Moserbaer India Ltd., New Delhi V. DCIT, New Delhi

ITA 1617/DEL/2015

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 0705 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 20-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Capital asset; Depreciation; Transfer pricing; Principle of natural justice; International transaction; Rule of consistency; Earning of tax free income; Proportionate interest; Question of law; Notional interest; Revenue expenditure; Capital expenditure
• Section: 143(3); 92B; 14A; 10B

Judgement Text

1 ITA NOS. 6042/DEL/2012 & ORS IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI N. K. SAINI, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER ITA NO. 6042/DEL/201 2 ( A.Y 2008-09) MOSERBAER INDIA LTD. TAX, 43-A, OKHLA INDL AREA, PHASE-III NEW DELHI-110020 AAAM0322J (APPELLANT) VS ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 5(1) NEW DELHI (RESPONDENT) ITA NO. 2395/DEL/2014 ( A.Y 2009-10) MOSERBAER INDIA LTD. TAX, 43-A, OKHLA INDL AREA, PHASE-III NEW DELHI-110020 AAAM0322J (APPELLANT) VS ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 5(1) NEW DELHI (RESPONDENT) ITA NO. 1200/DEL/2014 ( A.Y 2009-10) ASTT. COMMISSIONER OF INCOME TAX CIRCLE 5(1) NEW DELHI (APPELLANT) VS MOSERBAER INDIA LTD. TAX, 43-A, OKHLA INDL AREA, PHASE-III NEW DELHI-110020 AAAM0322J (RESPONDENT) ITA NO. 1617/DEL/2015 ( A .Y 2010-11) MOSERBAER INDIA LTD. TAX, 43-A, OKHLA INDL AREA, PHASE-III NEW DELHI-110020 AAAM0322J (APPELLANT) VS DCIT CIRCLE 17(1) NEW DELHI (RESPONDENT) APPELLANT BY SH. UPVAN GUPTA, ADV RESPONDENT BY SH. SANJAY I. BARA, CIT DR 2 ITA NOS. 6042/DEL/2012 & ORS ORDER PER SUCHITRA KAMBLE, JM THESE APPEALS ARE FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE AGAINST THE ASSESSMENT ORDERS DATED 30/10/2012 FOR A. Y. 20 08-09, 28.02.2014 FOR A.Y. 2009-10 AND 30.01.2014 FOR A.Y. 2010-11 PASSED BY THE ASSESSING OFFICER U/S 143 (3) READ WITH SECTION 144C OF THE INCOME TA X ACT, 1961. 2. THE REVISED GROUNDS ARE AS UNDER: ITA NO. 6042/DEL/2012(A.Y 2008-09) GENERAL 1. THAT ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN COMPUTING TAXABLE INCOME OF THE APPELLANT AT RS. 62,39,09,420 AS AGAI NST RETURNED LOSS OF RS.79,08,80,137. TRANSFER PRICING ISSUES 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS.73,99,46,465 TO THE APPELLANTS INCOME ON ACC OUNT OF THE ALLEGED DIFFERENCE IN ARMS LENGTH PRICE OF EXPORTS MADE BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISES. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS. 98,88,047 TO THE APPELLANTS INCOME ON ACCOU NT OF THE ALLEGED DIFFERENCE IN ARMS LENGTH PRICE OF INTEREST CHARGED BY APPELL ANT FROM ITS ASSOCIATED ENTERPRISES. CORPORATE TAX ISSUES 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN REDUCING THE DEDUCTION CLAIMED BY APPELLANT UNDER THE PROVISIONS OF SECTION 10B OF THE INCOME-TAX ACT, 1961 (THE ACT) TO NIL IN RESPECT OF ELIGIBLE UNIT AT A-164, NOIDA BY SETTING OFF THE LOSSES OF OTHER UNITS. DATE OF HEARING 05.07.2018 DATE OF PRONOUNCEMENT 03 .10.2018 3 ITA NOS. 6042/DEL/2012 & ORS 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 10B OF THE ACT IN RESPECT O F FOREIGN EXCHANGE GAIN OF RS.2,53,81,255 BY HOLDING THE SAME TO BE INCOME NOT DERIVED FROM THE INDUSTRIAL UNDERTAKING. 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 10B OF THE ACT IN RESPECT O F SCRAP SALES OF RS.1,33,96,944 BY HOLDING THE SAME TO BE INCOME NOT DERIVED FROM THE INDUSTRIAL UNDERTAKING. 7. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN DISALLOWING A SUM OF RS.9,22,99,536, BEING 25% OF THE EXPENDITURE ON ROYALTY OF RS.36,91,98,145 PAID TO VARIOUS PARTIES, AS CAPITAL EXPENDITURE RELYING UPON THE DECISION OF SUPREME COURT IN THE CASE OF SOUTHE RN SWITCHGEAR LTD.: 232 ITR 359. 8. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN DISALLOWING A SUM OF RS. 1,69,22,820 INVOKING PROVISIONS OF SECTION 1 4A OF THE ACT READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 (THE RULES) , HOLDING THE SAME TO BE EXPENSES ATTRIBUTABLE TOWARDS INVESTMENTS MADE FOR EARNING OF EXEMPT DIVIDEND INCOME, THOUGH, THE APPELLANT HAD NOT EARN ED ANY DIVIDEND/ EXEMPT INCOME DURING THE RELEVANT ASSESSMENT YEAR. 9. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN DISALLOWING A SUM OF RS.10,33,76,854, BEING EXPENSES INCURRED ON ISSU E OF FOREIGN CURRENCY CONVERTIBLE BONDS (FCCB) HOLDING THE SAME TO BE C APITAL IN NATURE. 10. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING DEDUCTION OF A SUM OF RS.26,11,87,091, BEING AMOUNT PERTAINING TO AMORTISATION OF PREMIUM PAYABLE AT THE TIME OF REDE MPTION OF FCCB, HOLDING THE SAME TO BE UNASCERTAINED AND CONTINGENT IN NATU RE. ITA NO. 2395/DEL/2014 ( A.Y 2009-10) GENERAL 1. THAT ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN COMPUTING TAXABLE INCOME OF THE ASSESSEE APPELLANT AT RS.54,71,49,400/- AS AGAI NST RETURNED LOSS OF RS.1,93,73,70,310/- 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN MAKING AN ADDITION OF RS. 1,78,26,66,433 TO THE APPELLANTS INCOME ON ACCOUNT OF THE ALLEGED DIFFERENCE IN ARMS LENGTH PRICE OF EXPORTS MADE BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISES. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LA W IN MAKING AN ADDITION OF RS.9,12,25,805 TO THE APPELLANTS INCOME ON ACCO UNT OF THE ALLEGED 4 ITA NOS. 6042/DEL/2012 & ORS DIFFERENCE IN ARMS LENGTH PRICE OF INTEREST CHARGE D BY APPELLANT FROM ITS ASSOCIATED ENTERPRISES. CORPORATE TAX ISSUES 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN REDUCING THE DEDUCTION CLAIMED BY APPELLANT UNDER THE PROVISIONS OF SECTION 10B OF THE INCOME-TAX ACT, 1961 (THE ACT) IN RESPECT OF ELIG IBLE UNIT AT A-164, NOIDA BY SETTING OFF THE LOSSES OF OTHER UNITS. 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 10B OF THE ACT IN RESPECT O F FOREIGN EXCHANGE GAIN OF RS.23,87,05,343 BY HOLDING THE SAME TO BE INCOME NO T DERIVED FROM THE INDUSTRIAL UNDERTAKING. 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 10B OF THE ACT IN RESPECT O F SCRAP SALES OF RS. 1,49,48,144 BY HOLDING THE SAME TO BE INCOME NOT DE RIVED FROM THE INDUSTRIAL UNDERTAKING. 7. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN DISALLOWING A SUM OF RS. 6,87,14,859 (NET OF DEPRECIATION), BEING 25% OF THE EXPENDITURE ON ROYALTY OF RS. 36,64,79,248 PAID TO VARIOUS PARTIES , AS CAPITAL EXPENDITURE RELYING UPON THE DECISION OF SUPREME COURT IN THE C ASE OF SOUTHERN SWITCHGEAR LTD.: 232 ITR 359. 8. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING A SUM OF RS.2,57,60,916 INVOKING PROVISIONS OF SECTION 14 A OF THE ACT READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 (THE RULES), HOL DING THE SAME TO BE EXPENSES ATTRIBUTABLE TOWARDS INVESTMENTS MADE FOR EARNING OF EXEMPT DIVIDEND INCOME, THOUGH, THE APPELLANT HAD NOT EARN ED ANY DIVIDEND/ EXEMPT INCOME DURING THE RELEVANT ASSESSMENT YEAR. 9. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING DEDUCTION OF A SUM OF RS.38,86,26,890, BEING AMOUNT PERTAINING TO AMORTISATION OF PREMIUM PAYABLE AT THE TIME OF REDE MPTION OF FOREIGN CURRENCY CONVERTIBLE BONDS (FCCB), HOLDING THE SAME TO BE UNASCERTAINED AND CONTINGENT IN NATURE. ITA NO. 1200/DEL/2014 ( A.Y 2009-10) REVENUES APP EAL 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE & IN LAW, THE LD. MEMBERS OF DRP ERRED IN DIRECTING THE A.O TO APPLY PLR OF RBI FOR F.Y 2008- 09 TO DETERMINE ALP OF INTEREST RECEIVABLE FROM LOA N TO SUBSIDIARY AS AGAINST INTEREST RATE APPLIED BY THE TPO OF 17.24% ? 