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2015 (9) TMI 286 - ITAT MUMBAI

2015 (9) TMI 286 - ITAT MUMBAI - TMI - Disallowance of depreciation on the intangible assets viz. , material supply contracts, distribution network and right to brand usage - Held that:- The assessee had acquired Textile Effect(TE) Business from CIBA-India and DDCL as a going concern on a lump sale basis, that manufacturing facilities of both the entities were not transferred as part of slump sale, that as a part of slump sale the entire distribution channel was handed over to the assessee inclu .....

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ng into MCS and getting distribution network, the assessee had acquired business/commercial rights that were of the similar nature as mentioned in sec. 32 (1) (ii) of the Act. Same is the case about use of brand name. The assessee had assigned value to various assets namely Fixed assets (Rs. 6. 68 crores), Intangible assets (Rs. 54. 94 crores), Goodwill (41. 87crores). We are of the opinion that by relying upon the valuation report of an expert the assessee had not contravened any of the provisi .....

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would be entitled to the same treatment in the hands of the successor. The recovery of the debt is a right transferred along with the numerous other rights comprising the subject of the transfer. If the law permits the transferor to treat the whole or part of the debt as irrecoverable and to claim a deduction on that account, the same right should be recognised in the transferee. It is merely an incident flowing from the transfer of the business, together with its assets and liabilities, from t .....

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s how far same were followed by the officers concerned. The assessee has specifically alleged that the directions of the DRP were not carried out. In next para i. e. para 5. 2. 3 the DRP mentions that the TPO had rightly rejected the TP Study but reasons have not been given for agreeing with the views of the TPO especially when the assessee had made extensive submissions stating that as how the stand taken by the TPO was flawed. Similar is the position of the next paragraph. The DRP has endorsed .....

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onsideration during fresh adjudication proceedings. - Decided in part in favour of assessee by way of remand.

Disallowance of depreciation on intangibles and goodwill - Held that:- the assessee is entitled to claim depreciation u/s 32(1) (ii) of the Act with regard to MSC, DN and Brand usage. Similar is the position about Goodwill in light of the judgment of the Hon'ble Supreme Court delivered in the case of Smifs Securities [2012 (8) TMI 713 - SUPREME COURT] - Decided in favour of as .....

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ing Grounds of Appeal for the above mentioned two AY. s. : ITA No. 3916/M/14 (AY. 07-08): GROUND NO. 1: Disallowance of depreciation on intangibles 1. 1 The learned Assessing Officer/Dispute Resolution Panel has erred in disallowing depreciation of ₹ 13, 73, 50, 000/- claimed by the Appellant on the intangible assets viz. , material supply contracts, distribution network and right to brand usage. 1. 2. The learned Assessing Officer/Dispute Resolution Panel has erred in further observing th .....

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nt. 1. 3. The learned Assessing Officer/Dispute Resolution Panel has erred in concluding that the valuer's report is incomplete and inconclusive and cannot be accepted. 1. 4. The learned Assessing Officer/Dispute Resolution Panel erred in holding that the aforementioned intangible assets viz. material supply contracts, distribution network and brand usage right are not akin to the intangible assets referred to in the provisions of section 32(1 )(ii) of the Income-tax Act, 1961 (hereinafter r .....

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on the intangible assets viz. , material supply contracts distribution network and right to brand usage and to re-compute its total income accordingly. Without prejudice to the foregoing: 1. 7. The learned Assessing Officer/Dispute Resolution Panel has erred in not considering the payments made by the Appellant for right to brand usage as a revenue deduction. GROUND NO. 2: Disallowance of share issue expenditure 2. 1The learned Assessing Officer/Dispute Resolution Panel erred in disallowing shar .....

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entitled to a deduction under section 35D of the Act on the share issue expenditure incurred by it. 2. 4. The Appellant submits that the learned Assessing Officer/Dispute Resolution Panel be directed to grant due deduction under section 35D of the Act for the share issue expenditure incurred by the Appellant. GROUND NO. 3: Disallowance of expenditure on payment basis under section 43B of the Act 3. 1 The learned Assessing Officer/Dispute Resolution Panel erred in not allowing deduction for payme .....

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uired by it pursuant to the slump sale. 3. 3 The learned Assessing Officer/Dispute Resolution Panel erred in observing that the claim such expenditure was made during the course of assessment whereas the claim was made by the appellant by way of a note to the return of income. 3. 4. The Appellant submits that the learned Assessing Officer/Dispute Resolution Panel be directed to grant due deduction to it under section 43B of the Act and to recompute its total income accordingly. GROUND NO. 4: Gen .....

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e Tax ('AO') incorporating the directions of the Dispute Resolution Panel ('DRP') for the aforesaid assessment year on the following grounds: 1. Erroneous in not following the direction issued by the DRP 1. 1 The AO erred by not following the directions issued by the DRP u/s 144C(5) of the Act. 2. Erroneous disallowance of the corporate service charges 2. 1 The learned AO/DRP erred in upholding the TPO's contention for the disallowance of management service charges paid by th .....

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ct perspective. 3. Erroneous approach adopted by the TPO in computing the adjustment for the Polyurethanes ("PU") division 3. 1 The AO/TPO erred in & the DRP erred in upholding the action of AO/TPO in rejecting the approach followed by the Appellant in its transfer pricing study report without appreciating that this approach was consistently followed by the appellant in the past assessment years. 3. 2 The AO/TPO erred & the DRP erred in upholding the action of AO/TPO in benchma .....

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ng the fact of the case and allocation keys adopted by the Appellant. 5. Application of (+1-5%) in computation of adjustment 5. 1 The Appellant craves that in computing the amount of Transfer Pricing adjustment if any, the benefit of +1-5% range be granted to the Appellant. 6. Disallowance of depreciation on intangibles 6. 1 The learned Assessing Officer/Dispute Resolution Panel has erred in disallowing depreciation of ₹ 6, 84, 70, 313/- claimed by the Appellant on the intangible assets vi .....

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Income-tax Act, 1961 (hereinafter referred to as "the Act") and hence, such aforementioned intangibles are not eligible for depreciation. 7. Disallowance of depreciation on goodwill claimed under section 32(1)(ii) of the Act 7. 1 The learned Assessing Officer/Dispute Resolution Panel erred in disallowing depreciation on goodwill of ₹ 6, 38, 78, 278/- as claimed under section 32(1)(ii) of the Act by it. 8. Disallowance of share issue expenditure 8. 1 The learned Assessing Officer/ .....

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ome/computation of income for the assessment year 2009-10 leading to a double disallowance. 9. Disallowance of expenditure on payment basis under section 43B of the Act 9. 1 The learned Assessing Officer/Dispute Resolution Panel erred in not allowing deduction for payment made by the appellant in connection with liabilities of CIBA Speciality Ltd. taken over by the appellant by way of slump sale. 10. Disallowance of unpaid service tax and works contract tax - Haryana under section 43B of the Act .....

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The learned AO erred in initiating Penalty Proceeding U/S 271 (1)(c) read with Explanation 7 of the Act. 12. The Appellant submits that each grounds of appeal are without prejudice to one another. 13. The Appellant craves leave to add, to alter, amend, substitute and / or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal. During the course of hearing before us, the Authorised Representative (AR) did not press ground no. 2 for the .....

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under: AY. Return filed on Returned Income Assessment dt. Assessed Income Dt. of orders of DRP 2007-08 31. 12. 2008 ₹ 14, 77, 25, 342/- 27. 12. 2010 ₹ 21, 84, 75, 151/- 25. 3. 2014 2009-10 26. 09. 2009 ₹ 53, 97, 90, 433/- 13. 01. 2014 ₹ 72, 51, 75, 838/- 24. 12. 2013 ITA/3916/Mum/ AY. 2007-08: 2. 1. Brief facts of the case are that in this matter original order passed by the AO, in pursuance of the directions issued by DRP-II Mumbai, was challenged before the Tribunal. I .....

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assessment on 29. 3. 2013. 2. 2. First ground of appeal is about disallowance of depreciation on intangibles, amounting to ₹ 13. 73crores. During the assessment proceedings, the AO found that the assessee-company had claimed depreciation of ₹ 12. 07 crores under the head depreciation on Material Supply Contract (MSC) and on Distribution Network (DN) and ₹ 6. 25 crores under the head Brand Uses Expenses (BUE). He directed the assessee to explain as to why the above referred clai .....

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o toll manufacturing agreement (material supply agreement with CIBA-India and DDCL), that it had recorded the fixed assets and intangible assets at fair value as determined by an independent valuer, that as per the agreement it was granted non exclusive irrevocable and royalty fee licence to use trademarks, domain name for a period of 24 months, that based on valuation report of independent valuer it had valued the aforesaid right (to use brands), as revenue expenditure, that the payment made by .....

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32 ITR 316). Without prejudice to the above, it was contended that if the payments made for brand use was treated as capital asset then depreciation@ 25% as per the provisions of section 32(1)(ii)of the Act should be allowed. With regard to MSC, it was stated that on acquisition of textile effect business the manufacturing facilities of DDCL were not transferred to the assessee, that in order to protect its business interest it entered into an MSC with DDCL to ensure consistency in quality and q .....

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further discount of 4. 5% on invoice value if the payment was made within five days, that MSCwas an intangible asset in terms of s. 32(1) (ii) and was eligible for depreciation @ 25%. The assessee relied upon the cases of Skyline Caterers Ltd. (306 ITR-AT-369) Kotak Forex Brokerage Ltd. and Coca Cola Beverage P Ltd. About the DN, it was contended that over the years CIBA-India and DDCL had created strong distribution network for selling their products, that through the DN agreement the assessee .....

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iness from ICI Ltd. in the AY 2002-03 as a going concern in accordance with business Transfer Agreement (BTA), that it had acquired the fixed assets, intellectual properties, intangibles and the net current assets, that the actual cost of the fixed assets for the assessee was the consideration which it had paid to ICI Ltd. , that a similar disallowance had been made by the AO in the earlier A. Y. s, that the Tribunal had deleted the addition for the A. Y. s 2002-03, 2003-04 and 2004-05. With reg .....

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consideration, that it was not a case of revaluation of the assets. The assessee referred to the case of Ashwin Vanaspati (255 ITR 26) in its support. In its support the assessee furnished valuation report dt. 19. 1. 2007 prepared by M. M. Ravji & Co. CA. To enquire into the genuineness of the claim of the assessee, the AO called for information from DDCL and CIBA India under sec. 131 of the Act. He directed them to furnish details of written down value (WDV) of all the blocks of assets tra .....

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5 crores). On 20. 12. 2010, the assessee filed its explanation in that regard. After considering the submission of the assessee, he held that the assessee had not incurred any expense on brand use, that the notional value ascribed by the valuer was on the basis of future estimated sales, that there was no existence of any brand uses right at the time of transfer, that the transferor had admitted that the asset as a brand uses was not in existence at the time of transfer, that the claim of the as .....

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f depreciation on MSC, DN and right to use brand. 2. 3. Before us, the AR contended that as per the Toll Manufacturing Agreement (TMA) the assessee was to get the things manufactured for a period of 5 years at no profit /loss basis, that the independent valuer had valued the benefit occurring to the assessee, that all the three intangibles were entitled for depreciation u/s. 32(1)of the Act, that there was transfer of intangibles by way of slump sale, that the valuer's report was complete an .....

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rtainments Network Ltd. (108 TTJ 180) , ONGC Videsh Ltd (37 SOT 97) , Weizmann Forex Ltd. (51 SOT 535) , Sarabhai Zydus Animal Health Ltd. (ITA /26/Del. /2005) and Drill Bits International Pvt. Ltd. (ITA/ 1361/ Pun/ 2010). He referred to page No. 42, 309-311, of the paper book. Departmental Representative (DR) argued that the transaction was a slump purchase, that valuation of each unit was not made, that business as a single unit was sold by CIBA and Dye Chem, that both those entities had not m .....

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the cases dealing with intangible assets and Goodwill. In the case of Smifs Securities Ltd. (supra) the Hon'ble Supreme Court has held that provisions of sec. 31(2) are applicable to goodwill. It is also found that business rights, list of clients, brand equity, non compete fee etc. have been held to be intangible assets by the Hon'ble Court/ITAT, while dealing with the issue of depreciation. We would like to reproduce the relevant portions of the judgments dealing with the issue. The Ho .....

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i the Hon'ble Kerala High Court (supra) has deliberated upon the facts of the case and allowability of depreciation on intangible assets. In that matter the assessee had purchased a hospital in Quilon with its land, building, equipment, staff, name, trade mark and goodwill as a going concern under two separate sale deeds. Under the sale deed, the value of the goodwill which included the name of the hospital and its logo and trade mark was ₹ 2 crores. The assessee was allowed depreciati .....

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mittedly the hospital was run in the same building, in the same town, in the same name for several years prior to purchase by the assessee. By transferring the right to use the name of the hospital itself, the previous owner had transferred the goodwill to the assessee and the benefit derived by the assessee was retention of continued trust of the patients who were patients of the previous owners. When the goodwill paid was for ensuring retention and continued business in the hospital, it was fo .....

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ible assets specifically enumerated in clause (ii) and such of the other business or commercial rights similar to the items specifically covered therein. " The Hon'ble Delhi High Court in the matter of Areva T and D India Ltd. (supra) has discussed the issue of depreciation to be granted on intangible assets. It has also discussed the facts of the case. Following are the finding of the court: The principle of ejusdem generis provides that where there are general words following particul .....

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ion 32(1)(ii) of the Act preceding the term "business or commercial rights of similar nature", it is seen that the intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words "business or commercial rights of similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of the specified intangible assets bu .....

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at form part of the tool of trade of an assessee facilitating smooth carrying on of the business. ……. in the case of the assessee, intangible assets, viz. , business claims, business information, business records, contracts, skilled employees and know-how were all assets, which were invaluable and resulted in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The intangible assets .....

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rcial rights of similar nature" specified in section 32(1)(ii) of the Act and were accordingly eligible for depreciation under that section. …the commercial rights acquired to sell products under the trade name and through the network created by the seller for sale in India were entitled to depreciation. In the case of Manipal Universal Learning Pvt. Ltd. (supra) the assessee had agreed in the sale agreement to the price of ₹ 51. 63 crores as the value of the SMU agency rights. .....

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on including the value of goodwill. On appeal to the Hon'ble Karnataka High Court the court held that Explanation 3 to section 32(1) of the Act, defined the expression "asset" to include intangible assets like goodwill. Goodwill is an asset under Explanation 3(b) to section 32(1)of the Act, that depreciation was allowable even on the goodwill, that that the assessee would be entitled to claim depreciation in respect of an amount of ₹ 98, 73, 25, 000 (including goodwill) and n .....

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g facilities of both the entities were not transferred as part of slump sale, that as a part of slump sale the entire distribution channel was handed over to the assessee including the customer, dealers, marketing people, marketing plans, laboratory, supply-chain and the warehouses, that the services of textile effects employees was transferred to the assessee, that it had entered into agreement with CIBA-India and DDCL for material supply and for supply of chemical products to the newly acquire .....

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and intangible assets in the books of account. We find that in the valuation report the valuer had assigned value to MSC, DN and Brand uses, that the AO/DRP has not brought anything on record to disprove the correctness of the valuer. As far as the entries in the balance sheet of CIBA-India and DDCL is concerned, in our opinion same are not decisive factors. What has to be seen in case of a slump sale is the treatment given by the assessee in its books of account to the assets acquired and as t .....

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business/commercial rights. Therefore, we are of the opinion that by entering into MCS and getting distribution network, the assessee had acquired business/commercial rights that were of the similar nature as mentioned in sec. 32 (1) (ii) of the Act. Same is the case about use of brand name. The assessee had assigned value to various assets namely Fixed assets (Rs. 6. 68 crores), Intangible assets (Rs. 54. 94 crores), Goodwill (41. 87crores). We are of the opinion that by relying upon the valuat .....

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mp sale the value adopted by the assessee on the basis of valuation report can be considered for depreciation purpose. The Hon'ble Gujarat High Court in the case of Aswin Vanaspati Industries Ltd. (255 ITR 26) has approved the principle of valuation of acquired asset by a valuer and held that in absence of adequate material on record in form of departmental valuation report and the opinion of the technical experts could not be ignored. In light of the above discussion, ground no. 1 is decide .....

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ilities were of CIBA India Ltd. and not of the assessee. He also held that the assessee had made the claim about the expenditure during the course of assessment proceedings. 3. 1. During the course of hearing before us, the AR stated that the assessee had taken over the liabilities of CIBA India Ltd, that these were known liabilities, that as per the agreement the assessee had to incur the expenditure, that the AO or DRP had not doubted the genuineness of the expenditure incurred. He relied upon .....

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velopment, manufacturing and marketing of dyes and chemical products used in or the benefit of textile franchise in Republic of India and shall include the assets, transfer of employees / encumbrances, permitted liens and liabilities. In sub para xiv of Para 1. 1 term liability has been defined as under: "liability means: (a) all obligations and liabilities to the extent included in net working capital (b) all obligations and liabilities attributable to the transferee's ownership or use .....

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opinion that once all the liabilities were taken over by the assessee in pursuance of the agreement, then to make payment of the agreed sums was a legal obligation and it was his duty to fulfill that obligation. It is also a fact that there is no doubt about the incurring of expenditure. In our opinion. Clauses (b) and (c) of the liability clause clearly indicate that the the assessee had taken over liabilities attributable to the prior period. So, the assessee was legally bound to make payment .....

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s comprising the subject of the transfer. If the law permits the transferor to treat the whole or part of the debt as irrecoverable and to claim a deduction on that account, the same right should be recognised in the transferee. It is merely an incident flowing from the transfer of the business, together with its assets and liabilities, from the previous owner to the transferee. It is a right which should, on a proper appreciation of all that is implied in the transfer of a business, be regarded .....

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es (AE. s). For determining the Arm's length Price (ALP) of such transactions, he made a reference to the Transfer Pricing Officer(TPO). Along-with the TP documentation, a copy of the agreement entered into by the assessee with its AE. s in relation to the corporate service charges was submitted before the TPO. With reference to the direction dated 20/12/2012 of the TPO, the assessee submitted the nature of types of service availed from its AE. s for payment for its corporate service charges .....

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company with its AE. s. In reply to the show cause notice, issued by the TPO on 6. 1. 2013, the assessee filed sample copies of invoices raised by the AE along-with the ledger account of management fee/intra group services. It also explained the nature of services and contended that the services availed by it from its AE. s were essential to the business of the company and did not constitute share holder/stewardship activities of the AE, that the AE possessed the requisite skill sets. The asses .....

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d using scientific basis, that the expenses were identified to each segment on actual basis. It also objected to adhoc allocation of all the expenses by the TPO, using turnover ratio. Without prejudice it was submitted that if any TP adjustment was to be proposed same should be restricted only to AE segment and not to the entire Unit/entity as a whole. Vide his order, dtd. 23. 01. 13, the TPO proposed adjustment of ₹ 11, 44, 72, 502/-in respect of international transactions entered in to b .....

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PO upheld his order and issued certain directions to the AO/TPO. We will discuss the order of the DRP at appropriate place. 4. 2. Before us, the AR stated that the DRP had not adjudicated the issue, that the assessee had filed certain papers before the DRP as additional evidence, that the DRP did not admit or reject the said papers, that non adjudication of the issue had kept the issue alive. He referred to the pg. 967 to 1341 of the paper book, ground no. 3 raised in form no. 35A, Annexture 3 a .....

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or accept the additional evidence produced by the assessee once same were filed before it. Secondly, the ground of appeal relating to was not decided. Non-adjudication of a ground raised by an assessee is miscarriage to justice. We would like to reproduce the order of the DRP dealing with TP issue and same reads as under: 5. 2. 1 The applicant has submitted before the DRP that the entire payment of corporate expenses of ₹ 46, 299, 732/- as an adjustment U/s 92CA. We have considered the su .....

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46, 299, 732 /- was treated as an adjustment U/s 92CA. We agree with the order of the TPO and the addition proposed on this count in the draft order. 5. 2. 2 The assessee has submitted that TPO has reworked the margin calculation incorrectly as following errors were found in the calculation submitted by the assessee: - In case of Allied Resins, the increase in closing stock was not taken into account while working out the Margin - In Camphor and Jyoti Resins, increase in closing stock was added .....

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ed in using entity level for the purposes of bench marking international transactions. In this regard, we find that the TPO has correctly pointed out the infirmities in the TP Study report before rejecting it and we are in agreement with his views. The TPO in his order has clearly brought out the reasons for making the adjustment at the entity level. Therefore, we are in agreement with the TPO on this issue. 5. 2. 4 The assessee has submitted that the TPO is entitled only to determine arms lengt .....

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on of calculation of PLI are not acceptable as the basis of allocation of expenses and the correctness of allocation are not verifiable. Therefore, these are not reliable. In the absence of the same, and considering the interlinking between AE and non-AE imports, it is not possible to prepare reliable segment-wise accounts. Further, it is noted that the assessee itself has bench -marked its international transactions using entity-level operating margin as the PLI. This would indicate that though .....

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action of considering single year data for the comparable companies selected by him for the year ended 31 st March 2009 as against three year data used by the assessee. We have considered the order of the TPO and the submissions filed by the applicant and found that the action of the TPO is as per the provisions of Rule 10B( 4) of the Income Tax Rules, 1962. Thus, we confirm the action of the TPO in this regard. 5. 2. 6 Regarding claim of standard deduction of 5% from the arm's length price .....

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of the above discussion we confirm the adjustment carried out by the AO in pursuance of the order of the TPO in principle subject to verification of the computational error' as claimed by the applicant. " A glance at the order of the DRP shows that the order is a non speaking order and it has not given any reasons for arriving at its conclusion. In para no. 5. 2. 1. the DRP talks of failure of the assessee to submit 'even a single evidence' to prove that it had received any serv .....

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