KOB Medical Textiles Private Limited, Palladam V. DCIT, Tiruppur

ITA 855/CHNY/2015

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7625 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 11-01-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 16-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Principle of natural justice; International transaction; Additional depreciation; Wholly owned subsidiary
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 143(3); 92; 10B; 201; 13; 22

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , . ! '# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO.855/MDS./2015 / ASSESSMENT YEAR : 2010-11 M/S.KOB MEDICAL TEXTILES PVT LTD., S.F.NO.29-30,PERUMPALI, SEMMIPALAYAM VILLAGE, TRICHY ROAD, PALLADAM 641 662. VS. THE DCIT, CIRCLE-2, TIRUPUR. [PAN AABCK 2679 R ] ( $% / APPELLANT) ( &'$% /RESPONDENT) / APPELLANT BY : MR.KAPIL HIRANI,ADVOCATE MR. DARPAN KIRPALANI,ADVOCATE /RESPONDENT BY : / DATE OF HEARING : 11 - 01 - 201 7 !' / DATE OF PRONOUNCEMENT : 09 - 03 - 2017 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE ARE DIRECTED AGAINST ASSESSMENT ORDER DATED 30.01.2015 FOR A.Y 2010-11, CONSEQUENT TO THE DIRECTIONS ITA NO.855 /MDS./2015 :- 2 -: OF THE DISPUTE RESOLUTION PANEL (DRP), CHENNAI, DAT ED 29.12.2014 U/S. 143(3) R.W.S.92CA(3) OF THE ACT. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE IS A 100% SUBSIDIARY OF KARL OTTO BRAUN KG. GERMANY AND ENGA GED IN THE BUSINESS OF MANUFACTURE OF ELASTIC BADAGES FOR FIXA TION, SUPPORT, COMPRESSION & CRAPE AND COTTON BANDAGES. THE ASSES SEE IS 100% EXPORT ORIENTED UNIT (EOU) AS APPROVED BY THE MINIS TRY OF COMMERCE AND INDUSTRY. THE ASSESSEE FILED ITS RETURN OF INCO ME FOR ASSESSMENT YEAR 2010-11 ON 13.10.2010 DECLARING AN INCOME OF ` 11,47,340/- AFTER CLAIMING DEDUCTION U/S.10B OF THE ACT TO THE EXTENT OF ` 1,20,28,476/-. AS THE COMPANY WAS HAVING INTERNATIONAL TRANSACTION S, A REFERENCE WAS MADE TO TPO U/S.92CA OF THE ACT. BASED ON THE ORDER OF THE TPO, THE DRAFT ASSESSMENT ORDER WAS PASSED WHICH WAS CON FIRMED BY THE DRP VIDE ORDER DATED 29.12.2014 MAKING ADDITIONS AS UNDER:- SL.NO. PARTICULARS AMOUNT (INR) 1 ALP UPWARD ADJUSTMENT TO THE INTERNATIONAL TRANSACTIONS 4,01,18,062/- 2 DISALLOWANCE OF CLAIM OF DEDUCTION U/S.10B 1,20,2 8,476/- TOTAL 5,21,46,538/- CONSEQUENTLY, THE AO PASSED THE ASSESSMENT ORDER ON 30.01.2015. AGAINST THIS ASSESSEE IS IN APPEAL BEFORE US. ITA NO.855 /MDS./2015 :- 3 -: 3. THE FIRST GROUND FOR OUR CONSIDERATION IS WITH REGARD TO SUSTAINING THE ADDITION OF ` 4,01,18,602/- TOWARDS UPWARD ADJUSTMENT IN THE ALP OF TRANSFER PRICING ADJUSTMETS WITH THE FOLLOWING GROUNDS:- 2. TRANSFER PRICING ADJUSTMENTS 2.1 THE LEARNED DRP, AO AND TPO (COLLECTIVELY REFER RED TO AS LOWER AUTHORITIES ) HAVE ERRED IN LAW AND FACTS BY MAKIN G AN ADJUSTMENT TO THE TRANSFER PRICE OF THE APPELLANT BY INR 40,118,602. 2.2 THE LEARNED LOWER AUTHORITIES FAILED TO APPRECI ATE THE FACT THAT AY 2010- 11 WAS ABNORMAL YEAR OF OPERATIONS FOR THE APPELLAN T: 2.2.1 THE APPELLANT EXPANDED ITS MANUFACTURING FACI LITY BY EXPANDING ITS WEAVING PRODUCTION LINE AND ADDITION OF KNITTING DI VISION; AND 2.2.2 SUCH EXPANSION RESULTED IN CERTAIN CAPACITY C OST WHICH COULD NOT BE ABSORBED DUE TO UNDERUTILIZATION OF THE CAPACITY. 2.3 THE LEARNED LOWER AUTHORITIES HAVE ERRED IN LAW AND FACTS BY CONSIDERING ONLY SINGLE YEAR FINANCIAL DATA INSTEAD OF MULTIPLE YEAR FINANCIAL DATA CONSIDERING THE ABNORMAL YEAR OF OPERATIONS OF THE APPELLANT. 2.4 THE LEARNED LOWER AUTHORITIES HAVE ERRED IN LAW AND FACTS BY NOT GRANTING: 2.4.1 ECONOMIC AND COMMERCIAL ADJUSTMENTS WITHOUT T AKING COGNIZANCE OF THE APPELLANTS LIMITED RISK NATURE VIS--VIS THE E NTREPRENEURIAL RISKS BORNE BY THE COMPARABLE COMPANIES; AND 2.4.2 WORKING CAPITAL ADJUSTMENT FOR THE DIFFERENCE IN LEVEL OF INVESTMENTS IN THE WORKING CAPITAL BETWEEN THE ASSESSEE AND THE CO MPARABLE COMPANIES. 2.5 THE LEARNED LOWER AUTHORITIES HAVE ERRED IN LAW AND FACTS BY NOT TAKING COGNIZANCE OF THE SUBMISSIONS MADE BY APPELLANT MAP PING THE SIGNIFICANT ITA NO.855 /MDS./2015 :- 4 -: MARKET RISK BORNE BY THE COMPARABLE COMPANIES AND MATURED STAGE OF OPERATIONS AS COMPARED TO THE APPELLANTS FIRST YEA R OF KNITTING DIVISION OPERATIONS. 2.6 THE LEARNED AUTHORITIES HAVE ERRED IN LAW AND F ACTS BY RE-COMPUTING THE ARMS LENGTH PRICE WITHOUT REJECTING THE TRANSFER P RICING DOCUMENTATION MAINTAINED BY THE APPELLANT IN GOOD FAITH. IN THIS REGARD, THE ORDER OF THE LEARNED LOWER AUTHORITIES TO THE EXTENT PREJUDICIAL TO THE APPELLANT IS BAD IN LAW AND LIABLE TO BE QUASHED. 4. BEFORE US, LD.A.R SUBMITTED THAT THE ASSESSEE UNDERTAKES CONTRACT MANUFACTURING FOR ITS GROUP COMPANIES AND IS COMPENSATED FOR ITS ACTIVITIES ON A COST PLUS MODEL BASED ON AN INTRAGROUP CONTRACT MANUFACTURING AGREEMENT. IT IS SUBMITTED THAT THE ASSESSEE APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) AND THE RETURN ON TOTAL OPERATING COST (OP/TC) AS THE PROFIT LEVEL INDICATOR (PLI) COMPUTED ITS MARGIN AT 1.92%. THE APPELLANT IN ITS TP ANALYSIS SELECTED 4 COMPARABLES , WHOSE ARITHMETIC MEAN OF MARGINS CAME TO 10.24% WHICH AFTER RISK ADJ USTMENT CAME TO 2.59% AND THUS AS PER PROVISO TO SECTION 92C(2) THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WERE CONSIDERED TO BE AT ARMS LENGTH BY THE ASSESSEE. THE LD.A.R CHALLENGED THE THE UPWARD ADJUSTMENT MADE BY THE TPO AND SUSTAINED BY THE DRP ON PRIMARILY 2 COUNTS: I. ADJUSTNENT TOWARDS RISK PROFILE OF THE APPELLANT COMPARED WITH THAT OF COMPARABLE COMPANIES AND ITA NO.855 /MDS./2015 :- 5 -: II. ADJUSTMENT TOWARDS ABNORMAL EXPENSES INCURRED B Y THE APPELLANT DURING THE YEAR. ACCORDING TO LD.A.R, ADJUSTMENT TOWARDS RISK PROFI LE UNDERTAKEN BY THE APPELLANT IS DIFFERENT THAN THAT OF THE COMPARA BLE COMPANIES AND AS SUCH THE MARGINS OF THE COMPARABLES WARRANT ADJU STMENTS. THE ASSESSEE IS A CONTRACT MANUFACTURER AND THE COMPARA BLES ARE ENTREPRENEUR COMPANIES. THE APPELLANT DOES NOT BEAR ANY MARKET RISK, CREDIT RISK, R&D RISK AND FOREIGN EXCHANGE RISK. TH E RISKS BORNE BY THE ENTREPRENEUR COMPANIES ARE SIGNIFICANTLY HIGHER WHE N COMPARED TO A CONTRACT MANUFACTURER. 4.1 FURTHER, LD.A.R DREW OUR ATTENTION TO THE ASSE SSEES LETTER DATED 23.12.2013 FILED BEFORE THE TPO GIVEN THE DETAILS O F THE RISK ADJUSTMENT (COPY AT PAGES 246-255 OF THE PAPER BOOK ). THE AVERAGE RISK ADJUSTED MARGIN OF THE COMPARABLE COMPANIES CO MES TO 2.59% WHICH WHEN COMPARED TO THE MARGIN OF THE APPELLANT OF 1.92% AND AFTER GIVING BENEFIT OF PROVISO TO SECTION 92C(2) O F 5% IS AT ARMS LENGTH AND AS SUCH NO ADJUSTMENT TO ALP IS WARRANTE D. THE LD.A.R FURTHER VIDE SUBMISSION DT. 9.1.2014 (COPY AT PAGES 266-289 OF PAPER BOOK) AND VIDE SUBMISSION DT. 17.1.2014 (COPY AT PA GES 290-308 OF PAPER BOOK) IN RESPONSE TO SHOW CAUSE NOTICES ISSUE D BY THE TPO EXPLAINED IN THE DETAIL THE METHODOLOGY OF CALCULAT ING RISK ADJUSTMENT AS CLAIMED BY THE APPELLANT. THE LD.A.R PLEADED THA T THE LD. TPO/DRP ITA NO.855 /MDS./2015 :- 6 -: IGNORING THE SUBMISSIONS AND CONTENTIONS OF THE APP ELLANT AND MERELY ON CONJECTURES AND SURMISES PROCEEDED TO DISMISS TH E CLAIM OF THE APPELLANT FOR RISK ADJUSTMENT. THE EXTENT OF RISK B EING AN INTEGRAL PART IN DETERMINING THE EXTENT OF MARGIN EARNED, ADJUSTM ENT TOWARDS RISK BECOMES IMPERATIVE. THE ASSESSEE FURTHER MORE HAVIN G GIVEN THE DETAILED WORKING OF THE SAME, THE CLAIM OF THE ASSE SSEE TOWARDS RISK ADJUSTMENT DESERVES TO BE ALLOWED IN THE INTEREST O F NATURAL JUSTICE. 5. ON THE OTHER HAND, LD.D.R SUBMITTED THAT THOUGH THE ASSESSEE MENTIONED THE RISK PROFILE IN TP DOCUMENTATION, IT IS NOT POSSIBLE TO ASCERTAIN THE EXACT RISK PROFILE OF COMPARABLES TO SEE THAT THEY WERE EXPOSED TO DIFFERENT LEVELS OF RISK. ACCORDING TO LD.D.R, WHEN THE ASSESSEE MADE THE CLAIM OF RISK ADJUSTMENTS, THE IN ITIAL ONUS IS ON THE ASSESSEE TO FILE THE REQUISITE INFORMATION PERTAINI NG TO THAT CLAIM. HOWEVER, THE ASSESSEE FAILED TO DISCHARGE ITS INIT IAL ONUS. IN THE ABSENCE OF RELEVANT INFORMATION TO COMPUTE THE RELI ABLE AND ACCURATE ADJUSTMENTS, IT CANNOT BE MADE TO THE PROFIT MARGIN OF THE COMPARABLES. THE ASSESSEE HAS NOT BEEN ABLE TO MAK E A CASE FOR ITSELF ON THE PRELIMINARY CONCEPT OF REASONABILITY AND H ENCE THE QUESTION FOR ANY ADJUSTMENT CANNOT BE MADE. THE RULE 10C(2) (E) OF THE INCOME TAX RULES, 1962 PROVIDES THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMENTS CAN BE MADE TO ACCOUNT FOR DI FFERENCES, IF ANY, ITA NO.855 /MDS./2015 :- 7 -: BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INT O SUCH TRANSACTIONS. HE HAS RELIED ON THE ORDER OF TRIBUNAL IN THE CASE OF ADP (P) LTD., VS. DCIT REPORTED IN (2011) 57 ITR (HYD.)(TRIB) 310 AND IN THE CASE OF DCIT VS. DELOITTE CONSULTING (INDIA) PVT. LTD., IN (2011) 61 DTR (HY.)(TRIB) 101. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. AS POINTED OUT BY THE LD.D.R, THERE IS NO T HUMB RULE FOR RISK ADJUSTMENTS IN EACH AND EVERY CASES, WHENEVER THE A SSESSEE CLAIMED ANY RISK ADJUSTMENT IN ACCORDANCE WITH RULE 10C(2)( E). WHILE ARRIVING THE ALP, THE ASSESSEE HAS TO IDENTIFY AND QUANTIFY THE LEVEL OF RISK INVOLVED BETWEEN THE ASSESSEE AND THE COMPARABLES W HILE UNDERTAKING FOR ANALYSES IN THE TRANSFER PRICING DOCUMENTS. TH E RISK ADJUSTMENTS COULD BE GIVEN ONLY TO COMPANY TO COMPANY BASIS CON SIDERING LEVELOF RISK INVOLVED BETWEEN THE ASSESSEE AND THE COMPARAB LE COMPANIES. IT IS PRIMARY DUTY OF THE ASSESSEE TO PROVIDE REQUISIT E INFORMATION PERTAINED TO THE CLAIM. SINCE THE ASSESSEE DID NOT DISCHARGE ITS INITIAL ONUS AND IN THE ABSENCE OF INFORMATION TO COMPUTE T HE RELIABLE ACCURATE RISK ADJUSTMENTS, IT IS NOT POSSIBLE TO GR ANT RISK ADJUSTMENTS CLAIMED BY THE ASSESSEE. HOWEVER, CONSIDERING HIGH DEGREE OF RISK INVOLVED WITH THE COMPARABLES, WE ARE INCLINED TO G RANT RISK ITA NO.855 /MDS./2015 :- 8 -: ADJUSTMENTS AT 2% ON ADHOC BASIS. ACCORDINGLY, THI S GROUND IS PARTLY ALLOWED. 7. THE NEXT ISSUE IS WITH REGARD TO ADJUSTMENT TOWARDS ABNORMAL EXPENSES . 7.1 BEFORE US, LD.A.R SUBMITTED THAT THE ASSESSEE IS A CONTRACT MANUFACTURER. VIDE CONTRACT MANUFACTURER AGREEMENT; THE ASSESSEE IS ENTITLED TO COMPENSATION OF COST PLUS 9.5% WHICH WA S REDUCED TO 7% W.E.F 1.1.2010. COST INCLUDES COST OF MATERIALS, MANUFACT URING OVERHEADS AND STORE-COST AND ADMINISTRATION COST AND OTHER ESSENT IAL COSTS EXCEPT CORPORATE TAXES BUT INCLUDING FRINGE BENEFIT TAX. F URTHER, LD.A.R SUBMITTED THAT THE A.E IS SUPPOSED TO ISSUE TO THE APPELLANT WITHI N 60 DAYS PRIOR TO THE END OF EACH CALENDAR YEAR A FORECAST OF THE CONTRAC T MANUFACTURE CONTAINING THE DETAILS AND ESTIMATES OF THE CONTRACT MANUFACTU RE REQUIRED TO NEXT CALENDAR YEAR. THE ASSESSEE IN TURN SUBMITS AN OPE RATING PLAN GIVING ESTIMATES OF THE COSTS TO ITS A.E BASED ON WHICH THE SELLING PRICE IS FIXED AND THE SELLING PRICE REMAINS CONSTANT THROUGHOUT T HE YEAR. CONSIDERING THE SAME, THE ASSESSEE COULD NOT PREDICT THE ABNORMAL COSTS IT INCURRED DURING THE YEAR WHICH COULD BE FACTORED IN THE SELLING PRI CE WHICH AFFECTED ITS MARGINS. ACCORDING TO LD.A.R, SUCH ABNORMAL COSTS D ESERVE TO BE EXCLUDED WHILE DETERMINING THE ALP ADJUSTMENTS. THE ASSESSEE HAS INCURRED THE FOLLOWING ABNORMAL COSTS ITA NO.855 /MDS./2015 :- 9 -: A. ABNORMAL WASTAGE OF MATERIALS AMOUNTING TO RS. 1 ,43,17,081/- AND B. DEPRECIATION 7.2 THE LD.A.R SUBMITTED THE FOLLOWING POINTS FOR O UR CONSIDERATION WITH REGARD TO ABNORMAL MATERIAL WASTAGE RS. 1,43,17,081/-. A. THE ASSESSEE EXPANDED ITS MANUFACTURING FACILITY BY EXPANDING ITS WEAVING PRODUCTION LINE AND ALSO HAS STARTED KNITTI NG DIVISION DURING THE YEAR UNDER APPEAL. THE MATERIAL COST DURING THE YEAR UNDER APPEAL WAS SIGNIFICANTLY HIGH DUE TO THE FIRST YEAR OF KNITTING OPERATIONS. DUE TO LEARNING CURVE OF NEW OPERATORS, THERE IS ABNORMAL WASTAGE OF MATERIALS TO THE TUNE OF RS. 1, 43,17,081/- (RS. 1.43 CRORES APPROX) B. THE ASSESSEE HAS CONSIDERED F.Y 2008-09 AS BASE YEAR AS THE BUSINESS OPERATIONS IN F.Y 2008-09 WERE CONDUCTED I N NORMAL BUSINESS CONDITIONS WHEREIN THE MATERIAL COST WAS 5 3.83% OF SALES. CONSIDERING THE SAME RATIO FOR THE CURRENT YEAR, TH E ABNORMAL MATERIAL WASTAGE COMES TO RS. 1,43,17,081/- (DETAIL ED WORKING AT PAGE 12 OF TPO ORDER). C. THE ABNORMAL WASTAGES BEING EXTRAORDINARY AND NO NRECURRING ITEMS DESERVE TO BE EXCLUDED WHILE DETERMINING THE MARGIN S EARNED IN THE INTEREST OF NATURAL JUSTICE. ITA NO.855 /MDS./2015 :- 10 - : 7.3 THE LD.A.R SUBMITTED THE FOLLOWING POINTS FOR OUR CONSIDERATION WITH REGARD TO DEPRECIATION RS. 1,56,12,909/- (99,94,929/- + 56,17,980/-) A. THE ASSESSEE HAS DURING THE YEAR REVISED THE ES TIMATED ECONOMIC LIFE OF ITS FIXED ASSETS BASED ON A TECHNICAL STUDY RESULTI NG IN EXCESS DEPRECIATION CHARGE TO PROFIT & LOSS ACCOUNT. REFERENCE TO POINT NO. 2 OF SCHEDULE 18 OF ANNUAL REPORT AT PAGE 150 OF PAPER BOOK WHEREIN IT HAS BEEN DISCLOSED AS UNDER: DURING THE YEAR, THE COMPANY HAS REVISED THE ESTIM ATED ECONOMIC USEFUL LIFE OF ITS FIXED ASSETS BASED ON T ECHNICAL STUDY. AS A RESULT OF THIS CHANGE, THE DEPRECIATION CHARGE FOR THE YEAR HAS INCREASED BY RS. 99,94,929/- WITH A CONSEQUENTI AL IMPACT ON THE PROFIT FOR THE YEAR . B. THE APPELLANT HAS FURTHER CALCULATED AN AMOUNT O F RS. 56, 17,980/- AS EXCESS DEPRECIATION CHARGED DURING THE YEAR ON ACCO UNT OF EXPANSION OF WEAVING PRODUCTION LINE. THE APPELLANT HAS MADE AN INVESTMENT IN FIXED ASSETS AMOUNTING TO RS. 21,94,56,363/- (RS. 22 CROR ES APPROX) (DETAILS AT PAGE 144 OF THE PAPER BOOK) WHICH HAS RESULTED IN E XCESS DEPRECIATION FOR THE YEAR. C. THE APPELLANT HAS TAKEN F.Y 2008-09 AS BASE YEAR AS THE