2009-VIL-334-ITAT-DEL

Equivalent Citation: [2010] 2 ITR 196, TTJ 123, 509

Income Tax Appellate Tribunal DELHI

ITA Nos. 4459/Del/2007 & 4469/Del/2007

Date: 11.06.2009

SCHEFENACKER MOTHERSON LIMITED.

Vs

INCOME-TAX OFFICER AND ANOTHER.

BENCH

Member(s)  : VIMAL GANDHI., A. K. GARODIA.

JUDGMENT

These two appeals by the taxpayer for asst. yrs. 2003-04 and 2004-05 are directed against orders of Commissioner -of Income-tax (Appeals) [CIT(A)] upholding adjustment of INR Rs. 1,11,52,533 and INR Rs. 86,52,721 respectively under s. 92C(4) for not charging ALP in the international transactions carried by it with its associated concerns.

Taxpayer's (tested party) activities

2. The taxpayer appellant, Schefenacker Motherson Ltd. (SML) is a joint venture between Motherson Sumi Systems Ltd., India (MSSL) and Schefenacker International GmbH, Germany (Schefenacker AG). MSSL holds 49 per cent equity stake in SML, while other 51 per cent equity stake is held by Schefenacker AG.

2.1 Schefenacker AG is the world's largest manufacturer of rear view mirrors and related cable assemblies in automobiles. SML is the leading rear view mirror manufacturer for the Indian automobile industry. Its operations comprise of manufacturing of manual rear view mirrors which are supplied in the domestic market to car manufacturers such as Maruti, Ford, Toyota, Hyundai, etc. and cable assemblies which are exported to the group companies worldwide.

2.2 The Schefenacker Group companies have provided SML with technical information, know-how for the design and manufacturing of rear view mirror and related cable assemblies, and the required technologies and logistics support by way of technical engineering instructions, technical training, quality control, etc.

2.3 The taxpayer's associated concerns are responsible for complex product development, R&D, quality standards and processes, marketing and brand building and also for developing relationships with various OEMs and thus enjoys significant brand equity in the global markets.

2.4 A new plant was set up at Chennai in July, 2002 by taxpayer SML to manufacture/assemble door handles and T-Gate besides the existing product lines for catering to Hyundai India.

3. The taxpayer SML filed with return of income, a transfer pricing report (TP report) which revealed that the taxpayer had carried in the relevant period the following transactions with its associated enterprises (AE):

Details of international transactions with AEs

              Assessment year 2003-04 
1. Sale of goods                     - Rs. 4,49,00,948
2. Purchase of parts and components  -   Rs. 80,93,725
3. Royalty                           -   Rs. 29,35,771
4. Cost recharges                    -   Rs. 19,06,700

TNMM used as most appropriate method

3.1 In the TP report for asst. yr. 2003-04, taxpayer's auditor had stated that transactions with AE were carried at arm's length and price charged/paid was justified and comparable, using transactional net margin method (TNMM) as the most appropriate method for benchmarking (international transactions). It was noted that for comparative analysis, the taxpayer had focused on the operative result of comparable companies for the financial years 2001-02 and 2002-03 instead of contemporaneous data for financial year 2002-03 only. Profit level indicator (PLI) chosen for selection of comparable companies was cash profit/sales. The TP report further stated that above ratio was used in order to remove the effect of differences in capacity utilization of the taxpayer and the comparable companies. Cash profit was arrived at by deducting operative expenses from operating income without considering depreciation both in the case of the taxpayers and comparable companies.

ALP by use of cash profit/sale as PLI

3.2 The taxpayer identified a set of nine uncontrolled comparable companies from Prowess Database [as detailed in Table 2 of the order of learned CIT(A)] by adopting a formula base search of auto component manufacturer segment of above companies. Thereafter, the search was refined by using certain quantitative filters detailed in paras 5.32 to 5.42 of the TP report. On the basis of analysis and by adopting PLI referred to above, the taxpayer computed arithmetic mean of cash profit/sale of 9 comparable companies at 8.33 per cent using data for financial years 2001-02 and 2002-03. Taxpayer's cash profit/sale of the financial year 2002-03 was shown at 8.85 per cent. Since the margin of profit of the taxpayer was higher than the average arithmetic mean of nine comparable companies, the TP report claimed that the taxpayer had satisfied arm's length standard set under the Indian TP regulations relating to transactions of import of raw material, export of finished products and payment, of royalty. The TP report also stated that since cost recharges by the taxpayer to its associated companies represented actual cost incurred, supported by third party bills, the transactions independent of TP analysis satisfied arm's length standard.

TPO's reasons for rejecting PLI of cash profit/sales

4. The Transfer Pricing Officer (TPO) to whom reference was made by AO raised objection on the selection of PLI by the taxpayer's auditor. He rejected TP analysis furnished by the taxpayer as not conforming to r. 10B of Indian IT Rules. Reasons for adapting above course are extracted below:

"(a) In computing the PLI under TNMM, the taxpayer does not have any choice regarding the numerator used in the ratio, though the denominator could be costs, sales, assets or any other relevant base.

(b) Under TNMM, the net operating margin of the tested party is to be used as the numerator.

(c) Since the net profit margins have not been defined under the Act and the rules, the same has to be construed and given a meaning which is generally understood.

(d) In accounting parlance, the net profit margin normally means profit before tax, computed in accordance with the accounting principles followed by the taxpayer. Any items of income and expenditure, which have no bearing on the margins of the transaction under examination, have to be excluded. Financial cost and interest income not directly related to the transactions or profit or loss on sale of assets are also to be excluded.

(e) Cash profit used by the appellant in the numerator is not identical in meaning and substance to the net operating profit margin as the same is more akin to gross profits rather than net profits."

4.1 The TPO accordingly issued show cause notice dt. 3rd March, 2006 to the taxpayer requiring to meet above objections on its choice of PLI and working of profit margin. The taxpayer, in its reply, reiterated that cash profit/sale ratio was a ratio well accepted to compute operational profit and therefore the same could not be rejected. Margins in the case of taxpayers and comparable were computed by adopting same base i.e. ratio of operating profit and total cost excluding depreciation from the numerator and denominator. This way margin disclosed was claimed to be reasonable and comparable. The TPO, however, rejected above computation with the following reasons:

"(a) Rule 10B(1)(e) of the Rules does not permit any adjustment to be made to the operating margins of the assessee company.

(b) Making adjustments on account of depreciation to recompute net operating profit margin of the assessee has no sanction of law.

(c) The assessee company can make adjustments to the net operating margins of the comparables only, as evident from the provisions of r. 10B(1)(e)(iii) of the Rules.

(dl Making adjustments to both the controlled and the uncontrolled transactions do not amount to compliance to the TP regulations.

(e) Excluding depreciation completely to take care of low capacity utilization tantamounts to distorting the very basis of the comparability adjustments. "

TPO's determination of ALP

4.2 The TPO also applied quantitative filter of ratio between depreciation and total cost to the nine selected comparables of the taxpayer and worked out percentage of depreciation to total cost as per table below reproduced from CIT(A)'s order:

                  Table 3 in CIT(A)'s order 
--------------------------------------------------------------------
Sl.           Name             Depreciation  Total cost    % of
No.                              (in Rs.     (in  Rs.   depreciation
                                 crores)     crores)    in total
--------------------------------------------------------------------
1.  Schefenacker Motherson Ltd.     1.6       19.58       8.17
--------------------------------------------------------------------
2.  Ring Plus Aqua Ltd.            2.36       27.92       8.45
--------------------------------------------------------------------
3.  Coventry Coil-O-Matic          0.91       15.19       5.99
    (Haryana) Ltd.
--------------------------------------------------------------------
4.  Roto Pumps Ltd.                0.71       12.00       5.91
--------------------------------------------------------------------
5.  Gujarat Automotive Gears       0.23        4.82       4.77
    Ltd.
--------------------------------------------------------------------
6.  Dennison Hydraulics India      0.36        10.6       3.39
    Ltd.
--------------------------------------------------------------------
7.  E.L. Forge Ltd.                 1.3       41.95       3.09
--------------------------------------------------------------------
8.  Coventry Spring & Engg.        0.74       24.73       2.99
    Co. Ltd.
--------------------------------------------------------------------
9.  Frontier Springs Ltd.          0.23         8.7       2.64
--------------------------------------------------------------------
10. Bhagwati Autocast Ltd.         0.47       20.02       2.34
--------------------------------------------------------------------

5. In the light of provisions of r. 10C(2)(d) of the Rules, the TPO concluded that since no accurate adjustment could be made to account for different levels of capacity utilization, selection of comparables themselves have to be made on the basis of similar ratio of depreciation to total cost. Accordingly, the following 3 comparables (Table 4) which had somewhat similar ratios of depreciation to total cost as of the taxpayer, were selected as final comparables for finding mean operating margin of profit which was taken at 6.66 per cent as under:

                     Table 4 from CIT(A)'s order 
----------------------------------------------------------------
Sl.         Name               % of       OP     TC       PLI
No.                       depreciation                   (OP/TC)
                            in total
----------------------------------------------------------------
1.  Coventry Coil-O-Matic     5.99       2.17   15.19     14.28%
    (Haryana) Ltd.
----------------------------------------------------------------
2.  Ring Plus Aqua Ltd.       8.45       3.85   27.92     13.78%
----------------------------------------------------------------
3.  Roto Pumps Ltd.           5.91   (-) 0.97   12.00  (-) 8.09%
----------------------------------------------------------------
    Arithmetic mean:                                       6.66%
----------------------------------------------------------------

5.1 This arithmetic mean of OP/TC at 6.66 per cent was adopted to work ALP and as it exceeded the OP/TC ratio of 0.74 per cent of the taxpayer, the TP adjustments for financial year 2002-03 were worked out (Table 5) as under:

               TP adjustments as per order of the TPO
----------------------------------------------------------------
Computation of ALP of international transactions:
----------------------------------------------------------------
Total cost of the assessee company              =   19,58,57,185
----------------------------------------------------------------
Operating profit (cash profit of Rs. 1,74,54,970
minus depreciation of Rs. 1,60,13,886)          =      14,41,084
----------------------------------------------------------------
Operating profit at arm's length margin (6.66%) =    1,30,44,088
----------------------------------------------------------------
Adjustment to the operating profit
(Rs. 1,30,44,088 - Rs. 14,41,084)               =    1,16,03,004
----------------------------------------------------------------
5% of international transaction                 =      28,91,857
----------------------------------------------------------------

5.2 The TPO has further observed that the taxpayer during the financial year 2002-03 made both transactions of sale and purchase with its AEs. Since PLI has been taken as the ratio between the net operating profit margin and the total cost incurred and purchases had been included in the total cost, no adjustment was being made to the total cost as it would skew the PLI. Accordingly, the TPO held that adjustments were being made to the transactions of sales made to the associated concerns and the total sales value would be revised upward by an amount of Rs. 1,16,03,004. Since the proposed adjustment of Rs. 1,16,03,004 exceeded 5 per cent of the international transaction amounting to Rs. 28,91,857, the entire TP adjustments were to be added to the total income of the taxpayer. Accordingly, after providing an opportunity of being heard to the taxpayer, TP adjustments of Rs. 1,16,03,004 were made to the total income of the taxpayer for the asst. yr. 2003-04.

Assessment year 2004-05

5.3 In the period relevant to asst. yr. 2004-05, the taxpayer showed to have carried the following international transactions with its AEs. The transactions were shown in TP report to be at arm's length by adopting TNMM method as under:

              Details of international transactions
                             Table 1 
--------------------------------------------------------------
Sl.   International transactions      TP method     Value
No.                                   used         (in Rs.)
--------------------------------------------------------------
1.   Purchase of parts and components   TNMM      4,38,48,119
--------------------------------------------------------------
2.   Sale of goods                      TNMM      5,11,49,848
--------------------------------------------------------------
3.   Royalty                            TNMM         3,14,954
--------------------------------------------------------------
4.   Testing charges                    TNMM           91,743
--------------------------------------------------------------
5.   Recharges                           CUP        17,30,000
--------------------------------------------------------------

A similar TP report for asst. yr. 2004-05

6. The AO again made reference under s. 92CA(1) of the Act to the TPO for computation of ALP in respect of above international transactions. Vide order de 22nd Nov., 2006, the TPO proposed adjustment of Rs. 1,10,96,223 to international transactions of purchase. In its comparative analysis, taxpayer's auditor had focused on operative results of comparable companies for the period 1st April, 2001 to 16th Feb., 2004. The other quantitative filters adopted in the process of selection of comparables are detailed in paras 5.72 and 5.74 of TP report. As per TP report 15 companies were ultimately selected, 13 from prowess database and two from capitaline database shown in Table 2 of the impugned order. PLI chosen was again cash profit/sales, and justification for exclusion of depreciation was "to eliminate differences in technology used, age of assets used in production, differences in capacity utilization and different depreciation policies adopted by various companies in auto component industry". The arithmetic mean by applying TNMM was worked out at 10.06 per cent against 10.83 per cent of the taxpayer for financial year 2003-04 on base ratio of cash profit/sale. The TP report claimed that arm's length standards, required under the TP regulation relating to first four transactions, were satisfied. The TPO rejected this TP report in the light of provision of r. 10B of the IT Rules and held that cash profit/sales ratio was not correct PLI for determining the ALP under the above rule. He gave almost similar reasons as have been noted for asst. yr. 2003-04 for adopting above course. According to the TPO, analysis carried by the taxpayer without considering depreciation, has no sanction of law.

Exclusion of comparables by TPO

6.1 The TPO also had a critical look at the comparables selected by the taxpayer. He observed that the taxpayer was the leading rear view mirror manufacturer for the Indian automobile industry and this product approximately contributes 85 per cent to the company's top line. The export of cable assemblies contribute to the balance of the top line. An analysis of the product line of some of the comparables revealed that they could actually not be considered as real comparables.

6.2 The TPO excluded Bhagwati Autocast Ltd. as that company was incorporated in 1982 and was engaged in business of castings for tractor, compressor and automobile industries.

6.3 Jay Ushin Ltd. was excluded as it was established in 1986 and was manufacturing automobile equipment like door latches, switch, key sets and heater control. The company was also having substantial related party transactions.

6.4 Shard low India Ltd. was excluded and it was established in 1960 and the company was manufacturing forgings for crankshafts, axle beams, stub axles and steering arms and connection rods for 2, 3, 4 and 6 cylinder engines.

6.5 Minda HUF Ltd. was incorporated in 1986 and enjoyed market leadership in security systems for automotive industry.

6.6 Swaraj Automotives Ltd. was established in 1974 and was manufacturing air cleaners, head rests, seats and recliners. The TPO noted that profile of the assessee was quite different and 85 per cent of total sales related to rear view mirrors were made to top automobile companies and also exported. The TPO, accordingly, excluded above five companies.

Computation of ALP by TPO

6.7 The TPO then proceeded to compute the ALP adopting ratio of operating profit to sales and by using data for the financial year 2003-04 for the remaining 10 selected comparables as detailed in Table 4 below:

                                  Table 4 
--------------------------------------------------------------------
Sl.      Company name      Operating profit  Sales for the  OP/Sales
No.                        for the financial financial year
                           year 2003-04      2003-04
--------------------------------------------------------------------
1.  Amforge Industries Ltd.    18.2             221.87        8.20
    (Prowess Database)
--------------------------------------------------------------------
2.  Automobile Corpn. of Goa  10.13             124.55        8.13
    (Prowess Database)
--------------------------------------------------------------------
3.  Bharat Forge Ltd.         210.5             907.74       23.18
    (Prowess Database)
--------------------------------------------------------------------
4.  E.L. Forge Ltd.            5.92              58.18       10.17
    (Prowess Database)
--------------------------------------------------------------------
5.  Lumax Industries Ltd.     14.49              27.17        5.33
    (Prowess Database)
--------------------------------------------------------------------
6.  Phoenix Lamps Ltd.        19.08             165.96       11.49
    (Prowess Database)
--------------------------------------------------------------------
7.  Pricol Ltd.               34.42             442.39        7.78
    (Prowess Database)
--------------------------------------------------------------------
8.  Rasandik Engineering      25.01             136.16       18.36
    Inds. India Ltd.
    (Prowess Database)
--------------------------------------------------------------------
9.  Simmonds Marshall Ltd.     1.16              13.34        8.69
    (Prowess Database)
--------------------------------------------------------------------
10. Tata Auto Plastic Systems 13.59             140.79        9.65
    Ltd. (Prowess Database)
--------------------------------------------------------------------
                                          Arithmetical       11.10
                                          mean
--------------------------------------------------------------------

Adjustments made by TPO

6.8 The ratio of net operating profit/sales was worked out by the TPO by using data for the financial year 2003-04 as under:

Net sales                                           Rs. 30,75,86,918
         Profit before tax    Rs. 2,47,08,770
Add:     Financial expenses     Rs. 23,04,381
                              Rs. 2,70,13,151
Less:    Non-recurring income   Rs. 39,67,927
         Net operating profit                       R s. 2,30,45,224
OP/sales (2,30,45,224 - 30,75,86,918)                          7.49%

7. The arithmetic mean of OP/sales of the comparables was worked out at 11.10 per cent and was taken to be the arm's length ratio. As it exceeded ratio of 7.49 per cent of the taxpayer, TP adjustment of Rs. 10,96,223 were made as under:

                                Table 5 
----------------------------------------------------------------
Computation of ALP of international transactions:
----------------------------------------------------------------
Total cost of the assessee company              =   30,75,86,918
----------------------------------------------------------------
Net operating profit                            =    2,30,45,224
----------------------------------------------------------------
Operating profit at arm's length margin
(net sales * 0.111)                             =    3,41,42,147
----------------------------------------------------------------
Adjustment to the operating profit
(3,41,42,147 - 2,30,45,224)*                    =    1,10,96,223
----------------------------------------------------------------

 (*) There appears to be an arithmetical mistake in the calculation of TP adjustment as the correct amount is Rs. 1,10,96,923. Since the discrepancy is very nominal, the same is being ignored.

7.1 The TPO observed that the taxpayer made both transactions of sale and purchase with its AEs in the relevant period. Since PLI has taken the ratio between the net operating profit margin and the net sales, sales made to the AEs stood included in the total sales and therefore, no adjustment was made to the total sales as it would skew the PLI. The TPO only made adjustments to the transaction of purchases made from the AEs. Accordingly, value of the international transaction of purchases from the AEs was revised downward by an amount of Rs. 1,10,96,223. The arm's length value of purchase transactions was worked out at Rs. 3,27,51,896 (purchase value of international transaction of Rs. 4,38,48,119 minus TP adjustment of Rs. 1,10,96,223). 5 per cent of above ALP in the case of the purchase was worked out at Rs. 16,37,595. Accordingly, total value of purchases falling in the upper band of 5 per cent of the ALP was worked out at Rs. 3,43,89,490. Since the actual value of the purchase transactions at Rs. 4,38,48,119 exceeds the tolerable band of Rs. 3,43,89,490 (Rs. 3,27,51,896 x 1.05), the taxpayer was held to be not entitled to the benefit of proviso to sub-s. (2) to s. 92C of the Act. Accordingly, the TPO worked out the proposed TP adjustment at Rs. 1,10,96,223 which were adopted in assessment for asst. yr. 2004-05.

Appeal by the taxpayer before the CIT(A)

No fault found in assumption of jurisdiction by TPO/AO

7.2 The taxpayer challenged above TP adjustments in both the years and carried the matter in appeal before the learned CIT(A). Several technical objections on account of initiation of proceeding under the TP regulations were raised. Reference made to the TPO was also challenged. It was claimed that assumption of jurisdiction by the AO and by the TPO was not in accordance with law. The learned CIT(A) on consideration of technical objections, found no error in the approach of the AO in assuming jurisdiction or in making reference to the TPO. All the technical objections were thus rejected. We have not noted these technical objections in detail as learned counsel appearing for the taxpayer fairly conceded that the Benches of Tribunal have already decided these issues and impugned orders of CIT(A) were quite in line with the Tribunal's views. The learned counsel further did not challenge application of decision of jurisdictional Delhi High Court in the case of Sony India (P) Ltd. vs. CRDT (2006) 206 CTR (Del) 157 : (2007) 288 ITR 52 (Del) by the learned CIT(A) to the facts of the case.

Adoption of cash profit as PLI reagitated. CIT(A) not convinced

7.3 Learned representative of the taxpayer further challenged the computation of ALP by the TPO and PLI adopted by him. The learned CIT(A) did not accept the contention of the taxpayer that PLI under the TNMM could be cash profit/sales. He also held that there was no justification to exclude depreciation while computing net margin of the taxpayers and the comparables. In the light of proviso to r. 10B(4) of IT Rules, the learned CIT(A) held that data for carrying TP analysis has to be of current financial year as there was nothing on record to show that data of preceding two years had any influence on the determination of the transfer price in the year under consideration. After detailed discussion, the learned CIT(A) held, "I am of the considered view in the light of discussion in the preceding sub-paras that appellant as well as the TPO/AO committed errors in relying on prior years data for computation of PLI of the companies". Relevant data to be used for comparison was held to be data of current financial year 2002-03. On the main objection of the taxpayer relating to use of PLI used for comparative analysis, the learned CIT(A) rejected use of ratio of net profit/sales. He found no force in the argument of the taxpayer that the taxpayer was not able to utilize its full capacity and, therefore, deduction of depreciation in all cases be not taken into account. He held that no evidence was brought on record to show how taxpayer's circumstances were different from other comparables to account for low capacity utilization, nor any analysis was available in taxpayer's TP report to ascertain the important element of fixed cost in the case of taxpayer and the comparables.

Case for ignoring depreciation rejected

8. According to the learned CIT(A), the claim of the taxpayer for ignoring depreciation was to be rejected for the following reasons:

(i) Depreciation is an important element of total cost in a manufacturing unit. Analysis of functions performed, assets deployed and risks assumed (FAR analysis) is to be conducted first by the taxpayer. This onus was not completely discharged in these cases.

(ii) The controversy was not taken before the TPO/AO.

(iii) TNMM allows for substantial product dissimilarities. Analysis of these distinctions (dissimilarities) should have been part of FAR analysis of comparables in the taxpayer's TP report. The taxpayer has ignored this aspect and now cannot be allowed to come up with these arguments during the appellate proceedings.

(iv) Fresh investment was being made in automobile ancillary industry which was in the expansion phase. Therefore, there is no requirement to exclude depreciation in computation of PLI.

8.1 The learned CIT(A) also rejected contention of the taxpayer that its plant was set up in July, 2002 and enhanced depreciation has reduced its profitablilty and, therefore, depreciation need to be ignored.

ALP determined by taking ratio (OP)/(TC)

8.2 learned CIT(A) then examined result of profit (OP) to total cost (TC) of ten companies with following observations:

"The appellant had chosen to aggregate all the international transactions of purchase, sale and royalty rather than going in for a transaction-wise analysis. The total cost includes payment of royalty to the AEs and payments for components that are used in the manufacturing process. Royalty is paid for the use of patented technology and the same technology is used in the enterprise level production process. The same is true for the components as well. Therefore, keeping in mind the relative importance of the sale transaction made to the AE and the fact that the cost involving international transactions have bearing on the overall sales of the entity, the base of total cost is held to be the correct denominator. Accordingly, I am inclined to agree with the TPO/AO that OP/TC is the correct PLI for the benchmarking analysis.

5.5 In the light of the discussion in the foregoing paras, the comparability analysis is to be carried out by using the current financial year data of 2002-03, using OP/TC as the PLI. During the appellate proceedings, the appellant furnished the following information relating to computation of PLI of the nine finally selected comparables (Table 6) in the TP report. except for any information on Coventry Spring & Engineering Co. Ltd.:

                                Table 6 
----------------------------------------------------------------
Sl.   Name                                  OP     TC     OP/TC
No.
----------------------------------------------------------------
1.   Ring Plus Aqua Ltd.                   7.38   32.84   22.47%
----------------------------------------------------------------
2.   Coventry Coil-O-Matic (Haryana) Ltd.  1.84   17.53   10.50%
----------------------------------------------------------------
3.   Gujarat Automotive Gears Ltd.         0.09    4.64    1.94%
----------------------------------------------------------------
4.   E.L. Forge Ltd.                       3.85   36.05   10.68%
----------------------------------------------------------------
5.   Coventry Spring & Engg. Co. Ltd.         -       -        -
----------------------------------------------------------------
6.   Bhagwati Autocast Ltd.               -1.61   13.59  -11.85%
----------------------------------------------------------------
7.   Roto Pumps Ltd.                       0.42   13.06    3.22%
----------------------------------------------------------------
8.   Denison Hydraulics India Ltd.         3.72   11.78   31.58%
----------------------------------------------------------------
9.   Frontier Springs Ltd.                 0.47    9.72    4.84%
----------------------------------------------------------------
     Mean                                                  9.17%
----------------------------------------------------------------
     Schefenacker Motherson Ltd.           0.14   19.58    0.74%
----------------------------------------------------------------

Exclusion of comparable and determination of ALP

8.3 The learned CIT(A) thereafter mentioned the characteristics required to be examined in selection of uncontrolled transactions or enterprises. He noted steps required to be taken for computing ALP. After analysis of comparables, the learned CIT(A) excluded Roto Pumps Ltd. as that company was engaged in manufacturing of progressive cavity pumps used in industries such as sugar, paper, agriculture, oil and gas, waste water treatment etc. The job profile of company was quite different. So was the case of Denison Hydraulics India Ltd. and Frontier Springs Ltd. Accordingly, above three companies were excluded from list of comparables. On the basis of the remaining six companies, the learned CIT(A) worked out mean operative profit at 6.43 per cent as against 0.74 per cent disclosed by the taxpayer as per details given below:

                                Table 8 
----------------------------------------------------------------
Sl.   Name                                  OP     TC     OP/TC
No.
----------------------------------------------------------------
1.   Bhagwati Autocast Ltd.               -1.61   13.59  -11.85%
----------------------------------------------------------------
2.   Coventry Coil-O-Matic (Haryana) Ltd.  1.84   17.53   10.50%
----------------------------------------------------------------
3.   E.L. Forge Ltd.                       3.85   36.05   10.68%
----------------------------------------------------------------
4.   Frontier Springs Ltd.                 0.47    9.72    1.84%
----------------------------------------------------------------
5.   Gujarat Automotive Gears Ltd.         0.09    4.64    1.94%
----------------------------------------------------------------
6.   Ring Plus Aqua Ltd.                   7.38   32.81   22.47%
----------------------------------------------------------------
     Mean                                  2.00   19.06    6.13%
----------------------------------------------------------------
     Schefenacker Motherson Ltd.           0.11   19.58    0.74%
----------------------------------------------------------------

TP adjustments made by CIT(A)

8.4 Learned CIT(A) accordingly proposed TP assessment of Rs. 1,11,52,533 as per the following details:

                                Table 9
----------------------------------------------------------------
Computation of ALP of international transactions:
----------------------------------------------------------------
Total cost of the assessee company                  19,58,57,185
----------------------------------------------------------------
Operating profit (cash profit of Rs. 1,74,54,970
minus depreciation of Rs. 1,60,13,886)                 14,41,084
----------------------------------------------------------------
Operating profit at arm's length margin
(total cost * .0643)                                 1,25,93,617
----------------------------------------------------------------
Adjustment to the operating profit
(1,25,93.617 - 14,41,084)                            1,11,52,533
----------------------------------------------------------------
ALP of the international transaction of sale
(Rs. 4,68,07,648 + Rs. 1,11,52,533)                  5,79,60,181
----------------------------------------------------------------
95% of ALP                                           5,50,62,172
----------------------------------------------------------------

10,2 Learned CIT(A) also rejected contention of the assessee that benefit of proviso (safe havens) i.e., +/- 5 per cent of the adjusted mean profit be allowed to the taxpayer.

Assessment year 2004-05

9. For the asst. yr. 2004-05, the learned CIT(A) noted TNMM comparables taken by the TPO and his working of profit margin was at 11.10 per cent. He also reproduced in the impugned order the adjustment made by the AO based on the order of the TPO at Rs 1,10,96,223. He also took note of argument of the taxpayer that TPO wrongly applied PLI of operating profit/sales (OP/sales) instead of cash profit to sales suggested by the taxpayer. TPO's action in not considering material differences between the taxpayer company and the comparables was also challenged. It was argued that TPO wrongly excluded five companies out of comparables. The learned CIT(A) also noted reasons given by the TPO for rejecting taxpayer's claim which were quite similar to the reasons given for the asst. yr. 2003-04. These need not be repeated here.

CIT(A)'s TP analysis

9.1 On facts and circumstances of the case, the learned CIT(A) rejected the use of multi years data as the same according to him was not permissible under r. 10B(4) of IT Rules. The learned CIT(A) also rejected argument of the taxpayer on under capacity utilisation for not considering depreciation. He held that the taxpayer has failed to give details of capacity utilisation of comparable cases. Taxpayer was also held to have failed to bring in TP report clear-cut distinctions and dissimilarities between the tested party and comparables, which needed adjustment. Similar reasons as have been noted for asst. yr. 2003-04 have been given for rejecting taxpayer's claim that cash profit to sales cannot be taken as PLI in the comparability analysis under TNMM. He held that comparative analysis was to be carried by adopting ratio of operating profit/total cost (OP/TC). The learned CIT(A) then considered 15 comparable companies giving mean profit of 9.40 per cent as per details below:

                                Table 7
----------------------------------------------------------------
Sl.     Company name              OP          TC       OP/TC
No.
----------------------------------------------------------------
1.  Amforge Industries Ltd.      17.15      172.69     9.93%
    (Prowess Database)
----------------------------------------------------------------
2.  Automobile Corpn. of Goa     10.36      114.19     9.07%
    (Prowess Database)
----------------------------------------------------------------
3.  Bhagwati Autocast Ltd.        0.29       22.58     1.28%
    (Prowess Database)
----------------------------------------------------------------
4.  Bharat Forge Ltd.           197.85      709.86    27.87%
    (Prowess Database)
----------------------------------------------------------------
5.  E.L. Forge Ltd.               5.96       52.22    11.41%
    (Prowess Database)
----------------------------------------------------------------
6.  Jay Ushin Ltd.                2.96       87.37     3.39%
    (Prowess Database)
----------------------------------------------------------------
7.  Lumax Industries Ltd.        13.23      258.47     5.12%
    (Prowess Database)
----------------------------------------------------------------
8.  Minda HUF Ltd.                5.96      105.74     5.64%
    (Capitaline Database)
----------------------------------------------------------------
9.  Phoenix Lamps Ltd.           18.55      147.41    12.58%
    (Prowess Database)
----------------------------------------------------------------
10. Pricol Ltd.                  58.78      364.09    16.14%
    (Prowess Database)
----------------------------------------------------------------
11. Rasandik Engineering          5.73      118.49     4.84%
    Inds. India Ltd.
    (Prowess Database)
----------------------------------------------------------------
12. Shardlow India Ltd.           2.02       59.16     3.41%
    (Prowess Database)
----------------------------------------------------------------
13. Simmonds Marshall Ltd.        1.04        12.3     8.46%
    (Prowess Database)
----------------------------------------------------------------
14. Swaraj Automotives Ltd.      -0.65       27.93    -2.33%
    (Capitaline Database)
----------------------------------------------------------------
15. Tata Auto Plastic Systems    11.83      128.96     9.17%
    Ltd. (Prowess Database)
----------------------------------------------------------------
    Mean                                               9.40%
----------------------------------------------------------------
    PLI for the appellant as                           5.97%
    per information submitted
    to the TPO for the current
    financial year 2003-04,
    submitted vide letter dt.
    10-10-2006.
----------------------------------------------------------------

9.2 The learned CIT(A) then referred to requirement of r. 10B of IT Rules and factors which, according to him, are required to be considered in quantitative and qualitative filters. He then referred to various steps which are required to be taken into account while identifying comparable transactions. These are noted at p. 25 of the impugned order. The learned CIT(A) then considered the circumstances under which loss-making businesses (enterprises) can be taken into consideration.

9.3 The learned CIT(A), thereafter, re-examined 15 companies taken as comparables. Out of them, nine were finally selected for working out mean profit.

Table 8

---------------------------------------------------------------------

Sl. Name Observations on qualitative Remarks

No. aspects

---------------------------------------------------------------------

1. Amforge Industries Ltd. 1. As per the annual report, Accepted by the (Prowess this company supplies TPO. Held not to Database) crankshafts to leading be a correct brands of cars and also comparable. supplier of connecting rods to leading branded cars.

2. The company is next to the industry leader Bharat Forge and poised to grow at much faster pace.

3. Capital expenditure plan is in place to capture available growth opportunities.

4. Initiative taken by the management resulted in a turnaround in financial years 2002-03 and 2003-04.

---------------------------------------------------------------------

2. Automobile Corpn Goa Ltd.. 1. As per the annual report, Accepted by the of the company had two TPO. Held not to (Prowess Database) divisions, sheet metal be a correct division and bus body comparable. building division.

2. One of the major customers for the sheet metal division is Tata Motors Ltd. Commercial vehicle segment experienced all round improvements in all parameters-both operational and financial. The prime driver for this division is the robust growth of 35% in the commercial vehicle segment industry in India.

3. The bus body building division has benefited from the initiatives of various Governments to phase out old vehicles.

4. Consolidated operating profit of the company was used in the TP analysis.

---------------------------------------------------------------------

3. Bhagwati Autocast Ltd. 1. Engaged in manufacturing Accepted by the (Prowess of highly specialized TPO. Held not to Database) castings for the automobiles, be a correct tractor, compressor and comparable. hydraulic industries.

2. The company performed well in terms of capacity utilization and sales revenue. However, due to steep increase in the prices of basic raw materials, the company's profitability has not been achieved full as per projections.

3. The company succeeded to get better prices for its products during the last quarter of the year.

4. The new hand moulding project started in the middle of the year added to the production capacity.

---------------------------------------------------------------------

Determination of ALP by CIT(A)

10. With similar observations as above in other 12 cases, the CIT(A) held that six comparables namely-(1) Automobile Corpn. of Goa Ltd., (2) Jay Ushin Ltd., (3) Lumax Industries Ltd., (4) Minda HUF Ltd., (5) Rasandik Engineering Industries India Ltd. and (6) Swaraj Automotives Ltd. were operating in different circumstances noted in the impugned order and, therefore, could not be taken for comparative analysis. These companies were excluded. On the basis of remaining 9 companies, the learned CIT(A) worked out mean arm's length operating profit at 11.14 per cent against 5.97 per cent of the taxpayer. The adjustment to be made in the profit was worked out at Rs. 86,52,721 as per details below:

                                Table 9
----------------------------------------------------------------
Sl.     Company name              OP          TC       OP/TC
No.
----------------------------------------------------------------
1.  Amforge Industries Ltd.      17.15      172.69     9.93%
    (Prowess Database)
----------------------------------------------------------------
2.  Bhagwati Autocast Ltd.        0.29       22.58     1.28%
    (Prowess Database)
----------------------------------------------------------------
3.  Bharat Forge Ltd.           197.85      709.86    27.87%
    (Prowess Database)
----------------------------------------------------------------
4.  E.L. Forge Ltd.               5.96       52.22    11.41%
    (Prowess Database)
----------------------------------------------------------------
5.  Phoenix Lamps Ltd.           18.55      147.41    12.58%
    (Prowess Database)
----------------------------------------------------------------
6.  Pricol Ltd.                  58.78      364.09    16.14%
    (Prowess Database)
----------------------------------------------------------------
7.  Shardlow India Ltd.           2.02       59.16     3.41%
    (Prowess Database)
----------------------------------------------------------------
8.  Simmonds Marshall Ltd.        1.04        12.3     8.46%
    (Prowess Database)
----------------------------------------------------------------
9.  Tata Auto Plastic Systems    11.83      128.96     9.17%
    Ltd. (Prowess Database)
----------------------------------------------------------------
    Mean                                              11.14%
----------------------------------------------------------------
    PLI for the appellant as                           5.97%
    per information submitted
    to the TPO for the current
    financial year 2003-04,
    submitted vide letter dt.
    10-10-2006.
----------------------------------------------------------------
                                Table 10
----------------------------------------------------------------
Computation of ALP of international transactions:
----------------------------------------------------------------
Total cost of the assessee company                  28,45,41,694
----------------------------------------------------------------
Operating profit                                     2,30,45,224
----------------------------------------------------------------
Operating profit at arm's length margin
(total cost * 1114)                                  3,16,97,945
----------------------------------------------------------------
Adjustment to the operating profit
(3,16,97,945 - 2,30,45,224)                            86,52,721
----------------------------------------------------------------
ALP of the international transaction of sale
(Rs. 5,11,49,848 + Rs. 86,52,721)                    5,98,02,569
----------------------------------------------------------------
95% of ALP                                           5,68,12,441
----------------------------------------------------------------

10.1 The learned CIT(A) also rejected contention of the taxpayer that he was entitled to +/1 5 per cent adjustment to the arithmetic mean adopted in this case under proviso to s. 92C(2) of the Indian Regulation. The learned CIT(A) accordingly upheld adjustment to the above extent. Tax administration has accepted the orders of the CIT(A) for both the years.

Submissions of parties in appeal before the Tribunal

11. The taxpayer being aggrieved has brought the issue in appeal before the Tribunal. We have heard Shri Rahul K. Mitra for the taxpayer and Shri Ashok Mittal, senior Departmental Representative for the Revenue. Shri Mitra did not challenge fairly assumption of jurisdiction by the AO and his reference to the TPO under s. 92CA(1) of the Act. He further accepted application of TNMM as "most appropriate method" in these appeals. It was also not disputed that comparables taken into account by the learned CIT(A) for TP analysis were furnished by the taxpayer. Shri Mitra reiterated that while computing operating profit of the tested party and mean margin of comparables, cash profit was to be taken into account without depreciation. Shri Mitra, reiterated the contentions raised on behalf of the taxpayer before the Revenue authorities and noted above. Shri Mitra further showed his willingness to accept ratio of cash profit/total cost excluding depreciation be applied to the tested party as also to comparables taken by the learned CIT(A). He furnished calculations on above lines to show that no adjustments were required to be made. In the alternative Shri Mitra requested that the taxpayer be permitted to raise additional ground of appeal and additional evidence in these proceedings. A separate application was made for the above purpose.

12. Shri Ashok Mittal, learned senior Departmental Representative read out and relied upon orders of CIT(A). He submitted that in the impugned orders. the learned CIT(A) has elaborately discussed various issues and, therefore, it was not necessary for him to say anything or file any written submissions for which a specific opportunity was provided to the parties. He argued that the learned CIT(A) has given sound basis for computing ALP. The learned Departmental Representative also opposed request of the taxpayer to raise additional ground of appeal or file additional evidence.

Finding of the Tribunal

13. We have given careful thought to the rival submissions of parties. Shri Mitra did not raise any of the technical objections on assumption of jurisdiction by the AO under s. 92 or on reference to TPO under s. 92CA of the Act as total value of international transactions exceeded Rs. 5 crores in both the years under appeal. It was also not disputed that comparables taken into account by CIT(A) were supplied by the taxpayer. It was submitted that the learned CIT(A) was in error in selection of comparables and inclusion of depreciation for computing net profit. In the light of submissions of the parties including their written submissions, we proceed to consider the controversies raised before us, the main being whether depreciation could be disregarded in the TP analysis both in the case of the taxpayer and the comparables.

Revenue (Department) has accepted CIT(A)'s order

14. We have already noted that the Department has accepted orders of the learned CIT(A) superseding orders of the TPO and the AO. We are further inclined to accept in principle the general observations of the learned CIT(A) on TP analysis subject to modification discussed hereinafter. We may start our discussion considering, the nature of depreciation and its role in computing commercial profit, assessable profit and operating profit.

Views (general) on claim of depreciation

Depreciation only capital loss

14.1 There are various shades of opinions among experts whether depreciation should be taken into account for working out profits of an enterprise. One view is that it is not a revenue deduction at all. As per that view, depreciation is. nothing but an annual loss (assumed or real) in the cost/value of various capital assets due to causes like age-use of asset etc., ultimately leading to retirement of the asset. Depreciation is depletion (actual or notional) in the value of a capital asset. Therefore, allowance of depreciation, being capital in nature should find no place in the computation of profit where only revenue receipts and revenue expenditure are taken into consideration. In the case of CIT vs. Bibhuti Bhusan Dutt (1963) 48 ITR 233 (Cal), the deduction of depreciation for working out divisible profits was held not necessary. The Court relied upon r. 4 of Company Law Rules which has been quoted in the decision as below:

"Loss or depreciation of fixed capital does not affect the divisible profits or render it necessary to make good the same out of income."

As per above view, depreciation cannot enter computation of profit. Depreciation only a privilege not an obligation (View of Supreme Court and several High Courts)

15. In the case of CIT vs. Mahendra Mills (2000) 159 CTR (SC) 381 : (2000) 243 ITR 56 (SC), Hon'ble Supreme Court held that taxpayer cannot be forced to claim depreciation in the computation of taxable income. It was held to be a privilege of the taxpayer and an option with him. A privilege cannot work to a disadvantage and an option cannot become an obligation. It was accordingly held that the AO cannot grant depreciation allowance when the same is not claimed by the taxpayer. The Hon'ble Supreme Court approved similar view taken by different High Courts in India in large number of cases. It specifically confirmed the following decisions:

(i) Beco Engineering Co. Ltd. vs. CIT (1984) 41 CTR (P&H) 249 : (1984) 148 ITR 478 (P&H);

(ii) CIT vs. Andhra Cotton Mills Ltd. (1996) 133 CTR (AP) 398 : (1996) 219 ITR 404 (AP);

(iii) CIT vs. Andhra Cotton Mills Ltd. (1998) 144 CTR (AP) 21 : (1997) 228 ITR 30 (AP);

(iv) CIT vs. Friends Corporation (1989) 79 CTR (P&H) 181 : (1989) 180 ITR 334 (P&H);

(v) CIT vs. J.K. Industries Ltd. (2000) 158 CTR (Cal) 17 : (2000) 241 ITR 537 (Cal);

(vi) CIT vs. Shri Someshwar Sahakari Sakhar Karkhana Ltd. (1989) 75 CTR (Bom) 135 : (1989) 177 ITR 443 (Bom); and

(vii) Chief CIT (Admn.) vs. Machine Tool Corporation of India Ltd. (1992) 108 CTR (Kar) 110 : (1993) 201 ITR 101 (Kar).

Opposite view

16. The opponent of the above view while accepting that depreciation is a capital loss, justify its deduction, to replace the value of an asset to tl1e extent it has depreciated during the period of accounting-and corresponding allowance for depreciation takes its place. Therefore, when arriving at profits for the relevant period, the amount of depreciation has to be deducted, which must be replaced first, as otherwise, initial capital loss would, to that extent, be incorrectly and falsely converted into and treated as profits. Paton in his "Accounts' Handbook" described depreciation as out-of-pocket charge as any other payment. He observed:

"There is still widespread misapprehension as to the precise significance of the depreciation charge. It is often deemed a more or less imaginary and hypothetical element, and is sharply contrasted with the regular 'out-of-pocket' cost as any other. The depreciation charge is merely the periodic operating aspect of fixed asset, costs, and there is no doubt as to the reality of such costs. Far from being a non-out-of-pocket charge depreciation represents the extreme example of pre-payments."

16.1 Para 3.1 of AS-6 issued by the ICAI explains the concept of depreciation as under:

"3.1 Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined."

Variation in allowance (depreciation) under income-tax and company law

16.2 It is further an accepted position that scheme of depreciation allowance under the Indian IT Act is quite different from scheme of depreciation under the Indian company law. Under the former statute, depreciation is computed at rates prescribed under rules varying between 5-100 per cent on the cost or on WDV, whereas under the Indian company law, depreciation is allowed as per schedule on straightline method or reducing balancing method which is claimed to accord to the actual depreciation suffered. Then, initial depreciation is allowed in the year of purchase of the asset besides the normal depreciation. There are further provisions for allowing 100 per cent of cost as depreciation on small assets of the specified value in the year of acquisition. By and large, cost of replacement is allowed as deduction in lieu of depreciation on certain assets for specified years. Under few provisions, depreciation is not deducted whereas generally it is deducted out of cost while working out "WDV" under tax laws. Obviously, such provisions under tax laws are made by way of incentives for setting new structures or new installations. Rates of depreciation also differ from asset to asset and from year to year. It is not necessary that allowance should match loss actually suffered in the relevant period. It is allowed as a fixed notional allowance.

