Appeal Details
Counselvise Citation
[2018] 118 COUNSELVISE.COM (IT) 8196 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 year(s) 6 month(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
31-12-2018
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
Not Allotted
Assessment Year
2010-2011
Appeal Filed On
07-06-2016
Judgement Text
ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 1 OF 35 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD D BENCH, AHMEDABAD [CORAM: JUSTICE P P BHATT, PRESIDENT AND PRAMOD KUM AR VICE PRESIDENT] ITA NO.: 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 2(2), AHMEDABAD .....APPE LLANT VS DISHMAN PHARMACEUTICALS & CHEMICALS LTD. ... .......RESPONDENT 2, BHARDWAJ CHAMBERS, NEAR SWASTIK CROSS ROAD NAVRANGPURA, AHMEDABAD 380 009 [PAN:AAACD4164D] ITA NO.: 1388/AHD/2016 ASSESSMENT YEAR: 2010-11 DISHMAN PHARMACEUTICALS & CHEMICALS LTD. ... ..APPELLANT 2, BHARDWAJ CHAMBERS, NEAR SWASTIK CROSS ROAD NAVRANGPURA, AHMEDABAD 380 009 [PAN:AAACD4164D] VS. DEPUTY COMMISSIONER OF INCOME TAX OSD RANGE 1, AHMEDABAD ..........RESPONDE NT APPEARANCES BY MAHESH SHAH ALONG WITH VINOD TALWANI FOR THE REVENUE TUSHAR P HEMANI, ALONG WITH PARIMAL PARMAR FOR THE ASSESSEE DATE OF CONCLUDING THE HEARING : OCTOBER 30, 201 8 DATE OF PRONOUNCEMENT : DECEMBER 31, 2018 O R D E R 1. THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORD ER DATED 29 TH MARCH 2016, PASSED BY THE CIT(A) IN THE MATTER OF ASSESSMENT UNDER SECTIO N 143(3) R.W.S. 144 C OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2010-11. 2. WE WILL FIRST TAKE UP THE APPEAL FILED BY THE AS SESSING OFFICER. ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 2 OF 35 3. IN FIRST GROUND OF APPEAL, THE ASSESSING OFFICER HAS RAISED THE FOLLOWING GRIEVANCE: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) HAS ERRED IN LAW AND/OR ON FACTS IN DELETING THE ADDITI ON OF RS.1,38,86,837 ON ACCOUNT OF ADJUSTMENT IN SALES PRICE. 4. SO FAR AS THIS GRIEVANCE OF THE ASSESSING OFFICE R IS CONCERNED, THE RELEVANT MATERIAL FACTS ARE LIKE THIS. THE ASSESSEE BEFORE US IS A CO MPANY ENGAGED IN THE BUSINESS OF MANUFACTURING BULK DRUGS AND FINE CHEMICALS. DURING THE RELEVANT FINANCIAL PERIOD, THE ASSESSEE HAS SOLD SOME OF THESE DRUGS TO ITS ASSOCI ATED ENTERPRISES (NON AES) ABROAD. THE METHOD ON THE BASIS OF WHICH THESE SALE TRANSACTION S HAVE BEEN BENCHMARKED IS TRANSACTIONAL NET MARGIN METHOD (TNMM). IT IS ON THE APPLICATION OF THIS METHOD OF BENCHMARKING THE ARMS LENGTH PRICE THAT THE DISPUTE HAS ARISEN. THE VIEW OF THE TRANSFER PRICING OFFICER (TPO) IS THAT SINCE THE ASSESSEE HAS SOLD IDENTICAL PRODU CTS TO THE NON AES, I.E. INDEPENDENT PARTIES, AND, THEREFORE, THE PRICES AT WHICH SUCH SALES TO T HE INDEPENDENT PARTIES HAS TAKEN PLACE PROVIDES VALID INPUTS FOR APPLICATION OF COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. THE TPO HAS ALSO HIGHLIGHTED THE PRINCIPLE THAT WHEN A DIRECT METHOD LIKE CUP METHOD CAN BE PRESSED INTO SERVICE, SUCH A METHOD MUST BE PREFERR ED OVER ANY INDIRECT METHOD SUCH AS TNMM. A DETAILED ANALYSIS IS THEN DONE OF THE TRANS ACTIONS WITH THE NON AES AND BASED ON SUCH ANALYSIS, THE CUP METHOD IS ADOPTED. ACCORDING LY, BY ADOPTING THE ARMS LENGTH PRICES ON THE BASIS OF SUCH INTERNAL CUP INPUTS, THE ADJUS TMENTS ARE MADE IN SALE PRICES OF CETYL PYRIDINIUM CHLORIDE (RS 42,58,664), ETHYL TRIPHENYL PHOSPHONIUM BROMIDE (RS 26,48,310), PHENYL TRIMETHYL AMMONIUM CHLORIDE (RS 62,27,476) A ND TETRA BUTYL AMMONIUM (RS 7,52,387). THE AGGREGATE OF THESE ALP ADJUSTMENT TH US WORKS OUT TO RS 1,38,86,837. AGGRIEVED BY THE ALP ADJUSTMENT SO MADE, ASSESSEE C ARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). LEARNED CIT(A) NOTED THAT THIS ISSUE IS COV ERED, IN FAVOUR OF THE ASSESSEE, BY DECISIONS OF THIS TRIBUNAL FOR THE ASSESSMENT YEARS 2002-03, 2003-04 AND 2004-05, WHICH HAS BEEN FOLLOWED BY HIS PREDECESSORS FOR THE ASSESSMEN T YEARS 2005-06, 2006-07, 2007-08, 2007-08, 2008-09 AND 2009-10. FOLLOWING THE VIEW S O TAKEN IN THESE PRECEDENTS, THE CIT(A) DELETED THE IMPUGNED ALP ADJUSTMENT OF RS 1,38,86,8 37. AGGRIEVED BY THE RELIEF SO GRANTED BY THE CIT(A), THE ASSESSING OFFICER IS IN APPEAL B EFORE US. 5. SHRI MAHESH SHAH, LEARNED COMMISSIONER (DR), DOE S NOT DISPUTE THAT THE ISSUE IN APPEAL IS COVERED BY THE DECISIONS OF THE COORDINAT E BENCHES, IN FAVOUR OF THE ASSESSEE, BUT HE ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 3 OF 35 CONTENDS THAT THE FACTS IN THIS ASSESSMENT YEAR ARE MATERIALLY DIFFERENT INASMUCH AS SUFFICIENT AND VALID CUP INPUTS ARE AVAILABLE IN THIS ASSESSME NT YEAR WHILE NO VALID COMPARABLE UNCONTROLLED INPUTS WERE AVAILABLE IN THE YEARS IN WHICH THE MATTER WAS DECIDED IN FAVOUR OF THE ASSESSEE. HE ALSO TAKES US THROUGH VARIOUS DECI SIONS OF THE TRIBUNAL, MAINLY SERDIA PHARMACEUTICALS PVT LTD VS ACIT [(2011) 136 TTJ 129 (MUM)] - WHICH WAS AUTHORED BY ONE US, I.E. THE VICE PRESIDENT, IN SUPPORT OF THE FUNDAMENTAL PROPOSITION THAT THE DIRECT METHODS OF DETERMINING THE ALP HAVE AN INHERENT EDG E OVER THE INDIRECT METHODS, AND, THEREFORE, A DIRECT METHOD LIKE CUP SHOULD BE PRESS ED INTO SERVICE FOR SUCH PRODUCTS AS BULK DRUGS. IT IS CONTENDED THAT GIVEN THE NATURE OF PRO DUCT SOLD BY THE ASSESSEE TO ITS AES, CUP WILL BE MOST APPROPRIATE METHOD ON THE FACTS OF THI S CASE. LEARNED COMMISSIONER MAKES VERY ELABORATE SUBMISSION ON THE FIRST PRINCIPLES REGARD ING CHOICE OF MOST APPROPRIATE METHOD IN DETERMINING THE ARMS LENGTH PRICE, BUT, FOR THE RE ASONS WE WILL SET OUT IN A SHORT WHILE, IT IS NOT REALLY NECESSARY TO GO TO THAT ASPECT OF THE MA TTER IN MUCH DETAILS. HE THEN ALSO ADDRESSES US ON, WHAT HE PERCEIVES AS, ADEQUATE AVAILABILITY OF INTERNAL CUP INPUTS. IN ESSENCE, HIS SUBMISSION IS, THAT CUP METHOD IS THE MOST APPROPRI ATE METHOD ON THE FACTS OF THIS CASE, THAT SUFFICIENT INTERNAL CUP INPUTS ARE AVAILABLE, AND, THEREFORE, DISREGARDING THE TNMM BENCHMARKING BY THE ASSESSEE, WE SHOULD UPHOLD THE STAND OF THE ASSESSING OFFICER AND UPHOLD THE ADDITION MADE TO THE ALP BY ADOPTING INT ERNAL CUP METHOD. LEARNED COMMISSIONER ALSO SUBMITS THAT THERE IS NO RES JUDICATA IN THE TAX PROCEEDINGS AND A FRESH CALL CAN BE TAKEN ON THE FACTS OF EACH ASSESSMENT YEAR. HE THUS URGES US TO UPHOLD THE ORDER OF THE ASSESSING OFFICER, WHICH TAKES INTO ACCOUNT CUP MET HOD FOR DETERMINING THE ARMS LENGTH PRICE, AND REVERSE THE STAND OF THE CIT(A) ON THIS POINT. 6. SHRI TUSHAR HEMANI, LEARNED COUNSEL FOR THE ASSE SSEE, SUBMITS THAT THIS ISSUE IS NOT ONLY SQUARELY COVERED BY THE DECISIONS OF THIS TRIB UNAL IN ASSESSEES OWN CASES FOR THE EARLIER YEARS, HONBLE JURISDICTIONAL HIGH COURT IS IN SEISIN OF THE MATTER AS THEIR LORDSHIPS HAVE ADMITTED QUESTIONS OF LAW ON THIS ISSUE. HE SUBMITS THAT THE DECISIONS OF THE COORDINATE BENCHES DEAL WITH THE ISSUE IN APPEAL IN A VERY FAI R AND COMPREHENSIVE MANNER, TAKES US THROUGH THESE DECISIONS AND JUSTIFIED THE SAME ON M ERITS. LEARNED COUNSEL THEN SUBMITS THAT THERE IS NO MATERIAL CHANGE IN THE FACTS AND CIRCUM STANCES OF THE CASE SO AS TO WARRANT A DEPARTURE FROM THE DECISION IN THE EARLIER YEAR, AN D THAT IT IS ONLY A LARGER BENCH WHICH CAN EXAMINE THE POSSIBILITIES OF SUCH A DEPARTURE FROM VIEWS. OUR ATTENTION IS THEN ALSO INVITED TO HONBLE JURISDICTIONAL HIGH COURTS JUDGMENT DATED 31 ST AUGUST 2012 WHEREIN THEIR ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 4 OF 35 LORDSHIPS HAVE ADMITTED A QUESTION OF LAW AGAINST T HE ORDER PASSED BY THE COORDINATE BENCHES TO THE EFFECT AS TO WHETHER THE APPELLATE TRIBUNAL IS RIGHT IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS 3,06,48,478 UNDER SECTION 92CA(3) O F THE ACT MADE BY THE TPO, HOLDING THAT THE TNMM IS MOST APPROPRIATE METHOD RATHER THAN THE INTERNAL CUP METHOD. LEARNED COUNSEL SUBMITS THAT THERE IS NO GOOD REASON TO DIS TURB THE ACCEPTED PAST HISTORY OF THIS CASE, AND, TAKE A VIEW DIFFERENT FROM THE VIEW TAKEN BY T HE OTHER COORDINATE BENCHES FOR THE EARLIER YEARS. LEARNED COUNSEL SUBMITS THAT WHILE THERE IS NO RES JUDICATA IN THE INCOME TAX PROCEEDINGS, IT IS ALSO A SETTLED LEGAL POSITION, W HERE A FUNDAMENTAL ASPECT PERMEATING THROUGH THE DIFFERENT ASSESSMENT YEARS HAS BEEN FOU ND AS A FACT ONE WAY OR THE OTHER, IT WOULD NOT BE AT ALL APPROPRIATE FOR THE SAME FORUM TO TAK E A DIFFERENT VIEW OF THE MATTER IN ANOTHER ASSESSMENT YEAR. LEARNED COUNSEL SUBMITS THAT WHEN HONBLE JURISDICTIONAL HIGH COURT HAS ALREADY ADMITTED THE ABOVE QUESTION FOR CONSIDERATI ON, THERE IS NO GOOD REASON FOR DEVIATING FROM THE STAND OF THE TRIBUNAL AS ON THIS STAGE. HE GOES A STEP FURTHER AND SUBMITS THAT EVEN IF THERE ARE DOUBTS ON CORRECTNESS OF THE EARLIER DECI SION, IT CANNOT EVEN BE REFERRED TO A LARGER BENCH AT THIS STAGE. IN SUPPORT OF THIS PROPOSITION , HE INVITES OUR ATTENTION TO THE DECISION OF ANOTHER COORDINATE BENCH, IN THE CASE OF GENERAL MOTORS INDIA LTD VS ACIT [ITANOS.: 1293/AHD/2015 AND 1294/AHD/2015; ORDER DATED 11 TH AUGUST 2016] WHEREIN IT IS HELD THAT WHEN HONBLE HIGH COURT IS SEIZED OF AN ISSUE, THER E IS NO POINT IN CONSTITUTING A SPECIAL BENCH TO RECONSIDER THE DECISION OF A COORDINATE BE NCH, ON THAT ISSUE, IN ASSESSEES OWN CASE, BECAUSE SUCH AN ACTION WILL BE MEANINGLESS FORMALIT Y. IT IS, WITHOUT PREJUDICE TO THE STAND OF THE ASSESSEE ON MERITS, SUBMITTED THAT WHATEVER MAY BE THE MERITS, OR LACK OF MERITS, OF THE VIEW TAKEN EARLIER BY THE COORDINATE BENCH, AS THAT VIEW IS NOW UNDER EXAMINATION BY HONBLE COURT ABOVE, AND, SOONER OR LATER, THE BENE FIT OF THEIR LORDSHIPS VIEWS WILL BE AVAILABLE, THERE IS NO POINT IN THIS RITUALISTIC EX ERCISE OF TAKING A CALL ON CORRECTNESS OF THAT EARLIER VIEW. IT IS SUBMITTED THAT A DIVISION BENCH CANNOT DEPART FROM THE VIEW TAKEN BY ANOTHER DIVISION BENCH AND, NO MATTER HOW LARGE A B ENCH OF THE TRIBUNAL DECIDES AN ISSUE ON REFERENCE TO THE SPECIAL BENCH, IT IS SUBJECT TO TH E VIEWS OF HONBLE COURTS ABOVE. SUCH VIEWS OF HONBLE HIGH COURT BEING LIKELY TO BE AVAILABLE SOON, A REFERENCE FOR LARGER BENCH, WHICH IS WHAT LEARNED COMMISSIONERS ARGUMENT CAN AT BEST AIM AT, WILL BE MEANINGLESS FORMALITY. LEARNED COUNSEL THEN JOINS THE ISSUE WITH THE LEARN ED COMMISSIONER (DR) ON SELECTION OF CUP METHOD, AS MOST APPROPRIATE METHOD, ON THE FACT S OF THIS CASE. HE SUBMITS THAT SELECTION OF A METHOD OF ASCERTAINING THE ARMS LENGTH PRICE CANNOT BE AN ACADEMIC EXERCISE DE HORS THE FACTS OF EACH CASE AND IT DOES NOT, AS SUCH, TAKE P LACE IN VACUUM. THEREFORE, IT CANNOT BE SAID ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 5 OF 35 THE CUP METHOD WILL ALWAYS BE MOST APPROPRIATE METH ODS IN THE CASE OF BULK DRUGS WHETHER OR NOT SUFFICIENT CUP INPUTS ARE AVAILABLE. LEARNED COUNSEL THEN POINTS OUT THAT WHATEVER INTERNAL CUP INPUTS ARE RELIED UPON BY THE TPO, ARE INAPPROPRIATE INASMUCH AS THE SIZE OF THE INPUTS IS MATERIALLY DIFFERENT FROM THE SIZE OF ACT UAL INTRA AE TRANSACTIONS AND, AS EVIDENT FROM A PLAIN LOOK AT THE QUANTITIES INVOLVED IN COM PARABLE CASES VIS--VIS INTRA AE TRANSACTIONS, THE VARIATIONS ARE SO SIGNIFICANT THA T THE ENTIRE COMPARISON IS MEANINGLESS. WHATEVER BE THE ACADEMIC MERITS FOR PREFERENCE OF C UP METHOD, IN THE PRESENT CASES, GIVEN THE LIMITATIONS OF AVAILABLE INTERNAL CUP INPUTS, C UP METHOD CANNOT BE HELD TO BE MOST APPROPRIATE METHOD. IT IS THEN POINTED OUT IS THAT WHAT IS COMPARED IS THE AVERAGE TRANSACTION PRICE AND NOT THE ACTUAL PRICE, AND SUCH AN APPROAC H IS ALIEN TO TRANSFER PRICING LEGISLATION. THE APPROACH OF THE TPO, WHICH IS WHAT LEARNED COMM ISSIONER (DR) IS JUSTIFYING, IS CLAIMED TO BE UNSUSTAINABLE IN LAW. WE ARE THUS URGED TO C ONFIRM THE ACTION OF THE AUTHORITIES BELOW AND DECLINE TO INTERFERE IN THE MATTER. IN BRIEF RE JOINDER, LEARNED COMMISSIONER (DR) REITERATES HIS PRAYER TO DEPART FROM THE VIEW TAKEN BY THE COORDINATE BENCH EARLIER AND SUBMITS THAT THE VIEW TAKEN BY THE EARLIER BENCHES, IN ASSESSEES OWN CASES, ARE CONTRARY TO THE FUNDAMENTAL OF THE TRANSFER PRICING LEGISLATION . HE ALSO SUBMITS THAT MERELY BECAUSE CUP INPUT IS OF A SMALLER SIZE DOES NOT MAKE THE COMPAR ISON MEANINGLESS, AS LONG AS THE CUP INPUTS ARE BONAFIDE . 7. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 8. LEARNED COMMISSIONER (DR)S VERY ERUDITE ARGUMEN TS ARE INDEED VERY ENLIGHTENING BUT, AS IT SOMETIMES HAPPENS, THE QUALITY OF ARGUME NTS IN SUPPORT OF A PROPOSITION IS INVERSELY PROPORTIONAL, PROPORTIONAL IF IT IS, TO THE MERITS OF THE PROPOSITION SOUGHT TO BE ADVANCED. THIS IS ONE SUCH OCCASION. WHATEVER MAY BE INHERENT EDG E OF THE DIRECT METHODS OF DETERMINING ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION OVER INDIRECT METHODS OF DETERMINING THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS, AS LEARNED COUNSEL FOR THE ASSESSEE RIGHTLY CONTENDS, SELECTION OF THE MOST APPROPRIATE METHOD FOR DETERMINING ARMS LENGTH PRICE UNDER THE TRANSFER PRICING PROVISIONS, IN A PARTICULAR FA CT SITUATION, IS NOT AN ACADEMIC EXERCISE WHICH CAN BE DECIDED DE HORS THE PECULIAR FACTS OF THAT SITUATION, AND, THEREFO RE, THERE CANNOT BE ANY STRAIGHT-JACKET FORMULAS HOLDING APPLICATION OF A PARTICULAR METHOD IN CASE OF A PARTICULAR TYPE OF PRODUCT OR SERVICE. WHILE RULE 1 0B(1) OF THE INCOME TAX RULES 1962, PROVIDES THAT ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 6 OF 35 BY ANY OF THE METHODS, BEING THE MOST APPROPRIATE METHOD, SET OUT THEREIN, RULE 10 C(1) PROVIDES THE MECHANISM FOR SELECTING THE MOST APPRO PRIATE METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR TRAN SACTION AND WHICH PROVIDES THE MOST RELIABLE MEASURE OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION . RULE 10C(2) FURTHER PROVIDES THAT IN SELECTING THE MOST APPROPRIATE METHOD AS SPECIFIED IN RULE 10C(1), CERTAIN FACTORS ARE TO BE TAKEN INTO ACCOUN T: (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRAN SACTION; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACCOUNT ASS ETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHOD ; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN THE INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRANSACTION AND BETWEEN THE ENTERPRISE S ENTERING INTO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJ USTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTI ONS REQUIRED TO BE MADE IN APPLICATION OF A METHOD [EMPHASIS, BY UNDERLINING, SUPPLIED BY US] 9. WHAT IS CLEAR FROM THE ABOVE ANALYSIS IS THAT A METHOD OF DETERMINING ARMS LENGTH PRICE, TO BE HELD AS A MOST APPROPRIATE METHOD (M AM), SHOULD BE, AS PROVIDED IN RULE 10C(1), A METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR TRANSACTION AND A METHOD AND WHICH PROVIDES THE MOST RELIABLE MEASURE OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION . UNDER RULE 10C(2)(C), THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPL ICATION OF THE METHOD IS ONE OF THE CRUCIAL FACTORS DETERMINING SUITABILITY OF A METHOD OF DETERMINATION OF ARMS LENGTH PRICE IN A PARTICULAR FACT SITUATION. QUITE CLEARLY, THEREFO RE, UNLESS SUITABLE RELIABLE DATA INPUTS NECESSARY FOR APPLICATION OF A PARTICULAR METHOD, AS CUP IN THIS CASE, ARE AVAILABLE, CUP ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 7 OF 35 METHOD CANNOT BE SAID TO BE MOST APPROPRIATE METHOD S ON THE FACTS OF THIS CASE. WHAT HAS BEEN RELIED UPON BY THE TPO IS INTERNAL CUP DATA BU T THEN RATHER THAN TAKING THE COMPARABLE UNCONTROLLED PRICE OF THE TRANSACTION, THE TPO HAS COMPARED AVERAGE OF INTRA AE TRANSACTIONS AND INDEPENDENT TRANSACTIONS. THIS APPROACH, THOUGH IN THE CASE OF APPLICATION OF COST PLUS METHOD, HAS BEEN REJECTED BY A COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS TARA ULTIMO PVT LTD [(2012) 143 TTJ 91 (MUM)], THOUGH THE SAME REASONING WILL BE EQUALLY APPLICABLE IN RESPECT OF THE CUP AS WELL AS THE COMPUTATION MECHANISM, IN THAT RESPECT, IS MATERIALLY SIMILAR. IN THIS CASE, SPEA KING THROUGH ONE OF US (I.E. THE VICE PRESIDENT), THE COORDINATE BENCH HAD OBSERVED AS FO LLOWS: THE WAY THIS RULE WORKS, THE BENCHMARK GROSS PROFIT IS TO BE APPLIED ON EACH TRANSACTION WITH THE AES , WHILE, FOR COMPUTING THE BENCHMARK, ONE COULD TAKE INTO ACCOUNT A SERIES OF SAME OR SIMILAR TRANSACTIO NS. IN OTHER WORDS, WHILE SETTING THE BENCHMARK, ONE CAN TAKE INTO ACCOUNT SE VERAL TRANSACTIONS WITH UNRELATED ENTERPRISE ON WHAT CAN BE TERMED AS 'GLOB AL BASIS', ESSENTIALLY IN RESPECT OF SAME OR SIMILAR PROPERTY OR SERVICES THO UGH, THE BENCHMARK SO ARRIVED AT CANNOT BE APPLIED ON THE GLOBAL BASIS I.E. THE A VERAGE OF GROSS PROFIT EARNED FROM SAME OR SIMILAR TRANSACTIONS WITH AES. THE APPLICATION OF CPM HAS TO BE ON TRANSACTION BASIS RATHER THAN ON GLOBAL BASIS, AND THIS FUNDAMENTAL SCHEME OF COST PLUS METHOD IS ALSO EVIDENT FROM THE PLAIN WORDINGS OF R ULE 10 B AS WELL. ANY OTHER VIEW OF THE MATTER WILL RESULT IN INCONGRUITIES. FOR EXAMPLE, IF OUR AVERAGE MARK UP TO UNRELATED ENTERPRISES IS 20 PER CENT. AND WE CHARGE A MARK-UP OF 2 PER CENT IN ONE TRANSACTION WITH AE AND 38 PER CENT IN ANOTHER TRAN SACTION WITH THE AE, BOTH THESE TRANSACTIONS, BY APPLYING THE MARK UP ON GLOBAL BAS IS, WILL MEET THE TEST OF ALP WHEREAS IN THE FIRST CASE, THE MARK UP CHARGED IS C ERTAINLY NOT A MARK-UP RESULTING IN AN ALP. IN THIS PARTICULAR CASE, FOR EXAMPLE, THE N ORMAL MARK UP IN TRANSACTIONS WITH HAS BEEN COMPUTED AT 16.31 PER CENT. AND THE AVERAG E OF MARK UP ON SALES TO AES HAVING BEEN TAKEN AT 17.08 PER CENT. ENTIRE SALES T O AES HAS BEEN TAKEN AT ALP, BUT, THE MARK UP IN THE MANY CASES IS CLEARLY LESS THAN BENCHMARK. TO GIVE ONE EXAMPLE, AT PAGE 221 OF THE PAPER-BOOK, MARGIN OF 14.15 PER CEN T (4 INVOICES), 13.95 PER CENT. 13.81 PER CENT. 14 PER CENT (4 INVOICES), 14.14 PER CENT (2 INVOICES), AND 14.16 PER CENT IS GIVEN BY ASSESSEE'S OWN COMPUTATION, AND, O N THE SAME PAGE, ON ONE INVOICE, THE ASSESSEE HAS SHOWN A MARGIN AS HIGH AS 27 PER C ENT. THE COST PLUS METHOD, ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 8 OF 35 THEREFORE, HAS NOT BEEN CORRECTLY APPLIED. IN ANY C ASE, ONE OF THE MOST IMPORTANT INPUT, I.E. DIAMOND, HAS BEEN IMPORTED AT A PRICE FOR WHIC H NO ALP DOCUMENTATION IS AVAILABLE AND THE PRICE OF IMPORTS HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTATION OF COSTS AS WELL. THE COSTS OF INPUTS HAVE NOT BEEN VE RIFIED EITHER. NO EFFORTS ARE MADE TO SHOW THAT THE TERMS OF SALE TO THE AES AND ALL OTHE R RELEVANT FACTORS ARE MATERIALLY SIMILAR VIS-A-VIS THE TRANSACTIONS WITH INDEPENDENT ENTERPRISES. THE CPM IS APPLIED BY COMPARING GROSS PROFIT ON SALES, WHEREAS THE METHOD REQUIRES COMPARISON OF MARK UP ON COSTS ON TRANSACTIONS WITH AES VIS-A-VIS MARK UP ON COSTS ON TRANSACTIONS WITH NON AES [EMPHASIS, BY UNDERLINING, SUPPLIED BY US NOW] 10. THE QUANTITIES ARE A MATERIAL FACTOR TOO BUT TH EN THIS ASPECT HAS BEEN IGNORED ALTOGETHER. ONE OF THE TRANSACTIONS, WHICH IS TAKEN AS AN INTERNAL CUP INPUT, IS A TRANSACTION FOR 50 KG OF ETHYL TRIPHENYL PHOSPHONIUM BROMIDE A ND THE FACT THAT THIS SALE TO AN INDEPENDENT KOREAN ENTITY HAS TAKEN PLACE HAS BEEN USED TO BENCHMARK SALE OF 15,800 KGS TO THE AES IN THE US. CLEARLY, THIS DOES NOT MAKE SENS E INASMUCH AS A SMALL ONE OFF TRANSACTION OF 5O KGS CANNOT BE A RELIABLE INPUT FOR DECIDING A RMS LENGTH PRICE OF A BULK 15,800 KG TRANSACTION. THATS ONE ASPECT OF THE MATTER. THE OTHER ASPECT OF THE MATTER IS THE NATURE OF TRADE RELATIONSHIP IN THE SENSE OF ITS IMPACT ON TH E FUNCTIONS, ASSET AND RISKS ASSUMED BY THE AES WHICH WILL HAVE THE CRUCIAL BEARING ON THE PRIC ES. UNLESS THESE VITAL FACTORS ARE TAKEN INTO ACCOUNT, AND SUITABLE ADJUSTMENTS ARE MADE IN THE AVAILABLE CUP INPUTS, THE APPLICATION OF CUP HAS NO USEFULNESS. THE VARIATIONS IN NATURE OF RELATIONSHIP AFFECTING THE FAR ANALYSIS IS NOT EVEN DISPUTED BY THE REVENUE AND RULE 10 B(1 )(A)(II) ITSELF PROVIDES THAT SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEE N THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRI CE IN THE OPEN MARKET. AS REGARDS THE DECISION OF COORDINATE BENCH IN THE CASE OF SERDIA PHARMACEUTICALS (SUPRA), THAT WAS A CASE IN WHICH NO DISPUTE WAS RAISED WITH RESPECT TO THE COM PARABLES CASES EXCEPT ON ACCOUNT OF QUALITY FOR WHICH SUITABLE ADJUSTMENT WAS ALLOWED. THIS PRECEDENT, THEREFORE, DOES NOT OFFER ANY HELP TO THE CASE OF THE REVENUE. ALL THAT HAS B EEN RELIED UPON IS INTERNAL CUP AND FOR THE DETAILED REASONS SET OUT BY THE CIT(A), WHICH MEETS OUR APPROVAL, THESE CUP INPUTS WERE NOT RELIABLE ENOUGH. IN ANY CASE, DIFFERENCES DUE TO VA RIATIONS IN FAR DUE TO NATURE OF TRADE RELATIONSHIP WITH AES HAVE NOT BEEN ACCOUNTED FOR A ND SUITABLE ADJUSTED. THE EXTERNAL CUP ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 9 OF 35 INPUTS ARE NOT EVEN REFERRED TO AND RELIED UPON BY THE TPO. THERE ARE NO OTHER INDEPENDENT COMPARABLE TRANSACTIONS BROUGHT TO THE ANALYSIS BY THE TPO OR THE LEARNED COMMISSIONER (DR). ALL THESE FACTORS PUT TOGETHER DONOT MAKE OUT A CASE FOR APPLICATION OF CUP IN THIS CASE. NOT ONLY THAT THERE IS NO JUSTIFICATION, BEY OND VAGUE GENERALITIES, FOR CUP IN THE PRESENT CASE AND NOT ONLY THAT THAT CUP METHOD APPL ICATION MECHANISM IS INCORRECT, WE FIND THAT SUFFICIENT QUANTITY OF RELIABLE CUP INPUTS ARE NOT AVAILABLE ON THE FACTS OF THIS CASE. THAT IN THE LIGHT OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE DONOT SEE LEGALLY SUSTAINABLE MERITS IN THE CASE OF THE LEARN ED COMMISSIONER (DR) AND WE REJECT HIS PLEA THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THIS CASE, CUP METHOD IS REQUIRED TO BE APPLIED. IN ANY CASE, THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE COORDINATE BENCHES, IN FAVOUR OF THE ASSESSEE, AND HAVING PERUSED THESE DECISIONS AND MATERIAL ON RECORD, WE ARE NOT INCLINED TO TAKE ANY OTHER VIEW OF THE MATTER T HAN THE VIEW SO TAKEN BY THE COORDINATE BENCHES. WE HAVE ALSO NOTED THAT HONBLE HIGH COUR T IS ALREADY SEIZED OF THE MATTER AND IT IS ONLY A MATTER OF TIME THAT THEIR LORDSHIPS TAKE A C ALL ON THE MATTER. GIVEN THIS SITUATION, EVEN IF WE HAD ANY RESERVATIONS ON THE CORRECTNESS OF TH E COORDINATE BENCH DECISION, WHICH WE DONOT HAVE ANYWAY, THE MATTER COULD NOT HAVE BEEN R EFERRED FOR THE CONSTITUTION OF A SPECIAL BENCH AND THIS DIVISION BENCH COULD NOT HAVE TAKEN A DIFFERENT VIEW OF THE MATTER. THAT IS WHAT IS THE SETTLED LEGAL POSITION. IN VIEW OF THES E DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE APPROVE THE CONCLUSIONS AR RIVED AT BY THE LEARNED CIT(A) AND DECLINE INTERFERE IN THE MATTER. 11. GROUND NO. 1 IS THUS DISMISSED. 12. IN GROUND NO. 2, THE ASSESSING OFFICER HAS RAIS ED THE FOLLOWING GRIEVANCE: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) HAS ERRED IN LAW AND/OR ON FACTS IN DELETING THE ADDITI ON OF RS. 11,63,68,000 ON ACCOUNT OF GUARANTEE FEES. 13. SO FAR AS THIS GRIEVANCE IS CONCERNED, THE RELE VANT MATERIAL FACTS ARE LIKE THIS. DURING THE COURSE OF THE PROCEEDINGS BEFORE THE TPO, IT WA S NOTICED THAT THE ASSESSEE COMPANY HAS EXTENDED CORPORATE GUARANTEES ON BEHALF OF ITS VARI OUS ASSOCIATED ENTERPRISES ABROAD BUT HAS NOT CHARGED ANY CONSIDERATION FOR THE SAME. WHILE T HE ASSESSEES STAND WAS THAT EXTENDING CORPORATE GUARANTEES DOES NOT AMOUNT TO AN INTERNAT IONAL TRANSACTION, WITHIN THE MEANINGS OF ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 10 OF 35 SECTION 92B, AND AS SUCH NO ALP ADJUSTMENTS CAN BE MADE IN RESPECT OF THE SAME, THE TPO DID NOT SHARE THAT PERCEPTION. THE LEARNED TPO WAS OF THE VIEW THAT, FOR THE DETAILED ANALYSIS SET OUT IN ORDER, CORPORATE GUARANTEES ARE CLEARLY COVERED BY THE DEFINITION OF INTERNATIONAL TRANSACTION AS SET OUT IN SECTION 92B. IN HIS DETAI LED ANALYSIS, HE WAS ALSO THE VIEW THAT 2.98% OF THE AMOUNT OF THE CORPORATE GUARANTEE IS AN ARM S LENGTH PRICE FOR THE SAME. ON THIS BASIS, AND HAVING NOTED THAT THE ASSESSEE DID NOT CHARGE A NY CONSIDERATION FOR THE ISSUANCE OF CORPORATE GUARANTEES, HE MADE AN ALP ADJUSTMENT OF RS 11.63 CRORES IN RESPECT OF THE SAME. HOWEVER, WHEN THE MATTER TRAVEL IN APPEAL BEFORE TH E CIT (A), LEARNED CIT (A) DELETED THE ALP ADJUSTMENTS RELYING UPON THE DECISION OF THIS T RIBUNAL, IN THE CASE OF MICRO INK LTD VS ACIT [(2016) 157 ITD 132 (AHD)]. AGGRIEVED BY THE RELIEF SO GRANTED BY THE CIT(A), THE ASSESSING OFFICER IS IN APPEAL BEFORE US. 14. WE ARE HARDLY RIVAL CONTENTIONS, PERUSED THE MA TERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF APPLICABLE LEGAL POSITION. 15. WE FIND THAT THIS ISSUE IS NOW COVERED, IN FAVO UR OF THE ASSESSEE, IN ASSESSEES OWN CASE FOR THE PRECEDING ASSESSMENT YEARS. IN THIS DE CISION DATED 20 JUNE 2018, A COORDINATE HAS ANALYSED THE ISSUE IN GREAT DETAIL AND TAKEN NOTE O F DECISIONS BY VARIOUS COORDINATE BENCHES, AND THEN COME TO THE CONCLUSION THAT ISSUANCE OF CO RPORATE GUARANTEES DOES NOT CONSTITUTE AN INTERNATIONAL TRANSACTION WITH THE MEANINGS OF SECT ION 92B. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THE ISSUE IS THUS COVERED, IN FAVOUR OF THE ASSESSEE AND IN ASSESSEES OWN CASES, BY COORDINATE BENCHES OF TRIBUNAL. AS REGARDS THE DECI SION OF THE COORDINATE BENCH IN THE CASE OF MICRO INK LTD (SUPRA), WE FIND THAT HONOURABLE JURI SDICTIONAL HIGH COURT HAS ADMITTED APPEAL TO DETERMINE THE QUESTION AS TO WHETHER OR NOT ISSU ANCE OF CORPORATE GUARANTEES AMOUNTS TO INTERNATIONAL TRANSACTION WITHIN MEANINGS OF SECTIO N 92B. IN THE CASE OF MICRO INK (SUPRA), THE COORDINATE BENCH, SPEAKING THROUGH ONE OF US (I.E. THE VICE PRESIDENT), HAS HELD, AS SUMMARIZED BY THE HEADNOTES ON THE TAXMANN.COM, AS FOLLOWS: I. IT IS ONLY ELEMENTARY THAT THE DETERMINATION OF ARM 'S LENGTH PRICE, UNDER THE SCHEME OF THE INTERNATIONAL TRANSFER PRICING SET OU T IN THE ACT, CAN ONLY BE DONE IN RESPECT OF AN 'INTERNATIONAL TRANSACTION'. SECTION 92(1) PROVIDES THAT, '(A)NY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SH ALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE'. IN ORDER TO ATTR ACT THE ARM'S LENGTH PRICE ADJUSTMENT, THEREFORE, A TRANSACTION HAS TO BE AN ' INTERNATIONAL TRANSACTION' FIRST. ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 11 OF 35 THE EXPRESSION 'INTERNATIONAL TRANSACTION' IS A DEF INED EXPRESSION. SECTION 92B DEFINES THE EXPRESSION 'INTERNATIONAL TRANSACTION'. [PARA 21] II. THE 'OECD' TRANSFER PRICING GUIDELINES FOR MULTINAT IONAL ENTERPRISES AND TAX ADMINISTRATIONS' SPECIFICALLY RECOGNISES THAT ANY A CTIVITY IN THE NATURE OF SHAREHOLDER ACTIVITY, WHICH IS SOLELY BECAUSE OF OW NERSHIP INTEREST IN ONE OR MORE OF THE GROUP MEMBERS, I.E., IN THE CAPACITY AS SHAR EHOLDER 'WOULD NOT JUSTIFY A CHARGE TO THE RECIPIENT COMPANIES'. IT IS THUS CLEA R THAT A SHAREHOLDER ACTIVITY, IN ISSUANCE OF CORPORATE GUARANTEES, IS TAKEN OUT OF A MBIT OF THE GROUP SERVICES. CLEARLY, THEREFORE, AS LONG AS A GUARANTEE IS ON AC COUNT OF, WHAT CAN BE TERMED AS 'SHAREHOLDER'S ACTIVITIES', EVEN ON THE FIRST PRINC IPLES, IT IS OUTSIDE THE AMBIT OF TRANSFER PRICING ADJUSTMENT IN RESPECT OF ARM'S LEN GTH PRICE. IT IS ESSENTIAL TO APPRECIATE, AT THIS STAGE, THE DISTINCTION IN A SER VICE AND A BENEFIT. ONE MAY BE BENEFITED EVEN WHEN NO SERVICES ARE RENDERED, AND, THEREFORE, IN MANY A SITUATION IT'S A 'BENEFIT TEST' WHICH IS CRUCIAL FOR TRANSFER PRICING LEGISLATION. [PARA 36] III. THERE CAN BE ACTIVITIES WHICH BENEFIT THE GROUP ENT ITIES BUT THESE ACTIVITIES NEED NOT NECESSARILY BE 'PROVISION FOR SERVICES'. THE FA CT THAT THE OECD CONSIDERS SUCH ACTIVITIES IN THE SERVICES SEGMENT DOES NOT ALTER T HE CHARACTER OF THE ACTIVITIES. WHILE THE GROUP ENTITY IS THUS INDEED BENEFITTED BY THE SHAREHOLDER ACTIVITIES, THESE ACTIVITIES DO NOT NECESSARILY CONSTITUTE SERVICES. THERE IS NO SUCH EXPRESS REFERENCE TO THE BENEFIT TEST, OR TO THE CONCEPT OF BENEFIT A TTACHED TO THE ACTIVITY, IN RELEVANT DEFINITION CLAUSE OF 'INTERNATIONAL TRANSACTION' UN DER THE DOMESTIC TRANSFER PRICING LEGISLATION. IT IS ALSO ESSENTIAL TO TAKE NOTE OF T HE LEGAL POSITION, IN INDIA, IN THIS REGARD. NO MATTER HOW DESIRABLE IS IT TO READ SUCH A TEST IN THE DEFINITION OF THE INTERNATIONAL TRANSACTION' UNDER DOMESTIC TRANSFER PRICING LEGISLATION, AS IS THE SETTLED LEGAL POSITION, IT IS NOT OPEN TO COURT TO INFER THE SAME. [PARA 37] IV. ONE MORE THING WHICH IS CLEARLY DISCERNIBLE FROM TH E ABOVE DISCUSSIONS IS THAT THE TESTS RECOGNIZED BY THESE GUIDELINES ARE INTERWOVEN TWIN TESTS OF BENEFIT AND ARM'S LENGTH. BENEFIT TEST IMPLIES THE RECIPIENT GROUP ME MBER SHOULD GET 'ECONOMIC OR COMMERCIAL VALUE TO ENHANCE ITS COMMERCIAL POSITION '. THE BENEFIT TEST IS INTERLINKED WITH THE ARM'S LENGTH TEST IN THE SENSE THAT IT SEEKS AN ANSWER TO THE QUESTION WHETHER UNDER A SIMILAR SITUATION AN INDEP ENDENT ENTERPRISE WOULD HAVE ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 12 OF 35 BEEN WILLING TO PAY FOR THE ACTIVITY CONCERNED, OR WOULD HAVE PERFORMED THE ACTIVITY IN-HOUSE FOR ITSELF. SO FAR AS THE BENEFIT TEST IS CONCERNED, IT IS ALIEN TO THE DEFINITION OF INTERNATIONAL TRANSACTION' UNDER THE INDIAN TRANSFER PRICING LEGISLATION. SO FAR AS ARM'S LENGTH TEST IS CONCERN ED, IT PRESUPPOSES THAT SUCH A TRANSACTION IS POSSIBLE IN ARM'S LENGTH SITUATION. HOWEVER, IN A SITUATION IN WHICH THE SUBSIDIARY DOES NOT HAVE ADEQUATE FINANCIAL STA NDING OF ITS OWN AND IS INADEQUATELY CAPITALIZED, NONE WILL GUARANTEE FINAN CIAL OBLIGATIONS OF SUCH A SUBSIDIARY. [PARA 38] V. THE ISSUANCE OF FINANCIAL GUARANTEE IN FAVOUR OF AN ENTITY, WHICH DOES NOT HAVE ADEQUATE STRENGTH OF ITS OWN TO MEET SUCH OBLIGATIO NS, WILL RARELY BE DONE. THE VERY COMPARISON, BETWEEN THE CONSIDERATION FOR WHIC H BANKS ISSUE FINANCIAL GUARANTEES ON BEHALF OF ITS CLIENTS WITH THE CONSID ERATION FOR WHICH THE CORPORATES ISSUE GUARANTEES FOR THEIR SUBSIDIARIES, IS ILL CON CEIVED BECAUSE WHILE BANKS SEEK TO BE COMPENSATED, EVEN FOR THE SECURED GUARANTEES, FOR THE FINANCIAL RISK OF LIQUIDATING THE UNDERLYING SECURITIES AND MEETING T HE FINANCIAL COMMITMENTS UNDER THE GUARANTEE, THE GUARANTEES ISSUED BY THE CORPORA TE FOR THEIR SUBSIDIARIES ARE RARELY, IF AT ALL, BACKED BY ANY UNDERLYING SECURIT Y AND THE RISK IS ENTIRELY ENTREPRENEURIAL IN THE SENSE THAT IT SEEKS TO MAXIM ISE PROFITABILITY THROUGH AND BY THE SUBSIDIARIES. VI. IT IS INHERENTLY IMPOSSIBLE TO DECIDE ARM'S LENGTH PRICE OF A TRANSACTION WHICH CANNOT TAKE PLACE IN ARM'S LENGTH SITUATION. THE MO TIVATION OR TRIGGER FOR ISSUANCE OF SUCH GUARANTEES IS NOT THE KIND FOR CONSIDERATIO N FOR WHICH A BANKER, FOR EXAMPLE, ISSUE THE GUARANTEES, BUT IT IS MAXIMIZATI ON OF GAINS FOR THE RECIPIENT ENTITY AND THUS THE MNE GROUP AS A WHOLE. IN GENERA L, THUS, THE CONSIDERATION FOR ISSUANCE OF CORPORATE GUARANTEES ARE OF A DIFFERENT CHARACTER ALTOGETHER. [PARA 39] VII. AT THIS STAGE, IT WOULD BE APPROPRIATE TO ANALYZE T HE BUSINESS MODEL OF BANK GUARANTEES, WITH WHICH CORPORATE GUARANTEES ARE SOM ETIMES COMPARED, IN THE CONTEXT OF BENCHMARKING THE ARM'S LENGTH PRICE OF C ORPORATE GUARANTEES. A BANK GUARANTEE IS A SURETY THAT THE BANK, OR THE FINANCI AL INSTITUTION ISSUING THE GUARANTEE, WILL PAY OFF THE DEBTS AND LIABILITIES I NCURRED BY AN INDIVIDUAL OR A ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 13 OF 35 BUSINESS ENTITY IN CASE THEY ARE UNABLE TO DO SO. B Y PROVIDING A GUARANTEE, A BANK OFFERS TO HONOUR RELATED PAYMENT TO THE CREDITORS U PON RECEIVING A REQUEST. THIS REQUIRES THAT BANK HAS TO BE VERY SURE OF THE BUSIN ESS OR INDIVIDUAL TO WHOM THE BANK GUARANTEE IS BEING ISSUED. SO, BANKS RUN RISK ASSESSMENTS TO ENSURE THAT THE GUARANTEED SUM CAN BE RETRIEVED BACK FROM THE BUSIN ESS. THIS MAY REQUIRE THE BUSINESS TO FURNISH A SECURITY IN THE SHAPE OF CASH OR CAPITAL ASSETS. ANY ENTITY THAT CAN PASS THE RISK ASSESSMENT AND PROVIDE SECURITY M AY OBTAIN A BANK GUARANTEE. VIII. THE CONSIDERATION FOR THE ISSUANCE OF BANK GUARANTE E, SO FAR AS A BANKER IS CONCERNED, IS THIS. WHEN THE CLIENT IS NOT ABLE TO HONOUR THE FINANCIAL COMMITMENTS AND WHEN CLIENT IS NOT ABLE TO MEET HIS FINANCIAL COMMITMENTS AND THE BANK IS CALLED UPON TO MAKE THE PAYMENTS, THE B ANK WILL SEEK A COMPENSATION FOR THE ACTION OF ISSUING THE BANK GUARANTEE, AND F OR THE RISK IT RUNS INHERENT IN THE PROCESS OF MAKING THE PAYMENT FIRST AND REALIZING I T FROM THE UNDERLYING SECURITY AND THE CLIENT. EVEN WHEN SUCH GUARANTEES ARE BACKE D BY ONE HUNDRED PERCENT DEPOSITS, THE BANK CHARGES A GUARANTEE FEES. IN A S ITUATION IN WHICH THERE IS NO UNDERLYING ASSETS WHICH CAN BE REALIZED BY THE BANK OR THERE ARE NO DEPOSITS WITH THE BANK WHICH CAN BE APPROPRIATED FOR PAYMENT OF G UARANTEE OBLIGATIONS, THE BANKS WILL RARELY, IF AT ALL, ISSUE THE GUARANTEES. IX. OF COURSE, WHEN A CLIENT IS SO WELL PLACED IN HIS C REDIT RATING THAT BANKS CAN ISSUE HIM CLEAN AND UNSECURED GUARANTEES, HE GETS NO FURT HER ECONOMIC VALUE BY A CORPORATE GUARANTEE EITHER. ONE CAN NOW COMPARE THI S KIND OF A GUARANTEE WITH A CORPORATE GUARANTEE. THE GUARANTEES ARE ISSUED WITH OUT ANY SECURITY OR UNDERLYING ASSETS. WHEN THESE GUARANTEES ARE INVOKE D, THERE IS NO OCCASION FOR THE GUARANTOR TO SEEK RECOURSE TO ANY ASSETS OF THE GUA RANTEED ENTITY FOR RECOVERING PAYMENT OF DEFAULT GUARANTEES. THE GUARANTEES ARE N OT BASED ON THE CREDIT ASSESSMENT OF THE ENTITY, IN RESPECT OF WHICH THE G UARANTEES ARE ISSUED, BUT ARE BASED ON THE BUSINESS NEEDS OF THE ENTITY IN QUESTI ON. EVEN IN A SITUATION IN WHICH THE GROUP ENTITY IS SURE THAT THE BENEFICIARY OF GU ARANTEE HAS NO FINANCIAL MEANS TO REIMBURSE IT FOR THE DEFAULTED GUARANTEE AMOUNTS, W HEN INVOKED, THE GROUP ENTITY WILL ISSUE THE GUARANTEE NEVERTHELESS BECAUSE THESE ARE COMPULSIONS OF HIS GROUP SYNERGY RATHER THAN THE ASSURANCE THAT HIS FUTURE O BLIGATIONS WILL BE MET. ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 14 OF 35 X. THERE IS NO MEETING GROUND IN THESE TWO TYPES OF GU ARANTEES, SO FAR THEIR ECONOMIC TRIGGERS AND BUSINESS CONSIDERATIONS ARE C ONCERNED, AND JUST BECAUSE THESE INSTRUMENTS SHARE A COMMON SURNAME, I.E., 'GU ARANTEE', THESE INSTRUMENTS CANNOT BE SAID TO BE BELONG TO THE SAME ECONOMIC GE NUS. OF COURSE, THERE CAN BE SITUATIONS IN WHICH THERE MAY BE ECONOMIC SIMILARIT IES, IN THIS RESPECT, MAY BE PRESENT, BUT THESE ARE MORE OF AN EXCEPTION THAN TH E RULE. IN GENERAL, THEREFORE, BANK GUARANTEES ARE NOT COMPARABLE WITH CORPORATE G UARANTEES. [PARA 40] XI. THERE HAS TO BE SOMETHING ON RECORD TO INDICATE OR SUGGEST THAT THE FUNDS RAISED BY THE SUBSIDIARY, WITH THE HELP OF THE GUARANTEE G IVEN BY THE ASSESSEE, ARE NOT FOR ITS OWN BUSINESS PURPOSES. AS A PLAIN LOOK AT THE D ETAILS OF CORPORATE GUARANTEES WOULD SHOW, THESE GUARANTEES WERE ISSUED TO VARIOUS BANKS IN RESPECT OF THE CREDIT FACILITIES AVAILED BY THE SUBSIDIARIES FROM THESE B ANKS. THE GUARANTEES WERE PRIMA FACIE IN THE NATURE OF THE SHAREHOLDER ACTIVITY AS IT WAS TO PROVIDE, OR COMPENSATE FOR LACK OF, CORE STRENGTH FOR RAISING THE FINANCES FROM BANKS. NO MATERIAL, INDICATING TO THE CONTRARY, IS BROUGHT ON RECORD IN THIS CASE. XII. GOING BY THE OECD GUIDANCE ALSO, IT IS NOT REALLY P OSSIBLE TO HOLD THAT THE CORPORATE GUARANTEES ISSUED BY THE ASSESSEE WERE IN THE NATURE OF 'PROVISION FOR SERVICES' AND NOT A SHAREHOLDER ACTIVITY WHICH ARE MUTUALLY EXCLUSIVE IN NATURE. IN THE LIGHT OF THESE DISCUSSIONS, IT IS OPINED AND SA ID VIEW IS FULLY SUPPORTED BY THE OECD GUIDANCE IN THIS, THAT THE ISSUANCE OF CORPORA TE GUARANTEES, IN THE NATURE OF QUASI CAPITAL OR SHAREHOLDER ACTIVITY - AS IS TH E UNCONTROVERTED POSITION ON THE FACTS OF THIS CASE, DOES NOT AMOUNT TO A SERVICE IN WHICH RESPECT OF WHICH ARM'S LENGTH ADJUSTMENT CAN BE DONE. [PARA 41] XIII. IT IS THUS CLEAR THAT EVEN IF ONE ACCEPTS THE CONTE NTION OF THE REVENUE THAT ISSUANCE OF A CORPORATE GUARANTEE AMOUNTS TO A 'PROVISION FO R SERVICE', SUCH A SERVICE NEEDS TO BE RE-CHARACTERIZED TO BRING IT IN TUNE WITH COM MERCIAL REALITY AS 'ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEI R TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERP RISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER'. NO BANK WOULD BE WIL LING TO ISSUE A CLEAN GUARANTEE, I.E., WITHOUT UNDERLYING ASSET, TO ASSES SEE'S SUBSIDIARIES WHEN THE BANKS ARE NOT WILLING TO EXTEND THOSE SUBSIDIARIES LOANS ON THE SAME TERMS AS ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 15 OF 35 WITHOUT A GUARANTEE. SUCH A GUARANTEE TRANSACTION C AN ONLY BE, AND IS, MOTIVATED BY THE SHAREHOLDER, OR OWNERWISE CONSIDERATIONS. XIV. NO DOUBT, UNDER THE OECD GUIDANCE ON THE ISSUE, AN EXPLICIT SUPPORT, SUCH AS CORPORATE GUARANTEE, IS TO BE BENCHMARKED AND, FOR THAT PURPOSE, IT IS IN THE SERVICE CATEGORY BUT THAT OCCASION COMES ONLY WHEN IT IS COVERED BY THE SCOPE OF 'INTERNATIONAL TRANSACTION' UNDER THE TRANSFER PRIC ING LEGISLATION OF RESPECTIVE JURISDICTION. THE EXPRESSION 'PROVISION FOR SERVICE S' IN ITS NORMAL OR LEGAL CONNOTATIONS, AS SEEN EARLIER, DOES NOT COVER ISSUA NCE OF CORPORATE GUARANTEES, EVEN THOUGH ONCE A CORPORATE GUARANTEE IS COVERED B Y THE DEFINITION OF INTERNATIONAL TRANSACTION', IT IS BENCHMARKED IN TH E SERVICE SEGMENT. IN VIEW OF THE ABOVE, OECD GUIDELINES, AS A MATTER OF FACT, STRENG THEN THE CLAIM OF THE ASSESSEE THAT THE CORPORATE GUARANTEES ISSUED BY THE ASSESSE E WERE IN THE NATURE OF QUASI CAPITAL OR SHAREHOLDER ACTIVITY AND, FOR THIS REASO N ALONE, THE ISSUANCE OF THESE GUARANTEES SHOULD BE EXCLUDED FROM THE SCOPE OF SER VICES AND THUS FROM THE SCOPE OF 'INTERNATIONAL TRANSACTIONS' UNDER SECTION 92B. XV. OF COURSE, ONCE A TRANSACTION IS HELD TO BE COVERED BY THE DEFINITION OF INTERNATIONAL TRANSACTION, WHETHER IN THE NATURE OF THE SHAREHOLDER ACTIVITY OR QUASI CAPITAL OR NOT, ALP DETERMINATION MUST DEPEND ON WHAT AN INDEPENDENT ENTERPRISE WOULD HAVE CHARGED FOR SUCH A TRANSACTIO N. IN THIS LIGHT OF THESE DISCUSSIONS, IT IS HELD THAT THE ISSUANCE OF CORPOR ATE GUARANTEES IN QUESTION WAS NOT IN THE NATURE OF 'PROVISION FOR SERVICES' AND T HESE CORPORATE GUARANTEES WERE REQUIRED TO BE TREATED AS SHAREHOLDER PARTICIPATION IN THE SUBSIDIARIES. [PARA 43] XVI. AS FOR THE WORDS 'PROVISION FOR SERVICES' APPEARING IN SECTION 92B, AND CONNOTATIONS THEREOF, THIS EXPRESSION, IN ITS NATUR AL CONNOTATIONS, IS RESTRICTED TO SERVICES RENDERED AND IT DOES NOT EXTEND TO THE BEN EFITS OF ACTIVITIES PER SE. WHETHER ONE LOOKS AT THE EXAMPLES GIVEN IN THE OECD MATERIAL OR EVEN IN EXPLANATION TO SECTION 92B, THE THRUST IS ON THE SE RVICES LIKE MARKET RESEARCH, MARKET DEVELOPMENT, MARKETING MANAGEMENT, ADMINISTR ATION, TECHNICAL SERVICE, REPAIRS, DESIGN, CONSULTATION, AGENCY, AND SCIENTIF IC RESEARCH, LEGAL OR ACCOUNTING SERVICE OR COORDINATION SERVICES. AS A MATTER OF FA CT, EVEN IN THE EXPLANATION TO SECTION 92B GUARANTEES HAVE BEEN GROUPED IN ITEM 'C ' DEALING WITH CAPITAL ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 16 OF 35 FINANCING, RATHER THAN IN ITEM 'D' WHICH SPECIFICAL LY DEALS WITH 'PROVISION FOR SERVICES'. WHEN THE LEGISLATURE ITSELF DOES NOT GRO UP 'GUARANTEES' IN THE 'PROVISION FOR SERVICES' AND INCLUDES IT IN THE 'CAPITAL FINAN CING', IT IS REASONABLE TO PROCEED ON THE BASIS THAT ISSUANCE OF GUARANTEES IS NOT TO BE TREATED AS WITHIN THE SCOPE OF NORMAL CONNOTATIONS OF EXPRESSION 'PROVISION FOR SE RVICES'. XVII. UNDER SECTION 92B, CORPORATE GUARANTEES CAN BE COVE RED ONLY UNDER THE RESIDUARY HEAD I.E. 'ANY OTHER TRANSACTION HAVING A BEARING O N THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISE'. IT IS FOR THIS REASON T HAT SECTION 92B, IN A WAY, EXPANDS THE SCOPE OF INTERNATIONAL TRANSACTION IN THE SENSE THAT EVEN WHEN GUARANTEES ARE ISSUED AS A SHAREHOLDER ACTIVITY BUT COSTS ARE INCU RRED FOR THE SAME OR, AS A MEASURE OF ABUNDANT CAUTION, RECOVERIES ARE MADE FO R THIS NON-CHARGEABLE ACTIVITY, THESE GUARANTEES WILL FALL IN THE RESIDUA RY CLAUSE OF DEFINITION OF INTERNATIONAL TRANSACTIONS UNDER SECTION 92B. AS FO R THE REVENUES ARGUMENT THAT 'WHETHER THE SERVICE HAS CAUSED ANY EXTRA COST TO T HE ASSESSEE SHOULD NOT BE THE DECIDING FACTOR TO DETERMINE WHETHER IT IS AN INTER NATIONAL AND THEN GIVES AN EXAMPLE OF BRAND ROYALTY TO MAKE HIS POINT. WHAT, I N THE PROCESS, HE OVERLOOKS IS THAT IS THAT SECTION 92B(1) SPECIFICALLY COVERS SAL E OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY'. THE EXPRESSION 'BEARING ON TH E PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES' IS RELEVANT ONLY FOR RE SIDUARY CLAUSE I.E. ANY OTHER SERVICES NOT SPECIFICALLY COVERED BY SECTION 92B. XVIII. THERE IS NO DISPUTE THAT EXPLANATION TO SECTION 92B STATES THAT IT IS MERELY CLARIFICATORY IN NATURE INASMUCH AS IT IS 'FOR THE REMOVAL OF DOUBTS', AND, THEREFORE, ONE HAS TO PROCEED ON THE BASIS THAT IT DOES NOT AL TER THE BASIC CHARACTER OF DEFINITION OF 'INTERNATIONAL TRANSACTION' UNDER SEC TION 92B. ACCORDINGLY, THIS EXPLANATION IS TO BE READ IN CONJUNCTION WITH THE M AIN PROVISIONS, AND IN HARMONY WITH THE SCHEME OF THE PROVISIONS, UNDER SECTION 92 B. UNDER THIS EXPLANATION, FIVE CATEGORIES OF TRANSACTIONS HAVE BEEN CLARIFIED TO H AVE BEEN INCLUDED IN THE DEFINITION OF 'INTERNATIONAL TRANSACTIONS'. THE FIR ST TWO CATEGORIES OF TRANSACTIONS, WHICH ARE STATED TO BE INCLUDED IN THE SCOPE OF EXP RESSION 'INTERNATIONAL TRANSACTIONS' BY THE VIRTUE OF CLAUSE (A) AND (B) O F EXPLANATION TO SECTION 92B, ARE TRANSACTIONS WITH REGARD TO PURCHASE, SALE, TRANSFE R, LEASE OR USE OF TANGIBLE AND ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 17 OF 35 INTANGIBLE PROPERTIES. THESE TRANSACTIONS WERE ANYW AY COVERED BY TRANSACTIONS 'IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE O R INTANGIBLE PROPERTY'. XIX. THE ONLY ADDITIONAL EXPRESSION IN THE CLARIFICATION IS 'USE' AS ALSO ILLUSTRATIVE AND INCLUSIVE DESCRIPTIONS OF TANGIBLE AND INTANGIBLE A SSETS. SIMILARLY, CLAUSE (D) DEALS WITH THE ' PROVISION OF SERVICES, INCLUDING PROVISI ON OF MARKET RESEARCH, MARKET DEVELOPMENT, MARKETING MANAGEMENT, ADMINISTRATION, TECHNICAL SERVICE, REPAIRS, DESIGN, CONSULTATION, AGENCY, SCIENTIFIC RESEARCH, LEGAL OR ACCOUNTING SERVICE' WHICH ARE ANYWAY COVERED IN 'PROVISION FOR SERVICES ' AND 'MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN TWO OR MORE ASSOCIATED ENTERPRI SES FOR THE ALLOCATION OR APPORTIONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED OR TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR F ACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERPRISES '. XX. THAT LEAVES THE TRIBUNAL WITH TWO CLAUSES IN THE EX PLANATION TO SECTION 92B WHICH ARE NOT COVERED BY ANY OF THE THREE CATEGORIES DISC USSED ABOVE OR BY OTHER SPECIFIC SEGMENTS COVERED BY SECTION 92B, NAMELY BORROWING O R LENDING MONEY. THE REMAINING TWO ITEMS IN THE EXPLANATION TO SECTION 9 2B ARE SET OUT IN CLAUSE (C) AND (E) THERETO, DEALING WITH (A) CAPITAL FINANCING AND (B) BUSINESS RESTRUCTURING OR REORGANIZATION. THESE ITEMS CAN ONLY BE COVERED IN THE RESIDUAL CLAUSE OF DEFINITION IN INTERNATIONAL TRANSACTIONS, AS IN SEC TION 92B(1), WHICH COVERS 'ANY OTHER TRANSACTION HAVING A BEARING ON PROFITS, INCO MES, LOSSES, OR ASSETS OF SUCH ENTERPRISES'. IT IS, THEREFORE, ESSENTIAL THAT IN O RDER TO BE COVERED BY CLAUSE (C) AND (E) OF EXPLANATION TO SECTION 92B, THE TRANSACTIONS SHOULD BE SUCH AS TO HAVE BEATING ON PROFITS, INCOMES, LOSSES OR ASSETS OF SU CH ENTERPRISE. XXI. IN OTHER WORDS, IN A SITUATION IN WHICH A TRANSACTI ON HAS NO BEARING ON PROFITS, INCOMES, LOSSES OR ASSETS OF SUCH ENTERPRISE, THE T RANSACTION WILL BE OUTSIDE THE AMBIT OF EXPRESSION 'INTERNATIONAL TRANSACTION'. TH IS ASPECT OF THE MATTER IS FURTHER HIGHLIGHTED IN CLAUSE (E) OF THE EXPLANATION DEALIN G WITH RESTRUCTURING AND REORGANIZATION, WHEREIN IT IS ACKNOWLEDGED THAT SUC H AN IMPACT COULD BE IMMEDIATE OR IN FUTURE AS EVIDENT FROM THE WORDS 'I RRESPECTIVE OF THE FACT THAT IT (I.E. RESTRUCTURING OR REORGANIZATION) HAS BEARING ON THE PROFIT, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISE AT THE TIME OF TRANSACTIO N OR ON A FUTURE DATE'. WHAT IS ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 18 OF 35 IMPLICIT IN THIS STATUTORY PROVISION IS THAT WHILE IMPACT ON ' PROFIT, INCOME, LOSSES OR ASSETS' IS SINE QUA NON, THE MERE FACT THAT IMPA CT IS NOT IMMEDIATE, BUT ON A FUTURE DATE, WOULD NOT TAKE THE TRANSACTION OUTSIDE THE AMBIT OF 'INTERNATIONAL TRANSACTION'. IT IS ALSO IMPORTANT TO BEAR IN MIND THAT, AS IT APPEARS ON A PLAIN READING OF THE PROVISION, THIS EXCLUSION CLAUSE IS NOT FOR 'CONTINGENT' IMPACT ON PROFIT, INCOME, LOSSES OR ASSETS BUT ON 'FUTURE' IM PACT ON PROFIT, INCOME, LOSSES OR ASSETS OF THE ENTERPRISE. XXII. THE IMPORTANT DISTINCTION BETWEEN THESE TWO CATEGOR IES IS THAT WHILE LATTER IS A CERTAINTY, AND ONLY ITS CRYSTALLIZATION MAY TAKE PL ACE ON A FUTURE DATE, THERE IS NO SUCH CERTAINTY IN THE FORMER CASE. IN THE INSTANT C ASE IT IS AN UNDISPUTED POSITION THAT CORPORATE GUARANTEES ISSUED BY THE ASSESSEE TO THE VARIOUS BANKS AND CRYSTALLIZATION OF LIABILITY UNDER THESE GUARANTEES , THOUGH A POSSIBILITY, IS NOT A CERTAINTY. IN VIEW OF THE DISCUSSIONS ABOVE, THE SC OPE OF THE CAPITAL FINANCING TRANSACTIONS, AS COULD BE COVERED UNDER EXPLANATION TO SECTION 92B READ WITH SECTION 92B(1), IS RESTRICTED TO SUCH CAPITAL FINAN CING TRANSACTIONS, INCLUDING INTER ALIA ANY GUARANTEE, DEFERRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT DURING THE COURSE OF BUSINESS, AS WILL HAVE 'A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OR SUCH ENTERPRISE'. XXIII. THIS PRE-CONDITION ABOUT IMPACT ON PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES IS A PRE-CONDITION EMBEDDED IN SECTION 92B(1) AND THE ONLY RELAXATION FROM THIS CONDITION PRECEDENT IS SET OUT IN CLAUSE (E) OF THE EXPLANATION WHICH PROVIDES THAT THE BEARING ON PROFITS, INCOME, LOSSE S OR ASSETS COULD BE IMMEDIATE OR ON A FUTURE DATE. THESE GUARANTEES DO NOT HAVE A NY IMPACT ON INCOME, PROFITS, LOSSES OR ASSETS OF THE ASSESSEE. THERE CAN BE A HY POTHETICAL SITUATION IN WHICH A GUARANTEE DEFAULT TAKES PLACE AND, THEREFORE, THE E NTERPRISE MAY HAVE TO PAY THE GUARANTEE AMOUNTS BUT SUCH A SITUATION, EVEN IF THA T BE SO, IS ONLY A HYPOTHETICAL SITUATION, WHICH ARE, AS DISCUSSED ABOVE, EXCLUDED. WHEN AN ASSESSEE EXTENDS AN ASSISTANCE TO THE ASSOCIATED ENTERPRISE, WHICH DOES NOT COST ANYTHING TO THE ASSESSEE AND PARTICULARLY FOR WHICH THE ASSESSEE CO ULD NOT HAVE REALIZED MONEY BY GIVING IT TO SOMEONE ELSE DURING THE COURSE OF ITS NORMAL BUSINESS, SUCH AN ASSISTANCE OR ACCOMMODATION DOES NOT HAVE ANY BEARI NG ON ITS PROFITS, INCOME, ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 19 OF 35 LOSSES OR ASSETS, AND, THEREFORE, IT IS OUTSIDE THE AMBIT OF INTERNATIONAL TRANSACTION UNDER SECTION 92B(1). [PARA 44] XXIV. IN THE PRESENT CASE, AS ALREADY HELD THAT THE ISSUA NCE OF CORPORATE GUARANTEES WERE IN THE NATURE OF SHAREHOLDER ACTIVITIES- AS WA S THE UNCONTROVERTED CLAIM OF THE ASSESSEE, AND, AS SUCH, COULD NOT BE INCLUDED I N THE 'PROVISION FOR SERVICES' UNDER THE DEFINITION OF 'INTERNATIONAL TRANSACTION' UNDER SECTION 92B. TAKING NOTE OF THE INSERTION OF EXPLANATION TO SECTION 92B, THA T THE ISSUANCE OF CORPORATE GUARANTEES IS COVERED BY THE RESIDUARY CLAUSE OF TH E DEFINITION UNDER SECTION 92B OF THE ACT BUT SINCE SUCH ISSUANCE OF CORPORATE GUA RANTEES, ON THE FACTS OF THE PRESENT CASE, DID NOT HAVE 'BEARING ON PROFITS, INC OME, LOSSES OR ASSETS', IT DID NOT CONSTITUTE AN INTERNATIONAL TRANSACTION, UNDER SECT ION 92B, IN RESPECT OF WHICH AN ARM'S LENGTH PRICE ADJUSTMENT COULD BE MADE. IN THI S VIEW OF THE MATTER, AND FOR BOTH THESE INDEPENDENT REASONS, THE IMPUGNED ALP AD JUSTMENT IS SET ASIDE. [PARA 48] 16. WE ARE IN CONSIDERED AGREEMENT WITH THE VIEWS S O EXPRESSED BY THE COORDINATE BENCH. IN ANY CASE, IT CANNOT BE OPEN TO US TO DEVIATE FRO M THE DECISION OF THE COORDINATE BENCH IN ASSESSEES OWN CASE OR TO RECOMMEND CONSTITUTION OF A SPECIAL BENCH IN THE LIGHT OF CONFLICTING DECISIONS WHEN THE MATTER IS PENDING FO R ADJUDICATION BY HONBLE JURISDICTIONAL HIGH COURT. IN THE CIRCUMSTANCES, WE SEE NO REASON S TO TAKE ANY REVIEW OF THE MATTER THEN THE VIEW SO TAKEN BY THE COORDINATE BENCHES. AS FOR THE VERY ERUDITE AND ENLIGHTENING ARGUMENTS BY THE LEARNED DEPARTMENTAL REPRESENTATIVE ON MERIT S OF THE QUESTION BEFORE US, ALL WE CAN SAY THAT AT THIS STAGE IT IS NOT OPEN TO US TO REVI SIT THE CONCLUSIONS ARRIVED AT BY THE COORDINATE BENCH IN ASSESSEES OWN CASE AS ALSO THE CONCLUSION S ARTICULATED BY ONE OF US IN THE CASE OF MICRO INK (SUPRA), BUT THEN THIS ISSUE IS AN OPEN I SSUE BEFORE THE HONBLE JURISDICTIONAL HIGH COURT AND, AS AND WHEN THEIR LORDSHIPS HAVE TO TAKE A CALL ON THE ISSUE, THESE ARGUMENTS MAY BE PLACED BEFORE THEIR LORDSHIPS FOR THEIR CONSIDER ATION. OF COURSE, WHATEVER WE SAY IS AND SHALL ALWAYS REMAIN SUBJECT TO WHAT HONBLE COURTS ABOVE DECIDE ON THE ISSUE. RESPECTFULLY FOLLOWING THE VIEWS OF THE COORDINATE BENCHES ON TH E ISSUE, IN THE CASE OF MICRO INK (SUPRA) AND IN ASSESSEES OWN CASE, WE UPHOLD THE RELIEF GR ANTED BY THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 17. GROUND NO. 2 IS THUS DISMISSED. ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 20 OF 35 18. IN GROUND NO. 3, THE GRIEVANCE RAISED BY THE AS SESSING OFFICER IS AS FOLLOWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDIT ION OF RS 1,44,29,469 ON ACCOUNT OF ADDITION UNDER SECTION 145A OF THE ACT. 19. SO FAR AS THIS GROUND OF APPEAL IS CONCERNED, T HE ISSUING APPEAL LIES IN THE NARROW COMPASS OF MATERIAL FACTS. DURING THE COURSE OF ASS ESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS NOT ADDED THE PROPOR TIONATE AMOUNT OF CENVAT CREDIT (I.E. 1,44, 29, 469) AS REQUIRED UNDER SECTION 145A, T O THE CLOSING STOCK OF RS 3, 52, 64, 950 AS ON 31 MARCH 2010. WHEN THE ASSESSEE WAS ASKED AS TO WHY THE VALUE OF CLOSING STOCK SHOULD NOT BE WORKED OUT ON INCLUSIVE METHOD AS PER THE RE QUIREMENTS OF SECTION 145 A, IT WAS CLARIFIED BY THE ASSESSEE THAT THE METHOD BEING FOL LOWED WAS EXCLUSIVE METHOD OF ACCOUNTING. IT WAS IN THIS BACKDROP THAT THE ASSESSING OFFICER MADE AN ADDITION OF RS 1,44, 29, 469. AGGRIEVED, ASSESSEE CARRIED THE MATTER APPEAL BEFOR E THE CIT(A). LEONARD CIT(A), RELYING UPON CONSISTENT STAND BEING TAKEN BY THE COORDINATE BENCHES OF THE TRIBUNAL AND HAVING GIVEN THE FINDING THAT THE TREATMENT GIVEN BY THE ASSESSE E IS COMPLETELY TAX NEUTRAL, DELETED THE SAID ADDITION. THE ASSESSING OFFICER IS AGGRIEVED OF THE RELIEF SO GRANTED BY THE CIT(A) AND IS IN APPEAL BEFORE US. 20. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING P ERUSED THE MATERIAL ON RECORD, WE SEE NO NEED TO INTERFERE WITH THE FINDINGS OF THE CIT(A ) ON THIS GROUND EITHER. THE LAW IS BY NOW WELL SETTLED. THERE IS NO IMPACT ON PROFITABILITY W HETHER THE ASSESSEE FOLLOWS THE EXCLUSIVE METHOD OR INCLUSIVE METHOD, AND THERE CANNOT BE AN ADDITION, THUS, ON THAT SCORE. THAT IS WHAT THE COORDINATE BENCHES OF THIS TRIBUNAL, INCLUDING IN THE CASES OF ITO VS MAMTA BRAMPTON ENGINEERING PVT LTD (ITA NO. 2387/AHD/2013) AND DCI T VS AIA ENGINEERING LTD (ITA NO. 1122/AHD/2015), HAVE CONSISTENTLY RELYING UPON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS INDO NIPPON CHEMICALS LTD (261 ITR 275) AND OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF ACIT VS NARMADA CHEMATUR PETROCHEMICALS (327 ITR 369). LEARNED DEPARTMENTAL REPRESENTATIVE DOES NOT DISPUT E THIS POSITION AND MERELY RELIES UPON THE STAND OF THE ASSESSING OFFICER. IN VIEW OF THES E DISCUSSIONS, AND BEARING IN MIND ENTIRETY OF THE CASE, WE APPROVE THE CONCLUSIONS ARRIVED AT BY THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER ON THIS COUNT AS WELL. ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 21 OF 35 21. GROUND NO. 3 IS THUS DISMISSED. 22. IN GROUND NO. 4, THE ASSESSING OFFICER HAS RAIS ED THE FOLLOWING GRIEVANCE: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDIT ION OF RS 62,02,470 ON ACCOUNT OF DISALLOWANCE UNDER SECTION 10B OF THE ACT. 23. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THIS ISSUE IS ALSO COVERED, IN FAVOUR OF THE ASSESSEE AND IN ASSESSEES OWN CASES FOR THE ASSESS MENT YEARS 2006-07, 2007-08, 2008-09 AND 2009-10. A COPY OF THE ORDER DATED 20 TH JUNE 2018 WAS ALSO PLACED ON RECORD. IN VIEW OF TH IS UNDISPUTED POSITION, AND RESPECTFULLY FOLLOWING COO RDINATE BENCH DECISIONS IN ASSESSEES OWN CASE, WE CONFIRM THE RELIEF GRANTED BY THE CIT(A) A ND DECLINE TO INTERFERE IN THE MATTER. 24. GROUND NO. 4 IS ALSO DISMISSED. 25. GROUND NO. 5 AND 6 ARE GENERAL IN NATURE AND DO NOT CALL FOR ANY SPECIFIC ADJUDICATION BY US. THESE GROUNDS ARE THUS SUMMARILY DISMISSED A S NOT PRESSED. 26. THE APPEAL OF THE ASSESSING OFFICER IS THUS DIS MISSED. 27. WE NOW TURN TO THE APPEAL FILED BY THE ASSESSEE . 28. IN THE FIRST THREE GROUND OF APPEAL, WHICH WE W ILL TAKE UP TOGETHER, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCES: 1. THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FA CTS OF THE CASE IN CONFIRMING THE TRANSFER PRICING ADJUSTMENT OF RS.18,46,660/- I N RESPECT OF INTEREST ON LOAN TO ASSOCIATED ENTERPRISES MADE CONSEQUENT TO ADOPTING INTEREST RATES AT US LIBOR + 3.83%, EURO LIBOR + 3.35% AND 7.2% ON SUCH LOANS. 2. BOTH THE LOWER AUTHORITIES FAILED TO APPRECIA TE THAT APPELLANT HAS PROVIDED LOAN TO ITS ASSOCIATED ENTERPRISES AND THEREFORE, L ENDING RATES SHOULD BE APPLIED AND NOT BORROWING RATES. 3. IN ANY CASE, TRANSACTIONS IN RESPECT OF LENDI NG FUNDS TO ASSOCIATED ENTERPRISE ARE NOT INTERNATIONAL TRANSACTIONS AND HENCE, THE S AME ARE NOT REQUIRED TO BE ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 22 OF 35 BENCHMARKED. ACCORDINGLY, ADDITION MADE ON THAT COU NT IS ILLEGAL AND WITHOUT JURISDICTION. 29. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THIS ISSUE IS ALSO NOW COVERED, IN FAVOUR OF THE ASSESSEE AND IN ASSESSEES OWN CASE, BY ORDER D ATED 20 TH JUNE 2018 WHEREIN THE COORDINATE BENCH HAS, INTER ALIA, OBSERVED AS FOLLOWS: 10. NEXT COMMON ITEM IN ALL THESE THREE YEARS IS AD JUSTMENT RECOMMENDED IN ALP OF INTEREST RATE REQUIRED TO BE CHARGED BY THE ASSE SSEE FROM ITS AE ON THE LOANS GIVEN BY IT. 11. BRIEF FACTS OF THE CASE ARE THAT IN THE ASSESSM ENT YEAR 2007-08, HE ASSESSEE HAS EXTENDED FOREIGN CURRENCY LOAN AMOUNTING TO RS.24,5 0,70,500/-TO DISHMAN EUROPE LTD., AND RS.5,36,70,000/- TO DISHMAN PHARMA SOLUTI ON AG. THE ASSESSEE HAS CHARGED TOTAL INTEREST OF RS.40,93,995/- AT THE RAT E OF LIBOR PLUS 1%. THE LD.TPO HAS OBSERVED THAT ONE OF THE AES. BORROWED FUNDS FROM E UROPEAN BANK AT THE RATE OF EURIBOR PLUS 3.75%. THE LD.TPO CONFRONTED THE ASSES SEE AS TO WHY THIS RATE BE NOT TAKEN FOR BENCHMARKING RATE OF INTEREST REQUIRED TO BE CHARGED BY THE ASSESSEE. IN RESPONSE TO THE QUERY OF THE AO, IT WAS CONTENDED B Y THE ASSESSEE THAT LOAN HAD BEEN GRANTED TO THE AE IN ORDER TO CREATE INFRASTRUCTURE FACILITIES FOR THE SMOOTH OPERATION OF THE AE AND THIS IS NEEDED TO SUSTAIN, SURVIVE AN D GROW IN MOST COMPETITIVE MARKET. THE ASSESSEE FURTHER SUBMITTED THAT BASIS OF CHARGI NG OF INTEREST WAS COST OF FUNDS TO THE ASSESSEE, AS IT HAD RAISED THE FUNDS BY ISSUING FCCB AT NOMINAL COST 0.5% TO 1%. IT HAS ALSO STATED THAT IN ANY CASE THE ASSESSEE HA S CHARGED INTEREST AT THE RATE OF LIBOR PLUS 1%, WHICH IS ACCORDING TO THE MARKET CON DITIONS. THE LD.TPO REJECTED THE CONTENTIONS OF THE ASSESSEE AND OBSERVED THAT IT WA S NOT GRANTED FOR CREATING INFRASTRUCTURE FACILITIES. ACCORDING TO THE LD.TPO ONE OF THE AES. HAD BORROWED MONEY FROM EUROPEAN MARKET AT THE RATE OF EURIBOR P LUS 3.75% WHICH COULD BE APPLIED ON THE LOANS GRANTED TO ITS AE. ACCORDINGLY THE LD.TPO HAS MADE ADJUSTMENT OF RS.87,19,932/- IN THE ASSESSMENT YEAR 2007-08. O N SAME PRINCIPLE, ADJUSTMENTS HAVE BEEN RECOMMENDED IN THE SUBSEQUENT TWO YEARS. THE LD.CIT(A) HAS APPRECIATED THE CONTROVERSY BUT CONCURRED BY THE LD.TPO. FURTHE R, THE LD.CIT(A) HAS ACCEPTED ALTERNATIVE CONTENTIONS OF THE ASSESSEE. A CREDIT O F RS.40,93,995/- CHARGED BY THE ASSESSEE AS INTEREST IN THE ASSESSMENT YEAR 2007-08 HAS BEEN GIVEN AGAINST THE ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 23 OF 35 ADJUSTMENT RECOMMENDED BY THE LD.TPO. ON SIMILAR LI NES, INTEREST WHICH HAS BEEN CHARGED BY THE ASSESSEE FROM ITS AE HAS BEEN ALLOWE D AS SET OFF AGAINST ULTIMATE INTEREST COMPUTED BY THE TPO BY ADOPTING THE RATE O F EURIBOR PLUS 3.75%. 12. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE RECORD CAREFULLY. IT IS PERTINENT TO OBSERVE THAT THE ASSESSEE WAS HAVING C ASH CREDIT ACCOUNT IN DOLLAR DENOMINATION WITH ICICI BANK, SINGAPORE BRANCH AND BOI. IT HAS GIVEN A LOAN IN DOLLAR DENOMINATION FROM THESE ACCOUNTS TO ITS AE, DISHMAN EUROPE LTD. SIMILARLY, IT WAS HAVING CASH CREDIT ACCOUNT WITH CORPORATION BAN K AND GIVEN LOAN FROM THESE ACCOUNTS TO DISHMAN PHARMA SOLUTION. THE ASSESSEE H AS GIVEN LOANS IN DOLLAR. THESE LOANS HAVE BEEN GIVEN FROM SINGAPORE BRANCH. THE QU ESTION BEFORE US IS WHETHER THE INTEREST RATE CHARGED BY THE ASSESSEE AT LIBOR PLUS 1% IS AT MARKET RATE OR IT HAS GIVEN SOME UNDUE BENEFIT TO ITS AES AND THUS, ITS R ATE COULD NOT BE CONSIDERED AS ARMS LENGTH PRICE. THE LD.TPO HAS NOT MADE MUCH DI SCUSSION ON THIS ASPECT. HE HARBOURED A BELIEF THAT SINCE ONE OF THE AES. BORRO WED FUNDS FROM EUROPEAN BANK AND PAID HIGHER RATE OF INTEREST, THUS FUNDS GIVEN BY THE ASSESSEE SHOULD ALSO CARRY THAT VERY RATE OF INTEREST. IN OUR OPINION, THE LD. TPO FAILED TO APPRECIATE THE FACT THAT THE ASSESSEE IS THE TESTED PARTY AND NOT THE AE. TH E FACTUM OF BUSINESS REQUIREMENT IN A FOREIGN COUNTRY AT WHAT RATE OF INTEREST FUNDS AR E BEING BORROWED BY THE AE IS TOTALLY IRRELEVANT ASPECTS. THE QUESTION BEFORE THE TPO WAS AT WHAT RATE AN INDIAN CONCERN SHOULD PROVIDE LOANS IN DOLLAR DENOMINATION TO AN UNRELATED PARTY FROM INDIA. THE AE HAS OBTAINED LOANS FROM EUROPEAN MARK ET, WHICH IS ALTOGETHER A DIFFERENT CURRENCY AND THE REQUIREMENT OF AE COULD BE DIFFERENT FOR THAT. THERE MAY BE HIGHER RATE OF INTEREST PREVAILING FOR BORROWING FU NDS, BUT AT WHAT RATE THE LOAN COULD BE MADE FROM INDIA IN DOLLAR DENOMINATION ?. THE AS SESSEE HAS POINTED OUT THAT LIBOR IS THE PREVAILING RATE AND IT HAS CHARGED LIB OR PLUS 1%. NO DEFECT HAS BEEN POINTED OUT IN THIS RATE. ONLY THING IS THAT ONE OF THE AES HAS OBTAINED LOAN FROM EUROPEAN MARKET, THEREFORE, THE LD.TPO HAS APPLIED THAT RATE. TO OUR MIND THIS ACTION OF THE LD.TPO COULD BE JUSTIFIED IF HE HAS POINTED OUT THAT A TESTED PARTY IN INDIA HAS GRANTED LOAN TO ITS AE IN DOLLAR DENOMINATION AT A HIGHER RATE THAN THE LIBOR PLUS 1%. IT IS ALSO PERTINENT TO NOTE THE COST OF THE FU NDS TO THE ASSESSEE. THE ASSESSEE HAS CONTENDED THAT IT HAS RAISED FUNDS BY ISSUING OF FC CB AT NOMINAL COST 0.5% TO 1% AND IT HAS GIVEN THESE FUNDS TO ITS AE. THUS, THE A SSESSEE HAS DEMONSTRATED THAT THE ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 24 OF 35 RATE CHARGED BY IT WAS AT A MARKET RATE AND ITS TRA NSACTIONS WERE AT ARMS LENGTH. NO ADJUSTMENT CAN BE MADE IN THE RATE OF INTEREST CHAR GED BY THE ASSESSEE FROM ITS AE ON PROVIDING LOANS IN DOLLAR DENOMINATION. WE ALLOW TH E APPEAL 30. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER THAN THE VIEW SO TAKEN BY THE COORDINATE BENCH IN ASSESSEES OWN CASE- PARTICULAR LY AS NO DISTINGUISHING FACTS OF THE CASE HAVE BEEN POINTED OUT TO US. AS A MATTER OF FACT, L EARNED DEPARTMENTAL REPRESENTATIVE HAS SPECIFICALLY AGREED THAT THE ISSUE IS A COVERED ISS UE AND THAT THERE ARE NO DISTINGUISHING FACTORS. IN THIS VIEW OF THE MATTER, AND BEARING IN MIND ENTIRETY OF THE CASE, WE UPHOLD THE PLEA OF THE ASSESSEE AND DELETE THE IMPUGNED ADJUST MENT OF RS 18,46,660. 31. GROUND NOS. 1 TO 3 ARE THUS ALLOWED IN THE TERM S INDICATED ABOVE. 32. IN GROUND NO. 4, THE ASSESSEE HAS RAISED THE FO LLOWING GRIEVANCE: THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN CONFIRMING THE DISALLOWANCE OF RS.13,32,845/- MADE IN RESPECT OF P RIOR PERIOD EXPENDITURE WITHOUT APPRECIATING THAT SUCH PRIOR PERIOD EXPENDI TURE GOT CRYSTALLIZED DURING THE YEAR UNDER CONSIDERATION. 33. SO FAR AS THIS GRIEVANCE OF THE ASSESSEE IS CON CERNED, IT IS SUFFICIENT TO TAKE NOTE OF THE FACT THAT WHILE THE ASSESSEE HAD EARNED A PRIOR PER IOD INCOME OF RS 1,23,32,898 AND INCURRED A PRIOR PERIOD EXPENDITURE OF RS 13,32,845, THE ASS ESSEE HAD CREDITED A NET INCOME OF RS 1,10,00,053 TO ITS PROFIT AND LOSS ACCOUNT AND OFFE RED THE SAME TO TAX. WHILE THE ASSESSING OFFICER HAPPILY TAXED THE INCOME OF RS 1,23,32,898, HE DECLINED TO GIVE DEDUCTION OF RS 13,32,845 TO EARN THIS INCOME. IN APPEAL, LEARNED C IT(A) HAS CONFIRMED THIS DISALLOWANCE. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. 34. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THIS ISSUE IS ALSO COVERED, IN FAVOUR OF THE ASSESSEE AND IN ASSESSEES OWN CASE, BY ORDER DATED 20 TH JUNE 2018 WHEREIN THE COORDINATE BENCH HAS, INTER ALIA, OBSERVED AS FOLLOWS: 24. THE CASE OF THE REVENUE IS THAT THE INCOME PERT AINING TO ANY PERIOD HAS TO BE ACCOUNTED FOR EITHER ON RECEIPT BASIS OR ACCRUAL BA SIS. ONCE THE ASSESSEE HAS SHOWN INCOME, IT IS TO BE TAXED. BUT EXPENDITURE COULD BE ALLOWED IF THE ASSESSEE IS ABLE TO ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 25 OF 35 DEMONSTRATE THAT SUCH EXPENDITURE WAS INCURRED FOR EARNING OF SUCH INCOME. ACCORDING TO THE LD. REVENUE AUTHORITIES, THE ASSES SEE HAS FAILED TO DEMONSTRATE THAT THIS EXPENDITURE WAS INCURRED FOR EARNING SUCH PRIO R PERIOD INCOME. ACCORDINGLY, THE LD.AO DID NOT ALLOW SET OFF EXPENDITURE AGAINST PRI OR PERIOD INCOME. 25. WITH THE ASSISTANCE OF LD. REPRESENTATIVES, WE HAVE GONE THROUGH THE RECORD CAREFULLY. IT IS PERTINENT TO NOTE THAT ALONG WITH THIS APPEAL, WE HAVE HEARD APPEALS FOR THE ASSESSMENT YEAR 2005-06 AND 2006-07. IN THE ASS ESSMENT YEAR 2006-07, THE ASSESSEE HAS PRIOR PERIOD INCOME AT RS.46,50,648/- AND IT HAS DEBITED PRIOR PERIOD EXPENDITURE OF RS.43,11,114/-. THE NET DIFFERENTIAL AMOUNT OF RS.3,39,534/- HAS BEEN CREDITED TO PROFIT & LOSS ACCOUNT AND OFFERED FOR T AXATION. THE AO DID NOT ALLOW SET OFF PRIOR PERIOD EXPENDITURE AND TAXED THE GROSS INCOME . THE ISSUE CAME UP BEFORE THE TRIBUNAL. WE HAVE UPHELD TAXABILITY OF NET DIFFEREN TIAL AMOUNT. THE TRIBUNAL OBSERVED THAT ONCE THE ASSESSEE HAS BEEN OFFERING INCOME OF PRIOR PERIOD AS AN ENTITY, THEN ITS PRIOR PERIOD EXPENDITURE CANNOT BE DISALLOWED SIMPL Y BY OBSERVING THAT IT IS NOT ASCERTAINABLE WHETHER THIS EXPENDITURE WERE INCURRE D FOR EARNING A PARTICULAR RECEIPTS OFFERED UNDER THE HEAD PRIOR PERIOD INCOM E. ACCORDING TO THE TRIBUNAL, IF AN ASSESSEE IS OFFERING PRIOR PERIOD INCOME, THEN T HE EXPENDITURE WHICH WERE INCURRED UNDER DIFFERENT HEADS AND CRYSTALILISED IN THIS YEA R OUGHT TO BE SET OFF AGAINST HAT INCOME. CONSIDERING OUR FINDING IN THE ASSESSMENT Y EAR 2006-07, WE PARTLY ALLOW ALL THE GROUNDS AND DIRECT THE AO TO TAX ONLY NET DIFFE RENTIAL AMOUNT. IN OTHER WORDS, IN ANY PARTICULAR YEAR, IF THERE IS A NEGATIVE INCOME, THEN THAT AMOUNT IS TO BE DEBITED TO THE PROFIT & LOSS ACCOUNT. IN OTHER WORDS, SAY, IN THE ASSESSMENT YEAR 2007-08, THE ASSESSEE HAS INCOME OF RS.41,11,972/- AND EXPENDITU RE OF RS.47,34,697/-; THERE IS A NEGATIVE AMOUNT OF RS.7,22,725/-. THIS NET AMOUNT I S TO BE ALLOWED AS EXPENDITURE TO THE ASSESSEE. ON SAME PRINCIPLE, THE INCOME OF THE ASSESSEE BE COMPUTED IN REST OF TWO YEARS. THUS, THESE GROUNDS OF APPEAL ARE PARTLY ALL OWED. 35. THE PLEA OF THE ASSESSEE IS IN CONSONANCE WITH THE PRINCIPLE SO LAID DOWN BY THE COORDINATE BENCH. WE, THEREFORE, UPHOLD THE PLEA AN D DIRECT THE ASSESSING OFFICER ONLY TO TAX THE NET INCOME- I.E. PRECISELY WHAT THE ASSESSEE HA S PRAYED FOR. 36. GROUND NO. 4 IS THUS ALLOWED. ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 26 OF 35 37. IN GROUND NO. 5, THE GRIEVANCE RAISED BY THE AS SESSEE ARE AS FOLLOWS: THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN CONFIRMING DISALLOWANCE OF RS.2,01,717/- MADE IN RESPECT OF DE PRECIATION ON ELECTRIC INSTALLATION. 38. LEARNED COUNSEL DID NOT PRESS THIS GRIEVANCE ON ACCOUNT OF SMALLNESS OF AMOUNT. THE SAME IS THUS DISMISSED FOR WANT OF PROSECUTION. 39. GROUND NO. 5 IS THUS DISMISSED. 40. IN GROUND NO. 6 TO 9, WHICH WE WILL TAKE UP TO GETHER, GRIEVANCE OF THE ASSESSEE IS AS FOLLOWS: 6. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON F ACTS OF THE CASE IN CONFIRMING THE ACTION OF AO IN NOT EXCLUDING UNREALIZED EXPORT OUT OF TOTAL TURNOVER OF THE UNDERTAKING WHILE WORKING OUT ELIGIBLE PROFIT FOR D EDUCTION U/S 10B OF THE ACT. 7. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON F ACTS OF THE CASE IN CONFIRMING THE ACTION OF AO IN NOT GRANTING DEDUCTION U/S 10B OF THE ACT ON OTHER INCOME. 8. ALTERNATIVELY AND WITHOUT PREJUDICE, BOTH T HE LOWER AUTHORITIES FAILED TO APPRECIATE THAT ONLY PROFIT/INCOME ELEMENT EMBEDDED IN OTHER INCOME CAN BE REDUCED AND NOT GROSS AMOUNT OF INCOME WHILE DETERM INING ELIGIBLE PROFIT FOR THE PURPOSE OF SECTION 10B OF THE ACT. 9. BOTH THE LOWER AUTHORITIES OUGHT TO HAVE APPREC IATED THAT ON ACCOUNT OF DISALLOWANCES/ADDITIONS MADE TO THE BUSINESS INCOME OF THE APPELLANT, ELIGIBLE PROFIT FOR CLAIMING DEDUCTION U/S 10B OF THE ACT HA S ALSO INCREASED TO THAT EXTENT AND THEREFORE, BOTH THE LOWER AUTHORITIES HAVE ERRE D IN LAW AND ON FACTS OF THE CASE IN NOT ALLOWING FURTHER DEDUCTION U/S 10B OF T HE ACT ON ENHANCED ELIGIBLE PROFIT ON ACCOUNT OF DISALLOWANCE/ADDITIONS SO MADE . 41. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THE ISSUES SO ARISING IN CONNECTION WITH THE CLAIM UNDER SECTION 10B ARE ALSO COVERED, IN FAVOUR OF THE ASSESSEE AND IN ASSESSEES OWN CASE FOR THE EARLIER YEARS, BY DECISIONS OF THE COO RDINATE BENCHES INCLUDING THE DECISION DATED 20 TH JUNE 2018 WHICH WAS FILED BEFORE US. THIS DECISION , INTER ALIA, OBSERVES AS FOLLOWS: ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 27 OF 35 61. GROUND NOS.25 TO 27, GROUND NO.16 TO 19 AND 14 TO 16 (ASSESSEES APPEALS); GROUND NO.5 TO 8, GROUND NO.4 TO 6 AND GROUND NO.2 (IN REV ENUES APPEAL) FOR THE ASSESSMENT YEARS 2007-08 TO 2009-10 RESPECTIVELY. THE ISSUE AGITATED IN ALL THESE YEARS AND ALL THESE GROUNDS RELATES TO DETERMINATION OF CORRECT AMOUNT FOR GRAN T OF DEDUCTION UNDER SECTION 10B OF THE INCOME TAX ACT, 1961. 62. AFTER HEARING BOTH THE SIDES, WE FIND THAT THIS ISSUE IS SIMILAR TO ISSUE RAISED IN ASSESSMENT YEAR 2006-07, WHEREIN WE ALLOWED THE CLA IM OF THE ASSESSEE. RELEVANT PARAGRAPHS OF THE ORDER OF THE TRIBUNAL FOR ASSTT.YEAR 2006-07 READS AS UNDER: 46. BRIEF FACTS OF THE CASE ARE THAT IN THE RETURN OF INCOME, THE ASSESSEE HAS CLAIMED DEDUCTION UNDER SECTION 10B OF THE ACT AT RS.33,19, 35,229/- IN RESPECT OF EOU UNITS AT BAVLA AND NARODA. THE ASSESSEE HAS SUBMITTED AUDIT REPORT INFORM NO.56G OF THE ACT. ON ANALYSIS OF THE RETURNS AND DOCUMENTS, THE LD.AO AS OF THE V IEW THAT THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION UNDER SECTION 10B ON SOME OF THE ITEMS. A CCORDINGLY, HE MADE ADJUSTMENTS AND REDUCED DEDUCTION BY A SUM OF RS.10,21,60,135/-. IN OTHER WORDS, THE LD.AO HAS COMPUTED THE DEDUCTION AT RS.22,97,75,094/-. SIX POINTS WHICH HA VE BEEN CONSIDERED BY THE AO FOR MAKING ADJUSTMENT IN THE COMPUTATION OF DEDUCTION ARE AS U NDER: I) UNREALISED EXPORT EXCLUDED FROM THE EXPORT TURNO VER; II) OTHER INCOME NOT CONSIDERED FOR ELIGIBLE DEDUCT ION U/S 10B ; III) CUSTOM DUTY ALLOCATED ON THE BASIS OF RAW MATE RIAL IMPORTS IN EOUS AND NON-EOU ; IV) PACKING EXPENSES AND PACKING MATERIAL EXPENSES ALLOCATED IN PROPORTION TO QUANTUM OF SALES IN EOUS AND NON-EOU ; V) CLEARING AND FORWARDING EXPORTS EXPENSES ALLOCAT ED IN PROPORTION TO QUANTUM OF SALES IN EOUS AND NON-EOU ; VI) ALLOCATION OF ADMINISTRATIVE AND INTEREST EXPEN SES IN PROPORTION TO. TOTAL SALES IN EOUS AND NON-EOU. 47. OUT OF THE ABOVE SIX POINTS, THE ASSESSEE IS CH ALLENGING ORDER OF THE LD.CIT(A) ON ISSUE NO.1 AND 2 WHEREAS REVENUE IS CHALLENGING ORD ER OF THE CIT(A) ON ISSUE NOS.3 TO 6. 48. WITH THE ASSISTANCE OF THE LD.REPRESENTATIVES, WE HAVE GONE THROUGH THE RECORD CAREFULLY. THERE IS NO DISPUTE WITH REGARD TO THE P ROPOSITION THAT ASSESSEE IS ENTITLED FOR GRANT OF DEDUCTION UNDER SECTION 10B OF THE ACT. THE DISP UTE RELATES TO QUANTIFICATION OF THE ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 28 OF 35 DEDUCTION. FIRST WE TAKE THE ISSUE AGITATED BY THE REVENUE IN ITS GROUNDS OF APPEAL. IN THE FIRST FOLD OF GRIEVANCE, THE REVENUE HAS CONTENDED THAT T HE AO HAS RIGHTLY ALLOCATED CUSTOM DUTY ON THE BASIS OF RAW-MATERIAL IMPORTS IN EOU AND NON -EOU UNITS. THE AO WAS OF THE VIEW THAT CUSTOM DUTY PAID BY THE ASSESSEE AND DEBITED I N THE ACCOUNTS OUGHT TO BE ALLOCATED ON THE IMPORTS MADE FOR THE EOU UNITS. THE LD.CIT(A) AFTER MAKING A DETAILED ANALYSIS HELD THAT THERE WAS NO CUSTOM DUTY ON THE IMPORTS MADE REQUIR ED TO BE CONSUMED IN EOU UNITS. IF THAT BE A FACT, THEN HOW THE AO COULD ALLOCATE SUCH AMOU NT TO SUCH UNITS ? THE ASSESSEE HAS BEEN MAINTAINING SEPARATE BOOKS OF ACCOUNTS AND DEBITED ACTUAL EXPENDITURE IN EACH UNIT. THEREFORE, THE LD.CIT(A) IS JUSTIFIED IN HOLDING TH AT CUSTOM DUTY WHICH IS NOT INCURRED BY THE ASSESSEE ON THE IMPORTS OF RAW-MATERIAL MEANT FOR E OU UNITS CANNOT BE ALLOCATED. WE DO NOT ANY MERIT IN THIS FOLD GRIEVANCE RAISED BY THE REVE NUE. IT IS REJECTED. 49. NEXT THREE FOLD GRIEVANCES ARE COMMON. THE GRIE VANCE OF THE REVENUE IN THESE FOLDS OF GRIEVANCES RELATES TO ALLOCATION OF EXPENDITURE INCURRED TOWARDS PACKING MATERIAL, CLEARING AND FORWARDING EXPENSES, ADMINISTRATIVE AND INTERES T EXPENSES. IT IS PERTINENT TO OBSERVE THAT WHERE MIXED ACCOUNTS AND COMMON MANAGEMENT IS THERE , THEN CERTAIN OVERHEAD EXPENSES REQUIRED TO BE ALLOCATED AT THE LEVEL OF HO, BUT IF AN ASSESSEE IS MAINTAINING SEPARATE BOOKS ACCOUNTS AND DEMONSTRATE ALL EXPENDITURE INCURRED B Y IT; IDENTIFIABLE AND ALLOCATABLE, THEN ON ESTIMATE BASIS SUCH EXPENDITURE CANNOT BE ALLOCATED ON THE BASIS OF TURNOVER OR QUANTUM OF SALES. THE LD.CIT(A) HAS OBSERVED THAT ACCOUNTS OF THE ASSESSEE WERE AUDITED. IT HAS MAINTAINED SEPARATE ACCOUNTS. THE AO DID NOT PIN-PO INT SPECIFIC DEFECTS IN THE EXPENDITURE DEBITED BY THE ASSESSEE. IN OTHER WORDS, IF THE AO IS ABLE TO LAY HIS HAND ON A PARTICULAR EXPENDITURE, WHICH IS MEANT FOR EOU UNITS, BUT DEBI TED EITHER TO THE HO OR IN NON-EOU UNITS, THEN PROBABLY HE WOULD BE JUSTIFIED IN ALLOCATING E XPENDITURE ON ESTIMATED BASIS. BUT NO SUCH EXERCISE HAS BEEN CARRIED OUT BY THE AO, THEREFORE, WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL. GROUNDS OF APPEAL RAISED BY THE REVENUE IN THIS CONNECTION ARE REJECTED. 50. AS FAR AS FIRST FOLD GRIEVANCE OF THE ASSESSEE IS CONCERNED, THE LD.AO HAS EXCLUDED UNREALIZED EXPORTS FROM EXPORT TURNOVER. THE LD.CIT (A) CONFIRMED HIS ACTION. 51. THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT NO DOUBT UNREALIZED EXPORT HAS BEEN EXCLUDED FROM THE EXPORT TURNOVER, THEN SIMULTANEOU SLY THESE AMOUNT SHOULD BE EXCLUDED FROM THE TOTAL TURNOVER WHILE COMPUTING THE ELIGIBLE AMO UNT FOR GRANT OF DEDUCTION UNDER SECTION 10B. 52 WE FIND FORCE IN THIS CONTENTION, BECAUSE IF AN ITEM DOES NOT FALL IN EXPORT TURNOVER, THEN IT IS TO BE EXCLUDED FROM TOTAL TURNOVER ALSO. WE DIRECT THE AO TO EXCLUDE UNREALIZED ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 29 OF 35 EXPORTS FROM THE EXPORT TURNOVER AS WELL AS FROM TO TAL TURNOVER FOR COMPUTING DEDUCTION ADMISSIBLE UNDER SECTION10B OF THE ACT. 53. IN THE NEXT FOLD GRIEVANCE, ASSESSEE HAS PLEADE D THAT THE LD.CIT(A) HAS ERRED IN NOT INCLUDING OTHER INCOME IN THE ELIGIBLE PROFIT FOR D EDUCTION UNDER SECTION 10B. THE LD.COUNSEL FOR THE ASSESSEE AT THE VERY OUTSET SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF SPECIAL BENCH OF THE ITAT IN THE CASE OF MARAL OVERSEAS LTD. VS. CIT, 136 ITD 177. HE FURTHER CONTENDED THAT ITAT, A HMEDABAD HAS FOLLOWED THIS DECISION IN THE CASE OF SONIC TECHNOLOGY P.LTD. RENDERED IN ITA NO.2665 & 2720/AHD/2011. ON THE OTHER HAND, THE LD.DR RELIED UPON THE ORDERS OF THE LD.CIT(A). 54. WE HAVE DULY CONSIDERED RIVAL SUBMISSIONS AND G ONE THROUGH THE RECORD. WE FIND THAT SPECIAL BENCH OF ITAT IN THE CASE OF MARAL OVERSEAS LTD. (SUPRA) HAS CONSIDERED THIS ISSUE. THE LD.AO HAS BEEN HARPING UPON THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF LIBERTY INDIA LTD. VS.CIT, 317 ITR 218 IN COMING TO THE CONCLUSION THAT OTHER INCOMES VIZ. SALE OF SCRAP ETC. ARE NOT TO BE CONSIDERED AS DERI VED FROM EXPORT ACTIVITIES. IT IS PERTINENT TO OBSERVE THAT IN THE CASE OF SONIC TECHNOLOGY P.LTD. THE ASSESSEE HAS CLAIMED DEDUCTION AFTER INCLUDING INTEREST INCOME, SALE OF SCRAP, SUNDRY BA LANCE WRITTEN OFF, EXCHANGE RATE FLUCTUATIONS AND INCREMENTAL TURNOVER AND DISBURSEM ENT OF SUBSIDY FROM THE GOVERNMENT. THESE ITEMS WERE HELD TO BE ELIGIBLE FOR GRANT OF D EDUCTION UNDER SECTION10B OF THE ACT. THE ITAT IN THE CASE OF SONIC TECHNOLOGY HAS FURTHER OB SERVED THAT ORDER OF THE SPECIAL BENCH INDORE BENCH HAS BEEN UPHELD BY THE HONBLE DELHI H IGH COURT. DISCUSSION MADE BY THE ITAT QUA THIS ISSUE READS AS UNDER: 11. WE ALSO FIND THAT THE DECISION OF SPECIAL BENC H OF TRIBUNAL IN THE CASE OF MARAL OVERSEAS LTD. (SUPRA) WAS UPHELD BY HON'BLE DELHI H IGH COURT IN THE CASE OF HRITNIK EXPORT PVT. LTD.(ITA NO. 219/2014 & 239/2014 ORDER DATED 1 3.11.2014) WHEREIN HON'BLE HIGH COURT DISMISSED THE APPEAL OF REVENUE BY HOLDING AS UNDER :- BY WAY OF THESE APPEALS, THE REVENUE HAS CHALLENGED THE ORDERS PASSED BY INCOME TAX APPELLATE TRIBUNAL (TRIBUNAL, FOR SHORT) DATED 11TH SEPTEMBER, 2013 AND 24TH OCTOBER, 2013 RELATING TO ASSESSMENT YEARS 2008-09 AND 2009-10, R ESPECTIVELY. TRIBUNAL HAS FOLLOWED THE DECISION OF THEIR SPECIAL BENCH IN THE CASE OF MARA L OVERSEAS LTD. VERSUS ADDITIONAL COMMISSIONER OF INCOME TAX DECIDED ON 20TH MARCH, 2 012, IN WHICH IT HAS BEEN HELD:- '78. SECTION 10B SUB-SECTION (1) ALLOWS DEDUCTION I N RESPECT OF PROFITS AND GAINS AS ARE DERIVED BY A 100% EOU. SECTION 10B(4) LAYS DOWN SPE CIAL FORMULA FOR COMPUTING THE PROFITS DERIVED BY THE UNDERTAKING FROM EXPORT. THE FORMULA IS AS UNDER :- ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 30 OF 35 PROFIT OF THE BUSINESS OF THE UNDERTAKING X EXPORT TURNOVER TOTAL TURNOVER OF BUSINESS CARRIED OUT BY THE UNDER TAKING 79. THUS, SUB-SECTION (4) OF SECTION 10B STIPULATED THAT DEDUCTION UNDER THAT SECTION SHALL BE COMPUTED BY APPORTIONING THE PROFITS OF THE BUSI NESS OF THE UNDERTAKING IN THE RATIO OF TURNOVER TO THE TOTAL TURNOVER. THUS, NOT-WITH-STAN DING THE FACT THAT SUB-SECTION (1) OF SECTION 10B REFERS THE PROFITS AND GAINS AS ARE DERIVED BY A 100% EOU, YET THE MANNER OF DETERMINING SUCH ELIGIBLE PROFITS HAS BEEN STATUTOR ILY DEFINED IN SUB-SECTION (4) OF SECTION 10B OF THE ACT. AS PER THE FORMULA S TATED ABOVE, THE ENTIRE PROFITS OF THE BUSINESS ARE TO BE TAKEN WHICH ARE MULTIPLIED BY TH E RATIO OF THE EXPORT TURNOVER TO THE TOTAL TURNOVER OF THE BUSINESS. SUB-SECTION (4) DOES NOT REQUIRE AN ASSESSEE TO ESTABLISH A DIRECT NEXUS WITH THE BUSINESS OF THE UNDERTAKING AND ONCE AN INCOME FORMS PART OF THE BUSINESS OF THE UNDERTAKING, THE SAME WOULD BE INCLUDED IN THE PROFITS OF THE BUSINESS OF THE UNDERTAKING. THUS, ONCE AN INCOME FORMS PART OF THE BUSINESS OF THE ELIGIBLE UNDERTAKING, THERE IS NO FURTHER MANDATE IN THE PROVISIONS OF SECTION 10B TO EXCLUDE THE SAME FROM THE ELIGIBLE PROFITS. THE MODE OF DETERMINING THE ELIGIBLE DEDUCTION U/S 10B IS SIMILAR TO THE PROVISIONS OF SECTION 80HHC INASMUCH AS BOTH THE SECTIONS MANDATES DETERM INATION OF ELIGIBLE PROFITS AS PER THE FORMULA CONTAINED THEREIN. THE ONLY DIFFERENCE IS T HAT SECTION 80HHC CONTAINS A FURTHER MANDATE IN TERMS OF EXPLANATION (BAA) FOR EXCLUSION OF CERTAIN INCOME FROM THE ''PROFITS OF THE BUSINESS'' WHICH IS, HOWEVER, CONSPICUOUS BY ITS AB SENCE IN SECTION 10B. ON THE BASIS OF THE AFORESAID DISTINCTION, SUB- SECTION (4) OF SECTION 10A/10B OF THE ACT IS A COMPLETE CODE PROVIDING THE MECHANISM FOR COMPUTING THE ''PROFITS OF THE BUSINESS'' ELIGIBLE FOR DEDUCTION U/S 10B OF THE ACT. ONCE AN INCOME FORMS PART OF THE BU SINESS OF THE INCOME OF THE ELIGIBLE UNDERTAKING OF THE ASSESSEE, THE SAME CANNOT BE EXC LUDED FROM THE ELIGIBLE PROFITS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10B OF THE ACT. AS PER THE COMPUTATION MADE BY THE ASSESSING OFFICER HIMSELF, THERE IS NO DISPUTE THAT BOTH THESE INCOMES HAVE BEEN TREATED BY THE ASSESSING OFFICER AS BUSINESS INCOME. THE CBDT CIRC ULAR NO. 564 DATED 5TH JULY, 1990 REPORTED IN 184 ITR (ST.) 137 EXPLAINED THE SCOPE A ND AMBIT OF SECTION 80HHC AND THE MODE OF DETERMINATION OF PROFITS DERIVED BY AN ASSESSEE FROM THE EXPORT OF GOODS. I.T.A.T., SPECIAL BENCH IN THE CASE OF INTERNATIONAL RESEARCH PARK LA BORATORIES V. ACIT, 212 ITR (AT) 1, AFTER FOLLOWING THE AFORESAID CIRCULAR, HELD THAT STRAIGH T JACKET FORMULA GIVEN IN SUB-SECTION (3) HAS TO BE FOLLOWED TO DETERMINE THE ELIGIBLE DEDUCTION. THE HON'BLE SUPREME COURT IN THE CASE OF P.R. PRABHAKAR; 284 ITR 584 HAD APPROVED THE . A.Y. 2007-08 PRINCIPLE LAID DOWN IN THE SPECIAL BENCH DECISION IN INTERNATIONAL RESERARCH P ARK LABORATORIES V. ACIT (SUPRA). IN THE ASSES SEE'S OWN CASE THE I.T.A.T. IN THE PRECEDING YEARS, AFTER CONSIDERING THE DECISION IN THE ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 31 OF 35 CASE OF LIBERTY INDIA HELD THAT PROVISIONS OF SECTI ON 10B ARE DIFFERENT FROM THE PROVISIONS OF SECTION 80IA WHEREIN NO FORMULA HAS BEEN LAID DOWN FOR COMPUTING THE ELIGIBLE BUSINESS PROFIT. 80. IN VIEW OF THE ABOVE DISCUSSION, QUESTION NO. 2 IS ANSWERED IN AFFIRMATIVE AND IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, THE ASSESSEE I S ELIGIBLE FOR CLAIM OF DEDUCTION ON EXPORT INCENTIVE RECEIVED BY IT IN TERMS OF PROVISIONS OF SECTION 10B( 1) READ WITH SECTION 10B(4) OF THE ACT.' THE AFORESAID VIEW IS IN CONSONANCE WITH THE DECISI ON OF THIS COURT DATED 1ST SEPTEMBER, 2014 PASSED IN ITA 438/2014, COMMISSIONER OF INCOME TAX- VII VERSUS XLNC FASHIONS IN WHICH THIS COURT HAS HELD AS UNDER :- 'DEDUCTION UNDER SECTION 10B OF THE INCOME TAX ACT, 1961 (ACT, IN SHORT) IS TO BE MADE AS PER THE FORMULA PRESCRIBED BY SUB-SECTION (4), WHIC H READS AS UNDER: '10B. SPECIAL PROVISION IN RESPECT OF NEWLY ESTABLI SHED HUNDRED PER CENT EXPORT- ORIENTED UNDERTAKINGS- ......... ...... (4) FOR THE PURPOSES OF SUB-SECTION (1), THE PROFIT S DERIVED FROM EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE SHALL BE THE AMOUNT WHI CH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURN OVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING'. SUB-SECTION (4), THEREFORE, IS THE SPECIAL PROVISIO N WHICH ENABLES THE ASSESSEE TO COMPUTE THE PROFITS DERIVED FROM THE EXPORT OF ARTICLES OR THIN GS OR COMPUTER SOFTWARE. WE DO NOT SEE ANY CONFLICT BETWEEN SUB-SECTION (1) AND SUB-SECTION (4 ) TO SECTION 10B, AS SUB- SECTION (1) STATES THAT DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DER IVED BY A HUNDRED PERCENT EXPORT-ORIENTED UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS O R SOFTWARE WOULD BE ELIGIBLE UNDER THE SAID SECTION. SUB- SECTION (1) IS A GENERAL PROVISION AN D IDENTIFIES THE INCOME WHICH IS EXEMPT AND HAS TO BE READ IN HARMONY WITH SUB-SECTION (4) WHIC H IS THE FORMULA FOR FINDING OUT OR COMPUTING WHAT IS ELIGIBLE FOR DEDUCTION UNDER SUB- SECTION (1). NEITHER OF THE TWO PROVISIONS SHOULD BE MADE IRRELEVANT AND BOTH HAVE TO BE APPLI ED WITHOUT NEGATING THE OTHER. IN OTHER WORDS, THE MANNER OF COMPUTING PROFITS DERIVED FROM EXPORTS UNDER SUB-SECTION (1), HAS TO BE DETERMINED AS PER THE FORMULA STIPULATED IN SUB-SEC TION (4), OTHERWISE SUB-SECTION (4) WOULD BECOME OTISE AND IRRELEVANT. ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 32 OF 35 THE ISSUE IN QUESTION IN THIS APPEAL WHICH PERTAINS TO THE ASSESSMENT YEAR 2009-10, RELATES TO DUTY DRAW BACK IN THE FORM OF DEPB BENEFITS. AS PER SECTION 28, CLAUSE (III-C), . A.Y. 2007-08 ANY DUTY OF CUSTOMS OR EXCISE REPAID OR REPAYABLE A S DRAWBACK TO A PERSON AGAINST EXPORTS UNDER CUSTOMS AND CENTRAL EXCISE DUTIES DRAW BACK R ULES, 1971 IS DEEMED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION. THE SAID PROVISION HAS TO BE GIVEN FULL EFFECT TO AND THIS MEANS AND IMPLIES THAT THE DUTY DRAW BACK OR DUTY B ENEFITS WOULD BE DEEMED TO BE A PART OF THE BUSINESS INCOME. THUS, WILL BE TREATED AS PROFI T DERIVED FROM BUSINESS OF THE UNDERTAKING. THESE CANNOT BE EXCLUDED. EVEN OTHERWISE, WHEN WE APPLY SUB-SECTION (4) TO SE CTION 10B, THE ENTIRE AMOUNT RECEIVED BY WAY OF DUTY DRAW BACK WOULD NOT BECOME ELIGIBLE FOR DEDUCTION/EXEMPTION. THE AMOUNT QUANTIFIED AS PER THE FORMULA WOULD BE ELIGIBLE AND QUALIFY FOR DEDUCTION/EXEMPTION. THE POSITION IS SOMEWHAT AKIN OR CLOSE TO SECTION 80HHC OF THE ACT, WHICH ALSO PRESCRIBES A FORMULA FOR COMPUTATION OF DEDUCTION IN RESPECT OF EXPORTS. IN VIEW OF THE AFORESAID, WE DO NOT FIND ANY MERIT IN THE PRESENT APPEAL AND THE SAME IS DISMISSED.' KARNATAKA HIGH COURT IN COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE VERSUS MOTOROLA INDIA ELECTRONICS (P) LTD., ITA NO. 428/2007, DECIDED ON 11.12.2013, REPORTED AS [2014] 46 TAXMANN.COM 167 (KARNATAKA) HAS ALSO TAKEN A SIMILA R VIEW, WHEREIN IT HAS BEEN HELD:- 'BY FINANCE, ACT, 2001, WITH EFFECT FROM 01.04.2001 , THE PRESENT SUB-SECTION (4) IS SUBSTITUTED IN THE PLACE OF OLD SUB-SECTION (4). NO DOUBT SUB-S ECTION 10(B) SPEAKS ABOUT DEDUCTION OF SUCH PROFITS AND GAINS AS DERIVED FROM 100% EOU FRO M THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE. THEREFORE, IT EXCLUDES PROFIT AND GAINS FROM EXPORT OF ARTICLES. BUT SUB-SECTION (4) EXPLAINS WHAT IS SAYS THAT PROFITS DERIVED FROM EXPORT OF AR TICLES OR THINGS OR COMPUTER SOFTWARE SHALL BE THE ACCOUNT WHICH BARES TO THE PROFITS OF THE BU SINESS OF THE UNDERTAKING AND NOT THE PROFITS AND GAINS FROM EXPORT OF ARTICLES. THEREFORE, PROFI TS AND GAINS DERIVED FROM EXPORT OF ARTICLES IS DIFFERENT FROM THE INCOME DERIVED FROM THE PROFI TS OF THE BUSINESS OF THE UNDERTAKING. THE PROFITS OF THE BUSINESS OF THE UNDERTAKING INCLUDES THE PROFITS AND GAINS FROM EXPORT OF THE ARTICLES AS WELL AS ALL OTHER INCIDENTAL INCOMES DE RIVED FROM THE BUSINESS OF THE UNDERTAKING. IT IS INTERESTING TO NOTE THAT SIMILAR PROVISIONS A RE NOT THERE WHILE DEALING WITH COMPUTATION OF INCOME UNDER SECTION 80HHC. ON THE CONTRARY THERE I S SPECIFIC PROVISIONS LIKE SECTION 80HHB WHICH EXPRESSLY EXCLUDES THIS TYPE OF INCOMES . THEREFORE, IN VIEW OF THE AFORESAID ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 33 OF 35 PROVISIONS, IT IS CLEAR THAT, WHAT IS EXEMPTED IS N OT MERELY THE PROFITS AND GAINS FROM THE EXPORT OF ARTICLES BUT ALSO THE INCOME FROM THE BUS INESS OF THE UNDERTAKING.' IN VIEW OF THE AFORESAID POSITION, THE APPEALS HAVE TO BE DISMISSED. WE ORDER ACCORDINGLY. 12. WE THUS FIND THAT THE DECISION OF SPECIAL BENCH OF TRIBUNAL IN THE CASE OF MARAL OVERSEAS (SUPRA) WHEREIN THE RATIO THAT ONCE ON INC OME FORMS PART OF THE BUSINESS OF THE INCOME OF THE ELIGIBLE UNDERTAKING OF THE ASSESSEE, THE . A.Y. 2007-08 SAME CANNOT BE EXCLUDED FROM THE ELIGIBLE PROFITS FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 10B OF THE ACT, HAS BEEN UPHELD BY HON'BLE DELHI & KARNATAKA HIGH C OURTS IN THE CASE OF HRITNIK EXPORTS PVT. LTD. & MOTOROLA INDIA ELECTRONICS PVT. LTD. 55. RESPECTFULLY FOLLOWING THE ABOVE, WE ALLOW SECO ND FOLD OF GRIEVANCE RAISED BY THE ASSESSEE IN ITS GROUND NO.27 AND DIRECT THE AO TO I NCLUDE THIS OTHER INCOME IN THE ELIGIBLE PROFIT FOR THE PURPOSE OF GRANT OF DEDUCTION UNDER SECTION 10B OF THE ACT. 56. IN VIEW OF THE ABOVE DISCUSSION, WE DO NOT FIND ANY MERIT IN THE APPEAL OF THE REVENUE. IT IS DISMISSED. 63. BEFORE US NO DISPARITY OF THE FACTS HAS BEEN PO INTED OUT BY THE LD.DR IN THESE YEARS IN THIS BEHALF. THEREFORE, FOLLOWING OUR ORDER FOR THE ASSESSMENT YEAR 2006-0 IN ASSESSEES OWN CASE WE DIRECT THE AO TO ALLOW THE CLAIM OF THE ASS ESSEE UNDER SECTION 10B IN ACCORDANCE WITH OUR DIRECTIONS CONTAINED IN ORDER FOR THE ASSE SSMENT YEAR 2006-07. ACCORDINGLY, WE ALLOW THE GROUNDS OF APPEALS OF THE ASSESSEE AND RE JECT THAT OF THE REVENUE. 42. NO DISTINGUISHING FEATURES WERE POINTED OUT TO US. LEARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO FAIRLY ACCEPTED THIS POSITI ON. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF DEDUCTION UNDER SECTION 10B IN THE TERMS INDICATED ABOVE. THE OBSERVATIONS SO MADE WILL APPLY MUTATIS MUTANDIS IN THE PRESENT YEAR AS WELL. 43. GROUND NOS. 6 TO 9 ARE THUS ALLOWED IN THE TERM S INDICATED ABOVE. 44. GROUND NOS. 10 TO 12 ARE GENERAL IN NATURE AND DO NOT CALL FOR ANY SPECIFIC ADJUDICATION BY US. 45. WE HAVE NOTED THAT THE ASSESSEE HAS ALSO MOVED CERTAIN ADDITIONAL GROUNDS OF APPEAL WHICH ARE AS FOLLOWS: ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 34 OF 35 1. BOTH THE LOWER AUTHORITIES OUGHT TO HAVE ALLOWED PR EMIUM PAYABLE OF RS.3,44,61,150/- ON REDEMPTION OF FOREIGN CURRENCY CONVERTIBLE BONDS AS AN EXPENSE U/S.37(1) OF THE ACT. 2. BOTH THE LOWER AUTHORITIES OUGHT TO HAVE ALLOWED 1/ 5 TH OF SHARE ISSUE EXPENSES INCURRED FOR INITIAL PUBLIC OFFER, BEING RS. 1,26,6 4,000/- U/S.35D OF THE ACT. 3. BOTH THE LOWER AUTHORITIES OUGHT TO HAVE ALLOWED PR OVISION FOR LEAVE ENCASHMENT OF RS.31,16,487/- U/S.37(1) OF THE ACT. 4. BOTH THE LOWER AUTHORITIES OUGHT TO HAVE ALLOWED DE DUCTION OF EDUCATION CESS OF RS. 11,10,875/- ON INCOME TAX AND DIVIDEND DISTR IBUTION TAX U/S.37(1) OF THE ACT. 5. BOTH THE LOWER AUTHORITIES OUGHT TO HAVE ALLOWED AM OUNT OF RS.6,25,00,000/- TRANSFERRED TO DEBENTURE REDEMPTION RESERVE U/S 117 C OF THE COMPANIES ACT, 1956, AS AN ALLOWABLE REDUCTION WHILE COMPUTIN G BOOK PROFIT U/S. 115JB OF THE ACT. 46. LEARNED COUNSEL HAS MOVED A PETITION, SETTING O UR ELABORATE REASONS IN SUPPORT, SEEKING ADMISSION OF THE ABOVE GROUNDS OF APPEAL, A ND PRAYED THAT, IF ADMITTED, THESE ISSUES MAY KINDLY BE REMITTED TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATION ON MERITS, AS, IN ALL FAIRNESS, THE ASSESSING OFFICER HAD NO OCCASION TO DEAL WITH THE SAME. 47. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE A PPLICABLE LEGAL POSITION. 48. LEARNED DEPARTMENTAL REPRESENTATIVE FAIRLY STA RES THAT WHILE HE HAS NO OBJECTION TO THE ADMISSION OF ADDITIONAL GROUNDS OF LAW, IF SO B E PERMISSIBLE UNDER THE LAW, BUT THE MATTER SHOULD NOT BE ADJUDICATED ON MERITS AT THIS STAGE A S THE SAME HAS NOT BEEN EXAMINED BY THE AUTHORITIES BELOW. THAT PLEA IS GRACIOUSLY CONCEDED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE AS WELL. IN THE LIGHT OF THESE DISCU SSIONS, WHILE WE ARE INCLINED TO ADMIT THESE GROUNDS OF APPEAL IN THE LIGHT OF LAW LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CORPORATION LTD VS CIT [(199 8) 229 ITR 383 (SC)], AND TO REMIT THE SAME TO THE FILE OF THE ASSESSING OFFICER FOR A DJUDICATION ON MERITS, IN ACCORDANCE WITH ITA NO.: 1388 AND 1511/AHD/2016 ASSESSMENT YEAR: 2010-11 PAGE 35 OF 35 THE LAW AND BY WAY OF A SPEAKING ORDER AND AFTER G IVING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. ORDERED, ACCORDINGLY. 49. THE ADDITIONAL GROUNDS OF APPEAL ARE THUS ADMIT TED AND ALLOWED FOR STATISTICAL PURPOSES. 50. THE APPEAL OF THE ASSESSEE IS THUS PARTLY ALLOW ED IN THE TERMS INDICATED ABOVE. 51. TO SUM UP, WHILE THE APPEAL FILED BY THE ASSESS ING OFFICER IS DISMISSED, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT TODAY ON THE 31 ST DAY OF DECEMBER, 2018. SD/- SD/- JUSTICE P P BHATT PRAMOD KUMAR (PRESIDENT) (VI CE PRESIDENT) AHMEDABAD, DATED THE 31 ST DAY OF DECEMBER, 2018 **PK/F-BT COPIES TO: (1) THE APPELLANT (2) THE RESPOND ENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER TRUE COPY ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD 1. DATE OF DICTATION: ......ORDER PROCESSED BY HON BLE VP ON HIS LAPTOP 31.12.2018.......... 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: ..... 31.12.2018.. 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR . P.S./P.S.: 31.12.2018.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: ... 31.12.2018. .. 5. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK : . 31.12.2018. 6. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK : . 7. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER : . 8. DATE OF DESPATCH OF THE ORDER: ......
Other Referred Cases
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Laws Referred To
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1:1 Consultation on Startup Compliance
₹1
Consultation on Entity Formation
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Assignment of Registered Trademark
Mehul₹500
Sales Forecasting Sheet
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