BUSINESS OPERATIONS IN F.Y 2008-09 WERE CONDUCTED IN NORMAL BUSINESS CONDITIONS WHEREIN THE DEPRECIATION WAS 3.78% OF SALES. CONSID ERING THE SAME RATIO FOR THE CURRENT YEAR, THE ABNORMAL DEPRECIATION COMES T O 1,56,12,909/- OUT OF WHICH RS. 99,94,929/- IS ON ACCOUNT OF REVISION OF ESTIMATED USEFUL LIFE OF ITA NO.855 /MDS./2015 :- 11 - : ASSETS AS PER POINT (A) SUPRA AND THE BALANCE AMOUN T OF RS. 56,17,980/- HAS THUS BEEN ATTRIBUTED TO ABNORMAL DEPRECIATION ATTRI BUTABLE TO EXPANSION. (DETAILED WORKING AT PAGE 13 OF TPO ORDER). D. THE EXCESS DEPRECIATION BEING ABNORMAL COSTS DES ERVE TO BE EXCLUDED WHILE DETERMINING THE MARGINS EARNED IN THE INTERES T OF NATURAL JUSTICE. I. THE APPELLANTS OPERATING MARGINS FOR VARIOUS YEARS ARE AS UNDER: A. A.Y 2007-08 11.00% B. A.Y 2008-09 10.03% C. A.Y 2009-10 14.60% D. A.Y 2010-11 1.92% E. A.Y 2011-12 8.39% F. A.Y 2012-13 7.56% 7.4 ACCORDING TO LD.A.R, THE ABOVE DETAILS SUPPORT THE CONTENTION OF THE APPELLANT THAT THERE WERE SIGNIFICANT ABNORMAL COST S INCURRED BY THE APPELLANT DURING THE YEAR UNDER APPEAL I.E AY 2010- 11 RESULTING IN AL3NORMALLY LOWER PROFITS WHICH NEEDS TO BE GIVEN D UE ADJUSTMENT WHILE DETERMINING THE ALP IN THE INTEREST OF NATURAL JUST ICE. 7.5 ACCORDING TO LD.A.R, THE OPERATING MARGIN OF THE AS SESSEE AFTER EXCLUDING THE ABNORMAL COSTS SPECIFIED ABOVE COMES TO 14.10% WHICH AFTER CONSIDERING ADJUSTMENT OF +5% AS PER PROVISO TO SEC TION 92C(2) MAKES THE MARGIN OF THE APPELLANT WHEN COMPARED TO THE MARGIN S OF COMPARABLES AT 10.24% MAKING ANY ADJUSTMENT TO ALP UNWARRANTED AND LIABLE TO BE DELETED. ITA NO.855 /MDS./2015 :- 12 - : 8. ON THE OTHER HAND, LD.D.R SUBMITTED THAT BEFORE THE COMMENCEMENT OF EACH CALENDAR YEAR ON THE BASIS OF THE FORECAST GIVEN BY THE AE, THE ASSESSEE HAS TO SUBMIT ITS ESTIMATE OF BUDGETED COS T. THE CLAIM OF ABNORMAL MATERIAL COST DUE TO LEARNING CURVE IN RESPECT OF T HE NEWLY STARTED KNITTING DIVISION SHOULD HAVE BEEN ANTICIPATED BY THE ASSESS EE AND SHOULD HAVE BEEN PROVIDED FOR SUITABLY. BESIDES, THE CHANGE IN THE A CCOUNTING POLICY, OF PROVIDING FOR DEPRECIATION ON ESTIMATING THE USEFUL LIFE OF THE ASSETS IS ANOTHER FACTOR THE ASSESSEE SHOULD HAVE TAKEN NOTE OF. BOTH THE ABOVE MENTIONED EXPENDITURES SATISFY THE DEFINITION OF CO ST AS PER THE CONTRACT MANUFACTURING AGREEMENT ENTERED INTO. BESIDES, THE AGREEMENT ALSO PROVIDES FOR FACTORING IN THE MODIFICATIONS DURING THE RELEVANT PREVIOUS YEAR. THEREFORE, THE CLAIM OF THE ASSESSEE DOES NOT DESER VE MERIT. ACCORDING TO LD.D.R, THE APPRECIABLE DROP IN THE PROFIT MARGIN D ESPITE THE FACT THAT THE MARK UP HAS BEEN REVISED TO 5% TO 93% AND THEREAFTE R SLASHED DOWN TO 7% WAS NOT TAKEN INTO ACCOUNT BY THE ASSESSEE WHILE EX PLAINING THE DISMAL PERFORMANCE DURING THE YEAR. THE REASON WHY THE ASS ESSEE HAS AGREED TO WORK FOR A LOWER MARGIN OF 7%, A REDUCTION OF 2.5% FOR A PERIOD OF THREE MONTHS DURING THE RELEVANT PREVIOUS YEAR FROM FIRST OF JANUARY 2010, DESPITE THE CLAIM OF EXTRAORDINARY EXPENDITURE IS SOMETHING ONLY THE ASSESSEE COULD EXPLAIN. SINCE THE ASSESSEE AS A CONTRACT MANUFACTU RER IS OPERATING ON A COST PLUS MODEL AND THE AGREEMENT PROVIDES FOR RECKONING ALL THE EXPENSES OTHER THAN FINANCE COST AND TAXES, THE CLAIM TO EXCLUDE T HE ABOVE FROM THE OPERATING EXPENDITURE DESERVES NO CONSIDERATION. ITA NO.855 /MDS./2015 :- 13 - : 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE IS A CONTRACT-MANUFACTURER AND HAVING MARK-UP RAISED FROM 5% TO 9.5% ON THE GOODS PROCURED BY IT, LATER IT WAS REVISED TO 7%, SO THAT THE WASTAGE SUFFERED BY THE ASSESSEE TAKEN CARE OF BY MARK-UP PRICES AND MANUFACTURED GOODS. ONCE THE PRICE WAS MARKED UP, THERE CANNOT BE ANY LOSS TO THE ASSE SSEE AND THE ENTIRE WASTAGE IS TAKEN CARE BY MARKED UP PRICE OF SALE PRICE. HENCE, WE DO NOT FIND ANY MERIT IN THE PLEA OF THE ASSESSE E WITH REGARD TO CLAIM OF ABNORMAL WASTAGE. 10. NEXT ISSUE IS WITH REGARD TO ABNORMAL DEPRECIA TION. AS DISCUSSED IN EARLIER, THE ASSESSEES PRICING PATTER N IS MARKING UP OF 7% ON THE COST OF GOODS MANUFACTURED. BEING SO, TH E INCREASE IN DEPRECIATION COST HAS ALSO TAKEN CARE OF BY MARK UP OF SALES PRICE. ACCORDINGLY, THE ASSESSEE CANNOT SEEK ANY FURTHER A DJUSTMENTS TOWARDS ADDITIONAL DEPRECIATION COST. THIS GROUND O F APPEAL BY ASSESSEE IS ALSO REJECTED. 11. THE NEXT ISSUE IS WITH REGARD TO REJECT THE CL AIM OF DEDUCTION U/S.10B OF THE ACT. ITA NO.855 /MDS./2015 :- 14 - : 12. BEFORE US, THE LD.A.R HAS ADVANCED THE FOLLOWI NG REASONS IN SUPPORT OF THE CLAIM OF DEDUCTION U/S.10B OF THE AC T BY THE ASSESSEE. A ) THE ASSESSEE FILED ITS RETURN OF INCOME CLAIMING DEDUCTION U/S. 10B OF ` 1,20,28,476/-. THE ASSESSEE HAS BEEN REGULARLY GET TING BENEFIT OF DEDUCTION U/S. 10B FOR THE PAST MANY YEA RS. THE ASSESSEE HAD COMMENCED PRODUCTION IN A.Y 2001-02 AN D AS SUCH ACCORDING TO TERMS OF SECTION 10B THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION TILL 10 YEARS STARTING FROM A.Y 200 1-02 AND ENDING IN A.Y 2010-11 I.E THE YEAR UNDER APPEAL. B) DURING A.Y 2000-01, THE ASSESSEE HAD UNDERTAKEN TRIAL RUNS TO TEST THE FUNCTIONING OF MACHINERY AND QUALITY OF TH E PRODUCTS TO BE MANUFACTURED. THE ASSESSEE HAD SUBMITTED THE DAT E OF TRIAL RUN BEING 27TH MARCH 2000 IN THE PERFORMANCE REPORT WHICH WAS FILED WITH THE MADRAS EXPORT PROCESSING ZONE (MEPZ) . THE DATE AS MENTIONED IN THE PERFORMANCE REPORT WAS ERRONEOU SLY CONSIDERED IN FORM 56G AS WELL WHICH WAS NOT CORREC T AS ACTUAL PRODUCTION HAD NOT COMMENCED AS ON 27.3.2000. THE A SSESSEE HAS NOT CLAIMED ANY DEDUCTION U/S 10-B FOR A.Y 2000 -01. THE ASSESSEE, IN ORDER TO COMMENCE ITS MANUFACTURING AC TIVITIES WAS ITA NO.855 /MDS./2015 :- 15 - : GRANTED THE FOLLOWING STATUTORY APPROVALS / REGISTR ATIONS FROM STATUTORY AUTHORITIES 1. APPROVAL UNDER FACTORIES ACT, 1948 ON 31ST MARCH 2000 2. APPROVAL OF THE DIVISIONAL FIRE OFFICER, COIMBAT ORE ON 4 APRIL 2000 3. APPROVAL OF THE FACTORY INSPECTOR FOR THE FACTOR Y BUILDING 10TH APRIL 2000 4. APPROVAL OF THE DEPUTY DIRECTOR, TOWN AND COUNTR Y PLANNING ON 29 MAY 2000. 5. HEALTH AND SAFETY CLEARANCE RECEIVED ON 27 MARCH 2000. THE ASSESSEE HAD COMMENCED PRODUCTION AFTER THE REC EIPT OF THE ABOVE APPROVALS WITHOUT WHICH THE ASSESSEE WAS NOT AUTHORIZED TO COMMENCE THE PRODUCTION. THOUGH THE TRIAL RUN IS PE RMITTED BEFORE THE AFORESAID APPROVALS ARE OBTAINED, THE COMMERCIAL PR ODUCTION CAN ONLY COMMENCE AFTER OBTAINING ALL THE ABOVE MANDATORY AP PROVALS. C) THE ASSESSING OFFICER (AO) SIMPLY RELYING ON THE DA TE OF COMMENCEMENT OF MANUFACTURE AS ERRONEOUSLY MENTIONE D IN FORM 56G AS 27.3.2000 WHICH WAS THE DATE OF CONDUCT OF TRIAL RUN AS MENTIONED IN THE PERFORMANCE REPORT FILED WI TH MEPZ CONSIDERED A.Y 2000-01 AS THE INITIAL YEAR FOR CLAI MING DEDUCTION U/S 10B AND ACCORDINGLY HELD THE 10TH CONSECUTIVE Y EAR OF DEDUCTION AS A.Y 2009-10 THUS DENYING THE APPELLANT THE BENEFIT OF DEDUCTION U/S 10B FOR A.Y2010-11. THAT THE ASSE SSEE DID NOT ITA NO.855 /MDS./2015 :- 16 - : COMMENCE PRODUCTION IN A.Y 2000-01 IS FURTHER SUBST ANTIATED FROM THE FACT THAT THE APPELLANT IN A.Y 2001-02 PRO CURED RAW MATERIAL OF 28 TONS FOR CARRYING OUT COMMERCIAL PRO DUCTION WHEREAS IN A.Y 2000-0 1 IT HAD PROCURED ONLY 0.08 T ON WHICH WAS USED FOR TRIAL RUN. D) THE LD.A.R PLACES RELIANCE ON CIT VS. HIMALAYA N MAGNESITE LTD. (2005) 276 ITR 56 (ALLAHABAD) WHEREIN THE HONBLE H IGH COURT WHILE DECIDING THE ALLOWABILITY OF DEDUCTION UNDER ERSTWHILE SECTION 80I HELD THAT THE DEDUCTION HAS TO BE ALLOW ED HELD THAT THE ASSESSEE HAVING UNDERTAKEN ONLY TRIAL PRODUCTIO N IN THE RELEVANT PREVIOUS YEAR AND REGULAR PRODUCTION HAVIN G STARTED IN THE SUBSEQUENT YEAR, ASSESSEE WAS NOT ENTITLED TO D EDUCTION U/S 80J. GOING BY THE SAME ANALOGY THE DEDUCTION U/S 10 -B HAS TO BE ALLOWED ONLY IN THE YEAR OF ACTUAL COMMERCIAL PRODU CTION AND NOT IN THE YEAR OF TRIAL PRODUCTION. E) THE LD.A.R FURTHER PLACES RELIANCE ON DY CIT VS . BHANSALI TRADING CO. ITA NO. 784/JP/2014 WHEREIN THE HONBLE ITAT HA S WHILE DECIDING THE ALLOWABILITY OF DEDUCTION U/S 10B HELD AS UNDER:- -DEDUCTION UNDER SECTION 10B--100 PER CENT EXPORT ORIENTED UNDERTAKINGS NO POSITIVE INCOME ACCRUED TO ASSESSEE -- COMMENCEMENT OF PERIOD OF TEN CONSECUTIVE YEARS -- PERIOD ITA NO.855 /MDS./2015 :- 17 - : OFTEN CONSECUTIVE YEARS FOR CLAIMING OF DEDUCTION U NDER SECTION LOB COMMENCED FROM THE ASSESSMENT YEAR IN WHICH POS ITIVE INCOME FIRST ACCRUED TO ASSESSEE, I.E., ASSESSMENT YEAR 2002-03 AND NOT FROM THE ASSESSMENT YEAR 2001-02 IN WHICH I T STARTED MANUFACTURING ACTIVITY. AO WAS NOT, THEREFORE, JUST IFIED IN DISALLOWING THE DEDUCTION FOR ASSESSMENT YEAR 2011- 12 AS THE SAME FOR THERE OF ELIGIBILITY PERIOD STARTING FROM ASSESSMENT YEAR 2002-03. --ASSESSEE REGISTERED AS 100 PERCENT EXPOR T ORIENTED UNDERTAKING (EOU) COMMENCED MANUFACTURING AND PRODU CTION ON 12-3-2001 CLAIMED DEDUCTION UNDER SECTION LOB FO R ASSESSMENT YEAR 2011-12. AO DISALLOWED THE SAME ON THE GROUND THAT AS ASSESSEE HAD COMMENCED MANUFACTURING ACTIVITY IN FINANCIAL YEAR 2000-0 1 WHICH WAS EVIDENT FROM C LAIM OF DEPRECIATION FOR ASSESSMENT YEAR 2001-02, ELIGIBILI TY PERIOD OF TEN CONSECUTIVE YEARS WAS, THEREFORE, COMPLETED IN ASSESSMENT YEAR 2010-11. ASSESSEE CONTENDED THAT THOUGH REGIST RATION AS EOU WAS EFFECTIVE EARLIER, DEDUCTION UNDER SECTION LOB FOR THE FIRST TIME WAS CLAIMED IN ASSESSMENT YEAR 2002-03 A ND TEN CONSECUTIVE YEARS, THEREFORE, COMPLETED IN ASSESSME NT YEAR 2011-12. HELD: IF ASSESSEE WAS HAVING POSITIVE INCOME, THEN ONLY THERE WAS OCCASION TO CLAIM THE DEDUCTION UNDE R SECTION 108. AS POSITIVE INCOME ACCRUED TO IT IN THE ASSESS MENT YEAR 2002-03 AND FROM THEN ONWARDS IT CLAIMED DEDUCTION FOR A PERIOD OF TEN CONSECUTIVE YEARS ENDING IN ASSESSMEN T YEAR 2011- 12. AO WAS NOT, THEREFORE, JUSTIFIED IN MAKING DISA LLOWANCE FOR ASSESSMENT YEAR 2011-12. F) ACCORDING TO LD.A.R, THE ABOVE CASE COVERS THE CASE OF THE APPELLANT IN TOTO IN AS MUCH AS IN A.Y 2000-01, THE APPELLANT DID NOT HAVE ANY POSITIVE INCOME AND AS SUCH THERE WAS NO OCCASION T O CLAIM DEDUCTION ITA NO.855 /MDS./2015 :- 18 - : U/S 10B. THE ASSESSEETHUS STARTED CLAIMING DEDUCTIO N FROM A.Y 2001- 02 ONWARDS WHICH CORRESPONDED TO THE PERIOD OF COMM ENCEMENT OF COMMERCIAL PRODUCTION AND ACCORDINGLY A.Y 2001-02 O UGHT TO BE CONSIDERED AS THE INITIAL YEAR OF DEDUCTION AND ACC ORDINGLY THE 10TH CONSECUTIVE YEAR WOULD BE A.Y 2010-11 MAKING THE AP PELLANT ENTITLED TO DEDUCTION U/S 10B FOR THE YEAR UNDER APPEAL. 