Principles governing "assessable" "commercial" or "operating" profit

16.3 Provision of a statute like Expln. 5 to s. 32 of the Act makes it compulsory to take depreciation into consideration in computing taxable profit (total income). Even in the case of the taxpayer before us for the two years under consideration, depreciation has been taken into account in computing its total income. Rs. 2,18,97,046 and Rs. 1,82,99,975 against Rs. 1,60,13,886 and Rs. 1,33,54,123 claimed in the P&L a/c have been allowed in asst. yrs. 2003-04 and 2004-05 respectively. In the first year, it has been allowed at a figure much higher than claimed in the P&L a/c. However, as at present, we are not concerned with above statutory provision or with the computation of total income. The reason being the following observations of Supreme Court in the case of CIT vs. Bipinchandra Maganlal & Co. Ltd. (1961) 41 ITR 290 (SC):

"There is no definable relation between the assessable income and the profits of a business concern in a commercial sense. Computation of income for purposes of assessment of income is based on a variety of artificial rules and takes into account several fictional receipts, deductions and allowances.... Smallness of the profit in s. 23A has to be adjudged in the light of commercial principles and not in the light of total receipts, actual or fictional."

There is no need to apply artificial rules or take fictional receipts or deductions into account while computing profit. However, computed profit under the Act is not the same as "profit" understood under the commercial parlance.

16.4 We may also refer to relevant observations of Bombay High Court on 'operating income' made in the context of s. 80HHC in the case of CIT vs. Bangalore Clothing Co. (2003) 180 CTR (Bom) 127at p. 135 as under:

"To give an example, in the case of a manufacturing company which undertakes exports, receipt of interest or commission may not be operational income because they do not have the element of turnover and consequently Expln. (baa) will apply. However, that will not be the case if the assessee is carrying on the business of financing because in the case of financing, the interest income which accrues to the assessee will have the element of turnover and in such a case, receipts like interest, will not attract Expln. (baa). The point which we would like to make, therefore, is that in every matter the AO will have ,to ascertain whether receipt of interest, commission, labour charges, etc. were a part of operational income. We cannot lay down any standard test for deciding .what would constitute operational incomes".

What constitutes "operational profit"; no standard test

17. The point emphasised by Hon'ble Bombay High Court is very relevant and has to be carefully noted for consideration in these appeals. There is no standard test for deciding what constitute operational income (or profit). What receipts or expenditure would constitute operational income would depend upon facts and circumstances of the case and nature of business involved. Therefore, Revenue's conclusion that operating profit or manufacturing cost must include "depreciation" irrespective of peculiar facts of case cannot prima facie be accepted as correct. If value of capital assets has got depleted then depleted value is to be taken into account to have commercial "true profit". Depreciation in such a case must be the actual value by which the asset has suffered depletion and not a notional amount under tax or company law or some policy or statutory provision. If any part of the amount claimed as depreciation does not represent the true amount of depreciation suffered, by plant and machinery or any other asset, then to the extent of such excess would only be the profit of the enterprise wrongly claimed as depreciation. It is nobody's case that depreciation in case of comparables or tested party was depreciation actually suffered and not depreciation claimed under artificial rules.

Indian Transfer Pricing Regulations:

18. Having noted vicissitudinary nature of "profit" and its connection with "depreciation", we may now refer to Indian TP Regulation under which ALP is required to be determined to consider whether deduction of depreciation is imperative to compute margin or mean operational margin.

18.1. The Indian TP Regulations is a complete code and are contained in Chapter X of the Act, supplemented by rr. 10A to 10E of IT Rules. Title of s. 92 is "Computation of income from international transaction having regard to ALP". Sub-ss. (1) and (2) of s. 92 [sub-s. (3) not being relevant here] are as under:

"92. Computation of income from international transaction having regard to ALP.-(1) Any income arising from an international transaction shall be computed having regard to the ALP.

Explanation-For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the ALP.

(2) Where in an international transaction, two or more AEs enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by. any such enterprise shall be determined having regard to the ALP of such benefit, service or facility, as the case may be.

92F. Definitions of certain terms relevant to computation of ALP, etc.-In ss. 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,-

(i) .........

(ii) 'arm's length price' means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises. in uncontrolled conditions."

18.2 Rule 10B of IT Rules makes provision of different methods of determining ALP including TNMM and for purposes of comparability of international transactions with uncontrolled transactions, the other principles provided are as under:

"Rule 10B Determination of ALP under s. 92C.-(`) For the purposes of sub-s. (2) of s. 92C, the ALP in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:

(a) Comparable uncontrolled method/(details not relevant, not produced)

(b) Resale price method                          -do-
(c) Cash plus method                             -do-
(d) Profit split method                          -do-

(e) TNMM, by which.-

(i) the net profit margin realised by the enterprise from an international transaction entered into with an AE is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;

(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;

(iii) the net profit margin referred to in sub-cl. (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market;

(iv) the net profit margin realised by the enterprise and referred to in sub-cl. (i) is established to be the same as the net profit margin referred to in sub-cl. (iii);

(v) the net profit margin thus established is then taken into account to arrive at an ALP in relation to the international transaction.

(2) For the purposes of sub-r. (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:

(a) the specific characteristics of the property transferred or services provided in either transaction;

(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;

(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;

(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.

(3) An uncontrolled transaction shall be comparable to an international transaction if-

(i) none of the differences, if any, between the transactions being compared or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market;

(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.

(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into:

Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared."

Summarised TP principles (general)

18.3 Under provisions of s. 92(1) of the Act and r. 10B, income of international transaction between associated concern is to be computed having regard to ALP. ALP, in turn, is the price which will be paid or charged by unrelated parties for a similar transaction in similar circumstances as are prevailing between related parties carrying international transaction. So an exercise is required to be carried to compare price charged or paid in a controlled transaction with price charged or paid in a similar uncontrolled transaction (i.e. a transaction between unrelated parties). In other words, controlled activities are compared with uncontrolled activities of independent parties. But comparison would serve its purpose only if transaction or entities under comparison are found to be similar or almost similar and this "almost" representing differences are evaluated and adjustments are made to bring transaction or enterprises to the same level. If a similar uncontrolled transaction is available for comparison, then ALP is determined by taking such price of similar uncontrolled transaction carried in similar circumstances. As similar transactions are not easy to find, and, therefore, an attempt is made to find entities carrying similar functions and their profit margin or mean of such margin from a range of entities, is taken into account and compared with profit margin of entity involved in international transaction called "tested party". Even here it is fundamental that comparable selected should carry similar functions in similar circumstances. This is achieved by carrying functional, assets and risk (FAR) analysis of the tested party and comparables. If there are any differences between selected comparables and the tested party, then such differences are adjusted. This has been emphasized in US and OECD guidelines and in sub-rr. (2) and (3) of r. 10B quoted above. These principles are applicable to analysis carried under all methods. These are also applicable under TNMM as noted above though TNMM is more liberal to functional differences. The relevant portion of the provision requiring adjustment of differences has been underlined. The differences between enterprises compared which materially affect net profit margin are required to be found and adjusted. Reliability, efficiency and effectiveness of TP analysis lie in finding close comparables, their proper evaluations and suitable adjustments of differences.

Reasons for exclusion of depreciation

19. In the present appeal, ALP of transactions carried was to be determined by comparing net profit of the taxpayer (tested party) with mean net profit of comparables, Only receipts and expenditure, having connection with international transactions, were required to be taken into account. Any receipt or expenditure having no bearing on price or margin of profit could not be taken into consideration. It is evident from statutory provisions quoted above that it is nowhere provided that deduction of depreciation is a must. Depreciation can be taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed. There is no formula which would be applicable universally and in all circumstances. "Net profit" used in r. 10B can be taken to mean commercial profit as held by the TPO and confirmed on appeal by the learned CIT(A). But depreciation in such profit on commercial principles has to be the "actual" amount by which the assets of business got depleted between the two dates separated by a year. It cannot be depreciation under tax or companies rules or as per policy of the company. In the case in hand. Revenue authorities went wrong in disregarding the context and purpose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates is not such an expenditure which must be deducted in all situations. It has no direct connection or bearing on price, cost or profit margin of the international transactions. Principles emphasized in the case of Bangalore Clothing by Bombay High Court are attracted here. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the taxpayer in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons.

Guidance Note of ICAI accepts cash profit/sale as a base under TNMM

20. The taxpayer also relied upon para 22.4 of guidance note on transfer pricing issued by ICAI suggesting cash profit/sales as one of the ratios to be applied for computing ALP under the TNMM as per Indian Regulations.

Sub-title (g) of Table 5 under para 22 of guidance note provides as under:

"(g) Some of the ratios that can be used for determining the ALP under the method are:

(i) ratio of net profit before tax to sales.

(ii) ratio of net profit before interest and tax to sales.

(iii) ratio of cash profit to sales

(iv) ratio of net profit before tax to shareholders' funds

(v) ratio of net profit before interest and tax to assets,

(vi) Berry ratio-ratio of operating cost to operating revenue."

OECD Guidelines support taxpayer's case

20.1 The taxpayer had throughout contended that cash profit/sale be adopted as a PLI ratio. Exclusion of depreciation was justified, "to eliminate difference in technology used, age of assets used in production, differences in capacity utilisation and different depreciation policies adopted by various companies in auto component industry". [See letter dt. 24th March, 2006 before AO and letter dt. 18th Dec., 2006 before CIT(A) where taxpayer explained its case in detail].

20.2 We need not comment for want of details, what effect under utilization capacity had on profits of taxpayer and comparables. But other contention that depreciation would depend I upon type of technology employed, age and nature of machinery used, is quite well-founded. Above, along with size of enterprise and investment in plant/machinery were important factors to be taken into account for comparison and for computing profit. There is considerable support for the contention raised on behalf of the taxpayer in para 1.22 of the OECD Guidelines on Transfer Pricing which is reproduced below:

"1.22 It may also be relevant and useful in identifying and comparing the functions performed to consider the assets that are employed or to be employed. This analysis should consider the type of assets used, such as plant and equipment, the use of valuable intangibles, etc., and the nature of the assets used, such as the age, market value, location, property right protections available, etc."

Sufficient evidence to show material differences on account of depreciation

20.3 The claim of depreciation can lead to great difference in computing profits of comparables as depreciation is permitted depending upon nature of plant/machinery and year of use. In 5th or 6th year of commencement, depreciation can be 25 to 30 per cent of amount allowed in first year to an enterprise. In these appeals, the TPO had excluded certain comparables after noting differences in their year of start of operations. These were Bhagwati Autocast Ltd. (1982), Jay Ushin Ltd. (1986), Shardlow India Ltd. (1980) etc. Thus, age of plant/machinery and other related information is available on record and, therefore, contention of the taxpayer on differences in claim of depreciation is fully established on record. Further vast difference in depreciation is also evident from the following Table 3 showing comparison of percentage of depreciation to the total cost in accounts of taxpayer and comparables:

                  Table 3 in CIT(A)'s order 
--------------------------------------------------------------------
Sl.           Name             Depreciation  Total cost    % of
No.                              (in Rs.     (in  Rs.   depreciation
                                 crores)     crores)    in total
--------------------------------------------------------------------
1.  Schefenacker Motherson Ltd.     1.6       19.58       8.17
--------------------------------------------------------------------
2.  Ring Plus Aqua Ltd.            2.36       27.92       8.45
--------------------------------------------------------------------
3.  Coventry Coil-O-Matic          0.91       15.19       5.99
    (Haryana) Ltd.
--------------------------------------------------------------------
4.  Roto Pumps Ltd.                0.71       12.00       5.91
--------------------------------------------------------------------
5.  Gujarat Automotive Gears       0.23        4.82       4.77
    Ltd.
--------------------------------------------------------------------
6.  Dennison Hydraulics India      0.36        10.6       3.39
    Ltd.
--------------------------------------------------------------------
7.  E.L. Forge Ltd.                 1.3       41.95       3.09
--------------------------------------------------------------------
8.  Coventry Spring & Engg.        0.74       24.73       2.99
    Co. Ltd.
--------------------------------------------------------------------
9.  Frontier Springs Ltd.          0.23         8.7       2.64
--------------------------------------------------------------------
10. Bhagwati Autocast Ltd.         0.47       20.02       2.34
--------------------------------------------------------------------

20.4 As against ratio of 8.17 per cent of the taxpayer, only Ring Plus Aqua Ltd. had the closest ratio of 8.45 per cent. Such ratio in other enterprises varied between 2.34 per cent to 5.99 per cent which is quite large having regard to mean margin which on cost is approximately 9 per cent only. Obviously there are differences between the machinery employed by the taxpayer and other comparable concerns which are reflected in amount and percentage of depreciation claimed. How this variation and difference could be ignored under TP Regulations is neither shown nor explained. The taxpayer has debited high amount/ratio of depreciation as per rules as it was first or second year of commencement of its business. Other enterprises have claimed depreciation at much lower amounts which is seen in percentage to total cost in Table 3. At p. 28, the learned CIT(A) drew a Table of the differences in investment in plant and machinery in the case of the taxpayer and other comparables which is as under:

--------------------------------------------------------------------
Name of the comparable   Products manufactured   Investment in plant
                                                 & machinery during
                                                 the financial year
                                                 2002-03
--------------------------------------------------------------------
Schefenacker Motherson   Rear view mirrors,         2.78 crores
Ltd.                     door handles, T-Gates
                         and cable assembly
--------------------------------------------------------------------
Ring Plus Aqua Ltd.      Shaft bearings, starter   43.33 crores
                         Gears, pulleys and
                         rollers
--------------------------------------------------------------------
Coventry Coil-O-Matic    Coils                     15.91 crores
Ltd.
--------------------------------------------------------------------

20.5 It is more than 5 and 15 times of the taxpayer. Size of the assets besides the age of the assets of comparables was leading to difference in the profit margins and in mean margin. On the contrary, claim of depreciation is eating up large chunk of profit in the case of the taxpayer. How above differences were not considered in applying FAR analysis? The learned CIT(A) has not said a word on "asset" employed and "risks" suffered by the tested party and the comparables. Thus, material differences needing suitable adjustment were ignored and a flawed analysis was carried even in appellate proceedings.

20.6 The AO, after looking into details of financial results of comparable enterprises, excluded all companies except the three, although two of companies selected, namely Coventry Coil-O-Matic (Haryana) Ltd. and Roto Pumps Ltd. percentage of depreciation to total cost had differences of more than 2 per cent as shown above, which, in our opinion, is quite substantial. The learned CIT(A) is right in holding that working of mean profit of the TPO on the basis of three selected companies was not correct. But then the learned CIT(A) also failed to give due regard to the nature, type and age of the machinery employed by comparables or size of the companies leading to material differences. Without considering obvious material differences, the contention of the taxpayer to take profit without depreciation was rejected. We feel this rejection is not sound in law.

Adverse inferences against taxpayer unjustified

21. Learned CIT(A)'s observations that taxpayers' TP report should contain analysis of distinction/dissimilarities between taxpayer and comparable also go beyond requirement of r. 10C and prescribed Form 3CEB. Therefore, his refusal to look into details and adverse inference drawn by him against the taxpayer is legally unjustified. The taxpayer was to furnish particulars required by Form 3CEB and to answer questions raised in the said form. The prescribed form only requires to give, "method used for determining the ALP" and nothing more. Completed Form 3CEB was filed. Dissimilarities and differences, if any, are to be noted and discussed during the course of proceedings before the TPO and not in TP report. The approach adopted in this case was wrong would be more than clear from provisions of sub-s. (2) of s. 92CA reproduced below:

"(2) Where a reference is made under sub-s. (1), the TPO shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the ALP in relation to the international transaction referred to in sub-s. (1)."

21.1 It is quite clear from above that supporting evidence is to be produced before the TPO and this was done. TPO has not raised any objection on this score. The learned CIT(A) was not right in drawing adverse inference against the taxpayer."

Depreciation leading to material differences has not been challenged at all

22. The learned CIT(A) has observed "fresh investment was being made in automobile ancillary industry which was in expansion phase and, therefore, there is no requirement to exclude depreciation in computing PLI". What expansion, when made, the date and year of expansion, its comparability with taxpayer's case? Nothing relevant is stated in the impugned orders. We do not know how differences on account of depreciation could be ignored on the facts stated above merely on general observations that automobile ancillary industry is in the expansion phase. Taxpayer is seeking adjustment of differences on account of depreciation and no plausible reason has been given for not accepting this claim. There is no finding that there are no differences in claim of depreciation and, therefore, it should have been excluded in computing "operating profit" as warranted by rules. On the other hand, the differences as per the chart are accepted. The finding that cash profit cannot be considered is not legally correct. The taxpayer in order to get adjustment of difference in depreciation furnished arm's length working after excluding depreciation and by taking all other expenses into consideration and showed that such profit of the taxpayer was quite comparable to the mean margin of other comparables similarly computed. This demonstratively showed that deduction of depreciations was making huge difference and required suitable adjustment. This claim has not been challenged. It is clear that the best way to adjust difference on account of depreciation was to ignore depreciation both in case of the tested party and the comparables. After all TP adjustments are to be made of differences in price charged or paid for international transaction and not of difference in the claim of depreciation as has been done in this case. Such adjustments also matched the requirement of the context (TP principles). 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 profit are/were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of the Revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by provisions of IT Regulations. There is no way to dislodge the claim of the taxpayer. The context and purpose of legislation and facts of case overwhelmingly approve adoption of cash profit only.

23. The taxpayer in both the assessment years showed before the Revenue authorities that profit shown by the taxpayer satisfies arm's length requirement on ratio of cash profit to sales if uniformly applied. As the deduction of depreciation is leading to wide differences, the same should be excluded. The only reason given for rejecting taxpayer's analysis and for making adjustment in the two years is that use of ratio of cash profit without depreciation is not permitted under the law. This view in the light of above discussion cannot be accepted as correct and is disapproved.

AO directed to examine/verify taxpayer's claim

24. The learned CIT(A) determined ALP by taking ratio of profit/total cost (OP/TC) and thus made adjustment in the two assessment years. The learned representative of the taxpayer had furnished detailed working to the Revenue authorities, taking the base of cash profit/sale (excluding depreciation). No comments of Revenue authorities are available on this claim. The taxpayer has also furnished similar working taking cash profit/TC (excluding depreciation) and has claimed that if benefit of proviso to s. 92(2) is allowed, there is no case for making any adjustments in the two years is as under:

      Assessment year 2003-04 (Financial year 2002-03)
---------------------------------------------------------------------
                                           March,  March,   March,
                                           2003    2003     2003
---------------------------------------------------------------------
Company name                    Reference  Sales   Total    Operating
                                                   Cost     profit
                                                   (TC)     (OP)
---------------------------------------------------------------------
Bhagwati Autocast Ltd.          Page 662   11.98   13.59    -1.61
---------------------------------------------------------------------
Coventry Coil-Q-Matric          Page 696   19.37   17.53     1.84
(Haryana) Ltd.
---------------------------------------------------------------------
E.L. Forge Ltd.                 Page 736    39.9   36.05     3.85
---------------------------------------------------------------------
Frontier Springs Ltd.           Page 737   10.19    9.72     0.47
---------------------------------------------------------------------
Gujarat Automotive Gears Ltd.   Page 771    4.73    4.64     0.09
---------------------------------------------------------------------
Average (CIT comparables)
---------------------------------------------------------------------
Company                         Page 814   19.73   19.59     0.14
---------------------------------------------------------------------
Table continues...
---------------------------------------------------------------------
March,    March,    March,   March,   March,   March,       March,
2003      2003      2003     2003     2003     2003         2003
---------------------------------------------------------------------
Amortis-  Deprec-   Cash   CP/Sales   OP/TC   Total cost    CP/Adj TC
ation     iation   profit                     excluding
                   (CP)                       depreciation
                                              and
                                              amortisation
                                              (Adj TC)
---------------------------------------------------------------------
0.02       0.47     -1.12   -9.35%   -11.85%     13.1       -8.55%
---------------------------------------------------------------------
   0       0.96       2.8   14.46%    10.50%    16.57       16.90%
---------------------------------------------------------------------
   0       1.01      4.86   12.18%    10.68%    35.04       13.87%
---------------------------------------------------------------------
0.09       0.24       0.8    7.85%     4.84%     9.39        8.52%
---------------------------------------------------------------------
0.07       0.23      0.39    8.25%     1.94%     4.34        8.99%
---------------------------------------------------------------------
0.17       2.64     10.19   25.34%    22.47%    30.03       33.93%
---------------------------------------------------------------------
                             9.79%     6.43%                12.28%
---------------------------------------------------------------------
           1.60      1.75    8.85%     0.74%    17.98        9.71%
---------------------------------------------------------------------
CP/TC : +/- 5% calculation            (Amount in Rs.)
Expenses excluding depreciation        17,98,43,306
ALP @ 112.28%                          20,19,28,064
Applying proviso to s. 92C(2), i.e.,   19,18,31,661
after adjusting 5% (95% thereof)
Company's turnover                     19,72,98,269

So, it is within ALP as per Sony India [Soni India (P) Ltd. vs. Dy. CIT (2008) 118 TTJ (Del) 865-Ed.] and Development Consultants [Development Consultants (P) Ltd. vs. Dy. CIT (2008) 115 TTJ (Kol) 577-Ed.]

        Assessment year 2003-04 (Financial year 2002-03)
---------------------------------------------------------------------
                                           March,  March,   March,
                                           2003    2003     2003
---------------------------------------------------------------------
Company name                    Reference  Sales   Total    Operating
                                                   Cost     profit
                                                   (TC)     (OP)
---------------------------------------------------------------------
Amforge Industries Ltd.         Page 536   189.84  172.69    17.15
---------------------------------------------------------------------
Bhagwati Autocast Ltd.          Page 576    22.87   22.58     0.29
---------------------------------------------------------------------
Bharat Forge Ltd.               Page 609   907.71  709.86   197.85
---------------------------------------------------------------------
E.L. Forge Ltd.                 Page 676    58.18   52.22     5.96
---------------------------------------------------------------------
Phoenix Lamps Ltd.              Page 772   165.96  147.71    18.55
---------------------------------------------------------------------
Pricol Ltd.                     Page 753   422.87  364.09    58.78
---------------------------------------------------------------------
Shard low India Ltd.            Page 817    61.18   59.16     2.02
---------------------------------------------------------------------
Simmonds Marshall Ltd.          Page 818    13.34    12.3     1.04
---------------------------------------------------------------------
Tata Auto Plastic               Page 849   140.79  128.96    11.83
Systems Ltd.
---------------------------------------------------------------------
Average (CIT comparables)
---------------------------------------------------------------------
Company                         Page 850    35.21   33.23     1.98
---------------------------------------------------------------------
Table continues...
---------------------------------------------------------------------
March,    March,    March,   March,   March,   March,       March,
2003      2003      2003     2003     2003     2003         2003
---------------------------------------------------------------------
Amortis-  Deprec-   Cash   CP/Sales   OP/TC   Total cost    CP/Adj TC
ation     iation   profit                     excluding
                   (CP)                       depreciation
                                              and
                                              amortisation
                                              (Adj TC)
---------------------------------------------------------------------
2.23       4.35     23.73   12.50%    9.93%      166.11      14.29%
---------------------------------------------------------------------
0.01       0.54      0.84    3.67%    1.28%       22.03       3.81%
---------------------------------------------------------------------
3.86      45.77    247.48   27.26%   27.87%      660.23      37.48%
---------------------------------------------------------------------
0.05       0.98      6.99   12.01%   11.41%       51.19      13.66%
---------------------------------------------------------------------
0.01      14.25     32.81   19.77%   12.58%      133.15      24.64%
---------------------------------------------------------------------
   0      20.55     79.93   18.76%   16.14%      343.54      23.09%
---------------------------------------------------------------------
0.92       1.29      4.23    6.91%    3.41%       56.95       7.43%
---------------------------------------------------------------------
0.01       0.35       1.4   10.49%    8.46%       11.94      11.73%
---------------------------------------------------------------------
0.36        6.7     18.89   13.42%    9.17%       121.9      15.50%
---------------------------------------------------------------------
                            13.87%   11.14%                  16.85%
---------------------------------------------------------------------
           1.83      3.81   10.83%    5.97%       31.40      12.14%
---------------------------------------------------------------------
CP/TC : +/- 5% calculation            (Amount in Rs.)
Expenses excluding depreciation        31,40,00,687
ALP @ 116.85%                          36,69,09,803
Applying proviso to s. 92C(2), i.e.,   34,85,64,313
after adjusting 5% (95% thereof)
Company's turnover                     35,21,22,794

So, it is within ALP as per Sony India and Development Consultants

Thus, on figures and methodology adopted by learned CIT(A), with the exclusion of depreciation, we see that there is no case for making any adjustment. However, it is not clear from record whether above figures were verified by the Revenue authorities. Both the parties agreed that above figures and computations can be verified by the AO/TPO. We are also of the view that it would be appropriate to get above claim verified by the AO/TPO. Accordingly, we set aside the impugned orders of Revenue authorities including TPO and restore the matter to the file of the AO to carry above exercise. In case either on cash profit/sale basis or on cash profit/total cost of comparables finalized by the learned CIT(A), it is found that arm's length principles are satisfied in international transactions, no adjustment is to be made. Otherwise, fresh orders be passed in accordance with law in the light of above discussion. We, however, make it clear that matters which have already attained finality are not intended to be reopened.

Request for additional ground/additional evidence declined

25. Before close, it is recorded that the learned counsel for the taxpayer had also made a request for raising additional grounds of appeal and had sought permission to file additional evidence during the hearing of the appeals. It was claimed that TP analysis was carried in these cases, aggregating all the international transactions of various nature. In the taxpayer's report only segmental profit of international transaction was to be taken for comparison. Accordingly, the taxpayer proved that it should be permitted to file a fresh TP report and the entire case from that point onwards should be examined afresh after remand. Request was opposed by the learned Departmental Representative.

26. It is no doubt true that for an appropriate comparison, the profit of the segment to which international transactions relate, should be taken into consideration both in the hands of the tested party and comparables. However, it is by no means an easy task to segmental profit, particularly when books of account are not maintained segment-wise. Consolidated accounts are generally maintained and are available on public domain. In the present case, Revenue authorities carried TP analysis, mainly on the basis of information furnished by the taxpayer. Both the parties accepted some enterprises as suitable comparables and carried comparative analysis. It is neither permissible nor desirable at this stage of second appeal to permit a somersault and accept that taxpayer's report was not correct and a fresh report should be permitted to be filed and thereafter fresh TP analysis be carried. No such argument was raised or taken by the taxpayer or made in impugned orders. We see no good reason to permit the taxpayer to make a totally new case which will knock off earlier assessments and require to carry fresh analysis from the first stage. The taxpayer has not placed any material on record to show that alleged segmental profit in its case or in the case of comparables is available in public domain and would give different results. As is clear from above discussion, both the parties proceeded to accept material on record as relevant material and carried TP analysis which has been thoroughly discussed above. In the above background, the request of the taxpayer to permit to raise additional grounds and to lead fresh material has no substance and is rejected.

27. In the light of above discussion, both the appeals of the taxpayer are allowed for statistical purposes in terms stated above.

 

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