Aithent Technologies Pvt. Ltd., New Delhi V. JCIT, New Delhi

ITA 1490/DEL/2011

• Counselvise Citation: 149020114 RSA 2011
• Duration Of Justice: 3 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 28-07-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 25-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: YOGESH VERMA
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction; Notional interest
• Section: 142(1); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SH. T.S.KAPOOR, ACCOUNTANT MEMBER I.T.A .NO. - 1606/ DEL/201 1 (ASSESSMENT YEAR - 2003 - 04 ) DCIT, CIRCLE - 1(1), ROOM NO. - 390, C.R. BUILDING, NEW DELHI (APPELLANT) VS M/S AITHENT TECHNOLOGIES PVT. LTD., A - 16/9, VASANT VIHAR, NEW DELHI - 110057 P AN - AAACS2319H (RESPONDENT) I.T.A .NO. - 1490/ DEL/201 1 (ASSESSMENT YEAR - 2003 - 04 ) M/S AITHENT TECHNOLOGIES PVT. LTD., A - 16/9, VASANT VIHAR, NEW DELHI , - 110057 P AN - AAACS2319H (APPELLANT) VS J CIT, COY CIRCLE - 1(1), C.R. BUILDING, NEW DELHI - 110002. (RESPONDENT) I.T.A .NO. - 2330/ DEL/201 1 (ASSESSMENT YEAR - 2005 - 06 ) M/S AITHENT TECHNOLOGIES PVT. LTD., A - 16/9, VASANT VIHAR, NEW DELHI, - 110057 P AN - AAACS2319H (APPELLANT) VS DCIT, CIRCLE - 1(1), C.R. BUILDING, NEW DELHI - 110002. (RESPONDENT) APPELLANT BY SH. YOGESH VERMA, DR RESPONDENT BY SH. AKHILESH GUPTA, CA ORDER PER DIVA SINGH, JM ITA NO.1606& 1490/DEL/2011 ARE CROSS APPEALS FILED BY THE REVENUE AND THE ASSESSEE RESPECTIVELY AGAINST THE ORDER DATED 30.12.2010 OF CIT(A) - XX, 2 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 NEW DELHI PERTAINING TO 2003 - 04 ASSESSMENT YEARS AND ITA NO.2330/DEL/2011 IS FILED BY THE ASSESSEE AGAINST THE ORDER DATED 25.02.2011 OF CIT(A) - XX, NEW DELHI PERTAINING TO 2005 - 06 ASSESSMENT YEAR. ALL THESE APPEALS ARE BEING DECIDED BY A COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE GROUNDS RAISED BY THE REVENUE AND THE ASSESSEE IN THEIR RESPECTIVE APPEALS FOR 2003 - 04 ASSESSMENT YEAR READ AS UNDER: - IN ITA NO. 1606/DEL/2011 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING TRANSFER PRICING ADJUSTMENT MADE BY THE AO AT RS.2,32,77,939/ - I.T.ACT, IGNORING THAT: A). THE TPO HAS USED ARITHMETIC MEAN AS AGAINST WEIGHTED AVERAGE USED BY THE ASSESSEE, AS THE INDIAN TRANSFER PRICING REGULATIONS PRESCRIBED ARITHMETIC MEAN. B). THE TPO USED COMPARABLE USED BY THE ASSESSEE FOR BENCHMARKING AS THE ASSESSEE WAS UNABLE TO EXPLAIN HOW THESE COMPANIES BECAME NON COMPARABLE FOR THE YEAR UNDER CONSIDERATION. C). THE SENSITIVITY ANALYSIS CARRIED OUT BY THE TPO IS A VALID TOOL OF COMPARABILITY ANALYSIS. D). LD. CIT(A) HAS NOT ALSO NOT POINTED OUT ANYWHERE I N HER ORDER AS TO HO W THESE COMPANIES ARE NON COMPARABLE. 2. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIGHT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) OF APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEAL. IN ITA NO. 1490/DEL/201 1 1. THE ORDER OF THE LEARNED ASSESSING OFFICER IS BAD IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LD. TPO/AO HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN MAKING ADDITION OF RS.77,35,892/ - ON ACCOUNT OF NOTIONAL INTEREST ON INTEREST FREE LO AN GIVEN TO THE SUBSIDIARY OF THE APPELLANT IN U.S.A. 3. THE APPELLANT MAY BE ALLOWED TO ADD/AMEND/WITHDRAW ANY GROUNDS AT THE TIME OF HEARING. 3. THE RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE RETURNED A LOSS OF RS .5,52,66,493/ - B Y WAY OF FILING ITS RETURN. THE SAID RETURN WAS PICKED UP FOR SCRUTINY AFTER ISSUANCE OF NOTICE U/S 143(2) & 142(1) ETC. THE AO TAKING INTO CONSIDERATION THE FACT THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT WHOSE MAIN REVENUE SOURCE WAS FROM ITS OWN SUBSIDIARY AND ASSOCIATE ENTERPRISES NAMELY AITHENT INCORPORATION, USA REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER (HEREINAFTER REFERRED TO AS TPO ). THE RELEVANT 3 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 FACT S AS EMANATING FROM THE ORDER U/S 92CA(3) OF THE TPO DATED 13.01.2006 READ AS UNDER: - 2.1. THE ASSESSEE COMPANY IS A SOFTWARE - CONSULTING FIRM PROVIDING SOFTWARE SOLUTION TO GLOBAL CLIENTS. THE ASSOCIATED ENTERPRISE, A I THENT INC., IS NEW YORK BASED COMPANY WHO IDENTIFIES THE CUSTOMERS AND THEREAFTER, WORK IS ASSIGNED TO THE ASSESSEE COMPANY. AS PER TRANSFER PRICING REPORT, THE ASSESSEE IS PRIMARILY ENGAGED IN TWO TYPES OF SOFTWARE DEVELOPMENT ACTIVITIES VIZ. OFF - THE - SHELF SOFTWARE AND SPECIFIED TECHNICAL SOFTWARE SPECIFICATIONS. THE COMPENSATION OF SOFTWARE DEVELOPMENT BET WEEN THE TWO RELATED PARTIES IS DETERMINED EITHER ON TIME AND MATERIAL CONTRACT BASIS OR AN FIXED PRICE CONTRACT BASIS. THE CUSTOMERS ARE PRIMARILY USA AND CANADA BASED AND THE PRICING FOR THE CUSTOMERS IS DETERMINED BY ASSOCIATED ENTERPRISE. 