THE DY. CIT, CIRCLE-2(1)(1),, AHMEDABAD vs. M/S. GUJARAT MICROWAX LTD.,, AHMEDABAD

Per B.M. Biyani, A.M.:

THESE APPEALS:

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. 2. Since majority of the Grounds in these Appeals are identical except difference of figures, we have heard both of these appeals together and dispose of by this common order. We will start with ITA No. 2682/Ahd/2016 for assessment-year 2011-12.

ITA No. 2682/Ahd/2016 FOR ASSESSMENT-YEAR 2011-12:

GROUNDS:

“1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 4,85,58,403/- made by the AO on account of upward adjustment proposed by the TPO by determining arm’s length price without properly appreciating the facts of the case and the material brought on record. 2. The Ld. CIT(A) has erred in law and on facts by rejecting CUP as MAM without properly appreciating the facts of the case and the material brought on record. 3. The Ld. CIT(A) has erred in law and on facts by accepting TNMM as MAM without properly appreciating the facts of the case and the material brought on record. 4. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 28,92,965/- on account of commission paid to overseas agents without deducting the tax at source without properly appreciating the facts of the case and the material brought on record. 5. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance made u/s 10B of the Act without properly

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. appreciating the facts of the case and the material brought on record. 6. The Ld. CIT(A) has erred in law and on facts in directing the AO to take into consideration the revised computation of total income filed during the course of assessment proceedings without properly appreciating the facts of the case and the material brought on record. 7. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 8. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 9. The appellant craves leave to add, alter and / or amend all or any of the ground before the final hearing of the appeal.” GROUND No. 1, 2 and 3:

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. Transfer Pricing Study Report [“TPSR”]. On perusal of TPSR, the Ld. TPO observed that the assessee has benchmarked international transactions according to the Comparable Uncontrolled Price Method [“CUP method”]. The Ld. TPO found the CUP method in order and accepted the same. Hence there was no dispute between the assessee and Ld. TPO / AO in so far adoption of CUP method as the Most Appropriate Method is concerned. However, the Ld. TPO found that the assessee has done several transactions on different dates with its AEs as well as Non-AEs. The Ld. TPO further found that the prices charged by the assessee in certain sales-transactions of MCCP, CCS and SSG to its AEs were lower than the prices charged in the sale-transactions made to Non-AEs on the same dates (or on nearest dates in cases wherever data of same dates were not available). Hence those transactions were not at arm’s length prices. Therefore, the Ld. TPO asked assessee to explain the reasons of the variations in the prices. In response, the assessee explained following reasons:

(i) There were transactions in which the assessee had charged lower prices from AEs as compared to Non-AEs, but there were other transactions too in which the assessee had charged higher prices from AEs as compared to Non-AEs. The cherry-picking of transactions done at lower prices and ignoring the transactions done at higher prices, is not warranted. The assessee submitted that all transactions undertaken with AEs during the whole year must be aggregated and average price must be worked out. Similar aggregation must be done for all transactions with Non-AEs. Thereafter, annual average price of transactions with AEs must be compared with the annual average price of transactions with Non-AEs. If this aggregation-approach is applied, the difference would remain within the 5% bandwidth acceptable under 2nd proviso to section 92C(3).

(ii) Adjustment must be allowed on account of capacity utilisation, economics of scale in production, growth in export sales, growth in

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. goodwill, brand recognition and market research due to the association with AEs (9% in MCCP, 7% in CCS and 7% in SSG).

(iii) Adjustment must be allowed on account of geographical risk as the AEs were located in Zero Risk Countries as against which the Non- AEs were located in High Risk countries (3.25% in MCCP, 2.01% in CCS and 3.67% in SSG).

(iv) Adjustment must be allowed on account of timely receipt of payment since the assessee received early-payment from AEs as compared to Non-AEs in terms of number of days (0.70% in MCCP, 2.71% in CCS, 1.40% in SSG).

(v) Adjustment must be allowed on account of additional consideration / extra-profit share received from AEs credited to “Misc. Income / Others income” in the books of account (Rs. 58,59,403/- in MCCP, Rs. 2,73,58,615/- in CCS and SSG).

The assessee claimed that if these points are taken into account, the prices charged for the impugned transactions with AEs would be at arm’s length. However, the Ld. TPO rejected these submissions of assessee and proceeded to compute ALPs of the transactions done with AEs. While doing so, the Ld. TPO made a transaction-by-transaction comparison of the transactions done by assessee with AEs and Non-AEs strictly on the same date. However, if the data of same date was not available, the Ld. TPO made a comparison on the nearest dates which too were very close to the dates of transactions. This comparison and calculation has been noted on Page No. 13, 14, 34, 35 of the Order dated 21.01.2015 passed by Ld. TPO u/s 92CA(3) and the Annexure-A, B and C annexed to that Order. Based on such exercise, the the Ld. TPO proposed an upward adjustment of Rs. 4,85,58,403/- in Para No. 7 of his Order as under:

Transaction Upward adjustment Sale of MCCP 1,23,16,469/-

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd.

Sale of CCS 2,68,84,692/- Sale of SSG 93,57,242/- Total 4,85,58,403/-

9.1 CUP Method:

On Page No. 79 of his order, the Ld. CIT(A) has noted following submission of assessee:

“2.9. The appellant submitted that the AO / TPO ought to have considered the average sale price of each of the products and would have compared the same with the average price to the non- AEs to determine the ALP of the International Transactions with the AE. In this regard, it has submitted the comparison of such average prices which is reproduced as under:- Products AE (Rs.) Non-AE Difference 5% of A ALP (A) export Rs. (Rs.) (Rs.) (B-A) (B) MCCP 106.57 104.62 NA NA Yes CCS 338.71 349.79 11.08 16.94 Yes*

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. SSG 186.02 194.96 8.94 9.30 Yes* * The variation between the ALP and price at which the international transaction is undertaken does not exceed 5 percent of the later. Accordingly, as per second proviso to Sec. 92C(2) of the Act, the said international transactions are at ALP.” Thereafter on Page No. 98, the Ld. CIT(A) concluded thus:

“2.32 The other issues such as capacity utilisation, country risk, better payment terms etc. and necessary adjustment to be made for these issues as raised by the appellant are not discussed herein detail in view of the fact that even as per the CUP Method, no adjustment was warranted on the basis of the average price theory and variation below the 5% of the sale rate to AE. It will also be appropriate to mention that even under the CUP method, the approach of the TPO of selectively cherry picking of the transactions i.e. only adverse instances and adopting transaction by transaction comparison is not justifiable. The 1st proviso to Section 92C(2) itself states that in case where more than one price is determined, the arm’s length price shall be taken to be the arithmetical mean of such prices. This directs the comparison of average prices between the AE and Non-AE transactions in view of the decisions / judgements cited in the preceding paras.” Thus, as far as CUP method is concerned, the Ld. CIT(A) concluded arm’s length of the transactions with AEs on the basis of aggregation-rule / average-price, without going into various adjustments claimed by the assessee before Ld. TPO.

9.2 TNMM:

The assessee made following submission to Ld. CIT(A) vide letter dated 02/05/2016, as noted on Page No. 42 of the order of Ld. CIT(A):

“1.25 Without prejudice to above, although the Appellant had selected CUP method as the most appropriate method (“MAM”), the Appellant based on the fact that the AE and Non-AEs considered for benchmarking analysis are in different geographies; though CUP is used as the MAM. However, it is not possible to make accurate adjustments for determination of ALP. In view of the same, the Appellant hereby submit corroborative analysis using TNMM, discussed below in detail. Further, the Appellant would like to submit that the purpose of the Transfer Pricing is determination of the ALP, which can also be justified using one or more methods.

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. 1.26 In this regard, we respectfully submit the benchmarking analysis under TNMM below.” Internal TNMM 1.27 The products sold in the export market to AEs and Non-AEs carry a similar manufacturing process and can be compared under the broad parameters of TNMM. In view of the same, Appellant’s AE segment and Non-AE export segment can be compared to substantiate the arm’s length nature of the international transactions. The comparative internal TNMM analysis between export transactions of GMPL with AEs and Non-AEs as submitted before your good-self is reproduced below: Profit Level Indicator EXPORT (‘PLI’) AE Non-AE Net Cost Plus (‘NCP’) (%) 22.47 11.31 In view of above, the international transaction undertaken by the Appellant is at arm’s length. External TNMM 1.28 Further, the Appellant has also conducted external TNMM analysis wherein the NCP earned by the Appellant from sales to its AEs was compared with the NCP earned by independent comparable companies. The Appellant had employed databases viz. Prowess and Capitaline Plus to identify the said independent comparable companies. The said analysis resulted in 5 broadly comparable independent companies. The weighted average NCP of the said 5 broadly comparable independent companies range from 1.28 percent to 12.64 percent with an arithmetic mean of 9.60 percent. As mentioned above, the Appellant had earned a NCP of 22.47 percent from its transactions with its AEs. In view of the above, the international transaction undertaken by the Appellant is at arm’s length.” Thereafter, the assessee made following submission to Ld. CIT(A) vide letter dated 10/05/2016 for invocation of Rule 46A so as to take TNMM on record:

“1.7 The appellant was of a strong belief that the learned TPO will consider and grant the said adjustments as mandated by the transfer pricing regulations. However, the learned TPO challenged the assumptions on which the adjustments were sought and denied to grant the adjustments in his order. The Appellant cam to know about the learned TPO’s intention of not allowing the said adjustments for the first time on receipt of the TPO’s order. The learned TPO did not provide any opportunity to the Appellant to provide its contentions in support of the said Page 8 of 51

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. adjustments. Moreover, the TPO did not himself make the necessary adjustments to account for the differences between the international transaction and the comparable uncontrolled transaction and thus avoided the requirement of Rule 10B(1)(a). 1.15 It is clear from the above discussion that CUP requires very high degree of comparability and there should be no difference for which accurate adjustments cannot be made. In the case of the Appellant, accurate adjustments for the following reasons may be challenging. 1.16 In this regard, the Appellant respectfully submits that considering the terms of the Agreement between the Appellant and its AE and other factors, there may be differences between the international transactions and comparable transactions considered for CUP, for which making accurate adjustments may not be possible. 1.19. In view of above discussion, the Appellant respectfully submits that the Appellant was not given opportunity by the learned TPO to put forth its contentions in support of the various adjustments sought by the Appellant to account for the differences between the international transaction and the comparable uncontrolled transaction. Moreover, the Appellant has got the opportunity for the first time before your Honour to place on record its legal plea based on the above discussed ruling of the Hon’ble High Court in case of Luxottica India Eyerwear (P) Ltd. that the arm’s length price can be supported by any prescribed method at any stage of proceedings since the said ruling was pronounced after the receipt of TPO’s order. In view of same, considering Rule 46A(1)(c), the Appellant respectfully submits that the corroborative anlaysis should be accepted and taken on record.” Before Ld. CIT(A), the assessee also placed reliance on following decisions to demonstrate that the assessee can select any other method as most appropriate method to support the arm’s length nature of the international transactions at any stage of proceedings:

(i) Pfizer Limited Vs. ACIT - ITA No. 3729 / Mum / 2008 – ITAT Mumbai (ii) Luxottica India Eyewear (P) Ltd. – ITA No. 1115/Del/2014 – ITAT Delhi (iii) Chemtex Global Engineering (P) Ltd. – ITA No. 3590/Mum/2010 – ITAT Mumbai (iv) Mattel Toys (I) (P) Ltd. Vs. DCIT – ITA No. 2476 & 2801/Mum/20087 – ITAT Mumbai Page 9 of 51

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. (v) Daikin Air Conditioning India (P) Ltd. – ITA No. 2922 & 5293/Delhi/2011 – ITAT Delhi

The Ld. CIT(A) acceded to the request of assessee and admitted additional evidence under Rule 46A. Finally, the Ld. CIT(A) concluded thus: “2.29. In view of the aforesaid discussion, since the appellant was not given opportunity by the TPO to put forth its contention in support of various adjustments sought by the appellant to account for the difference between the International Transaction with AE and comparable uncontrolled transactions, the appellant has requested vide its application for admission of the additional evidence dated 10/05/2016 of which relevant extract have been reproduced in the preceding paras of this order and considering the various judgements in particular judgement of Hon’ble Delhi High Court in the case of Luxottica India Eyewear Pvt. Ltd. (supra) holding that the ALP can be supported by any prescribed method at any stage of proceedings and the fact that this ruling was pronounced after the receipt of the TPOs order. Since the additional evidences submitted were crucial for substantial justice, therefore, respectfully following the judgements of Hon’ble Courts briefly discussed below, the same were admitted under Rule 46A. 2.36. Although the Appellant had originally selected the CUP as the MAM in its transfer pricing documentation, but as the Associated Enterprises (AEs') and Non-AEs are in different geographies and it was not possible to make accurate adjustments for differences in geographic conditions affecting the economics of business, it took the support from the TNMM method as MAM. This is because in the Income-tax Rule No. 1OB(1)(a) the CUP method is restricted by applicability of strict comparability parameters and the ability to make accurate adjustment is a prerequisite before applicability of this method. 2.37. In view of the same, the contention of the Appellant is found correct and the transactions with the AE were also found on ALP even as per the TNMM method being the most appropriate method. The objection raised by the TPO in his remand report that the Appellant cannot change the method during the course of Appellate proceedings is not correct. As observed by number of decisions of Hon'ble High Court and Tribunals as discussed above, the Appellant cannot be precluded from benchmarking its transactions with the help of any method other than the one which is taken for consideration in its transfer pricing documentation. After all the mandate of the TP provisions is to arrive at an accurate benchmarking to consider the Arm's Page 10 of 51

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. Length Nature of the AE transactions.

2.38. On-going through the details and documents, it is noticed that the benchmarking on the basis of TNMM as MAM in respect of both internal and external TNMM has been found proper. Based on the internal TNMM benchmarking, the Appellant has earned a margin of 22.47 % on AE transactions as compared to 11.31% earned on Non-AE transactions. Further, based on the external TNMM, the Appellant's 22.47% margin compares favourably with the Arm's Length Margin of 9.60% earned by the independent companies. In view of the same, the margin earned by the Appellant in its International Transactions with its AEs is at Arm's Length.

In view of the aforesaid discussion, in no case, the upward transfer pricing adjustment made by the AO / TPO is justified and hence the same is deleted.

Thus, the related grounds of appeal are allowed.” 9.3 From above paras, it is very clear that on one hand the assessee adhered to CUP method, but on other hand the assessee put forward TNMM to corroborate the arm’s length nature of transactions. Further, the Ld. CIT(A) has also held that “in no case, the upward transfer pricing adjustment made by the AO / TPO is justified and hence the same is deleted.” The words “in no case” conveys that the upward adjustment is not justified both in CUP method and TNMM.

10.1 TNMM:

The Ld. DR started his arguments by assailing the action of Ld. CIT(A) to permit TNMM. Ld. DR submitted that it is the assessee who analysed its transactions and adopted CUP method as Most Appropriate Method. Ld. DR further submitted that even the auditors of assessee have also used CUP Method in their report in Form No. 3CEB. He further submitted that during the assessment-proceeding, the Ld. AO made a reference to the Ld. TPO in terms of section 92CA of the act and even in the coure of proceeding before Ld. TPO, the assessee adopted CUP Method in TPSR. The Ld. DR went on Page 11 of 51

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. submitting that even the Ld. TPO analysed the submission of assessee on CUP method and thereafter accepted CUP method as Most Appropriate Method. Moreover, the Ld. AO also completed assessment-order on the basis of CUP method. According to Ld. DR, once CUP method had been selected, enforced and acted upon at all stages before completion of assessment by the assessee itself, it was neither lawful nor logical on the part of the assessee to suddenly advance the TNMM before Ld. CIT(A) on the premises, firstly that the Ld. TPO has not given opportunity to the assessee to explain the adjustments in CUP method and secondly by submitting that the accurate adjustments required in CUP method may not be possible. Ld. DR further submitted that the Ld. CIT(A) was not justified in accepting TNMM overruling the objection raised by Ld. AO in remand-report.

10.2 CUP Method:

For the sake of completeness, the Ld. DR also contested that the Ld. CIT(A) was not justified to accept aggregation-theory because all transactions undertaken by the assessee were done on varying rates and they were independent of each other and the Ld. TPO has made a systematic date-wise comparison of the transactions with AEs vis-à-vis the transactions with Non-AEs and thereafter arrived at an upward adjustment of Rs. 4,85,58,403/-. Ld. DR placed a heavy reliance on the decision of this Ahmedabad Bench in Atul Ltd. Vs. ACIT, Ahmedabad in ITA No. 3118/Ahd/2010, order dated 29.10.2012.

10.3 With these submissions, Ld. DR submitted that the upward adjustment of Rs. 4,85,58,403/- proposed by Ld. TPO is very rightly calculated after due consideration. Therefore, the Ld. CIT(A) has wrongly deleted the same. Ld. DR prayed to uphold the addition made by Ld. AO.

11.1 CUP Method: Page 12 of 51

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. Ld. AR submitted that it is an undisputed fact that out of several transactions made by the assessee, certain transactions with AEs were at lower prices and certain were at higher prices as compared to the transactions with Non-AEs. Ld. AR submitted that the Ld. TPO has cherry- picked the transactions made at lower prices and ignored the transactions made at higher prices. According to Ld. AR, this approach of Ld. TPO is totally unlawful and absurd. In other way, the Ld. AR submitted that the all transactions made during the year with the AEs, whether at lower rates or higher rates, must be aggregated and the annual-average-rate must be determined. Same exercise must be done for the transactions with Non-AEs. According to Ld. AR, the assessee has already presented this working to Ld. TPO and found that the variation between the annual-average-price charged from AEs and annual-average-price charged from Non-AEs is in the range of permissible-limit of 5% and hence the upward adjustment suggested by Ld. TPO was not required. In support of aggregation theory, the Ld. AR placed reliance on following decisions:

(a) ADIT, Circle 1(1), Interntional Taxation, New Delhi Vs. ABB Lummus Heat Transfer B.V., ITAT Delhi, (2015) 64 taxmann. Com 210

(b) M/s Petrochem Middle East India Pvt. Ltd. Vs. DCIT-8(2), Mumbai – ITA No. 2255/Mum/2014

(c) Gulbrandsen Chemicals (P) Ltd. Vs. DCIT (2017) 79 taxmann.com 105, ITAT Ahmedabad

(d) Reliable Cashew Co. (P) Ltd. Vs. ACIT, Chennai ITA No. 2237/Mds/2013, order dated 04.09.2015

(e) ACIT, Mumbai Vs. Essar Steel Ltd. (2014) 50 taxmann.com 183, ITAT Mumbai

(f) ACIT Vs. Audco India Limited (2011) 13 taxmann.com 121, ITAT Mumbai, order dated 16.11.2010

11.2 TNMM:

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. Ld. AR submitted that it is now well accepted in numerous decisions that an assessee can take any other method as most appropriate method at any stage of proceeding. In support of this proposition, the Ld. AR advanced following decisions:

(a) Luxottica India Eyewear P.Ltd. (ITA No.1115/Del/2014) - Delhi ITAT (b) Pfizer limited Vs. ACIT (ITA No. 3729/Mum./2008) - Mumbai ITAT (c) Chemtex Global Engineers P. Ltd. (ITA No. 3590/Mum/2010) - Mumbai ITAT (d) Mattel Toys (I) (P.) Ltd. vs. DCIT (ITA No.2476 & 2801/Mum/2008) -Mumbai ITAT (e) Daikin Air Conditioning India (P.) Ltd. (ITA No. 2922 & 5293/Delhi/2011 - Delhi ITAT Ld. AR further carried our attention to the data of TNMM noted by Ld. CIT(A) on Page No. 42 of his order [reproduced earlier] to show that the NCP% earned by assessee in the transactions with AEs was much higher, according to both internal TNMM and external TNMM.

11.3 With these submissions, the Ld. AR concluded that the Ld. CIT(A) was justified in deleting the upward addition made by Ld. AO and hence there is no need to interfere with the order of Ld. CIT(A). Accordingly, the Ld. AR requested to uphold the deletion.

12.1 CUP Method:

We have seen that the primary controversy between the parties is whether “transaction-by-transaction approach” or “aggregation approach” is to be applied. In order to adjudicate this, we would analyse the relevant provisions of law holding the field but before that we should bear in mind

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. two factual points, viz. (i) the assessee has done several transactions of the same product with its AEs and also with Non-AEs on different dates during the year. The transactions with AEs have been made on varying prices and there is no series, dependence or spill of transactions over each other. Same is the case of the transactions done with Non-AEs; and (ii) on the same dates (or nearest dates), the prices charged in the impugned transactions with AEs were lower than the prices charged in the transactions with Non- AEs. (a) Now we first start with OECD guidelines which are often referred to in the matters of transfer pricing.

OECD Guidelines on Transfer Pricing:

"3.9 Ideally, in order to arrive at the most precise approximation of fair market value, the arm's length principle should be applied on a transaction by transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis.

Examples may include 1. Some long-term contracts for the supply of commodities or services, 2. rights to use intangible property, and 3. pricing a range of closely linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm's length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method or methods. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis. 3.10 Another example where a taxpayer’s transactions may be combined is related to portfolio approaches. A portfolio approach is a business strategy consisting of a taxpayer bundling certain transactions for the purpose of earning an appropriate return across the portfolio rather than necessarily on any single product within the portfolio. For instance, some products may be marketed by a taxpayer with a low profit or even at a loss, because they create a demand for other products and/or related services of the same taxpayer that are then sold or provided with high profits (e.g. equipment and captive Page 15 of 51

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. aftermarket consumables, such as vending coffee machines and coffee capsules, or printers and cartridges). Similar approaches can be observed in various industries. Portfolio approaches are an example of a business strategy that may need to be taken into account in the comparability analysis and when examining the reliability of comparables.” Analysis: These OECD guidelines clearly prescribe that “Ideally, in order to arrive at the most precise approximation of fair market value, the arm's length principle should be applied on a transaction by transaction basis”. It is true that these guidelines permit aggregation of transactions too but that is only when those transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. In short, the aggregation can be done only if there is a scientific or rational basis.

(b) Now we turn to various provisions of Income-tax Act, 1961 and Income-tax Rules, 1962:

Section 92(1): “92(1). Any income arising from an international transaction shall be computed having regard to the arm’s length price.”

Analysis: This is the master provision of Indian transfer pricing law. The words “an international transaction” clearly demonstrate that each international transaction shall be treated separately and the income arising from each such transaction shall be computed having regard to its own ALP.

Rule 10A(d): “10A. For the purposes of this rule and rules 10AB to 10E,— (a) to (c) XXX (d) "transaction" includes a number of closely linked transactions. Analysis:

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. This Rule prescribes definitions of certain terms. Rule 10A(d) defines "transaction" as including “a number of closely linked transactions”. The words “a number of closely linked transactions” clearly demonstrate that the transactions must be closely-linked. Although there is no mechanism prescribed in the law to ascertain close-linkage of transactions, yet this has to be understood bearing in mind our basic objective i.e. computing ALP in a proper manner. There is enough literature to suggest that the transactions can be taken as “closely-linked” only if separate evaluation or profitability analysis is not possible. Two or more transactions can be said to be closely-linked when they emanate from a common source being an order/contract/agreement/arrangement and the nature, characteristics and terms of the transactions are substantially flowing from the said common source.

First proviso to Section 92C(2): “92C(2). The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices:” Analysis: This 1st Proviso to section 92C(2) prescribes that if more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices. Basically such situations may arise in CUP method, when multiple prices of the same transaction on the same date (or nearest date) are available. In that case, arithmetic mean has to be taken. Rule 10B(1)(a)(i): “10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :—

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd.

(a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction;

Analysis: This Rule prescribes the methodology of CUP method. The words “comparable” and “such” appearing in the language clearly demonstrate that the price charged in a comparable transaction or a number of such comparable transactions must be identified. Thereafter, such price must be adjusted to account for differences. Even this does not support aggregation of independent transactions.

(c) Now we turn to an important decision of this Ahmedabad Bench itself in Atul Ltd. Vs. ACIT, Ahmedabad in ITA No. 3118/Ahd/2010, order dated 29.10.2012, which is heavily relied upon by the revenue:

“5.20. We have given our thoughtful consideration on the argument advanced by both the sides on the application of principle of aggregation. In this regard, a reference of Rule 10A(d) was made. This sub-clause has defined the term "transaction" which includes a number of closely linked transaction. In our opinion, the closely linked transaction are those transaction where they cannot be segregated and if segregated, then such transaction cannot be evaluated adequately on a separate basis. There is a situation where a long term contract for a supply of commodity or for rendering the service has been entered into between the parties. If the term of the said contract spill over on number of transactions, then naturally all those transactions are required to be aggregated, so that the evaluation can be made adequately. There are certain situations, where it is almost impractical to determine the price of each individual product or an independent

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. transaction. There is a situation where in a product-line, each product is intricately connected with each other, so that it is impractical to determine the price of a single commodity in the linked products comprising the line of product. In such a situation, the aggregation is required. The OECD guidelines also give an another example, that if a transaction is routed from one AE to an another, then it is more appropriate to consider the transaction which is being routed in a part from an entity to an another entity and, therefore the entire transaction is to be taken into account rather than evaluating individual transaction on a separate basis. These few examples do not match with the facts of this appeal. The transactions under scrutiny in this appeal were neither of same 'product-line' nor 'routed-in-parts', nor with the purpose of 'portfolio-approach'; therefore prima facie this adjustment is uncalled-for. In the case of Tara Ultimo Pvt. Ltd. 30 Taxman.com 184 (Mum.), the Respected Co-ordinate Bench has at one place opined that the application of CPM has to be on transaction basis rather than on global basis. According to the Bench, this fundamental scheme of cost plus method is also evident from the plain wordings of Rule 10B as well. Even also in our considered opinion, each international transaction as defined in section 92(1) is to be computed having regard to the arm's length price. Section 92(1) is worded in this manner, quote "(1) Any income arising from an international transaction shall be computed having regard to the arm's length price." Unquote. So the article 'an' has significance.

Analysis: It is true that the factual matrix of this decision was different in the sense the assessee demanded aggregation of products manufactured in different divisions / units and the same was not allowed by the Tribunal. But we should look into the ratio of the decision. The Tribunal categorically emphasized that the aggregation-approach can be applied only in certain situations and not always. In the present appeal before us, the assessee has done several transactions with the AEs and Non-AEs which are independent of each other. This independence is very much visible from the fact that the assessee has done transactions with AEs on different dates at different prices and so is the case in transactions with Non-AEs. There is nothing to suggest in the transactions done by the assessee which warrant aggregation. Hence the ratio of this decision is very much applicable. Page 19 of 51

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. (d) We would also like to refer a very relevant decision held in ACIT vs. UE Trade Corporation (India) Pvt. Ltd. 45 SOT 197 (Delhi), ITA No. 4405(Del)/2009 order dated 24.12.2010:

"4.2. The second ground is that the position should be seen as a whole with respect to all the transactions and not only with respect to the disputed transactions. In other words, if transfer pricing study is made for all the transactions, the variation made by the AO would be of insignificant amount warranting no addition. On the other hand, the case of the learned Departmental Representative is that purchases by way of import do not constitute a series of connected transactions, but each transaction is a separate transaction. Therefore, the AO was right in examining each transaction separately for this purpose. It is seen that the assessee has not been able to bring anything on record that various purchases were a part of pre-arranged scheme or agreement so as to constitute a part of the indivisible transactions of purchase. Accordingly, it is held that the AO was within his right to evaluate each transaction separately." Analysis: This decision is directly applicable to the present appeal before us. The facts are exactly same. Hence according to this, aggregation is not possible.

(e) Finally, we would like to analyse the precedents relied upon by the Ld. AR:

ADIT, Circle 1(1), Interntional Taxation, New Delhi Vs. ABB Lummus Heat Transfer B.V., ITAT Delhi, (2015) 64 taxmann. Com 210: “9. Reverting to the facts of the extant case, we find that the assessee has entered into transactions with two parties, namely, India Glycols Ltd. and Petron Engineering Construction Ltd. Total revenue from rendering of service to these two parties is Rs. 8,08,550/-. In all, there are 8 invoices raised by the assessee, viz. seven on India Glycols Ltd. and one on Petron Engineering Construction Ltd., as under: Date Invoice No. Name of the company Amount 21.04.2004 6-2302-3-LHTD-04 India Glycols Limited 2,80,000 05.05.2004 6-2302-3-LHTD-05 India Glycols Limited 24,000 05.07.2004 6-2302-3-LHTD-06 India Glycols Limited 24,000 22.07.2004 6-2302-3-LHTD-07 India Glycols Limited 2,00,000

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd.

08.08.2004 6-2302-3-LHTD-08 India Glycols Limited 1,22,000 05.11.2004 6-2302-3-LHTD-09 India Glycols Limited 90,000 10.01.2005 6-2302-3-LHTD-10 India Glycols Limited 24,000 19.05.2004 6-2375-1-LHTD-007 Petron Engineering 44,550 Construction Ltd. Total 8,08,550 10. Copies of these invoices were admittedly filed before the AO and the same have been placed for our consideration also. It can be seen that out of seven invoices raised on India Glycols Ltd., three invoices for Rs. 24,000/- each represent ‘Site visit’ to M/s India Glycols Ltd., for discussions about the work undertaken to be done by the assessee for them. These invoices represent site visiting charges by the assessee’s employees for which there is a charge of Rs. 24,000/-, which rate on hourly basis, comes to Rs. 1,500/-. In so far as the rendering of actual service is concerned, the invoices are for sum of Rs. 2,80,000/-, Rs. 2,00,000/-, Rs. 1,22,000/- and Rs. 90,000/- on India Glycols Ltd. and Rs. 44,550/- on M/s Petron Engineering Construction Ltd. These five invoices represent service charges for actual work done by the assessee to these unrelated parties. The AO has ignored these five invoices and picked up only three invoices of Rs. 24,000/- each for determining the benchmark rate of Rs. 1,500/- per hour, which in fact, represented merely site visiting charges undertaken by the assessee’s employees. If all the eight invoices are considered, the average hourly rate comes to Rs. 717/- per hour which was placed before the AO, who chose to ignore the same. If we ignore the three invoices of Rs. 24,000/- each from both the sides, namely revenue as well as the number of hours, the average hourly rate charged comes to Rs. 682/-. Viewed from any angle, the price charged by the assessee from its AE at Rs. 1,135/- per hour is definitely at arm’s length in comparison with the average price of Rs. 717/- or Rs. 682/-, as the case may be. In view of foregoing discussion, we are of the considered opinion that the Ld. CIT(A) was justified in deleting the addition on merits. We, therefore, countenance the impugned order on this score.” Analysis:

The facts of this case are very much in line with the concept of aggregation. As we can see, certain invoices related to “site visit” for discussion of work and other invoices relates to the “actual work done”. The activities of “site visit” and “actual work” very inextricably related and constituted a series of work. Therefore, there was logical necessity of aggregation. In the present appeal before us, all transactions are independent and there is no such

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. necessity of aggregation. Hence this decision is not applicable to us.

M/s Petrochem Middle East India Pvt. Ltd. Vs. DCIT-8(2), Mumbai – ITA No. 2255/Mum/2014

“3. Second ground of appeal as about addition made on account of rejection of Comparable Uncontrolled Price (CUP) in respect of the international transactions entered into by the assessee with its Associated Enterprises (AEs). During the assessment proceedings, the AO made a reference to the Transfer Pricing officer (TPO) to determine the Arm’s Length Price (ALP) of the international transactions of the assessee. During the TP proceedings, the TPO found that the assessee has used CUP method to justify the ALP, that it has used data which provided comparable rates for the imported products, that where the data was not available on the date of import of goods, it had used the data of nearest date, that in case of multiple transactions on the same day for various quantities it had taken an average (arithmetical mean) of all rates to arrive at the ALP rate, that it had used the date of the place from where the goods were imported, that it had entered into 245 international transactions Out of the total transactions, he made adjustments. After receiving the order of the TPO, the AO issued a draft order to the assessee. It filed objections before the DRP for each transaction. The DRP deleted the addition in respect of one transaction. However, adjustment made by the TPO for the remaining six transactions were upheld. First of them was transaction no. 1. The assessee had imported 4.98 lakh Kgs. Of Sovesso100 @ Rs. 43.09 per kg. As the comparable data of 05.05.2008 was not available, so the assessee used the data of 01.08.2008. The rate charged by the AE (Rs. 43.09 per kg) was lower than the rates prevailing on the 01.08.2008 (Rs. 58.58), the assessee claimed that the transaction was at ALP. However, the TPO chose to use the data of 02.03.2009 and held that on that date rate of Sovesso100 was Rs. 27.54 per kg.,that the transaction was not at arm’s length. The DRP held that beyond the nearness of date the assessee had not mentioned as to how the transaction was otherwise comparable in terms of volume or any other details, that in absence of such details the method adopted by the TPO had to be upheld. 3.1Before us, the Authorised Representative (AR) argued that the DRP itself had upheld the nearest date approach adopted by the assessee, that the date chosen by it was 88 days from the actual transaction, that TPO’s CUP date was 301 days from actual date, that on 01.08.2008 the rate for all quantities was same, that

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. volume had no impact on rate. Departmental Representative (DR) supported the orders of the TPO and DRP. 3.2. We have heard the rival submissions and perused the material before us. We find that the rate of Sovesso100, prevalent on 01.08.2008, for the quantities ranging from 1.05 lakh Kgs. to 8.3 lakh Kgs. was same i.e. Rs.58.88 per Kg., that the volumes picked up by the assessee were comparable to the transaction of 4.98 Kgs., that the AO had cherry-picked the lowest rate of Rs. 27.54 per Kg. for making adjustments, that the comparison of the volume data adopted by the AO and the TPO clearly prove that volume had any impact on the price, that the DRP had heavily relied upon the volume theory. In these circumstances we are of the opinion that the data based on nearness of the date was a justifiable and reasonable data to decide the ALP of the transaction. Secondly, we find that TPO himself had accepted the CUP dated 01/08/2008 for the transaction entered in to by the assessee on 24.06.2008, that the quantity involved in the transaction was 5 lakh Kgs. (Pg.92 of the Paper book). In these circumstances, we are of the opinion, that the data of nearest date has to be taken as valid comparable. Considering these peculiar facts, we are of the opinion that the decision of the DRP cannot be endorsed. 4. Second transaction is of purchase of 19.54 lakh Kgs. of Toluene @ Rs. 47.86 per Kg. The material was purchased on 05.06.2008. As the data for that day was not available the assessee used average rate of CUP data of 29.05.2008. However, the TPO took the lowest rates from the data used by the assessee and held that there were six transactions ranging from 75000kg. to 5 lakhs Kgs., that price range varied from Rs. 44.18 to Rs. 55.91, that the assessee had purchased huge quantity that such bulk purchase would have resulted in lower purchase price, that the assessee had extrapolated the price to fit itself in to ±5% band, that the data field was mathematically unreasonable. The DRP upheld the order of the TPO. 4.1. Before us, the AR argued that volume of the transactions did not impact the rates, that trend did not indicate that volumes affected the rates, that the TPO had cherry picked the rate, that the TPO was not consistent in selecting the comparables. DR supported the order of the DRP. 4.2. We have considered the material available on record. We find that the assessee had taken the average price of the transactions entered into on 29.05.2008, that the TPO had picked up the lowest rate. In our opinion picking up of a convenient or favourable data is not a proper method to determine the ALP. As per the provisions of section 92C(2) of the Act an arithmetic mean of the prices has to be adopted as the ALP when more than one comparable price is available. In the case under consideration the assessee had adopted the arithmetic mean, which according to us, was a justifiable step considering the peculiar

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. facts of the case. We find that the TPO himself had used average of three transactions for benchmarking the transaction of Mono Ethylene Glycol. Considering all these facts we hold that the approach of the TPO and the DRP was not as per the provisions of the Act. 5. Next transaction is about import of 1 lakh Kgs. of Maleic Anhydride. The assessee had purchased the goods @ Rs.76.55 per Kg. It arrived at the average rate of Rs. 76.88 per Kg. as the CUP rate. The TPO adopted the rate of Rs. 68.76 per Kg. which was the lowest rate of all the transactions of 01.08.2008. The DRP upheld the order of the TPO holding that the assessee had mentioned that average taken by it considered the volume to transactions also. 5.1. Before us, the AR stated volume of the product did not impact the rates of the products, that average of all the quantities of the day were ignored, that the assessee had taken the arithmetical mean of the price as ALP. DR relied upon the order of the TPO. 5.2. We find that the assessee had taken the average price for determining the ALP, whereas the TPO had taken the lowest price. As held earlier the practice of cherry picking should be avoided while invoking the provisions of Chapter X of the Act. From the date it is clear that 1.20 lakh Kgs. goods were purchased @ Rs.78.43 Rs. per Kg. Similarly, 41,000 Kgs. goods were purchased @ Rs.76.28 per Kg. We also find that the TPO had accepted the assessee's CUP dt.30.7.2008 while determining the ALP of transaction dt. 29.7.08 for a transaction of One lakh Kgs. (pg-92 of the PB). Considering these facts we find that the assessee had imported the material at the rate which fits within the ± 5% range of the CUP rate. The transaction is at arm's length. 6. The next transaction pertains to Mosstanol L. The assessee had imported 4 lakh Kgs of Mosstanol L on 16.12.08 @Rs.15.13 per kg. The TPO compared Mosstanol L with Ethyl Alcohol (Pg107 of the PB) as the TPO had made the adjustment made on wrong comparables, the addition made by him is deleted. 7. Now we would take the import of Mono Ethylene Glycol (MEL). On 27.1.09 the assessee had imported 9.91 lakhs Kgs of MRL @ Rs. 25.87 per Kg. As the comparable date for that date was not available it used the data of 31.1.2009. As against the rate of Rs. 26.71 per Kg the TPO took the average of Rs. 21.74 per Kg based on the data of 23.1.2008. The DRP following its order for the earlier transaction upheld the order of the TPO. 7.1. Before us, the AR contended that the assessee had used CUP dated 30.1.2009, that the TPO had used 23.1.2009, but the date used by the TPO was further away than the CUP which the assessee had used. The DR supported the order of the DR.

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. 7.2. We find that the assessee had imported MEL on 27.1.2009 @ Rs. 25.87 per Kg, that the CUP rate as on 30.1.2009 was Rs. 26.71 per Kg, that the rate adopted by the assessee fits within the ± 5% of the CUP range. In our opinion the date chosen by the assessee was more appropriate than the date adopted by the TPO. The DRP itself had held that nearest CUP data should be considered.In the case under consideration the assessee had adopted the data of 30th January which was the nearest date for the transaction in question. Therefore, in our opinion adjustment made by the TPO was not proper. 8. Now we would take transaction No. 6. The assessee had purchased 4 lakh Kgs of Toluene @Rs.26.38 per Kg. Since the comparable data for 12.2.2009 was not available the assessee used the data of 16.2.2009 (Rs.26.83 per Kg). The TPO chose to use data for 31.1.2009 (Rs.24.10 per Kg.). The DRP upheld the order of the TPO referring to the earlier transactions. 8.1 Before us, the AR made same submissions made for the earlier year and stated that it had imported the goods at a lower rate, that the transaction had to be considered at ALP. We find that the date chosen by the assessee is near to the date of transaction, that the TPO had not chosen the transaction of 18.2.2009 where 4 lakhs Kgs of Toulene was imported @ Rs.29.31 per Kg (Pg-106 of the PB) .Considering the above facts we are of the opinion that adjustment made by the TPO cannot be sustained. In short, all the additions made by the TPO (for six transactions) are directed to be deleted. Ground No.2 is decided in favour of the assessee.” Analysis:

Facts of this case clearly indicate that the assessee had used comparable data on the date of import of goods and where such data on the date of import was not available, the assessee used data of nearest date. Further if there were multiple data on the date (or nearest date), then the assessee had used average of all those rates. As against this, the TPO / DRP used either the data of remote-dates or cherry-picked lowest rates on the date / nearest date. It is in these facts that the Hon’ble ITAT held that the cherry-picking of lowest rate was not logical, the assessee’s approach to adopt average rate on the date / nearest date of transaction was approved. This decision does not support the Ld.

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. AR’s argument that annual average of all transactions done in a year should be taken. In fact, this decision goes against the assessee and supports the revenue’s stand that the data of same date or nearest date must be taken for comparison. If there are multiple data on the same date or nearest date, then only average of those data has to be taken.

Gulbrandsen Chemicals (P) Ltd. Vs. DCIT (2017) 79 taxmann.com 105, ITAT Ahmedabad:

“4. The ascertainment of arm's length price of the assessee's transactions with its AEs came up for scrutiny before the Transfer Pricing Officer. During these proceedings, the TPO noted that the assessee has sold 60,10,855 kg of ANH to its AE on an average price of Rs.38.07. He noted that there was a huge difference in the prices at which the assessee has sold ANH to its AE vis-à-vis the prices at which he has sold the same product to its non AEs. Taking the price at which the assessee has sold the product to its non AE as a valid internal CUP (comparable uncontrolled price), the TPO computed the arm's length price of sale to the AE. The assessee adopted the highest price at which the sale was made to non AE as the internal CUP. The difference was thus worked out, as per tables given in the transfer pricing order, at Rs.1,19,09,726. The assessee was, in this background, required to show cause as to why this difference between the arm's length price on the basis of internal CUP and the transaction value not be added to the income of the assessee.

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. assessee. An ALP adjustment of Rs.1,12,40,558 was accordingly recommended.

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year". In this view of the matter, there is no good reason to take a different stand now and claim that aggregation of transactions cannot be permitted in this assessment year, so far as benchmarking of ANH sales to AE is concerned. The plea of the assessee is indeed well taken and it merits our acceptance. We have also noted that there is no dispute that once this principle is adopted, the benchmarking done of the assessee is to be accepted and the transactions are to be held as arm's length transactions. The assessee, therefore, deserves to succeed on this issue. Having said that, we must clarify that we refrain from making any observations on merits regarding application of aggregation principle in general and that our conclusions are confined to peculiar facts, including the accepted past history, of this case.”

Analysis:

Facts of this case clearly indicate that there was a long-term ongoing arrangement between the assessee and his AE. The Hon’ble Court accepted that the aggregation-rule is acceptable in “certain situations”. Moreover in this decision, the Hon’ble Court has gone by the past-history of the assessments of assessee. Further, the last sentence of the decision categorically states “Having said that, we must clarify that we refrain from making any observations on merits regarding application of aggregation principle in general and that our conclusions are confined to peculiar facts, including the accepted past history, of this case.”

In the present appeal before us, the assessee has not produced agreement with its AE to the Ld. TPO. This fact is clearly admitted by the assessee himself and noted by Ld. CIT(A) on Page No. 35 of the CIT(A)’s order. Further if we look into the working of ALP made by Ld. TPO in Annexure-A, B and C to his Order u/s 92CA(3), it is clearly visible that the assessee has sold the same product to its AEs at different rates on different dates. The very Page 28 of 51

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. fact of selling the same product to AEs on different rates prove that the assessee does not have any long-term rate-arrangement with the AEs. Therefore, this decision is not applicable to present appeal before us.

Reliable Cashew Co. (P) Ltd. Vs. ACIT, Chennai ITA No. 2237/Mds/2013, order dated 04.09.2015:

“8. Without prejudice to the above, the ld. Authorised Representative for assessee submitted that the Transfer Pricing Officer compared the price of the assessee's product supplied at average rate published in cashew bulletin of the cashew export council. According to him, it is wrong to compare the monthly average with the individual transaction. According to him, monthly average price to be compared with average monthly price charged by the assessee in respect of product supplied by the assessee. We find merit in the argument of the assessee's counsel. The transfer pricing officer is not justified in comparing with the average price published by the cashew bulletin of cashew export council with that of price mentioned in individual transaction for the products. Accordingly, we direct the TPO to compare the average monthly price to the product published in cashew bulletin with the average price charged by the assessee for its product and decide accordingly.”

Analysis:

In this case, the TPO compared “monthly average price” reported in the independent bulletin with the prices of individual transactions undertaken by the assessee. Therefore, the assessee argued that “monthly average price” of independent bulletin must be compared with “monthly average price” of transactions done by the assessee and not with prices of individual transactions. The ITAT accepted assessee’s stand. This decision is not applicable to present appeal before us.

ACIT, Mumbai Vs. Essar Steel Ltd. (2014) 50 taxmann.com 183, ITAT Mumbai:

This decision has already been critically analysed by Hon’ble ITAT, Delhi in JSL Limited Vs. ACIT, New Delhi ITA No. 4249/Del/2013 as under:

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. “42….…The learned AR vehemently relied upon the decision of the coordinate bench in case of ACIT versus Essar Steel Limited in ITA number 3727/ MUM/ 2011 where the assessee has compared the average price of eight transactions of export of goods made to associated enterprise applying CUP method was upheld. We have carefully considered the argument of the learned authorised representative and the decision of the coordinate bench in CIT versus Essar Steels Ltd (Supra). The facts in that particular cases were that the appellant had considered all the transaction with its associated enterprise in totality by aggregating the same. The Transfer Pricing Officer picked up only two transactions where the price charged was less than the average market price and also beyond 5% permissible band width to make the addition ignoring other transactions where the average price charged was more. On careful consideration of the above decision, it is apparent that if the transactions are the interlinked transactions then the ALP should be considered of export of goods on aggregate basis. It can be established in many ways that transactions are interlinked, one of the illustrative way is supply of goods billed separately but the purchase order is common and the rates are also predetermined with adjustments on account of material prices. Before us, no such data is available or any other information by which we can say that the transactions of export to associated enterprise are interlinked transactions. It is also clear that merely because they are the export of the same goods over a period to the Associated Enterprises, they do not become interlinked. There has to be a binding element behind all the transactions to make them one and connected. Such data was also not available before the learned Transfer Pricing Officer or learned Dispute Resolution Panel. If this fact is established by the assessee then the issue is squarely covered in favour of the assessee on this point by the decision of the coordinate bench. Therefore, respectfully following the decision of the coordinate bench, we also direct the AO to compute the ALP considering the transactions of export to associated enterprise on aggregate basis after assessee establishes before him that all these export transactions of the associated enterprise are interlinked. To this extent, this issue is sent back to the file of the learned AO/TPO with a direction to the assessee to substantiate the argument that the transactions of export of goods to associated enterprise are interlinked.”

The analysis made by Hon’ble ITAT Delhi Bench is equally applicable to the present appeal before us because in the present appeal too, the assessee has not adduced any evidence to prove that the impugned transactions were interlinked or had a binding element. It is for the assessee to establish such a fact

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. but the assessee has not done. Even if the assessee has not done till now, an opportunity can now be given to do this.

ACIT Vs. Audco India Limited (2011) 13 taxmann.com 121, ITAT Mumbai, order dated 16.11.2010:

“7. Ground No.4 is against the deletion of addition of Rs.7,28,865/- made by the Assessing Officer u/s.92CA(3).

"4.4 I have perused the facts of the case, Transfer Pricing Officer's (TPO) order and assessment order thereof on this point. It is observed that the appellant had supplied the gate, globe and check valves to its AE amounting to Rs.2,13,64,571/-. The primary business of the AE is sourcing of valves from the appellant company and marketing them in American markets. The appellant had the confidence to adopt CUP methodology which is the traditional method to justify its Arm's Length. It filed full details, in this regard, before the TPO as well as the undersigned. While passing the order, the TPO ignored this data by dismissing it as general in nature.

4.8 The aggregate sale to an AE at USA is only Rs.2,13,64,571/-, which is hardly 1% of the total sales of the company. It does not appear probable that for such a small turnover, which would hardly have any material affect on the income, the appellant would have tried to shift its profits."

4.9 More importantly, the aggregate difference of Rs.6,94,310/- between sale of L&T LLC (Rs.2,13,64,571/-) Arm's Length Price (Rs.2,06,70,261/-) is only 3.35% and is well within the 5% of the tolerance limit permitted by the law. It is observed from the details filed by the appellant before the TPO as well as at the appellate stage that the prices realized from unrelated parties for an item is not uniform but higher or lower than the prices charged

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. to related party (L&T LLC). That is to say that there are transactions for which data has been furnished, which shows that the appellant has charged higher rates from its AE as compared to third party uncontrolled transactions. The TPO while making the adjustments took only those figures in which valves were sold at the lower prices to the USA based AE while ignoring those figures and data where the same were sold at the higher price. Thus while making the adjustments, he disregarded the fact that the appellant has also sold valves to its AE at prices higher as compared to the average charged to the third unrelated parties. It would have been fair and reasonable on the part of the TPO to consider the aggregate of the sales made to the AE and then compared it with third parties as against the individual items considered by him. He has been selective in his approach and made the order arbitrary. Had the aggregate of sales made to the AE and that to the third parties been taken into account then the appellant's case squarely falls within 5% tolerance threshold. To my mind, it is appropriate to consider the aggregate sales to AE as against individual items selected arbitrarily. It is not fair for a quasi-judicial authority to pick up those data, which are convenient and suitable to it and ignore the corresponding data which goes against it. Ultimately an order to stand has to have a mark of fairness, resonableness and judiciousness. Taking all the above facts and circumstances, I am of the view that there is no case for adjustments of Rs.7,28,865/- in respect of the export price of finished valves of L&T LLC by selectively utilizing the data where the 5% limit is lower in respect of AE and ignoring those figures/data where sale of valves to the AE are at prices higher as compared to the average prices charged to third unrelated parties. The addition so made on totality of facts is, therefore, deleted." In the absence of any contrary material placed on record by the revenue against the finding of the ld. CIT(A) and keeping in view that the difference between the sale of L&T LLC and Arm's Length Price is only 3.35% which is well within the limit of 5% , we are inclined to A.Y:02-03 uphold the finding of the ld. CIT(A) in deleting the addition made by the Assessing Officer. The ground taken by the revenue is, therefore, rejected.” Analysis:

In this case, the influential factor was that the sales to AE constituted just 1% of the total sales of the assessee which could hardly have any material effect on income. The Hon’ble Co- ordinate Bench has just confirmed the findings concluded by Ld. CIT(A). We can also observe that the decision was given way-

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. back in 2010 and the transfer pricing concepts were relatively new at that time. In our respectful submission to the Hon’ble Co- ordinate Bench, this decision does not discuss on the merits of the applicability or non-applicability of aggregation-rule. Therefore, with due respect, we are not inclined to follow this decision.

(f) Conclusion:

Having made an extensive analysis of the submission of both sides and the relevant material on aggregation-theory, now we proceed to conclude.

Firstly, we observe that section 92(1) of the Income-tax Act, 1961 mandates in stricter terms the computation of ALP of each international-transaction and does not allow aggregation as such. However, Rule 10A(d) of Income-tax Rules, 1962 defines "transaction" as including “a number of closely linked transactions” and therefore aggregation of closely-linked transactions is possible. That means, unless the characteristic of “closely-linked” is satisfied, the aggregation is not possible.

Secondly, we observe that OECD guidelines clearly prescribe that “ideally the arm's length principle should be applied on a transaction by transaction basis.” Although the OECD guidelines permit aggregation- rule but that is only when separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. OECD guidelines provide examples of those situations too. Thus, the OECD guidelines are in alignment with the Section 92(1) read with Rule 10A(d).

Thirdly, various legal precedents discussed above have permitted aggregation-theory in restricted situations and not as a matter of convenience.

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. Therefore, the obvious conclusion is that the aggregation is not a rule of blind application, it is to be applied in certain situations and there has to be a scientific or rational basis for adoption.

In the present case before us, the assessee has not explained any scientific or convincing reason for aggregation and annual averaging of the prices except that the arithmetical calculation favours the assessee i.e. if the annual-average-price charged from AEs is compared with the annual-average-price charged from Non-AEs, the variation falls within 5% acceptable limit. In fact the assessee has not filed its agreement with AE to Ld. TPO and admitted this mistake in its submission to Ld. CIT(A) which are recorded on Page No. 35 of the CIT(A)’s order:

“1.2 The Appellant has entered into an agreement with its Associated Enterprise (“AE”), JRS Pharma GmbH & Co. KG (“JRS”) appointing JRS as the exclusive distributor of the products as defined in the said agreement (please refer to Page No. 233 of the Paper Book). However, it was erroneously mentioned before the Learned Transfer Pricing Officer (“TPO”) by the Appellant’s then Authorised Representative, that there is no agreement in place between the Appellant and JRS. The Appellant realised this mistake after the transfer pricing order was issued by the Learned TPO and based on this fact TPO concluded the TP assessment. In view of same, during assessment proceedings vide submission dated 16 March 2015, the said agreement was submitted before the Assessing Officer (“AO”). The AO was further requested that the Appellant be given an opportunity to represent its case before the Learned TPO for reconsideration in the light of the said agreement and the Appellant would strive to provide all possible support to complete the assessment proceedings before due date of completion of assessment (please refer to Page No. 209 of the Paper Book for the relevant submission). However, the learned AO issued the order without again referring the matter to the learned TPO.” If we allow the demand of assessee without even verifying the logic behind aggregation / averaging, it would become a wrong precedent, much fatal not only to this assessee but also to any other taxpayer or even to the revenue. If an absolute conclusion is made that annual- averaging is to be done for determining ALP in all cases or any case, it

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. may so happen that in another year the arithmetic is against assessee i.e. the annual-average-pricing of AEs is lower than the annual- average-pricing of Non-AEs. In that case, the revenue would be claiming that all transactions done during the year are not at arm’s length price and therefore annual-average-pricing of Non-AEs should be taken as ALP and based thereon addition to taxable income is warranted. This way the assessee shall be put in a serious problem. Same thing can happen with other taxpayers too. As far as revenue is concerned, the annual-averaging can lead to revenue-leakage since it may encourage a tendency amongst the assessees to undertake a few transactions with AEs at magical higher prices so as to get favourable arithmetic and thereby avoid the very law of transfer pricing. Thus, the blind aggregation / averaging can be fatal to all parties, the present assessee, any other taxpayer and even the revenue. Hence we should not entertain or encourage a belief that aggregation or averaging is allowed in all cases or in any case. In fact, it is the assessee who must prove or at least present the facts and data before the TPO / AO by which it can be proved that there is a situation of closely-linked transactions and aggregation is necessary. Unless this exercise is done, its not possible to accept aggregation or averaging. We find that in the present appeal, no such attempt has been done at lower level. Hence the assessee must be given an opportunity to prove justification for application of aggregation-theory.

12.2 TNMM: We have analysed the legal precedents quoted by Ld. AR, mentioned earlier, in support of the proposition that the ALP can be supported by any method at any stage of proceeding. We are in agreement with the Ld. AR on this aspect and we accept this proposition. But we observe following peculiar points with regard to TNMM accepted by Ld. CIT(A) in present appeal:

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. (a) Firstly, we observe that there is no clear-cut conclusion by the assessee or Ld. CIT(A) that assessee has said go-bye to the CUP method and selected TNMM. As noted in foregoing discussion, the assessee has claimed before the Ld. CIT(A) to corroborate the arm’s length of transactions by TNMM. Even the Ld. CIT(A) has mentioned in his order that the ALP determined by CUP method is corroborated by TNMM. Ld. CIT(A) has also mentioned that in any case i.e. whether CUP method or TNMM, upward adjustment is not required. Thus, the assessee is putting equal force on CUP method as well as TNMM to justify the arm’s length of transactions. This is a flip-flop which is against the mandate of section 92C(1) itself.

Section 92C(1) reads as under: “92C.(1) The arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :— (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed15 by the Board.

It can be seen that the words “shall be determined by any of the following methods, being the most appropriate method” clearly demonstrate that the ALP shall be determined by one of the various methods enumerated in (a) to (f). Further, such one method must be the most appropriate method. Thus, this section clearly prohibits an assessee or revenue from adopting two methods.

Therefore, the assessee has to make his stand crystal clear about the selection of method, be it CUP method or TNMM. This stand is absent or ambiguous in the order of Ld. CIT(A).

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. (b) Secondly, the Ld. CIT(A) has considered that (i) as per internal TNMM, the assessee earned NCP of 22.47% from AEs which is more than 11.31% NCP earned from Non-AE, and (ii) as per external TNMM, the assessee earned NCP% of 22.47% from AEs which is more than 1.28% to 12.64% NCP earned by independent companies. These data of NCP, with a very lengthy analysis placed at Page No. 128 to 236 of the Paper-Book, were supplied by the assessee to Ld. CIT(A) as an additional evidence under Rule 46A. In the remand-report, the TPO did not verify these data because he raised a serious objection against the admissibility of additional evidence itself. However, the Ld. CIT(A) admitted additional evidence. But these data and analysis have not at all been verified by Ld. TPO. Further the order passed by Ld. CIT(A) nowhere transpires that these data have been verified by Ld. CIT(A). Thus, these data of TNMM, which are heavily relied upon by the assessee in his support and which are very crucial, remain unverified by TPO as well as Ld. CIT(A). One more aspect to be noted is that in the transaction-by-transaction analysis done for CUP method, the prices charged in many transactions with the AEs are lower than the prices charged in transactions with Non-AE and the assessee has demand several adjustments, roughly aggregating above 10%, to justify the lower prices. On the other hand, in the internal TNMM, the assessee is claiming to have earned 22.47% NCP from AEs against 11.31% NCP from Non-AEs which shows that the NCP% earned from AEs is almost double of NCP% earned from Non-AEs. Although it is true that the assessee has done certain transactions at higher prices with AEs, yet if the assessee is claiming more than 10% adjustment in CUP method and still claiming to have earned almost double NCP% from AEs, there is a gross distance and the figures certainly need a proper verification.

The above discussions can be summed up as follows:

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. (i) The assessee has claimed that its then authorised representative had erroneously mentioned before the TPO that there was no agreement with AE. Therefore the assessee could not submit agreement with AE to Ld. TPO. Subsequently, the assessee realised this mistake and requested the Ld. AO to enable it to submit agreement to Ld. TPO. [Refer Para No. 12.1(f)].

(ii) The assessee has not made his choice clear-cut about the Most Appropriate Method. It is not clear that the assessee has said go-bye to CUP method and selected TNMM as Most Appropriate Method. Hence the assessee must make it stand crystal clear about Most Appropriate Method. [Refer Para No. 12.2(a)].

(iii) If the assessee selects CUP method:

(a) The assessee has not proved legal justification to apply aggregation-theory. Hence an opportunity must be given to the assessee to prove the same. [Refer Para No. 12.1(f)].

(b) The assessee has claimed that no opportunity was given to it to prove the adjustments to be made in the price-variations. Therefore, it would be fair and appropriate to give an opportunity to the assesse to explain the adjustments. [Refer Para No. 9.2].

(iv) If the assessee selects TNMM:

The TNMM data supplied by assessee has not been verified by lower authorities. Therefore, the data must be verified to arrive at a proper conclusion [Refer Para No. 12.2(b)].

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. to a proper conclusion. Accordingly, Ground No. 1 to 3 of the Revenue are allowed for statistical purposes.

GROUND No. 4:

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. documentary evidences as were filed to Ld. AO. Further, the assessee also made a detailed submission supported by judicial precedents on legal provisions of section 5, 9(1), 195 and 40(a)(i). After due consideration at length, the Ld. CIT(A) observed that the foreign agents have done their activities on foreign soil and none of their activities was carried out in India. Ld. CIT(A) further observed that the source of income qua the agents is not the sale made from India but their own activities undertaken on foreign soil. Ld. CIT(A), therefore, observed that the commission income was not earned in India and hence not taxable in India on any basis under section 5 or 9(1). Ld. CIT(A) further also observed that neither section 195 nor section 40(a)(i) were attracted in the circumstance. Ld. CIT(A) also observed that the assessee paid commission to 6 agents, out of which 5 were old agents to whom commission was paid in earlier years as well and only 1 agent was new. Ld. CIT(A) perused various documents filed by the assessee and recorded a finding about the genuineness of services and payment of commission. With these, the Ld. CIT(A) deleted the disallowance.

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. placed following decisions of Hon’ble Jurisdictional High Court before us: (a) PCIT Vs. Nova Technoplast (P) Ltd. (2018) 94 taxmann.com 322 b) ABM Steels (P) Ltd. Vs. ACIT (2016) 75 taxmann.com 182 (c) Freshtop Fruits Ltd. Vs. DCIT (2016) 73 taxmann.com 162 Ld. AR also carried our attention to the order of ITAT, Ahmedabad in assessee’s own case for assessment-year 2013-14 in ITA No. 2503/Ahd/2016 order dated 24.05.2018 placed at Page No. 326 of the Paper-Book where the ITAT has dismissed the departmental appeal and upheld the deletion of similar disallowance made by Ld. CIT(A) by observing as under:

“The principles laid down in the above cited judgements are squarely applicable to the instant facts of the case. Thus, it can be safely concluded that the commission income in the hands of foreign agents is not chargeable to tax in India in the given facts & circumstances. Once an income is not chargeable to tax in India then the question of deducting TDS under the provision of section 195 of the Act does not arise. Accordingly, we do not find any reason to interfere in the order of Ld. CIT(A). Hence the ground of appeal raised by the revenue is hereby dismissed.” 20. We have considered the rival submissions of both sides. We observe that the Hon’ble Jurisdictional High Court has consistently held that the commission payment to foreign agents who render services outside India, is not chargeable to tax in India and therefore TDS u/s 195 as well as disallowance u/s 40(a) are not attracted. We find that the revenue, though insisting for disallowance, has not been able to bring any evidence to demonstrate that the impugned commission-payment was taxable in India in the hands of payees. We further observe that the issue is well covered by the decision of ITAT, Ahmedabad in assessee’s own case for assessment- year 2013-14 and the applicability of the said decision is not controverted by the revenue on facts or in law. Therefore, following the same view, we hold that the commission-payment was not chargeable to tax in India and neither TDS u/s 195 nor the disallowance u/s 40(a)(i) is attracted. Regarding genuineness of commission-payment, we observe that the assessee has given sufficient documentary evidences to prove the services of

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. agents and payment of commission. It is also observed that the assessee has paid commission to majority of the agents in preceding years as well and the same stood allowed as deduction. We also find that the Ld. CIT(A) has given a reasoned order on this point and deleted the disallowance. Therefore, we uphold the deletion made by Ld. CIT(A). With this, Ground No. 4 of the Revenue is dismissed.

GROUND No. 5 and 6:

(i) Deduction has been wrongly disallowed in respect of Misc. Income of Rs. 2,73,58,615/- and Interest Income of Rs. 1,28,777/-.

(ii) Commission related to Unit-II amounting to Rs. 1,82,240/- has been disallowed in computing taxable income but the increased profit of Page 42 of 51

ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. Unit-II consequent upon such disallowance had not been considered while computing deduction u/s 10B.

(iii) Correct re-allocation of expenses to Unit-I and Unit-II supplied by the assessee had been wrongly rejected. Further, section 145(2) has been wrongly applied to reject the books of account.

(iv) Revised COI filed by assessee has been wrongly rejected on the premise that the assessee has not filed revised Return of Income. This has resulted into computational error in the amount of deduction u/s 10B and taxable income.

(i) Regarding Misc. Income of Rs. 2,73,58,615/-, Ld. AR submitted that the assessee is exporting goods to JRS Pharma GmbH & Co. KG, Germany (“JRS”) at an agreed-price and thereafter JRS is re-selling the same goods in Germany to different customers. Ld. AR submitted that per terms and conditions agreed upon, JRS shall remit 50% of the difference of agreed price and ultimate sale-price charged by JRS from its own customers, as profit-share, to the assessee. Ld. AR submitted that during the year under consideration, the assessee received a sum of Rs. 2,73,58,615/- on account of such profit-share through banking-channel which is evidenced by the copies of the Foreign Inward Remittance Certificates (FIRCs) issued by State Bank of India and submitted to Ld. AO during assessment-proceeding. Ld. AR submitted that the receipt of Rs. 2,73,58,615/- is nothing but an additional consideration related to the sale of goods and therefore it is essentially and certainly a part of the business-receipt of assessee. Ld. AR

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. also submitted that the actual character of the receipt of Rs. 2,73,58,615/- is additional consideration related to sales made to JRS, although the nomenclature “Misc. income” has been used in books of account. Relying upon following decisions, Ld. AR contested that the description in the books of account is not decisive, the true nature of receipt has to be seen:

(a) Kedarnath Jute Mfg. Co. Ltd. (1971) 82 ITR 363 (SC) (b) CIT Vs. Gopal Purohit 2010-TIOL-129-HC-MUM-IT

Regarding interest income of Rs. 1,28,777/-, Ld. AR submitted that the assessee has earned interest income of Rs. 1,21,486/- on security deposit with Uttar Gujrat Vij Company Ltd. (UGVCL) and Rs. 7,291/- from bank. Ld. AR submitted that these receipts are in the course of business carried on by the assessee therefore they too form part of profit of the Unit-II and eligible for deduction.

Ld. AR also drew our attention to section 10B(4) of the act. Ld. AR submitted that this section clearly prescribes that for the purpose of section 10B, the profits derived from export of articles or things or computer software shall be the amount which bears to the “profits of the business of undertaking”, the same proportion as the “export turnover” in respect of such articles or things or computer software bears to the “total turnover” of the business carried on by the undertaking. According to Ld. AR, the expression “profit of the business of undertaking” occurring in section 10B shall include not only sales-turnover, but also other incomes earned by the assessee in the course of business. In support of this proposition, the Ld. AR relied upon following decisions:

(a) CIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. ITA No. 955/Ahd/2012, ITAT Ahmedabad (b) CIT Vs. Motorola India Electronics (P) Ltd. (2014) 46 taxmann. Com 167 (Karnataka High Court) (c) CIT Vs. Rajesh Exports Ltd. ITA No. 484 of 2018 dated 20.11.2018 (Karnataka HC)

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. (d) Camiceria Apparels India (P) Ltd. Vs. ACIT (2019) 103 taxmann.com 238 (Madras HC) (e) CIT Vs. Hewlett Packard Global Software Ltd. (2017) 87 taxmann.com 182 (Karnataka HC).

(ii) Regarding impact of disallowance of commission related to Unit-II (Rs. 1,82,240/-) on deduction u/s 10B, Ld. AR submitted that if the Hon’ble Bench upholds the deletion of disallowance made by Ld. CIT(A), this issue would not survive at all.

(iii) Regarding re-allocation of expenses, the Ld. AR submitted that the assessee has made re-allocation of expenses to Unit-I and Unit-II on a scientific basis i.e. (a) the expenses specifically debited in Unit-I and Unit-II are directly related to them and no change was required, (ii) common expenses have been allocated between Unit-I and Unit-II in the ratio of quantities sold by them. Ld. AR further argued that the mistake in allocation of expenses at the time of filing return, does not mean that the books of account were incomplete or incorrect. Ld. AR submitted that the Ld. AO has not pointed out any specific defect in the books of account. Hence the rejection of books of account by invoking section 145(2) is not tenable. Notwithstanding this, Ld. AR made an additional submission that the Ld. CIT(A) has not approved the rejection of books by Ld. AO but in the Grounds of Appeal, the appellant-revenue has not raised any ground challenging the action of Ld. CIT(A).

(iv) Regarding Revised COI, Ld. AR submitted that it is an established proposition that the deduction u/s 10B has to be computed on the basis of correct profit of the eligible business. Ld. AR submitted that at the time of filing return of income, certain mistakes occurred in computation of deduction u/s 10B which the assessee came to discover during the course of assessment-proceeding. Therefore, in order to provide correct working of deduction u/s 10B, the assessee filed a Revised COI to Ld. AO. But the Ld. AO, relying upon Goetze India Ltd. Vs. CIT (2006) 284 ITR 323 (SC), rejected such Revised COI on the ground that the assessee had not filed

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. revised Return of Income. Ld. AR submitted that the assessee had already claimed deduction u/s 10B in the Return of Income and the Revised COI was merely to supply rectified figures of what has already been claimed. Ld. AR submitted that it was not a case of filing a new claim before Ld. AO for the first time and hence the decision of Goetze India Ltd. (supra) is not applicable. Ld. AR submitted that owing to the rejection of Revised COI, there occurred computational error in the amount of deduction u/s 10B and therefore the assessee claimed before Ld. CIT(A) to give a direction to Ld. AO for consideration of Revised COI while working out deduction u/s 10B. Ld. AR submitted that even otherwise it is by now well-decided in innumerable judgements that the Goetze India (supra) does not prohibit admission of newer claims by the appellate authorities. Finally, the Ld. AR submitted that even otherwise the Ld. AO is duty bound to compute correct amount of deduction u/s 10B after setting right the mistakes. Hence in a way by filing Revised COI, the assessee has merely helped the Ld. AO to do what is required in law. Therefore, rejection of the Revised COI by Ld. AO is not valid.

(i) Regarding Misc. Income of Rs. 2,73,58,615/-, the controversy is very simple and straight and it seems that the confusion is mainly due to the accounting head “Misc. Income / Other Income” used by assessee. The undisputed facts are such that the assessee is exporting goods to JRS Pharma GmbH & Co. KG, Germany (“JRS”) at an “agreed price” and thereafter JRS is re-selling the same goods in Germany to different customers. The assessee is receiving consideration from JRS in two parts, viz. (i) Initially “agreed price” is received and this is declared as “sale-price” in the books of account, (ii) Thereafter, 50% of the difference of “agreed price” and ultimate sale-price charged by JRS from its own customers, amounting to Rs. 2,73,58,615/- during the year, is also received but such

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. receipt is credited as “Misc. income / other income” in the books of account. The assessee has proved by clinching evidences that it has received (ii) through banking channel. It is the claim of the assessee that (ii) receipt is also a part of sale-price and in any case it is definitely a business-receipt. As against this, the revenue’s impression is that (i) is sale-price but (ii) is misc. income / other income. This mis-understanding, as we feel, is created due to the accounting head “misc. income” used by the assessee. We observe that (ii) is in the form of additional consideration related to the sales-made by the assessee to JRS. We find sufficient force in the submission of Ld. AR that the nomenclature used by the assessee as “Misc. Income / Other Income” is not decisive, we have to look into the true nature of receipt. Thus, we are persuaded to hold that the receipt of Rs. 2,73,58,615/- is a business- receipt.

Regarding interest income of Rs. 1,28,777/-, we observe that the assessee has received interest of 1,21,486/- from Uttar Gujrat Vij Company Ltd. (UGVCL) on security deposit made for the purpose of business and Rs. 7,291/- as interest from bank. We observe that the security deposit is inextricably linked with the business carried on by the assessee and hence the interest of Rs. 1,21,486/- earned thereon is a part of business-profit. Similarly, the interest of Rs. 7,291/- earned from bank is also a part of business-profit because the business-funds have been kept deposited in the bank account in the ordinary course of business and the amount of interest is also very nominal. Therefore, the interest of Rs. 7,291/- has a direct nexus with the business.

In PCIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. (2019) 112 taxmann.com 91 (Gujrat), Hon’ble Jurisdictional High Court has held:

“60. Thus, sub-section (4) of Section 10B stipulates that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover to the total turnover. Thus, notwithstanding the fact that sub-section (1) of Section 10B refers the profits and gains as are derived by a 100% EOU, yet the manner of determining such eligible profits has been statutorily defined in sub-section (4) of Section 10B of the Act. As per the formula stated

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Sub-section (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an amount forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits.” 62. In view of the aforesaid discussion, we hold that the dividend income, profit on sale of fixed assets, profit on sale of investments, excess provision returned back, duty drawback and interest income could be said to have direct nexus with the income of the business of the undertaking. Although it may not partake the character of profit and gain from the sale of article, yet it could be termed as an income derived from the consideration realized by the export-articles. In view of the definition of “income from profits and gains” incorporated in sub-section (4), the Tribunal committed no error in granting the benefit of exemption, as contemplated under Section 10B of the Act.” In CIT Vs. Motorola India Electronics (P) Ltd. (2014) 16 taxmann. Com 167 (Karnataka), interest income earned from inter-corporate loans and deposits in lying in EEFC account was held as eligible for deduction u/s 10B. Similarly, the Full Bench of Karnataka High Court in CIT Vs. Hewelett Packard Global Soft Ltd. (2017) 87 taxmann.com 182 has held that interest on bank deposits is eligible for 100% exemption u/s 10A and 10B.

In the light of these decisions, we are of the considered view that the Misc. income of Rs. 2,73,58,615/- and interest income of Rs. 1,28,777/- are eligible for deduction u/s 10B.

(ii) Regarding impact of disallowance of commission related to Unit-II (Rs. 1,82,240/-) on deduction u/s 10B, we find that this issue does not survive in view of the fact that we have already upheld the deletion of disallowance made by Ld. CIT(A) in earlier paragraph. Therefore, this issue becomes infructuous.

(iii) Regarding re-allocation of expenses, we observe that the approach adopted by the assessee is correct in as much as the expenses specifically

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. debited in Unit-I and Unit-II are treated as directly related to them and the common expenses have been allocated on the basis of quantities sold by respective units. We also find sufficient weightage in the submission of Ld. AR that the mistake in allocation of expenses does not mean that the books of account were incomplete or incorrect. We observe that the Ld. AO has not pointed out any specific defect in the books of accounts maintained by the assessee. Hence the rejection of books of account is not valid.

(iv) Regarding Revised COI, we observe that at the time of filing return of income, certain mistakes had occurred in computation of deduction u/s 10B and therefore the assessee submitted a correct working of deduction u/s 10B. We observe that the assessee had claimed deduction u/s 10B in the Return of Income itself and during assessment-proceeding, the assessee submitted only a revised calculation of deduction. We observe that in Goetze India Ltd. Vs. CIT (2006) 284 ITR 323 (SC), the Hon’ble Supreme Court has not approved filing of new claim before AO and not filing of revised calculation of a claim which is already existing in the Return of Income. We also find weightage in the argument of Ld. AR that it is the legal duty of AO to verify, compute and allow correct amount of deduction and the assessee has merely helped the AO in this process.

GROUND No. 7, 8 and 9:

ITA No. 2683/Ahd/2016 FOR ASSESSMENT-YEAR 2012-13:

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. 29. Now we take up ITA No. 2683/Ahd/2016 for assessment-year 2012- 13. The revenue has raised following Grounds:

“1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 6,03,40,435/- made by the AO on account of upward adjustment proposed by the TPO by determining arm’s length price without properly appreciating the facts of the case and the material brought on record. 2. The Ld. CIT(A) has erred in law and on facts by rejecting CUP as MAM without properly appreciating the facts of the case and the material brought on record. 3. The Ld. CIT(A) has erred in law and on facts by accepting TNMM as MAM without properly appreciating the facts of the case and the material brought on record. 4. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 35,92,131/- on account of commission paid to overseas agents without deducting the tax at source without properly appreciating the facts of the case and the material brought on record. 5. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 6. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 7. The appellant craves leave to add, alter and / or amend all or any of the ground before the final hearing of the appeal.”

GROUND No. 1, 2 and 3:

GROUND No. 4:

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ITA No.2682 & 2683/Ahd/2016 A.Y. 2011-12 and 2012-13 Gujarat Microwax Pvt. Ltd. paragraphs, we dismiss Revenue’s Ground No. 4 of Assessment-Year 2012- 13.

GROUND No. 5, 6 and 7:

DISPOSITION:

Order pronounced in the open court on 15.06.2022.

Sd/- Sd/- (SUCHITRA KAMBLE) (B.M. BIYANI)

Judicial Member Accountant Member

Ahmedabad, Dated : 15th June, 2022 Patel/ Sr. P.S. Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Sr. Private Secretary Income Tax Appellate Tribunal Ahmedabad Bench, Ahmedabad

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