M/s Instrumentarium Corporation Ltd., Kolkata V. DDIT (IT)-1(1), KOLKATA, Kolkata

ITA 1549/KOL/2009

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4454 (ITAT-KOLKATA)
• Duration Of Justice: 6 year(s) 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 23-05-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 02-09-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: NIKITA CHAPPARIA
• Keywords: Business income; Depreciation; Transfer pricing; Double taxation relief; International transaction; Permanent establishment; Advance ruling; Wholly owned subsidiary; Fair market value; Notional interest; Commercial expediency; Unabsorbed depreciation
• Section: 92F; 148; 144; 92

Judgement Text

I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 1 OF 41 IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA SPECIAL BENCH A , KOLKATA [CORAM: JUSTICE D D SUD (PRESIDENT), N V VASUDEVAN JM AND PRAMOD KUMAR AM ] I.T.A. NO S . 1548 AND 1549 /KOL/2009 ASSESSMENT YEAR S : 2003 - 04 AND 2004 - 05 INSTRUMENTARIUM CORPORATION LIMIT ED, FINLAND .APPELLANT PO BOX 100, FL 00031, GE FINLAND [PAN: AAADCG1535E] VS. ASSISTANT DIRECTOR OF INCOME TAX INTERNATIONAL TAXATION I KOLKATA .. RESPONDENT APPEARANCES BY: N VENKATRAMAN ALONG WITH AVRA MAZUMDAR, PRASUN KUMAR MAITI, MAN ISH SHETH, RAHUL DAGA, AND NIKITA CHAPPARIA , FOR THE APPELLANT RAHUL MITRA, ALONG WITH NILESH MODI , PRASHANT MAHESHWARI, MITAL SANGHARAJKA FOR THE INTERVENOR SHELL GLOBAL SOLUTIONS INTERNATIONAL BV [ ON THE BASIS OF ITA NOS. 2933/ AHD/ 2011 AND 2841/ AHD/ 2012, FOR THE A SSESSMENT YEARS 2007 - 08 & 2008 - 09 , IN THE CASES OF SHELL GLOBAL SOLUTIONS INTERNATIONAL B.V. VS ADIT (INTERNATIONAL TAXATION), AHMEDABAD] RASHMI RANJAN DAS , FOR RESPONDENT DATE OF CONCLUDING THE HEARING : APRIL 19 , 2016 DATE OF PRONOUNC IN G THE ORDER : JULY 15 , 2016 O R D E R PER PRAMOD KUMAR , AM : QUESTION BEFORE THE SPECIAL BENCH: 1. THIS QUESTIONS AS REFERRED TO THE SPECIAL BENCH, VIDE ORDER DATED 6 TH APRIL 2010, WERE AS FOLLOWS: (1) WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, NO ARMS LENGTH RATE OF INTEREST WAS REQUIRED TO BE CHARGED ON THE LOAN GRANTED BY I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 2 OF 41 THE NON - RESIDENT ASSESSEE - COMPANY TO ITS WHOLLY OWNED SUBSIDIARY INDIAN COMPANY M/S. DATEX - OHMEDA (INDIA) PVT. LTD. (DATEX)? (2) WHETHER, IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, CBDT CIRCULAR NO.14 OF 2001 [252 ITR (ST.) 104] AND TAXATION RULING TR 2007/1 ISSUED BY AUSTRALIAN TAXATION OFFICER ARE RELEVANT IN THE CONTEXT OF TRANSFER PRICING REGULATIONS OF INDIA, IN PARTICULAR TO THE CASE OF THE ASSESSEE? (3) WHETHER, SETTING OFF OF LOSS WITH FUTURE PROFITS AND NOT ASSESSING THE INTEREST INCOME IN THE HANDS OF THE ASSESSEE ON ARMS LENGTH PRICE WILL CAUSE REAL LOSS TO THE GOVT. EXCHEQUER? 2. HOWEVER, WHEN THIS FINALLY CAME UP FOR HEARING ON 19 TH APRIL 201 6, IT WAS NOTICED THAT SOME OF THESE QUESTIONS ARE NOT EVEN RAISED IN THE GROUNDS OF APPEAL FILED BY THE ASSESSEE AND ARE IN THE NATURE OF ARGUMENTS ON CERTAIN PERIPHERAL ISSUES , IN SUPPORT OF THE CORE GRIEVANCE, FOCUSSING ON CERTAIN NARROW FACETS OF THE I SS UES REQUIRING OUR ADJUDICATION. AS ALL THESE ASPECTS WILL HAVE TO BE DEALT WITH IN THE COURSE OF OUR ADJUDICATION ANYWAY, IT IS NOT NECESSARY TO HAVE SPECIFIC QUESTIONS ON EACH OF THE ARGUMENTS. IT WAS IN THIS BACKGROUND, AND WITH A VIEW TO SUCCINCTLY SE T OUT THE CONTROVERSY REQUIRING OUR ADJUDICATION, THAT THE NEED TO MODIFY THE QUESTIONS TO BE ANSWERED BY THE SPECIAL BENCH WAS FELT. ACCORDINGLY, WITH THE CONSENT OF THE PARTIES, HONBLE PRESIDENT WAS PLEASED TO MODIFY THE QUESTIONS FOR THE CONSIDERATION OF SPECIAL BENCH, AND THE QUEST ION THAT THIS SPECIAL BENCH THUS FINALLY ADJUDICATED UPON WAS AS SET OUT BELOW: WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AN ARMS LENGTH PRICE (ALP) ADJUSTMENT , OF RS 3,88,37,190 FOR THE ASSESSMENT YEAR 2 003 - 04 AND RS 5,18,95,560 FOR THE ASSESSMENT YEAR 2004 - 05, WAS REQUIRED TO BE MADE, IN RESPECT OF INTEREST FREE LOAN GRANTED BY THE ASSESSEE, A NON - RESIDENT COMPANY, TO ITS WHOLLY OWNED SUBSIDIARY IN INDIA ? THE ASSESSEE AND THE TRANSACTION: 2. THE BACKG ROUND IN WHICH THIS QUESTION HAS COME UP FOR THE CONSIDERATION OF THIS SPECIAL BENCH IS LIKE THIS. THE ASSESSEE BEFORE US, INSTRUMENTARIUM CORPORATION LIMITED ( ICL - FINLAND , IN SHORT), IS A COMPANY INCORPORATED IN, AND TAX RESIDENT OF, I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 3 OF 41 FINLAND. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLING MEDICAL EQUIPMENT, AND IT HAS A WHOLLY OWNED SUBSIDIARY IN INDIA BY THE NAME OF DATEX OHMEDA INDIA PVT LTD ( DATEX INDIA , IN SHORT) WHICH ACTS AS ICL - FINLANDS MARKETING ARM FOR ITS PRODUCTS IN INDIA. ON 26 TH AUGUST 2002, THE ASSESSEE ENTERED INTO AN AGREEMENT, WHICH WAS DULY APPROVED BY THE RESERVE BANK OF INDIA, TO ADVANCE AN INTEREST FREE LOAN OF RS 36 CRORES TO DATEX - INDIA. IT IS THIS INTEREST FREE ADVANCE BY THE ASSESSEE TO ITS INDIAN SUBSIDIARY W HICH IS THE SUBJECT MATTER OF DISPUTE BEFORE US. THE PRECISE POINT OF DISPUTE IS THAT WHILE THE ASSESSING OFFICER IS FIRM THAT BY ADOPTING AN ARMS LENGTH INTEREST ON THIS LOAN, AN ARMS LENGTH PRICE (ALP) ADJUSTMENT IS REQUIRED TO BE MADE TO THE INCOME TO BE BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE, I.E. I CL - FINLAND, THE ASSESSEE IS OF THE VIEW THAT, FOR A VARIETY OF REASONS - INCLUDING PRIMARILY THE ISSUE OF BASE EROSION OF INDIAN TAX BASE, NO SUCH ADJUSTMENT CAN BE MADE. AAR SAGA: 3. THE ASSESSEE HA D APPROACHED THE AUTHORITY FOR ADVANCE RULING IN THIS REGARD. WHILE WE WILL DEAL WITH THIS ASPECT OF THE MATTER IN MORE DETAIL AT A LATER STAGE, SUFFICE TO NOTE THAT THE AAR ENTERTAINED ONLY ONE QUESTION FOR , WHAT CAN BE TERMED AS , ADJUDICATION, AND THIS QUESTION WAS WHETHER THE APPLICANT IS REQUIRED TO COMPLY WITH THE PROVISIONS OF THE INCOME - TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) CONTAINING THE LEGISLATION RELATING TO TRANSFER PRICING, NAMELY, SECTIONS 92 TO 92F OF THE ACT, WITH RESPECT TO THE SAID TRANSACTION OF LOAN AND ACCORDINGLY CHARGE INTEREST AS PER THE PRINCIPLES OF ARMS LENGTH PRICE FROM DATEX . THIS QUESTION WAS ANSWERED BY THE AAR AS FOLLOWS: ADVERTING TO QUESTION NO. 3, AS REFRAMED, IT WILL BE NECESSARY TO BEAR IN MIND THE SCH EME OF SECTIONS 92, 92A, 92B. THE ASSESSING OFFICER IS ENJOINED TO WORK OUT THE ARMS LENGTH PRICE AS PER SUB - SECTIONS (1) AND (2) OF SECTION 92 FOLLOWING THE METHOD OUTLINED IN SECTION 92C. IF HE CONSIDERS NECESSARY OR EXPEDIENT SO TO DO, HE MAY WITH THE PREVIOUS APPROVAL OF THE COMMISSIONER, REFER THE COMPUTATION OF ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION TO THE TRANSFER PRICING OFFICER UNDER SECTION 92CA. THE TRANSFER PRICING OFFICER HAS TO DETERMINE THE ARMS LENGTH PRICE AFTER N OTICE TO THE ASSESSEE. ON THE BASIS OF SUCH DETERMINATION THE ASSESSING OFFICER HAS TO COMPUTE THE TOTAL INCOME OF THE ASSESSEE. IT IS ONLY IF THE ASSESSING OFFICER I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 4 OF 41 COMES TO THE CONCLUSION THAT THE INTEREST OF THE REVENUE WOULD BE BETTER SERVED BY NOT APPL YING SUB - SECTIONS (1) AND (2) THAN BY ADHERING TO THEM, SUB - SECTION (3) WOULD BE ATTRACTED AND THE ASSESSING OFFICER WILL HAVE TO PROCEED WITH THE ASSESSMENT WITHOUT GIVING EFFECT TO SUB - SECTIONS (1) AND (2). WITHOUT COMPLYING WITH THE STATUTORY REQUIREME NTS IT WILL BE TOO PRESUMPTUOUS TO ASSUME THE SAID TRANSACTION IS BENEFICIAL FOR THE REVENUE AND THEN INVOKE SUB - SECTION(3) OF SECTION 92. 12. TO CONSIDER THE APPLICABILITY OF SUB - SECTION (3) OF SECTION 92, WE HAVE PERUSED THE LOAN AGREEMENT BETWEEN THE APPLICANT AND THE DATEX DATED AUGUST 26, 2002. CLAUSES 5, 6 AND 7 OF THE AGREEMENT ARE RELEVANT FOR OUR PURPOSE. 5. REPAYMENT. THE BORROWER SHALL REPAY THE PRINCIPAL AMOUNT OF THE LOAN IN A BULLET PAYMENT OF THREE YEARS MATURITY CALCULATED FROM THE FIR ST DAY OF LOAN PERIOD. ON THE MATURITY OF THE LOAN THE BORROWER WILL PAY BACK TO THE LENDER EQUIVALENT AMOUNT IN US DOLLARS OF 360,000,000 RUPEES (RUPEES THREE HUNDRED AND SIXTY MILLION ONLY) AT THE EXCHANGE RATE PREVALENT ON THE DATE OF REPAYMENT OF THE LOAN AS FULL DISCHARGE OF THE LOAN. 6. INTEREST RATE THE LOAN WILL BE MADE AVAILABLE BY THE LENDER TO THE BORROWER FREE OF ANY INTEREST. 7. OVERDUE INTEREST. IF THE PAYMENT IS DELAYED DEFAULT INTEREST OF 16% WILL BE CHARGED. OVERDUE INTEREST IS CALCUL ATED FOR THE PERIOD BEGINNING FROM THE MATURITY DATE AND ENDING TO DATE THE PRINCIPAL AMOUNT IS RECEIVED TO THE LENDERS BANK ACCOUNT. THE OVERDUE INTEREST SHALL BE PAID WITH THE PRINCIPAL AMOUNT. THOUGH CLAUSE 6 PROVIDES THAT THE LOAN WILL BE MADE AVAI LABLE BY THE LENDER TO THE BORROWER FREE OF ANY INTEREST, CLAUSE7 STIPULATES THAT IF THE PAYMENT IS DELAYED, DEFAULT INTEREST OF 16%WILL BE CHARGED WHICH HAS TO BE CALCULATED FOR THE PERIOD BEGINNING FROM THE MATURITY DATE AND ENDING TO DATE THE PRINCIPAL AMOUNT IS RECEIVED TO THE LENDERS BANK ACCOUNT. THE OVERDUE INTEREST HAS TO BE PAID WITH THE PRINCIPAL AMOUNT. CLAUSE 5 REQUIRES THAT THE BORROWER SHALL REPAY THE PRINCIPAL AMOUNT OF LOAN IN A BULLET PAYMENT OF THREE YEARS MATURITY CALCULATED FROM THE FIR ST DAY OF LOAN PERIOD. IT APPEARS TO US THAT CLAUSE 6 CANNOT BE READ IN ISOLATION; IT HAS TO BE TAKEN IN CONJUNCTION WITH CLAUSES 5 AND 7 WHICH STIPULATE ABOUT REPAYMENT OF LOAN AND FOR PAYMENT ON OVERDUE INTEREST. WITHOUT KNOWING THE EXACT POSITION IN REG ARD TO THE REPAYMENT OF LOAN OR THE APPLICABILITY OF OVERDUE INTEREST, IT WILL BE PREMATURE TO ASSUME THAT THE RATE OF INTEREST IS 0% AND PROCEED TO PRONOUNCE RULING ON THAT PREMISE. 13. IN THIS CONTEXT, IT IS IMPORTANT TO NOTICE PROVISO (II) TO SUB - SECT ION (2) OF SECTION 245R OF THE ACT, WHICH GIVES NO OPTION TO THE AUTHORITY EXCEPT TO REJECT I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 5 OF 41 THE APPLICATION WHERE THE QUESTION RAISED IN THE APPLICATION INVOLVES DETERMINATION OF FAIR MARKET VALUE OF ANY PROPERTY. THERE CAN BE NO DISPUTE THAT DETERMINATION OF ARMS LENGTH PRICE INVOLVES DETERMINATION OF FAIR MARKET RATE OF INTEREST . THE SINE QUA NON FOR APPLICABILITY OF SUB - SECTION (3) OF SECTION 92 IS THE FINDING THAT THE COMPUTATION OF INCOME UNDER SUB - SECTION (1) OR DETERMINATION OF THE ALLOWANCE FOR ANY EXPENSE OR INTEREST UNDER THAT SUB - SECTION READ WITH THE EXPLANATION OR THE DETERMINATION OF ANY COST OR EXPENSE ALLOCATED OR APPORTIONED, OR, AS THE CASE MAY BE, CONTRIBUTED UNDER SUB - SECTION(2), HAS THE EFFECT OF REDUCING THE INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS, AS THE CASE MAY BE, COMPUTED ON THE BASIS OF ENTRIES MADE IN THE BOOKS OF ACCOUNT IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE INTERNATIONAL TRANSACTION WAS ENTERED INTO. HAVING REGARD TO THE AFOREMENTIONED PROVISION PROVISO (II) TO SUB - SECTION (2) OF SECTION 245R OF THE ACT - IT IS A PROHIBITED EXERCISE FOR THE AUTHORITY. INDEED THE AUTHORITY IS ENJOINED TO REJECT THE APPLICATION IF THE QUESTION INVOLVES DETERMINATION OF FAIR MARKET VALUE OF THE PROPERTY. IT FOLLOWS THAT THE AUTHORI TY CANNOT PRONOUNCE ANY RULING ON THE APPLICABILITY OF SUB - SECTION (3) OF SECTION 92 OF THE ACT. 14. IN THE LIGHT OF THE ABOVE DISCUSSION, THE APPLICANT HAS NO OPTION BUT TO COMPLY WITH THE PROVISIONS OF THE ACT INCLUDING THE LEGISLATION RELATING TO TRAN SFER PRICING, NAMELY, SECTIONS 92 TO 92F OF THE ACT WITH RESPECT TO THE SAID TRANSACTION OF LOAN. WHETHER OR NOT THE APPLICANT WOULD CHARGE THE INTEREST, AS PER THE PRINCIPLES OF THE ARMS LENGTH PRICE, ON THE SAID LOAN ADVANCED TO DATEX, HAVING REGARD TO ITS CONTRACTUAL OBLIGATION, IS A MATTER FOR THE APPLICANT TO CONSIDER BUT FOR THE PURPOSES OF THE ACT THE RATE OF INTEREST WILL HAVE TO BE TAKEN AS PER THE PRINCIPLES OF ARMS LENGTH PRICE. [EMPHASIS, BY UNDERLINING, SUPPLIED BY US NOW] 4. IT WAS IN THI S BACKDROP THAT THE AUTHORITY FOR ADVANCE RULING DECLINED TO ANSWER THE RULING S OUGHT BY THE ASSESSEE. IN A SUBSEQUENT ORDER DATED 2NDD FEBRUARY 2005, THE AUTHORITY FOR ADVANCE RULING CLARIFIED, TO SET AT REST APPLICANTS DOUBTS ABOUT THE IMPACT OF CERTAIN OBSERVATIONS MADE BY THE AUTHORITY, THAT THE SAID ORDER DOES NOT PRECLUDE THE PETITIONER FROM RAISING NECESSARY PLEAS, INCLUDING (EMPHASIS BY UNDERLINING SUPPLIED BY US NOW ) THE PLEA ABOUT THE APPLICABILITY OF CBDT CIRCULAR IN THE COURSE OF ASSESSMENT PROCEEDINGS. THERE IS NO DISPUTE, THEREFORE, THAT EVEN THOUGH THERE ARE CERTAIN OBSERVATIONS BY THE AUTHORITY FOR ADVANCE RULING, WHICH MAY BE CONSTRUED AGAINST THE ASSESSEE ON MERITS, NOTHING REALLY TURNS ON THE SAME AS THE APPLICATION FOR ADVANCE RULING WAS DISMISSED IN PRINCIPLE AND AS ALL THE ISSUES WERE LEFT OPEN FOR ADJUDICATION IN THE COURSE OF THE NORMAL ASSESSMENT PROCEEDINGS OF THE ASSESSEE. I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 6 OF 41 PROCEEDINGS BEFORE THE AUTHORITIES BELOW: 5. TURNING TO THE PROCEEDINGS BEFORE THE AUTHORITIES BELOW, EV EN AFTER THIS UNSUCCESSFUL EFFORT OF OBTAINING THE ADVANCE RULING, THE ASSESSEE DID NOT FILE ANY INCOME TAX RETURN IN INDIA FOR ANY OF THE ASSESSMENT YEARS BEFORE US. WHILE MATERIAL FACTS FOR THE BOTH THE ASSESSMENT YEARS ARE THE SAME, BARRING THE DIFFEREN CE IN CERTAIN FIGURES OF OUTSTANDING AMOUNT AND THE RESULTANT ARMS LENGTH PRICE ADJUSTMENT, WE WILL TAKE UP THE FACTS OF THE ASSESSMENT YEAR 2003 - 04 AS A MATTER OF CONVENIENCE. THE ASSESSEE DID NOT FILE THE INCOME TAX RETURN AND DID NOT EVEN RESPOND TO TH E NOTICES ISSUED UNDER SECTION 148 AND UNDER SECTION 142(1). IT WAS IN THIS BACKDROP THAT THE ASSESSING OFFICER PROCEEDED TO TREAT THE DATEX OHMEDA (INDIA) PVT LTD ( DATEX INDIA, IN SHORT) AS A REPRESENTATIVE ASSESSEE OF THE ASSESSEE, AND PROCEED TO FINALIZ E THE ASSESSMENT UNDER SECTION 144 R.W.S. 147.THE ASSESSING OFFICER NOTED THAT DATEX INDIA IS A LOSS MAKING CONCERN AND THAT IT HAS, AS ON 1 ST APRIL 2003, ACCUMULATED UNABSORBED BUSINESS LOSS OF RS 12,25,42270 AND ACCUMULATED UNABSORBED DEPRECIATION OF RS 12,77,67,761. IT WAS ALSO NOTED THAT THE ASSESSEE AND DATEX INDIA, WHICH WAS WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE AND ITS MARKETING ARM IN INDIA, ENTERED INTO AN AGREEMENT DATED 26 TH AUGUST 2002 UNDER WHICH THE ASSESSEE EXTENDED AN INTEREST FREE LOAN D ENOMINATED IN US DOLLARS, WHICH WAS EQUIVALENT TO RS 36 CRORES , TO DATEX INDIA FOR ITS GENERAL BUSINESS PURPOSES. THE ASSESSING OFFICER WAS OF THE VIEW THAT IT IS NOT IN DISPUTE THAT THE INTEREST FREE LOAN GRANTED BY THE ASSESSEE TO ITS SUBSIDIARY WAS NOT AT AN ARMS LENGTH PRICE, AND, ACCORDINGLY, AN ARMS LENGTH PRICE ADJUSTMENT WAS NORMALLY REQUIRED TO BE MADE IN RESPECT OF INTEREST EARNING OF THE ASSESSEE FROM THE GRANT OF THIS LOAN. THE ONLY DEFENCE OF THE ASSESSEE, ACCORDING TO THE ASSESSING OFFICER, WAS THAT EROSION OF TAX BASE AND CONSEQUENT LOSS OF TAX REVENUE IN INDIA BUT THEN THIS ARGUMENT WAS ON THE PRESUMPTION THAT THE DATEX WAS MAKING PROFITS AND PAYING TAXES THEREON. THE ASSESSING OFFICER WAS OF THE VIEW THAT THIS ARGUMENT IS UNSUSTAINABLE IN LAW BECAUSE THE DATEX INDIA HAS BEEN A LOSS MAKING COMPANY RIGHT FROM THE BEGINNING AND AS SUCH THE PAYMENT OF INTEREST BY DATEX INDIA WILL ONLY ENHANCE THE LOSSES AND THE LOSS OF REVENUE WILL BE MERELY NOTIONAL. THE ASSESSING OFFICER, THEREFORE, CONCLU DED THAT IT IS, THEREFORE, A CASE IN WHICH THE NON - I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 7 OF 41 APPLICATION OF ARMS LENGTH PRINCIPLE WILL RESULT IN A REAL LOSS FOR THE INDIAN TAX REVENUE, AND NOT THE OTHER WAY ROUND . THE ASSESSING OFFICER ALSO BRIEFLY REFERRED TO , AND RELIED UPON, THE REPORT OF EXPERT COMMITTEE GROUP ON TRANSFER PRICING GUIDELINES , 2002, AND SECTION 482 OF US INTERNAL REVENUE CODE. ON FACTUAL ASPECTS REGARDING QUANTUM OF ADJUSTMENT, THE ASSESSING OFFICER NOTED THAT, AS EVIDENT FROM THE MATERIAL ON RECORD IN THE CASE OF DATEX IND IA, THE ASSESSEE HAD AN OUTSTANDING BALANCE, AS AT THE YEAR END, OF RS 50,62,98,144 AS AGAINST RS 14,72,87,857 IN THE BEGINNING OF THE YEAR . THIS FACT, ACCORDING TO THE ASSESSING OFFICER, SHOWED THAT APART FROM THE LOAN OF RS 36 CRORES UNDER CONSIDERATION , THE ASSESSEE HAD GRANTED LOAN TO DATEX INDIA EVEN IN THE EARLIER YEARS . IT WAS ALSO NOTED THAT, IN THE YEAR BEFORE US, NO PROVISION WAS MADE BY DATEX INDIA IN RESPECT OF INTEREST LIABILITY ON LOANS GRANTED BY THE ASSESSEE, WHEREAS SCRUTINY OF THE PAST R ECORDS SHOW THAT THE DATEX INDIA HAD MADE THE PROVISIONS FOR INTEREST ON PARENT COMPANY LOAN OF US $ 3 MILLION . THE ASSESSING OFFICER INFERRED THAT THIS (CHANGE IN ACCOUNTING TREATMENT FOR PROVISION OF INTEREST) CLEARLY INDICATES THAT DATE X HAS STOPPED PROVIDING FOR INTEREST ON THE LOAN FROM THE ASSESSEE W.E.F. 2002 - 03, THE EARLIER LOAN OF USD 3 MILLION WAS INTEREST BEARING . THE ASSESSING OFFICER ALSO NOTED, AS WAS STATED IN THE TRANSFER PRICING REPORT OF DATEX INDIA, THAT AVERAGE PLR OF THE STATE BANK OF INDIA FOR 2002 - 03 WAS 10.87%. BASED ON THIS ANALYSIS, AND WITHOUT THE BENEFIT OF ANY ASSISTANCE OR COOPERATION FROM THE ASSESSEE, THE ASSESSING OFFICER FINALIZED THE ARMS LENGTH PRICE ADJUSTMENT TO THE INCOME OF THE ASSESSEE AS FOLLOWS: 8. IN THE L IGHT OF THE ABOVE AND IN VIEW OF THE FACT THAT INFORMATION BASED ON EXTERNAL COMPARABLE' INVOLVING INDEPENDENT ENTITIES IN THE MARKET IN RESPECT OF PAYMENT OF INTEREST UNDER SIMILAR BUT UNCONTROLLED CIRCUMSTANCES IS AVAILABLE IN THE ACCOUNTANT'S REPORT IN FORM 3CEB IN THE FORM OF PLR OF SBI FOR F.Y. 2002 - 03, IT IS THE CUP METHOD WHICH APPEARS TO BE THE MOST SUITED FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRICE OF THE INTEREST INCOME RECEIVABLE BY THE ASSESSEE FROM DATEX IN THE PRESENT CASE. AS MENTI ONED IN THE TRANSFER PRICING REPORT FILED BY DATEX, THE PLR OF SBI @ 10.87% WAS A PRIME INDICATOR OF THE INTEREST RATE PREVAILING IN THE MARKET IN F.Y.2002 - 03. 8.1. IT WOULD, THEREFORE, BE ONLY APPROPRIATE TO APPLY RATE OF 10.87% TO DETERMINE THE INTEREST INCOME OF THE ASSESSEE. HOWEVER, AS INDICATED ABOVE, SUCH INTEREST IS CHARGEABLE NOT ONLY ON THE LOAN OF RS. 36 CRORES GRANTED BY I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 8 OF 41 THE ASSESSEE TO DATEX DURING THE YEAR, BUT ALSO ON THE OPENING BALANCE OF LOAN GRANTED EARLIER I.E. 14,72,87,857/ - AS ON 01.4 .2002 ON WHICH DATEX SUDDENLY STOPPED MAKING ANY PROVISION FOR INTEREST W.E.F. THE LAST ASSTT.YEAR. INTEREST WAS, THEREFORE, CHARGEABLE ON RS. 36,00,00,000/ - W.E.F. 01.09.02 TO 31.3.2003 (IN ABSENCE OF THE INFORMATION ABOUT THE SPECIFIC DATE ON WHICH DATEX RECEIVED SUCH LOAN, IT IS PRESUMED THAT IT WAS RECEIVED ON THE LAST DAY OF THE MONTH IN WHICH THE AGREEMENT WAS ENTERED IN TO I.E. 31.08.02) PLUS ON 14,72,87,857/ - FOR THE ENTIRE F.Y.2002 - 03. IN CASE ANY SMALL ADJUSTMENT IN THE FIGURES BY WAY OF REPAYMENT ETC. WAS MADE DURING THE YEAR, THE SAME CANNOT BE ACCOUNTED FOR IN ABSENCE OF ANY CO OPERATION FROM THE ASSESSEE. INTEREST INCOME OF THE ASSESSEE IS, THEREFORE, COMPUTED AS UNDER: LOAN AMOUNT 36,00,00,000 14,72,87,857 PERIOD 01.09.02 TO 3 1.3.2003 = 7 MONTHS 01.4.2002 TO 31.3.2003 = 12 MONTHS INTEREST @ 10.87% 2,28,27,000 1,60,10,190 TOTAL 3,88,37,190 ASSESSEE'S INCOME FROM INTEREST ON LOAN GRANTED TO DATEX IS, THUS, DETERMINED AT RS.3,88,37,190/ - , WHICH WIL L ALSO BE THE TOTAL INCOME OF THE ASSESSEE. (RS.) TOTAL INCOME - 3,88,37,190 TAX - 38,83,719 [THE ABOVE INTEREST INCOME IS CHARGEABLE TO TAX @10% AS PER ARTICLE 12.2 OF THE DTAA BETWEEN INDIA & FINLAND] 6. AGGRIEVED B Y THE ADDITION OF RS 3,88,37,190 MADE TO THE INCOME OF THE ASSESSEE, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. WHILE REJECTING THE CONTENTIONS OF THE ASSESSE ON MERITS, LEARNED CIT(A), INTER ALIA , OBSERVED AS FOLLOWS: 14. THE APPELLANT HAS RELIED ON THE BOARDS CIRCULAR NO.14 OF 2001 THAT THE NEW SECTION 92 IS NOT INTENDED TO BE APPLIED IN CASES WHERE THE ADOPTION OF ARMS LENGTH PRICE DETERMINED UNDER THE REGULATIONS WOULD RESULT IN A DECREASE IN THE OVERALL TAX INC IDENCE IN INDIA IN RESPECT OF THE PARTIES INVOLVED IN THE INTERNATIONAL TRANSACTION. IT IS TRUE, BUT AS MENTIONED EARLIER OR ALSO OBSERVED BY THE LD. AAR THE APPELLANT WAS REQUIRED TO COMPLY WITH THE PROVISIONS OF THE I.T. ACT CONTAINING THE LEGISLATION R ELATING TO TRANSFER PRICING NAMELY SECTIONS 92 TO 92F WITH RESPECT TO THE SAID TRANSACTION OF LOAN AND ACCORDINGLY INTEREST FOR PURPOSES OF THOSE PROVISIONS WOULD HAVE BEEN I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 9 OF 41 CHARGED AS PER THE PRINCIPLES OF ARM'S LENGTH PRICE. THEREAFTER, IT WAS ON THE A.O. OF M/S. DATEX TO EXAMINE THE APPLICABILITY OF ARM'S LENGTH PRICE ON SUCH INTEREST. HOWEVER, THE APPELLANT HAS FAILED TO DO SO. IN FACT, THE A.O. OF APPELLANT COMPANY HAS TAKEN THE VIEW IN FAVOUR OF THE REVENUE BY BRINGING TO TAX THE INTEREST NOT CHARGED B Y THE APPELLANT AGAINST THE PROVISIONS OF THE ACT. 15. UNDER THE NEW PROVISIONS, THE PRIMARY ONUS IS ON THE TAXPAYER TO DETERMINE AN ARM'S LENGTH PRICE IN ACCORDANCE WITH THE RULES, AND TO SUBSTANTIATE THE SAME WITH THE PRESCRIBED DOCUMENTATION. WHERE SUC H ONUS IS DISCHARGED BY THE ASSESSEE AND THE DATA USED FOR DETERMINING THE ARM'S LENGTH PRICE IS RELIABLE AND CORRECT, THERE CAN BE NO INTERVENTION BY THE A.O. HOWEVER, IN THE PRESENT CASE, THE APPELLANT HAS FAILED TO DISCHARGE THE PRIMARY ONUS RELATING TO INTERNATIONAL TRANSACTION. 16. IN THE CIRCULAR NO.14 OF 2001, THE BOARD HAS CLARIFIED THAT THE SECOND PROVISO TO SECTION 92C(4) OF THE ACT REFERS TO A CASE WHERE THE AMOUNT INVOLVED IN THE INTERNATIONAL TRANSACTION HAS ALREADY BEEN REMITTED ABROAD AFTER DEDUCTING THE TAX AT SOURCE AND SUBSEQUENTLY, IN THE ASSESSMENT OF THE RESIDENT PAYER, AN ADJUSTMENT IS MADE TO THE TRANSFER PRICE INVOLVED AND. THEREBY THE EXPENDITURE REPRESENTED BY THE AMOUNT SO REMITTED IS PARTLY DISALLOWED. UNDER THE INCOME TAX ACT, A NON - RESIDENT IN RECEIPT OF INCOME FROM WHICH TAX HAS BEEN DEDUCTED AT SOURCE HAS THE OPTION OF FILING A RETURN OF INCOME IN RESPECT OF THE RELEVANT INCOME. IN SUCH CASE, A NON - RESIDENT COULD CLAIM A REFUND OF A PART OF THE TAX DEDUCTED AT SOURCE ON THE GR OUND THAT AN ARM'S LENGTH PRICE HAS BEEN ADOPTED BY THE A.O. IN THE CASE OF THE RESIDENT AND THE SAME PRICE SHOULD BE CONSIDERED IN DETERMINING THE TAXABLE INCOME OF THE NON - RESIDENT. THUS, THE APPELLANT WAS HAVING AN OPTION OF GETTING THE REFUND, HAD IT B EEN COMPLIED THE PROVISIONS OF THE ACT RELATING TO THE INTERNATIONAL TRANSACTION OF SAID LOAN AND HAD THERE BEEN ANY ADJUSTMENT TO THE TRANSFER PRICE ADOPTED BY THE A.O. IN THE CASE OF RESIDENT COMPANY. BUT THE APPELLANT HAS PREFERRED TO IGNORE THE RELEVAN T PROVISIONS OF THE ACT IN THIS REGARD AND SUO - MOTU MADE A CLAIM THAT BY DOING SO IT HAS TAKEN DECISION IN FAVOUR OF THE GOVT. EXCHEQUER OR THE TAX REVENUE OF THE COUNTRY. ON THE CONTRARY, BY DOING SO IT HAS ACTED AGAINST THE TAX REVENUE OF THE COUNTRY. IN CONTINUATION OF ABOVE, IT HAS FURTHER BEEN CLARIFIED IN THE CIRCULAR THAT HOWEVER, THE ADOPTION OF THE ARM'S LENGTH PRICE IN SUCH CASES WOULD NOT ALTER THE COMMERCIAL REALITY THAT THE ENTIRE AMOUNT CLAIMED EARLIER WOULD HAVE ACTUALLY BEEN RECEIVED BY THE ENTITY LOCATED ABROAD. IT HAS THEREFORE BEEN MADE CLEAR IN THE SECOND PROVISO THAT INCOME OF ONE ASSOCIATED ENTERPRISE SHALL NOT HE RECOMPUTED MERELY BY THE REASON OF AN ADJUSTMENT MADE IN THE CASE OF THE OTHER ASSOCIATED ENTERPRISE ON DETERMINATION OF ARM 'S LENGTH PRICE BY THE ASSESSING OFFICER. THUS, IN THE CASE OF APPELLANT, EVEN IF, BY APPLYING THE PRINCIPLES OF ARM'S LENGTH PRICE, THE A.O. HAS COMPUTED THE CHARGEABLE INTEREST ON LOAN, THE INDIAN ENTERPRISE I.E. M/S. DATEX WOULD NOT BE ABLE TO RECOMPUT ED ITS INCOME TO ENHANCE THE CLAIM OF THE LOSS. HENCE, THE A.O. HAS NOT ACTED AGAINST THE SPIRITS OF THE BOARD'S CIRCULAR REFERRED BY THE APPELLANT. I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 10 OF 41 IN VIEW OF ABOVE DISCUSSION, IT IS HELD THAT APPELLANT HAS FAILED TO COMPLY WITH THE PROVISIONS OF THE ACT RELATING TO AN INTERNATIONAL TRANSACTION AND HENCE THE A.O. WAS JUSTIFIED IN BRINGING TO TAX THE INTEREST INCOME ON LOAN GRANTED TO M/S. DATEX BY APPLYING THE PRINCIPLES OF ARM'S LENGTH PRICE. THE ACTION OF THE A.O. IN THIS REGARD IS UPHELD. 7. THE ASSE SSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. THE CASE OF THE INTERVENER 8. BRIEFLY, THE RELEVANT MATERIAL FACTS IN THE CASE OF THE INTERVENER ARE LIKE THIS. THE INTERVENER IS A DUTCH COMPANY, I.E. INCORPORATED AND FISCALLY DOMICILED IN THE N ETHERLANDS, WHICH HAS RENDERED CERTAIN TECHNICAL SERVICES TO ITS ASSOCIATED ENTERPRISE IN INDIA - NAMELY HAZIRA LNG PORT LIMITED AND HAZIRA PORT PRIVATE LIMITED. IT IS STATED THAT THE FEES RECEIVED BY THE APPELLANT (I.E. INTERVENER BEFORE US) FROM HLPL AND HPPL WERE SUBJECT TO TAX @10% ON GROSS BASIS IN THE HANDS OF THE APPELLANT (I.E. INTERVENER BEFORE US) AS FEES FOR TECHNICAL SERVICES, AS PER THE PROVISIONS OF THE INDIA NETHERLANDS TAX TREATY, WITH RESPECT TO WHICH THERE IS NO DISPUTE. IN THE COURSE OF PROCEEDINGS BEFORE THE TRANSFER PRICING OFFICER, AND FOR THE DETAILED REASONS SET OUT IN THE ORDER PASSED BY THE TPO, HE WAS OF THE VIEW THAT THE INTERVENER SHOULD HAVE CHARGED THE HIGHER AMOUNT OF FEES FOR TECHNICAL SERVICES. ACCORDINGLY, THE TPO PROCEEDE D TO RECOMMENDED ADJUSTMENTS OF RS 8,53,03,582 FOR THE ASSESSMENT YEAR 2007 - 08 AND OF RS 29,43,61,998 FOR THE ASSESSMENT YEAR 2008 - 09. AGGRIEVED, THE INTERVENER RAISED HIS GRIEVANCE BEFORE THE DISPUTE RESOLUTION PANEL. THE INTERVENER ALSO, INTER ALIA , R AISED THE ISSUE REGARDING BASE EROSION OF TAX BASE IN INDIA, AS THE RATE OF TAX ON ROYALTY EARNING IN THE HANDS OF THE ASSESSEE COMPANY WAS 10% WHEREAS THE CORPORATE TAX RATE AT THE RELEVANT POINT OF TIME WAS 34%. IT WAS THUS CONTENDED THAT THE APPLICATION OF ARMS LENGTH PRINCIPLE IN COMPUTATION OF INCOME IN THESE INTERNATIONAL TRANSACTIONS, BETWEEN THESE ASSOCIATED ENTERPRISES I.E. THE INTERVENER AND ITS INDIAN AES, WILL RESULT OF EROSION OF TAX BASE BY 24%. WHILE DISPUTE RESOLUTION PANEL AGREED WITH THES E CONTENTIONS OF THE ASSESSEE IN PRINCIPLE, IT PROCEEDED TO UPHOLD APPLICABILITY OF TRANSFER PRICING PROVISION IN THIS CASE AS THE INDIAN AES OF THE INTERVENER HAD SUFFERED LOSSES IN THE RELEVANT I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 11 OF 41 ASSESSMENT YEARS, AND AS SUCH, THERE WAS NO EROSION OF TAX B ASE IN THESE ASSESSMENT YEARS. IT WAS IN THIS BACKDROP THAT THE ASSESSING OFFICER PROCEEDED TO MAKE ALP ADJUSTMENTS OF RS RS 8,53,03,582 FOR THE ASSESSMENT YEAR 2007 - 08 AND OF RS 29,43,61,998 FOR THE ASSESSMENT YEAR 2008 - 09. THE APPEALS FILED BY THE INTER VENER ARE NOW PENDING BEFORE THE TRIBUNAL. SINCE WHATEVER THIS SPECIAL BENCH DECIDES ON THE RELEVANCE OF BASE EROSION PRINCIPLE IN THE TRANSFER PRICING WILL ALSO HAVE BEARING ON THE APPEALS OF THE INTERVENER, IT IS PRAYED THAT THE INTERVENER SHOULD ALSO BE ALLOWED AN OPPORTUNITY OF HEARING BY US. BASE EROSION THEORY - TAXPAYERS PERSPECTIVE 9 . THE BASIC ARGUMENT OF THE ASSESSEE IS THAT SINCE THERE IS NO EROSION OF TAX BASE IN INDIA BY THE ASSESSEE COMPANY GIVING AN INTEREST FREE LOAN TO ITS WHOLLY OWNED SUBSIDIARY INDIAN COMPANY, THE PROVISIONS OF THE TRANSFER PRICING CANNOT BE PRESSED INTO SERVICE IN THIS CASE. LEARNED COUNSEL SUBMITS THAT AN ARMS LENGTH PRICE ADJUSTMENT IS PERMISSIBLE AND WILL BE IN ACCORDANCE WITH THE LAW ONLY AS LONG AS IT DOES NOT R ESULT IN BASE EROSION. SECTION 92(3), ACCORDING TO THE LEARNED COUNSEL, EMBODIES THE BASE EROSION PRINCIPLE INASMUCH AS THE SAID SUB SECTION SPECIFICALLY PROVIDES THAT IN THE EVENT OF COMPUTATION OF INCOME ARISING FROM INTERNATIONAL TRANSACTIONS, ON THE BA SIS OF ARMS LENGTH PRICE, HAS THE EFFECT OF REDUCING THE INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS, THE PROVISIONS OF SECTION 92 WILL NOT COME INTO PLAY. IN PLAIN WORDS, ACCORDING TO THE ASSESSEE, IN A SITUATION IN WHICH RESULT OR CONSEQUENCE OF A N ARMS LENGTH PRICE ADJUSTMENT IS EROSION OF DOMESTIC TAX BASE, THE PROVISIONS OF TRANSFER PRICING CANNOT BE INVOKED. ELABORATING UPON THE FACTUAL ELEMENTS EMBEDDED IN THIS PROPOSITION, IT IS SUBMITTED THAT WHILE THE RECEIPTS IN THE HAND OF THE ASSESSEE A RE TAXABLE @10% ON GROSS BASIS, IN VIEW OF THE SPECIFIC TREATY PROVISIONS TO THAT EFFECT, THE EXPENDITURE SO INCURRED WILL BE FULLY DEDUCTIBLE IN THE HANDS OF THE RESIDENT SUBSIDIARY, AND AS SUCH WILL REDUCE TAXABILITY WHICH IS OTHERWISE AT 36.75%. THE NE T EFFECT WILL BE THAT IN T HE EVENT OF INTEREST FREE LOANS FROM THE FOREIGN PARENT COMPANY BEING SUBJECTED TO ARMS LENGTH PRICE ADJUSTMENT, THE INDIAN TAX BASE WILL STAND ERODED BY 2 6.75% OF SUCH AN ALP ADJUSTMENT. IT IS SUBMITTED THAT THE FACT THAT THE HO LDING COMPANY, I.E. THE ASSESSEE, HAS PROVIDED THE I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 12 OF 41 INTEREST FREE LOAN TO ITS INDIAN SUBSIDIARY, I.E. DATEX - INDIA, IS NOT IN DISPUTE, AND THAT THE GENUINENESS OF THE LOAN, ITS USAGE AND RETURN TO THE ASSESSEE IS ALSO NOT IN DISPUTE. IT IS ALSO POINTED OUT THAT IF THE COMPUTATION OF INTEREST IS IMPUTED TO THE LOAN, THE NET RESULT WILL BE (A) A WITHHOLDING TAX OF 10% ON THE INTEREST PAYABLE, (B) A STATUTORY REDUCTION OR DEDUCTIBILITY OF THE SAID EXPENSES E WHICH WILL ALLOW BENEFIT OF 36.75% TAX TO THE ASSESS E, AND (C) A RESULTANT BASE EROSION OF 26.75% TO THE INDIAN REVENUE. LEARNED COUNSEL THEN INVITES OUR ATTENTION TO THE CBDT CIRCULAR NO. 14 OF 2001 WHICH, INTER ALIA , STATES THAT ..THE BASIC INTENTION UNDERLYING THE NEW TRANSFER PRICING REGULATIONS IS TO PREVENT SHIFTING OF PROFITS BY MANIPULATING PRICES CHARGED OR PAID IN INTERNATIONAL TRANSACTIONS, THEREBY ERODING THE COUNTRYS TAX BASE AND THAT THE NEW SECTION 92 IS , THEREFORE, NOT INTENDED TO BE APPLIED IN CASES WHERE ADOPTION OF ARMS LENGTH PRICE, DETERMINED UNDER THE REGULATIONS, WILL RESULT IN A DECREASE IN OVERALL TAX INCIDENCE IN INDIA IN RESPECT OF PARTIES INVOLVED IN THE INTERNATIONAL TRANSACTIONS . A REFERENCE IS THEN MADE TO THE CDBT CIRCULAR NO. 12 DATED 23 RD AUGUST 2001 WHICH, INTER ALIA, STATES THAT THE AFORESAID PROVISIONS HAVE BEEN ENACTED WITH A VIEW TO PROVIDE STATUTORY FRAMEWORK WHICH CAN LEAD TO COMPUTATION OF REASONABLE, FAIR AND EQUITABLE PROFIT AND TAX IN INDIA SO THAT THE PROFITS CHARGEABLE TO TAX IN INDIA DO NOT GET DIVERTED E LSEWHERE BY ALTERING THE PRICES CHARGED AND PAID IN INTRA - GROUP TRANSACTIONS LEADING TO EROSION IN OUR TAX REVENUES . LEARNED COUNSEL THEN SUBMITS THAT THESE CBDT CIRCULARS HAVE BEEN REFERRED TO, WITH APPROVAL, BY A FIVE MEMBER BENCH OF THIS TRIBUNAL IN TH E CASE OF AZTEC SOFTWARE TECHNOLOGY SERVICES LTD VS ACIT [(2009) 107 ITD SB 141 (BANG)]. LEARNED COUNSEL ALSO INVITED OUR ATTENTION TO, AND RELIED UPON, THE RULING NO. 1 OF 007 ISSUED BY THE AUSTRALIAN TAX OFFICE (ATO, IN SHORT) WHICH HOLDS THAT ALP ADJUS TMENTS ARE NOT REQUIRED TO BE MADE IN THE CASES OF INTEREST FREE LOANS GRANTED BY THE NON - RESIDENT COMPANY TO THE DOMESTIC COMPANY EVEN IF THE DOMESTIC COMPANY IS INCURRING LOSSES. HE SUBMITS THAT THE SAME PRINCIPLE MUST FOLLOW IN THE PRESENT CASE AS WELL, AND, ACCORDINGLY, NO ALP ADJUSTMENT IS REQUIRED TO BE MADE IN RESPECT OF THE LOANS GIVEN BY THE ASSESSEE TO ITS INDIAN AE I.E. DATEX INDIA. LEARNED COUNSEL SUBMITS THAT THE BAR ON CORRESPONDING DEDUCTION ADJUSTMENTS IN THE HANDS OF THE AE , AS SET OUT IN S ECOND PROVISO TO SECTION 92C(4), COMES INTO PLAY ONLY WHEN ARMS LENGTH PRICE IS I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 13 OF 41 PAID TO THE AE AS IS EVIDENT FROM THE LANGUAGE OF THE PROVISO WHICH REFERS TO ARMS LENGTH PRICE PAID TO THE ASSOCIATED ENTERPRISE. THE CASE OF THE ASSESSEE IS THAT SINCE NO PAYMENT HAS BEEN MADE BY THE INDIAN AE, I.E. DATEX INDIA, THE BAR ON DEDUCTION DOES NOT COME INTO PLAY. FOR THIS REASON ALSO, ACCORDING TO THE LEARNED COUNSEL, THE ALP ADJUSTMENTS CANNOT MADE, AND TRANSFER PRICING PROVISIONS CANNOT BE INVOKED, ON THE FACT S OF THIS CASE. 10. ON THE STRENGTH OF THESE SUBMISSIONS, LEARNED COUNSEL FOR THE ASSESSEE URGED US TO HOLD THAT THE TRANSFER PRICING PROVISIONS CANNOT BE INVOKED ON THE FACTS OF THIS CASE AS INDEED SIMILARLY PLACED CASES. LEARNED COUNSEL GIVES A RATHER D RAMATIC TOUCH TO HIS OPENING SUBMISSIONS B Y STATING THAT WHILE THERE MAY NOT BE MUCH TAX REVENUES INVOLVED IN THIS CASE, WHICH IS NO MORE THAN, TO USE HIS WORDS, A DROP IN THE OCEAN, OUR DECISION ON THIS MACRO ISSUE OF RELATIONSHIP BETWEEN BASE EROSION AND TRANSFER PRICING WILL HAVE A HUGE IMPACT ON THE TRANSFER PRICING ADMINISTRATION IN GENERAL AND IT WILL GUIDE THE COURSE OF DE STINY FOR PROPER USE THIS ANTI ABUSE PROVISION . WE ARE URGED TO RISE TO THE OCCASION AND LAY DOWN SOUND PRINCIPLES FOR APPLICATIO N OF THE TRANSFER PRICING PROVISIONS. SUBMISSIONS BY THE INTERVENOR 11. WE MAY, AT THIS STAGE, TAKE NOTE OF THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE INTERVENER AS WELL. LEARNED COUNSEL BEGUN BY POINTING OUT THAT HIS SUBMISSIONS BEFORE THE SPECIAL BENCH ARE CONFINED TO THE APPLICABILITY PER SE OF THE TRANSFER PRICING ON THE UNIQUE FACTS OF HIS CASE WHICH ARE, TO THE MATERIAL EXTENT, COMMON WITH THAT OF THE APPELLANT. HE SUBMITS THAT FOR EVERY ADDITIONAL MONETARY UNIT OF FEES CHARGED BY THE ASSESSEE TO ITS INDIAN AES, THE INDIAN AES WILL GET A TAX SHIELD OF 34%, WHEREAS THE ASSESSEE WILL SUFFER TAX ONLY @ 10% ON GROSS BASIS. THERE IS THUS BASE EROSION OF THE INDIAN TAX REVENUE TO THE EXTENT OF 24%, AND THIS BASE EROSION DEFEATS THE VERY INTENT AND OB JECTIVE OF INTRODUCING THE TRANSFER PRICING PROVISIONS IN INDIA . HE REFERS TO THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE ACT 2001, WHICH INTRODUCED TRANSFER PRICING PROVISIONS IN INDIA, AND THE CBDT CIRCULAR NO. 14 OF 2001 (SUPRA). IN PARTICUL AR, OUR ATTENTION IS INVITED TO THE OBSERVATION THAT THE I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 14 OF 41 NEW SECTION 92 IS, THEREFORE, NOT INTENDED TO BE APPLIED IN THE CASES WHERE ADOPTION OF THE ARMS LENGTH PRICE DETERMINED UNDER THE REGULATION WOULD RESULT IN A DECREASE IN THE OVERALL TAX INCIDENC E IN INDIA IN RESPECT OF THE PARTIES INVOLVED IN INTERNATIONAL TRANSACTION . HE SUBMITS THAT IN THE INSTANT CASE, CHARGING OF HIGHER SERVICE FEES BY THE ASSESSEE TO INDIAN AES WOULD HAVE RESULTED IN AN EROSION OF TAX BASE IN INDIA SINCE THE TAX APPLICABLE ON THE ADDITIONAL INCOME, BY WAY OF ALP ADJUSTMENT, WOULD BE INSUFFICIENT TO OFFSET THE TAX FORGONE BY THE GOVERNMENT ON ACCOUNT OF DEDUCTION AVAILABLE TO INDIAN AES OF THE ASSESSEE. HE THEN REFERS TO HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF K P V ERGHESE VS INCOME TAX OFFICER [(1981) 131 ITR 597 (SC)] IN SUPPORT OF THE PROPOSITION THAT A STATUTE SHOULD BE INTERPRETED IN A MANNER TO ACHIEVE AND ADVANCE THE LEGISLATIVE INTENT. LEARNED COUNSEL ALSO REFERRED TO, AND RELIED UPON, THE JUDICIAL PRECEDENTS IN SUPPORT OF THE PROPOSITION THAT THE CIRCULARS ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES ARE BINDING UPON ALL THE FIELD OFFICERS, AND IT IS NOT OPEN TO THE OFFICERS TO TAKE A STAND DIFFERENT THAN THE STAND TAKEN IN SUCH CIRCULARS. HE THEN POINTS OUT THAT THE INTERVENER ASSESSEE DID MAKE PROFITS IN THE SUBSEQUENT ASSESSMENT YEARS AND STARTED ABSORBING THE LOSSES INCURRED EARLIER. IT CANNOT, THEREFORE, BE SAID THAT THE ASSESSEE WAS ALL ALONG INCURRING LOSSES ONLY AND HAD NO TAX LIABILITY. HE EMPHASIZES THAT AN EFFORT TO INCREASE LOSSES HAS ALWAYS BEEN VIEWED WITH THE SAME DEGREE OF DISDAIN AND APATHY, UNDER THE LAW, AS AN EFFORT TO DECREASE T HE PROFITS. LEARNED COUNSEL THEN REFERRED TO HONBLE SUPREME COURTS DECISION IN THE CASE OF CIT VS GOLD COIN HEA LTH FOOD PVT LTD [(2008) 304 ITR 308 (SC)] IN SUPPORT OF THE PROPOSITION THAT WHEN PENALTY CAN BE LEVIED FOR OVERSTATING THE LOSS, AND WHEN HONBLE SUPREME COURT HAS CLARIFIED THAT THE EXPRESSION INCOME ALWAYS INCLUDED LOSSES, I.E. NEGATIVE PROFITS, THE SAME PRINCIPLE SHOULD APPLY IN THE CONTEXT OF LOSSES SUFFERED BY THE INDIAN AES OF THE ASSESSEE INASMUCH AS NOTIONAL COMPUTATION OF TAX SHOULD BE TAKEN INTO ACCOUNT FOR COMPUTING THE BASE EROSION. A REFERENCE IS THEN MADE TO A RULING ISSUED BY THE AUSTRAL IAN TAX OFFICE ( ATO , IN SHORT), I.E. RULING NO. 2007/1, WHICH HOLDS THAT NO ALP ADJUSTMENT NEEDS TO BE MADE IN THE CASE OF NON - RESIDENT LENDER GIVING AN INTEREST FREE LOAN TO THE AUSTRALIAN DOMESTIC COMPANY, AND THIS PRINCIPLE WILL APPLY EVEN IF THE AUSTRA LIAN DOMESTIC COMPANY WAS TO INCUR A GENUINE TAX LOSS SINCE THE TAX LOSS ELIGIBLE TO BEING CARRIED FORWARD. HE SUBMITS THAT I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 15 OF 41 THE SAID RULING OF THE ATO, WHICH IS ALSO THE OPINION OF THE GOVERNMENT OF AUSTRALIA - A COUNTRY WELL EXPERIENCED IN THE FIELD OF TRA N SFER PRICING WHEN COMPARED TO INDIA, SQUARELY APPLIES TO THE CASE OF THE ASSESSEE. HE HASTENS TO ADD THAT EVEN THOUGH THIS RULING DOES NOT BIND THE TRIBUNAL, IT SHOULD BE TREATED AS HAVING PERSUASIVE EFFECT AND SHOULD BE GIVEN DUE CONSIDERATION. LEARNE D COUNSEL THEN MAKES AN INTERESTING REFERENCE TO THE DECISION OF HONBLE SUPREME COURT, IN THE CASE OF DIT VS MORGAN STANLEY & CO LTD [(2007) 292 ITR 416 (SC)], AND CONTENDS THAT, IN THE LIGHT OF THIS DECISION, THE TRANSFER PRICING PROVISIONS CANNOT BE APP LIED ON THE FACTS OF THIS CASE AS LONG AS THE ADDITIONAL INCOME, WHICH IS SOUGHT TO BE BROUGHT TO TAX BY WAY OF ALP ADJUSTMENTS, IS OTHERWISE SUBJECT TO TAX IN INDIA. HE SUBMITS THAT THIS DECISION WAS RENDERED IN THE CONTEXT OF ATTRIBUTION OF PROFITS TO TH E PE BUT THEN IT ACCEPTS, AND IN FACT LAYS DOWN, THE BROAD PRINCIPLE THAT UNLESS THERE ARE PROFITS RESIDING IN THE FOREIGN ENTERPRISE IN A JURISDICTION OUTSIDE INDIA, THERE CANNOT BE ANY OCCASION TO BRING THEM TO TAX IN INDIA. IN CASE, ACCORDING TO THE LEA RNED COUNSEL, THE PROFITS SOUGHT TO BE TAXED IN INDIA IN THE HANDS OF THE FOREIGN ENTERPRISE ARE ALREADY RESIDING IN INDIA IN THE HANDS OF THE AES, IT WILL BE A MEANINGLESS FORMALITY AND EMPTY RITUAL INASMUCH AS THESE PROFITS ARE ALREADY TAXABLE IN THE HAN DS OF THE AES, AND WHEN EXAMINING THE INTRA AE TRANSACTIONS, A HOLISTIC VIEW IS REQUIRED TO BE TAKEN. IT IS THUS SUBMITTED THAT IN THE LIGHT OF THE AUSTRALIAN TAX OFFICE RULING (SUPRA) AS ALSO HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF MORGAN STANLEY (SUPRA) ALSO, THE TRANSFER PRICING PROVISION CANNOT APPLY ON THE FACTS OF THIS CASE. REVENUES STAND ON BASE EROSION THEORY 12. LEARNED COMMISSIONER (DR) SUBMITS THAT THE PROVISIONS OF THE STATUTE ARE QUITE CLEAR AND UNAMBIGUOUS, AND ADMIT NO CONTROVERS Y. IT IS SUBMITTED THAT THERE IS NO DISPUTE THAT THE TRANSACTIONS BETWEEN THE FOREIGN COMPANY AND ITS INDIAN AES ARE TRANSACTIONS BETWEEN THE AES, AS DEFINED UNDER SECTION 92A, AND THAT THE TRANSACTIONS ARE IN THE NATURE OF INTERNATIONAL TRANSACTIONS UNDE R AS DEFINED UNDER SECTION 92 B. HE FURTHER SUBMITS THAT IN TERMS OF THE PROVISIONS OF SECTION 92 ANY PROFITS ARISING OUT OF INTERNATIONAL TRANSACTIONS BETWEEN THE ASSOCIATED ENTERPRISES ARE REQUIRED TO BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE . AS REGARDS THE I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 16 OF 41 PROVISIONS OF SECTION 92 (3) , HE SUBMITS THAT IT PROVIDES THAT THE PROVISIONS OF SECTION 92 SHALL NOT APPLY IN A CASE WHERE THE COMPUTATION OF INCOME UNDER SUB - SECTION (1) OR THE DETERMINATION OF THE ALLOWANCE FOR ANY EXPENSE OR INTEREST UND ER, OR THE DETERMINATION OF ANY COST OR EXPENSE ALLOCATED OR APPORTIONED, OR, AS THE CASE MAY BE, CONTRIBUTED UNDER SUB - SECTION (2), HAS THE EFFECT OF REDUCING THE INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS, AS THE CASE MAY BE, COMPUTED ON THE BASIS O F ENTRIES MADE IN THE BOOKS OF ACCOUNT IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE INTERNATIONAL TRANSACTION WAS ENTERED INTO BUT THEN THIS LIMITATION COMES INTO PLAY ONLY WHEN THE INCOME OF THE ASSESSEE, IN WHOSE HANDS INCOME FROM INTERNATIONAL TRANSAC TIONS IS TO BE COMPUTED, STANDS REDUCED OR THE LOSS IN HIS HANDS STANDS INCREASED. LEARNED DR ALSO SUBMITS THAT IN THE LIGHT OF A FIVE MEMBER BENCH DECISION OF THIS TRIBUNAL IN THE CASE OF AZTECH SOFTWARE & TECHNOLOGY LIMITED VS ACIT [(2007) 107 ITD SB 141 (BANG)] , THE APPLICATION OF TRANSFER PRICING, WHICH MUST BE APPLIED NO MATTER HOW INEQUITABLE THE LEGAL PROVISIONS ARE, IN THE PRESENT CASE CANNOT BE QUESTIONED. HE FURTHER POINTS OUT JUST BECAUSE ALP ADJUSTMENTS ARE MADE IN THE HANDS OF THE NON - RESIDENT ASSOCIATED COMPANIES, THESE ALP ADJUSTMENTS WILL NOT ENTITLE THE INDIAN AES TO GET ANY DEDUCTIONS IN RESPECT OF THE ALP ADJUSTMENTS. IT IS CONTENDED THAT LEARNED COUNSEL HAS MISINTERPRETED THE SECOND PROVISO TO SUGGEST THAT CORRESPONDING DEDUCTION WILL BE AVAILABLE IN THE HANDS OF THE AE ON THE GROUND THAT NO ARMS LENGTH PRICE HAS ACTUALLY BEEN PAID BY THE INDIAN AE. IT IS STATED THAT THERE IS NO PROVISION IN THE STATUE ENABLING SUCH A DEDUCTION ON ACCOUNT OF THE ALP ADJUSTMENT AND IN THE HANDS OF THE AFFE CTED AE. THERE IS THUS NO LOSS, REAL OR NOTIONAL, TO THE INDIAN TAX REVENUE BY MAKING ALP ADJUSTMENTS IN THE HANDS OF THE NON - RESIDENT COMPANIES IN RESPECT OF HIGHER INTEREST OR FEES THAT THE NON - RESIDENT COMPANIES, ACCORDING TO THE TPO, SHOULD HAVE CHARGE D FROM THE INDIAN AES. LEARNED COMMISSIONER (DR) THUS POINTS OUT THAT THIS THEORY OF EROSION OF INDIAN TAX BASE IS ILL CONCEIVED. HE ALSO SUBMITS THAT, IN ANY EVENT, TIME VALUE OF MONEY CANNOT BE IGNORED AND EVEN IF THERE WAS TO BE ANY IMPACT OF THIS ALP ADJUSTMENT ON THE TAXABILITY IN THE HANDS OF THE INDIAN AE, IT WOULD HAVE BEEN ONLY IN A SUBSEQUENT YEAR AND THERE IS NOTHING ON RECORD TO EVEN REMOTELY SUGGESTED THAT DISCOUNTED NET PRESENT VALUE OF THIS FUTURE LOSS IS MORE THAN THE TAX REVENUE AT PRESENT . HE SUBMITS THAT A RUPEE IN TAX, SAY FIVE YEARS FROM NOW, I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 17 OF 41 CANNOT BE TREATED AS A RUPEE IN TAX TODAY. IT IS SUBMITTED THAT THE INDIAN AE IS INCURRING LOSSES AS ON NOW AND AS SUCH TAX ADVANTAGE TO THE AE, EVEN IF ANY, IS PURELY HYPOTHETICAL AT THIS STAGE. T HE LOSS TO THE REVENUE, FOR THE PURPOSE OF SECTION 92(3), HAS TO BE A REAL LOSS AND IT CANNOT BE A HYPOTHETICAL LOSS WHICH DEPENDS ON THE ASSESSEE NOT ONLY MAKING PROFITS IN THE SUBSEQUENT ASSESSMENT YEARS BUT MAKING SO MUCH OF PROFITS AS WOULD SET OFF ALL THE LOSSES INCURRED BY THE ASSESSEE. AS FOR THE DISPUTE RESOLUTION PANEL ACCEPTING THE BASE EROSION THEORY IN THE HANDS OF THE INTERVENER, BUT DECLINING TO TAKE IT TO THE LOGICAL CONCLUSION ONLY ON THE GROUND THAT THE ASSESSEE HAS SUFFERED THE LOSSES IN T HE RELEVANT ASSESSMENT YEAR, LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITS THAT AT THE RELEVANT POINT OF TIME THE ORDERS PASSED BY THE DRP WERE NOT APPEALABLE AND THAT IS THE ONLY REASON THAT EVEN WHEN THE REVENUE AUTHORITIES DID NOT AGREE WITH THE INTERPRET ATION GIVEN BY THE DRP, THE MATTER COULD NOT HAVE BEEN CARRIED FURTHER, BUT THEN IN ANY EVENT, THE INTERPRETATION OF LAW BY THE DRP DOES NOT BIND THIS TRIBUNAL. HE POINTS OUT THAT AS THE INTERVENER HIMSELF ACCEPTS THE VIEWS OF THE DRP DO NOT BIND THE INTE RPRETATION OF LAW BY THIS FORUM. IT IS, THEREFORE, INCORRECT TO SAY THAT THE THEORY OF TAKING A HOLISTIC VIEW OF TAXABILITY IN THE HANDS OF ALL THE AES, AS AGAINST THE ASSESSEE ALONE, HAS BEEN ACCEPTED BY THE REVENUE AUTHORITIES. AS FOR THE CBDT CIRCULARS RELIED UPON BY THE ASSESSEE, IT IS SUBMITTED THAT THERE IS NO DISPUTE THAT THESE CIRCULARS ARE BINDING ON THE FIELD AUTHORITIES BUT THEN SINCE THERE IS NO DEDUCTION AVAILABLE TO THE AES IN RESPECT OF ALP ADJUSTMENTS MADE IN THE HANDS OF THE ASSESSEE NON - RE SIDENT COMPANIES, THERE IS NO REDUCTION IN OVERALL INCIDENCE OF TAXATION AS A RESULT OF THE ALP ADJUSTMENTS BEING MADE IN THE HANDS OF THE NON - RESIDENT COMPANIES EARNING INCOME FROM THEIR INDIAN AES - WHICH IS SINE QUA NON FOR THE NON APPLICATION OF TRANSFE R PRICING PROVISIONS IN SUCH CASES. LEARNED DR SUBMITS THAT AS FAR AS THE CIRCULARS ARE CONCERNED, THESE CIRCULARS AT BEST DEAL WITH SUCH SITUATIONS IN WHICH THERE IS OVERALL REDUCTION OF TAX INCIDENCE - WHICH IS CERTAINLY NOT THE CASE BEFORE US. COMING TO THE MORGAN STANLEY DECISION (SUPRA), LEANED COUNSEL POINTS OUT THAT ADMITTEDLY THIS DECISION IS IN THE CONTEXT OF THE PROFIT ATTRIBUTION TO THE PERMANENT ESTABLISHMENT AND IT DOES NOT, THEREFORE, HAVE ANY BEARING ON THE ISSUE BEFORE US. HE POINTS OUT THA T THE SHORT ISSUE BEFORE US IS APPLICABILITY OF SECTION 92(3) WHICH WAS NOT EVEN THE SUBJECT MATTER OF CONSIDERATION BY HONBLE SUPREME COURT. AS FOR I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 18 OF 41 THE LOSS TO THE REVENUE AS A RESULT OF THE IMPUGNED ALP ADJUSTMENTS, L EARNED DR SUBMITS THAT IT IS FOR THE REVENUE TO DECIDE WHAT IS BEST FOR THE REVENUE, AND JUST AS MUCH AS THE REVENUE IS PREVENTED FROM SITTING IN JUDGMENT OVER HOW SHOULD THE ASSESSEE CONDUCT HIS BUSINESS, THE ASSESSEE SHOULD NOT STEP INTO THE SHOES OF THE REVENUE AUTHORITIES EITHER. IF THE ASSESSEE THINKS THAT AS A RESULT OF THE ALP ADJUSTMENTS BEING MADE IN THE HANDS OF THE ASSESSEE, THE TAX BASE OF THE INDIAN REVENUE IS BEING ERODED BECAUSE TAXABILITY IN THE HANDS OF THE ASSESSEES AES IN INDIA WILL BE ADVERSELY AFFECTED, THE ASSESSEE CANN OT BE AGGRIEVED OF THE SAME. THE ASSESSEE STANDS TO GAIN IN SUCH AN EVENTUALITY, AND NO ASSESSEE IN THE WORLD, AND LEAST OF ALL THESE HARD NOSED BUSINESS ENTITIES, CAN BE AGGRIEVED OF BEING SUBJECTED TO LOWER OVERALL TAXATION. IT IS NOT THEIR SENSE OF FAIR PLAY, BUT COMPULSIONS OF THEIR VESTED INTERESTS, WHICH MOTIVATE SUCH SUBMISSIONS. HE SUBMITS THAT IT IS INTERESTING TO NOTE THAT THE ASSESSE WAS EARLIER CHARGING INTEREST ON LOANS GIVEN TO THE INDIAN COMPANIES BUT IT WAS ONLY WHEN THE LOSSES SUFFERED BY T HE INDIAN AES SURFACED, AND THE INDIAN AES DID NOT GAIN ANY TAX ADVANTAGE FROM THESE INTEREST PAYMENTS, THAT THE ASSESSEE STOPPED CHARGING THE INTEREST ON LOANS TO THE INDIAN AES. BY NO STRETCH OF LOGIC, THEREFORE, IT COULD BE SAID THAT NOT CHARGING THE IN TEREST WAS A BONAFIDE BUSINESS DECISION. AS THE DEVELOPMENTS SUGGEST, ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, THE DECISION OF THE FOREIGN PARENT COMPANY NOT TO CHARGE INTEREST ON LOANS TO THE INDIAN AES WAS TRIGGERED BY THE LOSSES BEING INCUR RED BY THE INDIAN AES. LEARNED DR SUBMITS THAT IN ANY EVENT ON THE BASIS OF ASSESSEES PERCEPTIONS ABOUT SOME CONCEPTUAL NOTIONS UNDERLYING THESE LEGAL PROVISIONS, THE CLEAR MANDATE OF LAW CANNOT BE READ DOWN. WHAT IS BEING REFERRED TO AS EROSION OF TAX BASE OF THE INDIAN REVENUE IS, ACCORDING TO THE LEARNED DR, BASED ON SOME BROAD PURPOSE AND NOTIONS OF THE TRANSFER PRICING AND WITH COMPLETE DISREGARD TO THE FACTS OF THE PRESENT CASES. LEARNED DR ALSO INVITED OUR ATTENTION TO THE FACT THAT THE ASSESSEE H AS BEEN COMPLETELY INDIFFERENT TO THE NOTICES SERVED BY THE ASSESSING OFFICER AND THAT NO INFORMATION WAS FURNISHED BY THE ASSESSEE AT THE ASSESSMENT STAGE. THE ASSESSEE DID NOT, DESPITE SPECIFIC REQUISITION TO THAT EFFECT, EVEN FILE THE INCOME TAX RETURN AND HAS BEEN COMPLETELY NON COOPERATIVE. THE CONDUCT OF THE ASSESSEE DOES NOT INSPIRE ANY CONFIDENCE. LEARNED COUNSEL SUBMITTED THAT WHILE, ACCORDING TO THE LEARNED COUNSEL, STAND OF THE ASSESSEE HAS BEEN THAT THERE ARE NO I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 19 OF 41 DISPUTES ABOUT BONAFIDES OF INTER EST FREE LOAN, THE FACT OF THE MATTER IS THAT THE ASSESSEE HAS NOT EVEN GIVEN THE BASIC DETAILS OF DEALINGS WITH THE INDIAN AE AND IT WAS LEFT TO THE ASSESSING OFFICER TO COMPILE INFORMATION FROM THE SECONDARY SOURCES AND FRAME THE ASSESSMENT ON THAT BASIS . 13. ON THE STRENGTH OF THESE SUBMISSIONS, LEARNED COMMISSIONER (DR) URGES US TO HOLD THAT THE TRANSFER PRICING PROVISIONS HAVE BEEN RIGHTLY INVOKED IN THESE CASES AND THAT THE THEORY OF NON APPLICABILITY OF TP PROVISIONS ON THE BASIS OF BASE EROSION OF INDIAN REVENUE IS NEITHER CORRECT IN PRINCIPLE NOR APPLICABLE ON THE FACTS OF THESE CASES. REJOINDER OF THE ASSESSEE ON BASE EROSION THEORY 14. LEARNED COUNSEL SUBMITS THAT WHILE IT IS TRUE THAT INDIAN AE WAS MAKING LOSSES IN THE RELEVANT ASSESSMENT YEA RS, ONE CANNOT LOSE SIGHT OF THE FACT THAT THE INDIAN AE HAD THE STATUTORY RIGHT TO CARRY FORWARD THE LOSS FOR A PERIOD OF 8 YEARS AND SET OFF THE SAME AGAINST THE PROFITS WITHIN THE STIPULATED TIME FRAME. IT IS, THEREFORE, CLEAR THAT LEARNED DR HAS ERRED IN ASSUMING THAT TAX ADVANTAGE TO THE INDIAN AE OF THE ASSESSEE IS PURELY HYPOTHETICAL. HE THEN POINTS OUT THAT THE ASSESSEE S AE, I.E. DATEX INDIA, MERGED HAD MERGED WITH WIPRO GE HEALTHCARE LTD IN THE YEAR 2008 - 09 MUCH BEFORE THE STATUTORY PERIOD OF EIGH T YEARS. WITHOUT BEING COMMITTAL ON WHETHER OR NOT THE LOSS INCURRED BY THE INDIAN AE WAS COMPLETELY SET OFF AGAINST THE PROFITS OF THE COMPANY IN WHICH IT MERGED, LEARNED COUNSEL SUBMITS THAT WIPRO GE MUST HAVE SUBSUMED THE ACCUMULATED LOSSES IN THE FIRST YEAR OF MERGER ITSELF. THIS, ACCORDING TO THE LEARNED COUNSEL, SHOWS THAT THE LOSS TO THE INDIAN REVENUE WAS A REAL LOSS. AS FOR THE INDIAN AE NOT BEING ELIGIBLE FOR DEDUCTION AS A RESULT OF THE ALP ADJUSTMENTS, LEARNED COUNSEL THAT THE SITUATION OF CREAT ING AN INCOME, AS A RESULT OF THE ALP ADJUSTMENTS, IS TO BE TREATED DIFFERENTLY FROM INCREASING AN INCOME, AS A RESULT OF THE ALP ADJUSTMENTS. HE SUBMITS THAT DEDUCTION FOR ALP ADJUSTMENT IN THE HANDS OF THE INDIAN AE WILL HAVE TO BE ALLOWED IN THE FORMER CASE, THOUGH IT MAY NOT BE ALLOWED IN THE LATTER CASE. HE DID NOT, HOWEVER, ELABORATE ANY FURTHER ON THIS PROPOSITION OR REFER TO THE LEGAL BASIS OF THIS PROPOSITION. LEARNED COUNSEL THEN SUBMITTED THAT THE I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 20 OF 41 EXPRESSION USED IN SECTION 92(3) IS HAS THE EFF ECT OF REDUCING THE INCOME CHARGEABLE TO TAX OR REDUCING THE LOSS , THAT THE EXPRESSION EFFECT AND IMPACT ARE SYNONYMOUS, AND, THEREFORE, WHAT NEEDS TO BE EXAMINED IS THE CONSEQUENCE WHICH SHOULD FLOW FROM THE COMPUTATION. HE THEN SUBMITS THAT IF THE CONTENTIONS OF THE REVENUE ARE TO BE UPHELD IT WILL RESULT IN A SITUATION THAT THE FOREIGN COMPANY WILL BE TAXED @ 10% ON THE SAME INCOME IN RESPECT OF WHICH A TAX SHIELD AT MUCH HIGHER RATE, I.E. 36% IN THIS CASE, IS ALLOWED FOR THE CORRESPONDING DEDUCTI ON TO INDIAN AE, AND THUS THE ASSESSEE IS LEGALLY PERMITTED TO ERODE THE INDIAN TAX BASE. HE THEN SUBMITS THAT WHEN THE EXPLICIT INTENT OF LAW IN TERMS OF SECTION 92(3) IS EXACTLY TO THE OPPOSITE TO SUCH A SCENARIO, A DECLARATION OF LAW OR A JUDGMENT TO TH E CONTRARY SHOULD NOT BE LAID DOWN OR ACCEDED TO, AND THAT EITHER A RULE OF LAW OR A JUDICIAL INTERPRETATION RESULTING IN BASE EROSION SHOULD NOT AVERTED. LEARNED COUNSEL THEN SUBMITS THAT THE TRANSFER PRICING PROVISIONS DEAL WITH THE TRANSACTIONS INVOLVI NG TWO OR MORE PARTIES , AND WHAT SHOULD BE PUT TO TEST IS TAX IMPLICATIONS OF A TRANSACTION AS A WHOLE RATHER THAN TAX IMPLICATIONS OF THE TRANSACTION IN THE HANDS OF ONE OF THE ASSESSEE. THEREFORE, ACCORDING TO THE LEARNED COUNSEL, SECTION 92(3) CANNOT BE GIVEN SUCH A RESTRICTIVE MEANING SO AS TO EXAMINE THE IMPACT OF TAXABILITY ONLY IN THE HANDS OF THE ASSESSE RATHER THAN OF ALL THE AES PUT TOGETHER. AS FOR THE IMPACT OF AZTEC DECISION (SUPRA) BY A FIVE MEMBER BENCH OF THIS TRIBUNAL, LEARNED COUNSEL SUB MITTED THAT THE TRIBUNAL DID NOT HAVE ANY OCCASION TO EXAMINE THE IMPACT OF SECTION 92(3), AND, THEREFORE, THIS DECISION CANNOT HAVE ANY BEARING ON THE INTERPRETATION OF SECTION 92(3). IN THE LIGHT OF THESE SUBMISSIONS, LEARNED COUNSEL FOR THE ASSESSEE ON CE AGAIN URGES US TO HOLD THAT THE TRANSFER PRICING PROVISIONS PER SE ARE NOT APPLICABLE ON THE FACTS OF THIS CASE. OUR ANALYSIS OF THE BASE EROSION ARGUMENT 15. WE FIND THAT SECTION 92 (1)) REQUIRES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACT ION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE . TO THIS EXTENT, THERE IS NO DISPUTE THAT THE TRANSACTIONS BEFORE US ARE INTERNATIONAL TRANSACTIONS BETWEEN THE ASSOCIATED ENTERPRISES, AND THE INCOME ARISING FROM THESE TRANSACTIONS IS, THEREF ORE, REQUIRED TO BE COMPUTED HAVING REGARD I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 21 OF 41 TO THE ARMS LENGTH PRICE. THE CASE OF THE ASSESSEE, HOWEVER, AT BEST IS THAT THE ASSESSEE IS COVERED BY THE EXCLUSION CLAUSE SET OUT IN SECTION 92(3) WHICH LAYS DOWN THE SITUATION IN WHICH THE PROVISION OF COMPUT ATION OF INCOME HAVING REGARD TO THE ARMS LENGTH PRICE, AS SET OUT IN SECTION 92(1), WILL NOT APPLY. 16. SECTION 92(3) , TO THE EXTENT RELEVANT FOR OUR ANALYSIS, PROVIDES AS FOLLOWS: (3) THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE TH E COMPUTATION OF INCOME UNDER SUB - SE CTION (1) HAS THE EFFECT OF REDUCING THE INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS, AS THE CASE MAY BE, COMPUTED ON THE BASIS OF ENTRIES MADE IN THE BOOKS OF ACCOUNT IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE INTERNATIONAL TRANSACTION WAS ENTERED INTO 17. IN PLAIN WORDS, WHAT THIS SUB SECTION HOLDS IS THAT WHERE AS A RESULT OF COMPUTATION OF INCOME UNDER SECTION 92(1) ON THE BASIS OF ARMS LENGTH PRINCIPLE , EITHER THE INCOME OF THE ASSESSEE IS REDUCED OR LOSS OF THE ASSESSEE IS INCREASED , THE PROVISIONS OF SECTION 92(1) WILL NOT BE PRESSED INTO SERVICE. IN OTHER WORDS, WHERE COMPUTATION OF INCOME ON THE BASIS OF ARMS LENGTH PRICE HAS THE EFFECT OF LOWERING THE PROFITS OR INCREASING THE LOSSES, SUCH A COMPUTATI ON ON ARMS LENGTH PRICE SHALL NOT BE RESORTED TO. TAKE FOR EXAMPLE, A SITUATION IN WHICH AN ENTERPRISE SELLS A PRODUCT TO ITS AE AT RS 100 WHEREAS ITS ARMS LENGTH PRICE IS ONLY RS 90, THE COMPUTATION OF INCOME IN THE HANDS OF SUCH AN ENTERPRISE WILL STIL L BE TAKEN AT RS 100 AND NOT AT RS 90. ADOPTING THE ARMS LENGTH PRICE IN SUCH A SITUATION WILL RESULT IN A SITUATION IN WHICH, THE COMPUTATION OF ARMS LENGTH PRICE WILL HAVE THE EFFECT OF LOWERING THE PROFITS OR INCREASING THE LOSSES. ESSENTIALLY, THEREF ORE, IT REFERS TO THE COMPUTATION OF INCOME IN THE HANDS OF THE ASSESSEE IN RESPECT OF WHICH COMPUTATION OF INCOME IS BEING DONE UNDER SECTION 92(1). 18. IN SUBSTANCE, FUNDAMENTAL CONTENTION OF THE ASSESSEE, HOWEVER, IS THAT WE SHOULD TAKE A HOLISTIC VIE W OF THE MATTER AND ADOPT THE CONCE PT OF LOWERING OVERALL PROFITS AND INCREASING OVERALL LOSSES , NOT ONLY FOR THE ASSESSEE ALONE, BUT OF ALL THE RELATED AES AS A WHOLE - AS TAXABLE IN INDIA. GOING A STEP FURTHER, WHAT IS IMPLICIT IN THE ARGUMENT OF THE ASSE SSEE IS THAT WE SHOULD NOT EVEN LOOK AT THE FIGURES OF INCOME OR LOSSES BUT ON TAX IMPACT OF SUCH PROFITS OR LOSSES. IN EFFECT THUS, REDUCING I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 22 OF 41 THE INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS SHOULD BE DE FACTO READ AS REDUCING THE TAX LIABILITY ON INC OME OR INCREASING THE TAX SHIELD FOR THE LOSSES. IN EFFECT, THUS, NOT ONLY THE ACTUAL TAX IMPACT BUT ALSO THE POSSIBLE TAX ADVANTAGE, DE HORS THE TIME VALUE OF MONEY, SHOULD BE TAKEN INTO ACCOUNT. THIS INTERPRETATION, ACCORDING TO THE ASSESSEE, WILL ADVANC E THE INTENT OF THE LEGISLATURE AND OBJECTIVES OF THE TRANSFER PRICING. 19. A PLAIN READING OF SECTION 92(3), HOWEVER, INDICATES THAT WHAT IS TO BE SEEN IS IMPACT ON PROFITS OR LOSSES FOR THE YEAR IN CONSIDERATION ITSELF AS IT IS TO BE COMPUTED ON THE BA SIS OF ENTRIES MADE IN THE BOOKS OF ACCOUNTS IN RESPECT OF PREVIOUS YEAR IN WHICH THE INTERNATIONAL TRANSACTION WAS ENTERED INTO . THERE IS THUS NO SCOPE AT ALL FOR TAKING INTO ACCOUNT THE IMPACT ON TAXES FOR THE SUBSEQUENT YEARS. THE TAX SHIELD AVAILAB LE TO THE ASSESSEES AE, AS A RESULT OF ACCUMULATED LOSSES - EVEN IF ANY, CAN ONLY AFFECT THE INCOME OF THE SUBSEQUENT YEARS, WHICH, FOR THE REASONS NOTED ABOVE, ARE NOT RELEVANT FOR THE PURPOSE OF SECTION 92(3). THE MANNER IN WHICH THE ARGUMENT OF THE ASSE SSEE IS PLACED, A PART OF THE SECTION IS BEING INTERPRETED IN ISOLATION WITHOUT APPRECIATING THE IMPACT OF THE OTHER PART OF THE SAME SECTION. SUCH AN APPROACH IS CLEARLY NOT PERMISSIBLE. THIS LEGAL POSITION APART, THE ARGUMENTS OF THE ASSESSEE ALSO PROCE ED ON THE FALLACIOUS LOGIC INASMUCH AS THE AMOUNT BY WHICH INCOME OF THE ASSESSEE IS INCREASED BY THE ARMS LENGTH PRICE ADJUSTMENTS, UNDER THE INDIAN LAW, IS NOT AVAILABLE FOR DEDUCTION IN THE HANDS OF THE CORRESPONDING INDIAN AE. TAKE FOR EXAMPLE A SITUA TION IN WHICH THE ASSESSEE HAS NOT EARNED AN INCOME OF RS 100 FROM INTEREST ON ACCOUNT OF LOAN GIVEN BY THE ASSESSEE TO ITS INDIAN AE, OR FROM FEES FOR TECHNICAL SERVICES RENDERED TO THE INDIAN ASSESSEE, BUT AN ALP ADJUSTMENT OF RS 400 IS MADE IN RESPECT O F THIS INCOME. IN SUCH A SITUATION, WHAT IS DEDUCTIBLE IN THE HANDS OF THE INDIAN AE IS ONLY RS 100 AND NOT RS 500. THEREFORE, AS A RESULT OF THIS ALP ADJUSTMENT, THERE IS NO LOWERING OF PROFIT OR INCREASE IN LOSS OF THE AE EVEN WHILE INCOME OF THE ASSESSE E STANDS INCREASED BY RS 400. THERE IS NO BASE EROSION BY THE ALP ADJUSTMENTS IN THE HANDS OF INCOME OF THE NON - RESIDENT COMPANY IN RESPECT OF TRANSACTIONS WITH THE INDIAN AES. THE BASE EROSION COULD HAVE, IF AT ALL, TAKEN PLACE AT BEST IN A SITUATION IN W HICH THE INDIAN AE WAS TO ACTUAL LY ALLOW THE INCOME TO THE NON - R ESIDENT COMPANY . THAT IS I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 23 OF 41 NOT THE CASE BEFORE US, AND IN SUCH A SITUATION, IN ANY EVENT, ALP ADJUSTMENTS WOULD NOT HAVE COME INTO PLAY AT ALL . AS REGARDS LEARNED COUNSELS CONTENTION THAT IF TH ERE IS AN ENHANCEMENT TO AN INCOME CORRESPONDING DEDUCTION CANNOT INDEED BE GIVEN TO THE RELATED AE, BUT IF AN ALTOGETHER NEW INCOME IS BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE, AS A RESULT OF ALP ADJUSTMENT, CORRESPONDING DEDUCTION IS REQUIRED TO BE GI VEN TO THE INDIAN AE, WE FIND NO BASIS WHATSOEVER FOR THIS CONTENTION. THE SCHEME OF TRANSFER PRICING LEGISLATION DOES NOT SUPPORT THE PLEA OF THE ASSESSEE. LEARNED COUNSEL HAS NOT BEEN ABLE TO POINT OUT ANY SPECIFIC LEGAL PROVISION ENABLING SUCH A CORRESP ONDING DEDUCTION OR DEMONSTRATE, OR EVEN REMOTELY SUGGEST, THE LINE OF DEMARCATION AS VISUALIZED BY THE LEARNED COUNSEL. AS REGARDS THE REFERENCE TO SECOND PROVISO TO SECTION 9 2C (4) MADE BY THE LEARNED CIT(A), ON INCORRECTNESS OF WHICH SO MUCH RELIANCE HA S BEEN PLACED BY THE LEARNED COUNSEL, THE CIT(A) WAS INDEED IN ERROR AS IT REFERS TO RE - CO M PUTATION OF INCOME IN THE HANDS OF AN AE, AS A RESULT OF LOWER DEDUCTION BEING ALLOWED , BUT THEN NOTHING REALLY TURNS ON THAT. THE REASONING GIVEN BY THE CIT(A) WAS INCORRECT, THE CONCLUSION ARRIVED AT HIM BY WAS NOT. HE WAS RIGHT, EVEN IF SERENDIPITOUSLY. THE DEDUCTION FOR THE ALP ADJUSTMENT WILL NOT BE AVAILABLE TO THE INDIAN AE BECAUSE THERE IS NO PROVISION ENABLING DEDUCTION FOR ALP ADJUSTMENTS. THE SECOND PROVIS O TO SECTION 92C(4) REFERS TO A SITUATION IN WHICH LET US SAY AN A RESIDENT ASSESSEE PAID RS 100 FOR INTEREST TO ITS AE ABROAD, AND DULY DEDUCTED TAX FROM THE SAME OR THE TAX WAS DEDUCTIBLE FROM THE SAID PAYMENT, BUT THE ARMS LENGTH PRICE OF THE INTEREST WAS ASCERTAINED AT RS 40. IN SUCH A SITUATION, WHILE DEDUCTION, AS PER ARMS LENGTH PRINCIPLE , IS TO BE ALLOWED ONLY FOR RS 40, THE TAXABILITY IN THE HANDS OF THE AE SHALL CONTINUE TO BE FOR RS 100. CLEARLY, THEREFORE, REFERENCE TO SECOND PROVISO TO SECTI ON 92C(4), AS MADE BY THE LEARNED CIT(A), WAS WHOLLY UNWARRANTED. HOWEVER, LEARNED COUNSEL OF THE ASSESSEE IS ALSO EQUALLY IN ERROR WHEN HE CONTENDS THAT SINCE THE SECOND PROVISO TO SECTION 92C(4) DOES NOT COME INTO PLAY ON THE FACTS OF THIS CASE, THERE I S NOTHING IN THE ACT WHICH PROHIBITS DATEX (I.E. INDIAN AE) TO RECOMPUTE ITS INCOME AND CLAIM THE LOSS TO BE SET OFF AGAINST THE PROFITS OF THE FUTURE YEARS . IN FACT, NOTHING IN THE INCOME TAX ACT ENABLES SUCH A CLAIM OF DEDUCTION . AS FOR SECOND PROVISO T O SECTION 92C(4) , IT CONSTITUTE S A BAR AGA INST LOWERING INCOME OF THE NON - RESID ENT AE, AS A RESULT OF LOWERING THE DEDUCTION IN THE HANDS OF THE INDIAN AE, RATHER THAN AS I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 24 OF 41 ENABLING A HIGHER DEDUCTION IN THE HANDS OF THE INDIAN AE AS A RESULT OF INCREASING NON - RESIDENT AES INCOME. 20. ONE MUST ALSO TAKE NOTE OF THE FACT THAT AS FAR AS THE YEARS BEFORE US ARE CONSIDERED, BASE EROSION HAS TAKEN PLACE BECAUSE OF ASSESSEE GRANTING AN INTEREST FREE LOAN TO INDIAN AE. IT IS SO FOR THE REASON THAT IF THIS TRANSAC TION STRUCTURE IS TO BE ACCEPTED WITHOUT ALP ADJUSTMENT, WHILE INDIAN TAX ADMINISTRATION WILL LOSE THE TAXABILITY OF INTEREST IN THE HANDS OF THE ASSESSEE @10%, IT WILL HAVE NOTHING TO LOSE IN THE HANDS OF TAXABILITY OF THE INDIAN AE BECAUSE ADMITTEDLY THE RELATED INDIAN AE WAS INCURRING THE LOSES. BY NOT MAKING THE IMPUGNED ALP ADJUSTMENTS, THE TAX ADMINISTRATION IS CERT AIN TO HAVE ITS TAX BASE ERODED BY 10% OF THE ARMS LENGTH INTEREST. TO WHAT EXTENT, THIS TAX REVENUE WILL COULD HAVE BEEN OFFSET BY THE I NCREASE OF LOSS OF THE INDIAN AE IS WHOLLY ACADEMIC BECAUSE THERE IS NO WAY ONE CAN ASCERTAIN, AT LEAST AT THE ASSESSMENT STAGE, AS TO WHETHER THIS LOSS WILL BE ACTUALLY SET OFF AGAINST THE FUTURE PROFITS OF THE INDIAN AE. 21. THE CASE OF THE ASSESSEE IS THAT THE APPROACH ADOPTED ABOVE IS MYOPIC BECAUSE SUCH AN APPROACH OVERLOOKS THE TAX SHIELD AVAILABLE TO THE INDIAN AE IN THE FORM OF ACCUMULATED LOSSES. IN OUR CONSIDERED VIEW, H OWEVER, TAX ADMINISTRATION CANNOT BE EXPECTED TO HAVE CLAIRVOYANCE OF WHETHER OR NOT INDIAN AE WILL ACTUALLY MAKE SUFFICIENT PROFITS IN THE NEXT EIGHT ASSESSMENT YEARS WHICH WILL SUBSUME THE LOSSES INCUR RED BY THE ASSESSEE BY THE AE. THE BENEFIT OF TAX SHIELD, EVEN IF ANY, IS, THEREFORE, WHOLLY HYPOTHETICAL . THE APPROACH ADOPTED B Y THE TAX ADMINISTRATION, THEREFORE, CAN AT THE MOST BE CONSERVATIVE, BUT NOT CERTAINLY NOT MYOPIC. IN ANY CASE, THAT IS WHAT THE LAW PROVIDES . WE HAVE TO INTERPRET THE LAW AS IT EXISTS AND NOT AS IT OUGHT TO BE. THE LAWMAKERS MAY HAVE PREFERRED A BIRD IN THE HAND OVER TWO IN THE BUSH BUT THAT IS A POLICY ISSUE. IN ANY EVENT, N OTHING IN THE WORLD CAN MATCH THE EXACTITUDE OF HINDSIGHT BUT THE TROUBLE IS THAT IT INHERENTLY COMES A BIT TOO LATE . IF THE ASSESSEE WAS TO BE SO CERTAIN OF THE TAX BENEFIT TO THE IN DIAN REVENUE BY THIS TRANSACTION STRUCTURE BY WAY OF INTEREST FREE LOAN TO INDIAN AE , THE TRANSACTION WOULD NOT HAVE BEEN STRUCTURED IN THIS MANNER; AFTER ALL THE UNDERLYING MOTIVE IN THE ACTIVITIES OF THE ASSESSEE IS TO MAXIMISE GAINS FOR ITS SHAREHOLDER RATHER THAN I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 25 OF 41 BROADEN THE TAX BASE OF INDIAN REVENUE. OF COURSE, EVEN THIS TAX SHIELD OF ACCUMULATED LOSSES IS WHOLLY ACADEMIC INASMUCH AS THE DEDUCTION HAS NOT BEEN CLAIMED, NOR CAN IT BE CLAIMED AT THIS STAGE. 2 2 . LET US, AT THIS STAGE, TURN TO THE ATO R ULING ON WHICH BOTH THE PARTIES BEFORE US HAVE PLACED SO MUCH OF RELIANCE. THIS RULING IS ISSUED BY THE AUSTRALIAN TAX OFFICE, ( HTTPS://WWW.ATO.GOV.AU/LAW/VIEW/DOCUMENT ?DOCID=TXR/TR20071/NAT/ATO/00001 ) , FOR THE AUSTRALIAN TAXPAYERS AND IT PROVIDES AS FOLLOWS: 15. IN AN INTEREST FREE LOAN SITUATION, FOR EXAMPLE, WHERE INTEREST COULD HAVE BEEN CHARGED BY A NON - RESIDENT COMPANY TO AN AUSTRALIAN RESIDENT COMPANY, IF THE C OMMISSIONER WERE TO MAKE A DETERMINATION AND ADJUSTMENT UNDER SUBSECTION 136AD(2) AGAINST THE NON - RESIDENT COMPANY SO AS TO DEEM AN INTEREST WITHHOLDING TAX LIABILITY, NO CONSEQUENTIAL ADJUSTMENT COULD BE MADE BY WAY OF A DEEMED DEDUCTION TO THE RESIDENT C OMPANY UNDER SECTION 136AF. THE REASON FOR THIS IS THAT THE CIRCUMSTANCES SPECIFIED IN SUBSECTION 136AF(1) DO NOT PROVIDE FOR A CONSEQUENTIAL ADJUSTMENT WHERE A SECTION 136AD DETERMINATION IS MADE TO IMPOSE OR INCREASE A TAXPAYERS WITHHOLDING TAX LIABILIT Y. 16. HOWEVER, THE COMMISSIONER WILL HAVE REGARD TO WHETHER THE RELEVANT TRANSACTION HAS DISADVANTAGED THE AUSTRALIAN REVENUE (SEE PARAGRAPH 117 OF TR 94/14). IN SITUATIONS WHERE THERE IS A COMMERCIAL REASON FOR THE INTEREST FREE LOAN AND THE INTEREST FR EE LOAN HAS NOT BY ITSELF DISADVANTAGED THE REVENUE, IT WOULD NOT BE APPROPRIATE FOR THE COMMISSIONER TO MAKE A SUBSECTION 136AD(2) DETERMINATION AND ADJUSTMENT AGAINST THE NON - RESIDENT COMPANY TO RAISE THE WITHHOLDING TAX LIABILITY IN THE FIRST INSTANCE. SUCH AN INTEREST FREE LOAN ARRANGEMENT DOES NOT INVOLVE THE ALLOWANCE OF A DEDUCTION TO THE AUSTRALIAN BORROWER AND, THUS, HAS NOT BY ITSELF DISADVANTAGED THE AUSTRALIAN REVENUE. 17. BY CONTRAST, A DETERMINATION AND ADJUSTMENT UNDER SUBSECTION 136AD(2) O F THE ITAA 1936 COULD BE APPROPRIATE WHERE THE AUSTRALIAN BORROWER IS A TAX EXEMPT ENTITY. ANOTHER CASE WOULD BE WHERE SECTION 8 - 1 OF THE ITAA 1997 WOULD NOT ALLOW A DEDUCTION. 18. THE QUESTION HAS ALSO BEEN RAISED WHETHER A DETERMINATION AND ADJUSTMENT U NDER SUBSECTION 136AD(2) TO RAISE A WITHHOLDING TAX LIABILITY TO THE NON - RESIDENT WITH RESPECT TO AN INTEREST FREE LOAN WOULD BE APPROPRIATE WHERE THE AUSTRALIAN RESIDENT IS IN A GENUINE TAX LOSS POSITION. BECAUSE OF THE EFFECTS OF PROVISIONS SUCH AS THE C ARRY - FORWARD LOSS AND LOSS TRANSFER PROVISIONS OF THE ACT, IT IS DIFFICULT TO EVALUATE THE OVERALL REVENUE EFFECT IN THOSE SITUATIONS. ACCORDINGLY, THE APPROACH IN PARAGRAPHS 16 AND 17 OF THIS RULING SHOULD BE FOLLOWED WITH NO DETERMINATION AND ADJUSTMENT UNDER SUBSECTION 136AD(2). I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 26 OF 41 2 3 . IT IS IMPORTANT TO BEAR IN MIND THE FACT UNLIKE IN THE PROVISIONS OF SECTION 92 OF THE INDIAN INCOME TAX ACT, 1961, WHEREIN USE OF ARMS LENGTH PRINCIPLE IS MANDATORY IN COMPUTATION OF INCOME ARISING TO AN ASSESSEE FROM THE INTERNATIONAL TRANSACTIONS, SECTION 136 AD OF THE AUSTRALIAN INCOME TAX ASSESSMENT ACT 1936, A COMPUTATION OF INCOME ON THE BASIS OF ARMS LENGTH PRICE IS DISCRETIONARY FOR THE COMMISSIONER INASMUCH AS IT COMES INTO PLAY IN RESPECT OF AN INTERNATIONAL TRAN SACTIONS BETWEEN THE AES WHEN, INTER ALIA , (B) THE COMMISSIONER, HAVING REGARD TO ANY CONNECTION BETWEEN ANY 2 OR MORE OF THE PARTIES TO THE AGREEMENT OR TO ANY OTHER RELEVANT CIRCUMSTANCES, IS SATISFIED THAT THE PARTIES TO THE AGREEMENT, OR ANY 2 OR MO RE OF THOSE PARTIES, WERE NOT DEALING AT ARMS LENGTH WITH EACH OTHER IN RELATION TO THE SUPPLY (C) CONSIDERATION WAS RECEIVED OR RECEIVABLE BY THE TAXPAYER IN RESPECT OF THE SUPPLY BUT THE AMOUNT OF THAT CONSIDERATION WAS LESS THAN THE ARMS LENGTH CONS IDERATION IN RESPECT OF THE SUPPLY; AND (D) THE COMMISSIONER DETERMINES THAT THIS SUBSECTION SHOULD APPLY IN RELATION TO THE TAXPAYER IN RELATION TO THE SUPPLY ( HTTPS://WWW.LEGISLATION.GOV.AU/DETAILS/C2013C00040/HTML/VOLUME_3#_TOC346211123) .. THE PROVISIONS OF THE INDIAN INCOME TAX ACT 1961 AND THE AUSTRALIAN INCOME TAX ASSESSMENT ACT 1936 ARE THUS NOT AT ALL IN PARI MATERIA IN THIS CONTEXT . THIS ASPECT OF THE MATTER WILL BE MORE GLARING FROM THE FOLLOWING EXTRACTS FROM ATO RULING 94/14 REFERRED TO, AND RELIED UPON, IN THE AFORESAID RULING: HTTPS://WWW.ATO.GOV.AU/LAW/VIEW/DO CUMENT?DOCID=TXR/TR9414/NAT/ATO/00001 THE COMMISSIONER HAS A DISCRETION WHETHER OR NOT TO APPLY SECTION 136AD 114. IN EXERCISING THE DISCRETION IN PARAGRAPH (D) OF SUBSECTIONS 136AD(1), (2) AND (3) THE COMMISSIONER MUST TAKE INTO ACCOUNT ALL RELEVANT FA CTS AND CIRCUMSTANCES AS THEY EXISTED AT THE TIME THE INTERNATIONAL AGREEMENT WAS MADE IN FORMING A VIEW AS TO WHETHER THE AMOUNT OF CONSIDERATION IN AN INTERNATIONAL AGREEMENT NEEDS TO BE ADJUSTED. IT WOULD ALSO BE RELEVANT TO CONSIDER SUBSEQUENT EVENTS T O THE EXTENT THAT THEY ARE RELEVANT TO TESTING PURPOSE OR ASSIST IN DETERMINING THE TRUE NATURE OF ANY AGREEMENT BY COMPARING THE CONDUCT OF THE PARTIES AND THE STATED TERMS OF THE AGREEMENT. THE COMMISSIONER MUST NOT CONSIDER IRRELEVANT CIRCUMSTANCES (PAR AGRAPHS 390 - 391) . 115. IN PARTICULAR THE COMMISSIONER NEEDS TO BE SATISFIED THAT THE VARIOUS PRECONDITIONS IN SUBSECTIONS 136AD(1), (2), OR (3) ARE MET AS THE CASE MAY BE. CONSIDERATION ALSO NEEDS TO BE GIVEN TO WHETHER THE EXERCISE OF THE DISCRETION, OR A FAILURE TO EXERCISE IT, WOULD BE CONSISTENT WITH THE POLICY UNDERLYING DIVISION 13 (PARAGRAPH 392). I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 27 OF 41 116. IT WOULD ALSO BE RELEVANT TO CONSIDER WHETHER THERE IS ANY EVIDENCE OF THE TAXPAYER'S PURPOSE SINCE THIS WOULD ALSO BE A RELEVANT FACTOR. HOWEVER , THIS WOULD NEED TO BE WEIGHED WITH OTHER FACTORS, INCLUDING THE EFFECT ON THE AUSTRALIAN REVENUE OF THE USE OF NON - ARM'S LENGTH CONSIDERATION, AGAINST THE WORDING AND LEGISLATIVE PURPOSE OF SECTION 136AD (PARAGRAPH 393) . 117. HAVING REGARD TO THE LEGIS LATIVE INTENT, WHERE PARAGRAPHS (A), (B) AND (C) OF SUBSECTIONS 136AD(1) - (3) HAVE BEEN SATISFIED, THEN, IN THE ABSENCE OF SOUND REASONS TO THE CONTRARY, IT COULD BE EXPECTED THAT THE DISCRETION IN PARAGRAPH (D) OF THE RELEVANT SUBSECTION WOULD BE EXERCIS ED WHERE THE AUSTRALIAN REVENUE HAS BEEN DISADVANTAGED (PARAGRAPH 394) . 118. WHERE THE DISCRETION UNDER PARAGRAPH (D) OF SUBSECTIONS 136AD(1), (2) OR (3) IS EXERCISED, A FORMAL DETERMINATION SHOULD BE MADE TO THAT EFFECT (PARAGRAPH 395) . 2 4 . THE INDIAN TRANSFER PRICING REGULATIONS DO NOT GIVE ANY SUCH DISCRETIONS TO THE TAX ADMINISTRATION FOR THE APPLICATION OF ARMS LENGTH PRICE IN COMPUTATION OF PROFITS ARISING FROM INTERNATIONAL TRANSACTIONS. AS THERE IS NO DISCRETION WITH THE TAX ADMINISTRATION, THE RE IS NO OCCASION FOR ANY GUIDING PRINCIPLES IN THE USE OF DISCRETION. SO FAR AS THE INDIAN TRANSFER PRICING PROVISIONS ARE CONCERNED, THE USE OF ARMS LENGTH PRICE, IN COMPUTATION OF INCOME ARISING FROM INTERNATIONAL TRANSACTIONS BETWEEN THE AES, IS MAND ATORY. THE ONLY RIDER IS THAT THESE PROVISIONS ARE NOT TO BE APPLIED ONLY IN THE EVENT OF THE EXCLUSION CLAUSE IN SECTION 92(3) BEING SATISFIED, BUT THEN , AS WE HAVE SEEN EARLIER IN OUR ANALYSIS, THIS EXCLUSION CLAUSE DO ES N OT COME INTO PLAY ON THE FACTS O F THESE CASES AT ALL. 2 5 . IT IS ALSO USEFUL TO NOTE THAT IN THE EVENT OF ALP ADJUSTMENTS, UNDER THE AUSTRALIAN INCOME TAX ASSESSMENT ACT, 1936, CONSEQUENTIAL ADJUSTMENTS ARE PERMISSIBLE IN CERTAIN CONDITIONS UNDER SECTION 136 AF OF THE SAID ACT. NO SUCH A DJUSTMENTS ARE PERMISSIBLE UNDER THE INDIAN INCOME TAX ACT, 1961. IT IS SUFFICIEN T TO TAKE NOTE OF THE FACT THAT THE SITUATION IN THE AUSTRALIAN LAW, SO FAR AS THIS ASPECT OF THE MATTER IS CON CERNED, IS MATERIALLY DIFFERENT. WHEN THE RELEVANT LEGAL PROVIS IONS ARE NOT IN PARI MATERIA, THE CLARIFICATIONS ISSUED BY THE ATO ARE NOT EVEN RELEVANT. OF COURSE, EVEN WHEN THE PROVISIONS WERE TO BE IN PARI MATERIA , NOTHING REALLY TURNS ON THESE CLARIFICATIONS ISSUED BY THE ATO. AT BEST, THE APPROACH ADOPTED IN THESE CLARIFICATIONS COULD BE TAKEN AS ARGUMENTS IN SUPPORT OF THE ASSESSEE. I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 28 OF 41 2 6 . LET US NOW TURN TO THE CBDT CIRCULA RS RELIED UPON BY THE ASSESSEE. WHEN TRANSFER PRICING PROVISIONS WERE INTRODUCED ON THE STATUTE, THE CBDT VIDE CIRCULAR DATED 14 OF 2001, INTER ALIA HAD THIS TO SAY: NEW LEGISLATION TO CURB TAX AVOIDANCE BY ABUSE OF TRANSFER PRICING 55.1 THE INCREASING PARTICIPATION OF MULTI - NATIONAL GROUPS IN ECONOMIC ACTIVITIES IN THE COUNTRY HAS GIVEN RISE TO NEW AND COMPLEX ISSUES EMERGING FROM TRANSACTIONS ENTERED INTO BETWEEN TWO OR MORE ENTERPRISES BELONGING TO THE SAME MULTI - NATIONAL GROUP. THE PROFITS DERIVED BY SUCH ENTERPRISES CARRYING ON BUSINESS IN INDIA CAN BE CONTROLLED BY THE MULTI - NATIONAL GROUP, BY MANIPULATING THE PRICES CHARGED AND PAID IN SU CH INTRA - GROUP TRANSACTIONS, THEREBY, LEADING TO EROSION OF TAX REVENUES. 55.2 UNDER THE EXISTING SECTION 92 OF THE INCOME - TAX ACT, WHICH WAS THE ONLY SECTION DEALING SPECIFICALLY WITH CROSS BORDER TRANSACTIONS, AN ADJUSTMENT COULD BE MADE TO THE PROFITS OF A RESIDENT ARISING FROM A BUSINESS CARRIED ON BETWEEN THE RESIDENT AND A NON - RESIDENT, IF IT APPEARED TO THE ASSESSING OFFICER THAT OWING TO THE CLOSE CONNECTION BETWEEN THEM, THE COURSE OF BUSINESS WAS SO ARRANGED SO AS TO PRODUCE LESS THAN EXPECTED PR OFITS TO THE RESIDENT. RULE 11 PRESCRIBED UNDER THE SECTION PROVIDED A METHOD OF ESTIMATION OF REASONABLE PROFITS IN SUCH CASES. HOWEVER, THIS PROVISION WAS OF A GENERAL NATURE AND LIMITED IN SCOPE. IT DID NOT ALLOW ADJUSTMENT OF INCOME IN THE CASE OF NON - RESIDENTS. IT REFERRED TO A CLOSE CONNECTION WHICH WAS UNDEFINED AND VAGUE. IT PROVIDED FOR ADJUSTMENT OF PROFITS RATHER THAN ADJUSTMENT OF PRICES, AND THE RULE PRESCRIBED FOR ESTIMATING PROFITS WAS NOT SCIENTIFIC. IT ALSO DID NOT APPLY TO INDIVIDUAL TRA NSACTIONS SUCH AS PAYMENT OF ROYALTY, ETC., WHICH ARE NOT PART OF A REGULAR BUSINESS CARRIED ON BETWEEN A RESIDENT AND A NON - RESIDENT. THERE WERE ALSO NO DETAILED RULES PRESCRIBING THE DOCUMENTATION REQUIRED TO BE MAINTAINED. 55.3 WITH A VIEW TO PROVIDE A DETAILED STATUTORY FRAMEWORK WHICH CAN LEAD TO COMPUTATION OF REASONABLE, FAIR AND EQUITABLE PROFITS AND TAX IN INDIA, IN THE CASE OF SUCH MULTINATIONAL ENTERPRISES, THE ACT HAS SUBSTITUTED SECTION 92 WITH A NEW SECTION, AND HAS INTRODUCED NEW SECTIONS 92 A TO 92F IN THE INCOME - TAX ACT, RELATING TO COMPUTATION OF INCOME FROM AN INTERNATIONAL TRANSACTION HAVING REGARD TO THE ARMS LENGTH PRICE, MEANING OF ASSOCIATED ENTERPRISE, MEANING OF INTERNATIONAL TRANSACTION, COMPUTATION OF ARMS LENGTH PRICE, MAINTENA NCE OF INFORMATION AND DOCUMENTS BY PERSONS ENTERING INTO INTERNATIONAL TRANSACTIONS, FURNISHING OF A REPORT FROM AN ACCOUNTANT BY PERSONS ENTERING INTO INTERNATIONAL TRANSACTIONS AND DEFINITIONS OF CERTAIN EXPRESSIONS OCCURRING IN THE SAID SECTIONS. 55.4 THE NEWLY SUBSTITUTED SECTION 92 PROVIDES THAT INCOME ARISING FROM AN INTERNATIONAL TRANSACTION BETWEEN ASSOCIATED ENTERPRISES SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. ANY EXPENSE OR OUTGOING IN AN INTERNATIONAL TRANSACTION IS ALSO TO BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THUS IN THE CASE OF A MANUFACTURER, FOR EXAMPLE, THE PROVISIONS WILL APPLY TO EXPORTS MADE TO THE ASSOCIATED ENTERPRISE AS ALSO TO IMPORTS FROM THE SAME OR ANY OTHER ASSOCIATED ENTERPRISE. THE PROVISION IS ALSO APPLICABLE IN A CASE WHERE THE INTERNATIONAL TRANSACTION COMPRISES ONLY AN OUTGOING FROM THE INDIAN ASSESSEE. I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 29 OF 41 55.5 THE NEW SECTION FURTHER PROVIDES THAT THE COST OR EXPENSES ALLOCATED OR APPORTIONED BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES UNDER A MUTUAL AGREEMENT OR ARRANGEMENT SHALL BE AT ARMS LENGTH PRICE. EXAMPLES OF SUCH TRANSACTIONS COULD BE WHERE ONE ASSOCIATED ENTERPRISE CARRIES OUT CENTRALIZED FUNCTIONS WHICH ALSO BENEFIT ONE OR MORE OTHER ASSOCIATED ENTERPRISES, OR TWO OR MORE ASSOCIATED ENTERPRISES AGREE TO CARRY OUT A JOINT ACTIVITY, SUCH AS RESEARCH AND DEVELOPMENT, FOR THEIR MUTUAL BENEFIT. THE NEW PROVISION IS INTENDED TO ENSURE THAT PROFITS TAXABLE IN INDIA ARE NOT UNDERSTATED (OR LOSSES ARE NOT OVERSTATED) BY DECLARING LOWER RECEIPT S OR HIGHER OUTGOINGS THAN THOSE WHICH WOULD HAVE BEEN DECLARED BY PERSONS ENTERING INTO SIMILAR TRANSACTIONS WITH UNRELATED PARTIES IN THE SAME OR SIMILAR CIRCUMSTANCES. THE BASIC INTENTION UNDERLYING THE NEW TRANSFER PRICING REGULATIONS IS TO PREVENT SHI FTING OUT OF PROFITS BY MANIPULATING PRICES CHARGED OR PAID IN INTERNATIONAL TRANSACTIONS, THEREBY ERODING THE COUNTRYS TAX BASE. THE NEW SECTION 92 IS, THEREFORE , NOT INTENDED TO BE APPLIED IN CASES WHERE THE ADOPTION OF THE ARMS LENGTH PRICE DETERMINED UNDER THE REGULATIONS WOULD RESULT IN A DECREASE IN THE OVERALL TAX INCIDENCE IN INDIA IN RESPECT OF THE PARTIES INVOLVED IN THE INTERNATIONAL TRANSACTION . [EMPHASIS, BY UNDERLINING, SUPPLIED BY US] 27. WHAT THE CIRCULAR STATES IS THE INTENT OF THE LEGI SLATURE AND THE FACT THAT IT IS INTENT OF THE LEGISLATURE IS STATED IN SO MANY WORDS. HOWEVER, IT IS NOT A N ORDER, DIRECTION OR INSTRUCTION TO THE FIELD AUTHORITIES TO THE EFFECT THAT SECTION 92 IS NOT TO BE APPLIED WHEN OVERALL TAX INCIDENCE IN INDIA, IN RESPECT OF THE PARTIES INVOLVED IN THE INTERNATIONAL TRANSACTION, WILL DECREASE. SECTION 119 (1) , WHICH MAKES CBDT CIRCULARS BINDING ON THE FIELD AUTHORITIES, LAYS DOWN THAT THE CBDT MAY, FROM TIME TO TIME, ISSUE SUCH ORDERS, INSTRUCTIONS AND DIRECTIONS TO OTHER INCOME - TAX AUTHORITIES AS IT MAY DEEM FIT FOR THE PROPER ADMINISTRATION OF THIS ACT, AND SUCH AUTHORITIES AND ALL OTHER PERSONS EMPLOYED IN THE EXECUTION OF THIS ACT SHALL OBSERVE AND FOLLOW SUCH ORDERS, INSTRUCTIONS AND DIRECTIONS OF THE BOARD ( EMPHASIS, BY UNDERLINING, SUPPLIED BY US). WHAT FOLLOWS IS THAT IT IS ONLY THE ORDER, INSTRUCTION OR DIRECTION OF THE CBDT WHICH BINDS THE FIELD AUTHORITIES. THERE ARE CERTAIN SITUATIONS, AS ENVISAGED IN SECTION 119(2), IN WHICH THE CBDT CIRCULARS CAN RELA X THE RIGOUR OF LAW BUT IT IS NOT EVEN THE CASE OF THE ASSESSEE, AND RIGHTLY SO, THAT THE PROVISIONS OF SECTION 92 CAN BE RELAXED UNDER SECTION 119(2). THE BOARDS UNDERSTANDING ABOUT THE INTENT OF LEGISLATURE , IN OUR CONSIDERED VIEW, DOES NOT IN ANY WAY F ETTER THE FIELD AUT HORITIES. 28. HAVING SAID THAT, THE ROLE OF INTENT OF LEGISLATURE AT BEST COMES INTO PLAY ONLY WHEN THERE IS ANY AMBIGUITY IN THE WORDS OF THE STATUTE WHICH ARE BEING SOUGHT TO BE I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 30 OF 41 INTERPRETED. THAT IS NOT THE CASE HERE. IF INTENTION OF THE LAW IS NOT IMPLEMENTED BY THE PLAIN WORDS OF THE STATUTE, AND UNLESS THERE IS AN AMBIGUITY REQUIRING SOME VIOLENCE WITH THE WORDS, SUCH AN INTENTION, NO MATTER HOW NOBLE IT IS, IS OF NO RELEVANCE IN THE JUDICIAL INTERPRETATION. IN SUCH A SITUATION , REJECTING THE RELEVANCE OF INTENT OF LEGISLATURE IN INTE RPRETING A STATUTE, A DIVISION BENCH OF THIS TRIBUNAL, IN THE CASE OF TATA TEA LTD VS JCIT [(2003) 87 ITD 351 (KOL)] , HAS OBSERVED AS FOLLOWS: THE HOUSE OF LORDS ITSELF, IN A LATER JUDGMENT IN THE M ATTER OF MAGOR & ST MELLONS RURAL DISTRICT COUNCIL VS. NEWPORT CORPORATION (1951) 2 ALL ER 839, DID NOT APPROVE THE PROPOSITION ADVANCED BY LORD DENNING. IT IS INTERESTING TO NOTE THE ARTICULATE EXPRESSIONS OF LORD. SIMONDS, SUPPORTING THE MAJORITY VIEW AN D AT P. 841 OF 2 ALL ER (1951), UNEQUIVOCALLY AND CATEGORICALLY REJECTING LORD DENNINGS THEORY ON THE REL EVANCE OF INTENT OF LEGISLATURE : 'MY LORDS, THE CRITICISM WHICH I VENTURE TO MAKE OF THE JUDGMENT OF LEARNED LORD JUSTICE (DENNING L.J.) IS NOT DIREC TED AT THE CONCLUSION HE HAS REACHED. IT IS AFTER ALL A TRITE SAYING THAT ON QUESTIONS OF CONSTRUCTION DIFFERENT MINDS MAY COME TO DIFFERENT CONCLUSIONS......... BUT IT IS ON THE APPROACH OF LORD JUSTICE TO WHICH IS A QUESTION OF CONSTRUCTION AND NOTHING E LSE. I THINK IT DESIRABLE TO MAKE SOME COMMENT, FOR, AT A TIME WHEN SO LARGE A PROPORTION OF THE CASES THAT ARE BROUGHT BEFORE THE COURTS DEPEND ON THE CONSTRUCTION OF MODERN STATUTES, IT WOULD NOT BE RIGHT FOR THIS HOUSE TO PASS UNNOTICED THE PROPOSITIONS THAT THE LEARNED LORD JUSTICE LAYS DOWN FOR THE GUIDANCE OF HIMSELF AND PRESUMABLY OTHERS....... .......THE PART WHICH IS PLAYED IN JUDICIAL INTERPRETATION OF A STATUTE BY REFERENCE TO THE CIRCUMSTANCES OF ITS PASSING IS TOO WELL KNOWN TO NEED RE - STATEME NT........ THE DUTY OF THE COURT IS TO INTERPRET THE WORDS THAT THE LEGISLATURE HAS USED. THOSE WORDS MAY BE AMBIGUOUS, BUT, EVEN IF THEY ARE, POWER AND DUTY OF THE COURT TO VENTURE OUTSIDE THEM ON A VOYAGE OF DISCOVERY ARE STRICTLY LIMITED; SEE, FOR INSTA NCE, ASSAM RAILWAYS & TRADING COMPANY LTD. VS. IRC (2) AND PARTICULARLY THE OBSERVATIONS OF LORD WRIGHT (1935) AC 458...... ...........WHAT THE LEGISLATURE HAS NOT WRITTEN, THE COURT MUST WRITE, AND FILL IN THE GAPS. THIS PROPOSITION, WHICH RESTATES IN A NEW FORM THE VIEW EXPRESSED BY THE LORD JUSTICE IN THE EARLIER CASE OF SEAFORD COURT ESTATES LTD. VS. ASHER (TO WHICH LORD JUSTICE HIMSELF REFERS) CANNOT BE SUPPORTED. .......IT APPEARS TO ME TO BE NAKED USURPATION OF LEGISLATIVE FUNCTION IN THE THIN GUI SE OF INTERPRETATION AND IT IS LESS JUSTIFIABLE WHEN IT IS GUESSWORK WITH WHAT MATERIAL THE LEGISLATURE WOULD, IF IT HAD TO DISCOVER THE GAP, HAVE FILLED IT IN. IF A GAP IS DISCLOSED, THE REMEDY LIES IN AN AMENDING ACT......' LORD DENNINGS AGGRESSIVE DEF INITION OF THE POWER OF THE COURTS, SO FAR AS QUESTION OF CASUS OMISSUS IS CONCERNED, WAS SEVERALLY CRITICIZED BY LORD SIMONDS AND OTHER LAW LORDS IN THE ABOVE CASE. LORD MORTON OBSERVED THAT 'THESE HEROICS ARE OUT OF PLACE' I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 31 OF 41 AND POINTED OF LORD TUCKER 'YOU R LORDSHIPS WOULD BE ACTING IN A LEGISLATIVE RATHER THAN JUDICIAL CAPACITY OF THE VIEW PUT FORWARD BY DENNING L.J. WERE TO PREVAIL' (AT P. 850). AS OBSERVED IN CROSS : STATUTORY INTERPRETATION (2ND EDITION, AT P. 45), THE CURRENT TENDENCY AMONG ENGLISH JUD GES WOULD APPEAR TO INCLINE AWAY FROM THE DENNING APPROACH. THESE VIEWS ARE ALSO ECHOED BY HONBLE SUPREME COURT OF INDIA FROM TIME TO TIME. IN THE CASE OF STATE OF KERALA VS. MATHAI VERGHESE AIR 1987 SC 33, HONBLE SUPREME COURT HAS TAKEN A VIEW THAT THE COURT CANNOT REFRAME THE LEGISLATION FOR THE VERY GOOD REASON THAT IT HAS NO POWER TO LEGISLATE. IN JUMMA MASJID VS. KODIAMANIANDRA AIR 1962 SC 847, AT P. 850 HONBLE SUPREME COURT REFERRED TO, WITH APPROVAL, LORD LOREBURNS OBSERVATION, 'WE ARE NOT ENTITL ED TO READ WORDS INTO AN ACT OF PARLIAMENT UNLESS CLEAR REASONS FOR IT IS TO BE FOUND WITHIN THE FOUR CORNERS OF THE ACT ITSELF.' [VICKERS SONS AND MAXIM LTD. VS. EVANS (1910) AC 444 (HL) AT P. 445]. LORD SIMONDS REJECTION OF DENNINGS APPROACH WAS CITED, WITH APPROVAL, BY HONBLE SUPREME COURT IN THE CASE OF PUNJAB LAND AND DEVELOPMENT CORPORATION VS. PRESIDING OFFICER, LABOUR COURT (1990) 3 SCR 111, AT PP. 153 - 4. WE LEAVE IT AT THAT . 2 9 . WE ARE IN CONSIDERED AGREEMENT WITH THE VIEW SO STATED BY THE DIVI SION BENCH. IN THIS VIEW OF THE MATTER, EVEN IF IT IS INDEED INTENT OF THE LEGISLATURE THAT TRANSFER PRICING PROVISIONS ARE NOT TO BE INVOKED IN THE CASES WHERE THERE IS LOWERING OF THE OVERALL PROFITS OF ALL THE ASSOCIATED ENTERPRISES CONNECTED WITH THE T RANSACTIONS, SINCE THE WORDS OF THE STATUTORY PROVISION DID NOT TRANSLATE THIS INTENT INTO THE LAW, IT CANNOT BE OPEN TO US TO HOLD THAT IN THE LIGHT OF THE LEGAL PROVIS IONS, AS THEY STAND EMBODIED IN SECTION 92(3), TRANSFER PRICING PROVISIONS ARE NOT TO B E INVOKED WHEN, AS A RESULT OF STRUCTURING OF TRANSACTION IN A PARTICULAR WAY, THERE IS NO EROSION OF INDIAN TAX BASE. THAT IS, OF COURSE, BESIDES THE FACT THAT AS W E EMPHASIZED EARLIER AS WELL, MERE POSSIBILITY OF A SET OFF OF FUTURE PROFITS, AGAINST TH E LOSSES INCURRED BY THE AE, CANNOT BE TAKEN INTO ACCOUNT INTO SUCH A COMPUTATION ABOUT OVERALL TAX IMPACT, NOR TIME VALUE OF MONEY CAN BE IGNORED IN THESE COMPUTATIONS. THE VAGUE GENERALITIES AND UNCERTAIN CONTINGENCIES ALSO HAVE NO ROLE IN THE COMPUTATIO NS OF OVERALL TAX IMPACT OF STRUCTURING OF A TRANSACTION. IN THIS VIEW OF THE MATTER, EVEN IF WE ACCEPT THE PLEA THAT THE TRANSFER PRICING PROVISIONS ARE NOT TO BE INVOKED WHEN OVERALL PROFITABILITY IS REDUCED BY THE WAY IN WHICH THE IMPUGNED INTERNATIONA L TRANSACTION IS STRUCTURED BY THE ASSESSEE, IT WILL HAVE NO IMPACT ON THE PRESENT FACT SITUA TION AS A LIMITED PERIOD ENTITLEMENT , FOR SET OFF OF LOSS AGAINST FUTU RE PROFITS, CANNOT BE ADJUSTED AGAINST THE PROFITS WHICH HAVE ESCAPED TAXATION, FOR THE PURPO SE OF THESE COMPUTATIONS OF OVERALL IMPACT. THE BENEFIT OF LOSS IS NOT REAL; IT IS CONTINGENT UPON AN UNCERTAIN EVENT I.E. PROFITS BEING MADE SO AS TO SUBSUME THESE I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 32 OF 41 LOSSES. LEARNED COUNSEL HAS SUBMITTED, THOUGH IN VERY GENERAL AND UNCOMMITTED TERMS, THAT INDIAN AE OF THE ASSESSEE HAS SUBSEQUENTLY MERGED IN A PROFIT MAKING AND ALL THE LOSSES BROUGHT FORWARD MUST HAVE BEEN USED IN SET OFF AGAINST THE PROFITS OF THE MERGED ENTITY. THESE FACTS , EVEN IF TRUE, COULD NOT HAVE BEEN KNOWN AT THE ASSESSMENT STAGE, A ND, THEREFORE, NOTH ING REALLY TURNS ON THESE FACTS. WHAT IS KNOWN, ONLY WITH THE BENEFIT OF HINDSIGHT TODAY, COULD NOT HAVE BEEN KNOWN AT THE TIME OF ASSESSMENT. THAT APART, THIS VAGUE SUBMISSION CANNOT HAVE ANY BEARING ANY BEARING ON OUR ADJUDICATION. IT IS ONLY ELEMENTARY THAT WHEN A PARTY LEANS UPON, OR REFERS TO, A FACT NOT BORNE OUT OF RECORDS, HE HAS TO STATE THAT ON AN AFFIDAVIT - AS IS THE MANDATE OF RULE 10 OF T HE APPELLATE TRIBUNAL RULES 1963. WE HAVE TAKEN NOTE OF THE FACT THAT THE ASSESSEE BEFO RE US HAS BEEN COMPLETELY NON - COOPERATIVE AND DEFIANT IN APPROACH. THE ASSESSE E DID NOT FILE THE TAX RETURN, T HE ASSESSEE DID NOT SUBMIT THE REQUISITIONED INFORMATION, AND T HE ASSESSEE DID NOT RESPOND TO ANY NOTICE ISSUED BY THE ASSESSING OFFICER . THE COND UCT OF THE ASSESSEE LEAVES A LOT TO BE DESIRED. YET, THE ASSESSEE CLAIMS THAT THE INTEREST FREE LOAN GRANTED BY THE ASSESSEE TO ITS INDIAN AE WAS A BONAFIDE BUSINESS DECISION WITHOUT ANY TAX MOTIVE. WHEN EVEN BASIC FACTS ABOUT THE ASSESSEES DEALINGS WITH THE INDIAN AE ARE NOT FURNISHED BY THE ASSESSEE, AND HAD TO BE COLLECTED BY THE ASSESSING OFFICER FROM THE SECONDARY SOURCES, IT IS DIFFICULT TO HAVE FAITH IN THE SE WHOLLY UNSUBSTANTIATED CLAIMS OF THE ASSESSEE; THERE IS NO MATERIAL BEFORE US TO SUPPORT TH ESE CLAIMS EITHER. 30. COMING TO THE MORGAN STANLEY (SUPRA) DECISION OF HONBLE SUPREME COURT, WE FIND THAT IT WAS ON A WHOLLY UNRELATED ISSUE OF PERMANENT ESTABLISHMENT PROFIT ATTRIBUTION. IT IS ONLY ELEMENTARY THAT A DECISION ON AN AUTHORITY ON WHAT I S ACTUALLY DECIDES AND NOT ON WHAT LOGICALLY FOLLOWS FROM THE SAME. WHAT THEIR LORDSHIPS WERE DECIDING, IN THE CASE OF MORGAN STANLEY, WAS THE SCOPE AND IMPACT OF A TAX TREATY PROVISION, AND IT WAS IN THIS CONTEXT THAT CERTAIN OBSERVATIONS OF MACRO IMPORTA NCE WERE MADE . WE NOW COME TO THE PROPOSITION THAT, ACCORDING TO HONBLE SUPREME COURT, AS LONG AS PROFITS RELATABLE TO THE ECONOMIC ACTIVITIES OF THE INDIAN AE ( A PERMANENT ESTABLISHMENT IN THAT CASE) WERE TAXED IN INDIA, EVEN IF IN THE HANDS OF A SEPARAT E LEGAL ENTITY, NO FURTHER PROFIT ATTRIBUTION CAN BE MADE IN THE HANDS OF THE INDIAN AE. BY THIS LOGIC , IT IS WHOLLY IMMATERIAL AS TO IN WHOSE HANDS AN INCOME IS TO I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 33 OF 41 BE TAXED AS LONG AS ENTIRE PROFITS ARE SUBJECTED TO TAX IN INDIA, AND EVERY PAYMENT BY THE INDIAN AE TO THE NON - RESIDENT COMPANY WILL BE OUTSIDE THE AMBIT OF ALP ADJUSTMENT BECAUSE WHATEVER IS EARNED BY THE NON - RESIDENT COMPANY FROM INDIAN AE WILL BE TAX NEUTRAL IN THE SENSE THAT WHATEVER IS ADDED TO THE INCOME OF THE NON - RESIDENT WILL STAND RED UCED FROM THE INCOME COMPUTATION OF THE INDIAN AE BUT THEN SUCH AN APPROACH IS ALIEN TO INDIAN TRANSFER PRICING LEGISLATION. THESE MACRO OBSERVATIONS , AT SOME LEVEL, MAY COME INTO CONFLICT WITH THE FUNDAMENTALS OF THE PRESENT T RANSFER PRICING LEGISLATION BUT THEN THIS CONFLICT, EVEN IF ANY, CANNOT ALLOW US TO IGNORE THE SPECIFIC PROVISIONS OF THE STATUTE. THE OBSERVATIONS MADE BY THEIR LORDSHIPS IN THE CONTEXT OF PE PROFIT ATTRIBUTION, WHICH IS ON THE BASIS OF A BILATERAL TAX AVOIDANCE AGREEMENT, CANNOT B E USED TO NULLIFY OR RESTRICT THE IMPACT OF TRANSFER PRICING PROVISIONS UNDER THE STATUTE. THESE OBSERVATIONS MAY AT BEST SHOW THAT THE TRANSFER PRICING LEGISLATION IS NOT BASED ON, WHAT COULD BE CONSTRUED AS, SOUND FIRST PRINCIPLE S AS APPRECIATED BY HONB LE SUPREME COURT BUT THEN AS LONG AS THIS LAW IS ON THE STATU TE, WE ARE BOUND BY THE SAME. LEARNED COUNSELS REFERENCE TO ARTICLE 14 1 OF THE CONSTITUTION OF INDIA, WHILE MAKING HIS POINT AND EMPHASIZING THAT THE LAW LAID DOWN BY HONBLE SUPREME COURT IN M ORGAN STANLEY S CASE (SUPRA) BINDS THIS FORUM - AS INDEED ALL THE COURTS IN INDIA, IS PERHAPS WHOLLY OUT OF PLACE INASMUCH AS T HE QUESTION BEFORE HON BLE SUPREME COURT WAS ALTOGETHER DIFFERENT. 31. AS WE DEAL WITH THIS ASPECT OF THE MATTER, WE MAY USEFULLY REFER TO THE FOLLOWING OBSERVATIONS MADE BY HONBLE SUPREME COURT ITSELF IN THE CASE OF CIT VS SUN ENGINEERING WORKS PVT LTD [(1992) 198 ITR 297 (SC)]: IT IS NEITHER DESIRABLE NOR PERMISSIBLE TO PICK OUT A WORD OR A SENTENCE FROM THE JUDGMENT OF TH IS COURT, DIVORCED FROM THE CONTEXT OF THE QUESTION UNDER CONSIDERATION AND TREAT IT TO BE THE COMPLETE 'LAW' DECLARED BY THIS COURT. THE JUDGMENT MUST BE READ AS A WHOLE AND THE OBSERVATIONS FROM THE JUDGMENT HAVE TO BE CONSIDERED IN THE LIGHT OF THE QUES TIONS WHICH WERE BEFORE THIS COURT. A DECISION OF THIS COURT TAKES ITS COLOUR FROM THE QUESTIONS INVOLVED IN THE CASE IN WHICH IT IS RENDERED AND WHILE APPLYING THE DECISION TO A LATTER CASE, THE COURTS MUST CAREFULLY TRY TO ASCERTAIN THE TRUE PRINCIPLE LA ID DOWN BY THE DECISION OF THIS COURT AND NOT TO PICK OUT WORDS OR SENTENCES FROM THE JUDGMENT, DIVORCED FROM THE CONTEXT OF THE QUESTIONS UNDER CONSIDERATION BY THIS COURT, TO SUPPORT THEIR REASONINGS. IN H.H. MAHARAJADHIRAJA MADHAV RAO JIWAJI RAO SCINDIA BAHADUR V. UNION OF INDIA [1971] 3 SCR 9 THIS COURT CAUTIONED: I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 34 OF 41 'IT IS NOT PROPER TO REGARD A WORD, A CLAUSE OR A SENTENCE OCCURRING IN A JUDGMENT OF THE SUPREME COURT, DIVORCED FROM ITS CONTEXT, AS CONTAINING A FULL EXPOSITION OF THE LAW ON A QUESTION WH EN THE QUESTION DID NOT EVEN FALL TO BE ANSWERED IN THAT JUDGMENT.' 3 2. IRONICALLY, HOWEVER, THIS IS PRECISELY WHAT THE LEARNED COUNSEL FOR INTERVENER HAS ENDED UP DOING. HE HAS PICKED UP AN ASPECT OF THE MATTER TOTALLY DIVORCED FROM ITS CONTEXT AND PRO CEEDED TO TREAT THE SAME AS A FULL EXPOSITION OF LAW ON A QUESTION WHEN THE QUESTION DID NOT EVEN FALL TO BE ANSWERED IN THAT JUDGMENT . THE APPROACH ADOPTED BY THE LEARNED COUNSEL FOR THE INTERVENER, THEREFORE, DOES NOT MERIT OUR APPROVAL. 33. IN THE LI GHT OF THE FOREGOING DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE ARE NOT INCLINED TO ACCEPT THE BASE EROSION ARGUMENT, IN PRINCIPLE, NOR DO WE FIND ANYTHING IN THE FACTS ON RECORD TO EVEN SUPPORT THE FACTUAL ELEMENTS EMBEDDED IN THE PLEA OF THE ASSESSEE. WE REJECT THIS PLEA. OTHER ARGUMENTS 3 4 . LEARNED COUNSEL FOR THE ASSESSEE, HOWEVER, HAS MUCH MORE ARMOURY IN STORE. HE CONTENDS THAT BASE EROSION ARGUMENT APART, EVEN OTHERWISE NO ARMS LENGTH PRICE ADJUSTMENTS CANNOT BE MADE ON THE FAC TS OF THIS CASE. IT IS SUBMITTED THAT GRANT OF INTEREST FREE LOAN TO THE INDIAN SUBSIDIARY IS IN THE NATURE OF A SHAREHOLDER SERVICE INASMUCH AS IT IS ONLY BECAUSE OF OWNERSHIP INTEREST IN THE INDIAN SUBSIDIARY WAS GIVEN THE INTEREST FREE LOAN. LEARNED CO UNSEL SUBMITS THAT THE INTEREST FREE LOAN WAS GIVEN TO THE INDIAN SUBSIDIARY TO BAIL IT OUT OF THE FINANCIAL DISTRESS. OUR ATTENTION IS THEN INVITED TO THE OECD REPORT AND BEPS ACTION PLAN NO. 10 REPORT WHICH SUGGEST THAT THIS KIND OF A SHAREHOLDER SERVIC E IS NOT REQUIRED TO BE A TREATED AS A SERVICE FOR THE PURPOSE OF ARMS LENGTH PRICE ADJUSTMENT. A REFERENCE IS ALSO MADE TO THE US TRANSFER PRICING REGULATIONS AND IT IS POINTED OUT THAT AN ACTIVITY IS NOT CONSIDERED TO PROVIDE A BENEFIT IF SOLE EFFECT OF THE ACTIVITY IS TO PROTECT THE CAPITAL INVESTMENT OF THE RENDERER. MOVING ON FROM THE SHAREHOLDER ACTIVITY ARGUMENT, LEARNED COUNSEL SUBMITS THAT IT IS NOT OPEN TO THE ASSESSING OFFICER TO QUESTION THE COMMERCIAL I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 35 OF 41 EXPEDIENCY OF A TRANSACTION. WHEN IN HIS WISDOM THE ASSESSEE HAS ADVANCED AN INTEREST FREE LOAN, ACCORDING TO THE LEARNED COUNSEL, THE REVENUE AUTHORITIES CANNOT DISREGARD THE COMMERCIAL EXPEDIENCY OF THE INTEREST FREE LOAN AND INSTEAD IMPUTE INTEREST THEREON. IN SUPPORT OF THIS PROPOSITION, HE R ELIES UPON A DECISI ON OF THIS TRIBUNAL, IN THE CASE OF ERICSSON INDIA PVT LTD VS DCIT [(2012)17 ITR TRIB 79 (DEL)] WHICH HOLDS THAT IT IS TAXPAYERS PREROGATIVE TO AVAIL THE SERVICES FROM AN AE AND TPO CANNOT QUESTION THE SAME. A REFERENCE IS THEN MADE TO DECISION OF THIS TRIBUNAL IN THE CASE OF ABHISHEK AUTO INDUSTRIES VS DCIT [(2011) 15 ITR TRIB 168 (DEL)] , IN SUPPORT OF THE PROPOSITION THAT LEGALLY BINDING ARRANGEMENTS BETWEEN THE PARTIES CANNOT BE DISREGARDED BY THE REV ENUE AUTHORITIES, WITHOUT ASSIGNIN G COGENT REASONS. IN SUBSTANCE, ACCORDING TO THE LEARNED COUNSEL, A NON INTEREST BEARING LOAN CANNOT BE RE - CHARACTERIZED AS, EVEN FOR TRANSFER PRICING PURPOSES, AN INTEREST BEARING LOAN. HIS CONTENTION IS THAT AN INTEREST FREE LOAN BEING TREATED AS AN INT EREST BEARING LOAN AMOUNTS TO RE - CHARACTERIZATION OF A TRANSACTION - WHICH IS NOT PERMISSIBLE UNDER THE SCHEME OF THE LAW. LEARNED COUNSEL REFERS TO, AND RELIES UPON, JUDGMENTS OF HONBLE DELHI HIGH COURT IN THE CASES OF CIT VS COTTON NATURALS INDIA PVT LT D [(2015) 118 DTR 1 (DEL)] AND CIT VS EKL APPLIANCES LTD [(2015) 345 ITR 241 (DEL)] IN THIS REGARD. HIS NEXT ARGUMENT IS THAT TAXATION LAWS IN INDIA DO NOT MANDATE THE CHAGRINING OF INTEREST ON LOAN ADVANCED TO ITS ASSOCIATED ENTERPRISES. FURTHERMORE, ACCO RDING TO THE LEARNED COUNSEL, WHERE THERE IS NO INCOME, THERE CANNOT BE ANY TAX. HE THEN REFERS TO JUDICIAL PRECEDENTS IN THE CASES OF CIT VS SHOORJI VALLABHDAS & CO [(1962) 46 ITR 144 (SC)], CIT VS ARIHANT AV ENUES AND CR EDIT LTD [(2013) 217 TAXMANN.COM 10 5 (GUJ)] AND SHIVNANDAN BUILDCON PVT LTD VS CIT [(2015) 60 TAXMANN.COM (DEL)] IN SUPPORT OF THE PROPOSITION THAT NOTIONAL INTEREST CANNOT BE BROUGHT TO TAX. LEARNED COUNSEL THEN TAKES US THROUGH HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF SA BUILDERS LTD VS CIT [(2007) 288 ITR 1 (SC)] AND POINTS OUT THAT WHEN ASSESSEE HAS DEEP INTEREST IN THE OTHER COMPANY, AS A SUBSIDIARY, GRANT OF INTEREST FREE LOAN IS FULLY JUSTIFIED ON COMMERCIAL CONSIDERATIONS. BY THE SAME LOGIC, ACCORDING TO THE LEARNED COUNSEL, NO ALP ADJUSTMENTS CAN BE JUSTIFIED IN RESPECT OF NOTIONAL INTEREST. LEARNED COUNSEL THEN TAKES US THROUGH THE DEFINITION OF INCOME UNDER SECTION 2(28A) OF THE ACT, AND CONTENDS THAT THE STATUE DOES NOT OBLIGATE PAYMENT OF INTEREST. IT IS SUBMITTED THAT I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 36 OF 41 IN TEREST IS DEFINED AS INTEREST PAYABLE IN ANY MANNER AND IT IS NOT REALLY NECESSARY THAT PAYMENT SHOULD BE MADE AT ALL. IT IS THEN SUBMITTED THAT SECTION 92 (1) REQUIRES THAT INCOME ARISING OUT OF INTERNATIONAL TRANSACTIONS WILL BE COMPUTED ON THE BASIS OF ARMS LENGTH PRICES BUT WHEN THERE IS NO INCOME IN THE HANDS OF THE ASSESSE, FROM SUCH TRANSACTIONS, INCOME CANNOT BE INVENTED ON THE BASIS OF ASSIGNING ARMS LENGTH PRICES TO THE TRANSACTIONS. WHAT IS NOT AN INCOME CANNOT BE BROUGHT TO TAX UNDER THE TR ANSFER PRICING LEGISLATION. RELIANCE IS PLACED ON THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES LIMITED VS ACIT [(2015) 368 ITR 1 (BOM)] TO SUPPORT THE CONTENTION THAT IT IS ONLY WHEN AN INCOME FLOWS FROM THE TRANSACTION THAT AN ALP ADJUSTMENT CAN BE MADE, AND AN ALP ADJUSTMENT CAN ONLY MODIFY, THOUGH NOT CREATE, AN INCOME. IT IS SUBMITTED THAT TRANSFER PRICING PROVISIONS ARE ONLY MACHINERY PROVISIONS TO ADJUST THE QUANTIFICATION OF INCOME. HE THUS CONTENDS THAT WHILE ALP ADJUSTMENTS PERMIT INCREASE IN AN INCOME, IN A CASE WHERE NO INCOME IS REPORTED, ALP ADJUSTMENTS CANNOT BE MADE AT ALL. ON THE STRENGTH OF THESE ARGUMENTS, LEARNED COUNSEL URGES US TO HOLD THAT NO ALP ADJUSTMENTS WERE WARRANTED, EVEN IF PERMISSIBLE IN LAW , ON THE FACTS AND IN THE CIRCUMSTANCES OF THIS CASE. 35. LEARNED DEPARTMENTAL REPRESENTATIVE VEHEMENTLY OPPOSES THE SUBMISSIONS OF THE ASSESSEE. HE SUBMITS THAT THESE ARGU MENTS ARE WHOLLY ILL CONCEIVED AND FACTUAL ELEMENTS EMBEDDED IN THESE ARGUMENTS ARE NOT BORNE OUT FROM THE MATERIAL ON RECORD. WE ARE ONCE AGAIN REMINDED THAT THE ASSESSEE HAS NOT MADE ANY FACTUAL SUBMISSIONS AT THE ASSESSMENT AND FIRST APPELLATE STAGE, AND IT IS ONLY NOW THAT ALL SORT OF FACTUAL ISSUES ARE BEING RAISED - AND THAT TOO WIT HOUT ANY EVIDENCE IN SUPPORT OF THESE CLAIMS. AS FOR THE INTEREST FREE LOAN BEING IN THE NATUR E OF SHAREHOLDER SERVICE, LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITS THAT IT IS A NEW CASE BEING MADE OUT AT THIS STAGE, AND IT IS IMPORTANT TO BEAR IN MIND THE FACT THAT, AS EVIDENT FROM UNCONTROVERTED FACTS SET OUT IN THE ASSESSMENT ORDER, THE INDIAN AE WAS EARLIER PAYING INTEREST ON LOANS FROM THE ASSESSEE. IT IS THE FACT OF AE INCURRING THE LOSSES WHICH HAS APPARENTLY TRIGGERED NON CHARGING OF INTEREST. HE ALS O SUBMITS THAT BONAFIDES OF THE CHANGE IN INTEREST POLICY IS FAR FROM ESTABLISHED; EVEN THE BASIC DETAILS HAVE NOT BEEN FILED BY THE ASSESSEE. HE THEN SUBMITS THAT IT IS NOT THE I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 37 OF 41 COMMERCIAL EXPEDIENCY OF THE INTEREST FREE LOANS WHICH IS BEING QUESTIONED BY THE REVENUE AUTHORITIES. THE ASSESSEE IS INDEED FREE TO ADVANCE INTEREST FREE LOAN TO A SUBSIDIARY AND EVEN SUCH A USAGE OF FUNDS BY THE ASSESSEE IS TO BE CONSIDERED TO BE COMMERCIALLY EXPEDIENT USE OF FUNDS, RATHER THAN DIVERSION OF FUNDS, BUT THEN THAT ASPECT OF THE MATTER IS RELEVANT FOR GRANT OF DEDUCTION IN THE HANDS OF INTEREST PAID BY THE ASSESSEE. HOWEVER, AS FOR THE IMPACT OF INTERNATIONAL TRANSACTIONS WITH THE AES, THE LAW REQUIRES THE INCOME FROM SUCH TRANSACTIONS BEING COMPUTED IN ACCORDANCE WI TH THE ARMS LENGTH PRICE. THE ISSUES BEING RAISED BY THE ASSESSEE ARE WHOLLY IRRELEVANT IN THE CONTEXT OF TRANSFER PRICING. LEARNED DR FURTHER SUBMITS THAT ASSIGNING ARMS LENGTH INTEREST TO AN INTEREST FREE LOAN DOES NOT AMOUNT TO RE - CHARACTERIZING A TR ANSACTION. THE TRANSACTION CONTINUES TO BE IN THE NATURE OF A LOAN; ITS ONLY AN ARMS LENGTH CONSIDERATION WHICH HAS BEEN ASSIGNED TO THIS TRANSACTION. AS REGARDS REFERENCE TO SECTION 2(28A) DEFINING INTEREST, IT IS SUBMITTED THAT THE ARGUMENT OF THE AS SESSEE IS WHOLLY IRRELEVANT AND NOTHING CAN BE EVEN MADE OUT OF THIS ARGUMENT. LEARNED DR THEN SUBMITS THAT THERE IS NO LEGAL JUSTIFICATION, OR CONC EPTUAL BASIS, FOR THE PLEA THAT INCOME CAN ONLY BE INCREASED AS A RESULT OF ARMS LENGTH PRICE ADJUSTMENT , THOUGH WHEN INCOME IS AT ZERO FIGURE IT MUST REMAIN THERE . ALL THAT THE SECTION 92 REQUIRES , ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, IS THAT THE INCOME FROM INTERNATIONAL TRANSACTIONS IS TO BE COMPUTED ON THE BASIS OF ARMS LENGTH PRICE, AND, IF THE TRANSACTIONS AT BOOK VALUE DONOT RESULT IN AN INCOME BUT TRANSACTIONS AT ALP LEAD TO AN INCOME, THE INCOME, AS COMPUTED ON THE BASIS OF ALP, IS TO BE BROUGHT TO TAX. WE ARE URGED TO REJECT THE HYPER TECHNICAL, AND RATHER CREATIVE BUT WHOLLY DIVORCE D FROM THE EXISTING LEGAL PROVISIONS, CONTENTIONS OF THE ASSESSEE. 36. IN BRIEF REJOINDER, LEARNED COUNSEL FOR THE ASSESSEE ONCE AGAIN REITERATES HIS CONTENTIONS AND URGES US TO INTERPRET THE LAW IN A MANNER TO AS TO BE IN TUNE WITH THE UNDERLYING INTENT OF LEGISLATURE AND THE REALITIES OF BUSINESS. HE ONCE AGAIN EMPHASIZES HIS CLAIM THAT ADVANCING THE INTEREST FREE LOAN TO THE INDIAN AE WAS WARRANTED BY THE BUSINESS EXIGENCIES, AND THAT THE TRUE REWARD FOR THIS LOAN WAS MUCH MORE THAN A SIMPLE INTEREST EA RNING - IT WAS PROTECTING THE BUSINESS OF THE ASSESSEE AS A WHOLE. THE INDIAN AE, LEARNED COUNSEL SUBMITS, WAS TAKING CARE OF I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 38 OF 41 BUSINESS INTERESTS OF THE ASSESSEE AS ITS MARKETING ARM IN INDIA , AND IT WAS IN BUSINESS INTEREST OF THE ASSESSEE, WHETHER THE DATE X WAS AN AE OR NOT, TO KEEP IT ALIVE AND BAIL IT OUT OF FINANCIAL DISTRESS. IT IS SUBMITTED THAT, WHILE TAKING A CALL ON SUBMISSION OF THE ASSESSE, WE SHOULD BEAR IN MIND THESE BUSINESS REALITIES AS WELL. IN THE LIGHT OF THESE DISCUSSIONS, ACCORDING TO TH E LEARNED COUNSEL, IT WAS INDEED NOT A FIT CASE FOR MAKING AN ALP ADJUSTMENT EVEN ON MERITS. WE ARE URGED TO HOLD SO. 37. IN OUR CONSIDERED VIEW, THE COMMERCIAL EXPEDIENCY OF A LOAN TO SUBSIDIARY IS WHOLLY IRRELEVANT IN ASCERTAINING ARMS LENGTH INTEREST ON SUCH A LOAN. THERE IS INDEED NO BAR ON ANYONE ADVANCING AN INTEREST FREE LOANS TO ANYONE BUT WHEN SUCH TRANSACTIONS ARE COVERED BY THE INTERNATIONAL TRANSACTIONS BETWEEN THE ASSOCIATED ENTERPRISE, SECTION 92 OF THE ACT MANDATES THAT THE INCOME FROM SUC H TRANSACTIONS IS TO BE COMPUTED ON THE BASIS OF ARMS LENGTH PRICE. THE JUDICIAL PRECEDENTS RELIED BY THE ASSESSEE , SUCH AS IN THE CASE OF SA BUILDERS (SUPRA), IN SUPPORT OF THE PROPOSITION THAT INTEREST FREE ADVANCE TO THE SUBSIDIARY, IN WHICH ASSESSEE H AS DEEP INTEREST, ARE JUSTIFIED ON THE GROUNDS OF COMMERCIAL EXPEDIENCY ARE IN THE CONTEXT OF THE QUESTION WHETHER SUCH A USE OF BORROWED FUNDS CAN BE SAID TO BE FOR THE PURPOSES OF BUSINESS, AND, ACCORDINGLY, WHETHER INTEREST ON BORRO WINGS FOR FUNDS SO US ED CAN BE ALLOWED AS A DEDUCTION IN COMPUTATION OF BUSINESS INCOME OF THE ASSESSEE. THAT IS NOT THE ISSUE HERE, AND THESE JUDICIAL PRECEDENTS ON THE COMMERCIAL EXPEDIENCY, THEREFORE, HAVE NO RELEVANCE IN COMPUTATION OF ARMS LENGTH PRICE OF LOAN GIVEN TO A N ASSOCIATED ENTERPRISE. SIMILARLY, LEARNED COUNSELS CONTENTION THAT A NOTIONAL INCOME CANNOT BE TAXED, AND RELIANCE ON SHOORJI VALLABHDAS DECISION (SUPRA) IN THIS REGARD, IS WH OLLY MISPLACED BECAUSE THAT PROPOSITION IS IN THE CONTEXT OF TAX LAWS IN GEN ERAL, WHEREAS, TRANSFER PRICING PROVISIONS, BEING ANTI ABUSE PROVISIONS WITH THE SANCTION OF THE STATUTE, COME INTO PLAY IN THE SPECIFIC SITUATION OF CERTAIN TRANSACTIONS WITH THE ASSOCIATED ENTERPRISE. THE GENERAL PROVISIONS OF THE LAW HAVE TO GIVE WAY TO THESE SPECIFIC ANTI ABUSE PROVISIONS. WHILE A NOTIONAL INTEREST INCOME CANNOT INDEED BE BROUGHT TO TAX IN GENERAL, THE ARMS LENGTH PRINCIPLE REQUIRES THAT INCOME IS COMPUTED, IN CERTAIN SITUATIONS, ON THE BASIS OF CERTAIN ASSUMPTIONS WHICH ARE INHERENTLY NOTIONAL IN NATURE. WHEN THE LEGAL PROVISIONS ARE NOT IN PARI MATERIA, AS THE PROVISION OF NORMAL I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 39 OF 41 COMPUTATION OF INCOME AND THE PROVISION OF COMPUTATION OF INCOME IN THE CASE OF INTERNATIONAL TRANSACTIONS BETWEEN THE ASSOCIATED ENTERPRISES, WHAT IS HELD T O BE CORRECT IN THE CONTEXT OF ONE SET OF LEGAL PROVISIONS HAS NO APPLICATION IN THE CONTEXT OF THE OTHER SET OF LEGAL PROVISIONS. 38. AS FOR THE ASSESSEE S CLAIM THAT THE LOAN BEING EXTENDED FREE OF INTEREST WAS IN THE NATURE OF SHAREHOLDER SERVICE, THI S PLEA IS BEING TAKEN UP FOR THE FIRST TIME BEFORE US AND THE ASSESSEE HAS NOT EVEN FURNISHED BASIC EVIDENCES FOR THE FACTUAL ELEMENTS EMBEDDED IN THIS PROPOSITION. SUCH FACTS CANNOT BE INFERRED OR ASSUMED; THERE HAS TO BE SOME MATERIAL ON RECORD TO DEMONS TRATE, OR EVEN INDICATE, THE EXISTENCE OF THESE FACTS. THE REFERENCES TO OECD REPORT AND BEPS REPORT IS IN THE CONTEXT OF BENEFIT TEST, BUT THEN THE BENEFIT TEST IS NOT REALLY RELEVANT IN THE CONTEXT OF INDIAN TRANSFER PRICING LEGISLATION. LEARNED COUNSEL HAS NOT EXPLAINED AS TO HOW THESE INPUTS ARE RELEVANT IN INTERPRETING THE SCOPE OF THE STATUTORY PROVISION BEFORE US, NOR DO WE SEE ANY RELEVANCE OF THIS MATERIAL IN THE PRESENT CONTEXT AND GIVEN THE FACT SITUATION ABOVE. IT IS ALSO IMPORTANT TO BEAR IN MI ND THE UNCONTROVERTED FINDINGS OF THE ASSESSING OFFICER THAT THE INTEREST WAS ALL ALONG CHARGED BY THE ASSESSEE ON ITS LOANS TO DATEX BUT, FOR SOME UNEXPLAINED REASONS, THE ASSESSEE HAS STOPPED CHARGING INTEREST IN THE ASSESSMENT YEAR 2003 - 04. THE COMMERCI AL BONAFIDES OF THE PRESENT TRANSACTIONS ARE NOT ESTABLISHED . AS REGARDS THE ASSESSEES CLAIM THAT THE REVENUE AUTHORITIES HAVE RE - CHARACTERIZED THE TRANSACTION, AND THAT THEY DO NOT HAVE THE POWERS TO DO SO, WE FIND THAT THE CLAIM OF THE ASSESSEE IS ILL C ONCEIVED INASMUCH AS THERE IS NO RE - CHARACTERIZATION OF THE TRANSACTION, INASMUCH AS IT CONTINUES TO BE A LOAN TRANSACTION AND INASMUCH AS THE SUBSTITUTION OF ZERO INTEREST BY ARMS LENGTH INTEREST DOES NOT ALTER THE BASIC CHARACTER OF TRANSACTION. THE QUE STION OF RE - CHARACTERIZATION ARISES ONLY WHEN THE VERY NATURE OF TRANSACTION IS ALTERED, SUCH AS CAPITAL SUBSCRIPTION BEING TREATED AS LOAN OR SUCH A TRADE ADVANCE RECEIVED BEING TREATED AS A BORROWING. THERE IS NO CHANGE IN THE CHARACTER OF TRANSACTION IN THIS CASE. LEARNED COUNSELS RELIANCE ON EKL APPLIANCES DECISION (SUPRA) AND COTTON NATURAL DECISION (SUPRA) IS THUS IRRELEVANT. IN THE CASE OF ABHISHEK AUTO (SUPRA), WHAT WAS DONE WAS THAT OF THE JOINT VENTURE AGREEMENT, WHICH WAS DULY APPROVED BY THE RESERVE BANK OF INDIA AND OTHER REGULATORY BODIES, WAS DISREGARDED BY I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 40 OF 41 QUESTIONING ITS NEED, AND IT WAS IN THIS CONTEXT THAT THE TRIBUNAL OBSERVED THAT LEGALLY BINDING JOINT VENTURE ARRANGEMENTS CANNOT BE DISREGARDED BY THE REVENUE AUTHORITIES. THIS OBSERV ATIONS, TAKEN OUT OF THE CONTEXT, CANNOT BE INTERPRETED TO MEAN THAT AN ARMS LENGTH PRICE OF AN INTEREST FREE LOAN CANNOT BE ADOPTED FOR ASCERTAINING INCOME FROM LOAN TRANSACTION. 39. IN OUR CONSIDERED VIEW, THE ASSESSEE IS NOT REALLY CORRECT IN CONTEN DING THAT WHEN THE ASSESSEE HAS NOT REPORTED ANY INCOME FROM A PARTICULAR INTERNATIONAL TRANSACTION, THE ALP ADJUSTMENT CANNOT COMPUTE THE SAME. THE COMPUTATION OF INCOME ON THE BASIS OF ARMS LENGTH PRICE DOES NOT REQUIRE THAT THE ASSESSEE MUST REPORT SOM E INCOME FIRST, AND ONLY THEN IT CAN BE ADJUSTED FOR THE ALP. SECTION 92(1) IS NOT AN ADJUSTMENT MECHANISM; IT IS A COMPUTATION MECHANISM. THE ARMS LENGTH PRICE PRINCIPLE REQUIRES THAT AN ARMS LENGTH PRICE IS ASSIGNED TO THE TRANSACTIONS BETWEEN THE ASS OCIATED ENTERPRISE, AND IF THE INCOME IN COMPUTED, IF ANY, ON THE BASIS OF THE ARMS LENGTH PRICE SO ASSIGNED. AS REGARDS RELIANCE ON THE VODAFONE SERVICES DECISION (SUPRA), THAT DEALS WITH A SITUATION IN WHICH THE INTERNATIONAL TRANSACTION WAS INHERENTLY INCAPABLE OF PRODUCING THE INCOME CHARGEABLE TO TAX AS IT WAS IN THE CAPITAL FIELD . THIS IS EVIDENT FROM THE OBSERVATION OF HONBLE BOMBAY HIGH COURT TO THE EFFECT THAT, IN THIS CASE, THE REVENUE SEEMS TO BE CONFUSING THE MEASURE TO A CHARGE AND CALLING THE MEASURE A NOTIONAL INCOME. WE FIND THAT THERE IS ABSENCE OF ANY CHARGE IN THE ACT TO SUBJECT ISSUE OF SHARES AT A PREMIUM TO TAX . UNDOUBTEDLY, LEARNED COUNSEL IS RIGHT IN INTERPRETING THIS DECISION TO THE EXTENT THAT WHAT IS NOT IN THE NATURE OF INCO ME CANNOT BE TURNED INTO INCOME SO AS TO MAKE ALP ADJUSTMENT THEREIN, AND THEN BRING THE ALP ADJUSTMENT TO TAX, SINCE THE COMPUTATION IS OF INCOME AND IT IS ONLY THE PRICE AT WHICH TRANSACTION IS ENTERED INTO THAT IS TO BE TAKEN AS AN ARMS LENGTH PRICE IN COMPUTATION OF THAT INCOME. THE ALP ADJUSTMENTS CANNOT BE TREATED AS INCOME PER SE . HOWEVER, TH E ASSESSEE DOES NOT DERIVE ANY SUPPORT FROM THIS DECISION SINCE CONSIDERATION FOR A LOAN, I.E INTEREST, IS INHERENTLY IN THE NATURE OF INCOME. THERE IS NO, AND THERE CANNOT BE ANY, DISPUTE OR CONTROVERSY ABOUT THIS CHARACTER OF INCOME. THE POINT OF DISPUTE IS WHETHER ZERO INTEREST, OR NO INTEREST, IS GOOD ENOUGH FOR COMPUTING THE INCOME OR WHETHER AN ARMS LENGTH INTEREST MUST SUBSTITUTE THIS ZERO INTEREST. THE A NSWER IS OBVIOUS. AS I.T.A. NOS.1548 AND 1549/KOL/2009 ASSESSMENT YEARS: 2003 - 04 AND 2004 - 05 PAGE 41 OF 41 LONG AS THE TRANSACTION IS AN INTERNATIONAL TRANSACTION BETWEEN THE AES, THE COMPUTATION OF INCOME HAS TO BE ON THE BASIS OF ARMS LENGTH INTEREST. THEREFORE, IN OUR CONSIDERED VIEW, EVEN WHEN NO INCOME IS REPORTED IN RESPECT OF AN ITE M IN THE NATURE OF INCOME , SUCH AS INTEREST, BUT THE SUBSTITUTION OF TRANSACTION PRICE BY ARMS LENGTH PRICE RESULTS IN AN INCOME, IT C AN VERY WELL BE BROU GHT TO TAX UNDER SECTION 92. THIS PLEA OF THE ASSESSEE IS ALSO , THEREFORE, UNSUSTAINABLE IN LAW. 40. IN VIEW OF THE FOREGOING DISCUSSIONS, AND FOR THE DETAILED REASONS SET OUT ABOVE, WE REJECT THE CONTENTION OF THE ASSESSEE THAT , IN PRINCIPLE, NO ARMS LENGTH PRICE ADJUSTMENTS CAN BE MADE IN RESPECT OF THE INTEREST FREE ADVANCES GRANTED BY THE ASSESSEE T O ITS INDIAN AE, I.E. DATEX OHMEDA INDIA PVT LTD. HOWEVER, SO FAR AS QUANTIFICATION OF THE ARMS LENGTH PRICE ADJUSTMENT IS CONCERNED, THE SAME WILL HAVE TO BE DEALT WITH THE DIVISION BENCH AS NO ARGUMENTS, WITH RESPECT TO THE QUANTIFICATION PART, WERE A DVANCED BEFORE US. IT IS ALSO OPEN TO THE PARTIES TO TAKE UP ANY OTHER ISSUE, NOT SPECIFICALLY DEALT WITH ABOVE, BEFORE THE DIVISION BENCH IN ACCORDANCE WITH LAW. 41. THE MATTER WILL NOW GO BACK TO THE DIVISION BENCH FOR DECIDING THE APPEAL IN THE LIGHT O F OUR OBSERVATIONS ABOVE. PRONOU NCED IN THE OPEN COURT TODAY ON 15 TH DAY OF JULY, 2016. SD/XX SD/XX SD/XX N V VASUDEVAN JUSTICE D D SUD PRAMOD KUMAR (JUDICIAL MEMBER) (PRESIDENT) (A CCOUNTANT MEMBER) DATED: THE 15 TH DAY OF JULY , 2016. COPIES TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) INTERVENER (7) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCHES, KOLKATA