DSM Anti - Infectives India Limited, Nawanshahr V. Addl. CIT, Chandigarh

ITA 1139/CHANDI/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80849 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 07-11-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 28-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJAY SHARMA
• Assessee Lawyers: K M SINGHJ
• Keywords: Related party transaction; Depreciation; Transfer pricing; Business expenditure; International transaction; Rule of consistency; Earning of tax free income; Additional evidence; Wholly owned subsidiary; Commercial expediency
• Section: 143(3); 92D; 92B; 80HHC; 234B; 14A; 10B; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.1139 /CHD/2011 ASSESSMENT YEAR : 2007-08 DSM ANTI-INFECTIVES INDIA LIMITED, VS. THE ADDL CIT, BHATI MOHAN SINGH NAGAR, RANGE I, TOANSA, NAWANSHAHR. CHANDIGARH. PAN: AABCM4314K AND ITA NO.1290 /CHD/2012 ASSESSMENT YEAR : 2008-09 DSM SINOCHEMM PHARMACEUTICALS VS. THE ADDL CIT, INDIA PRIVATE LIMITED, RANGE I, (EARLIER KNOWN AS DSM ANTI-INFECTIVES CHANDIGARH. INDIA LIMITED), BHATI MOHAN SINGH NAGAR, TOANSA, NAWANSHAHR. PAN: AABCM4314K (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI NISHANT SAINI,RAMIT KATY AL, SAURABH BHATTACHARYA & K.M.SINGHJ RESPONDENT BY : SHRI AJAY SHARMA DATE OF HEARING : 02.05.2014 DATE OF PRONOUNCEMENT : 07.08.2014 O R D E R PER SUSHMA CHOWLA, J.M. : THESE TWO APPEALS FILED BY THE ASSESSEE ARE AGAINST THE SEPARATE ORDERS OF THE ADDL. COMMISSIONER OF INCOME TAX (APP EALS), CHANDIGARH DATED 26.11.2010 AND 31.10.2012 RELATING TO ASSESSM ENT YEARS 2007-08 2 AND 2008-09 AGAINST THE ORDER PASSED UNDER SECTION 144C(1) READ WITH SECTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHOR T THE ACT). 2. BOTH THE APPEALS RELATING TO THE SAME ASSESSEE O N SIMILAR ISSUE WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY T HIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.1139/CHD/2011 :: ASSESSMENT YEAR 2007-08 3. THE ASSESSEE IN ITA NO.1139/CHD/2011 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE & IN LAW, THE HON'BLE DRP ERRED IN CONFIRMING THE DRAFT ASSESSMENT ORDER OF THE LD. AO ON THE FOLLOWING ISSUES AND DIRECTING THE LD. AO TO ASSESS LOSS AT RS. 47,023,341/- AS AGAINS T THE RETURNED LOSS OF RS. 184,949,539/-: - DISALLOWANCE OF RS. 114,432/- BEING THE DEPB CLAIMS SHORT RECEIVED AND WRITTEN OFF DURING THE YEAR. - DISALLOWANCE OF RS. 98,567,574/- OUT OF THE INTERES T PAID & FINANCIAL EXPENSES INCURRED DURING THE YEAR. - DISALLOWANCE OF RS. 8,538,662/- OUT OF THE COMMIS SION EXPENSES INCURRED DURING THE YEAR. - DISALLOWANCE OF RS. 1,510,059/- UNDER SECTION 14A OF THE ACT ON AN ARBITRARY BASIS. - ADDITION ON ACCOUNT OF TRANSFER PRICING ('TP') AD JUSTMENT OF RS. 29,195,471/-. 2. THAT THE LD. AO ERRED ON FACTS AND IN LAW, IN MAKING A DISALLOWANCE OF RS. 114,432/- ON ACCOUNT OF DEPB CLAIMS REJECTED OR SHORT RECEIVED A ND WRITTEN OFF DURING THE YEAR IN THE PROFIT & LOSS ACCOUNT. 2.1 THAT THE LD. AO ERRED ON FACTS AND IN LAW, IN M AKING A DISALLOWANCE OF RS. 114,432/- OF DEPB CREDIT SHORT RECEIVED IN THE RELEVANT YEAR AND WRITTEN OFF IN THE PROFIT AND LOSS ACCOUNT DURING THE YEAR UNDER CONSIDERATION WITHOUT APPRECIATING THAT THE SAME HAS BEEN CONSIDERED AND OFFERED TO TAX IN THE EARLIER YEARS. 2.2 THAT THE LD. AO ERRED ON FACTS AND IN LAW WHILE MAKING THE ABOVE DISALLOWANCES AND ERRED, IN HOLDING THAT EXPORT INCENTIVES WERE NOT T AXABLE IN EARLIER YEARS AND DEDUCTION UNDER SECTION 80HHC WAS AVAILABLE ON THE DEPB. 3. THAT THE LD. AO ERRED ON FACTS AND IN LAW, IN MA KING A DISALLOWANCE OF FINANCE EXPENSES OF RS. 98,567,574 BY INADVERTENTLY HOLDING THAT THE AP PELLANT HAD UTILIZED BORROWED FUNDS FOR GIVING INTEREST FREE ADVANCES TO ITS JOINT VENTURE COMPANY I.E. HINDUSTAN MAX-GB LTD. ('HMGB') WITHOUT APPRECIATING THAT NO ADVANCES HAVE BEEN MADE BY THE APPELLANT COMPANY TO HMGB DURING THE YEAR UNDER CONSIDERATION NOR IN THE IMMEDIATELY PRECEDING YEAR. 3.1 THAT THE LD. AO ERRED ON FACTS AND IN LAW IN HO LDING THAT THE INTEREST ON LOAN FUNDS BORROWED BY THE APPELLANT COMPANY CANNOT BE ALLOWED AS A BUSINESS EXPENDITURE EITHER UNDER SECTION 36(I)(III) OR SECTION 37 OF THE ACT W ITHOUT APPRECIATING THAT THE INTEREST EXPENSE INCURRED BY THE APPELLANT DURING THE YEAR U NDER CONSIDERATION IS ON LOAN FUNDS BORROWED AND UTILIZED FOR WORKING CAPITAL PURPOSES AND FOR NEW EXPANSION AND THERE IS NO NEXUS OR DIVERSION OF FUNDS TO HMGB DURING THE YEAR . 3 3.2 THE LD. AO ERRED ON FACTS AND IN LAW, IN NOT FO LLOWING THE FAVORABLE TRIBUNAL DECISION IN THE APPELLANT'S OWN CASE FOR THE ASSESSMENT YEARS 2 003-04 & 2004-05 ON THE IDENTICAL ISSUE. 4. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN M AKING A DISALLOWANCE OF RS. 8,538,662/- OUT OF COMMISSION EXPENSES CHARGED TO T HE PROFIT & LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. 4.1. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN M AKING A DISALLOWANCE OF RS. 6,072,653/- (OUT OF RS. 8,538,662/-) ON THE ALLEGED GROUND THAT THE EXPORT SALES WERE INVOICED TO THOSE PARTIES AND HENCE THERE IS N O LIABILITY TO PAY COMMISSION TO THOSE PARTIES WITHOUT APPRECIATING TH AT THE COMMISSION PAID TO THOSE PARTIES WAS OUT OF PURELY COMMERCIAL CONSI DERATION AND ON ACCOUNT OF BUSINESS EXPEDIENCY. 4.2 THAT THE LD. AO ERRED ON FACTS AND IN LAW, IN M AKING A DISALLOWANCE OF RS. 2,466,009/-(OUT OF RS. 8,538,662/-) BY ARBITRARILY FIXING AN AVERAGE RATE OF COMMISSION AT 3% AND HOLDING THE COMMISSION PAID IN EXCESS OF 3% PAID TO AGENTS AS EXCESSIVE AND UNREASONABLE WITHOUT APPRECIATING THAT AT NONE OF THE PARTIES IS A RELATED PARTY AND COMMISSION PAID IN EXCESS OF 3% W AS ON ACCOUNT OF BUSINESS EXPEDIENCY. 5. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MAKI NG A DISALLOWANCE OF EXPENDITURE OF RS. 1,510,059/- ON THE ALLEGED GROUN D THAT SAID EXPENDITURE IS INCURRED FOR EARNING TAX EXEMPT INCOME ('DIVIDEND') FROM INVESTM ENTS BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. 5.1. THAT THE LD. AO ERRED ON FACTS & IN LAW, BY N OT APPRECIATING FACT OF THE ASSESSEE'S CASE AND MAKING AN ARBITRARY DISALLOWANCE UNDER SEC TION 14A OF THE ACT. 5.2. THAT THE LD. AO ERRED IN NOT APPRECIATING THAT THE APPELLANT HAS NEITHER EARNED ANY INCOME ON INVESTMENTS HELD DURING THE YEAR NOR SUCH INCOME HAS BEEN CLAIMED EXEMPT AND FURTHER THE APPELLANT HAS NOT INCURRED A NY EXPENDITURE IN RELATION TO INVESTMENTS OR EARNING OF EXEMPT INCOME. 6 . THAT THE LD. AO ERRED ON FACTS AND IN LAW, IN EN HANCING THE INCOME OF THE APPELLANT BY RS. 2,91,95,471/- BY HOLDING THAT THE APPELLANT'S INTERNATIONAL TRANSACTIONS DO NOT SATISFY THE ARM'S LENGTH PRINCI PLE AS ENVISAGED UNDER THE ACT AND IN DOING SO HAVE GROSSLY ERRED IN: 6.1. DISREGARDING THE ARM'S LENGTH PRICE ('ALP'), AS DET ERMINED BY THE APPELLANT IN THE TP DOCUMENTATION MAINTAINED BY IT IN TERMS OF SECTION 920 OF THE ACT READ WITH RULE 10D OF THE RULES. 6.2. HOLDING THAT THE BENCHMARKING DONE BY THE APPELLANT IN RESPECT OF INTERNATIONAL TRANSACTION RELATING TO PAYMENT TOWAR DS CORPORATE SERVICE FEES IS NOT IN ACCORDANCE WITH THE LAW AND HAVE GROSSLY ERR ED IN: 6.2.1. NOT APPRECIATING THAT PAYMENT TOWARDS CORPORATE SER VICE FEES IS CLOSELY LINKED TO THE MANUFACTURING FUNCTION OF THE APPELLANT AND THE REBY REJECTING TRANSACTIONAL NET MARGIN METHOD ('TNMM') ADOPTED BY THE APPELLANT. 6.2.2. ERRED IN ANALYSING THE TRANSACTION SEPARATELY AND D ETERMINING THE ALP AT RS. 38,77,055/- AGAINST THE SUM OF RS. 3,30,72,526/- BY INAPPROPRIATE APPLICATION OF COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD WITHOU T FURNISHING DETAILS OF PRICE CHARGED IN ANY COMPARABLE UNCONTROLLED TRANSACTION 6.3. HOLDING THAT THE APPELLANT HAS NOT FURNISHED OR FUR NISHED ONLY GENERIC DOCUMENTARY EVIDENCE TO DEMONSTRATE THE BENEFITS RE CEIVED FROM THE AES THEREBY IGNORING THE SUBMISSIONS AND DOCUMENTS SU BMITTED BY THE APPELLANT DURING THE ASSESSMENT PROCEEDINGS. 6.4. HOLDING THAT THE APPELLANT HAS NOT BEEN ABLE TO EST ABLISH THE NEED FOR THE SERVICES RECEIVED FROM AES BASED ON THE PREMISES THAT NO COS T BENEFIT ANALYSIS WAS UNDERTAKEN WITH REGARD TO COST OF SERVICES AND BENE FIT RECEIVED FROM AES VIS-A-VIS 4 INDEPENDENT PARTIES 6.5. HOLDING THAT THE COST INCURRED BY AES FOR PROVIDING SERVICES HAVE BEEN ARBITRARILY ALLOCATED TO DSM INDIA. 6.6. MAKING VARIOUS STATEMENTS IN THE ORDER PASSED UNDER SECTION 143(3) READ WITH SECTION 144C(3) OF THE ACT, BASED ON HIS CONJECTURE S, SURMISES, INFERENCES AND PRESUMPTIONS WHICH ARE NOT IN ACCORDANCE WITH FACTS OF THE CASE AND AGAINST LEGAL PRINCIPLES. 7. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN CHARGING INTEREST UNDER SECTIONS 234A, 234 B, 234C AND 234D OF THE ACT. 8. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER S ECTION 271(1)(C) OF THE ACT MECHANICALLY AND WITHOUT RECORDING ANY ADEQUATE REA SONS FOR SUCH INITIATION. 4. THE GROUND NO.1 RAISED BY THE ASSESSEE IS GENERA L IN NATURE AND THE SAME IS DISMISSED. 5. THE ISSUE IN GROUND NO.2 RAISED BY THE ASSESSEE IS AGAINST DISALLOWANCE OF RS.1,14,432/- ON ACCOUNT OF DEPB CL AIM. 6. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT D URING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD DEBITED SUM OF RS.1, 14,433/- ON ACCOUNT OF EXPORT INCENTIVES WRITTEN OFF. THE CLAIM OF THE ASSESSEE WAS THAT THIS PERTAINS TO SHORT RECEIPT OF DEPB CLAIM, WHICH HAD EARLIER BEEN OFFERED TO TAX. HOWEVER, NO DEDUCTION ON THE SAID DEPB CLA IM WAS CLAIMED IN THE EARLIER YEARS. THE ASSESSEE FURNISHED COPIES O F THE RELEVANT LICENCES AND SANCTION LETTERS ISSUED BY KANDLA SPECIAL ECONO MIC ZONE (SEZ) BEFORE THE ASSESSING OFFICER TO PROVE ITS CASE OF S HORT RECEIPT OF INCENTIVE. THE ASSESSING OFFICER IN THE DRAFT ASSE SSMENT ORDER PROPOSED DISALLOWANCE OF THE SAID AMOUNT FOLLOWING DISALLOWA NCE MADE IN ASSESSMENT YEAR 2006-07. THE DRP, NEW DELHI ALSO D ISMISSED THE OBJECTION OF THE ASSESSEE IN VIEW OF THE DECISION B EING MADE IN THE EARLIER YEARS. 7. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT TH AT THE TRIBUNAL IN THE APPEALS OF ASSESSEE AND REVENUE FOR ASSESSMENT YEARS 2005-06 AND 2006-07 IN ITA NOS.1395, 1360 & 1455/CHD/2010 VIDE CONSOLIDATED 5 ORDER DATED 8.8.2013 HAD CONSIDERED THE ISSUE VIDE PARAS 76 TO 79 AND REMITTED THE ISSUE BACK TO THE FILE OF THE ASSESSIN G OFFICER WITH DIRECTIONS TO ADJUDICATE THE ISSUE. THE LEARNED A. R. FOR THE ASSESSEE FURTHER POINTED OUT THAT FOR THE YEAR UNDER CONSIDE RATION THE RELEVANT DETAILS WERE FILED BEFORE THE ASSESSING OFFICER. 8. THE LEARNED D.R. FOR THE REVENUE PLACED RELIANCE ON THE ORDER OF THE ASSESSING OFFICER. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. WE FIND THAT IDENTICAL ISSUE OF WRITE OFF OF EXPORT IN CENTIVES AROSE BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 AND VIDE PA RAS 78 AND 79 IT WAS HELD AS UNDER : '78. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE RECORD. THE ISSUE ARISING VIDE GROUND NO. 2.3 RAISED BY THE ASS ESSEE IS AGAINST THE CLAIM OF DEDUCTION OF RS.18,43,753/- ON ACCOUNT OF WRITE-OFF OF EXPORT INCENTIVE WHICH WAS SHORT RECEIVED BY THE ASSESSEE. AS PER THE DETAILS FILED BY THE ASSESSEE, IT TRANSPIRES THAT THE ASSES SEE HAD ACCOUNTED FOR THE EXPORT INCENTIVES RECEIVABLE IN THE FINANCIAL Y EAR 2003-04 AND AS REFERRED TO BY US IN PARAS HEREIN ABOVE, THE ASSESS EE HAD NOT CLAIMED ANY DEDUCTION UNDER SECTION 80HHC OF THE ACT IN THE ASSESSMENT YEAR 2004-05. AS AGAINST ITS CLAIM OF DEPB, THE AMOUNTS WERE SHORT RECEIVED BY THE ASSESSEE ON 14.03.2006 AND THE BALANCE WAS C LAIMED AS A DEDUCTION DURING THE YEAR ENDING 31.3.2006. THE DE TAILS IN RESPECT OF THE DEPB DUE, DEPB RECEIVED AND SHORT-FALL IN THE D EPB CREDIT ARE AS UNDER : DEPB NO.3710000460 DATED 14.03.06 APPLIED FOR RS. 2,690,915.80 DECEMBER,2003 RECEIVED RS. 1,614,400.00 SHORTFALL RS. 1,076,515.80 DEPB NO.3710000461 DATED 14.03.2006 APPLIED FOR RS. 3,592,065.94 JANUARY,2004 RECEIVED RS. 2,858,140.00 SHORTFALL RS. 733,925.94 DEPB NO.3710000462 DATED 14.03.2006 APPLIED FOR RS. 85,762.73 RECEIVED RS. 52,451.00 FEBRUARY,2004 SHORTFALL RS. 33,311.73 TOTAL DEPB WRITTEN OFF DURING THE YEAR : RS. 9,458, 449.47 6 79. THE ASSESSEE BY WAY OF APPLICATION FOR ADMISSIO N OF ADDITIONAL EVIDENCE HAS PLACED ON RECORD THE COPIES OF THE APP LICATION MADE BEFORE THE KANDLA SEZ ALONGWITH THE COPIES OF DEPB LICENCE RECEIVED BY THE ASSESSEE REFLECTING THE CLAIM AT PAGES 695 TO 711 O F THE PAPER BOOK. THE SAID DOCUMENTS ARE ADMITTED AS ADDITIONAL EVIDENCE IN VIEW OF NO OBJECTION RAISED BY THE LD. DR FOR THE REVENUE. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND MERIT IN THE CLA IM OF THE ASSESSEE THAT THE WRITE-OFF OF SUCH EXPORT INCENTIVES WHICH WERE RECEIVED SHORT BY THE ASSESSEE BY WAY OF COMMUNICATION OF THE DEDUCTION O F DEPB LICENCE TO THE ASSESSEE UNDER WHICH ITS CLAIM WAS RESTRICTED, IS TO BE ALLOWED AS A DEDUCTION IN THE YEAR IN WHICH THE SAID COMMUNICATI ON HAS BEEN RECEIVED BY THE ASSESSEE. ADMITTEDLY, THE ASSESSEE HAD RECE IVED THE SAID COMMUNICATION ON 14.03.2006 I.E. FALLING WITHIN THE FINANCIAL YEAR 2005- 06 AND HENCE, THE SAID CLAIM OF THE ASSESSEE IS ALL OWABLE FOR THE CAPTIONED ASSESSMENT YEAR. HOWEVER, THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE IN RESPECT OF THE COPIES OF APPLICATION MA DE IN RESPECT OF THE DEPB CLAIM AND ALSO THE COPIES OF THE DEPB LICENCE RECEIVED BY THE ASSESSEE UNDER WHICH THE CLAIM OF DEPB WAS RESTRICT ED BY KANDLA SEZ, WERE NOT AVAILABLE BEFORE THE ASSESSING OFFICER. H ENCE, THE ISSUE IS RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER FOR THE LIMITED PURPOSE OF VERIFYING THE QUANTUM OF THE DEPB LICENCE RECEIV ED BY THE ASSESSEE UNDER WHICH ITS CLAIM WAS REJECTED. THE PLEA OF TH E ASSESSEE IS THAT AS AGAINST THE CLAIM OF DEPB OF RS.35,92,066/- AND RS. 85,762/-, IT HAD ONLY RECEIVED SUM OF RS.28,58,140/- AND RS.52,451/- AS D EPB LICENCE. IN CASE THE CLAIM OF THE ASSESSEE IS FOUND TO BE CORRE CT AFTER VERIFICATION OF THE REQUISITE DOCUMENTS, WHICH ARE PLACED AT PAGES 695 TO 711 OF THE PAPER BOOK AS ADDITIONAL EVIDENCE, THE DEDUCTION OF RS.18,43,753/- IS TO BE ALLOWED IN THE HANDS OF THE ASSESSEE. THE ASSES SING OFFICER SHALL AFFORD REASONABLE OPPORTUNITY OF HEARING TO THE ASS ESSEE AND SHALL DECIDE THE MATTER IN LINE WITH OUR DIRECTIONS. THE GROUND NO. 2.1 AND 2.2 RAISED BY THE ASSESSEE IS, THUS DISMISSED AND G ROUND NO. 2.3 RAISED BY THE ASSESSEE IS, THUS ALLOWED FOR STATISTICAL PU RPOSES. 10. THE FACTS OF THE PRESENT CASE ARE IDENTICAL TO THE FACTS IN ASSESSMENT YEAR 2006-07 AND FOLLOWING OUR DECISION WE REMIT THE PRESENT ISSUE ALSO BACK TO THE FILE OF ASSESSING OFFICER TO CARRY OUT THE VERIFICATIONS IN THE HANDS OF THE ASSESSEE AND DECI DE THE MATTER IN LINE WITH OUR DIRECTIONS. THE GROUND NO.2 RAISED BY THE ASSESSEE IS THUS ALLOWED FOR STATISTICAL PURPOSES. 11. THE ISSUE IN GROUND NO.3 RAISED BY THE ASSESSEE IS AGAINST THE DISALLOWANCE OF FINANCIAL EXPENSES OF RS.9,85,67,57 4/-. THE ASSESSING OFFICER DURING THE YEAR UNDER CONSIDERATION HAD MAD E DISALLOWANCE ON ACCOUNT OF INTEREST ON ADVANCES MADE TO M/S HINDUST AN MAX GB LTD. ON WHICH THE ASSESSEE HAD NOT CHARGED ANY INTEREST AS AGAINST INTEREST 7 EXPENSES BOOKED ON INTEREST BEARING ADVANCES. THE ASSESSING OFFICER WAS OF THE VIEW THAT ON THE ONE HAND THE ASSESSEE H AD BORROWED MONEY FROM ITS PARENT COMPANY ON INTEREST AND ON THE OTHE R HAND, HAD DIVERTED THE FUNDS TO ITS JOINT VENTURE COMPANY WITHOUT CHAR GING ANY INTEREST. THE ASSESSING OFFICER FURTHER NOTED THAT SIMILAR IS SUE AROSE IN THE EARLIER YEARS AND THE ASSESSEE HAD TAKEN THE PLEA T HAT ADVANCES WERE MADE TO THE SAID CONCERN IN EARLIER YEARS FOR SUPPL Y OF RAW MATERIAL AND THE LOAN CARRIED AN INTEREST RATE OF 16.5% PER ANNU M. HOWEVER, SINCE THE SUBSIDIARY HAD MADE AN APPLICATION TO THE BOARD FOR FINANCIAL AND INDUSTRIAL RECONSTRUCTION (IN SHORT BIFR), NO INTER EST WAS CHARGED ON THE SAID LOAN BY THE ASSESSEE FROM THE SAID COMPANY. T HE PLEA OF THE ASSESSEE THAT NO DISALLOWANCE WAS WARRANTED UNDER S ECTION 36(1)(III) OF THE ACT ON SUCH BUSINESS ADVANCES WAS REJECTED BY T HE ASSESSING OFFICER AND FOLLOWING THE RATIO LAID DOWN BY THE HON'BLE PU NJAB & HARYANA HIGH COURT IN CIT VS. ABHISHEK INDUSTRIES LTD. [286 ITR 1 (P&H)] DISALLOWANCE OF RS.9,85,67,574/- WAS MADE. THE SAI D DISALLOWANCE WAS APPROVED BY THE DRP AND THE ASSESSEE IS IN APPEAL B EFORE US. 12. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT T HAT SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2003-0 4 AND ASSESSMENT YEAR 2005-06 AND THE SAID ADDITION WAS DELETED IN T HE HANDS OF THE ASSESSEE IN THE EARLIER YEARS. 13. WE FIND THAT THE TRIBUNAL (SUPRA) HAD CONSIDERE D THE ISSUE IN ASSESSMENT YEAR 2005-06 VIDE PARAS 5 TO 11 AND VIDE PARAS 9 TO 11 HAD HELD AS UNDER: 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING IN THE APPEAL FILED BY THE REVENU E IS IN RELATION TO THE INTEREST CHARGEABLE ON THE ADVANCES MADE BY THE ASSESSEE IN THE EARLIER YEARS. DURING THE YEAR UNDER CONSIDERA TION A SUM OF RS.59.55 CRORES WAS DUE FROM M/S HINDUSTAN MAX G.B. LTD., WHICH WAS JOINT VENTURE COMPANY PROMOTED BY THE ASSESSEE COMPANY. THE 8 ASSESSEE HAD ADVANCED THE SAID AMOUNT TO M/S HINDUS TAN MAX G.B. LTD. AGAINST SUPPLY OF RAW MATERIAL, AND WAS CARRYI NG INTEREST @ 16.5% PER ANNUM. HOWEVER, BECAUSE OF THE FINANCIAL CONSTRAINTS, M/S HINDUSTAN MAX G.B. LTD. MOVED AN APPLICATION BE FORE THE BIFR FOR WINDING UP AND THEREAFTER NO INTEREST WAS EARNED ON THE SAID LOAN. THE ASSESSEE WHILE FILING THE RETURN OF INCOME HAD NOT RECOGNIZED THE INTEREST DUE ON THE SAID ADVANCES MA DE BY IT IN THE EARLIER YEARS. AS PER NOTE NO.6 I.E. NOTES TO THE BALANCE SHEET AND PROFIT & LOSS ACCOUNT ANNEXED TO THE FINANCIAL STATEMENT PLACED AT PAGES 25 AND 27 OF THE PAPER BOOK, AS PER CLAUSE 7-A, IT WAS REPORTED AS UNDER: BASED ON THE UNAUDITED FINANCIAL STATEMENTS AS AT MARCH 31, 2004, HMGBS NET WORTH HAS BEEN COMPLETELY ERODED AND IT HAS SUSPENDED ITS PRODUCTION DUE TO SIGNIFICANT DECLINE GLOBALLY IN T HE REALIZATION OF GOODS MANUFACTURED BY IT. IN VIEW O F THE ABOVE, THE ABILITY OF HMGB TO CONTINUE AS A GOING CONCERN IS DEPENDENT ON CONTINUED FUTURE FINANCIAL SUPPORT BY ITS PROMOTER COMPANIES AND ALS O IMPROVEMENT IN THE PRICES OF GOODS MANUFACTURED BY IT. HOWEVER, IN VIEW OF THE STRATEGIC LONG TERM INVOLVEMENT OF THE COMPANY WITH HMGB, NO PROVISION HAS BEEN CONSIDERED FOR ANY POSSIBLE LOSS ES WHICH MAY ARISE ON THE ABOVE ACCOUNT. 10. THE SAID ADVANCES MADE BY THE ASSESSEE WERE BRO UGHT FORWARD FROM THE EARLIER YEARS AND BECAUSE OF THE J OINT VENTURE COMPANY BEING NOT IN GOOD FINANCIAL CONDITIONS, NO INTEREST WAS CHARGED ON THE SAID LOAN. THE ASSESSEE IN THE EARL IER ASSESSMENT YEARS 2003-04 AND 2004-05 HAD NOT CHARGED ANY INTER EST ON THE SAID LOAN AND THE TRIBUNAL IN ITA NO.366/CHD/2007 R ELATING TO ASSESSMENT YEAR 2003-04 AND ITA NO.281/CHD/2008 REL ATING TO ASSESSMENT YEAR 2004-05 VIDE ORDER DATED 15.10.2008 HAD ALLOWED THE CLAIM OF THE ASSESSEE OBSERVING THAT THE BORROW INGS MADE BY THE ASSESSEE FROM ITS PARENT COMPANY HAD BEEN UTILI ZED FOR THE PURPOSES OF BUSINESS AND THE CLAIM OF INTEREST EXPE NDITURE HAD BEEN CONSTANTLY ALLOWED IN THE PRECEDING YEARS. AS THERE WAS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OTHER THAN TH AT PART OF THE INTEREST ACCRUED ON THE ADVANCES MADE TO M/S HINDUS TAN MAX G.B. LTD. HAD BEEN WRITTEN OFF IN THE INSTANT YEAR, COUL D NOT BE THE BASIS TO SUGGEST THAT THE BORROWINGS FROM THE PARENT COMP ANY HAD NOT BEEN UTILIZED FOR BUSINESS PURPOSES. FURTHER IT WA S HELD THAT THERE WAS SUFFICIENT MATERIAL TO SHOW THAT THE RELATIONSH IP OF THE ASSESSEE WITH ITS SUBSIDIARY M/S HINDUSTAN MAX G.B. LTD. WAS BASED ON COMMERCIAL EXPEDIENCY AND ADVANCING OF AMO UNT WAS FOR BUSINESS PURPOSES. CONSEQUENTLY, THE INTEREST PAID ON BORROWINGS WAS HELD TO BE ALLOWABLE DEDUCTION UNDER SECTION 36 (1)(III) OF THE ACT IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE A PEX COURT IN S.A.BUILDERS VS. CIT [288 ITR 1(SC)]. 11. WE FIND THAT THE ISSUE IN THE PRESENT APPEAL IS IDENTICAL TO THE ISSUE BEFORE THE TRIBUNAL IN ASSESSEES OWN CAS E RELATING TO ASSESSMENT YEARS 2003-04 AND 2004-05. ADMITTEDLY, THE ASSESSEE HAD PAID INTEREST ON THE BORROWINGS MADE FROM ITS P ARENT COMPANY IN THE EARLIER YEARS AND NO FRESH BORROWINGS HAD BE EN MADE DURING THE YEAR UNDER CONSIDERATION. THE INTEREST EXPENDITURE HAD 9 BEEN ALLOWED IN THE HANDS OF THE ASSESSEE FROM YEAR TO YEAR. FURTHER THE ADVANCES TO M/S HINDUSTAN MAX G.B. LTD. WERE ALSO MADE IN THE EARLIER YEARS AND THE BALANCE IS BROUGH T FORWARD FROM THE PRECEDING YEAR ON WHICH IN THE EARLIER YEARS TH E ASSESSEE WAS CHARGING INTEREST. HOWEVER, THE INTEREST ON THE SA ID LOAN HAD NOT BEEN RECOGNIZED DURING THE YEAR UNDER CONSIDERATION AS M/S HINDUSTAN MAX G.B. LTD. HAD GONE BEFORE THE BIFR BE CAUSE OF FINANCIAL CONSTRAINT. IN THE ABOVE SAID CIRCUMSTAN CES, WE FIND NO MERIT IN THE ORDER OF THE ASSESSING OFFICER AND UPH OLDING THE ORDER OF THE CIT (APPEALS) WE DISMISS GROUND NO.1 RAISED BY THE REVENUE. 14. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN CIT, CHANDIGARH VS. M/S DSM ANTI INFECTIVES INDIA LTD. IN ITA NO.257 OF 2009 (O&M), DATE OF DECISION 28.10.2013 ON THE ISSUE OF DISALLOWANCE OF INTEREST HAD HELD AS UNDER: 11. FROM THE ABOVE, IT EMERGES THAT THE CIT (A) AN D THE TRIBUNAL HAD CONCLUDED THAT THERE WAS COMMERCIAL EXPEDIENCY IN GIVING INTEREST FREE LOAN TO HMGB AND THE DEDUCTION WAS ADMISSIBLE UNDER SECTION 36(1) (III) OF THE ACT . THE PRIMARY FACTORS INTER ALIA WHICH WERE TAKEN INTO CONSIDERATION WERE THAT: (I) THE HMGB HAD PROVIDED RAW MATERIAL TO T HE ASSESSEE AT LESS THAN THE MARKET RATE; (II) THE HMGB WAS PROVIDING A HIGH QUALITY AND COS T RELIABLE SOURCE OF SUPPLY AND IT GAVE ASSURED SUPPLY OF KEY RAW MATERIAL; (III) THE ASSESSEE HAD TAKEN LOAN BY PAYING INT EREST AT THE RATE OF 2-3% WHEREAS THE AMOUNT WAS ADVANCED TO HMGB AT THE RATE OF 16.50% A ND EARNED INTEREST OF RS.2,63,93,820/- DURING THE ASSESSMENT YEAR 2004-05 . (IV) FURTHER, THE AVERAGE COST OF MATERIAL WHI CH WAS PAID BY THE ASSESSEE TO THE JOINT VENTURE WAS LOWER THAN THE COST FROMM OTHER CONCERN S WHERE THE QUANTITY WAS COMPARABLE. THE AFORESAID FINDINGS OF CIT(A) AND THE TRIBUNAL H AVE NOT BEEN SHOWN TO BE ERRONEOUS OR PERVERSE IN ANY MANNER. 12. IN ALL FAIRNESS TO LEARNED COUNSEL FOR THE REVENUE, ADVERTING TO THE JUDGMENTS RELIED UPON BY HER, IN VIEW OF THE FI NDINGS OF FACT RECORDED BY CIT(A) AND THE TRIBUNAL THAT THERE EXISTED COMMERCI AL EXPEDIENCY IN GIVING INTEREST FREE LOAN TO HMGB, WHICH FINDINGS ARE NOT SHOWN TO BE AGAINST THE RECORD, NO ADVANTAGE CAN BE DERIVED BY THE REVENUE FROM THE PRONOUNCEMENT REPORTED IN ABHISHEK INDUSTRIES LIMIT ED'S CASE (SUPRA). IN SO FAR AS MOTOR GENERAL FINANCE LIMITED AND INDIAN SHAVINGS PRODUCTS LIMITEDS CASES (SUPRA) ARE CONCERNED, THESE PRONOU NCEMENTS WERE PRIOR TO JUDGMENT OF THE APEX COURT IN S.A.BUILDERS'S CASE ( SUPRA). FURTHER, ON FACTUAL MATRIX THEREIN, NO COMMERCIAL EXPEDIENCY WA S SHOWN TO BE EXISTING AND THEREFORE, IN VIEW OF DISTINGUISHABLE CIRCUMSTA NCES INVOLVED, THESE DO NOT ADVANCE THE CASE OF THE REVENUE. 15. THE ISSUE ARISING VIDE GROUND OF APPEAL NO.3 IS IDENTICAL TO THE ISSUE BEFORE THE HON'BLE PUNJAB & HARYANA HIGH COUR T IN ASSESSMENT 10 YEARS 2003-04 (SUPRA) AND 2004-05 AND BEFORE THE T RIBUNAL IN ASSESSMENT YEARS 2005-06 AND 2006-07 (SUPRA). THE SAID ADVANCES TO JOINT VENTURE COMPANY WERE MADE IN THE EARLIER YEAR S ON WHICH THE ASSESSEE IN THE EARLIER YEARS WAS EARNING INTEREST INCOME BUT BECAUSE OF THE SAID JOINT VENTURE COMPANY FILING PETITION BEFO RE BIFR, NO INTEREST WAS CHARGED BY THE ASSESSEE COMPANY ON THE SAID ADV ANCES. WE FIND NO MERIT IN THE ORDER OF THE ASSESSING OFFICER IN DISA LLOWING PART OF THE EXPENDITURE BEING RELATABLE TO SUCH ADVANCES MADE B Y THE ASSESSEE INTEREST FREE TO IT IS JOINT VENTURE COMPANY AND TH E SAME IS DELETED. THE GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE IS THU S ALLOWED. 16. THE GROUND OF APPEAL NO.4 RAISED BY THE ASSESSE E IS AGAINST DISALLOWANCE OF COMMISSION EXPENSES TOTALING RS.85, 38,662/-. THE SAID DISALLOWANCE OUT OF COMMISSION EXPENSES ARE AGAINST DISALLOWANCE OF RS.60,72,653/- OUT OF EXPORT SALES COMMISSION AND R S.24,66,009/- OUT OF DOMESTIC SALES COMMISSION. 17. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT T HAT BOTH THE ISSUES WERE BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 AND THE MATTER IN RESPECT OF ALLOWANCE OF EXPORT SALES COMMISSION HAS BEEN REMITTED BACK TO THE ASSESSING OFFICER FOR VERIFICATION AND THE I SSUE IN RELATION TO DOMESTIC SALES COMMISSION HAS BEEN DECIDED IN FAVOU R OF THE ASSESSEE. 18. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT U NDER SECTION 144C(13) OF THE ACT READ WITH SECTION 143(3) OF THE ACT HAD NOTED THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HA D INCURRED EXPENDITURE OF RS.45.85 MILLION UNDER THE HEAD COM MISSION AS PER SCHEDULE-XIX. THE ASSESSEE WAS ASKED TO FURNISH T HE DETAILS AND CONFIRMATION IN RESPECT OF COMMISSION PAID. THE RE PLY OF THE ASSESSEE 11 BEFORE THE ASSESSING OFFICER IS INCORPORATED AT PAG ES 31 TO 40 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER NOTED THAT IDENTICAL ISSUE AROSE IN THE CASE OF THE ASSESSEE DURING ASSESSMENT YEAR 2006-07 AND ADDITION WAS CONFIRMED IN THE HANDS OF THE ASSESSEE BY THE D RP ALSO ON BOTH ACCOUNTS OF EXPORT SALES COMMISSION AND DOMESTIC SA LES COMMISSION. THE DRP DISMISSED THE OBJECTION OF THE ASSESSEE IN VIEW OF THE ADDITION BEING MADE IN THE EARLIER YEARS. 19. WE FIND THAT IDENTICAL ISSUE OF ALLOWANCE OF CO MMISSION EXPENSES AROSE BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2006-0 7 AND VIDE ORDER DATED 8.8.2013 VIDE PARAS 81 TO 86, THE ISSUE WAS C ONSIDERED AT LENGTH BY THE TRIBUNAL. IN RESPECT OF THE COMMISSION PAID IN RELATION TO EXPORT SALES THE MATTER HAS BEEN REMITTED BACK TO THE ASSE SSING OFFICER TO VERIFY THE CLAIM OF ASSESSEE THAT THE COMMISSION PA ID TO THE SAID CONCERN HAD ANY CONNECTION WITH THE SALES MADE THROUGH SAID CONCERN. THE RELEVANT FINDINGS OF THE TRIBUNAL ARE AS UNDER: 81. THE ISSUE IN GROUND NO. 4 RAISED BY THE ASSESS EE IS AGAINST DISALLOWANCE OF RS.96,15,144/- BOOKED AS COMMISSION EXPENSES. 82. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD DEBITED A SUM OF RS .2.60 CRORES UNDER THE HEAD COMMISSION, WHICH INCLUDED A SUM OF RS.1 0,563,783/- ON ACCOUNT OF COMMISSION ON EXPORTS AND SUM OF RS.1,55 ,27,136/- ON ACCOUNT OF DOMESTIC SALES. THE ASSESSEE WAS SHOW C AUSED TO FURNISH THE COMPLETE DETAILS IN RESPECT OF THE SAID PAYMENTS BY THE ASSESSING OFFICER. THE ASSESSEE FURNISHED DETAILS OF COMMISS ION AGENTS AND THE AMOUNT OF SALES EFFECTED THROUGH THEM INCLUDING THE RATE OF COMMISSION. THE ASSESSING OFFICER, FROM THE DETAILS NOTED THAT THE RATE OF COMMISSION PAID TO THE MOST OF THE PARTIES WAS APPROXIMATELY 2 .9% ON EXPORT SALES AND ON DOMESTIC SALES, IT VARIED BETWEEN 1% TO 4%. THE ASSESSING OFFICER ALSO NOTED THAT IN RESPECT OF TWO OF THE CO MMISSION AGENTS, THE TOTAL COMMISSION WAS PAID ON 31.3.2000 I.E. AT THE CLOSE OF THE YEAR. THE ASSESSEE FAILED TO FILE ANY CONFIRMATION FROM THE C OMMISSION AGENTS BEFORE THE ASSESSING OFFICER AND ALSO NO WRITTEN AG REEMENTS REGARDING THE PAYMENT OF COMMISSION WAS FILED DURING THE ASSE SSMENT PROCEEDINGS. THE ASSESSING OFFICER AFFORDED VARIOUS OPPORTUNITIE S TO THE ASSESSEE WHICH WERE NOT COMPLIED WITH. THE ASSESSING OFFICE R FURTHER NOTED THAT SOME OF THE PARTIES TO WHOM SALES HAD BEEN MADE, HA D ALSO BEEN PAID COMMISSION. HOWEVER, NO SUCH COMMISSION WAS PAID T O MANY OF THE PARTIES TO WHOM EXPORTS HAVE BEEN MADE OR TO WHOM D OMESTIC SALES HAVE BEEN MADE. THE ASSESSING OFFICER, THUS HELD THAT T HERE WAS NO MERIT IN THE COMMISSION PAID TO THE PARTIES TO WHOM SALES HA D BEEN MADE I.E. P.I. 12 MENSANGAN SAKTI AMOUNTING TO RS.40,97,199/-, M/S ED WARD KELLER (PHILS) INC AMOUNTING TO RS.6,95,475/- AND ALSO MAL ACHITE CHEMICALS AMOUNTING TO RS.545,257/-. THUS, DISALLOWANCE OF R S.53,37,931/- WAS MADE OUT OF THE COMMISSION PAID BY THE ASSESSEE TO THE RESPECTIVE PARTIES TO WHOM SALES WERE MADE. FURTHER, IN RESPE CT OF COMMISSION PAID TO M/S ACE CORPORATION @ 6.6% AS AGAINST NORMA L RATE OF COMMISSION AT 3% WAS HELD BY THE ASSESSEE TO BE EXC ESSIVE. SIMILAR EXCESSIVE COMMISSION PAID TO OTHER PARTIES, ALL TOT ALING RS.42,77,212/- WAS DISALLOWED BY THE ASSESSING OFFICER. THE ASSES SEE IS IN APPEAL AGAINST SAID DISALLOWANCE. 83. THE DRP VIDE ORDER DATED 20.09.2010 HAD UPHELD THE DISALLOWANCE PROPOSED BY THE ASSESSING OFFICER. 84. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT TH E ALLEGATIONS OF THE ASSESSING OFFICER THAT NO DETAILS WERE FILED, ARE I NCORRECT AS THE PERUSAL OF THE ASSESSMENT ORDER WOULD REFLECT THAT ASSESSEE WAS APPEARING FROM DAY-TODAY AND WAS FURNISHING THE DETAILS REQUISITIO NED DURING THE ASSESSMENT PROCEEDINGS. THE LD. AR FOR THE ASSESSE E REFERRED TO THE VARIOUS REPLIES FILED BEFORE THE ASSESSING OFFICER WHICH ARE APPARENT FROM THE PERUSAL OF THE PARA 5 TO 5.6 OF THE ASSESS MENT ORDER. THE GRIEVANCE OF THE LD. AR FOR THE ASSESSEE WAS THAT T HE REPLY OF THE ASSESSEE HAS BEEN SUMMARILY REJECTED BY THE ASSESSI NG OFFICER VIDE HIS OBSERVATIONS IN PARA 5.8. THE NEXT OBJECTION OF TH E LD. AR FOR THE ASSESSEE WAS THAT THE COMMISSION AMOUNT REFERRED TO BY THE ASSESSING OFFICER IN RESPECT OF EDWARD KELLAR (PHILS) INC WER E CORRECT. HOWEVER, THE COMMISSION AMOUNT OF MALACHITE CHEMICALS WAS IN CORRECT AND THE SALES AMOUNT IN RESPECT OF THE PARTIES WERE WRONG. IT WAS POINTED OUT BY THE LD. AR FOR THE ASSESSEE THAT CONFIRMATIONS WERE FILED BEFORE THE DRP WHICH ARE PLACED AT PAGE 305 OF THE PAPER BOOK. HE FURTHER SUBMITTED THAT SIMILAR COMMISSION PAID IN THE SUCCEEDING YEAR HAS BEEN ALLOWED. THE CASE OF THE ASSESSEE WAS THAT THE SAID PARTIES WERE TRADERS AND WERE ALSO ACTING AS COMMISSION AGENTS AND THE BUSINESS O F THE ASSESSEE WAS CONDUCTED THROUGH SUCH AGENTS WHO WERE MAKING PURCH ASES ON BEHALF OF OTHER PARTIES. IT HAS BEEN FURTHER POINTED OUT THA T THE OBSERVATION OF THE ASSESSING OFFICER THAT THE ASSESSEE WAS PAYING COMM ISSION ON THE PURCHASES MADE BY THE PARTIES IS INCORRECT AS THE S AID COMMISSION WAS BEING PAID TO PERSONS WHO WERE ACTING AS COMMISSION AGENTS. IN RESPECT OF THE DOMESTIC SALES AND THE COMMISSION THEREON, I T WAS POINTED OUT BY THE LD. AR FOR THE ASSESSEE THAT THE ASSESSING OFFI CER HAD DISALLOWED THE COMMISSION BEING HIGHER THAN 3%. THE PLEA OF THE A SSESSEE WAS THAT THE COMMISSION HAD BEEN PAID TO UNRELATED PARTIES AND D URING THE ASSESSMENT PROCEEDINGS, NO QUERIES WERE MADE BY THE ASSESSING OFFICER IN THIS REGARD. 85. THE LD. DR FOR THE REVENUE POINTED OUT THAT TH E ASSESSEE HAD FAILED TO FILE THE CONFIRMATION DURING THE ASSESSME NT PROCEEDINGS AND THE CONFIRMATION CLAIMED TO BE FILED IS FILED VERY LATE . FURTHER, IN THE ABSENCE OF ANY WRITTEN AGREEMENT, IT CANNOT BE PRES UMED THAT THE ASSESSEE WAS PAYING COMMISSION. FURTHER, THE ASSES SEE HAS FAILED TO FURNISH ANY DETAILS OF THE BUSINESS SERVICES CONDUC TED BY THE SAID COMMISSION AGENT AND AS THE ASSESSEE HAS FAILED TO JUSTIFY THE RENDERING OF SERVICES BY THE SAID COMMISSION AGENT, THE SAID EXPENDITURE IS NOT ALLOWABLE IN THE HANDS OF THE ASSESSEE. RELIANCE W AS PLACED ON ASSAM PESTICIDES AND AGRO CHEMICALS VS CIT 227 ITR 846. 13 86. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE RAISED VIDE GROUND NO. 4 IS AGAINST THE DISAL LOWANCE OF COMMISSION EXPENSES TOTALING RS.96,15,144/-. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD CLAIMED TOTAL EXPENDITURE OF RS.2. 60 CRORES UNDER THE HEAD COMMISSION. THE SAID COMMISSION INCLUDED BOT H COMMISSION PAID ON ACCOUNT OF EXPORTS AND ALSO THE COMMISSION PAID ON DOMESTIC SALES. THE CASE OF THE REVENUE IS THAT THE ASSESSEE HAD MA DE SALES TO CERTAIN PARTIES, TO WHOM COMMISSION WAS ALSO PAID AND THE S AME BEING NOT RELATABLE TO THE BUSINESS OF THE ASSESSEE, WAS NOT TO BE ALLOWED AS AN EXPENDITURE. HOWEVER, THE CASE OF THE ASSESSEE BEF ORE US IS THAT THE SAID COMMISSION HAS BEEN PAID AGAINST THE PURCHASE ORDER S BOOKED BY THE SAID CONCERN, WHO WERE ENGAGED IN TRADING AND WERE ALSO COMMISSION AGENTS. THE TWO TRANSACTIONS WERE CLAIMED TO BE DI FFERENT AND WITHOUT ANY CONNECTION TO EACH OTHER. THE ASSESSEE HAS PLA CED ON RECORD THE DETAILS OF COMMISSION PAID AT PAGES 291 & 292 OF TH E PAPER BOOK. THE ABOVESAID DETAILS REFLECT COMMISSION ON EXPORT SALE S PAID OF RS.105,63,783/- AND DOMESTIC COMMISSION OF RS.155,2 7,136/-. THE ASSESSEE HAD FURTHER FURNISHED THE DETAILS OF THE P ARTIES ALONGWITH THE RATES OF COMMISSION, SALES MADE TO THE SAID PARTIES AND THE TOTAL COMMISSION PAID TO THE SAID PARTIES, WHICH ARE PLAC ED AT PAGES 293 AND 294 OF THE PAPER BOOK. AS AGAINST THE EXPORT COMMI SSION, THE ASSESSEE HAD PAID A SUM OF RS.695,475/- ON SALES OF RS.2.35 CRORES TO M/S EDWARD KELLER @ 2.950%. FURTHER COMMISSION OF RS.40,97,19 9/- ON SALE VALUE OF RS.13.80 CRORES HAS BEEN PAID TO P.I. MENSANGAN SAKTI. THE NEXT ITEM OF PAYMENT IS TO M/S MALACHITE CHEMICALS, WHICH AS PER THE ASSESSEE IS RS.885,880/- ON SALE VALUE OF RS.2.98 CRORES @ RS.2 .966%. THE ASSESSING OFFICER HAS ADOPTED THE COMMISSION PAID T O M/S MALACHITE CHEMICALS AT RS.455,257/-. THE CASE OF THE ASSESSE E BEFORE US IS THAT THE COMMISSION AGENTS ARE ALSO TRADERS OF THE DRUGS AND ARE ALSO ACTING AS COMMISSION AGENTS. THE ASSESSEE IS ENGAGED IN THE MANUFACTURE OF INTERMEDIARIES AND BULK DRUGS, WHICH IN TURN ARE UT ILIZED BY OTHER CONCERNS FOR THE PREPARATION OF THE FINAL PRODUCTS. THE ASSESSEE, THROUGH THE SAID COMMISSION AGENTS HAD SOLD THE ITE MS MANUFACTURED BY IT TO DIFFERENT CONCERNS. THE ASSESSEE HAS PLACED ON RECORD THE CONFIRMATION FROM P.I. MENSANGAN SAKTI IN RESPECT O F RECEIPT OF COMMISSION OF RS.40,97,199/-. THE SAID CERTIFICATE IS PLACED AT PAGES 305 OF THE PAPER BOOK. WE FIND MERIT IN THE CASE O F THE ASSESSEE. HOWEVER, THE NECESSARY DETAILS IN THIS REGARD ARE N OT AVAILABLE, IN PARTICULAR THE PLEA OF THE ASSESSING OFFICER THAT T HE ASSESSEE HAD MADE SALES TO THE SAID PARTIES ON WHICH COMMISSION HAD B EEN PAID. WE, THEREFORE, REMIT THIS ISSUE TO THE FILE OF ASSESSIN G OFFICER TO VERIFY THE CLAIM OF THE ASSESSEE THAT THE COMMISSION PAID TO T HE SAID CONCERN HAD NO CONNECTION WITH THE SALES MADE TO THE SAID CONCE RNS AND IF THE CONTENTION OF THE ASSESSEE IS FOUND TO BE CORRECT, THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE CLAIM OF EXPENDITURE BOOKED O N ACCOUNT OF COMMISSION PAID ON EXPORT SALES. REASONABLE OPPORT UNITY OF HEARING SHALL BE AFFORDED TO THE ASSESSEE TO PUT FORWARD IT S CONTENTIONS. IN VIEW THEREOF, THIS ISSUE IS SET ASIDE TO THE FILE OF AS SESSING OFFICER WITH OUR DIRECTIONS. 20. AS THE ISSUE ARISING BEFORE US IS IDENTICAL TO THE ISSUE ARISING BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2006-07, FOL LOWING THE SAME PARITY OF REASONING WE REMIT THIS ISSUE ALSO BACK T O THE FILE OF THE 14 ASSESSING OFFICER TO DECIDE THE SAME IN LINE WITH O UR DIRECTIONS IN ASSESSMENT YEAR 2006-07. 21. THE SECOND LIMB OF THE ISSUE IS IN CONNECTION W ITH THE COMMISSION PAID ON DOMESTIC SALES. SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 AND VIDE PARA 87 IT WAS OBS ERVED AS UNDER: 87. THE SECOND ASPECT OF THE CLAIM OF EXPENDITURE UNDER THE HEAD COMMISSION RELATES TO THE COMMISSION PAID ON DOME STIC SALES. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD PAID COMMISSION AT VARYING RATES STARTING FROM ABOUT 1% TO 5%. THE AS SESSEE HAS FILED ON RECORD THE DETAILS OF THE ABOVESAID COMMISSION TOTA LING RS.155,27,136/- THE ASSESSEE HAS TABULATED THE NAMES OF THE PARTIES ALONGWITH THE DETAILS OF SAME VALUE OF SALES, COMMISSION PAID AND THE RAT ES AT WHICH PAID. THE PERUSAL OF THE SAID DETAILS REFLECT THE COMMISS ION @ 4.48% BEING PAID TO M/S ACE CORPORATION. THE TOTAL AMOUNT PAID TO THE SAID PARTY IS RS.1351,250/-. THE ASSESSING OFFICER, ON THE OTHER HAND, VIDE PARA 5.12 HAS NOTED THAT THE COMMISSION TO THE SAID PARTY HAS BEEN MADE @ 6.6% VIDE PARA 5.12 AT PAGE 32 OF THE ASSESSMENT ORDER. THE ASSESSEE, ON THE OTHER HAND, HAS FURNISHED THE DETAILS OF COMMISSION AT PAGES 291 AND 292 OF THE PAPER BOOK IN WHICH THE COMMISSION TO M/ S ACE CORPORATION HAS BEEN SHOWN AT RS.13,51,250/-. WE ARE IN CONFOR MITY WITH THE SUBMISSION OF THE ASSESSEE THAT THE RATE OF COMMISS ION PAID FOR THE TRANSACTION CANNOT BE INTERFERED BY THE ASSESSING O FFICER AS IT IS THE UNDERSTANDING BETWEEN THE PARTIES AT THE RELEVANT T IME WHICH DETERMINES THE RATE OF COMMISSION TO BE PAID ON A PARTICULAR T RANSACTION. IN VIEW THEREOF, WE REVERSE THE ORDER OF ASSESSING OFFICER IN RESTRICTING THE RATE OF COMMISSION TO 3% . IN ANY CASE, THE SAID RESTRI CTION WAS MADE BY THE ASSESSING OFFICER OBSERVING THAT THE RATE OF COMMIS SION PAID BY THE ASSESSEE WAS 6.6% WHEREAS THE ASSESSEE CLAIMS THAT IT HAD PAID COMMISSION @ 4.48%. THE OTHER TWO PARTIES TO WHOM COMMISSION HAD BEEN PAID BY THE ASSESSEE AND THE SAME HAS BEEN RES TRICTED BY THE ASSESSING OFFICER ARE M/S INTEGRATED TECHNOLOGY AND M/S AAKAAR ENGINEERING & MANUFACTURING CO. THE COMMISSION TO THE SAID PARTIES, AS ALLEGED BY THE ASSESSING OFFICER ARE PAID @ 6.90 % AND 6.76% RESPECTIVELY. IN LINE WITH OUR OBSERVATIONS HEREIN ABOVE, WE FIND NO MERIT IN THE DISALLOWANCE MADE BY THE ASSESSING OFF ICER RESTRICTING TO RATE OF COMMISSION TO 3% AS AGAINST THE RATES AGREE D UPON BETWEEN THE PARTIES. REVERSING THE ORDER OF THE ASSESSING OFFI CER, WE DELETE THE ADDITION OF RS.42,77,213/-. THE GROUND NO. 4 RAISE D BY THE ASSESSEE IS, THUS PARTLY ALLOWED. 