5 ITA NOS. 6042/DEL/2012 & ORS 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE & IN LAW, THE LD. MEMBERS OF DRP ERRED IN NOT DIRECTING THE A.O TO CH ARGE THE MARK UP ON THE INTEREST AMOUNT AS SAME IS PROVISED IN THE SAFE HAR BOUR RULE? 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE & IN LAW, THE LD. MEMBERS OF DRP ERRED IN DIRECTING THE A.O THAT NO I NTEREST NEED TO BE CHARGED ON SHARE APPLICATION MONEY PENDING WITH ITS FOREIGN SUBSIDIARIES WITHOUT APPRECIATING THE FACT THAT SHARES HAVE NOT BEEN ALL OTTED WITHIN TIME AS PER NORMS OF THE COMPANY LAW AND ALSO THE FACT THAT ASS ESSEE HAS PARKED ITS MONEY WITH ITS FOREIGN AE? 4. THAT THE ORDER OF THE DRP IS ERRONEOUS AND IS N OT TENABLE ON FACTS AND IN LAW. 5. THAT THE GROUNDS OF APPEAL ARE WITHOUT PREJUD ICE TO EACH OTHER. 6. THAT THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR FORGO ANY GROUND(S) OF APPEAL EITHER BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. ITA NO. 1617/DEL/2015 ( A.Y 2010-11 ) GENERAL 1. THAT ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN COMPUTING TAXABLE INCOME OF THE APPELLANT AT RS.1,43,95,15,290 AS AGA INST RETURNED LOSS OF RS. 6,63,65,973. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS.41,53,41,460 TO THE APPELLANTS INCOME ON ACC OUNT OF THE ALLEGED DIFFERENCE IN ARMS LENGTH PRICE OF EXPORTS MADE BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISES. 3. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS.5,20,26,523 TO THE APPELLANTS INCOME ON ACCO UNT OF THE ALLEGED DIFFERENCE IN ARMS LENGTH PRICE OF INTEREST CHARGE D BY APPELLANT FROM ITS ASSOCIATED ENTERPRISES. 4. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS. 1,29,00,171 TO THE APPELLANTS INCOME ON ACC OUNT OF NOTIONAL INTEREST BY RECHARACTERISING THE SHARE APPLICATION MONEY PAID T O THE ASSOCIATED ENTERPRISE AS LOAN. CORPORATE TAX ISSUES 5. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN REDUCING THE DEDUCTION CLAIMED BY APPELLANT UNDER THE PROVISIONS OF SECTION 10B OF THE INCOME-TAX ACT, 1961 (THE ACT) IN RESPECT OF ELIG IBLE UNIT AT A-164, NOIDA BY 6 ITA NOS. 6042/DEL/2012 & ORS SETTING OFF THE LOSSES OF OTHER UNITS. 6. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN NOT ALLOWING DEDUCTION UNDER SECTION 10B OF THE ACT IN RESPECT O F SCRAP SALES OF RS. 8,61,23,941 BY HOLDING THE SAME TO BE INCOME NOT DE RIVED FROM THE INDUSTRIAL UNDERTAKING. 7. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN ARBITRARILY REDUCING A SUM OF RS 12,13,80,604 ON ACCOUNT OF ROYALTY DISA LLOWANCE FROM THE PROFIT OF THE ELIGIBLE UNDERTAKING. 8. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING A SUM OF RS.19,58,46,433 (NET OF DEPRECIATION), BEING 25% OF THE EXPENDITURE OF ROYALTY OF RS.1,04,45,14,309 PAID TO VARIOUS PARTIE S, AS CAPITAL EXPENDITURE RELYING UPON THE DECISION OF SUPREME COURT IN THE C ASE OF SOUTHERN SWITCHGEAR LTD.: 232 ITR 359. 9. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING A SUM OF RS.5,12,96,791 INVOKING PROVISIONS OF SECTION 14 A OF THE ACT READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962 (THE RULES), HOL DING THE SAME TO BE EXPENSES ATTRIBUTABLE TOWARDS INVESTMENTS MADE FOR EARNING OF EXEMPT DIVIDEND INCOME, THOUGH, THE APPELLANT HAD NOT EARN ED ANY DIVIDEND/ EXEMPT INCOME DURING THE RELEVANT ASSESSMENT YEAR. 10.THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING DEDUCTION OF A SUM OF RS.22,56,54,588, BEING AMOUNT PERTAINING TO AMORTISATION OF PREMIUM PAYABLE AT THE TIME OF REDE MPTION OF FOREIGN CURRENCY CONVERTIBLE BONDS (FCCB), HOLDING THE SAME TO BE UNASCERTAINED AND CONTINGENT IN NATURE. 3. THE LEAD APPEAL IS FOR ASSESSMENT YEAR 2008-09, THEREFORE, THE BRIEF FACTS OF ASSESSMENT YEAR 2008-09 IS TAKEN HERE. THE ASSES SEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF OPTICAL AND MAGNE TIC, STORAGE MEDIA. THE PRODUCT RANGE INCLUDED RECORDABLE COMPACT DISKS (CD -R) REWRITABLE COMPACT DISKS (CD-RW), PRE-RECORDED CD/DVD, DIGITAL VERSATI LE DISKS IN OPTICAL MEDIA AND COMPACT CASSETTES, MICROFLOPPY DISKS AND DIGITA L AUDIO TAPES IN MAGNETIC MEDIA SEGMENT AND HOME ENTERTAINMENT BUSINESS. THE CASE WAS REFERRED TO THE TRANSFER PRICING OFFICER, NEW DELHI WITH THE APPROV AL OF CIT-II, NEW DELHI U/S 92CA OF THE I.T ACT, 1961. THE ORDER OF THE TRANSF ER PRICING OFFICER-1(3) WAS PASSED U/S 92CA (3) OF THE I.T ACT, 1961 ON 31/10/2 011 WHERE BY THE TPO HAS PROPOSED FOLLOWING ENHANCEMENTS IN THE TOTAL INCOME OF THE ASSESSEE FOR THE 7 ITA NOS. 6042/DEL/2012 & ORS INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESS EE. A DRAFT ASSESSMENT ORDER UNDER THE PROVISIONS OF SE CTION 144C(1) READ WITH SECTION 143(3) WAS SERVED UPON THE ASSESSEE COMPANY ON 26/12/2011. THE ASSESSEE FILED ITS OBJECTION IN THE OFFICE OF THE D ISPUTE RESOLUTION PANEL-1, NEW DELHI. THE DISPUTE RESOLUTION PANEL-1, NEW DELHI V IDE ITS ORDER DATED 4/9/2012 HAS DISPOSED OFF THE OBJECTIONS OF THE ASS ESSEE COMPANY. THUS THE ASSESSMENT ORDER IS BEING FINALIZED IN ACCORDANCE W ITH THE DIRECTIONS OF THE DISPUTE RESOLUTION PANLE-1, NEW DELHI. 4. THE ASSESSING OFFICER VIDE ORDER DATED 30/12/201 2 PASSED AN ASSESSMENT ORDER THEREBY MAKING VARIOUS ADDITIONS. 5. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASS ESSEE HAS FILED THE PRESENT APPEAL BEFORE US. 6. THE LD. AR SUBMITTED THAT GROUND NO. 1 IS GENERA L IN NATURE. HENCE GROUND NO. 1 IS DISMISSED. 7. AS REGARDS GROUND NO. 2 RELATING TO EXPORTS TO A E, THE LD. AR SUBMITTED THAT DURING THE RELEVANT ASSESSMENT YEAR, THE ASSE SSEE SUPPLIED CDS, FLOPPIES ETC. TO ITS OVERSEAS AES, VIZ., GLOBAL DAT A MEDIA FZ LLC, DUBAI (GDM), EUROPEAN OPTIC MEDIA TECHNOLOGY GMBH (EUR OPTIC} AND OM&T BV (OM&T) WORTH RS.544.76 CRORES. THE AES WERE ENGAG ED IN RE-SELLING/ DISTRIBUTION OF SUCH PRODUCTS. FOR BENCHMARKING THE AFORESAID INTERNATIONAL TRANSACTION, THE ASSESSEE SELECTED TNMM AS THE MOST APPROPRIATE METHOD (MAM) APPLYING OPERATING PROFIT/SALES (OP/SALES ) AS THE PROFIT LEVEL SL. PARTICULARS AMOUNT IN INR 1 ON A/C OF EXPORTS MADE TO THE A.E 73,95,75,860/ - 2 ON A/C OF INTEREST ON LOAN TO SUBSIDIARY CO 1,58,81,963/ - TOTAL 75,54,57,823/ - 8 ITA NOS. 6042/DEL/2012 & ORS INDICATOR (PLI) AND SELECTED ITS OVERSEAS AES AS TESTED PARTY, SINCE THE SAME WERE LEAST COMPLEX. THE BENCHMARKING ANALYSIS OF AS SESSEE IS AS UNDER: PARTICULARS RESULTS NO. OF COMPARABLE COMPANIES 9 AVERAGE OP/SALES 2.75% AES (GDM, EUROPTIC AND OM& TOP/SALES -1.61%, -44.89%-134.20% THUS, THE TESTED PARTY, I.E., THE OVERSEAS AES HAVE EARNED LESS PROFIT THAN ITS COMPARABLES. ACCORDINGLY, THE INTERNATIONAL TRANSAC TION WAS CONSIDERED TO BE AT ARMS LENGTH PRICE. THE TPO, BY RELYING UPON THE TP ORDERS FOR A.YS 2005-06 & 2006-07, REJECTED THE ASSESSEES ACTION OF SELECT ING OVERSEAS AES AS TESTED PARTY. BY RELYING UPON THE SAID ORDERS, HE ALSO REJ ECTED THE PLI SELECTED BY THE ASSESSEE. FURTHER, BY RELYING UPON THE TP ORDER FOR A.YS 2006-07, THE TPO CONSIDERED ASSESSEE AS TESTED PARTY AND OPERATING P ROFIT/ TOTAL COST (OP/ TC) AS PLI. THE TPO ALSO USED INTERNAL TNMM AS MAM AND COMPARED ASSESSEES PROFIT OF AE SEGMENT WITH THE PROFIT OF NON- AE SEG MENT. THE LD. AR SUBMITTED THAT TRANSFER PRICING ADJUSTMENT CANNOT EXCEED PROF IT OF FOREIGN AE. THE LD. AR RELIED UPON THE DECISION OF THIS TRIBUNAL IN ASSESS EES OWN CASE FOR THE A.YS 2003- 04, 2005-06 & 2006-07. (MOSER BAER INDIA LTD. VS. DCIT 93 TAXMANN. COM 79). THE AFORESAID DECISION WAS PRONOUNCED BY T HIS TRIBUNAL ON THE BASIS OF ANOTHER DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y 20 02-03 AND THE DECISION OF DELHI HIGH COURT IN THE CASE OF CIT VS GLOBAL VENTE DGE (P) LTD.: ITA 1828/ 2010 (SLP AGAINST THIS DECISION HAS BEEN DISMISSED BY THE SUPREME COURT IN CC NO.21808/ 2013). THE LD. AR SUB MITTED THAT IN THE PRESENT CASE, ALL THE 3 AES HAD INCURRED LOSSES IN THEIR AUDITED FINANCIAL STATEMENTS FOR THE RELEVANT PERIOD . THE LD. AR SUBMITTED THAT FOLLOWING THE DECISION OF THIS TRIBUNAL IN ASSESSEES OWN CASE FO R THE PRECEDING ASSESSMENT YEARS AND THE DECISION OF DELHI HIGH COURT IN THE C ASE OF GLOBAL VANTEDGE (P) LTD. (SUPRA), THE TRANSFER PRICING ADJUSTMENT IN TH E PRESENT CASE CALLS FOR BEING DELETED IN TOTALITY. WITHOUT PREJUDICE, THE LD. AR SUBMITTED THAT, FOREIGN AE CAN BE CONSIDERED AS A TESTED PARTY AS UPHELD BY TH IS TRIBUNAL IN ASSESSEES OWN CASE FOR THE AYS 2003-04, 2005-06 & 2006-07. THUS, THE LD. AR 9 ITA NOS. 6042/DEL/2012 & ORS SUBMITTED THAT THE AFORESAID TRANSFER PRICING ADJUS TMENT SHALL NOT SUSTAIN AT ALL. 8. THE LD. DR RELIED UPON THE ASSESSMENT ORDER & OR DER OF TPO. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL T HE RELEVANT MATERIAL AVAILABLE ON RECORD. FOR AYS 2003-04, 2005-06 & 20 06-07, THE TRIBUNAL HELD AS UNDER:- 7.8. ON PERUSAL OF OBSERVATIONS BY COORDINATE BENC H OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 (SU PRA) WHICH HAS BEEN REPRODUCED IN EARLIER PART OF THIS ORDER, IT IS OBS ERVED THAT DURING ASSESSMENT YEAR 2002-03, ASSESSEE FILED BEFORE LD. TPO SUFFICI ENT EVIDENCE TO SUBSTANTIATE ITS CLAIM OF ALP NOT EXCEEDING MAXIMUM AMOUNT RECEIVED BY ASSOCIATED ENTERPRISES FROM CUSTOMERS AND ACTUAL VA LUE OF INTERNATIONAL TRANSACTIONS. HOWEVER IN THE PRESENT CASE HAVING REGARD TO OUR OB SERVATION FROM FINANCIALS OF AE, ASSESSEE HAS FAILED TO ESTABLISH BY WAY OF S UFFICIENT EVIDENCE BEFORE LD. TPO, REGARDING ACTUAL VALUE OF INTERNATIONAL TR ANSACTION RECEIVED BY AE. IT IS ALSO OBSERVED FROM THE RELEVANT PARA 21 (SUPRA) REPRODUCED HEREINABOVE THIS TRIBUNAL REFRAINED FROM DEALING WITH THE OTHER OBJECTIONS RAISED BY ASSESSEE THEREIN SINCE THE HONBLE BENCH WAS CONVIN CED WITH THE ARGUMENTS OF LD. AR REGARDING ACTUAL VALUE OF TRANSACTIONS RE CEIVED BY AE THEREIN. 7.9. CONSIDERING TOTALITY OF FACTS, WE FIND IT IS N ECESSARY TO SET ASIDE THIS ISSUE BACK TO LD. TPO FOR DUE VERIFICATION OF ARGUM ENT ADVANCED BY LD. AR IN THE 2 ND LIMB ON THE BASIS OF DOCUMENTS FILED BY ASSESSEE I N RESPECT OF THE SAME. LD. TPO IS DIRECTED TO ACCEPT ASSESSEES CONT ENTION OF FOREIGN AE TO BE A TESTED PARTY IN THE EVENT ASSESSEE IS ABLE TO PROVI DE COMPLETE FINANCIALS OF GDM DUBAI ALONG WITH COMPLETE FINANCIALS OF RELEVAN T COMPARABLES REQUIRED TO BENCHMARK THE INTERNATIONAL TRANSACTION. LD. TPO SHALL THEN CONSIDER THE 10 ITA NOS. 6042/DEL/2012 & ORS FOREIGN AE TO BE TESTED PARTY. LD. TPO SHALL THEN V ERIFY IS THE FOREIGN AE COULD BE CONSIDERED AS LEAST COMPLEX WITH MINIMUM ADJUSTM ENTS AND FOR WHICH COMPARABLES ARE AVAILABLE EASILY ON PUBLIC DOMAIN. 7.10. IN THE EVENT ASSESSEE IS NOT ABLE TO PROVIDE COMPLETE DETAILS AS RECORDED HEREINABOVE, LD. TPO SHALL CONSIDER ASSESS EE TO BE THE TESTED PARTY IN THE LIGHT OF ARGUMENTS ADVANCED BY ASSESSEE IN 2 ND LIMB OF HIS ARGUMENT, WHICH HAS ATTAINED FINALITY AS SLP HAS BEEN DISMISS ED BY HONBLE SUPREME COURT IN THE CASE OF CIT V. GLOBAL VANTAGE (P.) LTD . CC NO. 21808/2013 VIDE, ORDER DATED 2/01/2014, WHEREIN HONBLE SUPREME COUR T UPHELD DECISION OF HONBLE HIGH COURT IN THE CASE OF CIT V. GLOBAL VAN TAGE PVT. LTD. TA NO. 1828/2010 ORDER DATED 14/03/13. TO SUCCEED IN THIS ARGUMENT ASSESSEE SHALL PROVIDE ALL THE DETAILS TO ASCERTAIN THE CORR ECT VALUE OF TRANSACTION RECEIVED BY A.E. 7.11 ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STA NDS ALLOWED FOR STATISTICAL PURPOSES. FROM THE PERUSAL OF TRIBUNALS ORDER DATED 1/5/2018 , THE TRIBUNAL HAS REMANDED BACK THE ISSUE TO THE FILE OF THE TPO, DIR ECTING TO ACCEPT ASSESSEES CONTENTION OF FOREIGN AE TO BE A TESTED PARTY IN TH E EVENT ASSESSEE IS ABLE TO PROVIDE COMPLETE FINANCIALS OF GDM DUBAI ALONG WITH COMPLETE FINANCIALS OF RELEVANT COMPARABLES REQUIRED TO BENCHMARK THE INTE RNATIONAL TRANSACTION. THE TRIBUNAL FURTHER DIRECTED THAT THE TPO SHALL THEN C ONSIDER THE FOREIGN AE TO BE TESTED PARTY AND THEN VERIFY WHETHER THE FOREIGN AE COULD BE CONSIDERED AS LEAST COMPLEX WITH MINIMUM ADJUSTMENTS AND FOR WHIC H COMPARABLES ARE AVAILABLE EASILY ON PUBLIC DOMAIN. IT CAN BE SEEN T HAT IN THIS YEAR ASSESSEE SUBMITTED THAT ALL THREE AES HAD INCURRED LOSSES IN THEIR AUDITED FINANCIAL STATEMENT FOR THE RELEVANT PERIOD BEFORE. AS PER TH E DIRECTION OF THE TRIBUNL FOR A.YS. 2003-04, 2005-06 AND 2006-07, THE FOREIGN AE CAN BE CONSIDERED AS A 11 ITA NOS. 6042/DEL/2012 & ORS TESTED PARTY. THEREFORE, WE DIRECT THE TPO IN THE E VENT ASSESSEE IS ABLE TO PROVIDE COMPLETE FINANCIALS OF FOREIGN AE ALONG WIT H COMPLETE FINANCIALS OF RELEVANT COMPARABLES REQUIRED TO BENCHMARK THE INTE RNATIONAL TRANSACTION. WE FURTHER DIRECT THE TPO TO CONSIDER THE FOREIGN AE T O BE TESTED PARTY AND THEN VERIFY WHETHER THE FOREIGN AE COULD BE CONSIDERED A S LEAST COMPLEX WITH MINIMUM ADJUSTMENTS AND FOR WHICH COMPARABLES ARE A VAILABLE EASILY ON PUBLIC DOMAIN. THUS, WE ARE REMANDING BACK THIS ISS UE TO THE FILE OF A.O/TPO. NEEDLESS TO SAY, THE ASSESSEE BE GIVEN OPPORTUNITY OF HEARING BY FOLLOWING PRINCIPLES OF NATURAL JUSTICE. GROUND NO. 2 IS PART LY ALLOWED FOR STATISTICAL PURPOSE. 10. AS REGARDS TO GROUND NO. 3 RELATING TO TRANSFER PRICING ADDITION IN RESPECT OF INTEREST ON LOAN GIVEN TO FOREIGN A.E, T HE LD. AR SUBMITTED THAT THE ASSESSEE HAD GRANTED LOAN TO ITS FOREIGN AE, VIZ., PERAROUND LTD., CYPRUS AND RECEIVED INTEREST OF RS.99,17,287 THEREUPON @ EURIB OR + 200 BASIS POINTS, WHICH WAS EQUIVALENT TO 6.41%. THE ASSESSEE FOR THE PURPOSE OF BENCHMARKING THE AFORESAID TRANSACTION AND COMPUTING ALP THEREOF , CONSIDERED RETURNS AVAILABLE ON INVESTMENT OPPORTUNITIES IN INDIA (BAN K FD, CERTIFICATE OF DEPOSIT, COMMERCIAL PAPER ETC.) AS REDUCED BY THE COUNTRY RI SK PREMIUM OF INVESTING IN THE INDIAN MARKET, WHICH WAS EQUIVALENT TO 4.69% (7 .88%- 3.19%). THE TPO BENCHMARKED THE AFORESAID TRANSACTION @ 17.26% BY A PPLYING THE YIELD RATE ON CORPORATE BONDS. THE SAID RATE WAS COMPUTED BY TPO ON THE BASIS OF INFORMATION RECEIVED BY HIM FROM VARIOUS BANKS/ INV ESTMENT COMPANIES IN INDIA. THE DRP DIRECTED THE TPO TO APPLY THE PRIME LENDING RATE (PLR) PRESCRIBED BY RBI @ 13.25% TO BENCHMARK THE TRANSAC TION. THE LD. AR SUBMITTED THAT THE AFORESAID LOAN WAS GRANTED BY AS SESSEE IN PRECEDING ASSESSMENT YEAR, VIZ., A.Y. 2007-08, WHEREIN, THE I NTEREST RATE CHARGE BY ASSESSEE WAS ACCEPTED TO BE AT ARMS LENGTH PRICE. ACCORDINGLY, UNDER IDENTICAL FACTS AND CIRCUMSTANCES, TPO CANNOT DEVIATE FROM A SETTLED POSITION. THE LD. AR FURTHER SUBMITTED THAT THE ARMS INTEREST RATE I N RESPECT OF LOAN ADVANCED TO FOREIGN A.E., LIBOR/EURIBOR SHOULD BE TAKEN AS BENC HMARK. THE LD. AR 12 ITA NOS. 6042/DEL/2012 & ORS RELIED UPON THE FOLLOWING DECISIONS, WHEREIN, IT HA S BEEN HELD THAT, ARMS INTEREST RATE IN RESPECT OF LOAN ADVANCED TO FOREIG N AE SHOULD BE COMPUTED BASED ON INTEREST RATE APPLICABLE TO CURRENCY IN WH ICH LOAN HAS TO BE REPAID (PLR IS NOT RELEVANT FOR FOREIGN CURRENCY LOANS AND LIBO R/ EURIBOR ONLY CAN BE CONSIDERED FOR BENCHMARKING THE SAME): I. CIT VS COTTON NATURALS (1) (P) LTD.: 231 TAXMAN 401 (DELHI HIGH COURT) II. CIT VS TATA AUTOCOMP SYSTEMS LTD.: 374 ITR 516 (MUMBAI HIGH COURT). THE LD. AR FURTHER SUBMITTED THAT THE HONBLE RAJAS THAN HIGH COURT IN CASE OF CIT VS. VAIBHAV GEMS LTD. 88 TAXMANN.COM 12 HELD THAT WHERE ASSESSEE EXTENDED LOAN TO ITS AE, ADJUSTMENT SHOULD BE MADE AT AVERAGE LIBOR RATE EXISTING AT THAT TIME, I.E., AT 0.79%, INSTEAD OF LIBOR + 2%. THE LD. AR ALSO RELIED UPON THE FOLLOWING CASE LAWS:- COTTON NATURALS (1) (P) LTD. VS DCIT: 169 TTJ 685 ( DELHI ITAT) MOTHERSON SUMI SYSTEMS LTD. VS ADDL. CIT: 58 TAXMAN N.COM 38 (DELHI ITAT) UFO MOVIES (I) LTD. VS ACIT: 175 TTJ 633 (DELHI IT AT) SIVA INDUSTRIES & HOLDINGS LTD. VS ACIT: 46 SOT 11 2 (CHENNAI ITAT) MANUGRAPH INDIA LTD. VS DCIT: 69 TAXMANN.COM 400 ( MUMBAI ITAT) EVEREST KANTO CYLINDER VS DCIT: 75 TAXMANN.COM 238 (MUMBAI ITAT) RAIN COMMODITIES LTD. VS ADDL. CIT: 65 TAXMANN.COM 240 (HYDERABAD ITAT) CES (P) LTD. VS DCIT: 41 TAXMANN.COM 409 (HYDERABA D ITAT) MYLAN LABORATORIES LTD. VS ACIT: 63 TAXMANN.COM 17 9 (HYDERABAD ITAT) SOMA TEXTILES & INDUSTRIES LTD. VS ADDL. CIT: 81 T AXMANN.COM 67 (AHMEDABAD ITAT) ACCORDINGLY, THE ADJUSTMENT MADE BY TPO ON ACCOUNT OF DIFFERENCE IN ALP OF INTEREST CALLS FOR BEING DELETED. 11. THE LD. DR RELIED UPON THE ASSESSMENT ORDER. 13 ITA NOS. 6042/DEL/2012 & ORS 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT CAN BE SEEN THAT INTEREST R ATE IN RESPECT OF LOAN ADVANCED TO FOREIGN AE SHOULD BE COMPUTED BASED ON INTEREST RATE APPLICABLE TO CURRENCY IN WHICH LOAN HAS TO BE REPAID. THE ASSESSEE HAD GR ANTED LOAN TO ITS FOREIGN AE, VIZ., PERAROUND LTD., CYPRUS AND RECEIVED INTEREST OF RS.99,17,287 THEREUPON @ EURIBOR + 200 BASIS POINTS, WHICH WAS EQUIVALENT TO 6.41%. THE ASSESSEE FOR THE PURPOSE OF BENCHMARKING THE AFORESAID TRANSACTI ON AND COMPUTING ALP THEREOF, CONSIDERED RETURNS AVAILABLE ON INVESTMENT OPPORTUNITIES IN INDIA (BANK FD, CERTIFICATE OF DEPOSIT, COMMERCIAL PAPER ETC.) AS REDUCED BY THE COUNTRY RISK PREMIUM OF INVESTING IN THE INDIAN MAR KET, WHICH WAS EQUIVALENT TO 4.69% (7.88%- 3.19%). THE AFORESAID LOAN WAS GRA NTED BY ASSESSEE IN PRECEDING ASSESSMENT YEAR, VIZ., A.Y. 2007-08, WHER EIN, THE INTEREST RATE CHARGE BY ASSESSEE WAS ACCEPTED TO BE AT ARMS LENG TH PRICE. THUS, THE TPO WAS NOT CORRECT IN DEVIATING ITS OWN DECISION FROM THE PREVIOUS YEAR AS PER THE RULE OF CONSISTENCY. BESIDES THIS, THE LD. ARS REL IANCE ON THE DECISION OF JURISDICTIONAL DELHI HIGH COURT IN THE CASE OF COMM ISSIONER OF INCOME-TAX -I V. COTTON NATURALS (I) (P.) LTD. 231 TAXMAN 401 IS VER Y APT. THE HONBLE HIGH COURT HELD AS UNDER: 28. WE DO NOT AGREE WITH THE FINDING RECORDED IN P ARAGRAPH 5 OF THE TPOS ORDER THAT THE COMPARABLE TEST TO BE APPLIED IS TO ASCERTAIN WHAT INTEREST WOULD HAVE BEEN EARNED BY THE ASSESSED BY ADVANCING A LOAN TO AN UNRELATED PARTY IN INDIA WITH A SIMILAR FINANCIAL H EALTH AS THE TAXPAYERS SUBSIDIARY. THE AFORESAID REASONING IS UNACCEPTABLE AND ILLOGICAL AS THE LOAN TO THE SUBSIDIARY AE IN THE INSTANT CASE IS NOT GRA NTED IN INDIA AND IS NOT TO BE REPAID IN INDIAN RUPEE. IT IS NOT A COMPARABLE T RANSACTION. THE FINDING OF THE TPO THAT FOR THIS REASON THE INTEREST RATE SHOU LD BE COMPUTED AT 14% PER ANNUM I.E. THE AVERAGE YIELD ON UNRATED BONDS FOR F INANCIAL YEARS (FY, FOR SHORT) 2006-07, HAS TO BE REJECTED. THUS, THE CONTENTION OF THE LD. AR ARE ACCEPTED THA T WHERE THE TRANSACTION WAS OF LENDING MONEY IN FOREIGN CURRENCY TO ITS FOR EIGN SUBSIDIARIES THE 14 ITA NOS. 6042/DEL/2012 & ORS COMPARABLE TRANSACTIONS, THEREFORE, WAS OF FOREIGN CURRENCY LENT BY UNRELATED PARTIES. THE FINANCIAL POSITION AND CREDIT RATING O F THE SUBSIDIARIES WILL BE BROADLY THE SAME AS THE HOLDING COMPANY. IN SUCH A SITUATION, DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICABILITY AND THE IN TERNATIONAL RATE FIXED BEING EURIBOR + 200 POINTS WAS PROPERLY TAKEN BY THE ASSE SSEE. THEREFORE, THE TPOS TREATMENT OF BENCHMARKING THE AFORESAID TRANS ACTION @ 17.26% BY APPLYING THE YIELD RATE ON CORPORATE BONDS AS WELL AS THE DRP DIRECTING THE TPO TO APPLY THE PRIME LENDING RATE (PLR) PRESCRIBED BY RBI @ 13.25% TO BENCHMARK THE TRANSACTION, BOTH WERE NOT CORRECT. G ROUND NO. 3 IS ALLOWED. 13. AS REGARDS GROUND NO. 4 RELATING TO DEDUCTION U NDER SECTION 10B TO BE ALLOWED WITHOUT SETTING OFF THE LOSSES OF OTHER UNI TS, THE LD. AR SUBMITTED THAT THE ASSESSEE HAD CLAIMED DEDUCTION U/S 10B OF THE A CT IN RESPECT OF ELIGIBLE UNIT WITHOUT SETTING OFF LOSSES OF OTHER UNITS. THE A.O/DRP HELD THAT SECTION 10B DEDUCTION IS ALLOWABLE POST SETTING OFF LOSSES OF OTHER UNITS. THE LD. AR SUBMITTED THE PRESENT ISSUE STANDS SETTLED IN FAVOU R OF THE ASSESSEE BY THE DECISION OF SUPREME COURT IN THE CASE OF CIT VS YOKOGAWA INDIA LTD.: 391 ITR 274, WHEREIN, IT HAS BEEN HELD THAT, THE STATE OF DEDUCT ION FOR SECTION 10A WOULD BE WHILE COMPUTING ACROSS TOTAL INCOME OF ELI GIBLE UNDERTAKING UNDER CHAPTER IV OF THE ACT AND NOT AT THE STATE OF COMPU TATION OF TOTAL INCOME UNDER CHAPTER VI OF ACT, I.E. BEFORE SETTING OFF LOSSES O F OTHER UNITS. 14. THE LD. DR RELIED UPON THE ASSESSMENT ORDER. 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ISSUE OF CLAIMING DEDUCTIO N U/S 10B OF THE ACT IN RESPECT OF ELIGIBLE UNIT WITHOUT SETTING OFF LOSSES OF OTHER UNITS STANDS SETTLED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF SUPREME C OURT IN THE CASE OF CIT VS YOKOGAWA INDIA LTD.: 391 ITR 274, WHEREIN, IT HAS BEEN HELD THAT, THE STATE OF DEDUCTION FOR SECTION 10A WOULD BE WHILE COMPUTING ACROSS TOTAL INCOME OF ELIGIBLE UNDERTAKING UNDER CHAPTER IV OF THE ACT AN D NOT AT THE STATE OF 15 ITA NOS. 6042/DEL/2012 & ORS COMPUTATION OF TOTAL INCOME UNDER CHAPTER VI OF ACT , I.E. BEFORE SETTING OFF LOSSES OF OTHER UNITS. GROUND NO. 4 IS ALLOWED. 16. AS REGARDS GROUND NO. 5 RELATING TO REDUCTION O F DEDUCTION U/S 10B ON ACCOUNT OF SALE OF FORWARD EXCHANGE CONTRACT, THE L D. AR SUBMITTED THAT THE ISSUE OF ELIGIBILITY OF PROFITS ARISING ON SALE OF FORWARD EXCHANGE CONTRACT TOWARDS DEDUCTION UNDER SECTION 10B OF THE ACT STANDS COVERED IN FAVOUR OF ASSESSEE BY THE DECISION OF THIS HONBLE TRIBUNAL I N ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2003-04, 2005- 06 & 2006-07. SINCE THE ABOVE MENTIONED RECEIPTS HAD DIRECT NEXUS WITH BUSINESS/ INDUSTRIAL UNDERTAKING OF THE ASSESSEE, THE SAME WAS ELIGIBLE FOR DEDUCTION U/S 1 0B. 17. THE LD. DR RELIED UPON THE ASSESSMENT ORDER. 18. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ISSUE OF REDUCTION OF DEDU CTION U/S 10B ON ACCOUNT OF SALE OF FORWARD EXCHANGE CONTRACT IS ALREADY DECIDE D IN FAVOUR OF THE ASSESSEE FOR A.Y. 2003-04, 2005-06 AND 2006-07 BY THE TRIBUN AL. THE TRIBUNAL HELD AS UNDER: 5.3. WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY B OTH THE SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US AND THE JUDIC IAL DECISIONS RELIED UPON BY LD. AR. 5.4. IT IS OBSERVED THAT ONLY ACTIVITY CARRIED ON B Y ASSESSEE IS TO SELL MANUFACTURED PRODUCTS THROUGH ITS FOREIGN AE. THERE FORE IT IS NOT CORRECT TO SAY THAT ASSESSEE TRADED IN FOREIGN EXCHANGE DERIVA TIVES. FURTHER AUTHORITIES BELOW DO NOT DISPUTE THAT FOREIGN EXCHANGE RECEIVED BY ASSESSEE WAS IN RESPECT OF EXPORTS MADE. ASSESSING OFFICER HAS NOT BROUGHT ANYTHING ON RECORD TO PROVE THAT FOREIGN EXCHANGE GAIN WAS DUE TO ANY SPECULATIVE TRANSACTION ENTERED INTO BY ASSESSEE. 16 ITA NOS. 6042/DEL/2012 & ORS 5.5. UNDER SUCH CIRCUMSTANCES WE REVERSE THE OBSE RVATIONS OF LD. CIT (A) AND HOLD THAT FOREIGN EXCHANGE GAIN EARNED BY ASSES SEE WAS ARISING OUT OF BUSINESS OF ELIGIBLE UNDERTAKING FOR PURPOSES OF DE DUCTION UNDER SECTION 10B OF THE ACT. 5.6. ACCORDINGLY THIS GROUND RAISED BY ASSESSEE STA NDS ALLOWED. THUS, THE ISSUE IS SQUARELY COVERED IN FAVOUR OF T HE ASSESSEE BY THE DECISION OF THE TRIBUNAL FOR A.YS. 2003-04, 2005-06 AND 2006-07. GROUND NO. 5 IS ALLOWED. 19. AS REGARDS TO GROUND NO. 6 RELATING TO REDUCTIO N OF DEDUCTION U/S 10B ON ACCOUNT OF SCRAP SALE, THE LD. AR SUBMITTED THAT THE ASSESSEE CLAIMED DEDUCTION U/S 10B IN RESPECT OF SCRAP SALES. THE AS SESSING OFFICER, HOWEVER, HELD THE SAME TO BE NOT DERIVED FROM BUSINESS UNDER TAKING. THE DRP ERRONEOUSLY DIRECTED THE ASSESSING OFFICER TO EXCLU DE SCRAP SALES FROM THE PURVIEW OF DEDUCTION UNDER SECTION 10B. SCRAP SALES ARE SALES MADE BY ASSESSEES EXISTING EXPORTS BUSINESS ONLY. THE REVE NUE HAS NOT BEEN ABLE TO POINT OUT ANY OTHER BUSINESS FROM WHICH SUCH SALES HAVE BEEN MADE. THE ISSUE IS COVERED IN FAVOUR OF ASSESSEE BY FOLLOWING DECIS IONS: I) GE BE (P) LTD. VS ACIT: 371 ITR 32 (KARNATAKA HI GH COURT) II) DCIT VS EXL SERVICE.COM (I) (P) LTD.: ITA NO. 4 459/DEL/2013 (DELHI ITAT) III) SONIC TECHNOLOGY INDIA INC. VS ITO:ITA NO. 266 5/AHD/2011 (AHMEDABAD ITAT). 20. THE LD. DR RELIED UPON THE ASSESSMENT ORDER. 21. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. SCRAP SALES ARE SALES MADE BY ASSESSEES EXISTING EXPORTS BUSINESS ONLY AND THE REVENUE WAS NOT ABLE TO POINT OUT ANY OTHER BUSINESS 17 ITA NOS. 6042/DEL/2012 & ORS FROM WHICH SUCH SALES WERE MADE. THE DECISIONS RELI ED BY THE LD. AR ARE APPLICABLE IN THE PRESENT CASE. THE HONBLE KARNATA KA HIGH COURT IN CASE OF GE BE (P) LTD. (SUPRA) HELD AS UNDER: 11. KEEPING IN MIND THE PRINCIPLE LAID DOWN BY THE APEX COURT, NO DOUBT THE ASSESSEE IS NOT IN THE BUSINESS OF EXPORT OF SC RAPS BUT IS IN THE BUSINESS OF EXPORT OF X-RAY EQUIPMENTS, HIGH VOLTAGE TANKS A ND DETECTORS USED IN CT SCANNERS AND AFTER MANUFACTURING THESE PRODUCTS, TH EY ARE EXPORTED. IN THE PROCESS OF MANUFACTURING, THE UNUTILIZED RAW MATERI ALS FORMS PART OF SCRAPS AND THAT SCRAPS ALSO HAS VALUE. BUT IT IS NOT EXPOR TED AND HENCE, THEY ARE ELIGIBLE FOR THE BENEFIT UNDER SECTION 10B OF THE A CT. THE ASSESSEE SHOULD HAVE EARNED PROFITS AND GAINS FROM SUCH EXPORT OF ARTICL ES OR THINS. THE SAID ARTICLES OR THINGS SHOULD HAVE BEEN MANUFACTURED OR PRODUCED BY THE ASSESSEE. THE SECTION DOES NOT REQUIRE THAT THE PROFITS AND GAINS DERIVED SHOULD BE FROM THE ARTICLES OR THINGS WHICH ARE EXPORTED ONLY. IT IS T HE PROFITS AND GAINS DERIVED BY AN 100% EXPORT ORIENTED UNDERTAKING FROM THE EXP ORT OF ARTICLES. THEREFORE, WHEN THE ASSESSEE UNDERTAKES MANUFACTURI NG ACTIVITY OR PRODUCTION ACTIVITY AND IN THE PROCESS IT RESULTS I N ANY SCRAPS, THE SAID SCRAPS ATTRACT THE NEXUS BETWEEN THE PROFITS AND GAINS DER IVED FROM THE ASSESSEE FROM EXPORT BUSINESS. THEREFORE, IT SATISFIES THE R EQUIREMENTS OF SECTION 10B AND THE TRIBUNAL HAS RIGHTLY HELD THAT THE ASSESSEE IS ENTITLED TO THE BENEFIT OF SECTION 10B EVEN IN RESPECT OF THE PROFITS EARNED O UT OF SALE OF SCRAPS MATERIALS WITHIN THE COUNTRY. IN THAT VIEW OF THE M ATTER, WE DO NOT SEE ANY INFIRMITY IN THE ORDER PASSED BY THE TRIBUNAL. ACCO RDINGLY, THE THIRD SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR O F THE ASSESSEE AND AGAINST THE REVENUE. IN THE PRESENT CASE IN FACT, SCRAP SALES ARE SALES MADE BY ASSESSEES EXISTING EXPORTS BUSINESS ONLY. THERE IS THE DIRECT NEXUS BETWEEN THE PROFITS AND GAINS DERIVED FROM THE ASSESSEE FROM EXPORT BUS INESS AND THEREFORE, IT SATISFIES THE REQUIREMENTS OF SECTION 10B OF THE AC T. THUS, THE ASSESSING 18 ITA NOS. 6042/DEL/2012 & ORS OFFICER WAS NOT CORRECT IN DISALLOWING THIS CLAIM O F THE ASSESSEE. GROUND NO. 6 IS ALLOWED. 22. AS REGARDS TO GROUND NO. 7, RELATING TO DISALLO WANCE OF ROYALTY/TECHNICAL KNOW-HOW, THE LD. AR SUBMITTED THAT DURING THE RELE VANT ASSESSMENT YEAR, THE ASSESSEE MADE PAYMENT ON ACCOUNT OF ROYALTY/ TECHNI CAL KNOW-HOW AND CLAIMED DEDUCTION FOR THE SAME. THE ASSESSING OFFIC ER RELYING UPON THE DECISION OF SUPREME COURT IN THE CASE OF SOUTHERN SWITCHGEAR VS. CIT: 232 ITR 359 DISALLOWED 25% OF THE TOTAL EXPENDITURE AND HELD TH E SAME TO BE CAPITAL IN NATURE. THE LD. AR SUBMITTED THAT THE AFORESAID ISS UE STANDS COVERED IN FAVOUR OF ASSESSEE BY THE DECISION OF THIS TRIBUNAL IN ASS ESSEES OWN CASE FOR THE ASSESSMENT YEARS 2003-04, 2005-06 & 2006-07. 23. THE LD. DR RELIED UPON THE ASSESSMENT ORDER. 24. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.YS. 2003-04, 2005-06 AND 2006-07 HELD AS UNDER: 9.7 CERTAIN FACTS AS OBSERVED BY LD. CIT(A) ARE TH AT KNOW-HOW ARE OWNED BY OWNERS AND ASSESSEE WAS GRANTED RIGHT TO U SE FOR PERIOD OF TIME TILL AGREEMENT CONTINUES TO EXIST. AND THAT UPON TERMINA TION, ASSESSEE HAS TO DISCONTINUE MANUFACTURING ACTIVITIES AND SALE OF PR ODUCTS WHERE THE USE OF SUCH KNOW-HOW IS APPLICABLE. 9.8 FURTHER LD. AO OBSERVED THAT ASSESSEE HAS BEEN USING KNOW-HOW SINCE 2003. LD. TPO OBSERVED THAT AGREEMENTS ENTERE D INTO BY ASSESSEE WITH THESE PARTIES HAVE BEEN RENEWED FROM TIME TO TIME A UTOMATICALLY AND ASSESSEE IS ALLOWED TO SELL PRODUCTS MANUFACTURED W ITH THE HELP OF SUCH KNOW-HOW WORLDWIDE. FURTHER AGREEMENT WITH M/S HP G RANTS ASSESSEE AN EXCLUSIVE SUB-LICENSE TO REPRODUCE, USE AND DISPLAY THE HP TRADE MARKS IN THE 19 ITA NOS. 6042/DEL/2012 & ORS TERRITORY ASSIGNED TO ASSESSEE AND ASSESSEE IS FREE AS PER TERMS OF AGREEMENT TO CONTRACT OUT THE MANUFACTURING OF HP BRANDED PRO DUCTS TO HP APPROVED 3 RD PARTIES AND TO APPOINT DISTRIBUTORS FOR SALE OR DIS TRIBUTION OF HP BRANDED PRODUCTS WITHIN THE TERRITORY. 9.9. FROM THE CLAUSES REFERRED TO BY LD. AO IN HIS ORDER, IT APPEARS THAT, ASSESSEE ACQUIRED MERELY RIGHT TO DRAW UPON TECHNIC AL KNOWLEDGE OF FOREIGN COMPANIES FOR A LIMITED PURPOSE OF CARRYING ON ITS BUSINESS, AND THAT FOREIGN COMPANIES DID NOT PART WITH ANY OF THEIR ASSETS ABS OLUTELY FOR EVER OR FOR A LIMITED PERIOD OF TIME, THAT THEY CONTINUED TO HAVE THE RIGHT TO USE THEIR KNOWLEDGE AND, EVEN AFTER AGREEMENTS HAD RUN THEIR COURSE, THEIR RIGHTS IN THIS BEHALF WAS NOT LOST, THAT ASSESSEE HAD NOT, TH EREFORE, ACQUIRED ANY ASSET OR ADVANTAGE OF AN ENDURING NATURE FOR BENEFIT OF I TS BUSINESS AND THAT PAYMENTS WERE, THEREFORE, REVENUE IN NATURE AND WER E DEDUCTIBLE. 9.10. ACCORDINGLY WE DO NOT FIND ANY INFIRMITY IN T HE FINDINGS OF LD. CIT(A) AND THE SAME IS UPHELD. 9.11. IN THE RESULT THE GROUND RAISED BY REVENUE ST ANDS DISMISSED. THUS, IN THE PRESENT ASSESSMENT YEAR AS WELL THE A SSESSEE MADE PAYMENT ON ACCOUNT OF ROYALTY/ TECHNICAL KNOW-HOW AND CLAIM ED DEDUCTION FOR THE SAME. FROM THE PERUSAL OF THE AGREEMENTS, IT CAN BE SEEN THAT THE ASSESSEE ACQUIRED MERELY RIGHT TO DRAW UPON TECHNICAL KNOWLE DGE OF FOREIGN COMPANIES FOR A LIMITED PURPOSE OF CARRYING ON ITS BUSINESS, AND THAT FOREIGN COMPANIES DID NOT PART WITH ANY OF THEIR ASSETS ABS OLUTELY FOR EVER OR FOR A LIMITED PERIOD OF TIME, THAT THEY CONTINUED TO HAVE THE RIGHT TO USE THEIR KNOWLEDGE AND, EVEN AFTER AGREEMENTS HAD RUN THEIR COURSE, THEIR RIGHTS IN THIS BEHALF WAS NOT LOST, THAT ASSESSEE HAD NOT, TH EREFORE, ACQUIRED ANY ASSET OR ADVANTAGE OF AN ENDURING NATURE FOR BENEFIT OF I TS BUSINESS AND THAT PAYMENTS WERE, THEREFORE, REVENUE IN NATURE AND WER E DEDUCTIBLE. THIS 20 ITA NOS. 6042/DEL/2012 & ORS POSITION REMAINS IDENTICAL TO THAT OF EARLIER ASSES SMENT YEARS WHEREIN THE TRIBUNAL DECIDED THIS ISSUE IN FAVOUR OF THE ASSESS EE AND AGAINST THE REVENUE. GROUND NO. 7 IS ALLOWED. 25. AS REGARDS TO GROUND NO. 8 RELATING TO DISALLOW ANCE U/S. 14A, THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER, IN THE ASSESS MENT ORDER, WITHOUT RECORDING ANY SATISFACTION AS TO NEXUS OF EXEMPT IN COME EARNED WITH EXPENSES INCURRED BY ASSESSEE DURING THE RELEVANT ASSESSMENT YEAR PROCEEDED TO MAKE DISALLOWANCE UNDER SECTION 14A OF THE ACT BY APPLYI NG THE PROVISIONS OF RULE 8D. THE ASSESSING OFFICER RELIED UPON THE DECISION OF DAGA CAPITAL (ITAT) (SB) WHICH STANDS OVERRULED BY THE MUMBAI HIGH COURT IN THE CASE OF GODREJ & BOYCE VS. CIT: 328 ITR 81. THE LD. AR SUBMITTED THA T, EVEN AFTER COMING INTO EXISTENCE OF RULE 8D, RECORDING OF SATISFACTION BY THE ASSESSING OFFICER QUA NEXUS OF EXEMPT INCOME EARNED WITH EXPENSES INCURRE D BY ASSESSEE IS A SINE QUA NON, WHICH IS NOT COMPLIED WITH BY THE ASSESSIN G OFFICER IN THE PRESENT CASE. THE LD. AR RELIED UPON THE FOLLOWING DECISIONS: MAXOPP INVESTMENT LTD. VS CIT: 402 ITR 640 (SC) EICHER MOTORS LTD. VS CIT: 398 ITR 51 (DELHI HC) ASSOCIATED LAW ADVISERS VS. ITO : 87 TAXMANN.COM 14 8 (DELHI ITAT) FURTHER, IN ABSENCE OF EARNING OF EXEMPT DIVIDEND I NCOME, THE PROVISIONS OF SECTION 14A OF THE ACT CANNOT BE APPLIED. IN THE PR ESENT CASE, NO EXEMPT INCOME HAS BEEN EARNED BY THE ASSESSEE DURING THE R ELEVANT ASSESSMENT YEAR. THE LD. AR RELIED UPON THE FOLLOWING DECISIO NS: CHEMINVEST LTD. VS CIT: 378 ITR 33 (DELHI HC) CIT VS LAKHANI MARKETING INC.: 226 TAXMAN 45 (P&H H C) CIT VS CHETTINAD LOGISTICS (P.) LTD.: 248 TAXMAN 55 (MADRAS HC) ACCORDINGLY, DISALLOWANCE MADE BY THE ASSESSING OFF ICER UNDER THE PROVISIONS OF SECTION 14A OF THE ACT IS UNSUSTAINABLE AND CALL S FOR BEING DELETED. 26. THE LD. DR RELIED UPON THE ASSESSMENT ORDER. 21 ITA NOS. 6042/DEL/2012 & ORS 27. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE LD. AR SUBMITTED THAT THER E IS NO EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE PRESENT ASSESSMEN T YEAR. BUT THE APPLICABILITY OF RULE 8D CAN NOT BE DONE AWAY BY TH E ASSESSEE. THE LD. AR RELIED UPON THE DECISION OF MAXOPP INVESTMENT LTD. (SUPRA) WHEREIN IT IS HELD AS UNDER: 41. HAVING REGARD TO THE LANGUAGE OF SECTION 14A(2 ) OF THE ACT, READ WITH RULE 8D OF THE RULES, WE ALSO MAKE IT CLEAR THAT BE FORE APPLYING THE THEORY OF APPORTIONMENT, THE AO NEEDS TO RECORD SATISFACTION THAT HAVING REGARD TO THE KIND OF THE ASSESSEE, SUO MOTO DISALLOWANCE UNDER S ECTION 14A WAS NOT CORRECT. IT WILL BE IN THOSE CASES WHERE THE ASSESS EE IN HIS RETURN HAS HIMSELF APPORTIONED BUT THE AO WAS NOT ACCEPTING THE SAID A PPORTIONMENT. IN THAT EVENTUALITY, IT WILL HAVE TO RECORD ITS SATISFACTIO N TO THIS EFFECT. FURTHER, WHILE RECORDING SUCH A SATISFACTION, NATURE OF LOAN TAKEN BY THE ASSESSEE FOR PURCHASING THE SHARES/MAKING THE INVESTMENT IN SHAR ES IS TO BE EXAMINED BY THE AO. IN FACT, THE ASSESSEE IN ITS RETURN OF INCOME HAS N OT DETERMINED ANY ADMINISTRATIVE EXPENDITURE INCURRED IN RELATION TO THOSE INVESTMENTS, WHICH WOULD EARN TAX-FREE INCOME. THE ASSESSEE HAS ALSO N OT DETERMINED OR ALLOCATED ANY EXPENDITURE ON ACCOUNT OF INTEREST IN RELATION TO THE AVERAGE INVESTMENT OF RS. 157,63,33,630/-. THEREFORE, IT WILL BE APPROPRI ATE TO REMAND BACK THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR RE-C OMPUTATION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT AS PER THE LAW. NEEDLE SS TO SAY, THE ASSESSEE BE GIVEN OPPORTUNITY OF HEARING BY FOLLOWING PRINCIPLE S OF NATURAL JUSTICE. GROUND NO. 8 IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 28. AS REGARDS TO GROUND NO. 9 RELATING TO DISALLOW ANCE OF FCCB ISSUE EXPENSES, THE LD. AR SUBMITTED THAT THE ASSESSEE, I N JUNE 2007, I.E., DURING THE RELEVANT ASSESSMENT YEAR, HAD ISSUED ZERO COUPO N FOREIGN CURRENCY CONVERTIBLE BONDS (FCCB) WITH A TOTAL ISSUE SIZE OF US$ 150 MILLION TO BE 22 ITA NOS. 6042/DEL/2012 & ORS LISTED IN SINGAPORE STOCK EXCHANGE. THE SAID FCCB C OULD NOT BE ISSUED/ SOLD TO/ IN INDIA, USA OR CANADA. THE ISSUE WAS MADE IN 2 TRANCHES OF USD 75 MILLION EACH. THE GROSS YIELD TO MATURITY (YTM) O F TRANCHE A WAS FIXED AT 6.10% P.A. AND FOR TRANCHE B WAS 6.75% P.A., WITH C OMPOUNDING DONE ON A SEMI-ANNUAL BASIS. THE BOND-HOLDERS ALSO HAD AN OPT ION OF CONVERTING THEIR FCCBS INTO EQUITY SHARES ANYTIME ON OR AFTER 31.07 .2007 UNTIL 11.06.2012. THE ASSESSEE INCURRED EXPENSES OF RS. 10,33,76,854 ON ISSUE OF FCCBS AND CLAIMED THE SAME AS DEDUCTION IN THE RETURN OF INCO ME. THE SAID EXPENDITURE, IN ACCORDANCE WITH THE PROVISIONS OF SECTION 78 OF THE COMPANIES ACT, 1956, WAS DEBITED TO SECURITIES PREMIUM ACCOUNT AND NOT C HARGED TO P&L ACCOUNT. ACCORDINGLY, THE SAME WAS CLAIMED AS DEDUCTION IN T HE RETURN OF INCOME AS A SEPARATE LINE ITEM. THE ASSESSING OFFICER/ DRP DISA LLOWED THE AFORESAID FCCB ISSUE EXPENSES BY HOLDING THAT THE SAME TO BE INCUR RED ON ISSUE OF SHARES AND HENCE CAPITAL IN NATURE. THE LD. AR SUBMITTED T HAT, THE FCCBS UNDER CONSIDERATION ARE LIABLE FOR CONVERSION INTO EQUITY AT THE OPTION OF THE BOND- HOLDER AND THE SAME IS NOT MANDATORILY REQUIRED TO BE DONE. THE BOND-HOLDER MAY OPT TO CONTINUE BEING A BOND-HOLDER INSTEAD OF BEING A SHAREHOLDER. ACCORDINGLY, THE FCCBS UNDER CONSIDERATION, BOTH I N ACCOUNTING BOOKS AS WELL AS TAX RETURNS, ARE REQUIRED TO BE TREATED AS DEBT TILL THEY ARE CONVERTED INTO EQUITY BY THE BOND-HOLDER (THE ASSESSEE HAS NO CONTROL OVER CONVERSION/ NON-CONVERSION OF FCCB'S INTO EQUITY, WHILE, THE SA ME IS DEPENDENT TOTALLY ON THE DISCRETION OF THE BOND-HOLDER). THE LD. AR FURT HER SUBMITTED THAT, THE WINDOW FOR CONVERSION OF BONDS INTO EQUITY EXPIRED ON 11.06.2012. AS ON DATE, AS PER THE REAL DATA AVAILABLE QUA CONVERSION , NOT MORE THAN 1% OF BOND-HOLDERS EXERCISED THE RIGHT OF CONVERSION AND BALANCE, VIZ., 99% OF BOND HOLDERS ALWAYS REMAINED IN THE CAPACITY OF A BOND-HOLDER ONLY. THE ISSUE UNDER CONSIDERATION, THE LD. AR SUBMITTED, IS NO MO RE RES-INTEGRA AND STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS OF VARIOUS HIGH COURTS (INCLUDING THE JURISDICTIONAL DELHI HIGH COURT) AND TRIBUNALS. THE LD. AR SUBMITTED THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. HAVELLS INDIA LIMITED 352 ITR 376 HAD HELD THAT EXPENDITURE INCURRED ON ISSUE OF DEBENTURES IS TO BE ALLOWED AS REVENUE EXPENDITURE DESPITE INDICATIONS TO 23 ITA NOS. 6042/DEL/2012 & ORS EFFECT THAT DEBENTURES ARE TO BE CONVERTED IN NEAR FUTURE INTO EQUITY SHARES. THE LD. AR RELIED UPON THE FOLLOWING DECISIONS: CIT VS. SECURE METERS LIMITED: 321 ITR 611 (RAJASTH AN HIGH COURT) - SLP DISMISSED IN CC NO.10548/ 2009 CIT VS. FIRST LEASING CO. INDIA LIMITED: 304 ITR 67 (MADRAS HIGH COURT) CIT VS. SOUTHERN PETROCHEMICAL INDUSTRIES CORPORATI ON LIMITED: 311 ITR 202 (MADRAS HIGH COURT) CIT VS. ITC HOTELS LIMITED: 334 ITR 109 (KARNATAKA HIGH COURT) CIT VS. SUKHJIT STARCH & CHEMICALS LIMITED: 326 ITR 29 (PUNJAB & HARYANA HIGH COURT) MAHINDRA & MAHINDRA LIMITED VS JCIT: 36 SOT 348 (MU MBAI ITAT) CIT VS. RELIANCE NATURAL RESOURCES LIMITED: 166 ITD 385 (MUMBAI ITAT) IN VIEW OF THE AFORESAID JUDICIAL PRECEDENTS, THE L D. AR SUBMITTED THAT THE EXPENSES INCURRED BY ASSESSEE ON ISSUE OF FCCBS CA LLS FOR BEING ALLOWED AS DEDUCTION. 29. THE LD. DR RELIED UPON THE ASSESSMENT ORDER. 30. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. DURING THE PRESENT ASSESSMENT YEAR, THE ASSESSEE HAD ISSUED ZERO COUPON FOREIGN CURRENCY CONVERTIBLE BON DS (FCCB) WITH A TOTAL ISSUE SIZE OF US$ 150 MILLION TO BE LISTED IN SINGA PORE STOCK EXCHANGE. THE SAID FCCB COULD NOT BE ISSUED/SOLD TO/IN INDIA, USA OR CANADA. THE ISSUE WAS MADE IN 2 TRANCHES OF USD 75 MILLION EACH. THE GROS S YIELD TO MATURITY (YTM) OF TRANCHE A WAS FIXED AT 6.10% P.A. AND FOR TRANCH E B WAS 6.75% P.A., WITH COMPOUNDING DONE ON A SEMI-ANNUAL BASIS. THE BOND-H OLDERS ALSO HAD AN OPTION OF CONVERTING THEIR FCCBS INTO EQUITY SHARE S ANYTIME ON OR AFTER 31.07.2007 UNTIL 11.06.2012. THE ASSESSEE INCURRED EXPENSES OF RS. 10,33,76,854 ON ISSUE OF FCCBS AND CLAIMED THE SAM E AS DEDUCTION IN THE 24 ITA NOS. 6042/DEL/2012 & ORS RETURN OF INCOME. THESE FACTS WERE NOT DISPUTED BY THE REVENUE AT ANY POINT OF TIME. THE SAID EXPENDITURE, IN ACCORDANCE WITH THE PROVISIONS OF SECTION 78 OF THE COMPANIES ACT, 1956, WAS DEBITED TO SECURITIES PREMIUM ACCOUNT AND NOT CHARGED TO P&L ACCOUNT BY THE ASSESSEE. ACCORDINGLY , THE SAME WAS CLAIMED AS DEDUCTION IN THE RETURN OF INCOME AS A SEPARATE LIN E ITEM. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. HAVELLS INDIA LIMITED 352 ITR 376 HAD HELD THAT EXPENDITURE INCURRED ON ISSUE OF DEBENTURES IS TO BE ALLOWED AS REVENUE EXPENDITURE DESPITE INDICATIONS TO EFFECT THAT DEBE NTURES ARE TO BE CONVERTED IN NEAR FUTURE INTO EQUITY SHARES. THUS, THE ISSUE IS SQUARELY COVERED BY THE HONBLE DELHI HIGH COURT DECISION. GROUND NO. 9 IS ALLOWED. 31. AS REGARDS TO GROUND NO. 10 RELATING TO DISALLO WANCE OF REDEMPTION PREMIUM AMORTISED IN RESPECT OF FCCB, THE LD. AR SU BMITTED THAT THE ASSESSEE, FOR THE PURPOSE OF PAYMENT OF REDEMPTION PREMIUM TO BOND-HOLDERS IN FUTURE, AMORTIZED THE SAME IN BOOKS OF ACCOUNTS OVER THE TENURE OF BONDS, ON A PRUDENT BASIS, AS THE SAME WAS AN ASCERTAINED LIABILITY. THE PREMIUM AMORTISED EVERY YEAR, IN ACCORDANCE WITH THE COMPAN Y LAW PROVISIONS, WAS ALSO DEBITED TO SECURITIES PREMIUM ACCOUNT AND NOT CHARGED TO P&L ACCOUNT. ACCORDINGLY, THE SAME WAS CLAIMED AS DEDUCTION IN T HE RETURN OF INCOME AS A SEPARATE LINE ITEM. DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE CHARGED AN AMOUNT OF RS.30,47,84,267 TOWARDS PROVISION FOR REDEMPTION PREMIUM. OUT OF THE SAME, AN AMOUNT OF RS.4,35,97,176 (PROPORTIO NATE INTEREST EXPENDITURE QUA FCCB UTILIZATION TOWARDS PURCHASE OF CAPITAL AS SETS) WAS SUO MOTU NOT CLAIMED AS DEDUCTION IN THE RETURN OF INCOME. ONLY RS.26.11,87,091 (DIFFERENCE OF RS.30,47,84,267 - RS.4,35,97,176) WAS CLAIMED AS DEDUCTION IN THE RETURN OF INCOME. THE ASSESSING OFFICER/ DRP DISALLOWED THE A FORESAID REDEMPTION PREMIUM AMORTIZATION BY HOLDING THAT THE SAME IS UN ASCERTAINED AND CONTINGENT IN NATURE. THE LD. AR SUBMITTED THAT AT THE END OF THE RELEVANT ASSESSMENT YEAR, THE FCCB WERE IN THE NATURE OF DEB T AND CONVERSION THEREOF INTO EQUITY, WAS SOLELY AT THE OPTION OF THE BOND-H OLDER. ACCORDINGLY, AS A PRUDENT BUSINESSMAN, THE ASSESSEE WAS REQUIRED TO A SCERTAIN THE FUTURE LIABILITY AND CREATE PROVISIONS IN RESPECT THEREOF. THE LD. AR ALSO SUBMITTED 25 ITA NOS. 6042/DEL/2012 & ORS THAT, IN REALITY, ONLY 1 % (APPROX.) OF BOND HOLDER S EXERCISED THE OPTION OF CONVERSION. IN-FACT, ON THE BASIS OF CIRCUMSTANCES PREVAILING AT THE RELEVANT TIME, CONVERSION OF BONDS INTO EQUITY SHARES WAS NO T AT ALL A VIABLE OPTION FOR BOND-HOLDERS, SINCE, THE MARKET PRICE OF EQUITY SHA RES WAS MUCH LOWER THAN FCCB PRICE, DUE TO GLOBAL RECESSION AND CRASHING OF SHARE MARKETS IN INDIA. THE LD. AR SUBMITTED THAT, IN RESPECT OF THE CONVER SION OF 1% (APPROX.) OF FCCB BY BOND-HOLDERS INTO EQUITY SHARES IN SUBSEQUE NT YEARS, THE PREMIUM ALREADY AMORTIZED WAS REVERSED IN BOOKS OF ACCOUNTS AND WAS OFFERED TO TAX IN THE RETURN OF INCOME. THE LD. AR FURTHER SUBMITTED THAT IT IS A TRITE LAW THAT INTEREST ON DEBENTURES IS AN ALLOWABLE EXPENDITURE. THE LD. AR RELIED UPON THE DECISION OF SUPREME COURT IN THE CASE OF TAPARIA TOOLS LIMITED VS JCIT: 372 ITR 605, WHEREIN, IT WAS HELD THAT, ONE TIME UPFRONT DISCOUN TED INTEREST PAYMENT IN RESPECT OF 5 YEARS DEBENTURES WAS TO BE ALLOWED AS DEDUCTION IN YEAR OF PAYMENT ITSELF. THE LD. AR FURTHER SUBMITTE D THAT THE APEX COURT ALSO HELD THAT A DIFFERENT TREATMENT TOWARDS INTEREST IN BOOKS OF ACCOUNTS COULD NOT BE A FACTOR WHICH WOULD DEPRIVE ASSESSEE FROM CLAIM ING ENTIRE EXPENDITURE AS A DEDUCTION. FURTHER, THE LD. AR SUBMITTED THAT THE C OURTS IN VARIOUS DECISIONS HAVE ALSO HELD THAT, PREMIUM ON REDEMPTION OF FCCB CAN BE AMORTIZED OVER THE LIFE OF FCCB AND BE CLAIMED AS DEDUCTION IN THE RETURN OF INCOME. THE LD. AR POINTED OUT THE DECISION OF MUMBAI HIGH COURT IN THE CASE OF CIT VS. S.M. HOLDING & FINANCE PVT. LTD.: 264 ITR 370. IN THAT C ASE, THE ASSESSEE HAD ISSUED ZERO INTEREST UNSECURED REDEEMABLE CONVERTIB LE DEBENTURES OF RS.100 EACH REDEEMABLE AFTER 10 YEARS AT A PREMIUM OF 100% . ASSESSEE CLAIMED BEFORE THE ASSESSING OFFICER A SPREAD OVER. ASSESSEE CLAIM ED THAT THE PREMIUM PAYABLE BY IT WAS RS.5,47,50,000 AFTER EXPIRY OF 10 YEARS. HOWEVER, THE ASSESSEE CLAIMED DEDUCTION OF RS.54,75,000 P.A. THE ASSESSIN G OFFICER DISALLOWED THE ASSESSEES CLAIM FOR DEDUCTION OF RS. 54,75,000 ON THE GROUND THAT THE LIABILITY WAS NOT ASCERTAINABLE. THE ASSESSMENT ORDER WAS CON FIRMED BY THE CIT(A). HOWEVER, THE TRIBUNAL OVERRULED THE CIT(A)S ORDER IN VIEW OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPN. LTD. V. CIT: 225 ITR 802. ON FURTHER APPEAL, THE HIGH COURT AFFIRMED THE DECISION OF THE TRIBUNAL BY HOLDING THAT, SINCE, DURING THE REL EVANT ASSESSMENT YEAR, NO 26 ITA NOS. 6042/DEL/2012 & ORS CONVERSATION WAS MADE, THE REDEMPTION PREMIUM AMORT IZATION WAS ALLOWABLE AS DEDUCTION. THE LD. AR ALSO RELIED UPON THE FOLLO WING DECISIONS: CIT VS SHREE RAJASTHAN SYNTEX LTD.: 269 ITR 4 61 (RAJASTHAN HIGH COURT) CIT VS TORRENT PHARMACEUTICALS LTD.: 393 ITR 6 25 (GUJARAT HIGH COURT) DCIT VS UAG BUILDERS (P) LTD.: 53 SOT 370 (DELHI IT AT) MAHINDRA & MAHINDRA LIMITED VS DCIT: 54 SOT 146 (M UMBAI ITAT) LMN INDIA LIMITED: 307 ITR 40 (AAR) IN VIEW OF THE AFORESAID JUDICIAL PRECEDENTS, THE L D. AR SUBMITTED THAT THE REDEMPTION PREMIUM AMORTIZATION CLAIMED AS DEDUCTIO N BY THE ASSESSEE IN THE RETURN OF INCOME IS ALLOWABLE. 32. THE LD. DR RELIED UPON THE ASSESSMENT ORDER. 33. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS PERTINENT TO NOTE THAT T HE ASSESSEE, FOR THE PURPOSE OF PAYMENT OF REDEMPTION PREMIUM TO BOND-HOLDERS IN FU TURE, AMORTIZED THE SAME IN BOOKS OF ACCOUNTS OVER THE TENURE OF BONDS, ON A PRUDENT BASIS, AS THE SAME WAS AN ASCERTAINED LIABILITY. THE PREMIUM AMORTISED EVERY YEAR, IN ACCORDANCE WITH THE COMPANY LAW PROVISIONS, WAS ALSO DEBITED T O SECURITIES PREMIUM ACCOUNT AND NOT CHARGED TO P&L ACCOUNT. ACCORDINGLY , THE SAME WAS CLAIMED AS DEDUCTION IN THE RETURN OF INCOME AS A SEPARATE LINE ITEM. DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE CHARGED AN A MOUNT OF RS.30,47,84,267 TOWARDS PROVISION FOR REDEMPTION PREMIUM. OUT OF TH E SAME, AN AMOUNT OF RS.4,35,97,176 (PROPORTIONATE INTEREST EXPENDITURE QUA FCCB UTILIZATION TOWARDS PURCHASE OF CAPITAL ASSETS) WAS SUO MOTU NO T CLAIMED AS DEDUCTION IN THE RETURN OF INCOME. ONLY RS.26.11,87,091 (DIFFERE NCE OF RS.30,47,84,267 - RS.4,35,97,176) WAS CLAIMED AS DEDUCTION IN THE RET URN OF INCOME. AT THE END OF THE RELEVANT ASSESSMENT YEAR, THE FCCB WERE IN T HE NATURE OF DEBT AND CONVERSION THEREOF INTO EQUITY, WAS SOLELY AT THE O PTION OF THE BOND-HOLDER. 27 ITA NOS. 6042/DEL/2012 & ORS ACCORDINGLY, AS A PRUDENT BUSINESSMAN, THE ASSESSEE WAS REQUIRED TO ASCERTAIN THE FUTURE LIABILITY AND CREATE PROVISIONS IN RESPE CT THEREOF. THE LD. AR RELIANCE UPON THE DECISION OF SUPREME COURT IN THE CASE OF TAPARIA TOOLS LIMITED VS JCIT: 372 ITR 605, IS VERY MUCH APPLICABLE IN THE P RESENT CASE. THE APEX COURT FURTHER HELD THAT, ONE TIME UPFRONT DISCOUNTE D INTEREST PAYMENT IN RESPECT OF 5 YEARS DEBENTURES WAS TO BE ALLOWED AS DEDUCTION IN YEAR OF PAYMENT ITSELF. THE APEX COURT ALSO HELD THAT A DIF FERENT TREATMENT TOWARDS INTEREST IN BOOKS OF ACCOUNTS COULD NOT BE A FACTOR WHICH WOULD DEPRIVE ASSESSEE FROM CLAIMING ENTIRE EXPENDITURE AS A DEDU CTION. FURTHER, THE COURTS IN VARIOUS DECISIONS HAVE ALSO HELD THAT, PREMIUM O N REDEMPTION OF FCCB CAN BE AMORTIZED OVER THE LIFE OF FCCB AND BE CLAIMED A S DEDUCTION IN THE RETURN OF INCOME. THUS, THE ASSESSING OFFICER WAS NOT CORRECT IN DISALLOWING THE SAME. GROUND NO. 10 IS ALLOWED. 34. IN RESULT, ITA NO. 6042/DEL/2012 FOR A.Y. 2008- 09 FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 35. THE LD. AR DURING THE COURSE OF HEARING SUBMITT ED THAT THE OTHER ASSESSMENT YEARS I.E. 2009-10 AND 2010-11 ARE IDENT ICAL. THE LD. DR SUBMITTED THAT THE GROUNDS OF ASSESSEES APPEAL IN ALL THE THREE ASSESSMENT YEARS ARE IDENTICAL. 36. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ISSUES ARE IDENTICAL IN TH E APPEALS FILED BY THE ASSESSEE FOR A.YS. 2009-10 AND 2010-11. HENCE, ITA NO. 2395/DEL/2014 AND 1617/DEL/2015 ARE PARTLY ALLOWED AS PER THE DIRECTI ON GIVEN IN ITA NO. 6042/DEL/2012 FOR 2008-09 FOR EACH IDENTICAL GROUND SEPARATELY. 37. IN RESULT, ITA NO. 2395/DEL/2014 AND 1617/DEL/2 015 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE. 28 ITA NOS. 6042/DEL/2012 & ORS 38. AS REGARDS, THE REVENUES APPEAL FOR ASSESSMENT YEAR 2009-10 BEING ITA NO. 1200/DEL/2014, THE LD. AR SUBMITTED THAT AS REG ARDS GROUND NO. 1 & 2 OF THE REVENUES APPEAL, THE SAME IS ALREADY DEALT WHILE DEALING WITH THE ASSESSEES APPEAL. HENCE, THE GROUND NO. 1 AND 2 O F THE REVENUES APPEAL ARE DISMISSED. 39. AS REGARDS GROUND NO. 3, THE LD. AR SUBMITTED T HAT THE SAME IS RELATING TO TRANSACTION OF PAYMENT OF SHARE APPLICATION WHIC H DOES NOT FALL WITHIN THE PURVIEW OF TERM INTERNATIONAL TRANSACTION UNDER SEC TION 92B. THE LD. AR RELIED UPON THE DECISION OF THE DELHI TRIBUNAL IN CASE OF BHARTI AIRTEL LTD. VS. ADDITIONAL CIT 161 TTJ 428. THE LD. DR COULD NOT C ONTROVERT THE SAME. THUS, THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSE SSEE. 40. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE TRIBUNAL IN CASE OF BHARTI AIRTEL LTD. (SUPRA) HELD AS UNDER: 35. ..SUFFICE TO SAY THAT WE HAVE REACHED OUR CONCLUSIONS ON THE BASIS OF THE LEGAL PROVISIONS UNDER SECTION 92B AND NO JUDICIAL PRECEDENT, CONTRARY TO OUR UNDERSTANDING OF THESE LEGAL PROVIS IONS, HAS BEEN CITED BEFORE US. THERE IS A DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF MAHINDRA & MAHINDRA (SUPRA), REFERRED TO IN THE DRP ORDER, BUT THAT DECISION DOES NOT DEAL WITH THE SCOPE OF AMENDED SECTION 92B AND LEAVES TH E ISSUE OPEN BY STATING THAT POST INSERTION OF EXPLANATION TO SECTION 92B, THE MATTER WILL HAVE TO BE EXAMINED IN THE LIGHT OF THE AMENDED LAW. WE HAVE H ELD THAT EVEN AFTER THE AMENDMENT IN SECTION 92B, BY AMENDING EXPLANATION T O SECTION 92B, A CORPORATE GUARANTEE ISSUED FOR THE BENEFIT OF THE A ES, WHICH DOES NOT INVOLVE ANY COSTS TO THE ASSESSEE, DOES NOT HAVE ANY BEARIN G ON PROFITS, INCOME, LOSSES OR ASSETS OF THE ENTERPRISE AND, THEREFORE, IT IS OUTSIDE THE AMBIT OF INTERNATIONAL TRANSACTION TO WHICH ALP ADJUSTMENT CAN BE MADE. AS WE HAVE DECIDED THE MATTER IN FAVOUR OF THE ASSESSEE ON THI S SHORT ISSUE, WE SEE NO NEED TO ADDRESS OURSELVES TO OTHER LEGAL ISSUES RAI SED BY THE ASSESSEE AND 29 ITA NOS. 6042/DEL/2012 & ORS THE JUDICIAL PRECEDENTS CITED BEFORE US. 36. FOR THE REASONS SET OUT ABOVE, AND AS WE HAVE H ELD THAT THE ISSUANCE OF CORPORATE GUARANTEES IN QUESTION DID NO T CONSTITUTE INTERNATIONAL TRANSACTION WITHIN MEANINGS THEREOF UNDER SECTION 92B, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED ALP ADJUSTMENT OF RS. 33,10,161. THE ASSES SEE GETS THE RELIEF ACCORDINGLY. IN THE PRESENT CASE, TRANSACTION OF PAYMENT OF SHAR E APPLICATION DOES NOT FALL WITHIN THE PURVIEW OF TERM INTERNATIONAL TRANS ACTION UNDER SECTION 92B AS THERE IS NO DIRECT BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF THE ENTERPRISE AND, THEREFORE, IT IS OUTSIDE THE AMBIT OF INTERNATIONAL TRANSACTION TO WHICH ALP ADJUSTMENT CAN BE MADE. THUS, THE ISSU E IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND THE DRP RIGHTLY DIRECTED THE ASSESSING OFFICER THAT NO INTERESTS NEED TO BE CHARGED ON SHARE APPLICATIO N MONEY PENDING WITH ITS FOREIGN SUBSIDIARIES. THEREFORE, GROUND NO. 3 OF RE VENUES APPEAL IS DISMISSED. 41. IN RESULT, ITA NO. 1200/DEL/2014 FILED BY THE R EVENUE FOR A.Y. 2009-10 IS DISMISSED. 43. IN RESULT, THE THREE APPEAL FILED BY THE ASSESS EE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE AND REVENUES APPEAL FOR ASSESS MENT YEAR 2009-10 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 03RD OCTOB ER, 2018 . SD/- SD/- (N. K. SAINI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 03/10/2018 R. NAHEED 30 ITA NOS. 6042/DEL/2012 & ORS COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE OF DICTATION 05.07.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 05.07.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 04.10 .2018 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 05.10 .2018 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 05.10 .2018 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER