Deputy Commissioner of Income-tax, Circle - 1(1),, Pune v. M/s. Carraro India Pvt.Ltd, (AS a Successor of Turbo Gears India Pvt.Ltd),, Pune

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C PUNE BEFORE SHRI R.S. SYAL VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY JUDICIAL MEMBER . / ITA NO.1719/PUN/2018 / ASSESSMENT YEAR : 2010-11 DCIT CIRCLE-1(1) PUNE VS. M/S. CARRARO INDIA PVT. LTD. (AS A SUCCESSOR OF TURBO GEARS INDIA PVT. LTD. ) B2/2 MIDC RANJANGAON PUNE 412220 PAN : AAACC5292M APPELLANT RESPONDENT . / ITA NO.1720/PUN/2018 / ASSESSMENT YEAR : 2010-11 CARRARO INDIA PVT. LTD. (AS A SUCCESSOR OF TURBO GEARS INDIA PRIVATE LIMITED) B2/2 MIDC RANJANGAON PUNE 412220 PAN : AAACC5292M VS. DCIT CIRCLE-1(1) PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL VP : THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE - ASSAIL THE CORRECTNESS OF THE ORDER PASSED BY THE ASSESSEE BY SHRI M.P. LOHIA & MS. ANJALI CHAUDHURY REVENUE BY SHRI T. VIJAYA BHASKAR REDDY DATE OF HEARING 26-11-2019 DATE OF PRONOUNCEMENT 28-11-2019 ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 2 COMMISSIONER OF INCOME-TAX (APPEALS)-13 PUNE ON 21-08-2 018 IN RELATION TO THE ASSESSMENT YEAR 2010-11. 2. THE FIRST ISSUE RAISED HEREIN IS AGAINST THE CONFIRMATION O F TRANSFER PRICING ADDITION AMOUNTING TO RS.2.77 CRORE FROM THE INTERNATIONAL TRANSACTION OF PAYMENT OF PROFESSIONAL FEE. 3. SUCCINCTLY THE FACTUAL PANORAMA OF THE CASE IS THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF GEAR WORLD SPA WHICH IS FURTHER A WHOLLY OWNED SUBSIDIARY OF CARRARO SPA. THE ASSESSEE IS ENGAGED IN THE MANUFACTURING AND TRADING OF GEARS FOR CONSTRUCTION EQUIPMENT UTILITY AND COMMERCIAL VEHICLES AGRICULTURAL TRACTORS AND COMPONENTS FOR THE AUTOMOTIVE INDUSTRY . IT FILED A RETURN DECLARING TOTAL INCOME AT NIL. CERTAIN INTERNATIONA L TRANSACTIONS WERE REPORTED IN FORM NO.3CEB. THE AO MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETER MINING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS. TH E TPO IN HIS ORDER U/S. 92CA(3) OF THE INCOME-TAX ACT 1961 (HEREINAFTER ALSO CALLED THE ACT) NOTICED THAT THE ASSESSEE A PPLIED THE TRANSACTIONAL NET MARGINAL METHOD (TNMM) FOR DEMONSTRAT ING THAT THE INTERNATIONAL TRANSACTION OF PAYMENT OF PROFESSIONAL FEE S TO THE TUNE OF RS.2.79 CRORE WAS AT ALP. THE ASSESSEE CHO SE ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 3 FOREIGN/ASSOCIATED ENTERPRISE AS A TESTED PARTY AND CERTAIN FO REIGN COMPARABLES ON THE BASIS OF WHICH IT WAS CLAIMED THAT THE INTERNATIONAL TRANSACTION WAS AT ALP. AS PER THE TPO THE AS SESSEE DID NOT PRODUCE ANY EVIDENCE BEFORE HIM SUPPORTING THE R ECEIPT OF SERVICES QUANTUM OF SERVICES AND THE COST OF THE SAME IN THE OPEN MARKET. APPLYING THE COMPARABLE UNCONTROLLED PRICE METHOD (CUP) AS THE MOST APPROPRIATE METHOD THE TPO DETERMINED NIL ALP OF THE INTERNATIONAL TRANSACTION WHICH FOLLOWED AN ADDITION FO R THE EQUAL SUM BY THE AO. THE ASSESSEE CONTENDED BEFORE THE LD. CIT(A) THAT OUT OF TOTAL SUM OF RS.2.77 CRORE THE ASSESS EE ITSELF WROTE BACK A SUM OF RS.2 17 91 441/- AS ITS INCOME FOR THE A.Y. 2012-13 WHICH AMOUNT WAS ACTUALLY NOT PAID. THE SUSTENA NCE OF DISALLOWANCE TO THIS EXTENT WAS CLAIMED TO BE AMOUNTING TO DOUBLE TAXATION. THE ASSESSEE ADDUCED FURTHER EVIDENCE TO SHOW THAT IT DID AVAIL SERVICES. THE LD. CIT(A) SENT THE ADDITIONAL EVIDENCE TO THE TPO CALLING FOR THE REMAND REPORT. IN SUCH A REMAND REPO RT THE TPO DID NOT CONCUR WITH THE ASSESSEES EVIDENCE BY NOTICING TH AT THE E-MAILS PUT FORTH ON BEHALF OF THE ASSESSEE DID NOT PR OVE ANY RENDITION OF SERVICES BY THE AES NECESSITATING THE MAKING OF PAYMENT. THE LD. CIT(A) THEREFORE UPHELD THE ADDITION MA DE BY ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 4 THE AO AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL B EFORE THE TRIBUNAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. IT IS SEEN THAT THE ASSESSEE E NTERED INTO THE INTERNATIONAL TRANSACTION AND ACCORDINGLY DEBITED A SUM OF RS.2.79 CRORE ON ACCOUNT OF PAYMENT OF PROFESSIONAL FEE. THE ASSESSEE SUBMITTED THAT A SUM OF RS.2.17 CRORE AND ODD WAS WRITTEN BACK IN ITS ACCOUNTS FOR THE A.Y. 2012-13 AND OFFERED FO R TAXATION LEAVING THEREBY THE REMAINING DEBIT IN ITS ACCOUNTS ON THIS SCORE TO THE TUNE OF RS.61 70 479/- COMPRISING OF A SUM OF RS. 61 21 401/- TO GWS AND RS.49 078/- TO CARRARO INTERNATIONAL SA. 5. IN SO FAR AS THE SUM OF RS.2.17 CRORE AND ODD IS CONCERNED WHICH IS CLAIMED TO HAVE BEEN WRITTEN BACK BY THE ASSESSEE IN ITS ACCOUNTS FOR THE A.Y. 2012-13 AND OFFERED FOR TAXATION THERE CAN BE NO ADDITION FOR THIS SUM IN THE YEAR UNDER CONSIDERATION IF THE SAME HAS ACTUALLY BEEN WRITTEN BACK. THERE IS NO FINDING OF THE AUTHORITIES BELOW THAT SUCH AN AMOUNT HAS BEEN OFFERED FOR TAXATION IN A LATER YEAR. THE AO IS DIRECTED TO VERIFY THIS CONTENTION O F THE ASSESSEE. IN CASE IT IS FOUND TO BE CORRECT THEN ADDITION TO THIS EXTENT SHOULD BE DELETED IN THE YEAR UNDER CONSIDERATION. ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 5 6. AS REGARDS THE REMAINING AMOUNT THE MAJOR SUM IS RS.61 21 401/- TO GWS. THE CASE OF THE ASSESSEE IS THAT IT DID RECEIVE SERVICES FROM GWS WHICH FACT HAS BEEN WRONGLY D ENIED BY THE TPO IN THE REMAND PROCEEDINGS AS WELL. WE HAVE PERUS ED A COPY OF THE ADVISORY SERVICE AGREEMENT DATED 5.11.2009 B ETWEEN TURBO GEARS INDIA PRIVATE LIMITED (THE EARLIER NAME OF THE AS SESSEE) AND GEAR WORLD SPA (GWS) PURSUANT TO WHICH THE ASSESSEE RECEIVED ADVISORY SERVICES ON MANUFACTURING STRATEGY GLOBAL SOURCING AND QUALITY CONTROL SALES AND MARKETING ADMINISTRATIO N CONTROLLING AND HUMAN RESOURCE LOGISTIC SUPPORT AND OTHER SERVICES CONNECTED OR ANCILLARY TO THE ABOVE CITED SERVICES. THIS AGREEMENT PROVIDES THAT SUCH SERVICES SHALL BE PERFORMED B Y GEAR WORLD FOR WHICH IT WILL CHARGE AT COST PLUS MARK UP. PERCENTA GES OF MARK UP FOR DIFFERENT SERVICES HAVE BEEN GIVEN IN ANNEXU RE-B. PAGE 964 OF THE PAPER BOOK IS A LIST OF EMPLOYEES OF GWS ENGAGED IN RENDERING SUCH SERVICES TO THE ASSESSEE. PAGE 965 IS A COPY OF E- MAIL FROM MR. FRANCO CALVO OF GWS TO THE ASSESSEES CUSTOME R IN INDIA NAMELY MR. SANJAY IN CONNECTION WITH THE BUSINESS AC TIVITY. FROM PAGE 966 ONWARDS THERE ARE COPIES OF SEVERAL E-M AILS EXCHANGED BETWEEN THE ASSESSEE/ITS CUSTOMERS ON ONE HAND AND THE EMPLOYEES OF GWS ON THE OTHER IN CONNECTION WITH BUSINESS ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 6 ACTIVITIES. THE TPO HAS ALSO ACCEPTED THIS FACT IN HIS REMAND REPORT RELEVANT PART OF WHICH HAS BEEN REPRODUCED ON PAGE 21 O F THE IMPUGNED ORDER. THE TPO ADMITTED IN PARA 8 OF THE REMA ND REPORT THAT .. AFTER REMOVING REPETITIVE EMAILS AROUND 60 EMAILS HAVE BEEN ANALYSED. THE EMAIL WISE ANALYSIS IS ATTACHED AS ANNEXU RE A. ON THE DETAILED ANALYSIS OF THESE EMAILS IT IS SEEN THAT ASSESSEE HAS NOT PROVED THAT ANY SERVICE HAS ACTUALLY BEEN RECEIVED FROM THE AE. THE PAYMENT OF PROFESSIONAL FEE IS ALSO FOUND TO H AVE NOT BEEN LINKED TO ANY SPECIFIC SERVICE . IN PARA NO. 10 THE TPO NOTICED THAT THE PROOF SUBMITTED IN THE FORM OF THE EMAILS EXCHANGES BETWEEN THE ASSESSEES EMPLOYEE AND PARENT CO MPANY ARE NOTHING BUT THE ACTIVITIES OF THE SHAREHOLDERS . THUS THE TPO ADMITTED THE FACTUM OF THE EMAIL EXCHANGES BETWEEN THE ASSESS EE/ITS CUSTOMERS AND GWS. THE TPO HELD THAT SUCH E-MAILS WERE IN THE NATURE OF SHAREHOLDERS ACTIVITY WHICH POSITION IS NOT CORRECT ON NOTICING THAT THE EFFECT OF SUCH SERVICES ALSO PERCOLATED TO TH E ASSESSEE COMPANY THEREBY EXCLUDING THEM FROM THE AMBIT OF SHAREHOLDERS ACTIVITY. THUS IT IS AMPLY ESTABLISHED THAT THE SERVICES WERE RENDERED BY GWS TO THE ASSESSEE. IT IS A C OMMON SUBMISSION THAT THE POSITION IS SIMILAR IN RESPECT OF THE PROFES SIONAL ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 7 SERVICES FROM CARRARO INTERNATIONAL SA FOR A MINOR SUM O F RS.49 078/-. 7. HAVING HELD THAT THE SERVICES WERE IN FACT RENDERED B Y THE AES TO THE ASSESSEE THE NEXT QUESTION IS THE DETERMINATION OF THE ALP OF SUCH SERVICES. IT IS SEEN THAT THE ASSESSEE CHOSE THE TNMM AS THE MOST APPROPRIATE METHOD AND SELECTED FOREIGN/AE AS A TESTED PARTY AND CERTAIN OTHER COMPARABLES. AS AGAINST THIS THE TPO APPLIED THE CUP METHOD AND TREATED NIL ALP OF THE INTERNATIONAL TRANSACTION. 8. THE LD. AR FAIRLY ADMITTED THAT THE BENCHMARKING ANALYS IS OF THE INTERNATIONAL TRANSACTION MAY BE CARRIED OUT BY TREATING THE ASSESSEE ITSELF AS A TESTED PARTY. IN THE ABSENCE OF ANY DATA AVAILABLE ON RECORD DECIPHERING THE PROFIT RATE OF THE ASSESSEE FRO M SUCH TRANSACTIONS AND THAT OF THE COMPARABLE COMPANIES IN INDIA WE ARE UNABLE TO DETERMINE OR VERIFY THE ALP OF THE INTERNATIONAL TRANSACTION AT OUR END. WE THEREFORE SET-ASIDE THE IMP UGNED ORDER ON THIS SCORE AND REMIT THE MATTER TO THE FILE OF THE AO/TPO F OR A FRESH DETERMINATION OF THE ALP OF PAYMENT OF PROFESSIONAL F EE FOR THE REMAINING AMOUNT OF RS.61 70 479/- (RS.61 21 401/- + RS.40 078/-). THIS BENCHMARKING WOULD BE DONE BY TAKING THE ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 8 ASSESSEE ITSELF AS A TESTED PARTY AND INDIAN COMPARABLES A ND THEN APPLYING A CORRECT METHOD. NEEDLESS TO SAY THE ASSESSEE W ILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDINGS. 9. THE ASSESSEE REPORTED CERTAIN OTHER INTERNATIONAL TRANSACTIO NS INCLUDING EXPORT OF FINISHED GOODS IMPORT OF RAW MATERIALS PAYMENT OF SURETY CHARGES PAYMENT OF WARRANTY CHARGES AND REIMBURSEMENT OF EXPENSES. THE TPO NOTICED THAT THE ASSES SEE IN ITS ORIGINAL T.P. STUDY DOCUMENTATION ADOPTED THE EXTERNAL TNMM AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING SUCH INTERN ATIONAL TRANSACTIONS IN AN AGGREGATE MANNER. DURING THE COURSE OF THE PROCEEDINGS BEFORE THE TPO THE ASSESSEE CAME OUT WITH A SUPPLEMENTARY REPORT SEGREGATING SUCH TRANSACTIONS. THE BENCHMARKING FOR EXPORTS TO AES WAS DONE BY ADOPTING THE INTERNAL TNMM AS THE MOST APPROPRIATE METHOD RESULTING IN A SUO MOTO TRANSFER PRICING ADJUSTMENT OF RS.1 00 39 947/-. FOR THE REMAINING TRANSACTIONS THE ASSESSEE APPLIED OTHER METHODS. THE TPO R EJECTED THE ASSESSEES SUPPLEMENTARY REPORT AND STUCK TO THE EXTERN AL TNMM AS ADOPTED BY IT IN THE ORIGINAL TRANSFER PRICING STUDY DOCUMENTATION. HE SELECTED SIX COMPANIES AS COMPARABLE WITH THEIR ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 9 AVERAGE PROFIT LEVEL INDICATOR OF OP/OR AT 15.52%. THE ASS ESSEES PLI AFTER THE DISALLOWANCE OF PAYMENT OF PROFESSIONAL SERVIC ES WAS DETERMINED AT (-)13.60%. THIS IS HOW THE TRANSFER PRICING ADJUSTMENT/ADDITION OF RS.11.30 CRORE CAME TO BE MADE. T HE LD. CIT(A) REJECTED THE ASSESSEES VERSION AND SUSTAINED THE A DDITION. 10. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RE LEVANT MATERIAL ON RECORD. THE ARGUMENT PUT FORTH ON BEHALF OF T HE ASSESSEE BEFORE US IS CONFINED TO URGING THE APPLICATION OF THE INTERNAL TNMM AS THE MOST APPROPRIATE METHOD ON AGGREGATE B ASIS OF THE INTERNATIONAL TRANSACTIONS UNDER CONSIDERATION INSTEAD OF THE EXTERNAL TNMM AS APPLIED BY THE TPO. IN THIS REGARD THE AS SESSEE HAS SUBMITTED A WORKING OF PERCENTAGE OF PROFIT/LOSS EARNED BY IT FROM TRANSACTIONS WITH AES AND NON-AES (BOTH DOMESTIC AND EXPORT) BY CALCULATING OP/TC FROM EXPORT TO AES AND NON-AES UNIFORMLY AT (-) 15.46% AND FROM DOMESTIC SALES TO NON-AES AT (-) 21.99%. SUCH A CALCULATION HAS BEEN PLACED AT PAGE 652 OF THE PAPER BOOK. IT WAS IN THE HUE OF SUCH A CALCULATION THAT THE ASSESSEE CONTENDED THAT THE INTERNAL TNMM OF EXPORTS TO NON-AES SHO ULD BE CONSIDERED AS A BENCHMARK AND CONSEQUENTLY NO TRANSFER PRICING ADDITION WAS CALLED FOR. ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 10 11. RULE 10B(1)(E) DEALS WITH THE DETERMINATION OF THE ALP UNDER THE TNMM. CLAUSE (I) OF RULE 10B(1)(E) STIPULATES THAT THE NET PROFIT MARGIN FROM AN INTERNATIONAL TRANSACTION WITH AN AE IS COMPUTED IN RELATION TO COST INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED ETC. CLAUSE (II) IS MATERIAL FOR THE PRESENT PURPOS E. IT PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANS ACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGA RD TO THE SAME BASE. ON SPLITTING CLAUSE (II) INTO TWO PARTS IT DIVULGES THAT THE REFERENCE IS MADE TO INTERNAL AND EXTERNAL COMPARABLES. ON E PART OF CLAUSE (II) REFERS TO 'THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE .... FROM A COMPARABLE UNCONTROLLED TRANSACTION' AND THE OTH ER PART TALKS OF 'THE NET PROFIT MARGIN REALISED .... BY AN UNCONTROLLE D ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION'. IT TRA NSPIRES THAT WHEREAS THE FIRST PART REFERS TO THE PROFIT MARGIN FROM INTERNAL COMPARABLE UNCONTROLLED TRANSACTIONS THE SECOND PART REFERS TO PROFIT MARGIN FROM AN EXTERNAL COMPARABLE UNCONTROLLED TRANSA CTION. ERGO IT IS DISCERNIBLE THAT WHAT IS TO BE COMPARED UNDER THIS METHOD IS THE PROFIT FROM A COMPARABLE UNCONTROLLED TRANSACTION. THE WORD 'COMPARABLE' MAY ENCOMPASS AN INTERNAL COMPARABLE AS WELL AS AN EXTERNAL COMPARABLE. THERE IS A CUE IN THE RULE ITSELF AS TO THE ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 11 PREFERENCE TO BE GIVEN TO INTERNAL COMPARABLE UNCONTROLLED TRANSACTIONS VIS--VIS EXTERNAL COMPARABLE UNCONTROLLED TRANSACTIONS. IT IS SO BECAUSE THE DELEGATED LEGISLATURE HAS FIRSTLY REFERRE D TO THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE (INTERNAL) FROM A COMPARABLE UNCONTROLLED TRANSACTION AND THEREAFTER IT REFER S TO THE NET PROFIT MARGIN REALIZED BY AN UNRELATED ENTERPRISE (EXTERNA L) FROM COMPARABLE UNCONTROLLED TRANSACTION. THUS WHERE A POTENTIAL COMPARABLE IS AVAILABLE IN THE SHAPE OF AN UNCONTROLLED TRANS ACTION OF THE SAME ASSESSEE IT IS LIKELY TO HAVE A HIGHER DEGREE O F COMPARABILITY VIS-A-VIS THE COMPARABLES IDENTIFIED AMONGST THE UNCONTROLLED TRANSACTIONS OF THIRD PARTIES. THE UNDERLYING OBJE CT BEHIND THE COMPUTATION OF THE ALP OF AN INTERNATIONAL TRANSACTIO N IS TO FIND OUT THE PROFIT WHICH SUCH ENTERPRISE WOULD HAVE EARN ED IF THE TRANSACTION HAD BEEN WITH SOME THIRD PARTY INSTEAD OF RELATED P ARTY. WHEN DATA IS AVAILABLE SHOWING PROFIT MARGIN OF THAT ENTERPRISE ITSELF AS REALIZED FROM A THIRD PARTY IT IS ADVISABLE TO HAVE RE COURSE TO AN INTERNALLY COMPARABLE UNCONTROLLED TRANSACTION. THE REA SON IS OVERT THAT VARIOUS FACTORS HAVING BEARING ON THE QUALITY OF OUTPUT ASSETS EMPLOYED INPUT COST ETC. CONTINUE TO REMAIN BY AND LARGE SAME IN CASE OF AN INTERNAL COMPARABLE. THE EFFECT OF DIFF ERENCE DUE TO SUCH INHERENT FACTORS ON COMPARISON MADE WITH THE THIRD PA RTIES ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 12 GETS NEUTRALIZED WHEN COMPARISON IS MADE WITH INTERNAL COMPARABLE. EX CONSEQUENTI IT FOLLOWS THAT AN INTERNAL COMPARABLE UNCONTROLLED TRANSACTION IS MORE NOTEWORTHY VIS-A-VIS ITS COUNTERPART I.E. EXTERNAL COMPARABLE. 12. HOWEVER IT IS IMPORTANT TO BEAR IN MIND THAT THE INTER NAL CASES CONSTITUTE GOOD COMPARABLE ONLY IF OTHER THINGS BETWEEN THE TRANSACTIONS WITH AES AND NON-AES ARE SIMILAR SUCH AS TYP E OF PRODUCTS OR SERVICES DEALT WITH GEOGRAPHICAL LOCATIONS QUANT ITIES SOLD AND TIMING OF SALES ETC. IN CASE THE NATURE OF PRODU CTS OR SERVICES DEALT WITH IN THE TRANSACTIONS WITH THE AES AND NON-AES ARE AT VARIANCE THEN THE COMPARABILITY CRIPPLES AND THE TRANSACTION S WITH NON-AES SHED CREDENCE EVEN UNDER THE TNMM. IN THE OTHERWISE SCENARIO THAT IS WHERE THE NATURE OF PRODUCTS/SER VICES IS SIMILAR BUT THERE ARE DIFFERENCES DUE TO GEOGRAPHICAL LOCATIO NS OR TIMING OF TRANSACTIONS OR QUANTITY DEALT WITH ETC. THEN THE TRANSACTIONS WITH NON-AES CAN BE CONSIDERED AS BENCHMARK PROVIDED THE EFFECT OF SUCH DIFFERENCES CAN BE REMOVED BY MEANS OF ADJUSTMENT IN THE PROFIT/PRICE OF NON-AE TRANSACTIONS. IN CAS E SUCH EFFECT OF SUCH DIFFERENCES CANNOT BE PROPERLY OFF-LOADED THEN THE INTERNAL COMPARABLE TRANSACTIONS CANNOT BE CONSIDERED FOR ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 13 BENCHMARKING. THE HONBLE JURISDICTIONAL HIGH COURT IN PR. CIT VS. AMPHENOL INTERCONNECT INDIA PVT. LTD. (2019) 410 ITR 0373 (BOM) HAS HELD THAT THE COMPARABLE UNCONTROLLED PRICE (CUP) IS NOT APPROPRIATE IN CASE OF GEOGRAPHICAL DIFFERENCES VOLUME D IFFERENCES TIMING DIFFERENCES RISK DIFFERENCES AND FUNCTIONAL DIFFERE NCES. IN CIT VS. J.P. MORGAN INDIA (P) LTD. (2017) 99 CCH 382 MU MHC (BOM): (2018) 161 DTR 398 (BOM) THE HONBLE BOMBAY HIGH COURT HAS BEEN HELD THAT THE CUP CAN BE USED BY MAKING APPROPRIATE ADJUSTMENTS TO RATES CHARGED BY ASSESSEE FROM RELATED AND UNRELATED PARTIES. SIMILAR VIEW HAS BEEN TAKEN BY THE PU NE BENCHES OF THE TRIBUNAL IN THE CONTEXT OF THE TNMM IN THE CASE OF EATON INDUSTRIAL SYSTEMS PVT. LTD. VS. DCIT (ITA NO.505/PUN/2015) VIDE ITS ORDER DATED 25.11.2019. 13. THE CAVEAT TO THE RULE OF ADOPTING INTERNAL CASES AS COMPARABLE IS THE COMPUTABILITY OF THE CORRECT PROFIT MARGIN FROM TRANSACTION S WITH NON-AES. WHERE THE ASSESSEE MAINTAINS SEPARATE BOOKS OF ACCOUNT IN RESPECT OF TRANSACTIONS WITH AES AND NON-AES TH E BENCHMARKING DOES NOT POSE ANY SERIOUS PROBLEM AS ONE CAN EASILY FIND OUT THE PROFIT MARGIN OF THE NON-AE TRANSACTIONS. BUT TH E SITUATION BECOMES A LITTLE TRICKY WHEN THE ACCOUNTS ARE MAINTAINED IN ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 14 A CONSOLIDATED MANNER AND THEREAFTER AN EXERCISE OF ALLOCATION/APPORTIONMENT IS DONE FOR ASCERTAINING THE PROFIT MAR GIN FROM AE AND NON-AE TRANSACTIONS. IN CASE THE TEMPTATION TO PARK MORE PROFITS IN THE AE TRANSACTIONS BY IMPROPER ALLOCATION O F COSTS ETC. IS ESCHEWED SUCH PROFIT MARGINS CAN ALSO SERVE THE P URPOSE. HOWEVER IN CASE THE ALLOCATION OF COSTS ETC. IS DONE BY THE ASSESSEE FROM CONSOLIDATED ACCOUNTS IT BECOMES INCUMBENT UPON THE AO/TPO TO SATISFY HIMSELF AS REGARDS THE APPLICATION OF APPRO PRIATE KEYS FOR ALLOCATION OF COMMON OPERATING COSTS AND REVENUE S. 14. ADVERTING TO THE FACTS OF THE INSTANT CASE THE LD. AR HA S INVITED OUR ATTENTION TOWARDS PAGE 652 OF THE PAPER BOOK AS PER WHICH IT HAS COMPUTED PROFIT (LOSS) MARGIN FROM EXPORT TRANS ACTIONS WITH AES AND NON-AES UNIFORMLY AT (-) 15.46% BY ALLOCATIN G THE OPERATING COSTS AND REVENUES IN CERTAIN PERCENTAGES THE VERACITY OF WHICH HAS NOT BEEN EXAMINED BY THE TPO. SINCE SUCH A CALCU LATION OF PROFIT (LOSS) MARGIN HAS NOT BEEN VERIFIED BY ANY AUTH ORITY WE SET-ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE F ILE OF AO/TPO. IN SUCH FRESH EXERCISE THE TPO WILL FIRSTLY EXAMINE IF THE TRANSACTIONS WITH THE NON-AES CAN BE CONSIDERED AS COMPAR ABLE IN TERMS OF NATURE OF PRODUCTS GEOGRAPHICAL LOCATIONS TIMING A ND ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 15 QUANTITIES SOLD AND THE AFORE DISCUSSED PARAMETERS. IN CAS E THE TRANSACTIONS OF EXPORT TO THE NON-AES ARE CAPABLE FOR COMP ARISON WITH THE INTERNATIONAL TRANSACTIONS OF EXPORT TO THE AES THEN THE TPO WILL PROCEED TO EXAMINE THE VERACITY OF CALCULATION OF THE PLI FROM EXPORTS TO THE NON-AES VIS--VIS EXPORTS TO THE AES AS GIVEN ON PAGE 652 OF THE PAPER BOOK. IN CASE HE GETS SATISFIED HE WILL PROCEED TO DETERMINE THE ALP BY ADOPTING THE INTERNAL TNMM AS THE MOST APPROPRIATE METHOD. IN CASE THE AO/TPO COMES TO CONCLUSION THAT THE WORKING DONE BY THE ASSESSEE IS NOT COR RECT AND FURTHER PROPER DETERMINATION OF PLI FROM EXPORTS TO NON-AES IS NOT POSSIBLE THEN HE WOULD BE FREE TO BENCHMARK THE INTERNATION AL TRANSACTIONS AS PER LAW AFTER ALLOWING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 15. IN VIEW OF OUR DECISION IN PRINCIPLE THAT THE INTERNAL TNM M SHOULD BE APPLIED AT THE FIRST INSTANCE UNLESS THE DETERMINATION UNDER THIS METHOD BECOMES DIFFICULT THE OTHER ISSUES RAISED BY BOTH THE SIDES EMANATING FROM THE ADOPTION OF EXTERNAL TNMM BY THE TP O AS THE MOST APPROPRIATE METHOD HAVE BEEN RENDERED INFRUCTU OUS AND SUCH GROUNDS ARE THEREFORE DISMISSED AS HAVING BECOME ACADEMIC IN NATURE. ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 16 16. THE LAST GROUND IN THE ASSESSEES APPEAL AGAINST NON- CONSIDERATION OF CARRY FORWARD OF BUSINESS LOSSES AND UN ABSORBED DEPRECIATION AMOUNTING TO RS.37 22 81 779/- IS DIRECTED TO BE CONSIDERED BY THE AO AS PER LAW. 17. IN THE RESULT BOTH THE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH NOVEMBER 2019. SD/- SD/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 28 TH NOVEMBER 2019 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-13 PUNE 4. 5. 6. THE PR.CIT-V PUNE / DR C ITAT PUNE; / GUARD FILE. / BY ORDER // TRUE COPY // SENIOR P RIVATE SECRETARY / ITAT PUNE ITA NOS.1719 & 1720/PUN/2018 CARRARO INDIA PRIVATE LIMITED 17 DATE 1. DRAFT DICTATED ON 26-11-2019 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 27-11-2019 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *