TMI Blog2015 (7) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... light of OECD guidelines, while working out ratio of raw-material should be worked out by comparing the raw-material vis-à-vis sales. In this view of the matter, we uphold the finding of the TPO for the year under appeal wherein he arrived at the conclusion that the assessee should be allowed the adjustment of 18.50% because of excess consumption of raw-material. However, in our opinion, while giving the adjustment, the assessee should be allowed the adjustment of 18.50% of the sales and not of the 18.50% of the rawmaterial cost. We, therefore, direct the Assessing Officer to allow the adjustment of 18.50% of the sales while working out the operating profit and if, after the above adjustment, the operating profit of the assessee works out to more than 6.78% i.e. the average of operating profit of comparables, then no adjustment should be made. With this direction, we set aside the orders of the lower authorities and restore the matter back to the file of the Assessing Officer. Set off of part of losses against the income - Held that:- The appellant is entitled to set off of the business loss pertaining to AY 1997-98 in its case against its profit of AY 2004- 05 in view of provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing the claim of bad debts of ₹ 7,53,08,028 written off through provision for bad debt account. 3.1. That the learned CIT(A) has erred in computing the Transfer pricing adjustment of ₹ 7,62,29,166 for the manufacturing segment of Power Control Domestic Tariff Area ( PCDTA ) division of the Appellant Company. 3.2. That the learned CIT(A) has erred while computing the raw material adjustments of the Appellant Company and the comparable companies in the manufacturing segment of the PCDTA division and consequently arriving at the revised operating margin of comparable companies. 3.3. Without prejudice to the above, the learned CIT(A) has erred in not appreciating the error made by the learned Transfer Pricing officer in computing the raw material adjustment and the consequent operating margin of the Appellant Company. 3.4. That the learned CIT(A) has erred mathematically by adding the adjustment made by the Transfer Pricing Officer in the Transfer Pricing order of an amount of ₹ 21,155,611 to the revised adjustment as computed based on the learned CIT(A) s approach, instead of subtracting it from the revised adjustment. That the Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequent to the merger/amalgamation, as per the A.O. there was no scope of any alignment in the accounting practices and policies including taxation matters in the books of accounts of the new entity i.e. the appellant. As per the AO the scheme of merger was approved with the appointed date which was 01-04-2003 and accordingly the arrangement/ amalgamation/ merger became effective from the first day of the previous year relevant to assessment year under consideration. Since the order of Hon'ble Gujarat High Court regarding the scheme of arrangement was passed on 02-05-2005 whereas all the companies including the appellant company were liable to file their return of income as per provisions of section 139 of the Act / Sec. 44AB-of the Act for A.Y. 2004-05 on or before 31-10-2004 and accordingly separate returns of income along with statutory audit report as well as tax audit report u/s 44AB of the Act were filed by all the companies before the respective AOs and details of which are mentioned by the AO on Page No.4 of assessment order. As per the AO had the scheme of arrangement/ amalgamation/merger not taken place, for the sake of argument, then all the above referred companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed return prepared to give effect to scheme of arrangement without any alignment in the accounting practices and policies of respective companies ought to have considered with disallowable being added to the income as per profit and loss account should have been naturally ₹62,63,45,413/-. As per the AO however on perusal of revised return of income such disallowables were considered at ₹51,25,39,846/-. Thus as per the AO the act of the appellant company of reduction in the amount of disallowables to the tune of ₹11,60,49,285/- was neither justified nor maintainable within the provisions of law. The AO was of the view that the figures shown as disallowables in the respective returns of the above companies / entities should have been appeared as a consolidated total in the revised return of the appellant company and there was no scope for any re-alignment, omission left because the figures were worked out by the respective companies in their respective original returns of income after considering the factual positions as well as the provisions of the Act. As per the AO for the sake of argument, if the scheme of arrangement would not have come into operation, the the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the true state of affairs and accordingly he rejected the books of accounts of the appellant u/s 145(3) of the IT Act. 3.1. The AO further made adjustment as proposed by TPO and made addition of ₹ 2,11,55,611/-. 3.2 Against this, the assessee filed an appeal before the ld.CIT(A) who, after considering the submissions partly allowed the appeal. The ld.CIT(A) made disallowance of bad debt of ₹ 7,53,08,029/-; thereby enhanced the income of the assessee. The ld.CIT(A) also made enhancement into Transfer Pricing adjustment. The assessee feeling aggrieved by the order of the ld.CIT(A), has filed the present appeal before us. 4. First ground of assessee s appeal is general in nature which require no independent adjudication. 5. Ground Nos.2.1 2.2 are inter-connected and, therefore, the same are decided together. The ld.counsel for the assessee submitted that the ld.CIT(A) travelled beyond the record and made enhancement on the matter that was neither considered by the AO nor was a subject matter of appeal. In support of this contention, the ld.counsel for the assessee placed reliance on the judgment of Hon ble Apex Court rendered in the case of CIT(Central), C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of income which have not been considered during the course of assessment cannot be encompassed in the enhancement power of the AAC. Reliance in placed on the judgments of the Gujarat High Court in the case of Prabhudas Ramji v CIT (1966) (62ITRITR 621) and CIT v Jagdish Mills Ltd (1964) (51 ITR 266); Karnataka High court in the case of Sterling Construction And Trading Company v ITO (1975)(99 ITR 236). It is further contended that the power of enhancement by CIT(A) contemplated in Section 251 of the Act does not include the power to discover new source of income. This contention was also upheld by the Delhi High Court in the case of CIT vs Union Tyres (240 ITR 556) and approved by the full bench of Delhi High Court in the case of CIT v Sardari Lal and Co (251 ITR 864) after placing reliance on the judgments of CIT v Rai Bahadur Hardutroy Motilal Chamaria (supra) and CIT v Shapoorji Pallonji Mistry (supra). The facts of the instant case are similar to the case of CIT v Sardari Lal (supra). In both the cases the CIT(A) had sought extraneous information, unconnected with the appeal or proceedings before the lower authorities, with a view to enhance income of the Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said case, the subject matter of enhancement was considered by the AO and after receiving a reply from the assessee, the AO chose not to make an addition. Accordingly, it was held that the AO had considered the matter. Drawing a parallel to the case under consideration, the Ld. AO, at the time of assessment, had not enquired anything about the subject claim of bad debt. Though, the subject bad debts did form part of the financial statements of the assessee for the subject AY, it was not enquired upon on any aspect by the Ld. AO. Accordingly, it is submitted that the subject bad debts were not considered by the Ld. AO and enhancement by the Ld. CIT(A) on that account after roving enquires would tantamount to discovery of new source of income which is beyond the jurisdiction of his office. Indirect way of making additions beyond the limitations period Without prejudice to the above, it is contended that enhancement based on intimation by the Ld. AO after the expiry of time limits of reopening assessment would tantamount to indirectly reopening the assessment. Such indirect re-opening beyond the time limits specified under Section 148 is not contemplated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebit to the Provision for bad debt account . This in itself would demonstrate that the subject debts have been written off from the ledger of the debtor. The judgment of CIT v Hotel_Ambassador (253 ITR 430) sought to be relied by the Ld. AO is distinguishable on facts. In the said case, the assessee wrote off the amount as bad debts in the debtors ledger, after the accounts were finalised and audited. In that context, it was held that deduction under Section 36(l)(vii) cannot be allowed if the assessee writes off the debt in some of the books maintained by it, which do not form part of the audited accounts. However, in the case of the Appellant, bad debts have been written off from the books of accounts which have been finalized and audited by the statutory auditors. Further, the Ld. CIT(A) has relied on the judgment of Sampanna Kuries by the Kerala High Court to substantial that even after the deletion of the words established to have become bad in the previous year from Section 36(l)(iii), the bad debts written off should be 'irrecoverable'. It was held that since no material has been brought on record to show that the subject debts have infact become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary, ld.CIT-DR also submitted a note and reiterated as were made in the submission, which reads as under:- Note on Enhancement of income by the Commissioner (Appeals) It is commonly understood that the First Appellate Authority viz. the Commissioner (Appeals) has the power of enhancement in relation to any matter connected with an appeal before him. This proposition arises from the wording in section 251(1) which reads as under: In disposing of an appeal, the Commissioner (Appeals) shall have the following powers - (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment (emphasis added). However, some decisions have been rendered wherein the power of enhancement was sought to be restricted by holding that such enhancement would not apply to sources of income which had not been considered by the Assessing Officer -CIT, Bombay v. Shapoorji Pallonji Mistry (1962) 44 ITR 891 (SC). However, this line of thinking was overturned by a series of the decisions of the Apex Court in CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC), Jute Corporation of India Ltd. v. CIT (1991) 187 ITR 688 (SC) and the last in the serie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question nos. 1 and3 must be answered in the negative. The appeal is therefore allowed............ The Apex Courts decision is in tune with the well accepted legal maxim that no word can be read into a statute if it is not clearly so provided. No word which is provided in a statute can also be excluded as meaningless. In other words, there has to be a strict interpretation of the statute as is clear from the wordings: Cape Brandy Syndicate v. IRC (1921) 1 KB 64, AV Fernandez V. State of Kerala AIR 1957 SC 657, CWT v. Kripashankar Dayashankar Worah 81ITR 763 (SC). However, subsequent to the Supreme Court's decision which appeared to have set at rest finally the issue as to whether the first appellate authority had limitless powers of enhancement of income, Court decisions have been coming seeking to distinguish the decision of the Supreme Court cited earlier. Thus, in CIT v. Union Tyres [1999] 240 ITR 556 (Delhi) and in CIT v. Sardari Lal and Co. [2002] 251 ITR 864 (Delhi) the High Courts has sought to distinguish the Apex Court decision on the ground that the Apex Court did not deal with a situation where a new source of income was considered by the Appellate Autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee that a new issue of availability of alternate methods of enhancement like 147, 263 etc. are being discussed now. Here, one can see that the Court itself has accepted the existence of alternate methods of enhancement - 147 / 148 or 263 but put its foot down on another alternate enhancement method - 251(1). The fact that the distinction made regarding new source of income just not being there is clear from the fact that enhancement based on new source of income had been considered and approved by the Apex Court in Deluram's case et al, and quite clear from the reproduction from that case noted earlier. It is also worth noting that if the wording in section 251(1)(a) read as under: In respect of issues in appeal, he may confirm, reduce, enhance or annul the assessment, then, the interpretation given by the various High Courts may perhaps have been relevant. We have also noted that a strict interpretation of the statute is the norm. It is also interesting to note that under 251(2), the Commissioner (Appeals) is bound to give reasonable opportunity of being heard to the assessee before an enhancement is made. The explanation to sub clause (2) therein further categoric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee has not complied with the statutory requirement of section 36(1)(vii), therefore first we would examine whether the ld.CIT(A) was justified in holding that there is a non-compliance of the provisions of section 36(1)(vii) r.w.s.36(2) of the Act; thereby the claim of bad debt could not have been allowed. Undisputedly, the contention of the assessee is that it has complied with the provisions of section 36(1)(vii) r.w.s.36(2) of the Act. It is submitted that the subject bad debts have been credited to the debtor s account with a corresponding debit to the Provision for bad debt account . In this context our attention was drawn to page Nos.77 and 78 of the paper-book. It is also contended that the provision for bad debt was offered to tax in the preceding years in which the said provision was created and charged to profit and loss account. The disallowance of bad debts written off in the current year would tantamount to double disallowance. The Reliance is placed on judgement of the Hon ble Apex Court rendered in the case of TRF Ltd. vs. CIT reported at (2010) 323 ITR 397 (SC). We find force into the contention of ld.counsel for the assessee. The Hon ble Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ara-6.7 of the order u/s.92CA(3) of the TPO, Ahmedabad for A.Y. 2005-06. The TPO in such order on perusal of P L account realized that the cost of raw-material was major cost affecting the profit of the appellant and hence it was decided to mark up the cost of raw-material of the comparables to arrive at adjusted value of the total purchases of the appellant so that costlier local purchases do not colour the appellant s transaction with AE s. Hence, the entire raw-material cost was reduced to bring Industry at level. The TPO observed that the local raw-material purchases of the appellant was very high (65.99%) and due to these higher local cost of purchase, its results were not comparable with local comparables. It was also observed by the TPO that the cost of purchase of raw-material of local comparable may be not due to existence of unrecognized raw-material market. Thus as per provision of rule 10B(e)(iii) of the income Tax Rules, adjustment was made to the results of the comparable companies and purchase inefficiency of the appellant was adjusted, which results into mean adjusted margin to sales at 1.22%. In my opinion the TPO in his order for A.Y. 2005-06 has adopted correct m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to follow the above method/approach for AY 2004-05 and to make transfer pricing adjustment on account of Arm s Length Price at ₹7,62,29,166/- in the case of appellant. In result, there will be enhancement of Transfer Pricing Adjustment of ₹5,50,73,555/- on account of Arm s Length Price in the case of appellant for the year under consideration. The assessment is enhanced by an amount of ₹5,50,73,555/- accordingly. Thus the grounds of appeal no.3,4,5,6 7 of the appellant are dismissed. Since the appellant has filed inaccurate particulars of income by adopting wrong and incorrect method in respect of Transfer Pricing adjustment with regard to International Transactions entered into with AE in view of the reasons as discussed above and therefore the penalty proceedings u/s.271(1)(c) of the IT Act are also initiated on enhanced income of ₹.5,50,73,555/- for filing of inaccurate particulars of income. 8.1. The submissions of the ld.counsel for the assessee are reproduced hereunder:- B. ARGUMENTS BEFORE THE HON'BLE TRIBUNAL (Ground No. 3.1 and 3.4): Ground No. 3.1: That the learned CIT(A) has erred in computing the Transfer pricing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrectly, the adjusted operating margin would be as provided in the table below. Computation of the proportion of international transaction to total costs Particulars Amount (In INR) Amount (In INR) Income Income from Operations 1,045,039,761 Expenditure Total expenses (excluding raw material cost) 417,262,348 Total Material Cost 709,346,049 Less: Downward Adjustment of materials cost as per material cost of comparables (1,045,039,761*18.50%) 193,332,356 516,013,693 Total Expenditure (after adjustment for raw material cost) 933,276,041 Revised Profit 111,763,720 Adjusted OP/ Sales 10.69% 18. As is evident from the table ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I selected in this case is OP / Sales with 'Sales' as the relevant base since the import transaction of the tested party is subject matter of test. Accordingly, the raw material adjustment should also be computed having regard to the same relevant base and comparing the RM / Sales ratio of the tested party with the RM / Sales ratio of the comparable companies. 25. In this regard the relevant extracts of the Rule 10B(e) of the Income-tax Rules, 1962 are reproduced below for immediate reference: transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal transaction entered into with an Associated Enterprise ('AE') is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or leaving regard to any other relevant base. 28. In the instant case, the subject matter of test is the transaction of import of raw materials in the manufacturing segment of Power Controls division of GEIIPL. Thus OP/ Sales (Sales being the uncontrolled base) has been used as the appropriate PLI. Accordingly, any adjustments thereafter, under TXMM, have to be made with reference to the same relevant base (i.e. Sales). Adopting a different, controlled base, would vitiate the analysis by considering the very transaction which is the subject matter of test for the purpose of the adjustment. 29. Thus in the present case, the raw material adjustments in the manufacturing segment of the Power Controls division of GEIIPL have to be computed by comparing the ratio of raw material costs to sales of the tested party with the ratio of raw material costs to sales of the comparable companies, thereby adjusting the operating margins of the comparable companies for the differences in this ratio. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arm' length Margin (%) before raw material adjustment (D) 6.78% Arm' length Margin (%) post raw material adjustment - Considering sales as the base (E) -11.73% Arm's Length Operating Profit (F)= (A)*(E) (122,583,164) Adjustment (G) =(F) - (B) Nil 37. Evidently, the operating profit margin earned by Appellant at (7.81)%, is higher than the arithmetical of the adjusted operating profit margin of the comparable companies (post adjustment for raw material costs) of (11.73)%. Accordingly, this lends support to the fact that the international transactions of the Appellant in the manufacturing segment of Power Controls division continue to be demonstrated to be at arm's length even as per the Ld. TPO's own accepted analysis. Without prejudice to the fallacy of the adjustments in terms of our contentions made above, the Appellant further contends as follows: Adjustment to be made on proportionate basis 38. The transaction related to purchases from associated enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial costs or expenses representing the international transaction with associated enterprises which constitutes a meagre 17% of the total material costs. 41. In this regard we provide below the computation of the proportionate adjustment that could have been considered even if one were to make any adjustment to the transfer prices, based on the learned TPO's own faulty approach. 42. The TP adjustment as computed by the learned TPO is given in the table below: Adjustment as computed by the TPO Particulars Arm's length at adjusted RM as per the TPO (Rs.) Total Income from operations 1,045,039,761 AE transactions- Imports from GE entities and Royalty (Balancing Figure) 100,114,028 Material consumed (purchased from Non GE Entities) 456,851,491 Other expenses 417,262,348 Total Expenses 974,227,867 Operating profit 70,811,894 Operating profit after exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing Segment) of the Appellant vide order dated 22.12.2006 for AY 2004-05 . This issue has been discussed in detail in the TP order. During the course of TP proceedings it was observed by the TPO that th international transactions relating to manufacturing activity were not at arms length price because the TNMM method was selected as most appropriate method and PL1 margin of tested party was worked out to (-) 7.81%(OP/Sales) whereas the PL1 margin of the comparables selected by the assessee was 6.78%(OP/Sales). Since the difference between PLI margin of the tested party and the comparables was beyond 5% variation, the adjustment was worked out to ₹ 15,23,80,530/-. However, the value of international transaction shown by the assessee was ₹ 12,12,69,639/-, therefore TPO did not adopt this amount of ₹ 15.23 crores for adjustment. The TPO observed that the cost of raw material was a major cost affecting the profit of the assessee and the TPO removed the raw material cost from the assessee as well as the comparables to arrive at the adjusted value of total purchases. However, the TPO did not exclude the value of raw material purchased from AE as the same was at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's. Hence, the entire rawmaterial cost was reduced to bring at industry level. The TPO observed that the local raw material purchases of the appellant was very high (65.99%) and due to these higher local cost of purchases, its results were not comparable with local comparables. It was also observed by the TPO that the cost of purchase of raw-material of local comparable may be not due to existence of unrecognized raw-material market. Thus as per provision of rule 1 OB(e) (Hi) of the Income tax Rules, adjustment was made to the results of the comparable companies and purchase inefficiency of the appellant was adjusted, which results into mean adjusted margin to sales at 1.22%. In my opinion the TPO in his order for AY 2005-06 has adopted correct method by considering RM/operating expenses ratio of the tested party and comparable companies and by proceeding to compute the raw-material adjustment. Thus in my opinion the same method/approach should be followed in the case of appellant for AY 2004-05 also which is the year under consideration. It is pertinent to mention that if the adjusted cost of raw-material is calculated on the basis of sales turnover, then the cost of raw-mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's Comments:- As discussed in the comments on ground No.3.1 in para (ii), the detailed discussion has been made by the Ld. C1T(A) for computation of raw material adjustment and accordingly revised operating margins of the comparables was worked out. The assessee has claimed that C1T(A) has computed raw material adjustment using operating cost as the base and has arrived the revised TP adjustment of ₹ 5,50,73,595/- being the difference between the arithmetic mean of adjusted OPM of (-) 2.54% of the comparable companies and OPM of (-) 7.81% of the assessee (tested party). The claim of assessee that CIT(A) has used operating cost as base is incorrect. The C1T(A) has discussed this issue in detail in the appeal order at para 13.13 which is already reproduced in the comments of TPO on Ground No.3.1 above. It is clearly mentioned that the cost of raw material in the case of assessee was 65.99% (RM/Sales) for AY 2005-06 whereas in the case of comparables this ratio was 54.18% (RM/Sales) only. Therefore, to eliminate the differences in the cost of raw material in the case of assessee vis-a-vis comparables, suitable adjustment was made by the TPO and accordingly the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 25.10.2012. A copy of relevant page of order u/s 154 is attached as per annexure-A. In view of the above, the ground raised by the assessee may be rejected . Ground No. 3.3 Without prejudice to the above, the learned CIT(A) has erred in not appreciating the error made by the learned Transfer Pricing Officer in computing the raw material adjustment and the consequent operating margin of the Appellant Company. TPO's comments: The assessee has claimed that the adjusted operating margin of the appellant would be at 10.69%(OP/Sales) instead of 4.75% worked out by the TPO. The computation of 10.69% margin worked out by the assessee is reproduced as under: Particulars Amount(lNR) Amount(INR) Income Income from operations 104,50,39,761 Expenditure Total Expenses(Excluding raw material cost) 41,72,62,348 Total material cost 70,93,46,049 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal is redundant . 9. We have given our thoughtful consideration to the rival submissions made by the respective parties. The undisputed facts remain in this case are that the assessee had transactions with related party and therefore, transfer pricing provisions were applicable in the case of the assessee. The assessee had operating loss of 7.81% as under:- i.b. Assessee had taken OP/Sales as it PLI. The OP/Sales computed by the assessee is -7.81%. The calculation of margin of the assessee is as under:- Operating Income/Sales 1,045,039,761 Total Expenses 1,126,608,397 Operating Loss (81,568,636) Operating Loss/Sales -7.81% 10. The TPO noticed that as per list of comparables provided by the assessee, the operating margin of the comparables was 6.78%, as under:- i.b.1 The assessee had provided a list of comparables the same is provided as under:- S.No. Name of Comparables Operating Profit Margin 1 Bhartia Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,045,039,761 Expenditure Total Expenses excl material cost 417,262,348 Total Material Cost 709,346,049 Less : Downward adjustment of material cost as material cost of competitors are less 131,224,919 578,121,130 (709,346,049 * 18.50%) Revised Total expenditure 995,383,478 Revised Profit/Loss 49,656,283 OP/Sales 4.75% 12. At the time of hearing before us, it was pointed out by the ld. Counsel that while working out the consumption of raw material by the assessee as well as comparables, the Assessing Officer worked out the ratio by dividing raw material to the sales, which would be evident from the following working by the TPO. i.c.1 The margin of raw material to sales of comparables was calcul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not under appeal before him. However, be that as it may be, we have heard both the parties with regard to the method to be followed while comparing the raw-material component of the assessee as well as comparables. After considering the arguments of both the sides and facts of the case, we find force in the contention of the ld. Counsel of the assessee that the ratio of raw-material/sales would be a proper ratio to compare the consumption of raw-material by the assessee and comparable parties, because sales in the case of the assessee is, admittedly, uncontrolled transaction. We also find that OECD guidelines in this regard read as under:- 2.88 The denominator should be reasonably independent from controlled transactions, otherwise there would be no objective starting point. For instance, when analyzing a transaction consisting in the purchase of goods by a distributor from an associated enterprise for resale to independent customers, one could not weight the net profit indicator against the cost of goods sold because these costs are the controlled costs for which consistency with the arm s length principle is being tested. Similarly, for a controlled transaction consisting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibutor for resale to the same independent end-user customers, for instance because the service activity is performed using rights or other assets that are granted under the distribution arrangement. See also discussion of portfolio approaches in paragraph 3.10. 15. In the instant case, what is being tested is whether purchase from associated enterprises is at arms-length or not. Admittedly, sales by the assessee is not to the associated parties and therefore, is un-controlled transaction. In view of above, in the light of OECD guidelines, while working out ratio of raw-material should be worked out by comparing the raw-material vis- -vis sales. In this view of the matter, we uphold the finding of the TPO for the year under appeal wherein he arrived at the conclusion that the assessee should be allowed the adjustment of 18.50% because of excess consumption of raw-material. However, in our opinion, while giving the adjustment, the assessee should be allowed the adjustment of 18.50% of the sales and not of the 18.50% of the rawmaterial cost. We, therefore, direct the Assessing Officer to allow the adjustment of 18.50% of the sales while working out the operating profit and if, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he outset it is submitted that the Assessee Company has purported to set off losses of only ₹ 2,59,69,283 and balance ₹ 464,712 pertains to unabsorbed depreciation purported to be set off in the revised return of income filed for the year under consideration. The brought forward business losses of ₹ 2,59,69,283 set off during the year under consideration pertains to the losses incurred by the Lighting Division (i.e. the Appellant Company) in AY 1997-98 and were set off in compliance with the conditions stipulated in Section 79 of the Act. Section 79 requires an inquiry to be made as to who the shareholders were at two points in time i.e on the last day of the previous year in which the losses are set off and on the last day of the previous year in which the losses were incurred. On identification of persons/ shareholders at two points in time, it must be ascertained what their share holding in the company is at two points in time. Section 79 refers to persons in plurality. The reference is to shareholders and not a shareholder. The comparison has to be of the collective holdings of these persons or the group. Reliance placed on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that the appellant was once again called upon to furnish details of company-wise losses which merged into the appellant company and the share holding pattern of such companies in the year of incurrence of losses. The AO has further stated that the contention of the appellant is not correct as it itself has claimed the benefit of carried forward and setting off of the losses and therefore, it is obligatory upon it to substantiate the claim specifically in light of the provisions of Sec.79 of the Act . Thus it is clear that AO had called for details from the appellant during the course of assessment proceedings for AY 2005-06 also for substantiating the claim of the appellant specially in the light of provisions of section 79 of the Act. Once, the entire loss has been disallowed by the AO in the case of appellant in AY 2004-05 itself, then it is not clear as to how carried forward and set off of part of such losses of ₹.102,83,83,355/- can further be considered for the purpose of allowing or disallowing the same u/s.79 of the IT Act against the profit of 2005-06. These facts show that the AO has contradicted himself by stating that the appellant was called upon to furnis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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