[2017] 79 taxmann.com 281 (Pune - Trib.)/[2017] 58 ITR(T) 649 (Pune - Trib.

)[10-
02-2017]

IT/ILT : When in course of transfer pricing proceedings certain information was

collected by TPO, which in turn was confronted to assessee and thereupon applied
to determine ALP of international transactions, said exercise of jurisdiction by TPO
could not be questioned

IT/ILT : When assessee failed to demonstrate any qualitative clarities in data which
would justify invoking proviso to rule 10B(4), TPO had rightly taken into
consideration single year's data pertaining to relevant assessment year in order to
arrive at PLI of comparables

IT/ILT : While determining ALP, only persistent loss making concerns can be
excluded from list of comparables

IT/ILT : Where comparables had not incurred any start-up activity cost or VRS
expenses, then said expenses had to be excluded from operating expenses being
extraordinary cost incurred by assessee during relevant assessment year

IT/ILT : Where assessee claimed adjustment in respect of excess depreciation

charged by it on its fixed assets, since in terms of rule 10B(1)(e)(iii) such adjustment
if any, had to be made in hands of comparables, assessee's claim was to be rejected

IT/ILT : Where assessee sought adjustment relating to capacity utilisation, since

such adjustment, if any, had to be made in hands of comparables, assessee's claim
could not be allowed
IT/ILT : Transfer pricing adjustment, if any, is to be made to total income of
assessee only with reference to international its transactions with its AE, and not
with reference to total turnover

IT/ILT : Where fixed assets drove revenues of assessee enterprise and depreciation
was significant cost component to be accounted for, such depreciation could not be
disregarded for transfer pricing purposes while benchmarking international
transaction under TNMM method

■■■

[2017] 79 taxmann.com 281 (Pune - Trib.)

IN THE ITAT PUNE BENCH 'A'
Vishay Components (P.) Ltd.
v.
 Assistant Commissioner of Income-tax, Circle-7, Pune*
MS. SUSHMA CHOWLA, JUDICIAL MEMBER
AND R.K. PANDA, ACCOUNTANT MEMBER
IT APPEAL NO. 1712 (PUNE) OF 2011
SA NO. 73 (PUNE) OF 2016
[ASSESSMENT YEAR 2007-08]
FEBRUARY 10, 2017
Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length
price (Comparables and adjustments/Adjustment - General) - Assessment year 2007-08 -
Assessee-company was engaged in manufacturing of resistors and capacitors - It entered
into various international transactions with its AE - Whether when in course of transfer
pricing proceedings, certain information was collected by TPO, which in turn was
confronted to assessee and thereupon applied to determine ALP of international
transactions, said exercise of jurisdiction by TPO could not be questioned - Held, yes [Para
14] [In favour of revenue]

Section 92C of the Income-tax Act, 1961, read with rule 10B of the Income-Tax Rules, 1962 -
Transfer pricing - Computation of arm's length price (Comparables and
adjustments/Comparables - Current v. Multiple Year Data) - Assessment year 2007-08 -
Whether when assessee failed to demonstrate any qualitative clarities in data which
would justify invoking proviso to rule 10B(4), TPO rightly took into consideration single
year's data pertaining to relevant assessment year in order to arrive at PLI of comparables -
Held, yes [Para 17] [In favour of revenue]

Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length
price (Comparables and adjustments/Comparables - Loss making company) - Assessment
year 2007-08 - Whether while determining ALP, only persistent loss making concerns can be
excluded from list of comparables - Held, yes [Para 22] [In favour of assessee]

Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length
price (Comparables and adjustments/Adjustment - Operating cost/profit) - Assessment
year 2007-08 - Whether where comparables had not incurred any start-up activity cost or
VRS expenses, said expenses had to be excluded from operating expenses being
extraordinary cost incurred by assessee during relevant assessment year - Held, yes [Para
28] [In favour of revenue]

Section 92C of the Income-tax Act, 1961, read with rule 10B of the Income-Tax Rules, 1962 -
Transfer pricing - Computation of arm's length price (Comparables and
adjustments/Adjustment - Depreciation) - Assessment year 2007-08 - Whether where
assessee claimed adjustment in respect of excess depreciation charged on fixed assets,
since in terms of rule 10B(1)(e)(iii), said adjustment, if any, had to be made in hands of
comparables, assessee's claim was to be rejected - Held, yes [Para 44] [In favour of revenue]
Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length
price (Comparables and adjustments/Adjustment - Capacity utilisation) - Assessment year
2007-08 - Whether where assessee sought adjustment relating to capacity utilisation, since
said adjustment, if any, had to be made in hands of comparables, assessee's claim could
not be allowed - Held, yes [Para 51] [In favour of revenue]

Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length
price (Comparables and adjustments/Adjustment - General) - Assessment year 2007-08 -
Whether transfer pricing adjustment, if any, is to be made to total income of assessee;
same should only be with reference to international transactions of assessee with its AE
and not with reference to total turnover - Held, yes [Para 60] [In favour of assessee]

Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length
price (Comparables and adjustments/Adjustment - Depreciation) - Assessment year 2007-08
- Assessee claimed that it provided higher rate of depreciation in its books of account as
compared to comparable companies, which largely followed depreciation rates as provided
in Schedule XIV of Companies Act - In view thereof, assessee claimed that OPBDIT be
benchmarked against OPBDIT earned by comparable companies, because of difference in
depreciation policies - Whether where fixed assets drove revenues of assessee enterprise
and depreciation was significant cost component to be accounted for, then such
depreciation could not be disregarded for transfer pricing purposes while benchmarking
international transaction under TNMM method - Held, yes - Whether since, in such a
situation, exclusion of depreciation would distort comparability analysis, cash profit or
PBDIT could not be adopted as PLI - Held, yes [Para 37] [In favour of revenue]
CASE REVIEW

Demag Cranes & Components (India) (P.) Ltd. v. Dy. CIT [2012] 17 taxmann.com 190/49 SOT 610
(Pune) (para 31); Dy. CIT v. Sumi Motherson Innovative Engg. Ltd. [2014] 150 ITD 195/42 taxmann.com
242 (Delhi) (para 38); Honda Motorcycle & Scooters India (P.) Ltd. v. Asstt. CIT [2015] 56 taxmann.com
237/154 ITD 21 (Delhi) (para 39) and CIT v. Welspun Zucchi Textiles Ltd. [2017] 77 taxmann.com 137
(Bom.) (para 41) followed.
Schefenacker Motherson Ltd. v. ITO [2009] 123 TTJ 509 (Delhi) (para 36) and CIT v. B.A. Continuum
India (P.) Ltd. [ITTA No.440 of 2014, dated 16-07-2014] (para 37) distinguished.

CASES REFERRED TO

Demag Cranes & Components (India) (P.) Ltd. v. Dy. CIT [2012] 17 taxmann.com 190/49 SOT 610
(Pune) (para 26), Akash Films v. CIT [1991] 190 ITR 32/[1992] 60 Taxman 31 (Kar.) (para 32),
Schefenacker Motherson Ltd. v. ITO [2009] 123 TTJ 509 (Delhi) (para 32), CIT v. B.A. Continuum India (P.)
Ltd. [ITTA No.440 of 2014, dated 16-07-2014] (para 32), Toyota Kirloskar Motors (P) Ltd. v. Asstt. CIT
[2012] 28 taxmann.com 293 (Bang.) (para 35), Fiat India (P.) Ltd. v. Dy. CIT [2010- TIOL-30-ITAT -
Mum-TP] (para 36), Dy. CIT v. Sumi Motherson Innovative Engg. Ltd. [2014] 150 ITD 195/42
taxmann.com 242 (Delhi) (para 38), Honda Motorcycle & Scooters India (P.) Ltd. v. Asstt. CIT [2015] 56
taxmann.com 237/154 ITD 21 (Delhi) (para 39), CIT v. Welspun Zucchi Textiles Ltd. [2017] 77
taxmann.com 137 (Bom.) (para 41), Dy. CIT v. EDAG Engineers & Design India (P.) Ltd. [2014] 50
taxmann.com 322 (Delhi) (para 52), NORD Drive Systems (P.) Ltd. v. ACIT [IT Appeal No.158 (PN) of
2014, dated 30-3-2016] (para 54), Tasty Bite Eatables Ltd. v. Asstt. CIT [2013] 59 taxmann.com 437
(Pune) (para 54), ITO v. Sak Soft Ltd. [2009] 30 SOT 55 (Chennai) (SB) (para 71) and CIT v. Gem Plus
Jewellery India Ltd. [2011] 330 ITR 175/[2010] 194 Taxman 192 (Bom.) (para 71).
Farooq V. Irani and Pramod Jadhav for the Appellant. Suhas S. Kulkarni for the Respondent.
ORDER

Ms. Sushma Chowla, Judicial Member - This appeal filed by the assessee is against the order of
ACIT, Circle 7, Pune, dated 31.10.2011 relating to assessment year 2007-08 passed under section
143(3) r.w.s. 144C(1 3) of the Income-tax Act, 1961 (in short 'the Act').

2. The assessee has raised the following grounds of appeal:—

On the facts and in the circumstances of the case and in law, the Hon'ble DRP and
consequentially, the learned AO have:

I. In respect of transfer pricing adjustment

In connection with manufacturing activity

1. General ground challenging the transfer pricing adjustment of Rs. 129,006,231

Erred on facts and in law by making a transfer pricing adjustment to its international
transactions in connection with its manufacturing activity (export of finished goods,
import of raw materials and components for manufacturing finished goods, import of
finished goods for resale and receipt of commission) and not accepting the analysis
undertaken by the Appellant to determine the arms length price.

2. Conducting an unjustified fresh search for identifying additional comparable companies at

the time of assessment proceedings and proceeded with using non-contemporaneous data

Erred on facts and in law by conducting an unjustified fresh search at the time of
assessment proceedings for identification of comparable companies and also erred in
relying on the information available at the time of assessment for determining arms'
length price but not available at the time of complying with the transfer pricing
regulations.

3. Use of single year data

Erred in considering the operating margins earned by the companies identified as

comparable based on the financial data pertaining to the financial year ended 31 March
2007 only and rejecting the financial data of such companies for prior two years for
determining the arms length price of international transactions.

4. Consideration of companies as comparable which were not available in public domain at the
time of complying with the regulations

Erred on facts and in law by considering companies (namely Tibrewala Electronics

Limited, which was not available in public domain at the time of complying with the
documentation requirements and added very recently in public databases) as
comparable and thus defeating the intention and purpose of using contemporaneous
data in arriving at arm's length comparability analysis.

5. Adopting an incoherent approach for selection/rejection criteria of comparable companies

Rejection of Keltron Group companies as comparable

Without prejudice to the grounds above, if fresh search is sustained, erred on facts and
in law in rejecting Keltron Group companies (namely Keltron Component Complex
Limited, Keltron Resistors Limited and Keltron Electro Ceramic Limited) as comparables.

Incoherent approach adopted while accepting Gujarat Poly-Avx Electronics Limited as

comparable

Also without prejudice to the above grounds, even if fresh search is sustained, erred on
facts and in law, by adopting an incoherent approach for rejecting Keltron Group
companies as comparable on certain criteria and not applying similar criteria/rationale
(as applied for such rejection) while accepting Gujarat Poly-Avx Electronics Limited as
comparable.

6. Treating restructuring cost (voluntary retirement expenses) and start-up costs relating to new
project (Romeo Project) as part of operating expenses

Erred on facts and in law by considering restructuring costs (voluntary retirement

expenses) and start-up costs incurred by the Appellant (non recurring and abnormal)
relating to new project (Romeo Project) as a part of operating expenses.

7. Non-exclusion of depreciation as part while calculating the Profit level indicator of the
Appellant

Erred in facts and law in considering depreciation as part of operating expenses of

companies considered as comparable and the Appellant without giving due credence to
the fact that the Appellant charges a higher rate of depreciation (compared to
depreciation rates provided in Schedule XIV of the Companies Act, 1956) vis-a-vis
companies considered as comparable (which largely follow depreciation rates as
prescribed in Schedule XIV of the Companies Act, 1956). The learned Transfer Pricing
Officer and the learned Assessing Officer ought to have followed the Hon'ble Panel's
stand in case of the Appellant for A Y 2006-07 on similar grounds whereby the profit
level indicator has been accepted as operating profits excluding depreciation as the
Hon'ble DRP has not given any directions in this regard for A Y 2007-08.

8. Non-consideration of asset utilisation adjustment on account of difference relating to

proportion of asset utilized (Net Sales/Total Fixed Assets) by the Appellant and companies
considered as coma parable

Erred in law and in fact by comparing the operating margin earned by the Appellant and
the comparable companies without allowing the adjustment undertaken on account of
differences relating to proportion of asset utilized (Net Sales/Total Fixed Assets) by the
Appellant and the companies considered as companies without appreciating the fact
 that such information has been called for by the learned Transfer Pricing Officer himself
during the course of assessment proceedings.

9. Non-consideration of capacity related adjustment

Erred in law and in fact by comparing the operating margin earned by the Appellant and
the comparable companies without allowing an adjustment on account of differences
in the capacity utilized by the Appellant and the companies considered as companies.

10. Non-consideration of working capital related adjustment

Erred in law and in fact by comparing the operating margin earned by the Appellant and
the comparable companies without allowing an adjustment on account of differences
in the working capital employed by the Appellant and the companies considered as
companies without appreciating the fact that working capital adjustment has been
allowed by the Hon'ble DRP in principle.

11. Non- consideration of +/-5% range

Erred in computing the transfer pricing adjustment from the arm's length price without
giving the benefit of the option available to the Appellant under proviso to section
92C(2) of the Act of adopting as arm's length price, a price which varies by not more
than 5 per cent from the arm's length price.

12. Computation of transfer pricing adjustment with reference to total turnover instead of
adjustment attributable to the value of international transactions.

Erred on facts and in law by computing the transfer pricing adjustment with reference
to total turnover instead of computing and restricting the same with reference to value
of international transactions.

II. In respect of disallowances/additions other than transfer pricing adjustment

13. Disallowance of stock written-off in Domestic Tariff Area ('DTA) unit

Erred on facts and in law by disallowing the deduction claimed by the Appellant in
respect of stock written off amounting to Rs.2,735,991 without appreciating the fact
that the claim of stock written off is not a provision for obsolescence but actual loss
allowable under section 28/37(1) of the Act and also without appreciating that all
documentary evidences supporting such write-off were submitted during the course of
assessment proceedings.

14. Re-computation of deduction under section 10B of the Act by reducing insurance and
communication expenses from export turnover

Erred on facts and in law by re-computing the deduction under section 10B of the Act
claimed by the Appellant by reducing the insurance and communication expenses of
the eligible unit from export turnover of the Appellant:
 - Without appreciating that the said expenses have not been charged to the
customers;

- Without appreciating that the said expenses have not been incurred in foreign
currency; and

- Without verifying whether the expense are attributable for delivery of goods
outside India.

15. Reduction of insurance and communication expenses from export turnover only and not
from total turnover

Erred on facts and in law by re-computing the deduction under section 10B of the Act
by reducing insurance and communication expenses of the eligible unit only from the
export turnover and not from total turnover.

16. Disallowing the claim of deduction under section 10B of the Act

Erred on facts and in law by disallowing the claim of deduction under section 10B of the
Act, without appreciating that:

- The deduction under section 10B is a undertaking specific deduction; and

- The deduction should be computed at source level without setting-off brought

forward losses or losses from other unit.

Without prejudice to the above, even otherwise, erred in disallowing deduction under
section 10B of the Act considering that the assessed total income was more than the
profits earned by the eligible unit.

III. Other Grounds of Objections

17. Initiation of penalty proceedings under section 271(1)(c) of the Act

Erred in law and on facts in initiating penalty proceedings under section 271(1)(c)
without considering the fact that transfer pricing adjustment and corporate tax
adjustment on account of difference of opinion pertaining to selection criteria adopted
for identifying the comparable companies, interpretation of provisions of law, etc.

18. Erroneous levy of interest under section 234B of the Act

Erred in law and on facts in levying interest under section 234B of the Act to the extent
addition is made to the total income of the Appellant on account of transfer pricing
adjustment and corporate tax related matters without considering the fact that
shortfall in advance tax resulted in view of the proposed additions to total income,
which are unanticipated in nature.
3. The grounds of appeal No.1 to 12 raised by the assessee are against transfer pricing
adjustment made in the hands of assessee.
4. Briefly, in the facts of the present case, the assessee was engaged in manufacture of resistors
and capacitors used in various electronic applications/products. The assessee's manufacturing
facilities were divided into a Domestic Tariff Area unit for manufacturing capacitors and low end
resistors, and an Export Oriented Unit for manufacturing certain high end resistors which are
exported to overseas group entities. The assessee was also providing certain Information
Technology Enabled Services to certain Vishay Group entities. Vishay Group was a leading
international manufacturer and supplier of electronic components. The electronic components
manufactured by the assessee were used in almost every type of product that contains
electronic circuitry, including computer related products, power management products,
telecommunications equipments, measuring instruments, industrial equipments, automotive
applications, process control systems, military and aerospace applications, consumer
electronics and appliances, medical instruments and electronic sales. The assessee had filed
return of income declaring total income at Nil. The assessee had claimed deduction under
section 10B of the Act at Rs.62,39,187/-. The case of the assessee was taken up for scrutiny. The
Assessing Officer made a reference to the Transfer Pricing Officer (in short 'the TPO') after taking
the approval of the CIT, who in turn, passed the order under section 92CA(3) of the Act
proposing an adjustment of Rs.13,16,88,404/- and also no deduction under section 10B of the
Act to be allowed on such adjustment. The Assessing Officer thereafter, issued draft assessment
order to the assessee proposing the said transfer pricing adjustment along with other additions
proposed to be made on account of corporate issues. The assessee filed objections before the
Dispute Resolution Panel (in short 'the DRP'), which were rejected in respect of upward
adjustment for manufacturing activity at Rs.12,90,06,231/-. In the meanwhile, the assessee filed
rectification application under section 92CA(5) r.w.s. 154 of the Act against the order passed by
the TPO under section 92CA(3) of the Act vis-à-vis working of operating profit margins in the case
of three comparable companies Cosmic Global Ltd., Informed Technologies India Ltd. and Maple
E-solutions Ltd. The said rectification application moved by the assessee was rejected by the
TPO. The Assessing Officer points out that the assessee failed to file any appeal against the said
order nor it was brought to the knowledge of DRP, hence, adjustment on account of
international transactions relating to manufacturing activity was determined at
Rs.12,90,06,231/-.

5. With regard to Back Office Services for which upward adjustment of Rs.26,82,173/- was
proposed by the TPO, the DRP directed to allow working capital adjustment. The Assessing
Officer after considering submissions of the assessee noted that the working capital adjustment
would come to 18.36% as against 22.37% determined by the TPO. On comparison with assessee's
operating margins of 15%, the Assessing Officer held that the same meets arm's length test and
hence, no addition was to be made on this count.

6. The assessee is in appeal against the said addition made in the manufacturing segment.

7. The ground of appeal No.1 raised by the assessee is general in nature and hence, the same is
dismissed.

8. The issue in grounds of appeal No.2 and 4 raised by the assessee is against fresh search
conducted by the TPO, under which additional comparable company was identified i.e. Tibrewala
Electronics Ltd. The assessee is aggrieved by the order of TPO in selecting the said concern since
the data of said concern was added in the data base on 25.03.2008 i.e. beyond the due date of
compliance and the assessee thus pleaded that the same is not contemporaneous data and the
same cannot be used for benchmarking the international transactions of the assessee.

9. The learned Authorized Representative for the assessee fairly pointed out that the similar
issue arose before the Tribunal in earlier year, wherein objections were raised to fresh search
conducted by the TPO during the course of TP proceedings and consequent selection of
Tibrewala Electronics Ltd. and the Tribunal has decided the said issue against the assessee.

10. The learned Departmental Representative for the Revenue placed heavy reliance on the
order of Tribunal dated 16.05.2016.

11. We have heard the rival contentions and perused the record. The first issue which arises by
way of grounds of appeal No.2 and 4 raised by the assessee under transfer pricing provisions is
the selection of data by the TPO during the course of TP proceedings. The plea of assessee
before us is that selection process carried out by the TPO during the course of TP proceedings is
that the data of certain companies which was not originally available in public domain, is used by
the TPO while benchmarking international transactions of the assessee in the manufacturing
segment. Undoubtedly, the learned Authorized Representative for the assessee has not
submitted that the said concern is not functionally comparable; the only objection raised by the
learned Authorized Representative for the assessee was the selection of said concern on later
date by the TPO, especially where the data of the said concern was not available while assessee
prepared its TP study report.

12. The assessee is engaged in the business of manufacture of resistors and capacitors, which in
turn, were used in various electronic applications and products. The assessee had undertaken
several international transactions with its associate enterprises. The assessee in the
manufacturing segment had applied TNMM method to benchmark its international transactions,
wherein certain comparables were selected by the assessee and it was pleaded that the
international transactions undertaken by the assessee were at arm's length price. However, the
TPO conducted fresh search and selected certain other companies also; one of which was
Tibrewala Electronics Ltd., against the same, the assessee is in appeal.

13. The Tribunal in ITA No.133/PN/2011 relating to assessment year 2006 - 07, vide order dated
25.05.2012 had decided the issues relating to transfer pricing adjustment, but thereafter, the
assessee moved Miscellaneous Application No.82/PN/2013, relating to assessment year 2006-07.
The Tribunal vide order dated 02.08.2013 in the said Miscellaneous Application observed that the
grounds of appeal No.2, 3, 5, 9, 12, 13 and 15 were not adjudicated by the Tribunal in the first
round, thereafter, the Tribunal vide order dated 16.05.2016 adjudicated the aforesaid issues. The
issue arising by way of ground of appeal No.2 i.e. fresh search conducted by the TPO and
selection of Tibrewalal Electronics Ltd. was also adjudicated in the second round of proceedings
by the Tribunal. The Tribunal vide paras 13 to 22 observed as under:—

'13. Now, coming to the stand of assessee with regard to fresh search undertaken at the
time of assessment proceedings.
14. Under section 92D of the Act, it is provided that every person who has entered into an
international transaction is to keep and maintain such information and documents in
respect thereof as may be prescribed. Rule 10D of the Rules prescribes the information
and documents to be kept and maintained under section 92D of the Act. It is not any
ones' case that the assessee has not maintained such documents as prescribed under
Rule 10D of the Rules. The plea of the assessee before us is that by way of maintenance
of such information and documents, the assessee is to keep a record of its
international transactions and by way of clause (l) to also prepare the details of
adjustments, if any, made to the transfer prices to align them with arm's length prices
determined under these Rules and consequent adjustments made to the total income
for tax purposes. The proviso under sub-rule (2) to Rule 10D of the Rules provides that
the assessee shall be required to substantiate, on the basis of material available with
him, that income arising from international transaction entered into by him has been
computed in accordance with section 92 of the Act. Further, information which is
specified in sub-rule (1) is to be supported by authentic documents which include
various publications, reports and financial statements as per sub-rule (3) to the said
Rule 10D of the Rules. Under sub-rule (4), it is provided that the information and
documents specified under sub-rules (1) and (2) as far as possible be contemporaneous
and should exist latest by specified date referred to in clause (4) of section 92F of the
Act .

15. Under the provisions of section 92F(4) of the Act, the specified date is the same as
assigned to due date in Explanation (2) sub-section (1) of section 139 of the Act. In other
words, the data which is to be used by the assessee in relation to its international
transaction vis-à-vis transfer pricing provisions should be such which is available by the
due date of filing the return of income. First onus is upon the assessee to justify that
the international transaction entered into by it with its associate enterprises is at arm's
length price, in case it is compared with uncontrolled transactions i.e. transactions
entered into by other concerns in similar circumstances. This documentation is to be
compiled by the assessee by way of transfer pricing report in order to justify the arm's
length price of its international transactions.

16. Under section 92C of the Act, it is provided that arm's length price in relation to
international transaction shall be determined by following any of the methods
prescribed therein which is the most appropriate method, having regard to the
international transaction or class of transactions or class of associated persons or
functioned performed by such persons or such other relevant entities as the Board
may prescribe. Sub-section (2) therein provides that the most appropriate method shall
be applied for determination of arm's length price in the manner as may be prescribed.
Section 92C(3) of the Act reads as under:-

"92C. (1)..........

(2).......
(3) Where during the course of any proceeding for the assessment of income, the Assessing
Officer is, on the basis of material or information or document in his possession, of the
opinion that—

(a) the price charged or paid in an international transaction [or specified domestic
transaction] has not been determined in accordance with sub- sections (1) and (2); or

(b) any information and document relating to an international transaction [or specified
domestic transaction] have not been kept and maintained by the assessee in
accordance with the provisions contained in sub-section (1) of section 92D and the
rules made in this behalf; or

(c) the information or data used in computation of the arm's length price is not reliable
or correct; or

(d) the assessee has failed to furnish, within the specified time, any information or
document which he was required to furnish by a notice issued under sub-section (3) of
section 92D,

the Assessing Officer may proceed to determine the arm's length price in relation to
the said international transaction [or specified domestic transaction] in accordance
with sub-sections (1) and (2), on the basis of such material or information or document
available with him."

17. Under the said sub-section, the Assessing Officer during the course of any proceedings
for assessment of income, on the basis of material or information or documents in his
possession, is of the opinion that the conditions laid in clauses (a) to (d) are not fulfilled,
then the Assessing Officer may proceed to determine the arm's length price in relation
to such international transaction in accordance with sub-section (1) and (2), on the
basis of material or information or documents available with him. The said exercise of
power by the Assessing Officer is after affording an opportunity of hearing to the
assessee to show cause as to why the arm's length price should not be so determined
on the basis of material or information or documents in the possession of Assessing
Officer.

18. Under section 92CA of the Act, where the assessee had entered into international
transaction in any previous year and where the Assessing Officer considers it necessary
or expedient, he may with previous approval of the Commissioner refer the
computation of arm's length price in relation to the said international transaction
under section 92C of the Act to the TPO. Under section 92CA(3) of the Act, the TPO is
empowered to determine the arm's length price in relation to the international
transaction in accordance with sub-section (3) of section 92C of the Act. For doing so,
the TPO is to serve notice upon the assessee requiring him to produce or cause to be
produced, any evidence on which he may rely upon in support of computation made by
him of the arm's length price in relation to international transaction. After hearing such
evidence including any information or documents referred to in section 92C(3) of the
Act and after considering such evidence as the TPO may require on specified date and
 also taking into account relevant material which he has gathered and confronted to
assessee, the TPO has to pass an order in writing. Hence, under the provisions of the
Act, the machinery to pass an order for determination of arm's length price of an
international transaction entered into by any person is so provided. It is not only the
evidences which are relied upon by the assessee in support of its computation of arm's
length price of its international transaction but also any other evidence which the TPO
may require on some specified points or the information which may be gathered by the
TPO can be used by the TPO to determine the arm's length price of international
transaction. Undoubtedly, the assessee is the first person who is to collect the
information and documents in respect of its international transaction which are
enlisted under Rule 10D of the Rules. But mere collections of documents and
compilation of data is not the only responsibility of the assessee, who can be asked to
produce such other evidence as the TPO may require on any points. Further, the TPO is
also empowered to take into account such material which he has gathered i.e. the data.
However, there is a restriction in the section itself that such data should be available in
public domain. Such material collected to be used against assessee should be put to
the assessee to explain. Further, as decided by us in the paras hereinabove in view of
Rule 10B(4) of the Rules, the data should be relatable to the financial year in which the
international transaction has been entered into. Thus, it is incumbent upon the TPO to
ensure that all the conditions provided under the Act and as per the Rules are fulfilled.

19. In the facts of the present case itself, we have noted that the assessee had prepared its
transfer pricing report and computed the PLI of comparables by adopting the data for
preceding two years. The assessee in its transfer pricing report had not used the data
of the year in which the international transaction had taken place to benchmark its
international transaction to be at arm's length price or not. During the course of
transfer pricing proceedings, the TPO show caused the assessee as to why instant
year's data should not be used and further computed the arithmetic mean of PLI of
comparables on the basis of data relating to assessment year 2006-07. The data
compiled by the TPO relates to assessment year 2006-07 of the listed companies which
were picked up by the assessee itself as being comparables. However, while doing the
search process for benchmarking the international transaction, the TPO included two
further companies i.e. DEKI Electronics Ltd. and Tibrewala Electronics Ltd., data of which
was confronted to the assessee. The objection of assessee to the inclusion of above
said concerns was that the data relating to the said concerns was not available at the
time of complying with the documentation requirements and had come into public
domain much later. We find no merit in the claim of the assessee that the data of
companies which were not available in public domain at the time of complying with
documentation requirements cannot be considered. The companies which are picked
up by the TPO are functionally comparable to the assessee and the data which has
been compiled by the TPO relates to assessment year 2006-07, and was confronted to
the assessee and merely because the data came into public domain at a later date, the
same cannot be ignored. The TPO has power to use any data which comes into his
possession and Section has not provided any fetters to the collections of data on a
particular date or otherwise and use of such data; in the absence of which, there could
 not be curtailment of powers to be exercised by the TPO for determining arm's length
price of international transaction. Merely because, the financial results of a concern
which were functionally similar to the assessee came into public domain on a later date,
but relate to the year in which the international transaction had been undertaken,
cannot be rejected on the surmise that they were not available on the date of
compilation of documentation and/or came in the public domain later. The argument of
learned Authorized Representative for the assessee before us is that if the TP
proceedings of a particular case had been taken up on an earlier date when no such
data was available, would put such a person on an advantageous position as compared
to person whose TP proceedings were taken up on a later date when information in
respect of such comparables were recently published. The search process is to be
carried out by the TPO who in turn, has to determine the arm's length price of
international transaction on the basis of information available with him and once such
information is made available to him, then the same can be applied by the TPO after
confronting the same to assessee, to compute the transfer pricing adjustment, if any, in
the hands of the assessee. Accordingly, the TPO under the Act is fully justified in
carrying out the fresh search, if needed, for identifying the comparable companies, may
be additional and proceed with transfer pricing proceedings. Such data collected by the
TPO cannot be called as non-contemporaneous, where the concerns picked up by the
TPO are functionally comparable and the data for the relevant year was available.

20. We find support from the ratio laid down by the Bangalore Special Bench in Aztec
Software and Technology v. ACIT (supra), wherein the Tribunal while considering the
statutory provisions for determination of arm's length price of a taxpayer observed
that the burden to establish the transaction to be at arm's length price was upon the
taxpayer, who had to furnish comparable transactions, apply appropriate method for
determination of arm's length price and justify the same by producing the relevant
material and documents before the Revenue authorities. Where the Revenue
authorities were not satisfied with the arm's length price and supporting
documents/information furnished by the taxpayer, the Tribunal held that the
authorities had an ample power to determine the same and make suitable adjustment.
In such case, the responsibility of determination of arm's length price is shifted to the
Revenue authorities who are to determine the same in accordance with statutory
regulations. The Tribunal further while concluding the issue had considered the burden
of proof on the taxpayer and the Revenue authorities and had observed as under:-

"132. A dispassionate study of provisions of various countries on Burden of Proof, would

show, the following fundamental features:

(i) That the burden to establish that international transaction is carried at ALP, is on the
taxpayer who is to disclose all the relevant information and documents relating to
prices charged and profit earned with related and unrelated customer.

(ii) If the Assessing Officer has determined an ALP, other than the price declared by the
assessee, Assessing Officer has to prove that the price determined by him is reliable
 and reasonable and confirms the statutory requirement unless the case is covered by
situation No. (iii) below.

(iii) In case of failure on the part of the taxpayer to comply with the statutory provisions,
the tax authorities would have to determine the ALP. In such a situation, burden of
proof on tax authorities is much reduced."

21. Thereafter, the conclusion of the Tribunal was that the taxpayer had to cooperate with
the tax authorities by furnishing relevant information. Further, where the authorities
were of the view that arm's length price was not correctly determined by taxpayer, then
the same could be substituted by arm's length price on the basis of material or
information furnished by the assessee or collected by the Revenue authorities. It was
further held that such arm's length price had to be determined by keeping in mind the
provisions of the Act and also the principles of natural justice and be fair and
reasonable to the taxpayer and any material collected to be used against the taxpayer
was to be put to the taxpayer to explain. It was further held that the adjustments made
on account of arm's length price by tax authorities could be deleted in appeal only if
appellate authorities are satisfied and records a finding that arm's length price
submitted by the assessee was fair and reasonable. The relevant findings of the
Tribunal are as under:-

"133. Having regard to the statutory provisions, particularly the mandate of sections
92(1) and 92D read with relevant rules, we hold that it is obligatory on the part of the
taxpayer to furnish information relating to controlled international transactions, select
a suitable method for determination and furnish ALP of such international transactions
carried by it and give basis and supporting authentic evidence of ALP and adjustments
made. The taxpayer has further to cooperate in the determination of the ALP by the tax
authorities by furnishing all relevant information. The tax authorities in cases where
they are of the opinion that ALP has not been correctly determined by the taxpayer, can
substitute their own ALP on the basis of material or information furnished by the
assessee or collected by them. However, such ALP has to be determined having in mind
provisions of sections 92 and 92C and other rules and regulations. While determining
ALP, tax authorities are bound to follow principles of natural justice and be fair and
reasonable to the taxpayer. Any material collected to be used against the taxpayer is to
be put to taxpayer to explain. Having regard to the purpose of the legislation and
application of similar enactment world over, it must further be held that adjustments
made on account of ALP by tax authorities can be deleted in appeal only if the appellate
authorities are satisfied and records a finding that ALP submitted by the assessee is fair
and reasonable. Merely by finding faults with the transfer price determined by the
revenue authorities (AO/TPO), addition on account of "adjustments" cannot be deleted.
This is because the mandate of section 92(1) is that in every case of international
transaction, income has to be determined having regard to ALP. Therefore, unless ALP
furnished by the taxpayer is specifically accepted, the appellate authorities on the basis
of material available on record has to determine ALP itself. Subject to statutory
provisions, Appellate authorities can direct lower revenue authorities to carry this
 exercise in accordance with law. The matter cannot be left hanging in between. ALP of
international transaction has to be determined in every case."

22. The above said proposition has been laid down by the Special Bench of Bangalore
Tribunal while interpreting the transfer pricing provisions and the principle laid down
by the Special Bench of Tribunal is applicable to the issue before us. The learned
Authorized Representative for the assessee before us has placed reliance on the ratio
laid down by Hon'ble Bombay High Court in Scindia Steam Navigation Co. Ltd. Vs. CIT
(supra), wherein the issue was the applicability of amended provisions of the Act. The
question arising before the Hon'ble Bombay High Court was that in case any provision
has been amended later, were such amended provisions to be applied while completing
assessment of the year which was pending as on the date, on which the amendment
was brought in or as per the provisions which were applicable to the relevant year. The
Hon'ble Bombay High Court did not accept the contention of the learned Departmental
Representative for the Revenue in this regard as it would cause startling results. The
said proposition laid down by the Hon'ble Bombay High Court is not applicable to the
facts of the present case before us, where under the provisions of the Act itself, the TPO
is empowered to substitute the arm's length price on the basis of material or
information furnished by the assessee or collected by him. In case, such an authority
has been delegated to the TPO and in exercise of such authority, certain information is
collected by the TPO, which in turn, is confronted to the assessee and thereon applied
to determine the arm's length price of international transaction, the said exercise of the
jurisdiction by the TPO cannot possibly be questioned. Accordingly, we find no merit in
the reliance placed upon by the learned Authorized Representative for the assessee.
The learned Authorized Representative for the assessee further relied upon on other
decisions which are factually different from the issue before us. Accordingly, we find no
merit in the claim of assessee in this regard and upholding the action of TPO, the
grounds of appeal No.2 and 3 raised by the assessee are dismissed.'
14. The issue arising in the present grounds of appeal No.2 and 4 is identical to the issue before
the Tribunal in assessment year 2006-07 and following the same parity of reasoning, we hold
that the TPO had rightly exercised its powers in selecting the said concern and hence, we find no
merit in the grounds of appeal No.2 and 4 raised by the assessee.

15. The issue in ground of appeal No.3 raised by the assessee is against the use of single year's
data and applying the said data to determine the arithmetic mean of margins of comparables.

16. Similar issue also arose before the Tribunal in assessment year 2006-07 in the remanded
proceedings and vide order dated 16.05.2016, the Tribunal held as under:—

"10. We may first take up the last issue raised by the assessee with regard to adoption of
single year's data. The learned Departmental Representative for the Revenue in this
regard has filed written submissions and has pointed out that under Rule 10B(4) of the
Rules, there is mandate to use only current year's data. In this regard, he further placed
reliance on series of decision by different Benches of Tribunal. He further stated that
the assessee while commenting on the filter of excluding companies, which have
 declining revenue or were making persistent losses, the assessee had argued that it
had used multiple years data for his comparability study, which was denied to the
assessee while computing arm's length price of comparables. He pointed out that there
was no merit in the contention of assessee in this regard and though the Act ordinarily
prohibits use of multiple years data for comparability, the multiple year data in the case
of a comparable could be used only to understand its peculiar circumstances. He
further referred to OECD revised guidelines in this regard, which distinguish between
use of multiple years data for functional analysis and for statistical purposes i.e. for
computing arithmetic mean i.e. para 3.75 to 3.79 of OECD revised guidelines. He
stressed that the assessee has confused the use of multiple years data for functional
analysis of comparables with the use of same for working out the PLI of comparables.
Where comparable companies are selected, margins of the current year only have to be
considered, so that there is no inconsistency. For deciding the issue of use of current
year's data vis-à- vis the use of earlier two years data as canvassed by the learned
Authorized Representative for the assessee at length, the relevant provisions to be
taken note of are Rule 10B(4) of the Rules. Reading the provisions of said Rules, it
provides that for computation of arm's length price, the data pertaining to the financial
year to which the international transaction pertains shall alone be used. The word used
in the Rule is "shall" and hence, the provisions of Rule 10B(4) of the Rules which
provides the computation of procedure for working out the arm's length price under
section 92C of the Act are to be applied. Under the proviso, it is further provided that
earlier year's data relating to up to two years may also be considered to analyze, if
certain facts had an influence on the determination of transfer price in relation to the
transactions being compared. Reading the provisions of the Act, it entails that the
earlier years data can be used in conjunction with the current year's data in case where
the data revealed the facts influencing the determination of transfer pricing in the year
under consideration. Both the OECD guidelines and Rule 10B(4) of the Rules in the main
provisions provided that the data to be used for analyzing the comparability of
uncontrolled transactions with international transaction shall be the data relating to
financial year in which international transaction had been entered into.

11. Similar issue arose before the Pune Bench of Tribunal in Eaton Industries Pvt. Ltd. v. ACIT
in ITA No.1622/PN/2011, relating to assessment year 2007-08 and the Tribunal vide
order dated 28.02.2013 deliberated upon the issue of use of single year's data as
against the claim of assessee to compute the PLI of comparables on the basis of
multiple years data i.e. inclusive of preceding two years. The Tribunal in this regard
observed as under:-

"7. Another aspect which has been canvassed by the assessee is to the effect that the
TPO has bench-marked the international transactions of the assessee after computing
the PLI of the comparable companies based on financial data of the relevant financial
year 2006-07 alone, as against assessee's claim to compute PLI of the comparable cases
on the basis of multiple year's data inclusive of preceding two years. On this aspect, the
assessee contended that use of a single year data i.e. for F.Y. 2006 -07 for determining
the PLI of the comparable cases is not justified and that it would be more appropriate
to consider the financial data available of the comparable companies for a period of
earlier two years i.e. 2004-05 and 2005-06 also. It is canvassed that at the time of
conducting transfer pricing study by the assessee, the financial information of the
comparable companies for the earlier two years was available and therefore, in terms
of Rule 10B(4) of the Income Tax Rules, 1962 (in short 'the Rules') such data was
permissible to be utilized. Similar objections have been reiterated even before us. In
this connection, we find that for determination of ALP u/s 92C(2) of the Act, the manner
is prescribed in Rule 10B of the Rules. In terms of Rule 10B(4) of the Rules, it is provided
that the data to be used in analyzing the comparability of an uncontrolled transaction
with an international transaction shall be the data relating to the financial year in which
the international transaction has been entered into. Therefore, on a bare reading of
rule 10B(4) of the Rules, no fault can be found with the stand of the TPO in determining
the PLI of the comparable companies on the basis of financial data for F.Y. 2006 -07
which corresponds to the assessment year under consideration in which the impugned
'international transactions' have been carried out. So however, the proviso to Rule
10B(4) of the Rules prescribes that data relating to a period, not being more than two
years prior to such financial year, may also be considered if such data reveals facts
which could have an influence on the determination of transfer price in relation to the
transactions being compared. The said proviso is sought to be invoked by the assessee
to justify its claim that the financial information of the comparable companies for
earlier two financial years of 2004-05 and 2005-06 be also considered. Before us, the
learned counsel for the assessee submitted that there was justification for invoking of
the proviso to Rule 10B(4) inasmuch as there is a variation in average PLI of the four
comparable cases adopted by the assessee based on the single year data vis-à-vis the
PLI computed after the use of multiple year's data. It was pointed out that after using
multiple year's data of the four comparable cases, the average PLI came to 10.98%
whereas the average PLI for the same set of four comparable cases after using single
year's data for F.Y. 2006 -07, came to 27.04%. It was therefore, submitted that the
aforesaid variation reveals that the same is capable of influencing determination of
transfer pricing in relation to international transaction in question and thus the proviso
to rule 10B(4) is justifiably invoked in the present case by the assessee.

8. Ostensibly, the use of multiple years' data on one hand and the use of single year
data on the other hand in the present case shows difference in average PLI of the four
comparable cases. So however, the same does not meet with the requirements of
invoking the proviso to Rule 10B(4). Pertinently, the proviso can be invoked in a
situation where "data reveals facts which could have an influence on the determination
of transfer prices in relation to the transactions being compared". The variation in PLI
by itself is not a fact to justify invoking of the said proviso, rather what is required is to
show that the data reveals certain facts which could possibly have an influence on
determination of the transfer price. Quite clearly, the assessee has not demonstrated
any qualitative peculiarities in the data which reveal facts that are potent to justify
invoking of the proviso to Rule 10B(4) of the Rules in the present case. We therefore,
find that in the present case, the TPO made no mistake in considering single year's data
pertaining to F.Y. 2006 -07 to arrive at PLI of the comparable cases in order to
 determine the transfer price of the impugned international transactions of the
assessee. Thus, on this aspect, the assessee has to fail.

12. Several Benches of Tribunal have also held that single year's data is to be used while
computing the PLI of comparable companies. The contention of the assessee that by
multiple years data of the comparable companies, the average PLI of set of
comparables would be within +/-5% margins cannot be applied as the variation in PLI by
itself does not justify invoking of the said proviso. The assessee has to establish that the
data reveals certain facts which could have the influence on the determination of
transfer price. Where we find that the assessee before us has failed to demonstrate any
qualitative peculiarities in the data which would justify invoking the proviso to Rule
10B(4) of the Rules in the present case and hence, we find no mistake in the order of
Assessing Officer in considering the single year's data pertaining to assessment year
2006-07 to arrive at the PLI of comparable cases in order determine the transfer price
of international transaction conducted by the assessee. Thus, the ground of appeal
No.5 raised by the assessee in this regard is rejected."
17. In the year under appeal also, where the assessee has failed to demonstrate any qualitative
clarities in the data which would justify invoking of the proviso to Rule 10B(4) of the Income Tax
Rules in the present case and hence, we find no mistake in the order of Assessing Officer/TPO in
considering single year's data pertaining to assessment year 2007-08 in order to arrive at the PLI
of comparable cases while applying transfer pricing provisions. The ground of appeal No.3
raised by the assessee is thus, dismissed.

18. The issue in ground of appeal No.5 raised by the assessee is against selection of companies.

19. The assessee is aggrieved by the incoherent approach of the TPO for selection/rejection
criteria of comparable companies, wherein the TPO had selected Gujarat Poly-Avx Electronics
Ltd. to be functionally comparable and on the other hand, having rejected Keltron Components
Complex Ltd., Keltron Resistors Ltd. and Keltron Electro Ceramic Ltd. i.e. Keltron group
companies as being not functionally comparable. It may be pointed out herein itself that Keltron
Group of companies were owned by the Government. The plea of the assessee was that there
was no merit in rejection of said concerns. The TPO was of the view that all four companies were
government companies having other than profit motives operations and also the said concerns
were referred to BIFR because of persistent loss making and hence, were to be rejected. The
other concerns i.e. Gujarat Poly-Avx Electronics Ltd. was selected by the assessee to be
functionally comparable for the past four years. The DRP in their directions have also pointed
out that Keltron Component Complex Ltd. being government company has other than profit
motive operations and the company was not comparable on FAR basis. It was also the
observations of DRP that out of four concerns of Keltron Group of companies, two companies
were filtered out by the assessee based on FAR analysis in TP report and now the assessee
cannot argue that the same may be included. Further, there was eroding of net worth of said
concerns because of persistent loss making. The learned Authorized Representative for the
assessee pointed out that rejection of said concern was before the Tribunal in assessment year
2006-07, wherein vide order dated 25.05.2012, the Tribunal had considered the issue. He then,
referred to the financial profile of the said concern and pointed out that employee/sales costs
ration of the two concerns need to be looked into, wherein the average was 13.97% which was
comparable to 16.84%. He further stressed that the same facts relied upon to reject the Keltron
group companies have been ignored to include Gujarat Poly-Avx Electronics Ltd. He referred to
the Paper Book and pointed out that even Gujarat Poly-Avx Electronics Ltd. had negative net
worth and has been referred to BIFR because of persistent loss making concern. He further
pointed out that where the assessee was manufacturing capacitors and resistors which were
being supplied to the associate enterprises, then such concerns should not be considered. He
stressed that first of all, there was no need to depart from earlier years order since there was no
difference in facts and issues and in case Keltron group companies were excluded, then Gujarat
Poly-Avx Electronics Ltd. also needs to be excluded.

20. The learned Departmental Representative for the Revenue stressed that where the assessee
himself had selected Gujarat Poly-Avx Electronics Ltd. in assessment year 2006-07, then there is
no merit in his plea for its exclusion. He further pointed out that once criteria was adopted by
the assessee himself during the year to exclude persistent operation loss making companies.
Our attention was drawn to the TP study report at Paper Book 5.49 and remarks of Directors of
Keltron Components Complex Ltd., Keltron Resistors Ltd. and Keltron Electro Ceramic Ltd. He
further pointed out that where the assessee has applied TNMM method, then there is no merit
in looking at the employee cost ratio while benchmarking international transactions.
21. We have heard the rival contentions and perused the record. The issue which is raised by
way of ground of appeal No.5 is against the orders of authorities below in selecting Gujarat Poly-
Avx Electronics Ltd. as comparable and rejecting Kerltron Group companies while benchmarking
international transactions of the assessee. The assessee in its TP study report had himself
applied the criteria of rejecting concerns which were persistent loss making and two of the
companies of Keltron Group companies were filtered out by the assessee based on FAR analysis.
In the TP report on the other hand, Gujarat Poly-Avx Electronics Ltd. was selected by the
assessee in its transfer pricing study. The said concern was also being selected in earlier years.
The assessee states that it was not considered as comparable in financial year 2006-07 i.e. the
year under appeal as it was persistent loss making concern. The issue which needs to be
adjudicated is whether even if the assessee has selected one concern as comparable in the
earlier years, irrespective of change in factual aspects of the said concern, can the same be
excluded. The case of the assessee before us is that the basis for excluding Keltron Group
companies is that the said concerns were government concerns which had negative net worth
and were persistent loss making, even Gujarat Poly-Avx Electronics Ltd. was loss making concern
and was referred to BIFR. In case, there is change in circumstances, then the changed
circumstances have to be taken into account while selecting the companies especially in case
where one of the filters adopted by the assessee was not to take into consideration the
persistent loss making concerns. Accordingly, we find merit in the plea of assessee in this regard.
However, we direct the Assessing Officer to verify the claim of assessee that the said concern is
persistent loss making and has been referred to BIFR.

22. Another aspect which also needs to be considered is that in assessee's own case for
assessment year 2006-07, the Tribunal vide order dated 25.05.2012 had directed the Assessing
Officer to include Keltron group companies in the comparable set on the basis that the
comparable companies could not be rejected merely because it was loss making concern so
long as it satisfies the functional test of comparability and also that merely because the
company was owned by the government could not be the criteria to reject the same. The Income
Tax proceedings for each of the years are independent proceedings and the principles of res
judicata are not applicable but in order to maintain consistency, it is established rule of principle
that the settled issue may not be disturbed. However, in the present case, there is difference in
the factual aspects, wherein the concerns are not simply loss making concerns but persistently
loss making concerns. In case they fall in the category of persistent loss making, then the
margins of said concerns should not be adopted in order to benchmark the international
transactions of the concern which is making supplies to its associate enterprises and which is
market dominant concern. Accordingly, we hold so. We direct the Assessing Officer to verify the
claim of assessee that both the Keltron group companies and Gujarat Poly-Avx Electronics Ltd.
are persistent loss making concerns and if so, then both the concerns are to be excluded from
the final set of comparables while benchmarking the international transactions in manufacturing
segment. The ground of appeal No.5 is thus allowed for statistical purposes.

23. The next issue raised by way of ground of appeal No.6 is against the computation of PLI i.e.
operating margins/operating cost, wherein the claim of assessee was that certain extraordinary
items should be excluded in determining PLI of the assessee concern.
24. Brief facts relating to the issue are that the assessee for the year under consideration had
launched Voluntary Retirement Scheme for its employees, based on which 23 employees opted
for voluntary retirement and the total cost amounted to Rs.1,01,36,664/-. The re-structuring cost
incurred by the assessee was claimed to be for the purpose of managing the business in more
cost effective and efficient manner. Further claim of the assessee before the Assessing Officer
was that since the same was not linked to the activity of manufacturing undertaken by the
assessee, the same should be excluded from the operating expenses while computing PLI of
assessee. The assessee in the TP study report pointed out that the said claim was formulated as
the assessee was making loss and was unable to operate to its full capacities and in order to
retrench the excess labour, the scheme was implemented. This was claimed to be
extraordinary/non-recurring expenditure which ought to be excluded while computing the
margins of assessee. Another aspect pointed out by the assessee was that the said expenditure
was added back in the computation of income and the deduction was claimed in phased
manner. The TPO was of the view that since the cost was incurred during normal business
operations and were incidental to the operations of assessee company, the same were to be
considered as part of operating expenses. Another point raised by the TPO was that the
assessee has failed to demonstrate as to whether the other comparables have incurred such
expenses.

25. Another expenditure incurred by the assessee being start-up cost relating to new project i.e.
Romeo Project was also claimed to be excluded from operating expenses while determining the
PLI of assessee. The assessee in this regard explained that the project was in the nascent stage
with negligible sales and during the year substantial costs were incurred for recruitment of
marketing staff and their training and travel, material cost, etc. Therefore, cost amounting to
Rs.1.10 crore was excluded from the operating cost by the assessee while computing PLI of the
instant year. It was also pointed out that the said cost has been recovered from the associate
enterprises by the assessee in the subsequent years and also no such new expansion or
addition to capacity had taken place in the case of comparable companies. The TPO rejected this
plea of the assessee on the ground that the expenses incurred were not on the cost of new
project but were personnel expenses, which contained neither abnormal cost nor non-operating
cost. The learned Authorized Representative for the assessee stressed that where the start-up
cost has been recovered from the associate enterprises though in the subsequent years, then
the same should be excluded from operating cost in this year. Reference was made to the
provisions of Rule 10B of the Income Tax Rules, wherein it is provided that adjustments were to
be made in case of differences, which could materially affect the amount of net profit margins in
the open market. It was stressed that the comparable companies as identified in the TP study
report had not incurred any start-up activity cost. The DRP upheld the order of TPO/Assessing
Officer and the Assessing Officer in the final assessment order re-computed the PLI of assessee.

26. Before us, the learned Authorized Representative for the assessee pointed out that while
computing the PLI, the assessee had adopted operating profit/operating cost as the Indicator
and certain extraordinary items should be excluded in determining the said PLI. The two items
were VRS expenses and the expenses on new projects i.e. shifting of plant from Belgium to India.
The learned Authorized Representative for the assessee pointed out that in the preceding year,
one plant was shifted from Portugal to Pune and this year another plant was shifted from
Belgium to India and the Tribunal had considered similar issue of exclusion of extraordinary
costs from operating expenses and where the comparable companies had not incurred any
start-up activity cost as was clear from the Annual reports, then the Tribunal vide order dated
25.05.2012 directed the Assessing Officer/TPO to exclude the said cost following the directions
contained in the order of Tribunal in Demag Cranes & Components (India) (P.) Ltd. v. Dy. CIT [2012]
17 taxmann.com 190/49 SOT 610 (Pune).

27. The learned Departmental Representative for the Revenue on the other hand, stressed that
where the start-up cost incurred by the comparables was not criteria of search filters and where
business was progressing, then such cost had to be incurred. He further pointed out that TNMM
method adopted would take care of such cost. Reference was made to the order of TPO in this
regard and it was pointed out that the TPO has come to conclusion that this expenditure on
start-up cost was neither abnormal nor non-operating expenditure. In respect of VRS
expenditure, the learned Departmental Representative for the Revenue pointed out that the
expenditure is part of salary expenditure and when TNMM method is applied, it takes care of the
same and hence, no merit in its exclusion from operating expenses.

28. We have heard the rival contentions and perused the record. The assessee is in appeal
against the orders of Assessing Officer/DRP, wherein the claim of assessee of excluding the re-
structuring cost i.e. VRS expenditure and start-up cost relating to the new project was not
excluded from operating expenses while computing margins of assessee. The first aspect of the
issue is that the assessee for the year under consideration had launched VRS for its employees,
based on which 23 employees have opted for VRS scheme and the total cost amounted to
Rs.1,01,36,664/-. The assessee had added back the said expenses in the computation of income
and the deduction has been claimed in the phased manner. The plea of assessee by way of
ground of appeal No.6 raised before us is that the said expenditure being an extraordinary
expenditure, merits to be excluded from operating cost while determining the margins for
benchmarking the international transactions of the assessee.
29. The second expenditure which is claimed to be excluded from operating cost relating to new
project i.e. Romeo Project, the assessee claims that the said costs were incurred for recruitment
of marketing staff, their training and travel, material cost amounting to Rs.1.10 crore. The
assessee has recovered the said cost from its associate enterprises in the subsequent years.
Another related point raised by the assessee was that where such new expansion/addition to
capacity have not taken place in the hands of comparable companies, then the said expenditure
being an extraordinary expenditure, merits to be excluded from operating cost. Both the
Assessing Officer and DRP have held otherwise saying that these were regular costs incurred by
the assessee in the normal course of carrying on of its business and hence, merits to be part of
operating expenses.

30. The computation of operating profit margins and the exclusion of any extraordinary costs
which are incurred in the specific year and is not regular expenditure and the same should be
excluded from operating cost in order to arrive at the operating profit margin, was considered
by the Pune Bench of Tribunal in the case of Demag Cranes & Components (India) (P.) Ltd. (supra)
and that principle has been applied by the Tribunal in assessee's own case while deciding appeal
for assessment year 2006-07, wherein cost of Rs.2,13,78,619/- pertained to BISFIC project and
Rs.50 lakhs in respect of power capacitor project, were excluded. The relevant observations of
the Tribunal are in 12 to 14, which are being referred but not reproduced for the sake of brevity.
31. The matter has been remitted back to the file of Assessing Officer/TPO to examine the claim
of assessee in the light of directions contained in the order of Tribunal in the case of Demag
Cranes & Components (India) (P.) Ltd. (supra). The issue which arises in the present appeal by the
assessee is to be tested on the basis of principles laid down by the Tribunal in Demag Cranes &
Components (India) (P.) Ltd. (supra) and in case it is found to be extraordinary cost, then the same
is to be excluded from the operating expenses. The second aspect which has to be kept in mind
is that where the comparable companies have not incurred any start-up activity cost or VRS
expenses, then the said expenses are to be excluded being extraordinary cost incurred by the
assessee during the year. Following the directions of Tribunal in preceding year, we direct the
Assessing Officer/TPO to examine the claim of assessee in line with the directions of Tribunal
and decide the issue accordingly. The ground of appeal No.6 is thus, allowed as indicated above.

32. The issue in ground of appeal No.7 raised by the assessee is against non-exclusion of
depreciation while calculating PLI of assessee. The assessee in this regard claimed that it
provides higher rate of depreciation in its books of account as compared to the comparable
companies, which largely followed depreciation rates as provided in Schedule XIV of the
Companies Act. In view thereof, the assessee claimed that OPBDIT be benchmarked against
OPBDIT earned by the comparable companies, because of the difference in depreciation
policies, hence an adjusted PLI i.e. OPBDIT/operating cost would provide better comparison.
Reference was made to Rule 10(B)(1)(e) and 10(B)(3) of the Income Tax Rules which provide for
adjustments to be made in case of differences between international transactions and
comparable uncontrolled transactions. The TPO rejected the claim of assessee relying on the
decision of Hon'ble Karnataka High Court in Akash Films v. CIT [1991] 190 ITR 32/[1992] 60 Taxman
31 holding that the net profit margins normally means profit before tax, computed in
accordance with the accounting principles. With regard to provisions of Rule 10B of the Rules, it
was pointed out that the differences which warrant an adjustment should be such which could
materially affect the amount of net profit margins in open market. The charging of higher
depreciation by the assessee was because of internal policy of the company and would not
affect net profit margins in the open market. The assessee filed objections before the DRP.
Against the objections raised by the assessee before the DRP, no comments were offered by the
Panel. The assessee is aggrieved by non-speaking order of DRP. It was pointed out by the
learned Authorized Representative for the assessee that in view of specific provisions of Rule
10B of the Rules, there was need for economic adjustment to arm's length price for difference in
accounting policies. Reliance in this regard was placed on the ratio laid by the Delhi Bench of
Tribunal in Schefenacker Motherson Ltd. v. ITO [2009] 123 TTJ 509 and the Hon'ble High Court of
Andhra Pradesh in CIT v. B.A. Continuum India (P.) Ltd. [ITTA No.440 of 2014, judgment dated 16-07-
2014].

33. We have heard the rival contentions and perused the record. The assessee is aggrieved by
the non-speaking order of DRP, wherein the plea of assessee that while benchmarking its
international transaction OPBDIT should be benchmarked against OPBDIT earned by the
comparable company because of difference in depreciation policies. The assessee had made the
plea that an adjusted PLI i.e. OPBDIT/Operating Cost could provide better comparison. The
assessee pleads that it was charging higher depreciation because of its internal policies which in
turn, affect the net profits in the open market and hence, the economic adjustment should be
made for difference in accounting policies. The assessee before us is engaged in asset intensive
industry, wherein the gross value of plant & machinery is to the tune of Rs.93 crores and the
cost of total assets is Rs.117 crores (gross value).

34. Another aspect to be noted is that in addition to the depreciation, the assessee has also
claimed heavy repairs and maintenance expenditure i.e. on building of Rs.77.66 lakhs, on plant &
machinery of Rs.3.28 crores and others of Rs.1.41 crores. In such an incident, where depreciation
is significant cost, then a prudent businessman would not ignore the same while benchmarking
its cost.

35. Further, in the initial years when the asset is new then, the depreciation to be allowed is
higher but for the same machinery, depreciation would be lower as the asset ages. When age of
materially same asset is relatably less then depreciation incidence could be much higher. For
example, where the value of asset is 100 and the rate of depreciation is 30, then depreciation
would be 30; in second year of acquisition, depreciation would be 21, in third year it would be
14.7 and in the fourth year, the depreciation would be 10. Such huge variation in depreciation
incidence could make comparison unworkable. But that is not the case here. In such incidence,
the PLI determined by excluding depreciation from the profits for comparison under TNMM
analysis distorts comparability analysis. There are varying opinions whether depreciation could
be taken into account for working out the profits of an enterprise or not. The Bangalore Bench of
Tribunal in Toyota Kirloskar Motors (P) Ltd. v. Asstt. CIT [2012] 28 taxmann.com 293 had in such
circumstances observed as under:—

'19.4.1 We have heard both parties and carefully perused and considered the material on
record including the judicial decisions cited on both sides. There are varying opinions
among experts whether depreciation should be taken into account for working out profits of
an enterprise. One view is that it is not revenue deduction at all. As per that view,
depreciation is only an annual loss in the cost/value of the capital assets due to factors like
age of assets, their usage etc. and therefore allowance of depreciation, being capital in
nature, should find no place in the computation of profits. The opposite view is that
depreciation, though a capital loss, needs to be deducted, to replace the value of assets to
the extent it has depreciated. Be that as it may, in the present case, ALP of the transactions
to be determined by comparing the profits of the assessee with that of the comparable
companies. There are no express statutory provisions which indicate that deduction for
depreciation is a must. Depreciation, which can have varied basis and is allowed at different
rates, is not an expenditure which must be deducted in all situations. It has no direct bearing
or connection on price, cost or profit margin of international transactions. It can therefore
be held that depreciation can be taken into account or disregarded in computing profit,
depending on the context and purpose for which profit is to be computed.

19.4.2 In the case of Schefenacker Motherson Ltd (supra) of the ITAT, Delhi, the issue of whether
depreciation can be excluded for comparison has been discussed at length and it was held
in para 22 thereof that -

" ….. The basic issue involved was whether the cost paid or charged for international
transactions was at arm's length or not. The factors which go to influence price, cost or
profits are/were relevant for computing profit and not depreciation having no direct
connection with price or profit but responsible for wide differences. The case of revenue is
not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is
leading to differences, then differences are required to be adjusted, as required by the IT
regulations. There is no way to dislodge the claim of the tax payer. The context and purpose
of legislation and facts of the case overwhelmingly approve adoption of cash profit only."

This case was relied upon by the assessee in support of its proposition that cash PLI or
PBDIT is the appropriate PLI.

19.4.3 We find that the above finding of the Tribunal was given as the case of revenue was
not clear and the TPO had rejected cash PLI without assigning any reasons. Subsequently,
the Mumbai, ITAT, in the case of Fiat India Pvt Ltd (supra) held that in an asset intensive
industry where assets are the key drivers, excluding depreciation would not lead to any
meaningful outcome and PBIT and not PBDIT is to be taken for computing PLI. The assessee
in the instant case is also similarly in the asset-intensive industry of automobile
manufacturing like the assessee in the cited case (supra), where depreciation is a significant
cost, which no prudent businessman would ignore while pricing a passenger car. In such an
instance, when the price is determined by considering the depreciation cost, excluding
depreciation from the profits for comparison under TNMM distorts the comparability
analysis. We are therefore of the opinion that in view of the finding of the Mumbai ITAT in the
case of Fiat India Pvt Ltd (supra) in which the assessee therein is in the asset intensive
automobile industry, as is the assessee in the present case, that cash PLI or PBDIT to sales is
not the appropriate PLI and also note that the TPO has given depreciation adjustment for
differences in relative level of depreciation cost with reference to sales. We, therefore,
dismiss this ground raised by the assessee.'
36. The learned Authorized Representative for the assessee has placed heavy reliance on the
ratio laid down by the Delhi Bench of Tribunal in Schefenacker Motherson Ltd. (supra), but the same
has been distinguished by the later decision of Bangalore Bench of Tribunal in Toyota Kirloskar
Motors (P.) Ltd. (supra), where reliance is placed on the decision of Mumbai Bench of Tribunal in
Fiat India (P.) Ltd. v. Dy. CIT (2010- TIOL-30-ITAT -Mum-TP). Hence, we find no merit in the said
reliance placed upon by the learned Authorized Representative for the assessee.

37. Another reliance which was placed upon by the learned Authorized Representative for the
assessee is on the ratio laid down by the Hyderabad Bench of Tribunal in the case of B.A.
Continuum India (P.) Ltd. (supra), wherein the issue was against the order of TPO while calculating
the PLI had considered the profit before depreciation but had failed to exclude the same in
denominator i.e. Operating Cost/Total Cost which as per the assessee resulted in erroneous
computation of PLI of the assessee company as well as that of comparable companies. The
Tribunal in such circumstances had held that the depreciation has impact on the profit margins
of the assessee and hence, adjustment had to be made. The Hon'ble High Court of Andhra
Pradesh had upheld the said order of Tribunal. However, the said issue does not arise in the
present case and hence, the same is not applicable being factually different. Accordingly, where
the fixed assets drives revenues of manufacturing enterprise and where depreciation is
significant cost component to be accounted for, then such depreciation could not be disregard
for transfer pricing purposes while benchmarking international transaction under TNMM
method. The exclusion of depreciation would distort the comparability analysis, therefore, cash
profit or PBDIT could not be adopted as the PLI.
38. The Delhi Bench of Tribunal in a later decision in Dy. CIT v. Sumi Motherson Innovative Engg. Ltd.
[2014] 150 ITD 195/42 taxmann.com 242, where the company manufactured models, dyes,
molted components and provided consultancy services to associate enterprises, held that
under TNMM method, net profit margin was the starting point for determining arm's length
price. It was further held that net profit margin was synonymous to net operating profit, which
meant profit from business activity after considering all direct and indirect costs and after
excluding non-operating incomes and expenses. Thus, all operating expenses were required to
be taken into account. The Tribunal thus, held that the assessee in that case could not substitute
the net operating profit with cash profit and the TPO was justified in adopting the operating
profit/sales as the PLI. The assessee therein further contended that if depreciation had to be
taken into account for determining the arm's length margin, then it was entitled to make an
appropriate adjustment on account of higher depreciation charged during the relevant tax
period due to change in the depreciation policy. The said plea of the assessee was also rejected
since the change in policy was only in respect of some of the assets, otherwise the depreciation
method had not changed. The plea of the assessee that suitable adjustment was warranted
because of assessee's ratio of depreciation/sales was at 24% as compared to the average ratio
of 5.48%, in case of comparable companies, was held to be irrelevant because depreciation had
to be reckoned with cost of assets rather than sales. Another plea of the assessee that the TPO
had accepted CP/S as PLI for subsequent tax period and to be applied in accordance with rule of
consistency was also rejected as for two years subsequent to the relevant tax year the TPO had
rejected the CP/S.
39. Further, in another decision of Delhi Bench of Tribunal in Honda Motorcycle & Scooters India (P.)
Ltd. v. Asstt. CIT [2015] 56 taxmann.com 237/154 ITD 21 involving the manufacturing enterprise
where the TNMM method was adopted as most appropriate method, the Tribunal held that for
the for purpose of TNMM, "operating profits" as envisaged under the relevant Indian Transfer
Pricing Rules embraced cumulative effect of all items of operating income and expenses. In
other words, it was not permissible to consider individual items of revenue and expenses. The
Tribunal held as under:—

"… when we consider the operating profit margin, the effect of all the individual higher or
lower items of expenses or income gets subsumed in the overall operating profit margin,
ruling out the need for any adjustment on comparison of one-to-one items resulting into the
determination of the operating profit margin."

40. However, the Tribunal acknowledged that the differences in amounts of depreciation in case
of tested party vis-à-vis comparables due to different depreciation rates called for appropriate
adjustment.

41. We further find support from the ratio laid down in recent decision by the Hon'ble Bombay
High Court in CIT v. Welspun Zucchi Textiles Ltd. [2017] 77 taxmann.com 137, where the question
raised before the Hon'ble High Court was as under:—

"(ii) Whether on the facts and in the circumstances of the case and despite the prescription
of parameters of comparability by Rule 10B(2) of the Income Tax Rules, 1962, the Tribunal
was correct in law, in directing the inclusion of DEPB in turnover and depreciation in net
profit for the purpose of profit margin of comparables and assessee?"

42. The Hon'ble High Court held that the depreciation is to be included as operating expenses to
determine the operating cost of the assessee and the comparables. The question before the
Hon'ble High Court was the comparability between profit margins of assessee and the
comparables in view of the parameters of comparability under Rule 10B(2) of IT Rules. The
Hon'ble High Court has held as under:—

"4 …..

(a)….

(b)….

(d) We find that so far as exclusion of DEPB benefit in arriving at the operating profit of
the respondent assessee is concerned, the order of the Tribunal for the Assessment
Years 2005-06 and 2007-08 were appealed by the Revenue to this Court. Mr. Suresh
Kumar, learned Counsel appearing for the Revenue very fairly states that this very issue
was raised by the Revenue in its appeal before this Court for the earlier assessment
years being Income Tax Appeal No.1827 of 2013 relating to A.Y. 2005 -06 and Income Tax
Appeal No.171 of 2014 relating to A.Y. 2007-08. However, this Court by orders dated
22nd September, 2015 for A.Y. 2005-06 and 1st July, 2016 for A.Y. 2007 -08, dismissed the
Revenue's appeal. In the above view, the issue with regard to the exclusion of the DEPB
 benefit stands concluded by virtue of order of this Court against the Revenue and in
favour of the respondent assessee.

(e) So far as depreciation is concerned, we find that the analysis done by the Tribunal to
include DEPB benefit to hold it to be an operating revenue to determine operating
profit, would be equally applicable in case of depreciation for the purposes of holding it
to be an operating expenses to determine operating costs. It must be borne in mind
that the depreciation which is incurred by the comparables are not being excluded
before arriving at the total cost while applying the TNMM method for the purposes of
determining the ALP price of the respondent assessee's export to its Associate
Enterprise. The comparison to determine the ALP has to the extent possible has to be
done between like to like and similar to similar. One sided exclusion would lead to
distortion in comparison."
43. In view of above said, we hold that where the assessee is engaged in the business of
manufacture of resistors and capacitors which in turn, are used in various electronic
applications and products and where the assessee's manufacturing facilities are established
separately for the domestic tariff area and for export oriented unit and the items manufactured
by the are used in different products which contained electronic circuits and has wide
application in different spheres, there is no merit in the claim of assessee in adopting the cash
PLI or PBDIT as the PLI. We dismiss the plea of the assessee in this regard.

44. In the written note filed, the assessee had made submissions for differential depreciation
adjustment which was without prejudice to his claim. The assessee claims that the rate of
depreciation i.e. depreciation/average written down value charged by the assessee at 17.97%
was higher than average rate of depreciation charged by the comparable companies i.e. 12.07%.
The assessee submits that excess depreciation should be excluded while computing operating
margins of the assessee. We find no merit in the said plea of the assessee under Rule 10B(1)(e)
(iii) of the Rules, adjustment if any, has to be made in the hands of comparables and not in the
hands of tested party. We dismiss the plea of the assessee in this regard. However, in case the
assessee is able to establish that there is material difference in the claim of depreciation by the
assessee vis-à-vis comparables, then suitable adjustment may be allowed in the hands of
comparables after due verification by the Assessing Officer/TPO.

45. Another related aspect of the issue is that the assessee has mentioned that no comments
were offered by the DRP against the objections raised by the assessee. However, the assessee
has not asked for remitting back to the file of DRP but had argued the issue at length and hence,
we have decided the said issue and since full opportunity has been given to the assessee, it
fulfills the principles of natural justice.

46. One last aspect of the issue is that the stand of exclusion of depreciation from the operating
cost was accepted in earlier year by the TPO and the DRP. In case the stand has been accepted
by the TPO, then where is the need of any decision of DRP. Such submission has been made in
the written note filed by the assessee, however, the same is not reconcilable and hence, same is
dismissed. In any case, rule of consistency does not apply to IT proceedings and as held in Sumi
Motherson Innovative Engg. Ltd. (supra), there is no justification in pressing into service rule of
consistency, where different stands have been taken in different years. Accordingly, we hold so.
47. The issue raised by way of grounds of appeal No.8 and 9 is non- allowance of capacity
utilization while computing the margins of assessee company.

48. The learned Authorized Representative for the assessee pointed out that the fixed cost
remained variable and where the capacity utilization of comparable companies was higher, then
the adjustment on account of non utilization of capacity should be allowed in the hands of
assessee. The learned Authorized Representative for the assessee fairly pointed out that the
unit of assessee was established in 1999 and the year under appeal was financial year 2006-07.

49. The learned Departmental Representative for the Revenue strongly opposed the claim of
assessee and relied on the order of CIT(A).

50. We have heard the rival contentions and perused the record. We have adjudicated the issue
relating to transfer pricing in the paras hereinabove. The unit of assessee was established in
1999 and the year under appeal is financial year 2006-07. The assessee claims that since the
capacity utilization of comparables was higher, then it should be allowed adjustment on account
of capacity utilization. While deciding the ground of appeal No.6, the assessee had asked for
deduction out of operating expenses on account of extraordinary items and one of the items
was the amount paid under VRS scheme. On one hand, the assessee says that its capacity is not
fully utilized and on the other hand, it retrenches its staff during the year by offering VRS
scheme.

51. The first aspect to be noted is that under Rule 10B(1)(e)(iii) of the Act, adjustments for
variations is to be provided which could materially affect the amount of net profit margin in the
open market in Comparable Uncontrolled Transactions, then adjustments are to be made in
respect of net profits realized by the comparable transactions or enterprises. In other words,
adjustment, if any, on account of capacity under-utilization is not to be made in the profits
earned by the tested party i.e. assessee but in the hands of comparables. So, we find no merit in
the claim of assessee that capacity utilization adjustment should be allowed in the hands of
assessee.
52. The second aspect of the issue is that whether such capacity under- utilization adjustment
could be provided in the hands of comparables. The Delhi Bench of Tribunal in Dy. CIT v. EDAG
Engineers & Design India (P.) Ltd. [2014] 50 taxmann.com 322 while considering the case of captive
service unit had denied the claim of adjustment on account of under-utilization of capacity
observing as under:—

"5 ……That apart, in the case of a one hundred percent captive service unit, as is the
assessee before us, the very concept of capacity underutilization may not really make
any sense unless the assessee has not been able to offer, for reasons beyond its
control, the underutilized capacity to its AE. There is no finding on this aspect of the
matter. As the assessee does not have the liberty to work for any other customer, and
is wholly dependent on its AE for productive use of its capacity to work, the AE should
normally make good any losses to the captive unit caused by its not being able to make
use of the available capacity. "
53. The assessee before us is also captive service provider which was established in 1999 and in
the absence of assessee having brought on record any reasons for under-utilization of capacity
to be provided to associate enterprises, we find no merit in the claim of the assessee.

54. The learned Authorized Representative for the assessee has placed reliance on the ratio laid
down by the Pune Bench of Tribunal in NORD Drive Systems (P.) Ltd. v. ACIT in ITA No.158/PN/2014,
relating to assessment year 2009-10, order dated 30.03.2016 and in Tasty Bite Eatables Ltd. v. Asstt.
CIT [2013] 59 taxmann.com 437 (Pune), relating to assessment year 2007-08, order 10.06.2015.
However, the factual aspects are at variance where the units were in their initial stage of
establishment and the claim of assessee for allowing adjustment on account of capacity
utilization is rejected. The grounds of appeal No.8 and 9 are thus, dismissed.

55. The issue raised by way of ground of appeal No.10 is to allow adjustment on account of
differences in working capital employed by the assessee and the companies considered as
comparables.

56. Similar issue was raised in assessment year 2006-07 and the Tribunal vide order dated
25.05.2013 vide para 21 has remitted the issue back to the file of Assessing Officer/TPO to
examine the claim of assessee relating to working capital adjustment and eliminate such
difference, if any, as would materially affect the profit margins, following the same parity as in
Demag Cranes & Components (India) (P.) Ltd. (supra) and as per law. Following the same parity of
reasoning, the issue is remitted back to the file of Assessing Officer to examine the claim of
assessee vis-à-vis working capital adjustments, if any, to be carried out in the hands of
comparables as per law. The ground of appeal No.10 raised by the assessee is thus, allowed for
statistical purposes.

57. The next issue raised by way of ground of appeal No.11 is against the non-allowance of
benefit of provision available to the assessee under the proviso to section 92C(2) of the Act.
58. The learned Authorized Representative for the assessee pointed out that the issue is
covered in favour of assessee, wherein the Tribunal vide order dated 25.05.2013 in para 16 had
restored the matter back to the file of Assessing Officer. However, we find that the issue of
computing adjustment without giving benefit of provision available to the assessee under the
proviso to section 92C(2) of the Act for +/- 5% stands decided against the assessee and following
various decisions on this issue, this ground of appeal raised by the assessee is thus, dismissed.

59. The issue raised by way of ground of appeal No.12 under transfer pricing provisions is
against computation of transfer pricing adjustment with reference to total turnover of exports,
computing and restricting the same with reference to the value of international transactions.
This issue also has been adjudicated by the Tribunal in assessment year 2006-07 vide paras 25
and 26 order dated 25.05.2012, wherein the plea of assessee that transfer pricing adjustment, if
any, was to be made to the total income of the assessee, then the same should only with
reference to international transactions of the assessee with associate enterprises and not with
reference to total turnover, is accepted and the Assessing Officer was directed to determine the
arm's length price of international transactions accordingly. The relevant findings of Tribunal are
in paras 25 and 26 which we are being referred but not reproduced for the sake of brevity.

60. The issue arising by way of ground of appeal No.12 is identical to the issue before the
Tribunal in assessment year 2006-07 and following the same parity of reasoning, we hold that
the transfer pricing adjustment, if any, is to be made to the total income of assessee, then the
same should only be with reference to international transactions of assessee with its associate
enterprises and not with reference to total turnover. The Assessing Officer is thus, directed to
determine the arm's length price of international transactions accordingly. The ground of appeal
No.12 is thus, allowed.

61. Now, coming to the corporate issues raised by way of grounds of appeal No.13 to 18. The
first issue raised by the assessee by way of ground of appeal No.13 i.e. disallowance of stock
written off in DTA unit. The assessee is aggrieved by the order of Assessing Officer in disallowing
deduction claimed on account of stock written off amounting to Rs.27,35,991/-.

62. Brief facts relating to the issue are that for the year under consideration, the assessee had
made provision of obsolete stock of Rs.1,10,86,370/- which comprised of raw material to the
extent of Rs.75,61,653/- and finished goods of Rs.35,24,717/-. The assessee had added back the
same in the computation of total income and only actual obsolete stock written off during the
year totaling Rs.27,35,991/- was claimed as deduction from total income. The assessee claims
that it was maintaining system of recognizing obsolete stock on account of several reasons i.e.
old stock, damage materials, self life expiry goods, against which there were no orders or lower
orders, finished goods written off by the customers, etc. The claim of assessee was that the
accounting policy of providing for obsolete stock and subsequent write off when the stock was
actually written off in the books of account was practice which was consistently followed on year
to year basis. The internal control procedure was applied by the assessee for write off of
obsolete stock which in turn, is approved by internal management teams in respect of write off
of major items of stock along with corresponding copies of tax invoices evidencing the payment
of Excise duty on the stock along with CENVAT credit registers corresponding to the above write
off. The Assessing Officer on the other hand, did not accept the contention of assessee since the
issue was decided in favour of the Revenue in assessee's own case in assessment year 2006-07.
The DRP observed that the assessee had not provided evidence that the stock had actually
become obsolete and non-movable and also the assessee did not produce Excise registers and
other certificates which were requisitioned to justify the claim. The internal correspondence filed
by the assessee was held to be insufficient by the DRP and hence, the contention of assessee
against the write off of old stock was disallowed.

63. The assessee is in appeal against the order of Assessing Officer in adopting the aforesaid
disallowances.

64. The plea of assessee before us is that the assessee had made provision for obsolete stock of
Rs.1.10 crores during the year but the same was added back in the computation of income and
only actual obsolete stock written off during the year of Rs.27,35,991/- was reduced from the
total income. He further stressed that the accounting policy of providing of obsolete stock and
subsequent write off was followed by the assessee consistently on year to year basis and the
internal control procedure was sufficient to justify the write off. Reliance was placed on series of
decisions for allowance of write off of obsolete stock as allowable business deduction under the
provisions of section 28/37(1) of the Act. The assessee pointed out that the sample copies of
Excise registers in form RG-1 for finished goods and RG-23D for imported finished goods with
corresponding write off was filed and available at pages 18.1 to 18.91 of Paper Book. Further, the
assessee had also provided the relevant extracts corresponding to write off and the tax invoices.
He further stated that the issue now stands covered by the order of the Tribunal in assessee's
own case relating to assessment year 2006-07. However, the issue was sent back to the
Assessing Officer because of additional evidence, whereas for the year under consideration, all
evidences were produced but because of earlier year, the said expenditure was disallowed in the
hands of assessee. The Tribunal in ITA No.133/PN/2011 relating to assessment year 2006-07, in
the remanded proceedings vide order dated 16.05.2016 vide paras 23 to 26 had adjudicated the
issue of write off of stock and the matter was set aside to the file of Assessing Officer, in view of
additional evidence filed before the Tribunal.

65. The learned Departmental Representative for the Revenue placed reliance on the orders of
authorities below.

66. We have heard the rival contentions and perused the record. The issue arising in the present
appeal vide ground of appeal No.13 is against the disallowance of obsolete stock written off in
the DTA Unit amounting to Rs.27,35,991/-. The assessee claimed that it was following the policy
of recognizing obsolete stock and writing off part of the stock. During the year under
consideration, the assessee had made provision for obsolete stock to the extent of Rs.1.10
crores but had written off only an amount of Rs.27,35,991/- and the same was claimed as
deduction in the return of income. The provision made of Rs.1.10 crore was added back in the
computation of total income. The assessee claims that it is maintaining systematic manner of
recognizing obsolete stock and its write off subsequently, which system has been followed from
year to year. The assessee further claims that it had Internal Control Procedure which enables
for such write off of such obsolete stock. The assessee has furnished certain information before
the Assessing Officer but the authorities below disallowed the claim in the hands of assessee
since similar claim was disallowed in assessment year 2006-07. The Tribunal in remanded
proceedings in ITA No.133/PN/2011, relating to assessment year 2006 -07 vide order dated
16.05.2016 had remanded back the issue to the file of Assessing Officer vide paras 23 to 26 since
the additional evidence was filed before the Tribunal in respect thereof. The plea of the assessee
for the year under appeal is that all the evidences were before the Assessing Officer. However,
we find that the Assessing Officer has not considered the said evidence since the matter was
already decided against the assessee in assessment year 2006-07 and following the same, the
amount was disallowed. The assessee has also furnished certain additional evidences in this
regard i.e. evidence relating to the amount of stock written off in the case of raw materials and
manufactured finished goods with monthly returns and in case of finished goods trading with
quarterly Excise returns filed by the assessee. The Assessing Officer is directed to consider the
said evidences while adjudicating the issue raised. We remit this also back to the file of Assessing
Officer, who shall verify the claim of assessee and decide the issue in accordance with law. The
ground of appeal No.13 raised by the assessee is thus, allowed for statistical purposes.

67. Now, coming to the ground of appeal No.15 wherein the issue raised is against reduction of
insurance and communication expenses from export turnover and not from total turnover while
computing deduction under section 10B of the Act.

68. The learned Authorized Representative for the assessee pointed out that in case ground of
appeal No.15 is decided in favour of the assessee, ground of appeal No.14 would become
academic. The Assessing Officer while completing assessment had re-computed the deduction
under section 10B of the Act by reducing the insurance and communication expenses from
export turnover. The Assessing Officer was of the view that the insurance expenses of
Rs.2,52,600/- and communication expenses of Rs.4,27,800/- were to be reduced from total
turnover and the deduction under section 10B of the Act was re-computed at Rs.62,32,216/- as
compared to the claim of assessee at Rs.62,39,187/-. The assessee filed objections against the
order of Assessing Officer and pointed out that out of total communication expenses of
Rs.4,27,800/-, only some portion of expenses should be reduced from export turnover/total
turnover provided the expenses have been incurred in foreign currency and are attributable to
delivery of exports. It was the case of assessee that since none of the expenses were incurred in
foreign currency, hence no amount is to be reduced.

69. With respect to insurance expenses, it was pointed out that insurance cost amounting to
Rs.2,52,600/- pertains to transit risk insurance and the said amount was included both in import
and export transactions. Thus, only small portion was to be excluded from the export/total
turnover, in case expenses were incurred in foreign currency. Since none of the amounts were
incurred in foreign currency, no amount was to be allowed. The DRP directed the Assessing
Officer to re-examine the claim of assessee and re-work the expenses to be reduced from export
turnover as per clause (iii) of Explanation 2 to section 10B of the Act. The plea of the assessee
that only the expenditure incurred in foreign exchange should be reduced from the export
turnover/total turnover was brushed aside by the DRP. The Assessing Officer consequently, in
the final assessment order re-computed the deduction claimed under section 10B of the Act and
disallowed the same, against which the assessee is in appeal.
70. The learned Authorized Representative for the assessee contented before us that in case the
expenses under consideration were to be reduced from export turnover, then the same are also
to be reduced from total turnover. In this regard, reliance was placed on the definition of term
'total turnover' provided under section 80HHC of the Act and it was pointed out that sum of
export turnover and domestic turnover would constitute total turnover and in case certain
expenses are to be excluded from export turnover, then the same are to be excluded from the
total turnover also.

71. Similar issue of re-working of deduction under section 10B of the Act by excluding insurance
and communication expenses from the total turnover arose before the Tribunal in assessment
year 2006-07 and the Tribunal vide order dated 25.05.2012 decided the said issue vide paras 27
to 35 and the issue was set aside to the file of Assessing Officer to determine appropriate
amount of communication and insurance expenses that were attributable to export outside
India which is to be excluded both from the figure of export turnover as well as total turnover
and thereafter, re-work the deduction under section 10B of the Act. Reliance was placed on the
ratio laid down by the Special Bench of Tribunal in ITO v. Sak Soft Ltd. [2009] 30 SOT 55 (Chennai)
and the Hon'ble Bombay High Court in CIT v. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175/[2010]
194 Taxman 192. The relevant paras of the Tribunal are in paras 32 to 35, which we are being
referred but not reproduced for the sake of brevity.

72. The issue arising in the present appeal raised by the assessee is identical to the issue before
the Tribunal in assessment year 2006-07 and following the same parity of reasoning, we remit
this issue also back to the file of Assessing Officer to determine the appropriate amount of
insurance and communication expenses which are attributable to the exports made by the
assessee and the same are to be excluded both from the export turnover and total turnover.
Consequently, the ground of appeal No.15 raised by the assessee is allowed as indicated above
and the ground of appeal No.14 thus, becomes academic.

73. Now, coming to the ground of appeal No.16 raised by the assessee which is against re-
computation of deduction under section 10B of the Act by setting off of brought forward losses
of eligible unit and all the other units before computing deduction under section 10B of the Act.
The assessee is aggrieved by the order of Assessing Officer in not allowing the deduction under
section 10B of the Act being undertaking specific deduction.

74. The learned Authorized Representative for the assessee fairly pointed out that similar issue
had arisen before the Tribunal in earlier years also i.e. in the remand proceedings and the issue
has been decided by holding that the deduction claimed is unit specific and the same is
computed before adjusting brought forward losses, depreciation from eligible unit or other unit.
The relevant observations of the Tribunal are in paras 29 and 30 which read as under:—

'29. We find that similar issue of computation of deduction under section 10B of the Act vis-
à-vis brought forward unabsorbed depreciation arose before the Tribunal in
assessment year 2005-06 and the Tribunal vide paras 27 to 29 observed as under:-

"27. We have heard the rival contentions and perused the record. The issue arising vide
ground of appeal No.3 is in relation to the computation of deduction under section 10B
of the Act after the amendment to section w.e.f. 01.04.2001. The persons invoking the
said provisions are entitled to a deduction under the Act, as compared to the pre-
amended provisions of the section, under which the income comprising under the said
section was exempt from the total income. The issue arising before us is whether while
computing deduction under section 10B of the Act, in cases where the assessee has
unabsorbed losses or depreciation, brought forward from earlier years, then whether
the said unabsorbed business losses/depreciation are to be adjusted from the gross
total income before allowing the deduction under section 10B of the Act or the said
losses or the deduction under section 10B of the Act is to be allowed in the hands of the
assessee without considering the brought forward unabsorbed losses/depreciation,
which can be set off against the other income of assessee. Both the authorities below
had denied the claim to the assessee, in view of the ratio laid down by the Hon'ble
Supreme Court in Himasingka Seide Ltd. v. CIT (supra). The perusal of the judgment of
Hon'ble Karnataka High Court in the said case reflects that the years under appeal
related to assessment years 1988-89 to 1990-91 i.e. the years where the benefit under
section 10B of the Act was for being exempt from total income. However, the year
under appeal before us is assessment year 2005-06, wherein the said section has been
amended and the deduction now is allowable to the assessee as against the said
income being exempt in the earlier years. The issue is settled by the Hon'ble Bombay
High Court in CIT v. Black & Veatch Consulting Pvt. Ltd. (2012) 348 ITR 72 (Bom), wherein it
was held as under:-
"The deduction under s. 10A, has to be given effect to at the stage of computing the
profits and gains of business. This is anterior to the application of the provisions of s.72
which deals with the carry forward and set off of business losses. A distinction has been
made by the Legislature while incorporating the provisions of Chapter VI-A. Section
80A(1) stipulates that in computing the total income of an assessee, there shall be
allowed from his gross total income, in accordance with and subject to the provisions of
the Chapter, the deductions specified in ss.80C to 80U. S.80B(5) defines for the purpose
of Chapter VI-A "gross total income" to mean the total income computed in accordance
with the provisions of the Act, before making any deduction under the Chapter. What
the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in
the content of the deduction which is allowable under s.10A, which would not be
permissible unless a specific statutory provision to that effect were to be made. In the
absence thereof, such an approach cannot be accepted. Thus ITAT was correct in
holding that the brought forward unabsorbed depreciation and losses of the unit the
Income which is not eligible for deduction under s.10A of the Act cannot be set off
against the current profit of the eligible unit for computing the deduction under s.10A
of the IT Act."

28. The said proposition of law has further been applied by the Hon'ble Bombay High
Court in CIT v. M/s. Ganesh Polychem Ltd. in Income Tax Appeal No.2083 of 2012, order
dated 25.02.2013 and in CIT v. Schmetz India Pvt. Ltd. (2012) 79 DTR (Bom) 356 and also by
the Hon'ble High Court of Gujarat in CIT v. Ace Software Exports Ltd. in Tax Appeal No.687
of 2012, order dated 18.02.2013. The Mumbai Bench of Tribunal has also applied the
said proposition in various cases.

29. The learned Departmental Representative for the Revenue on the other hand,
placed reliance on the ratio laid down by the Hon'ble Supreme Court in Synco Industries
Ltd. v. AO, (2008) 299 ITR 444 (SC), wherein the issue was whether while computing the
quantum of deduction under section 80I(6) of the Act, the Assessing Officer has to treat
the profits derived from an industrial undertaking as only source of income in order to
arrive at deduction under Chapter VI-A. The Hon'ble Supreme Court held that the gross
total income under section 80B(5) of the Act, which is also referred to in section 80I(1) of
the Act, was required to be computed in manner provided under the Act, which pre-
supposes that gross total income shall be arrived at after adjusting losses of other
division against profits derived from an industrial undertaking. The issue before the
Hon'ble Supreme Court is at variance with the issue before us and the said ratio is not
applicable to the facts of the present case. The issue in the present appeal is squarely
covered by the ratio laid down by the Hon'ble Bombay High Court in CIT v. Black & Veatch
Consulting Pvt. Ltd. (supra), wherein deduction under section 10A of the Act was to be
computed in the hands of assessee and the same was whether the brought forward
losses had to be adjusted before computing deduction under section 10A of the Act. It
may be pointed out that the provisions of section 10A and 10B of the Act are at
parametria. Following the ratio laid down by the Hon'ble Bombay High Court, we hold
that the deduction under section 10B of the Act is to be computed in the hands of the
 assessee before adjusting brought forward unabsorbed losses/depreciation. The
ground of appeal No.3 raised by the assessee is thus, allowed."

30. Following the same parity of reasoning and applying the ratio laid down by the
Hon'ble Bombay High Court in CIT v. Black & Veatch Consulting Pvt. Ltd. (2012) 348 ITR 72
(Bom), we hold that the deduction under section 10B of the Act is to be computed
before adjusting brought forward unabsorbed losses/depreciation. The learned
Authorized Representative for the assessee had not raised any other issue except
pointing out that the issues stands covered by the order of Tribunal. In view thereof, we
direct the Assessing Officer to re-compute the deduction under section 10B of the Act
without setting of brought forward and unabsorbed depreciation of earlier years. Thus,
the ground of appeal No.12 is dismissed and the ground of appeal No.13 is allowed.'
75. The issue arising in the present appeal is identical to the issue before the Tribunal and
following the same parity of reasoning, we hold that deduction under section 10B of the Act is
unit specific and is to be allowed anterior to the application of provisions of sections 71/72 of the
Act which deals with carry forward and set off of business losses. The Assessing Officer is thus,
directed to compute the deduction before adjusting brought forward unabsorbed losses or
depreciation of eligible unit or other units. The ground of appeal No.16 raised by the assessee is
thus, allowed.

76. The ground of appeal No.17 is against initiation of penalty proceedings, is premature and
hence, the same is dismissed.
77. The ground of appeal No.18 raised by the assessee is against levy of interest under section
234B of the Act, which is consequential and hence, the same is dismissed. Thus, the grounds of
appeal raised by assessee are partly allowed.

78. In view of disposal of main appeal, the Stay Application filed by the assessee is dismissed.

79. In the result, the appeal of the assessee is partly allowed and Stay Application is dismissed.
SUNIL

*Partly in favour of revenue/Matter remanded.