13. ON THE OTHER HAND, LD.D.R SUBMITTED THAT THE D EDUCTION U/S.10B IS AVAILABLE FOR A PERIOD OF 10 SUCCESSIVE ASSESSME NT YEARS STARTING FROM THE YEAR IN WHICH THE UNDERTAKING BEGINS TO MA NUFACTURE THE THINGS OR ARTICLE ETC. FURHTER, LD.D.R SUBMITTED TH AT THE ASSESSEE STARTED THE ACTIVITY OF MANUFACTURING THE GOODS. HO WEVER, THE PRODUCTION OF FINISHED GOODS DID NOT COME INTO EXIS TENCE AS ON 31.03.2000. THE RAW MATERIAL AND THE STORES CONSUME D IN THE MANUFACTURING ACTIVITY HAVE REMAINED IN THE FORM OF WORK IN PROGRESS AS ON 31.03.2000. THERE IS NO DISPUTE IN THIS REGAR D. AS PER FORM NO.56 G, THE DATE OF COMMENCEMENT OF THE PRODUCTION IS 27.03.2000 ITSELF. LD.D.R SUBMITTED THAT THE ASSESSMENT YEAR 2010-11 IS THE 11 TH YEAR AND THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S.10B OF THE ACT. 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN PLEA OF ASSESSEE IS THAT THE PRE SENT ASSESSMENT ITA NO.855 /MDS./2015 :- 19 - : YEAR 2010-11 IS THE 10 TH YEAR OF CLAIM OF DEDUCTION U/S.10B OF THE ACT AND FILED A COPY OF RETURN FOR ASSESSMENT YEAR 2000 -01 STATING THAT THERE WAS NO CLAIM OF DEDUCTION U/S.10B OF THE ACT. HE HAS ALSO RELIED ON THE JUDGEMENT OF JAIPUR BENCH OF TRIBUNAL IN THE CASE OF CIT VS. BHANSALI TRADING COMPANY IN ITA NO.784/JP/2014 VID E ORDER DATED 14 TH JULY 2016 FOR ASSESSMENT YEAR 2011-12 WHEREIN HEL D THAT IF THE ASSESSEE IS HAVING POSITIVE INCOME, THEN ONLY THERE WAS OCCASION TO CLAIM THE DEDUCTION U/S.10B OF THE ACT AS POSITIVE INCOME ACCRUED TO IT IN THE ASSESSMENT YEAR 2002-03 AND THEN ONWARDS IT CLAIMED DEDUCTION U/S.10B OF THE ACT FOR A PERIOD OF TEN CO NSECUTIVE YEARS ENDING IN THE ASSESSMENT YEAR 2011-12. THE AO IS N OT THEREFORE JUSTIFIED IN MAKING THE DISALLOWANCE FOR ASSESSMENT YEAR 2011-12. 14.1 IN THE PRESENT CASE OF ASSESSEE ALSO, THERE W AS A BUSINESS LOSS IN THE ASSESSMENT YEAR 2000-01 AND THE ASSESSEE HAS NOT CLAIMED DEDUCTION U/S.10B OF THE ACT AND MADE A NOTE IN TH E STATEMENT OF INCOME THAT THE COMPANY IS CLAIMING EXEMPTION U/S. 10B OF THE ACT FROM THIS ASSESSMENT YEAR ONWARDS. THERE WAS NO CLA IM OF DEDUCTION U/S.10B AND ALSO THE REVENUE IS NOT ALLOWED ANY CLA IM U/S.10B OF THE ACT IN THE RELEVANT TO ASSESSMENT YEAR 2000-01, AS SUCH IT IS TO BE NOTED THAT ASSESSMENT YEAR 2000-01 CANNOT BE CONSID ERED AS FIRST YEAR OF CLAIM OF DEDUCTION U/S.10B OF THE ACT. FROM THE ASSESSMENT YEAR ITA NO.855 /MDS./2015 :- 20 - : 2001-02, DEDUCTION U/S.10B OF THE ACT WAS TO CONSTR UED AS FIRST YEAR OF CLAIM OF DEDUCTION U/S.10B OF THE ACT. ACCORDINGLY , IT IS TO BE ALLOWED FOR TEN CONSECUTIVE YEARS COMMENCING FROM THE ASSES SMENT YEAR 2001-02 ENDING ON ASSESSMENT YEAR 2010-11. ACCORDIN GLY, WE DIRECT THE AO GO GRANT DEDUCTION U/S.10B OF THE ACT. THIS GROUND OF THE ASSESSEE IS ALLOWED. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 09 TH MARCH, 2017, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) ! / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 09 TH MARCH, 2017. K S SUNDARAM &'(()*( +* / COPY TO: ( 1 . / APPELLANT 3. ( ,(- . / CIT(A) 5. */0 (1 / DR 2. / RESPONDENT 4. ( , / CIT 6. 02(3 / GF