SUCH ADJUSTMENTS DISTORT AND ACCORD INGLY INVALIDATE THE COMPARABILITY ANALYSIS. SUCH STARTLING RESULTS SHO ULD HAVE PUT THE TPO ON NOTICE AND HE OUGHT TO HAVE CONDUCTED FURTHER EXAMI NATION TO TEST THE VERACITY OF HIS FINDINGS WHICH HAS NOT BEEN DONE. THE APPEL LANT ALSO SUBMITS THAT IF 33 ITA NO.828/BANG/2010 THERE WERE TO BE SUCH VARIATIONS IN THE RESULTS BEF ORE AND AFTER THE OPERATING EFFICIENCY ADJUSTMENT, THE COMPANIES CANNOT BE ADOP TED AS COMPARABLES AT ALL. (IV) INTER DEPENDENCY BETWEEN MATERIAL COST AND OPERATING EXPENSES : A HOLISTIC APPROACH IS REQUIRED TO BE ADOPTED IN TH E COMPARATIVE STUDY OR ANALYSIS. BUSINESS IS A CONSTITUENT OF MANY FACTOR S. MANY OF THESE FACTORS ARE INTERLINKED. AN EXAMINATION OF ONE WITHOUT THE OTHE R MAY THEREFORE NOT BE ADVISABLE. THE TPO HAS ERRED IN NOT APPRECIATING THAT OPERATI NG EFFICIENCY IS SIGNIFICANTLY INFLUENCED BY THE QUALITY OF MATERIAL S USED. FOR EXAMPLE, IF A PERSON MANUFACTURING BRICKS USES A BAD QUALITY OF C LAY, IT IS VERY LIKELY THAT : A) THE TIME CONSUMED FOR THE JOB WOULD BE LONGER; B) THE QUALITY OF PRODUCT (BRICKS) WOULD SUFFER; C) WASTAGES ARE GOING TO BE HIGH; D) ACCEPTANCE OF THE PRODUCT BY THE CUSTOMER IS BOUND TO SUFFER. A GOOD QUALITY OF CLAY ON OTHER HAND WOULD SIGNIFIC ANTLY REDUCE THE ABOVE MENTIONED DOWNSIDES. OPERATING EFFICIENCY AND THE QUALITY OF MATERIAL USED ARE THUS INTERDEPENDENT. THERE IS AN INTERPLAY BET WEEN THEM. ONE IS INEXTRICABLY LINKED TO OTHER. THEY CANNOT THEREFOR E BE SEGREGATED. THE APPROACH OF THE TPO TO SEGREGATE THESE COMPONENTS A ND THEREAFTER DRAW ADVERSE CONSEQUENCES AGAINST THE APPELLANT IS FAULT Y. THE SAME NEEDS TO BE DISREGARDED. THE CORRECT APPROACH WOULD THEREFORE BE TO RECKON THE OPERATING COSTS AND THE MATERIAL COSTS SIMULTANEOUSLY AND TOG ETHER. TO GIVE ANOTHER EXAMPLE, CUTTING WOOD WITH BLUNT A XE WOULD TAKE LONGER WHEN COMPARED TO SHARP AXE. THE COST OF BLUNT AXE MAY B E LESS BUT THE LABOUR WOULD BE HIGH. OPERATING EXPENDITURE IS THUS DEPENDENT O N THE QUALITY OF THE MATERIAL AND TECHNOLOGY USED. THIS IS MORE SO INCASE OF THE APPELLANT WHO FOLLOW S TOYOTA PRODUCTION SYSTEM (HEREINAFTER REFERRED AS TPS FOR SHORT). TPS DIF FERS FROM THE OTHER MODES OF ORGANIZING PRODUCTION AND PERFORMING THE MANUFAC TURING MANAGEMENT FUNCTION. TPS SEEKS TO CONTINUOUSLY ELIMINATE WAST E AND NON-VALUE ADDED WORK FROM AN ORGANIZATION AND PROVIDE VALUE TO THE CUSTO MER IN TERMS OF PRODUCTS AND SERVICES. THIS IS REFERRED TO AS LEAN MANAGEME NT, WHICH ENABLES AN ORGANIZATION TO EMPLOY FEWER RESOURCES IN MANUFACTU RING AND MANAGEMENT. TPS BELIEVES IN GREATER DEGREE OF OUTSOURCING : IN ORDER TO ENSURE THAT THE COMPONENTS AND THE SUB- SYSTEMS ARE DESIGNED AND MANUFACTURED TO THE HIGHEST STANDARDS TPS RELIES ON ORGANIZATIONS THAT ARE KNOWN TO BE GOOD IN DESIGN AND MANUFACTURE OF SUCH SUB-SYSTEMS RATHER THAN DOINT IT IN-HOUSE. THESE COMPONENTS ARE SOURCED DI RECTLY FROM THE VENDORS AND USED IN THE FINAL ASSEMBLY LINE / PROCESS TO ENSURE DESIRED QUALITY OF THE PRODUCTS PRODUCED. ON THE OTHER HAND, IN CASE OF C OMPARABLES, MATERIALS ARE BROUGHT AND THE SAME COMPONENT IS FABRICATED IN-HO USE. INPUT MATERIAL COST IN SUCH CASES WOULD INDICATE ONLY THE MATERIAL COST . THE MATERIALS PURCHASED WILL UNDERGO VALUE ADDITION BY WAY OF FURTHER PROCE SSING IN-HOUSE. SUCH 34 ITA NO.828/BANG/2010 PROCESSING COSTS ARE CAPTURED AS OPERATING EXPENSES . IN VIEW OF THIS INTRINSIC DIFFERENCE IN FUNCTIONING, THE PROPORTION OF MATERI AL COST IN TPS IS LIKELY TO BE HIGHER COMPARED TO OTHERS. IT ALSO IMPLIES THAT FO R THE APPELLANT, THE PRICE AT WHICH A SUPPLIER PROVIDED THE COMPONENTS WILL INCLU DE COST OF MATERIAL AS WELL AS THE COST OF CONVERSION AND CLASSIFIED AS MATERIAL COST. THE APPELLANT IN THIS REGARD RELIES ON THE CHARTS ON PAGE 26 & 27 OF THE NOTE. THE APPELLANT THEREFORE SUBMITS THAT IN ITS CASE, MATERIAL COST INCLUDES CONVERSION OR PROCESSING COST WHICH IN CASE OF COMP ARABLES ARE CLASSIFIED AS MANUFACTURING OR LABOUR COST. THEREFORE DIRECT COMP ARISON OF MATERIAL COST OF THE APPELLANT WITH THAT OF THE COMPARABLES WOULD BE INCORRECT. QUALITY OF MATERIAL AFFECTS OPERATIONAL EFFICIENCY : UNDER TPS, THE ORGANIZATION BENEFITS SIGNIFICANTLY BY SOURCING HIGH QUALITY INPUTS AND THEREBY AVOIDING UNNECESSARY EXPENDITURE IN TERMS OF RECTIFYING ANY DEVIATIONS FROM CUSTOMERS SPECIFICATIONS. HIGH QU ALITY RAW MATERIAL WILL TYPICALLY REQUIRE FEWER NUMBER OF INSPECTIONS, FEWE R SCRAP AND DEFECTS, LESSER MANAGERIAL SUPERVISION TO ENSURE QUALITY, LESSER TI ME TO RESPOND TO CUSTOMER REQUIREMENT AND SO ON. THE TPS CAPTURES THESE ASPE CTS BY ITS BASIC DEFINITION OF VARIOUS TYPES OF WASTES INAN ORGANIZATION. THE APPELLANT THEREFORE SUBMITS THAT THERE IS A STRONG RELATIONSHIP BETWEEN THE MAT ERIALS AND OPERATING EXPENDITURE. CORRELATION BETWEEN THEM IS NEGATIVE SINCE LOW MATERIAL COST WILL LEAD TO HIGH OPERATING EXPENDITURE. THE CONCEPT OF VARIANCE ANLAYSIS UNDER STANDARD CO STING ASSUMES RELEVANCE IN THIS CONTEXT. THE RELEVANT PORTION OF THE DOWNLOAD FROM THE WEBSITE WAS FILED WITH THE CIT (APPEALS) ( WWW.BPP.COM/ACCA/DOWNLOADS/SC/ATF57-SC.PDF ) (PAGE 211 & 212 OF CASE LAW COMPILATION). THE DOWN LOAD CONSISTS OF AN EXPLANATION OF THE INTERDEPENDENCY BETWEEN MATERIAL AND EFFICIENCY AND THE IMPACT OF VARIANCE THEREUNDER. IT IS SUGGESTED THEREFORE THA T THE INDIVIDUAL VARIANCES SHOULD NOT BE LOOKED AT IN ISOLATION. THE VARIANCE S ARE INTER-RELATED, AND MUCH OF IT OCCURS ONLY BECAUSE THE OTHER VARIANCE OCCURR ED TOO. WHEN TWO VARIANCES ARE INTERDEPENDENT (INTER-RELATED) ONE WILL USUALLY BE ADVERSE AND THE OTHER ONE FAVOURABLE. FOR EXAMPLE, IF CHEAPER MATERIALS ARE PURCHASED FOR A JOB IN ORDER TO OBTAIN A FAVOURABLE PRICE VARIANCE, MATERIALS WA STAGE MIGHT BE HIGHER AND AN ADVERSE USAGE VARIANCE MAY OCCUR. SIMILARLY IF THE CHEAPER MATERIALS ARE MORE DIFFICULT TO HANDLE, THERE MIGHT BE AN ADVERSE LABO UR EFFICIENCY VARIANCE TOO. THE APPELLANT FURTHER SUBMITS THAT THE TPOS CONCL USION REGARDING OPERATING EFFICIENCY JUST LOOKING PROFIT AND LOSS ACCOUNT (OP ERATING EXPENSES INCURRED BY THE APPELLANT) IS INCORRECT. OPERATING EFFICIENCY IS INFLUENCED BY VARIOUS FACTORS LIKE QUALITY OF ASSETS (WHICH FORM PART OF BALANCE SHEET), QUALITY OF MATERIAL USED FOR MANUFACTURE, MANUFACTURING PROCES SES, EMPLOYEE MORALE, TRAINING OF EMPLOYEES AND MANY OTHER FACTORS. THER EFORE AN ADJUSTMENT CONFINED SOLELY TO OPERATING EXPENDITURE IN THE PRO FIT AND LOSS ACCOUNT IS WITHOUT BASIS AS ALSO INCORRECT. 35 ITA NO.828/BANG/2010 BASED ON ALL THE ABOVE, THE APPELLANT SUBMITS THAT SEGREGATION OF MATERIAL COST AND OPERATING EXPENSES IS BAD IN LAW AND LIABL E TO BE REJECTED. IF AT ALL, THEY HAVE TO BE AGGREGATED FOR THE PURPOSE OF COMPA RISON, ON SUCH AGGREGATION, THE APPELLANTS PERFORMANCE IS BETTER THAN THOSE O F COMPARABLES AS EXTRACTED ON PAGE 336 OF PAPER BOOK. THE TABLE IS EXTRACTED BELOW : PARTICULARS APPELLANT COMPARABLE COMPANIES MATERIAL COST 73.71 65.65 OPERATING COST 18.45 27.01 TOTAL : 92.16 92.66 ON THE BASIS OF THE ABOVE, THE OPERATING EFFICIENCY ADJUSTMENT AS MADE BY THE TPO IS TO BE DELETED. 