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

Adjustment on account of export of finished goods of INR 18,26,260 c) erred in rejecting the economic analysis conducted by the Appellant wherein the appellant applied Transactional Net Margin Method (TNMM), while the learned TPO selectively applied CUP for benchmarking the transaction of export of certain finished goods, d) erred in not considering the approach of the Appellant under TNMM analysis and erred in considering alleged CUP for certain finished goods while accepting TNMM for balance finished goods, thus, being inconsistent in the approach vis-à- vis benchmarking the transaction of export of finished goods to AEs; e) erred in selection of CUP as the most appropriate method for determination of the arm's length price for certain finished goods, without appreciating that goods sold to third party and product sold to AE are not comparable and thereby CUP method fails as CUP method requires high degree of product comparability: f) Without prejudice to the above, even if CUP method is applied, erred in not granting the suitable adjustments in CUP in relation to the portfolio approach, cash discount, excise, freight expenses, admin and finance expenses, warehousing expenses and other dissimilarities to make the CUP data comparable; g) erred in not rejecting the CUP method on the ground that accurate adjustment on account of difference in products sold to AE and products sold to third party cannot be reasonably determined, leading to CUP being faulty method in the present case, h) erred in not granting benefit of proviso to section 92C(2) of the Act while making an adjustment to the arm's length price where benefit is within the prescribed limit.

Adjustment on account of import of raw material, sample spare parts and finished goods of INR 11,10,85,819 i) erred in stating that deprecation on goodwill to be considered as non-operating for the purpose computation of PLI only in case depreciation on goodwill is disallowed without appreciating that the said depreciation on goodwill and non- compete fees are exceptional/extraordinary in nature and cannot be linked with its allowability under section 32; j) erred in rejecting the economic analysis conducted by the Appellant wherein the appellant applied TNMM with respect to benchmarking the transaction of import of raw material, sample spares parts and finished goods from AE; k) erred in considering depreciation on goodwill and amortization of non-compete fees as operating expense while calculating operating margin of tested party and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 without appreciating that depreciation/amortization on goodwill and non- compete are exceptional/extraordinary in nature, l) erred in considering depreciation on goodwill and amortization of non-compete fees as operating expenses on the ground that as per transfer pricing provisions there is no mechanism under which an adjustment can be made to tested party, without appreciating that it is trite law that only operational expenses/income should be considered for the purpose of computation of operating margin of tested party, whereas depreciation of goodwill and non-compete fees being exceptional/extra ordinary in nature should be excluded from margin computation of tested party m) Without prejudice to the above, erred in rejecting the alternate contention to consider the cash profits as PLI (le operating profit before depreciation/ amortization on tangible and intangible assets) to eliminate the difference in exceptional/extra ordinary depreciation so as to make an apple to apple comparison n) erred in treating foreign exchange loss as operating in nature while computing the margins of the Appellant disregarding the fact that the said loss is on account of differences in currency rates resulting from interplay of demand and supply factors of foreign currency markets and not solely a function of business operations; o) erred in disregarding the rejection of loss-making comparable company Reed Relays & Electronic India Ltd from the set of comparable companies by the leamed TPO without appreciation that it is not a persistent loss-making company. p) erred in disregarding the ground of considering the margins of comparable companies, Titan Time Products Limited and Akasaka Electronics Limited, annual reports of which were not available earlier at the time of TP Assessment proceedings but available subsequently during the course of CIT(A) proceedings, q) erred in applying arbitrary turnover filter for rejecting certain comparables having turnover less than INR 50 crores, even though the same are functionally comparable with the Appellant and without demonstrating that the turnover influences operating profits of the comparables; r) erred in ignoring the provisions of Rule 10B(3) of the Income Tax Rules, 1962, which envisages usage of multiple year data of comparable companies for the purpose of determination of the arm's length price as defined under section 92F(ii) of the Act, s) erred in not granting benefit of proviso to section 92C(2) of the Act while making an adjustment to the arm's length price where benefit is within the prescribed limit,”

2.1 Grounds taken by the Revenue are reproduced as under:

“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was correct in directing to exclude the depreciation on goodwill from operating cost for the purpose of calculating PLI of the assessee on the ground that the same and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 was disallowed by the AO and upheld by the CIT (A), even though the assessee has debited the said depreciation to the profit and loss account and the same was claimed by the assessee as an expense while computing the taxable income without appreciating the fact that operating cost relating to PLI working for TP comparability purpose has got nothing to do with the disallowance made on corporate issues.

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

3.1. 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 4. 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. Havells India Limited' is not a comparable due to extraordinary event 5. 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 and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 extensive R&D activities whereas assessee and other comaparables does not undertake any such R&D activities and therefore the same should not be considered as suitable comparable vis-à-vis-assessee. In continuation to ground No. 3 (I and k) - Exclusion of depreciation on goodwill and non-compete fee while computing operating margins 6. 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. Erroneous computation of margins of comparable companies 7. 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.”

5.1. 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: and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 Particular Amount (in Rs. Crores) Current Assets 63.51 Less: Current Liabilities -35.75 Net Current Assets – (A) 27.76 Add: Tangible Fixed Assets 55.04 Add: Software 1.26 Total Net Assets – (B) 84.06 Add: Intangible Fixed Assets Brand 43.60 Non-compete Fees 70.00 Distribution Network 77.13 Goodwill 325.21 Total consideration paid 600.00 5.2. 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.

5.3. 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 and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 the sixth proviso (fifth proviso) of section 32(1), explanation 7 to section 43(1) and explanation 2 to section 43(6)(c). Ld. CIT(A) also noted while accepting the arguments of the assessee that ld. Assessing Officer had not brought on record anything concrete showing that the valuation report for the purpose of purchase price allocation is incorrect. Ld. Assessing Officer did not refer the matter to DVO, in case he was not in agreement with the valuation made by the assessee. Thus, he noted that action of ld. Assessing Officer cannot be sustained on such nonspecific concrete ground.

5.4. Assessee took up the matter before the Tribunal in 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 jurisdiction 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.

5.5. 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 and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 depreciation so claimed by the assessee on this goodwill in the year Assessment Year 2011-12 and 2012-13 is tabulated below: Particular Amount (in Rs.) Goodwill on account of purchase of Switchgear 325,21,06,276 Division from IAFL in Assessment Year 2011-12 Depreciation claimed in AY 2011-12 at rate of 25% 81,30,26,569 Opening WDV in AY 2012-13 243,90,79,707 Depreciation claimed in AY 2012-13 at rate of 25% 60,97,69,927 5.6. 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. and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 6. 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 jurisdictional 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 Fair Value Fair value Adjustment 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 6.1. 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. and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 6.2. 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.

6.3. 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 and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 goodwill is held as allowable in subsequent appellate proceedings, then in that case, the depreciation on goodwill is to be treated as operative expense while computing the margin. We will deal with this aspect of depreciation on goodwill separately while adjudicating upon the grounds relating to transfer pricing adjustment.

7.1. 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: and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 “5.24 On plain reading of the above proviso, it is clear that same is in relation to allocation of the depreciation on the asset between predecessor and successor entities, whereas in the instant case goodwill was not in existence as intangible asset in the case of predecessor companies from whom the assessee has acquired corresponding units under slump sale Therefore, the said provision is also not applicable of the facts of the instant case 5.25 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.” 7.2. 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.

7.3. 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 and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 out of acquiring switchgear division under the business transfer agreement by way of slump sale. Accordingly, ground no.2 raised by the assessee is allowed.

9.3. 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 and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 9.4. 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% Mean 7.38% 9.5. 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% 9.6. 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 and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 marking were only three which gave the mean operating margin of 14.83%. Details of the same is tabulated below: Sr. Name Average NPI No.

Operating Profit/Revenue Ratio of the 1.44% Appellant Operating Revenue of the Appellant on AE 82,96,17,769 import Operating Profit/Revenue Ratio of the 14.83% comparables ALP of the Import cost to AE (B) 70,65,85,454 Difference ALP & Import cost from AE (A-B) 11,10,85,819 (+5%) of Import cost from AE (A*5%) 4,08,83,564

10.1. 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 amortisation of goodwill from operating cost. The said para is reproduced as under: “30. We have heard the rival contentions, perused the material available on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the assessee has treated amortization of goodwill as part of its operating cost in financial statements. In fact, the assessee has not raised any objection before the TPO for exclusion of amortization of goodwill from operating cost. However, the assessee has taken this ground for the first time before the DRP and argued that amortization of goodwill is not operating in nature. We find that the term operating expenditure means, the cost incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations, but it does not include extra ordinary items or loss on transfer of assets or investment other than assets on which the depreciation is included in the operating expenses. From the definition of operating cost, it is undisputedly clear that the depreciation on any asset is part of operating cost because the assets are used in the course of business of the assessee. Whether goodwill is an asset and the same has been used in the business of the assessee to be eligible for depreciation and part of operating cost has to be seen in relevant facts of the case. In the present case, goodwill is not self-generated one to be considered it as asset employed in the business. Further, the goodwill arises out of acquisition of global engineering design from another company. The excess of liabilities over assets has been treated as goodwill. Since it is one time extra ordinary expenses arise on account of acquisition of global design services division from another company and a difference between the asset and liabilities of the transferor company, in our considered view, said asset being goodwill cannot be included as asset employed in the business of the assessee to be considered as operating in nature. Further, the learned DRP has itself given a finding that goodwill acquired on account of amalgamation or business transfer agreement is not eligible for depreciation. Once the assessee is not eligible for depreciation on goodwill, then the same cannot be considered as operating in nature for the purpose of computing margin. Therefore, we are of the considered view that the TPO is erred in including amortization of goodwill as part of operating cost. Thus, we direct the TPO to exclude amortization of goodwill from operating cost.”

10.2. 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. Name of the Technology Non-compete Product Software Goodwill Trademark Remarks Page No. No. Company Know-how fees development 2142-2143 1. Easun Reyrolle INR 5.50 crores INR 1 crores INR 7 19 crores NR 0.11 crores Limited Amortisation Amortisation Amortisation Amortisation period -16. 21% under SLM period- As per 20% under period -Basis IT Act (25%) SLM Lease period

2144-2145 2. Havells India INR 0.51 crores Product under NR 9 03 crores Limited Amortisation development Amortisation period 6 period 6 Years Years Amortisation period- 5 years

2146-2147 3. Larsen & Toubro INR 16 2 crores NR 163 crores Amortisation Limited period - 6 years Amortisation period- 6 years for foreign technology and 3 for Indigenous 2148-2149 4. SPEL INR 0 57 crores Amortisation basis SLM Semiconductor Limited 2150-2151 5. Reed Relays & INR 0.11 Crores Amortisation basis WDV Electronics India Limited 2152-2154 6. Akasaka Electronics No Limited Intangible assets 2155-2156 7. Circuit Systems No India Limited amortisation on intangible assets 2157-2158 8. Electro teknica ntangible Switchgears Pvt Ltd assets under development 2159-2160 9. Kaycee Industries No Limited Intangible assets 2161-2162 10. Toyoma Electric INR 0 07 Crores Cost of Limited acquisition less accumulated depreciation

2163-2164 11. Novateur Electrical INR 70 crores INR 4.41 crores INR 402 crores INR 43 and Digital Systems Amortisation Amortisation period - 3/5 Amortisation crores Private Limited period - 5 years years period - 5 years Amortisation period - 5 years 10.3. 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.

11.1 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 and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 expense which cannot be said to be an asset actively employed in the business operations of the assessee. Even though the depreciation on this goodwill has been held to be allowed for the purpose of computation of net profit as reported by the assessee in its profit and loss account, however, for the purpose of benchmarking the transactions with the AEs, the same cannot be considered as an operating cost to compute the PLI for comparability. Accordingly, we hold that depreciation on goodwill and amortisation of non-compete fees is to be excluded by treating it as non-operating cost, being an extraordinary item for the purpose of margin computation and determination of ALP. Accordingly, corresponding grounds raised by the assessee are allowed and those raised by the Revenue are dismissed.

12.1. 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.

12.2. 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.

13.1. 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.

Particulars AY 2012-13 AY 2011-12 AY 2010-11 Operating Revenue 3,76,71,332 4,84,07,076 4,40,26,254 Operating Cost 7,15,85,458 4,25,94,712 4,25,60,017 Operating Profit 3,39,14,126 58,12,364 14,66,237 OP/OR% -90.03% 12.01% 3.33% 15.1. 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 and 1189/Mum/2020 Navateur Electricals and Digital systems Pvt. Ltd. AY 2012-13 Court of Bombay in the case of CIT vs. Goldman Sachs India Securities Pvt. Ltd. in 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.

15.2. 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.

16.1. 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

Filters considered by Learned TPO Whether SPEL passes the filter

Turnover more than 50 crore Yes (refer page 793 of paperbook) Related party sales less than 25% Yes (refer page 809 of paperbook) Consistent loss making No (refer page 1374 of paperbook) Annual report available Yes (Refer page no. 764 to 841 of paperbook) Extraordinary event occurred No 17.1. It is important to note that this comparable formed part of the 18 comparables which were before the ld. TPO. SPEL is engaged in business of offering electronic circuits and mainly operates in integrated circuits assembly which according to assessee is similar to its business and fulfils all the filters applied by ld. TPO. Its margin (OP/sales) in the year under consideration was 2.90%. Considering the submissions made by the assessee on the factual position as stated above and there being no cogent reason given by ld. TPO for not considering this comparable, we find it appropriate to direct the ld. TPO for its inclusion, for which the matter is remitted back to the file of ld. TPO/Assessing

Order is pronounced in the open court on 25 August, 2025