M/s. Schneider Electric India Pvt. Ltd., Gurgaon v. DCIT, New Delhi

ITA 937/DEL/2014 | 2009-2010
Pronouncement Date: 29-09-2016 | Result: Allowed

Appeal Details

RSA Number 93720114 RSA 2014
Assessee PAN AABCS1624G
Bench Delhi
Appeal Number ITA 937/DEL/2014
Duration Of Justice 2 year(s) 7 month(s) 10 day(s)
Appellant M/s. Schneider Electric India Pvt. Ltd., Gurgaon
Respondent DCIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 29-09-2016
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted I1
Tribunal Order Date 29-09-2016
Date Of Final Hearing 23-08-2016
Next Hearing Date 23-08-2016
Assessment Year 2009-2010
Appeal Filed On 18-02-2014
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI S.V. MEHROTRA ACCOUNTANT MEMBER AND SHRI KULDIP SINGH JUDICIAL MEMBER ITA NO.937/DEL./2014 (ASSESSMENT YEAR : 2009-10) SCHNEIDER ELECTRIC INDIA PVT. LTD. VS. DCIT CIRCL E 7 (1) 9 TH FLOOR TOWER C BUILDING 10 NEW DELHI. DLF CYBER CITY PHASE II GURGAON 122 002 (HARYANA). (PAN : AABCS1624G) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.M. GUPTA ADVOCATE REVENUE BY : MS. SWATI JOSHI CIT DR DATE OF HEARING : 23.08.2016 DATE OF ORDER : 29.09.2016 O R D E R PER KULDIP SINGH JUDICIAL MEMBER : APPELLANT M/S. SCHNEIDER ELECTRIC INDIA PVT. LTD. (HEREINAFTER REFERRED TO AS THE ASSESSEE) BY FIL ING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE ORDER PASSED BY THE AO/TPO/DRP UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE INCOME-TAX ACT 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2009-10 ON THE GROUNDS INTER ALIA THAT :- ITA NO.937/DEL./2014 2 TRANSFER PRICING ('TP') MATTERS ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW: 1. THE LD ASSESSING OFFICER ('AO') PURSUANT TO THE DIRECTIONS OF THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP') ERR ED IN MAKING A TRANSFER PRICING ADJUSTMENT OF RS.101 88 29 361/- T O THE INCOME OF THE APPELLANT BY HOLDING THAT THE INTERNATIONAL TRA NSACTION PERTAINING TO ITS MANUFACTURING SEGMENT DISTRIBUTI ON SEGMENT AND RESEARCH AND DEVELOPMENT (R&D)SUPPORT SERVICES SEGM ENT OF THE APPELLANT DOES NOT SATISFY THE ARM'S LENGTH PRINCIP LE ENVISAGED UNDER THE INCOME-TAX ACT 1961 ('THE ACT'). MANUFACTURING SEGMENT 2. THE LD AO/TRANSFER PRICING OFFICER ('TPO') ERRED IN ENHANCING THE INCOME OF THE APPELLANT BY MAKING A T P ADJUSTMENT OF RS.60 14 65 390 ON ACCOUNT OF THE MANUFACTURING SEGMENT WHILE PASSING THE RECTIFICATION ORDER U/S 154 OF THE ACT AND NOT ALLOWING THE ADJUSTMENT CLAIMED BY THE APPELLANT IN ITS TP S TUDY WHICH IS ALLOWED IN THE ORDER PASSED BY THE LD TPO U/S SECTI ON 92 CA(3) OF THE ACT DATED JANUARY 30 2013. 3. THE LD. AO ID RP ITPO ERRED IN ENHANCING THE INC OME OF THE APPELLANT BY MAKING A TP ADJUSTMENT \ OF RS.60 14 65 390 ON ACCOUNT OF THE MANUFACTURING SEGMENT OF THE APPELLA NT BY ERRONEOUSLY REJECTING THE APPELLANT'S SEGMENTATION OF ITS ACCOUNT FOR TP PURPOSE AS UNDERTAKEN IN THE TP STUDY. 3.1 WITHOUT PREJUDICE TO GROUND NUMBER 3 AND AS AN ALTERNATE THE LD AO/TPO/DRP ERRED IN FAILING TO CONSIDER THAT IN ANY EVENT ONLY PROPORTIONATE TP ADJUSTMENT SHOULD HAVE BEEN M ADE IN THE APPELLANT'S CASE UNDER THE TRANSACTIONAL NET MARGIN METHOD ('TNMM'). 3.2 THE LD AO/TPO/DRP ERRED IN FAILING TO APPRECIAT E THAT THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT RELATIN G TO ITS MANUFACTURING SEGMENT WOULD MEET THE ARM'S LENGTH P RINCIPLE EVEN ON A TRANSACTION-BY-TRANSACTION BASIS. DISTRIBUTION SEGMENT 4. THE LD. AO/DRP /TPO ERRED IN ENHANCING THE INCOM E OF THE APPELLANT BY MAKING A TP ADJUSTMENT OF RS.37 58 66 000 ON ACCOUNT OF THE DISTRIBUTION SEGMENT OF THE APPELLAN T AND IN DOING SO HAVE GROSSLY ERRED IN NOT ALLOWING ADJUSTMENT ON AC COUNT OF CUSTOMS DUTY AND ADVERSE MOVEMENT OF FOREIGN EXCHAN GE CLAIMED IN TP STUDY. ITA NO.937/DEL./2014 3 4.1 WITHOUT PREJUDICE TO GROUND 4 ABOVE THE LD AO/ TPO/DRP ERRED IN FAILING TO CONSIDER THAT IN ANY EVENT ONL Y PROPORTIONATE TP ADJUSTMENT SHOULD HAVE BEEN MADE IN THE APPELLANT'S CASE UNDER THE TNMM. R&D SUPPORT SERVICES SEGMENT 5. THE LD AO/TPO/DRP ERRED IN ENHANCING THE INCOME OF THE APPELLANT BY MAKING A TP ADJUSTMENT OF RS.4 14 97 9 71 ON ACCOUNT OF THE R&D SUPPORT SERVICES SEGMENT OF THE APPELLAN T AND IN DOING SO HAVE ERRED BY DISTORTING THE COMPARABILITY ANALY SIS CONDUCTED BY THE APPELLANT IN THE TP DOCUMENTATION. CORPORATE TAX MATTERS 6. THAT ON THE FACTS OF THE CASE AND IN LAW THE AS SESSMENT ORDER PASSED BY THE LD. AO UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT IS BAD IN LAW IN CONFIRMING THE ADDITIONS MADE IN THE DRAFT ASSESSME NT ORDER PASSED UNDER SECTION 144C OF THE ACT WITHOUT CONSIDERING T HE SUBMISSIONS MADE BY THE APPELLANT. 7. THAT ON THE FACTS OF THE CASE AND IN LAW THE LD AO/LD. DRP HAS ERRED IN DISALLOWING 3/4TH OF THE ADVERTISE MENT AND SALES PROMOTION EXPENSES AMOUNTING TO RS.6 32 85 750 BY E RRONEOUSLY HOLDING THAT SUCH EXPENDITURE IS ENDURING IN NATURE AND THUS IN THE NATURE OF DEFERRED REVENUE EXPENDITURE. 8. THAT ON THE FACTS OF THE CASE AND IN LAW THE LD AO/LD. DRP HAS ERRED IN DISALLOWING 4/5TH OF THE RECRUITME NT EXPENDITURE AMOUNTING TO RS.1 12 88 617 BY ERRONEOUSLY HOLDING THAT SUCH EXPENDITURE IS ENDURING IN NATURE AND THUS IN THE NATURE OF DEFERRED REVENUE EXPENDITURE. 9. THAT ON THE FACTS OF THE CASE AND IN LAW THE LD AO/LD. DRP HAS ERRED IN DISALLOWING 3/4TH OF THE LICENSES AND PERMITS EXPENDITURE AMOUNTING TO RS.1 69 93 222 BY ERRONEOU SLY HOLDING THAT SUCH EXPENDITURE IS ENDURING IN NATURE AND THU S IN THE NATURE OF DEFERRED REVENUE EXPENDITURE. 10. THAT ON THE FACTS OF THE CASE AND IN LAW THE L D. AO/LD. DRP HAS ERRED IN NOT ALLOWING THE APPELLANT THE EL IGIBLE DEDUCTION UNDER SECTION 10A OF THE ACT AMOUNTING TO RS.3 53 3 8 348. 10.1 THAT ON THE FACTS OF THE CASE AND IN LAW THE LD. AO/LD.DRP HAS GRAVELY ERRED IN NOT EXCLUDING THE IN COME OF SECTION 10A UNIT AMOUNTING TO RS.3 53 38 348 AT SOU RCE ITSELF BEFORE ARRIVING AT THE GROSS TOTAL INCOME OF THE AP PELLANT. ITA NO.937/DEL./2014 4 11. WITHOUT PREJUDICE TO THE ABOVE GROUND NO.7 8 A ND 9 THE LD. AO OUGHT TO BE DIRECTED TO RECOMPUTE THE DEDUCT ION UNDER SECTION 10A OF THE ACT AFTER CONSIDERING THE DISALL OWANCE OF EXPENSES VIZ. ADVERTISEMENT AND SALES PROMOTION EXP ENDITURE RECRUITMENT EXPENDITURE AND LICENCES AND PERMITS EX PENDITURE AND EXCLUDING ANY ADJUSTMENT UNDER SECTION 92C(4) O F THE ACT IN VIEW OF THE PROVISO TO SECTION 92C(4) OF THE ACT. 12. THAT THE LD. AO HAS GROSSLY ERRED IN LAW IN LEV YING INTEREST UNDER SECTION 234B AND 234D OF THE ACT AND ALSO WIT HDRAWING INTEREST UNDER SECTION 244A OF THE ACT. 13. THAT THE LD. AO HAS GROSSLY ERRED IN LAW IN INI TIATING THE PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 2. BRIEFLY STATED THE FACTS OF THIS CASE ARE : ASSE SSEE COMPANY SCHNEIDER ELECTRIC INDIA PVT. LTD. (SEIPL) IS A WH OLLY OWNED SUBSIDIARY OF SCHNEIDER ELECTRIC INDUSTRIES SA FRA NCE IS INTO THE MANUFACTURING OF LOW VOLTAGE AND MEDIUM VOLTAGE EQU IPMENT MOULDED CASE CIRCUIT BREAKERS (MCCBS) RM6 CONTRAC TORS PUSH BUTTONS LOW VOLTAGE CONTROL PANEL MEDIUM VOLTAGE CONTROL PANEL AND RING MASTER UNITS. ASSESSEE COMPANY IS ALSO EN GAGED IN THE DISTRIBUTION OF THE IMPORTED ELECTRICAL DISTRIBUTIO N EQUIPMENTS VARIOUS TYPES OF COMPONENTS FOR MANUFACTURING OF LA W VOLTAGE AND MEDIUM VOLTAGE ELECTRICAL DISTRIBUTION EQUIPMENT AN D EXPORT THEM TO ITS ASSOCIATED ENTERPRISES (AES) AND THESE EQUIP MENTS ARE MANUFACTURED BY UTILIZING OF RAW MATERIALS PROCURED FROM DOMESTIC UNRELATED PARTIES. DURING THE YEAR UNDER CONSIDERA TION ASSESSEE COMPANY HAS ALSO RENDERED IT RELATED AND OTHER SER VICES TO ITS OVERSEAS AFFILIATES ON A LIMITED BASIS I.E. : ITA NO.937/DEL./2014 5 (A) E-CONTENT / E-CATALOGUE SERVICES; (B) R& D SUPPORT SERVICES; AND (C) BUSINESS SUPPORT SERVICES. 3. DURING THE YEAR UNDER ASSESSMENT ASSESSEE COMPA NY ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS :- S.NO. NATURE OF INTERNATIONAL TRANSACTION AMOUNT (IN INR) (BOOK VALUE) TP METHOD 1. IMPORT OF COMPONENTS (MANUFACTURING FUNCTION) 1 723 098 003 TNMM 2. EXPORT OF MANUFACTURED GOODS (MANUFACTURING FUNCTION) 992 576 284 TNMM 3. IMPORT OF CAPITAL EQUIPMENT (TRADING FUNCTION) 2 916 697 233 TNMM 4. IMPORT OF CAPITAL EQUIPMENT 101 075 273 TNMM 5. PAYMENT OF ROYALTY 154 278 694 TNMM 6. PROVISION OF REPAIR & MAINTENANCE SERVICES (RECEIVED/RECEIVABLE) 5 664 371 TNMM 7. RECEIPTS OF REPAIR & MAINTENANCE SERVICES (PAID/PAYABLE) 125 894 TNMM 8. RECEIPT OF IT SUPPORT SERVICES (PAID/PAYABLE) 184 544 993 TNMM 9. RECEIPT OF MANAGEMENT SUPPORT SERVICES (PAID/PAYABLE) 150 688 232 TNMM 10. PAYMENT OF PROJECT SUPPORT FEES (PAID/PAYABLE) 48 609 747 TNMM 11. PROVISION OF E-CONDUCT/ E- CATALOGUE SERVICES (RECEIVES/RECEIVABLE) 103 344 044 TNMM 12. PROVISION OF BUSINESS SUPPORT SERVICES 107 554 362 TNMM 13. PROVISION OF RESEARCH & DEVELOPMENT (R&D) SERVICES (RECEIVED / RECEIVABLE) 682 422 512 TNMM 14. REIMBURSEMENT OF EXPENSES (PAID/ PAYABLE) 98 050 206 TNMM 15. RECOVERY OF EXPENSES (RECEIVED / RECEIVABLE) 62 624 694 REFER PARA 1.15 4. FOR BENCHMARKING THE LD. TPO HAS CONFINED HIMSE LF TO MANUFACTURING SEGMENT TRADING SEGMENT AND R&D SEGM ENT. ITA NO.937/DEL./2014 6 ASSESSEE IN ITS TRANSFER PRICING REPORT (TP REPORT) USED PREVIOUS DATA TO BENCHMARK THE INTERNATIONAL TRANSACTIONS AN D HAS SELECTED OP / SALES AS THE PLI. ASSESSEE WORKED OUT THE WEI GHTED AVERAGE OF OP/SALES OF 7 COMPARABLES AT7.44% CALCULATED TH E AVERAGE OF THE RAW MATERIAL IMPORT OF THE TOTAL RAW MATERIAL A T 17.03% IN COMPARABLES AS AGAINST 83.68% OF THE ASSESSEE. FOR INTERNATIONAL TRANSACTIONS OF MANUFACTURING EXPORT TO AES THE ASSESSEE HAS TAKEN OP/SALES AS PLI WITH GREATER AVERAGE OF 7 COM PARABLES AT 9.55% AS AGAINST 27.97% OF THE ASSESSEE. 5. TPO HOWEVER CALLED UPON THE ASSESSEE TO USE CONTEMPORANEOUS DATA AND TO FILE THE AUDITED MARGIN OF COMPARABLES BY USING DATA FOR THE FINANCIAL YEAR 20 08-09 WHICH THE ASSESSEE HAS PROVIDED. THE MEAN MARGIN OF OP/SALES OF 7 COMPARABLES AT 7.88% IS PROPOSED TO BE USED AS THE ARMS LENGTH MARGIN FOR COMPUTING THE ARMS LENGTH PRICE (ALP) IN THIS SEGMENT IN PLACE OF THE MARGIN OF THE TESTED PARTY WHICH IS COMPUTED AT MINUS 4.89% ON THE BASIS OF WHICH THE T PO PROPOSED THE ADJUSTMENT OF RS.7832.55 LAKHS WITH THE MANUFAC TURING SEGMENT DETAILED AS UNDER :- PARTICULARS TOTAL SALES NET OF EXCISE 61 357.96 ARMS LENGTH MARGIN @ 7.88% 4835 MARGIN OF THE ASSESSEE -2997.55 DIFFERENCE IN THE MARGIN 7832.55 ITA NO.937/DEL./2014 7 ADJUSTMENT PROPOSED TO BE MADE 7832.55 6. AFTER CONSIDERING THE REPLY FILED BY THE ASSESSE E TO THE PROPOSED ADJUSTMENT QUA MANUFACTURING SEGMENT TPO CAME TO THE CONCLUSION THAT THE ASSESSEE HAS CREATED ARTIFICIAL SEGMENT FOR THE PURPOSE OF TRANSFER PRICING WHICH CANNOT BE ACCEPTE D ON THE GROUND THAT SIMILAR ISSUE WAS INVOLVED IN AY 2008-09. 7. TPO TAKEN THE NET PROFIT MARGIN (NPM) FOR THIS S EGMENT AT 1.64% ALREADY CALCULATED IN THE SHOW-CAUSE NOTICE. SO ULTIMATELY TPO CAME TO THE CONCLUSION THAT SINCE THE PRICE CHA RGED BY THE ASSESSEE WAS MORE THAN 5% FROM THE VALUE OF INTERNA TIONAL TRANSACTION AN ADJUSTMENT OF RS.7832.55 LAKHS IS T O BE MADE TO THE INCOME OF THE ASSESSEE. 8. SO FAR AS THE TRADING SEGMENT IS CONCERNED TPO NOTICED FROM ANNEXURE D-5 TO THE TP REPORT THAT THE OPERATI NG PROFIT TO THE SALES RATIO IN THE CASE OF ASSESSEE IS MINUS 4.63% AND ASSESSEE CARRIED OUT THE ADJUSTMENT BY CLAIMING THAT IT IS I MPORTING 100% OF THE FINISHED GOODS BEING SOLD BY IT AS AGAINST THE AVERAGE 6.12% OF IMPORT CONTENTS IN THE TRADING FUNCTIONS OF THE COM PARABLE SELECTED BY THE ASSESSEE COMPANY AND CALCULATED THE ADJUSTED NPM AT 13.97% BUT THE ASSESSEE HAS FAILED TO PROVIDE ANY B ASIS AS TO HOW THE ADJUSTMENT HAS BEEN MADE. AFTER CONSIDERING TH E REPLY FILED BY ITA NO.937/DEL./2014 8 THE ASSESSEE COMPANY THE LD. TPO CAME TO THE CONCL USION THAT THE ASSESSEE HAS ONLY MADE ADJUSTMENT I.R.O. THE AES TR ADING TRANSACTION AND REFUSED TO ENTERTAIN THE CONTENTION OF THE ASSESSEE AS TO THE PROPORTIONATE ADJUSTMENT AND THEREBY COMP UTED AN ADJUSTMENT OF RS.3758.66 LAKHS IN THE TRADING SEGME NT. 9. SO FAR AS BENCHMARKING OF INTERNATIONAL TRANSACT IONS RELATING TO CONTRACT R&D IS CONCERNED THE ASSESSEES UNIT IS REGISTERED UNDER THE SOFTWARE TECHNOLOGY PARK OF INDIA (STPI) AND ASSESSEE HAS BENCHMARKED THE AFORESAID INTERNATIONAL TRANSAC TION USING TRANSACTIONAL NET MARGIN METHOD (TNMM) AND PLI OF N PM. SO CHOOSING 14 COMPARABLES IN THE TP REPORT AND BY USI NG 3 YEARS DATA CALCULATED THE WEIGHTED AVERAGE ARITHMETIC MEA N OF NCP MARGIN AT 11.50%. THE ADJUSTED MARGIN OF THE ASSE SSEE WAS CALCULATED AT 11.30% AND THE ASSESSEE HAS SUO MOTU CARRIED OUT ADJUSTMENT OF RS.411 LAKHS UNDER THIS SEGMENT. HOW EVER THE ASSESSEE WAS CALLED UPON TO FURNISH UPDATED MARGIN OF 14 COMPARABLES WHICH THE ASSESSEE HAS FURNISHED. LD. TPO AFTER CONSIDERING THE REPLY FILED BY THE ASSESSEE AND THE CONTENTION THAT THE ASSESSEE IS EXEMPTED U/S 10A CAME TO THE CONCL USION THAT ADJUSTMENT OF RS.6 00 92 904/- IS REQUIRED TO BE MA DE AS THE PRICE CHARGED BY THE ASSESSEE VARIES MORE THAN 5% FOR THE VALUE OF THE INTERNATIONAL TRANSACTION BEING THE DIFFERENCE BETW EEN THE ALP AND ITA NO.937/DEL./2014 9 THE PRICE CHARGED BY THE ASSESSEE FROM ITS AES FOR EXPORT OF SERVICES AND THEREBY ENHANCED THE INCOME OF THE ASS ESSEE BY AN AMOUNT OF RS.6 00 92 904/- IN RESPECT OF THE INTERN ATIONAL TRANSACTIONS FOR PROVISION OF THE R&D OF SOFTWARE S ERVICES. 10. TPO ALSO ENHANCED THE INCOME OF THE ASSESSEE QU A MANUFACTURING SEGMENT AT RS.78 32 55 000/- AND FURT HER MADE AN ADJUSTMENT OF RS.37 58 66 000/- QUA THE TRADINGS SE GMENT TRANSACTIONS. 11. ASSESSEE COMPANY CARRIED THE MATTER BY RAISING OBJECTIONS BEFORE THE LD. DRP WHICH HAS UPHELD THE ORDER PASSE D BY THE LD. TPO. FEELING AGGRIEVED THE ASSESSEE HAS COME UP BE FORE THE TRIBUNAL BY CHALLENGING THE IMPUGNED ORDER PASSED B Y AO/TPO/DRP BY WAY OF PRESENT APPEAL. 12. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE S OF THE PARTIES TO THE APPEAL GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. OUR GROUND-WI SE FINDINGS ARE AS UNDER :- GROUND NO.1 13. GROUND NO.1 IS GENERAL IN NATURE WHICH HAS BEEN SUPPLEMENTED IN DETAIL IN THE OTHER GROUNDS RAISED BY THE ASSESSEE ITA NO.937/DEL./2014 10 HENCE NEEDS NO SPECIFIC ADJUDICATION. SO WE ACCOR DINGLY DECIDE THE SAME. TRANSFER PRICING (TP) GROUNDS GROUNDS NO.2 3 3.1 & 3.2 14. IN GROUND NO.3 THE ASSESSEE RAISED THE CONTENT ION THAT THE TP ADJUSTMENT TO THE TUNE OF RS.60 14 65 390/- HAS BE EN MADE BY THE DISPUTE RESOLUTION PANEL (DRP)/TPO/AO WITHOUT CONSI DERING THE ADDITIONAL EVIDENCE BROUGHT ON RECORD BY THE ASSESS EE. PRIME CONTENTION RAISED BY LD. AR FOR THE ASSESSEE TO THE TP ADJUSTMENT TO THE TUNE OF RS.60 14 65 390/- QUA MANUFACTURING SEG MENT IS THAT TRANSACTION BY TRANSACTION APPROACH NEEDS TO BE FOL LOWED FOR BENCHMARKING THE INTERNATIONAL TRANSACTION AND TO S ELECT ITS AES AS TESTED PARTIES. 15. TO DECIDE THE ISSUE IN CONTROVERSY WE WOULD LI KE TO EXAMINE THE TP APPROACH ADOPTED BY THE LD. TPO QUA THE TP A DJUSTMENT OF THE MANUFACTURING SEGMENT WHICH IS REPRODUCED FOR READY PERUSAL AS UNDER :- 3. BENCHMARKING OF MANUFACTURING BELATED TRANSACTIONS 3.1 THE ASSESSEE HAS BENCHMARKED THE ABOVE STATED INTERNATIONAL TRANSACTIONS USING TRANSACTIONAL NET MARGIN METHOD. THE TESTED PARTY MARGIN FOR THIS SEGMENT HAS BEEN C ALCULATED AS BELOW :- ITA NO.937/DEL./2014 11 PARTICULARS IMPORT OF COMPONENTS MANUFACTURIN G AND SALES TO NON AES MANUFACTURING AND EXPORT TO AES SALES NET OF EXCISE 24 982.14 9 736.05 TOTAL EXPENSES 24 773.04 7.012.86 OPERATING PROFIT 209.10 2 723.19 OP/OC 0.84% 38.83% OP/SALES 0.72% 27.97% 3.2 IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSA CTIONS IN THE MANUFACTURING SEGMENT THE ASSESSEE IN TRANSFER PRI CING REPORT HAS SELECTED 7 COMPARABLES WHICH ORE REPRODUCED HEREUND ER: S.NO. COMPANY NAME 1. HAVELL'S INDIA LTD 2. INDO ASIAN FUSEGEAR LTD 7. JSL INDUSTRIES LIMITED 6. K. DHANDAPANI & CO. LTD. 5. KAYCEE INDUSTRIES LTD 3. REED RELAYS & ELECTRONICS INDIA LTD 4. SALZER ELECTRONICS LTD 3.3 IN THE TP REPORT THREE YEAR'S DATA HAS BEEN USE D TO BENCHMARK THE INTERNATIONAL TRANSACTIONS. FOR THE I NTERNATIONAL TRANSACTIONS OF 'MANUFACTURE USING IMPORTED COMPONE NTS AND SOLD TO NON AE'S' THE ASSESSEE HAS SELECTED THE OP/SALES OF THE AS THE PLI. THE WEIGHTED AVERAGE OP/SALES OF THE 7 COMPARA BLES HAS BEEN WORKED OUT AT 7.44%. FURTHER THE AVERAGE OF R AW MATERIAL IMPORTS TO TOTAL RAW MATERIALS AND SPARES WAS CALCU LATED AT 17.03% IN COMPARABLES AS AGAINST 83.68% OF THE ASSESSEE. THE NPM FOR MANUFACTURING WAS ADJUSTED FOR THE RATIO OF HIGH IM PORTS IN THE CASE OF THE ASSESSEE AND THE ADJUSTED NPM WAS CALCU LATED AT 12.29% (APPENDIX C5 OF TP REPORT) AS AGAINST A NET LEVEL LOSS OF - 3.33%. 3.5 FOR THE INTERNATIONAL TRANSACTIONS OF 'MANUFACT URE AND EXPORTS TO AES' THE ASSESSEE HAS SELECTED THE OP/SA LES AS THE PLI. THE WEIGHTED AVERAGE OP/SALES OF THE 7 COMPARABLES HAS BEEN WORKED OUT AT 9.55% AS AGAINST 27.97% OF THE ASSESS EE. 3.6 IT WAS NOTICED FROM THE SUBMISSION DATED 16.04. 2012 THAT SIX SEGMENTS HAVE BEEN CREATED FOR BENCHMARKING PUR POSES. ITA NO.937/DEL./2014 12 BESIDES THERE ARE FOUR SEGMENTS IN WHICH THERE ARE STATED TO BE NO INTERNATIONAL TRANSACTION. IT IS NOTICED FROM THIS CHART FURNISHED BY THE ASSESSEE THAT THERE IS ONE SEGMENT BY THE NAME OF MANUFACTURING (TP) AND THERE IS ANOTHER SEGMENT MAN UFACTURING (LOCAL]. VIDE ORDER SHEET DATED 12.06.2012 THE AS SESSEE WAS ASKED TO EXPLAIN AS TO HOW THE SEGMENTS HAVE BEEN D RAWN AND TO EXPLAIN THE KEY TO ALLOCATION. THE ASSESSEE VIDE S UBMISSIONS DATED 08.10.2012 SUBMITTED THE REPLY. HOWEVER IT IS SEEN THAT: THERE ARE NO COGENT REASONS FOR CREATING ARTIFICIAL SEGMENTAT ION FOR THE PURPOSES OF TRANSFER PRICING. FROM THE EXAMINATION A/SEGMENTATION CARRIED OUT FOR TP PURPOSES IT IS NOTED THAT THIS I NTER-SE SEGMENTATION ARTIFICIALLY CREATED BY BIFURCATING TH E MANUFACTURING FUNCTION IS NOT SUPPORTED BY AUDITED FINANCIALS. TH E SEGMENTATION FOR TP PURPOSES IS ALSO NOT SUPPORTED BY AUDITED AS -17 SEGMENTED FINANCIALS. 3.7 IN VIEW OF THE ABOVE DISCUSSION IT IS PROPOSE D TO AGGREGATE ALL THE MANUFACTURING SEGMENTS. THE RESULTS ARE CO MPUTED AS UNDER: (AMOUNT IN RS.LACS) PARTICULARS IMPORT OF COMPONENTS MANUFACTURING AND SALES TO NON AES MANUFACTURING AND EXPORT TO AES MANUFACTURING LOCAL TOTAL SALES NET OF EXCISE 24 982.14 9 736.05 26639.77 61357.96 TOTAL EXPENSES 24 773.06 7 012.86 32569.61 64355.51 OPERATING PROFIT 209.10 2 723.19 -5929.84 -2997.55 OP/OC -4.66% OP/SALES - 4.89% ON THE BASIS OF ABOVE ANALYSIS AND IT IS PROPOSED T O AGGREGATE ALL THE ARTIFICIALLY CREATED SEGMENTS UNDER THE MANUFAC TURING FUNCTIONS AND CALCULATE THE TESTED PARTY MARGIN OF THIS SEGME NT USING AGGREGATED FINANCIALS. IT IS PROPOSED TO ADOPT TEST ED PARTY MARGIN USING OP/SALES AS THE PLI FOR THIS SEGMENT AT (4.29 )%. 3.8 IN VIEW OF THE FACT THAT RULE 10D(4) REQUIRES O NLY THE CONTEMPORANEOUS DATA TO BE USED THE UPDATED MARGIN S OF THE ABOVE COM PARABLES USING DATA FOR FY 2008-09 WERE C ALLED FOR WHICH HAVE BEEN SUBMITTED VIDE SUBMISSION DATED 22 ND OCTOBER 2012 AND ARE REPRODUCED AS UNDER. S.NO. COMPANY NAME OP/SALES (%) 1. HAVELL'S LNDIA LTD 8.68 ITA NO.937/DEL./2014 13 2. INDO ASIAN FUSEQEAR LTD 13.48 3. JSL INDUSTRIES LIMITED 5 .42 4. K. DHANDAPANI & CO. LTD. 2.36 5. KAYCEE INDUSTRIES LTD 5.22 6. REED RELAYS & ELECTRONICS INDIA LTD 10.69 7. SALZER ELECTRONICS LTD 9.34 MEAN 7.88% 3.9 THE COMPARABLES SELECTED BY THE ASSESSEE ARE T HUS PROPOSED TO BE USED FOR THE PURPOSE OF BENCHMARKING. SINGLE YEAR'S DATA IS PROPOSED TO BE USED. THE MEAN MARGIN OP /SALES OF 7 COMPARABLES 7.88% IS PROPOSED TO BE USED AS THE ARM 'S LENGTH MARGIN FOR COMPUTING THE ARM'S LENGTH PRICE IN THIS SEGMENT IN PLACE OF THE MARGIN OF THE TESTED PARTY WHICH IS CO MPUTED AT 4.89%. THUS THE AMOUNT OF ADJUSTMENT PROPOSED IS CO MPUTED AS UNDER: AS COMPUTED ABOVE AN ADJUSTMENT OF RS: 7832.55 LAK HS IS PROPOSED TO BE MADE IN THE MANUFACTURING SEGMENT 5.6 REPLY OF THE ASSESSEE THE ASSESSEE IN REPLY TO SHOW-CAUSE NOTICE ISSUED HAS FURNISHED REPLY DATED 24.01.2013 IN WHICH THE ASSE SSEE HAS TAKEN THE FOLLOWING ARGUMENTS: THE ASSESSEE HAS STATED THAT 'MANUFACTURING LOCAL S EGMENT' WAS CREATED BECAUSE THIS SEGMENT CONTAINS MAJORITY OF DOMESTIC TRANSACTIONS AND DOES NOT INVOLVE SIGNIFIC ANT INTERNATIONAL TRANSACTIONS. THE IMPORTED RAW MATERI AL COMPONENTS CONSTITUTE ONLY 15% OF THE TOTAL COST FO R MANUFACTURE OF FINAL PRODUCTS WHEREAS IN THE 'MANUFACTURING IMPORTED SEGMENT' THESE ACCOUNT FOR MORE THAN 80% OF TOTAL COST. ASSESSEE HAS RELIED UPON RULE 10B(L)(E) WHEREIN DEF INITION OF TNMM HAS BEEN GIVEN TO STATE THAT THE NPM MARGIN PERTAINING TO 'MANUFACTURING LOCAL SEGMENT' INVOLVE S NEGLIGIBLE INTERNATIONAL TRANSACTIONS AND 'MANUFACT URING EXPORTS SEGMENT' WAS NOT COMPARABLE. PARTICULARS TOTAL SALES NET OF EXCISE 61 357.96 ARMS LENGTH MARGIN @ 7.88% 4835 MARGIN OF THE ASSESSEE -2997.55 DIFFERENCE IN THE MARGIN 7832.55 ADJUSTMENT PROPOSED TO BE MADE 7832.55 ITA NO.937/DEL./2014 14 ASSESSEE HAS SLATED THAT THE AMBIT OF SEGMENTATION UNDER TRANSFER PRICING IS MUCH WIDER THAN THE OBJECTIVE O F SEGMENTATION AS MANDATED UNDER AS-17. THE ASSESSEE HAS STATED THAT THE BASIS OF ALLOCATIO N OF EXPENSES HAS BEEN BROADLY EXPLAINED. BASED ON ABOVE ARGUMENTS ASSESSEE HAS STATED THAT THE BIFURCATION OF MANUFACTURING INTO SUB-SEGMENTS WAS JUSTIFIED FROM TP PERSPECTIVE. CONSIDERATION OF REPLY OF ASSESSEE WITH RESPECT TO BIFURCATION OF 'MANUFACTURING FUNCTION SEGMENT': 5.7 THE ABOVE STATED REPLY OF THE ASSESSEE HAS BEEN EXAMINED AND CONSIDERED. THE VARIOUS CONTENTIONS MADE BY THE ASSESSEE HAVE ALSO BEEN CONSIDERED. IT IS OBSERVED THAT THE ASSES SEE HAS IN FACT ARTIFICIALLY SEGREGATED ITS MANUFACTURING FUNCTION SEGMENT FOR TP PURPOSES SO AS TO ARRIVE AT AN INFLATED TESTED PART Y MARGIN TO BRING IT WITHIN ARM'S LENGTH RANGE. THIS CONCLUSION IS BA SED ON FOLLOWING IRREFUTABLE FACTS: I) THE REASONS GIVEN FOR EXCLUDING 'MANUFACTURING L OCAL SEGMENT' ARE NOT CONVINCING. THE ASSESSEE HAS STATE D THAT THE IMPORTED RAW MATERIAL COMPONENTS CONSTITUTE ONLY 15 % OF THE TOTAL COST FOR MANUFACTURE OF FINAL PRODUCTS. THUS THE A SSESSEE HAS ITSELF ADMITTED THAT THIS 'MANUFACTURING LOCAL SEGMENT' DO ES INCLUDE INTERNATIONAL TRANSACTIONS RELATING TO IMPORT OF RA W MATERIAL COMPONENTS. THE ASSESSEE IN ITS LATER PART OF ITS R EPLY HAS ALSO ADMITTED THAT THIS SEGMENT ALSO INCLUDES ALLOCATED COSTS. THE ASSESSEE HAS BEEN AGAIN UNABLE TO EXPLAIN OR JUSTIF Y AS TO HOW THESE INTERNATIONAL TRANSACTIONS UNDER THE 'MANUFACTURING LOCAL SEGMENT' ARE GETTING BENCHMARKED UNDER TNMM BY EXCLUDING THI S SEGMENT ALTOGETHER FROM ITS BENCHMARKING ANALYSIS. THEREFOR E THE CONTENTIONS WITH REGARD TO NON INCLUSION OF THIS SE GMENT ARE REJECTED. HOWEVER THE CONTENTIONS REGARDING SEGREG ATION OF THIS SEGMENT AT ALL ARE CONSIDERED SEPARATELY. II) THE ASSESSEE HAS STATED THAT THEY HAVE NOW GOT THEIR ACCOUNTS AUDITED AND FOR THE ABOVE SEGMENTAL ACCOUN TS ASSESSEE HAS FURNISHED CERTIFICATE FROM PANKAJ BILLA & CO. CHARTERED ACCOUNTANTS DATED 21.01.2013. IN THE ABOVE STATED C ERTIFICATE THE FIRM OF CA HAS ONLY CERTIFIED WHAT THE ASSESSEE HAD CARRIED OUT IN ITS TP REPORT. NO BASIS FOR ABOVE CERTIFICATION HAS BEEN GIVEN BY THE AUDITORS EXCEPT FOR REITERATING WHAT THE ASSESS EE HAD ITSELF CARRIED OUT IN ITS TP REPORT. THIS POST-FACTO CERTI FICATE IS NOT VALID BECAUSE OF THE FOLLOWING REASONS: THE SEGMENTATION CARRIED OUT FOR TP PURPOSES IS NOT SUPPORTED BY AUDITED AS-17 FINANCIALS. THE ORIGINAL AUDITORS OF THE COMPANY S R BATLIBOI & ASSOCIATES HAVE CARRIED OUT SEGMENTATION ON THE BAS IS OF ITA NO.937/DEL./2014 15 ACCOUNTING STANDARD AS-L1 ISSUED BY CHARTERED ACCOUNTANTS OF INDIA. THE SEGMENTAL REPORTING IS WI TH RESPECT TO PRIMARY BUSINESS SEGMENTS I.E. INDUSTRI AL ELECTRICAL AND ELECTRONICS ITEMS. THE OTHER SEGMENT IS THE SEGMENT RELATING TO SERVICES SEGMENT WHICH INCLUDES RESEARCH AND OTHER SERVICES PROVIDED TO GROUP COMPA NIES. THE SEGMENT ACCOUNTING POLICIES HAVE BEEN SPECIFICA LLY LAID OUT IN NOTE B OF SCHEDULE 19 TO THE ACCOUNTS. NO SUCH SUB SEGMENTING HAS BEEN CARRIED OUT BY THE ORIGINAL AUDITORS OF THE COMPANY. CERTAIN EXPENSES HAVE BEEN ALLOCATED ON THE BASIS O F CERTAIN KEYS SUCH AS 'HOURS SPENT' 'NET SALES' 'FIXED ASS ETS' AND 'USAGE'. THESE ALLOCATION KEYS ARE NOT DEFINED SO A S TO ARRIVE AT ACCURATE ALLOCATION. IT MAY BE MENTIONED THAT IN THE AUDITED REPORT WHIC H WAS PREPARED ON THE BASIS OF ACTUAL AUDIT AND PHYSICAL VERIFICATION NO SUCH DIFFERENTIATION HAS BEEN REPO RTED BY THE AUDITOR. THE CLAIM MADE BY THE ASSESSEE IN THE CERTIFICATE IS BASED ON AN ARTIFICIAL ASSUMPTION W HICH IS NOT SUBSTANTIATED BY THE AUDITED ACCOUNTS. III) THE CONTENTIONS OF THE ASSESSEE AS PER DEFINIT ION UNDER RULE 10B (L)(E) FOR TNMM AND RELIANCE ON THE JUDGMENTS I N THE CASES OF E-GAINS AND MENTOR GRAPHICS ALSO DOES NOT HELP THE CASE OF THE ASSESSEE WHEREIN THE ASSESSEE HAS ARGUED THAT TO M AKE ONE OF THE SEGMENTS COMPARABLE RESULTS OF OTHER COMPARABLE SE GMENTS NEED TO BE ARTIFICIALLY SEGREGATED AND THEN COMPLETELY E XCLUDED FROM BENCHMARKING ANALYSIS. 5.8 ON THE BASIS OF ABOVE ANALYSIS AND DISCUSSIONS IT IS CLEAR THAT THE ASSESSEE HAS CREATED ARTIFICIAL SEGMENTS F OR THE PURPOSE OF TRANSFER PRICING WHICH CANNOT BE ACCEPTED. SIMILAR ISSUE WAS INVOLVED IN THE AY 2008-09 WHERE TILE ASSESSEE HAD PREFERRED FILING OF OBJECTIONS BEFORE THE DRP. THE DRP-II NE W DELHI VIDE ITS DIRECTIONS BAS DECLINED TO INTERFERE IN THE OR DER PASSED BY THE TPO AND HAS CONFIRMED THE ACTION OF TAKING MANUFACT URING SEGMENT HAS A WHOLE. IN VIEW OF THIS THE TESTED PAR TY MARGIN WITH RESPECT TO 'MANUFACTURING FUNCTION SEGMENT' IS HELD TO BE THE TOTAL INCOME AND EXPENSE IN THIS SEGMENT. THE NET PROFIT MARGIN (NPM) FOR THIS SEGMENT SHALL BE TAKEN AT 1.64% AS CALCULA TED IN THE SHOW- CAUSE NOTICE. 5.9 THERE IS NO DISPUTE OVER THE SELECTION OF COMPA RABLES. THE MARGINS OF THE COM PARABLES ARE TO BE CONSIDERED FO R THE FY 2008- 09 AS DISCUSSED IN THE PRECEDING PARAGRAPHS W.R.T U SE OF CURRENT YEAR DATA. THE OTHER ISSUE INVOLVED IS COMPUTATION OF ADJUSTMENT. THE ASSESSEE IS ESSENTIALLY COMPUTING THE QUANTUM O F ADJUSTMENT TAKING THE BENEFIT OF +/-5%. THE ASSESSEE HAS CONTE NDED THAT BENEFIT OF PLUS MINUS S% AS STIPULATED IN SECTION 9 2C(2) OF THE ACT SHOULD HAVE BEEN GIVEN TO IT. THE TAXPAYER'S ABOVE OBJECTION IS NOT ITA NO.937/DEL./2014 16 ACCEPTABLE IN VIEW OF THE AMENDMENTS MADE IN THE IN COME TAX ACT AND VARIOUS CASE LAWS. 5.10 IN VIEW OF DETAILED DISCUSSIONS IN THE FOREGOI NG PARAGRAPH THE QUANTUM OF ADJUSTMENT TO BE MADE IS COMPUTED AS UNDER: 5.11 SINCE THE PRICE CHARGED BY THE ASSESSEE VARIES BY MORE THAN 5% FROM THE VALUE OF INTERNATIONAL TRANSACTIONS AN ADJUSTMENT OF RS.78 32 55 000/- IS TO BE MADE TO THE INCOME OF TH E ASSESSEE IN THE CONTRACT R&D SEGMENT BEING THE DIFFERENCE BETW EEN THE ARM'S LENGTH PRICE AND THE PRICE CHARGED BY THE ASS ESSEE FROM ITS AES FOR EXPORT OF SERVICES. THE ASSESSING OFFICER S HALL ENHANCE THE INCOME OF THE ASSESSEE BY AN AMOUNT OF RS.78 32 55 000/- WHILE COMPUTING ITS TOTAL INCOME. 16. THE LD. TPO DECLINED TO ENTERTAIN THE CONTENTIO NS RAISED BY THE ASSESSEE TO ADOPT THE TRANSACTION BY TRANSACTIO N APPROACH ON THE GROUND THAT ASSESSEE HAS ARTIFICIALLY SEGREGATED IT S MANUFACTURING SEGMENT FUNCTION FOR TP PURPOSES IN ORDER TO DETERM INE INFLATED TESTED PARTY MARGIN TO BRING ITS TRANSACTION IN ARM S LENGTH RANGE. TPO ALSO DECLINED TO ENTERTAIN THE REASON GIVEN BY THE ASSESSEE FOR EXCLUDING MANUFACTURING LOCAL SEGMENTS BEING NOT CONVINCING AS THE ASSESSEE HAS ITSELF ADMITTED THAT THE MANUFACT URING LOCAL SEGMENT INCLUDES INTERNATIONAL TRANSACTION RELATIN G TO IMPORT OF RAW MATERIAL COMPONENT. TPO ALSO OBSERVED THAT THE ASSESSEE HAS FAILED TO EXPLAIN / ADJUSTMENT AS TO HOW THIS INTER NATIONAL TRANSACTION UNDER THE MANUFACTURING LOCAL SEGMENT A RE GETTING PARTICULARS TOTAL SALES NET OF EXCISE 61 357.96 ARMS LENGTH MARGIN @ 7.88% 4835 MARGIN OF THE ASSESSEE -2997.55 DIFFERENCE IN THE MARGIN 7832.55 ADJUSTMENT PROPOSED TO BE MAD E 7832.55 ITA NO.937/DEL./2014 17 BENCHMARK UNDER TNMM BY EXCLUDING THIS SEGMENT FORM ITS BENCHMARKING ANALYSIS. TPO HAS ALSO NOT ADMITTED C ERTIFICATE FOR AUDITED SEGMENTAL ACCOUNTS GIVEN BY PANKAJ BILLA & CO. CA DATED 21.01.2013 ON THE GROUNDS INTER ALIA THAT THIS IS A POST FACTO CERTIFICATE NOT SUPPORTED BY AS-17 FINANCIALS; THAT CERTAIN EXPENSES HAVE BEEN ALLOCATED ON THE BASIS OF CERTAIN KEYS S UCH AS HOURS SPENT NET SALES FIXED ASSETS AND USAGE WHI CH ARE NOT DEFINED IN ORDER TO ARRIVE AT ACCURATE ALLOCATION. TPO ALSO RELIED UPON THE ORDER PASSED BY LD. DRP IN ASSESSEES OWN CASE QUA AY 2008-09 WHEREIN MANUFACTURING FUNCTIONS SEGMENT IS HELD TO BE TOTAL INCOME AND EXPENSES IN THIS SEGMENT AND AS SU CH HAS PREFERRED TO BENCHMARK THE TRANSACTION BY AGGREGATI NG ALL THE SEGMENTS. 17. UNDISPUTEDLY COMPARABLES SELECTED BY THE ASSES SEE FOR BENCHMARKING HAVE BEEN ADOPTED BY THE LD. TPO WITH THE RIDER THAT MARGIN OF THE COMPARABLES ARE TO BE TAKEN FOR FY 20 08-09 BY USING CURRENT YEAR DATA ONLY. 18. THE LD. AR FOR THE ASSESSEE CONTENDED THAT THE LD. TPO HAS ERRED IN NOT CONSIDERING THE ADDITIONAL EVIDENCES B ROUGHT ON RECORD BY THE ASSESSEE BEFORE THE LD. DRP TO SUBSTANTIATE THE TRANSACTION BY TRANSACTION APPROACH ADOPTED BY THE ASSESSEE FOR BENCHMARKING THE INTERNATIONAL TRANSACTION REGARDING MANUFACTURI NG SEGMENT AND ITA NO.937/DEL./2014 18 TO SELECT ITS AES AS TESTED PARTY. UNDISPUTEDLY A DDITIONAL EVIDENCES BROUGHT BEFORE THE LD. TPO ARE AVAILABLE AT PAGES 375 TO 450 OF PAPER BOOK-1 WHICH ARE COMPREHENSIVE ENOUGH TO DETERMINE IF THE BENCHMARKING OF INTERNATIONAL TRAN SACTIONS QUA MANUFACTURING SECTOR IS REQUIRED TO BE MADE BY ADOP TING TRANSACTION BY TRANSACTION APPROACH. 19. BARE PERUSAL OF THE TP ORDER GOES TO PROVE THAT THE ADDITIONAL EVIDENCES BROUGHT ON RECORD BY THE ASSESSEE IN ORDE R TO SUPPORT ITS CONTENTION TO ADOPT THE TRANSACTION BY TRANSACTION APPROACH FOR BENCHMARKING THE INTERNATIONAL TRANSACTION AND TO S ELECT ITS AES AS TESTED PARTY HAS NEITHER BEEN DISCUSSED NOR ANSWERE D BY THE LD. TPO. 20. LIKEWISE THE ADDITIONAL EVIDENCES BROUGHT BEFO RE LD. DRP AVAILABLE AT PAGES 550 TO 597 OF PAPER BOOK-1 HAVE ALSO NEITHER BEEN DISCUSSED NOR REPLIED WITH BY THE LD. DRP. 21. IDENTICAL ISSUED WAS COME UP BEFORE THE TRIBUNA L IN ASSESSEES OWN CASE QUA AY 2007-08 AND AY 2008-09 W HEREIN MATTER HAS BEEN SET ASIDE TO THE AO FOR FRESH ADJUD ICATION OPERATIVE PART OF THE ORDER PASSED BY THE COORDINAT E BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2008-09 IN I TA NO.6281/DEL/2012 IS REPRODUCED FOR READY PERUSAL :- ITA NO.937/DEL./2014 19 5. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. WE H AVE ALSO GONE THROUGH THE WRITTEN SUBMISSIONS MADE. THE ITAT IN ASSESSEES OWN CASE ASSESSMENT YEAR 2007-08 IN ITA NO.5728/DEL/2011 DATED 22.11.2012 HAS RESTORED THE ISSUE TO THE FILE OF THE ASSESSING OFFICER. THE RELEVANT PORTION OF THE ORDER OF ITAT IS AS UNDER :- 5. CONSIDERING THE ABOVE SUBMISSIONS WE FIND THAT IN THE CASE KYUNGSHIN INDUSTRIAL MOTHERSON LTD. (SUPRA ) THE PRIMARY CONTENTIONS OF THE ASSESSEE INVOLVED WAS RE GARDING ANALYSIS OF SUPPLIERS' PROFITABILITY FOR IMPORTS AN D LIMITING THE VARIATION ON ACCOUNT OF TRANSFER PRICING ONLY T O THE PROPORTION OF RELATED PARTY TRANSACTIONS. THE AUTHO RITIES BELOW DID NOT ADDRESS THE ISSUES FOR WANT OF DATA. THE TRIBUNAL ACCEDED TO THE ASSESSEE'S PLEA FOR ACCEPTI NG THESE ADDITIONAL EVIDENCES AND REMANDING THE MATTER TO TH E AUTHORITIES BELOW FOR FRESH ADJUDICATION. AGAIN IN THE CASE OF QUARK SYSTEMS INDIA PVT. LTD. (SUPRA) THE SPECIA L BENCH OF THE TRIBUNAL HAS HELD THAT THE APPELLANT CAN NOT BE ESTOPPED FROM HIGHLIGHTING MISTAKES IN THE ASSESSME NT EVEN THOUGH SUCH MISTAKE IS THE RESULT OF EVIDENCE ADDUC ED BY THE TAX PAYER. WE FIND THAT IN THE PRESENT CASE THE ASSESSEE HAS ALSO COLLATED SUPPLEMENTARY EVIDENCE TO CORROBO RATE THE ARM'S LENGTH NATURE OF ITS INTERNATIONAL TRANSACTIO NS IN ADHERENCE TO THE PRINCIPLES AND CONTENTIONS MADE BE FORE THE AUTHORITIES BELOW. WE THUS IN THE INTEREST OF JUSTI CE SET ASIDE THE MATTER TO THE FILE OF THE A.O. TO FIRST A SCERTAIN TO HIS SATISFACTION THAT THE INSTANCES FURNISHED BY TH E ASSESSEE BY WAY OF SUPPLEMENTARY EVIDENCE ARE INDEED COMPARA BLE TO THE CASE OF THE ASSESSEE TO CORROBORATE THE ARM' S LENGTH NATURE OF ITS INTERNATIONAL TRANSACTION IN ADHERENC E TO THE PRINCIPLES OF ARM'S LENGTH AND THEN ANALYSE PRICING POLICY OF THE ASSESSEE IN THE LIGHT OF THE SAID EVIDENCE WHIC H WAS NOT IN THE POSSESSION OF THE ASSESSEE EARLIER. IT IS NE EDLESS TO MENTION OVER HERE THAT WHILE DECIDING THE ISSUE AFR ESH THE A.O. WILL AFFORD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IN VIEW OF THE DECISION OF ITAT IN ASSESSEES OWN C ASE AND ALSO IN VIEW OF THE DECISION OF ITAT RELIED UPON BY THE ASS ESSEE CITED SUPRA IN THE CASE OF KYUNGSHIN INDUSTRIAL MOTHERSO N LTD. IN ITA NO.1396 (DEL.)/2009 AND IN VIEW OF THE DECISION OF SPECIAL BENCH IN THE CASE OF QUARK SYSTEMS INDIA PVT. LTD. REPOR TED IN 38 SOT 307 (B) WE FIND IT APPROPRIATE TO SET ASIDE THE MA TTER TO THE FILE OF THE ASSESSING OFFICER TO FIRST ASCERTAIN TO HIS SAT ISFACTION THAT THE INSTANCES FURNISHED BY THE ASSESSEE BY WAY OF SUPPL EMENTARY EVIDENCES ARE INDEED COMPARABLE TO THE CASE OF THE ASSESSEE TO CORROBORATE THE ARMS LENGTH NATURE OF ITS INTERNATI ONAL TRANSACTION IN ADHERENCE TO THE PRINCIPLES OF ARMS LENGTH AND T HEN ANALYSE PRICING POLICY OF THE ASSESSEE IN THE LIGHT OF THOS E EVIDENCES. THUS ITA NO.937/DEL./2014 20 THE GROUNDS NO.1 TO 3 ARE RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER. 22. SO KEEPING IN VIEW THE FACT THAT ADDITIONAL EV IDENCES BROUGHT ON RECORD BY THE ASSESSEE BEFORE THE LD. TP O / LD. DRP HAVE NOT BEEN CONSIDERED AND THE FACT THAT IDENTICA L ISSUE IN ASSESSEES OWN CASE HAS ALREADY BEEN RESTORED BACK FOR FRESH ADJUDICATION BY THE AO QUA AY 2007-08 AND AY 2008-0 9 WE DEEM IT EXPEDIENT TO RESTORE THIS ISSUE AS TO THE M ANUFACTURING SEGMENT TO THE FILE OF AO WHO SHALL ADJUDICATE AFTE R PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. CONSEQ UENTLY GROUNDS NO.3 3.1 AND 3.2 ARE DETERMINED IN FAVOUR OF THE A SSESSEE. HOWEVER IN THE LIGHT OF THE FINDINGS RETURNED BY T HE BENCH ON GROUNDS NO.3 3.1 AND 3.2 GROUND NO.2 HAS SINCE BE COME INFRUCTUOUS AND NEEDS NO ADJUDICATION. GROUND NO.5 : 23. ASSESSEE HAS BENCHMARKED THE INTERNATIONAL TRAN SACTION RELATING TO CONTRACT AND R&D AND MADE A SUO MOTU AD JUSTMENT TO THE TUNE OF RS.411 LAKHS. HOWEVER THE LD. TPO IN ORDER TO BENCHMARK INTERNATIONAL TRANSACTION TO CONTRACT R&D SUPPORT SERVICES SEGMENT ADOPTED THE FOLLOWING FILTERS :- I. USE OF CURRENT YEAR DATA : IT HAS ALREADY BEEN ARGUED EARLIER THAT THE TRANSFER PRICING PROVISIONS LAY DO WN THAT PRIMARILY CURRENT YEAR DATA SHOULD BE USE. YOU HAVE OBJECTED TO THE USE OF THIS FILTER. HOWEVER YOU HAVE IGNORED THE/ACT THAT THE PROVISO TO RULE 10D(4) ALLOWS THE ITA NO.937/DEL./2014 21 USE OF MULTIPLE YEAR DATA ONLY IF THE ASSESSEE IS A BLE TO DEMONSTRATE THROUGH RELEVANT DATA THAT CERTAIN FACTORS OF EARLI ER YEARS HAS AFFECTED THE TRANSFER PRICES FOR THE CURRENT YEAR. YOU HAVE NOT BEEN ABLE TO DO SO IN ANY OF YOUR SUBMISSIONS. THERE ARE SUFFICIENT JUDICIAL PRONOUNCEMENTS THAT SUPPORT THE USE OF CUR RENT YEAR DATA. II. DIFFERENT FINANCIAL YEAR : IF A COMPANY IS HAVING AN ACCOUNTING YEAR DIFFERENT FROM FINANCIAL YEAR FOR W HICH FINANCIALS OF YOUR COMPANY ARE BEING CONSIDERED THE SAME HAS BEEN EXCLUDED AS THE PROFITS AND REVENUE PERTAIN TO DIFFERENT PER IOD OTHER THAN CURRENT YEAR WHICH IS FY 2008-09. THIS FILTER IS BE ING APPLIED BECAUSE EVEN AFTER APPLICATION OF THIS FILTER THER E ARE SEVERAL COMPARABLE COMPANIES AVAILABLE IN SOFTWARE DEVELOPM ENT. III. REJECT COMPANIES WHERE TURNOVER IS LESS THAN RS.5 CRORE: THIS FILTER IS APPLIED BECAUSE WHERE THE TURNOVER AND COST BASE IS VERY SMALL IT IS MORE THAN LIKELY THAT THE MARGINS WILL BE ERRATIC. THAT APART A COMPANY THAT IS VERY SMALL I N SIZE DOES NOT HAVE SUFFICIENT ECONOMIC SIGNIFICANCE THAT IT BE US ED AS A BENCHMARK. FURTHERMORE UNDER RULE 10B (2) & (3) OF THE IT RULES AS ALSO BOTH UNDER UN AND OECD TP GUIDELINES 'TURNOVER' PER SE IS NOT A COMPARABILITY FACTOR. HOWEVER 'ECO NOMIES OF SCALE' MAY AT TIMES BE A COMPARABILITY FACTOR. TURNOVER MA Y BE COMPARABILITY FACTOR IN THE CIRCUMSTANCES WHERE IT IS PROVED THAT TURNOVER SIGNIFICANTLY INFLUENCE PRICE COST OR PRO FIT ARISING FROM INTERNATIONAL TRANSACTION. HOWEVER NO SUCH ATTEMPT HAS BEEN MADE BY THE ASSESSEE IN ITS TP STUDY. IV. SELECT COMPANIES WHERE THE RATIO OF SERVICE INCOME TO TOTAL INCOME IS AT LEAST 75% : THE USE OF THIS FILTER IS TO ENSURE THAT VIE CHOOSE COMPANIES THAT ARE PRIMARILY IN THE SERVICE SECTOR. THIS FILTER ENSURES THAT COMPANIES THAT HAVE SIGNIF ICANT INCOMES FROM MANUFACTURING AND TRADING ACTIVITIES ARE REJEC TED. IN YOUR CASE YOUR ENTIRE INCOME IS FROM PROVISION OF SERVICES. I T WOULD NOT BE APPROPRIATE TO BENCHMARK YOUR CASE AGA INST A COMPANY THAT HAS SIGNIFICANT INCOME FROM MANUFACTUR ING OR TRADING ACTIVITIES. THIS FILTER WILL THUS ENSURE IN TEGRITY OF ALL COMPARABLE DATA. V. SELECT COMPANIES WHERE INCOME FROM EXPORTS IS AT LE AST 75% OF TOTAL INCOME: THIS FILTER IS REQUIRED TO BE APPLIED SINCE YOU ARE PRIMARILY EARNING INCOME FROM EXPORTS. EVEN IN CASES WHERE AN ASSESSEE IS HAVING INCOME FROM DOMESTIC OP ERATIONS THE TRANSFER PRICING AUDIT WILL BENCHMARK TRANSACTIONS WITH THE AE WHICH WILL BE AN EXPORT TRANSACTIONS. THERE ARE JU DICIAL PRONOUNCEMENTS THAT SUPPORT THE CASE THAT EXPORTERS SHOULD NOT BE COMPARED WITH DOMESTIC COMPANIES. HENCE THIS FILTE R IS REQUIRED TO BE APPLIED WITH A THRESHOLD 75%. ITA NO.937/DEL./2014 22 VI. REJECT COMPANIES WHERE RELATED PARTY TRANSACTIONS EXCEED 25% OF SALES: THERE IS NO DOUBT THAT COMPANIES WITH SIGNIFICANT RELATED PARTY TRANSACTIONS NEED TO BE E XCLUDED FROM THE BENCHMARKING PROCESS. ON THE ISSUE OF THRESHOLD OF RELATED PARTY TRANSACTIONS IT CAN BE STATED THAT WHEN THE RPT EX CEEDS 25% OF SALES IT CAN BE SAID TO BE THE STAGE WHEN IT WILL START AFFECTING THE PRICE PAID/RECEIVED. THE RATIONALE GIVEN FOR THE US E OF THE IF IN IT OF 25% IS SOUND AND THIS THRESHOLD LIMIT HAS BEEN APPR OVED EXPLICITLY AN IMPLICITLY IN QUITE A FEW JUDICIAL PRONOUNCEMENTS. HOWEVER COMPANIES WHICH ARE HAVING CONSOLIDATED SA LES NOT EXCEEDING 125% OF SALES OF STANDALONE ENTITY AN D NOT HAVING LARGE VARIATION IN THE PROFIT MARGINS BETWEEN THE S TANDALONE ENTITY AND CONSOLIDATED ENTITY HAVE BEEN CONSIDERED AT THE CONSOLIDATE LEVEL IRRESPECTIVE OF THE RELATED PARTY TRANSACTION S AS THE 'RELATED PARTY TRANSACTIONS CANCEL OUT AT CONSOLIDATED LEVEL AND SIGNIFICANT PORTION OF THE BUSINESS (>80%) CONSIDERS THE OPERAT IONS IN INDIAN CONDITIONS IN WHICH YOU OPERATE. IN CASE OF COMPANIES WHICH ARE N OT HAVING SIGNIFICANT DIFFERENCE BETWEEN THE MARGINS OF STAND ALONE ENTITY AND CONSOLIDATED ENTITY IT IS CLEAR THAT RPT HAVE NOT SIGNIFICANTLY INFLUENCED THE MARGINS OF SUCH COMPANIES AND HENCE THEY HAVE BEEN CONSIDERED. FURTHER AS PER THE DISCLOSURE NORMS RELATED PARTY TRANSACTIONS ARE MANDATORILY REQUIRED TO BE REPORTED BY A COMPANY HA VING TURNOVER ABOVE RS.50 CRORES. HENCE COMPANIES WHERE TURNOVER IS LESS THAN 50 CRORES AND NO DISCLOSURE IN RESPECT OF RELATED P ARTY TRANSACTIONS HAS BEEN MADE HAVE NOT BEEN CONSIDERED AS THERE IS A POSSIBILITY THAT COMPANY MAY BE HAVING RELATED PARTY TRANSACTIO NS BUT THE SAME HAVE NOT BEEN REPORTED. COMPANIES HAVING TURNO VER LESS THAN 50 CRORES WHERE RELATED PARTY TRANSACTIONS' DISCLOS URE HAS BEEN MADE AND RELATED PARTY TRANSACTIONS DO NOT EXCEED 2 5% OF SALES HAVE BEEN CONSIDERED. VII. COMPANIES THAT HAVE EMPLOYEE COST THAT IS LESS THAN 25% OF TOTAL COST: THE RATIONALE FOR THIS FILTER IS THAT COMPANIES THAT ARE ENGAGED IN SOFTWARE DEVELOPMENT WILL REQUI RE A MINIMUM LEVEL OF EXPENDITURE ON PERSONNEL EXPENSE. THERE AR E JUDICIAL PRONOUNCEMENTS THAT SUPPORT THE CONTENTION THAT EXP ENSE ON PERSONNEL THAT IS EXTREMELY LOW MAY LEAD TO THE CON CLUSION THAT THE COMPANY IS NOT ENGAGED IN SOFTWARE DEVELOPMENT THE ASSESSEE IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES (SWD). SERVICES ARE RENDERED THROUGH EMPLOYEES. THE EXPEND ITURE INCURRED ON PURCHASE OF RAW MATERIAL/TRADING GOODS ETC. IS NEGLIGIBLE IN SUCH CASES. EMPLOYEES COST CONSTITUTE S THE MAJOR COMPONENT OF COST IN ANY SERVICE SECTOR. VERY LOW E MPLOYEE COST VIZ; LESS THAN 25% OF TOTAL COST INDICATES THAT CO MPANY IS EITHER ENGAGED IN SOME OTHER BUSINESS OR IT HAS OUTSOURCED THE SERVICE ITA NO.937/DEL./2014 23 FUNCTIONS TO A THIRD PARTY I.E. IT IS NOT RENDERI NG SERVICES ON ITS OWN. SUCH COMPANIES CANNOT BE TREATED AS FUNCTIONAL LY COMPARABLE TO THE ASSESSEE. VIII. COMPANIES THAT ARE AFFECTED BY SOME PECULIAR ECONOM IC CIRCUMSTANCE : COMPANIES THAT ARE AFFECTED BY FACTORS LIKE PERSISTENT: LOSSES DECLINING SALES EXTRAORDINARY INCOME OR EXPENSE MERGERS AND ACQUISITIONS OR OTHER SUCH FAC TORS WHICH AFFECT THE OPERATIONS OF THE COMPANY SUBSTANTIALLY SHOULD NOT BE USED AS COMPARABLES AS THEY WILL NOT PROVE TO BE GO OD BENCHMARKS. 24. AFTER APPLYING THE AFORESAID FILTERS TPO REJEC TED FOLLOWING COMPARABLES COMPANIES AS SELECTED BY THE ASSESSEE F OR BENCHMARKING :- S.NO. NAME OF THE COMPANY REMARK S OF THIS OFFICE 1. ADITYA BIRLA MINACS TECHNOLOGIES LTD. / BIRLA TECHNOLOGIES LTD. REJECT 2. AKSHAY SOFTWARE TECHNOLGIES LTD. ACCEPT 3. COMPUTECH INTERNATIONAL LTD. REJECT 4. HALIOS & MATHESON INFORMATION TECHNOLOGY LTD. REJECT 5. L G S GLOBAL LTD. ACCEPT 6. POWERSOFT GLOBAL SOLUTIONS LTD. REJECT 7. R SYSTEMS INTERNATIONAL LTD. REJECT 8. SASKEN COMMUNICATION ACCEPT 9. SONATA SOFTWARE LTD. REJECT 10. QUINTEGRA SOLUTIONS LTD. REJECT 25. LD. TPO SELECTED THE FOLLOWING FINAL SET OF COM PARABLES FOR BENCHMARKING INTERNATIONAL TRANSACTION RELATING TO CONTRACT R&D:- ITA NO.937/DEL./2014 24 S.NO. COMPARABLES OP/OC (W/O FX) (%) 1. AKSHAY SOFTWARE TECHNOLGIES LTD. 7.99 2. AZTECSOFT LTD. (CONSOLIDATED) 27.37 3. BODHTREE CONSULTING LTD. 69.80 4. CAT TECHNOLGOIES LTD. 34.43 5. GOLDSTONE TECHNOLOGIES (SEG) 10.28 6. INFOSYS TECHNOLOGIES LIMITED 40.74 7. LARSEN & TURBO INFOTECH LIMITED 21.56 8. LGS GLOBAL LTD . 17.55 9. MINDTREE LIMITED 27.36 10. PERSISTENT SYSTEMS LIMITED 37.77 11. R S SOFTWARE (I) LIMITED 10.15 12. SASKEN COMMUNICATION TECH. LTD. 22.67 13. TATA CONSULTANCY SERVICES LTD. 31.44 14. TATA ELXSI LTD. 16.89 15. THINK SOFT GLOBAL 16.56 16. THIRDWARE SOLUTIONS 37.27 AVERAGE OP/TC 26.86 26. ON THE BASIS OF TP STUDY THE LD. TPO DETERMINE D THE ARMS LENGTH PRICE AS UNDER :- 18. DETERMINATION OF ARMS LENGTH PRICE: ON THE BASIS OF ABOVE DISCUSSION THE AVERAGE MEAN MARGIN OF COMPARABLE COMPANIES IN PROVISION OF SOFTWARE DEV ELOPMENT SERVICES SEGMENT COMES TO 26.86%. THIS MARGIN SHA LL BE ADOPTED FOR THE PURPOSE OF BENCHMARKING INTERNATIONAL TRANS ACTION IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES SEGMENT. THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION IS CO MPUTED AS UNDER :- PARTICULARS AMOUNT INR OPERATING COST 650 172 467 ARMS LENGTH MARGIN (%) 26.86% ARMS LENGTH MARGIN (RS.) 174 636 325 ARMS LENGTH PRICE 824 808 792 PRICE CHARGED BY THE ASSESSEE 723 615 888 105% OF PRICE CHARGED IN INTERNATIONAL TRANSACTION 759 796 682 DIFFERENCE FOR WHICH ADJUSTMENT IS REQUIRED TO BE MADE 101 192 904 ADJUSTMENT OFFERED IN THE TP STUDY 41 100 000 ADJUSTMENT NOW PROPOSED TO BE MADE 60 092 904 ITA NO.937/DEL./2014 25 19. SINCE THE PRICE CHARGED BY THE ASSESSEE VARIES BY MORE THAN 5% FROM THE VALUE OF THE INTERNATIONAL TRANSACTIONS AN ADJUSTMENT OF RS.60 092 904/- IS TO BE MADE TO THE INCOME OF T HE ASSESSEE BEING THE DIFFERENCE BETWEEN THE ARMS LENGTH PRICE AND THE PRICE CHARGED BY THE ASSESSEE FROM ITS AES FOR EXPORT OF SERVICES. THE ASSESSING OFFICER SHALL ENHANCE THE INCOME OF THE A SSESSEE BY AN AMOUNT OF RS.60 092 904/- WHILE COMPUTING ITS TOTAL INCOME. 27. LD. AR FOR THE ASSESSEE CHALLENGING THE ADJUSTM ENT OF RS.6 00 92 904/- BY THE TPO IN RESPECT OF INTERNATI ONAL TRANSACTION OF PROMOTION OF R&D/SOFTWARE SERVICES CONTENDED THA T THE COORDINATE BENCH IN ASSESSEES OWN CASE QUA AY 2008 -09 ORDER AVAILABLE AT PAGES 18 TO 37 OF THE SUPPLEMENTARY PA PER BOOK DEALT WITH IDENTICAL ISSUES AND RESTORED THE CASE TO THE TPO TO DECIDE AFRESH. IN THE LIGHT OF THE DIRECTIONS GIVEN BY TH E COORDINATE BENCH IN THE ORDER DATED 09.09.2003 QUA AY 2008-09 (SUPRA ) OPERATIVE PART OF WHICH IS REPRODUCED IN PRECEDING PARA NO.25 OF THIS ORDER. MOREOVER TPO HAS DEALT WITH ALL THE SEGMENTS DIFFE RENTLY SHOWING AVERAGE OP/TC OF COMPARABLES AT 26.86% VIS--VIS AS SESSEES OP/TC AT 11.14% . LD. AR FURTHER CONTENDED THAT TH E TPO HAS NOT ADOPTED TRANSACTION BY TRANSACTION APPROACH FOR MAK ING TP ADJUSTMENT. 28. HOWEVER ON THE OTHER HAND LD. DR CONTENDED TH AT THIS ISSUE HAS ALREADY BEEN DETERMINED BY BOTH TPO AND DRP. A SSESSEE COMPANY WHILE MAKING SUBMISSIONS BEFORE THE TPO DAT ED 24.01.2013 IN RESPONSE TO THE SHOW-CAUSE NOTICE TOO K A SPECIFIC ITA NO.937/DEL./2014 26 STAND THAT BENCHMARKING OF INTERNATIONAL TRANSACTIO NS NEEDS TO BE MADE ON TRANSACTION BY TRANSACTION BASIS FOR WHICH COMPLETE DOCUMENTS HAVE BEEN SUBMITTED AS REFERRED AT PAGE 2 91 OF THE PAPER BOOK IN THE FORM OF ANNEXURE D-1 TO D-42 AND ANNEXURE D- 43 TO D-44. THE TPO HAS EXAMINED SEPARATE SEGMENTA L ACCOUNT IN RESPECT OF TRANSACTION BY TRANSACTION SEGMENT. HOW EVER BY FOLLOWING THE RULE OF CONSISTENCY THE TPO IS REQUI RED TO DECIDE THE ISSUE DE NOVO AFTER PROVIDING AN OPPORTUNITY OF BEI NG HEARD TO THE ASSESSEE. SO GROUND NO.5 IS DETERMINED IN FAVOUR OF THE ASSESSEE AND THE MATTER IS RESTORED TO THE TPO. GROUNDS NO.4 & 4.1 29. THE LD. AR FOR THE ASSESSEE CHALLENGING THE IMP UGNED TP ADJUSTMENT REGARDING TRADING SEGMENT TO THE TUNE OF RS.37 58 66 000/- CONTENDED THAT THERE IS NO DISPUT E WITH THE REVENUE AS TO THE DISTRIBUTION SEGMENT IN THE EARLI ER YEARS AS THERE WAS HEALTHY MARGIN AND NO ADJUSTMENT WAS MADE. BUT DURING THE YEAR UNDER ASSESSMENT HEALTHY MARGIN COULD NOT COM E ON RECORD ONLY DUE TO FOREIGN CURRENCY LOSS. 30. UNDISPUTEDLY AS PER FINANCIALS GIVEN IN ANNEXU RE D-5 TO THE TP REPORT THE OPERATING PROFIT TO THE SALES RATIO IN CASE OF ASSESSEE IS MINUS 4.63%. ASSESSEE HAS CARRIED OUT THE ADJUS TMENT ON THE GROUND THAT IT IS IMPORTING 100% FINISHED GOODS BEI NG SOLD BY IT AS ITA NO.937/DEL./2014 27 AGAINST THE AVERAGE 6.12% OF IMPORT CONTENTS IN THE TRADING FUNCTIONS OF COMPARABLES SELECTED BY THE ASSESSEE C OMPANY. ASSESSEE HAS COMPUTED ADJUSTED NET PROFIT MARGIN (N PM) AT 13.97%. 31. HOWEVER THE TPO REJECTED THE ADJUSTMENT MADE B Y THE ASSESSEE ON THE GROUND THAT IT HAS NOT DISCLOSED TH E BASIS AS TO HOW THE ADJUSTMENT HAS BEEN MADE NOR THE ASSESSEE HAS P UT ANY FILTER OF A MINIMUM LEVEL OF IMPORTS OF FINISHED GOODS OF ITS SEARCH FOR COMPARABLES. THE CALCULATION OF THE ADJUSTED NPM A T 13.97% MADE BY THE ASSESSEE IS AS UNDER :- (AMOUNT IN LACS) PARTICULARS ACTUAL ADUSTED SALES 42 084.56 42 141.20 COST OF SALE 35 763.61 27 943.75 EXCISE STORES CONSUMED WAGES INDUSTRIAL COST DEPRECIATION INDUSTRIAL SPECIFIC PERSONNEL COST SPECIFIC COSTS 27.23 OTHER EXPENSES (COMM/ ADMN) 8 269.97 8 281.10 TOTAL EXPENSES 44 033.58 36 252.08 OPERATING PROFIT (1 949.02) 5 889.12 OPERATING PROFIT (%) -4.63% 13.97% 32. ASSESSEE COMPANY HAS CHOSEN 5 COMPARABLES AND C OMPUTED THE UPDATED MARGIN (OP/SALES) OF THE COMPARABLE COM PANY AS UNDER :- ITA NO.937/DEL./2014 28 S.NO. NAME OF THE COMPARABLE OP/SALES (%) (I) ADTECH SYSTEMS LIMIT E D 16.94 (II) K. DHANDAPANI & CO. LTD. 0.32 (III) KARUNA CABLES LIMITED 3.64 (IV) REMI SALES & ENGINEERING LIMITED 1.98 (V) CHLORIDE INTERNATIONAL LIMITED -1.37 4.30 33. THE TPO COMPUTED THE PROPOSED AMOUNT OF ADJUSTM ENT AS UNDER :- 34. ASSESSEE COMPANYS CONTENTION FOR ADJUSTING ITS MARGIN BECAUSE OF ITS HIGH IMPORT CONTENT IN COMPARISON TO THE COMPARABLES HAS NOT BEEN ACCEPTED BY THE TPO. TPO CATEGORICALLY OBSERVED THAT EVEN DURING THE TP PROCEEDINGS THE A SSESSEE HAS NOT COME UP WITH SUITABLE COMPARABLES AND MADE THE ADJU STMENT IN DISTRIBUTION SEGMENT BY TAKING THE UPDATED MARGIN O F COMPARABLES TAKEN BY THE ASSESSEE IN ITS REPORT AND COMPUTED TH E AMOUNT OF ADJUSTMENT AS UNDER :- PARTICULARS TOTAL SALES NET OF EXCISE 42 084.56 ARMS LENGTH MARGIN @ 4.30% 1809.64 MARGIN OF THE ASSESSEE - 1949.02 DIFFERENCE IN THE MARGIN 3 758.66 ADJUSTMENT PROPOSED TO BE MADE 3758.66 PARTICULARS TOTAL SALES NET OF EXCISE 42 084.56 ARMS LENGTH MARGIN @ 4.30% 1809.64 MARGIN OF THE ASSESSEE -1949.02 DIFFERENCE IN THE MARGIN 3758.66 ITA NO.937/DEL./2014 29 35. PERUSAL OF THE ORDER PASSED BY THE TPO AS WELL AS DRP GOES TO PROVE THAT BOTH LD. TPO AS WELL AS LD. DRP HAVE NOT TAKEN INTO ACCOUNT THE FOREIGN CURRENCY LOSS SUFFERED BY THE A SSESSEE COMPANY LEADING TO THE UNHEALTHY MARGIN. LD. DRP RATHER TO ED THE LINE OF TPO TO DECIDE THIS ISSUE. 36. ASSESSEE CATEGORICALLY SUBMITTED BEFORE THE LD. DRP THAT LOSS IN DISTRIBUTION SEGMENT IS DUE TO ADVERSE FOREIGN E XCHANGE MOVEMENT AND HAS DULY DEMONSTRATED THE EFFECT OF LO SS OF FOREIGN CURRENCY AT PAGE 979 AND 980 OF THE PAPER BOOK. RE LEVANT PARA ARE REPRODUCED FOR READY PERUSAL AS UNDER :- 50. THE ASSESSEE WOULD FURTHER EMPHASIZE THAT THE LOSS IN THIS SEGMENT WAS PRIMARILY ON ACCOUNT OF ADVERSE FOREIGN EXCHANGE MOVEMENT. THE ASSESSEE IN ITS DISTRIBUTION SEGMENT IMPORTED 100% OF FINISHED GOODS FROM ITS AES AND HENCE THE I NR VALUE PURCHASES [INVOICED IN FOREIGN CURRENCY BY THE AES I.E. EURO C'EUR') IN THIS CASE] DEPENDED HIGHLY ON THE PREVAI LING EXCHANGE RATES. THUS THE ASSESSEE WAS EXPOSED TO HIGH ECONO MIC FOREIGN EXCHANGE RISK. THIS TYPICALLY OCCURS WHEN THE BUSIN ESS GENERATES SALES IN ONE CURRENCY AND INCURS COSTS IN ANOTHER. 51. DURING FY 2007-08 THE MOVEMENT OF EUR AGAINST INR WAS RANGE BOUND BETWEEN INR 54/EUR 112 TO INR 59/EU R 1 LEVELS. HOWEVER DURING FY 2008-09 THERE WAS A SHA RP DEPRECIATION OF INR AGAINST EUR AND THE INDIAN CURR ENCY FELL AROUND 16% (FROM INR 58/EUR 1 TO INR 67/EUR 1) AGAI NST THE EURO CURRENCY IN A SHORT SPAN OF 6 MONTHS I.E. FR OM FEBRUARY 2008 TO JULY 2008. 52. THE ASSESSEE HIGHLIGHTS THAT AS PER THE GLOBAL TRANSFER PRICING POLICY OF SCHNEIDER GROUP THE PURCHASE PRI CE FOR IMPORTED GOODS ARE FIXED BASED ON A FOREIGN EXCHANGE FORECAS T RATE AND THIS EXERCISE OF FORECASTING THE FOREIGN EXCHANGE RATE F OR EVERY CALENDAR YEAR IS CARRIED OUT IN THE MONTH OF DECEMBER OF THE PREVIOUS YEAR. THUS FOR THE CALENDAR YEAR 2008-09 THE PRICE WAS FIXED IN DECEMBER 2007 WHEN THE FOREIGN EXCHANGE RATE WAS I NR 57- 46/EUR 1 (ESTIMATED RATE FOR CALENDAR YEAR FY 2008- 09). HOWEVER DUE TO GRIM GLOBAL ECONOMIC CONDITIONS TH E INDIAN ITA NO.937/DEL./2014 30 RUPEE DEPRECIATED SHARPLY. THIS ADVERSELY AFFECTED THE MARGINS OF THE ASSESSEE AS THE COST OF IMPORTED GOODS INCREASE D DUE TO FOREIGN EXCHANGE MOVEMENTS. THE SAME IS REPRESENTED BELOW :- AVERAGE-MONTHLY.BID-RATES-OF-EUR-TO-INR 37. ASSESSEE CONTENDED THAT IN VIEW OF RULE 10B(3) OF THE INCOME-TAX RULES 1962 ADJUSTMENT IS REQUIRED TO B E CARRIED OUT TO ELIMINATE ANY MATERIAL DIFFERENCES BETWEEN THE ASSE SSEE AND THE COMPARABLE COMPANIES AND THE ASSESSEE RELIED UPON O RDER PASSED BY ITAT DELHI BENCH IN CASE CITED AS HONDA TRADING CORPORATION INDIA PVT. LTD. VS. ACIT - (ITA NO.5297 /DEL/2011 ORDER DATED 08.03.2013) . 38. IN THE IDENTICAL SITUATION ARISEN IN HONDA TRADING CORPORATION INDIA PVT. LTD. (SUPRA) BENEFIT HAS BEEN EXTENDED TO THE ASSESSEE ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUA TION OPERATIVE PART OF THE ORDER IS REPRODUCED FOR READY PERUSAL A S UNDER :- 19. ON THE ISSUE OF ADJUSTMENT OF EXCHANGE FLUCTUATION LOSS INCURRED BY THE ASSESSEE WE OBSERVE THAT IT I S A WELL ACCEPTED PRINCIPLE OF TRANSFER PRICING REGULATIONS TO COMPAR E LIKE WITH LIKE AND ELIMINATE THE DIFFERENCES IF ANY BY SUITABLE A DJUSTMENT. THE ITA NO.937/DEL./2014 31 SAID PRINCIPLE CLEARLY PROVIDES FOR ADJUSTMENTS IN MARGINS OF THE ENTERPRISE ENTERING INTO INTERNATIONAL TRANSACTIONS FOR ANY DIFFERENCES BETWEEN SUCH INTERNATIONAL TRANSACTIONS AND THE TRANSACTION OF COMPARABLES OR BETWEEN THE ENTERPRIS E ENTERING INTO INTERNATIONALS TRANSACTIONS AND COMPARABLE COMPANIE S. THE FOREIGN EXCHANGE ELEMENT ALSO NEEDS CONSIDERATION. RULE 10B (3) OF INCOME TAX RULES 1962 PROVIDES THAT AN APPROPRIATE ADJUSTMENT IS REQUIRED TO BE MADE ON ACCOUNT OF THE DIFFERENCES B ETWEEN THE CONTROLLED AND THE UNCONTROLLED TRANSACTIONS. THIS RULE CLEARLY STIPULATES THAT AN UNCONTROLLED TRANSACTION SHALL B E COMPARABLE TO AN INTERNATIONAL TRANSACTION IF NONE OF THE DIFFER ENCES BETWEEN THE TRANSACTIONS BEING COMPARED OR BETWEEN THE ENTERPR ISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFF ECT THE PRICE OR COST CHARGED OR PAID IN OR THE PROFIT ARISING FROM SUCH TRANSACTIONS IN THE OPEN MARKET. THIS RULE CLEARLY STIPULATES TH AT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE M ATERIAL EFFECTS OF SUCH DIFFERENCES. 39. BY FOLLOWING THE RULE OF CONSISTENCY AND THE FA CTS AND CIRCUMSTANCES OF THE CASE FOREIGN CURRENCY FLUCTUA TION NEEDS TO BE TAKEN INTO ACCOUNT FOR TP ADJUSTMENT BOTH FOR COMPA RABLE COMPANIES AS WELL AS TESTED PARTY. SO THIS GROUND IS ALSO REQUIRED TO BE RESTORED TO THE TPO TO MAKE FRESH ADJUSTMENT REGARDING DISTRIBUTION SEGMENT BY TAKING INTO ACCOUNT FOREIGN CURRENCY FLUCTUATION DULY DEMONSTRATED BY THE ASSESSEE IN VI EW OF THE OBSERVATIONS MADE HEREIN BEFORE. CORPORATE GROUNDS GROUND NO.6 40. GROUND NO.6 IS GENERAL IN NATURE WHICH WOULD BE DECIDED IN THE REMAINING CORPORATE GROUNDS AND AS SUCH NEEDS NO SPECIFIC FINDINGS. ITA NO.937/DEL./2014 32 GROUNDS NO.7 & 8 41. LD. AO/LD. DRP HAVE DISALLOWED 3/4 TH OF THE ADVERTISEMENT AND SALES PROMOTION EXPENSES TO THE TUNE OF RS.6 32 85 750/- AND 4/5 TH OF THE RECRUITMENT EXPENDITURE AMOUNTING TO RS.1 1 2 88 617/- BY TREATING THE SAME BEING ENDURING IN NATURE AND I N THE NATURE OF DEFERRED REVENUE EXPENDITURE. LD. DRP ALSO DISALLO WED THE ADVERTISEMENT AND SALES PROMOTION EXPENDITURE AND R ECRUITMENT EXPENDITURE ON THE GROUND THAT THE SAME HAVE LONG L ASTING VALUE HAVING A SPREAD OVER EFFECT. 42. HOWEVER LD. AR FOR THE ASSESSEE CONTENDED THAT THE ADVERTISEMENT AND SALES PROMOTION EXPENSES AND RECR UITMENT EXPENDITURE WERE ALLOWED IN ASSESSEES OWN CASE FOR AY 2002-03 AND AY 2003-04 VIDE ORDER PASSED IN ITA NO.4525/DEL /2005 AND 3984/DEL/2006 RESPECTIVELY AND FURTHER APPEALS FILE D BY THE REVENUE HAVE ALSO BEEN DISMISSED BY THE HONBLE HIG H COURT. 43. UNDISPUTEDLY IDENTICAL ISSUE WAS DEALT WITH BY THE COORDINATE BENCH IN ASSESSEES OWN CASE QUA AY 2002 -03 AND AY 2003-04 ORDERS OF WHICH ARE AVAILABLE AT PAGES 64 TO 81 OF THE PAPER BOOK. DISALLOWANCE ON ACCOUNT OF ADVERTISEME NT AND SALES PROMOTION EXPENSES TO THE TUNE OF RS.6 32 85 750/- AND RECRUITMENT EXPENDITURE TO THE TUNE OF RS.1 12 88 617/- MADE BY THE AO AND CONFIRMED BY LD. DRP ARE ALLOWABLE ON THE GROUND TH AT THESE ITA NO.937/DEL./2014 33 EXPENDITURE HAVE NOT RESULTED INTO ACQUISITION OF A NY ASSET BY THE ASSESSEE COMPANY NOR ANY ENDURING ADDITIONS HAVE BE EN ACCRUED TO THE ASSESSEE. SO BY FOLLOWING THE ORDER PASSED BY THE COORDINATE BENCH IN ASSESSEES OWN CASE QUA AY 2002-03 AND AY 2003-04 GROUNDS NO.7 & 8 ARE DETERMINED IN FAVOUR OF THE AS SESSEE AS AO/DRP HAVE ERRED IN DISALLOWING 3/4 TH OF THE ADVERTISEMENT AND SALES PROMOTION EXPENSES AMOUNTING TO RS.6 32 85 75 0/- AND 4/5 TH OF THE EXPENDITURE OF THE RECRUITMENT EXPENDITURE T O THE TUNE OF RS.1 12 88 617/-. HOWEVER AO TO VERIFY THE EXACT PERIOD OF CONTRACT TO COMPUTE THE EXPENSES INCURRED BY THE AS SESSEE AND DISALLOW THE EXPENSES IF THE SAME ARE FOUND TO BE N OT ATTRIBUTABLE TO THE YEAR UNDER ASSESSMENT. GROUND NO.9 44. AO DISALLOWED 3/4 TH OF THE LICENCES AND PERMITS EXPENDITURE AMOUNTING TO RS.1 69 93 222/- OUT OF THE LICENCES A ND PERMITS EXPENSES OF RS.2 26 57 629/- ON THE GROUND THAT THE SAME LEAD TO THE ENDURING BENEFIT TO THE ASSESSEE COMPANY AS ITS BENEFITS DO NOT RESTRICT TO ONLY ONE YEAR AND ONLY ALLOWED 1/4 TH OF THE EXPENDITURE AMOUNTING TO RS.56 64 407/- AND APPORTIONED THE BAL ANCE AMOUNT OF RS.1 69 63 222/- IN THE NEXT FIVE YEARS AND THER EBY MADE AN ADDITION OF RS.1 69 93 222/-. LD. DRP ALSO AFFIRME D THE ORDER PASSED BY THE AO. ITA NO.937/DEL./2014 34 45. LD. AR FOR THE ASSESSEE RELYING UPON THE SPECI AL BENCH DECISION OF ITAT IN CASE OF PEERLESS SECURITIES LIMITED VS. JCIT (2005) 94 ITRD 89 (KOL.)(SB) AND DECISION RENDERED BY HONBLE HIGH COURT OF MADRAS IN CASE OF CIT VS. SOUTHERN ROADWAYS LTD. (2006) 155 TAXMAN 493 (MAD) . 46. OPERATIVE PART OF THE DECISION RENDERED BY SPEC IAL BENCH OF THE TRIBUNAL IN CASE OF PEERLESS SECURITIES LIMITED (SUPRA) IS REPRODUCED AS UNDER FOR KIND PERUSAL :- SECTION 37(1) OF THE INCOME-TAX ACT 1961 - BUSINE SS EXPENDITURE - ALLOWABILITY OF - ASSESSMENT YEAR 1996-97 - WHETH ER A PAYMENT MADE TO REMOVE POSSIBILITY OF A RECURRING DISADVANT AGE CANNOT BE CONSIDERED AS PAYMENT MADE TO SECURE AN ENDURING AD VANTAGE - HELD YES - WHETHER WHERE ADVANTAGE CONSISTS OF MER ELY IN FACILITATING ASSESSEE'S TRADING OPERATIONS OR ENABL ING MANAGEMENT OR CONDUCT OF ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING FIXED CAPITAL UNT OUCHED EXPENDITURE WOULD BE ON REVENUE ACCOUNT EVEN THOUG H ADVANTAGE MAY ENDURE FOR INDEFINITE FUTURE - HELD YES - WHET HER IF EXPENDITURE IS FOR INITIAL OUTLAY OR FOR ACQUIRING OR BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE OF AN ENDURING BENE FIT TO BUSINESS THAT IS BEING CARRIED ON OR FOR EXTENSION OF BUSIN ESS THAT IS GOING ON OR FOR A SUBSTANTIAL REPLACEMENT OF AN EXISTING BUSINESS ASSET IT WOULD BE CAPITAL EXPENDITURE - HELD YES - WHETHER WHERE EXPENDITURE ALTHOUGH FOR PURPOSE OF ACQUIRING AN A SSET OR ADVANTAGE IS FOR RUNNING OF BUSINESS OR FOR WORKIN G OUT THAT ASSET WITH A VIEW TO PRODUCE PROFIT IT WOULD BE REVENUE EXPENDITURE - HELD YES - WHETHER IF AMOUNT PAID FOR ACQUISITION OF AN ASSET OF AN ENDURING NATURE IS SETTLED MERE FACT THAT AMOUNT S O SETTLED IS CHALKED OUT INTO VARIOUS SMALL AMOUNTS OR PERIODIC INSTALMENTS CAPITAL NATURE OF EXPENDITURE WOULD NOT CEASE TO BE SO OR ALTERED INTO NATURE OF A REVENUE EXPENDITURE - HELD YES - WHETHER EXPENDITURE INCURRED AFTER BUSINESS IS SET UP MAY B E ALLOWED EVEN IF IT IS INCURRED BEFORE BUSINESS HAS ACTUALLY COMM ENCED - HELD YES - ASSESSEE WAS ENGAGED IN BUSINESS OF SHARE TRA DING AND STOCK BRAKING - SINCE YEAR UNDER CONSIDERATION WAS FIRST YEAR OF BUSINESS REVENUE AUTHORITIES REJECTED VARIOUS CLAIMS OF EXPE NDITURE MADE BY ASSESSEE ON GROUND THAT EXPENDITURE HAD BEEN INCURR ED FOR INITIAL OUTLAY OR FOR ACQUIRING OR BRINGING IN EXISTENCE AS SETS OR ADVANTAGE OF ENDURING BENEFIT AND HENCE THEY WERE CAPITAL IN NATURE AND DID ITA NO.937/DEL./2014 35 NOT FALL WITHIN PURVIEW OF SECTION 37(1) - WHETHER DEVELOPMENT FEE PAID TO CALCUTTA STOCK EXCHANGE ASSOCIATION TO BECO ME MEMBER THEREOF WAS CAPITAL EXPENDITURE - HELD YES - WHET HER EXPENDITURE TOWARDS FEES FOR OPERATING ON FLOOR PAID TO CALCUTT A STOCK EXCHANGE ASSOCIATION WAS OF REVENUE IN NATURE - HEL D YES - WHETHER PAYMENT OF ADMISSION FEE TO OTC EXCHANGE OF INDIA (OTCEI) IN ORDER TO BECOME DEALER ON OTCEI AND TO O PERATE COUNTER FOR CONDUCTING ASSESSEE'S BUSINESS AS A SHA RE DEALER AND PAYMENT OF TECHNOLOGY COST FOR IMPARTING TRAINING T O ASSESSEE'S EMPLOYEES SO AS TO MAKE THEM QUALIFIED AS PER GUIDE LINES LAID DOWN BY OTCEI WAS FOR PURPOSE OF CARRYING OR RUNNIN G ASSESSEE'S BUSINESS OF SHARE TRADING IN A PROFITABLE MANNER AN D WAS REVENUE EXPENDITURE - HELD YES - WHETHER EXPENDITURE TOWAR DS NON- ADJUSTABLE DEPOSIT FOR ADMISSION AS A TRADING MEMBE R OF WHOLESALE DEBT MARKET OF NATIONAL STOCK EXCHANGE OF INDIA (NS EI) SO AS TO ENABLE ASSESSEE TO USE AND UTILIZE NETWORK OF NSEI FOR ITS TRADING OPERATIONS AT A NATIONWIDE LEVEL SO AS TO FACILITAT E IT TO CARRYON BUSINESS SMOOTHLY EXTENSIVELY EFFECTIVELY AND PRO FITABLY WAS OF REVENUE IN NATURE - HELD YES - WHETHER DEPOSIT FOR VERY SMALL APERTURE TERMINALS (VSATS) ON ACCOUNT OF PROVIDING BY NSEI ON- LINE SCREEN BASED TRADING FACILITIES ON EQUAL ACCES S BASIS TO ALL TRADING MEMBERS DIRECTLY RELATED TO BUSINESS OPERA TION AND TRADING ACTIVITIES CARRIED ON BY ASSESSEE AND WAS THEREFORE ALLOWABLE AS REVENUE EXPENDITURE - HELD YES. 47. KEEPING IN VIEW THE SETTLED PRINCIPLE AND THE F ACTS AND CIRCUMSTANCES OF THE CASE EXPENDITURE OF RS.2 26 5 7 629/- INCURRED BY THE ASSESSEE ON LICENCES AND PERMITS BEING NECES SARY TO RUN THE BUSINESS WITHOUT WHICH ASSESSEES UNIT WOULD HAVE S TOPPED WHICH ARE REVENUE IN NATURE AND CANNOT BE DEFERRED TO ANO THER 5 YEARS. EVEN OTHERWISE LICENCE FEE FOR ONE YEAR HAS BEEN C LAIMED BY THE ASSESSEE IN THE YEAR UNDER ASSESSMENT ITSELF. SO GROUND NO.9 IS DETERMINED IN FAVOUR OF THE ASSESSEE AND AO IS TO R ECOMPUTE THE DEDUCTIONS IN THE LIGHT OF SECTION 10A OF THE ACT. ITA NO.937/DEL./2014 36 GROUNDS NO.10 & 10.1 48. LD. AR FOR THE ASSESSEE CONTENDED THAT AO/DRP H AVE ERRED ON FACTS AND IN LAW IN NOT RECOMPUTING THE DEDUCTIO N U/S 10A AFTER MAKING THE DISALLOWANCE OF THE EXPENSES IN RELATION TO SECTION 10A UNIT AND FURTHER CONTENDED THAT DURING AY 2007-08 THIS ISSUE WAS RESTORED TO THE TPO TO DECIDE AFRESH. 49. UNDISPUTEDLY ASSESSEE COMPANY IS A STPI UNIT G ETTING COST PLUS 5% MARKUP. PERUSAL OF THE COMPUTATION OF TOTA L INCOME AVAILABLE AT PAGE 1186 OF THE PAPER BOOK SHOWS THA T ON AGGREGATION BASIS THERE IS A LOSS BUT IN R&D SEGM ENT PROFIT IS THERE. SINCE THE ASSESSEE IS INTO THE MULTIPLE BUS INESS IN WHICH IT HAS LOSS THE ONLY QUESTION TO BE DETERMINED IS :- AS TO WHETHER IN SUCH CIRCUMSTANCES THE ASSESSEE I S ENTITLED FOR SECTION 10A EXEMPTION IN TP ADJUSTMENT ? 50. LD. AR RELIED UPON THE DECISION OF ITAT IN THE CASE OF CIT VS. TEI TECHNOLOGIES (P.) LTD. - (2012) 25 TAXMAN.COM 5 (DELHI) . THE RATIO OF THE JUDGMENT IN CASE OF TEI TECHNOLOGIES (P.) LTD. (SUPRA) IS THAT IMPLICATION OF EXEMPTION PROVISIONS CONTAINED U/S 10A IS THAT THE PARTICULAR INCOME WHICH IS EXEMPT F ROM TAX DOES NOT ENTER IN THE FIELD OF TAXATION AND IS NOT SUBJE CT TO ANY COMPUTATION. SO THE BUSINESS LOSS OF NON-ELIGIBLE UNITS COULD NOT BE SET OFF AGAINST PROFITS OF THE UNDERTAKING ELIGI BLE FOR EXEMPTION ITA NO.937/DEL./2014 37 U/S 10A AS SECTION 10A UNIT IS NOT TAXABLE AT ALL. HOWEVER SECTION 10A DEDUCTION WILL NOT AFFECT FOR TP ADJUSTMENT NOR THIS PROFIT IS TO BE DEDUCTED. SO IN THESE CIRCUMSTANCES GROUNDS N O.10 10.1 AND 11 ARE REQUIRED FRESH CONSIDERATION BY THE AO WHO S HALL VERIFY THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE REGARDING EXPENSES AND DEDUCTION U/S 10A OF THE ACT. SO GROUNDS NO.10 1 0.1 & 11 ARE DETERMINED IN FAVOUR OF THE ASSESSEE. 52. IN VIEW OF OUR FINDINGS ON THE ABOVE GROUNDS P RESENT APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS DAY 29 TH OF SEPTEMBER 2016. SD/- SD/- (S.V. MEHROTRA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 29 TH DAY OF SEPTEMBER 2016 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT) NEW DELHI. AR ITAT NEW DELHI.