15.3 THE LEARNED DEPARTMENTAL REPRESENTATIVE MADE A FORCEFUL SUBMISSIONS IN SUPPORT OF THE OPERATING EFFICIENCY ADJUSTMENT. (I) IT WAS SUBMITTED THAT EVERY FUNCTION CARRIED OU T BY AN ENTERPRISE IS REFLECTED IN THE COST DEBITED TO THE PROFIT AND LOSS ACCOUNT AND THU S AN ENTERPRISE OPERATING MORE EFFICIENTLY THAN ANOTHER SHOWS THAT IT IS PERFORMI NG THE SAME OR MORE FUNCTIONS AT A LOWER COST. (II) WITH RESPECT TO THE ASSESSEE'S SUBMISSION THA T OPERATING EFFICIENCY ADJUSTMENT IS NOT CONTEMPLATED BY LAW, THE LEARNED DEPARTMENTAL REPRE SENTATIVE CONTENDED THAT RULE 10B(3) PERMITS REASONABLE AND ACCURATE ADJUSTMENTS TO ELIM INATE MATERIAL EFFECT ON PRICE OR MARGIN OR COSTS. (III) THE LEARNED DEPARTMENTAL REPRESENTATIVE RELI ED ON PARA 2.71 OF THE OECD T.P. GUIDELINES, 2010, WHICH STATES THAT NET PROFIT INDI CATORS MAY BE DIRECTLY AFFECTED BY FORCES LIKE MANAGEMENT EFFICIENCIES, INDIVIDUAL STR ATEGIES, ETC. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO CITED SECTION 1.482-5 OF THE US REGULATIONS DEALING WITH THE IMPACT OF 36 ITA NO.828/BANG/2010 FACTORS LIKE DIFFERENCES IN MANAGEMENT EFFICIENCY E TC ON THE OPERATING PROFIT AND PROVIDES THAT IF MATERIAL DIFFERENCES ARE THERE, THE SAME SH OULD BE ELIMINATED. (IV) WITH RESPECT TO THE ASSESSEE'S CONTENTION REG ARDING INTER-DEPENDENCE BETWEEN OPERATING EFFICIENCY AND QUALITY OF MATERIAL, THE L EARNED DEPARTMENTAL REPRESENTATIVE HAS STATED THAT THE TAX PAYER HAS NOT BROUGHT ON RECORD ANY MATERIAL TO PROVE ITS CONTENTION THAT IN THE CASE OF COMPARABLES, THIS MODEL IS NOT BEING FOLLOWED. (V) WITH RESPECT TO THE ASSESSEE'S CONTENTION THAT THE TOYOTA PRODUCTION SYSTEM BELIEVES IN GREATER DEGREE OF OUTSOURCING, THE LEAR NED DEPARTMENTAL REPRESENTATIVE SUBMITS THAT NOTHING HAS BEEN BROUGHT ON RECORD BY THE ASSESSEE TO DEMONSTRATE THAT THE COMPARABLES DO NOT FOLLOW THE SAME MODEL. (VI) WITH RESPECT TO THE ASSESSEE'S RELIANCE ON E XPERTS OPINION, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE SAME IS ADDITIONA L EVIDENCE AND THEREFORE CANNOT BE CONSIDERED AT THIS STAGE OF PROCEEDINGS. IF AT ALL THE EXPERTS OPINION IS TO BE CONSIDERED, THEN THIS MATTER SHOULD BE REMANDED TO THE FILE OF THE TPO FOR EXAMINATION / REBUTTAL OF THE SAME. 15.4 IN REJOINDER TO THE LEARNED DEPARTMENTAL REPRE SENTATIVES SUBMISSION, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED AS UNDER : (I) THE LAW CONTEMPLATES AN ADJUSTMENT TO BE MADE FOR TRANSACTION LEVEL DIFFERENCE OR ENTERPRISE LEVEL DIFFERENCE IN SUPPORT OF FUNCTIONS PERFORMED, OR ASSETS EMPLOYED OR RISKS ASSUMED. IT IS SUBMITTED THAT THE LAW DOES N OT CONTEMPLATE AN ADJUSTMENT TO THE DIFFERENCE IN COSTS FOR THE SAME FUNCTION PERFORMED AS THE TPO HAS ATTEMPTED TO DO. 37 ITA NO.828/BANG/2010 (II) WITH RESPECT TO THE LEARNED DEPARTMENTAL REPR ESENTATIVES CONTENTION THAT THE OPERATING EFFICIENCY ADJUSTMENT IS IN ACCORDANCE WI TH RULE 10B(3), THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT TO DETER MINE WHETHER A DIFFERENCE EXISTS, A HOLISTIC VIEW REQUIRES TO BE TAKEN AND NOT JUST BY LIMITING THE EXAMINATION TO THE PROFIT AND LOSS ACCOUNT AND SUCH AN EXERCISE HAS NOT BEEN CARR IED OUT BY THE TPO. RATHER, THE ADJUSTMENT AS CARRIED OUT BY THE TPO HAS LED TO STA RTLING RESULTS DISTORTING FACTUAL REALITIES AND ARE NOT WARRANTED AS PER THE PROVISIO NS OF RULE 10B(3). (III) WITH RESPECT TO THE LEARNED DEPARTMENTAL REP RESENTATIVES RELIANCE ON 1.482 5 OF THE US REGULATIONS TO SUPPORT THE ARGUMENT THAT MAN AGEMENT EFFICIENCY ADJUSTMENT SHOULD BE DONE, THE LEARNED COUNSEL FOR THE ASSESSE E SUBMITTED THAT THE US REGULATIONS MERELY STATE THAT USE OF STATISTICAL TOOL LIKE INTE R-QUARTILE RANGE IRON OUT DIFFERENCES LIKE TECHNICAL EXPERTISE OR MANAGEMENT EFFICIENCY AND NO WHERE THEREIN HAS ANY METHODOLOGY BEEN PROVIDED TO MAKE AN ADJUSTMENT FOR DIFFERENCE IN OPERATIONAL EFFICIENCY. IT WAS ARGUED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT RELIANCE ON FOREIGN LAW / PROVISION IS NOT CALLED FOR WHEN NO BASIS HAS BEEN MADE OUT REGA RDING ITS SIMILARITY / RELEVANCE TO INDIAN T.P. REGULATIONS WHICH ARE DETAILED AND SELF -CONTAINED. (IV) WITH RESPECT TO THE LEARNED DEPARTMENTAL REPR ESENTATIVES CONTENTION THAT COMPARABLES CAN BE ADOPTED IF REASONABLE AND ACCURA TE ADJUSTMENTS CAN BE MADE, THE LEARNED COUNSEL FOR THE ASSESSEE STATES IF THE OPER ATING EFFICIENCY OF THE ASSESSEE IF FAR IN EXCESS OF THE OTHER COMPARABLE COMPANIES, THIS D ISPARITY IS SUFFICIENT TO REJECT ALL THE COMPARABLE COMPANIES ADOPTED BY THE ASSESSEE AND TP O AS COMPARABLES FOR THE T.P. ANALYSIS. 38 ITA NO.828/BANG/2010 (V) THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ON A PERUSAL OF THE ANNUAL REPORTS OF THE COMPARABLE COMPANIES VARIOUS COMPON ENTS LIKE ENGINES, TRANSMISSION, ETC ARE PRODUCED IN-HOUSE AS AGAINST THE ASSESSEE WHO H AS OUTSOURCED THE MANUFACTURE OF SUCH COMPONENTS OR IMPORTS THE SAME. THEREFORE, DI RECT COMPARISON OF OPERATING COST OF THE ASSESSEE WITH THAT OF THE COMPARABLES WOULD BE INCORRECT. (VI) WITH REGARD TO THE LEARNED DEPARTMENTAL REPRE SENTATIVES CONTENTION THAT THE ASSESSEE IS MAKING CONSISTENT LOSSES, THE LEARNED C OUNSEL FOR THE ASSESSEE SUBMITTED THAT ITS SALES AND PROFITS HAVE INCREASED SUBSTANTIALLY IN THE SUBSEQUENT YEARS OF OPERATION. (VII) THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUB MITTED THAT BASED ON THE ABOVE SUBMISSION, IT IS CLEAR THAT THE ADJUSTMENT FOR OPE RATING EFFICIENCY AS PROPOSED BY THE TPO IS BAD IN LAW. FURTHER, NO OPERATING EFFICIENC Y ADJUSTMENT HAS BEEN MADE IN THE EARLIER YEARS OR IMMEDIATELY SUCCEEDING YEARS AND T HIS INCONSISTENCY IN SUCH ADJUSTMENT IS PROOF ENOUGH THAT THE SAID ADJUSTMENT IS TO BE REMO VED. (VIII) WITH RESPECT TO THE EXPERT OPINION INTRODUCE D AS ADDITIONAL EVIDENCE, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ADMISSI ON OF THE SAME IS WITHIN THE POWER OF THE ITAT. 15.5.1 WE HAVE HEARD BOTH PARTIES AND CARE FULLY CONSIDERED THE RIVAL SUBMISSIONS. WE ARE CONCERNED HERE WITH A UNIQUE AND UNUSUAL ADJ USTMENT MADE BY THE TPO AND UPHELD BY THE LEARNED CIT (APPEALS). THE TPO HAS MADE THE OPERATING EFFICIENCY ADJUSTMENT BY BRINGING THE OPERATING EXPENDITURE OF THE COMPARABL ES AT PAR WITH THAT OF THE ASSESSEE. THE TPO HAS CONCLUDED THAT THE ASSESSEE IS VERY EFF ICIENT AS ITS OPERATING EXPENSES ARE LESSER WHEN COMPARED TO THAT OF THE COMPARABLE COMP ANIES. BRIEFLY, THE TPO HAS EQUATED 39 ITA NO.828/BANG/2010 OPERATING EFFICIENCY TO OPERATING EXPENDITURE. BEF ORE THE LEARNED CIT (APPEALS) DETAILED SUBMISSIONS WERE MADE ON THIS ISSUE AND A REMAND RE PORT WAS CALLED FOR THEREON. THE LEARNED CIT (APPEALS) HOWEVER WAS OF THE VIEW THAT SINCE THESE SUBMISSIONS WERE NOT FILED BEFORE THE TPO DURING THE ASSESSMENT PROCEEDINGS TH EY COULD NOT BE ENTERTAINED AT THE APPELLATE STAGE. BEFORE US APART FROM THE SUBMISSI ONS MADE, EXPERT OPINION HAS BEEN FILED ON THIS ISSUE BY THE ASSESSEE WHICH WAS NOT AVAILAB LE BEFORE THE TPO. IN THESE CIRCUMSTANCES, IT IS IN THE FITNESS OF THINGS AND I N THE INTEREST OF EQUITY AND JUSTICE THAT THIS MATTER OF OPERATING EFFICIENCY ADJUSTMENT BE R EMANDED BACK TO THE FILE OF THE TPO FOR RE-EXAMINATION. 15.5.2 WHILE REMITTING THIS ISSUE TO THE FILE OF THE TPO, IT APPEARS THAT THERE IS MERIT IN THE ARGUMENTS MADE BY BOTH THE SIDES. HOW EVER, IN ORDER TO RESOLVE THE ISSUE OF OPERATING EFFICIENCY, THERE SHOULD BE A FRESH EXAMI NATION CARRIED OUT OF THE INTER-PLAY OF THE FOLLOWING THREE ASPECTS WHILE COMPUTING THIS AD JUSTMENT : I) THE INTER-PLAY BETWEEN THE MATERIAL COST AND OTH ER OPERATING COSTS OF THE ASSESSEE AND COMPARABLE COMPANIES DUE TO THE FUNCTIONAL DIFFEREN CES BETWEEN THEM; II) THE OPERATIONAL EFFICIENCY; AND III) THE PRICE CHARGED IN CONTROLLED TRANSACTION. IT APPEARS FROM THE RECORD THAT THE TPO HAS ONLY CO NSIDERED THE ASPECTS AT (II) AND (III) BUT NOT (I) ABOVE. THUS THE ISSUE OF ADJUSTMENT FO R OPERATING EFFICIENCY, IF ANY, IS REMITTED TO THE FILE OF THE TPO FOR RE-EXAMINATION IN THE LIGHT OF THE EXPERT OPINION FILED BY THE ASSESSEE. THE TPO IS DIRECTED TO AFFORD ADE QUATE OPPORTUNITY TO THE ASSESSEE TO BE HEARD AND TO FILE WRITTEN SUBMISSIONS / DETAILS AND TO PASS A REASONED ORDER THEREON. 40 ITA NO.828/BANG/2010 THE TPO WOULD ALSO BE FREE TO COUNTER THE EXPERT OP INION FILED BY THE ASSESSEE WITH ANOTHER EXPERTS OPINION. 16. ADMISSION OF ADDITIONAL EVIDENCE WE NOTICE THAT RULE 29 OF THE ITAT RULES PERMIT AD DITIONAL EVIDENCE TO BE ADMITTED UNDER THE FOLLOWING CIRCUMSTANCES : I) TO ENABLE THE ITAT TO PASS AN ORDER. II) IF IT IS FOR ANY SUBSTANTIAL CAUSE. III) IN THE EVENT OF A SITUATION WHERE THE INCOME T AX AUTHORITIES HAVE DECIDED THE CASE WITHOUT AFFORDING THE ASSESSEE SUFFICIENT OPPORTUNI TY TO ADDUCE EVIDENCE EITHER ON POINTS SPECIFIED OR NOT SPECIFIED BY THEM. IT IS HELD IN THE CASE OF CIT VS. SALIGRAM PREM NAT H (1989) 179 ITR 239 THAT IN ORDER TO DO SUBSTANTIAL JUSTICE, THE ITAT IS VESTED WITH THE REQUISITE AUTHORITY TO ADMIT ADDITIONAL EVIDENCE. IN THE FACTUAL MATRIX OF THE CASE, WE FI ND THAT THE ASSESSEE HAD MADE SUBMISSIONS ON THE SAID MATTER ON WHICH THE EXPERTS OPINION IS NOW FILED. THE EXPERT OPINION IS FILED AND AVAILABLE WITH THE DEPARTMENT FOR SUBSEQUENT YEARS IN THE ASSESSEE'S CASE AS SUBMITTED BY THE LEARNED COUNSEL FOR THE AS SESSEE. WE ALSO NOTICE THAT THE LEARNED DEPARTMENTAL REPRESENTATIVE WHILE OPPOSING THE ADMISSION, ARGUED ON THE FALLACIES AND SHORT COMINGS OF THE EXPERTS OPINION. IN VIEW OF ALL OF THE ABOVE, AND OF THE PARAMOUNT CONSIDERATION FOR THE EFFECTIVE DISPOSAL OF THIS APPEAL, FOR WHICH REASON THE ITAT CAN ADMIT ADDITIONAL EVIDENCE, WE IN THE INTER EST OF EQUITY AND JUSTICE ADMIT THE EXPERTS OPINION FOR BEING CONSIDERED IN THE DISPOSA L OF THIS GROUND OF APPEAL. 41 ITA NO.828/BANG/2010 17.0 EXCISE DUTY ADJUSTMENT 17.1 THE GROUND RAISED AT A-12 , CHALLENGES THE NON-EXCLUSION OF EXCISE DUTY IN SA LES AND MATERIAL COST BY THE TPO WHILE COMPUTING ALP WITHOU T APPRECIATING THAT VARIABLE EXCISE DUTY STRUCTURE EFFECTS THE MATERIAL COST AND THERE BY MARGINS. IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT WHILE COMPUT ING THE MARGINS FOR COMPARISON PURPOSES, THE ASSESSEE HAD EXCLUDED BOTH EXCISE DUT Y AND CUSTOMS DUTY BOTH FOR THE COMPARABLES AND ITSELF. IT IS FURTHER SUBMITTED TH AT THE TPO REJECTED THIS ADJUSTMENT MADE BY THE ASSESSEE ON THE GROUNDS THAT AS PER SEC TION 145A OF THE ACT, THE COST IS THE AMOUNT SPENT TO BRING THE GOODS TO THE PRESENT LOCA TION AND CONDITION AND THIS WOULD INCLUDE EXCISE DUTY AND THAT NO INDEPENDENT ENTERPR ISE WOULD AGREE FOR A PURCHASE PRICE WITHOUT TAKING INTO ACCOUNT THE DUTY STRUCTURE. TH E LEARNED CIT(APPEALS), IT IS SUBMITTED, UPHELD THE ACTION OF THE TPO AS HE WAS OF THE VIEW THAT EXCISE DUTY HAS NO MATERIAL IMPACT ON PROFITABILITY AND THAT COMPARABLE COMPANI ES HAVE TO INCUR CERTAIN DIRECT COSTS / EXPENSES WHICH ARE NOT REQUIRED TO BE BORNE BY THE ASSESSEE. 17.2 WITH RESPECT TO THE EXCISE DUTY ADJUSTMENT, T HE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT EXCISE DUTY LEVY IS UNEVEN ACROSS MA NUFACTURERS AND THEREFORE THE MARGIN ON SALES OUGHT TO BE CALCULATED EXCLUDING EXCISE DU TY. IT WAS CONTENDED THAT FROM AN ACCOUNTING PROSPECTIVE ALSO, EXCISE DUTY IS A PASS THROUGH COST AND HENCE FINANCIAL STATEMENTS ARE TYPICALLY PREPARED NET OF EXCISE DUT Y AND PROFITABILITY IS ARRIVED AT ACCORDINGLY. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER ARGUED THAT IN THE RELEVANT PERIOD, THE ASSESSEE MANUFACTURED ONLY PASSENGER CA RS FOR WHICH THE EXCISE DUTY RATE WAS AT 32%, WHEREAS THE COMPARABLE COMPANIES HAD A DIFF ERENT PRODUCT MIX WHICH COULD 42 ITA NO.828/BANG/2010 INCLUDE COMMERCIAL VEHICLES AND / OR ENGINE COMPONE NTS FOR WHICH EXCISE DUTY WAS AT 16%. THEREFORE, THE COMPARABLES BEING SUBJECTED TO EXCI SE DUTY AT RATES DIFFERENT FROM THAT OF THE ASSESSEE EXCISE DUTY OUGHT TO BE EXCLUDED FO R COMPUTING COMPARABLE MARGIN ON SALES BETWEEN THEM. IT WAS ALSO CONTENDED BY THE L EARNED COUNSEL FOR THE ASSESSEE THAT INCLUSION OF EXCISE DUTY SKEWS THE GROSS PROFIT. I T WAS FORCEFULLY ARGUED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN THE SUCCEEDING YE ARS, THE MARGINS HAVE BEEN COMPUTED BY THE TPO EXCLUDING EXCISE DUTY AND THEREFORE SUBMITT ED THAT FOR THE YEAR UNDER CONSIDERATION ALSO, THE COMPUTATION BE MADE ON THE BASIS OF NET SALES ( IE. AFTER EXCLUDING EXCISE DUTY) AND ALSO EXCISE DUTY BE EXCLUDED FROM OPERATING COSTS ALSO. 17.3 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPOR TED THE ORDERS OF THE AUTHORITIES BELOW ON THIS ISSUE. THE LEARNED DEPARTMENTAL REPR ESENTATIVE ARGUED THAT THE ACCOUNTING TREATMENT OF AN ITEM FOR THE PURPOSE OF FINANCIAL A CCOUNTING WOULD NOT BE A DETERMINANT FACTOR HOW THAT PARTICULAR ITEM SHOULD BE TREATED F OR COMPUTING THE OPERATING COST FOR THE PURPOSE OF TRANSFER PRICING. THE LEARNED DEPAR TMENTAL REPRESENTATIVE CONTENDED THAT EXCISE DUTY IS AN INTEGRAL PART OF OPERATING COST A ND IS ALSO EMBEDDED IN SALES AND THEREFORE SHOULD BE CONSIDERED AS PART OF COST AS W ELL AS REVENUE. THE LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER CONTENDED THAT IF THE ASSESSEE WANTS TO EXCLUDE EXCISE DUTY FROM COST, THEN THE SAME SHOULD ALSO BE EXCLUDED FROM SALES SO THAT COMPARABILITY ANALYSIS COULD BE AT THE SAME LEVEL B ETWEEN THE ASSESSEE AND THE COMPARABLE COMPANIES. THUS THE MARGIN MAY BE COMPUTED EITHER ON GROSS SALES (EXCLUDING EXCISE DUTY IN COST AS WELL AS SALES) OR ON NET SALES (INCLUDIN G EXCISE DUTY IN COST AS WELL AS SALES.) 43 ITA NO.828/BANG/2010 17.4 THE LEARNED COUNSEL FOR THE ASSESSEE IN REJOIN DER CONTENDS THAT THE LEARNED DEPARTMENTAL REPRESENTATIVE HAD SUBMITTED THAT EXC ISE DUTY SHOULD BE REMOVED FROM BOTH COSTS AND REVENUES AND THAT WAS PRECISELY WHAT THE ASSESSEE IS REQUESTING I.E. THAT EXCISE DUTY BE EXCLUDED FROM BOTH SALES AND OPERATI NG COSTS AS HAD BEEN DONE BY THE ASSESSEE WHEN COMPUTING THE MARGINS. IN THIS VIEW OF THE MATTER, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT EXCISE DUTY ADJUSTMENT AS CARRIED OUT BY THE ASSESSEE OUGHT TO BE ACCEPTED. 17.5 WE HAVE HEARD BOTH PARTIES ON THE ISSUE OF EXC ISE DUTY ADJUSTMENT AND PERUSED THE MATERIAL ON RECORD. ON CAREFUL CONSIDERATION O F THE SAME, WE ARE OF THE VIEW THAT THE ASSESSEE'S GROUND ON EXCISE DUTY ADJUSTMENT NEEDS T O BE ALLOWED. THE ASSESSEE COLLECTS EXCISE DUTY AS LEVIED BY THE CENTRAL GOVERNMENT AND THERE IS NO PROFIT ELEMENT INVOLVED IN COLLECTING THE SAME AND REMITTING IT TO THE GOVERNM ENT. EXCISE DUTY IS A PASS THROUGH COST AND FINANCIAL STATEMENTS ARE PREPARED NET OF EXCISE DUTY AND BASED ON THIS THE PROFITABILITY IS WORKED OUT. TP REGULATIONS ARE BA SED ON THE ACTUAL MARGINS AND PASS THROUGH ITEMS LIKE EXCISE DUTY ARE NOT TO BE CONSI DERED WHILE COMPUTING MARGINS AS IS ALSO THE CASE WITH THE COMPARABLE COMPANIES. THE LEARN ED DEPARTMENTAL REPRESENTATIVE TOO DID NOT APPEAR TO HAVE SERIOUS OBJECTIONS TO THE EX CLUSION OF EXCISE DUTY IN ARRIVING AT THE MARGINS. IN VIEW OF THIS, WE DIRECT THE ASSESSING OFFICER / TPO TO PERFORM THE TP COMPARABILITY ANALYSIS EXCLUDING EXCISE DUTY FROM S ALES AS WELL AS COSTS FOR BOTH THE ASSESSEE AND THE COMPARABLE COMPANIES SO AS TO MAIN TAIN CONSISTENCY / PARITY AND TO COMPUTE THE MARGINS ACCORDINGLY. 18.0 CUSTOMS DUTY ADJUSTMENT 44 ITA NO.828/BANG/2010 18.1 IN THE GROUNDS RAISED AT A-7 AND 13 , IT IS CONTENDED THAT THE AUTHORITIES BELOW HAVE ERRED IN NOT APPRECIATING THAT A CUSTOMS DUTY ADJUSTMENT WAS MADE IN ORDER TO PUT THE ASSESSEE AND THE COMPARABLES ON A LEVEL PLAYING FILED. IT IS SUBMITTED THAT AS THE ASSESSEES IMPORT COMPONENT OF RAW-MATERIAL AT 53% IN THE RELEVANT PERIOD IS HIGH, THE CORRESPONDING CUSTOMS DUTY EXPENSE IS PROPORTIONATE LY GREATER LEADING TO LOWER PROFITS. IN COMPARISON TO THE ASSESSEE WHO IS IN A START UP PHASE, THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDS, THE COMPARABLE COMPANIES ARE EST ABLISHED PLAYERS IN THE AUTOMOBILE MARKET AND HAVE NEGLIGIBLE IMPORT CONTENT DUE TO IN DIGENIZATION OF MATERIALS REQUIRED FOR PRODUCTION. IN THESE CIRCUMSTANCES, THE LEARNED CO UNSEL FOR THE ASSESSEE ARGUES THAT THE ASSESSEE'S HAVING TO PAY THE HIGHER CUSTOMS DUTY CO MPONENT IT WOULD PUT THE ASSESSEE AT A DISADVANTAGE WHEN COMPARED WITH THE OTHER COMPARABL E COMPANIES AS CUSTOMS DUTY IMPACT PROFIT MARGINS. IT IS SUBMITTED THAT AS THE IMPORT COMPONENT INCREASES, THE MATERIAL COST AS A PERCENTAGE OF SALES ALSO INCREASES AND THEREBY LEADS TO A REDUCTION IN PROFIT MARGINS. IN VIEW OF THE ABOVE, THE ASSESSEE SUBMITTED THAT T HE ADVERSE EFFECT OF CUSTOMS DUTY WARRANTS ITS EXCLUSION SO AS TO BRING THE ASSESSEE AND THE COMPARABLES ON PAR. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECI SION OF THE ITAT, MUMBAI IN THE CASE OF SKODA AUTO INDIA PVT. LTD. VS. ACIT REPORTED IN 30 SOT 319 (MUM) AND SUBMITTE D THAT THE PROPOSITION OF CUSTOMS DUTY ADJUSTMENT IS ALSO SUPPORTED BY THIS DECISION. 18.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESEN TATIVE SUPPORTED THE FINDINGS OF THE AUTHORITIES BELOW AND SUBMITTED THAT CUSTOMS DU TY IS PAID ON THE PARTS AND COMPONENTS IMPORTED FROM ITS AES AND SO FORMS A PA RT OF THE COST OF PURCHASE OF THE RAW MATERIAL. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE DECISION OF 45 ITA NO.828/BANG/2010 WHETHER TO IMPORT OR PURCHASE LOCALLY IS A COMMERCI AL DECISION. AS THE METHOD ADOPTED IS TNMM, WHICH IS TOLERANT OF MINOR FUNCTIONAL DIFFERE NCES ,ADJUSTMENTS CANNOT BE MADE FOR EACH AND EVERY ITEM OF EXPENDITURE. FOR EXAMPLE, T HE ANNUAL REPORT OF TATA MOTORS LTD SAYS THAT THERE IS A CONSUMPTION OF STEEL AND ITS C OST MAY BE DUE TO AN INCREASE IN STEEL PRICES. THEN ITS COST ALSO SHOULD BE ADJUSTED FOR THIS INCREASE OF STEEL PRICES, AS SUCH TYPE OF EXPENDITURE IS NOT SUBSTANTIAL IN THE CASE OF THE ASSESSEE. THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED THAT THE ASSE SSEE IS SELLING TOYOTA BRAND VEHICLES IN INDIA AND HAS ESTABLISHED ITS BUSINESS KNOWING W ELL THAT CUSTOMS DUTY IS REQUIRED TO BE PAID ON IMPORTS OF VEHICLES TO INDIA IN SEMI-KNOCK ED DOWN (SKD) CONDITION. THE LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER ARGUED THAT THE COMPARABLE COMPANIES LIKE TATA MOTORS ETC PAY EXCISE DUTY AS WELL AS SALES TAX ON THE INPUTS USED BY THEM IN THE MANUFACTURE OF COMMERCIAL OR PASSENGER VEHICLES WH ICH THE ASSESSEE DOES NOT BEAR IN A SIGNIFICANT WAY. THE LEARNED DEPARTMENTAL REPRESEN TATIVE RELIED ON THE DECISION OF SONY INDIA PVT LTD VS.DCIT REPORTED IN 114 ITD 448 IN SU PPORT OF THE PROPOSITION THAT CUSTOMS DUTY ADJUSTMENT SHOULD NOT BE GIVEN. IN THE SAID D ECISION, IT WAS HELD THAT THE IMPORT OF COMPONENTS IN A COMMERCIAL DECISION MADE BY THE ASS ESSEE CONSCIOUSLY TAKING INTO ACCOUNT ALL THE COMMERCIAL CONSIDERATION INCLUDING THE OBVI OUS BENEFITS OF BETTER QUALITY WHICH IS BOUND TO TRANSLATE INTO HIGHER SELLING PRICE OF THE PRODUCT. WITH RESPECT TO THE LEARNED COUNSEL FOR THE ASSESSEES RELIANCE ON THE DECISIO N OF SKODA AUTO PVT LTD (SUPRA), THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE SAID DECISION WAS NOT APPLICABLE TO THE FACTS OF THE ASSESSEE'S CASE, AS THE MAIN AR GUMENT BEFORE THE ITAT WAS THAT IT WAS THE FIRST YEAR OF THE ASSESSEE'S OPERATIONS AND COMPLETE FACILITIES ENSURING 46 ITA NO.828/BANG/2010 REASONABLE INDIGENOUS RAW-MATERIAL CONTRACT WAS NOT IN PLACE AND THEREFORE IT HAD TO SELL CARS WITH SUCH HIGH IMPORT CONTENTS, WHILE THE NORM AL SELLING PRICE OF THE CAR WAS COMPUTED IN THE LIGHT OF THE COST AS WOULD APPLY WH EN THE COMPLETE FACILITIES OF REGULAR PRODUCTION WAS IN PLACE. IT IS ALSO SUBMITTED BY T HE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE TRIBUNAL CONCURRED WITH THE FINDINGS IN TH E SONY INDIA DECISION (SUPRA) AND HELD THAT HIGHER IMPORT CONTENT BY ITSELF DOES NOT WARRA NT AN ADJUSTMENT, AS IT IS A COMMERCIAL DECISION. FURTHER, IN THE SKODA CASE, THE TRIBUNAL HAS GIVEN A CLEAR FINDING THAT IT IS AN ASSEMBLER OF CARS WHEREAS THE COMPARABLE COMPANIES WERE MANUFACTURERS. IN THE CASE OF THE ASSESSEE, THE LEARNED DEPARTMENTAL REPRESENTATI VE SUBMITS, IT IS A FULL FLEDGED MANUFACTURER WITH SUFFICIENT LOCALIZATION AS EVIDEN CED BY THE LOCAL SOURCING OF 60% OF ITS MATERIAL CONSUMPTION. THE LEARNED DEPARTMENTAL REP RESENTATIVE ALSO POINTED OUT THAT IN THE CASE OF SKODA (SUPRA), IT WAS THE FIRST YEAR OF OPERATION AND IT WAS CLAIMED THAT FOR WANT OF LOCAL VENDORS IT WAS FOUND TO IMPORT TO TH E EXTENT OF 98.55% WHEREAS THE ASSESSEE IS IN ITS THIRD YEAR OF OPERATION AND IS I N THE BUSINESS OF MANUFACTURING OF PASSENGER CARS IN INDIA SINCE 1999. IT IS THUS SUB MITTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT NO ADJUSTMENT IS REQUIRED ON CU STOMS DUTY PAID BY THE ASSESSEE. 18.3 THE LEARNED COUNSEL FOR THE ASSESSEE IN REJOIN DER HAS REITERATED HIS SUBMISSIONS THAT IMPORT OF PARTS AND COMPONENTS WAS NECESSARY BECAUSE IT WAS THE START UP PHASE AND IT NEEDED TO ADHERE TO THE GLOBAL QUALITY STANDARDS , FOR WHICH THE TOYOTA GROUP IS RENOWNED. LOCALISATION OF SUCH HIGH QUALITY RAW M ATERIAL AND PRODUCT TAKE TIME DUE TO SEVERAL FACTORS. THE ASSESSEE MANUFACTURES TOYOTA VEHICLES USING TECHNOLOGY PROVIDED BY TOYOTA MOTOR CORPORATION AND IS REQUIRED TO ENSURE GLOBAL TOYOTA STANDARD WITH REGARD TO 47 ITA NO.828/BANG/2010 QUALITY OF PARTS USED AND FINISHED GOODS, THEREFORE , HIGH QUALITY OF INPUTS BECOME A PRE- REQUISITE. IT IS THE QUALITY OF VEHICLES TURNED OU T BY THE TOYOTA GROUP THAT ENSURES ITS PRE-EMINENCE IN THE AUTOMOBILE INDUSTRY. IN THE RE LEVANT PERIOD, IT IS SUBMITTED THAT, THE ASSESSEE WAS IN ITS START-UP-PHASE AND THE LOCALIZA TION PROCESS HAD COMMENCED WHEREBY AFTER IDENTIFICATION OF VENDORS / OEMS THE ASSESSE E INVOLVES ITSELF TO ENSURE THAT THE QUALITY AND STANDARD IS MAINTAINED. THE LEARNED CO UNSEL FOR THE ASSESSEE SUBMITTED THAT IN SUCH A SCENARIO WHERE THE SALE PRICE IS MARKET D RIVEN, A HIGHER IMPORT COST (THROUGH A DIFFERENTIAL DISCHARGE OF DUTY) IS BOUND TO DEPRESS PROFITS. IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN SUCH A SCENARIO, T HE AUTOMOBILE INDUSTRY BEING SENSITIVE AND INFLEXIBLE, IN ORDER TO ELIMINATE THE IMPACT O F MARGINS DUE TO DUTY DIFFERENTIALS, THE IMPACT OF CUSTOMS DUTY HAS TO BE ELIMINATED. 