22. THE FACTS OF THE PRESENT CASE ARE IDENTICAL TO THE FACTS IN ASSESSMENT YEAR 2006-07 AND THE ASSESSING OFFICER H AS ALSO UPHELD THE DISALLOWANCE, IN VIEW OF THE DISALLOWANCE BEING MAD E IN ASSESSMENT YEAR 2006-07. WE FIND NO MERIT IN THE SAID DISALLOWANC E AND FOLLOWING THE RATIO LAID DOWN IN ASSESSMENT YEAR 2006-07, WE DIRE CT THE ASSESSING 15 OFFICER TO DELETE THE ADDITION OF RS.24,66,009/-. THE GROUND OF APPEAL NO.4.1 RAISED BY THE ASSESSEE IS ALLOWED FOR STATIS TICAL PURPOSES AND GROUND OF APPEAL NO.4.2 RAISED BY THE ASSESSEE IS A LLOWED. 23. THE GROUND OF APPEAL NO.5 RAISED BY THE ASSESSE E IS AGAINST THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT AMOU NTING TO RS.15,10,059/-. THE SAID DISALLOWANCE WAS MADE IN THE HANDS OF THE ASSESSEE ON ACCOUNT OF INVESTMENT OF RS.50 MILLION AS ON 31.3.2007 IN THE SHARES OF HMGB LTD. THE CLAIM OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT IT HAD NOT UTILIZED ANY OF THE BOR ROWED FUNDS FOR INVESTMENT IN THE SAID SHARES AND AS SUCH THE PROVI SIONS OF SECTION 14A OF THE ACT WERE NOT APPLICABLE. ANOTHER PLEA RAISE D BY THE ASSESSEE WAS THAT THE SAID INVESTMENT WAS MADE IN THE EARLIER YE ARS AND NO FRESH INVESTMENT WAS MADE DURING THE YEAR UNDER CONSIDERA TION. THE ASSESSING OFFICER, HOWEVER, INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT DISALLOWED A SUM OF RS.15,10,059/- OUT OF I NTEREST EXPENDITURE BEING ATTRIBUTABLE TO THE TAX FREE INVESTMENT MADE BY THE ASSESSEE. THE SAID ADDITION WAS CONFIRMED BY THE DRP. 24. WE FIND THAT SIMILAR ISSUE AROSE BEFORE THE TRI BUNAL IN ASSESSMENT YEAR 2006-07 AND THE TRIBUNAL VIDE PARAS 88 AND 89 HELD AS UNDER: 88. THE GROUND NO. 5 RAISED BY THE ASSESSEE IS AGA INST THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE ACT. THE CASE OF THE ASSESSEE WAS THAT THE SAID PR OVISIONS WERE NOT APPLICABLE AS THE ASSESSEE HAD MADE ONLY ONE INVEST MENT OF RS.5 CRORES IN 1996 IN M/S HINDUSTAN MAX-GB LTD. ON WHICH THE A SSESSEE WAS RECEIVING INTEREST. HOWEVER, SINCE THE SAID COMPANY HAD GONE INTO LIQUIDATION, NO INTEREST WAS RECEIVED FROM THE SAID PARTIES. IT WAS FURTHER POINTED OUT THAT AT THE TIME OF INVESTMENT, THE DIVIDEND INCOME WAS TAXABLE AND IN ANY CASE, THE INVESTMENT WAS MAD E TO DO BUSINESS OF PURCHASE OF RAW MATERIALS FROM THE SAID CONCERN. A NOTHER CONTENTION OF THE LD. AR WAS THAT THE SAID INVESTMENT WAS MADE OU T OF OWN FUNDS AND HENCE, NO MERIT IN THE DISALLOWANCE MADE BY THE ASS ESSING OFFICER. 89. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSING OFFICER FROM THE BALANCE-SHEET NOTED THE INVESTMENT OF RS. 5 CRORES IN SHARES OF M/S HINDUSTAN MAX-GB LTD. THE SAID INVESTMENT WAS MADE IN THE 16 EARLIER YEARS ON WHICH THE ASSESSEE WAS EARNING INT EREST. WHILE DECIDING GROUND NO.3 OF THE PRESENT APPEAL, WE HAVE DELIBERATED UPON THE ISSUE OF DISALLOWANCE OF INTEREST RELATABLE TO SUCH ADVANCES MADE BY THE ASSESSEE ON WHICH AS PER THE ASSESSING OFFICER, NO INTEREST WAS CHARGED AS AGAINST THE INTEREST EXPENDITURE INCURRE D BY THE ASSESSEE. IT IS AN ADMITTED POSITION THAT THE ASSESSEE WAS RECEI VING INTEREST ON THE SAID ADVANCES. THE SAID INVESTMENT WAS MADE FOR BU SINESS PURPOSES I.E. FOR THE PURCHASE OF RAW MATERIAL FROM THE SAID CONC ERN. HOWEVER, AS THE SAID CONCERN WAS IN FINANCIAL CONSTRAINT, THE APPLI CATION WAS MADE BEFORE THE BIFR BY THE SAID CONCERN AND THEREAFTER, NO INTEREST WAS BEING CHARGED BY THE ASSESSEE ON THE SAID ADVANCES. ADMITTEDLY, THE SAID INVESTMENT WAS NOT MADE DURING THE YEAR UNDER CONSIDERATION, AS IS APPARENT FROM THE FACT THAT THE ISSUE OF DISALLOWAN CE OF INTEREST UNDER SECTION 36(1)(III) OF THE ACT IN RELATION TO THE SA ID ADVANCE, AROSE BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2003-04 AND THEREAF TER. IN THE TOTALITY OF THE ABOVESAID FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT NO DISALLOWANCE IS WARRANTED UNDER SECTION 14A READ WI TH RULE 8D OF IT RULES AS THE SAID INVESTMENT HAD BEEN MADE BY THE A SSESSEE IN A JOINT VENTURE FOR BUSINESS EXPEDIENCY. ACCORDINGLY, WE D IRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS.12,40,501/-. GROUND NO.5 RAISED BY THE ASSESSEE IS THUS, ALLOWED. 25. THE ISSUE ARISING BEFORE US IS IDENTICAL TO THE ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 AND FOLLOWI NG THE SAME PARITY OF REASONING WE DELETE THE ADDITION OF RS.15,10,059 /- AND THE GROUND OF APPEAL NO.5 RAISED BY THE ASSESSEE IS THUS ALLOWED. 26. THE ISSUE IN GROUND NO.6 RAISED BY THE ASSESSEE IS AGAINST THE ADJUSTMENT MADE ON ACCOUNT OF ARMS LENGTH PRICE AN D WE SHALL DEAL WITH THIS ISSUE ALONGWITH THE ISSUE RAISED IN ASSESSMENT YEAR 2008-09. 27. THE GROUND OF APPEAL NO.7 RAISED BY THE ASSESSE E IS AGAINST CHARGING OF INTEREST UNDER SECTION 234A, 234B, 234C AND 234D OF THE ACT, WHICH IS CONSEQUENTIAL IN NATURE AND HENCE THE SAME IS DISMISSED. ITA NO.1290/CHD/2012 :: ASSESSMENT YEAR 2008-09 28. THE ASSESSEE IN ITA NO.1290/CHD/2012 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE & IN LAW, THE HON'BLE DRP ERRED IN CONFIRMING THE DRAFT ASSESSMENT ORDER OF THE LD. AO ON THE FOLLOWING ISSUES: 17 - DISALLOWANCE OF RS. 9,85,67,574/- BEING THE INTERES T ON ACCOUNT OF DIVERSION OF FUNDS. - DISALLOWANCE OF RS. 85,75,079/- OUT OF THE COMMISSI ON EXPENSES INCURRED DURING THE YEAR. - DISALLOWANCE OF RS. 21,36,334/- UNDER SECTION 14A O F THE ACT ON AN ARBITRARY BASIS. - ADDITION ON ACCOUNT OF TRANSFER PRICING ('TP') ADJU STMENT OF RS. 6,14,13,983/-. 2. THAT THE LD. AO ERRED ON FACTS AND IN LAW, IN MAKING A DISAL LOWANCE OF FINANCE EXPENSES OF RS. 98,567,574 BY INADVERTENTLY HOLDIN G THAT THE APPELLANT HAD UTILIZED BORROWED FUNDS FOR GIVING INTEREST FREE ADVANCES T O ITS JOINT VENTURE COMPANY I.E. HINDUSTAN MAX-GB LTD. ('HMGB') WITHOUT APPRECIATING THAT NO ADVANCES HAVE BEEN MADE BY THE APPELLANT COMPANY TO HMGB DURING THE YE AR UNDER CONSIDERATION NOR IN THE IMMEDIATELY PRECEDING YEAR. 2.1 THAT THE LD. AO ERRED ON FACTS AND IN LAW IN HO LDING THAT THE INTEREST ON LOAN FUNDS BORROWED BY THE APPELLANT COMPANY CAN NOT BE ALLOWED AS A BUSINESS EXPENDITURE EITHER UNDER SECTION 36(L)(III ) OR SECTION 37 OF THE ACT WITHOUT APPRECIATING THAT THE INTEREST EXPENSE INCU RRED BY THE APPELLANT DURING THE YEAR UNDER CONSIDERATION IS ON LOAN FUND S BORROWED AND UTILIZED FOR WORKING CAPITAL PURPOSES AND FOR NEW EXPANSION AND THERE IS NO NEXUS OR DIVERSION OF FUNDS TO HMGB DURING THE YEAR. 2.2 THAT THE LD. AO ERRED ON FACTS AND IN LAW, IN NOT F OLLOWING THE FAVORABLE TRIBUNAL DECISION IN THE APPELLANT'S OWN CASE FOR THE ASSESSMENT YEARS 2003-04 & 2004-05 ON THE IDENTICAL ISSUE 3. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MA KING A DISALLOWANCE OF RS. 8,575,079/- OUT OF COMMISSION EXPENSES CHARGED TO T HE PROFIT & LOSS ACCOUNT FOR THE YEAR UNDER CONSIDERATION. 3.1 THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MAK ING A DISALLOWANCE OF RS. 5,677,403/- (OUT OF RS. 8,575,079/-) BEING THE DISCOUNT GIVEN TO THE BUYER OF GOODS IN THE NORMAL COURSE OF BUSINESS DEBITED U NDER THE HEAD 'COMMISSION EXPENSES' ON SURMISES AND SELF ASSUMED FACTS. 3.2 WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO WHIL E DISALLOWING THE COMMISSION PAID TO PARTIES WHO ACTED AS PRINCIPAL D ISTRIBUTORS NAMELY MALACHITE CHEMICALS AND EDWARD KELLER (PHILS) INC., INADVERTENTLY DISALLOWED SUMS OF RS.3,514,524 AND RS.2,162,879 RE SPECTIVELY AS AGAINST ACTUAL COMMISSION EXPENSE OF RS. NIL AND RS. 356,01 3/- RESPECTIVELY DEBITED TO THE PROFIT AND LOSS ACCOUNT OF THE ASSES SEE COMPANY. THE LD. AO HAS INADVERTENTLY CONSIDERED THE FIGURE OF COMMISSI ON PAID TO THEM IN THE CAPACITY OF AGENTS FROM THE DETAILS FILED DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS. 3.3 THE LD AO HAS ERRED IN PROPOSING A DISALLOWANCE OF RS.2,897,676 (OUT OF THE TOTAL AMOUNT OF RS 8,575,079) BY ARBITRARILY FIXING AN AVERAGE RATE OF COMMISSION @ 3% PAID TO AGENTS ON THE ALLEGED REASONING THAT THE SAME ARE EXCESSIVE AND UNREASONABLE WITHOUT APPRECIATING THA T NONE OF THE PARTIES TO WHOM COMMISSION IS PAID IS IN ANY WAY RELATED TO TH E ASSESSEE COMPANY AND COMMISSION PAID TO THESE AGENTS IN EXCESS OF 3% IS ON ACCOUNT OF BUSINESS EXPEDIENCY. 18 4. THAT THE LD. AO ERRED ON FACTS & IN LAW, IN MAKI NG A DISALLOWANCE OF EXPENDITURE OF RS.2,136,334/- ON THE ALLEGED GROUND THAT SAID EXPENDITURE -IS INCURRED FOR EARNING TAX EXEMPT INCOME FROM INVEST MENTS BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF TH E INCOME TAX RULES, 1962. 4.1. THAT THE LD. AO ERRED ON FACTS & IN LAW, BY NOT APP RECIATING FACTS OF THE ASSESSEE'S CASE AND MAKING AN ARBITRARY DISALLOWANC E UNDER SECTION 14A OF THE ACT. 4.2. THAT THE LD. AO ERRED IN NOT APPRECIATING THAT THE APPELLANT HAS NEITHER EARNED ANY INCOME ON INVESTMENTS HELD DURING THE YE AR NOR SUCH INCOME HAS BEEN CLAIMED EXEMPT AND FURTHER THE APPELLANT HAS N OT INCURRED ANY EXPENDITURE IN RELATION TO INVESTMENTS OR EARNING O F EXEMPT INCOME. 5. THE LD. AO/DRP ERRED ON FACTS AND IN LAW DETERMI NING THE ARM'S LENGTH PRICE ('ALP') OF THE ASSESSEE'S INTERNATIONAL TRANSACTION S PERTAINING TO PAYMENT TOWARDS CORPORATE SERVICE FEES TO ITS ASSOCIATED ENTERPRISE S (AES) AT RS. 32,32,315/- AGAINST THE SUM OF RS. 6,46,46,298/- INCURRED BY THE ASSESS EE AND IN DOING SO HAVE GROSSLY ERRED IN: 5.1. DISALLOWING 95% OF THE AMOUNT PAID TOWARD CORPORATE SERVICE CHARGE, ON AN ADHOC BASIS, DESPITE LD. DRP ACKNOWLEDGING THAT SERVICES HAVE BEEN RECEIVED BY THE APPELLANT. 5.2. ALLEGING THAT THE APPELLANT HAS RECEIVED DUPLICATIV E SERVICES UNDER THE CORPORATE SERVICE CONTRACT. 5.3. HOLDING THAT THERE WAS NO NEED FOR SUCH SERVICES TH EREBY CHALLENGING THE COMMERCIAL WISDOM OF THE APPELLANT IN MAKING SUCH P AYMENTS AND THEREBY PASSING THE ORDER IN CONTRADICTION WITH THE JUDICIA L PRONOUNCEMENTS. 5.4. HOLDING THAT THE ASSESSEE HAS NOT FURNISHED/FURNISH ED ONLY GENERIC DOCUMENTARY EVIDENCE TO DEMONSTRATE THE BENEFITS RE CEIVED FROM THE AES IGNORING THE SUBMISSIONS AND DOCUMENTS SUBMITTED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS. 5.5. HOLDING THAT THE ASSESSEE HAS NOT FURNISHED ANY EVI DENCE AS TO COST BENEFIT ANALYSIS WITH REGARD TO COST OF SERVICES AND BENEFI TS RECEIVED FROM AES VIS-A- VIS INDEPENDENT PARTIES AND THAT NO INDEPENDENT VER IFICATION WAS CONDUCTED BY THE ASSESSEE TO SUBSTANTIATE THE COSTS INCURRED BY THE AE. 5.6. ASSERTING THAT THE ASSESSEE HAS NOT IDENTIFIED PAYM ENT FOR EACH AND EVERY SERVICE AND HOLDING THAT IDENTIFICATION OF SEPARATE PAYMENT FOR EACH SERVICE IS NECESSARY TO DETERMINE THE ARM'S LENGTH NATURE. 5.7. ASSERTING THAT THE COST INCURRED BY AES FOR PROVIDI NG SERVICES HAVE BEEN ARBITRARILY ALLOCATED TO DSM INDIA. 5.8. HOLDING THAT THE BENCHMARKING DONE BY THE ASSESSEE IN RESPECT OF INTERNATIONAL TRANSACTION RELATING TO PAYMENT TOWAR DS CORPORATE SERVICE FEES IS NOT IN ACCORDANCE WITH THE LAW AND IN DOING SO HAVE GROSSLY ERRED BY: 5.8.1. DISREGARDING THE ALP, AS DETERMINED BY THE ASSESSEE IN THE TP DOCUMENTATION MAINTAINED BY IT IN TERMS OF SECTION 92D OF THE ACT READ WITH RULE L0 D OF THE RULES. 5.8.2. NOT APPRECIATING THAT PAYMENT TOWARDS CORPORATE SER VICE FEES IS CLOSELY 19 LINKED TO THE OVERALL BUSINESS ACTIVITY OF THE ASSE SSEE AND ERRED IN ANALYZING THE TRANSACTION SEPARATELY FOR THE DETERM INATION OF ARM'S LENGTH PRICE. 5.8.3. REJECTING TRANSACTIONAL NET MARGIN METHOD ('TNMM') ADOPTED BY THE ASSESSEE, AS THE MOST APPROPRIATE METHOD FOR BENCHM ARKING THE TRANSACTION FOR PAYMENT TOWARDS CORPORATE SERVICE F EES. 5.8.4. APPLYING CUP METHOD IN CONTRAVENTION OF THE PROVISI ONS OF RULE 10B OF THE INCOME TAX RULES, 1962. 5.8.5. CONSIDERING THE ARM'S LENGTH PRICE OF THE TRANSACTI ON IN RESPECT OF PAYMENT OF CORPORATE SERVICE CHARGE AS 32,32,315/- AGAINST THE SUM OF RS. 6,46,46,298/- BY IN APPROPRIATE APPLICATION OF CUP METHOD MERELY BASED ON PRESUMPTIONS WITHOUT FURNISHING DETAILS OF PRICE CHARGED IN ANY COMPARABLE UNCONTROLLED TRANSACTION. 6. THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, WHILE SUGGESTING THE ADDITION, THE LD. AO / TPO HAVE INTER-ALIA GROSSLY ERRED IN MAKING STATEMENTS IN THE ORDER PASSED UNDER SECTION 92CA OF THE ACT, BASED O N HIS CONJECTURES AND SURMISES, WHICH ARE NOT IN ACCORDANCE WITH FACTS OF THE CASE, THEREBY MAKING A HIGH PITCHED ASSESSMENT. 7. THAT THE LD. AO ERRED ON FACTS AND IN LAW IN CHARGI NG INTEREST UNDER SECTIONS 234B OF THE ACT. 8. THE LD. AO ALSO ERRED IN PROPOSING TO INITIATE PENA LTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT FOR CONCEALMENT OF INCOME OR F URNISHING INACCURATE PARTICULARS OF INCOME. THAT THE ABOVE GROUNDS AND SUB GROUNDS OF OBJECTION S ARE WITHOUT PREJUDICE TO EACH OTHER. 29. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUNDS OF APPEAL WHICH READ AS UNDER: GROUND NO. 8.1: 'THAT ON THE FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW, THE LD. AO HAD ERRED IN NOT REDUCING A SUM OF RS. 7,614,696 /- BEING DEPB CREDIT RECOVERED IN AY 2008-09 WHICH WAS EARLIER WRITTEN O FF IN AY 2006-07 IN THE PROFIT AND LOSS ACCOUNT BUT NOT ALLOWED IN THE ASSE SSMENT UNDER SECTION 143(3) OF THE ACT BY HOLDING THAT THE WRITE OFF IS PREMATU RE AND THUS NOT ALLOWABLE. GROUND NO. 8.2: 'THAT THE LD. AO FAILED TO APPRECIA TE THAT THE SUM OF RS. 7,614,696/- BEING DEPB CREDIT HAS SUFFERED TAX IN AY 2006-07 ON ACCOUNT OF DISALLOWANCE WHILE COMPLETING THE ASSESSMENT UNDER SECTION 143(3 ) OF THE ACT AND HAS AGAIN SUFFERED A TAX IN AY 2008-09 BEING CREDIT TO THE PROFIT AND LOSS ACCOUNT AND OFFERED TO TAX IN THE RETURN OF INCOME, THIS HAS RESULTED IN DOUBLE TAXATION OF THE SAME AMOUNT WHICH IS IMPERMISSIBLE UNDER THE LAW. 20 30. THE ADDITIONAL GROUNDS OF APPEAL BEING PURELY T ECHNICAL INVOLVING NO INVESTIGATION INTO THE FACTS ARE ADMITTED FOR AD JUDICATION. 31. THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSE E IS GENERAL IN NATURE AND THE SAME IS DISMISSED. 32. THE ISSUE IN GROUND OF APPEAL NO.2 RAISED BY TH E ASSESSEE IS AGAINST THE DISALLOWANCE OF FINANCIAL EXPENSES OF R S.9,85,67,574/- ON THE INTEREST FREE ADVANCES MADE TO THE JOINT VENTURE CO MPANY M/S HINDUSTAN MAX GB LTD. THE ISSUE RAISED VIDE GROUND NO.2 IS I DENTICAL TO THE ISSUE RAISED VIDE GROUND NO.2 IN ASSESSMENT YEAR 2007-08 AND FOLLOWING THE SAME PARITY OF REASONING, WE ALLOW THE CLAIM OF THE ASSESSEE AND DELETE THE ADDITION OF RS.9.85 CRORES. THE GROUND OF APP EAL NO.2 RAISED BY THE ASSESSEE IS THUS ALLOWED. 33. THE ISSUE IN GROUND OF APPEAL NO.3 IS AGAINST D ISALLOWANCE OF RS.85,75,079/- OUT OF COMMISSION EXPENSES, OUT OF W HICH THE DISALLOWANCE OF RS.56,77,403/- WAS MADE OUT OF EXPO RT SALES COMMISSION AND RS.28,97,676/- OUT OF DOMESTIC SALES COMMISSION . WE FIND THAT SIMILAR ISSUE HAS BEEN RAISED BY THE ASSESSEE VIDE GROUND NO.4 IN ASSESSMENT YEAR 2007-08. WE HAVE ALREADY DEALT WIT H THE ISSUE IN PARAS HEREINABOVE WHILE DECIDING THE APPEAL FOR ASSESSMEN T YEAR 2007-08 AND THE ISSUE OF COMMISSION ON EXPORT SALES HAS BEEN RE MITTED BACK TO THE ASSESSING OFFICER WITH DIRECTIONS, WHEREAS THE DISA LLOWANCE MADE OUT OF DOMESTIC SALES COMMISSION HAS BEEN DELETED. FOLLO WING THE SAME PARITY OF REASONING, WE DIRECT THE ASSESSING OFFICER TO DE CIDE THE ISSUE OF ALLOWANCE OF COMMISSION ON EXPORT SALES IN LINE WIT H OUR DIRECTIONS IN THE EARLIER YEARS AND FURTHER DELETE THE ADDITION M ADE ON ACCOUNT OF DISALLOWANCE OUT OF DOMESTIC SALES COMMISSION. THE GROUND OF APPEAL 21 NO.3.1 RAISED BY THE ASSESSEE IS THUS ALLOWED FOR S TATISTICAL PURPOSES AND GROUND NO.3.2 IS ALLOWED. 34. THE ISSUE IN GROUND OF APPEAL NO.4 IS AGAINST T HE DISALLOWANCE OF RS.21,36,334/-. SIMILAR ISSUE HAS BEEN RAISED BY T HE ASSESSEE IN ASSESSMENT YEAR 2007-08 AND THE ISSUE HAS BEEN DECI DED IN FAVOUR OF THE ASSESSEE IN VIEW OF THE FACT THAT THE SAID INVESTME NT IN SHARES OF JOINT VENTURE COMPANY WAS MADE BY THE ASSESSEE IN ASSESSM ENT YEAR 1997-98 AND OUT OF ITS OWN FUNDS. FURTHER THE SAID INVEST MENT WAS IN THE EARLIER YEARS FOR BUSINESS EXPEDIENCY. HOWEVER, SINCE JOIN T VENTURE COMPANY HAS APPROACHED BIFR, NO INCOME WAS ARISING ON THE I NVESTMENT MADE IN THE SAID CONCERN. IN LINE WITH OUR ORDER IN THE PA RAS HEREINABOVE RELATING TO GROUND NO.5 RAISED IN ASSESSMENT YEAR 2 007-08, WE DELETE THE ADDITION OF RS.21,36,334/- MADE BY THE ASSESSING OF FICER BY INVOKING SECTION 14A OF THE ACT. THE GROUND OF APPEAL N O.4 IS ALLOWED. 35. THE ISSUE IN GROUND OF APPEAL NOS. 5 AND 6 RAIS ED BY THE ASSESSEE IS AGAINST TRANSFER PRICING ADJUSTMENT AND WE SHALL DEAL WITH THE SAME ALONGWITH THE ISSUE RAISED IN ASSESSMENT YEAR 2007- 08. 36. THE GROUND OF APPEAL NO.7 RAISED BY THE ASSESSE E IS AGAINST CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT IS CONSEQUENTIAL IN NATURE AND HENCE THE SAME IS DISMISSED. 37. THE ASSESSEE HAS RAISED ADDITIONAL GROUND OF AP PEAL AGAINST THE TREATMENT OF DEPB CREDIT, WHICH WAS RECOVERED IN AS SESSMENT YEAR 2008- 09. THE FACTS RELATING TO THE ISSUE ARE THAT THE A SSESSEE HAD WRITTEN OFF DEPB CREDIT IN ASSESSMENT YEAR 2006-07 IN THE PROFI T & LOSS ACCOUNT, WHICH WAS NOT ALLOWED BY THE ASSESSING OFFICER WHIL E COMPLETING THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT HOLDING THAT THE WRITE OFF WAS PRE-MATURE AND HENCE NOT ALLOWABLE. HOWEVER, DURIN G THE YEAR UNDER 22 CONSIDERATION THE ASSESSEE HAD RECOVERED THE SAID D EPB CREDIT WHICH WAS EARLIER WRITTEN OFF IN ASSESSMENT YEAR 2006-07. T HE ADDITIONAL GROUND OF APPEAL RAISED BY THE ASSESSEE BEING CONSEQUENTIA L TO THE ASSESSMENT PROCEEDINGS IN ASSESSMENT YEAR 2006-07 AND BEING LE GAL IN NATURE WHEREIN NO INVESTIGATION INTO FACTS IS REQUIRED IS ADMITTED FOR ADJUDICATION. 38. WE FIND THAT THE ISSUE OF WRITE OFF DEPB CREDIT BEING EXPORT INCENTIVES AROSE BEFORE THE TRIBUNAL IN ASSESSMENT YEAR 2006-07 (SUPRA) AND THE TRIBUNAL VIDE ITS FINDING IN PARAS 78 AND 7 9 HAD REMITTED THE ISSUE BACK OF THE ACT THE ASSESSING OFFICER WITH DI RECTIONS TO ALLOW THE CLAIM OF THE ASSESSEE AFTER VERIFICATION. THE ASSE SSEE DURING THE YEAR UNDER CONSIDERATION HAD RECOVERED THE SAID DEPB CRE DIT WHICH WAS WRITTEN OFF IN ASSESSMENT YEAR 2006-07. IN CASE TH E SAID AMOUNT OR ANY PART OF THE SAID AMOUNT IS ADDED BACK IN THE HANDS OF THE ASSESSEE THEN THE AMOUNT RECOVERED IN ASSESSMENT YEAR 2008-09 CAN NOT BE AGAIN BROUGHT TO TAX AS THAT WOULD RESULT IN DOUBLE TAXAT ION. AS THE FIRST ISSUE OF ALLOWABILITY OF THE CLAIM OF WRITE OFF IN THE HA NDS OF THE ASSESSEE IN ASSESSMENT YEAR 2006-07 HAS BEEN REMITTED BACK TO A SSESSING OFFICER, WE ARE OF THE VIEW THAT THIS ISSUE ALSO NEEDS TO GO BA CK TO THE ASSESSING OFFICER TO DECIDE THE SAME IN LINE WITH THE DECISIO N IN ASSESSMENT YEAR 2006-07. REASONABLE OPPORTUNITY OF HEARING SHALL BE AFFORDED TO THE ASSESSEE BY THE ASSESSING OFFICER. THE ADDITIONAL GROUND OF APPEAL NO.8 IS THUS ALLOWED FOR STATISTICAL PURPOSES. 