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Vishay Components Pvt. Ltd. Versus Asst. Commissioner of Income-tax, Circle-7, Pune

2017 (2) TMI 636 - ITAT PUNE

Transfer pricing adjustment - use of single year’s data and applying the said data to determine the arithmetic mean of margins of comparables - Held that:- Where the assessee has failed to demonstrate any qualitative clarities in the data which would justify invoking of the proviso to Rule 10B(4) of the Income Tax Rules in the present case and hence, we find no mistake in the order of Assessing Officer / TPO in considering single year’s data pertaining to assessment year 2007-08 in order to arri .....

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e concern which is making supplies to its associate enterprises and which is market dominant concern. Accordingly, we hold so. We direct the Assessing Officer to verify the claim of assessee that both the Keltron group companies and Gujarat Poly-Avx Electronics Ltd. are persistent loss making concerns and if so, then both the concerns are to be excluded from the final set of comparables while benchmarking the international transactions in manufacturing segment - Non-exclusion of depreciation .....

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is no merit in the claim of assessee in adopting the cash PLI or PBDIT as the PLI. We dismiss the plea of the assessee in this regard. - Non allowance of capacity utilization while computing the margins of assessee company - Held that:- Rule 10B(1)(e)(iii) of the Act, adjustments for variations is to be provided which could materially affect the amount of net profit margin in the open market in Comparable Uncontrolled Transactions, then adjustments are to be made in respect of net profits re .....

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ld that:- Similar issue was raised in assessment year 2006-07 and the Tribunal remitted the issue back to the file of Assessing Officer/TPO to examine the claim of assessee relating to working capital adjustment and eliminate such difference, if any, as would materially affect the profit margins, following the same parity as in Demag Cranes & Components (2012 (1) TMI 60 - ITAT Pune ) Pvt. Ltd. Vs. DCIT (supra) and as per law. Following the same parity of reasoning, the issue is remitted back to .....

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th reference to total turnover of exports, computing and restricting the same with reference to the value of international transactions - Held that:- This issue also has been adjudicated by the Tribunal in assessment year 2006-07 wherein the plea of assessee that transfer pricing adjustment, if any, was to be made to the total income of the assessee, then the same should only with reference to international transactions of the assessee with associate enterprises and not with reference to total t .....

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ingly. - Disallowance of stock written off in DTA unit - Held that:- The plea of the assessee for the year under appeal is that all the evidences were before the Assessing Officer. However, we find that the Assessing Officer has not considered the said evidence since the matter was already decided against the assessee in assessment year 2006-07 and following the same, the amount was disallowed. The assessee has also furnished certain additional evidences in this regard i.e. evidence relating .....

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expenses from export turnover and not from total turnover while computing deduction under section 10B - Held that:- We remit this issue also back to the file of Assessing Officer to determine the appropriate amount of insurance and communication expenses which are attributable to the exports made by the assessee and the same are to be excluded both from the export turnover and total turnover. - Re-computation of deduction under section 10B of the Act by setting off of brought forward losses .....

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, SA No. 73/PUN/2016 - Dated:- 10-2-2017 - MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM For The Appellant : S/Shri Farooq V. Irani and Pramod Jadhav For The Respondent : Shri Suhas S. Kulkarni ORDER PER SUSHMA CHOWLA, JM: This appeal filed by the assessee is against the order of ACIT, Circle 7, Pune, dated 31.10.2011 relating to assessment year 2007-08 passed under section 143(3) r.w.s. 144C(1 3) of the Income-tax Act, 1961 (in short the Act ). 2. The assessee has raised the following grounds o .....

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als and components for manufacturing finished goods, import of finished goods for resale and receipt of commission) and not accepting the analysis undertaken by the Appellant to determine the arms length price. 2. Conducting an unjustified fresh search for identifying additional comparable companies at the time of assessment proceedings and proceeded with using non-contemporaneous data Erred on facts and in law by conducting an unjustified fresh search at the time of assessment proceedings for i .....

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prior two years for determining the arms length price of international transactions. 4. Consideration of companies as comparable which were not available in public domain at the time of complying with the regulations Erred on facts and in law by considering companies (namely Tibrewala Electronics Limited, which was not available in public domain at the time of complying with the documentation requirements and added very recently in public databases) as comparable and thus defeating the intention .....

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ncoherent approach adopted while accepting Gujarat Poly-Avx Electronics Limited as comparable Also without prejudice to the above grounds, even if fresh search is sustained, erred on facts and in law, by adopting an incoherent approach for rejecting Keltron Group companies as comparable on certain criteria and not applying similar criteria / rationale (as applied for such rejection) while accepting Gujarat Poly-Avx Electronics Limited as comparable. 6. Treating restructuring cost (voluntary reti .....

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as part of operating expenses of companies considered as comparable and the Appellant without giving due credence to the fact that the Appellant charges a higher rate of depreciation (compared to depreciation rates provided in Schedule XIV of the Companies Act, 1956) vis-a-vis companies considered as comparable (which largely follow depreciation rates as prescribed in Schedule XIV of the Companies Act, 1956). The learned Transfer Pricing Officer and the learned Assessing Officer ought to have fo .....

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n law and in fact by comparing the operating margin earned by the Appellant and the comparable companies without allowing the adjustment undertaken on account of differences relating to proportion of asset utilized (Net Sales/Total Fixed Assets) by the Appellant and the companies considered as companies without appreciating the fact that such information has been called for by the learned Transfer Pricing Officer himself during the course of assessment proceedings. 9. Non-consideration of capaci .....

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ces in the working capital employed by the Appellant and the companies considered as companies without appreciating the fact that working capital adjustment has been allowed by the Hon'ble DRP in principle. 11 Non- consideration of +/-5% range Erred in computing the transfer pricing adjustment from the arm's length price without giving the benefit of the option available to the Appellant under proviso to section 92C(2) of the Act of adopting as arm's length price, a price which varie .....