18.4 WE HAVE HEARD BOTH SIDES AND CONSIDERED THE SU BMISSIONS MADE BY BOTH OF THEM. THE CRUX OF THE ISSUE IS WHETHER THE CUSTOMS DUTY A DJUSTMENT MADE BY THE ASSESSEE IN ITS T.P. STUDY NEEDS TO BE ALLOWED OR REJECTED. AFTER CAREFUL CONSIDERATION OF THE FACTS ADVOCATED AND THE PROPOSITION PUT FORWARD, WE ARE O F THE VIEW THAT ALL THE POINTS RAISED BY THE ASSESSEE AND REVENUE HAVE NOT BEEN FULLY EVA LUATED BY THE TPO IN ARRIVING AT THE DECISION TO REJECT THE ASSESSEE'S CUSTOMS DUTY ADJU STMENT, SOME OF WHICH ARE THE FOLLOWING : I) THE ASSESSEE IS IN THE EARLY STAGE OF ACTIVITIES (3RD YEAR OF OPERATION) WITH A HIGH IMPORT CONTENT OF 40 50% WHICH WOULD BE MUCH LESS THAN T HAT OF THE COMPARABLES AND LOCAL SOURCING OF ABOUT 50%. HOWEVER, IN THIS PERIOD THE TOYOTA QUALIS WAS THE BEST SELLING MULTI-PURPOSE WITH A 40% MARKET SHARE IN 2002-03. IN THE LIGHT OF THESE FACTS, THE TPO 48 ITA NO.828/BANG/2010 SHOULD EXAMINE THE APPLICABILITY OF THE DECISION IN THE CASE OF SONY INDIA PVT LTD (SUPRA) THAT IF THE TAX PAYER COMPANY HAS PURCHASED IMPORTE D COMPONENTS AFTER PAYMENT OF CUSTOMS DUTY AT A HIGHER PRICE THAN INDIGENOUS COMP ONENTS, THIS DECISION MUST HAVE BEEN TAKEN BY IT CONSCIOUSLY TAKING INTO ACCOUNT ALL THE COMMERCIAL CONSIDERATIONS INCLUDING THE OBVIOUS BENEFITS OF BETTER QUALITY WHICH IS BOUND T O REFLECT OR TRANSLATE INTO A HIGHER SELLING PRICE OF THE PRODUCT WHICH HARDLY LEAVES AN Y SCOPE FOR ADJUSTMENT TO THE PROFIT MARGIN OF THE COMPARABLES ON THIS ISSUE. II) NO DOUBT, A HIGHER IMPORT CONTENT OF RAW-MATERI AL DOES NOT WARRANT AN ADJUSTMENT IN OPERATING MARGINS AS WAS HELD IN SONY INDIA PVT LTD CASE (SUPRA), BUT WHAT IS TO BE REALLY SEEN IS WHETHER THE HIGH IMPORT CONTENT WAS NECESSI TATED BY CIRCUMSTANCES BEYOND THE ASSESSEE'S CONTROL. III) WHETHER THE HIGHER CUSTOMS DUTY COMPONENT ON ACCOUNT OF IMPORTS IMPACTS THE PROFIT MARGINS OF THE ASSESSEE, PUTTING IT AT A DISADVANTA GEOUS POSITION, VIS--VIS THE COMPARABLE COMPANIES WHO WOULD BE PAYING MORE OF CENTRAL EXCIS E DUTY, SALES TAX ETC. IV) WHETHER IF THE SALE PRICE IS MARKET DRIVEN, A HIGHER IMPORT DUTY COST THROUGH A DIFFERENTIAL DISCHARGE OF DUTY IS BOUND TO DEPRESS PROFITS AND THE IMPORT OF CUSTOMS DUTY WOULD HAVE TO BE ELIMINATED THROUGH ADJUSTMENT TO M AINTAIN THE IMPACT ON MARGINS ? IN THESE FACTUAL CIRCUMSTANCES, WE REMAND THE MATTE R, OF EXAMINING THE NECESSITY OF WHETHER CUSTOMS DUTY ADJUSTMENT IS TO BE ALLOWED, A S CLAIMED BY THE ASSESSEE, TO THE FILE OF THE TPO. THE TPO IS DIRECTED TO EXAMINE THE CON TENTIONS OF THE ASSESSEE ON CUSTOMS DUTY ADJUSTMENT IN A HOLISTIC PERSPECTIVE ALSO KEEP ING IN MIND THE OBSERVATIONS MADE BY US (SUPRA) AND IN THE LIGHT OF THE DECISION OF THE ITA T, PUNE IN THE CASE OF SKODA AUTO INDIA 49 ITA NO.828/BANG/2010 PVT LTD VS. ACIT (2009-TIOL-214-ITAT-PUNE) RELIED O N BY THE ASSESSEE AND THE CASE OF SONY INDIA PVT LTD VS. DCIT 114 ITD 448 (DELHI) RE LIED ON BY REVENUE. 19.1 IN THE GROUND RAISED AT A-14, THE ASSESSEE HAS CONTENDED THAT THE AUTHORITIES BELOW HAVE ERRED IN NOT CONSIDERING CASH PLI (PROFI T LEVEL INDICATOR) OR PBDIT (PROFIT BEFORE DEPRECIATION, INTEREST AND TAX) TO SALES WHI CH IS AN ACCEPTED PARAMETER OF PROFIT MARGIN FOR DETERMINING ALP. THE LEARNED COUNSEL FO R THE ASSESSEE SUBMITTED THAT THE TPO COMPARED THE RATIO OF DEPRECIATION TO SALES OF THE ASSESSEE (5.58% OF SALES) WITH THAT OF THE COMPARABLES (2.78% OF SALES) AND ADJUST ED THE DIFFERENCE IN DEPRECIATION OF EACH OF THE COMPARABLES TO THE LEVEL OF THE ASSESSE E AT 5.58% OF SALES. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CASH PL I IS AN ACCEPTED RATIO FOR DETERMINING ALP AS PER PARA 1.44 OF OECD T.P. GUIDELINES AND WH ICH HAS BEEN ACCEPTED BY THE ITAT, DELHI IN SCHEFENACKER MOTHERSON LTD. VS. ITO (2009-TIOL-376-ITAT-DEL). THE ASSESSEE ALSO RELIED ON THE DECISION OF THE HYDERAB AD TRIBUNAL IN THE CASE OF QUAL CORE LOGIC LTD. VS. DCIT (22 TAXMAN.COM 4) WHEREIN IT HAS BEEN HEL D THAT WHERE DEPRECIATION OF THE TAX PAYER WAS HIGH WHEN COMPARED TO COMPARAB LES, PROFITS SHOULD BE CONSIDERED WITHOUT DEPRECIATION. IN VIEW OF THIS THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPOS ADJUSTMENT FOR DEPRECIATION SHOULD BE EL IMINATED FROM THE COMPARABILITY ANALYSIS. 19.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPOR TED THE ORDERS OF THE AUTHORITIES BELOW ON THIS ISSUE AND SUBMITTED THAT WHEN DEPRECI ATION FORMS PART OF THE CONSIDERATIONS WHILE FIXING THE PRICE, AS IN THE CASE OF MANUFACTU RING A CAR, DEPRECIATION CANNOT BE ELIMINATED FROM THE COMPARABILITY ANALYSIS. IT WAS FURTHER SUBMITTED THAT AS FIXED ASSETS 50 ITA NO.828/BANG/2010 DRIVE THE REVENUES OF A MANUFACTURING CONCERN AND A LSO THE DEPRECIATION COST IS A SIGNIFICANT ONE, WHICH IS CONSIDERED WHILE FIXING T HE PRICE OF A CAR, THEN DEPRECIATION EFFECT CANNOT BE ELIMINATED BY EXCLUDING DEPRECIATI ON WHILE COMPARING PROFITABILITY OF THE ASSESSEE WITH THAT OF THE COMPARABLES. THE LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER CONTENDED THAT IN THE CASE OF NEW COMPANIES DEPRECI ATION WOULD BE HIGHER AS COMPARED TO AN OLD ENTERPRISE, BUT THE EXPENSES ON REPAIRS AND MAINTENANCE WOULD BE LOWER IN A NEW ENTERPRISE AS COMPARED TO AN OLDER ONE AND THEREFOR E THE DEPRECIATION ALONG WITH EXPENSES ON REPAIRS AND MAINTENANCE TAKES CARE OF T HE AGE FACTOR OF THE ASSESSEE VIS-- VIS THE COMPARABLE COMPANIES. IT IS ARGUED THAT IN ASSET INTENSIVE MANUFACTURING CONCERNS LIKE THE ASSESSEE, EXCLUSION OF DEPRECIATI ON DISTORTS THE COMPARABILITY ANALYSIS AND THEREFORE CASH PLI OR PBDIT IS NOT THE APPROPRI ATE PLI. IN SUPPORT OF THIS PROPOSITION THE LEARNED DEPARTMENTAL REPRESENTATIVE PLACED RELIANCE ON THE DECISION OF THE ITAT, MUMBAI IN THE CASE OF FIAT INDIA PVT LTD VS. DCIT (2010-TIOL-30-ITAT-MUM- TP). 19.3 IN REJOINDER THE LEARNED COUNSEL FOR THE ASSES SEE SUBMITTED THAT THE LEARNED DEPARTMENTAL REPRESENTATIVES CONTENTION THAT DEPRE CIATION IS ONE OF THE CONSIDERATION FOR FIXING THE PRICE AND THEREFORE CANNOT BE ELIMIN ATED FROM THE COMPARABILITY ANALYSIS IS WITHOUT BASIS AS THE TPO HAD ANALYSED THAT THE SALE S PRICE IS MARKET DRIVEN. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON PARA 136 OF OECD DRAFT GUIDELINES ON TRANSACTIONAL PROFITS METHOD TO SUBMIT THAT SINCE DEPRECIATION CH ARGES ARE SUSCEPTIBLE TO DIFFERENCES IN ACCOUNTING TREATMENT AND MAY MATERIALLY DISTORT THE COMPARISON IN IN AN ASSET INTENSIVE INDUSTRY, THEREFORE CASH PLI WOULD BE APPROPRIATE I N THE FACTS AND CIRCUMSTANCES OF THE 51 ITA NO.828/BANG/2010 CASE. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO RE LIED ON THE DECISION OF THE ITAT, HYDERABAD IN THE CASE OF QUAL CORE LOGIC LTD VS. DC IT (22 TAXMAN.COM 4) WHEREIN IT WAS HELD THAT WHERE DEPRECIATION OF TAX PAYER WAS HIGH WHEN COMPARED TO COMPARABLES, PROFITS SHOULD BE CONSIDERED WITHOUT DEPRECIATION. IN THES E CIRCUMSTANCES, THE LEARNED COUNSEL FOR THE ASSESSEE SOUGHT THAT CASH PLI OR PBDIT TO S ALES SHOULD BE ACCEPTED AS THE PARAMETER OF PROFIT MARGIN FOR DETERMINING ALP. 19.4.1 WE HAVE HEARD BOTH PARTIES AND CAREFULLY PER USED AND CONSIDERED THE MATERIAL ON RECORD INCLUDING THE JUDICIAL DECISIONS CITED ON BO TH SIDES. THERE ARE VARYING OPINIONS AMONG EXPERTS WHETHER DEPRECIATION SHOULD BE TAKEN INTO ACCOUNT FOR WORKING OUT PROFITS OF AN ENTERPRISE. ONE VIEW IS THAT IT IS NOT REVEN UE DEDUCTION AT ALL. AS PER THAT VIEW, DEPRECIATION IS ONLY AN ANNUAL LOSS IN THE COST / V ALUE OF THE CAPITAL ASSETS DUE TO FACTORS LIKE AGE OF ASSETS, THEIR USAGE ETC. AND THEREFORE ALLOWANCE OF DEPRECIATION, BEING CAPITAL IN NATURE, SHOULD FIND NO PLACE IN THE COMPUTATION OF PROFITS. THE OPPOSITE VIEW IS THAT DEPRECIATION, THOUGH A CAPITAL LOSS, NEEDS TO BE DE DUCTED, TO REPLACE THE VALUE OF ASSETS TO THE EXTENT IT HAS DEPRECIATED. BE THAT AS IT MAY, IN THE PRESENT CASE, ALP OF THE TRANSACTIONS TO BE DETERMINED BY COMPARING THE PROF ITS OF THE ASSESSEE WITH THAT OF THE COMPARABLE COMPANIES. THERE ARE NO EXPRESS STATUTO RY PROVISIONS WHICH INDICATE THAT DEDUCTION FOR DEPRECIATION IS A MUST. DEPRECIATION , WHICH CAN HAVE VARIED BASIS AND IS ALLOWED AT DIFFERENT RATES, IS NOT AN EXPENDITURE W HICH MUST BE DEDUCTED IN ALL SITUATIONS. IT HAS NO DIRECT BEARING OR CONNECTION ON PRICE, CO ST OR PROFIT MARGIN OF INTERNATIONAL TRANSACTIONS. IT CAN THEREFORE BE HELD THAT DEPREC IATION CAN BE TAKEN INTO ACCOUNT OR 52 ITA NO.828/BANG/2010 DISREGARDED IN COMPUTING PROFIT, DEPENDING ON THE C ONTEXT AND PURPOSE FOR WHICH PROFIT IS TO BE COMPUTED. 19.4.2 IN THE CASE OF SCHEFENACKER MOTHERSON LTD (SUPRA) OF THE ITAT, DELHI, THE ISSUE OF WHETHER DEPRECIATION CAN BE EXCLUDED FOR C OMPARISON HAS BEEN DISCUSSED AT LENGTH AND IT WAS HELD IN PARA 22 THEREOF THAT .. THE BASIC ISSUE INVOLVED WAS WHETHER THE COS T PAID OR CHARGED FOR INTERNATIONAL TRANSACTIONS WAS AT ARMS LENGTH OR N OT. THE FACTORS WHICH GO TO INFLUENCE PRICE, COST OR PROFITS ARE / WERE RELEVAN T FOR COMPUTING PROFIT AND NOT DEPRECIATION HAVING NO DIRECT CONNECTION WITH P RICE OR PROFIT BUT RESPONSIBLE FOR WIDE DIFFERENCES. THE CASE OF REVE NUE IS NOT CLEAR. IF DEPRECIATION IS NOT LEADING TO ANY DIFFERENCE, ITS EXCLUSION IS IMMATERIAL. IF IT IS LEADING TO DIFFERENCES, THEN DIFFERENCES ARE REQ UIRED TO BE ADJUSTED, AS REQUIRED BY THE IT REGULATIONS. THERE IS NO WAY TO DISLODGE THE CLAIM OF THE TAX PAYER. THE CONTEXT AND PURPOSE OF LEGISLATION AND FACTS OF THE CASE OVERWHELMINGLY APPROVE ADOPTION OF CASH PROFIT ONLY . THIS CASE WAS RELIED UPON BY THE ASSESSEE IN SUPPOR T OF ITS PROPOSITION THAT CASH PLI OR PBDIT IS THE APPROPRIATE PLI. 19.4.3 WE FIND THAT THE ABOVE FINDING OF THE TRIBU NAL WAS GIVEN AS THE CASE OF REVENUE WAS NOT CLEAR AND THE TPO HAD REJECTED CASH PLI WITHOUT ASSIGNING ANY REASONS. SUBSEQUENTLY, THE MUMBAI, ITAT, IN THE CASE OF FIAT INDIA PVT LTD (SUPRA) HELD THAT IN AN ASSET INTENSIVE INDUSTRY WHERE ASSETS ARE THE KEY D RIVERS, EXCLUDING DEPRECIATION WOULD NOT LEAD TO ANY MEANINGFUL OUTCOME AND PBIT AND NOT PBDIT IS TO BE TAKEN FOR COMPUTING PLI. THE ASSESSEE IN THE INSTANT CASE IS ALSO SIMI LARLY IN THE ASSET-INTENSIVE INDUSTRY OF AUTOMOBILE MANUFACTURING LIKE THE ASSESSEE IN THE C ITED CASE (SUPRA), WHERE DEPRECIATION IS A SIGNIFICANT COST, WHICH NO PRUDENT BUSINESSMAN WO ULD IGNORE WHILE PRICING A PASSENGER CAR. IN SUCH AN INSTANCE, WHEN THE PRICE IS DETERM INED BY CONSIDERING THE DEPRECIATION 53 ITA NO.828/BANG/2010 COST, EXCLUDING DEPRECIATION FROM THE PROFITS FOR C OMPARISON UNDER TNMM DISTORTS THE COMPARABILITY ANALYSIS. WE ARE THEREFORE OF THE OP INION THAT IN VIEW OF THE FINDING OF THE MUMBAI ITAT IN THE CASE OF FIAT INDIA PVT LTD (SUP RA) IN WHICH THE ASSESSEE THEREIN IS IN THE ASSET INTENSIVE AUTOMOBILE INDUSTRY, AS IS THE ASSESSEE IN THE PRESENT CASE, THAT CASH PLI OR PBDIT TO SALES IS NOT THE APPROPRIATE PLI AN D ALSO NOTE THAT THE TPO HAS GIVEN DEPRECIATION ADJUSTMENT FOR DIFFERENCES IN RELATIVE LEVEL OF DEPRECIATION COST WITH REFERENCE TO SALES. WE, THEREFORE, DISMISS THIS GR OUND RAISED BY THE ASSESSEE. ADJUSTMENTS FOR DIFFERENCES 20.1 IN THE GROUNDS RAISED AT A-15 , THE ASSESSEE CONTENDS THAT THE AUTHORITIES BELOW HAVE ERRED IN NOT MAKING ADJUSTMENT FOR VARIO US EXTRA-ORDINARY EXPENSES INCURRED WHILE COMPUTING THE ALP. THE LEARNED COUNSEL FOR T HE ASSESSEE CONTENDED THAT FOR A MEANINGFUL TNMM ANALYSIS, THE RESULTS OF COMPARABLE COMPANIES NEED TO BE ADJUSTED FOR TRANSACTION LEVEL DIFFERENCES OR ENTERPRISE LEVEL D IFFERENCES. 20.2 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITS T HAT IN THE RELEVANT PERIOD THERE WAS A GLOBAL INCREASE IN STEEL PRICES AND SIMULTANEOUSL Y A FALL IN THE VALUE OF THE RUPEE VIS--VIS THE US DOLLAR. AS A RESULT THEREOF, THE ASSESSEE W OULD HAVE TO INCUR HIGHER RUPEE COSTS FOR ITS IMPORTS AND THE RUPEE DEPRECIATION RESULTED IN HIGHER CUSTOM DUTY PAYMENTS ON IMPORTED COMPONENTS WHEREAS THE COMPARABLE COMPANIE S DID NOT SUFFER A SIMILAR IMPACT. WE HAVE CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND ARE OF THE VIEW THAT THEY DO NOT HAVE MERIT ON THIS ISSUE FOR THE SIMPLE REAS ON THAT THE COMPARABLE COMPANIES ALSO SUFFER THE IMPACT OF INCREASE IN STEEL PRICES AS IS BORNE OUT BY THE ANNUAL REPORT OF TATA 54 ITA NO.828/BANG/2010 MOTORS WHEREIN THIS ASPECT IS HIGHLIGHTED. IN THIS VIEW OF THE MATTER, WE HOLD THAT NO ADJUSTMENT IS REQUIRED ON THIS ISSUE. 20.3 IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE IS PART OF A WORLD RENOWNED MULTI-NATIONAL ORGANIZATION AND AS PART OF ITS GLOBAL IMAGE HAS MADE SUBSTANTIAL INVESTMENTS IN ESTABLISHING DEALERSHIP NETWORKS, IMPLEMENTED GLOBAL STANDARDS OF OFFICE LAYOUT AND THEREBY SECURED THE HIGHEST SA TISFACTION FOR BOTH CUSTOMERS AND DEALERS. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND F IND NO MERIT IN THE CLAIM FOR MAKING ANY ADJUSTMENT ON THIS COUNT. THE ASSESSEE HAS FAILED TO DEMONSTRATE THAT COMPARABLES DO NOT INVEST IN SETTING UP DEALERSHIP NETWORK. EVEN OTHERWISE TNMM IS TOLERANT TO MINOR FUNCTIONAL DIFFERENCES AND HENCE NO ADJUSTMENT IS REQUIRED FOR THIS DIFFERENCE IN OPERATION. 20.4 IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN THE CASE OF THE ASSESSEE THE TECHNOLOGY BELONGED TO THE AE AND THER EFORE RESEARCH AND DEVELOPMENT ACTIVITY WAS NOT ASSUMED BY THE ASSESSEE AND HENCE THE ASSESSEE WAS INSULATED FROM CERTAIN RISKS. IN THESE CIRCUMSTANCES, IT IS SUBMI TTED THAT IT IS NATURAL THAT THE PROFIT MARGINS OF THE ASSESSEE ARE LOWER THAN THAT OF THE COMPARABLES WHO ASSUME THE FULL RANGE OF FUNCTIONS AND RISKS AND HAVE FULL FLEDGED ASSETS . THE SUBMISSIONS OF THE ASSESSEE HAVE BEEN CAREFULL Y CONSIDERED. WE FIND THAT THE ASSESSEE IS ALSO A FULL FLEDGED MANUFACTURER PERFOR MING THE FUNCTIONS, BEARING ALL THE RISKS AND EMPLOYING ASSETS JUST AS OTHER COMPARABLES UNDE RTAKE THEIR MANUFACTURING ACTIVITIES AND HENCE NO ADJUSTMENT IS CALLED FOR ON THIS COUNT . 