GlaxoSmithKline Consumer Healthcare Ltd., Nabha V. Addl. CIT, Chandigarh

ITA 1324/CHANDI/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68444 (ITAT-CHANDIGARH)
• Duration Of Justice: 8 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 01-05-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 20-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJAY SHARMA
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; Principle of natural justice; International transaction; Earning of tax free income; Period of limitation; Proportionate interest; Retrospective amendment; Question of law; Cost of acquisition; Avoidance of tax; Procedural lapse; Time period of passing order; Capital expenditure
• Section: 92C; 43B; 143(3); 92D; 92B; 92F; 234B; 14A; 37(1); 10B; 154; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B, CHANDIGARH BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.1324 /CHD/2012 (ASSESSMENT YEAR : 2007-08) M/S GLAXO SMITHKLINE CONSUMER, VS. THE ADDL. C. I.T., HEALTHCARE LTD., RANGE-IV, DLF PLAZA TOWERS, CHANDIGARH. DLF CITY PHASE-I, GURGAON. PAN: AACCS0144E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI AJAY VOHRA RESPONDENT BY : SHRI AJAY SHARMA, DR DATE OF HEARING : 25.06.2013 DATE OF PRONOUNCEMENT : 26.08.2013 O R D E R PER SUSHMA CHOWLA, J.M. : THE PRESENT APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE ASSESSING OFFICER DATED 18.10.2011 PASSED UNDER SEC TION 143(3) R.W.S. 144C(3) OF THE INCOME TAX ACT, 1961 RELATING TO ASS ESSMENT YEAR 2008- 09. AS IMPUGNED ASSESSMENT ORDER IS PASSED AFTER A SSESSEES OBJECTIONS AGAINST THE PROPOSED ADDITIONS TO THE RETURNED INCO ME HAVING BEEN EXAMINED BY THE DISPUTE RESOLUTION PANEL, THIS IS A DIRECT APPEAL AGAINST THE ASSESSMENT ORDER. 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE REA D AS UNDER: 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPLETING THE ASSESSMENT UNDER SECTION143(3) READ WITH SECTION 144C OF THE I NCOME-TAX ACT ('THE ACT') AT AN INCOME OF RS.449,77,86,367/- AS AGAINST THE R ETURNED INCOME OF RS.275,73,15,234/-. 2 TRANSFER PRICING ISSUES: 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING ADDITION TO THE INCOME OF THE APPELLANT TO THE EXTENT OF RS.106,44, 25,680 ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARM'S LENGTH PRICE OF INTERNATION AL TRANSACTIONS. 2.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN MAKING TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 106,44,25,680 IN RELATI ON TO THE ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENSES (HEREINAFTER REFERRED TO AS 'THE AMP EXPENSES') INCURRED BY THE APPELLANT. 2.2 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION, U NILATERALLY INCURRED BY THE APPELLANT, COULD NOT BE REGARDED AS A 'TRANSACTION' IN THE ABSENCE OF ANY UNDERSTANDING / ARRANGEMENT BETWEEN THE APPELLANT A ND THE ASSOCIATED ENTERPRISE. 2.3 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT THE AMP EXPENSES, ETC., INCURRED BY THE APPELLANT I N INDIA CANNOT BE CHARACTERIZED AS AN INTERNATIONAL TRANSACTION AS PE R SECTION 92B, SO AS TO INVOKE THE PROVISIONS OF SECTION 92 OF THE ACT. 2.4 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT THE AMP EXPENSES UNILATERALLY INCURRED BY THE APPEL LANT CANNOT BE CHARACTERIZED AS INTERNATIONAL TRANSACTION, EVEN AF TER THE AMENDMENT BROUGHT IN BYFINANCEACT2012 INSERTING AN EXPLANATIO N TO SECTION 92B. 2.5 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN HOL DING THAT SINCE THE APPELLANT WAS MANUFACTURER - CUM - DISTRIBUTOR OF P RODUCTS IN INDIA, IT WAS REQUIRED TO INCUR CERTAIN ROUTINE EXPENDITURE AS LI MITED RISK DISTRIBUTOR BUT IT HAS INCURRED CERTAIN NON-ROUTINE EXPENDITURE FOR THE AE FOR PROMOTING BRAND IN INDIA AND DEVELOPING MARKETING INTANGIBLE FOR THE AE FOR WHICH IT HAS NOT BEEN COMPENSATED. 2.6 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN CON CLUDING THAT THE APPELLANT HAD INCURRED HUGE AMP EXPENDITURE ON PROMOTION OF B RAND / MARKETING INTANGIBLES OWNED BY THE ASSOCIATED ENTERPRISE MAKI NG THE SAME MORE VALUABLE, BY BEARING RISK AND USING BOTH TANGIBLE AND HUMAN A SSETS INTANGIBLES, WHICH LED TO ENHANCED SALE OF PRODUCTS AND INCREASE PROFITABILIT Y OF THE ASSOCIATED ENTERPRISES AND, THEREFORE, ASSOCIATED ENTERPRISES WERE OBLIGED TO REIMBURSE A PART OF THE AMP EXPENDITURE. 2.7 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND I N LAW IN HOLDING THAT AMP EXPENSES INCURRED BY THE APPELLANT RESULTED IN PROM OTION OF BRAND OWNED BY THE ASSOCIATED ENTERPRISE, THEREBY CREATING MARKETING I NTANGIBLES WHOSE ULTIMATE BENEFIT INURED TO THE ASSOCIATED ENTERPRISE. 2.8 THAT THE TPO / DRP ERRED ON FACTS AND IN LAW IN HOL DING THAT THE APPELLANT HAS PROVIDED SERVICES OF SIGNIFICANT VALUE BY INCURRING SIGNIFICANT AND SUBSTANTIAL COST AND THE AES HAVE RECEIVED SIGNIFICANT, ECONOMI C AND COMMERCIAL BENEFIT LIKE ENHANCED VALUE OF GLAXO AND HORLICKS' TRADEMARK IN INDIA AND DEVELOPMENT OF MARKETING INTANGIBLES IN INDIA. 2.9 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN NOT APPRECIATE THE AMP EXPENSES INCURRED BY THE APPELLANT WERE FOR SALE OF THE PRODUCTS MANUFACTURED BY THE APPELLANT IN INDIA AND THE TRADEMARK 'HORLICKS' WAS ONLY ASSOCIATED WITH SUCH PRODUCTS. 2.10 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN NOT APPRECIATING THAT 3 ADVERTISEMENT AND MARKETING EXPENSES WAS NOT INCURR ED BY THE APPELLANT ON BEHALF OF OR FOR THE BENEFIT OF THE AE, AND THE BENEFIT TO THE AE, IF ANY, IS ONLY INCIDENTAL. 2.11 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND I N LAW IN NOT APPRECIATING THAT IN THE ABSENCE OF ANY UNDERSTANDING / ARRANGEMENT BETW EEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE, THE ASSOCIATED ENTERPRISE WA S UNDER NO OBLIGATION TO REIMBURSE THE AMP EXPENSES INCURRED BY THE APPELLAN T FOR SALE OF ITS PRODUCTS. 2.12 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN NOT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT, DID NOT RES ULT IN CREATION OF ANY MARKETING INTANGIBLES; MUCH LESS ON ACCOUNT OF THE AE. 2.13 THE TPO / DRP ERRED ON FACTS AND IN LAW IN HOLDING THAT THE EFFORTS TO CREATE MARKETING INTANGIBLES ARE IN THE NATURE OF SERVICES AND ENTREPRENEURIAL EFFORTS UNDERTAKEN BY THE APPELLANT. 2.14 THAT THE ASSESSING OFFICER ERRED IN FAILING TO APPR ECIATE THAT THE SCHEME OF TRANSFER PRICING UNDER CHAPTER-X OF THE ACT ONLY PROVIDES FOR DETERM INATION OF 'PRICE' FROM AN INTERNATIONAL TRANSACTION INCLUDING ANY EXPENDITURE ARISING FROM AN INTERNATIONAL TRANSACTION BUT IT CANNOT DETERMINE THE 'QUANTUM' OF INTERNATIONAL TRANSACTIO N OR EXTENT OF BUSINESS EXPENDITURE. 2.15 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN NOT APPRECIATING THAT THE CHARACTERIZATION OF THE APPELLANT BEING THAT OF A FULL FLEDGED MANUF ACTURER JUSTIFIES THE CONDUCT OF THE APPELLANT IN INCURRING AND BEARING THE COST OF AMP EXPENDITUR E. 2.16 THAT THE DISPUTE RESOLUTION PANEL ERRED ON FACTS AN D IN LAW IN CONFIRMING THE ADJUSTMENT MADE BY THE TPO WITH REGARD TO THE AMP EXPENSES HOL DING THAT (1) NO INDEPENDENT PERSON, PARTICULARLY IN A LONG TERM ARRANGEMENT, WOULD FORE GO THE COMPENSATION FOR THE ADDITIONAL MARKETING ACTIVITIES UNDERTAKEN BY THE APPELLANT, ( II) THE AE NEEDS TO COMPENSATE THE APPELLANT AS IT HAD BEEN FOUND THAT THE APPELLANT HAD INCURRE D EXCESSIVE AMP EXPENSES, AND DEVELOPMENT AND PROMOTION OF A BRAND IN INDIA DIREC TLY BENEFITTED THE AE ALSO. 2.17 THAT THE ASSESSING OFFICER/DRP ERRED IN DEEMING AN INTERNATIONAL TRANSACTION OF PROVISION OF SERVICE ALLEGEDLY APPLYING BRIGHT LINE TEST (BLT) H OLDING THAT THE AMP/SALES RATIO OF THE APPELLANT ALLEGEDLY EXCEEDS THE AMP/SALES RATIO OF THE FOLLOWING COMPARABLE COMPANIES: SR. NO. NAME OF THE COMPARABLE COMPANY AMP AS %AGE OF SALES 1. NIJJER AGRO FOODS LTD. 0.23% 2. CROWN MILK SPECIALTIES PVT. LTD. 1.06% 3. PRIYA FOOD PRODUCTS LTD. 6.32% 4. MODERN DAMES LTD. 1.20% MEAN 2.20% 2.18 THE ASSESSING OFFICER ERRED ON FACTS AND HI LA W IN NOT APPRECIATING THAT 'BRIGHT LINE LIMIT' IS NOT A PRESCRIBED METHOD UNDER THE PURVIEW OF SEC TION 92C OF THE ACT. 2.19 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE POWER OF THE TPO IS RESTRICTED TO THE DETERMINATION OF ARM'S LEN GTH PRICE OF INTERNATIONAL TRANSACTIONS BY APPLYING ANY OF THE PRESCRIBED METHOD AND NOT TO MA KE DISALLOWANCE OF BUSINESS EXPENSES INCURRED BY THE APPELLANT. 4 2.20 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN NOT APPRECIATING THAT IN ABSENCE OF SPECIFIC PROVISION UNDER THE TRANSFER PR ICING REGULATIONS IN INDIA, ADJUSTMENT ON ACCOUNT OF THE ARM'S LENGTH PRICE OF ADVERTISEMENT AND BRAND PROMOTION EXPENSES COULD NOT BE MADE BY APPLYING BL T. 2.21 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE AE HAS INDEPENDENTLY INCURRED SUBSTANTIAL EXPEN DITURE ON AMP, TO ADVERTISE AND PROMOTE THE BRAND IN THE OVERSEAS MARKET WHICH MUST HAVE ALSO BENEFITED THE APPELLANT. 2.22 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW HI RELYING UPON THE DECISION OF THE CASE OF DHL INCORPORATED AND SUBSIDIARIES VS. C OMMISSIONER OF INTERNAL REVENUE TAX COURT, TCM 1998-461, AFF D IN PART, REV 'D IN PART 285F.3D.1285. 89AFTR2D2002-1978(CA-9,2002);AND GLAXO SMITH KLINE HOLDING (AMERICAS) INC. VS. COMMISSIONER, T.C.NO. 5750-04 AND T.C.NO. 6959- 05, WHICH WERE RENDERED IN THE CONTEXT OF SPECIFIC PROVISION UNDER THE TRAN SFER PRICING REGULATIONS OF UNITED STATES OF AMERICA. 2.23 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW HI CONSIDERING THE FOLLOWING EXPENSES FOR THE PURPOSE OF CALCULATING ALLEGED AMP EXPENDITURE OF THE APPELLANT PARTICULARS AMOUNT (RS IN LACS) SELLING AND DISTRIBUTION EXPENSES 1067.50 MARKET RESEA RCH EXPENSES 969.16 TOTAL 2036.66 2.24 WITHOUT PREJUDICE THAT THE ASSESSING OFFIC ER ERRED ON FACTS AND IN LAW HI NOT CONSIDERING THE FOLLOWING COMPANIES AS COMPARABLE F OR BENCHMARKING ADVERTISEMENT AND PUBLICITY EXPENSES: COMPANY NAME TOTAL SAL ES & DIST EXPN/SALES % CADBURY INDIA LTD. 18.03 GILLETTE INDIA LTD. 27.12 HINDUSTAN UNILEVER LTD. 20.20 NESTLE INDIA LTD. 9.32 PROCTER & GAMBLE HYGIENE & HEALTH CARE LTD. 19.72 18.88 2.25 THE TPO / DRP ERRED ON FACTS AND IN LAW HI HOLDING THAT FOR THE PURPOSE OF COMPUTING THE BRIGHT LINE AMP EXPENSES COMPANIES WH ICH ARE ENGAGED HI BRAND BUILDING EXERCISE AND CREATING MARKETING INTANGIBLE S FOR THEIR BRANDS CANNOT BE TAKEN AS COMPARABLES, AND ONLY ROUTINE DISTRIBUTORS ARE TO BE TAKEN WHO ARE NOT 5 ENGAGED IN ANY BRAND BUILDING EXERCISE CREATING MAR KETING INTANGIBLES FOR THEIR BRANDS CANNOT BE TAKEN AS COMPARABLES, AND ONLY ROU TINE DISTRIBUTORS ARE TO BE TAKEN WHO ARE NOT ENGAGED IN ANY BRAND BUILDING EXERCISE. 2.26 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN REJECTING THE BENCHMARKING ANALYSIS UNDERTAKEN BY THE APPELLANT W HEREIN CLOSELY LINKED TRANSACTIONS WERE BENCHMARKED TOGETHER AND INSTEAD SEGREGATING THE AMP EXPENSES FOR THE PURPOSE OF BENCHMARKING SUCH TRANSACTIONS. 2.27 THE TPO / DRP ERRED ON FACTS AND IN LAW IN HOLDING THAT 'AS THESE COMPARABLES WERE SELECTED BY THE TAXPAYER ITSELF AFTER UNDERTAK ING A DETAILED SEARCH PROCESS AND AFTER DOING AN ELABORATE FAR ANALYSIS THERE IS NO R EASON TO DISREGARD THEM FOR THE PURPOSES OF BRIGHT LINE DETERMINATION. THIS IS MORE SO AS THE TAXPAYER HAS SELECTED TNMM AS THE MOST APPROPRIATE METHOD AND HA S SELECTED COMPARABLES WHO ARE FUNCTIONALLY SIMILAR TO IT. 2.28 WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW, HI NOT APPRECIATING THAT THE AMP EXPENSES INCURRED BY THE APPELLANT WAS APPROPRIATELY ESTABLISHED TO BE AT ARM'S LENGTH APPLYING TRANSACT IONAL NET MARGIN METHOD (TNMM) ON ENTITY-WIDE BASIS. 2.29 THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND I N LAW IN HOLDING THAT THE APPELLANT HAS RENDERED SERVICE TO THE AES BY INCURR ING THE AMP EXPENSE AND BY HOLDING THAT MARKUP HAS TO BE EARNED BY THE APPELLA NT IN RESPECT OF THE AMP EXPENSES, ALLEGED TO HAVE INCURRED FOR AND ON BEHALF OF THE A E. 2.30 WITHOUT PREJUDICE, THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW HI NOT APPRECIATING THAT MARKUP, IF AT ALL, HAD TO BE REST RICTED TO THE VALUE ADDED EXPENSES INCURRED BY THE APPELLANT FOR PROVIDING THE ALLEGED SERVICE IN THE NATURE OF BRAND PROMOTION. CORPORATE TAX ISSUES 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING CONSUMER MARKET RESEARCH EXPENSES OF RS. 9,69,15,622/- UNDER SECTION 37(1) OF THE ACT ALLEGING THE SAME TO BE CAPITAL IN NATURE. 4. WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER ER RED ON FACTS AND IN LAW IN NOT ALLOWING DEPRECIATION ON THE AMOUNT OF MARKET RESEA RCH EXPENSES DISALLOWED AS CAPITAL EXPENDITURE. 4.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND H I LAW IN REDUCING THE RETURNED INCOME BY AN AMOUNT OF RS. 170,88,165/-, WITHOUT AP PRECIATING THAT THE ASSESSEE HAD CLAIMED A DEDUCTION OF THE CLOSING BALANCE LYING IN PLA AMOUNTING TO RS. 32,62,786/- AND CONSEQUENTLY ADDED BACK THE OPENING BALANCE LYI NG IN PLA AMOUNTING TO RS. 2,03,50,951/- RESULTING IN A NET ADDITION OF RS. 1, 70,88,165/- 6 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING DISALLOWANCE OF RS.1,72,00,000/-, CLAIMED IN RESPEC T OF LIABILITY FOR POST RETIREMENT MEDICAL BENEFITS TO EMPLOYEES ON THE BAS IS OF ACTUARIAL VALUATION, IN ACCORDANCE WITH THE REVISED ACCOUNTING STANDARD 15, RELATING TO ACCOUNTING OF EMPLOYEE BENEFITS, ON T HE GROUND THAT SAME IS AN UNASCERTAINED LIABILITY. 5.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN OBSERVING THAT THE AFORESAID PROVISION MADE FOR POST RETIREMENT MEDICA L BENEFITS TO EMPLOYEES HAS RESULTED IN DOUBLE DEDUCTION TO EMPLOYEES INASMUCH AS DEDUCTION HAS ALSO BEEN CLAIMED BY THE ASSESSEE IN RESPECT OF MEDICAL INSUR ANCE PREMIUM PAID DURING THE RELEVANT YEAR(S). 5.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN OBSERVING THAT THE PROVISION HAS BEEN MADE BY DEBITING THE GENERAL RES ERVES WITHOUT APPRECIATING THAT THE SAID PROVISION WAS MADE BY DEBITING THE PR OFIT AND LOSS ACCOUNT AND NOT THE GENERAL RESERVES OF THE APPELLANT. 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING EXPENDITURE AGGREGATING TO RS.55,56,64,000, INCURRED BY THE APP ELLANT DURING THE RELEVANT PREVIOUS YEAR ON ACCOUNT OF ROYALTY, HOLDING THE SA ME TO BE CAPITAL IN NATURE. 6.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN NOT FOLLOWING THE BINDING DIRECTIONS OF THE DISPUTE RESOLUTION PANEL ('DRP') TO RE-DETERMINE THE ISSUE AFTER VERIFICATION OF FACTS WITH REFERENCE TO THE AGREEME NT ENTERED INTO BY THE APPELLANT. 6.2 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEPRECIATION ON AFORESAID EXPENDITURE INCU RRED ON ACCOUNT OF ROYALTY DISALLOWED AS CAPITAL EXPENDITURE. 7. THAT THE ASSESSING OFFICER ERRED ON F ACTS AND IN LAW IN DISALLOWING INTEREST OF RS.1,54,76,000/- AS CAPITAL EXPENDITU RE IN TERMS OF PROVISO TO SECTION 36 (L)(III) OF THE ACT ALLEGING THE SAME TO HAVE BEEN INCURRED FOR INVESTMENT MADE HI CAPITAL WORK IN PROGRESS ('CWIP'). 7. 1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN PROCEEDING ON A FACTUALLY INCORRECT PREMISE THAT THE APPELLANT HAD BORROWED F UNDS WHICH HAVE BEEN UTILIZED FOR MAKING INVESTMENT IN CWIP, WITHOUT APP RECIATING THAT THE APPELLANT HAD NO BORROWED FUNDS AT ALL. 7.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN HOLDING/ OBSERVING THAT THE APPELLANT FAILED TO FURNISH COMPLETE DETAILS IN RES PECT OF LOAN FUNDS. 7.3 THAT THE DRP ERRED ON FACTS AND IN LAW IN HOLDING T HAT (A) THE APPELLANT WAS NOT ABLE TO ESTABLISH THAT OWN FUNDS WERE UTILIZED FOR INVESTMENT IN CWIP; AND (B) SINCE COMMON POOL OF FUNDS WERE UTILIZED BY THE APPELLANT , THE ASSESSING OFFICER WAS JUSTIFIED IN COMPUTING PROPORTIONATE INTEREST FOR T HE PURPOSE OF DISALLOWANCE. 7 7.4 WITHOUT PREJUDICE, THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW HI NOT ALLOWING DEPRECIATION (IN THE YEAR OF CAPITALIZATION OF T HE CWIP) ON INTEREST EXPENSES OF RS. 1,54,76,000/- HELD TO BE CAPITAL IN NATURE. 8. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING FURTHER DISALLOWANCE OF RS. 1,02,32,000 UNDER SECTION 14A OF THE ACT, BEING THE DIFFERENCE BETWEEN DISALLOWANCE COMPUTED AS PER METHOD PROVIDE D IN RULE 8D OF THE INCOME TAX RULES, 1962 ('THE RULES') AND THE AMOUNT SUO MOTU D ISALLOWED BY THE APPELLANT. 8.1 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN INVOKING RULE 8D OF THE RULES AND COMPUTING DISALLOWANCE OF RS. 1,08,39,000/- UNDER SECTION 14A OF THE ACT, WITHOUT APPRECIATING THAT CONDITIONS PRECEDENT FOR APPLYING RULE 8D AS PRESCRIBED HI SUB-SECTIONS (2)7 (3) OF THE SAID SECTION WERE NOT SATISFIED. 8.2 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN ATTRIBUTING PART OF THE INTEREST EXPENDITURE INCURRED DURING THE YEAR TOWAR DS EARNING OF THE EXEMPT INCOME, WHILE COMPUTING DISALLOWANCE UNDER SECTION 14A OF T HE ACT HI ACCORDANCE WITH PROVISIONS OF RULE 8D OF THE RULES, WITHOUT APPRECI ATING THAT THE APPELLANT HAD NO BORROWED FUNDS AT ALL. 8.3 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN HOLDING THAT THE DISALLOWANCE OF RS.6,06,977/- MADE BY THE APPELLANT , SUO MOTU, IN THE RETURN OF INCOME UNDER SECTION 14A OF THE ACT WAS INCORRECT. 8.4 THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN NOT APPRECIATING THAT EVEN IN CASE OF MIXED POOL OF FUNDS, WHERE SURPLUS FUNDS AR E MORE THAN INVESTMENT MADE, A PRESUMPTION NEEDS TO BE DRAWN IN FAVOUR OF ASSESSEE THAT INTEREST FREE FUNDS HAVE BEEN UTILIZED FOR INVESTMENTS. 9. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN LEVYING INTEREST UNDER SECTIONS 234B AND 234C OF THE ACT. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR VARY, ANY OF THE AFORESAID GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 3. THE ASSESSEE HAD MADE AN APPLICATION FOR ENLARGE MENT OF GROUND OF APPEAL NO.2.23 AS UNDER: RE: REQUEST FOR ENLARGEMENT OF GROUNDS OF APPEA L NO. 2.23 GROUND OF APPEAL NO. 2.23 OF THE MEMORANDUM OF APPE AL READS AS FOLLOWS: 'WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING THE FOLLOWING EXPENSES FOR THE PURPOSE OF CALCULATI NG ALLEGED AMP EXPENDITURE OF THE APPELLANT 8 PARTICULARS AMOUNT (RS IN LACS) SELLING AND DISTRIBUTION EXPENSES 1067.50 MARKET RESEARCH EXPENSES 969.16 TOTAL 2036.66 THE APPELLANT SEEKS TO CRAVE LEAVE TO ENLARGE THE A BOVE GROUND OF APPEAL, READ AS UNDER: 'WITHOUT PREJUDICE THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN CONSIDERING THE FOLLOWING EXPENSES FOR THE PURPOSE OF CALCULATING A LLEGED AMP EXPENDITURE OF THE APPELLANT PARTICULARS AMOUNT (RS IN LACS) SELLING AND DISTRIBUTION EXPENSES 1067.50 MARKET RESEARCH EXPENSES 969.16 SALES PROMOTION 4,460.21 TOTAL 6,496.87 LESS ALLOWED BY TPO 1,167.35 BALANCE 5,329.52 THE FACTS IN RELATION TO THE AFORESAID GROUND OF AP PEAL ARE ALREADY ON RECORD. NO FRESH INVESTIGATION IN THE AFORESAID IS CALLED FOR. IT IS ACCORDINGLY PRAYED THAT THE ENLARGEMENT OF THE GROUND OF APPEAL MAY KINDLY BE PERMITTED AND THE SAME ADJUDICATED ON MERITS. 4. THE LEARNED A.R. FOR THE ASSESSEE VEHEMENTLY STR ESSED THAT THE SAID ENLARGEMENT OF GROUND OF APPEAL NO.2.23 MAY BE ALLO WED TO THE ASSESSEE IN ORDER TO ADJUDICATE THE ISSUE. THE LEARNED A.R. FOR THE ASSESSEE FURTHER SUBMITTED THAT THE SAID ISSUE IS SQUARELY C OVERED BY THE ORDER OF THE TRIBUNAL IN THE EARLIER YEAR. WITHOUT GOING IN TO THE MERITS OF THE SAID PLEA OF ENLARGEMENT OF GROUND OF APPEAL NO.2.2 3 WE ARE OF THE VIEW THAT THE GROUND OF APPEAL RAISED BY THE ASSESSEE I. E. ORIGINAL GROUND OF APPEAL NO.2.23 TAKES CARE OF THE ISSUE AND THERE IS NO MERIT IN THE REQUEST MADE BY THE LEARNED A.R. FOR THE ASSESSEE A ND THE SAME IS REJECTED. 5. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E WAS ENGAGED IN THE MANUFACTURING AND SELLING OF NUTRITIONAL PRODUCTS I .E. MALTED MILK FOOD PRODUCTS AND DRINKS UNDER THE BRANDS HORLICKS, BOOS T, MALTOVA AND VIVA. 9 DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE AL SO EXPORTED MALTED MILK FOOD TO ITS GROUP COMPANIES, WHICH WERE MANUFA CTURED BY THIRD PARTY VENDORS IN INDIA AND THUS ACTED AS TRADERS. FURTHER IT PROVIDED CERTAIN ADMINISTRATIVE SUPPORT SERVICES SUCH AS MAR KETING, SALES INPUTS, IT SUPPORT, TRAINING AND ACCOUNTING ETC. TO ITS GRO UP COMPANIES. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD ENTER ED INTO INTERNATIONAL TRANSACTION WITH ASSOCIATED ENTERPRISES AND THE AMO UNT OF TRANSACTION INVOLVED WAS MORE THAN RS.15 CRORES. THE ASSESSING OFFICER REFERRED THE CASE TO TRANSFER PRICING OFFICER (HEREIN AFTER REFER TO AS TPO, CHANDIGARH) FOR DETERMINING ARMS LENGTH PRICE IN R ELATION TO INTERNATIONAL TRANSACTIONS UNDER SECTION 92CA OF TH E ACT. THE ADDL. COMMISSIONER OF TRANSFER PRICING VIDE ORDER DATED 2 1.10.2011 COMPUTED THE VALUE OF INTERNATIONAL TRANSACTION UNDER SECTIO N 92CA(3) OF THE ACT AT RS.109,22,10,830/-. THE DISPUTE RESOLUTION PANE L THEREAFTER ISSUED DIRECTIONS UNDER SECTION 144C (5) OF THE ACT DATED 3.9.2012 PURSUANT TO WHICH THE ASSESSING OFFICER HAD PASSED THE ORDER UN DER SECTION 143(3) R.W.S. 144C OF THE ACT DATED 3.9.2012. THE ASSESS EE IS IN APPEAL AGAINST THE SAID ORDER OF THE ASSESSING OFFICER AND RAISED SEVERAL GROUNDS OF APPEAL. 6. THE GROUND NO.1 RAISED BY THE ASSESSEE BEING GEN ERAL IS DISMISSED AS SUCH. 7. THE GROUND NO.2 RAISED BY THE ASSESSEE IS AGAINS T THE TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.106,44,25,680/- IN RELATION TO ADVERTISEMENT, MARKETING AND SALES PROMOTION EXPENS ES (HEREINAFTER REFERRED TO AS AMP EXPENSES) INCURRED BY THE ASSE SSEE. 8. THE GROUND NOS.2.1 TO 2.30 RELATE TO SEVERAL ASP ECTS OF TRANSFER PRICING ADJUSTMENT MADE IN THE CASE OF THE ASSESSEE . BOTH THE AUTHORIZED 10 REPRESENTATIVES APPEARING BEFORE US FAIRLY ADMITTED THAT THE ISSUE OF TRANSFER PRICING ADJUSTMENT MADE ON ACCOUNT OF AMP EXPENSES NOW STANDS COVERED BY THE MAJORITY VIEW IN SPECIAL BENC H OF DELHI TRIBUNAL IN M/S L.G. ELECTRONICS INDIA P. LTD. VS. ACIT IN I TA NO.5140/DEL/2011 RELATING TO ASSESSMENT YEAR 2007-08, REPORTED IN (2 013) 140 ITD 41 (DEL)(SB) IN WHICH THE ASSESSEE WAS ONE OF THE INTE RVENER, WHICH HAS BEEN APPLIED BY THE TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2007-08 IN ITA NO.1148/CHD/2011 VID E ORDER DATED 2.4.2013. 9. THE LEARNED A.R. FOR THE ASSESSEE HAS FURNISHED ON RECORD TABULATED DETAILS ISSUE-WISE BEING ADJUDICATED BY THE SPECIAL BENCH OF THE TRIBUNAL VIDE SEVERAL PARTS OF THE DECISION AND WE PROCEED TO DEAL WITH THE SAME IN THE PARAS HEREINBELOW. 10. THE LEARNED D.R. FOR THE REVENUE POINTED OUT T HAT THE ISSUE STANDS COVERED AGAINST THE ASSESSEE BY THE DECISION OF SPE CIAL BENCH OF THE DELHI TRIBUNAL IN M/S L.G. ELECTRONICS INDIA P. LTD . VS. ACIT (SUPRA). HOWEVER, IN VIEW OF THE DIRECTIONS OF THE SPECIAL B ENCH THE MATTER HAS TO BE REFERRED BACK TO THE TRANSFER PRICING OFFICER FOR COMPUTATION PURPOSES. 11. THE LEARNED A.R. FOR THE ASSESSEE, HOWEVER, POI NTED OUT THAT IN LINE WITH THE RATIO LAID DOWN BY THE SPECIAL BENCH, THE ISSUE NEEDS TO BE LOOKED AT BY THE TRANSFER PRICING OFFICER AFTER CON SIDERING THE COMPARABLES IN ORDER TO COMPUTE THE TRANSFER PRICIN G ADJUSTMENT ON ACCOUNT OF AMP EXPENSES. THE PLEA OF THE LEARNED A .R. FOR THE ASSESSEE WAS THAT OPPORTUNITY SHOULD BE GIVEN BY TPO TO THE ASSESSEE TO FURNISH THE LIST OF RELEVANT COMPARABLES. 11 12. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAD F URNISHED RETURN OF INCOME DECLARING TOTAL INCOME OF RS.2,75,73,15,234/ -. THE ASSESSING OFFICER VIDE LETTER DATED 9.8.2010 AND THEREAFTER V IDE LETTER DATED 27.7.2011 AND FURTHER LETTER DATED 23.8.2011 MADE R EFERENCE TO THE TPO UNDER SECTION 92CA(1) OF THE ACT. THE DETAILS OF T HE SAID COMMUNICATION ARE ENLISTED UNDER PARAS 2.1 TO 2.3 A T PAGES 1 AND 2 OF THE ORDER OF THE TPO. THE TPO AFTER CONSIDERING THE BU SINESS ACTIVITIES OF THE ASSOCIATED ENTERPRISES AND HOLDINGS OF THE ASSE SSEE COMPANY BY HOLDING COMPANY, CONCLUDED THAT THE ASSESSEE COMPAN Y INCORPORATED UNDER THE LAWS OF INDIA, WAS 43.16% OWNED BY HORLIC KS LTD., U.K., WHICH IN TURN WAS PART OF GSK GROUP. THE TPO THUS HELD THAT IT WAS ASSOCIATED ENTERPRISE WITHIN THE MEANING OF SECTION 92A(2)(A) OF THE ACT. THE TPO AT PART OF PAGE-4 AND PAGE-5 HAS ENLISTED S UMMARY OF BUSINESS ACTIVITIES AND NATURE OF RELATIONSHIP WITH THE ASSE SSEE COMPANY OF VARIOUS ASSOCIATED ENTERPRISES. AT PAGE 6 OF THE REPORT OF THE TPO IT HAS BEEN OBSERVED AS UNDER: 6. TRANSFER PRICING METHOD ADOPTED BY THE ASSESSE E: 6.1 INTERNATIONAL TRANSACTIONS OF EXPORTS OF MALTED FOOD/BISCUITS AND EXPORTS OF PACKING MATERIAL/TAZZO S HAVE BEEN SEPARATELY BENCHMARKED ADOPTING TNMM AS THE APPROPRIATE METHOD AND OPERATING PROFIT AT COST AS THE PROFIT LEVEL INDICATOR (PLI). THE SAME METHOD H AS BEEN USED IN THE PRECEDING YEARS BY THE ASSESSEE. F OR CHOOSING INDEPENDENT COMPARABLES, THE ASSESSEE HAS USED 'PROWESS' SOFTWARE DEVELOPED BY THE CENTRE FOR MONITORING INDIAN ECONOMY AND CAPITALINE PLUS CORPORATE DATABASE. RECEIPT OF I.T. SERVICE S AND REIMBURSEMENTS OF EXPENSES ARE BENCHMARKED USING CO ST PLUS METHOD (MARK-UP). 13. THE ASSESSEE HAD ADOPTED TNNM METHOD AND APPLIE D CERTAIN FILTERS FOR REJECTING THE NON-COMPARABLES AND HAD ANALYZED THE OPERATING PROFIT/TOTAL COST RATIO OF DIFFERENT COMPANIES AS E NLISTED UNDER PARAS 6.2 AND 6.3 OF THE ORDER OF THE TPO AND WORKED OUT ARIT HMETIC MEAN 12 OPERATING PROFIT MARGIN EARNED BY THE SAID COMPARAB LES AT 8.90% AS AGAINST OPERATING PROFIT MARGIN AT 20.93% DECLARED BY THE ASSESSEE. VIDE PARA 7.2 THE TPO NOTED THAT THE ASSESSEE HAD S ALES TURNOVER OF RS.138920.17 LACS AND BESIDE SELLING & DISTRIBUTION EXPENSES OF RS. 1067.50 LACS, HAD DEBITED THE FOLLOWING EXPENSES : S.NO. NAME OF EXPENSES AMOUNT (RS.LACS) 1. SERVICE CHARGES PAID TO SELLING AGENT 11.16 2. DISCOUNT SALES 53.35 3. ADVERTISEMENT EXPENSES 1064.11 4. MARKET RESEARCH 969.16 5. SALES PROMOTION 4460.21 6. DEVELOPMENT & SCIENTIFIC RESEARCH 244.60 TOTAL 17447.09 14. THE TPO VIDE PARA 7.5 AT PAGE 7 OF THE ORDER, C ONSIDERED THE SHAREHOLDING PATTERN OF TWO COMPANIES AND OBSERVED THAT GSK ASIA PVT. LTD. IS SUBSIDIARY OF S.B. PORT LOUIS LTD., MAURITI US, AN ASSOCIATED ENTERPRISE. SIMILARLY GLAXO GROUP LTD., U.K. (AN ASSOCIATED ENTERPRISE) HAS 35.99% SHARE HOLDING IN GSK PHARMAC EUTICALS LTD. THUS THE PROVISIONS OF SECTION 92A(2)(B) OF THE I.T . ACT ARE ATTRACTED . FURTHER THE TPO VIDE PARA 7 ANALYZED THE TRANSFER P RICING APPROACH ADOPTED BY THE ASSESSEE. THE TPO FURTHER NOTED TH AT THE ASSESSEE WAS PAYING ROYALTY WHICH WAS DEEMED INTERNATIONAL TRANS ACTION BETWEEN THE ASSESSEE AND ITS AE. THE OTHER ASPECT NOTED BY THE TPO WAS MARKETING ROYALTY FOR USE OF HORLICKS AND THE ASSESSEE HAD INCURRED EXPENDITURE OF RS.17447.09 LACS ON ADVERTISEMENT, MARKETING AND PROMOTION OF THE SAID PRODUCT. AS PER THE TPO, THE ASSESSEE HAD CRE ATED MARKETING INTANGIBLE BY INCURRING EXPENDITURE OF RS.17447.09 LACS ON ADVERTISEMENT, MARKETING AND PROMOTION OF THE AE BR ANDS AND PRODUCTS, WHICH WAS NOT COMPENSATED FOR BY THE AE AND IN ORDE R TO EXAMINE THE ARMS LENGTH PRICE, IT WAS NECESSARY TO COMPARE TOT AL EXPENDITURE INCURRED BY THE ASSESSEE ON BEHALF OF THE AE IN IND IA AND THE AMOUNT 13 PAID BY THE ASSESSEE IN INDIA AS CONTRIBUTION FOR A DVERTISEMENT EXPENDITURE BY THE AE. 15. THE ASSESSEE WAS THUS SHOW CAUSED AS TO WHY IT SHOULD NOT BE INFERRED THAT IT HAD INCURRED BOTH ROUTINE AND NON- ROUTINE ADVERTISEMENT AND MARKETING EXPENSES ON BRAND PROMOTION AND DEVEL OPMENT OF MARKETING INTANGIBLES FOR THE ASSOCIATED ENTERPRISE S (IN SHORT AE). THE TPO ALSO ANALYSED THE RESULTS OF COMPARABLES RELIED UPON BY THE ASSESSEE AT PAGE 9 TO PAGE 14 OF THE ORDER OF TPO. 16. THE TPO THEREAFTER FINALLY SELECTED FOUR COMPAN IES OUT OF LIST OF SIXTEEN COMPANIES SELECTED BY THE ASSESSEE FOR BENC HMARKING THE INTERNATIONAL TRANSACTION OF EXPORT OF MALTED FOODS , BISCUITS TO AES TAKING INTO CONSIDERATION THE EXPENSES INCURRED ON SELLING AND DISTRIBUTION EXPENSES. THE TPO THEREAFTER DETERMIN ED THE ARMS LENGTH PRICE OF REIMBURSEMENT FOR BRAND PROMOTION AND MARK ETING INTANGIBLE OF THE AE IN INDIA AS PER TABLE AT PAGES 15 AND 16 OF THE ORDER OF THE TPO AND THE ARMS LENGTH VALUE OF SUBSIDY WAS DETERMINE D AT RS.1,65,49,47,320/- AGAINST WHICH THE ASSESSEE HAD RECEIVED NIL SUBSIDY AND SHORT FALL WAS PROPOSED AS AN ADJUSTMENT TO THE PRICE OF REIMBURSEMENT FOR BRAND PROMOTION AND MARKETING INT ANGIBLE OF THE AE IN INDIA. THE TPO UNDER PARA 8 AT PAGES 16 TO 32 A NALYZED THE REPLY OF THE ASSESSEE ON VARIOUS ASPECTS AND CONSIDERED FOLL OWING ISSUES: PARA 8.1 WHETHER ROYALTY IS AN INTERNATIONAL TRANS ACTION? PARA 8.2 WHETHER AMP EXPENDITURE IS INTERNATIONAL TRANSACTION? PARA 8.3 DISALLOWANCE UNDER SECTION 37(1)? PARA 8.4 THE ISSUE RELATING TO ADVERTISEMENT, MARKE TING AND PROMOTIONAL EXPENDITURE. 14 PARA 8.5 CONCEPT OF MARKETING INTANGIBLE AND ITS APPLICATION TO THE FACTS OF THE CASE OF THE ASSESSEE. PARA 8.5.13 AMP EXPENDITURE PERTAINING TO PRODUCTS WHERE BRANDS ARE OWNED BY THE ASSESSEE WAS TO BE EXCLUDED WHILE COMPUTING AMP EXPENDITURE ON THE DEVELOPMENT OF MARKETING INTANGIBLE OF THE AE. PARA 8.5.21 BENCHMARKING OF INTERNATIONAL TRANSACTI ON. PARA 8.6 OTHER CONTENTIONS RAISED BY THE ASSESSEE. PARA 9 SELECTION OF COMPARABLES FOR BENCHMARKING OF ROUTINE AMP EXPENDITURE. 17. THE TPO VIDE PARA 9 SELECTED ONLY FOUR COMPANIE S AS COMPARABLES AS AGAINST SIXTEEN COMPANIES SELECTED BY THE ASSESS EE. THE SELLING AND DISTRIBUTION EXPENDITURE OF THE SAID CONCERN AS COM PARED TO THE SALES WERE NOTED BY THE TPO AND THE AVERAGE WAS WORKED OU T AT 2.20%. ON THE OTHER HAND, THE TOTAL MARKING EXPENDITURE INCURRED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION WAS RS.17447.09 LACS ON GROSS SALES OF RS.149745.66 LACS. THE AMP EXPENDITURE OF THE A SSESSEE ACCOUNTED FOR 11.65% OF THE INCOME AS COMPARED TO AVERAGE AMP EXPENDITURE TO INCOME RATIO OF 2.20% FOR THE COMPARABLES I.E. COMP ARABLES UNDER CONTROL PRICE, SELECTED BY THE TPO. THE TPO THUS C ONCLUDED BY ESTABLISHING THAT THE ASSESSEE HAD INCURRED HUGE NO N ROUTINE EXPENDITURE ON DEVELOPMENT MARKETING INTANGIBLE FOR THE AE. TH E SAID COMPARABILITY ANALYSIS ALSO PROVE THAT AMP EXPENDITURE IN THE CAS E OF THE ASSESSEE WAS IN EXCESS OF THE BRIGHT LINE TEST MORE THAN ROUTINE MARKETING EXPENDITURE OF THE DISTRIBUTORS. THE TPO THUS HELD THAT THE EXPENDITURE WHICH IS BEYOND THE ROUTINE MARKETING EXPENDITURE IS FOR THE BENEFIT OF AE . THE TPO THUS DETERMINED THE ARMS LENGTH PRICE OF REIMB URSEMENT RECEIVED BY THE ASSESSEE FOR THE BRAND PROMOTION AND MARKETI NG INTANGIBLE OF THE AE IN INDIA AND COMPUTED THE ARMS LENGTH VALUE OF THE SUBSIDY AT RS.1,09,22,10,830/- AS AGAINST NIL SUBSIDY RECEIVED BY THE ASSESSEE. THE 15 TPO THUS HELD THAT AN ADJUSTMENT OF RS.1,09,22,10,8 30/- WAS TO BE MADE TO THE INCOME OF THE ASSESSEE ON WHICH ASSESSEE WOU LD NOT BE ENTITLED TO DEDUCTION UNDER SECTIONS 10A, 10AA, 10B OR UNDER CH APTER VI-A IN RESPECT OF THE ENHANCED AMOUNT. 18. THE MAIN PLEA OF THE ASSESSEE BEFORE THE TPO WA S AS UNDER, WHICH WAS REJECTED BY THE TPO: 8.5.11 THE ASSESSEE HAS CONTENDED THAT EXPENDITURE ON AMP IS RECURRING IN NATURE, IT IS FOR THE PROMOTION OF PRODUCTS MANUFACTURED AND SOLD IN INDIA WHICH HAS NOT RESULTED INTO INDIRECT BENEFIT TO THE AE AND HAS DIRECTLY BENEFITED IT. ACCORDING TO IT, SUCH EXPENDITURE DOES NOT RESULT IN THE CREATION OF ANY ASSET. ALTERNATELY, IT HAS CLAIMED THAT ANY MARKETING INTANGIBLE, IF CREATED WERE NOT ON BEHALF OF OR TRANSFERRED TO THE AE. THE ASSESSEE HAS ALSO PROVIDED DATA OF AMP EXPENDITURE INCURRED BY GSK WORLDWIDE BUT THE SAME IS FOR THE YEAR 2010 AND THEREFORE NO INFERENCE IS DRAWN. 8.5.12 THE ASSESSEE HAS PLEADED THAT ALL THE ADVERTISEMENTS IN PRINT MEDIA, PRESS OR OTHERWISE IN RELATION TO PRODUCTS AIMED TO BENEFIT ONLY THE PRODUCTS SOLD BY THE ASSESSEE AND ANY BENEFIT ACCRUING TO THE AES WAS ONLY INCIDENTAL. ASSESSEE HAS CLAIMED THAT ALL BENEFITS OF INCURRING EXPENSES ON SELLING & DISTRIBUTION AND MARKETING & ADVERTISING ARE RECEIVED BY IT. IT IS ALSO CLAIMED THAT NO BENEFIT ACCRUES TO THE ASSESSEE ON ACCOUNT OF THIS EXPENDITURE. 19. THE ASSESSEE FILED ITS OBJECTIONS IN FORM NO.35 A BEFORE THE DISPUTE RESOLUTION PANEL. DIRECTIONS UNDER SECTION 144C(5) OF THE ACT WERE ISSUED BY THE DISPUTE RESOLUTION PANEL, NEW DE LHI VIDE ITS ORDER DATED 3.9.2012. THE DRP UPHELD THE FINDINGS OF THE TPO AND DIRECTED THE ASSESSING OFFICER TO ADOPT THE SAME IN RESPECT OF ARMS LENGTH PRICE, EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH AND DIS COUNT ON SALES. 20. THE ASSESSING OFFICER DURING THE ASSESSMENT PR OCEEDINGS CONFRONTED THE REPORT OF TPO TO THE ASSESSEE. THE ASSESSING OFFICER OBSERVED THAT A REFERENCE WAS MADE TO THE TPO UNDER SECTION 92CA OF 16 THE ACT FOR COMPUTATION OF ARMS LENGTH PRICE OF TH E INTERNATIONAL TRANSACTIONS OF OVER RS.5 CRORES AS PER FORM NO.3CE B FILED BY THE ASSESSEE. IN VIEW OF THE ORDER OF THE TPO AND DRP, THE ASSESSING OFFICER RECALCULATED THE ARMS LENGTH PRICE OF REIM BURSEMENT RECEIVED BY THE ASSESSEE FOR BRAND PROMOTION AND MARKETING INTA NGIBLES OF THE AE IN INDIA AND THE DIFFERENCE IN THE AMOUNT OF ARMS LEN GTH SUBSIDY AND THE VALUE OF INTERNATIONAL TRANSACTION UNDERTAKEN BEING MORE THAN 5%, ADJUSTMENT OF RS.1,06,44,25,680/- WAS MADE TO THE I NCOME OF THE ASSESSEE, AFTER CONSIDERING THE REPLY OF THE ASSESS EE ON THE ISSUE. 21. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF THE ASSESSING OFFICER PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE ACT AND HAS RAISED VARIOUS GROUNDS OF APPEAL. BOTH THE AUTHORIZED RE PRESENTATIVES FAIRLY ADMITTED THAT THE ISSUE HAS BEEN DELIBERATED UPON B Y THE SPECIAL BENCH OF DELHI TRIBUNAL IN M/S L.G. ELECTRONICS INDIA PVT . LTD. VS. ACIT (SUPRA) AND MAJORITY VIEW IN THE SAID DECISION IS A GAINST THE ASSESSEE. MULTIPLE GROUNDS OF APPEAL HAVE BEEN RAISED BY WAY OF GROUND NOS.,2 TO 2.30. THE LEARNED A.R. FOR THE ASSESSEE FURTHER P OINTED OUT THAT THE RATIO LAID DOWN BY THE SPECIAL BENCH OF THE DELHI T RIBUNAL IN M/S L.G. ELECTRONICS INDIA P. LTD. VS. ACIT (SUPRA) HAS BEEN APPLIED BY THE CHANDIGARH BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE AND THE ISSUE OF DETERMINATION OF ARMS LENGTH PRICE IN RELATION TO AMP EXPENDITURE HAS BEEN RESTORED BACK TO THE FILE OF THE TPO WITH DIRECTIONS. IT WAS ALSO POINTED OUT BY THE LEARNED A.R. FOR THE ASSESS EE THAT CERTAIN PORTION OF THE SAID EXPENDITURE BEING RELATABLE TO THE BRAN DS OWNED BY THE ASSESSEE HAD BEEN DIRECTED TO BE ALLOWED BY THE TRI BUNAL IN EARLIER YEAR. 22. THE GROUND NO.2 RAISED BY THE ASSESSEE IS GENER AL IN RESPECT OF THE AFORESAID ADJUSTMENT MADE ON ACCOUNT OF AMP EXPENDI TURE. THE ISSUE IN GROUND NOS.2.1 TO 2.16 IS WHETHER THE TRANSACTION I S AN INTERNATIONAL 17 TRANSACTION. THE CHANDIGARH BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2007-08 OBSERVED A S UNDER: 21. THE GROUND NO.2 RAISED BY THE ASSESSEE IS GENER AL IN RESPECT OF THE AFORESAID ADJUSTMENT MADE ON ACCOUNT OF AMP EXPENDITURE. THE ISSUE IN GROUND NOS.2.1 TO 2.7 IS WHETHER THE T RANSACTION IS AN INTERNATIONAL TRANSACTION. THE SPECIAL BENCH OF TH E TRIBUNAL IN M/S L.G. ELECTRONICS INDIA P. LTD. VS. ACIT (SUPRA) VIDE PARAS 14.1 TO 14.20 OF THE DECISION HELD AS UNDER: 14.1. HAVING SEEN THAT THERE WAS A TRANSACTION BETW EEN THE ASSESSEE AND THE FOREIGN AE, NOW LET US EXAMINE AS TO WHETHER SUCH T RANSACTION CAN BE CALLED AS INTERNATIONAL TRANSACTION. IT WAS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE AND SOME OF THE INTERVENERS THAT EVEN IF IT IS TREA TED AS A TRANSACTION, BUT STILL IT DOES NOT FALLS WITHIN THE DEFINITION OF `INTERNATIO NAL TRANSACTION' AS PER SECTION 92B OF THE ACT. IT WAS ARGUED THAT SEC. 92B REFERS TO A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY ETC. IT WAS SUBMITT ED THAT THE EXPRESSION IN THE NATURE OF HAS BEEN CLARIFIED BY WAY OF INSERTION OF EXPLANATION TO SECTION 92B BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT FRO M 1-4-2002, BUT THE CASE UNDER CONSIDERATION DOES NOT FALL IN ANY OF THE SUB -CLAUSES OF CLAUSE (I) OF THE EXPLANATION TO SECTION 92B SO AS TO BE CALLED AS AN INTERNATIONAL TRANSACTION. 14.2. COMING A STEP AHEAD OF ACTUAL INTERNATIONAL T RANSACTION AS PER SECTION 92B(1), THE LD. COUNSEL SUBMITTED THAT THE LEGISLAT URE ALSO DEEMS CERTAIN TRANSACTIONS AS INTERNATIONAL TRANSACTIONS AS PER S UB- SEC. (2) OF SEC. 92B. ELABORATING SUB-SEC. (2) OF SEC. 92B, IT WAS PUT FO RTH THAT A TRANSACTION WITH A THIRD PARTY IS DEEMED AS AN INTERNATIONAL TRANSACTI ON IF THERE IS A PRIOR AGREEMENT IN RELATION TO THE RELEVANT TRANSACTION B ETWEEN THE THIRD PERSON AND THE ASSOCIATED ENTERPRISE OR THE TERMS OF RELEVANT TRANSACTION ARE DETERMINED IN SUBSTANCE BETWEEN SUCH THIRD PERSON AND THE ASSOCIA TED ENTERPRISE. IT WAS STATED THAT THE CASE OF THE ASSESSEE CANNOT BE BROUGHT EVE N WITHIN THE PURVIEW OF SUB- SEC. (2) BECAUSE THERE IS NO ALLEGATION BY THE REVE NUE THAT THE THIRD PARTIES WHO WERE PAID BY THE ASSESSEE FOR DEFRAYING ADVERTISEME NT EXPENSES HAD ANY UNDERSTANDING WITH THE FOREIGN AE SO AS TO DETERMIN E THE TERMS OF THEIR AGREEMENTS FOR ADVERTISEMENT WITH THE ASSESSEE. ONC E A TRANSACTION IS NOT COVERED UNDER SUB-SEC. (1) OF SECTION 92B, THE LD. AR STATED THAT THE SAME CAN BE DEEMED AS AN INTERNATIONAL TRANSACTION ONLY WHEN IT FALLS UNDER SUB-SEC. (2) OF SEC. 92B. IF A TRANSACTION DOES NOT SATISFY THE PRE - REQUISITES FOR INCLUSION EITHER IN SUB-SEC. (1) OR SUB-SECTION (2) SECTION 92B, IT CANNOT BE RECKONED AS AN INTERNATIONAL TRANSACTION SO AS TO BE ELIGIBLE FOR PROCESSING UNDER CHAPTER X OF THE ACT. 14.3. THE LD. AR ARGUED THAT THERE IS ALWAYS SOME C ONSIDERATION FOR DOING ANY THING, WITHOUT WHICH THERE CAN BE NO VALID AGREEMEN T. IT WAS POINTED OUT THAT NO CONSIDERATION MOVED BETWEEN THE ASSESSEE AND THE FO REIGN AE ON ACCOUNT OF THE ALLEGED BRAND BUILDING. THE ASSESSEE INCURRED ADVER TISEMENT EXPENSES FOR WHICH THE PAYMENTS WERE MADE TO THIRD PARTIES UNRELATED T O IT. SUCH TRANSACTIONS GOT CONCLUDED ON THE INCURRING OF ADVERTISEMENT EXPENSE S WITHOUT ANY DIRECT OR INDIRECT INVOLVEMENT OF THE ASSESSEE'S FOREIGN AE. IT WAS STATED THAT A TRANSACTION WITH A THIRD PARTY OR A PART OF SUCH TR ANSACTION CANNOT BE CALLED AS TRANSACTION WITH THE AE. AS THE ENTIRE ADVERTISEMEN T EXPENSES WERE INCURRED IN INDIA VIS A VIS THIRD PARTIES, THE REQUIREMENT OF S EC. 92B WAS CLAIMED TO BE LACKING. THE LD. AR ARGUED THAT THERE SHOULD BE A F IRST DEGREE NEXUS BETWEEN THE INCURRING OF ADVERTISEMENT EXPENSES AND THE BRAND P ROMOTION FOR THE FOREIGN AE 18 SO AS TO REGARD IT AS AN INTERNATIONAL TRANSACTION. ANY INCIDENTAL BENEFIT RESULTING TO THE FOREIGN AE, OUT OF THE EXPENSES IN CURRED BY THE ASSESSEE IN INDIA, CANNOT BE TERMED AS INTERNATIONAL TRANSACTION. AS T HERE WAS NO TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN AE INSOFAR AS INCURRING OF AMP EXPENSES IS CONCERNED, THE LD AR ARGUED THAT THE SAME CEASED TO BE AN INTERNATIONAL TRANSACTION. IT WAS ARGUED THAT THE PRESENT SO-CALL ED TRANSACTION OF BRAND BUILDING FOR THE FOREIGN AE BY THE ASSESSEE IS NEIT HER COVERED UNDER SUB-SECTION (1) NOR (2) OF SECTION 92B AND HENCE THE SAME CANN OT BE RECOGNIZED AS AN INTERNATIONAL TRANSACTION. 14.4. THE LD. DR CONTENDED THAT A CAREFUL LOOK AT S UB-SECTION (1) OF SECTION 92B WOULD INDICATE THAT THE TERM `INTERNATIONAL TRANSAC TION' HAS BEEN DEFINED IN WIDEST POSSIBLE MANNER. NORMALLY A PROVISION IS EIT HER EXHAUSTIVE OR INCLUSIVE. SECTION 92B WAS CLAIMED AS A CLASSIC EXAMPLE OF A C OMBINATION OF BOTH. IT WAS EXPLAINED THAT THE PROVISION CAN BE SEEN INTO THREE PARTS. FIRST PART IS EXHAUSTIVE AS OPENING WITH : ` INTERNATIONAL TRANSACTION MEANS A TRANSACTION ....I N THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR IN TANGIBLE PROPERTY, OR PROVISION OF SERVICES.....'. SECOND PART FURTHER ADVANCES THE SCOPE OF THE EXHAUSTIVE CHARACTER BY ROPING IN `ANY OTHER TRANSACTION HAVIN G A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES'. THIR D PART IS INCLUSIVE WHICH PROVIDES THAT IT `SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION O R APPORTIONMENT OF...ANY COST OR EXPENSE ...IN CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES.' 14.5. THE LD. DR ARGUED THAT THE INSTANT TRANSACTIO N CAN BE VIEWED AS INTERNATIONAL TRANSACTION NOT ON ONE BUT ON THREE D IFFERENT COUNTS. THE FIRST BEING, THE EARLIER PART OF SUB-SECTION (1), WHICH I S IN THE NATURE OF THE EXHAUSTIVE PART OF THE DEFINITION REFERRING TO.IN THE NATURE O F ....PROVISION OF SERVICES'. IT WAS STATED THAT THE AUTHORITIES BELOW HAVE PRIMARILY VI EWED THIS TRANSACTION AS IN THE NATURE OF PROVISION OF A SERVICE OF CREATING, IMPRO VING OR MAINTAINING MARKETING INTANGIBLE FOR THE FOREIGN AE, IN LIEU OF WHICH THE FOREIGN AE OUGHT TO HAVE REIMBURSED THE ASSESSEE. 14.6. THE LD. DR CONTENDED THAT IT CAN ALSO BE CONS IDERED AS AN INTERNATIONAL TRANSACTION HAVING A `BEARING ON THE PROFITS, INCOM E, LOSSES OR ASSETS' OF THE ASSESSEE. BEARING ON THE PROFITS OF AN ENTERPRISE W AS EXPLAINED AS A TRANSACTION HAVING BEEN RECORDED IN SUCH A WAY THAT THE PROFITS OF THE ENTERPRISE GET NEEDLESSLY DEFLATED. IN THE PRESENT CONTEXT, THERE CAN BE DEFLATION OF PROFITS OF AN ENTERPRISE, WHEN THE EXPENSES PERTAINING TO THE FOR EIGN AE ARE ALSO CLAIMED AS DEDUCTION BY THE INDIAN ENTERPRISE. IF IT AMPLY TUR NS OUT THAT THE INDIAN ENTITY HAS BOOKED CERTAIN AMOUNT INCURRED FOR ITS AE AS IT S OWN EXPENSE, THIS WOULD HAVE THE EFFECT OF REDUCING THE PROFIT WITHOUT REAS ON, THEREBY DEPRIVING INDIAN EXCHEQUER FROM ITS RIGHTFUL SHARE OF TAXES. IT WAS STATED ON BEHALF OF THE REVENUE THAT THE ASSESSEE INCURRED AMP EXPENSES WITH A TACI T UNDERSTANDING OF CREATING THE MARKETING INTANGIBLE FOR ITS FOREIGN AE. THE AS SESSEE NOT ONLY CLAIMED DEDUCTION FOR THE AMP EXPENSES INCURRED FOR ITS OWN BUSINESS PURPOSE BUT ALSO FOR THE EXPENSES TOWARDS CREATING OR IMPROVING THE MARKETING INTANGIBLES OF THE FOREIGN ENTITY. THIS EXCESS CLAIM OF DEDUCTION WAS STATED TO HAVE A DIRECT BEARING ON THE PROFITS OF THE ASSESSEE, THEREBY BRINGING IT WITHIN THE AMBIT OF AN INTERNATIONAL TRANSACTION. 14.7. THE THIRD WAY OF LOOKING AT THIS AS AN INTERN ATIONAL TRANSACTION WAS ITS INCLUSION UNDER THE RELEVANT PART OF SECTION 92B(1) , WHICH RUNS AS UNDER : `AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT (TH ERE IS AN ORAL UNDERSTANDING) BETWEEN TWO OR MORE ASSOCIATED ENTER PRISES (BETWEEN THE ASSESSEE AND FOREIGN AE) FOR THE ALLOCATION OR APPO RTIONMENT OF..... ANY COST OR 19 EXPENSE INCURRED OR TO BE INCURRED (BRAND PROMOTION EXPENSES) IN CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES (BENEFIT, SERVICE OR FACILITY O F WHICH SHALL BE AVAILABLE TO THE FOREIGN AE). IT WAS STATED THAT THERE IS AN AGREEME NT BETWEEN THE ASSESSEE AND ITS FOREIGN AE UNDER WHICH ONLY THE ASSESSEE WAS TO INCUR ALL AMP EXPENSES IN INDIA IN CONNECTION WITH A BENEFIT, SERVICE OR FACI LITY TO BE PROVIDED TO ITSELF AS WELL AS ITS FOREIGN AE. HE ARGUED THAT THE EXCESS O F THE AMP EXPENSES INCURRED BY THE INDIAN ENTITY OVER WHAT OTHER COMPARABLE IND EPENDENT ENTITIES INCUR IN SIMILARLY PLACED SITUATION, MEANS THE EXCLUSIVE BEN EFIT, SERVICE OR FACILITY TO THE FOREIGN AE SO AS TO CONSTITUTE THE VALUE OF INTERNA TIONAL TRANSACTION OF BRAND BUILDING FOR IT. THAT IS HOW HE CONTENDED THAT THE PRESENT TRANSACTION IS AN INTERNATIONAL TRANSACTION FROM THREE DIFFERENT ANGL ES. 14.8. THE LD. DR ARGUED THAT THE PAYMENT TO THIRD P ARTIES FOR ADVERTISING IS NOT AN INTERNATIONAL TRANSACTION. IT HAS NEVER BEEN THE CASE OF THE REVENUE THAT THE PAYMENT MADE TO THE THIRD PARTIES TOWARDS ADVERTISE MENT EXPENSES BE TREATED AS AN INTERNATIONAL TRANSACTION. HE STATED THAT RATHER THE INTERNATIONAL TRANSACTION IS RESTRICTED TO THE ACTIVITY DONE BY THE INDIAN AE IN RELATION TO FOREIGN AE FOR ADDING VALUE TO A BRAND (BEING AN INTANGIBLE PROPER TY OF THE FOREIGN AE), THE PAYMENT FOR WHICH MADE BY THE INDIAN ASSESSEE IS IN CLUDED IN THE OVERALL AMP EXPENSES CLAIMED AS DEDUCTION BY THE ASSESSEE. 14.9. REPLYING TO THE LD. DR'S CONTENTION THAT SECT ION 92B HAS BEEN WORDED VERY WIDELY TO INCLUDE EACH AND EVERY TRANSACTION BETWEE N THE TWO AES WITHIN THE PALE OF INTERNATIONAL TRANSACTION, THE LD. COUNSEL FOR SOME OF THE INTERVENERS RELIED ON THE JUDGMENT IN ADDTL. CIT VS. INCOME TAX APPELLATE TRIBUNAL & ANR. [(1975) 100 ITR 483 (AP)] TO CONTEND THAT SIMULTANE OUS USE OF THE WORDS `MEANS' AND `INCLUDES' IN A DEFINITION MAKE IT EXHA USTIVE AND NOT INCLUSIVE. IT WAS HIGHLIGHTED THAT ONLY THE TRANSACTIONS SET OUT IN SECTION 92B CAN BE CONSIDERED AS INTERNATIONAL TRANSACTIONS AND NOTHIN G BEYOND THAT. AS THE INSTANT TRANSACTION IS NOT COVERED BY SECTION 92B, IT WAS C LAIMED THAT THE SAME CANNOT BE CONSIDERED AS AN INTERNATIONAL TRANSACTION. 14.10. AFTER CONSIDERING THE RIVAL SUBMISSIONS IN T HIS REGARD, WE HAVE NO DOUBT IN OUR MIND THAT ONLY INTERNATIONAL TRANSACTIONS CA N BE CONSIDERED WITHIN THE PURVIEW OF THE CHAPTER X OF THE ACT. UNLESS A TRANS ACTION IS AN INTERNATIONAL TRANSACTION WITHIN THE MEANING OF SEC. 92B, THE SAM E CANNOT BE SUBJECTED TO THE TP PROVISIONS. THE EXPRESSION `INTERNATIONAL TRANSA CTION' HAS BEEN DEFINED UNDER SECTION 92B, WHICH HAS TWO SUB-SECTIONS. THE FIRST SUB-SECTION TALKS OF ACTUAL INTERNATIONAL TRANSACTION AND THE SECOND SUB -SECTION REFERS TO A DEEMED INTERNATIONAL TRANSACTION. 14.11. THE CASE OF THE REVENUE IS THAT IT IS AN INT ERNATIONAL TRANSACTION IN TERMS OF SUB-SEC. (1) OF SEC. 92B. LET US SEE THE PRESCRI PTION OF THIS PROVISION, WHICH IS AS UNDER :- '92B. MEANING OF INTERNATIONAL TRANSACTION.--(1) FO R THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92C, 92D AND 92E, 'INTERNA TIONAL TRANSACTION' MEANS ATRANSACTION BETWEEN TWO OR MORE ASSOCIATED E NTERPRISES, EITHER OR BOTH OF WHOM ARE NON-RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVIS ION OF SERVICES, OR LENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTIO N HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH EN TERPRISES AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN T WO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORT IONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN 20 CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROV IDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES.' 14.12. AFTER SUB-SECTION (1), THERE IS SUB-SECTION (2) FOLLOWED BY THE EXPLANATION WITH TWO CLAUSES, INSERTED BY THE FINANCE ACT, 2012 W.R.E.F. 1.4.2002 STARTING WITH THE EXPRESSION : ` FOR THE REMOVAL OF DOUBTS'. CLAUSE (I) OF THE EXPLANATION PROVIDES THAT THE EXPRESSION `INTERNATIONAL TRANSACTION' SHALL IN CLUDE - . THEN THERE ARE FIVE SUB- CLAUSES FROM (A) TO (E). C LAUSE (II) OF THE EXPLANATION PROVIDES THAT THE EXPRESSIONS `INTANGIBLE PROPERTY' SHALL INCLUDE - . THEN THERE ARE TWELVE SUB-CLAUSES FROM (A) TO (L). 14.13.1. FIRSTLY WE SHALL EVALUATE THE RIVAL CONTEN TIONS ABOUT THE DEFINITION OF INTERNATIONAL TRANSACTION' U/S 92B, BEING EXHAUSTI VE OR INCLUSIVE. IT IS NOTICED THAT SUCH DEFINITION AS PER SUB-SECTION (1) USES BO TH THE WORDS `MEANS' AND `INCLUDES' AT TWO DIFFERENT PLACES. A DEFINITION IS EXHAUSTIVE WHEN IT INCORPORATES THE WORD `MEANS' IN ITS OPENING PART AND THEREAFTER LISTS OUT CERTAIN ITEMS, SAY A AND B. IN THAT CASE IT WILL MEAN THAT ONLY A AND B FORM THE CONTENT OF THE THING DEFINED. A DEFINITION IS INCLUSIVE WHEN IT USES THE WORD `INCLUDES' IN ITS OPENING PART AND THEREAFTER LISTS OUT CERTAIN ITEMS, SAY A AND B. IN THAT CASE IT WILL MEAN THAT NOT ONLY A AND B BUT ALSO OTHER ITEMS NOT LIST ED, SAY C OR D, CAN ALSO FORM THE CONTENT OF THE THING DEFINED, IF THESE ARE OTHE RWISE OF THE SAME NATURE. IF HOWEVER A DEFINITION INCLUDES BOTH THE WORDS `MEANS ' AND `INCLUDES', THAT IS, IT SAYS THAT IT MEANS `A' AND INCLUDES `B', THEN IT WI LL AGAIN MEAN THAT IT IS AN EXHAUSTIVE DEFINITION TO INCLUDE BOTH A AND B AND N OT C OR D ETC. A DEFINITION DESPITE BEING EXHAUSTIVE CAN STILL BE INCLUSIVE, IF ONE OR MORE OF ITS COMPONENTS ARE AGAIN DEFINED IN AN INCLUSIVE MANNER. SUPPOSE I N THE DEFINITION OF THE THIRD CATEGORY DISCUSSED ABOVE, HAVING BOTH A AND B BY US E OF THE WORDS `MEANS' AND `INCLUDES', THE CONTENTS OF EITHER A OR B ARE BOTH ARE FURTHER DEFINED IN AN INCLUSIVE MANNER, THIS DEFINITION WILL AGAIN BECOME INCLUSIVE TO THE EXTENT OF THE DEFINITION OF EITHER A OR B OR BOTH HAVING BEEN DEF INED IN AN INCLUSIVE MANNER. 14.13.2. TURNING TO THE DEFINITION OF INTERNATIONAL TRANSACTION AS PER SUB-SECTION (1) OF SEC. 92B IT IS NOTICED THAT IT USES BOTH THE WORDS `MEANS' AND `INCLUDES'. WHEN WE EXAMINE THE EXPLANATION TO THIS SECTION CLA RIFYING THE MEANING OF THE EXPRESSION `INTERNATIONAL TRANSACTION' AND `INTANGI BLE PROPERTY', THEN IT BECOMES CLEAR THAT BOTH HAVE AGAIN BEEN DEFINED IN INCLUSIV E MANNER. EVEN THOUGH SUB- CLAUSES (A) TO (C) AND (E) OF CLAUSE (I) OF THE EXP LANATION DEFINING `INTERNATIONAL TRANSACTION' ARE EXHAUSTIVE, BUT SUB-CLAUSE (D) BEI NG THE `PROVISION OF SERVICES' IS AGAIN INCLUSIVE AS `INCLUDING' PROVISION OF MARK ET RESEARCH, MARKET DEVELOPMENT, MARKETING MANAGEMENT,...'. IT IS OF CR ITICAL IMPORTANCE TO OBSERVE THAT THE EXPRESSION `INTERNATIONAL TRANSACTION' ITS ELF HAS BEEN DEFINED IN THIS EXPLANATION ONLY IN AN INCLUSIVE MANNER. AS A RESUL T OF INSERTION OF THE EXPLANATION WITH RETROSPECTIVE EFFECT, THE OTHERWIS E EXHAUSTIVE DEFINITION OF `INTERNATIONAL TRANSACTION' GIVEN IN SUB-SECTION (1 ) HAS BEEN CONVERTED INTO AN INCLUSIVE ONE. CLAUSE (II) OF THE EXPLANATION ALSO DEFINES THE EXPRESSION `INTANGIBLE PROPERTY' IN AN INCLUSIVE MANNER. SUB-C LAUSE (A) OF CLAUSE (II) EMBRACES `MARKETING RELATED INTANGIBLE ASSETS' IN T HE AMBIT OF INTANGIBLE PROPERTY, WHICH IS AGAIN NOT EXHAUSTIVE BECAUSE OF THE USE OF THE EXPRESSION `SUCH AS' BEFORE `TRADEMARKS, TRADE NAMES, BRAND NA MES, LOGOS'. FROM THE ABOVE EXAMINATION OF SECTION 92B IN ENTIRETY, IT CAN BE E ASILY NOTICED THAT THE LEGISLATURE HAS GIVEN VERY EXTENSIVE AND INCLUSIVE MEANING TO THE EXPRESSIONS `INTERNATIONAL TRANSACTION' AND `INTANGIBLE PROPERT Y'. 14.14. WHEN WE READ SEC. 92B(1) IT COMES TO FORE TH AT IN ORDER TO BE CHARACTERIZED AS AN INTERNATIONAL TRANSACTION, THE FOLLOWING SALIENT FEATURES MUST BE PRESENT : - 21 (1) THERE SHOULD BE A `TRANSACTION' (2) SUCH `TRANSACTION' SHOULD BE BETWEEN TWO OR MOR E AES AND EITHER OR BOTH OF WHOM SHOULD BE NON-RESIDENTS. (3) SUCH TRANSACTION SHOULD BE OF THE NATURE AS REF ERRED TO IN SECTION 92B. 14.15. IN THE EARLIER PART OF THIS ORDER, WE HAVE H ELD THAT THE BRAND BUILDING BY THE ASSESSEE FOR ITS FOREIGN AE CONSTITUTES A `TRAN SACTION'. SO FAR AS THE SECOND REQUISITE IS CONCERNED, THERE IS NO DISPUTE ON THE FACT THAT LG KOREA IS AN ASSOCIATED ENTERPRISE OF THE ASSESSEE. THUS, THERE ARE TWO AES IN THE PRESENT CASE AND ONE OF THEM, NAMELY, LGK IS A NON-RESIDENT . THIS CONDITION ALSO STANDS SATISFIED. 14.16. THE THIRD REQUISITE IS THAT THE `TRANSACTION ' AS PER THE FIRST REQUISITE MUST BE OF THE NATURE AS REFERRED TO IN SECTION 92B. ALL THE THREE REQUISITES MUST BE CUMULATIVELY SATISFIED SO AS TO MAKE A `TRANSACTION ' AN `INTERNATIONAL TRANSACTION'. IF THERE IS A TRANSACTION BETWEEN TWO AES AND ONE OR BOTH OF WHOM ARE NON-RESIDENTS, IT WILL NOT BECOME AN INTERNATIO NAL TRANSACTION SO AS TO FALL WITHIN THE DOMAIN OF CHAPTER-X, UNLESS IT IS OF THE NATURE AS DEFINED IN SECTION 92B. 14.17. IT HAS BEEN VIGOROUSLY ARGUED BY THE LD. COU NSEL FOR THE ASSESSEE AND SOME OF THE INTERVENERS THAT CLAUSE (I) OF EXPLANAT ION TO SECTION 92B GIVES MEANING TO THE EXPRESSION `IN THE NATURE OF INTERNA TIONAL TRANSACTION' AND SINCE SUB-CLAUSES (A) TO (E) OF CLAUSE (I) DO NOT REFER T O TRANSACTION OF BRAND BUILDING, IT CANNOT BE CONSIDERED AS AN INTERNATIONAL TRANSAC TION. WE ARE NOT PERSUADED BY THIS SUBMISSION. IT IS PERTINENT TO NOTE THAT TH E EXPRESSION `INTERNATIONAL TRANSACTION' AS PER CLAUSE (I) OF THE EXPLANATION H AS BEEN `CLARIFIED' `INCLUDE' FIVE SUB-CLAUSES. THUS THE MEANING ASSIGNED TO `INT ERNATIONAL TRANSACTION' AS PER CLAUSE (I) OF THE EXPLANATION IS SIMPLY INCLUSIVE A ND NOT EXHAUSTIVE. THERE IS HARDLY ANY NEED TO BURDEN THIS ORDER WITH THE RATIO DECIDENDI EMANATING FROM A PLETHORA OF JUDGMENTS THAT THE SCOPE OF AN INCLUSIV E DEFINITION ALWAYS EXTENDS BEYOND THE SPECIFIED INCLUSIONS. 14.18.1. NOW WE WILL EXAMINE AS TO WHETHER THIS TRA NSACTION FALLS WITHIN ANY OF THE SUB-CLAUSES OF CLAUSE (I) OF EXPLANATION TO SEC TION 92B. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE VIEW POINT OF T HE LD. DR THAT THE TRANSACTION OF BRAND BUILDING IS IN THE NATURE OF `PROVISION OF SERVICE', IS NOT TENABLE. HE SUBMITTED THAT INDIAN ENTITY IS ENGAGED IN THE BUSI NESS OF MANUFACTURING AND SELLING OF ELECTRONIC GOODS ETC. AND NOT IN RENDERI NG SERVICES OF ADVERTISEMENT AND PROMOTION OF A BRAND TO ITS CUSTOMERS. HIS CONT ENTION WAS THAT IN ORDER TO BRING ANY TRANSACTION WITHIN THE SCOPE OF `PROVISIO N OF SERVICES', IT IS SINE QUA NON THAT THE MAIN BUSINESS ACTIVITY OF THE INDIAN E NTERPRISE AND THE NATURE OF SERVICE PROVIDED TO THE FOREIGN AE MUST BE SAME. AS IT IS NOT SO IN THE PRESENT CASE, THE LD. AR CONTENDED THAT THE TRANSACTION CAN NOT BE HELD AS A `PROVISION OF SERVICE'. 14.18.2. WE DO NOT FIND ANY FORCE IN THIS SUBMISSIO N ADVANCED ON BEHALF OF THE ASSESSEE FOR THE REASON THAT THE LANGUAGE OF SECTIO N 92B SIMPLY MANDATES THE PROVISION OF SERVICES' BY ONE AE TO ANOTHER. IT IS NOT QUALIFIED BY ANY WORDS TO RESTRICT ITS SCOPE ONLY TO SUCH SERVICES AS ARE PRO VIDED BY THE ASSESSEE IN ITS REGULAR COURSE OF BUSINESS. WHAT IS SIGNIFICANT IN THIS REGARD IS THE FACTUM OF RENDITION OF SERVICE, WHICH IS AN INTERNATIONAL TRA NSACTION. SOURCE OF SERVICE IS INCONSEQUENTIAL. IT CAN BE PRODUCED BY THE AE AS PR IMARILY ENGAGED IN THE BUSINESS OF RENDERING SUCH SERVICE OR IT CAN BE PRO DUCED BY THE INDIAN AE OTHERWISE THAN BY BEING PRIMARILY ENGAGED IN SUCH B USINESS OR IT CAN BE 22 OUTSOURCED. THE FACT THAT THE INDIAN ENTITY IS REND ERING ANY SERVICE TO THE FOREIGN AE, WHICH IS NOT ITS MAIN BUSINESS, WOULD NOT CONVE RT THE OTHERWISE INTERNATIONAL TRANSACTION INTO A NON-INTERNATIONAL TRANSACTION. 14.18.3. ORDINARILY A SERVICE MAY BE PROFESSIONAL, PUBLIC OR A BUSINESS SERVICE. EVEN IN COMMON PARLANCE PROVISION OF SERVICE MEANS THE ACT OF PERFORMING A TASK FOR A PERSON WHICH THAT PERSON REQUIRES IT IN EXCHANGE FOR SOME CONSIDERATION. CL. (I) OF EXPLANATION TO SECTION 92 B DEFINING `INTERNATIONAL TRANSACTION' INCLUDES THROUGH SUB-CLAUSE (D) : `PRO VISION OF SERVICES, INCLUDING PROVISION OF MARKET RESEARCH, MARKET DEVELOPMENT, M ARKETING MANAGEMENT.....'. CLAUSE (II) OF THE EXPLANATION DEFINING `INTANGIBLE PROPERTY' INCLUDES THROUGH SUB-CLAUSE (A) : `MARKETING RELATED INTANGIBLE ASSE TS, SUCH AS, TRADEMARKS, TRADE NAMES, BRAND NAMES, LOGOS'. WHEN WE CONSIDER BOTH T HESE PROVISIONS TOGETHER, IT BECOMES CLEAR THAT PROVISION OF SERVICES DEFINED IN AN INCLUSIVE MANNER ENCOMPASSING ALL THE MARKET RELATED SERVICES INCLUD ING THOSE SPECIFICALLY COVERED LIKE MARKET DEVELOPMENT, RESEARCH AND ADMIN ISTRATION AND THE FURTHER FACT THAT BRAND NAME AND LOGOS HAVE BEEN SPECIFICAL LY CONSIDERED AS MARKETING INTANGIBLES, THERE REMAINS NO DOUBT ABOUT THE BRAND BUILDING BEING A PROVISION OF SERVICE IN THE PRESENT CONTEXT. IN THE LIGHT OF THE ABOVE DISCUSSION WE ARE OF THE CONSIDERED OPINION THAT THE TRANSACTION OF BRAN D BUILDING BY THE ASSESSEE FOR THE FOREIGN AE IS IN THE NATURE OF `PROVISION OF SE RVICE'. HAVING HELD SUCH TRANSACTION TO BE AN INTERNATIONAL TRANSACTION IN T HE NATURE OF `PROVISION OF SERVICE', WE DO NOT CONSIDER IT EXPEDIENT TO DEAL W ITH THE CONTENTION OF THE LD. DR THAT IT IS ALSO AN INTERNATIONAL TRANSACTION HAVING A `BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS' OF THE ASSESSEE ON ONE HA ND AND/OR TOWARDS ALLOCATION OR APPORTIONMENT OF ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR FACILITY PROV IDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES, ON THE OTHER. 14.19. NOW WE TAKE UP THE CONTENTION OF THE LD. AR THAT THERE WAS NO TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN AE INSOFAR AS INCURRING OF AMP EXPENSES IS CONCERNED AND FURTHER THE ASSESSEE ENTERED INTO TRA NSACTIONS WITH THE THIRD PARTIES WHO ARE ADVERTISING AGENCIES AND IT IS NOT THE CASE OF THE REVENUE THAT THE TERMS OF TRANSACTIONS WITH SUCH THIRD PARTIES W ERE DETERMINED IN SUBSTANCE BY THE FOREIGN AE. INSOFAR AS THE PART OF THE CONTE NTION OF THE LD. AR ABOUT THE DEEMED INTERNATIONAL TRANSACTION U/S 92B IS CONCERN ED, WE FIND THAT IT IS NOBODY'S CASE THAT THE TRANSACTION IN QUESTION IS A DEEMED INTERNATIONAL TRANSACTION. IN ORDER TO BE COVERED UNDER SUB- SEC. (2) OF SEC. 92B FOR MAKING A TRANSACTION WITH A THIRD PARTY AS DEEMED INTERNATIO NAL TRANSACTION, IT IS ESSENTIAL THAT THE AE OF THE ASSESSEE SHOULD HAVE INFLUENCE O VER THE THIRD PARTY IN TERMS OF DETERMINING THE TERMS AND CONDITIONS OF SUCH TRANSA CTION. IT IS ONLY IN SUCH A SITUATION THAT THE TRANSACTION WITH SUCH THIRD PART Y IS DEEMED TO BE AN INTERNATIONAL TRANSACTION. FURTHER IT IS NOT THE CA SE OF THE REVENUE THAT THE TRANSACTION OF PAYMENTS OF AMP EXPENSES TO THE THIR D PARTIES IS AN INTERNATIONAL TRANSACTION. RATHER THE INTERNATIONAL TRANSACTION H AS BEEN TAKEN AS THE VALUE ADDITION MADE BY THE ASSESSEE TO THE BRAND BY MAKIN G PAYMENT WHICH ARE INCLUDED IN THE OVERALL AMP EXPENSES PAID TO THE TH IRD PARTIES. 14.20. THE FURTHER CONTENTION THAT THERE WAS NO CON SIDERATION BY THE FOREIGN AE IN THE PRESENT CASE, IS AGAIN OF NO AVAIL. THE MERE FACT THAT NO CONSIDERATION MOVED BETWEEN THE AES FOR A TRANSACTION IS NOT A DE CISIVE FACTOR TO HAVE INFLUENCE OVER ITS NATURE. PAYMENT OF CONSIDERATION HAS NOT BEEN MADE AS A CONDITION PRECEDENT FOR INCLUSION OF ANY TRANSACTIO N WITHIN THE AMBIT OF SECTION 92B. THE TRANSFER PRICING PROVISIONS SHOULD BE SEEN IN THE BACKDROP OF THE FACT THAT THESE ARE SPECIAL PROVISIONS FOR AVOIDANCE OF TAX ON THE TRANSACTIONS STRUCTURED BETWEEN TWO ASSOCIATED ENTERPRISES. THE SIMPLE FACT THAT THE FOREIGN AE DID NOT PAY ANY CONSIDERATION TO THE INDIAN AE W ILL NOT TAKE THE TRANSACTION 23 OUT OF THE PURVIEW OF THE TRANSFER PRICING PROVISIO NS, IF IT IS OTHERWISE AN INTERNATIONAL TRANSACTION. 14.21 THUS IT IS PALPABLE THAT ALL THE THREE NECESS ARY INGREDIENTS AS CULLED OUT FROM BARE READING OF SECTION 92B ARE FULLY SATISFIE D IN THE PRESENT CASE. THERE IS A TRANSACTION OF CREATING AND IMPROVING MARKETING I NTANGIBLES BY THE ASSESSEE FOR AND ON BEHALF OF ITS FOREIGN AE; THE FOREIGN AE IS NON-RESIDENT; SUCH TRANSACTION IS IN THE NATURE OF PROVISION OF SERVIC E. RESULTANTLY, WE HOLD THAT THE REVENUE AUTHORITIES WERE FULLY JUSTIFIED IN TREATIN G THE TRANSACTION OF BRAND BUILDING AS AN INTERNATIONAL TRANSACTION IN THE FAC TS AND CIRCUMSTANCES OF THE PRESENT CASE. 22. IN VIEW OF THE MAJORITY DECISION OF THE SPECIAL BENCH IN M/S L.G. ELECTRONICS INDIA P. LTD. VS. ACIT (SUPRA), WE HOLD THAT THE TRANSACTION IN QUESTION IS AN INTERNATIONAL TRANSAC TION WHICH IS LIABLE TO BE CONSIDERED UNDER THE PROVISIONS OF SEC TION 92B OF THE ACT AND THE ASSESSING OFFICER WAS JUSTIFIED IN TREA TING THE TRANSACTION OF BRAND BUILDING AS AN INTERNATIONAL T RANSACTION IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE GROUN D NOS.2.1 TO 2.7 ARE THUS DISMISSED. 23. THE ISSUE IN THE PRESENT APPEAL IS IDENTICAL TO THE ISSUE RAISED BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE AND FOLL OWING THE MAJORITY DECISION OF THE SPECIAL BENCH OF THE DELHI TRIBUNAL IN M/S L.G. ELECTRONICS INDIA P. LTD. VS. ACIT (SUPRA) AND ORDE R OF TRIBUNAL IN ASSESSEE OWN CASE RELATING TO ASSESSMENT YEAR 2007 -08, WE HOLD THAT THE TRANSACTION UNDERTAKEN BY THE ASSESSEE IS AN INTERN ATIONAL TRANSACTION, LIABLE TO BE CONSIDERED UNDER SECTION 92B OF THE AC T AND THE ASSESSING OFFICER WAS JUSTIFIED IN TREATING THE SAID TRANSACT ION AS AN INTERNATIONAL TRANSACTION. THE GROUND NOS.2.1 TO 2.16 ARE THUS D ISMISSED. 24. VIDE GROUND NOS.2.17 TO 2.22 THE ASSESSEE IS AG GRIEVED BY THE APPLICATION OF THE PRESCRIBED METHOD FOR DETERMININ G THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. AS ADMITTE D BY THE LEARNED A.R. FOR THE ASSESSEE, SIMILAR ISSUE AROSE BEFORE THE SP ECIAL BENCH OF THE DELHI TRIBUNAL IN M/S L.G. ELECTRONICS INDIA P. LTD . VS. ACIT (SUPRA) AND ALSO BEFORE THE CHANDIGARH BENCH OF THE TRIBUNA L IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2007-08 (SUPRA) WH EREIN VIDE PARAS 24 AND 25 IT WAS HELD AS UNDER: 24 24. THE NEXT ISSUE RAISED BY THE ASSESSEE IS VIDE G ROUND NOS. 2.8 TO 2.13 I.E. APPLICATION OF THE PRESCRIBED METHOD F OR DETERMINING THE AMP OF THE INTERNATIONAL TRANSACTION. THE SPEC IAL BENCH OF THE TRIBUNAL VIDE ITS MAJORITY VIEW IN PARAS 20.1 TO 24 .1 OF THE DECISION HELD AS UNDER: 20.1. WE HAVE NOTICED ABOVE THAT THE TP PROVISIONS REQUIRE TWO VARIABLES. HAVING SEEN THE FIRST VARIABLE, BEING THE COST/VALU E OF INTERNATIONAL TRANSACTION ABOVE, NOW WE SHALL FIND THE SECOND VARIABLE, BEING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. TNMM APPLIED ON ONE TRANSACTION - WHETHER ALP OF OT HER TRANSACTIONS PERMISSIBLE ? 21.1. THE LD. COUNSEL FOR THE APPELLANT STARTED HIS CONTENTIONS ON THIS POINT BY URGING IN THE VERY BEGINNING THAT NO DISALLOWANCE C AN BE MADE OUT OF AMP EXPENSES BY BENCHMARKING THEM SEPARATELY WHEN THE O VERALL NET PROFIT RATE DECLARED BY THE ASSESSEE IS HIGHER THAN OTHER COMPA RABLE CASES. IT WAS SUBMITTED THAT THE ASSESSEE MADE IMPORTS FROM ITS F OREIGN AE WHICH WERE SUBJECTED TO THE TP PROVISIONS UNDER THE TRANSACTIO NAL NET MARGIN METHOD (HEREINAFTER CALLED THE TNMM) AND HENCE THERE WAS N O WARRANT FOR MAKING ANY FURTHER ADDITION ON THE TRANSACTION OF BRAND BUILDI NG EXPENSES INCURRED BY THE ASSESSEE FOR THE FOREIGN AE. THE LD. COUNSEL STATED THAT THE OVERALL HIGHER NET PROFIT RATE IMPLIES THAT, FIRSTLY, THERE WAS NO ADV ERTISEMENT BY THE ASSESSEE FOR THE BRAND OF THE FOREIGN AE AND SECONDLY, IF AT ALL IT WAS THERE, THE SAME STOOD COMPENSATED BY THE FOREIGN AE IN TERMS OF SALE OF G OODS TO THE ASSESSEE AT LOWER RATES. THE SALE OF GOODS AT LOWER PRICES TO THE ASS ESSEE BY THE FOREIGN AE SHOULD BE CONSIDERED AS A QUID PRO QUO FOR THE FOREIGN BRA ND BUILDING. FOR ASCERTAINING AS TO WHETHER OR NOT THE FOREIGN ENTERPRISE SOLD GO ODS TO THE ASSESSEE AT A LOWER PRICE, THE LD. AR URGED THAT THE OVERALL NET PROFIT RATE OF THE ASSESSEE SHOULD BE CONSIDERED, WHICH WILL NATURALLY ABSORB THE EFFECT OF INCURRING SUCH BRAND BUILDING EXPENSES. IF THE OVERALL PROFIT RATE IS HI GHER, IT WILL MEAN THAT THE EXPENSES INCURRED BY THE ASSESSEE ON BRAND BUILDING WERE COMPENSATED BY THE FOREIGN AE IN TERMS OF LOWER PRICE OF GOODS CHARGED FROM THE INDIAN AE, NECESSITATING NO SEPARATE FURTHER ADDITION ON THE A LLEGED PRESUMPTION OF THE ASSESSEE HAVING INCURRED ANY AMP EXPENSES TOWARDS B RAND BUILDING. THE LD. AR RELIED ON THE CASE OF THE HON'BLE SUPREME COURT IN CIT VS. CALCUTTA DISCOUNT CO. LTD. [(1973) 91 ITR 8 (SC)], TO CANVASS THE VIE W THAT THE ASSESSEE CANNOT BE EXPECTED TO EARN MAXIMUM PROFIT. IT WAS SUBMITTED T HAT THE ACTION OF THE REVENUE IN FIRSTLY TAXING HIGHER RATE OF NET PROFIT ON SALES AND THEREAFTER FURTHER INCREASING THE INCOME BY MAKING ADDITION ON ACCOUNT OF AMP EXPENSES, RUNS CONTRARY TO THE CARDINAL PRINCIPLE LAID DOWN IN THA T CASE. HE EXPLAINED THAT IN THAT CASE THE REVENUE OPINED THAT THE ASSESSEE SHOU LD HAVE TRANSFERRED ITS GOODS AT A HIGHER PRICE THAN THAT DECLARED. REJECTING THI S CONTENTION, THE HON'BLE SUPREME COURT CAME TO HOLD THAT THAT ONCE A TRANSAC TION IS BONA FIDE, THE PROFIT CANNOT BE COMPUTED BY TAKING MARKET PRICE, IGNORING THE REAL PRICE FETCHED. IN THE LIGHT OF THIS JUDGMENT IT WAS CONTENDED THAT TH E ACTION OF THE REVENUE IN FIRSTLY BENCHMARKING THE NET PROFIT BY APPLYING TNM M ON THE INTERNATIONAL TRANSACTION OF IMPORTS AND THEN MAKING SEPARATE ADD ITION FOR AMP EXPENSES IS AKIN TO THE STAND OF THE REVENUE IN THAT CASE, BEIN G THE MAXIMIZATION OF PROFIT IN ALL POSSIBLE WAYS, WHICH CANNOT BE SUSTAINED. WITH REFERENCE TO CERTAIN MATERIAL FROM THE PAPER BOOK, THE LD. AR SUBMITTED THAT THE ASSESSEE'S NET PROFIT RATE WAS BETTER THAN CERTAIN OTHER COMPARABLE CASES. SINCE T HE OVERALL NET PROFIT OF THE ASSESSEE WAS RELATIVELY HIGHER, IT WAS PLEADED THAT NO ADDITION WAS CALLED FOR BY SEPARATELY PROCESSING ANY ITEM OF EXPENSE INCLUDING THE AMP UNDER THE TP PROVISION. SIMILAR ARGUMENTS WERE ADVANCED BY THE L D. COUNSEL FOR SOME OF THE INTERVENERS. 25 21.2. PER CONTRA, THE LD. DR STRONGLY OPPOSED THIS CONTENTION BY SUBMITTING THAT THERE IS NO REQUIREMENT UNDER LAW THAT IF ONE TRANS ACTION HAS BEEN SUBJECTED TO THE TRANSFER PRICING PROVISIONS BY APPLYING THE TNM M THEN NO OTHER INTERNATIONAL TRANSACTION CAN BE SEPARATELY CONSIDE RED. IT WAS ACCENTUATED THAT ALL THE INTERNATIONAL TRANSACTIONS ARE REQUIRED TO BE VIEWED INDEPENDENT OF EACH OTHER. 21.3. WE HAVE HEARD THE RIVAL SUBMISSIONS ON THIS I SSUE IN THE LIGHT OF MATERIAL PLACED BEFORE US AND PRECEDENT RELIED. THE CRUX OF THE LD. AR'S SUBMISSION IN THIS REGARD IS THAT WHEN THE INTERNATIONAL TRANSACT ION OF IMPORT OF RAW MATERIAL WAS SCRUTINIZED BY THE TPO UNDER TNMM AND THE OVERA LL NET PROFIT OF THE ASSESSEE WAS FOUND TO BE HIGHER THAN OTHER COMPARAB LES, THEN NO OTHER INTERNATIONAL TRANSACTION COULD HAVE BEEN PROCESSED UNDER THE TP PROVISIONS. THERE ARE TWO SUB-ARGUMENTS IN THIS MAIN ARGUMENT O F THE LD. AR. FIRST, THAT THE INTERNATIONAL TRANSACTION OF IMPORT OF RAW MATERIAL HAS BEEN PROCESSED UNDER THE TNMM ON ENTITY LEVEL AND SECOND THAT WHEN ON DO ING THIS EXERCISE, THE OVERALL NET PROFIT WAS FOUND TO BE BETTER THAN OTHE R COMPARABLES, THEN THE NO ADDITION WAS CALLED FOR BY SUBJECTING THE AMP EXPEN SES TO THE TP PROVISIONS. 21.4. THERE IS A BASIC FALLACY IN THE FIRST SUB-ARG UMENT, WHICH LIES IN NOT PROPERLY APPRECIATING THE MODUS OPERANDI OF APPLYIN G THE TNMM. THIS METHOD PROVIDES FOR BENCHMARKING OF `AN' INTERNATIONAL TRA NSACTION BY CONSIDERING THE OPERATING PROFIT FROM THE CONCERNED INTERNATIONAL T RANSACTION VIS--VIS CERTAIN BASIS AS GIVEN IN RULE 10B(1)(E), BEING TOTAL COST, SALES, CAPITAL EMPLOYED ETC. HERE IT IS SIGNIFICANT TO NOTE THE MEANING OF THE T ERM `TRANSACTION' AS GIVEN IN RULE 10A(D). IT PROVIDES THAT : `TRANSACTION INCLUD ES A NUMBER OF CLOSELY LINKED TRANSACTIONS'. PLURAL OF TRANSACTIONS BECOMES SINGU LAR WHEN THE TRANSACTIONS ARE CLOSELY LINKED TO EACH OTHER OR ARE IDENTICAL. THES E CLOSELY LINKED TRANSACTIONS CAN BE PROCESSED AS ONE TRANSACTION UNDER ANY OF TH E PRESCRIBED METHODS. IF AN INDIAN ENTERPRISE HAS MADE SALE OF SIMILAR GOODS TO ITS FOREIGN AE THROUGH SEVERAL INVOICES AND HAS ALSO INCURRED SOME EXPENSE S OR PAID INTEREST TO IT, IT WOULD MEAN THAT ALL THE TRANSACTIONS OF SALES ARE C LOSELY LINKED AND THESE CAN BE PROCESSED AS ONE UNIT. HOWEVER THE TRANSACTIONS OF PAYMENT OF INTEREST OR INCURRING OF ANY OTHER EXPENSE WOULD BE REQUIRED TO BE SEPARATELY SCRUTINIZED UNDER CHAPTER-X BECAUSE THESE ARE OF A DIFFERENT NA TURE VIS-A-VIS THE TRANSACTIONS OF SALES. 21.5. IT IS UNDISPUTED THAT UNDER THE TNMM, IT IS A LWAYS THE OPERATING PROFIT FROM THE CONCERNED INTERNATIONAL TRANSACTION THAT I S VIEWED IN RELATION TO THE TOTAL COST, SALES OR CAPITAL EMPLOYED ETC. OF THAT INTERNATIONAL TRANSACTION. IT IS NOT AS IF THE PERCENTAGE OF THE MARGIN IS TO BE DET ERMINED BY CONSIDERING THE NET PROFIT OF THE ENTITY IN RELATION TO THE TOTAL SALES OF THE ENTITY. WHEN WE CONSIDER OPERATING PROFIT TO TOTAL COSTS OF AN INTERNATIONAL TRANSACTION, ALL THE ITEMS OF NON-OPERATING EXPENSES AND NON-OPERATING INCOME QUA SUCH INTERNATIONAL TRANSACTION ARE LIABLE TO BE EXCLUDED. THE CORRECT APPROACH UNDER THE TNMM IS TO CONSIDER THE OPERATING PROFIT FROM EACH INTERNAT IONAL TRANSACTION IN RELATION TO THE TOTAL COST OR SALES OR CAPITAL EMPLOYED ETC. OF SUCH INTERNATIONAL TRANSACTION AND NOT THE NET PROFIT, TOTAL COSTS, SA LES, CAPITAL EMPLOYED OF THE ASSESSEE AS A WHOLE ON ENTITY LEVEL. SECTION 92C UN EQUIVOCALLY PROVIDES THAT THE ALP IN RELATION TO `AN' INTERNATIONAL TRANSACTION S HALL BE DETERMINED BY ANY OF THE PRESCRIBED METHODS. IN TURN, RULE 10B(1)(E) ALS O TALKS OF THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM `AN' INTERNA TIONAL TRANSACTION. WHEN THE MANDATE OF THE SECTION AND THE RELEVANT RULE IS UNA MBIGUOUS SO AS TO APPLY ON EACH TRANSACTION, AS IS APPARENT FROM THE USE OF TH E ARTICLE `AN', THEN THE COMPUTATION OF THE ALP OF `AN' INTERNATIONAL TRANSA CTION ON THE ENTITY LEVEL IS INAPPROPRIATE. OUR CONCLUSION THAT EACH INTERNATION AL TRANSACTION IS REQUIRED TO BE SEPARATELY SCRUTINIZED UNDER CHAPTER-X ALSO BECO MES APPARENT FROM THE 26 LANGUAGE OF SECTION 92(3) AS DISCUSSED INFRA. THUS IT IS CLEAR THAT THE SANCTION IS FOR APPLYING THE TNMM ONLY ON A TRANSACTIONAL LEVEL AND NOT ON ENTITY LEVEL. OF COURSE, THE TNMM CAN BE CORRECTLY APPLIED ON ENTITY LEVEL IF ALL THE INTERNATIONAL TRANSACTIONS ARE OF SALE BY THE ASSES SEE TO ITS FOREIGN AE AND THERE IS NO OTHER TRANSACTION OF SALE TO ANY OUTSIDER AND ALSO THERE IS NO OTHER INTERNATIONAL TRANSACTION. BUT IF THERE ARE SEVERAL UNRELATED INTERNATIONAL TRANSACTIONS, AS IS THE CASE BEFORE US AND THE ASSE SSEE OR THE TPO HAS APPLIED THE TNMM IN A WRONG MANNER ON ENTITY LEVEL FOR TEST ING ANY OF SUCH TRANSACTIONS, THEN THE REMEDY LIES IN CORRECTING SU CH MISTAKE RATHER THAN DRAWING LEGALLY UNSUSTAINABLE CONCLUSIONS BY TAKING SUCH MISTAKE AS A CORRECT LEGAL POSITION. 21.6. NOW WE ESPOUSE THE SECOND SUB-ARGUMENT THAT W HEN ON APPLYING THE TNMM ON ENTITY LEVEL FOR THE TRANSACTION OF IMPORT OF RAW MATERIAL THE OVERALL NET PROFIT IS BETTER THAN OTHER COMPARABLES, THEN N O ADDITION IS CALLED FOR BY SUBJECTING THE AMP EXPENSES TO THE TP PROVISIONS. W E HAVE HELD IN AN EARLIER PARA THAT WHEN THERE ARE DIFFERENT UNRELATED INTERN ATIONAL TRANSACTIONS, THE APPLICATION OF TNMM ON ENTITY LEVEL FOR EXAMINING O NE OF SUCH TRANSACTIONS, IS ITSELF AN INCORRECT APPROACH. NOTWITHSTANDING THAT, WE DEEM IT EXPEDIENT TO DEAL WITH THE ARGUMENT OF THE LD. AR THAT IF RATE OF NET PROFIT OF THE ASSESSEE IS BETTER THAN OTHER COMPARABLES, THEN NO ADJUSTMENT CAN BE D ONE UNDER CHAPTER-X. 21.7. ON A SPECIFIC QUERY FROM THE BENCH, IT WAS AD MITTED BY THE LD. AR THAT NO ADDITION WAS MADE BY THE TPO ON ACCOUNT OF APPLICAT ION OF THE TNMM ON THE IMPORTS MADE BY THE ASSESSEE FROM ITS FOREIGN AE. I N OUR CONSIDERED OPINION, THERE IS A NOTEWORTHY DIFFERENCE BETWEEN TWO SITUAT IONS, VIZ., ONE WHERE THE TNMM IS WRONGLY APPLIED ON ENTITY LEVEL AND SOME AD DITION IS MADE TO THE OVERALL NET PROFIT OF THE INDIAN AE WHILE TESTING T HE INTERNATIONAL TRANSACTION OF IMPORTS OF RAW MATERIAL AND ALSO SOME FURTHER ADDIT ION IS MADE BY APPLYING THE TP PROVISION ON AMP EXPENSES; AND THE SITUATION IN WHICH NO ADDITION IS MADE TO THE OVERALL PROFIT ON ACCOUNT OF APPLICATION OF THE TNMM BUT AN ADDITION IS MADE BY APPLYING THE TP PROVISIONS ON THE TRANSACTI ON OF AMP EXPENSES INCURRED TOWARDS BRAND BUILDING FOR THE FOREIGN AE. 21.8. WE FIND NO BAR ON THE POWER OF THE TPO IN PRO CESSING ALL INTERNATIONAL TRANSACTIONS UNDER THE TP PROVISIONS WHEN THE OVERA LL NET PROFIT EARNED BY THE ASSESSEE IS BETTER THAN OTHERS. EARNING AN OVERALL HIGHER PROFIT RATE IN COMPARISON WITH OTHER COMPARABLE CASES CANNOT BE CO NSIDERED AS A LICENCE TO THE ASSESSEE TO RECORD OTHER EXPENSES IN INTERNATIO NAL TRANSACTIONS WITHOUT CONSIDERING THE BENEFIT, SERVICE OR FACILITY OUT OF SUCH EXPENSES AT ARM'S LENGTH. ALL THE TRANSACTIONS ARE TO BE SEPARATELY VIEWED. T HIS POSITION CAN BE SEEN WITH A SIMPLE ILLUSTRATION. SUPPOSE AN INDIAN ENTITY IS ENGAGED IN MANUFACTURING OF SOME PRODUCTS AND ALL THE SALES ARE TO ITS FOREIGN AE. IN SUCH INTERNATIONAL TRANSACTION, IT EARNS ACTUAL PROFIT OF, SAY, `120/- . FURTHER SUPPOSE THE ARM'S LENGTH PROFIT ON TOTAL SALES EARNED IN COMPARABLE U NCONTROLLED TRANSACTIONS IS `100. IN SUCH A CASE, THERE CAN BE NO QUESTION OF M AKING ANY ADDITION ON ACCOUNT OF ARM'S LENGTH PROFIT FROM SUCH INTERNATIO NAL TRANSACTION OF SALE TO FOREIGN AE BECAUSE THE ACTUAL OVERALL PROFIT IS MOR E THAN THE ARM'S LENGTH PROFIT. IT MAY ALSO BE POSSIBLE THAT THE ACTUAL PROFIT OF T HE INDIAN AE WAS `140/- BUT THE AMP EXPENSES HAVE BEEN SO CLAIMED AS DEDUCTION SO A S TO INCLUDE A PART REPRESENTING BRANDING BUILDING FOR THE FOREIGN AE T O THE TUNE OF `20/-. IN SUCH A CASE, NOTWITHSTANDING THE FACT THAT THE ASSESSEE'S OVERALL PROFIT AT `120/- IS MORE THAN THE ARM'S LENGTH PROFIT EARNED BY COMPARABLE C ASES AT `100/-, STILL THERE WILL BE A REQUIREMENT FOR MAKING ADJUSTMENT OF `20/- ON ACCOUNT OF ADVERTISEMENT EXPENSES INCURRED BY THE ASSESSEE TOWARDS THE BRAND BUILDING ON BEHALF OF THE FOREIGN AE. IF WE ACCEPT THE ASSESSEE'S CONTENTION THAT SINCE `120/-, BEING THE PROFIT DECLARED BY THE ASSESSEE FROM THE INTERNATIO NAL TRANSACTION IS MORE THAN 27 THE ARM'S LENGTH PROFIT OF `100/- AND HENCE NO FURT HER ADJUSTMENT ON ACCOUNT OF AMP EXPENSES SHOULD BE MADE, THEN THE ASSESSEE'S IN COME WOULD STAND REDUCED TO `120/- AS AGAINST THE ACTUAL INCOME OF `140/-. W E FAIL TO APPRECIATE AS TO HOW THE JUDGMENT IN THE CASE OF CALCUTTA DISCOUNT CO. L TD. (SUPRA) ADVANCES THE CASE OF THE ASSESSEE. THERE CANNOT BE ANY QUARREL O N THE PROPOSITION THAT THE ASSESSEE CANNOT BE COMPELLED TO EARN MAXIMUM PROFIT . AS IT IS THE REAL PROFIT WHICH IS TO BE TAXED AND THE ASSESSEE CANNOT BE EXP ECTED TO EARN MAXIMUM PROFIT, IN THE SAME WAY, THE ASSESSEE CANNOT BE ALL OWED TO REDUCE ITS REAL PROFIT BY INCLUDING CERTAIN EXPENSES WHICH ARE FOR THE BEN EFIT OF THE FOREIGN AE. 21.9. IT IS PERTINENT TO NOTE THAT PRESENTLY WE ARE DEALING WITH A CASE IN WHICH THE MAJORITY OF THE ASSESSEE'S SALES IS TO INDIAN C USTOMERS. NATURALLY THE TP PROVISIONS CANNOT BE APPLIED IN RESPECT OF SALES TO INDIAN CUSTOMERS BECAUSE THESE ARE NOT INTERNATIONAL TRANSACTIONS. IN SUCH A CASE, THERE CAN BE NO BENCHMARKING OF THE PROFITS REALIZED FROM SUCH INDI AN CUSTOMERS SO AS TO FORM A PLATFORM FOR CONTENDING THAT THE TNMM HAS BEEN APPL IED ON THE OVERALL PROFITS AND HENCE THE AMP EXPENSES SHOULD NOT BE SUBJECTED TO THE TP PROVISIONS. IN FACT, THE ASSESSEE IS A MANUFACTURER AND ONLY RAW M ATERIALS ARE IMPORTED FROM ITS FOREIGN AE. THE TRANSACTION OF IMPORT OF RAW-MA TERIAL IS A SEPARATE INTERNATIONAL TRANSACTION LIABLE TO BE SUBJECTED TO THE TP PROVISIONS. APART FROM SUCH PURCHASE OF RAW- MATERIAL, THE ASSESSEE, AS A MANUFACTURER IS ALSO REQUIRED TO INCUR SEVERAL OTHER EXPENSES ON MANUFACTURING, F INANCING AND SELLING WHICH CONSTITUTE PART OF THE TOTAL COST OF PRODUCT ALONG WITH THE COST OF RAW MATERIALS. SUBJECTING THE INTERNATIONAL TRANSACTION OF PURCHAS E OF RAW MATERIAL TO THE TP PROVISIONS WOULD ONLY SHOW THAT PURCHASE PRICE OF R AW-MATERIAL IS NOT UNNECESSARILY INFLATED. IT IS SELF EVIDENT THAT NET PROFIT IS NOT DEPENDENT ONLY ON THE PURCHASE COST. A HOST OF OTHER FACTORS CONTRIBU TE TO THE EARNING OF PROFIT. IT MAY BE POSSIBLE THAT A MANUFACTURER SUCCEEDS IN MAK ING ECONOMICAL PURCHASES BUT SUFFERS SETBACK IN INCURRING OTHER EXPENSES THE REBY RESULTING INTO A COMPARATIVELY LOW PROFIT. SIMILARLY THERE CAN BE A CONVERSE SITUATION IN WHICH THE PURCHASES ARE MADE COSTLY BUT THE ECONOMIES IN OTHER AREAS ARE ACHIEVED THEREBY LEADING TO HIGHER PROFIT. THE CRUX IS THAT PURCHASE COST IS ONLY ONE OF SEVERAL OTHER IMPORTANT FACTORS HAVING A BEARING ON THE OVERALL PROFIT. ALL OTHER COSTS, INCLUDING THE AMP EXPENSES ARE INDEPENDENT O F SUCH COST OF IMPORT OF RAW MATERIAL, HAVING SOME CORRELATION WITH THE OVERALL PROFIT. IN OUR CONSIDERED OPINION THERE IS NO LOGIC IN NOT APPLYING THE TP PR OVISIONS ON AMP EXPENSES, IF THE INTERNATIONAL TRANSACTION OF IMPORT OF RAW-MATE RIAL FROM THE FOREIGN AE HAS BEEN SUBJECTED TO THE TP PROVISIONS. AS THE TRANSAC TIONS OF IMPORT OF RAW- MATERIAL AND AMP EXPENSES ARE DISTINCT FROM EACH OT HER, HAVING INDEPENDENT EFFECT ON THE OVERALL NET PROFIT OF THE INDIAN AE, BOTH ARE REQUIRED TO BE SEPARATELY PROCESSED AS PER THE TP PROVISIONS. 21.10. IT WAS ALSO CONTENDED ON BEHALF OF THE ASSES SEE THAT IF THE OVERALL PROFIT OF THE INDIAN ENTITY IS MORE THAN THE COMPARABLE CASES THEN IT SHOULD BE PRESUMED THAT THE FOREIGN ENTERPRISE SUPPLIED GOODS AT RELAT IVELY LOW PRICE TO MAKE UP FOR THE AMP EXPENSES INCURRED IN INDIA TOWARDS BRAND PR OMOTION. IN OUR CONSIDERED OPINION THERE ARE NO ROOTS FOR SUCH A PR ESUMPTION. IN ORDER TO TAKE BENEFIT OF SUCH A CONTENTION THE ASSESSEE IS REQUIR ED TO DIRECTLY PROVE THE FACT OF CHEAP PURCHASES DE HORS THE OVERALL HIGHER NET PROF IT RATE. THIS FACT CAN BE ESTABLISHED BY DEMONSTRATING THAT THE FOREIGN AE CH ARGED A SPECIALLY LOW PRICE FROM THE ASSESSEE IN COMPARISON WITH THAT CHARGED F OR THE SIMILAR GOODS SUPPLIED TO OTHER INDEPENDENT ENTITIES DEALING WITH IT IN INDIA OR IN CASE THERE IS NO OTHER INDEPENDENT ENTITY IN INDIA, THEN THE PRIC E CHARGED FOR SIMILAR GOODS FROM OTHER FOREIGN PARTIES. IT CAN ALSO BE PROVED B Y SHOWING THAT GOODS WITH IDENTICAL FEATURES ARE AVAILABLE IN THE INDIAN MARK ET AT A HIGHER PRICE. THE FACT THAT THE ASSESSEE HAS A BETTER NET PROFIT RATE IN C OMPARISON WITH OTHER COMPARABLE ENTITIES IS NOT DECISIVE IN ITSELF OF TH E ASSESSEE HAVING PURCHASED THE 28 GOODS AT A CONCESSIONAL RATE FROM ITS FOREIGN AE AS A COMPENSATION FOR ITS INCURRING AMP EXPENSES TOWARDS THE PROMOTION OF THE IR BRAND. 21.11. AT THIS STAGE, IT IS RELEVANT TO NOTE SUB-SE CTION (1) OF SECTION 92, WHICH PROVIDES THAT : `ANY INCOME ARISING FROM AN INTERNA TIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE.' SIMILARLY IT IS PERTINENT TO TAKE STOCK OF SUB-SECTION (3) OF SECTION 92, WHICH PROVIDES THAT : `THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE THE COMPUTATION OF INCOME UNDER SUB- SECTION (1) OR THE DETERMINATION OF THE ALLOWA NCE FOR ANY EXPENSE OR INTEREST UNDER THAT SUB-SECTION, OR THE DETERMINATI ON OF ANY COST OR EXPENSE ALLOCATED OR APPORTIONED, OR, AS THE CASE MAY BE, C ONTRIBUTED UNDER SUB-SECTION (2), HAS THE EFFECT OF REDUCING THE INCOME CHARGEAB LE TO TAX OR INCREASING THE LOSS, AS THE CASE MAY BE, COMPUTED ON THE BASIS OF ENTRIES MADE IN THE BOOKS OF ACCOUNT IN RESPECT OF THE PREVIOUS YEAR IN WHICH TH E INTERNATIONAL TRANSACTION WAS ENTERED INTO'. ON A CAREFUL PERUSAL OF SUB-SECT ION (3) IN COMBINATION WITH SUB- SECTION (1), IT TRANSPIRES THAT IF THE COMPUTA TION OF INCOME HAVING REGARD TO ALP OF AN INTERNATIONAL TRANSACTION HAS THE EFFECT OF REDUCING THE INCOME CHARGEABLE TO TAX COMPUTED ON THE BASIS OF ENTRIES MADE IN THE BOOKS OF ACCOUNT, THEN THE PROVISIONS OF SECTION 92 WILL BE IGNORED. IT CAN BE UNDERSTOOD BY WAY OF A SIMPLE EXAMPLE. IF THE ARM'S LENGTH PRICE OF AN I NTERNATIONAL TRANSACTION IN THE NATURE OF EXPENSE IS `100 AND THE AMOUNT OF ACTUAL EXPENSE RECORDED IN THE BOOKS OF ACCOUNT IS `80/-, THEN THE ARM'S LENGTH PR ICE OF SUCH EXPENSE AT `100 WILL BE IGNORED, BECAUSE ACTING UPON SUCH ALP WILL LEAD TO LOWERING OF THE TOTAL INCOME BY `20, WHICH ISN'T PERMISSIBLE AS PER SUB-S ECTION (3). IF HOWEVER THE ALP OF SUCH EXPENSE TURNS OUT TO BE LOWER AT `60, T HEN SUB-SECTION (1) OF SECTION 92 WILL APPLY AND THE TOTAL INCOME OF THE ASSESSEE WILL BE COMPUTED BY CONSIDERING THE ALP OF EXPENSE AT `60, MAKING A NOR THWARDS SOJOURN TO THE TOTAL INCOME BY `20. 21.12. WE HAVE NOTICED ABOVE THAT SUB-SECTION (1) O F SECTION 92 READ WITH RULE 10B REQUIRES COMPUTATION OF INCOME FROM `AN' INTERN ATIONAL TRANSACTION HAVING REGARD TO ITS ARM'S LENGTH PRICE. IT MEANS THAT EAC H INTERNATIONAL TRANSACTION IS REQUIRED TO BE SUBJECTED TO THE TP PROVISIONS DISTI NCTLY. WHAT IS RELEVANT TO NOTE ON A CONJOINT READING OF SUB-SECTION (1) AND SUB-SE CTION (3) OF SECTION 92 IS THAT IF THERE ARE TWO DISTINCT INTERNATIONAL TRANSACTION S AND THE DETERMINATION OF ALP IN RESPECT OF THE FIRST TRANSACTION LEADS TO AN INC REASE IN TOTAL INCOME AS PER SUB- SECTION (1) BUT NO ADJUSTMENT IS CALLED FOR IN RESP ECT OF THE SECOND TRANSACTION AS PER SUB-SECTION (3) BECAUSE OF THE ALP ON THE NEGAT IVE SIDE, THEN THE ALP IN RESPECT OF THE FIRST TRANSACTION SHALL BE CONSIDERE D IN COMPUTING THE TOTAL INCOME, BUT THE ALP OF THE SECOND TRANSACTION SHALL BE IGNORED. THERE IS NO PROVISION WHICH PERMITS SET OFF OF NEGATIVE ADJUSTM ENT WITH THE POSITIVE ADJUSTMENT TO THE INCOME ON ACCOUNT OF DIFFERENT IN TERNATIONAL TRANSACTIONS. THE OUTCOME OF BOTH THE TRANSACTIONS HAS TO BE GIVEN EF FECT DISTINCTLY. IT, THEREFORE, DIVULGES THAT TWO OR MORE INTERNATIONAL TRANSACTION S ARE REQUIRED TO BE SEPARATELY PROCESSED UNDER THE TP PROVISIONS. THE C ONTENTION THAT IF TNMM HAS BEEN APPLIED ON ONE INTERNATIONAL TRANSACTION, THEN IT WOULD OUST THE JURISDICTION OF THE TPO TO PROCESS OTHER INTERNATIONAL TRANSACTI ONS UNDER CHAPTER-X, REALLY DOES NOT STAND IN THE SCHEME OF THE PROVISIONS. FUR THER, IT THIS CONTENTION IS TAKEN TO LOGICAL CONCLUSION, THEN SUB-SECTION (3) O F SEC. 92 WILL BECOME REDUNDANT TO SOME EXTENT. 21.13. THERE IS ONE MORE WAY OF FORTIFYING OUR ABOV E CONCLUSION. TNMM IS ONE OF THE FIVE RECOGNIZED METHODS FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION. SUCH ALP CAN BE DETERMINED INTER ALIA BY COMPARABLE UNCONTROLLED PRICE (CUP) METHOD OR COST PLUS METHOD OR EVEN BY T HE TNMM. ALL THE FIVE METHODS, AS PRESCRIBED UNDER SECTION 92(1) AND RULE 10B, AIM AT DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION IN ONE WAY OR T HE OTHER. FIRST IS THE CUP 29 METHOD, BY WHICH THE PRICE CHARGED OR PAID FOR PROP ERTY TRANSFERRED ETC. IN A COMPARABLE UNCONTROLLED TRANSACTION IS IDENTIFIED. SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION. THE ADJUSTED P RICE ARRIVED AT IS TAKEN AS ALP IN RESPECT OF THE PROPERTY TRANSFERRED ETC. IN THE INTERNATIONAL TRANSACTION. IN THE LIKE MANNER ALL THE METHODS INCLUDING TNMM P ROVIDE FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION. THE MAIN FOCUS OF THE LD. AR WAS ON RESTRICTING THE APPLICATION OF THE PROVISIONS OF CH APTER-X TO OTHER INTERNATIONAL TRANSACTIONS WHEN ONE TRANSACTION HAS BEEN PROCESSE D UNDER THE TNMM. IT HAS BEEN ARGUED SO ON THE GROUND THAT UNDER THE TNMM, T HE NET PROFIT OF THE ENTITY IS CONSIDERED WHICH INCLUDES THE EFFECT OF ALL OTHE R TRANSACTIONS ALSO. THE NATURAL CONSEQUENCE OF THE LD. AR'S ARGUMENT ON THI S ISSUE IS THAT IF THE ALP OF AN INTERNATIONAL TRANSACTION IS DETERMINED BY THE T NMM THEN NO OTHER INTERNATIONAL TRANSACTION CAN BE SUBJECTED TO THE T P PROVISIONS. FROM HERE IT FOLLOWS THAT IF ANY OTHER METHOD, SUCH AS CUP OR RE SALE PRICE METHOD ETC., IS APPLIED FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION, THEN THE PROCESSING OF THE OTHER INTERNATIONAL TRANSACTIONS IS PERMISSIBLE. THE IRRATIONALITY OF THE CONTENTION CAN BE MEASURED FRO M THIS FACTOR ALONE. AS ALL THE FIVE METHODS ARE AIMED TOWARDS ONE END, BEING THE D ETERMINATION OF ALP OF AN INTERNATIONAL TRANSACTION, IT IS BUT NATURAL THAT T HE CONSEQUENCES OF APPLICATION OF EACH SUCH METHOD QUA THE OTHER INTERNATIONAL TRA NSACTIONS CANNOT BE VARYING. IT IS NOT POSSIBLE TO HOLD THAT IF ONE METHOD IS EM PLOYED FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION THEN IT IS OPEN TO THE TPO TO PROCESS OTHER INTERNATIONAL TRANSACTIONS THROUGH THE TP PROVISION S, BUT IF SOME OTHER METHOD IS SO USED, THEN ALL OTHER INTERNATIONAL TRANSACTIO NS ARE IMMUNE FROM SUCH PROCESSING. THE LD. AR COULD NOT DRAW OUR ATTENTION TOWARDS ANY SUCH PROVISION IN THE ACT. AT BEST, THE APPLICATION OF ANY METHOD INCLUDING TNMM SHOWS THAT THE SAID TRANSACTION IS AT ALP. IN OUR CONSIDERED O PINION, THE REQUIREMENT OF BENCHMARKING ALL OTHER INTERNATIONAL TRANSACTIONS O F EXPENSES INCLUDING AMP, ALSO NEEDS TO BE SCRUPULOUSLY DONE, APART FROM TEST ING ONE INTERNATIONAL TRANSACTION UNDER THE TNMM. 22.1. NOTWITHSTANDING HIS ARGUMENT THAT THE WHEN TH E TNMM IS APPLIED TO INTERNATIONAL TRANSACTION OF IMPORTS, NO ADDITION C AN BE MADE BY PROCESSING ANY OTHER INTERNATIONAL TRANSACTION, THE LD. AR THEN CO NTENDED THAT THE ADDITION BY WAY OF ADJUSTMENT MADE IS NOT SUSTAINABLE BECAUSE T HE DETERMINATION OF ALP IN THIS CASE IS NOT BASED ON ANY OF THE METHODS PRESCR IBED UNDER THE TRANSFER PRICING REGULATIONS. REFERRING TO SEC. 92C, THE LD. AR SUBMITTED THAT FIVE METHODS HAVE BEEN LISTED IN SPECIFIC AND THERE IS A GENERAL CLAUSE I.E. (F), WHICH STATES - SUCH OTHER METHODS AS MAYBE PRESCRIBED BY THE BOARD . IT WAS STATED THAT SUCH OTHER METHOD AS PER CLAUSE (F) OF SEC. 92 C(1), HAS BEEN BROUGHT INTO EXISTENCE BY MEANS OF NOTIFICATION DATED 23-5-2012 THROUGH INCOME-TAX SIXTH AMENDMENT RULES 2012 COMING INTO FORCE ON FIRST DAY OF APRIL 2012, APPLICABLE FROM THE A.Y. 2012-13. RELYING ON THE JUDGMENT OF T HE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. & ORS. VS. CIT [(2012) 247 CTR (DEL.) 162], THE LD. AR CONTENDED THAT RULE 10A B, SPECIFYING THE SIXTH METHOD, CANNOT HAVE RETROSPECTIVE OPERATION WHEN IT HAS BEEN MADE APPLICABLE FROM A.Y. 2012-13. 22.2. COMING BACK TO HIS POINT, IT WAS ARGUED THAT THE TPO/DRP HAVE DETERMINED ALP IN RESPECT OF AMP EXPENSES BY APPLYI NG THE BRIGHT LINE TEST, WHICH IS NOT ONE OF THE FIVE RECOGNIZED METHODS UND ER THE INDIAN LEGISLATION. AS DETERMINATION OF ALP HAS NOT BEEN DONE AS PER ANY O F THE METHODS U/S 92C, THE LD. AR CONTENDED THAT THE SAME SHOULD BE SET ASIDE. HE RELIED ON AN ORDER PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN CA CO MPUTER ASSOCIATES PVT. LTD. VS. DCIT DATED 28-1-2010, IN WHICH THE ASSESSE E PAID ROYALTY TO ITS PARENT COMPANY. THE TPO REJECTED THE ALP OF ROYALTY PAYMEN T AS SHOWN BY THE 30 ASSESSEE ON THE GROUND THAT SOME OF THE SALES DID N OT MATERIALIZE FOR VARIOUS REASONS AND THE SAME WERE WRITTEN OFF BY THE ASSESS EE IN THE SAME FINANCIAL YEAR. IT WAS OPINED THAT THERE WAS NO QUESTION OF P AYING ROYALTY ON SUCH SALES MERELY ON THE BASIS OF RAISING INVOICES. THE TRIBUN AL REJECTED THE DEPARTMENTAL STAND BY HOLDING THAT THE ALP WAS NOT DETERMINED BY THE TPO AS PER ANY OF THE METHODS PRESCRIBED IN RULE 10B. TO THIS EXTENT THE ACTION OF TPO WAS SET ASIDE. THE SAID ORDER PASSED BY THE TRIBUNAL HAS BEEN UPHE LD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. CA COMPUTERS PVT. LTD. VIDE ITS JUDGMENT DATED 3-7-2012. IN VIEW OF THIS LEGAL POSITION, THE LD. AR CONTENDED THAT SINCE THE BRIGHT LINE METHOD ADOPTED BY THE AUTHORITIES B ELOW IS NOT A RECOGNIZED METHOD, THE DETERMINATION SO MADE SHOULD BE SET ASI DE AND THE MATTER NEED NOT BE RESTORED FOR A FRESH DETERMINATION. IT WAS ALSO CONTENDED THAT THE REVENUE CANNOT BE ALLOWED TO HAVE SECOND INNINGS FOR ITS OW N FAULT. THE LD. AR FURTHER SUBMITTED THAT THE TPO DID NOT CONFRONT THE ASSESSE E WITH THE COMPUTATION OF THE ALP BY APPLYING THE BRIGHT LINE TEST, WHICH GOES AG AINST THE PRINCIPLES OF NATURAL JUSTICE. 22.3. THE LEARNED COUNSEL FOR ONE OF THE INTERVENER S SUBMITTED THAT ANY CONTRACT FOR PURCHASE/SERVICE INVOLVES TWO ELEMENTS VIZ. QUA NTITY AND PRICE. CHAPTER-X OF THE ACT ONLY TOUCHES PRICE ASPECT AND NOT QUANTITY ASPECT. BY ADOPTING THE BRIGHT LINE METHOD, THE LEARNED COUNSEL CONTENDED THAT THE TPO HAS IMPINGED ON THE QUANTUM ASPECT OF THE ADVERTISEMENT EXPENSES WHICH CANNOT FALL WITHIN THE PURVIEW OF CHAPTER-X. HE SUBMITTED THAT BY APPLYING THE BRIGHT LINE METHOD, THE TPO/AO HAVE TAKEN A VIEW THAT THE ASSESSEE SHOULD N OT HAVE INCURRED SO MUCH EXPENSES ON AMP. HE ALSO CONTENDED THAT CHAPTER-X O F THE ACT IS A COMPLETE CODE IN ITSELF INASMUCH AS IT INCLUDES NOT ONLY THE SUBSTANTIVE BUT ALSO THE MACHINERY PROVISIONS. IF MACHINERY PROVISION CANNOT BE APPLIED THEN THE SUBJECT MATTER GOES OUT OF THE TAX NET. IN SUPPORT OF THIS CONTENTION, HE RELIED ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE O F CIT V. B.C.SRINIVASA SETTY [(1981) 128 ITR 294 (SC)] AND ANOTHER JUDGMENT OF T HE HON'BLE SUPREME COURT IN THE CASE OF PNB FINANCE LIMITED V. CIT [(2008) 3 07 ITR 75 (SC)]. IN THE LIGHT OF THESE JUDGMENTS IT WAS SUBMITTED THAT THE HON'BLE SUPREME COURT HAS CLEARLY HELD THAT WHERE MACHINERY PROVISION FAILS, THE CHARGE CANNOT BE ATTRACTED UNDER THE SUBSTANTIVE PROVISION. SINCE TH E REVENUE'S CASE HINGES ON THE COMPUTATION OF ALP OF AMP EXPENSES ON THE BASIS OF A BRIGHT LINE METHOD WHICH IS NOT PRESCRIBED U/S 92C, THE LD. AR CONTEND ED THAT THE ENTIRE EXERCISE MUST FAIL. 22.4. PER CONTRA, THE LD. DR EMPHASIZED ON THE WORD ANY AS USED IN SUB- SECTION (1) OF SECTION 92C(1). HIS CONTENTION WAS T HAT THE WORD ANY IN SUB- SECTION (1) CANNOT BE READ AS RESTRICTING ITSELF TO ANY ONE OF THE FIVE METHODS BUT IT MAY ALSO BE A COMBINATION OF TWO OR MORE OF SUCH METHODS. HE RELIED ON CERTAIN TRIBUNAL ORDERS TO BUTTRESS HIS POINT THAT THE ALP CAN BE DETERMINED BE ANY METHOD EVEN THOUGH IT IS NOT SPECIFICALLY ONE O F SUCH FIVE METHODS. HE INVITED OUR ATTENTION TOWARDS AN ORDER PASSED BY TH E BANGALORE BENCH OF THE TRIBUNAL IN WHICH IT HAS BEEN HELD THAT EXCESS EARN ING METHOD (EEM) SHOULD BE APPLIED FOR DETERMINATION OF ALP WHICH IS NOTHIN G BUT ENLARGEMENT OF THE CUP METHOD. HE ALSO REFERRED TO ANOTHER ORDER PASSE D BY THE BANGALORE BENCH OF THE TRIBUNAL IN WHICH SCOPE OF THE CUP METHOD HA S BEEN ENLARGED. IN THIS CASE THE TRIBUNAL DIRECTED THE DETERMINATION OF ALP BY COMPUTING WRITTEN DOWN VALUE OF THE ASSET AS AGAINST THE VALUE AS PER THE REGISTERED VALUER'S REPORT, WHICH WAS ADOPTED BY THE TPO. THE LEARNED DR CONTEN DED THAT THE MAIN THRUST OF THE TP PROVISION IS ON THE DETERMINATION OF ALP AND METHODS ARE ONLY MEANS TO ACHIEVE THIS END RESULT. HE ARGUED THAT IF THERE IS AN INTERNATIONAL TRANSACTION AND THE ALP CANNOT BE DETERMINED BY ANY OF THE PRES CRIBED METHODS, THEN THERE CAN BE NO FETTERS ON THE POWERS OF THE TPO TO ADOPT ANY OTHER METHOD FOR DETERMINING ALP. 31 22.5. WITHOUT PREJUDICE TO HIS ABOVE SUBMISSION, TH E LEARNED DR CONTENDED THAT THE ACTION OF THE DRP IN ENHANCING THE COST/VALUE O F THE INTERNATIONAL TRANSACTION OF `161.21 CRORE BY A MARK-UP OF 13% LE D TO THE IMPLICIT APPLICATION OF THE `COST PLUS METHOD'. IT WAS SUBMITTED THAT ME RELY BECAUSE THERE IS NO EXPRESS MENTION OF THE USE OF COST PLUS METHOD, THE REALITY AND THE SUBSTANCE OF THE APPLICATION OF SUCH METHOD CANNOT BE DENIED. 22.6. REPLYING TO THE CONTENTION RAISED ON BEHALF O F THE ASSESSEE FOR CANCELLING THE ASSESSMENT ITSELF FOR THE REASON OF APPLICATION OF A NON-PRESCRIBED METHOD, THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED T HAT THE DRP APPLIED COST PLUS METHOD. EVEN IF IN ANY CASE THERE IS A WRONG A PPLICATION OF METHOD BY THE AUTHORITIES, THE RIGHT COURSE IS TO SEND THE MATTER BACK TO THE AO/TPO FOR CORRECTING THE DEFICIENCY INSTEAD OF TAKING AWAY TH E JURISDICTION ITSELF. 22.7. IN REJOINDER, THE LEARNED AR FOUND FAULT WITH THE ARGUMENT OF THE LD. DR ON THE APPLICATION OF THE COST PLUS METHOD BY CONTENDI NG THAT THIS METHOD CANNOT BE APPLIED AS THE TRANSACTION IS NOT IN THE NATURE OF RENDERING OF SERVICE. HIS CONTENTION WAS THAT UNLESS AN ASSESSEE ITSELF IS RE GULARLY ENGAGED IN THE PROVISION OF SERVICE WHICH IS PROVIDED TO THE AE, T HE COST PLUS METHOD U/S 10B(1)(C) CANNOT APPLY. 22.8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. BEF ORE PROCEEDING FURTHER IT IS IMPERATIVE TO NOTE THAT WE HAVE DEALT WITH THE CONT ENTION OF THE LD. AR ABOUT THE APPLICATION OF BRIGHT LINE TEST BY THE AUTHORITIES BELOW BY HOLDING THAT SUCH METHOD HAS BEEN EMPLOYED TO DETERMINE THE COST/VALU E OF INTERNATIONAL TRANSACTION AND NOT ITS ALP. ANOTHER CONTENTION HAS BEEN RAISED BY THE LD. AR THAT UNLESS AN ASSESSEE ITSELF IS REGULARLY ENGAGED IN THE BUSINESS OF PROVIDING SERVICES, THERE CAN BE NO PROVISION OF SERVICE TO T HE OTHER AE. THIS CONTENTION HAS ALSO BEEN DEALT WITH AND REJECTED BY HOLDING TH AT THE PRESENT INTERNATIONAL TRANSACTION IS IN THE NATURE OF `PROVISION OF SERVI CE'. NOW WE WILL PROCEED TO SEE IF IT HAS TO BE ANY OF THE PRESCRIBED METHODS OR IT CAN EVEN BE A COMBINATION THEREOF AND FURTHER IF AN INAPPROPRIATE METHOD IS A PPLIED BY THE AUTHORITIES BELOW THEN WHAT ARE THE CONSEQUENCES. 22.9. SECTION 92(1) OF THE ACT PROVIDES THAT ANY IN COME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE. COMPUTATION OF ARM'S LENGTH PRICE HAS BEEN S ET OUT IN SECTION 92C. SUB- SECTION (1) PROVIDES THAT THE ALP OF AN INTERNATION AL TRANSACTION SHALL BE BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING T HE MOST APPROPRIATE METHOD. FIVE METHODS ARE DISTINCTLY PRESCRIBED U/S 92C(1) A ND THEN THERE IS CLAUSE (F) WHICH TALKS OF ANY OTHER METHOD AS MAY BE PRESCRIBE D. SINCE SIXTH METHOD HAS BEEN PRESCRIBED UNDER RULE 10AB THROUGH THE INCOME- TAX (6TH AMENDMENT) RULES, 2012 WHICH HAS BEEN MADE APPLICABLE FROM THE A.Y. 2012-13, THE SAME CANNOT APPLY TO THE ASSESSMENT YEAR UNDER CONSIDERA TION IN VIEW OF THE JUDGMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN MAXOPP INVESTMENT LTD. (SUPRA). RULE 10B PROVIDES THE MODUS OPERANDI FOR THE COMPUT ATION OF ALP UNDER THESE FIVE METHODS. SUB-SECTION (1) OF SECTION 92C STARTS WITH : THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION S HALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS, BEING MOST APPROPRIATE METHO D ................ IN OUR CONSIDERED OPINION, THE CONTENTION OF THE LD. DR LA YING EMPHASIS ON THE WORD `ANY' FOR PROPELLING HIS POINT OF VIEW THAT THE MET HOD FOR DETERMINING THE ALP CAN ALSO BE A COMBINATION OF THE PRESCRIBED METHODS , IS DEVOID OF FORCE. THERE IS NO DOUBT THAT THE WORD ANY HAS BEEN USED U/S 92C(1) WHICH WOULD HAVE ORDINARILY IMPLIED THAT ANY SPECIFIC OR NON-SPECIFI C METHOD OR EVEN A COMBINATION OF ONE OR MORE PRESCRIBED METHODS IS SU FFICIENT. HOWEVER IT IS RELEVANT TO NOTE THAT THE SCOPE OF THE WORD ANY IS CIRCUMSCRIBED BY THE SUCCEEDING WORDS OF THE FOLLOWING METHODS BEING THE MOST APPROPRIATE 32 METHOD. THE AMBIT OF THE WORD ANY IN SUB-SECTION (1) HAS BEEN RESTRICTED BY THE `FOLLOWING' FIVE SPECIFIC METHODS GIVEN IN THE LATER PART OF THE PROVISION. RULE 10B ALSO PROVIDES IN THE SAME MANNER THAT .... THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE D ETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHO D........ HERE ALSO THE WORD `ANY' IS SUCCEEDED BY THE WORD `FOLLOWING', WHICH I MPLIES THAT IT CAN BE ANY OF THE FIVE METHODS PRESCRIBED IN THE FOLLOWING PART O F THE RULE. WHEN WE READ SUB- SECTION (1) OF SECTION 92C IN ENTIRETY ALONG WITH R ULE 10B(1), THERE REMAINS NO DOUBT THAT THE ARM'S LENGTH PRICE IS REQUIRED TO BE DETERMINED BY ANY SINGLE METHOD OUT OF THE FIVE PRESCRIBED METHODS. IT IS FU RTHER PERTINENT TO NOTE THE PRESCRIPTION OF RULE 10C WHICH DEALS WITH THE DETER MINATION OF MOST APPROPRIATE METHOD TO BE APPLIED FOR DETERMINING AL P. SUB- RULE (1) PROVIDES THAT THE MOST APPROPRIATE METHOD FOR THE PURPOSE OF SECTION 92C(1) SHALL BE THE METHOD WHICH IS BEST SUITABLE TO THE FACTS AND CIRC UMSTANCES OF EACH CASE. SUB- RULE (2) WHICH ASSUMES SIGNIFICANCE IN THE PRESENT CONTEXT PROVIDES THAT : IN SELECTING THE MOST APPROPRIATE METHOD AS SPECIFIED IN SUB-RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT........... USE OF THE DEFINITE ARTICLE THE IN SUB-RULE (2) ALONG WITH THE MOST APPROPRIATE METHOD , MAKES IT ABUNDANTLY CLEAR THAT IT CAN BE ANY OF THE METHODS GIVEN IN SUB-RULE (1), THAT, IN TURN, DRAWS STRENGTH FROM SECTION 92C (1), WHICH REFERS TO THE FIVE METHODS. IN OUR CONSIDERED OPINION THE GENERAL AND A NON- CASE SPECIFIC ARGUMENT ADVANCED BY THE LD. DR THAT THERE CAN ALSO BE A COMBINATION OF THE ONE OR MORE OF THE FIVE METHODS FOR DETERMINING THE ALP, IS NOT CORRECT. 22.10. AS REGARDS THE CONTENTION THAT METHODS ARE T OOLS FOR DETERMINING THE ALP, WE FIND THAT THERE IS NO DISPUTE THAT THE MAIN PURPOSE OF CHAPTER X IS TO DETERMINE THE ALP OF AN INTERNATIONAL TRANSACTION, BUT SUCH DETERMINATION CAN BE DONE ONLY BY WAY OF THE METHODS SPECIFIED BY THE STATUTE. WHEN THE LEGISLATURE HAS SPECIFICALLY ENSHRINED A PROVISION U/S 92C REQUIRING THE COMPUTATION OF ALP BY ANY OF THE PRESCRIBED METHODS , IT DOES NOT FALL IN THE REALM OF THE TPO OR FOR THAT MATTER ANY OTHER AUTHO RITY TO BREACH SUCH MANDATE AND APPLY OR DIRECT TO APPLY ANY OTHER METHOD. GOIN G BY THE DICTATE OF THE PROVISION AS SUBSISTS UNDER SUB-SECTION (1) OF SECT ION 92C, THERE CAN BE ABSOLUTELY NO DOUBT ON ADOPTION OF ANY SINGLE METHO D OUT OF THOSE SET OUT IN SECTION. 22.11. RULE10B HAS SPECIFIED A SET PROCEDURE TO BE FOLLOWED FOR DETERMINING THE ALP DISTINCTLY UNDER THE FIVE METHODS. IT IS EQUALL Y NOT PERMISSIBLE TO INVENT A NEW PROCEDURE AND TRY TO FIT SUCH PROCEDURE WITHIN ANY OF THE EXISTING PROCEDURES PRESCRIBED AS PER THESE METHODS. NO ONE IS AUTHORIZED TO ADD ONE OR MORE NEW STEPS IN THE PRESCRIBED PROCEDURE OR TO SU BSTITUTE ANY OTHER MECHANISM WITH THE ONE PRESCRIBED UNDER THE RULE. I T IS NEITHER POSSIBLE TO INVENT A NEW METHOD NOR TO SUBSTITUTE A NEW METHODO LOGY IN PLACE OF THE ONE PRESCRIBED IN THE RULE. 23.1. WE HAVE NOTICED FROM THE ORDERS OF THE AUTHOR ITIES BELOW THAT THERE IS NO EXPRESS REFERENCE TO ANY METHOD EMPLOYED FOR DETERM INING THE ALP OF THE INTERNATIONAL TRANSACTION. THIS FACTOR IN ITSELF, C ANNOT BE CONSIDERED AS DETRIMENTAL TO THE COMPUTATION OF THE ALP, IF IN SU BSTANCE IT HAS ACTUALLY BEEN COMPUTED BY ANY OF THE PRESCRIBED METHODS. IN OUR C ONSIDERED OPINION THE DRP AS WELL AS AO IN PASSING THE IMPUGNED ORDER WERE RI GHT IN APPLYING THE SPIRIT OF THE `COST PLUS METHOD' TO THE FACTS OF THE INSTANT CASE BY FIRSTLY IDENTIFYING THE COST/VALUE OF SERVICE PROVIDED TO THE ASSESSEE AND THEREAFTER ADDING MARK-UP. THE MERE FACT THAT DRP DID NOT SPECIFICALLY MENTION IT IN SO MANY WORDS, WILL NOT IPSO FACTO MEAN THAT IT DID NOT APPLY THE COST PLUS METHOD, WHEN THE ESSENCE OF THE WORKING MATCHES WITH THE METHODOLOGY PROVIDE D IN THAT METHOD. 33 23.2. AT THIS STAGE IT WILL BE APT TO NOTE THE DIRE CTIVE OF `COST PLUS METHOD' AS PER RULE 10B(1) (C), WHICH IS AS UNDER :- '(C) COST PLU S METHOD, BY WHICH,-- (I) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INC URRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SERVICES PROVIDE D TO AN ASSOCIATED ENTERPRISE, ARE DETERMINED ; (II) THE AMOUNT OF A NORMAL GROSS PROFIT MARK-UP TO SUCH COSTS (COMPUTED ACCORDING TO THE SAME ACCOUNTING NORMS) ARISING FRO M THE TRANSFER OR PROVISION OF THE SAME OR SIMILAR PROPERTY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTERPRISE, IN A COMPARABLE UNCONTROLLED TRANSACTIO N, OR A NUMBER OF SUCH TRANSACTIONS, IS DETERMINED ; (III) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO I N SUB- CLAUSE (II) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OTHER DIFFEREN CES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACT IONS, WHICH COULD MATERIALLY AFFECT SUCH PROFIT MARK-UP IN THE OPEN MARKET ; (IV) THE COSTS REFERRED TO IN SUB-CLAUSE (I) ARE IN CREASED BY THE ADJUSTED PROFIT MARK-UP ARRIVED AT UNDER SUB-CLAUSE (III) ; (V) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARM'S L ENGTH PRICE IN RELATION TO THE SUPPLY OF THE PROPERTY OR PROVISION OF SERVICES BY THE ENTERPRISE ;' 23.3. GOING BY THE COST PLUS METHOD AS PER RULE 10B (1)(C), WE FIND THAT THE FIRST STEP IS TO DETERMINE THE COST OF SERVICES PROVIDED BY AN ENTERPRISE TO ITS ASSOCIATED ENTERPRISE. WE HAVE NOTICED ABOVE THAT T HE AUTHORITIES BELOW HAVE COMPUTED THE COST/VALUE OF THE SERVICE PROVIDED TO THE FOREIGN AE AT `161.21 CRORE. IT IS THIS AMOUNT WHICH CONSTITUTES THE FIRS T STEP UNDER THE COST PLUS METHOD. THE SECOND STEP IS TO DETERMINE THE AMOUNT OF NORMAL GROSS PROFIT MARK-UP TO SUCH COSTS ARISING FROM THE PROVISION OF SIMILAR SERVICE BY AN UNRELATED ENTERPRISE IN AN UNCONTROLLED COMPARABLE TRANSACTION. THE THIRD STEP UNDER THE COST PLUS METHOD IS TO ADJUST THE GROSS P ROFIT MARK-UP AS DETERMINED UNDER THE SECOND STEP TO TAKE INTO ACCOUNT THE FUNC TIONAL OR OTHER DIFFERENCES BETWEEN THE COMPARABLE UNCONTROLLED TRANSACTION AND THE INTERNATIONAL TRANSACTION. THE DRP DETERMINED 13% PROFIT MARK-UP. THE ADOPTION OF 13% CONSTITUTES STEPS 2 AND 3 OF THE COST PLUS METHOD. STEP 4 TALKS OF INCREASING THE COST AS DETERMINED UNDER STEP 1 BY SUCH ADJUSTED PR OFIT MARK-UP. IN THIS CASE, THE DRP INCREASED COST OF `161.21 CRORE UNDER STEP 1 WITH 13% AS DETERMINED UNDER STEPS 2 AND 3 TO FIND OUT THE AMOUNT AS PER 4 TH STEP AT `182.71 CRORE. STEP 5 DECLARES THAT THE FIGURE COMPUTED UNDER STEP 4 SH OULD BE TAKEN AS AN ARM'S LENGTH PRICE FOR THE PROVISION OF SERVICES BY THE E NTERPRISE. THUS IT IS VIVID THAT THE DRP DETERMINED A SUM OF `182.71 CRORE AS THE AL P UNDER THE COST PLUS METHOD OF THE INTERNATIONAL TRANSACTION IN THE NATU RE OF PROVISION OF SERVICE WITH ITS COST/VALUE AT `161.21 CRORE. 23.4. IT IS RELEVANT TO NOTE THAT UNDER SECOND AND THIRD STEPS WHAT IS REQUIRED TO BE DETERMINED IS THE RATE OF NORMAL GROSS PROFIT MA RK-UP AS ARISING TO THE ENTERPRISE FROM AN UNCONTROLLED TRANSACTION OR TO A N UNRELATED ENTERPRISE IN A SIMILAR SITUATION. HERE IT IS SIGNIFICANT TO NOTE T HAT A COMPARABLE UNCONTROLLED TRANSACTION TO BE CONSIDERED FOR BENCHMARKING THE N ORMAL GROSS PROFIT MARK-UP HAS TO BE SIMILAR TO THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION. CONSEQUENTLY, THE PROFIT MARK-UP UNDER STEPS 2 AND 3 SHOULD IN THE PRESENT CASE BE THE RATE WHICH AN INDEPENDENT THIRD PARTY EARNS FOR CREATING MARKETING INTANGIBLE FOR AND ON BEHALF OF THE FOREIGN ENTERPR ISE. IN THE PRESENT CASE, THE DRP SUGGESTED 13% MARK-UP. THE DRP WENT WRONG IN AP PLYING STEPS 2 AND 3 34 BY ARBITRARILY DETERMINING THE RATE OF MARK-UP AT 1 3% WITHOUT SHOWING AS TO HOW MUCH AN INDEPENDENT COMPARABLE ENTITY HAS EARNE D FROM AN INTERNATIONAL TRANSACTION SIMILAR TO ONE WHICH IS UNDER CONSIDERA TION. 23.5. AT THIS JUNCTURE WE CONSIDER IT EXPEDIENT TO REFER CLAUSE (II) OF SECTION 92F WHICH DEFINES ARM'S LENGTH PRICE TO MEAN A PRICE WHICH IS APPLIED OR PROPOSED TO BE APPLIED IN A TRANSACTION BETWEEN PER SONS OTHER THAN ASSOCIATED ENTERPRISES, IN UNCONTROLLED CONDITIONS. RULE 10A O F THE INCOME-TAX RULES, 1962 GIVES MEANING TO UNCONTROLLED TRANSACTION UNDER CLAUSE (A) AS A TRANSACTION BETWEEN ENTERPRISES OTHER THAN ASSOCIAT ED ENTERPRISES, WHETHER RESIDENT OR NON- RESIDENT . IT IS THIS EXPRESSION UNCONTROLLED TRANSACTION WHICH HAS BEEN USED IN RULE10B(1) INTER ALIA IN CLA USE (C) I.E. COST PLUS METHOD. A READING OF SECTION 92F(II) WITH RULE 10A(A) AND 1 0B(1)(C) IN UNISON CLEARLY POINTS OUT THAT THE ARM'S LENGTH PRICE IS A PRICE W HICH IS APPLIED IN A TRANSACTION BETWEEN NON-AES IN UNCONTROLLED CONDITIONS. STEPS 2 AND 3 OF RULE 10B(1)(C) CONTEMPLATE THE DETERMINATION OF NORMAL GROSS PROFI T MARK-UP OF A COMPARABLE UNCONTROLLED TRANSACTION, WHICH WOULD MEAN A TRANSA CTION BETWEEN NON-AES. ONE HAS TO NECESSARILY PASS THROUGH THESE STEPS FOR DETERMINING ALP UNDER THE COST PLUS METHOD. WHEN THESE STEPS UNEQUIVOCALLY PR OVIDE FOR DETERMINING NORMAL GROSS PROFIT MARK-UP FROM THE PROVISION OF S IMILAR SERVICES BY AN UNRELATED ENTERPRISE IN A COMPARABLE UNCONTROLLED S ITUATION, WHAT IS REQUIRED TO BE DONE IS TO FIRST FIND OUT SOME COMPARABLE UNCONT ROLLED TRANSACTION; THEN ASCERTAIN THE PROFIT MARK-UP OF SUCH COMPARABLE UNC ONTROLLED TRANSACTION; AND THEN ADJUST IT TO BRING IT AT PAR WITH THE INTERNAT IONAL TRANSACTION UNDER CONSIDERATION BY REMOVING THE EFFECT OF FACTORS OF NON-COMPARABILITY. THE COST PLUS METHOD UNDER RULE 10B(1)(C) DOES NOT PROVIDE F OR ASSUMING A HYPOTHETICAL PROFIT MARK-UP UNDER STEPS 2 AND 3 FOR DETERMINING ALP. IT HAS TO BE A PROFIT MARK-UP OF A COMPARABLE UNCONTROLLED TRANSACTION. T HE DRP SUGGESTED 13% MARK- UP WITHOUT SHOWING SUCH MARK-UP IN A COMPARAB LE UNCONTROLLED TRANSACTION. THIS COURSE OF ACTION CANNOT BE SANCTI ONED. WHEN THE RULE PRESCRIBES A PARTICULAR METHOD TO BE FOLLOWED AND T HE STEPS SO GIVEN ARE UNAMBIGUOUS, IT IS IMPERMISSIBLE TO SUBSTITUTE SUCH STEPS WITH ANY OTHER MODE. ACCORDINGLY WE DO NOT APPROVE THE ACTION TAKEN BY T HE A.O. IN IMPLEMENTING THE DIRECTION OF THE DRP TO MARK-UP 13% ON THE COST/VAL UE OF INTERNATIONAL TRANSACTION. 23.6. WE HAVE HELD EARLIER IN THIS ORDER THAT THE T PO WAS NOT JUSTIFIED IN RESTRICTING HIMSELF ONLY TO THE TWO COMPARABLE CASE S AS AGAINST CERTAIN OTHER COMPARABLE CASES CITED BY THE ASSESSEE WITHOUT VERI FYING OR DISCUSSING THE COMPARABILITY OR OTHERWISE OF SUCH CASES CITED BY T HE ASSESSEE. THESE OBSERVATIONS HAVE BEEN MADE IN THE CONTEXT OF DETER MINING THE COST/VALUE OF INTERNATIONAL TRANSACTION WHICH WAS WORKED OUT BY T HE AUTHORITIES BELOW AT `161.21 CRORE. CERTAIN RELEVANT FACTORS HAVE ALSO B EEN DISCUSSED BY US IN THAT PART OF THE ORDER WHICH SHOULD BE TAKEN INTO CONSID ERATION BEFORE DETERMINING THE COST/VALUE OF THE TRANSACTION. RESULTANTLY, WE HAVE SET ASIDE THE COST/VALUE OF INTERNATIONAL TRANSACTION AT `161.21 CRORE AND REST ORED THE MATTER TO THE FILE OF AO/TPO FOR DETERMINING SUCH VALUE AFRESH AFTER ALLO WING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THIS DE TERMINATION WOULD PROVIDE THE FIGURE OF FIRST STEP AS PER THE COST PLUS METHO D, BEING THE COST/VALUE OF THE INTERNATIONAL TRANSACTION. AS THE DRP ALSO DID NOT CORRECTLY PROCEED TO COMPUTE THE CORRECT RATE OF MARK-UP AS PER LAW, IN OUR CONS IDERED OPINION THE ENDS OF JUSTICE WOULD ADEQUATELY MEET IF THE PROCESS OF DET ERMINING NORMAL PROFIT MARK- UP AS PER STEPS 2 AND 3 OF RULE 10B(1)(C) AS AGAINS T 13% APPLIED BY THE DRP/AO, IS ALSO RESTORED TO THE FILE OF THE AO/TPO SO THAT HE MAY DETERMINE THE COST/VALUE OF INTERNATIONAL TRANSACTION IN THE FIRS T INSTANCE AND THEN THE ALP OF THIS INTERNATIONAL TRANSACTION. 35 24.1. WE DO NOT FIND ANY SUBSTANCE IN THE CONTENTIO N OF THE LEARNED AR THAT SINCE THE AUTHORITIES BELOW DID NOT APPLY ANY OF THE RECO GNIZED METHODS, THEIR ORDERS BE DECLARED AS VOID AB INITIO WITHOUT REQUIRING ANY RESTORATION FOR FRESH DETERMINATION. THE OBVIOUS REASON IS THAT, EVEN IF IT IS PRESUMED THAT THE CONTENTION OF THE LD. AR IS CORRECT, WHICH IS OTHER WISE NOT BECAUSE OF THE APPLICATION OF THE ESSENCE OF THE COST PLUS METHOD BY THE DRP/AO IN THE PRESENT CASE, IT WOULD AT THE MOST BE A CASE OF DEFECT IN A PPLICATION OF THE PROCEDURAL PROVISION IN THE SENSE THAT THE ALP HAS NOT BEEN CO MPUTED STRICTLY AS PER THE FORCE OF THE PRESCRIBED METHODS. IT WOULD NOT BE A CASE THAT THE AUTHORITIES LACKED JURISDICTION TO DETERMINE ALP OR THEIR ACTIO N WAS BARRED BY THE LIMITATION PERIOD. IN THAT SENSE IT WOULD BE A CASE OF IRREGUL ARITY. ONCE AN IRREGULARITY INTERVENES AT A PARTICULAR STAGE OF THE PROCEEDINGS , THE REQUIREMENT IS TO TAKE THE HANDS OF CLOCK BACK TO SUCH STAGE AND THEN MAKE THE NECESSARY CORRECTION. ANY PROCEEDINGS BECOME NULLITY WHEN THESE ARE TAKEN WIT HOUT ANY JURISDICTION OR BEYOND THE LIMITATION PERIOD. THE TEST TO DETERMINE AS TO WHETHER THE ORDER PASSED IS INVALID OR IRREGULAR IS TO SEE WHETHER TH ERE IS A LACK OF JURISDICTION OR A PROCEDURAL DEFAULT. COMING BACK TO OUR CONTEXT, WE FIND THAT THE LAPSE CAME IN APPLYING THE PROCEDURE OF DETERMINING ALP CORRECTLY . SUCH A LAPSE COUPLED WITH THE FACT THAT THERE WAS OTHERWISE VALID JURISDICTIO N AND THE ACTION WAS WELL WITHIN THE TIME LIMIT, CANNOT IN OUR CONSIDERED OPI NION LEAD TO THE DECLARATION OF THE ORDER AS A NULLITY. THERE OCCURRED AN IRREGULAR ITY DUE TO SUCH LAPSE WHICH CAN VERY WELL BE CURED BY CORRECTING IT FROM THE ST AGE AT WHICH SUCH LAPSE OCCURED. IN VIEW OF THE FOREGOING DISCUSSION, WE AR E OF THE CONSIDERED OPINION THAT THERE IS NO MERIT IN THE CONTENTION OF THE LEA RNED AR THAT THE ENTIRE PROCEEDINGS BE DECLARED AS NULL AND VOID SIMPLY BEC AUSE OF SOME PROCEDURAL LAPSE IN DETERMINING THE ALP OF THE INTERNATIONAL T RANSACTION. 25. IN VIEW OF THE ABOVE SAID RATIO LAID DOWN BY TH E MAJORITY VIEW IN THE SPECIAL BENCH OF THE TRIBUNAL AND IN VI EW OF THE ISSUE BEING SET ASIDE TO THE TPO AND THE ISSUE BEFORE US BEING IDENTICAL, WE RESPECTFULLY FOLLOWING THE RATIO LAID DOWN BY TH E SPECIAL BENCH OF THE TRIBUNAL (MAJORITY VIEW) IN M/S L.G. ELECTR ONICS INDIA (P) LTD. VS. ACIT (SUPRA) ALSO SET ASIDE THE PRESENT IS SUE FOR ADOPTION OF THE PRESCRIBED METHOD FOR DETERMINING ARMS LENG TH PRICE IN RELATION TO THE AMP EXPENDITURE TO THE FILE OF THE TPO. THE TPO WHILE DECIDING THE ISSUE AS DIRECTED BY THE SPECIAL BENCH WOULD GIVE REASONABLE OPPORTUNITY OF HEARING TO THE ASSES SEE. THE ASSESSEE IS AT LIBERTY TO FURNISH COMPLETE LIST OF COMPARABLES BEFORE THE TPO IN ORDER TO ADJUDICATE THE ISSUE AFR ESH. CONSEQUENTLY, GROUND NOS.2.8 TO 2.13 ARE ALLOWED FO R STATISTICAL PURPOSES. 25. THE ISSUE RAISED VIDE GROUND NOS.2.17 TO 2.22 I S IDENTICAL TO THE ISSUE RAISED BEFORE THE SPECIAL BENCH OF THE TRIBUN AL (MAJORITY VIEW) IN M/S L.G. ELECTRONICS INDIA (P) LTD. VS. ACIT (SUPRA ) AND ALSO BEFORE CHANDIGARH BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE WHERE THE ISSUE HAS BEEN SET ASIDE TO THE FILE OF THE ASSESSING OFF ICER/TPO. IN VIEW THEREOF, FOLLOWING THE MAJORITY VIEW OF THE SPECIAL BENCH OF THE TRIBUNAL (MAJORITY VIEW) IN M/S L.G. ELECTRONICS I NDIA (P) LTD. VS. 36 ACIT (SUPRA) AND THE CHANDIGARH BENCH OF THE TRIBUN AL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2007-08, WE SE T SIDE THE PRESENT ISSUE ALSO BACK TO THE FILE OF THE ASSESSING OFFICE R/TPO FOR ADOPTION OF PRESCRIBED METHOD FOR DETERMINING THE ARMS LENGTH PRICE IN RELATION TO AMP EXPENDITURE. THE ASSESSING OFFICER/TPO WOULD P ROVIDE REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE, WHO IN TURN IS AT LIBERTY TO FURNISH FRESH LIST OF COMPARABLES BEFORE THE TPO IN ORDER TO ADJUDICATE THE ISSUE AFRESH. THUS THE GROUND NOS.2.17 TO 2.22 RAISED BY THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 26. THE ISSUE IN GROUND NO.2.23 IS AN ALTERNATE GRO UND OF APPEAL RAISED BY THE ASSESSEE WITHOUT PREJUDICE TO THE ABOVE SAID AND THE CONTENTION OF THE ASSESSEE IS THAT WHILE CALCULATING AMP EXPENDI TURE, THE EXPENDITURE RELATING TO SELLING AND DISTRIBUTION EXPENSES, MARK ETING AND OTHER ALLIED EXPENSES ARE TO BE EXCLUDED FROM THE ALLEGED AMP EX PENDITURE, BEING NOT RELATABLE TO ADVERTISEMENT AND MARKETING EXPEND ITURE. THE ASSESSEE IN ITS REPLY DATED 29.12.2011 FILED BEFORE THE ASSE SSING OFFICER HAD ELABORATELY COMMENTED UPON THE REPORT OF THE TPO WH ICH IS REPRODUCED AT PAGES 73 TO 102 OF THE ASSESSMENT ORDER. THE AS SESSEE HAD FURNISHED TABULATED DETAILS BEFORE THE ASSESSING OFFICER UNDE R WHICH THE FOLLOWING DETAILS WERE CONSIDERED TO BE AMP EXPENDITURE: NATURE AMOUNT (RS.LACS) AMOUNT (RS.LACS) - DISCOUNT SALES - MARKET RESEARCH - SALES PROMOTION - SCIENTIFIC RESEARCH & DEVELOPMENT - SELLING & DISTRIBUTION - ADVERTISING - SERVICE CHARGES TO SELLING AGENTS 53.35 969.16 4,460.21 244.60 1,067.50 10,641.11 11.16 _______ 17,447.09 37 27. THE PLEA OF THE ASSESSEE WAS THAT OUT OF THE TO TAL EXPENDITURE OF RS.17447.09 LACS EXPENSES TOTALING RS.2345.77 WERE NOT IN THE NATURE OF ADVERTISEMENT AND SALES PROMOTION AND THE BREAK UP OF THE SAID EXPENDITURE WAS AS UNDER: NATURE AMOUNT (RS.LACS) AMOUNT (RS.LACS) - DISCOUNT SALES - MARKET RESEARCH - SELLING & DISTRIBUTION - SCIENTIFIC RESEARCH & DEVELOPMENT - SERVICE CHARGES TO SELLING AGENTS - TOTAL 53.35 969.16 1,067.50 244.60 11.16 _______ 2,345.77 28. FURTHER PLEA OF THE ASSESSEE WAS THAT THE EXPEN SES INCURRED FOR THE BRAND OWNED BY THE ASSESSEE COMPANY TOTALED TO RS.4 122.18 LACS AND WHILE TAKING AMP EXPENSES WHICH INCLUDED THE EXPEND ITURE INCURRED ON MARKET RESEARCH AT RS.969.16 LACS, SALE PROMOTION E XPENSES OF RS.4460.21 LACS AND SELLING AND DISTRIBUTION EXPENS ES OF RS.1067.50 LACS, HAD TO BE EXCLUDED. THE LEARNED A.R. FOR THE ASSESSEE HAS SOUGHT PERMISSION TO MOVE AN APPLICATION FOR ENLARGEMENT O F GROUND OF APPEAL 2.23 AS IN THE ORIGINAL GROUND OF APPEAL IT HAS REF ERRED TO ONLY TWO EXPENSES I.E. SELLING AND DISTRIBUTION EXPENDITURE AND MARKETING RESEARCH EXPENDITURE, WHEREAS EVEN SALES PROMOTION WERE CONS IDERED AS PART OF AMP EXPENSES. 29. THE LEARNED D.R. FOR THE REVENUE HAD NO OBJECTI ON TO INCLUSION OF SALES PROMOTION EXPENSES AS PART OF GROUND NO.2.23. 30. THE LEARNED A.R. FOR THE ASSESSEE FURTHER POINT ED OUT THAT THE TRIBUNAL IN ASSESSEES OWN CASE VIDE PARAS 26 TO 29 IN THE APPEAL RELATING TO ASSESSMENT YEAR 2007-08 HAD DIRECTED TH E ASSESSING OFFICER TO EXCLUDE EXPENDITURE INCURRED ON MARKETING RESEAR CH, SALES PROMOTION 38 AND SELLING AND DISTRIBUTION AS NOT BEING LINKED TO THE BRAND PROMOTION OF PRODUCTS OF AE. THE LEARNED A.R. FOR THE ASSESS EE FAIRLY POINTED OUT THAT THOUGH OUT OF TOTAL SALES PROMOTION EXPENSES O F RS.4460.21 LACS THE TPO HAD ALREADY EXCLUDED EXPENSES RELATING TO LOCAL BRANDS TO THE TUNE OF RS.1167.35 LACS AND HAD CONSIDERED THE BALANCE S ALES PROMOTION OF INTERNATIONAL BRANDS. THE DRP HAD DIRECTED EXCLUSI ON OF EXPENSES INCURRED ON SCIENTIFIC RESEARCH AND DISCOUNT ON SAL ES AND THE BALANCE EXPENSES CONSIDERED BY THE ASSESSING OFFICER WAS RS .17149.14 LACS. 31. WE FIND THAT SIMILAR ISSUE AROSE BEFORE THE TRI BUNAL IN ASSESSMENT YEAR 2007-08 AND THE TRIBUNAL VIDE PARAS 26 TO 29 O BSERVED AS UNDER: 26. THE NEXT SET OF GROUNDS OF APPEAL ARE GROUND NO S.2.14 TO 2.16 WHEREIN THE ASSESSEE HAS RAISED THE ISSUE THAT THE EXPENDITURE RELATING TO MARKET RESEARCH SERVICE CHARGES PAID TO SELLING AGENTS AND DISCOUNT ON SALES ARE TO BE EXCLUDED FROM THE A LLEGED AMP EXPENDITURE AS BEING NOT RELATABLE TO ADVERTISEMENT AND MARKETING EXPENDITURE. THE CLAIM OF THE LEARNED A.R. FOR THE ASSESSEE IS THAT THE SAID ISSUE IS ALSO COVERED BY THE DECISION OF S PECIAL BENCH OF THE TRIBUNAL (MAJORITY VIEW) IN M/S L.G. ELECTRONI CS INDIA (P) LTD. VS. ACIT (SUPRA) VIDE PARAS 18.5 AND 18.6 OF T HE DECISION. THE RELEVANT PARAS ARE AS UNDER: 18.5. WE DO NOT FIND ANY FORCE IN THE CONTENTION OF THE LEARNED DR MADE IN THIS REGARD. THE LOGIC IN THE EXERCISE OF FINDING OUT TH E AMP EXPENSES TOWARDS CREATION OF MARKETING INTANGIBLES FOR THE FOREIGN A E STARTS WITH THE EXPENSES WHICH ARE OTHERWISE IN THE NATURE OF ADVERTISEMENT, MARKETING AND PROMOTION. IF AN EXPENDITURE ITSELF IS NOT IN THE NATURE OF ADVER TISING, MARKETING OR PROMOTION, THAT OUGHT TO BE EXCLUDED AT THE VERY OUTSET. WE, T HEREFORE, REJECT THIS CONTENTION RAISED BY THE LEARNED DR. 18.6. AS WE ARE PRESENTLY CONSIDERING THE TERM `ADV ERTISEMENT MARKETING AND PROMOTION EXPENSES', WHICH IS ANALOGOUS TO, IF NOT LESSER IN SCOPE THAN THE TERM `ADVERTISEMENT, PUBLICITY AND SALES PROMOTION' AS E MPLOYED IN THE ERSTWHILE SUB- SEC. (3B) OF SEC. 37, ALL THE JUDGMENTS RENDERED IN THE CONTEXT OF SUB-SEC. (3A) & (3B) OF SEC. 37 WILL SQUARELY APPLY TO THE INTERPRE TATION OF THE SCOPE OF AMP EXPENSES. WE, THEREFORE, HOLD THAT THE EXPENSES IN CONNECTION WITH THE SALES WHICH DO NOT LEAD TO BRAND PROMOTION CANNOT BE BROU GHT WITHIN THE AMBIT OF ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES FOR DETERMINING THE COST/VALUE OF THE INTERNATIONAL TRANSACTION. 27. THE PLEA OF THE ASSESSEE BEFORE US WAS THAT EXP ENSES AGGREGATING RS.5500.86 LACS ARE EXPENSES INCURRED IN CONNECTION WITH SALE AND DO NOT LEAD TO BRAND PROMOTION AS HEL D BY THE SPECIAL BENCH. AFTER EXCLUDING THE AFORESAID SELLI NG EXPENSES AGGREGATING TO RS.5500.86 LACS, THE REMAINING EXPEN SES OF RS.8679.75 LACS (CONSTITUTING 6.87% OF THE TOTAL SA LES) ONLY IS 39 REQUIRED TO BE CONSIDERED FOR THE PURPOSE OF BENCHM ARKING ANALYSIS AS UNDERTAKEN BY THE TPO. THE LEARNED D. R. FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF THE AUTHOR ITIES BELOW. 28. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. THE CLAIM OF THE ASSESSEE IS THAT THE TOTAL AMP EXP ENDITURE CONSIDERED BY THE TPO WHILE DETERMINING THE ALP INC LUDED CERTAIN EXPENSES WHICH ARE IN RELATION TO THE SALES MADE BY THE ASSESSEE AND ARE NOT RELATED TO THE BRAND PROMOTION. THE CL AIM OF THE ASSESSEE IS WITH REGARD TO THE EXPENSES TOTALING RS .5500.86 LACS AS TABULATED BELOW: S.NO. NAME OF EXPENSES AMOUNT (RS.LACS) 1. DISCOUNT SALES 60.52 2. MARKET RESEARCH 664.24 3. SALES PROMOTION 3939.90 4. SELLING AND DISTRIBUTION 826.17 5. SERVICE CHARGES PAID TO SELLING AGENT 10.03 TOTAL 5500.86 29. WE FIND THAT THE SPECIAL BENCH OF THE TRIBUNAL (MAJORITY VIEW) IN M/S L.G. ELECTRONICS INDIA (P) LTD. VS. A CIT (SUPRA) HELD THAT THE EXPENSES IN CONNECTION WITH THE SALES DO N OT LEAD TO BRAND PROMOTION AND THUS CANNOT BE BROUGHT WITHIN THE AMB IT OF ADVERTISEMENT, MARKETING AND PROMOTION EXPENSES FOR DETERMINING THE COST/VALUE OF THE INTERNATIONAL TRANSACTION. I N VIEW THEREOF, WE DIRECT THE ASSESSING OFFICER TO EXCLUDE THE EXPENSE S INCURRED BY THE ASSESSEE IN CONNECTION WITH THE SALES TOTALING RS.5500.86 LACS AS THE SAME DO NOT FALL WITHIN THE AMBIT OF AMP EXP ENSES AND HENCE NOT TO BE CONSIDERED FOR COMPUTING THE COST/V ALUE OF INTERNATIONAL TRANSACTION. THE ASSESSEE VIDE GROUN D NO.4 HAD RAISED THE ISSUE AGAINST DISALLOWANCE OF CONSUMER M ARKET RESEARCH EXPENSES OF RS.567.49 LACS. IN VIEW OF OUR DECISIO N IN ALLOWING THE CLAIM OF THE ASSESSEE BEING RELATABLE TO SALES PROM OTION EXPENSES, THIS GROUND OF APPEAL IS THUS ALLOWED. THE GROUND NOS.2.14 TO 2.16 AND GROUND NO.4 ARE THUS ALLOWED. 32. THE ISSUE BEFORE US IS IDENTICAL TO THE ISSUE A RISING BEFORE THE TRIBUNAL IN EARLIER YEAR AND FOLLOWING THE SAME PAR ITY OF REASONING WE DIRECT THE ASSESSING OFFICER TO EXCLUDE THE FOLLOWI NG EXPENDITURE AS THE SAME DO NOT FALL WITHIN THE AMP EXPENDITURE AND THU S THESE ARE NOT TO BE CONSIDERED FOR COMPUTING THE COST/VALUE OF INTERNAT IONAL TRANSACTIONS. THE EXPENDITURE ARE AS UNDER: 40 NATURE AMOUNT (RS.LACS) AMOUNT (RS.LACS) MARKET RESEARCH SALES PROMOTION (RS.4460.21 RS.1167.35) SELLING & DISTRIBUTION EXPENSES RS. 969.16 RS.3292.86 RS.1067.50 3292.86 33. THE ASSESSEE VIDE GROUND NO.3 HAS RAISED THE IS SUE AGAINST DISALLOWANCE OF CONSUMER MARKET RESEARCH EXPENSES O F RS.969.16 LACS IN VIEW OF OUR DECISION IN ALLOWING THE CLAIM OF THE A SSESSEE BEING RELATABLE TO SALES PROMOTION EXPENSES THIS GROUND O F APPEAL IS THUS ALLOWED. THE GROUND NOS.2.23 AND 3 ARE THUS ALLOWE D. 34. THE NEXT ISSUE RAISED BY THE ASSESSEE IS VIDE G ROUND OF APPEAL NOS.2.24 TO 2.30 WHEREIN THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER IN NOT CONSIDERING CERTAIN COMPAN IES AS COMPARABLES FOR BENCHMARKING, ADVERTISEMENT AND PUBLICITY EXPEN SES. THE NEXT GRIEVANCE OF THE ASSESSEE IS THAT BOTH THE TPO AND DRP HAD HELD THAT FOR THE PURPOSE OF COMPUTING THE BRIGHT LINE TEST, AMP EXPENSES OF COMPANIES WHICH ARE ENGAGED IN BRAND BUILDING EXERC ISE AND CREATING MARKETING INTANGIBLES FOR THEIR BRANDS CANNOT BE TA KEN AS COMPARABLES, AND ONLY ROUTINE DISTRIBUTORS ARE TO BE TAKEN WHO A RE NOT ENGAGED IN ANY BRAND BUILDING EXERCISE. THE NEXT CONTENTION OF TH E ASSESSEE WAS THAT THE ASSESSING OFFICER HAD ERRED IN REJECTING THE BE NCHMARKING ANALYSIS UNDERTAKEN BY THE ASSESSEE WHEREIN CLOSELY LINKED T RANSACTIONS WERE BENCHMARKED TOGETHER AND INSTEAD SEGREGATING THE AM P EXPENSES FOR THE PRUPOSE OF BENCHMARKING SUCH TRANSACTIONS. THE ASS ESSEE WAS ALSO AGGRIEVED BY THE FINDINGS OF THE ASSESSING OFFICER/ DRP THAT IT HAD RENDERED SERVICE TO THE AES BY INCURRING THE AMP EX PENSE AND BY HOLDING THAT MARKUP HAD TO BE EARNED BY THE ASSESSE E IN RESPECT OF THE AMP EXPENSES, ALLEGED TO HAVE INCURRED FOR AND ON B EHALF OF THE AE. 41 35. WE FIND THAT SIMILAR ISSUE AROSE BEFORE THE TRI BUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 2007-08 AND TH E TRIBUNAL VIDE PARAS 30 AND 31 HAD CONSIDERED THE ISSUE AND HELD A S UNDER: 30. THE ASSESSEE VIDE GROUND NOS.2.17 AND 2.18 HAD RAISED THE ISSUE OF TAKING INTO CONSIDERATION THE COMPARABLE C OMPANIES FOR BENCHMARKING THE ADVERTISEMENT AND PUBLICITY EXPENS ES. ADMITTEDLY THE SAME ISSUE HAS BEEN DELIBERATED UPON BY THE SPECIAL BENCH OF THE TRIBUNAL (MAJORITY VIEW) IN M/S L.G. ELECTRONICS INDIA (P) LTD. VS. ACIT (SUPRA) VIDE PARA 17.6 OF T HE MAJORITY VIEW AND OBSERVED AS UNDER: 17.6. IN PRINCIPLE, WE ACCEPT THE CONTENTION OF TH E LD. AR ABOUT THE NECESSITY OF CHOOSING PROPERLY COMPARABLE CASES IN THE FIRST INS TANCE BEFORE STARTING THE EXERCISE OF MAKING COMPARISON OF THE AMP EXPENSES I NCURRED BY THEM FOR FINDING OUT THE AMOUNT SPENT BY THE ASSESSEE FOR IT S OWN BUSINESS PURPOSE. HOWEVER THE WAY IN WHICH SUCH COMPARABLE CASES SHOU LD BE CHOSEN, AS ADVOCATED BY THE LD. AR, IS NOT ACCEPTABLE. HE SUBM ITTED THAT ONLY SUCH COMPARABLE CASES SHOULD BE CHOSEN AS ARE USING THE FOREIGN BRAND. WE FIND THAT CHOOSING CASES USING THE FOREIGN BRAND EX FACIE CAN NOT BE ACCEPTED. IT IS BUT NATURAL THAT THE AMP EXPENSES OF SUCH CASES WILL AL SO INCLUDE CONTRIBUTION TOWARDS BRAND BUILDING OF THEIR RESPECTIVE FOREIGN AES. IN SUCH A SITUATION THE COMPARISON WOULD BECOME MEANINGLESS AS THEIR TOTAL AMP EXPENSES WILL STAND ON THE SAME FOOTING AS THAT OF THE ASSESSEE BEFORE THE EXCLUSION OF EXPENSES IN RELATION TO BRAND BUILDING FOR THE FOREIGN AE. THE CORRECT WAY TO MAKE A MEANINGFUL COMPARISON IS TO CHOOSE COMPARABLE DOMES TIC CASES NOT USING ANY FOREIGN BRAND. OF COURSE WHEN EFFECT WILL BE GIVEN TO THE RELEVANT FACTORS AS DISCUSSED ABOVE, IT WILL CORRECTLY REFLECT THE COST /VALUE OF INTERNATIONAL TRANSACTION. 31. THE PLEA OF THE ASSESSEE IN THIS REGARD WAS THA T THE EXPENDITURE WAS INCURRED ON FOREIGN BRAND NAME I.E HORLICKS AND ALSO ON DOMESTIC BRANDS SUCH AS BOOST, VIVA, MALTOV A, ETC., AND THE EXPENSE AS A PERCENTAGE ON SALES OF FOREIGN BRA ND WAS 10.37% AND ON DOMESTIC BRAND WAS 14.02%. CONSEQUENTLY THE AMP EXPENDITURE INCURRED ON FOREIGN BRAND BEING LOWER T HAN WHAT IS INCURRED ON DOMESTIC PRODUCT, NO TRANSFER PRICING A DJUSTMENT IS TO BE MADE. AS THE ISSUE OF DETERMINING THE TRANSFER PRICING ADJUSTMENT IN RELATION TO AMP EXPENSES INCURRED BY THE ASSESSEE BEING SET ASIDE TO THE FILE OF TPO FOR REDETERMININ G THE ALP OF INTERNATIONAL TRANSACTION AFTER CONSIDERING THE COM PARABLES COMPANIES, WE DIRECT THE TPO TO CONSIDER THE ASPECT RAISED BY THE ASSESSEE IN THIS REGARD AND REDETERMINE THE VALUE O F ARMS LENGTH PRICE IN RELATION TO THE AMP EXPENDITURE INCURRED B Y THE ASSESSEE FOR THE BRAND PROMOTION OF THE FOREIGN BRAND AND AL SO FOLLOWING THE DIRECTIONS GIVEN BY THE SPECIAL BENCH OF THE TR IBUNAL (MAJORITY VIEW) IN M/S L.G. ELECTRONICS INDIA (P) LTD. VS. A CIT (SUPRA) IN THIS REGARD. THE GROUND NOS.2.17 AND 2.18 ARE THUS ALLOWED FOR STATISTICAL PURPOSES. 36. AS THE ISSUE OF DETERMINING THE TRANSFER PRICIN G ADJUSTMENT IN RELATION TO AMP EXPENSES INCURRED BY THE ASSESSEE D URING THE YEAR UNDER 42 CONSIDERATION HAD BEEN SENT TO THE FILE OF THE ASSE SSING OFFICER/TPO AS PER OUR DIRECTIONS IN THE PARAS HEREINABOVE, WE DIR ECT THE TPO TO CONSIDER THE PRESENT ASPECT RAISED BY THE ASSESSEE ALSO IN THIS REGARD AND REDETERMINE THE VALUE OF ARMS LENGTH PRICE IN RELA TION TO AMP EXPENSES INCURRED BY THE ASSESSEE FOR BRAND PROMOTION OF FOR EIGN BRAND IN TURN FOLLOWING THE OBSERVATIONS OF THE MAJORITY VIEW OF THE SPECIAL BENCH OF THE TRIBUNAL (MAJORITY VIEW) IN M/S L.G. ELECTRONI CS INDIA (P) LTD. VS. ACIT (SUPRA). THE ASSESSEE IS AT LIBERTY TO FILE L IST OF FRESH COMPARABLES IN THIS REGARD BEFORE THE ASSESSING OFFICER/TPO IN LINE WITH THE MAJORITY VIEW OF SPECIAL BENCH OF THE TRIBUNAL IN M/S L.G.EL ECTRONICS INDIA P. LTD. VS. ACIT (SUPRA). THE GROUND NOS.2.24 TO 2.30 ARE THUS ALLOWED FOR STATISTICAL PURPOSES. 37. THE ISSUE IN GROUND NO.3 HAS BEEN ADJUDICATED B Y US ALONGWITH GROUND NO.2.23 IN PARAS HEREINABOVE AND THE SAID GR OUND OF APPEAL NO.3 IS THUS ALLOWED. IN VIEW OF OUR ALLOWING GROUND NO .3 THE GROUND NO.3.1 RAISED BY THE ASSESSEE BEING WITHOUT PREJUDICE TO T HE SAME THUS BECOMES INFRUCTUOUS AND THE SAME IS DISMISSED. 38. THE ISSUE RAISED VIDE GROUND NO.4 IS AGAINST TH E DISALLOWANCE MADE UNDER SECTION 43B OF THE ACT IN RELATION TO THE DED UCTION CLAIMED TOWARDS THE CLOSING BALANCE AMOUNTING TO RS.32,62,7 86/- LYING IN PROFIT & LOSS ACCOUNT. THE SECOND ASPECT OF THE ISSUE IS VIDE GROUND NO.4.1 BY WHICH THE ASSESSEE IS AGGRIEVED BY THE ORDER OF ASSESSING OFFICER IN REDUCING THE RETURNED INCOME BY REDUCING SUM OF RS. 170.88 LACS, THOUGH THE ASSESSEE HAD CLAIMED DEDUCTION OF THE CLOSING B ALANCE LYING IN PROFIT & LOSS ACCOUNT AMOUNTING TO RS.32,62,786/-. 39. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD CLAIMED DEDUCTION AT R S.32,62,786/- ON 43 ACCOUNT OF DIFFERENCE IN EXCISE DUTY DEPOSITED/BALA NCE WITH THE EXCISE DEPARTMENT AT THE END OF CURRENT FINANCIAL YEAR AND PREVIOUS FINANCIAL YEAR. THE ASSESSING OFFICER VIDE PARA 2.5 AT PAGE 4 OF THE ASSESSMENT ORDER OBSERVED AS UNDER: 2.5 THIS YEAR, THE TOTAL DEPOSIT WITH EXCISE AUTHOR ITIES AS ON 31-03-2008 WAS RS.32,62,786/-WHEREAS THE SAME AMOUNT AS ON 31- 03-2007 WAS RS.2,03,50,951/- AND ACCORDINGLY, THE ASSESSEE HAS REDUCED ITS INCOME BY RS.1,70,88,165/- (I.E. DIFFERENCE BETWEEN OPENING E XCISE BALANCE OF RS.32,62,786/- AND CLOSING EXCISE BALANCE OF RS.2,0 3,50,951/-) IN THE RETURN. SINCE THE CLAIM FOR DEDUCTION OF RS.36,87,4 81/- WAS NOT ACCEPTED IN THE PREVIOUS YEAR, THEREFORE, IN ORDER TO V' MAINTA IN JUDICIAL CONSISTENCY IN THE STAND TAKEN BY THE DEPARTMENT IN THE EARLIER YEARS IN THE ASSESSEE'S OWN CASE, THE ADDITION OF RS.1,70,88,165/- IS NOT C ALLED FOR IN THE CURRENT YEAR WHICH IS SUBJECT TO RECTIFICATION U/S 154 AS P ER DECISION OF APPELLATE AUTHORITIES FOR EARLIER ASSESSMENT YEARS. ACCORDINGLY, THE RETURNED INCOME WILL DECREASE BY THE SAID AMOUNT OF RS.1,70, 88,165/ -. 40. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF T HE ASSESSEE IN VIEW OF THE APPEAL PENDING BEFORE THE APPELLATE AUTHORIT Y ON THIS ISSUE. 41. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT T HAT SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN THE PRECEDING YEAR AND THE TRIBUNAL VIDE PARAS 38 TO 41 ALLOWED THE CL AIM OF THE ASSESSEE IN TURN FOLLOWING THE RATIO LAID DOWN BY THE SPECIAL B ENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO.343/CHD/2005 RELAT ING TO ASSESSMENT YEAR 2001-02 REPORTED IN 107 ITD 343 (CHD)(SB). W E FIND THAT IDENTICAL ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESS EES OWN CASE IN EARLIER YEAR WHEREIN CONTENTION OF THE ASSESSEE WAS AS UNDER: 36. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT T HAT THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL I N ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 200 1- 02, REPORTED IN 107 ITD 343 (CHD)(SB). THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT THAT THE TRIBUNAL IN ASSESSMENT YEARS 1998-99 TO 2000-01 AND 2002-03 TO 2006-07 HAD FOLLOWED THE ORDER OF THE SPECIAL BENCH OF TRIBUNAL AND ALLOWED THE RELIEF TO THE ASSESSEE. FURTHER RELIANCE WAS PLACED IN CIT VS. RAJ & SANDEE PS LTD. [293 ITR 12 (P&H)], CIT VS. MODIPON LTD. [334 ITR 106 (DEL)] AND CIT VS. MARUTI SUZUKI INDIA LTD. 44 [250 CTR 140 (DEL)]. THE LEARNED A.R. FOR THE ASSESSEE FURTHER POINTED OUT THAT THE HON'BLE SUPRE ME COURT IN CIT VS. SHRI RAM HONDA POWER EQUIPMENT CORPORATION IN CIVIL APPEAL NO.5721 OF 2012 VIDE JUDGMENT DATED 19.9.2012 HAD LAID DOWN THAT THE CRE DIT OF THE EXCISE DUTY PAID WAS TO BE ALLOWED. THE LEA RNED A.R. FOR THE ASSESSEE FURTHER REFERRED TO THE RATIO LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN CIT VS. MARUTI SUZUKI INDIA LTD. (SUPRA) AND POINTED OUT TH AT THE ONLY ISSUE RAISED WAS IN CONNECTION WITH THE EX CESS PAYMENT MADE ON ACCOUNT OF EXCISE DUTY, WHICH WAS LYING IN THE PLA ACCOUNT . 42. THE TRIBUNAL VIDE PARAS 38 TO 42 HELD AS UNDER: 38. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING VIDE GROUND OF APPEAL NO.3 IS AGA INST DISALLOWANCE MADE UNDER SECTION 43B OF THE ACT ON A CCOUNT OF EXCESS PAYMENT MADE ON ACCOUNT OF EXCISE DUTY. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD CLAIMED EXP ENDITURE OF RS.36,87,481/- BEING THE DIFFERENCE BETWEEN THE EXC ISE DEPOSIT WITH THE EXCISE DEPARTMENT I.E. THE BALANCE IN THE CENTR AL EXCISE LYING IN PLA ACCOUNT AS ON 31.3.2007 AND AS ON 31.3.2006. T HE SAID SUM OF RS.36,87,481/- REPRESENTS THE EXCESS PAYMENT MAD E TO THE EXCISE AUTHORITIES, WHICH AS PER THE ASSESSEE COULD BE USE D TO OFFSET THE PAYMENT OF EXCISE DUTY ON THE FINAL PRODUCTS. THE DIFFERENCE IN THE TOTAL BALANCE OF TWO ACCOUNTS I.E. ON 31.3.2007 AND 31.3.2006 OF RS.36,87,481/- WAS CLAIMED BY THE ASSESSEE AS A DED UCTION UNDER THE PROVISIONS OF SECTION 43B OF THE ACT. THE PRES ENT ISSUE RAISED VIDE GROUND NO.3 STANDS COVERED IN FAVOUR OF THE AS SESSEE BY THE ORDER OF THE SPECIAL BENCH OF THE CHANDIGARH TRIBUN AL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 200 1-02, REPORTED IN 107 ITR 343 (CHD)(SB) (SUPRA). THE SAID DEDUCTI ON HAD BEEN CONSISTENTLY ALLOWED IN THE CASE OF THE ASSESSEE I. E. IN THE PRECEDING YEARS 1998-99 TO 2000-01 AND THEREAFTER I N ASSESSMENT YEARS 2002-03 TO 2006-07. THE TRIBUNAL IN ITA NO.1 238/CHD/2010 RELATING TO ASSESSMENT YEAR 2006-07 ORDER DATED 2 5.1.2012 VIDE PARA 49 ALLOWED THE CLAIM OF THE ASSESSEE IN TURN F OLLOWING THE RATIO LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIG H COURT IN CIT VS. RAJ & SANDEEPS LTD. (SUPRA) OBSERVING AS UN DER: 49. THE PRESENT ISSUE IS COVERED BY THE DECISION OF SPECIAL BENCH IN THE CASE OF THE ASSESSEE ITSELF . FURTHER THE JURISDICTIONAL HIGH COURT IN RAJ & SAN DEEPS LTD. (SUPRA) HAS HELD THAT WHERE THE ASSESSEE HAD DEPOSITED THE EXCISE DUTY PAYABLE IN ADVANCE IN ACCOUNT-CURRENT, AFTER THE GOODS WERE MANUFACTURED, SUCH AMOUNT WAS DEDUCTIBLE. FOLLOWING THE SAME, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE IN RESPECT OF INCREMENTAL BALANCE AMOUNTING TO RS.25,23,710/- LYING IN PLA ACCOUNT, UNDER SECTION 43B OF THE ACT. THE GROUND NO.4 IS ALLOWED. 45 39. THE HONBLE PUNJAB & HARYANA HIGH COURT IN RAN & SANDEEPS LTD. (SUPRA) HELD AS UNDER: HELD, THAT IT WAS FOUND AS A FACT BY THE TRIBUNAL T HAT DUTY AS PER THE STATUTORY PROVISIONS BECAME PAYABLE, THE MOMENT GOO DS WERE MANUFACTURED AND THE ASSESSEE WAS UNDER AN OBLIGATI ON TO DEPOSIT THAT AMOUNT IN THE ACCOUNT-CURRENT AND THE AMOUNT SO D EPOSITED IN THE ACCOUNT-CURRENT BEING NON REFUNDABLE, THERE WAS N O REASON FOR THE REVENUE TO DENY THE BENEFIT OF DEDUCTION IN THE YEA R IN QUESTION WHEN THE GOODS WERE MANUFACTURED AND THE AMOUNT WAS DEPOSITE D IN THE ACCOUNT- CURRENT. THE EXPENSE WOULD CERTAINLY RELATE TO THE YEAR IN WHICH THE GOODS WERE MANUFACTURED AND THE AMOUNT WAS DEPOSITE D, WHICH THE GOODS WERE MANUFACTURED AND THE AMOUNT WAS DEPOSITE D, WHICH COULD NOT POSSIBLE BE TREATED AS AN ADVANCE. THE AMOUNT WAS D EDUCTIBLE. 40. FURTHER THE DELHI HIGH COURT IN CIT VS. MODIPON LTD. (SUPRA) HAD ALLOWED SIMILAR CLAIM OF EXCISE DUTY PA ID IN ADVANCE UNDER THE PROVISIONS OF SECTION 43B OF THE ACT AND HELD AS UNDER: (II) THAT WITH REGARD TO THE DEDUCTION OF RS. 14,7 1,387/- ON ACCOUNT OF EXCISE DUTY PAID IN ADVANCE AS BUSINESS EXPENDITURE, THE PROCEDURE ENVISAGED FOR PAYMENT OF EXCISE DUTY ENVISAGES SUCH DUTY TO BE DEPOSITED IN ADVANCE WITH THE TREASURY BEFORE THE GOODS WERE REMOVED FROM THE FACTORY PREMISES. THE D UTY, THUS, ALREADY STOOD DEPOSITED IN THE ACCOUNTS OF THE ASSE SSEE MAINTAINED WITH THE TREASURY AND THE AMOUNT, THUS, STOOD PAID TO THE STATE. THE SUBMISSION OF THE DEPARTMENT THAT IT WAS ONLY O N REMOVAL OF THE GOODS THAT THE AMOUNT CREDITED TO THE PERSONAL LEDGER ACCOUNT COULD BE CLAIMED AS DEDUCTIBLE UNDER SECTION 43B OF THE INCOME TAX ACT, 1961, COULD NOT BE ACCEPTED. 41. FURTHER THE HON'BLE DELHI HIGH COURT IN CIT VS. MARUTI SUZUKI INDIA LTD. (SUPRA) ALSO DELIBERATED UPON THE PAYMENT MADE TOWARDS EXCISE DUTY IN PERSONAL LEDGER ACCOUNT AND CONSEQUENT ALLOWANCE UNDER SECTION 43B OF THE ACT AND HELD AS UNDER: A PLAIN READING OF S. 43B CLARIFIES THAT : (A) DEDU CTION CLAIMED BY THE ASSESSEE MUST BE 'OTHERWISE' ALLOWABLE UNDER TH E OTHER PROVISIONS OF THE ACT; (B) THE DEDUCTION MUST RELAT E TO ANY SUM PAYABLE BY WAY OF TAX, DUTY, CESS OR FEE; (C) THE A SSESSEE MUST HAVE INCURRED LIABILITY IN RESPECT OF SUCH TAX, DUT Y, ETC. ON FULFILLING THESE CONDITIONS, THE ASSESSEE'S CLAIM C AN BE ALLOWED IN THE YEAR IN WHICH ACTUAL PAYMENT IS MADE, NOTWITHST ANDING THE YEAR IN WHICH LIABILITY IS INCURRED. THE TERM 'LIAB ILITY TO PAY SUCH SUM WAS INCURRED BY THE ASSESSEE' TOGETHER WITH THE WORDS 'A SUM FOR WHICH THE ASSESSEE INCURRED LIABILITY' IN EXPLN . 2 UNDERLINE THAT PAYMENT MUST RELATE TO THE INCURRED LIABILITY TO BE CALLED 'ANY SUM PAYABLE'. IN THE PRESENT CASE, THE ASSESSEE HAD NO OPTION, BUT TO KEEP THE ACCOUNT, IN RESPECT OF EACH EXCISABLE P RODUCT (EVIDENT FROM THE MANDATE IN R. 173G THAT IT 'SHALL KEEP AN ACCOUNT CURRENT'). THE LATTER PART OF THE MAIN RULE MAKES I T CLEAR BEYOND ANY DOUBT THAT THE ASSESSEE HAS NO CHOICE IN THE OB LIGATION, AND CANNOT REMOVE THE GOODS MANUFACTURED BY IT, UNLESS SUFFICIENT AMOUNTS ARE KEPT IN CREDIT. THE REVENUE'S CONTENTIO N THAT THE AMOUNTS IN CREDIT ALSO RELATE TO GOODS NOT MANUFACT URED, AND THEREFORE, NOT RELATABLE TO ANY 'LIABILITY INCURRED IS WITHOUT ANY BASIS.. THE ARRANGEMENT PRESCRIBED BY THE RULE IS B OTH A COLLECTION MECHANISM DICTATED BY CONVENIENCE, AS WELL 'AS MANDATORY. IT IS CONVENIENT, FOR THE REASON, THAT IF THE ASSESSEE WE RE TO BE ASKED TO PAY THE EXACT AMOUNT, THROUGH SOME OTHER METHOD, BY DEPOSIT, AS A PRECONDITION FOR CLEARANCE, THAT WOULD HAVE BEEN CU MBERSOME TO IT AS WELL AS THE REVENUE; IT WOULD ALSO HAVE LED TO P ROBLEMS OF STORAGE OF GOODS AND SLOW DOWN THEIR SUPPLY AND DIS TRIBUTION. THE RULE-MAKERS PRAGMATICALLY DIRECTED THAT 'SUFFICIENT ' AMOUNTS OUGHT TO BE MAINTAINED IN THE ACCOUNT, TO COVER THE REMOVALS. THEREFORE, AT ANY GIVEN POINT OF TIME, THERE HAD TO BE AN EXCESS IN 46 THE ACCOUNT, IF THE ASSESSEE WERE TO REMOVE THE GOO DS. EACH CLEARANCE MENTIONS THE- QUANTUM OF GOODS AND THE DU TY AMOUNT, WHICH IS APPARENTLY RECONCILED AT THE END OF THE PE RIOD, AND SHORTFALLS IF ANY ARE APPROPRIATED FROM THE ACCOUNT . THE EXCESS CREDIT IS LIKEWISE ADJUSTED FOR THE NEXT DAY'S CLEA RANCES. THE POINT TO BE UNDERLINED, IS THAT THERE IS NO CHOICE, AND T HE AMOUNTS RELATE TO THE ASSESSEE'S DUTY LIABILITY, FALLING WITHIN TH E DESCRIPTION UNDER S. 43B. THE TRIBUNAL WAS THEREFORE JUSTIFIED IN HOL DING THAT THE AMOUNTS DEPOSITED BY THE ASSESSEE IN THE EXCISE PER SONAL LEDGER ACCOUNT COULD NOT BE DISALLOWED UNDER S. 43B.CIT V S. SHRI RAM HONDA POWER EQUIPMENT CORPORATION (CIVIL APPEAL NO. 5721 OF.2012, DT. 19TH SEPT., 2012) FOLLOWED; CIT VS. C. L GUPTA & SONS (2003) 180 CTR (ALL) 530 : (2003) 259 ITR 513 (ALL) CONCURRED WITH. 42. THE HON'BLE DELHI HIGH COURT IN CIT VS. MARUTI SUZUKI INDIA LTD. (SUPRA) IN TURN RELIED UPON THE RATIO LAID DOW N BY THE HON'BLE SUPREME COURT IN CIT VS. SHRI RAM HONDA POWER EQUIP MENT CORPORATION (SUPRA), WHEREIN IT HAS BEEN LAID DOWN THAT THE PLA CREDIT WAS EXCISE DUTY PAID. THE SAID OBSERVATION WAS MADE WHERE THE ASSESSEE WAS FOLLOWING NET METHOD OF VALUATION OF CLOSING STOCK. IN VIEW OF THE ABOVE SAID RATIO LAID DOWN B Y THE HON'BLE DELHI HIGH COURT IN CIT VS. MARUTI SUZUKI INDIA LTD . (SUPRA), CIT VS. MODIPON LTD. (SUPRA), HON'BLE PUNJAB & HARYANA HIGH COURT IN RAJ & SAN DEEPS LTD. (SUPRA) AND ALSO THE SPECI AL BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE DIRECT THE ASSE SSING OFFICER TO ALLOW THE CLAIM OF EXPENDITURE OF RS.36,87,481/- CL AIMED UNDER THE PROVISIONS OF SECTION 43B OF THE ACT. THE GROUND N O.3 RAISED BY THE ASSESSEE IS THUS ALLOWED. 43. FOLLOWING THE ABOVE SAID PARITY OF REASONING WE DIRECT THE ASSESSING OFFICER TO ALLOW EXPENDITURE OF RS.32,62, 786/-. FURTHER THE SECOND PLEA OF THE ASSESSEE IN RESPECT OF THE ADDIT ION OF RS.1,70,88,165/- IS NOT WARRANTED. HOWEVER, THE ASSESSING OFFICER S HALL VERIFY THE CLAIM OF THE ASSESSEE IN THIS REGARD AND AFTER AFFORDING REASONABLE OPPORTUNITY OF HEARING SHALL WORK OUT THE CONSEQUENTIAL EFFECT. THE GROUND NO.4 RAISED BY THE ASSESSEE IS ALLOWED AND GROUND NO.4.1 IS ALLOWED FOR STATISTICAL PURPOSES. 44. THE GROUND NOS.5 TO 5.2 RELATE TO THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF RS.1.72 CRORES IN RESPECT OF LIABIL ITY OF POST RETIREMENT MEDICAL BENEFITS TO EMPLOYEES. THE LEARNED A.R. FO R THE ASSESSEE POINTED OUT THAT SIMILAR ISSUE AROSE BEFORE THE TRI BUNAL IN ASSESSMENT YEAR 2007-08 AND THE SAME HAD BEEN DECIDED IN FAVOU R OF THE ASSESSEE. ANOTHER ASPECT WHICH WAS POINTED OUT BY THE LEARNED A.R. FOR THE 47 ASSESSEE THAT IN THE PRECEDING YEAR, THE SAID AMOUN T WAS DEBITED TO THE RESERVE ACCOUNT, HOWEVER DURING THE YEAR UNDER CONS IDERATION THE SAID AMOUNT HAD BEEN DEBITED TO THE PROFIT & LOSS ACCOUN T. 45. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD CLAIMED EXPENDITURE OF RS.1.72 CRORES ON ACCOUNT OF MEDICAL REIMBURSEMENT TO THE EX-EMPLOYEE S ON THE BASIS OF ACTUARIAL VALUATION. THE ASSESSEE DURING THE PRECE DING YEAR HAD CHARGED THE SAID AMOUNT TO THE GENERAL RESERVE. HOWEVER, D URING THE YEAR UNDER CONSIDERATION THE SAID AMOUNT WAS DEBITED TO THE P ROFIT & LOSS ACCOUNT AND SAID FACT HAS BEEN NOTED BY THE ASSESSING OFFIC ER VIDE PARAS 7.1 AT PAGE 15 OF THE ASSESSMENT ORDER. THE ASSESSING OFF ICER REJECTING THE EXPLANATION FILED BY THE ASSESSEE IN RESPECT OF THE DEDUCTIBILITY OF THE SAID EXPENDITURE PROPOSED DISALLOWANCE OF THE CLAIM OF RS.1.72 CRORES, WHICH IN TURN WAS CONFIRMED BY THE DRP AND CONSEQUE NT ORDER WAS PASSED BY THE ASSESSING OFFICER. WE FIND THAT SIMI LAR ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASS ESSMENT YEAR 2007-08 AND THE TRIBUNAL VIDE PARAS 51 TO 63 HELD AS UNDER: 51. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE WAS PROVIDING BENEFIT OF MEDICAL ASSISTANCE/REIMBURSEMENT OF MEDICAL EXPENSES TO THE EMPLOYEES POST RETIREMENT. THE SAID BENEFIT WAS BEING ALLOWE D BY THE ASSESSEE IN TERMS OF THE EMPLOYMENT AGREED UPON BET WEEN THE COMPANY AND THE EMPLOYEES AT THE TIME OF THEIR APPO INTMENT. IN ORDER TO MEET THE SAID LIABILITY OF PROVIDING MEDIC AL BENEFITS/ASSISTANCE TO ITS EMPLOYEES POST RETIREMEN T, THE ASSESSEE WAS CONTRIBUTING TOWARDS THE INSURANCE POLICY TAKEN FOR THE SAID PURPOSE. THE ASSESSEE PRIOR TO THE YEAR UNDER CONS IDERATION HAD CLAIMED AND WAS ALLOWED DEDUCTION IN RESPECT OF THE PREMIUM PAID FOR KEEPING AFLOAT THE MEDICAL INSURANCE POLICY TAK EN FOR THE BENEFIT OF EMPLOYEES FROM YEAR TO YEAR. SUCH MEDI- CLAIM INSURANCE POLICIES WERE TAKEN BY THE ASSESSEE IN ORDER TO PRO VIDE MEDICAL ASSISTANCE POST RETIREMENT TO THE EMPLOYEES. HOWEV ER, DURING THE YEAR UNDER CONSIDERATION THE INSTITUTE OF CHARTERED ACCOUNTANTS REVISED THE ACCOUNTING STANDARD-15 WHICH IS REPRODU CED AT PAGES 29 TO 31 OF THE ASSESSMENT ORDER UNDER WHICH THE IN STITUTE ISSUED REVISED ACCOUNTING STANDARD FOR ACCOUNTING THE EMPL OYEES MEDICAL BENEFIT POST RETIREMENT. AS PER THE ASSESSEE, THE ICAI MADE THE SAID ACCOUNTING STANDARD TO BE FOLLOWED COMPULSORIL Y W.E.F. 48 1.4.2006 I.E. ASSESSMENT YEAR 2007-08 I.E. THE YEAR UNDER APPEAL. THE GIST OF THE REVISED ACCOUNTING STANDARD-15 IS R EPRODUCED AT PAGES 29 TO 31 OF THE ASSESSMENT ORDER. HOWEVER, T HE COPY OF THE ACCOUNTING STANDARD-15 IS ENCLOSED AT PAGES 836 TO 902 OF THE PAPER BOOK. THE OBJECTIVE OF THE REVISED ACCOUNTIN G STANDARD-15 IS TO PRESCRIBE THE ACCOUNTING AND DISCLOSURE FOR E MPLOYEE BENEFITS. THE STANDARD REQUIRES AN ENTERPRISE TO R ECOGNIZE: (A) ALLOWABILITY WHEN AN EMPLOYEE HAS PROVIDED SERV ICE IN EXCHANGE FOR EMPLOYEE BENEFITS TO BE PAID IN THE FU TURE; AND (B) AN EXPENSES WHEN THE ENTERPRISE CONSUMES THE EC ONOMIC BENEFIT ARISING FROM SERVICE PROVIDED BY AN EMPLOYE E IN EXCHANGE FOR EMPLOYEE BENEFITS. 52. THE SCOPE OF THE SAID ACCOUNTING STANDARD-15 WA S MANDATORILY TO BE APPLIED BY AN EMPLOYER IN ACCOUNT ING FOR ALL EMPLOYEE BENEFITS, EXCEPT EMPLOYEE SHARE-BASED PAYM ENT. CLAUSE- 4 DEFINES EMPLOYEE BENEFITS INCLUDE: (A) SHORT-TERM EMPLOYEE BENEFITS, SUCH AS WAGES, SA LARIES AND SOCIAL SECURITY CONTRIBUTIONS (E.G., CONTRIBUTION T O AN INSURANCE COMPANY BY AN EMPLOYER TO PAY FOR MEDICAL CARE OF ITS EMPLOYEES), PAID ANNUAL LEAVE, PROFIT-SHARING A ND BONUSES (IF PAYABLE WITHIN TWELVE MONTHS OF THE END OF THE PERIOD) AND NON-MONETARY BENEFITS (SUCH AS MEDICAL CARE, HOUSIN G, CARS AND FREE OR SUBSIDIZED GOODS OR SERVICES) FOR CURRE NT EMPLOYEES; (B) POST-EMPLOYMENT BENEFITS SUCH AS GRATUITY, PENS ION, OTHER RETIREMENT BENEFITS, POST-EMPLOYMENT LIFE INS URANCE AND POST-EMPLOYMENT MEDICAL CARE; (C) OTHER LONG-TERM EMPLOYEE BENEFITS, INCLUDING LO NG- SERVICE LEAVE OR SABBATICAL LEAVE, JUBILEE OR OTHER LONG- SERVICE BENEFITS, LONG-TERM DISABILITY BENEFITS AND , IF THEY ARE NOT PAYABLE WHOLLY WITHIN TWELVE MONTHS AFTER THE E ND OF THE PERIOD, PROFIT-SHARING, BONUSES AND DEFERRED COMPEN SATION . 53. CLAUSE 7.3 OF REVISED AS-15 DEFINES THAT POST-EMPLOYMENT BENEFITS ARE EMPLOYEE BENEFITS (OTHER THAN TERMINAT ION BENEFITS) WHICH ARE PAYABLE AFTER THE COMPLETION OF EMPLOYMEN T . CLAUSE 24 OF REVISED AS-15 PROVIDES POST-EMPLOYMENT BENEFITS INCLUDE: (A) RETIREMENT BENEFITS, E.G., GRATUITY AND PENSI ON; AND (B) OTHER BENEFITS, E.G., POST-EMPLOYMENT LIFE INSU RANCE AND POST-EMPLOYMENT MEDICAL CARE. ARRANGEMENTS WHEREBY AN ENTERPRISES PROVIDES POST- EMPLOYMENT BENEFITS ARE POST-EMPLOYMENT BENEFIT PLA NS. AN ENTERPRISES APPLIES THIS STANDARD TO ALL SUCH ARRAN GEMENTS WHETHER OR NOT THEY INVOLVE THE ESTABLISHMENT OF A SEPARATE ENTITY TO RECEIVE CONTRIBUTIONS AND TO PAY BENEFITS . 49 54. UNDER CLAUSE 73 OF REVISED AS-15 IT HAS BEEN LA ID DOWN THAT ACTUARIAL ASSUMPTIONS ARE TO BE WORKED OUT AND SHOU LD BE MORE THAN UNBIASED AND MUTUALLY COMPATIBLE. FURTHER THE METHOD OF WORKING ACTUARIAL BENEFITS IS TO BE LAID DOWN UNDER ACCOUNTING STANDARD-15. FURTHER IN RESPECT OF TERMINATION BENEFITS, AS PER CLAUSE 133 IT IS PROVIDED THAT THE TERMINATION BENEFITS ARE TO BE TREATED SEPARATELY FROM OTHER EMPLOYEE BENEFITS AS THE EVENT WHICH GAVE RISE TO THE OBLIGATION IS THE TERMINATION RATH ER THAN EMPLOYEE SERVICE . UNDER CLAUSE 134 IT IS LAID DOWN THAT AN ENTERPRISE SHOULD RECOGNIZE TERMINATION BENEFITS AS A LIABILIT Y AND AN EXPENSE WHEN, AND ONLY WHEN: (A) THE ENTERPRISE HAS A PRESENT OBLIGATION AS A RE SULT OF A PAST EVENT; (B) IT IS PROBABLE THAT AN OUTFLOW OF RESOURCES EMB ODYING ECONOMIC BENEFITS WILL BE REQUIRED TO SETTLE THE OB LIGATION; AND (C) A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT O F THE OBLIGATION. 55. CLAUSE 137 OF REVISED AS-15 PROVIDES THAT TERMINATION BENEFITS ARE RECOGNIZED AS AN EXPENSES IMMEDIATELY . UNDER CLAUSE 138 IT IS PROVIDED THAT WHERE AN ENTERPRISE RECOGNIZES TERMINATION BENEFITS, THE ENTERPRISE MAY ALSO HAVE TO ACCOUNT F OR A CURTAILMENT OF RETIREMENT BENEFITS OR OTHER EMPLOYEE BENEFITS . 56. THE ASSESSEE ADMITTEDLY FOLLOWED THE REVISED AC COUNTING STANDARD-15. IN VIEW THEREOF THE ASSESSEE OBTAINED AN ACTUARIAL VALUATION CERTIFICATE WHICH READS AS UNDER: ACTUARIAL VALUATION CERTIFICATE MEDICAL REF:ACTVAL/M/GSK_0307 GLAXOSMITHKLINE CONSUMER HEALTHCARE LIMITED. RE: ACTUARIAL VALUATION - POST RETIREMENT MEDICAL A SSISTANCE AS ON 31.03.2007. THE ACTUARIAL VALUE OF LIABILITY OF THE COMPANY TOW ARDS POST RETIREMENT MEDICAL ASSISTANCE TO THE RETIRED /RETIRING OFFICERS AS PER THE COMPAN Y'S SCHEME UPTO THE DATE OF VALUATION MENTIONED ABOVE HAS BEEN CALCULATED AND THE RESULTS OF VALUATION ARE AS GIVEN BELOW: 1. BASIS: (A) DISCOUNT RATE - 8.00 % P.A. (B) MORTALITY - L.I.C. (1994-96) ULT. (C) RATE OF WITHDRAWAL - AS APPLICABLE TO THE GROUP. (D) PROJECTED UNIT CREDIT METHOD ADOPTED. 2. DETAILS OF STAFF: 50 THE INDIVIDUAL DETAILS IN RESPECT OF 366 OFFICERS C OVERED BY THESE BENEFITS & 140 RETIRED OFFICERS HAVE BEEN MADE AVAILABLE FOR THE P URPOSE. 3. BENEFITS: THE MEDICAL ASSISTANCE IS GRANTED FOR DUE TO ACCIDE NT OR SICKNESS AND IS LIMITED AS UNDER: DIRECTORS: RS1,50,000 PER YEAR MANAGERS: RS.1,50,000 PER YEAR EXECUTIVES: RS.1,00,000 PER YEAR THE COMPANY HAS ASSURED THE BENEFITS WITH NATIONAL INSURANCE COMPANY AND PAYS PREMIUM ANNUALLY. SUCH PREMIUM AND ANY INCREASE OF THE SAME HAS BEEN DULY CONSIDERED. 4. VALUATION RESULTS: THIS IS TO CERTIFY THAT AS PER THE ACTUARIAL VALUAT ION THE TOTAL VALUE OF THE POST RETIREMENT MEDICAL ASSISTANCE BENEFIT UNDER TH E ABOVE ASSUMPTIONS WORKS OUT TO:- RS. 11,73,99,623.00P. 5. THE PURPOSE OF THIS VALUATION IS TO MAKE INCRE MENTAL PROVISION IN THE BOOKS OF ACCOUNT. THE VALUATION HAS BEEN CARRIED OUT KEEPING IN VIEW THE PROVISIONS OF AS-15 ( R ) AS AN ON GOING CONCERN BASIS. (A.D.GUPTA) 57. THE AUDITORS VIDE NOTES TO THE ACCOUNTS VIDE NO TE NO.6 HAD REPORTED AS UNDER: 6. (A) THE COMPANY HAS DURING THE YEAR ADOPTED ACCOUNTING STANDARD 15 (REVISED 2005) EMPLOYEES BE NEFITS. ACCORDINGLY, THE TRANSITIONAL ADJUSTMENT AGGREGATIN G TO RS.11,37.19 LAKHS (NET OF DEFERRED TAX ASSET RSNIL) HAS BEEN CHARGED AGAINST THE OPENING GENERAL RESERVES. THE DETAILS OF THE TRANSITIONAL ADJUSTMENT IS AS FOLLOWS -POST EMPLOYMENT MEDICAL ASSISTANCE SCHEME RS.11,09 .90 LAKHS - LEAVE ENCASHMENT/COMPENSATED RS.27.29 LAKHS ABSENCE S FOR WORKERS (EARNED/SICK LEAVE)(ALSO REFER SCHEME 2) 58. THE ASSESSEE ACCORDINGLY MADE A PROVISION OF RS .1636.20 LACS ON ACCOUNT OF EMPLOYEES BENEFITS WHICH INCLUDE D THE PROVISIONS FOR POST RETIREMENT MEDICAL BENEFITS TO EMPLOYEES AT RS.11.09 CRORES. THE ABOVE SAID AMOUNT WAS BOOKED AS AN EXPENDITURE FOR COMPUTATION OF INCOME IN COMPLIANCE TO THE MANDATORY REVISED ACCOUNTING STANDARD-15. THE CLAI M OF THE ASSESSEE IN RESPECT OF THE ABOVE SAID EXPENDITURE W AS AS UNDER: (A) THE SAID DEDUCTION HAS BEEN CLAIMED FOR THE FIR ST TIME DURING THE RELEVANT ASSESSMENT YEAR, IN VIEW OF COM PLIANCE OF MANDATORY REVISED ACCOUNTING STANDARD-15. (B) SINCE THE PROVISION WAS MADE BY THE ASSESSEE ON THE BASIS OF ACTUARIAL VALUATION IN RESPECT OF AN ACCRU ED LIABILITY FOR THE ENTITLEMENT EARNED BY THE EMPLOYEES WHILE I N SERVICE, THE SAME WAS CLEARLY ALLOWABLE AS DEDUCTION. 51 (C) UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, DEDU CTION OF EXPENDITURE IS ALLOWABLE IN THE YEAR IN WHICH LI ABILITY IS QUANTIFIED AND ACCRUED, NOTWITHSTANDING THAT THE SA ME HAS TO BE DISCHARGED AT A LATER DATE. (D) FURTHER, THE AFORESAID LIABILITY INCURRED TOWAR DS MEDICAL BENEFITS WAS ONLY AN INCREMENTAL LIABILITY AFTER CONSIDERING/REDUCING THE AMOUNT OF MEDICAL INSURANC E PREMIUM PAID TO INSURANCE COMPANIES. THE SAID LIAB ILITY INCURRED, THUS, DID NOT INCLUDE THE AMOUNT OF PREMI UM PAID FOR WHICH DEDUCTION WAS ALREADY CLAIMED. (E) THE DEDUCTION WAS CLAIMED BECAUSE OF CHANGE IN THE METHOD OF ACCOUNTING AND WHERE THERE IS A BONAFIDE CHANGE IN THE METHOD OF ACCOUNTING, THE CLAIMS ON THE BASI S OF THE CHANGED METHOD, EVEN IF PERTAINING TO EARLIER YEARS , WOULD BE ALLOWABLE DEDUCTION IN THE YEAR OF CHANGE, MORE SO SINCE THE LIABILITY IN REGARD THERETO HAS NOT BEEN CLAIMED DE DUCTION IN SUCH EARLIER YEARS. (F) SINCE THE LIABILITY ON ACCOUNT OF MEDICAL ASSIS TANCE PERTAINING TO SERVICES RENDERED IN THE EARLIER YEAR S HAS BEEN ACCOUNTED OR CLAIMED IN THE RELEVANT YEAR FOR THE F IRST TIME, IN VIEW OF THE BONAFIDE CHANGE IN THE METHOD OF ACC OUNTING (PURSUANT TO MANDATORY AS-15 (REVISED), FOR WHICH N O DEDUCTION WAS CLAIMED IN THE EARLIER YEARS NOR WOUL D BE CLAIMED AGAIN IN THE YEAR OF PAYMENT, THE SAID LIAB ILITY IS ALLOWABLE DEDUCTION IN THE RELEVANT YEAR ITSELF. THE DEDUCTION ON ACCOUNT OF LIABILITY TOWARDS MED ICAL REIMBURSEMENT EXPENSES AGGREGATING TO RS.11.09 CROR ES BEING ACTUARIAL VALUATION IN RESPECT OF SUBSISTING LIABIL ITY HAS BEEN CORRECTLY CLAIMED BY THE APPELLANT. (G) THE ASSESSING OFFICER HAD DISALLOWED THE CLAIM OF THE ASSESSEE OBSERVING THAT; (A) THE AMOUNT OF LIABILITY, WHICH WAS INCURRED ON THE BASIS OF ACTUARIAL VALUATION, WAS MADE ON THE BAS IS OF CERTAIN ASSUMPTION AND, THUS, THE SAME CANNOT BE SA ID TO BE ASCERTAINED LIABILITY. (B) THE ASSESSEE HAS CLAIMED DOUBLE DEDUCTION IN RESPECT OF SAME LIABILITY, VIZ., ONCE AT THE TIME OF PAYMENT O F PREMIUM OF INSURANCE COMPANIES AND SECONDLY, AT THE TIME OF CREATING THE IMPUGNED PROVISION FOR MEDICAL BENEFITS. 59. THE FIRST ASPECT OF THE ISSUE RAISED BEFORE US IS WHETHER THE RECOGNITION OF THE LIABILITY IN VIEW OF THE REVISED ACCOUNTING STANDARD-15 WHICH IS A NOTIFIED ACCOUNTING STANDARD BY THE ICAI IS TO BE RECOGNIZED WHILE COMPUTING THE INCOME OF THE ASSESSEE IN LINE WITH THE METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE ASSESSEE. THE SECOND ASPECT OF THE ISSUE IS WHETHER SUCH EXPE NDITURE IS TO BE ALLOWED AS A DEDUCTION THOUGH THE LIABILITY HAS BEE N RECOGNIZED IN 52 THE YEAR UNDER CONSIDERATION BUT THE SAME HAS TO BE INCURRED IN THE SUCCEEDING YEAR. 60. THEIR LORDSHIP OF HONBLE SUPREME COURT IN BHAR AT EARTH MOVERS VS. CIT (SUPRA) HELD THAT THE PROVISION MADE FOR MEETING LIABILITY OF LEAVE ENCASHMENT SCHEME IS TO BE ALLOW ED AS DEDUCTION, OBSERVING AS UNDER: THE LAW IS SETTLED : IF A BUSINESS LIABILITY HAS DE FINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SH OULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO BE CAPAB LE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATI ON MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS N OT A CONTINGENT ONE. THE LIABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A F UTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILIT Y SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN. IN METAL BOX COMPANY OF INDIA LTD. VS THEIR WORKMEN ( 1969 ) 73 ITR 53 ( SC ), THE APPELLANT-COMPANY ESTIMATED ITS LIABILITY UN DER TWO GRATUITY SCHEMES FRAMED BY THE COMPANY AND THE AMOUNT OF LIABILITY W AS DEDUCTED FROM THE GROSS RECEIPTS IN THE PROFIT AND LOSS ACCOUNT. THE COMPAN Y HAD WORKED OUT ON AN ACTUARIAL VALUATION ITS ESTIMATED LIABILITY AND MAD E PROVISION FOR SUCH LIABILITY NOT ALL AT ONCE BUT SPREAD OVER A NUMBER OF YEARS. THE PRACTICE FOLLOWED BY THE COMPANY WAS THAT EVERY YEAR THE COMPANY WORKED OUT THE ADDITIONAL LIABILITY INCURRED BY IT ON THE EMPLOYEES PUTTING IN EVERY AD DITIONAL YEAR OF SERVICE. THE GRATUITY WAS PAYABLE ON THE TERMINATION OF AN EMPLO YEE'S SERVICE EITHER DUE TO RETIREMENT, DEATH OR TERMINATION OF SERVICE - THE E XACT TIME OF OCCURRENCE OF THE LATTER TWO EVENTS BEING NOT DETERMINABLE WITH EXACT ITUDE BEFORE HAND. A FEW PRINCIPLES WERE LAID DOWN BY THIS COURT, THE RELEVA NT OF WHICH FOR OUR PURPOSE ARE EXTRACTED AND REPRODUCED AS UNDER : (I) FOR AN ASSESSEE MAINTAINING HIS ACCOUNTS ON THE MERCANTILE SYSTEM, A LIABILITY ALREADY ACCRUED, THOUGH TO BE DISCHARGED AT A FUTURE DATE, WOULD BE A PROPER DEDUCTION WHILE WORKING OUT THE PROFITS AND GAINS OF HIS BUSINESS, REGARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE AND ACCOUNTANCY. IT IS NOT AS IF SUCH DEDUCTION IS PERMISSIBLE ONLY IN THE CASE OF AMOUNTS ACTUALLY EXPENDED OR PAID; (II) JUST AS RECEIPTS, THOUGH NOT ACTUAL RECEIPTS B UT ACCRUED DUE ARE BROUGHT IN FOR INCOME-TAX ASSESSMENT, SO ALSO LIABILITIES ACCR UED DUE WOULD BE TAKEN INTO ACCOUNT WHILE WORKING OUT THE PROFITS AND GAINS OF THE BUSINESS; (III) A CONDITION SUBSEQUENT, THE FULFILMENT OF WHI CH MAY RESULT IN THE REDUCTION OR EVEN EXTINCTION OF THE LIABILITY, WOULD NOT HAVE THE EFFECT OF CONVERTING THAT LIABILITY INTO A CONTINGENT LIABILITY; (IV) A TRADER COMPUTING HIS TAXABLE PROFITS FOR A P ARTICULAR YEAR MAY PROPERLY DEDUCT NOT ONLY THE PAYMENTS ACTUALLY MADE TO HIS E MPLOYEES BUT ALSO THE PRESENT VALUE OF ANY PAYMENTS IN RESPECT OF THEIR S ERVICES IN THAT YEAR TO BE MADE IN A SUBSEQUENT YEAR IF IT CAN BE SATISFACTORI LY ESTIMATED. SO IS THE VIEW TAKEN IN CALCUTTA CO. LTD. VS CIT ( 1959 ) 37 ITR 1 ( SC ) WHEREIN THIS COURT HAS HELD THAT THE LIABILITY ON THE ASSES SEE HAVING BEEN IMPORTED, THE LIABILITY WOULD BE AN ACCRUED LIABILITY AND WOULD N OT CONVERT INTO A CONDITIONAL ONE MERELY BECAUSE THE LIABILITY WAS TO BE DISCHARG ED AT A FUTURE DATE. THERE MAY BE SOME DIFFICULTY IN THE ESTIMATION THEREOF BU T THAT WOULD NOT CONVERT THE 53 ACCRUED LIABILITY INTO A CONDITIONAL ONE; IT WAS AL WAYS OPEN TO THE TAX AUTHORITIES CONCERNED TO ARRIVE AT A PROPER ESTIMATE OF THE LIA BILITY HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. APPLYING THE ABOVESAID SETTLED PRINCIPLES TO THE FA CTS OF THE CASE AT HAND WE ARE SATISFIED THAT THE PROVISION MADE BY THE APPELLANT- COMPANY FOR MEETING THE LIABILITY INCURRED BY IT UNDER THE LEAVE ENCASHMENT SCHEME PROPORTIONATE WITH THE ENTITLEMENT EARNED BY EMPLOYEES OF THE COMPANY, INCLUSIVE OF THE OFFICERS AND THE STAFF, SUBJECT TO THE CEILING ON ACCUMULATI ON AS APPLICABLE ON THE RELEVANT DATE, IS ENTITLED TO DEDUCTION OUT OF THE GROSS RECEIPTS FOR THE ACCOUNTING YEAR DURING WHICH THE PROVISION IS MADE FOR THE LIA BILITY. THE LIABILITY IS NOT A CONTINGENT LIABILITY. THE HIGH COURT WAS NOT RIGHT IN TAKING THE VIEW TO THE CONTRARY. THE APPEAL IS ALLOWED. THE JUDGMENT UNDER APPEAL IS SET ASIDE. THE QUESTION REFERRED BY THE TRIBUNAL TO THE HIGH COURT IS ANSWE RED IN THE AFFIRMATIVE, I.E., IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 61. IN THE FACTS OF THE PRESENT CASE BEFORE US THE ASSESSEE HAD RECOGNIZED AND ACCOUNTED FOR THE POST RETIREMENT BE NEFIT DUE TO ITS EMPLOYEES, IN TERMS OF THE SCHEME OF EMPLOYMENT AND ALSO IN TERMS OF THE REVISED/CHANGE IN ACCOUNTING STANDARD-15 ISS UED BY ICAI WHICH WAS TO BE FOLLOWED DURING THE YEAR, IS AN ALL OWABLE DEDUCTION IN THE HANDS OF THE ASSESSEE. THE SAID C LAIM BEING BASED ON THE VALUATION OF THE ACTUARY IS BOTH SCIENTIFIC AND ONE OF THE RECOGNIZED METHOD OF ACCOUNTING AND QUANTIFYING THE SAID POST RETIREMENTAL MEDICAL BENEFITS. IN SUCH CASES THOUG H ACTUAL AND EXACT QUANTIFICATION MAY NOT BE POSSIBLE, HOWEVER, THE LIABILITY SO RECOGNIZED BY THE ASSESSEE COULD NOT BE SAID TO BE UNASCERTAINED AND CONTINGENT. THE ASSESSEE HAVING FOLLOWED THE M ERCANTILE SYSTEM OF ACCOUNTING WAS COMPULSORILY REQUIRED TO A CCOUNT FOR THE SAID POST RETIREMENT MEDICAL BENEFITS AS THE SAME W AS QUANTIFIED AND HAD ACCRUED DURING THE YEAR. THE CLAIM OF THE ASSESSEE WAS THUS ALLOWABLE IRRESPECTIVE OF THE FACT THAT THE AS SESSEE HAD MADE A PROVISION IN THE BOOKS OF ACCOUNT BUT HAD CLAIMED THE SAID DEDUCTION IN THE COMPUTATION OF INCOME. IT IS WELL SETTLED PROPOSITION THAT THE WAY IN WHICH ENTRIES ARE MADE BY THE ASSES SEE IN ITS BOOKS OF ACCOUNT IS NOT DETERMINATIVE OF THE QUESTION WHETHER THE ASSESSEE HAD EARNED ANY PROFIT OR SUFFERED ANY LOSS AS HELD BY THE HONBLE APEX COURT IN SUTLEJ COTTON MILLS LTD. VS. CIT (SUPRA). IT WAS FURTHER HELD BY THE HONBLE APEX COURT THAT WHAT IS NECESSARY TO BE CONSIDERED IS THE TRUE NATURE OF TR ANSACTION AND WHETHER IN FACT IT HAS RESULTED IN PROFIT OR LOSS T O THE ASSESSEE. FURTHER THE SAID DEDUCTION WAS CLAIMED DURING THE Y EAR UNDER CONSIDERATION AND THE CLAIM BEING BONAFIDE IS TO BE ALLOWED IN THE YEAR IN WHICH THE SAME ACCRUES THOUGH THE SAID LIAB ILITY IS TO BE DISCHARGED AT A LATER DATE. 62. IDENTICAL ISSUE AROSE IN BOKARO POWER SUPPLY CO . (P) LTD. VS DCIT (SUPRA) OF ALLOWABILITY OF CLAIM OF DEDUCTION OF POST RETIREMENT MEDICAL BENEFITS ON THE BASIS OF ACTUARI AL VALUATION AND THE SAME WAS HELD TO BE NOT AN UNASCERTAINED LIABIL ITY AND WAS HELD AS ALLOWABLE, OBSERVING AS UNDER: 5. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. WE HA VE ALSO PERUSED THE ORDER OF AUTHORITIES BELOW. THE ASSESSEE COMPANY OF WAS LIAB LE TO PAY FOR MEDICAL EXPENSES OF 54 ITS RETIRED EMPLOYEES IN ACCORDANCE WITH THE TERMS OF EMPLOYMENT. PRIOR TO THIS YEAR, THE ASSESSEE WAS CLAIMING THESE EXPENSES IN THE YEAR OF EXPENDITURE. DUE TO THE CHANGE IN THE ACCOUNTING STANDARD IN RESPECT OF THE ACCOUNTIN G OF POST RETIREMENT BENEFITS, THE ASSESSEE GOT DONE THE ACTUARIAL VALUATION OF THESE LIABILITIES AND STARTED CLAIMING THE SAME ON THAT BASIS. IT IS CLAIMED IN VIEW OF THE AC COUNTING STANDARD, AS-15. THIS CLAIM WAS BASED ON THE VALUATION OF LIABILITY ON ACTUARIA L AND SCIENTIFIC BASIS. IN SUCH CASES, THE ACTUAL AND EXACT QUANTIFICATION MAY NOT BE POSSIBLE , HOWEVER, LIABILITY CANNOT BE SAID TO BE A CONTINGENT ONE. SINCE THE PROVISION HAS BEEN MADE ON SCIENTIFIC BASIS AND THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THEREFOR E, IN OUR CONSIDERED VIEW, THE CIT (A) WAS JUSTIFIED IN DELETING THE ADDITION WHILE DECIDING I TA NO.149/DEL/2012. A LIABILITY WHICH HAS ALREADY ACCRUED THOUGH DISCHARGED ON A FUTURE DATE WOULD BE ENTITLED FOR DEDUCTION. WHILE WORKING OUT THE PROFIT & GAIN OF THE BUSINESS THE A CCRUED RECEIPTS ARE BROUGHT TO THE TAX, SIMILARLY, ACCRUED LIABILITIES DUE WOULD ALSO BE EN TITLED FOR DEDUCTION WHILE WORKING OUT THE PROFIT AND GAIN OF THE BUSINESS OF THE YEAR. CO MPUTATION OF TAXABLE PROFIT FOR A PARTICULAR YEAR CAN BE WORKED OUT ONLY BY DEDUCTING THE ACTUAL PAYMENTS MADE TO THE EMPLOYEES AND PRESENT VALUE OF ANY PAYMENT IN RESPECT OF THE SERV ICES IN THAT PARTICULAR YEAR TO BE MADE IN SUBSEQUENT YEAR. IN VIEW OF THIS, WE FIND THE ORDER OF CIT (A) IN ITA NO.149/DEL/2012 IN ORDER. WE SET ASIDE THE ORDER OF CIT (A) IN ITA NO.4921/DE L/2010. FOR DOING SO, WE ALSO GET SUPPORT FROM THE FOLLOWING DECISIONS OF HON'BLE SUP REME COURT AND HON'BLE DELHI HIGH COURT. 5.1 HON'BLE SUPREME COURT IN THE CASE OF METAL BOX COMPANY OF INDIA LTD. VS. THEIR WORKMEN - 73 ITR 53 HAS HELD AS UNDER :- ' CONTINGENT LIABILITIES DISCOUNTED AND VALUED AS N ECESSARY, CAN BE TAKEN INTO ACCOUNT AS TRADING EXPENSES IF THEY ARE SUFFICIENTL Y CERTAIN TO BE CAPABLE OF VALUATION AND IF PROFITS CANNOT BE PROPERLY ESTIMAT ED WITHOUT TAKING THEM INTO CONSIDERATION. AN ESTIMATED LIABILITY UNDER A SCHEME OF GRATUITY, IF PROPERTY ASCERTAINABLE AND ITS PRESENT VALUE IS DIS COUNTED, IS DEDUCTIBLE FROM THE GROSS RECEIPTS WHILE PREPARING THE PROFIT AND L OSS ACCOUNT. THIS IS RECOGNISED IN TRADE CIRCLES AND THERE IS NOTHING IN THE BONUS ACT WHICH PROHIBITS SUCH A PRACTICE. SUCH A PROVISION PROVIDE S FOR A KNOWN LIABILITY OF WHICH THE AMOUNT CAN BE DETERMINED WITH SUBSTANTIAL ACCURACY. IT CANNOT, THEREFORE, BE TERMED A 'RESERVE'. THEREFORE, THE ES TIMATED LIABILITY FOR THE YEAR ON ACCOUNT OF A SCHEME OF GRATUITY SHOULD BE A LLOWED TO BE DEDUCTED FROM THE GROSS PROFITS. THE ALLOWANCE IS NOT RESTRI CTED TO THE ACTUAL PAYMENT OF GRATUITY DURING THE YEAR. WHERE THE FIXED ASSETS AR E REVALUED AND THE DIFFERENCE BETWEEN ITS COST AND THE VALUE FIXED ON SUCH REVALU ATION IS CREDITED TO THE CAPITAL RESERVE, UNLESS THE TRIBUNAL FINDS THAT THE REVALUATION IS MALA FIDE, THE INTEREST ON THE AMOUNT OF THE RESERVE SHOULD BE ALL OWED AS A DEDUCTION FROM THE GROSS PROFITS. FROM THE PROVISIONS OF SECTION 6(C) AND SECTION 7 O F THE BONUS ACT, IT IS EVIDENT THAT THE TRIBUNAL MUST FIRST ESTIMATE THE AMOUNT OF DIRE CT TAXES ON THE BALANCE OF GROSS PROFITS AS WORKED OUT UNDER SECTIONS 4 AND 6, BUT W ITHOUT DEDUCTION BONUS, THEN WORK OUT THE QUANTUM OF TAXES THEREON AT RATES APPL ICABLE DURING THE YEAR TO THE INCOME, PROFITS AND GAINS OF THE EMPLOYER AND, AFTE R DEDUCTING THE AMOUNT OF TAXES SO WORKED OUT, ARRIVE AT THE AVAILABLE SURPLUS. THIS W ILL BE CONSISTENT WITH THE RULE LAID DOWN BY COURTS AND TRIBUNALS BEFORE THE ACT WA S ENACTED, THAT THE BONUS AMOUNT SHOULD BE CALCULATED AFTER PROVISION FOR TAX WAS MA DE AND NOT BEFORE, FROM WHICH PARLIAMENT DOES NOT APPEAR TO HAVE MADE A DEPARTURE .' HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH M OVERS LIMITED VS. CIT - 245 ITR 428 = (2002-TIOL-123-SCRM HAS HELD AS UNDER :- 'HELD, REVERSING THE DECISION OF THE HIGH COURT, TH AT THE PROVISIONS MADE BY THE ASSESSEE-COMPANY FOR MEETING THE LIABILITY INCURRED BY IT UNDER THE LEAVE ENCASHMENT SCHEME PROPORTIONATE WITH THE ENTITLEMENT EARNED BY THE EMPLOYEES OF THE COMPANY, INCLUSIVE OF THE OFFICERS AND THE STAFF, SUBJECT TO THE CEILING ON ACCUMULATION AS APPLICABLE ON THE RELEVANT DATE, WAS ENTITLED TO DE DUCTION OUT OF THE GROSS RECEIPTS FOR THE ACCOUNTING YEAR DURING WHICH THE P ROVISION IS MADE FOR THE LIABILITY. THE LIABILITY IS NOT A CONTINGENT LIABILITY.' 55 HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. INS ILCO LIMITED - 197 TAXMAN 55 HAS HELD AS UNDER :- 'SIMILARLY IT WAS HELD BY THE HON'BLE DELHI HIGH CO URT IN THE CASE OF CIT VS. INSILCO LTD. THAT WHERE THE PROVISIONS WERE ESTIMATED ON TH E BASIS OF ACTUARIAL CALCULATIONS, THE DEDUCTION CLAIMED BY THE ASSESSEE HAS TO BE ALL OWED. THE RELEVANT EXTRACTS OF THE DECISION IS REPRODUCED BELOW FOR READY REFERENC E:- '6. IN THE CASE OF SHREE SAJJAN MILLS LTD (SUPRA), THE SUPREME COURT WAS EXA MINING THE PROVISION-MADE BY THE ASSESSEE TOWARDS GRATUITY UNDER THE INCOME TAX ACT, 1961. THE SUPREME COURT, AFTER NOTICING THE JUDGMENT IN METAL BOX COMPANY (S UPRA), CRYSTALLIZED ITS ANALYSIS AT PAGE 599 AND MADE THE FOLLOWING OBSERVATIONS:- 'IT WOULD THUS BE APPARENT FROM THE ANALYSIS AFORESAID THAT THE POSITION TILL THE P ROVISIONS OF SECTION 40A(7) WERE INSERTED IN THE ACT IN 1973 WAS AS FOLLOWS:- 1 XXXX 2 XXXX 3 XXXX 4 XXXX 5. PROVISION MADE IN THE PROFIT AND LOSS ACCOUNT FOR THE ESTIMAT ED PRESENT VALUE OF THE CONTINGENT LIABILITY PROPERLY ASCERTAINED AND DISCO UNTED ON AN ACCRUED BASIS AS FALLING ON THE ASSESSEE IN THE YEAR OF ACCOUNT COUL D BE DEDUCTIBLE EITHER UNDER SECTION 28 OR SECTION 37 OF THE ACT.' ITA 873/2008 & 1156/2008 PAGE 6 OF 25 7. THE DIVISION BENCH OF THIS COURT, WHILE CONSIDER ING DEDUCTIBILITY OF A PROVISION FOR WARRANTIES MADE BY AN ASSESSEE, WHICH DEALT IN COMPUTERS IN THE CASE OF CIT VS HEWLETT PACKARD INDIA (P) LTD, BY ITS JUDGMENT PASS ED IN APPEAL NO. ITA 486/2006 DATED 31.03.2008, UPHELD THE DEDUCTIBILITY OF THE PROVISION FOR WARRANTY ON THE GROUND THAT IT WAS MADE ON THE BASIS OF ACTU ARIAL VALUATION BEING COVERED BY THE PRINCIPLE SET OUT IN METAL BOX COMPANY (SUPRA). IN VIEW OF THE AFORESAID DECISIONS AND GIVEN THE FACT THAT THE PROVISION WAS ESTIMATED BASED ON ACTUARIAL CALCULATIONS, WE ARE OF THE OPINION THAT THE DEDUCT ION CLAIMED BY THE ASSESSEE HAD TO BE ALLOWED. WE FIND NO FAULT WITH THE REASONING OF THE TRIBUNAL. NO SUBSTANTIAL QUESTION OF LAW ARISES FOR OUR CONSIDERATION. ' 5.2 CONSIDERING THE FACTS OF THE ASSESSEE'S CASE AND ALSO THE DECISION OF HON'BLE SU PREME COURT AND HON'BLE JURISDICTIONAL HIGH COURT, WE SUSTAIN THE ORDER OF CIT (A) IN ITA NO.149/DEL/2012 ON THIS ISSUE. WE ALLOW ITA NO. 4921'/DEL/2010 AND DISMISS REVENUE'S APPEAL ON THIS GROUND. 63. IN VIEW THEREOF, WE DIRECT THE ASSESSING OFFICE R TO ALLOW THE DEDUCTION OF RS.11.09 CRORES ON ACCOUNT OF POST RET IREMENT MEDICAL BENEFITS. THE GROUND NOS.5 AND 6 RAISED BY THE ASS ESSEE ARE THUS ALLOWED. 46. THE ISSUE ARISING BEFORE US IS IDENTICAL TO THE ISSUE AROSE BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE AND FOLLOWING T HE SAME PARITY OF REASONING, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE IN RESPECT OF THE POST RETIREMENT MEDICAL BENEFITS TO THE EMPLOYEES CLAIMED AT RS.1.72 CRORES. THE GROUND OF APPEAL NOS.5 TO 5.2 RAISED BY THE ASSESSEE ARE THUS ALLOWED. 47. THE GROUND NOS. 6 TO 6.2 RAISED BY THE ASSESSEE ARE AGAINST DISALLOWANCE OF EXPENDITURE AGGREGATING RS.5556.64 LACS INCURRED BY THE ASSESSEE ON ACCOUNT OF ROYALTY. 56 48. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAD CLAIMED EXPENDITURE ON ROYALTY AT RS.5556.64 LACS D URING THE YEAR UNDER CONSIDERATION. THE CLAIM OF THE ASSESSEE WAS THAT IT HAD ENTERED INTO AN AGREEMENT DATED 7.2.1997 WITH M/S GLAXOAMITHKLINE A SIA PVT. LTD. (GSKAP), WHICH PROVIDED A NON EXCLUSIVE RIGHT TO US E THE TRADEMARKS UPON OR IN RELATION TO THE CONTRACT PRODUCTS (AS LI STED IN THE SCHEDULE TO THE AGREEMENT) FOR SALE IN INDIA, NEPAL AND BHUTAN DURING THE TERM OF THE AGREEMENT. SUCH ROYALTY WAS PAID AT THE PRESCRIBED RATE ON THE NET SALES VALUE OF THE CONTRACT PRODUCTS SOLD. THE ASSESSING OFFICER VIDE PARA 9.2 HAD OBSERVED THAT THE SAID ROYALTY WAS BEING PAID B Y THE ASSESSEE FROM YEAR TO YEAR @5% OF THE NET SALES OF THE PRODUCTS B EARING TRADEMARK HORLICKS AND CLAIMING THE SAME AS REVENUE EXPENDI TURE. THE REPLY OF THE ASSESSEE IS INCORPORATED UNDER PARA 9.3 AT PAGE S 29 TO 41 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER PROPOSED D ISALLOWANCE OF THE CLAIM OF ROYALTY HOLDING THE SAME TO BE CAPITAL IN NATURE ON THE GROUND THAT THE SIMILAR ISSUE HAD BEEN RAISED BY THE REVEN UE IN THE CASE OF SWARAJ ENGINES LTD., [309 ITR 443(SC)] WHEREIN THE MATTER HAD BEEN REMITTED BACK TO THE HON'BLE PUNJAB & HARYANA HIGH COURT BY THE HON'BLE APEX COURT. THE DRP DIRECTED THE ASSESSING OFFICER TO REDETERMINE THE ISSUE OBSERVING AS UNDER: WE HAVE CAREFULLY CONSIDERED THIS ISSUE. IT IS SE EN THAT THIS ISSUE IS COVERED BY THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF SWARAJ ENGINES LTD. 30 9 ITR 443 (SC). THE AO IS DIRECTED TO RE-DETERMINE T HIS ISSUE AFTER VERIFICATION OF FACTS WITH THE REFERENC ES TO THE AGREEMENT IN QUESTIONS ENTERED INTO BY THE ASSE SSEE WITH M/S GLAXO SMITHKLINE ASIA LTD. ON 7/2/97, IN V IEW OF HE DIRECTIONS OF HE HON'BLE SC IN THEIR AFORESAI D JUDGMENT. 49. THE ASSESSING OFFICER ON PERUSAL OF JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF SWARAJ ENGINES LTD. (SUPRA) HE LD AS UNDER: 57 9.7 PERUSAL OF THE JUDGEMENT SHOWS THAT THE BASIC I SSUE AS TO WHETHER THE ROYALTY PAID IS REVENUE OR CAPITAL IN NATURE HAS BEEN REMITTED BACK AND DEPENDING ON THE ANSWER TO THAT QUESTION, THE ISSUE OF APPLICABILITY OF SECTION 35A B OF THE INCOME TAX ACT, 1961 IS TO BE DECIDED BY THE HON'BLE COURTS. THE HON'BLE SUPREME COURT HAS ALSO HELD THAT THE HIGH COURT IS TO DECIDE WHETHER THE EXPENDITURE IS REVENUE OR CAP ITAL IN NATURE AFTER CONSTRUING THE AGREEMENT BETWEEN THE PARTIES. 9.8 HENCE, IT IS SEEN THAT THE HON'BLE SUPREME COUR T HAS REMITTED THE ISSUES FOR FRESH CONSIDERATION BY THE HIGH COURT. IN VIEW OF THE DIS CUSSION ABOVE, IT IS CLEAR THAT THE ISSUE HAS NOT BEEN SETTLED AND IS NOT FINALIZED IN THE CASE O F M/S SWARAJ ENGINES (SUPRA). ACCORDINGLY, NO ACTION AS A RESULT OF THIS JUDGEMENT CAN BE TAKEN I N THIS CASE. 9.9 ACCORDINGLY, IN ORDER TO HAVE A CONSISTENT STAN D, THE EXPENDITURE AGGREGATING TO RS.55,56,64,000/- INCURRED BY THE ASSESSEE ON ACCOUNT OF ROYALTY IS HELD TO BE CAPITAL IN ATT IRE AND DISALLOWED SUBJECT TO THE FINAL OUTCOME IN THE CASE OF M/S SWA RAJ ENGINES (SUPRA). PENALTY PROCEEDING U/S 271(L)(C) OF THE INCOME TAX ACT ARE INITIATED SEPARATELY FOR FURNISHING INACCURATE PARTICULARS OF INCOME TO THE TUNE OF RS.55,56,64,00 0/-. 50. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT T HAT THE SAID EXPENDITURE ON ACCOUNT OF ROYALTY HAD BEEN ALLOWED TO THE ASSESSEE FROM YEAR TO YEAR AND ONLY DURING THE YEAR UNDER CONSIDE RATION, SAID EXPENDITURE HAD BEEN HELD TO BE CAPITAL IN NATURE T HOUGH THE ASSESSEE WAS INCURRING EXPENDITURE FOR USE OF THE TRADE MARK AND NOT FOR ACQUISITION OF TRADE MARK. IT WAS FURTHER POINTED OUT BY THE LEARNED A.R. FOR THE ASSESSEE THAT THE ASSESSING OFFICER VIDE PA RAS 9.7 AND 9.8 AT PAGE 43 OF THE ASSESSMENT ORDER HAD APPLIED THE PROVISIO NS OF SECTION 35AB OF THE ACT AND DISALLOWED THE CLAIM OF THE ASSESSEE. THE NEXT CONTENTION OF THE LEARNED A.R. FOR THE ASSESSEE WAS THAT THE PROV ISIONS OF SECTION 35AB WERE NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION . ANOTHER PLEA WAS RAISED BY THE LEARNED A.R. FOR THE ASSESSEE THAT TH ERE WAS NO DISPUTE WHETHER ROYALTY WAS EXCESSIVE OR NOT, AS THE ASSESS ING OFFICER HIMSELF SAID THAT IT WAS NOT EXCESSIVE. THE ONLY ISSUE TO BE CONSIDERED WAS WHETHER THE SAID EXPENDITURE WAS REVENUE OR CAPITAL IN NATURE. OUR ATTENTION WAS DRAWN TO THE OBSERVATIONS OF THE ASSE SSING OFFICER AT PARA 9.2 AT PAGE 41 OF THE ASSESSMENT ORDER WHEREIN THE ASSESSING OFFICER HIMSELF HAD OBSERVED THAT THE SAID EXPENDITURE WAS BEING CLAIMED FROM YEAR TO YEAR. THE LEARNED A.R. FOR THE ASSESSEE PL ACED RELIANCE ON THE 58 PRINCIPLE OF RES- JUDICATA AND POINTED OUT THAT THE SAID EXPENDITURE IS TO BE ALLOWED AS AN EXPENDITURE. 51. IN RESPECT OF GROUND NO.6.1 RAISED BY THE ASSES SEE IT WAS POINTED OUT BY THE LEARNED A.R. FOR THE ASSESSEE THAT AFTER DIRECTIONS OF THE DRP, THERE WAS LIMITED MANDATE AVAILABLE FOR THE ASSESSI NG OFFICER TO RE- DETERMINE THE ISSUE AFTER VERIFICATION OF FACTS WIT H REFERENCE TO THE AGREEMENT ENTERED UPON BY THE ASSESSEE. IN RESPECT OF GROUND NO.6.2 RAISED BY THE ASSESSEE IT WAS POINTED OUT THAT THE SAID CLAIM WAS MADE WITHOUT PREJUDICE TO THE ISSUE RAISED VIDE GROUND N OS.6 AND 6.1. 52. THE LEARNED D.R. FOR THE REVENUE PLACED RELIANC E ON THE ORDERS OF THE AUTHORITIES BELOW. 53. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING VIDE THE ABOVE SAID GROUND OF APPEAL NOS.6 AND 6.1 IS IN RELATION TO THE EXPENDITURE CLAIMED BY THE ASSESSEE ON ACCOUNT OF PAYMENT OF ROYALTY TO THE GSKAP. ADMITTEDLY THE AS SESSEE WAS PAYING THE SAID ROYALTY FROM YEAR TO YEAR AS PER THE TERMS OF AGREEMENT DATED 7.2.1997. AS PER THE TERMS OF THE SAID AGREEMENT THE PAYMENT WAS MADE FOR THE LICENCE/RIGHTS TO USE TRADE MARK PROVIDED B Y GSKAP. THE COPY OF THE AGREEMENT IS PLACED AT PAGES 1 TO 17 OF THE PAPER BOOK AND AS PER CLAUSE-12 IT IS PROVIDED AS UNDER: 12. IN CONSIDERATION OF THE RIGHT TO USE THE TRADE MARKS GRANTED HEREIN, SBCH SHALL PAY TO SB ASIA A ROYALTY OF UPTO FIVE (5) PERCENT OF THE NET SALES VALUE OF THE CONTRACT PR ODUCTS SOLD UNDER THE TRADE MARKS. NET SALES VALUE FOR THE PURPOSE OF THIS CLAUSE SHALL MEAN SALES NET OF RETURNS/ALLOWANCES AND NET OF EXCISE DUTY. 54. THE ISSUE ARISING IN THE PRESENT APPEAL IS WHET HER SUCH ROYALTY PAID BY THE ASSESSEE IS IN THE NATURE OF CAPITAL OR REVE NUE EXPENDITURE. THE ASSESSING OFFICER AND DRP HAD CONSIDERED THE ALLOWA BILITY OF THE 59 EXPENDITURE IN VIEW OF THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SWARAJ ENGINES LTD. (SUPRA) WHEREIN THE ISSUE WAS THE APPLICABILITY OF SECTION 35AB OF THE ACT IN THE CON TEXT OF ROYALTY PAID AS PERCENTAGE OF THE NET SALE PRICE BEING REVENUE A ND CAPITAL IN NATURE. THE HON'BLE SUPREME COURT HELD THAT AFTER INSERTION OF SECTION 35AB OF THE ACT, PROVIDING FOR ALLOWANCE OF EXPENDITURE ON KNOW-HOW AS REVENUE OR CAPITAL, WOULD BE A SUBSTANTIAL QUESTION OF LAW AND THE ISSUE WAS SET ASIDE TO THE HON'BLE HIGH COURT FOR FRESH CONSIDERA TION. THE APPEAL BEFORE THE HON'BLE SUPREME COURT RELATED TO THE ASS ESSMENT YEAR AS ON 30.12.1991. HOWEVER, THE PROVISIONS OF SECTION 35A B OF THE ACT WERE APPLICABLE TILL ASSESSMENT YEAR 1997-98 AND ARE NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION I.E. THE ASSESSMENT YEAR 2 008-09. IN VIEW THEREOF, RATIO LAID DOWN BY THE HON'BLE SUPREME COU RT IN THE CASE OF CIT VS. SWARAJ ENGINES LTD. (SUPRA) IS NOT APPLICABLE T O THE FACTS OF THE PRESENT CASE. WE FIND NO MERIT IN THE ORDER OF THE ASSESSING OFFICER IN THIS REGARD. 55. NOW COMING TO THE ASSESSABILITY OF EXPENDITURE OF ROYALTY INCURRED BY THE ASSESSEE, THE PERUSAL OF THE REPORT OF THE T PO ALSO REFLECTS THAT BOTH TPO AND ASSESSING OFFICER HAD NOTED THAT THE S AID PAYMENTS HAD BEEN MADE IN THE EARLIER YEARS. THE AGREEMENT ENTE RED INTO BY THE ASSESSEE IS DATED 7.2.1997 AND FOLLOWING THE PRINCI PLE OF CONSISTENCY WHERE THE SAID EXPENDITURE HAS BEEN ALLOWED IN THE HANDS OF THE ASSESSEE FROM YEAR TO YEAR, THE SAME MERITS TO BE ALLOWED IN THE YEAR UNDER CONSIDERATION ALSO. 56. FURTHER THE EXPENDITURE HAS BEEN INCURRED FOR T HE RIGHT TO USE THE TRADE MARK WHICH DOES NOT RESULT INTO ACQUISITION O F ANY RIGHTS OF ENDURING NATURE AND THE SAME CANNOT BE HELD TO BE A N EXPENDITURE OF 60 CAPITAL IN NATURE. THE ASSESSEE HAD NOT ACQUIRED T ITLE TO THE SAID TRADE MARK AS IS APPARENT FROM THE PERUSAL OF THE TERMS O F AGREEMENT ENTERED BETWEEN THE ASSESSEE AND GSKAP. THE ROYALTY WAS BE ING PAID AT PRESCRIBED PERCENTAGE OF THE NET SALE VALUE OF THE CONTRACTED PRODUCT AND HENCE WAS LINKED TO THE SALES MADE BY THE ASSESSEE. THE SAID EXPENDITURE WAS DULY ALLOWABLE IN THE HANDS OF THE ASSESSEE. RELIANCE IS PLACED ON THE RATIO LAID DOWN BY THE DELHI HIGH COU RT IN SHARDA MOTOR INDUSTRIAL LTD. [319 ITR 109 (DEL)] WHEREIN IT WAS HELD THAT ROYALTY PAID ON THE BASIS OF RATE PER UNIT OF PRODUCTION IS REVE NUE EXPENDITURE AND COULD NOT BE CONSIDERED AS CAPITAL EXPENDITURE . ANOTHER ASPECT TO BE KEPT IN MIND IS THAT THE ISSUE OF PAYMENT OF ROYALT Y WAS ALSO REFERRED TO THE TPO DURING THE YEAR UNDER CONSIDERATION, BEING DEEMED INTERNATIONAL TRANSACTION AND AFTER FULLY SCRUTINIZING THE TRANSA CTION, THE TPO HAS ACCEPTED THE ARMS LENGTH PRICE OF THE TRANSACTION FOR THE YEAR UNDER CONSIDERATION. ACCORDINGLY, WE DIRECT THE ASSESSI NG OFFICER TO ALLOW THE CLAIM OF ROYALTY PAID AT RS.5556.64 LACS. THE GROUND NOS.6 AND 6.1 RAISED BY THE ASSESSEE ARE THUS ALLOWED. 57. THE GROUND NO.6.2 BEING WITHOUT PREJUDICE TO GR OUND NOS.6 AND 6.1 IS DISMISSED IN VIEW OF OUR ALLOWING THE GROUND NOS .6 AND 6.1. 58. THE ISSUE IN GROUND NO.7 RAISED BY THE ASSESSEE IS AGAINST DISALLOWANCE OF INTEREST IN TERMS OF PROVISO TO SEC TION 36(1)(III) OF THE ACT AMOUNTING TO RS.1,54,76,000/-. 59. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD SHOWN INVESTMENT IN FIXED DEPOSITS AS CLOSING WORK-IN-PROGRESS(CWIP IN SHORT). THE OPENI NG BALANCE OF CWIP AS ON 1.4.2007 WAS RS.767.17 LACS AND THE CLOSING B ALANCE OF CWIP AS ON 31.3.2008 WAS RS.18.12.21 LACS. THE ASSESSING OFFI CER NOTED THAT THE 61 ASSESSEE HAD PAID INTEREST ON DEPOSITS AT RS.290.06 LACS, INTEREST TO BANK AT RS.83.71 LACS AND INTEREST TO OTHERS AT RS.100.3 0 LACS. THE TOTAL INTEREST PAID BY THE ASSESSEE WAS RS.474.07 LACS. THE ASSESSEE WAS SHOW CAUSED TO EXPLAIN AS TO WHY THE PROVISIONS OF PROVI SO TO SECTION 36(1)(III) OF THE ACT BE NOT APPLIED. THE ASSESSIN G OFFICER IN THE ABSENCE OF COMPLETE DETAILS BEING FURNISHED BY THE ASSESSEE WITH REGARD TO UTILIZATION OF CASH CREDIT LIMIT, LONG TERM LOAN AND SHORT TERM LOAN, IN THE ASSESSMENT ORDER PASSED PURSUANT TO THE DIRECTI ONS ISSUED BY THE DRP APPLIED THE PROVISIONS OF PROVISO TO SECTION 36(1)( III) OF THE ACT AND DISALLOWED SUM OF RS.1,54,76,000/-. 60. THE PLEA OF LEARNED A.R. FOR THE ASSESSEE BEFOR E US WAS THAT THE TOTAL EXPENDITURE INCURRED BY THE ASSESSEE WAS RS., 474.07 LACS WHICH INCLUDED THE INTEREST ON HOUSING LOAN TO EMPLOYEES WHICH HAS BEEN EXCLUDED BY THE DRP. AS AGAINST THE INTEREST EXPEN DITURE, THE ASSESSEE HAD EARNED INTEREST INCOME OF RS.608.44 LACS. THE PLEA OF THE LEARNED A.R. FOR THE ASSESSEE WAS THAT THE ABOVE SAID INTER EST WAS PAID ON COMPULSION BUT NO BORROWINGS WERE MADE FOR BUSINESS PURPOSES. THE MAIN PLEA OF THE LEARNED A.R. FOR THE ASSESSEE WAS THAT THERE WAS NO INVESTMENT OUT OF BORROWED FUND INTO WORK-IN PROGRE SS, WHICH THE ASSESSING OFFICER WANTS TO DISALLOW UNDER THE PROVI SO TO SECTION 36(1)(III) OF THE ACT. THE INTEREST ON DEPOSITS FR OM DEALERS/WHOLESALERS PAID DURING THE YEAR UNDER CONSIDERATION AMOUNTING TO RS.290.06 LACS WAS BROUGHT FORWARD FROM THE EARLIER YEARS AND NO F RESH DEPOSITS WERE RECEIVED FROM THE ABOVE SAID DEALERS/WHOLESALERS. THE NEXT ASPECT OF THE INTEREST PAID TO BANK ON CHEQUE DISCOUNTING AMOUNTI NG TO RS.83.71 LACS CANNOT BE SAID TO BE IN RELATION TO ANY BORROWED FU ND. 61. THE LEARNED D.R. FOR THE REVENUE PLACED RELIANC E ON THE ORDER OF THE ASSESSING OFFICER. 62 62. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD MA DE INVESTMENT IN FIXED ASSETS WHICH WERE REFLECTED AS CWIP IN ITS BA LANCE SHEET. THE CLOSING BALANCE AS ON 31.3.2008 WAS RS.1812.21 LACS AS AGAINST CLOSING BALANCE AS ON 31.3.2007 REFLECTED AT RS.767.17 LACS . IN VIEW OF THE INCREASE IN THE CLOSING CWIP BALANCE AND IN VIEW OF THE ASSESSEE HAVING INCURRED INTEREST EXPENDITURE OF RS.474.07 LACS , T HE ASSESSING OFFICER WAS OF THE VIEW THAT THE INTEREST RELATABLE TO THE ASSETS WHICH HAVE NOT BEEN PUT TO USE AS THE AMOUNT HAD BEEN SHOWN AS CWI P, MERITS TO BE DISALLOWED IN VIEW OF THE PROVISIONS OF PROVISO TO SECTION 36(1)(III) OF THE ACT. THE ASSESSEE HAD FURNISHED DETAILS OF INT EREST EXPENDITURE TOTALING RS.474.07 LACS WHICH IS AS UNDER: DETAILS OF INTEREST EXPENSE RS.IN LACS INTEREST ON DEPOSITS FROM DEALERS/WHOLESALERS 290.0 6 INTEREST ON CHEQUE DISCOUNTING WITH BANKS 83.71 DIFFERENTIAL INTEREST ON HOUSING LOAN TO EMPLOYEES 96.95 INTEREST ON OTHERS 3.35 TOTAL 474.07 63. OUT OF THE ABOVE SAID LIST OF INTEREST PAID, TH E DIFFERENTIAL INTEREST ON HOUSING LOAN TO EMPLOYEES AT RS.96.95 LACS HAD B EEN EXCLUDED ON THE INSTRUCTIONS OF THE DRP BY THE ASSESSING OFFICER. HOWEVER, AS THE NET INTEREST EXPENDITURE PAID BY THE ASSESSEE WAS OVER AND ABOVE THE INTEREST RELATABLE TO CWIP BALANCE AS ON 31.3.2008, THE DISA LLOWANCE OF RS.154.76 LACS WAS MADE BY THE ASSESSING OFFICER. 64. THE ASSESSEE COMPANY DURING THE YEAR UNDER CONS IDERATION HAD SHOWN SALES OF RS.1389 CRORES, NET OF EXCISE DUTY. FURTHER THE ASSESSEE HAD DEPOSITS WITH BANK AT RS.5750.00 LACS AS AGAINS T RS.1650.00 LACS ALONGWITH RESERVES AND SURPLUS AT RS.66248.2 LACS. THE ASSESSEE HAD SHOWN INCOME OF INTEREST EARNED BY IT DURING THE YE AR AT RS.608.44 LACS. THE PERUSAL OF THE INTEREST EXPENDITURE INCURRED BY THE ASSESSEE REFLECTS 63 THAT THE MAJOR PORTION AS ON INTEREST ON DEPOSITS F ROM DEALERS/WHOLESALERS AT RS.290.06 LACS, WHICH IS BEI NG PAID BY THE ASSESSEE DUE TO THE BUSINESS COMPULSION. NO FRESH DEPOSIT HAS BEEN RECEIVED DURING THE YEAR. FURTHER INTEREST WAS PAI D TO THE BANK ON CHEQUE DISCOUNTING AT RS.83.71 LACS AND SUCH INTERE ST CANNOT BE SAID TO HAVE BEEN INCURRED ON SUCH BORROWED FUNDS WHICH IN TURN COULD BE PRESUMED TO HAVE BEEN PARKED AS INVESTMENT IN CWIP. THE BALANCE INTEREST IS PAID TO OTHER AT RS.3.35 LACS. IN THE TOTALITY OF THE ABOVE SAID FACTS AND IN VIEW OF THE ASSESSEE HAVING EARNED INT EREST INCOME OF RS.608.44 LACS AS AGAINST THE INTEREST EXPENDITURE OF RS.474.70 LACS AND IN THE ABSENCE OF ANY BORROWINGS MADE BY THE ASSESS EE FOR RUNNING THE BUSINESS, WE FIND NO MERIT IN THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER THE PROVISO TO SECTION 36(1)(III) OF THE ACT. THE BASIC CONDITION FOR APPLYING THE PROVISIONS OF PROVISO TO SECTION 36(1)(III) OF THE ACT IS THAT MONEY SHOULD HAVE BEEN BORROWED FOR THE PURPOSES OF INVESTMENT IN CAPITAL ASSETS ON WHICH INTEREST HAD BEEN PAID BY THE ASSESSEE, THEN SUCH INTEREST AS RELATABLE TO THE IN VESTMENT IN CAPITAL ASSETS IS TO BE DISALLOWED. HOWEVER, IN THE ABSENC E OF ANY BORROWINGS MADE BY THE ASSESSEE, WE FIND NO MERIT IN THE DISAL LOWANCE MADE BY THE ASSESSING OFFICER UNDER THE PROVISO TO SECTION 36(1 )(III) OF THE ACT. ACCORDINGLY, WE DELETE THE ADDITION OF RS.154.76 LA CS. THE GROUND NOS.7 TO 7.2 RAISED BY THE ASSESSEE ARE THUS ALLOWE D. 65. THE GROUND NO.7.3 RAISED BY THE ASSESSEE WAS WI THOUT PREJUDICE TO GROUND NOS.7 TO 7.2 AND IN VIEW OF OUR ALLOWING THE GROUND NOS.7 TO 7.2, GROUND NO.7.3 IS DISMISSED. 66. THE LAST ISSUE RAISED BY THE ASSESSEE IS BY WAY OF GROUND NOS.8 TO 8.4 RELATING TO DISALLOWANCE OF EXPENSES UNDER SECT ION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES. 64 67. THE BRIEF FACTS RELATING TO THE PRESENT ISSUE A RE THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD RECEIVED DIVID END INCOME OF RS.1954.70 LACS ON MUTUAL FUND, WHICH IN TURN WAS C LAIMED AS EXEMPT UNDER SECTION 10(34) OF THE ACT. THE ASSESSEE IN T HE RETURN OF INCOME HAD DISALLOWED EXPENDITURE OF RS.6,06,977/- WHICH I S CLAIMED TO HAVE BEEN INCURRED IN RELATION TO EARNING OF EXEMPT DIVI DEND INCOME. THE ASSESSING OFFICER, HOWEVER, APPLYING THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES COMPU TED DISALLOWANCE BOTH ON ACCOUNT OF INTEREST EXPENDITURE AND ADMINIS TRATIVE EXPENDITURE RESULTING IN DISALLOWANCE OF RS.102.32 LACS. 68. AFTER HEARING BOTH THE AUTHORIZED REPRESENTATIV ES AND AFTER PERUSING THE RECORD, THE FIRST ASPECT OF THE ISSUE IS WHETHER THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES ARE APPLICABLE? THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD RECEIVED DIVIDEND ON MUTUAL FUNDS AMOUNTING TO RS.1954.70 LACS. THE ASSESSEE ON ITS OWN MOTION HAD DISALLOWED EXPEN DITURE OF RS.6,06,977/- BEING RELATABLE TO EARNING OF THE EXE MPT INCOME. IN OTHER WORDS, THE ASSESSEE HAD ADMITTED THAT IT HAD INCURR ED CERTAIN EXPENDITURE FOR EARNING THE SAID EXEMPT INCOME. THE CLAIM OF T HE ASSESSEE IS THAT IT HAD WORKED OUT ALL THE DISALLOWANCE IN A SCIENTIFIC MANNER BY MAKING DISALLOWANCE OUT OF SALARIES AND OTHER HEADS INVOLV ED IN THE INVESTMENT ACTIVITY AND ALSO OUT OF ADMINISTRATION AND OTHER E XPENSES. THE SECOND ASPECT OF THE ISSUE WAS THAT NO BORROWED FUNDS WERE AVAILABLE WITH THE ASSESSEE COMPANY. THERE WAS NO MERIT IN THE DISALL OWANCE UNDER RULE 8D(II) OF INCOME TAX RULES ON ACCOUNT OF SUCH INTER EST EXPENDITURE. IN VIEW OF OUR DECISION IN THE PARAS HEREINABOVE IN RE LATION TO THE DISALLOWANCE OF INTEREST UNDER PROVISO TO SECTION 3 6(1)(III) OF THE ACT, WE HOLD THAT NO DISALLOWANCE OF INTEREST EXPENDITUR E BEING RELATABLE TO 65 THE INVESTMENT IN SUCH FUNDS ON WHICH THE ASSESSEE HAD EARNED TAX FREE INCOME, IS MERITED. ACCORDINGLY, WE DIRECT THE AS SESSING OFFICER TO DELETE THE DISALLOWANCE COMPUTED UNDER RULE 8D(II) OF INCOME TAX RULES. THE SECOND ASPECT OF THE ISSUE IS DISALLOWA NCE UNDER RULE 8D(III) OF INCOME TAX RULES ON ACCOUNT OF ADMINISTRATIVE EX PENSES. ADMITTEDLY, THE ASSESSEE IS NOT MAINTAINING SEPARAT E ACCOUNTS IN RESPECT OF ITS INVESTMENT ACTIVITY AND IN VIEW THEREOF THE PROVISIONS OF RULE 8D OF INCOME TAX RULES ARE SQUARELY APPLICABLE AND DIS ALLOWANCE IS TO BE COMPUTED IN ACCORDANCE WITH THE SAID PROVISIONS OF RULE 8D OF INCOME TAX RULES FOR WORKING OUT DISALLOWANCE UNDER SECTIO N 14A OF THE ACT. ACCORDINGLY, WE UPHOLD THE ORDER OF THE ASSESSING O FFICER IN THIS REGARD. HOWEVER, THE ASSESSEE IS ENTITLED TO THE SET OFF OF THE AMOUNT SURRENDERED AT RS.6,06,977/-. IN VIEW THEREOF, GRO UND NOS.8 TO 8.4 RAISED BY THE ASSESSEE ARE PARTLY ALLOWED. 69. THE GROUND NO.9 RAISED BY THE ASSESSEE IS AGAIN ST CHARGING OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT, WH ICH IS CONSEQUENTIAL. HENCE GROUND OF APPEAL NO.9 RAISED BY THE ASSESSEE IS DISMISSED. 70. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON THIS 26 TH DAY OF AUGUST, 2013. SD/- SD/- (T.R.SOOD) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 26 TH AUGUST, 2013 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH 66