M/s Aithnet Technologies Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 2064/DEL/2013

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 8924 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 29-01-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 09-04-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Keywords: Business income; Depreciation; Transfer pricing; Double taxation relief; International transaction; Notional interest; Onus to prove; Reason to believe; Reassessment proceedings
• Section: 92C; 143(3); 92D; 92B; 10AA; 10B; 32; 147; 148; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: I : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI A.T. VARKEY , JM ITA NO. 2064/DEL/2013 ASSESSMENT YEAR: 2005 - 06 A ITHENT TECHNOLOGIES PVT. LTD., A - 16/9, VASANT VIHAR , NEW DELHI. PAN : AAACS2319H ( APPELLANT ) VS. INCOME TAX OFFICER, WARD - 1(3), NEW D ELHI. ( RESPONDENT ) ITA NOS. 3512/DEL/2010 &1923/DEL/2013 ASSESSMENT YEAR : 2006 - 07 AITHENT TECHNOLOGIES PVT. LTD., A - 16/9, VASANT VIHAR , NEW DELHI. PAN : AAACS2319H (APPELLANT) VS. DCIT, CIRCLE - 1(1), C . R . BUILDING, NEW DELHI. (RESPONDENT) ASSESSEE BY : SHRI AKHILESH GUPTA, CA DEPARTMENT BY : S HRI PEEYUSH JAIN, CIT, DR ORDER PER R.S. SYAL, AM : THIS BATCH OF THREE APPEALS BY THE ASSESSEE COMPRISES OF ONE APPEAL BY THE ASSESSEE FOR THE AY 2005 - 06 AND TWO APPEALS FOR THE AY 2006 - 07. SINCE SOME OF THE ISSUES RAISED IN THESE APPEALS ARE COMMON, WE ARE , THEREFORE, PROCEEDING TO DISPOSE THEM OFF BY THIS CON SOLIDATED ORDER, FOR THE SAKE OF CONVENIENCE. ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 2 ASSESSMENT YEAR 2005 - 06 . 2. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED THE CIT(A) ON 12.03.2013. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST NOT EXCLUDING DEPRECIATION ON BUILDING FROM OPERATING EXPENSES WHILE MAKING ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 3 . BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT ORIGINAL ASSESSMENT FOR THIS YEAR WAS COMPLETED BY THE ASSESSING OFFICER (AO) ON 10.10.2006. DURING THE COURSE OF A SSESSMENT PROCEEDINGS FOR THE AY 2008 - 09, IT WAS NOTICED THAT THE ASSESSEE HAD CLAIMED DEPRECIATION ON BUILDING AGAINST THE BUSINESS INCOME , WHEREAS THE RENTAL INCOME FROM THE SAME BUILDING WAS OFFERED UNDER THE HEAD INCOME FROM HOUSE PROPERTY . ON BE ING CALLED UPON TO EXPLAIN AS TO WHY DEPRECIATION CLAIMED ON THE RENTED BUILDING BE NOT DISALLOWED, THE ASSESSEE CANDIDLY ACCEPTED THAT DEPRECIATION ON BUILDING WAS ERRONEOUSLY CLAIMED AS DEDUCTION. THAT IS HOW, THE ASSESSMENT FOR THE AY 2008 - 09 WAS FINA LIZED BY GRANTING STANDARD DEDUCTION @ 30% AGAINST THE INCOME FROM HOUSE PROPERTY AND DENYING THE CLAIM OF DEPRECIATION IN THE COMPUTATION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. ON THE BASIS OF HIS ORDER PASSED FOR THE A Y 2008 - 09, THE AO INITIATED RE - ASSESSMENT PROCEEDINGS FOR THE YEAR IN QUESTION BY ISSUING NOTICE U/S 148. DURING THE COURSE OF REASSESSMENT PROCEEDINGS, ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 3 THE ASSESSEE ADMITTED THAT DEPRECIATION ON BUILDING WAS WRONGLY CONSIDERED AS DEDUCTION AGAINST THE B USINESS INCOME . SIMULTANEOUSLY, IT WAS ALSO STATED THAT THE AMOUNT OF SUCH DEPRECIATION WAS CONSIDERED BY THE ASSESSEE AS WELL AS THE TRANSFER PRICING OFFICER (TPO) AS PART OF THE OPERATING COSTS FOR THE PURPOSES OF DETERMINATION OF THE ARM S LENGTH PRIC E (ALP) OF ITS INTERNATIONAL TRANSACTION. HENCE, THE AO WAS REQUESTED TO RECALCULATE THE ARM S LENGTH OPERATING PROFIT MARGIN AND REDUCE THE TP ADDITION ACCORDINGLY. THE AO DID NOT ACCEPT THE ASSESSEE S CONTENTION. THE LD. CIT(A), TOO, REFUSED TO INTER FERE WITH THE ASSESSMENT ORDER ON THE GROUND THAT THE REASSESSMENT ORDER WAS PASSED ONLY ON THE POINT OF CALCULATION OF HOUSE PROPERTY INCOME AND DISALLOWANCE OF DEPRECIATION AND, HENCE THE ASSESSEE S CLAIM FOR REDUCTION IN THE ADDITION ON ACCOUNT OF TRANS FER PRICING ADJUSTMENT WAS NOT ACCEPTABLE. 