55 ITA NO.828/BANG/2010 20.5 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITS T HAT, THE ASSESSEE IS IN A START UP PHASE (THIRD YEAR OF OPERATION) WHEREAS THE COMPARA BLE COMPANIES ARE WELL ESTABLISHED, WITH SOME HAVING OPERATIONS OVER SIX DECADES. IT I S SUBMITTED THAT AT THE START UP STAGE, MARKET ACCEPTANCE IS YET TO GAIN GROUND; TECHNOLOGY IS IN THE STAGE OF ABSORPTION AND THE WORKERS WOULD BE IN THE PROCESS OF GEARING UP TO TH E TECHNICALITIES INVOLVED IN MANUFACTURING ESPECIALLY WHEN KAIZER AND JIT (JUST- IN-TIME) CONCEPTS ARE INVOLVED. THE SUBMISSIONS OF THE ASSESSEE HAVE BEEN CAREFULL Y CONSIDERED. IN OUR VIEW, THE EXCISE DUTY ADJUSTMENT AS RECOMMENDED BY US AND THE RE-EXAMINATION OF THE CUSTOMS DUTY ADJUSTMENT DIRECTED BY US WOULD NEUTRALIZE THE DIFF ERENCES, IF ANY AND THEREFORE NO SEPARATE ADJUSTMENT IS REQUIRED TO BE MADE. 21.0 PLI COMPUTATION THE ASSESSEE SUBMITS THAT THE TPO HAS ERRED IN REJ ECTING THE FOLLOWING WHILE COMPUTING MARGINS. I) COMMISSION INCOME II) PROVISION FOR WARRANTY COSTS III) MARKETING EXPENSES 21.2 COMMISSION INCOME IT IS SUBMITTED THAT THE ASSESSEE HELPS THE AE IN PROCESSING ENQUIRIES FOR AUTOMOBILES MANUFACTURED BY THEM AND ALSO RENDERS O THER SERVICES IN THE COURSE OF AND FOR THE PURPOSE OF SELLING THE VEHICLES OF THE AES . FOR THESE SERVICES, THE ASSESSEE EARNS A COMMISSION. IT IS CONTENDED THAT SINCE THESE SER VICES ARE RENDERED IN THE COURSE OF ITS BUSINESS OPERATIONS, THE SAID COMMISSION INCOME SHO ULD BE REGARDED AS OPERATING INCOME. 56 ITA NO.828/BANG/2010 WE HAVE CONSIDERED THE ASSESSEE'S SUBMISSION CAREF ULLY. WE ARE IN AGREEMENT WITH THE TPOS ACTION IN EXCLUDING COMMISSION INCOME FOR THE REASON THAT THE COMMISSION INCOME EARNED BY THE ASSESSEE IS NOT DERIVED FROM O UT OF THE ASSESSEE'S BUSINESS OPERATIONS OF MANUFACTURE AND SALE OF PASSENGER VEH ICLES OR THE SALE OF SPARE PARTS AND COMPONENTS. ADMITTEDLY, IT IS EARNED FROM INCIDENT AL ACTIVITIES FOR RENDERING OTHER SERVICES TO THE AES AND THEREFORE ITS INCLUSION IN OPERATIONAL INCOME WOULD LEAD TO A DISTORTION THEREIN. 21.3 PROVISION FOR WARRANTY COSTS THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITS THAT WHEN THE ASSESSEE SELLS ITS VEHICLES TO VARIOUS CUSTOMERS, THEY HAVE AN ATTACHE D WARRANTY CONDITION. IN THE EVENT OF A FAULTY DESIGN OR MANUFACTURE, DEFECTS ARISE WHICH W ERE NOT ORIGINALLY VISUALIZED. IT IS SUBMITTED THAT IN THE RELEVANT PERIOD, THE ASSESSEE NOTICED A DEFECT IN THE EXHAUST SYSTEM OF THE AUTOMOBILES MANUFACTURED BY IT. APPR EHENDING THAT THERE WOULD BE INCREASED EXPENDITURE TO RECTIFY THESE DEFECTS, THE ASSESSEE MADE A SPECIAL ONE TIME PROVISION OF 15.90 CRORES TOWARDS WARRANTY COSTS. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE SAME BEING AN UNUSUAL EXPENDITUR E AND ALSO NON-RECURRING, IT OUGHT NOT TO HAVE BEEN INCLUDED IN THE OPERATING COSTS WHICH WAS WHAT THE TPO DID. IT WAS FURTHER SUBMITTED THAT IN THE SUCCEEDING YEARS, IN THE ASSE SSEE'S OWN CASE, THE TPO HAD ACCEPTED THAT WARRANTY PROVISION IS NOT OPERATING EXPENDITUR E AND EXCLUDED IT FROM OPERATIONAL COSTS. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUB MITTED THAT WARRANTY ADJUSTMENT IS NOT CALLED FOR ON THE GROUND THAT IT IS PART OF THE OPERATING EXPENDITURE AND INTEGRAL TO THE TAX PAYERS BUSINESS. THIS WAS REBUTTED BY THE LEARNED COUNSEL FOR THE ASSESSEE 57 ITA NO.828/BANG/2010 STATING THAT THE WARRANTY PROVISION IS A SPECIAL, E XTRA-ORDINARY, ONE TIME PROVISION MADE IN THE RELEVANT PERIOD AND THEREFORE IT SHOULD BE EXCL UDED WHILE COMPUTING OPERATING MARGINS. WE HAVE HEARD BOTH PARTIES AND CAREFULLY CONSIDERE D THE MATERIAL ON RECORD. IN NORMAL BUSINESS OPERATIONS OF THE KIND THE ASSESSEE IS INVOLVED IN NAMELY, MANUFACTURE AND SALE OF PASSENGER CARS, WARRANTY WOULD BE ATTACHED AND WILL FORM PART OF OPERATIVE EXPENDITURE. HOWEVER, IN THE INSTANT CASE, FROM TH E FACTS ON RECORD, IT IS CLEAR THAT THE SPECIAL WARRANTY PROVISION OF RS.15.90 CRORES TO WA RRANTY COSTS WAS A SPECIAL, ONE TIME PROVISION MADE TO OVERCOME THE DEFECTS IN THE EXHAU ST SYSTEM OF THE AUTOMOBILE MANUFACTURED BY IT IN THE RELEVANT PERIOD. IN THAT SENSE, IT IS CLEARLY AN EXTRA-ORDINARY EXPENSE OF A NON-RECURRING NATURE AND IN THAT VIEW OF THE MATTER REQUIRES TO BE EXCLUDED FROM OPERATING COSTS. IN VIEW OF THIS FACTUAL MATR IX, WE DIRECT THAT THE ONE TIME SPECIAL WARRANTY PROVISION, ARISING OUT OF AN EXTRA-ORDINAR Y VIZ. MANUFACTURING DEFECT IN EXHAUST OF PASSENGER VEHICLE IN THE RELEVANT PERIOD SHOULD BE CONSIDERED AS NON-OPERATING EXPENDITURE. 21.4 MARKETING EXPENSES IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASS ESSEE THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD INTRODUCED A NEW VEH ICLE AND IN ORDER TO PROMOTE THE LAUNCH AND SALES OF THIS VEHICLE INCURRED SUBSTANTI AL MARKETING EXPENSE OF RS.10.19 CRORES. IT IS CONTENDED THAT THESE EXPENSES BEING SPECIAL O NE TIME EXPENSES, NOT ASSOCIATED WITH THE ORDINARY BUSINESS ACTIVITIES OF THE ASSESSEE, T HE SAME IS TO BE EXCLUDED WHILE ARRIVING AT THE OPERATIONAL COSTS. THE LEARNED DEPARTMENTA L REPRESENTATIVE SUBMITTED THAT FOR 58 ITA NO.828/BANG/2010 THE RELEVANT PERIOD, THE MARKETING EXPENDITURE OF T HE COMPARABLE COMPANIES IS 4.72% WHICH IS HIGHER THAN THAT OF THE ASSESSEE AT 2.89% INSPITE OF LAUNCH OF A VEHICLE. IT WAS FURTHER SUBMITTED THAT ALL THE COMPARABLE COMPANIES AND THE ASSESSEE WERE AUTOMOBILE MANUFACTURERS AND YEAR ON YEAR WOULD BE BRINGING OU T NEW MODELS FOR WHICH MARKETING EXPENSES WOULD BE INCURRED IN THE NORMAL COURSE OF BUSINESS AND THEREFORE THERE IS NO NEED FOR ADJUSTMENT FOR MARKETING EXPENSES. WE HAVE HEARD BOTH PARTIES AND CAREFULLY CONSIDERE D THE MATERIAL ON RECORD. IT IS A MATTER OF RECORD THAT EVEN THOUGH THE ASSESSEE CL AIMS EXTRAORDINARY MARKETING EXPENSES WERE INCURRED ON LAUNCH OF A PASSENGER VEH ICLE, ITS MARKETING EXPENDITURE AT 2.89% IS LESS THAN THAT OF THE COMPARABLE COMPANIES WHICH IS 4.72%. IT IS COMMON KNOWLEDGE THAT THE COMPARABLE COMPANIES ALSO IN THE AUTOMOBILE INDUSTRY WOULD BE LAUNCHING NEW MODELS / VEHICLES AT REGULAR INTERVAL S, FOR WHICH THEY TOO, JUST LIKE THE ASSESSEE, WOULD BE INCURRING MARKETING EXPENSES TO PROMOTE THEIR PRODUCTS. IN THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THESE MAR KETING EXPENSES FOR LAUNCH OF NEW VEHICLES ARE PART AND PARCEL OF THE NORMAL BUSINESS OPERATIONS OF THE ASSESSEE AND THE COMPARABLE COMPANIES AND THEREFORE WOULD COMPRISE A PART OF THE OPERATIONAL EXPENSES. FROM AN ACCOUNTING PERSPECTIVE, IT IS GENERALLY PER CEIVED THAT MARKETING EXPENSES HAVE AN IMPACT ON REVENUES OVER A PERIOD OF TIME. HOWEVER, IN THE ASSESSEE'S CASE WE FIND THAT ALL THE MARKETING EXPENSES HAVE BEEN INCURRED AND CLAIM ED IN THE RELEVANT PERIOD ONLY. IN VIEW OF THE FACTS AND CIRCUMSTANCES AS DISCUSSED AB OVE, WE ARE OF THE OPINION THAT THE MARKETING EXPENSES INCURRED BY THE ASSESSEE FOR LAU NCH OF A NEW PASSENGER VEHICLE IN THE 59 ITA NO.828/BANG/2010 RELEVANT PERIOD, IS INCURRED IN THE NORMAL COURSE O F ITS BUSINESS OPERATIONS AND FORMS PART OF ITS OPERATING EXPENDITURE. IN THIS VIEW OF THE MATTER, THE ASSESSEE'S CLAIM IS REJECTED. 