DCIT, CIRCLE - 11(1), KOLKATA, KOLKATA vs. M/S. J. J. EXPORTERS LTD., KOLKATA

आयकर अपील�य अधीकरण, �यायपीठ – “C” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH: KOLKATA (सम�) �ी ऐ. ट�. वक�, �यायीक सद�य एवं डॉ. अजु�न लाल सैनी, लेखा सद�य) [Before Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]

I.T.A. No. 1371/Kol/2017 Assessment Year: 2008-09

Deputy Commissioner of Income-tax, Vs. M/s. J. J. Exporters Ltd. Circle-11(1), Kolkata. (PAN: AAACJ6722H) Assessee Respondent & C.O. No.71/Kol/2018 In I.T.A. No. 1371/Kol/2017 Assessment Year: 2008-09 M/s. J. J. Exporters Ltd. Vs. Deputy Commissioner of Income-tax, Circle-11(1), Kolkata. Cross Objector Respondent & I.T.A. No. 1372/Kol/2017 Assessment Year: 2009-10 Deputy Commissioner of Income-tax, Vs. M/s. J. J. Exporters Ltd. Circle-11(1), Kolkata. Assessee Respondent & C.O. No.72/Kol/2018 In I.T.A. No. 1372/Kol/2017 Assessment Year: 2009-10 M/s. J. J. Exporters Ltd. Vs. Deputy Commissioner of Income-tax, Circle-11(1), Kolkata. Cross Objector Respondent Date of Hearing 30.08.2018 Date of Pronouncement 19.09.2018 For the Revenue Shri G. Mallikarjuna, CIT, DR For the Assessee/Cross Objector Shri S. Jhajharia, A/R

2 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 ORDER Per Dr. Arjun Lal Saini, AM The captioned two appeals filed by the Revenue, pertaining to Assessment Years 2008-09 and 2009-10 and two Cross-Objections filed by the assessee, pertaining to assessment years 2008-09 and 2009-10, are directed the against the separate orders passed by the Ld. Commissioner of Income Tax (Appeals), Kolkata, which in turn arise out of fair assessment orders passed by the Assessing Officer, which incorporate the findings of order passed by Ld. Transfer Pricing Officer (‘TPO’) under section 92CA(3) of the Income Tax Act,1961 (hereinafter referred to as ‘the Act’).

Grounds relating to Transfer Pricing

3 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 (1).The main grievance of the Revenue in Assessment Years 2008-09 and 2009-10 are that M/s. Zenith Exports Ltd. and M/s. Eastern Silk Ltd. should not be considered as comparable because these companies are not functionally comparable with the assessee company and seven comparable companies selected by the ld TPO should be treated comparable and arm`s length price (ALP) adjustment made to the tune of Rs.12,31,02,132/- should be upheld. Whereas in Cross-Objections filed by the Assessee in Assessment Years 2008-09 and 2009-10, the main grievance of the Assessee is that seven comparable companies selected by the ld. TPO should be rejected, as ld CIT(A) had already rejected six companies out of seven companies selected by ld TPO. [ vide Revenue Ground No.4(i),& 4(ii), for A.Y. 2008-09, and Ground Nos.1 & 2, for A.Y. 2009-10 and [Assessee`s CO No.1 for A. Y. 2008-09 & CO.No.1 for 2009-10]

(2) Revenue`s Ground No.3 and 4 are in respect of allocation of cost between the Associate Enterprise (AE) and Non-AE transactions and the non- consideration of entity level margin by the CIT(A) and consideration of transactional margin only.

(3) Revenue`s Ground No. 6, 7 and 8 are in respect of challenging PLI as OP/Sales and various constituents of the PLI (Profit Level Indicator) which has been disputed by the TPO/AO. Assessee`s CO. ground Nos. 2, 3 and 5 are in respect of export incentive and Forex fluctuation which should be considered as part of OR ( Operating Revenue).

(4) Revenue`s ground No.9 is challenging all the grounds raised by the assessee before CIT(A) right from 2(a) to 2 (h) so raised by the assessee and considered by ld CIT(A). Assessee`s CO. ground Nos. 4, 6 7 and 8 are in respect of export from 10A & 10B Unit, and relate to grievance that transfer pricing provision did not apply to transaction between the 10A and 10B unit, and to reduce the turnover pertaining to sections 10A & 10B in computation of arm’s length price. Note: All the above grounds relating to transfer pricing for A.Y. 2008-09 and for A.Y. 2009-10 are similar and identical therefore, we take Revenue`s appeal in ITA 3

4 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 No.1372/Kol/2017 for A.Y.2009-10, as the lead case to adjudicate all the transfer pricing issues of the Revenue as well as assessee`s cross objections.

Other Grounds raised by Revenue (1). Revenue`s ground No.5 relates to grievance of the Revenue that companies eligible for claiming deduction u/s 10A of the Act, should continue to remain liable to pay Minimum Alternate Tax (MAT) u/s 115JB of the Act.

(2).Ground No.1 raised by the Revenue in Assessment Year 2008-09 (in ITA No.1371/Kol/2017) and Ground No.10 raised by the Revenue in Assessment Year 2009-10 (in ITA No.1372/Kol/2017) relates to disallowance u/s 14A read with Rule 8D(2)(iii).

(3).Ground No.2 raised by the Revenue in Assessment Year 2008-09 in ITA No.1371/Kol/2017 relates to disallowance of depreciation to the tune of Rs.15,392/-.

(4).Ground No.3 raised by the Revenue in Assessment Year 2008-09 in ITA No.1371/Kol/2017 relates to addition of Rs.6,43,440/- on account of unexplained investment deleted by the ld. CIT(A) admitting additional evidence.

5 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 and 2009-10, the main grievance of the Assessee is that seven comparable companies selected by the ld. TPO should be rejected, as ld CIT(A) had already rejected six companies out of seven companies selected by ld TPO. [ vide Revenue Ground No.4(i),& 4(ii), for A.Y. 2008-09, and Ground Nos.1 & 2, for A.Y. 2009-10 and [Assessee`s CO No.1 for A. Y. 2008-09 & CO.No.1 for 2009-10] (2) Revenue`s Ground No.3 and 4 are in respect of allocation of cost between the Associate Enterprise (AE) and Non-AE transactions and the non- consideration of entity level margin by the CIT(A) and consideration of transactional margin only.

(3) Revenue`s Ground No. 6, 7 and 8 are in respect of challenging PLI as OP/Sales and various constituents of the PLI (Profit Level Indicator) which has been disputed by the TPO/AO. Assessee`s CO. ground Nos. 2, 3 and 5 are in respect of export incentive and Forex fluctuation which should be considered as part of OR ( Operating Revenue).

(4) Revenue`s ground No.9 is challenging all the grounds raised by the assessee before CIT(A) right from 2(a) to 2 (h) so raised by the assessee and considered by ld CIT(A). Assessee`s CO. ground Nos. 4, 6 7 and 8 are in respect of export from 10A & 10B Unit, and relate to grievance that transfer pricing provision did not apply to transaction between the 10A and 10B unit, and to reduce the turnover pertaining to sections 10A & 10B in computation of arm’s length price. Note: All the above grounds relating to transfer pricing for A.Y. 2008-09 and for A.Y. 2009-10 are similar and identical therefore, we take Revenue`s appeal in ITA No.1372/Kol/2017 for A.Y.2009-10, as the lead case to adjudicate all the transfer pricing issues of the Revenue as well as assessee`s cross objections.

6 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 following international transactions with its associated enterprises, the details of which are given as under:

Sl No. Name of A.E Nature of services Amounts (Rs.) 1 SPIN International Inc Export of Fabrics 20,04,96,006/- 2 OOO JJ Homes Export of Fabrics 94,68,840/- 3 J.J. Creations SA Export of Fabrics 31,26,409/-

During the course of the proceedings before ld TPO, the assessee filed a Transfer Pricing Study Report and such other documents as were required together with detailed submissions to justify the arm's length price computed in respect of the international transactions. The documents and information submitted during the course of the proceedings were perused by the ld TPO and he noticed that in respect of the international transactions, the conclusion arrived by the assessee, in respect of the arm's length nature of the transaction should not be acceptable. However, the assessee claimed that its profit margin on transaction with its A.E, was at a higher margin that with other companies. For the said claim the assessee submitted a working. The assessee was asked to submit the details regarding the allocation of expenses to A.E, and non-A.E. In response, the assessee submitted a letter reiterating the above facts. The ld TPO noted that in the transfer pricing report, the details of calculation of OPM and search process was very sketchy. The assessee selected two comparable companies, Viz: Zenith Exports Ltd and Eastern Silk Ind Ltd. The annexure-E reflecting the calculation of OPM of the comparables selected speaks of OP/TC, while the assessee has compared this margin with its GP margin. In view of the above, the TP documentation relied upon by the assessee was rejected by the ld TPO.

Search Process

To determine the comparables a search process was undertaken which is summarized as under: 6

7 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 Prowess Database

Database was run using the cut-off October, 2012 Number of companies which reflected data for the period 2009 18780 Industry selected "Textiles' 828 Sub-industry selected were "silk and silk articles" 97 Sales greater than 1 crore were selected 77 Mfg sales/Total Sales >65% was selected 68 Companies with positive net worth were selected 60 Export Sales Total Sales >50o% was selected 15 Companies after qualitative analysis 7 Final Comparables OP/TC Grabal Alok Impex Ltd. [Merged] 37.07% Hanung Toys &Textiles Ltd. 20.45% Jaipuria Silk Mills Pvt. Ltd. 28.23% Kariwala Industries Ltd. 26.65% Sharadha Terry Products Ltd. 37.01% Silktex Ltd. 13.65% Welspum India Ltd. 13.55% Average 25.23%

8 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 margins. However, the incomes and expenses related to the operations of the relevant financial year alone is considered for the computation of operating margins of the comparables. The following incomes, which are non-operating in nature and nothing to do with the operations of the company, are excluded from operating revenues: i. Interest, ii. Dividends, iii. Provisions no longer written back. iv. Gain on sale of assets/investments, v. Income from investments, vi. Gain on revaluation of assets. vii. Foreign Exchange gain, and viii. Other incomes not pertaining to the operations

Similarly, the following expenses which are non-operating and provisions are excluded from operating expenses:

i. Provisions other than provisions for bad debts

ii. Loss on sale of assets/investments

iii. Loss on revaluation of assets

iv. Foreign exchange loss

v. Other expenses not pertaining to the operations.

Similarly, extra ordinary expenses or income which do not recur every year like donations, preliminary expenses written off are not considered as operating expenses as the comparison of the profits should be at same level for the comparable with that of the tax payer. Provisions no longer required written back has been excluded from profit and loss as these are treated as extraordinary income and also does not pertain to the business operations of the taxpayer during the FY.2007-08, as these provisions pertain to the expenses of earlier year or years but written back during this year.

9 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 Table 1

Sales Rs.64,81,75,212 Add: Foreign Exchange Fluctuation Rs. 1,65,66,037 Operating Income Rs.66,47,41,249 Expenses debited to P & L Account Rs.63,09,58,946 Less: Provision for leave pay Rs. 19,24,541 Loss on Sale of investment Rs. 14,74,211 Operating Expense Rs.62,75,60,194 Operating Profit Rs. 3,71,81,055 OP/TC 5.92%

Thus, the ld TPO computed the OP/TC @ 5.92%, on an entity level basis.

Average PLI of Comparable ( see para 6 of this order) 25.23%

Table 2

Operating Cost ( see table 1 above) Rs.62,75,60,194 Arm's Length Margin ( see para 6, average PLI computed by 25.23% on operating cost TPO) Arm's Length Price (ALP) [ (Rs.62,75,60,194 *25.23%) + Rs,78,58,93,631 Rs.62,75,60,194 ]

10 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018

Price Received vis-a-vis the Arm's Length price to adjust upward

The price charged by the tax payer to its Associated Enterprises was compared to the Arm's Length price as under:

Table 3

Arm's Length Price @ 125.23% of Rs.78,58,93,631 operating cost Less: Sales with Non-AE (International) Rs.41,47,03,175 Sales with non-AE (Local) Rs. 3,22,97,070 Total Sales with non-AE Rs.44,97,00,245 Arm's Length Sales with A.E. Rs.33,61,93,386 Price charged in international transaction Rs.21,30,91,254 Shortfall being adjustment u/s 92CA Rs.12,31,02,132

The above shortfall of Rs.12,31,02,132/- was treated as transfer pricing to be adjusted upward u/s 92CA.

11 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 As regards the issues being selection and the rejection of the comparables, the ld CIT(A) noted that the Assessing Officer has failed to bring on record any reason for rejection of the comparables so given by the assessee i.e. M/s. Zenith Exports Ltd. & M/s. Eastern Silk Ind. Ltd. In Zenith Exports Ltd., the assessee has furnished the segmental report of the said comparable and as such the Assessing Officer’s contention in such respect is not acceptable and whereas in respect of Eastern Silk Ind. Ltd., it has merely rejected the same on account of turnover without differentiating the same on account of any dissimilarity in Function, Asset or Risk borne by such comparable. Hence, ld CIT(A) noted that both the comparables rejected by the TPO had been wrongly rejected and same needs to be considered while computing the margin of the comparables.

As regards the selection of the comparables, selected by TPO, the ld CIT(A) noted that the TPO had selected comparables, whose product profile doesn't match with that of the assessee or the chosen comparable doesn't have export activity or has major related party transaction. Therefore, ld CIT(A) rejected the following companies:

i) Grabal Alok Impex Ltd. ... ………..Embroidered Fabric, Laces ii) Welspun India Ltd. ... Terry Towels, Bed linen products iii) Sharadha Terry Products Ltd. ... Terry Towels, Blanket iv) Hanung Toys and Textiles Ltd. ... Stuffed Toys, Curtains, Cushions v) Kariwala industries Ltd. ................. Industrial Garments vi) Jaipuria Silk Mills Pvt. Ltd. .......... Uses local yarn and as such product mix doesn't concur with the assessee Therefore, ld CIT(A) rejected the six comparable companies out of seven comparable companies, selected by the ld TPO. The reasons for rejection has been given in front of each company as stated above. However, the ld CIT(A) accepted the comparable “Silktex Ltd.”, as selected by the TPO, and this way, the ld CIT(A) allowed the assessee`s appeal partly.

12 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 12. Before us, Mr. S. Jhajharia, the ld Counsel for the assessee submitted that the upward transfer pricing adjustment to the tune of Rs. 12,31,02,132/- made by the ld TPO is not based on the controlled international transaction with AE. The Ld Counsel submitted that ld TPO had applied PLI of the comparable on the entire operating cost of the assessee. That is, the PLI computed by the ld TPO at the rate of 5.92% is at entity level, which is not considered at all in transfer pricing scenario. The application of the PLI of the comparable can only be applied to the controlled transaction with AE to the tune of Rs.21,30,91,254/- and not to the entire result of the entity. That is, only the controlled international transaction has to be compared with uncontrolled transaction and adjustment has to be made only to the controlled international transaction and not otherwise.

