NOVATEUR ELECTRICAL AND DIGITAL SYSTEMS PVT LTD.,MUMBAI vs. ASST CIT 10(3)(1), MUMBAI

1 Grounds taken by the Revenue are reproduced as under:

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was correct in directing to exclude the depreciation from operating cost for the purpose of calculating PLI of the assessee, without understanding the nuances of TP procedures that such exclusion would lead to skewed results in IP comparability as all the depreciation in the nature of operating expenses have been taken into account in comparables as operating cost while working out the PLI of comparables and that exclusion of the same in the hands of assessee alone is not correct.

The appellant prays that the order of the CIT(A) on the above grounds be set side and that of the AO be restored.”

Assessee moved an application dated 17.09.2023 for admission of additional legal grounds which was admitted. However, subsequently, assessee made a request for withdrawal of the additional grounds so filed by it vide application dated 14.03.2024 filed on 16.04.2024. Accordingly, additional grounds raised vide application dated 17.09.2023 are dismissed as withdrawn.

1. Later, assessee moved another application dated 17.01.2025 for filing of additional grounds. Since there was no contrary submission on their admission, the same were admitted for adjudication. The additional grounds so raised are as under: “Comparable SPEL Semiconductor Limited rejected without any cogent reason

erred in not considering/ selecting SPEL Semiconductor Ltd as comparable company without providing any cogent reason and without appreciating that SOEL Semiconductor Limited is functionally similar and passes the filter applied by the Learned TPO.

erred in selecting Havells India Limited as comparable company Ignoring the fact that it has undergone amalgamation during the relevant year which is an extraordinary event that misleads its financial data and also engaged into Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

Ought to have excluded depreciation on goodwill and non-compete fee while computing the Appellant's operating margins to bring parity with the operating margins of the comparables.

erred in wrongly computing the single year operating margin, l.e. operating profit/ operating revenue of Easun Reyrolle Ltd. at 6.63% instead of correct margin of 4.90% and Larsen and Toubro Ltd. at 10.16% instead of correct margin of 4.15% without providing any reason.”

Ground No. 1 is general in nature and therefore not adjudicated separately and will be dealt along with other grounds. Ground No.2 deals with corporate issue in respect of depreciation on goodwill. Ground no.3 to 6 relates to transfer pricing adjustments. We will take up the grounds seriatim.

Brief facts of the case are that assessee is a company engaged in business of manufacturing and sale of miniature circuit breakers, residual current circuit breakers and wiring accessories and trading of distribution boards and circuit breakers. It was incorporated on 11.08.2010 in the name of Era Electricals Pvt Ltd. (EEPL). It acquired the business of switch gear division of Indo Asian Fusegear Ltd. (IAFL) who was an unrelated third-party seller, through a slump sale on 22.07.2010 for which the effective date of business transfer was 09.09.2010. Name of the assessee after the said acquisition was changed to Indo Asian Electric Pvt. ltd. (IAEPL) on 14.04.2011. Later, assessee again changed its name on 21.03.2012 to Novateur Electrical and Digital Systems Pvt. Ltd. (hereinafter referred to as ‘Novateur’ or the ‘assessee’). Assessee filed its return of income on 30.11.2012 reporting Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

1. Assessee had acquired switchgear division of Indo Asian Fusegear Limited through business transfer agreement, dated 22.07.2010 by way of slump sale on a going concern basis for total consideration of Rs.600 Crores. This transaction of slump sale is relevant to Assessment Year 2011-12. To record the transaction of slump sale in the books of accounts, based on valuation report, purchase price allocation was undertaken to record the assets and liabilities. The details of such allocation are tabulated as under: Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

2. Based on the aforesaid purchase price allocation, the difference of Rs.325.21 Crores between the consideration paid for acquisition of switchgear division over the value of assets and liabilities transferred was recorded as goodwill in the books of accounts of the assessee. Assessee claimed depreciation on goodwill so accounted for, it being goodwill arising on account of acquisition of switchgear division, not being a self-generated goodwill.

3. Claim of depreciation on the said goodwill in Assessment Year 2011-12 was disallowed by the ld. Assessing Officer on the premise that fair market value adjustment made to land, building and plant and machinery is not correct. Ld. CIT(A) also confirmed the said disallowance made by the ld. Assessing Officer. While confirming this disallowance, ld. CIT(A) referred to the provisions under the Act which dealt with case of amalgamation wherein goodwill arose. He referred to Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

4. Assessee took up the matter before the Tribunal in ITA No.2767/Mum/2024, dated 31.12.2024, contesting the disallowance of depreciation of goodwill. It is important to note that Revenue did not come up in appeal on this issue where ld. CIT(A) had made a positive finding on the valuation aspect in respect of purchase price allocation for the transaction of slump sale which gave rise to the goodwill, while acquiring the switchgear division by the assessee. The Coordinate Bench vide its order, allowed the appeal of the assessee on the juri iction issue by holding that the impugned assessment order for Assessment Year 2011-12 was barred by limitation and therefore bad in law. The said assessment order was thus quashed without adjudicating on the merits of the case. Owing to this order of Coordinate Bench, the position of assessee got restored to the total income returned by it, meaning thereby, the claim of depreciation on the goodwill so acquired got allowed.

5. Assessee made its claim of depreciation on good will in the year under consideration, i.e., Assessment Year 2012-13 by working out the opening written down value (WDV) for the year. The working of Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

6. In the year under consideration, both ld. Assessing Officer and ld. CIT(A) disallowed the claim of depreciation of the goodwill by making the reference to the treatment given by them in Assessment Year 2011- 12. It was noted by them that since depreciation on goodwill was not allowed in Assessment Year 2011-12, there is no opening WDV and therefore depreciation cannot be allowed in Assessment Year 2012-13. No independent finding is given on the allowability of depreciation on goodwill except for stating that the same would be allowed if there is an opening WDV on the asset. Claim of the assessee in this respect is that now when the assessment order for Assessment Year 2011-12 stands quashed by the order of Coordinate Bench, the disallowance for the claim of depreciation so made also stands deleted which would give rise to opening WDV for the block of assets in respect of goodwill. Therefore, on this premise alone, the statement made by ld. CIT(A) while sustaining the addition is effaced. Thus, assessee asserted that once the asset is included in the block of assets and depreciation of such an asset is allowed in the year in which addition is made, depreciation should also be allowed in the subsequent years. Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

It is undisputed fact that the claim of assessee in respect of depreciation on goodwill arising on account of slump sale transaction stands on the strength of decision of the Coordinate Bench held in favour of the assessee on the juri ictional issue without going to the merits of the claim. The assessment order itself had been quashed as bad in law, being barred by limitation. The transaction of slump sale giving rise to goodwill on account of acquiring switchgear division by the assessee, is not in dispute except for the issue raised by the ld. Assessing Officer regarding the valuation of assets. In respect of this, from the perusal of the impugned assessment order, from para-4.4, we note that ld. Assessing Officer has stated that there are no detailed working or comparable transactions discussed about the fair value adjustments, while referring to the valuation report filed by the assessee. Ld. Assessing Officer took note of certain factual position about the fair market value of the assets and the allocation done by the valuer, which is tabulated below: (In Rs. million) Particulars Net Book value Fair Value Adjustment Fair Value Fair value of invested capital 560.8 5439.2 6000 Fair value of tangible assets 548.2 279.8 828 Fair value of intangible assets 12.6 5159.4 5172

1. According to him, the fair value adjustment of the large areas of the land, building and plant and machinery amounts to a sum of Rs.27.98 Crores which does not appeal to a reasonable person. He further, noted that ld. Assessing Officer is not bound by the valuation report and he has to determine the veracity of the report for which assessee has not discharged its onus to prove the claim of depreciation. Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

2. Having gone through the observations of the ld. Assessing Officer, they are in the nature of conjectures and surmises without bringing anything cogent on record to disprove the claim of the assessee on its merit. The basis adopted by the authorities below are treating the transaction of slump sale analogous to amalgamation and reading the provisions of the Act with that perspective to dislodge the claim of the assessee. It is noted that ld. Assessing Officer has not questioned the allowability of depreciation on goodwill u/s.32 of the Act. He has only questioned the valuation of the assets under the valuation report furnished by the assessee and purchase price allocation made in accordance therewith. Also, ld. CIT(A) has upheld the disallowance on the basis that it has not been allowed in Assessment Year 2011-12 and therefore, there is no opening WDV to allow the same in the year under consideration.

3. Further, ld. CIT(A) has given his findings while dealing with the transfer pricing adjustment on the treatment of depreciation on goodwill as operating expense or otherwise. On page 28-29, ld. CIT(A) while dealing with the issue where ld. TPO has considered the depreciation on goodwill and non-compete fees as operating in nature for computing the profit level indication (PLI) for the transactions of import of raw materials, etc., he noted that payment of goodwill and non-compete fees is related to the business of the assessee which is substantiated by gradual increase in the business of the assessee in the subsequent years and thus, upheld the findings of the ld. TPO of treating the depreciation as operating in nature. However, according to him, since the depreciation on goodwill itself has been disallowed, he held that the same should not form part of expenses while computing the operating margin. Thus, he directed the ld. TPO that in case the depreciation on Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

For the present issue raised vide ground no.2 along with its sub- grounds, we note that goodwill per se is an intangible asset within the meaning of explanation 3 to section 32(1)(ii) and is thus eligible for depreciation. We draw our force from the decision of Hon'ble Supreme Court in the case of SMIFS Securities Ltd. [2012] 348 ITR 302 (SC) wherein it is held that excess consideration paid by it over the value of net assets acquired amounts to goodwill. Further, it was held that goodwill falls within the expression “any other business or commercial right of a similar nature” and is therefore an asset under explanation 3 to section 32(1) and thus eligible for depreciation.

1. In the present case before us, it is an undisputed fact that assessee had acquired the business on a slump sale basis, wherein consideration was paid in excess of net assets value for acquiring the business concern which was recorded as goodwill. For the sixth proviso to section 32(1) referred by the authorities below, we note that it cannot be extended to negate the claim of depreciation on goodwill in the hands of the assessee as there did not appear any goodwill in the books of Indo Asian Fusegear Ltd., from whom the assessee acquired the switchgear division under the business transfer agreement by way of slump sale on a going concern basis. For this we refer to the decision of Coordinate Bench of ITAT, Mumbai in the case of Thermo Fisher Scientific India (P) Ltd. [2023] 155 taxmann.com 346, wherein it was held as under: Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

25 The ratio is in the case of United Breweries Ltd. (supra) is also not applicable over the facts of case as in the said case there was amalgamation of the three wholly owned subsidiaries whereas in the instant case there is a acquisition of units of third parties by way of slump sale.”

2. For the reference made by the authorities below to explanation 7 to section 43(1) and explanation 2 to section 43(6)(c), we note that they apply for determining actual cost/written down value in cases relating to amalgamation. They do not apply in the case of slump sale transaction. Explanation 7 to section 43(1) requires that cost of the asset transferred by the amalgamating company to the amalgamated company shall be the same as it would have been in the hands of the amalgamating company. This explanation will not have any application where the asset is not transferred by the amalgamating company and the where the amalgamated entity incurred a cost for acquiring the asset. In the present case before us, assessee has paid consideration for acquiring the assets of the switchgear division which is more than the fair market value of the assets. Similarly, in respect of explanation 2 to section 43(6)(c), it relates to acquisition of a subsidiary company by its holding company or vice versa and for the transaction of amalgamation. It does not deal with transaction of slump sale. Thus, the provisions referred by the authorities below are misplaced for the impugned transaction of slump sale undertaken by the assessee which gave rise to the goodwill on which depreciation is claimed.

3. Considering the factual matrix on record and judicial precedents referred above as well as applicable provisions of the Act, we hold that assessee is eligible to claim depreciation on the goodwill which is arising Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

We now take up grounds in respect of transfer pricing adjustments made by the ld. TPO and incorporated by the ld. Assessing Officer while passing the final assessment order, details of which are tabulated below: Nature of international transactions Amount in INR Method used for benchmarking Import of raw material, samples and spare parts 52,72,65,801 TNMM Import of finished goods 50,86,81,316 TNMM Export of finished goods 24,46,46,665 TNMM Import of capital assets 2,21,24,526 CUP Reimbursement of expenses 1,15,10,288 CUP Provision of support services 1,86,71,723 TNMM Payment of interest on CCD 44,00,00,000 CUP

1. Assessee has raised as many as 19 grounds in respect of transfer pricing adjustments along with four additional grounds. Out of these several grounds, we first take up the common issue arising in ground no.3(i), (j), (k), (l), (m) and ground no.6 as well as ground no.1, 2 and 3 of the appeal by the Revenue, whereby depreciation on goodwill and amortisation of non-compete fees is under contest for its treatment whether as operating in nature or non-operating, for the purpose of ALP bench marking. We take up this issue first since as we already noted in the above paragraphs on the finding of ld. CIT(A) who directed the ld. TPO to exclude the depreciation on goodwill while computing the operating margins of the assessee as disallowance of depreciation on Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

We note that for the purpose of computing operating cost, assessee considered depreciation on goodwill, amortisation of non- compete fees and foreign exchange loss as non-operating in nature to arrive at its PLI at 10.65% (OP/OR). The working of the same is tabulated below: Particulars Amt. (INR in Lakhs) Sales/Operating Income (OR) 102,832 Less: Operating Expenses 91,885 Operating Profit (OP) 10,947 OP/OR (Percentage) 10.65%

1. Contrary to this, ld. TPO treated depreciation on goodwill and amortisation of non-compete fees as operating in nature by holding that acquisition of business was carried out in Assessment Year 2011-12 and therefore, goodwill cannot be considered to be extraordinary item in the year under consideration. He also observed that assessee had only excluded the depreciation on account of intangible while computing PLI, though it had acquired both tangible and intangible assets under the business transfer agreement for the purpose of executing the slump sale transaction. He also noted that any adjustment for the purpose of benchmarking is possible only in the Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

2. Based on the above working, ld. TPO computed the PLI margin of the assessee and the comparables to arrive at an upward adjustment for an amount of Rs.11,10,85,819/-. This adjustment is in respect of import of raw materials, samples, spare parts and finished goods.

3. Assessee had applied the following filters for the purpose of carrying out benchmarking exercise:- a. Export sales filter i. Comparable companies – export sales less than 50% ii. Comparable segment data – no export sales filter applied b. Turnover filter – average sales greater than or equal to Rs.1 Crore c. Related party transaction (RPT) filter – 10% d. Multiple year margins Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

4. Based on the above filters, assessee arrived at 10 comparable companies with single year margin to arrive at a mean of 7.38%. The details of the same is tabulated below: Sr. No Name Average NPI 1 Circuit Systems (India) Ltd 2.89% 2 Easun Reyrolle Ltd 6.63% 3 Integra India Group co. Ltd (merged) 1.47% 4 Titan Timeproducts Ltd 3.22% 5 Toyama Electric Ltd 4.75% 6 Reed relays & Electronics India Ltd 13.39% 7 Eon Electric Ltd (switchgear) 10.05% 8 Havells India Ltd 27.69% 9 Kaycee Industries Ltd 7.24% 10 Precision Electronics Ltd -3.56%

5. In the course of transfer pricing assessment proceedings, additional eight comparable were furnished, bringing the total number of comparable to 18. Details of these eight comparable is tabulated below: Sr. No. Name Average NPI 1 Akasaka Electronics Ltd. 3.20% 2 Standard Electrical Ltd. NA 3 Larsen & Toubro Ltd. 10.16% 4 Centum Electronics Ltd. 6.30% 5 Electro Teknica Switchgears Pvt. Ltd. -3.90% 6 O/E/N India Ltd. 16.29% 7 Spaceage Switchgears Ltd. NA 8 S P E L Semiconductor Ltd. 2.90%

6. Contrary to the above, ld. TPO applied the filters with certain modifications. There was no change to the export sales filter. For the turnover filter, ld. TPO took average sales greater than or equal to Rs.50 Crores. For the RPT filter, he took 25% as against 10% by the assessee and ld. Assessing Officer took single year margins instead of multiple year margins by the assessee. Based on these modified filters, the final set of comparable companies which were left for the purpose of bench Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

7. Based on this comparability exercise, ALP adjustment was calculated as tabulated below: ALP of the Import/Purchase transactions Amount (in INR) Import Cost from AE (purchase of components & payment for IT & support service) (A)

44% Operating Revenue of the Appellant on AE import

83% ALP of the Import cost to AE (B) 70,65,85,454 Difference ALP & Import cost from AE (A-B)

On the treatment of depreciation on goodwill and amortisation of non-compete fees, contention of the assessee is that these are extraordinary items arising out of restructuring undertaken by the assessee and is therefore, not related to the business transactions undertaken with AEs. Reference was made to Rule 10D(3) of the Rules to submit that differences which are material enough to affect the pricing or profitability, then reasonable accurate adjustments should be Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

1. Findings of the Coordinate Bench on this issue are dealt in para- 30, whereby it is held that ld. TPO erred in including amortisation of goodwill as part of operating cost. It directed the ld. TPO to exclude Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

2. Further, assessee tabulated the data of comparable companies which do not exhibit goodwill or amortisation expenses in their financials for the purpose of comparability. Sr. No. Name of the Company Technology Know-how Non-compete fees Product development Software Goodwill Trademark Remarks Page No. 1. Easun Reyrolle Limited

Havells India Limited

Larsen & Toubro Limited

SPEL Semiconductor Limited

Reed Relays & Electronics India Limited

Akasaka Electronics Limited

Circuit Systems India Limited

Electro teknica Switchgears Pvt Ltd ntangible assets under development

Kaycee Industries Limited

Toyoma Electric Limited

Novateur Electrical and Digital Systems Private Limited

3. According to the assessee, there are no intangible assets recorded in the books of accounts of comparable companies which form part of the final set of comparable except for Easun Reyrolle Ltd., wherein component of non-compete fees amortised at the rate of 20% is included. Thus, assessee submitted that depreciation on goodwill and amortisation of non-compete fees are extraordinary and non-operating in nature and therefore, to be excluded while computing the operating margin. Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

We have heard both the parties and perused the material on record. We have given our thoughtful consideration on the submissions made. In the present case, as we have already noted goodwill represents the payment made by the assessee while acquiring the business of switchgear division which is in excess of net assets acquired by it. This excess payment is in anticipation of future economic benefits. The goodwill so arisen is claimed as a depreciation year on year basis and not an operating expense in the regular course of business but is the cost of acquisition and an extraordinary item which cannot be considered as operating in nature for computing the margin on cost. It is a one-time extraordinary expense, not an asset actively employed in the business operations. Further, profit level indicator is a function of different items of income and expenditure which are accounted for in the financial statements, both for the tested party and the comparable. From the factual data tabulated above for the comparable, we note that for a like to like comparison between the assessee and the comparable companies, the amortisation of intangibles asset was not considered while computing the operating margin. Calculation of PLI enables comparability with other similar companies on the basis of margin earned. Objective of calculating PLI is to get the best comparability possible. Non inclusion of depreciation on goodwill and non-compete fees in operating expense is nothing but an adjustment to increase the comparability between the two comparable.

1 Considering the facts on record and elaborate discussion made above, we find that goodwill accounted for by the assessee is arising out of the acquisition of switchgear division under a slump sale transaction which is not a self generated one. This is a one time extraordinary Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

Assessee has contested on the turnover filter, whereby certain comparable were rejected vide Ground no.3(q), for which ld. AO took the turnover for comparables with less than 50 crores, as against turnover of Rs.1 crore taken by the assessee. As already noted, assessee had adopted TNMM as the most appropriate method to benchmark international transaction for import of raw materials. By taking the turnover of Rs.1 crore as turnover filter amongst other filters, 10 comparable companies were selected for benchmarking. In the course of proceedings, assessee furnished additional 8 comparables at the instance of learned TPO, bringing the total number of comparables to 18. However, ld TPO applied a lower turnover filter of Rs.50 crores and rejected the total number of comparables to arrive at three comparable companies. While doing so, ld. AO did not take note of any upper limit of turnover for selection/rejection of comparable companies. In the course of proceedings, ld. AO did not take note of any upper limit of turnover for selection of comparable companies. Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

1. Application of filters for selection of comparable companies is for the purpose of ensuring that sufficient number of potential comparable companies are selected for comparison. The objective is to identify comparables that are sufficiently similar to the tested party in terms of functionality, risk, financial parameters, business operations, etc. The filters need to be applied so as to ensure comparability based on facts of each case. Adoption of appropriate filters should lead to widening the pool of potential comparables, so as to reflect economic realities of the tested party. This leads to reliable transfer pricing analysis for the purpose of arriving at arms’ length pricing and would be more robust and consistent. There are standard turnover filters which evolved over a period of time, such as 1/10 - 10 times. However, there is no such specific rule to provide any guidance on such filters which can be applied.

2. In the present case, assessee has adopted turnover filter of Rs.1 crore against which ld. TPO took it at Rs.50 crores without any upper limit. Based on the approach of assessee, a list of 18 comparables were identified. Based on the approach of ld. TPO, only three comparables remained for the purpose of benchmarking. We find that a more balanced approach needs to be adopted for taking turnover filter, so as to arrive at a wider pool of potential comparables for a more reliable transfer pricing analysis so as to be in accordance with arm’s length principle. Accordingly, in the given set of facts, we find it appropriate to remit this specific issue back to the file of ld. TPO/AO for undertaking the exercise once again with a relaxed quantitative filter having lower and upper range of turnover and comparable with the case of the assessee. Accordingly, ground no.3(q) is allowed for statistical purposes. Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

In ground no.3(p), assessee sought inclusion of two comparable companies, namely Titan Time Products Ltd. and AKASAKA Electronics Ltd. For the comparable Titan Time product Ltd., assessee did not press for its inclusion in the course of hearing. Both these comparables were rejected by ld. TPO from the final set of comparables since financial statements for the year under consideration were not available. However, they are now made available and therefore, assessee seeks inclusion of the comparable AKASAKA Electronics Ltd., since the other one fails on its FAR analysis, more particularly on the RPT filter and hence has not pressed for inclusion.

1. In respect of AKASAKA Electronics Ltd., according to the assessee, it passes all the prescribed filters and has a margin of 0.55%. The filters for comparability test are as follows: Filters considered by learned TPO Whether Akasaka passes the filter Related party sales less than 25% Yes Consistent loss making No Annual report available Yes Extraordinary event occurred No 13.2. Considering the above factual position and having perused the financial statements placed in the paper book, we direct to include the said comparable for the purpose of benchmarking. Accordingly, now that the annual report of this comparable company is placed on record, the issue raised in this ground is remitted back to the file of ld. TPO/Assessing Officer for appropriate verification and considerations, in terms of the aforesaid observations. This ground is thus allowed for statistical purposes. Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

Ground No.3(r) and ground No.3(s) are rendered academic in nature and therefore are not adjudicated upon. Also for ground No.3(n), assessee had submitted as not pressed and therefore is dismissed as not pressed. Further, ground No.3(j) is also rendered academic in nature and therefore needs no separate adjudication. Ground nos. 3(a) and 3(b) are general in nature and therefore, need no separate adjudication.

In respect of ground No.3(o) which deals with rejection of a loss making company, Reed Relays & Electronics India Ltd. from the set of comparable companies, it was pointed out by the ld. Counsel that no finding has been given by ld. CIT(A) in the impugned order though all the details were furnished and are placed on record. This comparable was rejected on account of it being consistent loss making. Contrary to this observation, it was submitted that this company incurred a loss only for AY 2012-13 but recorded profits during the preceding two years, i.e., AY 2011-12 and 2010-11. In this respect the details were furnished, reproduced as under:

1. Assessee thus, asserted that this company cannot be tainted as a loss making company, as it is not incurring operating losses on a continuous basis. Reliance was placed on the decision of Hon’ble High Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 Pvt. Ltd. in ITA No.2222 of 2013. Assessee contended that merely because an otherwise functionally comparable company has incurred a loss in one of the years, it cannot be a ground to reject it for comparability. Loss making companies are part of market and an entity’s ability to make profits and losses is contingent upon market conditions. Assessee thus, prayed for its inclusion in the final list of comparable companies.

2. In the given facts and circumstances of the case, we note that ld. CIT(A) has not given any finding to this effect and therefore, we find it appropriate to remit the specific issue back to the file of ld. CIT(A) for its meritorious denovo adjudication, by taking into account the submissions made by the assessee. Further, assessee be given reasonable opportunity of being heard to make any further submission, if so required. Accordingly, ground No.3(o) is allowed for statistical purposes.

We now take up ground No.3(c) to 3(h) in respect of transaction of export of certain finished goods for which transfer pricing adjustment was made. On this set of transactions, assessee applied TNMM as the most appropriate method. However, ld. TPO selectively applied CUP for benchmarking transactions of certain finished goods. According to the assessee, ALP for only certain finished goods sold to third parties and products sold to AEs are comparable and the selection of CUP by ld. TPO is not correct since application of CUP requires a high degree of product comparability. According to the assessee, while arriving at TNMM as its most appropriate method, it has maintained the prescribed documentation and has undertaken scientific comparability analysis Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

1. Before us, assessee has demonstrated differences in the products sold by it to the third parties and to the AEs for their non comparability to apply CUP method. Ld. TPO has applied CUP only on the basis of product similarity without appreciating various other differences pointed out by the assessee, which includes cash discount, excise, freight expenses, administration and finance expenses, warehousing expenses, etc. Accordingly, in the given set of facts, the approach of ld. TPO of adopting two different methods for the transaction of export of finished goods is not justifiable. He has not found any defect with the method adopted by assessee for a certain part of the said transaction, i.e., TNMM. Accordingly, we allow ground No.3(c) to (h) so as to accept Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

Ground No.4 seeks inclusion of one comparable SPEL Semiconductor Ltd., which the ld. TPO has rejected from the list of comparable companies. Claim of the assessee is that this comparable company satisfies all the filters applied by the ld. TPO to the other comparable companies. Details of filters considered by the ld. TPO and this comparable company meeting these criteria are tabulated below:

Through ground No.5, assessee is contesting exclusion of the comparable of Havells India Ltd. since it is not comparable due to extraordinary event of amalgamation which took place in its case during the relevant year. Based on the facts stated, Standard Electrical Ltd. got merged with its parent company, i.e., Havells India Ltd., under the scheme of amalgamation for which the appointed date of the scheme was 01.04.2011. Assessee referred to the notes to accounts of the annual report of Havells India Ltd., whereby it reported that on segmental basis, its switchgear divisions has shown a growth of 22% due to amalgamation of Standard Electrical Ltd. with its. It is also reported by it that without the amalgamation, the growth of Havells India Ltd. would have been 9%. Thus, this comparable having undergone extraordinary event of amalgamation and merger during the year cannot be considered as a comparable company. Assessee also highlighted that on its own, it had rejected two comparables of Integra India Group Company Ltd., and Eon Electric Ltd on account of extra ordinary event due to amalgamation which ld. TPO did not dispute in the course of assessment proceedings. Also, assessee submitted that this comparable company is engaged extensively into R & D activities as discernible from its financial statements. Thus, it claimed for its exclusion. We have considered the factual position as narrated above. On these set of facts, we find it appropriate to remit this specific issue back to the file of ld. TPO for its examination and verification and allow the claim of the assessee for its exclusion for the purpose of benchmarking. Accordingly, ground No.5 is allowed for statistical purposes. Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13

In ground No.7, assessee seeks for correction of margins considered by the ld. TPO for the two comparable companies. According to the assessee, ld. TPO has inadvertently considered incorrect margins for Easun Reyrolle Ltd. and Larsen and Toubro Ltd. Assessee has referred to their relevant annual reports to point out correct operating margins which ought to have been considered by the ld. TPO. Considering the submissions made by the assessee, we find it appropriate to remit this issue back to the file of ld. TPO/Assessing Officer for considering the correct margins based on material placed on record. Accordingly, ground no.7 is allowed.

In the result, appeal of the assessee is partly allowed and that by the Revenue is dismissed.