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ustment 13. Disallowance of stock written-off in Domestic Tariff Area ('DTA) unit Erred on facts and in law by disallowing the deduction claimed by the Appellant in respect of stock written off amounting to ₹ 2,735,991 without appreciating the fact that the claim of stock written off is not a provision for obsolescence but actual loss allowable under section 28/37(1) of the Act and also without appreciating that all documentary evidences supporting such write-off were submitted during .....

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that the said expenses have not been incurred in foreign currency; and - Without verifying whether the expense are attributable for delivery of goods outside India. 15. Reduction of insurance and communication expenses from export turnover only and not from total turnover Erred on facts and in law by re-computing the deduction under section 10B of the Act by reducing insurance and communication expenses of the eligible unit only from the export turnover and not from total turnover. 16. Disallow .....

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e assessed total income was more than the profits earned by the eligible unit. III. Other Grounds of Objections 17. Initiation of penalty proceedings under section 271(1)(c) of the Act Erred in law and on facts in initiating penalty proceedings under section 271(1)(c) without considering the fact that transfer pricing adjustment and corporate tax adjustment on account of difference of opinion pertaining to selection criteria adopted for identifying the comparable companies, interpretation of pro .....

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y the assessee are against transfer pricing adjustment made in the hands of assessee. 4. Briefly, in the facts of the present case, the assessee was engaged in manufacture of resistors and capacitors used in various electronic applications / products. The assessee s manufacturing facilities were divided into a Domestic Tariff Area unit for manufacturing capacitors and low end resistors, and an Export Oriented Unit for manufacturing certain high end resistors which are exported to overseas group .....

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e applications, process control systems, military and aerospace applications, consumer electronics and appliances, medical instruments and electronic sales. The assessee had filed return of income declaring total income at Nil. The assessee had claimed deduction under section 10B of the Act at ₹ 62,39,187/-. The case of the assessee was taken up for scrutiny. The Assessing Officer made a reference to the Transfer Pricing Officer (in short the TPO ) after taking the approval of the CIT, who .....

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ejected in respect of upward adjustment for manufacturing activity at ₹ 12,90,06,231/-. In the meanwhile, the assessee filed rectification application under section 92CA(5) r.w.s. 154 of the Act against the order passed by the TPO under section 92CA(3) of the Act vis-à-vis working of operating profit margins in the case of three comparable companies Cosmic Global Ltd., Informed Technologies India Ltd. and Maple E-solutions Ltd. The said rectification application moved by the assesse .....

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ter considering submissions of the assessee noted that the working capital adjustment would come to 18.36% as against 22.37% determined by the TPO. On comparison with assessee s operating margins of 15%, the Assessing Officer held that the same meets arm's length test and hence, no addition was to be made on this count. 6. The assessee is in appeal against the said addition made in the manufacturing segment. 7. The ground of appeal No.1 raised by the assessee is general in nature and hence, .....

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nnot be used for benchmarking the international transactions of the assessee. 9. The learned Authorized Representative for the assessee fairly pointed out that the similar issue arose before the Tribunal in earlier year, wherein objections were raised to fresh search conducted by the TPO during the course of TP proceedings and consequent selection of Tibrewala Electronics Ltd. and the Tribunal has decided the said issue against the assessee. 10. The learned Departmental Representative for the Re .....

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originally available in public domain, is used by the TPO while benchmarking international transactions of the assessee in the manufacturing segment. Undoubtedly, the learned Authorized Representative for the assessee has not submitted that the said concern is not functionally comparable; the only objection raised by the learned Authorized Representative for the assessee was the selection of said concern on later date by the TPO, especially where the data of the said concern was not available w .....

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ternational transactions undertaken by the assessee were at arm's length price. However, the TPO conducted fresh search and selected certain other companies also; one of which was Tibrewala Electronics Ltd., against the same, the assessee is in appeal. 13. The Tribunal in ITA No.133/PN/2011 relating to assessment year 2006 - 07, vide order dated 25.05.2012 had decided the issues relating to transfer pricing adjustment, but thereafter, the assessee moved Miscellaneous Application No.82/PN/201 .....

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nd of proceedings by the Tribunal. The Tribunal vide paras 13 to 22 observed as under:- 13. Now, coming to the stand of assessee with regard to fresh search undertaken at the time of assessment proceedings. 14. Under section 92D of the Act, it is provided that every person who has entered into an international transaction is to keep and maintain such information and documents in respect thereof as may be prescribed. Rule 10D of the Rules prescribes the information and documents to be kept and ma .....

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s and consequent adjustments made to the total income for tax purposes. The proviso under sub-rule (2) to Rule 10D of the Rules provides that the assessee shall be required to substantiate, on the basis of material available with him, that income arising from international transaction entered into by him has been computed in accordance with section 92 of the Act. Further, information which is specified in sub-rule (1) is to be supported by authentic documents which include various publications, .....

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. In other words, the data which is to be used by the assessee in relation to its international transaction vis-à-vis transfer pricing provisions should be such which is available by the due date of filing the return of income. First onus is upon the assessee to justify that the international transaction entered into by it with its associate enterprises is at arm's length price, in case it is compared with uncontrolled transactions i.e. transactions entered into by other concerns in s .....

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f associated persons or functioned performed by such persons or such other relevant entities as the Board may prescribe. Sub-section (2) therein provides that the most appropriate method shall be applied for determination of arm's length price in the manner as may be prescribed. Section 92C(3) of the Act reads as under:- 92C. (1)..... (2)..... (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or docum .....