4 . THE ASSESSEE, THROUGH THE PRESENT APPEAL, SEEKS RE - COMPUTATION OF THE ALP OF ITS INTERNATIONAL TRANSACTION WITH THE SUITABLE REDUCTION IN THE OPERATING COSTS BY THE DISALLOWED AMOUNT OF DEPRECIATION AND THE RESULTANT INCREASE IN ITS OPERATING PROFIT MARGIN . 5 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THE FACTUAL SCENARIO IN SO FAR AS THE CLAIM OF DEPRECIATION AGAINST THE BUSINESS INCOME IS CONCERNED. THE ASSESSEE FRANKLY ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 4 ADMITTED ITS MISTA KE IN CLAIMING DEDUCTION FOR DEPRECIATION ALLOWANCE. THE SHORT CONTROVERSY RAISED IN THE PRESENT APPEAL IS FOR REDUCING SUCH DISALLOWED AMOUNT OF DEPRECIATION ALLOWANCE FROM THE TOTAL OPERATING COSTS FOR THE PURPOSES OF CALCULATING ADDITION ON ACCOUNT OF T RANSFER PRICING ADJUSTMENT. 6 . IT IS EVIDENT THAT THE INSTANT ASSESSMENT ORDER HAS BEEN PASSED U/S 143(3) READ WITH SECTION 147 OF THE INCOME - TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT ). SCOPE OF REASSESSMENT IS SET OUT IN SECTION 147 ITS ELF. TO THE EXTENT WE ARE CONCERNED WITH THE ISSUE IN THE PRESENT APPEAL, SUB - SECTION (1) OF SECTION 147 PROVIDES THAT : IF THE ASSESSING OFFICER HAS REASON TO BELIEVE THAT ANY INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT FOR ANY ASSESSMENT YEAR, HE M AY, SUBJECT TO THE PROVISIONS OF SECTIONS 148 TO 153 , ASSESS OR REASSESS SUCH INCOME AND ALSO ANY OTHER INCOME CHARGEABLE TO TAX WHICH HAS ESCAPED ASSESSMENT AND WHICH COMES TO HIS NOTICE SUBSEQUENTLY IN THE COURSE OF THE PROCEEDINGS UNDER THIS SECTION, OR RECOMPUTE THE LOSS OR THE DEPRECIATION ALLOWANCE OR ANY OTHER ALLOWANCE, AS THE CASE MAY BE, FOR THE ASSESSMENT YEAR CONCER NED . THUS IT IS VIVID THAT THE SCOPE OF REASSESSMENT PROCEEDINGS IS NOT ONLY RESTRICTED TO THE ISSUES FOR WHICH NOTICE WAS ISSUED U/S 148 BUT ALSO EXTENDS TO ANY OTHER INCOME CHARGEABLE TO TAX WHICH HAS ESCAPED ASSESSMENT AND WHICH COMES TO HIS NOTICE SU BSEQUENTLY IN THE COURSE OF THE PROCEEDINGS UNDER THIS SECTION. WE ARE NOT GOING DEEP INTO THE NUANCES ABOUT THE SCOPE OF REASSESSMENT ON OTHER ASPECTS, WITH WHICH ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 5 WE ARE NOT PRESENTLY CONCERNED. TO SUFFICE, THERE IS NO MANDATE IN THE PROVISION ENTITLING T HE ASSESSEE TO PUT FORTH A FRESH CLAIM FOR DEDUCTION OR ALLOWANCE ETC. IN THE REASSESSMENT PROCEEDINGS. IT TRANSPIRES THAT THE RE - ASSESSMENT PROCEEDINGS ARE FOR THE BENEFIT OF THE REVENUE. ERGO, IT FOLLOWS THAT NO DEDUCTION ETC. CAN BE CLAIMED IN THE REASS ESSMENT PROCEEDINGS, EVEN IF OTHERWISE ADMISSIBLE UNDER THE LAW, WHICH WAS OMITTED TO BE CLAIMED DURING THE ORIGINAL ASSESSMENT PROCEEDINGS. 7 . IF WE REVISIT THE PRESCRIPTION OF SUB - SECTION (1) OF SECTION 147, IT COMES TO THE FORE THAT THE ISSUES Q UA THE INCOME WHICH THE AO SEEKS TO ASSESS OR REASSESS ARE THROWN OPEN BEFORE HIM IN THE REASSESSMENT PROCEEDINGS. ADMITTEDLY, THE ASSESSEE CANNOT BE ALLOWED TO PUT FORTH A NEW CLAIM FOR DEDUCTION DURING THE COURSE OF PROCEEDINGS U/S 147. BUT IF THE CLAIM FOR NEW DEDUCTION EMANATES FROM THE ESCAPED INCOME ITSELF, WHICH THE AO IS SEEKING TO INCLUDE IN THE TOTAL INCOME OF THE ASSESSEE, THEN THERE CAN BE NO HINDRANCE IN THE ASSESSEE CLAIMING SUCH DEDUCTION, OF COURSE, SUBJECT TO THE CONDITION THAT THE OVERALL INCOME SHOULD NOT COME DOWN FROM THE ORIGINALLY ASSESSED INCOME. IN OTHER WORDS, SO LONG AS THE INCOME WHICH EARLIER ESCAPED ASSESSMENT IS MORE THAN THE AMOUNT OF ALLOWABLE DEDUCTION RELATING TO SUCH INCOME THAT THE ASSESSEE SEEKS DURING THE REASSESSMENT PROCEEDINGS, SO AS TO KEEP THE TOTAL INCOME AT A HIGHER PEDESTAL THAN THE ORIGINALLY ASSESSED INCOME, THERE CAN BE NO OBSTACLE IN GRANTING OF SUCH DEDUCTION, PROVIDED SUCH DEDUCTION IS OTHERWISE PERMISSIBLE AS PER LAW. ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 6 8 . ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE REASSESSMENT WAS INITIATED ON THE GROUND THAT THE ASSESSEE CLAIMED EXCESS DEPRECIATION AGAINST THE BUSINESS INCOME . THE ASSESSEE WHILE CALCULATING ITS OPERATING PROFIT, INCLUDED THE AMOUNT OF SUCH IMPERMISSIBLE DEPRECI ATION ALSO IN ITS OVERALL OPERATING COSTS FOR THE PURPOSES OF BENCHMARKING ITS INTERNATIONAL TRANSACTION. IF DEPRECIATION ON BUILDING IS NOT PERMISSIBLE, THEN, IT CANNOT BE ALLOWED TO STAND AT ALL IN THE ASSESSEE S COMPUTATION OF INCOME AS WELL AS THE OFF SHOOTS OF SUCH COMPUTATION. CALCULATION OF OPERATING PROFIT MARGIN, FOR DETERMINING THE ARM S LENGTH PRICE OF AN INTERNATIONAL TRANSACTION, ENVISAGES THE CONSIDERATION OF THE AMOUNT OF DEPRECIATION AS WELL. NOT ALLOWING REDUCTION OF SUCH DEPRECIATION FROM THE OPERATING COSTS WOULD LEAD TO THE SIMULTANEOUS EXISTENCE AS WELL AS NON - EXISTENCE OF DEPRECIATION ALLOWANCE, INASMUCH AS IT WILL NOT EXIST IN THE COMPUTATION OF ASSESSEE S TOTAL INCOME, BUT IT WILL EXIST IN THE COMPUTATION OF OPERATING COSTS AND THE R ESULTANT OPERATING PROFIT. SUCH PROPOSITION IS TOTALLY MISPLACED AND ILL - CONCEIVED. THE AMOUNT OF DEPRECIATION CAN BE EITHER THERE OR NOT THERE, FOR ALL PRACTICAL PURPOSES. IT CAN T BE ACCEPTED THAT FOR THE PURPOSES OF COMPUTATION OF TOTAL INCOME, THE DEP RECIATION IS UNAVAILABLE, BUT FOR PURPOSES OF COMPUTATION OF ALP OF THE INTERNATIONAL TRANSACTION, SUCH DEPRECIATION IS AVAILABLE. AS THE CLAIM FOR REDUCTION OF SUCH IMPERMISSIBLE DEPRECIATION FROM THE OPERATING COSTS DIRECTLY FLOWS FROM THE NON - ADMISSIBI LITY OF SUCH DEPRECIATION, WHICH IS THE SUBJECT MATTER OF REASSESSMENT, ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 7 WE HOLD IN PRINCIPLE, THAT SUCH A CLAIM CANNOT BE OUSTED AT THE VERY OUTSET ON THE PREMISE THAT IT CANNOT BE ENTERTAINED IN REASSESSMENT PROCEEDINGS. HOWEVER, THE RIDER REMAINS THAT AN Y FRESH CLAIM MADE DURING THE COURSE OF REASSESSMENT PROCEEDINGS, RELATING TO THE INCOME WHICH EARLIER ESCAPED ASSESSMENT, MUST BE OTHERWISE PERMISSIBLE UNDER LAW. 9. COMING TO THE EXAMINATION OF THE ADMISSIBILITY OF THE ASSESSEE S CLAIM FOR REDUCTION IN THE OPERATING COSTS BY THE AMOUNT OF DEPRECIATION NOT ALLOWABLE, WE FIND THAT THE FIRST PROVISO TO SECTION 92C(4) CARRIES SOME RESTRICTIONS ON THE QUESTION OF GRANT OF DEDUCTIONS ETC. QUA THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE ASSESSEE GETS ENHANCED DUE TO THE ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT. THIS PROVISO PROVIDES THAT : NO DEDUCTION UNDER SECTION 10A OR SECTION 10AA OR SECTION 10B OR UNDER CHAPTER VI - A SHALL BE ALLOWED IN RESPECT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE ASSESSEE IS ENHANCED AFTER COMPUTATION OF INCOME UNDER THIS SUB - SECTION . THE ESSENCE OF THIS PROVISION IS THAT IF THE TOTAL INCOME OF THE ASSESSEE HAS BEEN ENHANCED DUE TO THE ADJUSTMENT ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT, THEN THE BENEFIT OF DEDUCTIONS ETC. MENTIONED IN THIS PROVISO SHALL NOT BE ACCORDINGLY INCREASED. IN OTHER WORD S, THE SPECIFIED DEDUCTIONS WILL BE COMPUTED BY TAKING THE ELIGIBLE INCOME DE HORS SUCH ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT. THE EFFECT OF THIS PROVISO IS TO GO ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 8 AHEAD WITH THE INCREASED TOTAL INCOME DUE TO TRANSFER PRICING ADJUSTMENT WITHOUT GIVI NG ANY CONSEQUENTIAL REDUCTION IN INCOME IN TERMS OF SECTION 10A OR SECTION 10AA OR SECTION 10B OR UNDER CHAPTER VI - A OF THE ACT. AS THE CLAIM FOR DEPRECIATION QUALIFIES FOR DEDUCTION U/S 32 AND THIS SECTION HAS NOT BEEN COVERED IN THE FIRST PROVISO TO SE CTION 92C(4), WE HOLD THAT THIS PROVISO HAS NO APPLICATION TO THE FACTS OF THE INSTANT CASE. EVEN OTHERWISE, THIS PROVISO TALKS OF RESTRICTING THE CLAIM OF THE SPECIFIED DEDUCTIONS AND EXEMPTIONS AS A RESULT OF INCREASE IN THE TOTAL INCOME DUE TO TRANSFER PRICING ADJUSTMENT AND DOES NOT COVER A SITUATION SIMILAR TO THE ONE WHICH IS PREVAILING BEFORE US, BY WHICH THE ASSESSEE SEEKS REDUCTION OF THE OPERATING COST ENABLING THE DETERMINATION OF PROPER TRANSFER PRICING ADJUSTMENT. 1 0 . HAVING CROSSED THE B ARRIER OF THE OTHERWISE DEDUCTIBILITY OF DEPRECIATION FROM THE OPERATING COST, LET US SCRUTINIZE, IF THIS CLAIM IS OTHERWISE PERMISSIBLE UNDER THE LAW. THE CONTENTION OF THE LD. AR IS THAT THE AO IN THE REASSESSMENT PROCEEDINGS SHOULD HAVE REDUCED THE AMO UNT OF DISALLOWED DEPRECIATION FROM THE OPERATING COSTS FOR CALCULATING THE ALP OF THE INTERNATIONAL TRANSACTION. DESPITE THE AFORE DISCUSSED LEGAL POSITION FAVOURING THE ASSESSEE S CLAIM FOR DEDUCTION OF THE AMOUNT OF DEPRECIATION ALLOWANCE FROM THE TOTAL COSTS FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS IN THE REASSESSMENT PROCEEDINGS, WE FIND OURSELVES UNABLE TO ORDER SUCH REDUCTION BECAUSE OF THE APPLICABILITY OF SUB - SECTION (4) TO SECTION 92CA. THIS PROVISION PROVIDES THAT: ON RECEIPT OF THE ORDER UNDER SUB - ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 9 SECTION (3), THE ASSESSING OFFICER SHALL PROCEED TO COMPUTE THE TOTAL INCOME OF THE ASSESSEE UNDER SUB - SECTION (4) OF SECTION 92C IN CONFORMITY WITH THE ARM S LENGTH PRICE SO DETERMINED BY THE TRANSFER PRICING OFFICER. SUB - SECTION (4), AS IT PRESENTLY EXISTS, HAS BEEN SUBSTITUTED BY THE FINANCE ACT, 2007 W.E.F. 1.6.2007. PRIOR TO ITS SUBSTITUTION, THE HITHERTO SUB - SECTION (4) READ OUT AS UNDER: - ON RECEIPT OF THE ORDER UNDER SUB - SECTION (3), THE AO SHALL PROCEED TO COMPUTE THE TOT AL INCOME OF THE ASSESSEE UNDER SUB - SECTION (4) OF SECTION 92C HAVING REGARD TO THE ARM S LENGTH PRICE DETERMINED UNDER SUB - SECTION (3) BY THE TRANSFER PRICING OFFICER. 1 1 . A CONJOINT READING OF THE EXISTING AND THE EARLIER PROVISIONS OF SUB - SECTIO N (4) MAKES IT OVERT THAT WHEREAS THE TPO S REPORT DETERMINING THE ALP WAS EARLIER NOT BINDING ON THE AO, WHO COULD CHANGE THE COMPUTATION OF ALP AS PER HIS WISDOM, BUT NOW WITH THE SUBSTITUTION OF SUB - SECTION (4), THE AO HAS BECOME FUNCTUS OFFICIO AS REGA RDS THE ALP DETERMINED BY THE TPO. NOW, THE AO IS OBLIGED TO COMPUTE THE TOTAL INCOME OF THE ASSESSEE IN CONFORMITY WITH AND NOT HAVING REGARD TO THE ALP DETERMINED BY THE TPO. NOW, THE AO CANNOT TINKER WITH SUCH DETERMINATION DONE BY THE TPO. 12 . AS THE INSTANT ASSESSMENT ORDER HAS BEEN PASSED BY THE AO U/S 143(3) READ WITH SECTION 147 ON 28.12.2011, THE CASE FALLS FOR CONSIDERATION UNDER THE ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 10 SUBSTITUTED PROVISION PRESENTLY EXISTING ON THE STATUTE, FORBIDDING THE AO FROM ALTERING THE TPO S DETERMINATION OF ALP IN ANY MANNER. AS SUCH, WE HOLD THAT THE AO WAS INCOMPETENT TO ACCEPT THE ASSESSEE S CLAIM FOR REDUCING THE OPERATING COSTS WITH THE AMOUNT OF DEPRECIATION FOR THE PURPOSE OF CALCULATING THE ALP OF ITS INTERNATIONAL TRANSACTION, IN M AKING THE EXTANT ASSESSMENT U/S 147. THE FINAL CONCLUSION DRAWN BY THE AUTHORITIES BELOW IN THIS REGARD IS, THEREFORE, UPHELD. HOWEVER, WE MAKE IT CLEAR THAT IT IS OPEN TO THE ASSESSEE TO SEEK ANY LEGAL REMEDY, IF AVAILABLE, AS PER LAW FOR GETTING THE N EEDFUL DONE IN THIS REGARD. 