DCIT, CIRCLE - 10, KOLKATA, KOLKATA vs. M/S. DIC INDIA LTD., KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

Both appeals by the Revenue are arising out of different orders of Commissioner of Income Tax (Appeals)-XXXII and CIT(A)-XII, Kolkata in appeal No.19/CIT(A)-XXXII/Cir-10/08-09 & 456/XII/R-10,Kol dated 17.09.2009 and 31.12.2008. Assessments were framed by DCIT Circle-10 and ACIT Raange-10 Kolkata u/s 143(3)(II) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide their orders dated 29.12.2006 and 31.12.2008 for assessment years 2046-05 and 2005-06 respectively.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 2 Shri D.S.Damle, Ld. Authorized Representative appeared on behalf of assessee and Sk. Zafarul Haque Tanweer & Shri Kalyan Nath, Ld. Departmental Representatives appeared on behalf of Revenue.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 3 transactions with its overseas group companies. All overseas DIC group companies would be Associates Enterprises (for short AE) and accordingly all the transactions between DIC India and other AE would need to satisfy the Arm’s Length Pricing (ALP for short) standard prescribed by Indian Regulations.

4.1 The assessee, during the relevant year engaged in the business of manufacturing, trading & selling of printing inks, industrial adhesive and other allied products. In the relevant year, assessee had the following transactions with its AE. Sl. Nature of transaction Amount (in INR) Method used No. a) Import of products for 40.44 million TNMM trading b) Export of manufactured 37.63 million TNMM goods

All the above transactions were benchmarked applying the TNMM method prescribed in Section 92C of the Act. However the TPO u/s 92CA(3) the TPO rejected the assessee’s computation and evaluation of ALP.

4.2 The assessee in its transfer price study has worked out the mean PLI (operating profit/sales) of the comparable companies @ 3.10% in relation to its export to its AE. The assessee has demonstrated its operating profit is @ 4.58% on the value of the exports. Accordingly, assessee submitted that there is no need to make any adjustment in the amount of profit as it has exported the goods to its AE at ALP or imported the goods from AE at ALP. However, the AO disagreed with the method adopted by the assessee for working out ALP of the goods exported/ imported. The AO observed that the total value of import/ export is only Rs. 104 million in comparison to the total turnover of Rs. 2334 million of the assessee. The transactions with AE are less than 5%, therefore TNMM is not the most appropriate method. The AO also observed that the assessee for the AY 2003-04 used the CPM method for the export to

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 4 AE and RPM method for the Export from AE. So the AO adopted the CPM method and worked out the ALP for the exported goods as under:- The manufacturing details submitted by the assessee are as under:- Total Domestic Export to Export to sales non-AEs AEs Net sales 2,288,221,250 2,024,504,485 37,986,395 80,760,331 Other income 45,519,716 Raw material 1,616,195,407 1,400,627,381 32,271,826 63,842,458 consumption Gross profit 672,025,843 623,877,104 5,714,569 16,917,873 GP on sales 29% 31% 15% 21% GP on cost 42% 45% 18% 26%

It was observed that the overall GP margin is 42% on total costs of the assessee. However on export to AEs, the GP on cost is only 18% as compared to 26% earned on the export to non-AEs. The AO further observed that the functions performed by the assessee are similar in both the cases of exports to AE and non-AE. Therefore the GP margin should be similar. The assessee objected on the assumption of the AO and stated that the products are different for export to AE and non-AEs. However the AO rejected the plea by observing that the assessee himself used CPM for AY 2003-04 to determine the ALP on its export transactions with AE. Under the CPM it is not necessary that there should be similarity in the products exported to AE and non-AE. However it is in the CUP method, the exact comparability of the product is necessary. Accordingly the AO determined Arm‘s Length price in respect of exports at 26% on cost. The AO further allowed the relief 5% and worked out adjusted ALP at 21% only and GP margin shown by the assessee is only 18%. Hence, upward adjustment of export to AE @ 3% is worked out as under :- Cost of goods exported to AEs = ₹32,271,826 = ₹ 9,68,154/- TP adjustment @ 3%

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 5 Hence, an upward adjustment of ₹ 9,68,154/- is required to be made on considerations received by the assessee on exports to AEs.

4.3 Similarly, the AO worked out the ALP for the trading goods using the re- sale price method. In respect of the trading account, the assessee produced the following details:- Purchased from Purchased from Purchased from Purchased from related related unrelated and unrelated and (domestic) and (imported) and sales to related sales to sales to sales to unrelated unrelated unrelated Net sales 2,273,015 80,941,169 7,278,000 54,477,855 Raw materials 1,569,885 70,670,144 5,166,711 42,047,002 consumptions Gross profit 703,130 10,271,025 2,111,289 12,430,853 GP on sales 31% 13% 29% 23%

It was observed that the GP is 23% in respect of trading of goods with unrelated parties which are the uncontrolled transactions so it considered the Arms Length Margin. Whereas the GP in the case of import from related parties and further sales to unrelated parties, the GP margin earned by the assessee is only 13%. On question by the TPO, the assessee demonstrated the products imported and sold from related parties and unrelated parties are different. However the TPO disregarded the plea of the assessee by observing that the assessee himself used RPM for AY 2003-04 to determine the ALP of the import transactions with. It is not necessary that the product should be similar. It is in the CUP method, the exact comparability of the product is a essential. Under the RPM, the similarity of the function is necessary which is matching i.e. in both the cases of imports from AE and non AE, the functions performed are trading only. Besides the there is no substantial value addition by the assessee in the trading goods. Hence, RPM is the most appropriate method in the given facts.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 6 In view of the above, the AL GP margin on sales in respect of imports is considered as 23%. After giving 5% relief, adjusted ALPO is 18% only. The GP margin shown by the assessee is only 13%.

Similarly the assessee submitted for imported goods that the TNMM method was used to determine the ALP in the AY 2003-04 and the allegation of the TPO that the assessee had used RPM method for determining the ALP is factually incorrect. The observation of the TPO that comparability of the product is necessary in the case of CUP method and not under other methods is not correct. The similarity in the product is required for the purpose of comparability in order to determine the ALP. In the instant case, the TPO has selected totally dissimilar products.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 7 However, considering the submission of assessee and facts of the case ld. CIT(A) deleted the addition made by the AO by observing as under : “6. I have considered the submissions of the appellant and perused the documents furnished in support of ALP determined by the appellant, relying on TNMM Method. The assessee furnished before me the reports prepared by its auditors M/s Price Waterhouse u/s 92CA, for the AYs 20-04 & 2004-05. On going through Transfer Pricing reports for AY 2003-04 * 2004-05 I find the Auditors had examined merits & demerits of various methods prescribed in the Act for determination of ALP. On comparative analysis of the methods prescribed in the Act the Auditors preferred to apply Transactional Net Margin Method (TNMM) for determination of ALP In the appellant’s case for ay 2003-04 & also AY 2004-05. it appeared from the order passed u/s. 93CA(3) for the ay 2003-04 that no adjustment was proposed in respect of appellant had justified ALP in respect of its international transactions with AEs with reference to TNMM method.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 8 production overheads & other direct selling cots which had bearing on determination of selling price. The profitability in Export sale cannot be determined solely with reference to cost of raw material consumed. Apart from cost of material consumption, other manufacturing costs, over-heads & selling expenses have bearing on the determination of export sale price & consequent profitability. While determining ALP of international transactions with AEs these costs and expenses should haves been considered by the TPO. In the present case, save and except considering the ratio of material consumption to gross profit; TPO did not however take into account other costs and expenses associated with manufacture & sale of goods to non AEs.

Manufacturing Domestic sales Export to Related unrelated NET SALES 2,024,504,485 37,986,395 80,760,331 Raw material consumption 1,414,761,409 32,271,826 63,842,458 Manufacturing cost (as per list attached) 206,499,457 3,874,612 8,237,554 Royalty 2% on sales 40,490,090 1,615,207 Sales commission 34,806,318 3,541,431 Adjusted cost 1,696,557,274 36,146,438 77,236,649 Gross profit 327,947,211 1,839,957 3,523,682 Gross profit margin 16.20% 4.84% 4.36%

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 9 From the facts as are brought on record I find force in the A/R’s argument that profit margin in Exports to AEs was higher than the profit margin in exports to Non AEs. In his report u/s 92CA(3) TPO failed to consider the cost & manufacturing sales overheads. I have therefore no hesitation in holding that TPO did not correctly work out the ALP in respect of exports to AEs. If he had taken into account the costs and expenses associated with exports made to unrelated parties, the profit margin of the appellant in exports to AEs compared favourably as opposed to profit margin in exports to unrelated parties. For the aforesaid reasons therefore I do not find merit in the upward adjustments of rs.9,68,154/- proposed by the TPO in respect of export to AEs. The addition of Rs.9,68,154/- is therefore deleted.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 10 earned margin of Rs.1,02,71,025/- which in percentage term was 13%. The cost of purchases effected from unrelated parties (domestic and import) was ascertained by TPO at Rs.4,20,47,002/-. These purchases inter alia included 3 products viz., press chemicals, blankets & machines. The products procured from unrelated parties & sold to unrelated parties were other than printing ink. It appeared from the comparative statement that purchases from unrelated parties were imported as from the comparative statement that purchases from unrelated parties were imported as well as sourced locally. Profit margins varied substantially form product to product and also depending whether the product was sourced locally or imported. For example, in the case of sale of press chemicals, the assessee earned profit margin of 32% from locally sourced press chemicals whereas in the case of imported press chemicals profit margin was only 14%. In the case of imported blankets sold to unrelated parties locally profit margin was 29% and in respect of machines procured locally & sold to unrelated parties locally profit margin was 9%. The overall profit margin in trading operations involving 3 products other than printing ink was 23%. From analysis of these facts & figures, I however find that in respect of each product profit margins varied substantially & profit margin of 23% did not represent GP margin of anyone specific product and therefore the TPO was not justified in adopting overall gross profit rate for making comparison of profit margins of dissimilar products. It is settled proposition of law that comparison can only be made between the comparables. Before making comparison of profit margins of two products, it was necessary for the TPO to establish that the products considered for comparison matched each other at least in their essential attributes. In the present case the TPO compares profit margin in respect of printing ink on one hand and combined profit margin on sale of press chemicals, blankets & machines. The facts noted above however established that each of the 3 products which were purchases & sold to unrelated parties; had independent and varying profit margins and even amongst then these products were not comparable. The facts further indicate that profit margin of printing chemicals sourced locally was 31% whereas profit margin for imported press chemicals was only14%. These facts indicated that even within the same product category; profit margins substantially varied & in respect of imported printing chemicals profit margin was 14% which is comparable with profit margin of 13% earned by the assessee in respect of trading in import printing ink. On considering the totality of the facts & circumstances of the case therefore I find that TPO did not appreciate facts of the case in proper perspective but made comparison of profit margins of dissimilar products having different end uses. These products did not compare with each other in their essential attributes. Each product performed different functions or had different end uses and having regard to dissimilarity of the products; the net profit margins

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 11 were substantially different and therefore profit margins of such dissimilar products could not be considered for determination of ALP. Save and except the reasons discussed in the order u/s 92AC(3), neither the AO nor the TPO brought on record any other material or evidence to justify the downward adjustments in the cost of printing inks imported from AEs. On the other hand, in the reports furnished before the AO; the appellant justified its transactions with AEs by adopting TNMM method and no infirmity in the working of ALP; made by adopting TNMM method was proved by the AO or the TPO. In absence of any other adverse material or infirmity in the report furnished by the assessee before AO; I find no justification in the adjustments carried made by the TPO in respect of material imported from AEs and sold to unrelated parties. The addition of Rs.40,47,058/- is therefore ordered to be deleted.

Being aggrieved by the order of the ld. CIT(A) Revenue is in appeal before us.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 12 Based on these, he made upward adjustment to the ALP of the goods exported to the AEs for Rs. Rs.9,68,1514.00.

With regard to the trading function, the TPO noted that while in case of purchases made from unrelated parties for making sales to unrelated parties, the gross level margin on sales was 23%. This he considered as the arm's length margin for trading activity in uncontrolled circumstances and selected the RPM as the most appropriate method. He noted that in respect of import from related parties for sales to unrelated parties, the gross profit margin was only 13%. The assessee explained that the products are different. But the TPO was of the view that in the RPM, the main requirement is similarity of functions. Thus, he made a downward adjustment to the price of the imports from AEs for Rs. 40,47,058.00.

On receipt of these determinations from the TPO, the AO gave opportunity to the assessee and then passed the assessment order on the same lines as proposed in the order of the TPO. The assessee preferred an appeal before Ld. CIT(A) and raised various arguments against the adjustments to the total income resulting from the determination of the ALP of international transactions. Ld.CIT(A) in para 6 & 7 of the appellate order has held that the TPO was not justified in rejecting the TNMM used by the assessee. Ld. CIT(A) has arrived at this view on the ground that the TPO thought that the assessee itself had used CPM and RPM to justify the ALP in earlier year and that is why he rejected TNMM on ground of consistency. He found that the assessee has used TNMM in its analysis and not CPM or RPM. This assertion is not correct. As mentioned above, the TPO did not consider the TNMM as the most appropriate method in the circumstances of the assessee as its international transactions were less than 5% of the turnover. Further, he intended to analyze the two segments viz. manufacturing and trading segments, separately. This is clearly mentioned in the last Para of

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 13 page 2 of the TPO's order. The reference to the use of CPM and RPM in earlier year was not made in the context of rejection of the TNMM. It was made while justifying these two methods as the most appropriate method for the two respective functions of the assessee. To appreciate this distinction, it is felt necessary that the whole process of arriving at the ALP of an international transaction in the case of the assessee be summarized. Section 92D requires any person who has entered into an international transaction to keep and maintain such information and documents in respect thereof as may be provided. Rule 10D of the IT Rules prescribes in a detailed manner the information and documents which have to be kept and maintained by the assessee. The methods considered for determination of the ALP of an international transaction and the actual working of computation of ALP is a part of such information. On receiving a reference from the AO u/s 92CA(l) of the Act, the TPO initiated proceedings u/s 92CA(2), during which the assessee submitted a Report prepared by M/s Price water house Coopers as part of the documents and information kept and maintained by it. Rule 10D(e) casts a responsibility on the assessee to keep and maintain information and documents regarding description of functions performed by the assessee and its AEs involved in the international transactions. In this context, reference is made to Part-IV of the Report submitted by the assessee, which carries out the functional analysis. Pages 22 and 23 of this Report clearly describe the Functions performed as consisting of, inter alia, trading activities - where the assessee is purchasing for resale and acting as a normal distributor, and manufacturing activities - where the assessee is carrying out normal manufacturing function which also involves importing raw materials and exporting goods. Further, at page 29 of this Report, the assessee has clearly being characterized as an entity having routine manufacturing and routine trading activities. A copy of these three pages is attached as Annexure 1 to these written submissions. Once the functional analysis has been made, the Assessee is required to show that it has conducted a comparability analysis and also an analysis of

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 14 the Methods prescribed for determination of the ALP of the international transactions. So far as the assessee is concerned, this has to be done in accordance with section 92C(1) & (2) of the Act read with Rule 10B of the Rules. Section 92C(1) provides that the ALP of an international transaction is to be determined by any of the Methods prescribed therein (clauses (a) to (f) of this sub-section), being the most appropriate method, having regard to the following: (i) The nature of transactions, or (ii) Class of transactions, or (iii) Class of associated persons, or (iv) Functions performed by such persons, or (v) Such other relevant factor as the Board may prescribe.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 15 transactions carried out under that function. On page 33 of the Report, the assessee accepts that CPM could have been applicable in case of export of manufactured goods, but has rejected this Method on the ground that (Para 5.19): " ... since exports to unrelated parties is very small, hence trying to compare margins at the gross level for related and unrelated party will not be correct because of the volume and different geographical locations. "

Similarly, as per Rule 10B(1)(b), RPM has to be applied to an entity which is involved in reselling of property or services purchased. As the assessee has a trading function, this Method can be applied for international transactions carried out under that function. On page 34 of the Report, the assessee accepts that RPM could have been applicable in case of import of finished goods for resale in the Indian market, but has rejected this Method on the ground that (Para 5.22): " ... since DIC is engaged in trading of different classes of goods, the profitability of which may vary vastly (since the variety of products that DIC trades in has different profitability levels), the margins on related and unrelated party transactions cannot be compared reliably."

This only leaves the TNMM. The assessee has considered the TNMM as the most appropriate method. However, in applying it, it has aggregated all the international transactions together and compared the operating profits in relation to sales with those of comparable entities selected by it. At this juncture, it would be appropriate to make a reference to Rule 10B(1)(e) which prescribes the manner in which TNMM is to be applied. The Rule clearly mentions that in this method, the net margin realized from an international transaction is to be computed in relation to a relevant base and this is to be compared with the net margin realized by the same enterprise or by an unrelated enterprise from a one or more comparable uncontrolled transactions. Thus, the TNMM prescribed in Rule 10B(1)(e) is based on a transactional analysis. Further, in doing so, as provided in Section 92C(1) and already mentioned above, the following factors have to be taken into account:

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 16 (i) The nature of transactions, or (ii) Class of transactions, or (iii) Class of associated persons, or (iv) Functions performed by such persons

However, the assessee has not applied the TNMM by taking into consideration the nature of transactions (import of raw materials for manufacturing, import of finished goods for trading, export of finished goods for trading, payment of royalty), the class of transactions (export, import), the class of associated persons (manufactures, traders, technical knowhow providers) or the functions performed (manufacturing, trading).

The assessee has also not taken into account the comparability factors prescribed in Rule 10B(2) which requires taking into account (in respect to both controlled and uncontrolled transactions): i. Characteristics of the property transferred ii. Functions performed, assets used etc iii. Contractual terms iv. Conditions prevailing in the markets in which the parties to both controlled and uncontrolled transactions are operating.

It needs to be mentioned here that, these requirements are common to all the Methods described in Rule 10BB(1). Thus, the assessee failed to draw any distinction between the international transactions carried out under the manufacturing function taking into account assets used and risks assumed on one hand and international transactions carried out under the trading function taking into account the assets used and risks assumed.

The TPO examined the Report submitted by the assessee. It needs to be highlighted here that the AO or the TPO is not burdened with the responsibilities mentioned in section 92D read with Rule 10D. Section 92C(3) of the Act simply mentions that if during the course of proceedings, on the

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 17 basis of information or documents in his possession, the AO or the TPO is of the opinion that, inter alia, the price charged or paid in an international transaction has not been determined in accordance with section 92C(1) &(2), then he can proceed to determine the ALP of the international transaction in accordance with section 92C(1) & (2) on the basis of information and documents available to him.

As mentioned earlier, the TPO was of the view that due to the small volume of international transactions in relation to the turnover, net profit from the transactions would not give a correct picture for comparison. Further, he also wanted to look at the two functions - manufacturing and trading - separately.

The reference to CPM and RPM used in earlier year i.e. AY 2003-04, was made in the context of justifying the price of the transactions "during the course of proceedings before the TPO". It is seen that during proceedings before the TPO for AY 2003-04, the gross margins for the two segments were called for, which were submitted by the assessee. On examination, the TPO found they were within range and hence no adjustments were made. As mentioned above, this reference was made in the context of selection of these two methods as the most appropriate methods for their respective segments and not in the context of rejection of the TNMM.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 18 In Para 8 to 10 of his appellate order, Ld. CIT(A) has next taken up the actual application of CPM in the context of the manufacturing function. It is seen that on the basis of details furnished by the assessee, Ld. CIT(A) has arrived at a view that various costs, including royalty and commission payments were not included while computing the cost of production under the CPM. After allowing for these costs, Ld. CIT(A) found that the margins would not lead to any adjustments in the ALP.

In this context, it has already been mentioned above that the details of gross margins for the two segments were called from the assessee itself. The sheet supplied by the assessee to the TPO in this regard is enclosed as Annexure 2 to this submission. If additional details were submitted by the assessee with regard to computation of gross margins, the same should have been remanded to the AO /TPO for comments. Thus, the nature of these additional manufacturing costs remained un-examined from the TPO's side. Further, it is seen that royalty and commission payments are included in the cost side for sales to unrelated parties. These are operational costs and not costs of production. Even if there are no sales, there would be cost of production and the gross margin would be a loss, but there would not be any royalty or commission payment on the basis of percentage of sales. On these grounds, it is pleaded that the decision of Ld. CIT(A) is erroneous.

So far as the computation of ALP under the RPM in case of trading function is concerned, Ld. CIT(A) has dealt with it in para 11 to 13 of the appellate order. The main issues highlighted therein is that whereas the assessee imported printing inks from the AEs for sale in domestic market, it procured press chemicals, blankets and machines from unrelated parties for resale. In view of Ld. CIT(A), the margins on these different types of products are different. Further, there is no infirmity in the working of ALP under TNMM (para 13, page 24). Accordingly, it was held that the adjustments made were not proper.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 19 In this context, it needs to be mentioned here that Rule 10B(1)(b) provides that comparison can be made with products which are similar. In that case, comparison could have been made to margins earned from press chemicals. Secondly, the infirmity in the overall application of TNMM to the two functions has already been pointed out.

As the assessee has filed an application under Rule 27 of the Appellate Tribunal Rules 1963, no arguments are made against other objections raised by the assessee before Ld. CIT(A) .

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 20 (e) Royalty paid 30.68 million TNMM

All the above transactions were benchmarked applying the TNMM Method prescribed in Section 92C of the Income-tax Act, 1961. In the order passed u/s 92CA(3) the TPO found the transactions mentioned at SI. No. (b), (d) & (e) benchmarked applying the TNMM Meth to be "at arm’s length” (ALP). However as regards the export of manufactured products & import of various goods for trading, the TPO rejected the assessee's computation and evaluation of arm's length pricing. The TPO without pointing out any defect in the benchmarking exercise or in the reasons stated by the transfer pricing auditor in the transfer pricing report for taking the TNMM Method to be the most appropriate method baldly alleged that since the volume of import & export transactions with the AEs was not substantial (being less than 5%), TNMM Method was not reliable. Apart from the foregoing reservation which is clearly not the decisive parameter for choosing the most appropriate method, the TPO in the entire transfer pricing assessment framed ix] s 92CA(3) failed to point out any infirmity or fallacy in the benchmarking exercise or the comparables used by the assessee. Even in his written arguments the D/R has merely reiterated the TPO's stand that since the volume of the import & export transactions was not substantial the TNMM Method was not suitable. In this regard it is submitted that nowhere does Rule 10B of the I.T. Rules, 1962 require that the volume of the transactions conducted with AEs is a relevant or decisive parameter for application of TNMM Method. Reference in this regard may be made to Rule 10C which lays down the decisive parameters to determine the most appropriate method. The relevant extracts are as follows: Most Appropriate Method (a) the nature and class of the international transaction or the specified domestic transaction;

(b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 21 assets employed or to be employed and risks assumed by such enterprises;

(c) the availability, coverage and reliability of data necessary for application of the method;

(d) the degree of comparability existing between the international transaction or the specified domestic transaction] and the uncontrolled transaction and between the enterprises entering into such transactions;

(e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions;

(f) the nature, extent and reliability of assumptions required to be made In application of a method."

Nowhere does in the above clause has the volume or value of transaction is mentioned as the decisive or relevant criteria to examine the appropriateness of any of the methods. On the other hand at Pages 33 & 34 of the Transfer Pricing Report [Pages 55 & 56 of the Paper Book], the transfer pricing auditor has elaborately stated as to why the CP Method & the RP Method could not be applied for benchmarking the assessee's transactions with AEs and has justified the application of TNMM Method. Therefore the contention of the TPO & argument of the D/R that benchmarking exercise carried by the assessee was not reliable since the volume of the import & export transactions were not substantial is erroneous and bad in law. It is imperative to mention that the TPO did not dispute the benchmarking of commission income & royalty payment under the TNMM method adopted by the assessee; justifying to be ALP. The commission proceeds represented only a faction of the total turnover of the assessee. The TPO however did not dispute the application of TNMM Method for benchmarking the commission income. Similarly royalty payment of Rs.30.68 million to AE was only 1.21% of the total expenses debited to P&L AI c. Even this transaction was

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 22 benchmarked applying TNMM Method. The TPO accepted the assessee's benchmarking exercise and the application of TNMM Method in respect of royalty payment was accepted as well. In the circumstances the assessee fails to understand that if the application of TNMM was found justifiable by the TPO in respect of commission received and royalty paid which were admittedly less that 5% of the total turnover expenses then why only the transactions referred to in (a.) & (c) of the above client the TPO & the D/R found the same TNMM to be inappropriate on the ground that these were not substantial. Such selective &; contradictory approach adopted by the TPO was therefore unjustified and bad in law. This further proves that the allegation of the TPO that TNML method could not be applied to imports I exports from AEs since it constituted less than 5% of total turnover was ex-facie fallacious. It is also pertinent to mention that similar quantum of imports/exports from AEs were made in the earlier AY 2003-04 and the subsequent years as well. Even in the preceding AY 2003-04 and the subsequent AY 2006-07 & onwards, value of import/ export transactions with AEs was near about 5% of the total turnover. However neither in the TP order for the earlier year nor in transfer pricing orders for AYs 2006-07 & onwards; the application of TNMM Method was rejected by TPO on the ground that the value of international transactions with AEs was less than 5% of total turnover. The assessee submits that principle of res judicata though not strictly applicable in tax proceedings; yet the established rule of consistency must also be followed on factual matters permeating through the years. It is a well settled legal position that factual matters which permeate through more than one assessment year, if the Revenue has accepted a particular view or proposition in the past, it is not open for the Revenue to take a entirely contrary or different stand in a later year on the same issue, involving identical facts unless and until a cogent case is made out by the AO on the basis of change in facts, position or in law. In fact even the TPO in his order himself has advocated the principle that consistent method should be applied over the years and the assessee cannot change the method every year where the facts & the transactions with AEs

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 23 are the same. For this purpose the TPO has referred the proceedings before his predecessor for AY 2003-04 who had allegedly adopted RPM & CPM for determining ALP in AY 2003-04. The observations of the TPO at Pages 3 & 5 of the TP Order [Pages 122 & 124 of the Paper Book] are however factually incorrect. Copy of the TP study for AY 2003-04 is at Pages 126 to 225 of Paper Book and order ii]» 92CA(3) for AY 2003-04 is at Page 226 of Paper book. It will be noted from Pages 154 to 161 of the Paper Book [Pages 24 to 31 of TP study] that even in the AY 2003-04 the TP auditor had justified TNMM to be the most appropriate method and in the TP order for AY 2003-04 no adjustment was proposed. It is therefore submitted that the rejection of TNMM Method applied by the assessee on the ground that the volume of import & export transactions with the AEs were not substantial is totally unwarranted and incorrect. The assessee further submits that both the TPO and the D/R have singularly failed to explain as to why and on what basis any of the other four methods prescribed in Section 92C( 1) was found or considered more suitable or for that matter more reliable than the TNMM Method. It appears from the TO Order that the TPO proceeded to arbitrarily apply the "Cost Plus Method" for benchmarking "Export of manufactured goods" and "Resale Price Method" for "Trading of various goods". The TPO made factually incorrect statement in the impugned order for holding that "CP Method" and the "RP Method" were the most suitable methods for benchmarking "Export of manufactured goods" and "Trading of various goods" respectively. The TPO ignored the fact that both of the aforesaid methods failed to satisfy the decisive parameters laid down in Rule 10B of I.T. Rules, 1962 which were relevant & pertinent before proceeding to apply these methods. On Pages 55 & 56 of the Paper Book [ Pages 33 & 34 of the Transfer Pricing Report for FY 2003-04 ] the Transfer Pricing Auditor has elaborately set out the reasons as to why the CP Method & the RP Method could not be applied for benchmarking the ALP. The TPO however failed to distinguish the reasoning furnished by the Transfer Pricing Auditor and arbitrarily applied CP Method & RP Method. Furthermore even the

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 24 benchmarking exercise conducted by the TPO suffered from factual inaccuracies infirmities which therefore yielded incorrect results. The primary reason cited by the TPO for applying CP Method & RP Method for benchmarking "Export of manufactured goods" and "Trading of various goods" was that the assessee himself adopted the aforesaid two methods in the immediate preceding year i.e. AY 2003-04. The relevant extracts of the TPO order is as follows: "The assessee himself used CPM/ RPM for AY 2003-04 to justify its export transactions with AE during the course of proceedings before the TPO. Now, this year when the results are not in favour the assessee, it cannot turn back and find faults with the appropriateness of the method."

It is clearly evident from the above that the TPO proceeded to apply CP Method & RP Method on the premise that the assessee itself benchmarked its transactions using this method in the earlier year and therefore in the relevant year the assessee could not turn around and question the appropriateness of this method. This observation of the TPO is patently wrong and contrary to the jurisdictional facts on record. The assessee has placed on record the Transfer Pricing Report for AY 2003-04 [ Pages 126 to 225 of Paper book] and also the transfer pricing order passed u/s 92CA(3) in AY 2003-04 at Pages 226 of the paper book. On perusal of Pages 24 to 31 of TP Study [Pages 154 to 161 of Paper Book] it shall be noted that the assessee had applied TNMM Method to benchmark all its international transactions in AY 2003-04. The alleged finding of the TPO that the assessee followed CP Method & RP Method in earlier year is therefore factually incorrect. Even the D/R in his written arguments has reiterated that the assessee had adopted the CP Method & RP method in the immediate preceding AY 2003-04. This shows that even the D/R failed to take note of the basic jurisdictional documents of AY 2003-04 which were admittedly before him in the form of Pages Nos. 126 to 225 of the Paper book. The Id. D/ R also did not care to take note of the categorical findings of the Id. CIT(Appeals) at Pages 18 & 19 of his order where he had clearly stated that in the earlier year the assessee had justified ALP of his transactions with AEs on

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 25 TNMM Method. This shows the non-application of mind by the D/R to the facts involved in the present case. The assessee therefore submits that the basic premise of the TPO's contention which is supported by the D/R in his arguments are factually incorrect and patently wrong. The assessee reiterates that it had applied TNMM Method to justify the arm's length price in AY 2003- 04 and not the CP or RP Method as alleged.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 26 the TNMM because the assessee had applied CPM/RPM in earlier year is clearly untenable and incorrect. 9.1 From the written arguments, it is further stated that the Id. D/R has not been able to dislodge the CIT(A) 's factual finding which on the facts involved in the assessee's case he had held that CP method & RP Method was incorrectly applied by the TPO. The CIT(A) in his hand pointed out specific factual fallacies or infirmities committed by the O and on account of which the CIT(A) had held that ALP as determined he TPO, by following RPM & CPM did not represent true & correct ALP. In the arguments, placed before the ITAT at Page 6, the D/R shrugged off the TPO's responsibility to justify adoption of another method vis-a-vis the nod adopted by the assessee. At Page 6 of his written arguments referring section 92C(3) of the Act, Ld. D/R has stated that the TPO is only required to firm opinion that the price charged by the assessee is not in accordance with relevant provisions and / or methods and then he can straightaway proceed impute the correct arm's length price. The D/R in his submission has argued that the AO or the TPO were not obliged to discharge the responsibility call them by the specific provisions of Section 92D read with Rule 10D. In his missions the Id. D/R has tried to make out a case that the AO or TPO are required to justify the arm's length price with reference to the correct facts transactional documents of the assessee. Going by D/R's logic, the AO 01: TPO has unlimited, unspecified and unbridled powers to reject the bench-making exercise carried out by the assessee without even the need to substantiate it with reference to the true facts, details & documents of the asses Such argument of the D/R is blatantly erroneous and contrary to the provisions of law and also the principles of natural justice. Before the Id. CIT(Appeals), the assessee without prejudice to its primary contention that TNMM Method was in most appropriate method had successfully made out the case that even the CP Method & RP Method was applied to the assessee's case, even then international transactions with its AEs were at arm's length. In support of investments the assessee had relied

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 27 on the facts & figures which were availing the audited accounts. The Id. CIT(Appeals) after considering the explains & calculations furnished by the assessee accepted its contention and the: deleted the upward adjustment proposed by the TPO on being satisfied t factually the TPO had wrongly computed the ALP because he had not taken into account the true; correct and the relevant facts. 9.2 The Ld. D/R in his written arguments has bier tried to find faults & errors in the aforesaid benchmarking exercised out by the CIT(Appeals). The allegations levelled by the Ld. D/R in his written arguments are unjustified both on facts & in law at Page 7 of his submissions the Ld. D/R has pointed out alleged faults committed by the Id. CIT(Appeals) while applying CP Method & RP Method to the export of manufactured products & trading of various goods respectively. In the first instance, we deal with the allegations in respect of benchmarking of the "export of manufactured goods" to AEs by applying the CPM. On Page 7 of his arguments the Ld. D/R has alleged that the assessee filed different statements of "gross profit" margin before the TPO and the Id. CIT(Appeals). It is the Ld. D/R's contention that the different calculation sheet furnished before the Ld. CIT(Appeals) was in the nature of additional evidence and the AO /TPO was never confronted with these facts & figures for their comments. In this regard, it is submitted that the observations of the Ld. D/R are misleading, erroneous & unjustified. At this juncture, it would be relevant to place before the ITAT the correct facts in their proper perspective. In the transfer pricing assessment proceedings u/s 92CA(3), the assessee had submitted the details/ explanations justifying the application of TNMM to benchmark export of manufactured goods to AEs. In the course of TP proceedings the TPO however required the assessee to furnish the details of sales & purchases of both traded goods & manufactured goods and the consequential gross margins earned by it. The TPO did not call for the 'cost sheet' or the complete 'cost working' of the manufactured goods which were exported to AEs but only required the assessee to furnish the details of cost of

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 28 raw materials consumed. The TPO did not cite any reasons for which he had sought these details. In compliance with the directions of the TPO the assessee furnished the break-up of sales made in the manufacturing & trading operations to both related & unrelated parties. Corresponding details of the cost of materials consumed vis-a-vis value of finished goods exported were also furnished in response to TPO's requisition. The TPO never informed the assessee that he had decided to apply CP Method nor he required the assessee to furnish relevant data to compare the gross profit margins. In fact even after obtaining the details of sales & cost of raw materials, the TPO never issued any "show cause" notice requiring the assessee to furnish the statement giving details of direct & indirect costs, factory overheads and post manufacturing expenses incurred in relation to its exports to AEs & non-AEs. The TPO also never show caused the assessee to explain as to why TNMM should be rejected or for that matter why CPM should not be applied to its case. The assessee was kept in complete dark and was never informed by the TPO that he was proposing to benchmark the ALP applying CP Method. It is only after the assessee received the TPO's order u/s 92CA(3) that the assessee became aware that the TPO had chosen to arbitrarily apply the CPM Method in respect of export of manufactured goods. The TPO while applying the CP Method suo moto equated the "gross margins" as being difference between the export sales value & corresponding cost of raw materials consumed. From the plain reading of the TO Order it appears that the TPO was of the considered opinion that "gross profit margin" was the difference between the export sales value & cost of raw materials consumed and no other associated costs was required to be considered in arriving at the G.P. margin. The TPO was all along well aware that he had called for only the details of export sales & corresponding cost of raw materials consumed. TPO consciously did not call for further details of manufacturing & marketing costs because in his view for applying CP Method, the data required pertained only to cost of material consumption & nothing more. In TPO's view other direct costs/ expenses & indirect overheads were not required to be imputed in

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 29 arriving at the "gross profit margin" for the purposes of arriving at ALP of manufactured goods while applying CP Method. This fact is substantiated from the TPO's order itself. The relevant extracts from the TPO's order is as follows: 9.3 From the above calculation table prepared by the TPO himself, it is clearly evident that the TPO had required the assessee to furnish only the details of sales & corresponding cost of raw materials consumed. Reason being that TPO himself had requisitioned this limited data from the assessee. It is also pertinent to note that the TPO in his order nowhere alleged that the assessee failed to provide any details or the cost break-up in respect of goods manufactured by it. As such it will be appreciated that it was never the TPO's case that information relating to manufacturing and or marketing cost was requisitioned by him and which the assessee failed to furnish and on account of such failure the TPO had to determine the GP margin only with reference to cost of material consumed. On the contrary it was a case where the TPO consciously & knowingly benchmarked the transaction by computing the gross profit margin because the difference between export sale price and cost of raw materials consumed. Such understanding & calculation and application of CP Method by the TPO was wholly erroneous and incorrect. Aggrieved by the same, the assessee challenged it before the CIT(Appeals).

In the appellate proceedings, the assessee disputed the mode & the manner in which the TPO had applied the CPM Method. It was explained that in order to apply CP Method, the gross profit margin had to be computed as the difference between 'value of sales' and the 'cost of goods sold'. Unlike in case of traded goods, the 'cost of goods sold' of manufactured products is determined by aggregating cost pertaining to raw materials, labour, factory overheads, direct & indirect expenses etc. All the aforesaid cost heads are included for determination of the 'cost of goods sold'. It was explained before the CIT(A) that the AO& TPO had erroneously considered only the cost of raw

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 30 materials and omitted to consider the other relevant expenses/ overheads for the purposes of computing the "cost of goods sold". It was in this background that the assessee furnished a statement before the CIT(Appeals) containing its version of computation of gross profit margin on export of manufactured goods. The D /R in his written arguments has however tried to project as if the assessee had intentionally tried to conceal true facts at the stage of assessment and deliberately furnished different statements before the TPO & CIT(Appeals) respectively. The D/R has therefore suggested that the same should have been remanded back. The assessee submits that the said allegation of the D /R is completely unjustified. Before the TPO, the assessee had furnished the details of sales & cost of material consumption because only so much of the data was requisitioned by him. It was the TPO's own understanding that for applying CP Method, the gross profit margin was to be computed only with reference to sales & cost of materials consumed and nothing more. It is for this reason the TPO has nowhere alleged in his order that there was failure on the assessee's part to furnish the relevant information. The assessee became aware about TPO's wrong understanding of CP Method only when the order is] s 92CA(3) was received. On noting the factual infirmities committed by the TPO in computing "profit margin" and thereby computing wrong ALP, the assessee challenged the TPO's order in appeal. In the course of appeal, the assessee in support of its contention, explained that for computing the correct gross profit margin of manufactured products, in addition to cost of materials consumed other direct & indirect costs & factory overheads were also required to be included. Reference in this regard was invited to Rule 10B of the I.T. Rules, 1962 which lays down the manner in which the CP method is to be applied. The relevant part of the said Rule provides as follows: "cost plus method, by which,- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined;

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 31 (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined;

(iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market;

(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii);

(v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise."

From bare perusal of the above Rule, it is evident that for applying CP method, one has to compute the cost of production which shall include both direct & indirect costs. The TPO was therefore clearly wrong in considering only the "cost of raw materials" as the complete "cost of production". Before the CIT(Appeals), errors committed by the TPO were pointed out. The assessee also furnished the correct computation of "gross profit" margin which should have been applied by the TPO himself in the context of CP Method for benchmarking export of manufactured products. Comparing the calculation of the profits margin as done by the TPO and by the assessee, the Ld. CIT(A) found merit in assessee's calculation of the profit margin. The Ld.CIT(A) found that if the TPO had correctly computed the ALP of the international transactions with AEs then the assessee's profit margin was 4.84% whereas the profit margin earned by the assessee on exports made to in AEs was 4.36%. The Ld. CIT(A) therefore held that on account of adoption of wrong facts and data the ALP computed by the TPO in case of transactions with non AEs was erroneous and hence no adverse inference could be drawn against the assessee on the basis of such wrong computation. The CIT(A) accordingly allowed relief to the assessee. The Hon'ble ITAT will

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 32 therefore appreciate that it was not a case where the assessee filed additional evidence or had furnished different statements before TPO and CIT(Appeals) as alleged by the Id. D/R in his written submissions. The calculation sheet filed by the assessee was its submission in rebuttal to the wrong computation of profit margins as made by the TPO in his impugned order. It was not in the nature of additional evidence. It was only the case where the TPO's & assessee's versions of computation of gross profit margin in CP Method were different. The facts & figures were taken by both from the audited accounts which were available both to the AO and the TPO. The CIT(A) merely decided on the question as to which of the two computation statements was more appropriate. The D/R has however wrongly stated that the assessee filed additional evidence before the CIT(A). It is further pertinent & relevant to state that even though the Id. D/R has made elaborate written submissions, no attempt whatsoever has been made by him to rebut the CIT(A)'s factual findings by pointing out any factual infirmities or falsity therein. It is therefore submitted that when the D /R has not pointed out any specific error in the factual findings of the Ld. CIT(A), his request for remand cannot- be accepted only with a view to give the 'Revenue only the second innings for framing the assessment afresh. It is also pertinent to mention that nowhere in the grounds of appeal has the Department alleged that the CIT(A) had acted in violation of Rule 46A of the LT. Rules, 1962 and wrongfully admitted additional evidence. It is not even the AO's case that the assessee had filed any additional evidence. Had this been the grievance of the AO then he would have certainly taken it up by raising specific ground of appeal. Even in the order u/s 92CA(3) the TPO has nowhere alleged that the assessee did not file details pertaining to cost break- up of manufactured goods though requisitioned by him. These facts therefore support the assessee's contention that it had never filed additional evidence before the CIT(A). The TPO had consciously computed gross profit margin by deducting from the value of export Sales; only the Cost of raw materials consumed for applying the CP Method. In the circumstances it is submitted that the Ld. DR has tried to twist the actual facts to give a

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 33 misleading picture that the assessee had either filed additional details or two sets of statements before the TPO and CIT(A).; 9.2 It is also imperative to note that even though in his order the CIT(A) has pointed out specific infirmities & mistakes committed by the TPO in determining ALP of non-AE transactions the D/R in his written arguments has nowhere even attempted to justify the manner in which CP Method was applied by the TPO. In fact the D/R conceded that Rule 10B required inclusion of both direct & indirect cost of production for application of CP method. This therefore shows that the D/R did not have any adverse material with him to counter the CIT(A)'s findings rendered on merits. The assessee submits that the arguments placed by the D/R needs to be rejected as he has not been able to point out or establish any factual infirmity or falsity in the findings recorded by the CIT(A). In the written arguments the D/R has further submitted that the assessee had erroneously included the royalty & commission paid as part of "manufacturing costs" while determining ALP under the CP Method. The D/R contended that even if there are no sales, there would still be cost of production and thereby the gross margin will be a loss. However in absence of any sale there would be no expenditure of account of royalty or commission paid. The argument of the D/R is absurd, illogical and self-contradictory. If there are no sales there would be no need to carry out benchmarking exercise. If the assessee does not undertake any "sales" then the entire cost of production debited to the profit & loss account would reflect in the credit side of the said profit & loss account as "cost of finished goods in stock" and accordingly there would neither be any - gross profit or loss. It is only when the goods manufactured are sold either to AEs or non AEs the question of computation of ALP consequently computation of the profit margin would arise. It is only because the assessee had made sales to its AEs that ALP was required to be computed by adopting one of the recognized but suitable method. However the fact remains that one of important pre-requisite to apply CP Method is that there should be "sales" to AE. In absence of any sale of manufactured goods the gross profit margin

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 34 would be unascertainable. The gross profit margin is the difference between sales & cost of goods sold. AS such the "value of sales" is the essential ingredient for computing gross profit margin and in its absence there can be no question of its determination. The D/R in his submission therefore referred to such an irreconcilable & totally impractical situation. As regards the D/R's statement that in case of no sales the gross profit margin would be a loss, it is submitted that even this statement is factually as well as theoretically incorrect. First of all, in case of no "sales" situation, gross profit margin cannot be computed. The doctrine of impossibility shall operate. Even if for a moment the D/R's logic is accepted at its face value that the gross profit can be computed without the sales value, even then the gross profit would be NIL. In such an eventuality entire "cost of production" debited on the debit side would be reflected as cost of unsold stock and will accordingly reflect on the credit-side of the P&L a/c. In the circumstances the gross profit would be NIL. The Ld. D/R has further argued that the royalty & commission expenses are not "cost-side" related expense but "sales-related" expense and hence could not form part of "cost of production". In this regard we submit the Ld. D/R has properly understood the true meaning of the assessee's submissions made before the CIT(A). It was never the assessee's case that these 2 expenses were to be considered as part of production cost. In the first instance it is submitted that the assessee never included the royalty & commission as part of manufacturing costs of the assessee. Instead the same were excluded from value of export sales made to unrelated parties to make them comparable to the sales made to AEs and accordingly ascertain the arm's length value of an uncontrolled transaction. This is done by the assessee in conformity with both Rule 10B & 10C of the LT. Rules, 1962. Therefore the allegation of the D/R that the assessee had treated it to be manufacturing costs is erroneous & incorrect. Reference in this regard is made to Clause (1) of Rule 10B which in respect of CP Method clearly stipulates that both direct & indirect costs will have to be considered and such

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 35 cost of goods sold will have to be appropriately marked up to ascertain the arm's length value. Such mark-up would be the gross profit mark-up which one would earn in a comparable uncontrolled transaction. The term comparable "uncontrolled transaction" has been defined in sub-clause (3) of Rule 10B which reads as follows: "An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if-- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. " Similar provision is contained in clause (c) of Rule 10B which lays down the manner in which the CP Method is to be applied. The relevant extracts of the aforesaid Rule is as follows: "cost plus method, by which,- ......... (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences. if any. between the international transaction and the comparable uncontrolled transactions. or between the enterprises entering into such transactions. which could materially affect such profit mark-up in the open market;"

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 36 respect of export sales to unrelated parties, the assessee paid royalty to its parent company as well as paid commission to agents who procured export orders. As such the export sales price of unrelated parties was materially higher than the export sale price charged from AEs. In terms of Rule 10C & 10B(3)(ii) it was therefore necessary to make suitable adjustment to the sale price realized in uncontrolled transactions so as to make them comparable with the transactions with AEs. The assessee therefore excluded the royalty & commission paid on sales to unrelated parties so as to arrive at the comparable arm's length value of uncontrolled transactions in conformity with Rule 10B & Rule 10C of IT Rules, 1962. Accordingly the normal gross profit mark-up was computed only after excluding the royalty & commission costs. The D/R however failed to appreciate the foregoing facts of the case and wrongly alleged that the assessee treated commission & royalty to be manufacturing costs. The assessee therefore submits that the royalty & commission which were paid on sales to unrelated parties were rightly deducted by the Id. CIT(A) while computing the gross profit margin. The computation of the assessee and the Id. CIT(A) was therefore in conformity with Clause (1) & (3) of Rule 10B of the LT. Rules, 1962. The allegations of the D/R are therefore factually & legally unjustified and therefore devoid of any merit. As regards computation of ALP under the RP Method in respect of traded goods, it is submitted that the TPO had determined the ALP by making comparison of dissimilar products having different applications & uses and therefore having different profit margins. The TPO however GP rate of materials (printing inks) imported from AEs and sold to unrelated parties compared with GP rate of all purchases & sales made to unrelated parties for application of RP Method. Comparing combined GP rate of totally dissimilar products with GP rate of printing inks was wholly illogical and without meaning. It was further explained before the CIT(A) that the profit margins substantially varied on account of geographical differences. The profit margins of products sourced locally or imported varied significantly. These infirmities were pointed out before the Id. CIT(A). The Ld. CIT(A) observed that the

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 37 assessee had three different trading items, blankets, machines & press chemicals which were totally dissimilar and incomparable. The Ld. CIT(A) further observed that profits margins varied substantially depending upon the fact that the products were either sourced locally or imported. The Ld. CIT(A) therefore compared product-wise & geographical-wise profit margins of trading transactions with AEs vis-a-vis trading transactions with unrelated parties and found them to be arm's length. In the written arguments the D/R has admittedly not justified or supported the manner in which ALP was computed by the TPO. Furthermore the D/R has also not disputed the observations & factual findings recorded by the Id. CIT(A) holding that- even by applying RP Method the transactions with AEs were at arm's length. The D/R has failed to pin point any specific infirmity or falsity in the appellate order passed by the Id. CIT(A). In fact the D / R concurred with the findings of the Id. CIT(A) that only the GP margins of similar products can be compared and not otherwise. The D/ R in fact concurred with the assessee's contention as well as the Id. CIT(A) findings that the only press chemicals was comparable to printing inks. Both the assessee as well the Id. CIT(A) had compared the profit margin earned from sale of imported printing inks to unrelated parties with the profit margin earned by the assessee from sale of imported press chemicals to unrelated parties. In the facts involved in the present case the Id. CIT(A) noted that the assessee had imported printing inks from AEs worth Rs.7.06 crores which was sold to unrelated parties for Rs.8.09 crores resulting in gross profit margin of 13%. Correspondingly the assessee had imported press chemicals from unrelated parties worth Rs.1.75 crores which was sold to unrelated parties for Rs.2.02 crores yielding profit margin of 14%. Without prejudice to the assessee's contention that the aforesaid margins would require turnover adjustment and working capital adjustment, it is submitted that the margin was 13% earned from transactions with related parties was found comparable to margin of 14% earned from uncontrolled transactions and was therefore held to be at arm's length by the CIT(A). The difference in margin of 1% was well within the permitted range of +/ - 5% allowed in second proviso Section 92C of

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 38 the Income-tax Act, 1961. In the circumstances it shall be appreciated that both the assessee and the Id. CIT(A) had benchmarked the trading of imported printing inks to trading of imported press chemicals as required by the D/R in his written submissions. On comparison it was found to be at arm's length. Therefore there is no dispute between the assessee and D/R on this particular issue. In the written submissions the D/R had nothing adverse to state in the context of computation of ALP under RPM Method as contended by the assessee and applied by the Id. CIT(A). In the circumstances the appeal of the Revenue to the extent of TP adjustment on trading transactions also fails.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 39 before adopting the CPM/RPM, the TPO had to first reject TNMM and that too with reasons for the rejection. We also further find that the TPO has considered only cost of raw materials consumed and no other associated costs was considered in arriving at the G.P. margin. The TPO in order to apply CP Method cost pertaining to raw materials, labour, factory overheads, direct & indirect expenses etc should take into consideration. All the aforesaid cost heads are included for determination of the 'cost of goods sold' as per Rule 10B of the I.T. Rules, 1962 which lays down the manner in which the CP method is to be applied. The relevant part of the said Rule provides as follows: "cost plus method, by which,- (i) The direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) The amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined;

(iii) The normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the. functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market;

(iv) The costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii);

(v) The sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise."

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 40 From bare perusal of the above Rule it is evident that for applying CP method, one has to compute the cost of production which shall include both direct & indirect costs. The TPO was therefore clearly wrong in considering only the "cost of raw materials" as the complete "cost of production". Similarly the product similarity in the products is essential for the determination of ALP. The profit margins of products sourced locally or imported varied significantly. These infirmities were not considered by the TPO. The profit margins varied significantly depending upon the fact that the products were either sourced locally or imported. From the submission we find that the assessee had imported printing inks from AEs worth Rs.7.06 crores which was sold to unrelated parties for Rs.8.09 crores resulting in gross profit margin of 13%. Correspondingly the assessee had imported press chemicals from unrelated parties worth Rs.1.75 crores which was sold to unrelated parties for Rs.2.02 crores yielding profit margin of 14%. Without prejudice to the assessee's contention that the aforesaid margins would require turnover adjustment and working capital adjustment, it was observed that the margin was 13% earned from transactions with related parties was found comparable to margin of 14% earned from uncontrolled transactions and was therefore held to be at arm's length by the CIT(Appeals). The difference in margin of 1% was well within the permitted range of +/ - 5% allowed in second proviso Section 92C of the Income-tax Act, 1961. In view of above we do not find any infirmity in the order of the ld. CIT(A). Hence we allow assessee’s ground.

The assessee claimed the deduction u/s. 80HHC for the profit of the business. The AO during the course of assessment proceedings observed that the profit of the business is inclusive of fees for services for an amount of Rs.90 lakhs. The assessee did not deduct 90% of such fees of services in terms of this

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 41 provision of the Explanation of (baa) to Sec. 80HHC of the Act. Accordingly, the AO has reduced the profit of the assessee’s business by 90% of Rs.90 lakhs being fees for services.

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 42 16. Coming to next issue is as regards that Ld. CIT(A) erred in allowing the deduction of custom duty of Rs.11,77,331/- against the advance license and thereby violating the provision of Sec. 43B of the Act. This issue is emanating from the assessment order for the AY 2003-04 for the addition made by the AO on account of non-payment of custom duty before filing the return of income for that year for Rs. 11,77,331/- The assessee has written back in the profit & loss account in the AY 2004-05 i.e. the year under consideration. The AO at the time of assessment has not excluded the same from the taxable income of the assessee.

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.

Coming to Revenue’s appeal in ITA No.1432/Kol/2011 for AY 05-06. 13. Sole issue raised by Revenue is that Ld. CIT(A) erred in deleting the adjustment in tax value of international trans with AE for Rs.41,45,237/-.

ITA No.181/Kol/2010 & 1432.Kol/2011 A.Ys. 04-05 & 05-06 DCIT Cir-10 Kol. vs. M/s DIC India Ltd. Page 43 14. As stated earlier, the issue in this year is same as that of the last year. The only difference is the amount involved. Since the facts are exactly, identical both parties are agreed whatever view taken in the above appeal of Revenue may be taken in this appeal of Revenue also. We hold accordingly.