39. NOW COMING TO THE TRANSFER PRICING ISSUE RAISED BY THE ASSESSEE IN BOTH THE CAPTIONED ASSESSMENT YEARS I.E. ASSESSMENT YEAR 2007-08 AND 2008-09. THE ASSESSEE IS AGGRIEVED BY THE ADJUSTMEN T MADE OF RS.2,91,95,471/- IN ASSESSMENT YEAR 2007-08 AND RS. 6,46,46,298/- IN ASSESSMENT YEAR 2008-09. 23 40. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATIO N WAS ENGAGED IN THE PROCESS OF MANUFACTURING OF INTERMEDIARIES AND BULK DRUGS. THE ASSESSEE WAS WHOLLY OWNED SUBSIDIARY OF GB INTERNAT IONAL B.V., THE NETHERLANDS, WHICH WAS SUBSIDIARY OF DSM BV, NETHER LANDS. THE SAID CONCERNS WERE FOUND TO BE ASSOCIATED ENTERPRISES WI THIN THE MEANING OF SECTION 92A(2)(A) OF THE ACT. THE TRANSFER PRICIN G OFFICER(TPO) HAD SUMMARIZED THE BUSINESS ACTIVITIES AND NATURE OF RE LATIONSHIP WITH THE ASSESSEE COMPANY OF VARIOUS ASSOCIATED ENTERPRISES IN THE TABLE UNDER PARA 5.2 AT PAGE 5 OF THE TRANSFER PRICING ORDER. THE ASSESSEE HAD ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) FOR TR ANSFER PRICING ANALYSIS WITH OPERATING PROFIT/SALES RATIO AS PROFI T LEVEL INDICATOR. THE SAME METHOD WAS USED IN THE PRECEDING YEARS BY THE ASSESSEE. FOR CHOOSING INDEPENDENT COMPARABLES, THE ASSESSEE HAD USED PROWESS DATABASE. THE ASSESSEE WAS ENGAGED IN THE FOLLOWI NG INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES: A. EXPORT OF ACTIVE PHARMACEUTICAL INGREDIENTS B. IMPORT OF RAW MATERIAL C. IMPORT OF FINISHED GOODS D. PAYMENT OF CORPORATE SERVICES CHARGES/ MANAGEMENT SERVICE CHARGES E. REIMBURSEMENT OF EXPENSES F. PAYMENT OF INTEREST ON LOANS TAKEN 41. FOR DETERMINING THE ARMS LENGTH PRICE OF THE I NTERNATIONAL TRANSACTIONS, ALL THE TRANSACTIONS OTHER THAN INTER EST ON LOAN WERE GROUPED TOGETHER AND THE PROFITABILITY HAD BEEN DET ERMINED FOR THE COMPANY AS A WHOLE BY THE ASSESSEE. THE TPO ANALY ZED ASSESSEES TRANSFER PRICING APPROACH UNDER PARA 7 OF THE ORDER AND ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE. THE TPO NOTED THAT AS PER THE TRANSFER PRICING (TP) DOCUMENT FURNISHED FOR THE ASSESSME NT YEAR 2007-08, THE 24 TAXPAYER COMPANY HAS PURCHASED RAW MATERIALS/CONSUM ABLES AND FINISHED GOODS FROM ITS A.E.'S. AND ALSO HAS EXPORTED FINISH ED .GOODS TO THEM. FURTHER, IT HAS RECEIVED SERVICES FROM A.E.'S, PAID INTEREST ON LOANS RECEIVED BY IT FROM A.E. AND ALSO HAS RECEIVED REIM BURSEMENT FOR EXPENSES. ALL TRANSACTIONS RELATING TO IMPORTS, EXP ORTS & SERVICES RECEIVED HAVE BEEN CLUBBED TOGETHER & TNMM METHOD W AS APPLIED. ONLY INTEREST PAID ON LOAN WAS SEPARATELY BENCH-MAR KED & COMPARED WITH EURIBOR . THE ASSESSEE HAD PAID SERVICE FEE OF RS.3,30,72,5 26/- AS DETAILED UNDER PARA 3.1 TO ITS ASSOCIATED ENTERPRIS ES (AES). AS PER THE TRANSFER PRICING STUDY REPORT THE ASSESSEE HAD EXPL AINED THE NATURE OF THE SERVICES AS UNDER : CORPORATE SERVICE CHARGE : THE AE PROVIDES THE COR PORATE SERVICES IN THE AREA OF PRODUCTION AND SALES, MARKE T INFORMATION, BUSINESS INTELLIGENCE, SAFETY, HEALTH AND ENVIRONMENT AND FINANCE RELATED STRATEGIC PLANNING SUPPORT TO THE ASSESSEE. FOR WHICH IT CHARGES AS PER THE A LLOCATION OF TOTAL EXPENSES OF DSM CORPORATE AND BUSINESS GROUP UNITS. 42. AFTER GOING THROUGH THE DETAILS FURNISHED BY TH E ASSESSEE IN TP REPORT, THE TPO RAISED THE FOLLOWING POINTS: (A) THE BENCHMARKING PROCESS OF THE ASSESSEE APPEA RS TO BE INCORRECT. THE ASSESSEE HAS USED TNMM AS THE METHOD WHEREIN VARIOU S TRANSACTIONS ARE GROUPED TOGETHER, AND THE PROFITABILITY HAS BEEN DE TERMINED FOR THE 'COMPANY AS A WHOLE' AND AN ATTEMPT IS MADE TO DEMO NSTRATE THAT THE PAYMENT BY THE ASSESSEE IS AT ARM'S LENGTH. THIS AP PROACH IS INCORRECT. THE INCOME TAX ACT ON THE APPLICATION OF ARM'S LENGTH P RICING METHODS REQUIRE THAT THE METHOD SHOULD BE APPLIED ON A TRANSACTION- BY-TRANSACTION BASIS. THE ASSESSEE SHOULD HAVE CARRIED OUT SEPARATE ANALY SIS FOR THE INTERNATIONAL TRANSACTION OF PAYMENT TOWARDS SERVICE FEES TO ITS AE'S. THE ASSESSEE SHOULD HAVE BEEN ABLE TO DEMONSTRATE THAT AN INDEPENDENT E NTERPRISE OPERATING IN UNCONTROLLED ENVIRONMENT WOULD HAVE MADE SUCH A PAY MENT FOR SUCH SERVICE. THAT HAS NOT BEEN DONE. (B) THE FUNCTIONS AND RESPONSIBILITY OF THE ASSESSEE TH AT HAVE BEEN MENTIONED ABOVE SHOW THAT THE ASSESSEE PERFORMS VIT AL FUNCTIONS WITHOUT ANY SUPPORT FROM ITS AE, HENCE, THERE DOES NOT APPE AR TO BE ANY RATIONALE FOR MAKING A PAYMENT OF SERVICES FEE. (C) IT HAS BEEN MENTIONED IN THE T.P. REPORT THA T THE SERVICES PROVIDED BY THE AE INCLUDE 'MARKETING'. HOWEVER, IT HAS BEEN BR OUGHT OUT THAT ALL THE MARKETING EFFORTS ARE MADE BY THE ASSESSEE. THE SEL LING AND DISTRIBUTION EXPENSES, AS REPORTED IN THE PROWESS DATABASE, FOR THE LAST FEW YEARS, IS TABULATED BELOW. 25 AS IT CAN BE SEEN THAT THE MOST TANGIBLE MARKETING EFF ORT IS MADE BY THE ASSESSEE, NOT ITS AE. THE ASSESSEE IS PRESENT IN INDIA FOR A FEW DECADES. HENCE, IT IS THE ASSESSEE WHICH HAS BUILT UP THE PRESENCE OF THE BRA ND IN INDIA. THESE CAN BE NO JUSTIFICATION FOR THE ASSESSEE TO MAKE A PAYMENT TO THE AE FOR MARKETING. (D) FURTHUR, AS ITSELF ADMITTED BY THE ASSESSEE, IT PER FORMS ADVERTISING AND MARKETING FUNCTIONS. IT CANNOT BE EXPECTED TO PAY T HE AE FOR FUNCTIONS THAT IT PERFORMS ON ITS OWN. (E) ALL OTHER SERVICES THAT ARE MENTIONED IN THE T. P. REPORT ARE IN THE NATURE OF INCIDENTAL SERVICES FOR WHICH NO SEPARATE PAYMENT IS REQUIRED. 43. THE TPO ASKED THE ASSESSEE TO FURNISH THE FOLLO WING DETAILS AS ENUMERATED IN PARA 5 : (A) IDENTIFY EACH OF THE SERVICES ACTUALLY RECEIVED BY YOU FROM THE AES FOR WHICH THE AMOUNT HAS BEEN PAID. (B)PLEASE SUBMIT THE CONTEMPORANEOUS DOCUMENTARY EV IDENCE TO SHOW THAT THESE SERVICES HAVE ACTUALLY BEEN RECEIVED BY YOU. (C)PLEASE STATE THE PAYMENT MADE BY YOU FOR EACH OF THE AVAILED SERVICES. (D) PLEASE FURNISH THE COPY OF ACCOUNT OF THE AES (PROVIDING THE SERVICES) IN YOUR BOOKS OF ACCOUNTS AND YOUR COPY OF ACCOUN TS IN THE BOOKS OF AES (PROVIDING THE SERVICES). (E)HOW THE PAYMENT HAS BEEN QUANTIFIED? ALSO PLEASE STATE AS TO WHETHER ANY COST BENEFIT ANALYSIS WAS DONE? IF SO THE DETAI LS THEREOF SHOULD BE FURNISHED. THE COST BENEFIT ANALYSIS SHOULD BE (A) WITH REFERENCE TO THE COST OF THE SERVICES AND BENEFIT RECEIVED THERE FRO M AND (B) SERVICES RECEIVED FROM AES VIS-A-VIS INDEPENDENT PARTIES. (F) WHETHER ANY SUCH SERVICES AVAILED FROM AES, HAV E ALSO BEEN PERFORMED BY YOU OR AVAILED FROM INDEPENDENT PARTIE S? IF YES THE DETAILS OF SUCH EXPENDITURE MAY BE FURNISHED. (G) FURNISH THE COPY OF AGREEMENTS WITH AES FOR REC EIVING SUCH SERVICES. (H) PLEASE STATE AS TO WHAT TANGIBLE AND DIRECT BEN EFIT HAS BEEN DERIVED BY YOU. (I) DOCUMENTARY EVIDENCE OF COST INCURRED BY THE AE FOR RENDERING EACH TYPE OF SERVICES PURPORTEDLY RECEIVED BY YOU AND TH E MARK UP APPLIED, IF ANY BY THE AE. (J) WHETHER AE IS RENDERING SUCH SERVICES TO ANY OT HER AES/INDEPENDENT PARTIES. IF YES THE DETAILS THEREOF. 44. THE TPO WAS OF THE VIEW THAT THE ASSESSEE HAD N OT BEEN ABLE TO DEMONSTRATE THAT THE PAYMENT OF SERVICE FEE WAS AT ARMS LENGTH AND A.Y. 2007 - A.Y.2006 - A.Y.2005 - A.Y.2004 - 05 SELLING & DISTRIBUTION EXPENSES 13.61 7.27 6.31 5.09 26 ALSO THAT NO INDEPENDENT PARTY WOULD HAVE MADE SUCH PAYMENT. THUS BY APPLICATION OF CUP METHOD, THE ARMS LENGTH PRIC E IN RESPECT OF THE SAID TRANSACTION WAS PROPOSED TO BE REDUCED TO NIL. THE ASSESSEE FILED REPLY IN RESPONSE THERETO AND BASED ON THE SAME THE TPO OBSERVED THAT - AS STATED EARLIER, IN PARA NO.6, THE ASSESSEE HAD AGGREGATED THE INTERNATIONAL TRANSACTIONS OF IMPORTS, EXPORTS AND PAYMENT OF SERVICE FEES AND APPLIED TNM METHOD USING OPERATING PROFIT MARGI N AT SALES AS THE PROFIT LEVEL INDICATOR. IN THE SHOW CAUSE LETTER (R EPRODUCED IN PARA NO. 7 ABOVE), IT WAS POINTED OUT TO THE ASSESSEE, THAT TH IS APPROACH IS INCORRECT. IT WAS MENTIONED IN THE SHOW CAUSE THAT THE CORRECT APPROACH WOULD HAVE BEEN FOR THE ASSESSEE TO DEMONSTRATE THAT AN INDEP ENDENT ENTITY WOULD HAVE MADE SUCH A PAYMENT IN SIMILAR CIRCUMSTANCES. THE ASSESSEE HAS NOT RAISED ANY OBJECTION OVER THE PROPOSED CUP METHOD I N THE SHOW CAUSE LETTER. THE ASSESSEE HAS NOT BEEN ABLE TO GIVE A SEPARATE B ENCHMARKING FOR EACH OF THE SERVICES . THAT HE HAS SUPPOSEDLY RECEIVED. THE ASSESSEE HAS AGGREGATED THIS TRANSACTION WITH OTHER TRANSACTION S AS A CLASS OF TRANSACTIONS. HOWEVER, IT SHOULD HAVE BENCHMARKED E ACH TRANSACTION SEPARATELY. 45. RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY T HE MUMBAI BE3NCH OF THE TRIBUNAL IN STAR INDIA PVT. LTD. VS. ACIT (2 008)-TIOL-426-ITAT- MUM FOR THE SAID PROPOSITION. IT WAS FURTHER OBSER VED THAT IN SUCH CIRCUMSTANCES THE TPO WAS EMPOWERED TO APPLY APPROP RIATE METHOD FOR EACH TRANSACTION. THE TPO THUS HELD THAT FOR ANA LYZING THE ARMS LENGTH NATURE OF SERVICE FEE PAID BY THE ASSESSEE TO ITS AES, CUP METHOD COULD BE APPLIED. THE SERVICE FEE FOR SEPA RATE CLASS OF TRANSACTION, AS PER THE TPO, COULD BE ANALYZED SEPA RATELY. REFERENCE WAS MADE TO THE PROVISIONS OF SECTION 92B OF THE AC T, WHICH RECOGNIZES THE ANALYSIS OF DIFFERENT CLAUSES OF TRANSACTIONS S EPARATELY INCLUDING THE PAYMENT HAVING MADE APPEARING ON THE INCOME/PROFITS . THE BREAK-UP OF THE SERVICE FEE OF RS.3,30,72,526/- PAID TO AES WAS AS UNDER: NAME OF THE ASSOCIATED ENTERPRISE AMOUNT OF PAYMENT (RS.) DSM ANTI INFECTIVES B.V., THE NETHERLANDS 43,76,479 DSM NV CONCERN, THE NETHERLANDS 2,86,59,149 DSM NUTRITIONAL PRODUCTS, THE NETHERLANDS 36,898 TOTAL 3,30,72,526 27 46. THE TPO CONSIDERED THE NATURE OF EACH OF THE SE RVICES AND MADE OBSERVATIONS AS PER PARA 8.2 AT PAGE 12 ONWARDS AS UNDER: A) THE ASSESSEE HAS CLAIMED PAYMENT OF RS. 36,898 TO M/S. DSM NUTRITIONAL PRODUCTS, THE NETHERLANDS IN THE FORM 3CEB REPORT W HEREAS IN THE TRANSFER PRICING STUDY REPORT, THE SAME PAYMENT IS SHOWN TO M/S. DSM FOOD SPECIALISTS U.K. LTD., U.K. IN THE SUBMISSION FILED BY THE ASSESSEE, NO DETAILS HAVE BEEN PROVIDED OH THIS PAYMENT TO THE AE. B) REGARDING PAYMENT OF RS. 43,76,479 TO M/S. DSM ANTI INFECTIVES B. V., THE NETHERLANDS, , IT IS OBSERVED THAT ONLY AMOUNT OF RS. 21,94,UNDER SECTION 10(23C)(IIIAD) OF THE ACT PERTAINS TO TECHNICAL ASS ISTANCE FEES AND THE REMAINING PAYMENT OF RS. 21,82,368 IS TOWARDS ICT C HARGES. FOR THE TECHNICAL FEES, THE ASSESSEE HAS FILED RELEVANT INV OICES. IT IS OBSERVED THAT THESE PAYMENTS ARE TOWARDS SPECIFIC PROJECTS OF THE ASSESSEE COMPANY. THE ASSESSEE HAS ALSO ENCLOSED THE BASIS OF COMPUTATION OF THESE CHARGES WHICH IS SALARY COST ON HOURLY BASIS OF THE TECHNICAL ASSIST ANCE PROVIDED. ON ICT CHARGES THE ASSESSEE HAS ENCLOSED SAMPLE INVOICES B UT NO BASIS, AS TO HOW THESE COSTS HAVE BEEN COMPUTED, WAS SUPPLIED. FURTH ER, IT IS OBSERVED THAT THIS PAYMENT IS UNIFORMLY MADE AT 2,917 EUROS PER M ONTH TILL DEC.,2006 AND SUBSEQUENTLY AT 2,750 EUROS. NO AGREEMENT HAS BEEN SUBMITTED BY ASSESSEE WITH ITS AE FOR THE PAYMENT OF ICT CHARGES. FURTHE R, THE NATURE OF THESE ICT CHARGES HAS NOT BEEN ELABORATED. C) THE PAYMENT TO M/S DSM NV CONCERN, THE NETHERLAN DS IS RS. 2,86,59,149/- AND AS PER THE DETAILS FILED BY THE A SSESSEE, IT IS OBSERVED THAT PAYMENT OF RS. 16,82,944/- IS TOWARDS CONFERENCES A ND ORIENT COURSES ORGANIZED BY THE ASSESSEE FOR THE EMPLOYEES OF THE ASSESSEE COMPANY AND THE REMAINING PAYMENT IS TOWARDS ICT CHARGES. THE ASSE SSEE HAS SUBMITTED THE BREAK-UP OF THESE ICT CHARGES AS UNDER : SR. NO. NATURE OF SERVICES AMOUNT (RS.} 1.. R & M OTHERS 29,13,335 2. RATES & TAXES 5,29,125 3. LEGAL & PROFESSIONAL 2,27,59,133 4. INFRASTRUCTURE 7,74,611 TOTAL 2,69,76,205 47. HOWEVER, AS PER THE TPO NO DETAILS OF THE SAID EXPENSES WERE PROVIDED THOUGH THE ASSESSEE HAD FILED COPY OF AGRE EMENT DATED 1.1.2004 WITH THE AE. THE TPO AT PAGE 13 HAD CONSIDERED T HE NATURE OF SERVICE COVERED BY THE SAID AGREEMENT BUT OBSERVED THAT THE ASSESSEE HAD ONLY GIVEN A GENERAL DESCRIPTION OF THE SO-CALLED SERVIC ES AND THEIR BENEFITS, WITHOUT LINKING TO THE TWO ASPECTS. THE TPO THER EAFTER VIDE PARA 8.5 AT PAGE 14 ONWARDS HAD CONSIDERED THE VARIOUS ASPECTS OF THE SERVICE CHARGES PROVIDED BY THE ASSESSING OFFICER I.E. IN T HE FIELD OF FINANCIAL 28 ACCOUNTING AND AUDITING, ENVIRONMENTAL SAFETY AND H EALTH, BUSINESS ADVISORY ROLE OF AE AND EXAMINING OECD GUIDELINES WITH REGARD TO THE INTRA GROUP SERVICES. THE RELEVANT PORTION OF THE GUIDELINES I.E. CLAUSES 7.5,7.6,7.20,7.23,7.29 AND 7.31 ARE REPRODUCED UNDE R PARA 8.7 AT PAGES 16 AND 17 OF THE TPO ORDER. THE TPO THUS ANALYZED THAT ON THE BASIS OF THE SAID GUIDELINES IN ORDER TO EXAMINE THE ARMS L ENGTH PRICE OF INTRA GROUP SERVICES RECEIVED BY ONE OF THE ASSOCIATED EN TERPRISES, FOLLOWING ESSENTIAL INFORMATION SHOULD BE AVAILABLE: 1. WHETHER THE AE HAS RECEIVED INTRA GROUP SERVICES? 2. WHAT ARE THE ECONOMIC AND COMMERCIAL BENEFITS DERIV ED BY THE RECIPIENT OF INTRA GROUP SERVICES? 3. IN ORDER TO IDENTIFY THE CHARGES RELATING TO SERVIC ES,-THERE SHOULD BE A MECHANISM IN PLACE WHICH CAN IDENTIFY (I) THE COST INCURRED BY T HE AE IN PROVIDING THE INTRA GROUP SERVICES AND (II) THE BASIS OF ALLOCATION OF COST T O VARIOUS AES. 4. WHETHER A COMPARABLE INDEPENDENT ENTERPRISE WOULD H AVE PAID FOR THE SERVICES IN COMPARABLE CIRCUMSTANCES? 48. HOWEVER, FROM THE DETAILS FILED BY THE ASSESSEE THE TPO OBSERVED THAT IT HAD NOT BEEN ABLE TO PROVE THAT THE ASSESSE E HAD ACTUALLY RECEIVED SERVICES OF SOME VALUE THAT WOULD CALL FOR SUCH A H UGE PAYMENT. IN THE ABSENCE OF ANY CONTEMPORANEOUS EVIDENCE FURNISHED B Y THE ASSESSEE THAT THE SAID SERVICES HAD ACTUALLY BEEN RECEIVED BY IT AND IN THE ABSENCE OF ANY PROPER COST BENEFIT ANALYSIS DONE BY THE ASSESS EE, WHEN IT ENTERED INTO AN AGREEMENT WITH THE AE FOR SUCH PAYMENT, AND IN THE ABSENCE OF ANY TANGIBLE AND DIRECT BENEFIT ARISING TO THE ASSE SSEE AND ALSO IN THE ABSENCE OF THE ASSESSEE HAVING AVAILED SAID SERVICE S FROM INDEPENDENT PARTIES, IT WAS OBSERVED BY THE TPO THAT, UNIVERSALLY, SUCH PAYMENTS ARE BEING TREATED AT ARM'S LENGTH ONLY WHEN IT IS P ROVED SUBSTANTIALLY BY THE TAXPAYER THAT SUCH SERVICES WERE ACTUALLY RECEI VED AND FURTHER PROVING THAT SUCH RECEIVED, SERVICES HAVE BENEFITED IT. IN MOST OF THE COUNTRIES LIKE UK, USA, GERMANY ETC IT IS AN ESTABL ISHED POSITION THAT A SUBSIDIARY DOES NOT TO HAVE TO PAY FOR THE AUDITING , ACCOUNTING AND SUCH 29 OTHER FUNCTIONS PERFORMED BY THE PARENT COMPANY AS OWNER OF THE SUBSIDIARY COMPANY. IF THE SUBSIDIARY WERE AN INDEP ENDENT COMPANY IT WOULD NEITHER REQUIRE SUCH SERVICES NOR WOULD IT PA Y FOR THE SAME. THE TPO VIDE PARA 9 THUS CONCLUDED AS UNDER : 9. AMONG THE TOTAL PAYMENT OF RS. 3,30,72,526 T O THE AE'S, AS SERVICE FEES, THE ASSESSEE HAS BEEN ABLE TO PROVIDE PROPER DETAILS IN RESPECT OF TECHNICAL ASSISTANCE (PROJECT RELATED) OF RS. 21,94 ,111 (PARA NO. 8.2.2) AND OF RS. 16,82,944 TOWARDS CONFERENCE/TRAINING OF EMPLOYEES OF ASSESSEE COMPANY ABROAD (PARA NO. 8.2.3). FOR THE R EMAINING SERVICES, THE ASSESSEE HAS NOT BEEN ABLE TO SHOW THAT ANY SER VICE HAS ACTUALLY PASSED TO IT. NO INDEPENDENT PARTY WOULD HAVE MADE A PAYMENT IN UNCONTROLLED CIRCUMSTANCES. THEREFORE, BY THE APPLI CATION OF CUP, THE ARMS LENGTH OF THIS TRANSACTION OF PAYMENT OF SERVI CE FEE IS DETERMINED AT RS. 38,77,055 (21,94,111 + 16,82,944) AS AGAINST RS . 3,30,72,526 DETERMINED BY THE ASSESSEE. THE ASSESSING OFFICER S HALL ENHANCE THE INCOME OF THE ASSESSEE BY RS. 2,91,95,471 (3,30,72, 526 - 38,77,055). 49. THE ASSESSING OFFICER VIDE PARA 6 OF THE DRAFT ASSESSMENT ORDER AFTER RELYING UPON THE REPORT OF THE TPO AND AFTER CONFRONTING THE SAME TO THE ASSESSEE, DETERMINED THE ARMS LENGTH OF EXP ORTS TO AES AT RS.38,27,055/- AS AGAINST THE VALUE OF RS.3,30,74,5 26/- DETERMINED BY THE ASSESSEE. THE ASSESSING OFFICER NOTED THAT TH E ASSESSEE HAD REPEATED THE SAME SUBMISSIONS AS WERE MADE BEFORE T HE TPO AND IN VIEW THEREOF, THE INCOME OF THE ASSESSEE WAS PROPOSED TO BE ENHANCED BY RS.2,91,95,471/-. 50. THE DISPUTE RESOLUTION PANEL-1, NEW DELHI UPHEL D THE PROPOSAL MADE BY THE TPO AND THE ASSESSING OFFICER THEREAFTE R PASSED AN ASSESSMENT ORDER DATED 28.9.2011 UNDER SECTION 144C (13) R.W.S. 143(3) OF THE ACT ENHANCING THE INCOME OF THE ASSESSEE BY RS.2,91,95,471/- ON ACCOUNT OF TP ADJUSTMENT AS DISCUSSED UNDER PARA 6. 4 OF THE ASSESSMENT ORDER. THE ASSESSEE IS IN APPEAL AGAINST THE SAID ORDER OF TPO. 51. DURING THE ASSESSMENT YEAR 2008-09 SIMILAR REFE RENCE WAS MADE BY THE ACIT, CIRCLE-1, CHANDIGARH VIS--VIS INTERNATIO NAL TRANSACTIONS TO THE TPO UNDER SECTION 92CA(1). THE ASSESSEE DURIN G THE ASSESSMENT YEAR 2008-09 WAS ENGAGED IN SIMILAR BUSINESS OF MAN UFACTURING OF 30 INTERMEDIARIES AND BULK DRUGS. THE ASSESSEE WAS W HOLLY OWNED SUBSIDIARY OF G.B. INTERNATIONAL, B.V., THE NETHERL ANDS AND WHICH IN TURN WAS THE SUBSIDIARY OF DSM B.V., THE NETHERLAND S. THE SAID CONCERNS WERE ASSOCIATED ENTERPRISES WITHIN THE MEA NING OF SECTION 92A(2)(A) OF THE ACT. THE TPO UNDER PARA 5.2 AT P AGE 5 OF THE TP ORDER HAD ENLISTED THE BUSINESS ACTIVITIES AND THE NATURE OF RELATIONSHIP WITH THE ASSESSEE COMPANY OF VARIOUS ASSOCIATED ENTERPRI SES. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD ALSO FOLLOW ED TNMM METHOD FOR TRANSFER PRICING ANALYSIS WITH OPERATING PROFITS/SA LES RATIO AS PROFIT LEVEL INDICATOR. THE ASSESSEE AS IN THE PRECEDING YEAR HAD GROUPED TOGETHER THE DIFFERENT TRANSACTIONS OTHER THAN INTEREST ON L OAN AND THE PROFITABILITY HAD BEEN DETERMINED FOR THE COMPANY AS A WHOLE. T HE TPO UNDER PARA 7.1 HAS TABULATED THE AGGREGATE OF VARIOUS INTERNAT IONAL TRANSACTIONS WHICH INCLUDED PAYMENT OF SERVICE FEES AND AS PER T HE TRANSFER PRICING STUDY REPORT, THE SAID SERVICE FEES WERE BIFURCATED AS UNDER: SR. NO. NAME OF THE A.E. AMOUNT (RS.) 1. DSM ANTI INFECTIVES B.V., THE NETHERLANDS 7,77,5 5,640 2. DSM NV CONCERN, THE NETHERLANDS 8,45,22,342 3. DSM NUTRITIONAL PRODUCTS, THE NETHERLANDS 29,314 4. DSM N.V. INTL. HUMAN RESOURCES SERV., THE NETHER LANDS 13,82,684 5. DSM DERETIL S.A., SPAIN 1,24,045 TOTAL 16,38,14,025 52. THE PAYMENT OF RS.7,77,55,640/- INCLUDED ROYALT Y OF RS.5,20,30,000/- PAID TO M/S DSM ANTI INFECTIVES B. V., THE NETHERLANDS. THE ASSESSEE WAS SHOW CAUSED TO EXPL AIN THE NATURE OF PAYMENT TOWARDS SERVICE FEES TOTALING RS.16.38 CROR ES, WHICH INCLUDED ROYALTY OF RS.5.20 CRORES. AS PER THE TPO THE B ENCH MARKING PROCESS 31 ADOPTED BY THE ASSESSEE WAS INCORRECT AS THE ASSESS EE HAD USED TNMM METHOD WHEREIN VARIOUS TRANSACTIONS WERE GROUPED TO GETHER. AN ATTEMPT WAS MADE TO DEMONSTRATE THAT THE PAYMENT BY THE ASS ESSEE WAS AT ARMS LENGTH. AS PER THE TPO, UNDER THE INCOME TAX ACT, APPLICATION OF ARMS LENGTH PRICING METHOD REQUIRE THAT THE METHOD SHOUL D BE APPLIED ON A TRANSACTION BY TRANSACTION BASIS. FURTHER THE FUNC TIONS AND RESPONSIBILITY OF THE ASSESSEE WHICH ARE PART OF TH E TRANSFER PRICING REPORT SHOW THAT THE ASSESSEE PERFORMS VITAL FUNCTI ONS WITHOUT ANY SUPPORT FROM ITS AES AND HENCE THERE DOES NOT APPEA R ANY RATIONAL FOR MAKING PAYMENT OF SERVICE FEE. FURTHER THE ASSESS EE IN THE TP REPORT HAD MENTIONED THAT THE SERVICES PROVIDED BY THE AES INCLUDED MARKETING. EFFORTS WERE MADE BY THE ASSESSEE AS THE SELLING AN D DISTRIBUTION EXPENSES AS REPORTED IN THE PROWESS DATABASE, INCLU DED SELLING AND DISTRIBUTION EXPENSES OF RS.18.94 CRORES DURING THE YEAR AS AGAINST RS.13.61 CRORES DURING THE PRECEDING YEAR. THE TP O WAS OF THE VIEW THAT MOST TANGIBLE MARKETING EFFORT WAS MADE BY THE ASSESSEE AND NOT BY ITS AES. HENCE THERE WAS NO JUSTIFICATION FOR THE ASSESSEE TO MAKE THE PAYMENT TO AES FOR MARKETING. THE TPO FURTHER HEL D THAT ALL OTHER SERVICES THAT ARE MENTIONED IN THE TP REPORT ARE IN THE NATURE OF INCIDENTAL SERVICES FOR WHICH NO SEPARATE PAYMENT WAS REQUIRED. IN VIEW THEREOF, THE ASSESSEE WAS ASKED BY THE TPO TO SUBMIT THE FOLLOWING DETAILS: (A) IDENTIFY EACH OF THE SERVICES ACTUALLY RECEIVED BY YOU FROM THE AES FOR WHICH THE AMOUNT HAS BEEN PAID. (B) PLEASE SUBMIT THE CONTEMPORANEOUS DOCUMENTARY EVIDE NCE TO SHOW THAT THESE SERVICES HAVE ACTUALLY BEEN RECEIVED BY YOU. (C) PLEASE STATE THE PAYMENT MADE BY YOU FOR EACH OF TH E AVAILED SERVICES. (D) PLEASE FURNISH THE COPY OF ACCOUNT OF THE AES (PROV IDING THE SERVICES) IN YOUR BOOKS OF ACCOUNTS AND YOUR COPY OF ACCOUNTS IN THE BOOKS OF AES (PROVIDING THE SERVICES). (E) HOW THE PAYMENT HAS BEEN QUANTIFIED? ALSO PLEASE ST ATE AS TO WHETHER ANY COST BENEFIT ANALYSIS WAS DONE? IF SO THE DETAILS T HEREOF SHOULD BE FURNISHED. THE 32 COST BENEFIT ANALYSIS SHOULD BE (A) WITH REFERENCE TO THE COST OF THE SERVICES AND BENEFIT RECEIVED THERE FROM AND (B) SERVICES RECEIVED FROM AES VIS-A-VIS INDEPENDENT PARTIES. (F) WHETHER ANY SUCH SERVICES AVAILED FROM AES, HAVE AL SO BEEN PERFORMED BY YOU OR AVAILED FROM INDEPENDENT PARTIES? IF YES THE DETAIL S OF SUCH EXPENDITURE MAY BE FURNISHED. (G) FURNISH THE COPY OF AGREEMENTS WITH AES FOR REC EIVING SUCH SERVICES. (H) PLEASE STATE AS TO WHAT TANGIBLE AND DIRECT BEN EFIT HAS BEEN DERIVED BY YOU. (I) DOCUMENTARY EVIDENCE OF COST INCURRED BY THE AE FOR RENDERING EACH TYPE OF SERVICES PURPORTEDLY RECEIVED BY YOU AND THE MAR K UP APPLIED, IF ANY BY THE AE. (J) WHETHER AE IS RENDERING SUCH SERVICES TO ANY OT HER AES/INDEPENDENT PARTIES. IF YES THE DETAILS THEREOF. 53. THE TPO AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE OBSERVED THAT THE ASSESSEE SHOULD HAVE ADOPTED SEPA RATE BENCH MARKING FOR EACH OF THE SERVICES THAT HAD SUPPOSEDLY RECEIV ED. ON THE OTHER HAND, THE ASSESSEE HAD AGGREGATED THE TRANSACTION W ITH OTHER TRANSACTIONS AS A CLASS OF TRANSACTIONS. THE TPO THUS HELD THA T AS THE SERVICE FEE IS A SEPARATE CLASS OF TRANSACTION, THE SAME HAD TO BE A NALYZED SEPARATELY. REFERENCE WAS MADE TO THE PROVISIONS OF SECTION 92B IN THIS REGARD. THE TPO FURTHER HELD THAT THE NET MARGIN REALIZED B Y THE ENTERPRISE DURING THE YEAR FORM DIFFERENT CLASS OF INTERNATION AL TRANSACTIONS WERE TO BE COMPUTED AS PER RULE 10B(1)(E)(I) OF THE INCOME TAX RULES. RELIANCE WAS PLACED ON VARIOUS DECISIONS OF THE TRI BUNAL FOR THE PROPOSITION THAT THE ENTITY LEVEL MARGINS COULD NOT BE COMPARED PARTICULARLY WHEN OTHER SEGMENT HAD SIGNIFICANT REV ENUE. AS PER THE SAID DECISIONS, SEGMENTAL RESULTS HAD TO BE COMPARE D. THE TPO VIDE PARA 10 ELABORATELY CONSIDERED EACH ITEM OF NATURE OF SERVICES RECEIVED FROM AES AND VIDE PARA 11 DELIBERATED UPON THE PAYM ENT OF CS CHARGES TO THE AES. THE TPO VIDE PARA 12 THEN OBSERVED AS UNDER: 33 12. ON THE BASIS OF ABOVE IT CAN BE SEEN THAT IN O RDER TO EXAMINE THE ARM'S LENGTH PRICE OF INTRA GROUP SERVICES RECEIVED BY ONE OF THE ASSO CIATED ENTERPRISES FOLLOWING ESSENTIAL INFORMATION SHOULD BE AVAILABLE: 1. WHETHER THE AE HAS RECEIVED INTRA GROUP SERVIC ES? 2. WHAT ARE THE ECONOMIC AND COMMERCIAL BENEFITS D ERIVED BY THE RECIPIENT OF INTRA GROUP SERVICES? 3. IN ORDER TO IDENTIFY THE CHARGES RELATING TO SER VICES, THERE SHOULD BE A MECHANISM IN PLACE WHICH CAN IDENTIFY (I) THE COST INCURRED BY T HE AE IN PROVIDING THE INTRA GROUP SERVICES AND (II) THE BASIS OF ALLOCATION OF COST T O VARIOUS AES. 4. WHETHER A COMPARABLE INDEPENDENT ENTERPRISE WOUL D HAVE PAID FOR THE SERVICES IN COMPARABLE CIRCUMSTANCES? FROM THE DETAILS AVAILABLE IT IS CLEAR THAT THE ASS ESSEE HAS NOT BEEN ABLE TO PROVE THAT HE HAS ACTUALLY RECEIVED SERVICES OF SOME VALUE THAT C ALL FOR SUCH A HUGE PAYMENT. 12.1 IF ONE MAY SUM UP THIS DISCUSSION, THE FOLLOWING PO INTS MAY BE NOTED IN TERMS OF THE QUESTIONS POSED TO THE ASSESSEE AT PAR A 5 OF THE SHOW CAUSE NOTICE (REPRODUCED AT PARA NO, 7.2 OF THE ORDER). 54. THE TPO THEREAFTER CONSIDERED THE DIFFERENT MET HODS PRESCRIBED UNDER SECTION 92C(1) OF THE ACT AND WAS OF THE VIEW THAT THE MOST APPROPRIATE METHOD IN ASSESSEE COMPANY WOULD BE THE CUP METHOD BY SELECTING THE ASSESSEE COMPANY AS ITS PART. THE TPO WAS OF THE VIEW THAT THE ASSESSEE, IN MAJORITY OF THE TRANSACTIONS, COULD NOT SHOW AS TO WHETHER THE SERVICES WERE ACTUALLY NEEDED BY IT AND /OR WHETHER THE SAME WERE ACTUALLY RECEIVED BY IT. IN THE ABSENCE OF A NALYSIS DETAILS WHERE HUGE PAYMENT WAS MADE BY THE ASSESSEE TO ITS AES AN D WHERE IT HAS NOT BEEN ESTABLISHED WHETHER OR NOT THE ASSESSEE NEEDED SERVICES WHETHER OR NOT SUCH SERVICES WERE MAINLY FOR ITS DIRECT BENEFI TS OR WHETHER OR NO SUCH SERVICES WERE ACTUALLY AVAILED BY IT, THE ASSE SSEE HAD TO SHARE THE COST ON THE BASIS OF SOME ALLOCATION KEYS. THE TP O WAS OF THE VIEW THAT NO INDEPENDENT PERSON IN SIMILAR CIRCUMSTANCES WOULD PAY SUCH AMOUNT. THE PAYMENTS BENEFITS TO THE PAYERS SHOU LD BE DIRECT AND TANGIBLE AND NOT INDIRECT OR INCIDENTAL. RELIANC E WAS PLACED ON OECD GUIDELINES AND VARIOUS CASE LAWS IN THIS REGARD. IN VIEW THEREOF, THE TPO VIDE PARA 16 OBSERVED AS UNDER: 34 16. THE ASSESSEE HAS NOT BEEN ABLE TO SHOW THAT AN Y SERVICE HAS ACTUALLY PASSED TO IT. NO INDEPENDENT PARTY WOULD HAVE MADE A PAYMENT IN U NCONTROLLED CIRCUMSTANCES. THEREFORE, BY THE APPLICATION OF CUP, THE ARMS LENG TH OF THIS TRANSACTION OF PAYMENT OF SERVICE FEE IS DETERMINED AT RS. 9,91,67,727 AS AGA INST RS. 16,38,14,025 DETERMINED BY THE ASSESSEE. THE ASSESSING OFFICER SHALL ENHANCE THE I NCOME OF THE ASSESSEE BY RS. 6,46,46,298/- (16,38,14,025-9,91,67,727). 55. THE ASSESSING OFFICER VIDE PARA 6 AT PAGES 70 T O 109 CONSIDERED THE REPORT OF THE TPO AND CONFRONTED THE SAME TO TH E ASSESSEE AND SHOW CAUSED THAT THE ARMS LENGTH PRICE OF THE EXPORTS T O AES HAD BEEN DETERMINED AT RS.9,91,67,727/- AS AGAINST THE PAYME NT OF RS.16.38 CRORES DETERMINED BY THE ASSESSEE COMPANY. HENCE THE TOT AL INCOME WAS ENHANCED BY RS.6,46,46,298/- AND IT WAS ALSO HELD T HAT THE ASSESSEE WAS NOT ENTITLED TO ANY DEDUCTION UNDER SECTIONS 10A,10 AA, 10B OR CHAPTER- VI-A IN RESPECT OF THE ENHANCED AMOUNT. 56. THE DRP, PANEL-1, NEW DELHI VIDE PARA 4 CONSIDE RED THE ISSUE AND ALSO EXAMINED VARIOUS EVIDENCES FILED BY THE ASSESS EE AND HELD AS UNDER: DRP HAS EXAMINED THE EVIDENCES AND DETAILS FILED O N 26.07.2011 BEFORE TPO AND NOW BEFORE DRP IN VOL. I OF PAPERBOOK (PAGE 7& 8) HAS C OME TO THE CONCLUSION THAT IT CAN NOT BE SAID THAT NO SERVICES HAVE BEEN RECEIVED BY THE ASSESSEE. WHILE SOME SERVICES MAY BE DUPLICATE OR NOT RELEVANT, THERE IS SOME ELEMENT WHICH CAN BE SAID TO BE RELATED TO ASSESSEE. HENCE, AN ADHOC ALLOWANCE OF 5% SUCH COST S CAN BE ATTRIBUTED TO BE REMUNERATION FOR SERVICES RENDERED. ALP IS TO BE DE TERMINED AFTER REDUCING THIS AMOUNT, TPO IS DIRECTED TO RECOMPUTE ALP ACCORDINGL Y. 57. THE ASSESSING OFFICER VIDE ORDER PASSED UNDER S ECTION 144C(13) R.W.S. 143(3) OF THE ACT DATED 31.10.2012 MADE AN A DDITION ON ACCOUNT OF TRANSFER PRICING ISSUE TAKING INTO CONSIDERATION TH E DIRECTIONS OF DRP, PANEL-1, NEW DELHI. 58. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF THE ASSESSING OFFICER. 59. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT TH E ISSUE RAISED ON ACCOUNT OF TRANSFER PRICING IS IN RELATION TO DISAL LOWANCE OF INTRA GROUP SERVICES. IT WAS POINTED OUT BY THE LD. AR FOR THE ASSESSEE THAT THE 35 INTERNATIONAL TRANSACTION RELATING TO PURCHASE AND SALE OF GOODS WAS ACCEPTED BY THE TPO AND THE ADJUSTMENT ON ACCOUNT O F ARMS LENGTH PRICE WAS MADE ONLY ON ACCOUNT OF INTRA GROUP SERVI CES. SYNOPSIS OF THE CASE WAS FILED BY THE ASSESSEE AND IT WAS POINTED O UT THAT VARIOUS SERVICES WERE AVAILED BY THE ASSESSEE FROM AES AGAI NST WHICH PAYMENTS WERE MADE TOTALING RS. 330,72,526/-. THE LD. AR FO R THE ASSESSEE POINTED OUT THAT PART OF THE PAYMENTS FOR DIFFERENT SERVICES WERE ALLOWED BY THE TPO BUT PAYMENTS IN RELATION TO CORPORATE SE RVICE CHARGES, ICT SERVICES, AURORA CHARGES AND TECHNICAL AND PROFESSI ONAL SERVICE CHARGES TOTALING ABOUT RS. 2.91 CR WERE NOT ALLOWED. AS PE R THE TPO, THE VALUE OF THE SAID PAYMENTS MADE BY THE ASSESSEE WERE TO B E DETERMINED AT ARMS LENGTH AND HE DETERMINED THE ARMS LENGTH PRI CE OF SUCH PAYMENT AT NIL IN ASSESSMENT YEAR 2007-08. THE MAIN COMP ONENT OF THE AMOUNT DISALLOWED BY THE TPO WAS ON ACCOUNT OF CORPORATE S ERVICE CHARGES AND PAYMENTS FOR ICT SERVICES. AS PER THE ASSESSEE, THE CORPORATE SERVICE CHARGES INVOLVED PROVISION OF CORPORATE SERVICES BY AES TO ASSESSEE IN THE NATURE OF TECHNICAL AND COMMERCIAL SERVICES AND SERVICES WITH RESPECT TO ACCOUNTING, AUDITING, FINANCIAL, FISCAL, SOCIAL, LEGAL, ENVIRONMENTAL, SAFETY, HEALTH AND INSURANCE MATTERS . FOR AVAILING THESE SERVICES THE APPELLANT PAYS CORPORATE SERVICE CHARG ES AS PER THE ALLOCATION OF TOTAL EXPENSE INCURRED BY THE AES, IN ACCORDANCE WITH THE AGREEMENT. THE LD. AR FOR THE ASSESSEE POINTED OU T THAT AS PER THE AGREEMENT 5% MARK UP WAS APPLIED ON THE COSTS INCUR RED FOR THE PROVISION OF THESE SERVICES. THE RESULTANT AMOUNT W AS ALLOCATED TO THE APPELLANT BY APPLYING THE FOLLOWING FORMULA: 2 X GVA OF THE ASSESSEE + I X INVESTED CAPITAL OF T HE ASSESSEE X CORPORATE COSTS 2 X GVA OF THE ASSESSEE + IX TOTAL INVESTED CAPI TAL OF THE GROUP 36 60. THE PLEA OF THE ASSESSEE FURTHER WAS THAT THE S AID FORMULA HAD BEEN APPLIED TO ALLOCATE THE CORPORATE SERVICE COSTS TO THE VARIOUS ENTITIES WITHIN DSM GROUP FOR SEVERAL YEARS. IT WAS FURTHE R PLEADED THAT THE COSTS CHARGED TO DSP INDIA I.E THE ASSESSEE WAS ONL Y 0.27% OF THE TOTAL COST INCURRED BY THE DSP GROUP FOR PROVIDING CORPOR ATE SERVICES. AS PER THE TPO, NO SERVICES WERE PROVIDED BY THE SAID AES AND THE PAYMENTS MADE UNDER CORPORATE SERVICE FEE BY THE ASSESSEE TO ITS AE WAS IN THE NATURE OF INCIDENTAL/IMAGINARY SERVICES. THE TPO T HUS ADOPTED THE COMPARATIVE UNCONTROLLED PRICE (CUP) METHOD AS TH E APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTI ON AND DETERMINED THE ARMS LENGTH PRICE AT NIL. IT WAS FURTHER POI NTED OUT BY THE LD. AR FOR THE ASSESSEE THAT THE DRP CONFIRMED THE ADDITIO NS PROPOSED BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER MEN TIONING THAT THE FORMULA ITSELF SHOWS THAT THERE WAS ARBITRARY COST ALLOCATION. THE ASSESSING OFFICER THUS ENHANCED THE INCOME BY RS. 2 91,95,471/-. 61. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT TH E ASSESSEE HAD ENTERED INTO A CORPORATE SERVICES AGREEMENT WHICH I S PLACED AT PAGES 10 TO 17 OF THE PAPER BOOK UNDER WHICH IT WAS AGREED T HAT THE AE WOULD PROVIDE CORPORATE SERVICES OF COMMERCIAL, ACCOUNTIN G, AUDITING, FINANCIAL, FISCAL, SOCIAL, LEGAL, ENVIRONMENTAL, SA FETY, HEALTH AND INSURANCE NATURE AGAINST WHICH IT WAS AGREED THAT P AYMENT FOR THE SAID CORPORATE SERVICES PROVIDED BY THE AE TO THE ASSESS EE WOULD BE PAID AS PER THE FORMULA AGREED UPON. 62. THE LD. AR FOR THE ASSESSEE FURTHER POINTED OUT THAT ANOTHER SERVICE TO BE PROVIDED BY THE AE WAS THE CORPORATE GUARANTE E WHICH HAD NOT MATERIALIZED DURING THE YEAR UNDER CONSIDERATION BU T HAD MATERIALIZED IN THE SUCCEEDING YEAR. ANOTHER ASPECT OF THE SAID GU ARANTEE WAS THE REDUCTION IN THE RATE OF INTEREST ON LOAN AVAILED B Y THE ASSESSEE WHICH 37 WAS REDUCED BECAUSE OF THE INTERVENTION OF THE AE. THE LD. AR FOR THE ASSESSEE FURTHER STATED THAT CORPORATE OPERATIONAL AUDIT WAS DONE BY THE AE AND THE TPO HAS SEEN THE SAID REPORT AND COMMENT ED IT WAS OF VALUE TO ASSESSEE. THE CASE OF THE ASSESSEE BEFORE US WA S THAT IT WAS AN OVERALL MANAGEMENT OF OPERATIONS FOR WHICH THE SAID SERVICE FEE WAS PAID. IT WAS POINTED OUT BY THE LD. AR FOR THE ASS ESSEE THAT THE OBSERVATION OF THE TPO THAT THERE WERE NO SERVICES AND HENCE, NO BENEFITS TO THE ASSESSEE WAS INCORRECT. 63. OUR ATTENTION WAS DRAWN TO THE LIST OF SERVICES PROVIDED BY THE SAID AE WHICH IS ENLISTED IN THE SYNOPSIS AT PAGE 3 AND COPY OF THE CORPORATE OPERATION AUDIT 2006 WHICH IS PLACED AT PAGE 111 TO 127 OF THE PAPER BOOK. ANOTHER AUDIT CARRIED OUT BY THE AE WAS ON S AFETY, HEALTH AND ENVIRONMENT (SHE-AUDIT), UNDER WHICH VARIOUS FIRMS VISITED INDIA AND MET DIFFERENT PERSONS, COPY OF THE SAID AUDIT REPOR T WAS ALSO FURNISHED ON RECORD DURING THE COURSE OF HEARING. THE NEXT IT EM WAS THE PROPOSAL TO SET-UP DSM INDIA ANTI INFECTIVE ENERGY & UTILITI ES NETWORK WITH THE OBJECTIVE OF SAVING ON ENERGY AND UTILITY COST. TH E DETAILS OF THE SAID ARE PROVIDED IN ANNEXURE-4 FURNISHED ALONGWITH THE SYNOPSIS DATED 06.01.2014. 64. ANOTHER ELEMENT OF THE SAID SYNOPSIS WAS THE CO ST OF PARTICIPANTS TO ATTEND THE CONFERENCES OUTSIDE INDIA UNDER WHICH THE EXPENSES ON TRAVELING WERE PAID BUT NO PARTICIPATION FEE WAS PA ID BY THE ASSESSEE ON ACCOUNT OF ITS EMPLOYEES. 65. ANOTHER SERVICE PROVIDED BY THE AE WAS BY WAY O F A SHE FLYER UNDER WHICH THE INSPECTION DESCRIBING SEVERAL UPPER AND LOWER LIMIT WAS EXCHANGED BETWEEN THE GROUP. FURTHER, THERE WAS EX CHANGE OF E-MAILS 38 WITH AE IN RELATION TO NEGOTIATION OF BETTER TERMS FOR FINANCIAL CHARGES, ISSUANCE OF LETTER OF CREDIT FACILITY OF EURO 10 MI LLION ETC. 66. THE LD. AR FOR THE ASSESSEE POINTED THAT THE SE COND EXPENDITURE WHICH HAS BEEN DISALLOWED BY THE TPO WAS THE ICT CH ARGES WHICH WERE TOWARDS COST ALLOCATION FOR USE SAP, INTERNET, DIAL -IN SERVICE, HELPDESK, INCIDENT HANDLING, SERVICE REQUEST HANDLING, ON-SIT E SUPPORT, E-MAIL SYSTEM, SOFTWARE APPLICATIONS E.G. MICROSOFT, MAXIM O, SAMETIME ETC. FURTHER AURORA CHARGES OF RS. 529,125/- RELATE TO D EPRECIATION ON IT ASSETS OWNED BY THE AES BUT USED BY THE APPELLANT F OR THE PURPOSE OF ITS BUSINESS IN INDIA. IT WAS POINTED OUT BY THE LD. A R FOR THE ASSESSEE THAT THE TPO HAS ACCEPTED THE ARMS LENGTH PRICE OF INTE RNATIONAL TRANSACTIONS PERTAINING TO PAYMENT MADE FOR ICT SERVICES AND AUR ORA CHARGES IN THE NEXT ASSESSMENT YEAR 2008-09. ACCORDINGLY, FOLLOWI NG THE RULE OF CONSISTENCY WHICH HAS ALSO BEEN UPHELD BY THE TRIBU NAL IN VARIOUS CASES, ADJUSTMENT MADE ON ACCOUNT OF THESE TRANSACTIONS I. E. PAYMENT OF ICT SERVICES AND AURORA CHARGES SHOULD BE DELETED. 67. THE LD. DR FOR THE REVENUE FILED WRITTEN SYNOPS IS ALONGWITH THE COPY OF THE RELEVANT PORTION OF OECD GUIDELINES. THE FIRST PLEA OF THE LD. DR FOR THE REVENUE IN RESPECT OF INTRA GROUP SE RVICES WAS THAT THE SAID SERVICE WAS PERFORMED BY ONE MEMBER OF THE MUL TI-NATIONAL GROUP FOR THE BENEFIT OF ONE OR MORE RELATED MEMBERS OF T HE SAME GROUP. WHERE THE SERVICES HAD BEEN RENDERED FOR THE EXCLUS IVE PURPOSE OF A SINGLE RECIPIENT, THEN IT WAS EASY TO DETERMINE WHE THER THE SERVICE RECIPIENT HAD RECEIVED A BENEFIT OR NOT. HOWEVER, WHERE THE SERVICES RENDERED RESULT IN JOINT BENEFIT, THEN THE ACTUAL O R PERCEIVED BENEFIT FOR EACH INDIVIDUAL RECIPIENT IS TO BE ESTABLISHED. TH E LD. DR FOR THE REVENUE POINTED OUT THAT PARA 7.2 OF THE OCED GUIDE LINES RECOGNIZE THE TYPES OF INTRA GROUP SERVICES, WHERE THE KEY ISSUE TO BE CONSIDERED 39 REGARDING INTRA GROUP SERVICES WAS WHETHER THE SAID INTRA GROUP SERVICE HAD BEEN RENDERED BY THE TAX PAYER AND/OR WHAT ARE THE ECONOMIC AND COMMERCIAL BENEFITS DERIVED BY THE RECIPIENT. REFE RENCE WAS MADE TO THE PARA 7.5 OF OECD GUIDELINES FOR THE ANALYSIS OF TRA NSFER PRICING FOR INTRA GROUP SERVICES. THE LD. DR FOR THE REVENUE, THEREA FTER MADE REFERENCE TO PARAS 7.6 AND 7.8 OF THE OECD GUIDELINES IN RELA TION TO THE BENEFIT ARISING TO THE RECIPIENT OF THE SERVICES. ALSO REF ERENCE WAS MADE TO PARA 7.18 OF THE OECD GUIDELINES THAT MANAGEMENT FEE POR TION DOES NOT ITSELF MEAN THAT MANAGEMENT SERVICES HAVE BEEN PROVIDED. THE LD. DR FOR THE REVENUE FURTHER MADE REFERENCE TO THE ACTIVITIES WH ICH DO NOT CONSTITUTE INTRA GROUP SERVICES I.E. THE EXCEPTION PROVIDED UN DER OECD GUIDELINES AS PER PARA 7.9 TO 7.12, 7.13 OF OECD GUIDELINES. I DENTIFYING THE ACTUAL ARRANGEMENTS FOR CHARGING FOR INTRA GROUP SERVICES, THE LD. DR FOR THE REVENUE SUBMITTED THAT THERE WAS A DIRECT COST ALLO CATION AND THEN THERE WAS AN INDIRECT COST ALLOCATION OF THE EXPENSES. R EFERENCE WAS MADE TO PARA 7.21, 7.23 AND 7.25 OF OECD GUIDELINES IN THIS REGARD. FOR THE PURPOSE OF CALCULATING THE ARMS LENGTH PRICE, THE PERSPECTIVE OF BOTH THE SERVICE PROVIDER AND THE SERVICE RECIPIENT HAVE TO BE CONSIDERED I.E. HOW MUCH THE SERVICE COSTED TO THE PROVIDER AND HOW MUC H WAS THE SERVICE WORTH TO THE RECIPIENT. ANOTHER ASPECT TO BE SEEN W AS HOW MUCH WOULD COMPARABLE ENTERPRISES PAY FOR THE SAID SERVICE. R EFERENCE WAS MADE TO PARA 7.29 OF THE OECD GUIDELINES. 68. THE LD. DR FOR THE REVENUE FURTHER POINTED OUT THAT IT HAS TO BE DETERMINED WHETHER ANY COST BENEFIT ANALYSIS WAS CA RRIED ON BY THE ASSESSEE. IN THE FACTS OF THE CASE AS PER THE LD. DR FOR THE REVENUE, THE AUDIT WAS FORCED UPON THE ASSESSEE AND IN FACT NO B ENEFIT AROSE TO THE ASSESSEE BY THIS OPERATIONAL AUDIT. THE NEXT ASPE CT REFERRED BY THE LD. DR FOR THE REVENUE WAS THAT ALL OVER THE WORLD, THE COMPANY TAKES 40 SUCH MEASURES TO OVER-SEE OPERATIONS AND THERE WAS NO MERIT IN CHARGING FEE FOR SUCH OPERATIONS. 69. ANOTHER ASPECT RAISED BY THE LD. DR FOR THE REV ENUE WAS THAT THE TAX PAYER IN THE PRESENT CASE HAD NOT QUANTIFIED SE RVICES RECEIVED BY IT AND FOR EACH AND EVERY SERVICE RECEIVED BY IT, NO B REAK-UP HAS BEEN GIVEN BY THE TAX PAYER AND CHARGES ARE PAID ON THE BASIS OF THE FORMULA AGREED UPON BETWEEN THE PARTIES WHICH CANNOT BE ACC EPTED PER-SE. IT WAS FAIRLY ADMITTED BY THE LD. DR FOR THE REVENUE THAT THE ICT CHARGES AND AURORA CHARGES DISALLOWED DURING THE YEAR HAVE BEEN ALLOWED BY THE TPO IN THE SUCCEEDING YEAR. THE LD. DR FOR THE REVENUE VEHEMENTLY STRESSED THAT THE AGREEMENT ENTERED INTO BETWEEN THE PARTIES WAS TO TRANSFER PROFITS OUT OF INDIA WITHOUT PAYING THE TAXES THERE ON. IN SUCH CIRCUMSTANCES, THE TRANSACTION HAS TO BE SEEN AT AR MS LENGTH PRICE, AS TRANSACTION IDENTIFICATION OF THE SERVICES IN RELAT ION TO WHICH SUCH CHARGES ARE BEING PAID. IT WAS POINTED OUT BY THE L D. DR FOR THE REVENUE THAT WHEREVER THE SERVICES HAVE BEEN IDENTIFIED, TH E SAME HAVE BEEN ALLOWED BY THE TPO AND NO DISALLOWANCE HAS BEEN MAD E FOR THE SAID SERVICES. 70. THE LD. DR FOR THE REVENUE REFERRING TO THE FAC TS OF THE CASE POINTED OUT THAT IN ADDITION TO THE PAYMENTS BEING MADE TO THE AE, THE ASSESSEE HAD ALSO INCURRED EXPENSES UNDER SEVERAL H EADS WHICH WERE INTER-LINKED TO THE INTRA GROUP SERVICES. FURTHER RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS : I) M/S KNOR-BREMSE INDIA PRIVATE LIMITED VS. ACIT, ITA NO.5097/DEL/2011, A.Y. 2007-08, DATED 31.10.2012. II) M/S DELOITTE CONSULTING INDIA PVT. LTD. ITA NO 579, 1272,1273/MUM/2011, ORDER DATED 30.03.2012. III) M//S GEM PLUS INDIA PVT. LTD. ITA NO.352/BANG/ 2009, DATED 21.10.2010, 2010-TII-55-ITAT-BANG-TP. 71. THE LD. AR FOR THE ASSESSEE IN REJOINDER TO THE SUBMISSIONS MADE BY LD. DR FOR THE REVENUE POINTED OUT THAT THERE IS NO MERIT IN THE PLEA OF 41 THE LD. DR RELYING UPON THE OECD GUIDELINES THAT IN ORDER TO EVALUATE THE ARMS LENGTH PRICE OF INTRA GROUP SERVICES, EAC H SERVICE PROVIDED WITHIN THE OVERALL CORPORATE SERVICES FRAMEWORK SHO ULD BE SEPARATELY IDENTIFIED. RELIANCE WAS PLACED ON PARA 7.20, 7.22 TO 7.24 OF OECD GUIDELINES AND ALSO ON THE U.S. SERVICE REGULATION WHICH ENLISTED THE REGULATION REGARDING SHARE SERVICES ARRANGEMENTS. THE SUBMISSION OF THE LD. AR FOR THE ASSESSEE THAT UNDER THE ARMS LENGTH PRINCIPLE, IT WAS NOT MANDATORY TO IDENTIFY THE COST OF EACH SERVICE SEPA RATELY AND IT WOULD SUFFICE IF THE COSTS RELATING TO PROVISION OF VARIO US SERVICES WERE AGGREGATED AND ALLOCATED ON THE BASIS OF AN APPROPR IATE ALLOCATION KEY. 72. THE LD. AR FOR THE ASSESSEE FURTHER TOOK US THR OUGH THE VARIOUS BENEFITS ARISING TO THE ASSESSEE ON ACCOUNT OF THE VARIOUS SERVICES PROVIDED BY ITS AES WHICH WE SHALL REFER TO WHILE D ECIDING THE ISSUE. ANOTHER CLARIFICATION GIVEN BY THE LD. AR FOR THE A SSESSEE WAS THAT THE LD. DR FOR THE REVENUE HAD CONTENDED THAT THE ASSES SEE HAD ENTERED INTO CONTRACT SERVICE AGREEMENT WITH DSM NV WHEREAS THE GUARANTY HAD BEEN ISSUED BY ANOTHER AE I.E. DSM FINANCE DV. IT WAS P OINTED OUT BY THE LD. AR FOR THE ASSESSEE THAT DSM FINANCE DV WAS PAR T OF CORPORATE TREASURY DIVISION OF DSM GROUP AND IT AMENDED FROM DSM NV TO MANAGE, ARRANGE, SUPPORT THE FUNDING OF DSM GROUP C OMPANIES. IN OTHER WORDS, THE GUARANTEE WAS ISSUED BY DSM FINANC E DV AT THE DIRECTION/INSTRUCTION OF DSM NV AND ACCORDINGLY, AR MS LENGTH GUARANTEE FEE WAS PAYABLE BY THE ASSESSEE TO DSM NV IN CONSIDERATION FOR ISSUE OF SUCH GUARANTY. 73. IN RESPECT OF ASSESSMENT YEAR 2008-09, TPO HAD ACCEPTED OTHER INTERNATIONAL TRANSACTIONS OF THE ASSESSEE BUT HAD MADE A DISALLOWANCE OF RS. 6.46 CR WITH REGARD TO THE PAYMENT TOWARDS CORP ORATE SERVICE CHARGES MADE BY THE ASSESSEE ALLEGING THAT NO BENEF ITS WERE AVAILED BY 42 THE ASSESSEE BY MAKING SUCH PAYMENTS TO ITS AES AND DETERMINED THE ARMS PRICE LENGTH AT NIL. THE DRP ACKNOWLEDGED T HAT THE ASSESSEE HAD RECEIVED SERVICES BY MAKING PAYMENT OF CORPORATE SE RVICE CHARGES. HOWEVER, THE ARMS LENGTH PRICE OF THE CORPORATE SE RVICE CHARGES WAS DETERMINED AT 5% OF THE TOTAL PAYMENT AGAINST WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 74. THE FIRST CONTENTION RAISED BY THE LD. AR FOR T HE ASSESSEE IN RELATION TO ASSESSMENT YEAR 2008-09 WAS THAT THE AS SESSEE HAD DULY DEDUCTED THE TAX AT SOURCE OUT OF THE CORPORATE SER VICES CHARGES PAID BY IT. THE SAID CHARGES WERE PAID AS PER THE AGREEMEN T BETWEEN THE PARTIES AND SIMILAR FORMULA AS IN THE EARLIER YEARS WAS APP LIED. THE NATURE OF CORPORATE SERVICES INVOLVED PROVISION OF CORPORATE SERVICES BY THE AES TO ASSESSEE IN THE NATURE OF TECHNICAL AND COMMERCIAL SERVICES AND SERVICES WITH RESPECT TO AC COUNTING, AUDITING, FINANCIAL, FISCAL, SOCIAL, LEGAL, ENVIRONMENTAL, SA FETY AND HEALTH MATTERS. FOR AVAILING THESE SERVICES THE ASSESSEE PAYS CORPO RATE SERVICE CHARGES AS PER THE ALLOCATION OF TOTAL EXPENSE INCURRED BY THE AE, IN ACCORDANCE WITH THE AGREEMENT. IT WAS CLARIFIED BY THE LD. AR FOR THE ASSESSEE THAT DURING THE YEAR UNDER CONSIDERATION ONLY THE CORPOR ATE SERVICE CHARGES WERE HELD TO BE NOT AT ARMS LENGTH PRICE AND DISAL LOWANCE OF THE TOTAL EXPENSES WAS MADE EXCEPT THE CONCESSION ALLOWED BY THE DRT PANEL, NEW DELHI. THE OBJECTIVE OF ENTERING THE SAID AGRE EMENT WITH ITS AE WAS TO ACHIEVE BUSINESS SUCCESS OF ASSESSEE IN ORDE R TO MEET THE DEMANDS OF CUSTOMER ON PRODUCT QUALITY, CONTINUOUS TECHNOLO GICAL IMPROVEMENTS. THE AIM OF PROVIDING THE CORPORATE SERVICE AGREEMEN T WAS TO ENABLE THE ASSESSEE IN CARRYING OUT ITS BUSINESS OPERATIONS MO RE EFFICIENTLY IN THE GLOBALIZED AND COMPETITIVE MARKET. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT FURTHER, IT IS PERTINENT TO NOTE THAT SHAR ING OF TECHNICAL KNOW- 43 HOW, EXPERIENCE AND INFORMATION RELATING TO CORPORA TE RESEARCH AND ACCESS TO THE PATENTS ARE PROVIDED BY AE FOR ASSIST ING ASSESSEE IN DEVELOPING A COMPETITIVE EDGE IN ITS PHARMACEUTICA L BUSINESS. BY AVAILING OF THESE SERVICES, ASSESSEE IS ABLE TO CON CENTRATE ITS WORKFORCE REQUIREMENT ON ITS CORE BUSINESS OF MANUFACTURING A ND SALES. THEREFORE, ASSESSEE BY WAY OF THE CSC HAS ACCESS TO GREATER AN D GLOBAL EXPERIENCE OF THE AE FOR ALL THE RESEARCH RELATED ACTIVITIES A ND THUS CAN BENEFIT FROM THE GLOBAL BEST PRACTICES. THE PLEA OF THE ASSESSE E WAS IN VIEW THEREOF, THE COST INCURRED BY THE ASSESSEE TO AVAIL THE BENE FITS FROM CORPORATE SERVICES OF A TECHNICAL NATURE AND CORPORATE SERVIC ES OF A COMMERCIAL, ACCOUNTING, FINANCIAL, FISCAL, SOCIAL, LEGAL, ENVIR ONMENTAL, SAFETY AND HEALTH NATURE WERE TO COMMENSURATE WITH THE BENEFIT S RECEIVED BY THE APPELLANT, CONSIDERING THE NATURE OF THE FUNCTIONS PERFORMED BY THE AE AND COSTS ALLOCATIONS (INCLUDING A MARK-UP OF 5%) C HARGED TO THE ASSESSEE IN LIEU THEREOF. 75. THE LD. AR FOR THE ASSESSEE PLACED RELIANCE ON THE FOLLOWING DECISIONS FOR THE PROPOSITION THAT THE COMMERCIAL W ISDOM OF THE ASSESSEE IN MAKING PAYMENTS TO ITS AES UNDER AN AGREEMENT CA NNOT BE QUESTIONED: MCCANN ERICKSON INDIA PVL. LTD. [TS-39L-ITAT-2O12(D EL)] DRESSER-RAND INDIA PVT. LTD. VS. ACIT [TS-510-ITAT- 2OLL(MUM)] CUSHMAN & WAKEFIELD INDIA PVT. LTD. VS. ACIT ITS-67 3-ITAT- 2O11(DEL) EKL. APPLIANCES LTD [TS-206-HC-2OL2 (DEL)] ERICSSON INDIA PRIVATE LTD. [TS-319-ITAT-2O12(DEL)] SC ENVIRO AGRO INDIA PRIVATE LIMITED [I.T.A. NO.606 0/MUM/2011] FESTO CONTROLS PRIVATE LTD VS. DOT [TS-4-ITAT-2O13( BANG)-TP] 76. THE LD. AR FOR THE ASSESSEE THEREAFTER ELABORAT ELY TOOK US THROUGH THE ECONOMIC BENEFITS REALIZED BY THE ASSESSEE FROM THE PAYMENT OF CORPORATE SERVICE FEE TO ITS AE WHICH WE SHALL REFE R TO WHILE DECIDING THE NATURE OF EXPENSES. THE PLEA OF THE ASSESSEE W AS THAT AS THE SERVICES 44 AVAILED BY IT RESULTED IN BENEFIT TO IT AND ALSO AD DED ECONOMIC AND COMMERCIAL VALUE TO THE BUSINESS OF THE ASSESSEE, H ENCE, THE SAID BENEFITS SHOULD BE CONSIDERED AND THE TRANSFER PRIC ING ADDITION MADE BY THE TPO SHOULD BE DELETED. ANOTHER CONTENTION RAIS ED BY THE LD. DR FOR THE REVENUE IS THAT THE TPO HAD APPLIED CUP METHOD BUT HAD NOT FURNISHED DETAILS OF UN-CONTROLLED TRANSACTION BASE D ON WHICH THE ARMS LENGTH PRICE FOR THE TRANSACTION WAS DETERMINED TO BE NIL AND HENCE, THE SAME WAS NOT IN ACCORDANCE WITH LAW. 77. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE COMPANY BEFORE US IS WHOLLY OWNED SUBSIDIA RY OF DSM INTERNATIONAL B.V., THE NETHERLANDS. DURING THE YE AR UNDER CONSIDERATION THE ASSESSEE WAS ENGAGED IN MANUFACTU RING OF INTERMEDIARIES AND BULK DRUGS. THE ASSESSEE HAD E NTERED INTO AN AGREEMENT WITH ITS PRINCIPAL I.E. DSM INTERNATIONAL B.V., THE NETHERLANDS ON 1.1.2004. THE AGREEMENT TITLED AS CORPORATE SERVICES CONTRACT UNDER WHICH IT WAS PROVIDED THAT THE AE WA S ENGAGED IN RESEARCH AND DEVELOPMENT PROGRAMMES IN A VARIETY OF FIELDS AND HAD ACQUIRED LARGE NUMBER OF FUNDAMENTAL RIGHTS AS WELL AS KNOWLEDGE AND EXPERIENCE IN THE AREA OF SCIENCE AND TECHNOLOGY. IT HAD ALSO ACQUIRED KNOWLEDGE IN THE AREA OF COMMERCE, FINANCE, ACCOUNT ING, ECONOMICS AND OTHER SUBJECTS FOR SUCCESSFUL CARRYING OUT THE BUSI NESS OPERATION. THE SAID RIGHTS AND KNOWLEDGE AND EXPERIENCE WERE ACQUI RED FOR THE BENEFIT OF ALL THE RELATED COMPANIES. HOWEVER, IT WAS ACK NOWLEDGED BETWEEN THE PARTIES THAT SEPARATE PAYMENT FOR EACH RIGHT, E ACH PIECE OF INFORMATION AND EACH TRANSFER OF KNOWLEDGE AND EXPE RIENCE WOULD GIVE RISE TO CONSIDERABLE PROBLEMS AND IN ORDER TO HAVE UNINTERRUPTED FLOW OF INFORMATION, THE SYSTEM OF SEPARATE PAYMENTS WOULD BE VERY DIFFICULT TO MAINTAIN. THE PARTIES, THEREFORE, ENTERED INTO TH IS CORPORATE SERVICES 45 CONTRACT UNDER WHICH THE AE AGREED TO PLACE ACCESS TO ALL THE AVAILABLE KNOW-HOW EXPERIENCE AND INFORMATION RELATING TO COR PORATE RESEARCH AND TO PROVIDE THE ASSESSEE WITH TECHNICAL HELP AND ASS ISTANCE AND ALSO TO GRANT TO THE ASSESSEE NON-EXCESSIVE, NON-TRANSFERAB LE AND INDIVISIBLE LICENCE UNDER ALL THE EXISTING AND FUTURE PATENT OR SIMILAR RIGHTS IN THE FIELD OF CORPORATE RESEARCH IN PRODUCTS AND PRODUCT ION METHOD AND TO FURTHER GIVE ACCESS TO ALL AVAILABLE KNOW-HOW EXPER IENCE AND INFORMATION RELATING TO COMMERCIAL, ACCOUNTING, AUD ITING, FINANCIAL, FISCAL, SOCIAL, LEGAL, ENVIRONMENTAL, SAFETY, HEALT H AND INSURANCE MATTERS. IN TURN THE ASSESSEE AGREED TO PAY TO THE COMPANY S PECIFIED SUM AS DESCRIBED IN ARTICLE 6(D). VIDE ARTICLE 3 OF THE AGREEMENT, THE CORPORATE SERVICES OF TECHNICAL NATURE AND VIDE ART ICLE 4, THE CORPORATE SERVICES OF COMMERCIAL, ACCOUNTING, AUDITING, FINAN CIAL, FISCAL, SOCIAL, LEGAL, ENVIRONMENTAL, SAFETY, HEALTH AND INSURANCE NATURE WERE AGREED TO BE PROVIDED. THE SERVICE TO BE PROVIDED UNDER ART ICLE 4 ARE AS UNDER: A. THE TRADING AND DISTRIBUTION OF GOODS, IN PARTICULA R RELATING TO ADVERTISING, SALES PROMOTION, PUBLIC RELATIONS, MARKET RESEARCH, LABELING, PACKAG ING, TRANSPORT AND SHIPMENT, REGULAR AND SUSTAINED EXPORT ACTIVITIES, CROSS-BORDER PURCHASIN G FROM THIRD PARTIES, BARTER TRANSACTIONS, ETC.; B. FINANCIAL, ACCOUNTING AND AUDITING MATTERS -AS RELA TED TO; (I) ACCOUNTING PRINCIPLES AND METHODS; (II) BUDGETING METHODS; (III) CAPITAL STRUCTURE, LOANS, CURRENCY POLICY, FINANCIA L RESEARCH, PROVIDING GUARANTEES, CREDIT MANAGEMENT, BUY OR LEASE DECISIONS, GENERAL BANKING MATTERS, LONG-TERM CREDIT, ETC.; (!V) DATA PROCESSING TECHNIQUES; C. FISCAL AND LEGAL MATTERS, INCLUDING PATENTS, TRADE NAMES, IMPORT AND EXCISE DUTIES, COMPLIANCE, ETC., WITH RESPECT TO CROSS-BORDER AND OTHER ACTIVITIES; D. PERSONNEL MATTERS, INCLUDING THE SELECTION AND TRAI NING OF PERSONNEL; E. ENVIRONMENTAL, SAFETY AND HEALTH MATTERS, INCLUDING RESPONSIBLE CARE ISSUES; F. INSURANCE; G. THE ADMISSION, AT THE COMPANY'S REQUEST, O( A REASO NABLE NUMBER OF ITS EMPLOYEES TO DSM'S SITES AND BUILDINGS TO ENABLE THEM TO FAMILIARIZE T HEMSELVES WITH DSM'S ORGANIZATION AND WORKING METHODS AND TO RECEIVE SPECIFIC ADVICE IN T HE AFOREMENTIONED FIELDS; H. THE SENDING, AT THE COMPANY'S REQUEST, OF EXPERT S TO THE OFFICES AND FACTORIES OF THE COMPANY FOR PERIODS AGREED BY .THE PARTIES, CONCERNED FOR T HE PURPOSE OF ADVISING THE COMPANY IN THE AFOREMENTIONED FIELDS; I, ALL OTHER SUCH MATTERS ON WHICH THE COMPANY APPR OACHES DSM AND WHICH DSM CONSIDERS TO BE REASONABLE AND APPROPRIATE. 46 78. FURTHER IT WAS ALSO AGREED BETWEEN THE PARTIES THAT THE ASSESSEE WOULD MAKE AVAILABLE OF ITS TECHNICAL, COMMERCIAL A ND OTHER KNOWLEDGE RELATING TO THE AREAS MENTIONED IN ARTICLE 4 TO ITS AE. 79. AS PER ARTICLE 6 OF THE AGREEMENT AS PER THE AG REEMENT 5% MARK UP WAS APPLIED ON THE COSTS INCURRED FOR THE PROVISION OF THESE SERVICES. THE RESULTANT AMOUNT WAS ALLOCATED TO THE APPELLANT BY APPLYING THE FOLLOWING FORMULA: 2 X GVA OF THE ASSESSEE + I X INVESTED CAPITAL OF T HE ASSESSEE X CORPORATE COSTS 2 X GVA OF THE ASSESSEE + IX TOTAL INVESTED CAPI TAL OF THE GROUP 80. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATIO N AVAILED CERTAIN SERVICES AS UNDER : S.NO. PARTICULARS AMOUNT (INR) 1 CORPORATE SERVICE CHARGE 22,759,134 2 ICT SERVICES 5,801,076 3 AURORA CHARGES 529,125 4 SERVICES 69,238 5 TECHNICAL & PROFESSIONAL SERVICE CHARGE 36,898 6 SERVICES SSP - TECHNICAL ASSISTANCE 2,174,203 7 ORIENTAL COURSE 1,450,360 8 CONFERENCE PRODUCT TEAM 232,582 9 DIAL COST AGR 19,910 TOTAL 33,072,526 81. THE ASSESSING OFFICER HAD MADE A REFERENCE TO T PO UNDER SECTION 92CA(I) OF THE ACT IN RESPECT OF VARIOUS INTERNATIO NAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE ON ACCOUNT OF PURCHASE OF RAW MATERIAL, CONSUMABLES AND/OR FINISHED GOODS, EXPORT OF MATERI AL, ON ACCOUNT OF SERVICES RECEIVED, REIMBURSEMENT OF EXPENSES AND IN TEREST PAID ON LOAN. THE TPO IN VIEW OF THE HOLDINGS OF THE COMPANY TABU LATED THE SUMMARY OF BUSINESS ACTIVITIES AND NATURE OF RELATIONSHIP W ITH THE ASSESSEE COMPANY OF VARIOUS ASSOCIATED ENTERPRISES UNDER PAR A 5.2 AT PAGE 5 OF THE TPO ORDER. 47 82. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATIO N HAD ADOPTED TNMM METHOD FOR TRANSFER PRICING ANALYSIS WITH OPER ATING PROFIT/SALES RATIO AS PROFIT LEVEL INDICATOR. THE SAME METHOD WAS ADOPTED BY THE ASSESSEE IN THE PRECEDING YEARS ALSO. 83. THE FIRST ISSUE RAISED BY THE TPO WAS THAT THE ASSESSEE WAS ENGAGED IN SEVERAL INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES AND FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE OF THE SAID INTERNATIONAL TRANSACTION ALL THE TRANSACT IONS EXCEPT INTEREST ON LOAN WERE GROUPED TOGETHER AND THE PROFITABILITY HA D BEEN DETERMINED FOR THE COMPANY AS WHOLE. THE TPO SEGREGATED THE PAYM ENT OF SERVICE FEE AS PER THE TRANSFER PRICING STUDY REPORT TOTALING R S.3,30,72,526/- AND THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY ALL THE TRANSACTIONS WERE GROUPED TOGETHER TO DETERMINE THE ARMS LENGTH PRIC ING. AS PER THE TPO, UNDER INCOME TAX ACT WHILE APPLYING ARMS LENG TH PRICING METHOD, THE SAME SHOULD BE APPLIED ON TRANSACTION BY TRANSA CTION BASIS AND SEPARATE ANALYSIS FOR THE INTERNATIONAL TRANSACTION OF PAYMENT TOWARDS SERVICE FEE TO THE AE SHOULD HAVE BEEN CARRIED ON B Y THE ASSESSEE. FURTHER THE ASSESSEE WAS ALSO ASKED TO DEMONSTRATE THAT WHETHER AN INDEPENDENT ENTERPRISE OPERATING IN UNCONTROLLED EN VIRONMENT WOULD HAVE MADE SUCH A PAYMENT FOR SUCH SERVICES. THE A SSESSEE WAS ASKED TO IDENTIFY EACH OF THE SERVICES ACTUALLY RECEIVED BY IT FROM THE AE FOR WHICH THE AMOUNT WAS PAID AND ALSO TO SUBMIT DOCUME NTARY EVIDENCE THAT THE SAID SERVICES HAD ACTUALLY BEEN RECEIVED BY THE ASSESSEE. THE ASSESSEE WAS ALSO ASKED TO BIFURCATE THE PAYMENTS F OR EACH OF THE FIELD SERVICES. THE ASSESSEE WAS ALSO REQUISITIONED TO QUANTIFY THE PAYMENTS MADE WHETHER ANY COST BENEFIT ANALYSIS WERE DONE. RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY MUMBAI BENCH OF THE TRIBU NAL IN M/S STAR INDIA PVT. LTD. FOR THE PROPOSITION THAT EACH TRANS ACTION SHOULD HAVE BEEN 48 BENCHMARKED SEPARATELY. THE RELEVANT EXTRACT OF T HE SAID DECISION IS REPRODUCED UNDER PARA 8.1 AT PAGES 9 AND 10 OF THE ORDER OF THE TPO. 84. THE FIRST ASPECT RAISED BEFORE US IS WHETHER TH E ASSESSEE SHOULD HAVE BENCHMARKED EACH OF THE TRANSACTIONS SEPARATEL Y. ADMITTEDLY, THE ASSESSEE HAD ENTERED INTO SERIES OF TRANSACTIONS WI TH ITS AE I.E. PURCHASE OF RAW MATERIAL, CONSUMABLES, FINISHED GOODS, ETC, EXPORT OF MATERIAL, CORPORATE SERVICES, REIMBURSEMENT OF EXPENSES AND I NTEREST PAID ON LOAN, WHICH IT HAD AGGREGATED IN ORDER TO DETERMINE THE A RMS LENGTH PRICE OF THE TRANSACTIONS EXCEPT INTEREST ON LOAN. WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE MUMBAI BENCH OF THE TRIBUNAL IN M/ S STAR INDIA PVT. LTD. (SUPRA) WHEREIN IT HAS BEEN HELD THAT FOR DETE RMINING THE ARMS LENGTH PRICE EACH OF THE ASSESSEES INDEPENDENT ACT IVITIES HAVE TO BE SEGREGATED. SIMILAR PROPOSITION HAD BEEN LAID DOWN BY THE MUMBAI BENCH OF THE TRIBUNAL IN UCB INDIA PVT. LTD. [317 I TR 292 (AT)(MUMBAI)]. THE RELEVANT EXTRACT OF BOTH THE DEC ISIONS ARE REPRODUCED BY THE TPO UNDER PARA 8.1 AT PAGES 9 TO 12 OF THE TP ORDER. WE ARE NOT REPRODUCING THE RELEVANT EXTRACT OF THE DECISION FOR THE SAKE OF BREVITY. IN LINE WITH THE RATIO LAID DOWN BY T HE TRIBUNAL, WE HOLD THAT THE TPO IS EMPOWERED TO APPLY APPROPRIATE METH OD FOR EACH OF THE INTERNATIONAL TRANSACTIONS AND AS THE SERVICE FEE P AID BY THE ASSESSEE WAS A SEPARATE CLASS OF TRANSACTIONS, THE SAME IS TO BE ANALYZED SEPARATELY, THEN FROM THE OTHER RELATED PARTY TRANSACTIONS. T HE LEARNED D.R. FOR THE REVENUE HAS PLACED RELIANCE ON VARIOUS PARAS OF OEC D GUIDELINES IN THIS REGARD AND WE APPLY THE SAID PRINCIPLE VIS--VIS DI FFERENT TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE. 85. THE SECOND ASPECT OF THE ISSUE RAISED BY THE TP O IS THAT UNDER THE HEAD INTRO GROUP SERVICES ALSO, THE ASSESSEE SHOULD HAVE SEGREGATED THE TRANSACTIONS AND CHARGES PAID FOR EACH TRANSACTION SHOULD HAVE BEEN 49 BIFURCATED IN ORDER TO DETERMINE WHETHER THE SAID T RANSACTIONS WERE AT ARMS LENGTH PRICE. THE ISSUE OF INTRA GROUP SERV ICES IS ALSO ADDRESSED BY THE OECD GUIDELINES WHEREIN UNDER PARA 7.20 OF O ECD GUIDELINES IT IS PROVIDED THAT WHERE THERE IS A DIRECT CHARGE MET HOD, THEN THE ASSOCIATED ENTERPRISES ARE TO BE CHARGED FOR SPECIF IC SERVICES. HOWEVER, UNDER PARA 7.22 OF OECD GUIDELINES IT IS RECOGNIZED THAT THE DIRECT CHARGE METHOD FOR CHARGING FOR INTRA GROUP SERVICE WAS DIFFICULT TO APPLY IN PRACTICE AND WHERE THE GROUPS HAVE DEVELOP ED OTHER METHODS FOR CHARGING FOR SERVICES PROVIDED BY PARENT COMPANIES OR GROUP SERVICE CENTRE, THEN SUCH METHOD IS TO BE APPLIED. UNDER PARA 7.23 OF OECD GUIDELINES RECOGNITION OF COST ALLOCATION AND APPOR TIONMENT METHOD INVOLVING SAME DEGREE OF ESTIMATION OR APPROXIMATIO N IS RECOGNIZED. FURTHER UNDER PARA 7.24 OF OECD GUIDELINES, AN INDI RECT CHARGE METHOD IS RECOGNIZED UNDER WHICH CHARGES CANNOT BE QUANTIF IED EXCEPT ON APPROXIMATE OR ESTIMATE BASIS WHERE THERE IS RENDER ING OF SERVICE TO VARIOUS MEMBERS OF THE GROUP AND THERE IS RECORDING OF RELEVANT SERVICE ACTIVITY FOR EACH OF THE BENEFICIARY. APPLYING TH E ABOVE SAID GUIDELINES TO THE ISSUE IN HAND, WE HOLD THAT THE ASSESSEE HAS BENCH-MARKED THE INTRA GROUP SERVICES AS A WHOLE AND THE PAYMENTS HA VE BEEN MADE TO THE AES ON THE BASIS OF THE CORPORATE SERVICE CONTRACT ENTERED INTO BETWEEN THE PARTIES AND THERE IS NO REQUIREMENT TO IDENTIFY EACH AND EVERY SERVICE AVAILED UNDER INTRA GROUP SERVICES. 86. THOUGH THE ASSESSEE HAS MADE PAYMENTS UNDER DIF FERENT HEADS FOR SERVICES AVAILED FROM THE AE, AS DETAILED IN CHART IN THE PARAS HEREINABOVE, HOWEVER, THE TPO HAD ACCEPTED THE PAYM ENTS MADE ON ACCOUNT OF TECHNICAL ASSISTANCE AND TRAINING, CONFE RENCE CHARGES AT SR.NOS. 6 TO 9 IN THE TABLE ABOVE BUT HAD DISALLOWE D BALANCE SUM OF RS.2,91,95,471/-, WHICH CONSTITUTE OF ITEMS AT SR.N OS.1 TO 5 IN THE TABLE ABOVE. 50 87. NOW COMING TO THE INDIVIDUAL ITEMS CONSIDERED B Y THE TPO, THE LIST INCLUDES ICT SERVICES OF RS.58,01,076/- AND AURORA CHARGES OF RS.5,29,125/-. THE PAYMENTS HAD BEEN MADE BY THE ASSESSEE IN THE SUCCEEDING YEAR WHICH HAD BEEN ALLOWED BY THE TPO A ND IT HAS BEEN HELD THAT THE TRANSACTION WAS AT ARMS LENGTH PRICE. D URING THE YEAR UNDER CONSIDERATION THE SAID AMOUNTS WERE NOT ALLOWED AS THE ASSESSEE HAD NOT GIVEN ANY BASIS FOR COMPUTING THE COST. ON THE PE RUSAL OF THE DETAILS FURNISHED IN THIS REGARD, WE ARE OF THE VIEW THAT T HE FACTURM OF INCURRING THE SAID EXPENSES IS NOT DOUBTED. HOWEVER, THE TP O HAD NOT ACCEPTED THE ARMS LENGTH PRICE OF THE SAID TRANSACTION BUT SIMILAR EXPENSES WERE ALLOWED IN THE SUCCEEDING YEAR. FOLLOWING THE PRI NCIPLES OF CONSISTENCY AND AS THE FACTS OF THE CASE FOR THE YEAR UNDER APP EAL ARE SIMILAR TO THE FACTS IN ASSESSMENT YEAR 2008-09 WE HOLD THAT THE P AYMENTS MADE TOWARDS ICT SERVICES AND AURORA CHARGES ARE AT ARM S LENGTH AND ARE DULY ALLOWABLE IN THE HANDS OF THE ASSESSEE. SIMI LARLY, THE NEXT TWO ITEMS ARE ON ACCOUNT OF SERVICES OF RS.69,238/- AND TECHNICAL AND PROFESSIONAL CHARGES OF RS.36,898/-. THE TPO HAD DISALLOWED THE SAID EXPENDITURE AS IN THE FORM NO.3CEB AUDIT REPORT, TH E SAID PAYMENTS HAD BEEN SHOWN TO HAVE BEEN MADE TO DSM NUTRITIONAL PRODUCTS. HOWEVER, IN THE TRANSFER PRICING STUDY REPORT, THE SAME WAS SHOWN TO M/S SM FOOD SPECIALTIES U.K. LTD. THE ASSESSEE HAS CL ARIFIED THAT THE SAME ARE GROUP ENTITIES AND THERE IS NO DISCREPANCY IN T HE AUDIT REPORT AND TRANSFER PRICING REPORT. WE FIND NO MERIT IN THE REPORT OF THE TPO IN THIS REGARD AND DISMISSING THE SAME WE HOLD THAT BO TH THE EXPENSES OF RS.69,238/- AND RS.36,898/- ARE AT ARMS LENGTH PRI CE AND NO ADJUSTMENT IS TO BE MADE ON THIS ACCOUNT. 88. THE ONLY PAYMENT NOW LEFT TO BE CONSIDERED IS C ORPORATE SERVICE CHARGES. THE PLEA OF THE ASSESSEE WAS THAT THE SA ID PAYMENTS WERE MADE 51 TO THE AE UNDER AN AGREEMENT AND THE SAID DECISION OF THE ASSESSEE IN MAKING THE AFORESAID PAYMENTS COULD NOT BE QUESTION ED BY THE AUTHORITIES BELOW. RELIANCE WAS PLACED ON SERIES OF DECISIONS BY THE TRIBUNAL FOR THE PROPOSITION THAT THE COMMERCIAL WI SDOM OF THE ASSESSEE IN MAKING THE PAYMENT TO ITS AE UNDER AN AGREEMENT CANNOT BE QUESTIONED. THE LEARNED A.R. FOR THE ASSESSEE FUR THER SUBMITTED THAT VARIOUS DOCUMENTS WITH REGARD TO THE NATURE OF CORP ORATE SERVICES PROVIDED BY THE AE TO THE ASSESSEE, AGAINST WHICH T HE ASSESSEE HAD PAID THE CORPORATE SERVICE FEE TO ITS AE WERE FURNISHED BEFORE THE TPO AND COPIES OF WHICH WERE ALSO PLACED BEFORE US. OUR A TTENTION WAS DRAWN TO THE SUBMISSIONS FILED BEFORE THE TPO ALONGWITH THE ANNEXURE IN RESPECT OF SEVERAL DOCUMENTS PLACED AT PAGES 1 TO 245 OF TH E PAPER BOOK. THE PLEA OF THE ASSESSEE WAS THAT THE SAID DOCUMENTS HA VE NOT BEEN CONSIDERED IN ENTIRETY BY THE AUTHORITIES BELOW. IN THE SYNOPSIS SUBMITTED ON 7.11.2013, THE LEARNED A.R. FOR THE AS SESSEE HAD ENLISTED VARIOUS BENEFITS REALIZED BY THE ASSESSEE FROM THE PAYMENT OF CORPORATE SERVICE FEE TO ITS AE, WHICH ARE AS UNDER: HOWEVER, ON WITHOUT PREJUDICE BASIS, TO DEMONSTRAT E THE ECONOMIC BENEFITS REALISED BY DSP INDIA FROM PAYMENT OF CORPORATE SERVICE FEE TO ITS AES, THE APPELLANT SUBMITTED THE FOLLOWING DOCUMENTS/MAILS EXCHANGED IN DAY-TO-DAY OPERATIONS WITH AES ON A SAMPLE BASIS VIDE SUBMISSION DATED 21 OCTO BER 2010, EVIDENCING THIS FACT (PLACED AT PAGES 88 TO 160 OF PAPER BOOK): PROPOSAL TO SETUP DSM ANTI-INFECTIVE ENERGY & UTILI TIES NETWORK WITH THE 'OBJECTIVE OF SAVING ON ENERGY AND UTILITY COST, COVERING - OB JECTIVE, SCOPE, TIMING/IMPLEMENTATION AND APPROVED BUDGET (PLACED A T PAGE 88 TO 94 OF THE PAPERBOOK) PRESENTATION ON SAFETY, HEALTH AND ENVIRONMENT ('SH E') AUDIT SHOWING SCORES ON DIFFERENT SHE CATEGORIES (PLACED AT PAGE 9710 102 O F THE PAPERBOOK) PRESENTATION ON CORPORATE SHE AND MANUFACTURING PRA CTICES DISCUSSING 'OPERATING WINDOW SHE', CLARIFYING HOW IT WORKS, PROCESS OF ES TABLISHING LIMITS AND INSTRUCTIONS DESCRIBING SAFE UPPER AND LOWER LIMITS (PLACED AT P AGE 103 TO 108 OF THE PAPERBOOK) AGENDA FOR DAI SHE&M CONFERENCE (HELD BETWEEN 26 TO 28 JUNE 2006) - COVERING INTER-ALIA, WORKSHOP: REAL LIFE SCENARIOS; DISCUSSION ON PITFALLS/ ROADBLOCKS; FOCUS ON KEY ELEMENTS OF WORK PROCESS; EXPERIENCES IN DAI ETC. (PLACED AT PAGE 109 AND NO OF THE PAPERBOOK) CORPORATE OPERATIONAL AUDIT 2006 REPORT SHOWING THE FINDINGS, SIGNIFICANCE AND PROPOSED ACTION (PLACED AT PAGE IN TO 127 OF PAPERB OOK). SOME OF THE KEY FINDINGS ARE LISTED BELOW: 52 - NO MANUFACTURING PLAN IS AVAILABLE WHICH CAN LEAD TO MISALIGNMENT BETWEEN BUSINESS OBJECTIVES AND MANUFACTURING OBJECTIVES (PLEASE REF ER TO PAGE 112 OF THE PAPERBOOK) - LACK OF STRUCTURAL GAP ANALYSIS FOR MRO WORK PROC ESS AND FORMULATION OF ACTION PLAN TO CLOSE GAPS LEADING TO ADDITIONAL COSTS (PLEASE R EFER TO PAGE 112 OF THE PAPERBOOK) - DEFICIENCIES IN MATERIAL HANDLING E.G. UNSEALED D RUMS WERE RELEASED WITHOUT FURTHER ASSESSMENTS, (PLEASE REFER TO PAGE 115 OF THE PAPER BOOK) - INCOMPLETE MARKETING AND SALES PLAN PUTTING IMPLE MENTATION APPROACH OF CONTRIBUTION MARGIN STRATEGY AT RISK (PLEASE REFER TO PAGE 119 O F THE PAPERBOOK) - SUPPLIER PERFORMANCE SYSTEM NOT AVAILABLE DUE TO WHICH IT IS UNCERTAIN WHETHER GOODS/SERVICES ARE SUPPLIED ACCORDING TO THE CONTRA CT (PLEASE REFER TO PAGE 120 OF THE PAPERBOOK) SHE FLYER COVERING PRELIMINARY FINDINGS ON AGROL INZ EXPLOSION (PLACED AT PAGE 128 OF THE PAPERBOOK) MONTHLY PUBLICATION OF DSM GROUP - 'OPERATIONAL EXC ELLENCE' COVERING VARIOUS UPDATES FROM DSM GROUP (PLACED AT PAGE 129 TO 147 OF THE PA PERBOOK) EXCHANGE OF E-MAILS EXCHANGED WITH AE IN RELATION T O - - NEGOTIATION OF BETTER TERMS FOR FINANCIAL CHARGES D UE TO GLOBAL RELATION (PLEASE REFER TO PAGE 148 OF THE PAPERBOOK); - ISSUANCE OF LETTER OF CREDIT FACILITY OF EURO 10 MI LLION (APPROX 63 CRORES) (PLEASE REFER TO PAGE 156 OF THE PAPERBOOK) - REDUCTION IN FEES CHARGED BY THE BANK FROM DSP INDI A BASED ON THE GLOBAL RELATIONSHIP OF THE AE WITH THE BANK (PLEASE REFER TO PAGES 157 AND 158 OF THE PAPERBOOK) - SHARING OF BEST PRACTICES RECEIVED BY THE APPELLANT (PLEASE REFER TO PAGES 149 AND 151 TO 154 OF THE PAPERBOOK). 20. IT IS PERTINENT TO MENTION THAT THE LD. TPO, ON ONE HAND, IN HIS ORDER CONTENDED THAT NO SERVICES HAS BEEN RECEIVED BY THE APPELLANT; WHILE ON THE OTHER HAND, HIMSELF ACCEPTED IN ITS ORDER THAT A CORPORATE OPERATIONAL AUDIT' 2006 WAS CONDUCTED BY THE AE FOR DSP INDIA WHICH IS OF VALUE FOR APPELLANT. 89. SIMILAR LIST OF THE SERVICES PROVIDED BY AE IN ASSESSMENT YEAR 2008-09 HAD BEEN SUMMARIZED BY THE ASSESSEE IN THE SYNOPSIS FILED, WHICH READS AS UNDER: HOWEVER, ON WITHOUT PREJUDICE BASIS, TO DEMONSTRAT E THE ECONOMIC BENEFITS REALISED BY DSP INDIA FROM PAYMENT OF CORPORATE SER VICE FEE TO ITS AES, THE APPELLANT SUBMITTED THE FOLLOWING DOCUMENTS/MAILS EXCHANGED IN DAY-TO-DAY OPERATIONS WITH AES ON A SAMPLE BASIS VIDE SUBMISSION DATED 26 JULY 201 1 (PLACED AT PAGES 1-108 OF PAPER BOOK) AND 12 SEPTEMBER 2011, (PLACED AT PAGES 109 T O 321 OF PAPER BOOK) EVIDENCING THE RECEIPT OF ECONOMIC BENEFITS B Y THE APPELLANT FROM THE SERVICES RENDERED BY ITS AES : AGENDA OF SAFETY, HEALTH AND ENVIRONMENT (SHE) CO URSE (HELD ON APRIL 17-2007 AND JUNE 5-8, 2007) DESIGNED FOR ENGINEERS WHO ARE CONCERNED WITH PROCESS INSTALLATION & PRODUCT MANUFACTURING (PLACED AT PAG ES 146 TO 172 OF THE PAPERBOOK), COVERING- - DESCRIPTION OF SHE COURSE HELD, TARGET AUDIENCE FOR THE SAID COURSE, TOPICS TO BE ADDRESSED AND ISSUES TO BE COVERED DURING THE COURS E (PLEASE REFER TO PAGE 148 OF THE PAPERBOOK) - NAMES AND DESIGNATIONS OF INDIAN PARTICIPANTS (PLEA SE REFER TO PAGES 152, 154 AND 157 OF THE PAPERBOOK) 53 UN-ANNOUNCED SHE AUDIT REPORT DATED MAY 2007 COVE RING THE OUTCOME OF SHE AUDIT AND IMPROVEMENT IN SHE STANDARDS VIS-A-VIS SHE AUDI T HELD IN THE PRECEDING YEAR (PLACED AT PAGES 174 TO 179 OF PAPERBOOK). SOM E OF THE KEY FINDINGS ARE GIVEN BELOW- - NO TAGS WERE APPLIED ON THE SWITCH OF PUMPS IN CERT AIN PLANTS AND NO BLIND PLATES WERE USED TO PREVENT LEAKAGES, (PLEASE REFER TO PAGE 177 OF THE PAPERBOOK) - THE BYPRODUCT METHYLACETOACETATE WAS SOLD TO AN OUT SIDE COMPANY REUSING BOXES WITH THE NAME DSM DERETIL ON IT. THIS CAN RESULT IN UNAUTHORIZED USE OF THE DSM BRAND NAME, (PLEASE REFER TO PAGE 178 OF THE PA PERBOOK) - EQUIPMENT WHICH WAS NOT IN USE WAS NOT LABELLED AS SUCH; EMERGENCY SHOWERS WERE EQUIPPED WITH A NON STANDARD VALVE; HOUSEKEEPI NG ON THE ROOF OF THE UTILITY BUILDING WAS SUB-STANDARD AND SAFETY HARNESSES OF T HE CONTRACTOR WERE NOT TAGGED ETC. (PLEASE REFER TO PAGE 179 OF THE PAPERBOOK) COPY OF E-MAILS EXCHANGED WITH AE SHOWING SUPPORT P ROVIDED BY THE AE WITH RESPECT TO GUARANTEEING INCREASE IN LETTER OF CREDI T FACILITY AND CORPORATE GUARANTEE AVAILED BY DSP INDIA (PLACED AT PAGES 188 TO 189 OF THE PAPERBOOK) MEMO ON GOOD MANUFACTURING COMPLIANCE ('GMP') AUDIT - APRIL TO JULY 2007 SHOWING COMMON AUDIT FINDINGS FOCUSSED ON THE LEA RNING POINTS FROM TWO RECENT FDA INSPECTIONS AND CUSTOMER AUDIT OBSERVATIONS (PL ACED AT PAGES 191 TO 199 OF PAPERBOOK). END. USER PRE MIGRATION TRAINING ON AURORISATION- A PRESENTATION DESCRIBING THE USES AND BENEFITS OF AURORA AND WHY IT IS REQUIRED, ALONGWITH ADVANTAGES OF AURORA IMPLEMENTATION (PLACED AT PAGES 204 AND 226 OF THE PAPERBOOK) EXCHANGE OF E-MAILS EXCHANGED WITH AE IN RELATION T O - - DISCUSSION ON LONG TERM PROGRAM FOR PHASED ELIMIN ATION OF OZONE-DEPLETING SUBSTANCES IN INDUSTRIAL APPLICATIONS IN ACCORDANCE WITH SHE REQUIREMENTS AND DISCUSSION ON REPLACEMENT OF CFC MACHINES (PLEASE R EFER TO PAGE 237 TO 239 OF THE PAPERBOOK) - AURORA ROLLOUT - AUGUST 2007 IN RELATION REASONS AND BENEFITS OF IMPLEMENTING AURORA (PLEASE REFER TO PAGE 298 AND 299 OF THE PAP ERBOOK) - FDA (FOOD AND DRUG ADMINISTRATION) AUDIT IN INDIA - MAIL SENT BY JAN W.H SMEETS (SENIOR MANAGER, INTERNATIONAL REGULATORY AF FAIRS) TO THE FDA GIVING BACKGROUND INFORMATION ON THE MANUFACTURING FACILIT Y AND PRODUCTION PROCESS OF 6- APA BY DSM IN INDIA (PLACED AT PAGE 300 OF THE PAPE RBOOK) 18. FURTHER, THE APPELLANT ALSO SUBMITTED THAT THE FINANCIAL SERVICES FORMING PART OF THE CSC ALSO INCLUDE PROVISIONING OF GUARAN TEE(S) BY AF, ON BEHALF OF DSP INDIA (PLEASE REFER TO POINT B(III) OF ARTICLE 4 OF THE CORPORATE SERVICE CONTRACT PLACED AT PAGE 142 OF THE PAPERBOOK). IN THIS REGARD, IT W AS SUBMITTED THAT THE AE (KONINKLIJE DSM NV) HAD GUARANTEED A LETTER OF CREDIT FACILITY OF DSP INDIA AMOUNTING TO EURO 30 MILLION (APPROX I9O'CRORCS). FURTHERMORE, THE AE HA D ALSO PROVIDED A CORPORATE GUARANTEE AMOUNTING TO INR 52.63 CRORE ON BEHALF OF DSP INDIA TO DEUTSCHE BANK. IT IS RESPECTFULLY SUBMITTED THAT AS A RESULT OF THE G UARANTEE PROVIDED BY THE ASSOCIATED ENTERPRISES, THE APPELLANT WAS ABLE TO BORROW FUNDS AT CHEAPER RATES OF INTEREST. 90. THE FIRST REFERENCE MADE WAS TO THE CORPORATE OPERATIONAL AUDIT 2006 REPORT. IT WAS CARRIED OUT BY THE AE FOR DET AILING ITS FINDINGS, SIGNIFICANCE AND PROPOSED ACTION TO BE TAKEN BY THE ASSESSEE. THE SAID REPORT IS PLACED AT PAGES 111 TO 117 OF THE PAPER B OOK. THE ASSESSEE HAS ALSO PLACED ON RECORD A LETTER RECEIVED FROM AE WITH REGARD TO CORPORATE OPERATIONAL AUDIT CONDUCTED, WHICH IN TUR N CONTAINS SCOPE OF 54 AUDIT FUNCTIONS COVERED IN THE AUDIT ALONG WITH NAM E OF THE PERSONNEL CONDUCTING AUDIT, WHICH IS ATTACHED AS ANNEXURE-1 T O LETTER DATED 6.1.2014. 91. THE SECOND SET OF ITEMS ARE IN RELATION TO PRES ENTATION OF SAFETY, HEALTH AND ENVIRONMENT AUDIT (SHE AUDIT), WHICH ARE PLACED AT PAGES 97 TO 102 OF THE PAPER BOOK. THE ASSESSEE HAS ALSO FURTHER PLACED TABULATED DETAILS ANNEXED AS ANNEXURE-2 TO THE LETT ER DATED 6.1.2014 IN WHICH IT HAS ENLISTED DATE-WISE SCHEDULE WITH RESPE CT TO SHE AUDIT CONDUCTED BY THE ASSOCIATED ENTERPRISES CONTAINING THE NAME OF THE PERSONNEL CONDUCTING THE AUDIT AND ALSO THE NAME OF THE EMPLOYEES OF THE ASSESSEE WHO WERE INTERVIEWED OR PARTICIPATED IN TH E SAID AUDIT. ANOTHER BENEFIT ARISING FROM THE SAID ARRANGEMENT W AS THE PROCEDURE TO SET UP DSM ANTI INFECTIVES ENERGY UTILITY NET WORK WITH THE OBJECT OF SAVING OF ENERGY AND UTILITY GOODS, WHICH IN TURN I S PLACED AT PAGES 88 TO 94 OF THE PAPER BOOK. AS PER THE ASSESSEE, THE SA ID PROJECT WAS A GLOBAL INITIATIVE OF THE DSM GROUP FOR OPERATION, MAINTEN ANCE WITH THE AIM TO REDUCE THE ENERGY AND UTILITY COST. THE ASSESSEE HAS FURTHER FURNISHED DETAILS OF BENEFITS DERIVED BY IT AS A RESULT OF TH E CORPORATE OPERATIONAL AUDIT AND OTHER ENERGY SAVING PROJECTS UNDERTAKEN B Y AE AND FURNISHED THE DETAILS IN ANNEXURE-3, WHICH IS ATTACHED TO THE LETTER DATED 6.1.2014. THE LEARNED A.R. FOR THE ASSESSEE HAS FURTHER TABUL ATED THE LIST OF DOCUMENTS/PARTICULARS FILED BEFORE THE TRIBUNAL AND ALSO BEFORE THE TPO AND POINTED OUT THAT THE SERVICES PROVIDED BY THE A E HELPED THE ASSESSEE IN CARRYING ON THEIR DAY-TO-DAY BUSINESS, WHICH IN TURN ALSO ENCOURAGED ENERGY SAVINGS AND ALSO SAFETY, HEALTH AND ENVIRONM ENT MANUFACTURING AND GOODS MANUFACTURING PRACTICES. 92. THE NEXT SET OF SERVICES PROVIDED BY THE AE WAS IN RELATION TO HEALTH CONFERENCE OUT SIDE INDIA WHERE PARTICIPATIO N FEE WAS NOT PAID BUT 55 THE TRAVELING EXPENSES OF THE PERSONNEL TRAVELING A BROAD WERE INCURRED BY THE ASSESSEE. IN ADDITION, THERE WAS A NEWSLET TER STARTED BY THE AES CALLED SHE FLYER, WHICH COVERED VARIOUS FACILITIES TO BE CHECKED IN RESPECT OF EXPLOSION OF BOILERS AND FIRE FACILITIES . 93. FURTHER THERE WAS EXCHANGE OF E-MAIL BETWEEN AE AND THE ASSESSEE REGARDING NEGOTIATIONS WITH BANKERS ON ACCOUNT OF F INANCE AND TREASURY SERVICES. THE FIRST SET OF NEGOTIATIONS WAS IN RESPECT OF BETTER TERMS OF FINANCIAL CHARGES DUE TO GLOBAL RELATIONSHIP UND ER WHICH THERE WAS A RATE CORRECTION VIS--VIS RATE OF INTEREST PAYABLE ON LOAN IN THE YEAR UNDER CONSIDERATION AND ALSO IN THE SUCCEEDING YEAR . FURTHER THERE WAS ISSUANCE OF LETTER OF CREDIT OF FACILITIES OF EURO 10 MILLIONS I.E. APPROXIMATELY RS.63 CRORES BY THE AE IN FAVOUR OF T HE ASSESSEE. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT IN T HE SUCCEEDING YEAR THE AE HAD GRANTED A LETTER OF CREDIT FACILITY OF EURO 30 MILLIONS APPROXIMATELY RS.190 CRORES AND ALSO AE HAD PROVIDE D A CORPORATE GUARANTEE AMOUNTING TO INR 52.63 CRORES TO THE BANK . AS A RESULT OF GUARANTEE PROVIDED BY AE THE ASSESSEE WAS ABLE TO B ORROW FUNDS AT CHEAPER RATE OF INTEREST. IN THE FINANCIAL YEAR 2 006-07, THERE WAS INTEREST SAVING OF RS.1.40 CRORES, WHILE IN FINANCI AL YEAR 2007-08 THERE WAS CUMULATIVE SAVING OF RS.9.29 CRORES. 94. THE CASE OF THE ASSESSEE BEFORE US WAS THAT ON THE BASIS OF ALLOCATION USED BY THE GROUP TO ALLOCATE COST INCUR RED IN RELATION TO SERVICES RENDERED, THE TOTAL AMOUNT HAD BEEN ALLOCA TED AMONG GROUP COMPANIES IN A SYSTEMATIC MANNER, WHICH IN TURN LEA VES NO SCOPE FOR ARBITRARY ALLOCATION OF COST. THE FORMULA WORKED OUT BY THE PARTIES SAFEGUARDED THAT THE COST ARE CHARGED TO VARIOUS ME MBERS, DEPENDING ON THEIR CONTRIBUTION TO THE TOTAL INVESTED CAPITAL A ND GROSS VALUE ADDED, WHICH REPRESENTED APPROPRIATE SHARE OF COST TO BE B ORNE BY EACH MEMBER. 56 THE GROSS VALUE ADDED OVER INVESTED CAPITAL WAS THE FORMULA ADOPTED WHERE UNDER WHICH GVA WAS GIVEN MORE IMPORTANCE AND THE FORMULA WORKED OUT TO GVA X 2 + INVESTED CAPITAL OF COMPANY DIVIDED BY GVA X 2 + INVESTED CAPITAL OF GROUP IS TO BE APPLIED TO C ORPORATE COSTS. THE LEARNED A.R. FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT THE TOTAL COST TO THE ASSESSEE WAS 0.27% OF THE TOTAL COST INCURRED B Y DSP GROUP FOR PROVIDING CORPORATE SERVICES. THE TPO, ON THE OTH ER HAND, HAD DISALLOWED THE CLAIM OF THE ASSESSEE AS IT HAD NOT PROVIDED THE BREAK UP OF THE AMOUNTS ATTRIBUTABLE TO EACH SERVICE AND HE HAD ALSO CHALLENGED AS TO WHAT WERE THE ECONOMIC AND COMMERCIAL BENEFITS D ERIVED BY RECIPIENT OF INTRA GROUP SERVICE AND WHETHER COMPARABLE INDEP ENDENT ENTERPRISE WOULD HAVE PAID FOR THE SERVICES IN COMPARABLE CIRC UMSTANCES. AS PER THE TPO, FROM THE DETAILS AVAILABLE IT WAS NOT CLEA R WHETHER THE ASSESSEE HAD ACTUALLY RECEIVED SERVICES OF SAME VALUE THAT WOULD JUSTIFY SUCH HUGE PAYMENT. 95. WE FIND NO MERIT IN THE PLEA OF THE ASSESSING O FFICER/TPO WITH REFERENCE TO THE SERVICES PROVIDED BY THE AE. TH E ASSESSEE IN TERMS OF AGREEMENT ENTERED INTO IN THE EARLIER YEAR HAD BEEN PAYING THE SAID FEES AS CORPORATE SERVICE CHARGES. THE ASSESSEE WAS A PART OF WORLD WIDE GROUP AND SOME GOVERNANCE IS REQUIRED FOR RUNNING V ARIOUS UNITS ACROSS THE GLOBE. THE GROUP AS A WHOLE HAD DECIDED TO FI X CERTAIN NORMS FOR RUNNING THE MANUFACTURING UNIT AND COST INCURRED BY THE MEMBERS, TO STREAMLINE THE FUNCTIONING OF DIFFERENT ENTITIES OF THE GROUP AND ALSO FOR PROVIDING FINANCIAL ASSISTANCE BY WAY OF RATE CORRE CTION OF THE INTEREST RATE PAYABLE ON THE BORROWINGS AND ALSO IN THE CASE OF THE ASSESSEE BY PROVIDING GUARANTEE IN THE FORM OF ACTUAL MONEY CON SIDERATION, WHICH IN TURN HAS RESULTED IN MONETARY BENEFITS TO THE ASSES SEE ALONGWITH BENEFITS OF THE RESEARCH AND DEVELOPMENT CARRIED ON BY THE M EMBERS IN THE FIELD OF BUSINESS. FOR AVAILING THE ABOVE SAID BENEFIT , THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH ITS MEMBERS IN THE P RECEDING YEARS AND 57 CORPORATE SERVICE CHARGES HAD BEEN PAID FROM YEAR T O YEAR I.E. BOTH IN THE PRECEDING YEARS AND ALSO IN THE SUCCEEDING YEARS AN D WE FIND NO MERIT IN THE ORDER OF HE ASSESSING OFFICER/TPO IN HOLDING TH AT THE ASSESSEE HAD NOT RECEIVED ANY BENEFITS UNDER THE SAID AGREEMENT AND HENCE THE PAYMENTS MADE BY A TO ITS AES WERE NOT AT ARMS LEN GTH PRICE. 96. IN ASSESSMENT YEAR 2008-09 UNDER THE HEAD CORPO RATE SERVICE CHARGES, IN ADDITION TO THE CHARGES PAID AS IN THE PRECEDING YEAR, THE ASSESSEE HAS ALSO PAID ROYALTY FOR SPECIFIC PURPOSE S TO USE TRADE MARK AND PATENT, WHICH ADMITTEDLY IS A BUSINESS EXPENDIT URE AND IS TO BE ALLOWED AS AN EXPENDITURE IN THE HANDS OF THE ASSES SEE. IN ANY CASE, THE ROLE OF THE TPO IS TO DETERMINE THE ARMS LENGTH SE RVICE OF A TRANSACTION AND HE CANNOT REJECT THE ENTIRE PAYMENT UNDER THE P ROVISIONS OF SECTION 92CA OF THE ACT. THE SAID PROPOSITION HAS BEEN L AID DOWN BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES LTD., ITA. 1608 & 1070/2011 VIDE DATED 29.3.2012, WHEREI N ON SIMILAR FACTS WHERE THE TPO HAD DETERMINED ALP AT NIL, IT WAS HEL D AS UNDER: '21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR ASSESSEE TO SHOW THAT ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSINESS CARRIED ON BY HIM HAS A CTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EXPENDITURE S HOULD HAVE BEEN INCURRED 'WHOLLY AND EXCLUSIVELY' FOR THE PURPOSE O F BUSINESS AND NOTHING MORE. IT IS THIS PRINCIPLE THAT INTER ALIA FINDS EXPRESSION IN THE OECD GUIDELINES, IN THE PARAGRAPHS WHICH WE HAVE QU OTED ABOVE. 22. EVEN RULE IOB(L)(A) DOES NOT AUTHORISE DISALLOW ANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE V IEW OF THE 'REVENUE THE EXPENDITURE WAS UNREMUNERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY ASSESSEE IN HIS BUSINESS, HE COU LD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE IOB. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR ASSESSEE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF AS BUSINESS EXP ENDITURE, HE HAS NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A P ART THEREOF ON THE GROUND THAT ASSESSEE HAS SUFFERED CONTINUOUS LOSSES . THE FINANCIAL 58 HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDG E ALLOWABILITY OF AN EXPENSE; THERE IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PRESENT CASE IS TO HOLD THAT ASSESSEE O UGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/BRAND FEE , BECAUSE IT HAS BEEN SUFFERING LOSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCUR RED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELINES., HE IS EXPECTED TO EXAMINE THE INTERNAT IONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJU STMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICUL ARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR A UTHORISED. 23. APART FROM THE LEGAL POSITION STATED ABOVE, EVEN ON MERITS THE DISALLOWANCE OF THE ENTIRE BRAND FEE/ROYALTY PAYMEN T WAS NOT WARRANTED. ASSESSEE HAS FURNISHED COPIOUS MATERIAL AND VALID R EASONS AS TO WHY IT WAS SUFFERING LOSSES CONTINUOUSLY AND THESE HAVE BE EN REFERRED TO BY US EARLIER. FULL JUSTIFICATION SUPPORTED BY FACTS AND FIGURES HAVE BEEN GIVEN TO DEMONSTRATE THAT THE INCREASE IN THE EMPLOYEES C OST, FINANCE CHARGES, ADMINISTRATIVE EXPENSES, DEPRECIATION COST AND CAPACITY INCREASE HAVE CONTRIBUTED TO THE CONTINUOUS LOSSES. THE COMPARAT IVE POSITION OVER A PERIOD OF 5 YEARS FROM 1998 TO2003WITH RELEVANT FIG URES HAVE BEEN GIVEN BEFORE THE CIT (APPEALS) AND THEY ARE REFERRED TO I N A TABULAR FORM IN HIS ORDER IN PARAGRAPH 5.5.1.IN FACT THERE ARE FOUR TABULAR STATEMENTS FURNISHED BY ASSESSEE BEFORE THE CIT(AP PEALS) IN SUPPORT OF THE REASONS FOR THE CONTINUOUS LOSSES. THERE I S NO MATERIAL BROUGHT BY THE REVENUE EITHER BEFORE THE CIT(APPEALS) OR BEFORE TH E TRIBUNAL OR EVEN BEFORE US TO SHOW THAT THESE ARE INCORRECT FIGURES OR THAT EVEN ON MERITS THE REASONS FOR THE LOSSES ARE NOT GENUINE. 24. WE ARE, THEREFORE, UNABLE TO HOLD THAT THE TRIB UNAL COMMITTED ANY ERROR IN CONFIRMING THE ORDER OF THE CIT (APPEALS) FOR BOTH THE YEARS DELETING THE DISALLOWANCE OF THE BRAND FEE I ROYALTY PAYMENT WHI LE DETERMINING THE ALP, ACCORDINGLY, THE SUBSTANTIAL QUESTIONS OF LAW ARE A NSWERED IN THE AFFIRMATIVE AND IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE. TH E APPEALS ARE ACCORDINGLY DISMISSED WITH NO ORDER AS TO COSTS. 97. WE FURTHER FIND THAT THE SAID PRINCIPLE HAS BEE N APPLIED BY HYDERABAD BENCH OF THE TRIBUNAL IN GROUP OF CASES W ITH LEAD ORDER IN ITA NO.944/HYD/2007 IN THE CASE OF TNS INDIA PVT. L TD. VS. ACIT RELATING TO ASSESSMENT YEAR 2003-04. THE TRIBUNAL VIDE ORDER DATED 22.1.2014 APPLIED THE SAID PRINCIPLE TO HOLD THAT THE TPO WENT BEYOND HIS JURISDICTION IN DENYING THE PAYMENT OUT-RIGHTLY , WHEREAS, HIS ROLE IS LIMITED TO DETERMINING THE ALP. IN THE GUISE OF D ETERMINATION OF ALP, THE TPO CANNOT QUESTION THE BUSINESS DECISION OF PA YMENT AND DETERMINE THAT NO SERVICES WERE RENDERED. IN THAT VIEW OF T HE MATTER, THE DIRECTION OF THE TPO, CANNOT BE UPHELD AT ALL . 59 98. THE TPO IN THE PRESENT CASE HAD SIMILARLY DENIE D THE PAYMENT TO THE ASSESSEE WHILE DETERMINING THE ARMS LENGTH PRI CE OF THE SAID TRANSACTIONS OF THE ASSESSEE WITH THE AE. FOLLOWI NG THE RATIO LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN CIT VS. EKL APPL IANCES LTD. (SUPRA) AND HYDERABAD BENCH OF THE TRIBUNAL IN TNS INDIA PV T. LTD. VS. ACIT (SUPRA), WE HOLD THAT THE TPO EXCEEDED ITS JURISDIC TION IN DENYING THE SAID PAYMENT WHILE DETERMINING THE ARMS LENGTH PRI CE OF THE SAID TRANSACTIONS AND HOLDING THAT NO SERVICES WERE REND ERED BY THE AES. 99. WE HAVE GONE THROUGH VARIOUS DOCUMENTS FILED BY THE ASSESSEE BEFORE THE TPO AND ALSO BEFORE US, UNDER WHICH THE ASSESSEE HAS ENLISTED VARIOUS SERVICES PROVIDED BY THE AE TO ASSESSEE COM PANY, WHICH WE HAVE REFERRED TO IN THE PARAS HEREINABOVE. IN THE ENTI RETY OF THE ABOVE SAID EVIDENCE PRODUCED BY THE ASSESSEE, IT CANNOT BE SAI D THAT NO SERVICES WERE PROVIDED BY THE AE. THE TPO HAS DISREGARDED THE DOCUMENTS FILED BEFORE HIM. FURTHER THE DRP, PANEL-1, NEW DELHI RE LATING TO ASSESSMENT YEAR 2008-09 HAS HELD THAT SOME BENEFITS WERE ALLOW ABLE TO THE ASSESSEE. IN ADDITION TO VARIOUS SERVICES PROVIDED CERTAIN FI NANCIAL BENEFITS IN TERMS OF SAVINGS WERE ALSO MADE AVAILABLE TO THE AS SESSEE ON ACCOUNT OF THE FOLLOWING: (I) BETTER TERMS FOR FINANCIAL CHARGES. (II) ISSUANCE OF LETTER OF CREDIT OF EURO 10 MILLI ON (APPROXIMATELY 63 CRORES IN ASSESSMENT YEAR 2007-08. (III) GUARANTEE IN ASSESSMENT YEAR 2008-09. (IV) REDUCTION IN FEES CHARGED BY BANKS FROM THE A SSESSEE. 100. THE LEARNED A.R. FOR THE ASSESSEE HAS FURTHER FURNISHED REJOINDER TO THE SUBMISSIONS OF THE LEARNED D.R. FOR THE REVE NUE ON 12.2.2014 IN WHICH IT HAS FILED THE DOCUMENTS IN RELATION TO THE LOAN AGREEMENT ENTERED BY THE ASSESSEE WITH DEUTSCHE BANK, AGAINST WHICH IT HAD AVAILED TERM LOAN FROM THE SAID LOAN AMOUNTING TO RS.52.63 CRORES IN ASSESSMENT 60 YEAR 2008-09. ANOTHER DOCUMENTS FILED BY THE ASSE SSEE IS LETTER ISSUED BY DEUTSCHE TO THE AE CONFIRMING ASSUMPTION OF RISK ON BEHALF OF THE ASSESSEE. FURTHER THE COPY OF DEED OF PLEDGE OF S UM OF EURO 10 MILLIONS AS GUARANTEE AGAINST PROVIDING LOAN TO THE ASSESSEE HAS ALSO BEEN FILED. THE PLEA OF THE ASSESSEE WAS THAT AS PER THE BENCH- MARKING ANALYSIS CONDUCTED BY THE ASSESSEE, THE ARMS LENGTH PRICE O F THE GUARANTEE ISSUED BY AE TO THE ASSESSEE WAS 2.65% FOR FINANCIAL YEAR 2006-07 AND 4.65% FOR FINANCIAL YEAR 2007-08, WHICH TRANSLATE INTO BE NEFIT OF RS.1.39 CRORES AND RS.2.45 CRORES RESPECTIVELY. FURTHER DURING F INANCIAL YEAR 2007-08 THE ASSESSEE AVAILED LETTER OF CREDIT I.E. LC FACIL ITY FROM ROYAL BANK OF SCOTLAND AND SAME WAS ISSUED ON THE BASIS OF CORPOR ATE GUARANTEE AMOUNTING EURO 30 MILLIONS ISSUED BY THE ASSOCIATED ENTERPRISES. THE ASSESSEE SUBMITTED THAT FOR AVAILING LC FACILITY FI XED DEPOSIT WAS REQUIRED TO BE PLEDGED BY THE CUSTOMER AS A SECURIT Y AGAINST THE FACILITY AVAILED, HOWEVER, THE ASSESSEE DID NOT FURNISH ANY SECURITY AS GUARANTEE WAS PROVIDED BY THE AE. THE ASSESSEE HAS FURTHER FURNISHED ECONOMIC ANALYSIS UNDERTAKEN FOR BENCH-MARKING, THE GUARANTE E PROVIDED BY THE AE, WHICH WAS ATTACHED AS ANNEXURE-4 TO THE SAID RE JOINDER AND IT WAS CONCLUDED THAT THE GUARANTEE FEE CHARGED BY DSM NET HERLANDS TO THE ASSESSEE AT 4% FOR OVER ALL ARRANGEMENT WAS TO BE C ONSIDERED TO BE AT ARMS LENGTH UNDER THE INDIAN REGULATIONS. 101. IN THE TOTALITY OF THE FACTS AND CIRCUMSTANCES , THE TOTAL COST INCURRED BY VARIOUS ENTITIES OF THE GROUP INCURRED IN RELATION TO SERVICES RENDERED HAS BEEN ALLOCATED AMONGST THE GROUP COMPA NIES IN SYSTEMATIC MANNER. UNDER THE FORMULA AGREED UPON BETWEEN THE PARTIES, COSTS WERE CHARGED TO VARIOUS MEMBERS, DEPENDING ON THEIR CONT RIBUTION TO THE INVESTED CAPITAL AND GROSS VALUE ADDED AND APPROPRI ATE SHARE OF COST TO BE BORNE BY EACH ENTITY WAS WORKED OUT. THIS PRACTI CE WAS ADOPTED TO 61 ACHIEVE BUSINESS EFFICIENCY IN ORDER TO MEET THE DE MANDS OF CUSTOMERS AND TO RUN BASIC OPERATIONS MORE EFFICIENTLY IN GLO BALIZED AND COMPETITIVE MARKET. 102. THERE IS NOTHING TO SHOW THAT THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE WERE NOT AT ARMS LENGTH PRICE. IT IS IR RELEVANT AS TO WHAT BENEFIT THE ASSESSEE EVENTUALLY DERIVED FROM THE SA ID SERVICES BUT WHAT WAS ACTUALLY DETERMINATIVE FACTOR, SO FAR AS ALV AD JUSTMENT IS CONCERNED, AS TO WHAT THE ASSESSEE WOULD HAVE PAID FOR THESE SERVICES IN A SITUATION IN WHICH THESE SERVICES WERE RENDERED B Y A NON AE. AS IS CLEARLY EVIDENT FROM THE MATERIAL PRODUCED BEFORE U S, THE SERVICES WERE INDEED RENDERED BY AE AS IN EARLIER YEAR, IN RESPEC T OF WHICH NO ADJUSTMENT WAS MADE IN THE EARLIER YEARS BY THE TPO HIMSELF. THE ACTION OF THE TPO IN APPLYING CUP METHOD WITHOUT THERE BEI NG ANY VALID COMPARABLE WAS THUS PATENTLY INCORRECT. WE REVERS E THE FINDINGS OF THE TPO IN THIS REGARD. 103. THE LD. DR FOR THE REVENUE RELIED UPON VARIOUS DECISIONS. IN M/S KNORR-BREMSE INDIA PRIVATE LIMITED VS. ACIT, ITA NO . 5097/DEL/2011, AY 2007-08 DATED 31.10.2012, THE PROPOSITION LAID D OWN WAS THAT CUP METHOD HAD TO BE APPLIED AS NO TRANSACTION-WISE DET AILS WERE AVAILABLE. WE FIND NO MERIT IN THE SAID RELIANCE IN VIEW OF OU R HOLDING THAT THE TPO HAS FAILED TO POINT OUT ANY COMPARABLE FOR APPLYING THE CUP METHOD. FURTHER, SINCE THE TRANSACTION HAS BEEN FOUND TO BE AT ARMS LENGTH, THERE IS NO MERIT IN ANY ADJUSTMENT ON THIS ACCOUNT. 104. THE LD. DR FOR THE REVENUE FURTHER RELIED ON M /S GEM PLUS INDIA PVT. LTD. ITA NO.352/BANG/2009, DATED 21.10.2010. 2 010-TII-55-ITAT- BANG-TP, WHEREIN IT WAS HELD AS UNDER : WE HEARD BOTH SIDES IN DETAIL AND ALSO PERUSED THE RECORDS OF THE CASE INCLUDING THE PAPER BOOK FILED BY THE ASSESSEE COMP ANY RUNNING IN TO 62 390 PAGES. THE NECESSARY FACTS OF THE CASE HAVE ALR EADY BEEN DISCUSSED IN PARAGRAPHS ABOVE. ON EXAMINATION OF T HE FACTS AND CIRCUMSTANCES OF THE CASE AND THE TERMS OF THE AGRE EMENT ENTERED INTO BY THE ASSESSEE AND ITS SINGAPORE ASSOCIATE, THE TP O HAS COME TO CERTAIN PERTINENT OBSERVATIONS IN HER ORDER. SHE HA S OBSERVED THAT THE TERMS PRESCRIBED IN THE AGREEMENT IN RESPECT OF THE PAYMENTS TO BE MADE BY THE ASSESSEE COMPANY ARE INDEPENDENT OF THE NATURE AND VOLUME OF SERVICES, IF ANY RENDERED BY THE SINGAPOR E ASSOCIATE. THIS IS A VITAL OBSERVATION MADE BY THE TPO WHICH GOES TO T HE ROOT OF THE ISSUE. THE FUNCTION OF THE TPO IS TO COMPARE THE PA YMENTS MADE BY THE ASSESSEE COMPANY FOR SERVICES RECEIVED IF ANY AND T O SEE WHETHER THOSE PAYMENTS ARE COMPARABLE. IN A GIVEN SCENARIO, THE TPO HAS TO EXAMINE WHETHER THE PAYMENTS WERE AL P CONDUCIVE. THEREFORE IT IS VERY IMPERATIVE ON THE PART OF THE ASSESSEE TO ESTABLISH BEFORE THE TPO THAT THE PAYMENTS WERE MADE COMMENSU RATE TO THE VOLUME AND QUALITY OF SERVICES AND SUCH COSTS ARE C OMPARABLE. THE PAYMENT TERMS AS POINTED OUT BY THE TPO ARE INDEPEN DENT OF THE NATURE OR VOLUME OF SERVICES. THE ASSESSEE HAS DEFE ATED IN THIS PRIMARY EXAMINATION ITSELF. THE TPO IS ALSO JUSTIFIED IN MA KING A PERTINENT OBSERVATION THAT THE EXPENSES ARE APPORTIONED BY SI NGAPORE AFFILIATE AMONG DIFFERENT COUNTRY CENTERS ON THE BASIS OF THE IR OWN AGREEMENTS AND NOT ON THE BASIS OF THE ACTUAL SERVICES RENDERE D TO THE INDIVIDUAL UNITS. IT IS IN ADDITION TO THE ABOVE FUNDAMENTAL F LAW, THAT THE TPO HAS MADE A CLEAR FINDINGS THAT THERE ARE NO DETAILS AVAILABLE ON RECORD IN RESPECT OF TH E NATURE OF SERVICES RENDERED BY SINGAPORE AFFILIATE TO THE ASSESSEE COM PANY. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE TPO IS JUSTI FIED IN HOLDING THAT THE ASSESSEE HAS NOT PROVED ANY COMMENSURATE BENEFI TS AGAINST THE PAYMENTS OF SERVICE CHARGES TO THE SINGAPORE AFFILI ATE. THEREFORE, THE TPO IS JUSTIFIED IN MAKING THE ADJUSTMENT OF ALP UN DER SECTION 92CA OF THE INCOME TAX ACT,1961. 105. FURTHER, IN M/S DELOITTE CONSULTING INDIA PVT. LTD. ITA NO.579,1272,1273/MUM/2011 ORDER DATED 30.03.2012 RE LIED UPON BY THE LD. DR FOR THE REVENUE, THE PROPOSITION LAID DOWN I N M/S GEM PLUS INDIA PVT. LTD. ITA NO.352/BANG/2009, DATED 21.10.2010. 2 010-TII-55-ITAT- BANG-TP WAS APPLIED AND IT WAS HELD AS UNDER : 40. IN THE CASE ON HAND, THE TPO HAS DETERMINED T HE ALP AT 'NIL' KEEPING IN VIEW THE FACTUAL POSITION AS TO WHETHE R IN A COMPARABLE CASE, SIMILAR PAYMENTS WOULD HAVE BEEN MADE OR NOT IN TERMS OF THE AGREEMENTS. THIS IS A CASE WHERE THE ASSESSEE HAS N OT DETERMINED THE ALP. THE BURDEN IS INITIALLY ON THE ASSESSEE TO DET ERMINE THE ALP. THUS, THE ARGUMENT OF THE ASSESSEE THAT THE TPO HAS EXCEE DED HIS JURISDICTION BY DISALLOWING CERTAIN EXPENDITURE IS AGAINST THE FACT S. THE TPO HAS NOT DISALLOWED ANY EXPENDITURE. ONLY THE ALP WAS DETERM INED. IT WAS THE ASSESSING OFFICER WHO COMPUTED THE INCOME BY ADOPTI NG THE ALP DECIDED BY THE TPO AT 'NIL'. 106. HOWEVER, BOTH THESE PROPOSITIONS LAID DOWN IN M/S GEM PLUS INDIA PVT. LTD. (SUPRA) AND M/S DELOITTE CONSULTING INDIA PVT. LTD. (SUPRA) WAS 63 OVER-RULED BY THE RATIO LAID DOWN BY THE HON'BLE DE LHI HIGH COURT IN CIT VS EKL APPLIANCES LTD. (SUPRA). THE RATIO IN M/S DELOITTE CONSULTING INDIA PVT. LTD. (SUPRA) WAS LAID DOWN BE CAUSE OF THE PECULIAR FACTS OF THE CASE AND AS LAID DOWN BY VARIOUS COURT S, THE SAID PROPOSITION CANNOT BE UNIVERSALLY APPLIED. 107. ANOTHER ASPECT RAISED BY THE TPO WAS THAT EVEN AFTER PAYING SAID CORPORATE SERVICE CHARGES, NO BENEFIT HAD ARISEN TO THE ASSESSEE AS THE ASSESSEE WAS RUNNING INTO LOSSES. WE FIND NO MERIT IN THE SAID PLEA OF THE TPO TO DICTATE WHAT THE BUSINESS DEALS OF THE A SSESSEE SHOULD BE. IT IS THE BUSINESS SMAN WHO CAN ONLY JUDGE THE LEGITIM ACY OF THE BUSINESS NEEDS OF THE COMPANY FROM THE POINT OF VIEW OF A PR UDENT BUSINESSMAN. THE BENEFIT DERIVED AND OCCURRING TO THE COMPANY MU ST ALSO BE CONSIDERED FROM THE ANGLE OF A PRUDENT BUSINESSMAN. SUCH WAS THE PROPOSITION LAID DOWN BY THE DELHI BENCH OF TRIBUNA L IN MCCANN ERICKSON INDIA PVT. LTD. VS ADDL. CIT (SUPRA). APP LYING THE SAID PRINCIPLE, WE HOLD THAT IT IS NOT OPEN TO THE ASSES SING OFFICER TO DECIDE THE NECESSITY OR OTHERWISE OF AN EXPENDITURE INCURR ED BY A BUSINESSMAN. THE BENEFIT ARISEN TO A COMPANY ARE WIDE AND VARIED . WE HAVE ELABORATELY CONSIDERED THE NATURE OF SERVICES PROVI DED BY THE AE TO THE ASSESSEE BEFORE US AND IT CANNOT BE SAID THAT NO BE NEFITS HAVE ARISEN TO THE ASSESSEE. IN ADDITION TO THE BENEFITS ARISING FOR CONDUCTING THE BUSINESS IN A MORE SYSTEMATIC MANNER, THE ASSESSEE HAS ALSO MADE SUFFICIENT SAVINGS ON ACCOUNT OF THE GUARANTEE PROV IDED BY THE AE AND ALSO RATE CORRECTION ON THE BORROWINGS MADE BY THE ASSESSEE. 108. THE LD. DR FOR THE REVENUE FURTHER POINTED OUT THAT THE DIRECT COST ALLOCATION IS TO BE MADE WHERE SERVICES GIVEN BY TH E AE ARE QUANTIFIED ON THE COST WITH A MARK UP VALUE. WE FIND NO MERIT IN THE SAID STAND OF THE LD. DR AS THE ASSESSEE WHILE CONDUCTING HIS BUS INESS IS THE BEST 64 PERSON IN CHARGE OF THE BENEFITS ARISING TO IT AND THE COST OF SUCH BENEFITS HAVE TO BE CONSIDERED FROM THE ANGLE OF A PRUDENT BUSINESSMAN. THE REVENUE HAS FAILED TO BRING ON RECORD ANY EVIDE NCE TO NEGATE THE CLAIM OF THE ASSESSEE VIS--VIS THE SERVICES RECEIV ED ON VARIOUS ACCOUNTS AND IN VIEW OF THE EVIDENCES REFERRED TO BY US AND CONSIDERING THE NATURE OF BUSINESS AND IN VIEW OF THE FACTS AND CIRCUMSTAN CES, WE FIND MERIT IN THE CLAIM OF THE ASSESSEE AND WE FIND NO JUSTIFICAT ION TO SUSTAIN THE ADDITION MADE BY THE TPO. 109. SIMILAR PRINCIPLE WAS LAID DOWN BY THE MUMBAI BENCH OF TRIBUNAL IN DRESSER-RAND INDIA PVT. LTD. VS. ADDL. CIT (SUPRA) WHEREIN IT HA S BEEN HELD THAT WHERE THERE ARE CONTEMPORANEOUS EVID ENCES BY WAY OF EXCHANGE OF E-MAILS, REPORTS, GUIDANCE NOTES WHICH SHOW THAT THE ASSESSEE HAD RECEIVED THE SERVICES FROM THE AE AND WHERE ALL THE EVIDENCES WERE BEFORE THE TPO AND THE DRP, IN THE A BSENCE OF ANY WHISPER ABOUT WHAT WAS THE NATURE OF THE SAID DOCUM ENTS AND WHY THE SAID DOCUMENTS WERE NOT FOUND TO BE SATISFACTORY, T HERE IS NO MERIT IN THE ORDER OF THE TPO IN REJECTING THE SAID EVIDENCE. 110. IN VIEW OF THE ABOVESAID PRINCIPLES LAID DOWN, WE FIND NO MERIT IN THE ADJUSTMENTS MADE BY THE TPO. ANOTHER ASPECT IS TO BE KEPT IN MIND WHILE DECIDING THE ISSUE. THE PLEA RAISED BY THE L D. AR FOR THE ASSESSEE WAS THAT SAVINGS TO THE ASSESSEE AS RESULT OF SERVI CES PROVIDED BY THE AE SHOULD BE CONSIDERED WHILE HOLDING THE TRANSACTION TO BE AT ARMS LENGTH. IT WAS FAIRLY CONCEDED BY THE LD. AR FOR THE ASSESS EE THAT UNDER INTERNATIONALLY ACCEPTED NORMS, SAVINGS ARE TO BE S HARED BETWEEN THE PARTIES IN THE RATIO OF 50 : 50. THE LD. AR FOR TH E ASSESSEE FURTHER POINTED OUT THAT THE SAVINGS ON ACCOUNT OF GUARANTE E FEE IN ASSESSMENT YEAR 2007-08 WERE RS. 1.40 CR AND THE TOTAL SAVINGS IN ASSESSMENT YEAR 2008-09 WERE RS. 9.29 CR. THE TPO IN ASSESSMENT YE AR 2007-08 HAS 65 MADE AN ADJUSTMENT OF RS. 2,91,95,471/- AND IN THE ASSESSMENT YEAR 2008-09 HAS MADE AN ADJUSTMENT OF RS. 6,14,13,983/- . IN VIEW OF THE ADMISSION OF THE ASSESSEE, WE ARE OF THE VIEW THAT 50% OF THE BENEFITS ARISING TO THE ASSESSEE ON ACCOUNT OF FINANCIAL BEN EFITS IS TO BE RETAINED BY THE ASSESSEE IN INDEPENDENT PARTY TRANSACTION. H OWEVER, IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE HAS TRANSFERRED 1 00% OF THE SAID BENEFITS TO THE AE BY WAY OF PAYING THE CORPORATE S ERVICE CHARGES. ACCORDINGLY, WE DIRECT THE TPO/A.O. TO DISALLOW 50% OF THE BENEFITS ARISING ON ACCOUNT OF GUARANTEE FEE AND INTEREST CO ST AS BEING NOT ON ARMS LENGTH AND THE BALANCE PAYMENT IS ALLOWABLE I N THE HANDS OF THE ASSESSEE AS BEING ON ARMS LENGTH AGAINST WHICH NO ADJUSTMENT IS TO BE MADE. THE TPO/A.O. SHALL AFFORD REASONABLE OPPORTU NITY OF HEARING TO THE ASSESSEE TO DETERMINE THE TOTAL FINANCIAL BENEF ITS ARISING TO THE ASSESSEE IN THE RESPECTIVE YEARS. THE GROUNDS OF A PPEAL RAISED BY THE ASSESSEE ARE THUS, PARTLY ALLOWED. 111. THE FACTS IN ITA NO.1290/CHD/2012 ARE IDENTICA L TO THE FACTS IN ITA NO. 1139/CHD/2011 AND OUR DECISION ON TRANSFER PRICING ADJUSTMENT IN ITA NO. 1139/CHD/2011 SHALL APPLY MUTATIS-MUTAND IS TO ITA NO. 1290/CHD/2012 ALSO. 112. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSE E ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 7 TH DAY OF AUGUST, 2014. SD/- SD/- (T.R.SOOD) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 7 TH AUGUST, 2014 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH 66