TECHNIMONT ICB P. LTD, MUMBAI v. ACIT RG 9(3), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH MUMBAI BEFORE SHRI S.V. MEHROTRA ACCOUNTANT MEMBER. AND SHRI VIJAY PAL RAO JUDICIAL MEMBER ITA NO.7098/MUM./2010 (ASSESSMENT YEAR : 2006 07 ) DATE OF HEARING: 15.2.2011 M/S. TECNIMOUNT ICB PVT. LTD. TECNIMOUNT ICB HOUSE BLDG.NO.2 504 CHINCHOLI BUNDER LINK ROAD MALAD (WEST) MUMBAI 400 064 AAACI2628B .. APPELLANT V/S ACIT 9(3) AAYAKAR BHAVAN M.K. ROAD NEW MARINE LINES MUMBAI 400 020 .... RESPONDENT ASSESSEE BY : SHRI M.P. LOHIA A/W SHRI MANOJ ANCHAL AND SHRI TEJAS SHAH REVENUE BY : SHRI HEMANT LAL A/W MS. MALTI SHRIDHARAN O R D E R PER S.V. MEHROTRA A.M. THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AS PER T HE PROVISIONS CONTAINED UNDER SECTION 253(D) OF THE INCOME TAX AC T 1961 (FOR SHORT THE ACT ) RELATING TO THE APPEALS TO THE APPELLATE TRIBUNA L FOR ASSESSMENT YEAR 2006 07 AGAINST THE ORDER DATED 30 TH AUGUST 2010 PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE ACT FOR ASSESS MENT YEAR 2006 07 IN PURSUANCE TO THE DIRECTIONS GIVEN BY THE DISPUTE RE SOLUTION PANEL (HEREIN AFTER FOR SHORT DPR ) UNDER SECTION 144C(13) OF THE ACT M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 2 2. BRIEF PROFILE OF THE ASSESSEE COMPANY IS LIKE THIS. THE ASSESSEE COMPANY IS A JOINT VENTURE BETWEEN TECNIMOUNT EDISO N GROUP BASED IN ITALY AND THE KAPADIA GROUP BASED IN INDIA. TECNIMOUNT ED ISON GROUP IS AN ITALY BASED ENGINEERING AND CONSTRUCTION GROUP WITH WORLD WIDE OPERATIONS. THE GROUP IS THE MARKET LEADER IN THE POLYOLEFIN SECTOR WITH STRONG CAPABILITY IN POLYMERS OIL AND GAS AND PETROCHEMICALS. IT IS ONE OF THE LEADING EPC COMPANY IN INDIA. THE ASSESSEE COMPANY WAS INITIALL Y SET UP BY SHRI NARENDRA KAPADIA. IN THE YEAR 1996 TECNIMOUNT SPA ONE OF THE LEADING EPA COMPANIES IN EUROPE ACQUIRED 50% EQUITY AND CO MPANY WAS RE CHRISTENED AS TECNIMOUNT ICB PVT. LTD. THE ASSESSEE COMPANY IS ENGAGED IN THE ACTIVITIES LIKE EPC LUMP SUM TURNKEY CONTRACTS ENGINEERING DESIGN SERVICES SUPERVISION SERVICES TRANSLATION SERVICE S AND FEASIBILITY STUDIES. IT ALSO RENDERS ONSHORE / OFFSHORE DESIGN AND ENGINEER ING SERVICES AND FIELD CONSTRUCTION SUPERVISION SERVICES. THE ASSESSEE COM PANY PRIMARILY RENDERS ENGINEERING DESIGN SERVICES AND FIELD CONSTRUCTION SUPERVISION SERVICES TO VARIOUS ENTITIES WITHIN THE TECNIMOUNT GROUP. THE T RAINED TECHNICAL PERSONNEL AVAILABLE WITH THE ASSESSEE COMPANY ARE U TILISED BY THE TECNIMOUNT GROUP FOR EXECUTION OF ASSIGNMENTS ACROS S THE GLOBE. THE SERVICES ARE RENDERED EITHER FROM INDIA OR BY DEPUT ATION OF PERSONNEL OF THE TECNIMONT OFFICES OR AT THE FIELD CONSTRUCTION SITE S. THE ASSESSEE COMPANY IS COMPENSATED ON AN HOURLY BASIS ON ACTUAL MAN HOURS SPENT AS CAPTURED BY TIME SHEETS. HOURLY RATES VARY FOR DIFFERENT ACTIVI TIES SUCH AS PIPING DESIGN CIVIL DESIGN INSTRUMENTATION DESIGN ELECTRICAL DE SIGN MACHINERY DESIGN ETC. AND THE EXPERIENCE AND SKILL SET OF THE PERSO NNEL INVOLVED IN PERFORMING THE SERVICES. THE ASSESSEE COMPANY IS THE PREFERRED VENDOR IN CASE OF OUTSOURCING OF ENGINEERING SERVICES WITHIN OR OUTSI DE THE GROUP. THEREFORE DURING THE YEAR UNDER CONSIDERATION IT HAD ENTERED INTO TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES AS WELL AS NON ASSOCIATED ENTERPRISES. THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESS EE COMPANY WITH ITS ASSOCIATED ENTERPRISES (HEREIN AFTER FOR SHORT A.ES ) DURING THE FINANCIAL YEAR ENDED 31 ST MARCH 2006 WERE AS UNDER: M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 3 S.NO. NATURE OF INTERNATIONAL TRANSACTIONS TRANSACTION VA LUE (AMOUNT IN INR) 1. SUPPLY OF EQUIPMENT 90 747 040 2. INSTRUMENTATION AND CONSTRUCTION CONTRACT 90 701 56 2 3. FIELD CONSTRUCTION SUPERVISION ACTIVITY FOR PROJECT S EXECUTED BY ASSOCIATED ENTERPRISES (A.ES) 108 194 521 4. PROJECT MANAGEMENT ACTIVITY IN CONNECTION WITH PROJECTS EXECUTED BY A.ES 66 308 301 5. ENGINEERING DESIGN ACTIVITY 15 469 702 6. SOFTWARE SERVICE 661 334 7. PAYMENT OF CONSULTANCY FEE 1 490 608 8. PAYMENT OF SERVICE CHARGES 6 060 484 9. REIMBURSEMENT OF EXPENSES 5 005 024 10. RECOVERY OF EXPENSES 87 582 863 3. IN ORDER TO DETERMINE THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS REFERENCE UNDER SECTION 92CA(1) OF THE ACT WAS MADE TO THE TRANSFER PRICING OFFICER (HEREINAFTER FOR SHORT REF ERRED TO AS TPO ) BY THE DCIT 9(3) MUMBAI ON 2 ND SEPTEMBER 2008. THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT IS CONTAINED FROM PAGES 229 TO 241 OF THE PAPER BOOK. OUT OF THE INTERNATIONAL TRANSACTIONS NOTED ABOVE TRANSACTIONS FROM SERIAL NO.1 TO 6 RELATE TO RECEIPTS OF ` 37 21 00 000 IN RESPECT OF VARIOUS SERVICES AND SERIAL NO.7 TO 9 RELATE TO RECOVERY OF AMOUNT OF `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` 10 86 80 340. HE FURTHER POINTED OUT THAT SINCE THE ARMS LENGTH VALUE OF SALES / SE RVICE DID NOT FELL WITHIN THE 5% RANGE HE PROPOSED TO MAKE AN ADJUSTMENT OF ` 10 86 80 340. THE DETAILED COMPUTATION IS GIVEN AT PAGE 6 OF TPOS ORDER. 5. THE ASSESSEE IN ITS REPLY DATED 28 TH AND 29 TH OCTOBER 2009 POINTED OUT THAT IT HAD EARNED HIGHER MARGINS IN RESPECT OF INCOME FROM A.ES VIS A VIS INCOME FROM NON A.ES. THE ASSESSEE REFERRED TO RULE 10B(1)(E) AND POINTED OUT THAT THE ASSESSEE HAD COMPUTED NET PROF IT MARGIN FROM INTERNATIONAL TRANSACTIONS SEPARATELY AND THEREFOR E IN VIEW OF THE ABOVE RULE THE SAME SHOULD HAVE BEEN CONSIDERED AND ENTI TY LEVEL ANALYSIS SHOULD NOT HAVE BEEN DONE. THE ASSESSEE ALSO POINTED OUT T HAT IT HAD CALCULATED MARGIN OF COMPARABLE COMPANIES BASED ON SEGMENTAL D ATA WHEREVER APPLICABLE WHILE THE TPO HAD CONSIDERED THE MARGIN DIRECTLY FROM THE PROWESS DATA BASE WITHOUT CONSIDERING THE SEGMENTAL DATA. FURTHER IT WAS POINTED OUT THAT THE LOSS MAKING COMPANIES SHOULD N OT BE REJECTED. FURTHER MULTIPLE DATA SHOULD BE CONSIDERED IN PLACE OF DATA FOR THE FINANCIAL YEAR 2005 06 ONLY. M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 5 6. THE TPO AFTER CONSIDERING ASSESSEES SUBMISSIONS OBSERVED THAT THE ASSESSEE HAD PROVIDED THE SPLIT PROFIT & LOSS A/C I N RESPECT OF INCOME FROM A.ES AND NON A.ES. THE DIRECT EXPENSES WERE ALLOCAT ED ON ACTUAL BASIS AND INDIRECT EXPENSES WERE ALLOCATED BASED ON TWO SEPAR ATE ALLOCATION KEYS. HE POINTED OUT THAT THE ASSESSEE DID NOT PROVIDE ANY D ETAILS AS TO HOW DIRECT EXPENSES FOR EACH SEGMENT WERE CAPTURED. HE NOTED T HE ACCOUNTING POLICY EXPLAINED BY THE ASSESSEE AT PAGES 10 AND 11 OF THE ORDER AND POINTED OUT THAT THE SAME WAS VERY COMPLEX. THE RECOGNITION OF THE REVENUE AND COSTS BOTH WAS DEPENDENT ON VARIOUS FACTORS SUCH AS THE L EVEL OF COMPLETION OF WORK THE PROFITABILITY FROM THE PROJECT ETC. HE P OINTED OUT THAT THERE COULD BE INSTANCES WHERE INCOME IN RESPECT OF A.ES CONTR ACT IS BOOKED BUT NOT IN RESPECT OF NON A.ES CONTRACT DUE TO DIFFERENCE IN STAGES OF COMPLETION. HE FURTHER POINTED OUT THAT NO AUTHENTICATED DOCUMENTS WERE PRODUCED TO PROVE THE GENUINENESS OF SPLIT PROFIT & LOSS A/C. THE SEG MENTAL ACCOUNTS WERE NOT PART OF THE AUDITED ACCOUNTS SUBMITTED BY THE ASSES SEE. HE THEREFORE HELD THAT THE SPLIT PROFIT & LOSS A/C COULD NOT BE RELIE D ON AND ACCORDINGLY ENTITY LEVEL MARGIN COMPARISON VIS A VIS THE COMPARABLE COMPANIES HAD TO BE DONE. 7. AS REGARDS MARGIN OF COMPARABLE COMPANIES CONSIDERI NG THE SEGMENTAL DATA WHEREVER APPLICABLE HE ACCEPTED THE ASSESSEE S CONTENTION AND ACCORDINGLY THE MARGIN AS PROVIDED BY THE ASSESSEE WERE CONSIDERED TO BE THE ARMS LENGTH BENCHMARKS. HOWEVER LOSS MAKING C OMPANIES WERE REJECTED. HE ALSO CONSIDERED THE DATA FOR FINANCIAL YEAR 2005 06 ONLY AS AGAINST FOR THE THREE YEARS CONSIDERED BY THE ASSES SEE AND COMPUTED THE ARITHMETIC MEANS AT 6.57% IN REGARD TO OPERATING PR OFIT TO OPERATING COST AS GIVEN IN PARA 5.29 OF HIS ORDER AND COMPUTED THE AD JUSTMENTS TO BE MADE FOR ARRIVING AT ARMS LENGTH PRICE AT ` 8 94 37 237. THE WORKING GIVEN IN PARA 5.2.11. IS AS UNDER: 5.2.11 AS REGARDS MARGINS OF ASSESSEE ARE LOWER THA N THE MARGINS OF COMPARABLE COMPANIES AN ADJUSTMENT TO T HE ARMS LENGTH PRICE OF THE SALES / SERVICES TO A.ES IS WARRANTED. THE WORKING OF THE ADJUSTMENT ARE AS FOLLOWS: M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 6 PARTICULARS AMOUNT ( ` ) OPERATING COSTS A 1 123 002 149 ARMS LENGTH PROFIT MARGIN ON COSTS B 6.57% ARMS LENGTH PROFIT C = A + B 73 781 241 ARMS LENGTH VALUE OF SALES D = A + C 1 196 783 390 LESS: VALUE OF NONA.ES SALES E 740 052 838 ARMS LENGTH VALUE OF A.ES SALES F = D E 456 730 552 95% THEREOF G = F * 95% 433 894 025 ACTUAL VALUE OF A.E SALES H 372 082 458 ADJUSTMENT AMOUNT I = F H 84 648 094 THE ARMS LENGTH PAYMENT WHICH SHOULD HAVE BEEN REC EIVED BY THE ASSESSEE FROM ITS A.ES FOR SUPPLY AND SERVICES IS THUS CALCULATED AT ` 456 730 552. HOWEVER THE ASSESSEE HAS RECEIVED AN AMOUNT OF ` 372 082 458. THUS AN ADJUSTMENT OF ` 8 46 48 094 IS BEING MADE TO THE INCOME OF THE ASSESSEE ON ACCOUNT OF PAYMENT RE CEIVED BY THE ASSESSEE FROM ITS A.ES FOR SUPPLY AND SER VICES. ( ADJUSTMENT OF ` 8 46 48 094) 8. THE ASSESSING OFFICER VIDE HIS ORDER DATED 19 TH NOVEMBER 2009 AFTER MAKING ADJUSTMENTS AS PER THE ORDER OF THE TPO PRO POSED THE TOTAL INCOME AT ` 13 83 14 700 AS AGAINST THE RETURNED INCOME OF ` 4 92 87 464 AS UNDER: TOTAL INCOME AS PER RETURN OF INCOME 4 92 87 464 ADD: ADDITIONS AS DISCUSSED (I) TRANSFER PRICING ADJUSTMENTS ON A/C OF MARK UP ON REIMBURSEMENT OF COSTS 43 79 143 (II) TRANSFER PRICING ADJUSTMENT ON A/C OF PAYMENT RECEIVED FOR SUPPLIES AND SERVICES 8 46 48 094 8 90 27 237 TOTAL INCOME 13 83 14 701 R/O TO . 13 83 14 700 9. AGAINST THIS DRAFT ORDER THE ASSESSEE FILED OBJECT IONS BEFORE THE DISPUTE RESOLUTION PANEL (HEREIN AFTER FOR SHORT DRP ) IN RESPECT OF M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 7 VARIATIONS MADE BY THE ASSESSING OFFICER. THE ASSES SEE INTER ALIA TOOK FOLLOWING OBJECTIONS BEFORE THE DRP: A) REJECTION OF SEGMENTAL ACCOUNT IS NOT PROPER; B) USE OF SINGLE YEAR DATA; C) EXCLUDING OTHER INCOME FROM OPERATIVE INCOME; D) REJECTION OF LOSS MAKING COMPANY (UB ENGINEERING LIMITED); AND E) ADJUSTMENT TO THE TOTAL COST RATHER THAN COST AT TRIBUTABLE TO AE. 10. THE DPR CONFIRMED THE FINDINGS OF THE TPO AS REGARD S REJECTION OF SEGMENTAL ACCOUNT INTER ALIA OBSERVING THAT ALTHOUGH THE ASSESSEE HAD FILE D AUDITED ACCOUNT BEFORE IT THE SAME WAS NOT CONSIDE RED AS THE SAME SHOULD HAVE BEEN FILED BEFORE THE TPO. THE DRP ALSO CONFIR MED THE FINDINGS OF THE TPO AS REGARDS ADOPTING SINGLE YEAR DATA OBSERVING THAT THIS APPROACH WAS IN CONFORMITY WITH THE TRANSFER PRICING REGULATION IN INDIA. THE DRP FURTHER POINTED OUT THAT MULTIPLE YEAR DATA CAN ONLY BE APP LIED IF THE ASSESSEE HAD APPLIED MULTIPLE DATA IN ITS PRICE SETTING MECHANIS M. DRP FURTHER HELD THAT THE DATA RELATING TO U.B. ENGINEERING LTD. IS COMP ARABLE AND THEREFORE REQUIRED TO BE INCLUDED AS COMPARABLE AND HENCE T O THIS EXTENT DRP DID NOT AGREE WITH THE FINDINGS OF THE TPO IN EXCLUDING THE COMPARABLES WHICH WERE LOSS MAKING. INSOFAR AS ACTION OF TPO IN MAKIN G ADJUSTMENT TO THE TOTAL COST RATHER THAN THE COST ATTRIBUTABLE TO A.ES WAS CONCERNED DRP CONFIRMED THE SAME AFTER TAKING INTO CONSIDERATION THE FACT T HAT THE DECISION OF MUMBAI BENCH OF THIS TRIBUNAL IN TOW INTERNATIONAL PVT. LT D. TARA JEWELS EXPORTS PVT. LTD. AND TARA ULTIMO PVT. LTD. V/S ACIT REPORTED I N 2010 TIOL 166 ITAT MUM AND APPEAL HAD BEEN FILED BEFORE THE BOMBAY HI GH COURT. 11. ON THE LAST ISSUE WHICH RELATES TO DENIAL OF +/ 5% AS PER THE PROVISIO TO SECTION 92C(2) OF THE ACT THE DRP OBSERVED THAT THE PROVISION IS CLARIFICATORY AND PROCEDURAL IN NATURE AND THE ARM S LENGTH PRICE DETERMINED BY THE TPO DOES NOT FALL WITHIN +/ 5% RANGE AND THEREFORE NO ADJUSTMENT IS REQUIRED. THE ASSESSING OFFICER GAVE EFFECT TO T HESE DIRECTIONS VIDE HIS ORDER DATED 30 TH AUGUST 2010. THE ASSESSEE IS AGGRIEVED AND IS IN F URTHER APPEAL BEFORE THE TRIBUNAL. M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 8 12. GROUNDS NO.1 AND 3 ARE GENERAL IN NATURE HENCE N O SEPARATE ADJUDICATION IS REQUIRED. 13. GROUNDS NO.2 9 AND 10 READS AS UNDER: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE ASSESSING OFFICER HAS ERRED IN MAKING AN ADDITI ON OF ` 8 90 27 237 TO THE TOTAL INCOME OF THE APPELLANT BASED ON THE T RANSFER PRICING ADJUSTMENT DETERMINED BY THE TPO. 9. NONCONSIDERATION OF BUSINESS INCOME AS OPERATIO NAL REVENUE WITHOUT PREJUDICE TO THE ABOVE THE LEARNED AO/TPO ERRED IN HOLDING THAT THE OTHER BUSINESS INCOME VIZ. WRITE B ACK OF LIABILITIES WRITE BACK OF PROVISIONS ETC. SHOULD NOT BE CONSI DERED AS PART OF THE OPERATIONAL REVENUE WHILE COMPUTING THE NET PROFIT OF THE APPELLANT. 10. WITHOUT PREJUDICE TO THE ABOVE THE LEARNED AO /TPO SHOULD HAVE EXCLUDED ATTRIBUTABLE EXPENSES INCURRED FOR EA RNING SUCH INCOME AND OTHER NONOPERATING INCOME FROM THE OPERATIONAL COST WHILE COMPUTING THE OPERATING MARGIN OF THE APPELLANT. 14. DURING THE COURSE OF HEARING THE LEARNED COUNSEL F OR THE ASSESSEE DID NOT WISH TO PRESS THE AFORESAID GROUNDS OF APPEAL. LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND DID NOT DISPUTE THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE. CONSEQUENTLY THE SE GROUNDS OF APPEAL ARE DISMISSED AS NOT PRESSED. 15. GROUND NO.4 READS AS UNDER: 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE ASSESSING OFFICER HAS ERRED IN MAKING AN ADDITI ON OF ` 43 79 143 BEING TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF FIV E PERCENT MARKUP ON THE AMOUNT OF REIMBURSEMENT OF EXPENSES RECEIVED BY THE APPELLANT FROM ITS AES. 16. LEARNED COUNSEL FOR THE ASSESSEE DID NOT WISH TO PR ESS THIS GROUND OF APPEAL BEFORE US DUE TO SMALLNESS OF THE TAX EFFECT . CONSEQUENTLY THIS GROUND OF APPEAL IS ALSO DISMISSED AS NOT PRESSED. 17. THE ISSUE ARISING OUT OF GROUNDS NO.5 6 7 AND 8 RELATE TO REJECTION OF SEGMENTAL ANALYSIS MADE BY THE ASSESSEE. M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 9 18. BEFORE US LEARNED COUNSEL FOR THE ASSESSEE REFERRE D TO PAGES 168 TO 170 OF THE PAPER BOOK WHEREIN THE PETITION FOR PERM ITTING TO FILE ADDITIONAL EVIDENCE BEFORE THE DRP II IS CONTAINED AND SUBMITTED THAT THE ASSESSEE FURNISHED AUDITED SEGMENTAL RESULTS TO SUBSTANTIATE THE GENUINENESS OF SEGMENTAL PROFITABILITY. HE REFERRED TO SECTION 144 C(6)(C) TO POINT OUT THAT THE DRP IS REQUIRED TO ISSUE THE DIRECTIONS IN REGA RD TO THE OBJECTIONS FILED BY THE ASSESSEE ON THE EVIDENCE FURNISHED BEFORE IT. H E FURTHER REFERRED TO RULES FRAMED BY THE BOARD IN PURSUANCE TO SECTION 144C(14 ) TITLED INCOME TAX (DISPUTES RESOLUTION PENAL) RULES 2009 AND REFERRED TO RULE 4(3)(B) R/W PROVISO AND POINTED OUT THAT THE DRP SHOULD HAVE TA KEN INTO CONSIDERATION THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE PARTI CULARLY WHEN THERE WAS NO VARIATION IN THE FIGURES AND ONLY THE PROCEDURAL RE QUIREMENT OF GETTING THE SEGMENTAL RESULTS AUDITED WAS FULFILLED. LEARNED CO UNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE DRP SEGMENTAL RESULTS HA D TO BE TAKEN INTO CONSIDERATION AND NOT THE RESULTS AT ENTITY LEVELS. HE FURTHER REFERRED TO PAGE-75 OF THE PAPER BOOK WHEREIN PROFIT & LOSS A/C OF ASSESSEE COMPANY FOR THE YEAR ENDED 31 ST MARCH 2006 IS CONTAINED AND REFERRED TO INTERNAL PAGE-8 OF TPOS ORDER TO DEMONSTRATE THAT HE HAD TAKEN INT O CONSIDERATION THE TOTAL OPERATING COST AGGREGATING TO ` 1 12 37 84 938. HE REFERRED TO PAGE-62 OF THE PAPER BOOK WHEREIN THE ASSESSEES SEGMENTAL RES ULTS ARE CONTAINED IN WHICH THE OPERATING PROFIT TO OPERATING COST IS COM PUTED @ 33.32%. LEARNED COUNSEL FURTHER POINTED OUT THAT AS AGAINST THIS THE TPO HAD APPLIED 6.57% TO THE TOTAL OPERATING COST OF ` 1 12 30 02 149 AND HAS DETERMINED THE ARMS LENGTH PROFIT AT ` 73 81 241 AFTER REJECTING THE SEGMENTAL RESULTS. LEARNED COUNSEL SUBMITTED THAT THIS ISSUE IS COVERE D BY FOLLOWING DECISIONS:- (I) ACIT V/S M/S. TEJ DIAMOND (ITA NO.5034/MUM./2007 ORDER DATED 15.2.2010) REPORTED AS 2010 TII 27 ITAT MUM TP; (II) ACIT V/S M/S. TWINKLE DIAMOND 2010TII09ITATMUM TP WHEREIN IT HAS BEEN HELD THAT ++ TNMM REQUIRES COMPARISON OF NET PROFIT MARGINS REALISED BY AN ENTERPRISE FROM AN INTERNATIONAL TRA NSACTION OR AN AGGREGATE OF A CLASS OF INTERNATIONAL TRANSACTIONS AND NOT COMPA RISONS OF OPERATING MARGINS OF ENTERPRISES. IN THE CASE OF UCB INDIA P. LTD. (2009TIOL184 ITATMUM) IT HAS BEEN HELD THAT SECTION 92C READ WI TH RULE 10B(1)(E) DEALS WITH TRANSACTIONS NET MARGIN METHOD AND IT REFERS T O ONLY NET PROFIT MARGIN REALISED BY AN ENTERPRISE FROM AN INTERNATIONAL TRA NSACTION OR A CLASS OF SUCH TRANSACTION BUT NOT OPERATIONAL MARGINS OF ENTERPR ISES AS A WHOLE; M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 10 (III) M/S. STAR PITE 45 DTR 65 (MUM.); (IV) GOLWALA DIAMONDS ITA NO.2346/MUM./2006; AND (V) UCB INDIA PVT. LTD. V/S ACIT 121 ITD 131 (MAD.). 19. LEARNED COUNSEL FURTHER POINTED OUT THAT THE ASSESS EE HAD RELIED ON THE DECISION IN IL. JIN ELECTRONICS (I) PVT. LTD. V /S ACIT (2010) 36 SOT 227 (DEL.) WHEREIN AT PAGE-239 IT WAS OBSERVED AS UND ER:- 15. THE ASSESSEE HAS ALSO TAKEN ONE ALTERNATIVE GR OUND OUT OF THE TOTAL RAW MATERIALS CONSUMED BY THE ASSESSEE FOR MA NUFACTURING PRINT CIRCUIT BOARDS ONLY 45.51 PER CENT OF THE TOTAL RA W MATERIALS WERE IMPORTED THROUGH ASSESSEE S ASSOCIATE CONCERNS A ND THEREFORE ANY ADJUSTMENT IF ANY CALLED FOR CAN ONLY BE MADE TO THE 45.51 PER CENT OF THE TOTAL TURNOVER AND NOT TO THE TOTAL TURNOVE R 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 B EST ONLY 45.51 PER CENT OF THE OPERATING PROFIT CAN BE ATTRIBUTED TO I MPORTED RAW MATERIAL ACQUIRED FROM ASSESSEES ASSOCIATE CONCERNS. IN THE PRESENT CASE THE AO HAS CALCULATED THE OPERATING PROFIT ON THE ENTIR E SALES OF THE ASSESSEE WHICH IN OUR CONSIDERED OPINION IS NOT J USTIFIED WHEN IT IS ADMITTED POSITION THAT ONLY 45.51 PER CENT OF RAW M ATERIAL HAS BEEN ACQUIRED BY THE ASSESSEE FROM ITS ASSOCIATE CONCERN S FOR THE PURPOSE OF MANUFACTURING ITEMS. THE ASSESSEE HAS STATED THA T THE OPERATING PROFIT IF APPLIED TO 45.51 PER CENT OF THE TURNOVER WOULD COME TO RS.35 52 573 AS AGAINST OPERATING PROFIT OF RS.24 3 5 175 BOOKED BY THE ASSESSEE AND THE DIFFERENCE THEREOF WOULD ONLY BE CALLED FOR TO BE MADE AS ADDITION TO THE PROFIT SHOWN BY THE ASSESSE E. WE THEREFORE DIRECT THE AO TO MODIFY THE ASSESSMENT AND MAKE THE ADJUSTMENT ONLY TO THE EXTENT OF DIFFERENCE IN THE ARM S LENGTH O PERATING PROFIT WITH ADJUSTED PROFIT WITH REFERENCE TO THE 45.51 PER CEN T OF THE TURNOVER AND NOT TO THE TOTAL TURNOVER OF THE ASSESSEE. THER EFORE TO THIS EXTENT THE ADDITION MADE BY THE AO AND FURTHER CONFIRMED B Y THE CIT(A) IS REDUCED. WE ORDER ACCORDINGLY. [EMPHASIS SUPPLIED ] 20. LEARNED COUNSEL FURTHER SUBMITTED THAT BENEFIT OF V ARIATION / REDUCTION OF 5% FROM THE ARITHMETIC MEAN AS PER PROVISO TO SE CTION 92C OF THE ACT IS TO BE GIVEN TO THE ASSESSEE AS PER HIS OPTION AS HAS B EEN HELD IN FOLLOWING DECISIONS: 1. IL. JIN ELECTRONICS (I) PVT. LTD. V/S ACIT (20 10) 36 SOT 227 (DEL.) 2. T TWO INTERNATIONAL PVT. LTD. 2010TIOL166ITATM UM; 3. TEJ DIAMOND (ITA NO.5034/MUM./2007 ORDER DATED 15. 2.2010; 4. TWINKLE DIAMOND (2010 TII 09 ITAT MUM TP) (MUM ITAT ); 5. STARTEX NETWORKS (I) PVT. LTD. (2010 TII 13 ITAT D EL. TP); AND 6. M/S. STARLITE 45 DTR 65 (MUM.) (TRIB.). M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 11 21. LEARNED COUNSEL IN THE ALTERNATIVE SUBMITTED THAT EVEN IF ADJUSTMENT IS TO BE MADE ON ENTITY LEVEL OPERATING RESULTS TH E SAME CAN BE DONE ONLY TO A.ES TRANSACTIONS AS AGAINST ENTIRE TRANSACTIONS O F BUSINESS. FOR THIS PROPOSITION HE RELIED ON THE FOLLOWING DECISIONS: 1. SONY (I) P. LTD. 114 ITD 448 (DEL.); 2. PHILIPS SOFTWARE 26 SOT 226 (BANG.); 3. DEVELOP[MENT CONSULTANTS P. LTD. 115 TTJ 577 (KOL. ); 4. SKODA AUTO INDIA 30 SOT 319 (PUNE); 5. SCHEFENACKER MOTHERSON LTD. 123 TTJ 14 (DEL.); 6. TOSHIBA INDIA P. LTD. TII 14 ITAT DEL. TP; 7. CUSTOMER SERVICES INDIA P. LTD. 30 SOT 486 (DEL.); 8. SAP INDIA 6 ITR (TRIB.) 81 (BANG.); AND 9. ACIT V/S UE TRADE CORPORATION (I) PVT. LTD. 2011T IIITATDEL. TP. 22. LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE F INDINGS OF THE TPO AND ALSO THE ASSESSMENT ORDER PASSED IN PURSUANCE T O THE DIRECTION ISSUED BY THE DRP UNDER SECTION 144C(5). SHE SUBMITTED THA T THE ASSESSEE HAD NOT SUBSTANTIATED THE CORRECTNESS OF SEGMENTAL RESULTS AND THEREFORE THE TPO OBSERVED THAT THE AUTHENTICATED DOCUMENTS WERE NOT PRODUCED TO PROVE THE GENUINENESS OF SPLIT PROFIT & LOSS A/C AND FURTHER OBSERVED THAT THE SEGMENTAL ACCOUNTS WERE NOT PART OF THE AUDITED ACC OUNT SUBMITTED BY THE ASSESSEE. SHE THEREFORE SUBMITTED THAT DRP RIGHTL Y REJECTED ASSESSEES REQUEST FOR CONSIDERING ADDITIONAL EVIDENCE. HOWEVE R SHE SUBMITTED THAT EVEN IF THE AUDITED STATEMENT FILED BEFORE THE DRP AS ADDITIONAL EVIDENCE ARE TO BE ADMITTED BY THE TRIBUNAL THEN THE MATTER NEED S TO BE RESTORED BACK TO THE FILE OF ASSESSING OFFICER AS HE HAS NOT CONSIDE RED THE SEGMENTAL RESULTS. FURTHER SHE POINTED OUT THAT THERE IS A VIDE VARIA TION BETWEEN PROFIT MARGIN OF A.ES AND NON A.ES TRANSACTIONS WHICH NEEDS TO B E EXAMINED. SHE REFERRED TO PAGE-16 OF PAPER BOOK WHEREIN THE DETAILS OF INT ERNATIONAL TRANSACTIONS ARE GIVEN AND FURTHER REFERRED TO PAGE-20 OF THE PA PER BOOK WHEREIN THE NATURE OF THESE INTERNATIONAL TRANSACTIONS HAS BEEN GIVEN. SHE SUBMITTED THAT SUPPLY OF EQUIPMENT INSTRUMENTATION OF CONSTR UCTION CONTRACT FIELD CONSTRUCTION SUPERVISION ACTIVITY FOR PROJECTS EXE CUTED BY A.ES PROJECT MANAGEMENT ACTIVITIES IN CONNECTION WITH PROJECTS E XECUTED BY A.ES ENGINEERING DESIGN SERVICES SOFTWARE SERVICES ARE ENTIRELY DIFFERENT NATURE OF M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 12 TRANSACTIONS AND THEREFORE THE PROFIT MARGIN IS A LSO DIFFERENT IN RESPECT OF ALL THESE TRANSACTIONS. SHE SUBMITTED THAT ALL THE INTE RNATIONAL TRANSACTIONS COMPRISED IN DIFFERENT ACTIVITIES HAVE TO BE TAKEN INTO CONSIDERATION IF THE SEGMENTAL FIGURES ARE TO BE TAKEN AS BENCHMARK FOR DETERMINING THE PROFITABILITY. IN THIS REGARD LEARNED DEPARTMENTAL REPRESENTATIVE REFERRED TO RULE-10A(D) OF THE ACT AND POINTED OUT THAT THIS RU LE DEFINES THE MEANING OF TRANSACTION AS USED IN COMPUTATION OF ARMS LENGTH PRICE AND INCLUDES THE NUMBER OF CLOSELY LINKED TRANSACTIONS. SHE POINTED OUT THAT UNLESS THE TRANSACTIONS ARE CLOSELY LINKED THEY HAVE TO BE TR EATED AS SEPARATE TRANSACTIONS AND PROFITABILITY DETERMINED ACCORDING LY. SHE FURTHER REFERRED TO RULE-10B(E) WHICH DEALS WITH PROCEDURE RELATING TO DETERMINATION OF ARMS LENGTH PRICE BY TRANSACTIONAL NET MARGIN METHOD AND POINTED OUT THAT THE TERM USED IS AN INTERNATIONAL TRANSACTION IN CLAUSE (I) AND THEREFORE EACH AND EVERY INTERNATIONAL TRANSACTIONS HAS TO BE EXAM INED. SHE SUBMITTED THAT THE ASSESSING OFFICER SHOULD LOOK AT EACH INTERNATI ONAL TRANSACTION IN DEPTH. LEARNED DEPARTMENTAL REPRESENTATIVE FURTHER VEHEMEN TLY OPPOSED THE SUBMISSION OF LEARNED COUNSEL THAT IN TERMS OF PROV ISO TO SECTION 92C THE ASSESSEE IS ENTITLED TO BENEFIT OF VARIATION / REDU CTION OF 5% FROM THE ARITHMETIC MEAN. SHE SUBMITTED THAT AS PER PROVISO ONLY IF ARMS LENGTH PRICE FALLS WITHIN +/ 5% RANGE THE ASSESSEE CAN EXERCISE ITS OPTION FOR ADOPTING THE OTHER PRICE. AS REGARDS GROUND NO.14 LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE SAME WOULD BE REL EVANT ONLY IF ASSESSEES PLEA FOR ADOPTING SEGMENTAL RESULT IS REJECTED. 23. WE HAVE HEARD THE RIVAL SUBMISSIONS PERUSED THE OR DERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RECORD. AT THE OUTSET WE MAY POINT OUT THAT THERE IS NO DISPUTE BETWEEN THE ASSE SSEE AND THE DEPARTMENT OVER THE METHOD ADOPTED FOR DETERMINING THE ARMS L ENGTH PRICE BEING TNM METHOD. THE NEXT ISSUE FOR CONSIDERATION IS WHETHER TO APPLY TNM METHOD AT ENTITY LEVEL OR AT TRANSACTIONAL LEVEL FOR DETERMIN ING THE ARMS LENGTH PRICE. THE ASSESSEE HAD SUBMITTED SEGMENTAL RESULTS FOR IT S TRANSACTIONS WITH A.ES AND TRANSACTIONS WITH NON A.ES. THE TPO REJECTED TH E SEGMENTAL RESULTS AS CONTAINED AT PAGE-62 OF PAPER BOOK ON THE GROUND TH AT THE SAME WERE NOT M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 13 AUTHENTICATED AND ALSO DID NOT FORM PART OF AUDITED FINANCIAL STATEMENT OF ACCOUNTS. LEARNED COUNSEL DURING THE COURSE OF HEA RING SUBMITTED BEFORE US THAT THIS OBJECTION WAS NOT BROUGHT TO THE NOTIC E OF ASSESSEE. HOWEVER WHEN IT RECEIVED THE ORDER THEN IT GOT THE SEGMENT AL RESULTS DULY AUDITED AND FILED THE SAME BEFORE THE DRP AS ADDITIONAL EVI DENCE VIDE ITS PETITION DATED 4 TH MAY 2010. THE DRP HAS SUMMARILY REJECTED THE ASSES SEES ADDITIONAL EVIDENCE OBSERVING THAT THE SAME WAS NOT FILED BEFORE THE DRP. THEREFORE THE FIRST ISSUE WHICH ARISES FOR OUR CON SIDERATION IS REGARDING SCOPE OF POWERS OF DRP REGARDING ENTERTAINING ADDIT IONAL EVIDENCE. IN THIS REGARD WE MAY REFER TO LEGAL PROVISIONS WHICH HAVE TO BE TAKEN INTO CONSIDERATION WHEN ADDITIONAL EVIDENCE IS FILED BEF ORE THE DRP. SECTION 144C DEALS WITH REFERENCE TO DRP AND SUB SECTIONS 5 6 A ND 14 READ AS UNDER:- 5. THE DISPUTE RESOLUTION PANEL SHALL IN A CASE WH ERE ANY OBJECTION IS RECEIVED UNDER SUBSECTION (2) ISSUE SUCH DIRECTIONS AS IT THINKS FIT FOR THE GUIDANCE OF THE ASSESSING OFFIC ER TO ENABLE HIM TO COMPLETE THE ASSESSMENT. 6. THE DISPUTE RESOLUTION PANEL SHALL ISSUE THE DIR ECTIONS REFERRED TO IN SUBSECTION (5) AFTER CONSIDERING THE FOLLOW ING NAMELY (A) DRAFT ORDER; (B) OBJECTIONS FILED BY THE ASSESSEE; (C) REPORT IF ANY OF THE ASSESSING OFFICER VALUATION OFFICER OR TRANSFER PRICING OFFICER OR ANY OTHER AUTHORITY; (D) RECORDS RELATING TO THE DRAFT ORDER; (E) EVIDENCE COLLECTED BY OR CAUSED TO BE COLLECTED BY IT; AND (F) RESULT OF ANY ENQUIRY MADE BY OR CAUSED TO BE MADE BY IT 14. THE BOARD MAY MAKE RULES FOR THE PURPOSES OF TH E EFFICIENT FUNCTIONING OF THE DISPUTE RESOLUTION PANEL AND EXP EDITIOUS DISPOSAL OF THE OBJECTIONS FILED UNDER SUBSECTION (2) BY THE E LIGIBLE ASSESSEE. RULE 4 OF INCOME TAX (DISPUTES RESOLUTION PENAL) RU LES 2009 DEALS WITH PROCEDURE FOR FILING OBJECTIONS BEFORE DRP WH ICH READS AS UNDER:- 4. EACH PANEL SHALL HAVE A SECRETARIAT FOR RECEIVIN G OBJECTIONS CORRESPONDENCE AND OTHER DOCUMENTS TO BE FILED BY T HE ELIGIBLE ASSESSEE AND SHALL ALSO BE RESPONSIBLE FOR ISSUING NOTICES CORRESPONDENCE AND DIRECTION IF ANY ON BEHALF OF T HE PANEL. M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 14 A COMBINED READING OF SECTION 144C R/W RULE 4 OF I NCOME TAX (DISPUTES RESOLUTION PENAL) RULES 2009 CLEARLY SH OW THAT THE DRP HAD TO TAKE INTO CONSIDERATION THE EVIDENCE FURNISHED BY T HE ASSESSEE BEFORE ISSUING ANY DIRECTIONS. THE PROVISO TO RULE-4B INCOME TAX ( DISPUTES RESOLUTION PENAL) RULES 2009 CLEARLY DEALS WITH ADDITIONAL E VIDENCE AND REQUIRES THAT IT SHOULD BE SEPARATELY FILED ALONG WITH APPLICATION S TATING THE REASONS FOR SO DOING. IN THE PRESENT CASE LEARNED COUNSEL HAS POI NTED OUT THAT THERE IS NO VARIATION IN THE SEGMENTAL RESULTS SUBMITTED BY IT IN COURSE OF PROCEEDINGS BEFORE TPO AND AUDITED SEGMENTAL RESULTS FILED BEFO RE THE DRP. THE ONLY OBJECTION FOR NOT CONSIDERING THE SAME WAS THAT THE Y WERE NOT AUDITED. THIS WAS ONLY A PROCEDURAL REQUIREMENT AND ONCE THE SAME WAS COMPLIED WITH THE AUDITED SEGMENTAL ACCOUNTS SHOULD HAVE BEEN ADM ITTED AS ADDITIONAL EVIDENCE BY THE DRP IN ORDER TO IMPART SUBSTANTIAL JUSTICE TO THE ASSESSEE. WE THEREFORE ADMIT THE AUDITED SEGMENTAL RESULTS FILED BY THE ASSESSEE VIDE ITS PETITION DATED 4 TH MAY 2010 AND RESTORE THE MATTER BACK TO THE FILE OF ASSESSING OFFICER FOR DENOVO CONSIDERATION IN AC CORDANCE WITH LAW. 24. NOW COMING TO THE MAIN ISSUE WHETHER THE SEGMENTAL RESULTS ARE TO BE TAKEN INTO CONSIDERATION OR PROFIT MARGIN AT ENT ITY LEVEL IS TO BE CONSIDERED WE FIND THAT CHAPTER-X INCORPORATES SPE CIAL PROVISIONS RELATING TO AVOIDING OF TAX IN REGARD TO INTERNATIONAL TRANSACT IONS AND INCOME FROM INTERNATIONAL TRANSACTIONS HAS TO BE DETERMINED AT ARMS LENGTH PRICE. THEREFORE AS PER THE PROVISIONS CONTAINED UNDER SE CTIONS 92 TO 94 INTERNATIONAL TRANSACTIONS ARE TO BE TAKEN INTO CON SIDERATION. THEREFORE SEGMENTAL RESULTS ARE TO BE CONSIDERED AND NOT THE PROFIT AT ENTITY LEVEL. AS REGARDS THE SUBMISSIONS OF LEARNED DEPARTMENT REPRE SENTATIVE THAT WITH REFERENCE TO SEGMENTAL RESULTS EACH AND EVERY INTE RNATIONAL TRANSACTION HAS TO BE CONSIDERED SEPARATELY BECAUSE ALL THE ACTIVIT IES ARE SEPARATE AND PROFIT MARGIN WILL BE DIFFERENT. LEARNED COUNSEL OBJECTED TO THESE SUBMISSIONS POINTING OUT THAT IT IS NOT THE APPEAL FILED BY THE REVENUE BUT BY THE ASSESSEE. HE ALSO SUBMITTED THAT THE TRIBUNAL HAS N O POWER OF ENHANCEMENT AND ONLY SEGMENTAL RESULTS HAVE TO BE CONSIDERED. O N THIS COUNT WE FIND M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 15 THAT TPO HAS NOT AT ALL CONSIDERED THE SEGMENTAL RE SULTS AND THEREFORE WE REFRAIN FROM MAKING ANY OBSERVATIONS WITH REFERENCE TO THE SUBMISSIONS MADE BY THE LEARNED DEPARTMENTAL REPRESENTATIVE AND CONSIDER IT APPROPRIATE TO ONLY OBSERVE THAT THE ASSESSING OFFI CER WILL CONSIDER THE SEGMENTAL RESULTS AND DETERMINE THE ARMS LENGTH PR ICE IN ACCORDANCE WITH LAW. CONSEQUENTLY THESE GROUNDS OF APPEAL ARE ALLO WED FOR STATISTICAL PURPOSES IN TERMS OF OUR ABOVE OBSERVATIONS. 25. GROUND NO.8 READS AS UNDER:- 8. REJECTION OF LOSS MAKING COMPARABLES ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED A.O./TPO ERRED IN REJECTING THE MARGINS OF LOSS MAKING COMPANIES WHILE COMPUTING THE ARITHMETIC MEANS OF C OMPARABLE COMPANIES. 26. THE TPO HAD EXCLUDED LOSS MAKING COMPANIES FOR ARRI VING AT ARITHMETIC MEANS OF COMPARABLE COMPANIES. HOWEVER DRP HAS NOT ACCEPTED THESE FINDINGS OF TPO AND HAS HELD THAT U.B. ENGINEERING LTD. WHICH WAS A LOSS MAKING COMPANY REQUIRED TO BE INCLUDED AS COMPARABL E. LEARNED COUNSEL POINTED OUT THAT WHILE GIVING EFFECT TO DRPS DIREC TIONS THE ASSESSING OFFICER HAS AGAIN EXCLUDED THE SAME. 27. HAVING HEARD THE RIVAL SUBMISSIONS AND HAVING PERUS ED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE O N RECORD WE DIRECT THE ASSESSING OFFICER TO COMPLY WITH THE DIRECTION OF D RP IN THIS REGARD. WE ORDER ACCORDINGLY. THIS GROUND IS THUS ALLOWED. 28. THE ISSUE ARISING OUT OF GROUNDS NO.12 AND 13 DEAL WITH THE ISSUE REGARDING BENEFIT OF VARIATION / REJECTION OF 5% FR OM ARITHMETIC MEAN. 29. THE DRP WHILE ISSUING DIRECTIONS UNDER SECTION 144 C(5) OBSERVED THAT AS REGARDS BENEFIT OF +/- 5% ADJUSTMENT AS PER PRO VISO TO SECTION 92C(2) THE SAME BEING CLARIFICATORY AND PROCEDURAL IN NATU RE DOES NOT CALL FOR ADJUSTMENT IN THE ARMS LENGTH PRICE DETERMINED BY THE TPO BECAUSE THE ARMS LENGTH PRICE DETERMINED BY THE TPO DOES NOT F ALL WITHIN +/- 5% RANGE. M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 16 30. LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO PAPER BOOK PAGE NO.253 CONTAINING CASE LAW WHERE DECISION OF TRIBUNAL IN S ONY INDIA PVT. LTD. V/S DCIT (2008) 114 ITD 448 (DEL.) IS CONTAINED AND R EFERRED TO PAGE-270 OF THE PAPER BOOK WHEREIN THE TRIBUNAL HAS OBSERVED AS UNDER:- CIRCULAR NO. 12 DT. 23RD AUG. 2001 DOES NOT HELP TO SOLVE THE PROBLEM. THE SAID CIRCULAR WAS ISSUED PRIOR TO INTR ODUCTION OF THE PROVISO. HOWEVER IT IS A SETTLED LAW THAT WHEN A P ROVISO IS INTRODUCED THE COURTS HAVE TO LOOK AT THE LANGUAGE IN WHICH TH E PROVISO IS EXPRESSED. ONLY IN CASES OF AMBIGUITY IT IS PERMIT TED TO GO BEYOND THE LANGUAGE AND CONSIDER THE INTENTION OF THE LEGISLAT ION. AS FAR AS THE FIRST LIMB OF PROVISO IS CONCERNED THE SAME HAS GE NERAL APPLICATION. THE CONTROVERSY IS RELATING TO THE SECOND LIMB/PORT ION OF THE PROVISO TO S. 92C(2) WHERE 'AN OPTION' IS GIVEN TO THE TAXPAYE R TO TAKE ALP WHICH MAY VARY FROM THE ARITHMETIC MEAN BY AN AMOUNT NOT EXCEEDING 5 PER CENT OF SUCH ARITHMETIC MEAN. HERE AGAIN THERE IS NO CONTROVERSY THAT TAXPAYER CAN TAKE ALP WHICH IS NOT EXCEEDING 5 PER CENT OF THE ARITHMETIC MEAN. THE 'OPTION' AS IS CLEAR FROM THE LANGUAGE IS TO TAKE ALP WHICH IS NOT IN EXCESS OF 5 PER CENT OF THE SAI D MEAN. THE WORD 'OPTION' AS PER THE LAW LEXICON IS SYNONYMOUS WITH 'CHOICE' OR 'PREFERENCE'. THEREFORE IT IS THE CHOICE OF THE AS SESSEE TO TAKE ALP WITH A MARGINAL BENEFIT AND NOT THE ARITHMETICAL ME AN DETERMINED BY THE MOST APPROPRIATE METHOD. THERE IS NOTHING IN TH E LANGUAGE TO RESTRICT THE APPLICATION OF THE PROVISION ONLY TO M ARGINAL CASES WHERE PRICE DISCLOSED BY THE ASSESSEE DOES NOT EXCEED 5 P ER CENT OF THE ARITHMETIC MEAN. THE ALP DETERMINED ON APPLICATION OF MOST APPROPRIATE METHOD IS ONLY AN APPROXIMATION AND IS NOT A SCIENTIFIC EVALUATION. THEREFORE THE LEGISLATURE THOUGHT IT P ROPER TO ALLOW MARGINAL BENEFIT TO CASES WHO OPT FOR SUCH BENEFIT. BOTH IN THE FIRST AS ALSO IN THE SECOND LIMB IMPLICATIONS OF DETERMINED ALP ARE THE SAME EXCEPT FOR THE MARGINAL BENEFIT ALLOWED TO THE ASSE SSEE UNDER THE SECOND LIMB. HENCE SECOND LIMB IS APPLICABLE EVEN TO CASES WHERE THE TAXPAYER INTENDS TO CHALLENGE ALP TAKEN AS ARITHMET IC MEAN AND DETERMINED THROUGH THE MOST APPROPRIATE METHOD. OPT ION IS GIVEN TO THE ASSESSEE AS IN SOME CASES VARIATION NOT EXCEED ING 5 PER CENT OF ARITHMETIC MEAN MIGHT NOT SUIT THE ASSESSEE AND TH EREFORE ASSESSEE IN SUCH CASES SHOULD NOT BE PUT TO A PREJUDICE. OTH ERWISE THERE IS NO DIFFERENCE BETWEEN THE FIRST AND THE SECOND LIMB OF THE PROVISION AS FAR AS RIGHT OF THE ASSESSEE TO CHALLENGE THE DETERMINE D PRICE IS CONCERNED. THE SECOND LIMB ONLY ALLOWS MARGINAL REL IEF TO THE ASSESSEE AT HIS OPTION TO TAKE ALP NOT EXCEEDING 5 PER CENT OF THE ARITHMETIC MEAN. THEREFORE BENEFIT OF THE SECOND LIMB OF THE PROVISO TO S. 92C(2) IS AVAILABLE TO ALL ASSESSEES IRRESPECTIVE OF THE F ACT THAT PRICE OF INTERNATIONAL TRANSACTION DISCLOSED BY THEM EXCEEDS THE MARGIN PROVIDED IN THE PROVISO.DEVELOPMENT CONSULTANTS (P ) LTD. VS. DY. CIT (2008) 115 TTJ (KOL) 577 RELIED ON. M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 17 31. HE FURTHER REFERRED TO THE DECISION IN ACIT V/S U E TRADE CORPORATION (INDIA) PVT. LTD. 2011 TTI 04 ITAT DEL TP WHEREIN ALSO THE DECISION IN SONY INDIA PVT. LTD. (SUPRA) WAS FOLLOWED. THUS TH E ASSESSEES CONTENTION IS THAT IT IS ENTITLED FOR STANDARD DEDUCTION OF 5% IN ARMS LENGTH PRICE DETERMINED ON THE BASIS OF ARITHMETIC MEAN. HE ALSO REFERRED TO THE DECISION IN PHILIPS SOFTWARE CENTRE PVT. LTD. V/S ACIT (2008 ) 119 TTJ 721 (BANG.) WHEREIN AT PAGE-399 WHILE SUMMARIZING ITS CONCLUSI ON TRIBUNAL INTER-ALIA OBSERVED AS UNDER:- 5.71 WE THEREFORE SUMMARISE OUR CONCLUSION AS FO LLOWS : (I) SINCE THE BASIC INTENTION BEHIND INTRODUCING THE TP PROVI SIONS IN THE ACT IS TO PREVENT SHIFTING OF PROFITS OUTSIDE INDIA AND THE ASSESSEE IS CLAIMING BENEFIT UNDER S. 10A OF THE ACT THE TP PROVISIONS OUGHT NOT TO BE APPLIED TO THE ASSESSEE. (II) CIRCULAR NO. 14 OF 20 01 ISSUED BY THE CBDT IS BINDING UPON THE TPO. (III) THERE WAS NO IN FIRMITY IN THE TP STUDY CONDUCTED BY THE ASSESSEE AND THE TPO ERRED IN DISREGARDING THE SAME FOR THE PURPOSE OF COMPUTING FRAMING THE A SSESSMENT AND MAKING THE TRANSFER PRICING ADJUSTMENT. (IV) THE TP O OR THE AO NEEDS TO SATISFY AND COMMUNICATE TO THE TAXPAYER THE RELE VANT CLAUSE UNDER S. 92C(3) WHICH HAS BEEN TRIGGERED BY THE ASSESSEE WHICH HAS NECESSITATED THE APPLICATION OF THE TP PROVISIONS. IN THE INSTANT CASE SINCE THIS WAS NOT DEMONSTRATED TO THE ASSESSEE TH E TRANSFER PRICING ORDER IS VOID. (V) THE TPO ERRED IN CONDUCTING A FR ESH STUDY FOR THE PURPOSE OF PASSING HIS ORDER. THE STUDY CONDUCTED B Y THE TPO IS NOT IN CONFORMITY WITH THE PROVISIONS OF RR. 10B(4) AND 10 D(4). (VI) THE TPO ERRED IN DISREGARDING THE MOST APPROPRIATE METHOD A DOPTED BY THE ASSESSEE IN THE TP STUDY AND ALSO IN USING THE PRO WESS DATABASE. THE TPO DID NOT PROVIDE ANY REASON FOR DEVIATING FROM T HE TP STUDY IN RESPECT OF THESE MATTERS. (VII) THE TP STUDY CANNOT BE IGNORED BY THE TPO IN THE ABSENCE OF ANY DEFICIENCY OR INSUFFICIE NCY. FURTHER THE ORDER PASSED BY THE TPO APPEARS TO HAVE BEEN PASSED WITH THE INTENTION OF MAKING A HIGHER TRANSFER PRICING ADJUS TMENT. (VIII) FOR THE PURPOSE OF COMPARABILITY COMPANIES WITH EVEN A SIN GLE RUPEE OF TRANSACTIONS WITH AE CANNOT BE CONSIDERED AS COMPAR ABLES. (IX) ADJUSTMENT NEEDS TO BE MADE TO THE MARGINS OF THE C OMPARABLES TO ELIMINATE DIFFERENCES ON ACCOUNT OF DIFFERENT FUNCT IONS ASSETS AND RISKS. MORE SPECIFICALLY ADJUSTMENT NEEDS TO BE MA DE FOR : (A) DIFFERENCES IN RISK PROFILE. (B) DIFFERENCE IN WORK ING CAPITAL POSITION. (C) DIFFERENCES IN ACCOUNTING POLICIES. (X) THE TPO HAS GROSSLY ERRED IN NORMALISING THE PROFITS OF SUPER PROFIT COMPANIES . SUCH COMPANIES SHOULD HAVE BEEN EXCLUDED FROM THE LIST OF COMPARAB LES. 32. LEARNED DEPARTMENT REPRESENTATIVE REFERRED TO CIRCU LAR DATED 23 RD AUGUST 2001 WHICH WAS ISSUED PRIOR TO THE INSERTIO N OF PROVISO TO SECTION 92C(2) WHEREIN THE BOARD HAD DECIDED AS UNDER:- M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 18 (I) THE ASSESSING OFFICER SHALL NOT MAKE ANY ADJUST MENT TO THE ARMS LENGTH PRICE DETERMINED BY THE TAXPAYER IF S UCH PRICE IS UPTO 5% LESS OR UPTO 5% MORE THAN THE PRICE DETERMINED B Y THE ASSESSING OFFICER. IN SUCH CASES THE PRICE DECLARED BY THE TA XPAYER MAY BE ACCEPTED. 33. WE HAVE HEARD THE RIVAL SUBMISSIONS PERUSED THE OR DERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION IN SONY INDIA PVT. LTD. (SU PRA) RELIED ON BY THE ASSESSEE WHEREIN IT HAS BEEN HELD AS UNDER:- CIRCULAR NO. 12 DT. 23RD AUG. 2001 DOES NOT HELP TO SOLVE THE PROBLEM. THE SAID CIRCULAR WAS ISSUED PRIOR TO INTRODUCTION OF THE PROVISO. HOWEVER IT IS A SETTLED LAW THAT WHEN A PROVISO IS INTRODUC ED THE COURTS HAVE TO LOOK AT THE LANGUAGE IN WHICH THE PROVISO IS EXPRES SED. ONLY IN CASES OF AMBIGUITY IT IS PERMITTED TO GO BEYOND THE LANGUAG E AND CONSIDER THE INTENTION OF THE LEGISLATION. AS FAR AS THE FIRST L IMB OF PROVISO IS CONCERNED THE SAME HAS GENERAL APPLICATION. THE CONTROVERSY I S RELATING TO THE SECOND LIMB/PORTION OF THE PROVISO TO S. 92C(2) WHERE 'AN OPTION' IS GIVEN TO THE TAXPAYER TO TAKE ALP WHICH MAY VARY FROM THE ARITHM ETIC MEAN BY AN AMOUNT NOT EXCEEDING 5 PER CENT OF SUCH ARITHMETIC MEAN. HERE AGAIN THERE IS NO CONTROVERSY THAT TAXPAYER CAN TAKE ALP WHICH IS NOT EXCEEDING 5 PER CENT OF THE ARITHMETIC MEAN. THE 'OPTION' AS IS CLEAR FROM THE LANGUAGE IS TO TAKE ALP WHICH IS NOT IN EXCESS OF 5 PER CENT OF THE SAID MEAN. THE WORD 'OPTION' AS PER THE LAW LEXICON IS S YNONYMOUS WITH 'CHOICE' OR 'PREFERENCE'. THEREFORE IT IS THE CHOI CE OF THE ASSESSEE TO TAKE ALP WITH A MARGINAL BENEFIT AND NOT THE ARITHMETICA L MEAN DETERMINED BY THE MOST APPROPRIATE METHOD. THERE IS NOTHING IN TH E LANGUAGE TO RESTRICT THE APPLICATION OF THE PROVISION ONLY TO MARGINAL C ASES WHERE PRICE DISCLOSED BY THE ASSESSEE DOES NOT EXCEED 5 PER CEN T OF THE ARITHMETIC MEAN. THE ALP DETERMINED ON APPLICATION OF MOST APP ROPRIATE METHOD IS ONLY AN APPROXIMATION AND IS NOT A SCIENTIFIC EVALU ATION. THEREFORE THE LEGISLATURE THOUGHT IT PROPER TO ALLOW MARGINAL BEN EFIT TO CASES WHO OPT FOR SUCH BENEFIT. BOTH IN THE FIRST AS ALSO IN THE SECO ND LIMB IMPLICATIONS OF DETERMINED ALP ARE THE SAME EXCEPT FOR THE MARGINAL BENEFIT ALLOWED TO THE ASSESSEE UNDER THE SECOND LIMB. HENCE SECOND L IMB IS APPLICABLE EVEN TO CASES WHERE THE TAXPAYER INTENDS TO CHALLENGE AL P TAKEN AS ARITHMETIC MEAN AND DETERMINED THROUGH THE MOST APPROPRIATE ME THOD. OPTION IS GIVEN TO THE ASSESSEE AS IN SOME CASES VARIATION N OT EXCEEDING 5 PER CENT OF ARITHMETIC MEAN MIGHT NOT SUIT THE ASSESSEE AND THEREFORE ASSESSEE IN SUCH CASES SHOULD NOT BE PUT TO A PREJUDICE. OTHERW ISE THERE IS NO DIFFERENCE BETWEEN THE FIRST AND THE SECOND LIMB OF THE PROVISION AS FAR AS RIGHT OF THE ASSESSEE TO CHALLENGE THE DETERMINED P RICE IS CONCERNED. THE SECOND LIMB ONLY ALLOWS MARGINAL RELIEF TO THE ASSE SSEE AT HIS OPTION TO TAKE ALP NOT EXCEEDING 5 PER CENT OF THE ARITHMETIC MEAN . THEREFORE BENEFIT OF THE SECOND LIMB OF THE PROVISO TO S. 92C(2) IS AVAI LABLE TO ALL ASSESSEES IRRESPECTIVE OF THE FACT THAT PRICE OF INTERNATIONA L TRANSACTION DISCLOSED BY THEM EXCEEDS THE MARGIN PROVIDED IN THE PROVISO.DE VELOPMENT CONSULTANTS (P) LTD. VS. DY. CIT (2008) 115 TTJ (KO L) 577 RELIED ON. M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 19 34. RESPECTFULLY FOLLOWING THE AFORESAID DECISION THES E GROUNDS OF APPEAL ARE ALLOWED. HOWEVER IN THE ARMS LENGTH PRICE TO BE DETERMINED BY THE ASSESSING OFFICER AN ADJUSTMENT IS CONTEMPLATED IN THE PROVISO IS TO BE MADE AT THE OPTION OF THE ASSESSEE. 35. GROUND NO.14 READS AS UNDER:- 14. WITHOUT PREJUDICE TO THE ABOVE GROUNDS IN APPE AL ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW TH E LEARNED A.O/TPO ERRED IN APPLYING THE ARMS LENGTH PROFIT MARGIN BA SED ON COSTS TO THE ENTIRE OPERATING COSTS OF THE APPELLANT INSTEAD OF RESTRICTING THE SAME TO THE OPERATING COSTS ATTRIBUTABLE TO THE A.E TRAN SACTION. 36. AS REGARDS APPLYING OF ARMS LENGTH MARGIN TO BOTH A.ES AND NON A.ES TRANSACTIONS LEARNED COUNSEL SUBMITTED THAT THE AR ITHMETIC MEAN DETERMINED BY THE ASSESSING OFFICER IN ANY CASE I S TO BE APPLIED ONLY TO INTERNATIONAL TRANSACTION AGGREGATING TO ` 23 CRORES AND NOT TO THE ENTIRE TRANSACTION AGGREGATING ` 112 CRORES REGARDING A.ES AND NON A.ES BOTH. 37. HAVING HEARD THE RIVAL SUBMISSIONS AND HAVING PERUS ED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE O N RECORD WE FIND THAT THIS IS AN ALTERNATIVE PLEA RAISED BY THE ASSESSEE THAT IF THE OPERATING PROFIT TO OPERATING COST AT THE ENTITY LEVEL ARE TO BE APPLIE D THEN THE SAME SHOULD BE APPLIED ONLY TO THE INTERNATIONAL TRANSACTIONS WITH A.ES AND NOT TO NON ASSOCIATED TRANSACTIONS. AS WE HAVE ALREADY HELD TH AT SEGMENTAL ACCOUNTS ARE TO BE CONSIDERED THEREFORE THE ISSUE ARISING OUT OF THIS GROUND OF APPEAL IS ONLY ACADEMIC IN NATURE AND HENCE DISMISSED. 38. IN THE RESULT THIS APPEAL IS PARTLY ALLOWED IN TER MS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 25.2.2011. SD/- VIJAY PAL RAO JUDICIAL MEMBER SD/- S.V. MEHROTRA ACCOUNTANT MEMBER MUMBAI DATED: 25.2.2011 M/S. TECNIMOUNT ICB PVT. LTD. ITA NO.7098/MUM./2010 20 COPY TO : (1) THE ASSESSEE (2) THE RESPONDENT (3) THE CIT(A) MUMBAI CONCERNED (4) THE CIT MUMBAI CITY CONCERNED (5) THE DR E BENCH ITAT MUMBAI TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT MUMBAI BENCHES MUMBAI DATE INITIAL 1. DRAFT DICTATED ON 17.2.2011 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 21.2.2011 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 21.2.2011 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 21.2.2011 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 21.2.2011 SR.PS/PS 6. DATE OF PRONOUNCEMENT 25.2.2011 SR.PS 7. FILE SENT TO THE BENCH CLERK 25.2.2011 SR.PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER