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M/s. Vishay Components India Pvt. Ltd. Versus The Addl. Commissioner of Income Tax, Range – 7, Pune and Vica-Versa

2015 (11) TMI 118 - ITAT PUNE

Transfer pricing adjustment - transfer pricing adjustment - international transaction of both the export of finished goods and import of finished goods for re-sale - TNM Method v/s RPM method - whether no merit in deviating from the TNM Method applied by the assessee to benchmark its international transactions with its associate enterprises on aggregate basis? - Held that:- The assessee has time and again explained the reasons why it had adopted the TNMM method and had also explained the differe .....

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s, wherein similar explanation has been accepted by the TPO itself in all the other years. The conduct of the business and the products manufactured are identical in the year under consideration, when compared to the other years i.e. assessment years 2006-07, 2007-08 and 2008-09. In the entirety of the above said facts and circumstances, we are of the view that the adoption of TNMM method was the most appropriate method for benchmarking international transactions with its associate enterprises a .....

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an the margins declared by the comparables picked up by the assessee in its TP study report and consequently, the international transactions entered into by the assessee with its associate enterprises being at arm's length price, no addition is warranted in the hands of the assessee - Decided in favour of assessee.

Set off of brought forward unabsorbed depreciation before claiming of deduction under section 10B - Held that:- The issue in the present appeal is squarely covered by the r .....

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gned assessment year is squarely covered by the ratio laid down by the Hon’ble Supreme Court in TRF Ltd. Vs. CIT (2010 (2) TMI 211 - SUPREME COURT) and following the said ratio, we uphold the order passed by the CIT(A). - Decided in favour of assessee. - ITA No.551/PN/2014, ITA No.736/PN/2014 - Dated:- 8-10-2015 - MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM For The Assessee : Shri Farooq V. Irani For The Department : Shri S.K. Rastogi, CIT ORDER PER SUSHMA CHOWLA, JM : The cross-appeals filed .....

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nces of the case and in law, the Hon'ble CIT(A) has: I. In respect of transfer pricing adjustment 1. Adjustment in respect of international transaction of export of finished goods Erred on facts and in law by making a transfer pricing adjustment of ₹ 4,70,39,838 to the value of international transaction relating to export of finished goods by rejecting the transfer analysis undertaken (based on selecting Transactional Net Margin Method ('TNMM') as most appropriate method) by th .....

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ejection of CPM in the TP report and before the learned TPO; and (iii) CPM being the traditional method is preferred over TNMM. - not appreciating the facts that the gross profit margin workings provided by the Appellant (submitted based on the specific request of the learned TPO) provides information on gross margin based on standard cost of production considered in Bill of Material for selected sample of products which is different than the actual/real profit earned by the Appellant and hence .....

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finished goods, without taking into account the lower of 5 per cent variation from the comparable margins determined, which is permitted under the provisions of section 92C(2) of the Act. 2. Adjustment in respect of international transaction of import of finished goods for resale Erred on facts and in law by making a transfer pricing adjustment of ₹ 14,11,280 to the value of international transaction relating to import of finished goods for resale by rejecting the transfer pricing analysi .....

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; - selecting Resale Price Method as most appropriate method; and - computing the arm's length price of import of finished goods for resale, without taking into account the lower of 5 per cent variation from the comparable margins determined, which is permitted under the provisions of section 92C(2) of the Act. II. In respect of non - transfer pricing ground 3. Set off of brought forward unabsorbed depreciation before claiming of deduction under section 10B of the Act Erred on facts and in l .....

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Appellate Tribunal to decide this appeal according to law. 4. The Revenue in ITA No.736/PN/2014 has raised the following grounds of appeal :- 1) On the facts and in the circumstances of the case, learned CIT(A)-IT/TP has erred in deleting the addition made by the Assessing Officer by disallowing the assessee's claim of bad debts amounting to ₹ 30,63,290/-. 2) On the facts and in the circumstances of the case, learned CIT(A)-IT/TP erred in holding that after the amendment to section 36( .....

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in the circumstances of the case, learned CIT(A)-IT/TP is also factually not correct in holding that AO had not discussed any specific bad debt when the AO in his order had listed all the bad debts and had discussed each of them individually in his order for holding as to why the claim in respect of the same was not allowable. 5) The appellant craves to add, amend or alter any grounds of appeal. 5. The assessee is aggrieved by way of grounds of appeal No.1 and 2 by the transfer pricing adjustme .....

