Income Tax Appellate Tribunal - Delhi
Ge India Industrial (P) Ltd.,, Haryana vs The Acit.,Kheda Circle,, Nadiad on 4 December, 2018
In the Income-Tax Appellate Tribunal,
Delhi Bench 'I-2', New Delhi
Before : Shri Bhavnesh Saini, Judicial Member And
Shri L.P. Sahu, Accountant Member
ITA No. 2781/Ahd/2012
Assessment Year: 2008-09
GE India Industrial Private Limited, vs. ACIT, Khedia Circle
Building No. 7A, 4 - 6 Floor, DLF
th th Nadiad.
Cyber City, DLF Phase-III, Sector-25A,
Gurgaon. (PAN-AAACG4901D)
(Applicant) (Respondent)
Applicant by Sh. Sachit Jolly, Advocate &
Sh. Siddharth Joshi, Advocate
Respondent by Sh. H.K. Choudhary, CIT/DR
Date of Hearing 11.10.2018
Date of Pronouncement 04.12.2018
ORDER
Per L.P. Sahu, A.M. :
This appeal has been filed by the assessee against the final order passed by the Assessing Officer u/s. 143(3) r.w.s. 144C(13) dated 31.10.2012 on the following grounds :
1. "That the order of the Ld. AO, pursuant to the directions given by the Hon'ble DRP, to the extent detrimental to the Appellant, is perverse, erroneous on facts and bad in law and has been passed in violation of the principles of natural justice.
2.1 That the Ld. AO and Ld. DRP erred in denying the set off of unabsorbed depreciation to the extent of Rs. 46,29,00,427.ITA No. 278/Del/2012 2
2.2 That the Ld. AO and Ld. DRP has erred in treating the set off of unabsorbed depreciation of Rs.46,29,00,427 as claimed in the return of income for the year under consideration as set off of brought forward business loss.
3. That the Ld. AO and Ld. DRP erred in disallowing the expenditure booked under the head 'warranty and replacement expenses' of Rs.5,27,13,406.
4.1 That the Ld. AO and Ld. DRP erred in disallowing the claim for bad debts written off in profit' & loss account of Rs. 4,34,64,346.
4.2 The Ld. AO and Ld. DRP erred in not allowing the deduction of 'bad debts' in the years in which the said bad debts have actually crystallized.
4.3 The Ld.AO and Ld. DRP erred in not allowing deduction of 'bad debts' as loss in the normal course of business under section 29 of the Act.
4.4 Without prejudice to the above and even assuming but not admitting, that the bad debts written off are disallowed in the current year under consideration, the corresponding provision made and offered to tax in the past years ought to be allowed in the respective years.
5. That the Ld. AO has erred in not granting credit of taxes deducted at source to the extent of Rs6,71,995.
6. that the Ld. AO has erred in not granting the set off of brought forward MAT credit of Rs.10,80,83,186 under section 115JAA of the Act.
7. That the Ld. AO and the Ld. DRP, while making transfer pricing adjustment to the various divisions of the Appellant, erred in upholding the rejection of comparability analysis of the Appellant in the Transfer Pricing (TP) documentation by the Ld. Transfer Pricing Officer ('Ld. TPO') and confirming the comparability analysis adopted by the Ld. TPO.
8. That the Ld. AO and the Ld. DRP, while making transfer pricing adjustment to the various divisions of the Appellant, erred in disregarding application of prior year data as used by the Appellant in the TP documentation and holding that only current year (i.e. Financial Year 2007- 08) data for comparable companies should be used.
ITA No. 278/Del/2012 39. That the Ld. AO and the Ld. DRP, while making transfer pricing adjustment to the various divisions of the Appellant, erred in rejecting the turnover filter applied by the Appellant in the TP documentation and applying the lower turnover threshold limit of 50% less than the turnover of the respective divisions of the Appellant to reject companies as comparables.
10. That the Ld. AO and the Ld. DRP, while making transfer pricing adjustment to the Power Controls and Water and Process Technologies division, erred in making an adjustment for the complete segment level, including the domestic transactions as well.
11. That the Ld. AO and the Ld. DRP erred in upholding the adjustment of INR 2,25,93,835 in the Power Controls Division (Manufacturing Segment) and in upholding the TP adjustment even for the non associated enterprise transactions of the Appellant.
12. That the Ld. AO and the Ld. DRP erred in upholding the adjustments of INR 25,97,724 in the Lighting division (Distribution Segment) of the Appellant by the Ld. TPO.
13. That the Ld. AO and the Ld. DRP erred in confirming the use of Transactional Net Margin Method as the most appropriate method by the Ld. TPO instead of the use of Resale Price Method by the Appellant for the Lighting division.
14. That the Ld. AO and Ld. DRP erred in upholding the adjustment of INR 1,18,33,756 to the Transportation division of the Appellant by the Ld. TPO and in doing so erred in not providing appropriate adjustment on account of higher import content.
15. That the Ld. AO and the Ld. DRP erred in upholding the adjustment of INR 3,12,02,495 in the Water and Process Technologies Division (Manufacturing Segment) and in upholding the TP adjustment even for the non associated enterprise transactions of the Appellant.
16. That the Ld. AO and the Ld. DRP, erred in upholding the adjustment of INR 6,27,66,919 in respect of the Marketing Support services rendered by different divisions, and erred in not granting appropriate working capital adjustments.
ITA No. 278/Del/2012 417. That the Ld. AO/ Ld. DRP erred, in law and facts, in computing the arms length price without giving benefit of +/- 5 percent under the proviso to section 92C of the Act.
18. That the Ld. AO erred in consequently levying interest under section 234B of the Act to the extent of Rs. 12,35,68,005.
19. That the Ld. AO erred in excess quantification and levy of interest of Rs 12,27,135 under section j 234C of the Act.
20. That the Ld. AO erred in consequently levying interest under section 234D of Rs 1,46,99,349 and withdrawing interest under section 244A of Rs 91,88,339."
2. The brief facts of the case are that GE India Industrial Private Limited ('GEIIPL', the 'Company' or 'the Appellant') is a company incorporated in India with its principal location in Nadiad, Gujarat. The assessee was engaged in the business of manufacturing and trading of electric lamps and other electrical goods, manufacturing and sale of speciality chemicals, sale and service of vibration monitoring systems and its related parts, export and marketing of computer software, wind turbine generators and providing after sales services, providing training to employees of G.E. group etc. During the financial year 2007- 08, twelve divisions of GEIIPL viz. Plastics division, Lighting division, Transportation division, Water and Process Technologies division, Druck division, Bently Nevada India division, Bently Nevada Sales & Service division, Power Controls division, Wind division, Training division, Marketing Support division, and Inspection technologies division had related party transactions. The international transactions of GEIIPL, relevant to the Assessment Year 2008-09 were referred for determination of arm's length price by the Assistant Commissioner of Income Tax, Kheda Circle, Nadiad ('Assessing Officer' or 'AO') to the Additional Commissioner of Income-tax (TPO)-I, Ahmedabad ('Transfer ITA No. 278/Del/2012 5 Pricing Officer' or 'TPO'). The learned ('Ld.') TPO after the assessment proceedings under Section 92C of the Income Tax Act, 1961 (the 'Act') proposed an adjustment of INR13,92,32,889in respect of certain international transactions of some of the divisions of the Appellant,as per the order dated October 28, 2011 (the 'TP Order').
3. Subsequently, the AO issued the draft Assessment Order, inter alia, incorporating the adjustment made by the TPO to the transfer price of the Appellant. Against the draft assessment order of the AO, the Appellant filed objections before the Dispute Resolution Panel (the 'DRP') on January 30, 2012 After considering the submissions made and the detailed hearing, the DRP issued its directions vide order dated September 26, 2012 and partly upheld the arguments of GEIIPL against the arm's length price determined by the Ld. TPO for the Marketing Support services and accordingly, a relief of approximately INR 82 lakhs has been provided to the Appellant. The DRP has however upheld the view of the Ld. TPO in respect of transfer pricing adjustment made to the other divisions. The ld. AO/TPO made the following adjustments division-wise :
Amount (in Sl.No. Particulars INR) 1 Power Controls Division 22,593,835 (Manufacturing segment) 2 Lighting Division (Distribution 2,597,724 segment) 3 Transportation Division (Import and assembling of signaling 11,833,756 equipments) 4 Water and Process Technologies 31,202,495 Division (Manufacturing segment) 5 Marketing Support Services Division (Marketing Support 56,906,719 segment) 6 Sensing Division (Marketing 3,737,355 Support segment) ITA No. 278/Del/2012 6 7 Inspection Technologies Division 2,104,995 (Marketing Support segment) 8 Water & Process Technologies Division (Marketing Support 17,849 segment) Total 130,994,728 In addition to the above, the AO also made following additions :
(i). Unabsorbed business loss & depreciation Rs.46,29,00,427/-
(ii). Provision for warranty Rs.5,27,13,403/-
(iii). Bad Debts written off Rs.4,34,64,346/-
(iv). Non grant of TDS credit Rs.6,71,995/-
(v) Non-grant of set off of brought
Forward MAT credit. Rs.10,80,83,186/-
The AO further noticed that the assessee had claimed brought forward business/depreciation loss of earlier years to the tune of Rs. 46,29,00,427/-
through the filling of revised return. In this regard in response to the query raised by the Assessing Officer, the assessee submitted details of business loss/depreciation loss brought forward since 01.04.2004 to 31.03.2007 which have been duly incorporated in the assessment order. The AO observed that in assessment year 2005-06, out of total brought forward losses of earlier years of Rs.111,81,89,583/-, the brought forward losses to the extent of assessed income of Rs.101,25,07,648/- was allowed to be set off and remaining brought forward losses of Rs.10,56,81,935/- was allowed to be carried forward to subsequent year and this amount of Rs.10,56,81,935/- was allowed to be set off in the assessment order for A.Y. 2006-07. Since the brought forward losses of earlier years stood absorbed/set off in the assessment years 2005-06 and 2006-07, the claim of such brought forward losses of Rs.108,05,32,201/- made by the assessee in A.Y. 2007- 08 was disallowed due to the effect of setting off of total losses in A.Y. 2005-06 and 2006-07. The AO was further of the opinion that since, the assessments of A.Y. ITA No. 278/Del/2012 7 2005-06 and 2006-07 are pending in appeal, therefore, the claim for loss of Rs. 46,29,00,427/- pertaining to assessment year 2001-02, 2002-03 & 2003-04 of DTA division of GEPC and Lighting division was not allowable due to the merger process by various companies into the assessee company. Since the shareholding pattern was less than 51% in the new company, therefore, Section 79 was invoked and the set off of loss claimed to the extent of Rs. 46,29,00,427/- was disallowed and added back to the income of the assessee.
4. He further observed that the assessee has debited to Profit & Loss account under the head provision of Rs. 5,27,13,403/- for warranty and replacement expenses. The AO disallowed the above claim for provision for warranty on the premise that similar disallowance has been consistently made in A.Y. 2005-06, 2006-07 & 2007-08 holding the same as unascertained liability. The disallowed was made on the identical arguments of the assessee. It was also observed that no any scientific basis was adopted by the assessee for this provision and it was made on adhoc basis . The year wise provision and its utilization is as under for the last three years:
Particulars F.Y. 2004-05 F.Y.2005-06 F.Y.2006-07 F.Y.2007-08 Opening Balance 1,91,41,737 6,74,17,700 5,61,03,266 4,30,05,886 Add: Provision 6,36,06,725 2,43,96,674 2,92,64,198 5,27,13,403 created (gross) Less: Utilization 1,53,30,762 3,57,11,108 4,23,61,578 5.57,55,889 /written back Closing Balance 6,74,17,700 5,61,03,266 4,30,05,886 3,99,63,400 Sales 346,94,93,178 359,53,80,977 337,17,99,597 348,67,54,718 % Utilization over 18.53 38.89 49.62 58.25 provision % of utilization over 0.44 0.99 1.26 1.60 sales ITA No. 278/Del/2012 8 In support of his claim, the assessee submitted that it has been made on the basis of past experience and it can not be said that it is a contingent liabilities and relied on the decision of M/s Rotork Controls India (P) Ltd. of hon'ble S.C. The A.O. observed that the assessee has not carried out any of the exercise as mandated / advocated by the Hon'ble Supreme Court , while making provision for warranty. No any evidence was led by the assessee for establishing that there is relationship between the provision made and utilized in subsequent year with sales made by the assessee. the assessee was also unable to furnish the re- estimation of the warranty estimates as mandated/advocated by Hon'ble Supreme Court. The AO also observed that there are huge balances appearing in the provision for warranty expenses. Had the assessee adopted any scientific method for estimating the provision for warranty, there would not be balance of such a huge amount in the provision for warranty. The assessee filed details of the actual utilization of warranty and written back with the supporting vouchers before the DRP of Rs.5,57,55,889/- (40384937 + 15370952). After considering the submissions of the assessee and as per direction of the DRP, the AO allowed the claim to the extent of Rs.5,57,55,889/- and difference was added back to the income of the assessee.
5. Further, the AO observed that the assessee has debited Rs.4,34,64,346/- into the profit and loss account towards bad debts written off. The assessee was asked to justify the same. In response, the assessee vide letter dated 31.10.2011 submitted that the same are allowable under provisions of section 36(1)(vii) and 36(2) of the Act. He relied on the decision in TRF Ltd. vs. CIT (Civil appeal No. 5293 and 5294 of 2003)(SC). The assessee also submitted the details of the debtors on 05.12.2011 as under :
ITA No. 278/Del/2012 9 Sl. Name of Debtors Amount
1 Indian Railway 34,59,309
2. Tata Steel 6,65,735
3. ONGC 43,611
4. Tata Iron & Steel Co. Ltd. 83,776
5. Tamilnadu Electricity Board 19,27,406
6. West Bengal Power Devt. Copn. 18,18,423
7. M.P. State Electricity Board 5,31,002
8. Transmission Corpn. Of A.P. 22,21,480
The Assessing Officer observed that the above companies are cash right companies and the debts given to them cannot be believed to be bad. The assessee was unable to produce any correspondence with the said companies to justify the debts written off being bad. The AO, therefore, observed that it is in the nature of liquidated damages or discounts like dispute on performance incentives, discount differences, poor quality materials and hence less payment, quality issues, obsolete materials, turnover discount not given, customers claiming that materials not received in the first place, AMC contract not properly managed, so customers refused to pay, materials were short supply, defective materials, so customers reused to pay and designed discrepancy and short payment, not pertaining to current assessment years. The AO further observed that such reasons for write of as liquidated damages liable be allowed in the year of short payment or when the amount withheld are recovered from the assessee. The Bad debts and liquidated damages are loss to the business but the former is related to financial problems of the debtors and the latter is related to other reasons as mentioned above. The assessee has failed to submit separate details solely related to debtors whose debts have been written off due to reasons closed business, not traceable for several years, debts time barred and no legal action would be taken, default in settlement, bankrupt debtors etc., the alleged bad debts claim is considered in the nature of liquidated damages. He accordingly disallowed this ITA No. 278/Del/2012 10 claim for the reasons that the assessee was following mercantile system of accounting so the accrued liability can be allowed only in the year of accrual. Only bad debts are allowed in the year of write off u/s. 36(1)(vii), but there are no provisions in the Act to claim liquidated damages in the year of write off.
6. Being aggrieved by the assessment order, the assessee is in appeal before the Tribunal.
7. Ground No.1 is general in nature. It does not require separate adjudication. Ground No. 2.1 & 2.2 relates to denial of set off of unabsorbed depreciation to the tune of Rs.46,29,00,427/-. In this regard, the ld. AR of the assessee stated that the issue involved in this ground is squarely covered in favour of the assessee by the decision of ITAT Ahmedabad Bench in the case of assessee itself for A.Y. 2004-05 (Revenue's appeal No. 2154/Ahd/2012). On the other hand, the ld. DR relied on the orders of the lower authorities.
8. After hearing both the sides and perusing the entire materials available on record and case law cited, we find that the issue involved in this ground No. 2 is stated by the assessee to be squarely covered by the decision of Ahmedabad Bench of Tribunal in assessee's case for A.Y. 2004-05 as referred to above. We deem it appropriate to reproduce the observations of Tribunal made in para 19.1 to 20.1 of the order as under :
19.1. The only issue is to be examined whether the ld.CIT(A) was justified in allowing set off of the business loss. The ld.CIT-DR submitted that the ld.CIT(A) was not justified in allowing the set off of the business loss of Rs.2,64,32,995/- pertaining to AY 1997-98 ITA No. 278/Del/2012 11 against profit of AY 2004-05 without considering the fact. He submitted that the ld.CIT(A) ought o have upheld the order of the AO. He placed reliance on the order of the AO.
19.2. On the contrary, ld.counsel for the assessee submitted as under:-
"At the outset it is submitted that the Assessee Company has purported to set off losses of only Rs. 2,59,69,283 and balance Rs. 464,712 pertains to unabsorbed depreciation purported to be set off in the revised return of income filed for the year under consideration.
The brought forward business losses of Rs 2,59,69,283 set off during the year under consideration pertains to the losses incurred by the Lighting Division (i.e. the Appellant Company) in AY 1997-98 and were set off in compliance with the conditions stipulated in Section 79 of the Act.
Section 79 requires an inquiry to be made as to who the shareholders were at two points in time i.e on the last day of the previous year in which the losses are set off and on the last day of the previous year in which the losses were incurred.
On identification of persons/ shareholders at two points in time, it must be ascertained what their share holding in the company is at two points in time.
Section 79 refers to "persons" in plurality. The reference is to "shareholders" and not a shareholder. The comparison has to be of the collective holdings of these persons or the group.
Reliance placed on the ruling of the Supreme Court in the case of CIT vs. Italindia Cotton Co. P. Ltd (1988) 174 ITR 160 and Mumbai Tribunal decision in the case of Sunanda Capital Services Ltd. vs. JCIT (28 SOT 484).
The view that the reference in section 79 is to a group of shareholders is supported by judicial precedents and commentary by Kanga and Palkhivala in 'The law and practice of Income-tax, Eighth Edition, Volume 1, commentary by Chaturvedi and Pithisaria in Income Tax Law, 2nd Edition, vol 2, Page 1150.
In the instant case, as evident from the shareholding pattern, and admitted by the Ld. AO as well as Ld. CIT(A) that GE Pacific Pte Ltd, Singapore and GE Pacific (Mauritius) Ltd collectively continued to hold more than 51% of the shares of the Company in the year ended March 31,1997, (the years in which losses were incurred) and March 31, 2004 (the year of set off of losses).ITA No. 278/Del/2012 12
Hence, business losses have been set off and carried forward to the subsequent years in compliance with the conditions prescribed in section 79 of the Act.
Without prejudice, the ultimate holding company is General Electric Company, US which continues to exercise control over the assessee through its subsidiaries. Any change in the shareholding amongst the members of the GE group would not prejudice the right to carry forward the losses in case of assessee company as long as General Electric continues to have control over it through its subsidiaries. The ultimate beneficiary interest remains within the GE group. Reliance on Bangalore Tribunal Ruling in the case of Amco Power Systems Limited and Delhi Tribunal Ruling in the case of Select Holiday Resorts Pvt. Ltd."
20. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) has given a finding on fact in paras-12.19 & 12.20 of his order, which are reproduced hereunder:-
"12.19. From the above it can be seen that the appellant company has claimed set off of part of losses of ₹102,83,83,355/- against the income of AY 2005-06 also. From the above one can see that the AO has not denied set off of losses of the appellant against the profit of AY 2005-06 merely on the basis that the entire losses of ₹102,83,83,355/- has been disallowed to be carried forward and set off in AY 2004-05. Rather the AO has stated that the appellant was once again called upon to furnish details of company-wise losses which merged into the appellant company and the share holding pattern of such companies in the year of incurrence of losses. The AO has further stated that the contention of the appellant is not correct as it itself has claimed the benefit of carried forward and setting off of the losses and therefore, it is obligatory upon it to substantiate the claim specifically in light of the provisions of Sec.79 of the Act". Thus it is clear that AO had called for details from the appellant during the course of assessment proceedings for AY 2005-06 also for substantiating the claim of the appellant specially in the light of provisions of section 79 of the Act. Once, the entire loss has been disallowed by the AO in the case of appellant in AY 2004-05 itself, then it is not clear as to how carried forward and set off of part of such losses of ₹ .102,83,83,355/- can further be considered for the purpose of allowing or disallowing the same u/s.79 of the IT Act against the profit of 2005-06. These facts show that the AO has contradicted himself by stating that the appellant was called upon to furnish details of company-wise losses and share holding pattern of such company in the year of incurrence of losses during the course of assessment proceedings of AY 2005-06. The very fact is that the appellant has claimed carry forward and set off of part of the losses against the profit of subsequent year also i.e. AY 2005-06 and the AO has called for details with regard to such claim of the appellant in view of section 79 of the IT Act. Thus the Act of the AO itself is contradictory to his own stand so far as AY 2005-06 in the case of ITA No. 278/Del/2012 13 appellant is concerned as in AY 2004-05 he has disallowed entire losses of ₹102,83,83,355/- and in another year i.e. in AY 2005-06 he is again calling for details for the purpose of examining the claim of such losses or part of such losses. However, as stated in earlier paragraphs, the claim of set off of any losses pertaining to PCDTA & GEIIPL against the profit of AY 2005-06 is required to be considered by the AO as per law and on merits of the case while completing the assessment of such assessment year.
12.20. In view of the above discussion, it is held that the appellant (i.e. GEIIL) is entitled to set off of the business loss pertaining to AY 1997-98 in its case against its profit of AY 2004- 05 in view of provisions of section 79 of the IT Act. As regards remaining losses in the case of appellant, the same cannot be denied to be carried forward by the AO u/s.79 of the Act while completing the assessment for AY 2004-05. As stated above in case if remaining losses or part of such remaining losses which are pertaining to different years of GEPCDTA and GEIIPL are claimed by the appellant against the profit of subsequent assessment years (i.e. after AY 2004-05), allowability or disallowability of such claim of losses has to be considered by the AO on merits and subject to fulfillment of conditions as laid down in section 79 and also subject to fulfillment of conditions as laid down in other relevant provisions of the IT Act while completing the assessments in the case of appellant for such subsequent assessment years."
20.1. The above finding of the ld.CIT(A) is not controverted by the Revenue by placing any contrary material on record. Therefore, we do not see any reason to interfere with the order of the ld.CIT(A), same is hereby upheld. Thus, this ground of Revenue's appeal is rejected.
9. We have heard the rival submissions on the issue and perused the material available on record. The assessee has relied on the order in its own case for A.Y. 2004-05 (supra) and the appeal under consideration pertains to assessment year 2008-09. The ld. DRP has also affirmed the disallowance of carry forward of losses as done by the AO. While perusing the order of Tribunal in assessee's own case for A.Y. 2006-07 and 2007-08 in ITA No. 3064/Ahd/2010 dated 08.08.2013, the contention of the assessee in that case was that the assessee was legally entitled for carry forward of losses as per section 79 because he fulfilled the conditions as stipulated in the section for voting rights of more than 51% of the share holding, ITA No. 278/Del/2012 14 whereas in the instant case, we observe from the order of the Assessing Officer that the AO has observed that there is non-existence of share holding of 51% due to merger of various companies into the new company. The assessee has not produced before us the share holding pattern after merger of various companies so as to examine the issue in the light of section 79 of the Act. The assessee has also not produced before us the outcome of all preceding years of assessments after orders of appellate authorities so as to examine the allowability of brought forward losses claimed during the year under consideration. We, therefore, deem it just and proper to set aside this issue to the file of AO for deciding the same afresh after ascertaining/determining the carry forward losses based on the outcome of the decisions for the earlier years, which shall be submitted by the assessee before the AO. Needless to say, the assessee shall be given reasonable opportunity of being heard. Accordingly, ground No. 2 is allowed for statistical purposes.
10. In respect to ground No. 3 regarding provision for warranty amounting to Rs.5,27,13,403/-, the ld. AR of the assessee relied on the decision of Tribunal in its own case for A.Y. 2006-07 (supra), wherein the Tribunal has restored the issue back to the file of AO to decide the same afresh after considering the decision of Hon'ble Supreme Court in Rotork Control's India (P) Ltd., 314 ITR 62. On the other hand, the ld. DR relied on the orders of the authorities below.
11. Having heard the submissions of both the parties and perusing the material available on record, we find that the AO has given opportunity to the assessee to ITA No. 278/Del/2012 15 satisfy the principles laid down by Hon'ble Supreme Court in the aforesaid decision. The ld. Authorities below have categorically observed that the assessee failed to submit any evidence to establish that he had captured the relationship between the nature of sales, warranty provisions made and the actual expenses incurred against it, as laid down by Hon'ble Supreme Court. The other guideline given in the decision of Hon'ble Apex Court is that the assessee has to make re- estimation of provision for warranty year to year, but the assessee had failed to prove any such re-estimation made by it. Nothing is uttered on behalf of the assessee to rebut the finding of the AO that the assessee has no records or registers pertaining to expenses relating to warranty expenses to prove that working of warranty provision commensurate to the criteria given in the decision of Hon'ble Apex Court.
12. On perusing of working given by the assessee with respect to provision for warrantee, as detailed in the table above, we find that in F.Y. 2004-05, the provision including opening balance was of Rs.82748462/-, out of which the assessee has shown utilization of only Rs.1,53,30,762/- representing to 18.53%. There has been drastic increase in this percentage of utilization upto F.Y. 2007-08 upto 58.25%. Similar is the position with respect to percentage of utilization over sales, which has been drastically increased from 0.44% in F.Y. 2004-05 to 1.60% in F.Y. 2007-08, whereas we do not find any substantial or proportionate changes in the sales of the assessee during these years. We also find that the amounts of provisions for warranty claimed by the assessee do not appear to have any basis either in terms of sales or in terms of its utilization. For instance, the assessee has made provision for Rs.6,36,06,725/- against sale of Rs.346.94 Cr and odds and ITA No. 278/Del/2012 16 utilization thereof at Rs.1.53 Cr. in the F.Y. 2004-05. However, this ratio does not exists in subsequent Financial years 2005-06 to 200708, as in clear from the table above. This shows that the assessee has not adopted any particular prudential system for claiming the provisions for warranty. In such state of affairs, in our considered opinion, the ld. Authorities below have committed no error while allowing such provisions for warranty on the basis of actual utilization/written back thereof. Therefore, we find no infirmity in the order of AO on this count. Accordingly, this ground of appeal is dismissed.
13. In respect of ground No. 4.1 to 4.4 pertaining to disallowance of bed debts, the contention of the ld. AR is that the identical issue has been remanded by the Tribunal in assessee's own case for A.Y. 2006-07 and 2007-08 on the premise that the AO has not evaluated the facts in the light of the judgment of the Supreme Court in the case of TRF Ltd. (Civil appeal No.5293 and 5294 of 2003). The AO has treated the bad debts as liquidated damages only on his presumption without referring to any material in support of such presumption and the ld. DRP did not adjudicate upon this lapse of the AO. Reliance is also placed on the following decisions :
Girish Bhagwat Prasad, 256 ITR 772 (Guj) Texa India Ltd. (ITA No. 962/Del/2009) (Mum. ITAT) Morgan Securities & Credits, 292 ITR 339 (Del) Shakti Cargo Movers Pvt. Ltd. (Tax Appeal No. 1515 of 2010 (GUJ-HC) Frontline Corporation Ltd (Appeal No. 1943 of 2010) (Guj -HC).ITA No. 278/Del/2012 17
The ld. DR relied on the orders of the authorities below and submitted that the assessee had debited the bad debt in the profit & loss account, which is not the bad debt for the year under consideration.
14. Having considered the rival submissions and perused the entire material available on record, we find that various eventualities given by the AO for treating the impugned claim as that of liquidated damages caused to the assessee, are not supported by any material on record so as to ascertain that such damages were cause due to any of such eventualities. Therefore, in our considered opinion, unless there is material on record to substantiate any of the above eventualities given by the AO, the impugned claim cannot be treated as that of liquidated damage. We, however, find considerable substance in the findings of the AO that the debtors, such as Indian Railways, ONGC, Tata Iron and Steel Col. Ltd., Tamlnadu Electricity Board, West Bengal Power Development Corporation, MP State Electricity Board, Transmission Corporation of Andhra Pradesh, against whom huge amounts due have been written off by assessee as bad debt, are well known entities having Govt. Machineries, which could not be believed to be the bad debtors in common parlance. The assessee has also not furnished any material on record before us to satisfy the requirements of section 36(2) of the Act or to establish as to how the amounts written off became irrecoverable or bad debts from the entities of such a repute. In presence of this fact, the assessee was required to comment specifically on the eventualities of liquidated damages given by the AO, which he failed to do so but simply said that it was only the presumption of the AO. We, therefore, keeping in view the aforesaid facts, decision of Hon'ble Apex Court in the case of TRF Ltd. (supra) and the order of Tribunal in assessee's own cases for A.Yrs. 2006-07 and 2007-08 (supra) on the same issue, remit the matter back to the file of AO for deciding the same afresh ITA No. 278/Del/2012 18 after considering all the relevant material on record. The assessee is directed to furnish all the relevant material/evidence as required by the AO in the remand proceedings. The AO may also consider alternate ground No. 4.4 raised by the assessee before us in accordance with law, if needed. Needless to say, the assessee shall be given reasonable opportunity of being heard. The issue which came up for consideration in A.Yrs. 2006-07 and 2007-08 before the Tribunal alongwith their findings read as under :
49. Ground no. 12 and its sub-grounds are with respect to the claim of Rs. 28,52,492/-
towards of debt written off:-
AO noticed that assessee has claimed deduction of Rs. 28,52,492/- on account of bad and doubtful debts written off directly against the provision account. He also noticed that an amount of Rs. 59,54,433/- was debited to the Profit and Loss account on account of bad debts and was not adjusted against the provision account. The assessee was asked to justify its claim. On perusing the details submitted by the assessee, AO noticed that the amounts involved were mostly in the nature of liquidated damages and according to him it were not on the nature of bad debts. He noted that in respect of Rs. 4.7 crore no details and even the party-wise break-up was filed. In respect of Rs. 3.01 crore, only party-wise break-up along with one line reasons in some of the cases were submitted. He also noted that the there was no external correspondences in any of the cases where the sums were written off. He thus concluded that the assessee has failed to prove that the trade loss had occurred during the year under consideration and has also failed to prove justification for claiming such deduction. He also noticed that some of the parties involved were Government Companies/organizations or big concerns having good financial base. He also noticed that with respect to liquidated damages written off no details with respect to payment sought as liquidated damages etc was made available.
He thus concluded that the assessee has failed to prove as to why the amount can be treated as bad debts, more so, when it was adjusted against the provision account instead of debiting it to the Profit and Loss account. He therefore held that the claim of assessee was not allowable. DRP also has confirmed the action of AO in disallowance of the claim.
50. Aggrieved by order of AO assessee carried the matter before DRP. DRP upheld the action of AO by holding as under:
10.3 The assessee's submissions have been considered carefully, but the same are found not acceptable. The assessee in the revised computation of income had claimed deduction of Rs.
28,00,52,402/- on account of bad and doubtful debts written off directly against the provision account. The AO had observed that perusal of profit and loss account, revealed that an amount or Rs. 59 ,54,433/- has been debited to profit and loss account on account ITA No. 278/Del/2012 19 of bad debts written of which is charged to profit and loss account and which has not been adjusted against the provision account. Schedule 9 of the Balance Sheet containing details of sundry debtors revealed that provision for doubtful debts has decreased from Rs. 45,26,24,979/- as on 31.03.2005 to Rs. 17,44.28,068/- as on 31.03.2006. The difference between the two is coming to Rs. 27,81,96,911/- which along with other provisions and adjustments has been adjusted against the bad debts written off. The AO has rightly held that the Bad debts written off has to be charged to profit and loss account and its adjustment against any provision account without touching the profit and loss account during the year is not a write off to be allowed under section 36(1)(vii) read with section 36(2). Reliance in this respect is placed on decision of the Hon'ble Kerala HC in the case of CIT v. Hotel Ambassador [2002] 253 ITR 430 (Ker), wherein the Hon'ble HC has held as under:
"We feel that writing off bad debts, without charging the same in the profit and loss account is not write off at all because the assessment is made based on the audited accounts and the profit and loss account and the Balance Sheet filed along with the returns. It is not enough if the assessee writes off the same in some of the books maintained by it, which do not form part of the audited accounts including the profit and loss account based on which assessment is made. Unless the write off took place at the time of finalization of accounts and is reflected into the books of accounts, it cannot be treated as written off at all."
Hence it is held that the conditions of writing of the debts in the books as stipulated in section 36(1)(vii) r.w.s. 36(2) has not been fulfilled in this case and accordingly the above referred claim of bad debt is not allowable.
10.4 Without prejudice to above legal ground the AO has held that on facts also the assessee's claim of bad debt is not allowable. Before us the assessee has not made any submissions in respect of factual finding of the AO given in the Draft assessment order. Hence it is presumed that the assessee has nothing to say on the factual finding given by the AO on this issue in the draft assessment order. The assessee has not controverted the actual finding of the AO given in the draft assessment order that in most of the cases, the assessee has not submitted the details of the parties. the nature of debts, why said debts have been considered as bad and the evidence that the said debts have been actually written off as irrecoverable in its accounts. Even before us the assessee has not submitted any details in this regard.
10.5 Similarly in the Draft assessment order the AO has given factual finding that on perusal of the details filed it is found that the amounts involved are mostly in the nature liquidated damages and not the bad debts in its true sense perse, the assessee has not made any submission on the said finding of the AO and hence it is presumed that the assessee has nothing to say on the said finding of the AO. The AO has rightly held that the year in which any liability is to be allowed in case of such liquidated damages are very much relevant. In case of liquidated damages the relevant issue is to examine the nature of dispute, the year in which the customer deducted the amount payable to the assessee. The reasons for deduction are also relevant. In case the assessee has failed to fulfill any contractual ITA No. 278/Del/2012 20 obligation and the other parties have deducted liquidated damages in earlier years, the liability towards such loss has to be taken crystallized in the earlier years. The unilateral decision of the assessee not to claim those liabilities in earlier year and to carry forward and claiming as deduction in subsequent year at its own convenience cannot be allowed. It is a settled law that, where the assessee follows mercantile system of accounting, loss/liability is allowable in the year of accrual provided it is an essential liability. Trading allowance not allowed not for some reason in the year in which it has incurred is not an allowable deduction in subsequent year. In the current year the deduction can be permitted in respect of only those losses which are incurred in the relevant accounting year. The AO has further held that in this case, the assessee has failed to prove that the said trading loss has occurred during the year under consideration. The assessee has failed to prove justification for claiming such deductions during the year. The AO has rightly held that on factual ground also the assessee's claim of bad debts is not allowable. In view of above the proposed disallowance of Rs. 28 ,00,52,402/- on account of bad debt is confirmed."
51. Aggrieved by the aforesaid order of DRP the assessee is in appeal before us.
52. Before us Ld. AR submitted that the amount of Rs. 28,00,52,402/ represented the actual bad debts incurred during the year and has been rightly written off in the book of accounts directly from the provision for doubtful debts account. He further submitted that the provision for doubtful debts which were debited to the profit and loss account in the past years were added in the computation of income in the respective past years when provision was made, as the same was not allowable as deduction as per explanation 2 to section 36(1)(vii) of the Act. Once the debt became bad in the current year, the same were written off as irrecoverable in the books of accounts by debiting "provision of doubtful debts" and crediting "debtors" account. It was further submitted that the assessee has duly applied that the provision of section 36(i)(vii) read with 36(2) of the Act. Ld. AR further submitted that after amendment made to clause (vii) of sub- section 1 of section 36, it is not necessary for the assessee to establish that the debt has become bad and it would suffice if the debts are merely written off in the books as bad, and hence not recoverable. He also placed reliance on the decision of Apex Court in the case of TRF Ltd vs. (Civil Appeal No. 5293 of 2003) Ld. AR also relied on the decision of Gujarat High Court in the case of Torrent Cable on the matter of liquidated damages. Ld. DR on the other had submitted that the bad debts were not written off in the Profit and Loss account. He further submitted that the party-wise details, nature of debts, when the same was offered to tax was not submitted by the assessee. In case of liquidated damages, the nature of dispute, the year in which the customer deducted the amount, the reason for deduction were also not submitted by the assessee, and thus he supported the order of AO & DRP.
53. We have heard the rival submissions and perused the material on record. From the details placed on record it is seen that bad debts written off also includes liquidated damages like nature of dispute, the year in which the customer deducted the amount, reasons for deduction etc. Before us the Ld DR has stated that the details of liquidated damages have not been furnished by assessee We further find that the matter with respect to liquidated damages has not been commented by the AO and therefore there is ITA No. 278/Del/2012 21 no finding of AO. The hon'ble apex court in the case of TRF Ltd (supra) has held as under:-
"After 1.4.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee."
54. In view of the aforesaid facts, we feel that the matter needs fresh examination more so in the light of the aforesaid decision of Hon'ble Apex Court. We therefore remit the matter to the file of AO to decide the issue afresh and also direct to him to examine the issue of liquidated damages for writing off. The assessee is also directed to co-operate by submitting promptly the details required by assessing officer for deciding the issue. Thus this ground of the assessee is allowed for statistical purpose.
Accordingly, grounds Nos. 4.1 to 4.4 of assessee deserve to be allowed for statistical purposes.
15. Ground No. 5 relates to non-granting of TDS credit to the extent of Rs.6,71,995/-. In this regard, the AO is directed to verify the actual TDS deductions and credit is to be allowed as per law.
16. Ground No. 6 has not been pressed by the ld. AR of the assessee. The same is, therefore, dismissed as not pressed.
17. On the TP adjustment, Ground No. 7 raised by assessee is general in nature and needs no specific adjudication.
18. Ground No. 8 relates to transfer pricing adjustments for various divisions for using of application of prior year data used by the appellant in the TP documentation, which has been rejected by the AO/TPO/DRP. In this regard the assessee submits as under :
ITA No. 278/Del/2012 221. The Ld. TPO and the Ld. DRP rejected the use of latest financial year data as was available in the databases and used for the purposes of benchmarking analysis at the time of preparing TP Documentation. [Refer Page 188 of the Appeal Memo (TP Order) and Page 23 of the Appeal Memo (DRP Order)].
2. Use of prior year data, i.e., FY 2005-06 and FY 2006-07 is specifically permitted by the Rules. The entire approach of the Appellant is detailed in the TP Study of each of the division. [Refer Page 116 to 2535 of the Paper book for the TP study of each division]
3. However, given the recent judicial precedents which are not in favour of the Appellant's stand, the Appellant wishes to not press on this ground.
In the written synopsis submitted by assessee as above, this ground has not been pressed by the AR of assessee. Therefore, this ground is rejected.
19. In respect of ground No. 9, the ld. AR agitated the turnover filter regarding the companies' whose turnover is less than 50% of the turnover of the entire division. In respect of manufacturing segment, i.e., power control division, the ld. TPO has applied the turnover filter of less than 10 Cr. The ld. TPO sought to reject companies merely based on the turnover filter which were otherwise functionally comparable companies and thus prune the set that resulted in very limited number of comparables. Based on the Revised set, the TPO arrived at the revised mean margin of the comparable companies for the purpose of the comparability analysis and accordingly considered transfer pricing adjustment in the following divisions and segment of the company.
(i) Power control division (manufacturing segment)
(ii) Lightening Division (Distribution segment)
(iii) Transportation Division (Import and assembly of signaling
equipment)
(iv) Water and process technology division(manufacturing segment
and marketing support service segment)
(v) Marketing support division (Marketing support service segment )
ITA No. 278/Del/2012 23
(vi) Sensing Division (Marketing Support segment)
(vii) Inspection Technologies Division (Marketing support segment)
(viii) Water & Process Technologies Division (Marketing Support
segment).
Further he submitted that the turnover filter is not a criteria for comparability test if the companies are otherwise functionally comparable. In support, the AR of the assessee relied on the following judgments :
(i). Chryscapital Investment Advisors (India) P. Ltd v. DCIT, 376 ITR 183 (Delhi), wherein it is observed as under :
23. The assessee's argument is that entities earning "super normal" or "abnormal" profits should be excluded from the list of comparables. For this purpose, it relied on several rulings of various Benches of the ITAT. These are Adobe Systems India (P.) Ltd. (Supra); Teva India (P.) Ltd. (Supra); Sapient Corpn. (P.) Ltd. (Supra); Maersk Global Services Centre (India) (P.) Ltd.
(Supra); Symantec Software Solutions (P.) Ltd. (Supra) and a Division Bench ruling of this court in Agnity India Technologies (P.) Ltd. (Supra). Besides, this court notices that a similar reasoning
- of applying what is known as the "turnover" filter or the exclusion of "superprofit" making companies reasoning was applied in Continuous Computing India (P.) Ltd. v. ITO [2012] 52 SOT 45 (URO)/21 taxmann.com 137 (Bang.); Centillium India (P.) Ltd. v. Dy. CIT [2012] 23 taxmann.com 34/53 SOT 145 (Bang.)and Addl CIT v. Frost and Sullivan India (P.) Ltd sic (supra). The revenue has on the other hand, relied on contrary views in Actis Advisers (P.) Ltd. v. Dy. CIT [2011] 10 taxmann.com 24 (Delhi); 24/7 Customer.Com. (P.) Ltd. v. Dy. CIT [2012] 28 taxmann.com 258/[2013] 140 ITD 344 (Bang.) and Willis Processing Services (I) (P.) Ltd. v. Dy. CIT [2013] 30 taxmann.com 350/57 SOT 339 (Mum.). Such views are echoed in Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2013] 29 taxmann.com 310/140 ITD 540 (Bang.) and Stream International Services (P.) Ltd. v. Asstt. DIT (International Taxation) [2013] 31 taxmann.com 227/141 ITD 492 (Mum.).
33. Such being the case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile - in respect of the activity in question can be viewed independently from other activities-cannot be subject to a per se standard of loss making company or an "abnormal" profit making concern or huge or "mega" turnover company. As explained earlier, Rule 10B (2) guides the six methods outlined in clauses (a) to (f) of Rule 10B(1), while judging comparability. Rule 10B (3) on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company - otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature - such as a huge profit or a huge turnover, ipso facto does ITA No. 278/Del/2012 24 not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not "materially affect the price...or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made.
(ii). Techbooks International Pvt. Ltd. vs. DCIT (ITA No. 240/Del/2015) dated 06.07.2015, where it is held as under :
12.2.1. The assessee included the segmental figures of this company in the list of comparables. The TPO eliminated this company on the ground that it was providing software services and ITES and its turnover from ITES was only 0.83 crore, which was less than the requisite turnover. 12.2.2.
Having heard both the sides on this issue, we find that the TPO has accepted the functional comparability of this company on segmental level. The ld. DR was also fair enough to candidly accept the functional similarity of the relevant segment of this company. In such circumstances, the question arises as to whether the relevant segment of this company can be excluded from the list of comparables merely on the ground that the revenue from this segment is only Rs.83 lacs? In our considered opinion, the quantum of turnover can be no reason for the exclusion of a company which is otherwise comparable. We have noticed above the judgment of the Hon'ble jurisdictional High Court in the case of ChrysCapital Investment Advisors (India) P. Ltd (supra) in which it has been held that high turnover or high profit can be no reason to eliminate an otherwise comparable company. The same applies with full force in the converse manner as well to a low turnover/low profit company. We, therefore, hold that a company cannot be excluded from the list of comparables on the ground of its low turnover. In principle, we direct the inclusion of the relevant segment of this company in the list of comparables. The TPO is directed to include the operating profit/operating costs of the ITES segment of this company in the list of comparables, after due verification of the necessary figures for determination of the operating profit margin etc. In addition to the above judgment, he also relied on the written synopsis submitted.
20. On the other hand, the ld. DR relied on the order of the lower authorities. He also submitted that if the turnover is not the criteria for comparable, then the matter should go to AO/TPO for re-examination.
21. We have considered the submissions of both the parties and perused the material available on record. Respectfully following the judgment of Hon'ble jurisdictional High Court and the Coordinate Bench, this matter is sent back to the ITA No. 278/Del/2012 25 AO/TPO for re-examination that the turnover should not be criteria for exclusion of the companies which are otherwise functionally comparables.
22. In respect of ground No. 10 & 11, the assessee has submitted written synopsis as under :
Background and international transactions:
4. GEIIPL - Power Control Division ('GEPC India') offers a wide range of low voltage switchgear components for industrial and domestic use. GEPC India is engaged in manufacturing of low voltage electrical products for sale to its customers. It performs functions and undertakes risks that are normally performed and undertaken by a manufacturer entrepreneur. Components are imported from the associated enterprises as well as bought locally for manufacturing the finished products of GEPC India.
5. GEPC India imported components represents around 7% of the total operating costs (and about 10% of the total material consumed) incurred by GEPC India.
International Transactions for FY 2007-08 pertaining to manufacturing segment of the Power Control division:
Amount in Particulars Outcome of TP order INR Import of components for 141,889,745 Adjustment of INR22,593,835 manufacturing of products GE PC India's specific contentions i. Rejection of Elpro International Limited as a comparable
6. The Ld. TPO rejected the comparable Elpro International Limited on the ground that the company is engaged in manufacturing of a single product i.e. Surge arrestors. Further, the Ld. TPO mentioned that Elpro International's single product has specific market in the Power sector and therefore its products may generate high profit or high loss and thus cannot be compared to that of the Appellant.
7. In this regard, the Assessee would like to submit that a comparable cannot be rejected merely on the ground that the company is manufacturing only one product. Based on our review of the website of the company we note that the company is engaged in manufacturing of the following products; surge arresters, distribution class arresters, station class arresters, secondary surge arresters, under oil surge arresters, accessories, zinc oxide discs and varistors. Though the products are classified under one category as arrestors, each product has its own application in designated fields. Thus the company is engaged in manufacturing wide range of arrestors.
Relevant extracts from website of the company are provided as Annexure 1to the executive summary.
8. Further review of annual report for financial year 2008 reveals that the company is also into manufacturing of isolators in addition to varistors and arrestors. Relevant extracts from the annual report of the company are provided as Annexure 2to the executive summary.
ITA No. 278/Del/2012 26In order to understand the various products manufactured by Elpro International, and for a better understanding, definitions1 of arrestors, varistors and isolators, and are provided below:
Arrestor: A lightning arrester, also known as lightning conductor, is a device used on electrical power systems and telecommunications systems to protect the insulation and conductors of the system from the damaging effects of lightning.
Varistors: A varistor is an electronic component with a "diode-like" nonlinear current-voltage characteristic. The name is a portmanteau of variable resistor. Varistors are often used to protect circuits against excessive transient voltages by incorporating them into the circuit in such a way that, when triggered, they will shunt the current created by the high voltage away from sensitive components. A varistor is also known as voltage-dependent resistor ('VDR'). A varistor's function is to conduct significantly increased current when voltage is excessive. Isolator: An isolator is a two-port device that transmits microwave or radio frequency power in one direction only. It is used to shield equipment on its input side, from the effects of conditions on its output side; for example, to prevent a microwave source being detuned by a mismatched load.
The above, substantiates the primary fact that Elpro is not a single product company as mentioned by the Ld. TPO to reject this company. Given the above analysis the Appellant submits that the Ld. TPO erred in rejecting Elpro International Limited stating that it is a single product company. The search was carried out with the objective of selection of broadly comparable companies to arrive at the arm's length margin. Therefore rejection of Elpro International Limited on basis of single product ground is incorrect and the company should be considered as part of comparables set.
ii. Modification of turnover filter
9. The revenue of the Appellant from the Power Controls division in the current year was INR 250.82 crores.
10. The Ld. TPO modified the turnover filter and rejected the companies having turnover less than INR 10 crores and rejecting companies otherwise functionally comparable [Refer Page 143 of the Appeal Memo]. The turnover of the division in FY 2007-08 was at INR 250.08 crores and the ld. TPO initially applied the lower turnover filter of INR 125.41 crores to eliminate companies less than the lower turnover filter. As this resulted only in one comparable, the Ld. TPO applied turnover filter of less than INR 10 crores filter and stated that in order to retain enough comparables a filter of INR 10 crores is applied. The ld. DRP upheld the filter modified by the TPO [Refer Page 18 of the Appeal Memo].
11. In this regard, the Appellant submits that there is no merit in modification made by the ld. TPO/ DRP. The Appellant also submits that given the limitation of the availability of data it was reasonable to consider all possibly available, functionally comparable companies and relaxing or not applying the turnover filter, rather than applying such a stringent and arbitrary filter which skews the comparability analysis.
12. The rejection of comparability analysis of the taxpayer by the TPO without cogent reasons is also supported by various cases namely:
• Chryscapital Investment Advisors (India) (P.) Ltd. v. DCIT [2015] 376 ITR 183.
"33. Such being the case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile-in respect of the activity in question can be viewed ITA No. 278/Del/2012 27 independently from other activities-cannot be subject to a per se standard of loss making company or an "abnormal" profit making concern or huge or "mega" turnover company. As explained earlier, Rule 10B (2) guides the six methods outlined in clauses (a) to (f) of Rule 10B(1), while judging comparability. Rule 10B (3) on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company-otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature-such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not "materially affect the price...or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made."
• Techbooks International Pvt. Ltd. v. DCIT: ITA No240/Del/2015 which followed Chryscapital and held that comparables cannot be rejected on the basis of low turnover. • Carlyle India Advisors Private Limited V ACIT ((2012)17 ITR(Trib) 24 (Mumbai)) which observed that TPO's action of rejecting Transfer Pricing Study based on the argument that taxpayer had rejected certain comparables after applying quantitative filters without giving reasons for rejection, did not sustain, since the summary of search process was provided in the Transfer Pricing Study.
• Indo American Jewellery Limited V DCIT ((2012) 50 SOT 528 (Mumbai)).
"We further find the external comparables selected by the assessee are from the public data base and the assessee has followed a detailed search process and made an analysis considering the various factors of selecting the external comparables as required under Transfer Pricing Regulations and Guidelines. Therefore, the transfer pricing study of the assessee and ALP of international transactions determined on the basis of such study simply cannot be rejected without any cogent reasons."
• Nokia India Pvt. Ltd. (ITA No.242/Del/2010) [approved by the Delhi High Court in ITA No.676/2015] which observed the arithmetic mean tends to iron out differences due to higher or lower size of company or fluctuating profitability. The company otherwise found to be functionally comparable cannot be excluded on the ground of higher or lower turnover. The relevant extracts of the judgement are given below:
"The TPO applied the filter rejecting companies having sales less than Rs.5 crore without any upper cap.
There is no mention in the language of the provisions for the exclusion of potential comparable companies simply on account of high or low turnover or profit rate. The Special bench of the tribunal in Maersk Global Centres (India) (P.) Ltd. VS.ACIT (2014) 147 ITD 83 (Mum)(SB) has also held that potential comparables cannot be excluded merely on the ground that their profit is abnormally higher. There can be no justifiable reason to exclude such high or low profit Same logic applies to the high or low turnover companies also. The mere fact that a company has a high or low turnover can be no reason to justify its exclusion if it is otherwise functionally comparable. The exclusion of companies on such a rationale runs contrary to the express provisions of the Act.
Adverting to the facts of the instant case, it is seen that the assessee's turnover under this segment amounted to less than Rs.10 crore. The TPO has applied the turnover filter by setting a lower limit of turnover at Rs.5 crore without setting any upper ceiling of turnover. We fail to comprehend any legally sustainable reason for applying the filter setting a lower ITA No. 278/Del/2012 28 limit of turnover at around half of the assessee's turnover and leaving the upper limit uncapped.
The situation would have been different if the TPO had either set no or a nominal lower limit of the turnover filter, leaving the upper limit open. In that situation, there would have been no reason to set any upper turnover filter as well."
13. The Appellant wishes to place reliance on the decision of the special bench of the Hon'ble Chandigarh Tribunal in the case of Quark Systems Pvt Ltd v/s ITO((2009)132 TTJ 1) wherein, the Hon'ble Chandigarh Tribunal upheld that the selection of comparable companies need to be based on a detailed analysis of functions performed, assets employed and risk assumed (FAR analysis) of the tested party and the comparable companies. This decision has been subsequently affirmed by the Hon'ble Punjab and Haryana High court [(2011)244 CTR 542].
14. Accordingly, relaxing a turnover criterion is preferable to applying such a stringent criterion, as it seeks to bring in its fold all functionally comparable companies, as opposed to only those which are arrived at by the application of a highly subjective filter that does not have a reasonable basis and is apparently imposed upon the Assessee with the objective of making a transfer pricing adjustment. [Refer Page 143 to 146 of the Appeal Memo].
15. Though, the Appellant had relaxed the turnover filter, the Appellant had eliminated smaller or startup companies. No company having turnover less than INR 1 crore was considered for the purposes of analysis. The results of the search process inter alia is provided below:
Amount (INR in Crores) Sl. Operating Operating Particulars Year Sales OPM No. costs profit 1 Amtech Electronics (India) Ltd. 200803 22.81 22.21 0.6 2.63% 2 B C H Electric Ltd. 200803 208.95 200.07 8.88 4.25%
-
3 Elpro International Ltd. 200803 26.4 32.3 -5.9 22.35% 4 Guardian Controls Ltd. 200803 3.43 3.36 0.07 2.04% 5 Incap Ltd. 200803 11.56 10.71 0.85 7.35% 6 Integra India Group Co. Ltd. 200803 13.94 13.16 0.78 5.60% 7 Kaycee Industries Ltd. 200803 23.55 22.42 1.13 4.80% Mean 0.62%
16. Basedon the above table, the OPM of 3.88% earned by GE PC as against arithmetic mean of 0.62%2 earned by comparables is demonstrated to be at arm's length. It is thus evident that the turnover filter applied by the TPO and upheld by the DRP is without any reasonable basis.
17. As result of the INR 10 crore filter, the comparable company Guardian Controls was rejected.
As already discussed in paragraph number 13, the Ld. TPO rejected Elpro International Limited. This resulted in five comparable companies in the final set.
ITA No. 278/Del/2012 2918. Accordingly the following margin and arithmetic mean of 5 companies was considered by the ld. TPO and proceeded to compute the TP adjustment [Page 234of the Appeal Memo].
Sl. Operating
Sales
No. profit
Particulars Year (INR in OPM
(INR in
Crores)
Crores)
1 Amtech Electronics India Ltd 200803 22.81 0.6 2.63%
2 BCH Electric Ltd 200803 208.95 8.88 4.25%
3 Incap Ltd 200803 11.56 0.85 7.35%
4 Integra India Group Co. Ltd. 200803 13.94 0.78 5.60%
5 Koycee Industries Limited 200803 23.55 1.13 4.80%
Mean 4.93%
19. Basedon the above, it is amply clear that the modification of the filter is only with for the purposes of changing the arithmetic mean such that it leads to an adjustment.
20. In addition, the Appellant would also like to place reliance on the following judgments, in which the lower turnover of INR 1 crore has been accepted to be a reasonable limit for the application of turnover filter.
• Adaptec (India) Private Limited (ITA No.1758/Hyd/2012);
• M/s Analog Devices India Pvt.Ltd.(IT(TP)A No.1161(BNG.)/2010); • Tesco Hindustan Service Centre Pvt.Ltd. (IT(TP).A No.1317/Bang/2010); • I.P. Unity Communications Pvt.Ltd. (I.T (T.P) A. No.l535/Banc Year/2012); • M/s Genisys Integrating Systems (India) PvtLts (ITA No.1231(Bang.)/2010); • Market Tools Research Pvt. Ltd. (ITA No. 2066/HYD/2011) iii. Proportionate adjustment - Power Control Division
21. Without prejudice to the other contentions, considering the miniscule proportion of international transactions, amounting to 9.72% of the raw material costs from associated enterprises to total material costs, if at all an adjustment were to be considered, the entire adjustment cannot be attributed to the purchases from related parties. The transfer pricing adjustment should be limited to the proportionate value of the international transactions of purchase from associated enterprises, thereby limiting any adjustment to 9.72% of the turnover. [Refer Page 153 to Page 156 of the Appeal Memo].
Particulars Amount (INR)
Total COGS 1,460,205,121
Import of components for 141,889,745
manufacturing the products from AE
Imports from AE/ Total COGS 9.72%
22. In this regard, the Appellant places reliance on the following decision of the Hon'ble Delhi High Court in Commissioner of Income Tax v. Keihin Panalfa Ltd. [2016] 381 ITR 407 (Delhi) which held;
ITA No. 278/Del/2012 30"11. The contention that the adjustment on account of expenses as determined by the Transfer Pricing Officer must be attributed entirely to the international transaction is bereft of any merits. During the financial year 2003-04 relating to the assessment year 2004-05, the assessee had reported an operating income of Rs. 72,24,22,000. The total expenses for the said period amounted to Rs. 68,00,88,000. Admittedly, the international transactions in question amounted to Rs. 15,90,66,935 which were only 23.38 per cent in value of the total expenses. The Transfer Pricing Officer had determined the profit level indicator (operating profit over total cost) of comparable cases at 8.29 per cent against 6.22 per cent as declared by the assessee. Applying the profit level indicator of comparable cases, the adjusted total expenses were computed at Rs. 66,71,17,924, thus, indicating an adjustment of Rs. 1,29,70,076. As in apparent from the above, the said adjustment related to the entire expenses and not just the international transactions alone. Since the international transactions only constituted 23.38 per cent, a transfer pricing adjustment proportionate to that extent could be made in respect of such international transactions. Thus, only an adjustment of Rs. 30, 33,593 could be attributed to the international transactions in question. The same was accepted by the Commissioner of Income- tax (Appeals) as well as the Tribunal. We do not find any infirmity with their decision."
23. Following Keihin Panalfa, the Hon'ble Bombay High Court in The Commissioner of Income Tax-1, Mumbai v. ALSTOM Projects India Limited ITA No. 362 of 2014, held:
"12.We are in respectful agreement with the view of the Delhi High Court in Keihin Panalfa Ltd. (Supra). One must not lose sight of the fact that the transfer pricing adjustment is done under Chapter X of the Act. The mandate therein is only to re-determine the consideration received or given to arrive at income arising from for International Transactions with Associated Enterprises. This is particularly so as in respect of transaction with non Associated Enterprises, Chapter X of the Act is not triggered to make adjustment to considerations received or paid unless they are Specified Domestic Transactions. The transaction with non-Associated Enterprises are presumed to be at arm's length as there is no relationship which is likely to influence the price. If the contention of the Revenue is accepted, it would lead to artificial increase in the profits of transactions entered into with non Associated Enterprises by applying the margin at entity level which is not the object of Chapter X of the Act. Absence of segmental accounting is not an insurmountable issue, as proportionate basis could be adopted as done by the Delhi High Court in Keihin Panalfa Ltd. (supra)."
24. Moreover, the Hon'ble Delhi ITAT in the case of IL Jin Electronics India Pvt Ltd ((2010) 36 SOT 227) inter alia held as follows:
"The assessee has also taken one alternative ground out of the total raw materials consumed by the assessee for manufacturing print circuit boards, only 45.51% of the total raw materials were imported through assessee's associate concerns, and, therefore, any adjustment, if any called for, can only be made to the 45.51% of the total turnover, and not to the total turnover of the assessee. After considering the facts of the case, we do not find any difficulty in accepting this contention of the assessee that at best only 45.51% of the operating profit can be attributed to imported raw material acquired from assessee's associate concerns. In the present case, the AO has calculated the operating profit on the entire sales of the assessee, which in our considered opinion, is not justified, when it is admitted position that only 45.51% of raw material has been acquired by the assessee from ITA No. 278/Del/2012 31 its associate concerns for the purpose of manufacturing items.... We, therefore, direct the AO to modify the assessment and make the adjustment only to the extent of difference in the arm's length operating profit with adjusted profit with reference to the 45.51% of the turnover, and not to the total turnover of the assessee.
25. In similar lines, Appellant places reliance on the decision of Hon'ble Mumbai ITAT in the case of Pennzoil Quaker State India Limited (ITA No. 8885/Mum/2010) and Firestone International (P) Ltd (ITA No. 4520/Mum/2011).The relevant extracts are reproduced below:
Pennzoil Quaker State India Limited "Adjustment has to be made only with respect to purchases with associate enterprises. In our view the claim of the assessee is very reasonable as the adjustment has to be made only with respect to transactions with associate enterprises based on arms-length price and not with respect to total purchases/sales. This view is supported by several decisions of the Tribunal, some of which have been referred to by the ld. AR in para-4 earlier. We, therefore, restore the issue to the file of AO/TPO for fresh computation of transfer pricing adjustment after necessary examination in the light of the observations made above and after allowing opportunity of hearing to the assessee."
Firestone International (P) Ltd "Respectfully following, we hold that the CIT (A) order is in tune with the provisions of the Act as interpreted by the above orders of the ITAT. Since the arm's length price has to be determined only with reference to the international transaction......If this sort of adjustment is permitted this will result in increasing the profit of assessee on the entire non-AE sales also, which is not according to the provisions of Transfer Pricing mandated by the Act for the impugned assessment year. Therefore, the Revenue grounds on this are rejected."
26. The Appellant would like to draw your kind attention to the decisions of Hon'ble Bombay High Court in the case of M/s. Thyssen Krupp Industries India Pvt. Ltd. (Appeal No. 2201 OF 2013) and M/s Tara Jewels Exports Pvt. Ltd. (Appeal No. 1814 OF 2013). The relevant extracts are reproduced below:
M/s. Thyssen Krupp Industries India Pvt. Ltd.
"e) We find that in terms of Chapter X of the Act, redetermination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with non AE. This adjustment is beyond the scope and ambit of Chapter X of the Act."
M/s Tara Jewels Exports Pvt. Ltd.
"6. The question as proposed by the revenue does not seems to arise from the impugned order of the Tribunal nor is the method of determination of ALP on application of TNMM arriving at the margin of 4.79% is disputed before Tribunal or before us. We are unable to understand the grievance of the revenue as formulated in the proposed question. The respondent- assessee has not challenged the application of TNMM and arriving at the margin of 4.79% arrived at by the TPO to determine ALP. The grievance of the respondent-assessee before the Tribunal is only with the margin of 4.79% being applied in respect of all it's sales and not ITA No. 278/Del/2012 32 restricted to the international transactions entered into by the respondent-assessee with it's AEs. It is evident from the provisions of Chapter X of the Act that the adjustment which has to be done to arrive at ALP is only in respect of the transaction with it's AEs. Thus no fault can be found with the order of the Tribunal.
7. Mr. Pinto is unable to point out how the aforesaid finding of the Tribunal is incorrect in law in the face of the clear provisions in Chapter X of the Act. The question as framed by the revenue to our mind do not arise from the impugned order of the Tribunal as the issue raised in the proposed question is not disputed. Accordingly, we see no reason to entertain the proposed reframed question of law as it does not give rise to any substantial question of law."
27. In this regard, the Appellant also places reliance on the following decisions of the various Hon'ble Income Tax Appellate Tribunals which have upheld the above principle:
• Two International (ITA NO 5644/MUM/2008) (Mumbai).
• Kyungshin Industrial Motherson Vs DCIT (ITA No. 1396(Del)/2009) (Delhi).
• Twinkle Diamond v. ACIT (ITA No. 5033/MUM/07),
• Addl. CIT v. Tej Diem ((2010) 130 TTJ 570) (Mumbai)
• UCB India Private Limited V ACIT ((2009) 317 ITR 292) (Mumbai)
• Demag Cranes & Components (India) Private Limited V DCIT ((2012) 144 TTJ
320) (Pune) and
• SL Lumax Limited V ACIT (ITA No. 1915/Mds/2011) (Chennai)
28. Further, it is noteworthy that in the same order issued by the Ld. TPO for the AY 2008-09, the principle of proportionate adjustment has been accepted by the Ld. TPO in the Lighting division. The relevant extracts from the TP order is provided as Annexure 3(i)to this executive summary. As the principle of proportionate adjustment is granted in the Lighting division in the instant case, the Appellant requests that the same should be granted for the Power Control division as well.
In addition, the Appellant draws reference to the order of Hon'ble DRP for the AY 2009-10, where the Hon'ble DRP has also accepted the principle of proportionate adjustment and directions were given to the Ld. TPO to limit adjustments proportionate to the value of international transactions. The relevant extracts from the Hon'ble DRP order is provided vide Annexure 3(ii)of this executive summary.
Also it is relevant to mention that the Ld. TPO himself, for the AY 2010-11,is in agreement with this principle and thereby limited the adjustment proportionate to value of international transactions. The relevant extracts of the TP order is provided vide Annexure3(iii) of this executive summary.
29. Accordingly, the Appellant submits that considering the very low quantum of the material costs representing the international transaction of the segment for FY 2007-08 vis-à-vis the total expenses and total material costs of the segment, any such adjustment, if at all, can be made only to the proportionate sales made out of raw materials imported from the associate concerns and not in respect of total sales of manufactured items which were manufactured from the total raw materials procured from third parties as well.
ITA No. 278/Del/2012 3330. The computation of the proportionate adjustment is thus provided below:
31.
Amount (INR.)
Particulars Actual sales pro -
rated to 9.72%
Sales 208,997,259
Material Cost 141,889,745
Operating Expenses 67,771,996
Add: Other income 8,777,260
Operating Profit (A) 8,112,777
Operating Profit Margin 3.88%
Adjusted to ALP of 4.93% (B) 10,303,565
Difference in ALP and Actual C= A- B 2,190,788
Actual import price (D) 141,889,745
ALP import price E = D-C 139,698,957
1.05 of D 148,984,2323
0.95 of D 134,795,258
ALP import price in the 5% range Yes
Adjustment Nil
Accordingly, the above ALP import price falls in the within +/-5% range and hence no adjustment is required to the transfer price.
23. The ld. DR relied on the orders of AO/TPO and DRP.
24. After hearing the submissions of both the sides and perusing the entire material available on record and we find that the assessee in his written synopsis has made extensive arguments pertaining to the issue and has also relied on several decisions, which have not been properly controverted on behalf of the Revenue. We, however, find that since these decisions were not relied upon by the assessee before the Authorities below, the findings of the authorities below is lacking on the same. In presence of these facts, we remit this matter too back to the file of AO/TPO to decide the same afresh after considering the extensive pleas taken in the written arguments before us as well as the case laws relied in support. The assessee is directed to put up its case before the AO with all ITA No. 278/Del/2012 34 supporting evidences and decisions in support. Needless to say, the assessee shall be given reasonable opportunity of being heard. Accordingly, grounds Nos. 10 & 11 are allowed for statistical purposes.
Ground No. 12 & 13 :
Background and international transactions:
25. The lighting division is engaged in the purchase, marketing and distribution of a wide range of lighting products in India for commercial and industrial use.
GELI sells its products only to third parties in India and sources its products primarily from unrelated parties. It also sources a small portion of the goods from the Associated Enterprises ('AEs'). The major functions of the division are taking title and holding inventory, customer development, purchase and sales planning, pricing, the processing of warranty claims, marketing, packaging and labeling and advertising. During the year, the assessee had imported goods in the lightening division of Rs.4,30,80,809/- and the AO/TPO had made upward adjustment of Rs.25,97,724/- by following TNMM method whereas the assessee had applied resale price method for calculating PLI. In the TP study report, the gross margin was taken at 23.47% and gross margin of comparables chosen by the assessee was 9.29%. Therefore, the assessee had not added any upward adjustment. The assessee company had chosen comparables for the lightening division for computing benchmarking of the following three companies:
Sl. No. Company name Gross profit Operating Profit
Margin % Margin %
1 Amzel Ltd. 11.71% 2.50%
2 Chloride International Limited 15.08% 2.51%
3 Karuna/Globus Corporation Limited 0.59% 2.79%
ITA No. 278/Del/2012 35
26. The ld. AR relied on the submissions made by him as under:
International Transactions for FY 2007-08 pertaining to distribution segment:
Particulars Amount (INR) Outcome of TP order
Imports of finished products for trading 43,080,809 Adjustment of INR 2,597,724
Rejection of the method applied
32. As per the TP study report of the Lighting division, the most appropriate method used by the Appellant in respect of distribution segment is RPM. This method has been consistently applied on a year on year basis and also accepted by the Ld. TPO's office in the past and also in the subsequent year.
33. Given the fact that the functions of the Appellant have remained the same, the method and therefore the PLI used by the Ld. TPO should also have been consistent for all the years. In support of the same, the Appellant draws reference to the table below highlighting the fact the Ld. TPO in the past accepted the comparability analysis including the RPM method.
Particulars AY 2006-07 AY 2007-08 AY 2008-09
Import of traded goods 111,426,016 124,536,186 43,080,809
Method applied by GELI RPM RPM RPM
GM of GELI in TP study 13.24% 16.29% 23.47%
GM of comparables 10.63% 10.11% 9.29%
Sales 823,423,545 953,547,836 897,033,502
RPM rejected
RPM and TNMM
Method applied by TPO RPM accepted accepted applied
34. Also, it is noteworthy that the gross margin of the Appellant has been increasing year on year and it does not hold any merit to deviate from RPM method and the Ld. TPO's intention is only to impose an adjustment without any basis.
i. Applicability of RPM
35. The RPM begins with the price at which a product that has been purchased from an AE is resold to an independent enterprise. This price (the resale price) is then reduced by an appropriate gross margin (the "resale price margin") representing the amount out of which the reseller would seek to cover its selling and other operating expenses and, in the light of functions performed (taking into account assets used and risks assumed), make an appropriate profit.
Ideally, the distributor should not add a significant amount of value to the products they resell ITA No. 278/Del/2012 36 or own valuable, non-routine intangibles that may affect the profits earned on the products they resell.
36. In this regard, the Appellant submits that the Appellant is a routine distributor engaged in trading of lighting products, adding no value to the products purchased from its AEs prior to resale to independent customers.
37. The Appellant draws reference to the Guidance note issued by the Institute of Chartered Accountants of India ("ICAI") on International Transactions under Section 92E of the Act also provides justification for the application of RPM with respect to Distributors.
Para 19.2 of the Guidance note issued by ICAI mention the application of RPM as follows:
"19.2 Typically transactions where the resale price method may be adopted are distribution of finished products or other goods involving no or little value addition."
38. This again goes to prove that RPM has been correctly applied for GELI's distribution activity as indicated in the guidance note issued by the ICAI.
Furthermore, the Assessee submits the fact that the Company is engaged in the distribution of lighting products. Accordingly the comparables of the Assessee being distributors of broadly similar products and hence are functionally close comparables for the purposes of applicability of RPM.
39. In this regard reference is made to Para 2.29 of the OECD guidelines:
"2.29 An appropriate resale price margin is easiest to determine where the reseller does not add substantially to the value of the product. In contrast, it may be more difficult to use the resale price method to arrive at an arm's length price where, before resale, the goods are further processed or incorporated into a more complicated product so that their identity is lost or transformed"
In this regard, the Appellant would like to place reliance on the judgment of the Bombay High Court in Commissioner of Income Tax v. L'Oreal India (P) Ltd. (2015) 276 CTR (Bom) 484 wherein the Hon'ble Court accepted the application of RPM as the most appropriate method for testing the transaction pertaining to buying products from its AEs for resale to third parties without any value addition/ further processing and held:
"7. After having perused the relevant part of the order passed by the CIT(A) and the Tribunal on this question, we are in agreement with Mr. Pardiwalla that the Tribunal did not commit an error of law apparent on the face of the record nor can the findings be said to be perverse. The Tribunal has found that the TPO has passed an order earlier accepting this method. The Tribunal has noted in para 19 of the order under challenge that this method is one of the standard method and the OECD (Organization of Economic Commercial Development) guidelines also state in case of distribution or marketing activities when the goods are purchased from associated entities and there are sales effected to unrelated parties without ITA No. 278/Del/2012 37 any further processing, then, this method can be adopted. The findings of fact are based on the materials which have been produced before the CIT(A) as also the Tribunal. Further, it was highlighted before the CIT(A) as also the Tribunal that the RPM has been accepted by the TPO in the preceding as well as succeeding assessment years. That is in respect of distribution segment activity of the assessee. In such circumstances, and when no distinguishing features were noted by the Tribunal, it did not commit any error in allowing the asssessee's appeal. Such findings do not raise any substantial question of law. The appeal is devoid of merits and is, therefore, dismissed. There would be no order as to costs."
The Appellant would also like to place reliance on the decision of Bangalore ITAT in the case of M/s. Sanyo India Pvt. Ltd. (IT(TP)A No.224/Bang/20 14) and the decision of Delhi ITAT in the case of Nokia India (P) Ltd. (ITA No.242/Del/2010). The relevant extracts are reproduced below.
M/s. Sanyo India. Pvt. Ltd. (IT(TP)A No.224/Bang/20 14) ....primarily engaged in the business of distribution and sale of consumer durables.
10. Respectfully following the decision of the Tribunal referred to above, that RPM is the most appropriate method."
Nokia India (P) Ltd. (ITA No.242/Del/2010) ...assessee simply purchased mobile phones and accessories from Nokia group companies situated outside India and resold the same as such without any further value addition...
13. We have noticed above that in the given circumstances, RPM is the first choice for consideration as the most appropriate method.
The Appellant would also like to place reliance on the decision of Delhi ITAT in the case of M/s. Yamaha Motor India Pvt. Ltd (ITA No.5748/Del./2011) and the decision of Delhi ITAT in the case of Luxottica India Eyewear P. Ltd. (ITA no.1115/Del/2014). The relevant extracts are reproduced below.
M/s. Yamaha Motor India Pvt. Ltd 8.7 According to the provisions of section 92C and Rule 10B, the arm's length price in relation to an international transaction has to be determined by following any of the appropriate method. The resale price method and the cost plus method operate at gross profit margin level requiring functional rather than product comparability. The profit split method and the TNMM operate at operating margin level used for a complex and integrated enterprise. The method which provides most reliable way of arriving at arm's length price is considered as most appropriate method. A comparative analysis is done for comparison of the controlled transaction with an uncontrolled transaction and controlled and uncontrolled transactions are comparable if none of the difference between the transactions can materially affect the factor being examined by adopting any of the methodology as mentioned in Section 92C.
ITA No. 278/Del/2012 388.8 We are of the view that where an assessee has followed one of the standard method for determining the arm's length price, such a method cannot discarded in preference over other method. In fact the transactional net margin method i.e. TNMM should be applied only when standard or traditional methods are incapable of being applied in the facts of the case because while traditional method seeks to compute the price at which international transactions would normally be entered into by the associated enterprise but for their interdependence and relationship, transactional profit method seeks to compute the profit that the tested party would normally earn on such transaction with unrelated parties. In the facts and circumstances of the case, we are of the view that TNMM method applied by the TPO for determining the arm's length priceis not the most appropriate method.
M/sLuxottica India Eyewear P.Ltd 10.4. As the undisputed fact is that the functional profile of the assessee is that of a trader and as the characterisation of the transaction is purchase and sale of goods, we hold that RSPM is the MAM by applying the following decisions of the Co-Ordinate Bench of the Tribunal.
Based on the above, the Appellant submits that RPM is the most appropriate method for testing the international transactions of distribution segment.
ii. Inconsistency in the Ld. TPO's approach
40. As regards the consistent application of RPM as the most appropriate method, it would also be relevant to draw reference to the principle laid out in the case of Lenovo (India) Private Limited [TS-178-ITAT-2012(Bang)], wherein the Hon'ble Bangalore Tribunal inter alia held as follows:
"12. There has to be a continuity and uniformity in the approach of the Revenue towards an issue and particularly in the case of the same assessee. When the facts and circumstances are exactly the same, the Revenue cannot be permitted to take a different approach in two different assessment years".
The above principle of consistency has also been upheld in the cases of:
• ACIT V NGC Networks (India) Private Limited (ITA No. 5307/M/2008) (Mumbai) • Brintons Carpets Asia Private Limited V Deputy Commissioner of Income Tax (ITA No. 1321/PN/2011) (Pune) • CIT V Gopal Purohit (228 CTR 582) (Bombay High Court) • Kuehne + Nagel Private Limited V ACIT (ITA No. 5648/Del/2010) (Delhi) • DCIT V Bacardi Martini India Ltd (ITA No. 2933(Del)/2010) (Delhi) ITA No. 278/Del/2012 39
41. Accordingly, the Appellant submits that the Ld. TPO was inconsistent in the approach and applied TNMM for testing the international transactions relating to import from related parties in the distribution segment without any economic rationale.
42. Further, the Appellant draws reference to paragraph number 39 wherein the Ld. TPO has accepted the method applied by the Appellant in the past. Thereby the comparables chosen in the TP study were also accepted by the Ld. TPO. In this regard, the Appellant draws reference to Mumbai ruling in the case of NGC Networks (India) Private Limited (ITA No. 5307/M/2008)wherein the Hon'ble Tribunal held as follows:
15".......These comparables and the method of computation of arm's length price has been accepted by the department in the subsequent assessment year i.e 2004-05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also."
43. Also, reliance is placed on Bangalore ruling in the case of GE India Technology Centre Private Limited[ITA no. 789/Bang/2010], wherein it was stated that 43 "....Uniformity and consistently in approach is essential for both the Revenue as well as the assessee alike unless the circumstances warrant otherwise." Therefore, it is worth mentioning that due to consistent approach followed by the Appellant while carrying out the economic analysis, one such comparable Amzel Automotive Limited was chosen consistently on a year on year basis and also accepted by the Ld. TPO in the earlier years. Therefore, it makes no rationale to reject this comparable for this year when facts and circumstances continue to be the same.
44. Therefore, the Appellant submits that, without prejudice to the TP study comparability analysis, even if the comparable companies selected by the Ld. TPO are tested along with Amzel Automotive Limited, the GM of 17.08% (as computed below) is lower than the GM of 23.47% of the Appellant. [Refer Page 157 to 161 of the Appeal Memo].
S.No. Company Name Gross Margin Net Margin
Amzel Automotive
1 Ltd. 9.26% 2.76%
2 Bajaj Electrical Ltd. 19.49% 7.50%
3 Birla Power Ltd. 22.49% 15.92%
Arithmetic mean 17.08% 8.73%
GELI's Margin 23.47% 6.53%
45. Also, the net margin of 6.53% earned by the Appellant is at arm's length after exercising its option as per proviso to section 92C(2) of the Act. The computation of ALP and the proviso to section 92C(2) is shown in the table below.
Particulars Actuals ALP 5% -5%
ITA No. 278/Del/2012 40
Sales4 56,332,726 56,332,726 56,332,726 56,332,726
COGS (AE
purchases) 43,080,809 41,839,576 45,234,849 40,926,769
Operating
expenses 9,575,303 9,575,303 9,575,303 9,575,303
Operating Profit 3,676,614 4,917,847 1,522,574 5,830,655
OP/Sales 6.53% 8.73% 2.70% 10.35%
The above ALP of 8.73% falls within the +/-5% range and hence no adjustment is required to the transfer price.
46. It is to say that ultimately, the Profit Level Indicator is only a measure of determining whether the transfer prices of the Company are at arm's length. The Appellant therefore submits that where it is established that by virtue of the gross profit itself being at arm's length, the transfer prices (the import transaction with AEs for resale to third parties) in turn are at arm's length, there is no possibility of inferring that there is any under-reporting of the income merely by a change in profit level indicator (method).
Based on the above, the international transaction of the Appellant relating to the imports of goods for distribution in the Lighting division continues to be demonstrated at arm's length for FY 2007-08.
47. Under these circumstances, where it is clearly demonstrated that there is no evasion of tax, any adjustment to the transfer prices is not only fundamentally incorrect but is also against the basic tenets of transfer pricing and also onerous to the Appellant.
27. On the other hand, the ld. DR relied on the order of the lower authorities and submitted that the lower authorities have made upward adjustment of Rs.25,97,724/-by following TNMM method. The comparables chosen by the authorities below are quite applicable in the present case. The res judicata does not apply in the income-tax proceedings. Every year is a separate assessment year, as held by many Hon'ble courts.
28. After hearing both the sides and perusing the entire material available on record, we observe that the assessee has used resale price method for benchmarking/PLI whereas the lower authorities have confirmed the Transaction ITA No. 278/Del/2012 41 Net Margin Method. The resale price method is a direct method which compares the gross margins (i.e., gross profit over sales) earned in transactions between related and unrelated parties for the determination of the arms length prices. The RPM method requires high level of functional comparability and is mainly applicable where the controlled party is a distributor. Practically, the application of RPM is found by working backwards from transactions taking place at the next stage in the supply chain, and is determined by subtracting an appropriate gross mark-up from the sale price to an unrelated third party, with the appropriate gross margin being determined by examining the conditions under which the goods or services are sold and comparing the said transaction to other, third- party transactions. Generally the RPM is used in the following situations.
(1). The RPM begins with the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. Therefore, the use of RPM is ideal for distribution activity, whereby the tested party purchases the products or obtains the service from its associated enterprises and resells the products/services to independent enterprises;
(2). RPM is the most appropriate in a situation where the sellers add relatively little value to the goods and not alter the goods physically before the resale. Packaging, repacking, labeling or minor assembly does not ordinarily constitute physical alteration;
(3). RPM is used in cases where reseller does not apply intangible assets to add value. The greater the value-added to the goods by the functions performed by the seller, the more difficult it will be to determine appropriate resale margin. This is especially true in a situation where the seller contributes to the creation or ITA No. 278/Del/2012 42 maintenance if a intangible property, such as a marketing intangible, in its activities;
29. It is clear from the submissions of both the sides that the assessee is routine distributor engaged in trading of lightening products to the independent customers without any value addition to the products purchased from its AEs. Therefore, the assessee has rightly applied RPM method. We further observe that while calculating PLI for the assessment year 2006-07 and 2007-08, the ld. TPO/AO had also accepted the RPM method applied by the assessee. There is no change in the facts and circumstances of the case. The assessee is dealing in the same business as was in earlier years. Therefore, the rule of consistency is applicable in the present case, as decided in various decisions. The rule of consistency is also supported by Rule 10D(4) and the decision of the Vishakhapattam Bench of ITAT in the case of KTC Ferro Alloys (P) Ltd. vs. ACIT (2014) 43 taxmann.com 152 wherein following the decision of Delhi Bench of the ITAT in the case of Hosley India Pvt. Ltd. vs. DCIT (ITA No. 5904/Del/2010 dated 25.10.2012) and the Pune Bench of ITAT in the case of Brintons Carpets Asia Pvt. Ltd. vs. DCIT (2011) 46 SOT 289 (Pune) held as under :
"As seen from the orders of the TPO in later two years, we are of the opinion that CUP is the most appropriate method and accordingly, we are of the opinion that TPO should have based his analysis on the basis of the CUP method alone, as in later years. Rule of consistency also applies to the facts of this case."
The AO/TPO is accordingly directed to adopt RPM method for calculating the PLI in respect of lightening division.
30. The relevant facts relating to ground No. 14 are that GET India does assembly of signaling products. For this purpose it imports panels from GE ITA No. 278/Del/2012 43 Transportation Systems Global Signaling, LLC ('GETS GS') and GE Transportation Systems spa ('GETS spa'). GET India assembles signaling products and sells them to Indian customers, mainly Indian Railways. In this division, the assessee has earned OPM of (-) 132.72% whereas the assessee company has computed 4.23% margin of comparables selected by him. If the low margin turnover are excluded then the average PLI rises to 6.23%. The assessee has not made any adjustments to the margins in light of a detailed note given by him. The heavy loss incurred by assessee in this division due to not granting approval by RDSO timely. The assessee had requested for entertaining adjustment on account of high import duty contained in the goods imported by this assessee company for manufacturing signaling equipments. He also submitted detailed working of import contents in respect of other comparables. But the ld. AO/TPO did not accept heavy operating expenses incurred as a fixed cost on account of delay in the approval of assessee's products by various authorities. Accordingly, they calculated average gross profit margin to 23.50% and made the following adjustments :
International Transactions for FY 2007-08 pertaining to import and assembling of signaling products segment:
Amount Particulars Outcome of TP order (INR) Import of signaling 32,345,481 Adjustment of INR 11,833,756 products In this regard, the AR of the assessee made following written submissions :
Adjustment on account of higher import content
48. The Ld. TPO examined GET India's contention that the losses were incurred on account of RDSO approval to the equipment imported by it, which resulted in high operating expenses and which ITA No. 278/Del/2012 44 eventually has contributed to the high losses incurred by the Company and thereby compared the margins at gross level. However the Ld. TPO failed to appreciate the claim of GET India on account of excess custom duty paid by transportation division and mentioned that GET India has not carried out simultaneous adjustment on account of higher price realization.
49. The Company submits that the total cost of goods sold of signaling segment of GET India includes 64 percent of import costs whereas in case of comparables the average import over total costs of goods sold ratio is only 14 percent as mentioned in the table below:
Amount (INR. in Crores) Imports Cost of goods Name of the company Income Imports as % of sold (COGS) COGS GET India 4.38 5.04 3.23 64.23% Comparables Adtech Systems Ltd. 20.48 13.05 5.39 41.30% K Dhandapani& Co. Ltd. 42.8 36.85 0.00 0.00% Remi Sales &Engg. Ltd. 45.59 36.37 0.00 0.00% Average Import as % of COGS of comparables 13.77%
50. This implies that GET India is subject to pay higher custom duty on excess import content of around 50 percent higher vis-à-vis its comparable companies. Therefore, in order to functionally compare the results of transportation division with the OM obtained by comparables companies, an adjustment on account of excess custom duty paid by transportation division is warranted.
51. In this regard the Appellant would like to draw reference on the Pune Tribunal decision in the case of Skoda Auto India (P) Ltd. vs ACIT ITA No. 202/PN/07, A.Y. 2003-04. The Tribunal acknowledged the differences on account of additional import cost between the assessee and the comparables and therefore allowed adjustment on account of higher costs incurred by the assessee. On similar lines, the Appellant further relied on the Delhi Tribunal ruling in the case of Demag Cranes and Components (India) Pvt. Limited v/s DCIT ITA No. 120/PN/2011, A.Y. 2006-07. The Tribunal relied on the decision in the case of Skoda Auto India (P) Limited and therefore granted adjustment on account of additional costs incurred by the assessee.
52. Moreover, in Toyota Kirloskar Motors Pvt. Ltd. v. ACIT ITA No. 828/Bang/2010, AY: 2003- 04 the Hon'ble Bangalore Tribunal, while remitting the matter to the TPO had observed that even though a higher import content does not warrant an automatic adjustment, what is really to be seen is whether the high import content was necessitated by circumstances beyond the assessee's control.ITA No. 278/Del/2012 45
53. Based on the above mentioned judicial precedents, the Appellant submits that the excess custom duty paid by Transportation division on excess imports is required to be adjusted towards the COGS to determine the adjusted GM of GET India.
Amount Particulars (INR) % Import/ COGS of tested party A 64.23% % Import /COGS of Comparables B 13.77% Excess Imports C=A-B 50.46% Custom duty paid during the year D 10,151,470 Excess custom duty E = (D*C)/A 7,975,385 The Company submits that if the gross margin of the segment was adjusted to the exclude the additional costs incurred for custom duty and thus the adjusted gross margin of transportation division is considered, the Transfer pricing adjustments as proposed in the TP Order by the Ld. TPO needs to be revised.
Accordingly, the Company submits that the TP adjustment if any should not exceed the following:
Particulars Amount (INR)
TP Adjustment considered by
11,833,756
the Ld. TPO in the TP order
Less : Custom Duty adjustment
7,975,385
as mentioned above
Maximum possible TP
3,858,371
adjustment
Accordingly, if at all any adjustment is done, excess import duty adjustment should be granted and accordingly, the TP adjustment ought not to have exceeded INR 3,858,371.
31. On the other hand, the ld. DR relied on the order of the lower authorities and submitted that the losses incurred due to delay in approval from RDSO and incurred heavy import duty is a reason other than international transactions. In order to supply the signaling equipments, the assessee should have obtained approval from RDSO in addition to Indian Railway approvals. The pilot projects were fixed price contract without an escalation clause. He further submitted that the case laws relied by the assessee are on different footings. Therefore, the case laws do not support the assessee.
ITA No. 278/Del/2012 4632. After hearing both the sides and perusing the entire material available on record, we observe that the total cost of goods sold of signaling segment includes 64% of import cost, but in the comparables selected by the AO/TPO, the average import over total cost of goods sold is only 14%. In this regard, the ld. DRP has rightly discussed this issue in detail as under :
"Thus we find that assessee has incurred loss even at the gross profit level. It means that assessee's emphasis on maintenance charges is misplaced, in so far as the ALP of the international transactions related to import of material from the AEs is concerned. Therefore, we confine ourselves to assessee's arguments related to import content. But we find that the cost is the amount spent to bring the goods to present location and condition.
• In case of material purchased, the cost of material is not just the purchase price, but includes the duties paid as well as the carriage & handling costs. This fundamental principle of accounting is explicitly spelt out in section 145A of the Income Tax Act. Hence, cost of goods sold cannot be worked out excluding the duties.
• No independent enterprise would agree for a purchase price without taking into account the duty structure or carriage cost. Ignoring the duties for making a purchase decision or budgeting for profits is not a normal business practice.
• The customs duty is paid on the imports made from its AEs. So, it forms part of the cost of purchase of material. Even in the case of independent parties, the same would form part of cost. It is a commercial decision to import or to purchase locally. • The other comparable companies pay excise duty as well as sales tax on the inputs used by them. Further, the rates of excise duty vary across the nature of inputs. Thus, these adjustments are not warranted as minor functional differences like that of sourcing of raw materials locally or imports would not affect net margins as the pricing of goods would take all these into account by these companies.
• The ITAT Delhi in the case of Sony India Pvt. Ltd. vs. DCIT (114 ITD 448 (Del) held that the import duty forms part of the cost and no adjustment is required on account of custom duty. • The Indian economy is globalized economy and it does not suffer now with isolation created by high walls of tariff to protect the indigenous industry. The tariff rates rather by creating the purchase price parity create a choice before the business entities as to whether to buy the material from abroad or locally. If there is no levy of tariffs, it will leave the scope of price difference between the two markets and therefore, the flow of trade will be such that entire purchases of goods will be from cheaper market and goods will be sold in expensive market. The trade flow will remove the difference in the price in two markets but in this process manufacturers in the expensive market will suffer due to relatively expensive goods produced by them are not sold and, therefore, by tariffs levied by the Governments the price parity is created in glabalized market and high tariff walls are not created to protest the domestic industries. Thus the choice is left with the buyers to decide as to the market from where to make the purchases of comparable goods. If for comparable good, still higher price is paid by ITA No. 278/Del/2012 47 the buyer, then it is quite possible that it is due to related party transactions. The purpose of transfer pricing is to find out difference in the prices due to fctors such as related party transactions by comparing it with similar transactions by undertaken by the third parties and therefore, calling basic custom duty as advantageous is against the principles of comparability and exclusion thereof from purchase price would create the distortion in the price of tested party and it will decrease the comparability. Import of inputs is assessee's conscious choice and there assessee should not make efforts to artificially improve the profit level by reducing the denominator in the calculation of profit level Indicator. This approach of the assessee will be at the expense of the basics of transfer pricing principles.
• In this matter, it may be said that the purpose of any adjustment should be to improve the comparability between the international transaction(s) undertaken by the tested party and the transactions undertake by uncontrolled comparables with unrelated parties. The purpose while making any adjustment can also be to improve the comparability between the tested party and the uncontrolled comparables. But in our view the purpose of any adjustment can never be to improve the profitability of the tested party so that it compares well with the uncontrolled comparables. Therefore, any effort made by the assessee to plead for an adjustment that will improve its profitability is misdirected and therefore, should not be accepted.
• The assessee relies upon Skoda Auto India Pvt. Ltd. vs ACIT- 2009-TIOL-214-ITAT, Pune. Therefore, it is necessary to discuss the facts of that case. The basic facts in that case were as follows :
I. The year under consideration was the first year of operation. II. The import content of raw material was as high as 98.55% The main arguments by the Pune Bench in the case of Skoda were that: a. No doubt, a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India Limited's case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. b. The argument before ITAT was that it was first year of assessee's operations and complete facilities ensuring reasonable Indigenous raw material content was not in place The assessee's claim is that it was in these circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. c. The ITAT remitted this mater to the file of the Transfer Pricing Officer for fresh adjudication in the light of its observations and particularly dealing with the contention that the present year being first full year of operations, the assessee ws forced to have higher import content in raw material as the manufacturing facilities, and vendor development was not complete, as also dealing with the contention that the business model in this year of operation was fundamentally different from the business model of the comparable concerns. The Transfer Pricing officer was also asked to consider whether the import content of the raw material have substantially come down in succeeding years and will take into account the conclusions that can be drawn from such a decline or consistency as the case may be, of the import content in the raw ITA No. 278/Del/2012 48 material. In case the Transfer Pricing officer come to the conclusion that adjustments in operation profits margin on account of peculiarities of business model resulting in higher import duties, the Transfer Pricing Officer will consider the manner in which impact of the same can be reasonably neutralized in a practical manner.
Thus, the Hon'ble ITAT held that adjustment for custom duty need not be made in all cases unless special circumstances warrant such adjustment. Thus, in the initial years when MNC vehicle manufacturers do not have sufficient facilities to indigenize the components, then there needs to be an adjustment for customs duty. Though the Hon. Tribunal in the case of Skoda accepted that use of extra ordinary high content of imported material was not a choice of the company, rather it was the compulsion of the company; still it is important to note that the Hon. Tribunal has not suggested that the custom duty should be excluded from the purchase price. Rather, the Hon. Tribunal held that the TPO should find out the means of neutralizing the impact of high Custom duty rate in the case of Skoda. There is no peculiar circumstance in the case of assessee. The assessee is in a premium segment wherein it was intending to import signaling equipments and supply the same to Railways after suitable manufacturing to be effected in India to suit the Indian requirements. Import of inputs is not a compulsion in its case. Rather, it is a conscious decision of the company in the given circumstances and therefore, payment of basic duty is not a compulsion in the case of assessee. Therefore, there is no need of even neutralizing the impact of custom duty paid. Claim for excluding custom duty from purchase price is asking for too much in the given circumstances."
33. From the above finding of the ld. DRP, the AO and TPO have rightly made addition of Rs.1,18,33,756/- in the transportation division. After considering all the submissions from both the sides, we find no infirmity in the order of the DRP/ AO/TPO on this count. Therefore, this ground is rejected.
34. In respect of ground No. 15, at the outset of hearing, the ld. AR did not press the provision for onerous contract issue. The brief facts of the case are that GEWPT India imports raw materials from AEs and local third party suppliers. GEWPT India is engaged in the manufacture of specialty chemicals, more specifically, water treatment chemicals and pulp and paper product chemicals. The ld. AO/TPO observed that the gross margin declined from 55.35% in 2006-07 to 48.92% in 2007-08 resulting into decline in gross margin of 6.43%. The gross margin shown by the assessee was much lower than the margins shown by its ITA No. 278/Del/2012 49 comparables selected by the assessee. In this regard, a show cause notice was given to the assessee. The assessee submitted detailed reply dated 13.10.2011 and tried to justify the decline in margin due to decline in the margin on some of the large value contracts entered into by the company during the year and operating cost did not decline proportionately and increase in personal cost, other operating costs, provision for onerous contracts and long term contracts. But the ld. AO/TPO did not accept the contention of the assessee and made upward adjustment as under :
International Transactions for FY 2007-08 pertaining to Import of Raw Materials/Reagents for Manufacture of Specialty Chemicals Amount Particulars Outcome of TP order (INR) Import of raw materials/ reagents for 37,879,772 Adjustment of manufacture of specialty chemicals INR 31,202,495 The assessee has submitted a written submission which reads as under :
54. The Appellant submits that during the year the manufacturing segment of Water division has incurred losses (-0.63%).
55. Provision for onerous contracts: Water division created a provision for onerous contracts of INR 5,631,443. This was an unusual expense booked as Water division foresees non-payment on account of few of its customers.
56. Re-computation of normal operating margin -The Appellant would like to submit that while computing the operating margin of the manufacturing segment of the Water division in the TP study, the provision for onerous contracts of INR 5,631,443 which is an extraordinary expenditure has to be excluded from the total costs. Your good self would appreciate the fact that this is an unusual expense and should be excluded while computing the normal operating profit margin for the purposes of comparability analysis.
57. In this regard, the Appellant would like to place reliance on the decision of the Hon'ble Delhi High Court in Commissioner of Income Tax v. Transwitch India Pvt. Ltd. ITA 678 of 2012 where the Hon'ble Court was dealing with assessee's contention of comparability adjustment on account of relocation and other expenses incurred (extraordinary expense), to the assessee's operating margin. The Court while accepting the ITAT decision observed as under:ITA No. 278/Del/2012 50
"It is not disputed that if the figure of Rs. 1,11,73,078/- is duly accounted for and taken into consideration, then the operating margin of the respondent/assessee comes to 17.80%, which is higher than the comparable operating margin of 17.09%, taken as a benchmark by the TPO. Submission on behalf of the appellant that the parent company should have shared the burden or a part thereof is not legally tenable. The said expenditure was incurred by the Indian company because of peculiar problems faced by them as a result of which they had to shift the place from where they were operating. The abnormality and difficulty resulting in extra expenditure was not created or caused by the associated enterprise. They were not responsible or liable for the said payments/expenditure. The associated enterprise did not have legal or contractual obligation to make extra or additional payment beyond the true and correct value of the transaction."
58. Similarly, the Hon'ble Delhi Bench of the ITAT has allowed a comparability adjustment on account of incurring of extraordinary expenses, in order to eliminate functional differences, in the following cases-
• Global Turbine Services Inc. v. ADIT ITA No. 3484/Del/2011: Adjustment allowed on account of under capacity utilization.
• G4S Secure Solutions v. ACIT ITA No. 1540/Del/2012: Adjustment allowed on account of extraordinary expenses.
• HCL Technologies BPO Services Ltd. v. ACIT ITA NO. 3547/Del/2010. • Honda Trading Corp. India Pvt. Ltd. v. ACIT (2014) 146 ITD 591 (Delhi): Adjustment allowed on account of exchange rate fluctuations.
59. In light of the above judicial decisions, the Appellant has computed the correct operating profit margin of the manufacturing segment of the Water division which is provided below for your good self's reference:
OM as per Adjusted
Particulars
TP study OM
Sale of Manufactured Goods 421,297,311 421,297,311
Material costs 216,827,164 216,827,164
Decrease/ (increase) inventories of work in
(1,879,352) (1,879,352)
progress
Gross profit 206,349,499 206,349,499
Gross Profit Margin 48.98% 48.98%
Operating Expenses 207,296,346 207,296,346
Provision of Onerous Contracts 5,631,443
Add: Other Income 3,920,114 3,920,114
Operating Profit (2,658,176) 2,973,267
Operating Margin (OM) -0.63% 0.71%
ITA No. 278/Del/2012 51
Proportionate segmentation for low purchases from related party
60. Without prejudice to the TP study, the Company wishes to submit that the division has purchases from related and unrelated party as well. The ratio of materials purchased from AEs to the total material costs is as follows:
Amount Particulars (INR) Total material cost 216,827,164 Cost of goods purchased from related parties 37,879,772 Imports from AE/ Total raw material cost 17.47%
61. Considering the miniscule proportion of international transactions, amounting to 17.47% of the raw material costs from associated enterprises to total material costs, if at all an adjustment were to be considered, the entire adjustment cannot be attributed to the purchases from related parties. The transfer pricing adjustment should be limited to the proportionate value of the international transactions of purchase from associated enterprises, thereby limiting any adjustment to 17.47% of the turnover. [Refer Page 166 to Page 170 of the Appeal Memo].
62. In this regard the Appellant draws reference to paragraph numbers 31 to 33 of Power Control division of this executive summary where detailed references on proportionate adjustment are discussed at length. The same are squarely applicable to water and process division as well.
63. Accordingly, the Appellant submits that considering the very low quantum of the material costs representing the international transaction of the segment for FY 2007-08 vis-à-vis the total expenses and the total material costs of the segment, any such adjustment, if at all, can be made only to the proportionate sales made out of raw materials imported from the associate concerns and not in respect of total sales of manufactured items which were manufactured from the total raw materials procured third parties as well.
64. The computation of the proportionate adjustment is provided below:
If adjustment for If adjustment for
onerous contract is onerous contract is
Particulars provided not provided
Actual sales pro-rated to 17.47% (Amount
in INR)
Sales 73,600,769 73,600,769
Material cost 37,879,772 37,879,772
Inventory -328,323 -328,323
Operating expenses 36,214,735 37,198,550
ITA No. 278/Del/2012 52
Add: Other Income 684,845 684,845
Operating profit 519,431 -464,384
Operating profit margin (%) 0.71% -0.63%
Adjusted to ALP of 6.78% 4,990,132 4,990,132
Difference in ALP and
Actual 4,470,702 5,454,517
The Appellant draws reference to paragraph numbers 31-33 in the Power Control division and to orders issued by TPO and DRP for respective years as they are squarely applicable to Water and Process division as well. The Appellant submits that if at all any adjustment is warranted, it ought not to have exceeded INR 4,470,702. Without prejudice to the stand considered in the TP study, if onerous contracts adjustment is not granted, the adjustment would still not exceed INR 5,454,517.
35. On the other hand, the ld. DR relied on the order of the lower authorities and submitted that the assessee itself had selected the comparables in the TP study and no exceptional reason has been cited by the assessee company for the suggested deviation from the margin of the comparables. The case laws cited by the ld. AR are not applicable because the AR was unable to show that the facts of the case are similar with the case laws cited by the AR of the assessee.
36. After hearing both the sides and perusing the entire material available on record, We find that the ld. DRP/AO/TPO has passed a good reasoned order and detailed analysis has been made from the submissions made by the assessee. The findings reached by the lower authorities are as under :
"11.3. The reply given by the assessee is not acceptable in light of the fact that the comparables have been selected by the assessee. It is clear that the comparables would also be under the similar train faced by the assessee company. No exceptional reason has been cited by the assessee company for the suggested deviation from the margin of the comparables. The company has continued to employ further manpower. This s not the first year of assessee manufacturing activity. As regards the provision for onerous contracts, the assessee has not been able to demonstrate the same from its books of accounts. Hence, the claim of onerous contracts is not found acceptable. This is a claim made for the first time and the assessee should have provided suitable supporting documentation for the same. The assessee has also claimed that proportionate disallowance should be made in its case as the imported costs are merely 17% of the total raw material costs incurred by the assessee company. As also discussed above, such claim of the assessee company is liable to be ITA No. 278/Del/2012 53 rejected in light of the rationale of attributing any variation in the PLI between the assessee and the comparable set to the related party transactions.
Thus we find that there is nothing which the TPO has not considered and there is nothing more we have to consider now. We agree with the TPO that the comparables are identified by the assessee, and that the comparables would also be under the similar strain as faced by the assessee company. In absence of any reason to disagree with the TPO we uphold the approach."
From the above submissions of the assessee, there is no extraordinary event proved by the assessee. The high custom duty is a routine transaction, which is applicable at the time of import of goods. After considering the submissions from both the sides, we, therefore, find no infirmity in the orders of the ld. Authorities below on this account. Accordingly, this ground of appeal is rejected.
In respect of Ground No. 16, the division-wise facts, in brief, are as under :
1. Marketing Support Division ('MSD'): MSD is engaged in undertaking market research activities, identifying and seeking business opportunities, providing information relating to products and services, acting as a channel of communication and gathering and providing information on current trends, technological developments, competitors and government policies.
2. Sensing Division: The Sensing division performs marketing support services for the sale of the equipment in India. It identifies, maintains and develops local relationships with customers and clarifies the products requirements of customers.
3. Inspection and Technologies Division: The Inspection Technologies division performs marketing support services for the sale of big equipment in India, which are directly shipped from related parties. It identifies, maintains and develops local relationships with customers.
The division recommends improvements to sales plans, assists in the development of strategy, and clarifies the products requirements of customers and also assists in resolution of customer claims and complaints on quality, delivery, etc. by coordinating with AEs.
4. Water and Process Technologies Division: One of the employees of GEWPT India provided marketing support services for GE Osmonics Inc., US in India. The services provided were in the nature of identifying and seeking business opportunities and providing information relating to products and services of GE Osmonics Inc. and its affiliate entities to potential customers in India. He acted as a channel of communication between customers in India and GE Osmonics and its affiliate entities. These services were provided during the months from April to June 2007.
The Ld. TPO/AO made the following adjustments :
ITA No. 278/Del/2012 54 Particulars Amount Adjustment as Adjustment as
(INR) per TP order per DRP
(INR) directions (INR)
Marketing Support Division 509,395,183 64,038,252 56,906,719
Sensing Division 61,019,533 4,620,326 3,737,355
Inspection Technologies 18,889,891 2,332,902 2,104,995
Division
Water and Process 291,742 13,599 17,849
Technologies Division
TOTAL 589,596,349 71,005,079 62,766,919
37. The ld. AR of the assessee made following written submissions and relied on the same :
i. Erroneous selection of comparable companies The Company submits that the Ld. TPO grossly erred in selecting comparable companies. As per the directions given by the Ld. DRP, the Ld. TPO excluded one comparable company and adopted the correct operating margin for two comparable companies. The arithmetic mean of the comparables as per the DRP directions is provided in the table below.
Sl. No. Name of the Comparables OP/TC
1 Best Mulyankayan Consultants Ltd 12.85%
2 Choksi Laboratories Ltd 27.54%
3 Genins India Ltd 9.22%
4 IDC (India) Limited 15.48%
5 India Cements Capital Ltd 30.91%
Indus Technical & Financial Consultants
6 Ltd. 14.56%
7 Rites Limited 15.93%
8 Technicom Chemie (I) Limited 7.32%
Arithmetic Mean 16.73%
Given the above eight comparable companies, the Appellant contends that the comparables chosen by the Ld. TPO do not fall in similar category of providing support services and thus do not satisfy the functional comparability. For these purposes the Appellant submits below the reasons for rejecting a few of the comparable companies.
ii. Assessee's Contentions - companies to be excluded Choksi Laboratories Limited ('Choksi'): The service offerings of the company include contract laboratory services, instrument calibration & validation services, environment management services, clinical research, consultancy and assaying &hallmarking. Hence, the Appellant contends that Choksi cannot be compared to the marketing support activity.
ITA No. 278/Del/2012 55Further, information from the Prowess database also substantiates the fact that Choksi's main activity is in medical testing centres/labs. It would be relevant to mention that a review of the Prowess database reveals that Choksi is classified under the category of "Medical testing centers and lab" and is listed under Hospital activities. It is a company which is listed when a search is conducted under the search string "Medical testing centers and lab" in prowess database. Relevant extracts from the database are provided as Annexure4for ready reference. This further strengthens the Appellant's argument that Choksi cannot be taken as a comparable by the ld. TPO.
In addition to the above, the Appellant thinks it is relevant to also draw reference to the Mumbai Tribunal5 ruling in the case of Evonik Degussa India Private Limited. The company Evonik Degussa India Private Limited was engaged in analytical support services (R&D support services and testing activities).
In this case, Choksi was considered as a comparable to Evonik Degussa India Private Limited and the same was accepted by the TPO, the company and the Tribunal. In addition to Choksi, other similar companies, namely, (i) GVK Bioscience Private Limited, (ii) TCG Life science Limited, and (iii) Vimta Labs were also considered. A relevant excerpt from the ruling is provided below for quick reference. This emphasizes the fact that Choksi cannot be compared to marketing support activity.
21..... "In view of our aforesaid findings, only four set of companies which has been accepted by both the TPO as well as the assessee viz. Choksi Labs Ltd., Vimta Lab Ltd., G.V.K. Biosciences P. Ltd. and TCG Lifescience Ltd., should be included for the purposes of comparability analysis and the arithmetic mean of the PLI of these final set of companies by taking operating profit of the total cost should be taken for the purpose of determining the ALP."
The Appellant would also like to place reliance on the decision Hon'ble Delhi ITAT in the case of of Yum! Restaurants (India) Private Ltd.(ITA No.6168/Del./2012), and Ciena India Pvt. Ltd. (ITA No.3324/Del/2013), wherein Choksi has not been considered as comparable to companies providing market support services. The relevant extracts are reproduced below:
Yum! Restaurants (India) Private Ltd.
"the assessee has raised the issue that DRP/TPO has erred in considering an inappropriate set of companies which has been taken as comparable to the support services outside India segment of the assessee.
...Similarly, comparability with M/s. Choksi Laboratories Ltd. is not justified as the company's assets employed comprises significantly of testing equipments which further emphasizes the fact that the company's functional profile is different vis-à-vis the assessee. Accordingly, we direct to recompute the ALP by excluding the following comparables taken by the TPO :-
(i) M/s. Saket Projects Limited;ITA No. 278/Del/2012 56
(ii) M/s. Choksi Laboratories Limited;
(iii) M/s. Wapcos (India) Limited; and
(iv) M/s. Rites Limited."
Ciena India Pvt. Ltd. (ITA No.3324/Del/2013) "Choksi Laboratories Ltd.
15. ....We fail to appreciate as to how marketing support services can be equated with testing services...
.....By no standard, this company can be considered as comparable with the assessee company. We, therefore, direct the exclusion of this company from the list of comparables. Without prejudice, the Appellant thus submits that if at all Choksi had to be considered as a comparable company, then the above mentioned similar companies should also be considered and all other companies listed under Medical testing centers and lab also out to be analysed. But this will lead to an unending search for comparable companies. While it is appreciated that for TNMM, a broad level of functional similarity is considered it cannot still be extended to any and all services or activities.
Having said this, the Appellant submits that these companies i.e. medical testing, clinical research etc. companies which are aligned to a specific industry certainly cannot be functionally comparable to the marketing support services activities of the Appellant and thus there is no merit in even going to do a search for Medical testing companies. The Appellant submits that on one hand the TPO has rejected the Appellants companies mentioning that these are functionally dissimilar, then there is no merit in the Ld. TPO's comparable as well in the case of Choksi. Thus it is clearly demonstrated that Choksi should be excluded from the list of comparable companies.
Rites Limited ('Rites'): At the outset, based on the information available, Rites offers comprehensive design consultancy for institutional and office complexes, group housing, educational campuses, transport terminals, hospitals, buildings for the physically disadvantaged, workshops, industrial buildings, recreation centres, convention centres etc., As per the information available in public domain6, "RITES Ltd., a Government of India Enterprise was established in 1974, under the aegis of Indian Railways. RITES is incorporated in India as a Public Limited Company under the Companies Act, 1956 and is governed by a Board of Directors which includes persons of eminence from various sectors of engineering and management. RITES Ltd., an ISO 9001-2008 company, is a multi- disciplinary consultancy organization in the fields of transport, infrastructure and related technologies. It provides a comprehensive array of services under a single roof and believes n transfer of technology to client organizations."
RITES employs over 2000 staff including over 1200 specialists of high professional standing in the fields of engineering, management and planning. Besides full time professionals, RITES also has on its panel a large number of experts, whose services can be drawn upon at short notice. This provides the company unmatched strength in meeting the needs of its clients worldwide7"
ITA No. 278/Del/2012 57It is clear from the above that Rites is an end-to end multi-disciplinary services company providing a range of services including engineering and management consultancy services.
Even based on the information from the Prowess database it is seen that the main activity of Rites is in management consultancy services. Therefore, Rites cannot be considered as comparable to market support activity of the Appellant. Relevant extracts from the database are provided vide Annexure5.
Further, the Appellant would like to draw reference to the Delhi Tribunal8 ruling in the case of MCI Com India Private Limited ('MCI'), (Now known as Verizon India Private Limited). The Tribunal ruling states that MCI being a marketing support services provider, it cannot be functionally compared to turn-key engineering services companies or end-to-end solutions providing companies namely, Rites, Engineers India Limited, TCE Consulting Engineers Limited and Water & Power Consultancy Services Limited (WAPCOS').
The Appellant would also like to place reliance on the decision of Delhi ITAT in the case of Nortel Networks India P. Ltd. (ITA Nos. 4765/Del/2011 & 427/Del/2013), Yum! Restaurants (India) Private Ltd., Ciena India Pvt. Ltd. (ITA No.3324/Del/2013) and the decision of the Hon'ble High Court in the case of Verizon India Pvt Ltd (ITA 271/2013 & ITA 277/2013), wherein Rites has not been considered as comparable to companies providing market support services. The relevant extracts are reproduced below:
Nortel Networks India P. Ltd. (ITA Nos. 4765/Del/2011 & 427/Del/2013) "We have heard the rival contentions and perused the material available on record. Apropos the issue of comparability and the exclusion of Choksi, Rites and WAPCOS, Delhi Tribunal in the cases of M/s MCI Com India P. Ltd. and M/s Verizon India P. Ltd. has held that companies like EIL, Rites, Wapsos and TCE are engineering companies which provide end to end solutions and therefore they cannot be compared with assessees who provide marketing support services to the parent company. They were held to be functionally not comparable with thee engineering companies."
Yum! Restaurants (India) Private Ltd. ITA No. 6168/Del/2012 "the assessee has raised the issue that DRP/TPO has erred in considering an inappropriate set of companies which has been taken as comparable to the support services outside India segment of the assessee.
...Similarly, comparability with M/s. Choksi Laboratories Ltd. is not justified as the company's assets employed comprises significantly of testing equipments which further emphasizes the fact that the company's functional profile is different vis-à-vis the assessee. Accordingly, we direct to recompute the ALP by excluding the following comparables taken by the TPO :-
(i) M/s. Saket Projects Limited;
(ii) M/s. Choksi Laboratories Limited;
(iii) M/s. Wapcos (India) Limited; and
(iv) M/s. Rites Limited."
H and M Hennes and Mauritz India (P) Ltd. v. DCIT ITA No. 4704/Del/2012 ITA No. 278/Del/2012 58 "We have heard the parties and have perused the material on record. The only surviving dispute before us, as seen from the above, is as to whether Rites Ltd. and Wapcos Ltd. are to be maintained as comparables.
This dispute stands settled in favour of the assessee in "Deputy CIT v. MCI Com India P. Ltd. [2012] 19 ITR (Trib) 42 (Delhi)". MCI Com, as per para 3 of the said order was into rendering marketing support services to its parent company, which included the following services (page 44):
(a) Market development ;
(b) Providing information on potential customers ;
(c) Liaisoning with potential customers for disseminating information regarding the products of the associated enterprises (AE's) and for obtaining feedback from potential customers ; and
(d) Exploring new service lines/ventures for associate enterprises in India.
Undeniably, these services can be squarely equated with those rendered by the present assessee, i.e., of providing sourcing and procurement services. In "Deputy CIT v. MCI Com India P. Ltd. [2012] 19 ITR (Trib) 42 (Delhi)", Rites Ltd. (supra) and Wapcos Ltd. (supra) were excluded as comparables, holding that marketing support services cannot be compared with turnkey engineering services; that Rites Ltd. and Wapcos Ltd. are engineering companies, providing end to end solutions, whereas "MCI Com." provided marketing support services to its parent company. The services of "MCI Com" qua Rites Ltd. and Wapcos Ltd. were not found functionally comparable. On this basis, we find "MCI Com" to be squarely applicable to the facts of the present case, as herein also, the services provided by the assessee are not at all comparable with Rites Ltd. and Wapcos Ltd. No decision to the contrary has been brought to our notice.
Therefore, we hereby exclude Rites Ltd. and Wapcos Ltd. as comparables for the purposes of the assessee's case. The grievance of the assessee is, thus, found justified to this extent and is accepted as such."
Verizon IndiaPvt Ltd (ITA 271/2013 & ITA 277/2013) "Marketing support services cannot be compared with turn key Engineering services. We agree with the view of the First Appellate Authority that EIL, Rites, Wapcos and TCE are engineering companies that provide end-to-end solutions and whereas the assessee company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable.
Incidentally, WAPCOS was excluded by the Ld. TPO based on the contentions raised by the Appellant in reply to show cause notice. Therefore, placing reliance on the same and ruling of the Delhi Tribunal in paragraph number 80, the Appellant submits that if WAPCOS is rejected, accordingly RITES Ltd. should also be rejected as a comparable.
In addition to the above ruling, the Appellant also draws reference to the Mumbai Tribunal ruling of Chemtex Global Engineering Private Limited9. An excerpt from the ruling is provided below for quick reference.
ITA No. 278/Del/2012 59"Even with regard to the comparable companies which are taken into consideration by the AO/TPO the learned CIT(A) has correctly held that Rites Limited is a Government of India enterprise and considering the nature of the contracts and the implicit guarantee provided by the Government of India, etc. Rites Limited cannot be taken as a comparable case and hence the learned CIT(A) was justified in excluding the same."
This ruling strengthens the Appellants argument that Rites cannot be considered as comparable to the marketing support services activity of the Appellant.
India Cements Capital Limited ('ICCL'):At the outset, it is noteworthy to mention that ICCL is engaged in diversified activities namely, foreign exchange, Midas Advisory, Share broking and Coromandel Travels. Based on the information available in the company's website10, "India Cements Capital Ltd. (ICCL) is a part of the Chennai-based business house of The India Cements Ltd. Mr. N Srinivasan, the MD of The India cements Ltd., is the Chairman of the company. ICCL is engaged in the following fee-based activities:
For X Change For X Change is the brand name under which the company extends money changing services as an RBI approved AUTHORISED DEALER CATEGORY-II. The division operates out of 17 centres spread over the country and buys and sells all major currencies. For X Change also stocks and sells Amex Travellers Cheques, Forex Prepaid Cards of HDFC, AMEX and AXIS, in addition to encashing Visa and Masters travelers Cheques. The division is headed by Mr. Premnath, who started his career with Thomas Cook and has over 25 years of experience in the industry.
Midas Advisory The company also extends advisory services on the forex market to exporters and importers , under the brand name of Midas Advisory. Supported by the latest information system from Reuters, the division offers advice on the forex market through periodic reports. Share Broking ICCL has a subsidiary company by name India Cements Investment Services Ltd. which is a corporate member of the NSE and is engaged in share broking activities. The company deals in Cash market and Futures & Options and extends DP services. Coromandel Travels Coromandel Travels is the division engaged in extending comprehensive travel related services like ticketing (international and domestic), hotel bookings, car rentals, leisure packages within India and abroad, and miscellaneous services like passport issuance and visa processing .The services are extended out of seven locations namely Chennai, Mumbai, New Delhi, Kolkata, Bangalore, Hyderabad, and Guwahati.
From the above, it is evident that ICCL operates in finance industry. This is further substantiated through facts gathered from Prowess database. Even based on the information from the Prowess database it is seen that the main activity of ICCL is in financial consultancy and advisory services. Also, it is seen from the Prowess database that the economic activity of the company is engaged in hire purchase and leasing services. Further, this company is also planning to venture into the insurance business.ITA No. 278/Del/2012 60
Further, from a comparability analysis perspective, it is important to consider comparables operate in same industry. In this regard, the Appellant draws reference to OECD Guidelines on comparability analysis as mentioned below "3.7 The "broad-based analysis" is an essential step in the comparability analysis. It can be defined as an analysis of the industry, competition, economic and regulatory factors and other elements that affect the taxpayer and its environment, but not yet within the context of looking at the specific transactions in question. This step helps understand the conditions in the taxpayer's controlled transaction as well as those in the uncontrolled transactions to be compared, in particular the economic circumstances of the transaction"
"3.38 A pragmatic solution may need to be found, on a case-by-case basis, such as broadening the search and using information on uncontrolled transactions taking place in the same industry and a comparable geographical market."
Therefore, as a principle of comparability and based on the above information, ICCL cannot be considered as comparable to market support activity of the Appellant. Relevant extracts from the database are provided vide Annexure 6.
The Appellant would also like to place reliance on the decision of the Hon'ble Mumbai Tribunal in Roche Products (India) Pvt. Ltd. v. ACIT, Mumbai ITA No. 7035/Mum/2012 wherein while excluding India Cements Capital Services as a comparable in the case of assessee providing marketing support services, the Tribunal observed:
"In the case under consideration, the TPO had selected comparables which had no similarity at all with the activities of the assessee. We are unable to understand is how the results of companies dealing in foreign exchange/maintaining freight station or engaged in providing end-to-end engineering services can be compared with marketing and allied services. Accordingly, we hold that the selection made by the TPO of comparables was neither methodical nor scientific."
iii. Assessee's contentions -Companies to be included
1. Tata Services Limited The Company submits that there is no merit in rejecting this company on the grounds that the company provided in-house support to the Tata group and functions on a no profit no loss basis. This is incorrect since the company has earned profit during the year and does not operate on a no profit no loss basis. Further, as per Annual report of Tata Services Limited, the company has no related party transactions and the support services segment of this company include services such as i.e., access control services, administrative support services, Bombay house telephone exchange, central receiving section, fort chambers, holiday homes, medical services, network communication system, staff canteen etc., is similar to the services rendered by the Company. Hence without prejudice to the TP study, it is submitted that if the search strategy adopted by the Ld. TPO is to be considered, then Tata Services Limited is to be accepted as a comparable.
It is observed that Tata Services operates in normal business circumstances and does not operate in no loss or no profit basis. The same can be seen from the table below which reflects that the company reported profits in the earlier years and in the subsequent year as well.
Particulars FY 2006 FY 2007 FY2009
ITA No. 278/Del/2012 61
Amount in INR crores
Sales 41.03 47.34 60.19
Operating Cost 38.68 45.70 59.53
Operating Profit 2.35 1.64 0.66
OP/TC% 6% 4% 1%
Further, it was substantiated through financial statements that there were no related party transactions to the Ld. DRP and no further contention was raised by the ld. DRP / Ld. TPO in this regard.
Therefore, the Appellant submits that if the search strategy of the Ld. TPO is adopted, Tata Services Limited should be considered as a comparable company. Thus, the Company submits that the search strategy of comparables adopted by the Ld. TPO apparently is inconsistent. Without prejudice to the TP study and the Appellant's arguments, even if the Ld. TPO's approach has to be consistently applied, Choksi, Rites , ICCL should be rejected and Tata Services Limited should be considered as comparable.
Accordingly, the revised arithmetic mean of the comparables based on the Appellant's arguments on the comparable companies is shown in the table below.
Sl. No. Name of the Comparables OP/TC
1 Best Mulyankayan Consultants Ltd 12.85%
2 Genins India Ltd 9.22%
3 IDC (India) Limited 15.48%
Indus Technical & Financial Consultants
4 Ltd. 14.56%
5 TechnicomChemie (I) Limited 7.32%
6 Tata Services Limited 7.57%
Arithmetic Mean 11.17%
iv. Working Capital Adjustment
The Company submits that the Ld. TPO erred in not granting working capital adjustment for Market Support Division. The Market Support Division has two segments namely, Market Support services and Administration services.
In this regard, reference is drawn to the Rule 10C(3) of Income-tax Rules, 1962 ('Rules') which interalia states as follows:
"(3) An uncontrolled transaction shall be comparable to an international transaction if:
i. none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or ITA No. 278/Del/2012 62 ii. reasonably accurate adjustments can be made to eliminate the material effects of such differences."
Further, the above is also supported by the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ('OECD guidelines') issued by the Organization for Economic Co-operation and Development ('OECD'), which also provide for Working Capital Adjustments as follows:
"2.81. In those cases where there is a correlation between the credit terms and the sales prices, it could be appropriate to reflect interest income in respect of short-term working capital within the calculation of the net profit indicator and/or to proceed with a working capital adjustment."
It is further submitted to Ld. DRP (refer page 180 of the Appeal Memo) the rationale for using working capital adjustment by the Appellant.
v. Comparability adjustments Furthermore, the OECD guidelines also provide that to improve the comparability, certain adjustments can be undertaken. The relevant extract from the OECD guidelines is provided below for your reference.
"3.47 The need to adjust comparables and the requirement for accuracy and reliability are pointed out in these Guidelines on several occasions, both for the general application of the arm's length principle and more specifically in the context of each method. As noted at paragraph 1.33, to be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology or that reasonably accurate adjustments can be made to eliminate the effect of any such differences...."
Also, the claim of working capital adjustments is supported in the case of Demag Cranes & Components (India) Pvt. Limited, Pune v. DCIT ITA No. 120/PN/2011, where it is observed that "33. ......In our opinion, the existence of difference @ 3.41%, which is worth Rs 31,72,099/-, attributable to the 'working capital' ought to amount to the 'material difference' considering the existing unadjusted operating margin of the comparables at 7.18%. In these circumstances, we are of the opinion that the said working capital differences constitutes quantitatively likely to materially affect the ALP / AL Operating Margi of the comparable. Therefore, the claims of the assessee are allowed".
In addition to the above, the Mumbai ruling in the case of Capgemini India Private Limited[TS-45-ITAT-2013 (Mum)], stated that "6. In our view, working capital adjustments are required to be made because these do impact the profitability of the company. Rule 108(2)(d) also provides that the comparability has to be ;judged with respect to various factors including the market conditions, geographical conditions, cost of labor and cost of capital in the market. Accounts receivable/payable effect the cost of working capital. A company which has a substantial amount blocked with the debtors for a long period cannot be fully comparable to the case which is able to recover the ITA No. 278/Del/2012 63 debt promptly. In our view, the average of opening and closing balance in the account receivable/payable for the relevant year may be adopted which may broadly give the representative level of working capital over the year. Even if there is some difference with respect to the representative level, it will not effect the comparability as the same method will be applied to all cases. Working capital adjustment cannot be denied to the assessee only on the ground that the assessee had not made any claim in the TP study if it is possible to make such adjustment. In our view, working capital adjustment will improve the comparability. We therefore, direct the AO/TPO to make the working capital adjustment after necessary examination in the light of the observations made above and after allowing opportunity of hearing to the assessee."
Placing reliance on the above, the Company submits that appropriate adjustments be made to factor the differences in the working capital level of the companies vis-à-vis the Appellant. vi. Pro-rated to segment revenue The Appellant submits that the Market Support Division has two segments namely, Market Support services and Administration services. In the order, the Ld. TPO stated that bifurcation of payables and receivables among these two segments was not clear due to consolidated accounts and hence did not grant working capital adjustment. In this regard, the Appellant submits that market support division is the significant revenue contributor to the division, which is about 93% as shown in the table below.
Operating Operating
Particulars Revenue Expenses
Market Support services 509,395,183 485,138,270
Division Total 548,752,224 552,941,415
Market Support services (as % of
total) 92.83% 87.74%
As the market support activity contributes significant portion of revenue for this division, the datafor receivables and payables have been considered proportionate to the market support segment revenue. The same is shown in the table below.
Year Receivable Payable
March-08 7,206,139 56,853,139
March-07 171,871,832 164,512,130
Average 89,538,986 110,682,635
Pro-rated to 83,117,162 102,744,369
93%
The computation of ALP and 5% range based on the proviso to section 92C(2) for each division is shown below.
Sensing Division
Particulars Actuals ALP 5% -5%
Revenue 61,019,533 61,737,455 64,070,510 57,968,556
Total Cost 55,532,769 55,532,769 55,532,769 55,532,769
Operating Profit 5,486,764 6,204,686 8,537,741 2,435,787
Return on Total Cost 9.88% 11.17% 15.37% 4.39%
ITA No. 278/Del/2012 64
Water & Process Division
Particulars Actuals ALP 5% -5%
Revenue 291,742 294,853 306,329 277,155
Total Cost 265,220 265,220 265,220 265,220
Operating Profit 26,522 29,633 41,109 11,935
Return on Total Cost 10.00% 11.17% 15.50% 4.50%
Market Support Division
Particulars Actuals ALP 5% -5%
Revenue 509,395,183 525,593,512 534,864,942 483,925,424
Total Cost 485,138,270 485,138,270 485,138,270 485,138,270
Operating Profit 24,256,913 40,455,243 49,726,673 (1,212,846)
Return on Total Cost 5.00% 8.3411% 10.25% -0.25%
Inspection Division
Particulars Actuals ALP 5% -5%
Revenue 18,889,891 19,950,439 19,834,386 17,945,396
Total Cost 17,945,397 17,945,397 17,945,397 17,945,397
Operating Profit 944,494 2,005,042 1,888,989 (1)
Return on Total Cost 5.26% 11.17% 10.53% 0.00%
From the above, ALP for Sensing and Water & Process divisions fall within the +/-5% range and hence no adjustment is required to the transfer price for the market support services rendered by the Appellant.
38. On the other hand, the ld. DR relied on the order of the lower authorities and tried to justify the inclusion of various comparables as included by the TPO and confirmed by DRP by referring their annual reports. He further submitted that the lower authorities have chosen those companies as comparables whose functional profiles are similar. In case of India cement Ltd. the assessee has produced the functional profile of the company on the basis of print out from the Website as on date which can not be accepted . The assessee was also unable to produce current assets and current liabilities separately in case of marketing support service divisions. Therefore, the lower authorities have rightly denied working capital adjustments. He further submitted that the case laws relied by the AR is not ITA No. 278/Del/2012 65 applicable in present case . During the course of hearing the ld. DR. was asked to file the Annual Report of the three companies namely Choksi laborities limited, RITES and India Cements Capital Ltd. The Ld. DR further drew our attention on the Financial Statements of Choksi Laboratories Limited and their Schedule No. 14 Sr No. 08 Segmental Reporting : The Company treats Analytical Charges & Consultancy Receipts as a single segment and therefore details of segments are not separately shown. The Company is commercial testing house engaged in testing of various products and also offers services in the field of pollution control as allied activity. The company is managed organizationally as a unified entity with various functional heads reporting to the top management and is not organized along segments. There are, therefore, no separate segments within the company as defined by AS-17 (Segment Reporting) issued by the ICAI. He also invited our attention to Sr. No. 13 of Schedule 14 Capacity and Production - (b) Installed Capacity : The company produces Effluent Treatment Plant as per customers' need. This is only incidental to company's Services activities. As such installed capacity of the company is not applicable. In the case Rites Ltd. the ld. DR drew our attention on the annual reports at page No. 7, 47 and 63 of the annual report which reads as under :
"The salient features of domestic business during the year were award of prestigious assignments of Advisory Consultancy services for Taj Expressway from Greater Noida to Agra, General Consultancy for Bangalore Metro, Detailed Engineering f MUTP Phase II work of MRVC, PMC for upgradation of Railway infrastructure in Rourkela Steel Plant, Rehabilitation on 290 BOXN Wagons of East Coast Railway and Training of 360 supervisors of Indian Railways.
During the year, RITES has secured a number of contracts relating to export of rolling stock and technical assistance thereof. These include award of prestigious assignment of leasing of 23 MG coaches to TRL Tanzania for five years and rehabilitation of 10 Nos. 73 class locomotives of TRL. Seventeen new passenger coaches, twelve gang cars, inspection cars and Rail-cum-Road Vehicles were exported and Technical assistance programme for Lubango Workshop Modernization was completed during the period, in an ongoing export project in Angola."ITA No. 278/Del/2012 66
"In Construction Management/supervision Contracts, fee is calculated as a percentage on the value of work done/built-up cost of each contract as determined by the Management, pending customer's approval, if any."
"V- Generic Names of Three Principal products/services of Company (as per monetary terms) (Rs. In Thousands) Item Code No. (ITC Code) : NA Product Description : a) Consultancy 29,83,398
b) Export Sales 20,83,065
c) Inspection 5,47,957
d) Lease Services 1,90,843"
In case of India Cements Capital Ltd., the ld. DR relied on page 9 of the annual report which reads as under :
FEE BASED ACTIVITIES The various fee-based divisions of the company have shown creditable performance.
For 'Xchange : This division which is full fledged money changer is at present operating at 28 locations and has established itself as a leading money changer in the South. In addition to buying and selling of all major currencies and travelers cheques, the Division also stocks Amex Travelers Cheques and Citibank World Money Cards and Axis Bank Travel currency prepaid cards. They are also subagents for Western Union Money Transfer.
Coromandel Travels : This division is having 7 IATA approved branches at Chennai, Mumbai (two IATA accredited branches), Bangalore, Delhi, Calcutta and Hyderabad. Apart from handing ticketing for domestic and international travel, this division is also handling inbound and outbound tours."
He further submitted that the print out of functional activities of India Cements Capital, taken from the web-site is not acceptable at all. He, therefore, contended that the comparables selected by the TPO/DRP are comparable to the functional profile of the assessee and most of the receipts of the comparables are from ITA No. 278/Del/2012 67 service sector. On working capital adjustment, the ld. DR relied on the order of the DRP.
39. After hearing both the sides and perusing entire material available on record, and written synopsis submitted by the assessee, we observe that the assessee has raised objection on both rejection of assessee's comparables as well as comparables selected by the TPO before us. As these have already been considered by the TPO and discussed in details in TP Order, we do not consider it necessary to repeat the same here. We, however, observe that the DRP has done good reasoned order. In this regard, the findings of the ld. DRP are reproduced as under :
Panel: The TPO has however given the details of service receipts in a table and has concluded that looking to very high percentage of service component in the receipts of the comparables and RPT being not very high, the assessee's objections against different comparables are not tenable. The relevant part of TP order in this regard is reproduced below -
7.6.14.The detailed submission made by the assesseehas been perused. The chart showing sevice income as % age of total income is as reproduced below :
SI. Name Database Total Service RPT
No Income Income (%|
. (Rs.Cr.) (%)
1 Apitco Ltd. Prowess 10.67 98.5 0
2 Best Mulyankayan Prowess 1.11 92.79 11
Consultants Ltd.
3 Choksi Laboratories Ltd. Capitaline 9.45 98.7 0
4 Genins India TP A Ltd. Prowess 5.34 96.69 0
5 IC R A Management Prowess 18.39 96.16 13.41
Consulting Services Ltd.
6 ID C (India) Ltd. Prowess 15.77 99.43 0.95
7 India Cements Capital Ltd. Prowess 7.95 97.48 0.72
8 Indus Technical & Prowess 1.15 98.26 0
Financial Consultants Ltd.
9 0 RG Informatics Ltd. (Seg.) Prowess 13.61 77.02 1
10 Rites Ltd. (Seg.) Prowess 353.13 84.43 3.49
ITA No. 278/Del/2012 68
11 Technicom-Chemie (India) Prowess 1.97 94.42 0
Ltd.
12 Vapi Waste & Effluent Prowess 19.9 79.85 0
Mgmt. Co. Ltd.
13 WAPCOS Ltd. (Seg.) Capitaline 81.97 97.55 0
It is clear from the above that although the comparables may be claiming to be operating in various segment, as clear from the above chart, financially, the dominant income is out of their service activity. None of the assessee companies have substantial related party transactions. In light of the above fact, the claim made by the assessee company in its submission referred above relating to service activity is not found acceptable and is rejected.
7.6.15 However, the claim of the assessee company with relation to the nature of consultancy activity has been examined. In the cases of Apitco Ltd., I C R A Management Consultancy Ltd., O R G Informatics Ltd. (Seg.) and WAPCOS Ltd. (Seg.), the issues raised by the assessee are found to be acceptable.
Accordingly, these companies are excluded from the above set, being functionally different from the assessee company's marketing support services. In light of the discussion above, the comparable set selected by this office is reduced to the following table.
Sl. Name Database Total Service RPT PBIT
No. Income Income (%) Cost(%)
(Rs.Cr.) (%)
1 Best Mulyankayan Prowess 1.11 92.79 11 12.85
Consultants Ltd.
2. Choksi Laboratories Capitaline 9.45 98.7 0 29.2
Ltd.
3 Genins India T P A Ltd. Prowess 5.34 96.69 0 9.22
4 ID C (India) Ltd. Prowess 15.77 99.43 0.95 15.48
5 India Cements Capital Prowess 7.95 97.48 0.72 30.91
Ltd.
6 Indus Technical & Prowess 1.15 98.26 0 14.56
Financial Consultants
Ltd.
7 Rites Ltd. (Seg.) Prowess 353.13 84.43 3.49 25.77
Technicom-Chemie Prowess 1.97 94.42 7.32
8 0
(India) Ltd.
9 Vapi Waste & Effluent Prowess 19.9 79.85 18.53
0
Mgmt. Co. Ltd.
Average 18.20
ITA No. 278/Del/2012 69
Broadly speaking the conclusion of the TPO is convincing. But still we find that in respect to some comparables identified by the TPO there is enough force in the arguments given by the assessee against them. Though very high services component is a prerequisite in TP study carried out to find out the Arm's Length Price, but we cannot ignore the profit earned on such services. If profit is not the motive then uncontrolled entities on the basis of services alone cannot be comparable. Accordingly, Vapi Waste & Effluent Mgmt. Co. Ltd. is not considered a suitable comparable. Assessee submits in this regard that the company is a non profit, non equity co-operative working on corporate culture for betterment of environment and sustainable development. Further as per the income statement the company receives income only from members. The company also has huge expenses on consumables amounting to Rs.1.07 Crores. The company receives huge contributions from Government of India and also from notified area. Further as per notes to accounts, the company is involved in Industrial infrastructure up gradation project and road up gradation project. The assessee has also submitted that Vaniyambadi Tanners Enviro Control Systems Limited & Pallavaram Tanners Indl. Effluent Treatment Co. Ltd. should also be considered by the TPO as comparables. These companies have been rejected by the TPO on the ground that they are operating effluent treatment plant. However, Vapi Waste & Effluent Mgmt. Co. Ltd., a comparable selected by the TPO is also operating the biggest effluent treatment plant. In this regard the assessee company has submitted that, without prejudice to the TP study and our arguments in regard to the comparables selected by the learned TPO, in case the TPO's approach has to be consistently applied, the above companies also need to be considered. We have directed the TPO to exclude Vapi Waste & Effluent Mgmt. Co. Ltd. and therefore, for the sake of consistency we cannot agree with the request of the assessee to include Vaniyambadi Tanners Enviro Control Systems Limited & Pallavaram Tanners Indl. Effluent Treatment Co. Ltd. The assessee has also submitted that the TPO has rejected Tata Services Limited on the grounds that the company provided in-house support to the Tata Group and functions on a no profit a loss basis. In this regard, the assessee has also submitted that Vapi Waste & Effluent Mgmt. Co. Ltd. is also a non- profit making company, rendering services only its members and yet has been selected as a comparable. Further, as per Annual report of Tata Services Limited, the company has no related party transactions and the support services segment of this company include service such as i.e. access control services, administrative support services, Bombay house telephone exchange, central receiving section, fort chambers, holiday homes, medical services, network communication system, staff canteen etc., is similar to the services rendered by assessee. Hence without prejudice to the TP study, the assessee submits that if the search strategy adopted by the TPO is to be considered, then Tata Services Limited is to be accepted as a comparable. In this connection, we again write that we have already directed the AO to excluded Vapi Waste & Effluent Mgmt. Co. Ltd, and hence Tata Services Limited cannot be included in the set of comparables. The assessee has also submitted that the TPO has rejected Charms Industries Limited on functional basis mentioning that it is engaged in trading of foreign currency. But the assessee submits that India Cement Capital Limited is also engaged in similar service under the brand 'For Xchange'. Yet, India Cements Capital Limited is selected as a comparable by the TPO. We find that the assessee has, except saying that Charms Industries Limited is also engaged in trading of foreign currency, not provided other information about this company. In our view trading in foreign currency is different from the business of foreign currency related services.
ITA No. 278/Del/2012 70Therefore on the basis of limited information provided by the assessee we cannot give direction to the AO to include Charms Industries Limited in the set of comparables. The assessee has also submitted that in case of M/s. Choksi Laboratories Limited and M/s. Rites Limited the TPO has committed error in computation of margins. In case of M/s. Choksi Laboratories Limited the assesses has submitted that the TPO has included other income and operating income while the same pertains to interest and other income. The assessee has also submitted that while computing the operating expenses, the TPO has considered listing fees to be an operating expense. We find that in computation of operating income other income is interest and other income is excluded, but the TPO has not done so in case of Choksi Laboratories Limited. We, therefore, direct the TPO to exclude interest and other income Rs. 1,245,676/- in the case of Choksi Laboratories Limited. We find that in the case synopses which the assessee has filed during the DRP hearings on page 16 the assessee has submitted that the TPO has not included in operating expenses Rs.22,500/-. If the TPO has considered Rs.22,500/- as operating expenses then the TPO should have included this amount in operating expenses but in the computation as per TPO, reproduced by the assessee on page 16, Rs.22,500/- has not been included in the operating expenses in the case of Choksi Laboratories Limited. Therefore, in view of the fact that this amount has not been included in operating expenses by the TPO, we uphold the decision of not including Rs.22,500/- as operating expenses as we consider that this expenditure is not revenue in nature. In the case of Rites Limited the TPO has not excluded Rs.299,580,000/- which is in the nature of other income. We find that the TPO should have excluded this amount while computing the operating profit margin in the case of this company. Therefore, we direct the TPO to exclude amount Rs.299,580,000/- appearing as other income in the computation of operating profit margin in the case of Rites Limited.
Working capital adjustment :
The assessee has requested for working capital adjustment in respect to Marketing support division.
Panel: The assessee had made request before the TPO also during TP proceedings but the TPO has not allowed the claim of the assessee. Why the TPO has rejected the claim of the assessee, to this we have referred to the TP order. The relevant paragraph from the TP order is reproduced below -
7.6.16 Claim for Working Capital Adjustment: The assessee has sought working capital adjustment in the case of "Marketing Support Group " stating that in that group, it has been possible to bifurcate the debtors and creditors and hence it is possible to work out the working capital adjustment. The claim made by the assessee has been perused. It is seen that Marketing Support Group functions alongwith Global Services Group. The assessee has given no thumb-rule or basis on which it has bifurcated the various assets in the balance sheet of the group and there is sufficient functionality similarity in both services. The assessee operates on cost plus model and the total turnover of marketing support services is Rs.50.94 Crores. However, it is seen that the GBS Division as a whole, after including the two different services rendered by the division, has incurred a loss. How the accounts of the division have been segmented so that the assessee has shown payables of ITA No. 278/Del/2012 71 Rs.11.04 crore and receivables ofRs.9.55 crore with reference to only marketing support group is not clear in light of consolidated accounts. Since the major cost, as per functional explanation given above is salary to employees, the above volume of receivables and payables are not taken at correctly, especially as the segment is not independent and forms a part of the division. In view of lack of information as well as lack of justification in light of the nature of work of the marketing support group, the request for working capital adjustment in the case of marketing support group is not found correct and is rejected. In respect of other divisions, no working capital adjustment has been claimed by the assessee company.
We agree with the TPO that the purpose of making any adjustment in TP cases is to improve the comparability. Therefore, the adjustment should be made only if reasonably accurate adjustment can be made. The assessee has not explained the basis of figures of debtors and creditors taken in 'Marketing Support Group' which is just a segment. Therefore, in absence of accurate details, we uphold the action of the TPO of not accepting the claim of working capital adjustment. In respect to other divisions, neither the assessee has claimed adjustment nor was it granted by the TPO.
40. From the above finding of ld. DRP, we observe that in case of Choksi Laboratories Ltd. and RITES Ltd., the assessee had challenged only the calculation mistakes regarding the operational income/expenses which has been duly decided by the ld. DRP by remitting the matter back to the AO/TPO, whilst the assessee has challenged before us the functional comparability of above companies which was not agitated before the DRP. He has also relied various case laws, as reproduced in the above written synopsis. Further, in case of India Cements Capital Ltd., the assessee did not provide details before the DRP, but its annual report has been submitted before us. Considering the above facts and circumstances of the case and submissions of the assessee, we think it proper to send the matter back to the AO/TPO for fresh calculation of adjustment after considering the pleas made by assessee in its written synopsis, if it is found suitable comparable. Further In his written synopsis, the AR of the assessee has pleaded that Tata Services Ltd. be included for the comparability test, but we find that the ld. DRP has properly dealt with this plea in their order and we do not find any infirmity in it on this count. In case of working capital, the ld. DRP has done ITA No. 278/Del/2012 72 good reasoned order and it does not require any interference. We, therefore, finding no infirmity in the order of DRP affirm the same. This ground is, thus, allowed for statistical purpose.
41. In respect of ground No. 17, the assessee has raised issue regarding benefit of +/- 5 per cent as per section 92C(2) of the IT Act, which is a statutory standard deduction. The ld. DRP has examined the issue on the basis of case laws cited by the assessee and has directed as under :
"The assessee has not mentioned about its claim division wise. In absence of proper representation, it is difficult to know about the veracity of assessee's claim. However, we make it clear in this regard that marginal variation of 5% is not allowed as standard deduction. However, with due respect to various decisions cited by the assessee, we hold that marginal variation of 5% price is allowed only if the price of international transactions disclosed by the assessee does not exceed the margin provided in the provision of second limb of proviso to section 92C(2) of the Act. If the price of international transactions disclosed by the assessee exceeds the margin then deduction is not at all permissible. Therefore, the TPO is directed to review the additions suggested by him to ensure that they are in accordance to our view on this matter."
42. The contention of the ld. AR has been that in view of the retrospective amendment to the proviso to section 92C of the Act in Finance Bill 2012, the assessee would get the benefit if it falls within +/- 5 percent range as specified in the proviso. We have gone through the order of the AO and we find that the AO though has reproduced the findings of ld. DRP in the order, but has not analysed the issue regarding benefit of +/- 5% of the price of international transactions, as directed by the ld. DRP. However, we find that the assessee has submitted segment-wise marginal variation of +/- 5 per cent, which is not correct. It should be calculated for whole international transactions declared by the assessee during the year. Therefore, the AO/TPO is accordingly directed to consider this issue in the light of directions of the DRP and also keeping in view the amendment made ITA No. 278/Del/2012 73 in proviso to section 92C of the Act by Finance Bill, 2012, as contended by the ld. AR. Hence, this ground is allowed for statistical purposes.
43. Ground No.18 & 19 pertain to charging of interest u/s. 234B and 234C of the IT Act to the extent of Rs.12,35,68,005/- and Rs.12,27,135/- respectively, which is consequential in nature. The AO is directed to give consequential effect thereof.
44. Ground No. 20 regarding interest u/s. 234D of Rs.1,46,99,349/- and withdrawal of interest u/s. 244A of Rs.91,88,339/- is dismissed as not pressed by the ld. AR.
45. In the result, the appeal is partly allowed as discussed above.
Order pronounced in the open court on 4th December, 2018.
Sd/- Sd/-
(Bhavnesh Saini) (L.P. Sahu)
Judicial member Accountant Member
Date:04.12.2018
Copy of order forwarded to:
(1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
(5) Departmental Representative (6) Guard File
By order
Assistant Registrar
Income Tax Appellate Tribunal
Delhi Benches, New Delhi