SC ENVIRO AGRO INDIA P. LTD, MUMBAI V. DCIT 3(3), MUMBAI

ITA 2057/MUM/2009

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8275 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 31-10-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 02-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Assessee Lawyers: R MURLIDHAR
• Keywords: Reopening of assessment; Transfer pricing; Business expenditure; International transaction; Cost of acquisition; Wholly owned subsidiary; Deemed dividend; Arm length price; Commercial expediency
• Section: 92C; 37(1); 194C; 147

Judgement Text

ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 1 OF 15 IN THE INCOME TAX APPELLATE TRIBUNAL 'K' BENCH, MUMBAI BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER AND ITA NOS. 2057 & 2058/MUM/2009 (ASSESSMENT YEARS: 2003-04 & 2004-05) SC ENVIRO AGRO INDIA LTD, 33, 3 RD FLOOR, MAKER CHAMBERS VI, 220 NARIMAN POINT, MUMBAI 400021 PAN: AAFCS 6405 F VS. DCIT 3(3), ROOM NO.609 & 668, 6 TH FLOOR, AAYAKAR BHAVAN, MK ROAD, MUMBAI 400020 (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI R. MURLIDHAR DEPARTMENT BY: SHRI AJEET KUMAR JAIN, CIT DR DATE OF HEARING: 31/10/2012 DATE OF PRONOUNCEMENT: 07/11/2012 O R D E R PER BENCH: THESE TWO APPEALS ARE BY ASSESSEE AGAINST THE ORDER S OF THE CIT (A)-32 MUMBAI, DATED 30.01.2009. SINCE COMMON I SSUES ARE INVOLVED IN BOTH THE APPEALS, THESE WERE DECIDED TO GETHER. ASSESSEE PLACED ON RECORD A PAPER BOOK RUNNING TO PAGES 1 TO 197 AND ALSO CASE LAW WHICH WERE CONSIDERED. 2. BRIEFLY STATED, ASSESSEE WAS INCORPORATED AS HOUSEH OLD REMEDIES (P) LTD ON 9.10.1987. IT HAD ENTERED INTO A TECHNICAL LICENSE AGREEMENT WITH M/S SUMITOMO CHEMICAL CO. LT D (SCCL) DATED 19.4.2000 FOR GRANT OF LICENSE FOR NON EXCLUS IVE, NON TRANSFERRABLE, NON ASSIGNABLE LICENSE TO USE TECHNO LOGY IN INDIA SOLELY AND EXCLUSIVELY FOR THE ALLOWED PURPOSE I.E. FOR COMMERCIAL PRODUCTION OF PYNAMINE FORTE AND OTHER PRODUCTS THA T MAY BE MUTUALLY AGREED UPON BETWEEN THE PARTIES FROM TIME TO TIME IN WRITING. AO ACCEPTS THAT ASSESSEE IS IN TO MANUFACT URING OF HOUSEHOLD INSECTICIDES AND PESTICIDES IN CROP PROTE CTION FIELD. AS PART OF THE LICENSE THE TECHNOLOGY AND INTELLECTUAL PROPERTY AND ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 2 OF 15 PRODUCTION OF CHRYSANTHEMIC CHLORIDE AND D-ALLETHRI N WERE GRANTED TO ASSESSEE. IN THE YEAR 2000-01 THE SCCL JAPAN ACQ UIRED 90% OF THE EQUITY SHARE CAPITAL OF THE COMPANY AND THE NAM E WAS CHANGED. THE COMPANY IS PRIMARILY ENGAGED IN THE MANUFACTURE OF INSECTICIDES AND PESTICIDES. AS PER THE AGREEMENT T HE COMPANY HAS TO SELL ITS PRODUCTS ONLY TO THE PARTIES APPROVED B Y THE SAID SCCL. IT ALSO PURCHASES THE REQUIREMENT OF INTERMEDIATES FRO M THE SAID COMPANY ONLY. IN THE IMPUGNED TWO YEARS ASSESSEE HA S PURCHASED INTERMEDIATES AND SOLD THE PRODUCTS TO THE ENTITIES THAT ARE EXPRESSLY APPROVED BY THE SAID SCCL. ONE OF THE COM PANY TO WHOM MOST OF THE PRODUCTS WERE SOLD AS M/S SUMITOMO CHEM ICAL INDIA (P) LTD (SCI) I.E. 100% SUBSIDIARY OF SCCL. IN THE TRAN SFER PRICING REPORT ASSESSEE SUBMITTED THAT THE ARRANGEMENT WITH SCCL A ND SCI IS IN THE NATURE OF CONTRACT MANUFACTURING. THE TRANSACTI ONS WERE REFERRED TO TPO FOR DETERMINING ARM LENGTH PRICE. W HILE ACCEPTING THE PRICE PAID/RECEIVED AS ARMS LENGTH PRICE FOR P URCHASE OF INSECTICIDES AND PESTICIDES, INTERMEDIATES FROM SCC L AND SALE OF INSECTICIDES AND PESTICIDES TO ANOTHER ASSOCIATE CO NCERN SCI, THE TPO HOWEVER, EXAMINED THE PAYMENT OF ROYALTY AT 5% TO SCCL AS PER THE TECHNOLOGY LICENSE AGREEMENT. HE WAS OF THE OPINION THAT SINCE THE PURCHASE AND SALES ARE ONLY FROM/TO ASSOC IATE CONCERNS AND ALSO ON THE REASON THAT SALES ARE NOT TO BE MAD E TO ANYBODY ELSE AND THERE IS NO COMMERCIAL EXPLOITATION OF TEC HNICAL KNOWHOW, HE CONSIDERED THAT FUNCTIONS BEING PERFORMED BY ASS ESSEE AS NOTHING BUT CONTRACT MANUFACTURING. SINCE IT IS A C ONTRACT MANUFACTURING AGREEMENT, THERE IS NO JUSTIFICATION FOR PAYMENT OF ROYALTY FOR USE OF TECHNICAL KNOWHOW ETC. ACCORDING LY HE DETERMINED THE ARMS LENGTH PRICE AT NIL AND DISALLOWED AN AMOU NT OF ` .89,44,388/- PAID BY ASSESSEE TO M/S SCCL AS ROYALT Y IN ASSESSMENT YEAR 2003-04 AND THE AN AMOUNT OF ` .67,70,358/- IN ASSESSMENT YEAR 2004-05. AO MADE SIMILAR DISALLOWAN CE IN THE ASSESSMENT ORDER PASSED HAVING REGARD TO THE TPO S ORDER. ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 3 OF 15 3. IT WAS SUBMITTED BEFORE THE CIT (A) THAT ASSESSEE W AS NOT A CONTRACT MANUFACTURER AND AN INDEPENDENT MANUFACTUR ER AND OBTAINED TECHNICAL KNOWHOW FOR MANUFACTURING OF INS ECTICIDES AND PESTICIDES AND THE ROYALTY BEING PAID FROM FINANCIA L YEAR 2000-01 ONWARDS AND THIS AGREEMENT WAS ALSO APPROVED BY THE RBI VIDE THEIR LETTER DATED 25.9.2000 (PAGE 26 OF THE PAPER BOOK) FOR A PERIOD OF SEVEN YEARS ON THE EX-FACTORY PRICE. IT WAS FURT HER SUBMITTED THAT ASSESSEE HAS NOT PAID ROYALTY ON ENTIRE SALES PRICE , BUT ONLY ON THE VALUE ADDITION MADE TO THE INTERMEDIATES PURCHASED FROM THE PRINCIPAL COMPANY, THEREFORE, NO ROYALTY WAS PAID O N PURCHASE COST OF THE RAW MATERIAL AND ONLY ON THE VALUE ADDITION. IN SUPPORT ASSESSEE PLACED THE CERTIFICATE FROM THE CHARTERED ACCOUNTANT TO DEMONSTRATE ABOUT THE ROYALTY WORKING (PAGE 194 OF THE PAPER BOOK) AND ALSO FURNISHED DETAILS OF SALES MADE TO OUTSIDE PARTIES I.E. THIRD PARTIES SO AS TO COUNTER THE OBSERVATIONS OF THE TP O THAT ASSESSEE HAS SOLD ONLY TO THE GROUP CONCERNS. THE LEARNED CI T (A), WHILE AFFIRMING THAT ASSESSEE WAS CONTRACT MANUFACTURER H OWEVER, ALLOWED ROYALTY PAYMENT ON THE SALES MADE TO OUTSIDE PARTIE S AND PARTLY ALLOWED THE CLAIM. 4. ASSESSEE IS AGGRIEVED ON THIS AND THE GROUNDS WERE RAISED WHICH ARE SIMILAR IN BOTH THE YEARS. FOR THE SAKE O F RECORD, THE GROUNDS RAISED IN ASSESSMENT YEAR 2003-04 ARE EXTRA CTED AS UNDER: 1. (A) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN DISALLOWING ` 61,25,3201- OUT OF TOTAL ROYALTY PAYMENT OF ` .89,44,388/-, BEING ROYALTY PAYMENT IN CONNECTION WITH SALES MADE TO THE ASSOCIATED ENTERPRISE BY THE APPELLANTS . YOUR APPE LLANTS SUBMIT THAT THE SAME IS ALLOWABLE AND OUGHT TO HAVE BEEN ALLOWED. WITHOUT PREJUDICE TO THE ABOVE, IT IS SUBMITTED THAT THE LEARNED COMMISSIONER OF INCOME T AX (APPEALS) FAILED TO APPRECIATE THAT THE ROYALTY PAI D BY THE APPELLANTS IS ONLY 5% OF NET EX-FACTORY PRICE O F SALE, AND THAT AS PER SECTION 92C(2), A STANDARD DEDUCTIO N OF 5% HAS TO BE GRANTED FROM ARM'S LENGTH PRICE DETERM INED BY THE TPO/AO. YOUR APPELLANTS SUBMIT THAT SINCE TH E ROYALTY OF 5% PAID COMES WITHIN THAT RANGE, NO ADJUSTMENT NEEDS TO BE MADE. WITHOUT PREJUDICE TO T HE ABOVE, YOUR APPELLANTS SUBMIT THAT AO/TPO HAS NOT ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 4 OF 15 ADOPTED ANY PARTICULAR METHOD FOR DETERMINING ARM'S LENGTH PRICE OF ROYALTY AS PER PROVISIONS OF SECTIO N 92C THE INCOME TAX ACT, 1961. HENCE YOUR APPELLANTS SUB MIT THAT NO ADJUSTMENT NEEDS TO BE MADE. (B) YOUR APPELLANTS SUBMIT THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN PASSI NG THE APPELLATE ORDER ON THE ERRONEOUS PRESUMPTION TH AT YOUR APPELLANT WAS A 'CONTRACT MANUFACTURER', EVEN THOUGH EVIDENCES TO THE CONTRARY WERE SUBMITTED BEF ORE HIM AND THE LOWER AUTHORITIES. (C) WITHOUT PREJUDICE TO THE ABOVE, YOUR APPELLANTS SUBMIT THAT THE ADDITION MADE BY THE TRANSFER PRICI NG OFFICER AND ASSESSING OFFICER IS EXCESSIVE AND OUGH T TO BE REDUCED SUBSTANTIALLY. 5. THE LEARNED COUNSEL EXPLAINED THE FACTS OF THE CASE AND REFERRED TO THE VARIOUS PAPERS PLACED IN THE PAPER BOOK TO SUBMIT THAT ASSESSEE IS NOT A CONTRACT MANUFACTURER. WHILE ADMITTING THAT THERE WAS A MISTAKE COMMITTED BY ASSESSEE IN THE TR ANSFER PRICING STUDY STATING THAT THE AGREEMENT IS IN THE NATURE O F CONTRACT MANUFACTURING, IT WAS SUBMITTED THAT THIS STATEMENT IN TP STUDY CANNOT BE TAKEN ADVERSELY TO ASSESSEES ACTUAL BUSI NESS PROFILE. IT WAS SUBMITTED THAT ASSESSEE HAD LARGE AMOUNT OF ASS ETS AND IS MANUFACTURING INSECTICIDES AND PESTICIDES AND IS SE LLING IN THE INDIAN MARKET. THEN HE REFERRED TO THE STATEMENT I N PAGE 63 TO SUBMIT THAT ASSESSEE HAD ` .22.91 CRORES OF SALES TO OUTSIDE PARTIES, WHEREAS THE SALES TO SCI IS ` .51.35 CRORES IN ASSESSMENT YEAR 2003- 04. LIKEWISE ASSESSEE ALSO SOLD TO THIRD PARTIES AT ` .24.00 CRORES WHEREAS THE SALES TO SCI WAS ` .62.33 CRORES IN ASSESSMENT YEAR 2004-05. HE FURTHER SUBMITTED THAT THE ROYALTY WAS NOT PAID ON ENTIRE SALE PRICE BUT ONLY ON THE VALUE ADDITION MA DE BY ASSESSEE WHILE MANUFACTURING INSECTICIDES AND PESTICIDES FRO M THE INTERMEDIATES IMPORTED FROM SCCL. IT WAS FURTHER SU BMITTED THAT THE CIT (A) ALLOWED ROYALTY AT 5% IN SALES MADE TO THIRD PARTIES, WHEREAS ASSESSEE HAS PAID ROYALTY AT THE SAME PRICE TO SCCL WHEREAS THE SALES WERE MADE TO ITS 100% SUBSIDIARY IN INDIA AT THE ARMS LENGTH PRICE. IT WAS HIS SUBMISSION THAT THE PRICE CHARGED TO ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 5 OF 15 SCI AND TO OUTSIDE PARTIES WAS THE SAME AND THIS WA S ACCEPTED BY THE TPO AS ARMS LENGTH PRICE. EVEN PURCHASES OF TH E INTERMEDIATES WERE ALSO ACCEPTED AS THAT OF ARMS LENGTH PRICE. T HEREFORE, SINCE ASSESSEE HAS OBTAINED TECHNICAL KNOWHOW FROM SCCL, 5% ROYALTY ON THE ENTIRE VALUE ADDITION MADE SHOULD HAVE BEEN ALLOWED BY THE CIT (A) RATHER THAN RESTRICTING TO SALES MADE TO TH IRD PARTIES. HE FURTHER SUBMITTED THAT ASSESSEE IS NOT A CONTRACT M ANUFACTURER AND REFERRED TO THE PERCENTAGE OF RAW MATERIAL IMPORTED , INDIGENOUS MATERIAL AND PACKING MATERIAL SO AS TO SUBMIT THAT ASSESSEE IS NOT A CONTRACT MANUFACTURER. 6. THE LEARNED COUNSEL RELIED ON VARIOUS CASE LAW TO S UBMIT THAT THE AGREEMENT IS ON PRINCIPAL TO PRINCIPAL BASIS AN D NOT A CONTRACT MANUFACTURING ARRANGEMENT. 7. IT WAS FURTHER ARGUED THAT THE TPO CANNOT QUESTION THE BUSINESS PURPOSE OF TRANSACTION WHEN ASSESSEE PAID 5% ROYALTY AND RESTRICT THE SAME TO NIL STATING THAT ASSESSEE IS A CONTRACT MANUFACTURER. IT WAS THE SUBMISSION THAT APART FROM THE FACT THAT ASSESSEE IS AN INDEPENDENT MANUFACTURER AND NOT A C ONTRACT MANUFACTURER, THE TPO CANNOT DISALLOW THE ENTIRE AM OUNT UNDER SECTION 37(1) AND RELIED ON THE PRINCIPLES LAID DOW N BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIAN CES IN ITA NO.1068/70/2011 (DEL HC) AND ALSO THE ITAT DECISION IN THE CASE OF ERICSON INDIA (P) LTD VS. DCIT IN ITA NO.5141/DEL/2 011. IT WAS ALSO FURTHER CONTENTION THAT SINCE ROYALTY WAS PAID AT 5 %, AO CANNOT DISALLOW THE ENTIRE AMOUNT AS IT WAS WITHIN THE SAF E HARBOR RANGE OF (+)/(-) 5% AND RELIED ON THE CASES OF ITAT BANGALOR E IN THE CASE OF PHILIPS SOFTWARE CENTRE (P) LTD VS. ACIT, 26 SOT 22 6 AND ITAT PUNE BENCH DECISION IN THE CASE OF STARNET NETWORKS (IND IA) PVT. LTD VS. DCIT (ITA NO.1350/PN/2010) TO SUBMIT THAT NO DISALL OWANCE CAN BE MADE. 8. WITH REFERENCE TO THE ISSUE OF ADDITIONAL GROUND IN AY 2003- 04 THE LEARNED COUNSEL REFERRED TO THE REASONING F OR REOPENING THE ASSESSMENT BEING A PROPOSED ADDITION UNDER SECTION 2(22)(E) ON THE ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 6 OF 15 LOANS AND ADVANCES GIVEN BY THE SCI WHICH WAS EXAMI NED AND NO ADDITION WAS MADE, VIDE PARA 6 OF THE ASSESSMENT O RDER. SINCE NO ADDITION ON THE REASON FOR REOPENING WAS MADE THE L EARNED COUNSEL SUBMITTED THAT THE REOPENING OF ASSESSMENT AND COMP LETING THE ASSESSMENT ON A DIFFERENT ASPECT (DISALLOWANCE OF R OYALTY) IN ASSESSMENT YEAR 2003-04 WAS NOT PROPER AND RELIED O N THE PRINCIPLES LAID DOWN BY THE HON'BLE BOMBAY HIGH COU RT IN THE CASE OF CIT VS. JET AIRWAYS (I) LTD 33 ITR 216 (BOM. HC) AND RANBAXY LABORATORIES LTD V. CIT 12, TAXMANN.COM 74 (DELHI H C). 9. THE LEARNED CIT (DR), HOWEVER, SUBMITTED THAT ASSES SEE IS A CONTRACT MANUFACTURER. IT WAS HIS SUBMISSION THAT A SSESSEE PURCHASES ENTIRE INTERMEDIATES FROM THE RELATED PAR TY AND SOLD TO PRIVATE PARTIES MAINLY TO THE RELATED PARTY. HE SUB MITTED THAT THERE ARE THREE TYPES OF MANUFACTURING PROCESSES I.E. FUL L FLEDGED MANUFACTURING, CONTRACT MANUFACTURING AND TOLL MANU FACTURING. WHAT ASSESSEES COUNSEL WAS DISTINGUISHING IS BETWE EN THE FULL FLEDGED MANUFACTURING AND TOLL MANUFACTURING AND NO T CONTRACT MANUFACTURING. HE REFERRED TO PAGE 186 OF THE PAPER BOOK I.E. SCHEDULE-I TO THE TP REPORT TO SUBMIT THAT THE CHAR TERED ACCOUNTANT HAS CERTIFIED THAT THE MANUFACTURING OF GOODS CARRIED ON BY ASSESSEE IS WHOLLY DEPENDENT ON THE USE OF TECHN ICAL KNOWHOW OF WHICH ASSOCIATE ENTERPRISE IS THE OWNER AND GOODS M ANUFACTURED BY ASSESSEE ARE SOLD TO THE PERSONS, PRICES AND OTHER CONDITIONS AS INFLUENCED BY THE ASSOCIATE ENTERPRISE. REFERRING T O THE SCHEDULE-I AND ALSO THE FUNCTIONAL ANALYSIS SUBMITTED BY ASSES SEE IN THE TP REPORT, IT WAS HIS SUBMISSION THAT ASSESSEE IS A CO NTRACT MANUFACTURER. FURTHER HE ALSO REFERRED TO THE PERCE NTAGE OF RAW MATERIAL USED IN MANUFACTURING TO SUBMIT THAT ASSES SEE IS CONTROLLED BY THE PRINCIPLE COMPANY IN MANUFACTURIN G ACTIVITY. THEREFORE, IT CANNOT BE CONSIDERED AS AN INDEPENDEN T MANUFACTURER AND IN A CONTRACT MANUFACTURING THERE IS NO REQUIRE MENT OF ROYALTY PAYMENT. IT WAS HIS SUBMISSION THAT AO HAS RIGHTLY CONSIDERED THAT THERE IS NO NEED TO PAY ANY ROYALTY. IN SUPPORT OF HIS CONTENTION ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 7 OF 15 THAT ASSESSEE IS A CONTRACT MANUFACTURER HE RELIED ON THE OBSERVATIONS OF THE ITAT IN THE CASE OF SONA VOKA P RECISION LTD TO SUBMIT THAT IN THAT CASE ONLY FRACTION OF THE GOODS MANUFACTURED ARE SOLD TO THE AE, WHEREAS BULK OF THE SALES ARE S OLD TO THE UNCONTROLLED PARTIES. IN THAT CASE IT WAS HELD THAT ASSESSEE CANNOT BE SAID TO BE A CONTRACT MANUFACTURER FOR AE WHEREA S IN THIS CASE TWO-THIRDS OF THE GOODS MANUFACTURED ARE SOLD TO AE . THEREFORE, ASSESSEE HAS TO BE CONSIDERED AS CONTRACT MANUFACTU RER. IT WAS FURTHER SUBMITTED THAT THE CASE LAW RELIED UPON BY ASSESSEE WAS NOT APPLICABLE AS THEY ARE PERTAINING TO THE DEFINITION OF WORK CONTRACT UNDER SECTION 194C AND DOES NOT APPLY TO THE ARRANG EMENT OF CONTRACT MANUFACTURING. HE ALSO DISTINGUISHED THE D ECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES (SUPRA) TO SUBMIT THAT IN THAT CASE ASSESSEE COULD NOT DEMONSTRATE THE BENEFIT OR ADVANTAGE OBTAINED BY THE TECHNICAL KNOWHOW RECEIVED AND THERE WAS NO JUSTIFICATION FOR THE ROY ALTY WHICH WAS DISALLOWED, WHEREAS IN THIS CASE THE FACTS ARE DIFF ERENT. IT WAS HIS SUBMISSION THAT THE CIT (A) HAS CORRECTLY ALLOWED T HE ROYALTY PAYMENT ON SALES MADE TO OUTSIDE PARTIES AND DISALL OWED THE ROYALTY PAYMENT ON SALES MADE TO AE. 10. IN REPLY IT WAS SUBMITTED THAT ASSESSEE IS AN INDEP ENDENT MANUFACTURER AND REFERRED TO THE INDIGENOUS MATERIA L UTILIZED IN THE LOCAL MANUFACTURING WHICH IS VARYING FROM 8 TO 21% IN THESE TWO YEARS. IT IS ALSO THE CONTENTION THAT WHEN THE SALE S ARE MADE TO OUTSIDE PARTIES, AT WHAT PERCENTAGE THE SALES ARE M ADE TO THE OUTSIDE PARTIES BECOME IRRELEVANT AS THE TPO ACCEPT ED THE PRICE OBTAINED FROM AE AS ARMS LENGTH PRICE, WHICH IN FAC T WAS THE SAME PRICE FOR WHICH THE GOODS ARE SOLD TO THIRD PARTIES . THE CONDITION THAT EVERY SALE HAS TO BE TO THE PARTY APPROVED BY THE PRINCIPAL IS INEVITABLE AS ASSESSEE IS MANUFACTURING CRITICAL CH EMICALS WHICH CAN NOT BE SOLD TO UNAUTHORIZED PERSONS, UNLESS ONE VERIFIES THE FACILITIES THEY HAVE FOR UTILIZING THE PRODUCTS SOL D AS RAW MATERIAL. SINCE THESE INSECTICIDES AND PESTICIDES ARE VERY CR ITICAL AND CANNOT ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 8 OF 15 BE MADE AVAILABLE TO ALL PERSONS PROPER RESTRICTION S ARE PLACED ON THE SUPPLY OF MANUFACTURED GOODS BY THE LICENSE HOL DER SO AS TO PROTECT FROM THE RISKS INVOLVED IN SELLING THE PROD UCTS TO OUTSIDERS. THE OBSERVATION RELIED UPON BY THE TPO THAT EVEN SA LES ARE CONTROLLED WAS IN THE CONTEXT OF APPROVED SALES TO THE AUTHORIZED PERSONS ONLY BUT THERE IS NO CONTROL OF THE PRICING OR MARKETING OR ANY OTHER ASPECT OF IT. HE REFERRED TO THE MANUFACT URING ACTIVITY AND TO THE FACT THAT ASSESSEE IS PURCHASING INTERMEDIAT ES AND UTILIZING IT IN ITS OWN MACHINERIES FOR PRODUCTION OF SPECIFIED CHEMICAL/ INSECTICIDES AND PESTICIDES AND PACKING THEM IN DIF FERENT PACKS. IT WAS ALSO SUBMITTED THAT ASSESSEES SALES ARE INDEPE NDENT OF PRINCIPAL EXCEPT THAT THE PARTIES ARE TO BE APPROVE D BY THE PRINCIPAL. IT WAS SUBMITTED THAT ASSESSEE IS HAVING PROPER LIC ENSE TO MANUFACTURE PRODUCTS ON ITS OWN AND IT CANNOT BE CO NSIDERED AS CONTRACT MANUFACTURING AS THERE IS NO ARRANGEMENT E ITHER FOR CONTRACT MANUFACTURING OR PAYING CHARGES FOR IT. EV EN IF THE THIRD PARTY OBTAINS LICENSE, SIMILAR CONDITIONS ARE BEING PLACED AND ROYALTY HAS TO BE MADE FOR TECHNOLOGY TRANSFER WHIC H WAS APPROVED BY THE RBI AT 5% ON VALUE ADDITION MADE BY ASSESSEE IN THE MANUFACTURING PROCESS. 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. AS SEEN F ROM THE RECORD ASSESSEE ENTERED INTO AN AGREEMENT FOR OBTAI NING LICENSE TO MANUFACTURE SPECIFIED INSECTICIDES AND PESTICIDES A ND AGREED TO PAY 5% ROYALTY ON THE VALUE ADDITION AND RBI HAS APPROV ED THE ROYALTY AT 5% FOR A PERIOD OF SEVEN YEARS. TILL ASSESSMENT YEAR 2003-04 THERE WAS NO DISPUTE WITH REFERENCE TO THE PAYMENT OF ROYALTY AND EVEN IN THE ORIGINAL ASSESSMENT COMPLETED THE ROYAL TY WAS ALLOWED AS ELIGIBLE EXPENDITURE IN THE ORDER UNDER SECTION 143(3). IN ASSESSMENT YEAR 2004-05 THIS ISSUE FOR THE FIRST TI ME WAS EXAMINED BY THE TPO ON THE BASIS OF THE TP REPORT OF ASSESSE E WHEREIN ASSESSEE SUBMITTED THAT THE ARRANGEMENT IS IN THE N ATURE OF CONTRACT MANUFACTURERS IN THE FAR ANALYSIS. SINCE T HIS WAS ADMITTED BY ASSESSEE, THE TPO WITHOUT EXAMINING THE NATURE OF ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 9 OF 15 AGREEMENT OR THE MANUFACTURING ACTIVITY OF ASSESSEE OR ANY OTHER INCIDENTAL FACTOR CAME TO A CONCLUSION THAT SINCE A SSESSEE ADMITTED TO BE A CONTRACT MANUFACTURER, THERE IS NO NEED TO PAY ANY ROYALTY. IN HIS ORDER THE TPO ALSO MENTIONS THAT ASSESSEE WA S NOT MAKING ANY SALES TO OUTSIDE PARTIES, THE FACT OF WHICH IS NOT CORRECT. ON THE BASIS OF HIS OBSERVATIONS, HE ARRIVED AT THE ROYALT Y ARMS LENGTH PRICE AT NIL. 12. THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES (SUPRA) HAS EXAMINED A SIMILAR ISSUE WHE THER THE TPO HAS POWER TO RESTRICT IT TO NIL WHEN HE WAS SUPPOSE D TO HAVE DETERMINED THE ARMS LENGTH PRICE OF THE INTERNATION AL TRANSACTION. THE HON'BLE HIGH COURT AFTER EXAMINING THE FACTS OF THE CASE HELD AS UNDER: 19. THERE IS NO REASON WHY THE OECD GUIDELINES SHOU LD 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 BEER: AFFIRMED BY THE TRIBUNAL. THESE GUIDELINES, I N 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 REF ER TO A FEW OF THESE AUTHORITIES TO ELUCIDATE THE POIN T. IN EASTERN INVESTMENT LTD. V. CIT, (1951) 20 ITR 1, IT 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 INCO ME TAX ACT'. IT WAS FURTHER HELD IN THIS CASE THAT' IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS A PROFIT ABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNED'. IN CIT V. WALCHAND & CO. ETC., (1967) 65 ITR 381, IT WAS HELD BY THE SUPREME COURT THAT IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS, REASONABLENESS OF THE EXPENDITURE 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 ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 10 OF 15 PROFITS WAS ERRONEOUS. IT HAS BEEN CLASSICALLY OBSE RVED BY LORD THANKERTON IN HUGHES V. BANK OF NEW ZEALAND , (1938) 6 ITR 636 THAT 'EXPENDITURE IN THE COURSE OF THE TRADE WHICH IS UN-REMUNERATIVE IS NONE THE LESS A P ROPER 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 B E 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. WHATEVER IS A PROPER OUTGOING BY 11'AY OF EXPENDITURE MUST BE DEBITED IRRESPECTIVE OF 'WHETHER THERE IS RECEIPT OF INCOME OR NOT. THAT IS THE PLAIN REQUIREMENT OF PROPER ACCOUNTING 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 M ADE 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 RECOGNIZED IN THE JUDGMENT ITSELF. THE FACT THAT TH E LANGUAGE EMPLOYED IN SECTION 37(1) OF THE ACT IS BR OADER 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 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 DECISIONS 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 ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 11 OF 15 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 THE PARAGRAPHS WHICH WE HAVE QUOTED ABOVE. 22. EVEN RULE 10B(1)(A) DOES NOT AUTHORIZE DISALLOW ANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCUR RED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UN-REMUNERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE L0B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE ASSESS EE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF AS BUSINESS EXPENDITURE, HE HA S NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A P ART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERE D CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EX PENSE; THERE IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PRESENT CASE IS TO HOLD THAT THE ASSESS EE OUGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/ BRAND FEE, BECAUSE IT HAS BEEN SUFFERING L OSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE T PO TO 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 SUITABLE ADJUSTMENT BUT A WHOLES ALE DISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON TH E GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORIZED. 13. THE PRINCIPLES LAID DOWN BY THE HONBLE DELHI HIGH COURT IN THE ABOVE SAID CASE EQUALLY APPLIES TO THE FACTS OF THE CASE. EVEN THOUGH THE LEARNED CIT (DR) TRIED TO DISTINGUISH ON THE REASON THAT THE FACTS ARE DIFFERENT THE RATIO DECIDENDI IN THE ABOVE SAID CASE IS ABOUT THE POWERS OF THE TPO TO DETERMINE THE ALP AT NIL VALUE. AS IN THE ABOVE SAID CASE WHAT THE TPO HAS DONE IN THE PR ESENT CASE IS ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 12 OF 15 ALSO TO HOLD THAT ASSESSEE NEED NOT PAY ANY ROYALTY ON THE PRESUMPTION THAT ASSESSEE IS A CONTRACT MANUFACTURE R. THE TPO HAS TO EXAMINE WHETHER THE PRICE PAID OR AMOUNT PAID WA S AT ARMS LENGTH OR NOT UNDER THE PROVISIONS OF TRANSFER PRIC ING AND ITS RULES. THE RULE DOES NOT AUTHORIZE THE TPO TO DISALLOW ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR ASSESSEE TO HAVE INCURRED THE SAME. ON THAT PRINCIPLE ALONE, WE CANNOT APPROVE THE ORDER OF THE TPO AS IT NOT ONLY CONSIDERED THE FACTS WRONGLY BUT ALSO EXCEEDED THE JURISDICTION AVAILABLE TO THE TPO IN EXAMINING THE ARMS LENGTH PRICE ON A TRANSACTION. 14. APART FROM THE LEGAL POSITION STATED ABOVE, EVEN ON MERITS THE DISALLOWANCE OF ENTIRE ROYALTY PAYMENT ON SALES TO AE WAS NOT WARRANTED. ASSESSEE ADMITTED THAT IT WRONGLY CLAIME D IN THE TP REPORT THAT THE ARRANGEMENT IS IN THE NATURE OF CON TRACT MANUFACTURING. HOWEVER, AS SEEN FROM THE AGREEMENT ENTERED BY THE ERSTWHILE HOME REMEDIES LTD WITH SCCL IT IS FOR OBTAINING LICENSE FOR MANUFACTURING SPECIFIED PRODUCTS. SINCE THE TECHNOLOGY IS SPECIFIC TO THE MANUFACTURING SPECIFIC ITEMS, TH E CONDITION IS THAT THE INTERMEDIATES ARE TO BE IMPORTED FROM THE SCCL. HOWEVER, AFTER IMPORTING THE INTERMEDIATES ASSESSEE IS ALSO USING THE INDIGENOUS MATERIAL IN MANUFACTURING THE SPECIFIED INSECTICIDE S AND PESTICIDES. IT IS ALSO ACQUIRING PACKING MATERIAL REQUIRED FOR PACKING INSECTICIDES AND PESTICIDES PRODUCED IN 5 LTRS AND 20 LTRS CONTAINERS. SINCE THESE INSECTICIDES AND PESTICIDES ARE FOR SPECIFIED FOR USAGE (MOSQUITO REPELLENTS ETC.,) THESE PRODUCT S ARE MAINLY SOLD TO AE AND ALSO TO OTHER THIRD PARTIES WHO REQUIRE T HE INSECTICIDES AND PESTICIDES SO MANUFACTURED. ASSESSEE IS ALSO PA YING EXCISE DUTY AND OTHER TAXES. THE PRINCIPAL COMPANY IS NOT PAYIN G ANY AMOUNT TO THE ASSESSEE COMPANY TOWARDS MANUFACTURING IF IT WERE TO BE CONSIDERED AS CONTRACT MANUFACTURING. EVEN THOUGH A DMITTEDLY ASSESSEE MENTIONED IN THE TP REPORT THAT THE ARRANG EMENT IS IN THE NATURE OF CONTRACT MANUFACTURING, THE FACTS INDICAT ES OTHERWISE. THE ROYALTY WAS PAID AS PER THE AGREEMENT ON THE VALUE- ADDED PRICE TO ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 13 OF 15 THE SCCL FOR PROVIDING THE LICENSE AND TECHNICAL KN OWHOW. THIS PAYMENT IS INDEPENDENT OF WHETHER ASSESSEE IS FULL FLEDGED MANUFACTURER OR A CONTRACT MANUFACTURER OR A TOLL M ANUFACTURER AND THE NATURE OF MANUFACTURING ACTIVITY CANNOT HAV E ANY BEARING ON THE PAYMENT OF ROYALTY. AS SUBMITTED, THE ROYALT Y IS NOT PAID ON THE ENTIRE SALES PRICE BUT ONLY ON THE VALUE ADDED PRICE WHICH WAS WORKED OUT SEPARATELY. WE ARE ALSO SURPRISED THAT T HE CIT (A) RESTRICTED THE ROYALTY ON THE SALES TO AE ONLY WHEN THE SALES TO AE WAS AT ARMS LENGTH PRICE AS THAT OF SALES TO THIRD PARTIES. THERE IS NO LOGIC IN ALLOWING THE SALES MADE TO THE THIRD PARTI ES AND NOT ON SALES MADE TO AE. AS ALREADY STATED THE SAID AGREEMENT W AS APPROVED BY THE RBI FOR PAYMENT OF ROYALTY AT 5% FOR A PERIOD O F 7 YEARS. THERE WAS ALSO NO SUCH DISALLOWANCE IN EARLIER YEARS. SIN CE WE DO NOT FIND ANY REASON TO RESTRICT THE ROYALTY TO NIL, WE ARE N OT IN A POSITION TO APPROVE THE ORDER OF THE CIT (A) ON THIS ISSUE. WIT HOUT GOING INTO THE NITTY-GRITTY OF DETERMINING WHETHER ASSESSEE IS A C ONTRACT MANUFACTURER OR A FULL-FLEDGED MANUFACTURER, SINCE ROYALTY IS PAID FOR ALLOWING ASSESSEE IN UTILIZING THE TECHNICAL KN OWHOW AND THE LICENSE FOR MANUFACTURING ACTIVITY, WE ARE OF THE O PINION THAT THE PAYMENT OF ROYALTY IS WHOLLY AND EXCLUSIVELY FOR TH E PURPOSE OF BUSINESS. IN VIEW OF THIS, WE ALLOW ASSESSEES GROU ND AND DIRECT AO TO ALLOW THE ROYALTY AS CLAIMED. 15. ASSESSEE ALSO RAISED ONE OF THE ARGUMENT AS GROUND THAT THE TP ADJUSTMENT SO MADE WILL BE WITHIN THE SAFE HARBO R LIMIT OF +/- 5%. THIS ARGUMENT CAN NOT BE ACCEPTED AS THE INTERN ATIONAL TRANSACTION IS THE PAYMENT OF ROYALTY ALONE. THE TP O DETERMINED ALP AT NIL WHICH WORKS OUT TO 100% VARIATION. THIS IS MORE THAN THE SAFE HARBOR LIMIT PRESCRIBED. THEREFORE THIS AR GUMENT CANNOT BE ACCEPTED. HOWEVER, WE HAVE HELD THAT THE PAYMENT OF ROYALTY IS WHOLLY AND NECESSARILY FOR THE PURPOSE OF BUSINESS. 16. THE RATE OF ROYALTY AT 5% WAS ALLOWED BY CIT(A) ON PART OF SALES. REVENUE HAS NOT COME IN APPEAL OR OBJECTED T O THE SAID RATE. THEREFORE, WE HOLD THAT 5% ROYALTY RATE IS AT ARM L ENGTH PRICE. FOR ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 14 OF 15 ALL THE REASONS STATED ABOVE, WE HOLD THAT ASSESSEE S PAYMENT OF ROYALTY CANNOT BE DISALLOWED INVOKING THE TP PROVIS IONS. WE DIRECT AO TO ALLOW THE SAME. GROUNDS IN BOTH ASSESSMENT YE ARS ARE THUS ALLOWED. 17. IN ASSESSMENT YEAR 2003-04, ASSESSEE HAS RAISED ONE MORE ADDITIONAL GROUND ON THE JURISDICTION OF AO FOR REO PENING THE ASSESSMENT. THIS ISSUE WAS NOT RAISED BEFORE THE CI T (A) AND FOR THE FIRST TIME RAISED BEFORE THE ITAT. SINCE IT A LEGAL ISSUE, AFTER CONSIDERING THE RIVAL CONTENTIONS, THE ADDITIONAL G ROUND WAS ADMITTED. 18. AS BRIEFLY STATED ABOVE, AO REOPENED THE ASSESSMENT UNDER SECTION 147 ON THE REASON THAT THERE WERE ADVANCES RECEIVED FROM THE ASSOCIATE CONCERN WHOSE 100% SHARES ARE ALSO HE LD BY THE SCCL AND HAS 90% SHAREHOLDING IN ASSESSEE COMPANY. EVEN THOUGH THERE IS NO DIRECT SHAREHOLDING BY THE AE CO MPANY (SCI) IN ASSESSEES COMPANY, AO WAS OF THE VIEW THAT THE PRO VISIONS OF SECTION 2(22)(E) ARE APPLICABLE ON THE LOANS AND AD VANCES GIVEN BY THE SCI TO ASSESSEE. FOR THAT REASON ONLY ASSESSMEN T WAS REOPENED. HOWEVER, IN THE COURSE OF THE ASSESSMENT PROCEEDING S ASSESSEE SUBMITTED THAT THE AMOUNT RECEIVED WAS NOTHING BUT TRADE ADVANCE AND DO NOT ATTRACT DEEMED DIVIDEND PROVISIONS UNDER SECTION 2(22)(E). AO ACCEPTED THE SUBMISSIONS AND NO ADVERS E INFERENCE WAS DRAWN ON THIS ISSUE. HOWEVER, BASED ON THE TP REPOR T FOR ASSESSMENT YEAR 2004-05, AO SIMILARLY DISALLOWED TH E ROYALTY AMOUNT EVEN THOUGH ON RECORD THERE SEEMS TO BE NO R EFERENCE TO THE TPO AS PRESCRIBED UNDER THE PROVISIONS. SINCE THE I SSUE OF DISALLOWANCE OF ROYALTY WAS NOT AN ISSUE FOR REOPEN ING THE ASSESSMENT AND THE ISSUE ON WHICH THE ASSESSMENT WA S REOPENED WAS DROPPED IN THE COURSE OF THE ASSESSMENT PROCEED INGS, AO HAS EXCEEDED THE JURISDICTION PROVIDED UNDER SECTION 14 7 AS HELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. JE T AIRWAYS (I) LTD, 331 ITR 216 (BOM). AO GETS POWER TO ASSESS SUC H OTHER INCOME, ONLY IF THE INCOME REFERRED TO IN THE REASO NS FOR REOPENING ITA NOS.2057 & 2058 OF 2009 OF SC ENVIRO AGRO INDIA PVT LTD MUMBAI PAGE 15 OF 15 HAS BEEN ASSESSED. AS THE AO DID NOT BRING ANY INCO ME TO TAX ON THE ISSUE OF DEEMED DIVIDEND, WE HOLD THAT REOPENIN G OF THE ASSESSMENT ITSELF WAS BAD IN LAW. THEREFORE, IN AY 2003-04 IT HAS TO BE HELD THAT THE RE-ASSESSMENT PER SE WAS BAD IN LAW. 19. IN THE RESULT, BOTH THE APPEALS BY ASSESSEE IN ITA NOS. 2057 & 2058/MUM/2009 ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH NOVEMBER, 2012. SD/- SD/- ( AMIT SHUKLA ) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 7 TH NOVEMBER, 2012. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI