Moser Baer India Ltd, V. DCIT Circle -5 (1),

ITA 882/DEL/2008

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98148 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Assessment Year: 2002-2003
• Appeal Filed On: 07-03-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDER KUMAR
• Assessee Lawyers: PUNEET CHUGH; NEERAJ JAIN ADV RAMA KATYAL
• Keywords: Business income; Transfer pricing; International transaction
• Section: 92C; 143(3); 92F; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI A.T. VARKEY, JUDICIAL MEMBER AND SHRI S.V.MEHROTRA, ACCOUNTANT MEMBER ITA NO.882/DEL./2008 (ASSESSMENT YEAR : 2002-03) MOSER BAER INDIA LTD, VS. DCIT, CIRCLE 5 (1), 43, OKHLA INDUSTRIAL ESTATE, NEW DELHI. NEW DELHI. (PAN : AAACM0322J) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI NEERAJ JAIN, ADV, RAMA KATYAL CA & SHRI PU NEET CHUGH, CA REVENUE BY : SHRI AMRENDER KUMAR, CIT DR DATE OF HEARING : 16.09.2015 DATE OF PRONOUNCEMENT : 14.12.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER : THIS APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) - XX, NEW DELHI DATED 27.12.2007 AND RELATES TO ASSESSMENT YEAR 2002-03. 2 ITA NO.882/DEL/2008 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE COM PANY IN THIS APPEAL ARE AS UNDER :- 1. THAT THE COMMISSIONER OF INCOME- TAX (APPEALS) ERRED ON FACTS AND IN LAW IN SUSTAINING THE ADDITIO N OF RS. 54,62,582/- TO THE APPELLANTS INCOME ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS, UPHOLDING THE FINDINGS IN THE ORDER PASSED BY THE TRANSFER PRICING OFFICER (TPO)/OTHER ASSESSING OFFICER. 2. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT HOLDING THAT THE R EFERENCE MADE BY THE ASSESSING OFFICER TO THE TPO MERELY ON THE BASIS THAT THE VALUE OF INTERNATIONAL TRANSACTIONS EXCEED ED RS. 5 CRORES WAS UNLAWFUL AND NOT IN ACCORDANCE WITH SECT ION 92CA(1) OF THE ACT. 3. THAT THE COMMISSIONER OF INCOME- TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT REFERENCE MADE BY THE ASSESSING OFFICER TO THE TPO UNDER SECT ION 92CA(1) OF THE ACT WITHOUT RECORDING SATISFACTION T HAT IT WAS NECESSARY OR EXPEDIENT SO TO DO WAS UNLAWFUL AND AD JUSTMENT MADE BY THE TPO/ ASSESSING OFFICER ON THE BASIS OF SUCH REFERENCE WAS INVALID. 4. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN NOT HOLDING THAT THE INTERNA TIONAL TRANSACTIONS ENTERED INTO WITH THE ASSOCIATED ENTER PRISE WERE AT ARMS LENGTH AND NO ADJUSTMENT TO THE PRICE THER EOF WAS CALLED FOR BEING MADE. 5. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN DISREGARDING THE ADJUSTMENT MADE TO THE PRICES OF INTERNATIONAL TRANSACTION OF EXPORT T O GLYPHICS MEDIA INC. (GMI) ON ACCOUNT OF GEOGRAPHICAL DIFFERE NCE, FOR DETERMINING THE ARMS LENGTH APPLYING COMPARABLE UNCONTROLLED PRICE (CUP) METHOD HOLDING THAT SUCH ADJUSTMENT WERE NOT CORRECTLY MADE. 3 ITA NO.882/DEL/2008 6. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN HOLDING THAT THE BENCHMARKIN G ANALYSIS IN THE INSTANT CASE TO BE CONDUCTED BY TAKING THE W HOLESALE EXPORT PRICES CHARGED BY THE APPELLANT FROM GMI AS GIVEN AND THEN COMPARING THESE PRICES WITH ARMS LENGTH C OMPUTED FROM THE UNCONTROLLED TRANSACTIONS AFTER MAKING THE NECESSARY ADJUSTMENTS. 7. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN HOLDING THAT THE CORRECT WAY OF MAKING THE ADJUSTMENT ON ACCOUNT OF SELLING EXPENSES INCUR RED BY GMI WAS TO REDUCE THE AVERAGE SELLING DISTRIBUTION EXPENSES INCURRED BY THE APPELLANT FROM THE PRICES CHARGED F ROM UNRELATED PARTIES. 8. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN NOT APPRECIATING THAT HE EVE N IF THE ADJUSTMENTS ON ACCOUNT OF (I) SELLING EXPENSES INCU RRED BY GMI WAS TO REDUCE THE AVERAGE SELLING AND DISTRIBUT ION EXPENSES INCURRED BY THE APPELLANT FROM THE PRICES CHARGED FROM UNRELATED PARTIES. 9. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ER RED ON FACTS AND IN LAW IN REJECTING THE ADJUSTMENT MAD E ON ACCOUNT OF GEOGRAPHICAL DIFFERENCE FOR DETERMINING THE ARMS LENGTH PRICE TO EXPORT TO USA BEING LOWER THAN THE PRICES OF EXPORT TO EUROPEAN COUNTRIES, HOLDING THAT THE DETA ILS OF EXPORT TO UNRELATED PARTIES DOES NOT REVEAL ANY PRI CE PATTERN OF THE BASIS OF COUNTRY DIFFERENCE. 10. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT WHILE CLAIMING 10% LOADING ON ACCOUNT OF GEOGRAPHICAL MARKET DIFFERENC E HAS NOT BROUGHT ON RECORD SUFFICIENT EVIDENCE TO SUBSTANTIA TE THIS CLAIM. 11. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN ORD ER TO MAKE A COMPARISON OF LIKE WITH LIKE AND FOR APPLICATION OF CUP METHOD, ADJUSTMENT WAS OUGHT TO BE MADE ON ACCOUNT OF THE GEOGRAPHICAL DIFFERENCES IN THE INTERNATIONAL TRANS ACTIONS AND COMPARABLE UNCONTROLLED TRANSACTIONS. 4 ITA NO.882/DEL/2008 12. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN DISREGARDING THE CONCLUSIVE EVIDENCES PLACED ON RECORD BY THE APPELLANT TO JUSTIFY THE AD JUSTMENT ON ACCOUNT OF GEOGRAPHICAL DIFFERENCES IN RESPECT OF P RICES OF INTERNATIONAL TRANSACTIONS OF EXPORT OF CDS IN USA AND THE PRICES OF EXPORT OF CDS TO UNRELATED PARTIES IN EUR OPEAN COUNTRIES. 13. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AD JUSTMENT ON ACCOUNT OF GEOGRAPHICAL DIFFERENCE WAS MADE ON THE BASIS OF INSTANCE OF PURCHASE OF SIMILAR PRODUCT BY AN UNREL ATED PARTY IN EUROPE AND USA DURING THE RELEVANT PREVIOUS YEAR . 14. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN UPHOLDING THE ADJUSTMENT ON ACCOUNT OF SELLING AND DISTRIBUTION EXPENSES INCURRED BY TH E APPELLANT AT RS. 0.27 PER CD ALLEGEDLY BEING SELLING AND DIST RIBUTION EXPENSES INCURRED IN DISTRIBUTING THE PRODUCTS IN N ON US LOCATIONS. 15. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT THE APPELLANT F AILED TO COME UP WITH DOCUMENTATION TO SHOW THAT IT TREATS T HAT US AND EUROPEAN MARKET DIFFERENTLY. 16. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT APPELLANT DID N OT PRODUCE ADEQUATE DOCUMENTATION FOR CLAIMING ADJUSTMENT ON A CCOUNT OF PURCHASING POWER PRIORITY CONSIDERING THE VARIOU S VARIABLES, SUCH AS, INTEREST RATE, EXCHANGE RATE, P RICE LEVEL, ETC. 17. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN DISREGARDING PRICES PAID FOR PURCHASE OF CDS IN EUROPEAN AND US BY IMATION ALLEGEDLY ON T HE GROUND THAT THE SAME PERTAINS TO SUBSEQUENT YEAR AN D DO NOT REFLECT CONTEMPORANEOUS MARKET SITUATION. 18. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE IN STANCES OF PURCHASE OF CDS IN EUROPE AND IN USA BY IMATION DUR ING THE RELEVANT PREVIOUS YEAR WAS ALSO PLACED ON RECOR D IN 5 ITA NO.882/DEL/2008 SUPPORT OF ADJUSTMENT ON ACCOUNT OF GEOGRAPHICAL DIFFERENCES. 19. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT THE REFERENCE T O BIG MAC INDEX BY THE APPELLANT IS ALSO MISPLACED. THE PRICE S OF A BURGER IN US COULD BE LOWER FOR A NUMBER OF REASONS . 20. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT THE ADJUSTMENT RELATING TO HIGHER COST OF PERFORMING DISTRIBUTION FUNCTION IN US COMPARED TO EUROPE HAS ALREADY BEEN TAKEN CARE OF T HROUGH SELLING AND DISTRIBUTION EXPENSES INCURRED BY THE A PPELLANT. 21. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT THE REFERENCE T O LOWER PRICES OF HOME ELECTRONICS AND HOUSEHOLD APPLIANCES IN US IS ALSO MISPLACED AS THESE BELONG TO DIFFERENT PRODUCT CATEGORIES. 22. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT INCURRENT OF LO SS BY A RELATED PARTY DOES NOT HAVE A BEARING ON THE DETERM INATION OF ARMS LENGTH PRICE IN THE TRANSACTION BETWEEN THE A PPELLANT AND ITS SUBSIDIARY GMI. 23. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT, IT THE ARMS L ENGTH PRICES FALLS OUTSIDE THE TOLERANCE BAND, TRANSFER PRICING ADJUSTMENT WOULD HAVE TO BE MAD FOR THE DIFFERENCE BETWEEN THE ARMS LENGTH PRICE DETERMINED BY THE ASSESSING OFFICER BA SED ON THE ARITHMETICAL MEAN OF THE PRICES AND THE PRICE SHOWN BY THE ASSESSEE. 24. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT THE TPO WAS JUS TIFIED IN TAKING THE ARMS LENGTH PRICE AT THE ARITHMETICAL M EAN OF PRICES WITHOUT ALLOWING FOR REDUCTION OF UP TO 5% I N RESPECT OF TRANSACTIONS WHERE THE TRANSFER PRICES FELL SHOR T OF THE TOLERANCE BAND OF 95% OF THE ARMS LENGTH PRICE. 25. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT FOR BENCHMARKIN G 6 ITA NO.882/DEL/2008 ANALYSIS, EACH INTERNATIONAL TRANSACTION IS TO BE C OMPARED WITH THE ARMS LENGTH PRICE DETERMINED AND THE TPO WAS CORRECT IN FOLLOWING SUCH A METHODOLOGY. THE APPELLANT CRAVES LEAVE TO ADD, AFTER, AMEND OR VARY FROM THE ABOVE GROUNDS OF APPEALS BEFORE OR AT THE TIME OF HEARING. 3. ALL THE GROUNDS RELATE TO ADJUSTMENT OF RS.54,62 ,582/- TO THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WITH ITS AE GLYPHICS MEDIA INC. USA (HEREINAFTER REFERRED TO AS GMI) 4. THE FACTS EMANATING FROM THE ORDERS OF AUTHORITI ES BELOW ARE THAT FOR THE INSTANT IN AN ORDER WAS PASSED BY THE DY. CIT, CIRCLE 5(1), NEW DELHI ON 28.7.2004 U/S 143(3) OF T HE ACT, WHEREBY HE DETERMINED THE ASSESSED LOSS AT RS. 3,21 ,14,948/- AFTER MAKING AN ADDITION OF RS. 54,62,582/- ON ACCO UNT OF THE DIFFERENCE BETWEEN THE ARMS LENGTH PRICE OF INTERN ATIONAL TRANSACTION AND THE BOOK VALUE OF THE TRANSACTION, TO THE RETURNED LOSS OF RS. 3,75,77,530/-. 5. DURING THE ASSESSMENT PROCEEDINGS, THE AO NOTICE D THAT THE ASSESSEE HAD SOLD 4,39,40,400 CDS AND 67,23,400 FLOPPIES TO ITS AE GMI, A COMPANY INCORPORATED IN USA FOR A SUM OF RS.42,12,03,955/-. AS PER THE ECONOMIC ANALYSIS CA RRIED OUT BY 7 ITA NO.882/DEL/2008 THE ASSESSEE, INTERNAL COMPARABLE UNCONTROLLED PRIC E METHOD WAS FOUND TO BE THE MOST APPROPRIATE METHOD FOR BENCHMA RKING INTERNATIONAL TRANSACTION OF EXPORTS TO GMI AS ASSE SSEE COMPANY HAD ENTERED INTO SIMILAR TRANSACTIONS WITH UNRELATE D PARTIES, WHICH SERVED AS UNCONTROLLED TRANSACTIONS. REGARDI NG THE DETERMINATION OF CUP AS THE MAM, THE FOLLOWING OBSE RVATIONS WERE MADE IN THE TP REPORT: MBI EXPORTS SIMILAR PRODUCTS TO UNRELATED PARTIES AS WELL AS GMI. SINCE INTERNAL COMPARABLES WERE AVAILABLE, THE INTERNATIONAL TRANSACTION RELATING TO SALE OF FINIS HED GOODS COULD BE JUSTIFIES AS BEING AT ARMS LENGTH, APPLYI NG CUP METHOD. FOR THE PURPOSES OF COMPARING THE PRICE CHARGED FRO M GMI AND INDEPENDENT UNCONTROLLED PARTIES IN EUROPE, THE FOLLOWING METHODOLOGY WAS ADOPTED: I) ENTIRE SALES TO AE (GMI) DURING 2001-2002 WERE SORTED ON THE BASIS OF PACKING AND MEMORY SIZE. II) COMPARABLE SALES TO ALL INDEPENDENT UNCONTROLLE D PARTIES IN EUROPE WERE ALSO SORTED ON THE BASIS OF PACKING AND MEMORY SIZE, AND III) AVERAGE SALE PRICE TO THE AE (GMI) WAS ADJUSTE D ON THE FOLLOWING ACCOUNT: A) ADJUSTMENT FOR EXPENSES OF THE INTERMEDIARY: GMI IS A WHOLESALE DISTRIBUTOR OF MBI. GMI EXCLUSI VELY DEALS IN PRODUCTS MANUFACTURED OF MBI AND INCURS EXPENDITURE FOR SALE OF SUCH PRODUCTS IN USA. THE W HOLESALE PRICE CHARGED FROM GMI, THEREFORE, IS TO BE SUITABL Y ADJUSTED FOR COMPARISON WITH THE RETAIL PRICE CHARGED FROM O THER 8 ITA NO.882/DEL/2008 INDEPENDENT ENTERPRISES. ALTERNATIVELY, GMI INCURS EXPENDITURE IN SELLING/ DISTRIBUTING MBI PRODUCTS I N USA, WHICH EXPENDITURE ARE INCURRED BY MBI FOR SELLING S UCH PRODUCTS TO UNRELATED PARTIES IN OTHER MARKETS, VIZ , EUROPE. CONSIDERING THIS FACT, THE WHOLESALE PRICE CHARGED FROM GMI WAS INCREASED BY THE PROPORTIONATE SELLING EXPENSES INCURRED BY GMI SO AS TO MAKE THE DATA COMPARABLE. THE MARK- UP IS DETERMINED ON THE BASIS OF ACTUAL OPERATING EXPENSE S INCURRED BY GMI DURING THE RELEVANT PERIOD. B) ADJUSTMENT FOR GEOGRAPHICAL DIFFERENCE: THE MARKET IN US IS DIFFERENT FROM EUROPEAN MARKET. THE EUROPEAN MARKET IS DOMINATED MORE BY BRAND NAME AND AESTHETICS FOR WHICH THE CUSTOMER IS WILLING TO PAY EXTRA. ON THE OTHER HAND, SALES TO USA ARE STANDARD AND NOT C USTOMER SPECIFIC. THE COSTING OF PRODUCTS EXPORTED TO EUPOR E IS, THEREFORE, SIGNIFICANTLY HIGHER DUE TO PACKING AND PRINTING. ALSO, US MARKET IS MORE COMPETITIVE AND PRICE- CONS CIOUS. USA DEMANDS BEST PRICE BEING A STRONG ECONOMY WITH HUGE DEMAND POTENTIAL. WE COMPARED THE PRICE THAT AN INDEPENDENT PARTY (EM TEC) WAS PREPARED TO PAY TO GMI IN USA AND TO MBI IN THE EUROPEAN MARKET FOR THE SAME PRODUCT. THE USA PRICE S WERE 10-20% LOWER THAN THE EUROPEAN PRICES. ACCORDINGLY, ON A CONSERVATIVE BASIS, 10% OF EXPORT PRICE HAS BEEN LO ADED ON THE WHOLESALE PRICE CHARGED BY MBI FROM GMI. IV) THE ADJUSTED PRICE OF SALE TO GMI WAS COMPARED WITH THE AVERAGE SALE PRICE OF COMPARABLE UNCONTROLLED ENTERPRISES. V) THE RESULT OF SUCH COMPARISON IS CHARTED (TABLE- 2) AS FOLLOWS; TABLE2 SR. NO. NAME OF PACKING AVERAGE WHOLESALE PRICE TO AE (IN US $) ADD SPECIFIC COST FACTOR (IN US $) ADD 10% MARK UP DUE TO DIFFERENCE IN US AND EUROPE ADJUSTED AVERAGE WHOLESALE PRICE TO GMI (IN US$) AVERAGE RETAIL PRICE [ARMS LENGTH PRICE] (IN DIFFERENCE IN AVERAGE PRICE [COL. 7- COL. 6] (IN US$) 9 ITA NO.882/DEL/2008 MARKETS (IN US$) US$) 1 2 3 4 5 6 7 8 1 CDR CAKE BOX ROTTERDAM 0.18 0.02 0.02 0.22 0.18 -0.04 2 CDR CAKE BOX- DIRECT 0.18 0.02 0.02 0.22 0.19 -0.03 3 CDR CAKE BOX- TOTAL 0.18 0.02 0.02 0.22 0.18 -0.04 4 JEWEL CASE- ROTTERDAM 0.26 0.02 0.03 0.31 0.30 -0.01 5 JEWEL CASE- DIRECT 0.33 0.02 0.04 0.39 0.32 -0.07 6 SLIM CASE- TOTAL 0.27 0.02 0.03 0.32 0.31 -0.02 7 SLIM CASE- ROTTERDAM 0.28 0.02 0.03 0.33 0.29 -0.04 8 SLIM CASE- DIRECT 0.27 0.02 0.03 0.32 0.31 -0.01 9 SLIM CASE- TOTAL 0.27 0.02 0.03 0.33 0.29 -0.03 10 FLOPPIES 0.12 0.02 0.01 0.16 0.10 -0.06 IT WAS NOTICED THAT THE PRICE CHARGED TO GMI WAS HI GHER THAN AS COMPARED TO THE AVERAGE SALE PRICE CHARGED TO COMPA RABLE UNCONTROLLED ENTERPRISES. SALE TO GMI IS, THEREFORE , BEING CONSIDERED AT ARMS LENGTH UNDER CUP METHOD. 4.3.2 ON THE BASIS OF THE ECONOMIC ANALYSIS CARRIED OUT IN THE TP REPORT, THE APPELLANT CAME TO THE CONCLUSION THAT I NTERNATIONAL TRANSACTION OF SALE OF FINISHED GOODS TO GMI WAS AT ARMS LENGTH. GMI HAD INCURRED LOSSES FROM THE TRANSACTIONS RELAT ING TO SALE OF PRODUCTS OF MBIL AND THERE COULD NOT BE ANY ALLEGAT ION TO TRANSFER OF PROFITS BY VIRTUE OF THE INTERNATIONAL TRANSACTI ONS. 6. A REFERENCE WAS MADE BY THE AO U/S 92CA(1) OF TH E ACT TO THE TPO FOR COMPUTATION OF ALP IN RESPECT OF THE SE 10 ITA NO.882/DEL/2008 INTERNATIONAL TRANSACTIONS. DURING THE TP PROCEEDI NGS THE ASSESSEE FURNISHED REVISED BENCHMARKING ANALYSIS WH ICH IS REPRODUCED BELOW: GLYPHICS MEDIA TRANSACTIONS COMPARABLE UNCONTROLLED TRANSACTIONS TYPE OF PACKING AVERAGE WHOLESALE PRICE (RS.) LESS DIFFERENTIAL FREIGHT (RS.) ADD SELLING & DISTRIBUTION EXPENSES INCURRED BY GMI (RS. ) ADD: 10% MARK-UP DUE TO DIFFERENCE IN US & EUROPEAN MARKETS (RS.) ADJUSTED AVERAGE RETAIL PRICE (RS.) AVERAGE RATE (RS.) 1 2 3 4 5 6 7 CDR CAKE BOX 8.53 0.05 1.11 0.96 10.65 8.54 CRD SLIM CASE 13.03 0.17 1.11 1.397 15.37 13.21 CDR JEWEL CASE 12.96 0.28 1.11 1.38 15.18 14.4 7. IT WAS SUBMITTED THAT BEFORE THE TPO THAT PRICES OF EXPORT TO GMI WERE COMPARABLE TO THOSE MADE TO UNRELATED E NTERPRISES AND THEREFORE, THE INTERNATIONAL TRANSACTIONS OF EX PORT TO GMI WAS CONSIDERED TO BE AT ARMS LENGTH BY APPLYING TH E CUP METHOD. 11 ITA NO.882/DEL/2008 8. THE TPO DID NOT ACCEPT THE ASSESSEES REVISED WO RKING, AND HIS FINDINGS AS SUMMARIZED IN THE ORDER OF CIT( A) ARE AS BELOW: I) THE METHODOLOGY ADOPTED IN THE BENCHMARKING ANALYSIS IS NOT CORRECT AS AVERAGE VALUE OF EACH CA TEGORY OF TRANSACTION WAS DONE WITH THE ARMS LENGTH PRICE, W HICH IS AGAIN AN AVERAGE FIGURE. AVERAGING IS NOT TO BE DON E FOR THE TRANSACTIONS IN EACH OF THE THREE CATEGORIES AND RA THER EACH OF THE TRANSACTIONS IS TO BE JUDGED SEPARATELY VIS--V IS ALP. IT MAY BE POSSIBLE THAT OUT OF SEVERAL SALES TRANSACTI ONS TO GMI, PRICES ARE BELOW THE ARMS LENGTH PRICE IN SOM E INSTANCES THAT WOULD REQUIRE TRANSFER PRICING ADJUS TMENTS. II) THE TPO HAD NO OBJECTION TO THE ADJUSTMENT MADE ON ACCOUNT OF FREIGHT DIFFERENTIAL, THOUGH HE HAD RESE RVATIONS ABOUT THE OTHER TWO ADJUSTMENTS. III) THE ADJUSTMENT FOR SELLING & DISTRIBUTION WAS MADE BY ADDING A FIGURES OF RS. 1.11/- PER CD, TO THE AVERA GE WHOLESALE PRICE CHARGED FROM THE GMI, TO ALL THE TH REE CATEGORIES OF PACKAGING. THE VALUE OF RS. 1.11/- WA S ARRIVED AT BY DIVIDING THE TOTAL EXPENSES OF GMI FOR THE PE RIOD 01.04.2001 TO 31.03.2002 OF US$ 11,84,410, BY THE T OTAL NUMBER OF CDS SOLD TO GMI AND THEN BY MULTIPLYING T HE SAME WITH THE APPROPRIATE FOREIGN EXCHANGE RATE TO ARRIVE AT AVERAGE SELLING & DISTRIBUTION (S&D) EXPENSES PER C D. IV) ACCORDING TO THE TPO, THE CORRECT WAY OF DOING THIS ADJUSTMENT WOULD BE TO REDUCE AVERAGE SELLING & DIS TRIBUTION EXPENSES INCURRED BY MBIL FROM THE PRICES CHARGED B Y IT FROM UNRELATED PARTIES. THIS WAS ACCEPTED, BY THE A .R.S DURING THE HEARING ON 15.3.2004. HOWEVER, THE TPO W AS OF THE VIEW THAT CERTAIN ADJUSTMENTS ARE TO BE DONE BE FORE COMING UP WITH THE CORRECT ARMS LENGTH PRICE. V) THE APPELLANT HAD FURNISHED DETAILS OF SELLING & DISTRIBUTION EXPENSES INCURRED BY MBIL AMOUNTING TO RS. 76,22,56,882/- TO THE TPO VIDE ITS LETTER DATED 11. 03.2004. IT WAS CONTENDED THAT THESE EXPENSES WERE PRIMARILY IN CURRED 12 ITA NO.882/DEL/2008 FOR SALES PROMOTION ACTIVITIES IN EUROPE, JAPAN AND EAST ASIAN MARKETS ONLY AND NOT IN USA. AN ANALYSIS OF T HE EXPENSES REVEALED THAT THE TOTAL EXPENSES OF RS. 76 .22 CRS. INCLUDED EXPENSES ON ACCOUNT OF ROYALTY OF RS. 39,57,72,326/-, INSURANCE OF RS. 2,86,47,543/- AND COMMISSION ON SALES OF RS. 3,70.644/-. ROYALTY WAS PAID TO PHILIPS FOR ACQUIRING PATENT RIGHTS, WHICH WAS FOR THE ENTIRE SALES, BOTH DOMESTIC AND EXPORTS, TO US AS WELL AS TO EUROPE AND OTHER COUNTRIES. THE TPO ARGUED THAT ROYALTY NO T BEING SELLING & DISTRIBUTION EXPENSES SHOULD BE EXCLUDED. ACCORDING TO THE TPO, THE SAME WAS THE CASE FOR INS URANCE. COMMISSION ON SALES BEING ON DOMESTIC SALES, THE SA ME WAS ALSO TO THE EXCLUDED. SINCE PACKING, FREIGHT AND FO RWARDING CHARGES OF RS. 25,20,03,838/- WERE BEING SEPARATELY CONSIDERED FOR WORKING OUT THE FREIGHT DIFFERENTIAL AND THE SAME NOT BEING SELLING & DISTRIBUTION EXPENSE, HAD ALSO TO BE EXCLUDED TO BRING AT PAR THE PRICE OF EXPORT TO GMI AND THOSE OF SALES TO THE URES. AFTER EXCLUDING THESE EXPENSE S, THE TPO CALCULATED THE BALANCE OF RS. 8,45,62,531/- TO BE THE ACTUAL SELLING & DISTRIBUTION EXPENSES THAT IS TO B E CONSIDERED FOR MAKING THE NECESSARY ADJUSTMENT. THE SAME WAS CALCULATED AS UNDER: TOTAL RS. 76,22,56,882/- LESS : ROYALTY RS. 39,57,72,326/- INSURANCE RS. 2,86,47,543/- COMMISSION ON SALES RS. 3,70,644/- PACKING, FREIGHTS & FORWARDING RS. 25,29,03,838/- BALANCE RS. 8,45,62,531/- VI) THE APPELLANT HAD CONTENDED THAT THE BALANCE OF RS. 8,45,62,531/- WERE ENTIRELY FOR PROMOTING EXPORT SA LES OTHER THAN THOSE TO GMI. THESE EXPENSED INCLUDED SALARY A ND ALLOWANCES, STAFF WELFARE EXPENSES, RENT, PRINTING & STATIONERY, POSTAGE TELEGRAM, TELEPHONE, ADVERTISEM ENT AND PUBLICITY, SALES PROMOTION & EXECUTION EXPENSES AND MISCELLANEOUS EXPENSES. IT WAS ALSO EXPLAINED BY TH E APPELLANT THAT THESE ARE SALARIES FORM MARKETING DI VISION OF MBIL ONLY. HOWEVER THE TPO WAS OF THE VIEW THAT A P ART OF THESE EXPENSES PERTAINED TO DOMESTIC SALES. ACCORDI NG, THE TPO COMPUTED THE RELEVANT SALES & DISTRIBUTION EXPE NSES PERTAINING TO THE EXPORT SALES TO NON-US DESTINATIO N EXCLUDING THE GMI EXPORTS AT RS. 0.27/- PER CD AS U NDER:- 13 ITA NO.882/DEL/2008 TOTAL SALES MADE DURING THE YEAR: RS. 680 CRORES LESS: EXPORT SALES MADE TO GMI: RS. 5 CRORES BALANCE: RS. 675 CRORES DOMESTIC TURNOVER @ 5% TO 7% OF THE TOTAL TURNOVER : RS. 50 CRORES. EXPORT TURNOVER TO NON- US DESTINATION : RS. 625 CRORES. RATIO BETWEEN EXPORT TURNOVER TO NON- US DESTINATION AND TOTAL TURNOVER : 625/675=93% APPORTIONMENT OF SELLING & DISTRIBUTION EXPENSES TO NON- US DESTINATIONS: RS. 8,45,62,531/- X 0.93= RS. 7,86,43,165/-. TOTAL NUMBER OF CDS AND FLOPPIES EXPORTED TO URES IN NON- US DESTINATIONS = 29,00,26,730 (WHILE WORKING OUT THE CORRESPONDING ADJUSTMENT IN GMIS WHOLESALE PRICE, THE APPELLANT HAD USED THIS NUMBER ) SELLING & DISTRIBUTION EXPENSES PER CD FOR EXPORT SALES TO NON- US DESTINATION = RS. 0.27/-. THE VALUE OF RS. 0.27/- WAS ACCORDINGLY USED BY THE TPO AS SELLING & DISTRIBUTION EXPENSES PER CD FOR EXPORT SALES TO NON- US DESTINATION THAT NEEDS TO B E SUBTRACTED FROM THE EXPORT PRICES CHARGED TO URES I N ACCORDANCE WITH RULE 10B(3) OF THE IT RULES. VII) THE APPELLANT HAD CLAIMED THAT EUROPEAN CUSTOM ERS WERE WILLING TO PAY MORE THAN US CUSTOMERS (PARA 5. 10 OF THE T.P. REPORT). TO SUBSTANTIATE THIS, AN EXAMPLE WAS GIVEN OF THE PRICES AN INDEPENDENT PARTY (EMTEC) WAS PREP ARED TO PAY TO GMI IN USA AND TO MBIL IN EUROPE FOR THE SAM E PRODUCT. THE TPO WAS OT PREPARED TO ACCEPT THIS DIF FERENCE ON THE BASIS OF ONE OR TWO ISOLATED TRANSACTIONS AS NO OTHER EXAMPLES WERE FURNISHED EITHER IN THE TP REPORT OR DURING THE 92CA PROCEEDINGS. ON THE CONTRARY, THE TPO FOUN D INSTANCES FROM THE DETAILS OF EXPORT SALES FILED WI TH LETTER DATED 11.02.2004 THAT HIGHER PRICES WERE CHARGED FR OM THE SAME US CUSTOMER VIZ LG ELECTRONICS LNC FOR 10.11-0 (JEWEL CASE CD BOX) SALES IN THREE DESTINATIONS AS EVIDENT FROM THE DETAILS BELOW: 14 ITA NO.882/DEL/2008 GERMANY RS. 12.4 POLAND RS. 12.4 USA RS. 13.59 VIII) VIDE LETTER DATED 11.03.2004, THE APPELLANT C LARIFIED THAT US PRICES WERE HIGHER IN LGS CASE DUE TO DIFF ERENCE IN MEMORY SIZE IN THE ITEMS SUPPLIED, AS CDS SUPPLIED TO USA HAD HIGHER MEMORY SIZE OF 700MB (80 MINUTES) AS AGA INST 650MB (74 MINUTES) SUPPLIED TO GERMANY AND POLAND. THE TPO HOWEVER, WAS NOT CONVINCED ABOUT THE EXPLANATIO N AS PRICE DIFFERENCE ON ACCOUNT OF MEMORY DIFFERENCE WA S NOT CORROBORATED FROM THE DETAILS FILED BY THE APPELLAN T. THE SAME WAS ALSO STATED TO HAVE BEEN CONFIRMED THROUGH LOCAL ENQUIRIES BY THE TPO. FURTHER, THE TPO HIGHLIGHTED TWO SPECIFIC INSTANCES BY WAY OF TWO INVOICES RAISED ON EMTEC OF AUSTRALIA FOR SALE OF CDS OF 74 MINUTE (I.E. 650 MB : INVOICE NO. RTD/EXP/264/01-02 DT. 10.8.2001) AND OF 80 MINU TES (I.E. 700MB; INVOICE NO. RTD/EXP/140/01-02 DT. 20.06.2001) WHERE THE PRICE DIFFERENCE WORKED OUT T O 3.5% ONLY. IN THE LG ELECTRONICS CASE, THE DIFFERENCE W AS OF 9.59%. HENCE, ACCORDING TO THE TPO, THE SAME WAS OB VIOUSLY NOT DUE T DIFFERENCE IN MEMORY SIZE. WHEN THIS FACT WAS BROUGHT TO NOTICE OF THE APPELLANT DURING THE TP PR OCEEDINGS ON 11.3.2004, NO ANSWER COULD BE PROVIDED. IX) THE TPO FURTHER OBSERVED THAT THE DETAILS OF EX PORTS SUBMITTED BY THE APPELLANT PERTAINED TO EXPORTS TO ALL DESTINATIONS INCLUDING EUROPE, MORROCCO, COLOMBIA, VENEZULA, TURKEY, AUSTRALIA, PANAMA, JAPAN, MEXICO, SYRIA, UAE AND CASABLANCA AND NOT RESTRICTED TO EUROPE ALO NE. IT WAS NOT THE APPELLANTS CASE THAT THERE WAS A PRICE DIFFERENTIAL BETWEEN THESE COUNTRIES AND THE USA. EXAMINATION OF DETAILS FURNISHED BY THE APPELLANT A LSO REVEALED NO PRICE PATTERN ON THE BASIS OF DESTINATI ON TO A PARTICULAR COUNTRY. ACCORDINGLY, IT WAS CONCLUDED B Y THE TPO THAT SINCE THE UNCONTROLLED TRANSACTIONS INCLUD ED EXPORTS TO ALL THESE COUNTIES BESIDES EUROPE, THERE WAS ABSOLUTELY NO JUSTIFICATION FOR MAKING ADJUSTMENT F OR GEOGRAPHICAL MARKET DIFFERENCES. HENCE, ADJUSTMENT ON ACCOUNT OF GEOGRAPHICAL DIFFERENTIAL WAS NOT ACCEPT ED BY THE TPO WHILE COMPUTING ARMS LENGTH PRICE. 15 ITA NO.882/DEL/2008 9. ON THE BASIS OF THE AFORESAID TPO COMPUTED THE A LP AS THE AVERAGE OF VARIOUS TRANSACTIONS PRICES FOR EACH OF THREE CATEGORIES OF CD PACKING VIZ. JEWEL BOX SLIM CASE A ND CAKE BOX AND ADJUSTMENTS WERE MADE TO THESE AVERAGE PRIC ES FOR FREIGHT DIFFERENTIAL AND SELLING AND DISTRIBUTION E XPENSES IN THE MANNER STATED HEREUNDER :- JEWEL CASE PACKING AVERAGE PRICE CHARGED FROM URES FOR EXPORT RS. 14.4 ADJUSTMENT AS PER RULE 10B FOR FREIGHT DIFFERENTIAL ADD: FREIGHT DIFFERENTIAL RS. 0.28 RS. 14.68 LESS: SELLING AND DISTRIBUTION EXPENSES AS WORKED O UT ABOVE RS. 0.27 ARMS LENGTH PRICE RS. 14.41 95% THEREON RS. 13.69 SLIM CASE PACKING AVERAGE PRICE CHARGED FROM URES FOR EXPORT RS. 13.2 1 ADJUSTMENT AS PER RULE 10B FOR FREIGHT DIFFERENTIAL ADD: FREIGHT DIFFERENTIAL RS. 0.17 RS. 13.38 LESS: SELLING AND DISTRIBUTION EXPENSES AS WORKED O UT ABOVE RS. 0.27 ARMS LENGTH PRICE RS. 13.11 95% THEREOF RS. 12.45 CAKE BOX PACKING AVERAGE PRICE CHARGED FROM URES FOR EXPORT RS. 8.54 ADJUSTMENT AS PER RULE 10B FOR FREIGHT DIFFERENTIAL ADD: FREIGHT DIFFERENTIAL RS. 0.05 RS. 8.59 LESS: SELLING AND DISTRIBUTION EXPENSES AS WORKED O UT ABOVE RS. 0.27 ARMS LENGTH PRICE RS. 8.32 95% THEREOF RS. 7.90 16 ITA NO.882/DEL/2008 10. THEREAFTER, PRICES CHARGED FROM GMI IN DIFFEREN T TRANSACTIONS BY THE ASSESSEE WERE COMPARED WITH THE ALPS WORKED OUT ABOVE. AS A RESULT THE POSITION WAS ARR IVED AS BELOW: SR. NO. DESCRIPTION PRICE PER CD ALP 95% OF THE ALP ALP OF THE INVOICE AMOUNT REMARKS 1 5.2.13 SLIM CASE: INVOICE FROM INDIA FOR 420000 CDRS FOR RS. 54269376 @ RS. 12.92 RS. 12.92 RS. 13.11 RS. 12.45 420000 @ 13.11 = RS. 55,06,200/- THE BOOK PRICE IN THE INVOICE IS MORE THAN 95%OF THE ALP. HENCE NO TP ADJUSTMENT CALLED FOR AS PER PROVISO TO SECTION 92C(2) OF THE ACT. 2 5.2.12- S3 SLIM CASE INVOICE FROM INDIA FOR 7200 CDRS FOR RS. 76,555@ RS. 10.63 RS. 10.63 RS. 13.11 RS. 12.45 7200@ 13.11= RS, 94,392/- THE BOOK PRICE IN THE INVOICE IS LESS THAN 95% OF THE ALP. HENCE TP ADJUSTMENT IS CALLED FOR AN AMOUNT OF RS. 17,837/- ON ACCOUNT OF DIFFERENCE BETWEEN THE ALP VALUE OF THE TRANSACTION AND THE INVOICE VALUE. 3 B 100-0-0 CAKE BOX INVOICE FROM INDIA FOR 6570000 CDRS FOR RS. 51794784 @ 7.88 RS. 7.88 RS. 8.32 RS. 7.90 6570000 @ RS. 8.32 = RS. 5,46,62,400/- THE BOOK PRICE IN THE INVOICE IS LESS THAN 95% OF THE ALP. HENCE TP ADJUSTMENT IS CALLED FOR AN AMOUNT OF RS. 28,67,616/- ON ACCOUNT OF DIFFERENC E BETWEEN THE ALP VALUE OF THE TRANSACTION AND THE INVOICE VALUE. 17 ITA NO.882/DEL/2008 4 10.4-11- S2 JEWEL BOX INVOICE FROM ROTTERDAM FOR 980000 CDRS FOR RS. 11985321.6 @ RS. 12.33 RS. 12.23 RS. 14.41 RS. 13.69 980000 @ RS. 14.41 = RS. 1,41,21,800/- THE BOOK PRICE IN THE INVOICE IS LESS THAN 95% OF THE ALP. HENCE TP ADJUSTMENT IS CALLED FOR AN AMOUNT OF RS. 21,36,479/- ON ACCOUNT OF DIFFERENCE BETWEEN THE ALP VALUE OF THE TRANSACTION AND THE INVOICE VALUE. 5 10-4-11-S2 JEWEL BOX INVOICE FROM ROTTERDAM 196000 CDRS FOR RS. 2485844,48 @ RS. 12.68 RS. 12.68 RS. 14.41 RS.13.69 196000 @ 14.41 = RS. 28,24,360/- THE BOOK PRICE IN THE INVOICE IS LESS THAN 95% OF THE ALP. HENCE TP ADJUSTMENT IS CALLED FOR AN AMOUNT OF RS. 3,38,516/- ON ACCOUNT OF DIFFERENCE BETWEEN THE ALP VALUE OF THE TRANSACTION AND THE INVOICE VALUE. 6 S.2-13-S1 SLIM BOX INVOICE FROM ROTTERDAM FOR 35800 CDRS FOR RS. 465995.712 @ RS. 13.02 RS. 13.02 RS.13.11 RS. 12.45 35800 @ RS. 13.11 = RS. 4,69,338/- THE BOOK PRICE IN THE INVOICE IS LESS THAN 95% OF THE ALP. HENCE TP ADJUSTMENT IS CALLED FOR AS PER PROVISO TO SECTION 92C(2) OF THE ACT. 7 S.2-13-S.1 SLIM BOX INVOICE FROM ROTTERDAM 186400 CDRS FOR RS. 2410224 @ RS. 13.02 RS.13.02 RS.13.11 12.45 186400 @ RS. 13.11 = RS. 2443704/- THE BOOK PRICE IN THE INVOICE IS LESS THAN 95% OF THE ALP. HENCE TP ADJUSTMENT IS CALLED FOR AS PER PROVISO TO SECTION 92C(2) OF THE ACT. 8 S.2-13-S.1 SLIM CASE INVOICE FROM ROTTERDAM RS. 12.16 RS.13.11 RS. 12.45 10800 @ 13.11 = RS. 14115880 THE BOOK PRICE IN THE INVOICE IS LESS THAN 95% OF THE 18 ITA NO.882/DEL/2008 1080000 CDRS FOR RS. 1313746.112 @ RS. 12.16 ALP. HENCE TP ADJUSTMENT IS CALLED FOR AN AMOUNT OF RS. 1,02,134/- ON ACCOUNT OF DIFFERENCE BETWEEN THE ALP VALUE OF THE TRANSACTION AND THE INVOICE VALUE. 11. THE TPO ON THE BASIS OF HIS COMPARISON OF BOOK PRICE IN VARIOUS INVOICES WITH THE ALP FOR EACH OF THE THREE CATEGORIES AS PER THE TABULATION GIVEN ABOVE, PROPOSED A TOTAL AD DITION OF RS. 54,62,582/- AS PER THE DETAILS GIVEN BELOW: S. NO. OF ABOVE TABLE NO. 4 TRANSACTION VALUE (RS.) ARMS LENGTH PRICE (RS.) DIFFERENCE (TO BE ADDED TO ASSESSEES INCOME (RS.) 2 76,555 94.392 17,837 3 5,17,94,784 5,46,62,400 28,67,616 4 1,19,85,321 1,41,21,800 21,36,479 5 24,85,844 28,24,360 3,38,516 8 13,13,746 14,15,880 1,02,134 TOTAL 6,76,56,250 7,31,18,832 54,62,582 12. ON APPEAL THE CIT(A) CONFIRMED THE ADJUSTMENT M ADE BY THE AO IN HIS ORDER DATED 27.12.2007 AND HENCE THIS APPEAL. 13. BEFORE US THE LD. COUNSEL FOR THE ASSESSEE HAS RESTRICTED HIS CONTENTION VIS--VIS GROUND TO THE FOLLOWING ADJUST MENTS: A) ADJUSTMENT ON ACCOUNT OF SELLING AND DISTRIBUTI ON EXPENSES; B) ADJUSTMENT ON ACCOUNT OF GEOGRAPHICAL DIFFERENC ES; 19 ITA NO.882/DEL/2008 C) INCORRECT COMPARISON OF PRICES BY TPO; D) WITHOUT PREJUDICE, THE ADJUSTMENT AT BEST SHOULD BE RESTRICTED TO THE AMOUNTS OF PROFITS RETAINED BY THE ASSOCIATE D ENTERPRISE; E) WITHOUT PREJUDICE, BENEFIT OF +(-)5% AS PER THE PROVISO TO SECTION 92C(2) OF THE INCOME TAX ACT, 1961 TO BE PR OVIDED WHILE COMPUTING THE ARMS LENGTH PRICE: 14. IN THE WRITTEN SYNOPSIS IT HAS BEEN CONTENDED A S UNDER: A) ADJUSTMENT ON ACCOUNT OF SELLING AND DISTRIBUTIO N EXPENSES THE APPELLANT HAS WHILE MAKING THE BENCHMARKING FO R COMPARISON OF PRICES OF EXPORT TO USA AND TO THE UNRELATED PAR TIES IN EUROPEAN COUNTRIES, CONSIDERED THE ACTUAL EXPENDITURE INCURR ED BY GMI IN DISTRIBUTION OF SUCH PRODUCTS IN USA. SUCH EXPENSE S, IT WOULD BE APPRECIATED WOULD HAVE BEEN INCURRED BY THE APPELLA NT HAD IT NOT BEEN OPERATING IN USA THROUGH THE ASSOCIATED ENTERP RISE, NAMELY GMI. THE APPELLANT ON THE OTHER HAND HAS ITS OWN B ASE IN EUROPE TO UNDERTAKE SELLING AND DISTRIBUTION FUNCTION AND IT HAS NOT ENGAGED A SOLE SELLING AGENT/WHOLESALE DISTRIBUTOR IN THAT COUNTRY. THE AFORESAID ADJUSTMENT WAS MADE CONSIDERING THE F ACT THAT MUCH HIGHER EXPENSES ARE REQUIRED TO BE INCURRED BY GMI IN PROMOTING SALE OF CDS MANUFACTURED BY THE APPELLANT IN USA AN D THE FACT THAT THE APPELLANT DOES NOT HAVE ANY PRESENCE IN US A THE TPOI WHILE COMPUTING ARMS LENGTH PRICE APPLYIN G CUP METHOD INSTEAD OF ADJUSTING THE SALE OF GMI BY THE SELLING AND OTHER EXPENDITURE INCURRED BY IT, AND COMPARING THE SALE SO ADJUSTED WITH THE SALE PRICE TO UNRELATED PARTIES I N EUROPEAN COUNTRIES, ON THE COUNTRY MADE ADJUSTMENT ON ACCOUN T OF MARKETING AND SELLING EXPENSES INCURRED FOR PROMOTING THE SAL E OF PRODUCTS IN EUROPEAN COUNTRIES AND REDUCING THE SAME FROM THE P RICE CHARGED FROM UNRELATED PARTIES IN EUROPE. THE ADJUSTMENT S O MADE BY THE ASSESSING OFFICER DOES NOT RECOGNIZE THE BUSINESS R EALITIES THAT MUCH HIGHER EXPENSES/COST IS REQUIRED TO BE INCURRE D FOR SELLING THE PRODUCTS IN USA, WHERE THE APPELLANT DOES NOT HAVE A SUBSTANTIAL MARKET PRESENCE AS COMPARED TO THE EXPENDITURE REQU IRED TO BE INCURRED BY APPELLANT IN EUROPE. THE TPO WHILE MAK ING THE 20 ITA NO.882/DEL/2008 ADJUSTMENT HAS NOT TAKEN INTO ACCOUNT THE MOST SIGN IFICANT FACTOR INFLUENCING THE PRICES OF EXPORT TO GMI. HENCE THE TPO HAS ERRONEOUSLY COMPUTED THE SELLING AND DISTRIBUTION E XPENSES @ RS. 0.27 PER CD INSTEAD OF RS. 1.11 PER CD AS COMPUTED BY THE APPELLANT. IT IS RESPECTFULLY SUBMITTED, THAT FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE APPLYING THE CUP METHOD, COMPARI SON OF INTERNATIONAL TRANSACTIONS WITH GMI HAVE TO BE MADE WITH THAT OF UNRELATED PARTIES IN A SIMILAR SITUATION, I.E., THE TWO PARTIES ARE TO BE PLACED IN SIMILAR SITUATION TO MAKE COMPARISON OF L IKE WITH LIKE POSSIBLE. RELIANCE N THIS REGARD IS PLACED ON THE FOLLOWING CASE LAWS: EGAIN COMMUNICATION (P) LTD. VS DCIT 118 ITD 243 ( KOL) SCHEFENACKER MOTHERSON LTD. VS. ITO 123 TTJ 509 (D EL) HONEYWELL AUTOMATION PVT. LTD. VS. DCIT 108 TTJ 92 4 (DEL) MENTOR GRAPHICS (NOIDA) (P) LTD. VS. DCIT 109 ITD 101 (DEL) DCIT VS. SONY INDIA (P) LTD. 114 ITD 488 (DEL) SKODA AUTO INDIA (P) LTD. VS. ACIT 122 TTJ 699 (PU NE) IT IS TO BE APPRECIATED THAT THE COMPARISON OF PRIC ES CHARGED FROM GMI WITHOUT MAKING THE AFORESAID ADJUSTMENTS WITH T HAT OF PRICES CHARGED FROM THIRD PARTY, WOULD RESULT IN FALLACIOU S COMPARISON AS THE TWO PARTIES WOULD NOT BE PLACED IN THE SIMILAR SITUATION. RULE 10B(3) OF THE RULES PROVIDES THAT AN APPROPRIA TE ADJUSTMENT IS REQUIRED TO BE MADE TO ACCOUNT FOR THE DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS. RELIANCE IN THIS REGARD IS ALSO PLACED ON THE RECEN T DECISION OF THE DELHI HIGH COUR TIN THE CASE OF SONY ERICSSON MOBIL E COMMUNICATIONS INDIA (P) LTD. VS. CIT (TA 16/2014) WHERE IN THE HONBLE DELHI HIGH COURT THAT REASONABLE ACCURATE A DJUSTMENTS SHOULD BE MADE TO ELIMINATE THE MATERIAL DIFFERENCE S ON THE PRICE OR MARGINS OF THE COMPARABLES. RELIANCE IN THIS REGAR D IS ALSO PLACED ON THE DECISION OF THE HONBLE HIGH COURT IN THE CA SE OF RAMPGREEN SOLUTIONS (P) LTD. VS. CI (ITA NO. 102/20 15 WHEREIN 21 ITA NO.882/DEL/2008 THE HONBLE HIGH COURT HELD THAT COMPARABLES SELECT ED FOR THE BENCHMARKING ANALYSIS SHOULD BE FUNCTIONALLY SIMILA R AND SUBJECT TO SIMILAR BUSINESS ENVIRONMENT AND RISKS. THE COM PARISON OF PRICES AS SOUGHT TO BE MADE BY THE TPO, WITHOUT ELIMINATING/MAKING ADJUSTMENTS FOR QUANTIFIABLE DIF FERENCES IN THE TWO TRANSACTIONS IS NOT IN ACCORDANCE WITH THE TRAN SFER PRICING REGULATIONS. THE ADJUSTMENT ON ACCOUNT OF DIFFEREN CE IN MARKET, IT IS SUBMITTED, IS BE TAKEN INTO CONSIDERATION TO DET ERMINE THE ARMS LENGTH PRICE THAT WOULD HAVE BEEN CHARGED FROM GMI IN IDENTICAL SITUATION AS THAT OF UNRELATED PARTY COMPARABLE. IT WOULD BE APPRECIATED, THEREFORE THAT THE COMPARI SON SOUGHT TO BE MADE BY THE TPO IGNORING THE ADJUSTMENT TO THE INTE RNATIONAL TRANSACTIONS ON ACCOUNT OF GEOGRAPHICAL AND OTHER D IFFERENCES AS AFORESAID SO AS TO APPLY CUP METHOD IS NOT IN ACCOR DANCE WITH THE PROVISIONS OF SECTION 92C READ WITH RULE 10C OF THE RULES. IT IS FURTHER SUBMITTED THAT GMI WHILE REPRESENTING THE APPELLANT IN USA AS SOLE DISTRIBUTOR OR SOLE SELLING AGENT, INCU RS SIGNIFICANT SELLING AND DISTRIBUTION EXPENSES. B) ADJUSTMENT ON ACCOUNT OF GEOGRAPHICAL DIFFERENC ES IT IS RESPECTFULLY SUBMITTED THAT THE PRICES OF EXP ORT OF PRODUCT OR COMMODITY VARY FROM COUNTRY TO COUNTRY FOR THE REAS ONS THAT (I) THE PRICES BEING OFFERED BY THE COMPETITORS IN THE MARK ET; (II) THE DUTIES AND TAXES ON IMPORTS INTO THE COUNTRY AND THE RESUL TANT DELIVERED COST TO THE CUSTOMER; (III) DOMESTIC CAPACITY AND D OMESTIC PRICES OF LOCAL MANUFACTURERS; (IV) THE STANDARD OF LIVING AN D PAYING CAPACITY PREVAILING IN DIFFERENT COUNTRIES; AND (V) THE PRIC ES FOR EACH COUNTRY IS DETERMINED CONSIDERING THE LANDED PRICE IN THE H ANDS OF THE CUSTOMER. THE NET FOB PRICE WOULD ALWAYS VARY FROM COUNTRY TO COUNTRY AND IN MANY CASES WITHIN THE SAME COUNTRY O N ACCOUNT OF THE DIFFERENCE IN FREIGHT BECAUSE OF THE DISTANCE, WHETHER IT IS SEAPORT OF LAND LOCKED COUNTRY/CITY, TO AND FRO CON TAINER TRAFFIC AND OTHER FACTORS. IT IS NEVER POSSIBLE THAT FOB VALUE OF SALES MAKE TO TWO DIFFERENT DESTINATION WOULD BE SAME. IT IS FURT HER SUBMITTED THAT THERE ARE SEVERAL FACTORS INFLUENCING THE PRICING O F ANY CURRENCY E.G. CAPITAL/CURRENT ACCOUNT INFLOWS, TRADE DEFICIT /SURPLUS, MONETARY POLICY ETC. FOR THAT REASON, PRICING OF THE PRODUCT OR COMMODITY WOULD VARY FROM COUNTRY TO COUNTRY BASED ON THE MON EY SUPPLY SITUATION AND PURCHASING POWER PARITY, ETC. REFEREN CE IS ALSO INVITED TO THE BIG MAC INDEX USUALLY REFERRED TO BY THE ECONOMISTS AS AN ACCEPTED INDICATOR OF THE PURCHASING POWER PA RITY/PRICE IN THE 22 ITA NO.882/DEL/2008 VARIOUS COUNTRIES, THE BIG MAC INDEX REVEALS THAT T HE CURRENCIES OF VARIOUS COUNTRIES ARE GENERALLY OVER/UNDER PRICED R ELATIVE TO THEIR PURCHASING POWER. THEREFORE, THE RESULT OF COMPARIS ON BETWEEN EXPORTS TO DIFFERENT COUNTRIES WOULD ALSO BE EFFECT ED BY THE DISTORTIONS IN THE PRICING OF CURRENCIES. THEREFORE, IT IS SUBMITTED THAT PRICES OF EXPORT OF FINISHED GOODS IN ONE COUNTRY CANNOT BE BENCHMARKED WITH REFERENCE TO PRICES PREVAILING IN ANOTHER COUNTRY BY APPLYING CUP METHO D, ON ACCOUNT OF, INTER ALIA, (I) VARIATION ON ACCOUNT OF THE STR ENGTH OF THE CURRENCY, (II) GEOGRAPHICAL DIFFERENCES FROM COUNTR Y TO COUNTRY OWING TO ECONOMIC SCENARIO/PURCHASING POWER, LEVEL OF COMPETITION, ETC. (III) MARKET CONDITION, ETC. THE MUMBAI BENCH OF TRIBUNAL IN THE CASE OF INTERVE T INDIA (P) LTD. VS. ASSTT. CIT [2010] 130 TTJ 301 39 SOT 93, H ELD THAT MARKET CONDITIONS OF THAILAND AND VIETNAM ARE TOTAL LY DIFFERENT AND APPROPRIATE ADJUSTMENTS ARE REQUIRED TO BE MADE TO ACCOUNT FOR THE EFFECT OF DIFFERENCES IN GEOGRAPHICAL LOCATIONS . RELIANCE IN THIS REGARD IS ALSO PLACED ON THE FOLLOWING DECISIONS WH EREIN IT HAS BEEN HELD THAT APPROPRIATE ADJUSTMENTS NEED TO MADE TO A CCOUNT FOR THE EFFECT OF DIFFERENCES IN GEOGRAPHICAL LOCATIONS GHARDA CHEMICALS LTD VS DCIT (ITA NO 2242/MUM/06) CIT VS DUFON LABORATORIES (ITA NO 1399/MUM/09) DISHMAN PHARMACEUTICALS AND CHEMICALS LTD VS DCIT ( ITA NO. 154 & 587/AHD/2007; ITA NO.2180 & 3213/AHD/2007 ) AS PER OECD GUIDELINES, WHILE APPLYING ANY OF THE P RESCRIBED TRANSFER PRICING METHOD, ADJUSTMENTS MUST BE MADE O N ACCOUNT OF DIFFERENCES BETWEEN CONTROLLED AND UNCONTROLLED SIT UATION THAT WOULD SIGNIFICANTLY AFFECT THE PRICES CHARGED OR RE CEIVED BY AN INDEPENDENT ENTERPRISE. OECD GUIDELINES PROVIDE THAT IN MAKING THESE COMPAR ISONS, MATERIAL DIFFERENCES BETWEEN THE COMPARED TRANSACTI ONS OR ENTERPRISES SHOULD BE TAKEN INTO ACCOUNT. IN ORDER TO ESTABLISH THE DEGREE OF ACTUAL COMPARABILITY AND THEN TO MAKE APP ROPRIATE ADJUSTMENTS TO ESTABLISH ARMS LENGTH CONDITIONS, I T IS NECESSARY TO COMPARE ATTRIBUTES OF THE TRANSACTIONS OR ENTERPRIS ES THAT WOULD AFFECT CONDITIONS IN ARMS LENGTH DEALINGS. ATTRIBU TES THAT MAY BE IMPORTANT INCLUDE THE CHARACTERISTICS OF THE PROPER TY OR SERVICES TRANSFERRED, THE FUNCTIONS PERFORMED BY THE PARTIES (TAKING INTO 23 ITA NO.882/DEL/2008 ACCOUNT ASSETS USED AND RISKS ASSUMED), THE CONTRAC TUAL TERMS, THE ECONOMIC CIRCUMSTANCES OF THE PARTIES, AND THE BUSI NESS STRATEGIES PURSUED BY THE PARTIES. SUB-RULE (2) OF RULE 10B OF THE RULES REFERS TO COM PARABILITY OF TRANSACTIONS. FOLLOWING THE LEAD OF OECD GUIDELINES , THE FOLLOWING FACTORS ARE PRESCRIBED IN THIS REGARD: CHARACTERISTICS OF THE PROPERTY OR SERVICES; FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSU MED; CONTRACTUAL TERMS OF THE TRANSACTIONS; MARKET CONDITIONS GEOGRAPHIC ALLOCATION AND SIZE OF THE MARKETS; COST OF LABOR AND CAPITAL; ECONOMIC DEVELOPMENT; AND LEVEL OF COMPETITION. FURTHER, FOR THE PURPOSE OF APPLYING CUP METHOD, MI NOR DIFFERENCES IN CONTRACTUAL TERMS OR ECONOMIC CONDITIONS CAN MATERIALLY AFFECT THE AMOUNT CHARGED IN AN UNCONTROLLED TRANSACTION. CUP METHOD BECOMES LESS RELIABLE SUBST ITUTE FOR ARMS LENGTH DEALINGS IF NOT ALL SIGNIFICANT CHARACTERIST ICS OF THE UNCONTROLLED TRANSACTIONS ARE COMPARABLE. THEREFORE, IT WOULD BE APPRECIATED THAT, IF APPROPR IATE ADJUSTMENT IS NOT MADE FOR THE SIGNIFICANT DIFFERENCES BETWEEN TH E CONTROLLED TRANSACTION AND UNCONTROLLED TRANSACTION, CUP METHO D WILL NOT PRODUCE A RELIABLE MEASURE OF AN ARMS LENGTH RESUL T. IN THE CASE OF THE APPELLANT THE INTERNATIONAL TRAN SACTION OF EXPORT OF CDS TO GMI, THE ASSOCIATED ENTERPRISE IN USA, AN D EXPORT TO UNRELATED PARTIES IN EUROPEAN COUNTRIES HAS TAKEN P LACE IN DIFFERENT MARKET CONDITIONS. GEOGRAPHICAL DIFFERENCES PLAY A MAJOR ROLE IN DETERMINING THE PRICE OF CDS SOLD TO THIRD PARTIES IN EUROPE AND THE PRICE OF CDS SOLD TO GMI IN USA. THE SAME REQUIRES APPROPRIATE ADJUSTMENT ON ACCOUNT OF GEOGRAPHICAL DIFFERENCE FO R THE REASONS SUBMITTED HEREIN BELOW: I) THE US MARKET IS A LOW PRICE MARKET WHERE CONSUM ERS ARE NOT READY TO PAY MORE PRICE FOR THE COMMODITIES AS COMPARED TO THE CONSUMERS IN EUROPE. 24 ITA NO.882/DEL/2008 THE FACT THAT USA IS CHARACTERIZED AS A LOW PRICE E CONOMY IN COMPARISON TO EUROPEAN COUNTRIES WOULD BE BORNE FRO M THE BIG MAC INDEX OF THE VARIOUS COUNTRIES, WHICH IS ENCLOS ED AT PAGE 150 OF THE PAPER BOOK. IT WOULD BE APPRECIATED THAT A M C DONALD BURGER WHICH IS SOLD FOR USD 3.00 IN USA IS SOLD FOR USD 3 .61 IN UK. THUS, DUE TO THIS PURCHASING POWER PARITY, AND ALSO PRICE CONSCIOUS CUSTOMERS, PRODUCTS IN THE US MARKET HAVE TO BE SOL D AT A LOWER PRICE AS COMPARED TO THE MARKETS IN THE EUROPEAN CO UNTRIES. HAVING REGARD TO THE PRICE CONSCIOUS US MARKET THE PRICES OF SALE OF CDS ARE GENERALLY KEPT LOWER THAN WHAT IS CHARGE D FROM CUSTOMERS IN EUROPE. II) THE APPELLANT IS A RECENT ENTRANT IN US MARKET FOR EXPORT OF CDS FROM INDIA. THE APPELLANT DOES NOT HAVE ANY PRE SENCE OR BRAND RECOGNITION IN THAT COUNTRY AND IS DEVELOPING MARKE T THROUGH GMI AND FOR THAT REASON THE APPELLANT IS CONSTRAINED TO PRICE THE PRODUCTS COMPETITIVELY WHILE EXPORTING TO USA. III) MARKETING OF CDS IN USA IS A DIFFERENT BALL GA ME ALTOGETHER. SUCH PRODUCTS ARE SOLD IN USA THROUGH VARIOUS SHOPP ING MALLS/SUPER MARKETS WHICH FOLLOW JUST IN TIME (JIT) APPROACH, I.E., THE RETAILER WOULD RENT OUT A SHELF SPACE TO THE DI STRIBUTOR WHO IS REQUIRED TO SUPPLY/PLACE ON THE SHELF HIS PRODUCTS IN SPECIFIED QUANTITY FOR SALE TO THE CUSTOMER. THE DISTRIBUTOR HAS TO MAINTAIN REQUISITE INVENTORY AND IS TO REPLENISH THE REQUISI TE QUANTITY OF CDS AS SOON AS THE SHELF STOCK IS REDUCED TO A MINIMUM LEVEL. IT WOULD BE APPRECIATED THAT IN THIS CASE RETAILER, I.E, THE SUPER MARKET/SHOP MALL DOES NOT MAINTAIN ANY INVENTORY AND EXPECT DEL IVERY OF THE PRODUCT IN THE DESIRED QUANTITY AND PACKING ON A VE RY SHORT NOTICE. IT WOULD BE APPRECIATED THAT THE COST OF OPERATIONS , THEREFORE, FOR THE DISTRIBUTOR IN USA IS MUCH HIGHER. FURTHER, THE DISTRIBUTOR IN USA IS DEALING ONLY IN CDS EXPORTED BY THE APPELLANT FROM INDIA AND IS, THEREFORE, INCURRI NG SIGNIFICANTLY HIGHER SELLING EXPENSES ON DISTRIBUTION/RESALE OF P RODUCTS IN THAT COUNTRY. THE DISTRIBUTORS IN EUROPEAN COUNTRIES, IT WOULD BE APPRECIATED, ARE GENERALLY DEALING IN SEVERAL PRODU CTS/COMMODITIES AND, THEREFORE, THE PER UNIT COST OF THEIR OPERATIO N IS MUCH LOWER THAN THE COST OF THE DISTRIBUTORS IN USA. A PART OF THE HIGHER COST OF OPERATIONS IN USA FOR THE DISTRIBUTOR, WHICH WOULD OTHERWISE HAVE BEEN INCURRED BY THE APP ELLANT (IF 25 ITA NO.882/DEL/2008 THERE WAS NO DISTRIBUTOR) TRANSLATES IN THE LOWER P RICES FOR EXPORT OF CDS TO USA. THE APPELLANT FOR THE AFORESAID REASONS, WHILE APPL YING THE CUP METHOD TO DETERMINE THE ARMS LENGTH PRICE, MADE AD JUSTMENTS, INTER ALIA, ON ACCOUNT OF DIFFERENCE IN PRICE REALI ZATION FOR SALE OF CDS IN USA AND EUROPE OWING TO GEOGRAPHICAL DIFFERE NCE DUE TO FACTORS SUCH AS, DIFFERENCE IN PURCHASING POWER PAR ITY, PRICING, CUSTOMERS IN USA BEING MORE PRICE CONSCIOUS, HIGHER COST OF DISTRIBUTION ETC. THE APPELLANT BASED ON INSTANCES OF PRICES PAID BY AN UNRELATED CUSTOMER FOR SIMILAR PRODUCTS IN USA A ND IN EUROPE, ON A CONSERVATIVE BASIS MADE AN UPWARD ADJUSTMENT O F 10% (THE VARIATION IN PRICES RANGED FROM 9% TO 25% OF THE PR ICE) IN THE PRICES OF SALE OF PRODUCTS TO USA. THE TPO IN HIS ORDER HAS ERRONEOUSLY OBSERVED THAT THE EXPORT PRICE OF 10.4-I-1-0 (JEWEL-CASE CD BOX) TO LG ELECT RONICS INC. IN USA WAS RS. 13.59 PER CD WHILE SALE PRICES OF THE S AME PRODUCT IN POLAND AND GERMANY, WAS RS. 12.4 PER CD. ON THAT BASIS THE TPO DID NOT ACCEPT THE CONTENTION OF THE APPELLANT THAT THE PRICES IN EUROPE MARKET WERE HIGHER IN COMPARISON TO USA ON A CCOUNT OF THE AFORESAID FACTORS. IT IS RESPECTFULLY SUBMITTED THAT LG ELECTRONICS IN C. IS A COMPANY BASED IN SEOUL, KOREA AND DEALS IN THEIR PRODUCTS I N EUROPE I.E., GERMANY, POLAND AND ALSO LATIN AMERICA. L.G. ELECTR ONICS, IT IS SUBMITTED, DOES NOT HAVE ANY PRESENCE IN USA NOR DO ES IT SELL ITS PRODUCTS IN THAT COUNTRY. THE SALE CONSIGNMENTS MEA NT FOR DISTRIBUTION IN LATIN AMERICA, VIZ PANAMA BY LG, AS A PRUDENT PRACTICE ARE SHIPPED TO A TRANSIT DESTINATION, MIAM I PORT IN USA AND FROM THERE IT IS CARRIED BY ROAD FOR SALE IN LA TIN AMERICA. (REFER EMAIL CORRESPONDENCE AT PAGE 151-152 OF THE PAPER BOOK) THE SALE PRICE OF CONSIGNMENT OF EXPORT TO LG IN US A (REFERRED BY THE ASSESSING OFFICER), THEREFORE, DOES NOT REPRESE NT THE PRICE OF SALE OF CDS IN USA AS SUCH CONSIGNMENT IS MEANT FOR SALE IN LATIN AMERICA AND MIAMI PORT IN USA IS ONLY A TRANSIT DES TINATION FOR THE SHIPMENT. TO THAT EXTENT, THE EXAMPLE REFERRED AND RELIED UPON BY THE ASSESSING OFFICER IS NOT OF COMPARABLE UNCON TROLLED TRANSACTION. IT HAS ALSO BEEN SUBMITTED BEFORE THE TRANSFER PRIC ING OFFICER THAT PRICE OF SALE OF CDS TO LG IN THE CONSIGNMENT SHIPP ED TO MIAMI, 26 ITA NO.882/DEL/2008 USA WERE HIGHER ON ACCOUNT OF HIGHER MEMORY SIZE OF THE CDS I.E. BEING 80 MINUTES (700 MB), WHILE MEMORY SIZE FOR CD S SOLD TO BOTH POLAND AND GERMANY WAS 74 MINUTES (650 MB). IT WOULD BE APPRECIATED, THAT THE PRICES OF THE AFO RESAID SALE OF CDS TO LG ELECTRONICS IN USA AND POLAND AND GERMANY WER E DIFFERENT OWING TO THE AFORESAID REASONS AND THE CONTENTION O F THE APPELLANT THAT THE PRICES CHARGED FOR SALE OF CDS IN EUROPE A RE HIGHER THAN IN USA FOR THE REASONS STATED ABOVE, WHICH IS ALSO COR ROBORATED BY EVIDENCES PLACED ON RECORD, IS VALID. C) INCORRECT COMPARISON OF PRICES BY TPO THE TPO WHILE DETERMINING THE TRANSFER PRICE HAS C OMPARED THE PRICES IN RESPECT OF INDIVIDUAL TRANSACTIONS OF EXP ORT TO THE ASSOCIATED ENTERPRISES AND THE AVERAGE PRICES OF EX PORT TO UNRELATED PARTIES THE INDIAN TRANSFER PRICING REGULATIONS PROVIDE FOR THE EVALUATION OF COMBINED TRANSACTIONS. THE INDIAN TRANSFER PRIC ING REGULATIONS PROVIDE FOR THE EVALUATION OF COMBINED TRANSACTIONS . THE TERM TRANSACTION HAS BEEN DEFINED IN CLAUSE (V) OF SECTI ON 92F OF THE ACT TO INCLUDE THE ARRANGEMENT, UNDERSTANDING OR ACTION IN CONCERT WHETHER OR NOT SUCH ARRANGEMENT, UNDERSTANDING OR A CTION IS FORMAT OR IN WRITING. FURTHER, RULE 10A(D) DEFINES TRANSA CTIONS TO INCLUDE A NUMBER OF CLOSELY LINKED TRANSACTIONS. THE OECD GUIDELINES ALSO PROVIDES THAT THERE ARE OF TEN SITUATIONS WHERE SEPARATE TRANSACTIONS ARE SO CLOSELY LINKED O R CONTINUOUS THAT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATE B ASIS. EXAMPLES MAY INCLUDE PRICING OF A RANGE OF CLOSELY LINKED PR ODUCTS (E.G. IN A PRODUCT LINE) WHEN IT IS IMPRACTICAL TO DETERMINE P RICING FOR EACH INDIVIDUAL PRODUCT OR TRANSACTION. IT WOULD BE APPRECIATED THAT PRICES OF EXPORT OF CD S TO THE ASSOCIATE ENTERPRISES AS WELL AS TO UNRELATED PARTI ES WOULD VARY SIGNIFICANTLY DURING THE YEAR ON ACCOUNT OF THE VAR IOUS FACTORS, VIZ. TIMING OF EXPORT, SIZE OF THE CONSIGNMENT, MARKET C ONDITIONS AND DEMAND AND SUPPLY FORCES ETC. TPO WHILE COMPUTING ARMS LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS OF E XPORT TO GMI, HAS TAKEN AVERAGE OF ALL TRANSACTIONS OF EXPORT TO UNRE LATED PARTIES DURING THE RELEVANT PREVIOUS YEAR. 27 ITA NO.882/DEL/2008 BY TAKING THE AVERAGE PRICE AS AFORESAID, VARIATION IN PRICES OF THE TRANSACTIONS DURING THE YEAR HAVE BEEN NORMALIZED. ON THE OTHER HAND, COMPARISON OF SUCH AVERAGE PRICE OF EXPORTS T O UNRELATED PARTIES WITH PRICES OF INDIVIDUAL TRANSACTIONS OF E XPORTS TO GMI DOES NOT RESULT IN COMPARISON OF LIKE WITH LIKE. IT IS FURTHER SUBMITTED THAT EACH CONSIGNMENT OF EX PORT OF CDS ARE INTER LINKED IN AS MUCH AS SUCH TRANSACTIONS ARE EN TERED INTO HAVING REGARD TO THE INTERNATIONAL SET OFF ON ACCOUNT OF V ARIATION IN PRICES OF THE VARIOUS INTERNATIONAL TRANSACTIONS ENTERED I NTO DURING THE YER. FOR THE PURPOSE OF MEANINGFUL COMPARISON, IT WOULD THEREFORE BE APPRECIATED THAT EXPORT OF CDS DURING THE YEAR TO T HE ASSOCIATED ENTERPRISE IS TO BE CONSTRUED AS ONE TRANSACTION AN D THE COMPARISON OUGHT TO BE MADE OF THE AVERAGE PRICE OF EXPORT OF GMI WITH THE AVERAGE OF ALL THE PRICES IN UNCONTROLLED COMPARABL E TRANSACTIONS DURING THE RELEVANT PREVIOUS YEAR. THE COMPARISON SOUGHT TO BE MADE BY THE TPO BETWEEN PRICES OF INDIVIDUAL TRANSACTION AND THE AVERAGE PRICE OF UNC ONTROLLED COMPARABLE TRANSACTIONS IS, THEREFORE, NOT APPROPRI ATE AND NOT IN ACCORDANCE WITH THE PROVISIONS OF THE LAW. D) WITHOUT PREJUDICE, THE ADJUSTMENT AT BEST SHOULD BE RESTRICTED TO THE AMOUNTS OF PROFITS RETAINED BY THE ASSOCIATE D ENTERPRISE IT IS RESPECTFULLY SUBMITTED THAT AS PER AUDITED A CCOUNTS, GMI EARNED GROSS PROFIT OF USD 3,19,231 ON TOTAL SALES OF USD 75,54,668, THE COST OF GOODS SOLD BEING USD 72,35,4 37. HOWEVER, GMI HAD INCURRED LOSS OF USD 8,65,179 AFTER TAKING INTO ACCOUNT THE OPERATING EXPENSES INCURRED FOR DISTRIBUTING TH E APPELLANTS PRODUCTS. THUS, APPELLANT COULD NOT BE EXPECTED TO HAVE MADE MORE PROFITS THAN THE COMBINED PROFIT MADE THE APPE LLANT AND ITS AE I.E. GMI, IF IT WERE TO MAKE SALES DIRECTLY TO T HE THIRD PARTY CUSTOMERS. FURTHER, YOUR HONOURS ATTENTION IS INCITED TO THE RECENT DECISION FO THE HONBLE TRIBUNAL IN THE CASE OF GLOBE VANTEDGE (P) LTD. VS. DCIT (ITA NO. 2763 & 2764/D/2009) WHEREIN IT IS HEL D THAT ADJUSTMENT ON ACCOUNT OF ARMS LENGTH PRICE OF INTE RNATIONAL TRANSACTIONS CANNOT EXCEED THE MAXIMUM ARMS LENGTH PRICE I.E. THE AMOUNT RECEIVED BY THE ASSOCIATED ENTERPRISE FROM T HE CUSTOMER AND THE ACTUAL VALUE OF INTERNATIONAL TRANSACTIONS. THE HOBLE 28 ITA NO.882/DEL/2008 JURISDICTIONAL HIGH COURT VIDE ORDER DATED 14.3.201 3 (IN ITA NOS 1828/2010, 1829/2010 & 1254/2011) HAD DISMISSED THE REVENUES APPEAL AGAINST THE SAID ORDER OF THE TRIBUNAL. THE SPECIAL LEAVE PETITION (SLP) OF THE REVENUE AGAINST THE SAID ORDE R HAS ALSO BEEN DISMISSED BY THE SUPREME COURT VIDE ORDER DATED 2.1 .2014 (CC NO. 22166 OF 2013) E) WITHOUT PREJUDICE, BENEFIT OF +(-)5% AS PER THE PROVISO TO SECTION 92C(2) OF THE INCOME TAX ACT, 1961 TO BE PR OVIDED WHILE COMPUTING THE ARMS LENGTH PRICE: IT IS RESPECTFULLY SUBMITTED THAT, THE TPO WHILE C OMPUTING THE ADJUSTMENT TO THE ARMS LENGTH PRICE APPLIED CUP ME THOD BY TAKING THE DIFFERENCE BETWEEN AVERAGE OF PRICES OF EXPORT TO UNRELATED PARTIES AND UNCONTROLLED PRICES FOR EACH EXPORT TO GMI. 15. THE LEARNED DR SUPPORTED THE ADJUSTMENTS MADE I N THE ORDERS OF AUTHORITIES BELOW. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL PLACED ON RECORD. TAKING UP THE FIRST OBJ ECTION VIZ-A- VIS SELLING AND DISTRIBUTION EXPENSES, THE LEARNED AR HAS CONTENDED THAT TPO/CIT(A) HAVE NOT CONSIDERED THE A CTUAL EXPENDITURE INCURRED BY GMI IN DISTRIBUTION OF PROD UCTS IN USA. IT HAS BEEN CONTENDED THAT THE TPO HAS MADE ADJUSTM ENT ON ACCOUNT OF MARKETING AND SELLING EXPENSES INCURRED FOR PROMOTING THE SALE OF PRODUCTS IN EUROPEAN COUNTRIE S AND REDUCED THE SAME FROM THE PRICE CHARGED FROM UNRELA TED PARTIES IN EUROPE. IT HAS BEEN CONTENDED THAT THE ABOVE AP PROACH DOES 29 ITA NO.882/DEL/2008 NOT RECOGNIZE THE BUSINESS REALITIES THAT MUCH HIGH ER EXPENSES/COST IS REQUIRED TO BE INCURRED FOR SELLIN G THE PRODUCTS IN USA, WHERE THE ASSESSEE DOES NOT HAVE A SUBSTANT IAL MARKET PRESENCE AS COMPARED TO THE EXPENDITURE REQUIRED TO BE INCURRED BY THE ASSESSEE IN EUROPE. THE CIT(A) HAD CONSIDERE D THE ABOVE OBJECTION AND HAS HELD AS UNDER: 9.4.4 THE TPO DURING THE TP PROCEEDINGS HAD ASKED THE APPELLANT TO FILED DETAILS RELATING TO THE RETAIL P RICES CHARGED BY GMI IN THE US MARKET BUT THE SAME WAS NOT FURNIS HED BY THE APPELLANT . IN ADJUDICATING THE ISSUE RELATING TO COMPARABILITY OF THE PRICES CHARGED IN THE INTERNAT IONAL TRANSACTIONS WITH THE RETAILS PRICES CHARGED IN THE EUROPEAN MARKET WOULD HAVE BEEN EASIER HAD THIS INFORMATION BEEN MADE AVAILABLE TO THE TPO. THE ISSUES RELATING TO T HE COMPUTATION OF THE ADJUSTMENT FACTORS WOULD HAVE BE EN FACILITATED BY THIS INFORMATION. HOWEVER, THE BURDE N OF PROOF WAS NOT DISCHARGED BY THE APPELLANT. THEREFORE, JUDICIAL NOTICE OF THIS FACT SHOULD BE TAKEN WHILE WORKING O UT THE ADJUSTMENT FACTORS. 9.4.5 THE APPELLANT HAD ADDED RS. 1.11 PER CD TO TH E AVERAGE WHOLE SALE PRICES CHARGED FROM GMI ON ACCOUNT OF SE LLING AND DISTRIBUTION EXPENSES INCURRED BY GMI IN SELLIN G THE APPELLANTS PRODUCT IN USA . THE TPO DID NOT ACCEPT THIS ADJUSTMENT AND ON THE CONTRARY MADE THIS ADJUSTMENT TO THE AVERAGE RETAIL PRICE BY WAY OF DEDUCTING RS. 0.27 P ER CD FROM THE PRICE CHARGED FROM THE UNRELATED PARTIES I N NON- US DESTINATIONS. IN COMING UP WITH THE ADJUSTMENT OF R S. 0.27 PER CD, THE TPO ANALYZED VARIOUS MINOR HEADS OF EXP ENSES UNDER THE BROAD HEAD OF SELLING & DISTRIBUTION EXP ENSES, WHICH HAS BEEN DISCUSSED IN DETAIL AT PARA NO. 5.3 (V) & (VI) OF THIS ORDER. DURING THE COURSE OF APPELLATE PROCE EDINGS, THE APPELLANT HAS RAISED OBJECTIONS TO THE ADJUSTMENT M ADE BY THE TPO ON THE GROUND THAT THE TPO HAD NOT APPRECIATED THE BUSINESS REALITIES OF THE REQUIREMENT FOR THE SUBSI DIARY TO 30 ITA NO.882/DEL/2008 INCUR HIGHER EXPENSES PLEADED THAT TO ACCOUNT FOR THESE SELLING AND DISTRIBUTION EXPENSES INCURRED BY GMI, ADJUSTMENTS SHOULD HAVE BEEN MADE TO THE WHOLESALE PRICE CHARGED BY THE APPELLANT FROM GMI BY A SUM OF RS. 1 .11 PER CD. 9.4.6 IT HAS ALREADY BEEN HELD AT PARA 9.1 OF THIS ORDER THAT THE CORRECT WAY OF MAKING ADJUSTMENT IS TO START FROM T HE EXPORT PRICES CHARGED BY THE APPELLANT FROM THE UNRELATED PARTIES IN NON- US DESTINATION S. THEREFORE., THE EXPENSES INC URRED BY GMI TO DEVELOP A MARKET FOR THE APPELLANTS PRODUCT DO NOT HAVE ANY RELEVANCE FOR THE PURPOSE OF MAKING ADJUST MENT ON ACCOUNT OF SELLING AND DISTRIBUTION EXPENSE. WHAT I S RELEVANT FOR THE PURPOSE OF THIS ADJUSTMENT IS THE SELLING A ND DISTRIBUTION EXPENSES INCURRED BY THE APPELLANT FOR DISTRIBUTING ITS PRODUCT IN NON- US LOCATIONS. THE TPO IN HIS ORDER HAS COMPUTED RS. 0.27 PER CD AS THE AMOUNT OF ADJUSTMENT THAT IS REQUIRED TO BE MADE ON ACCOUNT O F SELLING AND DISTRIBUTION EXPENSES. THE APPELLANT HAS NOT POINTED OUT ANY DEFECT IN THE ANALYSIS DONE BY THE TPO. EVEN IF IT IS ACCEPTED, AS ALLEGED BY THE APPELLANT THAT IT DID N O T CONCUR WITH THE METHODOLOGY ADOPTED BY THE TPO FOR THIS ADJUSTMENT, THE FACT REMAINS THAT THE TPO HAD COMPU TED THIS ADJUSTMENT FACTOR OBJECTIVELY. UNDER THESE CIRCUMST ANCES, I AM INCLINED TO AGREE WITH THE ANALYSIS DONE BY THE TPO IN COMING UP WITH RS. 0.27 PER CD AS THE ADJUSTMENT FA CTOR FOR SELLING AND DISTRIBUTION EXPENSES. THE TPO HAS ANAL YZED EACH OF THE MINOR HEADS OF EXPENSES UNDER THE BROAD HEAD OF SELLING AND DISTRIBUTION EXPENSES AND RECORDED HI S FINDINGS AS TO WHICH OF THESE EXPENSES ARE TO BE EXCLUDED FO R WORKING OUT THE ADJUSTMENT FACTOR. THEREFORE, I AM OF THE C ONSIDERED VIEW THAT THIS COMPUTATION REQUIRES NO INTERFERENCE AND THE SAME IS TO BE ACCEPTED FOR THE COMPUTATION OF ARMS LENGTH PRICE . 17. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND ORD ER OF CIT(A), WE FIND NO REASONS TO DEVIATE FROM THE ABOV E CONCLUSION. RULE 10B(3) CLEARLY PROVIDES THAT REAS ONABLY ACCURATE ADJUSTMENTS ARE TO BE MADE TO ELIMINATE TH E MATERIAL 31 ITA NO.882/DEL/2008 EFFECT OF DIFFERENCES BETWEEN CONTROLLED TRANSACTIO NS AND UNCONTROLLED TRANSACTION. THE ARGUMENT OF THE COU NSEL ON THE PREMISE THAT ADJUSTMENT DOES NOT RECOGNIZE THE BUSI NESS REALITIES THAT MUCH HIGHER EXPENSES/COST IS REQUIRED TO BE IN CURRED FOR SELLING THE PRODUCTS IN USA HAS ALREADY BEEN CONSID ERED BY THE CIT(A) WHO HAS HELD IN THIS REGARD THAT THE CORRECT WAY OF MAKING ADJUSTMENT IS TO START FROM THE EXPORT PRICE S CHARGED BY THE ASSESSEE FROM THE UNRELATED PARTIES IN NON- US DESTINATION S. THEREFORE., THE EXPENSES INCURRED BY GMI TO DEVELOP A MARKET FOR THE ASSESSEES PRODUCT DO NOT HAVE ANY RELEVANC E FOR THE PURPOSE OF MAKING ADJUSTMENT ON ACCOUNT OF SELLING AND DISTRIBUTION EXPENSE. WHAT IS RELEVANT FOR THE PURP OSE OF THIS ADJUSTMENT IS THE SELLING AND DISTRIBUTION EXPENSES INCURRED BY THE ASSESSEE FOR DISTRIBUTING ITS PRODUCT IN NON- U S LOCATIONS. THE TPO IN HIS ORDER HAS COMPUTED RS. 0.27 PER CD A S THE AMOUNT OF ADJUSTMENT THAT IS REQUIRED TO BE MADE ON ACCOUNT OF SELLING AND DISTRIBUTION EXPENSES. IN THIS CASE TH E TPO HAS COMPUTED RS. 0.27 PER CD AS THE AMOUNT OF ADJUSTMEN T THAT IS REQUIRED TO BE MADE ON ACCOUNT OF SELLING AND DISTR IBUTION 32 ITA NO.882/DEL/2008 EXPENSES. THE ASSESSEE HAS NOT POINTED OUT ANY DEF ECT IN THE ANALYSIS DONE BY THE TPO AND, ACCEPTED BY CIT(A). THIS METHODOLOGY ALSO IS IN ACCORDANCE WITH THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF RAMPGREEN S OLUTIONS (P) LTD. VS. CIT ITA NO. 102/2015 WHEREIN THE HONB LE HIGH COURT HELD THAT COMPARABLES SELECTED FOR THE BENCHM ARKING ANALYSIS SHOULD BE FUNCTIONALLY SIMILAR AND SUBJECT TO SIMILAR BUSINESS ENVIRONMENT AND RISKS. IN VIEW OF THE ABO VE THE CONTENTION RAISED BY THE COUNSEL IS HELD TO BE NOT MAINTAINABLE AND THEREFORE REJECTED. 18. NOW TAKING UP THE SECOND CONTENTION OF THE LEAR NED COUNSEL VIZ-A-VIZ ADJUSTMENT ON ACCOUNT OF GEOGRAPH ICAL DIFFERENCES, IT IS NOTED THAT CIT(A) HAD CONSIDERED THE ABOVE OBJECTION AND HELD AS UNDER: 9.5.2 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANT AND APPRAISED THE EVIDENCE ON RECORD. THERE IS NO DOUBT THAT GEOGRAPHICAL MARKET IS ONE OF THE MAJ OR ECONOMIC CIRCUMSTANCES THAT MUST BE EXAMINED BEFORE COMING TO A CONCLUSION REGARDING COMPARABILITY BETW EEN TWO SETS OF TRANSACTIONS. IN FACT ECONOMIC CIRCUMSTANCE S INCLUDE THE FOLLOWING OTHER FACTORS APART FROM THE GEOGRAPH ICAL LOCATION THAT NEED TO BE CONSIDERED FOR COMPARING T WO SETS OF TRANSACTIONS.: GEOGRAPHIC LOCATION 33 ITA NO.882/DEL/2008 SIZE OF THE MARKET COMPETITION AND SIZE AND IMPORTANCE OF COMPETITORS AVAILABILITY OF SUBSTITUTE GOODS AND SERVICES. LEVELS OF SUPPLY AND DEMAND CONSUMER PURCHASING POWER GOVERNMENT REGULATIONS COSTS OF PRODUCTION (COSTS OF LOCAL LABOR AND RAW MATERIALS) IT TWO COUNTRIES REPRESENT TWO DIFFERENT MARKETS, A DJUSTMENTS HAVE TO BE MADE BY TAKING INTO ACCOUNT ALL THE RELE VANT FACTORS. HOWEVER, BEFORE CONSIDERING ANY ADJUSTMENT , IT IS TO BE KEPT IN MIND AS DISCUSSED IS TO DEFEND ITS USE T HROUGH APPROPRIATE PARTY WHO CLAIMS AN ADJUSTMENT IS TO DE FEND ITS USE THROUGH APPROPRIATE DOCUMENTATION. I AM OF THE CONSIDERED VIEW THAT IN THE PRESENT CASE, THE APPEL LANT WHILE CLAIMING 10% LOADING ON ACCOUNT OF GEOGRAPHICAL MAR KET DIFFERENCE HAS NOT BROUGHT ON RECORD SUFFICIENT EVI DENCE TO SUBSTANTIATE THIS CLAIM. THE REASONS FOR COMING TO THIS CONCLUSION ARE SUMMARIZED BELOW: I) SEPARATE COUNTRIES DO NOT NECESSARILY MEAN SEPAR ATE GEOGRAPHICAL MARKETS. IT IS POSSIBLE THAT A TAXPAYE R APPROACHES A GROUP OF SEVERAL COUNTRIES AS A SINGLE HOMOGENOUS MARKET WHERE IT DELIVERS SIMILAR PRODUCT S, PERFORMS SIMILAR FUNCTIONS, USE SIMILAR FUNCTIONS, USES SIMILAR ASSETS, ASSUMES SIMILAR RISKS, ESTABLISHES SIMILAR CONTRACTUAL TERMS AND DEVELOPS A SINGLE BUSINESS STRATEGY. IT W AS INCUMBENT ON THE PART OF THE APPELLANT TO COME UP W ITH DOCUMENTATION TO SHOW THAT IT TREATS THE US & THE E UROPEAN MARKET DIFFERENTLY. BUT THE SAME WAS NOT DONE AT AN Y STAGE OF THE PROCEEDINGS. II) THE ARGUMENT OF PURCHASING POWER PARITY CANNOT BE LOOSELY USED AS IT HAS CONNECTIONS WITH NUMBER OF O THER ECONOMIC VARIABLES. THE PURCHASING POWER PARITY THE REON ASSERTS THAT THE EXCHANGE RATE BETWEEN TWO CURRENCI ES MUST BE PROPORTIONAL TO THE PRICE LEVEL OF TRADED GOODS IN THE TWO COUNTRIES. PURCHASING POWER PARITY IS ALSO INTIMATE LY TIED THE INTEREST RATE PARITY. THE INTEREST RATE PARITY THER EON ORIGINATES FROM THE LINK BETWEEN INTEREST RATES AND INFLATION RATES. THUS, THE INTEREST RATES, EXCHANGE RATES, PRICE LEVEL AND FOREIGN 34 ITA NO.882/DEL/2008 EXCHANGE RATES FORM AN INTEGRATED SYSTEM. VIOLATION S OF PURCHASING POWER PARITY LEAD TO ARBITRAGE OPPORTUNI TIES AND GIVE RISE TO A GRAY MARKET. THEREFORE, FOR CLAIMING ANY ADJUSTMENT FACTOR. NO SUCH DOCUMENTATION WAS DONE B Y THE APPELLANT AND THE ADJUSTMENT FACTOR OF 10% WAS USED WITHOUT ANY FIRM BASIS. III) THE REFERENCE TO BIG MAC INDEX BY THE APPELLAN T IS ALSO MISPLACE. THE PRICE OF A BURGER IN US COULD BE LOWER FOR A NUMBER OF REASONS SUCH AS RAW MATERIAL COST, DEMA ND CONDITIONS, FOOD HABITS ETC. FOR THE EUROPEAN MARKE T, A BURGER COULD BE A NOVELTY, HAVE A DIFFERENT SET OF ELASTIC ITY OF DEMAND AND HENCE CARRYING A PREMIUM PRICE. THE SAME ANALOGY COULD NOT BE TAKEN FOR CDS WITHOUT GETTING INTO THE FACTORS RESPONSIBLE FOR PRICES IN TWO DIFFERENT COU NTRIES. IN ANY CASE, THERE IS NO PRODUCT SIMILARITY BETWEEN A BURGER AND A CD FOR MEANING COMPARISON. THE RELIANCE ON PRICES PAID BY IMATION IS ALSO MISP LACED AS IT PERTAINS TO THE SUBSEQUENT YEAR AND DO NOT REFLECT CONTEMPORANEOUS MARKET SITUATIONS. V) ADJUSTMENT RELATING TO HIGHER COST OF PERFORMING DISTRIBUTION FUNCTION IN US COMPARED TO EUROPE HAS ALREADY BEEN TAKEN CARE OF THROUGH SELLING AND DISTRIBUTION EXPENSES INCURRED BY THE APPELLANT. SIMILARLY, REFERENCE TO HIGHER LABOUR COST IS US IS ALSO MISPLACED AS IT REFER TO SELLING & DISTRIBUTION COST ONLY. VI) ONE REASON FOR CLAIMING THIS ADJUSTMENT FOR GEOGRAPHICAL DIFFERENCE IS ALSO ON ACCOUNT OF HIGHE R COST ON PRINTING & PACKAGING FOR SELLING IN EUROPE. SINCE T HE TPO HAS ALREADY ALLOWED FOR ADJUSTMENT ON ACCOUNT OF FR EIGHT DIFFERENTIAL WHICH INCLUDE PACKING, FREIGHT AND FOR WARDING, THERE IS NO NEED TO MAKE ADJUSTMENT FOR THIS FACTOR UNDER THIS HEAD AGAIN. VII) THERE REFERENCE TO LOWER PRICES OF HOME ELECTR ONICS AND HOUSEHOLD APPLIANCES IN US IS ALSO MISPLACED AS THESE BELONG TO DIFFERENT PRODUCT CATEGORIES. 35 ITA NO.882/DEL/2008 VIII) THE ISSUE RELATING TO PRICE DIFFERENCE ON ACC OUNT OF MEMORY SIZE IS ALSO NOT RELEVANT TO COMPUTE AN ADJU STMENT FACTOR FOR GEOGRAPHICAL DIFFERENCES. IX) THE TPO HAS POINTED OUT THAT THE EUROPEN MARKET IN FACT INCLUDED ALL NON- US DESTINATIONS AND THERE WA S NO PRICING PATTERN POINTED OUT BY THE APPELLANT ON THE BASIS OF COUNTRY WISE DESTINATIONS. 9.5.3 IT CAN BE SEEN FROM THE FOREGOING ANALYSIS T HAT THE COMPUTATION OF THE ADJUSTMENT FACTOR AT 10% IS NOT TRANSPARENT AND PROPERLY DOCUMENTED. THE APPELLANT THUS FAILED TO DISCHARGE THE ONUS CAST ON IT FOR SUBSTAN TIATING ITS CLAIM OF ADJUSTMENT ON ACCOUNT OF GEOGRAPHICAL DIFF ERENCE. UNDER THESE CIRCUMSTANCES, I AM OF THE CONSIDERED V IEW THAT THE AD- HOC ADJUSTMENT OF 10% MADE BY THE APPELLANT IS NOT SUSTAINABLE IN THE ABSENCE OF SUPPORTIVE EVIDENCES. THEREFORE, IT IS HELD THAT THE TPO WAS CORRECT IN N OT ALLOWING ANY ADJUSTMENT ON ACCOUNT GEOGRAPHICAL MARKET DIFFE RENCE AND IT DID NOT IN ANY IMPROVE THE RELIABILITY OF TH E ARMS LENGTH PRICES COMPUTED. 19. FROM THE AFORESAID CONCLUSION IT IS APPARENT TH AT THE CIT(A) HAS NOT DISPUTED THAT GEOGRAPHICAL ADJUSTMEN T IS TO BE ALLOWED FOR COMPARING TWO SETS OF TRANSACTIONS. HO WEVER ON THE FACTS OF THE CASE OF THE ASSESSEE ON THE GROUND AS SUFFICIENT EVIDENCE WAS NOT BROUGHT ON RECORD TO SUBSTANTIATE THE CLAIM. THE QUESTION THEREFORE WHICH EMERGES IS THAT ARE TH ERE SUFFICIENT CLAIM OF THE ASSESSEE. THE ASSESSEE HAS RELIED ON BIG MAP INDEX TO CONTEND THAT US IS A LOWER PRICE MARKET AS COMPA RABLE EUROPE. IT HAS ALSO BEEN CONTENDED THAT ASSESSEE I S A RECENT 36 ITA NO.882/DEL/2008 ENTRANT IN US MARKET FOR EXPORT OF CDS AND DOES NOT HAVE ANY PRESENCE OR BRAND RECOGNITION. IT HAS BEEN STATED THAT PRODUCTS ARE SOLD IN USA THROUGH VARIOUS SHOPPING MALLS/SUPE R MARKETS WHICH FOLLOW JUST IN TIME (JIT) APPROACH I.E., THE RETAILER WOULD RENT OUT A SHELF SPACE TO THE DISTRIBUTOR WHO IS RE QUIRED TO SUPPLY/PLACE ON THE SHELF HIS PRODUCTS IN SPECIFIED QUANTITY FOR SALE TO THE CUSTOMER. IT HAS BEEN STATED THAT THE DISTRIBUTOR HAS TO MAINTAIN REQUISITE INVENTORY AND IS TO REPLENISH TH E REQUISITE QUANTITY OF CDS AS SOON AS THE SHELF STOCK IS REDUC ED TO A MAINTAIN LEVEL AND THE COST OF OPERATIONS FOR THE D ISTRIBUTOR IN USA IS MUCH HIGHER. ALSO, IT HAS BEEN STATED THAT, THE DISTRIBUTOR IN USA IS DEALING ONLY IN CDS EXPORTED BY THE ASSESSEE FROM INDIA AND IS THEREFORE, INCURRING SIG NIFICANTLY HIGHER SELLING EXPENSES ON DISTRIBUTION/RESALE OF P RODUCTS IN THAT COUNTRY. 20. HAVING REGARD TO THE ABOVE WE ACCEPT THE CLAIM OF THE ASSESSEE FOR ADJUSTMENT. THE CIT(A) OR THE TPO HAV E NOT DENIED OR DISPUTED ANY OF THE ABOVE FACTUAL SUBMISS ION TO THE ASSESSEE. A REJECTION OF A CLAIM FOR GENERAL CONSI DERATION FOR 37 ITA NO.882/DEL/2008 GRANTING AN ECONOMIC ADJUSTMENT WHICH ON THE FACE O F FIT IS TENABLE IS NOT A CORRECT WAY TO DISREGARD THE FACTS BROUGHT ON RECORD. THE REVENUE OUGHT TO HAVE APPRECIATED THE B USINESS AND THE NATURE OF THE MARKET. THE OBSERVATION OF THE T PO THAT THE EXPORT PRICE OF 10.4-I-I-0 (JEWEL-CASE CD BOX) TO L G ELECTRONICS INC. IN USA WAS RS. 13.59 PER CD WHILE SALE PRICES OF THE SAME PRODUCT IN POLAND AND GERMAN, WAS RS. 1 2.4 PER CD IS ALSO FOUND TO BE MISCONCEIVED AND THEREFORE FOR THE REASONS STATED ABOVE WE ALLOW THE ADJUSTMENT AS CLAIMED BY THE ASSESSEE. 21. ACCORDINGLY IF THE AFORESAID ADJUSTMENT IS APPL IED IT IS SEEN THAT THE TRANSACTION OF THE ASSESSEE WITH THE AE IS AT THE HIGHER THAN THE ARMS LENGTH PRICE AND THEREFORE TH E ADJUSTMENT SO MADE AND SUSTAINED IS DELETED. CONSEQUENTLY WE ARE NOT INCLINED TO TAKE UP REMAINING OBJECTION RAISED BY T HE LEARNED COUNSEL OTHER THAN TO HOLD THAT WE FIND MERIT THE S UBMISSION THAT SINCE THE AE (GMI) HAD INCURRED LOSS THEREFORE ASSE SSEE COULD NOT BE EXPECTED TO HAVE MADE MORE PROFITS THAN THE COMBINED PROFIT MADE THE ASSESSEE AND ITS AE I.E. GMI, IF IT WERE TO MAKE 38 ITA NO.882/DEL/2008 SALES DIRECTLY TO THE THIRD PARTY CUSTOMERS. THE S UPPORT IS DRAWN FROM THE DELHI BENCH OF TRIBUNAL IN THE CASE OF GLO BE VANTEDGE (P) LTD. VS. DCIT (ITA NO. 2763 & 2764/D/2009) WHER EIN IT IS HELD THAT ADJUSTMENT ON ACCOUNT OF ARMS LENGTH PRI CE OF INTERNATIONAL TRANSACTIONS CANNOT EXCEED THE MAXIMU M ARMS LENGTH PRICE I.E. THE AMOUNT RECEIVED BY THE ASSOCI ATED ENTERPRISE FROM THE CUSTOMER AND THE ACTUAL VALUE OF INTERNATI ONAL TRANSACTIONS. THE HONBLE JURISDICTIONAL HIGH COUR T VIDE ORDER DATED 14.3.2013 (IN ITA NOS 1828/2010, 1829/2010 & 1254/2011) HAD DISMISSED THE REVENUES APPEAL AGAIN ST THE SAID ORDER OF THE TRIBUNAL. THE SPECIAL LEAVE PETITION (SLP) OF THE REVENUE AGAINST THE SAID ORDER HAS ALSO BEEN DISMIS SED BY THE SUPREME COURT VIDE ORDER DATED 2.1.2014. RELIANCE IS ALSO PLACED ON THE JUDGMENT OF HONBLE HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P) LTD. VS. CIT 374 ITR 118 WHEREIN IT HAS BEEN HELD AS UNDER: 77. AS A CONCEPT AND PRINCIPLE CHAPTER X DOES NOT ARTIFICIALLY BROADEN, EXPAND OR DEVIATE FROM THE CONCEPT OF 'REA L INCOME'. 'REAL INCOME', AS HELD BY THE SUPREME COURT IN POON A ELECTRICITY SUPPLY CO. LTD. V. CIT [1965] 57 ITR 521, MEANS PRO FITS ARRIVED AT ON COMMERCIAL PRINCIPLES, SUBJECT TO THE PROVISIONS OF THE ACT. PROFITS AND GAINS SHOULD BE TRUE AND CORRECT PROFIT S AND GAINS, 39 ITA NO.882/DEL/2008 NEITHER UNDER NOR OVER STATED. ARM'S LENGTH PRICE S EEKS TO CORRECT DISTORTION AND SHIFTING OF PROFITS TO TAX THE ACTUA L INCOME EARNED BY A RESIDENT/DOMESTIC AE. THE PROFIT WHICH WOULD HAVE ACCRUED HAD ARM'S LENGTH CONDITIONS PREVAILED IS BROUGHT TO TAX . MISREPORTING, IF ANY, ON ACCOUNT OF NON-ARM'S LENGTH CONDITIONS RESU LTING IN LOWER PROFITS, IS CORRECTED. 22. HAVING REGARD TO THE ABOVE AND FOR THE REASONS STATED ABOVE THE ADJUSTMENTS MADE IS DELETED. 23. IN THE RESULT APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 14 TH DAY OF DECEMBER, 2015. SD/- SD/- (S.V.MEHROTRA) (A.T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : THE 14 TH DAY OF DECEMBER, 2015 TS COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A)-XX, NEW DELHI. 5. CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.