13 . IN THE RESULT, THE APPEAL IS DISMISSED. ASSESSMENT YEAR 2006 - 07 . 14. THE ASSESSEE HAS FILED TWO APPEALS FOR THE CAPTIONED ASSESSMENT YEAR. THE FIRST APPEAL ARISES FROM THE ASSESSMENT ORDER PASSED U/S 144C READ WITH SECTION 143(3) AND THE SECOND FROM THE CIT(A) S ORDER PASSED ON 25.02.2013 BASED ON THE ASSESSMENT ORDER PASSED U/S 143(3) READ WITH SECTION 147. 15 . FIRSTLY, WE ARE TAKING UP THE APPEAL AGAINST THE FINAL ASSESSMENT ORDER PASSED U/S 143(3) REA D WITH SECTION 144C ON 26.5.2010. 16 . GROUND NOS. 1 TO 5 ARE AGAINST THE ADDITION ON ACCOUNT OF NOTIONAL INTEREST ON INTEREST FREE LOAN GIVEN BY THE ASSESSEE TO ITS AE IN USA. BOTH THE SIDES ARE IN ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 11 AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF THE SE GROUNDS ARE, MUTATIS MUTANDIS , SIMILAR TO THOSE TAKEN FOR THE ASSESSMENT YEAR 2004 - 05. FOLLOWING THE VIEW TAKEN FOR SUCH EARLIER YEAR BY OUR SEPARATE ORDER, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR DECIDING THIS ISSUE AFRESH IN ACCORDANCE WITH THE DIRECTIONS GIVEN BY THE TRIBUNAL FOR THE AYS 2002 - 03 AND 2003 - 04. 17 . THE ONLY OTHER ISSUE WHICH SURVIVES IN THIS APPEAL IS AGAINST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 18 . BRIEFLY STATED, THE FACTS FOR THIS YEAR ARE THAT THE ASSESSEE REPORTED FOUR INTERNATIONAL TRANSACTIONS. THE DISPUTE THROUGH THESE GROUNDS IS AGAINST THE DETERMINATION OF THE ARM S LENGTH PRICE (ALP) OF THE FIRST INTERNATIONAL TRANSACTION OF SOFTWARE/PROD UCT DEVELOPMENT/SOFTWARE CONSULTANCY SERVICES WITH A VALUE OF RS.7,19,46,861/ - . THE ASSESSEE ADOPTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD. APART FROM THE ASSESSEE HAVING AN ASSOCIATED ENTERPRISE (AE) IN THE USA, IT ALSO HAS A BRANCH OFFICE IN CANADA. IN COMPUTATION OF THE ALP, THE ASSESSEE INADVERTENTLY CONSIDERED TRANSACTIONS WITH ITS BRANCH IN CANADA AS INTERNATIONAL TRANSACTIONS. THE TPO SELECTED SOME COMPARABLE CASES AND DETERMINED THEIR AVERAGE OPERATING PROFIT RATE. THE TRANSFER PRICING ADJUSTMENT WAS CALCULATED BY APPLYING SUCH MARGIN TO THE BASE OF THE ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 12 ASSESSEE S INTERNATIONAL TRANSACTIONS WITH ITS AE IN USA AND ALSO ITS BRANCH OFFICE IN CANADA. 19 . FIRST POINT ASSAILED BY THE LD. AR BEFORE US IS THAT THE TRANSACTIONS WITH BRANCH OFFICE WERE NOT IN THE NATURE OF TRANSACTIONS WITH AES AND, HENCE, THE SAME SHOULD HAVE BEEN EXCLUDED. 20 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E RELEVANT MATERIAL ON RECORD. BEFORE EVALUATING THE RIVAL CO NTENTIONS, IT IS PARAMOUNT TO ASCERTAIN THE FACTUAL POSITION IN THIS REGARD. IT CAN BE NOTICED THAT THE ASSESSEE IS AN INDIAN HOLDING COMPANY WITH A SUBSIDIARY IN USA. IT ALSO HAS A BRANCH OFFICE IN CANADA. IN SO FAR AS THE TRANSACTIONS WITH ITS AE IN US A ARE CONCERNED, THERE IS NO DISPUTE THAT THESE ARE INTERNATIONAL TRANSACTIONS BY THEIR VERY NATURE. BUT, AS REGARDS TRANSACTIONS WITH THE BRANCH OFFICE IN CANADA, IT CAN BE OBSERVED THAT THE ASSESSEE HAS COMPUTED ITS TOTAL INCOME BY AGGREGATING THE INDIA N HEAD OFFICE S ACCOUNTS ALONG WITH THE BRANCH OFFICE IN CANADA. THIS FACT IS UNMISTAKABLY BORNE OUT FROM THE ASSESSEE S AUDIT REPORT FOR THE YEAR ENDING 31.03.2006, A COPY OF WHICH IS AVAILABLE IN THE PAPER BOOK. NOTE 4 TO THE AUDITOR S REPORT MAKES IT OSTENSIBLE THAT THE FINANCIAL STATEMENTS OF THE CANADA BRANCH OF THE COMPANY HAVE BEEN INCLUDED IN THE FINANCIAL STATEMENTS. WE CAN NOTICE FROM SCHEDULE - 8 TO THE ASSESSEE S COMBINED BALANCE SHEET, A COPY OF WHICH IS AVAILABLE IN THE PAPER BOOK, THAT IT ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 13 DEP ICTS BANK BALANCE WITH TD CANADA TRUST, CANADA. THE ABOVE POINTS MAKE IT MANIFEST THAT THE ASSESSEE CLUBBED THE FINANCIAL RESULTS OF THE INDIAN HEAD OFFICE WITH THOSE OF ITS BRANCH OFFICE IN CANADA AND OFFERED THE AGGREGATED INCOME FOR TAXATION PURPOSES. THE FACT THAT THE OFFICE IN CANADA IS ITS BRANCH OFFICE AND NOT A DISTINCT ENTITY WAS SPECIFICALLY ARGUED BEFORE THE TPO, WHO HAS CHOSEN NOT TO REBUT THE SAME. WE HAVE, THEREFORE, NO HESITATION IN HOLDING THAT THE CANADA OFFICE IS THE ASSESSEE S BRANCH O FFICE AND IS NOT A SEPARATE ENTITY IN ITSELF. 21 . SECTION 90(2) OF THE ACT MAKES IT UNAMBIGUOUS THAT WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO AN AGREEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA, FOR GRANTING RELIEF OF TAX, ETC., IN RELA TION TO AN ASSESSEE TO WHOM SUCH AGREEMENT APPLIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE. THE CRUX OF THIS SUB - SECTION IS THAT THE PROVISIONS OF THE INCOME - TAX ACT OR THE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA), WHICHEVER ARE MORE BENEFICIAL TO THE ASSESSEE, SHALL APPLY. THE HON BLE SUPREME COURT IN CIT VS. P.V.A. L. KULANDAGAN CHETTIAR (2004) 267 ITR 654 (SC) HAS LAID DOWN SO BY HOLDING THAT : BY VIRTUE OF PROVISIONS OF SUB - S. (2) THEREOF, IT IS PROVIDED THAT, WHERE SUCH AGREEMENT HAS BEEN ENTERED INTO FOR GRANTING RELIEF OF TAX, OR AS THE CASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, THEN IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APPLIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXT ENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE. SIMILAR VIEW HAS BEEN ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 14 REITERATED BY THE HON BLE BOMBAY HIGH COURT IN CIT VS. SIEMENS AKTIONGESELLSCHAFT (2009) 310 ITR 320 (BOM) . IT IS, THEREFORE, DISCERNIBLE THAT AN ASSESSEE TO WHOM A DTAA APPLIES, HAS TH E OPTION OF BEING GOVERNED EITHER BY THE ACT OR THE DTAA. IN THE PRESENT CASE, THE ASSESSEE HAS CHOSEN TO BE RULED BY THE ACT. AS SUCH, WE WILL LIMIT OURSELVES IN CONSIDERING THE POSITION UNDER THE ACT ALONE. 22 . THE MOOT QUESTION UNDER THE ACT IS IF THE TRANSACTIONS OF THE ASSESSEE WITH ITS BRANCH OFFICE IN CANADA CAN BE CONSIDERED AS INTERNATIONAL TRANSACTIONS. THE ANSWER IS OBVIOUSLY IN NEGATIVE BECAUSE SECTION 92B(1) CATEGORICALLY PROVIDES THAT: FOR THE PURPOSES OF THIS SECTION AND SECTIONS 92, 92C, 92D AND 92E, AN INTERNATIONAL TRANSACTION MEANS A TRANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES .. . A BARE PERUSAL OF THE DEFINITION OF INTERNATIONAL TRANSACTION BRINGS TO LIGHT THAT FOR TREATING ANY TRANSACTION AS AN INTERNATIONAL T RANSACTION, IT IS SINE QUA NON THAT THERE SHOULD BE TWO OR MORE SEPARATE AES. WHEN WE CONSIDER THE DEFINITION OF INTERNATIONAL TRANSACTION GIVEN U/S 92B ALONG WITH THE MEANING OF THE AE GIVEN IN SECTION 92A, IT CLEARLY TRANSPIRES THAT IN ORDER TO DESCR IBE A TRANSACTION AS AN INTERNATIONAL TRANSACTION , THERE MUST BE TWO OR MORE SEPARATE ENTITIES. 23 . IT IS SIMPLE AND PLAIN THAT NO PERSON CAN TRANSACT WITH HIMSELF IN COMMON ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 15 PARLANCE. AS SUCH, ONE CANNOT EARN ANY PROFIT OR SUFFER LOSS FROM ONESE LF. THE SAME IS TRUE IN THE CONTEXT OF INCOME - TAX AS WELL. NEITHER ANY PERSON CAN EARN INCOME NOR SUFFER LOSS FROM ITSELF. IT IS CALLED THE PRINCIPLE OF MUTUALITY. WHEN EXPANDED COMMERCIALLY, THE PROPOSITION IS THAT THERE CAN BE NO PROFIT FROM TRADE WITH SELF. THIS IS FAIRLY SETTLED THROUGH A CATENA OF JUDGMENTS FROM THE HON BLE SUMMIT COURT INCLUDING SIR KIKABHAI PREM CHAND VS CIT (1953) 24 ITR 506 (SC) AS WELL AS THE HON BLE HIGH COURTS. IN BETTS HARTLEY HUETT & CO. LTD. (1979) VS. CIT 116 ITR 425 (CAL) , IT HAS BEEN HELD THAT THERE CANNOT BE A VALID TRANSACTION OF SALE BETWEEN BRANCH OFFICE AND HEAD OFFICE AND HENCE PROFIT ON SUCH SALES IS NOT INCLUDIBLE IN ASSESSEE'S INCOME. SIMILAR VIEW HAS BEEN RENDERED IN RAM LAL BECHAIRAM VS. CIT (1946) 14 ITR 1 ( ALL). EVEN WE ACCEPT AS CORRECT THE CONTENTION OF THE REVENUE FOR A MOMENT THAT THE ASSESSEE EARNED PROFIT FROM ITS BRANCH OFFICE, THEN SUCH PROFIT EARNED WOULD CONSTITUTE ADDITIONAL COST TO THE BRANCH OFFICE. ON THE AGGREGATION OF THE ANNUAL ACCOUNTS OF THE HEAD OFFICE AND BRANCH, SUCH INCOME OF THE HO WOULD BE SET OFF WITH THE EQUAL AMOUNT OF EXPENSE OF THE BO, LEAVING THEREBY NO SEPARATELY IDENTIFIABLE INCOME. 24 . REVERTING TO THE EXTANT CONTEXT, WE FIND THAT WHEN THE ASSESSEE IS ONLY ONE ENTITY IN DEALINGS BETWEEN THE HO AND ITS BRANCH OFFICE, SUCH INTER SE DEALINGS CEASE TO BE COMMERCIAL TRANSACTIONS IN THE PRIMARY SENSE, WHAT TO TALK OF AN INTERNATIONAL TRANSACTION , WHOSE PRE - REQUISITE IS A TRANSACTION BETWEEN TWO OR ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 16 MORE ASSOCIATED ENTERPRIS ES. SINCE THE BRANCH OFFICE IN CANADA IS ONLY A BRANCH OFFICE AND NOT A SEPARATE ENTITY DISTINCT FROM THE ASSESSEE, THE TRANSACTIONS BETWEEN THE HEAD OFFICE AND BRANCH OFFICE IN CANADA CANNOT BE CONSIDERED AS INTERNATIONAL TRANSACTION. 2 5 . THERE IS HARDLY ANY NEED TO ACCENTUATE THAT THERE CAN BE NO ESTOPPEL AGAINST THE LAW. MERELY BECAUSE THE ASSESSEE TOOK AN INADVERTENT APPRECIATION OF THE TRANSACTIONS WITH SELF AS INTERNATIONAL TRANSACTIONS, THAT CANNOT PREVENT IT FROM CLAIMING BEFORE TH E AUTHORITIES THAT THE CORRECT LEGAL POSITION SHOULD PREVAIL. IN VIEW OF THE FACT THAT THE ASSESSEE S OFFICE IN CANADA IS ITS BRANCH OFFICE, THE TRANSACTIONS BETWEEN THE HEAD OFFICE AND THE BRANCH OFFICE, UNDER THE PROVISIONS OF THE ACT, CANNOT BE CONSIDE RED AS INTERNATIONAL TRANSACTIONS. WE, THEREFORE, HOLD THAT THE TPO WAS NOT JUSTIFIED IN DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF SOFTWARE PRODUCT DEVELOPMENT/SOFTWARE CONSULTANCY SERVICES BY APPLYING THE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLES TO THE COST BASE OF TRANSACTIONS WITH ITS AE AND ALSO WITH THE BRANCH OFFICE IN CANADA. SUCH COST BASE IS DIRECTED TO BE CONSIDERED AS EXCLUSIVE OF TRANSACTIONS WITH THE CANADA BRANCH. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND DIRECT THE AO/TPO TO RECOMPUTE THE ALP IN THE LIGHT OF OUR ABOVE DIRECTIONS. ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 17 26 . THE OTHER OBJECTION TAKEN BY THE LD. AR AGAINST THE DETERMINATION OF ALP UNDER THIS SEGMENT IS IN NOT ALLOWING ADJUSTMENT ON ACCOUNT OF IDLE CAPACITY. THE ASS ESSEE CLAIMED THAT DURING THE YEAR 63% OF ITS EMPLOYEES REMAINED IDLE AND, HENCE, SOUGHT REDUCTION IN ITS OPERATING COST TO THE EXTENT OF SUCH EXTRAORDINARY EXPENSE. THE TPO JETTISONED THIS PROPOSITION. THE ASSESSEE NOW SEEKS REDUCTION IN ITS OPERATING CO STS ON ACCOUNT OF SUCH IDLE LABOUR COST FOR THE PURPOSES OF COMPUTING THE TRANSFER PRICING ADJUSTMENT. 