TMI Blog2015 (7) TMI 568X X X X Extracts X X X X X X X X Extracts X X X X ..... les, which finds support in the UN TP Manual. A careful perusal and analysis of the assessee's submissions before the CIT (Appeals) clearly places the assessee's stated position as one that accepts CPM as the MAM, provided certain adjustments are made for the differences in the marketing and selling functions, based on the actual expenses incurred by the companies. We, therefore, clearly find that it is before the Tribunal that the assessee has changed its stand, stating that TNMM is the MAM and that it would be absurd to consider CPM to be the MAM. TNMM was broached as an alternative approach only during the appellate proceedings. As we have already held, the concept of alternate approach or use of more than one method is not recognized in Indian TP Rules. The Indian TP Rules recognize use of only one method the most appropriate method (MAM). Based on the discussions in the pre paragraph of this order, CPM is the MAM in this case. TPO has not given any weightage to the various aspects pointed out by the assessee which call for making appropriate adjustments to the margins of the comparable companies, as required under Rule 10B(1)( c )(iii), (ic) (v) of the Rules. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluding the turnover on account of spares and components from the export turnover without excluding the same from the total turnover while computing deduction u/s. 10B - Held that:- This issue is no longer res integra and has been settled by the decision of the Hon ble High Court of Karnataka in the case of Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT), wherein held that whatever is excluded from the export turnover should also be correspondingly reduced from the total turnover while computing deduction u/s. 10B of the Act. Following the decision of the Hon ble High Court of Karnataka, we direct the AO to exclude the turnover from export of spares components both from the total turnover as well as the export turnover. Income from scrap sales - whether would form part of the profits of the undertaking eligible for deduction u/s. 10B? - Held that:- It is not in dispute before us that in assessee s own case, this Tribunal has taken a view that income from sale of scrap should form part of profits of the undertaking eligible for deduction u/s. 10B of the Act.In the circumstances, following the decision of the Tribunal in assessee s own case, we uphold the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Recovery of expenses : ₹ 39,99,681 5. The AO referred the determination of Arm s Length Price (ALP) in respect of international transactions entered into by the assessee. The subject matter of the dispute in grounds No.1 to 6 referred to above is with regard to determination of ALP in respect of international transaction of sale of manufactured goods by the Assessee to its AE. As already stated, the assessee is a contract manufacturer for the GEMS group, which is admittedly an AE. The price charged in respect of sale of manufactured goods was ₹ 373,12,86,546. The assessee claimed that the price it received on sale of manufactured goods to its AE was at arm s length and in support thereof filed transfer pricing (TP) report. In Annexure-C to the aforesaid report, the assessee has given a list of AEs with which the assessee has entered into international transactions during the previous year relevant to A.Y. 2004-05. The assessee adopted the Cost Plus Method as the most appropriate method for determining the ALP. The assessee identified 19 comparables. The arithmetic mean of the margin (gross margin to cost of production) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses reflect additional functions that are distinct from the activities tested by the method, separate compensation for that function may need to be deemed. Since, the comparables chosen by Your Honour perform functions which are beyond that of a contract manufacturer, the result obtained by the assessee through the application of the Cost Plus Method may also have to be substantiated through the application of the Transactional Net Margin Method. Without prejudice to our submission that CPM is applicable and that the comparables chosen by the tested party satisfy the criteria as propounded in the Transfer Pricing Regulations, we wish to submit that the net margin of GE BE: - is higher than the arithmetic mean of the net margins of the comparables used by the assessee; and - is within +/- 5% variation from the arithmetic mean of the unadjusted net margins of the companies chosen by Your Honour. 7. The TPO dealt with the alternative claim made by the assessee as follows:- 5.9.2.1 Methodology Taxpayer itself has chosen Cost Plus Method as the most appropriate method in the instant case. Sec.92C mandates the ALP needs to be computed using the most approp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Avg. 44.527 Out of this Shree Pacetronix Ltd. is rejected as per the taxpayer s request since it had related party transactions. The final list is as follows: Sl. No. Name of the comparable % of GP over costs 1 Contential Surgical Suture Ltd 74.167 2 Polymedicure Ltd. 27.646 3 South India Surgical Co. Ltd. 37.833 Avg. 46.55% 5.10.4 Adjustment towards Sales functions As discussed, the normal spending on marketing. advertising distribution comes to 8% of the sales. Therefore an 8% adjustment is given to ALP computed to neutralized the impact of these functions: Cost incurred for contract manufacturing activity A Rs.320,99,16,579 Normal mark up on cost (arithmetic mean of comparables) B 46.55% Arms Length Price compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the aforesaid addition made by the AO, the assessee preferred appeal before the CIT(A). One of the contention taken by the assessee before the CIT(A) was regarding the most appropriate method that needs to be applied in the present case. In this regard, the assessee raised the following contentions:- 1.4. The Appellant submits that in case if your good self considers that the comparables used in the TP Study do not have the desired degree of comparability for applying CPM as the most appropriate method, we submit that it would be more appropriate to use TNMM as the most appropriate method instead of rejecting the comparables used in the TP Study. 1.5. In this regard we submit that Para 3.27 of the OECD TP guidelines state that net margins used in the TNMM are less affected by transactional differences than is the case with price, as used in the CUP method. The net margins also may be more tolerant to some of the functional differences between controlled and uncontrolled transactions than gross margins (i.e., used in the RPM and the CPM). And, the differences in the functions performed between enterprises are often reflected in variations in operating expenses. Conseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is more tolerant to functional differences, can alternatively be used to determine the arm s length nature of the transactions. 1.10. In response to our submission to use TNMM as the alternate method, the reasoning of the Ld. TPO in rejecting the same is that the Company itself has used CPM as the most appropriate method. 11. The assessee relied on the OECD guidelines as well as the guidelines of ICAI in choosing the most appropriate method. The assessee also submitted : 1.24. We further submit that the exercise of transfer pricing assessment for determining arm s length price should not be directed towards making an adjustment, but should be carried out based on the rationales of economic and commercial principles. This is also supported by the statement of the Tax Tribunal in the case of Philips Software, wherein it was held that the action of the Ld. TPO was directed towards making a higher TP adjustment. 1.25. Further, in our submissions we have also clearly brought out the fact of significant functional dissimilarities between the Company and the alleged comparables. In view of such significant functional dissimilarities, CPM is liable to be rejected as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over transactional profit methods unless the Revenue authorities are able to demonstrate the fallacies in application of standard methods. In light of the above principles, it was held that the assessee having determined ALP of its international transactions with AEs by applying CUP/CPM by offering the comparison of gross profit margin on transactions with unrelated companies, TPO was not justified in rejecting the method adopted by assessee and making adjustments by applying TNMM on the ground that assessee had incurred loss in transactions with AEs and that the method employed by assessee was complex. Following the same analogy, where CPM has been selected by the appellant and accepted by the TPO as the most appropriate method in the instant case, it is for the appellant to demonstrate the fallacies in application of CPM before putting up a case for application of TNMM. It is for the appellant to show that TNMM is more appropriate than CPM and such an appropriateness of method must be shown on the touchstone of the factors set out in Rule 1OC(2). As the appellant has failed to make out a case for adoption of TNMM as the most appropriate method on the basis of cogent materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction with an uncontrolled transaction provides as follows:- (2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore self-evident that the cost of production of comparable companies would never be available in the public domain. In the absence of a statutory compulsion, discretion is vested with the Manufacturers in defining or structuring direct and indirect costs of their business which may even vary with the industry norm or practice. In the absence of standardization or statutory compulsion or prescribed definitions for direct and indirect costs, the elements or functions which constitute the cost of production can be at variance. Secondly in absence of a transparent disclosure, the inconsistencies in the accounting treatments of costs by the respective entities cannot be found out. As a result Cost Plus methodology cannot be resorted to, unless otherwise the data related to all the cost or functions are available in the public domain. 18. The next submission was that Rule 10(B) (1) (c) obligates determination of direct and indirect cost of production incurred by the enterprise in respect of property transferred or services provided. It obligates arriving at the normal gross profit markup to such costs and stipulates that the same should be computed according to the same accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tency. Where the accounting practices differ in the controlled transaction and the uncontrolled transaction, appropriate adjustments should be made to the data used to ensure that the same type of costs are used in each case to ensure consistency. The gross profit mark ups must be measured consistently between the associated enterprise and the independent enterprise. In addition, there may be differences across enterprises in the treatment of costs that affect gross profit mark ups that would need to be accounted for in order to achieve reliable comparability. Para 2.48 : The distinction between gross and net margin analyses may be understood in the following terms. In general, the cost plus method will use margins computed after direct and indirect costs of production, while a net margin method will use margins computed after operating expenses of the enterprise as well. It must be recognized that because of the variations in practice among countries, it is difficult to draw any precise lines between the three categories described above. 21. Reference was to the Guidance Note on Report on International Transactions under Section 92E of the Income tax Act, 1961 (Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions. 24. It was submitted that in the light of the above analysis, CPM method resorted to by the Revenue in the instant case is not the most appropriate method, as the Assessee produces to sell only to AEs and does not sell to third party and in the process not in possession of internal comparable cost data. 25. It was submitted that alternatively TNMM is the most appropriate method for the following reasons; TNMM operates at the net levels wherein the margins are more tolerant to functional difference than at gross levels; If there exist any difference in the functions the same gets reflected in the operating expenses; Adjustments for differences in the marketing advertisement expenses do not result in accurate adjustment for the additional functions performed by the comparable companies vis- -vis the Appellants with the application of CPM; Database limitation on account of Cost of Production (COP) can also be efficiently managed with the use of information at the net level; Differences, if any, in the cost structures also evens out at the net levels; The absence of comparables from the same industry calls for the selection of a broader set of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this may lead to a wide range of gross profit margins but still broadly similar levels of net operating profit indicators. In addition, in some countries the lack of clarity in the public data with respect to the classification of expenses in the gross or operating profits may make it difficult to evaluate the comparability of gross margins, while the use of net profit indicators may avoid the problem. 27. Attention was also invited to the Australian transfer pricing guidelines provide that: [TR 97/20 3.52. on Profit methods] .it might not be possible or practicable to use traditional methods because: i. there is insufficient reliable data to analyze comparability so as to determine an arm's length outcome other than through a profit split or a profit comparison at the net profit level. For example, if selling, general and administrative costs that are treated as part of costs of goods sold for an independent enterprise cannot be identified so as to adjust the gross margin in a reliable application of cost plus, it may be necessary to examine net margins in the absence of more reliable comparisons; ii. the product or service in question is unique or contains outof- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly further demonstrates the irrationality of the application of CPM to the facts of the present case. 30. It was submitted that the following will be the revised profit margin of the Assessee after giving effect to the directions of the TPO GE BE s net margin based on the GP / CoP as per TPO Particulars Amount (INR) Sales 3,731,286,546 Add: TP Adjustment to income as made by the learned TPO (as per TP order) 596,515,581 Total Income revised after the TP adjustment made by the learned TPO A 4,327,802,127 Less: Cost of production Materials cost 2,960,589,360 Personnel cost 19,078,438 Consumables 45,584,322 Depreciation 108,652,580 Repairs and maintenance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t/Total Cost ( OP/TC ) H = G / F 29.87% It was submitted that from the above calculation it would be clear the learned TPO has contemplated an increase in the revenue to arrive at the desired gross profit of approximately 35%, given the actual operating expense of the Assessee, the net margin of the Company is thus proposed to be considered at about a whopping 30%. It was submitted that the above computation clearly demonstrates the fundamental absurdity in the approach followed by the learned TPO and applying CPM vis- -vis TNMM which is the most appropriate method. It was further argued that based on the above computation of the net margin of the Assessee which is arrived at approximately 30%, it would be reasonable to assume that the comparable companies identified by the learned TPO must also achieve similar net profit levels. However, the OP / TC of the comparable companies is at about 12% as provided in the table in table given in paragraph 30 above. It was submitted that the above clearly demonstrates that the application of CPM is not only without any proper reasoning or basis and only with the objective of making the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to how the details of cost of production and gross profit are important before applying CPM. On the above submission, the learned DR has contended that under para 2.46 of the OECD TP guidelines where the accounting practices differ in the controlled transaction and the uncontrolled transaction, appropriate adjustments should be made to the data used to ensure that the same type of costs are used in each case to ensure consistency. The learned DR thus submitted that CPM cannot be rejected outright but has to be applied after giving appropriate adjustments to the data on costs of the controlled and uncontrolled transactions. v) The Assessee had submitted that the difference in functions performed by the Assessee and the comparable selected by the TPO would be clear from an analysis of the respective cost pattern and had in this regard highlighted that the Assessee s ratio raw material cost to sales is higher at 80.57% compared to 50.57 of the comparable. On the above submission, the learned DR has submitted before us that the above argument shows that the Assessee has accepted the fact that the products of the comparable and that of the Assessee are comparable and therefore the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified 19 comparable companies which were in the business of manufacture of (i) steel forgings, (ii) automotive brake systems, (iii) compressors; (iv) colour TV picture tubes, (v) Axle shafts, (vi) automotive gears; (vii) rear fork assembly; (viii) sheet metal components, assemblies and sub-assemblies,(ix) auto head lights, (x) fuel tanks, axle housing; (x) steering gears; (xi) wheels for automobiles; (xii) design engines; (xiii) steering gear assembly; (xiv) automotive airconditioning systems; (xv) steel metal parts. The arithmetic mean of the comparable companies was 15.72% gross mark-up on cost. The Assessee s gross mark-up on cost was 16.24% and therefore it was claimed that the price received from the AE by the Assessee in respect of the international transaction was at Arm s length. 33. The TPO accepted the methodology adopted by the Assessee viz., CPM as the MAM. The profit level Indicator (PLI) chosen by the Assessee viz., Gross profit on cost was also accepted by the TPO. The TPO was of the view that the comparable chosen by the Assessee were not from the Medical equipment industry segment and in terms of Rule 10B(2) (a) the comparability of an international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the TPO. Sl.No. Name of the comparable % of GP over costs 1 Contential Surgical Suture Ltd 74.167 2 Polymedicure Ltd. 27.646 3 South India Surgical Co. Ltd. 37.833 4 Shree Pacetronix Ltd. 38.462 Avg. 44.527 Out of this Shree Pacetronix Ltd. was rejected as per the taxpayer s request since it had related party transactions. The final list of comparable companies was as follows: Sl.No. Name of the comparable % of GP over costs 1 Contential Surgical Suture Ltd 74.167 2 Polymedicure Ltd. 27.646 3 South India Surgical Co. Ltd. 37.833 Avg. 46.55% The adjustment and consequent a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. (supra) wherein it was held that Profit methods are pressed into service only when the traditional method which includes CPM cannot be reasonably applied. Once the standard method is applied it cannot be discarded in preference over transactional profit method unless the revenue authorities are able to demonstrate the fallacies in application of standard method. 39. This reasoning cannot be accepted. There cannot be any estoppel in taxation matters. If the Assessee can show that the stand he originally took was not sustainable in law and seeks to take a different stand either in the course of proceedings before the Assessing Officer or Appellate authorities, the claim of the Assessee has to be tested on the basis of the applicable provisions of law. It cannot be rejected solely on the basis that it was contrary to the stand which the assessee had taken originally. At the same time, it does also mean that the assessee could be allowed free license to vary the functional analysis and the method adopted at any time during the appellate proceedings. The above proposition finds support in the decision of the ITAT, Pune, in the case of ACIT Vs MSS India (supra) reported in 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch are a step removed from the methods of computing the prices at which independent transactions would normally take place in respect of the product or service must, therefore, be put to service when the traditional methods, which seek to compute prices in independent situations, fail or are incapable of being implemented, as there are a large number of situations in which, for a variety of reasons, traditional methods are simply unworkable. The inputs necessary for applying the traditional methods are not always available and that is the reason that despite better results produced by these methods, these methods are not as much put to use. However, whenever necessary inputs for applying one of these methods are available and there is no dispute about comparability of those inputs, there is no good reason to resort to transactional profit methods. It would thus follow that in a situation in which the assessee has followed one of the standard methods of determining ALP, such a method cannot be discarded in preference over transactional profit methods, unless the revenue authorities are able to demonstrate the fallacies in application of standard methods. In any event, any preference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:- (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method. 42. In this regard, it is seen that in the TP Study submitted, the assessee has itself adopted. The Cost Plus Method ( CPM ) as the Most Appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services : TNMM is generally considered to be a residuary method and is relied upon when no direct comparables are available. In the instant case, due to availability of comparables, CPLM could be considered as the most appropriate method in determining arm s length price with respect to contract manufacturing services. Accordingly TNMM is not considered as most appropriate method. 43. The UN Practical Transfer Pricing Manual for developing countries, 2012 in para 5.3.6 lays down the following criteria for choosing MAM. 5.3.6. Selection of Transfer Pricing Method 5.3.6.1. The most appropriate transfer pricing method will be selected taking into account the strengths and weaknesses of the method, the appropriateness of the method in the light of the nature of the controlled transaction (based upon a functional analysis), the availability of reliable information (especially on uncontrolled comparables) and the degree of comparability between the controlled and the uncontrolled transactions(including reliability of comparability adjustments needed). 5.3.6.2.Once the taxpayer has identified the transfer pricing methods that are potentially applicable to the controlled tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's contention of using TNMM as an alternate approach or method is not in tune with the Indian TP Rules, even though it may be permissible as per OECD guidelines. As per the Indian TP Rules, the assessee is to select one method as the MAM. The Indian TP Rules does not give any scope or leverage to use different TP methods. 45. The U.N. Practical Transfer Pricing Manual for developing countries, 2012 in para 6.1.3.3 lays down as follows: 6.1.3.3. Once a method is chosen and applied taxpayers are generally expected to apply the method in a consistent fashion. Assuming that an appropriate transfer pricing method is being applied, a change in method is typically required only if there are any changes in the facts, functionalities or availability of data. The above guidelines presupposes an appropriate transfer pricing method being applied. The above guidelines emphasise on consistency being followed in applying the method. It also provides that the method can be changed, only if there are any changes in the facts, functionalities or availability of data. Assuming that there could be situations where on assessee may be required to change its chosen MAM for the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about the quantity and quality of production, and purchasing raw materials in some cases), risks incurred (e.g. market risk, credit risk and inventory risk) and assets owned (product intangibles). The contract manufacturer is thus the less complex and as such should be the tested party in the transfer pricing analysis. 6.2.20.3 The cost plus method is usually not a suitable method to use in transactions involving a fully-fledged manufacturer which owns valuable product intangibles as it will be very difficult to locate independent manufacturers owning comparable product intangibles. That is, it will be hard to establish a profit mark-up that is required to remunerate the fullyıfledged manufacturer for owning the product intangibles. In a typical transaction structure involving a fullyıfledged manufacturer and related sales companies (e.g. commissionaires), the sales companies will normally be the least complex entities involved in the controlled transactions and will therefore be the tested party in the analysis. The resale price method is typically more easily applied in such cases. 6.2.21 Case Examples of Cost Plus Method: 6.2.21.1. Example 1 (i) LCO, a dome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration. FS purchases its materials from unrelated suppliers and produces the apparel according to designs provided by PCO. The local taxing authority identifies 10 uncontrolled foreign apparel producers that operate in the same geographic market and are similar in many respects to FS; (ii) Relatively complete data is available regarding the functions performed and risks borne by the uncontrolled producers. In addition, data is sufficiently detailed to permit adjustments for differences in accounting practices. However, sufficient data is not available to determine whether it is likely that all material differences in contractual terms have been identified. For example, it is not possible to determine which parties in the uncontrolled transactions bear currency risks. As the differences in these contractual terms could materially affect price or profits, the inability to determine whether differences exist between the controlled and uncontrolled transactions will diminish the reliability of these results. Therefore, the reliability of the results of the uncontrolled transactions must be enhanced. As a general rule it can be said that the above guidelines advocate use of CPM i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles arrived at by the appellant are primarily suppliers of components / semi finished goods to Original Equipment Manufacturers (OEMs) and the functions of such companies are comparable or similar to those of a contract manufacturer. The comparables determined by the company primarily perform manufacturing functions and the performance of other functions (e.g. marketing advertisement) is negligible and insignificant, much the same as is the case with the appellant. Therefore, the profit margins of these companies are primarily reflective of the return on the manufacturing function. However, it would be worthy to note that the ld. TPO has given weightage to product similarity over the functional similarity thereby contradicting the basic premise of application of CPM. Base don this, the ld. TPO has chosen the set of comparables which fall under the broad category of Medical Equipments as classified in the Prowess database. The comparables chosen by the ld. TPO are engaged in the manufacture of medical consumables viz. Disposable syringes, Disposable sutures, Disposable needles, etc. On the other hand, the appellant is a contract manufacturer engaged in manufacturing Tub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. TPO and GE BE. While the appellant also is in principle in agreement with the ld. TPOs philosophy of adjusting the gross mark-up, however, your goodself would appreciate that in order that the adjustments have the desired effect, the actual proportion of marketing expenses to sales ought to be considered for each comparable. This is more so necessary because the level of these expenses as a proportion of sales for each of the ld. TPO comparable varies. In this regard, the appellant would like to mention that Centenial Surgical ( a comparable selected by the ld. TPO) is a case in point, for the reason that its marketing expenses as a proportion of sales is 30% and the adjustment of 8% Tribunal sales granted by the ld. TPO would be grossly inadequate to eliminate the effect of the marketing, distribution and advertisement function on the gross profits. Therefore the appellant submits that the financial analysis by the ld. TPO to arrive at the appropriate gross margin is erroneous, and the adjustment for the differences in the marketing and selling functions ought to be recomputed based on the actual expenses incurred by the companies. Further, in the same wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected should also perform a function performed by a contract manufacturer. If comparable companies perform functions beyond that of a contract manufacturer then they are not comparable. This argument is again general in nature without any particulars on the three comparable companies chosen by the TPO. 50. One of the pleas raised by the Assessee was that functional similarity is to be first seen before choosing an appropriate method and that the TPO in choosing CPM has given weightage to product similarity rather than functional similarity. The Assessee had further pointed out that the comparable chosen by the TPO were manufacturing medical consumables viz., disposal syringes, disposable sutures, disposable needles etc., and that the same cannot be compared with contract manufacturing of tubes, inserts, detectors, tanks and other parts and accessories for medical diagnostic imaging equipment which the Assessee manufactures and which are incorporated by the AE into equipment which are capital goods. On the above submission, the learned DR has submitted that it cannot be said that product similarity has no relevance. Product similarity is also important. If there is no product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin in the case of comparable companies. In that event appropriate adjustment to the gross margin of the comparable companies can be made. 53. It thus seen that the Assessee has not been able to point out as to how CPM is not the MAM in the present case. It can therefore be concluded that CPM, on the facts and circumstances of the present case, is the MAM. 54. It is however seen that the TPO has not given any weightage to the various aspects pointed out by the assessee which call for making appropriate adjustments to the margins of the comparable companies, as required under Rule 10B(1)( c )(iii), (ic) (v) of the Rules. The computation of adjustment at 8% made by TPO is not backed by proper reasoning or rationale. The comparables selected by the TPO perform additional functions in the nature of selling marketing thus evidencing functional differences with the appellant. This fact has been acknowledged by the TPO, but while giving adjustment, the TPO has computed the adjustment at an adhoc figure of 8%. In view of the difference in functions, the assessee is entitled to adjustments which are reliable and accurate, as stipulated in Rule 10C(2)(e) of the Rules. If such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57. Before us, the ld. counsel for the assessee pointed out that the issue as to whether trading profits have to be excluded from the profits of the business while computing deduction u/s. 10B is no longer res integra and has been settled by the Special Bench of the Tribunal in the case of Maral Overseas Ltd. v. ACIT, 136 ITD 177 (SB)(Indore) wherein the Special Bench held as follows:- 78. Section 10B of sub-section (1) allows deduction in respect of profits and gains as are derived by a 100% EOU. Section 10B(4) lays down special formula for computing the profits derived by the undertaking from export. The formula is as under :- Profit of the business of the Undertaking x Export Turnover Total turnover of business carried out by the Undertaking 79. Thus, sub-section (4) of section 10B stipulated that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, notwithstanding the fact that sub-section (1) of section 10B refers the profits and gains as are derived by a 100%EOU, yet the manner of determining such eligible profits has been statutorily defined in sub-sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that provisions of section 10B are different from the provisions of section 80-IA wherein no formula has been laid down for computing the eligible business profit. 80. In view of the above discussion, question NO.2 is answered in affirmation and in favour of the assessee. Accordingly, the assessee is eligible for claim of deduction on export incentive received by it in terms of provisions of section 10B(1) read with section 10B(4) of the Act. 58. Similar view was also expressed by the Mumbai ITAT in the case of T. Two International (P) Ltd. v. ITO, 122 ITD 279 (Mum) and ITAT Bangalore in the case of ACIT v. Motorola India Electronics Pvt. Ltd. in ITA No.1134 1139/Bang/2003, A.Y. 1998-99 2001- 02 by order dated 28.11.2006. 59. The ld. DR, however, pointed out that this Tribunal in assessee s own case for the A.Y. 2002-03 in ITA No.3624/Bang/2004 for the A.Y. 2001-02 by order dated 14.02.2007 has taken a view that profits from trading activity will not be eligible for deduction u/s. 10B of the Act. 60. We have considered the rival submissions and are of the view that the decision rendered by the Tribunal in assessee s own case for the A.Y. 2001-02 will no longer by bin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spute before us that in assessee s own case, this Tribunal has taken a view that income from sale of scrap should form part of profits of the undertaking eligible for deduction u/s. 10B of the Act. The grievance of the revenue is that there is no nexus between the scrap sales and manufacturing activity. We are of the view that there is no merit in the grounds raised by the revenue for the reason that this Tribunal has already taken a conscious decision in the order referred to in ground No.3 raised by the revenue. In the circumstances, following the decision of the Tribunal in assessee s own case, we uphold the order of the ld. CIT(Appeals) and dismiss grounds No.2 3 raised by the revenue. 66. Grounds No.4 5 raised by the revenue reads thus:- 4. The learned CIT(A) has erred in holding that 25% export earnings filter is to be applied even though it leaves only one company as a final comparable. 5. The learned CIT(A) has erred in holding that one comparable would be sufficient for comparability. 67. On the aforesaid grounds of appeal, the ld. counsel for the assessee submitted that this will have no impact on the TP adjustment, if those grounds are allowed. We are o ..... 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