Frigoglass India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 1906/DEL/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8273 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 11-01-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 01-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMENDRA KUMAR
• Keywords: Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; Principle of natural justice; International transaction; Commercial expediency
• Section: 143(3); 37(1); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 1906/DEL/2015 AY: 20 10-11 FRIGOGLAS INDIA PVT. LTD., VS DCIT, PLOT 26-A, SECTOR-3, CIRCLE-9(2), IMT MANESAR, NEW DELHI. GURGAON. (PAN: AAACF6804G) (APPELLANT) (RESPO NDENT) APPELLANT BY : SHRI HARPREET SINGH, ADV. SHRI ROPHAN KHARE, ADV. SHRI GAGANDEEP NAGPAL, CA RESPONDENT BY: SHRI AMENDRA KUMAR, CIT DR DATE OF HEARING: 11.01.2016 DATE OF PRONOUNCEMENT: 08.04.2016 ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGAI NST THE ASSESSMENT ORDER DATED 27.01.2015 FOR ASSESSMENT YE AR 2010-11 PASSED U/S 143(3) R.W.S. 144C OF THE INCOME TAX ACT , 1961 (HEREINAFTER CALLED THE ACT). 2. THE ASSESSEE, FRIGOGLASS INDIA PVT. LTD. (FIPL), WAS ESTABLISHED IN NOVEMBER 1998 AND IS A SUBSIDIARY OF NORCOOL HOLDING ASA, NORWAY. THE ASSESSEE IS IN THE BUSINE SS OF GLASS DOOR MERCHANDISING AND HAS A MANUFACTURING PLANT IN MANESAR, I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 2 GURGAON. THE FIPL PLANT CATERS TO THE INDIAN MARKE T AND ACTS AS AN EXPORT PLATFORM FOR THE ASIAN MARKET. GLASS DOO R MERCHANDISING CONCEPT IS RELEVANT IN ALCOHOLIC AND NON-ALCOHOLIC BEVERAGES, WATER, DAIRY PRODUCTS, BAKERY, CONFECTIO NARY, PHARMACEUTICALS ETC. 3. THE ASSESSEE HAD FILED ITS RETURN OF INCOME ON 1 2.10.2010 DECLARING AN INCOME OF RS. 9,30,49,569/-. THE INTER NATIONAL TRANSACTIONS FOR THE YEAR UNDER CONSIDERATION WERE AS PER THE FOLLOWING CHART - 4. SINCE THE ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AE), A REFERENCE WAS MADE BY THE ASSESSING OFFICER TO THE TRANSFER PRICI NG OFFICER INTERNATIONAL TRANSACTIONS SHOWN BY THE TAXPAYER: SR. NO. NATURE OF TRANSACTION METHOD SELECTED ARMS LENGTH PRICE AS PER TAXPAYER (I) PURCHASE OF RAW MATERIALS TNMM USING OPERATING PROFIT 10,477,158 (IF) PURCHASE OF TRADING GOODS 37,051,810 (III) PAYMENT OF ROYALTY 84,765,448 (IV) PAYMENT OF MANAGEMENT CONSULTANCY FEES 48,591,848 (V) SALE OF FINISHED GOODS ---------------------------- AS PLI OPERATING REVENUE 27,347,679 (VI) SALE OF COMPONENTS AND SPARES 27,312,504 (VII) RECEIPT OF SALES COMMISSION 8,479,350 (VIII) PURCHASE OF FIXED ASSETS 6,717,589 (IX) PROVISION OF SUPPORT SERVICES TNMM USING OPERATING PROFIT -- -------------------- AS PLI OPERATING COST 47,841,967 I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 3 (TPO) U/S 92CA(1) OF THE ACT. THE TPO PROPOSED AN ADDITION OF RS. 8,77,31,148 VIDE ORDER DATED 29.01.2014 AND THE ASSESSING OFFICER AFTER CONSIDERING THE INTERNATIONAL TRANSAC TIONS PROPOSED TO MAKE ASSESSMENT AT AN INCOME OF RS. 18,16,36,630 /- AFTER MAKING THE FOLLOWING ADDITIONS/DISALLOWANCES I) DISALLOWANCE OF DIFFERENCE IN ARMS LENGTH PRICE RS. 8,77,31,148 (ALP) II) DISALLOWANCE OF MISCELLANEOUS EXPENSES RS. 8,55,912 5. AGGRIEVED BY THE ACTION OF THE ASSESSING OFFICER , THE ASSESSEE APPROACHED THE DISPUTES RESOLUTION PANEL ( DRP) AND RAISED THE FOLLOWING OBJECTIONS:- 1. THE LEARNED TPO ERRED ON THE FACTS AND CIRCUMS TANCES OF THE CASE AND IN LAW, BY NOT ACCEPTING THE ECONOM IC ANALYSIS UNDERTAKEN BY THE ASSESSES WHICH WAS IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES FOR ESTABLISHING THE ARMS LENGTH PRICE OF TH E INTERNATIONAL TRANSACTIONS. 2. THE LEARNED TPO ERRED, ON FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW, IN REJECTING THE COMBINED TRAN SACTION APPROACH OF BENCHMARKING ADOPTED BY THE ASSESSEE IN ITS TRANSFER PRICING DOCUMENTATION AND PROCEEDING TO DETERMINE THE ALP OF INTERNATIONAL TRANSACTIONS PER TAINING TO PAYMENT OF ROYALTY AND MANAGEMENT FEE TO ITS ASSOCIATED ENTERPRISE (AE') ON A STANDALONE BASIS BY REJECTING TNMM AS THE MOST APPROPRIATE METHOD (MAM ).IN DOING SO, THE LEARNED TPO ERRED IN NOT CONSIDERING THE TRANSACTION BY TRANSACTION ANALYSIS SUBMITTED BY TH E ASSESSEE DURING THE ASSESSMENT PROCEEDINGS. THE LEARNED TPO ERRED, ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, IN ARBITRARILY SELECTING COMPARABL E UNCONTROLLED PRICE (CUP') METHOD AS THE MOST APPRO PRIATE METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTION PERTAINING TO PAYMENT OF MANAGEMENT FEE AND ROYALTY BY THE ASSESSEE TO ITS AE. IN DOING SO, THE LEARNED TP O HAS I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 4 ERRED IN: NOT UNDERTAKEN THE MAM ANALYSIS AS PRESCRIBED UNDE R RULE 10C OF THE RULES AND ACCORDINGLY NOT DOCUMENTE D THE SAME AS PRESCRIBED UNDER RULE 10D OF THE RULES; DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTI ON WITHOUT FOLLOWING THE MANNER OF APPLYING THE CUP ME THOD PRESCRIBED UNDER RULE 10B(1)(A) OF THE RULES; ADOPTING AN AD-HOC AND IRRATIONAL APPROACH TO RE-CO MPUTE THE ALP OF PAYMENT OF MANAGEMENT FEE, WITHOUT ESTABLISHING THE EXISTENCE OF ANY COMPARABLE UNCONT ROLLED TRANSACTIONS AND DEMONSTRATING THEIR COMPARABILITY WITH THE ASSESSEE; THE LEARNED TPO ERRED, ON FACTS AND CIRCUMSTANCES O F THE CASE AND MAKING AN ADJUSTMENT OF INR 2,965,700/- TO THE TOTAL INCOME OF THE ASSESSEE UNDER SECTION 92CA(3) OF THE ACT ON ACCOUNT OF ADJUSTMENT IN THE ARM'S LENGTH PR ICE OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF MANAGEM ENT FEE. IN DOING SO, THE LEARNED TPO HAS ERRED IN: MISINTERPRETED/ MISCONSTRUED THE FACTS WITH RESPEC T TO THE INTERNATIONAL TRANSACTIONS RELATING TO MANAGEMENT F EE ON THE BASIS OF INCORRECT PRESUMPTIONS. DISREGARDING THE GLOBAL TRANSFER PRICING REPORT JU STIFYING THE ARMS LENGTH NATURE OF THE TRANSACTION UNDER A TRANSACTION-BY-TRANSACTION ANALYSIS. THE LEARNED TPO ERRED, ON FACTS AND CIRCUMSTANCES O F THE CASE AND DISALLOWED THE PAYMENT OF ROYALTY BY CONSI DERING THE ALP OF THE SAME TO BE NIL AND MAKING AN ADJUSTM ENT OF INR 84,765,448 TO THE TOTAL INCOME OF THE ASSESSEE UNDER SECTION 92CA(3) OF THE ACT ON ACCOUNT OF ADJUSTMENT IN THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY. IN DOING SO, THE LEARNED TPO HA VE ERRED IN: A) DISREGARDING THE DOCUMENTARY EVIDENCE SUBMITTE D BY THE ASSESSEE AND ALLEGING NO SERVICES WERE ACTUALLY RECEIVED BY THE ASSESSEE; B) MISINTERPRETED/ MISCONSTRUED THE FACTS WITH RES PECT TO THE INTERNATIONAL TRANSACTIONS RELATING TO PAYMENT OF ROYALTY ON THE BASIS OF INCORRECT PRESUMPTIONS. C) DISREGARDING THE GLOBAL TRANSFER PRICING REPORT JUSTIFYING THE ARMS LENGTH NATURE OF THE TRANSACTI ON UNDER A TRANSACTION-BY-TRANSACTION ANALYSIS. I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 5 6. THE LEARNED TPO ERRED, ON FACTS AND CIRCUMSTANCE S OF THE CASE BY QUESTIONING THE COMMERCIAL RATIONALE OF THE LEGITIMATE BUSINESS EXPENSES INCURRED BY THE ASSESS EE AND NOT RESTRICTING THE SCOPE OF ASSESSMENT UNDER SECTI ON 92CA OF THE ACT TO DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION BY ADOPTING ONE OF THE PRESCRIBED METHODS ONLY. 7. THE LEARNED AO HAS ERRED ON FACTS AND IN LAW IN DISALLOWING MISCELLANEOUS EXPENSES AMOUNTING TO INR 855,912 BEING 5% OF THE TOTAL MISCELLANEOUS EXPENSE S, ON AD- HOC AND ARBITRARY BASIS ALLEGING THAT THE EXPENDITU RE INCURRED BY THE ASSESSEE IS NOT TOTALLY VOUCHED. IN DOING SO , THE LD. AO HAS FAILED TO BRING ON RECORD ANY EVIDENCE TO DEMON STRATE HOW THE SAID EXPENSE IS UNREASONABLE. 6. THE DRP ADJUDICATED THESE ISSUES AS UNDER:- (I) THE DRP CONCLUDED THAT THE TPO HAD RIGHTLY REJECTED THE TRANSFER PRICING STUDY (TP STUDY) OF THE ASSESS EE. (II) THE DRP CONCLUDED THAT THE ROYALTY PAYMENT BEING SENT THROUGH RBIS APPROVAL AT CERTAIN RATES CANNOT BE EQUATED AS PAYMENT BEING AT ARMS LENGTH AND THAT I T CANNOT BE USED AS COMPARABLE UNCONTROLLED PRICE (CUP). THE DRP FURTHER HELD THAT SINCE THE PAYMENT FOR ROYALTY TO AE WAS A SEPARATE INTERNATIONAL TRANSACTION INDEPENDENT OF FINANCIAL RESULTS AND CAPABLE OF BEING VERIFIED SEPARATELY, THE TPO WAS JUSTIFIED IN DETERMINING THE ALP SEPARATELY RATHER THAN I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 6 AGGREGATING IT WITH OTHER TRANSACTIONS UNDER TRANSACTIONAL NET MARGIN METHOD (TNMM). THE DRP FURTHER HELD THAT SINCE THE ASSESSEE COULD NOT SUBSTANTIATE THE BENEFIT DERIVED FROM THE PAYMENT O F ROYALTY, THE TPO WAS JUSTIFIED IN HOLDING THE ALP F OR PAYMENT OF ROYALTY TO BE AT NIL. (III) AS REGARDS THE ISSUE OF SELECTION OF CUP AS THE MOS T APPROPRIATE METHOD OF TNMM FOR BENCHMARKING THE PAYMENTS MADE ON ACCOUNT OF INTRA GROUP SERVICES AN D LICENCE FEE, THE DRP HELD THAT SINCE THE PAYMENT FO R INTERGROUP SERVICES AND PAYMENT FOR MANAGEMENT FEE TO AE WERE SEPARATE INTERNATIONAL TRANSACTIONS, INDEPENDENT OF FINANCIAL RESULTS AND CAPABLE OF BEI NG VERIFIED SEPARATELY, THE TPO WAS JUSTIFIED IN DETERMINING THE ALP SEPARATELY RATHER THAN AGGREGATING IT WITH OTHER TRANSACTIONS UNDER TNMM. (IV) AS REGARDS THE ACTION OF THE TPO IN MAKING AN ADJUSTMENT OF RS. 29,65,700/- ON ACCOUNT OF ADJUSTMENT IN THE ALP OF INTERNATIONAL TRANSACTIONS OF PAYMENT OF MANAGEMENT FEE, THE DRP HELD THAT THE ASSESSEE HAD MADE PAYMENTS FOR SERVICES AVAILED I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 7 WHICH CONTAINED TWO MARK-UPS, ONE BY THE ENTITY RENDERING THE SERVICES AND THE OTHER BY THE ENTITY IN GREECE. THEREFORE, THE SECOND MARK-UP OF 6.5% WAS RIGHTLY TO BE ADJUSTED IN THE DETERMINATION OF ALP. (V) AS REGARDS THE AD HOC DISALLOWANCE OF 5% OF THE MISCELLANEOUS EXPENSES, THE DRP RULED IN FAVOUR OF THE ASSESSEE AND HELD THAT SINCE THE DISALLOWANCE WAS N OT SUPPORTED BY ANY EVIDENCE, THE SAME HAD TO BE DELETED. 7. THE TPO CONSEQUENTLY PASSED THE ORDER ON 6.1.2 015 GIVING EFFECT TO THE DIRECTIONS OF THE DRP STATING THAT TH ERE WAS NO CHANGE IN THE TPOS ORDER DATED 29.01.14. ACCORDIN GLY, THE SAME AMOUNT OF RS. 8,77,31,148/- ON ACCOUNT OF T.P. ADJU STMENT WAS DISALLOWED. FURTHER, AN AMOUNT OF RS. 8,55,912/- B EING 5% OF TOTAL MISCELLANEOUS INCOME WAS ALSO ADDED BACK AND THE ASSESSMENT WAS COMPLETED AT RS. 18,16,36,630/-. 8. AGGRIEVED, THE ASSESSEE IS BEFORE US AND HAS PRE FERRED THE FOLLOWING GROUNDS OF APPEAL:- 1. 1.1. THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIR CLE- 9(2), NEW DELHI (THE ASSESSING OFFICER OR THE LD. AO) I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 8 PURSUANT TO DIRECTIONS OF HONBLE DISPUTE RESOLUTIO N PANEL (HONBLE DRP), HAS ERRED ON FACTS AND CIRCUMSTANC ES OF THE CASE AND IN LAW IN COMPLETING THE PRESENT ASSESSMEN T AT AN INCOME OF RS. 18,16,36,630 AS AGAINST THE RETURNED INCOME OF RS. 9,30,49,569 IS BAD IN LAW. 1.2. THAT, THE LEARNED DEPUTY COMMISSIONER OF INCOME TA X, TRANSFER PRICING OFFICER -I (5) (HEREINAFTER REFERR ED AS LD. TPO)/ HONBLE DRP HAS GROSSLY ERRED IN MAKING/UPHO LDING AN ADJUSTMENT OF RS. 8,77,31,148 IN RESPECT OF PAYM ENT FOR MANAGEMENT FEE AND ROYALTY TO ASSOCIATED ENTERPRISE S (AES) AND IN NOT APPRECIATING THAT NONE OF THE CO NDITIONS SET OUT IN SECTION 92C(3) OF THE ACT ARE SATISFIED IN THE PRESENT CASE. 2. 2.1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. TPO/HONBLE DRP HAVE ERRED IN NOT ACCEPTING THE ECONOMIC ANALYSIS OF THE APPELLANT, FOR DETERMINATI ON OF THE ARM'S LENGTH PRICE (ALP) IN CONNECTION WITH THE I MPUGNED INTERNATIONAL TRANSACTIONS. 2.2. THAT THE LD. TPO/ HONBLE DRP HAS GROSSLY ERRED IN REJECTING THE COMBINED TRANSACTION APPROACH OF BENCHMARKING ADOPTED BY THE APPELLANT IN ITS TRANSF ER PRICING ANALYSIS BY SELECTING TRANSITIONAL NET MARG IN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MA M) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF P AYMENT OF ROYALTY AND PAYMENT OF MANAGEMENT FEE TO ITS AES IN ACCORDANCE WITH THE ACT, RULES AND THE GENERALLY AC CEPTED OECD GUIDELINES. 2.3. THE LD. TPO/ HONBLE DRP ERRED IN NOT APPRECIATING THAT THE RECEIPT OF VARIOUS MANAGEMENT SERVICES, TECHNIC AL KNOW- HOW AND BRAND USAGE ARE CLOSELY LINKED TO THE OVERA LL BUSINESS ACTIVITIES OF THE APPELLANT AND ERRED IN A NALYZING THE TRANSACTION SEPARATELY FOR THE DETERMINATION OF ALP. 2.4. THE LD. TPO/ HONBLE DRP ERRED IN DISREGARDING THE GLOBAL TRANSFER PRICING REPORT JUSTIFYING THE ARMS LENGTH NATURE OF THE TRANSACTION UNDER ANALYSIS; I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 9 3. 3.1. THAT THE LD. TPO/ HONBLE DRP ERRED IN NOT CONDUCT ING THE ANALYSIS OF SELECTING THE MAM AS PRESCRIBED UND ER RULE 10C OF THE RULES AND ACCORDINGLY NOT DOCUMENTE D THE SAME AS PRESCRIBED UNDER RULE 10D OF THE RULES. 3.2. THE LD. TPO/ HONBLE DRP ERRED IN LAW BY UPHOLDING THE DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANS ACTION USING COMPARABLE UNCONTROLLED PRICE (CUP) METHOD WITHOUT FOLLOWING THE MANNER OF APPLYING THE CUP ME THOD PRESCRIBED UNDER RULE 10B(1)(A) OF THE RULES. 3.3. THE LD. TPO/ HONBLE DRP HAVE ERRED IN UPHOLDING T HE ADOPTION OF CUP METHOD AS THE MOST APPROPRIATE METH OD FOR DETERMINING THE ARM'S LENGTH PRICE IN RESPECT O F THE IMPUGNED INTERNATIONAL TRANSACTION WITHOUT IDENTIFY ING ANY COMPARABLE UNCONTROLLED TRANSACTION(S) FOR THE COMP UTATION OF THE ALP AS PRESCRIBED IN SECTION 92F(II) OF THE ACT. 4. 4.1. THE LD. TPO/ HONBLE DRP ERRED IN PASSING AN ORDER THAT IS PERVERSE IN LAW IGNORING THE RELEVANT SUBMISSION S, INFORMATION AND DOCUMENTS PROVIDED BY THE APPELLANT TO SUBSTANTIATE THE SERVICES AND BENEFITS RECEIVED BY THE APPELLANT IN LIEU OF PAYMENT OF ROYALTY, AND BASED ON A PREOCCUPIED MIND REACHED AT AN INAPPROPRIATE CONCLU SION THAT THE ARMS LENGTH VALUE OF THE TRANSACTION PERT AINING TO PAYMENT OF ROYALTY SHOULD BE NIL. 4.2. THE LD. TPO/ HONBLE DRP ERRED IN MISINTERPRETING/ MISCONSTRUED THE FACTS WITH RESPECT TO THE INTERNAT IONAL TRANSACTION RELATING TO PAYMENT OF AND ROYALTY ON T HE BASIS OF INCORRECT PRESUMPTIONS AND ACCORDINGLY MADE AN ADJUSTMENT OF INR 84,765,448 TO THE TOTAL INCOME OF THE ASSESSEE. 4.3. THE LD. TPO/ HONBLE DRP ERRED IN MISINTERPRETING/ MISCONSTRUED THE FACTS WITH RESPECT TO THE INTERNAT IONAL TRANSACTION RELATING TO PAYMENT OF MANAGEMENT FEE O N THE BASIS OF INCORRECT PRESUMPTIONS AND MADE AN ADJUSTM ENT OF OF INR 2,965,700/- TO THE TOTAL INCOME OF THE ASSES SEE. 5. QUESTIONING THE COMMERCIAL RATIONALE OF BUSINESS EX PENSES I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 10 6. THE LD. TPO/ HONBLE DRP ERRED IN QUESTIONING THE COMMERCIAL RATIONALE OF THE LEGITIMATE BUSINESS EXP ENSES INCURRED BY THE TAXPAYER AND NOT RESTRICTING THE SC OPE OF ASSESSMENT UNDER SECTION 92CA TO DETERMINING THE AR MS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION BY AD OPTING ONE OF THE PRESCRIBED METHODS ONLY. DISREGARDING THE DI RECTIONS OF THE HONBLE DRP. 6.1. THE LEARNED AO HAS ERRED ON FACTS AND IN LAW IN DISALLOWING MISCELLANEOUS EXPENSES AMOUNTING TO INR 855,912 BEING 5% OF THE TOTAL MISCELLANEOUS EXPENSE S, ON AD-HOC AND ARBITRARY BASIS ALLEGING THAT THE EXPEND ITURE INCURRED BY THE ASSESSEE IS NOT TOTALLY VOUCHED. IN DOING SO, THE LD. AO HAS FAILED TO BRING ON RECORD ANY EVIDEN CE TO DEMONSTRATE HOW THE SAID EXPENSE IS UNREASONABLE. WITHOUT PREJUDICE, THE LD. AO HAS FURTHER ERRED IN DISALLOWING 5% OF THE MISCELLANEOUS EXPENSES WITHOU T PROVIDING ANY OPPORTUNITY OF BEING HEARD TO VIOLATI NG THE PRINCIPLES OF NATURAL JUSTICE. IN DOING SO THE LD. AO ALSO ERRED IN NOT ALLOWING T HE DIRECTION OF THE HONBLE DRP, WHICH HAD DIRECTED THE AO TO DE LETE THE ADJUSTMENT; 7. 7.1 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. AO HAS ERRED IN CHARGING INTEREST UNDER 234 A, 234B, 234C AND 234D OF THE ACT, AS CONSEQUENCES OF THE ADDITIONS MADE IN THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) READ WITH SECTION 144C OF THE ACT. 7.2 THE APPELLANT DENIES ITS LIABILITY TO SUCH INT EREST AND PRAYS THAT THE AO BE DIRECTED TO DELETE THE LEVY OF AFORESAID INTEREST AS IT IS ENTIRELY A RESULT OF ADDITIONS/DI SALLOWANCE AND CONSEQUENTIAL IN NATURE. I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 11 8. 8.1. THE LD. AO HAS ERRED IN INITIATING PENALTY PRO CEEDINGS UNDER SECTION 271(1)(C) READ WITH SECTION 274 OF TH E ACT AGAINST THE APPELLANT. THE APPELLANT SUBMITS THAT THE ABOVE GROUNDS OF APP EAL ARE MUTUALLY EXCLUSIVE OF AND WITHOUT PREJUDICE TO EACH ANOTHER. FURTHER, THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMIT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL A T ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL SO A S TO ENABLE THE HONBLE ITAT TO DECIDE ON THE GROUNDS RAISED BY THE APPELLANT, AS PER LAW. 9. ON THE ISSUE OF ROYALTY, THE LD. AR SUBMITTED THAT THE ASSESSEE HAS ENTERED INTO ROYALTY AGREEMENT WITH IT S AE FRIGOGLASS SAIC (HEAD OFFICE) ON ACCOUNT OF RECEIPT OF ICM TECHNOLOGY AND FOR USE OF TRADEMARK. IT WAS SUBMIT TED THAT CUP METHOD COULD NOT BE APPLIED IN THE CASE AS NEITHER THE AE NOR THE ASSESSEE HAVE ENTERED INTO SIMILAR ROYALTY ARRA NGEMENTS WITH THIRD PARTIES AND THE DATA FOR EXTERNAL COMPARABLE TRANSACTIONS BETWEEN INDEPENDENT PARTIES IN INDIA WAS NOT AVAILA BLE. IT WAS SUBMITTED THAT THE ONLY METHOD WHICH COULD BE CORRE CTLY APPLIED WAS TNMM (WHICH HAS BEEN APPLIED BY THE ASSESSEE). IT WAS FURTHER SUBMITTED THAT THE BENCHMARKING APPROACH AD OPTED BY THE ASSESSEE HAS BEEN WRONGLY REJECTED AND THAT THE APPLICATION OF CUP METHOD WAS ERRONEOUS. IT WAS SUBMITTED THAT FIPLS I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 12 PRINCIPAL ACTIVITY BEING MANUFACTURING OF GLASS DOO R REFRIGERATORS, THE INTERNATIONAL TRANSACTIONS FORM AN INTEGRAL PAR T OF FIPLS BUSINESS OF MANUFACTURE AND SALE OF GLASS DOOR REFR IGERATORS. ACCORDINGLY, FOR THE PURPOSE OF ECONOMIC ANALYSIS, THE ASSESSEE COMBINED THE INTERNATIONAL TRANSACTION PERTAINING T O PAYMENT OF ROYALTY AS IN THIS CASE; THE TRANSACTION WAS SO CLO SELY LINKED OR CONTINUOUS THAT IT COULD NOT HAVE BEEN EVALUATED AD EQUATELY ON AN INDIVIDUAL BASIS. THEREFORE, THE TRANSACTIONS P ERTAINING TO PAYMENT OF ROYALTY WERE CONSIDERED AS CLOSELY LINKE D TO THE MANUFACTURE OF GLASS DOOR REFRIGERATORS AND A COMBI NED TRANSACTIONS APPROACH WAS USED. THE LD. AR SUBMITT ED THAT SINCE THE OPERATING MARGIN OF THE ASSESSEE WAS HIGH ER THAN THE ARITHMETIC MEAN OF THE OPERATING MARGINS OF THE COM PARABLE COMPANIES AND THE COST PERTAINING TO THE PAYMENT OF ROYALTY HAD ALREADY BEEN BENCHMARKED, THE INTERNATIONAL TRANSAC TION PERTAINING TO THE PAYMENT OF ROYALTY BY FIPL TO FRI GOGLASS SAIC SHOULD BE CONSIDERED TO BE AT ARMS LENGTH FROM THE ASSESSEES PERSPECTIVE. THE LD. AR FURTHER SUBMITTED THAT FRI GOGLASS SAIC HAD HIRED AN INDEPENDENT EXTERNAL CONSULTANT FOR RE VIEWING THE ARMS LENGTH NATURE OF 4% ROYALTY APPLIED BY THE HE AD OFFICE FOR THE LICENSING OF THE ICM TECHNOLOGY AND TRADEMARKS TO RELATED I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 13 GROUP ENTITIES AND BASED ON THE TERMS AND CONDITION S OF THE LICENSE AGREEMENT BETWEEN FRIGOGLASS SAIC AND ITS A FFILIATES AND IN VIEW OF THE BROADLY COMPARABLE LICENSING AGREEME NTS IDENTIFIED FROM THE SEARCH OF PUBLICLY AVAILABLE LICENSE AGREE MENTS, IT WAS CONCLUDED THAT A ROYALTY RATE OF 4% ON SALE OF PROD UCTS FOR THE USE OF TRADEMARKS AND ICM TECHNOLOGY WAS CONSIDERED TO BE AN ARMS LENGTH RATE. IT WAS ALSO SUBMITTED THAT NO I NDEPENDENT THIRD PARTY WILL LET ANY OTHER ENTITY USE ITS INTEL LECTUAL PROPERTY RIGHTS (IPR) AND ALLOW TO ENJOY THE BENEFITS FROM T HE USAGE OF SUCH IPR WITHOUT CHARGING A FEE. IT WAS SUBMITTED THAT FIPL ENJOYS A LOT OF BENEFITS IN MANUFACTURING AND MARKE TING FROM THE USE OF THE IPRS OWNED BY FRIGOGLASS SAIC. IT WAS SU BMITTED THAT FIPL HAD STARTED ENJOYING THE BENEFITS FROM THE USA GE OF THE TRADEMARKS AND ICM TECHNOLOGY FROM VERY INCEPTION A LTHOUGH A FORMAL AGREEMENT WAS ENTERED INTO IN SEPTEMBER 2007 AND HAD STARTED MAKING PAYMENT FOR SUCH SERVICES FROM ASSES SMENT YEAR 2009-10 ONLY. IT WAS FURTHER SUBMITTED THAT THE AC TIVITIES PERFORMED BY THE AE IN TERMS OF THE ROYALTY AGREEME NT WERE ICM SALES, CUSTOMER SERVICE, MARKETING SERVICES, PRODUC T DEVELOPMENT AND FUTURE TECHNOLOGIES. IT WAS SUBMITTED THAT MOS T OF THE CLIENTS OF THE FIPL WERE GLOBAL CLIENTS AND THE USE OF THE I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 14 TRADEMARK HAD A POSITIVE IMPACT ON THE SALES OF FIP L IN INDIA. THE LD. AR MADE A REFERENCE TO THE COMPARATIVE PROF ITABILITY CHART FROM FY 2005-06 TO FY 2009-10 AND SUBMITTED T HAT THE PROFITABILITY HAS BEEN INCREASING ON AN YEAR TO YEA R BASIS BECAUSE OF AVAILING OF THE SERVICES OF FRIGOGLASS SAIC AND, THEREFORE, SINCE THE BENEFITS RECEIVED FROM FIPL FROM RECEIPT OF SUC H SERVICES OUTWEIGH THE PAYMENT FOR SUCH SERVICES, THE ASSESSE E WAS JUSTIFIED IN MAKING PAYMENTS FOR ROYALTY. 10. IT WAS ALSO SUBMITTED THAT ROYALTY HAS BEEN PAI D ONLY AS PER THE TERMS OF THE AGREEMENT. THE LD. AR SUBMITTED T HAT THE DISALLOWANCE FOR ROYALTY WAS ULTIMATELY MADE ON THE GROUND OF COMMERCIAL EXPEDIENCY AND HE PLACED RELIANCE ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS EKL APPLIANCES LTD. 345 UTR 241 (DEL) AND THAT OF THE I TAT HYDERABAD B BENCH IN THE CASE OF DCIT VS AIR LIQU IDE ENGINEERING IN I.T.A. NO. 1040/HYD/2011 FOR THE PRO POSITION THAT SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMO NSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT WAS NO CONCERN OF THE TPO TO DISALLOW IT ON ANY EXT RANEOUS REASONING. HE SUBMITTED THAT ON THE FACTS OF THE C ASE, THE I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 15 PAYMENT OF ROYALTY DESERVES TO BE ALLOWED IN TOTO AS IT WAS ALLOWABLE BUSINESS EXPENDITURE. 11. REGARDING THE SECOND ISSUE OF PAYMENT OF MANAGE MENT CONSULTANCY FEE, IT WAS SUBMITTED THAT FIPL HAD ENT ERED INTO AN AGREEMENT WITH FRIGOGLASS SAIC FOR CERTAIN SUPPORT SERVICES. IT WAS SUBMITTED THAT THE OFFICIALS OF THE FIPL WERE I NVOLVED IN THE DETERMINATION OF COSTS FOR SERVICES RENDERED BY FIP L. SUCH COST DETAILS WERE SENT TO FRIGOGLASS SAIC WHERE SIMILAR COSTS WERE POOLED FROM DIFFERENT FRIGOGLASS ENTITIES GLOBALLY. ONCE A COMBINED COST POOL WAS DETERMINED, COSTS WERE ALLOC ATED TO DIFFERENT ENTITIES ON THE BASIS OF BENEFITS RECEIVE D BY THE PARTICULAR ENTITY. THE LD. AR ELABORATED THAT FIPL RENDERS CERTAIN SUPPORT SERVICES TO ITS AE AND THESE SERVIC ES OFFERED BY FIPL ARE SIMILAR IN NATURE TO SOME OF THE SERVICES PROVIDED BY ITS AE GLOBALLY. FIIPL IDENTIFIES THE COST FOR PROVISI ON OF SERVICE AND THE SAME IS REIMBURSED BEFORE THE AE. FOR THE YEA R UNDER CONSIDERATION, COSTS FOR THE FOLLOWING SERVICES WER E CHARGED TO FIPL FINANCE AND ACCOUNTING/CORPORATE GOVERNANCE, HR, IT, GENERAL MANAGEMENT, SUPPLY CHAIN, ICM MANUFACTURING AND ENGINEERING SERVICES. I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 16 12. THE LD. AR SUBMITTED THAT IN ORDER TO EFFECTIVE LY TRACK THE TIME AND COST UTILIZED BY EACH GROUP ENTITY, EACH G ROUP ENTITY HAS AN IN HOUSE MECHANISM TO CAPTURE ALL THE DIRECT AND INDIRECT COST INCURRED TO PROVIDE THESE SERVICES TO OTHER GROUP E NTITIES (INCLUDING FIPL) AND ONCE THE COST IS ACCURATELY DE TERMINED BY EACH GROUP ENTITY, SUCH COST DETAILS ARE SENT TO FR IGOGLASS SAIC WHERE SIMILAR COSTS ARE POOLED FROM DIFFERENT FRIGO GLASS ENTITIES GLOBALLY. THIS COMBINED COST POOL IS THEN ADJUSTED FOR COSTS INCURRED ON SHAREHOLDER ACTIVITIES AND DUPLICATE SE RVICES. ONCE A COMBINED COST POOL IS DETERMINED, COSTS ARE ALLOCAT ED TO DIFFERENT ENTITIES ON THE BASIS OF BENEFITS RECEIVED BY THE P ARTICULAR ENTITY. THE ALLOCATION KEYS USED ARE COMPENSATION AND BENEF IT COST OF THE PERSON PROVIDING THE SERVICES AND ACTUAL TIME S PENT BY THE PERSON PROVIDING SERVICES ALLOCATED BY USING TIME S HEETS ETC. AT THIS STAGE, AN APPROPRIATE MARK-UP IS APPLIED TO TH E CHARGEABLE COSTS IDENTIFIED BY FRIGOGLASS SAIC AND AS PER PARA 5 OF THE SERVICE AGREEMENT A MARK-UP OF 6.5% IS APPLIED AND BILLED TO THE RESPECTIVE FRIGOGLASS GROUP ENTITY (INCLUDING FIPL) . THE LD. AR ALSO SUBMITTED THAT FRIGOGLASS SAIC HAD HIRED AN IN DEPENDENT EXTERNAL CONSULTANT FOR REVIEWING THE ARMS LENGTH NATURE OF THE 6.5% MARK-UP APPLIED BY THE HEAD OFFICE FOR RENDERI NG I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 17 MANAGEMENT SUPPORT SERVICES TO RELATED GROUP ENTITI ES. THE SEARCH FOR COMPARABLE SERVICES PROVIDERS RESULTED I N THE IDENTIFICATION OF 720 INDEPENDENT COMPANIES. THESE COMPARABLES EXHIBITED AN ARMS LENGTH INTER-QUARTILE RANGE OF 3 .7% TO 13.3% WITH A MEDIAN OF 7.4%. ON THE BASIS OF THIS, THE 6 .5% COST PLUS MARK-UP CHARGED BY THE FRIGOGLASS GROUP CAN BE CONS IDERED CONSISTENT WITH THE ARMS LENGTH PRINCIPLE. THE LD . AR FURTHER SUBMITTED THAT THE TPO HAS ACCEPTED THE RECEIPT OF SERVICES AS WELL AS THE NEEDS AND BENEFITS AVAILED BY THE ASSES SEE AND HAS ONLY CHALLENGED THE COMPUTATION MECHANISM FOR SUCH SERVICES AND THAT TOO DISALLOWING ONLY THE MARK-UP CHARGED O N THE COST ALLOCATED TO AE, CONSIDERING THE SAME TO BE DUPLICA TIVE IN NATURE AND THE DRP HAS SIMPLY FOLLOWED THE REASONING OF TH E TPO WITHOUT EXERCISING AN INDEPENDENT ANALYSIS. THE LD . AR REFEREED TO THE ALLOCATION SHEET APPEARING ON PAGE 10 OF THE ORDER OF THE TPO AND SUBMITTED THAT THE TPO HAS MIXED UP TWO SET S OF TRANSACTIONS VIZ. AVAILING OF SERVICES FROM AE AT C OST PLUS 6.5% MARK-UP AND RENDERING SERVICES TO AE AT COST PLUS 1 5% MARK-UP. REFERRING TO PARA (II) ON PAGE 9 OF THE TPOS ORDER , THE LD. AR POINTED OUT THAT THE AGREEMENT WITH CYPRUS REFERRED TO IN THE SAID PARA WAS AN ALTOGETHER DIFFERENT AGREEMENT, A COPY OF WHICH I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 18 IS PLACED AT PAGE 1470 OF PAPER BOOK IV. HE SUBMIT TED THAT IN VIEW OF THE APPARENT MISTAKE ON FACTS THE MATTER SH OULD BE SET ASIDE TO THE FILE OF THE TPO FOR VERIFICATION AS TO WHETHER THE ALLOCATION OF EXPENSES HAS BEEN CORRECTLY MADE AS P ER THE ALLOCATION SHEETS. 13. ON THE ISSUE OF DISALLOWANCE ON ACCOUNT OF MISC ELLANEOUS EXPENSES, THE LD. AR SUBMITTED THAT THE TPO HAS NOT GIVEN EFFECT TO THE DIRECTION OF THE DRP IN THIS REGARD THAT THE DISALLOWANCE ON ACCOUNT OF MISCELLANEOUS EXPENSES IS TO BE DELET ED. HE PRAYED FOR A DIRECTION ON THIS ISSUE ALSO. 14. IN RESPONSE, THE LD. DR PLACING RELIANCE ON THE ORDERS OF THE DRP AS WELL AS THE TPO SUBMITTED ON THE ISSUE OF RO YALTY THAT THE PRINCIPLE OF COMMERCIAL EXPEDIENCY CANNOT TAKE AWAY THE ESSENCE OF OECD GUIDELINES AND THE BENEFIT ACCRUING AS A RE SULT OF THE PAYMENT OF ROYALTY HAS TO BE EXAMINED. HE EMPHASIZ ED THAT THE ASSESSEE HAS FAILED TO DEMONSTRATE AS TO WHAT DIREC T BENEFIT HAD ACCRUED TO THE ASSESSEE FROM THE PAYMENT OF ROYALTY . HE ALLEGED THAT IN ABSENCE OF PROPER JUSTIFICATION FOR THE PAY MENT OF ROYALTY, THE SAME WAS A SHAM TRANSACTION FOR PROFIT SHIFTING OUT OF INDIA. HE PLACED RELIANCE ON THE DECISION OF THE HON'BLE D ELHI HIGH COURT IN CIT VS ABHINANDAN INVESTMENT LTD. IN I.T.A . NO. I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 19 130/2001 FOR THE PROPOSITION THAT ALL COLORABLE DEV ICES IN THE GARB OF TAX PLANNING SHOULD BE IGNORED AND SUBSTANC E OVER FORM SHOULD PREVAIL. HE ALSO PLACED RELIANCE ON THE DEC ISION OF THE COORDINATE I BENCH OF THIS TRIBUNAL IN BOMBARDIER TRANSPORTATION INDIA PVT. LTD. VS DCIT IN I.T.A. NO . 1626/DEL/2015 WHEREIN THE BENCH HAD UPHELD THE ACTI ON OF THE DRP IN DETERMINING THE ALP OF INTRA-GROUP SERVICES RECEIVED FROM ITS AE AT NIL. THE LD. DR SUBMITTED THAT THE ORDER OF THE DRP SHOULD BE UPHELD. 15. ON THE ISSUE OF MANAGEMENT FEES, THE LD. DR SUB MITTED THAT THE TPO HAD CORRECTLY CALCULATED THE DISALLOWA NCE AND AS SUCH, NO RESTORATION WAS NECESSARY. ON THE ISSUE O F DISALLOWANCE OF MISCELLANEOUS EXPENDITURE, THE LD. DR, IN ALL FA IRNESS, ACCEPTED THAT THE TPO HAD SOMEHOW OVERLOOKED THE DI RECTIONS OF THE DRP AND SUBMITTED THAT HE IS AGREEABLE TO THE C ONTENTIONS OF THE LD. AR. 16. WE HAVE HEARD THE RIVAL PARTIES AT LENGTH AND C AREFULLY PERUSED THE MATERIAL ON RECORD. AS FAR AS THE ISSU E OF ROYALTY IS CONCERNED, WE FIND THAT THE ASSESSEE HAD FILED IN T HE COURSE OF THE TPO ASSESSMENT AS WELL AS BEFORE THE DRP, DETAI LED SUBMISSIONS, INCLUDING AGREEMENT BETWEEN AE AND THE ASSESSEE, I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 20 JUSTIFYING HOW THE TECHNICAL KNOW-HOW SUPPLIED BY I TS AE WAS CRUCIAL TO THE RUNNING OF ITS BUSINESS. IN CIT VS EKL APPLIANCES 341 ITR 241 (DEL), THE HON'BLE DELHI HIGH COURT HAD THE OCCASION TO CONSIDER AN ISSUE OF DISALLOWANCE OF ROYALTY BY TPO BECAUSE THE ASSESSEE IN THAT CASE HAD BEEN SUFFERING LOSSES , THE HON'BLE HIGH COURT WHILE HOLDING THAT SO LONG AS THE EXPEND ITURE OR PAYMENT BY ASSESSEE HAS BEEN DEMONSTRATED TO HAVE B EEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS R EASONING, OBSERVED AS FOLLOWS:- 16. THE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD , FOR SHORT) HAS LAID DOWN TRANSFER PRICING GUIDELINES FOR MULTI-NATIONAL ENTERPRISES AND TAX ADMINISTRATIONS. THESE GUIDELINES GIVE AN INTRODUCTION TO THE ARMS LENGTH PRICE PRINCIPLE AN D EXPLAINS ARTICLE 9 OF THE OECD MODEL TAX CONVENTION . THIS ARTICLE PROVIDES THAT WHEN CONDITIONS ARE MADE OR IMPOSED BETWEEN TWO ASSOCIATED ENTERPRISES IN THEIR COMMERCIAL OR FINANCIAL RELATIONS WHICH DIFFER FROM THOSE WHICH WOULD BE MADE BETWEEN INDEPENDENT ENTERPRISES THEN ANY PROFIT WHICH WOULD, BUT FOR THOSE CONDITIO NS, HAVE ACCRUED TO ONE OF THE ENTERPRISES, BUT, BY REA SON OF THOSE CONDITIONS, IF NOT SO ACCRUED, MAY BE INCLUDE D IN THE PROFITS OF THAT ENTERPRISE AND TAXED ACCORDINGL Y. BY SEEKING TO ADJUST THE PROFITS IN THE ABOVE MANNER, THE ARMS LENGTH PRINCIPLE OF PRICING FOLLOWS THE APPRO ACH OF TREATING THE MEMBERS OF A MULTI-NATIONAL ENTERPRISE GROUP AS OPERATING AS SEPARATE ENTITIES RATHER THAN AS INSEPARABLE PARTS OF A SINGLE UNIFIED BUSINESS. AFT ER REFERRING TO ARTICLE 9 OF THE MODEL CONVENTION AND STATING THE ARM S LENGTH PRINCIPLE, THE GUIDELINES PROVIDE FOR I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 21 RECOGNITION OF THE ACTUAL TRANSACTIONS UNDERTAKEN IN PARAGRAPHS 1.36 TO 1.41. PARAGRAPHS 1.36 TO 1.38 AR E IMPORTANT AND ARE RELEVANT TO OUR PURPOSE. THESE PARAGRAPHS ARE REPRODUCED BELOW: - 1.36 A TAX ADMINISTRATIONS EXAMINATION OF A CONTROLLED TRANSACTION ORDINARILY SHOULD BE BASED O N THE TRANSACTION ACTUALLY UNDERTAKEN BY THE ASSOCIATED ENTERPRISES AS IT HAS BEEN STRUCTURED BY THEM, USIN G THE METHODS APPLIED BY THE TAXPAYER INSOFAR AS THESE AR E CONSISTENT WITH THE METHODS DESCRIBED IN CHAPTERS I I AND III. IN OTHER THAN EXCEPTIONAL CASES, THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACTUAL TRANSACTIONS OR SUBSTITUTE OTHER TRANSACTIONS FOR T HEM. RESTRUCTURING OF LEGITIMATE BUSINESS TRANSACTIONS W OULD BE A WHOLLY ARBITRARY EXERCISE THE INEQUITY OF WHIC H COULD BE COMPOUNDED BY DOUBLE TAXATION CREATED WHER E THE OTHER TAX ADMINISTRATION DOES NOT SHARE THE SAM E VIEWS AS TO HOW THE TRANSACTION SHOULD BE STRUCTURE D. 1.37 HOWEVER, THERE ARE TWO PARTICULAR CIRCUMSTA NCES IN WHICH IT MAY, EXCEPTIONALLY, BE BOTH APPROPRIATE AND LEGITIMATE FOR A TAX ADMINISTRATION TO CONSIDER DISREGARDING THE STRUCTURE ADOPTED BY A TAXPAYER IN ENTERING INTO A CONTROLLED TRANSACTION. THE FIRST CIRCUMSTANCE ARISES WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FORM. IN SUCH A CASE T HE TAX ADMINISTRATION MAY DISREGARD THE PARTIES CHARACTERIZATION OF THE TRANSACTION AND RECHARACTER ISE IT IN ACCORDANCE WITH ITS SUBSTANCE. AN EXAMPLE OF THI S CIRCUMSTANCE WOULD BE AN INVESTMENT IN AN ASSOCIATE D ENTERPRISE IN THE FORM OF INTEREST -BEARING DEBT WH EN, AT ARMS LENGTH, HAVING REGARD TO THE ECONOMIC CIRCUMSTANCES OF THE BORROWING COMPANY, THE INVESTM ENT WOULD NOT BE EXPECTED TO BE STRUCTURED IN THIS WAY. IN THIS CASE IT MIGHT BE APPROPRIATE FOR A TAX ADMINIS TRATION TO CHARACTERIZE THE INVESTMENT IN ACCORDANCE WITH I TS ECONOMIC SUBSTANCE WITH THE RESULT THAT THE LOAN MA Y BE TREATED AS A SUBSCRIPTION OF CAPITAL. THE SECOND CIRCUMSTANCE ARISES WHERE, WHILE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME, THE ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 22 VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH W OULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVI NG IN A COMMERCIALLY RATIONAL MANNER AND THE ACTUAL STRUCTURE PRACTICALLY IMPEDES THE TAX ADMINISTRATIO N FROM DETERMINING AN APPROPRIATE TRANSFER PRICE. AN EXAMP LE OF THIS CIRCUMSTANCE WOULD BE A SALE UNDER A LONG-TERM CONTRACT, FOR A LUMP SUM PAYMENT, OF UNLIMITED ENTITLEMENT TO THE INTELLECTUAL PROPERTY RIGHTS ARI SING AS A RESULT OF FUTURE RESEARCH FOR THE TERM OF THE CONTR ACT (AS PREVIOUSLY INDICATED IN PARAGRAPH 1.10). WHILE IN T HIS CASE IT MAY BE PROPER TO RESPECT THE TRANSACTION AS A TRANSFER OF COMMERCIAL PROPERTY, IT WOULD NEVERTHEL ESS BE APPROPRIATE FOR A TAX ADMINISTRATION TO CONFORM THE TERMS OF THAT TRANSFER IN THEIR ENTIRETY (AND NOT SIMPLY BY REFERENCE TO PRICING) TO THOSE THAT MIGHT REASONABL Y HAVE BEEN EXPECTED HAD THE TRANSFER OF PROPERTY BEEN THE SUBJECT OF A TRANSACTION INVOLVING INDEPENDENT ENTERPRISES. THUS, IN THE CASE DESCRIBED ABOVE IT M IGHT BE APPROPRIATE FOR THE TAX ADMINISTRATION, FOR EXAM PLE, TO ADJUST THE CONDITIONS OF THE AGREEMENT IN A COMMERC IALLY RATIONAL MANNER AS A CONTINUING RESEARCH AGREEMENT. 1.38 IN BOTH SETS OF CIRCUMSTANCES DESCRIBED ABO VE, THE CHARACTER OF THE TRANSACTION MAY DERIVE FROM TH E RELATIONSHIP BETWEEN THE PARTIES RATHER THAN BE DETERMINED BY NORMAL COMMERCIAL CONDITIONS AS MAY HAVE BEEN STRUCTURED BY THE TAXPAYER TO AVOID OR MINIMIZE TAX. IN SUCH CASES, THE TOTALITY OF ITS TE RMS WOULD BE THE RESULT OF A CONDITION THAT WOULD NOT H AVE BEEN MADE IF THE PARTIES HAD BEEN ENGAGED IN ARMS LENGTH DEALINGS. ARTICLE 9 WOULD THUS ALLOW AN ADJUSTMENT OF CONDITIONS TO REFLECT THOSE WHICH THE PARTIES WOULD HAVE ATTAINED HAD THE TRANSACTION BEE N STRUCTURED IN ACCORDANCE WITH THE ECONOMIC AND COMMERCIAL REALITY OF PARTIES DEALING AT ARMS LENG TH. 17. THE SIGNIFICANCE OF THE AFORESAID GUIDELINES L IES IN THE FACT THAT THEY RECOGNISE THAT BARRING EXCEPTION AL CASES, THE TAX ADMINISTRATION SHOULD NOT DISREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHER TRANSACTIONS FOR THEM AND THE EXAMINATION OF A CONTROLLED TRANSACTIO N SHOULD ORDINARILY BE BASED ON THE TRANSACTION AS IT HAS I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 23 BEEN ACTUALLY UNDERTAKEN AND STRUCTURED BY THE ASSOCIATED ENTERPRISES. IT IS OF FURTHER SIGNIFICAN CE THAT THE GUIDELINES DISCOURAGE RE-STRUCTURING OF LEGITIM ATE BUSINESS TRANSACTIONS. THE REASON FOR CHARACTERISA TION OF SUCH RE-STRUCTURING AS AN ARBITRARY EXERCISE, AS GIVEN IN THE GUIDELINES, IS THAT IT HAS THE POTENTIAL TO CREATE DOUBLE TAXATION IF THE OTHER TAX ADMINISTRATION DOE S NOT SHARE THE SAME VIEW AS TO HOW THE TRANSACTION SHOUL D BE STRUCTURED. 18. TWO EXCEPTIONS HAVE BEEN ALLOWED TO THE AFORES AID PRINCIPLE AND THEY ARE (I) WHERE THE ECONOMIC SUBST ANCE OF A TRANSACTION DIFFERS FROM ITS FORM AND (II) WHE RE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BUT ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH W OULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVI NG IN A COMMERCIALLY RATIONAL MANNER. 19. THERE IS NO REASON WHY THE OECD GUIDELINES SHO ULD NOT BE TAKEN AS A VALID INPUT IN THE PRESENT CASE I N JUDGING THE ACTION OF THE TPO. IN FACT, THE CIT (AP PEALS) HAS REFERRED TO AND APPLIED THEM AND HIS DECISION H AS BEEN AFFIRMED BY THE TRIBUNAL. THESE GUIDELINES, IN A DIFFERENT FORM, HAVE BEEN RECOGNIZED IN THE TAX JURISPRUDENCE OF OUR COUNTRY EARLIER. IT HAS BEEN H ELD BY OUR COURTS THAT IT IS NOT FOR THE REVENUE AUTHORITI ES TO DICTATE TO THE ASSESSEE AS TO HOW HE SHOULD CONDUCT HIS BUSINESS AND IT IS NOT FOR THEM TO TELL THE ASSESSE E AS TO WHAT EXPENDITURE THE ASSESSEE CAN INCUR. WE MAY RE FER TO A FEW OF THESE AUTHORITIES TO ELUCIDATE THE POIN T. IN EASTERN INVESTMENT LTD. V. CIT , (1951) 20 ITR 1, I T WAS HELD BY THE SUPREME COURT THAT THERE ARE USUALLY M ANY WAYS IN WHICH A GIVEN THING CAN BE BROUGHT ABOUT IN BUSINESS CIRCLES BUT IT IS NOT FOR THE COURT TO DEC IDE WHICH OF THEM SHOULD HAVE BEEN EMPLOYED WHEN THE COURT IS DECIDING A QUESTION UNDER SECTION 12(2) OF THE INCOME TAX ACT. IT WAS FURTHER HELD IN THIS CASE T HAT IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS A PROFITABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNE D. IN CIT V. WALCHAND & CO. ETC., (1967) 65 ITR 381, IT W AS HELD BY THE SUPREME COURT THAT IN APPLYING THE TEST OF I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 24 COMMERCIAL EXPEDIENCY FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS, REASONABLENESS OF THE EXPENDIT URE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE REVENUE. IT WAS FURTHER OBSERVED THAT THE RULE THAT EXPENDITURE CAN ONLY BE JUSTIFIED IF THERE IS CORRESPONDING INCREASE IN THE PROFITS WAS ERRONEOUS. IT HAS BEEN CLASSICALLY OBSERVED BY LORD THANKERTON IN HUGHES V. BANK OF NEW ZEALAND, (1938) 6 ITR 636 THAT EXPENDITURE IN THE COURSE OF THE TRAD E WHICH IS UNREMUNERATIVE IS NONETHELESS A PROPER DEDUCTION IF WHOLLY AND EXCLUSIVELY MADE FOR THE PURPOSES OF TRADE. IT DOES NOT REQUIRE THE PRESENCE OF A RECEIPT ON THE CREDIT SIDE TO JUSTIFY THE DEDUCTION OF AN EXPENSE. THE QUESTION WHETHER AN EXPENDITURE CAN BE ALLOWED AS A DEDUCTION ONLY IF IT HAS RESULTED IN A NY INCOME OR PROFITS CAME TO BE CONSIDERED BY THE SUPR EME COURT AGAIN IN CIT V. RAJENDRA PRASAD MOODY , (1978 ) 115 ITR 519, AND IT WAS OBSERVED AS UNDER: - WE FAIL TO APPRECIATE HOW EXPENDITURE WHICH IS OTHERWISE A PROPER EXPENDITURE CAN CEASE TO BE SUCH MERELY BECAUSE THERE IS NO RECEIPT OF INCOME. WHATE VER IS A PROPER OUTGOING BY WAY OF EXPENDITURE MUST BE DEBITED IRRESPECTIVE OF WHETHER THERE IS RECEIPT OF INCOME OR NOT. THAT IS THE PLAIN REQUIREMENT OF PROPER ACC OUNTING AND THE INTERPRETATION OF SECTION 57(III) CANNOT BE DIFFERENT. THE DEDUCTION OF THE EXPENDITURE CANNOT, IN THE CIRCUMSTANCES, BE HELD TO BE CONDITIONAL UPON THE MAKING OR EARNING OF THE INCOME. IT IS NOTEWORTHY THAT THE ABOVE OBSERVATIONS WERE MADE IN THE CONTEXT OF SECTION 57(III) OF THE ACT WHERE THE LANGUAGE IS SOMEWHAT NARROWER THAN THE LANGUAGE EMPLOYED IN SECTION 37(1) OF THE ACT. THIS FACT IS RECOGNISED I N THE JUDGMENT ITSELF. THE FACT THAT THE LANGUAGE EMPLOYE D IN SECTION 37(1) OF THE ACT IS BROADER THAN SECTION 57 (III) OF THE ACT MAKES THE POSITION STRONGER. 20. IN THE CASE OF SASSOON J. DAVID & CO. PVT. LTD . V. CIT, (1979) 118 ITR 261 (SC), THE SUPREME COURT REFERRED TO THE LEGISLATIVE HISTORY AND NOTED THAT WHEN THE INCOME TAX BILL OF 1961 WAS INTRODUCED, SECTION I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 25 37(1) REQUIRED THAT THE EXPENDITURE SHOULD HAVE BEE N INCURRED WHOLLY, NECESSARILY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS IN ORDER TO MERIT DEDUCTION. PURSUANT TO PUBLIC PROTEST, THE WORD NECESSARILY WAS OMITTED FROM THE SECTION. 21. THE POSITION EMERGING FROM THE ABOVE DECISION S IS THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW T HAT ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY H IM FOR THE PURPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE O F BUSINESS AND NOTHING MORE. IT IS THIS PRINCIPLE THA T INTER ALIA FINDS EXPRESSION IN THE OECD GUIDELINES, IN TH E PARAGRAPHS WHICH WE HAVE QUOTED ABOVE. 22. EVEN RULE 10B (1)(A) DOES NOT AUTHORISE DISALLOWANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HA VE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENU E THE EXPENDITURE WAS UNREMUNERATIVE OR THAT IN VIEW OF T HE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INC URRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIO NS FOR THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTER IN TO THE TRANSACTION IS FOR THE ASSESSEE TO DECIDE. THE QUAN TUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF AS BUSINESS EXPENDITURE, HE HAS NO AUTHORITY TO DISALL OW THE ENTIRE EXPENDITURE OR A PART THEREOF ON THE GRO UND THAT THE ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. T HE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERI ON TO JUDGE ALLOWABILITY OF AN EXPENSE; THERE IS CERTAINL Y NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PR ESENT CASE IS TO HOLD THAT THE ASSESSEE OUGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/ BRAND FE E, BECAUSE IT HAS BEEN SUFFERING LOSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 26 DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO T O DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALL Y FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BU T A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICUL ARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 23. APART FROM THE LEGAL POSITION STATED ABOVE, EV EN ON MERITS THE DISALLOWANCE OF THE ENTIRE BRAND FEE/ RO YALTY PAYMENT WAS NOT WARRANTED. THE ASSESSEE HAS FURNISHED COPIOUS MATERIAL AND VALID REASONS AS TO WHY IT WAS SUFFERING LOSSES CONTINUOUSLY AND THESE HAVE BEEN REFERRED TO BY US EARLIER. FULL JUSTIFICATION SUPPORTED BY FACTS AND FIGURES HAVE BEEN GIVEN TO DEMONSTRATE THAT THE INCREASE IN THE EMPLOYEES COST, FINANCE CHARGES , ADMINISTRATIVE EXPENSES, DEPRECIATION COST AND CAPA CITY INCREASE HAVE CONTRIBUTED TO THE CONTINUOUS LOSSES. THE COMPARATIVE POSITION OVER A PERIOD OF 5 YEARS FROM 1998 TO 2003 WITH RELEVANT FIGURES HAVE BEEN GIVEN BEFOR E THE CIT (APPEALS) AND THEY ARE REFERRED TO IN A TABULAR FORM IN HIS ORDER IN PARAGRAPH 5.5.1. IN FACT THERE ARE FOUR TABULAR STATEMENTS FURNISHED BY THE ASSESSEE BEFORE THE CIT (APPEALS) IN SUPPORT OF THE REASONS FOR THE CONTINUOUS LOSSES. THERE IS NO MATERIAL BROUGHT BY THE REVENUE EITHER BEFORE THE CIT (APPEALS) OR BEFORE T HE TRIBUNAL OR EVEN BEFORE US TO SHOW THAT THESE ARE INCORRECT FIGURES OR THAT EVEN ON MERITS THE REASON S FOR THE LOSSES ARE NOT GENUINE. 17. HERE, IN THE PRESENT APPEAL, WHAT WE SEE IS THE TPO SITTING ON JUDGMENT ON THE BUSINESS AND COMMERCIAL EXPEDIEN CY OF THE ASSESSEE WHICH IS ERRONEOUS AS PER THE PROVISIONS O F THE ACT AS LAID DOWN CLEARLY BY THE HON'BLE DELHI HIGH COURT I N EKL I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 27 APPLIANCES (SUPRA). AS FAR AS THE DEPARTMENTS RELI ANCE ON THE HONBLE DELHI HIGH COURTS JUDGMENT IN ABHINANDAN I NVESTMENTS (SUPRA) AND ON THE DECISION OF THE CO-ORDINATE I BE NCH OF THE DELHI TRIBUNAL IN THE CASE OF BOMBARDIER TRANSPORAT ION INDIA PVT. LTD. IS CONCERNED, THESE JUDGMENTS WERE RENDER ED ON A DIFFERENT SET OF FACTS AND HENCE THE RATIO AS LAID DOWN BY THESE ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT APPE AL. 18. FURTHERMORE, WE ARE OF THE OPINION THAT ONCE TN MM HAS BEEN APPLIED TO THE ASSESSEE COMPANYS TRANSACTION, IT COVERS WITHIN ITS AMBIT THE ROYALTY TRANSACTIONS IN QUESTI ON TOO AND HENCE THE DEPARTMENTS CONTENTION FOR APPLYING THE CUP METHOD IS ERRONEOUS. WE DRAW SUPPORT FROM THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN CADBURY INDIA LTD. VS ACIT IN I.T.A. NO. 7408/MUM/2010 AND I.T.A. NO. 7641/MUM/2010 WHEREIN THE BENCH HAS UPHELD THE USE OF TNMM FOR ROYALTY BY HOL DING: 33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTION MAINLY ON THE BASIS OF THE BENEFIT TEST. IN THIS RE GARD, IT IS SEEN THAT THE PAYMENT OF ROYALTY CANNOT BE EXAMI NED DIVORCED FROM THE PRODUCTION AND SALES. ROYALTY IS INEXTRICABLY LINKED WITH THESE ACTIVITIES. IN THE A BSENCE OF PRODUCTION AND SALE OF PRODUCTS, THERE WOULD BE NO QUESTION ARISING REGARDING PAYMENT OF ANY ROYALTY. RULE 10A (D) DEFINES ' TRANSACTION AS A NUMBER OF CLOSELY LINKED TRANSACTIONS. ROYALTY, THEN, IS A TRANSACTIO N I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 28 CLOSELY LINKED WITH PRODUCTION AND SALES. IT CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF AN ENTERPRISE, BEING EMBEDDED THEREIN. THAT BEING SO, ROYALTY CANNOT BE CONSIDERED, AND EXAMINED IN ISOLATION ON A STANDALO NE BASIS. ROYALTY IS TO BE CALCULATED ON A SPECIFIED A GREED BASIS, ON DETERMINING THE NET SALES WHICH, IN THE P RESENT CASE, ARE REQUIRED TO BE DETERMINED AFTER EXCLUDING THE AMOUNTS OF STANDARD BOUGHT OUT COMPONENTS, ETC., SI NCE SUCH NET SALES DO NOT STAND RECORDED BY THE ASSESSE E IN ITS BOOKS OF ACCOUNT. THEREFORE, IT IS OUR CONSIDER ED OPINION THAT THE ASSESSEE WAS CORRECT IN EMPLOYING AN OVERALL TNMM FOR EXAMINING THE ROYALTY.. 19. IN THE CASE OF DCIT LTU VS CLSA INDIA LTD. (2 013) 33 TAXMANN.COM 260 (MUMBAI TRIBUNAL), THE BENCH HELD T HAT CUP METHOD CANNOT BE APPLIED IF THE RELEVANT INFORMATIO N IS NOT AVAILABLE. NO SUCH COMPARABLE TRANSACTION HAS BEEN BROUGHT ON RECORD BY THE ASSESSING OFFICER OR EVEN BY THE DRP. NO SUCH COMPARABLE CASE HAS BEEN PLACED BY THE REVENUE EVEN NOW. 20. HENCE, FOLLOWING THE RATIO OF THE HON'BLE DELHI HIGH COURT IN CIT VS EKL APPLIANCES (SUPRA), WE HOLD THAT THE ADD ITION MADE BY THE TPO AND UPHELD BY THE DRP IS UNSUSTAINABLE A ND IS LIABLE TO BE DELETED. HENCE, GROUND NOS. 4.1 AND 4.2 ARE ALLOWED. I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 29 21. GROUND NO. 4.3 ON THE ISSUE OF MANAGEMENT FEE I S RESTORED TO THE FILE OF THE TPO TO VERIFY AS TO WHETHER THE HEAD OFFICE HAS CORRECTLY ALLOCATED THE HOURS OF SERVICE/COST OF SE RVICE RENDERED AND ALSO WHETHER ANY OTHER COST CENTRES HAVE BEEN E RRONEOUSLY INCLUDED IN THE ALLOCATION. THE TPO IS DIRECTED TO EXAMINE THE ISSUE AFRESH AFTER GIVING DUE OPPORTUNITY TO THE AS SESSEE IN THIS REGARD. 22. AS REGARDS THE ISSUE OF MISCELLANEOUS EXPENSES , IT IS SEEN FROM PARA 10.2 OF THE DRPS ORDER THAT SINCE THE DR P HAS DIRECTED THAT THE ASSESSING OFFICER HAD NOT NOTED A NY DISCREPANCY OR IDENTIFIED ANY EXPENDITURE WHICH WAS EITHER PERSONAL IN NATURE OR WAS NOT INCURRED FOR THE PURP OSE OF BUSINESS, THE AD-HOC DISALLOWANCE WAS NOT SUSTAINAB LE. IN VIEW OF THIS SPECIFIC DIRECTION OF THE DRP, WE DIRECT TH E TPO TO PASS THE CONSEQUENTIAL ORDER IN THIS REGARD. 23. THE GROUND REGARDING INITIATION OF PENALTY PROC EEDINGS U/S 271(1)( C) OF THE ACT IS DISMISSED AS BEING PRE-MAT URE. 24. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. I.T.A. 1906/D/2015 ASSESSMENT YEAR: 2010-11 30 ORDER PRONOUNCED IN THE OPEN COURT ON 08.04.2016. SD/- SD/- (S.V. MEHROTRA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: THE 8 TH OF APRIL, 2016 GS COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT BY ORDER ASSTT. REGISTRAR