CHEROKEE INDIA P. LTD, MUMBAI v. ITO 8(1)(2), MUMBAI

ITA 825/MUM/2010 | 2005-2006
Pronouncement Date: 22-07-2011 | Result: Dismissed

Appeal Details

RSA Number 82519914 RSA 2010
Assessee PAN AABCC5420G
Bench Mumbai
Appeal Number ITA 825/MUM/2010
Duration Of Justice 1 year(s) 5 month(s) 19 day(s)
Appellant CHEROKEE INDIA P. LTD, MUMBAI
Respondent ITO 8(1)(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 22-07-2011
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted L
Tribunal Order Date 22-07-2011
Date Of Final Hearing 28-12-2010
Next Hearing Date 28-12-2010
Assessment Year 2005-2006
Appeal Filed On 03-02-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L : MUMBAI BEFORE SHRI D. MANMOHAN VICE PRESIDENT AND SHRI R.K.PANDA ACCOUNTANT MEMBER ITA. NO. 825/MUM/2010 ASSESSMENT YEAR 2005-2006 CHEROKEE INDIA PVT. LTD. MUMBAI PAN AABCC5420G VS. ITO 8 (1) (2) MUMBAI. (APPELLANT) (RESPONDENT) FOR APPELLANT : SHRI RAMESH IYER C.A. FOR RESPONDENT : SHRI VATSALYA SAXENA (DR) ORDER PER D. MANMOHAN V.P. 1. ASSESSMENT MADE BY THE ASSESSING OFFICER UNDER SECTION 143 (3) OF THE ACT READ WITH SECTION 92C(4) OF THE I.T. ACT FOR THE ASSESSMENT YEAR 2005-2006 HAVING BEEN CONFIRMED BY THE LEARNED CIT(A) ASSESSEE IS IN APPEAL BEFORE US. THOUGH SEV ERAL GROUNDS WERE URGED BEFORE US ALL THE GROUNDS ARE DIRECTED AGAIN ST THE CORRECTNESS OF THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO AS AGAINST THE PROFIT/LOSSES DECLARED BY THE ASSESSEE UNDER TRANSA CTIONAL NET MARGIN METHOD (HEREINAFTER REFERRED TO AS TNMM). 2. FACTS OF THE CASE ARE AS FOLLOWS :- ASSESSEE-CO MPANY WAS SET UP IN SANTACRUZ ELECTRONICS EXPORT PROCESSING Z ONE (SEEPZ). THIS WAS INCORPORATED ON 25-1-1984 AS A WHOLLY OWNED SUB SIDIARY (99.95%) OF CHEROKEE INTERNATIONAL USA. THE PRIME GOAL OF THE COMPANY WAS TO ACT AS A SUBSIDIARY TO ITS PARENT CO MPANY (HEREINAFTER REFERRED TO AS ASSOCIATED ENTERPRISE OR AE). TH E OBJECT OF THE COMPANY WAS TO MANUFACTURE VARIOUS MAGNETIC COMPONE NTS LIKE TRANSFORMERS INDUCTORS PRINTED CIRCUIT BOARDS ETC . AND TO EXPORT THE SAME TO AE. 2 2.1. IN THE YEAR UNDER CONSIDERATION ASSESSEE EXPO RTED FINISHED GOODS WORTH RS.15 91 07 755/-. THE ASSESSE E HOWEVER INCURRED LOSS OF RS.13.2 LAKHS DURING THE YEAR. OPE RATING LOSS OF THE ASSESSEE AS A PERCENTAGE OF SALES WORKS OUT TO 0.93 %. 2.2. THE CASE OF THE ASSESSEE WAS THAT 95% OF THE RAW MATERIALS WERE RECEIVED FROM AE FREE OF COST I.E. WITHOUT PAYMENT OF CUSTOM DUTY AS PROVIDED IN THE EXIM POLICY. BALANCE IS SOURCED BY THE ASSESSEE LOCALLY OR THROUGH IMPORTS. TITLE TO THE GOODS VESTS WITH AE THROUGHOUT THE MANUFACTURING PROCESS. IT WAS ALS O CONTENDED THAT THE PRODUCTION SCHEDULE IS GIVEN BY THE AE AND ASSE SSEE DOES NOT OWN ANY MANUFACTURING INTANGIBLES NOR DO THEY CONDUCT A NY INDEPENDENT RESEARCH AND DEVELOPMENT ACTIVITIES. UNDER THE CIRC UMSTANCES IT WAS CONTENDED ON THE EXPORTS MADE TO THE AE A MARK-UP OF 6% IS CHARGED TO THE EXPENDITURE/STANDARD COST INCURRED BY THE AS SESSEE. THE STANDARD COST IS BASED ON AN ESTIMATE OF THE COST LIKELY TO BE INCURRED DURING THE YEAR. IN THE PROCESS IT TAKES INTO ACCO UNT THE FUTURE VOLUMES AND OTHER FACTORS TO A REASONABLE EXTENT. S INCE THE PRODUCTS ARE PRICED BASED ON ESTIMATE OF TIME INVOLVED IN CO NVERSION OF RAW MATERIAL INTO FINISHED GOODS AND ESTIMATED COST AN Y VARIATION DUE TO INEFFICIENCIES OR CAPACITY UTILISATION WILL LEAD TO UNDER-ABSORPTION OF OVERHEADS AND SUCH UNDER-ABSORPTION WILL LEAD TO SO ME OVERHEADS WHICH WILL BE SADDLED ON THE ENTITY WITHOUT BEING T RANSFERRED ON TO THE SELLING PRICE OF FINISHED GOODS. UNDER THE CIRCUMST ANCES AS AGAINST THE ESTIMATED PROFIT OF RS. 62 LAKHS (BASED ON THE EARLIER YEARS FIGURES) THE ASSESSEE-COMPANY INCURRED A LOSS OF AR OUND RS. 13 LAKHS. IT WAS CONTENDED THAT THERE WERE JUSTIFIABLE FACTOR S FOR INCURRING THE LOSS WHICH IS MORE TO DO WITH ECONOMICS RATHER THAN WITH AN OBJECT TO AVOID TAX. 2.3. SINCE IT IS A TRANSFER PRICING CASE IN VIEW OF THE PROVISIONS OF SECTION 92CA OF THE ACT THE CASE OF THE ASSESSE E WAS REFERRED TO TPO (THE TRANSFER PRICING OFFICER) FOR COMPUTATION OF ALP (ARMS LENGTH PRICE) IN RELATION TO THE INTERNATIONAL TRAN SACTIONS. THE 3 TRANSFER PRICING OFFICER IN TURN ISSUED A QUESTION NAIRE TO THE ASSESSEE-COMPANY AND REQUESTED TO SUBMIT DETAILED E XPLANATIONS TO SUPPORT THE ARMS LENGTH PRICE COMPUTED IN THIS CASE . 2.4 ASSESSEE SUBMITTED THAT 95% OF THE RAW MATERIA LS WERE SUPPLIED BY AE ON FREE OF COST BASIS AND THE ASSESS EE-COMPANY DOES NOT HAVE TO PAY FOR THE RAW MATERIALS AND COMPONENT S RECEIVED FROM AE NOR IS IT REQUIRED TO TAKE ANY OTHER RISKS AND M ERELY HAS TO INCUR THE BASIC RUNNING EXPENDITURE TO MANUFACTURE THE EN D-PRODUCT TO ENABLE IT TO EXPORT THE SAME TO AE. AS PER THE ARRA NGEMENT STATED TO HAVE BEEN ENTERED INTO WITH THE AE THE ASSESSEE CH ARGED A MARK-UP OF 6% ON THE STANDARD COST. IN OTHERWORDS ASSESS EE IS REWARDED FOR THE VALUE ADDITION MADE TO THE RAW MATERIALS PROCUR ED FROM THE AE. ASSESSEE BEING A CAPTIVE MANUFACTURER OF TRANSFORME RS ETC. IT DOES NOT BEAR ANY RISK OF BUSINESS RELATED TO MARKETING INVENTORY OR OF CAPITAL IN WHICH EVENT THE METHOD FOLLOWED BY THE A SSESSEE I.E. MARK- UP OF 6% ON THE STANDARD COST IS REASONABLE. IN OT HERWORDS TNMM IS THE MOST APPROPRIATE METHOD AND THE ASSESSEE FURNIS HED CERTAIN COMPARABLES. 2.5. THE TPO OBSERVED THAT IF THE ASSESSEE DOES NO T HAVE TO BEAR ANY RISK OF BUSINESS THERE WAS NO NEED TO INCU R LOSS. UNDER THE CIRCUMSTANCES HE OBSERVED THAT THE CLAIM OF ASSESS EE THAT IT FOLLOWED COST-PLUS METHOD IS NOT EVIDENCED BY THE FINANCIAL RESULTS. TRANSFER PRICING OFFICER HAD NOTICED THAT THOUGH THE ASSESSE E-COMPANY HAS CLAIMED THAT IT WAS ENTITLED FOR A MARK-UP OF 6% ON COSTS ATTRIBUTABLE TO THE ASSESSEE AS PER THE AGREEMENTS ENTERED WITH AE ASSESSEE- COMPANY DID NOT FURNISH A COPY OF THE AGREEMENT. TH E TPO DIRECTED THE ASSESSEE-COMPANY TO PRODUCE COPY OF THE AGREEME NT AND ALSO TO DEFINE THE STANDARD COST I.E. COST ON WHICH MARK -UP WAS AGREED TO BE CHARGED. ASSESSEE HOWEVER FAILED TO PRODUCE TH E AGREEMENT. 4 2.6. HAVING REGARD TO THE CIRCUMSTANCES OF THE CAS E THE TPO OBSERVED THAT EVEN AS PER THE METHOD ADOPTED BY THE ASSESSEE I.E. TNMM THE MARK-UP SHOULD BE ON THE TOTAL COST INCUR RED BY THE ASSESSEE WHEREAS THE ASSESSEE CLAIMED TO HAVE INCUR RED NET LOSS WHICH MEANS THAT IT IS NOT ABLE TO RECOVER EVEN THE COST ATTRIBUTABLE TO MANUFACTURING OF THE TRANSFORMERS ETC. WHICH ARE S UPPLIED TO THE AE. 2.7. ASSESSEE OBJECTED TO THE VIEW OF THE TPO BY S TATING THAT AS PER RULE 10B ASSESSEE HAS TO PROVE THAT THE TRANSAC TION IS AT ALP AND IN SUPPORT THEREOF DATA OF COMPARABLES HAS TO BE S UPPLIED TO THE OFFICER. IT WAS ALSO CONTENDED THAT TRANSFER PRICIN G REQUIREMENTS ARE FRAMED NOT TO ASSESSEE PROFITS BUT TO ASCERTAIN AS TO WHETHER THE TRANSACTIONS ARE AT ARMS LENGTH. ONCE THE TRANSACTI ON IS PROVED TO BE AT ARMS LENGTH IT IS IMMATERIAL AS TO WHETHER THE COMPANY IS MAKING PROFIT OR LOSS. IT WAS ALSO CONTENDED THAT COST-PLU S METHOD HAS CERTAIN LIMITATIONS AND THUS IT IS NOT APPLICABLE TO THE CA SE OF THE ASSESSEE. THE LIMITATIONS ARE (A) FOR CPM IT IS REQUIRED TO WORK-OUT THE DIRECT AND INDIRECT COST OF MANUFACTURING; THOUGH DIRECT C OST CAN BE ASCERTAINED ON ACTUAL BASIS DETERMINATION OF INDIR ECT COSTS WOULD HAVE INVOLVED ALLOCATION OF COSTS AND FOR THAT PURP OSE EXCLUSION OF COST RELATING TO SELLING GENERAL AND ADMINISTRATIVE EXP ENSES ARE REQUIRED. (B) FOR VALID COMPARISON SIMILAR EXERCISE WAS REQUI RED TO BE CONDUCTED ON THE COMPARABLES AS WELL. GIVEN THE INFORMATION A VAILABLE ON THE DATABASES IT POSED LIMITATIONS ON CONSTRUCTING SIM ILAR COST BASE FOR COMPARABLES (C) DUE TO PAUCITY OF INFORMATION IT W AS NOT FEASIBLE TO DETERMINE THE CONSISTENCY IN THE METHODS FOR COMPUT ING COSTS BETWEEN THE COMPANY AND THE UNCONTROLLED COMPARABLE COMPANIES. 2.8. THE TPO OBSERVED THAT EVEN IF TNMM IS CONSIDE RED AS MOST APPROPRIATE METHOD TO BENCHMARK THE TRANSACTIO NS WITH THE AE THE ISSUE HEREIN IS NOT MAINLY WITH REGARD TO MARK- UP OF 6% ON COSTS BUT CENTRES AROUND THE QUESTION OF NATURE OF MARK-U P I.E. WHETHER THE ASSESSEE HAS ACTUALLY SHOWN TO HAVE CHARGED THE MARK-UP OF 6% ON COSTS. HAVING REGARD TO THE CIRCUMSTANCES I.E. (A) ASSESSEE IS 5 MAKING NET LOSS DESPITE CHARGING MARK-UP ON THE COS TS (B) CLAIMED TO HAVE CHARGED 6% ON COST AS PER THE AGREEMENT BUT ACTUAL WORKING THEREOF IS NOT REFLECTED IN THE ACCOUNTS (C) THERE IS ABSENCE OF DETAILS REGARDING THE STANDARD COST (D) AGREEMENT IS NOT PL ACED ON RECORD THE TPO CONCLUDED THAT THE ASSESSEE SHOULD BE ENTITLED TO CHARGE A MARK- UP AS PER TNMM ON THE TOTAL COST SO INCURRED. IN TH E INSTANT CASE THE COST OF EXPORTS WERE SHOWN AT RS.15 91 07 755/- AND WITH A MARK-UP OF 6% ON COSTS THE ARMS LENGTH VALUE OF THE SALES O F FINISHED GOODS IS TAKEN TO BE RS.16 21 17 599/-. ACCORDINGLY TPO SUG GESTED FOR AN ADJUSTMENT OF RS.30 09 844/-. 3. ASSESSING OFFICER ACCORDINGLY COMPLETED THE A SSESSMENT WHICH WAS CHALLENGED BY THE ASSESSEE BEFORE THE LEA RNED CIT(A). IT WAS CONTENDED THAT THE METHOD FOLLOWED BY THE ASSESSEE- COMPANY AS WELL AS THE PERCENTAGE OF MARK-UP IS IN ACCORDANCE WITH THE PROCEDURE PRESCRIBED IN LAW AND HENCE THE TRANSFER PRICING A DJUSTMENT MADE BY THE ASSESSING OFFICER DESERVES TO BE SET ASIDE. EXP LAINING FURTHER IT WAS STATED THAT THE EXTERNAL COMPARABLES WERE EXTRA CTED FROM THE PROWESS DATABASE. COMPARISON OF THE DATA SHOWS TH AT THE PRICE CHARGED BY THE ASSESSEE IS WITHIN THE MARGIN I.E. THE ASSESSEE WAS SELLING ITS GOODS ON ALP. IT WAS ALSO CONTENDED THA T THE TPO HAS DISREGARDED VARIOUS COMPARABLES WITHOUT GIVING ANY REASONS. SUBMISSIONS MADE BEFORE THE TPO WERE REITERATED BEF ORE THE CIT(A). 4. LEARNED CIT(A) OBSERVED THAT THE ASSESSEE IS A CONTRACT MANUFACTURER AND HENCE COST-PLUS METHOD IS THE MOST APPROPRIATE METHOD FOR TESTING THE ARMS LENGTH PRICE. HE FURTHE R OBSERVED THAT BY CHARGING THE MARK-UP ON ESTIMATED COST THE ASSESSEE HAS DEPRESSED THE COST BASE. THE BASIS FOR SUCH ESTIMATION IS ALS O NOT KNOWN. IN THE OPINION OF THE LEARNED CIT(A) IF THERE WAS A DIFFE RENCE BETWEEN THE ESTIMATED COST AND THE ACTUAL COST THEN IT IS INCU MBENT UPON THE ASSESSEE-COMPANY TO MAKE UP BY BILLING THE BALANCE IN THE SUBSEQUENT MONTHS. THE METHOD FOLLOWED BY THE ASSES SEE WAS REJECTED ON THE MAIN GROUND THAT CONTRACT MANUFACTU RER NORMALLY BILLS 6 AT TOTAL ACTUAL COST WHEREAS IN THE PRESENT CASE I T HAS BEEN DONE ON ESTIMATED COST. HE FURTHER NOTICED THAT THE ASSESSE E BEING A WHOLLY OWNED SUBSIDIARY OF CHEROKEE INTERNATIONAL LLC US A AND WAS TO FUNCTION AS A FULLY INTEGRATED INDIAN SUBSIDIARY C OST-PLUS METHOD WOULD HAVE BEEN PROPER SINCE THE ASSESSEE SHOULD NO T HAVE TAKEN ANY RISK AND IT SHOULD HAVE BEEN COMPENSATED BY ITS PAR ENT ON ACTUAL COST. HE ALSO HIGHLIGHTED THE FACT THAT ASSESSEE FA ILED TO PRODUCE ANY DOCUMENTS/AGREEMENTS WITH ITS PRINCIPAL REGARDING C ONTRACTUAL TERMS OF SHARING COST. DOUBTING THE CORRECTNESS OF THE ME THOD FOLLOWED BY THE ASSESSEE HE OBSERVED IN PARA 4.3 AS UNDER : ONE OF THE WAYS THROUGH WHICH TRANSFER PRICING IS DONE IN SUCH TRANSACTION IS THAT THE SUPPLIER (APPELLANT) TO WHI CH THE COST-PLUS METHOD IS APPLIED DOES NOT RECEIVE A CHARGE FROM TH E PRINCIPAL FOR COSTS RELATED TO IT. THIS IS DONE IN ORDER TO REDUC E THE SUPPLIERS (APPELLANTS) COST BASE ON WHICH MARK-UP IS CALCULAT ED. IN THE PRESENT CASE BY ADOPTING THE ESTIMATED COST THE BA SE HAS BEEN REDUCED BY RS.1 32 04 176/- (RS.5 01 64 176 RS.3 69 60 000) THUS MAKING IT LIABLE FOR ADJUSTMENTS. THE TPO ON T HE FACTS OF THE CASE CHARACTERIZATION OF TRANSACTION AND FUNCTIONS PERFORMED AS CORRECTLY APPLIED THE MARK-UP OF 6% ON ACTUAL COST. 4.1. HE ALSO OBSERVED THAT ONCE PARENT COMPANY IS HOLDING 99.95% HOLDING IT HAS TO COMPENSATE ITS SUBSIDIARY ON ACTUAL COST EVEN IF THE LOCAL COMPANY IS INEFFICIENT AND THUS COST-PLUS METHOD HAS TO BE ADOPTED. AT ANY RATE ASSESSEE-COMPANY HAVING NOT TAKEN THE ACTUAL COST INTO CONSIDERATION AND CHARGED MARK-UP OF 6% ON ESTIMATED COST THIS ITSELF WOULD HAVE LEAD TO ADJU STMENTS UNDER TNMM ALSO. LEARNED CIT(A) THUS SUPPORTED THE ORDER OF THE TPO/ASSESSING OFFICER BY OBSERVING THAT EVEN UNDER TNMM ADJUSTMENT MADE BY THE TPO IS IN ACCORDANCE WITH LA W. IN THIS REGARD HE OBSERVED THAT WHEN A TAX PAYER INTENDS TO DISPUT E TRANSFER PRICING METHOD ADOPTED BY THE TAX AUTHORITIES THE BURDEN O F PROOF IS UPON THE ASSESSEE TO PROVE THAT THE METHOD FOLLOWED BY T HE ASSESSEE IS 7 REASONABLE. NO DOUBT THE TRANSFER PRICING REGULATIO NS DO NOT QUESTION THE INTENT AND PURPOSE OF PARTIES OF SETTING THE CO NTRACT PRICE BY THE TAX PAYER BUT IT APPLIES REGARDLESS OF THE INTENTI ON TO THE EXTENT THE CONTRACT PRICE DEVIATES FROM THE ARMS LENGTH PRICE. HE ACCORDINGLY UPHELD THE ORDER OF THE ASSESSING OFFICER. 5. FURTHER AGGRIEVED ASSESSEE IS IN APPEAL BEFORE US. LEARNED COUNSEL SUBMITTED THAT IN THE INSTANT CASE TNMM IS THE MOST APPROPRIATED METHOD. ADVERTING OUR ATTENTION TO THE DETAILS OF KEY FINANCIALS IN RESPECT OF COMPARABLE COMPANIES WITH TURNOVER LESS THAN RS. 50 CRORES (PAGE 59 OF THE PAPER BOOK) IT WAS S UBMITTED THAT THE ASSESSEE FOLLOWED A WELL ESTABLISHED METHOD OF COST -PLUS 6% MARK-UP THEREON AND THE SAID PRICE WITH REFERENCE TO THE C OMPARABLE CASES CAN BE SAID TO BE AT ARMS LENGTH. THE TPO AS WELL A S THE ASSESSING OFFICER ACCEPTED TNMM AS THE CORRECT METHOD BUT THE LEARNED CIT(A) SOUGHT TO APPLY COST-PLUS METHOD WHICH IS NOT JUSTI FIED. HE FURTHER CONTENDED THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY COMPARABLES TO ARRIVE AT STANDARD COST AND HAS NOT FOLLOWED THE PARAMETERS PRESCRIBED UNDER RULE 10B OF THE I.T. RULES IN WHIC H EVENT METHOD FOLLOWED BY THE ASSESSEE-COMPANY SHOULD NOT HAVE BE EN DISTURBED. IN THIS REGARD HE RELIED UPON THE DECISION OF THE ITA T MUMBAI BENCH IN THE CASE OF C.A. COMPUTER ASSOCIATES PVT. LTD. VS. DCIT 37 SOT 306. HE ALSO ADVERTED OUR ATTENTION TO THE WRITTEN SUBMI SSIONS FILED BEFORE THE CIT(A) (PAGE 1 AT PARA 3.2) TO SUBMIT THAT ASSE SSEE FOLLOWED SYSTEMATIC METHOD TO ARRIVE AT STANDARD COST AND AD DED A MARK-UP OF 6% THEREON WHICH SHOULD NOT HAVE BEEN DOUBTED MEREL Y BECAUSE THE NET RESULT WAS A LOSS IN THE YEAR UNDER CONSIDERATI ON. HE STRONGLY SUBMITTED THAT METHOD FOLLOWED BY THE ASSESSEE IS B ASED UPON ACCEPTABLE DATA AND THE PRICE CHARGED BY THE ASSESS EE IS AT ARMS LENGTH IN WHICH EVENT ASSESSING OFFICER CANNOT REJE CT THE METHOD FOLLOWED BY THE ASSESSEE TO ESTIMATE ARMS LENGTH PR ICE ARBITRARILY. WRITTEN SUBMISSIONS WERE FILED REITERATING THE POIN TS ARGUED BEFORE US. 8 6. ON THE OTHER HAND LEARNED DR SUBMITTED THAT TH E DECISION OF THE ITAT MUMBAI BENCH (SUPRA) IS NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE. IN THAT CASE THE ISSUE WAS AS TO WHETHER BAD DEBTS CAN BE TAKEN INTO CONSIDERATION TO DETERMINE ALP OF ANY INTERNATIONAL TRANSACTION. HAVING REGARD TO THE PAR AMETERS PRESCRIBED IN RULE 10B THE BENCH OBSERVED THAT BAD DEBTS WRITT EN OFF CANNOT BE A FACTOR TO DETERMINE ALP. HOWEVER IN THE CASE OF CH EROKEE INDIA PVT. LTD. THE ASSESSEE HAS NOT DISCHARGED HIS OBLIGATION OF PROVING THE CORRECTNESS OF THE METHOD FOLLOWED BY IT. ADVERTING OUR ATTENTION TO RULES 10B 10C AND10D OF THE I.T. RULES LEARNED D.R . SUBMITTED THAT EVERY PERSON WHO ENTERS INTO AN INTERNATIONAL TRAN SACTION HAS TO MAINTAIN CERTAIN DOCUMENTS. IN THE INSTANT CASE TH E ASSESSEE BEING A CONTRACT MANUFACTURER THE MODE OF SHARING OF COSTS AND AGREEMENT THERE-FOR CAN BE VERIFIED ONLY IF THE AGREEMENT TO THAT EXTENT IS PLACED ON RECORD AS NO PRUDENT BUSINESSMAN WOULD HAVE SUF FERED LOSS. IN THE INSTANT CASE 5% OF THE RAW MATERIALS WERE PURC HASED BY THE ASSESSEE APART FROM INVESTING IN PLANT AND MACHINER Y ETC. AND FOR SUCH RISKS UNDERTAKEN THE ASSESSEE WOULD NOT ALLOW ITSELF TO BE AT THE MERCY OF AE AND WOULD HAVE CERTAINLY ENTERED INTO A WRITTEN AGREEMENT. SINCE ASSESSEE FAILED TO PRODUCE THE DOC UMENT AND HAVING ADMITTED THAT IT HAD MARKED-UP ITS PROFIT ON THE E STIMATED COST ONLY THE TAX AUTHORITIES WERE JUSTIFIED IN ACCEPTING THE MARK-UP ON THE TOTAL COST RATHER THAN ON ESTIMATED COST-EITHER UNDER COS T-PLUS METHOD OR UNDER TNMM. LEARNED COUNSEL RELIED UPON THE DECISIO N OF ITAT DELHI BENCH IN THE CASE OF MENTOR GRAPHICS 109 ITD 101 TO SUBMIT THAT TRANSFER PRICING IS NOT AN EXACT SCIENCE AND EVAL UATION OF TRANSACTIONS IS SOME TIMES BASED ON APPROXIMATION A FTER TAKING INTO ACCOUNT ALL FACTS AND CIRCUMSTANCES OF THE CASE. IN THE INSTANT CASE THE ASSESSEE DID NOT PERFORM ITS OBLIGATION OF PROV ING THE CORRECTNESS OF ITS CLAIM WITH REGARD TO THE AGREEMENT ENTERED I NTO WITH AE AND ALSO ON ACCOUNT OF FAILURE TO CHARGE THE MARK-UP ON THE ACTUAL COST. THEREFORE THE TAX AUTHORITIES WERE JUSTIFIED IN IG NORING THE BASIS 9 ADOPTED BY THE ASSESSEE. LEARNED DR THUS STRONGLY R ELIED UPON THE ORDERS PASSED BY THE TAX AUTHORITIES. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE RECORD. IN OUR CONSIDERED OPINION THE INITIAL BURDEN IS UPON THE ASSESSEE TO PROVE THE CORRECTNESS OF THE M ETHOD FOLLOWED. IN THE INSTANT CASE THIS BURDEN WAS NOT DISCHARGED PRO PERLY. AS COULD BE SEEN FROM RULES 10B TO 10D OF THE I.T. RULES READ W ITH PROVISIONS OF SECTION 92C OF THE ACT THE ALP IN RELATION TO AN I NTERNATIONAL TRANSACTION HAS TO BE DETERMINED BY ONE OF THE PRES CRIBED METHODS WHICH IS A MOST APPROPRIATE METHOD IN THE CIRCUMSTA NCES OF THE CASE I.E. HAVING REGARD TO THE NATURE OF TRANSACTION C LASS OF TRANSACTION CLASS OF ASSOCIATED PERSONS FUNCTIONS PERFORMED FO R SUCH PERFORMANCE AND SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PR ESCRIBE. THOUGH THE ASSESSEE HAS TO PROVE THAT THE METHOD FOLLOWED BY IT IS THE MOST APPROPRIATE METHOD IT IS NOT AN UNFETTERED CHOICE ON THE TAX PAYER AND THIS IS SUBJECT TO FOLLOWING CERTAIN PROCEDURES . APART FROM THE RELIABILITY OF THE DATA OF THE UNCONTROLLED TRANSAC TIONS IT IS MANDATORY TO EVERY PERSON WHO HAS ENTERED INTO AN INTERNATION AL TRANSACTION TO KEEP AND MAINTAIN SUCH INFORMATION AND DOCUMENTS AS MAY BE PRESCRIBED AND THE ASSESSING OFFICER MAY REQUIRE SU CH PERSON TO FURNISH ANY SUCH INFORMATION OR DOCUMENTATION WITHI N A PARTICULAR PERIOD OF TIME. 8. IN THE INSTANT CASE CORRECTNESS OF THE METHOD FOLLOWED BY THE ASSESSEE HINGES UPON THE NATURE OF AGREEMENT EN TERED INTO WITH AE. THOUGH THE ASSESSEE CLAIMED THAT IT HAS APPLIE D A MARK-UP OF 6% ON THE COSTS AS PER TNMM WHETHER SUCH MARK-UP CAN BE BASED ON AN ESTIMATED COST IS REQUIRED TO BE PROVED BY REFER RING TO THE AGREEMENT WHEREAS THE ASSESSEE COULD NOT FURNISH TH E AGREEMENT AND DID NOT PLACE SUFFICIENT PROOF TO SUPPORT HIS LOGIC OF ARRIVING AT STANDARD COST. SINCE ASSESSEE IS A CONTRACT MANUF ACTURER AND 5% OF THE RAW MATERIALS ARE PURCHASED ON ITS OWN TO MANUF ACTURE THE END- PRODUCT THERE IS SOME ELEMENT OF RISK INVOLVED HA VING INVESTED ON THE 10 PLANT AND MACHINERY INFRASTRUCTURE ETC. TO CARRY ON THE ACTIVITY OF MANUFACTURE. WHILE CONSIDERING THE REASONABLENESS O F THE REWARD ALL THESE FACTORS HAVE TO BE CUMULATIVELY TAKEN NOTE OF . AS RIGHTLY POINTED OUT BY THE TAX AUTHORITIES IN THE CASE OF A CONTRA CT MANUFACTURER IT IS UNTHINKABLE FOR A MANUFACTURER TO AGREE IN WRITING TO CARRY ON THE BUSINESS SO AS TO END UP IN LOSSES. ASSESSEE HAVING NOT TAKEN ACTUAL COST INTO CONSIDERATION TPO/ASSESSING OFFICER AS WELL AS THE LEARNED CIT(A) HAVE CORRECTLY NOTICED THAT EITHER UNDER TN MM OR UNDER COST- PLUS METHOD THE COST OF GOODS SUPPLIED SHOULD BE TA KEN INTO CONSIDERATION. IT ALSO DESERVES TO BE NOTICED THAT THE MARK-UP OF 6% HAS NOT BEEN DISPUTED BY THE TAX AUTHORITIES. 9. LEARNED COUNSEL APPEARING ON BEHALF OF THE ASS ESSEE SUBMITTED BEFORE US THAT IN ORDER TO DISREGARD THE METHOD FOLLOWED BY THE ASSESSEE THE BURDEN IS UPON THE TPO TO PROVE T HAT THE UNCONTROLLED TRANSACTIONS ARE NOT COMPARABLE AND IN THIS REGARD HE RELIED UPON THE DECISION OF ITAT MUMBAI BENCH IN T HE CASE OF C.A. COMPUTER ASSOCIATES PVT. LTD. (SUPRA). IN OUR OPINI ON THE DECISION RENDERED IN THE AFORECITED CASE IS CONFINED TO THE FACTS THEREIN; SINCE PARAMETERS PRESCRIBED IN RULE 10B VIS--VIS BAD DE BTS WRITTEN OFF WERE NOT TAKEN INTO CONSIDERATION THE TRIBUNAL CORR ECTLY OBSERVED THAT THE TPO WAS NOT JUSTIFIED IN ARRIVING AT THE ARMS L ENGTH PRICE BY TAKING INTO ACCOUNT THE BAD DEBTS WRITTEN OFF. IN T HE INSTANT CASE HOWEVER THERE IS NO DISPUTE WITH REGARD TO THE MET HOD FOLLOWED BY THE ASSESSEE EXCEPT FOR THE FACT THAT THE ASSESSEE HAS NOT PROVED SATISFACTORILY AS TO WHY ESTIMATED STANDARD-COST HAS TO BE TAKEN INTO CONSIDERATION PARTICULARLY WHEN THE TRANSACTION IS WITH THE PRINCIPAL WHO IS HOLDING 99.95% CONTROL OVER THE ASSESSEE-COM PANY. 10. AS COULD BE NOTICED FROM PARAS 4.1 TO 4.6 OF T HE CIT(A)S ORDER THE MAIN FACTOR FOR DISREGARDING THE METHOD FOLLOWED BY THE ASSESSEE WAS DUE TO NON-FURNISHING OF THE SO-CALLED AGREEMENT WITH THE AE. SINCE WE ARE IN AGREEMENT WITH THE DETAILE D REASONS GIVEN BY THE TPO/ASSESSING OFFICER AS WELL AS THE CIT(A) WE HOLD THAT THE 11 INITIAL BURDEN IS UPON THE ASSESSEE TO PROVE THE RE ASONABLENESS OF THE METHOD FOLLOWED BY THE ASSESSEE-COMPANY AND IN THE ABSENCE OF PROVING THE SAME BY PRODUCING ANY DOCUMENT/AGREEMEN T WITH ITS PRINCIPAL HIGHLIGHTING THE CONTRACTUAL TERMS OF SHA RING COST THE LEARNED CIT(A) WAS CORRECT IN HOLDING THAT THE SPEC IAL PROVISIONS OF THE ACT HAVE TO BE CONSTRUED STRICTLY AND THE METHOD AD OPTED BY THE TAX AUTHORITIES FOR MAKING TRANSFER PRICING ADJUSTMENTS IS REASONABLE IN THE CIRCUMSTANCES OF THE CASE. WE THEREFORE AFFIR M THE ORDER OF THE LEARNED CIT(A) AND DISMISS THE APPEAL FILED BY THE ASSESSEE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS THE 22 ND DAY OF JULY 2011. SD/- SD/- (R.K.PANDA) (D.MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI DATE 22 ND JULY 2011 VBP/- COPY TO 1. CHEROKEE INDIA PVT. LTD. UNIT 94/95 SDF-III SEEP Z ANDHERI (EAST) MUMBAI PAN AABCC5420G 2. ITO 8 (1) (2) MUMBAI. 3. CIT(A) -15 C.10/703 PRATYAKSHAKAR BHAVAN BAND RA-KURLA COMPLEX MUMBAI 400 051. 4. CIT-8 MUMBAI 5. DR L BENCH 6. GUARD FILE. (TRUE COPY) BY ORDER ASST. REGISTRAR ITAT MUMBAI BENCHES MUMBAI.