Where the assesee was a captive company rendering software development services to its parent company and was entitled to receive actual cost + 5% and it was agreed that the Transactional Net Margin Method (“TNMM”) was the appropriate method for determining arms’ length price, held:

(a) the strength of TNMM is that net margins (e.g. return on assets, operating income to sales and possibly other measures of net profit) are less affected by transactional differences than is the case with price as used in the CUP Method;

(b) However, the TNMM method also has a weakness because the net margin can be affected by factors that do not have an effect on price or margins;

(c) Accordingly, the TNMM has to be used sensibly and with appropriate adjustments to account for differences. Similarities and differences have to be carefully scrutinized to see the differences of situations, circumstances and environments;

(d) On facts, where two entities taken for comparison showed extraordinary results and had income from other sources, they had to be ignored;

(e) The margin of profit of the assessee has to be computed by adopting depreciation as per Indian laws if a higher rate has been provided in the accounts.

The issue of notice under s. 143 (2) I. T. Act within the time limit is mandatory for block assessment proceedings. If notice u/s 143 (2) is issued beyond the time limit, the block assessment order passed u/s 158BC is not valid.

See also: CIT vs. Scindia HUF (Bombay High Court), ACIT vs. Parekh Marine Agencies (ITAT Mumbai), ACIT vs. Aurangabad Holiday Resorts (ITAT Pune), Atul Glass Industries vs. DCIT (ITAT Delhi), Vin Vish Corporation vs. ACIT (ITAT Mumbai) & Tulika Mishra vs. JCIT (ITAT Delhi).

(1) Three tests have to be satisfied to constitute ‘manufacture’ (a) a certain commodity should have been produced; (b) the process of production should involve either labour or machinery and (c) the end product should have a distinct character, name and use;

(2) The term “production” has a wider connotation than the word “manufacture”. There is a difference between “processing” and “production”;

(3) The process of pasteurisation of milk does not amount to manufacture / processing for purposes of sections 80-I and 80-HHA as while pastuerised milk is improved in quality, it is not a commercially different product as compared to raw milk.

It is not mandatory for an asseessee to claim depreciation prior to the insertion of Explanation 5 to s. 32. Vahid Paper Converter vs. ITO 100 TTJ 532 (Ahd) (SB) distinguished.