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nufacturing facilities of the assessee were divided into Domestic Tariff Area unit ( DTA unit ) for manufacturing capacitors and low end resistors, and an Export Oriented Unit ( EOU ) for manufacturing certain high end resistors, which were exported to overseas group entities. During the year under consideration, the assessee had also started the activity of providing certain Information Technology Enabled Services ( ITES ) to certain Vishay Group entities. The Vishay Group was a leading interna .....

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r perusing the details / documents filed and the information furnished, was of the view that in respect of certain international transactions, the benchmarking done by the assessee company was not acceptable. Accordingly, a show cause notice was issued to the assessee. The TPO noted that the assessee had aggregated the transactions and taking operating margins over the operating revenue as PLI and following TNM Method had taken external comparables and the arm's length price of the transacti .....

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pe, the aggregation for the purpose of benchmarking of international transactions should not be allowed. The TPO was of the view that the benchmarking done by aggregating the transactions mentioned in the first four heads of the table was not acceptable and therefore, the same was proposed to be rejected. The TPO thus, show caused the assessee in respect of import of finished goods for re-sale. The TPO observed that the transfer pricing study report submitted by the assessee did not contain the .....

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found to be engaged in import of finished goods, which were sold to third parties in India and such imports were from associate enterprises as well as third parties. Accordingly, the assessee was asked to submit the details and separate profitability of the trading activity in respect of items imported from the associate enterprises and those imported from third parties and also separate profitability working up till gross level margins. Considering the details filed by the assessee, the TPO not .....

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57,27,33,837/-. The assessee had benchmarked the transaction by applying TNM Method using operating margins to operating cost as profit level indicator, which in the case of assessee worked out to 18.05% and the weighted average mean of comparable companies was 10.91% and hence, the transaction was found to be at arm s length. The TPO noted that the export of resistors to associate enterprises was done from EOU units of assessee s manufacturing facilities. The items which are produced in the EO .....

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onsuming. The TPO thus, asked the assessee to submit the split financials and profitability statements up to GP level in respect of certain items by doing the ABC analysis. The assessee furnished the details which are incorporated under para 3 at pages 7 and 8 of the order of TPO. The TPO noted from the working of gross margins that for sample size of items, which are about 100 in number and are accounted for nearly 80% of total sales, the gross profit earned in respect of export to associate en .....

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ansactions, was not acceptable and was rejected. In respect of imports made from the associate enterprises and third parties, the case of the assessee before the TPO was that the items were not similar or same and there was difference in technical specifications and also difference in application of products, and hence, application of re-sale market price method was not warranted to determine the arm's length price of the said transaction. Similarly, plea of the assessee in this regard was a .....

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esistors and high end resistors, respectively. Further, the static film capacitors and ceramic capacitors, which the assessee had imported from its associate enterprises and also the aluminum electronic capacitors, which had been imported from third parties, and the manufacture of the same form the set of comparables adopted by the assessee. Though the technical specifications may differ, the market was same as electronic components were different applications. Accordingly, the TPO held that res .....

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d not separately evaluated the said transaction. The entire trading activity was considered to be part of the manufacturing activity of the assessee itself and the aggregation of transaction and its valuation was adopted. In view of the contention of the assessee about non-comparability of transaction of import of finished goods from associate enterprises and third parties, was found to be not acceptable and was rejected. In view thereof, an adjustment was proposed to the international transacti .....

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support assessee s contention. The contention of the assessee that application of CPM method was not warranted because finished goods exported to associate enterprises and sold to third parties were not similar in terms of technical specifications and end use application, was also rejected. The TPO in this regard observed that what was benchmarked was the production from the EOU units, which meant that products manufactured therein were for exports only. The market for the export of products wa .....

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its case did not fit into the CPM method was found to be not acceptable by the TPO and the same was applied to benchmark the international transactions of the assessee. The TPO further observed that even if the arrangement for establishing the EOU units was to cater to the demand of associate enterprises, but in case there was an opportunity available for commanding better price for products, the same should not be charged to associate enterprises and in this regard, the profit of the assessee .....

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transaction relating to export of finished goods. The Assessing Officer passed the assessment order under section 143(3) of the Act making TP adjustment of ₹ 4.84 crores. 10. The CIT(A) after elaborating upon the issue, noted that the assessee has aggregated the international transactions of import of raw materials and finished goods, export of finished goods and receipt of commission for the application of TNM Method. As far as the import of raw materials and export of finished goods is c .....

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) observed that the transaction may be aggregated, when it was not possible to evaluate them separately and when the transactions were clearly linked and continuing. However, as per the CIT(A), the TP study report of the assessee was not in accordance with paras of OECD Guidelines. The CIT(A) accepted the view of the TPO that manufacturing and trading functions should be segregated and separately benchmarked. 11. The second issue which was considered by the CIT(A) was the application of most app .....

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sale to the associate enterprises as well as third parties consisted of different resistors, so as to make the gross margins. The contention of the assessee that exports segment and the domestic segment could not be compared because geographical difference, was also not valid. The CIT(A) noted that the assessee was not a contract manufacturer for associate enterprises, but operates as normal manufacturer and this being so if the assessee has lesser margins in exports segments than the domestic s .....

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d the adjustment to international transaction of import of finished goods for re-sale. The CIT(A) upheld the application of RPM method for benchmarking the international transaction of the assessee. 12 The assessee is in appeal against the above said adjustment made in the international transaction of both the export of finished goods and import of finished goods for re-sale. 13. The learned Authorized Representative for the assessee stressed that the assessee was applying TNM Method in its TP s .....

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re entered into by the assessee with its associate enterprises for all the subsequent years and the assessee was consistently following the method of TNM Method to benchmark its international transaction from year to year, which has been accepted by the Department. The assessee had aggregated the transactions and had also applied TNM Method. Where the products remained to be the same and in the absence of any evidence found to the contrary, the plea of the assessee before us was that the TNM Met .....

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drawn to the TP Study report placed at pages 33 and 34 of Paper Book and it was pointed out that where the assessee has entered into various transactions which are functionally dissimilar, then the aggregation of transactions cannot be allowed. Further, the learned Departmental Representative for the Revenue relied on the order of CIT(A). 15. We have heard the rival contentions and perused the record. The issue arising in the present appeal in respect of transfer pricing adjustment is in relati .....

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nished goods 57,27,33,837 TNMM 6 Reimbursement of 1) Software 99,47,110 1,44,68,153 At cost Actuals 2) Other expenses 45,21,043 7 IT support service fee 2,02,46,944 TNMM 8 ARP & BOM com service 47,51,221 TNMM Total 77,36,13,899 16. The assessee had aggregated the international transaction of import of raw materials and components for manufacturing finished goods for domestic sales as well as for exports, with international transactions of import of finished goods for resale trading and of re .....

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orked at 9.31% by the assessee in its TP report. The conclusion of the assessee was that the transfer pricing of international transactions was at arm's length price. However, the TPO rejected the aggregation approach adopted by the assessee and he further applied RPM method for benchmarking international transactions of import of finished goods for re-sale and further, applied cost plus method for international transaction of export of finished goods. In respect of import of finished goods .....

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gross profit margins earned from manufacturing and export to associate enterprises at 44.71%. The difference in gross profit margins in the above two segments was proposed as an adjustment in the hands of the assessee by the TPO at ₹ 4.70 crores. The Assessing Officer incorporated the above said adjustment in the assessment order resulting in addition of ₹ 4.84 crores. The assessee is in appeal against the adjustment made by the TPO which have been applied by the Assessing Officer an .....

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e assessment orders relating to assessment years 2006-07 to 2008-09 at pages 8.1 to 811 of the Paper Book. The perusal of order of TPO under section 92CA(3) of the Act relating to assessment year 2006-07, dated 29.10.2009 placed at pages 8.1 to 8.27 of Paper Book reflects that the TPO had noted the international transactions entered into by the assessee with its associate enterprises, which included the export of finished goods to overseas group companies and also import of finished goods for re .....

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er, the assessee has placed on record the assessment order relating to assessment year 2007-08 at pages 8.31 to 8.78 of Paper Book. The said order is also dated 29.10.2009 and the assessee had entered into similar international transactions and had aggregated its transactions and had also applied TNM Method by using operating profits over operating cost. The objection of the TPO was not with regard to application of TNM Method, but the comparables to be applied and the adjustment on account of a .....

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od and the aggregation of various international transactions has been approved by the TPO though the adjustment has been made to the international transactions on account of various other factors. The copy of the said order of TPO is placed at pages 8.92 to 8.116 of Paper Book. 18. The case of the assessee before us is that in view of the above said facts and circumstances, there was no merit in deviating from the TNM Method applied by the assessee to benchmark its international transactions wit .....

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the method adopted by the assessee for benchmarking its international transactions with its associate enterprises, in the absence of any reasons brought on record, there is no merit in deviating or taking stand contrary to the stand accepted in both the preceding and succeeding years, while benchmarking the international transactions in the hands of the assessee. In the absence of TPO or CIT(A) having been able to demonstrate as to how the facts of the present year are different from the facts o .....

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e on the gross profit level, as adopted by the TPO for benchmarking international transactions of the assessee with its associate enterprises. The explanations of the assessee have been rejected by the TPO/CIT(A) without any basis, wherein similar explanation has been accepted by the TPO itself in all the other years. The conduct of the business and the products manufactured are identical in the year under consideration, when compared to the other years i.e. assessment years 2006-07, 2007-08 and .....

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the assessee. 19. We find support from the order of Tribunal in John Deere India (P.) Lt d. Vs. DCIT in ITA No.1476/PN/2010 , relating to assessment year 2006-2010, 07, wherein the Tribunal vide order dated 20.02.2015 had decided the issue on both the aspects i.e. where a method has been consistently followed by the assessee why the same should not be applied to benchmark its international transactions and also the issue of application of TNMM method as compared to CUP method applied by the TPO .....

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ent is made only to the export of tractors and in respect of other reported transactions the Assessing Officer has accepted the method adopted by the assessee as well as determination of the ALP as per the T.P. study filed by the assessee. The contention of the assessee is that it had exported tractors to AEs for last several years and the assessee has adopted TNMM method as the most appropriated method for determining the ALP in respect of the transaction of export of tractors to the AEs from A .....

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e Nos. 282 - 285 of the P/B-2). The assessee has also filed the TPO s order for the A.Y. 2008-09 which is placed at Page Nos. 353 - 354 of the P/B-2. Though the TPO/DRP has gone on discussing the provisions of law but have conveniently ignored to put of record how the facts of the current year are different from the fact in A.Ys. 2004-05 and 2005-06 as in those years the TNMM was adopted by the assesse for determining the ALP which has been accepted as a most appropriate method by the TPO withou .....

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is expressed by the Hon'ble Supreme Court in the case of Radhasoami Satsang Vs. CIT 193 ITR 321 (SC). It is also certainly strange that in the A.Y. 2008 -09 the TPO has again accepted the TNMM method as an appropriate method which was adopted by the assessee and has not disturbed the result. We may refer here to the few decisions of the other Co-ordinate Benches in which it is held that when the facts involved are similar in various years and the Revenue has accepted the method adopted by t .....

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. Now, let us look into the T.P. study report filed by the assessee before the TPO. The TPO has rejected the comparable entities selected by the assessee company. It is seen that in the A.Y. 2005 -06 out of the 8 comparable selected by the assessee, 7 comparable were common and the TPO has not disputed those in that year. In this year, the TPO expressed the reservation on the comparable selected by the assessee to support his working of the ALP. There cannot be two standards for the Assessing Of .....

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his year as compared to A.Y. 2005 -06. There is a merit in the contention of the assessee that the tractors segment is niche segment and there is no much difference in the turnover of the comparable entities selected by the assessee. 19. The TPO has expressed his reservation on the Escorts Ltd. and HMT Ltd. comparable selected by the assessee on the ground that those two companies have incurred losses. It is seen that in the A.Y. 2005 -06 those two companies has incurred the losses but in spite .....

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ct of those two comparable companies selected by the assessee is erroneous and there is no justification for the TPO to reject those two comparable. The TPO has also objected to the inclusion of another entity i.e. Kerala Agro Machinery Corporation Ltd. (KAMCL) on the ground that the said company is manufacturing power tillers and power reapers and not engaged in the business of manufacturing tractors. According to the TPO the said company cannot be considered as a comparable for determining the .....

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a Escorts Ltd. the TPO has stated that Escort is also selling farm equipments along with tractors and therefore the said company cannot be considered as a comparable entity. 20. The main objection of the assessee is on the approach of the TPO it is submitted that in the preceding year the TPO accept those companies as a comparable have determining the ALP when in that year also all the facts and figures were before him in the A.Y. 2006 -07 the TPO adopt the different approach. In respect of the .....

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that even if the TPO is correct with regard to the four companies cited (supra) but still balance four companies are comparable to the assessee company and in the same business as no specific objection is noted by the TPO, those companies should be considered as comparable. The assessee states that net operating margins (NOM) of the balance four companies is within plus or minus 5% of the net operating margin of the export segment and hence, the transactions are at ALP. The assessee has filed th .....

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ed as a new comparable companies in this year. On perusal of the data in our opinion KAMCL cannot be considered as a comparable in the A.Y. 2006 -07 as said company is not admittedly in the business of manufacturing tractors. But in respect of the remaining 7 companies as per the data placed before us, all those companies are in the line of same business i.e. tractor manufacturing. If we put the remaining 7 companies selected by the assessee, the picture is as under: Sr. No. Name of the company .....

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ractors in domestic market also. We, accordingly, hold that the transaction of export of tractors to its AEs is at ALP within the settle parameters. 20. The Tribunal further dealt with the second aspect of the issue i.e. the application of most appropriate method and observed as under:- 22. Let us deal with another objection of the TPO on the appropriate method whether the TNMM which is adopted by the assessee is a correct appropriate method or CUP which is applied by the TPO. This issue stands .....

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the assets utilized, suitable adjustments are not possible to be made and hence, the said case CPM was not the most appropriate method for determining the ALP. The operating part of the discussion in the said decision is as under: 50. Considering the above submissions, vis-à-vis the method i.e. CPM (cost plus method) adopted by the learned TPO to determine the ALP, which has been relied upon by the learned Departmental Representative, we find that the learned TPO while adopting CPM has fa .....

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risk in export segments whereas the assessee has to bear all these risks in the domestic segment. The contractual statements also defer in the domestic segment vis-a-vis export segments. There are different characteristics and contractual terms in the two segments and further geographical and marked differences are also present. Thus, we are of the view that it is very difficult to make suitable adjustments for these differences, hence the CMA method is not appropriate method for determining the .....

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ent and the same is employed to the total cost of production of the goods sold to the AE and addition of ₹ 58,54,128 has been made. In this working, the learned TPO has failed to appreciate that during the year, the assessee has paid processing charges to the local contractors of ₹ 16,98,742 i.e. in respect of products sold in the domestic segment, hence the same should not have been allocated to the export segment. Besides, there is no reason to doubt the submission of the assessee .....

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assessee treating the same as having no basis. In our view, the apportionment of these costs is justified because major time of the employees is devoted towards the domestic segment. We also find substance in the submission of the learned Authorised Representative that assessee has also to incur selling and administrative expenses, freight expenses, bank interests etc., which cannot be ignored as ultimately the income-tax is levied on net profit and therefore, comparison of the net profit of th .....

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ebt risks, product/warranty risks etc., hence some percentage of reduction should he given in the margin computed for the domestic segment for the above risk. 52. Considering the above material facts in totality, we are of the view that the learned TPO was not justified in adopting the CPM as the most appropriate method. On the basis that the assessee had a joint facility arrangement or a long-term buy and supply arrangement with its AE, as we have discussed hereinabove, we find that there was n .....

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the Tribunal has followed the decision of Mumbai Bench of the Tribunal in the case of Asstt. CIT vs. NGC Network (India) (P) Ltd. ITA No. 5307/Mum/2006, dt. 23rd Feb., 2011 (para 15) [reported at (2011) 56 DTR (Mumbai)(Trib) 1 -Ed.] on the rule of consistency and need for not taking the domestic comparables and need for taking up the external comparable in matters of the transfer pricing adjustments. It was held further that the uncontrolled transactions and the external comparables which was a .....

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industrial products to its AEs as well as sold in the domestic market. The assessee had adopted TNMM but the said method was rejected by the TPO, and TPO substituted CPM in the place of TNMM. When the matter reached before the Tribunal it is held that CPM cannot be applied since there were various differences in the export segment and domestic segment such as market functions, geographic difference, volume difference, credit risk, related party transactions etc. In our opinion the said principle .....

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determining the ALP in respect of export of the tractors to the AEs and we approve TNMM as a most appropriate method adopted by the assessee for determining the ALP. We also hold that even after excluding KAMCL the average operating profit margin of the 7 companies are at 5.71% as against the 11.70% of the export segment of the assessee company. The ALP declared by the assessee is well within the limit. We, accordingly, hold so. In the result, the Ground No. 4 is allowed. 21. While deciding the .....

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re higher than the margins declared by the comparables picked up by the assessee in its TP study report and consequently, the international transactions entered into by the assessee with its associate enterprises being at arm's length price, no addition is warranted in the hands of the assessee. Accordingly, we delete the addition of ₹ 4.84 crores. The grounds of appeal No.1 and 2 raised by the assessee are thus, allowed. 22. The second issue raised by the assessee vide ground of appea .....

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he view that the brought forward losses and unabsorbed depreciation were required to be set off against the total income of the assessee first and thereafter, deduction under section 10B of the Act should be allowed. Accordingly, the Assessing Officer re -computed the deduction under section 10B of the Act by granting the deduction after allowing set off of brought forward losses. 23. The contention of the assessee before the CIT(A) was that the stage of granting of deduction under section 10B o .....

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see s appeal. Accordingly, he upheld the order of Assessing Officer in setting set off of brought forward unabsorbed depreciation before granting deduction under section 10B of the Act. 24. The assessee is in appeal against the said order of CIT(A). 25. The learned Authorized Representative for the assessee pointed out that the CIT(A) had relied on the decision of Hon ble Supreme Court in Himasingka Seide Ltd. Vs. CIT (supra), which was relatable to assessment years 1988-89 to 1990-91, wherein t .....

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epresentative for the assessee in this regard placed reliance on series of case laws filed in the Paper Book. 26. The learned Departmental Representative for the Revenue pointed out that admittedly, prior to 01.04.2000, the section speaks of exemption, but after its amendment, undoubtedly, it is a deduction allowable to the assessee under the Act. The learned Departmental Representative for the Revenue placing reliance on the ratio laid down by the Hon ble Supreme Court in Synco Industries Ltd. .....

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the pre-amended provisions of the section, under which the income comprising under the said section was exempt from the total income. The issue arising before us is whether while computing deduction under section 10B of the Act, in cases where the assessee has unabsorbed losses or depreciation, brought forward from earlier years, then whether the said unabsorbed business losses / depreciation are to be adjusted from the gross total income before allowing the deduction under section 10B of the Ac .....

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hat the years under appeal related to assessment years 1988-89 to 1990-91 i.e. the years where the benefit under section 10B of the Act was for being exempt from total income. However, the year under appeal before us is assessment year 2005-06, wherein the said section has been amended and the deduction now is allowable to the assessee as against the said income being exempt in the earlier years. The issue is settled by the Hon ble Bombay High Court in CIT Vs. Black & Veatch Consulting Pvt. .....

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ed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in ss.80C to 80U. S.80B(5) defines for the purpose of Chapter VI-A gross total income to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the content of the deduction which is allowable under s.10A, which woul .....

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lied by the Hon ble Bombay High Court in CIT Vs. M/s. Ganesh Polychem Ltd. in Income Tax Appeal No. 2083 of 2012, order dated 25.02.2013 and in CIT Vs. Schmetz India Pvt. Ltd. (2012) 79 DTR (Bom) 356 and also by the Hon ble High Court of Gujarat in CIT Vs. Ace Software Exports Ltd. in Tax Appeal No.687 of 2012, order dated 18.02.2013 . The Mumbai Bench of Tribunal has also applied the said proposition in various cases. 29. The learned Departmental Representative for the Revenue on the other hand .....

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referred to in section 80I(1) of the Act, was required to be computed in manner provided under the Act, which pre-supposes that gross total income shall be arrived at after adjusting losses of other division against profits derived from an industrial undertaking. The issue before the Hon ble Supreme Court is at variance with the issue before us and the said ratio is not applicable to the facts of the present case. The issue in the present appeal is squarely covered by the ratio laid down by the .....

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