Selection of a comparable company should be determined having regard to its functional comparability for the year under review and not with reference to preceding years

Emersons Process Management India Pvt. Ltd. Vs. Add. CIT (ITAT Mumbai)- The fact that this company was selected as one of the comparables, by assessee himself, in the preceding assessment year cannot be put against the assessee, as whether or not a comparable is to be included must depend on its merits rather than be solely guided by events of an earlier year – particularly when assessee is successfully able to demonstrate that the entity sought to be used as comparable is not engaged in same or materially similar business at least in the present year.

In addition to above Tribunal held that certain core issues in Transfer Pricing such as selection of comparables, working capital adjustments, availability of standard deduction of +/-5 percent, adjustment to be restricted only to the international transactions with the Associated Enterprises(AE’s), in favour of the taxpayer.

ITAT Mumbai

ITA No. 8118/Mum/2010

Assessment year: 2006- 07

Emersons Process Management India Pvt Ltd.

Vs. Additional Commissioner of Income Tax

Date of hearing: May 19 , 2011

Date of pronouncement: August 12 , 2011.

O R D E R

Per Pramod Kumar

1. By way of this appeal, the assessee appellant has called into question correctness of order dated 20^th September 2010, passed in the matter of assessment under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2006-07. As the assessment has been made after assessee’s objection to the draft assessment having been examined by the Dispute Resolution Panel, this is a direct appeal to the Tribunal against the assessment so made by the Assessing Officer.

2. In the first ground of appeal, the assessee is aggrieved of the Assessing Officer disallowing a claim of deduction of Rs 25, 47,394 on account of writing off the obsolete inventory.

3. Briefly stated, the relevant material facts are like this. In the course of the assessment proceedings, the Assessing Officer noticed that the assessee has written off obsolete inventory amounting to Rs. 25,47,394, and claimed deduction, in computation of business income, in respect of this write off. In response to Assessing Officer’s requisition for the nature and details of this write off, it was submitted by the assessee that, in accordance with the accounting policy regularly followed by the assessee, the assessee regularly identifies and writes off obsolete inventory. The items so identified include the inventory items which are lying in stock for more than two years, inventory items which have no probable or forecast ed use and obsolescence arising out of technological changes. The list of items to be so written off, according to the assessee, are prepared for each division as on a date and finally approved by the Divisional Chief Financial Officer. It was also submitted by the assessee that these obsolete inventory items are kept separately for disposal, and, after necessary internal approvals, destroyed or sold as scrap material. It was also submitted that the sale proceeds as scrap material is accounted for as and when the same is realised. The Assessing Officer was not impressed by any of these submissions. He was of the view that the assessee has “failed to establish that all these items, which have been classified as obsolete stock, were slow moving during the period relevant to the assessment year 2006-07” and that admittedly the value of these items is not included in the value of closing stock. The Assessing Officer also referred to Hon’ble Bombay High Court’s judgement in the case of CIT Vs Heredilla Chemicals Limited (225 ITR 532) wherein, according to the Assessing Officer, it has been held that the mere write off of an asset is not sufficient to claim the deduction, and the deduction can only be claimed in the year in which the asset is actually sold off. The Assessing Officer finally concluded that “the fact remains that the value of these so called inventories is not included in the closing stock”. The objection raised by the assessee before the Dispute Resolution Panel was , relying upon the CIT(A)’s order for the immediately preceding year, was summarily rejected. The assessee is aggrieved of the dis-allowance so made by the Assessing Officer and is in appeal before us.

4. Having considered the rival contention and having perusal the material on record, we are inclined to uphold the grievance of the assessee. It is only elementary, and as has been recognised by Honourable Supreme Court’s landmark judgement in the case of Chainrup Sampatram Vs CIT (24 ITR 481), an anticipated loss with regard to the value of stock is to be provided for by adopting the value of stock at the market price, when the same is lower than the cost price. Their Lordships noted that “While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation”. This principle, which is also reflected by accounting theory of conservatism, justifies taking into account all reasonably anticipated losses while computing the business profits. In the case before us, the items of stock are not moving for a period of more than two years, or the items have been found to be useless or obsolete by a sound internal control mechanism. The same parameters for identification and write off of obsolete stocks have been used from year to year, and revenue authorities do not even question bonafides of these parameters. Even in the present year, the objectivity or bonafides of this mechanism have not been called into question by the revenue authorities. As we find from the admitted facts on record, the issue really before us is whether the assessee was justified in not including the value of the slow moving inventory, so written off, in the closing stock. It is only elementary that closing stock is to be valued at the cost price or market price – whichever is less. However, in the present case and particularly bearing in mind the fact that in the present case the inventory items so excluded from closing stock are the items which have not been moving in stock for over two years, which have no likely use and which have been approved, through a sound internal control mechanism, for being discarded, by way of destruction or sale as scrap, we see justification in adopting market value of these items as nil. In effect, even as it is termed as write off of obsolete stock, it is adopting nil value in respect of market value of the items of obsolete stock. We have also noted that this is a consistent policy followed by the assessee, and it has been accepted, rightly so, by the revenue authorities all along.

5. The objection of the Assessing Officer mainly rests on his reliance on Honourable Bombay High Court’s judgement in the case of Heredilla Chemicals (supra). That, however, was a case in which assessee had written off a PAN catalyst but there was no particular justification even for the write off in that particular year. Their Lordships have observed that, “It is the case of the assessee that over the course of years the production process of the chemical was changed whereby the catalyst plant was rendered superfluous and as a result thereof, the PAN catalyst became obsolete” and that “Moreover, the production process of chemical in the factory of the assessee did not undergo the change in the year under consideration. Admittedly as set out in para 8 of the statement of the case, the production process had been changed over the course of the years. In such a situation the assessee cannot claim deduction for the cost of the PAN catalyst in any year he likes.” There was thus no good reason as to why the deduction was claimed or write off was made in that particular year. It was in this backdrop that Their Lordships observed that “Merely by writing off the value thereof, the assessee is not entitled to claim deduction in the year in which he had written off the same. There must be something positive to show that its value became nil in the particular year to justify the claim for deduction in that year.”. One must, however, bear in mind the fact that the observations made by the judges must be considered in the light of the facts which were before them; these are not words of the statute. Hon’ble Supreme Court has, in the case of CIT Vs Sun Engineering Pvt Ltd (198 ITR 297), beautifully summed up the right approach to such situations by laying down the principles like this :

“It is neither desirable nor permissible to pick out a word or a sentence from the judgement of this Court, divorced from the context of the question under consideration and treat it to be the complete “law” declared by this Court. The judgement must be read as a whole and the observations from the judgement have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgement, divorced from the context of the questions under consideration by this Court, to support their reasoning.”

6. In the light of the above observations, we do not think that observations made by Honourable Bombay High Court in the case of Heredilla (supra), which were dealing with a situation in which the year in which the machine had become obsolete could not be identified on the basis of any objective criterion and in which assessee had no justification for write off of the obsolete machine in that particular year, would apply to the fact situation that we are now in seisin of . In a later judgement, Honourable Bombay High Court, in the case of Alfa Laval India Ltd Vs DCIT (186 ITR 390) [which has been approved by Honourable Supreme Court in the judgement reported as CIT Vs Alfa Laval India Ltd (295 ITR 451)], upheld the assessee’s claim of write off of 90% of slow moving stock in an earlier than the year in which such obsolete stock was actually sold. This write off was allowed on the basis of auditor’s certification which was not challenged by the Assessing Officer. This judgement thus clearly indicate that the observation made by Honourable Bombay High Court judgement in the case of Heredilla (supra), to the effect that deduction is to be allowed in the year in which asset is actually sold, is not of universal application. It would, in our humble understanding, only apply in a situation in which there is no specific and acceptable explanation for write off for a particular year. In any event, we have to read these judgements in a harmonious manner, and that is what a harmonious reading leads us to. Lets not forget that right now we are dealing with a case in which write off is justified on the basis of application of a uniform criterion which has been applied consistently over the years, is done in an objective manner and the bonafides of the manner of provisioning is not called into question and the same has not been objected to by the revenue authorities. That leaves us with only the objection that scrap value realized in the case of obsolete stock has not been accounted for in the year of write off, or, in other words, write off is claimed on gross basis and not net basis. There is not much merit in this objection either. In many of the cases, as is submitted by the assessee- and not disputed by the Assessing Officer, the obsolete inventory is to be destroyed as selling the same even as scrap will adversely affect the commercial interests, and the value realized thus may not be significant at all, or be even negative value. One of the fundamental accounting principle is of materiality, and unless the scrap value is material enough, it is not really necessary to account for the same while accounting for write off of the asset. In any event, these realisations have been accounted for in the year of receipt, and it is nobody’s case that such realisation values could be reasonably estimated or were material enough. In view of these discussions, and bearing in mind entirety of the case and particularly past history of the case, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned dis-allowance of Rs 25,47,394. The assessee gets the relief accordingly.

7. Ground No. 1 is thus allowed.

8. Ground No. 2 is basically an alternative ground of the assessee, which would have been relevant only in the event of first ground of appeal having been dismissed. However, as ground no. 1 is allowed, this grievance of the assessee is rendered academic and infructuous. We, therefore, see no need to deal with this grievance.

9. Ground No. 2 is thus dismissed as infructuous.

10. In ground no. 3, the assessee has raised a grievance against the arm’s length price adjustment of Rs 6,25,82,5634 made to the income of the assessee. There are several sub grounds to this ground of appeal, but since all these sub grounds of appeal are primarily arguments in support of the main grievance against the ALP adjustment, we take all these grounds of appeal together.

11. Learned counsel has raised an objection, which he terms as preliminary objection, calling into question validity of reference made by the Assessing Officer to the Transfer Pricing Officer. It is his contention that, in view of Hon’ble Delhi High Court’s judgement in the case of Sony India Pvt Ltd Vs Union of India (288 ITR 52) read with the provisions of law as they stood at the relevant point of time, the Assessing Officer could not have made a reference to the Transfer Pricing Officer, without giving an opportunity of hearing to the assessee. He submits that since the Assessing Officer had any not given any opportunity of hearing to the assessee, before he made the reference to the Transfer Pricing Officer, the very exercise of determination of arms length price by the Transfer Pricing Officer is devoid of jurisdiction and, as such, non est. Elaborating upon his objection, learned counsel invites our attention to the interplay between Section 92 C(3) and 92 CA (1) of the Income Tax Act. It is submitted that while the Assessing Officer himself can determine the arms length price of an international transaction, as envisaged under section 92C(3), the Assessing Officer can also, when he “considers it expedient or expedient so to do” , with the previous approval of his Commissioner, refer to the computation of arms length price of international transaction to the Transfer Pricing Officer. He submits that once he refers the determination of the arms length price the Transfer Pricing Officer, the resultant determination of ALP by the Transfer Pricing Officer is binding on the Assessing Officer since, in view of the provisions of Section 92 CA (4)- as they stand amended with effect from 1^st June 2007 by the Finance Act 2007. He invites our attention to the fact that prior to this amendment in Section 92 CA(4), the Assessing Officer was to compute total income of the assessee “having regard to” the determination of ALP in the order passed by the Transfer Pricing Officer under section 92CA(3), but, post this amendment, the Assessing Officer was to compute total income of the assessee “in conformity with” the ALP determined in the order passed by the Transfer Pricing Officer under section 92CA(3). The paradigm shift in the amendment is that what was earlier seen as one of the inputs for determination of ALP by the Assessing Officer inasmuch as the Assessing Officer had the discretion to accept or not to accept the Transfer Pricing Officer’s order, post amendment the Assessing Officer has no choice in the matter and he is to determine the ALP on the basis of the order of the Transfer Pricing Officer. Having explained the amendment in the scheme of Section 92CA(3), learned counsel takes us through the judgement of Honourable Delhi High Court in the case of Sony India (supra) with a view to highlight that what prevailed upon Their Lordships in upholding the CBDT instructions directing all international transactions beyond a particular threshold monetary limit was that , at the stage of making a reference to the Transfer Pricing Officer, a prima facie view of the Assessing Officer is sufficient, since he will anyway another opportunity when he can form a considered view as to whether to accept the order passed by the Transfer Pricing Officer, or not. Learned counsel submits that, in view of the amendment in law and having regard to the fact that the order passed by the Transfer Pricing Officer binds the Assessing Officer, it is now incumbent upon the Assessing Officer to form a considered opinion on whether to make the reference to the Transfer Pricing Officer under section 92 CA(1), or to determine ALP on his own under section 92C(3), and since the Assessing Officer has not conducted this exercise, the very reference made by the Assessing Officer is legally invalid. Learned Departmental Representative, on the other hand, strongly opposes these submissions. He submits that the assessee has not challenged the validity of reference to the Transfer Pricing Officer, either before the Assessing Officer or even before the Dispute Resolution Panel, and that there is no specific ground of appeal challenging the reference. He further submits that this reference is in no way prejudicial to the interests of the assessee, as the assessee was entitled to proper hearing by the Transfer Pricing Officer as well. It is also pointed out that since the assessee fully participated in the proceedings before the TPO, it is no longer open to him to question the same. It is further submitted that the Assessing Officer can never form a considered view since transfer pricing is a highly specialised and technical subject, and all that the transfer pricing report accompanying the income tax return has is some basic data which, by itself, cannot lead to any considered opinions being drawn. Learned Departmental Representative then submits that the scope of Section 92 C(3) and 92CA(3) is mutually exclusive and quantitatively different, but whichever be the course followed, it does not adversely affect the assessee inasmuch as the assessee gets a full opportunity of hearing before the ALP is determined. Learned Departmental Representative then points out that Honourable Delhi High Court’s judgement in the case of Sony India (supra) was in a writ jurisdiction, and the observations so made in the judgement must be considered in that light. It was submitted that assessee is at liberty to approach the Honourable High Court in writ jurisdiction but it cannot be open to the Tribunal to examine validity of law in not providing for an opportunity of hearing at the stage of making the reference to the Transfer Pricing Officer. Learned Departmental Representative also submits that, if anything, this judgment supports the case of the Assessing Officer inasmuch as Their Lordships have recognised the Central Board of Direct Tax (CBDT)’s powers of issuing directions for Assessing Officer making references to the Transfer Pricing Officer, as also the CBDT’s powers to review the monetary threshold limits from time to time. It submitted that the Assessing Officer has made the reference by following the instructions which are fully binding on him under section 119 of the Act, and which have not been held by any judicial forum to be unlawful. Learned Departmental Representative further submits that the issues being raised by the assessee are purely constitutional issues, which question correctness of legal provisions of the statute, and these issues cannot be raised before this Tribunal – which itself is a creature of the statute. Learned Departmental Representative thus urges us to reject this grievance of the assessee. In rejoinder, learned counsel reiterates his submissions and points out that there is indeed a specific ground of appeal covering this grievance, as, in ground of appeal no. 3.9, the assessee has stated that “on the facts and in the circumstances of the case, the TPO and the AO has erred in proposing, and the Hon’ble DRP has further erred in upholding / confirming the action of the TPO in not stating any reasons to show that either of the conditions mentioned in clauses (a) to (d) of Section 92 C(3) of the Act were satisfied before making an adjustment of income to the appellant”. It is further submitted that the Assessing Officer’s decision to outsource determination of ALP, as reference under section 92CA(1) essentially implies, affects legitimate interests of the assessee, and there cannot be any justification in depriving the assessee of a hearing before such a decision is taken, and, in any case, there has to be some and material on record that it was considered view of the Assessing Officer to do so. Learned counsel then once again takes us through the provisions of Section 92 C(3) and 92 CA(1) to show qualitative difference between two, and submits that the provisions of Section 92 C(3) are fairly restricted , and that subjecting the assessee to much wider and rather unfettered scope of Section 92CA(1) does act to assessee’s prejudice. It is then submitted that the veiled reference to Section 292 BB is misplaced because it is not merely a question of wrong section and it affects the assessee in substantial manner. It is then submitted that merely because the assessee has participated in the proceedings, it cannot be said that the assessee has lost his right to question the jurisdiction. Acquiescence, according to the learned counsel, cannot vest the jurisdiction , when statue does not vest it. As for the hearing before the Transfer Pricing Officer and the Dispute Resolution Panel, learned counsel submits that the same is not a compulsory process and qualitatively different from the hearing before the Assessing Officer. He then submits that the rationale of the judgement, and the line of reasoning adopted by Their Lordships, which cannot be questioned by a lower forum, supports the case of the assessee, and that is what learned counsel has attempted to demonstrate in his arguments. Whether law is laid down in a writ proceedings, or appellate proceedings, the law so laid down is binding on the forums lower in judicial hierarchy. We are thus once again urged to reject the very reference by the Assessing Officer to the Transfer Pricing Officer.

12. Coming to the merits of the ALP adjustments, the relevant material facts are as follows. The assessee is engaged in the business of providing process management solutions, with help automate, control and manage complex plant processes, to various industries such as chemicals, food and beverages, hydro carbons, life sciences and like. For the provision of such solutions, the assessee imports analytical, flow and measuring instruments from its associated enterprises abroad. The product range of the assessee includes mass flow meters, liquid and gas analytical instrumentation and systems, temperature transmitters, and level instrumentation. The assessee has manufacturing facilities at three locations, and sales and service offices located all over India. In the course of the business so carried out, the assessee has entered into following international transactions:

Sr No.	Nature of transaction	Amount	ALP determination method used by the assessee
1.	Import of raw material and other supplies	110,04,38,208	Transactional Net Margin Method i.e. TNMM
2.	Export of Finished Goods	1,25,73,836	TNMM
3.	Import of Testing Equipment	1,68,2 1,496	TNMM
4.	Payment of royalty	10,23,098	TNMM
5.	Provision for support services	1,36,23,536	TNMM
6.	Availing of services	9,60,716	TNMM
7.	Receipt of commission income	55,95,166	TNMM
8.	Reimbursement of expenses	1,01,62,651	TNMM
	Total	116,11,98,707

13. In the transfer pricing study submitted by the assessee, the assessee had identified 12 com-parables, namely Ador Power ton Limited, Aimil, Av-tech Limited, Chemtrols Engineering Limited, Continental Controls Limited, Ethos Havac Systems Limited, Hind Rectifiers, Mega tech Control Limited, RSB Transmission India Limited, Remi Equipment, Remi Motors Limited and VXL Technological. The assessee took into consideration their results for three years, i.e. 2004, 2005 and 2006, and computed weighted average of these years. The mean for the respective years worked out to 5.25%, 4.90% and 7.93 %, and the weighted mean for these three years was computed at 5.34%. After making adjustment for the working capital and provision for doubtful debts, the assessee computed adjusted margin at 4.19% as against its own margin at 4.82%. In the course of proceedings before the Transfer Pricing Officer, as a result of reference having been made by the Assessing Officer to him for determination of arms length price, the TPO took objection to multiple year data being taken into account for comparability analysis. The assessee’s contention to the effect that reference to past two year’s data for the purpose of comparability analysis should be “an automatic, adequate and sufficient compliance of the provision of Rule 10B (4)” was rejected by the Transfer Pricing Officer. Referring to the wording of Rule 10 B(4), he observed that the data for last two years prior to the year in which international transactions have taken place can be taken into account only when “such data reveal facts which could have an influence on the determination of arms length price in relation to the transaction being compared”. Since, according to the Transfer Pricing Officer, the assessee has not demonstrated as to how this condition is satisfied, assessee’s reliance on multiple year data was rejected. The next objection of the Transfer Pricing Officer was that while the assessee had himself taken Aplab Limited, Ashco Industries Limited and Elecon Engineering Co Ltd as com-parables in the preceding assessment year, the assessee did not include these cases as comparables in the current assessment year. Out of these three companies, Elecon Engineering Co Ltd was later excluded by the Dispute Resolution Panel, and the dispute is thus confined to Aplab and Ashco. As regards the issue as to whether or not Aplab should be included in the com-parables, the stand of the assessee was during the relevant year, two of the subsidiaries of Aplab Limited, namely Aplab Display Devices & Systems Limited and Swicon Micro Systems Limited have merged in Aplab Limited, and, therefore, Aplab can no longer be said to be comparable with the assessee. As regards Ashco Industries Limited, the stand of the assessee was that this company is functionally different inasmuch as it is engaged in the business of food testing laboratories and residual analysis of pesticides industries which is materially different from assessee’s business. It was also pointed out by the assessee that, as evident from annual report of Ashco, this company was engaged in a number of transactions with its AEs, and, for this reason also, its profits can be treated as a benchmark for the assessee. It was further submitted by the assessee that the company has recently changed its policy with regard to bad debts, as a result of which an exceptional provision of Rs 2,36,90,877 had to be created. It was also noted that there is a major provision for differential charges in respect of certain duty claimed on retrospective basis. The TPO agreed to exclude the items, but further noted that margin of comparables shall also be accordingly adjusted. The assessee further asked for an adjustment in respect of working capital, which TPO agreed to grant , and was granted at 0.66%. The TPO also noted that the assessee has a commission income of Rs 56,43,077 in respect of direct sales by AEs, and excluded the same. The assessee’s contention that the assessee has to incur costs on warranty services, in respect of this commission, and it is thus an operational income, was rejected by the TPO. He was of the view that commission income, being of an entirely different nature and involves different types of functions and risks, cannot be bench marked along with industrial activity of the assessee. The TPO further noted that the assessee has not identified specific costs incurred in earning this commission income, and thus commission income was excluded on gross basis. Finally, the assessee claim of deduction of 5%, under proviso to Section 92C(4), was rejected on the ground that when variation between price at which transaction has been entered into vis-à-vis arms-length price computed is more than 5%, no such deduction is to be given. It was also contended that amendment in section 92C(4) makes it clear that legislative intention was only to accept the transaction value when it was within 5% deviation from the computed ALP, and not that 5% was to be granted as a standard deduction in computing the arms length price. The assessee is not satisfied and is in appeal before us.

14. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

15. We will deal with the merits, rather than technical objection raised by the assessee, first. To begin with, we will first of all take up the working capital adjustment issue. We have noted that even though the Transfer Pricing Officer has agreed to grant working capital adjustment, and has granted the same at 0.66%, the basis on which the working capital adjustment has been worked out is not at all clear from the records. Even though we put specific questions to the learned Departmental Representatives, as also the Transfer Pricing Officer who was also before us, there was no justification whatsoever for this figure of .66% as working capital adjustment. The computation for the working capital adjustment, as given by the assessee before the authorities below – which is also placed before us at pages 388 to 391 of the paper book, takes into account inventory, debtors and creditors and computes the working capital adjustment at 1.55%. It appears that the TPO has excluded the inventory from computation of working capital adjustment, but there cannot be any justification for doing so. Once he agrees in principle to make an adjustment for efficiency in working capital, as he has done in this case, there can not be any good reasons to exclude inventory from the computation for working capital adjustment. In this view of the matter, we uphold the grievance of the assessee that the working capital adjustment should have been taken at 1.55%, as was claimed by the assessee and which has not been specifically rejected by the TPO, as against 0.66% made by the TPO.

16. Secondly, we have noted that two companies, namely Aplab and Ashco, have been taken as com-parables- despites assessee’s vehement objection to the inclusion of these companies as com-parables. As far as Ashco is concerned, we find that, as evident from their directors report – a copy of which is placed at pages 280-281 of the paperbook, this company is engaged in the business of “providing all types of testing facilities for the food industry” and that it specializes in “residual analysis of pesticides antibiotics, PCBs, PHA, Sudan I, II and III, all types of food including water and soft drinks”. This business activity, in our humble understanding, is qualitatively different from the business carried on by the assessee, i.e. providing process management solutions, with help automate, control and manage complex plant processes and, in the process, manufacture and deal in includes mass flow meters, liquid and gas analytical instrumentation and systems, temperature transmitters, and level instrumentation. The assessee is, therefore, quite justified in its claim for exclusion of this company. The fact that this company was included as one of the comparable, by assessee himself, in the preceding assessment year cannot be put against the assessee, as whether or not an comparable is to be included must depend on its merits rather than be solely guided by the events of earlier year- particularly when assessee is successfully able to demonstrate that the entity sought to be used as a comparable is not engaged in same or materially similar business at least in the present year. As far as Aplab is concerned, we have noted that, as evident from its notes to accounts for the year ended 31^st March 2006- a copy of which was placed before us at pages 276 on wards of the paper book, two companies, namely Aplab Display Devices and Systems Limited and Swicon Micro Systems Pvt Ltd, merged in Aplab Limited in pursuance of amalgamation scheme duly approved by Honourable Bombay High Court. The results shown by Aplab Limited thus included the results of these two subsidiaries and, to that extent and as noted in note number 3 to the notes on accounts, “figures of the current year are not comparable with those of the previous year”. Here is a case in which figure of Aplab Limited are not comparable with its figures of the previous year, but yet the authorities below insist that these figures should be taken into account because the assessee had included this comparable in the preceding previous year. This approach proceeds on the fallacious assumption that the activity of the assessee must essentially the same as in the preceding year, and it overlooks the fact that in the relevant period the figures shown by Aplab include the figures of two new companies. As these two new companies, including a private company the activities of which are not in public domain anyway, have merged in Aplab, and as there is nothing on record to show that these two companies were also engaged in the same business, there cannot indeed be any justification for including the same as a comparable for the present year. The information about precise business activities are not in public domain and, as held in the case of Skoda India Ltd ACIT (122 TTJ 699), the assessee cannot be expected to get the details which are not in public domain. When TPO is insisting for inclusion of this comparable, the onus is on him to demonstrate that the comparable entity is engaged in the same or materially similar activity. We, therefore, also uphold assessee’s grievance against inclusion of Aplab Limited as a comparable. In effect, thus, we hold that Aplab Limited and Ashco Industries Limited cannot be included in the list of com-parables for the purposes of bench marking – first, because, two new companies have merged into this company and there is nothing on record to show that these companies were engaged in the same or materially similar activity; and, second, because, the business activity of this company is significantly different from the business activity of the assessee.

17. Thirdly, the commission income, which has been excluded from the profitability of the assessee, is not a passive income but an operational income on the facts of this case. The assessee is the local contact point for the AEs and is a virtual projection for the AEs in India giving them visibility and presence, is engaged in rendering warranty services for these direct sales on which commission is earned, and a part of its marketing efforts also contribute to this earning. In these circumstances, and particularly as related costs have not been segregated even on estimation basis which such an allocation essentially involves, we consider it appropriate that commission income on direct sales should not be excluded from the profitability of the assessee. On this aspect also, we must uphold the grievance of the assessee.

18. Fourthly, the question whether benefit of + 5% even when the variation in value of international transaction with AEs and its ALP is more than 5%, prior to amendment in second proviso to Section 92 C with effect from 1^st October 2009, the issue is no longer res integra. In the case of ACIT Vs UE Trade Corporation India Pvt Ltd (44 SOT 457), a coordinate bench has taken the view that this amendment is only prospective, and that so far as pre 1^st October 2009 position is concerned, the adjustment of 5% is to be allowed even in the cases where difference in value of international transactions and its ALP is more than 5%. We are in considered view of the views so articulated by the coordinate bench. Respectfully following the same, we uphold the grievance of the assessee and direct the Assessing Officer to grant a deduction of 5% in computation of arms length price, in accordance with the legal position elaborated upon by the coordinate bench.

19. Fifthly, as has been consistently held by the coordinate benches, the transfer pricing adjustment is to be made with respect to international transaction and not the entire sales. Learned Departmental Representative did not even dispute this point seriously. We, therefore, direct the Assessing Officer to compute the transfer pricing adjustment in the light of this legal position.

20. We have also noted that the assessee’s claim is that margin in respect of the comparable has been incorrectly calculated by the Transfer Pricing Officer. In page 4 of the power point presentation filed before us, the assessee has filed a chart of showing, what the assessee claims to be, correct figures. It is submitted that the assessee had given the computation of these margins before the TPO as well, but, without assigning any reasons, the TPO has rejected the same. We, therefore, deem it fit and proper to remit this issue to the file of the Assessing Officer for dealing with the computation of correct margins, after giving assessee an opportunity of hearing on this issue, and by way of a speaking order.

21. To sum up, so far as merits of the transfer adjustments are concerned, we remit the matter to the file of the Assessing Officer for adjudication de novo in the light of our above observations and specific directions. While doing so, the Assessing Officer will give a due and fair opportunity of hearing to the assessee and deal with the contentions of the assessee by way of a speaking order.

22. In the course of hearing before us, it was submitted by learned counsel that even though he has begun by taking a technical objection to the Assessing Officer’s reference to the Transfer Pricing Officer, in the event he succeeds on merits on the issues of working capital adjustment, exclusion of Apalb and Ashco as comparable and + 5% adjustment under second proviso to Section 92C, this objection will be rendered academic inasmuch as impugned transfer pricing adjustment will then not survive. In the preceding paragraphs, we have upheld these contentions. Therefore, the question regarding validity of reference, whatever be its merits or lack thereof, is purely an academic question on the facts of this case. In view of the submissions of the learned counsel, therefore, we decline to deal with this technical objection. Similarly, very elaborate submissions were made on the question whether the decisions of this Tribunal, as also Honourable Courts above, bind the Dispute Resolution Panel or not, and if these precedents are to be taken as of binding nature on the DRP, how can the Assessing Officer protect his interests of pursing the matter in further appeals against such judicial precedents, but, as given the academic nature of these discussions in the present situation, we see no need to deal with this aspect of the matter either. On the question of use of multiple year data also, it is not really necessary, on the facts of this case, to adjudicate the issue on merits. These issues are anyway left open for adjudication in a fit case.

23. Ground No. 3 is thus allowed for statistical purposes in the terms indicated above.

24. In ground no. 4, the assessee is aggrieved that the Assessing Officer erred in disallowing an amount of Rs 74,33,557 under section 40(a)(ia) on account of payment made to EECIPL.

25. To adjudicate on this grievance, it is sufficient to take note of the fact that the amount is admittedly towards reimbursement of expenses to Emerson Electric Co India Pvt Ltd, under a cost sharing arrangement. The dis-allowance has been made as taxes have not been deducted at source, even though , in the draft assessment order, the Assessing Officer proposed to make a dis-allowance under section 40A(2)as excessive or unreasonable. As the dis-allowance is finally made, pursuant to DRP directions, on the ground that taxes have not been deducted at source, that aspect of the matter is no longer relevant.

26. Having heard the rival contentions and having perused the material on record, we find that it is admittedly a case of reimbursement of expenses and it is a settled legal position that tax deduction at source requirements do not come into play in the case of reimbursement of expenses. Undoubtedly these payments are made for the services rendered but the TDS requirements would come into play at the point of time when services are made to the person who is rendering the services or to the person with whom contract for rendering of these services is entered into. Right now we are dealing with a situation in which payment is made to a group concern under a cost sharing arrangement and the payment is thus not for services but as reimbursement of expenses. In our considered view, TDS requirements do not come into play at this stage. Accordingly, the impugned dis-allowance must be deleted. We direct the Assessing Officer to do so.

27. Ground No. 4 is thus allowed.

28. In ground no. 5, the assessee is aggrieved of disallowance of Rs 58,35,000, out of payment made to Emerson Export Engineering Centre- a division of Emersons Electric Co India Pvt Ltd, under section 40A(2)(b) of the Income Tax Act.

29. So far as this grievance of the assessee is concerned, the material facts are like this. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has made a payment of Rs 1,49,9 1,446 to EEEC towards service charges but these charges have grown by 204% vis-à-vis expenses in the preceding year, whereas the increase in turnover is only 85%. While the Assessing Officer had proposed a dis-allowance of 20%, the DRP allowed the increase in the expenses only to the extent the increase of turnover was in the same ratio. The assessee is aggrieved and is in appeal before us.

30. Having heard the rival contentions and having perused the material on record, we are not inclined to uphold the impugned dis-allowance. The dis-allowance under section 40A(2)(b) can be made only to the extent the payment for the services is excessive or unreasonable vis-à-vis the market price of such services, but then what is essentially requires is that the market price of these services is established and then amount paid in excess of such market prices is to be disallowed. The Assessing Officer has not even gone through the motions of this exercise. A dis-allowance under section 40A(2)(b) on adhoc basis, as a percentage of total expenditure incurred, is inherently bad in law because such a dis-allowance can never have reasonable nexus with the market price of services for which payment is made. The Assessing Officer, under the guidance of DRP, has gone a step further. He has disallowed the expenditure to the extent this has not increased in the same ratio as the turnover. We are unable to see any merits, perhaps beyond sheer simplicity of calculation, in this approach, nor can we understand the justification for this approach. The benefit derived from an expenditure and its quantum cannot also go hand in hand, and to assume that it must also move in the ratio is too unrealistic an assumption to be adopted. There is nothing on record to even suggest that the service charges are in excess of its fair market value. Under these circumstances, in our considered view, the impugned dis-allowance of any legally sustainable merits. Accordingly, we direct the Assessing Officer to delete this dis-allowance as well.

31. Ground No. 5 is allowed.

32. In ground no. 6, the assesse is aggrieved of Assessing Officer’s adding the provision for differential duty of Rs 55,08,545 and provision for variable pay amounting to Rs 1,02,00,000 for the purpose of computing book profits under section 115 JB of the Act.

33. In the course of the assessment proceedings, the Assessing Officer made the adjustments in respect of provision for differential duty and for variable pay, as he treated the same as un ascertained liabilities in the absence from anything from the assessee to demonstrate that these are ascertained liabilities. Learned counsel now contends that these liabilities are ascertained liabilities, and, therefore, these liabilities are not required to be added back to the book profits. The assessee has now filed additional evidence, at pages 9 to 13 of the additional paper book, in support of the contention that these liabilities are well ascertained liabilities. Learned Departmental Representative, on the other hand, has strongly opposed admission of additional evidence as the same was not produced before the Assessing Officer. He further submits that if the additional evidence is to be admitted at all, the matter should be remitted to the file of the Assessing Officer for fresh adjudication in the light of such additional evidence.

34. Having heard the rival contentions, and having perused the material on record, we deem it fit and proper to admit the additional evidence and remit the matter to the file of the Assessing Officer for adjudication de novo in the light of these additional evidences and such other material as the assessee may wish to rely upon, to substantiate his claim that the liabilities in question are ascertained liabilities. The Assessing Officer shall decide the matter by way of a speaking order, in accordance with the law, and after giving a fair opportunity of hearing to the assessee.

35. Ground No. 6 is thus allowed for statistical purposes.