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ormation or data used in computation of the arm s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm s length price in relation to the said international transaction [or specified domestic transaction] in accordance with sub-sections (1) and (2), on the basis of such .....

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n the basis of material or information or documents available with him. The said exercise of power by the Assessing Officer is after affording an opportunity of hearing to the assessee to show cause as to why the arm's length price should not be so determined on the basis of material or information or documents in the possession of Assessing Officer. 18. Under section 92CA of the Act, where the assessee had entered into international transaction in any previous year and where the Assessing O .....

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ng him to produce or cause to be produced, any evidence on which he may rely upon in support of computation made by him of the arm's length price in relation to international transaction. After hearing such evidence including any information or documents referred to in section 92C(3) of the Act and after considering such evidence as the TPO may require on specified date and also taking into account relevant material which he has gathered and confronted to assessee, the TPO has to pass an ord .....

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sed by the TPO to determine the arm's length price of international transaction. Undoubtedly, the assessee is the first person who is to collect the information and documents in respect of its international transaction which are enlisted under Rule 10D of the Rules. But mere collections of documents and compilation of data is not the only responsibility of the assessee, who can be asked to produce such other evidence as the TPO may require on any points. Further, the TPO is also empowered to .....

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he TPO to ensure that all the conditions provided under the Act and as per the Rules are fulfilled. 19. In the facts of the present case itself, we have noted that the assessee had prepared its transfer pricing report and computed the PLI of comparables by adopting the data for preceding two years. The assessee in its transfer pricing report had not used the data of the year in which the international transaction had taken place to benchmark its international transaction to be at arm's lengt .....

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ransaction, the TPO included two further companies i.e. DEKI Electronics Ltd. and Tibrewala Electronics Ltd., data of which was confronted to the assessee. The objection of assessee to the inclusion of above said concerns was that the data relating to the said concerns was not available at the time of complying with the documentation requirements and had come into public domain much later. We find no merit in the claim of the assessee that the data of companies which were not available in public .....

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to the collections of data on a particular date or otherwise and use of such data; in the absence of which, there could not be curtailment of powers to be exercised by the TPO for determining arm's length price of international transaction. Merely because, the financial results of a concern which were functionally similar to the assessee came into public domain on a later date, but relate to the year in which the international transaction had been undertaken, cannot be rejected on the surmis .....

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y published. The search process is to be carried out by the TPO who in turn, has to determine the arm's length price of international transaction on the basis of information available with him and once such information is made available to him, then the same can be applied by the TPO after confronting the same to assessee, to compute the transfer pricing adjustment, if any, in the hands of the assessee. Accordingly, the TPO under the Act is fully justified in carrying out the fresh search, i .....

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determination of arm's length price of a taxpayer observed that the burden to establish the transaction to be at arm's length price was upon the taxpayer, who had to furnish comparable transactions, apply appropriate method for determination of arm's length price and justify the same by producing the relevant material and documents before the Revenue authorities. Where the Revenue authorities were not satisfied with the arm's length price and supporting documents / information f .....

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udy of provisions of various countries on Burden of Proof, would show, the following fundamental features: (i) That the burden to establish that international transaction is carried at ALP, is on the taxpayer who is to disclose all the relevant information and documents relating to prices charged and profit earned with related and unrelated customer. (ii) If the Assessing Officer has determined an ALP, other than the price declared by the assessee, Assessing Officer has to prove that the price d .....

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ation. Further, where the authorities were of the view that arm's length price was not correctly determined by taxpayer, then the same could be substituted by arm's length price on the basis of material or information furnished by the assessee or collected by the Revenue authorities. It was further held that such arm's length price had to be determined by keeping in mind the provisions of the Act and also the principles of natural justice and be fair and reasonable to the taxpayer an .....

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f sections 92(1) and 92D read with relevant rules, we hold that it is obligatory on the part of the taxpayer to furnish information relating to controlled international transactions, select a suitable method for determination and furnish ALP of such international transactions carried by it and give basis and supporting authentic evidence of ALP and adjustments made. The taxpayer has further to cooperate in the determination of the ALP by the tax authorities by furnishing all relevant information .....

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rial collected to be used against the taxpayer is to be put to taxpayer to explain. Having regard to the purpose of the legislation and application of similar enactment world over, it must further be held that adjustments made on account of ALP by tax authorities can be deleted in appeal only if the appellate authorities are satisfied and records a finding that ALP submitted by the assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the revenue authori .....

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cise in accordance with law. The matter cannot be left hanging in between. ALP of international transaction has to be determined in every case. 22. The above said proposition has been laid down by the Special Bench of Bangalore Tribunal while interpreting the transfer pricing provisions and the principle laid down by the Special Bench of Tribunal is applicable to the issue before us. The learned Authorized Representative for the assessee before us has placed reliance on the ratio laid down by Ho .....

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Bombay High Court did not accept the contention of the learned Departmental Representative for the Revenue in this regard as it would cause startling results. The said proposition laid down by the Hon ble Bombay High Court is not applicable to the facts of the present case before us, where under the provisions of the Act itself, the TPO is empowered to substitute the arm's length price on the basis of material or information furnished by the assessee or collected by him. In case, such an au .....

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ssee further relied upon on other decisions which are factually different from the issue before us. Accordingly, we find no merit in the claim of assessee in this regard and upholding the action of TPO, the grounds of appeal No.2 and 3 raised by the assessee are dismissed. 14. The issue arising in the present grounds of appeal No.2 and 4 is identical to the issue before the Tribunal in assessment year 2006-07 and following the same parity of reasoning, we hold that the TPO had rightly exercised .....

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t take up the last issue raised by the assessee with regard to adoption of single year s data. The learned Departmental Representative for the Revenue in this regard has filed written submissions and has pointed out that under Rule 10B(4) of the Rules, there is mandate to use only current year s data. In this regard, he further placed reliance on series of decision by different Benches of Tribunal. He further stated that the assessee while commenting on the filter of excluding companies, which h .....

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circumstances. He further referred to OECD revised guidelines in this regard, which distinguish between use of multiple years data for functional analysis and for statistical purposes i.e. for computing arithmetic mean i.e. para 3.75 to 3.79 of OECD revised guidelines. He stressed that the assessee has confused the use of multiple years data for functional analysis of comparables with the use of same for working out the PLI of comparables. Where comparable companies are selected, margins of the .....

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al transaction pertains shall alone be used. The word used in the Rule is shall and hence, the provisions of Rule 10B(4) of the Rules which provides the computation of procedure for working out the arm's length price under section 92C of the Act are to be applied. Under the proviso, it is further provided that earlier year s data relating to up to two years may also be considered to analyze, if certain facts had an influence on the determination of transfer price in relation to the transacti .....

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ting to financial year in which international transaction had been entered into. 11. Similar issue arose before the Pune Bench of Tribunal in Eaton Industries Pvt. Ltd. Vs. ACIT in ITA No.1622/PN/2011, relating to assessment year 2007-08 and the Tribunal vide order dated 28.02.2013 deliberated upon the issue of use of single year s data as against the claim of assessee to compute the PLI of comparables on the basis of multiple years data i.e. inclusive of preceding two years. The Tribunal in thi .....

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e year data i.e. for F.Y. 2006 -07 for determining the PLI of the comparable cases is not justified and that it would be more appropriate to consider the financial data available of the comparable companies for a period of earlier two years i.e. 2004-05 and 2005-06 also. It is canvassed that at the time of conducting transfer pricing study by the assessee, the financial information of the comparable companies for the earlier two years was available and therefore, in terms of Rule 10B(4) of the I .....

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which the international transaction has been entered into. Therefore, on a bare reading of rule 10B(4) of the Rules, no fault can be found with the stand of the TPO in determining the PLI of the comparable companies on the basis of financial data for F.Y. 2006 -07 which corresponds to the assessment year under consideration in which the impugned international transactions have been carried out. So however, the proviso to Rule 10B(4) of the Rules prescribes that data relating to a period, not bei .....

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was justification for invoking of the proviso to Rule 10B(4) inasmuch as there is a variation in average PLI of the four comparable cases adopted by the assessee based on the single year data vis-à-vis the PLI computed after the use of multiple year s data. It was pointed out that after using multiple year s data of the four comparable cases, the average PLI came to 10.98% whereas the average PLI for the same set of four comparable cases after using single year s data for F.Y. 2006 -07, .....

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ever, the same does not meet with the requirements of invoking the proviso to Rule 10B(4). Pertinently, the proviso can be invoked in a situation where data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared . The variation in PLI by itself is not a fact to justify invoking of the said proviso, rather what is required is to show that the data reveals certain facts which could possibly have an influence on determinati .....

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ssessee. Thus, on this aspect, the assessee has to fail. 12. Several Benches of Tribunal have also held that single year s data is to be used while computing the PLI of comparable companies. The contention of the assessee that by multiple years data of the comparable companies, the average PLI of set of comparables would be within +/-5% margins cannot be applied as the variation in PLI by itself does not justify invoking of the said proviso. The assessee has to establish that the data reveals ce .....

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of international transaction conducted by the assessee. Thus, the ground of appeal No.5 raised by the assessee in this regard is rejected. 17. In the year under appeal also, where the assessee has failed to demonstrate any qualitative clarities in the data which would justify invoking of the proviso to Rule 10B(4) of the Income Tax Rules in the present case and hence, we find no mistake in the order of Assessing Officer / TPO in considering single year s data pertaining to assessment year 2007- .....

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hand, having rejected Keltron Components Complex Ltd., Keltron Resistors Ltd. and Keltron Electro Ceramic Ltd. i.e. Keltron group companies as being not functionally comparable. It may be pointed out herein itself that Keltron Group of companies were owned by the Government. The plea of the assessee was that there was no merit in rejection of said concerns. The TPO was of the view that all four companies were government companies having other than profit motives operations and also the said con .....

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Keltron Group of companies, two companies were filtered out by the assessee based on FAR analysis in TP report and now the assessee cannot argue that the same may be included. Further, there was eroding of net worth of said concerns because of persistent loss making. The learned Authorized Representative for the assessee pointed out that rejection of said concern was before the Tribunal in assessment year 2006-07, wherein vide order dated 25.05.2012, the Tribunal had considered the issue. He th .....

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red to BIFR because of persistent loss making concern. He further pointed out that where the assessee was manufacturing capacitors and resistors which were being supplied to the associate enterprises, then such concerns should not be considered. He stressed that first of all, there was no need to depart from earlier years order since there was no difference in facts and issues and in case Keltron group companies were excluded, then Gujarat Poly-Avx Electronics Ltd. also needs to be excluded. 20. .....

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., Keltron Resistors Ltd. and Keltron Electro Ceramic Ltd. He further pointed out that where the assessee has applied TNMM method, then there is no merit in looking at the employee cost ratio while benchmarking international transactions. 21. We have heard the rival contentions and perused the record. The issue which is raised by way of ground of appeal No.5 is against the orders of authorities below in selecting Gujarat Poly-Avx Electronics Ltd. as comparable and rejecting Kerltron Group compan .....

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ee states that it was not considered as comparable in financial year 2006-07 i.e. the year under appeal as it was persistent loss making concern. The issue which needs to be adjudicated is whether even if the assessee has selected one concern as comparable in the earlier years, irrespective of change in factual aspects of the said concern, can the same be excluded. The case of the assessee before us is that the basis for excluding Keltron Group companies is that the said concerns were government .....

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. However, we direct the Assessing Officer to verify the claim of assessee that the said concern is persistent loss making and has been referred to BIFR. 22. Another aspect which also needs to be considered is that in assessee s own case for assessment year 2006-07, the Tribunal vide order dated 25.05.2012 had directed the Assessing Officer to include Keltron group companies in the comparable set on the basis that the comparable companies could not be rejected merely because it was loss making c .....

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pects, wherein the concerns are not simply loss making concerns but persistently loss making concerns. In case they fall in the category of persistent loss making, then the margins of said concerns should not be adopted in order to benchmark the international transactions of the concern which is making supplies to its associate enterprises and which is market dominant concern. Accordingly, we hold so. We direct the Assessing Officer to verify the claim of assessee that both the Keltron group com .....

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nary items should be excluded in determining PLI of the assessee concern. 24. Brief facts relating to the issue are that the assessee for the year under consideration had launched Voluntary Retirement Scheme for its employees, based on which 23 employees opted for voluntary retirement and the total cost amounted to ₹ 1,01,36,664/-. The re-structuring cost incurred by the assessee was claimed to be for the purpose of managing the business in more cost effective and efficient manner. Further .....

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extraordinary / non-recurring expenditure which ought to be excluded while computing the margins of assessee. Another aspect pointed out by the assessee was that the said expenditure was added back in the computation of income and the deduction was claimed in phased manner. The TPO was of the view that since the cost was incurred during normal business operations and were incidental to the operations of assessee company, the same were to be considered as part of operating expenses. Another point .....

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ruitment of marketing staff and their training and travel, material cost, etc. Therefore, cost amounting to ₹ 1.10 crore was excluded from the operating cost by the assessee while computing PLI of the instant year. It was also pointed out that the said cost has been recovered from the associate enterprises by the assessee in the subsequent years and also no such new expansion or addition to capacity had taken place in the case of comparable companies. The TPO rejected this plea of the asse .....

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is provided that adjustments were to be made in case of differences, which could materially affect the amount of net profit margins in the open market. It was stressed that the comparable companies as identified in the TP study report had not incurred any start-up activity cost. The DRP upheld the order of TPO / Assessing Officer and the Assessing Officer in the final assessment order re-computed the PLI of assessee. 26. Before us, the learned Authorized Representative for the assessee pointed o .....

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and the Tribunal had considered similar issue of exclusion of extraordinary costs from operating expenses and where the comparable companies had not incurred any start-up activity cost as was clear from the Annual reports, then the Tribunal vide order dated 25.05.2012 directed the Assessing Officer / TPO to exclude the said cost following the directions contained in the order of Tribunal in Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT in ITA No.120/PN/2011 for assessment year 2006-0 .....

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up cost was neither abnormal nor non-operating expenditure. In respect of VRS expenditure, the learned Departmental Representative for the Revenue pointed out that the expenditure is part of salary expenditure and when TNMM method is applied, it takes care of the same and hence, no merit in its exclusion from operating expenses. 28. We have heard the rival contentions and perused the record. The assessee is in appeal against the orders of Assessing Officer / DRP, wherein the claim of assessee of .....

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has been claimed in the phased manner. The plea of assessee by way of ground of appeal No.6 raised before us is that the said expenditure being an extraordinary expenditure, merits to be excluded from operating cost while determining the margins for benchmarking the international transactions of the assessee. 29. The second expenditure which is claimed to be excluded from operating cost relating to new project i.e. Romeo Project, the assessee claims that the said costs were incurred for recruit .....

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e held otherwise saying that these were regular costs incurred by the assessee in the normal course of carrying on of its business and hence, merits to be part of operating expenses. 30. The computation of operating profit margins and the exclusion of any extraordinary costs which are incurred in the specific year and is not regular expenditure and the same should be excluded from operating cost in order to arrive at the operating profit margin, was considered by the Pune Bench of Tribunal in th .....

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ed back to the file of Assessing Officer / TPO to examine the claim of assessee in the light of directions contained in the order of Tribunal in the case of Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT (supra). The issue which arises in the present appeal by the assessee is to be tested on the basis of principles laid down by the Tribunal in Demag Cranes & Components (India) Pvt. Ltd. Vs. DCIT (supra) and in case it is found to be extraordinary cost, then the same is to be exclud .....

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of appeal No.6 is thus, allowed as indicated above. 32. The issue in ground of appeal No.7 raised by the assessee is against non-exclusion of depreciation while calculating PLI of assessee. The assessee in this regard claimed that it provides higher rate of depreciation in its books of account as compared to the comparable companies, which largely followed depreciation rates as provided in Schedule XIV of the Companies Act. In view thereof, the assessee claimed that OPBDIT be benchmarked agains .....

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ilms Vs. CIT (1991) 190 ITR 32 (Ker) holding that the net profit margins normally means profit before tax, computed in accordance with the accounting principles. With regard to provisions of Rule 10B of the Rules, it was pointed out that the differences which warrant an adjustment should be such which could materially affect the amount of net profit margins in open market. The charging of higher depreciation by the assessee was because of internal policy of the company and would not affect net p .....

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ard was placed on the ratio laid by the Delhi Bench of Tribunal in Schefenacker Motherson Ltd. Vs. ITO (2009) 123 TTJ 509 and the Hon ble High Court of Andhra Pradesh in CIT Vs. M/s. B.A. Continuum India Pvt. Ltd. in ITTA No.440/2014, judgment dated 16.07.2014. 33. We have heard the rival contentions and perused the record. The assessee is aggrieved by the non-speaking order of DRP, wherein the plea of assessee that while benchmarking its international transaction OPBDIT should be benchmarked ag .....

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industry, wherein the gross value of plant & machinery is to the tune of ₹ 93 crores and the cost of total assets is ₹ 117 crores (gross value). 34. Another aspect to be noted is that in addition to the depreciation, the assessee has also claimed heavy repairs and maintenance expenditure i.e. on building of ₹ 77.66 lakhs, on plant & machinery of ₹ 3.28 crores and others of ₹ 1.41 crores. In such an incident, where depreciation is significant cost, then a pr .....

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eciation would be 21, in third year it would be 14.7 and in the fourth year, the depreciation would be 10. Such huge variation in depreciation incidence could make comparison unworkable. But that is not the case here. In such incidence, the PLI determined by excluding depreciation from the profits for comparison under TNMM analysis distorts comparability analysis. There are varying opinions whether depreciation could be taken into account for working out the profits of an enterprise or not. The .....

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w, depreciation is only an annual loss in the cost / value of the capital assets due to factors like age of assets, their usage etc. and therefore allowance of depreciation, being capital in nature, should find no place in the computation of profits. The opposite view is that depreciation, though a capital loss, needs to be deducted, to replace the value of assets to the extent it has depreciated. Be that as it may, in the present case, ALP of the transactions to be determined by comparing the p .....

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g profit, depending on the context and purpose for which profit is to be computed. 19.4.2 In the case of Schefenacker Motherson Ltd (supra) of the ITAT, Delhi, the issue of whether depreciation can be excluded for comparison has been discussed at length and it was held in para 22 thereof that - ….. The basic issue involved was whether the cost paid or charged for international transactions was at arm s length or not. The factors which go to influence price, cost or profits are / were rele .....

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adoption of cash profit only. This case was relied upon by the assessee in support of its proposition that cash PLI or PBDIT is the appropriate PLI. 19.4.3 We find that the above finding of the Tribunal was given as the case of revenue was not clear and the TPO had rejected cash PLI without assigning any reasons. Subsequently, the Mumbai, ITAT, in the case of Fiat India Pvt Ltd (supra) held that in an asset intensive industry where assets are the key drivers, excluding depreciation would not le .....

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under TNMM distorts the comparability analysis. We are therefore of the opinion that in view of the finding of the Mumbai ITAT in the case of Fiat India Pvt Ltd (supra) in which the assessee therein is in the asset intensive automobile industry, as is the assessee in the present case, that cash PLI or PBDIT to sales is not the appropriate PLI and also note that the TPO has given depreciation adjustment for differences in relative level of depreciation cost with reference to sales. We, therefore, .....

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m-TP). Hence, we find no merit in the said reliance placed upon by the learned Authorized Representative for the assessee. 37. Another reliance which was placed upon by the learned Authorized Representative for the assessee is on the ratio laid down by the Hyderabad Bench of Tribunal in the case of M/s. B.A. Continuum India Pvt. Ltd. (supra), wherein the issue was against the order of TPO while calculating the PLI had considered the profit before depreciation but had failed to exclude the same i .....

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plicable being factually different. Accordingly, where the fixed assets drives revenues of manufacturing enterprise and where depreciation is significant cost component to be accounted for, then such depreciation could not be disregard for transfer pricing purposes while benchmarking international transaction under TNMM method. The exclusion of depreciation would distort the comparability analysis, therefore, cash profit or PBDIT could not be adopted as the PLI. 38. The Delhi Bench of Tribunal i .....

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t costs and after excluding non-operating incomes and expenses. Thus, all operating expenses were required to be taken into account. The Tribunal thus, held that the assessee in that case could not substitute the net operating profit with cash profit and the TPO was justified in adopting the operating profit / sales as the PLI. The assessee therein further contended that if depreciation had to be taken into account for determining the arm's length margin, then it was entitled to make an appr .....

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nies, was held to be irrelevant because depreciation had to be reckoned with cost of assets rather than sales. Another plea of the assessee that the TPO had accepted CP/S as PLI for subsequent tax period and to be applied in accordance with rule of consistency was also rejected as for two years subsequent to the relevant tax year the TPO had rejected the CP/S. 39. Further, in another decision of Delhi Bench of Tribunal in Honda Motorcycle & Scooters India Pvt. Ltd. in ITA No.1379/Del/2011, o .....

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rgin, the effect of all the individual higher or lower items of expenses or income gets subsumed in the overall operating profit margin, ruling out the need for any adjustment on comparison of one-to-one items resulting into the determination of the operating profit margin. 40. However, the Tribunal acknowledged that the differences in amounts of depreciation in case of tested party vis-à-vis comparables due to different depreciation rates called for appropriate adjustment. 41. We further .....

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on of DEPB in turnover and depreciation in net profit for the purpose of profit margin of comparables and assessee? 42. The Hon ble High Court held that the depreciation is to be included as operating expenses to determine the operating cost of the assessee and the comparables. The question before the Hon ble High Court was the comparability between profit margins of assessee and the comparables in view of the parameters of comparability under Rule 10B(2) of IT Rules. The Hon ble High Court has .....

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me Tax Appeal No.1827 of 2013 relating to A.Y. 2005 -06 and Income Tax Appeal No.171 of 2014 relating to A.Y. 2007 -08. However, this Court by orders dated 22nd September, 2015 for A.Y. 2005 -06 and 1st July, 2016 for A.Y. 2007 -08, dismissed the Revenue s appeal. In the above view, the issue with regard to the exclusion of the DEPB benefit stands concluded by virtue of order of this Court against the Revenue and in favour of the respondent assessee. (e) So far as depreciation is concerned, we f .....

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e respondent assessee s export to its Associate Enterprise. The comparison to determine the ALP has to the extent possible has to be done between like to like and similar to similar. One sided exclusion would lead to distortion in comparison. 43. In view of above said, we hold that where the assessee is engaged in the business of manufacture of resistors and capacitors which in turn, are used in various electronic applications and products and where the assessee s manufacturing facilities are es .....

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e to his claim. The assessee claims that the rate of depreciation i.e. depreciation / average written down value charged by the assessee at 17.97% was higher than average rate of depreciation charged by the comparable companies i.e. 12.07%. The assessee submits that excess depreciation should be excluded while computing operating margins of the assessee. We find no merit in the said plea of the assessee under Rule 10B(1)(e)(iii) of the Rules, adjustment if any, has to be made in the hands of com .....

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ainst the objections raised by the assessee. However, the assessee has not asked for remitting back to the file of DRP but had argued the issue at length and hence, we have decided the said issue and since full opportunity has been given to the assessee, it fulfills the principles of natural justice. 46. One last aspect of the issue is that the stand of exclusion of depreciation from the operating cost was accepted in earlier year by the TPO and the DRP. In case the stand has been accepted by th .....

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issue raised by way of grounds of appeal No.8 and 9 is nonallowance of capacity utilization while computing the margins of assessee company. 48. The learned Authorized Representative for the assessee pointed out that the fixed cost remained variable and where the capacity utilization of comparable companies was higher, then the adjustment on account of non utilization of capacity should be allowed in the hands of assessee. The learned Authorized Representative for the assessee fairly pointed ou .....

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claims that since the capacity utilization of comparables was higher, then it should be allowed adjustment on account of capacity utilization. While deciding the ground of appeal No.6, the assessee had asked for deduction out of operating expenses on account of extraordinary items and one of the items was the amount paid under VRS scheme. On one hand, the assessee says that its capacity is not fully utilized and on the other hand, it retrenches its staff during the year by offering VRS scheme. 5 .....

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assessee but in the hands of comparables. So, we find no merit in the claim of assessee that capacity utilization adjustment should be allowed in the hands of assessee. 52. The second aspect of the issue is that whether such capacity underutilization adjustment could be provided in the hands of comparables. The Delhi Bench of Tribunal in DCIT Vs. EDAG Engineers and Design India (P.) Ltd. (2014) 50 Taxmann.com 322 while considering the case of captive service unit had denied the claim of adjustm .....

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mer, and is wholly dependent on its AE for productive use of its capacity to work, the AE should normally make good any losses to the captive unit caused by its not being able to make use of the available capacity. 53. The assessee before us is also captive service provider which was established in 1999 and in the absence of assessee having brought on record any reasons for under-utilization of capacity to be provided to associate enterprises, we find no merit in the claim of the assessee. 54. T .....

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see for allowing adjustment on account of capacity utilization is rejected. The grounds of appeal No.8 and 9 are thus, dismissed. 55. The issue raised by way of ground of appeal No.10 is to allow adjustment on account of differences in working capital employed by the assessee and the companies considered as comparables. 56. Similar issue was raised in assessment year 2006-07 and the Tribunal vide order dated 25.05.2013 vide para 21 has remitted the issue back to the file of Assessing Officer/TPO .....

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bles as per law. The ground of appeal No.10 raised by the assessee is thus, allowed for statistical purposes. 57. The next issue raised by way of ground of appeal No.11 is against the non-allowance of benefit of provision available to the assessee under the proviso to section 92C(2) of the Act. 58. The learned Authorized Representative for the assessee pointed out that the issue is covered in favour of assessee, wherein the Tribunal vide order dated 25.05.2013 in para 16 had restored the matter .....

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ment with reference to total turnover of exports, computing and restricting the same with reference to the value of international transactions. This issue also has been adjudicated by the Tribunal in assessment year 2006-07 vide paras 25 and 26 order dated 25.05.2012, wherein the plea of assessee that transfer pricing adjustment, if any, was to be made to the total income of the assessee, then the same should only with reference to international transactions of the assessee with associate enterp .....

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transfer pricing adjustment, if any, is to be made to the total income of assessee, then the same should only be with reference to international transactions of assessee with its associate enterprises and not with reference to total turnover. The Assessing Officer is thus, directed to determine the arm's length price of international transactions accordingly. The ground of appeal No.12 is thus, allowed. 61. Now, coming to the corporate issues raised by way of grounds of appeal No.13 to 18. T .....

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,653/- and finished goods of ₹ 35,24,717/-. The assessee had added back the same in the computation of total income and only actual obsolete stock written off during the year totaling ₹ 27,35,991/- was claimed as deduction from total income. The assessee claims that it was maintaining system of recognizing obsolete stock on account of several reasons i.e. old stock, damage materials, self life expiry goods, against which there were no orders or lower orders, finished goods written of .....

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invoices evidencing the payment of Excise duty on the stock along with CENVAT credit registers corresponding to the above write off. The Assessing Officer on the other hand, did not accept the contention of assessee since the issue was decided in favour of the Revenue in assessee s own case in assessment year 2006-07. The DRP observed that the assessee had not provided evidence that the stock had actually become obsolete and non-movable and also the assessee did not produce Excise registers and .....

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was added back in the computation of income and only actual obsolete stock written off during the year of ₹ 27,35,991/- was reduced from the total income. He further stressed that the accounting policy of providing of obsolete stock and subsequent write off was followed by the assessee consistently on year to year basis and the internal control procedure was sufficient to justify the write off. Reliance was placed on series of decisions for allowance of write off of obsolete stock as allo .....

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in assessee s own case relating to assessment year 2006-07. However, the issue was sent back to the Assessing Officer because of additional evidence, whereas for the year under consideration, all evidences were produced but because of earlier year, the said expenditure was disallowed in the hands of assessee. The Tribunal in ITA No. 133/PN/2011 relating to assessment year 2006-07, in the remanded proceedings vide order dated 16.05.2016 vide paras 23 to 26 had adjudicated the issue of write off o .....

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d that it was following the policy of recognizing obsolete stock and writing off part of the stock. During the year under consideration, the assessee had made provision for obsolete stock to the extent of ₹ 1.10 crores but had written off only an amount of ₹ 27,35,991/- and the same was claimed as deduction in the return of income. The provision made of ₹ 1.10 crore was added back in the computation of total income. The assessee claims that it is maintaining systematic manner o .....

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2011, relating to assessment year 2006 -07 vide order dated 16.05.2016 had remanded back the issue to the file of Assessing Officer vide paras 23 to 26 since the additional evidence was filed before the Tribunal in respect thereof. The plea of the assessee for the year under appeal is that all the evidences were before the Assessing Officer. However, we find that the Assessing Officer has not considered the said evidence since the matter was already decided against the assessee in assessment yea .....

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file of Assessing Officer, who shall verify the claim of assessee and decide the issue in accordance with law. The ground of appeal No.13 raised by the assessee is thus, allowed for statistical purposes. 67. Now, coming to the ground of appeal No.15 wherein the issue raised is against reduction of insurance and communication expenses from export turnover and not from total turnover while computing deduction under section 10B of the Act. 68. The learned Authorized Representative for the assessee .....

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deduction under section 10B of the Act was re-computed at ₹ 62,32,216/- as compared to the claim of assessee at ₹ 62,39,187/-. The assessee filed objections against the order of Assessing Officer and pointed out that out of total communication expenses of ₹ 4,27,800/-, only some portion of expenses should be reduced from export turnover / total turnover provided the expenses have been incurred in foreign currency and are attributable to delivery of exports. It was the case of .....

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n foreign currency, no amount was to be allowed. The DRP directed the Assessing Officer to re-examine the claim of assessee and re-work the expenses to be reduced from export turnover as per clause (iii) of Explanation 2 to section 10B of the Act. The plea of the assessee that only the expenditure incurred in foreign exchange should be reduced from the export turnover / total turnover was brushed aside by the DRP. The Assessing Officer consequently, in the final assessment order re-computed the .....

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over and domestic turnover would constitute total turnover and in case certain expenses are to be excluded from export turnover, then the same are to be excluded from the total turnover also. 71. Similar issue of re-working of deduction under section 10B of the Act by excluding insurance and communication expenses from the total turnover arose before the Tribunal in assessment year 2006-07 and the Tribunal vide order dated 25.05.2012 decided the said issue vide paras 27 to 35 and the issue was s .....

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us Jewellery India Ltd. reported in 330 ITR 175 (Bom). The relevant paras of the Tribunal are in paras 32 to 35, which we are being referred but not reproduced for the sake of brevity. 72. The issue arising in the present appeal raised by the assessee is identical to the issue before the Tribunal in assessment year 2006-07 and following the same parity of reasoning, we remit this issue also back to the file of Assessing Officer to determine the appropriate amount of insurance and communication e .....

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and all the other units before computing deduction under section 10B of the Act. The assessee is aggrieved by the order of Assessing Officer in not allowing the deduction under section 10B of the Act being undertaking specific deduction. 74. The learned Authorized Representative for the assessee fairly pointed out that similar issue had arisen before the Tribunal in earlier years also i.e. in the remand proceedings and the issue has been decided by holding that the deduction claimed is unit spec .....

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and perused the record. The issue arising vide ground of appeal No.3 is in relation to the computation of deduction under section 10B of the Act after the amendment to section w.e.f. 01.04.2001. The persons invoking the said provisions are entitled to a deduction under the Act, as compared to the pre-amended provisions of the section, under which the income comprising under the said section was exempt from the total income. The issue arising before us is whether while computing deduction under s .....

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f against the other income of assessee. Both the authorities below had denied the claim to the assessee, in view of the ratio laid down by the Hon ble Supreme Court in Himasingka Seide Ltd. Vs. CIT (supra). The perusal of the judgment of Hon ble Karnataka High Court in the said case reflects that the years under appeal related to assessment years 1988-89 to 1990-91 i.e. the years where the benefit under section 10B of the Act was for being exempt from total income. However, the year under appeal .....

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ation of the provisions of s.72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in ss.80C to 80U. S.80B(5) defines for the purpose of Chapter VI-A gross total inco .....

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ward unabsorbed depreciation and losses of the unit the Income which is not eligible for deduction under s.10A of the Act cannot be set off against the current profit of the eligible unit for computing the deduction under s.10A of the IT Act. 28. The said proposition of law has further been applied by the Hon ble Bombay High Court in CIT Vs. M/s. Ganesh Polychem Ltd. in Income Tax Appeal No.2083 of 2012, order dated 25.02.2013 and in CIT Vs. Schmetz India Pvt. Ltd. (2012) 79 DTR (Bom) 356 and al .....

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ction 80I(6) of the Act, the Assessing Officer has to treat the profits derived from an industrial undertaking as only source of income in order to arrive at deduction under Chapter VI-A. The Hon ble Supreme Court held that the gross total income under section 80B(5) of the Act, which is also referred to in section 80I(1) of the Act, was required to be computed in manner provided under the Act, which presupposes that gross total income shall be arrived at after adjusting losses of other division .....

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rought forward losses had to be adjusted before computing deduction under section 10A of the Act. It may be pointed out that the provisions of section 10A and 10B of the Act are at parametria. Following the ratio laid down by the Hon ble Bombay High Court, we hold that the deduction under section 10B of the Act is to be computed in the hands of the assessee before adjusting brought forward unabsorbed losses/depreciation. The ground of appeal No.3 raised by the assessee is thus, allowed. 30. Foll .....

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