22.0 ADJUSTMENT FOR AE TRANSACTIONS 22.1 IT IS SUBMITTED THAT THE ASSESSEE'S IMPORTS FR OM AES CONSTITUTED 37% OF THE TOTAL PURCHASE COST OF THE YEAR. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO ERRED IN APPLYING THE MODIFIED PLI FOR ALL TRANSACT IONS OF PURCHASE OF COMPONENTS INCLUDING PURCHASES FROM NON-AES AND THIS RESULTED IN THE MA KING OF AN ADJUSTMENT IN RESPECT OF TRANSACTIONS WITH NON-AES ALSO. IN THIS REGARD, THE ASSESSEE PLACED RELIANCE ON TH E DECISION OF THE DELHI TRIBUNAL IN THE CASE OF IL JIN ELECTRONICS (I) PVT. LTD. VS. AC IT (IN ITA NO.438/DEL/2008). IT IS SUBMITTED THAT IN THE CITED CASE THE ASSESSEE WAS E NGAGED IN THE MANUFACTURE OF PRINTED CIRCUIT BOARDS. OUT OF ITS TOTAL PURCHASES, 45.51% THEREOF WAS FROM AES. ON THE FACTS OF THE CASE, THE TRIBUNAL HELD THAT ADJUSTMENT CAN BE MADE ONLY TO THE EXTENT OF 45.51% OF THE TURNOVER. THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THE RELEVANT OBSERVATION OF THE TRIBUNAL IN PARA 15 OF ITS ORDER WHICH READS : AFTER CONSIDERING THE FACTS OF THE CASE, WE D O NOT FIND ANY DIFFICULTY IN ACCEPTING THIS CONTENTION OF THE ASSESSEE THAT AT B EST ONLY 45.51 OF THE OPERATING PROFIT CAN BE ATTRIBUTED TO IMPORTED RAW MATERIAL ACQUIRED FROM THE ASSESSEE'S ASSOCIATE CONCERNS. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO RELIED ON THE DECISION OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF GENYSYS INTEGRATING SYSTEMS (INDIA) PRIVATE LIMITED VS. DCIT (ITA NO.1231/BANG/2010) WHEREIN IT WAS HELD TH AT TP ADJUSTMENT SHOULD BE RESTRICTED TO AE TRANSACTIONS ONLY. THE LEARNED CO UNSEL FOR THE ASSESSEE SUBMITTED THAT 60 ITA NO.828/BANG/2010 THE ABOVE PROPOSITION THAT TP ADJUSTMENTS SHOULD BE RESTRICTED TO TRANSACTIONS WITH AES ONLY IS FURTHER SUPPORTED BY THE FOLLOWING JUDICIAL PRECEDENTS I) GLOBAL VANTEDGE PVT LTD (2010-TIOL-24-ITAT-DEL) II) DCIT VS. STARTEX NETWORKS (INDIA) PVT LTD (2010-TII -13-ITAT-DEL-TP) III) ACIT VS. WOCKHARDT LTD (6 TAXMAN.COM 78 (M&M ITAT ) IV) ADDL. CIT VS. TEJ DIAM (2010-TII-27-ITAT-MUM-TP) V) ABHISHEK AUTO INDUSTRIES LTD (2010-TII-54-ITAT-DEL- TP) VI) ANKIT DIAMONDS 43 SOT 523 (MUM) VII) ACIT VS. T TWO INTERNATIONAL PVT LTD (2010-TIOL-166 -ITAT-MUM). THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITS THAT T HE TP ADJUSTMENT, IF ANY, SHOULD BE RESTRICTED TO TRANSACTIONS WITH AES ONLY. 22.2 ON A PERUSAL OF THE ORDER OF THE LEARNED CIT(A PPEALS), AT PARA 7.31 THEREOF, WE FIND THAT THE CIT(APPEALS) HAS HELD THAT THE ALP AD JUSTMENT HAS TO BE RESTRICTED TO THE EXTENT OF IMPORT / PURCHASES FROM AES ONLY AND CA NNOT BE EXTENDED TO PURCHASES MADE FROM NON-AES AND HAS REMITTED THE MATTER BACK TO T HE FILE OF THE TPO FOR COMPUTATION OF THE SAME. SINCE THIS ISSUE IS NOT DISPUTED BEFO RE US, WE DECLINE TO ADJUDICATE THEREON OR INTERFERE THEREIN. 23.0 BENEFIT + / - 5% SAFE HARBOUR 23.1 IN THE GROUND NO.5 ON SAFE HARBOUR - THE ASSESSEE HAS SOUGHT THE BEN EFIT OF + / - 5% AS SET OUT UNDER THE PROVISO TO SECTION 92 C(2) OF THE ACT CITING SEVERAL JUDICIAL DECISIONS IN SUPPORT OF THIS PROPOSITION. PRIOR TO THE AMENDMENT MADE BY FINANCE (NO.2) ACT, 2009 AND THE FINANCE ACT, 2012, THE PROVISO TO SECTION 92C(2) OF THE ACT PROVIDED 61 ITA NO.828/BANG/2010 THAT THE ALP WOULD BE TAKEN TO BE THE ARITHMETICAL MEAN (AM) OR AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE A.M. BY AN AMOUNT NOT EXCEEDING 5% OF SUCH A.M. THUS, THE ALP WAS + / - 5% OF SUCH A.M. TH US, THE ALP WAS + / - 5% FROM THE A.M. THIS ISSUE IS MORE OF AN ACADEMIC NATURE AND CASE L AWS CITED BY THE ASSESSEE ARE NOT APPLICABLE TO THE FACTS OF THE CASE, AS THE IT ACT, 1961 HAS BEEN AMENDED WITH RETROSPECTIVE EFFECT FROM 1.4.2002 BY THE INTRODUCT ION OF A CLARIFICATORY AMENDMENT IN WHICH THE SECTION 92C (2A) WAS INSERTED, WHICH AS P ER THE FINANCE ACT, 2012 READS AS FOLLOWS : (2A) WHERE THE FIRST PROVISO TO SUB-SECTION (2) AS IT STOOD BEFORE ITS AMENDMENT BY FINANCE (NO.2) ACT, 2009 (33 OF 2009), IS APPLICABLE IN RESPECT OF INTERNATIONAL TRANSACTIONS FROM AN ASSESSMENT YE AR AND THE VARIATION BETWEEN THE ARITHMETICAL MEAN REFERRED TO IN THE SA ID PROVISO AND THE PRICE AT WHICH SUCH TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN EXCEEDS FIVE PER CENT OF THE ARITHMETICAL MEAN, THEN, THE ASSESSEE SHALL NOT BE ENTITLED TO EXERCISE THE OPTION AS REFERRED TO IN THE SAID PROVISO. 23.2 THE NEW SECTION 92C(2A) MANDATES THAT IF THE ARITHMETICAL MEAN PRICE FALLS BEYOND + / - 5% FROM THE PRICE CHARGED IN THE INTER NATIONAL TRANSACTIONS, THEN THE ASSESSEE DOES NOT HAVE ANY OPTION REFERRED TO IN SE CTION 92C(2). THUS, AS PER THE ABOVE AMENDMENT, IT IS CLEAR THAT THE + / - 5% VARIATION IS ALLOWED ONLY TO JUSTIFY THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS AND NOT F OR ADJUSTMENT PURPOSES. THE AFORESAID AMENDMENT HAS SETTLED THE ISSUE AND ACCORDINGLY THE 5% BENEFIT IS NOT ALLOWABLE IN THE ASSESSEE'S CASE. THE VARIOUS JUDICIAL DECISIONS CI TED PERTAIN TO THE PERIOD PRIOR TO THE RETROSPECTIVE AMENDMENT IN SECTION 92C(2A) OF THE A CT AND ARE NOT APPLICABLE TO THE FACTS OF THE ASSESSEE'S CASE. IN VIEW OF THE AMEN DMENT BROUGHT ABOUT THEREIN BY FINANCE 62 ITA NO.828/BANG/2010 ACT, 2012, THIS GROUND RAISED BY THE ASSESSEE IS NO T MAINTAINABLE AND IS ACCORDINGLY DISMISSED. 24.1 IN THE GROUNDS RAISED AT B , THE ASSESSEE SUBMITS THAT THE LEARNED CIT(APPEALS ) ERRED IN SETTING ASIDE THE FOLLOWING MATTERS TO THE FILE OF THE ASSESSING OFFICER / TPO WITHOUT APPRECIATING THAT UNDER SECTION 251 OF THE ACT, THE CIT(APPEALS) CANNOT SET ASIDE THE MATTER TO THE FILE FOR (I) COMPUTATION OF ALP R ESTRICTING THE ADJUSTMENTS TO PURCHASE OF COMPONENTS FROM AES ONLY AND (II) TREATMENT OF EXTRA-ORDINARY ITEMS LIKE LOSS ON SALE OF ASSETS, AMORTIZATION OF TECHNICAL FEES, DISCARDI NG OF OLD DIES AND MOULDS. 24.2 IN THIS REGARD, A PERUSAL OF THE LEARNED CIT(A PPEALS)S ORDER AND PARA 7.3.1 ON PAGE 40 THEREOF INDICATES THAT THE LEARNED CIT(APPEALS) HAS GIVEN A CLEAR FINDING THAT THE ALP ADJUSTMENT IS TO BE RESTRICTED TO THE EXTENT OF PUR CHASE OF COMPONENTS FROM ITS AES AND HAS CONSEQUENTLY ONLY DIRECTED THE TPO TO COMPUTE T HE ALP ADJUSTMENT, IF ANY, IN ACCORDANCE WITH HIS FINDING AND FOR THIS PURPOSE TO MAKE NECESSARY VERIFICATION IN THE MATTER. IN THIS VIEW OF THE MATTER, WE DO NOT FIND ANY REASON TO HOLD THAT THE LEARNED CIT(APPEALS), IN DIRECTING THE TPO TO RECOMPUTE THE ALP ADJUSTMENT, HAS EXCEEDED HIS JURISDICTION UNDER SECTION 251 OF THE ACT AND THERE FORE DECLINE TO INTERFERE THEREIN. 25. IN THE RESULT, THE ASSESSEE'S APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 2 ND NOV., 2012. SD/- SD/- (GEORGE GEORGE K) (JASON P BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMB ER *REDDY GP 63 ITA NO.828/BANG/2010 COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - B BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDE R SR. PRIVATE SECRETARY, ITAT, BANGALORE