Atul Limited, Ahmedabad V. The DY.CIT,(OSD), Range-1, Ahmedabad

ITA 1547/AHD/2007

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9783 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 15-06-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 18-04-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B S SANDHUDR
• Assessee Lawyers: S N SOPARKAR
• Keywords: Related party transaction; Depreciation; Transfer pricing; Opportunity of being heard; Diversion of income; International transaction; Retrospective amendment; Question of law; Cost of acquisition; Initiation of penalty proceedings; Onus to prove
• Section: 92C; 92D; 80HHC; 234B; 80IB; 32; 27; 37; 28; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' BEFORE SHRI BHAVNESH SAINI,JM & SHRI A N PAHUJA,AM ITA NO.1547/AHD/2007 (ASSESSMENT YEAR:-2004-05) ATUL LIMITED, 3 RD FLOOR, ASHOKA CHAMBERS, RASALA MARG, ELLIS-BRIDGE, AHMEDABAD V/S DEPUTY COMMISSIONER OF INCOME-TAX (OSD), RANGE- 1, AHMEDABAD [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI S N SOPARKAR, AR REVENUE BY:- SHRI B S SANDHUDR O R D E R A N PAHUJA: THIS APPEAL BY THE ASSESSEE AGAINST AN ORDER DATE D 23-03-2007 OF THE LD. CIT(APPEALS)-V, AHMEDABAD, RA ISES THE FOLLOWING GROUNDS:- 1 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN REDUCING THE CLAIM OF DEPRECIATIO N FROM RS.40,80,04,483/- TO RS.37,27,25,696/-. 2 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN DISALLOWING THE CLAIM OF DEDUCTION U/S 80IA OF THE ACT ON THE NEW POWER PLANT AMOUNTING TO RS.7,63,69, 274/-. 3 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN DENYING THE DEDUCTION U/S 80IB OF T HE ACT ON DEPB CREDIT OF RS.3,65,34,766/-. 4 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN REDUCING PROFITS OF THE BUSINESS ON ACCOUNT OF SALE PROCEEDS OF DEPB LICENSE WHILE CALCULATING DEDUCTION U/S 80HHC OF THE ACT WITHOUT APPRECIATING THE CLAIM OF THE APPELLANT UNDER THE AMENDED PROVISIONS OF S. 80HHC OF THE ACT. 5 ALTERNATIVELY AND WITHOUT PREJUDICE, ONLY 90% OF THE PROFITS AND NOT THE ENTIRE SALE PROCEEDS OF DEPB LICENSE COULD HAVE BEEN REDUCED FROM THE PROFITS OF THE BUSINESS. 6 ALTERNATIVELY AND WITHOUT PREJUDICE, IF PROFIT ON SALE OF DEPB LICENSES IS NOT FALLING WITHIN THE PURVIEW OF S. 28 (IIIA)/(IIIB)/(IIIC) OF THE ITA NO.1547/AHD/2007 2 ACT, THE SAME IS NOT LIABLE TO TAX AT ALL AND THERE FORE THE SAME HAS TO BE REDUCED FROM THE TAXABLE INCOME OF THE APPELLANT . 7 ALTERNATIVELY AND WITHOUT PREJUDICE, EVEN AS PER THE PROVISIONS OF TAXATION LAWS (SECOND AMENDMENT) ACT, 2005, THE SAI D DEPB SALE PROCEED IS ELIGIBLE FOR DEDUCTION U/S 80HHC OF THE ACT. 8 ALTERNATIVELY AND WITHOUT PREJUDICE LD. CIT(A) FA ILED TO APPRECIATE THAT THE SAID SALE PROCEEDS OF THE DEPB LICENSE ARE COVERED BY 28(IV) OF THE ACT AND THEREFORE DEDUCTION U/S 80HHC OF THE ACT OUGHT TO HAVE BEEN ALLOWED FULLY ON THE SAME. 9 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN ADDING RS.1,82,97,194/- ON ACCOUNT OF ADJUSTMENTS TO THE ARM'S LENGTH PRICE WITHOUT THERE BEING ANY J URISDICTION AS WELL AS LEGAL AND FACTUAL BASIS FOR THE SAME. 10 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN INVOKING THE PROVISIONS OF CHAPTER X WITHOUT PRIMA FACIE DEMONSTRATING THAT THERE WAS SOME TAX AVOIDAN CE. 11 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN MAKING A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) U/S 92C(3) R.W.S. 92CA(1) OF THE ACT WITHOUT PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE APPELLANT. 12 IN ANY CASE THE WHOLE REFERENCE AND THE CONSEQUE NT ORDERS ARE BAD AND ILLEGAL BECAUSE THE ALLEGED APPROVAL GRANTED BY CIT U/S 92CA(1) OF THE ACT IS VITIATED IN LAW FIRSTLY BECAU SE THE APPELLANT WAS NOT HEARD BEFORE ANY SUCH APPROVAL AND SEC ONDLY BECAUSE THE SAME HAS BEEN GRANTED MECHANICALLY, WITH OUT ANY APPLICATION OF MIND AND WITHOUT DUE DILIGENCE. 13 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF AO IN REFERRING THE CASE OF THE APPELLANT TO THE TRANSFER PRICING OFFICER. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THERE WAS NO REASONS TO INTERFERE WITH THE PRICING AS WEL L AS METHOD THEREOF ADOPTED BY THE APPELLANT AS THE SAME IS FAL LING WITHIN THE PARAMETERS OF TRANSFER PRICING LAID DOWN UNDER THE SCHEME OF THE ACT. 14 ALTERNATIVELY AND WITHOUT PREJUDICE, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ORDER OF THE ADD ITIONAL COMMISSIONER OF INCOME TAX ACTING AS TRANSFER PRICI NG OFFICER WHICH IS WITHOUT JURISDICTION AND AGAINST THE EXPRE SS PROVISIONS OF LAW IN AS MUCH AS ADDITIONAL COMMISSIONER OF INCOME TAX COULD NOT HAVE ACTED AS TRANSFER PRICING OFFICER. ITA NO.1547/AHD/2007 3 15 BOTH THE LOWER AUTHORITIES HAVE PASSED THE RESPE CTIVE ORDERS WITHOUT PROPERLY APPRECIATING THE FACT AND THAT THE Y FURTHER ERRED IN GROSSLY IGNORING VARIOUS SUBMISSIONS, EXPLANATIONS AND INFORMATION SUBMITTED BY THE APPELLANT FROM TIME TO TIME WHICH OUGHT TO HAVE BEEN CONSIDERED BEFORE PASSING THE IMPUGNED ORDER. 16 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE LEVY OF INTEREST UNDER SECTION 234B AND 234C OF THE ACT. 17 LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE ACTION OF AO IN INITIATING PENALTY UNDER SECTION 27 1(1)(C) OF THE ACT WITHOUT RECORDING MANDATORY SATISFACTION AS CONTEMP LATED UNDER THE ACT. 2 ADVERTING FIRST TO GROUND NO.1, FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING NIL INCOME FILED O N 30-10-2004 BY THE ASSESSEE, MANUFACTURING INTERMEDIATES, DYES AND COLORS, ETC., AFTER BEING PROCESSED U/S 143(1) OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS THE ACT], WAS SELECTE D FOR SCRUTINY WITH THE ISSUE OF NOTICE U/S 143(2) OF THE ACT ON 28-04- 2005.DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER (AO IN SHORT) NOTICED THAT THOUGH THE ASSESSEE DID NOT CLA IM ANY DEPRECIATION IN THE AY 2001-02, THE AO ALLOWED THE DEPRECIATION TO THE ASSESSEE IN THAT YEAR. SINCE THE ASSESSEE HAD C LAIMED DEPRECIATION OF RS.37,08,10,879/- IN THE YEAR UNDER CONSIDERATION, THE AO SHOW-CAUSED THE ASSESSEE AS TO WHY THE CLAIM FOR DEPRECIATION BE NOT REDUCED IN THE LIGHT OF HIS OWN FINDINGS IN THE AY 2001-02. IN RESPONSE, THE ASSESSEE SUBMITTED VIDE L ETTER DATED 25- 11-2006 THAT THE ASSESSEE DID NOT OPT FOR DEPRECIAT ION IN AY 2001- 02 IN VIEW OF THE DECISION OF THE HONBLE JURISDICT IONAL HIGH COURT IN THE CASE OF ARUN TEXTILE LTD. AS ALSO DECISION OF T HE HON'BLE SUPREME COURT IN THE CASE OF MAHENDRA MILLS LTD. I T WAS ALSO POINTED OUT BY THE ASSESSEE THAT THE EXPLANATION 5 TO SECTION 32(1)(II) WAS NOT EXPLANATORY AND CAME INTO OPERATI ON ONLY WITH EFFECT FROM AY 2002-03. ACCORDINGLY, RELYING UPON T HE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF RAM NATH JINDAL VS. CIT ,170 CTR 251 AND THE DECISION OF THE HONBLE KERALA ITA NO.1547/AHD/2007 4 HIGH COURT IN THE CASE OF CIT VS. KERALA ELECTRIC L AMP WORKS LTD.,183 CTR 182, THE ASSESSEE CONTENDED THAT DEPRE CIATION SHOULD NOT BE REDUCED IN THE YEAR UNDER CONSIDERATION. HOW EVER, THE AO DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE. WHILE R EFERRING TO THE AMENDMENT IN THE PROVISIONS OF SECTION 32 OF THE AC T AND THE PRINCIPLES LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. GUJARAT WAREHOUSING CORPORATION,104 ITR 1 AND THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CI T VS. MOTHER INDIA REFRIGERATION INDUSTRIES PVT. LTD.,155 ITR 71 1 AS ALSO THE DECISION OF THE ITAT AHMEDABAD BENCH IN THE CASE OF UNITED PHOSPHOURS LTD. VS. JCIT (2001) 73 TTJ 404 (AHD), T HE AO REDUCED THE CLAIM FOR DEPRECIATION ON THE BASIS OF HIS OWN FINDINGS IN THE AY 2001-02. 3. ON APPEAL, THE LEARNED CIT(A) UPHELD THE DISALLO WANCE, FOLLOWING HIS OWN DECISION FOR THE AY 2003-04. 4. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). BOTH THE PARTIES AG REED THAT THE ISSUE IS SQUARELY COVERED AGAINST THE ASSESSEE BY THE DEC ISION DATED 24- 07-2009 OF THE ITAT AHMEDABAD BENCH-D IN THE ASSESS EES OWN CASE FOR THE AY 2003-04 IN ITA NO.157/AHD/2007, F OLLOWING THE DECISION OF THE SPECIAL BENCH OF ITAT IN THE CASE OF VAHID PAPER CONVERTERS VS. ITO (2006) 98 ITD 165 (AHD) (SB). 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE AFORESAID DECISIONS OF THE IT AT. WE FIND THAT WHILE ADJUDICATING A SIMILAR ISSUE, THE TRIBUNAL VI DE THEIR AFORESAID ORDER DATED 24-07-2009 IN ITA NO.157/AHD/2007, CONC LUDED AS UNDER:- 3. AT THE OUTSET, IT WAS BROUGHT TO OUR NOTICE THA T THIS COMMON ISSUE IS RECURRING IN EVERY YEAR AND IN EARLIER ASSESSMENT Y EAR 2001-02 IN ITA ITA NO.1547/AHD/2007 5 NO.3528/AHD/2004, THE D BENCH OF THIS TRIBUNAL VI DE ORDER DATED 16-05- 2008, FOLLOWING THE SPECIAL BENCH OF THIS TRIBUNAL I.E., THE AHMEDABAD SPECIAL BENCH IN THE CASE OF VAHID PAPER CONVERTER S V. ITO, VAPI WARD- 4, DAMAN (2006) 98 ITD 165 (AHD) (SB), WHEREIN UNDE R PARA-5 IT WAS HELD AS UNDER:- 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND, PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE IS SUE INVOLVED IS DULY COVERED BY THE DECISION OF THE SPECIAL BENCH O F ITAT IN THE CASE OF VAHID PAPER CONVERTERS V. ITO, VAPI WARD-4, DAMAN (1006) 98 ITD 165 (AHD) (SB), IN WHICH IT WAS HELD AS UND ER: IT IS, THUS EVIDENT THAT FOR THE PURPOSE OF CH APTER VI-A, THE ASSESSING OFFICER HAS TO COMPUTE THE PROFITS AND GA INS OF BUSINESS SEPARATELY. OF COURSE, THE COMPUTATION HAS TO BE MADE AS PER THE PROVISIONS OF THE ACT MEANING THEREBY, W HILE COMPUTING THE PROFITS AND GAINS OF THE ELIGIBLE BUS INESS, THE ASSESSING OFFICER HAS TO GIVE EFFECT TO ALL THE REL EVANT PROVISIONS OF THE ACT, WHICH INCLUDE SECTION 32 ALSO. THEREFOR E, WHILE COMPUTING THE PROFITS AND GAINS OF THE ELIGIBLE BUS INESS, THE ASSESSING OFFICER HAS TO GIVE EFFECT TO THE PROVISI ONS OF SECTION 32 ALSO AND WORK OUT THE PROFITS AND GAINS AFTER ALLOW ING THE DEPRECIATION. IT IS TRUE THAT CERTAIN DIVISION BENCHES OF THE TRI BUNAL HAVE TAKEN THE VIEW THAT FOR COMPUTING DEDUCTION UNDER CHAPTER VI-A ALSO, IT IS THE OPTION OF THE ASSESSEE TO CLAIM THE DEPRE CIATION OR NOT TO CLAIM. HOWEVER, WHEN THE VIEW CANVASSED BY THE RE VENUE IS SUPPORTABLE BY THE DECISIONS OF THE SUPREME COURT, THE JURISDICTIONAL HIGH COURT AND OTHER HIGH COURTS IN THE SENSE THAT WHILE WORKING OUT THE INCOME FOR THE PURPOSE OF CHAPTER VI-A , THE DEPRECIATION HAS TO BE DEDUCTED WHETHER OPTED T O THE CLAIMED BY THE ASSESSEE OR NOT; AND THE VIEW CANVAS SED BY THE ASSESSEE WAS ONLY SUPPORTED BY THE DECISIONS OF THE TRIBUNAL THAT IT IS CHOICE OF THE ASSESSEE AS IN THE CASE OF NORMAL COMPUTATION OF INCOME, IT CANNOT BE SAID THAT BOTH THE VIEWS ARE EQUALLY POSSIBLE OR REASONABLE VIEWS. THE VIEW, WHI CH IS SUPPORTED BY THE DECISIONS OF THE SUPREME COURT, J URISDICTIONAL HIGH COURT AND OTHER HIGH COURTS, HAS TO BE PREFERR ED THAN THE VIEW TAKEN BY THE TRIBUNAL. THEREFORE, THE DEPRECIATION, WHICH IS THOUGH ALLOWA BLE BUT NOT CLAIMED IN THE RETURN FOR NORMAL COMPUTATION OF INC OME, HAS TO BE ALLOWED WHILE COMPUTING THE DEDUCTIONS UNDER CHAPTER VI-A ITA NO.1547/AHD/2007 6 VIZ., SECTIONS 80HH, 80IA, 80IB, ETC., OF AN INDUST RIAL UNDERTAKING. RESPECTFULLY FOLLOWING THE AFORESAID DECISIONS, WE DO NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF THE CIT(A). WE ACCORDINGLY CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. TH US, THIS GROUND STANDS DISMISSED. 4. NOW BEFORE US BOTH THE LD. COUNSEL FOR THE ASSES SEE AND THE LEARNED DR AGREED THAT THE ISSUE IS COVERED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. WE FIND FROM THE TRIBUNALS ORDER FOR ASSESSMENT YEAR 2001-02, WHICH HAS CONFIRMED THE ORDERS OF THE LOWER AUTHORITIES ALLOWING THE DEPRECIATION. ACCORDINGLY, IN THESE T WO ASSESSMENT YEARS, THE CIT(A) AS WELL AS THE ASSESSING OFFICER HAS ALL OWED DEPRECIATION ON CORRECT AMOUNT OF WDV AS WORKED OUT. BEFORE US NO MISTAKE IS POINTED OUT IN THE COMPUTATION OF WDV AND ACCORDINGLY WE UP HOLD THE ORDER OF CIT(A). THIS COMMON ISSUE OF THE ASSESSEES APPEAL S IS DISMISSED. 5.1 SINCE THE FACTS OBTAINING IN THE YEAR UNDER CO NSIDERATION ARE UNDISPUTEDLY SIMILAR TO THE FACTS OBTAINING IN THE PRECEDING ASSESSMENT YEARS, WE HAVE NO HESITATION IN UPHOLDIN G THE FINDINGS OF THE LEARNED CIT(A) IN THE LIGHT OF THE AFORESAID DE CISION OF THE ITAT IN THE ASSESSEES OWN CASE FOR AY 2003-04. THEREFOR E, GROUND NO.1 IN THE APPEAL OF THE ASSESSEE IS DISMISSED. 6. GROUND NO..2 IN THE ASSESSEES APPEAL RELATES TO THE CLAIM FOR DEDUCTION OF RS.7,63,69,274/- U/S 80IA OF THE ACT. RELYING UPON HIS OWN FINDINGS IN AY 2001-02, THE AO DISALLOWED THE C LAIM FOR DEDUCTION U/S 80IA ON PROFITS FROM NEW POWER PLANT ON THE GROUND THAT NEW INDUSTRIAL UNIT WAS FORMED BY A TRANSFER T O A NEW BUSINESS OF MACHINERY OR PLANT, WHICH WAS PREVIOUSLY USED BY THE ASSESSEE, RESULTING IN CONTRAVENTION OF THE PROVISIONS OF SEC TION 80IA(3)(II) OF THE ACT. 7. ON APPEAL, THE LEARNED CIT(A) UPHELD THE DISALLO WANCE, FOLLOWING HIS OWN ORDER FOR THE AY 2003-04. ITA NO.1547/AHD/2007 7 8. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). BOTH THE PARTIES AG REED THAT THE ISSUE IS SQUARELY COVERED AGAINST THE ASSESSEE BY THE DEC ISION DATED 24- 07-2009 OF THE ITAT AHMEDABAD BENCH-D IN THE ASSESS EES OWN CASE FOR THE AY 2003-04 IN ITA NO.157/AHD/2007. 9.. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO AFORESAID DECISION OF THE ITAT. WE FIND THAT WHILE ADJUDICATING A SIMILAR ISSUE, THE TRIBUNAL VIDE THE IR AFORESAID ORDER DATED 24-07-2009 IN ITA NO.157/AHD/2007, CONCLUDED AS UNDER:- 7. THE NEXT COMMON ISSUE IN BOTH THE APPEALS OF TH E ASSESSEE IS AS REGARDS TO THE DISALLOWANCE OF DEDUCTION U/S.80IA O F THE ACT. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS IN RESPEC TIVE APPEALS:- 3. THE LEARNED CIT(APPEALS)-VS, AHMEDABAD, ERRED I N NOT RECOGNIZING NEW POWER PLANT AS NEW INDUSTRIAL UNDER TAKING WHOSE PROFITS ARE ELIGIBLE FOR DEDUCTION UNDER SECT ION 80IA OF THE ACT. 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN DISALLOWING THE CLAI M OF DEDUCTION U/S.80IA OF THE ACT ON THE NEW POWER PLAN T. 8. AT THE OUTSET, THE LD. COUNSEL FOR THE ASSESSEE FAIRLY STATED THAT THIS ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ITA NO.3528/AHD.2004 FOR THE ASSESSMENT YEAR 2001-02 VIDE ORDER DATED 16-05-2008 AGAINST THE ASSESSEE. WE FIND THAT THE CIT(A) IN BOTH THE YEAR S HAS RELIED ON THE APPELLATE ORDER FOR THE ASSESSMENT YEAR 2001-02 AND DECIDED THIS ISSUE FOLLOWING THE SAME. HOWEVER, THE CIT(A) IN ASSESSM ENT YEAR 2003-04 HAS ALSO GIVEN A FINDING IN PARA 6.4 OF HIS APPELLATE O RDER 21-11-2006 AS UNDER:- 6.8 THUS THE ISSUE INVOLVED IS NOT THAT ANY OLD MA CHINERY WAS USED, BUT THE ISSUE IS THAT NO NEW INDUSTRIAL UNDER TAKING CAME INTO EXISTENCE. THE ABOVE POSITION CLEARLY SHOWS T HAT WHAT HAS BEEN DONE IN THE NAME OF ALLEGED NEW INDUSTRIAL UNDERTAKING IS THAT THE ASSESSEE HAS PURCHASED A TU RBINE AND IT HAS BEEN CLAIMED THAT TURBINE INDEPENDENTLY CAN GENERATE POWER AND AS SUCH THIS IS A NEW POWER PLANT. IT WAS CLAIMED THAT ASSESSEE HAD INSTALLED NEW TURBINE AND THIS CA N BE ITA NO.1547/AHD/2007 8 UTILIZED BY USING STEAM FROM OUTSIDE SOURCES AND SI NCE THE ASSESSEE ALREADY HAD A BOILER, THEY HAVE CHARGED FO R CONSUMPTION OF STEAM AT THE RATE OF RS.660/- PER MT . IT APPEARS THAT THE ASSESSEE WANTS TO SAY TURBINE IN I TSELF AMOUNTS TO ESTABLISHING A NEW UNDERTAKING. THIS DO ES NOT APPEAL TO REASON BECAUSE TURBINE IN ITSELF CAN NEVE R BE HELD TO BE A NEW POWER PLANT. A NEW POWER PLANT WILL HA VE SEVERAL THINGS LIKE PROVISION FOR SUPPLY OF STEAM, TRANSMISSION LINES, CONTROLLING TOWERS AND OTHER ITEMS. SIMPLY S AYING THAT A NEW TURBINE IS A NEW INDUSTRIAL UNDERTAKING MEANS T HAT IF A NEW ENGINE IS INSTALLED IN AN OLD BODY OF A CAR, TH E SAME IS CONVERTED INTO A NEW CAR. THIS EXAMPLE HAS BEEN GI VEN FOR SIMPLE AND LOGICAL UNDERSTANDING OF THE SITUATION. THE ASSESSEE HAS VEHEMENTLY CLAIMED AT THE TIME OF ASSE SSMENT THAT SUPPLY OF POWER IS NOT A PART OF THE POWER PLA NT THEN TURBINE IN ITSELF CAN NEVER BE SAID TO BE A POWER P LANT BECAUSE TURBINE ALONE CAN NEVER BE A UNIT OF GENERA TING POWER. AS DISCUSSED EARLIER, AS PER THE C.AS CERT IFICATE WHICH HAS BEEN REPRODUCED IN EARLIER PAT OF THE ORDER, WH ICH WAS TAKEN OUT OF ASSESSMENT ORDER, THAT THIS POWER PLAT WAS AN OLD PLANT. APART FROM THAT IT IS APPARENT THAT TURBINE IN ITSELF CANNOT BE SAID TO BE A NEW POWER PLANT, THEREFORE, THE CLAIM OF DEDUCTION U/S.80IA WAS SIMPLY WITH A VIEW TO RED UCE THE INCIDENCE OF TAX AND THE ASSESSING OFFICER AFTER IN VESTIGATION OF THE ISSUE AS RIGHTLY COME TO THE CONCLUSION THAT THE SAME CANNOT BE TERMED AS NEW POWER PLANT. THIS GROUND IS THEREFORE DISMISSED. WE FURTHER FIND THAT THIS ISSUE IS RECURRING FROM E ARLIER YEARS AND THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2001-02 IN ITA NO.3528/AHD.2004 HAS HELD AGAINST THE ASSESSEE BY DISCUSSING THE FAC TS AS UNDER:- 7.GROUND NOS.3 AND 4 RELATE TO THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 80-IA IN RESPECT OF NEW POWER PLANT. THE ASSESSEE CLAIMED THAT DURING THE YEAR HE HAS ESTABLISHED THE NEW POWER PLANT AND ACCORDINGLY CLAIMED THE DEDUCTION ON THAT POWER PLANT U/S 80-IA OF THE ACT. WHEN QUESTIONED BY THE AO, THE ASSESSEE VIDE LETTER DATED 9/3/2004 POINTED OUT THAT FOR GENERATION OF THE POWER WHAT IS REQUIRED IS TURBINE. FOR COMPOSITE PLANT FOR GENERATION OF POWER WHAT IS REQUIRED IS BOILER AND TURBINE. BOILER MANUFACTURES THE STEAM WHICH IS THE RAW MATERIAL FOR TURBINE. TURBINE IS ITA NO.1547/AHD/2007 9 INDEPENDENTLY KEPT FOR GENERATING POWER. THE ASSESSEE INSTALLED NEW TURBINE WHICH ITSELF IS A NEW INDUSTRIAL UNDERTAKING CAPABLE OF GENERATING ELECTRICITY. THIS TURBINE CAN BE OPERATED BY PURCHASING STEAM FROM OUTSIDE SOURCE BUT THE ASSESSEE SINCE HAD THE SPARE CAPACITY OF STEAM USED THE SAME FOR GENERATING ELECTRICITY IN TURBINE . IT WAS POINTED OUT THAT THE ASSESSEE HAS CHARGED FOR CONSUMPTION OF STEAM AT THE RATE OF RS.660 PER MT. RELYING ON THE DECISION 107 ITR 195 (SC), IT WAS POINTED OUT THAT THE ASSESSEE MAY ESTABLISH A NEW UNIT FOR USING THE PRODUCT OF THE OLD BUSINESS AS ITS RAW MATERIAL. THE BUSINESS MAY ESTABLISH NEW UNIT FOR SUPPLYING RAW MATERIAL FOR ITS OLD UNI T. THE ASSESSEE MAY ESTABLISH A DIVISION OF ITS OWN PRODUCT AS A NEW UNIT AND THE ASSESSEE MAY ESTABLISH ONE OR MORE UNITS. IT WAS ALSO POINTED OUT THAT THE AO HAS PRESUMED THAT THE EXISTING BOILER IS AN INTEGRAL PART OF THE NEW PLANT. THERE IS NO TRANSFER OF PREVIOUSLY USED PLANT AND MACHINERY AND THEREFORE THE QUESTION OF VALUE OF PREVIOUSLY USED PLANT BEING LESS THAN 20% OF THE TOTAL VALUE OF THE NEW PLANT AND MACHINERY DOES NOT SURVIVE. IT WAS ALSO POINTED OUT THAT THE TOTAL VALUE OF THE PLANT AND MACHINERY USED FOR BUSINESS OF GENERATING POWER WORKS OUT TO RS.14,56,44,295/- (1827180 ON PLANT AND MACHINERY AND 126427115 TURBINE, A NEW INDUSTRIAL UNIT). THE VALUE OF THE BOILER (PRE-EXISTING AND PRE-USED IS RS.1476600/- (PURCHASED SECOND-HAND ON 9-11-98). IT WAS ALSO CONTENDED THAT THE BOILER IS NOT A PART AND PARCEL OF NEW PLANT AND MACHINERY. THE AO DID NOT AGREE WITH THE CONTENTIONS OF THE ASSESSEE THAT THE TURBINE HAS TO BE TREATED AS AN INDEPENDENT POWER GENERATING UNIT AND ULTIMATELY HE HELD THAT NEW POWER PLANT HAS BEEN ESTABLISHED BY WAY OF TRANSFER OF OLD PREVIOUSLY USED MACHINERY AND ACCORDINGLY DID NOT ALLOW THE DEDUCTION U/S 80-IA IN RESPECT OF THIS POWER PLANT. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT(A) ALSO CONFIRMED THE FINDING OF THE AO BY HOLDING AS UNDER: 4.1 I HAVE CONSIDERED THE FINDINGS OF THE AO, SUBMISSIONS AND ARGUMENTS ADVANCED BY THE LD. COUNS EL ITA NO.1547/AHD/2007 10 FOR THE APPELLANT DURING THE COURSE OF ASSESSMENT A S WELL AS APPELLATE PROCEEDINGS AND CASE LAWS RELIED UPON ON THE ISSUE. I FIND THAT NO INDUSTRIAL UNDERTAKING CAME I NTO EXISTENCE WITHIN THE PROVISIONS OF SECTION 80IA BY TRANSFERRING THE BOILER OR BY INSTALLING NEW MACHIN ERY FOR THE PURPOSE OF GENERATION OF POWER FOR FACTORY CONSUMPTION. I FIND THAT THIS IS NOTHING BUT AN EX ERCISE TO CLAIM DEDUCTION TO REDUCE TAXABLE PROFITS. I ALSO F IND THAT THE POWER PLANT IS NOT CAPABLE TO RUN INDEPENDENTLY AND IS DEPENDENT ON THE TRANSFER OF STEAM ETC. FROM THE EX ISTING PLANT. I THEREFORE HOLD THAT THE APPELLANT IS NOT E NTITLED TO CLAIM DEDUCTION U/S 80IA ON NEW POWER PLANT AMOUNTI NG TO RS.15,68,40,556/-. THIS GROUND OF APPEAL IS THEREFO RE REJECTED. 8 BEFORE US, THE LEARNED AR VEHEMENTLY CONTENDED THAT THE INSTALLATION OF A NEW TURBINE IS A NEW IND USTRIAL UNDERTAKING CAPABLE OF GENERATING ELECTRICITY. THIS UNDERTAKING IS BEING RUN INDEPENDENTLY. MERELY THAT THE ASSESSEE WAS USING THE STEAM AS RAW MATERIAL FROM T HE EXISTING BOILER DOES NOT MEAN THAT A NEW INDUSTRIAL UNDERTAKING HAS COME INTO EXISTENCE. THE ASSESSEE COULD HAVE BOUGHT THE STEAM FROM OUTSIDE ALSO. THE POWER AND PLANT IS A SEPARATE UNIT FROM THE BOILER. THEREFORE, THE ASSESSEE SHOULD HAVE TREATED NEW TURBINE TO BE AN INDUSTRIAL UNDERTAKING. EVEN OTHER WISE ALSO IT WAS CONTENDED THAT THE VALUE OF THE BOILER IN ANY CASE WAS LESS THAN 20% OF THE TOTAL PLANT AND MACHINERY INSTALLED BY THE ASSESSEE. BOTH THE LEARN ED AO AND THE LEARNED CIT(A) COULD NOT BE ABLE TO UNDERSTAND THAT THE POWER CAN BE GENERATED INDEPENDENTLY. THUS, IT WAS CONTENDED THAT THE ASSESSEE WAS ENTITLED FOR THE DEDUCTION U/S 80IA. THE LEARNED DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE AO. 9 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S AND PERUSED THE MATERIAL ON RECORD ALONG WITH THE O RDER OF THE TAX AUTHORITIES BELOW. THE DEDUCTION U/S 80I A IS AVAILABLE TO AN ASSESSEE WHERE THE GROSS TOTAL INCO ME OF THE ASSESSEE INCLUDES ANY PROFITS AND GAINS DERI VED BY AN UNDERTAKING OR ENTERPRISE FROM ANY ELIGIBLE BUSINESS AS REFERRED TO IN SUB-SECTION (4). THE DEDUCTION SHALL BE ALLOWED AN AMOUNT EQUAL TO 100% OF THE PROFITS AND GAINS DERIVED FROM SUCH BUSINESS FO R TEN ITA NO.1547/AHD/2007 11 CONSECUTIVE YEARS. AS PER SECTION 80IA(4) THIS SECT ION APPLIES TO ANY UNDERTAKING WHICH IS SET UP IN ANY P ART OF INDIA FOR THE GENERATION OR GENERATION AND DISTRIBUTION OF POWER IF IT BEGINS TO GENERATE POWE R AT ANY TIME DURING THE PERIOD BEGINNING ON THE 1ST DAY OF APRIL, 1993 AND ENDING ON THE 31ST DAY OF MARCH, 20 10. SUB-SECTION (3) OF SECTION 80IA REQUIRES THAT SUCH UNDERTAKING MUST FULFILL THE CONDITIONS LAID DOWN THEREIN. THE FIRST CONDITION THEREIN IS THAT THE UNDERTAKING SHOULD NOT BE FORMED BY SPLITTING UP, O R THE RECONSTRUCTION, OF A BUSINESS ALREADY IN EXISTENCE. THE SECOND CONDITION STATES THAT THE UNDERTAKING IS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINE RY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. EXPLANATI ON 2 TO THIS SUB-SECTION STATES THAT WHERE IN THE CASE O F AN UNDERTAKING, ANY MACHINERY OR PLANT OR ANY PART THE REOF PREVIOUSLY USED FOR ANY PURPOSE IS TRANSFERRED TO A NEW BUSINESS AND THE TOTAL VALUE OF THE MACHINERY OR PL ANT OR PART SO TRANSFERRED DOES NOT EXCEED TWENTY PER C ENT OF THE TOTAL VALUE OF THE MACHINERY OR PLANT USED I N THE BUSINESS, THEN, FOR THE PURPOSES OF CLAUSE (II) OF THIS SUB-SECTION, THE CONDITION SPECIFIED THEREIN SHALL BE DEEMED TO HAVE BEEN COMPLIED WITH. THIS IS AN UNDISPUTED FACT THAT IN THIS CASE THE ASSESSEE HAS NOT TRANSFERRED THE EXISTING BOILER TO THE NEW UNDERTAK ING FOR GENERATING THE POWER BUT THE CONTENTION OF THE ASSESSEE IS THAT THE SAME VERY BOILER IS BEING USED FOR SUPPLYING THE STEAM TO BOTH THE TURBINE WHICH WAS ALREADY IN EXISTENCE AND THE NEW ONE ESTABLISHED BY THE ASSESSEE. THE CLAIM OF THE ASSESSEE IS THAT THE NEW TURBINE ESTABLISHED BY HIM ITSELF IS A NEW UNDERTAK ING ENGAGED IN THE BUSINESS OF GENERATING THE POWER. NE W TURBINE ITSELF CANNOT GENERATE POWER UNTIL AND UNLE SS THE STEAM IS PROVIDED TO IT THROUGH BOILER. AN UNDERTAKING WHICH IS ELIGIBLE FOR DEDUCTION U/S 80I A, IN OUR OPINION, MUST ITSELF BE AN INDEPENDENT UNDERTAK ING AND SHOULD BE ABLE TO CARRY OUT THE ACTIVITIES FOR WHICH IT HAS BEEN ESTABLISHED. THE NEW TURBINE ESTABLISHE D BY THE ASSESSEE CANNOT ITSELF GENERATE THE POWER. THE UNDERTAKING SO THAT IT MAY GENERATE THE POWER WILL BE COMPLETE ONLY WHEN BOTH NEW TURBINE AND THE BOILER ARE INSTALLED. THE ASSESSEE HAS NOT INSTALLED BOILER BU T IT IS PART OF EXISTING UNDERTAKING GENERATING THE POWER. THIS, IN OUR OPINION, IS MERELY AN EXPANSION OF THE EXIST ING UNDERTAKING. IF THE EXISTING BOILER IS CARVED OUT F ROM ITA NO.1547/AHD/2007 12 THE NEW TURBINE INSTALLED BY THE ASSESSEE, THE NEW TURBINE CLAIMED TO BE ELIGIBLE UNDERTAKING ITSELF C ANNOT GENERATE THE POWER. NO MATERIAL OR EVIDENCE WAS BROUGHT TO OUR KNOWLEDGE WHICH MAY PROVE THAT THE N EW TURBINE INSTALLED BY THE ASSESSEE CAN INDEPENDENTLY GENERATE THE POWER. THE ASSESSEE IS ALREADY HAVING THE UNDERTAKING ENGAGED IN THE BUSINESS OF GENERATING T HE POWER. THE ASSESSEE IN THIS CASE HAS MERELY ADDED A NEW TURBINE TO THE EXISTING UNDERTAKING BY WHICH HI S CAPACITY TO GENERATE THE POWER HAS INCREASED. THIS, IN OUR OPINION, IS MERELY AN EXPANSION OF THE EXISTING UNDERTAKING. THE NEW UNDERTAKING AS IS ELIGIBLE U/S 80IA, IN OUR OPINION, MUST BE INDEPENDENT AND INTEGRATED UNIT WHICH SHOULD BE ABLE TO CARRY ON TH E ACTIVITIES OR TO CARRY ON THE BUSINESS AS HAS BEEN STIPULATED U/S 80IA INDEPENDENTLY. IT IS NOT THE CA SE OF THE ASSESSEE THAT THE NEW UNIT ESTABLISHED BY THE ASSESSEE HAS TAKEN THE BOILER FROM THE EXISTING UNI T FOR ITS EXCLUSIVE USE AND GENERATION OF POWER. IT IS ON LY IN THE EXISTING UNIT THE ASSESSEE HAS ADDED NEW TURBIN E WHICH, IN OUR OPINION, CANNOT BE REGARDED TO BE ESTABLISHING THE NEW UNDERTAKING QUALIFYING FOR DEDUCTION U/S 80IA. WE, THEREFORE, DO NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF THE CIT(A) IN DENYING DEDUCTION TO THE ASSESSEE U/S 80IA. THUS, GROUND NOS.3 AND 4 STAND DISMISSED. 9. AS THE TRIBUNAL HAS ALREADY DECIDED THIS ISSUE A ND THIS BEING A RECURRING ISSUE AND WHILE DECIDING THIS ISSUE, ONE OF THE MEMBERS, I.E. THE AUTHOR OF THIS ORDER, IS PARTY TO THE ORDER FOR ASS ESSMENT YEAR 2001-02, THE FACTS BEING EXACTLY IDENTICAL, WE DECIDE THIS COMMO N ISSUE AGAINST THE ASSESSEE. ACCORDINGLY, THIS COMMON ISSUE OF THE ASS ESSEES APPEALS IS DISMISSED. 9.1 SINCE THE FACTS OBTAINING IN THE YEAR UNDER CO NSIDERATION ARE UNDISPUTEDLY SIMILAR TO THE FACTS OBTAINING IN THE PRECEDING ASSESSMENT YEAR, WE HAVE NO HESITATION IN UPHOLDING THE FINDINGS OF THE LEARNED CIT(A) IN THE LIGHT OF THE AFORESAID DE CISION OF THE ITAT IN THE ASSESSEES OWN CASE FOR AY 2003-04. THEREFOR E, GROUND NO.2 IN THE ASSESSEES APPEAL IS DISMISSED. ITA NO.1547/AHD/2007 13 10. GROUND NO.3 IN THE ASSESSEES APPEAL RELATES TO DEDUCTION U/S 80IB OF THE ACT ON THE DEPB CREDIT AMOUNTING TO RS .3,65,34,766/-. THE AO WHILE REFERRING TO THE DECISION OF THE HONB LE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V INDIA GELATINE & CH EMICALS LTD. [2005] 275 ITR 284 (GUJ) DID NOT ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S 80IB OF THE ACT ON THE AMOUNT OF DEPB BENEFITS AMOUNTING TO RS.3,65,34,766/-. 11. ON APPEAL, THE LEARNED CIT(A) UPHELD THE FINDIN GS OF THE AO, FOLLOWING HIS OWN DECISION IN AY 2003-04. 12. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED AR ON B EHALF OF THE ASSESSEE FAIRLY ADMITTED THAT THOUGH THE TRIBUNAL I N THE AFORESAID ORDER DATED 24-07-2009 IN AY 2003-04 ALLOWED THE CL AIM OF THE ASSESSEE, THE HON'BLE SUPREME COURT IN THEIR DECISI ON IN THE CASE OF LIBERTY INDIA VS. CIT (2009) 317 ITR 218 (SC) HE LD THAT DEPB BENEFITS WERE NOT ENTITLED TO DEDUCTION U/S 80IB OF THE ACT. ACCORDINGLY, THE LD. AR PLEADED THAT ISSUE HAS TO BE DECIDED IN THE LIGHT OF SAID DECISION OF THE HONBLE APEX COURT. O N THE OTHER HAND, THE LEARNED DR SUPPORTED THE FINDINGS OF THE LD. C IT(A) IN THE LIGHT OF DECISION OF THE HON'BLE SUPREME COURT IN THE CA SE OF LIBERTY INDIA (SUPRA). 13. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE AFORESAID DECISION OF THE ITAT AND THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF LIBERTY INDIA (SUPRA). ON A SIMILAR ISSUE AS TO WHETHER THE PROFIT FROM D UTY ENTITLEMENT PASSBOOK SCHEME (DEPB) AND DUTY DRAWBACK SCHEME ARE DERIVED FROM THE BUSINESS OF THE INDUSTRIAL UNDERTAKING AND CONSEQUENTLY ELIGIB LE FOR DEDUCTION U/S 80-IB OF THE ACT, THE HONBLE APEX COURT OBSERVED THAT THE A CT BROADLY PROVIDES FOR TWO ITA NO.1547/AHD/2007 14 TYPES OF TAX INCENTIVES, NAMELY, INVESTMENT LINKED INCENTIVES AND PROFIT LINKED INCENTIVES. CHAPTER VI-A ESSENTIALLY BELONGS TO TH E CATEGORY OF PROFIT LINKED INCENTIVES WHILE SS. 80-IA/80-IB REFER TO PROFITS DERIVED FROM ELIGIBLE BUSINESS, IT IS NOT THE OWNERSHIP OF THAT BUSINESS WHICH ATTRACT S THE INCENTIVES BUT THE GENERATION OF PROFITS (OPERATIONAL PROFITS) AND EAC H OF THE ELIGIBLE BUSINESS IN SUB- SECTIONS (3) TO (11A) CONSTITUTES A STAND-ALONE ITE M IN THE MATTER OF COMPUTATION OF PROFITS. IT WAS FURTHER HELD THAT SS. 80-IB/80 -IA ARE A CODE BY THEMSELVES AS THEY CONTAIN BOTH SUBSTANTIVE AS WELL AS PROCEDURAL PROVISIONS. S. 80-IB ALLOWS DEDUCTION OF PROFITS AND GAINS DERIVED FROM THE ELI GIBLE BUSINESS. THE WORDS DERIVED FROM IS NARROWER IN CONNOTATION AS COMPAR ED TO THE WORDS ATTRIBUTABLE TO. BY USING THE EXPRESSION DERIVED FROM, PARLIA MENT INTENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGREE; THOUGH THE OBJECT BEH IND DEPB ETC IS TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY PAYMENT ON THE IMPORT CONTENT OF EXPORT PRODUCT DEPB CREDIT/DUTY DRAWBACK RECEIPT DO NOT COME WITHI N THE FIRST DEGREE SOURCE AS THE SAID INCENTIVES FLOW FROM INCENTIVE SCHEMES ENA CTED BY THE GOVERNMENT OR FROM S. 75 OF THE CUSTOMS ACT. SUCH INCENTIVES PROF ITS ARE NOT PROFITS DERIVED FROM THE ELIGIBLE BUSINESS U/S 80-IB. THEY ARE ANCILLAR Y PROFITS OF SUCH UNDERTAKINGS AND EVEN AS PER AS-2 AND THE ICAI GUIDANCE NOTE, DU TY DRAWBACK, DEPB BENEFITS, REBATES ETC. CANNOT BE CREDITED AGAINST T HE COST OF MANUFACTURE OF GOODS BUT HAVE TO BE SHOWN AS AN INDEPENDENT SOURCE OF INCOME BEYOND THE FIRST DEGREE NEXUS BETWEEN PROFITS AND THE INDUSTRIAL UND ERTAKING. THE HONBLE APEX COURT CONCLUDED THAT 16. DEPB IS AN INCENTIVE. IT IS GIVEN UNDER DUTY E XEMPTION REMISSION SCHEME. ESSENTIALLY, IT IS AN EXPORT INCENTIVE. NO DOUBT, T HE OBJECT BEHIND DEPB IS TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY PAYMENT ON THE IMPORT CONTENT OF EXPORT PRODUCT. THIS NEUTRALIZATION IS PROVIDED FOR BY CRE DIT TOCUSTOMS DUTY AGAINST EXPORT PRODUCT. UNDER DEPB, AN EXPORTER MAY APPLY F OR CREDIT AS PERCENTAGE OF FOB VALUE OF EXPORTS MADE IN FREELY CONVERTIBLE CU RRENCY. CREDIT IS AVAILABLE ONLY AGAINST THE EXPORT PRODUCT AND AT RATES SPECIFIED B Y DGFT FOR IMPORT OF RAW MATERIALS, COMPONENTS ETC.. DEPB CREDIT UNDER THE S CHEME HAS TO BE CALCULATED BY TAKING INTO ACCOUNT THE DEEMED IMPORT CONTENT OF THE EXPORT PRODUCT AS PER BASIC CUSTOMS DUTY AND SPECIAL ADDITIONAL DUTY PAYA BLE ON SUCH DEEMED IMPORTS. THEREFORE, IN OUR VIEW, DEPB/DUTY DRAWBACK ARE INCENTIVES WHICH FLOW FROM THE SCHEMES FRAMED BY CENTRAL GOVERNMENT OR FROM SECTION 75 OF THE CUS TOMS ACT,1962, HENCE, ITA NO.1547/AHD/2007 15 INCENTIVES PROFITS ARE NOT PROFITS DERIVED FROM THE ELIGIBLE BUSINESS UNDER SECTION 80-IB. THEY BELONG TO THE CATEGORY OF ANCILLARYPROF ITS OF SUCH UNDERTAKINGS. 17. THE NEXT QUESTION IS WHAT IS DUTY DRAWBACK? S ECTION 75 OF THE CUSTOMS ACT, 1962 AND SECTION 37 OF THE CENTRAL EXCISE ACT, 1944 EMPOWER GOVERNMENT OF INDIA TO PROVIDE FOR REPAYMENT OF CUSTOMS AND EX CISE DUTY PAID BY AN ASSESSEE. THE REFUND IS OF THE AVERAGE AMOUNT OF DU TY PAID ON MATERIALS OF ANY PARTICULAR CLASS OR DESCRIPTION OF GOODS USED IN TH E MANUFACTURE OF EXPORT GOODS OF SPECIFIED CLASS. THE RULES DO NOT ENVISAGE A REF UND OF AN AMOUNT ARITHMETICALLY EQUAL TO CUSTOMS DUTY OR CENTRAL EXC ISE DUTY ACTUALLY PAID BY AN INDIVIDUAL IMPORTER-CUM-MANUFACTURER. SUB-SECTION ( 2) OF SECTION 75 OF THE CUSTOMS ACT REQUIRES THE AMOUNT OF DRAWBACK TO BE DETERMINED ON A CONSIDERATION OF ALL THE CIRCUMSTAN CES PREVALENT IN A PARTICULAR TRADE AND ALSO BASED ON THE FACTS SITUATION RELEVAN T IN RESPECT OF EACH OF VARIOUS CLASSES OF GOODS IMPORTED. BASICALLY, THE SOURCE OF DUTY DRAWBACK RECEIPT LIES IN SECTION 75 OF THE CUSTOMS ACT AND SECTION 37 OF THE CENTRAL EXCISE ACT. 18. ANALYSING THE CONCEPT OF REMISSION OF DUTY DRAW BACK AND DEPB, WE ARE SATISFIED THAT THE REMISSION OF DUTY IS ON ACCOUNT OF THE STATUTORY/POLICY PROVISIONS IN THE CUSTOMS ACT/SCHEME(S) FRAMED BY THE GOVERNME NT OF INDIA. IN THE CIRCUMSTANCES, WE HOLD THAT PROFITS DERIVED BY WAY OF SUCH INCENTIVES DO NOT FALL WITHIN THE EXPRESSION PROFITS DERIVED FROM INDUSTR IAL UNDERTAKING IN SECTION 80- IB. 19. SINCE RELIANCE WAS PLACED ON BEHALF OF THE ASSE SSEE(S) ON AS-2 WE NEED TO ANALYSE THE SAID STANDARD. 20. AS-2 DEALS WITH VALUATION OF INVENTORIES. INVEN TORIES ARE ASSETS HELD FOR SALE IN THE COURSE OF BUSINESS; IN THE PRODUCTION FOR SU CH SALE OR IN FORM OF MATERIALS OR SUPPLIES TO BE CONSUMED IN THE PRODUCTION. 21. INVENTORY SHOULD BE VALUED AT THE LOWER OF CO ST AND NET REALIZABLE VALUE (NRV). THE COST OF INVENTORY SHOULD COMPRISE ALL COSTS OF PURCHASE, COSTS OF CONVERSION AND OTHER COSTS INCLUDING COSTS INCURRED IN BRINGING THE INVENTORY TO THEIR PRESENT LOCATION AND CONDITION. 22. THE COST OF PURCHASE INCLUDES DUTIES AND TAXES (OTHER THAN THOSE SUBSEQUENTLY RECOVERABLE BY THE ENTERPRISE FROM TAX ING AUTHORITIES), FREIGHT INWARDS AND OTHER EXPENDITURE DIRECTLY ATTRIBUTABLE TO THE ACQUISITION. HENCE TRADE DISCOUNTS, REBATE, DUTY DRAWBACK, AND SUCH SIMILAR ITEMS ARE DEDUCTED IN DETERMINING THE COSTS OF PURCHASE. THEREFORE, DUTY DRAWBACK, REBATE ETC.SHOULD NOT BE TREATED AS ADJUSTMENT (CREDITED) TO COST OF PURCHASE OR MANUFACTURE OF GOODS. THEY SHOULD BE TREATED AS SEPARATE ITEMS OF REVENUE OR INCOME AND ACCOUNTED FOR ACCORDINGLY (SEE: PAGE 44 OF INDIAN A CCOUNTING STANDARDS & GAAP BY DOLPHY DSOUZA). THEREFORE, FOR THE PURPOSES OF AS-2, CENVAT CREDITS SHOULD NOT BE INCLUDED IN THE COST OF PURCHASE OF INVENTOR IES. EVEN INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) HAS ISSUED GUIDANCE NOT E ON ACCOUNTING TREATMENT FOR CENVAT/MODVAT UNDER WHICH THE INPUTS CONSUMED A ND THE INVENTORY OF INPUTS ITA NO.1547/AHD/2007 16 SHOULD BE VALUED ON THE BASIS OF PURCHASE COST NET OF SPECIFIED DUTY ON INPUTS (I.E. DUTY RECOVERABLE FROM THE DEPARTMENT AT LATER STAGE) ARISING ON ACCOUNT OF REBATES, DUTY DRAWBACK, DEPB BENEFIT ETC. PROFIT GE NERATION COULD BE ON ACCOUNT OF COST CUTTING, COST RATIONALIZATION, BUSINESS RES TRUCTURING, TAX PLANNING ON SUNDRY BALANCES BEING WRITTEN BACK, LIQUIDATION OF CURRENT ASSETS ETC. THEREFORE, WE ARE OF THE VIEW THAT DUTY DRAWBACK, DEPB BENEFITS, REBATES ETC. CANNOT BE CREDITED AGAINST THE COST OF MANUFACTURE OF GOODS DEBITED IN THE PROFIT & LOSS ACCOUNT FOR PURPOSES OF SECTIO NS 80-IA/80-IB AS SUCH REMISSIONS (CREDITS) WOULD CONSTITUTE INDEPENDENT S OURCE OF INCOME BEYOND THE FIRST DEGREE NEXUS BETWEEN PROFITS AND THE INDUSTRI AL UNDERTAKING. 24. IN THE CIRCUMSTANCES, WE HOLD THAT DUTY DRAWBAC K RECEIPT/DEPB BENEFITS DO NOT FORM PART OF THE NET PROFITS OF ELIGIBLE INDUST RIAL UNDERTAKING FOR THE PURPOSES OF SECTIONS 80I/80-IA/80-IB OF THE 1961 ACT . 13.1. IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISION OF THE HONBLE APEX COURT, WE HOLD THAT DEPB BENEFITS DO NOT FORM PART OF THE NET PROFITS OF ELIGIBLE INDUSTRIAL UNDERTAKING FOR THE PURPOSES OF SECTIONS 80-IB OF THE ACT. THEREFORE, WE HAVE NO OPTION BUT TO UPHOLD THE CONCLUSION OF THE LD. CIT(A) AND REJECT GROUND NO.3 OF THE APPEAL. 14. GROUND NOS..4 TO 8 IN THE APPEAL RELATE TO REDU CTION OF PROFITS OF THE BUSINESS ON ACCOUNT OF SALE PROCEEDS OF DEPB LICENSE WHILE COMPUTING DEDUCTION U/S 80HHC OF THE ACT. THE AO WH ILE COMPUTING THE DEDUCTION U/S 80HHC OF THE ACT, DID NOT INCREAS E ELIGIBLE PROFITS BY 90% OF THE PROFITS ON SALE OF DEPB LICENSE IN TH E LIGHT OF AMENDED PROVISIONS OF SECTION 80HHC OF THE ACT, THE ASSESSEE HAVING FAILED TO ESTABLISH THAT IT FULFILLED THE CO NDITIONS STIPULATED IN 3 RD PROVISO TO SECTION 80HHC OF THE ACT. 15. ON APPEAL, THE LEARNED CIT(A) UPHELD THE FINDIN GS OF THE AO IN THE LIGHT OF HIS OWN DECISION FOR AY 2003-04. 16. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINS T THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARN ED AR ON BEHALF OF THE ASSESSEE FAIRLY ADMITTED THAT THOUGH THE TRI BUNAL IN THEIR AFORESAID ORDER DATED 24-07-2009 IN THE AY 2003-04 HAD RESTORED ITA NO.1547/AHD/2007 17 THE ISSUE TO THE FILE OF THE AO FOR DECISION IN AC CORDANCE WITH AMENDMENTS BROUGHT IN SEC. 28 AND 80HHC OF THE ACT BY THE TAXATION LAWS (SECOND AMENDMENT) ACT, 2005, W.E.F 1.4.1998 , NOW THE ISSUE IS TO BE DECIDED IN THE LIGHT OF VIEW TAKEN IN THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. KALPATARU COLOURS & CH EMICALS (2010) 233 CTR (BOM) 313,REVESING THE DECISION IN THE CASE O F M/S TOPMAN EXPORTS,318 ITR(AT) 87(MUMBAI) (SB). ON THE OTHER H AND, THE LD. DR SUPPORTED THE FINDINGS OF THE LD. CIT(A). 17. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE DECISION RELIED ON . THE REL EVANT PROVISIONS OF SEC. 28(IIID) APPLICABLE W.E.F 1.4.1998 READ AS UND ER : (IIID) ANY PROFIT ON THE TRANSFER OF THE DUTY ENTI TLEMENT PASS BOOK SCHEME, BEING THE DUTY REMISSION SCHEME UNDER THE E XPORT AND IMPORT POLICY FORMULATED AND ANNOUNCED UNDER SE CTION 5 OF THE FOREIGN TRADE (DEVELOPMENT AND REGULATION) ACT, 1992 (22 OF 1992) 17.1 THE THIRD PROVISO TO SEC.80HHC(3) OF THE ACT A S INTRODUCED BY THE TAXATION LAWS (SECOND AMENDMENT) ACT, 2005, W.E .F 1.4.1998 READS AS UNDER: PROVIDED ALSO THAT IN THE CASE OF AN ASSESSEE HAVI NG EXPORT TURNOVER EXCEEDING RUPEES TEN CRORES DURING THE PREVIOUS YEAR, THE PRO FITS COMPUTED UNDER CLAUSE (A) OR CLAUSE (B) OR CLAUSE (C) OF THIS SUB-SECTION OR AFTER GIVING EFFECT TO THE FIRST PROVISO, AS THE CASE MAY BE, SHALL BE FURTHER INCRE ASED BY THE AMOUNT WHICH BEARS TO NINETY PER CENT OF ANY SUM REFERRED TO IN CLAUSE (IIID) OF SECTION 28, THE SAME PROPORTION AS THE EXPORT TURNOVER BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE ASSESSEE, IF THE ASSESSEE HAS NEC ESSARY AND SUFFICIENT EVIDENCE TO PROVE THAT, - (A) HE HAD AN OPTION TO CHOOSE EITHER THE DUTY DRAW BACK OR THE DUTY ENTITLEMENT PASS BOOK SCHEME, BEING DUTY REMISSION SCHEME; AND (B) THE RATE OF DRAWBACK CREDIT ATTRIBUTABLE TO THE CUSTOMS DUTY WAS HIGHER THAN THE RATE OF CREDIT ALLOWABLE UNDER THE DUTY ENTITLE MENT PASS BOOK SCHEME, BEING DUTY REMISSION SCHEME : ITA NO.1547/AHD/2007 18 17.2 AS IS APPARENT FROM THE IMPUGNED ORDER, THE LD. CIT(A) UPHELD THE FINDINGS OF THE AO SINCE THE ASSESSEE FA ILED TO FURNISH ANY EVIDENCE ,WHICH COULD ESTABLISH THAT THE ASSESS EE FULFILLED THE AFORESAID TWO CONDITIONS STIPULATED IN THE THIRD PR OVISO TO SEC.80HHC(3) OF THE ACT AS INTRODUCED BY THE TAXATI ON LAWS (SECOND AMENDMENT) ACT, 2005, W.E.F 1.4.1998. EVEN BEFORE U S SITUATION IS NO BETTER. THE ASSESSEE HAVING FAILED TO PROVE AS TO HOW IT FULFIL LED THE AFORESAID TWO STIPULATED CONDITIONS STIPULATED IN THE THIRD PROVISO TO SUB-S ECTION (3) OF SEC. 80HHC OF THE ACT, WE ARE OF THE OPINION THAT THE AS SESSEE IS NOT ENTITLED TO THE DEDUCTION U/S 80HHC OF THE ACT ON T HAT GROUND ALONE. 17.3 EVEN OTHERWISE WHILE ADJUDICATING A SIMILAR CLAIM IN THE CASE OF M/S TOPMAN EXPORTS,318 ITR(AT) 87(MUMBAI) (SB)., TH E FOLLOWING QUESTION WAS REFERRED TO THE SPECIAL BENCH: WHETHER THE ENTIRE AMOUNT RECEIVED ON SALE OF DEPB ENTITLEMENTS REPRESENTS PROFIT CHARGEABLE UNDER SECTION 28(IIID) OF THE INCOME TAX ACT OR THE PROFIT REFERRED TO THEREIN REQUIRES ANY ARTI FICIAL COST TO BE INTERPOLATED? 17.31 THE SPECIAL BENCH ADJUDICATED THE AFORES AID QUESTION IN FOLLOWING TERMS: I) THE ARGUMENT OF THE REVENUE THAT DEPB IS A POST EXPORT EVENT AND HAS NO RELATION WITH THE PURCHASE OF GOODS CANNOT BE ACCEP TED. THERE IS A DIRECT RELATION BETWEEN DEPB AND THE CUSTOMS DUTY PAID ON THE PURCHASES . FOR PRACTICAL PURPOSES, DEPB IS A REIMBURSEMENT OF THE COST OF PURCHASE TO THE EXTENT OF CUSTOMS DUTY; (II) THE DEPB BENEFIT (FACE VALUE) ACCRUES AND BECOMES A SSESSABLE TO TAX WHEN THE APPLICATION FOR DEPB IS FILED WITH THE CON CERNED AUTHORITY . SUBSEQUENT EVENTS SUCH AS SALE OF DEPB OR MAKING IM PORTS FOR SELF CONSUMPTION ETC ARE IRRELEVANT FOR DETERMINING THE ACCRUAL OF T HE INCOME ON ACCOUNT OF DEPB; (III) THOUGH S. 28 (IIIB) REFERS TO A CASH ASSISTA NCE AGAINST EXPORTS, IT IS WIDE ENOUGH TO COVER THE FACE VALUE OF THE DEPB BENEFIT; (IV) S. 28 (IIID) WHICH REFERS TO THE PROFITS ON TRANSFER OF THE DEPB OBVIOUSLY REFERS ONLY TO THE PROFIT ELEMENT AND NOT THE GROSS SALE PROCEEDS OF THE DE PB. IF THE REVENUES ARGUMENT THAT THE SALE PROCEEDS SH OULD BE CONSIDERED IS ITA NO.1547/AHD/2007 19 ACCEPTED THERE WOULD BE ABSURDITY BECAUSE THE FACE VALUE OF THE DEPB WILL THEN GET ASSESSED IN THE YEAR OF RECEIPT OF THE DEPB AND ALSO IN THE YEAR OF ITS TRANSFER; (V) CONSEQUENTLY, ONLY THE PROFIT (I.E. THE SALE VALUE LESS THE FAC E VALUE) IS REQUIRED TO BE CONSIDERED FOR PURPOSES OF S. 80HHC . 17.4 HOWEVER, THE AFORESAID DECISION OF THE SPEC IAL BENCH HAS NOW BEEN REVERSED BY THE HONBLE BOMBAY HIGH COURT IN THEIR DECISION IN THE CASE OF KALPATARU COLOURS & CHEMICA LS (SUPRA), HOLDING THAT THE ARGUMENT THAT S. 28(IIID) COVERED ONLY THE PROFIT (DIFFERENCE BETWEEN SALE CONSIDERATION AND FACE VALUE OF THE DE PB CREDIT) AND THAT THE FACE VALUE IS ASSESSABLE U/S 28(IIIB) IS NOT CORRECT. T HE ENTIRE AMOUNT RECEIVED ON TRANSFER OF THE DEPB CREDIT IS PROFITS AND FALLS UNDER S. 28(IIID). THERE WAS NO BASIS OR JUSTIFICATION FOR THE TRIBUNAL TO HOLD THA T THE FACE VALUE OF THE DEPB CREDIT CAN BE REDUCED FROM THE SALE CONSIDERATION. IT WAS NOT PERMISSIBLE TO BIFURCATE THE PROCEEDS OF THE DEPB INTO FACE VALUE AND EXC ESS OF FACE VALUE. THE APPROACH OF THE TRIBUNAL IS MISCONCEIVED AND UNSUST AINABLE. AS THE ASSESSEE HAD AN EXPORT TURNOVER EXCEEDING RS.10 CRORES AND D ID NOT FULFILL THE CONDITIONS SET OUT IN THE THIRD PROVISO TO S. 80HHC (3), IT WA S NOT ENTITLED TO A DEDUCTION U/S 80HHC ON THE AMOUNT RECEIVED ON TRANSFER OF DEPB, H ONBLE HIGH COURT CONCLUDED. THE RELEVANT FINDINGS OF THE HONBLE H IGH COURT ARE IN THE FOLLOWING TERMS: 31. WE DO NOT FIND ANY LOGICAL JUSTIFICATION IN BIF URCATING THE VALUE OF THE SALE CONSIDERATION REALIZED BY THE EXPORTER ON THE TRANS FER OF THE DEPB CREDIT. FOR ONE THING CLAUSE (IIID) OF SECTION 28 MUST COVER WITHIN ITS PURVIEW, THE ENTIRETY OF THE SALE CONSIDERATION WHICH IS REALIZED BY THE EXPORTE R ON THE TRANSFER OF THE DEPB CREDIT SINCE THAT REPRESENTS THE PROFIT WHICH THE E XPORTER OBTAINS ON THE TRANSFER OF THE CREDIT. NO PART OF THE CREDIT THAT IS AVAILABLE UNDER THE DEPB SCHEME CAN FALL FOR CLASSIFICATION UNDER CLAUSE (IIIB) OF SECTION 2 8 WHICH DEALS WITH CASH ASSISTANCE, RECEIVED OR RECEIVABLE AGAINST ANY SCHE ME OF THE GOVERNMENT OF INDIA. AS THE LEGISLATIVE HISTORY OF THE PROVISION WOULD SHOW CLAUSE (IIIB) WAS ENACTED BY PARLIAMENT AT A TIME WHEN THE EXPORT INC ENTIVES THAT WERE AVAILABLE WERE (I) IMPORT ENTITLEMENT LICENCES; (II) CASH COM PENSATORY SUPPORT; AND (III) DUTY DRAWBACK. THE DEPB SCHEME WAS NOT EVEN IN EXISTENCE WHEN CLAUSE (IIIB) CAME TO BE ENACTED INTO SECTION 28 BY THE FINANCE ACT OF 1990. THE DEPB SCHEME WAS BROUGHT INTO EXISTENCE WITH EFFECT FROM 1 APRIL 1997. CLAUSE (IIID) OF SECTION 28 WAS INSERTED BY THE AMENDING ACT OF 2005 WITH EF FECT FROM 1 APRIL 1998. THE VALUE OF THE DEPB CREDIT CAN BY NO MEANS BE REGARDE D AS A CASH ASSISTANCE ITA NO.1547/AHD/2007 20 WHICH IS RECEIVED OR RECEIVABLE BY A PERSON AGAINST EXPORTS UNDER ANY SCHEME OF THE GOVERNMENT OF INDIA. 32. THE TRIBUNAL HAS RELIED TO A CONSIDERABLE EXTEN T ON A SPEECH MADE BY THE THEN FINANCE MINISTER ON THE FLOOR OF PARLIAMENT IN SUPPORT OF ITS CONCLUSION THAT ONLY THE PREMIUM REALIZED BY AN EXPORTER ON THE SAL E OF THE DEPB CREDIT WOULD FALL WITHIN THE PURVIEW OF CLAUSE (IIID) OF SECTIO N 28 AND NOT THE FACE VALUE OF THE DEPB. THE ENTIRE APPROACH OF THE TRIBUNAL IS WITH R ESPECT MISCONCEIVED AND UNSUSTAINABLE. THE FINANCE MINISTER SOUGHT TO INTRO DUCE CLAUSE (IIID) IN SECTION 28 IN VIEW OF THE DECISION OF THE DELHI BENCH OF TH E TRIBUNAL IN THE CASE OF P & G ENTERPRISES ( SUPRA). THE DISPUTE IN THAT CASE RELATED TO TAXIN G THE ENTIRE AMOUNT RECEIVED ON THE TRANSFER OF THE DEPB CREDIT AND NOT THE AMOUNT THAT WAS RECEIVED IN EXCESS OF THE FACE VALUE OF THE DEPB CREDIT. AS A MATTER OF FACT IN THAT CASE THE ASSESSEE HAD CLAIMED THAT THE ENTIRE RECEIPT ON THE TRANSFER OF THE DEPB CREDIT INCLUDING THE FACE VALUE OF THE CREDIT AS PROFITS U NDER SECTION 28(IIIA). THE TRIBUNAL IN THAT CASE HELD THAT THE ENTIRETY OF THE AMOUNT WOULD BE COVERED BY SECTION 28(IV). HOWEVER, THE VIEW OF THE TRIBUNAL W AS THAT SINCE EXPLANATION (BAA) IN SECTION 80HHC DID NOT ENVISAGE THE EXCLUSI ON OF PROFITS COVERED BY SECTION 28(IV), SUCH PROFITS COULD NOT BE EXCLUDED WHILE COMPUTING THE DEDUCTION UNDER SECTION 80HHC. HENCE, THERE WAS NO DISPUTE IN CONSIDERING THE ENTIRETY OF THE RECEIPTS ON THE TRANSFER OF THE DEPB CREDIT AS PROFITS OF BUSINESS. THE DISPUTE WAS ONLY IN NOT TREATING THE RECEIPTS BY WAY OF TRA NSFER OF THE DEPB CREDIT AS EXPORT RECEIPTS WHILE COMPUTING THE DEDUCTION UNDER SECTION 80HHC. CONSEQUENTLY, THE ENTIRETY OF THE RECEIPTS ON THE T RANSFER OF THE DEPB CREDIT WHICH WAS SOUGHT TO BE INCLUDED IN SECTION 28(IV) W AS BROUGHT IN BY THE PARLIAMENTARY AMENDMENT IN THE FORM OF AN INSERTION OF CLAUSE (IIID) IN SECTION 28 WITH RETROSPECTIVE EFFECT. THERE WAS NO CONTROVERSY REGARDING THE TAXABILITY OF THE QUANTUM OF RECEIPTS ON THE TRANSFER OF THE DEPB CRE DIT. HENCE, FOR THESE REASONS WE ARE OF THE VIEW THAT IT CANNOT BE INFERRED FROM THE SPEECH OF THE FINANCE MINISTER THAT THE INSERTION OF CLAUSE (IIID) IN SEC TION 28 WAS MADE WITH A VIEW TO TAX ONLY THE AMOUNT WHICH HAS BEEN RECEIVED IN EXCE SS OF THE FACE VALUE OF THE DEPB CREDIT. 33. THE SUBMISSION THAT PRIOR TO THE INSERTION OF C LAUSE (IIID) IN SECTION 28, THE FACE VALUE OF THE DEPB CREDIT REALIZED ON THE TRANS FER OF SUCH CREDIT CONSTITUTED EXPORT PROFITS, BUT NOT THE AMOUNT REALIZED IN EXCE SS OF THE FACE VALUE OF THE DEPB IS SIMILARLY WITHOUT ANY BASIS. THIS IS BECAUS E (I) THE OBJECT OF DEPB WAS TO FURNISH AN INCENTIVE TO EXPORTERS SO AS TO ADJUS T THE CREDIT AGAINST THE CUSTOMS DUTY PAYABLE ON ANY GOODS IMPORTED INTO INDIA. HOWE VER, WHERE AN EXPORTER INSTEAD OF UTILIZING THE CREDIT TRANSFERS THE CREDI T AT A PREMIUM, IT CANNOT BE SAID THAT THE EXPORTER HAS UTILIZED THE CREDIT; (II) THE LEGISLATURE CONSIDERS THAT THE CUSTOMS DUTY AND EXCISE DUTY PAID ON RAW MATERIALS USED IN THE EXPORT PRODUCT, WHEN REPAID OR REPAYABLE AS DUTY DRAWBACK, WOULD NO T CONSTITUTE EXPORT PROFIT. SIMILARLY, WHEN THE DEPB CREDIT IS NOT UTILIZED IN THE BUSINESS BUT IS TRANSFERRED FOR VALUE, THE AMOUNT RECEIVED ON THE TRANSFER WOUL D BE BUSINESS PROFITS AND NOT EXPORT PROFITS IRRESPECTIVE OF WHETHER THE AMOUNT W HICH IS REALIZED IS EQUAL TO, LARGER THAN OR LESS THAN THE FACE VALUE OF THE DEPB CREDIT. PARLIAMENT HAS CONSIDERED THAT THE ENTIRETY OF THE AMOUNT RECEIVED ON THE TRANSFER OF THE DEPB ITA NO.1547/AHD/2007 21 SHALL CONSTITUTE PROFITS OF BUSINESS UNDER SECTION 28(IIID). SINCE SUCH PROFITS ARE NOT EXPORT PROFITS PARLIAMENT DIRECTED THAT NINETY PERCENT OF THOSE PROFITS WOULD BE EXCLUDED WHILE COMPUTING THE DEDUCTION UNDER SECTIO N 80HHC;(III) PARLIAMENT CONSIDERED THAT AN EXPORTER WHO INSTEAD OF UTILIZIN G THE DEPB CREDIT FOR PAYING CUSTOMS DUTY ON IMPORTED GOODS, MAKES A PROFIT BY T RANSFERRING THE DEPB, WOULD FORM A SEPARATE CLASS AND SEEKS TO TAX THE RECEIPTS ON THE TRANSFER OF THE DEPB CREDIT AS BUSINESS PROFITS AND NOT EXPORT PROFITS. EXPORTERS WHO TRANSFER THE DEPB CREDIT AND MAKE A PROFIT CANNOT BE PLACED ON PAR WI TH THOSE EXPORTERS WHO UTILIZE THE CREDIT FOR PAYING THE CUSTOMS DUTY ON THE IMPOR TED GOODS; (IV) THE FACT THAT PARLIAMENT DID NOT CONSIDER THE AMOUNT RECEIVED ONT HE TRANSFER OF THE DEPB TO BE EXPORT PROFIT CANNOT BE A GROUND TO HOLD THAT TH E RECEIPTS ON THE TRANSFER OF DEPB CREDIT ARE NOT BUSINESS PROFITS. COUNSEL APPEA RING ON BEHALF OF THE ASSESSEE SUBMITS THAT THE ENTIRE AMOUNT RECEIVED ON THE TRANSFER OF THE DEPB CREDIT IS BUSINESS PROFIT, BUT IT WAS CONTENDED THA T WHAT IS INCLUDED IN SECTION 28(IIID) IS THE AMOUNT RECEIVED ON THE TRANSFER OF THE DEPB CREDIT IN EXCESS OF THE FACE VALUE OF THE DEPB AND THE AMOUNT RECEIVED TO T HE EXTENT OF THE FACE VALUE OF THE DEPB WOULD BE COVERED UNDER SECTION 28(IIIB) . THERE IS NO MERIT IN THIS CONTENTION BECAUSE (A) THE DEPB CREDIT WAS NOT IN E XISTENCE WHEN SECTION 28(IIIB) WAS INSERTED BY THE FINANCE ACT OF 1990. D EPB CREDIT WAS INTRODUCED WITH EFFECT FROM 1 APRIL 1997 WHICH WAS AFTER THE INSERT ION OF CLAUSE (IIIB) IN SECTION 28; (B) SECTION 28(IIIB) REFERS TO CASH ASSISTANCE (BY WHATEVER NAME CALLED) RECEIVED BY THE ASSESSEE FROM THE GOVERNMENT PURSUANT TO A S CHEME OF THE GOVERNMENT. THE AMOUNT RECEIVED ON THE TRANSFER OF THE DEPB CRE DIT IS NOT RECEIVED BY THE ASSESSEE FROM THE GOVERNMENT PURSUANT TO A SCHEME O F THE GOVERNMENT WITHIN THE MEANING OF CLAUSE (IIIC) AND (C) WHEN SECTION 28(IIID) SPECIFICALLY DEALS WITH PROFITS REALIZED ON THE TRANSFER OF THE DEPB CREDIT , IT WOULD BE IMPERMISSIBLE AS A MATTER OF FIRST PRINCIPLE TO BIFURCATE THE FACE VAL UE OF THE DEPB AND THE AMOUNT RECEIVED IN EXCESS OF THE FACE VALUE OF THE DEPB. 34. FOR ALL THESE REASONS, WE HAVE COME TO THE CONC LUSION THAT THE VIEW OF THE TRIBUNAL ON THE TWO QUESTIONS OF LAW FORMULATED BY THE REVENUE IS UNSUSTAINABLE. IN THE CIRCUMSTANCES, WE ALLOW THE APPEAL BY ANSWER ING THE FIRST QUESTION OF LAW AS FORMULATED IN THE NEGATIVE. 33.(IT SHOULD BE ACTUALLY NUMBERED 35) INSOFAR AS THE SECOND QUESTION IS CONCERNED, WE ARE NOT IN AGREEMENT WITH THE VIEW OF THE TRIBUNAL THAT THE FACE VALUE OF THE DUTY ENTITLEMENT PASSBOOK REALIZED ON THE TRANSFER OF THE ENTITLEMENT IS CHARGEABLE TO TAX UNDER SECTION 28(IIIB). WE HAV E ALREADY CLARIFIED THAT THE ENTIRETY OF THE SALE CONSIDERATION WOULD FALL WITHI N THE PURVIEW OF SECTION 28(IIID). WE ANSWER THE SECOND QUESTION OF LAW ACCORDINGLY IN THE AFORESAID TERMS. 17.5 IN VIEW OF THE FOREGOING, ESPECIALLY WHEN THE LD. AR ON BEHALF OF THE ASSESSEE ALSO DID NOT POINT OUT ANY C ONTRARY DECISION AND INSTEAD RELIED UPON THE AFORESAID DECISION OF THE HONBLE BOMBAY HIGH COURT IN KALPATARU COLOURS & CHEMICALS( SUPRA) WHILE ITA NO.1547/AHD/2007 22 THE ASSESSEE HAD AN EXPORT TURNOVER EXCEEDING RS.10 CRORES AND DID NOT FULFILL THE CONDITIONS SET OUT IN THE THIRD PROVISO TO S. 8 0HHC (3), IT WAS NOT ENTITLED TO A DEDUCTION U/S 80HHC ON THE AMOUNT RECEIVED ON TRANS FER OF DEPB . THEREFORE, WE HAVE NO ALTERNATIVE BUT TO UPHOLD THE CONCLUSION OF THE LD. CIT(A). ACCORDINGLY, GROUND NOS. 4 TO 8 IN THE APPEAL ARE DISMISSED. 18. GROUND NOS.9 TO 14 IN THE APPEAL RELATE TO AN A DDITION OF RS.1,82,97,194/- ON ACCOUNT OF ADJUSTMENT IN ARMS LENGTH PRICE. THE AO WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSEE , MADE AN ADJUSTMENT OF RS.1,82,97,194/- IN TERMS OF PROVISIO NS OF SECTION 92CA(1) OF THE ACT ON ACCOUNT OF DETERMINATION OF A RMS LENGTH PRICE OF INTERNATIONAL TRANSACTION ENTERED INTO BY THE AS SESSEE. 19. ON APPEAL, THE LEARNED CIT(A) UPHELD THE FINDIN GS OF THE AO WHILE RELYING UPON HIS OWN DECISION FOR THE AY 2003 -04. 20. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINS T THE AFORESAID FINDINGS OF THE LEARNED CIT(A). BOTH THE PARTIES AGREED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION DATED 24-07-2009 OF THE ITAT AHMEDABAD BENCH-D IN THE ASSESSEES OWN CASE FOR THE AY 2003-04 IN ITA NO.157/AHD/2007. 21. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO AFORESAID DECISION OF THE ITAT. WE FIND THAT WHILE ADJUDICATING A SIMILAR ISSUE, THE TRIBUNAL VIDE THE IR AFORESAID ORDER DATED 24-07-2009 IN ITA NO.157/AHD/2007, CONCLUDED AS UNDER:- 21. THE NEXT COMMON ISSUE IN BOTH THE APPEALS OF T HE ASSESSEE IS AS REGARDS TO THE ORDERS OF CIT(A) CONFIRMING THE ADDI TION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. THE ASSESSEE HAS RAIS ED THE FOLLOWING GROUNDS IN RESPECTIVE APPEALS ARE UNDER:- 8. THE LEARNED CIT(APPEALS)-V, AHMEDABAD ERRED IN CONFIRMING THE ADDITION OF INCOME ON ACCOUNT OF TRA NSFER PRICING ADJUSTMENT. ITA NO.1547/AHD/2007 23 4. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN ADDING RS.1,80,62,067/- ON ACCO UNT OF ADJUSTMENTS TO THE ARMS LENGTH PRICE WITHOUT THERE BEING ANY JURISDICTION AS WELL AS LEGAL AND FACTUAL BASIS FOR THE SAME. 5. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN INVOKING THE PROVISIONS OF CHAP TER X WITHOUT PRIMA FACIE DEMONSTRATING THAT THERE WAS SOME TAX A VOIDANCE. 6. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN MAKING A REFERENCE TO THE TRANS FER PRICING OFFICER (TOP) U/S.92C(3) R.W.S. 92CA(1) OF THE ACT WITHOUT PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE APPELLANT. 7. IN ANY CASE THE WHOLE REFERENCE AND THE CONSEQU ENT ORDERS ARE BAD AND ILLEGAL BECAUSE THE ALLEGED APPROVAL GRANTE D BY CIT U/S.92C(1) OF THE ACT IS VITIATED IN LAW FIRSTLY BE CAUSE THE APPELLANT WAS NOT HEARD BEFORE ANY SUCH APPROVAL AND SECONDLY BECAUSE THE SAME HAS BEEN GRANTED MECHANICALLY, WITHOUT ANY APPLICATION OF MIND AND WITHOUT DUE DILIGENCE. 8. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF AO IN REFERRING THE CASE OF THE APPEL LANT TO THE TRANSFER PRICING OFFICER. UNDER THE FACTS AND CIRC UMSTANCES OF THE CASE, THERE WAS NO REASONS TO INTERFERE WITH THE PR ICING AS WELL AS METHOD THEREOF ADOPTED BY THE APPELLANT AS THE SAME IS FALLING WITHIN THE PARAMETERS OF TRANSFER PRICING LAID DOWN UNDER THE SCHEME OF THE ACT. 9. ALTERNATIVELY AND WITHOUT PREJUDICE, THE LEARNE D CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ORDER OF THE ADDITIONAL COMMISSIONER OF INCOME TAX ACTING AS TRANSFER PRICI NG OFFICER WHICH IS WITHOUT JURISDICTION AND AGAINST THE EXPRESS PRO VISIONS OF LAW INASMUCH AS ADDITIONAL COMMISSIONER OF INCOME TAX C OULD NOT HAVE ACTED AS TRANSFER PRICING OFFICER. .. 26. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. THE FACTS IN DETAIL ARE AVAILABLE IN ASSESSMENT YEAR 2003-04 IN ITA NO.157/AHD/2007 , HENCE, WE WILL DISCUSS THIS APPEAL FIRST. 27. WE FIND THAT THE ASSESSEE IS ENGAGED IN THE BUS INESS OF MANUFACTURING & SALE OF INTERMEDIATES, DIES, COLOUR S ETC. THE ASSESSEE HAS TWO SUBSIDIARIES BASED IN USA AND UK NAMELY, AA I AND AEL. THE ITA NO.1547/AHD/2007 24 TRANSACTION WITH BOTH THE AES HAVE BEEN ADJUSTED BY THE TPO AT ARMS LENGTH PRICE, REASON BEING THE SAID TRANSACTION WIT H THESE AES HAVE BEEN UNDERSTATED TO THE EXTENT OF RS.1,80,62,067/-. FOR THIS PURPOSE, THE ASSESSEE HAS OPTED FOR CUP METHOD AS THE ASSESS EE WAS HAVING SALES OF LARGE NUMBER OF PRODUCTS TO THESE AES DURI NG THE YEARS UNDER CONSIDERATION. THE ASSESSEE, APART FROM THE AES, A LSO SOLD DIVERSIFIED PRODUCTS TO VARIOUS OTHER ENTERPRISES WHO ARE NOT R ELATED TO THE ASSESSEE. THE ASSESSEE IN VIEW OF THESE FACTS, OPT ED FOR CUP METHOD, CONSIDERING THE COMPLEXITY OF THE TRANSACTIONS, PRO DUCT DIVERSITY AND MULTIPLICITY OF TRANSACTIONS, AND THIS WAS ONLY THE PRACTICABLE METHOD TO DETERMINE THE PROFITS EARNED BY THE ASSESSEE, AS A WHOLE, AS WELL AS TO THE TRANSACTIONS TO WHICH THE COMPARABLE PRICE APPL IES IN AN UNCONTROLLED TRANSACTIONS IN THE INTERNATIONAL MARK ET, BOTH THE AES AS WELL AS NON-AES. THE ASSESSEE CLAIMED DURING THE C OURSE OF HEARING BEFORE TPO, BEFORE THE AO DURING THE COURSE OF ASSE SSMENT PROCEEDINGS AND BEFORE CIT(A) SUBMITTED THE DETAILS OF PRICE CHARGED TO AES AND NON-AES AND THE REASONS FOR VARIATION. THE SAME DETAILS WERE EVEN PRODUCED BEFORE US AS ANNEXURE-A, WHICH IS AVA ILABLE AT PAGES 34 TO 111 OF THE ASSESSEES PAPER BOOK-II. THE ASSESSEE HAS MADE COMPARISON IN MANY OF THE CASES WITH THE SALES MADE WITH AES IN THE DEVELOPED COUNTRIES AND THE SALES MADE TO UNDER-DEV ELOPED COUNTRIES TO NON-AES. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE ASSESSEE HAS MORE MARGINS IN THE SALES MADE TO UNDER-DEVELOP ED COUNTRIES DUE TO VARIOUS RISKS INVOLVED IN DEALING WITH THE UNDER -DEVELOPED COUNTRIES. ACCORDINGLY, IT WAS THE CONTENTION THAT ITS SALES G OODS TO THE AES AND THE AES IN TURN SALE THE GOODS TO THEIR CUSTOMERS I N NORTH / SOUTH AMERICA, EUROPE ETC., WHICH ARE HIGHLY COMPETITIVE MARKETS AND AS SUCH IT BECOMES DIFFICULT TO SUSTAIN. THE ASSESSEE HAS D ENIED THAT IT HAS CHARGED LOWER RATES FROM AES AS COMPARED TO THOSE OF NON-AES, THE AES HAVE NOT BEEN ABLE TO MAKE PROFITS. AS PER ASS ESSEE, IF THE ASSESSEE HAS CHARGED RATES, WHICH ARE HIGHER THAN T HOSE CHARGED TO NON-AES THERE IS A POSSIBILITY THAT THE AES WILL NOT BE ABLE TO SALE ANYTHING. ACCORDING TO ASSESSEE, THE CUP METHOD IS USED, AS IN THE SAID METHOD, CONTROLLED TRANSACTIONS ARE BEING COMP ARED WITH UNCONTROLLED TRANSACTIONS WHEREIN THE DEGREE OF COM PARABILITY WITH UNCONTROLLED TRANSACTIONS IS VERY HIGH. ACCORDING T O ASSESSEE, IN ANY CASE, IT IS NOT NECESSARY TO GIVE ALL THE REASONS O R GROUNDS FOR JUSTIFICATION OF A PARTICULAR METHOD IN THE AUDIT R EPORT ITSELF. IF IT IS STATED THAT A PARTICULAR METHOD IS FOLLOWED BECAUSE IN MAJ ORITY OF THE CASES PRICES ARE COMPARABLE BETWEEN AE AND NON-AES, AS PE R THE ASSESSEE, IT HAS EVERY RIGHT TO ADOPT THE CUP METHOD. THE ASS ESSEE ALSO ADMITS THAT IN FEW INSTANCES, WHEN PRICES OF OTHER COMPARA BLE CASES ARE NOT AVAILABLE, IN THE ASSESSEES CASE, THE PRICES CHARG ED BY IT TO AE IN SUCH CASES CAN BE ADOPTED AS AN ALP. AS PER THE TPO THE WHOLESALE MARGINS AND VOLUME DISCOUNTS AS WELL AS POLITICAL R ISKS HAVE NOT BEEN SUBSTANTIATED BY THE ASSESSEE. NOW AS PER THE ASSES SEE, BOTH THESE MARGINS I.E. WHOLESALE DISCOUNTS AND POLITICAL RISK S VARY FROM PARTY TO PARTY AND COUNTRY TO COUNTRY AND IN AFRICAN COUNTRI ES WHERE HIGH ITA NO.1547/AHD/2007 25 POLITICAL UNCERTAINTY IS THERE, THE PRICES ARE OBVI OUSLY HIGHER COMPARED TO THE PRICES CHARGED TO A HIGHLY DEVELOPED NATIONS WH ERE LAW AND ORDER AND POLITICAL STABILITY IS THERE. 28. WHETHER THE INFORMATION SUBMITTED BY THE ASSESS EE IS ENOUGH IN THE CASE OF TRANSACTIONS RECORDED AS PER THE CUP METHOD . WE ARE OF THE VIEW THAT THE CUP METHOD COMPARES THE PRICE CHARGE FOR PROPERTY TRANSFERRED IN A CONTROLLED TRANSACTION TO THE PRIC E CHARGED FOR PROPERTY TRANSFERRED IN A COMPARABLE UNCONTROLLED TRANSACTIO N IN COMPARABLE CIRCUMSTANCES. IF THERE IS ANY DIFFERENCE BETWEEN THE TWO PRICES, THIS MAY INDICATE THAT THE CONDITIONS OF THE COMMERCIAL AND FINANCIAL RELATIONS OF THE ASSOCIATED ENTERPRISES ARE NOT AT ARMS LENGTH AND, THAT THE PRICE IN THE UNCONTROLLED TRANSACTION MAY NEED TO BE SUBSTITUTE FOR THE PRICE IN THE CONTROLLED TRANSACTION. IN THE CASES, WHERE CONTRO LLED AND UNCONTROLLED TRANSACTIONS ARE COMPARABLE, THEN REGARD SHOULD BE HAD TO THE EFFECT ON PRICE OF BORDER BUSINESS FUNCTION OTHER THAN JUST P RODUCT COMPARABILITY. THE EXAMPLES PROVIDED IN THE OECD GUIDELINES OF TRA NSFER PRICING GUIDELINES FOR MULTINATIONAL ENTERPRISES AND TAX AD MINISTRATION HAS DISCUSSED HOW THE CUP METHOD IS TO BE APPLIED. THE RELEVANT PARA 2.10 TO 2.13 READ AS UNDER:- 2.10 THE FOLLOWING EXAMPLES ILLUSTRATE THE APPLICA TION OF THE CUP METHOD, INCLUDING SITUATION WHERE ADJUSTMENTS MA NEED TO BE MADE TO UNCONTROLLED TRANSACTIONS TO MAKE THEM COMPARABLE UNCONTROLLED T RANSACTIONS. 2.11 THE CUP METHOD IS A PARTICULARLY RELIABLE METH OD WHERE AN INDEPENDENT ENTERPRISE SELLS THE SAME PRODUCT AS IS SOLD BETWEEN TWO ASSOCIATED ENTERPRISE. FOR EXAMPLE, AN INDEPENDENT ENTERPRISE SELLS UNBRANDED COLOMBIAN COFFEE BEANS OF A SIMILAR TYPE, QUALITY, AND QUANTITY AS THOSE SOLD BETWEEN TWO ASSOCIATED ENTERPRISES, A SSUMING THAT THE CONTROLLED AND UNCONTROLLED TRANSACTIONS OCCUR AT A BOUT THE SAME TIME, AT THE SAME STAGE IN THE PRODUCTION / DISTRIBUTION CHA IN, AND UNDER SIMILAR CONDITIONS. IF THE ONLY AVAILABLE UNCONTROLLED TRAN SACTION INVOLVED UNBRANDED BRAZILIAN COFFEE BEANS, IT WOULD BE APPRO PRIATE TO INQUIRE WHETHER THE DIFFERENCE IN THE COFFEE BEANS HAS A MA TERIAL EFFECT O THE PRICE. OF EXAMPLE, I COULD BE ASKED WHETHER THE SOURCE OF COFFEE BEANS COMMANDS A PREMIUM OR REQUIRES A DISCOUNT GENERALLY IN THE OPEN MARKET. SUCH INFORMATION MA BE OBTAINABLE FROM COMMODITY MA RKETS OR MAY BE DEDUCED FROM DEALER PRICES. IF THIS DIFFERENCE DOES HAVE A MATERIAL EFFECT ON PRICE, SOME ADJUSTMENTS WOULD BE APPROPRIATE. IF A REASONABLY ACCURATE ADJUSTMENT CANNOT BE MADE, HERE LIABILITY OF THE CU P METHOD WOULD BE REDUCED, AND IT MIGHT BE NECESSARY TO COMBINE THE C UP METHOD WITH OTHER LESS DIRECT METHODS, OR TO USE SUCH METHODS INSTEAD . 2.12 ONE ILLUSTRATIVE CASE WHERE ADJUSTMENTS MAY BE REQUIRED IS WHETHER THE CIRCUMSTANCES SURROUNDING CONTROLLED AND UNCONT ROLLED SALES ARE IDENTICAL, EXCEPT FOR THE FACT THAT THE CONTROLLED SALES PRICE IS A DELIVERED PRICE AND THE UNCONTROLLED SALES ARE MADE F.O.B. FA CTORY. THE DIFFERENCES ITA NO.1547/AHD/2007 26 IN TERMS OF TRANSPORTATION AND INSURANCE GENERALLY HAVE A DEFINITE AND REASONABLY ASCERTAINABLE EFFECT ON PRICE. THEREFORE , TO DETERMINE THE UNCONTROLLED SALES PRICE, ADJUSTMENT SHOULD BE MADE TO THE PRICE FOR THE DIFFERENCE IN DELIVERY TERMS. 2.13 AS ANOTHER EXAMPLE, ASSUME A TAXPAYER SELLS 10 00 TONS OF A PRODUCT FOR $9=80 PER TON TO AN ASSOCIATED ENTERPRISE IN IT S MNE GROUP, AND AT THE SAME TIME SELLS 500 TONS OF THE SAME PRODUCT FOR $1 00 PER TON TO AN INDEPENDENT ENTERPRISE. THIS CASE REQUIRES AN EVALU ATION OF WHETHER THE DIFFERENT VOLUMES SHOULD RESULT IN AN ADJUSTMENT OF THE TRANSFER PRICE. THE RELEVANT MARKET SHOULD BE RESEARCHED BY ANALYZING T RANSACTIONS IN SIMILAR PRODUCTS TO DETERMINE TYPICAL VOLUME DISCOUNTS. 29. SIMILARLY THE BANGALORE SPECIAL BENCH OF THIS T RIBUNAL IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. V. AC IT, CIRCLE-11(1), BANGALORE (2007) 107 ITD 141 (BANG) ((SB) HAS HELD THAT THE BURDEN TO ESTABLISH THAT INTERNATIONAL TRANSACTION CARRIED BY THE ASSESSEE IS AT ALP IS ON THE TAXPAYER. THE SPECIAL BENCH HELD AS UNDE R:- 127. HAVING REGARD TO ABOVE STATUTORY PROVISIONS, IT IS CLEAR THAT BURDEN TO ESTABLISH THAT INTERNATIONAL TRANSACTION WAS CARRIE D AT ALP IS ON THE TAXPAYER. HE HAS ALSO TO FURNISH COMPARABLE TRANSAC TIONS, APPLY APPROPRIATE METHOD FOR DETERMINATION OF ALP AND JUS TIFY THE SAME BY PRODUCING RELEVANT MATERIAL AND DOCUMENTS BEFORE TH E REVENUE AUTHORITIES. IN CASE REVENUE AUTHORITIES ARE NOT SA TISFIED WITH THE ALP AND THE SUPPORTING DOCUMENTS/INFORMATION FURNISHED BY T HE TAXPAYER, THE AUTHORITIES HAVE AMPLE POWER TO DETERMINE THE SAME AND MAKE SUITABLE ADJUSTMENTS. IN SUCH A SITUATION, AS RIGHTLY ADMITT ED IN THE GROUND OF APPEAL BY THE REVENUE, THIS RESPONSIBILITY OF DETER MINATION OF ALP IS SHIFTED TO THE REVENUE AUTHORITIES WHO ARE TO DETER MINE THE SAME IN ACCORDANCE WITH STATUTORY REGULATIONS. 128. THERE IS CRITICISM THAT LEGISLATURE IS NOT JU STIFIED IN PLACING ONEROUS BURDEN ON THE TAXPAYER TO MAINTAIN DETAILED DOCUMEN TS AND TO JUSTIFY THAT TRANSACTION WAS CARRIED AT ALP. IT IS CONTENDED/ARG UED THAT THIS IS LIKE INSISTING UPON PRODUCTION OF SELF-INCRIMINATING EVI DENCE AND IS UNCALLED FOR. THIS CRITICISM, IN OUR OPINION, IS WITHOUT ANY VALI D BASIS. IT IS TO BE REMEMBERED THAT INTERNATIONAL TRANSACTIONS CARRIED OUT BY TAXPAYER ARE CROSS-BORDER TRANSACTIONS. DEPARTMENTAL AUTHORITIES IN INDIA ARE REQUIRED TO DEAL WITH AND DETERMINE ALP OF TRANSACTIONS CARRIED IN ASIA, EUROPE, AMERICA, AUSTRALIA, OTHER DEVELOPED AND UNDER-DEVEL OPED COUNTRIES IN AFRICA, ETC. IT IS VERY DIFFICULT, IF NOT IMPOSSIBL E FOR THEM TO FIND RELEVANT DATA OF AN EXACT OR OF A SIMILAR TRANSACTION OR PROFIT M ADE NOT ONLY BY THE TAXPAYER, BUT ALSO BY OTHER SIMILARLY SITUATED UNCO NTROLLED ENTERPRISES. KNOWLEDGE OF ECONOMIC CONDITIONS PREVAILING AT THE PLACE WHERE TRANSACTIONS ARE CARRIED IS ALSO ESSENTIAL. THE VER Y NATURE OF THIS JOB OF ITA NO.1547/AHD/2007 27 COLLECTION OF DATA IS SUCH THAT THE ASSESSEE IS IN THE BEST POSITION TO GATHER THE REQUISITE INFORMATION. 129. THE TAXPAYER, ON THE OTHER HAND, AS A PARTY TO THE TRANSACTION HAS FULL KNOWLEDGE OF THE TRANSACTION CARRIED AND PROFIT EAR NED BY HIM. AS A PERSON ASSOCIATED WITH THAT PARTICULAR LINE OF BUSINESS AC TIVITY, THE ASSESSEE IS REASONABLY EXPECTED TO BE NOT ONLY AWARE ABOUT NUAN CES OF THAT BUSINESS, BUT ALSO ABOUT ECONOMIC CONDITIONS AND PECULIAR CIR CUMSTANCES, IF ANY, OF THAT BUSINESS. HE IS LIKELY TO KNOW EVEN ABOUT COMP ARABLE UNCONTROLLED TRANSACTIONS. OTHERWISE TOO AS PER THE SETTLED LAW EVERY ATTEMPT TO COLLECT BEST EVIDENCE HAS TO BE MADE. EVIDENCE OF SITUATION HAS TO BE CALLED FROM A PERSON POSSESSING SPECIAL MEANS TO KNOW THAT SITU ATION. THEREFORE, IT IS REASONABLE TO CALL UPON THE TAXPAYER TO FURNISH EVI DENCE OF CONTROLLED/UNCONTROLLED TRANSACTIONS WHICH ARE WITH IN TAXPAYERS SPECIAL KNOWLEDGE. HOWEVER, TAX AUTHORITIES CANNOT INSIST U PON THE TAXPAYER TO FURNISH INFORMATION HE DOES NOT POSSESS OR IS NOT R EQUIRED TO MAINTAIN UNDER RULES. GUIDELINES GIVEN IN CIRCULARS OF CBDT ARE TO BE FOLLOWED. WE, THEREFORE, HOLD THAT BURDEN OF PROOF TO ESTABLISH A LP AND TO FURNISH RELEVANT INFORMATION HAS RIGHTLY BEEN PLACED ON THE ASSESSEE . 130. IT WOULD NOT BE OUT OF PLACE TO MENTION THAT A LMOST ALL COUNTRIES WORLD OVER ARE FACING PROBLEM OF DIVERSION OF INCOME BY M ULTINATIONAL COMPANIES AND OTHER ENTERPRISES TO JURISDICTIONS WHERE THE TA X BURDEN IS LEAST OR THE LOWEST. THEREFORE, ALMOST ALL COUNTRIES HAVE SIMILA R ENACTMENTS TO TACKLE THIS MENACE. WE QUOTE BELOW THE POSITION OF 'BURDEN OF PROOF' IN SOME OF IMPORTANT COUNTRIES; IT BEING NOT POSSIBLE AND PRAC TICAL TO NOTE IN FULL DETAILS OF PROVISION OF ALL THE COUNTRIES. THIS INFORMATION IS BEING EXTRACTED FROM COMMENTARIES ON TRANSFER PRICING, 2006 PUBLISHED BY PRICE WATER HOUSE : 'BURDEN OF PROOF DENMARK THE QUESTION OF BURDEN OF PROOF HAS BEEN ONE OF THE MOST IMPORTANT ISSUE IN RELATION TO THE DEVE LOPMENT OF TRANSFER PRICING IN DENMARK. IN THE TEXACO AND BP DENMARK CO URT CASES THE HIGH COURT AND SUPREME COURT CONFIRMED THAT THE BURDEN O F PROOF LIES WITH THE TAX AUTHORITIES AND THAT THE TAXPAYER IS REQUIRED T O DISCLOSE INFORMATION RELEVANT TO THE QUESTION OF WHETHER THE ARM S LEN GTH PRINCIPLE HAS BEEN VIOLATED. THIS INFORMATION WOULD INCLUDE ITEMS SUCH AS PRICES AND GROSS PROFIT EARNED BY THE PARENT COMPANY WHEN DEALING WI TH OTHER GROUP COMPANIES AND WITH UNRELATED CUSTOMERS. WHERE THIS INFORMATION IS NOT DISCLOSED, THE COURT CONCLUDES THAT THE BURDEN OF P ROOF ON THE DANISH TAX AUTHORITIES IS REDUCED. FRANCE AS A RULE, THE BURDE N OF PROOF LIES WITH THE TAX AUTHORITIES, UNLESS THE TRANSFER OF PROFITS CON CERNS A TAX HAVEN, IN WHICH CASE THE BURDEN OF PROOF IS TRANSFERRED TO THE TAXP AYER. RECENT DEVELOPMENTS MEAN THAT THERE IS NOW A LEGAL REQUIRE MENT FOR TAXPAYERS TO PROVIDE DOCUMENTATION SUPPORTING THEIR TRANSFER PRI CING POLICIES. THOUGH IN THEORY THE BURDEN OF PROOF LIES WITH THE TAX ADMINI STRATION, IN PRACTICAL TERMS THE BURDEN OF PROOF HAS ALWAYS FALLEN ON THE TAXPAYER WHERE THE TAX AUTHORITIES HAVE DEEMED A PROFIT SHIFT TO HAVE TAKE N PLACE OR INAPPROPRIATE TRANSFER PRICING TO EXIST. INDONESIA INDONESIA OPER ATES ON A SELF- ASSESSMENT SYSTEM WITH COMPANIES SETTING THEIR OWN TRANSFER PRICES. THE ITA NO.1547/AHD/2007 28 BURDEN OF PROOF LIES WITH THE TAXPAYER TO PROVE THA T THE ORIGINAL PRICE HAS BEEN SET AT ARM S LENGTH. IRELAND UNDER IRELAND S SELF-ASSESSMENT SYSTEM, THE BURDEN OF PROOF IN THE EVENT OF A REVEN UE AUDIT WILL FALL ON THE TAXPAYER. ITALY THE GENERAL PRINCIPLE IS THAT THE B URDEN OF PROOF LIES WITH THE TAX AUTHORITIES. WHERE THE TAX AUTHORITIES ISSUE AN ASSESSMENT TO ADDITIONAL TAX, HOWEVER, THE TAXPAYER MUST PROVE TH ERE IS NO LIABILITY FOR THE ADDITIONAL TAX. THERE ARE OTHER CIRCUMSTANCES IN WH ICH THE BURDEN OF PROOF LIES WITH THE TAXPAYER. THE MOST IMPORTANT OF THESE ARE THE FOLLOWING : IF AN ENTERPRISE THAT IS TAX RESIDENT IN ITALY WANTS T O CLAIM A DEDUCTION FOR THE COSTS OF TRANSACTIONS WITH PARTIES THAT ARE RESIDEN T IN CERTAIN TAX HAVENS, THEN THE ITALIAN TAXPAYER MUST PROVIDE EVIDENCE THA T THE FOREIGN PARTY IS A GENUINE COMMERCIAL UNDERTAKING OR THAT THE TRANSACT IONS WERE EFFECTED IN CONNECTION WITH A REAL ECONOMIC INTEREST; AND AN ITALIAN TAXPAYER WOULD ALSO HAVE TO BE ABLE TO PROVE THAT THE RELEVANT TRA NSACTION ACTUALLY TOOK PLACE. MALAYSIA IN THE SELF-ASSESSMENT SYSTEM, THE BURDEN OF PROOF LIES WITH THE TAXPAYER TO CLEAR ANY TAX AVOIDANCE ALLEGA TION AND/OR ALLEGED TRANSFER PRICING ABUSE. THE INTENTION OF THE MALAYS IAN TRANSFER PRICING GUIDELINES IS TO ASSIST THE TAXPAYER IN THEIR EFFOR TS TO DETERMINE ARM S LENGTH TRANSFER PRICES AND AT THE SAME TIME COMPLY WITH THE LOCAL TAX LAWS AND THE ADMINISTRATIVE REQUIREMENTS OF THE MALAYSIA N TAX AUTHORITIES. IN THIS CONNECTION, UPON A FIELD AUDIT OR ENQUIRY, THE RELEVANT TAXPAYERS WITH RELATED PARTY TRANSACTIONS MUST BE ABLE TO SUBSTANT IATE WITH DOCUMENTS, AND TO THE TAX AUTHORITIES SATISFACTION, THAT ITS TRANSFER PRICES HAVE BEEN DETERMINED IN ACCORDANCE WITH THE ARM S LENGTH PR INCIPLE AND THAT THERE HAS NOT BEEN ANY ABUSE OF THE TRANSFER PRICES RESUL TING IN AN ALTERATION OF THE INCIDENCE OF TAX IN MALAYSIA. NETHERLANDS AS IN DICATED PREVIOUSLY, THERE IS A LEGAL OBLIGATION FOR THE TAXPAYER TO MAI NTAIN CERTAIN TRANSFER PRICING DOCUMENTATION. TO THE EXTENT THAT THIS REQU IREMENT IS NOT MET, THE BURDEN OF PROOF IS ULTIMATELY TRANSFERRED TO THE TA XPAYER. IN GENERAL, THERE ARE NO STATUTORY PROVISIONS TO INDICATE HOW THE BUR DEN OF PROOF IS DIVIDED BETWEEN THE TAXPAYER AND THE TAX AUTHORITIES. THE A LLOCATION OF THE BURDEN OF PROOF BETWEEN THE PARTIES IS AT THE DISCRETION O F THE COURT. HOWEVER, IN PRACTICE AND AS A RESULT OF DUTCH CASE LAW, IF THE COMPANY S REVENUE IS ADJUSTED UPWARDS BECAUSE OF TRANSFER PRICING ISSUES , THE BURDEN OF PROOF USUALLY LIES WITH THE TAX AUTHORITIES. ON THE OTHER HAND, THE BURDEN LIES WITH THE TAXPAYER TO PROVE THE DEDUCTIBILITY OF EXPENSES . IN TRANSFER PRICING CASES THE BURDEN OF PROOF TRANSFERS TO THE TAXPAYER IF THE PRICING ARRANGEMENTS ARE VERY UNUSUAL, FOR EXAMPLE IF COMPA RABLE UNCONTROLLED PRICES (CUP) ARE AVAILABLE BUT NOT USED, OR GOODS O R SERVICES ARE PROVIDED AT COST OR BELOW COST. THE BURDEN OF PROOF IS ALSO TRANSFERRED TO THE TAXPAYER, AND WILL BE MORE ONEROUS, IF S/HE REFUSES TO PROVIDE INFORMATION REQUESTED BY THE TAX AUTHORITIES WHERE THERE IS A L EGAL OBLIGATION TO PROVIDE THAT INFORMATION, OR IF THE REQUISITE TAX RETURN IS NOT FILED. FINALLY, THE COURT SOMETIMES ALLOCATES THE BURDEN OF PROOF TO THE PART Y BEST ABLE TO PROVIDE THE EVIDENCE. NEW ZEALAND IN NEW ZEALAND, THE BURDE N OF PROOF NORMALLY LIES WITH THE TAXPAYER, NOT THE COMMISSIONER. HOWEV ER, S. GD13(9) PLACES THE BURDEN OF PROOF ON THE COMMISSIONER WHERE THE T AXPAYER HAS DETERMINED ITS TRANSFER PRICES IN ACCORDANCE WITH S S. 13(6) TO 13(8) OF THE ITA NO.1547/AHD/2007 29 NEW ZEALAND TAX ACT. WHERE THE COMMISSIONER SUBSTIT UTES AN ARM S LENGTH PRICE FOR THE ACTUAL PRICE, THEN THE COMMISS IONER MUST PROVE THAT EITHER : (1) THIS IS A MORE RELIABLE MEASURE : OR ( 2) THE TAXPAYER HAS NOT CO- OPERATED WITH THE COMMISSIONER. THE GUIDELINES PROV IDE GUIDANCE ON WHAT IS CONSIDERED TO BE NON-COOPERATION : WHERE THE TAXPAYER DOES NOT PROVIDE THE REQUESTED RELEVANT INFORMATION TO THE COMMISSIONER : OR IF A TAXPAYER DOES NOT PREPARE ADEQUATE DOCUMENTAT ION, AND PROVIDE IT TO THE INLAND REVENUE IF REQUESTED. UNIT ED KINGDOM THE POSITION AFTER THE 1999 RULES IS THAT THE BURDEN FO R PROVING THAT TRANSFER PRICES ARE AT ARM S LENGTH FALLS SQUAREL Y ON THE TAXPAYER S SHOULDERS. THE ACT OF SUBMITTING THE RETURN UNDER S ELF- ASSESSMENT IMPLICITLY ASSUMES THAT THE TAXPAYER HAS MADE ALL N ECESSARY ADJUSTMENTS TO TAXABLE PROFITS TO TAKE ACCOUNT OF N ON-ARM S LENGTH PRICING. SWITZERLAND THE BURDEN OF PROOF WITHIN SWI TZERLAND LIES WITH : THE TAXPAYER REGARDING THE JUSTIFICATION OF TAX DE DUCTIBLE EXPENSES; AND THE TAX AUTHORITIES REGARDING ADJUSTMENTS, WHICH I NCREASE TAXABLE INCOME. THIS EFFECTIVELY MEANS THAT A TAXPAYER HAS TO PROVE TO THE SWISS TAX AUTHORITIES THAT THE PRICE IT HAS PAID FOR ITS TANGIBLES, INTANGIBLES AND ANY SERVICE IT HAS RECEIVED FROM A RELATED PARTY SA TISFIES THE ARM S LENGTH PRINCIPLE (I.E., JUSTIFIES THEIR TAX DEDUCTIBILITY) . ON THE OTHER SIDE, THE SWISS TAX AUTHORITIES RES PONSIBILITY IS TO PROVE THAT THE COMPENSATION FOR ANY SERVICE RENDERE D BY THE TAXPAYER OR ANY TANGIBLES OR INTANGIBLES TRANSFERRED TO A RELAT ED PARTY DOES NOT REACH AN ARM S LENGTH LEVEL. HOWEVER, IF A TAXPAYER FAI LS TO PRODUCE THE DOCUMENTS REQUIRED BY THE TAX AUTHORITIES, THIS BUR DEN OF PROOF ALSO REVERTS TO THE TAXPAYER. THEREFORE, IT IS RECOMMENDED THAT SWISS TAXPAYERS MAINTAIN APPROPRIATE DOCUMENTATION TO JUSTIFY ALL I NCOME AND EXPENSES RESULTING FROM RELATED PARTY TRANSACTIONS. THIS IS SPECIFICALLY ALSO TRUE WITH REGARD TO LICENSE FEES CHARGED TO A SWISS ENTITY OR SUPPORT AND DEFENSE OF LOW PROFITS IN CONNECTION WITH LIMITED RISK TYPE EN TITIES. UNITED STATES NON- US TAX AUTHORITIES AND PRACTITIONERS ALIKE HAVE TEN DED TO BE CRITICAL OF THE LEVEL OF DETAIL INCLUDED IN THE US REGULATIONS AND PROCEDURES. HOWEVER, IN CONSIDERING THE US REGIME, IT IS IMPORTANT TO BEAR IN MIND THAT UNLIKE MANY OF ITS MAJOR TRADING PARTNERS, THE US CORPORATE TAX SYSTEM IS A SELF- ASSESSMENT SYSTEM WHERE THE BURDEN OF PROOF IS GENE RALLY PLACED ON THE TAXPAYER, AND WHERE THERE IS AN ADVERSARIAL RELATIO NSHIP BETWEEN THE GOVERNMENT AND THE TAXPAYER. THIS ADDITIONAL COMPLI ANCE BURDEN IS NOT UNIQUE TO THE FIELD OF TRANSFER PRICING.' 131. SIMILAR PROVISIONS ARE AVAILABLE IN THE LAWS OF OTHER COUNTRIES. IT WOULD BE SEEN THAT EVEN A MOST ADVANCED COUNTRY LIK E UNITED KINGDOM HAS PROVISIONS PLACING ON THE TAXPAYER THE BURDEN O F PROVING THAT INTERNATIONAL TRANSACTION IS CARRIED AT ALP. ITA NO.1547/AHD/2007 30 132. A DISPASSIONATE STUDY OF PROVISIONS OF VARIOUS COUNTRIES ON BURDEN OF PROOF, WOULD SHOW, THE FOLLOWING FUNDAMENTAL FEATUR ES : (I) THAT THE BURDEN TO ESTABLISH THAT INTERNATIONAL TRANSACTION IS CARR IED AT ALP, IS ON THE TAXPAYER WHO IS TO DISCLOSE ALL THE RELEVANT INFORM ATION AND DOCUMENTS RELATING TO PRICES CHARGED AND PROFIT EARNED WITH R ELATED AND UNRELATED CUSTOMER. (II) IF THE AO HAS DETERMINED AN ALP, OTH ER THAN THE PRICE DECLARED BY THE ASSESSEE, AO HAS TO PROVE THAT THE PRICE DETERMINED BY HIM IS RELIABLE AND REASONABLE AND CONFIRMS THE STA TUTORY REQUIREMENT UNLESS THE CASE IS COVERED BY SITUATION NO. (III) B ELOW. (III) IN CASE OF FAILURE ON THE PART OF THE TAXPAYER TO COMPLY WITH THE STAT UTORY PROVISIONS, THE TAX AUTHORITIES WOULD HAVE TO DETERMINE THE ALP. IN SUC H A SITUATION, BURDEN OF PROOF ON TAX AUTHORITIES IS MUCH REDUCED. 133. HAVING REGARD TO THE STATUTORY PROVISIONS, PA RTICULARLY THE MANDATE OF SS. 92(1) AND 92D READ WITH RELEVANT RULES, WE HOLD THAT IT IS OBLIGATORY ON THE PART OF THE TAXPAYER TO FURNISH INFORMATION REL ATING TO CONTROLLED INTERNATIONAL TRANSACTIONS, SELECT A SUITABLE METHO D FOR DETERMINATION AND FURNISH ALP OF SUCH INTERNATIONAL TRANSACTIONS CARR IED BY IT AND GIVE BASIS AND SUPPORTING AUTHENTIC EVIDENCE OF ALP AND ADJUST MENTS MADE. THE TAXPAYER HAS FURTHER TO CO-OPERATE IN THE DETERMINA TION OF THE ALP BY THE TAX AUTHORITIES BY FURNISHING ALL RELEVANT INFORMAT ION. THE TAX AUTHORITIES IN CASES WHERE THEY ARE OF THE OPINION THAT ALP HAS NO T BEEN CORRECTLY DETERMINED BY THE TAXPAYER, CAN SUBSTITUTE THEIR OW N ALP ON THE BASIS OF MATERIAL OR INFORMATION FURNISHED BY THE ASSESSEE O R COLLECTED BY THEM. HOWEVER, SUCH ALP HAS TO BE DETERMINED HAVING IN MI ND PROVISIONS OF SS. 92 AND 92C AND OTHER RULES AND REGULATIONS. WHILE D ETERMINING ALP, TAX AUTHORITIES ARE BOUND TO FOLLOW PRINCIPLES OF NATUR AL JUSTICE AND BE FAIR AND REASONABLE TO THE TAXPAYER. ANY MATERIAL COLLECTED TO BE USED AGAINST THE TAXPAYER IS TO BE PUT TO TAXPAYER TO EXPLAIN. HAVIN G REGARD TO THE PURPOSE OF THE LEGISLATION AND APPLICATION OF SIMILAR ENACT MENT WORLD OVER, IT MUST FURTHER BE HELD THAT ADJUSTMENTS MADE ON ACCOUNT OF ALP BY TAX AUTHORITIES CAN BE DELETED IN APPEAL ONLY IF THE APPELLATE AUTH ORITIES ARE SATISFIED AND RECORD A FINDING THAT ALP SUBMITTED BY THE ASSESSEE IS FAIR AND REASONABLE. MERELY BY FINDING FAULTS WITH THE TRANS FER PRICE DETERMINED BY THE REVENUE AUTHORITIES (AO/TPO), ADDITION ON ACCOU NT OF 'ADJUSTMENTS' CANNOT BE DELETED. THIS IS BECAUSE THE MANDATE OF S . 92(1) IS THAT IN EVERY CASE OF INTERNATIONAL TRANSACTION, INCOME HAS TO BE DETERMINED HAVING REGARD TO ALP. THEREFORE, UNLESS ALP FURNISHED BY T HE TAXPAYER IS SPECIFICALLY ACCEPTED, THE APPELLATE AUTHORITIES ON THE BASIS OF MATERIAL AVAILABLE ON RECORD HAVE TO DETERMINE ALP ITSELF. S UBJECT TO STATUTORY PROVISIONS, APPELLATE AUTHORITIES CAN DIRECT LOWER REVENUE AUTHORITIES TO CARRY THIS EXERCISE IN ACCORDANCE WITH LAW. THE MAT TER CANNOT BE LEFT HANGING IN BETWEEN. ALP OF INTERNATIONAL TRANSACTIO N HAS TO BE DETERMINED IN EVERY CASE. 134. THERE WOULD BE CASES, WHERE TAXPAYER DOES NOT CO-OPERATE AND FAILS TO FURNISH ALP OR DISCLOSE FULL INFORMATION, RELEVA NT FOR DETERMINATION OF ITA NO.1547/AHD/2007 31 ALP WHEN CALLED UPON TO DO SO BY TAX AUTHORITIES. T HE TAXPAYER FAILS TO DISCHARGE BURDEN PLACED ON THE TAXPAYER. IN SIMILAR ENACTMENTS OF OTHER COUNTRIES, IT IS PROVIDED THAT BURDEN ON THE REVENU E AUTHORITIES IN SUCH A CASE WOULD BE REDUCED. WE HAVE NOT COME ACROSS SIMI LAR PROVISION IN CHAPTER X OF THE ACT. THE TAX AUTHORITIES THEREFORE , HAVE TO RESORT TO PROVISION OF S. 144 OF THE IT ACT AND DETERMINE THE ALP ON THE BASIS OF THE MATERIAL COLLECTED OR AVAILABLE ON RECORD. IN SUCH CIRCUMSTANCES, THE ALP DETERMINED WOULD BE ON THE PARITY WITH A BEST JUDGM ENT ASSESSMENT. SUCH ASSESSMENT (DETERMINATION OF ALP) WOULD HAVE SOME A PPROXIMATIONS AND ESTIMATIONS. BUT EVEN SUCH APPROXIMATIONS AND ESTIM ATIONS MUST SATISFY DICTATES OF JUSTICE AND FAIR PLAY AND LOOK REASONAB LE. IT CANNOT BE ARBITRARY AND CAPRICIOUS. THE ORDER OF TPO IS APPEALABLE AND THEREFORE, IT MUST BE OBJECTIVE, CONTAIN DETAILED REASONS, CONFORM TO REG ULATIONS AND SHOULD BE SEEN AS JUST AND FAIR. 135. ON CONSIDERATION OF THE RELEVANT PROVISIONS, I T IS EVIDENT THAT IN THE PROCESS OF DETERMINING ALP, THE FIRST IMPORTANT FAC TOR TO CONSIDER IS THE SPECIFIC CHARACTERISTICS OF SERVICES RENDERED BOTH IN THE INTERNATIONAL TRANSACTION AS ALSO IN THE UNCONTROLLED TRANSACTION . NEXT IMPORTANT ASPECT REQUIRED TO BE CONSIDERED IS AMOUNT OF ASSETS EMPLO YED, RISK INVOLVED, BOTH IN CONTROLLED AND UNCONTROLLED TRANSACTIONS. I F THERE ARE SUCH DIFFERENCES BETWEEN TRANSACTIONS TAKEN FOR COMPARIS ON, WHICH ARE LIKELY TO AFFECT THE PRICE OR COST CHARGE ETC. IN THE OPEN MA RKET THEN REASONABLE AND ACCURATE EVALUATION IS TO BE DONE AND ADJUSTMENT MA DE. RELIABILITY OF UNCONTROLLED TRANSACTION WOULD DEPEND UPON THE DEGR EE OF COMPARABILITY. THE UNCONTROLLED TRANSACTION MAY NOT BE TAKEN 'AS C OMPARABLE' IF THERE ARE SUCH MATERIAL DIFFERENCES AS CANNOT BE ADJUSTED . IF DATA FOUND SATISFIES ABOVE REQUIREMENTS THEN FURTHER PROCEEDINGS TO FIND THE MOST APPROPRIATE METHOD, BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF A PARTICULAR INTERNATIONAL TRANSACTION IS TO BE SELECTED. IN OTH ER WORDS, MOST APPROPRIATE METHOD WOULD BE THE METHOD WHICH PROVIDES MOST REAS ONABLE RESULTS HAVING REGARD TO THE DATA AVAILABLE FOR DETERMINING ARM S LENGTH PRICE. IF THERE ARE MORE THAN ONE ALPS DETERMINED ON THE APPL ICATION OF MOST APPROPRIATE METHOD THEN ARITHMETICAL MEAN OF SUCH P RICES OR PRICE AT OPTION OF THE ASSESSEE WITHIN 5 PER CENT VARIATION IS TO BE ADOPTED [PROVISO TO S. 92C(2)]. 136. IN THE LIGHT OF ABOVE GENERAL OBSERVATIONS, WE NOW PROCEED TO CONSIDER VARIOUS OBJECTIONS OF THE PARTIES FIRST BE ING CLUBBING OF INTERNATIONAL TRANSACTIONS FOR REFERENCE TO THE TPO . THE TAXPAYER, BEFORE THE LEARNED CIT(A), HAD CONTENDED THAT CLUBBING OF ALL TRANSACTIONS WITH MERE MENTION OF AGGREGATE VALUE OF ALL TRANSACTIONS IN REFERENCE TO TPO WAS WRONG. A SEPARATE REFERENCE IN RESPECT OF EACH INTERNATIONAL TRANSACTION SHOULD HAVE BEEN MADE. LIKEWISE APPROVA L GRANTED BY THE LEARNED CIT HAS ALSO BEEN CHALLENGED AS MECHANICAL AND ILLEGAL. SUCH AN OBJECTION HAS ALSO BEEN RAISED IN THE GROUNDS OF AP PEAL. WHILE ANSWERING SEVEN QUESTIONS REFERRED TO THE SPECIAL BENCH, WE H AVE DISCUSSED THIS OBJECTION RELATING TO APPROVAL OF CIT IN DETAIL. IN THE LIGHT OF ABOVE ITA NO.1547/AHD/2007 32 DISCUSSION, WE DO NOT FIND ANY SUBSTANCE IN THE TEC HNICAL OBJECTIONS RAISED BY THE ASSESSEE AND ACCEPTED BY THE LEARNED CIT(A) IN THE IMPUGNED ORDER. IT IS FURTHER TO BE NOTED THAT IN THE AUDIT REPORT FILED BY THE TAXPAYER IN FORM NO. 3CEB IT WAS STATED THAT THE TAXPAYER HA D PAID RS. 28,32,20,103 TO AZTEC US TOWARDS ONSITE SOFTWARE SE RVICES. LIKEWISE SUM PAID FOR MARKETING SERVICES WAS ALSO STATED. TAKING ABOVE DETAILS FROM THE AUDIT REPORT, A REFERENCE WAS MADE BY THE AO TO TPO TO DETERMINE ALP OF INTERNATIONAL TRANSACTIONS. THE TAXPAYER AND TPO HA D FULLY AND CLEARLY UNDERSTOOD WHAT INTERNATIONAL TRANSACTIONS WERE REF ERRED FOR THE DETERMINATION OF THE ALP. IN THE LIGHT OF CIRCULAR NO. 3 OF 2003, APPROVAL WAS RIGHTLY GIVEN BY THE CIT AS AGGREGATE VALUE OF TRANSACTIONS EXCEEDED RS. 5 CRORES. THE CIRCULAR BEING BINDING WAS REQUIR ED TO BE FOLLOWED. THE TAXPAYER FILED ALL CONCEIVABLE OBJECTIONS BEFORE TH E TPO. ALTHOUGH EACH TRANSACTION SHOULD BE SEPARATELY MENTIONED, BUT NO PREJUDICE IS SHOWN TO HAVE BEEN CAUSED TO THE TAXPAYER ON ACCOUNT OF NON- MENTION OF EACH TRANSACTION SEPARATELY. THEREFORE, IN OUR OPINION, THIS CONTENTION IS TO BE REJECTED. 30. IN VIEW OF THE ABOVE DICTATES PROVIDED IN THE G UIDELINES OF TRANSFER PRICE FOR MULTI-NATIONAL ENTERPRISES AND TAX ADMINI STRATION IN THE CASE OF CUP METHOD INCLUDING THE SITUATION WHERE ADJUSTMENT S NEED TO BE MADE TO UNCONTROLLED TRANSACTIONS TO MAKE THEM COMPARABL E UNCONTROLLED TRANSACTION. THE ASSESSEE HAS NOT FILED THE DETAIL S OF FUNCTIONAL ANALYSIS OF THESE ENTERPRISES TAKING INTO ACCOUNT ASSETS USED A ND RISK ASSUMED. SIMILARLY, THE HON'BLE ITAT BANGALORE SPECIAL BENCH IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. (SUPRA) HAS PLA CED BURDEN OF THE TAXPAYER TO JUSTIFY THE TRANSACTIONS CARRIED AT ALP BY MAINTAINING THE DOCUMENTS AND OTHER DETAILS. THE HON'BLE BANGALORE SPECIAL BENCH HAS ALSO HELD THAT TAXPAYER AS A PARTY TO THE TRANSACTI ON HAS FULL KNOWLEDGE OF TRANSACTION CARRIED OUT AND AS A PERSONAL ASSOCIATE WITH THAT PARTICULAR LINE OF BUSINESS, THE ASSESSEE REASONABLY ACCEPTED TO BE NOT ONLY AWARE ABOUT NUISANCE OF THAT BUSINESS AND BUT ALSO ECONOMIC CON DITIONS AND PECULIAR SITUATION OF THAT BUSINESS. THE BENCH FURTHER HELD THAT THE ASSESSEE KNEW EVEN ABOUT THE COMPARABLE UNCONTROLLED TRANSACTION, AND THEREFORE IT IS REASONABLE TO CALL UPON THE TAXPAYER TO FURNISH CON TROLLED / UN-CONTROLLED TRANSACTIONS WHICH ARE WITHIN TAXPAYERS SPECIAL KN OWLEDGE. ACCORDINGLY, THE BURDEN PLACED ON THE ASSESSEE IS NOT DISCHARGED IN THE PRESENT CASE BEFORE US AS THE ASSESSEE HAS NOT FILED THE DETAILS BEFORE TPO OR THE ASSESSING OFFICER. THE RELEVANT DETAILS, I.E. THE TRANSACTION CARRIED OUT OF COMPARABLE CONTROLLED AND UNCONTROLLED TRANSACTIONS . IN VIEW OF THESE FACTS, AND IN THE ABSENCE OF MATERIAL, WE HAVE NO A LTERNATIVE BUT TO EXPECT TO SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSIN G OFFICER TO DECIDE THE ISSUE AFRESH AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASSESSEE MAY SHOW THAT SALE PRICE OF THE CONTRO LLED TRANSACTIONS ARE AT ARMS LENGTH. IF THERE ARE DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS, THEN THE ASSESSEE IS ENT ITLED TO THE BENEFIT OF ADJUSTMENT FOR SUCH DIFFERENCES UNDER THE T.P. RULE S. THE AO/TPO IS DIRECTED TO PASS A FRESH ORDER IN THE LIGHT OF THE ABOVE OBSERVATIONS. THIS MATER IS SET ASIDE IN THE ENTIRELY TO THE FILE OF T HE AO OF THIS ISSUE . ITA NO.1547/AHD/2007 33 21.1 SINCE THE FACTS OBTAINING IN THE YEAR UNDER C ONSIDERATION ARE UNDISPUTEDLY SIMILAR TO THE FACTS OBTAINING IN THE PRECEDING ASSESSMENT YEAR, WE HAVE NO HESITATION IN RESTORIN G THE ISSUE RAISED IN THESE GROUNDS TO THE FILE OF THE AO WITH SIMILAR DIRECTIONS AS HAVE BEEN ISSUED IN THE PRECEDING ASSESSMENT YEA R IN THEIR AFORESAID DECISION BY THE ITAT IN THE ASSESSEES OW N CASE FOR AY 2003-04. WITH THESE OBSERVATIONS, GROUND NOS. 9 TO 14 ARE DISPOSED OF. 22. GROUND NO..15 BEING GENERAL IN NATURE, DOES NOT REQUIRE ANY SEPARATE ADJUDICATION AND IS , THEREFORE, DISMISSE D. 23 GROUND NO. 16 PERTAINS TO LEVY OF INTEREST U/S 234B & 234C OF THE ACT. THE LD. AR DID NOT MAKE ANY SUBMISSIONS ON THIS GRO UND. THE LEVY OF INTEREST U/S 234B & 234C OF THE ACT BEING MANDATORY [COMMISSION ER OF INCOME TAX.VS ANJUM M. H. GHASWALA AND OTHERS,252 ITR 1(SC), AFFI RMED BY HON'BLE APEX COURT IN THE CASE OF CIT V. HINDUSTAN BULK CARRIERS [2003] 259 ITR 449 (SC) AND IN THE CASE OF CIT V. SANT RAM MANGAT RAM JEWELLERS [2003] 264 ITR 564 (SC) ], THIS GROUND IS DISMISSED. HOWEVER, THE AO SHALL A LLOW CONSEQUENTIAL RELIEF ,IF ANY, WHILE GIVING EFFECT TO OUR AFORESAID DIRECTIO NS. 24. GROUND NO. 17 PERTAINS TO INITIATION OF PENAL TY PROCEEDINGS U/S 271(1)(C) OF THE ACT. THE LD. AR DID NOT MAKE ANY SUBMISSIONS ON THIS GROUND. MERE INITIATION OF PENALTY PROCEEDINGS BEING NOT APPEALABLE, THIS G ROUND IS, THEREFORE, DISMISSED. ITA NO.1547/AHD/2007 34 25. IN THE RESULT, APPEAL IS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT TODAY ON 24 -09-2010 SD/- SD/- (BHAVNESH SAINI) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATE : 24-09-2010 COPY OF THE ORDER FORWARDED TO: 1. ATUL LIMITED, 3 RD FLOOR, ASHOKA CHAMBERS, RASALA MARG, ELLIS-BRIDGE, AHMEDABAD 2. THE DCIT (OSD), RANGE-1, AHMEDABAD 3. CIT CONCERNED 4. CIT(A)-V, AHMEDABAD 5. THE DR, BENCH-D, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD