No.- ITA No. 1712/PUN/2011, SA No. 73/PUN/2016

MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM

For The Appellant : S/Shri Farooq V. Irani and Pramod Jadhav
For The Respondent : Shri Suhas S. Kulkarni

ORDER

The order of the Bench was delivered by

SUSHMA CHOWLA, JM:-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 subsections

(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 subsection (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 noncontemporaneous, 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 Vs. 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-àvis 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. Vs. 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) Pvt. Ltd. Vs. DCIT in ITA No.120/PN/2011 for assessment year 2006-07, order dated 04.01.2012.

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) Pvt. Ltd. Vs. DCIT (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) Pvt. Ltd. Vs. DCIT (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) Pvt. Ltd. Vs. DCIT (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 Kerala High Court in Akash Films Vs. CIT (1991) 190 ITR 32 (Ker) 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. Vs. ITO (2009) 123 TTJ 509 and the Hon’ble High Court of Andhra Pradesh in CIT Vs. M/s. B.A. Continuum India Pvt. Ltd. in ITTA No.440/2014, 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. Vs. ACIT 2012) 28 Taxman.com 293 (Bang.) 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. Vs. ITO (supra), but the same has been distinguished by the later decision of Bangalore Bench of Tribunal in Toyota Kirloskar Motors (P) Ltd. Vs. ACIT (supra), where reliance is placed on the decision of Mumbai Bench of Tribunal in Fiat India Pvt. Ltd. Vs. DCIT (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 M/s. B.A. Continuum India Pvt. 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 DCIT Vs. Sumi Motherson Innovative Engineering Ltd. (2014) 150 ITD 195 (Delhi), 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 Pvt. Ltd. in ITA No.1379/Del/2011, order dated 13.04.2015 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 Vs. M/s. Welspun Zucchi Text iles Ltd. in Income Tax Appeal No.1286 of 2014, judgment dated 06.01.2017 , 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 DCIT Vs. Sumi Motherson Innovative Engineering 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 nonallowance 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 underutilization adjustment could be provided in the hands of comparables. The Delhi Bench of Tribunal in DCIT Vs. EDAG Engineers and 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 Pvt. Ltd. Vs. ACIT in ITA No.158/PN/2014, relating to assessment year 2009-10, order dated 30.03.2016 and in Tasty Bite Eatables Ltd. Vs. ACIT in ITA No.1682/PN/2011, relat ing 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) Pvt. Ltd. Vs. DCIT (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 Vs. M/s. Sak Soft Ltd. reported in 121 TTJ 865 and the Hon’ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd. reported in 330 ITR 175 (Bom). 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 raise d 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. Vs. 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 Vs. 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 Vs. M/s. Ganesh Polychem Ltd. in Income Tax Appeal No.2083 of 2012, order dated 25.02.2013 and in CIT Vs. Schmetz India Pvt. Ltd. (2012) 79 DTR (Bom) 356 and also by the Hon’ble High Court of Gujarat in CIT Vs. 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. Vs. 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 presupposes 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 Vs. 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 Vs. 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.