27 . WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBVIOUS THAT THE TPO USED THE TNMM AS THE MOST APPROPRIATE ME THOD FOR CALCULATING THE ALP OF THIS TRANSACTION, WHICH WAS ALSO CONSIDERED BY THE ASSESSEE AS THE MOST APPROPRIATE METHOD. THE MECHANISM FOR DETERMINING THE ALP UNDER THIS METHOD HAS BEEN SET OUT IN RULE 10B(1)(E) AS UNDER: - (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENT ERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB - CLAUSE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 18 UNCONTROLLED TRANSACTIONS, OR B ETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB - CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB - CLAUSE (III) ; (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARM S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. 28 . IT CAN BE NOTICED FROM SUB - CLAUSE (I) THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION IS COMPUTED IN RELATION TO THE COSTS INCURRED OR SALES EFFECTED, ETC. SUB - CLAUSE (II) TALKS OF DETERMINING THE NET PROFIT MARGIN REALIZED FROM COMPARABLE UNCONTROLLED TRANSACTIONS. SUB - CLAUSE (III) SPEAKS OF ADJUSTING THE NET PROFIT MARGIN REALIZED FROM COMPARABLE UNCONTROLLED TRANSACTIONS DETERMINED IN SUB - CLAUSE (II) BY TAKING INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INT ERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. IT IS OBVIOUS FROM SUB - CLAUSE (I) THAT THE NET PROFIT MARGIN ACTUALLY REALIZED BY THE ASSESSEE IS ALWAYS TAKEN AS SUCH WITHOUT ANY ADJUSTMENT. THE EFFECT OF DIFFERENCES BETWEEN THE INTER NATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTIONS IS ALWAYS GIVEN IN THE NET OPERATING PROFIT MARGIN OF THE COMPARABLE UNCONTROLLED TRANSACTIONS. THERE IS NO MANDATE FOR ADJUSTING THE ASSESSEE S PROFIT MARGIN UNDER THE PROVISIONS OF RULE 10B(1 )(E). THE ASSESSEE S CONTENTION THAT ITS OPERATING COSTS SHOULD BE REDUCED TO THE EXTENT ITS EMPLOYEES ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 19 REMAINED IDLE IS, ERGO, INCAPABLE OF ACCEPTANCE. THE ADJUSTMENT, IF ANY, COULD HAVE BEEN ALLOWED, IF THE ASSESSEE HAD DEMONSTRATED THAT THE COMPARABLE COMPANIES HAD MORE UNDER - UTILIZATION OF THEIR LABOUR FORCE VIS - - VIS THE ASSESSEE. THE ONUS TO PROVE SUCH UNDER - UTILIZATION OF EMPLOYEES OF THE COMPARABLES, FOR CLAIMING ADJUSTMENT , SQUARELY LIES ON THE ASSESSEE. ON A SPECIFIC QUERY, THE LD. AR COULD NOT POINT OUT THAT THE UTILIZATION OF EMPLOYEES BY THE COMPARABLE COMPANIES WAS LESS THAN THE ASSESSEE. UNDER SUCH CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT NO SUCH ADJUSTMENT CAN BE GRANTED. WE, THEREFORE, APPROVE THE VIEW TAKEN BY THE AUTHORITI ES ON THIS ISSUE. 29 . THE ONLY ISSUE RAISED IN THE ASSESSEE S APPEAL EMANATING FROM THE CIT(A) S ORDER DATED 25.02.2013 BASED ON THE ASSESSMENT ORDER U/S 143(3) READ WITH SECTION 147, IS AGAINST THE NON - EXCLUSION OF DEPRECIATION ON BUILDING FROM OP ERATING EXPENSES WHILE MAKING TRANSFER PRICING ADJUSTMENT. 30 . BOTH THE SIDES ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE, MUTATIS MUTANDIS , SIMILAR TO THOSE OF THE AY 2005 - 06. FOLLOWING THE VIEW TAKEN BY US FOR SUCH PRECED ING YEAR IN A SEPARATE ORDER, WE UPHOLD THE ACTION OF THE LD. CIT(A) IN AFFIRMING THE ASSESSMENT ORDER ON THIS POINT. HERE AGAIN, WE MAKE IT CLEAR THAT IT IS OPEN TO THE ASSESSEE TO SEEK NECESSARY RELIEF UNDER SOME OTHER RELEVANT PROVISIONS OF THE ACT, IF AVAILABLE, AS PER LAW. ITA NOS. 2064/DEL/2013, 3512/DEL/2010, & 1923/DEL/2013 20 31 . IN THE RESULT, THE FIRST APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE SECOND APPEAL IS DISMISSED. THE ORDER PRONOUN CED IN THE OPEN COURT ON 03 .02 .2015. SD/ - SD/ - DATED, 3 RD FEBRUARY , 2015. D K / - RK/ - COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI. [A.T. VARKEY] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER