ACIT 8(1), MUMBAI vs. BUNGE INDIA P. LTD, MUMBAI

3.After receiving the order of the TPO,the AO issued a draft assessment order to the assessee.Aggrieved by the orders of the AO and the TPO,the assessee filed an appeal before the First Appellate Authority(FAA).Before him,it was argued that during the year under consideration, the assessee had carried out MTA with respect to agricultural commodities when it determined that financing aspect of the trade involving third-party banks in combination with a 10cent/metric ton spread on the export/import pricing would allow it to earn a sufficient profit,that it transacted with its AE’s on and instantaneous basis,that the purchase and sale of various agricultural commodities were undertaken at the same time without carrying out any marketing activities,that it did not play any role in deciding the price of the purchase/sale,that no legal consequences had to be suffered by the assessee as a result of failure/default on part of the either of the parties of the transactions, that the AEs made the assessee risk mitigated Trader,that the AEs were involved in the import and export of various agricultural commodities as agreed upon the terms and conditions(price, ports, legal consequences) without the assessee’s intervention at all,that the AEs were responsible for failure/default with regard to such transac- tions,that the assessee would identify and participate in such trade flows only after evaluating the potential to earn interest on the cash flows linked to such transactions,that it had a role limited to preparation of necessary trade documents in the overall trade flow,that it would enter into such purchase and sale transactions without taking physical delivery,that the title to the goods remained with the assessee only for an instant and was simultaneously transferred to the AEs, that it had no control over underlying transactions,that the first leg of the transaction included receiving advance against delivery to be made within 180/360 days, that the assessee would approach a local bank to open L/C for the payment at 180 days from the date of L/C for the import back of the transaction,that the L/C issuing bank would require the assessee to place funds in fixed deposits to act as security and Lien against the issue of L/C, that the assessee would place the export advance in FDR,that the bank would issue 180 days L/C for the import back of transaction, that the maturity date of L/C and FD would not coincide, that there would be a time lag of a few days between the maturity of L/C and FD,that the L/C would mature a few days before the FD,that the sale proceeds received were utilised to retire the L/C,that in the second leg of the transaction would include entering into a spot by and sell transaction with a view to complete the overall 5 sequence thereof, that L/C was not required to be provided to the AE since it would be a spot transaction,that on maturity of FD the proceeds were utilised to square of the spot by transaction,that in the overflow of the transaction the assessee would receive $.10 per metric ton for each leg of the transaction,in addition to the interest on FDR.It was further stated that the trade was entered into between the buyer and the seller,that the business did not depend on the assessee, that the participation by it in the transaction was to earn interest income,that the import and export prices were inherently at arm’s length,that the assessee was incapable of controlling the transaction with regard to pricing,terms,delivery,quality of the products,that there was no contractual/financial/legal obligation on part of the assessee,that in case of default by overseas entities the assessee had not to face any risk or liability,that it participated in the International trading of documents of an underlying trade only when there was an opportunity to earn interest income over and above $ .10/ MT, that while carrying out those activities it incurred certain expenditures such as L/C charges agency expenses, that those costs were inextricably linked to the earning of interest on the advances received by it,that same were directly related to the earning of interest income on the funds available,that the incurring of L/C charges, hedging expenses etc.would not arise if there was no earning of interest income, that the other operating expenditures of the assessee were insignificant,that its role in MTA was restricted to that of a facilitator and the functions performed by it were more in the nature of support service,that the purchase and sales had to be admitted at arm’s length and should not be disregarded in arriving at the operating margin.

4.During the appellate proceedings,the FAA called for a remand report from the TPO.In his remand report,dated 5/5/ 2009,the TPO reiterated his arguments on various issues regarding MTA including the exclusion of interest income for the purpose of computing the ALP.The TPO submitted,in his report,that the assessee had not claimed that interest income on FDR was an international transaction in its form number 3CEB,that interest income of Rs. 26.70 lakhs only was shown as international transaction, that the direct source of interest income was FDRs,that the assessee could not take an argument that interest income had to be included for computing ALP of international transaction of sale and purchase of agricultural commodities,that the assessee had made claim of clubbing of both trading loss of international transaction of MTA and interest income with a view to jacking up of 6 net operating margin from import and export of agricultural commodities,that the interest derived from borrowed funds were invested in short-term deposits with the banks,that such income had to be brought to tax under the head income from other sources,that same could not be adjusted against the interest payable by it on term loans secured from financial institutions,that the interest income-being income from other sources-could not be taken up for calculating net operating margin of MTA,that the claim of the assessee of making sale to AEs against the advance payment was factually incorrect,that the nomenclature of the business to the MTA would not change the actual nature of the transaction which was nothing but trading export activity, that the assessee should not have any grievance as the TPO had accepted the method adopted by it as well as the comparables disclosed in the TP report,that the TPO had neither treated the business model of the assessee differently nor had made any departure in the TP method and comparables disclos- ed in the TP report,that he had only objected to the computation of net operating margin from trading business division as disclosed in the TP report which was arrived at by amending the audited profit and loss account,that the purchases and sales of agricultural commodities were international transactions, that it was incorrect to exclude the cost of import in order to compute the operating cost to determine the net operating margin,that the correction of incorrect way of computing operating cost to compute the net operating margin of the MTA segment could not be held a fundamental change in the business model,that L/C charges were incurred for import of agricultural commodities,that it could not be held that same were incurred for earning interest income.In response to the remand report,the assessee made elaborate submissions before the FAA on 8/05/2009.

4.1.After considering the submissions of the assessee and the remand report,the FAA held that no loss had been incurred in the MTA,that from the remand report it was clear that the sales invoices showed earning of $ .10/metric ton, that overall the assessee had earned profit,that almost all the transactions were with the AEs,that it could not be inferred that assessee had incurred loss in trading operation with its AEs, that the computation of the TPO gave distorted figure, that operating cost could not be reduced from the sale price,that to compute the gross margin only the import price of goods from the export rights of the goods had to be reduced,that the assessee had earned gross margin of Rs. 2.15 crores,that the TPO had wrongly concluded that no advance was received against future sale of goods, 7 that all the advances received had been invested in FDRs,that the advance received served two purposes,that it was placed in FDR,that the FDRs acted as a security and Lien against the L/C to be issued to the supplier, that the L/C on maturity was adjusted against the sale proceeds of the first leg though the advance still remained in form of FDRs,that the assessee had merely changed economic analysis of the MTA,that the inherent business model of the assessee did not change-it remained that of a Trader,that even post-merger the MTA continued to remain the same,that the comparability of the international transactions should remain at par, that no material was brought on record to show that any change in the business model of the MTA had taken place,that the only change in the business model that resulted from the merger was the addition of more activities by way of manufacturing apart from continuing the MTA,that on a consistent principal basis the MTA should follow the Trader model as was followed in the earlier years and was accepted by the TPO,that it was incumbent upon the TPO to consider both import and export transaction for computing the operating margin of the assessee. The FAA further held that focus of the assessee,while carrying out the MTA,was to take advantage of the opportunities to earn interest on funds in the intervening period i.e. the time lag between receipt of advance and encashment of L/C at a fixed rate of $.10/ metric ton,that from the total income earned by the assessee major chunk was coming from the interest earned on FDRs,that the interest income originated from the MTA activities only,that the interest income was inextricably linked to such activities,that it had an inseparable economy nexus with the business model adopted by it,that the case laws relied upon by the TPO dealt with the deduction under section 80 HHC or 10A of the Act,that the placing of FDRs had a direct nexus to the carrying on of MTA,that the FDRs stem from the receipt of advances, that the FDRs were again placed as security and Lien with the bank for opening L/Cs,that the Live link of earning of interest income from FDRs was well established with carrying on of MTA,that u/s.92 of the Act the focus was on determination of the income from an international transaction and evaluation of the fact whether it was at arm’s length,that the emphasis was on determining the true income attributable to an international transaction,that the determination was based on the functions, assets and risk analysis of the transaction, that it had no relevance under which head the income was taxable under the Act,that all the income including interest income,as long as,it emanated from an international transaction had to be evaluated u/s.92 of the Act to find out as to whether it was at arm’s 8 length or not, that the importance was to the economic relevance of such income to an activity and not to it being taxed under a particular head of income.He further held that what was to be considered while benchmarking the MTA of the assessee as a Trader and that the relevant factors for arriving at the arm’s length price with regard to an international transaction with its AE’s was the business model,the appropriate comparables and the computation of the correct operating income of the assessee for benchmarking the MTA.

5.Before us,the Departmental Representative (DR) contended ,that the assessee had not produced any evidence to show that there was an agreement with the suppliers regarding credit period of 180/360 days, that there was no direct nexus between the earning of interest and MTA,that the AO had rightly excluded the interest income for making TP adjustments.He heavily relied upon the order of the TPO along with the remand report sent to the FAA during the appellate proceedings.The Authoried Representative(AR)submitted that while carrying out MTA the assessee would enter into back-to-back purchase and sale transactions instantaneous-without the goods physically entering India,that the interest received by it was an integral part of MTA and that same was factored in the economics of such trade, that nominal trading margin of $.10/metric ton-when complemented with the embedded interest earning-made the activity economy can visible and profitable, that the assessee had participate in MTA out of its own interest,that there was an opportunity to earn interest income over and above $.10/metric ton,that interest income was considered and accepted as a part of operating income in the TP orders for the earlier years, that costs L/C charges, hedging expenses would not arise if there was no earning of interest income, that the TPO in his show cause notice dated 16/10/2008 arrived at OP/OC of 1.31% wherein he included interest income as part of the operating income,that while passing the order he excluded interest income from the profit level indicator,that when interest was an integral part of the business activity the same should be considered for working out the profitability of the said activity,that 9 the AO/TPO could not go beyond the show cause notice,that the TPO excluded interest income from operating profit and also from PLI without giving any opportunity to the assessee and made transfer pricing adjustments, that the assessee had raised the issue before the AO wherein the company claimed that the order of the TPO was violative of principle of natural justice, that the TPO had benchmark the international transaction of MTA by selecting support service comparables at the rate of 6.44%, that the benchmarking of the international transactions using trading comparables had been considered and consistently accepted by the TPO in the earlier as well as in subsequent assessment years, that there had been no change in the business model of the company in the current year, that the TPO in a show cause notice had accepted that the company was engaged in MTA, that he should have considered functionally comparable companies engaged in trading activities as comparables and not the support service comparables, that the company are also provided caL/Culation of margins from the comparable companies having trading activity.He relied upon the cases of Sony India(P) Ltd (315ITR150-AT),E-gain indications Private Ltd(118 ITD 243)Mentor Graphics (Noida)Private Ltd(109 ITD 101),Dharampal Premchand Ltd(317 ITR 353), Vellore Electric Corporation Ltd.(227 ITR 557), Lokay Holdings (308 ITR 356).

6.We find that with a view to benchmark the international transactions of the MTA,the assessee had carried out detailed comprehensive benchmarking analysis, that it had selected TNMM is the most appropriate method(MAM),that it carried out a search process on capitaline database for identifying the comparables,that the search resulted into identification of eight companies engaged in support system activities,that the operating profit margin of comparables was found to be 6.44% on operating costs,that it selected operating profit to value added cost as the applicable PLI,that while computing the operating cost it excluded the sale and purchase price,that the assessee calculated its operating profit margin from its MTA@489.28%,that the TPO had carried out detailed analysis for determining the ALP,that considering the support service nature of the functions performed by the assessee,he compared its margin with the margins of comparable companies engaged in support service activities,that he had proposed the adjustments of Rs.501.51crores,that the adjustment was as arrived at by computing the operating profit margin by taking total costs as operating cost and total income by excluding interest under on FDR,that the adjusted operating loss was arrived at Rs.13.54 crores,that the loss was worked out by changing the PLI,that the TPO applied operating profit to total cost(including import cost),as compared to the PLI applied by the assessee i.e.operating profit to value added cost (without including import cost).The change of PLI by the TPO vis-a-vis the assessee meant that the TPO had considered the total MTA(including imports and exports),whereas the assessee had benchmarked the activity by considering the financial results from gross margin($ 0.10/metric ton)onwards. We find that vide show cause notices dated 14/10/2004 and 16/10/2004 the TPO had computed the operating margin after considering the interest as operating income.Both the notices prove that the TPO was convinced about the claim made by the assessee in the earlier years.But,the final order passed by the TPO ran converse to the show cause notices.We would like to refer to the notice dtd. 16. 10. 2004(pg.210 of the Paper book)and same reads as under: Sub: Notice u/s. 92CA (2) and 92D (3) of the Income Tax Act, 1961- Computation of Arm's Length Price - Asstt. Year 2005-06 – regarding With regard to the above proceedings in your case, and in continuation of the earlier questionnaire/ notice dated13-10-08 issued to you, your attention is invited to Annexure 6 of your T.P. Study for the A. Y. 2005-06, giving the calculation of the Operating Profit Margin of Merchanting Trade Activity. In this calculation the Operating Cost has been taken without considering the import price of goods. The Operating Cost includes both Direct and Indirect 11 Expenditure while you have excluded Direct expenditure i.e, purchase of goods, while computing the Total Cost although the import price of goods has been included in the expenditure shown (cost of materials) in the Audited Accounts. Please show cause as to why this Total Cost shown at Rs.7577,20,87,912/- should not be held as Operating Cost. Accordingly, the Operating Profit Margin from Merchanting Trade Activity is calculated as under: Operating cost Rs.7577,20,87,912/- Total Income Rs.7676,52,56,560/- Operating Profit Rs.99,31,68,648/- The OP/Sales Ratio 1.29% The OP/Operating Cost 1/31% Operating Cost Your OP/OC comes to 1.31% while the mean for the Comparables filed by you comes to 6.44%. Why should this not be benchmarked against the Comparables and adjustment made.

From the adjustment calculation,made by the TPO about international transactions, it is clear that the interest portion was not considered for determining ALP.We fail to understand as to how the TPO can make an adjustment without informing the assessee about exclusion of an item-especially when the same was not excluded in the show cause notice.No assessee can be taxed unwarned.Principles of natural justice demand that the assessees should be given a fair chance of hearing before due taxes are collected.The TPO,being a representative of the State,cannot behave like a mere tax gatherer.Collection of ‘DUE’ taxes presupposes fair play and adhering to principles of affording a reasonable opportunity of hearing to the members of Subject of the State i.e.to the tax-payer.In the case before us,we find that no justification has been given by the TPO as to why he opted for not including the interest portion while passing the final adjustment order.It appears that once he found the transaction falls within the safe limit(margin of +/- 5%),he decided to exclude the interest portion so that adjustment could be made.If that was the reason,it cannot be endorsed.Definitely adjustments can be made while invoking the provisions of chapter X of the Act,but,not in this manner.Such a trend will result in making adjustments at any cost.TP provisions were not introduced for achieving such objects.In other words,the sections governing the TP adjustments were included in the Act to make a meaningful comparison between the controlled and uncontrolled transactions to determine if the international transactions were at arm’s length.Therefore,if the comparison process is vitiated the determination of ALP would also be vitiated.If there were any other reasons for deviating from the show cause notice by the TPO,they are not coming out of the final adjustment order.Therefore, only on this count the order of the TPO has to be reversed.

6.1.But,we would like to discuss the merits of the case also.We find that interest income was considered as part of operating income in the earlier years by the TPO and that so long there was no change in the facts and circumstances interest income should have been continued to be considered as part of the operating income.In its reply to the show cause notice,dated 16/10/2010,the assessee had argued that the operating margin of MTA should be compared with trading comparables and not with support service comparables.Besides,the assessee had given a detailed working of computing operating margins of trading comparable companies and the operating margin of trading comparables was @ 0.95% on cost and at the rate of 0.92% on sales.In our opinion,the TPO had failed to recognise the difference between the comparables.We hold that he committed a mistake by comparing assessee’s margin with support service comparables,that the benchmarking process adapted by the assessee was consistent with the process followed and accepted by the TPO in the earlier years,that MTA existed during the pre-merger period and the assessee had carried out the similar activities in the year under consideration,that the nexus of interest on MTA was explained to the TPO in the submissions made on 10/9/2008 and 13/8/2008.

It is observed that the TPO had not considered the above replies filed by the assessee,while framing the final order or while forwarding the remand report.He continued to benchmark the operating margin of the MTA with that of support service comparables.But the margin(@2.36%)was reflective of the complete value chain activities comprised in manufacturing,conversion, marketing and selling.In other words the TPO had considered the comparables of manufacturing and trading companies having mean operating margin of 2.36%.When it appeared that the margin was within the range of +/-5%,the TPO excluded the interest income while making final adjustment.Thus,the operating margin of the assessee from MTA (including interest income) is 1.31% on cost,as appearing in the show cause notice of the TPO(dated 16/10/2008),as compared to the trading comparable mean margin of 0.94% on cost (as submitted to the TPO by the assessee in its submission dated 20/10/2008).As it is higher,so it could safely be concluded that assessee’s inter - national transactions of MTA were at arm’s length.

6.2.We are also of the opinion that the TPO had wrongly relied upon the judgments dealing with deduction under section 80 HHC/10 A of the Act,that the cases relied upon by the TPO were not relevant for computing the ALP,that classification of income under the heads like business income/income from other sources had no bearing on the TP analysis,that for TP purposes he had to consider the functional profiling of the assessee and had to evaluate income attributable to the internation- al transactions, while invoking the provisions of chapter X of the Act,that there was link of interest income with the functional analysis,that the assets were deployed in the business of the assessee,that same were not dependent on the chargeability under the different sets of income.

6.3.It was not the case of the TPO that surplus funds of the company were parked with the bank, that the advance received against the exports were immediately placed in FDR with the bank for the purpose of taking letter of credit in favour of the overseas sellers.A perusal of the balance sheet of the assessee reveales that the reserve and surplus of the assessee for the year under consideration was at Rs. 63.06 crores.Therefore,it could not be said that the surplus funds were parked in the FDRs to earn interest income.It is a fact that import/ export of the goods did not take place from or to India and the assessee came into picture to participate in the trading of international trade documents only.The participation by the assessee at a particular juncture resulted in earning of interest income which would not have been earned if the trade would have taken place completely and directly outside India.In our opinion,the interest income was an inherent an integral part of the assessee is business activity and same was rightly considered as an operating income for the purpose of calculation of operating margin,by the FAA.So,we endorse the views of the FAA that the interest income emanated from MTA and that same could not be excluded from calculating the operating margin of such activities for the purpose of section 92 of the Act. In the earlier part of our order,we have held that the assessee’s international transactions of MTA were at arm’s length.Therefore, first effective GOA(ground No.1(a-i) stand decided in its favour.

7.Next two grounds deal with deleting of additions by the FAA with regard to import of raw material and related issues including the treatment to be given to the segmental accounts.During the TP proceedings,the TPO found that the assessee had entered into International Transaction relating to import of soyabean oil, palm oil and Palmoline oil as well as export of soya bean meal and rapeseed meal,that it had used CUP method with regard to the international transactions.However, the TPO was of the opinion that CUP was not the MAM.So, he applied TNMM.He drew segmented account and examined the performance of segment other that MTA and other incomes.According to the TPO’s working operating profit of the assessee was(-)6.94%.For applying TNMM he took 26 comparables but later on excluded 5.In response to the show cause notice issued by TPO,the assessee contended that it had correctly used the CUP method, that in the earlier two years TPO had accepted the said method for determining the ALP, that the rates of CUP with regard to import of crude oil could not be compared to rates of merchanting- trade of the same commodity.The TPO observed under the TP Regulation ALP of a transaction could vary year to year depending upon economic conditions and comparability of the provisions,that CUP rates, applied by the assessee,were not exactly identifiable,that the same commodity was transacted at different rates in MTA,that assessee was not able to provide the resale margin of the crude oil sold in the local market,that soyabean meal was sold at a different rate as compared to the export to the AEs.

8.During the appellate proceedings,the FAA directed the TPO to submit a remand report.The TPO issued a show cause notice and proposed operating profit margin of Rs.2.92 crores to be applied on the operating income of Rs.806.56 crores as against assessee’s operating loss of Rs.56.01 crores.After considering the submiss- ion of the assessee,the TPO re-worked the operating margin of comparable companies@ 2.63%.After making adjustment to the operating expenses (unutilised capacity and non operating expenses)of the assessee,the operating loss was reduced to Rs.29.54crore.Accordingly, the mean operating margin of the comparables, i.e. 2.36% was applied to the operating income of Rs.809.54crore resulting in arms- length profit of Rs.19.10 crore.He adjusted the loss,entered by the assessee, of Rs. 29.54 crores and made an adjustment of Rs.48.65 crore to the import price. As a 16 result there was an overall reduction in the import price of the assessee . As it was more than 5% (54.27%) allowable under the provisio to section 92C(2) of the Act, so,the assessee was not given the benefit. Before the FAA,it was argued that CUP was MAM,that the imports made were for its own consumption,that it was not possible for the assessee to identify specific shipment with consumption in manufacturing or re-sale, that the TPO had failed in applying CUP,that he had not brought any evidence or document to reject other comparable transaction as provided by the assessee,that while applying the TNMM he had not accepted all the adjustment proposed by the assessee, that the unutilised capacity in respect of power, fuel etc, was considered at nil as against 20% claimed by the assessee,that it resulted in a higher operating loss by Rs.3.81crore, that factory, salary and wages on account of under utilisation capacity was also taken at nil by the TPO as against 70% claimed by the assessee, that it resulted in a higher operating loss by about Rs.5.46crore, that the depreciation on tangible assets and under utilisation resulted in higher loss of Rs.2.20crore, that the deferred revenue expenditure of Rs.1.05 crores resulted in a reduction of operating expenses by Rs.1.05 crores,that the claim made by the assessee to accept revised margin of 1.07% was not conceded by the TPO. The FAA held that the computation of revised margin was not considered by the TPO, that TPO was not correct in his remand report that no reasons were given by the assessee for taking segmental results of six companies whereas whole company results for remaining 20 companies,that for rejecting the CUP method TPO had given valid reasons,that TNMM was more appropriate method with regard to adjustment to be made.The FAA held that the TPO in the remand report had summarily concluded that non operating expenses,resulting from abnormal items, were correctly accounted for,that the contention of the TPO was not factually correct,that the TPO had allowed,while considering the claim for reduction of 17 operating expenditure,due to unutilised capacity as abnormal depreciation on tangi -ble assets,that he had adopted 50% of the total expenditure,that he had considered the optimum capacity at 60%and not 100% that he had arrived at abnormal expense of 50% of total expenses by the assessee as against 70%. The FAA allowed Rs.3.81 crores under the head power and fuel, repairs and maintenance of building plant and machinery to the extent of 5/7th of the expenses and observed that the loss would be reduced by Rs.2.72crore.The FAA allowed Rs.5.46crore under the heads salary and wages(5/7th of the expenses) further reducing the loss by Rs.3.90crore. Deferred Revenue expenditure of Rs.1.05 crore was also allowed, increasing the loss by the same amount.The FAA re-worked the segment account to determine the ALP and arrived at the conclusion that there was a difference of Rs.43.07crore to the operating cost of the assessee.He observed that if the difference was to be allocated on import of goods from AEs, as done by the TPO, the adjustment would lead to an overall reduction of 31.15% to the import price of goods from the AEs.It was further observed by the FAA that while making adjustment to ALP of export vis-a-vis MTA the TPO had applied arithmetic mean of operating margin on cost on uncontrolled companies of 6.44%, that it was applied to international transaction of sale to the AEs,that same resulted in adjust - ment of 6.24% of the value,that the TPO had denied the benefit of proviso to section 92C(2),that when comparable trading companies’operating margin on cost of 0.94%was applied it was clear that assessee’s OPM was higher than comparable margin,that the export to AEs was at arm’s length, that the ALP for export was lower than the export recorded in the books of account, that the TPO had made adjustment vis-a-viz only the import of goods from the AEs, that manufacturing operations had resulted in loss after the assessee acquired various businesses during the year under consideration.The assessee had requested that adjustment of Rs.43.07crore should be spared over the total operating cost of Rs.790.44crore 18 after giving effect to ± 5% range. Finally, the FAA concluded that the adjustment made by TPO resulted in overall reduction to the import price of goods by 54%, that even after providing additional relief there was only partial reduction in the TP adjustment,that it went against the very principle of profit based method, that the adjustment had no consonance to the reality of the situation, that the TPO had approached an incorrect method, that the application of CUP analysis showed that fluctuation in prices of agricultural commodities was at maximum 5%,that adjust - ment of high discount of 54% or lower could not be said to be in justifiable, that transfer pricing was not an exact science,that it was an art wherein principles of law,economics and business were applied to achieve equitable results, that application of CUP and TNMM gave very wide variation,that TNMM led to adjustment of 31.15% even after allowance of partial relief as compared to an adjustment under CUP of about 5%, that assessee was justified in claiming that while applying TNMM totality of the operations should be considered, that the exercise should not be centered on international transactions.After making above observations, the FAA reworked the ALP of international transaction of import of goods in manufacturing activity as under: Rupees Adjusted operating expenses of the assessee shown in (E) above. 7,90,44,26,285 105% of the above (applying ± 5% as per Proviso to Section 8,29.96,47,599 92C(2)-Arms length operating cost-(F) Total Operating expenses of the assessee as per (B) above 8,33,51,92,616 Difference to be adjusted towards international transctions of (3,55,45,017) import of goods from AEs assessee (F-B)assesseeG International transactions of goods imported from AEs – (H) 138,28,94,614 Arms length price of international transactions of goods imported 134,73,49,597 from AEs assessee (H-G)assesseeI On the basis of above adjustment, the import price of goods was determined at Rs. 3.55Crore as against Rs.48.65 Crores determined by the TPO.As a result,the assessee got a relief of Rs.45.09 Crores. 19 9.Before us,the DR relied upon the order of the TPO.The AR argued that the assessee had acquired DALDA brand from HLL, that the said acquisition would take some years to fructify, that the assessee had to be extra ordinary costs in that regard,that it had to incur significant start-up costs to establish the newly acquired brands in the initial years of acquisition, it was not able to fully utilise its manufacturing capacity, that there was extraordinary unutilised capacity,that it had calculated revised margin of 20 comparables selected by the TPO and had arrived at the arithmetic mean of 1.07% (page 222 of the paper book),that the same was not considered by the TPO,that though the FAA had stated that revised margin (1.07%)had to be taken he had erroneously,by oversight,took 2.36%while calcula - ting the adjustment,that if the correct margin(1.07%) of comparables was ten then the international transactions of the assessee of import of oil would be within the permissible limit of +/-5%, that TP adjustment should have been made only on international transactions, that the FAA had calculated the amount of adjustment to Rs. 3.55 crores, that if the correct margin of 1.07% of the comparables was adapted then the assessee’s international transaction of import of oil would be within the permissible limit of+/-5%.

10.We find that the TPO had made an adjustment of Rs. 48.65 crores to the entire segment of manufacturing activities instead of making the adjustment to only international transactions,that it had an effect of reducing the import price by 54.27%,that the FAA had reworked the adjustment after considering the extra ordinary items that would affect the profit margin of the assessee for the year under consideration,that the factors like underutilisation of capacity and non-operating expenditure was given due importance by the FAA, that the assessee had he calculated revised margin of the 20 comparables selected by the TPO, that the arithmetic mean arrived at by the assessee was not considered by him, that FAA had held that TPO was incorrect in not considering the revised caL/Culation of margins,that the FAA had objected to the treatment given to the six comparable where the TPO had not taken the segments based on their economy profile, that the FAA had mentioned that revised margin (1.07%) had to be adapted for determining adjustments and the resultant ALP. In our opinion,the TPO was not justified in making adjustment to the entire segment of manufacturing activity and not restricting the same to the international transactions.We find that in the cases of Tara Jewels Exports Pvt. Ltd(ITA No. 1814 of 2013)and Thyssen Krupp Industries India Pvt. Ltd.(ITA No. 2201 of 2013),the honorable Bombay High Court has held that for making adjustment as per the provisions of chapter X of the act transaction with AEs of an assessee had to be considered. We would like to reproduce the relevant portion of the judgement of Thyssen Krupp Industries India Pvt. Ltd. (supra) “We find that in terms of chapter X of the Act,the determination of the consideration is to be done only with regard to income arising from international transactions on determination of ALP. The adjustment which is mandated is only in respect of international transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties.The adjustment as proposed by the revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE.The adjustment is beyond the scope and ambit of chapter X of the Act. We find that while reworking the adjustment, the FAA had taken the margin at the rate of 2.36%.We find that the assessee had not filed any application before the FAA pointing out the apparent mistake in adopting the revised margin i.e. adopting the rate of 2.36% instead of rate of 1.07%.Considering these facts, we are of the opinion that matter should be restored back to the file of the AO/TPO to verify the fact and decide the value of the adjustment by taking appropriate revised margin rate.Grounds No 2 and 3 are decided accordingly. 21 11.Ground No.4 is about treating the interest income as business income amounting to Rs.114.87crore.During the assessment proceedings,the AO found that the assessee had shown interest income of Rs.1,14,87,57,073/- under the head business income.He held that the income was earned on bank FDRs, that same had to be taxed under the head income from other sources, that the assessee was not under any business compulsion to invest in FDRs.

12.In the appellate proceedings,the FAA concluded that interest income emanating from the FDR’s was directly connected with the MTA, that same had to be taxed under the head business income.

13.Before us,the DR argued that interests earned by the assessee had no connection with the business activity, that same was rightly taxed under the head income from other sources, that the assessee had parked its extra money to earn interest.The AR contended that the company would receive advance against the delivery to be made within 180/360 days, that it would approach a local bank to open L/C for payment at 180 days from the date of the L/C for the import leg of transaction, that the L/C issuing bank would mandate the company to place funds in the FDRs to act as security and Lien against the issue of L/C,the company would place the export advance in FD,that the bank would issue 180 days L/C for the import leg of the transaction, that the maturity date of L/C and FD did not coincide, that there would be a time lag of a few days between the maturity of L/C and FD wherein the L/C would mature a few days before the FD, that the sale proceeds received would be utilised to retire the L/C.He relied upon the cases of Karnal Co-operative Sugar Mills Ltd.(243 ITR 2), Lok Holdings (308 ITR 356).

14.We have heard the rival submissions and perused the metal before us. We find that while adjudicating the first ground,we have extensively dealt with the issue and have noted the facts. We have held that the placing of money in the banks in the forms of FDRs was directly linked with the carrying out of business of the assessee.We further find that interest income and by the assessee has been accepted to be taxable under the head income from dismiss a profession in the earlier as well as in the subsequent AY.s i.e. AY.s.2003-04, 2004-05, 2008-09 and 2011-12.The AO has not brought anything on record to prove that the facts of the earlier and subsequent years were different from the facts for the year under consideration. The rule of consistency stipulates that in absence of distinguishing facts and circumstances,the AO should not deviate from the stand taken/followed in the earlier years.Therefore,we are of the opinion that order of the FAA does not suffer from any legal infirmity.Confirming the same,we decide fourth ground of appeal against the AO.

15.Fifth Ground deals with non-compete fee of Rs.2,46,34,254/-.During the assessment proceedings,the AO found that the assessee had claimed revenue expenditure of Rs.2.45 crores,that it had claimed that it had acquired edible oil and fats business of Hindustan Lever Ltd.(HLL)with effect from September 2003,that the business purchases consisted of tangible assets, brands, product technology, knowhow and non-compete fee agreement,that pursuant to agreement, HLL was not to compete in respect of the aforesaid products in the territory of India and Nepal for a period of 5 years,that similar payment of Rs.7,00,00,000/- was made to Prestige Foods Ltd.(PFL)prohibiting them from manufacturing and marketing Chambal Refined Oil in the district of Dhar for a period of 5 years, that it had claimed depreciation on payments for brands and technical knowhow with regard to business taken over from HLL, that it was further claimed that the assessee was entitled for depreciation of good will, that it was writing off the non-compete payment proportionately over a period of 5 years in the books of accounts, that the non-compete payment was treated as revenue expenditure in the return of income by the assessee, that a pro-rata claim had been made over a period of 5 years, that the assessee had capitalised the amount paid to PFL in the books of accounts, that it had claimed proportionate depreciation over the period of 5 years.Considering the non-compete payment as revenue expenditure in the return of income the assessee company claimed a deduction of Rs.81.66 lakhs.The assessee relied upon the case of Madras Industrial Investment Ltd.(225ITR802).The AO directed the assessee to justify as to how such expenses could be claimed as revenue expenditure.In its reply,the assessee contended that the non-compete fee paid to HLL had been considered as miscellaneous expenditure whereas the payment made to PFL has been considered as fixed asset.After considering the submission of the assessee the AO held that the assessee would derive benefit from payments made to HLL and PFL for a very long period, that expenses incurred by it could not be allowed as revenue expenditure.Finally,he made disallowance of Rs.2.45 crores. 16.Aggrieved by the order of the AO,the assessee preferred an appeal before the FAA.After considering the available material,he held that by making payments under the heads non-compete fee to HLL and PFL the assessee had debarred the competitors to do business in some limited areas for 5 years,that the benefit derived by it was could not be considered as enduring benefit or long term benefit, that the provisions of section 35(D) of the Act allowed to amortization of certain preliminary expenses and the assessee were allowed to claim such expenses during a period of 5 years,that five year period could not be considered a long period,that the assessee required entering into non-compete agreement was only in 24 the form of forbearance undertaken by the seller for a limited period,that no enduring benefit had occurred to the assessee, that the expenses incurred by it could not be considered as capital expenditure. Following the order of the earlier year,the FAA allowed the appeal. 17.During the course of hearing before us,the AR fairly conceded that the issue is covered against the assessee by the order of the Tribunal delivered for the AY.2004-05.We find that while deciding the appeal for the earlier year (ITA/ 1779/M/2008) the Tribunal had held as under: 28. In addition to the above, assessee has raised two additional grounds. The first additional ground raised is as under: "The learned Assessing Officer erred in not allowing a deduction for the entire non compete fee of Rs.5,29,00,000/- paid by the appellant company to Hindustan Lever Limited even though the expenses has crystallized during the year.” In addition to the above, assessee has raised the following additional ground: "Without prejudice to ground 2, the learned Assessing Officer erred in not allowing depreciation in respect of non compete fees of Rs.5,29, 00, 000 paid to Hindustan Lever Limited." XXXXX 31.We have considered the rival submissions carefully.We find that assessee has also raised second additional ground and while adjudicating the same it was found in the later paras that AO has observed in para-8 of his order that in the agreement with HLL there was no separate value of the non compete fee and while adjudicating the second additional ground we have remitted that matter to his file for determination of the amount of non compete fee. We further find that the Special Bench of the Tribunal in the case of Tecumseh India (P) Ltd. vs. Addl. CIT [supra] has clearly held that an expenditure incurred on warding off of competition in business from a rival dealer will constitute capital expenditure and is not allowable u/s.37[1]. Therefore, respectfully following this decision while confirming the order of the Ld. CIT(A), we direct the AO not to allow as business expenditure the amount of non compete fee which may be determined by him.

32. Addl. Ground No.2: The Ld. Counsel of the assessee submitted that even if the non compete was held to be of capital nature, even then same has to be construed as intangible asset and accordingly depreciation has to be allowed and in this regard he relied on the decision of Chennai Tribunal in the case of ACIT vs. Real Image Tech (P) Ltd. [120 TTJ 983].

18.Last ground of appeal pertains to disallowance of Rs.57.27 lakhs.During the assessment proceedings,the AO found that the assessee had claimed market research expenses of Rs.57,27,009/- under the head miscellaneous expenditure of Trichy Unit.The AO directed the assessee,vide order sheet entry dated 11.12.2008 and 16.12.2008,to explain as to how the expenditure could be allowed as revenue expenditure.The assessee contended that during the FY 2004-05 it had paid Rs. 57.27 lakhs to A.C.Neilson(ACN) for providing market share data on monthly basis,that the data provided by ACN included the market share achieved by Dalda brand in each of the months, that such expenses were incurred every year and the benefits arising out of such expenditure would exhaust in that year only, that no enduring benefit was derived by the assessee and no capital asset had come into existence.However, the claim of assessee was rejected by AO and he stated that the assessee had incurred expenditure for getting market research of Dalda brand, that it had oriented its market strategy for increasing the sales, that the benefits of historical data were not confined to a particular month or year that the benefits were of enduring nature.

19.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA, who held that there was no enduring benefit derived from the expenditure. Following the order for the A.Y. 2005-06,he treated it revenue expenditure.

20.Before us,the DR stated that the expenditure incurred by the assessee was of capital nature,that it had resulted in enduring benefit to the assessee.The AR contended that the assessee was not deriving and in benefit from the market research,that such research would become obsolete within a short span of time,that the expenditure was revenue in nature.He referred to the cases of Ananda Bazar Patrika (P) Ltd.(184 ITR 542) and JK Chemicals Ltd. (207 ITR 985).

21.After hearing the rival submissions we are of the opinion that the expenditure incurred by the assessee on market research was a revenue expenditure and that it could not be treated capital expenditure. The fact that the assessee has two incur expenditure for research every month in itself proves that the span of life of the survey is very short.We find that in the case of Ananda Bazar Patrika (P) Ltd.,the Hon’ble Calcutta High Court has held as under: “………the market survey would give information about the circulation of the newspaper at a given point of time. There was no evidence to show that the readership would remain constant over a large number of years. Hence, the expenditure incurred on market survey could not be said to have brought into existence anything of an enduring benefit to the assessee. It was allowable as revenue expenditure.”

Respectfully following the above judgement, ground number six is decided against the AO. CO/29/M/2010,AY.2005-06: 22.The effective ground of appeal,filed by the assessee ,in the CO(GOA 1-3),is about application of cup for determining ALP relating to import of oil.While deciding the appeal for the earlier AY.,filed by the AO,we have set aside the issue to his file of for fresh adjudication.We find that the issue raised by the assessee directly connected with the grounds number 2&3,raised by the AO in his appeal. Following the same,effective ground of appeal is decided accordingly.

ITA/2697/MUM/2011-AY. 2006-07: 23.First ground of appeal is about application of CUP and rejection of TNMM for import of oil.Following our order for the earlier years(Grounds 2&3),we restore back the issue to the file of the AO.Ground No.1 is decided accordingly.

24.Second Ground deals with interest income and by the assessee.While deciding the appeal for the last year,we have held that interest income has to be treated as business income instead of income from other sources.Following the earlier years order,Ground 2 is decided against the AO.

25.Treatment to be given to non-compete fee is the subject matter of next ground of appeal.Following our order for the earlier year the issue is decided against the assessee.

26.Last ground of appeal is about market research expenses of Rs. 32.30 Lacs. We had dismissed the appeal filed by the AO while deciding the appeal for the last assessment year.Following the same ground number four is decided against the AO. Cross objection/174/MUM/2011-AY.2006-07: 27.First two grounds of CO were not pressed by the AR,during the course of hearing before us.Hence,same stand dismissed as not pressed.

28.Third Ground pertains to disallowance of expenditure of Rs.96,005/-incurred on land and site development.Rejecting the claim made by the assessee,the AO held that evidence in respect of the claim were not produced before him.

29.During the appellate proceedings,the assessee submitted the details of amounts incurred on land and site developments in the previous relating to the AY.1997-98 and stated that the it had to incur expenditure for the year under consideration.The FAA held that no further amounts were incurred during the previous year relevant to AY.2006-07,that the onus was on the appellant to produce evidence if it claimed deduction on any item that same was not produced,that it had made general arguments without any reference to specific material data or evidence.He confirmed the disallowance.

30.Before us,the AR submitted that the depreciation claim may be allowed for the expenditure.The DR supported the order of the FAA. We have considered the rival submissions and perused the material before us.In our opinion the order of the FAA does not suffer from any legal infirmity.So, confirming his order,we decide third ground against the assessee.

31.Next ground is about disallowance of Rs.14.05 lakhs incurred on premium on payment of leasehold land. During the assessment proceedings,the AO found that 29 the assessee had claimed an expenditure of Rs.14.05 lakhs under the head premium paid for land.The assessee had enclosed a note with the return of income wherein it was claimed that during the year 2002-03 the company had leased certain land at Pitampur for period of 20 years,that it had paid an amount of Rs.2.81 crores as upfront premium for acquiring the land,that the amount in question was being claimed on proportionate basis over the lease period of 20 years,that annual lease payment of Rs.19.58 lakhs was a revenue expenditure.The AO directed the assessee to justify the claim.After considering the submission of the assessee it was held that land was capital asset,that expenditure incurred was on acquiring of land and expenses incurred by way of annual lease payment represent -ed capital expenditure,that it was deriving enduring benefits from those assets. Finally,the AO rejected the claim made by the assessee.

32.Before the FAA,the assessee argued that the payments,being made on the leasehold property for 20 years,were made in advance,that the annual instalment payments spread over a period of 20 years,that amount claimed should be allowed. After considering the assessment order and the submissions of the assessee,the FAA held,in his appellate order,that held that the appellant had made lump sum payment called "Salami" at the time of obtaining a lease,that by its very nature such transactions were capital in nature as they provide enduring benefit to a businessman. Confirming the order of the AO,he upheld the disallowance 33.Before us,the AR contended that the expenditure was incurred for business purposes,that same was interlinked with acquisition of lease hold rights of lands,that the assessee had incurred an expenditure of Rs.2.81 crores for a period of twenty years,that proportionate expenditure should be allowed.He relied upon the case of Madras Industrial Investment Corporation Ltd.(225ITR802),and Sun Pharmaceutical Ind.Ltd.(329ITR479).Alternatively,it was argued that depreciation should be allowed if the expenditure was treated as capital expenditure.The DR supported the order of the FAA.

34.We have heard the rival submissions and perused the material before us.We find that in the case of Madras Industrial Investment Corporation Ltd.the issue was about discount-expenses incurred for issuing debentures.In our opinion,the matter is of no help to resolve the issue.In the case under consideration, a lump sum was paid at the time of obtaining a lease.We are of the opinion,that it is a capital expenditure by its nature itself.The lease was for a period of twenty years.So, we are not inclined to disturb the findings of the FAA and hold it to be a capital expenditure.However,we want to allow the alternate claim made by the assessee i.e. allowing depreciation as per the provisions of section 32 of the Act.Ground no.4 is allowed in favour of the assessee,in part.

35.Last ground of appeal pertains to disallowance of provision of Rs.7.63 lakhs towards obsolete stores.During the assessment proceedings,the AO found that the assessee had made a provision for the said amount under the head provision for obsolete stores.He directed the assessee to file details in that regard.But,no explanation or details were filed in that regard.So,he disallowed the claim made by the assessee.

36.Aggrieved by the order of the AO,the assessee preferred an appeal before the FAA.After considering the order of the AO and the submissions of the assessee,he held that under the Act,the deduction was generally and mainly allowed on actual basis,that the assessee had claimed that provision to obsolete stores had been made on scientific basis,that no material evidence was produced by it in that regard. Upholding the order of the AO,he dismissed the ground raised by the assessee.

37.Before us,the AR contended that the assessee had furnished a detailed scientific evaluation of the obsolete stores, that the store items were unusable, that same had to be impaired in compliance with the requirements of mandatory provisions contained in the companies Act -Schedules VI,that if a current assets did not have a value on realisation in the ordinary course of business at which they were to be stated in the balance sheet the provision had to be provided for. He relied upon the case of Indian Rare Earth Ltd.(375 ITR 276),delivered by the Hon’ble Bombay High Court.The DR supported the order of the FAA.

37.We have heard the rival submissions and perused the material before us.We find that though the assessee had claimed that it had followed a scientific method with regard to the obsolete stores,but it has not furnished any documentary evidence before the AO or the FAA or even before us.Making a claim is not sufficient it has to be backed by hard core evidences.In the case under considera - tion,the assessee has made only a provision.Historical data or analysis which could have tilted the scale in favour of the assessee,is not available.Therefore, we are of the opinion that the FAA had rightly upheld the order of the AO.The was not able to rebut the fact that the amount in question was only a provision. As far as the case relied upon by the assessee is concerned it is found that the assessee in that matter was a government owned company and had changed its method of valuation as per the directions of the C&AG.The facts of the present case are totally different.Confirming the order of the FAA,we decide ground no.5 against the assessee. 32 ITA/607/MUM/2012-AY.2007-08: 38.All the three grounds,raised by the AO (application of CUP/rejection of TNMM for import of oil,non-compete fee, market research expenses of Rs.45.20 lakhs) are same,which have been dealt by us in the earlier years.Following the same ground number one is restored back to the file of the AO,ground number two is decided in favour of the AO and the last ground stands dismissed.

CO/262/MUM/2012-AY.2007-08 39.First effective ground(Grounds 1-5)deal with the adjustment made with regard to import of oil.Following our order for the AY.2005-06,matter is restored back to the file of the AO.First effective ground stands allowed accordingly.

40.Sixth Ground is about treatment to be given to the interest income.Following our order for the earlier year,where the issue was raised by the AO,we hold that interest income is to be assessed as business income instead of income from other sources.Ground 6 is decided in favour of the assessee.

41.Disallowance of provision of Rs. 64.15 lakhs made towards obsolete stores is the subject matter of ground 7.Following our order for the earlier year,we decide ground no.7 against the assessee.

42.Ground eight deals with disallowance of expenses of Rs. 30.5 lakhs, being provision made for Employee Stock Option Plan(ESOP).During the assessment proceedings,the AO found that the parent company had raised debit note on the assessee for the amount payable on account of ESOPs, that it had made a provision of Rs.30.5 lakhs in the profit and loss account and had claimed the same as an allowable expenditure.The AO held that the expenditure could not be allowed as per the provisions of section 37 of the act. In the appellate proceedings, the FAA upheld the order of the AO.

43.Before us,the AR contended that the provisions in the accounts were made in conformity with the mandatory accounting standards and as per SEBI regulations, that upon the ESOP grant provision was required to be made in the books of accounts,that the assessee would make the payment to the parent company towards the debit notes, that the ESOPs were granted to the eligible employees of the group company in accordance with the equity incentive plan, the assessee had offered fringe benefit tax in its returns about the amount in question, that the payment of equity demonstrated that the amount payable by the assessee was towards an expenditure which was in form of a benefit to the employee. He relied upon the case of Biocon Ltd.(144 ITD 21) and stated that the assessee would actually make payment of the amount to the group company against the debit notes, that the provision made in the books was towards the payment for actual expenditure to be incurred by the assessee, that it was not merely an entry. The DR supported the order of the FAA.

44.We have heard the rival submissions and perused the material before us. We find that the issue of allowability of expenditure related with ESOPs has been deliberated upon and discussed extensively in the case of Biocon Ltd.(supra). We would like to reproduce the relevant portion of the order and same reads as under “Once it is held as a consideration for employment, the natural corollary which follows is that such discount (i) is an expenditure (ii) such expenditure is on an ascertained (not contingent) liability and (iii) it cannot be treated as short capital receipt. In view of the foregoing discussion, we are of the considered opinion that discount on shares under the ESOP is an allowable deduction.” Respectfully following the order of Biocon Ltd.(supra) ,we decide ground number eight in favour of the assessee.

45.Last ground is about disallowance of Rs. 49.49 Lacs being the loss on hedging transactions.The AR,before us,stated that the assessee wanted to withdraw the ground. Hence,same stands dismissed as withdrawn.