The ld. Counsel for the assessee also submitted before us in respect of the comparable selected by the assessee and the objections and comments on the Comparable selected by the ld TPO. The assessee selected two comparable companies Viz: 1) Zenith Exports Limited, and 2) Eastern Silk Ind.Limited. The relevant data and information about these companies, as submitted by the ld Counsel are given below, one by one, as follows

1). Zenith Exports Ltd. (Pb 65)

Nature Amount Paper book Pg. No Volume of Paper book Segmental Results Pg. 108 Volume I Turnover 461.60 cr (16.25%) Pg 111 Volume 1

The ld TPO has rejected such comparable without making any discussion in the order and has simply applied search process on data base applying certain filters. The TPO did not examine data which was very much part of the audited accounts of the said company. Since the assessee is also engaged in sales & manufacturing of silk fabric & segmental results available, it is functionally comparable and as the rejection by the TPO/ AO is not at all justified. Hence the company should be considered as comparable of the assessee and the segmental result as disclosed in the audited accounts should be considered for determination of "Mean Price" of the comparable. The Ld. CIT(A) in his wisdom has observed that TPO/ 12

13 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 AO had rejected this comparable due to high turnover and assets this party is not comparable without appreciating the fact that the functions of the company has not been disputed by TPO/AO. Since functions are similar to that to the assessee, this comparable company cannot be rejected. Moreover, in A.Y. 2010-11, this comparable having similar turnover and comparable assets TPO himself has selected this comparable. Moreover, in such respect following Courts have held that turnover cannot be criteria rejecting comparable.

a) Chrys capital Investment Advisors (India) Private Ltd. vs. DCIT(2015) 376 ITR 183(Del)

b) Tata Mcgraw Hill Education (P) Ltd. v. ACIT (2016) 63 taxman. Com 418 (Delhi AT)

c) Microchip Technology (India) Pvt. Ltd. v. ACIT (2018) 81 taxmann.com 389 (Bangalore AT) (page 38 of case law paper book)

As regards segmental results being available the comparable could not have been rejected by the AO/TPO and for which reliance is placed on: -

a) Electronic Arts Games (lndia) Pvt. Ltd. v. ACIT (2017) 86 taxmann.com 335 (Hyderabad AT)

b) DCIT v. Landis + Gyr Ld. (2017) 86 taxmann.com 109 (Kolkata AT) (Page 15 of case law paper book)

Hence it may be held accordingly.

2) Eastern Silk Ind. Ltd. (Pb 118)

Nature Amount Paper book Pg. No Volume of Paper book Turnover 510.03 cr Pg 127 Volume I RPT 82.90 cr (16.25%) Pg 138 Volume I Exports 413.24 cr Pg 140 Volume I

14 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 The TPO/ AO rejected such comparable company, without analyzing the FAR analysis of this comparable and merely applied search process and filters thereon to derive comparable without even considering this company. Since the function of the comparable is similar to that of the assessee, only reasonable accurate adjustment should have been done in case of turnover of such entity varied from that of the assessee and in this connection we have already submitted that Rule 10B(2), (3) & (4) read with Rule 10B(e) duly mentions for such adjustments to eliminate the material differences for determination of arm’s length price. Further, this comparable as selected by assessee had only 16.25% related party transactions (RPT) which is much within less than tolerance range as considered by various courts in the country which have considered such RPT (related party transaction) limit at 15 % to 25% and these judgments are as follows:

a) DCIT vs. Synopsis India (P) Ltd. (2015) 64 taxmann.com 10 (Bang)

b) 24/7 customer.com v. DCIT (2013) 140 ITD 344 (Bang)

c) Cordys R & D India (P) Ltd. (2014) 149 ITD 587 (Hyd)

d) SAP (India) Pvt. Ltd. v. Addl. CIT(2012) 87 taxmann.com 316 (Bangalore AT) Page 42 of case law paper book) [RPT tolerance unit between 15% to 25%]

Hence it may be held accordingly.

The ld Counsel objected the seven comparable selected by the ld TPO. The ld TPO selected the seven comparable companies to compute the PLI and arm`s length price.

The TPO in its order has selected following comparable and respective operating margins is as follows:

l. Grabal Alok Impex Ltd. (merged) 37.07%

15 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 4. Kariwala industries Ltd. 26.65%

Average 25.23%

The aforesaid comparable as selected by TPO without providing any opportunity to object to such selections and such consideration of such comparable without disclosing the function, asset and risk employed by such comparable is bad in law. Without prejudice, the TPO has not even disclosed the product profile of such alleged comparable and has already selected from prowess data base whose integrity is not without doubt and as such selection and employment of such comparable is bad in law.

The ld counsel pointed out that the TPO/ AO did not make any adjustment on account of the turnover, asset, employee and the risk profile to such company and considered such comparable as such without considering these facts. Without prejudice to the above, the ld Counsel submitted that the upward adjustment made to the sale value with the AE to the extent of Rs.12,31,02,132/- suffers infirmity and is also highly excessive. The overall margin of the assessee is around 20.94% only and hence the adjustment by the TPO/AO is highly excessive and wholly unreasonable. The gross margin earned by the assessee from the transaction with AE is at 20.94% whereas the overall gross margin of the assessee is 6.98% only. The assessee may have suffered losses on uncontrolled transaction since the gross margin on controlled transaction with AE is much better and higher than uncontrolled transaction. Hence, the contention of TPO & AO is grossly incorrect and wrong.

The ld Counsel pointed out that as per Rule 10B(1)(e) which deals with net margin method, clearly envisages that net profit margin realized by an enterprise only has to be taken up for comparison. In assessee's own case for A.Y 2007-08 in ITA No. 201/K/12 dated 12.5.2017 held as follows: 15

16 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 "19. It is clear from the statutory provisions especially Rule l0B(e)(i) to (iii) that it is only the international transaction that has to be compared with uncontrolled transaction and that the transaction undertaken by the entity as a whole. Hon'ble Mumbai ITAT in the case UCB India Ltd. v. ACIT (2009) 121 ITD 13l had held that sec.92C read with Rule 108(l)(e) deals with the Transactions Net Margin Method and it refers to only net profit margin realized by an enterprise from international transaction or a class of such transactions but not operating margins of enterprises as whole. This view was reiterated by the Hon'ble Mumbai ITAT, 'L' Bench in the case of Addl. CIT v. Tej Diam as reported in (2008) 37 SOT 341 (Mum.) and wherein Tribunal held that the margin of the international transaction can only be compared with uncontrolled transaction and not otherwise."

2) Silktex Ltd

Nature Amount Pg No Volume I Geographical segmental - - - information not provided

Import filter of RM not - - - applied nor it is available

Asset Base 23.47 Cr Pg 163 Volume I T.O 29.84 Cr Pg 164 Volume I

17 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 a) This company selected by TPO vide "Prowess data base” has a turnover of 29.84 crore as against turnover of tested party at 84.81 crore and as such cannot be considered as comparable.

b) The asset base of this company is at mere 23.47 crore as against of tested party at 64.21 crore.

c) The geometrical segmental transaction of such company has not been given whereas the AE of tested party is mainly in USA and a smaller party in Russia & Belgium. Hence, also this company does not qualify as comparable.

Hence, since the Function Asset & risk is not similar and hence it cannot be considered as comparable.

18 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 travelling expenses, fair and exhibition expenses are for the purposes of benefitting the entire business of the company and the AE as a whole and cannot be said to be attributable solely to the sales to unrelated entities. It has also been pointed out that an entity level, the margin cost is at 5.92% (OP margin) whereas assessee determined the margin on sales at 22.96% based on arbitrary allocation of expenses to unrelated entities. Therefore, the ld. CIT(A) was wrong in considering the PLI as OP/Sales without considering the fact that such sales includes sales to the AE and is accordingly vitiated. The ld. DR therefore pointed out that if these expenses, like fair exhibition expenses etc are eliminated, similar expenses as is incurred by the comparable companies should also needs to be added back to determine the arm’s length operating profit so as to ensure functional comparability on a like to like basis.

However, after considering the submissions of the counsel for the assessee, the ld DR for the revenue, so far assessment year 2008-09 is concerned, accepted the two comparable companies, viz: Zenith exports and Eastern Silk Ind Ltd. as selected by the assessee. However, for A.Y. 2009-10, ld DR objected about the Eastern Silk Ind Ltd, and submitted to the Bench that this company has high related party transactions, therefore, the said company should not be selected as a comparable company.

Apart from this, the ld. DR for the Revenue, to substantiate his arguments, relied on the judgment of the Coordinate Bench of the ITAT, Delhi in the case of Headstrong Service India Pvt Ltd, in ITA No.6200/Del/2012, Assessment Year 2008-09, order dated 11.02.2016 wherein it was held that:

“8.2. We have heard the rival submissions and perused the relevant material on record. It is observed that the assessee adopted TNMM as the most appropriate method in its TP study report. The TPO accepted the same. It was only for the first time that the assessee raised this alternative submission before the DRP for applying the alleged internal CUP method, which came to be turned down by the DRP. 8.3. It is noticed that the assessee has treated itself as a tested party in its transfer pricing study report, which has been accepted by the TPO. Under the CUP method as prescribed under Rule 10B(1)(a), price charged for services rendered in a comparable uncontrolled transaction is identified which is then adjusted to account for differences, if any, between the international transaction undertaken by the assessee and comparable uncontrolled transactions. Such adjusted price is taken as 18

19 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 ALP in respect of the services provided by the assessee in the international transaction. From the machinery provision contained in Rule 10B(1)(a) in this regard, it is clear that the internal CUP provides for comparing the assessee's international transaction with another comparable uncontrolled transaction undertaken by it. We fail to appreciate the logic behind the ld. AR's submission in comparing the Revenue sharing formula between the assessee and its AE on the one hand and its AE and third parties on the other. As the assessee is a tested party, under the CUP method, it is only the price charged by it which can be compared with the price charged by some comparable(s) in uncontrolled transactions. The argument put forth on behalf of the assessee can be successfully applied only in determining the ALP of the international transactions undertaken by its AE so as to make a valid comparison between remuneration paid by such AE to the assessee with that paid to unrelated parties, provided other terms and conditions of the provision of services are similar. Presently, we are dealing with the determination of ALP of the international transaction undertaken by the assessee and not its foreign AE. The assessee can resort to the CUP method only by showing that the price charged by it from its AE was favourably comparable to the price charged by some other comparable company(ies) in uncontrolled transaction(s). The ld. AR has brought no material on record to show the price charged in a comparable uncontrolled situation. We, therefore, hold that the view canvassed before the DRP for the first time in resorting to the CUP method is devoid of merits and as such, the most appropriate method in the facts and circumstances of the instant case is TNMM, which was originally adopted by the assessee and also approved by the TPO. 9. To sum up the above discussion, we hold that the assessee was not right in working out its PLI by also considering projected profits for the three subsequent years; no deduction on account of foreign exchange fluctuations can be allowed in the facts and circumstances of the instant case; and the revenue sharing formula as put forth by the assessee as relevant under the CUP method for determining the ALP, is not correct.” 16. In respect of section 10A company`s issue, the ld. DR for the Revenue held that even if the some units of assessee companies are enjoyed 10A benefit, the adjustment of arm’s length price is to be necessarily done as per section 92 of the Act. For that he relied on the judgment of the Coordinate Bench of ITAT, Hyderabad in case of M/s. Wissen Infotech vs. DCIT in ITA No.99/Hyd/2015 & ITA No.311/Hyd/2015 order dated 28.02.2017 wherein it was held that:

“6. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in the case of Tata Consultancy Services Ltd has held that the AO is required to give the assessee an opportunity of hearing before making any reference to the TPO. In the said case, we find that the facts and 19

20 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 circumstances are distinguishable from the facts of the case before us. The Coordinate Bench of the Tribunal at Delhi in the case of Gruner India Pvt. Ltd vs. DCIT in ITA No.6794/Del/2015 has clearly brought out the distinction in Paras 9.1 to 9.5 of its order. For the sake of clarity and ready reference, the relevant portion is reproduced as under: "V. Whether the TP provisions apply when deduction is available under the Act ? 9.1. The ld. AR argued that its profit is deductible u/s 80IC of the Act. He vehemently submitted that once the profit from rendering of software development services is deductible, then, no motive can be attributed for artificially reducing the profit by manipulating the price with its AE. It was elaborated that the profit of an assessee, eligible for deduction under section 80IC, becomes tax neutral irrespective of its quantum. He, therefore, urged that either the international transaction should not be processed in terms of Chapter-X of the Act or higher amount of deduction should be allowed corresponding to the amount of addition on account of transfer pricing adjustment. This was forcefully contested by the ld. DR. 9.2. Having heard the rival submissions and perused the relevant material, we find ourselves unable to accept both the submissions advanced by the ld. AR on this aspect of the matter. In so far as the first submission for not carrying out any transfer pricing adjustment in view of the benefit enjoyed by it u/s 80IC of the Act is concerned, we find that no exception has been carved out by the statute for non- determination of the ALP of an international transaction of an assessee who is eligible for the benefit of deduction section 10A/10B or any other section of Chapter-VIA of the Act. Section 92(1) clearly provides that any income arising from an international transaction is required to be computed having regard to its arm's length price. There is no provision exempting the computation of total income arising from an international transaction having regard to its ALP, in the case of an assessee entitled to deduction u/s 80IC or any other such relevant provision. Section 92C dealing with computation of ALP clearly provides that the ALP in relation to an international transaction shall be determined by one of the methods given in this provision. This section also does not immune an international transaction from the computation of its ALP when income is otherwise eligible for deduction. On the contrary, we find that sub-section (4) of section 92C plainly stipulates that where an ALP is determined, the AO may compute the total income of the assessee having regard to the ALP so determined. This shows that the total income of an assessee entering into an international transaction, is required to be necessarily computed having regard to its ALP without any exception. Thus, the ld. AR's argument that since its income is subject to deduction u/s 80IC, the provisions of the Chapter-X of the Act should not be applied, in our considered opinion, has no force in view of the clear statutory mandate contained in proviso to section 92C(4), which reads as under:-

21 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 `Provided that no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub- section. 9.3. A circumspect perusal of this proviso read along with sub-section (4) of section 92C divulges that when the total income of an assessee from an international transaction is computed having regard to its ALP, then, no deduction u/s 10A or any other section including those covered under Chapter VIA of the Act shall be allowed in respect of the amount of income by which the total income of the assessee has been enhanced after computation of income determined on the basis of the ALP of an international transaction. The legislature has unconditionally provided for not allowing the benefit of deduction under any section in respect of the addition made on account of transfer pricing adjustment. Not allowing of any benefit u/s 80IC in respect of an addition on account of transfer pricing adjustment pre-supposes the existence of transfer pricing addition in the first instance to an assessee who is otherwise eligible to the benefit of deduction under this section. If one was to presume that no addition towards transfer pricing adjustment is comprehensible in the case of an assessee enjoying the benefit of deduction u/s 80IC, then there was no need to enshrine an express provision forbidding the grant of deduction under this section in respect of enhancement of income due to transfer pricing adjustment. Once the legislature has engrafted an unambiguous provision explicitly spelling out the non- granting of deduction u/s 80IC on the enhanced income due to transfer pricing addition, we are afraid to accept the assessee's contention, which runs diagonally opposite to the unequivocal language of proviso to section 92C(4). This contention, if taken to a logical conclusion, would amount to obliterating the proviso itself, which is patently incorrect. 9.4. Our view is fortified by the Special Bench order in the case of Aztech Software and Technology Services Ltd. vs. ACIT (2007) 107 ITD 141 (SB) (Bangalore) in which similar issue has been decided by the Special Bench by holding that availability of exemption u/s 10A to the assessee is no bar to applicability of sections 92C and 92CA. Similar view has been taken by Pune Bench of the Tribunal in the case of ACIT vs. MSS India (P) Ltd. (2009) 123 TTJ 657 (Pune) and several other orders. The reliance of the ld. AR on the order of the Mumbai Bench of the Tribunal in the case of DCIT vs. Tata Consultants Services Ltd. (ITA No. 7513/M/2010) dated 4.11.2015, in our considered opinion is misconceived, because, in that case, the Tribunal primarily found that the AO erred in not himself examining the issue of TP and failed to apply his mind to the TP report filed by the assessee. The last sentence in para 54 of the order upholding the assessee's contention that no TP adjustment can be made where the assessee enjoys benefit of deduction u/s 10A or 80HHE, etc., is only obiter dicta inasmuch as the addition was found to be not sustainable on the other main grounds as discussed in the body of the order. On the contrary, we find that the decision of the Special bench in Aztech Software (supra) permitting the applicability of sections 92C and 92CA to an assessee availing the benefit of section 21

22 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 80IC etc. of the Act is its ratio decidendi. The ld. AR has not pointed out any judgment of some Hon'ble High Court deciding this point either way. In view of the fact that there is already a Special Bench decision in the case of Aztech Software (supra) which supports the making of transfer pricing adjustment notwithstanding the availability of deduction under such sections to the assessee, apart from clear statutory mandate contained in proviso to section 92C(4), we are more inclined to go with the view of the Special Bench. 9.5. It is, therefore, held that the eligibility of the assessee to deduction u/s 80IC of the Act does not operate as a bar on determining the ALP of international transaction undertaken by it and further the enhancement of income due to such transfer pricing addition cannot be considered for allowing the benefit of deduction under this section. Similar view has been taken by the Delhi bench of the tribunal in Headstrong Services India Pvt. Ltd. VS. DCIT (in ITA No. 6200/Del/2012) vide its order dated 11.2.2016. This contention is, therefore, jettisoned" 7. Facts and circumstances in the case before us are similar to the above and respectfully following the decision of the Coordinate Bench at Delhi, we dismiss the additional ground of appeal raised by the assessee.” 17. The ld. DR for the Revenue also relied on the judgment of the Special Bench, Kolkata in the case of Instrumentarium Corporation in ITA No.1548&1549/Kol/2009 wherein it was held that arm`s length price has to be computed as per section 92 of the Act, in case of any international transaction, even if the subsidiary company incurs losses.

23 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 economic conditions in which respective parties transact or operate including geographical locations, size etc. Thus, comparison of attributes of the transaction is carried which would affect conditions in Arm’s length dealing. Rule 10B (3) specifically provides as under:-

“An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if- none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or reasonably accurate adjustments can be made to eliminate the material effects of such differences”. This, Rule specifically recognizes that reasonably accurate adjustment should be made to eliminate the material effects of differences, if any. Sub-rule (2) lays down the factors for determining comparability whereas; sub-rule (3) lays down the standard of comparability. The standard comparability not necessarily entails complete identity between the two transactions but sufficient similarity. It can be held to be sufficient similar if the differences between them is not material so as to effect price or profit in the open market and if there is one such thing, then such a material difference needs to be eliminated through adjustments. The factors governing the price or profit in a transaction may depend upon business strategies, market conditions, competitions, market penetration schemes, geographical locations, climatic conditions, etc.

Guidelines issued by OECD ( 2017-OECD Transfer Pricing Guidelines) also recognized the business strategies adopted by the companies which have a bearing on profitability levels and profit level indicators (PLI). Para D.1.5 of OECD guidelines for the sake of ready reference are reproduced hereunder:

“D.1.5 Business strategies 1.114. Business strategies must also be examined in delineating the transaction and in determining comparability for transfer pricing purposes. Business strategies would take into account many aspects of an enterprise, such as innovation and new product development, degree of diversification, risk aversion, assessment of political changes, input of existing and planned labour laws, duration of arrangements, and other factors bearing upon the daily conduct of business. Such business strategies may need to be taken into 23

24 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 account when determining the comparability of controlled and uncontrolled transactions and enterprises. 1.115 Business strategies also could include market penetration schemes. A taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. Furthermore, a taxpayer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs (e.g. due to start-up costs or increased marketing efforts) and hence achieve lower profit levels than other taxpayers operating in the same market. 1.116 Timing issues can pose particular problems for tax administrations when evaluating whether a taxpayer is following a business strategy that distinguishes it from potential comparables. Some business strategies, such as those involving market penetration or expansion of market share, involve reductions in the taxpayer's current profits in anticipation of increased future profits. If in the future those increased profits fail to materialize because the purported business strategy was not actually followed by the taxpayer, the appropriate transfer pricing outcome would likely require a transfer pricing adjustment. However legal constraints may prevent re-examination of earlier tax years by the tax administrations. At least in part for this reason, tax administrations may wish to subject the issue of business strategies to particular scrutiny.

1.117 When evaluating whether a taxpayer was following a business strategy that temporarily decreased profits in return for higher long-run profits, several factors should be considered. Tax administrations should examine the conduct of the parties to determine if it is consistent with the purported business strategy. For example, if a manufacturer charges its associated distributor a below-market price as part of a market penetration strategy, the cost savings to the distributor may be reflected in the price charged to the distributor's customers or in greater market penetration expenses incurred by the distributor. A market penetration strategy of an MNE group could be put in place either by the manufacturer or by the distributor acting separately from the manufacturer (and the resulting cost borne by either of them), or by both of them acting in a co-ordinated manner. Furthermore, unusually intensive marketing and advertising efforts would often accompany a market penetration or market share expansion strategy. Another factor to consider is whether the nature of the relationship between the parties to the controlled transaction would be consistent with the taxpayer bearing the costs of the business strategy. For example, in arm's length transactions a company acting solely as a sales agent with little or no responsibility for long-term market development would generally not bear the costs of a market penetration strategy. Where a company has undertaken market development activities at its own risk and enhances the value of a product through a trademark or trade name or increases goodwill associated with the product, this situation should be reflected in the analysis of functions for the purposes of establishing comparability.

25 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 1.118 An additional consideration is whether there is a plausible expectation that following the business strategy will produce a return sufficient to justify its costs within a period of time that would be acceptable in an arm's length arrangement. It is recognised that a business strategy such as market penetration may fail, and the failure does not of itself allow the strategy to be ignored for transfer pricing purposes. However, if such an expected outcome was implausible at the time of the transaction, or if the business strategy is unsuccessful but nonetheless is continued beyond what an independent enterprise would accept, the arm's length nature of the business strategy may be doubtful and may warrant a transfer pricing adjustment. In determining what period of time an independent enterprise would accept, tax administrations may wish to consider evidence of the commercial strategies evident in the country in which the business strategy is being pursued. In the end, however, the most important consideration is whether the strategy in question could plausibly be expected to prove profitable within the foreseeable future (while recognising that the strategy might fail), and that a party operating at arm's length would have been prepared to sacrifice profitability for a similar period under such economic circumstances and competitive conditions.”

Thus, business strategies, market penetration, increase or save its market share are relevant and material factors determining prices and profit and PLI. All these factors have to be taken into consideration while eliminating the material effects which warrants some kind of reasonable accurate adjustments.

26 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018

We note that the assessee had aggregated the transaction at Rs.21,30,91,254/- made with AE although they are in different geographical terrain catering to different taste. However, it appears that as the comparables operating in one particular geographical territory is difficult to search, the assessee had aggregated the entire sales as "sales to AE" and then has compared with it's peers. This has not been challenged by Ld. TPO in order u/s 92CA of the Act. We note that there is no dispute as regards the choice of method. The assesee has adopted Transactional Net Margin Method i.e. TNMM, as most appropriate method (MAM). The Transactional Net Margin Method i.e. TNMM for which parameters as enshrined in Rule 10B(1)(e) has to be referred to in I.T Rules, 1962.

Particular Zenith Exports Eastern Silk Ind. Ltd. Sales turnover 239.53 510.03 Total income 239.53 510.03 Purchase 44.65 346.73 Stock adjustment (0.96) (89.92) Raw materials 116.71 104.73 MFG. Expenses 29.23 50.71 Other manufacturing 18.63 33.76 expenses Cost of goods sold 208.26 446.01 26

27 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 Gross profit 31.26 94.02 Operating profit 13.05% 12.5% Operating cost 15.01% 14.35%

Average margin on cost = 14.68% Average margin on sales – 12.78% As such the margin earned by assessee from AE at 22.96% is much better than that of comparables at average of 12.78%, We note that these comparables had been selected and accepted by TPO in subsequent assessment year,2010-11 having same product mix and functional comparability.

Now we deal with comparable selected by assessee and objection to comparable selected by TPO, as follows:

Comments Comparable selected by assessee (i) Zenith Exports Ltd.: Nature Amount Paper book Pg. No Volume of Paper book Segmental Results Pg. 108 Volume I Turnover 461.60 cr (16.25%) Pg 111 Volume 1

The TPO has rejected such comparable without any specific ground and it seems that since such party was engaged in leather silk & yarn. On TPO’s query the segmental data was duly provided to the TPO. However, the TPO did not examine such data which was very much part of the audited accounts of the said company. Indeed, on query during the course of hearing before TPO the relevant part of such accounts showing segmental result was duly submitted. The expenses were also apportioned to the revenue and such net result from such activity dealing in silk fabric (manufacturing & trading both) was duly disclosed. Since the assessee is also engaged in sales & manufacturing of silk fabric & segmental results available, it is functionally comparable and as the rejection by the TPO/ AO is not at all justified. Hence, the company should be considered as comparable of the assessee and the segmental result are disclosed in the audited accounts, should be considered for determination of "Mean Price" of the comparable. Ld. CIT(A) has observed that TPO/ AO had rejected (his comparable due to high turnover and assets, this party is not comparable without appreciating the fact that the functions of the company has not been disputed by TPO/AO. 27

28 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 Since functions are similar to that to the assessee, this comparable cannot be rejected. Moreover, in A.Y. 2010-11 this comparable having similar turnover and comparable assets TPO himself has selected this comparable. Moreover, the coordinate Bench of ITAT Bangalore in the case of Microchip technology (India) Pvt Ltd (2018) 81 Taxmann.com 389, held that turnover cannot be criteria for rejecting comparable. As regards segmental results being available, the comparable could not have been rejected by the AO/TPO, and for which reliance is placed on judgment of the coordinate Bench in the case of DCIT v. Landis + Gyr Ld. (2017) 86 taxmann.com 109. Based on this rationale, we accept this comparable company.

ii). Eastern Silk Ind. Ltd.

Nature Amount Paper book Pg. No Volume of Paper book Turnover 510.03 cr Pg 127 Volume I RPT 82.90 cr (16.25%) Pg 138 Volume I Exports 413.24 cr Pg 140 Volume I

The TPO/ AO rejected such comparable without analyzing the FAR analysis of this comparable and merely applied search process and filters thereon to derive comparable without even considering this Company.

Since the function of the comparable is similar to that of the assessee, only reasonable accurate adjustment should have been done in case of turnover of such entity varied from that of the assessee and in this connection we have already submitted that Rule 10B(2), (3) & (4) read with Rule 10B(e) duly mentions for such adjustments to eliminate the material differences for determination of arm’s length price. Further, this comparable as selected by assessee had only 16.25% related party transactions (RPT) which is much within less than tolerance range as considered by various Coordinate Benches of ITAT in the country which have considered such RPT (related party transaction) limit at 15% to 25% and these judgments are as follows: 28

29 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 a) DCIT vs. Synopsis India (P) Ltd. (2015) 64 taxmann.com 10 (Bang)

b) SAP (India) Pvt. Ltd. v. Addl. CIT(2012) 87 taxmann.com 316 (Bang AT)

Hence, we accept this comparable.

Coming to AY 2009-10, the TPO has made no discussion of any of the comparables. He has simply gone by the search he has made and has not considered the TP Study of the assessee, wherein the assessee has taken M/s. Eastern Silk Ltd. as a comparable case. The Ld. DR drew our attention to the fact that the said company had RPT transaction of 82.90 cr. which is amount 16.25% of its turnover of Rs.510 cr. and, therefore, he contended that this company should be excluded following RPT filter. However, the Ld. AR of the assessee contended before us that for AY 2010-11, the ld TPO in his order dated 29

30 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 30.01.2014, has considered, the Eastern Silk Ind Ltd. and has accepted as a comparable, taking into account same facts and circumstances, which were prevailing in A.Y.2008-09 &2009-10. In such a scenario, even though the assessee has got a higher RPT and, however, since the TPO has accepted the comparable Eastern Silk Ltd. for AY 2010-11, we agree with the Ld. CIT(A) that this company should not be excluded as a comparable. Further, we note that this comparable as selected by assessee had only 16.25% related party transactions (RPT) which is much within less than tolerance range as considered by various courts in the country which have considered such RPT (related party transaction) limit at 15% to 25% and these judgments are as follows:

a) DCIT vs. Synopsis India (P) Ltd. (2015) 64 taxmann.com 10 (Bang) b) 24/7 customer.com v. DCIT (2013) 140 ITD 344 (Bang) c) Cordys R & D India (P) Ltd. (2014) 149 ITD 587 (Hyd) d) SAP (India) Pvt. Ltd. v. Addl. CIT(2012) 87 taxmann.com 316 (Bangalore AT) Page 42 of case law paper book) [RPT tolerance unit between 15% to 25%]

We also note this fact that the TPO has not mentioned any RPT filter for AY 2009-10, in his order, therefore considering all the facts and circumstances, as explained above, we confirm the order of Ld. CIT(A) in accepting M/s. Eastern Silk Ltd as comparable for A.Y. 2009-10.

31 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 On appeal by the assessee before the ld CIT(A), the ld CIT(A) rejected six comparables, except Silktex Ltd. The ld CIT(A) noted that product profile of these comparable companies do not match with that of the assessee or the chosen comparable companies do not have export activity.

i) Grabal Alok Impex Ltd. ... ………..Embroidered Fabric, Laces ii) Welspun India Ltd. ... Terry Towels, Bed linen products iii) Sharadha Terry Products Ltd. ... Terry Towels, Blanket iv) Hanung Toys and Textiles Ltd. ... Stuffed Toys, Curtains, Cushions v) Kariwala industries Ltd. ................. Industrial Garments vi) Jaipuria Silk Mills Pvt. Ltd. .......... Uses local yarn and as such product mix doesn't concur with the assessee We decline to interfere in the order of CIT(A) in respect of rejection of six comparable companies, noted above with product profile.

However, we note that ld CIT(A) accepted, the Silktex Ltd. as comparable company. The details and particulars of this company is given below for ready reference:

2) Silktex Ltd

Nature Amount Paper book Pg No. Volume I of paper book - - - Geographical segmental information not provided - - - Import filter of RM not applied nor it is available Asset Base 23.47 Cr Pg 163 Volume I T.O 29.84 Cr Pg 164 Volume I

This company selected by TPO vide "Prowess data base” has a turnover of 29.84 crore as against turnover of tested party at 84.81 crore and as such cannot be considered as comparable.

32 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 b) The asset base of this company is at mere 23.47 crore as against of tested party at 64.21 crore.

c) The geometrical segmental transaction of such company has not been given whereas the AE of tested party is mainly in USA and a smaller party in Russia & Belgium. Hence, also this company does not qualify as comparable.

We also note that ld CIT(A) did not make adjustments on account of the factors governing the price or profit in a transaction which may depend upon business strategies, market conditions, competitions, market penetration schemes, geographical locations, climatic conditions, etc. Guidelines issued by OECD ( 2017-OECD Transfer Pricing Guidelines) also recognized the business strategies adopted by the companies which have a bearing on profitability levels and profit level indicators (PLI). Para D.1.5 of OECD guidelines are given in para 18 of this order. Therefore, since the ld CIT(A) has failed to do adjustment on account of business strategies, market conditions, competitions, market penetration schemes, geographical locations, climatic conditions, etc, as noted above. Moreover, since the Function Asset & risk is not similar and hence it cannot be considered as comparable, therefore, we reject this comparable. Therefore, we direct the ld. TPO/Assessing Officer not to consider this company as comparable for Assessment Years 2008-09 and 2009-10.

We note that the net profit margin earned by the Assessee from the controlled international transaction was 22.96% in comparison to the average net profit margin earned by the comparables chosen by the Assessee at 12.78%. If one were to proceed on the basis of the comparable selected by the assessee and apply its profit margin of 12.78%, the Assessee’s profit margin of 22.96% is higher. Hence the comparison of the net profit margin of the international transaction of the Assessee in comparison to the net profit margin of the comparables is much better and the addition so made by the TPO & AO is wholly wrong and incorrect and therefore, we delete both the upward transfer pricing adjustment made by TPO/AO for A.Y. 2008-09 at Rs.7,65,00,000/- and for A.Y. 2009-10 at Rs.12,31,02,132/-.

33 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 23. Now we deal with our concise ground No.2 which reads as under:

“(2) Revenue`s Ground No.3 and 4 are in respect of allocation of cost between the Associate Enterprise (AE) and Non-AE transactions and the non- consideration of entity level margin by the CIT(A) and consideration of transactional margin only.” At the outset itself, the Ld. Counsel for the assessee, brought to our notice that this issue is covered in the assessee’s own case in ITA No.201/Kol/2012, for AY 2007-08, order dated 12.05.2017, wherein the same issue arose and the Tribunal was pleased to accept the contention of the assessee and has held as under: “18. We have considered the rival submissions and we are of the view that order of CIT(A) does not call for any interference. Section 92F(ii) lays down that "'arm's length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions." Sec.92(v) defines “transaction” to include "an arrangement, undertaking or action in concert,- (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding." .. Rule 10B sub-clause (e) deals with Transaction Net Margin Method as follows:- (e) transactional net margin method, by which,- “(i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub-clause( 1) is established to be the same as the net profit margin referred to in sub-clause (ii); (v) the net profit margin established is then token into account to arrive at an arm's length price in relation to the international transaction."

34 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 19. It is clear from the statutory provisions especially Rule 10B( e) (i) to (iii) that it is only the international transaction that has to be compared with uncontrolled transaction and not the transaction undertaken by the entity as a whole. Hon'ble Mumbai ITAT in the case of UCB India (P) Ltd. V. ACIT (2009) 121 ITD 131 had held that sec, 92C read with Rule 10B(l) (e) deals with the Transactions Net Margin Method and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transactions but not operating margins of enterprises as whole. This view was re-iterated by the Hon'ble Mumbai ITAT ‘L ‘ Bench in the case of Addl. CIT v. Tej Diam as reported in [2010] 37 SOT 341 (Mum) and wherein tribunal held that the margin of the international transaction can only be compared with uncontrolled transaction and not otherwise. This view was also followed in following decisions as well: (a) DCIT v. Starlite (2010) 40 SOT 401 (Mum) (b) Decision of Delhi Tribunal in the case of Avishek Auto Ltd. v. DClT, Delhi, Circle - 1 (1 ) in ITA No. 1433/Del/2009· for A.Y 2004-05 order dt. 12.11.2010 ) the Hon'ble Tribunal while affirming the aforesaid judgment of Mumbai Tribunal in the case Of UCB India (F) Ltd. v. ACIT (supra) observed at page 8.2 of such order as : "It has not been disputed that provisions of chapter X of sec. 92C deal with international transaction only and not with transaction which . have no international cross border element at all. Therefore, the basis of making the adjustments on the enterprise level by taking 68.66 crores is not correct which should have been taken to sell to domestic parties, using Takata technology & Takata raw material using foreign technology and foreign raw material. The segment that was to be looked at was international segment, i.e. domestic sale, using foreign technology and foreign raw material. As given by the appellant, the operating profit margin on AE sales is 10.49% whereas in the domestic sales segment it is only 2.88%. Proposition that only international transaction have to be looked at has else been approved by various benches of the Tribunal which have been cited by the appellant and are not disputed by the Ld. CIT(R) and no contrary judgment has been cited before us on this proposition. We, therefore, accept also that only international transactions are to be taken into consideration while calculating the arm's length price." (c) DCIT, Ward 16(3) v. Twinkle Diamond in ITA No. 5033/ Mum/ 07 for A.Y 2004- 05 order dt. 30.04.2010. (d)ACIT v. T. Two International P. Ltd. & DCIT v. Tarajewels Exports P. Ltd. & ACIT v. Tara Ultimo P. Ltd. in ITA No. 5644, 5645 & 5646/ Mum/ 08 order dt. 29.2.2010. (e) IIjin Electronics Pvt. Ltd. v. ACIT (10) 36 SOT 227 20. It is not disputed by the TPO that the net profit margin earned by the Assessee from the controlled international transaction was 39.25% in comparison to the average net profit margin earned by the comparables chosen by the Assessee at 27.072%. If one were to proceed on the basis of the comparable selected by the TPO and apply its profit margin of 20.91%, the Assessee’s profit margin of 39.25% is higher. Hence the comparison of the net profit margin of the international transaction of the Assessee in comparison to the net profit margin of the comparables is much better and the addition so made by the TPO & AO is wholly wrong and incorrect and was rightly deleted by the CIT(A). 21. For the reasons given above ground nos. 2 and 3 raised by the revenue are dismissed.” 34

35 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018

Therefore, we find merit in the assessee’s contention that TPO could have made any adjustment only to the case corresponding to exports made to AE and not to the entire turnover of the assessee and hence, the TPO/AO’s action in such respect cannot be sustained. Respectfully following the order of the Coordinate Bench in assessee’s own case for AY 2007-08, we do not find any infirmity in the order of the Ld. CIT(A) and we uphold the same.

“(3) Revenue`s Ground No. 6, 7 and 8 are in respect of challenging PLI as OP/Sales and various constituents of the PLI (Profit Level Indicator) which has been disputed by the TPO/AO. Assessee`s CO. ground Nos. 2, 3 and 5 are in respect of export incentive and Forex fluctuation which should be considered as part of OR ( Operating Revenue).”

We note that the Revenue in A.Ys 2008-09 & 2009- l0 has contended that PLI (Profit Level Indicator) has been considered by the CIT(A) as OP/ Sales as against the PLI considered by the TPO as OP/OC. We note that the appellant has also been engaged in trading of yarn and as such the consideration of PLI as OP/OC may not reflect the true results. The PLI as shown by the appellant for the transaction with the AE are as follows : A.Y 2008-09 A.Y 2009-10 OP/OC = 20.04% 22.96% OP/Sales = 16.69% 18.67% Therefore, we confirm the assessee`s PLI as OP/ Sales.

We note that in the computation of PLI, operating profit is the difference between operating revenue and the operating cost. In the operating revenue the TPO had considered only the sales, ignoring the directly related sums such as export incentive, foreign exchange fluctuation, and since such items are form part of the operating revenue and accordingly the operating profit should be computed, provided these export incentive, foreign exchange fluctuation is part of the sale made to AE.

36 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018

(4) Revenue`s ground No.9 is challenging all the grounds raised by the assessee before CIT(A) right from 2(a) to 2 (h) so raised by the assessee and considered by ld CIT(A). Fair exhibition & travelling expenses in OC of AE Contended by revenue in Ground No.6. Assessee`s CO. ground Nos. 4, 6 7 and 8 are in respect of export from 10A & 10B Unit, and relate to grievance that transfer pricing provision did not apply to transaction between the 10A and 10B unit, and to reduce the turnover pertaining to sections 10A & 10B in computation of arm’s length price.

We note that these are miscellaneous grounds raised by the Revenue and assessee relating to transfer pricing. Fair Exhibition & Travelling expenses in OC of AE (contended by Revenue in Ground 6). The Revenue has contended that the expenses like travelling expenses, fair and exhibition expenses should be as part of the operating cost of the AE. We note that as per the FAR analysis the sales and marketing function in respect of the transaction with AE is to be performed by AE only and hence the expenses are incurred by such AE only. It has also to be appreciated that had such expenses incurred by assessee then the same would form part of the Transfer Pricing Study as well as the Form 3CEB as well would have also been part of the Transfer Pricing assessment and adjustment by the TPO. Since no such expenditure has been incurred, mere contention that the AE would have been benefited by such expenses, has no relevance nor can lead to apportionment of such expenses to the transaction with the AE. The another grievance of the assessee in cross objections No. 4,6,7,& 8 is that no Transfer Pricing adjustment is required in case transaction exempt u/s 10A & 10B Unit.

We note that as per section 92C (4) of the Act, no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under section 92C of the Act, which reads as follows:

“Section 92C: Computation of arm’s length price.

37 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 (1) The arm’s length price in relation to an international transaction [or specified domestic 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 prescribed by the Board………………………………….. ……………………………………………………………………………………………………………………………………….. (4) Where an arm’s length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm’s length price so determined: Provided that no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section: Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arm’s length price paid to another associated enterprise from which tax has been deducted [or was deductible] under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm’s length price in the case of the first mentioned enterprise.”

Our view is fortified by the Special Bench order in the case of Aztech Software and Technology Services Ltd. vs. ACIT (2007) 107 ITD 141 (SB) (Bangalore) in which similar issue has been decided by the Special Bench by holding that availability of exemption u/s 10A to the assessee is no bar to applicability of sections 92C and 92CA. Similar view has been taken by Pune Bench of the Tribunal in the case of ACIT vs. MSS India (P) Ltd. (2009) 123 TTJ 657 (Pune). Apart from this the judgment of the Special Bench, Kolkata in the case of Instrumentarium Corporation in ITA No.1548&1549/Kol/2009 wherein it was held that arm`s length price has to be computed as per section 92 of the Act. Therefore, if

38 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 the 10A and 10B unit sales goods/services to its AE, the arm`s length price should be computed. However, we note that in assessee`s case under consideration, the ld TPO has already included the sale of 10A & 10B units to compute the arm`s length price, therefore, this ground does not have any further impact and it is only an academic discussion and does not have any impact on our decision in para 22 of this order in deleting both the upward transfer pricing adjustment made by TPO/AO for A.Y. 2008-09 at Rs.7,65,00,000/- and for A.Y. 2009-10 at Rs.12,31,02,132/-.

39 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 (2).Ground No.1 raised by the Revenue in Assessment Year 2008-09 (in ITA No.1371/Kol/2017) and Ground No.10 raised by the Revenue in Assessment Year 2009-10 (in ITA No.1372/Kol/2017) relates to disallowance u/s 14A read with Rule 8D(2)(iii).

(3).Ground No.2 raised by the Revenue in Assessment Year 2008-09 in ITA No.1371/Kol/2017 relates to disallowance of depreciation to the tune of Rs.15,392/-.

(4).Ground No.3 raised by the Revenue in Assessment Year 2008-09 in ITA No.1371/Kol/2017 relates to addition of Rs.6,43,440/- on account of unexplained investment deleted by the ld. CIT(A) admitting additional evidence.

40 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018

After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved in the present appeal relating to section 14A, is no longer res integra. We note that assessee has share capital and reserves and surplus which is more than the investments made by the assessee, in both the assessment years, that is, A.Y.2008-09 and 2009-10 We note that assessee’s own funds are more than investments, hence, the presumption is that the investments were made out of share capital and reserve and surplus. Therefore, relying on the judgment of Hon`ble Bombay High Court in the case of CIT vs. Reliance Utilities Power Limited (2009) 313 ITR 340 (Bom) and CIT vs. HDFC Pvt. Ltd. 366 ITR 505 (Bom), we delete the addition under Rule 8D (2) (ii). As regards the disallowance made by the Assessing Officer u/s 14A r.w.r 8D(2)(iii) we direct the Assessing Officer to compute the disallowance in line of the judgment of jurisdictional Tribunal in the case of REI Agro India reported in (2013) 144 ITD 141 (Kol) and therefore, Assessing Officer is directed to consider only those shares and investments in respect of dividend income has been earned during the year. That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue is hereby upheld and the grounds raised by the Revenue on this issue is dismissed.

We note that the assets on which the company has claimed the depreciation was being used by the Company for keeping records and books of accounts of the company. Therefore, the flat was being used for the purpose of business, hence, the depreciation should be allowed to the assessee company. We note that the same issue of depreciation has been allowed to the assessee in the preceding years hence, to maintain the rule of consistency such depreciation has to be allowed in this year as well especially in the light of the fact that the Assessing Officer has not brought any material on record to prove that such flat was used for the purpose other than the business. That being so, we decline to interfere in the order passed by the ld. CIT(A), his order on this issue is hereby upheld and grounds raised by the Revenue is dismissed.

41 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018 32. Ground No.3 raised by the Revenue in Assessment Year 2008-09 in ITA No.1371/Kol/2017 relates to addition of Rs.6,43,440/- on account of unexplained investment deleted by the ld. CIT(A) admitting additional evidence.

We have heard both the parties and perused the material on record. We note that Assessing Officer disallowed an amount of Rs.6,43,440/- on account of information available in the AIR data, which was treated to be unexplained investment. We note that assessee has made investment during the year totaling to Rs.6,43,440/-. The assessee was not able to furnish any information or confirmation from Kotak Securities Ltd. for the above transaction and the bank statement and the other documentary evident, before the AO, therefore, the addition was made by the Assessing Officer. The assessee, in the course of appellate proceedings submitted copy of bank statement wherein such investment aggregating to Rs.6,43,440/- were duly recorded and reflected and the same explanation was even filed before the Assessing Officer. We note that this matter has been duly explained by the assessee before the Assessing Officer and the Assessing Officer had overlooked the explanation submitted by the assessee. We note that CIT(A) has co-terminus power as the Assessing Officer has, that is, the CIT(A) has all the powers as the Assessing Officer has, and in the assessee`s case ld CIT(A) had examined the documents. Therefore, we are of the view that since the said issue had been explained before the Assessing Officer by the assessee and the ld. CIT(A) accepted the same evidence in continuous of the explanation submitted by the assessee before the Assessing Officer, and the fact that the ld. CIT(A) has co-terminus power, therefore, we do not find any infirmity in the order passed by the ld. CIT(A) and his order on this issue is hereby confirmed.

Sd/- Sd/- (Aby. T. Varkey) (Dr. A.L. Saini) Judicial Member Accountant Member Dated : 19.09.2018 RS (Sr.PS)

42 M/s J.J. Exports Limited ITA No.1371 & 1372/Kol/2017 Co. No. 71 & 72/Kol/2018

Copy of the order forwarded to: 1. Assessee – M/s. J. J. Exporters Ltd., 23C, Ashutosh Choudhary Avenue, Kolkata – 700 091. 2 Revenue – DCIT, Cir-11(1) Kolkata, P-7, Chowringhee Square, Kolkata – 700 069. 3. The CIT(A) -17, Kolkata. 4. CIT Kolkata 5. DR, ITAT, Kolkata.

/True Copy, By order, Sr. Pvt. Secretary