ACIT, New Delhi V. M/s. Samsung India Electronics Pvt. Ltd, New Delhi

ITA 1842/DEL/2009

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2693 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 10-09-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 04-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G C SRIVASTAVA
• Keywords: Related party transaction; Capital asset; Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Deemed dividend; Revenue expenditure; Capital expenditure
• Section: 92C; 143(3); 92D; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: G : NEW DELHI BEFORE SHRI I. C. SUDHI R, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER ITA NO. 1842/DEL/2009 ASSESSMENT YEAR: 2002-03 ACIT, CIRCLE 7(1), VS. M /S. SAMSUNG INDIA ELECTRONICS PVT. LTD. ROOM NO. 312, C.R. BUILDING 7 TH & 8 TH FLOOR, IFCI TOWER, NEW DELHI. 61, NEHRU PLACE NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI G. C. SRIVASTAVA, DR RESPONDENT BY : SHR I DINESH VYAS, SENIOR ADVOCATE, S.K. SHARMA, TARU ARORA, SHASHANT BURMAN CAS ORDER PER I.C. SUDHIR, JUDICIAL MEMBER IN ITS GROUND (REVISED) THE REVENUE HAS QUESTIONED FIRST APPELLATE ORDER AS UNDER :- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 24,03, 22,940/- MADE BY THE AO ON ACCOUNT OF ARMS LENGTH PRICE. 1.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) ERRED IN APPLYING CURRENT YEARS DATA FOR THE COMPARABILITY ITA NO. 1842/DEL/2009 A.Y. 2002-03 2 ANALYSIS WHEN THE USE OF THE MULTIPLE YEAR DATA BOT H BY THE ASSESSEE AND TPO WAS NOT UNDER CHALLENGE BEFORE HIM. 1.2 WITHOUT PREJUDICE TO THE GROUND NO. 1.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A ) ERRED IN NOT FOLLOWING A CONSISTENT APPROACH IN APPLYING SINGLE YEAR DATA TO ONLY ONE SET OF TRANSACTIONS. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 11,92, 75,955/- MADE BY THE AO ON ACCOUNT OF ROYALTY PAID TO SEC KOREA. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 68,68, 216/- MADE BY THE AO ON ACCOUNT OF PROVISION FOR WARRANTY/AFTER SALE SERVICE COMPENSATION. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAWS, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 4,56,7 5,050/- MADE BY THE AO ON ACCOUNT OF ADVERTISEMENT AND SALE PROMOTION E XPENSES (BRAND PROMOTION). 5. ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 4,56,7 5,050/- MADE BY THE AO ON ACCOUNT OF ADVERTISEMENT AND SALE PROMOTION E XPENSES (BEING CAPITAL IN NATURE). 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 35,36, 485/- MADE BY THE AO ON ACCOUNT OF PURCHASE OF COMPUTER SOFTWARE. 7. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 4,40,9 2,460/- MADE BY THE AO ON ACCOUNT OF DEEMED DIVIDEND U/S 2(22)(E). 8. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 12,40, 743/- MADE BY THE AO ON ACCOUNT OF RECRUITMENT AND TRAINING EXPENSES. 2. WE HAVE HEARD AND CONSIDERED THE ARGUMENTS ADVANCED BY THE PARTIES IN VIEW OF ORDERS OF THE AUTHORITIES BELOW, MATERIAL AVAILA BLE ON RECORD AND THE DECISIONS RELIED UPON. 3. THE RELEVANT FACTS ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF CONSUMER ELECTRONIC S AND HOME APPLIANCES AS IN THE ITA NO. 1842/DEL/2009 A.Y. 2002-03 3 EARLIER YEARS. THE ASSESSEE COMPANY JOINTLY PROMOTE D BY SAMSUNG ELECTRONICS COMPANY (SEC), KOREA AND ITS INDIAN ASSOCIATES SEC, KOREA IS REGISTERED OWNER OF BRAND NAME AND LOGO OF SAMSUNG AND PRODUCES CONSUME RABLE DURABLES AND OTHER WHITE COLOUR GOODS UNDER THIS BRAND. M/S. SAMSUNG ELECTRONICS COMPANY, KOREA OWNS/CONTROLLED 74% OF THE EQUITY OF THE ASSESSEE C OMPANY. THE REMAINING 26% OF THE EQUITY IS HELD AND CONTROLLED BY ITS INDIAN PART NER AND ASSOCIATES. THERE IS ANOTHER 100% SUBSIDIARY COMPANY OF SEC, KOREA IN IN DIA, NAMED AND STYLED AS M/S. SAMSUNG ELECTRONICS INDIA INFORMATION AND TELECOMMU NICATIONS LTD. (SEITL) WHICH DEALS IN COMPUTER AND TELECOMMUNICATIONS PRODUCTS IN INDIA. 4. THE ASSESSEE COMPANY FILED ITS RETURN DECL ARING INCOME OF RS. 37,36,90,025/- WHICH WAS PROCESSED U/S 143(1) OF THE ACT ACCEPTING THE SAME INCOME. SUBSEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY AND ASSESSMENT HAS BEEN FRAMED U/S 143(3) OF THE ACT. RECEIPTS BY WAY OF SALE AND SERVICE FOR THE YEAR UNDER CONSIDERATION ARE SHOWN AT RS. 1068.21 CRORES AS AG AINST RS. 986.02 CRORES IN THE IMMEDIATELY PRECEDING YEAR. OTHER INCOME FOR THE YE AR AS PER SCHEDULE -8 OF THE BALANCE SHEET IS SHOWN AT RS. 17.32 CRORES AS AGAIN ST RS. 12.17 CRORES IN THE EARLIER YEAR. 5. DURING THE YEAR THE ASSESSEE HAD MADE PURC HASES FROM ITS FOREIGN ASSOCIATES ENTERPRISES (AE). THEREFORE THE AO AFTER TAKING TH E PRIOR APPROVAL OF COMMISSIONER REFERRED THE MATTER TO THE TPO TO DETERMINE THE ARM S LENGTH PRICE OF THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY W ITH ITS FOREIGN ASSOCIATED ENTERPRISES AS IN THE EARLIER YEARS ADDITIONS U/S 4 0A(2)(B) OF THE ACT WAS MADE ON THIS ACCOUNT IN THE CASE OF ASSESSEE. THE TPO VIDE ITS ORDER DATED 1.3.2005 ITA NO. 1842/DEL/2009 A.Y. 2002-03 4 DETERMINED THE ARMS LENGTH PRICE IN RESPECT OF THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY WITH ITS FOREIGN ASSOCIATED ENTERP RISE. IN THE FIRST APPEAL THE ASSESSEE RAISED (I) GENERAL GROUNDS (II) CORPORATE TAX ISSUE (III) TRANSFER PRICING ISSUES (TP ISSUES). ON THE RELIEF GIVEN BY THE LD. C IT(A), THE REVENUE IS IN APPEAL BEFORE US. GROUND NOS. 1, 1.1, 1.2, 2 AND 3 TO 5 6. THE RELEVANT FACTS ARE THAT AO NOTICED THE FOL LOWING INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE DURING THE YEAR :- DESCRIPTION OF THE INTERNATIONAL TRANSACTION BOOK VALUE OF THE TRANSACTION (IN RS.) ARMS LENGTH PRICE COMPUTED BY THE APPELLANT (RS.) PURCHASE OF RAW MATERIAL 1,242,617,458 1,242,617,458 SALE OF RAW MATERIAL 236,408 PURCHASE OF SPARES 54,006,189 54,006,189 PURCHASE OF FINISHED GOODS FOR RESALE 684,832,976 684,832,976 PURCHASE OF CAPITAL ITEMS 102,003,362 102,003,362 REPAIR AND MAINTENANCE EXPENSES 3,009,253 3,009,253 PAYMENT OF ROYALTY 119,275,955 119,275,955 COST RECHARGES 3,647,905 3,647,905 REIMBURSEMENT OF EXPENSES 175,232,846 175,232,846 7. THE ASSESSEE HAS SEGREGATED ITS TWO SEPARA TE AND DISTINCT LINE OF BUSINESS NAMELY ITA NO. 1842/DEL/2009 A.Y. 2002-03 5 (A) MANUFACTURING ACTIVITIES CLASSIGFED AS CLASS I ACTIVITY (B) TRADING ACTIVITY CLASSIFIED AS CLASS II ACTIVI TY. 8. THE ASSESSEE ADOPTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD IN ITS TRANSFER PRICING DOC UMENTATION FOR THE YEAR IN CLASS I AND CLASS II TRANSACTIONS. OPERATING PROFIT/ TOTAL C OST (OP/TC) WAS CHOSEN AS THE RELEVANT PROFIT LEVEL INDICATOR (PLI) FOR CLASS I TRA NSACTIONS AND OPERATING PROFIT/SALES (OP/SALES) WAS CHOSEN AS THE RELEVANT PROFIT LEVEL INDICATOR FOR CLASS II TRANSACTIONS. 9. THE FOLLOWING TABLE SUMMARIZES THE RESULT S OF THE COMPARABLE SEARCH AND THE FINANCIAL AND ECONOMIC ANALYSIS CARRIED OUT FOR THE CLASSEE I TRANSACTIONS BY THE ASSESSEE IN ITS TP DOCUMENTATION : CLASS 1 OP / TC NO. OF COMPANIES 8 MEAN (AVERAGE) 4.75% MEDIAN 6.59% UPPER QUARTILE 12.73% LOWER QUARTILE 0.77% MAXIMUM 14.67% MINIMUM (12.79%) 10. THE ARITHMETIC MEAN OF THE OP/TC OF THE COMPARABLE COMPANIES FINALLY SELECTED UNDER CLASS I TRANSACTIONS WORKED OUT TO 4. 75%. ON THE OTHER HAND, THE ASSESSEE EARNED AN OP/TC OF 5.36% DURING THE YEAR. SINCE THE PROFIT MARGIN EARNED BY THE ASSESSEE UNDER CLASS I TRANSACTIONS WAS HIGHE R THAN THE MEAN MARGIN OF COMPARABLE COMPANIES, THE ASSESSEE CONCLUDED THAT T HE PRICES OF THESE TRANSACTIONS ITA NO. 1842/DEL/2009 A.Y. 2002-03 6 MET THE ARMS LENGTH STANDARD PRESCRIBED UNDER THE INCOME TAX ACT, 1961. THE TPO AFTER GOING THROUGH THE TRANSFER PRICING DOCUMENTAT ION AND OTHER DETAILS FILED BY THE ASSESSEE DURING THE PROCEEDINGS U/S 92CA ADJUSTED T HE TRANSFER PRICES OF THE CLASS I INTERNATIONAL TRANSACTIONS OF THE ASSESEE AND ACCEP TED THE ARMS LENGTH PRICE IN RESPECT OF OTHER TRANSACTIONS. 11. THE TPO DETERMINED THE ARMS LENGTH PRIC E OF CLASS I TRANSACTIONS AT RS. 1,05,62,97,960/- AS AGAINST THEIR BOOK VALUE OF RS. 1,29,66,23,647/-. TPO THUS PROPOSED AN ADJUSTMENT OF RS. 24,03,22,940/- TO THE PURCHASE OF RAW MATERIAL AND PURCHASE OF SPARES TRANSACTIONS WITH THE ASSOCIATED ENTERPRISES. THE BASIS OF ADJUSTMENT TO CLASS I TRANSACTION BY THE TPO REMAIN ED ALLOCATION OF ADVERTISEMENT EXPENSES, REJECTION OF KIRLOSKAR AIRTEC LTD. AS A COMPARABLE ETC.. THIS ACTION OF THE TPO WAS QUESTIONED BY THE ASSESSEE BEFORE THE LD. C IT(A) ON SEVERAL GROUNDS. THE LD. CIT(A) AFTER DISCUSSING THE ISSUE IN DETAIL HAS DELETED THE ADDITION OF RS. 24,03,22,940/- MADE BY THE AO ON ACCOUNT OF ARMS LE NGTH PRICE WHICH HAS BEEN QUESTIONED BY THE REVENUE WITH THIS CONTENTION THAT THE LD. CIT(A) HAS ERRED IN APPLYING CURRENT YEARS DATA FOR THE COMPARABILITY ANALYSIS WHEN THE ISSUE OF THE MULTIPLE DATA BOTH BY THE ASSESEE AND TPO WAS NOT U NDER CHALLENGE BEFORE HIM. IT HAS BEEN FURTHER CONTENDED THAT THE LD. CIT(A) HAS ERRED IN NOT FOLLOWING A CONSISTENT APPROACH WHILE PREFERRING APPLICATION OF SINGLE YEAR DATA TO ONLY ONE SET OF TRANSACTIONS. 12. IN SUPPORT OF THE GROUNDS THE LD. DR SUB MITTED THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN SELECTIVELY ALTERING THE VERY BASI S OF FUNCTIONAL AND ECONOMIC COMPARABILITY CARRIED OUT BY THE TPO AND WHILE DOIN G SO HE HAS DESTROYED THE ITA NO. 1842/DEL/2009 A.Y. 2002-03 7 UNIFORMITY AND CONSISTENCY OF APPROACH ADOPTED BY T HE TPO, WHILE APPLYING CURRENT YEARS DATA TO ONE SET OF TRANSACTION AND LEAVING T HE OTHER SET OF TRANSACTION WITH MULTIPLE YEAR DATA. HE SUBMITTED THAT IN THE SAME O RDER OF ASSESSMENT , TWO DIFFERENT KINDS OF DATA CAN NOT BE USED MULTIPLE YEAR FOR ONE TRANSACTION AND THE CURRENT YEAR FOR THE OTHER TRANSACTION UNLESS ONE O R THE OTHER SET FALLS IN THE EXCEPTIONS PROVIDED UNDER RULES. LD. DR SUBMITTED T HAT THERE IS IRRATIONALITY IN THE APPROACH OF THE LD. CIT(A) ON TRANSFER PRICING. HE POINTED OUT THAT THE TPO HAD MADE THE ADDITION OF RS. 24.03 CRORE IN RESPECT OF CLASS I ACTIVITY AND NO ADJUSTMENT WAS MADE IN RESPECT OF CLASS II ACTIVITY. BEFORE THE LD. CIT(A) THE ASSESSEE HAD RAISED THREE GROUNDS WITH RESPECT TO TRANSFER PRICI NG ADJUSTMENT. FIRSTLY THE REJECTION OF KIRLOSKAR AIRTECH LTD. AS COMPARABLE, SECONDLY R EIMBURSEMENT OF AMP EXPENSES TREATED AS NON-OPERATING INCOME LIKE TREATING SUCH MARKETING EXPENSES AS OPERATING EXPENSES, AND THIRDLY +/- 5 ADJUSTMENT NOT ALLOWED. IN PARA NO. 10 OF THE ORDER LD. CIT(A) HAS DEALT WITH THE ISSUE IN RESPECT OF TREAT MENT OF REIMBURSEMENT OF AMP EXPENSES AT LENGTH AND IN THE LIGHT OF THE DECISION OF TRIBUNAL IN THE CASE OF SONY INDIA (P) LTD. 114 ITD 448 (DELHI) ADJUDICATED THAT EXCLUSION OF RS. 19.17 CRORES FROM THE OPERATING PROFIT WAS NOT JUSTIFIED. THEREA FTER THE LD. CIT(A) HAS BEEN SUDDENLY TURNED TO ALTOGETHER NEW ISSUE IN PARA NO. 11 OF HIS ORDER AND DEALT WITH THE USE OF CURRENT YEAR / MULTIPLE YEAR DATA AND AD JUDICATED THAT BOTH THE ASSESSMENT AND TP HAVE USED THE PLI OF OP/TC FOR ECO NOMIC ANALYSIS HOWEVER SINCE ALMOST ALL THE TRANSACTIONS OF THE ASSESSEE WITH IT S AES ARE ON COST SIDE, HENCE IN BETTER COMPARABILITY OP/SALES IS TO BE USED AS THE PLI. HE HELD FURTHER THAT THE RELEVANT DATA BE USED FOR DETERMINATION OF ARMS LEN GTH PRICE HAS TO BE DATA FOR CURRENT FINANCIAL YEAR I.E. 2001-02 IN THE PRESENT CASE. ON THE BASIS OF THESE FINDINGS ITA NO. 1842/DEL/2009 A.Y. 2002-03 8 THE LD. CIT(A) HAS RECALCULATED THE PROFIT MARGIN O F THE ASSESSEE AT 5.09% AND AIRTHMATIC MEAN OF PROFIT MARGIN OF COMPARABLE COMP ANIES AT 0.83% BY USING SINGLE YEAR DATA AND OP/SALES AS PROFIT LEVEL INDICATOR FO R CLASS I ACTIVITY. ACCORDINGLY HE ADJUDICATED THAT NO ADJUSTMENT IS WARRANTED ON ACCO UNT OF TRANSFER PRICING. 13. LD. DR CONTENDED THAT DURING THE COURS E OF ORAL ARGUMENTS, A CHART WAS FILED BY THE ASSESSEE SHOWING THAT NO ADJUSTMENT CO ULD ARISE IN CLASS II TRANSACTION IF THE CURRENT YEAR DATA IS APPLIED. THE LD. DR SUBMIT TED THAT THE APPLICATION OF CURRENT YEAR OR MULTIPLE DATA IS NOT ONLY ABOUT MARGINS EAR NED BY THE COMPARABLE COMPANIES. THE DATA IS CHOSEN TO MAKE A COMPARABILI TY ANALYSIS TO FIND OUT WHETHER THE COMPANIES WOULD BE COMPARABLE ON THE BASIS OF F UNCTIONS PERFORMED, ASSETS USED AND THE RISKS UNDERTAKEN (FAR) AND IT IS ONLY AFTER THIS PRIMARY EXERCISE THAT THE PROFIT MARGINS ARE OBTAINED TO FIND OUT THE ALP . THE LD. CIT(A) COULD NOT HAVE SIMPLY SUBSTITUTED THE PROFIT MARGINS OF COMPARABLE COMPANIES FROM THE CURRENT YEAR DATA WITHOUT DOING THIS EXERCISE. HE CONTENDED THAT IT WOULD NOT BE LEGALLY VALID TO START WITH A PRESUMPTION THAT IF A COMPANY IS COMPA RABLE ON THE BASIS OF EARLIER YEARS FINANCIALS, IT WOULD IPSO FACTO BE COMPARABL E ON THE BASIS OF NEXT YEAR FINANCIALS AS WELL. THERE MAY BE SEVERAL EXTRAORDIN ARY RECEIPTS/EXPENSES, THERE COULD BE RELATED PARTY TRANSACTION, THERE COULD BE NEW SE T OF WHOLLY UNCOMPARABLE ACTIVITIES IN THE CURRENT YEAR WHICH MAY RENDER THE COMPARABLES AS WHOLLY UNCOMPARABLE. HE SUBMITTED THAT THE USE OF SEPARATE SET OF DATA WOULD MAKE IT ABSOLUTELY NECESSARY TO GO FOR A FRESH SEARCH OF CO MPARABLES AS MANY NEW COMPANIES WOULD HAVE ENTERED THE DATA BASE WHICH WO ULD RENDER THE EARLIER SEARCH AS WHOLLY ESCHEWED. IT WOULD, THEREFORE, NOT BE POSS IBLE FOR THE REVENUE TO MAKE ITA NO. 1842/DEL/2009 A.Y. 2002-03 9 ANY COMMENT ON THE CHART SO FILED UNLESS THE COMPAR ABILITY IS EXAMINED AFRESH BY MAKING A SEARCH ON THE BASIS OF CURRENT YEARS DATA . THE LD. DR POINTED OUT THAT IT IS PRECISELY FOR THIS REASON THAT REVENUE IS AGGRIE VED WITH THE APPROACH ADOPTED BY THE LD. CIT(A). IF HE DECIDED TO APPLY THE CURRENT Y EARS DATA ON HIS END HE SHOULD HAVE GONE FOR A FRESH SEARCH OF COMPARABLES FROM TH E DATA BASE OF THE CURRENT YEAR INSTEAD OF SIMPLY SUBSTITUTING THE PROFIT MARGINS O F THE COMPARABLES COMPANIES BASED ON THE MULTIPLE DATA BY THAT BASED ON THE CUR RENT YEARS DATA. THE LD. DR ACCORDINGLY SUBMITTED IN THE INTEREST OF JUSTICE TO RESTORE THE MATTER TO THE AO /TPO FOR REDETERMINING THE ALP FOR BOTH SET OF TRANSACTI ONS BY APPLYING THE CURRENT YEARS DATA. 14. LD. AR ON THE OTHER HAND TRIED TO JUST IFY THE FIRST APPELLATE ORDER ON THE ISSUE. HE SUBMITTED THAT BEFORE THE LD. CIT(A) DATA BASED APPLICATION WAS REQUESTED BY THE ASSESSEE IN ITS SUBMISSION MADE BEFORE HIM, COPIES OF WHICH HAVE BEEN MADE AVAILABLE AT PAGE NOS. 39 TO 119 OF THE PAPER BOOK FILED BY THE ASSESSEE. ON THIS SUBMISSION LD. CIT(A) HAD GIVEN OPPORTUNITY TO THE TPO TO REACT AND AFTER CONSIDERING THESE SUBMISSIONS THE LD. CIT(A) AGREED WITH THE CONTENTION OF THE ASSESSEE. LD. AR REFERRED PAGE NO. 66 OF THE PAPER BOOK TO SUPPORT HIS CONTENTION THAT DETAILED MARGIN CALCULATION FOR SOME COMPANIES WERE MADE AVAILABLE TO THE LD. CIT(A). HE SUBMITTED FURTHER THAT CLASS I & II TRANSAC TIONS ARE NOT SAME BUT THE COMMON ISSUE BETWEEN THE TWO WAS REIMBURSEMENT OF A DVERTISEMENT EXPENSES. THE LD. AR SUBMITTED THAT C1T(A) WAS FULLY JUSTIFIED T O USE CURRENT YEAR DATA IN PLACE OF MULTIPLE YEAR/ PAST TWO YEARS AVERAGE DATA USED BY ASSESSEE AND TPO, EVEN WHEN IT WAS NOT CHALLENGED BY ASSESSEE IN ITS GROUNDS OF AP PEAL. IT IS A SETTLED POSITION IN ITA NO. 1842/DEL/2009 A.Y. 2002-03 10 LAW THAT POWERS OF APPELLATE COMMISSIONER ARE NOT C ONFINED TO THE SUBJECT MATTER OF APPEAL BUT EXTEND TO SUBJECT MATTER OF ASSESSMENT ( CIT VS AHMEDABAD CRUCIBLE CO. : 206 ITR 574 AND CIT VS RANICHERRA TEA CO~ LTD. : 207 ITR 979). FURTHER, THE SUPREME COURT HAS HELD IN JUTE CORPORATION OF INDIA VS CIT: 187 ITR 688 AND CIT VS NIRBHERAM DALURAM : 224 ITR 610 THAT APPELLATE AUTH ORITY'S POWERS ARE CO-TERMINUS WITH THAT OF ASSESSING OFFICER, AND THERE IS NO REA SON AS TO WHY HE CAN'T MODIFY THE ASSESSMENT ORDER ON JUST BASIS EVEN IF NOT RAISED B EFORE THE ITO. HE FURTHER SUBMITTED THAT NO FAULT CAN BE FOUND WITH REGARD TO THE PROCESS FOLLOWED BY CLT(A) IN DECIDING TO USE CURRENT YEAR'S DATA, SINCE HE HA D PUT ASSESSEE AS WELL AS TPO ON NOTICE OF HIS INTENTION OF DOING SO BY SEEKING AN E XPLANATION FROM BOTH OF THEM. ASSESSEE STRONGLY REFUTES UNSUBSTANTIATED PROPOSITI ON THAT ASSESSEE AND TPO WERE NOT GIVEN A CHANCE TO EXPLAIN THEIR POSITION ON USE OF CURRENT YEAR DATA. THE ORDER OF THE CIT(A) IN PARAGRAPH 11.2 CLEARLY RECORDS THA T 'THE APPELLANT AS WELL AS THE TPO WERE ASKED TO EXPLAIN WHY ONLY CURRENT YEAR DAT A SHOULD NOT BE USED FOR ALP DETERMINATION KEEPING IN VIEW THE PROVISIONS OF RUL E 10B(4).' IT MAY BE NOTED THAT RULE 10B(4), (AS REPRODUCED IN PARAGRAPH 11.6 OF HI S ORDER) STATUTORILY REQUIRES THAT THE DATA TO BE USED SHALL BE THE DATA RELATING TO T HE RELEVANT FINANCIAL YEAR. THUS BOTH, THE APPELLANT AND THE TPO WERE GIVEN A REASON ABLE OPPORTUNITY OF BEING HEARD AND ACTUALLY BOTH AVAILED OF THIS OPPORTUNITY BY FI LING THEIR WRITTEN SUBMISSIONS. THE APPELLANT FURNISHED ITS WRITTEN SUBMISSIONS DATED 1 8/11/2008 WHICH WAS DULY CONSIDERED BY THE CIT(A) IN PARAGRAPH 11.3. SIMILAR LY, THE TPO OFFERED ITS WRITTEN SUBMISSIONS ON 25/2/2009 WHICH WAS DULY CONSIDERED BY THE CIT(A) IN PARAGRAPH 11.4 OF HIS ORDER. IT IS IMPORTANT TO NOTE THAT THE TPO DID NOT EXPRESS ANY OBJECTION ON USING CURRENT YEAR DATA AND MADE NO GRIEVANCE WH ATSOEVER OF ANY OTHER NATURE. ITA NO. 1842/DEL/2009 A.Y. 2002-03 11 HE WAS SATISFIED WITH THE OPPORTUNITY AFFORDED TO H IM AND THEREFORE, IT IS NOT PERMISSIBLE IN THE APPELLATE PROCEEDINGS BEFORE THE TRIBUNAL TO GO INTO THIS SETTLED FACTUAL POSITION. SIMILARLY, IF THE TPO WANTED, HE COULD HAVE MENTIONED TO THE CIT(A) TO ALSO USE CURRENT YEAR DATA FOR CLASS II TRANSACTI ONS. SINCE THE TPO DID NOT MAKE SUCH REQUEST, THERE WAS NO NEED FOR THE CIT(A) TO M ENTION IN HIS ORDER ABOUT THE BENCHMARKING OF CLASS II TRANSACTIONS USING CURRENT YEAR DATA. SINCE THE LOWER AUTHORITIES THEMSELVES HAVE NOT MADE ANY GRIEVANCE ABOUT THIS ASPECT OF THE MATTER, THE REPRESENTATIVE OF THE DEPARTMENT CANNOT IN HIS ARGUMENTS RAISE THIS ISSUE WHICH IS OTHERWISE NOT IN DISPUTE. THE LD. AR SUBMITS TH AT BENCHMARKING OF CLASS II TRANSACTION USING CURRENT YEAR DATA (ANNEXURE I) RE VEAL THAT THE ASSESSEE'S MARGIN OF 4.44% IS MUCH HIGHER THAN THAT OF COMPARABLES (AT L OSS OF 5.24%). EVEN IF PROCAL ELECTRONICS WERE TO BE EXCLUDED, COMPARABLES MARGIN WILL ONLY INCREASE TO 1.63%, WHICH WILL STILL BE LESS THAN THE MARGINS MADE BY A SSESSEE. HE ALSO CITED FOLLOWING DECISIONS COPIES OF WHICH HAVE BEEN MADE AVAILABLE IN PAPER BOOK VOLUME II FIELD ON BEHALF OF THE ASSESSEE :- 1. SONY INDIA PVT. LTD. VS. DY. CIT (114 ITD 448 )( DEL.) 2. AZTEC SOFTWARE AND TECHNOLOGY SER VICES LTD. VS. ACIT (107 ITD 141)(SB)(BANG) 3. MENTOR GRAPHIC (NOIDA) PVT. LTD. VS DY. CIT (109 ITD 101)(DEL) 4. HONEYWELL AUTOMATION INDIA LTD. V S DY. CIT (2009- TIOL-104-IT AT PUNE) 5. NESTLE INDIA LIMITED VS DY. CIT (111 TTJ 498)(DEL) 6. AMWAY INDIA ENTERPRISES VS DY. CI T (111 ITD 112)(SB)(DEL) 7. CIT VS GE CAPITAL SERVICES (300 I TR 420)(DEL) 8. ACIT VS BHAUMIK COLOUR PVT. LTD. (120 TTJ 865)(SB) ITA NO. 1842/DEL/2009 A.Y. 2002-03 12 9. CIT V S HOTEL HILLTOP (313 ITR 11 6)(RAJ) 10. DAIMLER CHRYSLER INDIA PVT. LTD. VS DY, CIT (2009- TIOL-68-IT AT -PUNE) 15. HAVING GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND THE DECISIONS RELIED UPON IN VIEW OF THE ABOVE SUBMISSIONS BY THE PARTIES, WE FIND THAT THE TPO HAD MADE ALLOCATION OF ADVERTISEMENT EXPENSES AND R EJECTION OF KIRLOSKAR AIRTECH LTD. AS A COMPARABLE AS A BASIS OF ADJUSTMENT TO CL ASS I TRANSACTION. HE HAD DESIRED THE ARMS LENGTH PRICE OF CLASS I TRANSACTIONS AT RS. 1,05,62,97,960/- AS AGAINST THEIR BOOK VALUE OF RS. 1,29,66,23,647/-. THE TPO THUS PR OPOSED AN ADJUSTMENT OF RS. 24,03,22,940/- TO THE TRANSFER PRICES OF CLASS I TRA NSACTIONS OF THE PURCHASE OF RAW MATERIAL AND PURCHASE OF THE SPARES PARTS WITH THE AES. CLASS II TRANSACTIONS WERE ACCEPTED TO BE AT ARMS LENGTH. SO FAR AS ALLOCATIO N OF ADVERTISEMENT EXPENSES FOR ADJUSTMENT IS CONCERNED, THE ASSESSEE HAD INCURRED RS. 87.86 CRORES AS EXPENDITURE ON ADVERTISEMENT, MARKETING AND SALES PROMOTION ETC . OUT OF THIS EXPENDITURE , THE ASSESSEE HAD RECEIVED RS. 19.17 CRORES ON REIMBURSE MENT FROM ITS OVERSEAS AES. IN ITS BOOKS OF ACCOUNTS THE ASSESSEE REDUCED THE AMOU NT RECEIVED AS REIMBURSEMENT FROM THE TOTAL EXPENDITURE INCURRED ON ACCOUNT OF A DVERTISEMENT, MARKETING, SALES PROMOTION AND AFTER SALES SERVICE. THUS, NET EXPEND ITURE OF RS. 67.69 CRORES WAS SHOWN IN THE ASSESSSEES PROFIT AND LOSS ACCOUNT FO R THE YEAR. THE TPO WHILE COMPUTING THE ARMS LENGTH PRICE OF THE INTERNATIONA L TRANSACTIONS DID NOT CONSIDER REIMBURSEMENT OF RS. 19.17 CRORES RECEIVED FROM ITS AE AS PART OF OPERATING INCOME WHILE TREATING SUCH MARKETING EXPENSES TO BE PART O F OPERATING EXPENSES. THE TPO ALLOCATED ADVERTISEMENT EXPENDITURE REIMBURSED BY A ES OF RS. 19.17 CRORES TO CLASS I AND CLASS II TRANSACTIONS IN PROPORTION OF THE SALE S OF THESE SEGMENTS AND RECASTED THE SEGMENTAL PROFIT AND LOSS ACCOUNT OF THE ASSESS EE AS UNDER :- ITA NO. 1842/DEL/2009 A.Y. 2002-03 13 CLASS 1 (MFG) SALES RS. 6,48,96,73,238 CLASS 1 (TRADING) SALES RS. 4,31,13,74,239 TOTAL SALES RS. 10,80,10,47,477 CLASS II SALES AS % OF TOTAL SALES : 60.08% CLASS II SALES AS % OF TOTAL SALES :39.91 % ADDITIONAL OPERATING EXPENDITURE FOR CLASS I (MFG) A CTIVITY RS. 11,51,84,173 ADDITIONAL OPERATING EXPENDITURE FOR CLASS II (TRADIN G) ACTIVITY RS. 7,65,33,825 ! CLASS-1 MANUFACTURING CLASS II TRADING TOTAL OPERATING EXPENDITURE SHOWN (A) RS. 6,15,95,66,222 RS. 4,11,99,64,102 ADDITIONAL EXPENDITURE ALLOCATED FOR ADVERTISEMENT AND AFTER SALE EXPENSES NOT SHOWN IN P &L (B) RS.11,51,84,173 RS. 7,65,33,825 TOTAL OPERATING EXPENDITURE (A+B) RS. 6,27,47,50,395 RS. 4,19,64,97,927 OPERATING INCOME- SALES (C) RS. 6,48,96,73,238 RS. 4,31,13,74,239 OPERATING PROFIT (C- (A+B) RS. 21,49,22,843 RS. 11,48,76,312 OPERATING PROFIT MARGIN ON SALES 3.42% 2.66% THE ASSESSEE HAD IN THE RELEVANT PREVIOUS YEAR INCU RRED EXPENDITURE OF RS.45,67,50,504/-ON ADVERTISEMENT AND SALES PROMOTION. THE ASSESSING OF FICER OBSERVED THAT THE BRAND NAME OF 'SAMSUNG' IS THE REGISTERED PROPERTY OF SEC, KOREA AND IT HAS ONLY PERMITTED THE APPELLANT TO SELL ITS GOODS IN INDIA AND NO RIGHTS WHATSOEVER HA VE BEEN ASSIGNED IN RESPECT OF THE BRAND 'SAMSUNG' TO THE APPELLANT. THE ASSESSING OFFICER I N THE ASSESSMENT ORDER ALLEGED THAT THE SAID EXPENSES WERE INCURRED IN PROMOTING THE BRAND SAMSUNG IN INDIA, THE BENEFIT OF WHICH WAS ULTIMATELY TO BE DERIVED BY THE FOREIGN JOINT V ENTURE PARTNER, SEC. THE ASSESSING OFFICER ITA NO. 1842/DEL/2009 A.Y. 2002-03 14 ALSO HELD THAT THERE WERE SEVERAL 'SAMSUNG' PRODUCT S WHICH WERE BEING DEALT BY PERSONS OTHER THAN ASSESSEE AND BENEFIT OF SUCH EXPENDITURE ON ADVERTISEMENT AND BRAND PROMOTION IS TO BE DERIVED BY SUCH PRODUCTS BEING DEALT BY TH E OTHER PERSONS. THE ASSESSING OFFICER ON THE BASIS OF THE AFORESAID ALLEGATION MADE AD HOC D ISALLOWANCE OF RS.4,56,75,050 BEING 10% OF THE EXPENDITURE ON ADVERTISEMENT AND SALES PROMO TION ALLEGEDLY RELATABLE TO THE PROMOTION OF 'SAMSUNG' BRAND IN INDIA. THE ASSESSIN G OFFICER WHILE MAKING THE ABOVE DISALLOWANCE DID NOT APPRECIATE THAT THE ASSESSEE W AS THE EXCLUSIVE DEALER FOR SAMSUNG CONSUMER ELECTRONIC PRODUCTS AND HOME APPLIANCES IN INDIA AND ENTIRE EXPENDITURE ON ADVERTISEMENTS AND SALES PROMOTION WAS INCURRED FOR PROMOTING THE SALES OF SUCH PRODUCTS OF THE APPELLANT IN INDIA, BENEFIT OF WHICH WAS DER IVED ENTIRELY BY THE ASSESSEE. THE ASSESSING OFFICER MADE FURTHER DISALLOWANCE OF RS.4 ,56,75,050 BEING 10% OF THE TOTAL EXPENDITURE ON ADVERTISEMENT AND SALES PROMOTION HO LDING THE SAME TO BE CAPITAL EXPENDITURE RESULTING IN AN ENDURING BENEFIT. 16. THE LD. CIT(A) FOLLOWING THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SONY INDIA (P) LTD. (SUPRA) AND HAVING REGA RD TO PURPOSE OF THE EXPENDITURE AND TO THE EXTENT EXPENSES WERE FOR THE BENEFIT OF AES HELD THAT THE REIMBURSEMENT RECEIVED FROM THE AES ARE TOBE TREATED AS PART OF O PERATING PROFITS OF THE TAXPAYER. HE ACCORDINGLY HELD THAT EXCLUSION OF RS. 19.17 CRO RES FROM THE OPERATING PROFITS OF THE TAXPAYERS BASED ON THE GIVEN FACTS AND CIRCUMST ANCES OF THE CASE IS NOT JUSTIFIED. THE LD. DR POINTED OUT THAT ISSUE OF MARKETING AND ADVERTISEMENT EXPENSES HAS BEEN RECENTLY DECIDED BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF LG ELECTRONICS INDIA PVT. LTD. VS. ACIT, ITA NO. 5190/ D/2011 (AY. 2007-08) & OTHERS VIDE ORDER DATED JANUARY 2013. THE LD. AR ON THE OT HER HAND SUBMITTED THAT THE ISSUE RAISED BEFORE THE SPECIAL BENCH IN THE CASE O F LG ELECTRONICS & ORS. IS DIFFERENT, ITA NO. 1842/DEL/2009 A.Y. 2002-03 15 HENCE IT IS NOT HELPFUL IN THE PRESENT CASE. HE POI NTED OUT THAT THE ISSUE OF BRAND PROMOTION IN ADVERTISEMENT AND SALES PROMOTION IS FULLY COVERED IN THE ASSESSEES OWN CASE FOR THE ASSTT. YEAR 1998-99 BY THE TRIBUNA L WHICH HAS BEEN REAFFIRMED BY THE TRIBUNAL IN SUBSEQUENT ORDER FOR ASSTT. YEAR 20 00-01 AND 2001-02. HE SUBMITTED THAT THE HONBLE DELHI HIGH COURT HAS NOT ADMITTED APPEAL OF THE REVENUE ON THIS ISSUE FOR ASSTT. YEARS 2000-01 AND 2001-02 VIDE ITS ORDER DATED 11.1.2010. THE LD. AR SUBMITTED FURTHER THAT THE ISSUE IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN THE CASE OF NESTLE INDIA LTD. 111 TTJ 498 (DEL) AFFIRMED BY THE HONBLE HIGH COURT OF DELHI AND HONBLE SUPR EME COURT. HE SUBMITTED THAT ADVERTISEMENT EXPENSES WERE INCURRED ONLY IN INDIA A ND ONLY FOR THE PRODUCTS SOLD IN INDIA. ON THE ISSUE THAT ADVERTISEMENT AND SALES PRO MOTION EXPENSES ARE CAPITAL IN NATURE AS HELD BY THE AO OR NOT, THE LD. AR POINTED OUT THAT THE REVENUE HAS ACCEPTED THE ORDER OF THE TRIBUNAL (DELHI) IN FAVOU R OF THE ASSESSEE FOR THE ASSTT. YEARS 2000-01 AND 2001-02 AS THEY DID NOT PREFER AP PEAL BEFORE THE HONBLE HIGH COURT AGAINST THIS ORDER. CITED DECISIONS OF THE TR IBUNAL IN THE CASE OF THE ASSESSEE ARE REFERRED AS UNDER :- SAMSUNG INDIA ELECTRONICS LTD. VS . JCIT & ORS. ITA NO. 3164/D/2000 & ORS. (A.YS 1996-97 TO 1996-99 ) ORDER DATED 28.11.2008 SAMSUNG INDIA ELECTRONICS LTD. VS. DCIT ITA NOS. 4085/DEL/2003 & ORS. (ASSTT. YEARS 1999-20 00) ORDER DATED 19.12.2008 SAMSUNG INDIA ELECTRONICS LTD. VS. ACIT ITA NO. 532/D/2004 (ASSTT. YEAR 2001-02) ORDER DATE D 17.4.2009. ITA NO. 1842/DEL/2009 A.Y. 2002-03 16 17. WE FIND THAT IN ITS RECENT DECISION DATED JANUARY, 2013 THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF M/S. LG ELECTRONICS INDI A PVT. LTD. AND OTHERS. VS. ACIT (SUPRA) VIDE PARA NO. 21.6 OF THE ORDER HAVE HELD T HAT WHEN THERE ARE DIFFERENT UNRELATED INTERNATIONAL TRANSACTIONS, THE APPLICATI ON OF TNMM ON ENTITY LEVEL FOR EXAMINING ONE OF SUCH TRANSACTIONS, IS ITSELF AS IN CORRECT APPROACH. NOTWITHSTANDING THAT THE SPECIAL BENCH DEEMED IT FIT TO DEAL WITH T HE ARGUMENTS OF THE LD. AR THAT IF RATE OF NET PROFIT OF THE ASSESSEE IS BETTER THAN O THER COMPARABLES, THEN NO ADJUSTMENT CAN BE DONE UNDER CHAPTER X IN PARA NO. 21.8 OF THE DECISION, THE SPECIAL BENCH HAS HELD THAT THERE IS NO BAR ON THE POWER OF THE TPO IN PROCESSING THE INTERNATIONAL TRANSACTIONS UNDER THE TP PROVISI ON WHEN THE OVERALL NET PROFIT EARNED BY THE ASSESSEE IS GREATER THAN OTHERS. IT HA S BEEN HELD THAT EARNING OVERALL HIGHER PROFIT RATE IN COMPARISON TO OTHER COMPARABL E CASES CANNOT BE CONSIDERED AS A LICENSE TO THE ASSESSEE TO RECORD OTHER EXPENSES IN INTERNATIONAL TRANSACTIONS WITHOUT CONSIDERING THE BENEFIT, SERVICE OR FACILIT IES OUT OF SUCH EXPENSES AT ARMS LENGTH. ALL THE TRANSACTIONS ARE TOBE SEPARATELY VI EWED. THE ISSUE BEFORE THE SPECIAL BENCH WAS AS TO WHETHER ON THE FACTS AND IN CIRCUMS TANCES OF THE CASE, THE AO WAS JUSTIFIED IN MAKING TRANSFER PRICING ADJUSTMENT IN RELATION TO ADVERTISEMENT, MARKETING OF SALES PROMOTION EXPENSES INCURRED BY T HE ASSESSEE? AND SECONDLY AS TO WHETHER THE AO WAS JUSTIFIED IN HOLDING THAT THE AS SESSEE SHOULD HAVE EARNED A MARK UP FROM THE ASSOCIATED ENTERPRISE IN RESPECT O F AMP EXPENSES ALLEGED TO HAVE BEEN INCURRED FOR AND ON BEHALF OF AE? IN PARA NO. 9 .10 THE SPECIAL BENCH HAS HELD THAT THERE CAN BE NO IMPEDIMENT ON THE POWER OF THE ASSESSEE TO SPEND AS MUCH AS HE LIKES ON ADVERTISEMENT. THE FACT THAT THE ASSESS EE HAS SPENT PROPORTIONATELY MORE ON ADVERTISEMENT CAN , AT BEST BE A CAUSE OF D OUBT FOR THE AO TO TRIGGER ITA NO. 1842/DEL/2009 A.Y. 2002-03 17 EXAMINATION AND SATISFY HIMSELF THAT NO BENEFIT ETC . IN THE SHAPE OF BRAND BUILDING HAS BEEN PROVIDED TO THE FOREIGN AE. THERE CAN BE N O SCOPE FOR INFERRING ANY BRAND BUILDING WITHOUT THERE BEING ANY ADVERTISEMENT FOR THE BRAND OR LOGO OF THE FOREIGN AE EITHER SEPARATELY OR WITH THE PRODUCTS AND NAME OF THE ASSESSEE. THE AO/TPO CAN SATISFY HIMSELF BY VERIFYING IF THE ADVERTISEME NT EXPENSES ARE CONFINED TO ADVERTISING THE PRODUCTS TO BE SOLD IN INDIA ALONGWI TH THE ASSESSEES OWN NAME. IF IT IS SO, THE MATTER ENDS. THE AO WILL HAVE TO ALLOW D EDUCTION FOR THE ENTIRE AMP EXPENSES WHETHER OR NOT THESE ARE PROPORTIONATELY H IGHER. BUT IF IT IS FOUND THAT APART FROM ADVERTISING THE PRODUCTS AND THE ASSESSE ES NAME, IT HAS ALSO SIMULTANEOUSLY OR INDEPENDENTLY ADVERTISED THE BRAN D OR LOGO OF THE FOREIGN AE, THEN THE INITIAL DOUBT GETS CONVERTED INTO THE DIRECT IN FERENCE ABOUT SOME TACIT UNDERSTANDING BETWEEN THE ASSESSEE AND THE FOREIGN AE ON THIS SCORE. AS IN THE CASE OF AN EXPRESS AGREEMENT , THE INCURRING OF AMP EXPE NSES FOR BRAND BUILDING DRAWS STRENGTH FROM SUCH EXPRESS AGREEMENT, IN THE LIKE M ANNER, THE INCURRING OF PROPORTIONATELY MORE AMP EXPENSES COUPLED WITH THE ADVERTISEMENT OF BRAND OR LOGO OF THE FOREIGN AE GIVES STRENGTH TO THE INFERENCE O F SOME INFORMAL OR IMPLIED AGREEMENT IN THIS REGARD, HELD THE SPECIAL BENCH. I N PARA NO. 9.10 OF ITS DECISION THE SPECIAL BENCH DID NOT AGREE WITH THE CONTENTION OF THE LD. DR THAT THE MERE FACT OF THE ASSESSEE HAVING SPENT PROPORTIONATELY HIGHER AM OUNT ON ADVERTISEMENT IN COMPARISON THAT SIMILARLY PLACED INDEPENDENT ENTITI ES BE CONSIDERED AS CONCLUSIVE TO INFER THAT SOME PART OF THE ADVERTISEMENT EXPENSES WERE INCURRED TOWARDS BRAND FORMATION FOR THE FOREIGN AE. IN PARA NO. 9.12 THE SPECIAL BENCH HAS NOTED FURTHER THAT WHAT IS RELEVANT TO CONSIDER IS AS TO WHETHER AN INDEPENDENT ENTERPRISE BEHAVING IN A COMMERCIALLY RATIONAL MANNER WOULD IN CUR THE EXPENSES TO THE EXTENT ITA NO. 1842/DEL/2009 A.Y. 2002-03 18 THE ASSESSEE HAS INCURRED. IF THE ANSWER TO THIS QUE STION IS AFFIRMATIVE, THEN THE TRANSACTION CANNOT BE RECHARACTERIZED. IF, HOWEVER, THE ANSWER IS IN NEGATIVE, THEN THE TRANSACTION NEEDS TO BE PROVOKED FURTHER FOR DE TERMINING AS TO WHETHER ITS RECHARACTERISATION IS REQUIRED. SUCH RECHARACTERISA TION CAN BE DONE WITH THE HELP OF THE RATIO DECIDENDI OF THE SAID JUDGMENT ITSELF, B EING MAKING A COMPARISON WITH WHAT INDEPENDENT ENTERPRISES BEHAVING IN A COMMERC IALLY RATIONAL MANNER WOULD DO TIED WITH THE FACT OF THE ASSESSEE ALSO SIMULTAN EOUSLY ADVERTISING THE BRAND OF ITS FOREIGN AE. THE SPECIAL BENCH REVERTING TO THE CONT EXT OF AMP EXPENSES HAS OBSERVED FURTHER THAT ONE NEEDS TO FIND OUT AS TO H OW MUCH AMP EXPENSES WOULD AN INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER, INCUR. ONCE BY MAKING SUCH A COMPARISON, THE RESULT FOLLOWS THAT T HE INDIAN AE, PROMINENTLY DISPLAYING BRAND OF ITS FOREIGN AE IN ITS ADVERTISE MENT HAS INCURRED EXPENSES PROPORTIONATELY MORE THAN THAT INCURRED BY INDEPEND ENT ENTERPRISES BEHAVING IN A COMMERCIAL RATIONAL MANNER THEN IT BECOMES EMINENT TO RECHARACTERSATION THE TRANSACTION OF TOTAL AMP EXPENSES WITH A VIEW TO SE PARATE THE TRANSACTION OF BRAND BUILDING FOR THE FOREIGN AE. THE SPECIAL BENCH HAS REFERRED UNITED NATIONS TRANSFER PRICING MANUAL WHICH PROVIDES FOR THE ALLOCATION OF SUCH COST BETWEEN THE MNE AND ITS SUBSIDIARIES. THE SPECIAL BENCH ACCORDINGLY HEL D THAT IN THAT CASE IN THE FACTS AND CIRCUMSTANCES OF THAT CASE BEFORE IT THAT THERE WAS A TRANSACTION BETWEEN THE ASSESSEE AND THE FOREIGN AE UNDER WHICH THE ASSESSE E INCURRED AMP EXPENSES TOWARDS PROMOTION OF BRAND WHICH WAS LEGALLY OWNED BY THE FOREIGN ENTITY. 18. THE MATTER WAS THUS SET ASIDE TO THE FILE OF TPO FOR FRESH CONSIDERATION OF THE ISSUE AS PER GUIDELINES SET BY THE SPECIAL BENC H. ITA NO. 1842/DEL/2009 A.Y. 2002-03 19 19. WE THUS FIND THAT THE SPECIAL BENCH HAS CO ME TO THE CONCLUSION THAT THE ADVERTISEMENT DONE BY THE ASSESSEE ALSO CARRYING TH E BRAND/LOGO OF ITS FOREIGN AE COUPLED WITH THE FACT THAT IT SPENT PROPORTIONALLY HIGHER AMOUNT ON AMP EXPENSES, GIVES CLEAR INFERENCE OF A TRANSACTION BETWEEN TH E ASSESSEE AND ITS AE OF BUILDING AND PROMOTING THE FOREIGN BRAND. IN VIEW OF THIS DEC ISION OF SPECIAL BENCH WHEN WE EXAMINE FACTS OF THE PRESENT CASE WE NOTE THAT THER E IS NO SUCH ALLEGATION BY THE TPO IN THIS CASE THAT IT HAD SPENT PROPORTIONATELY HIGHER AMOUNT ON AMP EXPENSES TO DRAW AN INFERENCE OF A TRANSACTION BETWEEN THE A SSESSEE AND ITS AE OF BUILDING AND PROMOTING THE FOREIGN BRAND. THE ASSESSEE IN TH E RELEVANT PREVIOUS YEAR HAD INCURRED EXPENDITURE OF RS. 45,67,50,504/- ON ADVER TISEMENT AND SALES PROMOTION. THE AO OBSERVED THAT THE BRAND NAME OF SAMSUNG IS THE REGISTERED PROPERTY OF SEC, KOREA AND IT HAS ONLY PERMITTED THE ASSESSEE T O SELL ITS GOODS IN INDIA AND NO RIGHTS WHATSOEVER HAVE BEEN ASSIGNED TO OTHER PERSO NS. THE ASSESSING OFFICER ON THE BASIS OF THE AFORESAID ALLEGATION MADE ADHOC DI SALLOWANCE OF RS. 4,56,75,050 BEING 10% OF THE EXPENDITURE ON ADVERTISEMENT AND S ALES PROMOTION ALLEGEDLY RELATABLE TO THE PROMOTION OF SAMSUNG BRAND IN IND IA. THE AO MADE FURTHER DISALLOWANCE OF RS. 4,56,75,050/- BEING 10% OF THE TOTAL EXPENDITURE ON ADVERTISEMENT AND SALES PROMOTION HOLDING THE SAME TO BE CAPITAL EXPENDITURE RESULTING IN AN ENDURING BENEFIT. WE THUS FIND THAT WITHOUT ALLEGING THAT THE ASSESSEE HAD SPENT PROPORTIONATELY HIGHER AMOUNT ON AMP EXPE NSES, THE AO PRESUMED THAT IT HAD SPENT 10% OF EXPENDITURE ON ADVERTISEMENT AND S ALE PROMOTION ALLEGEDLY RELATABLE TO THE PROMOTION OF SAMSUNG BRAND IN IN DIA. AS DISCUSSED ABOVE THE DECISION OF SPECIAL BENCH IN THE CASE OF LG ELECTRO NICS INDIA PVT. LTD. IS NOT RELEVANT IN THE FACT AND CIRCUMSTANCES OF THE PRESENT CASE. ITA NO. 1842/DEL/2009 A.Y. 2002-03 20 20. IT IS PERTINENT TO NOTE OVER HERE THAT THE TPO /AO HAVE EQUATED THE REIMBURSEMENT OF EXPENSES WITH EQUITY OR WINDFALL G AIN OR SUBSIDY OR SOME ADHOC PAYMENT WHEREAS THE LD. CIT(A) HAS ACCEPTED THE CLA IM OF THE ASSESSEE ON THE BASIS THAT THE ASSESSEE HAD ENTERED INTO PRIOR AG REEMENTS FOR REIMBURSEMENT OF EXPENSES WITH ITS AE AND THE GENUINENESS OR BONAFID E OF THE AGREEMENT WAS NOT DOUBTED OR DISPUTED AT ANY STAGE OF PROCEEDINGS BY THE TPO /AO. THE TPO HAS ALSO ACCEPTED IN THE TP ORDER THAT THE REIMBURSEMENT REC EIPT WAS SPENT BY THE ASSESSEE TO WHOLLY AND EXCLUSIVELY FOR ITS BUSINESS OPERATIO NS. IN THIS REGARD THE LD. CIT(A) HAS TAKEN STRENGTH FROM THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SONY INDIA (P) LTD. (SUPRA) HOLDING THAT THE REIMBUR SEMENT SHOULD BE INCLUDED AS PART OF OPERATING INCOME OF THE TAX PAYER. THE LD. CIT(A) HAS ACCORDINGLY HELD THAT EXCLUSION OF RS. 19.17 CRORES FROM THE OPERATING PR OFIT OF THE TAX PAYER BASED ON GIVEN FACTS AND CIRCUMSTANCES OF THE CASE IS NOT JU STIFIED. THE TPO HAS HELD AS TO WHETHER AN EXPENDITURE IS OPERATING OR NON OPERATIN G DOES NOT DEPEND ON THE SOURCE OF ITS FUNDING, THE SOURCE OF AN EXPENDITURE MAY BE TRACED BACK TO EQUITY, DEBT OR WINDFALL GAIN BUT THE SOURCE DOES NOT CHARA CTERISE THE NATURE OF SUCH EXPENDITURE. WE THUS FIND THAT THE TPO HAS DISCUSSE D THE VERY PRINCIPLE FOR VERIFICATION OF THE NATURE OF THE CLAIMED AMP EXPEN SES TO WHICH THERE IS NO DISPUTE. BESIDES THE ISSUE RAISED IN GROUND NOS. 4 AND 5 IS FULLY COVERED BY THE DECISION OF THE TRIBUNAL IN FAVOUR OF THE ASSESEE IN ITS OWN CA SE FOR THE ASSESSMENT YEARS 1998- 99, 2000-01 AND 2001-02 (SUPRA). IT HAS BEEN STATED BY THE LD. AR THAT AGAINST THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEARS 2000 -01 AND 2001-02 ON THE ISSUE OF BRAND PROMOTION, THE REVENUE HAD PREFERRED APPEAL B EFORE THE HONBLE HIGH COURT, WHICH HAS BEEN REJECTED BY ORDER DATED 11.1.2010. H E HAS INFORMED FURTHER THAT THE ITA NO. 1842/DEL/2009 A.Y. 2002-03 21 REVENUE HAS NOT PREFERRED APPEAL BEFORE THE HONBLE HIGH COURT AGAINST THE ORDER OF THE TRIBUNAL FOR ASSTT. YEARS 2000-01 AND 2001-02 O N THE ISSUE OF EXPENDITURE BEING CAPITAL IN NATURE. THE RELEVANT PARA NOS. 4.3 AND 1 2 OF THE ORDER OF THE TRIBUNAL FOR ASSTT. YEAR 2000-01 AND 2001-02 ARE BEING REPRODUCE D HEREUNDER :- 4.3 WE HAVE CONSIDERED THE FACTS OF THE CASE AND RI VAL SUBMISSIONS. WE FIND THAT THE ISSUE STANDS COVERED BY THE ORDER OF THE TR IBUNAL IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 1998-99. PARAGRAPHS 26, 27 AND 28 DEAL WITH THE ISSUE. THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESS EE BY FOLLOWING THE DECISION IN THE CASE OF SASOON J. DAVID & COMPANY ( P) LTD. (SUPRA). FOR THE SAKE OF READY REFERENCE, THESE PARAGRAPHS ARE REPRODUC ED BELOW:- '26. FROM THE RECORDS, WE FOUND THAT ASSESSEE IN ADD ITION TO ITS ACTIVITIES IN CONSUMER DURABLES, HAD ITS OWN MANUFACTURING FAC ILITIES. THE EXPENDITURE WAS INCURRED TO PROMOTE THE BRAND AND TO I NCREASE ITS PRESENCE IN THE MARKET SO AS TO SALE ITS ENTIRE PRODU CTION. THE TOTAL EXPENDITURE INCURRED ON ADVERTISEMENT AND SALES PROMO TION WAS RS.29.4 CRORES. IN TERMS OF ITS AGREEMENT WITH THE P ARENT COMPANY, THE EXPENDITURE ON ADVERTISEMENT AMOUNTING TO RS.13 CRORES WAS REIMBURSED BY THE PARENT COMPANY, SINCE PART OF SUCH EXPENDITURE RESULTED IN BENEFIT TO THEM. THERE IS NO DISPUTE TO T HE FACT THE EXPENDITURE ON ADVERTISEMENT IS BEING LAID OUT FOR CO MPETING IN THE TRADE. FOR PROMOTING ITS PRODUCTS HAVING DIRECT NEXUS WITH THE SALES OF THE PRODUCTS IN INDIA. WE ALSO FOUND THAT DUE TO IN CURRING OF SUCH EXPENSES, THE SALES OF THE ASSESSEE COMPANY HAD INC REASED SUBSTANTIALLY AS DEMONSTRATED BELOW. JUNE 99 DEC.99 MAR.00 MAR.01 MAR.02 SALES QTY. 41,254 60,644 54,542 56,779 76,386 SALES VALUE 53,70,40,746 74,18,78,271 66,16,91,561 77,29,82,225 88,31,12,779 27. THE GENUINENESS OF THE EXPENDITURE HAS NOT B EEN DOUBTED, THE REASONABLENESS OF THE EXPENDITURE IS TO BE SEEN FROM T HE POINT A ITA NO. 1842/DEL/2009 A.Y. 2002-03 22 BUSINESSMAN AS HELD BY HON 'BLE SUPREME COURT IN CA SE OF WALCHAND & CO. (65ITR 381) AND DELHI HIGH COURT IN CASE OF DA LMIA CEMENTS PVT. LTD. (254 ITR 377). HOWEVER, :ALLOWANCE U/S 40A (A) CAN BE MADE ON ACCOUNT OF EXPENDITURE BEING UNREASONABLE OR EXCESSIV E, IN THE INSTANT CASE IT IS BODY'S CASE THAT PERSONS TO WHOM PAYMENT S HAS BEEN MADE ON ACCOUNT OF ADVERTISEMENT EXPENSES, WERE COVERED BY THE PROVISIONS OF SECTION 40A(2). PRESUMPTION OF THE A.O . THAT BY INCURRING THE EXPENDITURE, INCIDENTAL ADVANTAGE TO THE PARENT COMPANY WILL BE OBTAINED WHICH OWNED SAMSUNG BRAND, THAT ::T ALONE W OULD NOT SEEK TO DISTRACT FROM THE DEDUCTIBILITY OF EXPENDITURE IN THE HANDS OF THE ASSESSEE COMPANY. SINCE THE EXPENDITURE WAS INCURRED BY THE ASSESSEE COMPANY WHOLLY AND EXCLUSIVELY FOR THE PURP OSE OF ITS BUSINESS, IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN CASE OF SASOION J DAUD CO. ( 118 ITR 261), THE SAME IS TO B E ALLOWED. 28. IN VIEW OF ABOVE DISCUSSION, WE DO NOT FIND ANY MERIT IN THE ACTION OF THE A.O. FOR DISALLOWING THE EXPENDITURE OF ADVER TISEMENT INCURRED BY THE ASSESSEE COMPANY AND CLAIMED , REVENUE EXPEN DITURE. ' 12. GROUND NO. 4 IS AGAINST ALLOWANCE OF 10% OF AD VERTISEMENT EXPENSES, WHICH WAS DISALLOWED BY THE AO TO THE TOTAL INCOME BY HOLDING THAT THE EXPENDITURE WAS EITHER FOR NON-BUSINESS PURPOSES OR A N EXPENDITURE OF CAPITAL NATURE. IT WAS THE ADMITTED POSITION OF BOTH THE PA RTIES THAT THIS ISSUE ALSO STANDS COVERED IN FAVOUR OF THE ASSESSEE N ITA NO. 53 2(DEL)/2004 (SUPRA). RELYING ON OUR ORDER IN THAT APPEAL, HIS GROUND IS DISM ISSED. WE THUS DO NOT FIND INFIRMITY IN THE FIRST APPELLATE ORDER ON THE ISSUE AS IT IS ALSO COVERED BY THE EARLIER DECISION OF THE TRIBUNA L FOR ASSTT. YEARS 1998-99, 2000-01 AND 2001-02 AND THERE IS NO ALLEGATION BY THE TPO / AO THAT ASSESSEE HAS SPENT PROPORTIONATELY HIGH EXPENDITURE ON PROMOTING THE F OREIGN BRAND TO FOLLOW THE SPECIAL BENCH DECISION IN THE CASE OF L.G. ELECTRON ICS. THE ACTION OF LD. CIT(A) IN THIS REGARD IS THUS UPHELD. IN THE RESULT GROUND NO S. 4 AND 5 ARE REJECTED. 21. NO SUCH DISPUTE LIKE PROMOTION OF BRAND OWN ED BY FOREIGN AE INVOLVED IN THE CLAIMED REIMBURSEMENT OF WARRANTY AND SERVICE EXPEN SES IS THERE. A THREE YEAR AGREEMENT WAS ENTERED INTO BY THE ASSESSEE BEFORE I NCURRING SUCH EXPENSES AND ITA NO. 1842/DEL/2009 A.Y. 2002-03 23 THUS THE ASSESSEE WAS AWARE OF THE REIMBURSEMENT BE FORE IT INCURRED SUCH EXPENSES. PROVISION OF RS. 68,68,216/- WAS MADE ON ACCOUNT OF WARRANTY / AFTER SALE SERVICE. LIKE IN THE CASE OF REIMBURSEMENT OF AMP E XPENSES, THE TPO NEITHER DISPUTED THE BONAFIDE OF THE AGREEMENT NOR THAT IT WAS MEANT FOR BUSINESS PURPOSES. HE HAD MADE ADDITION OF RS. 68,68,216/- I N THIS REGARD ON EQUATING IT WITH WIND FALL GAIN OR SOME ADHOC PAYMENT. THE LD. CIT(A ) HAS DELETED THE ADDITION ON THE BASIS THAT THE REIMBURSEMENT RECEIVED FROM THE OVERSEAS AES WAS UNDER PRIOR AGREEMENT AND WAS DIRECTLY CONNECTED WITH THE CORRE SPONDING EXPENDITURE INCURRED AND THE ASSESSEE WOULD NOT HAVE INCURRED THE EXPEND ITURE BUT FOR THE INITIAL UNDERSTANDING/MANDATE FROM OVERSEAS AES TO THIS EFF ECT. THE ASSESSEE HAD ALSO MADE NO CLAIM FOR DEDUCTION AND NO DEBIT TO PROFIT & LOSS ACCOUNT WAS MADE IN THIS YEAR. UNDER THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION TREATING THE SAM E AS PART OF OPERATING PROFIT OF THE TAXPAYER. THE SAME IS UPHELD. THE GROUND NO. 3 IS T HUS REJECTED. GROUND NO. 2 22. DURING THE YEAR THE ASSESSSEE HAD INCU RRED AN EXPENSE OF RS. 11.92 CRORES ON ACCOUNT OF ROYALTY PAYABLE TO M/S. SAMSUN G ELECTRONICS COMPANY, KOREA (SEC) IN TERMS OF AGREEMENT SIGNED WITH THEM. THE A O ASKED THE ASSESSEE TO CLARIFY WHY WHOLE OF THE ROYALTY PAYMENT SHOULD NOT BE DISA LLOWED AS ROYALTY IS ORDINARILY INCURRED NOT FOR THE PURPOSE OF BUSINESS BUT FOR P ROCURING A RIGHT AND INHERENT ABILITY TO DO BUSINESS, AND ABILITY TO DO BUSINESS BY PROCURING CERTAIN RIGHTS / ASSETS / KNOWHOW INFORMATION ETC. IS A CAPITAL ASSET AND N OT A REVENUE EXPENDITURE. THE AO WAS NOT SATISFIED WITH THE REPLY FURNISHED BY THE A SSESSEE TO HIM. THE AO WAS OF ITA NO. 1842/DEL/2009 A.Y. 2002-03 24 THE VIEW THAT ROYALTY AGREEMENT IS MEANT TO BE FOR INDEFINITE PERIOD OF TIME . TECHNICAL KNOW-HOW WHICH ASSISTS IN MANUFACTURE OF GOODS IS A CAPITAL ASSET U/S 32(I)(II) AND THE ASSESSEE CAN BE REGARDED AS THE B ENEFICIARY OWNER OF THE TECHNOLOGY HELP. THE AO WHILE RELYING ON THE DECISI ONS IN THE CASES OF PINGLE INDUSTRIES LTD. VS. CIT, 40 ITR 67 AND ABDUL KHAN VS . CIT 4 ITR 689 TREATED THE CLAIMED EXPENSES ON ROYALTY AS CAPITAL EXPENDITURE. THE LD. CIT(A) HAS HOWEVER ACCEPTED THE CLAIMED PAYMENT AS REVENUE EXPENDITURE , WHICH HAS BEEN QUESTIONED BY THE REVENUE. 23. IN SUPPORT OF THE GROUND THE LD. DR HAS PLA CED RELIANCE ON THE ASSESSMENT ORDER. THE LD. AR ON THE OTHER HAND TRIED TO JUSTIF Y THE FIRST APPELLATE ORDER IN THIS REGARD. HE ALSO POINTED OUT THAT THE ISSUE RAISED I S FULLY COVERED IN FAVOUR OF THE ASSESEE BY FOLLOWING DECISIONS :- CIT VS. CIVA INDIA LTD, 61 ITR 692 (SC) ALENTIC CHEMICALS WORKS VS. CIT 177 ITR 377 (SC) CIT VS. J.K. SYSTEM 309 ITR 37 (DELI.) SRIRAM 177 TAXMAN 87 (DELHI) 24. THE LD AR ALSO REFERRED PAGE NO. 18 TO 3 8 OF THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE WHERE THE COPY OF ROYALTY AGREEMENT DATED 12.9.1995 HAS BEEN MADE AVAILABLE. 25. HAVING GONE THROUGH THE ORDERS OF THE A UTHORITIES BELOW, MATERIAL AVAILABLE ON RECORD AND THE DECISIONS RELIED UPON, WE FIND TH AT LD. CIT(A) HAS ACCEPTED THE ITA NO. 1842/DEL/2009 A.Y. 2002-03 25 CLAIMED ROYALTY PAYMENT AS REVENUE IN NATURE ON THE BASIS THAT RUNNING ROYALTY PAYMENT LINKED TO SALE PRICE FOR TECHNICAL ASSISTAN CE PROVIDED IN THE COURSE OF PRODUCTION IS A REVENUE EXPENDITURE INCURRED FOR TH E PURPOSE OF BUSINESS AND THAT IN THE ASSESSMENT YEARS 1999-200, 2000-01 AND 2001-02 THE FIRST APPELLATE AUTHORITY HAS ALLOWED THIS DEDUCTION. IT APPEARED FROM THE OR DERS OF THE AUTHORITIES BELOW THAT RIGHT FROM COMMENCEMENT OF COMMERCIAL PRODUCTI ON IN THE ASSESSMENT YEAR 1998-99 THE ASSESSEE IS PAYING RUNNING ROYALTY @ OF 5% OF EX FACTORY PRICE OF PRODUCTION UNDER TECHNOLOGY LICENSE AGREEMENT WITH SEC. IN THE ASSESSMENT YEAR 1998-99 THIS RUNNING ROYALTY WAS ALLOWED BY THE AO AS REVENUE EXPENDITURE BUT HE HAS BEEN DISALLOWING THE SAME FROM THE ASSESSMENT Y EAR 1999-2000. IN THE ABOVE STATED THREE YEARS THE LD. CIT(A) HAS ALLOWED THE P AYMENT WITH THIS OBSERVATION THAT ROYALTY PAYMENT IN THIS CASE IS DIRECTLY LINKED TO SALES ON REVENUE ACCOUNT AND IS FOR PROVIDING TECHNICAL ASSISTANCE IN THE COURSE OF PRO DUCTION OF TV AFTER SETTING UP OF MANUFACTURING PLANT IN INIDA. UNDISPUTEDLY THE TECH NOLOGY WAS LICENCED TO THE ASSESSEE BY SEC AND THUS THE ASSESSEE IS NOT OWNER OF IT. FROM THE TERMS AND CONDITIONS OF THE AGREEMENT IT APPEARS THAT THE AGR EEMENT CAN BE TERMINATED BY GIVING 6 DAYS NOTICE ON WHICH THE ASSESSEE IS REQUI RED TO STOP USING THE TECHNICAL KNOW HOW AND WAS TO RETURN THE TECHNICAL INFORMATIO N TO SEC. AS PER THE AGREEMENT THE ASSESSEE WAS REQUIRED TO MAINTAIN SECRECY OF TH E TECHNICAL INFORMATION ETC. AND WAS NOT PERMITTED TO SUB LICENSE, THE RIGHT UNDER T HE AGREEMENT. THE AGREEMENT DID NOT VEST IN THE ASSESSEE PROPRIETARY RIGHTS I N THE TECHNOLOGY OF SEC. EVEN DURING THE CURRENCY OF AGREEMENT SEC WOULD CONTINUE TO REMAIN THE OWNERSHIP OF THE TECHNOLOGY AND THE ASSESSEE WOULD AT NO STAGE A CQUIRE PROPRIETY RIGHTS THEREIN. THE RATIO THAT RUNNING ROYALTY PAYMENT LINKED TO SA LE PRICE FOR TECHNICAL ASSISTANCE ITA NO. 1842/DEL/2009 A.Y. 2002-03 26 PROVIDED IN THE COURSE OF PRODUCTION IS REVENUE IN NATURE AND NOW IS AN ESTABLISHED PREPOSITION OF LAW BY THE ABOVE CITED DECISIONS OF HONBLE SUPREME COURT AND HONBLE HIGH COURTS. TAKING STRENGTH FROM THESE DEC ISIONS THE LD CIT(A), IN OUR VIEW, HAS RIGHTLY HELD THAT THE CLAIMED ROYALTY PAY MENT WAS DEDUCTIBLE AS REVENUE EXPENDITURE. THE SAME IS UPHELD. GROUND NO. 2 IS ACCORDINGLY REJECTED. 26. TILL NOW WE HAVE ALREADY DISCUSSED THE BASIS OF ADJUSTMENT MADE BY THE TPO I.E. CREDIT FOR REIMBURSEMENT OF ADVERTISING, MARKE TING SALES PROMOTION AND AFTER SALES SERVICE EXPENSES ETC. AND NOW WE HAVE TO DISC USS THE ISSUE OF USE OF CURRENT YEAR VS. MULTIPLE YEAR DATA FOR AN ECONOMIC ANALYSI S. THE CONTENTION OF THE LD. DR REMAINED THAT THE LD. CIT(A) HAS ADJUDICATED THE IS SUE OF CURRENT YEAR VS MULTIPLE YEAR DATA WHICH WAS NOT RAISED BEFORE HIM. HE WAS T HUS NOT JUSTIFIED IN ALTERING THE VERY BASIS OF FUNCTIONAL AND ECONOMIC COMPARABILITY CARRIED OUT BY THE TPO. IN THE PROCESS HE HAS DESTROYED THE UNIFORMITY AND CONSIST ENCY OF APPROACH ADOPTED BY THE TPO WHILE APPLYING CURRENT YEAR DATA TO ONE SET OF TRANSACTION AND LEAVING THE OTHER SET OF TRANSACTION WITH MULTIPLE YEAR DATA. H IS FURTHER CONTENTION REMAINED THAT IN THE SAME YEAR OF ASSESSMENT, TWO DIFFERENT KINDS OF DATA CANNOT BE USED MULTIPLE YEAR FOR ONE TRANSACTION AND THE CURRENT Y EAR FOR THE OTHER TRANSACTION UNLESS ONE OR OTHER SET FALLS IN THE EXCEPTION PROV IDED IN THE RULES. THE LD. AR ON THE OTHER HAND TRIED TO JUSTIFY THE FIRST APPELLATE ORDER IN THIS REGARD. HE SUBMITTED THAT THE ISSUE IS FULLY COVERED BY THE DECISIONS CI TED BELOW WHICH HAS BEEN FOLLOWED BY THE LD. CIT(A) :- AZTEC SOFWARE AND TECHNOLOGY SERVICES LTD. VS. ACIT 107 ITD 141 (SB) (BANGALORE) ITA NO. 1842/DEL/2009 A.Y. 2002-03 27 MENTOR GRAPHICS (NOIDA) PVT. LTD. VS. DC IT 109 ITD 101 (DELHI) HONEYWELL AUTOMATION INDIA LTD. VS. DCIT 2009 TIOL_ 104 _ ITAT-PUNE 27. THE LD. AR SUBMITTED FURTHER THAT IT IS A SETTLED POSITION OF LAW THAT POWERS OF APPELLATE COMMISSIONER ARE NOT CONFINED TO THE S UBJECT MATTER OF APPEAL BUT EXTEND TO SUBJECT MATTER OF ASSESSMENT. HIS FURTHER SUBMISSION ALSO REMAINED THAT LD. CIT(A) IN DECIDING TO USE CURRENT YEARS DATA H AD PUT ASSESSEE AS WELL AS TPO ON NOTICE OF HIS INTENTION OF DOING SO. THE TPO DID NO T EXPRESS ANY OBJECTION ON USING CURRENT YEAR DATA. IT WAS FURTHER SUBMITTED THAT BE NCHMARKING OF CLASS II TRANSACTIONS USING CURRENT YEAR DATA REVEAL THAT TH E ASSESSEES MARGIN OF 4.4% IS MUCH HIGHER THAN THAT OF COMPARABLES ( AT LOSS OF 5 .24%). EVEN IF PROCAL ELECTRONICS WERE TO BE EXCLUDED COMPARABLES MARGIN WILL ONLY IN CREASE TO 1.63% WHICH WILL STILL BE LESS THAN THE MARGINS MADE BY ASSESSEE. 28. ON HAVING GONE THROUGH THE ORDERS OF THE LO WER AUTHORITIES, WE FIND THAT BOTH THE ASSESSEE AND TPO HAVE USED THE PLI OF OP / TC FO R ECONOMIC ANALYSIS. THE LD. CIT(A) NOTED THAT ALMOST ALL OF THE TRANSACTIONS OF THE ASSESSEE WITH ITS AES ARE ON THE COST SIDE, THE COST BASE OF THE ASSESSEE INCLU DES CONTROLLED TRANSACTIONS WITH AES FOR COMPARABILITY ANALYSIS. HENCE THE LD. CIT(A ) WAS OF THE VIEW THAT THE PLI TO BE USED SHOULD HAVE ITS BASE WHICH SHOULD NOT BE CO NTROLLED. THEREFORE, FOR BETTER COMPARABILITY ANALYSIS OP / SALES IS TO BE USED AS THE PLI. WHILE EXAMINING THE ISSUE OF THE DATA TO BE USED FOR ALP DETERMINATION, THE L D. CIT(A) NOTED THAT BOTH THE ASSESSEE AND TPO HAVE USED PAST TWO YEARS AVERAGE D ATA. HE ACCORDINGLY ASKED BOTH THE ASSESSEE AS WELL AS TPO TO EXPLAIN WHY ONL Y CURRENT YEAR DATA SHOULD NOT BE USED FOR ALP DETERMINATION, KEEPING IN VIEW THE PROVISIONS OF RULE 10B(4). IN ITA NO. 1842/DEL/2009 A.Y. 2002-03 28 RESPONSE THE ASSESSEE SUBMITTED THAT IT HAS PREPARE D THE TRANSFER PRICING DOCUMENTATION FOR THE FINANCIAL YEAR 2001-02 THEREB Y APPLYING CONTEMPORANEOUS DOCUMENTATION REQUIREMENTS PRESCRIBED BY RULE 10D( 4) WHICH REQUIRES THE DOCUMENTATION SHOULD EXIST LATEST BY THE DUE DATE O F FILING THE ASSESSEES TAX RETURN I.E. OCTOBER 31, 2002. IT WAS SUBMITTED THAT IT IS A PPARENT FROM THE TP REPORT THAT THE ASSESSEES SEARCH FOR UNCONTROLLED COMPARABLES RELIED PRIMARILY ON AN ELECTRONIC DATABASE NAMED PROWESS. IT WAS POINTED OUT THAT MOST CURRENT YEAR COMPANY ACCOUNTS WILL NOT HAVE BEEN ENTERED ON THE DATABASE BEFORE THE TARGET TAXPAYER HAS FILED THEIR TAX RETURN. IT WAS SUBMITTED THAT OECD G UIDELINES ALSO ACKNOWLEDGE THAT THERE ARE TIMING ISSUE IN COMPARABILITY WITH RESPEC T TO THE DOCUMENTATION CONCERNING THE COMPARABILITY FACTORS AND COMPARABLE UNCONTROLL ED TRANSACTIONS THAT ARE USED IN THE COMPARABILITY ANALYSIS. REFERRING PARA NO. 5.9 OF THE GUIDELINES PROVIDED FOR TAX ADMINISTRATION IT WAS SUBMITTED THAT THE GUIDELINES TO LIMIT THE REQUEST FOR DOCUMENTS TO THOSE THAT ARE LIKELY TO CONTAIN RELEV ANT INFORMATION BASED ON MULTIPLE YEAR DATA OR INFORMATION ABOUT FACTS THAT EXISTED A T THE TIME THE PRICING WAS DETERMINED. RULE 10B (4) HAS ALSO BEEN QUOTED. IT WA S SUBMITTED BY THE ASSESSEE THAT THE LAW PROVIDES FOR THE USE OF THE LATEST AVA ILABLE INFORMATION AND USE OF PRIOR YEAR DATA UNLESS IT CAN BE SHOWN THAT THE YEARS FOR WHICH THE DATA ARE AVAILABLE ARE UNLIKELY TO BE REPRESENTATIVE. FURTHER, SINCE TRANS FER PRICING POLICIES ARE OFTEN DETERMINED BASED ON HISTORICAL DATA THE SAME HAS AN INFLUENCE ON THE TRANSFER PRICES OF THE TRANSACTIONS BEING COMPARED. THEREFORE IF TH E ISSUE IS OF FIXATION OF PRICE DURING THE RELEVANT PERIOD THE DATA NECESSARILY HAS TO BE THAT OF THE PRIOR PERIOD AND CANNOT BE THE ONE RUNNING PARALLEL IN TIME. IT WAS A CCORDINGLY SUBMITTED BY THE ASSESSEE THAT IN THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE, FINANCIAL DATA OF ITA NO. 1842/DEL/2009 A.Y. 2002-03 29 COMPARABLE COMPANIES FOR THE YEARS 2000, 2001 AND F OR 2002 TO THE MAXIMUM EXTENT POSSIBLE, WAS USED FOR THE PURPOSES OF THE B ENCHMARKING ANALYSIS. THIS WAS DONE IN ORDER TO ELIMINATE TO THE MAXIMUM EXTENT PO SSIBLE ANY VARIANCE IN RESULTS CAUSED BY EXTRANEOUS FACTORS SUCH AS SHORT TERM DIF FERENCES IN BUSINESS CYCLES, PRODUCT LIFE CYCLES ETC. AND / OR BUSINESS STRATEGI ES OF THE INDIVIDUAL COMPANIES. 29. IT WAS SUBMITTED BEFORE THE LD. CIT(A) THAT THE RESULTS OF ANY ONE-YEAR MAY BE DISTORTED BY DIFFERENCES IN ECONOMIC OR MARKET C ONDITIONS. FURTHER, ENTERPRISES MAY NOT BE UNIFORMLY AFFECTED BY BUSINESS AND PRODU CT CYCLES AND THEREFORE DIFFERENCES BETWEEN DEALINGS MAY REFLECT DIFFERENCE S IN CIRCUMSTANCES. THEREFORE A REASONABLE CONCLUSION AS REGARDS TO ARMS LENGTH DE ALING BETWEEN CONTROLLED PARTIES COULD BE OBTAINED BY USING MULTIPLE YEAR DATA OF CO MPARABLES. IT WAS SUBMITTED THAT USE OF MULTIPLE YEAR DATA FOR THE PURPOSE OF COMPUT ATION OF ARMS LENGTH PRICE IS PERMITTED UNDER THE INDIAN REGULATIONS. THROUGH USE OF MULTIPLE YEAR DATA OF COMPARABLES DIFFERENCE DUE TO FACTORS SUCH AS BUSIN ESS OR PRODUCT CYCLES CAN BE EFFECTIVELY TAKEN INTO ACCOUNT AND COMPARABILITY C AN BE RELIABLY DETERMINED. 30. IT WAS SUBMITTED FURTHER THAT A TAX PAYER W OULD GENERALLY ALWAYS HAVE REGARD TO THE PAST YEARS DATA BEFORE ACTUALLY DETERMINING THE TRANSFER PRICES FOR A PARTICULAR YEAR. PAST YEARS DATA WOULD INCLUDE EVALUATING THE INFORMATION ON SEVERAL ASPECTS INTERNAL AS WELL AS EXTERNAL . IT WAS ACCORDINGLY SU BMITTED THAT REFERENCE OF PAST TWO YEARS DATA FOR THE PURPOSE OF COMPARABILITY ANALYSI S (AS PER PROVISO TO RULE 10B(4) SHOULD BE AN AUTOMATIC, ADEQUATE AND SUFFICIENT COM PLIANCE OF THE PROVISIONS OF RULE 10B(4). ITA NO. 1842/DEL/2009 A.Y. 2002-03 30 31. PARA NO. 1.49 AND 1.50 OF OECD GUIDELINES WERE QUOTED TO SAY THAT THE MULTIPLE YEAR DATA IS ALSO USEFUL IN PROVIDING INFO RMATION ABOUT THE RELEVANT BUSINESS AND PRODUCT LIFE CYCLES OF THE COMPARABLES. IT WAS S UBMITTED THAT DIFFERENCE IN BUSINESS OR PRODUCT LIFE CYCLE MAY HAVE MATERIAL EF FECT ON TRANSFER PRICING CONDITIONS THAT NEED TO BE ASSESSED IN DETERMINING COMPARABILI TY. IT WAS ALSO SUBMITTED BEFORE THE LD. CIT(A) THAT IN VIEW OF THE CONTEMPORANEOUS DOCUMENTATION REQUIREMENTS IN THE RULES, LACK OF INFORMATION AVAILABLE AT THE TI ME OF PREPARING THE TRANSFER PRICING DOCUMENTATION, FLEXIBILITY GRANTED BY THE LAW AND F OR APPROPRIATE DETERMINATION OF TRANSFER PRICING POLICIES, IT IS PRUDENT TO SELECT MULTIPLE YEAR DATA FOR A TRUE AND FAIR COMPARABILITY ANALYSIS. 32. IT WAS HOWEVER EMPHASIZED BY THE ASSESSEE THAT BENCHMARKING / ECONOMIC ANALYSIS IS THE MOST SIGNIFICANT / FOCAL PART OF TH E TP DOCUMENTATION THAT A TAX PAYER IS REQUIRED TO MAINTAIN AS PER RULE 10D AND IT IS T HE CRUX OF ANY TRANSFER PRICING ANALYSIS. IF DATA FOR THE CURRENT YEAR WHICH IS NOW AVAILABLE IN THE DATABASES, IS NOT USED TO DETERMINE THE ARMS LENGTH PRICE OF INTERNA TIONAL TRANSACTIONS IT WILL RENDER THE MAINTENANCE OF TP DOCUMENTATION BY THE TAXPAYER A REDUNDANT AND UNNECESSARY EXERCISE WHICH IS SURELY NOT THE INTENT OF THE INDI AN TP LEGISLATION. 33. REFERRING SECTION 92C AND 92D READ WITH RULE 10D, THE ASSESSEE SUBMITTED THAT THIS PROVISION CLEARLY INDICATE THAT DOCUMENTA TION (INCLUDING THE BENCHMARKING / ECONOMIC ANALYSIS) IS REQUIRED TO BE MAINTAINED BY A TAXPAYER TO ESTABLISH AND SUPPORT THE ARMS LENGTH NATURE OF ITS INTERNATION AL TRANSACTIONS. FURTHER TP DOCUMENTATION IS REQUIRED TO BE MAINTAINED CONTEMPO RANEOUSLY AND SHOULD EXIST LATEST BY OCTOBER 31 OF THE RELEVANT FINANCIAL YEAR . THIS MAKES IT EVIDENT THAT ITA NO. 1842/DEL/2009 A.Y. 2002-03 31 LEGISLATURE PREVENTS THE DETERMINATION OF ARMS LENGTH BEYOND THIS DATE I.E. DATA USED IN DETERMINATION OF ARMS LENGTH SHOULD BE AVAI LABLE LATEST BY OCTOBER 31, AND NOT BEYOND. THEREFORE, THE USE OF CURRENT YEAR DATA WOULD BE NOTHING BUT A HARDSHIP TO THE TAXPAYER AND IN CONTRADICTION TO THE INTENT OF THE LEGISLATURE. REFERENCE TO CBDT CIRCULAR NO. 12 OF 2001 WAS ALSO MADE IN SUPPO RT OF THE SUBMISSION THAT USE OF COMPARABLE COMPANY DATA FOR THE YEAR ENDED MARCH 31, 2002 WHICH IS CURRENTLY AVAILABLE BUT WAS NOT AVAILABLE AT THE TIME OF DETE RMINING THE ARMS LENGTH PRICE / CREATION OF TP DOCUMENTATION IS NOT THE INTENT OF THE LEGISLATION AND IS OUTSIDE THE SCOPE OF THE DOCUMENTATION REQUIRED TO BE MAINTAINE D BY THE ASSESSEE U/S 92D OF THE ACT READ WITH RULE 10D. 34. THE REACTION OF TPO IN HIS REMAND REPOR T DATED 25.2.2009 REMAINED THAT IN HIS ORDER THE TPO HAS RELIED ON THE TP REPORT SUBMI TTED BY THE ASSESSEE FOR USING THE DATA FOR COMPARABILITY ANALYSIS. IT WAS REPORTE D THAT THIS WAS THE FIRST YEAR OF TRANSFER PRICING ASSESSMENT WHERE THE ISSUES HAD NO T CRYSTALLIZED. BASED ON THE AVAILABILITY OF THE DATA THE COMPARABLES WERE SELEC TED OR THE WEIGHTED AVERAGE FINANCIAL DATA WAS USED FOR BENCHMARKING PURPOSE. 35. CONSIDERING THE ABOVE REACTIONS OF THE PA RTIES THE LD. CIT(A) HAS COME TO THE FOLLOWING CONCLUSION :- FINDINGS 11.5 THE APPELLANT IN ITS COMPARABILITY ANALYSIS HAD USED THE FINANCIAL YEAR DATA FOR THE PERIOD 19 99-2000 & 2000-0 1 TO COMPUTE OP/TC FOR ... THE COMPARABLES AND USED THE CURRENT FINANCIAL YEAR DAT A OF 2001-02 FOR COMPUTING OP / TC FOR THE APPELLANT. THE TPO / AO ALSO USED THE CU RRENT YEAR DATA FOR COMPUTING THE OP / TC OF THE APPELLANT AND USED WEIGHTED AVER AGE OF FINANCIAL YEARS 2000-01 AND 2001-02 FOR COMPUTATION OF OP/ TC FOR COMPARABL ES. THIS ISSUE IS DISCUSSED IN ITA NO. 1842/DEL/2009 A.Y. 2002-03 32 THE LIGHT OF THE PROVISIONS OF RULE 10B(4) OF THE R ULES. 11.6 RULE 10 B (4) OF THE RULES SPECIFIES THE REQUIREMENT REGARDIN G DATA TO BE USED FOR ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION READS AS UNDER: 'RULE 10B(4), - THE DATA TO BE USED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE IN TERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SU CH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. 11.7 THE USE OF THE WORD 'SHALL' IN THE MAIN PROVISION OF THE RULES MAKES IT ABUNDANTLY CLEAR THAT THE USE OF CURRENT FINANCIAL YEAR DATA (I.E. THE FINANCIAL YEAR IN WHICH INTERNATIONAL TRANSACTION WAS ACTUALLY ENT ERED INTO) IS A MANDATORY REQUIREMENT OF LAW IN THE COMPARABILITY ANALYSIS UN DER THE INDIAN TP REGULATIONS. THE PROVISO TO THE SAID RULE MAKES IT AN EXCEPTION IN ALLOWING THE USE OF DATA FOR THE PRECEDING TWO YEARS, IF AND ONL Y IF, IT IS PROVED THAT SUCH DATA REVEALS FACTS, WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE. THEREFORE, THE EXCEPTION COMES INTO PLAY ONL Y WH EN PROOF OF SUCH INFLUENCE IS BROUGHT ON RECORD. 11.8 CONTEMPORANEOUS TRANSACTIONS REFLECT SIMILAR E CONOMIC CONDITIONS. THEREFORE, THE USE OF CURRENT FINANCIAL YEAR DATA I S MORE RELEVANT AND APPROPRIATE FOR ENSURING A HIGHER DEGREE OF COMPARABILITY OF UN CONTROLLED TRANSACTIONS FOR ARRIVING AT RELIABLE ALP IN RESPECT OF THE INTERNATIONAL TRANSACTION. THE IMPORTANCE OF CONTEMPORARY ECONOMIC AND MARKET COND ITIONS ON PRICE SETTING MECHANISMS IS ALSO REFLECTED IN THE PROVISIONS OF R ULE 10B(3) OF THE RULES. THE SETTING UP OF A PRICE IS AFTER ALL A BUSINESS DECIS ION. IN AN OPEN MARKET TRANSACTION, PRICES ARE SET BY CONTEMPORARY ECONOMIC REALITIES OF DEMAND, SUPPLY, MARKET STRUCTURE AND OTHER RELEVANT FACTORS . THEREFORE, EX-ANTE DOCUMENTATION USING CONTEMPORANE OUS DATA USED AT THE TIME OF SETTING THE PRICE' IS THE MOST APPROPRIATE WAY OF SUPPORTING THE TRANS FER PRICES BETWEEN THE ASSOCIATED ENTERPRISES. HOWEVER, THE TP REGULATIONS ALSO ALLOW FOR DOCUMENTATION ON THE BASIS OF EX-POST ANA LYSIS TO SUPPLEMENT THE EX- ANTE DOCUMENTATION, FOR JUSTIFYING THE PRICES ALREA DY SET AT THE TIME OF THE TRANSACTION. NONETHELESS, EX-ANTE DOCUMENTATION IS PRIMARY AND EX-POST DOCUMENTATION IS SUPPLEMENTARY IN NATURE. 11. 9 THE OECD GUIDELINES IN PARA 1.49 TO 1.51 HAVE ACKNOWLEDGED THE USE OF MULTIPLE YEAR DATA UNDER SPECIAL CIRCUMSTANCES. USE OF MULTIPLE YEAR DATA IS CONSIDERED USEFUL TO SMOOTH OUT THE FLUCTUATIONS CA USED BY BUSINESS/ECONOMIC/PRODUCT LIFE CYCLE. HOWEVER, THE MERE CLAIM THAT THERE EXISTS A ITA NO. 1842/DEL/2009 A.Y. 2002-03 33 CYCLE IS NOT SUFFICIENT. WHENEVER A CLAIM IS PUT FO RWARD REGARDING EXISTENCE OF A CYCLE AND THEREBY JUSTIFYING THE USE OF MULTIPLE YE AR DATA, THE TAXPAYER WOULD BE EXPECTED (0 EXPLAIN WHY IT BELIEVES THAT THERE IS A CYCLE, WHAT TYPE OF CYCLE IT IS, DURATION OF A CYCLE AND TO WHAT EXTENT THE CYCLE IS EXPECTED TO IMPACT THE DATA TO BE USED. THUS MULTIPLE YEAR DATA SHOULD BE USED ONLY WHEN IT ADDS VALUE TO THE TP ANALYSIS. 11.10 UNDER SECTION 92D(1) OF THE ACT, EVERY PERSON ENTERING INTO AN INTERNATIONAL TRANSACTION, IS REQUIRED TO KEEP AND MAINTAIN SUCH INFORMATION AND DOCUMENT, IN RESPECT THEREOF, AS BEING PRESCRIBED U NDER THE RULES. RULE 10D(1) OF THE RULES, REQUIRES MAINTENANCE OF A RECORD OF T HE ANALYSIS PERFORMED TO EVALUATE COMPARABILITY AS WELL AS A RECORD OF THE A CTUAL WORKING CARRIED OUT FOR DETERMINING THE ALP. RULE 10D(4) OF THE RULES, REQU IRES THAT THE INFORMATION AND DOCUMENTATIONS TO BE MAINTAINED UNDER RULE 10D(1), SHOULD BE CONTEMPORANEOUS AS FAR AS POSSIBLE AND SHOULD EXIST LATEST BY THE DUE DATE OF FILING OF THE INCOME-TAX RETURN. THE PRIMACY GIVEN TO EX-ANTE DOCUMENTATION BASED ON CONTEMPORANEOUS DATA IS EVIDENT FROM THE P ROVISIONS IN CLAUSE (F) OF RULE 10D(I) OF THE RULES. IT IS TO BE NOTED THAT THE REQUIREMEN T OF EXISTENCE OF INFORMATION AND DOCUMENTATION BY THE DUE DATE OF FI LING OF RETURN, DOES NOT OVERRIDE THE PROVISIONS OF RULE 10B(4) OF THE RULES REGARDING MANDATORY USE OF CURRENT FINANCIAL YEAR DATA FOR CONDUCTING COMPARAB ILITY ANALYSIS. 11.11 T HE MANDATORY AND ABSOLUTE REQUIREMENT OF LAW FOR US E OF THE CURRENT FINANCIAL YEAR DATA CANNOT BE DISPENSED WITH EVEN I F THE RELEVANT DATA WAS NOT AVAILABLE WITH THE APPELLANT IN THE ELECTRONIC DATA BASE AT THE TIME OF PREPARATION OF THE TP REPORT. IN ANY CASE, THE TRANSFER PRICING PROVISIONS DO NOT MANDATE THE USE OF DATA FROM ANY PARTICULAR SOURCE. IN ANY CASE , THE APPELLANT WAS NOT PROHIBITED FROM PROCURING THE CURRENT FINANCIAL YEA R DATA FROM SOURCES OTHER THAN THE ELECTRONIC DATA BASE. NON AVAILABILITY OF INFOR MATION IN THE PUBLIC DATABASE MAY AT BEST BE RELEVANT TO EXPLAIN THE DISCHARGE OF THE APPELLANT'S OBLIGATION OF MAINTAINING THE PRESCRIBED DOCUMENTATION U/ S 92D( 1) OF THE ACT READ WITH RULE 10D OF THE RULES. 11.12 THE TPO IS EMPOWERED TO DETERMINE THE ALP BY USING THE CURRENT FINANCIAL YEAR DATA AVAILABLE AT THE LIME OF TRANSF ER PRICING PROCEEDINGS AND TO CONDUCT THE COMPARABILITY ANALYSIS BY USING SUCH DA TA IF THE SITUATION SO DEMANDS. AS IT IS MANDATORY AND ABSOLUTE REQUIREMEN T OF LAW TO USE THE CURRENT FINANCIAL YEAR DATA, THE TPO NOT ONLY HAS THE POWER BUT IS ALSO DUTY BOUND TO DETERMINE ALP BY USING THE CURRENT FINANCIAL YEAR D ATA IN THE COMPARABILITY ANALYSIS, EVEN IF SUCH DATA WAS NOT AVAILABLE TO TH E APPELLANT IN THE PUBLIC DATABASE AT THE TIME OF PREPARATION OF THE TP REPOR T. ITA NO. 1842/DEL/2009 A.Y. 2002-03 34 THE OBSERVATIONS MADE BY THE HON'BLE SUPRE ME COURT IN THE CASE OF CIT VS. BRITISH PAINTS INDIA LTD REPORTED IN 188 ITR 44 THA T IT IS NOT ONLY THE RIGHT BUT THE DUTY OF THE ASSESSING OFFICER, TO ACT IN EXERCISE OF HIS ST ATUTORY POWER, FOR DETERMINING, WHAT IN HIS OPINION, IS THE CORRECT TAXABLE INCOME, ARE REL EVANT UNDER THE CURRENT FACTUAL SITUATION AS WELL. 11.13 THE APPELLANT HAS NOT BROUGHT ON RECORD ANY COGENT RELEVANT AND RELIABLE EVIDENCE TO PROVE THAT THE DATA FOR PRECEDING TWO Y EARS REVEALED FACTS, WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF ALP. THE EXISTENC E OF ANY PRODUCT/ECONOMIC/BUSINESS CYCLE AFFECTING THE PERFORMANCE OF THE APPELLANT AN D THOSE OF THE COMPARABLES HAS NOT BEEN DOCUMENTED FOR BY THE APPELLANT. 11.1.4 THE ISSUE RELATING TO USE OF CURRENT YEAR DA TA IS WELL SETTLED NOW IN VIEW OF THE DECISION OF BANGALORE TRIBUNAL IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. AND REAFFIRMED IN THE CASE OF MENTOR GRAPHIC PVT. LTD. EVEN IN THE RECENT ORDER DATED 10.02.2009 IN THE CASE OF, HONEYWELL AUTOMATION INDIA LID VS DEN THE ITAT PUNE BENCH (2009-TIOL- 104-ITAT-PUNE) HAS ALSO REAFFIRMED THIS ISSUE. THER EFORE, I HOLD THAT UNLESS SPECIFIC REASONS ARE BROUGHT ON RECORD, THE COMPARABILITY ANALYSIS I S TO BE CONDUCTED ON THE BASIS OF CURRENT YEAR DATA. 11.15. IN VIEW OF THE FOREGOING DISCUSSIONS, EX-POST ANALYSIS CARRIED OUT BY THE APPELLANT FOR JUSTIFYING ITS TRANSFER PRICES RELYIN G ON PRIOR YEAR DATA IS NOT ACCEPTABLE. THEREFORE, I AM OF THE CONSIDERED VIEW IN THE L IGHT OF DISCUSSIONS IN THE PRECEDING SUB- PARAS THAT BOTH THE APPELLANT. AND THE TPO COMM ITTED ERRORS IN RELYING ON PRIOR YEARS' DATA FOR COMPUTATION OF OP / TC OF THE COMPARABLE COMPAN IES. THE RELEVANT DATA BE USED FOR DETERMINATION OF ARM'S LENGTH PRICE IS THE CURRENT FINANCIAL YEAR OF 2001-02. 36. WE FIND THAT THE ABOVE FINDING OF THE LD. C IT(A) ON THE ISSUE OF USE OF CURRENT YEAR VS. MULTIPLE YEAR DATA FOR COMPUTATI ON OF OP / TC OF COMPARABLE COMPANIES FOR THE PURPOSE OF DETERMINATION OF ARMS LENGTH PRICE IS BASED ON THE ABOVE CITED DECISIONS OF SPECIAL BENCH OF THE TRIBU NAL (BANGALORE) IN THE CASE OF M/S. AZTEC SOFTWARE AND TECHNOLOGY SERVICES LTD. VS. CI T (SUPRA), OF DELHI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. MENTOR GRAPHIS (NOIDA) PVT. LTD. VS. DCIT (SUPRA) AND OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF HONEYWELL AUTOMATION INDIA LTD. VS. DCIT (SUPRA) AFTER CONSIDERING THE SUBMISSIONS OF THE AS SESSEE AND THE TPO. THE LD. CIT(A) IN OUR VIEW HAS RIGHTLY COME TO THE CONCLUSI ON THAT BOTH THESE ASSESSES AND ITA NO. 1842/DEL/2009 A.Y. 2002-03 35 TPO HAVE COMMITTED ERRORS IN RELYING ON PRIOR YEARS DATA FOR COMPUTATION OF OP/TC OF THE COMPARABLE COMPANIES AND THAT THE RELEVANT D ATA BE USED FOR DETERMINATION OF ARMS LENGTH PRICE IS THE DATA OF CURRENT FINANCI AL YEAR OF 2001-02. AS DISCUSSED THE ASSESSEE IN ITS COMPARABILITY ANALYSIS HAD USED THE FINANCIAL YEAR DATA FOR THE PERIOD 1999-2000 & 2000-01 TO COMPUTE OP/TC FOR TH E COMPARABLE AND USED THE CURRENT FINANCIAL YEAR DATA OF 2001-02 FOR COMPUTIN G OP/TC OF THE ASSESSEE AND USED WEIGHTED AVERAGE OF FINANCIAL YEARS 2000-01 AN D 2001-02 FOR COMPUTATION OF OP / TC FOR COMPARABLES. THE LD. CIT(A) AFTER INVIT ING COMMENTS OF BOTH THE PARTIES AND DISCUSSING THE PROVISIONS LAID DOWN IN RULES 10 B(4), 10D(4) OECD GUIDELINES IN PARA NOS. 1.49 TO 1.51, SECTIONS 92D(1) OF THE IT A CT AS WELL AS AFORECITED DECISIONS OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. (SUPRA ), MENTOR GRAPHIC PVT. (SUPRA) AND HONEYWELL AUTOMATION INDIA LTD. (SUPRA) HAS HEL D THAT UNLESS SPECIFIC REASONS ARE BROUGHT ON RECORD, THE COMPARABILITY ANALYSIS I S TO BE CONDUCTED ON THE BASIS OF CURRENT YEAR DATA. HE HAS HELD THAT EX-POST ANALYSI S CARRIED OUT BY THE ASSESEE FOR JUSTIFYING ITS TRANSFER PRICES RELYING ON PRIOR YEA R DATA IS NOT ACCEPTABLE AND THAT BOTH THE PARTIES I.E. ASSESEE AND TPO HAVE COMMITTED ERR ORS IN RELYING ON PRIOR YEARS DATA FOR COMPUTATION OF OP/TC OF THE COMPARABLE COM PANIES. IN CONCLUSION HE HELD THAT RELEVANT DATA BE USED FOR DETERMINATION OF ARM S LENGTH PRICE IS THE CURRENT FINANCIAL YEAR OF 2001-02. THE ACTION OF THE LD. CI T(A) CAN BE APPRECIATED IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F CIT VS. BRITISH PAINTS INDIA LTD. (SUPRA) WHEREIN THE HONBLE COURT HAS BEEN PLEASED TO HOLD THAT IT IS NOT ONLY THE RIGHT BUT THE DUTY OF THE ASSESSING OFFICER, TO ACT IN EXERCISE OF HIS STATUTORY POWER, FOR DETERMINING WHAT IN HIS OPINION, IS THE CORRECT TAXABLE INCOME. THERE IS NO DISPUTE THAT THE FIRST APPELLATE AUTHORITY HAS GOT CO-TERMI NUS POWER WITH THAT OF THE ASSESSING ITA NO. 1842/DEL/2009 A.Y. 2002-03 36 OFFICER TO ACHIEVE THE JUST ASSESSMENT, THE VERY AN D ULTIMATE OBJECT OF THE I.T. ACT, 1961. WE THUS DO NOT FIND SUBSTANCE ON THE ISSUE RA ISED IN GROUND NOS. 1,1.1 AND 1.2 OF THE APPEAL. THE SAME ARE THUS REJECTED. 37. THE NEXT BASIS OF ADJUSTMENT MADE BY THE T PO REMAINED THE COMPARABLE COMPANY ANALYSIS. THE TPO REJECTED KIRLOSKAR AIRTEC H LTD. (KAL) AS A COMPARABLE FOR THE ASSESSEE UNDER CLASS I, GIVING REASONS SUCH AS O PERATING LOSS, NEGATIVE NETWORTH, MEAGER TURNOVER AND EXPENDITURE, LIMITED PRODUCTION AND MARKET SHARE, POSSIBLE EXPENSES OF RELATED PARTY TRANSACTIONS AND THAT THE COMPANY CEASED TO EXIST AFTER THE YEAR 2000-01. AFTER REJECTING KAL, THE TP O COMPUTED THE ARITHMETIC MEAN OP/TC OF THE REMAINING SEVEN COMPARABLE COMPANIES A T 7.25% (USING AVERAGE DATA OF PRECEDING TWO YEARS). ON THE BASIS OF THE ABOVE A TP ADJUSTMENT OF RS. 24,03,22,940/- WAS MADE TO ACCOUNT FOR THE DIFFEREN CE BETWEEN ASSESSEES OP/TC (3.43%) AND THE MEAN ARMS LENGTH OP/TC (7.25%) COMP UTED BY THE /TPO. THE AO UPHELD THE ADJUSTMENT MADE BY THE TPO IN HIS ORDER. IN MAKING THE ADJUSTMENT, THE 5% RANGE, AS PER PROVISION TO SECTION 92C(2) WAS NO T ALLOWED TO THE ASSESSEE BY BOTH THE TPO AND THE AO. AGAINST THE ACTION OF THE TPO IN REJECTING KAL, THE CONTENTION OF THE ASSESSEE REMAINED THAT KAL AS A M ANUFACTURER OF AIR CONDITIONERS WHICH CONSTITUTED 94% OF ITS TURN OVER DURING 2000- 01. ITS PRODUCTS AFTER SALE SERVICES ARE VERY WELL APPRECIATED BY ITS CUSTOMERS . GIVEN THE EXTENT OF FUNCTIONAL /ASSET/PRODUCT COMPARABLES REQUIRED UNDER THE TNMM, KAL IS A VALID COMPARABLE FOR THE ASSESSEE. IT WAS CONTENDED BY THE ASSESSEE THA T REJECTION OF KAL ON GROUND OF BEING A LOSS MAKING COMPANY IS ERRONEOUS AND UNJUST FIED. PLACING RELIANCE ON THE DECISION OF THE TRIBUNAL IN THE CASE OF SONY INDIA PVT. LTD. VS. DCIT (SUPRA), THE LD. ITA NO. 1842/DEL/2009 A.Y. 2002-03 37 CIT(A) HAS HELD THAT SELECTION OF VIDEOCON INTERNAT IONAL LTD. BY THE TPO SHOULD BE REJECTED FOR THE REASON THAT THE VIDEOCON INTERNATI ONAL IS ONE OF THE LARGEST INDIAN MANUFACTURERS OF GLASS SHELLS FUNNELS (ALL KEY COMP ONENTS)USED IN MANUFACTURE OF COLOR TELEVISION. VIDEOCON ENJOYS CONSIDERABLE COST BENEFITS DUE TO BACKWARD INTEGRATION AND INDIGENOUS MANUFACTURING OF COMPONE NTS AS REFLECTED IN THE COMPANYS RELEVANT ANNUAL REPORT WITH THE CAPTIVE M ANUFACTURING OF CTV SHELLS THE COMPANY ENJOYS COST ADVANTAGE VIS A VIS THE COMPETI TIORS. IT WAS ALSO NOTED THAT THE TOTAL TURN OVER OF VIDEOCON INTERNATIONAL DURING 20 01-02 WAS RS. 4970/- AS AGAINST THE ASSESEES TURNOVER OF ABOUT RS. 648 CRORES (UND ER CLASS I). THE LD. CIT(A) HELD THAT CARRIER AIRCON, HITAXHI, LIFE SOLUTIONS AND WH IRLPOOL OF INDIA ARE VALID COMPARABLES AND SHOULD BE INCLUDED FOR ALP DETERMI NATION. HE OBSERVED THAT THESE COPARABLES AND SHOULD BE INCLUDED FOR ALP DETERMINA TION. HE ALSO OBSERVED THAT THESE COMPANIES MANUFACTURE CONSUMER ELECTRONICS AN D HOME APPLIANCE SIMILAR TO ASSESSEE AND PERCENTAGE OF RELATED PARTY TRANSACTI ONS OF THESE COMPANIES IS LESS THAN 10-15% OF THEIR RESPECTIVE TOTAL REVENUES WHIC H IS ACCEPTABLE AS PER THE DECISION OF TRIBUNAL IN THE CASE OF SONY INDIA PVT. LTD. VS. DCIT (SUPRA). WE FIND THAT THE FIRST APPELLATE ORDER IN THIS REGARD IS RE ASONED ONE AND THERE IS NO REASON TO INTERFERE THEREWITH. THE SAME IS UPHELD. DETERMINATION OF ARMS LENGTH PRICE IN VIEW OF ADOPTION OF USE OF CURRENT YEAR DATA AND TAKING REIMBURSEMENT OF EXPENSES AS PART OF OPERATING PROFIT, THE OP/SALES CALCULATION OF THE ASSESSEE HAS ULTIMATELY BEEN ARRIVED BY THE LD. CIT(A) AS UNDER :- ITA NO. 1842/DEL/2009 A.Y. 2002-03 38 PARTICULARS MANUFACTURING SEGMENT (CLASS I) SALES (INCLUDING MGMT. FEES. SCRAP SALES & EXPORT INCENTIVES) 6,48,96,73,238 TOTAL INCOME 6,48,96,73,238 COST OF GOODS SOLD 3,52,34,28,562 EXCISE DUTY 88,20,70,206 RATES & TAXES 8,70,74,369 VALUE ADDED EXPENSES 1,66,69,93,086 TOTAL COSTS (TC) 6,15,95,66,223 OPERATING PROFIT (OP) 33,01,07,015 OP / SALES 5.09% 12.2 USING CURRENT YEAR DATA OF COMPARABLES, THE MEAN OP/SALES OF THE COMPARABLES USED BY THE TPO IN THE TP ORDER IS AS F OLLOWS :- S. NO. COMPANY NAMES OP/SALES FOR FY 2001-02 1. B.P.L LTD. 9.55% 2. GODREJ APPLIANCES LTD. -7.54% 3. KHAITAN ELECTRICALS LTD. 3.07% 4. POLAR INDUSTRIES -29.24% 5. SYMPHONY COMFORT SYSTEMS LTD. 8.34% 6. VALUE INDUSTRIES LTD. 9.97% 7. VIDEOCON INDUSTRIES LTD. 11.66% ITA NO. 1842/DEL/2009 A.Y. 2002-03 39 MEAN 0.83% 12.3 THE MEAN OP/SALES OF COMPARABLE COMPANIES AS ABOVE IS 0.83% THE APPELLANT EARNED AN OP / SALES OF 5.09% IN CLASS I D URING FY 2001-02. EVEN IF WE ANALYSE THE ABOVE RESULTS AFTER EXCLUDING THE HI GH LOSS MAKING COMPANY VIZ. POLAR INDUSTRIES, THE MEAN OP / SALES OF COMPA RABLES WORKS OUT TO 5.84%. EVEN IN SUCH A SCENARIO THE OP/SALES OF 5.09 % EARNED BY THE APPELLANT FALLS WITHIN THE 5% RANGE ALLOWED BY PROV ISO TO SECTION 92C(2). ACCORDINGLY, I HOLD THAT THE APPELLANTS INTERNATION AL TRANSACTION WITH AES DURING THE YEAR MEET THE ARMS LENGTH TEST. 38. WE FIND THAT THE FIRST APPELLATE ORDER ON THE ISSUE S IS COMPREHENSIVE AND REASONED ONE. IT IS BASED ON THE RELEVANT PROVISION S OF LAW AND THE DECISIONS RELIED UPON. SO FAR AS THE ISSUE OF VARIATION OF 5% IS CON CERNED IT IS ALLOWABLE UNDER PROVISO TO SECTION 92C(2) OF THE ACT AND IS WELL CO VERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN THE CASE OF SONY IN DIA PVT. LTD. VS. DCIT (SUPRA). THE TPO HELD THE EXPENSES AMOUNTING TO RS. 19.17 CRORES REIMBURSEMENT BY THE AES AS OPERATING EXPENSES . HOWEVER HE DID NOT CONSIDER TH E REIMBURSEMENT OF RS. 19.17 CRORES RECEIVED FROM AES AS OPERATIONAL INCOME OF T HE ASSESSEE. THE TPO THUS RECOMPUTED THE OP/TC OF THE ASSESSEE IN CLASS I AT 3 .43%. AFTER REJECTING KAL THE TPO COMPUTED THE AIRTHMATIC MEAN OP/TC OF THE REMAI NING 7 COMPARABLES COMPANIES AT 7.25% (USING AVERAGE DATA OF PRECEDING TWO YEARS). A TP ADJUSTMENT OF RS. 240322940/- WAS MADE BY THE TPO TO ACCOUNT F OR THE DIFFERENCE BETWEEN ASSESSEES OP/TC (3.43%) AND THE MEAN ARMS LENGTH O P/TC (7.25%). IN MAKING THE ADJUSTMENT, 5% RANGE, AS PER PROVISIO TO SECTIO N 92C(2) WAS NOT ALLOWED TO THE ASSESEE BY BOTH THE TPO AND THE AO. THE LD. CIT(A) HAS DELETED THE ENTIRE TP ADJUSTMENT MADE BY THE AO/TPO GIVING HIS FINDING ON REIMBURSEMENT OF CERTAIN EXPENSES, USE OF CURRENT YEAR DATA, COMPARABLE COMP ANIES ETC. WHICH WE HAVE ITA NO. 1842/DEL/2009 A.Y. 2002-03 40 DISCUSSED IN DETAIL HEREINABOVE AND WE DID NOT FIND REASON TO INTERFERE WITH THE FIRST APPELLATE ORDER ON ANY OF THE ISSUES RELATED TO DET ERMINATION OF ALP IN THE PRESENT CASE. GROUNDS NOS. 1,1.1,1.2,3,4 AND 5 ARE ACCORDINGLY RE JECTED. GROUND NO. 6 39. DURING THE YEAR ASSESSEE HAD INCURRED EX PENSES AGGREGATING TO RS. 4041697 ON PURCHASE OF VARIOUS COMPUTER SOFT WARE A S SHOWN IN PARA NO 12.1 OF THE ASSESSMENT ORDER. IN RESPONSE TO QUERY RAISED BY TH E AO IN THIS REGARD, IT WAS SUBMITTED BY THE ASSESSEE THAT THE EXPENDITURE DID NOT RESULT IN AN ENDURING BENEFIT IN CAPITAL FIELD AND THEREFORE IS NOT IN THE NATURE OF CAPITAL EXPENDITURE. RELYING ON THE DECISION IN THE CASE OF CIT VS. ARAVALI CONSTRU CTION CO. PVT. LTD. 259 ITR 30 AND OTHERS THE AO HELD IT TO BE AN ASSET AND AFTER ALLO WING 25% DEPRECIATION HE MADE A NET ADDITION OF RS. 3536485/-. BEING SATISFIED WITH THE SUBMISSION OF THE ASSESSEE THE LD. CIT(A) HAS DELETED THE ADDITION. 40. IN SUPPORT OF THE GROUNDS THE LD. DR HAS PL ACED RELIANCE ON THE ASSESSMENT ORDER. THE LD. AR ON THE OTHER HAND TRIED TO JUSTIF Y THE FIRST APPELLATE ORDER ON THE ISSUE. 41. HAVING GONE THROUGH THE ORDERS OF THE AUTHO RITY BELOW WE FIND THAT THE DETAILS OF THE SOFTWARE UNDER CONSIDERATION FURNISH ED ARE AS FOLLOWS :- ITA NO. 1842/DEL/2009 A.Y. 2002-03 41 S.NO. PARTICULARS NATURE PURPOSE AMOUNT REMARKS 1. SITE HOSTING CHARGES HOSTING OF SAMSUNG INDIA.COM SITE 80.769 2. MS VISUAL STUDIO VERSION 6 APPLICATION BASED USED IN SOFTWARE PROGRAMMING BY SOFTWARE DIVISION 30,500 3. MS OFFICE 2000 APPLICATION SOFTWARE UPGRADE OF MS OFFICE 97 (200 NOS.) & PURCHASE OF 200 NEW LICENCES 3,233,370 UPGRADED TO MS 2003 IN YEAR 2005 4. TREND ENT. SUIT APPLICATION SOFTWARE ANTI VIRUS SOFTWARE 325,650 REPLACED BY SYMANTEC IN YEAR 2005 5. ORACLE 8I APPLICATION SOFTWARE DATA BASE SOFTWARE 371,409 UPGRADED TO ORACLE 9I IN YEAR 2002 TOTAL 4,041,697 42. THE ASSESSEE CLAIMED THAT IT IS MERELY A LICENCE USER OF THESE PACKAGED SOFTWARE FOR A LIMITED PERIOD OF TIME AND THESE PRO DUCTS ARE NOT OWNED BY IT. OWING TO FREQUENT TECHNICAL ADVANCEMENT IN THE FIELD OF I T, THESE LICENCES ARE REPLACED IN A SHORT PERIOD OF TIME BY MORE ADVANCED VERSIONS PROD UCTS HENCE HAVE VERY SHORT UTILITY SHELF LIFE. IT WAS THUS ARGUED THAT THE EXP ENDITURE DID NOT RESULT IN ACQUISITION OF CAPITAL ASSET OF ENDURING BENEFIT OF CAPITAL NAT URE. IN THE ABOVE CITED DECISIONS BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. GE CAPITAL SERVICES LTD. (SUPRA) AND THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE O F AMWAY INDIA ENTERPRISES VS. DCIT ((SUPRA) IT HAS BEEN HELD THAT SUCH COMPUTER S OFTWARE DOES NOT HAVE UTILITY FOR ITA NO. 1842/DEL/2009 A.Y. 2002-03 42 LONG DURATION AND HENCE DO NOT RESULT IN ENDURING B ENEFIT. IT HAS BEEN HELD THAT SUCH SOFT WARE DOES NOT CONSTITUTE A PROFIT EARNING AND MERELY ENABLE THE ASSESSEE TO EFFICIENTLY CONDUCT ITS BUSINESS. FOLLOWING THE RAT IO OF THE DECISIONS ON THE ISSUE WE ARE OF THE VIEW THAT LD. CIT(A) HAS RIGHTLY ACCEPTE D THE CLAIMED EXPENDITURE AS REVENUE IN NATURE. THE SAME IS UPHELD. GROUND NO. 6 IS ACCORDINGLY REJECTED. GROUND NO. 7 DURING THE YEAR THE ASSESSEE HAD TAKEN CERTAIN INTE R CORPORATE DEPOSITS FROM ITS ASSOCIATE CONCERN M/S. SAMSUNG ELECTRONICS INDIA INF ORMATION AND TELECOMMUNICATIONS LTD. (SEIITL). INVOKING THE PROV ISIONS OF SECTION 2(22)(E) OF THE ACT, THE AO MADE AN ADDITION OF RS. 44092460/-. BEI NG SATISFIED WITH THE SUBMISSION OF THE ASSESSEE THE LD. CIT(A) HAS DELETED THE ADDI TION. 43. THE LD. DR HAS RELIED ON THE ASSESSMENT O RDER IN THIS REGARD. THE LD. AR ON THE OTHER HAND REFERRED THE CONTENTS OF THE FIRST A PPELLATE ORDER AND WITH THIS SUBMISSION THAT THE ISSUE RAISED IS FULLY COVERED I N FAVOUR OF THE ASSESSEE BY THE DECISIONS IN THE CASES OF ACIT VS. BHAWMIK COLOR PV T. LTD. 20TTJ (SB) 865 AND CIT VS. HOTEL HILL TOP 313 ITR 116 (RAJ.). HE SUBMITTED FURTHER THAT PROVISIONS OF SECTION 2 (22)(E) OF THE ACT ARE NOT APPLICABLE IN THE PRES ENT CASE AS ASSESSEE IS NOT A SHAREHOLDER OF SEIIT I.E. LENDING COMPANY. A LENDER IS TO BE TREATED AS COMPANY IN WHICH IT IS SUBSTANTIALLY INTERESTED, BEING 100% A SUBSIDIARY OF SEC KOREA WHICH IS LISTED AT KOREAN STOCK EXCHANGE. HE ALSO PLACED REL IANCE ON THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DAIMLER CHRYS LER INDIA PVT. LTD. 2009-TIOL-68- ITAT-PUNE. ITA NO. 1842/DEL/2009 A.Y. 2002-03 43 44. HAVING GONE THROUGH THE ORDERS OF THE AUTHO RITIES BELOW AND THE DECISIONS RELIED UPON WE FIND THAT IN THE CASE OF BHAUMIK COL OR PVT. LTD. (SUPRA) IT HAS BEEN HELD THAT DEEMED DIVIDEND U/S 2(22)(E) OF THE ACT C AN BE ASSESSED ONLY IN THE HANDS OF THE SHAREHOLDER OF THE LENDER COMPANY AND NOT IN THE HANDS OF A PERSON OTHER THAN A SHARE HOLDER. THE CONTENTION OF THE ASSESSE E BEFORE THE AUTHORITIES BELOW IN THIS REGARD HAS NOT BEEN REBUTTED THAT THE DEPOSITO R OF INTER-CORPORATE DEPOSITS I.E. SEIIT IS NOT A PRIVATE LIMITED SINCE IT IS A SUBSIDI ARY COMPANY OF SEC, SOUTH KOREA WHICH IS A WIDELY HELD QUOTED COMPANY LISTED AT RE COGNISED STOCK EXCHANGE IN KOREA. IT WAS SUBMITTED THAT BY VIRTUE OF ARTICLE 2 5 (4) OF THE INDIA-KOREA TREATY TITLED NON-DISCRIMINATION IT SHOULD BE TREATED AS WIDELY HELD COMPANY U/S 2(18) OF THE ACT. THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DAIMLER CHRYSTER INDIA PVT. LTD. VS. DCIT (SUPRA) IN WHICH THE INDIAN COMPANY BE ING A SUBSIDIARY OF A GERMAN LISTED COMPANY WAS HELD TO BE A WIDELY HELD COMPAN Y U/S 2(18) HAS ALSO DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. UNDER THESE CI RCUMSTANCES WE ARE OF THE VIEW THE LD. CIT(A) HAS RIGHTLY HELD THAT RECEIPT OF MON EY FROM SEIIT CANNOT BE TAXED IN THE HANDS OF THE ASSESSEE U/S 2(22)(E) OF THE ACT, AS THE ASSESSEE IS NOT A SHAREHOLDER OF SEIIT AND IT WILL BE VIOLATION OF ART ICLE 25(4) OF KOREAN TREATY IF ASSESSEE IS TREATED AS A NON 2(18) COMPANY. THUS TH E LD. CIT(A) WAS JUSTIFIED IN HOLDING THAT THE PAYMENT OF SUM PAID BY SEIIT TO THE ASSESSEE DOES NOT FALL WITHIN THE AMBIT OF PROVISIONS OF SECTION 2(22)(E) OF THE ACT. HIS ACTION IN DELETING THE ADDITION MADE IN THIS REGARD IS UPHELD. THE GROUND NO. 7 IS ACCORDINGLY REJECTED. GROUND NO. 8 ITA NO. 1842/DEL/2009 A.Y. 2002-03 44 45. DURING THE YEAR THE ASSESSEE HAD INCURRED AN EXPENSE OF RS. 1488892/- ON RECRUITMENT AND TRAINING OF EMPLOYEES. BEING NOT SA TISFIED WITH THE EXPLANATION OF THE ASSESSEE, THE AO HELD THAT THESE EXPENSES PROVI DE BENEFIT OF ENDURING NATURE. HENCE THE SAME SHOULD BE AMORTIZED. HE ALLOWED ONLY 1/6 TH OF THE EXPENDITURE IN THE YEAR. IN THE RESULT ADDITION OF RS. 1240743/- WAS MADE. THE LD. CIT(A) HAS DELETED THE ADDITION. 46. IN SUPPORT OF THE GROUND LD. DR HAS PLACED RELIANCE ON THE ASSESSMENT ORDER. THE LD. AR HAS REITERATED THE SUBMISSIONS MADE BEFO RE THE AUTHORITIES BELOW WITH THIS FURTHER SUBMISSION THAT THE ISSUE RAISED IS CO VERED IN FAVOUR OF THE ASESEE BY THE ORDER OF THE TRIBUNAL IN THE CASE OF ASSESSEE ITSEL F FOR THE ASSESSMENT YEARS 1998- 99, 1999-2000 AND 2000-01. HE POINTED OUT FURTHER THAT THE HONBLE JURISDICTIONAL HIGH COURT OF DELHI VIDE ITS ORDER DATED 11.1.2000 HAS BEEN PLEASED TO DISMISS THE APPEAL OF THE REVENUE PREFERRED AGAINST THE ORDER O F THE TRIBUNAL FOR THE ASSESSMENT YEAR 2001-02 47. HAVING GONE THROUGH THE ORDERS OF THE AUT HORITIES BELOW WE FIND THAT DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ASSESSEE ITSEL F FOR THE ASSESSMENT YEAR 1998-99 IN ITA NO. 3360/D/2002 HAS DECIDED THE ISSUE IN FAV OUR OF THE ASSESSEE ON THE SIMILAR EXPENSES INCURRED ON TRAINING OF EMPLOYEES AS ALLOWABLE DEDUCTION IN FULL. FOLLOWING THE SAME THE FIRST APPELLATE AUTHORITY IN THE ASSESSMENT YEARS 1999-2000 TO 2001-02 HAS DECIDED THE ISSUE IN FAVOUR OF THE A SSESSEE. THE SAME ACTION OF THE LD. CIT(A) IN THOSE ASSESSMENT YEARS HAS ALSO BEEN APPROVED BY THE TRIBUNAL. IT HAS BEEN INFORMED BY THE LD. AR THAT IN THE ASSESSM ENT YEAR 2001-02 THE REVENUE HAD PREFERRED APPEAL AGAINST THE ORDER OF THE TRIBU NAL ON THE ISSUE BEFORE THE ITA NO. 1842/DEL/2009 A.Y. 2002-03 45 HONBLE DELHI HIGH COURT WHICH HAS BEEN DISMISSED V IDE ITS ORDER DATED 11.1.2010. IN VIEW OF THESE FACTS AND CIRCUMSTANCES WE ARE OF T HE VIEW THAT THE LD. CIT(A) FOLLOWING THE ORDER OF THE TRIBUNAL IN THIS REGARD HAS RIGHTLY ACCEPTED THE CONTENTION OF THE ASSESSEE THAT THERE IS NO ENDURING BENEFIT I N INCURRING EXPENDITURE ON RECRUITMENT AND TRAINING OF EMPLOYEES. IT IS AN ONG OING EXPENSES, FULLY DEDUCTIBLE IN THE YEAR OF INCURRING SUCH EXPENDITURE. THE ACTION OF THE FIRST APPELLATE AUTHORITY IN THIS REGARD IS UPHELD. GROUND NO. 8 IS ACCORDINGLY REJECTED. CONSEQUENTLY APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT O N 30.4.2013. SD/- SD/- (SHAMIM YAHYA) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE 30.4.2013 VEENA COPY OF ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER DEPUTY REGISTRAR, ITAT