2.2. DURING THE YEAR, THE AITHENT TECHNOLOGY (REFERRED AS ATPL) HAS UNDERTAKEN THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATES ENTERPRISE AITHENT INC. (AI): - S.NO. DESCRIPTION OF TRANSACTIONS METHOD VALUE (IN RS.) 1 SALE OF CUSTOMIZED SOFTWARE TNMM 64,095,499 2 . SHORT - TERM LOAN TO AITHENT INC. _ 80,801,000 3.1. A PERUSAL OF THE SAME FURTHER SHOWS THAT CONSIDERING THE TRANSFER PRICING STUDY OF THE ASSESSEE T HE TPO PROPOSED THE ADDITION OF RS .2,32,77,939/ - FOR THE REASONS SET OUT IN PARA 7 TO PARA 9 OF HIS ORDER REPRODUCED HEREUNDER : - 6.1 DURING FINANCIAL YEAR 2001 - 02 FOR ASSESSMENT YEAR 2002 - 03, TOTAL REVENUE FROM SOFTWARE DEVELOPMENT WAS 161.812 MILLIONS AND IN THIS YEAR ATPL POSTED A PROFIT OF RS. 28.12 MILLION, WITH THESE FINANCIALS IT CAN BE TAKEN AS AN YEAR OF NORMAL OPERATIONS. IN THAT YEAR TOTAL EXPENSE ON SALARY WAS 106.51 MILLIONS WHICH COMES TO 65.82% OF TOTAL REVENUE. IN THE YEAR UNDER CONSIDE RATION, TOTAL REVENUE FROM SOFTWARE DEVELOPMENT IS 110.045 MILLIONS AGAINST IT EXPENDITURE ON SALARY IS 99.22 MILLION WHICH IS 90.16% OF TOTAL REVENUE. THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE WITH ANY COGENT EVIDENCE AS TO HOW MUCH OF THESE EXPENSE S CAN BE ATTRIBUTED TO IDLE EMPLOYEES. THE AMBIGUITY IN OF CALCULATION OF IDLE EMPLOYEE COST IS EVIDENT FROM THE FACT THAT DIFFERENT ADJUSTMENT HAS BEEN CLAIMED IN TRANSFER PRICING REPORT AND REPLY DATED 07.12.2005. 6.2 THE EMPLOYEE COST AT 65.82% OF TOT AL REVENUE DURING FINANCIAL YEAR 2001 - 02, IF TAKEN AS BENCHMARK AND APPLIED ON TOTAL REVENUE OF 110.045 MILLIONS FOR THE CURRENT YEAR, THE ASSESSEE COMPANY S EMPLOYEE COST UNDER NORMAL OPERATIONS SHOULD BE 72.43 MILLIONS. ANY EXPENSE OVER AND ABOVE IT CAN BE TREATED AS COST ON ACCOUNT OF IDLE EMPLOYEES. SINCE, ASSESSEE COMPANY HAS INCURRED A COST OF 99.22 MILLIONS AND IF OUT OF THIS 72.43 MILLIONS IS TREATED AS NORMAL EXPENSE, THE BALANCE RS. 26.79 MILLIONS CAN 4 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 BE TREATED AS COST FOR IDLE EMPLOYEES. THER EFORE, CLAIM OF ATPL ON IDLE EMPLOYEE COST IS RESTRICTED TO RS. 26.79 MILLIONS . 7. THE OPERATING PROFIT (LOSS) AS WORKED OUT IN ANNEXURE B FROM THE AUDITED FINANCIAL STATEMENTS AT RS. 3,96,46,595/ - AFTER A FURTHER ADJUSTMENT OF RS. 26.79 MILLION ON ACCOUN T OF IDLE EMPLOYEE COST WILL LEAVE AN ADJUSTED LOSS OF RS. 1,28,56,595/ - . ON THE SAME ANALOGY, THE TOTAL COST WORKED OUT IN ANNEXURE B AT RS. 149.92 MILLIONS IS REDUCED BY RS. 26.79 MILLION. DURING THE YEAR TOTAL SALES OF SOFTWARE IS RS. 11,00,45,872 AND THEREFORE, OP/SALES I - 11.68%. SEARCH FOR COMPARABLES 8.0 BY USING TWO PREVALENT DATABASE I.E., PROWESS AND CAPITALINE AND AFTER APPLYING FILTERS, EXPLAINED ON PAGE 42 TO 45 OF TRANSFER PRICING REPORT, ATPL IDENTIFIED SEVEN COMPANIES AS FINAL COMPARAB LES. THE GIST OF WORKING OF OPERATING PROFIT MARGINS OF THESE SEVEN COMPARABLES IS MENTIONED AT PAGE 37 OF TRANSFER PRICING REPORT WITH AVERAGE MEAN AT 5.91%. THE ASSESSEE HAS USED DATA FOR EARLIER TWO YEARS WITHOUT YEAR 2003 AND WEIGHTED AVERAGE HAS BEE N USED FOR CALCULATION OF PROFIT LEVEL INDICATOR. THE ISSUE OF USE OF MULTIPLE YEAR DATA WILL BE DEALT IN SUCCEEDING PARAGRAPHS. DURING THE TRANSFER PRICING PROCEEDINGS FOR THE LAST FINANCIAL YEAR 2001 - 02 (A.Y. 2002 - 03) THE ASSESSEE COMPANY IN ITS TRANSF ER PRICING REPORT AT PAGE 24 HAS USED FOLLOWING TEN COMPANIES AS COMPARABLES S.NO. COMPANY NAME 1. BODHTREE CONSUL. 2. FORE C SOFTWARE 3. FOURTH GEN. 4. INTEG. HITECH 5. ONLINE MEDIA SOL 6. TELESYS SOFTWARE 7. SYNFOSYS LIMITED 8. ESSEL SOFTWARE LIMITED 9. SRICO 10. GEODESIC INFORMATION SYSTEMS LIMITED NONE OF THESE HAS BEEN CONSIDERED AS COMPARABLES DURING THE TRANSFER PRICING APPROACH FOR CURRENT YEAR. A SEARCH FOR THESE TEN COMPANIES ON CAPITALINE PLUS CORPORATE DATABASES WAS CONDUCTED AND OUT OF THESE, FINANCIAL DATA FOR TWO COMPANIES (SYNFOSYS LIMITED AND ESSEL SOFTWARE LIMITED) FOR THE YEAR ENDING MARCH, 2003 WAS NOT AVAILABLE. ANOTHER COMPARABLE NAMED AS SRICO HAD A VERY INSIGNIFICANT SALE I.E ., LESS THAN 1 CRORE DURING THE CURRENT YEAR THEREFORE, IT WAS IGNORED. ANOTHER COMPARABLE GEODESIC INFORMATION SYSTEMS LIMITED HAS SHOWN ABNORMALLY HIGH PROFITS OF 185.80% IN THE CURRENT YEAR THEREFORE, CONSIDERING IT ABNORMAL WAS IGNORED. IN THIS PROCE SS OF REJECTION, OUT TEN COMPARABLES OF LAST YEAR FOUR WERE IGNORED AND SIX WERE LEFT WHICH COULD BE CONSIDERED AS FUNCTIONALLY COMPARABLE CASES. THE ASSESSEE VIDE THIS OFFICE LETTER DATED 28.12.2005, WAS ASKED TO EXPLAIN WHY THE REMAINING SIX 5 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 COMPARABLES I.E., BODHTREE CONSUL., FORE C SOFTWARE FOURTH GEN., INTEG. HITECH, ONLINE MEDIA SOL, TELESYS SOFTWARE BE NOT CONSIDERED AS COMPARABLES FOR BENCHMARKING INTERNATIONAL TRANSACTIONS. IN RESPONSE TO THE ABOVE LETTER THE ASSESSEE SUBMITTED REPLIES DATED 30 .12.2005 AND 04.01.2006. NOTHING SUBSTANTIAL WAS SUBMITTED AGAINST USE OF THE ABOVE COMPARABLES. THE OBJECTIONS RAISED WERE OF GENERAL NATURE THAT THERE ARE SLIGHT FUNCTIONAL VARIATIONS OR LAST YEAR WAS FIRST YEAR OF TRANSFER PRICING ETC. BUT A PERUSAL O F DETAILS OF FUNCTIONS OF ALL THESE SIX COMPANIES IT IS SEEN THAT THERE IS NO CHANGE IN FUNCTIONAL PROFILE AND OTHER FACTORS WHICH COULD RENDER THEM IN COMPARABLE WITH THE ASSESSEE COMPANY. SIMILARLY, THERE IS NO CHANGE IN FUNCTIONAL PROFILE OF ATPL WHICH COULD MAKE IT IN COMPARABLE WITH THE SAME SET OF COMPANIES HELD TO BE COMPARABLE BY THE ASSESSEE DURING THE TRANSFER PRICING PROCEEDING FOR IMMEDIATELY PRECEDING YEAR. 8.2 IN THE AFORESAID CIRCUMSTANCES THE COMPARABLES SELECTED BY ASSESSEE COMPANY FOR TH E YEAR UNDER REFERENCE ARE ACCEPTED BUT IN ADDITION THESE ABOVE SAID SIX COMPARABLES ARE ALSO MERGED FOR BENCHMARKING INTERNATIONAL TRANSACTION FOR THE PURPOSES OF TRANSACTIONAL NET MARGIN METHOD (TNMM). 8.3 THE PROFIT LEVEL INDICATOR ADOPTED BY THE ASSES SEE IS OPERATING MARGIN AND AT PAGE 37 OF TRANSFER PRICING REPORT THIS PLI HAS BEEN ADOPTED BY THE ASSESSEE WITH THE FOLLOWING REMARKS: OPERATING PROFIT MARGIN RATIO TAKES CARE OF THE DIFFERENCE IN FUNCTIONS. THE OPERATING PROFIT MARGIN IS AN INDICATOR OF PERFORMANCE FOR THE ASSESSEE AS IT CALCULATES THE OPERATING INCOME AND COSTS, WHICH TRULY REFLECTS THE PROFITS EARNED BY THE ASSESSEE FROM ITS OPERATIONS. HENCE, THE OPERATING PROFIT RATIO HAS BEEN CONSIDERED AS THE APPROPRIATE PLI. THE PLI ADOPTED USING OPERATING MARGIN OVER SALES IN NOT DISTURBED. 8.4 USE OF PREVIOUS YEAR DATA : IT IS WORTHWHILE TO MENTION THAT RULE 10B(4) OF INCOME TAX RULES PROVIDES THAT THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN IN TERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. THE PROVISO TO THIS RULE PROVIDE S AN EXCEPTION THAT DATA FOR THE PREVIOUS TWO YEARS MAY ALSO BE CONSIDERED IF IT REVEALS FACTS, WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE. THE PROVISO IS TO BE APPLIED AS AN EXCEPTION ONLY AND NOT AS A MATTER OF RULE. HOWEVER, A PERUSAL OF DATA USED FOR COMPARABLES BY THE ASSESSEE COMPANY REVEALS THAT THE ASSESSEE HAS USED WEIGHTED AVERAGE OF DATA OF COMPARABLES FOR FINANCIAL YEARS ENDING MARCH, 2001 AND MARCH, 2002 TAKING ADVANTAGE PROVIDED UNDER PROVISO TO RULE 10B(4) . BUT FOR INVOKING THIS EXCEPTION, IT HAS TO BE PROVED THAT DATA OF THE PREVIOUS YEAR REVEALS FACTS, WHICH COULD INFLUENCE THE TRANSFER PRICE. THE ASSESSEE HAS NOT BEEN ABLE TO MAKE OUT ANY CASE FOR INVOKING SUCH EXCEPTION, THUS AS PER RULE FOR 6 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 THE PURPO SE OF DETERMINATION OF ARM S LENGTH PRICE THE NET MARGINS OF ATPL DATA OF F.Y. 2002 - 03 ARE TO BE COMPARED WITH THE ARITHMETIC MEAN OF THE NET MARGIN OF COMPARABLE COMPANIES FOR THE SAME FINANCIAL YEAR I.E. F.Y. 2002 - 03 INSTEAD OF THE WEIGHTED AVERAGE OF NE T MARGINS FOR TWO PRECEDING YEARS ONLY. 8.5 AS MENTIONED IN PARA 8.0 ABOVE THE SEVEN COMPARABLES CHOSEN BY THE ASSESSEE DURING THE CURRENT YEAR AT PAGE 37 OF TRANSFER PRICING REPORT ALONG WITH SIX COMPARABLES USED LAST YEAR ARE TAKEN TO BE APPROPRIATE FOR BENCHMARKING INTERNATIONAL TRANSACTION FOR CURRENT YEAR. A SEARCH PROCESS FOR THE FINANCIAL DATA FOR THE YEAR 2002 - 03 FOR THESE 13 COMPARABLES WAS RUN ON CAPITALINE PLUS, THE DATABASE USED BY THE ASSESSEE COMPANY. OUT OF THESE 13 COMPARABLES FINANCIAL D ATA FOR YEAR 2002 - 03 IN RESPECT OF NET AXIS WAS NOT AVAILABLE AND, THEREFORE, THIS COMPARABLE WAS ALSO REJECTED. IN FINAL ANALYSIS ONLY 12 COMPARABLES ARE BEING ADOPTED FOR THE PURPOSES OF CALCULATING COMPARABLE PROFIT LEVEL INDICATOR. A WORKING OF OP/SA LES FOR REFERENCE THE COMPARABLES HAS EARNED OPERATING PROFIT ON SALES AT 9.47%. AS PER PARA 7.0 ABOVE OP/SALES IN THE CASE OF ASSESSEE COMPANY IS - 11.68%. EVEN AFTER PROVIDING THE BENEFIT OF +5% RANGE PERMITTED UNDER INDIAN TRANSFER PRICING LAW, THE IN TERNATIONAL TRANSACTION DOES NOT CONFIRM TO ARM S LENGTH PRINCIPLE AND, THEREFORE, AN ADJUSTMENT IN THE PRICE IS IMPERATIVE. 9. CALCULATION OF ARM S LENGTH PRICE FOR INTERNATIONAL TRANSACTION OF SALE OF SOFTWARE TOTAL SALES OF ATPL - RS. 11,00,45,872 (A) ADJUSTED OPERATING PROFIT (LOSS) OF ATPL - RS. 1,28,56,595 (B) (AS PER PARA 7.0 ABOVE) OPERATING PROFIT/SALES OF COMPARABLES - 9.47% (C) ARM S LENGTH OPERATING PROFIT (AXC) - RS. 1,04,21,344 (D) DIFFERENCE (D - B) - RS. 2,32,77,939 IT CAN THER EFORE, BE CONCLUDED THAT ON INTERNATIONAL TRANSACTION OF SALE OF SOFTWARE ATPL MUST EARN A PROFIT OF RS. 1,04,21,344 WHEREAS A (ADJUSTED) LOSS OF RS. 1,28,56,595 IS BEING POSTED. THE DIFFERENCE BETWEEN LOSS REPORTED BY THE ASSESSEE AND ARM S LENGTH PROFIT CALCULATED ON THE BASIS OF COMPARABLES AS ABOVE WOULD BE RS. 2,32,77,939/ - . THE VALUE OF INTERNATIONAL TRANSACTION ON ACCOUNT OF SALE OF CUSTOMIZED SOFTWARE IS THEREFORE, DETERMINED AT RS. 8,73,73,438/ - (6,40,95,499 + 2,32,77,939). THE ASSESSING OFFICER SHALL INCREASE THE INCOME OF ATPL BY 2,32,77,939/ - . 10. INTEREST FREE LOAN TO AITHENT US 10.1 THE ASSESSEE HAS LOAN OF RS. 7,39,16,850 OUTSTANDING FROM AITHENT U.S. AS ON MARCH, 31, 2003, THE DETAILS OF WHICH ARE AS UNDER: LOAN OUTSTANDING AS ON MARCH 31 , 2001 RS. 3,15,76,589 ADD: LOAN GRANTED DURING THE F.Y. 2001 - 02 RS. 4,23,40,261 LOAN OUTSTANDING AS ON MARCH 31, 2002 RS. 7,39,16,850 LOAN OUTSTANDING AS ON MARCH 31, 2003 RS. 8,08,01,000 7 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 IN FORM 3CEB, ATPL HAS GIVEN FOLLOWING NOTE AGAINST THIS LOAN TRANSACTIONS. THE TOTAL AMOUNT OF LOAN GIVEN TO IT S AE IS RS. 80,801,000 AS PER THE BOOKS OF ACCOUNTS. FURTHER, THE SAID AMOUNT OF RS. 80,801,000 HAS BEEN DETERMINED HAVING REGARD TO ARM S LE NGTH PRICE AS PER RULE 10B(2) (D) OF THE INCOME TAX RULE 1962. APPROVAL FROM THE RESERVE BANK OF INDIA HAS BEEN OBTAINED IN THIS REGARD. THE LOAN BEING INTEREST FREE HAS NOT BEEN BENCHMARKED SEPARATELY. 10.2 IN THE COURSE OF TRANSFER PRICING PROCEEDINGS IN REPLY LETTER DATED 22.12.2005 IN PARA 3, ATPL RETRACTED ITS ARGUMENT THAT LOAN IS APPROVED BY RESERVE BANK OF INDIA IN FOLLOWING TERMS: THE DOCUMENTS SUCH AS CORRESPONDENCE WITH THE AUTHORIZED DEALERS, ODA FORMS FILED WITH THE RBI, LETTERS FILED WITH THE RBI, INTIMATION FROM THE RBI AND OTHER RELEVANT DOCUMENTS IN RELATION TO THE LOAN GRANTED BY THE ASSESSEE TO AITHENT INC. ARE ENCLOSED AT ANNEXURE 3. IN OUR EARLIER SUBMISSIONS IT WAS INADVERTENTLY SUBMITTED THAT THE LOAN WAS GRANTED TO AITHENT INC. AFTER OBTAINING APPROVAL OF THE RBI. IN THIS RESPECT WE WISH TO CLARIFY THAT THE LOAN WAS GRANTED UNDER THE AUTOMATIC ROUTE FOR WHICH INTIMATION WAS FILED TO THE RBI BY THE ASSESSEE AND THE SAME WAS ALSO CONFIRMED BY THE RBI. HENCE THE VERY BASIS ON WH ICH INTERNATIONAL TRANSACTION WAS BENCHMARKED GOES AND THEREFORE, CLAIM OF ATPL THAT TRANSACTION IS AT ARM S LENGTH BECOMES OPEN TO SCRUTINY. 4. AGGRIEVED BY THIS THE ASSESSEE WENT IN APPEAL BEFOR E THE FIRST APPELLATE AUTHORITY. THE CIT(A) CONSIDERING THE SUBMISSIONS OF THE ASSESSEE WHICH ARE FOUND REPRODUCED IN THE IMPUGNED ORDER AT PAGES 13 - 18 CAME TO THE FOLLOWING CONCLUSION: - SEARCH FOR COMPARABLES 8.0 BY USING TWO PREVALENT DATABASE I.E., PROWESS AND CAPITALINE AND AFTER APPLYING FILTERS, EXPLAIN ED ON PAGE 42 TO 45 OF TRANSFER PRICING REPORT, ATPL IDENTIFIED SEVEN COMPANIES AS FINAL COMPARABLES. THE GIST OF WORKING OF OPERATING PROFIT MARGINS OF THESE SEVEN COMPARABLES IS MENTIONED AT PAGE 37 OF TRANSFER PRICING REPORT WITH AVERAGE MEAN AT 5.91%. THE ASSESSEE HAS USED DATA FOR EARLIER TWO YEARS WITHOUT YEAR 2003 AND WEIGHTED AVERAGE HAS BEEN USED FOR CALCULATION OF PROFIT LEVEL INDICATOR. THE ISSUE OF USE OF MULTIPLE YEAR DATA WILL BE DEALT IN SUCCEEDING PARAGRAPHS. DURING THE TRANSFER PRICING PROCEEDINGS FOR THE LAST FINANCIAL YEAR 2001 - 02 (A.Y. 2002 - 03) THE ASSESSEE COMPANY IN ITS TRANSFER PRICING REPORT AT PAGE 24 HAS USED FOLLOWING TEN COMPANIES AS COMPARABLES S.NO. COMPANY NAME 1. BODHTREE CONSUL. 2. FORE C SOFTWARE 8 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 3. FOURTH GEN. 4. INTEG. HITECH 5. ONLINE MEDIA SOL 6. TELESYS SOFTWARE 7. SYNFOSYS LIMITED 8. ESSEL SOFTWARE LIMITED 9. SRICO 10. GEODESIC INFORMATION SYSTEMS LIMITED NONE OF THESE HAS BEEN CONSIDERED AS COMPARABLES DURING THE TRANSFER PRICING APPROACH FOR CURRENT YEAR. A SEARCH FOR THESE TEN COMPANIES ON CAPITALINE PLUS CORPORATE DATABASES WAS CONDUCTED AND OUT OF THESE, FINANCIAL DATA FOR TWO COMPANIES (SYNFOSYS LIMI TED AND ESSEL SOFTWARE LIMITED) FOR THE YEAR ENDING MARCH, 2003 WAS NOT AVAILABLE. ANOTHER COMPARABLE NAMED AS SRICO HAD A VERY INSIGNIFICANT SALE I.E., LESS THAN 1 CRORE DURING THE CURRENT YEAR THEREFORE, IT WAS IGNORED. ANOTHER COMPARABLE GEODESIC INFO RMATION SYSTEMS LIMITED HAS SHOWN ABNORMALLY HIGH PROFITS OF 185.80% IN THE CURRENT YEAR THEREFORE, CONSIDERING IT ABNORMAL WAS IGNORED. IN THIS PROCESS OF REJECTION, OUT TEN COMPARABLES OF LAST YEAR FOUR WERE IGNORED AND SIX WERE LEFT WHICH COULD BE CONS IDERED AS FUNCTIONALLY COMPARABLE CASES. THE ASSESSEE VIDE THIS OFFICE LETTER DATED 28.12.2005, WAS ASKED TO EXPLAIN WHY THE REMAINING SIX COMPARABLES I.E., BODHTREE CONSUL., FORE C SOFTWARE FOURTH GEN., INTEG. HITECH, ONLINE MEDIA SOL, TELESYS SOFTWARE B E NOT CONSIDERED AS COMPARABLES FOR BENCHMARKING INTERNATIONAL TRANSACTIONS. IN RESPONSE TO THE ABOVE LETTER THE ASSESSEE SUBMITTED REPLIES DATED 30.12.2005 AND 04.01.2006. NOTHING SUBSTANTIAL WAS SUBMITTED AGAINST USE OF THE ABOVE COMPARABLES. THE OB JECTIONS RAISED WERE OF GENERAL NATURE THAT THERE ARE SLIGHT FUNCTIONAL VARIATIONS OR LAST YEAR WAS FIRST YEAR OF TRANSFER PRICING ETC. BUT A PERUSAL OF DETAILS OF FUNCTIONS OF ALL THESE SIX COMPANIES IT IS SEEN THAT THERE IS NO CHANGE IN FUNCTIONAL PROFIL E AND OTHER FACTORS WHICH COULD RENDER THEM IN COMPARABLE WITH THE ASSESSEE COMPANY. SIMILARLY, THERE IS NO CHANGE IN FUNCTIONAL PROFILE OF ATPL WHICH COULD MAKE IT IN COMPARABLE WITH THE SAME SET OF COMPANIES HELD TO BE COMPARABLE BY THE ASSESSEE DURING THE TRANSFER PRICING PROCEEDING FOR IMMEDIATELY PRECEDING YEAR. 8.2 IN THE AFORESAID CIRCUMSTANCES THE COMPARABLES SELECTED BY ASSESSEE COMPANY FOR THE YEAR UNDER REFERENCE ARE ACCEPTED BUT IN ADDITION THESE ABOVE SAID SIX COMPARABLES ARE ALSO MERGED FOR BENCHMARKING INTERNATIONAL TRANSACTION FOR THE PURPOSES OF TRANSACTIONAL NET MARGIN METHOD (TNMM). 8.3 THE PROFIT LEVEL INDICATOR ADOPTED BY THE ASSESSEE IS OPERATING MARGIN AND AT PAGE 37 OF TRANSFER PRICING REPORT THIS PLI HAS BEEN ADOPTED BY THE ASSESSEE WITH THE FOLLOWING REMARKS: OPERATING PROFIT MARGIN RATIO TAKES CARE OF THE DIFFERENCE IN FUNCTIONS. THE OPERATING PROFIT MARGIN IS AN INDICATOR OF PERFORMANCE FOR THE ASSESSEE AS IT CALCULATES THE OPERATING INCOME 9 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 AND COSTS, WHICH TRULY REFLECT S THE PROFITS EARNED BY THE ASSESSEE FROM ITS OPERATIONS. HENCE, THE OPERATING PROFIT RATIO HAS BEEN CONSIDERED AS THE APPROPRIATE PLI. THE PLI ADOPTED USING OPERATING MARGIN OVER SALES IN NOT DISTURBED. 8.4 USE OF PREVIOUS YEAR DATA : IT IS WORTHWHILE TO MENTION THAT RULE 10B(4) OF INCOME TAX RULES PROVIDES THAT THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TR ANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. THE PROVISO TO THIS RULE PROVIDES AN EXCEPTION THAT DATA FOR THE PREVIOUS TWO YEARS MAY ALSO BE CONSIDERED IF IT REVEALS FACTS, WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE. THE PROVISO IS TO BE APPLIED AS AN EXCEPTION ONLY AND NOT AS A MATTER OF RULE. HOWEVER, A PERUSAL OF DATA USED FOR COMPARABLES BY THE ASSESSEE COMPANY REVEALS THAT THE ASSESSEE HAS USED WEI GHTED AVERAGE OF DATA OF COMPARABLES FOR FINANCIAL YEARS ENDING MARCH, 2001 AND MARCH, 2002 TAKING ADVANTAGE PROVIDED UNDER PROVISO TO RULE 10B(4). BUT FOR INVOKING THIS EXCEPTION, IT HAS TO BE PROVED THAT DATA OF THE PREVIOUS YEAR REVEALS FACTS, WHICH CO ULD INFLUENCE THE TRANSFER PRICE. THE ASSESSEE HAS NOT BEEN ABLE TO MAKE OUT ANY CASE FOR INVOKING SUCH EXCEPTION, THUS AS PER RULE FOR THE PURPOSE OF DETERMINATION OF ARM S LENGTH PRICE THE NET MARGINS OF ATPL DATA OF F.Y. 2002 - 03 ARE TO BE COMPARED WITH THE ARITHMETIC MEAN OF THE NET MARGIN OF COMPARABLE COMPANIES FOR THE SAME FINANCIAL YEAR I.E. F.Y. 2002 - 03 INSTEAD OF THE WEIGHTED AVERAGE OF NET MARGINS FOR TWO PRECEDING YEARS ONLY. 8.5 AS MENTIONED IN PARA 8.0 ABOVE THE SEVEN COMPARABLES CHOSEN BY TH E ASSESSEE DURING THE CURRENT YEAR AT PAGE 37 OF TRANSFER PRICING REPORT ALONG WITH SIX COMPARABLES USED LAST YEAR ARE TAKEN TO BE APPROPRIATE FOR BENCHMARKING INTERNATIONAL TRANSACTION FOR CURRENT YEAR. A SEARCH PROCESS FOR THE FINANCIAL DATA FOR THE YEA R 2002 - 03 FOR THESE 13 COMPARABLES WAS RUN ON CAPITALINE PLUS, THE DATABASE USED BY THE ASSESSEE COMPANY. OUT OF THESE 13 COMPARABLES FINANCIAL DATA FOR YEAR 2002 - 03 IN RESPECT OF NET AXIS WAS NOT AVAILABLE AND, THEREFORE, THIS COMPARABLE WAS ALSO REJECTE D. IN FINAL ANALYSIS ONLY 12 COMPARABLES ARE BEING ADOPTED FOR THE PURPOSES OF CALCULATING COMPARABLE PROFIT LEVEL INDICATOR. A WORKING OF OP/SALES FOR REFERENCE THE COMPARABLES HAS EARNED OPERATING PROFIT ON SALES AT 9.47%. AS PER PARA 7.0 ABOVE OP/SAL ES IN THE CASE OF ASSESSEE COMPANY IS - 11.68%. EVEN AFTER PROVIDING THE BENEFIT OF +5% RANGE PERMITTED UNDER INDIAN TRANSFER PRICING LAW, THE INTERNATIONAL TRANSACTION DOES NOT CONFIRM TO ARM S LENGTH PRINCIPLE AND, THEREFORE, AN ADJUSTMENT IN THE PRICE IS IMPERATIVE. 9. CALCULATION OF ARM S LENGTH PRICE FOR INTERNATIONAL TRANSACTION OF SALE OF SOFTWARE TOTAL SALES OF ATPL - RS. 11,00,45,872 (A) ADJUSTED OPERATING PROFIT (LOSS) OF ATPL - RS. 1,28,56,595 (B) 10 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 (AS PER PARA 7.0 ABOVE) OPERATING PROFIT /SALES OF COMPARABLES - 9.47% (C) ARM S LENGTH OPERATING PROFIT (AXC) - RS. 1,04,21,344 (D) DIFFERENCE (D - B) - RS. 2,32,77,939 IT CAN THEREFORE, BE CONCLUDED THAT ON INTERNATIONAL TRANSACTION OF SALE OF SOFTWARE ATPL MUST EARN A PROFIT OF RS. 1 ,04,21,344 WHEREAS A (ADJUSTED) LOSS OF RS. 1,28,56,595 IS BEING POSTED. THE DIFFERENCE BETWEEN LOSS REPORTED BY THE ASSESSEE AND ARM S LENGTH PROFIT CALCULATED ON THE BASIS OF COMPARABLES AS AB OVE WOULD BE RS. 2,32,77,939/ - . THE VALUE OF INTERNATIONAL TRA NSACTION ON ACCOUNT OF SALE OF CUSTOMIZED SOFTWARE IS THEREFORE, DETERMINED AT RS. 8,73,73,438/ - (6,40,95,499 + 2,32,77,939). THE ASSESSING OFFICER SHALL INCREASE THE INCOME OF ATPL BY RS. 2,32,77,939/ - . 5. AGGRIEVED BY THIS BOTH ASSESSEE AND THE REVENU E IS IN APPEAL BEFORE THE TRIBUNAL. 6 . THE LD. CIT DR MR. PEEYUSH JAIN & MR. YOGESH VERMA REFERRING TO THE GRIEVANCE POSED BY THE REVENUE IN THEIR APPEAL INVITED ATTENTION TO THE FINDING ARRIVED AT IN THE IMPUGNED ORDER ON THE BASIS OF WHICH IT WAS THEIR SUBMISSION THAT THE CIT(A) HAS ERRED IN RESORTING TO USE THE WEIGHTED MEAN WHICH IS CONTRARY TO THE STATUTORY RULES WHICH P R O V I D E S F O R ARITHMETIC MEAN ACCORDINGLY THE FINDING IS VITIATED ON THIS CO UNT . IT WAS ALSO SUBMITTED THAT APART FROM THIS GLARING DEFECT EVEN OTHERWISE IT WAS THEIR ARGUMENT THAT REASONING IN THE IMPUGNE D ORDER IS COMPLETELY MISSING A S THERE IS NOTHING ON RECORD TO SHOW QUA THE COMPARABLES CHALLENGED AS TO ON WHAT BASIS THE ASSESSEE S CLAIM HAS BEEN FOUND TO BE MERITORIOUS . THE CIT( A) IT WAS SUBMITTED HAS NOT CA R E D TO DISCUSS THIS AND HAS PASSED A VERY CRYPTIC NON - SPEAKING ORDER . THE DISCUSSION MADE IN THE ORDER NAMELY THAT THE TRANSFER PRICING IS AN EXACT SCIENCE AND IN FACT IS AN ART IS A GENERAL DISCUSSION WHICH DOES NOT TAKE IN TO CONSIDERATION THE SPECIFIC REASONS OF THE TPO. THE FINDING ARRIVED CONSIDERING THE CLAIM FROM THE PERSPECTIVE OF SECTION 10B , IT WAS SUBMITTED IS CONTRARY TO THE STATUTORY PROVISIONS AND LACK OF INCENTIVE IF ANY WAS NOT A RELEVANT CRITERIA AS PER THE A CT. THE SAID FINDING I T WAS SUBMITTED IS CONTRARY TO THE SETTLED LEGAL POSITION AS HAS BEEN LAID DOWN BY THE VARIOUS JUDGEMENTS AND ORDERS OF THE HIGH COURTS AND THE 11 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 TRIBUNALS NAMELY COCA COLA INDIA INC. V. ACIT 309 ITR 194 (PUNJAB & HARYANA); 133 ITD 123 PARA 18 & AZTEC SOFTWARE TECHNOLOGY SERVICES LTD. V. ACIT 107 ITD 141 PARAS 127 - 129 . ACCORDINGLY IT WAS HIS SUBMISSION THAT BEING A NON - SPEAKING ORDER THE ISSUE SHOULD BE RESTORED BACK TO THE FILE OF THE CIT(A). ATTENTION WAS INVITED TO PAGE 5 OF THE SA ID ORDER WHEREIN ON THE GRIEVANCE POSED BY THE ASSESSEE ADDRESSED IN ASSESSEE S APPEAL AGAIN A CRYPTIC FINDING HAS BEEN GIVEN AND IT WAS HIS SUBMISSION THAT THE DEPARTMENT SHALL NOT OPPOSE THE REQUEST OF THE ASSESSEE ON THE GROUND THAT A NON - SPEAKING ORDER HAS BEEN PASSED. 7 . LD. AR THOUGH PLACED RELIANCE ON THE IMPUGNED ORDER HOWEVER WAS UNABLE TO SHOW HOW THE ORDER OF THE CIT(A) CAN BE SAID T O B E A SPEAKING ORDER. IN FACT CONSIDERING THE STATUTORY POSITION IT WAS CONCEDED THAT D E C I S I O N TO UPHOLD T H E A P P L I C A B I L I T Y OF WEIGHTED MEAN AS A TOOL IS CONTRARY TO THE MANDATE OF LAW AND TO THAT EXTENT THE DEPARTMENTAL STAND M AY BE CORRECT. HOWEVER IT WAS HIS SUBMISSION THAT SINCE THE ISSUE IS BEING RESTORED TO THE CIT(A) THE LD . AUTHORITY SHOULD BE DIRECTED TO DECIDE THE ISSUE AFRESH AFTER HEARING THE ASSESSEE. 8 . WE HAVE HEARD THE RIVAL SUBMISSION S AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THE FACE OF THE CLEAR STATUTORY MANDATE WE HOLD THAT THE CIT(A ERRED IN ACCEPT ING THE ASSESSEE S CLAIM BASED ON WEIGHTED M E AN AS IT WAS CONT RARY TO THE MANDATE OF LAW AS LA W PERMITS ONLY THE ARITHMETIC MEAN . ACCORDINGLY THE FINDING ARR IVED AT IS VITIATED ON THIS COUN T. IT IS ALSO SEEN THAT QUA THE COMPARABLES THE IMPUGNED ORDER IS VITIAT ED AS THE REASONING FOR CON C U R R I N G WITH THE ASSESSEE S CLAIM IS FOUND MISSING. IT IS WELL SETTLED THAT THE CORRECTNESS OF THE CONCLUSION WHEN QUESTIONED IN HIGHER FOR U M CAN ONLY BE CONSIDERED TAKING INTO CONSIDERATION THE DISCUSSION ON THE REASONS PR EVAILING IN THE MIND OF THE ADJUDICATING AUTHORITY. IN THE ABSENCE OF ANY DISCUSSION ADDRESSING THE REASON THE FINDING IS OPEN TO CHALLENGE ON THE GROUNDS OF BEING ARBITRARY. IN VIEW OF THE ABOVE IN THE ABSEN CE OF ANY REASONING THE ORDER IS H E LD TO BE NON - SPEAKING AND CONSIDERING THE REQUEST OF THE PARTIES THE ISSUE IS 12 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 RESTORED BACK TO THE FILE TO THE CIT(A) WITH THE DIRECTION TO DECIDE THE SAME BY WAY OF A SPEAKING ORDER IN ACCORDANCE WITH LAW AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEA RD. 9 . THE SOLE ISSUE AGITATED BY THE ASSESSEE IN ITS APPEAL IS FOUND DISCUSSED IN PARA 10 - 11 IN THE TPO S ORDER. A PERUSAL OF THE SAME SHOWS THAT A LOAN OF RS .8,08,01,000/ - WAS OUTSTANDING AT THE RELEVANT POINT OF TIME FROM AITHENT , USA AS ON 31.03.2003. THE ASSESSEE CLAIMED THAT N O ADJUSTMENT S WERE WARRANTED AS IT WAS A T ARM S LENGTH. THE TPO IN PARA 10.3 OF HIS ORDER TOOK NOTE OF THE FACT THAT IT IS WORTHWHILE TO NOTE THAT ON ONE HAND THE ASSESSEE IS INCURRING EXPENSE ON ACCOUNT OF INTEREST (FINANCIAL CHARGES) TO THE EXTENT OF RS.1,00,97,586/ - IN ITS PROFIT & LOSS ACCOUNT DESPITE THIS I T HAS TAKEN UNSECURED AND TERM LOANS OF RS.8.48 CRORES FROM BANKS APART FROM UNSECURED LOANS OF RS.28.18 LAKHS. IN ARM S LENGTH CONDITIONS IT IS DIFFICULT TO ACCEPT A POSITION THAT ATPL WOULD PAY INTEREST ON ITS LOANS AND WOULD NOT CHARGE ANY INTEREST FROM ITS SUBSIDIARY AND STILL CLAIM TRANSACTIONS BEING AT ARM S LENGTH. 9 .1. THE ASSESSEE IS FOUND TO HAVE PUT FORTH THE FOLLOWING ARGUMENTS IN SUPPO RT OF ITS CLAIM AS UNDER: - 10.4. MANY SUPPLEMENTARY ARGUMENTS WERE PUT FORTH BY ATPL JUSTIFYING ITS POSITION OF NOT CHARGING INTEREST ON LOANS AMOUNT AND A GIST OF ARGUMENTS IS AS UNDER: (A) TRANSFER PRICING REGULATIONS WERE INTRODUCED IN INDIA (UNDER THE INCOME TAX ACT, 1961 AND THE INCOME TAX RULES, 1962) W.EF.. FINANCIAL YEAR 2001 - 2002. AS THE REGULATIONS WERE INTRODUCED W.E.F FINANCIAL YEAR 2001 - 2002 THE SAME WILL BE APPLICABLE ON THE INT ERNATIONAL TRANSACTIONS ENTERED INTO BY AN ASSESSEE DURING OR AFTER THE FINANCIAL YEAR 2001 - 02. THE TRANSFER PRICING REGULATIONS CANNOT BE MADE APPLICABLE TO THE TRANSACTIONS ENTERED INTO BY AN ASSESSEE BEFORE THE FINANCIAL YEAR 2001 - 2002. (B) BY INFUSING FUNDS IN AIUS THE BENEFITS WOULD HAVE FLOWN TO ATPL ALSO, (C) AIUS WAS SUBSIDIARY COMPANY OF ATPL THEREFORE IN PLACE OF INTEREST FREE LOAN ASSESSEE COULD HAVE INVESTED IN SHARE CAPITAL OF AIUS THEREBY BLACKING FUNDS IN US. (D) THE RESERVE BANK OF INDIA HAS GRANTE D APPROVAL OF TRANSACTION IN EXCEPTIONAL CIRCUMSTANCES AND THIS IT CAN BE PRESUMED TO BE AT ARM S 13 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 LENGTH. 9 .2. THESE ARGUMENTS WERE NOT ACCEPTED AND THE TPO HELD THAT INTEREST @ 10% ON OUTSTANDING AMOUNT IS REQUIRED TO BE CHARGED ON THE FOLLOWING REASONING : - 11. IN VIEW OF THE ABOVE OF THE ASSESSEE REGARDING NOT CHARGING INTEREST FROM THE AE IS NOT PERCUSSIVE AND WITHOUT ANY FACE. THE CHARGING OF INTEREST ON LOAN BY ATPL TO AIUS WAS CONSIDERED AND ARM S LENGTH INTEREST @ 10% ON OUTSTANDING AMOUNT IS REQUIRED TO BE CHARGED. AN INTEREST CALCULATED @ 10% ON A N AVERAGE OUTSTANDING AMOUNT OF WHICH RS.7,73,58,925/ - BEING THE AVERAGE OF OPENING LOAN OUTSTANDING ON 01.04.2002 (RS.7,39,16,850) AND CLOSING BALA NCE AS ON 31.03.2003 COMES TO A SUM OF RS.77,35,892/ - AND IS TO BE ADDED TO TOTAL INCOME OF ATPL BEING ARM S LENGTH VALUE OF INTEREST AGAINST NIL CHARGED BY THE ASSESSEE. 9 .3. AS A RESULT OF THIS ADDITION OF RS 77,35,89 2/ - WAS MADE BY THE AO . THIS WAS CHALLENGED IN APPEAL BEFORE THE CIT(A) AND CONSIDERING THE SUBMISSIONS ADVANCED BY THE ASSESSEE THE CIT(A) DECIDED THE ISSUE IN THE FOLLOWING MANNER: - I FIND NO FORCE IN THE APPELLANTS SUBMISSION THE ADDITION MADE BY TPO AND HIS SUBMISSIONS ARE UPHELD . THE ASSESSEE APPEAL ON THIS GROUND IS DISMISSED. 10. THE LD. AR INVITING ATTENTION TO THE ORDER DATED 09.12.2011 IN THE CASE OF THE ASSESSEE FOR 2002 - 03 ASSESSMENT YEAR SUBMITTED THAT THE TRIBUNAL HAS RESTORED THE ISSUE IN THE IMMEDIATELY PRECEDING A SSESSMENT YEARS TO THE TPO ACCORDINGLY ON ACCOUNT OF IDENTICAL REASONING SAID ISSUE MAY ALSO BE RESTORED. THE PARTIES WERE REQUIRED TO ADDRESS THE POSITION AS SINCE THE FIRST ISSUE RAISED IN THE DEPARTMENTAL APPEAL HAS BEEN RESTORED TO THE CIT(A) WHY A PA RT OF THE ORDER SHOULD BE RESTORED TO THE AO/TPO. I N THESE CIRCUMSTANCES IT WAS THE SUBMISSION OF THE PARTIES THAT THE CIT(A) CAN PASS T H E ORDER TAKING INTO CONSIDERATION THE VIEW TAKEN BY THE AO IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND THIS DIRECTI ON WOULD MEET THE END S OF JUSTICE. 14 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 10.1 . ACCORDINGLY IN THE LIGHT OF THE SUBMISSIONS ADVANCED BY THE PARTIES ON THE MATERIAL AVAILABLE ON RECORD WE HOLD THAT THE IMPUGNED ORDER ON THIS GROUND IS ALSO NON - SPEAKING AND THE ISSUE IS RE S TORED BACK TO THE FILE TO THE CIT(A) WITH THE DIRECTION TO DECIDE THE SAME BY WAY OF A SPEAKING ORDER IN ACCORDANCE WITH LAW AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. NEEDLESS TO SAY THAT THE CIT(A) SHALL TAKE INTO CONSIDERATION THE ORDER OF THE TRIBUNA L RELIED UPON BY THE ASSESSEE. 11 . IN THE RESULT THE CROSS APPEALS OF THE REVENUE AND THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 12 . IT WAS A COMMON STAND OF THE PARTIES BEFORE THE BENCH THAT THE SOLE ISSUE RAISED IN ITA NO.2330/DEL/2011 BY THE ASSESSEE IN GROUND NO.2 IS IDENTICAL TO THE SOLE ISSUE RAISED BY THE ASSESSEE IN ITA NO.14 90/DEL/2011. THE ONLY DIFFEREN C E BEING THAT THEREIN ON THE LOAN OUTSTANDING THE ISSUE CAN BE RESTORED TO THE TPO INSTEAD OF THE CIT(A). A PERUSAL OF THE RECORD SHOW S THAT THE ASSESSEE IN THE YEAR UNDER CONSIDERATION RETURNED A LOSS OF RS . 3,58,53,150/ - AND THE AO IN - COMPLIANCE WITH THE TPO S ORDER DATED 10.09.2008 MADE AN ADDITION OF RS . 7,30,15,125/ - RESULTING IN A POSITIVE INCOME OF RS. 3,71,61,975/ - . THE ASSESSEE C ARRIED THE ISSUE IN APPEAL BEFORE THE CIT(A) WHO CONSIDERING THE PAST HISTORY OF THE ASSESSEE ON THE SAID ISSUE UPHELD THE AO S ACTION. CONSIDERING THE ORDER OF THE TRIBUNAL RELIED UPON BY THE ASSESSEE IN ITS OWN CASE WHEREIN 2002 - 03 ASSESSMENT YEAR THE IS SUE HAS BEEN RESTORED TO THE TPO FOLLOWING WHICH THE ORDER IN 2003 - 04 ASSESSMENT YEAR, WE HAVE R ESTORED THE ISSUE TO THE CIT(A), A CCORDINGLY IN THE PECULIAR FACTS AND CIRCUMSTANCES HEREIN ALSO FOLLOWING THE EARLIER ORDERS THE SAID ISSUE IS RESTORED WITH IDENTICAL DIRECTION. THE TPO SHALL PASS A SPEAKING ORDER IN ACCORDANCE WITH LAW AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. 15 I.T.A .NOS. - 1606 , 1490 & 2 330/DEL/2011 1 3 . I N THE RESULT THE CROSS APPEAL S OF THE PARTIES IN 2003 - 04 AND THE ASSESSEE S APPEAL IN 2005 - 06 ASSE SSMENT YEARS ARE ALLOWED FOR STATISTICAL PURPOSES. THE ORDER IS PRONOU NCED IN THE OPEN COURT ON 1 7 T H OF OCTOBER 2014 . S D / - S D / - ( T.S.KAPOOR ) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 1 7 / 1 0/2014 *AMIT KUMAR & SUBODH KUMAR COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI